CHAPTER 55-15

TOTAL RETURN UNITRUSTS

55-15-1    Definitions.

55-15-2    Trustee's authority to convert income trust, total return unitrust--Calculate trust amount, value--Conditions.

55-15-3    Interested trustee's authority over actions enumerated in § 55-15-2--Conditions.

55-15-4    Trustee may petition court--Appointment of disinterested person.

55-15-5    Annual valuation of trust required.

55-15-6    Calculation of unitrust amount.

55-15-7    55-15-7. Repealed by SL 2009, ch 252, § 40.

55-15-8    Unitrust amount as net income of trust--Allocation of capital gains to trust income.

55-15-9    Administration of total return unitrust--Authority of trustee.

55-15-10    Distributions of principal and standards for income distributions not affected by conversion.

55-15-11    Spouse may compel reconversion to income trust for certain trusts--Written instrument required.

55-15-12    Applicability of chapter.

55-15-13    Trustee acting in good faith not liable--Remedy.

55-15-14    No duty to act created.

55-15-15    Chapter not applicable to charitable remainder unitrust.

55-15-1. Definitions.

Terms used in this chapter mean:

(1)    "Disinterested person," any person who is not a related or subordinate party, as defined in 26 U.S.C. § 672(c) , as amended and in effect on January 1, 2023, 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," any 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 or more persons, whether at fixed intervals or from time to time, either in fixed proportions or in amounts or proportions determined by the trustee. However, no trust that otherwise is an income trust may qualify pursuant to this subdivision, if it is subject to taxation under 26 U.S.C. § 2001 or 26 U.S.C. § 2501, as amended and in effect on January 1, 2023, until the expiration of the period for filing the return therefor (including extensions);

(3)    "Interested distributee," any 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), as amended and in effect on January 1, 2023, with respect to such distributee;

(4)    "Interested trustee:"

(a)    Any individual trustee to whom the net income or principal of the trust can currently be distributed or would be distributed if the trust were then to terminate and be distributed;

(b)    Any trustee who may be removed and replaced by an interested distributee;

(c)    Any individual trustee whose legal obligation to support a beneficiary may be satisfied by distributions of income and principal of the trust; or

(d)    Any of the above;

(5)    "Total return unitrust," any income trust which has been converted under and meets the provisions of this chapter;

(6)    "Trustee," all persons acting as trustee of the trust, except where expressly noted otherwise, whether acting in their discretion or on the direction of one or more persons acting in a fiduciary capacity;

(7)    "Trustor," any individual who created an inter vivos or a testamentary trust;

(7A)    "Unitrust," a trust, the terms of which require or permit distribution of a unitrust amount, without regard to whether the trust has been converted to a unitrust in accordance with this chapter or whether the trust is established by express terms of the governing instrument;

(8)    "Unitrust amount," an amount equal to a percentage of a unitrust's assets that may or are required to be distributed to one or more beneficiaries annually in accordance with the terms of the unitrust. The unitrust amount may be determined by reference to the net fair market value of the unitrust's assets as of a particular date each year or as an average determined on a multiple year basis;

(9)    "Current valuation year," the accounting period of the trust for which the unitrust amount is being determined;

(10)    "Prior valuation year," each of the two accounting periods of the trust immediately preceding the current valuation year;

(11)    "I.R.C.," the Internal Revenue Code (26 U.S.C. section 1, et seq.); and

(12)    "Net income," the amount of income of the trust for the taxable year described in 26 U.S.C. § 643(b), as amended and in effect on January 1, 2023, as income when not preceded by the words, taxable, distributable net, undistributed net, or gross, otherwise known as the trust accounting income of a trust.

Source: SL 2002, ch 225, § 1; SL 2009, ch 252, § 45; SL 2023, ch 161, § 12.

55-15-2. Trustee's authority to convert income trust, total return unitrust--Calculate trust amount, value--Conditions.

