The New Utah Unitrust Act Can Help Trust Beneficiaries in a Period of Low Investment Yield

With historically low interest rates, income beneficiaries of traditional trusts have been suffering low distributions.  A trust often has different classes of beneficiaries, those who receive income distributions as the trust earns income, and those who receive the remaining principal of the trust after some event has occurred or some time period has elapsed.  A trustee is in a difficult position where investment decisions must be made to benefit the two classes of beneficiaries who have opposing interests.  The income beneficiaries will want a high allocation to income generating investments at the expense of capital growth investments favored by the remainder beneficiaries.  An example of such a situation is a trust established by a deceased husband for his second wife who is to receive the trust income, with the children of his first wife waiting to receive the principal until after the second wife passes away.

The Utah Unitrust Act became effective July 1, 2013.  The Act permits a trustee, or a beneficiary who petitions the trustee, to convert the traditional income trust into a Total Return Unitrust.  The word “unitrust” means a distributable amount computed as a fixed percentage of the fair market value (FMV) of trust assets as determined annually.  The Act permits a unitrust of at least 3% but not more than 5% of FMV.  The trustee can then invest the trust assets for total return as a prudent investor would do, without worrying whether the investment selection will disadvantage one class of beneficiaries in favor of the other.  There are important variables that must be agreed to by all of the parties when converting to a unitrust such as:

·       Setting the unitrust percentage

·       Determining how much capital gain is to be taxed to the income beneficiaries as part of the unitrust

·       The method for determining FMV

·       How expenses are to be accounted for between the beneficiaries

Converting a traditional income trust to a Unitrust may very well benefit both classes of beneficiaries as the trustee then can invest to grow the trust assets as a whole which will both increase the unitrust payout to the income beneficiaries and provide capital appreciation for the remainder beneficiaries.