(a) Unless expressly prohibited by the trust instrument, a trustee may release the power to adjust under Code Section 53-12-361 and convert a trust into a unitrust as described in this Code section if:
(1) The trustee determines that the conversion will enable the trustee to better carry out the intent of the settlor or testator and the purposes of the trust;
(2) The trustee gives written notice of the trustee's intention to release the power to adjust and to convert the trust into a unitrust and of how the unitrust will operate, including what initial decisions the trustee will make under this Code section, to:
(A) The settlor, if living;
(B) All living persons who are currently receiving or eligible to receive distributions of income of the trust; and
(C) Without regard to the exercise of any power of appointment, all living persons who would receive principal of the trust if the trust were to terminate at the time of the giving of such notice and all living persons who would receive or be eligible to receive distributions of income or principal of the trust if the interests of all of the beneficiaries currently eligible to receive income under subparagraph (B) of this paragraph were to terminate at the time of the giving of such notice.
If a beneficiary is not sui juris, such notice shall be given to the beneficiary's conservator, if any, and if the beneficiary has no conservator, to the beneficiary's guardian, including, in the case of a minor beneficiary, the beneficiary's natural guardian;
(3) At least one person receiving notice under each of subparagraphs (B) and (C) of paragraph (2) of this subsection is legally competent; and
(4) No beneficiary objects to the conversion to a unitrust in a writing delivered to the trustee within 60 days of the mailing of the notice under paragraph (2) of this subsection.
(b) (1) The trustee may petition the superior court to order the conversion to a unitrust.
(2) A beneficiary may request a trustee to convert to a unitrust. If the trustee does not convert, the beneficiary may petition the superior court to order the conversion.
(3) The court shall order conversion if the court concludes that the conversion will enable the trustee to better carry out the intent of the settlor or testator and the purposes of the trust.
(c) In deciding whether to exercise the power to convert to a unitrust as provided by subsection (a) of this Code section, a trustee may consider, among other things:
(1) The size of the trust;
(2) The nature and estimated duration of the trust;
(3) The liquidity and distribution requirements of the trust;
(4) The needs for regular distributions and preservation and appreciation of capital;
(5) The expected tax consequences of the conversion;
(6) The assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, and tangible and intangible personal property or real property; and the extent to which an asset is used by a beneficiary;
(7) To the extent reasonably known to the trustee, the needs of the beneficiaries for present and future distributions authorized or required by the governing trust instrument;
(8) Whether and to what extent the governing trust instrument gives the trustee the power to invade principal or accumulate income or prohibits the trustee from invading principal or accumulating income and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income; and
(9) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation on the trust.
(d) After a trust is converted to a unitrust:
(1) The trustee shall follow an investment policy seeking a total return for the investments held by the trust, whether the return is to be derived from:
(A) Appreciation of capital;
(B) Earnings and distributions from capital; or
(C) Both appreciation of capital and earnings and distributions from capital;
(2) The trustee shall make regular distributions in accordance with the governing trust instrument construed in accordance with the provisions of this Code section;
(3) The term "income" in the governing trust instrument shall mean an annual unitrust distribution equal to 4 percent of the net fair market value of the trust's assets or the payout percentage ordered under paragraph (1) of subsection (g) of this Code section, whether such assets would be considered income or principal under other provisions of this article and Article 17 of this chapter, averaged over the lesser of:
(A) The three preceding years; or
(B) The period during which the trust has been in existence;
(4) The trustee can determine the fair market value of the property in the trust by appraisal or other reasonable method or estimate; and
(5) The fair market value of the trust property shall not include the value of any residential property or any tangible personal property that, as of the first business day of the current valuation year, one or more of the current beneficiaries of the trust have or had the right to occupy or have had the right to possess or control, other than in his or her capacity as trustee of the trust, and instead the right of occupancy or the right to possession or control shall be deemed to be the unitrust amount with respect to such residential property.
(e) The trustee may in the trustee's discretion from time to time determine:
(1) The effective date of a conversion to a unitrust;
(2) The provisions for prorating a unitrust distribution for a short year in which a beneficiary's right to payments commences or ceases;
(3) The frequency of unitrust distributions during the year;
(4) The effect of other payments from or contributions to the trust on the trust's valuation;
(5) Whether to value the trust's assets annually or more frequently;
(6) What valuation dates to use;
(7) How frequently to value nonliquid assets and whether to estimate their value; and
(8) Any other matters necessary for the proper functioning of the unitrust.
(f) (1) Expenses which would be deducted from income if the trust were not a unitrust shall not be deducted from the unitrust distribution.
(2) The unitrust distribution shall be paid from net income, as such term would be determined if the trust were not a unitrust. To the extent net income is insufficient, the unitrust distribution shall be paid from net realized short-term capital gains. To the extent income and net realized short-term capital gains are insufficient, the unitrust distribution shall be paid from net realized long-term capital gains. To the extent income and net realized short-term and long-term capital gains are insufficient, the unitrust distribution shall be paid from the principal of the trust.
(g) The trustee or, if the trustee declines to do so, a beneficiary may petition the superior court to:
(1) Select a payout percentage different from 4 percent but not lower than 3 percent or higher than 5 percent;
(2) Provide for a distribution of net income, as would be determined if the trust were not a unitrust, in excess of the unitrust distribution if such distribution is necessary to preserve a tax benefit;
(3) Average the valuation of the trust's net assets over a period other than three years; or
(4) Reconvert from a unitrust. Upon a reconversion, the power to adjust under Code Section 53-12-361 shall be revived.
(h) A conversion to a unitrust shall not affect a provision in the governing trust instrument directing or authorizing the trustee to distribute principal or authorizing a beneficiary to withdraw a portion or all of the principal.
(i) A trustee shall not convert a trust into a unitrust:
(1) If payment of the unitrust distribution would change the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;
(2) If the unitrust distribution would be made from trust funds which are permanently set aside for charitable purposes under the governing trust instrument and for which a federal charitable, estate, or gift tax deduction has been taken, unless both income and principal are so set aside;
(3) If:
(A) Possessing or exercising the power to convert would cause an individual to be treated as the owner of all or part of the trust for federal income tax purposes; and
(B) The individual would not be treated as the owner if the trustee did not possess the power to convert; or
(4) If:
(A) Possessing or exercising the power to convert would cause all or part of the trust assets to be subject to federal estate, gift, or generation-skipping transfer tax with respect to an individual; and
(B) The assets would not be subject to federal estate, gift, or generation-skipping transfer tax with respect to the individual if the trustee did not possess the power to convert.
(j) (1) If paragraph (3) or (4) of subsection (i) of this Code section applies to a trustee and there is more than one trustee, a cotrustee to whom such provision does not apply may convert the trust unless the exercise of the power by the remaining trustee is prohibited by the governing trust instrument.
(2) If paragraph (3) or (4) of subsection (i) of this Code section applies to all the trustees, the trustees may petition the superior court to direct a conversion.
(k) (1) A trustee may release the power conferred by subsection (a) of this Code section to convert to a unitrust if:
(A) The trustee is uncertain about whether possessing or exercising the power to convert will cause a result described in paragraph (3) or (4) of subsection (i) of this Code section; or
(B) The trustee determines that possessing or exercising the power to convert will or may deprive the trust of a tax benefit or impose a tax burden not described in subsection (i) of this Code section.
(2) The release of the power to convert may be permanent or for a specified period, including a period measured by the life of an individual.
Section: Previous 53-12-360 53-12-361 53-12-362 53-12-363 53-12-364 NextLast modified: October 14, 2016