NET-INCOME WITH MAKE-UP CHARITABLE REMAINDER UNITRUSTS AND THE TRUST


Indiana Law Review
Volum e 45 2012 Num ber 3

NOTES

NET INCOME WITH MAKE-UP CHARITABLE REMAINDER
UNITRUSTS AND THE TRUSTEE’S POWER TO ADJUST UNDER

INDIANA’S UNIFORM PRINCIPAL AND INCOME ACT

TED R. B ATSON, JR.*

INTRODUCTION

In 1997, the National Conference of Commissioners on U niform State Laws
(Commissioners) promulgated a new version of the Uniform  Principal and
Income Act (UPAIA 1997).   Indiana adopted the UPAIA 1997 as the Indiana1

Uniform Principal and Income Act (the Indiana Act) in 2002.   Both the Indiana2

Act and the U PA IA 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 to3

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 (NIM CRUT)4

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

* J.D. Candidate, 2012, Indiana University Robert H. McKinney School of Law; M.B.A.,

1990, Indiana University; B.A., 1986, Asbury University, Wilmore, Kentucky.  I am grateful to the

following colleagues and friends who unselfishly gave of their time and expertise during the

preparation of this Note:  Professor Peter A. Prescott, Gregory W. Baker, Steven R. Bone, Emanuel

J. Kallina, Jonathan D. Ackerman, David W. Newman, and Frances D. Schafer.  As with most

significant endeavors, I am also deeply indebted to my wife Ruth and my two daughters, Kelsey

and Mackenzie.

1. UNIF. PRINCIPAL & INCOME ACT (amended 2008), 7A pt. III U.L.A. 363 (Supp. 2010),

available at http://www.law.upenn.edu/bll/archives/ulc/upaia/2000final.pdf.  Previous versions

were promulgated in 1931, UNIF. PRINCIPAL & INCOME ACT, 7A pt. III U.L.A. 589 (2006), and

1962, UNIF. PRINCIPAL & INCOME ACT, REVISED 1962 ACT, 7A pt. III U.L.A. 547 (2006).

2. Uniform Principal and Income Act, Pub. L. No. 84-2002, § 2, 2002 Ind. Acts 987

(codified at IND. CODE §§ 30-2-14-0.1 to -44 (2011), available at http://www.in.gov/

legislative/ic/code/title30/ar2/ch14.html).

3. IND. CODE § 30-2-14-15(a) (2011); UNIF. PRINCIPAL & INCOME ACT § 104(a).

4. IND. CODE § 30-2-14-15(a)(2); UNIF. PRINCIPAL & INCOME ACT § 104(a).



842 INDIANA LAW  REVIEW [Vol. 45:841

limitation.5

The trustee’s power to adjust is not a power of unfettered discretion.  Both the
Indiana Act and the UPA IA  1997 impose limitations on a trustee’s ability to
exercise the power to adjust.  These limitations have special implications in the
context of a NIM CRUT.  In addition, the Internal Revenue Code grants certain
federal tax benefits to the settlor of a NIM CRUT and exempts a NIM CRUT from
income tax.  Similar benefits are often conferred under state law.  Therefore, an
Indiana NIM CRUT 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 NIM CRUT
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 A ct 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 NIM CRUT
trustees.

I.  SETTING THE STAGE

A.  The Net Income with M ake-Up Charitable Remainder Unitrust

The term “charitable remainder trust” (CRT) is used to denote a trust
arrangement that creates two distinct classes of beneficiaries:  (1) income
beneficiaries  who are generally entitled to receive an income interest for life,6 7

and (2) charitable remainder beneficiaries who are entitled to receive the
remainder interest upon the expiration of the income interest.   In 1969, Congress8

enacted the Tax Reform Act of 1969  and prescribed rules such that a properly9

drafted, funded, and administered CRT (a qualified CRT) provides a number of
tax benefits to the creator of the trust.  The NIM CRUT is a special case of the
CRT that is distinguished by the manner in which the income beneficiary’s right
to income is defined.

1.  Charitable Remainder Trusts Generally.— CRTs are defined at I.R.C. §
664 and its supporting Treasury regulations.  A qualified CRT is a trust
arrangement that provides for the payment of a distribution at least annually to

5. See I.R.C. § 664(d)(3) (2006).

6. Id. § 664(d)(1)(A) (describing a charitable remainder annuity trust); Id. § 664(d)(2)(A)

(describing a charitable remainder unitrust).

7. The term of a charitable remainder trust may be “for a term of years (not in excess of 20

years) or for the life or lives of such individual or individuals.”  Id. §§ 664(d)(1)(A), 664(d)(2)(A).

8. Id. § 664(d)(1)(C) (describing a charitable remainder annuity trust); id. § 664(d)(2)(C)

(describing a charitable remainder unitrust).

9. Tax Reform Act of 1969, Pub. L. No. 91-172, § 201(e)(1), 83 Stat. 487, 562-64 (1969),

(codified as amended at I.R.C. § 664).



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 843

one or more non-charitable income beneficiaries  with the trust remainder10

irrevocably designated to, or for the use of, one or more charitable organizations
described in I.R.C. § 170(c).   CRTs are generally classified into two categories11

based upon the method used to compute the required payout to the income
beneficiary.  In the first category, the charitable remainder annuity trust (CRAT),
the trust pays the income beneficiary a fixed amount of not less than five percent
(and no more than fifty percent) of the trust’s initial value (the annuity amount).  12

In the second category, the charitable remainder unitrust (CRUT), the trust pays
the income beneficiary a fixed percentage of not less than five percent (and no
more than fifty percent) of the trust’s fair market value as redetermined annually
(the annual unitrust amount).13

In either a CRAT or a CRUT, the trustee may pay the annuity amount or the
annual unitrust amount from income or principal but must pay the income
beneficiary the required distribution from principal if the trust’s income is
insufficient.   Trust income in excess of the stated annuity amount or the annual14

unitrust amount must be added to the trust’s principal.15

A  C RT  created in conformity with I.R.C. § 664 is exempt from tax  unless16

it has unrelated business taxable income.   A transferor to an inter vivos C R T17

receives an income tax charitable deduction,  a gift tax charitable deduction,18 19

and, if applicable, an estate tax charitable deduction  equal to the present value20

10. I.R.C. §§ 664(d)(1)(A), 664(d)(2)(A); see also Treas. Reg. § 1.664-1(a)(1)(I) (1972). The

Internal Revenue Code requires that the current income beneficiary(ies) of a charitable remainder

trust be “one or more persons (at least one of which is not [a charitable organization]).” I.R.C. §§

664(d)(1)(A), 664(d)(2)(A).  Accordingly, charitable income beneficiaries are permitted so long

as there is at least one non-charitable beneficiary.

11. I.R.C. § 664(d)(2)(C).  Provision is also made for the remainder interest to remain in trust

for the use of an organization described in section 170(c).  Id.; see also Treas. Reg. § 1.664-

1(a)(1)(I).

12. I.R.C. § 664(d)(1)(A); see also Treas. Reg. § 1.664-1(a)(1)(I).

13. I.R.C. § 664(d)(2)(A); see also Treas. Reg. § 1.664-1(a)(1)(I).

14. Rev. Rul. 72-395 § 4.01, 1972-2 C.B. 340, 342 (describing the requirement for CRATs);

id. § 6.01 (describing the requirement for CRUTs).

15. Id. § 7.01 (The sample trust provision illustrated states, “Any income of the trust in

excess of such payments shall be added to principal.” (emphasis added)).  But see id. § 6.01(2)

(“Any income of the trust in excess of the unitrust amount may, but need not, be added to principal. 

Care should be taken, however, to assure that, under applicable local law, such excess income is

retained by the trust.” (emphasis added)).

16. I.R.C. § 664(c)(1) (providing that a CRT is exempt from income taxation); see also Treas.

Reg. § 1.664-1(a)(1)(I).

17. I.R.C. § 664(c)(2) (imposing an excise tax of one hundred percent on a CRT’s unrelated

business taxable income).

18. Id. § 170(f)(2)(A) (2006).

19. Id. § 2522(c)(2)(A) (2006).

20. Id. § 2055(e)(2)(A) (2006).  The estate tax charitable deduction is only available if the

settlor retains an income interest.  If the settlor names someone other than himself or herself as an



844 INDIANA LAW  REVIEW [Vol. 45:841

of the charitable remainder interest.   Similarly, a transferor to a testamentary21

CRT receives an estate tax charitable deduction.22

2.  The NIM CRUT, a Special C ase.— A NIM CRUT is a special case of a
CRUT.  Internal Revenue Code section 664(d)(3)(A) adds a twist to the standard
C RUT definition by providing that a CRUT agreement may define the paym ent
to the income beneficiary to be the lesser of the CRUT’s annual unitrust amount
and the trust’s accounting income.   Internal Revenue Code section 664(d)(3)(B)23

adds a further twist by permitting the payment of trust accounting income in
excess of the annual unitrust amount to the extent of any accumulated prior year
deficiencies to “make-up” for those prior year shortfalls.   Prior year deficiencies24

are measured as the excess of the CRUT’s annual unitrust am ount over the
CRUT’s trust accounting income each year.   The combination of the trust25

income provision and the deficiency “make-up” provision gives rise to the name
commonly associated with this type of CRUT, the net income with make-up
charitable remainder unitrust, or NIM CRUT.   Despite the difference in payout26

structure between a standard CRUT and a N IM CRUT, the computation of the
present value of the charitable remainder interest (i.e., the deductible amount) is
exactly the same for both types of CRUT.27

3.  Use of NIM CRUTs in Charitable Planning.— Donors wishing to make
charitable contributions of illiquid assets in exchange for an income stream
commonly use the NIM CRUT.   The NIM CRUT is particularly suited for this28

income beneficiary, then there is no estate inclusion of the CRT corpus and, as a result, no

charitable estate tax deduction.  See id.

