THE INCOME TRUST
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 rights 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 undertaken without the assistance of an actuary. Terminating these trusts can be done without costly litigation only with the consent of all current, successor and residual beneficiaries, -- 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.
Complications arise over issues of discretionary principal. In all other instances current incomes should be present valued using an interest rate that reflects current fund growth. The remainder amounts are determined differently depending on whether each primary beneficiary has the right to pass on the residual to their survivor. Income trusts only pay a portion of the income that represents the realized portion and trust requires liquidating principal. This can be dealt with one of two ways: (1) using the current CPI as the rate of discount for determining present values of income and projecting fund growth based on the current fund growth in determining remainder amounts; or (2) using life expectancies to discount future remainder balances to a current day value. As an actuary I recommend the first by recognizing the simple principle that even a full distribution of income distributes principal in terms of less buying power.
No methodology that allows for discretionary principal should beundertaken before understanding the financial circumstances of the current beneficiaries and their future possible needs. The one constant is people age with time. These needs should be determined on the basis of probable needs not based on pure speculation. There must be an evidentiary basis to support the future need. In one large group involving 13 beneficiaries and five primary with rights to survivorship for each of the next two levels I made use of the need for discretionary principal based on very probable results that at least two of the five primary beneficiary would require long-term care based on the average age in the high 80s. I used a recent insured study published by the society of actuaries that showed both incidence and utilization based on attained age. This is how there was an evidentiary basis and I used current circumstances and was able to show no speculation entered into allocation amounts; this is required if one is to expect all beneficiaries support the distributions. Everyone understands that future circumstances could deplete the asset when discretionary principal can be paid but when that is but one possibility agreement by all creates and expectation that every known beneficiary receives something. that is why distributions cannot engage in speculation in reaching an amount.
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 a few thousand dollars and it also limits what the healthy spouse can have to a very modest amount.)
While this is a viable method for receiving approval from all beneficiaries it should never be used to determine the real value of any one beneficiary involved in litigation. It can reduce the value the litigant receives and forces the estate to shoulder the expense of things less likely to happen.
