2013 Maryland Code
ESTATES AND TRUSTS
§ 15-502 - Fiduciary duties; general principles

§15-502.

(a) In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of Parts II and III of this subtitle, a fiduciary:

(1) Shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in this subtitle;

(2) May administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by this subtitle;

(3) Shall administer a trust or estate in accordance with this subtitle if the terms of the trust or the will do not contain a different provision or do not give the fiduciary a discretionary power of administration; and

(4) Shall add a receipt or charge a disbursement to principal to the extent that the terms of the trust and this subtitle do not provide a rule for allocating the receipt or disbursement to or between principal and income.

(b) In exercising a discretionary power of administration regarding a matter within the scope of this subtitle, whether granted by the terms of a trust, a will, or this subtitle, a fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries. A determination in accordance with this subtitle is presumed to be fair and reasonable to all of the beneficiaries.

§ 15-502 - 1. Conversion of trust into unitrust

(a) Conditions. -- A trustee may convert a trust into a unitrust as described in this section if:

(1) The trustee receives a written request from a beneficiary to exercise the power conferred by this subsection to convert to a unitrust;

(2) The trustee invests and manages the trust assets in the manner set forth in § 15-114(b) and (c) of this title;

(3) The trustee determines that the conversion will enable the trustee to better carry out the intent of the person who created the trust and the purposes of the trust; and

(4) (i) The trustee complies with the notice requirements of § 15-502.3 of this subtitle and all qualified beneficiaries consent; or

(ii) A court reviews a petition filed under § 15-502.3 of this subtitle and approves the proposed decision to convert to a unitrust.

(b) Factors. -- In deciding whether to exercise the power conferred by subsection (a) of this section, a trustee shall consider all factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant:

(1) The nature, purpose, and expected duration of the trust;

(2) The intent of the creator of the trust;

(3) The identity and circumstances of the beneficiaries;

(4) The needs for liquidity, regularity of income, and preservation and appreciation of capital;

(5) The assets held in the trust and:

(i) The extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property;

(ii) The extent to which an asset is used by a beneficiary; and

(iii) Whether an asset was acquired by the trustee or received from the creator of the trust;

(6) Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income;

(7) The actual and anticipated effect of economic conditions on principal and income and the effects of inflation and deflation; and

(8) The anticipated tax consequences of a unitrust conversion.

(c) Applicable principles. -- After a trust is converted to a unitrust, all of the following apply:

(1) The income of the trust that the income beneficiary is entitled to receive under the governing instrument shall be an annual unitrust distribution equal to a payout percentage of 4% of the net fair market value of the trust's assets, whether those assets would be considered income or principal under any other provision of this subtitle, averaged over the lesser of:

(i) The 3 preceding years; or

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

(2) Expenses that would be deducted from income if the trust were not a unitrust may not be deducted from the unitrust distribution;

(3) Any 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 may not be affected by the conversion to a unitrust;

(4) Unless otherwise provided by the governing instrument, the unitrust distribution shall be paid first from net income of the trust, as net income would be determined if the trust were not a unitrust, and then from principal; and

(5) The trustee may determine to account for the unitrust distribution in accordance with the following rules:

(i) To the extent net income is insufficient, the unitrust distribution shall be paid from net realized short-term capital gains;

(ii) To the extent income and net realized short-term capital gains are insufficient, the unitrust distribution shall be paid from net realized long-term capital gains; and

(iii) To the extent 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.

(d) Determination by trustee of trust value. -- The trustee shall determine:

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

(2) How frequently to value nonliquid assets and whether to estimate their value; and

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

(e) Provisions of payout, income distribution and valuation of a converted unitrust. -- If authorized by a court order, in accordance with a petition filed under § 15-502.3 of this subtitle, the converted unitrust may provide that:

(1) The payout percentage is different than 4%;

(2) A distribution of net income, as would be determined if the trust were not a unitrust, shall be made if in excess of the unitrust distribution and if that distribution is necessary to preserve a tax benefit; or

(3) Valuation of the trust's net assets shall be averaged over a period other than 3 years.

(f) Conversion not allowed under certain circumstances. -- A trustee may not convert a trust into a unitrust under subsection (a) of this section if:

(1) The conversion would result in the disallowance of an estate tax or gift tax marital deduction that would be allowed, in whole or in part, if the trustee did not have the power to convert;

(2) Payment of the unitrust distribution would change the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;

(3) The unitrust distribution would be made from any amount that is permanently set aside for charitable purposes under the governing instrument and for which a federal estate or gift tax deduction has been taken, unless both income and principal are so set aside;

(4) 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;

(5) Possessing or exercising the power to convert would cause all or part of the trust assets to be subject to estate or gift tax with respect to an individual and the assets would not be subject to estate or gift tax with respect to the individual if the trustee did not possess the power to convert; or

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

(g) Exceptions to nonconversion. --

(1) If subsection (f)(4), (5), or (6) of this section applies to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may convert the trust to a unitrust under subsection (a) of this section, unless exercise of the power by the remaining trustee or trustees is prohibited by the governing instrument.

