Over the years in my law practice, I have found that there are a number of reasons why a client will establish a trust. The client may have minor child, a disabled child, a child who has troubles with drugs or alcohol, or a child who simply cannot handle his finances. All of these reasons are good reasons for a client to establish a trust.
Reduced to its most basic meaning, a “trust” is a fiduciary relationship through which one person or institution (called the trustee) holds the assets of the trust for another individual (called the beneficiary). A trust is the relationship, not the written document.
The written document that most people would call the trust is really the trust agreement. The “trust agreement” establishes the terms of the trust. The trust agreement should express the “grantor’s”—the person who established the trust—intent. The intent is the reason why the grantor established the trust, for instance, because of a minor child or a child who cannot handle his finances or a child who is disabled.
The terms of the trust tell the trustee how to distribute the assets of the trust to the beneficiary. The typical terms of a trust may say that the trustee is to make distributions to the beneficiary for the beneficiary’s health, maintenance, support, and education. A trust for a disabled individual may say that the trustee should make distributions to the beneficiary at the trustee’s sole discretion in a manner that does not cause the beneficiary to lose government benefits, such as Medicaid.
A trust offers many advantages over an outright distribution. For a disabled individual, having the assets pass to a special needs trust can mean the difference between the individual receiving government benefits (such as Medicaid) or not. Since many disabled individuals have very high medical expenses, maintaining government benefits can be very important.
A trust can protect the assets in the trust from the creditors of the beneficiary. A clause called a spendthrift clause can be inserted into the trust to prevent the creditors of a beneficiary from accessing the assets of the trust to pay the beneficiary’s debts. For instance, assume that Mr. Smith’s son, Joe, has a significant amount of debt. If Mr. Smith died and left his estate directly to Joe, then Joe’s creditors could access the inheritance to satisfy their debts from Joe.
On the other hand, if Mr. Smith left Joe’s inheritance to a trust for Joe’s benefit, even if Joe is named as the trustee of his trust, then Joe’s creditors could not access the assets of the trust to satisfy Joe’s debts. In this way, Joe benefits from his father’s inheritance in a way that protects the inheritance from Joe’s debt. After all, Mr. Smith’s assets were not Joe’s assets, so why should Mr. Smith’s assets pay Joe’s debts.
With certain trusts, the beneficiary could be the trustee of the trust. Joe, in my example, could be the trustee of the trust so long as there are individuals named as beneficiaries after Joe, for instance, Joe’s children (Mr. Smith’s grandchildren). But with some trusts, it is not a good idea to name the beneficiary of the trust as the trustee.
You would not want to name a minor child as the trustee of his trust. You would not want to name someone who has issues with drugs or alcohol as the trustee of his trust. And you would not want to name a disabled individual as the trustee of his trust. You do not want the government agency in charge of the benefits to claim that the disabled individual has too much access to the assets of the trust because the beneficiary is serving as the trustee of the trust.
In fact, because government benefits are very complicated, it is a good idea to consider naming a professional trustee of a trust for a disabled individual. If the trustee makes an improper distribution, the disabled beneficiary could lose his government benefits; understanding government benefits is essential. Even with a trust for a minor child or a child who has issues managing money, it may be appropriate to name a professional as a back up trustee in the even the family-member trustee can no longer serve.
Many estate plans fail to reach their full potential because the wrong person was placed in charge. A trustee’s responsibilities can last for years and involve difficult financial and personal decisions. Choosing someone trustworthy is important, but choosing someone capable of handling the job can be equally important.