2013 Kentucky Revised Statutes CHAPTER 386 - ADMINISTRATION OF TRUSTS -- LEGAL INVESTMENTS -- UNIFORM PRINCIPAL AND INCOME ACT 386.454 Fiduciary's election to have certain standards apply to administration of trust or estate -- Power to adjust between principal and income -- Conversion to unitrust -- Adversary proceeding -- Powers under previous version of section.
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386.454 Fiduciary's election to have certain standards apply to administration
of trust or estate -- Power to adjust between principal and income -Conversion to unitrust -- Adversary proceeding -- Powers under previous
version of section.
(1)
(2)
Notwithstanding any provision of Kentucky law to the contrary, the fiduciary of
a trust or estate to which by law KRS 286.3-277 does not apply may elect to
have such provisions apply to the administration of the trust or estate by
providing the notice as required under subsection (2)(g) of this section.
(a) A fiduciary may, after providing notice as required under paragraph (g) of
this subsection, adjust between principal and income to the extent the
fiduciary considers necessary if KRS 286.3-277 applies by law or by
election made under subsection (1) of this section, the terms of the trust
or will describe the amount that may or shall be distributed to a
beneficiary by referring to the trust's or estate's income, and the fiduciary
determines, after applying the rules in KRS 386.452(1), that the fiduciary
is unable to comply with KRS 386.452(2). Additionally, a fiduciary may
reserve the right to convert the trust to a unitrust under subsection (3) of
this section in the future.
(b) In deciding whether and to what extent to exercise the power conferred
by this subsection, a fiduciary shall consider all factors relevant to the
trust or estate and its beneficiaries, including the following factors to the
extent they are relevant:
1.
The nature, purpose, and expected duration of the trust or estate;
2.
The intent of the settlor or testator;
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 or estate and:
a.
The extent to which they consist of financial assets, interests in
closely held enterprises, tangible and intangible personal
property, or real property;
b.
The extent to which an asset is used by a beneficiary; and
c.
Whether an asset was purchased by the fiduciary or received
from the settlor or testator;
6.
The net amount allocated to income under the other sections in this
chapter and the increase or decrease in the value of the principal
assets, which the fiduciary may estimate as to assets for which
market values are not readily available;
7.
Whether and to what extent the terms of the trust or will give the
fiduciary the power to invade principal or accumulate income or
prohibit the fiduciary from invading principal or accumulating income,
and the extent to which the fiduciary has exercised a power from
time to time to invade principal or accumulate income;
8.
The actual and anticipated effect of economic conditions and market
volatility on principal and income and effects of inflation and
(c)
(d)
(e)
deflation; and
9.
The anticipated tax consequences of an adjustment.
A fiduciary shall not make an adjustment:
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 fiduciary 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 the 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 or estate for income tax purposes, and the individual would not
be treated as the owner if the fiduciary 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 or estate assets to be included for
estate tax purposes in the estate of an individual who has the power
to remove a fiduciary or appoint a fiduciary, or both, and the assets
would not be included in the estate of the individual if the fiduciary
did not possess the power to make an adjustment;
7.
If the fiduciary is a beneficiary of the trust or estate; or
8.
If the fiduciary is not a beneficiary, but the adjustment would benefit
the fiduciary directly or indirectly; except that any effect on the
fiduciary's compensation shall not preclude an adjustment so long
as the fiduciary's fees are reasonable and otherwise comply with the
applicable law.
If paragraph (c)5., 6., 7., or 8. of this subsection applies to a fiduciary and
there is more than one (1) fiduciary or an additional fiduciary who is
appointed by court order, a binding agreement, or otherwise as provided
by law, a co-fiduciary to whom the provision does not apply may make an
adjustment unless the exercise of the power by the remaining fiduciary or
fiduciaries is not permitted by the terms of the trust or will. If paragraph
(c)5., 6., 7., or 8. of this subsection restricts all fiduciaries from possessing
or exercising a power under this section, the fiduciary may petition the
District Court for the court to effect the intended conversion or action.
A fiduciary may release the entire power conferred by this subsection or
may release only the power to adjust from income to principal or the
power to adjust from principal to income if the fiduciary is uncertain about
whether possessing or exercising the power will cause a result described
(3)
in paragraph (c)1. to 6. of this subsection or if the fiduciary determines
that possessing or exercising the power will or may deprive the trust or
estate of a tax benefit or impose a tax burden not described in paragraph
(c) of this subsection. The release may be permanent or for a specified
period, including a period measured by the life of an individual. Further, a
fiduciary may divide a trust or estate into one (1) or more fractional shares
if the division does not change the beneficial interests.
(f) Terms of a trust or will that limit the power of a fiduciary 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 or will that the
terms are intended to deny the fiduciary the power of adjustment
conferred by this subsection.
(g) A fiduciary shall not make an election or adjustment under this section
unless all of the following apply:
1.
