An income trust automatically pays income to current named beneficiaries  on specific sums of money or share interests bequeathed to them. The trustees have discretion to pay principal from those specific sums or share interest bequeathed to them and such payment is conditioned on specific  need.There are often successor beneficiaries who obtain the rights to automatic income and discretionary principal upon the death of the current beneficiary. The current and successor beneficiaries may receive their interest individually or jointly with the right of survivorship. Upon the deaths of all beneficiaries to each specific sum or share interest bequeathed the balance can sometimes go to named charities.These are also among the most complicated trusts to terminate and  should never be untaken without the assistance of anactuary. Terminating  these trusts can be done without costly litigation only with the consent of all current, successor and residual ficiaries as well as  the trustees. Because  consent of all interested parties is functionally required, a proposal setting forth methodology and assumptions should be performed before doing the major work. This determines whether such consent can be obtained before the trustees commit to spending the bulk of the money. 

When  there is a long history associated with the operation of this trust, it  may be used to help establish assumptions, particularly with respect to  the payment of discretionary principal. But understanding the way all the pieces fit together is the key to developing a methodology and assumptions used. This trust involves a specific amount of money. It is not operating as an insurance company making a profit or engaged in risks. Hence  everything contemplated must tie back to the specific amount of each  beneficiary’s interest or the resulting distributions will be unduly  prejudicial to some of the beneficiaries.   It is the main reason why  explicit assumptions as to a specified amount of earnings or principal  disbursed is contraindicated.  (Explicit assumptions include specific  percentage or dollar amount of principal paid, earnings as a fixed amount  or percentage of principal and a rate of discount, all of which are  little more than wild guesses.)

No methodology should be arrived at before understanding the financial circumstances of the current beneficiaries. This allows one to subgroup these individuals by their future needs for discretionary principal. 


Financial needs are frequently associated with age. The less affluent aged will have greater needs related to health issues particularly as they advance in age. The  probability of becoming frail increases with age and this increases the likelihood of requiring long-term nursing care or residing in an  assisted living facility.  Middle class beneficiaries who did not purchase long term nursing care insurance, and very few did, will not be able to afford long-term medical care without Medicaid assistance and this will not be possible  with their current beneficiary status in this income trust.(This is because the 1986 Medicaid Act limits the amount of assets that the ill-spouse has to almost nothing and it also limits what the healthy spouse can have to a very modest amount.) The Society of Actuaries has a twenty-year study on nursing care facilities showing probabilities based on attained age, which can be of great assistance in  establishing discretionary principal assumptions based on the likely future need for this care.

The right to future income is better valued implicitly ("a backdoor approach").  This means that no one assumption need be realistic or justified.  Instead, the assumptions, as a whole, must be reasonable.This avoids the need to justify assumptions on future income and it also avoids a host of other problems, including rewarding future risk that was never undertaken with a terminated trust. Whatever the future income will be is uncertain.  But it doesn’t matter because it will be paid, and as the trust will be liquidated there will be no principal remaining. Thus distributions can be determined without respect to what portion represents a right to lifetime of future income or discretionary future principal, simply by valuing the discretionary principal paid using zero  percent interest. 

Complications  arise at the intermediate stages with successor beneficiaries who  inherit a principal balance. That balance obviously was not used  implicitly to recognize a lifetime right to future earning with the  previous beneficiary. This error  of "the implicit methodology approach" can be corrected by adjusting and  increasing the payout to the prior beneficiary to implicitly recognize  earnings on the leftover balance, and proceeding to the next level of  beneficiary after making that adjustment.      

For  a comphrensive analysis, see Jerry Reiss, Terminating the income  Trust:  A Suggested Approach, ABA Bankers Journal (Dec. 2010).