THE NEW ENVIRONMENT IN CONNECTICUT FOR THE INVESTMENT AND MANAGEMENT OF TRUST AND CHARITABLE ASSETS

The Quinnipiac Probate Law Journal, Volume 14, Number 3 (2000)
1.1.2000
TABLE OF CONTENTS

I. Introduction

II. The Prudent Man Rule

III. Modern Portfolio Theory

IV. The Connecticut Uniform Prudent Investor Act

    A. Reasonable Risk and Return Trade-Off

    B. Necessity for Diversification

    C. Delegation

    D. Standard of Care for Trustees and Factors to Consider in Decisions

    E. Application of Act

    F. Nonprofit Organizations

V. Connecticut Principal and Income Act

VI. Total Return Trusts

VII. Conclusion

Appendix A

Appendix B

I. INTRODUCTION

As a result of the recent passage of the Connecticut Uniform Prudent Investor Act in 1997, and the new Connecticut Principal and Income Act in 1999, the environment of trust investment and management in the state has changed dramatically. Both acts are Connecticut versions of nationwide uniform acts promulgated by the National Conference of Commissioners on Uniform State Laws. The Uniform Acts considerably liberalize the rules of trust investing, reflecting a recognition of two modern economic realities: the corrosive power of inflation if extended for a period of time and the extraordinary performance of the stock market over the last 15 years. These changes impact both the trustees of individual trusts and those charged with investing charitable endowment and other charitable funds. In this article with the respect to the Connecticut Uniform Prudent Investor Act in general, the word "trustee" refers both to the trustee of an individual trust and to those charged with investing charitable funds.

Currently, some version of the Uniform Prudent Investor Act of 1994 has been enacted in 28 states.1 However, the states have been less inclined to enact the National Conference's more recent Uniform Principal and Income Act of 1997 to the same degree. In fact, as of August of 1999, only seven states have passed updated principal and income acts.2

This article reviews the law in Connecticut before passage of the recent acts. It then examines how the Connecticut Uniform Prudent Investor Act has changed the law governing trust investments and how the Connecticut Income and Principal Act complements those changes. Finally, it considers total return trusts, a vehicle designed to reflect the changes.3

II. THE PRUDENT MAN RULE

The prudent man rule, first enunciated in Harvard College v. Amory,4 long governed trust investing in Connecticut.5 This rule required that a trustee must "observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."6 On its face, the rule appears quite flexible. However, subsequent courts and state legislatures interpreted the prudent man rule conservatively. For example, many states, including Connecticut, passed "legal list" statutes to define exactly which assets trustees could hold as investments.7 The Supreme Court of Connecticut commented on its state's codification of the prudent man rule in a 1979 case: "Like its predecessor, this statute expressly limits the types of investments which may be made by a trustee, 'unless otherwise provided' by the instrument creating the trust."8 Permitted investments tended to be conservative, income-producing assets, such as bonds, or blue-chip, dividend-producing stocks.9

In Connecticut, trust settlors could alter the traditional investment mix that would otherwise be utilized by trustees by incorporating trust provisions which allowed other types of investments. In Jackson v. Conland,10 the Connecticut Supreme Court held that the trustees of a trust holding a majority of the shares of the Register Publishing Company were not required to observe the prudent investor rule,11 because the settlor clearly expressed his intention to

'enable the trustees to act forcefully and unhampered by [the] limitations frequently imposed upon fiduciaries.'12 The trust agreement stated that the trustees may 'retain as principal all or any part of the property . . . transferred to them . . . or they may at any time . . . sell [such property]' and that 'in exercising their discretion with respect to this matter, they shall not be held to the standard of a prudent investor and shall not be influenced solely by the character of the newspaper business, which is inherently hazardous.'13

The dissent argued that the discretion given to a trustee was generally treated by courts as including a duty to exercise the discretion prudently.14 Some states have followed the logic of the dissent, rather than that of the majority of the Connecticut Supreme Court.15

Historically, the prudence of a trustee in selecting a given investment was judged on an investment-by-investment basis, with each investment analyzed independently of all the others.16 Preservation of capital played a predominant role in guiding trustee investment decisions,17 and because of the importance placed on avoiding risky investments, the trustee had no duty to diversify.18

Although the courts accepted delegation for "ministerial" acts, they forbade the delegation of power to select investments,19 and the trustee could not delegate to others the duties that the trustee ought to perform personally.20 Even if the trustee lacked the background and expertise to perform the trust investment duties, he or she could delegate these duties only if the trust expressly provided for such delegation.21 Accordingly, what might otherwise have been considered to be an improper delegation could be permitted by the terms of a trust.22 If a trustee was found to have improperly delegated the power to administer a trust, the trustee would be personally liable for any loss resulting from the negligence, improper conduct, or acts of the person to whom the power was delegated.23

As time went on, critics found the prudent man rule inadequate in the modern investment environment. The rule focused upon preservation of nominal value of principal rather than upon maintenance of purchasing power, and the focus on the prudence of assets in isolation unnecessarily hindered trust portfolio growth by discouraging trustees from acquiring non-income producing assets.24 The Uniform Prudent Investor Act of 1994, adopted in 1997 by the Connecticut General Assembly, substantially in the form promulgated by the National Conference of Commissioners on Uniform State Laws, departed from the prudent man rule and sought to realign prudent investing law with the modern economic environment.

III. MODERN PORTFOLIO THEORY

Modern Portfolio Theory ("MPT") provides the foundation for the reforms enacted in the Connecticut Uniform Prudent Investor Act. This investment theory is a "body of knowledge that is creditable and thoroughly documented."25 Leading universities have conducted empirical research on the theory, and the results have been debated for years by scholars. The cornerstones of portfolio management date back to the 1930's, although it took some fifty years for the theory to be recognized as substantive by the legal community.26

A central tenet of MPT is that assets should not be viewed in isolation. Rather, the prudence of any given asset or group of similarly-classified assets must be judged only after balancing the asset against the overall trust portfolio in light of the trust purposes and risk profile.27 The emphasis is on the performance of the overall portfolio. Even if one investment fails, a trustee may still be considered prudent if the overall portfolio succeeds. The ultimate goal, therefore, is to balance the risks and returns of a portfolio by diversifying the assets held.28

MPT allows the trustee to combine more speculative investments with "safe" investments.29 The trustee need not focus solely on ordinary income, nor focus separately on ordinary income and on capital appreciation, if the basis for judging investment decisions rests on the success of the trust portfolio as a whole and not on the success or failure of each investment.30 Ultimately, MPT leads the trustee to focus on total return and not to distinguish rigidly between income and principal.31

