THE NEW ALCHEMY: HASSO V. HASSO AND CONVERTING PRINCIPAL TO INCOME UNDER THE REVISED UPIA

By Andrew Zabronsky, Esq. and Claudia J. Lowder, Esq.^*

I. INTRODUCTION

In recent years, estate planners have increasingly utilized limited partnerships, LLCs and other entities to gather client assets and pass wealth to younger generations. As part of this planning, the client will usually transfer interests in these entities to irrevocable trusts. Often overlooked amid the enthusiastic discussion about such devices, however, are certain side effects that can seriously undermine basic expectations of settlors and trust beneficiaries.

The 2007 case of Hasso v. Hasso¹ illustrates one such side effect, in the area of trust income and principal allocations. There, the question was the proper allocation of trust receipts generated from a $125 million sale of stock by a subsidiary of a corporation owned by the trust. Over time, the receipts amounted to nearly half the corporation’s net worth.² Yet the income beneficiary asserted that receipts should all be allocated to income and paid out to her. Such a wholesale transfer of the principal value of a trust to the income beneficiary would surely conflict with the desire and expectation of most settlors. There is also no question the same receipts would have to be treated as principal had the trust owned the shares directly. According to the Court of Appeal, however, because the shares were owned indirectly through entities, the opposite rule applied, and a major portion of the trust’s value had to be paid out to the income beneficiary.