ÿWPCš }éA‡´ SÃiá{ÖÕRãö3©±ÐDƒË@Ø-éØLb¦Û¤ŒâJŸ¨‘׸³9j–ñÙ=:¿¨€5Çi»'nŒ ïnD0=ÜND¯Íg· Æ+Ö!¯·újß»± Ί×† x\Æwéº#H’v±|ýÍñLQ¯_]Ü(Wé2æž™  ?<ÝZ¢Ö-½Ã‰ Î÷ÏyÞw“­öwYiÜ7گƤۛBÜeûé…:’áÀ}(Kw›°sÄ”é+7¶`ª?ŸHYx§Æí¨üe Áqäªì*}̆ˆ:O®ùö~b۹njëÿƒØ=ïUÑFcµž#=ø%«·ç­Ü®+I$úBÈ+vܾu”‘²¨ïÔFQ!¨Àpg4]ö…c¢ ³jÌ Iom.`Õ+ òëx…œRxØõý¸ÙTÏ™pé)%>µæ,æ¥ùÝÜO,mxÝ £1R«é¶×¼Œ€´Hb”• ¼øø¼è–vqsùŽ¹xž`Jv"³äÃj<ù”ÐK{‹¸Ç-p/W2G*b‹Þ~[Jâ º;¨c¼úŽÛb{‡ÙŽ›o™†Ïà”Ô‘p°ùuäë·‘íä ôÆøh p©Ã¶™4áe‹ †#Áà U N¡ %ï 0:õ w/ 43 G G ^ V b md 0U{ ûÐ Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð Ð 0VË Ë Ë Ë Ë Ë 00!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 0AQf’a”” 0~¨¨ B& 0DC 0T‡ 0hÛ 0|C 0V¿¿¿¿¿¿¿¿¿¿¿¿ B D12222222222222222222222222 Bcccc C€˜0&Öd9 Z‹6Times New Roman RegularX(üœ$¡¡ÔUSUS.,ÔSyÍ.BLE A3|xtˆ'/ ÿU‹ÿÀÀÀ(-2†æ$ªªÝ ƒüœ!ÝÔUSUS.,ÔÝ  Ý ñÝ ƒc½Þ)ÝÔUSUS.,ÔÝ  ÝÔ_Ôò òÔ€ôŒÏ àXXÔChapter€1€ð!ð€The€Two€Ô_ÔUPIAsÔ_Ô€ð!ð€How€They€Will€Change€the€Worldà€X!X!X!(#àPage€Ú  Ú1Ú  Úó ó(.3½Þ$§§Ý ƒüœ!ÝÔUSUS.,ÔÝ  Ý0ÿÿ.Normal(Vm$˜˜Ìà0  àà ° àØ:TABLE A(.(3Ä($¤¤Ý ƒüœ!ÝÔUSUS.,ÔÝ  Ýà  àòòÚ  Ú0Ú  Úóó d(#Ã$òòÚ  Ú0Ú  Úóó(,!ù$™™à0  àà0` (#(#àà  à(@›‚$ššà0  àà0` (#(#àà0¸ ` (#` (#àà ` à(TÅþ$››à0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà ¸ à(.3½Þ$©©Ý ƒüœ!ÝÔUSUS.,ÔÝ  ÝüÿP Pdoo)÷ÿ! dxdxöÿ  d ÿÿÿdÝ ƒüœ!ÝÔUSUS.,ÔÝ  ÝÔ_ÔÓ  Óòòò òóóòòó óò òó óÖ€ ÿÿÖÌò òThe€Two€Ô_ÔUPIAsÔ_ÔóóÐ Ï ÐÔ‡¼ÿð»XXÔThe€Uniform€Prudent€Investor€Act€andÐ Nž ÐThe€Uniform€Principal€and€Income€Act€ð!ð€Ð n ¾ ÐHow€They€Will€Change€the€Worldó óÔ#†X19X»¼ÿð¼#ÔÐ Ž Þ ÐÌBy€Glenn€M.€Ô_ÔKarischÔ_ÔÔ‡ôŒÏ àXX19ÔÐ ¨ ø ÐBarnes€&€Ô_ÔKarischÔ_Ô,€P.€C.Ð ¢ ò Ð2901„D€Bee€Caves€RoadÐ k»  ÐAustin,€Texas€78746Ð 4„  Ð(512)€328„8355€€€FAX€(512)€328„8413Ð ýM  Ðkarisch@texasprobate.comÔ#†X19X àôŒÏà#ÔÐ Æ  ÐÔ‡& XX19Ôðð€2003€by€Glenn€M.€Ô_ÔKarischÔ_Ô,€All€Rights€ReservedÔ#†X19X &:#ÔÐ ß  ÐÓ=ÓÌÔ*’ƒYr^Zddd Xdd Xdd X°(#°(#’ÔÔ,xdd ÔÔ+  ÔÐ 9‰9‰ ÐÓ  ÓYou€can't€stop€us€on€the€road€to€freedom.€€You€can't€stop€us€'cause€our€eyes€can€seeÐ í ÐMen€with€insight,€men€in€granite,€Knights€in€armor€intent€on€chivalry.Ð —ç ÐShe's€as€sweet€as€òòÔ_ÔUPIAÔ_Ôóó€honey.€€She's€an€angel€of€the€first€degree.Ð ‘á ÐShe's€as€sweet€as€òòÔ_ÔUPIAÔ_Ôóó€honey,€just€like€honey€from€the€bee.€Ô‡¼ÿð»XX19ÔÐ ‹Û ÐÔ#†X19X»¼ÿðu#ÔÌÓ  Óà0 l àà0Ä lÄ"lÄ"àà0 Ä Ä"Ä Ä"àà0t Ä" Ä"àà0ÌtÄ"tÄ"àà0$ÌÄ"ÌÄ"àà0|$Ä"$Ä"àð!ð€Van€MorrisonÐ#Ï|Ä"|Ä" #ÐÌÓÓà  àThe€Texas€Legislature€has€enacted€two€significant€trust€bills€in€2003€ð!ð€the€Uniform€PrudentÐ £ó ÐInvestor€Act€of€1994€and€the€Uniform€Principal€and€Income€Act€of€1997.€These€bills€will€bringÐ í Ðsignificant€changes€to€the€default€rules€governing€how€trusts€are€administered€and€accounted€for€inÐ —ç ÐTexas.Ð ‘á ÐÌò ò1.à0  àThe€Uniform€Prudent€Investor€Actó óÐ…Õ(#(# ÐÌà  àA€substantial€majority€of€states€have€adopted€versions€of€the€Uniform€Prudent€Investor€Act€ofÐ y!É Ð1994.