Annual Dinner Serves Up the New Principal and Income Act

On Sept. 4, Gov. George Pataki signed into law a revamped Principal and Income Act that is considered the first major overhaul of the legislation since the 1960s and is designed to give trustees much greater flexibility and decision-making power. A former surrogate of Nassau County and the chair of an advisory committee to the state legislature for this law, the Honorable C. Raymond Radigan, recently spoke about the significance of this legislation and its evolution over time at the New York State Society of CPAs Estate Planning Committee Annual Dinner.

According to Radigan, the revamped Principal and Income Act—effective Jan. 1, 2002—grew from the need to address problems within the Prudent Investor Act that the state legislature enacted in 1995 in response to changes in economic conditions as well as tax and trust laws. “The Prudent Investor Act encouraged trustees to invest for total return without regard to the distinction between principal and income. Fiduciaries, however, were unable to invest for total return due to a lag in the adoption of a complementary principal and income act,” stated a presentation outline provided to the 60 members in attendance and written by Radigan’s son, Raymond C. Radigan, Esq., of the Bank of New York.

“The Prudent Investor Rule says diversify, but the problem was that this was not enough. More was needed,” Radigan told the audience. In particular, under this rule, the trustee could not create a total return portfolio that adequately suited the interests of both the income beneficiary and the remaindermen.

The legislation will permit trustees to elect to place existing and future trusts into a total return unitrust, or to use a new equitable power of adjustment to shift funds between income and principal. In addition, the law recognizes many categories of income and principal that did not exist the last time the Principal and Income Act in New York was reformed.

“Overall, we may have to tinker with the Principal and Income Act (in the future), but we are doing pretty well,” Radigan said. “We are in competition with other states.”

“The Estate Planning Committee was privileged to have such a distinguished scholar, attorney and jurist address our group. Judge Radigan provided us with insights into New York’s new Principal and Income Act from the perspective of one who was extremely influential in the development of this significant new legislation,” said Estate Planning Committee Chair Susan R. Schoenfeld, principal and associate fiduciary counsel at Bessemer Trust Company N.A. in New York City.

Other Topics

In addition to the Principal and Income Act, Radigan shared his views on other matters related to estates and trusts.

Though it’s slated for repeal in 2010, Radigan said he doubts the estate tax will become a thing of the past.

“With the erosion of the surplus and the Sept. 11th crisis, everything is going to be looked at again,” Radigan said. “My prediction is that there is no way there is going to be a repeal of the estate tax. There is going to be a repeal of the repeal.”

Radigan also predicted simplification of the generation-skipping tax, and he said changes to the gift tax are unlikely.

To the delight of those in attendance and contrary to one popular belief, Radigan concluded his speech by stating that the Economic Growth and Tax Relief Reconciliation Act is full of professional opportunities for CPAs and it is incumbent on them to develop a good working relationship with attorneys to adequately address the different provisions of the new tax law.