30-3119.01 Conversion to total return trust. - Nebraska Statutes

30-3119.01. Conversion to total return trust.(1) Unless expressly prohibited by a trust, a trustee may release thepower to adjust described in section 30-3119 and convert a trust to a totalreturn trust as described in this section if all of the following apply:(a) The trustee determines that the conversion will enable the trusteeto better carry out the intent of the settlor and the purpose of the trust;(b) The trustee sends written notice of the trustee's decision to convertthe trust to a total return trust specifying a prospective effective datefor the conversion which shall not be sooner than sixty days after the noticeis sent and which shall include a copy of this section of law and shall specificallyrecite the time period within which a timely objection may be made. Such noticeshall be sent to the qualified beneficiaries determined as of the date thenotice is sent and assuming nonexercise of all powers of appointment;(c) There are one or more legally competent beneficiaries who are currentlyeligible to receive income from the trust and one or more legally competentbeneficiaries who would receive a distribution of principal if the trust wereto terminate immediately before the notice is given; and(d) No beneficiary has objected in writing to the conversion to a totalreturn trust and delivered such objection to the trustee within sixty daysafter the notice was sent.(2) Conversion to a total return trust or reconversion to an incometrust may be made by agreement between the trustee and all qualified beneficiariesof the trust. The trustee and all qualified beneficiaries of the trust mayalso agree to modify the distribution percentage, except that the trusteeand the qualified beneficiaries may not agree to a distribution percentageof less than three percent or greater than five percent. The agreement mayinclude any other actions a court could properly order pursuant to subsection(7) of this section.(3)(a) The trustee may, for any reason, elect to petition the courtto order conversion to a total return trust including, without limitation,the reason that conversion under subsection (1) of this section is unavailablebecause:(i) A beneficiary timely objects to the conversion to a total returntrust;(ii) There are no legally competent beneficiaries who are currentlyeligible to receive income from the trust; or(iii) There are no legally competent beneficiaries who would receivea distribution of principal if the trust were to terminate immediately.(b) A beneficiary may request the trustee to convert to a total returntrust or adjust the distribution percentage pursuant to this subsection. Ifthe trustee declines or fails to act within six months after receiving a writtenrequest from a beneficiary to do so, the beneficiary may petition the courtto order the conversion or adjustment.(c) The trustee may petition the court prospectively to reconvert froma total return trust or to adjust the distribution percentage if the trusteedetermines that the reconversion or adjustment will enable the trustee tobetter carry out the purposes of the trust. A beneficiary may request thetrustee to petition the court prospectively to reconvert from a total returntrust or adjust the distribution percentage. If the trustee declines or failsto act within six months after receiving a written request from a beneficiaryto do so, the beneficiary may petition the court to order the reconversionor adjustment.(d)(i) In a judicial proceeding instituted under this subsection, thetrustee may present opinions and reasons concerning:(A) The trustee's support for or opposition to a conversion to a totalreturn trust, a reconversion from a total return trust, or an adjustment ofthe distribution percentage of a total return trust, including whether thetrustee believes conversion, reconversion, or adjustment of the distributionpercentage would enable the trustee to better carry out the purposes of thetrust; and(B) Any other matter relevant to the proposed conversion, reconversion,or adjustment of the distribution percentage.(ii) A trustee's actions undertaken in accordance with this subsectionshall not be deemed improper or inconsistent with the trustee's duty of impartialityunless the court finds from all the evidence that the trustee acted in badfaith.(e) The court shall order conversion to a total return trust, reconversionprospectively from a total return trust, or adjustment of the distributionpercentage of a total return trust if the court determines that the conversion,reconversion, or adjustment of the distribution percentage will enable thetrustee to better carry out the purposes of the trust.(f) If a conversion to a total return trust is made pursuant to a courtorder, the trustee may reconvert the trust to an income trust only:(i) Pursuant to a subsequent court order; or(ii) By filing with the court an agreement made pursuant to subsection(2) of this section to reconvert to an income trust.(g) Upon a reconversion the power to adjust, as described in section 30-3119 and as it existed before the conversion, shall be revived.(h) An action may be taken under this subsection no more frequentlythan every two years, unless a court for good cause orders otherwise.