Chap. 432.—An ACT to prescribe the method of ascertainment of principal and
income and the apportionment of receipts and expenses among tenants and
remaindermen, and to make uniform the law with reference thereto.

[H B 438]
Approved March 30, 1936

1. Be it enacted by the General Assembly of Virginia, as follows:
Section 1. Definition of terms.—‘‘Principal” as used in this act
means any realty or personalty which has been so set aside or limited
by the owner thereof or a person thereto legally empowered that it
and any substitutions for it are eventually to be conveyed, delivered
or paid to a person, while the return therefrom or use thereof or any
part of such return or use is in the meantime to be taken or received
by or held for accumulation for the same or another person.

“Income” as used in this act means the return derived from
principal.

“Tenant” as used in this act means the person to whom income is
presently or currently payable, or for whom it is accumulated or who
is entitled to the beneficial use of the principal presently and for a time
prior to its distribution.

“Remainderman”’ as used in this act means the person ultimately
entitled to the principal, whether named or designated by the terms of
the transaction by which the principal was established or determined by
operation of law.

“Trustee” as used in this act includes the original trustee of any
trust to which the principal may be subject and also any succeeding or
added trustee.

Section 2. Application of the act—powers of settler—This act shall
govern the ascertainment of income and principal, and the apportion-
ment of receipts and expenses between tenants and remaindermen, in
all cases where a principal has been established with or, unless other-
wise stated hereinafter, without the interposition of a trust; except
that in the establishment of the principal, provision may be made
touching all matters covered by this act, and the person establishing
the principal may himself direct the manner of ascertainment of income
and principal and the apportionment of receipts and expenses or grant
discretion to the trustee or other person to do so, and such provision
and direction, where not otherwise contrary to law, shall control not-
withstanding this act.

Section 3. Income and principal—disposition.—(1) All receipts of
money or other property paid or delivered as rent of realty or hire
of personalty or dividends on corporate shares payable other than in
shares of the corporation itself, or interest on money loaned, or in-
terest on or the rental or use value of property wrongfully withheld or
tortiously damaged, or otherwise in return for the use of principal,
shall be deemed income unless otherwise expressly provided in this act.

(2) All receipts of money or other property paid or delivered as
the consideration for the sale or other transfer, not a leasing or letting,
of property forming a part of the principal, or as a repayment of
loans, or in liquidation of the assets of a corporation, or as the pro-
ceeds of property taken on eminent domain proceedings where separate
awards to tenant and remainderman are not made, or as proceeds of
insurance upon property forming a part of the principal except where
such insurance has been issued for the benefit of either tenant or re-
mainderman alone, or otherwise as a refund or replacement or change
in form of principal, shall be deemed principal unless otherwise ex-
pressly provided in this act. Any profit or loss resulting upon any change
in form of principal shall enure to or fall upon principal.
(3) All income after payment of expenses properly chargeable to
it shall be paid and delivered to the tenant or retained by him if
already in his possession or held for accumulation where legally so
directed by the terms of the transaction by which the principal was
established; while the principal shall be held for ultimate distribution
as determined by the terms of the transaction by which it was estab-
lished or by law.

Section 4. Apportionment of income——Whenever a tenant shall
have the right to income from periodic payments, which shall include
rent, interest on loans, and annuities, but shall not include dividends
on corporate shares, and such right shall cease and determine by death
or in any other manner at a time other than the date when such periodic
payments should be paid, he or his personal representative shall be
entitled to that portion of any such income next payable which amounts
to the same percentage thereof as the time elapsed from the last due
date of such periodic payments to and including the day of the deter-
mination of his right is of the total period during which such income
would normally accrue. The reriaining income shall be paid to the
person next entitled to income by:fhe terms of the transaction by which
the principal was established. but no action shall be brought by the
trustee or tenant to recover such apportioned income or any portion
thereof until after the day on which it would have become due to the
‘tenant but for the determination of the right of the tenant entitled
thereto. The provisions of this section shall apply whether an ultimate
remainderman is specifically ramed or not. Likewise when the right
of the first tenant accrues at. 4 time other than the payment dates of
such periodic payments, he -hall only receive that portion of such
income which amounts to the. ame percentage thereof as the time during
which he has been so entit].., is of the total period during which such
income would normally a rue; the balance shall be a part of the
principal.

Section 5. Corporat uividends and share rights—(1) All divi-
dends on shares of a co:poration forming a part of the principal which
are payable in the share, of the corporation shall be deemed principal.
Subject to the provision ,of this section, all dividends payable otherwise
than in the shares of -he corporation itself, including ordinary and
extraordinary dividen; and dividends payable in shares or other
securities or obligations of corporations other than the declaring cor-
poration, shall be deemed income. Where the trustee shall have the
option of receiving a dividend either in cash or in the shares of the
declaring corporation, it shall be considered as a cash dividend and
deemed income, irrespective of the choice made by the trustee.

