N.Y. Estates, Powers & Trusts Law § 11-2.4: Optional unitrust provision

§ 11-2.4 Optional unitrust provision

(a) Unless the terms of the trust provide otherwise, the net income of

any trust to which this section applies shall mean the unitrust amount

as determined hereunder.

(b) Unitrust amount.

(1) For the first year of the trust as a unitrust, including a short

year if applicable, the "unitrust amount" for the year shall mean an

amount equal to four percent of the net fair market values of the assets

held in the trust at the beginning of the first business day of the

current valuation year.

(2) For the second year of a trust as a unitrust, including a first

short year if applicable, the "unitrust amount" for the year shall mean

an amount equal to four percent multiplied by a fraction, the numerator

of which shall be the sum of (A) the net fair market values of the

assets held in the trust at the beginning of the first business day of

the current valuation year and (B) the net fair market values of the

assets held in the trust at the beginning of the first business day of

the prior valuation year, and the denominator of which shall be two.

(3) Commencing with the third year of a trust as a unitrust, including

a first short year if applicable, the "unitrust amount" for a current

valuation year of the trust shall mean an amount equal to four percent

multiplied by a fraction, the numerator of which shall be the sum of (A)

the net fair market values of the assets held in the trust at the

beginning of the first business day of the current valuation year and

(B) the net fair market values of the assets held in the trust at the

beginning of the first business day of each prior valuation year, and

the denominator of which shall be three.

(4) The unitrust amount for the current valuation year as computed in

accordance with subparagraph (b)(1), (2) or (3), as adjusted in

accordance with this subparagraph, shall be proportionately reduced for

any corpus distributions to beneficiaries mandated by the terms of the

trust, in whole or in part (other than distributions of the unitrust

amount), and shall be proportionately increased for the receipt, other

than a receipt that represents a return on investment, of any additional

corpus into the trust within a current valuation year.

(5) For purposes of clause (b)(2)(B), the net fair market values of

the assets held in the trust at the beginning of the first business day

of a prior valuation year shall be adjusted to reflect any distributions

to beneficiaries mandated by the terms of the trust, in whole or in part

(other than distributions of the unitrust amount), or receipts (other

than receipts that represent a return on investment) of any additional

principal into the trust, which have occurred after the first day of

such prior valuation year and by the close of the first day of the

current valuation year, as if the distribution or receipt had occurred

on the first day of such prior valuation year.

(6) In the case of a short year, the trustee shall prorate the

unitrust amount on a daily basis. The trustee shall prorate any

adjustment under subparagraph (b)(4) on a daily basis.

(7) In the case where the unitrust amount has been incorrectly

determined either in a current valuation year or in a prior valuation

year, then within a reasonable time (not to exceed eighteen months)

after the error was made, the trustee shall make any non-material

adjustments and pay to the underpaid beneficiary (in case of

non-material underpayment) or shall recover from the overpaid

beneficiary (in case of non-material overpayment) an amount equal to the

difference between the unitrust amount properly payable and any amount

actually paid for any completed valuation year of the trust and shall

properly adjust the unitrust amount for the current valuation year if

affected non-materially by prior incorrect determination of a unitrust

amount. A material correction shall require approval of the surrogate if

applied for by the trustee or an interested party.

(c) Other definitions and special rules. For purposes of this section:

(1) A "current beneficiary" is a person to whom the income (within the

meaning of this section or otherwise) of the trust is payable, or in the

discretion of the trustee may be paid, in whole or in part, during the

current valuation year.

(2) The term "current valuation year" shall mean the year of the trust

for which the unitrust amount is being determined.

(3) The term "prior valuation year" shall mean each of the two years

of the trust immediately preceding the current valuation year.

(4) The term "year" means a calendar year. A "short year" constitutes

a portion of a calendar year that begins when the interest of the

current beneficiary or class of current beneficiaries begins or ends

when the interest of the current beneficiary or class of current

beneficiaries ends.

