§ 8104. Trustee's power to adjust.
(a) Adjustment.--Subject to subsections (c) and (f), a trustee may adjust between principal and income by allocating an amount of income to principal or an amount of principal to income to the extent the trustee considers appropriate if:
(1) the governing instrument describes what may or must be distributed to a beneficiary by referring to the trust's income; and
(2) the trustee determines, after applying the rules in section 8103(a) (relating to fiduciary duties; general principles), that the trustee is unable to comply with section 8103(b).
(b) Considerations.--In deciding whether and to what extent to exercise the power conferred by subsection (a), a trustee may consider, among other things, all of the following:
(1) The size of the trust.
(2) The nature and estimated duration of the trust.
(3) The liquidity and distribution requirements of the trust.
(4) The needs for regular distributions and preservation and appreciation of capital.
(5) The expected tax consequences of an adjustment.
(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) 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 or testator.
(8) To the extent reasonably known to the trustee, the needs of the beneficiaries for present and future distributions authorized or required by the governing instrument.
(9) Whether and to what extent the governing instrument gives the trustee the power to invade principal or accumulate income or prohibits 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.
(10) The intent of the settlor or testator.
(11) The actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation.
(c) Prohibited adjustments.--A trustee may not make an adjustment under this section if any of the following apply:
(1) The adjustment would diminish the income interest in a trust which requires all of the income to be paid at least annually to a spouse and for which a Federal 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) The adjustment would reduce the actuarial value of the income interest in a trust to which a person transfers property with the intent to qualify for a Federal gift tax exclusion.
(3) The adjustment would change the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets.
(4) The adjustment is from any amount which is permanently set aside for charitable purposes under the governing instrument and for which a Federal estate or gift tax charitable deduction has been taken unless both income and principal are so set aside.
(5) If:
(i) possessing or exercising the power to make an adjustment would cause an individual to be treated as the owner of all or part of the trust for Federal income tax purposes; and
(ii) the individual would not be treated as the owner if the trustee did not possess the power to make an adjustment.
(6) If:
(i) possessing or exercising the power to make an adjustment would cause all or part of the trust assets to be subject to Federal estate or gift tax with respect to an individual; and
(ii) the assets would not be subject to Federal estate or gift tax with respect to the individual if the trustee did not possess the power to make an adjustment.
(7) If the trustee is a beneficiary of the trust.
(8) If the trust has been converted under section 8105 (relating to power to convert to unitrust).
(d) Permissible adjustment when otherwise prohibited.--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 prohibited by the governing instrument.
(e) Release of the power to adjust.--
(1) If paragraph (2) applies, a trustee may release any of the following:
(i) The entire power conferred by subsection (a).
(ii) The power to adjust from income to principal.
(iii) The power to adjust from principal to income.
(2) A release under paragraph (1) is permissible if any of the following apply:
(i) The trustee is uncertain about whether possessing or exercising the power will cause a result described in subsection (c)(1) through (6).
(ii) 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).
(3) The release may be permanent or for a specified period, including a period measured by the life of an individual.
(f) Application.--A governing instrument which limits the power of a trustee to make an adjustment between principal and income does not affect the application of this section unless it is clear from the governing instrument that it is intended to deny the trustee the power of adjustment conferred by subsection (a).
(July 7, 2006, P.L.625, No.98, eff. 60 days)
2006 Amendment. Act 98 amended subsec. (c)(4).
Cross References. Section 8104 is referred to in sections 8103, 8105, 8148, 8149, 8153 of this title.
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