January 01, 2009

UPIA Amendment Clarifies Tax Allocation Between Income and Principal When Mandatory Income Trust Owns Pass-through Entity (2009, 23:01)

UPIA Amendment Clarifies Tax Allocation Between Income and Principal When Mandatory Income Trust Owns Pass-through Entity

Probate & Property Magazine: January/February 2009, Vol. 23, No. 1

By Steven B. Gorin and Carol A. Cantrell
Steven B. Gorin is a partner in the Private Client practice group of Thompson Coburn LLP and a past chair of the Business Planning Group of the Real Property, Trust and Estate Law Section. He served as ABA Advisor to the Uniform Law Commission Drafting Committee for the changes to the UPIA described in this article. Carol Cantrell, chair of the Section's Fiduciary Income Tax Committee, did most of the drafting of this amendment. She is a shareholder in Briggs & Veselka Co. in Bellaire (Houston), Texas.

In the summer of 2008, the Uniform Law Commission amended section 505 of the Uniform Principal and Income Act (the "UPIA"). See Appendix to this article on page 30. The amendment clarifies the ambiguity that existed regarding how the trustee of a mandatory income trust should allocate between income and principal the tax on taxable income from a pass-through entity owned by the trust. This article addresses the concerns underlying the changes and explains how amended section 505 operates. It also discusses other problems and planning suggestions when a trust owns a pass-through entity, especially one that fails to distribute all of its income. These other concerns include complying with the prudent investor rule and qualifying the trust for the marital deduction.

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