A. Subject to § 64.2-1068, and except as otherwise provided in subdivision C 2 of § 64.2-1071, a fiduciary shall disburse from principal:
1. The balance of the disbursements described in subdivisions 1 and 3 of § 64.2-1064, after application of subdivision 2 of § 64.2-1064;
2. The fiduciary’s compensation calculated on principal as a fee for acceptance, distribution, or termination;
3. A payment of an expense to prepare for or execute a sale or other disposition of property;
5. A payment of an expense of an accounting, judicial or nonjudicial proceeding, or other matter that involves primarily principal, including a proceeding to construe the terms of the trust or protect property;
6. A payment of a premium for insurance, including title insurance, not described in subdivision 4 of § 64.2-1064, of which the fiduciary is the owner and beneficiary;
7. A payment of an estate or inheritance tax or other tax imposed because of the death of a decedent, including penalties, apportioned to the trust; and
8. A payment: a. Related to environmental matters, including:
4. Monitoring remedial activities and the release of substances;
6. Collecting amounts from persons liable or potentially liable for the costs of activities described in subdivisions (1) through (5);
7. Penalties imposed under environmental laws or regulations;
8. Other actions to comply with environmental laws or regulations;
10. Defending claims based on environmental matters; and b. For a premium for insurance for matters described in subdivision a.
B. If a principal asset is encumbered with an obligation that requires income from the asset to be paid directly to a creditor, the fiduciary shall transfer from principal to income an amount equal to the income paid to the creditor in reduction of the principal balance of the obligation.
C. Notwithstanding any other provision of law and unless the terms of the trust provide to the contrary, a trustee may pay from the principal of the trust from time to time (i) the federal or state income taxes, or both, imposed upon the settlor on income of the trust that is not distributed to the settlor or (ii) such amounts that are required to reimburse the settlor for any federal or state income taxes, or both, imposed on the settlor on income of the trust that is not distributed to the settlor. The trustee shall not have the power to make payments pursuant to this subsection with respect to any trust where a charitable income, estate, or gift tax deduction has been allowed, in whole or in part, for the contributions to such trust if the exercise of such power would limit or reduce the amount of such deduction.