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Many trust funds are designed to keep principal intact while generating a steady revenue stream. They do this by paying out some percent of net asset value and, assuming the trust fund grows faster than that percent, it all works out.

Assuming intact principal and steady revenue are fundamental goals of the fund:

1) How does that payout money get created? Investment dividends, fixed income, realizing capital gains, other ways?

2) What happens if annual return is less than the annual payout rate? Do they cut into principal, or is there a usually something that reduces the payout?

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    I think this could be edited to be related to PF. The 4% rule for retirement is meant to last for 30 years in a variety of market conditions. What if you want to live 70 years on an inheritance? What is the rule then, and how can you follow the same practices as a university endowment to preserve your capital to bequeath to your own heirs?
    – NL - SE listen to your users
    Commented Jun 21, 2019 at 17:03
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    I see the question was asked about college endowments and Nathan edited to try to save the question. Abstaining for now.
    – JTP - Apologise to Monica ♦
    Commented Jun 21, 2019 at 17:53
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    I guess my question isn't actually limited to endowment management. As Nathan L says, the same questions apply to a trust or personal portfolio. Thanks for the edit, it definitely fits with what I intended to ask!
    – jhch
    Commented Jun 21, 2019 at 19:14
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    The answer is still going to be specific to the trust fund. For example, one might set up a trust fund that simply stipulates they cannot touch the money until they turn 21, at which point they have full access to do whatever they want with the money. There is no revenue stream involved, and certainly no attempt to preserve a minimum value over time.
    – chepner
    Commented Jun 21, 2019 at 20:46
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    I'm not sure what you are looking for beyond "payment = max(X, balance - min_balance)". You just... don't... pay out anything that would decrease the balance below some threshold.
    – chepner
    Commented Jun 21, 2019 at 21:03

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Your questions are quite broad and there aren't really specific answers to them.

Your question #1 has no general answer. It just depends on what kinds of investments are in the trust.

As for your question #2, it's not really possible to guarantee both intact principal and unvarying revenue.

That can be approximated by setting some level of expected return, and then paying out on a schedule which is calculated, over time, to cancel out that return, leaving the principal intact (or perhaps allowing the principal to grow with inflation). But if the actual returns are less than the expected returns for an extended time, the principal may decrease. Also, if the actual returns are more than the expected returns for a long period of time, the beneficiary may pressure the trust administrators to increase payouts, and if they do, the payouts may get too big.

So there are no guarantees either way. There is no magical exact way to determine "how long" is too long for the payouts to be "too big" before the payment schedule should be adjusted; the trustees/managers just have to pay attention and try to set a level that is sustainable. In some cases, the trust terms may specify in detail how the money is to be allocated and managed, while in other cases trustees have more latitude.

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