21. Treas. Reg. § 1.664-3(d) (1972); see also Treas. Reg. § 1.664-4(a) (1972).

22. I.R.C. § 2055(e)(2)(A).

23. “Trust accounting income” is the term used to describe that portion of a trust portfolio’s

total return realized in the form of interest, dividends, rents, and other statutorily defined categories. 

UNIF. PRINCIPAL & INCOME ACT (amended 2008) § 104 cmt., 7A pt. III U.L.A. 363 (Supp. 2010).

Trust accounting income is the amount to which an income beneficiary is entitled when a trust

agreement “express[es] the income beneficiary’s distribution rights in terms of the right to receive

‘income.’” Id.

24. I.R.C. § 664(d)(3)(B).

25. Id.

26. The make-up provision is optional.  I.R.C. § 664(d)(3) (“[T]he trust instrument may

provide that the trustee shall pay the income beneficiary for any year – . . . (B) any amount of the

trust income which is in excess of [the annual unitrust amount].” (emphasis added)); see also Rev.

Rul. 72-395 § 7.01 cmt. 1, 1972-2 C.B. 340, 350 (explaining that “[m]akeup of deficiencies [is] not

required” (emphasis omitted)).  In rare cases this provision is omitted and the resulting trust is

typically called a “net income charitable remainder unitrust,” or NICRUT.

27. See Rev. Rul. 72-395 § 7.01 cmt. 2, 1972-2 C.B. 340, 350 (“[N]otwithstanding the [net

income limitation], the computation of the charitable deduction will be determined on the basis that

the regular unitrust amount will be distributed in each taxable year of the trust.”).

28. See B. Howard Pearson, Charitable Remainder Trusts and Other Charitable Techniques,

in 30TH ANNUAL ESTATE PLANNING INSTITUTE, at 967, 976-77 (PLI Tax Law & Est. Plan., Course

Handbook Series No. D-283, 1999).



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 845

type of contribution because, unlike a CRAT or a standard CRUT, a NIM CRUT
is not required to make a distribution to an income beneficiary unless the trust
receives trust accounting income.  Thus, for example, the NIM CRUT trustee in
possession of an illiquid asset, such as raw land, is not required to make a
distribution until the land is sold and the proceeds are invested in an income-
producing portfolio.  W ere this property contributed to a CRAT  or a standard
CRUT, the trustee would be required to make a distribution according to the
distribution schedule defined in the trust agreement.  Failure to make distributions
when required will generally cause a charitable remainder trust to lose its tax-
qualified status, potentially resulting in catastrophic results to the donor.29

NIM CRUTs are used much less frequently than CRATs or standard CRUTs. 
This is most likely because income distributions from a NIM CRUT are limited
to the trust’s net income instead of a more predictable (and, in many cases, larger)
annuity or unitrust am ount.  In 2007, for example, 21,475 NIM CRUT returns
were filed compared with 74,773 returns filed by standard CRUTs.   Based on30

these statistics, NIM CRUTs represented 22.3%  of all charitable remainder
unitrusts filing returns in 2007.31

4.  The Intersection of Federal Income Tax Law and State Principal and
Income Law.— Treasury Regulation section 1.664-3(a)(1)(i)(b)(3) states that
“trust income generally means income as defined under [I.R.C. §] 643(b) and the
applicable regulations.”   Internal Revenue Code section 643(b) specifies that32

“the term ‘income,’ when not preceded by the words ‘taxable,’ ‘distributable net,’
‘undistributed net,’ or ‘gross,’ means the amount of income of the estate or trust
for the taxable year determined under the terms of the governing instrument and
applicable local law.”   The applicable local law in Indiana is the Indiana A ct.33 34

B.  The M odernization of Principal and Income Accounting:
A Play in Two Acts

In administering a trust, a trustee is bound by a duty of impartiality to balance

29. See, e.g., Estate of Atkinson v. Comm’r, 309 F.3d 1290, 1295-96 (11th Cir. 2002)

(denying an estate tax charitable deduction where the trustee of a CRAT failed to make the required

annual annuity payments to the income beneficiary).

30. See Lisa Schreiber Rosenmerkel, Changing Times:  An Analysis of the 2007 Revision of

the Split-Interest Trust Information Return, 29 I.R.S. STAT. INCOME BULL., Mar. 2010, at 130, 135,

available at http://www.irs.gov/pub/irs-soi/10winbul.pdf.  For purposes of this analysis, the number

of NIMCRUT returns filed was computed as the sum of “Net Income CRUTs,” 4,628, and “Net

Income with makeup CRUTs,” 16,847.  See id. 

31. See id.  For purposes of this analysis, the percentage of NIMCRUT returns filed was

computed by dividing the sum of “Net Income CRUTs,” 4,628, and “Net Income with makeup

CRUTs,” 16,847, or 21,475, by the total number of returns filed, 96,248.  See id.

32. Treas. Reg. § 1.664-3(a)(1)(i)(b)(3) (as amended in 2004).

33. I.R.C. § 643(b) (2006) (emphasis added).

34. IND. CODE § 30-2-14-14(a) (2011) (“The following applies to a fiduciary in allocating

receipts and disbursements to or between principal and income . . . .”).



846 INDIANA LAW  REVIEW [Vol. 45:841

the competing interests of various classes of trust beneficiaries.   In the context35

of principal and income accounting, these competing interests are illustrated, on
the one hand, by the interest of income beneficiaries that the trust’s investment
portfolio be productive of income for distribution, and, on the other hand, by the
interest of remainder beneficiaries in the preservation and growth of the trust’s
principal.  To strike this balance, trustees have traditionally invested trust
portfolios according to a prudence standard and allocated the resulting investment
receipts and disbursements between the income account (payable to the income
beneficiaries) and principal account (payable to the remainder beneficiaries at the
expiration of the trust’s term).   36

In the thirty-five years between the promulgation of the R evised Uniform
Principal and Income Act  and the promulgation of UPAIA 1997, both37

investment practice and scholarship about the behavior of the investment markets
changed significantly.   The Commissioners first responded to these changes in38

1994 by promulgating the Uniform Prudent Investor Act (UPIA).   The UPIA set39

aside the “prudent man rule” of Harvard College v. Amory  in favor of the40

“prudent investor rule” of the Restatement (Third) of Trusts.   The41

Commissioners followed the UPIA with the UPAIA 1997 to harmonize the
adoption of the prudent investor rule in the UPIA with the rules relating to the
allocation of receipts and disbursements to the income and principal accounts.42

1.  Act 1:  The Uniform Prudent Investor Act.— The UPIA modernized trust
investment law in light of the widespread acceptance of modern portfolio
theory.   Under m odern portfolio theory, a trustee invests a trust’s portfolio as43

a whole to maximize total return given an acceptable level of risk.   In the44

language of the UPIA, “[a] trustee’s investment and management decisions
respecting individual assets must be evaluated not in isolation but in the context
of the trust portfolio as a whole and as a part of an overall investment strategy

35. See RESTATEMENT (THIRD) OF TRUSTS § 79 (2007).

36. See Robert B. Wolf, Defeating the Duty to Disappoint Equally—The Total Return Trust,

32 REAL PROP. PROB. & TR. J. 45, 50-51 (1997).

37. UNIF. PRINCIPAL & INCOME ACT, REVISED 1962 ACT, 7A pt. III U.L.A. 547 (2006).

38. See UNIF. PRINCIPAL & INCOME ACT (amended 2008) prefatory n., 7A pt. III U.L.A. 363,

366-67 (Supp. 2010); UNIF. PRUDENT INVESTOR ACT, prefatory n., 7B U.L.A. 1, 3 (2006);

RESTATEMENT (THIRD) OF TRUSTS, ch. 17 intro. n. (2007).

39. UNIF. PRUDENT INVESTOR ACT, 7B U.L.A. 1.

40. 26 Mass. (9 Pick.) 446, 469 (1830) ( “[Trustees should] observe how men of prudence,

discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to

the permanent disposition of their funds, considering the probable income, as well as the probable

safety of the capital to be invested.”).

41. RESTATEMENT (THIRD) OF TRUSTS § 90.

42. See UNIF. PRINCIPAL & INCOME ACT prefatory n.

43. See UNIF. PRUDENT INVESTOR ACT prefatory n.

44. See S. Alan Medlin, Limitations on the Trustee’s Power to Adjust, 42 REAL PROP. PROB.

& TR. J. 717, 719, 736 (2008).



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 847

having risk and return objectives reasonably suited to the trust.”   This is45

distinguishable from the prior rule of Amory, which over time came to treat
certain classes of assets as per se imprudent as well as to focus on the prudence
or imprudence of the selection of individual assets in a trust’s portfolio.46

Inherent in the UPIA’s approach is the absence of any concern about the
categories of returns generated by an investment portfolio.   However, under47

traditional notions of trust accounting income, the categories of returns generated
by an investment portfolio are important because only investment returns from
specific categories (e.g., interest, dividends, rents, and royalties) are considered
allocable to income  and, therefore, payable to income beneficiaries.  Similarly,48

absent language to the contrary in the trust agreement, capital appreciation,
realized or unrealized, has been traditionally allocable to the trust principal  and,49

therefore, retained for the benefit of the trust’s remainder beneficiaries.  As a
result, in states that adopted the UPIA, trustees were potentially placed in a bind. 
T hose trustees were duty-bound to invest according to the modern portfolio
theory principles of the UPIA.   At the same time, those trustees were duty-50

bound to impartially balance the interests of both income and remainder
beneficiaries with respect to the production of income under the traditional
income categories while adding to trust principal through capital appreciation. 
This balance was complicated by the fact that, in general, the greater the
proportion of a trust portfolio invested in equity securities, the smaller the
proportion of the overall expected investment return that will come from one of
the traditional categories of income distributable to a trust’s income
beneficiaries.   C onversely, the greater the proportion of a portfolio invested in51

fixed-income securities, the smaller the proportion of the overall expected
investment return that will result from capital appreciation that increases the
trust’s principal.   In other words, under the traditional model, to achieve a52

targeted amount of income to distribute to the trust’s income beneficiaries, the
trustee was necessarily required to sacrifice some overall investment return
potential in order to generate returns from categories that were distributable to the
trust’s income beneficiaries.