Ô_Ôð  ðÔ_Ô€Based€on€the€Restatement€(3rd)€of€Trusts:€Prudent€Investor€Rule€(1992)€promulgated€by€theÐ s"à ÐAmerican€Law€Institute,€the€first€"Ô_ÔUPIAÔ_Ô"€modernizes€the€investment€standard€for€trusts€which€do€notÐ m#½ Ðspecify€another€standard.Ð g$· ÐÌà  àCurrently,€the€default€investment€standard€applicable€to€Texas€trusts€is€found€in€Texas€TrustÐ [&«!! ÐCode€ðð€113.056(a):€€Ð U'¥"" ÐÌà8  à.€.€.€[A]€trustee€shall€exercise€the€judgment€and€care€under€the€circumstances€thenÐ I)™$$ Ðprevailing€that€persons€of€ordinary€prudence,€discretion,€and€intelligence€exercise€in€the€€Ð C*“%% Ѐ€management€of€their€own€affairs,€not€in€regard€to€speculation€but€in€regard€to€theÐ =+&& Ðpermanent€disposition€of€their€funds,€considering€the€probable€income€from€as€well€asÐ 7,‡'' Ðthe€probable€increase€in€value€and€the€safety€of€their€Ô_Ôcapital.ð  ðÔ_Ô€In€determining€whether€aÐ ° Ðtrustee€has€exercised€prudence€with€respect€to€an€investment€decision,€suchÐ ªú Ðdetermination€shall€be€made€taking€into€consideration€the€investment€of€all€of€the€assetsÐ ¤ô Ðof€the€trust€.€.€.€over€which€the€trustee€had€management€and€control,€rather€than€aÐ žî Ðconsideration€as€to€the€prudence€of€the€single€investment€of€the€trust.€.€.€.ИèÐ Ð  ÐÌà  àThis€is€a€Ô_ÔTexanizationÔ_Ô€of€the€prudent€man€rule€(or,€to€be€more€politically€correct,€the€prudentÐ Œ Ü Ðperson€rule)€first€espoused€in€òòHarvard€College€v.€Ô_ÔAmoryÔ_Ôóó,€26€Mass.€(9€Pick.)€446,€461€(1830)Ð † Ö Ð(trustees€should€"observe€how€men€of€prudence,€discretion€and€intelligence€manage€their€own€affairs,Ð € Ð Ðnot€in€regard€to€speculation,€but€in€regard€to€the€permanent€disposition€of€their€funds,€considering€theÐ z Ê  Ðprobable€income,€as€well€as€the€probable€safety€of€the€capital€to€be€invested")€and€later€included€in€aÐ tÄ  Ðslightly€different€form€in€the€Model€Prudent€Man€Rule€Statute€(1942)€and€the€Restatement€(2nd)€ofÐ n¾  ÐTrusts€(1959).Ô_Ôð  ðÔ_Ô€Texas€added€the€last€sentence€quoted€above€in€1991€to€make€the€standard€of€prudenceÐ h¸  Ðapplicable€to€investments€as€a€whole€rather€than€each€separate€investment.Ð b²  ÐÌà  àThe€Real€Estate,€Probate€and€Trust€Law€Section€(Ô_ÔREPTLÔ_Ô)€of€the€State€Bar€of€Texas€recentlyÐ V¦ Ðconcluded€a€multi-year€study€of€the€new€Uniform€Trust€Ô_ÔCode.ð  ðÔ_Ô€It€concluded€that€the€Uniform€TrustÐ P  ÐCode€as€a€whole€is€not€an€improvement€over€the€current€Texas€Trust€Ô_ÔCode.ð  ðÔ_Ô€However,€it€concludedÐ Jš Ðthat€one€part€of€the€Ô_ÔUTCÔ_Ô€Ô_Ô--Ô_Ô€the€Uniform€Prudent€Investor€Act€--€should€be€adopted,€with€a€fewÐ D” ÐTexas-oriented€changes.Ð >Ž ÐÌà  àThe€Texas€version€of€the€Uniform€Prudent€Investor€Act€replaces€the€prudent€person€rule€withÐ 2‚ Ðthe€prudent€investor€Ô_Ôrule.