These harsh economic times should induce clients, fiduciaries and their advisors to review trust distributions and portfolio viability.

Many investment advisors expect returns on investments during the next 10 to 20 years to be harder to replicate than during the previous 10 to 20 years. At the same time, inflation will take its toll. And it's widely expected that ordinary income and capital gains tax rates will increase sometime after this year.

Clearly, it's going to be a challenge to maintain trust portfolios and objectives. Sustaining a legacy lies in thoughtful management of portfolio size, investment strategies and distributions (type, timing and amount). Of course, the devil is in the details. So, let's look at what can be done.

Investment Returns

These days, investment advisors are factoring lower expected returns and higher volatilities into their asset allocation models and Monte Carlo simulations. While Monte Carlo simulations can vary significantly among institutions and all have their limitations, they're still very useful in calculating the likely returns at the end of a specific period. With these assessments of anticipated investment performance in hand, fiduciaries can make projections — looking also at disbursements and anticipated income taxes — of the probability that a trust will have a specific value at the end of a specified period.

A simulation can project the probabilities of the portfolio's value throughout the investment period and, therefore, the likelihood that it will meet distribution requirements. Indeed, fiduciaries should look at the probability of minimum and median values when it'll be beneficial to have minimum portfolio values, and liquidity when major principal distributions will be needed (for education expenses, purchase of major assets, payouts due to beneficiaries' ages, etc.).

Naturally, the further out a point in time is, the more uncertain the probability will be, as time magnifies small errors in estimated inputs. That's why it's helpful for fiduciaries to run new Monte Carlo simulations periodically to update projections and to ensure their investment strategies and asset allocation models are on target. Ongoing monitoring of a portfolio has long been a fiduciary obligation under prudent investor standards. But this duty may become more critical in this economic climate.

We also should keep in mind — and correct, for that fact — that Monte Carlo simulations for trusts are often performed in a vacuum. Little or no regard may have been given to the effects of distributions or to the taxes involved. Also, clients and their attorneys often rely on software that is effective for calculating transfer tax consequences. This software is less effective for their economic schedules, because the projections are based on arbitrary linear growth and income assumptions assigned by the clients or others and are not based on historical data for the various asset classes to be maintained in the portfolios. These faulty assumptions can cause well-intended plans to go awry. These problems are amplified when hard-to-value assets and non-traditional assets are included in a trust portfolio.

For instance, in the past 10 years fiduciaries have invested regularly in alternative investments.1 They did so to enhance returns and reduce risk by increasing diversification. Recently, though, many alternative investments have fallen short of expectations. And perhaps some of these alternative investments weren't a good fit for some portfolios' structures anyway. Clients and their advisors will have to step up even the most diligent of their due diligence when selecting and maintaining these investments and approaching new opportunities. They should:

  • perform proper due diligence to establish whether historical track records will persist;

  • focus portfolio construction on how an investment solution fits into the asset allocation model independently and is part of the overall portfolio risk and return budget;

  • obtain greater disclosure from the fund managers before, and even after, committing to the funds;

  • improve valuations of the assets, including hard-to-value financial products (for example, private equity and derivatives); and

  • determine potential conflicts of interest among the various parties selling and purchasing the investments.

Obviously, fiduciaries who do not have the ability to perform this kind of due diligence on alternative investment strategies should get expert help.

Keep in mind that any liquidity needed for distributions must be factored into assessments of alternative investments, as many of these investments can be less liquid than traditional investments. Also, fiduciaries will have to consider possible increases in federal income tax rates. Hedge funds, for instance, typically generate short-term capital gains or ordinary income. Tax overlay strategies can help offset some of the tax inefficiency associated with certain alternative investments. But sound alternative investments, including certain commodity funds and certain hedge funds, can, and have historically proven to mitigate risk and the negative effects of inflation.

Inflation

The time has come to give greater thought to the effects of inflation when designing trusts and distribution provisions. While the overall inflation rate may increase only moderately, it's critical to acknowledge that inflation generally increases at higher rates for luxury goods and services.

Section 227 of the Restatement (Third) of Trusts states that fiduciaries should consider inflation in investment strategy. Investment advisors should incorporate realistic inflation factors into investment strategies so as to address the beneficiaries' specific, anticipated spending needs. This approach will help trustees manage beneficiaries' expectations. For instance, some clients want their legacy to enable their family members to maintain a high or moderate lifestyle, or to meet specific needs (for education or health or other such expenses). Others want their legacy to sustain a particular charitable mission.

