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Information System Essay

4749 words - 19 pages

in Gov. Andrew Cuomo’s budget bill for
the next biennium and effective April
1, 2014, the state’s treatment of grantor
and nongrantor trusts was “decoupled”
from federal tax law. New York extend­
ed the classification of what is a grantor
trust, for state tax purposes, to include
the kind of irrevocable trusts that are
being created by New York residents
under Delaware and Nevada law. If the
trust is a grantor trust, the plan fails.
More broadly, a subcommittee of the
Multistate Tax Commission intends to
explore whether uniform rules should be
put in place for consistent treatment of
determining the residency of a trust. It
is the very presence of inconsistency on
trust ...view middle of the document...

643 have pro­
vided fiduciaries with some
flexibility in making distri­
butions of capital gains to
beneficiaries. Tax advisers
should understand the
options available under
state law, including the
“power to adjust” and
“unitrust” provisions, and
how those provisions intersect with
Regs. Sec. 1.643(a)-3. Additionally, ad­
visers should consider the grantor trust
rules and how they may provide further
options for income shifting.
B ackground

FAI, also referred to as trust account­
ing income, is determined by the gov­
erning instrument and applicable local
law. Although it is not a tax concept,
FAI is important in determining wheth­
er the fiduciary or beneficiaries pay tax
on the trust’ income. W hen the Internal
Revenue Code refers to “income,” the
reference is to the definition of FAI in
the governing instrument and applicable
local law (Sec. 643(b)).
If the governing instrument is silent
as to the treatment of capital gains for
FAI purposes, the fiduciary should look
to applicable local law. Currently, 46
states and the District of Columbia have

adopted some form of the
1997 UPAIA (see RIA Check­
point, “List of States Following
One of the Revised Uniform
Principal and Income Acts,”Table
T309).Three states (Georgia,
Illinois, and Louisiana) currently
operate under the 1962 UPAIA.
Rhode Island has not adopted
any form of the UPAIA. The
UPAIA typically allocates money
or property received from the sale,
exchange, or liquidation of an asset to
principal (UPAIA §404). For fiduciary
accounting purposes, this means that
capital gains are generally excluded from
income absent another exception.
However, the UPAIA was adopted
in part to update the current income
and principal rules to reflect the con­
cept of total return investing, which
includes the gain or loss that the asset
realizes. Total return “encourages
investors to seek the highest overall
return (given a certain risk tolerance
and within the bounds of prudent
investing), without being needlessly
hampered by how that return is cre­
ated” (Lee, Implementing Total Return
Trusts, p. 4 (2003)). For trusts with a
payout to a current beneficiary based
on income, a fiduciary relying on total
return investing (particularly in the
current low-yield environment) may
not generate sufficient cash from

The Tax Adviser

P H O TO B Y T IL E R 8 4 /IS T O C K


sources typically considered income,
such as interest and dividends, thus
inadvertently reducing the payout due
to the income beneficiary.
Example 1: A Trust is a marital trust
required to distribute all income to
the surviving spouse, B, during his
life, with the remainder to the dece­
dent’s children. The governing instru­
ment is silent regarding treatment of
capital gains, but the governing state
has adopted the 1997 UPAIA. The
trustee invests for total return with
a 70/30 allocation between equities
and fixed income. In 2014, the...

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