Chapter 168

2006 -- S 2278 SUBSTITUTE A

Enacted 06/23/06

A N A C T

RELATING TO FIDUCIARIES -- POWERS OF FIDUCIARIES

Introduced By: Senator F Caprio

Date Introduced: February 02, 2006

It is enacted by the General Assembly as follows:

SECTION 1. Chapter 18-4 of the General Laws entitled "Powers of Fiduciaries" is

hereby amended by adding thereto the following sections:

18-4-28. Trustee's power to adjust. -- (a) A trustee may adjust between principal and

income to the extent the trustee considers it to be advisable if the trustee invests and manages

trust assets as a prudent investor and the terms of the trust describe the amount that may or must

be distributed to a beneficiary by referring to the trust's income.

(b) In deciding whether and to what extent to exercise the power conferred by subsection

(a), 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 settler;

(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, the extent to which they consist of financial assets,

interests in closely held enterprises, tangible and intangible personal property or real property, the

extent to which an asset is used by a beneficiary, and whether an asset was purchased by the

trustee or received from the settler;

(6) 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 or prohibit 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;

(8) the actual and anticipated effect of economic conditions on principal and income and

effects of inflation and deflation; and

(9) the anticipated tax consequences of an adjustment.

(1) that diminishes the income interest in a trust that requires all of the income to be used

at least annually to a surviving spouse and for which an estate tax or gift tax martial 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 a 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 included for estate tax purposes in the estate of an individual who has the power

to remove a trustee or appoint a trustee, or both, and the assets would not be included in the estate

of 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 trustee is not a beneficiary, but the adjustment would benefit the trustee directly

or indirectly.

(d) If subsections (c)(5), (6), (7) or (8) herein apply to a trustee and there is more than one

trustee, a co-trustee to whom the provision does not apply may make the adjustment unless the

exercise of the power by the remaining trustee or trustees is not permitted by the terms of the

trust.

(e) A trustee may release the entire power conferred by subsection (a) or may release

only the power to adjust from income to principal or 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 subsections (c)(1) through (6) or (c)(8) herein 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 (c) herein. The release may be permanent or for a specified

period, including a period measured by the life of an individual.

(f) 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 in

subsection (a) herein.

18-4-29. Total return unitrusts - Alternative definition of income. – (a) The following

provisions shall apply to a trust which by its governing instrument, pursuant to court reformation

or pursuant to adjustment in accordance with section 18-4-28 requires the distribution at least

annually of an amount equal to a fixed percentage of not less than three (3) nor more than five

percent (5%) per year of the net fair market value of the trust's assets (the "Unitrust Amount")

valued at least annually, such trust to be referred to as a "Total Return Unitrust":

(1) The Unitrust Amount may be determined by reference to the net fair market value of

the trust's assets in one year or more than one year.

(2) Distribution of such a fixed percentage Unitrust Amount is considered a distribution

of all of the income of the Total Return Unitrust and shall not be considered a fundamental

departure from state law.

(3) Such a distribution of the fixed percentage of not less than three percent (3%) not

more than five percent (5%) is considered to be a reasonable apportionment of the total return of

a Total Return Unitrust.

(4) A Total Return Unitrust that provides for a fixed percentage in excess of five percent

(5%) per year shall be considered to have paid out all of the income of the Total Return Unitrust,

and to have paid out principal of the Total Return Unitrust to the extent that the fixed percentage

payout exceeds five percent (5%) per year.

(5) The governing instrument (including any changes effected by court reformation) may

or may not grant discretion to the trustee to adopt a consistent practice of treating capital gains as

part of the unitrust distribution, to the extent that the Unitrust Amount exceeds the net accounting

income, or it may specify the ordering of such classes of income.

(b) Unless the terms of the governing instrument (including any changes effected by

court reformation) specifically provide otherwise or grant discretion to the trustee as set forth

above, a distribution of the Unitrust Amount shall be considered to have been made from the

following sources in order of priority:

(1) from ordinary income determined as if the trust were not a unitrust;

(2) from ordinary income not allocable to net accounting income;

(3) from net realized short-term capital gains;

(4) from net realized long-term capital gains; and

(5) from the principal of the trust estate.

adjustment by the trustee) may provide that assets used by the trust beneficiary, such as residence

property or tangible personal property, may be excluded from the net fair market value for

computing to the Unitrust Amount. Such use may be considered equivalent to income or the

Unitrust Amount.

SECTION 2. This act shall take effect upon passage and shall apply to all trusts at any

time created and to all fiduciaries, whenever serving.

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LC01058/SUB A

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