ð  ðÔ_Ô€The€key€objectives€of€the€Act€are:Ð ,| Ѐ€Ð &v Ðà0  àððà0` (#(#àThe€standard€of€prudence€is€applied€to€any€€€investment€as€part€of€the€total€portfolio,Ð  p Ðrather€than€to€individual€€€Ô_Ôinvestments.ð  ðÔ_Ô€Ô_ÔUPIAÔ_Ô€ððð  ð2(b)€[new€Texas€Trust€Code€SectionÐ j Ð117.004(b)].Ô_Ôð  ðÔ_Ô€(This€is€similar€to€the€1991€amendment€to€Section€113.056.)Ðd` (#` (# Ѐ€Ð ^ Ðà0  àððà0` (#(#àThe€tradeoff€in€all€investing€between€risk€and€return€is€identified€as€the€fiduciaryððsÐ  X Ðcentral€consideration.€Ô_ÔUPIAÔ_Ô€€€ððð  ð2(b)€[new€Texas€Trust€Code€Section€117.004(b)].Ð!R` (#` (# Ѐ€€€Ð ü!L Ðà0  àððà0` (#(#àAll€categoric€restrictions€on€types€of€investments€have€been€abrogated;€the€trustee€canÐ ö"F Ðinvest€in€anything€that€plays€an€appropriate€role€in€achieving€the€risk/return€objectives€ofÐ ð#@  Ðthe€trust€and€that€meets€the€other€requirements€of€prudent€investing.€Ô_ÔUPIAÔ_Ô€ððð  ð2(e)€[newÐ ê$: ! ÐTexas€Trust€Code€Section€117.004(e)].€€(Note,€however,€that€several€self-dealingÐ ä%4!" Ðprohibitions€remain€(e.g.,€Texas€Trust€Code€ðððð€113.052,€113.053,€113.054,€113.055Ð Þ&."# Ðand€113.057).)ÐØ'(#$` (#` (# ÐÌà0  àððà0` (#(#àThe€long€familiar€requirement€that€fiduciaries€diversify€their€investments€has€beenÐ Ì)%& Ðintegrated€into€the€definition€of€prudent€investing.€Ô_ÔUPIAÔ_Ô€ððð  ð3€[new€Texas€Trust€CodeÐ Æ*&' ÐSection€117.005].ÐÀ+'(` (#` (# Їà  àMost€of€these€objectives€are€reflected€in€Section€2€of€the€Act€[new€Texas€Trust€Code€SectionÐ ° Ð117.004]:€Ð ªú ÐÌà8  àSECTION€2.€STANDARD€OF€CARE;€PORTFOLIO€STRATEGY;€RISK€ANDÐ žî ÐRETURN€OBJECTIVES.€Ð˜èÐ Ð  ÐÌà8  àà ` à(a)€A€trustee€shall€invest€and€manage€trust€assets€as€a€prudent€investor€€€€Ð Œ Ü Ðwould,€by€considering€the€purposes,€terms,€distribution€requirements,€and€otherÐ † Ö Ðcircumstances€of€the€trust.€In€satisfying€this€standard,€the€trustee€shall€exerciseÐ € Ð Ðreasonable€care,€skill,€and€caution.€Ðz Ê Ð Ð  ÐÌà8  àà ` à(b)€A€trusteeððs€investment€and€management€decisions€respecting€individual€€€€Ð n¾  Ðassets€must€be€evaluated€not€in€isolation€but€in€the€context€of€the€trust€portfolio€as€aÐ h¸  Ðwhole€and€as€a€part€of€an€overall€investment€strategy€having€risk€and€return€objectivesÐ b²  Ðreasonably€suited€to€the€trust.Ð\¬ Ð Ð  ÐÌà8  àà ` à(c)€Among€circumstances€that€a€trustee€shall€consider€in€investing€and€€€€Ð P  Ðmanaging€trust€assets€are€such€of€the€following€as€are€relevant€to€the€trust€or€itsÐ Jš Ðbeneficiaries:€ÐD”Ð Ð  ÐÌà8  àà8` Ð Ð àà ¸ à(1)€general€economic€conditions;Ð8ˆ` x` x ÐÌà8  àà8` Ð Ð àà ¸ à(2)€the€possible€effect€of€inflation€or€deflation;Ð,|` x` x ÐÌà8  àà8` Ð Ð àà ¸ à(3)€the€expected€tax€consequences€of€investment€decisions€or€€Ð  p Ðstrategies;Ðj` x` x ÐÌà8  àà8` Ð Ð àà ¸ à(4)€the€role€that€each€investment€or€course€of€action€playsÐ ^ Ðwithin€the€overall€trust€portfolio,€which€may€include€financial€assets,Ð  X Ðinterests€in€closely€held€enterprises,€tangible€and€intangible€personalÐ !R Ðproperty,€and€real€property;Ðü!L` x` x ÐÌà8  àà8` Ð Ð àà ¸ à(5)€the€expected€total€return€from€income€and€the€appreciationÐ ð#@  Ðof€capital;Ðê$: !