Wills, Trusts, and Estates

Principal and Income Problem

It used to be an issue that portfolios had to have the right balance of capital growth and dividend income to maintain impartiality between income beneficiaries and remainder beneficiaries. However now, you can just make an adjustment and distribute the growth as income. (Or alternatively, use a unitrust.)

Adjust

A trustee's power to adjust allows him to distribute the principal as income or to add income to the principal, as needed.

UPIA § 104 allows one to make an adjustment for impartiality problems.

Typically, trustees who are also beneficiaries do not have the power to adjust. However, they may be able to convert the trust into a unitrust with judicial review.

Unitrust

A unitrust is a trust where the settlor just sets a percentage of the trust income to be paid to the income beneficiaries each year. This solves the principal and income problem.