Investing the Trust's Assets and Paying Its Expenses

• Author: Margaret A. Munro, Kathryn A. Murphy
• Profession: Has more than 30 years' experience in trusts, estates, family tax, and small businesses/Attorney with more than 20 years' experience administering estates and trusts and preparing estate and gift tax returns
• Pages: 187-206

CHAPTER 12 Investing the Trust’s Assets and Paying Its Expenses 187

Chapter12

Investing the Trust’s

Assets and Paying Its

Expenses

Unlike an estate, a trust is an ongoing endeavor and its lifetime may well be

longer than yours. Your duty as trustee is to manage the trust’s assets to

ensure that the trust’s beneciaries will have adequate funds when they

need (or are entitled to) money. Your goal is to see that the asset base grows, not

to keep it the same or see it shrink.

In order to make your tenure as trustee a successful one, this chapter explains

what you need to know about separating principal from income. It also shows

some basic investment options, some of which you may decide to use to invest the

trust assets and others of which you may think aren’t for you, at least not now.

The beauty of being trustee, as opposed to executor, is that yours tends to be more

of a long-term role, so you have the option of investing one way now and then

changing it up later if it’s not working the way you want. Whichever you decide,

remember that your goal isn’t just to preserve the assets but also to put them to

IN THIS CHAPTER

»

Discovering how to dierentiate

between income and principal

»

Choosing investment advisors

»

Understanding diversication and

investing in a socially responsible way

»

Using trust assets to adequately

provide for beneciaries’ needs

»

Knowing which expenses you can and

can’t pay from the trust

188 PART 3 Operating a Revocable or Irrevocable Trust

work for the benet of the income beneciaries, any other present interest ben-

eciaries (who could also be the income beneciaries or some other person) and

the remaindermen.

Appreciating the Importance of Income

and Principal in Trust Administration

Picture a trust as two boxes. In one box, you keep all the property that’s available

to produce ordinary income like dividends, interest, or rents. When that income is

earned, it goes into the second box. As you make payments, some may come out

of either box, depending on what you (the trustee) decide; others, such as

beneciary payments, come only from the income box, assuming it has income in

it. Knowing how to dierentiate what belongs in the principal box from what

should be in the income box is one of the trickiest concepts to grasp in trust

administration.

To help you get a rm grasp on principal and income, the following sections give

you a clear denition of each and explain why and how distinguishing between the

two will help you manage your trust.

The people entitled to receive income (the income beneciaries) may be dierent

than those who will receive the principal (the remaindermen) when the trust

terminates. One of your many jobs as trustee is to make sure that you don’t favor

the income interest over the principal interest, or vice versa. You must be fair and

equitable to both.

Dening principal and income

Principal, sometimes referred to as the corpus or body, of the trust, is the property

that the trust owns. Principal may include cash, but it may also be stocks, bonds,

real estate, business interests, country club memberships, or season tickets to the

Met. In fact, anything that the trust can be said to own is principal. Although trust

principal starts with the assets that originally fund the trust (see Chapter11), it

may increase or decrease when the sale of trust property creates capital gains or

losses; when the grantor makes additional contributions to the trust; when the

trust receives a settlement or judgment as a party in a lawsuit; or even when you

transfer into principal any accumulated income that’s not required to go to an

income beneciary.