(a) If the terms of the trust expressly provide by specific reference to this section, then a trustee may have the power to 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, after applying the rules in Section 19-3A-103(a), that the trustee is unable to comply with Section 19-3A-103(b).
Terms Used In Alabama Code 19-3A-104
- Annuity: A periodic (usually annual) payment of a fixed sum of money for either the life of the recipient or for a fixed number of years. A series of payments under a contract from an insurance company, a trust company, or an individual. Annuity payments are made at regular intervals over a period of more than one full year.
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- Beneficiary: A person who is entitled to receive the benefits or proceeds of a will, trust, insurance policy, retirement plan, annuity, or other contract. Source: OCC
- beneficiary: Includes, in the case of a decedent's estate, an heir, legatee, and devisee and, in the case of a trust, an income beneficiary and a remainder beneficiary. See Alabama Code 19-3A-102
- Decedent: A deceased person.
- Gift: A voluntary transfer or conveyance of property without consideration, or for less than full and adequate consideration based on fair market value.
- income: Money or property that a fiduciary receives as current return from a principal asset. See Alabama Code 19-3A-102
- INCOME INTEREST: The right of an income beneficiary to receive all or part of net income, whether the terms of the trust require it to be distributed or authorize it to be distributed in the trustee's discretion. See Alabama Code 19-3A-102
- Jurisdiction: (1) The legal authority of a court to hear and decide a case. Concurrent jurisdiction exists when two courts have simultaneous responsibility for the same case. (2) The geographic area over which the court has authority to decide cases.
- Marital deduction: The deduction(s) that can be taken in the determination of gift and estate tax liabilities because of the existence of a marriage or marital relationship.
- person: An individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity. See Alabama Code 19-3A-102
- principal: Property transferred to or acquired by a fiduciary and held in trust for distribution to a remainder beneficiary when an income interest ends. See Alabama Code 19-3A-102
- property: includes both real and personal property. See Alabama Code 1-1-1
- Remainder: An interest in property that takes effect in the future at a specified time or after the occurrence of some event, such as the death of a life tenant.
- TERMS OF A TRUST: The manifestation of the intent of a settlor or decedent with respect to the trust, expressed in a manner that admits of its proof in a judicial proceeding, whether by written or spoken words or by conduct. See Alabama Code 19-3A-102
- Trustee: A person or institution holding and administering property in trust.
- trustee: An original, additional, or successor trustee, whether or not appointed or confirmed by a court. See Alabama Code 19-3A-102
(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, but not limited to:
(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 for the trust;
(5) The regularity of income to the trust;
(6) The need for preservation and appreciation of capital;
(7) The nature of the assets held in the trust and the extent to which they consist of financial assets, interests in closely held enterprises, tangible and intangible personal property, or real property;
(8) The extent to which an asset is used by a beneficiary;
(9) Whether an asset was purchased by the trustee or received from the settlor;
(10) 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;
(11) Whether and to what extent the terms of the trust a. give the trustee the power to invade principal or accumulate income, or b. prohibit the trustee from invading principal or accumulating income;
(12) The extent to which the trustee has exercised a power from time to time to invade principal or accumulate income;
(13) The actual and anticipated effect of economic conditions, inflation, and deflation upon principal and income; and
(14) The anticipated income and transfer tax consequences of an adjustment.
(c) Notwithstanding the power conferred by subsection (a), 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 the transfer 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) That changes the 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 not a beneficiary, but the adjustment would benefit the trustee directly or indirectly;
(8) If the trustee is a beneficiary of the trust; or
(9) If the trust is an express unitrust under Section 19-3A-105 (relating to express unitrusts) or is a unitrust by reason of a conversion under Section 19-3A-106 (relating to power to convert to unitrust).
(d) If subsection (c)(5), subsection (c)(6), subsection (c)(7), or subsection (c)(8) applies to a trustee and there is more than one trustee, then the 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 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 subsection (c)(7) 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) The trustee or any beneficiary of a trust covered by this chapter (or a trust to be created from a decedent‘s estate that is covered by this chapter) (1) may seek approval from a court of competent jurisdiction to be governed prospectively by this section, or (2) may at any time affirmatively elect to be governed prospectively by this section by obtaining the written consent of all of the current income beneficiaries and the presumptive remainder beneficiaries of the trust, and such written consent shall conclusively bind all persons who may have any interest in the affected trust, including all contingent remainder beneficiaries and potential appointees of the trust.