55-277.4:1 - Total return unitrust
§ 55-277.4:1. Total return unitrust.
A. As used in this section:
1. "Disinterested person" means a person who is not a "related orsubordinate party" (as defined in § 672 (c) of the Internal Revenue Code, 26U.S.C. § 1, et seq., (hereinafter referred to in this section as the"I.R.C.", and all such references shall include the specific sectionreferred to and any successor provisions thereof)) with respect to the personthen acting as trustee of the trust, and excludes the grantor of the trustand any interested trustee.
2. "Grantor" means an individual who created an inter vivos or atestamentary trust.
3. "Grantor-created unitrust" means a trust, created either by an intervivos or a testamentary instrument, which provides that the trust shall beadministered in the manner of a total return unitrust as provided in thissection.
4. "Income trust" means a trust, created by either an inter vivos or atestamentary instrument, which directs or permits the trustee to distributethe net income of the trust to one or more persons, either in fixedproportions or in amounts or proportions determined by the trustee, andregardless of whether the trust directs or permits the trustee to distributethe principal of the trust to one or more such persons.
5. "Interested distributee" means a person to whom distributions of incomeor principal can currently be made who has the power to remove the existingtrustee and designate as successor a person who may be a "related orsubordinate party" as defined in I.R.C. § 672 (c), 26 U.S.C. § 672 (c), withrespect to such distributee.
6. "Interested trustee" means: (i) an individual trustee to whom the netincome or principal of the trust can currently be distributed or would bedistributed if the trust were then to terminate and be distributed; (ii) anytrustee who may be removed and replaced by an interested distributee; or(iii) an individual trustee whose legal obligation to support a beneficiarymay be satisfied by distributions of income and principal of the trust.
7. "Total return unitrust" means (i) an income trust, which has beenconverted under and meets the provisions of this section; or (ii) agrantor-created unitrust.
8. "Trustee" means all persons acting as trustee of the trust, except whereexpressly noted otherwise, whether acting in their discretion or at thedirection of one or more persons acting in a fiduciary capacity.
9. "Unitrust amount" means an amount computed as a percentage of the fairmarket value of the trust.
B. A trustee, other than an interested trustee, or where two persons areacting as trustees the trustee that is not an interested trustee, or wheremore than two persons are acting as trustee a majority of the trustees whoare not an interested trustee, may, in its sole discretion and withoutjudicial approval, (i) convert an income trust to a total return unitrust;(ii) convert a total return unitrust to an income trust; or (iii) change thepercentage used to calculate the unitrust amount or the method used todetermine the fair market value of the trust if:
1. The trustee adopts a written policy for the trust providing: (i) in thecase of a trust being administered as an income trust, that futuredistributions from the trust will be unitrust amounts rather than net income;(ii) in the case of a trust being administered as a total return unitrust,that future distributions from the trust will be net income rather thanunitrust amounts; or (iii) that the percentage used to calculate the unitrustamount or the method used to determine the fair market value of the trustwill be changed as stated in the policy;
2. The trustee sends notice in a manner authorized under § 55-541.09 of itsintention to take such action, along with copies of such written policy andthis section, to: (i) the grantor of the trust, if living; (ii) withoutregard to the exercise of any power of appointment, the qualifiedbeneficiaries of the trust then determined under §§ 55-541.03 and 55-541.10,other than the attorney general of the Commonwealth; and (iii) all personsacting as advisor or protector of the trust. The representation provisions of§§ 55-543.01, 55-543.03, 55-543.04, and 55-543.05 shall apply to notice underthis subdivision;
3. At least one member of each class of qualified beneficiaries receivingnotice under clause (ii) of subdivision 2 is (i) legally competent, (ii) inthe case of a charitable organization, then existing, or (iii) represented inthe manner set forth in subdivision 2; and
4. No person receiving such notice objects, by written instrument deliveredto the trustee, to the proposed action of the trustee within 30 days ofreceipt of such notice.
