PROBATE CODE
SECTION 16370-16375




16370.  A trustee shall make the following disbursements from income
to the extent that they are not disbursements to which paragraph (2)
or (3) of subdivision (c) of Section 16340 applies:
   (a) Except as otherwise ordered by the court, one-half of the
regular compensation of the trustee and of any person providing
investment advisory or custodial services to the trustee.
   (b) Except as otherwise ordered by the court, one-half of all
expenses for accountings, judicial proceedings, or other matters that
involve both the income and remainder interests.
   (c) All of the other ordinary expenses incurred in connection with
the administration, management, or preservation of trust property
and the distribution of income, including interest, ordinary repairs,
regularly recurring taxes assessed against principal, and expenses
of a proceeding or other matter that concerns primarily the income
interest.
   (d) All recurring premiums on insurance covering the loss of a
principal asset or the loss of income from or use of the asset.




16371.  (a) A trustee shall make the following disbursements from
principal:
   (1) Except as otherwise ordered by the court, the remaining
one-half of the disbursements described in subdivisions (a) and (b)
of Section 16370.
   (2) Except as otherwise ordered by the court, all of the trustee's
compensation calculated on principal as a fee for acceptance,
distribution, or termination, and disbursements made to prepare
property for sale.
   (3) Payments on the principal of a trust debt.
   (4) Expenses of a proceeding that concerns primarily principal,
including a proceeding to construe the trust or to protect the trust
or its property.
   (5) Premiums paid on a policy of insurance not described in
subdivision (d) of Section 16370 of which the trust is the owner and
beneficiary.
   (6) Estate, inheritance, and other transfer taxes, including
penalties, apportioned to the trust.
   (7) Disbursements related to environmental matters, including
reclamation, assessing environmental conditions, remedying and
removing environmental contamination, monitoring remedial activities
and the release of substances, preventing future releases of
substances, collecting amounts from persons liable or potentially
liable for the costs of those activities, penalties imposed under
environmental laws or regulations and other payments made to comply
with those laws or regulations, statutory or common law claims by
third parties, and defending claims based on environmental matters.
   (b) If a principal asset is encumbered with an obligation that
requires income from that asset to be paid directly to the creditor,
the trustee shall transfer from principal to income an amount equal
to the income paid to the creditor in reduction of the principal
balance of the obligation.



16372.  (a) For purposes of this section, "depreciation" means a
reduction in value due to wear, tear, decay, corrosion, or gradual
obsolescence of a fixed asset having a useful life of more than one
year.
   (b) A trustee may transfer from income to principal a reasonable
amount of the net cash receipts from a principal asset that is
subject to depreciation, under generally accepted accounting
principles, but may not transfer any amount for depreciation under
this section in any of the following circumstances:
   (1) As to the portion of real property used or available for use
by a beneficiary as a residence or of tangible personal property held
or made available for the personal use or enjoyment of a
beneficiary.
   (2) During the administration of a decedent's estate.
   (3) If the trustee is accounting under Section 16352 for the
business or activity in which the asset is used.
   (c) An amount transferred from income to principal need not be
held as a separate fund.



16373.  (a) If a trustee makes or expects to make a principal
disbursement described in this section, the trustee may transfer an
appropriate amount from income to principal in one or more accounting
periods to reimburse principal or to provide a reserve for future
principal disbursements.
   (b) Principal disbursements to which subdivision (a) applies
include the following, but only to the extent that the trustee has
not been and does not expect to be reimbursed by a third party:
   (1) An amount chargeable to income but paid from principal because
it is unusually large, including extraordinary repairs.
   (2) A capital improvement to a principal asset, whether in the
form of changes to an existing asset or the construction of a new
asset, including special assessments.
   (3) Disbursements made to prepare property for rental, including
tenant allowances, leasehold improvements, and broker's commissions.
   (4) Periodic payments on an obligation secured by a principal
asset to the extent that the amount transferred from income to
principal for depreciation is less than the periodic payments.
   (5) Disbursements described in paragraph (7) of subdivision (a) of
Section 16371.
   (c) If the asset whose ownership gives rise to the disbursements
becomes subject to a successive income interest after an income
interest ends, a trustee may continue to transfer amounts from income
to principal as provided in subdivision (a).




16374.  (a) A tax required to be paid by a trustee based on receipts
allocated to income shall be paid from income.
   (b) A tax required to be paid by a trustee based on receipts
allocated to principal shall be paid from principal, even if the tax
is called an income tax by the taxing authority.
   (c) A tax required to be paid by a trustee on the trust's share of
an entity's taxable income shall be paid as follows:
   (1) From income to the extent that receipts from the entity are
allocated only to income.
   (2) From principal to the extent that receipts from the entity are
allocated only to principal.
   (3) Proportionately from principal and income to the extent that
receipts from the entity are allocated to both income and principal.
   (4) From principal to the extent that the tax exceeds the total
receipts from the entity.
   (d) After applying subdivisions (a), (b), and (c), the trustee
shall adjust income or principal receipts to the extent that the
trust's taxes are reduced because the trust receives a deduction for
payments made to a beneficiary.



16374.5.  Unless otherwise provided by the governing instrument,
determined by the trustee, or ordered by the court, distributions to
beneficiaries shall be considered paid in the following order from
the following sources:
   (a) From net taxable income other than capital gains.
   (b) From net realized short-term capital gains.
   (c) From net realized long-term capitalized gains.
   (d) From tax-exempt and other income.
   (e) From principal of the trust.



16375.  (a) A fiduciary may make adjustments between principal and
income to offset the shifting of economic interests or tax benefits
between income beneficiaries and remainder beneficiaries that arise
from any of the following:
   (1) Elections and decisions, other than those described in
subdivision (b), that the fiduciary makes from time to time regarding
tax matters.
   (2) An income tax or any other tax that is imposed upon the
fiduciary or a beneficiary as a result of a transaction involving or
a distribution from the estate or trust.
   (3) The ownership by a decedent's estate or trust of an interest
in an entity whose taxable income, whether or not distributed, is
includable in the taxable income of the estate, trust, or a
beneficiary.
   (b) If the amount of an estate tax marital deduction or charitable
contribution deduction is reduced because a fiduciary deducts an
amount paid from principal for income tax purposes instead of
deducting it for estate tax purposes, and as a result estate taxes
paid from principal are increased and income taxes paid by a decedent'
s estate, trust, or beneficiary are decreased, each estate, trust, or
beneficiary that benefits from the decrease in income tax shall
reimburse the principal from which the increase in estate tax is
paid. The total reimbursement must equal the increase in the estate
tax to the extent that the principal used to pay the increase would
have qualified for a marital deduction or charitable contribution
deduction but for the payment. The proportionate share of the
reimbursement for each estate, trust, or beneficiary whose income
taxes are reduced must be the same as its proportionate share of the
total decrease in income tax. An estate or trust shall reimburse
principal from income.