Trust Distribution Checklist

Trust Distribution Checklist

By: Martin M. Shenkman, CPA, MBA, JD

There are lots of ways you can have your trust distribute money to your beneficiaries. Here is a checklist of some of the jargon, considerations, and approaches involved in trust distribution. Too often people view these critical and personal decisions as mere "boilerplate". Doing so may well jeopardize your intended goals for setting up a trust. You need to take the time, and think through the "what ifs" to make it work.

When preparing a trust agreement consider all aspects of distributions decisions. Who should make the decisions? Who are the trustees? Should you instead provide for a distribution committee to make these decisions? When and how should these decisions be made? Start with personal details, and then conform those decisions to meet tax law requirements for the particular trust. Here are some points to consider:

Should there be any limits on the standards for distributions?

Should different trustees have different standards by which they can make distributions? For example, an institutional co-trustee may be given an unlimited standard ("comfort and welfare") while an individual trustee may be limited to maintaining a beneficiary's lifestyle ("ascertainable standard"). You may view the institution as a stronger and more independent decision maker that will not be pressured by a beneficiary in the same way that a family member trustee might be.

It's common to limit distributions to the beneficiaries in the areas of health, education, maintenance and support ("HEMS) to what the tax law calls an "ascertainable standard". This is loosely translated as maintaining the beneficiary's "standard of living". Lots of people are comfortable with this standard for distribution, but what does it mean? What is a beneficiary's standard of living? When should it be determined? When you sign the trust (or the will creating the trust)? After you die? After Junior starts spending that big insurance policy he collected after your death?

How should the trustee balance distributions when there are multiple current beneficiaries of one trust? It is common to name the surviving spouse, and the children all as beneficiaries of a by pass trust (intended to safeguard the current $2 million federal exclusion, or often a lower state exclusion, from tax in the surviving spouse's estate). Who should be favored, if anyone?

How should the trustee balance distributions when there are current beneficiaries (e.g., your third spouse), and remainder beneficiaries (children of your first marriage) of one trust? Some guidance as to how the trustee should balance distribution decisions should be provided. Who, if anyone, should be favored ? In some cases a unitrust approach is advisable (e.g., pay 4% of the value of the trust each year to the spouse, the remainder on her death to the children). It's reasonable and clear. But often it's too simplistic and rigid to accomplish your goals. If so, you need to provide parameters.

Who should be included in the definition of beneficiaries? If your children are named as beneficiaries of a trust, should their children also be included (although generation Skipping Transfer tax (GST issues) will have to be considered)? How do you define grandchildren? Should adopted children be included? Should your children's spouses be included? Partners?

Should the other resources available to a beneficiary be considered? If grandma set up a trust to pay for you daughter's lifestyle, should the trust you set up distribute what effectively will be a duplicative amount? Should a beneficiary be required to take out a reverse mortgage (or otherwise tap home equity) before the trust can pay out? If you mandate that support be considered, this could be a risk. If your spouse is a beneficiary of a by pass trust (not included in her estate) and the QTIP trust (marital trust taxed in her estate) mandates that distributions consider all resources, increasing the distributions from the by pass trust will effectively increase the tax on her death. Is that the intent?

Must all beneficiaries of a trust be treated equally? Equal sounds simple and superficially "fair" but does nothing to account for changed circumstances, different needs, etc. If one child beneficiary has a major health issue, is equal distribution really appropriate?

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