` x` x ÐÌà8  àà8` Ð Ð àà ¸ à(6)€other€resources€of€the€beneficiaries;ÐÞ&."#` x` x ÐÌà8  àà8` Ð Ð àà ¸ à(7)€needs€for€liquidity,€regularity€of€income,€and€preservation€orÐ Ò("$% Ðappreciation€of€capital;€andÐÌ)%&` x` x ÐÌà8  àà8` Ð Ð àà ¸ à(8)€an€assetððs€special€relationship€or€special€value,€if€any,€to€theÐ À+'( Ðpurposes€of€the€trust€or€to€one€or€more€of€the€beneficiaries.а` x` x ÐÌà8  àà ` à(d)€A€trustee€shall€make€a€reasonable€effort€to€verify€facts€relevant€to€theÐ ¤ô Ðinvestment€and€management€of€trust€assets.ОîÐ Ð  ÐÌà8  àà ` à(e)€A€trustee€may€invest€in€any€kind€of€property€or€type€of€investment€consistentÐ ’ â Ðwith€the€standards€of€this€[Act].ÐŒ ÜÐ Ð  ÐÌà8  àà ` à(f)€A€trustee€who€has€special€skills€or€expertise,€or€is€named€trustee€in€relianceÐ € Ð Ðupon€the€trusteeððs€representation€that€the€trustee€has€special€skills€or€expertise,€has€aÐ z Ê  Ðduty€to€use€those€special€skills€or€expertise.ÐtÄ Ð Ð  ÐÌà  àThe€Texas€version€of€the€Uniform€Prudent€Investor€Act€varies€very€little€from€the€uniformÐ h¸  Ðversion€of€the€Ô_ÔAct.ð  ðÔ_Ô€One€variation€is€in€the€section€of€the€Act€which€permits€a€trustee€to€delegateÐ b²  Ðauthority€to€make€investment€decisions€and€escape€liability€in€some€situations.€€Texas€adopted€theÐ \¬  Ðuniform€actððs€delegation€standard€(which€makes€it€easier€for€the€trustee€to€avoid€liability€than€the€currentÐ V¦ ÐTexas€delegation€statute€ð!ð€Texas€Trust€Code€Section€113.060),€but€the€Texas€version€provides€that€theÐ P  Ðtrustee€doesnððt€escape€liability€if:Ð Jš ÐÌà0  àððà0` (#(#àThe€agent€to€whom€the€authority€is€delegated€is€an€affiliate€of€the€trustee;Ð>Ž` (#` (# ÐÌà0  àððà0` (#(#àThe€terms€of€the€delegation€require€the€trustee€or€beneficiary€to€arbitrate€disputes;€orÐ2‚` (#` (# ÐÌà0  àððà0` (#(#àThe€terms€of€the€delegation€shorten€the€statute€of€limitations.Ð&v` (#` (# ÐÌSee€new€Texas€Trust€Code€Section€117.011.Ð j ÐÌà  àUnder€the€new€Uniform€Prudent€Investor€Act,€trustees€will€have€an€affirmative€duty€to€diversifyÐ ^ Ðinvestments€[Ô_ÔUPIAÔ_Ô€ðð3/new€Texas€Trust€Code€Section€117.005]€and€an€affirmative€duty€to€review€theÐ  X Ðtrust€assets€and€to€make€and€implement€decisions€concerning€the€retention€and€disposition€of€assets€inÐ !R Ðorder€to€bring€them€in€compliance€with€the€prudent€investor€rule€[Ô_ÔUPIAÔ_Ô€ðð4/new€Texas€Trust€CodeÐ ü!L ÐSection€117.006].€€Gone€will€be€the€old€Texas€provision€permitting€retention€of€trust€assets€held€at€theÐ ö"F Ðinception€of€the€trust€without€liability€for€diversification€(see€Texas€Trust€Code€ðð113.003).