This dilemma can be illustrated as follows :53

45. UNIF. PRUDENT INVESTOR ACT § 2(b) (emphasis added).

46. See RESTATEMENT (THIRD) OF TRUSTS, Ch. 17 intro. n.

47. See UNIF. PRINCIPAL & INCOME ACT prefatory n.; Medlin, supra note 44, at 719.

48. See UNIF. PRINCIPAL & INCOME ACT prefatory n.; Christopher P. Cline, The Uniform

Prudent Investor and Principal and Income Acts:  Changing the Trust Landscape, 42 REAL PROP.

PROB. & TR. J. 611, 647 (2008).

49. See Cline, supra note 48, at 647.

50. See, e.g., IND. CODE § 30-4-3.5-1(a) (2011) (“Except as otherwise provided [by the terms

of the trust agreement], a trustee who invests and manages trust assets owes a duty to the

beneficiaries of the trust to comply with the prudent investor rule set forth in this chapter.”).

51. See Wolf, supra note 36, at 59.

52. See id.

53. This example is patterned after an example found in Medlin, supra note 44, at 721.



848 INDIANA LAW  REVIEW [Vol. 45:841

Assum e that for the current year, a trustee can choose between Portfolio A
invested solely in the stock market (a one hundred percent equity allocation) and
Portfolio B invested solely in fixed-income securities  (a one hundred percent54

fixed-income allocation).  Further assume Portfolio A will earn a fifteen percent
return, all in the form of unrealized capital appreciation, while Portfolio B  will
earn a four percent return, all in the form of interest income.  Assuming (1) an
initial value of $1,000,000 and (2) that all trust accounting income is distributed
to the trust’s income beneficiaries, then the trust’s investment and distribution
activity can be summarized as follows:

Portfolio A

100%  E quity

P ortfolio B

100%  Fixed-Incom e

B eginning of Y ear V alue $1,000,000 $1,000,000

C apital A ppreciation $150,000 $0

T rust A ccounting In com e $0 $40,000

D istribution to In com e B eneficiaries $0 ($40,000)

E nd of Y ear V alue $1,150,000 $1,000,000

Assuming that the returns illustrated represent the maximum possible returns
for each portfolio given an equally acceptable degree of risk,  one can see that55

Portfolio A maximizes the trust’s investment performance but generates no
income to pay to the incom e beneficiaries; all of the investment return inures to
the benefit of the remainder beneficiaries.  But, if the trustee selects Portfolio B
to generate income to distribute to the income beneficiaries, then the trustee will
clearly favor the interests of the income beneficiaries over the rem ainder
beneficiaries because the portfolio generates no growth in the trust portfolio. 
Thus, the trustee is placed in a position of conflict between the two classes of
beneficiaries, each desiring that the trustee invest with their best interests in mind.

Trustees have traditionally managed this conflict in Solomon-like fashion by
devising portfolios, composed in part of equity securities and in part of fixed-
incom e securities, expected to generate blended returns comprised of interest,
dividends, and capital appreciation.  Returning to the previous example, if the
trustee invested instead in Portfolio C, which invests forty percent in equity

54. Fixed-income securities, generally corporate bonds and other similar corporate debt

instruments, produce fixed rates of return in the form of interest.  See Medlin, supra note 44 at 719. 

While the rate of return from fixed-income securities is subject to adjustment for inflation,

deflation, and other economic conditions, the rate of return on fixed-income securities is generally

more stable than the rate of return on equity securities (e.g., corporate stocks).  See id. at 720.

55. Because equity securities are generally more risky than fixed income securities, this

assumption is unlikely to hold in a real-world investment scenario.  See Wolf, supra note 36, at 52-

60.



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 849

securities and sixty percent in fixed-income securities, the resulting activity can
be summarized as follows :56

P ortfolio A

100%  E quity

P ortfolio B

100%  Fixed-In com e

P ortfolio C

40%  E quity/

60%  Fixed-In com e

B eginning of Y ear V alue $1,000,000 $1,000,000 $1,000,000

C apital A ppreciation $150,000 $0 $60,000

T rust A ccounting In com e $0 $40,000 $24,000

D istribution to In com e

B eneficiaries $0 ($40,000) ($24,000)

E nd of Y ear V alue $1,150,000 $1,000,000 $1,060,000

W hile Portfolio C does generate income that is distributable to the trust’s
income beneficiaries, it is only sixty percent of the amount they would receive
under Portfolio B.  Similarly, the remainder beneficiaries would receive some
capital appreciation, but only forty percent of the amount they would receive
under Portfolio A.  One commentator has characterized this result as the trustee’s
duty to disappoint equally.57

2.  Act 2:  The Uniform Principal and Income Act.— The Commissioners’
response to the potential conflict between an investm ent standard that is
indifferent to the categories of returns generated and a trust accounting income
regime principally based on categories of returns, was the introduction of an
equitable power of adjustment in the U PAIA 1997.  U PAIA 1997 section 104(a)
states:

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 103(a), that
the trustee is unable to comply with Section 103(b).58

The comments to section 104 (Comments) explicitly state that “[t]he purpose of
[the power to adjust] is to enable a trustee to select investments using the
standards of a prudent investor without having to realize a particular portion of

56. This example is an extension of an example found in Medlin, supra note 44, at 721.

57. See Wolf, supra note 36, at 72 (“All the trustee can do is to try to fulfill their duty of

impartiality by disappointing income and remainder beneficiaries equally!”).

58. UNIF. PRINCIPAL & INCOME ACT § 104(a) (amended 2008), 7A pt. III U.L.A. 363, 434

(Supp. 2010).



850 INDIANA LAW  REVIEW [Vol. 45:841

the portfolio’s total return in the form of traditional trust accounting income such
as interest, dividends, and rents.”59

To guide trustees in determ ining whether and to what extent to exercise the
power to adjust, UPAIA 1997 section 104(b) provides the following nine factors
for consideration:

(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
[Act] 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.60

The Comments state that these factors are intended to be consistent with a
similar list of factors in the UPIA “so that, to the extent possible, comparable
factors will apply to investment decisions and decisions involving the power to
adjust.”61

The Comments provide several examples illustrating the interplay between
the trustee’s investment decisions and the exercise of the power to adjust.  For
example, in Example 1 from the Comments, a newly appointed trustee determines
that a shift in the trust’s investment allocation from a portfolio invested twenty
percent in stocks (i.e., equity securities) and eighty percent in bonds (i.e., fixed-
incom e securities) to a portfolio equally weighted between the two asset classes
is appropriate because this alternative portfolio “has risk and return objectives
that are reasonably suited to the trust.”   However, having made this decision, the62

59. Id. § 104 cmt.

60. Id. § 104(b) (alteration in original).

61. Id. § 104 cmt.

62. Id.  Note that the phrase “risk and return objectives that are reasonably suited to the trust”

is from section 2(b) of the UPIA.  UNIF. PRUDENT INVESTOR ACT § 2(b).



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 851

trustee also determines that this new portfolio allocation will result in the receipt
of less dividend and interest income.   After considering the factors listed in63

UPAIA 1997 section 104(b), the “[trustee] may transfer cash from principal to
income to the extent [the trustee] considers it necessary to increase the amount
distributed to the income beneficiary.”64

II.  INDIANA’S POW ER TO A DJUST

The power to adjust is codified in the Indiana Act as follows:

(a) A trustee may 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:

(A) after applying the rules in section 14(a) of this chapter; and
(B) considering any power the trustee may have under the trust
or the will to invade principal or accumulate income; 

that the trustee is unable to com ply with section 14(b) of this
chapter.65

As adopted, Indiana’s power to adjust statute is substantially the same as
UPAIA 1997 section 104.  The only substantive change was the insertion of the
phrase “considering any power the trustee may have under the trust or the will to
invade principal or accumulate incom e” in Indiana Code section 30-2-14-
15(a)(3).   This phrase does not substantively alter the meaning of the power to66

adjust as embodied in the U PA IA  1997, but rather serves to highlight the
requirement that the trustee first administer a trust according to its terms as
required by Indiana Code section 30-2-14-14(a)(1). 

Under the Indiana Act, a number of threshold conditions must be satisfied
prior to an exercise of the power to adjust.   These threshold conditions can be67

divided into those that are external to the power to adjust (embodied in the
references to section 14(a) and section 14(b) in the text of the statute) and those
that are internal to the power to adjust’s statutory text.  Assuming the threshold
conditions are met, the trustee must then determ ine whether any of the statutory
prohibitions limiting the exercise of the power to adjust found in Indiana Code
section 30-2-14-15(c) are applicable.  If, after reviewing the prohibitions on the
exercise of the power to adjust found in Indiana Code section 30-2-14-15(c), the
trustee is still not prevented from pursuing the power to adjust, then the trustee

63. See UNIF. PRINCIPAL & INCOME ACT § 104 cmt.

64. Id.

65. IND. CODE § 30-2-14-15(a) (2011).

66. Id. § 30-2-14-15(a)(3).

67. See Medlin, supra note 44, at 726-36 (discussing these threshold conditions in the context

of the UPAIA 1997).



