As any estate planning attorney will tell you, estate planning is important, because the future is uncertain. But it is that very uncertainty that makes estate planning more difficult. In the past, estate planning options, like certain trusts, offered protections from creditors or taxes at the expense of flexibility. Planning for flexibility in your trust is possible, with the proper guidance.
None of us has a crystal ball. We all want to provide for our loved ones as thoroughly as possible, but there's no foolproof way to predict what their needs and capabilities will be. You probably want your beneficiaries to have access to trust distributions when they truly need them, but not so much access that you might as well have left them the assets outright.
Below are a few options for creating a trust with the flexibility to meet your beneficiaries' unforeseen needs, while protecting their interests.
Supplemental Needs Trust Provisions
What if a surviving spouse or a beneficiary has a disability or is incapacitated (Alzheimer's for example)? What then? If a person in such a condition (we refer to as a "special needs person") were to inherit directly, that would create multiple problems. A special needs person may need valuable government benefits, such as Medi-Cal. An inheritance may disqualify them from receiving such benefits. But if their inheritance is distributed to a Supplemental Needs Trust, it's not considered an asset of the special needs person for purposes of qualifying for government benefits. A trustee that you designated will manage the Supplemental Needs Trust for the benefit of your surviving spouse or beneficiary. We include Supplemental Needs Trust provisions in all of our trusts.
Personal Asset Trust
What if your beneficiary is a poor manager of money? Or has a drug problem? A problem marriage? Or is in a high risk occupation? Instead of receiving their inheritance outright, they would receive it in an asset-protected trust that we call the Personal Asset Trust. I would recommend setting up the Personal Asset Trust for all beneficiaries, even if they are responsible. A responsible beneficiary could be the trustee of their trust. You just never know what is on the horizon. Half of all married couples end up in divorce. Divorce is the most common reason for an adult beneficiary losing half of their inheritance. This trust will protect a beneficiary's inheritance from a community property claim.
Giving Discretion to the Trustee
Some trusts provide for distributions to be made to beneficiaries at certain intervals or ages, or upon certain events, such as graduation from college. There are a couple of potential problems with this approach. Creators (grantors) of trusts often pick these ages or milestones in an effort to ensure beneficiaries are mature enough to manage distributions, but there's no guarantee that they will be. Another problem with such trusts is that if distributions are mandated at certain points, creditors of beneficiaries may be able to reach those distributions.
Enter the discretionary trust. Here, the power to make distributions is within the trustee's discretion. A trust may be completely discretionary, giving more decision-making power to the trustee, or the grantor can establish standards for distributions. A common standard is that the trustee may make distributions in their discretion for health, education, maintenance, and support.
Because beneficiaries are not entitled to trust distributions, trust assets are generally beyond the reach of beneficiaries' creditors -- not to mention beyond the reach of spendthrift beneficiaries who might mismanage assets. The Personal Asset Trust, discussed above, is the best option.
Limited Powers of Appointment
Limited powers of appointment give beneficiaries the right to appoint trust assets to another person or persons, generally at their death. Let's say John, the grantor, creates a trust with his daughter Alice as beneficiary. Alice has 3 young children, Dylan, Emma, and Palmer. She intends to give each child an equal share in trust assets.
However, after the children are grown and Alice is nearing the end of her life, she realizes that might not best serve their needs. Dylan is independently wealthy. Emma is a social worker and earns little money. Palmer is a stay-at-home parent dependent on her husband's limited income. If John had granted Alice limited powers of appointment, she will have the ability to direct assets to the children most in need.
Appointing a Trust Protector
Especially for trusts that are intended to be in effect over a long period (such as the Personal Asset Trust), a trust protector can offer needed oversight and flexibility. A trust protector is not the trustee, but a separate person (such as an estate planning attorney) or entity who has powers over the trust.
A trust protector's role is to address issues that were not anticipated or foreseeable when the trust was created. The trust protector may be able to remove trustees who mismanage assets or alter administrative provisions to respond to changes in the law.
If you want the benefits of a trust, such as probate avoidance and control over assets, but want to preserve flexibility for unforeseen circumstances, contact us to discuss options. We invite you to contact our law office with any questions you may have about planning for flexibility in your trust.