Testamentary Trust terms: What to Consider

A trust allows you to control how and when assets are distributed to beneficiaries after your death. One of the key advantages of using a trust is the ability to define how distributions are made. 

These distribution terms can help ensure that assets are used in ways that align with your goals and support the needs of your beneficiaries.

Understanding the different types of trust distributions can help you decide what structure may be appropriate for your situation.

Why this decision matters

Customizing trust terms allows the trust to reflect the unique needs and circumstances of both the person creating the trust and the beneficiaries who will receive support from it.

No two families are exactly alike, and trust provisions can be adjusted to reflect different goals. These goals may include:

• protecting assets, 
• supporting beneficiaries over time, 
• addressing specific family situations, 
• or coordinating with tax planning strategies. 

Thoughtful design of trust provisions can help ensure the trust works effectively both now and in the future.

Common scenarios where trusts may be helpful

Trusts are often used in a variety of situations where flexibility or long-term management of assets is beneficial.

• For beneficiaries who are minors or young adults, a trust can provide support for education and basic living expenses until the beneficiary reaches an age or stage where they may be ready to manage assets independently.
• If there are concerns about creditor exposure, trusts may help protect inherited assets. Assets held in a properly structured trust may be less vulnerable to claims from lawsuits, bankruptcy proceedings, or divorce.
• Trusts may also be appropriate for beneficiaries with disabilities. In these cases, a trust can help provide financial support while preserving eligibility for certain government benefits.
• In situations involving business ownership, a trust can sometimes help provide continuity. A trust may hold business interests and include instructions about how those interests should be managed or transferred over time.

Types of trust distributions

Accumulations

Accumulations occur when income or assets generated by the trust are retained within the trust rather than distributed to beneficiaries. The assets remain invested and may grow over time.

Accumulations can help preserve assets for future use and may be appropriate for trusts designed to support beneficiaries over longer periods. For example, a trust might accumulate income for several years to help fund a beneficiary’s education or provide support later in life. 

Accumulations can also create reserves for unexpected expenses or future generations.

Discretionary distributions

Discretionary distributions allow the trustee to decide when and how much to distribute to beneficiaries based on their needs and circumstances.

This type of distribution provides flexibility, allowing the trustee to respond to changing situations. For example, the trustee might approve distributions for medical expenses, education costs, or support during difficult financial periods.

Discretionary distributions are often used in trusts created for children or young adults, because they allow the trustee to adapt support as circumstances change over time.

Mandatory distributions

Mandatory distributions require the trustee to make distributions according to a predetermined schedule or formula. 

For example, a trust might require that a certain percentage of assets be distributed each year or that specific payments be made at certain ages.

Mandatory distributions can provide predictable income to beneficiaries and may ensure that beneficiaries receive regular support from the trust.

Common discretionary distribution standards

Many trusts use commonly recognized standards to guide the trustee when making discretionary distributions. These standards help provide structure while still allowing flexibility.

Distributions for health

Trust provisions may allow distributions to cover health-related expenses for the beneficiary. These can include:

• medical treatment, 
• prescription medications, 
• rehabilitation services, 
• long-term care, 
• and other healthcare costs.

Trust funds may also be used to pay health insurance premiums or help cover other healthcare-related expenses. These provisions can be especially important for beneficiaries who may require ongoing medical care or support later in life.

Distributions for education

Trust distributions for education are commonly used to support a beneficiary’s educational goals. These may cover tuition, books, supplies, and related educational costs.

In some cases, distributions may also cover room and board, transportation, and other expenses associated with attending school or training programs. These provisions can help ensure beneficiaries have access to educational opportunities even if they face financial challenges.

Distributions for support and maintenance

Many trusts include provisions allowing distributions for a beneficiary’s support and maintenance. These provisions generally allow the trustee to distribute funds that are reasonably necessary for the beneficiary’s living expenses.

This may include:

• housing, 
• food, 
• clothing, 
• healthcare, 
• and other basic needs. 

Depending on the trust language, support distributions may also include educational or vocational training, assistance during periods of hardship, or other expenses that contribute to the beneficiary’s well-being.

When making discretionary distributions under these standards, the trustee is generally expected to act in good faith and follow the instructions in the trust document. The trustee may consider factors such as the beneficiary’s financial needs, other sources of income, and the long-term sustainability of the trust when making distribution decisions.