If you leave property in a trust, you also set its rules: what the money can be used for, when the beneficiary receives it, and who decides. The common choices are explained below.
This article is about trusts that start at your death to hold an inheritance for someone. They can be written into a Will or a Revocable Trust. They are different from a Revocable Trust you set up and use during your life. To compare a Will and a Revocable Trust, see this article for Washington or for Oregon.
Why this decision matters
The rules let the trust fit your family. A trust for a teenager looks very different from one for an adult child with a disability, or one meant to last for grandchildren. Thoughtful rules can:
- Support a beneficiary through school and early adulthood
- Protect the inheritance from creditors and divorce
- Handle a particular family situation, such as a blended family
- Work with any tax planning your attorney recommends
Key terms
- Testamentary trust: A trust that starts at your death to hold property for someone, such as a surviving spouse or a child. It can be written into a Will or a Revocable Trust.
- Trustee: The person or company that manages the trust and decides on distributions within the rules you set.
- Distribution: Money or property the Trustee gives from the trust to the beneficiary, or uses for their benefit.
- Principal: The property put into the trust. Income is what that property earns, such as interest and dividends.
Three types of distribution provisions
Distribution provisions tell the Trustee when to make distributions from the trust and how much judgment to use. Most trusts use one of these three types, or a mix of them.
Mandatory distributions
The Trustee must make distributions on a set schedule or formula. For example, the Trustee might distribute a set amount each year. Or the Trustee might distribute a share at certain ages, such as 25, 30, and 35. Mandatory distributions are predictable, but they cannot adjust if the beneficiary’s life changes.
Discretionary distributions
The Trustee decides when and how much to distribute, based on the beneficiary’s needs. This is the most flexible approach. It lets the Trustee help with a medical bill or a hard year, and hold back if a distribution would do more harm than good. It is common in trusts for children and young adults.
Accumulation of income
The Trustee can keep the trust’s income in the trust and let it grow, rather than distributing it. This can build a fund for college, a later stage of life, or future generations.
Common purposes for distributions
Many trusts guide the Trustee with standard purposes. Each one is broad enough to cover real life:
- Health: Medical care, prescriptions, therapy, long-term care, and health insurance.
- Education: Tuition, books, and supplies, and often housing and travel while in school or job training.
- Support and maintenance: Everyday living costs, such as housing, food, and clothing, at a reasonable standard.
The Trustee must act in good faith and follow the trust. They can consider the beneficiary’s other income and how long the trust needs to last.
These purposes also matter when a beneficiary is their own Trustee. Limiting distributions to these purposes helps keep the trust protected and out of the beneficiary’s own taxable estate.
When the trust ends
You decide how long the trust lasts:
- At a set age: The beneficiary receives everything at, say, 30. Simple, but the protection ends then.
- In stages: A share at each of several ages, so a mistake at 25 does not cost everything.
- For life: The trust lasts the beneficiary’s lifetime, and what is left passes to the people you choose. This gives the most lasting protection.
Want to read more?
These articles are optional.
- Outright or in a trust: Deciding whether to use a trust at all. See this article.
- Trusts for a surviving spouse: Providing for your spouse and your other beneficiaries. See this article.
- Choosing the people who carry out your plan: Including Trustees. See this article.
- Glossary: Common estate planning terms. See this article.