BILL NUMBER: S6765                 Revised 01/18/18

SPONSOR: LANZA
 
TITLE OF BILL:

An act to amend the surrogate's court procedure act, in relation to the
computation and allocation of the commissions of trustees of charitable
trusts

This is one in a series of measures being introduced at the request of
the Chief Administrative Judge upon the recommendation of his Surro-
gate's Court Advisory Committee.

This measure would amend sections 2308, 2309 and 2312 of the SCPA to
provide that an individual trustee of a wholly charitable trust would
receive commissions at the same rates as an individual trustee of a
non-charitable trust, with a reduced rate of 80% of the rates for a
non-charitable trust with a principal value of up to $20,000,000, and a
reduced rate of 50% on the principal value in excess of $20,000,000, and
to make other clarifications to existing law effecting wholly charitable
trusts and split interest trusts as described herein.

There currently is a difference under current law in the manner in which
              

trustees of wholly charitable trusts and trustees of non-charitable
trusts are compensated. Under current law (in the SCPA, section 2309(5)
and others, a trustee of a wholly charitable trust is entitled to 6% of
the annual income collected as compensation, while a trustee of a non-
charitable trust is entitled to compensation at the rate of $10.50 per
$1,000 (or major fraction thereof) on the first $400,000 of principal,
$4.50 per $1,000 (or major fraction thereof) the next $600,000 of prin-
cipal and 53.00 per $1,000 (or major fraction thereof) on all additional
principal, Therefore, if a non-charitable trust has $1,000,000 of
assets, the trustee's annual commissions would amount to $6,900, regard-
less of how much income was collected during the year. Meanwhile, if a
wholly charitable trust has $1,000,000 of assets that generates $1,000
of income throughout the year, then the trustee will be entitled to only
$600 for his or her annual commissions.

Such a discrepancy in compensation is unwarranted considering that the
duties of the trustee of a wholly charitable trust and those of the
trustee of a non-charitable trust are comparable. A trustee of a private
trust must devote time and effort in dealing with beneficiaries and
analyzing their financial needs and responsibilities. Similarly, a trus-
tee of a wholly charitable trust must devote comparable time and energy
analyzing grant requests and exercising due diligence with respect to
charitable grantees. In either case, the trustee has traditional fiduci-
ary responsibility for administering the trust faithfully and competent-
ly. The private trustee is accountable to the beneficiaries while the
charitable trustee is accountable to not only the charities but also the
Internal Revenue Service and the Charities Bureau of the New York Attor-
ney General's Office.

The existing compensation structure is also at odds with modern trust
administration. Under the total return concept embodied in the prudent
investor rule, the existing compensation structure for a trustee of a
wholly charitable trust creates a potential conflict of interest.
Although investments with a significant capital gain component may be
the most appropriate trust investment under the prudent investor rule, a
trustee of a wholly charitable trust has personal incentive to maximize
the income component of the investment return. An incentive to maximize
income seems particularly inappropriate because most trusts do not base
their charitable distributions on trust income, as discussed in the
following paragraph. Furthermore, if a trustee of a wholly charitable
trust does faithfully invest using prudent investor principles as
required by applicable law, his or her trustee commissions will in most
cases be substantially less than the commissions payable to a trustee of
a non-charitable trust of similar value, as illustrated above.

There also is a difference in the manner in which trustee commissions
are allocated against income and principal The commissions of a trustee
of a wholly charitable trust are allocated entirely to income, while the
commissions of a trustee of a private trust are payable one-third from
income and two-thirds from principal. The allocation of the commissions
of a trustee of a wholly charitable trust all to income has inadvertent
consequences. By requiring the trustee of the charitable trust to take
his or her commission from income, the amount of income available for
distribution to the charitable beneficiaries of certain pre-1969 wholly
charitable trusts is substantially reduced (pre-1969 wholly charitable
trusts generally provide for public charities to receive the net income
of the trust - the proposed change will increase the amounts payable to
charities from those trusts).

This measure addresses the need to treat trustees of charitable trusts
uniformly and to eliminate the disparate treatment of trustees of wholly
charitable trusts.

Proposed Amendment: The proposed amendment would implement the following
changes:

(1) Annual commissions of individual trustees of wholly charitable
trusts will be computed under the same structure as the annual commis-
sions of individual trustees of non-charitable trusts.  Therefore, both
sets of trustees will be compensated based upon the principal value of
the trust, rather than upon income collected.  However, there will be an
exception that the commission for trustees of wholly charitable trusts
on principal up to $20,000,000 will be reduced by 20% and on any amount
in excess of $20,000,000 such commission would be reduced by 50% to
$1.50 per $1,000 (or major fraction thereof). Corporate trustees will
still be entitled to reasonable compensation at their published rates.

(2) Annual commissions of individual and corporate trustees for charita-
ble trusts will be payable one-third from income and two-thirds from
principal. This will increase the amounts of income payable to the char-
itable beneficiaries of certain wholly charitable trusts.

This measure, which would have no fiscal impact on the State, would take
effect immediately and apply to all trusts in existence on or after its
effective date; provided that a trustee of a trust in existence on the
effective date may continue to take commissions under the prior law
until the end of the year in which the act becomes effective.

 
LEGISLATIVE HISTORY:

2017: S.6765 - Referred To Rules

 
EFFECTIVE DATE:
This act shall take effect immediately and shall apply to all trusts in
existence on or after such effective date; provided, however that a
trustee of a trust in existence on such effective date may make an irre-
vocable election within twelve months of such date immediately prior to
such effective date.

