When the grantor of a living trust expires, the trustee (particularly a relative or close friend) sometimes feels reluctant to revise the portfolio, believing it is an affront to the wishes of the deceased. After all, if the investments were sound throughout life, they need to be sound enough upon her or his death.
While the basic values of these investments are definitely the same, several circumstances have changed and have to be dealt with.
The most vital change is due to the trust itself. There are sections within the trust instrument which deal with income distributions, both during the grantor’s lifetime and after their death. The trustee should become familiar with these sections and how their differences will have an impact upon investment choices.
Secondly, with the departure of the grantor, new assets (for example, life insurance death benefits) are frequently added to the trust assets and these new assets must be spent in a manner that complies with the grantor’s wishes.
Thirdly, assets held outside the confidence often have to be considered. For example, the grantor may have held qualified retirement plan benefits which are passed directly to a trust
beneficiary. Use of these retirement benefits might have to be recognized and, in some cases, may even be discussed in the trust instrument.
Finally, the trust beneficiaries might have resources of their own and these asets should be brought into the mix of things.
When revising an investment plan, the requirements of the income beneficiaries are a fantastic place to start. First, determine available cash flow from sources outside the trust. Usually, this may include Social Security benefits, immediate annuities, deferred compensation, qualified retirement plans and, obviously, the beneficiary’s own assets.
Next, finance whatever income shortage is left by assuming a modest rate of return in the trust. Hopefully, this small amount will meet the requirements of their income beneficiaries.
Otherwise, you can increase the return marginally, but not too much. Sooner or later, you are going to reach beyond what return can be easily achieved with an acceptable risk level, to speak nothing of breaching the trustee’s duty to behave in a sensible fashion.
Since the trustee has a duty to all beneficiaries, including those who may ultimately inherit the confidence, it could be necessary to balance the income needs of their income beneficiaries and the expansion needs of the ultimate beneficiaries. This fidicuary function is paramount to the conclusions made by the trustee.
It’s also important to notice the difference between»return» and»total return,» as applied to a trust. Total return includes capital gains, but these gains are usually excluded from the definition of»distributable income» in a trust. Distributions that exceed income will be construed as principal and are often left to a trustee’s discretion. A trustee can say»no» as easily as»yes» to main distributions.
If principal distributions are left to the trustee’s discretion, it is a good guess that the intent wasn’t to punish the beneficiary, but to maintain the confidence from the beneficiary’s property.
Carrying this one step further, many financial advisors will assert that, when a beneficiary’s property is large enough to be exposed to estate taxes, then the beneficiary may be sensible to»spend down» his or their property and allow the trust grow in value.
The reverse is also correct. If a beneficiary has a small estate, then they might want income from the trust, but they might also want the principal to grow in their own name in order to receive a stepped-up tax basis upon departure.
These plans are extremely common if the ultimate beneficiaries will be the exact men and women.
The part of the trustee can be hard, but paying attention to the fluctuations in income needs will prevent future problems and inefficiencies in executing the responsibilities of administering the trust.