Title 18
Fiduciaries

Chapter 9.2
Qualified Dispositions in Trust

§ 18-9.2-2. Definitions.

As used in this chapter:

(1) “Claim” means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal equitable, secured or unsecured.

(2) “Creditor” means, with respect to a transferor, a person who has claim.

(3) “Debt” means liability on a claim.

(4) “Disposition” means a transfer, conveyance or assignment of property (including a change in the legal ownership of property occurring upon the substitution of one trustee for another or the addition of one or more new trustees), or the exercise of a power so as to cause a transfer of property, to a trustee or trustees, but shall not include the release or relinquishment of an interest that theretofore was the subject of a qualified disposition.

(5) “Property” includes real property, personal property, and interests in real or personal property.

(6) “Qualified disposition” means a disposition by or from a transferor to a trustee, with or without consideration, by means of a trust instrument.

(7) “Spouse” and “former spouse” means only persons to whom the transferor was married at, or before the time the qualified disposition is made.

(8) “Transferor” means a natural person who, or entity which, as an owner of property or as a holder of a general power of appointment, which authorizes the holder to appoint in favor of the holder, the holder’s creditors, the holder’s estate or the creditors of the holder’s estate, or as a trustee, directly or indirectly, makes a disposition or causes a disposition to be made.

(9) “Qualified trustee ” means a person who:

(i) In the case of natural person, is a resident of this state other than the transferor, or, in all other cases, is authorized by the provisions of the general or public laws to act as a trustee, and whose activities are subject to supervision by the department of business regulation, The Federal Deposit Insurance Corporation, the Comptroller of the Currency, or the Office of Thrift Supervision, or any successor to them; and

(ii) Maintains or arranges for custody in this state of some or all of the property that is the subject of the qualified disposition, maintains records for the trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation of fiduciary income tax returns for the trust, or otherwise materially participates in the administration of the trust.

(iii) For the purposes of this chapter, neither the transferor nor any other natural person who is a nonresident of this state nor an entity that is not authorized by the law of this state to act as a trustee or whose activities are not subject to supervision as provided in subparagraph (I) of this subsection shall be considered a qualified trustee; however, nothing in this chapter shall preclude a transferor from appointing one or more advisors, including, but not limited to:

(A) Advisors who have authority under the terms of the trust instrument to remove and appoint qualified trustees or trust advisors; and

(B) Advisors who have authority under the terms of the trust instrument to direct, consent to or disapprove distributions from the trust. For purposes of this section, the term “advisor” includes a trust “protector” or any other person who, in addition to a qualified trustee, holds one or more trust powers.

(iv) A person may serve as an advisor, notwithstanding that such person is the transferor of the qualified disposition, but such a person may not otherwise serve as advisor of a trust that is a qualified disposition except with respect to the retention of the veto right permitted by subsection (10)(ii) of this section.

(v) In the event that a qualified trustee of a trust ceases to meet the requirements of subparagraph (I) of this subsection, and there remains no trustee that meets such requirements, such qualified trustee shall be deemed to have resigned as of the time of such cessation, and thereupon the successor qualified trustee provided for in the trust instrument shall become a qualified trustee of the trust, or in the absence of any successor qualified trustee provided for in the trust amendment, the superior court shall, upon application of any interested party, appoint a successor qualified trustee.

(vi) In the case of a disposition to more than one trustee, a disposition that is otherwise a qualified disposition shall not be treated as other than a qualified disposition solely because not all of the trustees are qualified trustees.

