11.104A.040 - Power to convert to unitrust.

Power to convert to unitrust.

(a)(1) In this section, "beneficiary" means a person who has an interest in the trust to be converted and who has the legal capacity to act in his, her, or its own right with respect to all actions that such person may take under this section.

     (2) In this section, "unitrust" means both a trust converted into a unitrust under this section and a trust initially established as a unitrust. Unless inconsistent with the terms of the trust or will, subsections (f), (g), (h), (i), and (m) of this section apply to the unitrust initially so established.

     (b) Unless expressly prohibited by the terms of the trust, a trustee may release the power to make adjustments under RCW 11.104A.020 and convert a trust into a unitrust as described in this section if all of the following apply:

     (1) The trustee determines that the conversion will enable the trustee better to 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 release the power to adjust and to convert the trust into a unitrust and of how the unitrust will operate, including what initial decisions the trustee will make under this section, to each beneficiary who, on the date the notice is given:

     (i) Is a distributee or permissible distributee of trust income or principal; or

     (ii) Would be a distributee or permissible distributee of trust principal if the interests of the distributees described in (2)(i) of this subsection terminated and the trust then terminated immediately before the notice was given and if no powers of appointment were exercised.

     (3) There is at least one beneficiary under (2)(i) of this subsection and at least one other person who is a beneficiary under (2)(ii) of this subsection.

     (4) No beneficiary objects to the conversion to a unitrust in a writing delivered to the trustee within sixty days after the notice is given under (2) of this subsection.

     (c) The parties, as defined by *RCW 11.96A.030(4), may agree to convert a trust to or from a unitrust by means of a binding agreement under chapter 11.96A RCW.

     (d)(1) The trustee may petition the court under chapter 11.96A RCW to order a conversion to a unitrust if either of the following apply:

     (i) A party, as defined by *RCW 11.96A.030(4), timely objects to the conversion to a unitrust; or

     (ii) There are no beneficiaries under (2)(i) and (ii) of this subsection.

     (2) A party, as defined by *RCW 11.96A.030(4), may request a trustee to convert to a unitrust. If the trustee does not convert, the party, as defined by *RCW 11.96A.030(4), may petition the court to order the conversion.

     (3) The court shall approve the conversion or direct the requested conversion if the court concludes that the conversion will enable the trustee to better carry out the intent of the settlor or testator and the purposes of the trust.

     (e) In deciding whether to exercise a power to convert to a unitrust under this section, a trustee may consider, among other things, the factors set forth in RCW 11.104A.020(b).

     (f) After a trust is converted to a unitrust, all of the following apply:

     (1) The trustee shall follow an investment policy seeking a total return for the investments held by the trust, whether the return is to be derived:

     (i) From appreciation of principal;

     (ii) From earnings and distributions from principal; or

     (iii) From both.

     (2) The trustee shall make regular distributions in accordance with the terms of the trust, or the terms of the will, as the case may be, construed in accordance with the provisions of this section.

     (3) Unless expressly prohibited by the terms of the trust, the term "income" in the terms of a trust or a will means an annual distribution, the "unitrust distribution," equal to the percentage, the "payout percentage," that is no less than three percent and no more than five percent and that the trustee may determine in the trustee's discretion from time to time, or, if the trustee makes no determination, that shall be four percent of the net fair market value of the trust's assets, whether such assets would be considered income or principal under other provisions of this chapter, averaged over the lesser of:

     (i) The three preceding years; or

     (ii) The period during which the trust has been in existence.

     (g) The trustee may in the trustee's discretion from time to time determine all of the following:

     (1) The effective date of a conversion to a unitrust.

     (2) The provisions for prorating a unitrust distribution for a short year in which a beneficiary's right to payments commences or ceases.

     (3) The frequency of unitrust distributions during the year.

     (4) The effect of other payments from or contributions to the trust on the trust's valuation.

     (5) Whether to value the trust's assets annually or more frequently.

     (6) What valuation dates to use.

     (7) How frequently to value nonliquid assets and whether to estimate their value.

     (8) Whether to omit from the calculations trust property occupied or possessed by a beneficiary.

     (9) Any other matters necessary for the proper functioning of the unitrust.

     (h)(1) Expenses which would be deducted from income if the trust were not a unitrust may not be deducted from the unitrust distribution.

     (2) Unless otherwise provided by the terms of the trust, the unitrust distribution shall be paid from net income, as such term would be determined if the trust were not a unitrust. To the extent net income is insufficient, the unitrust distribution shall be paid from net realized short-term capital gains. To the extent net income and net realized short-term capital gains are insufficient, the unitrust distribution shall be paid from net realized long-term capital gains. To the extent net income and net realized short-term and long-term capital gains are insufficient, the unitrust distribution shall be paid from the principal of the trust.

     (3) To the extent necessary to cause gains from the sale or exchange of unitrust assets to be treated as income under any federal, state, or local income tax (for example, section 643 of the Internal Revenue Code and its regulations, including Treasury Regulation § 1.643(b)-1, as amended or renumbered), the trustee has the discretionary power to allocate the gains to income, so long as the power is reasonably and impartially exercised.

     (i) The trustee or, if the trustee declines to do so, a beneficiary may petition the court:

     (1) To change the payout percentage.

     (2) To provide 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.

     (3) To average the valuation of the trust's net assets over a period other than three years.

     (4) To reconvert from a unitrust.

     (j) Upon a reconversion, the power to adjust under RCW 11.104A.020 is revived.

     (k) A conversion to a unitrust does not affect a provision in the terms of a trust directing or authorizing the trustee to distribute principal or authorizing a beneficiary to withdraw a portion or all of the principal.

     (l) A trustee may not possess or exercise any power under this section in any of the following circumstances:

     (1) The unitrust distribution would be made from any amount that is permanently set aside for charitable purposes under the terms of a trust and for which a charitable deduction from a federal gift or estate tax has been taken unless both income and principal are so set aside.

     (2) The possession or exercise of the power 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 or exercise the power.

     (3) The possession or exercise of the power would cause all or any part of the trust estate to be subject to any federal gift or estate tax with respect to the individual and the trust estate would not be subject to such taxation if the trustee did not possess or exercise the power.

     (4) The possession or exercise of the power would result in the disallowance of a federal gift or estate tax marital deduction which would be allowed if the trustee did not have the power.

     (5) The trustee is a beneficiary of the trust.

     (m) If subsection (l)(2), (3), or (5) of this section applies to a trustee and there is more than one trustee or an additional trustee who is appointed by a court order, a binding agreement, or otherwise under chapter 11.96A RCW, a cotrustee to whom subsection (l)(2), (3), or (5) of this section does not apply may possess and exercise the power unless the possession or exercise of the power by the remaining trustee or trustees is not permitted by the terms of the trust. If subsection (l)(2), (3), or (5) of this section restricts all trustees from possessing or exercising a power under this section, the trustee may petition a court under chapter 11.96A RCW for the court to effect the intended conversion or action.

     (n) A trustee may release any power conferred by this section if any of the following applies:

     (1) The trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (l)(2), (3), or (4) of this section.

     (2) 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 (l) of this section.

     The release may be permanent or for a specified period, including a period measured by the life of an individual.

[2006 c 360 § 1; 2002 c 345 § 106.]

Notes: *Reviser's note: RCW 11.96A.030 was alphabetized pursuant to RCW 1.08.015(2)(k), changing subsection (4) to subsection (5).

Clarification of laws -- Enforceability of act -- Severability -- 2006 c 360: See notes following RCW 11.108.070.