A total return trust is a new way for trustees to invest money for the beneficiaries. In the past, trusts were focused on generating income, which caused conflicts between the beneficiaries who wanted either income or growth. Now, with the Prudent Investor Rule and modern portfolio theory, trustees have more flexibility to invest for the best overall return, combining income and growth. This helps all beneficiaries to benefit from the trust. The traditional difference between income and principal is not as important in modern portfolio theory, which focuses on the total return of the entire portfolio. A total return trust pays out a set amount (annuity trust) or a percentage of the trust’s value (unitrust) to the beneficiary. Most total return trusts are unitrusts. If the trust grows, the payout increases, and if the trust shrinks, the payout decreases. Whether to choose an annuity trust or a unitrust depends on the needs of the beneficiary and the remaindermen. The most important factor in investment performance is how your money is split between different types of assets, like stocks and bonds. In the past, stocks have made around 13.5% each year, while government bonds only make around 5.9%. Right now, stocks in the S&P 500 give about 1.5% in dividends. In 1998, if you wanted to get a 5% return, you would have needed to put about 95.32% of your money in stocks. The costs of managing a trust, like fees and taxes, can also affect how much money is left to give to the person getting the income from the trust. So it’s important to think about all of these things when deciding how to invest. Creating a trust involves deciding how much money the beneficiary will receive. Most people want to protect their spouse, so they usually choose a larger payout. To avoid big changes in the payout amount, the trustee might use a three-year average of the trust’s value. The trustee may also have the power to increase the payout if needed. For example, if the trust allows for a maximum annual payout of five percent, the trustee could have the authority to increase it to eight percent if necessary.
In some cases, like a Q-Tip trust, federal law requires that all income goes to the spouse. With a total return trust, the payout might be less than the actual income. To solve this, the trustee can be required to give the spouse the higher amount of either the actual income or the designated percentage of total return. When designing a total return trust, it’s important to consider the life expectancy of the person receiving the income and their tolerance for risk. Trustees also need to be aware of market and inflation risks. If the client is hesitant to diversify their investments, the trustee should get written permission or consider other options to minimize risk. If the trustee needs help with investments, they can hire an advisor, but they still have to do their own research and can’t delegate the entire investment function. In today’s investment world, it’s better for trustees to use total return trusts that focus on overall investment gains rather than traditional trusts that prioritize income. This benefits both current and future beneficiaries. This information comes from legal experts in the Elder Law Section.
Source: https://www.floridabar.org/the-florida-bar-journal/total-return-trusts-why-didnt-we-think-of-that/
Leave a Reply