Ingrid is the trustee of a trust in which Jens has a life estate and Karin has the remainder interest. The trust property is a farm. The farm is leased to Lars, who pays the rent to the trust. Property taxes are paid annually on the farm. Long-term
improvements are occasionally made and paid for. A section of the farm's land is sold to Margo, one of the farm's neigh¬bors. How are the payments for taxes and improvements classified (ordi¬nary or extraordinary)? How are the receipts of rent and the pro¬ceeds from the land sale classified? To whom are these costs and benefits allocated?
In cases involving trusts, among income and principal bene-ficiaries, questions of this type, concerning the apportionment of receipts and expenses between income and principal frequently arise. This can happen even when the income and principal beneficiaries are the same. If a trust instrument provides instructions, the trustee allocates the amounts accordingly. If the instrument is silent, the trustee refers to state law. Generally, the rule is that ordinary receipts and expenses are chargeable to the income beneficiary and extraordinary receipts and ex¬penses are allocated to the principal beneficiary.
In this problem, the re¬ceipt of rent from the farm and the expense of paying the property's taxes would be classified as ordinary. The cost of long-term improve¬ments and proceeds from the land sale would be extraordinary. Thus, the rent and taxes would be allocated to Jens, and the improvements and proceeds would be Karin's.
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