Question

Fred and Adele have a sizable estate ($4.5 million). They desire a stream of income to supplement their retirement income while also qualifying them for a charitable deduction. They feel they can use $1 million of their assets to fund this stream. They plan to give the $1 million to the American Heart Association; they are to receive $50,000 per year for 20 years (to supplement their other retirement income). What are the characteristics of the type of trust that can achieve this objective?

Group of answer choices

The trust assets must be revalued annually in order to determine the income payout amount

Fred and Adele's income stream will fluctuate with the value of the portfolio, each year

Fred and Adele can make additions to the trust as their cash flow permits.

There is no inflation protection in the distribution of income, but it is a guaranteed amount for 20 years.

Answer 1

As per the given information, payout is not made dependent on the end-use of the fund contributed to the American Heart Association. There is no stipulation to determine the pay out based on the activities or assets of the Association. Hence the first two answer choices which peg the pay out to valuation of assets of the Association are not applicable here. It is true that Fed and Adele can make additions to to the trust as their cash flow permits. But that is not part of the terms of the stated contribution planned.

The pay out, as per their plan, is definite in terms of amount. The yearly payment of $50,000 for 20 years corresponds to only the repayment of principal, without interest. There is no provision to increase the pay out based on any parameters, including inflation.

In view of all the above, the last option holds good viz. "There is no inflation protection in the distribution of income, but it is a guaranteed amount for 20 years".