Lump Sum Vs. Guaranteed Income: Why Make Payments to Beneficiaries?

Often, when establishing a trust, rather than giving them a lump sum, it is desirable to have the trust make payments to one person for a period of time (called a “lifetime beneficiary” or a “payment beneficiary”), setting up a guaranteed income stream, and then after that to give what is left to another person (called a “remainder beneficiary”). Two common examples: make payments to my spouse for the rest of her/his life, then split what is left equally between my kids. Or, make payments to my kids for the rest of their lives and then give the balance to my grandkids or to charity.

Why use a Unitrust?

A Unitrust is one mechanism for doing this, and a good one. But there are others. I wrote recently about the advantages of a Unitrust . Our question here is: Why would you want to do this (make payments to beneficiaries) in the first place?

With a Spouse: When the recipient of the lifetime payments is the spouse, usually the reasoning is fairly straight-forward.
• The spouse may have assets of his-or-her own. Regardless the guarantee of a payment stream, perhaps along with lifetime rights to live in a house, will assure the comfort of the spouse for the rest of her or his life.
• Additionally, the Trustee may well have discretion to make additional payments if needed. But the main corpus of the trust is protected for later beneficiaries (usually children).
i) There is no worry that it will be lost to creditors of the surviving spouse.
ii) There is no worry that if the spouse remarries that the assets, or a portion of them, will be lost.
iii) There is no worry that the assets will be depleted in the event of a major illness.
iv) And, of course, there is no worry that the surviving spouse will ‘rewrite the estate plan’ to leave the assets to others (whether willfully or due to manipulation). This concern is more acute with later-in-life marriages.

With Kids: When the recipients of the lifetime payments are the children, some of the issues are similar but many may be different. They may include:

1. Protect from spouses. By holding the corpus in trust and making payments to your child, you insure that if your child should later divorce that the corpus of the trust will not be available for distribution in the divorce. Your child will still have his or her inheritance.

2. Protect from creditors. The portion of the inheritance still held in trust is generally not available to pay creditors who obtain a judgment against your child.

3. Protect from sickness. If your child should become terribly sick, the corpus of the trust is not vulnerable to costs for care. This allows the use of public benefits to assist with care, and the Trustee can supplement the care from the trust. This will result in a much better overall quality of care than simply depleting the assets and being broke.

4. Protect from heirs themselves—behavior issues. Sadly, some people simply hit rough patches in their lives and get involved in self-destructive patterns. Whether gambling, alcohol, drugs, or something else awful, the last thing you want to do is finance the problem. Not only can the trustee see that this does not happen, but there will be something left for better days.

5. Protect from heirs themselves—spendthrift issues. It is well known that lottery winners file bankruptcy at a greater rate than the general public. Frequently people just don’t deal well with ‘found money’. Many people, upon receiving a (to them) large sum of money, proceed quickly to spend a large sum of money. Sometimes this is nothing more than willful, flagrant spending. Sometimes a more insidious irresponsibility or even naiveté. Whatever the reason(s), the money is quickly gone with little to show for it. Likely not what you worked and saved for.

6. Protect from heirs themselves—incentive to work. Sometimes we will see people respond to an inheritance by taking a little time off. Like a few years. Why work when you can live off of the savings of someone else? Related to the former point, it is important to think about what your child may do if coming into what they may receive, and the effect it will have upon them.

7. Protection of the heirs themselves—guaranteed income for life. Simply put, you can guarantee—as much as anything in this life can be guaranteed—that your child will have income for life. And it may not be enough income to live off of, but that may be a good thing too. How much difference would another $1000.00 a month make to you? How much difference would it have made back when things were tight?

8. Stretch the benefit/value of inheritance. This is more of a big-picture thing. You are looking at the overall family-picture. You are forcing the assets to be saved. They will be (presumably) invested, meaning that they will generate income. So while payments are being made, which deplete trust assets, income is being generated to replace trust assets. The payments are offset, at least to some extent, by growth. So kids can have payments for the rest of their lives, and the balance can go to grandkids, charities, or some combination.

The idea of a trust making payments to a surviving spouse, especially in a second marriage, is really a pretty good idea. The idea of a trust making payments to your children may or may not work well for children and your situation. But it is something to at least consider in determining what is to happen after your passing.