What are Some Ideas for Distribution Schemes?
Your distribution scheme can be as simple or as complicated as you wish, so long as it does not include any illegal provisions.
Of course, you can choose to make gifts of cash, specific pieces of property (i.e., shares of stock, real property, etc.), or you can leave percentages of the remaining assets to one or more people. These types of distributions are fairly straightforward, but these are not the only types of distributions.
Below are some possible distribution schemes that do not involve an immediate distribution:
- Right to Reside in Property: You can include provisions which grant a beneficiary a right to reside in specific property for a specified period of time (or for the remainder of their life). There are other inquiries that go along with this, such as who will pay the ongoing costs (i.e., repairs, HOA fees, improvements, property taxes, etc.) and, if it is your trust/estate, how much cash will be allocated to pay for these ongoing costs. This is most commonly set up for a temporary period of time for children to get back on their feet, or for surviving spouses (typically with a second marriage).
- Income Incentive: Another type of distribution scheme is to establish a subtrust which provides an annual (or other shorter period) distribution to a beneficiary equal to the amount of income that the beneficiary earns that year (or other shorter period). This provision is designed to incentivize the beneficiary to earn as much as possible to receive distributions.
- Calculable Distributions: If you do not wish to set a specific dollar amount or leave it to the discretionary of a trustee, then you can always come up with your own calculation for distributions. (E.g., $50,000 a year, but if it's a leap year then it's $60,000)
- Periodic Lump Sum Distributions: Sometimes, people want to provide specific dollar amounts to a beneficiary. This is possible, and you can set the frequency of distributions, the amount, as well as provide other limitations. While it can be difficult to come up with a specific dollar amount, this is typically used in conjunction with an income distribution to ensure that the beneficiary receives at least a certain amount every year/quarter.
- Discretionary Distributions: Another option for periodic distributions is to give the discretion to the trustee. This type of provision is risky on both sides. It can be particularly risky for your intentions because it can create a likelihood of litigation in the future, depending on who the beneficiary is.
- Income Distributions: Another type of distribution is for the income of the trust only to be distributed to the beneficiary. Because of the trustee compensation and attorney's fees, it's unlikely that there will be sufficient "income" to be distributed in most trusts under this scheme. Generally, this provision is used in conjunction with another distribution scheme to ensure that the beneficiary is actually receiving a benefit from the trust.
- Right of First Refusal to Purchase Real Property: Another option, which is typically used in conjunction with other provisions, is granting an option to purchase property to a beneficiary. These provisions often lead to litigation because of poor drafting. The important provisions to include in regards to this option are (1) what purchase price are you granting this right at (i.e., if it's not a set amount you had in mind, is it appraised as of your date of death?), (2) can the beneficiary use their other interest in the trust to purchase the property, and (3) what are the terms of the right of first refusal (when does it begin, when does it end, and when must the purchase be completed?).
There are many other potential options, but these are some of the most common distribution schemes people utilize for various reasons. These distribution provisions are often not an either/or situation, but usually a combination of these distribution schemes are utilized to effectuate your ultimate goal.
There are no hard and fast rules when it comes to a distribution scheme, but the important thing is to consider how people other than yourself and your attorney will read what you have written in your trust/will. This is one reason that our firm tries to draft our estate planning documents into plain English to minimize the likelihood of confusion in the future.
The important thing to remember with each of these distribution schemes is that, because they are ongoing, that means that they will have ongoing administration costs for items such as accounting to the beneficiaries, communications, tax preparation and filing, and other administrative tasks. This means that there will be ongoing fiduciary compensation (trustee/executor), attorney's fees, and tax preparation fees.
With these ongoing fees and costs, your intended distribution may not be feasible for as long as you intended, and so it will sometimes take an in-depth cost-benefit analysis as to a projected distribution scheme.
Another important issue to consider is who will be managing the distributions (the trustee). After so many years, your children will not think about this as being a gift from mom or dad, but rather they may see it as the trustee holding their money and refusing to release it. Thus, it is important to project what the dynamics will be in the future--and in some cases, it may be more efficient for you to place a neutral person into that role to eliminate the emotions. When considering a distribution scheme, you should also consider who will be implementing this, and the potential confusion that could be caused by a more complex distribution scheme--and the costs of carrying out that distribution scheme.
Lastly, the relationship of the beneficiaries generally is important. Though no one ever wants to acknowledge it, blended families rarely get along after the parent dies who was the common connection. If you have a spouse who is not the parent of your children, they will likely be at odds with your children after your death, and it's important to take steps to ensure not only that everyone understands what your intentions are, but also that you have placed the proper mechanisms in place to ensure your wishes will be carried out.
If you are considering such a distribution scheme, you should contact our office to discuss the potential costs and benefits, and the best way to implement your wishes.
You may also be interested in:
- What is a Trust?
- What is a Last Will and Testament?
- What is a Power of Attorney?
- What is an Advance Health Care Directive? How is it different from a Living Will or a Power of Attorney for Health Care?
- When Should I Update My Trust?
- Who Should Be My Trustee?
- Can I Avoid a Probate?
- Can I Just Set Up Beneficiaries on My Accounts?
- You Don't Need a Formal Estate Plan, but You Should Have a Plan.