Economists generally define inflation as the rise in prices of goods and services of the same quality. But it's important to note that inflation rates or cost of living increases differ as to particular items. Also, maintaining specific lifestyles (and making trust distributions) is often more about emotion than math. Many high-net-worth individuals want to maintain their ability to buy “the best.” In most cases, what's considered “the best” is scarcer and its price increases faster than customary goods and services or typical consumer price indexes. This happens because:

  • Many services for high-net-worth individuals cannot benefit from economies of mass production or outsourcing to low-wage countries.

  • Some commodities and services are priced based on demand, not cost — what a wealthy person somewhere in the world is willing to pay.

  • And the definition of “the best” evolves.

So, for example:2

  • Luxury apartments in Manhattan have substantial price increases driven by wealthy individuals from other countries.

  • Auction prices for major works of art have increased due to increasing global wealth.

  • Purchase prices and maintenance costs for yachts have noticeably increased significantly.

  • And some definitions have changed; it's no longer about affording a first class airplane ticket; now it is about owning a fractional interest in a private jet.

Some economists project an estimated long-term annual inflation rate of 2 percent to 3 percent. Yet Forbes magazine's “Cost of Living Extremely Well Index” puts the inflation rate for high scale wares and services in 2007 at close to 8 percent. These inflation figures can significantly erode a trust's purchasing power over time. For example, a portfolio invested now with $10 million will have a median probability that its value will be $15,807,972 in 2020. (See “A 5 Percent Payout” for an accredited investor, grantor trust, p. 39.) In 2008 dollars, assuming a rate of inflation of 2.5 percent, the purchasing power of that money will decrease to $11,396,494; but if inflation is 8 percent, the purchasing power will be only $5,789,133.

It's not just luxury whose price outraces the consumer price index. Indeed, it's commonly accepted that education or health care costs increase by twice that of most other expenses. Fiduciaries must consider this factor for those trusts that direct distribution for those needs. Also, managers of private foundations that focus primarily on education or health care are likely to see a decrease in their purchasing power unless the foundation receives additional contributions, or investment returns exceed the qualifying distributions, investment fees and applicable inflation rate. Depending on size, these foundations may not have access to investment opportunities (for example, alternative investments or the best managers) that can help increase returns and accomplish their goals.

Taxes

Investment strategies also will have to take into account the expected increase in federal tax rates (ordinary, capital gains and qualified dividend), because tax relief provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 will sunset in 2011. Rates may increase for the top brackets by 4.6 percent for ordinary income, 5 percent for long-term capital gains and 24.6 percent for dividends. The impact will depend, in part, on whether a trust or entity is tax-exempt, or a grantor or non-grantor trust.

Grantor trusts are effective for estate planning because the grantor pays the income taxes on the trust's realized gains, as well as distributed or accumulated ordinary income. A grantor trust, therefore, can more effectively sustain its asset base and provide for distributions to meet the demands of inflation and possibly reduced returns, than a non-grantor trust. (See “A Balanced Approach,” p. 31 and “Compare Results,” p. 33.)

A common method when creating a grantor trust for income tax purposes is to give the grantor, in a non-fiduciary capacity, the right to substitute trust property for other property of equivalent value.3 Grantors can exchange trust property with their property so that the trust meets their objectives and distribution requirements.4 Grantors, investment advisors and fiduciaries must collaborate to effectively implement this right. Typically, income taxes are not the trust's concern while a grantor is alive. But when the grantor's death is imminent, he may exchange low basis trust assets with his high basis assets. The assets in his estate will receive a step-up in basis and the trust assets will have a high basis.

Charitable remainder trusts (CRTs) also have the benefit of not having their income taxed, except for a 100 percent excise tax on unrelated business taxable income (UBTI) charged to the CRT's principal.5 UBTI also constitutes trust income for the purpose of determining the character of the income distributed to the non-charitable beneficiary. The trustee, therefore, should avoid investments that generate UBTI, but look to other investments that take advantage of the CRT's income tax efficiency. The trustee and investment advisors should be mindful of the four-tier income tax structure of CRTs and the tax consequences of the distributions to non-charitable beneficiaries.

