Deciding How to Distribute Your Estate
There is one part of the estate planning process that tends to act as a bottleneck more than any other, and that is figuring out how your estate should be distributed.
On the one hand, we all want our children to be taken care of, educated, and provided for, but on the other hand, we are reluctant to drop a whole inheritance in their laps with the hope that they have the maturity and wisdom to make proper decisions. Most clients plan on leaving their estate to their children, or if none, then to nieces and nephews, or someone of a younger, more vulnerable generation.
When determining the distribution of a share of the Trust Estate to any beneficiary (primarily those about whom you have concerns regarding their ability to appreciate and properly manage their inheritance), there are three areas in which you should focus, and consequently three decisions that need to be made.
ISSUE #1: DISTRIBUTION PRIOR TO "POINT OF MATURITY"
The beauty of a well-drafted living trust is the near limitless flexibility that the client has in determining the purpose of the distributions to the beneficiaries. As so, we do not have to, and in some cases do not want to make distributions outright, and free of trust, but rather hold on to the distribution until the respective beneficiary has reached some sort of "Point of Maturity." We will discuss the term, "Point of Maturity" later on. But until such beneficiary has grown up or matured, most clients would like to provide for them to the extent that they always have the bare necessities of life, and nothing more until such beneficiary has reached this Point of Maturity.
This first decision is a binary one: you can either choose to provide for the bare necessities of life for your beneficiaries until they reach a point of maturity, or you can choose to not provide any support until they are ready to begin receiving their inheritance.
The language of this paragraph, if included, typically contains language to the effect of, "Until each beneficiary has attained the age of [here you can insert any age, number of years, or any other qualifying criteria—we will discuss this in the next section] the trustee, in the trustee's sole and absolute discretion, shall administer and distribute an amount to the beneficiary sufficient to provide for that beneficiary's health, education, maintenance, and support."
Decision to be made: Until your beneficiary has become a of legal adult, or until such beneficiary has reached a point of maturity, do you want to provide for their basic living of necessities? (i.e., To provide a roof over their heads, clothes on their backs, food in the refrigerator, proper healthcare, and a school to attend).
ISSUE #2: DETERMINING THE "POINT OF MATURITY"
Although you may have minimal confidence in your beneficiaries to properly appreciate and manage an inheritance, if you do want to make a distribution to them, you will ultimately need to decide at what point in their lives will they begin to have complete and unfettered control over their inheritance. The beauty of the living trust however, is that such a point can be subject to any manner of restrictions and contingencies.
To be honest, most clients set the Point of Maturity at a specific age. Although age is not a concrete determination of maturity, most clients feel comfortable beginning distributions at a certain age. If the beneficiaries are minor children and very young, I recommend to my clients to look back at their own lives and determine at what age would they begin to trust their younger selves.
Other clients look at certain accomplishments, and judge maturity on their beneficiary's ability to achieve them. For example, a beneficiary might not be deemed "mature" until they have graduated from college, been married, entered the workforce, etc. Some clients are rightfully concerned about placing an overly-restrictive path over their beneficiaries' individuality and personal lives. To that extent these accomplishments can be much more general, relying on the sole and absolute discretion of the successor trustee. For example, rather than requiring graduation from college, you can require "completion of a formal educational program," which would be determined as "formal" by the successor trustee.
To an even further extent, broad paragraphs describing maturity can be used, leaving the determination up to the successor trustee. Such paragraphs would include phrases such as "the exhibition of behavior consistent with that of a contributing adult member of society," or " integration into a community, which would include, but would not be limited to gainful employment, healthy social relationships, community involvement, a defiant consistent residence, etc." These broad determinations, of course, would be determined by the sole and absolute discretion of the successor trustee.
It is important to remember, however, that your interpretation of maturity is 100% up to you. Some clients require marriage to another individual of a specific religion, others require a clean criminal record, while others require their beneficiary's to attend certain colleges, enter certain professions, or live in certain areas in order for them to receive their inheritance. Keep in mind, however that the more unrealistically restrictive your requirements are, the more likely your beneficiaries will be able to successfully obtain an exception from a court of law, and receive their inheritance without having to comply. For example, a famous case a few years back involved a trust that required a beneficiary (the client's son) to divorce his then-existing spouse in order to receive his inheritance. The court held that the trust provision was against public policy, and that such provisions could not promote behavior, such as divorce, crime, etc. Understandably, the happily-married son went to court, and the provision was stricken.
If you never want your beneficiaries to have so much control, consider that the only two alternatives would be one, to provide for a basic standard of living for the rest of their lives, or two, not name them as a beneficiary at all.
Once they have reached this Point of Maturity, we then need to decide the manner in which they will receive their distributions—the next section.
Decision to be made: Although your beneficiaries may be receiving small distributions to maintain a basic standard of living, at what point are you willing to allow them to complete and unfettered control of all, or part of their inheritance?
ISSUE #3: DETERMINING THE MANNER AND SCHEDULE OF DISTRIBUTION
Once you've determined at what point you are comfortable with that beneficiary receiving distributions, you then need to decide how and when that such beneficiary will receive their distributions. Do you want them to receive their entire inheritance outright and free of trust? Or at the other end of the spectrum, do you want to supply a steady flow of lifetime spending money?
If possible, it is preferred to leave your beneficiaries their inheritance outright and free of trust. The reason for this is that there are less decisions to be made, and less potential conflicts for the beneficiary to have. However, if a phased a distribution is necessary it can be done in any sort of interval: weekly, monthly, quarterly, annually, etc. Furthermore, a phased distribution can be of any amount determined by a percentage, a fixed amount, or an amount tied to some variable such as grades in school, the beneficiary's own salary, or anything else that is important to you.
