{"data":{"id":"us-ky/krs-386.454","jurisdiction":"us-ky","citation":"KRS 386.454","heading":"Fiduciary's election to have certain standards apply to administration of","body":"trust or estate -- Power to adjust between principal and income -- Conversion\nto unitrust -- Powers under previous version of section.\n(1) (a) A fiduciary may, after providing notice as required under paragraph (g) of this\nsubsection, adjust between principal and income to the extent the fiduciary\nconsiders necessary, the terms of the trust or will describe the amount that\nmay or shall be distributed to a beneficiary by referring to the trust's or estate's\nincome, and the fiduciary determines, after applying the rules in KRS\n386.452(1), that the fiduciary is unable to comply with KRS 386.452(2).\nAdditionally, a fiduciary may reserve the right to convert the trust to a unitrust\nunder subsection (2) of this section in the future.\n(b) In deciding whether and to what extent to exercise the power conferred by this\nsubsection, a fiduciary shall consider all factors relevant to the trust or estate\nand its beneficiaries, including the fo llowing factors to the extent they are\nrelevant:\n1. The nature, purpose, and expected duration of the trust or estate;\n2. The intent of the settlor or testator;\n3. The identity and circumstances of the beneficiaries;\n4. The needs for liquidity, regularity of income, and preservation and\nappreciation of capital;\n5. The assets held in the trust or estate and:\na. The extent to which they consist of financial assets, interests in\nclosely held enterprises, tangible and intangible personal property,\nor real property;\nb. The extent to which an asset is used by a beneficiary; and\nc. Whether an asset was purchased by the fiduciary or received from\nthe settlor or testator;\n6. The net amount allocated to income under the other sections in this\nchapter and the increase or decrease in the value of the principal assets,\nwhich the fiduciary may estimate as to assets for which market values\nare not readily available;\n7. Whether and to what extent the terms of the trust or will give the\nfiduciary the power to invade principal or accumulate income or prohibit\nthe fiduciary from invading principal or accumulating income, and the\nextent to which the fiduciary has exercised a power from time to time to\ninvade principal or accumulate income;\n8. The actual and anticipated effect of economic conditions and market\nvolatility on principal and income and effects of inflation and deflation;\nand\n9. The anticipated tax consequences of an adjustment.\n(c) A fiduciary shall not make an adjustment:\n1. That diminishes the income interest in a trust that requires all of the\nincome to be paid at least annually to a spouse and for which an estate\ntax or gift tax marital deduction would be allowed, in whole or in part, if\nthe fiduciary did not have the power to make the adjustment;\n2. That reduces the actuarial value of the income interest in a trust to which\na person transfers property with the intent to qualify for a gift tax\nexclusion;\n3. That changes the amount payable to the beneficiary as a fixed annuity or\na fixed fraction of the value of the trust assets;\n4. From any amount that is permanently set aside for charitable purposes\nunder a will or the terms of a trust unless both income and prin cipal are\nso set aside;\n5. If possessing or exercising the power to make an adjustment causes an\nindividual to be treated as the owner of all or part of the trust or estate\nfor income tax purposes, and the individual would not be treated as the\nowner if the fiduciary did not possess the power to make an adjustment;\n6. If possessing or exercising the power to make an adjustment causes all\nor part of the trust or estate assets to be included for estate tax purposes\nin the estate of an individual who has the p ower to remove a fiduciary or\nappoint a fiduciary, or both, and the assets would not be included in the\nestate of the individual if the fiduciary did not possess the power to\nmake an adjustment;\n7. If the fiduciary is a beneficiary of the trust or estate; or\n8. If the fiduciary is not a beneficiary, but the adjustment would benefit the\nfiduciary directly or indirectly; except that any effect on the fiduciary's\ncompensation shall not preclude an adjustment so long as the fiduciary's\nfees are reasonable and otherwise comply with the applicable law.\n(d) If paragraph (c)5., 6., 7., or 8. of this subsection applies to a fiduciary and\nthere is more than one (1) fiduciary or an additional fiduciary who is\nappointed by court order, a binding agreement, or otherwise as provided by\nlaw, a co -fiduciary to whom the provision does not apply may make an\nadjustment unless the exercise of the power by the remaining fiduciary or\nfiduciaries is not permitted by the terms of the trust or will. If paragraph (c)5.,\n6., 7., or 8. of this subsection restricts all fiduciaries from possessing or\nexercising a power under this section, the fiduciary may petition the District\nCourt for the court to effect the intended conversion or action.