What is a unitrust? Find out in this comprehensive overview from a reputable Georgia estate planning attorney.
Author: Paul Black
Paul’s experience as the son of two parents with big health challenges is what led him to the work he does today and gives him first-hand knowledge of the challenges that many caregivers and family members face. After graduation from GSU Law, Paul was chosen from dozens of applicants nationwide as one of three 2010-2011 Borchard Foundation Law & Aging Fellows. Paul has been named as a SuperLawyers “Rising Star” in the area of Estate Planning and as a member of Georgia’s “Legal Elite” by Georgia Trend magazine. Published on: February 16, 2022.
What Is a Unitrust?
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It’s never too early to start planning for your family’s future.
If you have questions, I’m here to help. There is no commitment, and we provide free initial 15-minute phone calls. We look forward to meeting you.
To understand the intricacies of a unitrust, take the following scenario. A family member creates a trust to provide for the surviving spouse in the event that they pass away. Should the spouse die, the assets would pass on to the children, who, in this scenario, are from a previous marriage.
The surviving spouse wants to receive maximum trust income, while the children would wish for appreciation. So, is there a reasonable way for a trustee to meet the needs of both parties?
In comes the unitrust. This form of trust dishes out a set percentage of the fair market value of the trust principal to the surviving spouse from our above scenario. The surviving spouse is also referred to as the current beneficiary.
Through prudent investments of acceptable risk (stock market, REITs, or Bitcoin), the asset in question grows as per the stock market performance, increasing the payout as per the percentage of the trust principal and increasing the trust’s value. The interests of both parties are aligned, and there is no conflict between them.
Unitrust amount means an amount equal to a percentage of a unitrust’s assets that may or are required to be distributed to one or more beneficiaries annually as per the terms of the unitrust.
What Is a Total Return Unitrust?
The key to such a trust is investing in options in the market that will guarantee an increase in the market value. From our industry experience, most trustees use a tried and proven approach known as Total Return Investing.
A total return unitrust focuses on a summation of all current earnings, including dividends, interest, and capital gains. Such a financial plan minimizes possible risk, considers the impact of inflation, and manages to generate income.
Drafting a trust with the format of total return investing is highly recommended. Get in touch with the Law Office of Paul Black to learn more at 404-328-7283 today! Receive a free initial 15-minute phone call consultation on your case.
How Does a Unitrust Work?
The person creating the trust (the ‘grantor’) transfers assets into the trust and designates a trustee for trust management. The grantor will also specify the percentage of trust value subjected to distribution each year, which could be anywhere between 5-7%. Then the grantor will transfer assets into the trust, which the trustee will invest in generating income.
The trustee is responsible for ensuring prompt and total unitrust payout to the current beneficiary. And instead of the payout of the income beneficiary based on income generated, the payment is set on the trust balance/ net asset value, NAV. The specified date is typically January 1, but it can be changed.
The set percentage paid is determined annually and is paid either on a monthly or quarterly basis.
Benefits of a Unitrust
Having brought together the current beneficiary and the remainder beneficiaries, this type of trust has additional benefits to both parties, including:
Potential for Growth
Provided the investment choices of the trustee are prudent, the assets therein have the potential for exponential growth. The income earned by the income beneficiary can increase on an annual basis. On the other hand, the remainder beneficiaries will be protected by the increase in the market value of the assets.
Unified Interests
In a unitrust, both the payment and remainder beneficiary benefit from the growth of the trust and any possible loss. This incentivizes them to work together.
A Solution to the Issue of Varying Interest Rates
Take, for example, a traditional trust where a trustee is instructed to issue a payout of 10% from the income stream before the Great Depression. However, when interest rates dipped to near zero, the money a spouse would have received would have been almost zero for a couple of years.
With investments of the trust principal, such a risk is averted with reasonable decision-making.
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How to Avoid Conflict of Interest With Unitrust
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From the trust setup explained above, the tension between the lifetime beneficiary and the remainder beneficiaries is bound to be tense. The former would prefer a robust investment strategy, guaranteeing substantial growth and thus income. On the other hand, the remainder beneficiary would prefer to invest in safer options focused on the appreciation of the trust.
The interest of the beneficiaries can be comprehensively handled with the implementation of a unitrust.
Without the proper setup of the trust, payout, and other elements that the unitrust requires, the trust may fall out. Depending on the interests of the parties involved, the matter might find itself in a court of law.
You can always search for an estate planning attorney near me or simply contact the Law Office of Paul Black. We have the knowledge required to align the interests of both the beneficiaries and the principal.
How Unitrust Distributes Income
The unitrust follows a unique formula to distribute income. For example, a trustee must pay 10% of the net asset value to the income beneficiary, i.e., the surviving spouse. At the beginning of the year, the trust has $500,000. The income beneficiary should receive $50,000. This can be broken down to $4,167.00 per month.
Suppose the trustee invested well in high-dividend stocks, bonds, and other income-bearing options. In that case, the trust could exhibit growth (if income earned from money invested in fewer expenses is greater than 10%).
Next year, the income beneficiary can gain an even fatter payout. In contrast, the remainder beneficiaries enjoy growth in the trust. But this all depends on the experience and expertise of the trustee to make informed decisions.
What is described above is known as the standard unitrust. There are three other payout options available:
Net Income Unitrust
The money distributed should be a fixed percentage of the annual value yearly. However, it can also include a net income allowance allowing the trustee to pay the lesser between the actual trust income and total unitrust value.
Net Income with Make-Up
The financial plan can be set up to allow for excess income from a particular year to make up for income deficiencies in previous years. It was established to balance income variances over time.
Flip Unitrust
This is a combination of the two of the above-described payout options. It starts out as a net income and then converts to a standard one upon the occurrence of a certain event.
Charitable Remainder Unitrust
Charitable remainder unitrusts are popular as a flexible type of life income plan. This estate planning tool provides income to a named beneficiary while the remainder of the trust goes to a chosen charity cause. More specifically, it provides variable income to income beneficiaries based on a percentage of the fair market value of the trust assets.
The charitable remainder unitrust is funded with valuable assets, including artwork, a house, and bonds. But, to avoid simply using it to avoid taxes, the federal government requires that a charity receive at least 10% value of the trust assets. This type of unitrust is eligible for a partial trust deduction and doesn’t have to pay capital gains tax when selling a trust’s assets.
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From the information available above, you can appreciate the technicality involved in drafting and implementing a trust. You will need the expertise and knowledge of a qualified and experienced estate planning attorney to establish your goals and fulfill them.
Call upon the Law Office of Paul Black, a reputable and top estate planning attorney operating from Atlanta, GA. Attorney Paul Black has considerable experience in dealing with estate law, especially estate planning, estate administration (probate), elder law, special needs planning, and conservatorships.
Mr. Paul Black is recognized as a Super Lawyers’ “Rising Star” when it comes to estate planning, and he is also a member of Georgia’s “Legal Elite,” as stated by the Georgia Trend Magazine.
Whatever your estate planning needs are, with the proper legal advice, you can turn them into reality! Get in touch with us today by calling 404-328-7283 and scheduling a consultation. Let’s secure the future of your family together.
