Family Trust Options
Provisions for Surviving Spouse
For those trusts wherein the surviving spouse may be a beneficiary (marital deduction type trusts, irrevocable insurance trusts, etc.), the first choice to be made is whether or not the surviving spouse will even be included as a beneficiary. (In some cases, clients may want the "by-pass" portion of the trust to go directly to the children.) If the spouse is to be included as a beneficiary, there are a number of options to consider.
In most cases where discretion is given to the Trustee to make distributions of principal, it is presumed that for tax purposes none of the assets of the Family Share will be distributed to surviving spouse until the Marital Share has first been used. In that way the assets passing tax free at the surviving spouse's subsequent death in the Family Share can be maximized while the taxable assets in the Marital Share can be minimized.
Spouse as Sole Beneficiary
If the surviving spouse is to be the sole beneficiary of the Family Share, several different options are available here. One is to provide that the Trustee will have the discretion to decide how much of the income and/or principal is to be distributed. Typically, language would be included to the effect that the surviving spouse is to be primarily provided for, including “reasonable luxury,” without necessarily trying to preserve the trust for other family members at the surviving spouse's own death. Another choice is to require all the income to be distributed, and provide the Trustee with discretion as to distributions or principal. This discretion can be "liberal" or it may be more limited, such as providing for distributions of principal only in the case of some "emergency." Finally, another choice is to provide that all income be distributed, but prohibit the Trustee from making any principal distributions.
Spouse as Sole Beneficiary While Competent
In this case, the income and principal of the Family Share is to be used for the surviving spouse exclusively. The Trustee is able to decide how much goes to him or her, and typically it is provided that the spouse should be primarily provided for, including “reasonable luxury.” In the event that the surviving spouse ever were to become disabled, all issue (descendants) are added as beneficiaries in order to avoid locking money into a trust with nobody able to enjoy it, assuming all the medical and other needs of the surviving spouse are met.
Spouse and Under Age Children are Beneficiaries
With this option, the income and principal of the Family Share is to be used for the surviving spouse and such of the client's as are under age 25 (or any other age selected). The Trustee is able to decide how much goes to each although typically the spouse would be primarily provided for, including “reasonable luxury.” Only those children under age 25 are included as beneficiaries as the surviving spouse would normally be supporting them in any event, and it is best tax-wise if the children receive the money directly from the trustee, rather than from the after-tax income of the surviving spouse.
"Spray and Sprinkle" Options
With these options, the surviving spouse and all of the family members in any generation are included as permissible beneficiaries of the income and/or principal of the Family Share. With this choice, further direction can be provided to the Trustee. One choice might be to favor the surviving spouse. Another is to favor the children primarily. Or, it can be provided that the surviving spouse and children be treated more or less equally.
5x5 Powers
In addition to including the surviving spouse as a potential beneficiary of the Family Share, additional powers can be included to allow the spouse the right each year to withdraw from the Family Share an amount equal to five percent of the market value of the Family Share, or $5,000, whichever amount is greater. This kind of power enables the surviving spouse to be assured of a maximum access to the principal (within precise tax limitations) without having to rely on the trustee.
Powers of Appointment
Similar to the provisions includible in the Marital Share trust, another option to build in flexibility and/or give the surviving spouse greater control over the ultimate disposition of the trust assets is to include a special or limited power of appointment. The "typical" limitation on this power is to either limit the power only to the Grantor's descendants, to the Grantor's descendants and their spouses, or to anyone. The choice of which group the power should apply to depends upon the amount of flexibility the Grantor is willing to give. Many clients will limit the power to descendants only to make sure that the surviving spouse does not end up exercising the power in favor of a new spouse. For many couples in a second marriage with children from prior marriages, the choice is often not to include any such powers.
In the Family Share, the power of appointment can be given to the surviving spouse to be exercised during his or her lifetime, and/or the power can be limited to a testamentary power (i.e., one that the surviving spouse can exercise only through his or her Last Will and Testament).
