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Total Return Trusts

Most trusts are designed to pay “income” (mainly interest and dividends) to one set of beneficiaries, while the “principal” (the original corpus of the trust plus any undistributed appreciation) accrues to the benefit of another set of beneficiaries. From the time the concept of the trust was first developed until about the 1950s, trust assets tended to produce far more income than capital appreciation. The long-term result was typically that early income beneficiaries fared well, but later income and principal beneficiaries fared poorly. (The decline of the English aristocracy was prominently fueled by this quiet phenomenon.) All that began to change half a century ago, and by the end of the twentieth century many sensibly invested trusts were yielding well under 2 percent. Today, therefore, the problem has reversed itself. Sensibly invested trusts—that is, those with predominantly equity-oriented portfolios—tend to appreciate handsomely over time, but they produce little in the way of current yield in our low-dividend, low-interest-rate environment.

Properly drafted trusts can easily deal with this problem by providing both a floor and a ceiling for payouts to current income beneficiaries. But what about the hundreds of thousands of trusts that were drafted years ago? State legislatures, under pressure from the legal and financial community and from income beneficiaries, have grappled with this issue, and roughly half the states now address it in one of two ...