14-11014

14-11014. Total return trusts; definitions

A. A trustee, other than an interested trustee, or if two or more persons
are acting as trustee, a majority of the trustees who are not an interested trustee, in
its sole discretion and without the approval of the probate court may:

1. Convert an income trust to a total return unitrust.

2. Reconvert a total return unitrust to an income trust.

3. Change the percentage used to calculate the unitrust amount or the method used
to determine the fair market value of the trust, or both, if:

(a) The trustee adopts a written policy for the trust providing either:

(i) In the case of a trust being administered as an income trust, future
distributions 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, future
distributions from the trust will be net income rather than unitrust amounts.

(iii) That the percentage used to calculate the unitrust amount or the method used
to determine the fair market value of the trust, or both, will be changed as stated in
the policy.

(b) The trustee sends written notice of its intention to take this action, along
with copies of the written policy and this section, to:

(i) The settlor of the trust, if living.

(ii) All living persons who are currently receiving or eligible to receive
distributions of income of the trust.

(iii) Without regard to the exercise of any power of appointment, all living
persons who would receive principal of the trust if the trust were to terminate at the
time of the giving of the notice and all living persons who would receive or be eligible
to receive distributions of income or principal of the trust if the interests of all of
the beneficiaries currently eligible to receive income under item (ii) of this
subdivision were to terminate at the time of the giving of the notice.

(iv) All persons acting as adviser or trust protector of the trust.

(c) At least one person receiving notice under subdivision (b), item (ii) or (iii)
of this subsection is legally competent.

(d) No person receiving notice objects to the proposed action of the trustee by
submitting a written instrument delivered to the trustee within thirty days after receipt
of the notice.

B. If there is no trustee of the trust other than an interested trustee, the
interested trustee or, if two or more persons are acting as trustee and are interested
trustees, a majority of interested trustees, in its sole discretion and without the
approval of the probate court may:

1. Convert an income trust to a total return unitrust.

2. Reconvert a total return unitrust to an income trust.

3. Change the percentage used to calculate the unitrust amount or the method used
to determine the fair market value of the trust, or both, if:

(a) The trustee adopts a written policy for the trust providing either:

(i) In the case of a trust being administered as an income trust, that future
distributions 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 than unitrust amounts.

(iii) That the percentage used to calculate the unitrust amount or the method used
to determine the fair market value of the trust, or both, will be changed as stated in
the policy.

(b) The trustee appoints a disinterested person who, in its sole discretion but
acting in a fiduciary capacity, determines for the trustee:

(i) The percentage to be used to calculate the unitrust amount.

(ii) The method to be used in determining the fair market value of the trust.

(iii) Which assets, if any, are to be excluded in determining the unitrust amount.

(c) The trustee sends written notice of its intention to take such action, along
with copies of the written policy and this section, and the determinations of the
disinterested person to:

(i) The settlor of the trust, if living.

(ii) All living persons who are currently receiving or eligible to receive
distributions of income of the trust.

(iii) Without regard to the exercise of any power of appointment, all living
persons who would receive principal of the trust if the trust were to terminate at the
time of the giving of the notice and all living persons who would receive or be eligible
to receive distributions of income or principal of the trust if the interests of all of
the beneficiaries currently eligible to receive income under item (ii) of this
subdivision were to terminate at the time of the giving of the notice.

(iv) All persons acting as adviser or protector of the trust.

(d) At least one person receiving notice under subdivision (c), item (ii) or (iii)
of this subsection is legally competent.

(e) No person receiving notice objects to the proposed action or the determinations
of the disinterested person by submitting a written instrument delivered to the trustee
within thirty days after receipt of the notice.

C. If any trustee wishes to convert an income trust to a total return unitrust,
reconvert a total return unitrust to an income trust or change the percentage used to
calculate the unitrust amount or the method used to determine the fair market value of
the trust, or both, but does not have the ability to or elects not to do it pursuant to
subsection A or B of this section, the trustee may petition the probate court for an
order as the trustee deems appropriate. If there is only one trustee of such a trust and
that trustee is an interested trustee or if there are two or more trustees of such a
trust and a majority of them are interested trustees, the court, in its discretion or on
petition of the trustee or trustees or of any person interested in the trust, may appoint
a disinterested person who, acting in a fiduciary capacity, shall present information to
the court necessary to enable the court to make its determinations.

D. The fair market value of the trust shall be determined at least annually, using
a valuation date or dates or averages of valuation dates as are deemed appropriate.
Assets for which a fair market value cannot be readily ascertained shall be valued using
valuation methods as are deemed reasonable and appropriate. Assets used by a trust
beneficiary, such as a residence property or tangible personal property, may be excluded
from fair market value for computing the unitrust amount.

E. The percentage to be used in determining the unitrust amount shall be a
reasonable current return from the trust, but not less than three per cent or more than
five per cent, taking into account the intentions of the settlor of the trust as
expressed in the governing instrument, the needs of the beneficiaries, general economic
conditions, projected current earnings and appreciation for the trust, and projected
inflation and its impact on the trust.

