Chipman Mazzucco Emerson Estate Planning and Elder Law

 § 11-2.3   Prudent Investor Act

   (a) Prudent investor rule.

    A trustee has a duty to invest and manage property held in a fiduciarycapacity  in  accordance  with  the prudent investor standard defined by this section, except as otherwise provided  by  the  express  terms  and provisions of a governing instrument within the limitations set forth bysection 11-1.7 of this chapter.  This  section  shall  apply  to anyinvestment made or held on or  after  January  first,  nineteen  hundred ninety-five by a trustee.

    (b) Prudent investor standard.

    (1)  The  prudent  investor  rule  requires a standard of conduct, not  outcome or performance. Compliance with the  prudent  investor  rule  is determined in light of facts and circumstances prevailing at the time of the  decision  or  action  of  a  trustee.  A trustee is not liable to a beneficiary  to  the  extent  that  the  trustee  acted  in  substantial compliance  with the prudent investor standard or in reasonable reliance on the express terms and provisions of the governing instrument.

    (2) A trustee shall exercise reasonable care,  skill  and  caution  to make  and  implement  investment  and  management decisions as a prudent  investor would  for  the  entire  portfolio,  taking  into  account  the purposes and terms and provisions of the governing instrument.

    (3) The prudent investor standard requires a trustee:

    (A)  to pursue an overall investment strategy to enable the trustee to make appropriate present and future distributions to or for the  benefit of  the beneficiaries under the governing instrument, in accordance with risk and return objectives reasonably suited to the entire portfolio;

    (B) to consider, to the extent relevant to the decision or action, the size of  the  portfolio,  the  nature  and  estimated  duration  of  the fiduciary  relationship,  the liquidity and distribution requirements of the governing instrument,  general  economic  conditions,  the  possible effect  of  inflation  or  deflation,  the  expected tax consequences of investment decisions or strategies and of distributions  of  income and principal,  the  role  that  each  investment  or course of action plays within the overall portfolio, the expected total return of the portfolio (including both income and appreciation of capital), and  the  needs  of beneficiaries  (to  the  extent  reasonably  known  to  the trustee) for present and future distributions authorized or required by the governing instrument;

    (C) to diversify assets unless the trustee reasonably determines  that it  is  in  the  interests of the beneficiaries not to diversify, taking into account the purposes and terms  and  provisions  of  the  governing instrument; and

    (D)  within  a  reasonable  time  after  the creation of the fiduciary relationship, to determine whether  to  retain  or  dispose  of  initial assets.

    (4) The prudent investor standard authorizes a trustee:

    (A)   to  invest  in  any  type  of  investment  consistent  with  the requirements of  this  paragraph,  since  no  particular  investment  is inherently  prudent  or  imprudent  for purposes of the prudent investor  standard;

    (B)  to  consider  related  trusts,  the  income  and   resources   of beneficiaries to the extent reasonably known to the trustee, and also an asset’s   special   relationship   or  value  to  some  or  all  of  the  beneficiaries if consistent with the trustee’s duty of impartiality;

    (C) to delegate investment and management functions if consistent with the duty to exercise skill, including special investment skills; and

    (D) to incur costs  only  to  the  extent  they  are  appropriate  and  reasonable  in relation to the purposes of the governing instrument, the  assets held by the trustee and the skills of the trustee.

    (5) Trustee’s power to adjust.

    (A)  Where the rules in article 11-A apply to a trust and the terms of the trust describe the amount that may  or  must  be  distributed  to  a beneficiary  by  referring  to  the trust’s income, the prudent investor standard also authorizes the trustee to  adjust  between  principal  and income  to  the  extent  the  trustee  considers advisable to enable the trustee  to  make  appropriate  present  and  future  distributions   in accordance  with  clause  (b)(3)(A)  if  the  trustee  determines, after applying the rules in article 11-A, that such  an  adjustment  would  be fair  and  reasonable  to  all  of  the  beneficiaries,  so that current beneficiaries may be  given  such  use  of  the  trust  property  as  is consistent with preservation of its value.

