2006 Code of Virginia § 55-277.4:1 - Total return unitrust

55-277.4:1. Total return unitrust.

A. As used in this section:

1. "Disinterested person" means a person who is not a "related orsubordinate party" (as defined in 672 (c) of the Internal Revenue Code, 26U.S.C. 1, et seq., (hereinafter referred to in this section as the"I.R.C.", and all such references shall include the specific sectionreferred to and any successor provisions thereof)) with respect to the personthen acting as trustee of the trust, and excludes the grantor of the trustand any interested trustee.

2. "Income trust" means a trust, created by either an inter vivos or atestamentary instrument, which directs or permits the trustee to distributethe net income of the trust to one or more persons, either in fixedproportions or in amounts or proportions determined by the trustee, andregardless of whether the trust directs or permits the trustee to distributethe principal of the trust to one or more such persons.

3. "Interested distributee" means a person to whom distributions of incomeor principal can currently be made who has the power to remove the existingtrustee and designate as successor a person who may be a "related orsubordinate party" as defined in I.R.C. 672 (c), 26 U.S.C. 672 (c), withrespect to such distributee.

4. "Interested trustee" means: (i) an individual trustee to whom the netincome or principal of the trust can currently be distributed or would bedistributed if the trust were then to terminate and be distributed; (ii) anytrustee who may be removed and replaced by an interested distributee; or(iii) an individual trustee whose legal obligation to support a beneficiarymay be satisfied by distributions of income and principal of the trust.

5. "Total return unitrust" means an income trust, which has been convertedunder and meets the provisions of this section.

6. "Trustee" means all persons acting as trustee of the trust, except whereexpressly noted otherwise, whether acting in their discretion or at thedirection of one or more persons acting in a fiduciary capacity.

7. "Grantor" means an individual who created an inter vivos or atestamentary trust.

8. "Unitrust amount" means an amount computed as a percentage of the fairmarket value of the trust.

B. A trustee, other than an interested trustee, or where two or more personsare acting as trustee a majority of the trustees who are not an interestedtrustee, may, in its sole discretion and without judicial approval, (i)convert an income trust to a total return unitrust; (ii) reconvert a totalreturn unitrust to an income trust; or (iii) change the percentage used tocalculate the unitrust amount or the method used to determine the fair marketvalue of the trust if:

1. The trustee adopts a written policy for the trust providing: (i) in thecase of a trust being administered as an income trust, that futuredistributions 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 thanunitrust amounts; or (iii) that the percentage used to calculate the unitrustamount or the method used to determine the fair market value of the trustwill 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 section, to: (i) thegrantor of the trust, if living; (ii) all living persons who are currentlyreceiving or eligible to receive distributions of income of the trust; (iii)all living persons who would receive principal of the trust if the trust wereto terminate at the time of the giving of such notice, without regard to theexercise of any power of appointment, or, if the trust does not provide forits termination, all living persons who would receive or be eligible toreceive distributions of income or principal of the trust if the personsidentified in clause (ii) of this subdivision 2 were deceased; and (iv) allpersons acting as advisor or protector of the trust;

3. At least one person receiving notice under each of clauses (ii) and (iii)of subdivision 2 is legally competent; and

4. No person receiving such notice objects, by written instrument deliveredto the trustee, to the proposed action of the trustee within 60 days ofreceipt of such notice.

C. If there is no trustee of the trust other than an interested trustee, theinterested trustee or, where two or more persons are acting as trustee andare interested trustees, a majority of such interested trustees may, in itssole discretion and without judicial approval, (i) convert an income trust toa total return unitrust; (ii) reconvert a total return unitrust to an incometrust; or (iii) change the percentage used to calculate the unitrust amountor 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 thecase of a trust being administered as an income trust, that futuredistributions 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 thanunitrust amounts; or (iii) that the percentage used to calculate the unitrustamount or the method used to determine the fair market value of the trustwill be changed as stated in the policy;

2. The trustee appoints a disinterested person who, in its sole discretionbut acting in a fiduciary capacity, determines for the trustee: (i) thepercentage to be used to calculate the unitrust amount; (ii) the method to beused in determining the fair market value of the trust; and (iii) whichassets, if any, are to be excluded in determining the unitrust amount;

3. The trustee sends written notice of its intention to take such action,along with copies of such written policy and this section, to: (i) thegrantor of the trust, if living; (ii) all living persons who are currentlyreceiving or eligible to receive distributions of income of the trust; (iii)all living persons who would receive principal of the trust if the trust wereto terminate at the time of the giving of such notice, without regard to theexercise of any power of appointment, or, if the trust does not provide forits termination, all living persons who would receive or be eligible toreceive distributions of income or principal of the trust if the personsidentified in clause (ii) of this subdivision 3 were deceased; and (iv) allpersons acting as advisor or protector of the trust;

4. At least one person receiving notice under each of clauses (ii) and (iii)of subdivision 3 is legally competent; and

5. No person receiving such notice objects, by written instrument deliveredto the trustee, to the proposed action of the trustee within 60 days ofreceipt of such notice.

