Advising trustees: Lessons from the revised Uniform Principal and Income Act.

• Author: Linder, Ronald J.
• Position: Brief Article

Changes to the rules relating to the determination of income in trusts and estates have given CPAs the opportunity to provide broad financial planning services to trustees.

Trustees are well advised to have an investment statement for all significant assets. These plans should reflect a thought-out approach to investment objects and cash-flow planning given the trust's objectives.

As with business entities, the complexities of advising will depend on the assets held and the trust's objectives. A trust with a modest portfolio intended to fund education could have a relatively simple plan, while one planning for extensive real estate holdings that are intended to provide multiple generations of beneficiaries with income may have a much more complicated plan.

Two Years Later

The accounting rules for trusts and estates were substantially changed as of Jan. 1, 2000. A practitioner working with California trusts and estates should have a copy of the California law and the California Law Revision Commission's report on this subject. The report may be downloaded at http://161.58.165.226/pub/Printed_Reports!; select sPRT-UPAIA-2000.pdf. While the new rules apply to estates and trusts, this article focuses on trusts.

Under the rules, a trustee may create reserves for future expenses for any business the trustee conducts. A definition of business for this purpose is very broad.

While a business does not include the income from a portfolio's management, it may include the following at the election of the trustee: income from real estate, mining, timber or investing in derivatives or options as well as other business operations.

Thus the trustee is charged with the responsibility of accounting for the business--not according to accounting rules--but based on the financial realities, taking into account the trust's purpose. Adjusting Income

Adjusting Income

In addition, the trustee has the power to adjust "income" if three conditions are met:

1) The trust must be investing under the Prudent Investor rules. Virtually all California trusts are covered by these rules unless the document specifically exempts the trust from the rules.

2) The trust has a provision that provides that distribution shall or may be made based on income.

3) The trustees determine that they cannot be impartial between the beneficiaries by applying the mechanical rules.

Since dividends are income and growth in asset value is not income, a trust holding all equities may understate the...