    (B)  In  deciding  whether  and  to  what extent to exercise the power conferred by clause (b)(5)(A), a trustee may consider,  in  addition  to  the  factors  stated  in  clauses (b)(3)(B) and (b)(4)(B), the following factors to the extent relevant:

    (i)  the  intent  of  the  settlor,  as  expressed  in  the  governing instrument;  the  assets  held  in  the  trust; the extent to which they consist of financial assets,  interests  in  closely  held  enterprises, tangible  and intangible personal property, or real property; the extent  to which an asset is used by a beneficiary; and whether an asset was purchased by the trustee or received from the settlor;

    (ii)  the  net  amount  allocated to income under article 11-A 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; and

    (iii) 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.

    (C) A trustee may not make an adjustment:

    (i) that diminishes the income interest in a trust that  requires  all  of  the income to be paid at least annually to a spouse and for which an  estate tax or gift tax marital deduction is claimed;

    (ii) that reduces the actuarial value of  the  income  interest  in  a trust  to  which  a person transfers property with the intent to qualify for a gift tax exclusion;

    (iii) that changes the amount payable to  a  beneficiary  as  a  fixed  annuity or a fixed fraction of the value of the trust’s assets;

   (iv)  from  any  amount  that  is permanently set aside for charitable purposes under a will  or  the  terms  of  a  trust  unless  the  income therefrom is also permanently devoted to charitable purposes;

    (v) if possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for  income  tax  purposes,  and  the  individual would not be treated as the  owner if the trustee did not possess the power to make an adjustment;

    (vi) if possessing or exercising  the  power  to  make  an  adjustment causes  all  or  part  of the trust assets to be included for estate tax purposes in the estate of an individual who has the power  to  remove  a  trustee  or  appoint  a  trustee,  or  both, and the assets would not be  included in the estate of the individual if the trustee did not  possess  the power to make an adjustment;

    (vii)  if  the  trustee  is  a  current  beneficiary  or a presumptive  remainderman of the trust; 

    (viii) if the trustee is not a current beneficiary  or  a  presumptive remainderman,  but  the adjustment would benefit the trustee directly or  indirectly; or

    (ix)  if  the  trust  is  an irrevocable lifetime trust which provides income to be paid for life to the grantor, and possessing or  exercising the  power  to make an adjustment would cause any public benefit program to consider the adjusted principal or income to be an available resource or available income and the principal or income or both  would  in  each  case not be considered as an available resource or income if the trustee did not possess the power to make an adjustment.

    (D)  If item (b)(5)(C)(v), (vi), (vii), or (viii) applies to a trustee  and there is more than one trustee, a co-trustee to whom  the  provision  does  not apply may make the adjustment unless the exercise of the power  by the remaining trustee or trustees is not permitted by  the  terms  of  the trust.

    (E)  A  trustee  may  release  the  entire  power  conferred by clause  (b)(5)(A) or may release  only  the  power  to  adjust  from  income  to principal or the power to adjust from principal to income if the trustee is uncertain about whether possessing or exercising the power will cause a result described in items (b)(5)(C)(i) through (vi) or (b)(5)(C)(viii) or  if  the  trustee  determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose  a  tax  burden not described in clause (b)(5)(C). The release may be permanent or for a specified  period,  including  a  period  measured  by  the  life  of an individual.

    (F) Terms of a trust that limit the power of  a  trustee  to  make  an adjustment between principal and income are not contrary to this section  unless  it  is  clear  from  the  terms  of the trust that the terms are  intended to deny the trustee the power of adjustment conferred by clause  (b)(5)(A).

    (6) Special investment skills.

 For a bank, trust company  or  paid  professional  investment  advisor(whether  or  not  registered under any federal securities or investment  law) which serves as a trustee, and any other trustee representing  that  such  trustee  has  special  investment  skills,  the  exercise of skill  contemplated by the prudent investor standard shall require the  trustee to  exercise  such  diligence  in investing and managing assets as would  customarily  be  exercised  by  prudent  investors  of  discretion   and intelligence having special investment skills.