For purposes of MPT, risk is broadly defined as the possibility that an investment will not achieve its expected return.32 Systematic or market risk, then, is the risk that the return in a market will decline because of changing economic conditions, such as rising inflation or fluctuating interest rates.33 MPT argues that it is impossible to protect against the systematic risks that threaten an entire market (e.g., a risk threatening the U.S. stock market or government bond market). However, a broadly diversified portfolio can at least provide protection against specific risks threatening individual investments (e.g., a risk threatening General Electric or an Orange County Municipal Bond).34 Trustees cannot avoid systematic risk because it is inevitably linked to fluctuations in the overall market.35 (In other words, market-wide recessions will diminish investor returns in the same way that bull markets will reward investors.)36 The market compensates the investor for market risk by increasing the rate of return and decreasing the price for more volatile assets with higher market risks. Given that investors prefer less volatility, they demand a higher rate of return as the price for investing in highly volatile assets.37

Specific or non-market risks are risk factors that negatively affect a specific investment or industry.38 That is, specific risks are unique to particular companies or a class of similar companies.39 Examples of specific risk include crop-destroying weather, costly lawsuits, labor strikes, or the sudden death or departure of a CEO or other key personnel.40 Because specific risk does not track market fluctuations, the market does not compensate for specific risk by offering the investor higher returns for a particular investment or industry.41

A diversified total portfolio provides MPT's answer to the problem of specific risk.42 "Diversification effectively ties portfolio returns to general market conditions and thereby dilutes the volatility associated with any one investment."43 Thus, a broad portfolio of stocks, bonds, real estate, and cash furnishes an excellent defense against specific risk. In turn, each category of investments should be diversified, so that the portfolio includes, for example, high-growth and blue-chip stocks, domestic and foreign stocks, and technology and consumer-product stocks. The goal is to assemble a diversified portfolio of assets that, as a whole, offset the specific risk of any one of the assets individually.44

Although diversification carries with it large systematic risk because it includes broad selections from all markets, it reduces specific risk to a low level, allowing for higher overall portfolio returns.45 Higher returns are possible because in an efficient market increased market risk brings increased returns.46 The statistical improbability that any one trustee can predict the performance of any one security in any given time period further suggests that emphasizing total return and diversification reduces the risk of poor investment performance. It is likely that "some of the individual investments may advance while others decline."47

MPT is consistent with the principle of efficient capital markets,48 which holds that an investment's price reflects all available information concerning that investment.49 Assuming capital markets are efficient, the price of an investment should correspond to its specific risk.50 Accordingly, no asset should either be underpriced or overpriced (and professional money managers seeking undervalued investments will frequently fail to find them).51

Applying the principle of efficient capital markets to a trust investment environment would lead a prudent trustee to assemble a portfolio consisting of assets broadly reflecting the investment markets so as to achieve performance equivalent to those markets and will minimize specific risk. Investment professionals have long accepted the underpinnings of MPT,52 and with the passage of the Connecticut Uniform Prudent Investor Act, the Connecticut legal community can now utilize it in trust and charitable fund investment and management as well as in estate planning.

IV. THE CONNECTICUT UNIFORM PRUDENT INVESTOR ACT

A. Reasonable Risk and Return Tradeoff

The Connecticut Uniform Prudent Investor Act states that a trustee's investment and management decisions must be judged "as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust."53 For example, an aggressively growing Internet stock will look more or less reasonable depending on whether the trust is designed to generate capital appreciation for distribution to a grandchild in twenty years, or to provide a steady and immediate income stream to a surviving spouse.54 However, the Internet stock may still be judged reasonable in the surviving spouse's case if, when balanced against the entire portfolio, it does not compromise the trust's purpose of providing income. Thus, the reasonableness of any one investment is judged with regard to both its reasonableness vis-à-vis the entire trust portfolio and with regard to how that investment fits into the trust's risk and return profile.

To determine a trust's risk and return profile (i.e., tolerance of volatility of return) the trustee must be aware of both "the regular distribution requirements of the trust and any irregular distributions that may in fact become necessary or appropriate."55 Based on the terms of the trust, the trustee must ascertain the distribution requirements in accordance with the needs of the beneficiaries.56 These distribution requirements effectively serve to define what level of risk is considered reasonable for a given trust.57

Once the trustee determines the risk and return objectives, the trustee may invest in any asset that promotes those objectives.58 No investment is bad, per se, or prohibited because low-risk assets can offset higher-risk assets.59 However, the probable return of any selected asset in a given portfolio should justify whatever risk is taken (considered in conjunction with other risks in the portfolio).60

B. Necessity for Diversification

The Connecticut Uniform Prudent Investor Act requires diversification among the trust assets.61 The trustee has discretion not to diversify, however, if special circumstances dictate that the purposes of the trust are better served without diversification.62 If, for example, adverse tax consequences from selling low-basis securities would nullify the gains from diversification, the trustee would be justified in not diversifying.63 Similarly, if the trust instrument directs the trustee to maintain certain assets, such as stock necessary for majority control of a family business, the trustee would not be required to diversify because the provisions of the trust would govern.64 Absent such a provision, however, the trustee would be imprudent to hold large positions of only one stock in the face of the diversification requirement.65 Traditional, single-asset trusts such as a life insurance trust or a qualified personal residence trust should contain a provision stating that the trust may hold nothing more than the single asset.66

The justification for the necessity of diversification comes from MPT. A lack of diversification increases specific risk, "for which there is no concomitant return."67 For example, a portfolio of only bonds faces the risk of being undercut by inflation or by corporate default. By the same token, a portfolio of only stocks faces the risk of increased volatility, a bear market, or even a market crash. A diversified portfolio of both stocks and bonds, however, provides a hedge against the failure of either market.

Mutual funds, index funds, and bond funds all provide diversification opportunities.68 If the trustee lacks the required expertise to select a diverse portfolio, the Connecticut Uniform Prudent Investor Act permits delegation of the investment responsibility.

