§ 30-3119.01 — Conversion to total return trust

Nebraska § 30-3119.01

• Jurisdiction: Nebraska
• Ch. 30: Decedents' Estates; Protection of Persons and Property

Text

(1) Unless expressly prohibited by a trust, a trustee may release the
power to adjust described in section 30-3119 and convert a trust to a total
return trust as described in this section if all of the following apply:
(a) The trustee determines that the conversion will enable the trustee
to better carry out the intent of the settlor and the purpose of the trust;
(b) The trustee sends written notice of the trustee's decision to convert
the trust to a total return trust specifying a prospective effective date
for the conversion which shall not be sooner than sixty days after the notice
is sent and which shall include a copy of this section of law and shall specifically
recite the time period within which a timely objection may be made. Such notice
shall be sent to the qualified beneficiaries determined as of the date the
notice is sent and assuming nonexercise of all powers of appointment;
(c) There are one or more legally competent beneficiaries who are currently
eligible to receive income from the trust and one or more legally competent
beneficiaries who would receive a distribution of principal if the trust were
to terminate immediately before the notice is given; and
(d) No beneficiary has objected in writing to the conversion to a total
return trust and delivered such objection to the trustee within sixty days
after the notice was sent.
(2) Conversion to a total return trust or reconversion to an income
trust may be made by agreement between the trustee and all qualified beneficiaries
of the trust. The trustee and all qualified beneficiaries of the trust may
also agree to modify the distribution percentage, except that the trustee
and the qualified beneficiaries may not agree to a distribution percentage
of less than three percent or greater than five percent. The agreement may
include any other actions a court could properly order pursuant to subsection
(7) of this section.
(3)(a) The trustee may, for any reason, elect to petition the court
to order conversion to a total return trust including, without limitation,
the reason that conversion under subsection (1) of this section is unavailable
because:
(i) A beneficiary timely objects to the conversion to a total return
trust;
(ii) There are no legally competent beneficiaries who are currently
eligible to receive income from the trust; or
(iii) There are no legally competent beneficiaries who would receive
a distribution of principal if the trust were to terminate immediately.
(b) A beneficiary may request the trustee to convert to a total return
trust or adjust the distribution percentage pursuant to this subsection. If
the trustee declines or fails to act within six months after receiving a written
request from a beneficiary to do so, the beneficiary may petition the court
to order the conversion or adjustment.
(c) The trustee may petition the court prospectively to reconvert from
a total return trust or to adjust the distribution percentage if the trustee
determines that the reconversion or adjustment will enable the trustee to
better carry out the purposes of the trust. A beneficiary may request the
trustee to petition the court prospectively to reconvert from a total return
trust or adjust the distribution percentage. If the trustee declines or fails
to act within six months after receiving a written request from a beneficiary
to do so, the beneficiary may petition the court to order the reconversion
or adjustment.
(d)(i) In a judicial proceeding instituted under this subsection, the
trustee may present opinions and reasons concerning:
(A) The trustee's support for or opposition to a conversion to a total
return trust, a reconversion from a total return trust, or an adjustment of
the distribution percentage of a total return trust, including whether the
trustee believes conversion, reconversion, or adjustment of the distribution
percentage would enable the trustee to better carry out the purposes of the
trust; and
(B) Any other matter relevant to the proposed conversion, reconversion,
or adjustment of the distribution percentage.
(ii) A trustee's actions undertaken in accordance with this subsection
shall not be deemed improper or inconsistent with the trustee's duty of impartiality
unless the court finds from all the evidence that the trustee acted in bad
faith.
(e) The court shall order conversion to a total return trust, reconversion
prospectively from a total return trust, or adjustment of the distribution
percentage of a total return trust if the court determines that the conversion,
reconversion, or adjustment of the distribution percentage will enable the
trustee to better carry out the purposes of the trust.
(f) If a conversion to a total return trust is made pursuant to a court
order, the trustee may reconvert the trust to an income trust only:
(i) Pursuant to a subsequent court order; or
(ii) By filing with the court an agreement made pursuant to subsection
(2) of this section to reconvert to an income trust.
(g) Upon a reconversion the power to adjust, as described in section 30-3119 and as it existed before the conversion, shall be revived.
(h) An action may be taken under this subsection no more frequently
than every two years, unless a court for good cause orders otherwise.
(4)(a) During the time that a trust is a total return trust, the trustee
shall administer the trust in accordance with the provisions of this subsection
as follows, unless otherwise expressly provided by the terms of the trust:
(i) The trustee shall invest the trust assets seeking a total return
without regard to whether the return is from income or appreciation of principal;
(ii) The trustee shall make income distributions in accordance with
the trust subject to the provisions of this section;
(iii) The distribution percentage for any trust converted to a total
