§ 30-2-14-15 — Power of trustee to adjust between principal and income

(a) A trustee may adjust between principal
and income to the extent the trustee considers necessary if:
(1) the trustee invests and manages trust assets as a prudent
investor;
(2) the terms of the trust describe the amount that may or must be
distributed to a beneficiary by referring to the trust's income; and
(3) the trustee determines:
(A) after applying the rules in section 14(a) of this chapter; and
(B) considering any power the trustee may have under the trust
or the will to invade principal or accumulate income;
that the trustee is unable to comply with section 14(b) of this
chapter.
(b) In deciding whether and to what extent to exercise the power
conferred by subsection (a), a trustee may consider, but is not limited
to, any of the following:
(1) The nature, purpose, and expected duration of the trust.
(2) The intent of the settlor.
(3) The identity and circumstances of the beneficiaries.
(4) The needs for liquidity, regularity of income, and preservation
and appreciation of capital.
(5) The assets held in the trust; the extent to which they consist of
financial assets, interests in closely held enterprises, tangible and
intangible personal property, or real property; the extent to which
an asset is used by a beneficiary; and whether an asset was
purchased by the trustee or received from the settlor.
(6) The net amount allocated to income under this chapter and the
increase or decrease in the value of the principal assets, which the
trustee may estimate as to assets for which market values are not
readily available.
(7) Whether and to what extent the terms of the trust give the
trustee the power to invade principal or accumulate income or
prohibit the trustee from invading principal or accumulating
income, and the extent to which the trustee has exercised a power
from time to time to invade principal or accumulate income.
(8) The actual and anticipated effect of economic conditions on
principal and income and effects of inflation and deflation.
(9) The anticipated tax consequences of an adjustment.
(c) A trustee may not make an adjustment:
(1) that diminishes the income interest in a trust that requires all
of the income to be paid at least annually to a spouse and for
which an estate tax or gift tax marital deduction would be
allowed, in whole or in part, if the trustee did not have the power
to make the adjustment;
(2) that reduces the actuarial value of the income interest in a trust
to which a person transfers property with the intent to qualify for
a gift tax exclusion;
(3) that changes the amount payable to a beneficiary as a fixed
annuity or a fixed fraction of the value of the trust assets;
(4) from any amount that is permanently set aside for charitable
purposes under a will or the terms of a trust unless both income
and principal are so set aside;
(5) if possessing or exercising the power to make an adjustment
causes an individual to be treated as the owner of all or part of the
trust for income tax purposes, and the individual would not be
treated as the owner if the trustee did not possess the power to
make an adjustment;
(6) if possessing or exercising the power to make an adjustment
causes all or part of the trust assets to be included for estate tax
purposes in the estate of an individual who has the power to
remove a trustee or appoint a trustee, or both, and the assets
would not be included in the estate of the individual if the trustee
did not possess the power to make an adjustment; or
(7) if the trustee is a beneficiary of the trust.
(d) If subsection (c)(5), (c)(6), or (c)(7) applies to a trustee and there
is more than one (1) trustee, a cotrustee to whom the provision does not
apply may make the adjustment unless the exercise of the power by the
remaining trustee or trustees is not permitted by the terms of the trust.
(e) A trustee may release the entire power conferred by subsection
(a) or may release only the power to adjust from income to principal or
the power to adjust from principal to income if the trustee:
(1) is uncertain about whether possessing or exercising the power
will cause a result described in subsection (c)(1) through (c)(6);
or
(2) 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 subsection (c).
The release may be permanent or for a specified period, including a
period measured by the life of an individual.
(f) Terms of a trust that limit the power of a trustee to make an
adjustment between principal and income do not affect the application
of this section unless it is clear from the terms of the trust that the terms
are intended to deny the trustee the power of adjustment conferred by
subsection (a).
(g) Nothing in this chapter is intended to create or imply a duty to
make an adjustment. A trustee incurs no liability for:
(1) not considering whether to make an adjustment; or
(2) choosing not to make an adjustment.

Legislative History

As added by P.L.84-2002, SEC.2.