Content area
Full Text
A problem often encountered by trustees is the inadvisability of making an outright distribution to a beneficiary because the beneficiary is mentally incompetent, incapable of handling his or her finances, facing financial problems, suffering from an alcohol or drug addiction, or would use the distribution for purposes the creator of the trust would undoubtedly disapprove of. This can be especially difficult if the distribution is a mandatory distribution upon a partial or full termination of a trust, as in the following examples:
* Upon turning age 25 next year, Rick is to receive an outright distribution of $2 million from a trust established for his benefit at his father's death. Rick is a member of an obscure religious sect and has already said that he will turn the distribution over to the leader of the sect.
* Joan has a severe drug addiction. At age 30, she received a distribution of one-half of the principal of a trust her mother set up. Within six months, she had spent all of the distribution supporting her drug addiction. In three months, upon attaining age 35, Joan will receive the balance of the trust principal, which is worth $500,000. Unless action is taken, this new distribution will undoubtedly go to support her addiction.
* Steve is a building contractor. While he has no current credit problems, 10 years ago he was in bankruptcy and emerged from it five years ago. Steve will receive an outright distribution of $3 million next month.
In this article, several courses of possible action to mitigate or eliminate the potentially adverse consequences of an outright distribution are examined, including
* making the best use of favorable provisions of the trust instrument
* facility of payment clauses
* use of a trust protector
* having the beneficiary establish a trust to receive the distribution
* distributing illiquid assets to the beneficiary instead of liquid assets
* judicial actions, such as reformation and construction
POSSIBLE SOLUTIONS
Provisions in trust instruments. The settlor, if he or she is concerned that a beneficiary should not receive outright distributions because of a possible negative consequence, may provide directly for alternatives in the instrument. The best approach is when the trust does not require outright distributions to the...