Financial & Estate Planning

If you set up a trust with more than one beneficiary, how can you avoid family squabbles? With a “total return” trust. Many trusts have more than one beneficiary, with differing investment priorities.

* Jack may be a spendthrift who wants the trustee to load up on bonds, in order to provide him with ample current cash flow, while Jill might prefer to see the trust funds invested in stocks for long-term appreciation.


* Some trusts have both “income beneficiaries” and “remaindermen,” with the latter destined to inherit the trust fund in the future.

With certain types of trusts, you’re almost ensuring family fights. Satisfying all the parties is especially demanding in today’s low-yield climate.

Indeed, the classic trust is a pay-all-income trust. Interest and dividends (and perhaps capital gains) are paid to someone who needs current income while the trust principal will be paid out to another beneficiary in the future.

As an alternative, create a total return trust. As the name suggests, such trusts instruct the trustee to invest for overall return rather than dividing a portfolio into income and growth segments. A certain percentage of the trust fund is to be paid out each year.

Total return trusts may be heavily weighted towards equities, which have been long-term winners, so current income might be only 1 percent or 2 percent per year, hardly enough to satisfy income-oriented trust beneficiaries.

To avoid slighting these beneficiaries, a total return trust might pay out a certain percentage of trust assets per year, even if some of that cash flow must come from selling securities. For example, a $100,000 trust fund that pays out 5 percent ($5,000) might earn 10 percent ($10,000) from a stock-heavy portfolio. That would increase the trust fund to $110,000 so the next year’s 5 percent payout would rise to $5,500.

In these circumstances, the trust beneficiaries have compatible rather than conflicting interests. The income beneficiary will receive a stream of cash flow that may grow over time, as long as the total return exceeds the payout rate, and the remaindermen will wind up with a trust fund larger than the original amount.


Generally, the payout percentage should be 3.5 percent-5 percent, to allow for long-term growth of principal. To smooth out the flow of income and eliminate extreme year-to-year fluctuations, the distributions might be based on a three-year or a five-year average of year-end trust values.