|SAME AS||SAME AS S04866-A|
|Amd §§11-2.3 & 11-A-4.4, EPT L|
|Relates to trust accounting income and principal; allows a trustee to allocate to income gains from the sale or exchange or other disposition of specified principal assets.|
|02/06/2018||referred to judiciary|
|02/15/2018||advanced to third reading cal.688|
|02/27/2018||delivered to senate|
|02/27/2018||REFERRED TO JUDICIARY|
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NEW YORK STATE ASSEMBLY
MEMORANDUM IN SUPPORT OF LEGISLATION
submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A9765 SPONSOR: Dinowitz
TITLE OF BILL: An act to amend the estates, powers and trusts law, in relation to trust accounting income and principal This is one in a series of measures being introduced at the request of the Chief Administrative Judge upon the recommendation of his Surro- gate's Court Advisory Committee. This measure would amend section 11-2.3(b)(5)(A) of the Estates, Powers and Trusts Law (part of the State's Prudent Investor Act) and 11-A-4.4(2) of such Law (part of the State's Principal and Income Act) to clarify that, unless a trust instrument otherwise provides, a trustee has the powers set forth in regulations under the Internal Revenue Code permitting a reasonable and impartial allocation of realized capital gains to income and thereby permitting the trustee to determine the incidence of such gains in a reasonable and impartial manner. Recent increases in the tax rates applicable to realized capital gains and the enactment of the new 3.8% tax on undistributed net investment income (which includes realized capital gains) have made it increasingly important that, to achieve results that are reasonable and impartial to all beneficiaries, a trustee be able effectively to determine whether the realized capital gains of a trust are taxed to the current benefici- aries or to the trust (i.e., in essence to the remainder beneficiaries). Briefly put, whether the trust or the current beneficiaries are taxed on the capital gains turns on whether such gains are "excluded" or "included" in what is called "distributable net income" (DNI) under IRC § 643(a). If they are excluded from DNI, they will be taxed to the trust. If they are included in DNI, then amounts distributed (or required to be distributed) to the current beneficiaries will be consid- ered, partially or fully, to "carry out" such gains and cause them to be taxed to such beneficiaries. The relevant statutory provisions and regulations are as follows: (a) The statute (unamended since the 1954 Code): § 643(a)(3) (a) Distributable net income For purposes of this part, the term "distributable net income" means, with respect to any taxable year, the taxable income of the estate or trust computed with the following modifications- Capital gains and losses Gains from the sale or exchange of capital assets shall be excluded to the extent that such gains are allocated to corpus and are not (A) paid, credited, or required to be distributed to any beneficiary during the taxable year...., or (b) The regulations (last amended in 2004): § 1.643(a)-3 (b) Capital gains ...are included in distributable net income to the extent they are, pursuant to the terms of the governing instrument and applicable local law, or pursuant to a reasonable and impartial exercise of discretion by the fiduciary (in accordance with a power granted to the fiduciary by applicable local law or by the governing instrument if not prohibited by applicable local law)- (1) Allocated to income (but if income under the state statute is defined as, or consists of a unitrust amount, a discretionary power to allocate gains to income must also be exercised consistently and the amount so allocated may not be greater than the excess of the unitrust amount over the amount of distributable net income determined without regard to this subparagraph § 1.643(a)-3(b)); (2) Allocated to corpus but treated consistently by the fiduciary on the trust's books, records, and tax returns as part of a distribution to a beneficiary; or (3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary. The foregoing regulations, proposed in 2001 and finalized in 2004, were the result of the Treasury's decision to accommodate changes in state laws (spearheaded by New York) designed to facilitate total return investing by trustees. As stated in the introduction to the proposed and final regulations: (Proposed) The prudent investor standard for managing trust assets has been enacted by many states and encourages fiduciaries to adopt an investment strate- gy designed to maximize the total return on trust assets. Under this investment strategy, trust assets should be invested for total positive return, that is, ordinary income plus appreciation, in order to maximize the value of the trust. Thus, under certain economic circumstances, equities, rather than bonds, would constitute a greater portion of the trust assets than they would under traditional investment standards ...To ensure that the income beneficiary is not penalized if a trustee adopts a total return investment strategy, many states have made, or are considering making, revisions to the definitions of income and princi- pal. Some state statutes (like those of New York) permit the trustee to make an equitable adjustment between income and principal if necessary to ensure that both the income beneficiary and the remainder beneficiary are treated impartially, based on what is fair and reasonable to all of the beneficiaries. Thus, a receipt of capital gains that previously would have been allocated to principal may be allocated by the trustee to income if necessary to treat both parties impartially. Conversely, a receipt of dividends or interest that previously would have been allo- cated to income may be allocated by the trustee to principal if neces- sary to treat both parties impartially, based on what is fair and reasonable to all of the beneficiaries. Thus, a receipt of capital gains that previously would have been allocated to principal may be allocated by the trustee to income if necessary to treat both parties impartially. Conversely, a receipt of dividends or interest that previously would have been allocated to income may be allocated by the trustee to princi- pal if necessary to treat both parties impartially. Other states are proposing legislation that would allow the trustee to pay a unitrust amount to the income beneficiary in satisfaction of that beneficiary's right to the income from the trust. This unitrust amount will be a fixed percentage, sometimes required to be within a range set by state stat- ute, of the fair market value of the trust assets determined annually. (Emphasis and bracketed material added.) (Final) The IRS and the Treasury Department recognize that state statutes are in the process of changing traditional concepts of