Hasso

Unfortunately, but not surprisingly, classification of money flowing into a trust, particularly in seven- or eight-figure amounts, can become a focus of controversy that drives a stake into the heart of a family. Such is the case here, where a widow is the sole income beneficiary of a marital trust established by her deceased husband, and their grown son and daughter are remainder beneficiaries whose pecuniary interests are at odds with the mother’s: Mother benefits from money allocated as income to the trust because it all goes to her; son and daughter are better served when such money is allocated to principal, to be stored up for their use at a later day.

The disparate interests of mother and children here compelled the trustee to petition the court for instructions about proper allocation—as income or principal—of millions of dollars in funds distributed to the trust by a subchapter S corporation of which the trust is a shareholder. The court determined as a matter of law the funds were to be allocated to income, thus the money goes to mother. The son and daughter appeal.

The general rule in California, established by statute, is unequivocal and simply stated: When…