Trusts

Question 1

Allocation Between Trust Principal and Income

Answer 1

All assets received by a trustee must be allocated to either income or principal. The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument. The traditional approach assumed that any money generated by trust property was income and that any money generated in connection with a conveyance of trust property was principal. The traditional approach serves as the starting point for the modern approach. Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. A distribution of stock is treated as a distribution of principal under the UPAIA.

Question 2

Class Gift - Vested Remainder - Disclaimer

Answer 2

A gift to a group of individuals with an automatic right of survivorship is a class gift. A class remains open and may admit new members until at least one class member is entitled to obtain possession of the gift or the preceding interest terminates. A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the disclaiming of the estate by its holder. If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable to the presumptive remainder beneficiaries of the trust, provided no one would be harmed by making a distribution to them earlier than it would have been made had the income beneficiary not disclaimed.

Question 3

Mandatory Trust

Answer 3

Subject to the trust instrument, it is the beneficiary’s right to receive income or principal from the trust. The trustee of a mandatory trust has no discretion regarding payments; instead, the trust document explains specifically and in detail how and when the trust property is to be distributed.