Mar 1, 2006 12:00 PM

New Dilemmas

By Sharon L. Klein, vice president and trust counsel, Fiduciary Trust Company International, New Yor

Traditionally, there has been tremendous tension between the competing interests of a trust's income and remainder beneficiaries. Investing pursuant to the Uniform Prudent Investor Act of 1994 (UPIA), which allows fiduciaries to invest for total return under modern portfolio theory, actually intensified this inherent conflict. Under the UPIA, trustees are permitted to invest in a manner that produces the best overall return, without distinguishing between principal and income. However, trustees were faced with the dilemma of whether they should invest for principal growth, which ultimately inures to the benefit of the remainder beneficiaries, or invest in a manner that produces a fair income payout to the current beneficiaries. The Uniform Principal and Income Act of 1997 (UPAIA)1 seemed to relieve this pressure when it revolutionized trust investing by giving trustees the ability to adjust allocations between principal and income to satisfy the needs of the current beneficiaries while preserving the principal for future beneficiaries.2

Some states3 adopted a unitrust approach instead of, or in addition to, the power-to-adjust. Under a unitrust regime, trustees are permitted to convert a conventional income trust into a total return trust, under which the income beneficiary receives an amount equal to a fixed percentage of the trust's market value.

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