There are many estate planning options for asset protection, but individuals often overlook the unitrust. Let’s look at the main benefits of a unitrust: predictable income, protection for future generations, and fair disbursements. If you are looking for a way to protect your assets, a unitrust may be the right choice for you!
What are the Benefits of a Unitrust?
A unitrust is a type of trust that allows an income beneficiary to receive income from the trust as a set percentage. This set percentage gives the beneficiary a more predictable income from year to year.
Predictable Income for Beneficiary
The stability comes because a percentage of the total amount stays more financially stable from year to year than receiving dividends based on the trust’s income only.
Protection for Remaindermen (Next in line Beneficiaries)
A unitrust also allows the next in line beneficiaries, the remaindermen, to receive a fair disbursement after the beneficiary dies.
The structure of a unitrust makes it less likely that the remaindermen and the beneficiary will act at odds with each other over the trust distributions.
What is a Unitrust? How is One Created?
The grantor of a unitrust creates the trust with an experienced asset protection attorney, transferring assets into the trust’s legal framework. The grantor may transfer cash, stocks, bonds, or real estate. Once they have moved the property into the trust, they appoint a trustee to manage the trust.
The trustee is responsible for investing the trust property and distributing the income to the beneficiary, and later, after the death of the beneficiary, the remaindermen.
Annuity Trusts vs. Unitrusts
With an annuity trust, the trustee may struggle to balance the interests of the beneficiary vs. the remaindermen. The beneficiary usually wants a stable and significant disbursement each year until death. However, the remaindermen generally want the beneficiary to receive less so that they can receive more after the beneficiary’s death.
With an annuity trust, the beneficiary only receives the trust’s income each year. Because of this framework, the trustee may feel pressure to invest for high yield, producing more revenue for the beneficiary, often at the remaindermen’s loss.
However, a unitrust makes it possible to keep both the beneficiary and the remaindermen happy with the disbursements. With a unitrust, the beneficiary’s income stream is similar each year. The remaindermen do not worry about the beneficiary’s distributions because the trust can grow.
More Predictable Stable Income Stream for Beneficiary
The unitrust provides an income stream to the beneficiary more predictable than if they were receiving dividends from the trust’s income only. The unitrust pays out a set percentage of the trust’s total value each year, regardless of how much the trust makes.
According to Retirement Watch, “The trust can be invested primarily for growth or a combination of growth and income. The portfolio’s value can grow over time, preserving its purchasing power and the amount received by the next generation, while still making regular payouts to the income beneficiary.”
For example, if a unitrust has a value of $100,000 and pays out five percent per year, the beneficiary would receive $5000 each year, usually in monthly payments. If the value of the unitrust increased to $200,000, the beneficiary would receive $10,000 that year. However, the remaindermen are satisfied because their disbursement amount also increases significantly, 2x over.
Providing Protection for the Remaindermen
A unitrust can protect future generations. The unitrust’s structure gives income payments for a set time. After the time passes, the remainder of the trust property distributes to the next in line beneficiaries (the remaindermen).
For example, a unitrust could payout beneficiary disbursements for 20 years to a 2nd wife. After 20 years, the remaining trust property would distribute to the grantor’s children by his first wife.
Unitrusts are also fair to all of the beneficiaries. Each beneficiary receives an equal share of the trust property. For example, if a unitrust has three beneficiaries and is worth $100,000, each beneficiary would receive $33,333 in trust distributions.
There are a few things to keep in mind if you consider setting up a unitrust. First, unitrusts can be complex and may require the help of an attorney or financial advisor.
Second, unitrusts are irrevocable, which means that once you create the trust, you, the grantor, cannot change it without a great deal of complex legal work.
Finally, unitrusts are subject to estate taxes, so the grantor will need to consider this when determining how much property to transfer into the trust.
Overall, unitrusts have a lot of benefits. They can provide a predictable income stream for beneficiaries and protection for future generations. They are also fair to all beneficiaries and can be structured to meet the specific needs of the grantor. If you are considering setting up a unitrust, talk to an attorney or financial advisor to get started.
We Can Help
At Vail Gardner Law, our legal focus is on asset protection and legacy planning. We work with individuals and families to create unitrusts, as well as other types of trusts, that can help protect your assets for future generations. Contact us today to schedule a consultation. We would be happy to answer any questions you have about unitrusts or estate planning in general.