The Vermont Statutes Online

Title 14A: Trusts

Chapter 009: Uniform Prudent Investor Act and Unitrusts

• § 901. Prudent investor rule

  (a) Except as otherwise provided in subsection (b) of this section, a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule set forth in this chapter.

  (b) The prudent investor rule, a default rule, may be expanded, restricted, eliminated, or otherwise altered by the provisions of a trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provisions of the trust. (Added 2009, No. 20, § 1.)

• § 902. Standard of care; portfolio strategy; risk and return objectives

  (a) A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

  (b) A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.

  (c) Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries:

  (1) general economic conditions;

  (2) the possible effect of inflation or deflation;

  (3) the expected tax consequences of investment decisions or strategies;

  (4) the role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;

  (5) the expected total return from income and the appreciation of capital;

  (6) other resources of the beneficiaries;

  (7) needs for liquidity, regularity of income, and preservation or appreciation of capital; and

  (8) an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

  (d) A trustee shall make a reasonable effort to verify facts relevant to the investment and management of trust assets.

  (e) A trustee may invest in any kind of property or type of investment consistent with the standards of this chapter. (Added 2009, No. 20, § 1.)

• § 903. Diversification

  A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying. (Added 2009, No. 20, § 1.)

• § 904. Duties at inception of trusteeship

  Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust and with the requirements of this chapter. (Added 2009, No. 20, § 1.)

• § 905. Reviewing compliance

  Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight. (Added 2009, No. 20, § 1.)

• § 906. Language invoking standard of this chapter

  The following terms or comparable language in the provisions of a trust, unless otherwise limited or modified, authorizes any investment or strategy permitted under this chapter: “investments permissible by law for investment of trust funds,” “legal investments,” “authorized investments,” “using the judgment and care under the circumstances then prevailing that persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital,” “prudent man rule,” “prudent trustee rule,” “prudent person rule,” and “prudent investor rule.” (Added 2009, No. 20, § 1.)

• § 907. Total return unitrusts

  (a) In this section:

  (1) “Disinterested person” means a person who is not a “related or subordinate party” (as defined in Section 672(c) of the Internal Revenue Code of 1986, as in effect on the effective date of this title (referred to in this section as the “I.R.C.”)) 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, created by either an inter vivos or a testamentary instrument, which directs or permits the trustee to distribute the net income of the trust to one or more persons, either in fixed 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 such 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” (as defined in I.R.C. § 672(c)) with respect to such distributee.

  (4) “Interested trustee” means any or all of the following:

  (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 which has been converted under and meets the provisions of this section.

  (6) “Settlor” means an individual who created an inter vivos or a testamentary trust.

  (7) “Unitrust amount” means an amount computed as a percentage of the fair market value of the trust.

  (b) A trustee, other than an interested trustee, or when two or more persons are acting as trustee, a majority of the trustees who are not an interested trustee (in either case referred to in this subsection as “trustee”), may, in its sole discretion and without the approval of the Probate Division of the Superior Court:

  (1) Convert an income trust to a total return unitrust;

  (2) Reconvert a total return unitrust to an income trust; or

  (3) Change the percentage used to calculate the unitrust amount and the method used to determine the fair market value of the trust if:

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

  (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; or

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

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

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

  (ii) All qualified beneficiaries; and

  (iii) All persons acting as trust protectors or trust advisors of the trust;

  (C) At least one person receiving such notice in each tier described in subdivision 103(13) of this title (first tier, second tier, and final beneficiaries) is legally competent; and

  (D) No person receiving such notice objects, by written instrument delivered to the trustee, to the proposed action of the trustee within 30 days of receipt of such notice.

  (c) If there is no trustee of the trust other than an interested trustee, the interested trustee or, when two or more persons are acting as trustee and are interested trustees, a majority of such interested trustees may, in its sole discretion and without the approval of the Probate Division of the Superior Court:

  (1) Convert an income trust to a total return unitrust;

  (2) Reconvert a total return unitrust to an income trust; or

  (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:

  (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; or

  (iii) That the percentage used to calculate the unitrust amount and the method used to determine the fair market value of the trust 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; and

  (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 such written policy and this section, and the determinations of the disinterested person to:

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

  (ii) All qualified beneficiaries; and

  (iii) All persons acting as trust protector or trust advisor of the trust;

  (D) At least one person receiving such notice in each tier described in subdivision 103(13) of this title (first tier, second tier, and final beneficiaries) is legally competent; and

  (E) No person receiving such notice objects, by written instrument delivered to the trustee, to the proposed action or the determinations of the disinterested person within 30 days of receipt of such notice.

  (d) A trustee who desires 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 but does not have the ability or elects not to do it under the provisions of subsection (b) or (c) of this section, the trustee may petition the Probate Division of the Superior Court for such order as the trustee deems appropriate. If there is only one trustee of such trust and such trustee is an interested trustee or in the event there are two or more trustees of such trust and a majority of them are interested trustees, the Probate Division of the Superior Court, in its own discretion or on the petition of such trustee or trustees or any person interested in the trust, may appoint a disinterested person who, acting in a fiduciary capacity, shall present such information to the Probate Division of the Superior Court as shall be necessary to enable the Probate Division of the Superior Court to make its determinations hereunder.

