California Adopts the Uniform Fiduciary Income and Principal Act

What You Need to Know

The Uniform Law Commission approved the UFIPA model in 2018.
California has become the seventh state to enact the model.
Banking groups and groups representing trust and estate lawyers have supported UFIPA adoption.

California has adopted a new law that could affect any estate planning arrangements in the state, or any other client arrangement in the state that involves the use of investments held inside a trust.

Gov. Gavin Newsom last week signed SB 522, the Uniform Fiduciary Income and Principal Act (UFIPA) bill.

The Uniform Law Commission, the body that developed the UFIPA model, says it will give trustees more flexibility to shift between income and principal when managing the payouts to trust beneficiaries.

The act also makes it easier for trustees to convert a traditional trust into a unitrust, which can give trustees more help with using a “total return investing” strategy, or effort to maximize growth in asset value as well as income, according to an analysis by Ronald Aucutt, a fellow of the American College of Trust and Estate Council.

California is the highest-population state in the country, with 39 million residents. It has now become the seventh state to enact the UFIPA model, and its support could speed up UFIPA adoption by other states.

What It Means

Any financial professionals with clients who use trusts, including trusts incorporating life insurance policies or annuity contracts, should ask their trust and estate law advisors for help with understanding the possible implication of UFIPA adoption.

UFIPA History

The Uniform Law Commission is a body that helps states draft laws. It developed the old Uniform Prudent Investor Act in 1931 and adopted updates in 1962 and 1997, according to analysts with the California Assembly Judiciary Committee. The 1997 update changed the name of the act to the Revised Uniform Principal and Income Act.

The original model was supposed to help states ensure that the people responsible for overseeing the assets inside trusts would invest the assets in a prudent way.

Dennis Sandoval, an estate planning and trust lawyer based in California, reported in 2022 that, as of that year, the only states that had not adopted laws based on the Uniform Principal and Income Act model were Georgia, Illinois and Louisiana.

California’s UFIPA Bill

California state Sen. Brian Jones, R-San Diego, introduced SB 1159, a Uniform Fiduciary Income and Principal Act bill, in 2022.

That bill passed 35-0 in the state Senate but failed to reach the state Assembly floor.

California Sen. Roger Niello, R-Sacramento, introduced the new UFIPA bill, SB 522, in February. It passed by a 36-0 vote in the Senate on April 20 and passed by a voice vote in the Assembly on June 19.

The California Bankers Association, the California Commission on Uniform State Laws and the the trusts and estates section of the California Lawyers Association supported SB 522. No one registered opposition to the bill.

Life and Annuity Provisions

The new UFIPA model appears to leave rules governing trusts involving use of life insurance and annuity arrangements intact.

The new law appears to keep a provision that forbids trustees from using the power to adjust if using that power could lead to the loss of annuity trust or unitrust treatment, or the loss of an annual gift tax exclusion, according to a Uniform Law Commission draft that includes drafting committee comments.