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Sample Total Return Unitrust

Here is sample language for a total return unitrust, with comments, provided by Pittsburgh attorney Robert Wolf, a leading advocate of the trusts.

I give the residue of my estate to my trustee___ to hold as a Total Return Unitrust under the following provisions:

A. During                  life. My trustee shall pay the distribution amount set forth below to or for the benefit of my ________ during h_____ life, in quarter-annual installments.

B. Distribution amount. The trustee shall pay to my _____________ in each tax year of this trust during h_____ life an amount equal to ______ (___%) percent of the average of the fair market values of the trust as of the close of the last business day of the trust's three previous tax years (or such lesser number of tax years as are available for the first three tax years of the trust) (the "distribution amount"). In the case of a short tax year, the distribution amount shall be calculated as set forth in subparagraphC below. In the case of contributions to or distributions from the trust, including initial funding, the distribution amount shall be determined as set forth in subparagraph D below. [Non-accrual alternative: The obligation to pay the distribution amount shall cease with the last regular payment before my ___________ death.]

C. Short year. For a short tax year, [including the year of a beneficiary's death] the distribution amount shall be based upon a prorated portion of the distribution amount set forth above, comparing the number of days in the short tax year to the number of days in the calendar year of which the short tax year is a part. [Note: This accrual may be helpful in securing "present interest" status for the annual gift tax exclusion, if that is important.]

D. Contributions and Distributions. [This complicated language is needed to accommodate multi-year funding of trusts from estates and discretionary distributions in light of the three-year smoothing rule.] In a tax year in which assets are added to or distributed from the trust (other than the distribution amount) (hereinafter "adjustment year"), the distribution amount shall be increased (in the case of a contribution) or decreased (in the case of a distribution) by an amount equal to ______ (___%) percent times the fair market value of the assets contributed or distributed (as of the date or dates of the contribution or distribution), multiplied by a fraction, the numerator of which is the number of days from the contribution or distribution to the end of the calendar year, and the denominator of which is the days in the calendar year. Further, the year end values for the two tax years preceding the adjustment year shall be increased by the amount of such addition, or decreased by the amount of such distribution, for purposes of determining the distribution amount for years following the adjustment year.

E. [Insert for QTIP, or delete and re-letter subparagraphs] If in any tax year of the trust the net income of the trust exceeds the distribution amount, such excess net income shall be distributed to my ________ at least annually.

F. Computing Fair Market Value. [This allows a closely-held business interest or real estate to be placed in the trust, but the TRU is cumbersome for this type of asset.] All computations of the trust's fair market value, or the value of any contributions or distributions as set forth above, shall include accounting income and principal, but no accruals shall be required. If the trust includes assets for which there is not a ready market, the trustee shall adopt such method of valuation as the trustee deems reasonable in its discretion under the circumstances.

G. Income earned in estate prior to trust funding. In addition to the distribution amount as determined above, the net accounting income earned in my estate and allocable to the residue shall be paid to the trust, and distributed to my _____________.

H. Source of distribution amounts. The distribution amounts from the trust shall be paid from net accounting income. If the net accounting income is insufficient to satisfy the distribution amount, the trustees shall allocate to income such net realized short-term capital gains as are needed to satisfy the distribution amount, and if still insufficient, the trustees shall allocate to income such net realized long-term capital gains as are needed to satisfy the distribution amount. If, after allocating said short-term and long-term capital gains to income, the income is still insufficient to pay the distribution amount, the balance needed shall be paid from the principal of the trust.

[It is not certain whether the IRS will respect this allocation provision, although it should since the capital gains are "allocated to income under the terms of the governing instrument." Reg. Sect. 1.643(a)-3(1). If not, all of the capital gains taxes will be paid by the trust, as would be the usual case with a simple trust. If you prefer that result, in order to allow the distribution to be more tax free to the beneficiary, simply leave out this subparagraph and that result should be assured. Please note that in such case, or if the Service will not respect this provision, you may wish to consider a distribution rate modestly lower to have the same long term economic result as if the capital gains tax liability were distributed out to the extent of distributions. Our computer modeling suggests that .25% to .35% would be an appropriate downward adjustment. Clearly this is cutting it pretty fine, but there it is.]

I. Discretionary distributions of additional amounts. In addition to the distribution amounts as set forth above, my trustee shall distribute such additional amounts, if any, of accounting income, capital gain or principal to my said _______________ as the trustee deems advisable for my _______________'s health, maintenance and support in h_____ accustomed standard of living, taking into account other income or assets which are available to h_____. [Comment: Discretionary distributions may be advisable for the same reasons as they are in any trust. Consider giving an independent trustee broader powers to enable beneficiary "to make estate planning gifts," "for _______ welfare" or "for any purpose in which money is needed."]

J. Death of ___________. On the death of my ______, the trustee shall [pay any accrued distribution amount to my ____________'s personal representative, and] distribute the balance in said trust to my then living issue, per stirpes, subject to the Trust Continuation Provisions hereinafter.