Ð ð#@  ÐÌà  àLike€most€of€the€current€Texas€Trust€Code,€the€Uniform€Prudent€Investor€Act€imposes€defaultÐ ä%4!" Ðrules€--€rules€which€apply€if€the€trust€instrument€is€Ô_Ôsilent.ð  ðÔ_Ô€Ô_ÔSettlorsÔ_Ô€of€trusts€may€override€these€new€rulesÐ Þ&."# Ðand€impose€whatever€standards€they€wish,€within€the€limits€of€public€policy,€statutes€and€the€commonÐ Ø'(#$ Ðlaw.Ð Ò("$% ÐÌà  àThe€Texas€Uniform€Prudent€Investor€Act€becomes€effective€January€1,€2004.Ô_Ôð  ðÔ_Ô€It€will€apply€notÐ Æ*&' Ðonly€to€trusts€created€after€that€date,€but€also€to€existing€trusts.Ð À+'( Їò ò2.€€The€Uniform€Principal€and€Income€Actó óÐ ° ÐÌà  àThe€freedom€to€invest€in€a€wide€variety€of€investments€granted€by€the€prudent€investor€ruleÐ ¤ô Ðcreates€a€serious€accounting€problem€for€the€Ô_Ôtrustee:ð  ðÔ_Ô€If€the€risk/return€analysis€makes€it€prudent€toÐ žî Ðinvest€primarily€in€growth-oriented€low-income-producing€assets,€how€can€the€interests€of€the€incomeÐ ˜è Ðbeneficiary€be€Ô_Ôprotected?ð  ðÔ_Ô€Harken€back€to€yesteryear€when€a€trustee€free€to€invest€in€growth€stocksÐ ’ â Ðcould€generate€an€annual€return€of€20%€or€more,€but€a€trustee€bound€to€generate€income€could€hopeÐ Œ Ü Ðfor€no€more€than€a€5-6%€Ô_Ôreturn.ð  ðÔ_Ô€Does€the€trustee€have€to€forego€these€gains€(and€incur€the€wrath€of€theÐ † Ö Ðremainder€beneficiaries)€in€order€to€assure€the€income€beneficiary€a€reasonable€return?Ð € Ð ÐÌà  àUnder€the€Uniform€Principal€and€Income€Act€of€1997,€the€answer€is€no€(at€least€in€someÐ tÄ  Ðcases).Ô_Ôð  ðð  ðÔ_Ô€Section€104€of€the€second€"Ô_ÔUPIAÔ_Ô"€permits€the€trustee€to€adjust€between€principal€and€incomeÐ n¾  Ðto€the€extent€the€trustee€considers€necessary€if€the€trustee€is€following€the€prudent€investor€rule€andÐ h¸  Ðcannot€otherwise€balance€the€interests€of€the€income€beneficiary€and€the€remainder€beneficiaries€fairly.€Ð b²  ÐThere€are€restrictions€on€this€power€to€adjust€if€the€trustee€also€is€a€beneficiary€or€if€marital€deductionÐ \¬  Ðtrust€(Ô_ÔQTIPÔ_Ô)€considerations€are€involved,€but€Ô_ÔUPIAÔ_Ô€Section€104€[new€Texas€Trust€Code€SectionÐ V¦ Ð116.005]€--€the€heart€of€the€new€principal€and€income€act€--€will€permit€the€adjustment€in€many€cases.Ð P  ÐÌà  àÔ_ÔREPTLÔ_Ô€considered€the€Uniform€Principal€and€Income€Act€to€be€a€necessary€adjunct€to€theÐ D” ÐUniform€Prudent€Investor€Act€--€if€the€Legislature€was€going€to€adopt€the€prudent€investor€rule,€it€alsoÐ >Ž Ðneeded€to€adopt€accounting€rules€to€assure€that€the€relative€rights€of€the€beneficiaries€are€Ô_Ôprotected.ð  ðÔ_ÔÐ 8ˆ ÐThe€result€is€that€Texas€has€two€new€uniform€acts€ð!ð€the€Uniform€Prudent€Investor€Act€and€the€UniformÐ 2‚ ÐPrincipal€and€Income€Act.