§ 35-6-108 — Total return unitrusts

Tennessee § 35-6-108

• Jurisdiction: Tennessee
• Title: 35

Text

(a) In this section: (1) "Disinterested person" means a person who is not a "related or subordinate party," as defined in 26 U.S.C. § 672(c) , with respect to the person then acting as trustee of the trust and excludes the trustor of the trust and any interested trustee; (2) "Income trust" means a trust, created by either an inter vivos or a testamentary instrument, which directs or permits the trustee to distribute the net income of the trust to one (1) or more persons, either in fixed proportions or in amounts or proportions determined by the trustee and regardless of whether the trust directs or permits the trustee to distribute the principal of the trust to one (1) or more such persons; (3) "Interested distributee" means a person to whom distributions of income or principal can currently be made who has the power to remove the existing trustee and designate as successor a person who may be a "related or subordinate party," as defined in 26 U.S.C. § 672(c) , with respect to such distributee; (4) "Interested trustee" means an individual trustee who is a qualified beneficiary or any trustee who may be removed and replaced by an interested distributee, or an individual trustee whose legal obligation to support a beneficiary may be satisfied by distributions of income and principal of the trust; (5) "Internal Revenue Code" refers to the Internal Revenue Code of 1986, as amended from time to time, and any references to a section of such shall include any successor, substituted, or amended section of the Internal Revenue Code; (6) "Qualified beneficiaries" means those beneficiaries of a trust specified in § 35-15-103(24) ; (7) "Total return unitrust" means an income trust that has been converted under this section or the laws of any other jurisdiction that permits an income trust to be converted to a trust in which a unitrust amount is treated as the net income of the trust; (8) "Trustee" means all persons acting as trustee of the trust, except where expressly noted otherwise, whether acting in their discretion or on the direction of one (1) or more persons acting in a fiduciary capacity; (9) "Trustor" means an individual who created an inter vivos or a testamentary trust; and (10) "Unitrust amount" means an amount computed as a percentage of the fair market value of the trust. (b) A trustee, other than an interested trustee, or where two (2) or more persons are acting as trustee, a majority of the trustees who are not an interested trustee, in either case hereafter "trustee", may, in its sole discretion and without court approval: (1) Convert an income trust to a total return unitrust; (2) In the case of a total return unitrust converted under this section or the laws of any other jurisdiction, reconvert a total return unitrust to an income trust; or (3) In the case of a total return unitrust converted under this section or the laws of any other jurisdiction, change the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust if all of the following apply: (A) The trustee adopts a written policy for the trust providing: (i) In the case of a trust being administered as an income trust, that future distributions 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 than unitrust amounts; or (iii) That the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust will be changed as stated in the policy; (B) The trustee sends written notice of its intention to take such action, along with copies of such written policy and this section, to the trustor of the trust, if living, and to all qualified beneficiaries of the trust; (C) At least one (1) person receiving notice under subdivision (b)(3)(B) is legally competent; and (D) No person receiving such notice objects, by written instrument delivered to the trustee, to the proposed action of the trustee within thirty (30) days of receipt of such notice. (c) If there is no trustee of the trust other than an interested trustee, the interested trustee or, where two (2) or more persons are acting as trustee and are interested trustees, a majority of such interested trustees may, in its sole discretion and without court approval: (1) Convert an income trust to a total return unitrust; (2) Reconvert a total return unitrust to an income trust; or (3) Change the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust if all of the following apply: (A) The trustee adopts a written policy for the trust providing: (i) In the case of a trust being administered as an income trust, that future distributions 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 than unitrust amounts; or (iii) That the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust will be changed as stated in the policy; (B) The trustee appoints a disinterested person who, in its sole discretion but acting in a fiduciary capacity, determines for the trustee: (i) The percentage to be used to calculate the unitrust amount; (ii) The method to be used in determining the fair market value of the trust; and (iii) Which assets, if any, are to be excluded in determining the unitrust amount; (C) The trustee sends written notice of its intention to take such action, along with copies of such written policy and this section, and the determinations of the disinterested person to the trustor of the trust, if living, and to all qualified beneficiaries of the trust; (D) At least one (1) person receiving notice under subdivision (c)(3)(C), of this section is legally competent; and (E) No person receiving such notice objects, by written instrument delivered to the trustee, to the proposed action or the determinations of the disinterested person within thirty (30) days of receipt of such notice. (d) If any trustee desires to convert an