Conversion to Unitrust
Unless expressly prohibited by the governing
instrument, a trustee may convert a trust into a unitrust, as
described in this section. A trust that limits the power of the
trustee to make an adjustment between principal and income or modify
the trust does not affect the application of this section unless it
is clear from the governing instrument that it is intended to deny
the trustee the power to convert into a unitrust.
The trustee may convert a trust into a unitrust without a
court order if all of the following apply:
The conditions set forth in subdivision (a) of Section 16336
The unitrust proposed by the trustee conforms to the
provisions of paragraphs (1) to (8), inclusive, of subdivision (e).
The trustee gives written notice of the trustee's intention to
convert the trust into a unitrust and furnishes the information
required by subdivision (c). The notice shall comply with the
requirements of Chapter 5 (commencing with Section 16500), including
notice to a beneficiary who is a minor and to the minor's guardian,
No beneficiary objects to the proposed action in a writing
delivered to the trustee within the period prescribed by subdivision
(d) of Section 16502 or a longer period as is specified in the notice
described in subdivision (c).
The notice described in paragraph (3) of subdivision (b) shall
include a copy of Sections 16336.4 to 16336.7, inclusive, and all of
the following additional information:
A statement that the trust shall be administered in accordance
with the provisions of subdivision (e) and the effective date of the
A description of the method to be used for determining the
fair market value of trust assets.
The amount actually distributed to the income beneficiary
during the previous accounting year of the trust.
The amount that would have been distributed to the income
beneficiary during the previous accounting year of the trust had the
trustee's proposed changes been in effect during that entire year.
The discretionary decisions the trustee proposes to make as
of the conversion date pursuant to subdivision (f).
In deciding whether to exercise the power conferred by this
section, a trustee may consider, among other things, the factors set
forth in subdivision (g) of Section 16336.
Except to the extent that the court orders otherwise or the
parties agree otherwise pursuant to Section 16336.5 after a trust is
converted to a unitrust, all of the following shall apply:
The trustee shall make regular distributions in accordance
with the governing instrument construed in accordance with the
provisions of this section.
The term "income" in the governing instrument shall mean an
annual distribution, the unitrust amount, equal to 4 percent, which
is the payout percentage, of the net fair market value of the trust's
assets, whether those assets would be considered income or principal
under other provisions of this chapter, averaged over the lesser of:
the three preceding years, or
the period during which the
trust has been in existence.
During each accounting year of the trust following its
conversion into a unitrust, the trustee shall, as early in the year
as is practicable, furnish each income beneficiary with a statement
describing the computation of the unitrust amount for that accounting
The trustee shall determine the net fair market value of each
asset held in the trust no less often than annually. However, the
following property shall not be included in determining the unitrust
Any residential property or any tangible personal property
that, as of the first business day of the current accounting year,
one or more current beneficiaries of the trust have or have had the
right to occupy, or have or have had the right to possess or control,
other than in his or her capacity as trustee of the trust, which
property shall be administered according to other provisions of this
chapter as though no conversion to a unitrust had occurred.
Any asset specifically devised to a beneficiary to the extent
necessary, in the trustee's reasonable judgment, to avoid a material
risk of exhausting other trust assets prior to termination of the
trust. All net income generated by a specifically devised asset
excluded from the unitrust computation pursuant to this subdivision
shall be accumulated or distributed by the trustee according to the
rules otherwise applicable to that net income pursuant to other
provisions of this chapter.
Any asset while held in a testator's estate or a terminating
The unitrust amount, as otherwise computed pursuant to this
subdivision, shall be reduced proportionately for any material
distribution made to accomplish a partial termination of the trust
required by the governing instrument or made as a result of the
exercise of a power of appointment or withdrawal, other than
distributions of the unitrust amount, and shall be increased
proportionately for the receipt of any material addition to the
trust, other than a receipt that represents a return on investment,
during the period considered in paragraph (2) in computing the
unitrust amount. For the purpose of this paragraph, a distribution or
an addition shall be "material" if the net value of the distribution
or addition, when combined with all prior distributions made or
additions received during the same accounting year, exceeds 10
percent of the value of the assets used to compute the unitrust
amount as of the most recent prior valuation date. The trustee may,
in the reasonable exercise of his or her discretion, adjust the
unitrust amount pursuant to this subdivision even if the
distributions or additions are not sufficient to meet the definition
of materiality set forth in the preceding sentence.
In the case of a short year in which a beneficiary's right to
payments commences or ceases, the trustee shall prorate the unitrust
amount on a daily basis.
Unless otherwise provided by the governing instrument or
determined by the trustee, the unitrust amount shall be considered
paid in the following order from the following sources:
From the net taxable income, determined as if the trust were
other than a unitrust.
From net realized short-term capital gains.
From net realized long-term capital gains.
From tax-exempt and other income.
From principal of the trust.
Expenses that would be deducted from income if the trust were
not a unitrust may not be deducted from the unitrust amount.
The trustee shall determine, in the trustee's discretion, all
of the following matters relating to administration of a unitrust
created pursuant to this section:
The effective date of a conversion to a unitrust.
The frequency of payments in satisfaction of the unitrust
Whether to value the trust's assets annually or more
What valuation dates to use.
How to value nonliquid assets.
The characterization of the unitrust payout for income tax
reporting purposes. However, the trustee's characterization shall be
Any other matters that the trustee deems appropriate for the
proper functioning of the unitrust.
A conversion into a unitrust does not affect a provision in
the governing instrument directing or authorizing the trustee to
distribute principal or authorizing the exercise of a power of
appointment over or withdrawal of all or a portion of the principal.
A trustee may not convert a trust into a unitrust in any of
the following circumstances:
If payment of the unitrust amount would change the amount
payable to a beneficiary as a fixed annuity or a fixed fraction of
the value of the trust assets.
If the unitrust distribution would be made from any amount
that is permanently set aside for charitable purposes under the
governing instrument and for which a federal estate or gift tax
deduction has been taken, unless both income and principal are set
If possessing or exercising the power to convert would cause
an individual to be treated as the owner of all or part of the trust
for federal income tax purposes, and the individual would not be
treated as the owner if the trustee did not possess the power to
If possessing or exercising the power to convert would cause
all or part of the trust assets to be subject to federal estate or
gift tax with respect to an individual, and the assets would not be
subject to federal estate or gift tax with respect to the individual
if the trustee did not possess the power to convert.
If the conversion would result in the disallowance of a
federal estate tax or gift tax marital deduction that would be
allowed if the trustee did not have the power to convert.
If paragraph (3) or (4) of subdivision (h) applies to a
trustee and there is more than one trustee, a cotrustee to whom the
provision does not apply may convert the trust unless the exercise of
the power by the remaining trustee or trustees is prohibited by the
governing instrument. If paragraph (3) or (4) of subdivision (h)
applies to all of the trustees, the court may order the conversion as
provided in subdivision (b) of Section 16336.5.
A trustee may release the power conferred by this section
to convert to a unitrust if either of the following circumstances
The trustee is uncertain about whether possessing or
experiencing the power will cause a result described in paragraph
(3), (4), or (5) of subdivision (h).
The trustee determines that possessing or exercising the power
will or may deprive the trust of a tax benefit or impose a tax
burden not described in subdivision (h).
A release pursuant to paragraph (1) may be permanent or for a
specified period, including a period measured by the life of an