§ 3324. Trustee’s power to adjust
(a) A trustee may adjust between principal and income to the extent the trustee considers
necessary if the trustee invests and manages trust assets as a prudent investor, 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 the trustee determines, after applying the
rules in subsection 3323(a) of this title, that the trustee is unable to comply with subsection 3323(b) of this title.
(b) In deciding whether and to what extent to exercise the power conferred by subsection
(a) of this section, a trustee shall consider all factors relevant to the trust and
its beneficiaries, including the following factors to the extent they are relevant:
(1) the nature, purpose, and expected duration of the trust;
(2) the intent of the settler;
(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 the other sections of 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; and
(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;
(7) if the trustee is a beneficiary of the trust; or
(8) if the trustee is not a beneficiary, but the adjustment would benefit the trustee
directly or indirectly.
(d) If subdivision (c)(5), (6), (7), or (8) of this section applies to a trustee and there
is more than one 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) of this section
or may release only the power to adjust from income to principal or the power to adjust
from principal to income if the trustee is uncertain about whether possessing or exercising
the power will cause one of the results described in subdivisions (c)(1)-(6) or (c)(8)
of this section or if 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 subsection (c) of this section. 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) of this section. (Added 2011, No. 114 (Adj. Sess.), § 1.)