§ 19-3A-106 — Conversion to Unitrust

Alabama § 19-3A-106

• Jurisdiction: Alabama
• Title 19: Fiduciaries and Trusts
• Ch. 3A: Alabama Principal and Income Act
• Art. 1: Definitions and Fiduciary Duties

Text

(a) Unless expressly prohibited by the governing instrument, a trustee may convert a trust into a unitrust as described in this section if all of the following apply:
(1) The trustee has concluded 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 convert the trust into a unitrust, including the trustee’s initial decisions as set forth below, to all the qualified beneficiaries. The written notice shall include the following:
a. An explanation of how the unitrust will operate;
b. The effective date of the conversion to a unitrust;
c. The unitrust percentage to be used;
d. The provisions for prorating a unitrust distribution for a short year in which a beneficiary’s right to payments commences or ceases;
e. Whether the net fair market value of the trust assets will be determined annually or averaged over a designated multiple year smoothing period; and
f. Such other matters as the trustee deems appropriate for the proper functioning of the unitrust, which may include such matters as:
1. Whether to omit from the calculations trust property occupied, used, or possessed by a beneficiary;
2. How nonliquid or hard to value assets shall be valued, how frequently to value them, and whether to estimate their value; or
3. Whether the trust assets will be valued annually or more frequently.
(3) There is at least one sui juris income beneficiary and at least one sui juris presumptive remainder beneficiary.
(4) No beneficiary, or a person who may represent and bind a beneficiary who is not sui juris, objects to the conversion to a unitrust in a writing delivered to the trustee within 60 days of the mailing of the notice under subdivision (2).
(5) If the trustee requests, the trustee receives consents from such beneficiaries as determined by the trustee.
(b)(1) Unless expressly prohibited by the governing instrument, the qualified beneficiaries of a trust may convert the trust into a unitrust as described in this section by a written instrument delivered to the trustee that sets forth all of the following:
a. A representation by the qualified beneficiaries that they have concluded that the conversion will enable the trustee to better carry out the intent of the settlor or testator and the purposes of the trust;
b. The effective date of the conversion to a unitrust, which shall not be earlier than 60 days after the date the written instrument is delivered to the trustee, unless the trustee consents to an earlier date, provided that such earlier date is not earlier than the date the written instrument is delivered to the trustee;
c. The unitrust percentage to be used;
d. The provisions for prorating a unitrust distribution for a short year in which a beneficiary’s right to payments commences or ceases;
e. Whether the net fair market value of the trust assets will be determined annually or averaged over a designated multiple year smoothing period; and
f. Such other matters as the beneficiaries deem appropriate for the proper functioning of the unitrust, which may include such matters as:
1. Whether to omit from the calculations trust property occupied, used, or possessed by a beneficiary,
2. How nonliquid or hard to value assets shall be valued, how frequently to value them, and whether to estimate their value, or
3. Whether the trust’s assets will be valued annually or more frequently.
(2) A trust may not convert into a unitrust unless the written instrument is executed by all qualified beneficiaries and the trustee(s), whether directly or by representation.
(3) Notwithstanding the foregoing, a trustee, prior to the effective date of the conversion, may seek court confirmation that the foregoing representations and requirements have been satisfied, in which case the conversion will not be effective before the conversion is confirmed by the court.
(c)(1) The trustee or a qualified beneficiary may petition the court to review the conversion to a unitrust, even if any of the following apply:
a. A beneficiary timely objects to the conversion to a unitrust;
b. There are no sui juris income beneficiaries or sui juris presumptive remainder beneficiaries; or
c. The trustee does not consent.
(2) Unless expressly prohibited by the governing instrument, the court shall order the conversion if the court concludes:
a. that the conversion will enable the trustee to better carry out the intent of the settlor or testator and the purposes of the trust; or
b. all qualified beneficiaries have consented to the conversion.
(3) The court shall make the following decisions which shall be set forth in the order of the court approving the conversion:
a. The effective date of the conversion to a unitrust;
b. The unitrust percentage to be used;
c. The provisions for prorating a unitrust distribution for a short year in which a beneficiary’s right to payments commences or ceases;
d. Whether the net fair market value of the trust assets will be determined annually or averaged over a designated multiple year smoothing period; and
e. Such other matters as the court deems appropriate for the proper functioning of the unitrust, which may include such matters as:
1. Whether to omit from the calculations trust property occupied, used, or possessed by a beneficiary;
2. How nonliquid or hard to value assets shall be valued, how frequently to value them, and whether to estimate their value; or
3. Whether the trust assets will be valued annually or more frequently.
(4) Court costs shall be charged to the trust or as otherwise determined by the court.
(d) The unitrust percentage with respect to a converted unitrust to be used in determining the unitrust amount shall be not less than three percent nor more than five percent, unless otherwise ordered by the court.
(e) During the period of time that the trust is a converted unitrust, all of the following apply:
