Being a trustee has never been more difficult than it is today. Trustees face major headwinds: fixed income yields are near historic lows, future equity returns are projected to be lower than ever before, income tax rates have increased substantially and trust beneficiaries are living longer. Fiduciaries now have more flexibility and discretion over the administration of trust assets than ever before, but these additional choices also bring increased complexity and risk. Here’s a framework to help trustees navigate the difficult task of aligning investment, distribution and tax policy for a broad spectrum of trusts.

 

The Fiduciary Toolbox

Fiduciaries must determine, given the intent of the creator of the trust, how the assets will be invested, who’ll receive distributions and who’ll pay the income taxes. Trustees, in other words, are tasked with solving a three-variable problem in which they must simultaneously determine appropriate investment, distribution and tax policies. With respect to investment policy, trustees are typically guided by the precepts of the Uniform Prudent Investor Act (UPIA),1 which generally provides that, although a trustee has no restrictions on the types of investments and is no longer limited to the composition of the return (for example, growth or income),2 a trustee must consider each investment in the context of “an overall investment strategy”3 that has “risk and return objectives reasonably suited to the trust.”4 This is often called “total return” investing. In practice, trustees must determine an appropriate asset allocation (simplistically, the percentage of stocks and bonds) for the trust and the beneficiaries.

From a distribution standpoint, trustees are guided by the terms of the trust and state law. Most trusts drafted today give fiduciaries broad discretion to distribute income and/or principal to the beneficiaries. This distribution power may be very broad or it may be limited (for example, by an “ascertainable standard”5 or by the requirement to take into account a beneficiary’s other assets). Older trusts and certain marital deduction trusts6 often limit distributions to the current beneficiary by fiduciary accounting income. However, with the broad implementation of total return investing, many states have adopted the “equitable adjustment” power under the Uniform Principal and Income Act (UPAIA),7 with a number of jurisdictions also adopting a unitrust conversion.8 Under the equitable adjustment power, when dealing with a trust pursuant to which distributions are determined in reference to fiduciary accounting income, a trustee may adjust between income and principal, as long as it’s administered “impartially” and based on what’s “fair and reasonable” to all the beneficiaries.9 As such, even for trusts in which distributions are limited by fiduciary accounting income, trustees typically have significant discretion in determining the amount to be distributed each year. In all, for the vast majority of trusts, trustees have the power (and burden) of determining an appropriate distribution policy in keeping with the goals of the trust.

With respect to taxes, trustees can place the burden on the current beneficiaries by making distributions that carry out distributable net income (DNI).10 DNI determines both the income items that may be deducted by the trust due to distributions and the character of the income that’s taxable to the beneficiaries.11 Determining DNI for a trust requires, first, ascertaining the taxable income of the trust and, then, modifying that figure in a number of ways. In the past, absent certain circumstances, capital gain was typically excluded from DNI and was taxable to the trust rather than to the beneficiary receiving the distributions.12 However, following the adoption of the UPAIA, the Treasury regulations now provide that capital gain can be included in DNI if state law and the governing instrument so provide or if the fiduciary allocates gain to DNI “pursuant to a reasonable and impartial exercise of discretion.”13 Thus, fiduciaries now have considerably more discretion in determining to what extent the trust or the beneficiaries bear the burden of income taxes on the assets. This is particularly important today because non-grantor trusts with taxable income above $12,15014 are now taxed at the highest income tax rates. When one considers, by contrast, that individual beneficiaries don’t reach the top threshold until they exceed $406,750 of taxable income,15 along with the potential income tax savings from distributions to beneficiaries residing in low- or no-income tax states, fiduciaries need to consider whether they should exercise this discretion. Both the UPIA and the UPAIA mandate that a fiduciary must consider the expected tax consequences of any decision made under these acts.16 

 

Capital Markets, Taxes and Longevity 

Today’s capital market environment is challenging because portfolios invested across a range of asset allocations will likely have significantly lower returns versus history.17 Bernstein’s median annualized return projection for 100 percent globally diversified equities is 8.1 percent over the next 30 years—far lower than the historical return of 10.4 percent.18 The median annualized return for a diversified intermediate-term municipal bond portfolio is projected to be approximately 3.3 percent over the next 30 years (because current yields are close to 70-year lows)—significantly below the historical return of 5.5 percent.19 As a result, stock/bond mixes—particularly those that are heavily weighted to bonds—are likely to lag behind their historical returns by a significant margin (and even lower than what Bernstein would project if market conditions were normalized).20 

Income tax rates for non-grantor trusts have risen significantly with the enactment of the American Taxpayer Relief Act of 201221 and the imposition of the 3.8 percent Medicare tax22 on net investment income that was enacted as part of the Health Care and Education Reconciliation Act of 2010.23 Today, the top tax rates on ordinary income and long-term capital gain (including the Medicare tax) are 43.4 percent and 23.8 percent respectively, whereas in 2012, they were 35.0 percent and 15.0 percent. 

