Living Trust Investing: Income Considerations when the Grantor Dies

A common problem I often see when working with living trust beneficiaries and trustees is the lack of attention in rethinking income strategies in the event of the grantor's death.

When the grantor of a living trust dies, the trustee (especially a family member or close friend) sometimes feels reluctant to revise the portfolio, feeling it's an affront to the wishes of the deceased. After all, if the investments were sound during life, they should be sound enough upon his or her death.

While the fundamental values of the investments are certainly the same, a number of circumstances have changed and must be dealt with.

The most crucial change is because of the trust itself. There are sections within the trust instrument that deal with income distributions, both during the grantor's lifetime and after his or her death. The trustee should become familiar with these sections and how their differences will have an impact upon investment decisions.

Secondly, with the passing of the grantor, new assets (such as life insurance death benefits) are often added to the trust assets and these new assets must be invested in a way that complies with the grantor's wishes.

Thirdly, assets held outside the trust often need to be considered. For example, the grantor may have held qualified retirement plan benefits that are passed directly to a trust beneficiary. Utilization of these retirement benefits may need to be recognized and, in some instances, may even be discussed in the trust instrument.

Lastly, the trust beneficiaries may have assets of their own and these asets should be brought into the mix of things.

When revising an investment strategy, the needs of the income beneficiaries are a good place to start. First, determine available cash flow from sources outside the trust. Typically, this could include Social Security benefits, immediate annuities, deferred compensation, qualified retirement plans and, of course, the beneficary's own assets.

Next, fund whatever income deficit is left by assuming a modest rate of yield in the trust. Hopefully, this modest amount will satisfy the needs of the income beneficiaries. If not, you can raise the yield somewhat, but not too much. At some point, you'll reach beyond what yield can be readily achieved with an acceptable risk level, to speak nothing of breaching the trustee's responsibility to act in a prudent fashion.

Because the trustee has a responsibility to all beneficiaries, including those who may ultimately inherit the trust, it may be necessary to balance the income needs of the income beneficiaries and the growth needs of the ultimate beneficiaries. This fidicuary role is paramount to the decisions made by the trustee.

It is also important to note the difference between "yield" and "total return," as applied to a trust. Total return includes capital gains, but those gains are often excluded from the definition of "distributable income" in a trust. Distributions that exceed income will be construed as principal and are often left to a trustee's discretion. A trustee can say "no" as easily as "yes" to principal distributions.

If principal distributions are left to the trustee's discretion, it's a good guess that the intent was not to punish the beneficiary, but to keep the trust out of the beneficiary's taxable estate.

Carrying this one step farther, many financial advisers will argue that, if a beneficiary's own estate is large enough to be exposed to estate taxes, then the beneficiary might be wise to "spend down" his or her own estate and let the trust grow in value.

The inverse is also true. If a beneficiary has a small estate, then he or she may want income from the trust, but he or she may also want the principal to grow in his or her own name so as to get a stepped-up tax basis upon death.

These strategies are very common if the ultimate beneficiaries are the same people.

The role of the trustee can be difficult, but paying attention to the changes in income needs will avoid future problems and inefficiencies in carrying out the duties of administering the trust.

Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at Dahlkefinancia@sbcglobal.net. You may also contact him by going directly to the Living Trust Network web site located at http://www.livingtrustnetwork.com

Copyright 2005. LivingTrustNetwork, LLC. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the written consent of the Living Trust Network, LLC.

---

Stocks: Understand What You Buy!

"There is nothing more frightful than ignorance in action!" Johann... Read More

A Funny Thing Happened on the Way to the Stock Market

On the 40 year journey through the turmoil of a... Read More

How Covered Calls Turned a Trader Around

Sidney felt sick as she looked at her latest OptionsXpress... Read More

Ignore Stock Market Talking Heads

You should ignore analysts on TV, the radio, the newspaper... Read More

Size Counts!

What the heck am I talking about?It is often said... Read More

Prosperity

It has fallen upon the consumer to make our economy... Read More

The I Word is Coming to a Town Near You

Hello Inflation, it has been awhile, I see you on... Read More

Online Broker Trade History Not Doing the Job

Let me start by saying that...Most online brokers do not... Read More

Bollinger Bands Strategies

The Bollinger Band theory is designed to depict the volatility... Read More

Protectionism

First let's see what protectionism is. According to Mr. Webster... Read More

Hill of Hope

Just about now everyone is confused as to which way... Read More

Understanding the Bulls and the Bears

If you've ever flipped on the television to CNN Financial... Read More

You Wont Like This

Why? Because I am going to shatter your conventional wisdom... Read More

The Importance of Using Stop Loss Orders When Spread Trading the Financial Markets

A Guide to Using Stop Loss Orders Stop losses are... Read More

Stock Analysis

I receive emails from Morningstar. This company provides statistics and... Read More

Moving Averages

Every day on CNBC-TV they show a 200-day moving average... Read More

The Stock Market Investor?s Worst Enemy

Every stock market investor faces one primal enemy. An enemy... Read More

Alfred E. Newman

What! Me worry?Many of you remember the cover of MAD... Read More

The Shadow

The Shadow knows. There used to be a radio program... Read More

Oil Stocks CHK WLL - What Is Their Worth?

(1) CHK stock price $16.74, NAV $32.5CHK is my favorite... Read More

Buy and Hold Investment Strategy

"Buy and hold" is one of the most heralded investment... Read More

Why Investors Use Financial Planners

Do you have a financial planner? Does one of your... Read More

How to Pay Less and Get More: Discount Broker vs Professional

How do you invest? What do you really pay? At... Read More

Pamplona, the Wild Investment Bulls

You remember (they show it on TV every year) the... Read More

Mutual Fund Expense Lies

When purchasing mutual funds we are cautioned to read the... Read More

Exchange Traded Funds Primer

Exchange Traded Funds (ETFs) are a group of passive index... Read More

Complacency Indicator

If you haven't heard of the technical indicator with the... Read More

Why Technical Indicators

The fight continues to rage among traders who use technical... Read More

Parachute Investing

Ever jumped out of an airplane? It's OK if you... Read More

Market Timing?

The recent criminal fiasco in the mutual fund industry is... Read More

Buying New Issues

Has your broker been calling you recently with the "great... Read More

What Are You Waiting For?

Do you own any mutual funds? In an IRA or... Read More

Cash

How many people went to a cash position this week?... Read More