Is the current beneficiary entitled to discretionary principal distributions? Do you understand the standards which are listed in the trust agreement for making principal distributions? Do you need to consider the impact of all principal distributions on the remainder beneficiaries?

Answer

The trustee must be careful, consistent and even-handed in making discretionary principal payments to a current beneficiary. Typically, the trust agreement will spell out specific circumstances when the trustee may distribute principal to a current beneficiary, such as for that beneficiary’s health, education and welfare. The current beneficiary may also have a right to withdraw the greater of $5,000 or 5 percent of the trust’s market value at the end of the year. The trustee must keep in mind that any distributions from principal ultimately reduce the amount that will be distributed to the remainder beneficiaries. Additionally, any distributions from principal reduce the amount invested to produce income.