(4)(a) During the time that a trust is a total return trust, the trusteeshall administer the trust in accordance with the provisions of this subsectionas follows, unless otherwise expressly provided by the terms of the trust:(i) The trustee shall invest the trust assets seeking a total returnwithout regard to whether the return is from income or appreciation of principal;(ii) The trustee shall make income distributions in accordance withthe trust subject to the provisions of this section;(iii) The distribution percentage for any trust converted to a totalreturn trust by a trustee in accordance with subsection (1) of this sectionshall be four percent, unless a different percentage has been determined inan agreement made pursuant to subsection (2) of this section or ordered bythe court pursuant to subsection (3) of this section; and(iv)(A) The trustee shall pay to a beneficiary in the case of an underpaymentwithin a reasonable time and shall recover from a beneficiary in the caseof an overpayment either by repayment by the beneficiary or by withholdingfrom future distributions to the beneficiary:(I) An amount equal to the difference between the amount properly payableand the amount actually paid; and(II) Interest compounded annually at a rate per annum equal to the distributionpercentage in the year or years during which the underpayment or overpaymentoccurs.(B) For purposes of subdivision (4)(a)(iv) of this section, accrualof interest may not commence until the beginning of the trust year followingthe year in which the underpayment or overpayment occurs.(b) For purposes of this subsection:(i) Distribution amount means an annual amount equal to the distributionpercentage multiplied by the average net fair market value of the trust'sassets. The average net fair market value of the trust's assets shall be thenet fair market value of the trust's assets averaged over the lesser of:(A) The three preceding years; or(B) The period during which the trust has been in existence; and(ii) Income, as that term appears in the governing instrument, meansthe distribution amount.(5) The trustee may determine any of the following matters in administeringa total return trust as the trustee deems necessary or helpful for the properfunctioning of the trust:(a) The effective date of a conversion to a total return trust pursuantto subsection (1) of this section;(b) The manner of prorating the distribution amount for a short yearin which a beneficiary's interest commences or ceases, or, if the trust isa total return trust for only part of the year or the trustee may elect totreat the trust year as two separate years, the first of which ends at theclose of the day on which the conversion or reconversion occurs, and the secondof which ends at the close of the trust year;(c) Whether distributions are made in cash or in kind;(d) The manner of adjusting valuations and calculations of the distributionamount to account for other payments from, or contributions to, the trust;(e) Whether to value the trust's assets annually or more frequently;(f) Which valuation dates to use and how many valuation dates to use;(g) Valuation decisions concerning any asset for which there is no readilyavailable market value, including:(i) How frequently to value such an asset;(ii) Whether and how often to engage a professional appraiser to valuesuch an asset; and(iii) Whether to exclude the value of such an asset from the net fairmarket value of the trust's assets for purposes of determining the distributionamount. For purposes of this section, any such asset so excluded shall bereferred to as an excluded asset and the trustee shall distribute any netincome received from the excluded asset as provided for in the governing instrument,subject to the following principles:(A) The trustee shall treat each asset for which there is no readilyavailable market value as an excluded asset unless the trustee determinesthat there are compelling reasons not to do so and the trustee considers allrelevant factors including the best interests of the beneficiaries;(B) If tangible personal property or real property is possessed or occupiedby a beneficiary, the trustee may not limit or restrict any right of the beneficiaryto use the property in accordance with the governing instrument regardlessof whether the trustee treats the property as an excluded asset; and(C) By way of example and not by way of limitation, assets for whichthere is a readily available market value include cash and cash equivalents;stocks, bonds, and other securities and instruments for which there is anestablished market on a stock exchange, in an over-the-counter market, orotherwise; and any other property that can reasonably be expected to be soldwithin one week of the decision to sell without extraordinary efforts by theseller. By way of example and not by way of limitation, assets for which thereis no readily available market value include stocks, bonds, and other securitiesand instruments for which there is no established market on a stock exchange,in an over-the-counter market, or otherwise; real property; tangible personalproperty; and artwork and other collectibles; and(h) Any other administrative matter that the trustee determines is necessaryor helpful for the proper functioning of the total return trust.(6)(a) Expenses, taxes, and other charges that would otherwise be deductedfrom income if the trust was not a total return trust may not be deductedfrom the distribution amount.(b) Unless otherwise provided by the governing instrument, the distributionamount each year shall be deemed to be paid from the following sources forthat year in the following order:(i) Net income determined as if the trust was not a total return trust;(ii) Other ordinary income as determined for federal income tax purposes;(iii) Net realized short-term capital gains as determined for federalincome tax purposes;(iv) Net realized long-term capital gains as determined for federalincome tax purposes;(v) Trust principal comprising assets for which there is a readily availablemarket value; and(vi) Other trust principal.