Uniform Principle and Income Act (UPAIA)

Unitrust Conversion.  A unitrust, or total return trust, is a trust that pays beneficiaries a fixed percentage of trust assets as opposed to paying them the income from the trust assets.  Under Nevada law, the term “income” means an annual distribution from the trust equal to not less than 3 percent and not more than 5 percent of the net fair market value of the trust’s assets as determined at the end of the calendar year by averaging, over the preceding 3 years, both the income and principal assets of the trust (trustee or beneficiary can petition the court to select a distribution percentage from 3 to 5 percent or to average the value of the trust assets over a period other than 3 years).

Trust can be converted into a unitrust.  Unless expressly prohibited by the trust instrument, UPAIA allows a trustee to convert a trust into a unitrust provided:

1. The trustee determines the conversion to a unitrust will better enable the trustee to carry out the intent of the settlor and the purpose of the trust;
2. The trustee gives written notice of his or her intention to convert the trust to a unitrust, including how the unitrust will operate, the income distributions rate established pursuant to Nevada law (NRS 164.797 and NRS 164.799) and what initial decisions the trustee will make pursuant to these sections to all beneficiaries who: (i) Are presently eligible to receive income from the trust; (ii) Would be eligible, if a power of appointment were not exercised, to receive income from the trust if the interest of any beneficiary eligible to receive income terminated immediately before the trustee gives notice; and (iii) Would receive, if a power of appointment were not exercised, a distribution of principal if the trust terminated before the trustee gives notice.
3. There is at least one beneficiary who is presently eligible to receive income from the trust and at least one beneficiary who would be eligible, if a power of appointment were not exercised, to receive income from the trust if the interest of any beneficiary eligible to receive income terminated immediately before the trustee gives notice; and
4. No beneficiary objects, in writing and delivered to the trustee within 60 days of the mailing of the notice, to the conversion of the trust to a unitrust.

Even if a beneficiary objects, the trustee can petition the court to approve the conversion of the trust into a unitrust and the court shall approve the conversion if the court concludes that the conversion will enable the trustee to better carry out the intent of the settlor and the purpose of the trust.

A beneficiary can request that a trustee convert a trust into a unitrust and if the trustee does not convert the trust, the beneficiary can petition the court to order the conversion.  The court will order the conversion if the court concludes that the conversion will enable the trustee to better carry out the intent of the settlor and the purpose of the trust.

Factors to consider before conversion.  Trustee must consider all factors relevant to the trust and its beneficiaries, including the following to the extent they are relevant in determining whether and to what extent to convert a trust to a unitrust:

1. The nature, purpose and expected duration of the trust;
2. The intent of the settlor;
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 the assets consist of financial assets, interests in closely held enterprises, tangible and intangible 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 by the settlor;
6. The net amount allocated to income under UPAIA and the increase or decrease in the value of the principal assets, which the trustee may estimate as to the 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.

Administration of unitrust.  A trustee of a unitrust may, in the trustee’s discretion, determine:

1. The effective date of a conversion of a unitrust;
2. The provisions for prorating a unitrust distribution for a beneficiary whose right to payments commences or ceases during a calendar year;
3. The frequency of unitrust distributions during a calendar year;
4. The effect of other payments from or contributions to the trust on the trust’s value;
5. How frequently to value non-liquid assets and whether to estimate the value of non-liquid assets;
6. Whether to omit from the calculations of the trust property occupied or possessed by a beneficiary; and
7. Any other matters necessary for the proper functioning of the unitrust.

Adjustment Power.  Under UPAIA, a trustee may adjust between principal and income to the extent the trustee considers this necessary if:  (a) the trustee invests and manages trust assets as a prudent investor; (b) the terms of the trust describe the amount that my or must be distributed to a beneficiary by referring to the trust’s income; and (c) the trust does not disallow such an adjustment, the trust is not silent on allocating receipts and disbursements to or between principal and income, and the trustee determines that he cannot administer the trust impartially, based on what is fair and reasonable to all beneficiaries.

Relevant factors.  Trustee must consider all factors relevant to the trust and its beneficiaries, including the following to the extent they are relevant:

1. The nature, purpose and expected duration of the trust;
2. The intent of the settlor;
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 the assets consist of financial assets, interests in closely held enterprises, tangible and intangible 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 by the settlor;
6. The net amount allocated to income under UPAIA and the increase or decrease in the value of the principal assets, which the trustee may estimate as to the 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.

Prohibited adjustments.  The trustee may not make an adjustment:

1. That diminishes the income interest in a trust that requires all the income to be paid at least annually to a surviving spouse and foe which an estate or gift tax marital deduction would be allowed, in whole or in par, if the trustee did not have the power to make the adjustment;
2. That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;
3. 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;
4. If possessing or exercising the power to make an adjustment causes a natural person to be treated as the owner of all or part of the trust for income tax purposes, and the natural person would not be treated as the owner if the trustee did not possess the power to make an adjustment;
5. If the trustee is a beneficiary of the trust; or
6. If the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly.

UPIA does not impose or create a duty of a trustee to make an adjustment between principal and income pursuant to the provisions of governing a trustee’s adjustment power (NRS 164.795) or ability to convert to a unitrust (NRS164.796).  A trustee will not be liable for: (a) not considering whether to make such an adjustment or (b) deciding not to make such an adjustment.

Investment Decisions:  In general, trustees are to administer a trust or estate in accordance with the terms of the trust or will in spite of the provisions of UPIA. Otherwise, trustees are obligated to comply with the prudent investor rule.  The trustee shall consider the terms, purposes, requirements for distribution and other circumstances of the trust when investing and managing property.  The trustee is to satisfy this standard by exercising reasonable care, skill and caution.  If the trust is a unitrust, the trustee is to follow an investment policy seeking a total return for the investment held by the trust whether or not the return is derived from appreciation of capital, from earnings and distributions of capital or from a combination thereof.

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