To Protect Beneficiaries, Use Specifically Tailored Trusts

Deciding what your loved ones get – or don’t get – after you are gone can be difficult. It’s even tougher if those to whom you wish to leave your hard-earned assets are not responsible with money or lack values you hold dear. A trust with tailored provisions is a possible solution. Leaving an inheritance in trust has many benefits, and one of them is the ability to create a document that specifically suits each beneficiary’s situation. These trusts are commonly referred to as spendthrift trusts, but a better description might be “beneficiary protection trusts” because that’s their main function – protect beneficiaries.

To be most effective, a trust of this kind will provide that someone other than the beneficiary be trustee. The trustee can be another family member, a family friend, a bank, or licensed fiduciary (either an individual or an entity such as Fleming & Curti). The trust then spells out how the trustee is to use trust assets for the beneficiary. Whoever creates the trust can add as many specifics as he or she desires. If you are the creator, consider: 1) how much freedom you want the trustee to have when making distributions, ans 2) how much certainty you want the beneficiary to have for when funds might be available.

Examples of Levels of Discretion that Protect Beneficiaries

None:  The trust spells out the exact purposes for which distributions can be made. For instance: “The trustee shall make distributions for health insurance premiums not paid for by an employer and insurance copays for necessary medical procedures and medication.”  In this case, the trustee must pay and only for the items specified.

Some:  The trust explains purposes for distributions, but adds some flexibility. “The trustee may make distributions for health insurance premiums, medical procedures or medications, taking into consideration all resources available to the beneficiary.”  In this case, the trustee can pay but he or she must assess whether there are other funds that could foot the bill instead.

Total:  The trust lets the trustee be the decider. “The trustee, in his or her total and unfettered discretion, may make distributions as he or she determines are in the best interests of the beneficiary.”  In this example, the trustee could make distributions for anything at all – or, depending on the circumstances, decline to distribute anything.

Add-Ons Can Enhance Effectiveness

If you choose limited discretion, other provisions can add flexibility. The trustee can have the power to decline to make distributions in certain circumstances. For instance, if a beneficiary becomes involved with drugs, alcohol, or gambling. The trust could authorize that payments for emergency situations go directly to medical  facilities, and not to the beneficiary.

Such a trust should always include what’s known as “spendthrift” language to further protect beneficiaries. These terms shield the trust from beneficiary creditors by prohibiting a beneficiary from using the trust as security for a loan or to satisfy debts.

These trusts also can help promote values. You can direct distributions to encourage education, contributions to society, or entrepreneurial efforts.

There are some legal limitations to restrictions; a trust cannot be unreasonable or against public policy. Provisions that punish a beneficiary for getting married might not withstand legal challenge; public policy favors marriage.

Details Can Help or Hinder Administration

If a trust like this sounds like it would work for your loved ones, consider:

  • Does the trustee enough flexibility to respond to changing circumstances?  You can limit distributions to health and education or a certain dollar amount per year. But, say, your beneficiary is jobless due to a global pandemic. You probably want the trust to be able to help.
  • Is the trustee power so flexible that the beneficiary has little or no ability to challenge a trustee’s actions?  If you give the trustee absolute discretion, it can be difficult for a beneficiary to hold an abusive trustee accountable. Consider naming co-trustees as a check and balance or appointing a trust protector to  intervene in disputes.
  • Do the terms create interpretation problems?  If you prohibit a “hedonistic” lifestyle, does your named trustee have the ability – or desire – to make such a judgment?  If your trustee is a family member or close family friend, will he or she want to make that call?  Would a bank or other institution?  Consider consulting with your prospective trustees regarding the terms and whether they will accept the trusteeship.
  • Do the terms create a complicated administration and potentially high fees? A lot of requirements can create additional work for the trustee. A trust might require a trustee to look into a beneficiary’s lifestyle choices or review drug tests. These types of provisions may act as a disincentive to serve or result in higher fees.

Crafting a trust specifically to protect beneficiaries requires careful consideration of both the trustee’s job and the beneficiary’s potential needs. The benefits to a beneficiary who needs assistance can be priceless.

 

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