Ð ,| ÐÌà  àSeveral€states€have€considered€addressing€the€need€to€adjust€between€income€and€principalÐ  p Ðwhich€arises€under€the€prudent€investor€rule€by€allowing€trustees€to€convert€income-only€trusts€intoÐ j ÐÔ_Ôunitrusts.ð  ðÔ_Ô€This€approach€was€considered€in€Texas€and€rejected€it€for€Ô_Ônow.ð  ðÔ_Ô€The€Ô_ÔunitrustÔ_Ô€conversionÐ d Ðstatutes€are€Ô_Ôevolving.ð  ðÔ_Ô€Eventually€there€may€be€a€generally€accepted,€fair€way€to€permit€trustees€toÐ ^ Ðconvert€income-only€trusts€into€Ô_ÔunitrustsÔ_Ô,€but€the€current€attempts€in€other€states€seem€flawed€in€thatÐ  X Ðthey€are€overly€complicated€or€likely€to€be€unfair€to€beneficiaries.Ð !R ÐÌà  àWhile€the€Ô_ÔunitrustÔ_Ô€conversion€concept€was€left€out,€the€Texas€version€of€the€Act€contains€aÐ ö"F Ðprovision€[new€Texas€Trust€Code€Section€116.007]€which€permits€a€Ô_ÔsettlorÔ_Ô€to€draft€a€non-charitableÐ ð#@  ÐÔ_Ôunitrust.ð  ðÔ_Ô€This€provision€is€intended€to€take€advantage€of€Proposed€Treasury€Regulation€1.643(b)-1,€66Ð ê$: ! ÐFed.€Reg.€10396€(February€15,€2001),€which€provides€that€amounts€allocated€between€income€andÐ ä%4!" Ðprincipal€pursuant€to€applicable€local€law€will€be€respected€if€local€law€provides€for€a€reasonableÐ Þ&."# Ðapportionment€between€the€income€and€remainder€beneficiaries€of€the€total€return€of€the€trust.€UnderÐ Ø'(#$ Ðthe€proposed€regulation,€a€state€law€that€provides€for€the€income€beneficiary€to€receive€each€year€aÐ Ò("$% ÐÔ_ÔunitrustÔ_Ô€amount€of€between€3%€and€5%€of€the€annual€fair€market€value€of€the€trust€assets€is€aÐ Ì)%& Ðreasonable€apportionment€of€the€total€return€of€the€Ô_Ôtrust.ð  ðÔ_Ô€New€Texas€Trust€Code€Section€116.007Ð Æ*&' Ðprovides€support€in€Texas€law€for€a€Ô_ÔsettlorÔ_Ô€who€wishes€to€create€a€non-charitable€Ô_ÔunitrustÔ_Ô€paying€aÐ À+'( ÐÔ_ÔunitrustÔ_Ô€amount€of€between€3%€and€5%€by€defining€such€amount€as€"income"€for€state€fiduciaryÐ ° Ðaccounting€Ô_Ôpurposes.ð  ðÔ_Ô€If€the€proposed€regulation€becomes€final,€this€should€make€it€unnecessary€for€aÐ ªú ÐÔ_ÔsettlorÔ_Ô€to€provide€for€the€payment€of€the€greater€of€the€Ô_ÔunitrustÔ_Ô€amount€or€actual€income€in€order€to€meetÐ ¤ô Ðtax€requirements€for€a€trust€which€requires€the€distribution€of€all€income€to€a€beneficiary€(for€example,€aÐ žî Ðmarital€deduction€(Ô_ÔQTIPÔ_Ô)€trust).Ô_Ôð  ðÔ_Ô€The€provision€does€not€require€that€trust€income€be€defined€in€terms€ofÐ ˜è Ða€Ô_ÔunitrustÔ_Ô€percentage,€nor€does€it€provide€a€means€for€converting€an€all-income€trust€into€a€Ô_Ôunitrust.ð  ðÔ_ÔÐ ’ â ÐBecause€other€rules€apply€to€charitable€Ô_ÔunitrustsÔ_Ô,€this€proposal€does€not€apply€to€them.Ð Œ Ü ÐÌà  àWhile€the€Texas€version€of€the€Uniform€Principal€and€Income€Act€does€not€contain€a€Ô_ÔunitrustÔ_ÔÐ € Ð Ðconversion€provision,€it€does€contain€another€controversial€provision€ð!ð€Section€105€of€the€uniform€act.