A grantor – the creator of a living trust – can allocate disbursements however he likes, both during his lifetime and after his death. It's his trust and he can set its terms. Therefore, if you've established your own trust, the power to decide when your beneficiaries receive money is all yours. If you’re a beneficiary, however, you're at the mercy of the grantor, and if the grantor has died, the right to dictate payments might transfer to his successor trustee. It depends on the type of trust the grantor created.
A sprinkling trust is a need-based trust. If it's also revocable, the grantor usually acts as trustee during his lifetime and a successor trustee steps in to take over for him if he should become incapacitated or die. Trustees of a sprinkling trust have full discretion to make trust fund payments when and how they see fit. This can be monthly, yearly, or for emergencies. Grantors typically design these trusts so that if one beneficiary has greater needs than the others, the trustee has the authority to write him a check whenever necessary. With a non-sprinkling trust, the trustee has no such flexibility. He must follow the terms of the trust documents. If the trust is irrevocable, these terms can't be changed. If the trust is revocable, only the grantor can change the timing of payments during his lifetime.
A spendthrift trust is more precautionary than a sprinkling trust – the grantor doesn't want at least one of his beneficiaries to get his hands on a lump sum of money all at once. This might be because the beneficiary is fiscally challenged and doesn't handle money well, or because he has an army of creditors breathing down his neck, ready to sue him and garnish everything he owns. It could even be because he's married to an unsavory individual and the grantor doesn't want a potential ex-spouse getting half his beneficiary's whole inheritance in a divorce. The trustee therefore metes out payments incrementally – possibly monthly – so only small portions of the trust fund are available to the beneficiary at any given time. His overall inheritance remains in the trust, safe from his creditors, his ex, even from his spending habits.
Simple Vs. Complex Trusts
Simple trusts must distribute their income. By law, they can't retain any earnings. If you're the beneficiary of a simple trust, you might receive payments monthly, biannually or even once a year – according to the terms of the trust documents and whenever the trust has income that it must distribute. A complex trust can hold onto some income and make payments to beneficiaries at the discretion of the trustee. It can also distribute principal, either according to the trust's terms or at the discretion of the trustee.
If you're the beneficiary of a trust, you might be better off taking monthly payments as needed rather than taking a lump sum. When the trustee transfers the trust's income to you, you must report it on your personal tax return and pay income taxes on the amount. Depending on how much your inheritance is, this could push you into a higher tax bracket and cause you to give up a higher percentage of your inheritance to Uncle Sam. If you're the grantor of a revocable trust and you're managing it during your lifetime, your asset's earnings are also reported on your own personal return. It might make more tax sense to transfer some of the trust's income to your beneficiaries monthly or incrementally each year so it's taxed at their possibly lower tax rates.
- Hemera Technologies/AbleStock.com/Getty Images
- Five Modes of Entry Into Foreign Markets
- Description of an Unstable Financial Situation
- Market Value Vs. Selling Value
- Tax Exempt Vs. Taxable Money Market Funds
- How to Invest in Treasury Money Market Funds
- Does My Earnest Money Count Toward Closing Costs?
- What Is the Difference Between a Money Market Fund & a Certificate of Deposit?
- Beginner's Guide to Money Market Funds
- Money Market Account Vs. Money Market Fund
- How to Measure FOREX Market Sentiment