Greater longevity is yet another headwind. According to the U.S. Census Bureau, the average life expectancy of an individual born in 1970 is 70.8 years, while for a person born in 2010, it’s 78.3 years.24 Because many trusts are created to provide support throughout one or more beneficiaries’ lifetimes, trusts will be required to last longer than ever before. 

 

The Trust Spectrum

Trusts are created for a myriad of reasons, their terms differ in countless ways and every beneficiary has different needs. Fiduciaries must customize the administration of each trust accordingly. As a way of providing a broad analytical framework, we’ve created a trust spectrum that should be helpful to fiduciaries. (See “Where Does Your Trust Lie?” p. 14.)  

We’ve provided examples of trusts in three major categories:

 

The left side of the chart contains trusts, such as support trusts, that focus primarily on the current beneficiary. With these trusts, the main concerns are the level, stability and sustainability of the distributions. Typically, the investment policy associated with trusts in this category is aimed towards wealth preservation (and some growth, but only to the extent required to maintain the current distributions).

 

In the middle of the spectrum lie those trusts that serve the interests of two different sets of beneficiaries—current and remainder. An example might be a marital trust, in which the remainder beneficiaries are unrelated to the current beneficiary. The important metrics in this type of trust would be the division of assets, the trust’s ability to maintain purchasing power and the remaining assets in the trust. The investment and distribution policies associated with this middle section of the spectrum are likely based on the needs of both kinds of beneficiaries, and setting them can be a harrowing task for the trustee. 

 

On the far right of the spectrum lie those trusts that are focused primarily on the interests of the remainder beneficiary. An example would be a dynasty trust, in which the main concern is maximizing the remainder value. Distributions to current beneficiaries are typically very small or nonexistent, and the focus is often on investing appropriately to create the highest probability that purchasing power will be maintained and remainder value maximized. Fiduciaries of such trusts traditionally select a more aggressive asset allocation aimed towards growth.  

 

With this framework in mind, we’ve prepared a series of case studies across an array of trust types to illustrate how fiduciaries can use the discretionary tools available to them and customize a strategy that can provide the highest probability of success, given the nature of the trust and situation at hand. In each of the case studies, we’ve assumed a starting trust corpus of $10 million in a non-grantor trust and have forecasted likely results based on different decisions that the fiduciary could make.25 For trustees discharging their responsibilities in today’s difficult environment, these case studies offer a methodology to consider in the process of determining appropriate investment, distribution and tax policies. 

 

Income-Only Trust

Consider a trust that can only distribute income and a trustee that’s seeking to maximize that amount. Although many fiduciaries may have significant discretion over the amount to distribute each year, let’s assume that the trustee has no power to adjust the distribution, so the trust can only pay out portfolio income. In this case, the only flexibility available to a trustee seeking to maximize income is to alter the trust’s asset allocation. As has already been established, today’s market environment is difficult. A portfolio allocated 60 percent equities/40 percent bonds would normally be expected to generate $362,000 in pre-tax income in the first year.26 Today, however, that same portfolio yields dramatically less—approximately $234,000. And, to make matters worse, the likelihood of a 20 percent peak-to-trough decline in assets is elevated.  

So, how can a trustee safely boost income in today’s market environment? Traditionally, a fiduciary might invest the trust assets in a bond-heavy allocation, but in today’s low-yield environment, an allocation skewed towards bonds likely wouldn’t provide much income. In fact, a 20 percent equity/80 percent bond allocation actually provides less income than a 60 percent/40 percent allocation. Alternatively, some fiduciaries might consider replacing intermediate-term bonds with a mixture of high-yield and long-term bonds to increase income. This technique does indeed provide more income, but at a risk level that’s inappropriately high.27 

