Chapter 34 - § 34.14 • PRINCIPAL AND INCOME ISSUES

• Jurisdiction: Colorado

§ 34.14 • PRINCIPAL AND INCOME ISSUES

If there is a trust under the will, or if for any other reason the pattern of the will is such that it is necessary to make a trust accounting distinction between principal and income, it will be necessary to study the provisions of the will and the Uniform Principal and Income Act as adopted in Colorado and amended several times.²⁹ As noted below in § 34.15, the Colorado act has been superseded by the Revised Uniform Principal and Income Act, generally effective July 1, 2001.³⁰ In 2009, the 1955 Principal and Income Act was reenacted. Unlike the Revised Act, the 1955 Act applies specifically to legal interests — that is, life estates — for a term of years, remainders, and reversions. The 1955 Act, as reenacted, applies to (1) a legal estate created before July 1, 2001, or after July 1, 2010; and (2) pre-July 1, 2001, trusts that opted out of portions of the Revised Act or are otherwise governed in part by the 1955 Act. The reenactment provides detail as to the applicability and mechanics of the opt in/opt out provision with respect to holders of legal (as opposed to trust) interests. It also clarifies that the 1955 Act provisions are still in effect with respect to trusts otherwise subject to the Revised Act that opt out in favor of the old Act. The following commentary relates to the old Act. The Revised Act continues many of the same basic concepts while providing several significant departures discussed below in § 34.15.

Under the general principles laid down in the Uniform Act and court decisions, the following usually will be treated as income credits: interest; dividends, including extraordinary cash or property dividends, but not including stock dividends or stock splits, or, usually, distributions of securities of other corporations ordered by governmental authority; rent for the use of real or personal property; and offspring of animals, after the number of animals in the group has been kept intact.

The following receipts usually are treated as principal: proceeds of sale of assets of the estate, including any gain or loss, but reduced by any income taxes allocable to the gain (but not if the transaction amounts to receipt of rent for the use of the property), repayment of loans, stock subscription rights, proceeds of most condemnations and, generally, the proceeds of insurance taken out to replace the value of the destroyed property, proceeds of corporate liquidations, most distributions of securities of other corporations under governmental divesting order, and also income accrued to date of death and other income in respect of a decedent.

Premiums and discounts on ordinary bonds are not amortized or accumulated, but the loss or gain on maturity falls upon or inures to principal. The increment on bonds issued at a discount but maturing at face, such as U.S. Government Series E bonds, is treated as income, whether or not an accrual basis of accounting is adopted.

Buildings, except those used in a business operated by the estate, usually are not subject to depreciation.³¹

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