€Ð z Ê  ÐSection€105€was€not€a€part€of€the€Uniform€Principal€and€Income€Act€as€first€adopted€by€the€NationalÐ tÄ  ÐConference€of€Commissioners€on€Uniform€State€Laws€(Ô_ÔNCCUSLÔ_Ô).€€It€was€added€as€an€afterthoughtÐ n¾  Ðwhen€states€such€as€California€started€adopting€provisions€permitting€a€trustee€to€cut€off€a€beneficiaryððsÐ h¸  Ðrights€by€giving€him€or€her€notice€of€the€trusteeððs€intention€to€make€an€adjustment€under€Section€104.€Ð b²  ÐÔ_ÔREPTLÔ_Ô€considered€the€provision€ill„conceived€and€unnecessary€and€did€not€include€it€in€the€version€ofÐ \¬  Ðthe€act€originally€introduced€in€the€Legislature.€€However€the€Trust€Services€Division€of€the€TexasÐ V¦ ÐBankers€Association€(TBA)€insisted€on€inserting€the€provision.€€Until€very€late€in€the€legislative€session,Ð P  Ðit€appeared€that€the€two€Ô_ÔUPIAsÔ_Ô€would€fail€to€be€enacted€because€of€this€provision.€€However,€Ô_ÔREPTLÔ_ÔÐ Jš Ðand€TBA€reached€a€compromise€to€save€the€two€bills,€resulting€in€a€modified€version€of€Section€105Ð D” Ðbeing€included€as€new€Texas€Trust€Code€Section€116.006.Ð >Ž ÐÌà  àUnder€new€Section€116.006(d),€a€trustee€can€initiate€a€proceeding€to€obtain€an€advisoryÐ 2‚ Ðopinion€about€whether€a€proposed€adjustment€under€Ô_ÔUPIAÔ_Ô€Section€104/new€Texas€Trust€Code€SectionÐ ,| Ð116.005€is€an€abuse€of€discretion.€€The€trustee€cannot€initiate€the€proceeding€unless€it€has€reasonableÐ &v Ðgrounds€for€believing€that€one€or€more€beneficiaries€will€object€to€the€adjustment,€and€a€beneficiaryððsÐ  p Ðfailure€or€refusal€to€sign€a€waiver€or€release€cannot€form€the€basis€of€this€belief.€€If€a€proceeding€isÐ j Ðinitiated,€the€trustee€is€required€to€fund€the€beneficiariesðð€legal€fees€from€the€trust,€and€the€court€isÐ d Ðpermitted€at€the€conclusion€of€the€proceeding€to€determine€which€party€should€bear€the€attorneyððs€feesÐ ^ Ðand€costs.€€It€could€let€the€costs€come€from€the€trust,€assess€them€against€the€trustee,€make€one€or€moreÐ  X Ðbeneficiaries€pay€the€costs,€or€use€some€combination€of€the€above.Ð !R ÐÌà  àThe€Uniform€Principal€and€Income€Act€comprehensively€treats€the€subject€of€allocating€receiptsÐ ö"F Ðand€disbursements€between€principal€and€income€and,€therefore,€replaces€Ô_ÔSubchapterÔ_Ô€D€of€ChapterÐ ð#@  Ð113€of€the€Texas€Trust€Code€(ðððð113.101€--€113.111).Ô_Ôð  ðÔ_Ô€This€means€that€trustees,€their€lawyers€andÐ ê$: ! Ðtheir€accountants€will€have€to€learn€some€new€rules.€€In€general,€the€Texas€version€of€the€Act€sticks€withÐ ä%4!" Ðthe€allocation€rules€contained€in€the€uniform€Ô_Ôact.ð  ðÔ_Ô€However,€the€Texas€version€varies€from€the€uniformÐ Þ&."# Ðversion€in€these€two€key€areas:Ð Ø'(#$ ÐÌà  àððà0 ` àòòò òOil,€Gas€and€Mineral€Income€--€ó óóóHow€could€a€bunch€of€Yankee€lawyers€expect€toÐ Ì)%& Ðdraft€a€rule€about€allocating€oil,€gas€and€mineral€receipts€which€Texans€could€embraceÐ Æ*&' Ðand€Ô_Ôapprove?