Lately, I’ve been writing a good deal about trusts. This past summer, New Jersey enacted its version of the Uniform Trust Code. The Code is a series of statutes that address the law of trusts.
Before New Jersey enacted the Code, our trust law was a bit of a hodge-podge. Many of the cases concerning trusts were very old. Because of their age, the cases are difficult to understand. When someone tells you that they don’t understand legalese, they should try reading a case from the 1800’s. Back then, Judges wrote in a manner that is practically incomprehensible.
The Uniform Trust Code is nice because it modernizes the law of trusts and condenses the law into a short series of statutes. If you have a question about a trust, you can probably find an answer to the question simply by reading the Code.
When it comes to trusts, many people are confused by the very nature of a trust. What is a Trust? A trust is a fiduciary relationship. From a practical standpoint, a trust exists when one person, called the Trustee, holds property for the benefit of another person, called the beneficiary. The Trustee is a fiduciary to the beneficiary because the trustee owes the beneficiary the duty to hold the property with the utmost care.
So, broken down to its most simple terms, a trust is simply one person holding property for another person. If Mr. Smith dies and leaves his son John’s share of his estate to a trust, naming his daughter Mary as the trustee of the trust, then Mary is holding John’s inheritance from Mr. Smith for John’s benefit.
Now a trust can have all types of purposes. Perhaps the beneficiary of the trust is a minor or disabled or has problems managing money or has problems with drugs and alcohol or has a disability. These are various reasons that Mr. Smith might want to create a trust for his son John.
A trust might only last until the beneficiary attains a certain age—25 or 30 or 35. Or a trust might last the lifetime of the beneficiary.
A trust can protect the assets being held in the trust from the creditors of the beneficiary. For instance, if John were ever to be sued or to get divorced, a trust can help insulate the assets being held in the trust from John’s creditors or soon-to-be ex-spouse. This is accomplished through the use of “spendthrift clause,” which is merely a provision of the trust that says the assets being held in the trust are being held free of the beneficiary’s creditors.
One of the most interesting provisions of New Jersey’s Uniform Trust Code is a provision that says a spendthrift clause is valid even if the trustee is also the beneficiary of the trust. In other words, Mr. Smith could leave John’s inheritance to John to hold as trustee for John’s benefit and the assets being held in the trust can be protected from John’s creditors by placing a spendthrift clause into the trust.
The reason I find this provision so interesting is this. Many people come to me and are concerned that someday their son or daughter might die and the inheritance that was left to the child will pass to the child’s spouse. The concern is, the child’s spouse might remarry and the client’s grandchildren will not get the inheritance the client left to the son.
For example, Mr. Smith dies and leaves his estate to his son John. John dies two years later and John’s Will leaves everything to John’s wife. John’s wife remarries. John’s wife dies and leaves everything to her new husband, which includes Mr. Smith’s inheritance. John’s children receive nothing from Mr. Smith.
Now, since John could serve as trustee of a trust for his own benefit, Mr. Smith could leave John’s inheritance to a trust that Mr. Smith creates in his last will. John could be the trustee of this trust. When John dies, the trust could name John’s children, not John’s wife, as beneficiary. The trust could even continue until John’s children reach adulthood.
The trust could also have a spendthrift clause in it that protects the assets of the trust from John’s creditors and the creditors of the grandchildren. Mr. Smith’s money is safe for many decades from creditors and divorce.