Trust in Trusts

William G. Morris is the principal of William G. Morris, P.A. He and his firm have represented clients in Collier County and surrounding areas for over 35 years. His practice includes litigation, personal injury, estate planning, probate, business law, construction law, landlord-tenant law, condominium and homeowners’ associations, divorce, real estate closings and debt collection and defense.

The information in this column is general in nature and not intended as legal advice.

Most people agree that avoiding probate is a good thing. Most people also know that a revocable trust can avoid probate. Under modern trust law, a person can be trustee of his or her own trust.

A person creating a trust is referred to as the grantor or settlor. These terms are interchangeable. A revocable trust is also known as a revocable living trust or living trust, all of them being the same thing.

A grantor can do whatever the person wants with assets in his or her trust during life. At death, the assets avoid probate because they are owned by the trust and are not treated as personal assets of the decedent. That makes the revocable trust a simple and flexible way to avoid probate. Revocable trusts also have the benefit of one-stop shopping. If the grantor wants to change distribution, all the grantor has to do is make a change to the trust.

Most people don’t know that trusts can be used for a lot more than simply avoiding probate. They can be tailored to meet specific needs or problems. That is particularly true when a trust is established after someone dies to provide for a beneficiary. This can be done in a will or as part of the direction for distribution under a revocable trust.

The most common trust after death is a trust established for a beneficiary who is not of an age the grantor wants to have unlimited access to funds. The funds are held in trust for benefit of the beneficiary until the beneficiary reaches a certain age. In some cases, the trust provides that distribution shall be made to the beneficiaries at different ages (i.e., part at 21, part at 35 and part at 45 years of age). Trusts for such beneficiaries can authorize the trustee to distribute income and principal as the trustee deems appropriate for the beneficiary or can limit use to such purposes as education and medical care.

At other times, the grantor wants to provide a lifetime safety net for a beneficiary. Assets left in a trust for the beneficiary may include directions that the assets be retained and administered to supplement the beneficiary’s income or that the beneficiary receive a weekly or monthly stipend of a certain amount until all of the assets are distributed.

Minority or young age is not the only consideration in establishing a trust for a beneficiary. The grantor may need to protect a beneficiary from the beneficiary’s weakness or frailties. Drug and alcohol abuse and gambling are frequently the reason for a grantor to decide that the beneficiary should not get a large amount of money at one time. The grantor must then decide how assets should be administered for benefit of the person suffering from such problems and the trust tailored to both provide for and protect the beneficiary.

The trust can include a provision that prevents access to the assets directly by the beneficiary and prevents the beneficiary’s creditors from reaching assets as well. That provision is known as a “spendthrift” provision and is particularly useful when the beneficiary has a history of poor money management.

Another use for trusts after death is to make sure funds don’t fall into the wrong hands. Some parents are not particularly pleased with their child’s spouse and that is especially true with respect to a child’s former spouse. Those parents want to make sure that the spouse or ex-spouse doesn’t get anything they leave to the child. Establishing a trust for benefit of the child means the child will benefit but not own the assets. That means the assets cannot be given by the child to the spouse, either directly or indirectly.

Some grantors want to take care of one beneficiary for that beneficiary’s life and make sure assets later go to another beneficiary or beneficiaries when the first beneficiary dies. That is often the case in a second marriage, when the grantor wants to take care of his or her spouse and have the remaining assets go to the grantor’s children from the first marriage.

Maintaining or creating eligibility for government benefits can be another use for trusts. A disabled child may be eligible for or receiving substantial governmental benefits for housing, medical care and support. Eligibility and the benefits may be terminated if the child inherits assets. Instead of giving a disabled child assets, a supplemental needs trust can be established for a disabled child or to pay for things not provided by government assistance and if properly structured will not disqualify the beneficiary from government assistance.

What can a supplemental needs trust pay for? Medical care not covered by government assistance, vacations, education, recreational activities, home modifications, furnishings, cell phone and computer, entertainment, transportation, and personal care items can all be paid. A supplemental needs trust can provide a much better life for a disabled beneficiary while preserving government benefits. An outright gift to the same beneficiary could disqualify the beneficiary from government assistance until the funds were spent and, in some cases, even longer.

Eligibility for government assistance can also be the reason for establishing a trust for the grantor. A Medicaid trust is an irrevocable trust established to shield one’s home and assets from nursing and assisted home spend-down requirements so a grantor can qualify for government assistance. The trust effectively places assets out of the grantor’s flexible control and the trust established is irrevocable.

Trusts can be used for a lot more than simply avoiding probate. With proper drafting, trusts can effectively control use of funds after the grantor’s death and even provide protection for a disabled or improvident beneficiary.