In administering a trust, a trustee will have the responsibility of appropriately allocating receipts and disbursements between principal and income. First and foremost, the trust itself will provide guidance as to how (if at all) to classify the assets. But what happens if the trust is silent on this point?
Enter Missouri’s Principal and Income Act. Under Missouri Revised Statute 469-405, a trustee may, in his/her discretion, make adjustments between principal and income for purposes of making allocations. Pursuant to said statute, the following factors may be considered by the Trustee:
(1) The nature, purpose and expected duration of the trust; (2) The intent of the settlor; (3) The identity and circumstances of the beneficiaries; (4) The needs for liquidity, regularity of income, and preservation and appreciation of capital; (5) The assets held in the trust, including the extent to which such assets consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property, and the extent to which such assets are used by a beneficiary, and whether such assets were purchased by the trustee or received from the settlor; (6) The net amount allocated to income pursuant to sections 469.401 to 469.467, other than this section, and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available; (7) Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income, or prohibit the trustee from invading principal or accumulating income, and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income; (8) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and (9) The anticipated tax consequences of an adjustment.
Although this statutory provision — and the distinction between principal and income all together — may seem benign and insignificant, the characterization is often crucial. For instance, a trust may say that only income may be distributed or that only income is available for expenses or taxes. As such, because the principal cannot be disturbed, the trustee has specific guidelines to follow in his/her fiduciary capacity. Perhaps most importantly creditor rights may or may not be severely curtailed.
Contact us today if you have any questions pertaining to the validity of a trust, trust amendments, creation, administration, or interpretation.