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Helping Trusts Keep The Faith


Penny Kaplan's husband, Edward, came from a close-knit New York family that was bound together by a real estate business. But after Edward died suddenly of an aneurism more than five years ago at age 44, the relationship between Penny and her in-laws began to unravel.

Much of the discord centered around a $14 million trust Edward had set up, $8 million of which was tied to the family business. Kaplan had expected the property to throw off considerable income, but that hasn't been the case. Her father-in-law and sister-in-law, Kaplan says, insisted the businesses weren't generating any cash. (Another part of the trust, a $6 million portfolio of mainly municipal bonds, is yielding about $178,000 a year for the widow.) "This is very emotional," Kaplan laments. "My hands are tied financially." The in-laws' attorney declined to comment.

Trusts can't be broken, but it has gotten easier to squeeze more money out of them. Kaplan petitioned the Surrogate's Court in Nassau County, N.Y., to convert Edward's trust into a "unitrust." That little-known vehicle would entitle the mother of two college-age children to receive 4% of the value of the entire trust annually, bumping up her total yearly income to roughly $560,000. That might mean her in-laws would have to manage the real estate differently or even sell all or part of it to get the cash needed to pay her. "In this case, the unitrust is a way to get money to the surviving spouse," says Kaplan's attorney, Stephen J. Silverberg of Certilman Balin Adler & Hyman in East Meadow, N.Y. The unitrust can be a godsend to many trust beneficiaries, he adds. "We're starting to recommend it more and more."

Besides New York, 19 other states allow for a unitrust conversion, which typically locks the trust into generating 4% in annual income. That figure is used in most states because it should provide a fair return to current beneficiaries while preserving enough of the capital to allow the trust to grow for the next generation.

The unitrust is part of a larger movement in legal circles to bring trust law into the 21st century. The idea is that even trusts set up years ago can be modified to solve current problems. For instance, the decades-old practice of splitting trust portfolios between bonds and dividend-paying stocks doesn't always generate enough income in today's low-dividend environment.

KNOW THE LAW

Now, to meet their goals, trusts need to invest for total return and, if necessary, get some of the cash payout by selling assets. In 39 states, trust beneficiaries can ask the trustees for what's called a power of adjustment. That permits trustees to use a measure of investment discretion in generating a trust's payout. In many cases the trustees can take this action on their own.

All of these changes started a decade ago when a panel of law professors and trust experts put forth revisions to the 76-year-old Uniform Principal & Income Act (UPIA) that most states have quietly adopted without publicity. "Most states are silent on the question of telling beneficiaries about unitrusts or the power of adjustment," says Seymour Goldberg, a senior partner at Goldberg & Goldberg in Jericho, N.Y. Goldberg maintains that few estate attorneys, accountants, or corporate trustees are up to speed on their state UPIA laws.

In fact, you can now purchase Goldberg's "The Adviser's Guide to the Revised Trust Accounting Rules" from the American Institute of Certified Public Accountants at cpa2biz.com. "The problem is, no one knows about this stuff, and beneficiaries don't have any idea about their rights under the law," he says. If they did, more trusts might come closer to satisfying the goals of those who set them up.

By Lynn O'Shaughnessy


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