C. If there is no trustee of the trust other than an interested trustee, theinterested trustee or, where two or more persons are acting as trustee andare interested trustees, a majority of such interested trustees may, in itssole discretion and without judicial approval, (i) convert an income trust toa total return unitrust; (ii) convert a total return unitrust to an incometrust; or (iii) change the percentage used to calculate the unitrust amountor the method used to determine the fair market value of the trust if:
1. The trustee adopts a written policy for the trust providing: (i) in thecase of a trust being administered as an income trust, that futuredistributions from the trust will be unitrust amounts rather than net income;(ii) in the case of a trust being administered as a total return unitrust,that future distributions from the trust will be net income rather thanunitrust amounts; or (iii) that the percentage used to calculate the unitrustamount or the method used to determine the fair market value of the trustwill be changed as stated in the policy;
2. The trustee appoints a disinterested person who, in its sole discretionbut acting in a fiduciary capacity: (i) in the case of conversion to a totalreturn unitrust, determines for the trustee (a) the percentage to be used tocalculate the unitrust amount, (b) the method to be used in determining thefair market value of the trust, and (c) which assets, if any, are to beexcluded in determining the unitrust amount; and (ii) determines for thetrustee that conversion is in the best interests of the trust;
3. The trustee sends notice in a manner authorized under § 55-541.09 of itsintention to take such action, along with copies of such written policy andthis section, to: (i) the grantor of the trust, if living; (ii) withoutregard to the exercise of any power of appointment, the qualifiedbeneficiaries of the trust then determined under §§ 55-541.03 and 55-541.10,other than the attorney general of the Commonwealth; and (iii) all personsacting as advisor or protector of the trust. The representation provisions of§§ 55-543.01, 55-543.03, 55-543.04, and 55-543.05 shall apply to notice underthis subdivision;
4. At least one member of each class of qualified beneficiaries receivingnotice under clause (ii) of subdivision 3 is (i) legally competent, (ii) inthe case of a charitable organization, then existing, or (iii) represented inthe manner set forth in subdivision 3; and
5. No person receiving such notice objects, by written instrument deliveredto the trustee, to the proposed action of the trustee or the determinationsof the disinterested person within 30 days of receipt of such notice.
D. If any trustee desires to convert an income trust to a total returnunitrust, convert a total return unitrust to an income trust, or change thepercentage used to calculate the unitrust amount or the method used todetermine the fair market value of the trust but does not have the ability toor elects not to do it under the provisions of subsections B or C above, thetrustee may petition the circuit court in which the trustee qualified, or ifthere is no such qualification, the circuit court for the jurisdiction inwhich the trustee or beneficiary resides, or if the trustee is a corporatetrustee and there is no resident beneficiary, the circuit court where thetrust account is administered, for such order as the trustee deemsappropriate. In the event, however, there is only one trustee of such trustand such trustee is an interested trustee or in the event there are two ormore trustees of such trust and a majority of them are interested trustees,the court, in its own discretion or on the petition of such trustee ortrustees or any person interested in the trust, may appoint a disinterestedperson who, acting in a fiduciary capacity, shall present such information tothe court as shall be necessary to enable the court to make itsdeterminations hereunder. Any qualified beneficiary of the trust thendetermined under §§ 55-541.03 and 55-541.10, other than the attorney generalof the Commonwealth, may also petition such circuit court to convert anincome trust to a total return unitrust, convert a total return unitrust toan income trust, or change the percentage used to calculate the unitrustamount or the method used to determine the fair market value of the trustassets.
E. The fair market value of the trust shall be determined at least annually,using such valuation date or dates or averages of valuation dates as aredeemed appropriate. Assets for which a fair market value cannot be readilyascertained shall be valued using such valuation methods as are deemedreasonable and appropriate. Such assets may be excluded from valuation,provided all income received with respect to such assets is distributed tothe extent distributable in accordance with the terms of the governinginstrument.
