Mike and Janes parents love them very much and want them to be happy and successful. In
Question:
Mike and Jane’s parents love them very much and want them to be happy and successful. In order to help Mike and Jane reach their goals, their parents create an irrevocable trust for Mike and Jane’s benefit. Community Bank is named as trustee of the trust. The parents contribute $400,000 cash into the trust in the first year. Each subsequent year, the parents contribute an additional $60,000 to the trust. The trust includes the following provisions:
1. The trustee is allowed to make distributions of income and/or principal to Mike or Jane in such amounts as the trustee determines in its sole discretion.
2. Each year, Jane is required to receive $20,000 of income distributions.
3. Each time parents make a contribution to the trust, Mike and Jane are each entitled to withdraw $30,000 from the trust for a period of 30 days following the contribution. After 30 days, the power to withdraw terminates for the year.
In the second year of the trust, the trustee distributes $20,000 to Jane and $30,000 to Mike. In that year, the trust had $30,000 of distributable net income.
Introduction to Corporate Finance
ISBN: 9781118300763
3rd edition
Authors: Laurence Booth, Sean Cleary