Using Testamentary Trusts: Part Two-Protection Trusts

In my last post, I discussed the use of trusts under a Will (known as “testamentary trusts”) to delay, minimize or eliminate federal and state estate taxes.  Marital, credit-shelter and disclaimer trusts provide sufficient protection from excess taxation for many individuals and families.  In addition, these trusts can also protect the assets contributed to them from claims of creditors.

Another type of testamentary trust frequently used are trusts that are designed to protect and preserve the assets from waste or other concerns other than taxes.  These “protection trusts” may exist for a short period of time or may last the lifetime of beneficiary depending on why they are established.

When discussing “protection trusts,” I am referring to two specific types of testamentary trusts, namely:

1)   Descendants’ Trusts-In a typical estate plan, the children (and grandchildren) of a Testator are often primary or secondary beneficiaries of an estate.  If these beneficiaries are not old enough or mature enough to handle inheriting a large amount of wealth directly, a descendants’ trust can be used to preserve the assets while also providing the beneficiaries with access to the trust’s income and principal.

Descendants’ trusts can either be structured as one trust for all the children (and grandchildren) or as individual trusts for each respective beneficiary.  Income and principal distributions are made based on a standard of the Testator’s choosing.  A common standard is to allow distributions for a beneficiary’s health, education, maintenance or support.  The Trustee of the Descendants’ trusts would have discretion to determine when distributions would be made and how much should be paid or applied for the benefit of a specific beneficiary.

A Descendants’ Trust can continue for the lifetime of a beneficiary or may terminate at earlier age as chosen by the Testator.  In addition, the beneficiary of a Descendants’ Trust may given the ability to withdraw a portion of the Trust principal before the Trust terminates.  The Testator is given significant flexibility in determining when and if to terminate these trusts and whether to allow for partial terminations.

2)   Supplemental Needs Trusts-For families with children or other relatives on government assistance programs like SSI or Medicaid, the ability to leave an inheritance to their special needs relative requires additional care.  Because of the strict income and asset limits on the beneficiaries of these programs, leaving an outright bequest is not possible.  Instead, a special needs relative may receive a bequest through a supplemental needs trust.

The beneficiary of supplemental needs trust can receive distributions during their lifetime to supplement the services paid for by the government.  Examples include travel, entertainment and other products or services normally not paid for by the beneficiary’s benefits.  The beneficiary cannot have any direct or indirect control over when and how the distributions are made.

A supplemental needs trust continues until the death of its beneficiary.  A named remainder beneficiary will receive whatever remains in the trust.   The beneficiary has no say in determining who receives the remainder of the trust principal and undistributed income.

Like the tax based trusts, these trusts can protect the assets in them from the claims of the creditors.  Unlike those trusts, descendants’ trusts and supplemental needs trusts also protect the assets from waste by a beneficiary and protect a beneficiary’s benefits in the case of supplemental needs trusts.

Please contact info@levyestatelaw.com for more information about testamentary trusts.

 

 

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