                                
 
BILL NUMBER: S6765A

SPONSOR: LANZA
 
TITLE OF BILL:  An act to amend the surrogate's court procedure act,
in relation to the computation and allocation of the commissions of
trustees of charitable trusts; and repealing certain provisions of such
law relating thereto

This is one in a series of measures being introduced at the request of
the Chief Administrative Judge upon the recommendation of his Surro-
gate's Court Advisory Committee.

This measure would amend sections 2308, 2309 and 2312 of the SCPA to
provide that an individual trustee of a wholly charitable trust would
receive commissions at the same rates as an individual trustee of a
non-charitable trust, with a reduced rate of 80% of the rates for a
non-charitable trust with a principal value of up to $20,000,000, and a
reduced rate of 50% on the principal value in excess of $20,000,000, and
to make other clarifications to existing law affecting wholly charitable
trusts and split interest trusts as described herein.

There currently is a difference under current law in the manner in which
trustees of wholly charitable trusts and trustees of non-charitable
              

trusts are compensated. Under current law (in the SCPA, section 2309(5)
and others, a trustee of a wholly charitable trust is entitled to 6% of
the annual income collected as compensation, while a trustee of a non-
charitable trust is entitled to compensation at the rate of $10.50 per
$1,000 (or major fraction thereof) on the first $400,000 of principal,
$4.50 per $1,000 (or major fraction thereof) on the next $600,000 of
principal and S3.00 per $1,000 (or major fraction thereof) on all addi-
tional principal.  Therefore, if a non-charitable trust has $1,000,000
of assets, the trustee's annual commissions would amount to $6,900,
regardless of how much income was collected during the year. Meanwhile,
if a wholly charitable trust has $1,000,000 of assets that generates
$1,000 of income throughout the year, then the trustee will be entitled
to only $600 for his or her annual commissions.

Such a discrepancy in compensation is unwarranted considering that the
duties of the trustee of a wholly charitable trust and those of the
trustee of a non-charitable trust are comparable. A trustee of a private
trust must devote time and effort in dealing with beneficiaries and
analyzing their financial needs and responsibilities. Similarly, a trus-
tee of a wholly charitable trust must devote comparable time and energy
analyzing grant requests and exercising due diligence with respect to
charitable grantees. In either case, the trustee has traditional fiduci-
ary responsibility for administering the trust faithfully and competent-
ly.

The private trustee is accountable to the beneficiaries while the chari-
table trustee is accountable to not only the charities but also the
Internal Revenue Service and the Charities Bureau of the New York Attor-
ney General 's Office.

The existing compensation structure is also at odds with modem trust
administration. Under the total return concept embodied in the prudent
investor rule, the existing compensation structure for a trustee of a
wholly charitable trust creates a potential conflict of interest.
Although investments with a significant capital gain component may be
the most appropriate trust investment under the prudent investor rule, a
trustee of a wholly charitable trust has personal incentive to maximize
the income component of the investment return. An incentive to maximize
income seems particularly inappropriate because most trusts do not base
their charitable distributions on trust income, as discussed in the
following paragraph. Furthermore, if a trustee of a wholly charitable
trust does faithfully invest using prudent investor principles as
required by applicable law, his or her trustee commissions will in most
cases be substantially less than the commissions payable to a trustee of
a non-charitable trust of similar value, as illustrated above.

There also is a difference in the manner in which trustee commissions
are allocated against income and principal The commissions of a trustee
of a wholly charitable trust are allocated entirely to income, while the
commissions of a trustee of a private trust are payable one-third from
income and two-thirds from principal. The allocation of the commissions
of a trustee of a wholly charitable trust all to income has inadvertent
consequences. By requiring the trustee of the charitable trust to take
his or her commission from income, the amount of income available for
distribution to the charitable beneficiaries of certain pre-1969 wholly
charitable trusts is substantially reduced (pre-1969 wholly charitable
trusts generally provide for public charities to receive the net income
of the trust - the proposed change will increase the amounts payable to
charities from those trusts).

This measure addresses the need to treat trustees of private trusts and
charitable trusts uniformly and to eliminate the disparate treatment of
trustees of wholly charitable trusts.

Proposed Amendment: The proposed amendment would implement the following
changes:

(1) Annual commissions of individual trustees of wholly charitable
trusts will be computed under the same structure as the annual commis-
sions of individual trustees of non-charitable trusts.  Therefore, both
sets of trustees will be compensated based upon the principal value of
the trust, rather than upon income collected.  However, there will be an
exception that the commission for trustees of wholly charitable trusts
on principal up to $20,000,000 will be reduced by 20% and on any amount
in excess of $20,000,000 such commission would be reduced by 50% to
$1.50 per $1,000 (or major fraction thereof). Corporate trustees will
still be entitled to reasonable compensation at their published rates.

(2) Annual commissions of individual and corporate trustees for charita-
ble trusts will be payable one-third from income and two-thirds from
principal. This will increase the amounts of income payable to the char-
itable beneficiaries of certain wholly charitable trusts.

This measure, which would have no fiscal impact on the State, would take
effect immediately and apply to all trusts in existence on or after such
effective date; provided, however that a trustee of a trust in existence
on such effective date may elect to continue to take commissions under
the law in effect prior to such effective date until December 31 of the
year this act takes effect.

 
2017-18 LEGISLATIVE HISTORY:

OCA 2017-32
Senate 6765 (Senator Lanza) (referred to Judiciary)