    (c) Delegation of investment or management functions.

    (1)  Delegation  of  an  investment  or management function requires a  trustee to exercise care, skill and caution in:

    (A) selecting a delegee suitable to exercise the  delegated  function,  taking  into  account the nature and value of the assets subject to such  delegation and the expertise of the delegee;

    (B) establishing the scope and terms of the delegation consistent with the purposes of the governing instrument;

    (C) periodically reviewing the delegee’s exercise of the delegated  function and compliance with the scope and terms of the delegation; and

    (D) controlling the overall cost by reason of the delegation.

    (2)  The  delegee has a duty to the trustee and to the trust to comply  with the scope and terms of the delegation and to exercise the delegated function  with  reasonable  care,  skill  and  caution.   An   attempted  exoneration  of the delegee from liability for failure to meet such duty  is contrary to public policy and void.

    (3) By accepting the delegation  of  a  trustee’s  function  from  the  trustee  of  a trust that is subject to the law ofNew York, the delegee  submits to the jurisdiction  of  the  courts  of  New  York  even  if  a delegation  agreement  provides otherwise, and the delegee may be made a party to any  proceeding  in  such  courts  that  places  in  issue  the  decisions or actions of the delegee.

    (d) Investment in securities of related investment companies.

  A  trustee  holding  funds  for  investment  may  invest  the  same in  securities of any management type investment company or trust registered pursuant to the federal  investment  company  act  of  nineteen  hundred  forty,  as  amended, notwithstanding that the trustee or an affiliate of the trustee acts  as  investment  advisor,  custodian,  transfer  agent, registrar,  sponsor,  distributor, manager or provides other services to  the investment company or trust. Unless  the  will,  lifetime  trust  or order appointing the trustee provides otherwise, the trustee shall elect  annually   either   (i)   to  receive  or  have  its  affiliate  receive  compensation for providing such services to such investment company or  trust for the portion of the trust invested in such investment company  or trust or (ii) to take annual corporate trustees’ commissions with  respect to such portion.

    (e) As used in this section:

    (1)  the term “trustee” includes a personal representative, trustee, guardian, donee of a power during minority, guardian under article  eighty-one of the mental hygiene law, committee of the property of an  incompetent person, and conservator of the property of a conservatee;

    (2) the term “trust” includes any fiduciary entity with property owned by a trustee as defined in this section;

    (3) the term “governing instrument” includes a court order; and

    (4) the term “portfolio” includes  all  property  of  every  kind  and  character held by a trustee as defined in this section.

  § 11-2.3-A  Judicial control with respect to fiduciary’s power to adjust

    (a) Judicial control of adjustment power.

  A court shall not change a fiduciary’s decision to exercise or not to exercise an adjustment power conferred by subparagraph 11-2.3(b)(5) unless it determines that the decision was an abuse of the fiduciary’s  discretion. A court shall not determine that a fiduciary abused his, her  or its discretion merely because the court would have exercised the  discretion in a different manner or would not have exercised the  discretion.

    (b) Applicable decisions.

    The decisions to which paragraph (a) applies include:

    (1) A determination under subparagraph 11-2.3(b)(5) of whether and to  what extent an amount should be transferred from principal to income or from income to principal.

    (2) A determination of the factors that are relevant to the trust  and its  beneficiaries, the extent to which they are relevant, and the weight, if any, to be given to the relevant factors, in deciding whether and to what extent to exercise the power conferred by subparagraph 11-2.3(b)(5).

    (c) Authorization for court to remedy abuse of discretion.

