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OF THE UNITED STATES 474 (1965). [Vol. 33:783 Income and the Life Beneficiary Also, it is not clear that the bond rate will necessarily produce constant principal values over the long term, even if it is used only in periods when the bond rate is higher than cash return on stocks. The bond rate will provide somewhat more income during a bull market than will the strict Massachusetts rule, but there is no apparent reason to assume that the resulting principal values and income payments will stay near a constant level as desired. Another solution to both the investment restriction and the unnecessarily low income of the Massachusetts rule is to give the trustee discretion to allocate receipts as a prudent man would.46 This solution has much to recommend it: all definitional problems are avoided, and the trustee, by judicious allocation, can free himself both to invest rationally and to pay out as much to the life tenant as is consistent with preserving the ability of the corpus to earn income.47 In addition, the discretionary solution can be applied even to stocks which do not have an established market value, as would be impossible with the constant percentage rule. However, as useful as discretion may be in other contexts, 48 it is deficient as a general solution to principal and income questions because it does not attempt to provide the "clear and uniform standard" which trustees need to guide their allocation decisions even when an individual settlor has committed the question to their discretion.49 Further, if a trustee's allocation produces results differing substantially from the widely accepted Massachusetts rule, as seems desirable, it may be attacked by the beneficiaries as "imprudent."50 An allocation rule affording clear guidelines seems preferable.51 46 One state, Delaware, has adopted a discretionary rule as a general standard. DEL. CODE ANN. tit. 12, § 3526(a) (Supp. 1964). Many trust instruments give discretionary power over allocation to individual trustees. See BOGERT §§ 560-61, 816. 47 It appears, however, that trustees usually adhere strictly to the Massachusetts rule even when they have been granted discretion in allocation. See Subcommittee of Committee on Trust Administration and Accountability of Trustees, Trustees' Absolute and Uncontrolled Discretionary Powers, in AsaRicaN BAR ASSOCIATION, SECaION OF REAL PROPERTY PRO BATE AND TRuST LAw, PROCEEDINGS, PART I, 185, 192 (1965). 48 Discretionary power to invade principal to meet an unexpected need of a beneficiary is desirable. See Sanders, An Examiner's Views on Estate Planning, 99 TRusrs & ESrATES 485 (1960). To effect tax savings, the trustee can be authorized to distribute income among low tax bracket members of a class of beneficiaries. See Halbach, Problems of Discretion in Discretionary Trusts, 61 COLuM. L. REv. 1425, 1453-55 (1961). 49 Commissioner's Prefatory Note, UPI, 9B UNIFORM LAWS ANN. 365, 366 (1957). 50 Beneficiaries frequently charge that a trustee has abused his discretion in allocating a particular receipt. See, e.g., In re Heard's Estate, 107 Cal. App. 2d 225, 236 P.2d 810 (1951); Burden v. Colorado Nat'l Bank, 116 Colo. 111, 179 P.2d 267 (1947); Dumaine v. Dumaine, 301 Mass. 214, 16 N.E.2d 625 (1938); In re Watland, 211 Minn. 84, 300 N.W. 195 (1941); In re Clarenbach's Will, 23 Wis. 2d 71, 126 N.W.2d 614 (1964). See also BOGERT §§ 560, 561, 816; Halbach, supra note 48, at 1428-33. 51 Trustees vigorously opposed the suggestion by Professor Dunham, the draftsman of 1966] 792 The University of Chicago Law Review [Vol. 33:783 An allocation rule which determines income independently of the form of return on stock investments seems to offer the most promising approach to avoiding the investment restrictions and unnecessarily low income to the life tenant which result from the Massachusetts rule. However, if a constant percentage is used, income fluctuates more than it does under a system which takes advantage of the relative stability of dividend payments, and the probability that the principal values and payments to the life tenant will rise or fall over the long run is increased under both the constant percentage and annuity rules because of the uncertainty involved in predicting investment performance in advance. These disadvantages can be reduced if, instead of a constant percentage, the current average rate of cash return on stocks held in all trusts is used as the income-determining percentage. 