Payouts and Distributions

Now, even more so than in the past, economic factors should be considered when choosing among four common trust distribution methods: unitrust, annuity, mandatory net income and discretionary net income or principal. Even trustees of existing trusts may decide that changing circumstances warrant amending distribution provisions, if that option is available. A trust document or applicable state law may allow such changes, or a trustee (or trust protector) may have to petition a court to modify these provisions.

What are the advantages and disadvantages of the four common trust disposition methods?

  • Unitrusts — Clients or fiduciaries may choose unitrusts because of potential increases in the trust's asset base, distributions and purchasing power over the trust term for the mutual benefit of the current and remainder beneficiaries. Unitrusts have become a more viable option in recent years because of the trusts and estates community's recognition of total return under modern portfolio theory and because of the Uniform Principal and Income Act (UPAIA) (which varies among states). Depending on the state, the UPAIA allows trustees to amend certain trusts so they can use statutory unitrust payout rates or to adjust between principal and income distributions. Trustees can invest for total return so as to act impartially among current and remainder beneficiaries.

    Most states require unitrust payout rates to be 3 percent to 5 percent annually. States differ as to the default unitrust rate available (for example, New York provides for the unitrust rate of 4 percent and Delaware allows for unitrust rates of 3 percent to 5 percent) and the availability of a power to adjust. The exercise of these powers may depend on consent of the trustee and beneficiaries, the trustee acting alone or the requirement to petition the court. Each statute should be carefully reviewed before action is taken. The trust assets are revalued each year or may be averaged over a multiple-year period. Clients and their legal counsel may consider it advisable to choose a state that, among other things, provides realistic and practical unitrust payout rates or flexibility for the power to adjust. A 2 percent difference can substantially affect a trust's asset base and its distributions to current and remainder beneficiaries. (See “Compare Results — 3 Percent Unitrust Payout,” p. 36; “Take the Middle Road,” p. 38; and “A 5 Percent Payout,” p. 39.) Also, there can be a significant disparity in a unitrust's portfolio's value if one is a grantor trust instead of a non-grantor trust.

    Trustees and grantors should be cautious about electing a unitrust amount in excess of the allowable minimum payout rates. While some clients initially want trusts to provide for the highest unitrust rate allowed, this approach is usually counterproductive, especially with long-term trusts. Higher payout rates, especially in down markets, may drastically reduce future payouts and the sustainability of the trust's portfolio. There is a measurable likelihood that the portfolio's value over time will be less than its initial value with a 5 percent payout rather than a 3 percent payout. The general rule of thumb is that a unitrust payout of 3.5 percent annually will sustain the initial value of a trust's asset base. Therefore, a power to adjust, if available, may be effective to address a particular trust's situation.

    A minimum 5 percent payout is required of standard charitable remainder unitrusts (CRUTs). Still, many clients want an even higher payout or the maximum payout allowed without violating Internal Revenue Code Section 664(d)(2)(D). But such payout rates can reduce distribution over the trust term (typically the donor's lifetime or 20 years). So, beware and choose a payout rate of more than the minimum 5 percent only after reviewing Monte Carlo simulations.

    Charitable lead unitrusts may have greater success over the long run if the trust's payout rate is somewhere between 3 percent to 5 percent, instead of the minimum 5 percent required of CRTs. Because a charitable lead trust has no required minimum payout rate, it is possible to pay out at a rate of less than 5 percent and extend the trust's term if that will obtain the desired charitable gift or estate tax deduction. Run different Monte Carlo simulations to determine the most effective payout rate. Extending a charity's lead interest and reducing the payout rate may ultimately provide greater distributions amounts to the charity and non-charitable beneficiaries.

    Generation-skipping transfer (GST) tax-exempt trusts run a particular risk of having distribution schemes that no longer make sense. After all, these trusts may have been created generations ago and grantors can't predict all future economic conditions and investment possibilities. As a result, GST trusts' payout schemes can spark conflicts between trustees and beneficiaries, or simply among beneficiaries.