C. Delegation

Unlike the prudent man rule and the Restatement (Second) of Trusts, which severely circumscribed trustee delegation, the Connecticut Uniform Prudent Investor Act allows trustees to obtain assistance for sophisticated investment duties.69 The "trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances."70 If a trustee is not equipped to satisfy the Act's standard of care, the trustee should delegate the investment responsibility to a professional.71 Under the old law, the trustee could delegate only if trust provisions specifically allowed delegation; however, now the trustee may delegate unless the provisions of the trust specifically prohibit it.72

If the trustee is a professional trustee, with special skills or expertise, or was named trustee in reliance upon a representation of special skills or expertise, the trustee must use those special skills or expertise in the overall management of the trust assets.73 If, however, comparably skilled professional trustees might otherwise delegate certain investment or management functions, perhaps within an organization, the professional trustee may properly delegate these functions as well. Professional trustees commonly include attorneys, bank trustees, and trust company trustees.

To delegate effectively under the Connecticut Uniform Prudent Investor Act, the trustee must exercise reasonable care, skill and caution in: 1) selecting the investment professional; 2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and 3) periodically reviewing the investment professional's actions in order to monitor the agent's performance and compliance with the scope and terms of the delegation.74 If the trustee meets these requirements, the trustee will not be held liable for improper investment decisions made by the investment professional. Since the liability will shift from the trustee to the investment agent, the scope and the terms of the delegation must be made abundantly clear and should be memorialized in a writing for the protection of both the trustee and the agent.

A trustee need not delegate all investment decisions to an investment professional. The trustee might make general asset allocation decisions for the trust consistent with the needs of the beneficiaries and then delegate the selection of individual investments to fill that asset allocation to a professional.75 The same standard of reasonable care, skill and caution would govern this delegation.

The Act requires periodic review by trustees of the acts of their investment agents, which would include a periodic review of the overall performance of the portfolio. The Act does not define "periodic," and it will necessarily depend on the size of the portfolio, the types of investments, the scope of the delegation, and the trust provisions, as well as other factors. A court would determine whether a trustee complied with the Act in light of the facts and circumstances existing at the time of a trustee's decision or action.76 However, if a trustee elects to adjust principal and income due to the use of a total return trust, and if the trustee pays income to a beneficiary on a quarterly basis, one might argue that a quarterly review by that trustee would be prudent.

Assuming the trustee has met the standard of care governing delegation, the trustee faces no liability for the delegated functions.77 Rather, the investment professional will face full liability subject to the jurisdiction of Connecticut courts as long as the underlying trust is subject to Connecticut law.78 The investment professional can be liable for noncompliance with the terms of the delegation agreement, for not exercising the delegated functions with reasonable care, skill or caution, or for violating any other duties arising out of the Connecticut Uniform Prudent Investor Act.79 Unlike the nationwide Uniform Act, Connecticut's version provides that the agent may never be exonerated from liability for failure to meet his duties to the trust or trustee. Any attempt at exoneration "is contrary to public policy and void."80

A trustee may incur only those costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.81 While this provision applies to all of the trustee's actions, and not solely delegation, it especially applies in cases of investment duty delegation. Management costs, such as investment adviser fees, fund manager fees, transaction costs, and trustee commissions, all must be reasonable.82 The trustee may minimize costs, for example, by using the services of a discount brokerage house or by engaging in careful cost comparisons of similar services, but there would be no duty to do so unless it was reasonable under the circumstances. Presumably, since the Connecticut Uniform Prudent Investor Act requires that the trustee oversee the agents and conduct periodic reviews, a trustee should continue to be entitled to a reasonable fee, even if the trustee delegates management or investment functions. However, if the trustee's compensation includes the investment management function, the trustee should lower his, her, or its fee to the extent the function is delegated.83 The modern trend is to abandon statutory fee schedules in favor of reasonable compensation for trustees, and courts have equitable authority to require the departure from fee schedules prescribed either by the instrument itself or by statute when the facts and circumstances indicate that such schedules are excessive or inadequate.84

D. Standard of Care for Trustees and Factors to Consider in Decisions

For all investment and management responsibilities not delegated, the trustee must operate as a prudent investor, by considering the purposes, terms, distribution requirements and other circumstances of the trust.85 A standard of reasonable care, skill, and caution governs the trustee's consideration of these various factors.86 As previously discussed, if a trustee possesses any special skills, he, she, or it must use them, whether the settlor has relied on such skills or not.87

A current trustee is not bound by the decisions of prior trustees and must comply independently with the prudent investor standard required by Connecticut law. Upon acceptance of a trusteeship or receipt of trust assets, the trustee must review the trust portfolio and ensure that it complies with the purposes, terms, distribution requirements and other circumstances of the trust.88 The trustee must conduct this review within "a reasonable time" after accepting responsibility for the trust.89

The Connecticut Uniform Prudent Investor Act includes ten factors to provide guidance in informing the trustee's decisions concerning investment and management of the trust assets. They are: 1) general economic conditions; 2) the possible effect of inflation or deflation; 3) the expected tax consequences of investment decisions, strategies and distributions; 4) the role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property and real property; 5) the expected total return from income and the appreciation of capital; 6) related trusts and other income and resources of the beneficiaries; 7) the need for liquidity, for regularity of income and for preservation or appreciation of capital; 8) an asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries; 9) the size of the portfolio; and 10) the nature and estimated duration of the trust.90 The trustee must consider only those factors relevant to the trust or its beneficiaries.91 In addition, the trustee should attempt to verify any facts relevant to the investment of the trust assets.92

Trustees have a duty to treat multiple beneficiaries impartially.93 Thus, if a settlor wants to favor one beneficiary, such as a surviving spouse, over other beneficiaries, the trust terms must provide for such treatment.94 The trustee should remain informed as to the current status and needs of the beneficiaries in order to fulfill the duty of loyalty, which requires management of the trust assets solely in the interest of the beneficiaries.95

Trustees who breach their duty to comply with the Connecticut Uniform Prudent Investor Act will be liable for any violations.96 However, "a trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on provisions of the trust."97 Therefore, if the trustee reasonably relied on provisions in the trust, which arguably eliminated or altered the default rule, the trustee will not be liable to the beneficiary for not complying with the Act. However, even where an instrument grants absolute discretion to a trustee, "such language does not dispense with the trustee's normal duty to act in good faith and in a manner consistent with the terms and purposes of the discretionary power."98 In other words, the trustee is expected to act prudently, regardless of the trust provisions.

