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Total Return Unitrusts July 17, 2000 (Principal Financial Group) Traditionally designed trusts create an inherent conflict between the interests of income beneficiaries and remainder beneficiaries by strictly separating principal and income. A new concept in trust design, the Total Return Unitrust (TRU), seeks to resolve this conflict by uniting the interests of income beneficiaries and remainder beneficiaries and maximizing returns to both. The Problem
Under many current trusts, the trustee faces a troublesome investment decision: (1) invest for long-term growth and make the remainder beneficiaries happy, but fail to meet the needs of the current income beneficiaries; (2) invest to maximize income, but alienate the remainder beneficiaries; or (3) try to please both by taking a middle approach which might result in insufficient income and unsatisfactory appreciation.
Practically speaking, most trustees need to satisfy the
income interest. Most trusts are intended to last for one or more lives. By focusing on income, classic trust design ignores the likelihood that stocks will outperform other investments over the long term. The result, inflation and taxes erode the value of both the income interest and remainder interest. The TRU
Authors Robert Wolf and Stephan Leimberg suggest the TRU concept to remedy this conflict.
The TRU is designed to impartially balance the interests of the current beneficiary and the remainder beneficiary while enabling the trustee to pay out as much as possible to the current beneficiary.
TRU Design
Essentially, the TRU is an express noncharitable unitrust. The TRU requires a payout one or more times a year to the current beneficiary of a stated and fixed percentage of the fair market value of the trust's assets (as revalued each year on the same date but averaged over a three year period to smooth out market fluctuations.)
The TRU is not required to distribute all income currently. So, if in a given year, income is greater than the percentage amount that is required to be distributed to the current beneficiary, it can be accumulated for the benefit of both current and remainder beneficiaries.
The TRU is designed to combine the interest of the trustee, current beneficiaries, remainder beneficiaries, and investment managers, by paying more each year to the current beneficiaries as the value of the investment increases and thus encourages the use of an investment portfolio that strives for maximum after-tax returns and long term capitol growth. The remainder beneficiaries and current beneficiaries now have the same investment interest.
Summary
Because it enables an investment policy that increases overall return and allocates more fairly between the current and remainder beneficiaries, a TRU is likely to meet the needs and goals of all beneficiaries and the objectives of the grantor-client.
Please send your comments, questions and article proposals to information@smartpros.com.
2000, Principal Financial Group. All Rights Reserved.
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