 If a court determines that a fiduciary has abused his, her or its  discretion, the court may restore the income and remainder beneficiaries  to the positions they would have occupied if the fiduciary had not abused his, her or its discretion, according to the following rules:

    (1)  To the extent that the abuse of discretion has resulted in no  distribution to a beneficiary or a distribution that is too  small,  the court shall require the fiduciary to distribute from the trust to the beneficiary an amount that the court determines will restore the  beneficiary, in whole or in part, to his or her appropriate position.

    (2)  To the extent that the abuse of discretion has resulted in a distribution to a beneficiary that is too large, the court shall restore  the beneficiaries, the trust, or both, in whole or in part, to their appropriate positions by requiring the fiduciary to withhold an amount from one or more future distributions to the beneficiary who received  the distribution that was too large or requiring that beneficiary to  return some or all of the distribution to the trust.

    (3)  To the extent that the court is unable, after applying subparagraphs (1) and (2), to restore the beneficiaries, the trust, or  both, to the positions they would have occupied if the fiduciary had not  abused his, her or its discretion, and if the court finds that the fiduciary was dishonest or arbitrary and capricious in the exercise of  his, her or its discretion, the court may require the fiduciary to pay  an appropriate amount from his, her or its own funds to one or more of the beneficiaries or the trust or both.

    (d) Petition by fiduciary.

Upon a petition by a  fiduciary who is authorized to exercise an adjustment power conferred by subparagraph 11-2.3 (b)(5), the court  having jurisdiction over the trust or estate may determine whether a  proposed exercise or nonexercise by the fiduciary of the adjustment power will result in an abuse of the fiduciary’s discretion.  If the petition describes the proposed exercise or nonexercise of the power and  contains sufficient information to inform the beneficiaries of the reasons for the proposal, the facts upon which the fiduciary relies, and an explanation of how the income and remainder beneficiaries will be affected by the proposed exercise or nonexercise of the power, a beneficiary who challenges the proposed exercise or nonexercise has the  burden of establishing that it will result in an abuse of discretion.

§ 11-2.4 Optional unitrust provision

    (a) Unless the terms of the trust provide otherwise, the net income of any  trust  to which this section applies shall mean the unitrust amount  as determined hereunder.

    (b) Unitrust amount.

    (1) For the first three years of the trust, the “unitrust amount”  for  a current valuation year of the trust shall mean an amount equal to four  percent of the net fair market values of the assets held in the trust on the first business day of the current valuation year.

    (2)  Commencing with the fourth year of a trust, the “unitrust amount”for a current valuation year of the trust shall mean an amount equal  to  four percent multiplied by a fraction, the numerator of which shall be the sum of (A) the net fair market values of the assets held in the trust on the first business day of the current valuation year and (B)  the net fair market values of the assets held in the trust on the  first business day of each prior valuation year, and the denominator of which shall be three.

    (3) The unitrust amount for the current valuation year as computed  in accordance with subparagraph (b)(1) or (2) shall be proportionately reduced for any distributions to beneficiaries mandated by the terms of the trust, in whole or in part (other than distributions of the unitrust amount), and shall be proportionately increased for the receipt, other than a receipt that represents a return on investment, of any additional property into the trust within a current valuation year.

    (4) For purposes of clause (b)(2)(B), the combined net fair market  values of the assets held in the trust on the first business day of a  prior valuation year shall be adjusted to reflect any reduction (in the  case of a mandated distribution) or increase (in the case of a receipt)  in the unitrust amount for such prior valuation year pursuant to subparagraph (b)(3), as if the distribution or receipt had occurred on  the first day of such prior valuation year.

    (5) In the case of a short year, the trustee shall prorate the unitrust amount on a daily basis.

    (6)  The assets “held in the trust” for purposes of computing the  unitrust amount shall not include assets while held in an estate.  If this section applies to a trust by reason of an election pursuant to clause (e)(1)(B) and if such election is not expressly made effective  prospectively as permitted under clause (e)(4)(A), then within a reasonable time after the election, the trustee shall determine the unitrust amount properly payable for any preceding and current valuation year of the trust. The trustee shall pay to the current beneficiary (in  case of underpayment) or shall recover from the current beneficiary  (in  case of overpayment) an amount equal to the difference between the unitrust amount properly payable and any amount actually paid for any completed valuation year of the trust.

