Your assets should be distributed at the most appropriate time. The timing of an asset transfer can have significant tax effects, reducing the net amount of any distribution.
Your estate is often exposed to the financial and personal circumstances of your beneficiaries. You should consider the possibility that at the time a beneficiary inherits part of your estate, they could be a minor or a spendthrift, or be experiencing financial or relationship difficulties. The timing of the distribution is therefore critical. If the assets are distributed at an inappropriate time, they may be lost to creditors and ex-spouses or misused by minors and spendthrifts.
The best way to ensure that your assets are distributed at the appropriate time is to establish a discretionary trust (including a testamentary trust). Such a trust provides the trustee with full discretion and flexibility as to how, when and to whom the assets are to be distributed. There are a number of examples that illustrate this point. They are as follows.
- if a beneficiary is a bankrupt or has a number of creditors, the trustee may decide not to make any distributions to the beneficiary until he has been discharged from bankruptcy or is no longer in financial trouble. Delaying distribution in this instance would protect the assets.
- If a beneficiary is a minor or spendthrift, the trustee may distribute so much of the income and property from the trust as is needed by the minor or spendthrift from time to time, for example, for education and living expenses. Delaying full distribution in this instance would protect the assets.
- The trustee may use his or her discretion to distribute income in a tax effective manner. A greater amount of income may be distributed to those beneficiaries who will pay the least tax.