(7)(a) The court may order any of the following actions in a proceedingbrought by a trustee or a beneficiary pursuant to subdivision (a), (b), or(c) of subsection (3) of this section:(i) Select a distribution percentage other than four percent, exceptthat the court may not order a distribution percentage of less than threepercent or greater than five percent;(ii) Average the valuation of the trust's net assets over a period otherthan three years;(iii) Reconvert prospectively from a total return trust or adjust thedistribution percentage of a total return trust;(iv) Direct the distribution of net income, determined as if the trustwere not a total return trust, in excess of the distribution amount as toany or all trust assets if the distribution is necessary to preserve a taxbenefit; or(v) Change or direct any administrative procedure as the court determinesis necessary or helpful for the proper functioning of the total return trust.(b) Nothing in this subsection shall be construed to limit the equitablejurisdiction of the court to grant other relief as the court deems proper.(8)(a) In the case ofa trust for which a marital deduction has been taken for federal tax purposesunder section 2056 or section 2523 of the Internal Revenue Code of 1986, asamended, the spouse otherwise entitled to receive the net income of the trustshall have the right, by written instrument delivered to the trustee, to compelthe reconversion during that spouse's lifetime of the trust from a total returntrust to an income trust, notwithstanding anything in this section to thecontrary.(b) Conversion to a total return trust shallnot affect any provision in the governing instrument:(i) That directs or authorizes the trustee to distribute principal;(ii) That directs or authorizes the trustee to distribute a fixed annuityor a fixed fraction of the value of trust assets;(iii) That authorizes a beneficiary to withdraw a portion or all ofthe principal; or(iv) That in any manner diminishes an amount permanently set aside forcharitable purposes under the governing instrument unless both income andprincipal are set aside.(9) If a particular trustee is also a beneficiary of the trust and conversionor failure to convert would enhance or diminish the beneficial interest ofthat trustee or, if possession or exercise of the conversion power by a particulartrustee alone would cause any individual to be treated as owner of a partof the trust for federal income tax purposes or cause a part of the trustto be included in the gross estate of any individual for federal estate taxpurposes, then that particular trustee may not participate as a trustee inthe exercise of the conversion power, except that:(a) The trustee may petition the court under subdivision (a) of subsection(3) of this section to order conversion in accordance with this section; and(b) A cotrustee or cotrustees to whom this subsection does not applymay convert the trust to a total return trust in accordance with subsection(1) or (2) of this section.(10) A trustee may irrevocably release the power granted by this sectionif the trustee reasonably believes the release is in the best interests ofthe trust and its beneficiaries. The release may be personal to the releasingtrustee or it may apply generally to some or all subsequent trustees. Therelease may be for any specified period, including a period measured by thelife of an individual.(11)(a) A trustee who reasonably and in good faith takes any actionor omits to take any action under this section is not liable to any personinterested in the trust. A discretionary act or omission by a trustee underthis section shall be presumed to be reasonable and undertaken in good faithunless the act or omission is determined by a court to have been an abuseof discretion.(b) If a trustee reasonably and in good faith takes or omits to takeany action under this section and a person interested in the trust opposesthe act or omission, the person's exclusive remedy shall be to seek an orderof the court directing the trustee to:(i) Convert the trust to a total return trust;(ii) Reconvert from a total return trust;(iii) Change the distribution percentage; or(iv) Order any administrative procedures the court determines are necessaryor helpful for the proper functioning of the trust.(c) A claim for relief under this subsection that is not barred by adjudication,consent, or limitation is nevertheless barred as to any beneficiary who hasreceived a statement fully disclosing the matter unless a proceeding to assertthe claim is commenced within six months after receipt of the statement. Abeneficiary is deemed to have received a statement if it is received by thebeneficiary or the beneficiary's representative in a manner described in section 30-2222 or 30-3121.(12) A trustee has no duty to inform a beneficiary about the availabilityand provisions of this section. A trustee has no duty to review the trustto determine whether any action should be taken under this section unlessthe trustee is requested in writing by a qualified beneficiary to do so.(13)(a) This section applies to trusts in existence on September 4,2005, and to trusts created on or after such date.(b) This section shall be construed to apply to the administration ofa trust that is administered in Nebraska under Nebraska law or that is governedby Nebraska law with respect to the meaning and effect of its terms unless:(i) The trust is a trust described in the Internal Revenue Code of 1986,as amended, 26 U.S.C. section 170(f)(2)(B), 664(d), 1361(d), 2702(a)(3),or 2702(b);(ii) Conversion of a trust to a total return trust is clearly contraryto the manifestation of the settlor's intent as expressed in the trust instrumentor as may be established by other evidence that would be admissible in a judicialproceeding; or(iii) The terms of a trust in existence on September 4, 2005, incorporateprovisions that operate as a total return trust. The trustee or a beneficiaryof such a trust may proceed under section 30-3121 to adopt provisions in thissection that do not contradict provisions in the governing instrument. SourceLaws 2005, LB 533, § 35; Laws 2010, LB760, § 1.Effective Date: July 15, 2010