(2) If subsection (f)(4), (5), or (6) of this section applies to all the trustees, the trustees may petition a court under § 15-502.3 of this subtitle to direct a conversion under subsection (a) of this section.

(h) Release of power of conversion. --

(1) A trustee may release the power conferred by subsection (a) of this section to convert to a unitrust if:

(i) The trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (f)(4), (5), or (6) of this section; or

(ii) 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 (f) of this section.

(2) A release described in paragraph (1) of this subsection may be permanent or for a specified period, including a period measured by the life of an individual.

(i) Reconversion from a unitrust. -- If the trustee receives a written request from a beneficiary to reconvert a trust from a unitrust, the trustee may reconvert a trust from a unitrust if:

(1) The trustee complies with the notice requirements of § 15-502.3 of this subtitle and all qualified beneficiaries consent to reconvert from a unitrust; or

(2) A court reviews a petition filed under § 15-502.3 of this subtitle and approves the proposed decision to reconvert from a unitrust.

(j) Limitation of conversion power in trust instrument. -- Unless it is clear from the terms of the trust that the terms are intended to deny the trustee the power conferred by subsection (a) of this section, the terms of a trust that limit the power of a trustee to convert to a unitrust do not affect the application of this section.

§ 15-502 - 2. Adjustment between principal and income

(a) Conditions. -- A trustee may adjust between principal and income to the extent the trustee considers necessary if:

(1) The trustee receives a written request from a beneficiary to exercise the power conferred by this subsection to make an adjustment;

(2) The trustee invests and manages the trust assets in the manner set forth in § 15-114(b) and (c) of this title;

(3) The terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income;

(4) The trustee determines, after applying the rules in § 15-502(a) of this subtitle, that the trustee is unable to comply with § 15-502(b) of this subtitle;

(5) The trustee determines that conversion of the trust to a unitrust in accordance with § 15-502.1(a) of this subtitle is an inappropriate method to comply with § 15-502(b) of this subtitle based on a review of all factors relevant to the trust and its beneficiaries; and

(6) (i) The trustee complies with the notice requirements of § 15-502.3 of this subtitle and all qualified beneficiaries consent; or

(ii) A court reviews a petition filed under § 15-502.3 of this subtitle and approves the adjustment.

(b) Factors. -- In deciding whether and to what extent to exercise the power conferred by subsection (a) of this section, a trustee shall consider all the factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant:

(1) The nature, purpose, and expected duration of the trust;

(2) The intent of the creator of the trust;

(3) The identity and circumstances of the beneficiaries;

(4) The needs for liquidity, regularity of income, and preservation and appreciation of capital;

(5) The assets held in the trust and:

(i) The extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property;

(ii) The extent to which an asset is used by a beneficiary; and

(iii) Whether an asset was acquired by the trustee or received from the creator of the trust;

(6) The net amount allocated to income under other provisions of this subtitle and the increase or decrease in the value of the principal assets, which the trustee may estimate as to assets for which market values are not readily available;

(7) Whether and to what extent the terms of the trust give the trustee the power to invade principal or accumulate income and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income;

(8) The actual and anticipated effect of economic conditions on principal and income and the effects of inflation and deflation; and

(9) The anticipated tax consequences of an adjustment.

(c) Adjustment not permitted if distribution of net income exceeds or is less than a certain percentage. -- Unless authorized by a court order in accordance with a petition filed under § 15-502.3 of this subtitle, a trustee may not make an adjustment under subsection (a) of this section in any accounting period if the adjustment results in a distribution of net income to the income beneficiary:

(1) That is greater than 4% of the net fair market value of the trust assets on the first business day of that accounting period, if the net income for that accounting period is less than 4% as determined under this subtitle before application of the provisions of subsection (a) of this section; or

(2) That is less than 4% of the net fair market value of the trust assets on the first business day of that accounting period, if the net income for that accounting period is greater than 4% as determined under this subtitle before application of the provisions of subsection (a) of this section.

(d) Additional conditions in which adjustment is not permitted. -- A trustee may not make an adjustment under subsection (a) of this section:

(1) That diminishes the income interest in a trust that requires all of the income to be paid at least annually to a spouse and for which an estate tax or gift tax marital deduction would be allowed, in whole or in part, if the trustee did not have the power to make the adjustment;

(2) That reduces the actuarial value of the income interest in a trust to which a person transfers property with the intent to qualify for a gift tax exclusion;

(3) That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;

(4) From any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside;

(5) If possessing or exercising the power to make an adjustment causes an individual to be treated as the owner of all or part of the trust for income tax purposes, and the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment;

(6) If possessing or exercising the power to make an adjustment causes all or part of the trust assets to be subject to estate or gift tax with respect to the individual and the assets would not be subject to estate or gift tax with respect to the individual if the trustee did not possess the power to make an adjustment;

(7) If the trustee is a beneficiary of the trust; or

(8) If the trust has been converted to a unitrust in accordance with § 15-502.1 of this subtitle.