income trust to a total return unitrust, reconvert a total return unitrust to an income trust, or change the percentage used to calculate the unitrust amount or the method used to determine the fair market value of the trust but does not have the ability to or elects not to do it under subsection (b) or (c), the trustee may petition the court for such order as the trustee deems appropriate. In the event, however, there is only one (1) trustee of such trust and such trustee is an interested trustee or in the event there are two (2) or more 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 or trustees or any person interested in the trust, may appoint a disinterested person who, acting in a fiduciary capacity, shall present such information to the court as shall be necessary to enable the court to make its determinations hereunder. (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 are deemed appropriate. Assets for which a fair market value cannot be readily ascertained shall be valued using such valuation methods as are deemed reasonable and appropriate. Assets used by a trust beneficiary, such as a residence property or tangible personal property, may be excluded from fair market value for computing the unitrust amount. (f) The percentage to be used in determining the unitrust amount shall be a reasonable current return from the trust, in any event not less than three percent (3%) nor more than five percent (5%), taking into account the intentions of the trustor of the trust as expressed in the governing instrument, the needs of the beneficiaries, general economic conditions, projected current earnings and appreciation for the trust, and projected inflation and its impact on the trust. (g) Following the conversion of an income trust to a total return unitrust, the trustee: (1) Shall consider the unitrust amount as paid from net accounting income determined as if the trust were not a unitrust; (2) Shall then consider the unitrust amount as paid from ordinary income not allocable to net accounting income; (3) After calculating the trust's capital gain net income described in 26 U.S.C. § 1222(9) , may consider the unitrust amount as paid from net short-term capital gain described in 26 U.S.C. § 1222(5) and then from net long-term capital gain described in 26 U.S.C. § 1222(7) ; and (4) Shall then consider the unitrust amount as coming from the principal of the trust. (h) In administering a total return unitrust, the trustee may, in its sole discretion but subject to the governing instrument, determine: (1) The effective date of the conversion; (2) The timing of distributions, including, but not limited to, provisions for prorating a distribution for a short year in which a beneficiary's right to payments commences or ceases; (3) Whether distributions are to be made in cash or in kind or partly in cash and partly in kind; (4) If the trust is reconverted to an income trust, the effective date of such reconversion; and (5) Such other administrative issues as may be necessary or appropriate to carry out the purposes of this section. (i) Conversion to a total return unitrust under this section shall not affect any other provision of the governing instrument, if any, regarding distributions of principal. (j) In the case of a trust for which a marital deduction has been taken for federal tax purposes under 26 U.S.C. § 2056 or § 2523 , 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 unitrust to an income trust, notwithstanding anything in this section to the contrary. (k) (1) This section shall be construed as pertaining to the administration of a trust and shall be available to any trust including a trust initially converted to a total return unitrust under the laws of another jurisdiction that is administered in Tennessee under Tennessee law or to any trust, regardless of its place of administration, whose governing instrument provides that Tennessee law governs matters of construction or administration unless: (A) The governing instrument reflects an intention that the current beneficiary or beneficiaries are to receive an amount other than a reasonable current return from the trust; (B) The trust is a pooled income fund described in 26 U.S.C. § 642(c)(5) or a charitable-remainder trust described in 26 U.S.C. § 664(d) ; and (C) The governing instrument expressly prohibits use of this section by specific reference to the section or expressly states the trustor's intent that net income not be calculated as a unitrust amount. (2) Any of the following statements in the governing instrument, or words similar to such statements, shall be sufficient to preclude the use of this section: The provisions of § 35-6-109 , as amended, or any corresponding provision of future law, shall not be used in the administration of this trust; or My trustee shall not determine the distributions to the income beneficiary as a unitrust amount. (l) Any trustee or disinterested person who in good faith takes or fails to take any action under this section shall not be liable to any person affected by such action or inaction, regardless of whether such person received written notice as provided in this section and regardless of whether such person was under a legal disability at the time of the delivery of such notice. Such person's exclusive remedy shall be to obtain an order of the court directing the trustee to convert an income trust to a total return unitrust, to reconvert from a total return unitrust to an income trust or to change the percentage used to calculate the unitrust amount. (m) This section shall be available to trusts in existence on July 1, 2010, or created thereafter.

Legislative History

Amended by 2019 Tenn. Acts, ch. 197, s 3, eff. 4/25/2019. Amended by 2018 Tenn. Acts, ch. 887, s 1, eff. 5/3/2018. Acts 2010 , ch. 725, § 21.