Lastly, when allowing these distributions it is important to consider any provisions that you would like to implement which way to curtail, or completely cut off distributions should the beneficiary do anything, or act in a manner inconsistent with your wishes.
Decision to be made: Assuming your beneficiary is mature or has reached a Point of Maturity, how would you like them to receive their inheritance? Outright and free of trust? Or would you like two fees it in over time? If so, in what intervals and in what amounts?
A SPECIAL NOTE REGARDING DIFFICULT BENEFICIARIES
Often times clients will express deep concern regarding very difficult beneficiaries. Especially in instances where these beneficiaries are children, it becomes difficult because although clients feel an inherent duty to leave their estate to their children, they don't want to distribute assets to their children if such would do more harm than good.
In these situations it is ultimately up to the client to make the decision, but in the world of limitless options, I most often suggest the following to my clients:Consider what it is in the beneficiary's life that is most concerning, and what sort of corrections need to be made in order to properly address those concerns. Make distribution contingent on the beneficiaries making those corrections. If it is something extremely difficult to correct, consider allowing the trustee to use that beneficiary's inheritance to help them make those corrections (i.e., rehab, counseling, etc.).Consider never turning over complete control to a beneficiary. You can provide for a basic standard of living for a period of years (i.e., 10 years, 15 years, etc.), and then distribute any leftover amount to a charity, preferably one dedicated to addressing the very behavior that is of concern to you in the first place.Consider relying more on your successor trustees discretion rather than your own. This is not to say that you are not currently close enough to the situation, but after your death the successor trustee will be in a much better position to look at the beneficiary's life, situation, and circumstances to make these decisions. Of course we do not want to give the successor trustee sole and absolute discretion to make distributions, but we would rather vaguely define "maturity," and leave it up to the successor trustee to use their best judgment.If the behavior in question is one that that is constantly repetitive, consider prohibiting distributions whenever that behavior is present. For example, you may want to instruct the successor trustee to make annual distributions of approximately 10% for every year the beneficiary is not arrested for any criminal activity; but such distributions would not take place if there were such an arrest in that particular year.
EXAMPLES OF DISTRIBUTION PROVISIONS
Without breaching my duty of confidentiality to my clients below, the following are some ideas of distribution provisions that I would suggest to my clients, the specific of which would only be suggested after it depend thorough conversation with each client:A deeply religious family may want to provide for the health, education, maintenance, and support of their children until they attain the age of 25 (age 25 being the Point of Maturity). After they attain the age of 25, each beneficiary would receive their share of the Trust Estate only if they are deemed to be actively participating in their religion or church as determined by a pastor, bishop, etc.Parents of a child who is in an abusive marriage cannot required divorce (see above), but can rather rely on the trustee's sole and absolute discretion to make a distribution only if such child is maintaining a home consistent with the proper "protection and nurturing" of their own children. Although such would not require divorce per se, a distribution could only be made in this situation if the child removed the rest of the family from the abusive spouse.I have heard a story about a law enforcement professional who allowed a distribution in amounts to be calculated by referring to a chart which would dictate distribution amounts based on blood alcohol level ascertained from random testing throughout each year to be arranged by the successor trustee.Clients can match the distribution amounts to each beneficiary's salary or net income. Some clients prefer to measure maturity to amount of income, and such allows greater distribution for greater income.Parents of a child who behaves in a manner consistent with a lifestyle involving drugs, promiscuity, illegal acts, or otherwise inappropriate behavior, but not necessarily participating in those specific actions, which may include affiliating with individuals that do participate in those actions, would want to rely on the successor trustee to make a determination as to whether that beneficiary is " behaving in a manner consistent with that of a contributing adult member of society" or "behaving in a manner consistent with the values, principles, and advice of [the clients]." CLOSING THOUGHTS
The term "rule from the grave" is a term used in estate planning to describe a client's wish to make post-mortem decisions which they could not possibly have the necessary information to make. "Ruling from the grave" presents a host of problems: trying to predict the future is never easy, and almost always inaccurate. And as so, future distribution provisions are often times inconsistent with the original intent of the clients, and the practicality of the future situation. When a client comes to me and says that they want the entire trust estate distributed to their beneficiaries outright and free of trust without any restrictions or contingencies, the first thing they comes to my mind is that there will unlikely be any problems with the administration of this estate. On the other hand, when a client comes to me with three or four pages of contingencies and restrictions, I can almost guarantee that I will receive some angry phone calls 20 years from now, and maybe even a full-blown litigation case with the children.
That being said, I encourage clients to place clear-cut restrictions on distributions such as age, time, graduation, gainful employment, etc. These restrictions instill future generations the values that the clients hold dear, and at the same time allowed distributions to be made only in situations where the beneficiaries are most likely to appreciate it, and do the most good it.
In situations where it is clear that the beneficiary is a leading a life inconsistent with that of an individual who would properly appreciate an inheritance and manage it well, I do not advise my clients to attempt to foresee potential restrictions and contingencies, but rather to describe the ideal situation in vague terms, and rely on the judgment and discretion of the successor trustee to determine when such distributions shall be made, and in what manner. The carefully drafted trust will provide the appropriate discretion needed to allow freedom to make the appropriate distributions, while at the same time preventing a disgruntled bend of beneficiary from disputing such.