§557A-104 - Trustee's power to adjust.

[§557A-104] Trustee's power to adjust.
(a) Subject to subsection (b), a trustee may adjust between principal and
income to the extent the trustee considers necessary if all of the following
conditions are satisfied:

(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, after applying the rules
in section 557A-103(a), and considering any power the trustee may have under
the trust to invade principal or accumulate income, either of the following
conditions exist:

(A) The trustee is unable to administer a
trust or estate impartially based on what is fair and reasonable to all
beneficiaries if no clear intention to favor one or more beneficiaries is
manifested in the will or trust; or

(B) In the case of a will or trust that
clearly manifests an intent to favor one or more beneficiaries, the trustee is
unable to favor such beneficiaries without diminishing the rights of other
beneficiaries.

(b) In deciding whether and to what extent to
exercise the power conferred by subsection (a), a trustee shall consider all of
the 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 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 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.

(1) That diminishes the income interest in a trust
that requires all of the income to be paid at least annually to a surviving
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's 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; provided that a trustee may transfer income to
principal only upon a court order (unless the trustee is holding institutional
funds as defined in section 517D-3 exclusively for the benefit of a community
foundation and section 517D-4 applies);

(5) If possessing or exercising the power to make an
adjustment may cause 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 have the power to make an
adjustment; or

(7) If the trustee is a beneficiary of the trust.

(d) If subsection (c)(5), (6), or (7) applies
to a trustee and there is more than one trustee, a co-trustee to whom the
provision does not apply may make the adjustment, unless the exercise of the power
by the remaining trustee or trustees is clearly 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 is
uncertain about whether possessing or exercising the power will cause a result
described in subsection (c)(1) through (6) 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). 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 are not contrary to
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 section or in this chapter
is intended to create or imply a duty to make an adjustment, and the trustee is
not liable for not considering whether to make an adjustment or for choosing
not to make an adjustment. [L 2000, c 191, pt of §1]