In re Estate of Jones, 422 S.W.3d 775 (Tex. App.—Texarkana 2013, no pet.).



Principal and Income Allocation


Testator died owning annuities which were payable to his estate.  Based on the terms of Testator’s will and trusts created thereunder, it became pivotal to determine whether the death benefits payable from the annuities are considered principal or income.  If they are income, Surviving Spouse would receive them all but if they are principal, then she would only receive the income generated by the proceeds of the annuities.  The trial court determined the death benefits were principal and Surviving Spouse appealed.


The appellate court affirmed.  The court engaged in a sophisticated discussion of the applicable provisions of the Texas Trust Code which are based on the Revised Uniform and Principal Act in reaching the conclusion that the death benefits were principal at the time when they became due and payable.  The benefits were a single payment owed because of Testator’s death and payable to Testator’s estate.  The benefits were not payable to the trust to which they were later allocated and they were not a right to receive future payments or an annuity.  See Prop. Code § 116.164 (deemed “persuasive, analogous authority that the death benefits (similar to insurance policy proceeds)” are principal).


The court also explained that the initial characterization of the benefits as principal would not change merely because the estate purchased five-year annuities with the benefits and transferred the annuities from Testator’s estate into a trust.  See Prop. Code § 116.161 (proceeds from the sale of principal are allocated to principal).


Moral:  Annuities payable to a decedent’s estate are principal even if they, or their proceeds, later pass into a trust.