October 29th, 2022 in Trusts
What is income and principal for a California trust? In order to be a legal trust, it must have property. Trust property is separated into income property and principal property. Many times a trust will specify who is to receive the income property and a different set of people will receive the principal income. For joint trusts, when the first spouse passes away, the trust can restrict the surviving spouse’s ability to access the principal of the trust and limit him to only using the income during his lifetime. The principal is reserved for the children and to be distributed after the death of the second spouse. This is can be in cases where the trust has income producing property such as rental income or generates interest or dividends.
Without any restrictions, the surviving spouse could use the principal and interest as he or she sees fit. The distinction between interest and principal can get muddled at times. Probate Code Section 16320 through 16375 sets forth the guidance to determine what is principal and what is income.
Sometimes the difference between income and principal are common sense. A common example is rental property is principal and the rents received is income. Stocks are principal but their dividends are income. Sometimes it is less clear. For example, if stock is sold at a gain, the gain is allocated to principal. It is always best to review the Probate Code to ensure the principal and income are accounted for correctly. As a trustee, it is important to allocate properly between principal and income and who the income and distribution beneficiaries are. As a beneficiary, it is important to know what you are entitled to and your rights as a beneficiary. Contact an attorney to learn more.