Gill wrote: ↑
Sun Jun 10, 2018 8:01 pm
I know you didn’t ask me but, isn’t a reasonable alternative the unitrust concept and simply pay out a percentage of the trust value each year to the beneficiary? No need to define or refer to income in that type of trust.
Yep, that's a good not-unreasonable alternative to separating the idea of principal and income.
Two concerns that may have to be addressed with a fixed percentage or fixed amount payout to the "income" recipient:
1. How to address the failing of the trust in the case where the payout results in significant principal decline due to a low interest rate / low dividend rate environment?
2. Whether to address high inflation/high income years? Percentage payout and depending on principal appreciation would be my recommended course of action here. The principal value goes up and as a result the percentage payout goes up over time as an absolute amount.
Case 1 will result in a decline in the value of the trust. In the case of a percentage payout this will result in a decline in the amount of the "income" payout over time and also a lower "principal" payout at the end of the trust term. Case 2 is "self-correcting".
Anyway, I agree that a fixed percentage payout structure is reasonable. But then again I don't think a payout based on a definition of income is entirely unreasonable. It is, after all, one of the documented retirement withdrawal methods on the bogleheads wiki: https://www.bogleheads.org/wiki/Withdrawal_methods
If it were me I'd probably specify an asset allocation, specify investments or equivalents (total stock, total international, total bond), and specify an income floor of 2% or so. This would be more to lock in good long term investment policy rather than avoid gaming the system, since I view gaming as a breach of fiduciary duty and thus avoided through legal protections.