Distributing The Trust Assets
How should your Trust distributions be structured for beneficiaries?
When setting up a trust, you may be concerned about how to structure trust distributions for your beneficiaries after you (the grantors) are no longer living. In other words, what is the appropriate age to distribute trust assets to a particular beneficiary? Should the distributions be split up so they don’t get everything at once? If they do split up distributions, what ages should such distributions take place and in what percentages? What if a beneficiary needs the money earlier than anticipated?
Many of these questions have subjective responses based on your personal beliefs and values. I’ve also had clients with very strong feelings on this topic based on their own experiences dealing with their parent’s trust. However, the general considerations are as follows:
Value / Complexity of Trust Assets. What is the value of the trust assets and how complex is the asset mix? If a trust is set up to hold basic stocks and bonds or cash equivalent investments (i.e., assets that can be easily turned into cash or transferred among beneficiaries with minimal logistics), and if subdividing the assets among several beneficiaries is relatively low (once again, value being a subjective figure), then you may decide a one-time distribution is appropriate since the amount involved doesn’t justify the complexity of keeping the trust in place. At the other end of the spectrum are those who have millions in the trust and want not only to protect the assets from creditors of beneficiaries (more on this below), but also the idea of keeping the assets in trust so they can one day be used for the benefit of their grandchildren. It is in these scenarios, where the distributions tend to be delayed and split up as certain key age milestones are reached.
Age / Maturity / Mental Capacity of Beneficiaries. Many clients don’t like the idea of an 18 year old having direct access to hundreds of thousands of dollars. Therefore, most set a minimum distribution age to 25 years old (the age when most client’s children have successfully completed college and have had time to gain some real world experiences and perspective). In certain scenarios, however, it is prudent to push this age higher or split the distributions based on the lifestyle of the beneficiary or potential risks of distributing the money or assets outright. For example, there may be a concern that the beneficiary isn’t great with money and, based on current spending habits, makes you think they need more time to develop financial literacy or responsibility. Other clients are more concerned that giving a beneficiary too much money too early will disincentivize them to work as hard during those critical foundational years of their career. And then there’s the litigation, creditor, and divorce risks that many have experienced first-hand. While this can vary from trust to trust, it is possible to structure the trust to prevent such assets from being attached in a lawsuit or divorce proceeding, but this only applies if the assets remain in trust. Therefore, some clients will hold off on complete distributions from the trust, not because of a beneficiaries financial maturity or age, but because they want to make sure the money doesn’t end up going to someone else (e.g., an angry ex-spouse), which is clearly contrary to the client’s intentions.
Trustee Selection. This is probably the biggest practical concern among clients because if they have no one but their children (i.e., the beneficiaries) to serve as successor trustee then it makes little difference to split up or delay distributions since they (the children) already have authority over the trust assets. You could write the trust so such access is limited, but without a proper check and balance mechanism (like an independent trustee) there’s little benefit in doing so. On the other hand, most clients do have a trusted sibling, cousin, or friend that is able to serve as trustee, but such persons may be about the same age as the clients, which begs the question - how long can that person serve as trustee? It’s the answer to that question, that typically decides whether or not delayed or multi-tiered distributions are feasible.
So what’s the best solution?
After factoring in the above considerations, most clients tend to draft their trust in one of two ways:
One-time distribution. Assets remain in separate (but equal) sub-trusts for each child until the child reaches a certain age (generally somewhere between age 25 to 35), at which point, the assets in sub-trust for that child are then distributed outright to him or her.
Three-tier distribution. Assets remain in a separate trust for each beneficiary, but distributions for each child are split equally among three milestone ages (e.g., one-third at age 25, one-half of reminder in trust at age 30, and all remaining trust assets at age 35). This approach balances the concern for giving too much too early against the risk of the successor trustee getting too old to properly oversee and manage the trust assets.
If you are interested in setting up a trust for your family, or simply want to learn more about the estate planning process, then feel free to give me a call at (781) 202-6368 or shoot me an email at JLento@PerennialTrust.com.
I’m always happy to help.
Sincerely,
Joseph M. Lento, J.D.
Attorney & Owner of Perennial Estate Planning