K. Goal of trust [Optional: and Corporate Trustee's Power to Alter Distribution Rate.] The goal of this trust is to provide an adequate and a relatively smooth flow of distributions, which distributions over the anticipated term of the trust may to the extent possible maintain or increase their real spending power after inflation. A second and related goal is to maintain or increase the real spending power of the trust both for the long term benefit of my ___________ and also for the benefit of the remaindermen. It is my intent by using a Total Return Unitrust, which is designed to invest for total return, whether produced by accounting income, short-term or long-term capital gains, to eliminate any conflict the trustee might otherwise experience between attaining the two goals set forth above. The distribution rate has been set at ______ (__%) percent based upon an expectation that over long periods of time, this distribution rate can be maintained and still have the distributions increase to [partially] offset [or more than offset] inflation. [Optional: If 3% or less. If a higher rate is used, use "to offset inflation as much as possible."] If this goal is achieved, the trust estate will also have maintained [or increased] [Optional: If 3% or less] its real value after inflation. [Make sure the goals are practical given the rate you insert. It is not a fair goal to expect a real increase after inflation if you insert a rate of 5% or more.] These goals will not be attainable every year, but will hopefully be attained over the long term. I understand that to the extent discretionary distributions are made in addition to the distribution amount that these economic goals will be compromised. Nevertheless, the corporate trustee shall not be liable for its good faith exercise of judgment in distributing such funds.

[Optional: In making a determination concerning discretionary distributions in addition to the distribution amount, my corporate trustee/trustee___ may wish to take into account that the welfare and support of my _______ is the most important goal of these trusts, with the preservation and building of wealth for the next generation of secondary importance.]

[Optional. If, as a result of permanent, substantial, and fundamental changes in the investment marketplace, the corporate trustee, acting alone, becomes convinced that the goals of the trust as set forth above cannot be attained because of the specific percentage distribution rates used for the distribution amount, the corporate trustee shall have the discretion to change such rates. The foregoing is intended to provide flexibility to the corporate trustee only in the event of extraordinary and unforeseen change in the investment marketplace from those markets experienced during the 20th Century. The corporate trustee shall not be held liable for the good faith exercise or non-exercise of this power.]

[Comment: Because the modeling of these trusts demonstrates that they work well and predictably for the periods 1926-1998, 1960-1998 and 1973-1998, it is not clear that this discretion is needed, or even wise. It may, however, give clients an added level of comfort - no small thing.]

2. Executors'andtrustees'powers. In addition to the powers conferred by law, my execut____ with respect to my estate, and my trustee, with respect to any trust, shall have the following powers, to be exercised in their absolute discretion, without the necessity of application to any Court, in the capacity to which such powers may be applicable: [Optional: except that they shall have no power as to the Marital Trust which would disqualify it for purposes of the marital deduction]

[Customary Provisions Omitted]

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B. Investments. To invest in any type of investment that plays an appropriate role in achieving the investment goals of the trust, which investment shall be considered as part of the total portfolio. It is my specific direction that no category or type of investment shall be prohibited. I specifically do not wish to limit the universe of trust investments in any way other than is dictated by the trustee's exercise of reasonable care, skill, and caution. In connection with the trustee's investment and management decisions with respect to this trust, the trustee is specifically entitled to take into account general economic conditions, the possible effect of inflation or deflation, the expected tax consequences of investment decisions or strategies, the role that each investment or course of action may play within the overall trust portfolio that may include financial assets, interests in closely-held enterprises, [Note - consider valuation problems here] tangible and intangible personal property, and real property; [Note - valuation problem] the expected total return from income and the appreciation of capital; other resources of the beneficiaries, the needs for liquidity, regularity of income and preservation or appreciation of capital, and the asset's special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries. Nor shall my trustee be limited to any one investment strategy or theory, including modern portfolio theory, the efficient markets theory or otherwise, but should be free to consider any appropriate investment strategy or theory under all the circumstances. [Insert for QTIP: Should the trustee invest in property which is unproductive, my spouse shall have the right to require the trustee to convert the same into productive property within a reasonable time.] [Consider provisions for personal use property such as residential real estate or tangible personal property. If such property is contemplated, it should not be included in the market value of the trust for determining the distribution.]

C. Delegation. The trustee may delegate investment and management functions that a prudent person of comparable skills would properly delegate under the circumstances. Should the trustee delegate such function, the trustee shall exercise reasonable care, skill, and caution in selecting an agent, establishing the scope and terms of the delegation consistent with the purposes and terms of the trust, and periodically reviewing the agent's actions in order to monitor performance and compliance with the terms of the delegation. Should such delegation occur as set forth above, the trustee that complies with the requirements for delegation shall not be liable to the beneficiaries or to the trusts for the decisions and actions of the agent to which the function was delegated, but by accepting the delegation of a trust function by the trustee of this trust, the agent submits to the jurisdiction of the courts of this state. [Most of this paragraph is imported from the Uniform Prudent Investor Act.]

* * *

I. Reformation. The corporate trustee, acting alone and in its sole discretion, shall have the power to reform this instrument, with or without Order of Court, in order to make any changes necessary so as to preserve and make the best use of the marital deduction for federal estate tax purposes, the exemption from generation-skipping transfer tax, or to carry out my intent regarding the allocation of capital gains to income as prescribed in this will. Any provisions of this will shall be interpreted or reformed so as to preserve these benefits and carry out my intent wherever possible, provided that such interpretation or reformation does not do violence to my primary intent to provide for my spouse and my children.

Copyright 2000 by Robert B. Wolf. Republished by permission. © 2000 Lawyers Weekly Inc., All Rights Reserved.