Living Trust Investing: Income Considerations when the Grantor Dies
A common problem I often see when working with living trust beneficiaries and trustees is the lack of attention in rethinking income strategies in the event of the grantor's death.
When the grantor of a living trust dies, the trustee (especially a family member or close friend) sometimes feels reluctant to revise the portfolio, feeling it's an affront to the wishes of the deceased. After all, if the investments were sound during life, they should be sound enough upon his or her death.
While the fundamental values of the investments are certainly the same, a number of circumstances have changed and must be dealt with.
The most crucial change is because of the trust itself. There are sections within the trust instrument that deal with income distributions, both during the grantor's lifetime and after his or her death. The trustee should become familiar with these sections and how their differences will have an impact upon investment decisions.
Secondly, with the passing of the grantor, new assets (such as life insurance death benefits) are often added to the trust assets and these new assets must be invested in a way that complies with the grantor's wishes.
Thirdly, assets held outside the trust often need to be considered. For example, the grantor may have held qualified retirement plan benefits that are passed directly to a trustbeneficiary. Utilization of these retirement benefits may need to be recognized and, in some instances, may even be discussed in the trust instrument.
Lastly, the trust beneficiaries may have assets of their own and these asets should be brought into the mix of things.
Because the trustee has a responsibility to all beneficiaries, including those who may ultimately inherit the trust, it may be necessary to balance the income needs of the income beneficiaries and the growth needs of the ultimate beneficiaries. This fidicuary role is paramount to the decisions made by the trustee.
If principal distributions are left to the trustee's discretion, it's a good guess that the intent was not to punish the beneficiary, but to keep the trust out of the beneficiary's taxable estate.
Carrying this one step farther, many financial advisers will argue that, if a beneficiary's own estate is large enough to be exposed to estate taxes, then the beneficiary might be wise to "spend down" his or her own estate and let the trust grow in value.
The inverse is also true. If a beneficiary has a small estate, then he or she may want income from the trust, but he or she may also want the principal to grow in his or her own name so as to get a stepped-up tax basis upon death.
These strategies are very common if the ultimate beneficiaries are the same people.
The role of the trustee can be difficult, but paying attention to the changes in income needs will avoid future problems and inefficiencies in carrying out the duties of administering the trust.
Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY. OR, PA, RI, VA, VT, WY.
Copyright 2005. LivingTrustNetwork, LLC. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the written consent of the Living Trust Network, LLC.