Do you understand Florida’s Principal and Income Act? Do you know how to determine if a receipt is principal or income or should be allocated between both? Do you know how to determine if an expense is principal or income or should be allocated between both?

Answer

Most certified public accountants are not experts at principal and income accounting. Net income calculated based on tax laws is usually not the same as net income calculated based on fiduciary law. The trustee must be familiar with the Principal and Income Act and, typically cannot rely on the accountant to prepare the fiduciary accountings or calculate net income.

 If there is a life income beneficiary and remainder beneficiaries, each receipt and disbursement must effectively be allocated among these beneficiaries. If a receipt is income, it benefits the income beneficiary and if a receipt is principal, it benefits the remainder beneficiaries. Conversely, if a disbursement is income, it reduces the income beneficiary’s distribution and if a disbursement is principal, it reduces the ultimate amount distributed to the remainder beneficiaries. These allocations are complicated and one of the most important of the trustee’s duties.