A trustee, other than an interested trustee, or, if two 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 the approval of any court, (i) convert an income trust to a total return unitrust, (ii) reconvert a total return unitrust to an income trust, or (iii) change the percentage used to calculate the unitrust amount and 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 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;

(2)    The trustee sends written notice of its intention to take such action, along with copies of such written policy and this chapter, to (i) the trustor, if living, (ii) all living persons who are currently receiving or eligible to receive distributions of income of the trust, (iii) 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 (without regard to the exercise of any power of appointment) or, if the trust does not provide for its termination, all living persons who would receive or be eligible to receive distributions of income or principal of the trust if the persons identified in subclause (ii) of this subdivision were deceased, and (iv) all persons acting as adviser or protector of the trust;

(3)    At least one person receiving notice under each of subclauses (ii) and (iii) of subdivision (2) is, to the best information and belief of the trustee, legally competent; and

(4)    No person receiving such notice objects, by written instrument delivered to the trustee, to the proposed action of the trustee within sixty days of receipt of such notice.

Source: SL 2002, ch 225, § 2.

55-15-3. Interested trustee's authority over actions enumerated in § 55-15-2--Conditions.

If there is no trustee of the trust other than an interested trustee, the interested trustee or, if two or more persons are acting as trustee and are interested trustees, a majority of such interested trustees, may, in its sole discretion and without the approval of any court, take such action as provided in § 55-15-2 so long as 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; and complies with all of the provisions of subdivisions (1) to (4), inclusive, of § 55-15-2.

Source: SL 2002, ch 225, § 3.

55-15-4. Trustee may petition court--Appointment of disinterested person.

If any trustee desires to (i) convert an income trust to a total return unitrust, (ii) reconvert a total return unitrust to an income trust, or (iii) change the percentage used to calculate the unitrust amount and 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 the provisions of §§ 55-15-2 and 55-15-3, or in the event the trustee receives a written objection within the applicable period, the trustee may petition the court for such order as the trustee deems appropriate. In the event, however, there is only one trustee of such trust and such trustee is an interested trustee or in the event there are two 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 determination.

Source: SL 2002, ch 225, § 4.

55-15-5. Annual valuation of trust required.

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. Such assets may be excluded from valuation, if all income received with respect to such assets is distributed to the extent distributable in accordance with the terms of the governing instrument.

Source: SL 2002, ch 225, § 5.

55-15-6. Calculation of unitrust amount.

The unitrust amount shall be determined as follows:

(1)    For the first three accounting periods of the trust, the unitrust amount for a current valuation year of the trust may not be less than three percent, nor more than five percent, by the election of the trustee, the disinterested person, or the court, of the net fair market value of the assets held in the trust on the valuation date of the current valuation year;

(2)    Beginning with the fourth accounting period of the trust, the unitrust amount for a current valuation year of the trust may not be less than three percent, nor more than five percent, by the election of the trustee, the disinterested person, or the court, of the average of the net fair market value of the assets held in the trust on the valuation date of the current valuation year and the net fair market value of the assets held in the trust on the valuation date of each prior valuation year, as defined in subdivision 55-15-1(10);

(3)    The percentage that may be elected by the trustee, the disinterested person, or the court in determining the unitrust amount shall be a reasonable current return from the trust, 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. However, such election by the trustee, the disinterested person, or the court in determining the unitrust amount may not be less than three percent nor more than five percent;

(4)    The unitrust amount for the current valuation year shall be proportionately reduced for any distributions, in whole or in part, other than distributions of the unitrust amount, and for any payments of expenses, including debts, disbursements and taxes, from the trust within a current valuation year that the trustee determines to be material and substantial, and shall be proportionately increased for the receipt, other than a receipt that represents a return on investment, of any additional property into the trust within a current valuation year;

(5)    In the case of a short accounting period, the trustee shall prorate the unitrust amount on a daily basis;

(6)    If the net fair market value of an asset held in the trust has been incorrectly determined either in a current valuation year or in a prior valuation year, the unitrust amount shall be increased in the case of an undervaluation, or be decreased in the case of an overvaluation, by an amount equal to the difference between the unitrust amount determined based on the correct valuation of the asset and the unitrust amount originally determined;

(7)    In determining the net fair market value of the assets held in trust, the determination may 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 income beneficiaries of the trust have or had the right to occupy, or have or had the right to possess or control, other than in a capacity as trustee, and instead the right of occupancy or the right of possession or control shall be deemed to be the unitrust amount with respect to the residential property or the tangible personal property; or any asset specifically given to a beneficiary under the terms of the trust and the return on investment on that asset, which return on investment shall be distributed to the beneficiary.

Source: SL 2002, ch 225, § 6; SL 2004, ch 312, § 7; SL 2005, ch 260, § 9; SL 2009, ch 252, § 39; SL 2013, ch 239, § 13.