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Income And Remainder Beneficiaries

Marital Trusts And The Tension Between “Income” And “Remainder” Beneficiaries

Example: Consider a marital trust, where all the income shall be distributed annually to the surviving spouse, and the trustee may distribute principal for the spouse’s benefit. Upon the spouse’s death, all trust funds shall be distributed to the grantor’s son from a prior marriage. The grantor and his spouse were longtime clients of the West Palm Beach Bank & Trust Company, where surviving spouse has had her individual or personal banking for 15 years. The surviving spouse serves as co-trustee with the bank, and has demanded that high-yielding, income-producing assets, such as REITs, junk bonds, and high dividend paying securities, constitute 90% of the trust portfolio, with the remaining 10% being cash. The bank purchases a number of high yielding investments haphazardly which they disclose to the remainder beneficiary, the grantor’s son from a prior marriage.

Is this investment “thesis” objective? Impartial? Of course not. In this example, the two co-trustees are “chasing yield” without regard to safety of principal, and without regard to their obligation to consider growth and capital appreciation as an as an element of their investment plan for the trust as a whole. While there is no doubt that during the surviving spouse’s life she is the sole and exclusive beneficiary of the trust, the trustees cannot invest without concern for the remainder beneficiary. We all understand that everyone likes money. But any prudent investment plan must include a strategy which balances current yield, or income, as well as safety of principal and reasonable capital appreciation (growth) over an extended period of time.

The co-trustees invested imprudently, with a misplaced, risky, short-term goal that clearly and selfishly favored the surviving spouse to the detriment of the remainder beneficiary. Objective? No. Impartial? No.

The irony is that by choosing the investments, which they did, the co-trustees exposed the trust assets to unnecessary risk which could have, over time, greatly diminished her income stream. The other irony is that they could have employed one or more methods to increase the distributions to her, most probably at a lower income tax rate, while still investing prudently and with care for the remainder beneficiary, and with greater safety of principal. It may be possible to convert the spouse’s income interest to a “unitrust” percentage or otherwise “adjust” (move) principal to “income.” Ideally, this gets more money to the spouse and permits the trustee to invest (more) for growth, benefit-ting the remainder beneficiaries.

As trustee, it will be your job, from time to time, to save co-trustees, and beneficiaries, from themselves.

Partially Does Not Mean Equally

There is a common misunderstanding that impartiality means treating all the beneficiaries the same. It doesn’t. It means there is no favoritism. No undue, un-deserved benefits or advantage. This duty of impartiality does not mean that you ignore the plain language of the trust, nor the grantor’s intent.

Remember, fair does not always mean equal.

Impartiality does not always equate with equality. The trustee should not look for an easy way out. The trustee should not necessarily seek acquiescence, or approval, in place of exercising sound discretion and judgment.

If The Grantor Wanted To Treat Everyone Equally, He Or She Would Have Done So

The trustee has a responsibility to be fair, objective, and impartial. These duties cannot be shelved, or placed on hold. A trustee is required to be ever-vigilant to its responsibilities, and to the duties which it has agreed to uphold.

Many parents, grantors of trusts, wish to treat loved ones and beneficiaries equitably, but not necessarily equally. If the grantor of a trust, under all circumstances, wanted each and every one of the beneficiaries to receive precisely equal distributions of trust funds, the grantor would have clearly enunciated this in the trust document.

Example:

The trust may read: “All distributions to my three children shall at all times and in all respects be of equal dollar amounts. Should my trustee choose to make a distribution to one beneficiary, the trustee shall make equal distributions at the same time and in the same amount to all other beneficiaries.”

But this is not the case. In fact, most grantors want their beneficiaries to be treated differently. That’s why discretion is given.

After all, different beneficiaries are going to have various demands and needs, different sources of income and stages of wealth. One of the purposes of having a trust is to provide flexibility to the trustee to provide for the different needs of the various beneficiaries from time to time.

Would You Let The Prisoners Run The Jail?

You need to remember why the grantor placed money in trust in the first place: The grantor has refused to throw money in the laps of his or her beneficiaries.

The grantor may love the beneficiaries, but just doesn’t trust them to be financially responsible. Or, put another way, the grantor did not intend, did not want, to have wealth used in ways they found dis-approving.

Rather, the grantor has set up a relationship, the trust: with standards of distribution—and standards of non-distribution.

In other words, the trustee should not be distributing trust funds for the sake of distributing money. Trust distributions should only be made when the standards for distribution are satisfied.

Example:

Consider a large trust, which has a number of beneficiaries each with various spending habits, annual incomes, and needs. One beneficiary makes regular requests of the trustee for sizable chunks of principal from the trust. In short, this beneficiary is always asking for money.

Issue: How is a trustee to act?

Answer 1: A good trustee will examine the request for principal, consider it, gather any information, which may be necessary or helpful, to make a determination whether it should be granted or not. A distribution would only be made if it were in line with the grantor’s intent as expressed in the document.

Answer 2: A bad trustee may seek acquiescence of the beneficiaries rather than exercising the judgment, which the grantor expected. Many times, a trustee will poll the beneficiaries and inform them of the request for principal distribution. Often, the other beneficiaries will consent to the distribution as long as an equal distribution is made to them. Everyone agrees, and the trustee then makes distributions to all beneficiaries. Wrong.

The prudent administration of a trust is not “tit-for-tat”.

Equal is not necessarily fair, nor impartial, nor objective, nor intended. Mutual acquiescence by beneficiaries is not the way to administer a trust. If the grantor wanted that, he or she would have made each beneficiary a co-trustee. In this example, instead of independently exercising its discretion and judgment, the trustee, in essence, has thrown its responsibility out the window, and permitted the beneficiaries to serve as trustee and decide how much they should get.

Don’t let the prisoners run the jail cell. Exercise discretion in a sound, thought-out manner.

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