By Steven J. Oshins, Esq., AEP (Distinguished)
Testing his theory that in every man dwells a good and an evil force, the reserved Dr. Jekyll develops a formula that separates the two, turning him into an argumentative estate planning attorney named Mr. Oshins who tells it like it is. Dr. Jekyll soon realizes he is becoming addicted to his darker self as he unleashes his opinions on the estate planning industry.
In this article, Dr. Jekyll and Mr. Oshins tackle the differences between a Staggered Distribution Trust and a Dynasty Trust. As expected, Mr. Oshins will provide a different view of the issue than that of Dr. Jekyll.
DR. JEKYLL’S VIEW: USE A STAGGERED DISTRIBUTION TRUST
Most trusts are designed as Staggered Distribution Trusts which are trusts that make mandatory distributions to the beneficiaries upon reaching certain ages. For example, many trusts pay out one-third of the assets upon the beneficiary reaching age 25, one-half of the balance upon the beneficiary reaching age 30 and the balance upon the beneficiary reaching age 35.
The philosophy used by the scriveners of these types of trusts is that the beneficiaries have multiple opportunities to learn from their mistakes. If the beneficiary wastes the first distribution, there are two more opportunities. If the beneficiary wastes the second distribution, there is one more opportunity.
I anticipate that Mr. Oshins will say that this staggering causes the beneficiary to lose creditor protection and divorce protection. However, my clients like to keep things simple and save accounting fees by avoiding a long-term trust.
MR. OSHINS’ VIEW: USE A DYNASTY TRUST
As usual, Dr. Jekyll is wrong! Just because most trusts are drafted as Staggered Distribution Trusts doesn’t make it right!
Creditor and divorce protection, as well as potential tax savings, trumps simplicity. The philosophy that a beneficiary should be given multiple mandatory distributions without any consideration of the resulting lack of creditor and divorce protection is simply wrong. Not to mention, this forces the taxable income earned though the assets into the hands of the recipient without any regard for whether the recipient is a resident of a state with a high state income tax.
Rather than force out distributions, the trust should instead be drafted as a Dynasty Trust. A Dynasty Trust is a long-term trust that continues for as long as applicable state law allows. During such time, the trust assets are protected from estate taxes and, if properly drafted, can be protected from creditors and divorcing spouses of the beneficiaries.
Instead of picking ages for mandatory distributions, a Dynasty Trust generally names the primary beneficiary as controlling trustee upon reaching a selected age, assuming the primary beneficiary is expected to be financially capable upon reaching that age. We call this a Beneficiary Controlled Trust.
The concept is that a financially capable beneficiary is better off receiving assets in a protected trust than receiving assets outright where they are exposed to creditors, divorcing spouses and with no ability to avoid state income taxes.
And with that, Mr. Oshins transformed back into Dr. Jekyll.
SUMMARY
Dr. Jekyll and Mr. Oshins have very opposite views about Staggered Distribution Trusts.
Mr. Oshins is argumentative, but he makes valid points. He is likely more correct than Dr. Jekyll is here because Mr. Oshins recognizes the value of creditor and divorce protection, whereas Dr. Jekyll seems to completely disregard it and believes that you simply grab a trust “form” and fill in names in the blanks with no regard for the consequences.
The claims made by both Dr. Jekyll and Mr. Oshins are opinions only and each of them is entitled to his own opinion, even if the other doesn’t agree. Mr. Oshins claims that he is always right and Dr. Jekyll is always wrong.
RELATED EDUCATION
If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:
- Estate Planning Techniques in a Time of Low Interest Rates
- The Installment Sale to an Intentionally Defective Grantor Trust
- The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
- Advanced-Level Estate Planning Sales & Marketing Kits
- Steve’s FREE State Rankings Charts
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor. Steve was also named one of the Top 100 Attorneys in Worth and is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates Lawyer of the Year in 2012, 2015 and 2018 and Tax Law Lawyer of the Year in 2016 and 2020. He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.