income and principal in response to investment strategies that seek total positive return on trust assets. These statutes are designed to ensure that, when a trust invests in assets that may generate little traditional income (including dividends, interest, and rents), the income and remainder beneficiaries are allocated reasonable amounts of the total return of the trust (including both traditional income and capital appreciation of trust assets) so that both classes of beneficiaries are treated impartially. Some statutes permit the trustee to pay to the person entitled to the income a unitrust amount based on a fixed percentage of the fair market value of the trust assets. Other statutes permit the trustee the discretion to make adjustments between income and principal to treat the beneficiaries impartially. Under the proposed regulations, a trust's definition of income in conformance with applicable state statutes will be respected for federal tax purposes when the state statutes provide for a reasonable apportionment of the total return of the trust. In New York, total return investing by trustees is facilitated statuto- rily by the power to adjust provisions of EPTL 11-2.3(b)(5) and the optional unitrust provisions of EPTL 11-2.4.* In addition to these statutes, the provisions of the trust itself may permit total return investing. E.g., a trustee who has unlimited discretion to distribute principal to a beneficiary to whom income must or may be paid is substantially free to invest without regard to the form of return because the power to distribute principal can be used in much the same manner as the power to adjust. In light of the foregoing, and as noted above, it is recommended that the New York statutes be amended to make clear that, unless the instru- ment provides otherwise, a trustee has the powers set forth in the regu- lations which would permit a reasonable and impartial allocation of realized capital gains to income and thereby permit the trustee to determine the incidence of such gains in a reasonable and impartial manner. This measure revises a prior legislative proposal submitted by this Office. Specifically, this measure adopts the recommendation of certain members of the New York State Bar Association and the Association of the Bar of the City of New York that (1) the provisions affecting New York's Power-to-Adjust be made directly within the present Power-To-Adjust provisions of EPTL 11-2-3(b), and (2) those provisions preclude any unintended and undesirable negative implications by clarifying the breadth of a trustee's power under EPTL 11-2.3(b)(5)(A). This measure, which would have no-fiscal impact on the State, would take effect immediately and apply to all trusts whenever established.   2017-18 LEGISLATIVE HISTORY: OCA 2017-31 Senate 4866 (Sen. Bonacic) (PASSED in 2017; referred to Judiciary in 2018)   2015-16 LEGISLATIVE HISTORY: OCA 2015-15 Senate 5620 (Sen. Bonacic) (PASSED) *As stated by the Court of Appeals in In Re Heller, 6 NY3d 649 (2006): "The Prudent Investor Act encourages investing for total return on a portfolio...The 2001 legislation allows trustees to pursue this strategy uninhibited by a constrained concept of trust accounting income...A trustee investing for a portfolio's total return under the Prudent Investor Act may now adjust principal and income to compensate for the effects of the investment decisions on distribution to income benefici- aries.... Alternatively, the optional unitrust provision lets trustees elect unitrust status for a trust (EPTL 11-2.4), by which income is calculated according to a fixed formula."
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STATE OF NEW YORK ________________________________________________________________________ 9765 IN ASSEMBLY February 6, 2018 ___________ Introduced by M. of A. DINOWITZ -- (at request of the Office of Court Administration) -- read once and referred to the Committee on Judici- ary AN ACT to amend the estates, powers and trusts law, in relation to trust accounting income and principal The People of the State of New York, represented in Senate and Assem- bly, do enact as follows: 1 Section 1. Clause (A) of subparagraph 5 of paragraph (b) of section 2 11-2.3 of the estates, powers and trusts law, as amended by chapter 408 3 of the laws of 2008, is amended to read as follows: 4 (A) Where the rules in article 11-A apply to a trust and the terms of 5 the trust describe the amount that may or must be distributed to a bene- 6 ficiary by referring to the trust's income, the prudent investor stand- 7 ard also authorizes the trustee to adjust between principal and income 8 to the extent the trustee considers advisable to enable the trustee to 9 make appropriate present and future distributions in accordance with 10 clause (b)(3)(A) if the trustee determines, in light of its investment 11 decisions, the consideration factors incorporated in clause (b)(5)(B), 12 and the accounting income expected to be produced by applying the rules 13 in article 11-A, that such an adjustment would be fair and reasonable to 14 all of the beneficiaries. In adjusting from income to principal under 15 the power conferred by this clause, the trustee may allocate to princi- 16 pal any form of receipt which would otherwise be characterized as income 17 and may specify the particular receipt or receipts being allocated to 18 principal. In adjusting from principal to income the trustee (i) may 19 allocate to income any asset which would otherwise be characterized as 20 principal, regardless of whether it constitutes original trust princi- 21 pal, accumulated income, or realized or unrealized appreciation, (ii) 22 may specify the particular asset or assets being allocated to income, 23 and (iii) may specify that what is being allocated to income is part or 24 all of the realized gain from the sale, exchange or other disposition of 25 particular principal assets. EXPLANATION--Matter in italics (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD09597-03-8A. 9765 2 1 § 2. Paragraph 2 of section 11-A-4.4 of the estates, powers and trusts 2 law, as added by chapter 243 of the laws of 2001, is amended to read as 3 follows: 4 (2) money or other property received from the sale, exchange, liqui- 5 dation, or change in form of a principal asset, including realized 6 profit, subject to this part; provided, however, that a trustee may vary 7 this allocation as provided in clause 11-2.3(b)(5)(A), and provided 8 further, that a trustee who has an unlimited discretionary power to 9 distribute principal, as defined in subparagraph 10-6.6(s)(9), may allo- 10 cate to income part or all of the realized gain from the sale, exchange 11 or other disposition of specified principal assets. 12 § 3. This act shall take effect immediately and shall apply to all 13 trusts, whenever established.