(10) “Trust instrument” means an instrument appointing a qualified trustee or qualified trustees for the property that is the subject of a disposition, which instrument:

(i) Expressly incorporates the general or public laws of this state to govern the validity, construction, and administration of the trust;

(ii) Is irrevocable; provided, that a trust instrument shall not be deemed revocable due to its inclusion in one or more of the following:

(A) A transferor’s power to veto a distribution from the trust;

(B) A power of appointment (other than a power to appoint to the transferor, the transferor’s creditors, the transferor’s estate or the creditors of the transferor’s estate) exercisable by will or other written instrument of the transferor effective only upon the transferor’s death;

(C) The transferor’s potential or actual receipt of income, including rights to such income retained in the trust instrument;

(D) The transferor’s potential or actual receipt of income or principal from a charitable remainder unitrust or charitable remainder annuity trust as such terms are defined in § 664 of the Internal Revenue Code of 1986 [26 U.S.C. § 664] and any successor provision thereto; and the transferor’s right, at any time and from time to time by written instrument delivered to the trustee, to release such transferor’s retained interest in such a trust, in whole or in part, in favor of a charitable organization that has or charitable organizations that have a succeeding beneficial interest in such trust;

(E) The transferor’s receipt each year of a percentage (not to exceed five percent (5%)) specified in the trust instrument of the initial value of the trust assets on their value determined from time to time pursuant to the trust instrument or of a fixed amount that on an annual basis does not exceed five percent (5%) of the initial value of the trust assets;

(F) The transferor’s potential or actual receipt or use of principal if such potential or actual receipt or use of principal would be the result of a qualified trustee’s or qualified trustees’ acting:

(1) In such qualified trustee’s or qualified trustees’ discretion;

(2) Pursuant to a standard that governs the distribution of principal and does not confer upon the transferor a substantially unfettered right to the receipt or use of the principal; or

(3) At the direction of an adviser described in subsection (9)(iii) of this section who is acting:

(a) In such advisor’s discretion; or

(b) Pursuant to a standard that governs the distribution of principal and does not confer upon the transferor a substantially unfettered right to the receipt of or use of principal. For purposes of this subsection, a qualified trustee is presumed to have discretion with respect to the distribution of principal unless such discretion is expressly denied to such trustee by the terms of the trust instrument;

(G) The transferor’s right to remove a trustee or advisor and to appoint a new trustee or advisor (other than a person who is a related or subordinate party with respect to the transferor within the meaning of § 672(c) of the Internal Revenue Code of 1986 [26 U.S.C. § 672(c)] and any successor provision thereto);

(H) The transferor’s potential or actual use of real property held under a qualified personal residence trust within the meaning of such term as described in § 2702(c) of the Internal Revenue Code of 1986 [26 U.S.C. § 2702(c)] and any successor provision thereto or the transferor’s possession and enjoyment of a qualified annuity interest within the meaning of such term as described in Treasury Regulation § 25.2702-5(c)(8) [26 C.F.R. § 25.2502-5(c)(8)] and any successor provision thereto;

(I) The transferor’s potential or actual receipt of income or principal to pay, in whole or in part, income taxes due on income of the trust if such potential or actual receipt of income or principal is pursuant to a provision in the trust instrument that expressly provides for the payment of such taxes and if such potential or actual receipt of income or principal would be the result of a qualified trustee’s or qualified trustees’ acting:

(1) In such qualified trustee’s or qualified trustees’ discretion; or

(2) At the direction of an advisor described in subsection (9)(iii) of this section who is acting in such advisor’s discretion. Distributions to pay income taxes made under discretion included in a governing instrument pursuant to subparagraph (C), subparagraph (F) or this subparagraph (I) of subsection (10)(ii) of this section may be made by direct payment to the taxing authorities.

(iii) Provides that the interest of the transferor or other beneficiary in the trust property or the income therefrom may not be transferred, assigned, pledged or mortgaged, whether voluntarily or involuntarily, before the qualified trustee or qualified trustees actually distribute the property or income therefrom to the beneficiary, and such provision of the trust instrument shall be deemed to be a restriction on the transfer of the transferor’s beneficial interest in the trust that is enforceable under applicable nonbankruptcy law within the meaning of § 541(c)(2) of the Bankruptcy Code (11 U.S.C. § 541(c)(2)) or any successor provision thereto; and

(iv) A disposition by a trustee that is not a qualified trustee to a trustee that is a qualified trustee shall not be treated as other than a qualified disposition solely because the trust instrument fails to meet the requirements of subparagraph (I) of this section.