PROF New Regs Enhance Asset Managemen
In blended famlies, disputes arise over the investment of assets in Qualified Terminal Interest Property Trusts. These trusts typically provide income to surviving spouse and the remainder to children. How the assets are invested means a great deal in terms of traditional income definitions. Dividends and interest were considered income. Therefore, there were allocated only to the income beneficiary. Capital gains, on the other hand, were allocated to the trust’s principal. Step-mon and Step-children could both beat up on the fiduciary and each other over how assets were invested.In MIchigan, there is now new opportunity for asset management. Changes in the law provide potential solutions to the traditional uncomfortable relationship between income and principal. On April 1, 2000, Michigan's adoption of the prudent investor rule went into effect, This rule provides that the overall performance of a portfolio is the test of whether a fiduciary has met the fiduciary's investment obligation. Now the Internal Revenue service has promulgated Reg REG - 106513-00 Proposed Regs on Trust Income Definition.
The combination of Michigan's adoption of the Prudent Investor Rule and the new proposed I.R.S. regulation signales new opportunitres to solve the tension between step-mom and step-children over the investment of QTIP assets. This is the Total Return Trust. In a nutshell, total return investing suggests that trust assets should be invested for total positive return (ordinary income plus appreciation) to maximize the overall value of the trust - for both sets of beneficiaries. Simplified, it attempts to move away from the old paradigm where the income beneficiary seeks the highest income producing investment possible (e.g. buy bonds) while the remainder beneficiary encourages the trustee to purchase the highest growth investment available (e.g. purchase equities), thus putting surviving parent and children immediately and eternally at odds - and placing the trustee in the middle.
The total return approach suggests that equities, rather than bonds, should comprise a much larger percentage of trust assets than under traditional investment standards.
To manage the relationship between income and principal, an Investment Policy Statement and Modern Portfolio Theory will be helpful. Professionsals working with an estate planning attorney who understands how to weave these concepts into the estate planning documents has the opportunity to assist clients with asset management which minimizes blended family dispiutes.
The income definition rules go into effect when the final regulations are promulgated so caution is in order. Now is the time to prepare for this important advance in the law.
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