Things that may surprise you about Florida's Principal and Income Act and related accounting law.

• Author: Carroll, William C.
• Position: Part 1

In 2002, the Florida Legislature adopted the Florida Uniform Principal and Income Act, effective on January 1, 2003 (the act). (1) The act, which is found in F.S. Ch. 738, is a modified version of the Uniform Principal and Income Act (1997). The statutory sections of the act allocate trust and estate receipts and disbursements between income and principal. Additionally, the act contains provisions that allow a trustee to make adjustments between income and principal ([section]738.104) and to convert a trust to a unitrust ([section]738.1041). Sections 738.104 and 738.1041 are beyond the scope of this article.

It is significant to note that the statutory sections of the act are "default" sections, meaning that the provisions of Ch. 738 only apply if the terms of the trust or will do not contain a different provision or do not give the fiduciary a discretionary power of administration. (2) It is critically important that attorneys practicing in the trusts and estates area have a working knowledge of the act. Through extensive examples, this two-part article will explore the inner workings of some of the more significant provisions of the act. These examples assume that the will or trust is silent as to allocating the receipt or disbursement at issue to either income or principal, and does not give the fiduciary a discretionary power of administration.

Part one will introduce some of the basic provision of the act. Part two will cover some of the more complex issues.

Example 1: Specifically Devised Real Estate

Mom's will specifically devises rental real estate to Son. The residue of the estate passes to Daughter. The will is silent as to who receives and/or pays the rental real estate receipts and expenses. Mom died on December 31. One year after Mom's death rental real estate gets distributed to Son. During the probate administration, the estate has the following receipts and disbursements.

* Rent received on rental real estate: $12,000 ($1,000 per month).

* Property taxes on rental real estate: $2,000.

* Estate administrative expenses: $200,000.

Section 738.201(1) provides that the net income and principal receipts on property specifically devised to a beneficiary shall be distributed to the beneficiary. Section 738.201(1) specifically refers to and incorporates the provisions of [section]738.301 through [section]738.706 in determining the net income and principal receipts. Pursuant to [section]738.502, the $12,000 of rent constitutes income and under [section]738.701(3), the $2,000 of property taxes is charged against income. Therefore, in addition to the distribution of the rental real estate, Son also receives $10,000 of net rental income (i.e., $12,000 of rent less $2,000 of property taxes).

Can the personal representative (PR) charge any portion of the $200,000 of estate administration expenses to the specifically devised rental real estate? Section 733.805(1)(d) provides that the PR may charge a portion of the estate administration expenses to the specifically devised rental real estate only in an abatement situation. Pursuant to [section]733.805(1)(b), Daughter, as the residuary beneficiary, would fully bear the payment of estate administrative expenses.

Alter the facts so that Mom died on January 3. The $2,000 property tax bill became a lien on the property on January 1 and January's rent of $1,000 (due on January 1) was not paid until January 10. These changes do not affect the result; Son still receives $10,000 of net rental income. Pursuant to [section]738.201(5), the net income and principal receipts on property specifically devised are determined based on amounts received or disbursed by the PR with respect to the property whether those amounts accrued or became due before, on, or after the date of the decedent's death.

Assume, instead, that the property devised to Son was a vacant lot and not income producing rental real estate, with Mom dying on January 3 and the $2,000 property tax bill becoming a lien on the property on January 1. There is, however, no rental income from the specifically devised property against which to charge property tax. Would Son or the estate (i.e., Daughter as the residuary beneficiary) be responsible for the property tax bill? Section [section]733.803 mandates that, absent a clear direction in the will to the contrary, a specific devise of encumbered property does not entitle the devisee to have the encumbrance paid at the expense of the residuary beneficiary. Thus, Son would be responsible for the tax bill. If Mom died on December 31 and the $2,000 property tax bill became a lien on the property on January 1, would Son or the estate be responsible for this property tax bill? Neither [section]733.803 nor [section]738.201(1) specifically addresses this scenario. However, in keeping with the underlying premise of [section]738.201(1) (i.e., that income and principal receipts on specifically devised property are first reduced by expenses on such property), the authors believe that the property tax bill should be Son's responsibility and not the estate's. Also, under [section]732.514, because Son is a vested devisee at Mom's death, he should be responsible for this...