852 INDIANA LAW  REVIEW [Vol. 45:841

should assess the factors found at Indiana Code section 30-2-14-15(b)  to68

determine whether and to what extent to exercise the power to adjust.

A.  External Threshold Conditions

As an initial matter, a trustee must administer a trust according to the terms
of the trust agreement, even if an applicable trust provision differs from the
Indiana Act.   The Comments  explain that this rule “emphasize[s] . . . that69 70

provisions in the terms of the trust are param ount”; the UPAIA 1997 is a set of
default rules that only have effect when the document is silent.   Second, a71

trustee may exercise any discretionary powers of administration given the trustee
under the terms of the trust agreement.   Third, a trustee must administer the trust72

in accordance with the applicable principal and income act in matters that are not
addressed in the trust agreement or covered by a discretionary power of
administration granted the trustee by the terms of the trust agreement.   Finally,73

“[i]n exercising the power to adjust . . . a fiduciary shall administer a trust . . .
im partially . . . .”   The Comments describe this requirement of impartiality as74

the “paramount consideration in applying [the power to adjust].”  75

In sum, before a trustee considers the appropriateness of an exercise of the
power to adjust, the trustee must first administer the trust using all principal and
income rules contained in the trust agreement and all the discretionary and non-
discretionary powers granted to the trustee under the terms of the trust agreement. 
Next, the trustee must apply all of the provisions of the Indiana Act other than the
power to adjust.  Having taken into account powers granted by the trust
agreement and having applied the Indiana Act, the trustee must then determine
whether the trustee has impartially administered the trust as between the income
and remainder beneficiaries before proceeding to the power to adjust.  If, in the
trustee’s assessment, the trustee has impartially administered the trust as between

68. The list of factors in IND. CODE § 30-2-14-15(b) corresponds to the list of factors found

at UNIF. PRINCIPAL & INCOME ACT § 104(b).  See supra note 60 and accompanying text.

69. IND. CODE § 30-2-14-14(a)(1) (2011).

70. Indiana did not create its own explanatory comments when it enacted the Indiana Act. 

However, where a statute is based on a uniform act, “[t]he comments to [the] uniform act are

indicative of the Legislature’s intent.”  Basileh v. Alghusain, 912 N.E.2d 814, 821 (Ind. 2009)

(addressing the Uniform Interstate Family Support Act).

71. UNIF. PRINCIPAL & INCOME ACT § 103 cmt.

72. IND. CODE § 30-2-14-14(a)(2).

73. Id. § 30-2-14-14(a)(3).

74. Id. § 30-2-14-14(b).

75. UNIF. PRINCIPAL & INCOME ACT § 104 cmt.; see also RESTATEMENT (THIRD) OF TRUSTS

§ 79 gen. cmt. a (2007) (A trustee has a duty to impartially administer a trust “in balancing the

naturally conflicting concerns of life and remainder beneficiaries . . . .  The duty of impartiality is

applicable to . . . . the allocation of receipts and expenditures between principal and income

accounts . . . , especially as fiduciary discretion, or the making of adjustments . . . , may be involved

. . . .”).



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 853

the income and remainder beneficiaries after satisfying these external threshold
conditions, then the inquiry stops.  However, if, after satisfying the external
conditions, the trustee determines that partiality is being shown to one class of
beneficiary over another, then the trustee must determine whether the internal
threshold conditions of the Indiana Act are met.

In general, a N IM CRUT trustee should be able to satisfy the external
threshold conditions.  A trustee prudently overseeing the every day administration
of a NIM CRUT will, as a matter of course, apply any discretionary and non-
discretionary powers in the administration of the trust.  Similarly, where the trust
agreement is silent as to the proper allocation of receipts and disbursements
between principal and income, the Indiana Act is the standard that guides the
decisions of a prudent trustee with regard to the administration of principal and
income matters.   The more difficult question is whether the trustee has, in fact,76

impartially administered the trust.  W hat is “fair and reasonable” is a highly fact-
sensitive determination that is likely to be colored by one’s perspective.  An
income beneficiary whose trust distributions are less than expected will almost
certainly have a different perspective from that of a charitable remainder
beneficiary with its own expectancy of what it should receive when the trust’s
term expires.

B.  Internal Threshold Conditions

In addition to the external threshold conditions described above, Indiana
Code section 30-2-14-15(a) imposes two internal threshold conditions that must
be met before an exercise of the power to adjust is proper.  First, the trustee must
“invest[] and manage[] [the] trust assets as a prudent investor.”   The Comments77

state that this “condition will be met [where] the prudent investor rule applies
because the Uniform [Prudent Investor] Act . . . has been enacted.”   For a78

NIM CRUT administered under Indiana law, this condition is met by virtue of
Indiana’s adoption of the Indiana Uniform Prudent Investor Act.79

Second, by its terms, the trust agreement must “describe the amount that may
or must be distributed to a beneficiary by referring to the trust’s income.”   The80

Comments state that this requirement is met

when the terms of the trust require all of the “income” to be distributed
at regular intervals; or when the terms of the trust require a trustee to
distribute all of the income, but permit the trustee to decide how much to
distribute to each member of a class of beneficiaries; or when the terms

76. See IND. CODE § 30-2-14-14(a)(1).

77. Id. § 30-2-14-15(a)(1).

78. UNIF. PRINCIPAL & INCOME ACT § 104 cmt.

79. Ind. Unif. Prudent Investor Act, Pub. L. No. 137-1999, § 3, 1999 Ind. Acts 756 (codified

at IND. CODE §§ 30-4-3.5-1 to -13).  Note that Indiana’s adoption of UPIA may satisfy this

condition in an objective sense, but whether the trustee is actually investing as a prudent investor

is an individualized determination based on the trustee’s actions in a particular case.

80. IND. CODE § 30-2-14-15(a)(2).



854 INDIANA LAW  REVIEW [Vol. 45:841

of a trust provide that the beneficiary shall receive the greater of the trust
accounting income and a fixed dollar amount (an annuity), or of trust
accounting income and a fractional share of the value of the trust assets
(a unitrust amount).  If the trust authorizes the trustee in its discretion to
distribute the trust’s income to the beneficiary or to accumulate some or
all of the income, the condition will be met because the terms of the trust
do not permit the trustee to distribute m ore than the trust accounting
income.81

W hile this Comment does not specifically describe a N IM CRUT, it does not
preclude a NIM CRUT from meeting the condition.  The Comment clearly states
that the condition is satisfied where a beneficiary is entitled to the greater of trust
accounting income or an annuity or unitrust amount.  But, a NIM CRUT income
beneficiary is entitled to the lesser of trust accounting income and the annual
unitrust amount.  The resolution of this distinction is found in the last clause of
the last sentence of the Comment:  “because the terms of the trust do not permit
the trustee to distribute more than the trust accounting income.”   The82

implication of this clause is that a trust term  perm itting the distribution of more
than trust accounting income does not “describe the amount that may or must be
distributed to a beneficiary by referring to the trust’s income”  and, therefore, the83

power to adjust is not available.  Conversely, a trust term that “describes the
amount that may or must be distributed” in terms of trust income, but does not
permit the distribution of trust income in excess of a stated unitrust amount, still
meets the requirement of the statute because it does not permit the distribution of
more than the trust’s accounting income.  This latter condition is clearly the case
with a NIM CRUT where trust accounting income, up to the annual unitrust
amount, must be distributed.   Even if there is a make-up amount, no more than84

trust accounting income may be distributed.85

Furthermore, in the case of a NIM CRUT, if trust accounting income exceeds
the annual unitrust amount, such excess must be retained and added to trust
principal.   The Comment does not address the case where such retention is86

mandatory, but the last sentence of the Comment does speak approvingly of a
discretionary power to retain income so long as “the terms of the trust do not
permit the trustee to distribute more than the trust accounting income.”  87

Following the same rationale stated in the last clause of the Comment, there is
little reason to distinguish between a NIM CRUT’s mandatory retention of income
and a discretionary retention of income coupled with a requirement that no more
than trust accounting income be distributed.  In neither case may a trustee

81. UNIF. PRINCIPAL & INCOME ACT § 104 cmt. (emphasis added).

82. Id.

83. IND. CODE § 30-2-14-15(a)(2).

84. See supra Part I.A.2.

85. See supra Part I.A.2.

86. See supra Part I.A.2. and note 15.

87. UNIF. PRINCIPAL & INCOME ACT § 104 cmt.



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 855

distribute more than the trust accounting income.  Therefore, a qualified
NIM CRUT should satisfy the requirement that the trust agreement “describe the
amount that may or must be distributed to a beneficiary by referring to the trust’s
income.”88

C. Statutory Prohibitions on the Exercise of the Power to Adjust

Indiana Code section 30-2-14-15(c) contains seven statutory prohibitions that
limit a fiduciary’s exercise of the power to adjust.  Of these seven, four are
relevant to a NIM CRUT.89

1.  Prohibition on Exercise Where Trustee Is a Beneficiary.— Indiana Code
section 30-2-14-15(c)(7) states that the power to adjust may not be exercised “if
the trustee is a beneficiary of the trust.”   Thus, if a NIM CRUT trustee is also a90

beneficiary of the trust (including a charitable remainder beneficiary) then that
beneficiary-trustee is prohibited from exercising the power to adjust.  However,
the Indiana Act provides that a co-trustee who is not a beneficiary m ay exercise
the power unless prohibited from doing so by the terms of the trust.   Thus, if the91

lim itation of Indiana Code section 30-2-14-15(c)(7) applies, it may be possible
to appoint a co-trustee who is not a beneficiary to exercise the power to adjust.92

2.  Grantor Trust Prohibition.— Indiana Code section 30-2-14-15(c)(5)
prohibits a trustee from

possessing or exercising the power to make an adjustment [if this] 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.93

This prohibition is intended to prevent the availability or exercise of the power
to adjust from causing a trust that is otherwise a non-grantor trust from becoming

88. IND. CODE § 30-2-14-15(a)(2).

89. The three that are not relevant are IND. CODE § 30-2-14-15(c)(1) (prohibiting an exercise

of the power to adjust that would adversely impact a claimed marital deduction); IND. CODE § 30-2-

14-15(c)(2) (prohibiting an exercise of the power to adjust that would adversely impact a claimed

gift tax exclusion); and IND. CODE § 30-2-14-15(c)(6) (prohibiting an exercise of the power to

adjust that would cause the corpus of the trust to be included in an individual’s estate).