It may seem impossible to increase income in today’s environment. However, we’ve found that a thoughtful approach to asset allocation can significantly improve outcomes. (See “Thoughtful Approach to Adding Income,” p. 15.) By employing high-dividend stocks in the equity component of a 60 percent/40 percent allocation, income could increase from $234,200 to roughly $253,000. Note that in today’s market, a trustee must be especially careful not to overpay for these stocks, many of which became overvalued in the years following the financial crisis. Alternatively, adding a 10 percent high-yield bond allocation sourced from equities could increase income to just under $278,000. If both high-dividend stocks and high-yield bonds are added, income could rise to $293,400—25 percent more income than from a traditional 60 percent/40 percent mix. A fiduciary has met one goal for the trust (increasing income) and has also achieved that goal without sacrificing safety. As indicated in the table at the bottom of the chart, the probability of experiencing a 20 percent peak-to-trough loss in the trust assets has decreased from 28 percent to 19 percent. However, fiduciaries must be mindful that while income has increased, this has come at the cost of the remainder beneficiary, as evidenced by the lower remainder value shown.  

Marital Trust—The Balancing Act

At the center of the trust spectrum, fiduciaries are tasked with ensuring that both the current and remainder beneficiaries are treated fairly and equitably. A classic example would be a marital trust28 in which the current beneficiary is a 50-year-old second spouse, and the remainder beneficiaries are the children from the deceased spouse’s first marriage. The trust is currently allocated 80 percent equities/20 percent bonds, and the trustee currently distributes annually to the spouse the greater of all income, or $400,000 (adjusted for inflation). The trustee must be mindful of two sets of concerns. The current beneficiary focuses on the distribution level, the stability of the distributions and the sharing of total trust wealth; the remainder beneficiaries care about the trust’s remainder, the purchasing power of the trust’s principal and their share of total trust wealth. 

Share of wealth. The current distribution policy clearly favors the spouse. (See “Effects of Inflation-Adjusted Distribution,” p. 16.) Thanks to the stable distribution policy, the spouse has a very narrow range of outcomes in the 30th year. However, the inflation-adjusted fixed distribution has a direct impact on the remainder beneficiaries. By Year 30, if markets are poor, there could be nothing left for the children. In fact, there’s a 16 percent chance of trust depletion. While the spouse’s needs are largely being met, the children are bearing all of the investment risk.

 

If the grantor’s intent for this trust was for all of the beneficiaries to be treated “equally” (an equal 50-50 sharing of trust assets between the spouse and children), then the current distribution policy isn’t fair or reasonable to the children. A trustee who has discretion to change the distribution policy (through distributions of principal or by using an equitable adjustment power conferred by a state’s UPAIA) might consider, instead, a unitrust-based distribution policy—one that annually distributes a fixed percentage of the value of the trust assets each year. By switching to a 4 percent unitrust, the trustee has eliminated depletion risk for the children (See “ Unitrust Improves Sharing of Wealth,” p. 16). In addition, the children’s share of wealth would increase meaningfully from 35 percent to 45 percent in the median case. With a unitrust policy, the spouse shares the risk, as evidenced by the larger distribution range. The spouse still receives distributions (though with far more variability), and the children now have increased their remainder value and their share in the trust’s wealth. 

However, due to today’s lower return environment, if the trustee’s goal is to attain a true 50 percent sharing of wealth in accordance with the grantor’s intent, the distribution policy would need to be lowered from 4 percent to 3.6 percent.

 

Stability of distributions. Although a unitrust-based distribution policy helps equalize the sharing of wealth, the trust’s equity-tilted allocation will experience volatility, which will directly impact the variability of the annual distributions to the spouse. A smoothing rule, which has been adopted in many states that have unitrust conversion statutes (and which can also be adopted by trustees as discretion allows in the absence of a conversion statute), would help stabilize the distributions. A 3-year smoothing rule for this trust would use the average of the trust assets over a 3-year period (the current year and the two previous years) and distribute 3.6 percent of that value. This technique would add more consistency on an annual basis and would reduce the probability of a 10 percent year-over-year decline in distributions to just 3 percent.

Unfortunately, smoothing rules can’t minimize the effect of market cycles over longer periods of time. For example, consider the actual path the distributions could take over the next 40 years for a trust allocated 80 percent equities/20 percent bonds, with a 3.6 percent unitrust distribution policy. Even with a 3-year smoothing rule, the distributions would start at $360,000 but could go as low as $180,000 and as high as $450,000. Over a 40-year period, there’s a 70 percent chance that the distribution will decline by 30 percent or more from the initial distribution. This is one of the problems with unitrust-based distribution policies. Because they’re based on market values, which can be irrationally exuberant or overly pessimistic, a smoothing policy can’t eliminate fluctuations in the distributions. In a bear market, the current participant’s support can slide, and in a bull market, the remainder beneficiaries’ wealth can be eroded because the current distributions rise to high levels.

