Last week, I wrote about the adoption of the Uniform Trust Code in New Jersey.  I believe that New Jersey’s adaptation of this uniform law will be very good for this area of the law. The Trust Code will bring clarity to a complicated area of the law that interests a great number of people.

A trust is a fiduciary relationship in which one person (or entity) holds assets for another individual (or entity).  A fiduciary is a person who has a duty of utmost care to hold assets for the benefit of another individual, typically called the beneficiary.

People often use trusts in their estate plans.  For instance, when planning for his death, Mr. Smith might want to leave his daughter’s share of his estate to a trust for the daughter’s benefit.  The daughter might have problems with drugs or might spend money to excess.

A trust would enable some other person, for instance, Mr. Smith’s son, to hold the daughter’s inheritance and to pay out the inheritance to the daughter in orderly increments.  Furthermore, the father could put a “spendthrift provision” in the trust that he created for his daughter’s benefit.

A spendthrift provision prevents the daughter’s creditors from reaching the assets in the daughter’s trust while those assets remain in the trust.  So, if the trustee continues to hold the assets in the trust, then a creditor of the daughter, who may even have a judgment against the daughter, cannot reach the assets in the trust that are being held for the daughter’s benefit.

As long as the trustee doesn’t distribute money from the trust to the daughter, her creditors cannot reach the assets of the trust.  If the daughter needed something (such as food or clothing or education or a vacation), the trustee could simply pay for those goods and services directly to the provider of those goods and services.  In this way, the daughter would never have the money from the trust in her name and her creditors could never reach the money, yet the assets of the trust could be used to pay for the goods and services that the daughter needs/wants.

A spendthrift provision could also protect the assets being held in the trust from any entanglement in the daughter’s possible divorce.  If the daughter were ever to get divorced, the money being held in a spendthrift trust could not be entangled in the daughter’s divorce.

So, the question might be, Why doesn’t everyone create trusts for their children?  Such a trust would protect the assets from creditors and divorce.  In fact, the Uniform Trust Code has a provision that allows the daughter to serve as sole trustee of her own trust and still protect the assets of the trust from her potential divorce or creditors.

The Trust Code was enacted into law about two weeks ago.  Before the enactment of the Trust Code, it was unclear if the same person could be sole trustee of a trust for her benefit and beneficiary of the trust and still receive the protection of a spendthrift provision.

Now that this concept has been codified into law, would I recommend trusts for children with more frequency?  Should most of my clients establishes trusts for their children in order to protect their inheritances from potential creditors or the potential for divorce?  I would say no.

I believe that people find trusts confusing.  Unless a person has real issues (for instance, drugs, alcohol, disabilities, or habitual credit problems), then creating a trust that will last the remainder of their life (when the individual might be 40 or 50 years of age) is overkill.

Moreover, I believe trusts have the potential of causing tensions where none exist.  For instance, assume that the daughter has been happily married for 20 years when Mr. Smith dies, but Mr. Smith created a trust for his daughter of which the daughter is the trustee and the reason Mr. Smith created this trust is to protect the assets from the daughter’s husband just in case the daughter gets divorced.  How do you think this makes the husband feel?

Also, assuming the daughter did get divorced, it would be wise for the daughter to resign from her role as trustee and allow the successor trustee, perhaps her brother, to serve as trustee. Now, the daughter must ask her brother for money, which tends to cause tensions between the brother and sister.

The bottom line is, trusts can be great, but only if there is a real need for the trust, not just because there’s a possibility something might happen. There’s a possibility I might win the Powerball, but it’s not likely.

Many people assume trusts only protect assets from taxes or probate, but a carefully written spendthrift clause can also shield beneficiaries from creditors, lawsuits, and poor financial decisions. Small drafting choices can sometimes make a very large difference later.