The Unitrust Graph
(Added 5/12/2009)
I've gotten into the habit of providing a graph for prospects to show how a unitrust's income, as well as the trust's corpus, may go up over time. As far as I'm concerned, this is an effective tool to help people understand the concept of unitrusts. With the market decline over the past several months, however, am I wrong to show a graph where the income and corpus rise? At this point I don't know what the future holds.
You never did know what the future holds. Neither you nor I nor anyone else ever will - which is perhaps the biggest problem with those graphs. The graphs often are a wonderful marketing and educational tool and they vividly show what may happen given certain assumptions. A picture - when compared to the complexity of verbiage needed to fully and properly describe a unitrust really is worth a thousand words.
But the graph you describe - and, from what I can gather, all those offered up by the people I've spoken with over the past two decades since they became commonplace in computer illustrations - omit a few words, some of which are important. Showing a graph with an ever upwardly curving line is far more powerful than the words, often muttered quickly and dismissively (almost as an unimportant afterthought), " . . . although your income could also go down." The issue at hand is not, strictly speaking, the use of the graph, but the context in which we put it. The assumptions will never hold. They never have. Reality is too unpredictable. Even if income does rise over time, it won't rise as smoothly as shown. At the least, donors have to be prepared for a rocky ride. And, as we've seen, income can drop and continue to drop for far longer than anyone might have thought.
While a graph that illustrates the characteristics of a unitrust is a useful tool, as ethics calls for balance and context, it needs to be accompanied by the whole relevant message, and all of it, not just the potentially good news, needs to make an impact. (Yes, the possibility of an income drop is relevant information.) What about showing a partner graph where the income is shown to drop? (No one I've ever spoken with has done this.) Also, if you can input the data (your software provider might be able to help with this), you might want to show the actual gains and losses of the markets, with an asset allocation as close as possible to the one you will use for a donor's trust, for a number of years in the past approximately equal to the life expectancy of the trust's beneficiaries. That would be more complex, but we would all have better prepared beneficiaries.
There are a number of things you can do to disclose a full and accurate picture of how a unitrust works. Unfortunately, predicting the future isn't one of them.