(a) A trustee shall allocate

(1) to income that portion of a payment that equals the greater of the following:

(A) the portion that the payor characterizes as interest, a dividend, a remittance in place of interest, or a remittance in place of a dividend; or

(B) the portion that is characterized as imputed interest for federal income tax purposes;

(2) to principal that portion of a payment that remains after the allocation is made under (1) of this subsection.

(b) If no part of a payment under a contract calling for equal installments over a fixed period of time is allocable to income under the provisions of (a) of this section, the difference between the trust's acquisition value of the contract and the total expected return is considered to be interest. The trustee shall allocate to income the portion of each payment equivalent to interest on the then unpaid principal balance at the rate specified in the contract or at a rate necessary to amortize the difference between the expected return and the acquisition value, where that rate is readily ascertainable by the trustee.

(c) If no portion of a payment from a separate fund held exclusively for the benefit of the trust is allocable to income under (a) or (b) of this section, but the internal net income of the fund determined as if the fund were a separate trust subject to AS 13.38.200 - 13.38.410, 13.38.500 - 13.38.690, or 13.38.710 - 13.38.860 is readily ascertainable by the trustee, the internal net income of the fund is considered to be the income earned by the fund, and the portion of the payment equal to the then undistributed net income of the fund realized since the trust acquired its interest in the fund is considered to be a distribution of that internal net income of the fund and shall be allocated to the trust income account. The balance of the payment described in this subsection shall be allocated to principal. The power to adjust under AS 13.38.210, the power to convert to a unitrust under AS 13.38.300, and the provisions of AS 13.38.420 apply to retirement benefits covered by this subsection that are payable to a trust. Those powers and provisions may be exercised by the payee trustee or in the governing instrument for the retirement benefits separately and independently from the exercise by the payee trustee or in the governing instrument of those powers and provisions for the trust, as if the retirement benefits and the trust were separate trusts subject to this chapter.

(d) A trustee shall allocate 10 percent of the part of the payment that is required to be made during the accounting period to income and the balance to principal if there is no part of the payment that is allocable to income under (a) - (c) of this section and all or part of the payment is required to be made. The trustee shall allocate the entire payment to principal if no part of a payment is required to be made or the payment received is the entire amount to which the trustee is entitled. In this subsection, a payment is not “required to be made” to the extent that it is made because the trustee exercises a right of withdrawal.

(e) If, to obtain a federal estate or gift tax marital deduction for a trust, the trustee must allocate more of a payment to income than provided for by this section, the trustee shall allocate to income the additional amount necessary to obtain the marital deduction.

(f) This section does not apply to payments to which AS 13.38.700 applies.

(g) In this section, “payment” means a payment that a trustee may receive over a fixed period of time or during the life of one or more individuals because of services rendered or property transferred to the payor in exchange for future payments, and includes

(1) a payment made in money or property from the payor's general assets or from a separate fund created by the payor or another person;

(2) a payment on or from

(A) an installment contract or note;

(B) a private or commercial annuity;

(C) a deferred compensation agreement;

(D) an employee death benefit;

(E) an individual retirement account; or

(F) a pension plan, profit-sharing plan, stock plan, bonus plan, or stock-ownership plan.