(e) Adjustment by cotrustee. -- If subsection (d)(5), (6), or (7) of this section applies to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may make the adjustment under subsection (a) of this section unless the exercise of the power by the remaining trustee or trustees is not permitted by the terms of the trust.

(f) Release of adjustment power. --

(1) A trustee may release the entire power conferred by subsection (a) of this section or may release only the power to adjust from principal to income if the trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (d)(1), (2), (3), (4), (5), or (6) of this section or if 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 (d) of this section.

(2) The release authorized under paragraph (1) of this subsection may be permanent or for a specified period, including a period measured by the life of an individual.

(g) Limitation of adjustment power in trust instrument. -- The terms of a trust that limit the power of a trustee to make an adjustment between principal and income do not affect the application of this section unless it is clear from the terms of the trust that the terms are intended to deny the trustee the power of adjustment conferred by subsection (a) of this section.

§ 15-502 - 3. Proposed decision by trustee

(a) "Qualified beneficiary" defined. -- In this section, "qualified beneficiary" means:

(1) A person who, on the date that notice is given by the trustee in accordance with subsection (b) of this section:

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

(ii) Would be a distributee or permissible distributee of the income or principal of the trust estate if the interests of the distributees described in item (i) of this paragraph terminated on the date that notice is given by the trustee; or

(iii) Would be a distributee or permissible distributee of the income or principal of the trust estate if the trust were to terminate on the date that notice is given by the trustee and no powers of appointment were exercised;

(2) If an individual described in paragraph (1) of this subsection is a minor, the individual's natural or legal guardian; or

(3) If an individual described in paragraph (1) of this subsection is a disabled person, as defined in § 13-101 of this article, any person acting on behalf of the individual under a guardianship, conservatorship, or committee.

(b) Notice. -- A trustee shall give notice of a proposed decision regarding the exercise or nonexercise of the discretionary power conferred under:

(1) Section 15-502.1(a) of this subtitle to convert a trust to a unitrust;

(2) Section 15-502.1(i) of this subtitle to reconvert from a unitrust; or

(3) Section 15-502.2(a) of this subtitle to adjust between principal and income.

(c) Mailing of notice. -- The trustee shall mail the notice required under subsection (b) of this section to:

(1) All qualified beneficiaries, except that notice of the proposed decision need not be given to any qualified beneficiary who consents in writing to the proposed decision at any time before the notice is mailed; and

(2) The creator of the trust, if living.

(d) Contents of notice. -- The notice of proposed decision shall state that it is given in accordance with this section and shall state the following:

(1) The name and mailing address of the trustee, together with the name and telephone number of a person who may be contacted for additional information;

(2) A description of the decision proposed to be taken and, if the proposed decision also includes an action that requires an order of a court in accordance with § 15-502.1 or § 15-502.2 of this subtitle, a description of that action;

(3) The time within which written consents to the proposed decision may be given to the trustee, which shall be at least 30 days after the mailing of the notice of proposed decision; and

(4) The date on or after which the proposed decision may be taken or is effective, which shall be after the end of the time within which consents to the proposed decision may be given to the trustee.

(e) Written consent of all qualified beneficiaries. -- If the trustee receives the written consent of all qualified beneficiaries, then the trustee shall undertake the proposed decision unless the proposed decision also includes an action that requires an order of a court in accordance with § 15-502.1 or § 15-502.2 of this subtitle.

(f) If any qualified beneficiary does not consent; petition for review. -- If any qualified beneficiary does not consent to the proposed decision, or if the proposed decision includes an action that requires an order of a court under § 15-502.1 or § 15-502.2 of this subtitle, then the trustee or any qualified beneficiary may file a petition to review the proposed decision in the circuit court for the county in which the trustee resides in this State, if the trustee is an individual, or in which the principal place of business of the trustee is located in this State.

(g) Sole remedy. --

(1) In a proceeding under subsection (f) of this section:

(i) With respect to the power to convert to a unitrust under § 15-502.1(a) of this subtitle or to reconvert from a unitrust under § 15-502.1(i) of this subtitle, the sole remedy in the proceeding is to direct, deny, or revise the conversion to a unitrust or reconversion from a unitrust; and

(ii) With respect to the power to adjust between principal and income under § 15-502.2(a) of this subtitle, the sole remedy in the proceeding is to direct, deny, or revise the adjustment between principal and income.

(2) Notice of the proceeding shall be given by the petitioner to the trustee and to all qualified beneficiaries.

(h) Binding effect. -- Any action taken or not taken in accordance with the provisions of this section shall be binding on the trustee, all qualified beneficiaries, and any other person who has a present or future interest in the trust, vested or contingent, including any unborn or unascertained beneficiary, and the trustee is not liable to any person for that action taken or not taken.