Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Sunday, October 21, 2012

Article on Trustee's Power to Adjust in Indiana

Images-2Ted R. Batson, Jr. (J.D. Candidate, 2012, Indiana University Robert H. McKinney School of Law) recently published his article entitled Net Income with Make-up Charitable Remainder Unitrusts and The Trustee's Power to Adjust Under Indiana's Uniform Principal and Income Act, 45 Ind. L. Rev. 841 (2012).  The introduction to the article is available below: 

In 1997, the National Conference of Commissioners on Uniform State Laws (Commissioners) promulgated a new version of the Uniform Principal and Income Act (UPAIA 1997). Indiana adopted the UPAIA 1997 as the Indiana Uniform Principal and Income Act (the Indiana Act) in 2002. Both the Indiana Act and the UPAIA 1997 provide in part that “[a] trustee may adjust between principal and income to the extent the trustee considers necessary” if certain conditions are met. An adjustment under this provision is commonly referred to as the trustee's “power to adjust.” One of the necessary conditions to an exercise of the power to adjust is that the trust's governing instrument “describe the amount that may or must be distributed to a beneficiary by referring to the trust's income.”  A net income with make-up charitable remainder unitrust (NIMCRUT) is a type of split-interest trust defined in the Internal Revenue Code that, by definition, requires the distribution of the trust's income subject to a unitrust limitation.
The trustee's power to adjust is not a power of unfettered discretion. Both the Indiana Act and the UPAIA 1997 impose limitations on a trustee's ability to exercise the power to adjust. These limitations have special implications in the context of a NIMCRUT. In addition, the Internal Revenue Code grants certain federal tax benefits to the settlor of a NIMCRUT and exempts a NIMCRUT from income tax. Similar benefits are often conferred under state law. Therefore, an Indiana NIMCRUT trustee desiring to exercise the power to adjust must be aware of the limitations imposed by the Indiana Act, and federal and state tax authorities.
Part I of this Note provides contextual background describing the NIMCRUT and the policy rationale behind the power to adjust. Part II examines the power to adjust as found in the Indiana Act, focusing on the threshold conditions for exercising the power and the internal limitations the Indiana Act places on a trustee's exercise of the power. Part III advocates an amendment to the Indiana Act to clarify the availability of the power to adjust to Indiana NIMCRUT trustees.


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