Investments inside an Irrevocable Trust - a conundrum

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JQuinn
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Joined: Tue Dec 01, 2015 3:03 pm

Investments inside an Irrevocable Trust - a conundrum

Post by JQuinn » Thu May 25, 2017 5:09 pm

I am both the beneficiary and the trustee of a GST (Generation Skipping Trust) and I need some advice about how to tweak the asset allocation. It is an irrevocable trust which requires the distribution of all income (dividends, interest) to the beneficiary (me) and the trust pays the capital gains. My parents (now deceased) set up the trust is to provide for their heirs and mine. I do not need any income from the trust. The trust has a basic 65/35 asset allocation holding tax-exempt bond funds and a diversified mix of international and US bond/stock index funds. My problem is that I am receiving too much income as a beneficiary - in particular VTSAX, VTABX and VTIAX pay only dividends as do Ca Tax Exempt Bond funds. I turn 70 this year so RMDs will raise my personal income. At the same time, other mutual funds (ex VPCCX) in the trust are paying CG so the Trust is paying the 3.8% surcharge already. I realize this is a "good" problem to have but I am trying to find an investment strategy that 1) keeps the trust allocations somewhat balanced, 2) reduces the distributions to me, and 3) keeps the CG under control inside the trust. I hate to say this, but it occurs to me that investing in individual non-dividend paying stocks might be the best approach. (I did not do this initially because I wanted the trust easy to maintain after my death but now I wonder if I should reconsider). Any ideas or comments? Specific investment suggestions or general comments welcome. Thanks in advance.

bsteiner
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Location: NYC/NJ/FL

Re: Investments inside an Irrevocable Trust - a conundrum

Post by bsteiner » Thu May 25, 2017 5:36 pm

That's an example of poor drafting. Why did they mandate that the income be distributed instead of providing for a co-trustee with discretion to distribute the income and principal to you and your issue or to accumulate the income?

If you or other trusts for your benefit have enough other assets so that you can maintain a prudent asset allocation in the aggregate, you could invest more of this trust in equities, or invest the equity portion more for growth than for income. Or, since income is relatively modest these days, leave it alone. Of course, before deciding, check to see what's permissible and what's required under the prudent investor law.

swimfin
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Joined: Sat Nov 12, 2016 2:14 pm

Re: Investments inside an Irrevocable Trust - a conundrum

Post by swimfin » Thu May 25, 2017 6:00 pm

Unless the instrument creating the trust provides otherwise, the trustees has discretion to invest in any investment the trustee wants. This is subject to the "reasonably prudent investor" rule.

If the instrument is silent on this, the trust law of the state you are in goes into great detail on the rights and duties of trustees.

As always, when in doubt about the interpretation of a legal document, consult a lawyer.

letsgobobby
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Re: Investments inside an Irrevocable Trust - a conundrum

Post by letsgobobby » Tue Feb 12, 2019 1:37 am

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Last edited by letsgobobby on Thu Apr 18, 2019 1:52 am, edited 1 time in total.

smackboy1
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Joined: Wed Mar 14, 2007 9:41 pm

Re: Investments inside an Irrevocable Trust - a conundrum

Post by smackboy1 » Tue Feb 12, 2019 4:10 pm

There might be a way out. Is the amount of $ at stake enough to make it worthwhile to hire an attorney to explore amending or decanting the trust? Perhaps change the terms of the trust or move the trust assets to another trust with more favorable terms. Carefully read the trust and look for the ability to amend, modify, reform or decant the trust. That power might be held by the trustee or another role such as a protector. State law governs trust modification. It might involve a 2 step process: 1) move the trust to a state with amenable trust laws state; 2) change or decant the trust. Another option is to obtain a court order to amend the trust.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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