(5) "Net fair market value" shall mean the fair market value of each

asset comprising the trust reduced by the fair market value of any

outstanding interest-bearing obligations of the trust, whether allocable

to a specific asset or otherwise. Fair market value of an asset may be

determined by any appropriate technique adopted and consistently applied

by the trustee, and such techniques may include, but are not limited to,

use of the asset's value at the close of business on the previous

business day, and notwithstanding that such day may be in a prior year

or be a day on which the trust was not subject to this section.

(6) In determining the sum of the net fair market values of the assets

held in the trust for purposes of subparagraphs (b)(1), (2) and (3), and

in determining whether an adjustment is required in accordance with

subparagraph (b)(4) or (5), there shall not be taken into account the

value:

(A) of any residential property or any tangible personal property

that, as of the beginning of the first business day of the current

valuation year, one or more current beneficiaries of the trust have or

had the right to occupy, or have or had the right to possess or control

(other than in his or her capacity as a trustee of the trust), and

instead the right of occupancy or the right to possession or control

shall be deemed to be the unitrust amount with respect to such

residential property or such tangible personal property; provided,

however, that the unitrust amount shall be adjusted in accordance with

subparagraphs (b) (4) and (5) for partial distributions from or receipt

into the trust of such residential property or tangible personal

property during the current valuation year.

(B) of any asset specifically given to a beneficiary and the return on

investment on such property, which return on investment shall be

distributable to such beneficiary.

(C) of any assets while held in a testator's estate.

(D) of (i) amounts paid or distributed to the trust by a decedent's

estate, another trust or another payor, as income pursuant to article

11-A attributable to an asset or amount due to the trust for a period

prior to its payment or distribution to the trust, unless and except to

the extent that the unitrust trustee, having the power to accumulate

income, shall have determined to accumulate and add such income to

principal, and such unaccumulated net income shall be distributable to

the beneficiaries of the trust; or (ii) any amount paid or distributed

by such decedent's estate, other trust or other payor, directly to

beneficiaries of the trust in satisfaction of their ultimate entitlement

to such income.

(7) In determining the net fair market value of each asset held in the

trust pursuant to subparagraphs (b)(1), (2) and (3), the trustee shall,

not less often than annually, determine the fair market value of each

asset of the trust that consists primarily of real property or other

property that is not traded on a regular basis in an active market, and

all such determinations shall, if made reasonably and in good faith, be

conclusive on all persons interested in the trust. Such determination

shall be conclusively presumed to have been made reasonably and in good

faith unless proven otherwise in a proceeding commenced by or on behalf

of a person interested in the trust within three years after the close

of the year in which the determination is made.

(8) The term "trustee" does not include a personal representative.

(9) The term "trust" does not include an estate.

(d) Commencement of current beneficiary's interest.

(1) The interest of a current beneficiary or class of current

beneficiaries in the unitrust amount begins on the date on which this

section becomes applicable to the trust pursuant to clause (e)(4)(A), or

if later the date assets first become subject to the trust. An asset

becomes subject to a trust:

(A) on the date it is transferred to the trust in the case of an asset

that is transferred to a trust during the transferor's life;

(B) on the date it is transferred to the trust in the case of an asset

that is transferred to a testamentary trust created under a will;

(C) on the date of an individual's death in the case of an asset that

is transferred to a trust by a third party by reason of the individual's

death;

(D) on the date of an individual's death in the case of a trust that

owns life insurance on the individual's life; or

(E) on the date a revocable trust becomes irrevocable in the case of

assets then held in the trust.

(2) A trust which continues in existence for the benefit of one or

more new current beneficiaries or class of current beneficiaries upon

the termination of the interests of all prior current beneficiaries or

classes of prior current beneficiaries, shall be deemed to be a new

trust, and, for purposes of clauses (e)(1)(B) and (e)(4)(A) and

subparagraph (d)(1), assets shall be deemed to first become subject to

the trust on the date of the termination of such interests.

(e) Trusts to which section applies.

(1) This section shall apply to any trust if:

(A) the governing instrument provides that this section shall apply to

such trust, or

(B) (i) with respect to a trust in existence prior to January first,

two thousand two, on or before December thirty-first, two thousand five,

the trustee, with the consent by or on behalf of all persons interested

in the trust or in his, her or its discretion, elects to have this

section apply to such trust, or

(ii) with respect to a trust not in existence prior to January first,

two thousand two, on or before the last day of the second full year of

the trust beginning after assets first become subject to the trust, the

trustee, with the consent by or on behalf of all persons interested in

the trust or in his, her or its discretion, elects to have this section

apply to such trust.

