At the time a trust is created, you (as the person(s) setting up the trust) will need to determine how, when and under what conditions the assets are to be distributed to the beneficiaries of the trust. Options are almost endless.
I’ve done dozens of trusts over the years with distribution plans that provide for staggered mandatory principal distributions of 1/3 at 25, 1/3 at 30 and the remaining 1/3 at 35. Over the past couple of years, I have been asking myself more and more whether these staggered mandatory distributions are a good idea at all. What is going to happen to the beneficiary between ages of 30 and 35 that causes clients to want to hold back the remaining 1/3 and to incur the associated administrative costs?
Putting aside the situations where a beneficiary has special needs, has a drug or alcohol addiction, has a bad marriage, or has serious financial troubles – all reasons to consider not including any mandatory distributions of principal and coming up with a custom distribution plan, most married clients with young kids just want to make sure that their children don’t inherit large sums before they are capable of managing the money (read: they are able to resist the temptation to buy a Porsche 911 Turbo in 3 colors). So, if not staggered mandatory principal distributions at 25, 30 and 35, what is the best option?
My general recommendation to the vast majority of my clients with young kids is to, after the death of the surviving spouse, keep the trust funds in a “common trust” for the benefit of all of your children until your youngest child finishes college (so that all the children are treated fairly economically). Once the youngest finishes college, either terminate the trust entirely and distribute equal shares to each child outright at that point, or hold each child’s share in trust until each child reaches whatever age you think is appropriate (e.g. 30 years old). As mentioned, there are an endless number of options for distribution plans, but this makes the most practical sense to me absent other extenuating factors.
