Trust laws have changed in the last 5 years. In the past, the Prudent Man Theory mandated that assets invested in a trust had to be invested with one primary goal – asset preservation. The problem with that concept is that the beneficiary of a trust – generally the spouse – has a conflicted position with heirs to the trust – generally children.
Example: Peter dies leaving $2 million in a trust, wanting to make sure that his wife, Karen, receives an adequate lifetime income and what’s left in the trust at the death of Karen passes to the children and heirs.
Under the old system, a traditional trust, significant assets would be left to the heirs, but the spouse would be forced to live on 3 and 4% annual income from the trust principal.
Today the laws governing trusts have changed, and Total Return Trusts have become the primary way to design the asset flow in a trust. So, replacing 3% returns are 7, 8 and 9% returns, allowing Karen to receive an adequate income to sustain her lifestyle.
The problem is that the beneficiary children are now receiving a reduced amount of income since the principal is being consumed. Thus parent and child are put into a conflict position.
In this case, conflict was avoided because a Concentrix partner showed Peter and Karen, before Peter’s death, how to structure and fund the trust so that Karen could receive an adequate income and the children would receive the same amount they would have received had the income to their mother been the much smaller amount mandated under the old law.
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