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§ 10.13 CONCEPT OF TRUST INCOMEtrusts that are subject to the generation-skipping transfer rules. 210 This aspect ofthe law is of concern to grantors, beneficiaries, and fiduciaries.The statutory law generally provides that, for these purposes, the termincome means the “amount of income of the estate or trust for the taxable yeardetermined under the terms of the governing instrument and applicable locallaw.” 211 This concept of income is used as the measure of the amount that mustbe distributed from a trust in order for the trust to qualify for certain federal taxtreatments. Trusts that are classified as simple trusts, net income charitableremainder unitrusts, 212 pooled income funds, and qualified subchapter S trustsare required to make distributions measured, at least in part, by the amount oftrust accounting income. A similar concept applies to trusts that qualify for thegift and estate tax marital deductions.A trust instrument may provide for any amount to be distributed to beneficiariescurrently. Trust provisions that measure the amount of the distribution byreference to income but define the term income differently from the state statutorydefinition of income generally are recognized for state law purposes. Variousprovisions of the Internal Revenue Code that require the current distribution ofincome to qualify the trust for certain federal tax treatment, however, are basedon the assumption that the income beneficiary will receive what is traditionallyconsidered to be income. In some situations, such as with qualified subchapter Strusts and marital deduction trusts for spouses who are U.S. citizens, the incomebeneficiary is also permitted to receive distributions of principal as long as all ofthe income is currently distributed. In other instances, such as with net incomecharitable remainder unitrusts and pooled income funds, only the income maybe distributed. In all of these situations, the determination as to what is incomeis critical. Thus, a core concept in this context is this: The definition of incomeunder the terms of the governing instrument and applicable local law must notdepart fundamentally from traditional concepts of income and principal, if thedesired federal tax treatment is to be secured.In recent years, applicable local law—state law—has been dramatically changingon this point. These statutes are in the process of altering traditional conceptsof income and principal in response to investment strategies that seek totalpositive return on trust assets. These statutes are designed to ensure that when atrust invests in assets that may generate little income in the traditional sense(such as dividends, interest, and rent), the income and remainder beneficiariesare allocated reasonable amounts of the total return of the trust (including traditionalincome and capital appreciation of trust assets), so that both classes ofbeneficiaries are treated impartially.Some statutes permit the trustee to pay an income beneficiary a unitrustamount—a fixed percentage of the fair market value of the trust assets. Otherstatutes accord the trustee the discretion to make adjustments between incomeand principal so as to treat the beneficiaries impartially.210 See 8.5.211 IRC § 643(b).212 See § 12.3(a)(ii), (iii). 385