The Unitrust is the most commonly-used form of gift trust. In a “Standard Unitrust,” the trust instrument specifies the level of income (the “Unitrust Amount”) payable to the income beneficiaries as a fixed percentage of the total trust market value as determined at the first of each year. If the trust realizes income in excess of that amount, the excess is not paid out, but is added to corpus. Unitrusts with non-liquid assets (such as real estate) are usually created as “Net Income Unitrusts,” which means that if the income in any year is less than the Unitrust Amount, the income beneficiaries receive only the net income. Usually, a Net Income Unitrust will also provide a “make-up” provision. This means that such shortfalls will be cumulated, so that in later years in which the income exceeds the Unitrust Amount, the excess will also be paid to the income beneficiaries (and not added to corpus), until the cumulative shortfall from prior years has been eliminated or “made-up.” Under appropriate circumstances, a Net Income Unitrust can be “flipped” or converted to a Standard Unitrust after conversion of the original asset(s) to liquid assets, in which case it may be referred to as a “Flip Unitrust.”
The original corpus of many unitrusts is property which produces little or no income or is not immediately marketable. This can present several kinds of challenges. The net income feature can be included in the trust instrument to avoid having to make unitrust payments when no income is available. However, personnel dealing with the donors must still carefully explain that the expected payments from the trust can only begin after the property is sold and converted to income-producing status. Furthermore, the donors, as income beneficiaries, should be advised that if the sale is an installment sale where the trust carries a note from the buyer, the unitrust payments could be interrupted if the buyer were to default. When a unitrust’s income stream is interrupted, the donor-beneficiaries have a tendency to remember the pre-gift discussions of possible income flows in terms of “guaranties.” The sensitive problem of disappointed donors is an inherent possibility in all unitrusts, but cooperative practices and policies are designed to minimize its occurrence.