90. IND. CODE § 30-2-14-15(c)(7).

91. Id. § 30-2-14-15(d).

92. Indiana did not adopt the provision in the UPAIA 1997 that prohibited an exercise of the

power to adjust by a non-beneficiary trustee where the adjustment would benefit the trustee

indirectly.  This raises the question of whether a non-beneficiary co-trustee could be the spouse or

child of a beneficiary.  If such a person is appointed co-trustee, the trustee’s duty of loyalty,

described in the Restatement (Third) of Trusts § 78 as the “duty to administer the trust solely in the

interest of the beneficiaries,” probably precludes such a co-trustee from acting improperly to his

or her own benefit.  RESTATEMENT (THIRD) OF TRUSTS § 78.

93. IND. CODE § 30-2-14-15(c)(5).



856 INDIANA LAW  REVIEW [Vol. 45:841

a grantor trust.94

A qualified NIM CRUT is not a grantor trust.   For example, notwithstanding95

the general rule that a retained right to income from a trust will cause the grantor
to be treated as the owner of the trust,  by rule a NIM CRUT is not a grantor trust96

simply because the grantor or the grantor’s spouse are income beneficiaries of the
trust.   However, a trust, including a NIM CRUT, is a grantor trust where “the97

beneficial enjoyment of the corpus or the income therefrom is subject to a power
of disposition, exercisable by the grantor or a nonadverse party, or both, without
the approval or consent of any adverse party.”98

W here the power to adjust is exercisable by the grantor or a nonadverse party,
or both, it is likely that the power to adjust is a power of disposition over trust
income that would cause the trust to be a grantor trust.  The power to adjust can
only be exercised where the am ount to be distributed to income beneficiaries is
described by reference to trust income.  M oreover, any adjustment between
income and principal necessarily has a direct effect on the amount of income to
be distributed.  As a power that necessarily affects the disposition of trust income,
it is probable that the IRS would characterize the power to adjust as a “power of
disposition” controlling the “beneficial enjoyment” of the income of the trust. 
Therefore, even if the terms of the trust agreem ent do not limit the grantor’s
exercise of the power to adjust, a grantor who is the trustee of a NIM CRUT
should not exercise the power to adjust, but rather should defer such an exercise
to a co-trustee who is neither a grantor nor a beneficiary.

3.  Prohibition on Changing a Fixed Annuity or U nitrust Amount.— Indiana
Code section 30-2-14-15(c)(3) prohibits an exercise of the power to adjust “that
changes the amount payable to a beneficiary as a fixed annuity or a fixed fraction
of the value of the trust assets.”   Referring to this provision, the Comments state99

that “a beneficiary’s right to receive a fixed annuity or a fixed fraction of the
value of a trust’s assets is not subject to [the power to adjust].”   One100

commentator suggests that this Comment “seem[s] to indicate that [UPAIA 1997

94. The term “grantor trust” is derived from I.R.C. § 671 which provides that “[w]here . . .

the grantor . . . [is] treated as the owner of any portion of a trust, there shall then be included in

computing the taxable income and credits of the grantor . . . those items of income, deductions, and

credits against tax of the trust which are attributable to that portion of the trust . . . .” (emphasis

added).  I.R.C. § 671 (2006).

95. See Treas. Reg. § 1.664-1(a)(4) (1972).

96. I.R.C. § 677(a) (2006) (“The grantor shall be treated as the owner of any portion of a trust

. . . whose income . . . is, or . . . may be-- (1) distributed to the grantor or the grantor's spouse . . .

.”).

97. Treas. Reg. § 1.664-1(a)(4) (“[N]either the grantor nor his spouse shall be treated as the

owner of the trust . . . merely because the grantor or his spouse is named as a recipient.”).

98. I.R.C. § 674(a) (2006).

99. IND. CODE § 30-2-14-15(c)(3) (2011).

100. UNIF. PRINCIPAL & INCOME ACT § 104 cmt. (amended 2008), 7A pt. III U.L.A. 363, 438

(Supp. 2010).



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 857

section] 104(c)(3)  governs charitable remainder trusts, including the net-[101]

income-with-makeup charitable remainder unitrust.”   102

It seems clear that this section works to prohibit an exercise of the power to
adjust in the case of a CRAT or standard CRUT which describe the amount due
to the income beneficiary as a fixed annuity or fixed fraction (or percentage) of
the value of the trust assets, respectively.  However, it is less clear whether this
prohibition should apply to a NIM CRUT.  A NIM CRUT requires that a trustee
distribute to the income beneficiary the lesser of the trust’s accounting income
and an annual unitrust amount.   An exercise of the power to adjust by a103

NIM CRUT trustee is not a change to the annual unitrust amount, but rather a
change to the amount of the trust accounting income.  For this reason, it seems
unlikely that the prohibition applies to NIM CRUTs.

4.  Prohibition on Adjustments from Amounts Perm anently Set Aside for
Charitable Purposes.— It is the fourth prohibition that poses the greatest test to
the propriety of the exercise of the power to adjust in the case of a NIM CRUT. 
Indiana Code section 30-2-14-15(c)(4) prohibits an adjustment “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.”   Of specific concern104

is whether an exercise of the power to adjust in the context of a NIM CRUT is “an
adjustment . . . from [an] amount . . . permanently set aside for charitable
purposes.”105

a.  In a NIM CRUT, is there an amount permanently set aside for charitable
purposes?— As previously noted, a transferor who transfers property to a
qualified NIM CRUT receives a charitable income tax deduction and charitable
transfer tax deduction equal to the present value of the remainder interest in the
trust.   To qualify for the income and transfer tax deductions, the remainder106

interest must be irrevocably designated to, or for the use of, one or more
charitable organizations.   Therefore, at least facially, a NIM CRUT’s charitable107

remainder interest is an amount permanently set aside for charitable purposes. 
Further, because a NIM CRUT defines the interest of the income beneficiaries in
terms of income and the only other available interest is the right to the trust
principal, at any given point in time, a NIM CRUT’s charitable remainder is, at
least theoretically, equivalent to the NIM CRUT’s principal.  Under this analytical
framework, an adjustment from principal to income would therefore be an
adjustment from an amount permanently set aside for charitable purposes.

However, this conclusion is arguably incorrect for at least three reasons. 
First, the computation of the present value of the rem ainder interest (the

101. UPAIA 1997 § 104(c)(3) corresponds to IND. CODE § 30-2-14-15(c)(3).

102. CHRISTOPHER P. CLINE, THE LAW OF TRUSTEE INVESTMENTS 82 (2009) (emphasis added).

103. See supra Part I.A.2.

104. IND. CODE § 30-2-14-15(c)(4).

105. Id.

106. See supra notes 18-21 and accompanying text.

107. See I.R.C. § 664(d)(1)(C) (2006) (describing a charitable remainder annuity trust); I.R.C.

§ 664(d)(2)(C) (describing a charitable remainder unitrust).



858 INDIANA LAW  REVIEW [Vol. 45:841

deductible amount) casts doubt on the assumption that the amount a NIM CRUT
donor intended to permanently set aside for charitable purposes is always equal
to the NIM CRUT’s principal.  Second, an appropriate exercise of the power to
adjust probably will not cause a NIM CRUT to lose tax benefits obtained when
it was created.  Finally, denying NIM CRUT trustees access to the power to adjust
is contrary to the policy underlying the power. 

b.  The computation of the present value of the remainder interest and its
relationship to the amount permanently set aside for charitable purposes.— The
prescribed method for computing the present value of the remainder interest of
a standard CRUT and a NIM CRUT are the same.   The computation requires108

seven inputs:  (1) the date of transfer;  (2) the age of each beneficiary;  (3) the109 110

unitrust percentage;  (4) the applicable I.R.C. § 7520 rate;  (5) the frequency111 112

of the required unitrust distributions (e.g., monthly, quarterly, semi-annual, or
annual distribution periods);  (6) the timing of distributions within the113

distribution period (e.g., whether distributions occur at the beginning or end of
the distribution period);  and (7) the date on which trust property is to be valued114

relative to the distribution year (e.g., at the beginning or the end of the period).115

As discussed above, the computation of the present value of the remainder
interest for a standard CRUT and a NIM CRUT is the same.   The computation116

assumes that the annual unitrust amount is distributed in full each year; it makes
no adjustment for the possibility that, in the case of a NIM CRUT, trust
accounting income may be less than the annual unitrust amount.  The computed
amount is the basis of the charitable income tax and transfer tax deductions.  As
such, it is arguable that this amount reflects the amount permanently set aside for
charitable purposes.  

For example, assume that Fred, age 68, and Jane, age 62, transfer $1,000,000
to a NIM C R U T  on January 15, 2011.  Further assume that the trust’s stated
unitrust percentage is five percent.  Based on a transfer date of January 15, 2011,

108. See supra Part I.A.2. and note 27 and accompanying text; see also Treas. Reg. § 1.664-4

(2009) (describing the computation of the remainder interest in a charitable remainder unitrust).

