May 2022 - Trusts & Estates and Elder Law Update

Trusts & Estates

and Elder Law Update

Trust Us, There’s a Trust That’s Right for You

Trusts are flexible vehicles that can be tailored to suit a person’s or family’s needs and unique circumstances. A Trust is simply a legal agreement between the person who creates the trust (sometimes known as the “Grantor”) and the person in charge of administering the trust (the “Trustee”). Once the trust is established, the Grantor (and perhaps others) fund the trust with assets for the benefit of the trust beneficiary or beneficiaries, and the Trustee manages the assets and makes distributions to the beneficiary or beneficiaries according to the trust terms. A Trustee’s duties and powers will be determined by the provisions in the trust document and the applicable State’s statutory and/or case law. There are a variety of ways in which a trust can be structured, depending on the preferences of the Grantor and the needs of the trust beneficiary. Following is a summary of some possible trust structures that could be used both in testamentary trusts (trusts created under a Will) or inter vivos trusts (trusts created under a separate trust agreement during the creator’s lifetime).

Trusts for a Term of Years

A trust created for a term of years (sometimes referred to as a “Stated Age Trust”) is any trust which lasts for a specified number of years, or more commonly, until the trust beneficiary attains a specific age or ages. Distributions to the beneficiaries can be in a lump sum, or can be structured to be paid over in stages upon the beneficiary attaining certain ages. By way of example, a common structure for a Stated Age Trust is for the beneficiary to receive one-third (1/3) of the trust assets at age twenty-five (25), one-half (1/2) of the remaining trust assets at age thirty (30) and the remainder of the assets at age thirty-five (35), after which the trust will terminate. Additionally, at any time during the trust term, distributions of income and principal can be made to the beneficiary at the discretion of Trustee.

Stated Age Trusts appeal to those individuals who want the trust assets to be protected while the beneficiary is maturing, but eventually want to give the beneficiary ownership over the assets to use as he or she sees fit. A potential downside of a Stated Age Trust is that the beneficiary may not be in a place in his or her life to receive the trust assets at the specified ages at which they are required to be distributed. Some such circumstances include the beneficiary going through a divorce, bankruptcy, litigation or experiencing mental health or addiction challenges. By forcing the funds out of the trust, those assets lose the benefit of protection from creditor and marital claims while simultaneously taking an asset that was outside of the beneficiary’s taxable estate and bringing it into his or her estate. Stated Age Trusts may include what we call a “hold-back” provision which gives the Trustee some discretion to continue to hold the funds in trust if it would not be in the beneficiary’s best interest to receive the trust funds when he or she attains the age of required distribution. While the holdback provision can be very helpful, it is not iron clad. Because the decisions to retain the fund or make the distributions is at the discretion of the Trustee, it is not as protective as a lifetime trust (discussed below) would be.

Lifetime Trusts

A Lifetime Trust, by its name, will hold assets in trust for the benefit of the beneficiary during his or her lifetime. There are no specified age or ages at which the Trustee must make distributions to the beneficiary. However, the Trustee may, at such Trustee’s discretion, make distributions in any amount to the beneficiary, including distributing the entirety of the trust (depending on the trust terms). This means that if a Lifetime Trust is created and the Trustee believes that it is no longer necessary to continue the trust, he or she may be able to distribute the entire balance to the beneficiary and terminate the trust (assuming the Trustee is independent, meaning such Trustee has no interest in the Trust).

Lifetime Trusts are beneficial as they offer the most protection from potential creditor and/or marital claims against the beneficiary and have the added benefit of keeping the trust assets outside of the beneficiary’s estate, if estate taxes become an issue. Potential downsides to Lifetime Trusts are that some people feel they are overly restrictive and can be seen as punitive. When weighing these issues, it is important to remember that the Trustee has power to make discretionary decisions regarding the trust assets. Furthermore, a responsible Trustee will administer the trust as the Grantor intended and in the best interest of the beneficiaries.

Trustee Discretion to Distribute

During the term of any trust (whether lifetime or for a term of years), the Trustee usually has discretion to make income and/or principal distributions to or for the benefit of the beneficiary for his or her health, education, maintenance, and support. In addition, a disinterested Trustee, if any is then serving, can be granted discretion to make Trust distributions for any reason that is in the beneficiary’s best interest.

In addition to discretionary distributions, a trust could also be structured to direct that a beneficiary receive a set amount of money per year or per month from the Trust. This could be all of the trust income or a specific dollar amount (which could be adjusted for inflation), or a certain percentage of the trust per year which would allow for the amount distributed to the beneficiary to be adjusted over time in relation to the value of the trust. For example, the trust could provide that the beneficiary will receive two (2%) percent of the value of the trust calculated annually and paid over in monthly or quarterly installments and if the trust asset values fluctuate, so will the payment. It should be noted, however, that if the beneficiary were in a position that it might not be beneficial to receive such a payment, the Trustee’s discretion to withhold the payment may be limited.

A beneficiary can also be appointed to be the co-Trustee of his or her trust along with a Disinterested Trustee. As a co-Trustee, the beneficiary would be able to make distributions to himself or herself for his or her health, education, maintenance, and support. With the cooperation of the co-Trustee, this structure would allow the beneficiary to have access to the funds while still retaining the benefit of built-in trust protections.

In addition to the trust provisions and structures set forth above, a Supplemental Needs Trust (“SNT”) can be created for beneficiaries who have special needs and/or are receiving government benefits. For more information on SNTs, please see our article, here.

There are numerous tax and non-tax considerations when one designs a Trust. If you are considering creating a trust and want to discuss your options, please reach out to one of the knowledgeable attorneys in our Trust and Estate Group who assist clients in the creations of all types of trusts on a regular basis.