return trust by a trustee in accordance with subsection (1) of this section
shall be four percent, unless a different percentage has been determined in
an agreement made pursuant to subsection (2) of this section or ordered by
the court pursuant to subsection (3) of this section; and
(iv)(A) The trustee shall pay to a beneficiary in the case of an underpayment
within a reasonable time and shall recover from a beneficiary in the case
of an overpayment either by repayment by the beneficiary or by withholding
from future distributions to the beneficiary:
(I) An amount equal to the difference between the amount properly payable
and the amount actually paid; and
(II) Interest compounded annually at a rate per annum equal to the distribution
percentage in the year or years during which the underpayment or overpayment
occurs.
(B) For purposes of subdivision (4)(a)(iv) of this section, accrual
of interest may not commence until the beginning of the trust year following
the year in which the underpayment or overpayment occurs.
(b) For purposes of this subsection:
(i) Distribution amount means an annual amount equal to the distribution
percentage multiplied by the average net fair market value of the trust's
assets. The average net fair market value of the trust's assets shall be the
net fair market value of the trust's assets averaged over the lesser of:
(A) The three preceding years; or
(B) The period during which the trust has been in existence; and
(ii) Income, as that term appears in the governing instrument, means
the distribution amount.
(5) The trustee may determine any of the following matters in administering
a total return trust as the trustee deems necessary or helpful for the proper
functioning of the trust:
(a) The effective date of a conversion to a total return trust pursuant
to subsection (1) of this section;
(b) The manner of prorating the distribution amount for a short year
in which a beneficiary's interest commences or ceases, or, if the trust is
a total return trust for only part of the year or the trustee may elect to
treat the trust year as two separate years, the first of which ends at the
close of the day on which the conversion or reconversion occurs, and the second
of which ends at the close of the trust year;
(c) Whether distributions are made in cash or in kind;
(d) The manner of adjusting valuations and calculations of the distribution
amount to account for other payments from, or contributions to, the trust;
(e) Whether to value the trust's assets annually or more frequently;
(f) Which valuation dates to use and how many valuation dates to use;
(g) Valuation decisions concerning any asset for which there is no readily
available market value, including:
(i) How frequently to value such an asset;
(ii) Whether and how often to engage a professional appraiser to value
such an asset; and
(iii) Whether to exclude the value of such an asset from the net fair
market value of the trust's assets for purposes of determining the distribution
amount. For purposes of this section, any such asset so excluded shall be
referred to as an excluded asset and the trustee shall distribute any net
income received from the excluded asset as provided for in the governing instrument,
subject to the following principles:
(A) The trustee shall treat each asset for which there is no readily
available market value as an excluded asset unless the trustee determines
that there are compelling reasons not to do so and the trustee considers all
relevant factors including the best interests of the beneficiaries;
(B) If tangible personal property or real property is possessed or occupied
by a beneficiary, the trustee may not limit or restrict any right of the beneficiary
to use the property in accordance with the governing instrument regardless
of whether the trustee treats the property as an excluded asset; and
(C) By way of example and not by way of limitation, assets for which
there is a readily available market value include cash and cash equivalents;
stocks, bonds, and other securities and instruments for which there is an
established market on a stock exchange, in an over-the-counter market, or
otherwise; and any other property that can reasonably be expected to be sold
within one week of the decision to sell without extraordinary efforts by the
seller. By way of example and not by way of limitation, assets for which there
is no readily available market value include stocks, bonds, and other securities
and instruments for which there is no established market on a stock exchange,
in an over-the-counter market, or otherwise; real property; tangible personal
property; and artwork and other collectibles; and
(h) Any other administrative matter that the trustee determines is necessary
or helpful for the proper functioning of the total return trust.
(6)(a) Expenses, taxes, and other charges that would otherwise be deducted
from income if the trust was not a total return trust may not be deducted
from the distribution amount.
(b) Unless otherwise provided by the governing instrument, the distribution
amount each year shall be deemed to be paid from the following sources for
that year in the following order:
(i) Net income determined as if the trust was not a total return trust;
(ii) Other ordinary income as determined for federal income tax purposes;
(iii) Net realized short-term capital gains as determined for federal
income tax purposes;
(iv) Net realized long-term capital gains as determined for federal
income tax purposes;
(v) Trust principal comprising assets for which there is a readily available
market value; and
(vi) Other trust principal.
(7)(a) The court may order any of the following actions in a proceeding
brought by a trustee or a beneficiary pursuant to subdivision (a), (b), or
(c) of subsection (3) of this section:
(i) Select a distribution percentage other than four percent, except
that the court may not order a distribution percentage of less than three