    In several Internal Revenue Service rulings (Private Letter Rulings 200818008, 200818015 and 200818019), trustees sought to modify GST trusts' net income distribution provisions to meet changing circumstances. The IRS gave its blessing, finding that a proposed modification (allowed under applicable state law) giving the trustees discretion to distribute the greater of a unitrust amount or the net income would not affect the GST tax-exempt status of a trust because the modification did not shift a beneficial interest to a lower generation. The trust was GST tax-exempt because it was irrevocable on or before Sept. 25, 1985 and no additional contributions were made to the trust after that date. The trustee then could invest for total return that would benefit both the current and remainder beneficiaries.

  • Annuity trusts — Annuity trusts have their own challenges. If annuity payments are too high, a trust portfolio may be unable to sustain itself. The likelihood of the portfolio depleting increases when the annuity payments are higher than the returns over time, or when a market downturn occurs early in the administration of the trust. The probability of depletion before a trust term ends increases significantly when asset allocation is insufficiently diverse to safeguard against early downturns in the market. A high annuity payout may create an unacceptable probability of depletion or reduction in the remaining principal over the long-term. Based on the asset allocation in “A Balanced Approach,” p. 31, there is a nominal probability that a trust with a 5 percent annuity (on the initial contribution) will be depleted during a 20-year period and approximately a 25 percent probability that an 8 percent annuity trust (on the initial contribution) will be depleted during a 20-year period.

    That said, grantor retained annuity trusts (GRATs) — especially zeroed out GRATs — have atypical investment strategies. They are usually short-term and have very high annuity payouts because it's intended that they'll pass appreciation (and not original principal) to heirs. Typically, such a trust is funded with a highly concentrated position that is expected to exceed, over a relatively short period, the IRS discount rate (the Section 7520 rate in effect at the time of the trust's funding). If the trust's performance falls below expectations, the trust terminates with little consequence.

    But grantors of charitable lead annuity trusts (CLATs) (zeroed out or non-zeroed out) usually expect the “lead interest” to charity to run its full term and for the remaining property to pass to family members. CLATs are not tax-exempt and usually are non-grantor trusts. Therefore, the trustee pays tax on realized gains and undistributed income. That makes it harder to keep a CLAT with a high payout rate in effect during its term.

    Clients should fund non-grantor CLATs with either cash or high basis assets to mitigate taxes on realized gains so that the trust's principal is not dissipated. Also, advisors should run various Monte Carlo simulations to calculate the probability that a CLAT will meet its objectives of providing for the charity during the lead term and having property remaining for the family. Clients should vet a range of payout rates before executing the trust document.

    Charitable remainder annuity trusts (CRATs) are less popular than CRUTs, because grantors expect to lose purchasing power over time with a fixed annuity stream. The annuity distributions can be jeopardized because of sub-par investment performance (especially in the early years of the trust). Typically, grantors under 75 years of age create CRUTs because their expected longevity allows for expected increases in the value of the CRUT property to provide increased purchasing power to meet adjustments for inflation. Older grantors may choose a CRAT because they want to be assured of fixed minimum distributions. They are less inclined to look to long-term investment horizons to correct diminution of purchasing power due to inflation increases. These issues require clients and their advisors to determine realistic annuity payout rates based on the term of the trusts, IRC Section 664(d)(1)(D), and Revenue Ruling 77-374 as well as current and foreseeable investment markets. Otherwise, the CRATs' assets may be depleted before the end of the annuity terms, causing the annuity payments to the non-charitable beneficiaries to cease and leaving no funds for charities.

  • Mandatory net income distributions — Because trusts that qualify for the marital deduction require distributions of all net income to be made to the spouse at least annually, trustees must often balance the conflicting interests of a spouse with the remainder beneficiaries. The spouse may request that the trustee invest heavily in fixed-income products (to produce more immediate income) and underweight growth-oriented investments (to the detriment of the remainder beneficiaries). The potential conflict tends to be worse if the spouse is not related to the remainder beneficiaries. In such stepparent cases, trustees should document investment policies with asset allocation models that support an unbiased approach. Of course, a trust document may direct the trustee to consider the spouse's needs as primary. The trustee then may direct investments to specifically address inflation factors and purchasing needs that favor the spouse. On the other hand, the trustee is more likely to invest for total return when the spouse is not dependent solely on the trust's income and is related to the remainder beneficiaries.