Ultimately, the Connecticut Uniform Prudent Investor Act expresses a standard of conduct, not outcome.99 Thus, if trust investments fail because of a widespread market decline and the trustee has complied with all of the provisions of the Act, the trustee should not be held liable. Compliance with the Act will be determined in light of all the facts and circumstances existing at the time of a trustee's decision or action.100

E. Application of Act

Connecticut's Uniform Prudent Investor Act applies to trustees of individual trusts and governing boards of institutional funds, such as nonprofit institutions and endowment funds.101 The liberal principles of the Act do not apply to estate executors and administrators, guardians, conservators, or other fiduciaries, who are subject to more conservative standards, though it is likely that the principles of the Act will inform court decisions involving them.102 The Act's provisions are strictly default and may be superseded by the express terms of the trust or by court order.103

The Act applies only to trust decisions made on or after its effective date of October 1, 1997.104 It applies equally to pre-existing trusts and trusts created after this date.105 The Act would apply to pre-existing trusts whose trust terms contain certain commonly used phrases or language, such as "prudent man rule" or "authorized investments."106 Drafters should review their standard language to determine whether the Act would apply as the default rule or whether the language effectively eliminates or alters its application.107

F. Nonprofit Organizations

The Connecticut Uniform Prudent Investor Act will now apply to those charged with investing charitable endowment or other charitable funds. In the past, the law imposed on fiduciaries of nonprofit organizations only the "twin duties of loyalty and care," and the same rules applied to all institutions from a neighborhood soup kitchen to a major university.108 Charity fiduciary law had shifted somewhat from "strict trust-law fiduciary standards to hands-off business-corporation director standards."109 This shift was most likely due to the fact that the charitable sector grew so rapidly that nonprofit organizations were no longer simply a perpetual fund invested by trustees but became more of a "modern enterprise subject to the management demands of a complex operating business."110

While the State Attorney General has nearly exclusive authority to challenge the actions of the trustee of a nonprofit corporation, the state will police trustees who breach their duty of loyalty by self-dealing but will rarely question the trustee's duty of care because of the reluctance to micro-manage the nonprofit sector.111 The handful of cases addressing the duty of care generally apply a corporate standard.112 This is because most board directors of nonprofit organizations are volunteers, and very few persons would serve on such boards if the trust standard of negligence applied to their actions rather than the business judgment rule.113

Now that Connecticut's Act applies to the governing boards114 of nonprofit organizations, the board must exercise care and prudence in accordance with the Act in the administration of their powers to appropriate appreciation, to make and retain investments, and to delegate investment management of institutional funds.115 If the board in the past had invested in socially responsible investments and not concentrated on total return, for example, these investments may no longer be prudent unless such investments are consistent with their organization's social or charitable purposes,116 the provisions of the gift instrument, or would otherwise qualify under the Connecticut Uniform Prudent Investor Act or the Connecticut Uniform Management of Institutional Funds Act.117

V. CONNECTICUT PRINCIPAL AND INCOME ACT

The Connecticut legislature enacted a new Principal and Income Act on June 4, 1999, in order to unify the rules governing principal and income allocation with the modern portfolio theory utilized by the Connecticut Uniform Prudent Investor Act.118 Like the Connecticut Uniform Prudent Investor Act, the Connecticut Principal and Income Act is default legislation that only applies in the absence of contrary provisions in the trust.119 The Act applies to every trust or decedent's estate in existence on or after January 1, 2000.120 Unlike the Prudent Investor Act, however, the new Connecticut Principal and Income Act applies to all fiduciaries, including executors, administrators, successor personal representatives, special administrators, or any person performing substantially the same function,121 though most sections apply only to trustees.122

Under prior law, in cases where a trust provided for a life estate followed by remainders, the trustee had a duty of impartiality to provide equally for the interests of all beneficiaries.123 The income beneficiary was entitled only to the net income of the trust, such as dividends and interest.124 Any capital appreciation, stock splits, and other capital-account transactions accrued to the remainder interest or trust corpus.125 Although the settlor could override this default scheme by granting the trustee discretion to invade corpus for the income beneficiary or requiring the accumulation of income, a clear income-principal distinction existed.

In addition, while the duty of impartiality required "due regard" for both principal and income interests, trustees commonly would err on the side of providing for the current income beneficiary to the extent that the trustees' discretion under the duty of impartiality allowed.126 Thus, trustees often loaded trust portfolios with high-yield stocks and bonds rather than expanding growth companies that retained profits and delivered returns in the form of capital appreciation.127 These trust practices now conflict with the new Connecticut Uniform Prudent Investor Act and MPT's emphasis on total return.

To reconcile the principal and income standards with the more liberal standards of the Prudent Investor Act, the Connecticut Principal and Income Act of 1999 gives the trustee the power to adjust returns between income and principal.128 This critical provision now allows trustees "to invest for the maximum return suitable to the trust, regardless of form, and then to allocate to income that portion that the trustee determines" appropriate to fulfill the duty of impartiality.129 The adjustment provision applies only if the instrument is silent as to the fiduciary's power to allocate proceeds between principal and income.130 If the instrument contains different provisions or grants a discretionary power of administration, the adjustment provision does not apply.131 A different provision would include, for example, a provision forbidding adjustment between income and principal or one specifying how income and principal should be allocated. A fiduciary may exercise a discretionary power of adjustment freely even if such exercise produces a result not permitted or required by the Act.132

The trustee may adjust between principal and income if the trustee meets the following three conditions. First, the trustee must invest and manage the trust assets as a prudent investor.133 In other words, the trustee must comply with the Connecticut Uniform Prudent Investor Act. Second, the terms of the trust must describe the amount that may or must be distributed to a beneficiary by specifically referring to the income of the trust.134 That is, the "income" or current beneficiary's distribution rights should be expressed "in terms of the right to receive 'income' in the sense of traditional trust accounting income."135 Finally, after applying the rules of Section 3(a), the trustee must determine that he, she, or it is unable to administer the trust impartially or that the trustee cannot achieve the degree of partiality required or permitted by the trust terms without making the adjustment.136

The purpose of the Principal and Income Act is to allow a trustee to choose an investment portfolio in accordance with the standards of the new prudent investor rule without having to produce a particular amount of traditional trust accounting income such as interest, dividends and rents.137 The power of the trustee to adjust between principal and income is intended to eliminate the distortions caused by total-return investing.138 The trustee now has the freedom to build a portfolio emphasizing assets, which derive their return from capital appreciation and, at the same time, to divert some of that capital appreciation to the income beneficiary. Of course if the risk and return objectives of the trust are best suited by a portfolio producing enough traditional income for the beneficial interest of the income beneficiary, then the trustee will have no need to exercise the power to adjust.139 This adjustment power can also be used to divert excess income to the trust corpus if, for example, high interest rates produce a very large amount of income and little or no capital appreciation, and as long as the trust is not a marital deduction trust.140

Not all trustees welcome this new power. Some trustees find the adjustment power to be somewhat ambiguous, requiring a detailed, subjective, and time-consuming analysis before the decision to adjust can be made.141 One way for trustees to deal with this new adjustment power is to base adjustment decisions on a mathematical comparison to a benchmark to insure that neither income nor remainder beneficiaries are shortchanged if a total-return investment is utilized.142 This suggested adjustment method works this way: "The benchmark would replicate the income produced by a 'traditional' income interest either by reference to a hypothetical or phantom portfolio invested in the traditional way to balance the interests of income and remainder beneficiaries, or by reference to a spending rate"143 that would also balance the interests of all beneficiaries.

