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When Should I Specify Conditions on Distributing Income From a Trust?

A revocable living trust is a useful estate planning tool when you want to make provisions for your family members beyond your death. A trust need not distribute all of its assets upon your death. You may instruct your trustee to retain the trust principal and distribute only the income at periodic intervals to your designated beneficiaries. This can ensure your beneficiaries receive a steady stream of income for many years.

Ex-Wife Continues to Collect From Late Father-in-Law’s Trust

It is important to be as specific as possible when spelling out the conditions for any income distributions under a revocable living trust. A recent California probate case offers a useful cautionary example. In this case, a man created a revocable living trust in 1977 just before he died. The trust became irrevocable on his death and remains in force today.

The decedent wanted the trust, which currently has about $4 million in assets, to pay a monthly income to each of his sons. The trust further said that if one of his sons died, his wife—the decedent’s daughter-in-law—should continue to receive the same monthly income distribution for the remainder of her life. After all of the sons, and the daughter-in-law, have died, the remainder of the trust assets will be divided among the decedent’s grandchildren or their heirs.

As it turned out, the son and his wife divorced in 1989, about 12 years after the decedent passed away. The son himself died in 2013. The bank serving as trustee then asked the probate court whether it should continue making the son’s income distribution to his ex-wife. The trust itself did not account for the possibility of divorce or expressly state that the daughter-in-law had to be married to the son at the time of his death in order to receive income.

One of the grandchildren who stood to be a remainder beneficiary opposed paying income to the ex-wife. Obviously, as long as she was alive and receiving payments, the trust cannot be distributed to the remainder beneficiaries. But ultimately, the court approved a settlement between the parties allowing the ex-wife to continue as an income beneficiary of the trust.

A second dispute then arose with a different remainder beneficiary over whether the trust had to pay the ex-wife’s legal fees. In a recent unpublished decision, the California First District Court of Appeals reversed a probate judge’s decision to allow the trustee to pay the ex-wife’s costs out of the principal of the trust. The appeals court said the trust may still have to pay those fees out of the trust’s income.

Need Advice From a California Estate Planning Lawyer?

The time and expense of the above litigation might have been avoided if the decedent had thought to condition his income gift on the continued marriage of his son and daughter-in-law. This is why it is important to consider such contingencies when making an estate plan. Keep in mind, your will or trust may not take effect for several years, even decades, after you execute the documents, and many things can change in the interim. If you would like to speak with an experienced San Diego estate planning attorney about this or any other subject, contact the Law Office of Scott C. Soady today.

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