When a person passes away, his property passes on to other individuals. If the decedent dies with a last will and testament, then his property will pass to the individuals he named in his Will. How property passes under a Will can vary greatly depending on the terms of the Will. Some Wills are very simple, “I leave everything to my wife, and if my wife predeceases me, to my children equally.” Some Wills can be quite complex, containing trusts to hold and manage money for the beneficiaries.
A trust in a Will is called a “testamentary trust.” The testamentary trust is created with words in the Will. Many trusts last for years, even decades. For instance, if Mr. Smith creates a testamentary trust for his son John and John is forty years old when Mr. Smith dies, the trust for John may last thirty or forty years. Because a trust may exist for decades, it is important to build flexibility into the trust and ensure that the trust contains certain key provisions.
A well-drafted trust will contain a “spendthrift clause,” which would shield the property in John’s trust from John’s creditors. If a creditor ever sues John, the creditor would not be able to reach the property in the trust.
Increasingly, I find my clients wanting to insert testamentary trusts into their Wills. Clients are concerned that a child’s creditors will reach the property they leave to the child or that the child will frivolously spend his inheritance or that the child will die and the inheritance will pass to the child’s spouse instead of to the client’s grandchildren. All of these issues can be effectively guarded against with a testamentary trust.
Assume that Mr. Smith dies. His Will leaves his estate to his four children equally, creating testamentary trusts for each of his four children. Mr. Smith was concerned that a child would die and the property he left to his son would pass to his son’s spouse instead of to his grandchildren.
The executor of Mr. Smith’s estate—in all likelihood, one of his children—will perform his duties as executor over the course of the months following Mr. Smith’s death. After the executor is done performing his duties, the estate will have been “settled,” meaning that all of Mr. Smith’s debts will have been paid, the estate’s debts will have been paid, and the inheritance of each beneficiary will have been distributed to the beneficiaries. .
The testamentary trusts, which are now fully funded because the executor has placed each of the four children’s inheritance in the trusts, may go on for years, even decades. Mr. Smith’s sons may have been around age forty when Mr. Smith died, and each son may live until he is eighty years old, meaning that each child’s trust may last for forty years.
Given the length of time that the trust may be active, I think it is important to build flexibility into the trusts. For instance, the tax laws governing trusts may change over time. If Mr. Smith dies in 2021, the tax law governing trust may change in 2030. If the trust is in Mr. Smith’s Will, the terms of the trust cannot be changed since Mr. Smith died in 2021. Mr. Smith’s Will became irrevocable the moment he died.
But if through the terms of his Will Mr. Smith appointed one or more of his children to be what is called a “trust protector” with the authority to modify the trusts in order to accommodate future changes in the laws governing the taxation of trusts, then that child who was given that authority could modify the terms of the trust to accommodate the change in tax law. In this way, even though the terms of the original Will do not accommodate a change that occurred nine years after Mr. Smith’s death, a person with authority, the trust protector, can change the terms of the testamentary trusts to accommodate the change in the law.
When you consult with an experienced certified elder law attorney, he or she is aware of these little techniques that can end up saving your family a great deal of money and concern.