The Act gives a trustee, "who has made a prudent, modern portfolio-based investment decision that has the initial effect of skewing return from all the assets under management," the power to eliminate the distortions caused by total return investing by adjusting between income and principal beneficiaries.144 The official comments to the Uniform Principal and Income Act, from which Connecticut's Act is drawn, may provide some further guidance for trustees on adjusting.145 The adjustment power:

does not empower a trustee to increase or decrease the degree of beneficial enjoyment to which a beneficiary is entitled under the terms of the trust; rather, it authorizes the trustee to make adjustments between principal and income that may be necessary if the income component of a portfolio's total return is too small or too large because of investment decisions made by the trustee under the prudent investor rule.146

All fiduciaries must determine if the provisions of the new Connecticut Principal and Income Act will govern the estate or trust in their charge. Those fiduciaries who are trustees must then determine whether they may adjust between principal and income or whether the provisions of the trust preclude them from doing so. And trustees must be careful not to make adjustments in the ten exceptions listed by the Act, which deal primarily with adjustments that would result in adverse tax consequences.147

With both the Connecticut Uniform Prudent Investor Act and the new Connecticut Principal and Income Act in place, Connecticut attorneys are well-situated to deliver trusts designed to maximize total return. Tension between the income beneficiary and the remainder beneficiary is reduced because trustees can concentrate on getting the most return for all beneficiaries in the new investment environment. The trustee may then assess the current circumstances of all the beneficiaries to allocate the total return fairly between them by adjusting between principal and income, if necessary.148 The total return trust provides one method to capitalize on the changes in the law.

VI. TOTAL RETURN TRUSTS

Total return investing consists of investing funds for the greatest possible return, regardless of whether that return is income or principal appreciation.149 The total return trust resembles the unitrust paradigm used in planning for foundations and charitable trusts, except that it is a private, noncharitable unitrust.150 Like a charitable unitrust, the total return trust directs the trustee to pay a specific percentage of the principal to the current beneficiary each year.151 If the trust produces no traditional trust accounting income, the current beneficiary still receives a percentage share. The trust may also direct the trustee to pay a percentage based on a formula, such as the inflation rate plus two percent, or five percent of a three-year rolling average of the principal.152 Such variations on a straight-percentage formula can account for dramatic shifts in the economic climate.

In a total return trust,153 the life beneficiary's distribution, the remainderman's share, and, typically, the trustee's compensation154 are all equally tied to the performance of the trust corpus. The remainderman receives whatever remains of the principal after the current beneficiary's death. All three parties share the same interest in the growth of the trust corpus, regardless of how that growth occurs. The risk and return profile for all three parties is the same.155 The larger and faster the trust corpus grows, the more the current beneficiary and trustee receive each year, and the more the remainderman receives at the end.

A grantor uncomfortable with choosing a flat percentage for the current beneficiary might instead choose a base dollar amount, indexed to inflation, to be paid from whatever resources the trust holds. Such a pecuniary pay-out allows the current beneficiary to receive a consistent amount but also permits the trustee to invest for total return. In a fiscal sense, this arrangement differs little from the traditional trust, which pays income to a current beneficiary but allows for discretionary principal payments to that same beneficiary. It differs, however, by providing for an equivalence of interest between current and remainder beneficiaries.

The total return trust accomplishes several goals. It allows the trustee to invest for the greatest return consistent with the risk and return purposes of the trust, and it allows the trustee to allocate the returns, regardless of origin, among current beneficiaries and remaindermen.156 The total return trust also allows for a fully diversified portfolio to protect against volatility and specific risk. Thus, the total return trust is an especially suitable vehicle for taking advantage of the new trust environment in Connecticut.

Existing trusts may be converted into total return trusts only if the trustee has been granted discretion and there are no different provisions indicating otherwise. A qualified terminable interest property trust, for example, could not be converted into a total return trust since all of the income must be paid to the surviving spouse.157

VII. CONCLUSION

The changes instituted by the Connecticut Uniform Prudent Investor Act and the new Connecticut Principal and Income Act have significantly changed the landscape of trust investing in the state. Connecticut practitioners should review existing revocable trust agreements and wills to determine if clients need to amend their instruments to conform to these changes. Lawyers should also review their model documents and wills to determine whether the appointed fiduciaries will fall within the purview of the statutes or whether the language will override one or both of the Acts. Lawyers must also decide under which circumstances the default statutes may be desirable for their clients. Trustees, including governing boards of institutional funds, should ensure that trusts are properly diversified, that investment decisions are properly delegated, if necessary, and that appropriate, periodic review of trust investments are made.

Increased private wealth concentrated in intangible assets such as pension plan benefits, stocks, and bonds has increased the need for sophisticated trust and estate planning.158 The Connecticut Uniform Prudent Investor Act and the Connecticut Principal and Income Act give trustees the freedom necessary to guard corpus from inflation and to provide a steady income stream. Income beneficiaries and remaindermen alike stand to gain from a bigger overall pie. Unlike most other states bound by more limiting acts rigidly separating income from principal, Connecticut has the opportunity to distinguish itself as an early leader in offering trusts that take advantage of the new planning environment.

Appendix A

According to Section 45a-541a, the Prudent Investor Rule is a default rule that may be expanded, restricted, eliminated or otherwise altered by the provisions of the trust. The provisions of the trust, therefore, should track the statutory sections which are to be altered, being careful to avoid general terms quoted in Section 45a-541j such as "authorized investments," "prudent trustee rule," etc. The drafter should be careful to address the multiple sections that may need to be altered to achieve the overall goals of the settlor, such as portfolio strategy, diversification, impartiality, and delegation. Following are some examples:

Portfolio Strategy (Section 45a541b). If the settlor does not want the trust portfolio to be evaluated as a whole but in isolation as under the old law, or if the settlor wants the trustee to consider certain circumstances in the decision-making process but not others, the provisions should clearly include and exclude these circumstances:

The trustee shall consider the following circumstances in investing and managing trust assets:

Diversification (Section 45a-541c). Trustees had been prohibited from diversifying assets under the old law, but now they have a duty to diversify, and no particular type of investment is prohibited. Therefore, if the settlor does not want the trustee to diversify the investments of a trust, the settlor must state this clearly:

The trustee shall not diversify the investments of the trust, but shall invest in only the following assets . . . to accomplish the purpose of . . . .

