RECENT CHANGES IN PRINCIPAL AND INCOME ACT ACCOUNTING [FLORIDA]

The following are some highlights of recent legislative changes, effective in 2013:

Carrying Value Definition. In fiduciary accountings, “carrying value” is the value of an asset when acquired by the fiduciary. Beneficiaries will often use the value to determine how the fiduciary has performed over time by comparing the current value of an asset to its carrying value. Fla.Stats. §738.102 clarifies that for estates and revocable trusts, this value is set at the value on the date of death. It also allows that if there is a change of fiduciaries, the fiduciaries can adjust the carrying value to fair market value at the time of change if done on the next accounting. This avoids fiduciaries being judged on values that were attributable to the period prior to when they became fiduciaries.

Unitrusts. Fla.Stats. §738.104 now allows a conversion of a trust to a unitrust without required a release of the power to adjust by the trustee. Fla.Stats. §738.1041 now employs a three year averaging rule in computing unitrust payouts unless a trust explicitly provides otherwise – this will provide smoothing in payouts in years with high volatility in values of assets.

Distributions to Beneficiaries. In the past, distributable income that was allocable among multiple beneficiaries was allocated based on their fractional interest in estate or trust assets based on date of distribution values. Fla.Stats. § 738.202(1) simplifies these computations by now using carrying values for this computation. Fla.Stats. §738.202(2)(a) now says to exclude unpaid liabilities from the assets in these computations.

Large Distributions from Publicly Traded Entities. New Fla.Stats. §738.401(3)(e) directs that distributions from publicly traded entities that exceed 10% or more of the value of the ownership interest will not be fully allocated to income, but will be allocated in part to income and in part to principal based on a 3% rate of return computation.  Correspondingly, publicly traded interests are removed from the partial liquidation reallocation rules that apply under Fla.Stats. §738.401(3)(c) per revised (5)(b) of the statute.

Distributions from Pass-Through Entities. Fla.Stats. §738.401(7) has been substantially revised and somewhat simplified. The general rule for distributions from entities is that distributions are income, not principal. Fla.Stats. §738.401(7) will instead disregard the entity and look to the assets generating the income in making the income vs. principal characterization when there is an individual trustee, the distributing entity is a pass-through entity and an investment entity, and the  trustee has the power to adjust.

Distributions from Deferred Compensation Plans, Annuities, and Retirement Plans Fla.Stats. §738.602 is simplified in its approach to using unitrust computations to allocate between income and principal.

Life Estates (or term for years tenancies) and Remainders. Fla.Stats. § 738.801 has been added to provide statutory rules for allocating expenses between the holder of the current tenancy and the remaindermen for nontrust interests.

Florida Laws, Chapter 2012-49