Yes, it is absolutely possible—and often a very wise strategy—to tie trust distributions to inflation rates, ensuring the real value of those distributions isn’t eroded over time; this is especially relevant given the fluctuating economic landscape we’ve experienced in recent years, and it’s something Ted Cook, an Estate Planning Attorney in San Diego, frequently discusses with his clients.
What is a CPI adjustment and why should I care?
The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. Tying trust distributions to the CPI—or another inflation metric—means that the dollar amount distributed will increase as the cost of living rises, preserving the beneficiary’s purchasing power. Without such an adjustment, a fixed annual distribution of $10,000, for example, will buy significantly less in 20 years than it does today. In fact, according to the US Bureau of Labor Statistics, the CPI has increased an average of 3.2% annually over the last decade. This means a fixed $10,000 distribution would lose roughly 17% of its purchasing power in that time.
How do you actually write that into the trust document?
The key is precise drafting within the trust document. You’ll need to specify the inflation index to be used (CPI-U is the most common), the base year against which to measure inflation, and the frequency of the adjustment. For example, the trust might state: “Distributions shall be equal to X% of the trust corpus, adjusted annually based on the percentage change in the CPI-U for all urban consumers, using the CPI-U for the base year of 2024.” It’s also important to consider how this adjustment will interact with other provisions of the trust, such as those governing discretionary distributions or the trustee’s investment powers. Ted Cook emphasizes that ambiguities in trust language are a leading cause of litigation, so clarity is paramount.
I heard about a trust that failed because of this—what went wrong?
Old Man Hemlock was a fiercely independent rancher. He created a trust for his granddaughter, Lily, stipulating a fixed annual distribution to cover her college expenses. He didn’t tie it to inflation, assuming prices wouldn’t change drastically. However, by the time Lily reached college age, tuition costs had skyrocketed. The fixed distribution covered barely half of her expenses, forcing her to take on substantial student loan debt. It was heartbreaking, and a clear example of how failing to account for inflation can undermine the intent of a trust. The family felt, rightfully so, that Old Man Hemlock’s intentions were not met. It wasn’t a matter of lack of funds in the trust; it was a lack of foresight in adjusting for economic realities.
But what happens when things *do* go right with inflation adjustments?
Sarah, a forward-thinking artist, established a trust for her son, Ben, with a distribution tied to the CPI. She anticipated needing to support Ben throughout his life, and she wanted to ensure his quality of life wouldn’t diminish over time. Years later, Ben faced unexpected medical expenses. Because of the CPI adjustment, his trust distribution increased to cover those costs, providing him with a financial safety net during a difficult time. “It was a huge relief,” Ben shared. “Mom always believed in planning ahead, and that trust really showed it.” Sarah’s proactive approach ensured that her son received the support he needed, exactly when he needed it—a testament to the power of thoughtful estate planning and the importance of considering inflation. It’s a beautiful example of how preparation and a little foresight can truly make a difference in someone’s life.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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