Florida has been growing incredibly quickly. According to a study by U.S. News and World Report, the state was one of the top five places people moved in 2024, and Fort Myers, Florida, was the fastest-growing place of the year.[i] Florida cities comprise 7 of the top 10 spots on the list. As the Sunshine State continues to grow and expand, it is more important than ever to modernize its laws to meet the needs of a changing and dynamic population.
One aspect of Florida law that will change in 2025 is the administration of trusts and estates. The Florida Uniform Fiduciary Income and Principal Act (FUFIPA) will replace the 2002 Florida Uniform Principal and Income Act (FPIA).
WHO THIS APPLIES TO:
This Act, consistent with the FPIA, applies to fiduciaries under trust documents in Florida. Since the passing of the FPIA in 2002, more people with existing trusts have moved to Florida, raising the question of what law applies to fiduciary duties and the treatment of income and principal. Opinions were divided as to whether these determinations were governed by the laws of the state of the trust’s creation or where the trust’s current situs is located.
The FUFIPA has addressed these concerns and determined that a trust is governed by the laws of the state where it is being primarily administered. If someone would like Florida law to apply, then the situs of their trust would need to be changed and updated by a Florida-licensed attorney. If you would like assistance in transferring your trust to Florida or to discuss whether that would be the best option, please contact us by clicking here.
In addition to providing guidance for fiduciaries, this 2025 change offers much-needed insight into how income and principal are treated for different classifications of beneficiaries. Modern trusts have tended to blur the line between “income beneficiaries” and “principal beneficiaries,” as many trust settlors have preferred the simplicity of having one type of beneficiary. In a unitrust, for example, a beneficiary receives income based on a percentage of total trust assets rather than considering what the trust assets generate in income over a given year.
Traditionally, however, trusts were structured to mandate that any income generated by the trust must be distributed. At the same time, the principal of the trust may be distributed or may be kept in the trust for investment and future savings.
The FUFIPA grants trustees a broad level of autonomy in determining what is income and what is principal and seeks to promote the use of Modern Portfolio Theory (MPT), which is explained more below.
INCOME V. PRINCIPAL
To understand the changes occurring in 2025, the concepts of “income” and “principal” as they relate to estate planning and trust administration are essential.
Trusts are funded with property of all types, and often, this property generates a periodic return. Most commonly, this is seen with assets such as rental real estate properties, income from investment holdings, and periodic dividend payments from stocks. The assets that generate that income (the property or properties, investments, and stocks) are considered the principal.
One often-used analogy is to picture the assets as a fruiting tree. The tree itself would be the principal, while the fruit the tree produces regularly would be the income.
While examples like this can make the differences between the two seem straightforward, the reality for fiduciaries is often quite complex. Expenses related to producing income in the trust reduce the net amount of income, so any fees or costs would need to be subtracted from the income and would reduce the amount payable to income beneficiaries.
This discrepancy between income and principal can also create a tug-of-war for the fiduciary. Understandably, income beneficiaries will want the trust to primarily invest in income-producing assets, whereas principal beneficiaries will prefer investment in assets that grow in value but do not necessarily create regular income. The conflict between these two possible investment strategies has led to the FUFIPA’s emphasis on MPT.
MPT deemphasizes the difference between income and principal and looks at the investment holdings as a whole. Its primary concept is that an asset’s specific risk and possible return should not be viewed on an asset-by-asset basis but rather the total portfolio’s risk and return should be considered.[ii]
[i] https://realestate.usnews.com/places/rankings/fastest-growing-places
[ii] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1952.tb01525.x