Provisions for Children and Other Beneficiaries
Single Fund
For clients with young children, an attractive choice is to provide that the assets in the Family Share will continue as a single fund until the youngest child reaches some specified age, e.g., 25. Until then, all the children (and any descendants of the children) will receive as much of the income and principal of the Family Share as the trustee decides. The Trustee can give as much or as little as the trustee sees fit. Keeping the trust as a single fund is one way of ensuring that the youngest child receives the same benefits as the eldest from the “family money” rather than spending the youngest’s share for education, etc. This can be particularly important if the client (and/or spouse) dies just at the time the eldest has finished a formal education while the youngest still has major education expenses ahead. When all the children reach the specified age, the remaining trust assets will then be divided.
Outright Division
If all the children are older, e.g., all their educational expenses and other support expenses have been made, the Family Share can provide for an immediate division.
Types of Division
Once the Family Share is to be divided, the next choice is to decide whether the division should be made between only the living children or between both the living children and any deceased children with issue of their own then living (i.e., a division per stirpes or by "right of representation"). In the first case, if only the living children are included, any grandchildren may be "disinherited." The second case is generally more typical, where a deceased child's own descendants as a group would divide the share that otherwise would have been set apart for the deceased child.
Share For Living Children Immediately
Once a living child's share has been established, one choice is to provide for an immediate outright distribution to the child.
Share for Living Children in Stages
Another choice is to provide that what is set apart for a child will be distributed in various stages, typically when the child reaches a certain age. The child's share may be distributed to him half at age 25 and half at age 30. Other choices include distributing the child's share over a longer period, e.g., in thirds or even in fourths. The idea here is that if there is any concern that the child may not spend his inheritance "wisely," by giving him only part of his share at one time, it will not all be spent "foolishly." Typically, the Trustee is also given the discretion to give to the child as much of the income and/or principal from his share even prior to reaching the specified ages as the Trustee deems advisable. Thus, the child's share is not totally "locked up" until he reaches the specified ages.
Share for Living Children in Trust for Lifetime
Another option is to provide that any share established for a living child will be held for him in trust for his entire lifetime. (This type of approach is often referred to as a "dynasty" trust.) The advantage of holding the child's share in trust is that it can be protected against lawsuits (possibly including a spouse in the event of divorce) and can be kept out of the child's own taxable estate at his death someday, all without any practical limitation on the child's access to the assets. During his lifetime, the Trustee can give to the child as much of his share as the Trustee thinks is advisable. The Trustee can pay out all of the trust or none of it or anything in between. Obviously, it is presumed that the Trustee will do what is best under the circumstances, and that is one of the major advantages of a trust, i.e., the Trustee can be one's alter ego to make decisions after one’s passing. The Trustee can be directed to be "liberal" in distributing principal, rather than trying to preserve it for the next beneficiaries, but the discretion is given to the Trustee to do what the trustee thinks best. Alternatively, the Trustee can be directed to be "conservative" in distributing principal. In addition to directing the Trustee to be "liberal" or "conservative" it is also possible to provide each child with certain limited powers of appointment (similar to those described above regarding the surviving spouse). The child might be given a power of appointment to give away any or all of his trust share to any descendant of the Grantor. This power would enable the child to give part or all of his own share to his own children without requiring the Trustee's assent. The power could be even broader, perhaps including spouses as well as descendants, or even giving the child the power to give away any or all of the trust assets to anybody in the world--other than the child himself. Finally, the child can also be given the right each year to withdraw from his share an amount equal to five percent of the market value of his share, or $5,000, whichever amount is greater. Thus, even though the child's share might be held in trust for his benefit without his being able to control it fully, a broad range of powers can be given to the child which gives him great practical control over the trust.
Deceased Children's Shares
Shares created for the issue of a deceased child can also be distributed in a variety of ways. First, the deceased child might be given a testamentary power of appoint which enables the child to specify how he would want his share to pass. As with the various powers of appointment described above, such a power of appointment can be as limited or as broad as the client may want. The power may be limited to descendants only, or perhaps to descendants and spouses of descendants, or it may be as broad as enabling the child to appoint his share to anyone. To the extent such a power is either not granted or not exercised, the trust can provide that the deceased child's share will either continue in trust or be paid outright to the deceased child's own descendants. If the client's children are relatively young and are likely to have under age children of their own, keeping the deceased child's share in trust for his own children as a single fund until the youngest reaches a specified age enables the Trustee to use that money for the benefit of all the deceased child's children as needed. It is also possible to include the deceased child's surviving spouse as a permissible beneficiary, often with the limitation that if the spouse remarries then he or she will no longer be a permissible beneficiary.
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