The question of delaying distributions from a bypass trust—also known as a credit shelter trust or an A-B trust—until a specific age is a common one for estate planning clients, and the answer is generally yes, but with careful consideration. Bypass trusts are designed to utilize the estate tax exemption—currently $13.61 million per individual in 2024— sheltering assets from estate taxes. However, the grantor—the person creating the trust—doesn’t have complete control over when and how beneficiaries receive distributions. This is where strategically delaying those distributions becomes crucial, balancing tax benefits with beneficiary needs.
What are the benefits of delaying trust distributions?
Delaying distributions offers several advantages. First, it allows for continued asset growth within the trust, potentially increasing the ultimate inheritance for beneficiaries. Imagine a trust funded with $2 million in growth stocks; delaying distributions for even five years could significantly increase the principal due to compounding returns. Second, it can protect beneficiaries from their own impulsivity or lack of financial maturity. Many clients express concern that a sudden influx of cash could be mismanaged by a young or inexperienced beneficiary. According to a recent study by the National Endowment for Financial Education, approximately 70% of lottery winners eventually spend all their winnings. Finally, delaying distributions can preserve assets for long-term care needs, should a beneficiary require it later in life.
How does the trust document control distribution timing?
The timing of distributions is meticulously defined in the trust document itself. A well-drafted trust will specify “triggering events” for distributions – milestones like reaching a certain age (e.g., 30, 35, or 40), completing a degree, or facing a documented financial hardship. The grantor can dictate that distributions occur in stages—a smaller amount at age 25, a larger amount at age 35, and the remaining balance at a later date. Ted Cook, a San Diego Estate Planning Attorney, emphasizes the importance of clear and unambiguous language in the trust document to avoid disputes among beneficiaries. For example, a clause might state: “Distributions shall be made in equal annual installments beginning when the beneficiary reaches age 30, provided they are actively employed or enrolled in a degree-granting program.” It’s important to remember that the trustee has a fiduciary duty to act in the best interests of the beneficiaries, even when adhering to the grantor’s instructions.
I had a client, Eleanor, who didn’t delay distributions…
Eleanor was a successful businesswoman who established a bypass trust for her two adult children, both in their early twenties. She wanted them to have access to the funds immediately after her passing, believing they were responsible enough to manage the inheritance. Unfortunately, her eldest son, Mark, quickly succumbed to peer pressure and used his share of the inheritance to finance a lavish lifestyle, ultimately losing it all within a year. Her daughter, Sarah, fared slightly better but lacked the financial literacy to invest wisely and gradually depleted her funds. Eleanor’s intent was to provide her children with a solid financial foundation, but the immediate access to funds resulted in wasted opportunities and financial instability. It was a difficult lesson for her family, and one we often share with clients considering immediate distributions.
But with careful planning, things can go right…
Another client, Robert, a retired engineer, came to us with similar concerns about providing for his grandchildren. We crafted a trust that stipulated distributions would begin when each grandchild reached age 25, with increasing amounts allocated at ages 30 and 35, contingent upon completing a four-year college degree or demonstrating financial responsibility through consistent employment. One grandchild, Emily, used the funds to finance her medical education, becoming a successful doctor. Another, David, invested his distributions in a small business, which thrived and provided him with financial independence. Robert’s proactive approach, combined with a well-structured trust, ensured that his grandchildren received the resources they needed to achieve their goals, building a legacy of financial stability and success. This is the outcome we strive for with every client, and the reason why careful planning is paramount in estate planning.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
Map To Point Loma Estate Planning Law, APC, a trust lawyer: https://maps.app.goo.gl/JiHkjNg9VFGA44tf9
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