Are you the beneficiary of a trust from which you would like to receive more income? If so, there is a statute in Kentucky that may help you reach that goal.
The Kentucky Principal and Income Act (the Act) became effective January 1, 2005 and includes provisions which help trust fiduciaries balance the interests of current beneficiaries (those currently receiving trust income) with remainder beneficiaries (those entitled to later receive the principal of the trust). Tension arises for the fiduciary because he must decide whether property received by the trust is income, and distributable to the current beneficiaries, or principal, to be held for the remainder beneficiaries. That is, current beneficiaries and remainder beneficiaries have inherently competing interests and the fiduciary must remain impartial in the administration of the trust.
The Act addresses these competing interests by permitting the fiduciary to determine whether trust receipts and expenses are allocated as income or principal. This allows the fiduciary to more effectively manage variations in the trust’s investment returns. For example, if the fiduciary determines that trust income distributable to the current beneficiaries is too low in some year based on the trust’s investments, the fiduciary has the power to reapportion some amount of principal to income to appease the interests of the current beneficiaries. The opposite holds true for years when the fiduciary determines that trust income distributable to the current beneficiaries is too high based on the trust’s investments.
Taking this idea a step further, the Act also allows for the conversion to a unitrust payout. This essentially directs the fiduciary to distribute to the current beneficiaries 3% to 5% of the fair market value of the trust’s assets each year, as income, regardless of traditional notions of principal and income. Ultimately, current beneficiaries presently receiving a 2% return on trust assets, for example, could reap significant benefits from such a conversion. Remainder beneficiaries can also benefit from such a conversion because it allows the fiduciary to focus on maximizing the total return on the trust’s investments, with an increased emphasis on long-term growth.
If you are interested in potentially receiving more income from your Kentucky trust, you should not hesitate to contact an experienced estate planning attorney for more information.
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