109. The date of transfer establishes the “valuation date” used to determine the applicable life

table as required by Treas. Reg. § 1.664-4(a)(1) (2011) and the I.R.C. § 7520 rate to be used as

required by Treas. Reg. § 1.664-4(a)(2) (2009).

110. The age of each beneficiary is an indirect input in computation.  A beneficiary’s age is

relevant to the selection of the remainder factor from the appropriate table as described in IRS

Publ’n 1457, Actuarial Valuations (5-2009), available at http://www.irs.gov/pub/irs-pdf/p1457.pdf. 

111. See Treas. Reg. § 1.664-4(e)(3) (2009).

112. Each month the IRS publishes an interest rate used to determine “the value of any

annuity, any interest for life or a term of years, or any remainder or reversionary interest.”  I.R.C.

§ 7520(a) (2006); see also Rev. Rul. 2011-6, 2011-10 I.R.B. 537, 538 tbl. 4 (providing an example

of the monthly publication of the I.R.C. § 7520 rate).

113. See Treas. Reg. § 1.664-4(e)(3).

114. See id. § 1.664-4(a)(3).

115. See id. § 1.664-4(e)(3).

116. See supra Part I.A.2. and note 27 and accompanying text.



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 859

the best  section 7520 rate allowed is 2.4% .  Under these facts, the present value117

of the remainder interest (and the putative am ount permanently set aside for
charitable purposes) is $365,700.   As previously explained, this computed118

amount is the same regardless of whether Fred and Jane’s trust is a standard
CRUT or a NIM CRUT.   

W hat is the effect if the NIM CRUT’s investment portfolio fails to produce
trust accounting income greater than or equal to the annual unitrust amount but
the overall investment return is greater than or equal to the annual unitrust
amount?   Under this scenario, each year the income beneficiaries will receive119

less than the annual unitrust amount while, at the expiration of the trust’s term,
the charitable remainder beneficiaries will receive a larger charitable
remainder— more than the putative amount permanently set aside for charitable
purposes.  This increase in the charitable remainder would be reflected in an
increase in the value of the trust’s principal over time.  Assuming the amount
originally computed as the present value of the remainder interest represents the
amount permanently set aside for charitable purposes, the difference between the
trust principal and the computed present value represents an amount not
permanently set aside for charitable purposes, an amount from which adjustments
could be made.

It is possible to illustrate this difference by substituting in the present value
computation, in place of the unitrust percentage, an estimate of the real rate of
return the trust will receive in the form of trust accounting income while holding
all other factors constant.  Assuming that Fred and Jane’s NIM CRUT will receive
a real rate of return of trust accounting incom e of three percent, the resulting
estim ate of the present value of the remainder interest is $541,824, a difference
of $176,124.  It is from this difference that an adjustment between principal and
income would be made under the power to adjust.  Assuming this difference is
over and above the amount permanently set aside for charitable purposes (as
measured by the computed present value of the remainder interest), an adjustment

117. Internal Revenue Code section 7520(a) provides in part that “[i]f an income, estate, or

gift tax charitable contribution is allowable for any part of the property transferred, the taxpayer

may elect to use such Federal midterm rate for either of the [two] months preceding the month in

which the valuation date falls . . . .” I.R.C. § 7520(a) (emphasis added).  When computing the

present value of the remainder interest for unitrusts requiring distributions more frequently than

annually, a higher I.R.C. § 7520 rate will produce a slightly larger result.

118. Further assume that income beneficiary distributions are paid at the end of each calendar

quarter and that the trust property is valued on the first day of each year.

119. If the trust accounting income rate of return exceeds the stated unitrust percentage, then

there is no distinction between the expected results of a standard CRUT and a NIMCRUT.  This

is because, in either case, the required distributions are exactly equal to the annual unitrust amount

and the income in excess of the annual unitrust amount is retained in the trust for the benefit of the

charitable remainder beneficiary.  Conversely, if the trust accounting income rate of return and the

overall rate of return are less than the stated unitrust percentage, or perhaps even reflect a negative

return, there is little or no amount from which to make an adjustment and the question of the

propriety of an adjustment is in all probability moot.



860 INDIANA LAW  REVIEW [Vol. 45:841

from this amount would not be subject to the limitation of Indiana Code section
30-2-14-15(c)(4).

In short, the computed present value of the remainder interest used to
substantiate the charitable income tax and transfer tax deductions is a reasonable
estimate of the amount the donor intended to “permanently set aside for charitable
purposes.”  In Indiana, “[t]he primary goal in construing a trust document is to
ascertain and effectuate the intent of the settlor.”   The charitable tax deductions120

a donor receives upon the transfer of property to a charitable remainder trust
suggests that it was the donor’s intent to permanently set aside for charitable
purposes a specific amount that, depending on the performance of the trust’s
investment portfolio, may be less than the trust principal.  Therefore, an
adjustment from principal amounts in excess of the amount permanently set aside
for charitable purposes should not be treated as an adjustment from an amount
permanently set aside for charitable purposes.  A contrary interpretation is that
altruistic donors create NIM CRUTs with the expectation that the charitable
remainder beneficiary will receive the excess described above.

An additional consideration in this analysis is the role of the unitrust amount
in limiting the potential for adjustment.  Because a NIM CRUT trustee can never
distribute more than the annual unitrust amount plus the makeup amount,  there121

is an upper bound to the amount of an adjustment from principal to income that
will be payable to the NIM CRUT’s income beneficiaries.  This upper bound
serves to limit a trustee’s ability to adjust from an amount permanently set aside
for charitable purposes.  Consequently the potential for abuse is significantly
diminished.

c.  A n appropriate exercise of the power to adjust will not cause the loss of
federal or state tax benefits obtained when the trust was created.— The
C om m ents provide that “[t]he purpose of [UPAIA 1997 sections 104(c)(1)]
through (4) is to preserve tax benefits that may have been an important purpose
for creating the trust.”   The implication is that, if upon enactment of the UPAIA122

1997 by a state, the availability of the power to adjust could cause a trust to lose
a tax benefit obtained when the trust was created, then, to preserve that tax
benefit, the trustee of that trust is denied access to the power to adjust.  In the case
of a NIM CRUT, three such tax benefits are relevant:  (1) the donor’s charitable
income tax deduction, (2) the charitable transfer tax deduction, and (3) tax-
exempt status during the administration of the trust.

W ith respect to federal tax benefits, the IRS has approved the use of the
power to adjust.  As noted above, the starting point in computing trust accounting
income is the I.R.C. § 643(b) and its applicable regulations.   In response to the123

publication of the UPAIA 1997 and its subsequent adoption by several states, on
January 2, 2004 the IRS released final regulations (the 2004 Regulations),

120. Malachowski v. Bank One, Indianapolis, 590 N.E.2d 559, 565 (Ind. 1992).

121. See supra Part I.A.2.

122. UNIF. PRINCIPAL & INCOME ACT § 104 cmt. (amended 2008), 7A pt. III U.L.A. 363, 438

(Supp. 2010).

123. See supra Part I.A.4.



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 861

amending the existing regulations under I.R.C. § 643(b), designed to

recognize that state statutes are in the process of changing traditional
concepts of income and principal in response to investment strategies that
seek total positive return on trust assets.  These statutes are designed to
ensure that, when a trust invests in assets that may generate little
traditional income (including dividends, interest, and rents), the income
and remainder beneficiaries are allocated reasonable amounts of the total
return of the trust (including both traditional income and capital
appreciation of trust assets) so that both classes of beneficiaries are
treated impartially.124

Consistent with this purpose, Treasury Regulation section 1.643(b)-1 was
amended by adding the following language:

Allocations pursuant to methods prescribed by [state principal and
income] statutes for apportioning the total return of a trust between
income and principal will be respected regardless of whether the trust
provides that the income must be distributed to one or more beneficiaries
or may be accumulated in whole or in part . . . .125

However, the 2004 Regulations included an express provision permitting a
NIM CRUT trustee to possess a discretionary power to apportion realized capital
gains between income and principal “under the terms of the governing instrument
but only to the extent that the state statute permits the trustee to make adjustments
between income and principal to treat beneficiaries impartially.”   Because this126

language appears in the regulation, is couched in language similar to the UPAIA
1997’s power to adjust, and is the only such language that appears in the
charitable remainder trust regulations, it is tempting to interpret this regulation as
the extent of the IR S’s permissive attitude toward the power to adjust.   That is,127

to assume that the IRS recognizes the valid existence of such a power only for
realized capital gains and only if the power is granted in the governing instrument
and only if there is a state statute permitting adjustments between incom e and
principal under a duty of impartiality.  This narrow view is contrary to the express
language of Treasury Regulation section 1.643(b)-1 recited above, which imposes
no limitation on the use of the power to adjust.

Furthermore, a careful reading of the preamble to the 2004 Regulations
indicates that it is unlikely that this language from the charitable remainder trust
regulations circumscribes the availability of the power to adjust.  Speaking in the
context of a discretionary power to apportion realized capital gains between

124. T.D. 9102, 2004-1 C.B. 366, 366-67.

125. Id. at 373-74 (emphasis added).

126. Treas. Reg. § 1.664-3(a)(1)(i)(b)(3) (as amended in 2004); see also T.D. 9102, 2004-1

C.B. 366, 374.

127. See, e.g., Medlin, supra note 44, at 743-44 (“The revised Treasury regulations allow the

allocation of capital gains, traditionally principal, to income for charitable remainder unitrusts, but

only if both the trust instrument and applicable state law allow such an equitable adjustment.”).



