The recent turmoil in the financial industry has hurt not only individual investors’ portfolios, but also trust investment returns. As publicly owned companies slash dividends and federal, state and local governments and banks lower their interest rates on fixed-income products, trust beneficiaries who rely on trust income distributions are facing hard times. And whenever there are hard times, fear and conflict often follow.
When Wall Street is in retreat, trustees must often choose between “staying the course” until the market rebounds (which benefits the remainder beneficiaries) or reallocating investments, perhaps at a loss, to generate more income (which benefits the income beneficiaries). Either way, the trustees are almost invariably charged with favoring one set of beneficiaries over the other.
Fortunately, many states permit trustees to go beyond the trust terms and make a one-time adjustment between principal and income, so as to treat all beneficiaries fairly, without having to resort to ill-advised changes in investment strategy. However, trustees must carefully consider many specific factors before making such an equitable adjustment.
Depending on the circumstances, some states also allow the trustee of a trust in which all income is distributed to one or more beneficiaries to convert the trust to a “total return unitrust.” A total return unitrust pays a fixed percentage (usually 3 percent to 5 percent) of the trust’s assets each year to the income beneficiaries, regardless of the actual investment income earned. With a total return unitrust, the trustees are free to invest with an eye toward maximizing the trust’s total investment return over the long term, which pleases the remainder beneficiaries, while providing the income beneficiaries with more predictable distributions.