What Defines the Principal Value of An Asset in a Trust?

Updated: Sep 2, 2020

Attorney Thomas B. Burton, with Burton Law LLC, in Eau Claire, Wisconsin answers a reader question with Attorney Matthew Underwood, with Underwood Legal, LLC, in Madison, Wisconsin about how to determine the principal value of an asset held in trust. Attorneys Underwood and Burton also discuss how the trust principal can generate income which is often distributed on an annual basis to trust beneficiaries.

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Transcript of Video: What Defines the Principal Value of An Asset in a Trust?

Okay welcome back today you'll see we're

coming to you from the Supreme Court

chambers here in the Wisconsin State

Capitol and I'm joined by my friend

attorney Matthew Underwood Matt thanks

for joining us thanks for having me Tom

and Matt I really appreciate you being

here today because this question comes

from Madison and Matt operates a

boutique estate planning and elder law

firm right in Madison where we both went

to law school so I'll get right into the

question Matt because it's a complex one

and that's why I'm having you answer it

today all right we'll do my best so the

question is what defines the principal

value of an asset and then there's a

bunch of detail and I'm going to just

hit the high points of the detail the

questioner says our income trust is an

asset protecting irrevocable trust which

in the section titled lifetime trust

principal beneficiaries names three

people we selected as our beneficiaries

a section further down separates us from

our assets by stating no payment or

distribution of the principal of the

touched shall be made to us etc. etc.

hence we have access to the income

generated by our assets but no access to

the principal my question what defines

the principal value of an asset

Accountants see the terms principal and

cost basis as synonymous but I suspect

when used in this relation surrounding

asset protection the principal may have

another meaning so that's the question

there Matt and I'll let you try to

unpack it sure so we're dealing with

somebody who has an irrevocable trust and

based on the situation these are

commonly set up when people have assets

that they'd like to protect

in particular protect those assets if

they or their spouse were to go into a

nursing home so what we have here is

somebody who said hey I want to protect

some of my assets from long-term care

costs and they set up an irrevocable

trust which is an income only trust

and what that means is that the in order

to get that long-term care protection

from that irrevocable trust is the

people setting up that trust can't have

direct access to those direct access to

those assets anymore so for example

if I want to set up an irrevocable trust

and I want to protect my house from

long-term care costs I need to put my

house into that trust and then after

five or more years that that house would

be essentially off-limits in terms of

long-term care costs so so the way this

trust is set up is its it prevents the

people setting up that trust from being

able to withdraw principal and when we

say principal what we typically mean is

kind of that core money that went into

that asset so if I purchased a house and

I purchased the house for $100,000 well

that's my principal amount that hundred

thousand dollars that I put in so I mean

in order to get that protection that

trust says well you can't reach

principal is off-limits to you

so that's protecting that principal now

the question comes in is the people who

had set up that trust can access income

so what is income and what is principal

and what can they actually take out of

that irrevocable trust so again

principal is kind of that that starter

money or the money that you put in to

purchase an asset when we talk about

income we're usually looking at things

like interest dividends rent from rental