\n(e) A fiduciary may release the entire power con ferred by this subsection or may\nrelease only the power to adjust from income to principal or the power to\nadjust from principal to income if the fiduciary is uncertain about whether\npossessing or exercising the power will cause a result described in parag raph\n(c)1. to 6. of this subsection or if the fiduciary determines that possessing or\nexercising the power will or may deprive the trust or estate of a tax benefit or\nimpose a tax burden not described in paragraph (c) of this subsection. The\nrelease may be  permanent or for a specified period, including a period\nmeasured by the life of an individual. Further, a fiduciary may divide a trust or\nestate into one (1) or more fractional shares if the division does not change the\nbeneficial interests.\n(f) Terms of a trust or will that limit the power of a fiduciary to make an\nadjustment between principal and income do not affect the application of this\nsection unless it is clear from the terms of the trust or will that the terms are\nintended to deny the fiduciary th e power of adjustment conferred by this\nsubsection.\n(g) A fiduciary shall not make an election or adjustment under this section unless\nall of the following apply:\n1. A fiduciary shall give written notice of the fiduciary's intention to make\nan adjustment t o each beneficiary, by certified mail with restricted\ndelivery and return receipt, who, on the date the notice is given:\na. Is a distributee or permissible distributee of trust income or\nprincipal; or\nb. Would be a distributee or permissible distributee of  principal if the\ninterests of the distributees described in subparagraph 1.a. of this\nparagraph terminated and the trust then terminated immediately\nbefore the notice was given and if no powers of appointment were\nexercised;\n2. There is at least one (1) b eneficiary under subparagraph 1.a. of this\nparagraph and at least one (1) other reasonably ascertainable person who\nis a remainder beneficiary under subparagraph 1.b. of this paragraph;\nand\n3. Every beneficiary to whom notice was sent pursuant to subparagr aph 1.\nof this paragraph has received the notice as evidenced by the certified\nmail return receipt and no beneficiary objects to the adjustment or\nelection in writing delivered to the fiduciary within thirty (30) days after\nthe notice is given under subparagraph 1. of this paragraph.\n(h) The fiduciary may petition the District Court under this subsection to order an\nadjustment or an election if any of the following apply:\n1. A beneficiary timely objects to the adjustment or the election, or a\nbeneficiary has not received the notice as evidenced by the certified mail\nreturn receipt;\n2. There is no reasonably ascertainable beneficiary under paragraph (g)1.a.\nof this subsection; or\n3. There is no reasonably ascertainable beneficiary under paragraph (g)1.b.\nof this subsection.\n(2) The following rules shall govern a fiduciary's conversion of a trust to a unitrust:\n(a) Unless expressly prohibited by the terms of a trust, a fiduciary may release the\npower to make adjustments under subsection (1) of this section and convert to\na unitrust as described in this subsection, if all of the following apply:\n1. The fiduciary determines that the conversion will enable the fiduciary\nbetter to carry out the intent of the settlor or testator and the p urposes of\nthe trust;\n2. The fiduciary gives written notice of the fiduciary's intention to release\nthe power to adjust and to convert the trust into a unitrust and of how the\nunitrust will operate, including what initial decisions the fiduciary will\nmake under this subsection, to each beneficiary, by certified mail with\nrestricted delivery and return receipt, who, on the date the notice is\ngiven:\na. Is a distributee or permissible distributee of trust income or\nprincipal; or\nb. Would be a distributee or pe rmissible distributee of trust principal\nif the interests of the distributees described in subparagraph 2.a. of\nthis paragraph terminated and the trust then terminated\nimmediately before the notice was given and if no powers of\nappointment were exercised;\n3. There is at least one (1) beneficiary under subparagraph 2.a. of this\nparagraph and at least one (1) other reasonably ascertainable person who\nis a remainder beneficiary under subparagraph 2.b. of this paragraph;\nand\n4. Every beneficiary to whom notice was sent pursuant to subparagraph 2.