Unitrusts and income trusts are important estate planning tools that can help to manage and distribute one’s assets. Each trust can serve a unique role in one’s portfolio. It is wise to have a basic understanding of how each works before choosing one of these tools to help meet your financial planning goals.
What is a unitrust?
A unitrust provides the beneficiary with a fixed percentage of the value of the trust assets. It is generally revalued each year. This structure is beneficial for both the beneficiary, who may receive more if the value of the assets increases, and the trustee, who needs clear, straightforward instructions.
What is an income trust?
An income trust, by contrast, disburses all generated income to the beneficiaries, typically on a scheduled basis such as quarterly or annually. The principal amount typically remains untouched, which can be advantageous for preserving wealth across generations.
While unitrusts generally provide a variable income based on asset value, which can increase if the assets perform well, income trusts are generally set up to provide a steady income stream based on generated earnings, which may be more suitable for beneficiaries dependent on this income.
Are these trusts right for my needs?
One of the considerations to take into account before moving forward with a trust is flexibility. Some trusts have very little flexibility. In exchange for giving up this flexibility or freedom to control the assets held within the trust, the trust protects the asset from the reach of creditors or gets certain tax benefits. As such, it is important to review how use of either of these trusts would impact your ability to access the assets used to fund the trust.
It is important to note that there is new legislation moving forward in Michigan that would increase the flexibility of these trusts. If passed, the Michigan Unitrust Act would allow fiduciaries to convert unitrusts to income trusts and vice versa. This would provide greater flexibility to tailor and adjust plans to meet a family’s evolving needs.
Setting up any trust in Michigan involves legal considerations that must align with state laws and personal circumstances. In addition to ensuring the language of the trust and trust structure meets your financial goals, it is also important to take tax considerations into account as both unitrusts and income trusts have different impacts on estate and income taxes. Careful planning helps to better ensure your assets are managed and distributed according to your wishes, providing peace of mind and financial security for your beneficiaries.
