Trust terms supersede the Uniform Principal and Income Act on allocation of eminent domain proceeds.
Sarah Forbes created an inter vivos trust and conveyed a certain parcel of real property located in Newport News to the trust. The trust terms instructed the trustee to distribute all of the trust net income Forbes during her lifetime. Upon Forbes’ death, the remaining assets were to be distributed to Riverside Healthcare Association, Inc.
In 2008, the Commonwealth of Virginia acquired a portion of the trust property through eminent domain and paid compensation to the trust for the property taken. The trustee sought declaratory relief from the Newport News Circuit Court whether the eminent domain compensation should be deemed trust income distributable to Forbes or trust principal to be held for Riverside. The trust terms defined income as “all funds received from the rental of the trust property and/or generated from or by the trust property and/or any proceeds from the trust property.” Under the Virginia Uniform Principal and Income Act (UPIA), in the absence of a contrary provision in the trust instrument a trustee is generally required to allocate the proceeds of property taken by eminent domain to principal.
The circuit court held that the eminent domain compensation should be deemed trust income under the terms of the trust instrument. Riverside appealed. On appeal, the Virginia Supreme Court affirmed the circuit court on the grounds that: (1) it was Forbes’ intent that any assets derived from the trust property would constitute proceeds from the trust property; (2) under the trust terms, eminent domain compensation should therefore be considered trust income, and as such, would be distributable to Forbes; and (3) the trust terms supersede the provisions of UPIA.