USA – CONNECTICUT Law and Practice Contributed by: William Kambas, Lawton Leung and Samantha Kopf, Withers
10. Fiduciary Regulation, Standards and Taxation 10.1 Corporate and Professional Fiduciaries Connecticut regulates fiduciaries through a combi- nation of banking oversight, licensing requirements and statutory trust administration rules. Professional fiduciaries – whether state‑chartered trust companies, banks or other corporate entities authorised to act in a fiduciary capacity – operate under a regulatory framework designed to ensure financial stability, com- petence and accountability. Entities seeking to offer fiduciary services must: • obtain authorisation from the Department of Bank- ing pursuant to Conn. Gen. Stat. §§ 36a‑70 to 36a‑71; • meet capitalisation and governance standards; and • employ qualified trust officers consistent with trust department regulations under Conn. Gen. Stat. § 36a‑365. Ongoing examinations under Conn. Gen. Stat. §§ 36a‑17 and 36a‑21 help ensure that fiduciary activities are conducted responsibly and in accord- ance with state law. Trust administration is governed principally by the Connecticut Uniform Trust Code (Conn. Gen. Stat. §§ 45a‑499a to 45a‑529f), which establishes core fidu- ciary duties, including the duty to administer the trust in good faith (§ 45a‑499c), to act in accordance with the trust’s terms (§ 45a‑499b) and to act loyally and solely in the interests of beneficiaries (§ 45a‑541b). Connecticut’s Prudent Investor Act (Conn. Gen. Stat. §§ 45a‑541 to 45a‑541l) requires trustees to man- age trust assets with the care, skill and diversification expected of a prudent investor in light of the trust’s purposes. Connecticut case law reinforces the intensity of these duties. In Konover v Kolodney , 202 Conn. 40 (1987), the Supreme Court emphasised that trustees must exercise independent judgement and cannot simply defer to outside advisers when doing so would com- promise loyalty or prudence. Similarly, cases such as Murphy v Wakelee , 247 Conn. 396 (1998), underscore that courts will strictly enforce fiduciary obligations
and may surcharge trustees who fail to act in benefi- ciaries’ interests or who mismanage trust property. These decisions illustrate the level of scrutiny Con- necticut courts apply to both individual and profes- sional fiduciaries. Additional fiduciary obligations arise under Connecti- cut’s probate statutes. Trustees must comply with accounting and reporting requirements under Conn. Gen. Stat. §§ 45a‑175 to 45a‑204, and probate courts exercise supervisory authority under Conn. Gen. Stat. § 45a‑98, including the ability to order accountings, remove fiduciaries or compel compliance. When trusts hold closely held business interests, trustees must also satisfy statutory duties relating to special assets, including delegation (§ 45a‑541i) and manage- ment of closely held business interests (§ 45a‑541k), and Connecticut courts have treated these obligations as requiring heightened attentiveness to conflicts of interest and valuation integrity. 10.2 Taxation of Trusts Resident trusts – generally those created by a Con- necticut domiciliary or established under the will of a decedent domiciled in the state – are taxed on Connecticut taxable income under Conn. Gen. Stat. § 12‑701 (a)(4) and related definitions in § 12‑700. Non-resident trusts are taxed solely on Connecti- cut‑source income, such as income derived from Con- necticut real property or business activities, pursuant to Conn. Gen. Stat. §§ 12‑711 and 12‑712. These dis- tinctions are especially important when a trust holds an interest in a business operating or owning assets in Connecticut, as entity‑level sourcing rules may pass through to the trust. Connecticut regulations provide detailed rules for cal- culating taxable income, applying the fiduciary adjust- ment, and allocating income among beneficiaries. The fiduciary adjustment – governed by Conn. Gen. Stat. § 12‑701 (a)(20) and Conn. Agencies Regs. § 12‑701 (a)(20)‑1 – requires trustees to reconcile differences between federal and Connecticut rules when deter- mining the taxable base. Adjustments may include add‑backs for Connecticut‑sourced partnership or S‑corporation income, disallowed tax‑exempt inter- est, or beneficiary‑level allocations unique to Con- necticut law.
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