D. If any trustee desires to convert an income trust to a total returnunitrust, reconvert a total return unitrust to an income trust, or change thepercentage used to calculate the unitrust amount or the method used todetermine the fair market value of the trust but does not have the ability toor elects not to do it under the provisions of subsections B or C above, thetrustee may petition the circuit court in which the trustee qualified, or ifthere is no such qualification, the circuit court for the jurisdiction inwhich the trustee or beneficiary resides, or if the trustee is a corporatetrustee and there is no resident beneficiary, the circuit court where thetrust account is administered, for such order as the trustee deemsappropriate. In the event, however, there is only one trustee of such trustand such trustee is an interested trustee or in the event there are two ormore 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 ortrustees or any person interested in the trust, may appoint a disinterestedperson who, acting in a fiduciary capacity, shall present such information tothe court as shall be necessary to enable the court to make itsdeterminations 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 aredeemed appropriate. Assets for which a fair market value cannot be readilyascertained shall be valued using such valuation methods as are deemedreasonable and appropriate. Such assets may be excluded from valuation,provided all income received with respect to such assets is distributed tothe extent distributable in accordance with the terms of the governinginstrument.

F. The percentage to be used in determining the unitrust amount shall be areasonable current return from the trust, in any event no less than threepercent nor more than five percent, taking into account the intentions of thegrantor of the trust as expressed in the governing instrument, the needs ofthe beneficiaries, general economic conditions, projected current earningsand appreciation for the trust, and projected inflation and its impact on thetrust.

G. Following the conversion of an income trust to a total return unitrust,the trustee:

1. Shall treat the unitrust amount as if it were net income of the trust forpurposes of determining the amount available, from time to time, fordistribution from the trust;

2. May allocate to trust income for each taxable year of the trust, orportion thereof:

(i) net short-term capital gain described in I.R.C. 1222 (5), 26 U.S.C. 1222 (5), for such year or portion thereof, but only to the extent that theamount so allocated together with all other amounts allocated to trust incomefor such year or portion thereof does not exceed the unitrust amount for suchyear or portion thereof; and

(ii) net long-term capital gain described in I.R.C. 1222 (7), 26 U.S.C. 1222 (7), for such year or portion thereof but only to the extent that theamount so allocated together with all other amounts, including amountsdescribed in clause (i) of this subdivision, allocated to trust income forsuch year, or portion thereof, does not exceed the unitrust amount for suchyear, or portion thereof; and

3. Shall treat the unitrust amount as if it were income of the trust forpurposes of determining the amount of trustee compensation where thegoverning instrument directs that such compensation be based wholly orpartially on income.

H. In administering a total return unitrust, the trustee may, in its solediscretion but subject to the provisions of the governing instrument,determine: (i) the effective date of the conversion; (ii) the timing ofdistributions, including provisions for prorating a distribution for a shortyear in which a beneficiary's right to payments commences or ceases; (iii)whether distributions are to be made in cash or in kind or partly in cash andpartly in kind; (iv) if the trust is reconverted to an income trust, theeffective date of such reconversion; and (v) such other administrativematters as may be necessary or appropriate to carry out the purposes of thissection.

I. Conversion to a total return unitrust under the provisions of this sectionshall not affect any other provision of the governing instrument, if any,regarding distributions of principal.

J. This section shall be construed as pertaining to the administration of atrust and shall be available to any trust that is administered under Virginialaw unless:

1. The governing instrument reflects an intention that the currentbeneficiary or beneficiaries are to receive an amount other than a reasonablecurrent return from the trust;

2. The trust is a trust described in I.R.C. 170 (f) (2) (B) or 664 (d),26 U.S.C. 170 (f) (2) (B) or 664 (d); or

3. The governing instrument expressly prohibits use of this section byspecific reference to this section or expressly reflects the grantor's intentthat net income not be calculated as a unitrust amount. A provision in thegoverning instrument that "The provisions of 55-277.4:1, Code of Virginia,as amended, or any corresponding provision of future law, shall not be usedin the administration of this trust," or "My trustee shall not determinethe distributions to the income beneficiary as a unitrust amount", orsimilar words reflecting such intent shall be sufficient to preclude the useof this section.

K. Any trustee or disinterested person who in good faith takes or fails totake any action under this section shall not be liable to any person affectedby such action or inaction, regardless of whether such person receivedwritten notice as provided in this section and regardless of whether suchperson was under a legal disability at the time of the delivery of suchnotice. Such person's exclusive remedy shall be to obtain an order of thecourt directing the trustee to convert an income trust to a total returnunitrust, to reconvert from a total return unitrust to an income trust or tochange the percentage used to calculate the unitrust amount.

(2004, c. 639.)