\nof this paragraph has received the notice as evidenced by the certified\nmail return receipt and no beneficiary objects to the conversion to a\nunitrust in a writing delivered to the fiduciary within thirty (30) days\nafter the notice is given under subparagraph 2. of this paragraph;\n(b) The fiduciary may petition the District Court under this subsection to order a\nconversion to a unitrust if any of the following apply:\n1. A party timely objects to the conversion to a unitr ust, or a beneficiary\nhas not received the notice as evidenced by the certified mail return\nreceipt;\n2. There is no reasonably ascertainable beneficiary under paragraph (a)2.a.\nof this subsection; or\n3. There is no reasonably ascertainable beneficiary unde r paragraph (a)2.b.\nof this subsection;\n(c) Notwithstanding the provisions of paragraph (h) of this subsection, a\nbeneficiary may request a fiduciary to convert to a unitrust. If the fiduciary\ndoes not convert, the beneficiary may petition the District Cou rt to order the\nconversion. The court shall approve the conversion or direct the requested\nconversion if the court concludes that the conversion will enable the fiduciary\nto better carry out the intent of the settlor or testator and the purposes of the\ntrust;\n(d) In deciding whether to exercise a power to convert to a unitrust under this\nsection, a fiduciary may consider, among other things, the factors set forth in\nsubsection (1)(b) of this section;\n(e) After a trust is converted to a unitrust, all of the following provisions shall\napply:\n1. The fiduciary shall follow an investment policy seeking a total return for\nthe investments held by the trust, whether the return is to be derived:\na. From appreciation of principal;\nb. From earnings and distributions from principal; or\nc. From both;\n2. The fiduciary shall make regular distributions in accordance with the\nterms of the trust, or the terms of the will, as the case may be, construed\nin accordance with the provisions of this section; and\n3. Unless expressly prohibited by the terms of the trust, the term \"income\"\nin the terms of a trust or will means an annual distribution, the \"unitrust\ndistribution,\" equal to the percentage, the \"payout percentage,\" that is no\nless than three percent (3%) and no more than five percent (5%) and that\nthe fiduciary may determine in the fiduciary's discretion from time to\ntime, or, if the fiduciary makes no determination, that shall be four\npercent (4%), of the net fair market value of the trust's assets, whether\nsuch assets would  be considered income or principal under other\nprovisions of this chapter, averaged over the lesser of:\na. The three (3) preceding years; or\nb. The period which the trust has been in existence;\n(f) The fiduciary may in the fiduciary's discretion from time to time determine all\nof the following:\n1. The effective date of a conversion to a unitrust;\n2. The provisions for prorating a unitrust distribution for a short year in\nwhich a beneficiary's right to payments commences or ceases;\n3. The frequency of unitrust distributions during the year;\n4. The effect of other payments from or contributions to the trust on the\ntrust's valuation;\n5. Whether to value the trust's assets annually or more frequently;\n6. What valuation dates to use;\n7. How frequently to value nonliquid assets and whether to estimate their\nvalue;\n8. Whether to omit from the calculations trust property occupied or\npossessed by a beneficiary; and\n9. Any other matters necessary for the proper functioning of the unitrust;\n(g) The following provisions regarding unitrust distribution shall apply:\n1. Expenses which would be deducted from income if the trust were not a\nunitrust shall not be deducted from the unitrust distribution;\n2. Unless otherwise provided by the terms of the t rust, the unitrust\ndistribution shall be paid from net income, as such term would be\ndetermined if the trust were not a unitrust. To the extent net income is\ninsufficient, the unitrust distribution shall be paid from the net realized\nshort-term capital gains. To the extent net income and net realized short-\nterm capital gains are insufficient, the unitrust distribution shall be paid\nfrom net realized long -term capital gains. To the extent net income and\nnet realized short -term and long -term capital gains are  insufficient, the\nunitrust distribution shall be paid from the principal of the trust; and\n3. To the extent necessary to cause gains from the sale or exchange of\nunitrust assets to be treated as income under any federal, state, or local\nincome tax, such a s section 643 of the Internal Revenue Code and its\nregulations, including Treasury Regulation sec. 1.643(b) -1, as amended\nor renumbered, the fiduciary has the discretionary power to allocate the\ngains to income, so long as the power is reasonably