The Total Return Unitrust is a relatively new financial and estate planning tool that is causing excitement in various circles. Though it 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.

Until recently, trustees were required by law to act as a "prudent man," investing not in regard to speculation, but considering probable income and probable safety of the invested capital. In fact, some states tolerated no losses in any single investment, which required trustees to invest with the utmost caution, usually for dividend and interest income. This not only forced the trustee to disappoint the remainder beneficiaries, but also suppressed the trust’s long-term gains from investment.

Times are finally changing, and states are beginning to allow trustees to follow the Prudent Investor Rules, which encourage diversification and allow investment with total return in mind. Losses are tolerated in individual investments if not in the overall portfolio. Thus, the trustee can devise an investment strategy that will maximize the portfolio’s performance over time. This is a total return trust, an exciting prospect for the remaindermen. But what about the life beneficiary?

If the total return trust is a unitrust, the life beneficiary’s distribution amount depends entirely on the trust’s fair market value. 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.

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.