Allocating Deferred Compensation and Annuity Payments in a Trust

14-7418. Deferred compensation, annuities and similar payments; definition A. To the extent that a payment is characterized as interest or a dividend, or a payment made in lieu of interest or a dividend, a trustee shall allocate it to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend or an equivalent payment. B. If no part of a payment is characterized as interest, a dividend or an equivalent payment, and all or part of the payment is required to be made, a trustee shall allocate to income ten per cent of the part that is required to be made during the accounting period and the balance to principal. If no part of a payment is required to be made or the payment received is the entire amount to which the trustee is entitled, the trustee shall allocate the entire payment to principal. For the purposes of this subsection, a payment is not required to be made to the extent that it is made because the trustee exercises a right of withdrawal. C. If, to obtain an estate tax marital deduction for a trust, a trustee must allocate more of a payment to income than provided for by this section, the trustee shall allocate to income the additional amount necessary to obtain the marital deduction. D. Subsections C, E and F of this section do not apply to the extent that the series of payments, without the application of subsection C of this section, would qualify for the marital deduction under 26 United States Code section 2056(b)(7)(C), as amended. E. A trustee shall determine the internal income of each separate fund for the accounting period as if the separate fund were a trust subject to this article. On request of the surviving spouse, the trustee shall demand that the person administering the separate fund distribute the internal income to the trust. The trustee shall allocate a payment from the separate fund to income to the extent of the internal income of the separate fund and distribute that amount to the surviving spouse. The trustee shall allocate the balance of the payment to the principal. On request of the surviving spouse, the trustee shall allocate principal to income to the extent the internal income of the separate fund exceeds payments made from the separate fund to the trust during the accounting period. F. If a trustee cannot determine the internal income of a separate fund but can determine the value of the separate fund, the internal income of the separate fund is deemed to equal four per cent of the fund's value, according to the most recent statement of value preceding the beginning of the accounting period. If the trustee cannot determine the internal income of the separate fund or the fund's value, the internal income of the fund is deemed to equal the product of the interest rate and the present value of the expected future payments, as determined under section 7520 of the internal revenue code of 1986, as amended, 26 United States Code section 7520, as amended, for the month preceding the accounting period for which the computation is made. G. This section does not apply to a payment to which section 14-7419 applies. H. For the purposes of this section, "payment" means a payment that a trustee may receive over a fixed number of years or during the life of one or more individuals because of services rendered or property transferred to the payer in exchange for future payments. Payment includes a payment made in money or property from the payer's general assets or from a separate fund created by the payer, including a private or commercial annuity, an individual retirement account and a pension, profit sharing, stock bonus or stock ownership plan. For purposes of subsections C, D, E and F of this section, payment also includes any payment from any separate fund, regardless of the reason for the payment.