|Wikimedia says this is a rental home, I''ll trust them|
Many long-term trusts contain distribution clauses that state that the beneficiary will receive a certain portion of trust income every year, usually 100% and upon certain birthdays, e.g. their 30th birthday, the beneficiary is to receive a fraction of trust principal, e.g. 1/4. Of note, the latter beneficiary may or may not be the same as the former beneficiary. For example, the income beneficiary could be a child and the principal beneficiary could be a grandchild. A natural question that arises is "what is the difference between trust income and trust principal?" The answer to this question is quite simple, trust income relates to the profits derived from trusts assets and trust principal relates to the asset itself.
For example, assume the trust's sole asset was a rental home with Tommy as trustee and Bobby as the lifetime income beneficiary and Beatrix as the remainder principal beneficiary. Rental income derived from the home would be classified as trust income. The home itself would be classified as trust principal. During Bobby's lifetime, Tommy would distribute to him the income derived from the rental home and when Bobby dies, the home would be distributed to Beatrix outright and free of trust.
The main reason why clients tend to design a trust this way is to benefit multiple generations. For instance, they can make their children the income beneficiary and their grand kids the principal beneficiary.
Still, I am not overly fond of these long-term trusts for a couple of reasons. First, there is an accounting issue that must be addressed. Per California law, each beneficiary is generally entitled to an annual accounting. A trust that last for 30 years would presumably require an accounting on 30 separate occasions. The amount of paperwork that must be documented then would be staggering. Second, income tax rates for trusts are quite steep. If a trust earns roughly $11,000 in income, the trust has reached the top income tax bracket. In contrast, for regular income taxes, a person has to earn hundreds of thousands of dollars before they reach the top income tax bracket. Third, assuming there is real property involved, ongoing maintenance costs would be significant. Numerous parts of a home require substantial expense in order to maintain it, plumbing, the roof, landscaping, heating, cooling, electrical, etc.
In short, I rarely if ever advise a client to seek a long-term trust as the benefits rarely outweigh the costs. Regardless, it is the client's ultimate decision as to how they want to proceed, I just have to tell them of the risks involved.