Many trusts are established with two different groups of beneficiaries. The first group are income beneficiaries. They have a right to the current income the trust property generates. Another group are remainder beneficiaries who get what is left in the trust when the trust ends.
Income beneficiaries naturally want the income maximized and remainder beneficiaries want the principal maximized.
As noted by Forbes in an article titled “With Interest Rates Low, Here's How To Boost Income From A Trust,” low interest rates make it difficult for trustees to keep both groups happy.
There simply are not enough good investment vehicles available to keep both groups of beneficiaries happy in low interest rate environments.
The solution is known as the power to adjust. This allows trustees to reclassify trust assets.
Forbes has an example of how it can work:
“By utilizing the power to adjust, trustees are able to invest in the best total return portfolio without regard to the amount of income it generates; so, for example, in the current low-rate climate, this may result in a portfolio that is primarily equity. The power to adjust allows the trustee to take a certain amount of principal, reclassify the assets as income, and distribute the assets to the income beneficiary.”
The power to adjust is legal in all but three states. However, most states do have a limit regarding what a trustee can do. Non-expert trustees should consult with attorneys and financial advisors about how they can use the power to adjust to keep competing groups of beneficiaries happy.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: Forbes (July 2, 2014) “With Interest Rates Low, Here's How To Boost Income From A Trust”