    The law has evolved to allow for unitrust payouts to spouses to satisfy the marital deduction requirements (under IRC Section 2056) in place of mandatory payouts of net income (if state law provides for a reasonable apportionment of total return between the spouse and the remainder beneficiaries6). Using unitrust payouts to the spouse instead of distributions limited to net income can increase overall returns for the trust and reduce the potential for conflicts between the spouse and remainder beneficiaries. But the challenge will be determining a suitable unitrust payout rate — presumably 3 percent to 5 percent. Many clients and their counsel still prefer the flexibility of providing for a combination of mandatory net income payouts with discretionary principal distributions by the trustee or withdrawals by the spouse (under IRC Section 2514). This flexible distribution arrangement can allow for total return investing and adequate liquidity for discretionary distributions.

  • Discretionary income and principal distributions — Those trusts that provide for discretionary distributions of principal and income often have evolving investment strategies over the trust term, based on the beneficiaries' changing needs and direction included in the trust's governing document. Trustees must look at numerous factors regarding who, when and under what situations distributions can be made. They will have to factor in the viability of the investment strategy if more demands are made for additional distributions. Trustees also must factor in that investment returns will likely be less in the next 10 to 20 years than the previous 10 to 20, that inflation will reduce the distributions' purchasing power, and that taxes for non-grantor trusts will likely increase. Trustees should have the asset allocation models reviewed more frequently when irregular distributions are made than when distributions are consistent. Investment strategies must take into account liquidity needs to meet irregular distributions. Clients also should consider the advantage of long-term trusts that provide for accumulation during the initial years without making current distributions. The ability to invest without making distributions or providing for an investment strategy that requires readily available cash for distributions (or tax) allows for a significant build-up in a portfolio. This is particularly evident when comparing grantor trusts to non-grantor trusts. (See “Compare Results,” p. 33.)

Take the Initiative

Trustees, especially of long-term trusts, may modify trusts proactively to meet new investment circumstances. In a recent ruling (PLR 200812002), trustees sought to combine trusts to increase investment opportunities and reduce administration expenses. This action was intended to improve potential returns and distributions for the beneficiaries. The IRS ruled favorably and stated that the modification did not affect the GST tax-exempt status of trust.

In another ruling (PLR 200806010), the Service found that the proposed modification and division of a trust into five separate and equal trusts wouldn't cause it to lose its GST tax-exempt status. The division would permit the principal of each separate trust to be managed in a manner particularly suited for each living grandchild, and his or her spouse and descendants.

Keep in mind that limited liability companies can be used very effectively to control the flow of income or principal from LLC interests owned by a trust that provides for mandatory or discretionary distributions of principal or income. The use of LLCs to pool assets, create additional investment opportunities and reduce administration expenses to increase overall returns can be a legitimate non-tax reason to form an LLC.7

The economy can greatly impact the fiduciaries' job of administering trusts to meet beneficiaries' needs. It's critical that beneficiaries be informed now so that their expectations of distributions are realistic. It's also essential to coordinate client objectives, trust investment strategies and trust distribution directions. Whether investment and inflation conditions get worse or improve, if everyone takes a long hard look at the economic reality and works together, they can devise a deliberate and practical trust plan that will maintain trust assets and satisfy objectives.

— Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Alternative investments such as derivatives, hedge funds, private equity funds and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments.

— U.S. Trust, Bank of America Private Wealth Management operates through Bank of America, N.A. and other subsidiaries of Bank of America Corporation.

— The author thanks his colleagues at U.S. Trust, Bank of America Private Wealth Management, for their assistance and input: Joseph Curtin, managing director and head of portfolio analytics and construction in New York; Robert M. Zimmerman, investment strategist and Michael R. McManus, investment strategist (both in New York) as well as Mark Wu, investment strategist in Los Angeles.

Endnotes

  • Fiduciaries and the entity (for example, a trust) typically must be both an “accredited investor” under Rule 501(a) of Regulation D under the Securities Act of 1937 and a “qualified purchaser” under Section 2(a)(51) of the Investment Company Act of 1940 unless the fund is registered or exempt from registration as an investment company with the Securities and Exchange Commission. See also Douglas Moore, “Alternative Investments-The Fiduciaries' Primer,” Trust & Estates, June 2007, p. 42.

