[§554G-5] Trust instrument. (a) A trust instrument shall be irrevocable and shall expressly incorporate the laws of this State governing the validity, construction, and administration of the trust.

(b) The trustee, in its discretion, may terminate any trust if and when its fair market value has declined to the extent that would make it uneconomical, imprudent, or unwise to continue to retain the trust, and shall pay and distribute the trust to the persons entitled to mandatory or discretionary income distributions as the trustee in the trustee's absolute discretion shall decide.

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

(2) 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 that may be exercised by will or other written instrument of the transferor effective only upon the transferor's death;

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

(4) The transferor's annual receipt of a percentage not to exceed five per cent of the initial value of the trust assets or its 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 per cent of the initial value of the trust assets;

(5) The transferor's potential or actual receipt or use of the trust's principal due to the discretionary action of a permitted trustee or to a provision in the trust instrument that governs the distribution of principal; provided that any included provision shall not confer upon the transferor a substantially unfettered right to the receipt or use of the principal;

(6) The transferor's right to remove a permitted trustee or advisor and to appoint a new permitted trustee or advisor;

(7) The transferor's potential or actual receipt of income or principal to pay income taxes due on income of the trust if the trust instrument includes a provision allowing or directing the use of trust funds to pay income taxes due, or if the permitted trustee acts in the trustee's discretion to allow payment of income taxes due on the trust income; or

(8) A permitted trustee's authority pursuant to discretion, direction, or the transferor's exercise of a testamentary power of appointment to pay all or any part of the transferor's debts outstanding at the time of the transferor's death, the expenses of administering the transferor's estate, or any estate or inheritance tax imposed on or with respect to the transferor's estate.

(d) A trust instrument may provide that the interest of a beneficiary of the trust, including a beneficiary who is the transferor of the trust, may not be transferred, assigned, pledged, or mortgaged, whether voluntarily or involuntarily, before the permitted trustee actually distributes the property or income to the beneficiary. Any provision of this type contained in 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 11 United States Code section 541(c)(2) of the Bankruptcy Code or any successor provision.

(e) A transferor may appoint, through the trust instrument, one or more advisors or protectors, including the following:

(1) Advisors who have authority under the terms of the trust to remove and appoint permitted trustees, advisors, or protectors;

(2) Advisors who have authority under the terms of the trust to direct, consent to, or disapprove of distributions from the trust; and

(3) Advisors, including the transferor beneficiary of the trust, who serve as investment advisors to the trust.

(f) Whenever there shall be a dispute, deadlock, or difference of opinion between a permitted trustee and an advisor, the transferor may direct that the determination of the advisor shall be binding upon the permitted trustee, but that the permitted trustee shall bear no liability or accountability for any act or transaction entered into as a result of the enforcement of the advisor's privilege if the permitted trustee dissents in writing.

(g) If a trustee of a trust existing prior to the enactment of this chapter proposes to make a permitted transfer, but the trust instrument does not contain a power of appointment that conforms to section 554G-5(c)(2), the trustee may deliver an irrevocable written election to have section 554G-5(c)(2) apply to the trust, and the nonconforming powers of appointment shall be deemed modified to the extent necessary to conform with section 554G-5(c)(2). The irrevocable written election shall include a description of the original transferor's powers of appointment as modified, and the original transferor's written consent to the modification. Consent of the original transferor to a modification of powers of appointment shall not be considered to be a permitted transfer.

(h) If, in any action brought against a trustee of a trust that results from a permitted transfer, a court declines to apply the law of this State in determining the validity, construction, or administration of the trust, or the effect of a spendthrift provision of the trust, the trustee, immediately upon the court's action and without the further order of any court, shall cease to be trustee of the trust and a successor trustee shall thereupon succeed as trustee in accordance with the terms of the trust instrument. If the trust instrument does not provide for a successor trustee or does not provide for an advisor or protector with powers to appoint successor trustees, a Hawaii court of competent jurisdiction shall appoint a successor permitted trustee upon the application of any beneficiary of the trust under any terms and conditions that the court determines to be consistent with the purposes of the trust and with this chapter. Upon the removal of a trustee pursuant to this section, the trustee who has been removed shall have no power or authority other than to convey the trust property to the successor trustee. [L 2010, c 182, pt of §2]