Principal and Income Allocations

Question 1

Who has the power to remove a trustee?

Answer 1

The court.

Question 2

Who can request removal of a trustee?

Answer 2

The court sua sponte, the settlor, co-trustees, or any of the beneficiaries.

Question 3

On what grounds will a trustee be removed?

Answer 3

1. Trustee committed a serious breach of trust;
2. lack of cooperation among trustees that substantially impairs administration of the trust;
3. trustee has not effectively administered the trust due to unfitness, unwillingness, or persistent failures; OR
4. there has been a substantial change in circumstances.

UNLESS these circumstances existed at the time the trustee was named and were known by the settlor, in which case they are not necessarily sufficient grounds for removal.

Question 4

How is the property allocated?

Answer 4

Depends if it’s principal or income.

Principal: generally goes to remaindermen

Income: generally goes to life beneficiaries

Question 5

How must the trustee allocate the trust property?

Answer 5

However the trust instrument says to or, lacking that, in such a manner that treats present and future beneficiaries fairly.

Question 6

How will the trust property be classified?

Answer 6

The trustee will focus on the total return to the trust portfolio, regardless of the classification as income or principal.

Question 7

Can the trustee recharacterize and reallocate investment returns?

Answer 7

Yes, if he deems it necessary to fulfill the trust purposes AND the allocations are reasonable, do not have adverse tax consequences, and are consistent with the trust instrument.

Question 8

In recharacterizing and reallocating the trust property, what factors must the trustee consider?

Answer 8

1. The intent of the settlor,
2. the language of the instrument,
3. the nature, size, likely duration, and purpose of the trust,
4. the identities and circumstances of the beneficiaries,
5. the relative needs for regularity of income,
6. preservation and appreciation of capital and liquidity,
7. the net amount allocated to income under other sections of the Uniform Principal and Income Act,
8. the increase and decrease in value of principal assets,
9. the effect of economic conditions on allocation, AND
10. the anticipated tax consequences of adjustment

Question 9

How must the trustee allocate receipts?

Answer 9

Per the UPAIA, but if that doesn’t apply, then

• cash money received from an entity is income (unless it is capital gain or is received following a partial or complete liquidation of the entity)
• all other property received from an entity is principal
• life insurance proceeds or other contracts in which the trust or trustee is named as a beneficiary are allocated to principal
  
  • except if the contract insures the trustee against loss, then it’s income.

Question 10

How must the trustee allocate expenses?

Answer 10

Equitably.

Charged to trust income:

1. 1/2 of the regular compensation to the turstee and those providing services to the trustee
2. 1/2 of accounting costs, court costs, etc.
3. Ordinary expenses in their entirety AND
4. insurance premiums that cover the loss of a trust asset.

Charged to trust principal:

1. 1/2 of the regular compensation to the trustee and those providing services to the trustee
2. 1/2 of accounting costs, court costs, etc.
3. Payments on the principal of any trust debts
4. Expenses of any proceeding concerning interest in principal
5. Estate taxes
6. Payments related to environmental matters.