CHAPTER 270

FORMERLY

SENATE BILL NO. 288

AN ACT TO AMEND TITLE 12 OF THE DELAWARE CODE RELATING TO TRUSTS.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE :

Section 1. Amend paragraph (2) of subsection (a) of § 3527 of Title 12 of the Delaware Code by deleting the second sentence of such paragraph and by inserting the following phrase before the period at the end of the first sentence of such paragraph:

“and regardless of whether the trust directs or permits the trustee to distribute the principal of the trust to one or more such persons”.

Section 2. Amend subsubparagraph 3. of subparagraph b. of subsection (b) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following:

“3. Without regard to the exercise of any power of appointment, all living persons who would receive principal of the trust if the trust were to terminate at the time of the giving of such notice and all living persons who would receive or be eligible to receive distributions of income or principal of the trust if the interests of all of the beneficiaries currently eligible to receive income under subsubparagraph 2. of this subparagraph b. were to terminate at the time of the giving of such notice; and”

Section 3. Amend subparagraph d. of subsection (b)(3) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following:

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

Section 4. Amend subsubparagraph 3. of subparagraph c. of subsection (c)(3) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following:

“3. without regard to the exercise of any power of appointment, all living persons who would receive principal of the trust if the trust were to terminate at the time of the giving of such notice and all living persons who would receive or be eligible to receive distributions of income or principal of the trust if the interests of all of the beneficiaries currently eligible to receive income under subsubparagraph 2. of this subparagraph c. were to terminate at the time of the giving of such notice; and”

Section 5. Amend subparagraph e. of subsection (c) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following:

“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 thirty (30) days of receipt of such notice.”

Section 6. Amend the third sentence of subsection (e) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following:

“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.”

Section 7. Amend subsection (g) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following new subsection:

“g. A trustee may act pursuant to subsection (b) or subsection (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 to the persons described in subsubparagraphs 2. and 3. of subparagraph b. of subsection (b) of this section or subsubparagraphs 2. and 3. of subparagraph c. of subsection (c) of this section, as the case may be, 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) subparagraph c. of subsection (b) or subparagraph d. of subsection (c), 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 and the amount required by I.R.C. § 4942.”.

Section 8. Amend subsection (h) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following new subsection:

“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.

Section 9. Amend subsection (l) of § 3527 of Title 12 of the Delaware Code by inserting the following phrase before “unless” in the introduction of such subsection:

“or to any trust, regardless of its place of administration, whose governing instrument provides that Delaware law governs matters of construction or administration”.

Section 10. Amend paragraph (2) of subsection (l) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following:

“(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);”

Section 11. Amend paragraph (3) of subsection (l) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety.

Section 12. Amend paragraph (3) of subsection (l) of § 3527 of Title 12 of the Delaware Code by deleting it in its entirety and substituting in lieu thereof the following:

"(3) the governing instrument expressly prohibits use of this section by specific reference to the section or expressly states the trustor's intent that net income not be calculated as a unitrust amount. A provision in the governing instrument that 'The provisions of 12 Delaware Code Section 3527, 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."

Section 13. Amend Title 12 of the Delaware Code by adding the following new § 3527A thereto:

Ҥ 3527A. 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 (3) nor more than five (5) 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 or may not provide a mechanism for changing the unitrust percentage similar to the mechanism provided under § 3527 of this title, based upon the factors noted therein, and may or may not provide for a conversion from a unitrust to an income trust and/or a reconversion of an income trust to a unitrust similar to the mechanism under § 3527 of this title.

(e) If an express total return unitrust does not specifically or by reference to § 3527 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 (3) percent nor more than five (5) 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 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.”

Section 14. This Act shall be effective upon enactment and shall apply to trusts whenever created.

Approved June 24, 2004