Florida’s New Fiduciary Income and Principal Act

Florida becomes one of only eight states to adopt a more flexible and beneficial framework for trustees to adjust the allocation of receipts and disbursements between income and principal. Effective January 1, 2025, the Florida Uniform Fiduciary Income and Principal Act (“FIPA”) modernizes trust and estate administration.

By Alexander M. Parthemer, LL.M. and David E. Bowers, LL.M.

The revised Chapter 738 of the Florida Statutes – Florida Uniform Fiduciary Income and Principal Act (“FIPA”) – brings a fresh update to fiduciaries in the state of Florida. Florida’s previous act, known as the Florida Uniform Principal and Income Act (“FUPIA”), was enacted in 2002 and has periodically received updates and patches. With trusts able to extend to up to 1,000 years, FIPA brings needed flexibility to the allocation of receipts and disbursements between income and principal, giving fiduciaries needed guidance and beneficiaries more predictability.

In 1997, the Uniform Law Commissioners (“ULC”) published the Uniform Principal and Income Act (the “1997 Uniform Act”), which was adopted – with modifications – in Florida in 2002. Over the years, Florida has enacted a few tweaks to it, with the adoption of unitrust rules arguably the biggest. In 2018, the ULC published an update, titled the Uniform Fiduciary Income and Principal Act (the “2018 Uniform Act”). FIPA uses the 2018 Uniform Act as the default structure but retains certain Florida-specific provisions from FUPIA. Approved by Governor DeSantis on May 29, 2024, FIPA largely becomes effective as of January 1, 2025. Florida is the eighth state to adopt this model legislation, improving Florida's attractiveness for trust administration, and also addressing some of the challenging issues within the current law.

Governing Law

Adopting the 2018 Uniform Act’s approach, FIPA adds a governing law provision that specifies that, except as provided in the terms of a trust, the fiduciary is governed by FIPA when Florida is either: (1) the principal place of administration of a trust or estate or (2) the situs of property not held in trust or an estate and subject to a life estate or other term of interest. The new rule covers all administrations starting from January 1, 2025, including administrations that began prior to the effective date.

Power to Adjust

Under Florida’s prior statute, Fla. Stat. § 738.104 (2002), a fiduciary may adjust between income and principal only if certain conditions are met and the adjustment is necessary for fair and impartial administration. This standard—often referred to as "impossibility"—restricts the trustee’s adjustment power to cases where fair treatment of beneficiaries would otherwise be unattainable. Adjustments are prohibited if they could lead to adverse tax consequences, like losing the marital deduction or unitrust treatment or incurring gift tax exposure for the Trustee. Trustees are also allowed to permanently release this power if they choose not to exercise it.

FIPA's core idea is that a trustee, knowledgeable in trust management and evolving impartiality standards, should be able to set reasonable standards for adjusting income and principal as needed. FIPA expands this power that has been relocated to Fla. Stat. § 738.203 (2024); removing the requirement to link trust distributions to the concept of “income,” which frequently led to inconsistent economic results. By lowering the threshold to exercise adjustment power and improving oversight requirements, FIPA empowers fiduciaries to more effectively balance the interests of all beneficiaries.

Several notable changes include:

• Standard Shift: Replaces the restrictive "impossibility" standard with a more flexible "assistance" standard, permitting adjustments if they aid in impartial administration.
• Co-Fiduciary: Authorizes the appointment of a co-fiduciary to exercise the adjustment power under specified circumstances.
• Expanded Savings Clauses: Maintains prohibitions against adjustments that could create adverse tax consequences, adding S corporation disqualification, loss of generation-skipping transfer tax exemption, and loss of public benefits as additional adverse consequences.
• Delegation and Release: Authorizes delegation or release of adjustment power, with a presumption that these actions are permanent and cover the entire power.
• Accountability: Adds transparency by requiring annual disclosure of adjustments in accounting reports or communicating them directly to Qualified Beneficiaries.

Unitrusts

Florida introduced unitrusts, even though unitrusts were not part of the 1997 Uniform Act, in 2002 under FUPIA Fla. Stat. § 738.1041 (2002). Under §738.1041, Florida law authorized the use of unitrusts, allowing income trusts to be converted to unitrusts (or vice versa) and treating the unitrust amount as trust income for distribution purposes. This enables the use of a fixed percentage of the trust's asset value as income, aligning with Treasury Regulations’ safe harbor for certain tax benefits like marital and charitable deductions.

FIPA replaces the unwieldy section of 738.1041 by splitting it into a series of smaller, more discrete sections found in Fla. Stat. §§ 738.301-738.310 (2024), which matches the numbering of the 2018 Uniform Act, as the ULC included unitrusts this time around. These provisions apply to (1) income trusts (unless the trust instrument expressly prohibits application), (2) express unitrusts (other than Charitable Remainder Unitrusts), and (3) previously converted unitrusts.

The Act maintains existing Florida law that the Unitrust Rate must be within the federal tax safe harbor of at least 3% and not more than 5%. Although FIPA permits a trust settlor to deliberately veer from the 3-5% safe harbor, it's crucial to exercise significant caution when planning beyond this limit.

