Trusts can be very flexible in meeting a family’s needs. But, needs can change over time. The key to a trust is flexibility. Let’s look at a couple fairly common situations and some solutions.
John and Jane consulted with an attorney who drafted a trust for them which started out revocable and became irrevocable upon the death of the survivor of them. The trust worked seamlessly while John and Jane were both alive. Then, when John died the trust continued for Jane’s life. At Jane’s death, there was $3 million in the trust. The trust held the assets in separate trusts for their three children, Bobby, Christine, and Dougie. One-third of the assets went into each of the subtrusts.
Each subtrust holds its $1 million in assets for distribution in the trustee’s complete discretion until the beneficiary reaches age 35. Veronica, Jane’s sister, was named the trustee of each trust. Once the beneficiary reaches age 35, the beneficiary becomes their own trustee and the distribution standard changes from complete discretion to distribution for their health, education, maintenance and support. This is a very common standard, especially when a beneficiary will serve as their own trustee. This “ascertainable” standard prevents the assets from being included in the beneficiary’s taxable estate.
One of the beneficiaries, Bobby, age 33, has creditor issues. The trust for Bobby’s benefit is completely discretionary while Veronica is the trustee. Bobby’s creditors cannot force Veronica to make any distributions to Bobby or to his creditors. However, once Bobby attains age 35 and the distribution standard shifts, the creditor would be able to force Bobby, as the trustee, to make distributions.
Another one of the beneficiaries, Dougie, developed a debilitating illness at age 30. Dougie receives help from Medi-Cal for his medical needs. Veronica uses the money in the trust for Dougie’s supplemental needs. However, once Dougie reaches age 35 and the distribution standard shifts, he will no longer be eligible for Medi-Cal because the trust resources will be deemed “available” resources.
The third beneficiary, Christine, is a successful professional. The trust for Christine’s benefit has worked as expected. Christine is responsible and is quite happy that in a few years she can take over the management of her trust yet keep it out of her taxable estate.
The same distribution plan seemed to be appropriate for each child when the attorney drafted the trust for John and Jane many years ago. However, now Bobby has creditor problems and Dougie has special needs which could jeopardize their inheritances.
If the trust has a Trust Protector, it may be possible to have the Trust Protector modify Bobby’s trust so Veronica can continue as trustee with a discretionary standard. Here in California, this would typically involve confirmation of the new trust terms by court petition. Some states allow the trustee to “decant” the trust into another trust drafted with the desired terms. Since California does not currently allow decanting, perhaps the situs of the trust could be changed to a state with a suitable statute. Then the trust could be decanted under the laws of the new state.
The trust for Dougie might have language which converts it to a “special needs trust” if he is reliant on public benefits such as Medi-Cal. If the trust has no such language, the Trust Protector, if any, may be able to convert Dougie’s trust to a special needs trust due to Dougie’s change in circumstances. Even if the trust were not drafted to include such provisions, like in the case of Bobby’s trust, perhaps Dougie’s trust could be decanted into a new trust with the appropriate terms.
Today, trusts can be drafted with more flexibility than ever. Also, even a trust which is not drafted with flexibility may be salvaged when the trustee works with an attorney knowledgeable in fixing trusts which are not working as intended. There are more tools than ever to fix trusts. However, these tools are complex and require the knowledge of an attorney experienced in their intricacies and use.
The attorneys in our firm are experienced in all aspects of estate and income tax planning, including fixing trusts that no longer work as intended. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up-to-date with information regarding all types of estate planning strategies and tools. You can receive more information about a complimentary review of your estate plan by calling our office at (408) 356-9200 or (831) 476-2400.