A fiduciary shall give written notice of the fiduciary's intention to
make an adjustment, or any intention to make an election to have
the provisions of KRS 286.3-277, if applicable, apply to the trust, to
each beneficiary, by certified mail with restricted delivery and return
receipt, who, on the date the notice is given:
a.
Is a distributee or permissible distributee of trust income or
principal; or
b.
Would be a distributee or permissible distributee of principal if
the interests of the distributees described in subparagraph 1.a.
of this paragraph terminated and the trust then terminated
immediately before the notice was given and if no powers of
appointment were exercised;
2.
There is at least one (1) beneficiary under subparagraph 1.a. of this
paragraph and at least one (1) other reasonably ascertainable
person who is a remainder beneficiary under subparagraph 1.b. of
this paragraph; and
3.
Every beneficiary to whom notice was sent pursuant to
subparagraph 1. of this paragraph has received the notice as
evidenced by the certified mail return receipt and no beneficiary
objects to the adjustment or election in writing delivered to the
fiduciary within thirty (30) days after the notice is given under
subparagraph 1. of this paragraph.
(h) The fiduciary may petition the District Court under this subsection to order
an adjustment or an election if any of the following apply:
1.
A beneficiary timely objects to the adjustment or the election, or a
beneficiary has not received the notice as evidenced by the certified
mail return receipt;
2.
There is no reasonably ascertainable beneficiary under paragraph
(g)1.a. of this subsection; or
3.
There is no reasonably ascertainable beneficiary under paragraph
(g)1.b. of this subsection.
The following rules shall govern a fiduciary's conversion of a trust to a unitrust:
(a)
(b)
(c)
Unless expressly prohibited by the terms of a trust, a fiduciary may
release the power to make adjustments under subsection (2) of this
section and convert to a unitrust as described in this subsection, if all of
the following apply:
1.
The fiduciary determines that the conversion will enable the fiduciary
better to carry out the intent of the settlor or testator and the
purposes of the trust;
2.
The fiduciary gives written notice of the fiduciary'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 fiduciary will make under this subsection, to each beneficiary, by
certified mail with restricted delivery and return receipt, who, on the
date the notice is given:
a.
Is a distributee or permissible distributee of trust income or
principal; or
b.
Would be a distributee or permissible distributee of trust
principal if the interests of the distributees described in
subparagraph 2.a. of this paragraph 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 (1) beneficiary under subparagraph 2.a. of this
paragraph and at least one (1) other reasonably ascertainable
person who is a remainder beneficiary under subparagraph 2.b. of
this paragraph; and
4.
Every beneficiary to whom notice was sent pursuant to
subparagraph 2. of this paragraph has received the notice as
evidenced by the certified mail return receipt and no beneficiary
objects to the conversion to a unitrust in a writing delivered to the
fiduciary within thirty (30) days after the notice is given under
subparagraph 2. of this paragraph;
The fiduciary may petition the District Court under this subsection to order
a conversion to a unitrust if any of the following apply:
1.
A party timely objects to the conversion to a unitrust, or a
beneficiary has not received the notice as evidenced by the certified
mail return receipt;
2.
There is no reasonably ascertainable beneficiary under paragraph
(a)2.a. of this subsection; or
3.
There is no reasonably ascertainable beneficiary under paragraph
(a)2.b. of this subsection;
Notwithstanding the provisions of paragraph (h) of this subsection, a
beneficiary may request a fiduciary to convert to a unitrust. If the fiduciary
does not convert, the beneficiary may petition the District Court to order
the conversion. The court shall approve the conversion or direct the
requested conversion if the court concludes that the conversion will
enable the fiduciary to better carry out the intent of the settlor or testator
and the purposes of the trust;
(d)
(e)
(f)
(g)
In deciding whether to exercise a power to convert to a unitrust under this
section, a fiduciary may consider, among other things, the factors set forth
in subsection (2)(b) of this section;
After a trust is converted to a unitrust, all of the following provisions shall
apply:
1.
The fiduciary shall follow an investment policy seeking a total return
for the investments held by the trust, whether the return is to be
derived:
a.
From appreciation of principal;
b.
From earnings and distributions from principal; or
c.
From both;
2.
The fiduciary 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; and
3.
Unless expressly prohibited by the terms of the trust, the term
"income" in the terms of a trust or will means an annual distribution,
the "unitrust distribution," equal to the percentage, the "payout
percentage," that is no less than three percent (3%) and no more
than five percent (5%) and that the fiduciary may determine in the
fiduciary's discretion from time to time, or, if the fiduciary makes no
determination, that shall be four percent (4%), 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:
a.
The three (3) preceding years; or
b.
The period which the trust has been in existence;
The fiduciary may in the fiduciary'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; and
9.
Any other matters necessary for the proper functioning of the
unitrust;
The following provisions regarding unitrust distribution shall apply:
1.
