This issue of The Lane Report won't report on recent trust law developments either, important as they are. What it will discuss - and even promote - is a new way to look at trusts and a new opportunity they hold.
Trusts are useful in all kinds of family and business contexts to manage assets for - and to distribute them to - beneficiaries who are entitled to the trust's income and others who will eventually receive its principal. The trustee, whose job it is to run the trust, is obliged to balance the competing interests of such "income" and "remainder" beneficiaries.
Investing in bonds and preferred stocks will maximize current yield and keep income beneficiaries happy but will disappoint remainder beneficiaries who won't see the trust's capital appreciate. On the other hand, investing in common stocks, the asset class most likely to grow wealth over time, is a strategy which inevitably will keep current income low and hurt income beneficiaries. The tension between income and remainder beneficiaries can sometimes be palpable.
We've seen the classic trust, however artfully drafted, pit family members against one another. And our investment affiliate, Marc J. Lane & Company, which helps trustees and our other clients manage their investments, has felt frustrated when investment goals conflict.
We've found a way around the problem and, where it fits, we've been introducing it into the trusts we design. To gild the lily, the approach we now take also affords our clients estate and income tax savings which simply haven't been available in traditional trust planning.
The solution is a "Total Return Trust" and it works this way: rather than paying income beneficiaries whatever the trust happens to yield each year, it pays them (now called "current" beneficiaries) a fixed percentage of the fair market value of the trust's assets. They're paid on the same day each year but a three-year averaging feature dampens the effects of any stock market volatility.
The result is exactly what you would want it to be: the trustee and all the beneficiaries pull together. Since current beneficiaries draw more income as investments succeed, everyone is happy to see big after-tax returns and healthy long-term capital growth.
Thanks to the Total Return Trust, the trustee and his or her investment adviser can now put the sound principles of asset allocation back to work, implement dollar cost averaging in bull and bear markets, and focus on the needs and risk tolerances of all the beneficiaries. The Total Return Trust is commended for your consideration. It encourages an investment policy which strives for overall return and shares it fairly with all the trust's beneficiaries.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.