FIPA's notable provisions include:

• Expanded Structure: Moves unitrust provisions from one large section to multiple, targeted sections, making the provisions clearer.
• Safe Harbor Compliance: Keeps Florida unitrusts within the federal 3-5% range, but includes flexibility for future Treasury regulation adjustments.
• Tax Ordering Rules: Introduces tax ordering for converted unitrusts, specifying distribution order (e.g., ordinary income first, then capital gains).
• Flexibility in Conversion: Allows trustees to convert between income and unitrust structures without court approval, though protective orders are optional.
• Valuation Methods: Adds precise definitions to streamline unitrust applications, covering terms like “unitrust rate” and “net fair market value.”
• Future Modifications: Ensures Florida law can quickly adapt to any relaxed federal tax standards, ensuring continued tax benefits.

Receipts and Disbursements

FIPA updates the guidelines for receipts and disbursements of trusts or estates, bringing Florida more in line with the 2018 Uniform Act, including:

Entity Receipts (§ 738.401)

• Florida’s unique lookback rule (applicable to large receipts) is retained but limited to three accounting periods (current and prior two periods), or the time the fiduciary has held the interest in the entity, if less, to ease administration.
• Restructuring the law to more closely match the 2018 Uniform Act’s overall organization and terminology (e.g., "partial liquidations" are now called "capital distributions").

Deferred Compensation, Annuity, or Similar Payments (§ 738.409)

• Adopts the term “internal income” and incorporates an accounting period to balance income and principal allocations more effectively.
• Allows fiduciaries to transfer assets from principal to income as needed for beneficiary distributions.

Minerals, Water, and Natural Resources (§ 738.411)

• Moves away from the 90/10 principal-income allocation, allowing the use of federal tax depletion rules as a safe harbor.

Derivatives, Options, and Asset-Backed Securities (§§ 738.414, 738.415)

• Adopts a 90% principal, 10% income allocation rule for derivatives and options, and expands the rule previously applicable to asset-backed securities.
• Updates definitions to match SEC standards, reflecting UFIPA’s more precise terminology.

Disbursements from Income and Principal (§§ 738.501, 738.502)

• Adds flexibility for fiduciaries when income is insufficient, allowing disbursements from the principal with an emphasis on fiduciary discretion and beneficiaries’ interests.
• Maintains Florida’s allocation of transfer tax to principal provisions, which captures not only the taxes imposed by the death of a decedent, as under the 2018 Uniform Act, but also non-decedent-imposed taxes, such as distributions from a Qualified Domestic Trust or a GST taxable distribution.

Reimbursements between Income and Principal (§§738.504, 738.505)

• Adds mechanisms for income-to-principal or principal-to-income adjustments, supporting liquidity and reserve requirements in certain situations (e.g., illiquidity, preparing property for sale, or insufficient income).
• Retains provisions for principal reimbursements, such as those necessary for maintaining mortgaged properties, with simplifications for readability.

Tax Provisions and Adjustments (§§738.506, 738.507)

• Deletes ambiguous language around tax adjustments (“but not eliminated”), ensuring that income tax reductions due to beneficiary deductions can still adjust income.
• Adds clarity on fiduciaries' options for reimbursing taxes, including withholding future distributions if necessary.

Apportionment of Property Expenses (§738.508)

• Retains existing property expense apportionment rules between tenants and remaindermen, with minor clarifications to improve application.
  

Conclusion

FIPA represents a modernization of Florida’s law and provides clear, updated guidelines to streamline the administration of trusts and estates in the modern era. By close alignment with the 2018 Uniform Act, FIPA promotes greater uniformity while preserving key Florida-specific provisions that reflect the state’s unique policy priorities. FIPA’s guiding principle of flexibility accommodates the unique needs of beneficiaries while preserving principal integrity and fiduciary oversight. This updated legal framework aims to maintain Florida's appeal as a favorable jurisdiction for estate and trust administration, with an emphasis on both modernization and a clear commitment to state-specific public policy.

This article originally appeared in Daily Business Review on December 6, 2024. For additional information or questions regarding FIPA or trust and estate administration, we urge you to contact the authors of this article.

The information provided in this article does not, and is not intended to, constitute legal advice; it is for general informational purposes only. No reader of this article should act or refrain from acting on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction to ensure the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.

About Alexander M. Parthemer

Jones Foster attorney Alex Parthemer is a member of the Corporate & Tax and Private Wealth, Wills, Trusts & Estates teams who focuses his practice in the areas of estate planning, probate and trust administration, tax planning, business planning, and transactional corporate law. 

He represents business owners and family offices in a wide range of corporate matters, including corporation, LLC, and LP entity formation, mergers and acquisitions, buy-sell agreements, dissolutions, tax-free reorganizations, conversions, and annual filings.

Alex holds a Master of Laws degree (LL.M.) in Taxation from the Graduate Tax Program at the University of Florida.

About David E. Bowers

Shareholder David E. Bowers, a Jones Foster board member and chair of the firm's Private Wealth, Wills, Trusts & Estates and Corporate & Tax practice groups, has over thirty years of experience in complex tax, trusts and estates, and business planning. David is a Florida Bar Board Certified Specialist in Tax and has extensive experience in estate planning, estate and trust administration, including IRS audits and business transactions.

David has held leadership roles in several industry organizations. He is currently an operating board member of the Florida Tax Institute and served as part chair of The Florida Bar's Tax Section, The Florida Bar's Tax Law Certification Committee, and the Palm Beach Tax Institute.