PA 10-31—HB 5281

Judiciary Committee

AN ACT CONCERNING AMENDMENTS TO THE CONNECTICUT UNIFORM PRINCIPAL AND INCOME ACT

SUMMARY: This act makes changes to trustee decisions under the Connecticut Principal and Income Act relating to (1) estate tax marital deductions from deferred compensation, annuities, and similar payments and (2) income tax payments.

EFFECTIVE DATE: October 1, 2010

ESTATE TAX MARITAL DEDUCTIONS

The act changes the rules that apply to payments from a private or commercial annuity; individual retirement account; or pension, profit-sharing, stock-bonus, or stock ownership plan, which it names “separate funds.

Under prior law, if a trustee had to allocate more of a payment to income than the law otherwise provided to obtain an estate tax marital deduction, the trustee had to make that allocation. The act eliminates this requirement and instead states that the general allocation of payment rules do not apply to allocate a payment from a “separate fund” to a trust:

1. to which an election to qualify for a marital deduction would be allowed under federal law with respect to a life estate for a surviving spouse (26 U. S. C. 2056(b)(7)) or

2. that qualifies for the marital deduction under federal law for a life estate with power of appointment in the surviving spouse (26 U. S. C. 2056(b)(5)).

Rules That Apply

The act instead applies the following rules.

1. A trustee must determine the internal income of each “separate fund” for the accounting period as if it were a trust. If the surviving spouse requests it, the trustee must demand the person administering the “separate fund” distribute the internal income to the trust. The trustee must allocate a payment from the “separate fund” to income to the extent of the fund's internal income and distribute it to the surviving spouse. The trustee must allocate the balance of the payment to principal. If the surviving spouse requests it, the trustee must allocate principal to income to the extent the fund's internal income exceeds payments made from the fund to the trust during the accounting period.

2. If the trustee cannot determine the “separate fund's” internal income but can determine its value, the internal income is deemed to equal 4% of the value according to the most recent statement of value preceding the beginning of the accounting period. If the trustee cannot determine the internal income of the fund or the fund's value, the internal income is the product of the interest rate and present value of the expected future payment as determined by federal law (26 U. S. C. 7520) for the month preceding the account period for which the computation is made.

The act's provisions apply to these trusts on or after the date of the decedent's death if the trust is (1) not funded by October 1, 2010 or (2) initially funded in calendar year 2010. Otherwise, it applies to a trust starting on January 1, 2010.

Exception

Under the act, these new rules do not apply if and to the extent the series of payments would otherwise qualify for the marital deduction under federal law as a survivor annuity (U. S. C. 26 2056(b)(7)(C)).

INCOME TAXES

Under prior law, a tax a trustee had to pay on the trust's share of an entity's taxable income was paid proportionately from (1) income, to the extent receipts from the entity are allocated to income and (2) principal, to the extent receipts are allocated to principal and the trust's share of taxable income exceeds the total receipts allocated to income or principal.

The act instead requires payments in these cases be paid (1) from income, to the extent the receipts are allocated only to income; (2) from principal, to the extent the receipts are allocated only to principal; (3) proportionately from principal and income, to the extent the receipts are allocated to both principal and income; and (4) from principal, to the extent the tax exceeds total receipts.

BACKGROUND

Connecticut Principal and Income Act

The Connecticut Principal and Income Act (CPIA) establishes rules for fiduciaries administering trusts. The rules relate to allocating property between principal and income and between income and remainder beneficiaries (income beneficiaries generally receive funds during the life of a trust and remainder beneficiaries receive the remainder of a trust's funds when it terminates). CPIA gives fiduciaries certain discretionary powers including the power to adjust between principal and income under certain circumstances.

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