Some Examples of the Trust Accounting Rules in New York State

• Author: Seymour Goldberg
• Profession: Senior partner in the law firm of Goldberg & Goldberg, P.C., in Woodbury, New York
• Pages: 109-143

POWER TO ADJUST

Situation 1

Assume that Jack dies on October 1, 2012. Jack’s will establishes a trust

for the benet of his only daughter, Mary. Assume that Mary is divorced

and earns only $15,000 a year as a part-time employee. The trust provides

that Mary will receive the income from the trust each year. The remain-

derman of the trust is Cole, Mary’s child. Harvey, Jack’s former business

associate, is the trustee. Harvey invests the trust assets primarily in equi-

ties. Further assume that during the calendar year 2013, the dividend

and interest income that the trust will receive is approximately 1 percent

of the fair market value of the trust assets as determined on January 2,

2013. This determination is made in November 2013. The fair market

value of the trust assets as of January 2, 2013, amounts to approximately

$1,000,000. Further assume that the unrealized capital gains for the cal-

endar year appear to be approximately 5 percent of the fair market value

of the trust assets as determined on January 2, 2013. This determination

is also made in November 2013.

Question: Does Harvey, as trustee, have the power to adjust the income

distribution to Mary from, for example, 1 percent to 3 percent so that Mary

will receive a distribution of $30,000 ($1,000,000 × 3 percent) instead of

$10,000 ($1,000,000 × 1 percent) from Jack’s trust for the calendar year

2013?

Answer: Yes. According to EPTL 11-2.3(b)(5), where the rules in the

UPAIA apply to a trust and the terms of the trust describe the amount

109

SOME EXAMPLES OF THE

TRUST ACCOUNTING RULES

IN NEW YORK STATE

that may or must be distributed to a beneciary by referring to the trust’s

income, the prudent investor standard also authorizes the trustee to adjust

between principal and income to the extent the trustee considers advis-

able based upon certain factors and accounting income expected to be

produced by applying the rules under the New York UPAIA. Such adjust-

ment would be deemed fair and reasonable to all the beneciaries.

POWER TO ADJUST

Situation 2

Assume the facts in Situation 1.

Question: What in general does the prudent investor rule mean?

Answer: According to EPTL 11-2.3(b)(1), “the prudent investor rule

requires a standard of conduct, not outcome or performance. Compli-

ance with the prudent investor rule is determined in light of facts and

circumstances prevailing at the time of the decision or action of a trustee.

A trustee is not liable to a beneciary to the extent that the trustee acted in

substantial compliance with the prudent investor standard or in reasonable

reliance on the express terms and provisions of the governing instrument.”

Further, according to EPTL 11-2.3(b)(3)(A), “the prudent investor

standard requires a trustee to pursue an overall investment strategy to

enable the trustee to make appropriate present and future distributions

to or for the benet of the beneciaries under the governing instrument,

in accordance with risk and return objectives reasonably suited to the

entire portfolio.”

POWER TO ADJUST

Situation 3

Assume the facts in Situation 2.

Question: What factors should Harvey, as trustee, consider in determin-

ing whether or not to exercise the power to adjust?

| C Y T Y T?110

Answer: According to EPTL 11-2.3, a trustee may consider a number

of factors, including the following:

(1) The nature and estimated duration of the duciary relationship.

(2)

The liquidity and distribution requirements of the governing

instrument.

(3)

The expected tax consequences of investment decisions or strate-

gies and of distributions of income and principal.

(4) The expected total return of the portfolio (including both income

and appreciation of capital).

(5)

The needs of beneciaries (to the extent reasonably known to the

trustee) for present and future distributions authorized or required

by the governing instrument.

(6)

To consider related trusts, the income and resources of beneciaries

to the extent reasonably known to the trustee.

(7)

The intent of the settlor, as expressed in the governing instrument.

(8)

The net amount allocated to income under [the UPAIA] and the

increase or decrease in the value of the principal assets, which the

trustee may estimate as to assets for which market values are not

readily available.

(9) Whether and to what extent the terms of the trust give the trustee

the power to invade principal or accumulate income or prohibit

the trustee from invading principal or accumulating income, and

the extent to which the trustee has exercised a power from time to

time to invade principal or accumulate income.

(10)

The trustee may consider the accounting income expected to be

produced by applying the rules under the New York Uniform Prin-

cipal and Income Act and that such adjustment would be fair and

reasonable to all the beneciaries.

111Some Example s of the Trust Acco unting Rules in New York State |