F. A trustee may act pursuant to subsection A or B of this section with respect to
a trust for which both income and principal have been permanently set aside for
charitable purposes under the governing instrument and for which a federal estate or gift
tax deduction has been taken, provided that:

1. Instead of sending written notice to the persons described in subsection A,
paragraph 3, subdivision (b), items (ii) and (iii) of this section or pursuant to
subsection B, paragraph 3, subdivision (c), items (ii) and (iii) of this section, as the
case may be, the trustee shall send the written notice to the named charity or charities
then entitled to receive income of the trust and, if no named charity or charities are
entitled to receive all of that income, to the attorney general of this state.

2. Subsection A, paragraph 3, subdivision (c) of this section or subsection B,
paragraph 3, subdivision (d) of this section, as the case may be, does not apply to that
action.

3. In each taxable year, the trustee must distribute the greater of the unitrust
amount and the amount required by section 4942 of the internal revenue code.

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

1. Shall consider the unitrust amount as paid from net accounting income determined
as if the trust were not a unitrust.

2. Shall then consider the unitrust amount as paid from ordinary income not
allocable to net accounting income.

3. After calculating the trust's capital gain net income described in section
1222(9) of the internal revenue code, may consider the unitrust amount as paid from net
short-term capital gain described in section 1222(5) of the internal revenue code and
then from net long-term capital gain described in section 1222(7) of the internal revenue
code.

4. Shall then consider the unitrust amount as coming from the principal of the
trust.

H. In administering a total return unitrust, the trustee, in its sole discretion
but subject to the provisions of the governing instrument, may determine:

1. The effective date of the conversion.

2. The timing of distributions, including provisions for prorating a distribution
for a short year in which a beneficiary's right to payments commences or ceases.

3. Whether distributions are to be made in cash or in kind or partly in cash and
partly in kind.

4. If the trust is reconverted to an income trust, the effective date of the
reconversion.

5. Any other administrative issues as may be necessary or appropriate to carry out
the purposes of this section.

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

J. Notwithstanding anything in this section to the contrary, in the case of a trust
for which a marital deduction has been taken for federal tax purposes under section 2056
or 2523 of the internal revenue code, the spouse otherwise entitled to receive the net
income of the trust has the right, by written instrument delivered to the trustee, to
prohibit conversion to a total return unitrust and to compel the reconversion during that
spouse's lifetime of the trust from a total return unitrust to an income trust.

K. This section pertains to the administration of a trust and is available to any
trust that is administered in this state under Arizona law or to any trust, regardless of
its place of administration, whose governing instrument provides that Arizona law governs
matters of construction or administration unless:

1. The governing instrument reflects an intention that the current beneficiary or
beneficiaries are to receive an amount other than a reasonable current return from the
trust.

2. The trust is a pooled income fund described in section 642(c)(5) of the internal
revenue code or a charitable remainder trust described in section 664(d) of the internal
revenue code.

3. The governing instrument expressly prohibits use of this section by specific
reference to this section or expressly states the settlor's intent that net income not be
calculated as a unitrust amount. A provision in the governing instrument that "the
provisions of Arizona Revised Statutes, section 14-11014, as amended, or any
corresponding provision of future law, shall not be used in the administration of this
trust" or "my trustee shall not determine the distributions to the income beneficiary as
a unitrust amount" or similar words reflecting such intent shall be sufficient to
preclude the use of this section.

L. Any trustee or disinterested person who in good faith takes or fails to take any
action under this section is not liable to any person affected by that action or
inaction, regardless of whether the person received written notice as prescribed in this
section and regardless of whether the person was under a legal disability at the time of
the delivery of the notice. The person's exclusive remedy is to obtain a court order
directing the trustee to convert an income trust to a total return unitrust, to reconvert
from a total return unitrust to an income trust or to change the percentage used to
calculate the unitrust amount.

M. This section is available to trusts in existence on October 1, 2008 or created
after that date.

N. For the purposes of this section:

1. "Disinterested person" means a person who is not a related or subordinate party
pursuant to section 672(c) of the internal revenue code with respect to the person then
acting as trustee of the trust and excludes the settlor of the trust and any interested
trustee.

2. "Income trust" means a trust that is created by either an inter vivos or a
testamentary instrument and that directs or permits the trustee to distribute the net
income of the trust to one or more persons, either in required amounts or proportions, or
in amounts or proportions determined by the trustee and regardless of whether the trust
directs or permits the trustee to distribute the principal of the trust to one or more of
these persons.

3. "Interested distributee" means a person to whom distributions of income or
principal can currently be made who has the power to remove the existing trustee and
designate as successor a person who may be a related or subordinate party pursuant to
section 672(c) of the internal revenue code with respect to that distributee.

4. "Interested trustee" means:

(a) An individual trustee to whom the net income or principal of the trust can
currently be distributed or would be distributed if the trust were then to terminate and
be distributed.

(b) Any trustee who may be removed and replaced by an interested distributee.

(c) An individual trustee whose legal obligation to support a beneficiary may be
satisfied by distributions of income and principal of the trust.

5. "Total return unitrust" means an income trust that has been converted under and
meets the requirements of this section.

6. "Trustee" means any person acting as trustee of the trust, unless expressly
noted otherwise, whether acting in that person's discretion or on the direction of one or
more persons acting in a fiduciary capacity.

7. "Unitrust amount" means an amount computed as a percentage of the fair market
value of the trust.