How to Make Discretionary Distributions of Trust Funds

Trust instruments usually give some guidance regarding what sorts of discretionary distributions a trustee can make to beneficiaries. Discretionary powers may be narrowly prescribed in the trust instrument, limiting the types of possible distributions. In many cases, however, these powers are open to interpretation. Discretionary powers are often used when making distributions to the beneficiary for his or her health and well-being, educational purposes, home ownership, or business endeavors.

Ensuring the beneficiary’s health and well-being

A trustee may have the power to make distributions to ensure the health and well-being of the trust’s beneficiary and his or her family. Sometimes these distributions are limited to covering medical expenses by the trust instrument. However, the health and well-being standard can usually be interpreted to include almost anything the trustee feels will add to the beneficiary’ general well-being. A vacation or ballet lessons are examples.

Paying for the beneficiary’s education

Saving for education inside a trust allows for some freedom when paying for that education. If the beneficiary receives merit scholarships or chooses not to go to college, the money can easily be used for other purposes.

The discretionary power to make distributions for education isn’t limited to postsecondary schools. You may also use trust monies to pay for private primary and secondary education, supplemental educational programs, educational summer camps, tutoring, or even to buy a computer. Like the health and well-being standard, a trustee’s power to make educational distributions is often flexible.

Should you fund the beneficiary’s purchase of a home?

Few trust instruments include specific language allowing distributions to a beneficiary for the purpose of purchasing a house. But few instruments explicitly prohibit you from making distributions for down payments or the total purchase price of a house.

Consider the trust’s resources and the beneficiary’s decision making skills when you navigate this gray area. Be certain, when making your decision, that the beneficiary can afford the house’s ongoing expenses, maintenance, and real estate taxes.

If you think the beneficiary should live in stable housing rather than going from rental to rental, but you’re not sure he or she can afford the upkeep and taxes on a house, you have the option of having the trust purchase, and own, the property. This way, you know that the bills are being paid, and you can arrange regular maintenance inspections.

Starting a business: Consider the beneficiary’s business plan

The decision to distribute trust funds for the purpose of allowing the beneficiary to start or additionally capitalize a business depends largely on your confidence in the beneficiary and his or her business plan. Request and study the business plan and make your judgment based on sound business principles.

Even if you decide against a distribution supporting the beneficiary’s business, you may want to loan the money to the beneficiary, based on the strength of the business plan. Have the beneficiary sign a promissory note requiring repayment of the principal and interest at market rates. The IRS issues Applicable Federal Rates every month, giving the minimum interest rate you can charge on a loan considered a fair market rate.

Trustee’s discretion: Make informed decisions

If a beneficiary asks for a distribution and the trust instrument isn’t clear about such a request, you need to decide. Ask the beneficiary lots of questions and review third-party documentation when available. You should deliberate carefully. Take what you know about the beneficiary into consideration. Remember, you’re not required to dispense money just because a beneficiary requests it.

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