862 INDIANA LAW  REVIEW [Vol. 45:841

income and principal, the IRS stated, “The provision in the . . . regulations [that
describes the apportionment of capital gains between income and principal] has
no effect on the determination of trust accounting income under applicable state
law that grants the trustee a power to reasonably apportion the total return of the
trust.”   This statement from the preamble, coupled with the express language128

of Treasury Regulation section 1.643(b)-1, clearly indicates that, as long as a
NIM CRUT trustee observes the formalities imposed by the applicable state’s
principal and income statute, the IRS will respect the trustee’s exercise of the
power to adjust.  As a result, a reasonable exercise of the power to adjust under
a state-law-imposed duty of impartiality should not cause a NIM CRUT to lose
any federal tax benefits obtained when the trust was created or to lose the trust’s
exempt status during the trust term.

The same result is obtained when considering the impact on state tax benefits. 
The starting point for computing the tax benefits conferred by the State of Indiana
on a qualified NIM CRUT is federal adjusted gross income as modified by state
statute.   Indiana does not allow a taxpayer to claim a charitable deduction in129

arriving at taxable income.   Therefore, there is no direct Indiana tax benefit to130

a donor who creates and transfers property to a NIM CRUT.   Because a131

qualified charitable remainder trust is exempt from federal income tax,  its132

federal adjusted gross income is zero dollars.  As a result, a charitable remainder
trust is effectively exempt from income tax in Indiana so long as its federal tax
exemption is preserved.  Furthermore, the charitable remainder interest in a
qualifying charitable remainder trust is exempt from Indiana’s inheritance tax.  133

T herefore, an exercise of the power to adjust that does not cause an otherwise
qualified charitable remainder trust to lose its exemption from federal income tax
granted by I.R.C. § 664(a), or to lose the estate tax deduction granted by I.R.C.
§ 2055(a), will not cause the trust to lose any state tax benefits obtained when the
trust was created or to lose the trust’s exempt status during the trust term. 

One commentator has noted a potential problem with applying this tax-
benefit-preservation rationale to circumvent the limitation of UPAIA 1997 section
104(c) (and its Indiana counterpart Indiana Code section 30-2-14-15(c)(4)):  The
plain language of the statute fails to incorporate the tax-benefit-preservation
rationale.   Absent a reference to the tax benefits to be preserved in the statute,134

128. T.D. 9102, 2004-1 C.B. 366, 369 (emphasis added).

129. See IND. CODE §§ 6-3-2-1, 6-3-1-3.5 (2011); see also id. § 6-3-1-14 (“The term ‘person’

means an individual, trust, or estate.”).

130. See id. §§ 6-3-2-1 to -21.7 (describing amounts includible in taxable income and amounts

deductible in arriving at taxable income).

131. However, because the excess of the value over the adjusted tax basis (i.e., the unrealized

capital gain) of property transferred to a NIMCRUT is excluded from federal adjusted gross income

and consequently excluded from Indiana taxable income, there is an indirect tax avoidance benefit.

132. See supra note 16.

133. IND. CODE § 6-4.1-3-1 (2011) (“Each transfer described in section 2055(a) of the Internal

Revenue Code is exempt from the inheritance tax.”); see also supra note 20.

134. See Medlin, supra note 44, at 744 (“[I]t is arguable that state law, based on the UPAIA



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 863

it is uncertain that a court interpreting the statute would look beyond the plain
language of the statute to the Comments.   H ad the drafters of the U PAIA 1997135

had the benefit of the IRS’s commentary accompanying the 2004 Regulations
when the UPAIA 1997 was promulgated, perhaps the prohibition on the exercise
of the power to adjust in the case of amounts permanently set aside for charitable
purposes would have been tem pered to make it clear that the power to adjust
should be exercisable by NIM CRUT trustees.

d.  Denying NIM CRUT trustees access to the power to adjust is contrary to
the policy underlying the power.— As discussed above, the UPIA and the UPAIA
1997 are two halves of a whole.   The UPIA creates a duty to invest as a prudent136

investor, seeking total return without regard to the categories of income that make
up the return, while the UPAIA 1997, through the mechanism of the power to
adjust, empowers a trustee to ensure impartial treatment of income and remainder
beneficiaries should inequities arise in the pursuit of optimal returns.   If the137

prohibition of Indiana Code section 30-2-14-15(c)(4) includes NIM CRUTs, then
the statutory scheme arguably creates a direct conflict between the trustee’s duty
to invest as a prudent investor and the trustee’s duty of impartiality; a conflict that
is not diminished by the fact that one class of beneficiary is made up of one or
more charitable organizations.

An Indiana NIM CRUT trustee has a duty to invest as a prudent investor.  138

Further, a trustee is also required to invest impartially, “taking into account any
differing interest of the beneficiaries.”   The trustee’s investment decisions are139

“evaluated . . . in the context of the trust portfolio as a whole and as a part of an
overall investment strategy having risk and return objectives reasonably suited to

[1997], . . . prohibits a reallocation from principal to income because section 104(c)(4) does not use

tax terms.”).

135. In Indiana, statutes that are “clear and unambiguous . . . [are construed by taking] words

and phrases . . . in their plain, ordinary, and usual sense.”  Basileh v. Alghusain, 912 N.E.2d 814,

821 (Ind. 2009).  If a “statute is susceptible to more than one interpretation it is deemed ambiguous

and thus open to judicial construction.” Id.  When construing an ambiguous statute, a primary rule

of statutory construction “is to determine, give effect to, and implement the intent of the

Legislature.”  Id.  Where the statute in question is based on a uniform act, “[t]he comments to [the]

uniform act are indicative of the Legislature’s intent.” Id.  However, “[i]t is always presumed, in

regard to a statute, that no absurd or unreasonable result was intended by the legislature.”  Simmons

v. State, 129 N.E.2d 121, 125 (Ind. 1955) (quoting Marks v. State, 40 N.E.2d 108, 111 (Ind. 1942)). 

Finally, when “applying and construing [the Indiana Act], consideration must be given to the need

to promote uniformity of the law . . . among states that enact [the UPAIA 1997].”  IND. CODE § 30-

2-14-44 (2011); see also 2A NORMAN J. SINGER & J.D. SHAMBIE SINGER, STATUTES AND

STATUTORY CONSTRUCTION § 48:11 (7th ed. 2007) (“Legislation adopted from a Uniform Act

should be construed in a manner which makes it operate uniformly with other states that have

adopted the Uniform Act.”).

136. See discussion supra Part I.B.

137. See supra Part I.B.

138. IND. CODE § 30-4-3.5-1(a) (2011); see also id. § 30-4-3-6(b)(1) (2011).

139. Id. § 30-4-3.5-6.



864 INDIANA LAW  REVIEW [Vol. 45:841

the trust.”   However, as previously noted, such an investment strategy is140

indifferent to the categories of income that make up the returns produced.   In141

fact, the pursuit of total return using “an overall investment strategy having risk
and return objectives reasonably suited to the trust”  may result in a portfolio142

that produces no trust accounting income and all capital appreciation (or loss), or
vice versa.  

Under a scenario where the trustee’s compliance with the duty to invest as a
prudent investor produces minimal trust accounting income under the traditional
categories of income while producing significant capital appreciation, the result
is a windfall to one class of beneficiary at the expense of the other.  In the
alternative, if a NIM CRUT trustee, considering the prohibition on the exercise of
the power to adjust imposed by Indiana Code section 30-2-14-15(c)(4),
determines that “risk and return objectives reasonably suited to” a NIM CRUT
requires investing in a fashion that sacrifices total return in favor of an allocation
which necessarily disappoints equally,  then neither class of beneficiary is143

served and the amount that ultimately passes to the charitable remainder
beneficiaries would, in all likelihood, be diminished.  This diminishment may
even be greater than the effect of an adjustment between principal and income
under the power to adjust.

In summary, a NIM CRUT trustee’s adjustment from principal to income is
not barred per se by Indiana Code section 30-2-14-15(c)(4).  If the present value
of the charitable rem ainder interest when a NIM CRUT is funded defines the
amount permanently set aside for charitable purposes, then, if the total return
from the trust’s investment portfolio exceeds the annual unitrust amount, and the
trust accounting income is less than the annual unitrust amount, the value of the
trust principal will exceed the amount permanently set aside for charitable
purposes.  An adjustment from this excess, up to the annual unitrust amount, is
an adjustment from an amount that is not permanently set aside from charitable
purposes.  In addition, an exercise of the power to adjust will not result in the loss
of federal or state tax benefits.  Finally, a NIM CRUT trustee denied access to the
power to adjust may be forced to invest in less productive investment portfolios
to the mutual detriment of both the income and remainder beneficiaries.

III.  W HAT IS N EEDED TO B REATHE LIFE INTO THE POW ER TO A DJUST
FOR NIM CRUTS?:  LEGISLATIVE INTERVENTION

The foregoing analysis notwithstanding, the lack of explicit statutory
authority or case law (in Indiana or any other state) supporting an exercise of the
power to adjust by a NIM CRUT trustee will give many trustees pause.  Therefore,
to breathe life into the power to adjust, a legislative change may be necessary to
give Indiana NIM CRUT trustees the confidence to exercise the power to adjust. 

