Source: L. 2000: Entire part R&RE, p. 1144, § 1, effective July 1, 2001.
Editor's note: This section is similar to former § 15-1-413 as it existed prior to 2001.
Prior Acts' Conflict with Uniform Prudent Investor Act. Section 2(b) of the Uniform Prudent Investor Act provides that "[a] trustee's investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole ... ." The underproductive property provisions in Section 12 of the 1962 Uniform Act and Section 11 of the 1931 Uniform Act give the income beneficiary a right to receive a portion of the proceeds from the sale of underproductive property as "delayed income." In each Uniform Act the provision applies on an asset by asset basis and not by taking into consideration the trust portfolio as a whole, which conflicts with the basic precept in Section 2(b) of the Prudent Investor Act. Moreover, in determining the amount of delayed income, the prior Uniform Acts do not permit a trustee to take into account the extent to which the trustee may have distributed principal to the income beneficiary, under principal invasion provisions in the terms of the trust, to compensate for insufficient income from the unproductive asset. Under Section 15-1-404 (2)(g) of this Act, a trustee must consider prior distributions of principal to the income beneficiary in deciding whether and to what extent to exercise the power to adjust conferred by Section 15-1-404 (1).
Duty to make property productive of income. In order to implement the Uniform Prudent Investor Act, this Act abolishes the right to receive delayed income from the sale proceeds of an asset that produces little or no income, but it does not alter existing state law regarding the income beneficiary's right to compel the trustee to make property productive of income. As the law continues to develop in this area, the duty to make property productive of current income in a particular situation should be determined by taking into consideration the performance of the portfolio as a whole and the extent to which a trustee makes principal distributions to the income beneficiary under the terms of the trust and adjustments between principal and income under Section 15-1-404 of this Act.
Trusts for which the value of the right to receive income is important for tax reasons may be affected by Reg. § 1.7520-3(b)(2)(v) Example (1) , § 20.7520-3(b)(2)(v) Examples (1) and (2) , and § 25.7520-3(b)(2)(v) Examples (1) and (2) , which provide that if the income beneficiary does not have the right to compel the trustee to make the property productive, the income interest is considered unproductive and may not be valued actuarially under those sections.
Marital deduction trusts. Subsection (1) draws on language in Reg. § 20.2056(b)-5(f)(4) and (5) to enable a trust for a spouse to qualify for a marital deduction if applicable state law is unclear about the spouse's right to compel the trustee to make property productive of income. The trustee should also consider the application of Section 15-1-404 of this Act and the provisions of Restatement of Trusts 3d: Prudent Investor Rule § 240, at 186, app. § 240, at 252 (1992). Example (6) in the Comment to Section 15-1-404 describes a situation involving the payment from income of carrying charges on unproductive real estate in which Section 15-1-404 may apply.
Once the two conditions have occurred -- insufficient beneficial enjoyment from the property and the spouse's demand that the trustee take action under this section -- the trustee must act; but instead of the formulaic approach of the 1962 Uniform Act, which is triggered only if the trustee sells the property, this Uniform Act permits the trustee to decide whether to make the property productive of income, convert it, transfer funds from principal to income, or to take some combination of those actions. The trustee may rely on the power conferred by Section 15-1-404 (1) to adjust from principal to income if the trustee decides that it is not feasible or appropriate to make the property productive of income or to convert the property. Given the purpose of Section 15-1-423, the power under Section 15-1-404 (1) would be exercised to transfer principal to income and not to transfer income to principal.
Section 15-1-423 does not apply to a so-called "estate" trust, which will qualify for the marital deduction, even though the income may be accumulated for a term of years or for the life of the surviving spouse, if the terms of the trust require the principal and undistributed income to be paid to the surviving spouse's estate when the spouse dies. Reg. § 20.2056(c)-2(b)(1)(iii).
Structure Colorado Code
Title 15 - Probate, Trusts, and Fiduciaries
Part 4 - Uniform Principal and Income Act
§ 15-1-403. Fiduciary Duties - General Principles
§ 15-1-404. Trustee's Power to Adjust
§ 15-1-404.5. Conversion - Unitrusts - Administration
§ 15-1-406. Determination and Distribution of Net Income
§ 15-1-407. Distribution to Residuary and Remainder Beneficiaries
§ 15-1-408. When Right to Income Begins and Ends
§ 15-1-409. Apportionment of Receipts and Disbursements When Decedent Dies or Income Interest Begins
§ 15-1-410. Apportionment When Income Interest Ends
§ 15-1-411. Character of Receipts
§ 15-1-412. Distribution From Trust or Estate
§ 15-1-413. Business and Other Activities Conducted by Trustee
§ 15-1-414. Principal Receipts
§ 15-1-416. Obligation to Pay Money
§ 15-1-417. Insurance Policies and Similar Contracts
§ 15-1-418. Insubstantial Allocations Not Required
§ 15-1-419. Deferred Compensation, Annuities, and Similar Payments
§ 15-1-421. Minerals, Water, and Other Natural Resources
§ 15-1-421.5. Disposition of Natural Resources
§ 15-1-423. Property Not Productive of Income
§ 15-1-424. Derivatives and Options
§ 15-1-425. Asset-Backed Securities
§ 15-1-426. Disbursements From Income
§ 15-1-427. Disbursements From Principal
§ 15-1-428. Transfers From Income to Principal for Depreciation
§ 15-1-429. Transfers From Income to Reimburse Principal
§ 15-1-431. Adjustments Between Principal and Income Because of Taxes
§ 15-1-432. Uniformity of Application - Construction
§ 15-1-434. Effective Date - Application to Existing Trusts and Estates - Election
§ 15-1-435. Application of Certain Provisions - Notice of Election
§ 15-1-436. Transitional Matters
§ 15-1-452. Source and Prior Enactment - Uniform Application
§ 15-1-453. Definitions - Construction of Terms
§ 15-1-455. Application of This Subpart 7 - Powers of Settlor
§ 15-1-456. Income and Principal - Disposition
§ 15-1-457. Apportionment of Income
§ 15-1-458. Corporate Dividends and Share Rights
§ 15-1-459. Premium and Discount Bonds
§ 15-1-460. Principal Used in Business
§ 15-1-461. Principal Comprising Animals
§ 15-1-462. Principal Subject to Depletion
§ 15-1-463. Unproductive Estate
§ 15-1-464. Disposition of Natural Resources
§ 15-1-464.5. Disposition of Natural Resources - Special Applicability
§ 15-1-465. Expenses - Trust Estates
§ 15-1-466. Expenses - Nontrust Estates