The Distribution of Your Assets
In order to make your trust1 or will more effective, it is important for us to understand how you want the assets of the trust distributed after taxes and other expenses are paid. It helps us if you provide us your instructions in writing. Hopefully, these pages will give you some helpful ideas. In your instructions, you will need to tell us how and when to allocate your assets and then tell us how, when, and on what condition to distribute those assets. The actual legal language used in the documents will probably be somewhat more complex, but for drafting purposes, we just need your plain-English explanation of what you have in mind.2
A. ASSET ALLOCATION
Which assets go to which beneficiaries? This can be specific or general. Many people include instructions for cash gifts and gifts of specific property. The balance of the assets — referred to as the “residue” of the estate or trust — is normally distributed in percentages or other fractions (such as “equal shares”).
A.1 Cash Gifts. You might make a list of gifts, something like this.
|Each grandchild who has graduated from an accredited college or university with a bachelor’s degree||$10,000|
A.2 Specific Assets. Again, a list is appropriate. These are generally put into a separate list that is mentioned in your will or trust.3
|John Jones||1999 Infiniti Q-45 automobile|
|Sarah Zulano||toaster oven|
|Larry Brown||100 shares of IBM stock1|
A.3 Formula-Based Amounts. It is common to design a trust so that the amount to be allocated to a beneficiary or to a share for one or more beneficiaries is determined by a set percentage or a formula. For example:
(a) Ten percent of the distributable assets shall be set aside as a trust for my grandchildren.
(b) The “Marital Trust” shall receive assets having a value equal to the amount needed to reduce the federal estate tax to zero.
(c) $200,000 or five percent of my distributable assets, whichever is less, shall be distributed to <name of charity>.
A.4 Residue. The “residue” of your probate estate or trust estate is the balance of the assets remaining in your estate or trust after all obligations have been paid and specific distributions have been made. You need to explain to us how the balance of your estate is to be divided up. Here are some options to consider, which can be applied to all or part of your assets.
(a) Children, By Right of Representation. To my children in equal shares, with the share of a deceased child going to his then living children, or, if none, to the other children. (Under Nevada law, this is the same as “per stirpes”.)
(b) Children, Per Capita. To my then living children in equal shares, with no share being allocated to the posterity of a deceased child.
(c) Percentages. Percentages or other fractions are specified because it is impossible to know what the exact makeup or value of your estate will be at your death. Make a list or table, making sure that everything adds up to 100%. Here is an example:
|Residuary Beneficiary||Percentage of Residue|
|ABC Health Foundation||5%|
A.5 Timing of Allocation. It is common to divide and allocate assets immediately upon your death, but it may be appropriate to defer the allocation of assets until the occurrence of an event, such as the death of a surviving spouse or when the youngest child reaches a specified age.
A.6 Alternate Allocation. For all types of gifts, specify alternate beneficiaries who will benefit if the named beneficiary does not survive you.
A.7 Excluded Persons. If you wish to exclude someone as a beneficiary of your will or trust, it is important to expressly say so, especially if that person has an expectation of being a beneficiary.
Once each beneficiary’s share has been identified, you need to describe how it is to be distributed. Not all beneficiaries — even those in the same class, such as children — need to receive their shares at the same time or even under the same criteria. Here are some options to consider:
B.1 Outright, Immediate Distribution. If a will provides for everything to be distributed as an immediate distribution, the will does not create a trust, and the estate will be closed when the final distribution is made by the personal representative. Similarly, if an inter vivos trust provides for everything to be distributed immediately upon death, the trust will terminate when all trust assets are distributed.
B.2 Testamentary Trust. A testamentary trust is created under a will that provides for the share of one or more beneficiaries to be distributed in any manner other than an immediate distribution — such as distributions in installments or a distribution that is delayed to a particular age or event, even if the term “trust” is not used.
B.3 Complete Distribution upon Triggering Event. A trust can provide for a single, complete distribution of a beneficiary’s share upon the occurrence of an event, such as reaching a specified age or receiving a college degree. It is common to allow the trustee the discretion to make distributions for health care (or at least emergency health care), education, and/or support until the triggering event occurs.