Impartiality (Section 45a-541f). Under the old law, the trustee had no duty to protect the corpus of the trust from erosion by inflation, but now the trustee has a duty to be impartial and protect all beneficiaries. However, if the settlor wishes to favor one beneficiary over another, the settlor should state who should be favored and if there are any limits on the favortism:

The trustee shall not act impartially in the investment and management of the trust assets, but shall first take into account the needs of the Settlor's surviving spouse, regardless of other assets the Settlor's spouse shall own at the time, even if the entire principal of the trust is exhausted.

Delegation (Section 45a-541i). Now, delegation is permitted and is considered prudent a majority of the time. If the settlor does not want the investment or management functions of the trust delegated by the trustee, or if the settlor wants to require delegation, the settlor should designate which functions should be delegated and to whom:

The trustee shall delegate the investment of the trust assets to a financial consultant with a minimum of ten years' experience with the investment of trusts of similar value at the firm of . . . .

Appendix B

Total Return Trust

The Trustee shall pay over or apply to or for the benefit of the beneficiary, in quarterly or more frequent installments, in the discretion of the Trustee, an amount equal to five percent (5%) of the net fair market value of the trust assets valued as of the first day of each taxable year of the trust. Such distribution shall be paid from the net income of the trust, and to the extent the net income is not sufficient, such distribution shall be paid from trust principal; provided however that in the taxable year in which the Settlor or the beneficiary dies, as the case may be, any such distribution shall be prorated by multiplying the five percent (5%) rate of return required above by a fraction, the numerator of which is the number of days from January 1 to the date of the death of the Settlor or the beneficiary, as the case may be, and the denominator of which is 365 (or 366 if the year of the death of the Settlor or the beneficiary, as the case may be, includes February 29). It is the Settlor's intent that the beneficiary be provided a distribution equal to five percent (5%) of the trust principal annually, prorated in the year of the death of the Settlor and the year of death of the beneficiary.

ENDNOTES

1 The states which have passed a version of the Uniform Investor Act of 1994 are Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Hawaii, Idaho, Illinois, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New Mexico, New York, North Dakota, Oklahoma, Oregon, Rhode Island, Utah, Vermont, Virginia, Washington and West Virginia.

2 The states which have passed a version of the Uniform Principal and Income Act of 1997 are Arkansas, California, Connecticut, Iowa, Oklahoma, Virginia, and South Dakota.

3 For further analysis of the tax consequences of total return trusts, see Robert B. Wolf, Defeating the Duty to Disappoint Equally-The Total Return Trust, 32 REAL PROP., PROB. & TR. J. 45 (1997); Susan Porter, The Total Return Trust & Prudent Investing-Is it Desirable?, ABA REAL PROP., PROB. & TR. L. SYMPOSIUM (1999).

4 26 Mass. (9 Pick.) 446 (1830).

5 See Jackson v. Conland, 178 Conn. 52, 55, 420 A.2d 898, 900 (1979); Harvard College v. Amory, 26 Mass. (9 Pick.) 446 (1830).

6 Harvard College, 26 Mass. at 461, (citing Hall v. Cushing, 26 Mass. (9 Pick.) 395 (1830).

7 See W. Brantley Phillips, Jr., Note, Chasing Down the Devil: Standards of Prudent Investment Under the Restatement (Third) of Trusts, 54 WASH. & LEE L. REV. 335, 341 (1997).

8 Jackson, 178 Conn. at 55, n.3.

9 See id. at 55.

10 See id. at 52.

11 See id. at 57.

12 Jackson, 178 Conn. at 56.

13 Id. In another Connecticut case, the court held that the trustee was not negligent in failing to diversify a trust which held Prentice-Hall stock as its single largest asset based on a trust provision that said "[t]he 'Trustee is specifically authorized to continue to hold the property as received from the settlors. . . .'" United States Trust Co. v. Bohart, 197 Conn. 34, 48-49, 495 A.2d 1034, 1043 (Conn. 1985). The settlor's motivation for creating the trust to hold the stock was to preserve family control of the company. Id. at 48.

14 See Jackson, 178 Conn. at 65 (Longo, J., dissenting).

15 See AUSTIN W. SCOTT, THE LAW OF TRUSTS § 227.14 (4th ed. 1988); see also § 227.14 n.8: "A provision in the terms of the trust authorizing the trustee to exercise his discretion in making investments is not interpreted as permitting him to make investments which a prudent person would not make." Id. The footnote lists the following states in which this was the law: California, Maine, New York, Ohio, and Pennsylvania. Also, the mere fact that "there is a provision in the terms of the trust authorizing the trustee to retain securities in which the testator had invested does not justify him in retaining them if such retention becomes imprudent." Id. at § 230.1.

16 See Helen W. George, Attorneys as Trustees and the Connecticut Uniform Prudent Investor Act, Regional Bar Assoc. of Stamford, Norwalk, Darien and Wilton (May 14, 1999).

17 See id.

18 See id.

19 See Edward C. Halbach, Jr., Significant Trends in the Trust Law of the United States, 32 VAND. J. TRANSNAT'L L. 531, 547 (1999).

20 See Scott, supra note 15 at § 171.

21 Helen W. George, The Connecticut Uniform Prudent Investor Act: Reformation or Revolution?, CONN. L. TRIB., Dec. 14, 1998, at 14.

22 See Scott, supra note 15 at § 171. In a case involving pension funds, the trustees entered into an agency agreement with a bank to invest the fund's assets, and the court found that the provisions of the trust agreement allowed this delegation. Local Union No. 422, U.A. of Joliet v. The First Nat'l Bank of Joliet, 93 Ill. App. 3d 890, 417 N.E.2d 1077 (Ill. App. 1981). The provision allowed the trustees the power to employ "such employees, legal, expert and clerical assistance . . . as the trustees in their discretion find necessary or appropriate in the performance of their duties." Id. at 893. Even though the agency agreement conferred upon the Bank "absolute and uncontrolled discretion" to administer the investment, the court found that the trustees had not delegated powers and duties that involved the exercise of discretion and judgment because they had to choose the proper agent and oversee the fund. Id.