If the trustee has the discretionary power under state law or under the trust document, the fiduciary might consider mitigating the impact of market cycles by adding an appropriately-sized floor and ceiling to the smoothed distribution. For example, a floor of 80 percent and a ceiling of 120 percent of the initial distribution, inflation-adjusted, creates more stability throughout market cycles for the spouse, without meaningfully impacting the share of wealth (See “Floor and Ceiling Trade-Off,” p. 17). The appropriate floor and ceiling for a trust will depend on number of factors, including the unitrust percentage, asset allocation and expected term of the trust, but for this trust, the 80 percent floor and 120 percent ceiling seem fair and reasonable to all of the beneficiaries.

Maintaining purchasing power of principal. Both the UPIA and the UPAIA mandate that a fiduciary must take into account the impact of inflation on the trust principal in administering the trust assets.29 We examined a range of allocations from 20 percent equities/80 percent bonds to 80 percent equities/20 percent bonds and ascertained the likelihood that a 3.6 percent unitrust distribution would maintain purchasing power over 30 years. The most growth-oriented allocation, with 80 percent in equities, has a mere 39 percent chance of maintaining purchasing power of principal.30 Even with this asset allocation, the 3.6 percent distribution is simply too large. 

Over 30 years, a 3.6 percent distribution results in real accumulated distributions to the spouse of $8.9 million and a remaining real portfolio value of $8.5 million—far short of the goal of maintaining the $10 million initial value, inflation-adjusted. However, if the distribution rate is reduced from 3.6 percent to 3 percent, the spouse receives about $1 million less in distributions, but the trust has a 50 percent chance of maintaining the $10 million goal.31

Clearly, the trustee of a marital trust of this kind faces daunting challenges. However, by using the full toolkit now available—including asset allocation changes, unitrust conversions, smoothing rules, floors and ceilings and resetting of the distribution rate—a trustee can design a distribution policy that has a high probability of achieving the goals of the trust.

 

Dynasty Trust

As mentioned previously, non-grantor trusts are taxed at the highest rates once taxable income exceeds $12,150. For this reason, non-grantor trusts carry an inherent federal income tax disadvantage when compared to an individual’s taxable portfolio. Trustees should consider whether making distributions of trust income might better serve the overall goals of the grantor and the grantor’s family, in terms of total wealth accumulation.

Even in situations in which the primary objective is to accumulate as much wealth as possible in the trust—for example, a dynasty trust or generation-skipping transfer (GST) tax-exempt trust—a trustee may be able to produce more total wealth by distributing trust income to the beneficiaries. This is especially likely when the beneficiaries are taxed at relatively low income tax rates, aren’t subject to state income tax and have sufficient applicable exclusion amount32 and GST tax exemption33  available to shelter whatever assets may accumulate in their gross estates. If the trust can spread income across a large enough number of beneficiaries, the savings can be significant.

Consider a $10 million GST tax-exempt trust, resident for state tax purposes in New York State and allocated 80 percent equities/20 percent bonds. The remainder beneficiaries reside in both high and low income tax states and have no substantial income or assets of their own. The grantor’s intent is to maximize wealth over multiple generations. Assuming the trustee makes no distributions to the beneficiaries, in 30 years the trust would have a value of just over $55 million, after taxes and inflation. (See “Maximize Wealth,” p. 18.) But, what if, instead, the trust distributed the lesser of: all income (including allocating capital gain to DNI) or $250,000 per beneficiary (the income threshold for the Medicare surtax for married taxpayers)?34 If the trustee made such a distribution to one New York State beneficiary who has the full advantage of “running the brackets” from the lowest tax rates to the higher federal and state tax rates, total wealth would increase by roughly $3.5 million, as shown in the second bar from the left. In this calculation we’ve assumed that the beneficiary reinvests the after-tax distributions in an 80 percent stock/20 bond portfolio. Increasing the distributions to four New York State beneficiaries would allow additional bracket runs, and the total wealth accumulated would increase by another $6.7 million. Finally, if the four beneficiaries resided in states that don’t have a state income tax (for example, Florida, Nevada and Texas), accumulated wealth would increase by another $5.3 million, for a total wealth increase of 28 percent over the no-distributions approach.

