Individuals who want to exercise greater control over their distributions turn to trusts as their estate planning vehicle of choice. Trusts empower their creators to exert “control from the grave” by allowing Trustmakers to specify criteria that must be met to issue distributions.
What characterizes these conditions, and should you do it? Read on to learn more.
What Conditions Can You Add to Your Trust?
Age-Based Vesting
Age-based vesting is the most common condition Trustmakers set and particularly prevalent among Trustmakers gifting to minor or adult children.
More mature people tend to exhibit stronger financial discipline than younger ones. To mitigate against the possibility that beneficiaries squander their inheritances all at once, Trustmakers often spread the gifts out over a number of years. For example, one common approach is to specify three age thresholds for distribution:
- 1/3 distributed at age 25
- 1/3 distributed at age 30
- 1/3 distributed at age 35
If the beneficiary is already over a particular age threshold at the time the Trustmaker passes away, that share is distributed outright, notwithstanding any other provisions in the trust to the contrary.
Spendthrift Provisions
In addition to age-based vesting, another common condition to add to your trust is spendthrift provisions. Spendthrift provisions help make sure that what you are intending to gift to a certain beneficiary does not wind up going to someone else instead. They restrain both voluntary and involuntary transfer of a beneficiary’s interest in the trust in at least one of three ways:
- Prevents the beneficiary from assigning or transferring the beneficiary’s future in the trust
- Prevents creditors from attaching to the assets of the trust before the assets are distributed to the beneficiary
- (Possibly) empowers the Trustee to withhold distributions to the beneficiary at the Trustee’s discretion
Other Distribution Conditions
The conditions that you add for distributions to your revocable living trust are only limited by your imagination. In addition to the age-based vesting requirements and spendthrift protections, Trustmakers sometimes add other criteria that beneficiaries must meet in order to receive distributions.
For example, you might earmark part of the Trust funds to be used only for higher education expenses or a post-graduate degree. Maybe you want to instill the value of finding and keeping a life partner, and so you carve out a portion of funds to be gifted upon marriage or a 5 or 10-year wedding anniversary.
Benefits and Drawbacks to Adding Conditions to Trusts
The benefit to adding conditions to the distributions in your trust is that it allows you to exercise "control from the grave." Even after your death, you can continue to guide your money and your beneficiaries to support values and causes that are important to you.
The drawback to adding conditions is that it may increase your trust administration expenses, reducing the net value received by your beneficiaries. Your trust may incur additional expense validating that the criteria are met or by reviewing and coordinating the eligible fund uses. By keeping your trust open longer than would be necessary if you were to make distributions outright, you may incur higher fees to compensate trustees, financial advisors, or other professional advisors.
The Bottom Line
Deciding whether to add conditions to your trust distributions and which ones to add is a personal choice driven by how much you value the greater control compared to the expediency (and sometimes, savings) of making gifts outright.
If you do decide to add conditions to your trust distributions, it’s a good idea to discuss these conditions with beneficiaries in advance, while you are still living. This advance communication helps put you and your beneficiaries on the same page, and it can also serve as a great time to reaffirm your values as they are reflected in the trust.
When you create your trust with Just In Case Estates, we make it easy to share your plan details with beneficiaries and other stakeholders straight from the member dashboard.
