For decades, it was very common for trusts to be set up like this: “The trust income will go to the first beneficiary, and when the first beneficiary dies, the trust assets will go to a second beneficiary.”

Here are some common examples:

• A couple sets up a trust with the income going to a child, and when the child dies, the assets go to their grandchildren.
• A wife’s will creates a trust that pays income to her second husband, and when he dies, the assets go to her children by her first marriage.
• A man sets up a trust where the income goes to his wife, and when she dies, the assets go to a charity.

That’s all well and good when interest rates are healthy. But over the last few years, interest rates have plunged to historic lows, and stayed there.

The result in many cases is that the first beneficiary of a trust ends up getting a lot less income than he or she expected – or than the person who created the trust expected, for that matter.

This often puts trustees in a bind. Typically, trustees want to manage the funds fairly to help both the first beneficiary and the second beneficiary. They will invest some assets in bonds and other fixed-income instruments to produce income, and others in equities to create long-term appreciation. But recently, such an approach has had the effect of shortchanging the first beneficiary.

A trustee could shift all the investments to bonds to try to make up the difference. But doing so would harm the second beneficiary.

There’s no perfect solution, but a different type of trust called a “unitrust” could make things easier in this environment.

Rather than paying the first beneficiary the interest each year, a unitrust pays the first beneficiary a fixed percentage of the trust’s total assets. So for instance, a trustee could determine the total value of all the trust assets as of December 31 of each year, and then pay the first beneficiary 4 percent of that value.

This doesn’t solve every problem, but it does prevent a first beneficiary from being punished when interest rates drop and stay low for a long time. It also allows a trustee to manage funds for the best possible overall return without having to worry about shortchanging one of the beneficiaries. The better the trust’s investments do, the better off both the first and second beneficiary will be.

While a typical unitrust pays the first beneficiary a fixed percentage of the trust assets each year, a popular variation is to “average out” the value of the assets over a three-year period. For instance, a trust could pay first beneficiary 4 percent of the average value of the trust on December 31 of the past three years.

This is a way of smoothing out the payments, so the first beneficiary’s income doesn’t fluctuate wildly from year to year depending on the market.

If you’re setting up a new trust, or if you have an old trust that can be modified, it might be worth considering making it a unitrust.

In highly unusual circumstances, even a trust beneficiary may be able to make this change.

In one recent New York case, a trust created in 1983 was designed to pay income to a daughter, with the assets going to other children after the daughter died. After the 2008 crash, the daughter’s income from the trust dwindled considerably. The daughter went to court and asked a judge to convert the trust to a 4-percent-a-year unitrust, saying she needed the additional funds to pay for her health care.

The judge agreed and converted the trust. The judge said that doing so was in keeping with the intent of the trust, which was to adequately support the daughter. The judge also said that since the daughter was now elderly and the trust assets had grown over the years, there was little chance that upping the annual payout to 4 percent would dangerously deplete the trust assets for the other beneficiaries.