 

There are a number of critical assumptions in these scenarios: More wealth is created—first, because the beneficiaries were able to fully run the income tax brackets, and second, because the trust income distributions didn’t create an estate tax liability at either the state or federal level. In reality, beneficiary situations aren’t so simple, and a trustee must consider all of the following financial factors: 

 

Potential unused applicable exclusion amount of each beneficiary;

State estate or inheritance tax implications;

Trust’s income tax rate, including state income taxes;

Beneficiary’s income tax rate;

Beneficiary’s other sources of income; and

Beneficiary’s other assets.

 

In addition, a trustee should consider the following non-financial factors: 

 

Whether delivery of control over the use and disposition of the assets distributed from the trust to the beneficiary is consistent with the trust’s purposes;

Assets distributed may lose the creditor protection afforded by the trust; 

Fairness and equality (how, for example, should a trustee make distributions if three out of four beneficiaries have low income).

 

To alleviate some of the transfer tax concerns that may accompany distributions from a dynasty trust, fiduciaries should consider using a partnership structure in which the beneficiary is a partner along with the trust. For example, the trust could form an entity taxable as a partnership like a limited partnership or limited liability company and distribute an interest in the entity to the beneficiary. Whether such distribution carries out DNI to the beneficiary is secondary to the fact that on an ongoing basis, a proportionate amount of partnership income will be allocated to the beneficiary. Given that any partnership interest held by a trust beneficiary will be in her gross estate for estate tax purposes, fiduciaries may also consider using intentionally defective grantor trusts35 (IDGTs) to minimize the estate tax impact but still retain the income tax benefits of having the partnership income taxed to the beneficiary-grantor. For example, the beneficiary may want to sell her partnership interest to an IDGT created by the beneficiary, thereby minimizing the estate tax impact of the distribution of the partnership interest, but allowing the assets to be taxed to the beneficiary for income tax purposes.

 

Trust Policy Statements

Trustees have more discretion and tools at their disposal than ever before. Unfortunately, the current market environment and Tax Code create significant headwinds, such that fiduciaries should review the tools at their disposal. Often, aligning investment, distribution and tax policies for a given trust is a matter of measuring the trade-offs, and equally important, communicating those trade-offs to the beneficiaries. It’s important to remember that in meeting fiduciary duty, a trustee is the guardian of process, not the guarantor of success. We recommend that trustees appropriately document the manner in which investment, distribution and tax policies have been determined and how the combination of these decisions may affect the interests of the beneficiaries. In some cases, it may be appropriate for trustees to adopt a trust policy statement with appropriate help from counsel. In all cases, the trust’s policies should be revisited both on a regular basis and whenever there’s a significant change in the capital markets, the Tax Code, trust legislation or the needs of the beneficiaries. 

 

Authors’ note: Our headline is from the 1963 comedy, “It’s a Mad, Mad, Mad, Mad World,” directed and produced by Stanley Kramer, about a group of strangers who compete against each other in a madcap cross-country chase to find $350,000 in buried treasure.                 

 

—Bernstein Global Wealth Management, a unit of AllianceBernstein, is a global investment manager that does not provide tax, legal or accounting advice.

 

Endnotes

1. Every state has adopted the Prudent Investor Act (or substantial portions thereof) or has “total return” investment provisions by law or court decision.

2. Uniform Prudent Investor Act (1995) (UPIA) Section 2(e). 

3. UPIA Section 2(b).

4. Ibid.

5. Internal Revenue Code Section 2041(b)(1)(A) and Treasury Regulations Section 20.2041-1(c)(2).

6. Qualified terminable interest property trusts under IRC Section 2506(b)(7) and general power of appointment marital trusts under IRC Section 2056(b)(5).

7. Uniform Principal and Income Act (2008) (UPAIA) Section 104(a). 

8. For example, New York and California provide for a 4 percent unitrust, N.Y. Estate Powers & Trusts Law Section 11-2.4 and CA Probate Code Section 16336.4; Florida provides for a 3 percent to 5 percent unitrust (or one-half of the IRC Section 7520 rate), Fl. Stat. Ann. Section 738.1041; and Delaware provides for a 3 percent to 5 percent “express total return unitrust,” Del. Code Ann. Tit. 12 Section 61-107. 