(iii) An election in accordance with this subparagraph shall be made

by an instrument, executed and acknowledged, and delivered to the

creator of the trust, if he or she is then living, to all persons

interested in the trust or to their representatives and to the court, if

any, having jurisdiction over the trust.

(2) (A) The court having jurisdiction of a trust to which this section

otherwise would apply by reason of subparagraph (e)(1) or clause

(e)(2)(B), upon the petition of the trustee or any beneficiary of the

trust and upon notice to all persons interested in the trust, may direct

that article 11-A shall apply to the trust and that this section shall

not apply to the trust; and

(B) At any time, the court having jurisdiction of a trust to which

this section otherwise would not apply, upon the petition of the trustee

or any beneficiary of the trust and upon notice to all persons

interested in the trust, may direct that this section shall apply to the

trust and that article 11-A shall not apply to the trust.

(3) For the purposes of this section, the phrase "all persons

interested in the trust" shall mean all the persons upon whom service of

process would be required in a proceeding for the judicial settlement of

the account of the trustee, taking into account section three hundred

fifteen of the surrogate's court procedure act. Where a person

interested in the trust has the same interest as a person under a

disability, it shall not be necessary to obtain the consent of or notify

the person under a disability.

(4) (A) This section shall apply to a trust with respect to which

there is:

(i) a direction in the governing instrument in accordance with clause

(e)(1)(A), as of the date provided for in such governing instrument, or

if there is no provision then as of the day on which assets first become

subject to the trust;

(ii) an election in accordance with clause (e)(1)(B), as of the date

specified in the election, which may be any day within the year in which

the election is made or the first day of the year commencing after the

election is made; or a

(iii) court decision rendered in accordance with clause (e)(2)(B) as

of the date specified by the court in its decision;

Provided, however, that if later than any date set by this clause,

this section shall not apply to the trust until January first, two

thousand two.

(B) If this section applied to a trust with respect to which a court

decision is rendered in accordance with clause (e)(2)(A), this section

shall cease to apply to such trust and article 11-A shall apply to the

trust as of the first day of the year beginning after the decision of

the court becomes final, unless the court in its decision provides

otherwise.

(5) In the determination of whether article 11-A or this section

should apply to a trust:

(A) All of the factors relevant to the trust and its beneficiaries,

including the following factors to the extent they are relevant, shall

be considered:

(i) the nature, purpose, and expected duration of the trust;

(ii) the intent of the creator of the trust;

(iii) the identity and circumstances of the beneficiaries;

(iv) the needs for liquidity, regularity of payment, and preservation

and appreciation of capital;

(v) the assets held in the trust; the extent to which they consist of

financial assets, interests in closely held enterprises, tangible and

intangible personal 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 from the creator of the trust.

(B) In any proceeding brought pursuant to subparagraph (e)(2), there

shall be a rebuttable presumption that this section should apply to the

trust.

(f) Trusts to which this section shall not apply. This section shall

not apply to a trust if:

(1) the governing instrument provides in substance that this section

shall not apply;

(2) the trust is a pooled income fund described in section 642(c)(5)

of the United States internal revenue code of 1986;

(3) the trust is a charitable remainder annuity trust or a charitable

remainder unitrust described in section 664 of the United States

internal revenue code of 1986; or

(4) the trust is an irrevocable lifetime trust which provides for

income to be paid for the life of a grantor, and possessing or

exercising the power to make this section apply would cause any public

benefit program to consider additional amounts of principal or income to

be an available resource or available income, and the principal or

income or both would in each case not be considered an available

resource or income, if there was no power to make this section apply,

if, based upon the facts and circumstances surrounding the formation of

such trust, it can reasonably be concluded that the primary purpose for

the establishment of the trust was to ensure that the trust principal

would not be treated as an available resource for the purposes of a

governmental assistance program.