Attorney Thomas B. Burton, with Burton Law LLC, in Eau Claire, Wisconsin answers a reader question with Attorney Matthew Underwood, with Underwood Legal, LLC, in Madison, Wisconsin about how to determine the principal value of an asset held in trust. Attorneys Underwood and Burton also discuss how the trust principal can generate income which is often distributed on an annual basis to trust beneficiaries.
Subscribe to Burton Law LLC's YouTube Channel
Transcript of Video: What Defines the Principal Value of An Asset in a Trust?
Okay welcome back today you'll see we're
coming to you from the Supreme Court
chambers here in the Wisconsin State
Capitol and I'm joined by my friend
attorney Matthew Underwood Matt thanks
for joining us thanks for having me Tom
and Matt I really appreciate you being
here today because this question comes
from Madison and Matt operates a
boutique estate planning and elder law
firm right in Madison where we both went
to law school so I'll get right into the
question Matt because it's a complex one
and that's why I'm having you answer it
today all right we'll do my best so the
question is what defines the principal
value of an asset and then there's a
bunch of detail and I'm going to just
hit the high points of the detail the
questioner says our income trust is an
asset protecting irrevocable trust which
in the section titled lifetime trust
principal beneficiaries names three
people we selected as our beneficiaries
a section further down separates us from
our assets by stating no payment or
distribution of the principal of the
touched shall be made to us etc. etc.
hence we have access to the income
generated by our assets but no access to
the principal my question what defines
the principal value of an asset
Accountants see the terms principal and
cost basis as synonymous but I suspect
when used in this relation surrounding
asset protection the principal may have
another meaning so that's the question
there Matt and I'll let you try to
unpack it sure so we're dealing with
somebody who has an irrevocable trust and
based on the situation these are
commonly set up when people have assets
that they'd like to protect
in particular protect those assets if
they or their spouse were to go into a
nursing home so what we have here is
somebody who said hey I want to protect
some of my assets from long-term care
costs and they set up an irrevocable
trust which is an income only trust
and what that means is that the in order
to get that long-term care protection
from that irrevocable trust is the
people setting up that trust can't have
direct access to those direct access to
those assets anymore so for example
if I want to set up an irrevocable trust
and I want to protect my house from
long-term care costs I need to put my
house into that trust and then after
five or more years that that house would
be essentially off-limits in terms of
long-term care costs so so the way this
trust is set up is its it prevents the
people setting up that trust from being
able to withdraw principal and when we
say principal what we typically mean is
kind of that core money that went into
that asset so if I purchased a house and
I purchased the house for $100,000 well
that's my principal amount that hundred
thousand dollars that I put in so I mean
in order to get that protection that
trust says well you can't reach
principal is off-limits to you
so that's protecting that principal now
the question comes in is the people who
had set up that trust can access income
so what is income and what is principal
and what can they actually take out of
that irrevocable trust so again
principal is kind of that that starter
money or the money that you put in to
purchase an asset when we talk about
income we're usually looking at things
like interest dividends rent from rental
property if the trust were to own a
business any sort of income that
business generates
could be considered income so one of
the things that we commonly see in that
and I would really caution you know the
person asking the question about this is
we really need to look at the language
in that trust and in how that trust is set
up because chances are that irrevocable
trust tells us what is considered income
and what is considered principal so I
think you know really what we need to do
is start there and see what that trust
says because I often see trusts that
have language in there saying that if
there is income in that trust that if
that income doesn't get taken out during
the year it becomes principal so we can
even have trust where money that's
considered income changes to principal
yeah so we need to be really
careful with that so you know when it
comes to principal one of the other
questions is capital gains so if I
purchase some stock for $100 now that
stock's worth a thousand dollars there's
you know some gains built into that that
investment
sometimes capital gains are treated as
income sometimes they're treated as
principal so again it comes down to
looking at you know what is that
language in the trust and if it's not in
there then we have to look to state law
so this is a pretty in-depth
question but again I'd recommend talk
to either the estate planning
attorney that help them set up the trust
or contacting a different estate
planning attorney who is knowledgeable
at trusts and can kind of walk through
the terms with you and then decide you
know what is income and principal and
one other note on that is that when we
when we help people set up these types
of trusts we're often looking at setting
up no income trust and the reason for
that is when we have an income trust all
of that income would be available to a
nursing home so if we want to protect
not only the principal but we want to
protect the income we're going to need
to also restrict the trust maker's access
to that income so that that's a lot of
very long answer there Tom but but those
are kind of the issues that I see at
least initially on it no that's great
thanks I think you unpacked it well
without knowing more about what the
questioner specifically has in that
trust because a lot of what you pointed
out is it's going to depend
the asset right so in your example if we put
a house in the trust a lot of times
houses don't throw off any income so
then right the principal is just going
to be the value of that house on the
date we sign the deed and transferred it
into the trust but for this guy's
question we need to know more about what
type of asset this is and and the income
it's throwing off and I think what you
were saying there Matt is first we're
going to look at the terms of the trust
itself and then if the trust is unclear
we go to state law
the Wisconsin Trust Code to figure it
out but overall you gave them a great
pathway here and I think the best answer
is sit down like you said with the
lawyer who drafted this trust or if
they're not available another lawyer
like Matt who's right in Madison and can
help you understand it because as he
pointed out that principal can change
to income or the income excuse me can
become principal if it's kept in the
trust so you really want to figure this
out as you move along with that trust so
thanks Matt I appreciate you taking this
hard question today and thank you for
joining us well thanks for having me
Tom
thank you for watching we'll see you
next time!
© 2020 Burton Law LLC. All Rights Reserved.
Transcript and captions provided for ease of access for the hearing impaired.
For questions about this topic, or to suggest a topic for a future blog post, please contact the office.