Commentary on HB 1373

1999 Legislation:

Commentary on HB 1373 -- Allocation of Principal and Income
of Deferred Annuities and Life Insurance Contracts Held in
Trusts (NIMCRUTS)

HB 1373, by Rep. Williams, is Rep. William's second attempt to pass a bill to make the default rule for allocation of income in a net income makeup charitable remainder unitrust (NIMCRUT) more favorable to the noncharitable NIMCRUT beneficiary. In 1997, Rep. Williams tried to pass a virtually identical bill, HB 2936. That bill drew no particular opposition, but it got going late enough in the session that it died in the House Calendars Committee.

HB 1373 would amend the Trust Code by Section 113.1021, which would provide that the increase in value of deferred annuities (prior to annuitization) and life insurance contracts held in a trust is income, not principal, and it is available for distribution only when the trustee receives cash on account of the obligation. Thus, the trustee of a NIMCRUT could invest in a deferred annuity, generating no income currently and causing a large build-up of "net income" to be "made up" in later years, then when it is desirable for the NIMCRUT beneficiary to receive income, cash in all or a portion of the annuity, resulting in the realization of a great deal of income, which then could be paid to the noncharitable beneficiary pursuant to the makeup provision. This is the so-called "spigot trust" -- the income can be turned on and off as desired.

I am not sure this bill is necessary, since the trust instrument can define income and principal. I suppose it would be helpful when the draftsman failed to anticipate the annuity issue and did not provide for the favorable allocation of income and principal in the trust instrument. Also, it would make it possible to stay close to the pre-approved CRUT forms promulgated by the IRS in revenue rulings since the default Texas income allocation provision could be relied upon. It didn't occur to me last session, but I wonder what effect this provision might have on a QTIP trust which invested in a deferred annuity -- probably none, but it may be thinking through. [02/12/99]