| mon problem I often see when working with living | | | | Hopefully, this modest amount will satisfy the |
| trust beneficiaries and trustees is the lack of | | | | needs of the income beneficiaries. If not, you can |
| attention in rethinking income strategies in the | | | | raise the yield somewhat, but not too much. At |
| event of the grantor's death. | | | | some point, you'll reach beyond what yield can be |
| When the grantor of a living trust dies, the | | | | readily achieved with an acceptable risk level, to |
| trustee (especially a family member or close | | | | speak nothing of breaching the trustee's |
| friend) sometimes feels reluctant to revise the | | | | responsibility to act in a prudent fashion. |
| portfolio, feeling it's an affront to the wishes of | | | | Because the trustee has a responsibility to all |
| the deceased. After all, if the investments were | | | | beneficiaries, including those who may ultimately |
| sound during life, they should be sound enough | | | | inherit the trust, it may be necessary to balance |
| upon his or her death. | | | | the income needs of the income beneficiaries and |
| While the fundamental values of the investments | | | | the growth needs of the ultimate beneficiaries. |
| are certainly the same, a number of | | | | This fidicuary role is paramount to the decisions |
| circumstances have changed and must be dealt | | | | made by the trustee. |
| with. | | | | It is also important to note the difference |
| The most crucial change is because of the trust | | | | between "yield" and "total return," as applied to a |
| itself. There are sections within the trust | | | | trust. Total return includes capital gains, but those |
| instrument that deal with income distributions, | | | | gains are often excluded from the definition of |
| both during the grantor's lifetime and after his or | | | | "distributable income" in a trust. Distributions that |
| her death. The trustee should become familiar | | | | exceed income will be construed as principal and |
| with these sections and how their differences will | | | | are often left to a trustee's discretion. A trustee |
| have an impact upon investment decisions. | | | | can say "no" as easily as "yes" to principal |
| Secondly, with the passing of the grantor, new | | | | distributions. |
| assets (such as life insurance death benefits) are | | | | If principal distributions are left to the trustee's |
| often added to the trust assets and these new | | | | discretion, it's a good guess that the intent was |
| assets must be invested in a way that complies | | | | not to punish the beneficiary, but to keep the |
| with the grantor's wishes. | | | | trust out of the beneficiary's taxable estate. |
| Thirdly, assets held outside the trust often need | | | | Carrying this one step farther, many financial |
| to be considered. For example, the grantor may | | | | advisers will argue that, if a beneficiary's own |
| have held qualified retirement plan benefits that | | | | estate is large enough to be exposed to estate |
| are passed directly to a trust beneficiary. | | | | taxes, then the beneficiary might be wise to |
| Utilization of these retirement benefits may need | | | | "spend down" his or her own estate and let the |
| to be recognized and, in some instances, may | | | | trust grow in value. |
| even be discussed in the trust instrument. | | | | The inverse is also true. If a beneficiary has a |
| Lastly, the trust beneficiaries may have assets of | | | | small estate, then he or she may want income |
| their own and these asets should be brought into | | | | from the trust, but he or she may also want the |
| the mix of things. | | | | principal to grow in his or her own name so as to |
| When revising an investment strategy, the needs | | | | get a stepped-up tax basis upon death. |
| of the income beneficiaries are a good place to | | | | These strategies are very common if the |
| start. First, determine available cash flow from | | | | ultimate beneficiaries are the same people. |
| sources outside the trust. Typically, this could | | | | The role of the trustee can be difficult, but paying |
| include Social Security benefits, immediate | | | | attention to the changes in income needs will |
| annuities, deferred compensation, qualified | | | | avoid future problems and inefficiencies in carrying |
| retirement plans and, of course, the beneficary's | | | | out the duties of administering the trust. |
| own assets. | | | | Copyright 2005. LivingTrustNetwork, LLC. All rights |
| Next, fund whatever income deficit is left by | | | | reserved. |
| assuming a modest rate of yield in the trust. | | | | |