2 Although the use of either a constant percentage or a current average rate of cash return frees investment decisions from the necessity of considering the form of the prospective return, only the use of the current rate of return removes the necessity of predicting market performance in advance. Moreover, income to the life tenant does not fluctuate as much as it would if a constant percentage is used to determine this income, since the use of the current rate of cash return as the income determining percentage ties the life tenant's income to the rate of dividend payments, rather than to the more volatile stock prices. Thus, if the market falls suddenly, the rate of cash return will rise, assuming that dividends remain constant, and the life tenant's income will be correspondingly stable: if a constant percentage were used, the life tenant's income would fluctuate with the market value of the trust's stocks: However, if income is paid at a rate which represents only cash dividends, principal will rise over the long term, reflecting the corporate policy of reinvesting half of earnings and the sustained growth of the economy. Therefore, a small percentage of principal in addition to that representing cash dividends should be paid as income to the life tenant, so that income is paid out at the highest rate consistent with maintenance of principal. This percentage should not be based on current price increases, since the increase in any one year may be lost in a later decline, and a policy of paying out every price increase would lead to ultimate depletion of principal since the cyclical losses would never be recouped. The percentage used to determine the life tenant's income the RPI, that the discretionary rule be adopted. See the panel discussion reprinted in Uniform Revised Principal and Income Act, 101 Tausrs & ESTATES 894, 896 (1962). 52 The individual trust's current rate of cash return cannot be used as the percentage, since investments of different cash yield would affect the life tenant's income, precisely the result this proposal attempts to avoid. Income and the Life Beneficiary representing price rises should therefore be a long term average of stock price rises, predicted from past market experience. This long term rise in prices has been about 3.35% per year,53 but because inflation has accounted for about one-third of this rise, the 3.35% figure should be reduced to 27. 54 This proposal contemplates that all receipts from common stocks be included in the trust corpus and that just prior to each payment date income will be determined by multiplying the current rate of cash return from stocks held in trust plus 2% by the current market value of the corpus. The major difficulty with this proposed alternative to the Massachusetts rule is the possibility that the individual trust will consistently earn less than the average trust, thereby depleting principal. 55 However, some deviation seems acceptable. The principal of a trust which pays out income at a rate higher than it actually earns on stock investments will decrease, but by maintaining the life tenant's income at a higher level, this rule has the beneficial effect of partially insulating the favored life tenant from the trustee's bad investment judgments. Eventually principal will decrease to the point that income is seriously impaired, but this will not occur at an alarming rate: a trust which consistently earned only 3% while the average yield of all trusts was 4% would lose only 10% of its original value in ten years, and only 25% of its value in thirty years. Of course, principal would be depleted more quickly if the rate of return actually earned is lower than this, but the possibility that the beneficiaries would be able to surcharge 53 This figure represents the average rate of price appreciation between 1926 and 19541955. This period was used because it contains both major depression and sustained growth and because both 1926 and 1954-1955 seem to mark the beginning of strong bull markets after a period of relative stability. It may, however, be argued that these are not comparable points in the economic cycle and that 3.35% is therefore not a strictly accurate figure. If it is assumed that a depression of 1929-1939 proportions will not again occur, a somewhat higher figure should be used. See generally, Fisher & Lorie, Rates of Return on Investments in Common Stocks, 37 J. Bus. 1, 7 (1964). 54 The annual rise of stock prices in constant dollars for the period 1926-1955 was 2.22%, and was rounded to 2% to facilitate calculation. See BUREAU OF THE CENSUS, U.S. DEP'T OF COMMERCE, HISTORICAL STATISTICS OF THE UNITED STATES 125 (1961); BUREAU OF THE CENSUS, U.S. DEP'T OF COMMERCE, STATISTICAL ABSTRACT OF THE UNITED STATES 361 (1965). 55 The possibility that returns on investment will be above average is not as objectionable, since one of the settlor's postulated goals, payment of highest sustainable income, is achieved as nearly as is practicable, while the other major goal, preserving the source of income, is not threatened by higher than average returns. Furthermore, the possibility that the proposed rule would actually provide less income to the life tenant than the Massachusetts rule, which would occur if the trustee succeeded in finding stocks whose cash return was more than 2% higher than the average cash return for all stocks, seems remote enough to be ignored, although it could be provided for by directing that either cash dividends actually received

Effectuating the Settlor's Intent: A Formula for Providing More Income for the Life Beneficiary