ð  ðÔ_Ô€The€uniform€act's€rule€on€oil,€gas€and€mineral€receipts€was€that€90%Ð À+'( Ðwere€principal€and€only€10%€were€Ô_Ôincome.ð  ðÔ_Ô€€This€is€a€far€cry€from€Texas's€current€rule,Ð ° Ðwhich€in€general€is€that€27ðð€%€of€gross€proceeds€is€principal€and€the€rest€(72ðð%)€isÐ ªú Ðincome€(Texas€Trust€Code€ðð113.107).Ô_Ôð  ðÔ_Ô€€The€new€Texas€version€provides€that€theÐ ¤ô Ðtrustee€must€allocate€these€receipts€"equitably."Ô_Ôð  ðÔ_Ô€It€further€provides€that€an€Ô_Ôallocationð  ðisÔ_ÔÐ žî Ðpresumed€to€be€equitable€if€the€amount€allocated€to€principal€equals€the€amount€allowedÐ ˜è Ðas€a€deduction€by€the€Internal€Revenue€Code€for€depletion€of€the€Ô_Ôinterest.ð  ðÔ_Ô€PerhapsÐ ’ â Ðmost€importantly,€the€Texas€version€includes€a€grandfather€provision€for€existing€trustsÐ Œ Ü Ð--€if€oil€and€gas€receipts€were€being€allocated€under€the€old€27ðð€/€72ðð€%€rule,€theÐ † Ö Ðtrustee€can€keep€using€that€allocation€formula.Ѐ Ð` (#` (# ÐÌà0  àððà0` (#(#àòòò òRetirement€Plans€--ó óóó€Similarly,€the€uniform€act's€rule€on€distributions€from€IRAs€andÐ tÄ  Ðother€retirement€plans€was€that€90%€of€each€distribution€was€principal€and€10%€wasÐ n¾  ÐÔ_Ôincome.ð  ðÔ_Ô€It€is€rare€for€the€IRA€or€retirement€plan€to€be€in€an€income-only€trust€(althoughÐ h¸  Ðit€is€not€unheard€of€for€the€IRA€to€be€placed€in€a€marital€deduction€(Ô_ÔQTIPÔ_Ô)€trustÐ b²  Ðbenefitting€the€second€spouse€for€life€with€remainder€to€children€of€the€first€marriage),Ð \¬  Ðbut€in€cases€where€this€happens€the€uniform€act€would€provide€very€little€for€the€incomeÐ V¦ ÐÔ_Ôbeneficiary.ð  ðÔ_Ô€€The€current€Texas€provision€(Texas€Trust€Code€ðð113.109)€is€fairer€to€theÐ P  Ðincome€beneficiary,€but€its€approach€(5%€of€the€inventory€value€of€the€deferredÐ Jš Ðpayment€right)€was€confusing,€difficult€to€apply€and€did€not€adequately€take€into€accountÐ D” Ðchanges€in€the€value€of€the€underlying€Ô_Ôasset.ð  ðÔ_Ô€The€Texas€version€of€Ô_ÔUPIAÔ_Ô€contains€aÐ >Ž Ðunique€Texas€provision€which€borrows€from€Ô_ÔunitrustÔ_Ô€Ô_Ôprinciples:ð  ðÔ_Ô€€a€payment€is€income€to€Ð 8ˆ Ѐthe€extent€of€4%€of€the€asset's€value€and€is€principal€to€the€extent€it€exceeds€4%€of€theÐ 2‚ Ðasset's€value.Ð,|` (#` (# ÐÌà  àLike€the€Texas€Uniform€Prudent€Investor€Act,€the€Texas€Uniform€Principal€and€Income€Act€is€aÐ  p Ðdefault€statute€--€if€the€trust€instrument€is€silent,€its€rules€apply,€but€if€the€trust€instrument€specifies€otherÐ j Ðrules,€those€other€rules€Ô_Ôapply.ð  ðÔ_Ô€Also,€like€the€prudent€investor€act,€it€will€become€effective€on€January€1,Ð d Ð2004,€and€apply€to€existing€as€well€as€new€Ô_Ôtrusts.ð  ðÔ_Ô€There€are€some€grandfather€provisions€(the€mostÐ ^ Ðsignificant€being€the€one€that€applies€to€mineral€interests),€but€in€general€the€accounting€rules€for€existingÐ  X Ðtrusts€will€change€on€January€1,€2004.