Source: https://idahotrustee.com/page/2/
Timestamp: 2019-02-20 23:56:54
Document Index: 4208082

Matched Legal Cases: ['§412', '§68', '§412', '§412', '§403', '§403', '§412', '§412', '§412', '§412', '§412', '§412', '§412', '§412']

Idaho Trustee | Helping Trustees excel, Grantors prepare, and Beneficiaries learn | Page 2
The Uniform Principal and Income Act (the “UPAIA”) was completed by the Commissioners on Uniform State Laws in 1997. The UPAIA was adopted shortly afterward by the State of Idaho. It has been adopted as of the writing of this article with minor variations by 44 states and the District of Columbia.
Much attention has been paid to a few of the innovative provisions of the UPAIA such as the Trustee’s “Power to Adjust” and the treatment of receipts by Trustees from entities. However, one innovative provision has had little real attention paid to it in professional literature (at least that I can find) and that is §412 (§68-10-412 of the Idaho Code) of the UPAIA dealing with the allocation of receipts by a Trustee from the sale of timber.
§412 was innovative in that it formally recognizes timber as a renewable resource, rather than a depleting resource such as minerals, water and other natural resources. Prior law in many states only instructed Trustees to allocate the proceeds of the sale of timber between income and principal in a manner that is “reasonable and equitable.” Thus, timber was treated in many cases as a depleting resource for trust accounting purposes. The result was an inconsistent use of statutory depletion rates, the federal income tax depletion rate, or some other method concocted by a trustee and the trust’s accountant.
Idaho adopted the UPAIA with no changes to §412. Here is the current Idaho statute:
“68-10-412. TIMBER. (a) To the extent that a trustee accounts for receipts from the sale of timber and related products pursuant to this section, the trustee shall allocate the net receipts:
1) To income to the extent that the amount of timber removed from the land does not exceed the rate of growth of the timber during the accounting periods in which a beneficiary has a mandatory income interest;
(3) To or between income and principal if the net receipts are from the lease of timberland or from a contract to cut timber from land owned by a trust, by determining the amount of timber removed from the land under the lease or contract and applying the rules in paragraphs (1) and (2) of this subsection; or
(4) To principal to the extent that advance payments, bonuses, and other payments are not allocated pursuant to paragraph (1), (2) or (3) of this subsection.
(d) If a trust owns an interest in timberland on the effective date of this chapter, the trustee may allocate net receipts from the sale of timber and related products as provided in this chapter or in the manner used by the trustee before the effective date of this chapter. If the trust acquires an interest in timberland after the effective date of this chapter, the trustee shall allocate net receipts from the sale of timber and related products as provided in this chapter.”
A Trustee does have the option of using §403 of the UPAIA to allocate receipts and disbursements. §403 is particularly helpful if a timber operation is an ongoing operation that is operated as a sole proprietorship (as opposed to a corporate entity) by the Trustee. However, it has been my experience that the sale of timber by many Trustees is an incidental transaction that occurs occasionally over time. The proper allocation of the proceeds of a timber sale are critical to calculating the interests of the trust’s income and principal beneficiaries.
To calculate the proper allocation between principal and income, the Trustee will need to know (1) the Net Timber Value of the timber owned by the trust and (2) the growth rate of the timber for the year in which the timber is sold. The Net Timber Value is the gross Merchantable or Saleable Timber Value minus the estimated harvesting and sale costs. The growth rate is the estimated growth is the estimated annual growth rate of the harvestable timber. To get both of these numbers, the Trustee will need to engage a timber expert or consultant to evaluate the timber and report on the timber’s value and estimated growth rate. The growth rate can vary depending upon the type of timber, local environmental factors, and recent climate.
There are two basic calculations described in §412(a). §412(a)(1) addresses the calculation required if the actual sale of timber is less than the growth rate for the year in which the timber was sold. §412(a)(2) addresses the calculation required if the actual sale of timber is more than the growth rate for the year in which the timber was sold.
Here are two examples, one for each calculation. The examples are based upon an actual timber evaluation on behalf of an income beneficiary of a trust where the Trustee not only failed to properly manage the trust’s timber, but also inadvertently caused the income beneficiaries not to realize the income to which they were otherwise entitled. The results were justifiable claims in litigation by the income beneficiary. In both calculations the assumed value of the timber owned by the trust is $2,000,000. The growth rate reported by the timber expert was 1.5% for the year in question.
Example 1 – §412(a)(1):
Gross Merchantable Timber Value $ 2,000,000
Estimated Harvesting and Sale Costs ( 972,331)
Net Timber Value $ 1,027,669
Estimated Growth Rate 1.5%
Value of Current Year Growth $ 30,000
Actual Net Proceeds of Sale $ 25,000
Amount allocated to Income $ 25,000
Amount allocated to Principal $ – 0 –
Note: Since the amount realized from the actual sale of timber is less than the value of current year growth, the entire amount of the sale is allocated to Income. Note that, to determine the value of current year growth, the estimated growth rate is applied to the gross timber value, not the net timber value.
Example 2 – §412(a)(2):
Actual Net Proceeds of Sale $ 342,556
Amount allocated to Income $ 30,000
Amount allocated to Principal $ 312,556
§412(a)(3) goes on to say that, if a Trustee receives proceeds of a lease or other contract that represents the sale of timber owned by the trust, such proceeds should be allocated by §412(a)(1) and (2) as well. Further §412(a)(4) instructs the Trustee to allocate advance payments, bonuses, or other amounts that are not allocated by subsections (1) and (2) entirely to principal.
It is critical that a Trustee properly and accurately calculate the allocations between income and principal of a trust. While the UPAIA gives Trustees discretion to allocate transactions between income and principal, this discretion should not be exercised in hindsight. Proper allocation of timber sales should be done concurrently with the actual sale so that the Trustee fulfills his or her duties to both income and principal/remainder beneficiaries.
Copyright Steve Masterson 2012. All rights reserved.
Posted on February 28, 2012	by Steve Masterson
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