and impar tially\nexercised;\n(h) Notwithstanding any other provision of this section to the contrary, a fiduciary\nor beneficiary may petition the District Court:\n1. To change the payout percentage;\n2. To provide for a distribution of net income, as would be determine d if\nthe trust were not a unitrust, in excess of the unitrust distribution if such\ndistribution is necessary to preserve a tax benefit;\n3. To average the valuation of the trust's net assets over a period other than\nthree (3) years; and\n4. To reconvert from a unitrust to the preconversion terms of the trust;\n(i) Upon a reconversion, the power to adjust under subsection (1) of this section\nshall be revived, and a trustee shall not be precluded from seeking a later\nunitrust conversion;\n(j) A conversion to a un itrust does not affect a provision in the terms of a trust\ndirecting or authorizing the fiduciary to distribute principal or authorizing a\nbeneficiary to withdraw a portion or all of the principal of the trust;\n(k) A fiduciary shall not possess or exercise  any power under this subsection in\nany of the following circumstances:\n1. The unitrust distribution would be made from any amount that is\npermanently set aside for charitable purposes under the terms of a trust\nand for which a charitable deduction from a federal gift or estate tax has\nbeen taken unless both income and principal are so set aside;\n2. The possession or exercise of the power would cause an individual to be\ntreated as the owner of all or part of the trust for federal income tax\npurposes and the  individual would not be treated as the owner if the\nfiduciary did not possess or exercise the power;\n3. The possession or exercise of the power would cause all or any part of\nthe trust estate to be subject to any federal gift or estate tax with respect\nto the individual and the trust estate would not be subject to such\ntaxation if the fiduciary did not possess or exercise the power;\n4. The possession or exercise of the power would result in the disallowance\nof a federal gift or estate tax marital deduction  which would be allowed\nif the fiduciary did not have the power; or\n5. The fiduciary is a beneficiary of the trust;\n(l) If paragraph (k)2., 3., or 5. of this subsection applies to a fiduciary and there is\nmore than one (1) fiduciary or an additional fiduci ary who is appointed by a\ncourt order, binding agreement, or otherwise as provided by law, a co -\nfiduciary to whom paragraph (k)2., 3., or 5. of this subsection does not apply\nmay possess and exercise the power unless the possession or exercise of the\npower by the remaining fiduciary or fiduciaries is not permitted by the terms\nof the trust or will. If paragraph (k)2., 3., or 5. of this subsection restricts all\nfiduciaries from possessing or exercising a power under this section, the\nfiduciary may petition t he District Court for the court to effect the intended\nconversion or action; and\n(m) A fiduciary may release any power conferred by this section if any of the\nfollowing applies:\n1. The fiduciary is uncertain about whether possessing or exercising the\npower will cause a result described in paragraph (k)2., 3., or 5. of this\nsubsection; or\n2. The fiduciary determines that possessing or exercising the power will or\nmay deprive the trust of a tax benefit or impose a tax burden not\ndescribed in paragraph (k) of this subsection.\nThe release may be permanent or for a specified period, including a period\nmeasured by the life of an individual.\n(3) Unless a beneficiary has requested the fiduciary in writing that the fiduciary\nconsider an adjustment, unitrust conversion, or change in payout percentage,\nnothing in this section imposes a duty on the fiduciary to make an adjustment,\nconversion, or change in payout percentage under subsection (2)(e)3. of this section,\nand the fiduciary is not liable for not considering whether to make an adjustment,\nconversion, or change in payout percentage under this section.\n(4) This section is intended to further descr ibe and clarify the powers previously\ngranted under the immediately preceding version of this section. These\nclarifications and revisions shall apply to and be available for all applicable and\nqualifying trusts, including any trust which may have previously sought relief under\na prior version of this section.","path":["KRS Chapter 386"],"source_url":"https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=43169","current_through":"Includes enactments through the 2026 Regular Session","vintage":"09/05/2026","retrieved_at":"2026-09-05T20:59:16Z","sha256":"a1f6f47ef4ef717b695022f6105acadf2f022f5a0db459e0bc1a274d0cbc6f07","source_id":"us-ky","stale":false,"prev":"us-ky/krs-386.452","next":"us-ky/krs-386.456"},"notice":"GroundRules: Original legal text. Not legal advice."}