    (7)  In  the  case where the net fair market value of an asset held in  the trust has been incorrectly determined either in a current  valuation year or in a prior valuation year, the unitrust amount shall be  increased (in the case of an undervaluation) or be decreased (in the  case of an overvaluation) by an amount equal to the difference between the unitrust amount as determined based on the correct valuation of  the asset and the unitrust amount as originally determined.

    (c) Other definitions and special rules. For purposes of this section:

    (1) A “current beneficiary” is a person to whom the income (within the  meaning of this section or otherwise) of the trust is payable, or in the  discretion  of  the trustee may be paid, in whole or in part, during the  current valuation year.

    (2) The term “current valuation year” shall mean the year of the trust for which the unitrust amount is being determined.

    (3)  The  term “prior valuation year” shall mean each of the two years

  of the trust immediately preceding the current valuation year.

    (4) The term “year” means a calendar year. A “short year” constitutes a portion of a calendar year that begins when the interest of the current beneficiary or class of current beneficiaries begins or ends when the interest of the current beneficiary or class of current beneficiaries ends.

    (5) “Net fair market value” shall mean the fair market value of each  asset comprising the trust reduced by any outstanding interest-bearing  obligations of the trust, whether allocable to a specific asset or otherwise.

    (6) In determining the sum of the net fair market values of the assets  held  in  the  trust for purposes of subparagraphs (b)(1) and (2), there  shall not be included the value:

    (A) of any residential property or any tangible personal property  that, as of the first business day of the current valuation year, one or  more current beneficiaries of the trust have or had the right to occupy,  or have or had the right to possess or control (other than in his or her capacity  as a trustee of the trust), and instead the right of occupancy  or the right to possession or control shall be deemed to be the unitrust amount with respect to such residential property or such tangible personal  property; provided, however, that the unitrust amount shall be  adjusted in accordance with subparagraph (b)(3) for partial distributions from or receipt into the trust of such residential property or tangible personal property during the current valuation year.

    (B) of any asset specifically given to a beneficiary and the return on investment on such property, which return on investment shall be  distributable to such beneficiary.

    (C) of any assets while held in a testator’s estate.

    (7) In determining the net fair market value of each asset held in the trust pursuant to subparagraphs (b)(1) and (2), the trustee  shall,  not less  often than annually, determine the fair market value of each asset of the trust that consists primarily of real property or other property that is not traded on a regular basis in an active market, and all such determinations shall, if made reasonably and in good faith, be conclusive on all persons interested in the trust. Such determination shall be conclusively presumed to have been made reasonably and in  good faith unless proven otherwise in a proceeding commenced by or on behalf of a person interested in the trust within three years after the close of the year in which the determination is made.

    (8) The term “trustee” does not include a personal representative.

    (9)  The term “trust” does not include an estate or any trust pursuant  to the terms of which any amount is permanently set aside for charitable  purposes unless the income therefrom is also permanently devoted to  charitable purposes.

    (d) Commencement of current beneficiary’s interest.

    (1)  The interest of a current beneficiary or class of current  beneficiaries in the unitrust amount begins on the date specified in the  governing instrument, on the date specified in an election to have this section apply pursuant to clause (e)(1)(B), on the date specified by the  court pursuant to clause (e)(2)(B) or, if no date is specified, on the date assets first become subject to the trust. An asset becomes subject to a trust:

    (A) on the date it is transferred to the trust in the case of an asset that is transferred to a trust during the transferor’s life;

    (B) on the date it is transferred to the trust in the case of an asset that is transferred to a testamentary trust created under a will;

    (C)  on the date of an individual’s death in the case of an asset that is transferred to a trust by a third party by reason of the individual’s death;

    (D) on the date of an individual’s death in the case of a  trust  that  owns life insurance on the individual’s life; or

    (E)  on  the date a revocable trust becomes irrevocable in the case of assets then held in the trust.

