Posted by
Keystone Law Firm
on 10/30/2023
Why Staged Withdrawal Rights Are A Bad Idea & A Better Way To Handle Trust Disbursements
We sometimes accomplish things in stages. First we crawl, then we walk, then we talk, and so on. Everything is done in the right season or time. Trust payouts are often handled in stages also. However, sometimes staged withdrawal rights are not the best way to handle trust disbursements.
What Are Staged Withdrawal Rights?
Some trusts are set up to be disbursed in one lump sum to the beneficiary or beneficiaries. Other trusts are designed to last for generations. One of the most common ways to structure a trust is to stagger or stage the beneficiary’s withdrawals.
For example, Don Anderson set up a trust and named his son, John, as the sole beneficiary. He structured the trust so that John received a certain percentage of the trust assets at age 25, another disbursement at 30, and the final full disbursement at age 30.
Sometimes this is done so the beneficiary will not lose their entire inheritance through bad judgment. The hope is that the beneficiary learns from handling the first disbursement badly, and does better with the second and third payouts.
Why Are They A Bad Idea?
If your beneficiary is able to withdraw his or her money from the trust, his creditors can also. And his divorcing spouse. And anyone who gets a civil judgment against him. Setting up a trust with payouts based on age could make your heir’s share of the estate vulnerable.
There’s the possibility that an heir will receive the first payment from the trust and waste it because they know more money is coming.
Also, one heir might be a responsible member of society at age 25. Another at the same age might be an addict or have a gambling problem or be fiscally irresponsible. Picking an arbitrary age is no guarantee that your beneficiary will be in good shape to take on a sizable inheritance.
Is There A Better Way?
Instead of setting arbitrary age deadlines for trust disbursements, the trust could include payout provisions. For an heir to receive a money from the trust, he or she might have to meet certain criteria.
It’s also possible to set up a protected trust and name your child as trustee (or successor trustee to take over when you die) and beneficiary. As trustee, your child decides when – or if – to make disbursements to himself or herself. This way usually offers some protection while allowing the beneficiary to make responsible decisions.
Learn More About Trusts
At Keystone Law Firm, we use our estate planning experience to help clients like you develop comprehensive estate plans. Call us at (480) 418-8448. We offer services for clients throughout Arizona, including Chandler, Gilbert, Sun Lakes, Tempe, Phoenix, Mesa, Scottsdale, and Apache Junction.
Keystone Law Firm
2701 W. Queen Creek Rd. #3
Chandler, AZ 85248
(480) 418-8448
https://www.KeystoneLawFirm.com