Expenses which would be deducted from income if the trust were
(h)
(i)
(j)
(k)
not a unitrust shall 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 the 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; and
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, such as Section 643 of the Internal Revenue
Code and its regulations, including Treasury Regulation sec.
1.643(b)-1, as amended or renumbered, the fiduciary has the
discretionary power to allocate the gains to income, so long as the
power is reasonably and impartially exercised;
Notwithstanding any other provision of this section to the contrary, a
fiduciary or beneficiary may petition the District 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 (3) years; and
4.
To reconvert from a unitrust to the preconversion terms of the trust;
Upon a reconversion, the power to adjust under subsection (2) of this
section shall be revived, and a trustee shall not be precluded from
seeking a later unitrust conversion;
A conversion to a unitrust does not affect a provision in the terms of a
trust directing or authorizing the fiduciary to distribute principal or
authorizing a beneficiary to withdraw a portion or all of the principal of the
trust;
A fiduciary shall not possess or exercise any power under this subsection
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 fiduciary did not possess or exercise the power;
3.
The possession or exercise of the power would cause all or any part
(6)
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 fiduciary 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 fiduciary did not have the power; or
5.
The fiduciary is a beneficiary of the trust;
(l) If paragraph (k)2., 3., or 5. of this subsection applies to a fiduciary and
there is more than one (1) fiduciary or an additional fiduciary who is
appointed by a court order, binding agreement, or otherwise as provided
by law, a co-fiduciary to whom paragraph (k)2., 3., or 5. of this subsection
does not apply may possess and exercise the power unless the
possession or exercise of the power by the remaining fiduciary or
fiduciaries is not permitted by the terms of the trust or will. If paragraph
(k)2., 3., or 5. of this subsection restricts all fiduciaries from possessing or
exercising a power under this section, the fiduciary may petition the
District Court for the court to effect the intended conversion or action; and
(m) A fiduciary may release any power conferred by this section if any of the
following applies:
1.
The fiduciary is uncertain about whether possessing or exercising
the power will cause a result described in paragraph (k)2., 3., or 5.
of this subsection; or
2.
The fiduciary 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 paragraph (k) of this subsection.
The release may be permanent or for a specified period, including a
period measured by the life of an individual.
(4) Unless a beneficiary has requested the fiduciary in writing that the
fiduciary consider an adjustment, unitrust conversion, or change in payout
percentage, nothing in this section imposes a duty on the fiduciary to
make an adjustment, conversion, or change in payout percentage under
subsection (3)(e)3. of this section, and the fiduciary is not liable for not
considering whether to make an adjustment, conversion, or change in
payout percentage under this section.
(5) If there shall be a District Court order approving or disapproving an
election to apply KRS 286.3-277 to a trust or to an estate under
subsection (1) of this section or a power to adjust under subsection (2) of
this section or converting a trust to a unitrust under subsection (3) of this
section, then an aggrieved party, no later than thirty (30) days from the
date of such order, may institute an adversary proceeding in Circuit Court
pursuant to KRS 24A.120(2).
This section is intended to further describe and clarify the powers previously
granted under the immediately preceding version of this section. These
clarifications and revisions shall apply to and be available for all applicable and
qualifying trusts, including any trust which may have previously sought relief
under a prior version of this section.
Effective:July 12, 2012
History: Amended 2012 Ky. Acts ch. 59, sec. 2, effective July 12, 2012. -Amended 2010 Ky. Acts ch. 21, sec. 6, effective July 15, 2010. -- Created 2004
Ky. Acts ch. 158, sec. 3, effective January 1, 2005.
Legislative Research Commission Note (7/12/2006). 2006 Ky. Acts ch. 247
instructs the Reviser of Statutes to adjust KRS references throughout the
statutes to conform with the 2006 renumbering of the Financial Services Code,
KRS Chapter 286. Such an adjustment has been made in this statute.
Legislative Research Commission Note (1/1/2005). In 2004 Ky. Acts ch. 158,
sec. 3, subsec. (2), a reference is made to "subsection (1) of this Act." Because
it is clear from the subject matter of ch. 158, sec. 3, subsec. (1), that the
reference was intended to be to "subsection (1) of this section" instead, this
manifest clerical or typographical error has been corrected during codification by
the Reviser of Statutes under KRS 7.136(1).
Legislative Research Commission Note (7/12/2012). In subsection (2)(a) of this
statute, a reference to "paragraph (f)" has been changed to read "paragraph
(g)." In subsection (3)(d) of this statute, a reference to "paragraph (a) of
subsection (2) of this section" has been changed to read "subsection (2)(b) of
this section." These corrections are clearly required by the context and by
examination of changes in paragraph designations that were adopted in
successive drafts of 2012 Ky. Acts ch. 59, sec. 2. The Reviser of Statutes has
corrected these manifest clerical or technical errors under KRS 7.136(1).
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