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 Section 91-17-103(a), that the trustee is unable to comply with Section 91-17-103(b).
In deciding whether and to what extent to exercise the power conferred by subsection (a), a trustee shall consider all factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant:
A trustee may not make an adjustment:
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;
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;
That changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets;
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;
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;
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;
If the trustee is a beneficiary of the trust; or
If the trustee is not a beneficiary, but the adjustment would benefit the trustee directly or indirectly.
If subsection (c)(5), (6), (7), or (8) 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.
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 (c)(8) 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.
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).
(1) For purposes of this section, and subject to subsection (c) of this section, from time to time a trustee may make a safe-harbor adjustment to increase net trust accounting income up to and including an amount equal to six percent (6%) of the trust's value as defined in subsection (g)(2). If a trustee determines to make this safe-harbor adjustment, the propriety of this adjustment shall be conclusively presumed. Nothing in this subsection (g) prohibits any other type of adjustment authorized under any provision of this section.
A trust's value under subsection (g)(1) shall be calculated as follows:
For trusts in existence for three (3) years or more, the value shall be the average fair market value of the trust assets over the past three (3) years;
For trusts in existence for at least two (2) years but less than three (3) years, the value shall be the average fair market value of the trust assets over the past two (2) years; and
For trusts in existence less than two (2) years, the value shall be the fair market value of the trust assets on December 31 of the preceding year.