A New Trust Code in
My ‘Toolbag’
Perhaps the most interesting provision in our code is that a trustee can
decide to change a trust that pays out
all of its income to a beneficiary into a
unitrust. The trustee is allowed to choose
between a 3 percent and 5 percent annualized disbursement for the unitrust.
I am in the process of overseeing a
testamentary trust for the benefit of a
nonprofit organization where the assets
(prior to the decedent’s demise) were all
invested in certificates of deposit with
maturities of less than a year. While I
initially hoped that there might be some
individual bonds or CDs that were still
paying 3 percent or 4 percent, I will find
it hard to earn much interest on the
fixed-income side due to the low-interest-rate environment.
Assuming that I invest evenly between
equities and fixed-income and that the
portfolio is worth about $500,000, I will
be able to generate an extra $10,000 in
income for the beneficiary by converting
to a unitrust paying a 5 percent rate.
According to our statutes, the corporate trustee does not need court approval; however, the trustee must notify
the beneficiary in writing of the plan to
convert an income trust to a unitrust.
Of course, my beneficiary knows that
we are looking at conversion to a unitrust because the organization urgently
needs all the income it can generate
from the trust for maintenance of its
building. The wording of this specific
trust allows for only 10 percent principal invasion very infrequently and
for specific reasons, so bolstering the
Afew columns ago, I wrote about the new trust code that had been passed in 2009 in Vermont, the state where I live. During the last month I have had two occasions to put the trust code into practice, so I hope that it might be useful to talk about this. Perhaps
you are already able to work with an updated, flexible series of statutes, but others
of you might not.
significant improvement to the beneficiary compared to an income trust.
Increasing the beneficiary’s income
in a low-interest-rate environment is one
major reason for converting an income
trust to a unitrust; I’m assuming that
fixed-income rates in another two years
or so will be higher and will generate
more substantial income, but not for now.
According to our trust code a trustee
can also revert back to an income trust
from a unitrust. I can’t say I’ve done this
but with time we will see what happens
and how the client’s needs evolve.
In separate example, we have a classic case where a man had a revocable
trust during his lifetime but did not
title all of his assets in the name of his
trust. My firm will soon serve as corporate trustee of a family trust for the
decedent’s son and grandchildren. The
assets are currently in probate and are
invested in short-term treasuries and a
large concentration of a stock that has
done very poorly this past year.
I am working with the executor so
that he may consider options to diversify
out of the concentrated holding before
the conclusion of probate in six more
months. After the equity concentration is
divested, we will be looking at significant
cash proceeds, a portion of which will
need to be invested into low-interest,
high-quality fixed-income instruments.
The primary beneficiary of this trust
does not have a strong need for income
from the trust, but he wants to receive
as much income as possible to set up
529 plans for his children. Principal
invasion is permitted from the trust for
certain ascertainable standards, which
are broadly defined.
About the Author
Thomas W. Brigh T,
CTFa, is a vice president
and trust officer with
Community Financial
Services Group based
in Newport, Vt. In addition to his
certified trust and financial advisor
(CTFA) designation with the Institute
of Certified Bankers, Mr. Bright holds
an M.B.A. in international business
from the Thunderbird School of
Global Management. He also serves on
the ABA Trust & Investments editorial
advisory board. Reach him by e-mail
at tbright@cfsgtrust.com.
