If you include a trust in your estate plan, typically done on behalf of children who would be the beneficiaries, the trust document should spell out how the trustee will distribute funds to the trust beneficiaries.
* If too much is paid out, money may be squandered, lost in a divorce action, etc.
* However, if too little is paid out, the trust beneficiary may be short of needed spending money.
Commonly, a trust instructs the trustee to pay out trust income to the beneficiary. The problem, though, is that trust income may be defined in several ways. Therefore, you should make certain that trust income is defined in the trust document, if such income is to be paid to the trust beneficiary.
With today’s low yields on fixed-income investments, simply paying out investment interest and dividends may not be adequate. One solution is to instruct the trustee to use a “total return unitrust” approach: pay the trust beneficiary, say, 4 percent or 5 percent of trust principal each year, even if the trustee has to sell some assets to raise cash.