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Unpaid Periodic Rent – Income or Principal?

Let’s say Chris dies on January 5, 2011. He has an estate plan with a typical Bypass/QTIP trust arrangement for his second wife, Suzy, remainder to his children from his first wife, along with a pour-over will. The children get the principal of the Bypass and QTIP when Suzy dies. Needless to say Chris’ children and Suzy despise one another. Suzy also dies in 2011, and under her estate plan all her property goes to her children from a prior marriage.

Chris is owed unpaid periodic rent of $100,000 due on January 1, 2011. The $100,000 of rent is paid on January 10, 2011, five days after Chris died. Predictably, litigation ensues. Chris’s children claim the $100,000 should be allocated to “principal,” which means it goes to them as remaindermen. Suzy’s children claim the receipt was “income” due to Suzy, which goes to them under her estate plan. Who wins (assuming both sides have competent lawyers familiar with the P&I statute)?

The answer is found in Probate Code §16346(a). Suzy’s income interest began on Chris’s date of death. Accordingly the rental income, because it accrued before her income interest began, is allocated to principal. Chris’s children, not Suzy’s children, get the cash.