On February 8, 2024, the Mississippi Supreme Court issued its opinion[1] regarding an issue of first impression regarding Mississippi’s Principal and Income Act of 2013 (the “Act”).[2] As a worthwhile note, the Court noted that this is an issue of first impression and acknowledged as well as appeared to oblige the parties so as to give valuable guidance to both trustees and courts of this state.
Principal and Income Act[3]
The Act is a group of statutes that governs the fiduciary duties related to the management and distribution of income and principal of trusts and estates in Mississippi. It includes provisions for defining terms, apportioning receipts and disbursements at the beginning and end of income interests, and other matters pertinent to trusts and estates. Specifically, the Act provides guidance on how trustees should allocate receipts between the income and principal, which in turn can affect the distributions allocations to income and principal beneficiaries, which was a central issue in the instant case.[4]
Background
The Crider Family Share Trust held common stock in Muskegon Energy Co. (“Muskegon Energy”) and in 2021, it received 2 distributions from Muskegon Energy. In June of 2021, Muskegon Energy distributed $79,660 to the trust. In November 2021, the trust received another distribution in the amount of $796,600. The total amount distributed in 2021 from Muskegon Energy to the trust was $876,260. The trustee The trustee of the trust subsequently allocated the total amount of the distributions to income, which in turn benefited the income beneficiary. Later, on November 30, 2021, the remainder beneficiaries filed a Motion to Stay and Object to Proposed Distribution from the Crider Family Share Trust and for Directions in the Jackson County Chancery Court, seeking to have the distribution paid to them as opposed to the income beneficiary, citing to Miss. Code Ann. Section 91-17-401(d)(2) (Rev. 2021) which stated: “(d) Money is received in partial liquidation: […] (2) If the total amount of money and property received in a distribution or series of related distributions is greater than twenty percent (20%) of the entity’s gross assets, as shown by the entity’s year-end financial statements immediately preceding the initial receipt.”
The chancellor in the lower court (Jackson County Chancery Court) denied the November 30, 2021, Motion on December 16, 2021, and held that the trustee adhered to the Principal and Income Act, Mississippi’s trust laws, and the trust agreement itself. Subsequently, the remainder beneficiaries filed a Notice of Appeal on March 2, 2022, but then requested the Court to stay the appeal in light of newly discovered evidence, pursuant to M.R.C.P. 60, on May 26, 2022. A hearing on the merits was held on October 4, 2022, and the Order, declining to modify the previous ruling, was issued November 30, 2022. Ultimately, a second Notice of Appeal was filed on December 6, 2022, with both appeals being consolidated.
In their appeal, the remainder beneficiaries argued they were entitled to any distributions stemming from the dividends because the dividend payout equaled 21.945% of Muskegon Energy’s assets (greater than 20%) and thus should have been allocated to principal as opposed to income under the Act. Accordingly, their position was that such was a partial liquidation and that the trustee breached her fiduciary duty by failing to distribute those amounts, which they asserted are properly allocable to principal, to them and instead allocating to income and distributing to the income beneficiary.
Discussion
Issue #1 – Whether a partial liquidation occurred under Miss. Code Ann. 91-17-401(d)(2).
The first item addressed by the Court was whether the distributions were made in partial liquidation, thereby triggering Miss. Code Ann. Section 91-17-401(c)(3), which states “(c) A trustee shall allocate the following receipts from an entity to principal: […] (3) Money received in total or partial liquidation of the entity[.]”
The remainder beneficiaries argued that the distributions were distributions in partial liquidation in that the total amount of the distributions made, relative to the gross assets, was 21.945%. In computing this figure, they stated that gross assets equaled $159,793,260 (for 2020, the immediately preceding period) and 2021 distributions equaled $35,650,940.
