Tuesday, May 20, 2014
In a typical trust, income is paid to a beneficiary automatically and principal is distributed for specified purposes (i.e. health, education, support). During times where a 2% interest rate or dividend is regarded as a good return, an income beneficiary may not receive very much from the trust. Hence, tensions may arise between the current income beneficiary, who wants to invest trust assets in income producing assets such as bonds, and the remainder beneficiaries, who want to invest the trust assets in appreciating assets such as stocks.
This investment dilemma can be remedied with a “total return trust.” A total return trust provides that a “specific percentage of the trust assets will be paid to the current beneficiary, regardless of whether the distribution is considered income, principal or capital gain.”
Recently, the Alabama Legislature amended the Alabama Principal Income Act to provide for two types of total return trusts (“unitrusts”). The first type of unitrust can be established as a total return trust, with the trustee being directed to pay a stated percentage of the trust assets to the beneficiary. The second type of unitrust is a traditional trust that can be transformed to a total return trust by the beneficiaries, trustees, or the court.
See Elizabeth Hutchins, Total Return Trusts Balance Beneficiaries’ Needs With Investment Flexibility, Sirote & Permutt, May 15, 2014.