Why two accounts
Many trusts pay income to one beneficiary for life and leave principal to others when the trust ends. Every receipt and every expense therefore has to be charged to one interest or the other, or split between them. The default rules come from the Uniform Principal and Income Act (1997), adopted with variations in most states, and its successor, the Uniform Fiduciary Income and Principal Act (2018). The trust instrument comes first: if it says how to allocate, follow it.
Estates that pass outright, and most conservatorships and powers of attorney, don't need the split and can be accounted for as a single fund.
Default rules for receipts
| Receipt | Default | UPIA 1997 |
|---|---|---|
| Interest | Income | §406 |
| Ordinary cash dividends | Income | §401(b) |
| Capital-gain dividends from mutual funds and REITs | Principal | §401(c)(3) |
| Property other than money from an entity (for example a stock dividend or split) | Principal | §401(c)(1) |
| Rent | Income | §405 |
| Proceeds and gains from selling an asset | Principal | §404(2) |
| Retirement plan and annuity payments | Part income, part principal; 10% to income when the payment's internal income isn't known | §409(c) |
The retirement rule is the one most often changed by state amendments and by the 2018 Act, so it always deserves a closer look.
Default rules for expenses
| Expense | Default | UPIA 1997 |
|---|---|---|
| Regular trustee compensation and investment advisory or custody fees | One-half income, one-half principal | §501(1), §502(a)(1) |
| Accounting, court and similar costs that concern both interests | One-half each | §501(2), §502(a)(2) |
| Ordinary expenses: interest, ordinary repairs, recurring property taxes | Income | §501(3) |
| Recurring insurance premiums on principal assets | Income | §501(4) |
| Payments on the principal of a debt | Principal | §502(a)(4) |
| Proceedings that concern primarily principal | Principal | §502(a)(5) |
| Estate, inheritance and other transfer taxes | Principal | §502(a)(7) |
For a decedent's estate, debts, funeral expenses and administration expenses are generally paid from principal (§201).
State enactments
California Prob. Code §16320 et seq.; Florida Stat. ch. 738; New York EPTL Article 11-A; Pennsylvania 20 Pa.C.S. ch. 81; Texas Prop. Code ch. 116; North Carolina G.S. ch. 37A; Michigan MCL 555.501 et seq.; Arizona A.R.S. §14-7401 et seq.; Washington RCW 11.104A; New Jersey N.J.S.A. 3B:19B; Virginia Code §64.2-1000 et seq. Several states have since adopted the 2018 Act or added unitrust conversions, so check the current version of your state's act.
The trustee's power to adjust
Most enactments let a trustee adjust between principal and income when the default rules would be unfair to one group of beneficiaries, for example when a trust invests for total return (UPIA §104). Adjustments should be documented and shown in the accounting.
How Summafolio handles it
Each transaction is allocated by rule, and the rule and citation appear in the ledger and the review packet. You can add matter-specific rules (for example, when the trust instrument charges all trustee fees to principal) and override any single transaction; overrides are locked and recorded in the audit trail. Matters that don't need the split run in single-fund mode.