  (e) The fair market value of the trust shall be determined at least annually, using such 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 such 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.

  (f) The percentage to be used in determining the unitrust amount shall be a reasonable current return from the trust, in any event not less than three percent nor more than five percent, 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.

  (g) A trustee may act pursuant to subsection (b) or (c) 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 as provided in subsection (b) or (c) of this section, the trustee shall send such 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 such income, to the Attorney General of this State;

  (2) Subdivision (b)(3)(C) or (c)(3)(D) of this section (relating to legal competence of qualified beneficiaries), as the case may be, shall not apply to such action; and

  (3) In each taxable year, the trustee shall distribute the greater of the unitrust amount or the amount required by I.R.C. § 4942.

  (h) 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 I.R.C. § 1222(9), may consider the unitrust amount as paid from net short-term capital gain described in I.R.C. § 1222(5) and then from net long-term capital gain described in I.R.C. § 1222(7); and

  (4) shall then consider the unitrust amount as coming from the principal of the trust.

  (i) In administering a total return unitrust, the trustee may, in its sole discretion but subject to the provisions of the governing instrument, 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 such reconversion; and

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

  (j) Conversion to a total return unitrust under the provisions of this section shall not affect any other provision of the governing instrument, if any, regarding distributions of principal.

  (k) In the case of a trust for which a marital deduction has been taken for federal tax purposes under I.R.C. § 2056 or § 2523, the spouse otherwise entitled to receive the net income of the trust shall have the right, by written instrument delivered to the trustee, to compel the reconversion during that spouse’s lifetime of the trust from a total return unitrust to an income trust, notwithstanding anything in this section to the contrary.

  (l) This section shall be construed as pertaining to the administration of a trust and shall be available to any trust that is administered in Vermont under Vermont law or to any trust, regardless of its place of administration, whose governing instrument provides that Vermont 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 I.R.C. § 642(c)(5) or a charitable-remainder trust described in I.R.C. § 664(d);

  (3) The governing instrument expressly prohibits use of this section by specific reference to the 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 section 907 of this title, 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.

  (m) Any trustee or disinterested person who in good faith takes or fails to take any action under this section shall not be liable to any person affected by such action or inaction, regardless of whether such person received written notice as provided in this section and regardless of whether such person was under a legal disability at the time of the delivery of such notice. Such person’s exclusive remedy shall be to obtain an order of the Probate Division of the Superior Court 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. (Added 2009, No. 20, § 1; amended 2009, No. 92 (Adj. Sess.), § 10; 2009, No. 154 (Adj. Sess.), § 236, eff. February 1, 2011.)

• § 908. Express total return unitrusts

  (a) The following provisions shall apply to a trust that, by its governing instrument, requires or permits the distribution, at least annually, of a unitrust amount equal to a fixed percentage of not less than three nor more than five percent per year of the fair market value of the trust’s assets, valued at least annually, such trust to be referred to in this section as an “express total return unitrust.”

  (b) The unitrust amount for an express total return unitrust may be determined by reference to the fair market value of the trust’s assets in one year or more than one year.

  (c) Distribution of such a fixed percentage unitrust amount is considered a distribution of all of the income of the express total return unitrust.

  (d) An express total return unitrust may provide a mechanism for changing the unitrust percentage similar to the mechanism provided under section 907 of this title, based upon the factors noted therein, and may provide for a conversion from a unitrust to an income trust or a reconversion of an income trust to a unitrust similar to the mechanism under section 907 of this title.

  (e) If an express total return unitrust does not specifically or by reference to section 907 of this title deny a power to change the unitrust percentage or to convert to an income trust, then the trustee shall have such power.

  (f) The distribution of a fixed percentage of not less than three percent nor more than five percent reasonably apportions the total return of an express total return unitrust.

  (g) The trust instrument may 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 distribution exceeds the net accounting income, or it may specify the ordering of such classes of income.

  (h) Unless the terms of the trust specifically provide otherwise, a distribution of the unitrust amount from an express total return unitrust shall be considered to have been made from the following sources in order of priority:

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

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

  (3) after calculating the trust’s capital gain net income as described in the Internal Revenue Code of 1986 (as in effect on the effective date of this title and referred to in this section as the “I.R.C.”), § 1222(9), from net realized short-term capital gain as described in I.R.C. § 1222(5) and then from net realized long-term capital gain described in I.R.C. § 1222(7); and

  (4) from the principal of the trust.

  (i) The trust instrument may provide that:

  (1) assets for which a fair market value cannot be readily ascertained shall be valued using such valuation methods as are deemed reasonable and appropriate; and

  (2) assets used by a trust beneficiary, such as a residence property or tangible personal property, may be excluded from the net fair market value for computing the unitrust amount. (Added 2009, No. 20, § 1.)