As Trustee you may be instructed to "pay all net income" to the beneficiary. Or you may be allowed to pay income in your discretion to the beneficiary. What is Trust income?
The classic interpretation of Trust income is the dividends, coupons, interest, etc. received as income from the investments, net of any expenses such as fees. However, the Trustee now may have other options as well. Depending on the terms of the Trust and the state law, the Trustee may use a total return approach by electing into a Unitrust method, or exercising discretion under the state's income and principal act called the "power to adjust" (PTA). In both the Unitrust and PTA option income will be defined as a percentage of the Trust's total return. The concept is to free the Trustee to invest in such a way as to maximize the return of the Trust portfolio, and to share the total return with the income beneficiary. [In the classic model, any capital appreciation benefits principal and thereby usually the remainder beneficiaries.
A Unitrust option may be specified in the Trust document. If not, state law may allow the Trustee to elect a Unitrust method. Usually all current and future beneficiaries will need to receive notice in advance and given the opportunity to object.
The PTA option may be allowed under the state's Principal and Income Act. If it is, then the Trustee is typically authorized to elect this method. Notice to beneficiaries is typically not required, but is a best practice.
In all cases, the best interests of the beneficiaries should be considered and documented. How will you define income?
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