Delaware recently became the first state to pass statutes governing total return unitrusts (TRUs). Several other states, including New York, New Jersey, Missouri, and Pennsylvania, are also considering similar statutes or have already passed them. This is great news for trustees in these states as well as those in the rest of the country. Now that the first step has been taken, many more states may follow Delaware's lead. Why the excitement?

The total return unitrust is a relatively new financial and estate planning tool that is not yet widely understood or implemented. It is becoming more and more common as word of its advantages in certain situations spreads. In general, the most common use for a total return unitrust is to maximize the long-term return of the trust while minimizing or eliminating conflicts between the life beneficiary and remainder beneficiaries.

These conflicts are inevitable in most trusts, which are created with two classes of beneficiaries-the life beneficiary and the remaindermen. The life beneficiary is entitled to annual distributions from the trust for a specified period, often for the individual’s life. Generally, this beneficiary retains an income interest (which pays trust income), an annuity interest (which pays a predetermined amount), or a unitrust interest (which pays a percentage of the trust principal). Often, the life beneficiary also has the ability to invade principal for specific reasons at the trustee’s discretion.

The remainder beneficiaries are successor beneficiaries after the life beneficiary’s interest ends. Obviously, the remainder beneficiaries want the trust principal to grow to maximize their inheritance. This can cause conflicts between the two classes of beneficiaries over the investment of trust assets. If the life beneficiary’s interest is an income interest, he or she may want the trustee to develop a strategy providing maximum income, while the remainder beneficiaries seek investments for maximum growth. This places the trustee in the middle.

However, the life beneficiaries of a TRU receive a unitrust interest, so their distribution amount depends entirely on the trust’s fair market value. This unifies the goals of both classes of beneficiaries. Obviously, the life beneficiary will want the trust assets to be worth as much as possible, no-matter what investment strategy is used. So, the investment goals of all beneficiaries will be met as long as the trustee invests wisely for total return over the long term.

Of course, a total return unitrust may not be appropriate in many situations, and anyone interested in using this or any other financial tool should first ask a qualified professional to explain all the options.