23 See Scott, supra note 15 at § 171.1.

24 See Jerald Horn, Prudent Investor Rule, Modern Portfolio Theory, and Private Trusts: Drafting and Administration Including the "Give-Me-Five" Unitrust, 33 REAL PROP. PROB. & TR. J. 1, 7 (1998).

25 Robert T. Willis, Jr., Prudent Investor Rule Gives Trustees New Guidelines, 19 ESTATE PLANNING 338, 338 (Nov.- Dec. 1992).

26 See id. (citing The Founders of Modern Finance: Their Prize Winning Concepts and 1990 Nobel Lectures, The Research Foundation of the Institute of Chartered Financial Analysis, 1991).

27 See CONN. GEN. STAT. § 45a-541b(b) (1999); See also Sara R. Stadler, An Investment Model for the Future, CONN. L. TRIB., Mar. 10, 1997, at 20.

28 See Phillips, supra note 7, at 352.

29 See id. at 348.

30 See Horn, supra note 24, at 57.

31 See Greta E. Solomon, The Prudent Investor Act-the New Rules for Trustees, GREATER BRIDGEPORT BAR ASSOC., INC. (Jan. 12, 1998); see also Robert M. Taylor, III, The Responsibilities of the Prudent Investor, CONN. L. TRIB., Oct. 6, 1997, at 22.(focusing on total return can protect the interests of remaindermen better than the prudent man rule because it can keep pace with inflation better than an income-oriented approach).

32 See Phillips, supra note 7, at 348.

33 See Horn, supra note 24, at 13.

34 See generally Phillips, supra note 7, at 348-52.

35 See id. at 349.

36 See id.

37 See Horn, supra note 24, at 14-15.

38 See Phillips, supra note 7, at 350.

39 See Horn, supra note 24, at 13.

40 See Phillips, supra note 7, at 350, n.89; see Horn, supra note 24, at 13.

41 See generally Horn, supra note 24, at 13-15.

42 See Phillips, supra note 7, at 350-51.

43 Id.

44 See Horn, supra note 24, at 15.

45 See Phillips, supra note 7, at 352.

46 See Edward C. Halbach, Jr., Trust Investment Law in the Third Restatement, 27 REAL PROP. PROB. & TR. J. 407, 433 (1992).

47 Glenn J. MacGrady, 1997 Connecticut Probate Law, 72 CONN. B. J. 245, 246, n.3 (1998).

48 See Phillips, supra note 7, at 351.

49 See id.

50 See id.

51 See id. at 351-52.

52 See Phillips, supra note 7, at 348, n. 77.

53 CONNECTICUT UNIFORM INVESTOR ACT, 7B U.L.A. 63.

54 See UNIFORM PRUDENT INVESTOR ACT, 7B U.L.A. 63, § 2 cmt. (Supp. 1999): "A trust whose main purpose is to support an elderly widow of modest means will have a lower risk tolerance than a trust to accumulate for a young scion of great wealth." Id.

55 RESTATEMENT (THIRD) OF TRUSTS § 227 cmt. e (1992).

56 See id.

57 See id.

58 See CONN. GEN. STAT. § 45a-541b(e)(1999); see also Taylor, supra note 31.

59 See Taylor, supra note 31; see also Stadler, supra note 27.

60 See id.

61 See CONN. GEN. STAT. § 45a-541c.

62 See id.

63 See Taylor, supra note 31.

64 See id.

65 See Stadler, supra note 27.

66 See Solomon, supra note 31.

67 George, supra note 21.

68 See generally id. at 14.

69 See RESTATEMENT (SECOND) OF TRUSTS § 171 (1959); see also CONN. GEN. STAT. § 45a-541i.

70 CONN. GEN. STAT. § 45a-541i.

71 See George, supra note 21.

72 See CONN. GEN. STAT. § 45a-541a(b).

73 See CONN. GEN. STAT. § 45a-541b(f).

74 See CONN. GEN. STAT. § 45a-541i(a), § 45a-541i(c).

75 See George, supra note 21.

76 See CONN. GEN. STAT. § 45a-541h.

77 See CONN. GEN. STAT. § 45a-541i(c).

78 See CONN. GEN. STAT. § 45a-541i(d).

79 See CONN. GEN. STAT. § 45a-541i(b), § 45a-541i(d).

80 CONN. GEN. STAT. § 45a-541i(b); see also Taylor, supra note 31.

81 See CONN. GEN. STAT. § 45a-541g.

82 See Taylor, supra note 31.

83 See John H. Langbein, The Uniform Prudent Investor Act and the Future of Trust Investing, 81 IOWA L. REV. 641, 654 (1996).

84 See Halbach, supra note 19, at 547.

85 See CONN. GEN. STAT. § 45a-541b(a).

86 See id.

87 See CONN. GEN. STAT. § 45a-541b(f).

88 See CONN. GEN. STAT. § 45a-541d.

89 See id.

90 See CONN. GEN. STAT. § 45a-541b(c). The Uniform Prudent Investor Act does not include factors nine and ten, nor the "related trusts and other income" language of factor six.

91 See id.

92 See CONN. GEN. STAT. § 45a-541b(d).

93 See CONN. GEN. STAT. § 45a-541f.

94 For sample trust language, see Appendix A.

95 See CONN. GEN. STAT. § 45a-541e.

96 See id.

97 Id.

98 Halbach, supra note 19, at 551-52.

99 See CONN. GEN. STAT. § 45a-541h.

100 See id.

101 See CONN. GEN. STAT. §§ 45a-527, 45a-532, 45a-541l. See discussion on nonprofit organizations, infra notes 109-18, and accompanying text.

102 See George, supra note 21; see also Solomon, supra note 31. The comments to the Uniform Prudent Investor Act indicate that the "present Act does not undertake to adjust trust-investment law to the special circumstances of the state schemes for administering decedents' estates or conducting the affairs of protected persons." UNIFORM PRUDENT INVESTOR ACT, 7B U.L.A. 63 (1994) Prefatory Note.

103 See CONN. GEN. STAT. § 45a-541a(b); see also Stadler, supra note 27. For sample trust provisions, see Appendix A.

104 See CONN. GEN. STAT. § 45a-541l.

105 See id.

106 See CONN. GEN. STAT. § 45a-541j.

The following terms or comparable language in a trust instrument, unless otherwise limited or modified by the instrument, authorizes any investment or strategy permitted under sections 45a-541 to 45a-541l, inclusive: 'Investments permissible by law for investment of trust funds,' 'legal investments,' 'authorized investments,' 'using the judgment and care under the circumstances then prevailing that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital,' 'prudent man rule,' 'prudent trustee rule,' 'prudent person rule,' and 'prudent investor rule.' Id.