(2) All rights to subscribe to the shares or other securities or
obligations of a corporation accruing on account of the ownership of
shares or other securities in such corporation, and the proceeds of any
sale of such rights, shall be deemed principal. All rights to subscribe
to the shares or.other securities or obligations of a corporation accruing
on account of the ownership of shares or other securities in another
corporation, and the proceeds of any sale of such rights, shall be
deemed income.
(3) Where the assets of a corporation are liquidated, amounts paid
upon corporate shares as cash dividends declared before such liquida-
tion occurred or as arrears of preferred or guaranteed dividends shall
be deemed income; all other amounts paid upon corporate shares on
disbursement of the corporate assets to the stockholders shall be deemed
principal. All disbursements of corporate assets to the stockholders,
whenever made, which are designated by the corporation as a return
of capital or division of corporate property shall be deemed principal.

(4) Where a corporation succeeds another by merger, consolida-
tion or reorganization or otherwise acquires its assets, and the corporate
shares of the succeeding corporation are issued to the shareholders of
the original corporation in like proportion to, or in substitution for,
their shares of the original corporation, the two corporations shall be
considered a single corporation in applying the provisions of this sec-
tion. But two corporations shall not be considered a single corporation
under this section merely because one owns corporate shares of or
otherwise controls or directs the ovher.

(5) In applying this section the date when a dividend accrues to
the person who is entitled to it sha. be held to be the date specified
by the corporation as the one on which the stockholders entitled thereto
are determined, or in default thereof the date of declaration of the
dividend. .

Section 6. Premium and discount bonds——Where any part of the
principal consists of bonds or other obligations for the payment of
money, they shall be deemed principal -t their inventory value or in
default thereof at their market value ©: the time the principal was
established, or at their cost where purcl sed later, regardless of their
par or maturity value; and upon their : spective maturities or upon
their sale any loss or gain realized therec shall fall upon or enure to
the principal.

Section 7. Principal used in business.“ \Vhenever a trustee or
a tenant is authorized by the terms of the cansaction by which the
principal was established, or by law, to use any part of the principal in
the continuance of a business which the origif:l owner of the property
comprising the principal had been carrying 01°’ the net profits of such
business attributable to such principal shall be’ eemed income.

(2) Where such business consists of buyi‘ 's and selling property,
the net profits for any period shall be ascertained by deducting from
the gross returns during and the inventory value of the property at
the end of such period, the expenses during and the inventory value
of the property at the beginning of such period.

(3) Where such business does not consist of buying and selling
property, the net income shall be computed in accordance with the
customary practice of such business, but not in such way as to decrease
the principal.

(4) Any increase in the value of the principal used in such busi-
ness shall be deemed principal, and all losses in any one calendar
year, after the income from such business for that year has been ex-
hausted, shall fall upon principal.

Section 8. Principal comprising animals.—Where any part of the
principal consists of animals employed in business, the provisions of
section seven shall apply; and in other cases where the animals are
held as a part of the principal partly or wholly because of the off-
spring or increase which they are expected to produce all offspring
or increase, shall be deemed principal to the extent necessary to main-
tain the original number of such animals and the remainder shall be
deemed income; and in all other cases such offspring or increase shall
be deemed income.

Section 9. Disposition of natural resources——Where any part of
the principal consists of property in lands from which may be taken
timber, minerals, oils, gas or other natural resources and the trustee or
tenant is authorized by law or by the terms of the transaction by
which the principal was established to sell, lease or otherwise develop
such natural resources, and no provision is made for the disposition of
the net proceeds thereof after the payment of expenses and carrying
charges on such property, such proceeds, if received as rent on a lease,
shall be deemed income, but if received as consideration, whether as
royalties or otherwise, for the permanent severance of such natural
resources from the lands, shall be deemed principal to be invested to
produce income. Nothing in this section shall be construed to abrogate
or extend any right which may otherwise have accrued by law to a
tenant to develop or work such natural resources for his own benefit.

Section 10. Principal subject to depletion—Where any part of the
principal consists of property subject to depletion, such as leaseholds,
patents, copyrights, and royalty rights, and the trustee or tenant in
possession is not under a duty to change the form of the investment
of the principal, the full amount of rents, royalties or return from
the property shall be income to the tenant; but where the trustee or
tenant is under a duty, arising either by law or by the terms of the
transaction by which the principal was established, to change the form
of the investment, either at once or as soon as it may be done without
loss, then the return from such property not in excess of five per centum
per annum of its fair inventory value or in default thereof its market
value at the time the principal was established, or at its cost where
purchased later, shall be deemed income and the remainder principal.

Section 11. Unproductive estate—(1) Where any part of a prin-
cipal in the possession of a trustee consists of realty or personalty
which for more than a year and until disposed of as hereinafter stated
has not produced an average net income of at least one per centum
per annum of its fair inventory value or in default thereof its market
value at the time the principal was established or of its cost where
purchased later, and the trustee is under a duty to change the form
of the investment as soon as it may be done without sacrifice of value
and such change is delayed, but is made before the principal is finally
distributed, then the tenant, or in case of his death his personal rep-
resentative, shall be entitled to share in the net proceeds received from
the property as delayed income to the extent hereinafter stated.