The trustee, however, computed these figures differently. She agreed the distribution amount equaled $35,650,940 but disagreed with respect to the gross asset value, stating instead that gross assets were $257,669,786, being the fair market value unencumbered by any liabilities. The trustee’s calculation resulted in percentage of gross assets of 13.6%, less than the 20% referenced in statute. Regardless, the trustee contended that the remainder beneficiaries’ computation was still incorrect because they failed to consider Miss. Code Ann. Section 91-17-401(e) which states “(e) Money is not received in partial liquidation, nor may it be taken into account under subsection (d)(2), to the extent that it does not exceed the amount of income tax that a trustee or beneficiary must pay on taxable income of the entity that distributes the money.” With respect to this assertion, the expert for the remainder beneficiaries admitted that this statute would change the results.
In light of the above, the remainder beneficiaries cited then to a California Court of Appeals case that implicitly held that the amount of income tax is ignored when determining partial liquidation. [5] They also argued that the comments to the Principal and Income Act refuted the plain meaning of subsection (e) and instead mandated that the partial liquidation calculation be determined on a post-tax basis. The Court quickly noted however that Mississippi had neither adopted such comments to its own Principal and Income Act nor any holding in the California case, cited to by the remainder beneficiaries. It would appear that the remainder beneficiaries argued that taxes be ignored in determining whether a partial distribution took place but that such is not ignored when computing the allocation amount. Their argument hinged heavily on their California case and the comment to Section 401(e) from the 2008 version of the Uniform Act (from which Mississippi’s version was modeled) was as follows:
Partial liquidations. Under subsection (d)(1), any distribution designated by the entity as a partial liquidating distribution is principal regardless of the percentage of total assets that it represents. If a distribution exceeds 20% of the entity’s gross assets, the entire distribution is a partial liquidation under subsection (d)(2) whether or not the entity describes it as a partial liquidation. In determining whether a distribution is greater than 20% of the gross assets, the portion of the distribution that does not exceed the amount of income tax that the trustee or a beneficiary must pay on the entity’s taxable income is ignored.
As to the issue of computation of whether a partial liquidation occurred under Miss. Code Ann. Section 91-17-401(d)(2), the Chancellor, and ultimately the Supreme Court, held that the amount payable in tax by the trust or beneficiary with respect to the distribution should be ignored from the outset for the purposes of determining whether a partial liquidation occurred, relying simply on the language of the statute, holding that the Chancellor was correct to include the tax effects in determining the 20 percent calculation under Miss. Code Ann. Section 91-17-401(d)(2), (e). Specifically, the Court held that an entity’s partial liquidation calculations should be determined on a post-tax basis as provided under Miss. Code Ann. Section 91-17-401(e).
Issue #2 – Whether the trustee breached her fiduciary duty owed to the remainder beneficiaries.
Being that a partial liquidation was determined never to have occurred due to the resolution of the first issue above, the Court held that the evidence in the record supported the Chancellor’s finding that the trustee complied with both the trust agreement and the Mississippi Uniform Trust Code. Thus, the Court upheld the Chancellor’s ruling with minimal discussion.
Conclusion
The instant case is a reminder for fiduciaries of the importance of being well-advised with respect to the administration of estates and trusts. Engaging competent counsel and advisors can be, and usually is, paramount for those willing to volunteer (or be hired) for what is often a heavily scrutinized role. It is important to note that the trustee faced the possibility of extreme liability with the case hinging on a matter of calculation in a more obscure area of law without any real precedent in the relevant jurisdiction.
[1] Matter of Crider Fam. Share Tr., 379 So. 3d 885 (Miss. 2024)
[2] See. Miss. Code Ann. Section 91-17-401 (Rev. 2021) et seq.
[3] There is a successor version of the Uniform Principal and Income Act, after which the Act is modeled. The new Act, not yet adopted in Mississippi, is the Uniform Fiduciary Income and Principal Act (UFIPA).
[4] It should be noted however that the Act provides options to trustees in certain cases, which appear not to have been the case in the instant case discussed in this article.
[5] Scurrah v. Elder, 2017 WL 3866784 (CA Ct. App. 2017).