140. Id. § 30-4-3.5-2(b).

141. See supra Part I.B.1.

142. UNIF. PRUDENT INVESTOR ACT § 2(b), 7B U.L.A. 1, 20 (2006).

143. See supra note 57 and accompanying text.



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 865

To that end, the author proposes that the Indiana legislature amend Indiana Code
section 30-2-14-15(c)(4) to read:

(c) A  trustee may not make an adjustment:  . . . (4) from any amount that
is permanently set aside for charitable purposes under a will or the terms
of a trust (A) for w hich a deduction or exemption from tax would be
allowed under Title 6 of the Indiana Code or sections 170, 664, 2055, or
2522 of the Internal Revenue Code if the trustee did not have the power
to make the adjustment; or (B) unless both the income and principal are
so set aside.  (Proposed change appears in italicized text)

The proposed change is appropriate for four reasons.  First, it is consistent
with the tax-benefit-preservation rationale articulated by the Commissioners in
the C om ments.  Second, it is consistent with the IRS’s current position with
respect to the power to adjust.  Third, it resolves the conflict between a trustee’s
duty to administer a NIM CRUT impartially between income beneficiaries and
remainder beneficiaries and the trustee’s duty to invest the trust prudently. 
Finally, it is consistent with the favorable stance Indiana has taken toward
NIM CRUTs in other modifications made when the Indiana Act was adopted.

A.  The Proposed Change Is Consistent with the Tax-Benefit-Preservation
Rationale Found in the Comments

As discussed above, the Comments state that “[t]he purpose of subsection[]
[104(c)](4) is to preserve tax benefits that m ay have been an important purpose
for creating the trust.”   The drafters of the UPAIA 1997 explicitly included144

language incorporating this tax-benefit rationale into two other subsections under
UPAIA 1997 section 104(c).  UPAIA 1997 section 104(c)(1) states that

(c) 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 allow ed, in whole or in part,
if the trustee did not have the power to make the adjustment.145

The highlighted text precludes the use of the power to adjust only if a specific tax
benefit, e.g., the estate tax or gift tax marital deduction, would be lost if the
trustee possesses the power to adjust.   By drafting the statute in this manner, the146

drafters left open the possibility that the power to adjust would be available in the
context of a marital deduction trust if the IRS ruled that such an exercise would
not result in the loss of the marital deduction.

Similarly, U PAIA 1997 section 104(c)(2) states that “(c) A trustee may not

144. UNIF. PRINCIPAL & INCOME ACT § 104 cmt. (amended 2008), 7A pt. III U.L.A. 363, 438

(Supp. 2010); see discussion supra at Part II.C.4.(a)(2).

145. UNIF. PRINCIPAL & INCOME ACT § 104(c)(1) (emphasis added); see also IND. CODE § 30-

2-14-15(c)(1) (2011).

146. See Medlin, supra note 44, at 744.



866 INDIANA LAW  REVIEW [Vol. 45:841

make an 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.”   In this case, the statute only precludes the exercise of147

the power to adjust if the creator of the trust intended for the transfer of property
to qualify for a gift tax exclusion.  Once again the drafters of the UPAIA 1997
anchored the prohibition on the exercise of the power to adjust to the preservation
of an expected tax benefit.  For example, in the case where a settlor transferred
property to a trust with no intent to qualify for a gift tax exclusion (perhaps
because the settlor had already exhausted all available gift tax exclusions), the use
of the power to adjust would not be precluded.

The proposed amendment explicitly imports the tax-benefit-preservation
rationale that underlies UPAIA 1997 sections 104(c)(1) and (2) into Indiana Code
section 30-2-14-15(c)(4).  The proposed amendment precludes the exercise of the
power to adjust only if the authorities that grant a tax benefit to be preserved
determine that the availability of the power to adjust would result in the loss of
the tax benefit.

B.  The Proposed Change Is Consistent with the IRS’s Current Position
with Respect to the Power to Adjust

As discussed above, the IRS has approved the exercise of the power to adjust
by NIM CRUT trustees.   However, some commentators have suggested that this148

permissive stance is limited to situations involving a discretionary power to
apportion realized capital gains between income and principal, and then only
when the discretionary power is “granted to the trustee under the terms of the
governing instrument but only to the extent that the state statute perm its the
trustee to make adjustments between income and principal to treat beneficiaries
impartially.”   But this narrow view is at odds with the language of Treasury149

Regulation section 1.643(b)-1 and the broad pronouncement in the preamble to
the 2004 Regulations that the provision limiting the apportionment of realized
capital gains “has no effect on the determination of trust accounting income under
applicable state law that grants the trustee a power to reasonably apportion the
total return of the trust.”150

Both the narrow interpretation of Treasury R egulation section 1.664-
3(a)(1)(i)(b)(3) and the broader statement of Treasury Regulation section
1.643(b)-1 are currently at odds with a facial reading of the limitation imposed
by Indiana Code section 30-2-14-15(c)(4).  By tying the availability of the power
to adjust to the IRS’s determ ination of the effect of the power to adjust on tax
benefits, the proposed amendment to Indiana Code section 30-2-14-15(c)(4)

147. UNIF. PRINCIPAL & INCOME ACT § 104(c)(2) (emphasis added); see also IND. CODE § 30-

2-14-15(c)(2).

148. See supra Part II.C.4.(a)(2).

149. Treas. Reg. § 1.664-3(a)(1)(i)(b)(3) (as amended in 2004); see supra note 127 and the

accompanying text.

150. T.D. 9102, 2004-1 C.B. 366, 369; see also supra notes 124-26 and accompanying text.



2012] INDIANA’S UNIFORM  PRINCIPAL AND INCOM E ACT 867

would permit the use of the power to adjust within the boundaries described by
either the narrow interpretation or the broad interpretation. 

C.  The Proposed Change Resolves the Conflict Between a Trustee’s Duty
of Impartiality and the Trustee’s Duty to Invest the Trust Prudently

As discussed above, Indiana Code section 30-2-14-15(c)(4) as currently
written creates a facial conflict between a trustee’s duty to treat the income and
remainder beneficiaries of a NIM CRUT impartially and the trustee’s duty to
invest the trust prudently.   The proposed amendment eliminates this conflict by151

making the power to adjust available to NIM CRUT trustees until federal or state
tax authorities (or legislatures) assert the preeminence of a tax policy favoring the
protection of all of a NIM CRUT’s principal.

D.  The Proposed Change Is Consistent with Indiana’s Favorable
Stance Toward NIM CRUTs

The proposed amendment to Indiana Code section 30-2-14-15(c)(4) is
consistent with the beneficial treatment Indiana has afforded NIM CRUTs
historically.  Indiana made two NIM CRU T-friendly changes to UPAIA 1997
when it enacted the Indiana Act in 2002.   The Indiana General Assembly152

amended UPAIA 1997 section 406 (relating to debt instruments) by adding the
following subsection: 

(c) Notwithstanding any other provision of this section, when an
obligation described in this section is held as an asset of a charitable
remainder trust, an increase in the value of the obligation over the value
of the obligation at the time of acquisition by the trust is distributable as
income.  For purposes of this subsection, the increase in value is
available for distribution only when the trustee receives cash on account
of the obligation.153

This provision ensures that the increase in value of an obligation, such as an
original issue discount bond (e.g., a zero-coupon bond), is allocable to income,
but only when the trustee receives cash on account of the obligation, typically as
a result of the sale or maturity of the bond. 

Similarly, the Indiana General Assembly amended UPAIA 1997 section 409
by adding the following subsection:

151. See supra Part II.C.4.(a)(3).

152. The author’s employer, Renaissance Administration LLC (but not the author) played a

role in recommending these changes to the Indiana General Assembly through the participation of

its in-house counsel as a member of the Probate, Trust, and Real Property Section of the Indiana

State Bar Association.

153. IND. CODE § 30-2-14-28(c) (emphasis added).  The statute refers to “charitable remainder

trusts” and not specifically to NIMCRUTs.  However, because NIMCRUTs are the only variety of

charitable remainder trust that determines income beneficiary payments by reference to trust

income, this provision is effectively targeted at NIMCRUTs.



868 INDIANA LAW  REVIEW [Vol. 45:841

(g) Notwithstanding any other provision of this section, when a private
or commercial deferred annuity is held as an asset of a charitable
remainder trust, an increase in the value of the obligation over the value
of the obligation at the time of the acquisition by the trust is distributable
as income.  For purposes of this subsection, the increase in value is
available for distribution only when the trustee exercises a right of
withdrawal or otherwise receives cash on account of the obligation.154

This provision ensures that the increase in value of an obligation, such as a
com m ercial deferred annuity, is allocable to income, but only when the trustee
receives cash on account of the obligation.  The proposed amendment is in line
with the type of incremental benefits accorded charitable remainder trusts by
these two enacted amendments.

In summary, the proposed amendment to Indiana Code section 30-2-14-
15(c)(4) is consistent with the policies underlying the prohibition on adjustments
from amounts permanently set aside for charitable purposes.  M oreover the
proposed amendment is in harmony with the IRS’s position on an exercise of the
power to adjust by a N IM CRUT trustee.  Furthermore, the proposed amendment
resolves a conflict in the duties a NIM CRU T  trustee owes trust beneficiaries. 
Finally, the proposed amendment is consistent with Indiana’s historically
favorable treatment of NIM CRUTs.

C ONCLUSION

Based on the foregoing analysis, an Indiana NIM CRUT trustee can exercise
the power to adjust.  H owever, the lack of explicit statutory authority or case law
that explicitly addresses the use of the power to adjust by NIM CRUT trustees is
likely to cause trustees to hesitate to exercise the power to adjust.  The Indiana
General A ssem bly should amend Indiana Code section 30-2-14-15(c)(4) to
explicitly authorize the exercise of the power to adjust by NIM CRUT trustees. 
Indiana has historically shown leadership in effecting positive change in principal
and income law as it relates to NIM CRUTs.  The proposed amendment furthers
Indiana’s leadership in this arena.  It is now up to the Indiana legislature to make
it clear that the power to adjust is alive and well for Indiana’s NIM CRUT
trustees. 

154. Id. § 30-2-14-31(g) (emphasis added).