4/18/02 3523s

2002 SESSION

01-2243

01/09

HOUSE BILL 1217

COMMITTEE: Commerce

ANALYSIS

This bill allows a trustee to convert a trust to a unitrust.

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Explanation: Matter added to current law appears in bold italics.

Matter removed from current law appears [in brackets and struckthrough.]

Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.

01-2243

4/18/02 3523s 01/09

STATE OF NEW HAMPSHIRE

In the Year of Our Lord Two Thousand Two

Be it Enacted by the Senate and House of Representatives in General Court convened:

191:1 New Section; Power to Convert to Unitrust. Amend RSA 564-A by inserting after section 3-b the following new section:

564-A:3-c Power to Convert to Unitrust.

I. Unless expressly prohibited by the governing instrument, a trustee may convert a trust into a unitrust as described in this section if all of the following apply:

(a) The trustee determines that the conversion will enable the trustee to better carry out the intent of the settlor or testator and the purposes of the trust.

(b) The trustee gives written notice of the trustee's intention 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 all the sui juris beneficiaries who:

(1) Are currently eligible to receive income from the trust; and

(2) Would receive, if no powers of appointment were exercised, a distribution of principal if the trust were to terminate immediately prior to the giving of notice.

(c) There is at least one sui juris beneficiary under subparagraph (b)(1) and at least one sui juris beneficiary under subparagraph (b)(2).

(d) No sui juris beneficiary objects to the conversion to a unitrust in a writing delivered to the trustee within 60 days of the mailing of the notice under subparagraph (b).

II.(a) The trustee may petition the court to approve the conversion to a unitrust if any of the following apply:

(1) A beneficiary timely objects to the conversion to a unitrust.

(2) There are no sui juris beneficiaries under subparagraph I(b)(1).

(3) There are no sui juris beneficiaries under subparagraph I(b)(2).

(b) A beneficiary may request a trustee to convert to a unitrust. If the trustee does not convert, the beneficiary may petition the court to order the conversion.

(c) 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.

III. In deciding whether to exercise the power conferred by paragraph I, a trustee may consider, among other things, all of the following:

(a) The size of the trust.

(b) The nature and estimated duration of the trust.

(c) The liquidity and distribution requirements of the trust.

(d) The needs for regular distributions and preservation and appreciation of capital.

(e) The expected tax consequences of the conversion.

(f) The assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property or real property; and the extent to which an asset is used by a beneficiary.

(g) To the extent reasonably known to the trustee, the needs of the beneficiaries for present and future distributions authorized or required by the governing instrument.

(h) Whether and to what extent the governing instrument gives the trustee the power to invade principal or accumulate income or prohibits the trustee from invading principal or accumulating income and the extent to which the trustee has exercised a power from time to time to invade principal or accumulate income.

(i) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation.

IV. After a trust is converted to a unitrust, all of the following apply:

(a) 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:

(1) From appreciation of capital;

(2) From earnings and distributions from capital; or

(3) From both.

(b) The trustee shall make regular distributions in accordance with the governing instrument construed in accordance with the provisions of this section.

(c) The term "income" in the governing instrument shall mean an annual distribution (the unitrust distribution) equal to 5 percent (the payout percentage) of the net fair market value of the trust's assets as determined at the end of the calendar year, whether such assets would be considered income or principal under other provisions of this chapter, averaged over the lesser of:

(1) The 3 preceding years; or

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

V. The trustee may in the trustee's discretion from time to time determine all of the following:

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

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

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

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

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

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

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

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

(b) Unless otherwise provided by the governing instrument, 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 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 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.

VII. The trustee or, if the trustee declines to do so, a beneficiary may petition the court to:

(a) Select a payout percentage different than 5 percent.

(b) 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.

(c) Average the valuation of the trust's net assets over a period other than 3 years.

(d) Reconvert from a unitrust.

VIII. A conversion to a unitrust does not affect a 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.

IX. A trustee may not convert a trust into a unitrust in any of the following circumstances:

(a) If 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.

(b) If the unitrust distribution would be made from any amount which 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.

(c) If:

(1) 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

(2) The individual would not be treated as the owner if the trustee did not possess the power to convert.

(d) If:

(1) Possessing or exercising the power to convert would cause all or part of the trust assets to be subject to federal estate or gift tax with respect to an individual; and

(2) The assets would not be subject to federal estate or gift tax with respect to the individual if the trustee did not possess the power to convert.

(e) If the conversion would result in the disallowance of a federal estate tax or gift tax marital deduction which would be allowed if the trustee did not have the power to convert.

(f) If the trustee is a beneficiary of the trust.

X.(a) If subparagraph IX(c), (d), or (f) applies to a trustee and there is more than one trustee, a cotrustee to whom the provision does not apply may convert the trust, unless the exercise of the power by the remaining trustee or trustees is prohibited by the governing instrument.

(b) If subparagraph IX(c), (d), or (f) applies to all the trustees, the trustees may petition the court to direct a conversion.

XI.(a) A trustee may release the power conferred by paragraph I to convert to a unitrust if any of the following apply:

(1) The trustee is uncertain about whether possessing or exercising the power will cause a result described in subparagraph IX(c), (d), or (f).

(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 paragraph IX.

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

191:2 Effective Date. This act shall take effect January 1, 2003.

(Approved: May 15, 2002)

(Effective Date: January 1, 2003)