Trust discretionary distributions: couple questions

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e-lambda*t
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Trust discretionary distributions: couple questions

Post by e-lambda*t »

I am trying to get up to speed to better understand irrevocable trusts. For the trust in question, the trustee has indicated that they would like to initiate a distribution soon. For purposes of discussion, the value in the trust is approximately $4M and beneficiary annual expenses for current lifestyle are $100k/yr. Questions:

1. The trust indicates discretionary distributions are for health, education, maintenance, and support (HEMS). By internet search, I have found some papers providing guidance on what HEMS constitutes. I have seen recommendations that distributions to allow the beneficiary to make “extraordinary gifts” are NOT included in HEMS. Question: what is the definition of “extraordinary gifts”? Does it include gifts to charity? Gifts to people? How much flexibility is there? (I could not find online the Restatement of Trusts (Third), which might provide detail.)

2. If no distributions have been made for the first xx years of the trust (while assets were illiquid, no longer the case) can a larger distribution be made to account for distributions that in theory could have been reasonably requested and made in the previous years?

I am trying to learn and gather other questions to ask the attorney.

Thanks,

Lambda.
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FIREchief
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Re: Trust discretionary distributions: couple questions

Post by FIREchief »

Are there successor beneficiaries that might reasonably be expected to challenge the trustee's actions?
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Gill
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Re: Trust discretionary distributions: couple questions

Post by Gill »

Your first source of guidance is the trust document itself. Normally the trustee is given broad discretion to make the decision as to what is appropriate under the circumstances given the language of the instrument, size of the trust, anticipated duration of the trust, and any emphasis in the settlor's intent as to priority between income beneficiaries and remaindermen. Normally it is difficult to question the discretionary decisions of the trustee unless there is clearly an abuse of discretion. Further support can be found in the decisions of the courts as to how similar language has been interpreted in the past.

To avoid the possibility of bias or an arbitrary decision by one officer, most trust companies use a Discretionary Payments Committee to make these decisions rather than allowing the trust administration officer to make such decisions alone. In my view, this is a considerable advantage of using a bank of trust company in trusts of this nature.

Gill
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JoinToday
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Re: Trust discretionary distributions: couple questions

Post by JoinToday »

With a $4M trust and 2% dividends (assumption), the income to the trust is approximately $80K.

Tax rates on trusts are onerous. I would be taking out at most, if not all, of the trust income. Maybe the fees can take a significant chunk of the income.

Are you expecting to leave the remaining money to beneficiaries? Do you have a plan for spending the money? ($X dollars per year). Depending on the asset allocation, the trust will either stay the same or grow (in real terms) with only $100K per year withdrawal, with a standard 60% : 40% (stock:bond) asset allocation
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Topic Author
e-lambda*t
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Re: Trust discretionary distributions: couple questions

Post by e-lambda*t »

Thanks all.

FIREchief, re successor beneficiaries, there are no children, so no. There is limited power of appointment to charities. Remainder (if not appointed) goes back to family (other trusts).

Gill, the trust does have some additional language that relates to discretion: grantor’s primary interest was current beneficiary; limited power of appointment to charity and it is known grantor supported giving to charity; also indicates trustee may take into account assets of the trust versus future needs of beneficiaries. Some of these seem to provide some flexibility.

JoinToday, I agree on the thoughts on assets vs potential dividend (and other) income. Plan for spending is conceptual, in development. Focus would be on charitable giving, hence the specific question about the “extraordinary gifts.”
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