In Part 1 of our article on Understanding the Florida Uniform Fiduciary Income and Principal Act, we introduced the recently enacted Florida Uniform Fiduciary Income and Principal Act (FUFIPA) and the 2002 Florida Uniform Principal and Income Act (FPIA) that it replaced. This article will dive a little more in-depth into the topics discussed in Part 1 and discuss the other impacts of this new legislation.
WHAT IS DIFFERENT BETWEEN THE OLD AND NEW INCOME AND PRINCIPAL ACTS:
Power to Adjust:
While many of the provisions between the FUFIPA and FPIA have remained the same, there are quite a few notable exceptions. Some differences are more minute in scope or effect. For example, the new FUFIPA stresses using the Modern Portfolio Theory and changes the term “partial liquidations” to “capital distributions.”[i]
Other and more drastic changes are included as well. One of the most notable changes is that the new Act allows Trustees broader discretion to differentiate between “income” and “principal .”(We recommend reading Part 1 of the Article on Understanding the Florida Uniform Fiduciary Income and Principal Act first as we discuss the differences between these terms in detail)
The “Power to Adjust” allows a Trustee to adjust assets between income and principal. A Trustee using this power could change the nature of certain receipts to favor income or principal beneficiaries as long as the trustee “invests and manages trust assets as a prudent investor” (emphasis added). Under FPIA, the Trustee was to consider nine factors when deciding to exercise power to adjust, including “the intent of the Grantor” and “the anticipated tax consequences.”[ii]
Under FUFIPA, the nine factors are kept, but they are no longer specific to exercising the power to adjust – they are now factors to be considered in all fiduciary decisions. FUFIPA also requires that Trustees and other fiduciaries keep detailed records when exercising the power and give any qualified beneficiaries at least annual notice if the power to adjust has been exercised.
Unitrusts:
Unitrusts have become increasingly popular over the last few decades. A Unitrust, compared to a traditional trust, is a trust that provides that “income” beneficiaries receive a net percentage of the value of the trust’s assets rather than actual income received thereon. This difference helps to reduce the likelihood that income and principal beneficiaries would be at odds. Rather than a Trustee needing to make investment decisions to either increase trust income annually or, instead, to provide for the growth of trust assets, they can allocate a percentage of the trust’s fair market value as “income.” Then the remainder can fall under “principal.”
The FUFIPA adds many long-overdue definitions to assist in preparing and administering unitrusts, including “unitrust rate” and “net fair value”. These terms are discussed further below.
Another change introduced by FUFIPA is the ability for a Trustee to convert a traditional income trust into a unitrust (or vice versa), even if the governing instrument is silent regarding the use of a unitrust.
WHAT STAYED THE SAME:
Safe Harbor:
FPIA contained language mandating that the rate for any unitrusts be within the federal tax safe harbor threshold – Between 3% and 5% per year. The amount of these distributions is considered the “unitrust rate .”By tying the unitrust rate to the federal tax safe harbor, annual allocations of a unitrust’s assets to be considered “income” should be at least 3 percent and no more than 5 percent of the net asset value of the trust, or NAV. These distributions are generally determined annually, but can be paid monthly to beneficiaries.
The new FUFIPA keeps this 3 to 5 percent threshold but allows for greater flexibility in the future in case the Treasury ever relaxes the tax safe harbor.
Trustee Ownership:
FUFIPA also retains the provision governing Trustees that own investment entities. Under both FPIA and FUFIPA, if a non-independent Trustee owns any entity that consists of primarily passive investments, that entity is ignored for the current year and the prior two years. Instead, the returns of all the underlying assets are used to determine income and principal allocations. For this purpose, a “passive investment” is one where more than one-half of the net income is from interest, royalties, dividends, or other similar investments.
CONCLUSION:
The FUFIPA has provided clarity and guidance to fiduciaries of trust and will hopefully allow for easier administrations. While this Act, like the 2002 Act, seeks to maintain uniformity among the laws of other states, there are also many Florida-specific provisions that reflect the state’s unique demographic and economic diversity.
If you would like to update your Florida trust to include these new provisions, contact a Florida Estate Planning lawyer, complete the CONTACT US FORM or give a Florida Trust Lawyer a call at 904-990-8000.
[i] FUFIPA §738.401
[ii] 2011 Florida Stat. § 738.104(2)(b) and (i)