percent or greater than five percent;
(ii) Average the valuation of the trust's net assets over a period other
than three years;
(iii) Reconvert prospectively from a total return trust or adjust the
distribution percentage of a total return trust;
(iv) Direct the distribution of net income, determined as if the trust
were not a total return trust, in excess of the distribution amount as to
any or all trust assets if the distribution is necessary to preserve a tax
benefit; or
(v) Change or direct any administrative procedure as the court determines
is necessary or helpful for the proper functioning of the total return trust.
(b) Nothing in this subsection shall be construed to limit the equitable
jurisdiction of the court to grant other relief as the court deems proper.
(8)(a) In the case of
a trust for which a marital deduction has been taken for federal tax purposes
under section 2056 or section 2523 of the Internal Revenue Code of 1986, as
amended, the spouse otherwise entitled to receive the net income of the trust
shall have the right, by written instrument delivered to the trustee, to compel
the reconversion during that spouse's lifetime of the trust from a total return
trust to an income trust, notwithstanding anything in this section to the
contrary.
(b) Conversion to a total return trust shall
not affect any provision in the governing instrument:
(i) That directs or authorizes the trustee to distribute principal;
(ii) That directs or authorizes the trustee to distribute a fixed annuity
or a fixed fraction of the value of trust assets;
(iii) That authorizes a beneficiary to withdraw a portion or all of
the principal; or
(iv) That in any manner diminishes an amount permanently set aside for
charitable purposes under the governing instrument unless both income and
principal are set aside.
(9) If a particular trustee is also a beneficiary of the trust and conversion
or failure to convert would enhance or diminish the beneficial interest of
that trustee or, if possession or exercise of the conversion power by a particular
trustee alone would cause any individual to be treated as owner of a part
of the trust for federal income tax purposes or cause a part of the trust
to be included in the gross estate of any individual for federal estate tax
purposes, then that particular trustee may not participate as a trustee in
the exercise of the conversion power, except that:
(a) The trustee may petition the court under subdivision (a) of subsection
(3) of this section to order conversion in accordance with this section; and
(b) A cotrustee or cotrustees to whom this subsection does not apply
may convert the trust to a total return trust in accordance with subsection
(1) or (2) of this section.
(10) A trustee may irrevocably release the power granted by this section
if the trustee reasonably believes the release is in the best interests of
the trust and its beneficiaries. The release may be personal to the releasing
trustee or it may apply generally to some or all subsequent trustees. The
release may be for any specified period, including a period measured by the
life of an individual.
(11)(a) A trustee who reasonably and in good faith takes any action
or omits to take any action under this section is not liable to any person
interested in the trust. A discretionary act or omission by a trustee under
this section shall be presumed to be reasonable and undertaken in good faith
unless the act or omission is determined by a court to have been an abuse
of discretion.
(b) If a trustee reasonably and in good faith takes or omits to take
any action under this section and a person interested in the trust opposes
the act or omission, the person's exclusive remedy shall be to seek an order
of the court directing the trustee to:
(i) Convert the trust to a total return trust;
(ii) Reconvert from a total return trust;
(iii) Change the distribution percentage; or
(iv) Order any administrative procedures the court determines are necessary
or helpful for the proper functioning of the trust.
(c) A claim for relief under this subsection that is not barred by adjudication,
consent, or limitation is nevertheless barred as to any beneficiary who has
received a statement fully disclosing the matter unless a proceeding to assert
the claim is commenced within six months after receipt of the statement. A
beneficiary is deemed to have received a statement if it is received by the
beneficiary or the beneficiary's representative in a manner described in section 30-2222 or 30-3121 .
(12) A trustee has no duty to inform a beneficiary about the availability
and provisions of this section. A trustee has no duty to review the trust
to determine whether any action should be taken under this section unless
the trustee is requested in writing by a qualified beneficiary to do so.
(13)(a) This section applies to trusts in existence on September 4,
2005, and to trusts created on or after such date.
(b) This section shall be construed to apply to the administration of
a trust that is administered in Nebraska under Nebraska law or that is governed
by Nebraska law with respect to the meaning and effect of its terms unless:
(i) The trust is a trust described in the Internal Revenue Code of 1986,
as amended, 26 U.S.C. section 170(f)(2)(B), 664(d), 1361(d), 2702(a)(3),
or 2702(b);
(ii) Conversion of a trust to a total return trust is clearly contrary
to the manifestation of the settlor's intent as expressed in the trust instrument
or as may be established by other evidence that would be admissible in a judicial
proceeding; or
(iii) The terms of a trust in existence on September 4, 2005, incorporate
provisions that operate as a total return trust. The trustee or a beneficiary
of such a trust may proceed under section 30-3121 to adopt provisions in this
section that do not contradict provisions in the governing instrument.

Legislative History

Source: Laws 2005, LB 533, § 35; Laws 2010, LB760, § 1.