Which Distribution Plan is Best for Your Trust?
So you’ve decided that a trust is the best estate planning vehicle for you due to its many benefits, one of which is flexibility with regard to your distribution provisions, and now you are trying to decide on which distribution plan is best for you and your family. This blog lays out the various distribution options available to you and also discusses some of the pros and cons of each distribution plan.
The Basic Distribution Plans Available to You
Although distribution plans vary widely, there are basically three distribution plans that I recommend to my clients:
- Outright Distributions. First, clients can make the distributions to their children or other beneficiaries outright. If the beneficiary is a charity, then this always makes the most sense. However, if the beneficiary is an individual, I usually recommend having a minimum age, typically age 25, before the trustee makes the outright distribution to the individual. This age can be adjusted depending on the current age and maturity of the individual. For some beneficiaries, age 21 or 22 is appropriate; however, for other beneficiaries, an older minimum age for an outright distribution is more appropriate. The general idea with an outright distribution is that the beneficiary is financially mature, for the most part, but needs a few more years of maturity/life experience in order to reduce the risk of such beneficiary “blowing it” in a short period of time.
- Discretionary Trust, With No Mandatory Distributions. Second, for some beneficiaries, it will never be a good idea to give them an outright distribution, because for various reasons (i.e., immaturity, drug or alcohol addictions, bipolar or mental illness, etc.), they will likely “blow it” if they receive an outright distribution in one lump sum. In addition, for larger estates, there are tax reasons for not giving children an outright distribution during their lifetime. For larger estates that will incur an estate tax at every generation, some families decide to create “dynasty trusts” after both spouses have passed away, so that there will be discretionary trusts established for the benefit of their children, grandchildren, and even great-grandchildren and beyond. In fact, depending on the size of the estate, these “dynasty trusts” can last up to 500 years in Arizona. Finally, one other benefit of discretionary trusts with no mandatory distributions is that your children, grandchildren, etc. will also have creditor protection benefits for such trusts. This means that, if your children’s trusts are drafted with the proper spendthrift language, your children will be able to access the funds in the trust (through a trustee), but your children’s creditors will not be able to get to these funds.
- Staggered Distributions. Sometimes clients do not like the outright distribution plan (even at an older age) and also do not like the “discretionary” distribution plan that only gives them discretionary access during their lifetime, and they ask me for “something in the middle”. The staggered approach usually works for these clients. With a staggered distribution plan, there are mandatory distributions at certain ages which stagger the distributions over time. For instance, a common staggered distribution plan that several of my clients like is an outright distribution of 1/3 of the balance at age 25, an outright distribution of 1/2 of the balance at age 30, and an outright distribution of the entire remaining balance at age 35. For the balance of the trust that is held in trust for a beneficiary before age 35, there are also discretionary distributions available, in the discretion of the trustee, for the beneficiary’s heath, education, welfare, and for things like a down payment on a home or an initial capital contribution for a business, if you so choose. These ages can be extended out even further if the clients want to have these outright distributions paid out over a longer period of time.
Factors to Consider
Here are some factors to consider if you are trying to decide which distribution plan is best for you and your family:
- The age and maturity of the beneficiaries.
- Are the beneficiaries generally doing well?
- The financial ability of your beneficiaries.
- Creditor protection for your beneficiaries.
- Who will serve as trustee if you are considering a longer term trust?
- The additional costs of administration post-death for a longer term trust.
- Do you feel comfortable with your beneficiaries feeling that there are “strings attached” to their distribution?
Of course, there may be other factors to consider as well that are specific to your family.
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