Know the Changes to NY Trust Accounting Rules
By Seymour Goldberg, CPA, MBA, JD
Most accountants that practice in New York State may not realize that the New York trust laws regarding accounting income have been completely revamped. The effective date of the revised laws is Jan. 1, 2002, and is retroactive to all trusts that were in existence on that date and/or any date thereafter.
The revamped New York State trust laws have three elements: the Uniform Principal and Income Act (UPAIA), the power to adjust (PTA) and the unitrust conversion. Any accountant who prepares fiduciary income tax returns or trust accountings must become aware of these revised trust rules in order to avoid potential malpractice and/or ethics issues.
If a trust operates as a unitrust pursuant to certain elections, then the trust beneficiary will receive four percent of the trust assets each year subject to an averaging computation. The unitrust amount is considered to be trust accounting income. If a trust does not operate as a unitrust, then the trust is subject to the accounting adjustments provided for under the UPAIA and the PTA.
The UPAIA provides for a number of accounting rules that affect the determination of trust accounting income. For example, the UPAIA permits the trustee to charge the income beneficiary for debt amortization with respect to real property and transfer the funds from income to principal for the amount of the debt amortization. This may be a significant optional adjustment for the trustee to consider. If the trustee is not aware of this optional adjustment, then the trustee could have a problem with the trust remainderman at a later date.
Other significant issues are found in the UPAIA. For example, if a trust has an interest in a pass-through entity, such as a partnership or limited liability company, then special rules apply when a cash distribution is made to the trust. A mere K-1 from an entity with any corresponding cash distribution is phantom income and not accounting income. If a K-1 exceeds a cash distribution, then special rules apply as well.
To learn more about these and other changes to New York trust accounting rules, register for the Fundamentals of Trust Accounting Income and Principal Rules Under the Revised New York State Laws being offered by the Foundation for Accounting Education. This program will cover more than 100 examples involving the revised trust laws in New York State from an accounting and tax point of view. The program, which is an eight-hour CPE course, will be held in Rochester Nov. 21, in New York City Jan. 24, 2006, and in Melville Jan. 27, 2006. To register for this program, visit the Society’s Web site at www.nysscpa.org.
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