107 For sample trust provisions, see Appendix A.

108 See Evelyn Brody, The Limits of Charity Fiduciary Law, 57 MD. L. REV. 1400, 1406 (1998).

109 Id. at 1407.

110 See Brody, supra note 108, at 1408.

111 See id. at 1406.

112 See id. at 1410.

113 See id. at 1412.

114 A governing board is defined as the body responsible for the management of an institution or an institutional fund. An institution means an incorporated or unincorporated organization organized and operated exclusively for educational, religious, charitable or other eleemosynary purpose, a governmental organization to the extent that it holds funds exclusively for any of these purposes, or a charitable community trust. An institutional fund is a fund held by an institution for its exclusive use, benefit or purposes, but does not include (A) a fund held for an institution by a trustee that is not an institution, other than a fund which is held for a charitable community trust or (B) a fund in which a beneficiary that is not an institution has an interest.

CONN. GEN. STAT. § 45a-527.

115 See CONN. GEN. STAT. §45a-532.

Public Act 97-140 amended Section 45a-532 of the Connecticut Uniform Management of Institutional Funds Act. It replaced the former standard, which stated that a governing board must exercise "ordinary business care and prudence under the facts and circumstances prevailing at the time of the action or decision and to consider certain specified factors in so doing with provision requiring the exercise of care and prudence in accordance with the standards established by the Connecticut Uniform Prudent Investor Act." CONN. GEN. STAT. §45a-532, note.

116 See Lewis D. Solomon and Karen C. Coe, Social Investments by Nonprofit Corporations and Charitable Trusts: A Legal and Business Primer for Foundation Managers and Other Nonprofit Fiduciaries, 66 UMKC L. Rev. 213, 221 (1997). "[T]he introduction of social and ethical criteria into the investment decision-making process is not grounds for the imposition of liability as long as the trustee neither minimizes the importance of financial criteria nor abandons her duty to diversify." Id. at 221-22.

117 See CONN. GEN. STAT. § 45a-530.

118 See 1999 Conn. Acts 164 (Reg. Sess.). The state legislature explained that the Principal and Income Act is a follow-up to the Connecticut Uniform Prudent Investor Act. Id.

119 See 1999 Conn. Acts 164 § 3(a)(1) (Reg. Sess.); see 1999 Conn. Acts 164, § 3(a)(2) (Reg. Sess.).

120 See 1999 Conn. Acts 164 § 36 (Reg. Sess.). Section 34 is the exception, taking effect from date of passage.

121 See id. at §3.

122 The sections that apply to all fiduciaries include the following: Section 3(a) which deals with allocating receipts and disbursements to or between principal and income; Section 3(b) on impartiality; Section 5 which deals with an estate or termination of a trust and the fiduciary's duty to determine the amount of net income or net principal receipts, the discharge of liabilities, and the distribution of assets; Section 6 and 7 on distribution of net income; and Section 30 on making adjustments between principal and income to offset the shifting economic interests or tax benefits between income beneficiaries and remainder beneficiaries. 1999 Conn. Acts No. 99-164 §§ 3, 5-7, 30 (Reg. Sess.).

123 See Langbein, supra note 83, at 667.

124 See id.

125 See id.

126 See id.

127 See Langbein, supra note 83, at 667.

128 See 1999 Conn. Acts 164 § 4(a) (Reg. Sess.).

129 See Langbein, supra note 83, at 668.

130 See 1999 Conn. Acts 164 § 3(a) (Reg. Sess.).

131 See id.

132 See id.

133 See 1999 Conn. Acts 164 § 4(a) (Reg. Sess.).

134 See id.

135 UNIF. PRINCIPAL AND INCOME ACT (1997) § 104, cmt., 7B U.L.A. 3, 9 (Supp. 1999).

136 See 1999 Conn. Acts 164, § 4(a) (Reg. Sess.); see UNIF. PRINCIPAL AND INCOME ACT § 104, cmt. (1997). Section 3(a) instructs the fiduciary to administer the trust or estate in accordance with the terms of the instrument even if it is different from the Act, to exercise a discretionary power of administration if given by the instrument even if the result is different from that permitted or required by the Act, to administer the trust or estate in accordance with the act if the instrument does not provides a different provision or discretion, and to add a receipt or charge a disbursement to principal if neither the instrument nor the Act provide an allocation rule for that particular receipt or disbursement. 1999 Conn. Acts 164, § 3(a) (Reg. Sess.).

137 See UNIF. PRINCIPAL AND INCOME ACT § 104, cmt. (Supp. 1999).

138 See Peter Chadwick and Steve Fast, Adjusting to the Power to Adjust: Distortion as the Key to Exercising a Major New Trustee Power, EST. & PROB. NEWSL., Connecticut Bar Association, at 3 (Sept. 1999).

139 See E. James Gamble, The Power to Adjust Between Principal and Income Under the 1997 Uniform Principal and Income Act, AM. BANKERS ASS'N TR. LETTER 7 (Aug. 1998).

140 See UNIF. PRINCIPAL AND INCOME ACT § 104, cmt. (1997); see infra note 146 and accompanying text.

141 See Chadwick and Fast, supra note 138, at 3.

142 Id.

143 Id.

144 See id. at 4.

145 See Chadwick and Fast, supra note 138, at 4.

146 UNIF. PRINCIPAL AND INCOME ACT (1997) §104, cmt.

147 See 1999 Conn. Acts 164, §4(c)(1)-(10) (Reg. Sess.).

148 See generally George, supra note 21.

149 See Wolf, supra note 3, at 53.

150 See id. at 74; see Langbein, supra note 83, at 669.

151 See Wolf, supra note 3, at 74; See Langbein, supra note 83, at 669.

152 See Langbein, supra note 83, at 669; see Wolf, supra note 3, at 75-76.

153 For an example of a total return trust, see App. B. See also, Wolf, supra note 3, at 78-82.

154 See Wolf, supra note 3, at 74-75. But see, supra note 84, and accompanying text, regarding the equitable authority of the court to adjust compensation for trustees if it is excessive or inadequate.

155 See Wolf, supra note 3, at 74.

156 See id. at 71.

157 See I.R.C. § 2056(b)(7).

158 See Phillips, supra note 7, at 382.

 

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