Relates to the computation and allocation of the commissions of trustees of charitable trusts; repealer

◆ The sponsor's argument

Why the sponsor says this is needed

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 pa

This is the sponsor's own case for the bill, quoted from their memorandum. It is not Agora's description of what the bill does.