Home' Island Sun : ISN 103015 Contents 19B
ISLAND SUN - OCTOBER 30, 2015
aura” complained that she wasn’t receiving enough
income from her deceased husband’s (Victor’s)
marital trust that he established for her benefit. She
wondered whether anything could be done to increase the trust
distributions. It was a conundrum since she was also the trustee
and had a duty not only to maximize income for herself, but to
invest in such a way that also achieves some growth for Vic-
tor’s children who are the remaindermen beneficiaries (those
that inherit after Laura passes).
As an example, assume that the marital trust has $1 million
of cash, stocks, bonds, and mutual funds. If Laura invested all of that into only income
producing assets in today’s low yield environment, she might get an average return of
3 percent. That would equate to thirty thousand dollars ($30,000) of annual income.
She would also be violating her fiduciary duty since there would be little or no growth
in the portfolio. Victor’s children would be losing to inflation over the course of Laura’s
Suppose instead Laura invests the marital trust portfolio in an equal mix of growth
stocks and income producing assets. Assume the growth stocks generate 7 percent
growth and the income generates 3 percent. In my example, the portfolio would have
unrealized capital gains of approximately $35,000 (7 percent multiplied by$500,000)
and income of $15,000 (3 percent multiplied by $500,000).
This result drops Laura’s income to only $15,000 annually as capital gains are not
distributed as income, rather they are reinvested as principle. While she achieves the
growth for Victor’s children, she does so at her own expense as the income falls by
Are there any options available?
Florida law does provide a very good option. Our statutes allow an income trust (the
marital trust which Laura receives in this example) to be converted into a “total return
unitrust” which works to benefit all of the parties in a low income yield environment
such as what we have currently in the United States.
What is a total return unitrust? A total return unitrust values the trust annually and
then distributes a fixed percentage (between 3 and 5 percent) annually to the income
beneficiary, regardless of the actual income from the trust. This frees the trustee to mix
the investments between growth and income to achieve the best possible return given
the beneficiaries’ risk tolerance.
Using Laura’s example above, the unitrust percentage would likely be fixed around
3 percent since it is tied to an IRS floating interest rate that adjusts annually. What this
accomplishes is to get Laura her $30,000 of income while allowing her to invest for
growth as well.
At the end of the day here’s what would happen: Laura invests for growth and for
income as I indicated above. So the total investment return for the year is $50,000 as
calculated above. Laura receives $30,000 of income ($15,000 dividends and interest
plus another $15,000 of capital gains.) The trust grows by $20,000 (the net between
the growth and the distributions).
The next year, the 3 percent is calculated on the new balance of $1,020,000. So
the distribution to Laura would increase slightly. Everyone is a winner.
You may wonder what happens if yields increase substantially. Under the same
Florida law used to convert the trust from an income trust to a total return unitrust the
trustee can reconvert it back to an income trust. So if yields went up to 7 or 8 per-
cent and it would be better for all of the beneficiaries if the trust returned to a straight
income trust, then that can be done as well.
As you might conclude, there are many details to this technique that I had to gloss
over to make it fit into the space allotted for this column. But if you are a beneficiary
of a trust that just isn’t achieving its income or growth goals, you may want to consider
asking your estate attorney if the total return unitrust concept would improve the situa-
tion for everyone.
©2015 Craig R. Hersch. Learn more at www.sbshlaw.com.
Distributing More Trust Income
In A Low Yield Environment
by Craig R. Hersch, Florida Bar Board Certified
Wills, Trusts & Estates Attorney; CPA
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