How Trusts Work, Part II

By Doug Casarella – St. Louis, MO Attorney and LegalBuffet.com writer

In part one of this article, we looked at the most elemental aspects of what a trust is and the legal names associated with them. In this part, we will look at how they can operate once they are in existence.

Distributions are when the trustee takes money out of the trust and gives it to one or all of the beneficiaries, based on the language of the trust. Distributions can either be made out of the trust principal (the assets in the trust) or out of the income generated by the principal, or both. Distributions out of principal have the consequence of depleting the trust, whereas distributing only income will keep the trust level. If there is no distribution, the trustee will add the income to the principal, thereby enlarging the trust.

Trust distributions can be either mandatory or discretionary. If the former, the trustee must make regular distributions based on the trust’s terms. If the latter, it will be in the trustee’s judgment as to when to give anything to the beneficiaries (this is why trustee selection is so important). When all of the trust assets are distributed, it’s called termination. In a revocable living trust, this will likely happen after the death of the settlor and/or the settlor’s spouse, who are almost always the present beneficiaries. Upon their deaths, the trust will pay out to the remainder, the future beneficiaries. This can be either as a direct payout from the trust, or done in staggered fashion, keeping the trust in existence longer.

Once the trust is created, modifications can be challenging based on the nature of the trust. Trusts can either be irrevocable or revocable. An irrevocable trust is true to its name in that once it is created, the settlor no longer has the power to undo the trust. It would require the settlor and everyone who may have an interest in the trust to persuade a court to make a change. Revocable trusts have the benefit of being much more flexible and can be changed as your needs change.

Hopefully this article has given you a better sense of how a trust operates. Going forward, when you create your estate plan, this knowledge will make you more comfortable that you have made the right choices in securing your future.

Now that you know more about trusts, are you interested in learning more? Do you need a living trust?

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