Published 6/11/2017 in The Maryland Daily Record
We are often advising clients who are the beneficiaries of trust and royalty income. In each case, we spend a good amount of time educating them about how to treat these types of variable income streams. It is a critical misstep to create a lifestyle that is locked into a fixed amount when relying on the variable nature of trust distributions and royalty income. We also consider this type of approach when people may receive annual gift amounts from family members, as circumstances could always change where the grantor is not able or may decide not to make annual gifts every single year.
The way to approach a variable income stream is to consider any money received as found money that would contribute to extras throughout the year. The extras could be in the form of added savings, which happens more rarely. Extra vacation, decorating, and home improvement projects are examples of things that would not be a part of your normal course of budgeting. The key is to create a lifestyle budget that is well within the range of income that is earned and stable.
In talking with a client who is eager to expand her lifestyle due to a stream of royalty income, we had to rein in the type of home she had in mind because there is no predictability to the timing and amount of when funds will be received and for how many years in the future the royalty source will produce income.
There are several variables that influence the amount and timing of these types of distributions. From the perspective of a trust, the underlying investment performance will impact the rate of distribution, especially if the disbursement amount is based on a percentage rather than a flat dollar amount. Though even in the fixed amount method, the investment performance may impact the viability of sustaining lifetime distributions at a set amount if the markets don’t deliver the anticipated returns that can keep up with the rate of withdrawal. It is prudent to continue to review the longevity of the underlying assets in a trust when lifetime distributions are in effect.
Royalty income is so dependent on the actual source that produces the royalty. The product, service, and industry that creates the income are so variable in determining the reliability of the income stream.
One of the most highly publicized areas where this is most true today is the music industry. With the ever-changing nature of music distribution, longtime steady and rising streams of income from music written, produced and sold has drastically changed. It is difficult to imagine how this industry model will evolve in the future given how rapid the changes have been over the past 5-10 years. In these cases, the timing of receiving funds is also well out of the control of the beneficiary. There is no way to influence when money will be paid out, which makes this source of income that much more unpredictable.
Given the lack of control over the amount and timing of receiving funds it is easy to understand how anxious the experience could be when trying to plan a lifestyle around an income source that is not within your grasp to influence. Ideally, beneficiaries have collaborative and cooperative relationships with trust officers who can foster the communication to help mitigate the impact of these variables. In the case of royalty income, this is simply not an available scenario, leaving the beneficiary with even less access or control.
In talking with a young woman last week, it was clear that she felt held up in her ability to make life decisions because of the uncertainty she felt about her trust income. She wasn’t granted access to the trustee, who would be a useful source of information; rather, her brother was appointed as the communicator for her, and she relied on him for financial guidance. The challenge with this setup is that it created a difficult dynamic that involved her brother in her personal finances, which is less than ideal. Coupled by her true desire to work in a creative field, she wasn’t confident in her ability to forgo stable employment to pursue a freelance creative business. Without the benefit of knowing how much and when funds would be received, it made planning for her future difficult.
My guidance was for her to focus on the amount of income she can earn on her own through being employed — either self-employed or as an employee — and from there make the life decisions that are in front of her. The trust income merely is a bonus if, as and when it is received.
—Dorie Fain, founder and CEO of &Wealth