  • According to data from Miller Samuel Inc.'s Average Sales Price Manhattan Luxury, the average price per year for Manhattan luxury apartments from 1989 to 2007 increased 6.2 percent, compared with the consumer price index (CPI) increase of 2.9 percent. According to Chiff.com, the most expensive painting sold at auction in 1987 was “Irises“ by Vincent Van Gogh, for $53.9 million; in 2006, “Portrait of Adele Block-Bauer“ by Gustav Klimt sold for $135 million. That represented a yearly price increase from 1987 to 2006 of 5 percent, compared with the 3.15 percent CPI. According to Patricia Kranz, “Measuring Wealth by the Foot,” The New York Times, March 16, 2008, the mega-yacht of the year in 1991 was the “Kingdom 5KR” bought for $40 million by Prince Al-Walid bin Talal; in 2005, “Rising Sun,” co-owned by Larry Ellison and David Geffen, cost about $200 million. Thus, from 1991 to 2007, the average price per year increase for mega-yachts was 12 percent, compared with the 2.7 percent CPI. As for flying nicely from New York to London, data from Forbes magazine's “Cost of Living Extremely Well Index” and the NetJets web site, the calculation of four round-trip tickets on British Airway's Concorde between New York and London from 1976 to 2007 averaged a per year increase of 9.65 percent, compared with the 4.35 percent CPI. (The 2007 calculation is based on a 50-hour fractional share through NetJets and does not include fuel and crew.)

  • Internal Revenue Code Section 675(4)(C).

  • In a recent ruling, Revenue Ruling 2008-22, 2008-16 IRB 796 and Announcement 2008-46, 2008-20 IRB 983, the Internal Revenue Service stated that the substitution right in a non-fiduciary capacity, would not cause the trust property to be included in the grantor's taxable estate.

  • IRC Sections 512 and 664(c)(2); Treasury Regulations Section 1.664-1. Certain alternative investments generate unrelated business taxable income (UBTI), because the investments are debt-financed or the investment is structured as a pass-through entity with income from an active trade or business or debt-financed income (see IRC Section 514). Many alternative investments are structured to avoid UBTI.

  • Section 104(c) of the Uniform Principal and Income Act, IRC Sections 2056(b)(5), and 643(b) and Treas. Regs. Sections 20.2056(b)-5(f)(1), 2056(6)-7(d)(1), 20.2056(b)-10, 25.2523(e)-1(f)(1) and 1.643(b)-1.

  • Estate of Anna Mirowski v. Commissioner, T. C. Memo 2008-74 (March 26, 2008).

Douglas Moore is a managing director in the New York office of The Multi-Family Office Group at U.S. Trust, Bank of America Private Wealth Management

A Balanced Approach

Whether your client is an accredited or non-accredited investor, here are asset allocation models that may help mitigate risk, enhance returns and sustain the asset base in a $10 million portfolio. The goal is moderate growth.

Assumes $10 million initial value and the following federal tax rates through year 2010: 35 percent ordinary income; 15 percent long-term capital gains; and 15 percent qualified dividends. For years 2011 to 2024: 39.6 percent ordinary income and qualified dividends; and 20 percent long-term capital gains.
— U.S. Trust Wealth Planner

Compare Results — No Payout

How will grantor and non-grantor trusts fare for accredited and non-accredited investors when there's no payout?

Snapshot — Look at year 2020: Faring best, the accredited investor using a grantor trust.

Accredited Investor

Non-Grantor Trust (Trust pays taxes)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,423,636 $10,167,396 $10,703,092 $11,287,249 $12,215,439
2012 10,677,661 12,582,851 14,109,236 15,824,442 18,911,534
2016 12,717,701 15,822,858 18,308,458 21,393,806 26,677,926
2020 15,425,353 19,831,021 23,704,014 28,324,876 37,469,099
2024 18,916,036 25,103,895 30,635,062 37,573,234 50,869,692

Grantor Trust (Grantor pays taxes)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,452,908 $10,210,258 $10,822,220 $11,482,001 $12,568,732
2012 11,022,404 13,226,782 15,063,949 17,194,966 21,085,143
2016 13,807,148 17,748,643 21,064,145 25,132,405 32,425,279
2020 17,400,833 23,717,765 29,245,734 35,975,656 49,874,069
2024 22,850,108 32,190,955 40,723,523 51,636,859 73,699,026

