KRS § 386.175 — KY Code / Title XXXIII / Chapter 386 / Section 386.175
386.175 Trustee's power to appoint principal or income in favor of trustee of second trust -- Terms of second trust -- Special fiduciary -- Notice -- Judicial proceedings
Status: in_force

386.175 Trustee's power to appoint principal or income in favor of trustee of

second trust -- Terms of second trust -- Special fiduciary -- Notice -- Judicial

proceedings.

(1) For the purposes of this section, the following definitions apply:

(a) "Current beneficiary" means a person who is a permissible distributee of trust

income or principal;

(b) "Original trust" means a trust established under an irrevocable trust instrument

pursuant to the terms of which a trustee has discretionary power to distribute

principal or income of the trust to or for the benefit of one (1) or more current

beneficiaries of the trust; and

(c) "Second trust" means a trust established under an irrevocable trust instrument,

the current beneficiaries of which are one (1) or more of the current

beneficiaries of the original trust. The second trust may be a trust created

under the same trust instrument as the original trust or under a different trust

instrument or the original trust whose terms have been modified under this

section.

(2) A trustee of an original trust may, without authorization by the court, exercise the

discretionary power to distribute principal or income to or for the benefit of one (1)

or more current beneficiaries of the original trust by appointing all or part of the

principal or income of the original trust subject to the power in favor of the trustee

of a second trust or by modifying the terms of the original trust. The trustee of the

original trust may exercise this power whether or not there is a current need to

distribute principal or income under any standard provided in the terms of the

original trust. The trustee's special power to appoint trust principal or income in

further trust under this section includes the power to create the second trust.

(3) The second trust may be a trust created or administered under the laws of any

jurisdiction, within or without the United States.

(4) The terms of the second trust shall be subject to all of the following:

(a) The beneficiaries of the second trust may include only beneficiaries of the

original trust;

(b) A beneficiary who has only a future beneficial interest, vested or contingent,

in the original trust cannot have the future beneficial interest accelerated to a

present interest in the second trust;

(c) The terms of the second trust may not reduce any fixed income, annuity, or

unitrust interest of a beneficiary in the assets of the original trust, including an

interest which is to take effect in the future;

(d) If any contribution to the original trust qualified for a marital or charitable

deduction for federal income, gift, or estate tax purposes under the Internal

Revenue Code, then the second trust shall not contain any provision that, if

included in the original trust, would have prevented the original trust from

qualifying for the deduction or that would have reduced the amount of the

deduction;

(e) If contributions to the original trust have been excluded from the gift tax by

the application of Sections 2503(b) and 2503(c) of the Internal Revenue Code,

then the second trust shall provide that the beneficiary's remainder interest in

the contributions shall vest and become distributable no later than the date

upon which the interest would have vested and become distributable under the

terms of the original trust;

(f) If any beneficiary of the original trust has a currently exercisable power of

withdrawal over trust property, then either:

a. The terms of the second trust shall provide a power of withdrawal in the

second trust identical to the power of withdrawal in the original trust; or

b. Sufficient trust property shall remain in the original trust to satisfy the

currently exercisable power of withdrawal;

(g) If the original trust holds stock of an S corporation, the terms of the second

trust shall not prevent or eliminate an election to be a qualified subchapter S

trust or an electing small business trust or result in the termination of the S

election of such corporation;

(h) If the power to distribute principal or income in the original trust is subject to

an ascertainable standard, then the power to distribute income or principal in

the second trust shall be subject to the same or a more restrictive ascertainable

standard as in the original trust when the trustee exercising the power

described in subsection (2) of this section is a possible beneficiary under the

standard; and

(i) The second trust may confer a power of appointment upon a beneficiary of the

original trust to whom or for the benefit of whom the trustee has the power to

distribute principal or income of the original trust. The permissible appointees

of the power of appointment conferred upon a beneficiary may include

persons who are not beneficiaries of the original or second trust. The power of

appointment conferred upon a beneficiary shall be subject to KRS 381.224,

381.225, and 381.226 covering the time at which the permissible period of the

rule against perpetuities and suspension of power of alienation begins and the

law that determines the permissible period of the rule against perpetuities and

suspension of power of alienation of the original trust.

(5) The court may appoint a special fiduciary with the authority to exercise the power to

appoint principal or income under subsection (2) of this section.

(6) The exercise of the power to appoint principal or income under subsection (2) of

this section:

(a) Shall be considered an exercise of a power of appointment, other than a power

to appoint to the trustee, the trustee's creditors, the trustee's estate, or the

creditors of the trustee's estate;

(b) Shall be subject to KRS 381.224, 381.225, and 381.226 covering the time at

which the permissible period of the rule against perpetuities and suspension of

power of alienation begins and the law that determines the permissible period

of the rule against perpetuities and suspension of power of alienation of the

original trust; and

(c) Is not prohibited by a spendthrift provision or by a provision in the original

trust instrument that prohibits amendment or revocation of the trust.

(7) To effect the exercise of the power to appoint principal or income under subsection

(2) of this section, all of the following shall apply:

(a) The exercise of the power to appoint shall be made by an instrument in

writing, signed and acknowledged by the trustee, setting forth the manner of

the exercise of the power, including the terms of the second trust and the

effective date of the exercise of the power. The instrument shall be filed with

the records of the original trust;

(b) The trustee shall give written notice of the trustee's intention to exercise the

power to all current beneficiaries of the original trust and all beneficiaries of

the oldest generation of remainder beneficiaries of the original trust, by

certified mail with restricted delivery and return receipt, at least sixty (60)

days prior to the effective date of the exercise of the power to appoint. The

notice shall include a copy of the instrument described in paragraph (a) of this

subsection;

(c) If all beneficiaries entitled to notice have received the notice as evidenced by

the certified mail return receipt and waive the notice period by a signed

written instrument delivered to the trustee, the trustee's power to appoint

principal or income shall be exercisable after notice is waived by all such

beneficiaries, notwithstanding the effective date of the exercise of the power;

(d) A current beneficiary or a beneficiary who is not a current beneficiary but is a

member of the oldest generation of the remainder beneficiaries of the original

trust may, no later than thirty (30) days from the date of receiving notice under

paragraph (b) of this subsection, commence a judicial proceeding pursuant to

KRS 386B.2-010 to object to the proposed exercise of the power under

subsection (2) of this section. In such case the proposed exercise of the power

shall require consent of the court; and

(e) In the event that a beneficiary did not receive the notice as evidenced by the

certified mail return receipt, and no other beneficiary has commenced a

proceeding under paragraph (d) of this subsection, the trustee may seek the

approval of the District Court to exercise the power.

(8) Nothing in this section shall be construed to create or imply a duty of the trustee to

exercise the power to distribute principal or income, and no inference of

impropriety shall be made as a result of a trustee not exercising the power to appoint

principal or income conferred under subsection (2) of this section. Nothing in this

section shall be construed to abridge the right of any trustee who has the power to

appoint property in further trust that arises under the terms of the original trust or

under any provision of law or under common law.

(9) This section shall not apply to any charitable remainder trust as defined in 26 U.S.C.

sec. 664(d).

(10) A trustee or beneficiary may commence a judicial proceeding pursuant to KRS

386B.2-010 to approve or disapprove of a proposed exercise of the trustee's special

power to appoint to a second trust pursuant to subsection (2) of this section.