Ever take a close look at a keyboard? Why are the “j,” “k,” and semicolon under your primary fingers and why place the “e,” “n,” “t,” and period where you have to stretch your fingers to reach them? Answer—because on the first manual typewriters, pushing a button caused a key to strike the paper. If you typed too fast, the keys would get stuck. To avoid this problem, the keyboard was originally designed to limit how fast you can type. Fast forward to today. Keyboards are electronic, and yesterday’s solution is no longer needed. Yet we all still use the same outdated keyboard.
If you read most revocable living trusts (RLTs) closely, you’ll likely find examples of yesterday’s outdated ideas. Ninety percent of RLTs have a trust distribution provision that mandates the Trustee distribute assets out of the trust when the beneficiary reaches certain ages. (Maybe you’ve seen the trust provision distributing 1/3 of the trust assets when the beneficiary—usually a child—reaches age 25, ½ the remaining trust assets at age 30, and the remainder at age 35.) This provision was first used assuming the beneficiary would be mature enough to handle the trust assets at the specified ages. Today, many RLTs include this clause because—well, it’s always been there.
Unfortunately, even assuming your child becomes mature enough at the distribution ages listed in your trust, this provision may have serious negative consequences. Assets you leave in trust for your children can be well protected from bad things that may happen to them, such as their divorce or lawsuits against them. But with the mandatory trust distribution provision, if your child were to divorce in the future, their ex-spouse may receive half (or even more) of the trust assets in the divorce. Even if the divorce occurs before your child reaches 25, 30 or 35 (or whatever ages have been chosen), the provision coupled with laws in some states may allow the divorcing spouse to receive trust assets once your child reaches a distribution age. But if your trust did not have that mandatory age-based distribution provision, it could insulate all trust assets from your child’s possible future divorce.
The age-based distribution provision creates a similar result if your child has a creditor. For example, if your child is a physician who gets sued for malpractice or is at fault in a car accident, the creditor can reach trust assets as soon as your child is old enough to receive a distribution. Regardless of how mature your child is or may be in the future, would you want the inheritance you leave to be shared with your child’s ex-spouse or creditor?
People often assume that all revocable living trusts are equal. But many contain provisions that may have made sense yesterday, but are limiting and possibly detrimental today.