Category: Trusts
Tags: Asset Protection, Trustee, Beneficiaries, Trusts


Increasing Trust Income Distributions

Posted on: August 19th, 2014
power to adjust

The power to adjust can provide long-term growth.

Many trusts provide for lifetime income, but no principal, to the first generation of beneficiaries. In these days of low interest rates, income payments have suffered. However, income distributions from trusts do not have to be permanently affected by low interest rates. Although the type and governing law of a trust may impose restrictions on how income is determined, there are ways to increase income from a trust.
 
One possible way, effective in select states, is through the ‘power to adjust’ option. Forbes recently described the power to adjust as a method used by “the trustee to take a certain amount of principal, reclassify the assets as income, and distribute the assets to the income beneficiary.”
 
Does every trustee have the power to adjust trust assets? Yes—unless the trust grantor has explicitly eliminated this power in the trust provisions or it is restricted by state law. If you are considering using the power to adjust to increase trust income at times when interest rates are low, review a few concerns:
  • Learn how your state’s statutes address the power to adjust. As of this writing, 47 states and the District of Columbia have enacted the power to adjust. In North Carolina, trustees exercising the power to adjust are required under North Carolina General Statutes to consider relevant factors of the beneficiaries and the trust, including anticipated tax consequences of an adjustment, effects of inflation or deflation, the intent of the grantor, purpose and duration of the trust, needs for income regularity and appreciation of capital, the beneficiaries’ circumstances, and several other factors included in the North Carolina Uniform Principal and Income Act.
  • Trustees in Illinois, Iowa, and North Dakota do not possess the legal power to adjust.
  • In North Carolina, trustees who are beneficiaries of the trust do not have the power to adjust. (Also, non-beneficiary trustees who may directly or indirectly benefit from an adjustment are not legally permitted to make an adjustment.)
The power to adjust is not used as a way to only increase trust incomes for immediate beneficiaries. If done with proper professional guidance, it’s also an opportunity for long-term growth. Effective adjustments can increase assets for remainder beneficiaries who may benefit from the trust many years in the future. An attorney can help ensure compliance with the respective jurisdiction’s laws and review options for trust investment, management and classification of income.
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