6 tips on trust fund distribution to beneficiaries

When you have worked hard to build wealth, you probably also know what kind of legacy you’d like to leave after you’re gone. One way to ensure your assets are distributed in a way that fits this legacy are trust funds.

What is a trust fund?

A trust fund is a tool that allows you to distribute assets to a beneficiary after your death, rather than simply giving those assets to them outright, such as in a will.

Before you set up a trust fund, however, you need to establish a trust. A trust is a legal contract between at least two parties that sets rules for how assets will be passed on to beneficiaries. When set up properly, a trust allows you to create a trust fund.

A trust fund can be especially useful if your children or grandchildren are the primary beneficiaries and you’re worried about how they’ll handle inherited wealth.

Ideas for family trust fund distribution

Here are six ways to distribute the assets of a trust fund that could help create a legacy for your family, as well as help provide long-term financial stability to your beneficiaries.

1. Reward academic and career success.

You can attempt to influence certain behaviors for your heirs early in their life by basing trust fund distributions on school performance or earnings. This can be a powerful tool for helping to establish productive traits early in adult life.

As an example, let’s say your grandchild is in college. You could establish a rule in your trust that if they achieve a 3.0 grade point average or higher, they receive a certain amount of money from the trust for living expenses. If they don’t meet that GPA goal, they would receive a lesser amount.

If your grandchild is no longer in higher education and has started their career, the trust could state that they will receive a principal distribution up to 50% of their earned income from the previous year, to be distributed in quarterly installments. This could encourage them to strive to earn a better salary.

However, you should keep individual trust beneficiaries’ abilities in mind before attaching financial rewards to academic or career performance.

2. Match contributions to education savings.

To encourage a trust fund beneficiary to save for higher education, you could instruct the trust to make a matching contribution to their college savings fund every time they make a deposit. That way, they will carry less student loan debt after college, giving them a launchpad to greater financial success in life.

3. Encourage philanthropy.

For many people with significant wealth, philanthropy forms an important part of the legacy they’d like to leave. If you’d also like to get your beneficiaries interested in charitable work, a trust can include language that incentivizes philanthropy.

For example, you could make charitable gift-giving a prerequisite for any future distribution of trust assets to beneficiaries. If you currently lead or are on the board of the family business, you could require their participation on the board of directors. Or if a beneficiary works for or creates a nonprofit business, you could use trust assets to supplement their income.

4. Fund family reunions.

To encourage lasting family bonds, a trust can be granted the power to distribute funds for a family reunion every few years to help solidify the extended family and encourage the broader family to consider what kind of a legacy they’d like to build, just as you did when establishing your trust.

5. Distribute trust assets using a schedule.

Everyone achieves emotional maturity at a different pace. When you’re considering how and when to distribute trust assets to beneficiaries, you might be concerned that one or more of your beneficiaries might not be prepared to handle a large amount of wealth—emotionally or fiscally. For that reason, age-based distribution provisions are fairly common in trust funds.

In this situation, you could distribute funds in a timed cadence to allow beneficiaries to learn how to handle their newfound wealth gradually. For example, your trust could include a trust fund schedule that a beneficiary should receive one-third of the trust at age 25, one-half at age 30, and the rest at age 35, when they will have a decade of financial management under their belt.

Depending on your trust beneficiaries’ circumstances, it might also make sense to have principal discretionary provisions available to them when they’re younger for certain purposes, such as to buy their first home or start a business. You could then save the majority of the money for when they’re more mature.

6. Avoid being too restrictive on milestone-based distributions.

Be cautious about tethering distributions to achievements or life stages, such as graduating from college, buying a first home, getting married or having children. While you can control how your assets are distributed after your death, you cannot control your loved ones’ preferences or the circumstances of their lives.

Without careful consideration and controls, a milestone-based distribution strategy might not have the desired effect on the beneficiaries you leave behind.

No matter how you distribute trust assets, communicate your wishes

These trust fund distribution ideas can help you fine-tune your wishes and desired effects when drafting a trust. But don’t forget to communicate your wishes clearly to both your estate planning attorney and the trustee or trustees you choose to administer the terms of the trust. They are the ones who will help bring your legacy to life after you’re gone.

Learn more about trust and estate services from U.S. Bank.