Non-Accredited Investor

Non-Grantor Trust (Trust pays taxes)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,208,191 $10,068,932 $10,673,189 $11,325,117 $12,394,485
2012 10,059,721 12,204,115 13,969,118 15,820,356 19,281,262
2016 11,754,215 15,120,351 17,912,419 21,156,144 27,258,732
2020 14,017,497 18,696,756 22,887,164 27,898,519 38,191,107
2024 16,829,485 23,362,057 29,286,428 36,830,331 51,362,921

Grantor Trust (Grantor pays taxes)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,242,593 $10,103,334 $10,767,607 $11,512,533 $12,731,448
2012 10,400,516 12,717,933 14,826,779 17,108,354 21,372,571
2016 12,602,472 16,737,159 20,378,882 24,703,949 33,046,828
2020 15,648,124 22,108,175 27,840,005 35,187,836 50,616,411
2024 19,873,973 29,325,765 38,265,524 50,244,523 74,013,591

Assumes $10 million initial value and the following federal tax rates through year 2010: 35 percent ordinary income; 15 percent long-term capital gains; and 15 percent qualified dividends. For years 2011 to 2024: 39.6 percent ordinary income and qualified dividends; and 20 percent long-term capital gains.
— U.S. Trust Wealth Planner

Compare Results — 3 Percent Unitrust Payout

Grantor vs. non-grantor trusts, for accredited vs. non-accredited investors — how do they grow?

Snapshot — Look at year 2020: Faring best: the accredited investor using a grantor trust.

Accredited Investor

Non-Grantor Trust (Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,123,636 $9,867,396 $10,403,092 $10,987,249 $11,915,439
2012 9,185,289 10,871,253 12,230,596 13,764,359 16,528,357
2016 9,725,417 12,199,163 14,154,923 16,590,703 20,810,085
2020 10,512,411 13,589,658 16,313,217 19,568,295 26,098,731
2024 11,464,719 15,304,808 18,765,335 23,141,848 31,518,871

Grantor Trust (No Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,152,908 $9,910,258 $10,522,220 $11,182,001 $12,258,732
2012 9,490,928 11,447,457 13,088,740 14,995,355 18,493,167
2016 10,593,153 13,717,790 16,356,323 19,617,482 25,488,174
2020 11,896,984 16,352,939 20,282,869 25,103,787 35,078,332
2024 13,938,731 19,830,516 25,258,646 32,205,677 46,437,745

Non-Accredited Investor

Non-Grantor Trust (Tax Paid )

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,908,191 $9,768,932 $10,373,189 $11,025,117 $12,094,485
2012 8,634,556 10,531,404 12,110,722 13,757,306 16,852,740
2016 8,965,384 11,613,501 13,834,690 16,405,017 21,288,448
2020 9,531,284 12,803,210 15,728,228 19,274,276 26,604,951
2024 10,189,057 14,240,440 17,909,025 22,553,825 31,861,897

Grantor Trust (No Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,942,593 $9,803,334 $10,467,607 $11,212,533 $21,431,448
2012 8,939,162 10,995,745 12,876,733 14,915,403 18,745,055
2016 9,644,455 12,906,353 15,810,053 19,268,220 25,958,429
2020 10,654,489 15,208,817 19,287,298 24,539,807 35,654,928
2024 12,057,039 17,989,906 23,680,838 31,331,123 46,594,820

Assumes $10 million initial value and the following federal tax rates through year 2010: 35 percent ordinary income; 15 percent long-term capital gains; and 15 percent qualified dividends. For years 2011 to 2024: 39.6 percent ordinary income and qualified dividends; and 20 percent long-term capital gains.
— U.S. Trust Wealth Planner

Take the Middle Road

Certain states require unitrust payout rates between 3 percent and 5 percent annually. Here's your portfolio at 4 percent Snapshot — In year 2020: the accredited investor using a grantor trust fares best.

Snapshot — In year 2020: the accredited investor using a grantor trust fares best.

