The Power to Adjust the Trust

Today’s low interest rates create special problems for those focused on income, including retirees and the income beneficiaries of trusts.

Prolonged periods of low interest rates can result in low trust income, creating conflict among beneficiaries. Many trusts are set up in a way that creates two different groups of beneficiaries. The first group are income beneficiaries who have a right to the current income the trust property generates. Another group are remainder beneficiaries. They 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 Forbespoints out, 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 as to 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.

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Reference: Forbes (July 2, 2014) “With Interest Rates Low, Here's How To Boost Income From A Trust”