Substitute Senate Bill No. 1052

Public Act No. 01-68

AN ACT CONCERNING THE PRINCIPAL AND INCOME ACT.

Be it enacted by the Senate and House of Representatives in General Assembly convened:

Section 1. (NEW) (a) A court shall not change a fiduciary's decision to exercise a discretionary power conferred by sections 45a-542 to 45a-542ff, inclusive, of the general statutes unless it determines that the decision was an abuse of the fiduciary's discretion. A court shall not determine that a fiduciary abused its discretion merely because the court would have exercised the discretion in a different manner or would not have exercised the discretion.

(b) The decisions to which subsection (a) of this section applies include: (1) A determination under subsection (a) of section 45a-542c of the general statutes of whether and to what extent an amount should be transferred from principal to income or from income to principal; and (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 subsection (a) of section 45a-542c of the general statutes.

(c) If a court determines that a fiduciary has abused its discretion, the remedy is to restore the income and remainder beneficiaries to the positions they would have occupied if the fiduciary had not abused 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 may 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 may 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 the beneficiary to return some or all of the distribution to the trust; and (3) to the extent that the court is unable, after applying subdivisions (1) and (2) of this subsection, to restore the beneficiaries, the trust, or both, to the positions they would have occupied if the fiduciary had not abused its discretion, the court may require the fiduciary to pay an appropriate amount from its own funds to one or more of the beneficiaries or to the trust, or both.

(d) Upon a petition by the fiduciary, the court having jurisdiction over the trust or estate may determine whether a proposed exercise or nonexercise by a fiduciary of a discretionary power conferred by sections 45a-542 to 45a-542ff, inclusive, of the general statutes will result in the 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 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.

Sec. 2. Subsection (c) of section 45a-542c of the general statutes is repealed and the following is substituted in lieu thereof:

(c) A trustee may not make an adjustment:

(1) 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 would be allowed, in whole or in part, if the trustee did not have the power to make the adjustment;

(2) 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;

(3) That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;

(4) From any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside;

(5) 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;

(6) 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;

(7) If the trustee is a beneficiary of the trust;

(8) If the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly;

(9) Between the income and principal of a legal life estate; or

(10) If the exercise of the power to adjust by allocating principal to income conferred by subsection (a) of this section would not significantly increase the funds actually available to the income beneficiary, taking into account funds available from sources other than the trust.

Approved June 6, 2001