F. The percentage to be used in determining the unitrust amount shall be areasonable current return from the trust, in any event no less than threepercent nor more than five percent, either as provided by the grantor in thegoverning instrument in the case of a grantor-created unitrust, or otherwisetaking into account the intentions of the grantor of the trust as expressedin the governing instrument, the needs of the beneficiaries, general economicconditions, projected current earnings and appreciation for the trust, andprojected inflation and its impact on the trust.
G. Following the conversion of an income trust to a total return unitrust, orupon the creation of a grantor-created unitrust, the trustee:
1. Shall treat the unitrust amount as if it were net income of the trust forpurposes of determining the amount available, from time to time, fordistribution from the trust, and the distribution of the unitrust amountshall be considered in full satisfaction of the distribution of all of thenet income of the trust;
2. May allocate to trust income for each taxable year of the trust, orportion thereof:
(i) net short-term capital gain described in I.R.C. § 1222 (5), 26 U.S.C. §1222 (5), for such year or portion thereof, but only to the extent that theamount so allocated together with all other amounts allocated to trust incomefor such year or portion thereof does not exceed the unitrust amount for suchyear or portion thereof; and
(ii) net long-term capital gain described in I.R.C. § 1222 (7), 26 U.S.C. §1222 (7), for such year or portion thereof but only to the extent that theamount so allocated together with all other amounts, including amountsdescribed in clause (i) of this subdivision, allocated to trust income forsuch year, or portion thereof, does not exceed the unitrust amount for suchyear, or portion thereof; and
3. Shall treat the unitrust amount as if it were income of the trust forpurposes of determining the amount of trustee compensation where thegoverning instrument directs that such compensation be based wholly orpartially on income.
H. In administering a total return unitrust, the trustee may, in its solediscretion but subject to the provisions of the governing instrument,determine: (i) if the trust is converted to a total return unitrust, theeffective date of the conversion; (ii) the timing of distributions, includingprovisions for prorating a distribution for a short year in which abeneficiary's right to payments commences or ceases; (iii) whetherdistributions are to be made in cash or in kind or partly in cash and partlyin kind; (iv) if the trust is converted to an income trust, the effectivedate of such conversion; and (v) such other administrative matters as may benecessary or appropriate to carry out the purposes of this section.
I. Conversion to a total return unitrust under the provisions of this sectionshall not affect any other provision of the governing instrument, if any,regarding distributions of principal.
J. Subject to the provisions of the governing instrument, this section shallbe construed as pertaining to the administration of a trust and shall beavailable to any trust that is administered under Virginia law, regardless ofthe date the trust was created, unless:
1. The governing instrument reflects an intention that the currentbeneficiary or beneficiaries are to receive an amount other than a reasonablecurrent return from the trust;
2. The trust is a pooled income fund described in I.R.C. § 642(c)(5), 26U.S.C. § 642(c)(5), or a charitable-remainder trust described in I.R.C. §664(d), 26 U.S.C. § 664(d); or
3. The governing instrument expressly prohibits use of this section byspecific reference to this section or expressly reflects the grantor's intentthat net income not be calculated as a unitrust amount. A provision in thegoverning instrument that "The provisions of § 55-277.4:1, Code of Virginia,as amended, or any corresponding provision of future law, shall not be usedin the administration of this trust," or "My trustee shall not determinethe distributions to the income beneficiary as a unitrust amount", orsimilar words reflecting such intent shall be sufficient to preclude the useof this section.
K. Any trustee or disinterested person who in good faith takes or fails totake any action under this section shall not be liable to any person affectedby such action or inaction, regardless of whether such person receivedwritten notice as provided in this section and regardless of whether suchperson was under a legal disability at the time of the delivery of suchnotice. Such person's exclusive remedy shall be to obtain an order of thecourt directing the trustee to convert an income trust to a total returnunitrust, to convert from a total return unitrust to an income trust or tochange the percentage used to calculate the unitrust amount.
(2004, c. 639; 2009, c. 477.)