B.4 Income-Only or Unitrust Payments. You may wish to set aside a fund as a trust for someone to receive income during his or her lifetime or for a fixed number of years, preserving the underlying property in the trust (referred to as the “corpus” or “principal” of the trust) for one or more other beneficiaries.
(a) As an alternative to income-only payments, the trust can provide for the payment of a “unitrust amount”, which is a fixed percentage of the value of the trust assets (such as 3%, for example) that is to be paid each year, first from income and then from the trust principal. We encourage this method because it avoids having disputes over the types of investments that are to be made (which can either favor the income beneficiary or the remainder beneficiaries), and it allows the trustee to make investments that generate the best overall return, even if part of that return would normally be classified as principal (i.e., appreciation).
(b) Once the income or unitrust beneficiary dies or another specified triggering event occurs, you will need to specify who the next income or unitrust beneficiary is, or, if there is no new income or unitrust beneficiary, how and to whom the remaining assets are to be distributed.
(c) The beneficiaries who are named to receive benefits after the income-only or unitrust payments cease are referred to as the “remainder beneficiaries”.
B.5 Periodic Payments. Installments, such as:
(a) 10% a year for 10 years.
(b) One third upon your death, one third five years later, and the final third five years after that.
(c) One third at age 30, one third at age 35, and the final third at age 40[, with the ages being reduced by five years for a beneficiary who has a bachelor’s degree from an accredited college or university].
B.6 Discretionary / Supplemental Needs. Discretionary distributions throughout the beneficiary’s lifetime to supplement their other resources, with no distributions that would disqualify the beneficiary from receiving SSI, Medicaid, or other public- or private-assistance benefits. This can be especially appropriate for disabled children and aging parents.
B.7 Separate Shares or A Common Trust. When a share or fund is set aside for the benefit of multiple beneficiaries, such as “children”, “grandchildren” or “descendants”, the trust can be divided into separate shares for each of the beneficiaries, or the trust can remain as one common fund (sometimes referred to as a “single-pot trust” or a “pot trust”) for the benefit of the entire group. It is most common for a pot trust to be designed as a discretionary trust that allows the trustee to make equal or unequal distributions to the various members of the beneficiary group, usually based on need and circumstances. In a pot trust, the trustee should be given clear guidelines of the factors to consider in making distributions. If the common fund is to be divided into shares upon the occurrence of a triggering event, you need to tell us what that triggering event is and what is to happen to each beneficiary’s share thereafter.
B.8 Salary-Matching. An annual amount equal to a percentage (50%, for example) of “earned income” that is shown on the beneficiary’s income tax return (IRS Form 1040) for the prior year.4 This can be paid in periodic installments to allow for budgeting by both the trustee and the beneficiary.
B.9 Incentive Payments. Early distributions or additional distributions can be made to or for beneficiaries who participate in activities you want to encourage, such as college graduation, completion of a vocational training program approved by the trustee, honorable military service, being an at-home mother, Peace Corps service, AmeriCorps service, church-service missions, or service as a volunteer for the Red Cross or other community service group.
It is up to you to decide what is best for each beneficiary, both in terms of the distribution or distributions the beneficiary will receive and the timing or conditions of those distributions.
NOTE: This memo provides general information only and does not contain legal, accounting, or tax advice. For brevity, this memo is oversimplified and should not be relied on for any particular situation.
- A trust can be either (1) a testamentary trust created after your death under the terms of a will or (b) an “inter vivos trust” (or “living trust”) that is created during your lifetime through a written “declaration of trust” or “trust agreement”.
- A sample of what you might provide can be found at sample. Yours may be simpler or more complex.
- Gifts of stock, cash, and other property classified by the law as “intangible personal property” cannot be made on a separate list under the terms of a will.
- It is common to require that the income tax return be provided with an affidavit from an accountant or other tax-return preparing certifying that the return was actually filed with the IRS.