(1) Notwithstanding any provision of this chapter to the contrary, the term “income” or “net income” in the governing instrument shall mean the unitrust amount.
(2) The frequency of distributions shall be determined in accordance with the governing instrument.
(3) If the written notice referenced in subsection (a), the written instrument referenced in subsection (b), or the order of the court referenced in subsection (c) provides that the net fair market value of the trust assets will be averaged over a designated smoothing period, the net fair market value of the trust assets for purposes of determining the unitrust amount shall be the average of the net fair market value of the trust assets over the designated smoothing period.
(4) Any distribution in excess of the unitrust amount shall be deemed to have been paid out of the principal of the trust.
(5) Expenses which would be deducted from income if the trust were not a unitrust may not be deducted from the unitrust amount.
(f) A conversion to a unitrust does not affect a provision in the governing instrument directing or authorizing the trustee to distribute principal or authorizing a beneficiary to withdraw a portion or all of the principal.
(g) Except to the extent otherwise provided in the governing instrument, the written notice referenced in subsection (a), the written agreement referenced in subsection (b), or the order of the court referenced in subsection (c), the trustee, from time to time, may determine the following:
(1) The frequency of payment of the unitrust amount during the year;
(2) Any adjustments to be made to the unitrust amount due to other payments from or contributions to the trust;
(3) The valuation dates to use;
(4) How nonliquid or hard to value assets shall be valued, how frequently to value them, and whether to estimate their value;
(5) Whether to omit from the calculations the value of trust property occupied, used, or possessed by a beneficiary; and
(6) Any other matters necessary for the proper functioning of the unitrust that are not inconsistent with the written notice referenced in subsection (a), the written agreement referenced in subsection (b), or the order of the court referenced in subsection (c).
(h) Modification of the unitrust provisions of a converted unitrust may be implemented by the trustee following the same procedures as in subsection (a) for converting a trust into a unitrust with the exception that the written notice shall state the modifications, by the qualified beneficiaries following the same procedures as in subsection (b) for converting a trust into a unitrust with the exception that the written instrument shall state the modifications, or by the court pursuant to the petition of a beneficiary or the trustee. Modifications shall be set forth in the notice, written instrument, or court order, as the case may be, that makes the modification. Modification may include any of the following:
(1) Changes or additions to any of the matters set forth in, or that could have been set forth in, the original notice, written instrument or court order, as the case may be, or any subsequent modifications thereto;
(2) Provisions 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; or
(3) Reversions from a unitrust, in which case the trust shall be administered in accordance with its provisions prior to its conversion to a unitrust. Upon reconversion, the power to adjust under Section 19-3A-104, if any, shall be revived.
(i) A trust may not be converted into a unitrust in any of the following circumstances:
(1) If payment of the unitrust amount would change the aggregate annual amount payable to a beneficiary as a fixed annuity;
(2) If the trust is an “Institutional Fund” governed by the provisions of Section 19-3C-1, et seq.;
(3) If the conversion would reduce any amount permanently set aside for charitable purposes under the governing instrument which is not expressed under the governing instrument as “income” or “net income” or determined pursuant to the terms of the governing instrument by reference to “income” or “net income”;
(4) If the conversion would reduce the value of any interest for which a federal estate or gift tax charitable deduction has been taken, or would cause the reduction of an amount being disbursed or to be disbursed to a charity for which an income, estate, or gift tax deduction has been taken;
(5) If 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 the individual would not be treated as the owner if the trustee did not possess the power to convert;
(6) If possessing or exercising the power to convert would cause all or part of the trust assets to be subject to federal estate or gift tax with respect to an individual, and the assets would not be subject to federal estate or gift tax with respect to the individual if the trustee did not possess the power to convert; or
(7) If the conversion would result in the disallowance of a federal estate or gift tax marital or charitable deduction which would be allowed if the trustee did not have the power to convert.
(j)(1) If subsection (i)(5) or subsection (i)(6) applies because a trustee is a beneficiary and there is more than one trustee, a co-trustee to whom the provision does not apply may convert the trust unless the exercise of the power by the remaining trustee or trustees is prohibited by the governing instrument.
(2) If subsection (i)(5) or subsection (i)(6) applies to all the trustees, the trustees may petition the court to direct a conversion or the beneficiaries may convert under subsection (b).
(k) (1) A trustee may release the power conferred by subsection (a) to convert to a unitrust if any of the following apply:
a. The trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (i)(5), subsection (i)(6), or subsection (i)(7).
b. The trustee determines that possessing or exercising the power will or may deprive the trust of a tax benefit or impose a tax burden not described in subsection (i).
(2) The release may be permanent or for a specified period, including a period measured by the life of an individual.

Legislative History

(Act 2013-336, p. 1179, §2.)