Accredited Investor

Non-Grantor Trust (Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,023,636 $9,767,396 $10,303,092 $10,887,249 $11,815,439
2012 8,726,737 10,344,995 11,655,650 13,127,787 15,787,940
2016 8,890,771 11,161,039 12,964,015 15,217,529 19,132,985
2020 9,218,573 11,944,056 14,363,457 17,256,218 23,078,178
2024 9,669,256 12,941,524 15,877,357 19,630,257 26,781,596

Grantor Trust (No Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $9,052,908 $9,810,258 $10,422,220 $11,082,001 $12,168,732
2012 9,020,814 10,897,772 12,478,457 14,315,370 17,689,146
2016 9,680,470 12,567,925 15,010,139 18,032,992 23,490,873
2020 10,454,314 14,415,028 17,915,705 22,219,110 31,127,634
2024 11,782,852 16,818,404 21,476,162 27,434,605 39,697,711

Non-Accredited Investor

Non-Grantor Trust (Tax Paid )

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,808,191 $9,668,932 $10,273,189 $10,925,117 $11,994,485
2012 8,197,052 10,016,397 11,535,422 13,118,267 16,104,534
2016 8,180,165 10,620,730 12,666,113 15,042,605 19,573,407
2020 8,356,842 11,252,021 13,844,607 16,999,592 23,530,787
2024 8,599,774 12,035,536 15,148,883 19,195,507 27,084,946

Grantor Trust (No Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,842,593 $9,703,334 $10,367,607 $11,112,533 $12,331,448
2012 8,490,346 10,464,826 12,275,496 14,235,701 17,929,009
2016 8,805,800 11,816,342 14,506,130 17,710,109 23,915,746
2020 9,352,581 13,392,949 17,022,333 21,719,102 31,656,473
2024 10,176,705 15,236,803 20,108,288 26,678,910 39,814,589

Assumes $10 million initial value and the following federal tax rates through year 2010: 35 percent ordinary income; 15 percent long-term capital gains; and 15 percent qualified dividends. For years 2011 to 2024: 39.6 percent ordinary income and qualified dividends; and 20 percent long-term capital gains.
— U.S. Trust Wealth Planner

A 5 Percent Payout

It's the minimum required of charitable remainder unitrusts, and maybe the maximum allowed for non-charitable unitrusts

Snapshot — At year 2020: the accredited investor in a grantor trust came out ahead.

Accredited Investor

Non-Grantor Trust (Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,923,636 $9,667,396 $10,203,092 $10,787,249 $11,715,439
2012 8,286,668 9,840,206 11,098,515 12,514,933 15,074,116
2016 8,108,674 10,201,247 11,863,492 13,942,141 17,576,775
2020 8,086,787 10,481,676 12,626,763 15,198,477 20,381,819
2024 8,141,143 10,925,435 13,419,685 16,601,545 22,719,675

Non-Accredited Investor

Non-Grantor Trust (Tax Paid )

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,708,191 $9,568,932 $10,173,189 $10,825,117 $11,894,485
2012 7,777,428 9,524,301 10,983,843 12,505,881 15,383,080
2016 7,458,588 9,701,409 11,585,681 13,781,489 17,973,796
2020 7,314,303 9,875,519 12,176,826 14,972,749 20,783,862
2024 7,242,218 10,150,923 12,804,181 16,237,635 22,985,082

Grantor Trust (No Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,952,908 $9,710,258 $10,332,220 $10,982,001 $12,068,732
2012 8,568,446 10,370,948 11,891,652 13,661,096 16,913,222
2016 8,838,325 11,504,494 13,763,283 15,563,193 21,633,878
2020 9,175,091 14,242,530 15,807,972 19,643,026 27,590,810
2024 9,943,629 14,242,530 18,229,907 23,337,413 33,885,907

Grantor Trust (No Tax Paid)

Year 5th percentile (95% chance) 25th percentile (75% chance) Median 75th percentile (25% chance) 95th percentile (< 5% chance)
2008 $8,742,593 $9,603,334 $10,267,607 $11,012,533 $12,231,448
2012 8,059,721 9,954,169 11,695,700 13,584,365 17,141,564
2016 8,032,581 10,809,271 13,294,746 16,264,497 22,019,526
2020 8,198,046 11,778,926 15,005,543 19,197,173 28,075,295
2024 8,574,859 12,883,620 17,056,384 22,685,009 33,966,720

Assumes $10 million initial value and the following federal tax rates through year 2010: 35 percent ordinary income; 15 percent long-term capital gains; and 15 percent qualified dividends. For years 2011 to 2027: 39.6 percent ordinary income and qualified dividends; and 20 percent long-term capital gains.

Please Note: For illustrative purposes only. This hypothetical illustration does not reflect the performance of any specific investment. Actual rates of return cannot be predicted and will flucuate. Your results may be more or less.
— U.S. Trust Wealth Planner