Principal and Income Allocations — Attention to Detail
by Carol Warnick
I recently had the occasion to pull out some old CLE materials from 2001 after Colorado’s adoption of the New Uniform Principal and Income Act (UPIA). That caused me to reflect on what has happened in the thirteen years since passage of the act in Colorado. Unfortunately, there still seem to be individual trustees as well as attorneys and accountants who do not appreciate that the provisions of this act must be considered in determining such basic things as what is income and what is principal, unless that is clearly spelled out in the document.
Determinations of income and principal, in conjunction with the distribution provisions of the document, are critical to determining what each trust beneficiary is to receive. The basic thrust of the UPIA is that the document will trump the UPIA rules, but the UPIA provides a set of default rules to make such determination if the trust is silent. It also contains special rules for such things as depreciation expense, how to handle receipts from depleting assets such as mineral interests, and giving the trustee the power to adjust between income and principal under certain circumstances.
A common mistake is to allocate principal and income based upon a recollection of what the UPIA says, or worse, how it was allocated for a previous client. The first thing the trustee should do is to read the trust document because if the issue is discussed there, there is no need to look further. However, most documents don’t go into the level of specificity in all areas as the UPIA does and therefore the practitioner must rely on the UPIA. It is also important to read the correct state’s UPIA statutes as states have varied in their adoption of portions of the original uniform law. Depreciation, for example, is one area that is treated differently by a variety of states.
More and more trusts are spanning multiple generations and require trustees to manage trust assets for decades. It is important to remember that a decision made today may be reviewed years later with 20/20 hindsight, when the cost of the trustee’s decision will have been compounding for years. This means that decisions involving even low dollar amounts now can be subject to close scrutiny years later. Trustees and their agents need to be fully aware of the provisions of the UPIA and make sure to follow them.