On March 27, 2013, Governor Herbert signed into law S.B. 198, which permits conversion of traditional income trusts to total return unitrusts without court approval. Prior to this legislation, a traditional trust could be converted to a unitrust in Utah only by filing a petition with the probate court requesting that the trust be modified under Utah Code §75-7-411 (or perhaps §75-7-412). The new statute appears at Utah Code §22-7-101 et. seq.
What is the difference between a traditional income trust and a total return unitrust?
A traditional trust typically has an income beneficiary and one or more remainder beneficiaries. The income beneficiary receives the income from the trust (i.e. interest and dividends generated by the trust assets) on at least an annual basis during his or her lifetime. The remainder beneficiaries receive whatever property is held in the trust at the time of the income beneficiary’s death.
Under a traditional trust, tension often arises between the income beneficiary and the remainder beneficiaries over how the trust assets should be invested. The income beneficiary generally wants the trust property invested in assets that produce a substantial amount of income, such as high-yield bonds, in order to maximize the income that he or she will receive. The income beneficiary does not mind that such assets produce little or no growth. The remainder beneficiaries, on the other hand, want to see the trust property invested in assets with significant appreciation potential, such as growth stocks, in order to maximize the value of the property that they will eventually receive. The remainder beneficiaries do not mind that such assets pay low, if any, dividends and produce little or no income.
A total return unitrust is designed to harmonize the interests of the income beneficiary and the remainder beneficiaries. It does this by providing that the income beneficiary (more appropriately called the “lifetime” beneficiary or the “unitrust” beneficiary) receives not the yearly income from the trust investments, but rather receives a fixed percentage of the value of all the trust assets each year. This value is recalculated every year. The percentage (usually between 3% and 5%) is designed to approximate the income that the trust assets would earn in a typical year. Thus, the lifetime beneficiary receives about what he or she would receive from a traditional trust in the early years, but also has a vested interest in seeing the value of the trust grow, just as do the remainder beneficiaries. The lifetime beneficiary does not care how much income the trust assets generate. He or she will receive the percentage unitrust payment from either income or principal, regardless of how much income the trust produces. With a unitrust, therefore, all of the beneficiaries have a common interest in seeing the value of the trust property grow.
Under Utah’s new statute, the unitrust percentage must be no lower than 3% and no higher than 5%. In order to convert a traditional trust to a unitrust under the new statute, the trustee must send notice of the proposed conversion to the settlor of the trust (if living) and to all trust beneficiaries who are eligible to receive distributions at that time or who would be eligible to receive distributions if the trust terminated at that time. If a beneficiary objects to the conversion, the trust may be converted only with the approval of the court. Only a disinterested trustee may convert a trust without court approval under the new statute.
For a discussion of estate planning in Utah, see the home page of this website.
Rust Tippett is the author of this blog post.
Copyright 2013 UNLEPI, LLC, a Utah limited liability company. All Rights Reserved.
This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC. The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.