(2) Such income shall be the difference between the net proceeds
received from the property and the amount which, had it been placed
at simple interest at the rate of five per centum per annum for the
period during which the change was delayed, would have produced the
net proceeds at the time of change, but in no event shall such income
be more than the amount by which the net proceeds exceed the fair
inventory value of the property or in default thereof its market value
at the time the principal was established or its cost where purchased
later. The net proceeds shall consist of the gross proceeds received
from the property less any expenses incurred in disposing of it and
less all carrying charges which have been paid out of principal during
the period while it has been unproductive.

(3) The change shall be taken to have been delayed from the time
when the duty to make it first arose, which shall be presumed, in the
absence of evidence to the contrary, to be one year after the trustee
first received the property if then unproductive, otherwise one year
after it became unproductive.

(4) If the tenant has received any income from the property or
has had beneficial use thereof during the period while the change has
been delayed, his share of the delayed income shall be reduced by the
amount of such income received or the value of the use had.

(5) In the case of successive tenants the delayed income shall be
divided among them or their representatives according to the length
of the period for which each was entitled to income.

Section 12. Expenses—Trust estates—(1) All ordinary expenses
incurred in connection with the trust estate or with its administration
and management, including regularly recurring taxes assessed against
any portion of the principal, water rates, premiums or insurance taken
upon the estates of both tenant and remainderman, interest on mort-
gages on the principal, ordinary repairs, trustee’s compensation except
commissions computed on principal, compensation of assistants, and
court costs and attorneys’ and other fees on regular accountings, shall
be paid out of income. But such expenses where incurred in disposing
of, or as carrying charges on, unproductive estate as defined in section
eleven, shall be paid out of principal, subject to the provisions of sub-
section two of section eleven.

(2) All other expenses, including trustee’s commissions computed
upon principal, cost of investing or reinvesting principal, attorneys’ fees
and other costs incurred in maintaining or defending any action to
protect the trust or the property or assure the title thereof, unless due
to the fault or cause of the tenant, and costs of, or assessments for,
improvements to property forming part of the principal, shall be paid
out of principal. Any tax levied by any authority, Federal, State or
foreign, upon profit or gain defined as principal under the terms of
subsection two of section three shall be paid out of principal, notwith-
standing said tax may be denominated a tax upon income by the taxing
authority.

(3) Expenses paid out of income according to subsection one
which represent regularly recurring charges shall be considered to have
accrued from day to day, and shall be apportioned on that basis
whenever the right of the tenant begins or ends at some date other
than the payment date of the expenses. Where the expenses to be
paid out of income are of unusual amount, the trustee may distribute
them throughout an entire year or part thereof, or throughout a series
of years. After such distribution, where the right of the tenant ends
during the period, the expenses shall be apportioned between tenant
and remainderman on the basis of such distribution.

(4) Where the costs of, or special taxes or assessments for, an
improvement representing an addition of value to property held by the
trustee as part of principal are paid out of principal, as provided in
subsection two, the trustee shall reserve out of income and add to the
principal each year a sum equal to the cost of the improvement divided
by the number of years of the reasonably expected duration of the
improvement.

Section 13. Expenses.—Non-trust estates—(1) Provisions of sec-
tion twelve, so far as applicable and excepting those dealing with costs
of, or special taxes or assessments for, improvements to property, shall
govern the apportionment of expenses between tenants and remainder-
men where no trust has been created, subject, however, to any legal
agreement of the parties or any specific direction of the taxing or
other statutes; but where either tenant or remainderman has incurred
an expense for the benefit of his own estate and without the consent
or agreement of the other, he shall pay such expense in full.

(2) Subject to the exceptions stated in subsection one, the cost of,
or special taxes or assessments for, an improvement representing an
addition of value to property forming part of the principal shall be
paid by the tenant, where such improvement cannot reasonably be ex-
pected to outlast the estate of the tenant. In all other cases a portion
thereof only shall be paid by the tenant, while the remainder shall be
paid by the remainderman. Such portion shall be ascertained by taking
that percentage of the total which is found by dividing the present
value of the tenant’s estate by the present value of an estate of the same
form as that of the tenant except that it is limited for a period corre-
sponding to the reasonably expected duration of the improvement.
The computation of present values of the estate shall be made on the
expectancy basis set forth in section fifty-one hundred and thirty-one
of the Code of Virginia and no other evidence of duration or ex-
pectancy shall be considered.

Section 14. Uniformity of interpretation—-This act shall be so
interpreted and construed as to effectuate its general purpose to make
uniform the law of those states which enact it.

Section 14%4. This act shall apply to all estates heretofore or hene-
after created, except that it shall not affect or change any transactions
which have taken place prior to the time this act becomes effective.

Section 15. This act may be cited as the Uniform Principal and
Income Act.

2. All acts or parts of acts which are inconsistent with the provi-
sions of this act are hereby repealed.