BILL NUMBER: S8373

SPONSOR: HOYLMAN-SIGAL
 
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 to repeal certain provisions of such law relating thereto

2.  
SOURCE OF BILL

This bill is being introduced at the request of the Unified Court
System, on the recommendation of the Chief Administrative Judge's Surro-
gate's Court Advisory Committee.

3.  
PURPOSE OF BILL

This bill is proposed to bring the commissions received by a charitable
trustee more in line with the commissions received by a trustee of a
non-charitable trust.

4.  
              

SUMMARY OF PROVISIONS

Section 1 amends SCPA 2308 to provide that the annual commissions of a
trustee of a charitable trust shall be 80 percent of the rates charged
for a trustee of noncharitable trust up to the sum of $20 million and 50
percent for sums over $20 million.

Section 2 of this bill amends SCPA 2308(5) to provide that the annual
commissions of a trustee of a charitable trust shall be 80% of the rates
charged for a trustee of a noncharitable trust with respect to a trust
having a value of up to $20 million and 50% of such rates with respect
to any portion of a trust that exceeds a value of $20 million.

Section 4 of this bill amends SCPA 2308(12), which governs the computa-
tion of commissions where the trustee is authorized or required to accu-
mulate income, to add a reference to SCPA 2308(5), as amended by Section
1 of this bill.

Section 5 of this bill amends SCPA 2309(3) to provide that annual
commissions allowed under this section, including those received by
trustees of charitable trusts, shall be payable one-third from income
and two-thirds from principal.  1

Section 6 of this bill amends SCPA 2309(5) to provide for the computa-
tion of the annual commissions of a trustee of a wholly charitable trust
in the aforesaid amounts (80 percent of the rates charged for a trustee
of a noncharitable trust for trusts having a value o up to $20 million
and 50 percent of such rates for any portion of a trust exceeding a
value of $20 million).

Section 7 of the bill amends SCPA 2312(3) by replacing a provision that
a corporate trustee shall not be entitled to any commission from princi-
pal with a provision that such a trustee shall not be entitled to any
commission for paying out principal.

Section 8 of the bill provides that the act shall, take effect 60 days
after enactment and shall apply to all trusts in existence on or after
4uSh effective date; provided, however, that a trustee of a trust in
existence on such effective date may elect to continue to take commis-
sions under the law in effect prior to such effective date until Decem-
ber 31 of the year this act takes effect.

5.  
JUSTIFICATION

This measure would amend sections 2308, 2309 and 2312 of the Surrogate's
Court Procedure Act (SCPA) to provide that an individual trustee of a
wholly charitable trust would receive commissions on the same basis as
an individual trustee of a non-charitable trust, with a reduced rate of
80% of the rates allowed for a trustee of a non-charitable trust for
trusts with a principal value of up to $20,000,000, and a reduced rate
of 50% of such rates for any portion of a trust exceeding a value of $20
million, and to make other clarifications to existing law affecting
wholly charitable trusts and split interest trusts as described below.

There currently is a difference in law in the way trustees of wholly
charitable trusts and trustees of non-charitable trusts are compensated.
Under the existing law (see SCPA 2308(5), 2309(5)), a trustee of a whol-
ly charitable trust is entitled to compensation consisting of 6% of the
annual income collected, 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 $3.00
per $1,000 (or major fraction thereof) on all additional principal.

Therefore, if a non-charitable trust has $1 million of assets, the trus-
tee'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 $1million of assets that generates $40,000 of income through-
out the year, then the trustee will be entitled to only $2,400 in 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 to 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 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 a personal incentive to maxi-
mize the income component of the investment return. An incentive to
maximize income seems particularly inappropriate because most charitable
trusts do not base their distributions solely on trust income. Rather,
such trusts are required to be administered consistent with the
provisions of the New York Prudent Management of Institutional Funds Act
(Article 5-A of the Not for Profit Corporation Law). 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 way 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 trus-
tee of a wholly charitable trust entirely to income has inadvertent
consequences. As a result of requiring the trustee of the charitable
trust to take their commission from income, the amount of income avail-
able for distribution to the charitable beneficiaries of certain wholly
charitable trusts may be substantially reduced.

This measure addresses the need to lessen the gap between the treatment
of trustees of private trusts and charitable trusts.

Specifically, this proposal 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, the commission
for trustees of wholly charitable trusts with a principal value of up to
$20 million will be reduced by 20% and, on any portion of the principal
value of the trust that exceeds $20 million, the commission will be
reduced by 50%. Corporate trustees will still be entitled to reasonable
compensation at their published rates. However, neither corporate trus-
tees nor individual trustees will be entitled to a commission for paying
out principal.

(2) Annual commissions of individual and corporate trustees of wholly
charitable trusts will also be allocated between income and principal on
the same basis as the annual commissions of individual trustees of non-
charitable trusts; that is, such commissions will be payable one-third
from income and two-thirds from principal. This will likely increase the
amounts of income payable to the charitable beneficiaries of certain
wholly charitable trusts.

6.  
PRIOR LEGISLATIVE HISTORY

This measure was first introduced to the Assembly and the Senate in the
2017-2018 legislative session (A9764-A/S6765-B). The proposal was intro-
duced in the Assembly for the 2019-2020 legislative session (A7523). The
proposal was again introduced during the 20212022 legislative session in
both houses and passed the Senate both years (A7800/S6499). The proposal
was introduced in the Senate during the 2023-2024 legislative session
(S7475) and again passed the Senate in both 2023 and 2024. With a few
amendments, the proposal is again being submitted.

7.  
FISCAL IMPLICATIONS

None.

8.  
EFFECTIVE DATE
This bill would take effect 60 days following enactment 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.