    (2) A trust which continues in existence for the benefit of one or  more new current beneficiaries or class of current beneficiaries upon  the termination of the interests of all prior current beneficiaries or  classes of prior current beneficiaries, shall be deemed to be a new  trust, and, for purposes of clause (e)(1)(B), assets shall be deemed  to first become subject to the trust on the first day of the first year that follows the date of the termination of such interests.

    (e) Trusts to which section applies.

    (1) This section shall apply to any trust if:

    (A) the governing instrument provides that this section shall apply to such trust, or

    (B) (I) with respect to a trust in existence prior to  January  first, two thousand two, on or before December thirty-first, two thousand five, the  trustee, with the consent by or on behalf of all persons interested in the trust or in his, her or its discretion, elects to have this section apply to such trust, or

    (II)  with respect to a trust not in existence prior to January first,  two thousand two, on or before the last day of the second full year  of  the  trust beginning after assets first become subject to the trust, the trustee, with the consent by or on behalf of all persons  interested  in the  trust or in his, her or its discretion, elects to have this section apply to such trust.

    (III) An election in accordance with this subparagraph shall  be  made by  an  instrument,  executed  and  acknowledged,  and  delivered to the  creator of the trust, if he or she is then living, to all persons  interested in the trust or to their representatives and to the court, if  any, having jurisdiction over the trust.

    (2) (A) The court having jurisdiction of a trust to which this section  otherwise would apply by reason of subparagraph (e)(1) or clause (e)(2)(B), upon the petition of the trustee or any beneficiary of the trust and upon notice to all persons interested in the trust, may direct  that article 11-A shall apply to the trust and that this section shall not apply to the trust; and

    (B) At any time, the court having jurisdiction of a trust to which  this section otherwise would not apply, upon the petition of the trustee or any beneficiary of the trust and upon notice to all persons  interested in the trust, may direct that this section shall apply to the trust and that article 11-A shall not apply to the trust.

    (3) For the purposes of this section, the phrase “all  persons  interested in the trust” shall mean all the persons upon whom service of  process would be required in a proceeding for the judicial settlement of  the account of the trustee, taking into account section three hundred fifteen of the surrogate’s court procedure act.  Where a person  interested in the trust has the same interest as a person under a disability, it shall not be necessary to obtain the consent of or notify  the person under a disability.

    (4) (A) This section shall apply to a  trust with respect to which there is a direction in the governing instrument in accordance with  clause (e)(1)(A), an election in accordance with clause (e)(1)(B) or a  court decision rendered in accordance with clause (e)(2)(B) as of the  first year of the trust in which assets first become subject to the  trust, unless the governing instrument or the court in its decision  provides otherwise, or unless the election in accordance with clause

  (e)(1)(B) is expressly made effective as of the first day of the first  year of the trust commencing after the election is made.

    (B)  If  this section applied to a trust with respect to which a court decision is rendered in accordance with clause (e)(2)(A), this section shall cease to apply to such trust and article 11-A shall apply to the trust as of the first day of the year beginning after the decision of the court becomes final, unless the court in its decision provides otherwise.

    (5) In the determination of whether article 11-A or this section  should apply to a trust:

    (A)  All of the factors relevant to the trust and its beneficiaries,  including the following factors to the extent they are relevant, shall be considered:

    (i) the nature, purpose, and expected duration of the trust;

    (ii) the intent of the creator of the trust;

    (iii) the identity and circumstances of the beneficiaries;

    (iv)  the needs for liquidity, regularity of payment, and preservation and appreciation of capital;

    (v) the assets held in the trust; the extent to which they consist  of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property; the extent to which an  asset is used by a beneficiary; and whether an asset was purchased by the trustee or received from the creator of the trust.

    (B) In any proceeding brought pursuant to subparagraph (e)(2), there shall be a rebuttable presumption that this section should apply to the  trust.