9. UPAIA Section 103(b).

10. IRC Section 643. 

11. IRC Sections 651(b), 652(a), 652(b), 661(a), 662(a) and 662(b) .

12. “Gains from the sale or exchange of capital assets shall be excluded to the extent that such gains are allocated to corpus and are not . . . paid, credited or required to be distributed to any beneficiary during the taxable year.” IRC Section 643(a)(3). 

13. Treas. Regs. Section 1.643(a)-3(a).

14. Revenue Procedure 2013-15, 2013-47 I.R.B. 537.

15. Ibid.

16. UPIA Section 2(c)(3) and UPAIA Section 104(b)(9).

17. Projections are from Bernstein’s Wealth Forecasting System, which is based on a Monte Carlo model that simulates 10,000 plausible paths of return for each asset class and inflation, producing a probability distribution of outcomes. However, the model goes beyond randomization by integrating the paths of return with an investor’s unique circumstances; taking the prevailing market conditions into consideration; and basing the forecasts on the building blocks of asset returns, such as inflation, yield spreads, stock earnings and price multiples. The projection incorporates the linkages that exist among the returns of the various asset classes and factors in a reasonable degree of randomness and unpredictability.

18. Globally diversified equities are represented and modeled as 21 percent U.S. diversified, 21 percent U.S. value, 21 percent U.S. growth, 7 percent U.S. small-mid cap, 22.5 percent developed international and 7.5 percent emerging market stocks. The historical return is represented by the average return of 70 percent in S&P 500, 25 percent in MSCI EAFE, and 5 percent MSCI EM from Jan. 1, 1984 through Sept. 30, 2013.

19. The historical return of bonds is the Lipper International Municipal Bond Average from Jan. 1, 1984 through Sept. 30, 2013.

20. Normalized market conditions are Bernstein’s estimates of capital markets equilibrium, which assumes that all assets are fairly priced. Pursuant to these types of conditions, Bernstein’s median projection return for 100 percent globally diversified equities is 9.6 percent and for 100 percent bonds is 5 percent—both still below the historical average. Normalized projections for other asset mixes are as follows: 6.5 percent for a 20/80 allocation, 7.8 percent for a 60/40 allocation, 8.7 percent for an 80/20 allocation. Today’s projections for other asset mixes are as follows: 4.6 percent for a 20/80 allocation, 6.6 percent for a 60/40 allocation, 7.4 percent for an 80/20 allocation.

21. P.L. 112-240, 126 Stat. 2313, enacted Jan. 2, 2013.

22. IRC Section 1411.

23. P.L. 111-152, 124 Stat. 1029, enacted March 30, 2010. This act amended the Patient Protection and Affordable Care Act, P.L. 111-148, 124 Stat. 119, enacted March 23, 2010.

24. “Expectations of Life at Birth, and Projections,” www.census.gov/compendia/statab/cats/births_deaths_marriages_divorces/life_expectancy.html.

25. In all scenarios, unless otherwise noted, we’ve assumed that globally diversified equities is comprised of 21 percent U.S. diversified, 21 percent U.S. value, 21 percent U.S. growth, 7 percent U.S. small-mid cap, 22.5 percent developed international and 7.5 percent emerging market stocks, and bonds are comprised of intermediate-term municipal bonds. The trust and beneficiary are subject to state income tax of 6.5 percent.

26. Assumes normalized market conditions, supra note 20.

27. The probability of a 20 percent or more peak-to-trough decline in the distribution is 54 percent over the next 20 years.

28. Might include, but wouldn’t necessarily be limited to, trusts that have qualified for the marital deduction under IRC Sections 2056 and 2523.

29. UPIA Section 2(c)(2) and UPAIA Section 104(b)(8).

30. The probability of maintaining purchasing power of principal for a 20 /80 allocation is 3 percent; 40/60 allocation is 11 percent and 60/40 allocation is 27 percent. 

31. Over 30 years, the current beneficiary would receive accumulated distributions of $8.9 million under a 3.6 percent distribution rate versus $7.9 million under a 3 percent distribution rate, inflation-adjusted. The remaining real value of the trust portfolio would be $8.5 million under a 3.6 percent distribution rate versus $10.0 million under a 3 percent distribution rate. 

32. IRC Section 2010(c)(3). 

33. IRC Section 2631(c).

34. IRC Section 1411(b). 

35. A trust that’s a grantor trust for income tax purposes under IRC Sections 671-679, but the assets of which wouldn’t be includible in the estate of the grantor.