Donald M. Thompson - Wills, Trusts, and Estate Planning


Total Return Trusts

Trusts usually provide that someone gets the income from the trust assets for a defined term and after that someone else gets the trust assets. The person getting the income is called the income beneficiary and the other person is called the remainderman. The trustee is obligated to act in the interests of both. Traditionally interest and dividends were the type of income distributable to the income beneficiary. Capital appreciation was not. Stocks these days do not pay very high dividends. Most of the return on stocks has been coming from appreciation in value. To achieve a significant rate of return for the income beneficiary the trustee usually has to invest in bonds. The bonds do not grow in value significantly and this creates tension with the remaindermen. To deal with this dilemma total return trusts have been created. In a total return trust the trustee is told to pay a percentage of the trust assets each year to the income beneficiary - usually 3 - 5%. Sometimes the direction is to pay the greater of trust accounting income (dividends and interest) or the specific percentage. This allows the trustee to invest for growth to protect the remainderman, but still to pay an adequate rate of return to the income beneficiary.

This type of trust was not used until recent state and federal enabling legislation because the tax consequences often hinged on the payment of all income from a trust. For instance, there is a marital deduction from the estate tax for trusts in which all the income is payable to the surviving spouse. A percentage of the value of trust assets could be less than all the accounting income (dividends and interest) of the trust.

Originally the total return trusts provided for payment of the greater of the percentage or actual income to qualify under the "all income" definitions. Now, federal law says that if state law provides for a reasonable definition of income, that will quality under federal law as all income.

Illinois' Principal and Income Act is what originally said principal and interest, but not capital gains, are income. Now it has been amended to allow payment of the percentage amount alone, rather than the greater of the percentage or accounting income.

|| Back to List of Topics ||
See My Probate Web Site ||
See My Business Law Web Site || See My Securities Arbitration Web Site ||

Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
Ph: 312-782-0844 * Fax: 312-201-1436 * Email: