California's adoption of the UPIA imposes on trustees the
duty to invest and manage trust assets as would a prudent investor. Trustee are
required to diversify trust investments, but may invest for total return
following a modern portfolio theory. In this Analysis, Margaret M. Hand
addresses the powers given trustees by the UPIA, including the power to make
adjustments between income and principal and to account separately for a
business or other activity. She writes:
If the trustee
invests for total return and, as a result, all or nearly all of the trust's
receipts are receipts of principal, such "prudent" investments would
favor the interests of the remainder beneficiaries over the interests of those
beneficiaries entitled to income. Conversely, if the trustee prudently invests
in investments that return trust accounting income but provide little capital
appreciation, the income beneficiary is favored over the remaindermen. Yet
trustees generally owe beneficiaries the duty of impartiality. The Uniform
Principal and Income Act reminds the trustee that this duty is of particular
importance when a trust's beneficiaries have conflicting interests in the
trust's income and principal. Only if the trust instrument so provides may a
trustee favor the interests of one beneficiary over another.
PRACTICE NOTE: The settlor may express
a preference for one or more beneficiaries in the provisions that govern the
trust's distribution, in a separate provision describing the trust's purpose,
or by implication. For example, if the deceased spouse has given the surviving
spouse a testamentary limited power of appointment over the bypass trust and if
by exercising that power, the surviving spouse might disinherit all or most of
the remainder beneficiaries who would take in default of the exercise, the
deceased spouse has impliedly favored the surviving spouse over all other
In isolation, the
duties imposed by the UPIA could imperil the trustee's ability to discharge his
or her duties of impartiality. The UPIA provides a remedy for this problem.
When circumstances prevent a trustee from discharging his duty to treat income
and principal beneficiaries impartially, if certain conditions are met, the
UPIA allows the trustee to make adjustments between the trust's income and
principal and thereby discharge the trustee's duty of impartiality.
Conditions Precedent to Making Adjustments
under which the trustee may adjust between income and principal are as follows.
power to adjust is only available to trustees who invest under the prudent
trust instrument must define one or more beneficiary's interests by reference
to the trust's income; and
trustee determines, after applying the rules in subdivision (a) of Prob. Code § 16335, and considering any power the trustee
may have under the trust to invade principal or accumulate income, that the
trustee is unable to comply with subdivision (b) of Prob. Code § 16335.
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