One of the key decisions when considering leaving a financial legacy behind for loved ones in a Trust is whether to provide access to the money as a lump-sum or in instalments in the event of death. It should be reiterated that, in a Trust structure, there is no standard way of distributing assets to the beneficiaries. The settlor of the Trust decides how assets should be disbursed.
For example, the settlor can determine that the beneficiaries receive the Trust assets directly with no restrictions. In the event of the settlor’s death, the Trustee can write the beneficiary a cheque, give them cash, and transfer real estate by drawing up a new deed, or selling the house and giving them the sales proceeds. Meanwhile, if properties in Trust are rented out, the beneficiaries can also derive regular rental income from the Trust. This can potentially lock in a predictable income stream for them over an extended period. While this type of distribution is straightforward, it doesn’t come with any protections which may be important to some settlors.
It is natural for many beneficiaries to prefer to receive their legacies in a lump-sum, but what if they have not handled large sums of money before? Does the recipient have the financial maturity and savviness to ensure that the legacy is not spent frivolously? Furthermore, there is a chance that beneficiaries of a large sum of money will be a victim of fraudulent or misguided financial advice, or financial scams. This might see them squander the legacy faster than expected.
As an example of potential dangers, The Straits Times recently reported an “epidemic of scams” where victims in Singapore have lost close to S$1 billion in the last five and a half years. Police reported that 90% of the scams in Singapore originated from overseas. Such news is likely to make people somewhat uneasy about leaving a lump-sum to their beneficiaries, especially if they are minors. They may lean towards making staggered payouts instead. There are bound to be complaints from some beneficiaries but in the long run, this may be the best option.
Advantage of staggered payouts
Staggered payouts are typically targeted at beneficiaries who may not be financially savvy enough at the time of disbursement. For example, the settlor may choose to distribute Trust funds on a timely basis, like monthly, or only after certain events that trigger disbursements, such as when the beneficiary turns 18 or gets married or has her first child.
A Trust can also make incremental payments over the years, or even make distributions based on the Trustee’s assessments. The Trustee can be entrusted to determine when and what a beneficiary receives from the Trust. For example, a discretionary Trust is commonly created for beneficiaries who have trouble managing their money. This suggests that the Trustee has to be someone who is known to the beneficiary and also trusted.
If a settlor has chosen staggered payouts to the beneficiaries, the Trustee must also be able to manage the Trust assets that lends potential for the assets to grow. In other words, the Trustee makes investments decisions, directly or indirectly, that will enhance the nest egg. This should increase the value of the Trust and in turn add value to the benefits that go to the beneficiaries. In this way, a settlor could potentially leave an expanding nest egg for the beneficiaries, even after death.
Finally, the option of staggered payouts can also protect beneficiaries from creditors. If a lump-sum is handed to a beneficiary, the Trustee has no control over what happens to that money. Creditors may lay claim to the assets, or the assets could be eroded or lost in a divorce or bankruptcy. By keeping the assets in a Trust, and staggering the disbursements, there is more control over assets. They can be protected over a longer period of time.
In the next blog post, we look at how a Trust can prevent the sale of property in the event of death