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 for more information about testamentary trusts.



Special Needs, Special Planning

As some of you know, I grew up in a family with a brother who has special needs.  Having a disabled relative poses many challenges to parents and siblings alike on an emotional, physical and social level.  It can also pose a financial challenge, a challenge, which can usually be met by applying for and receiving government benefits such as Supplemental Social Security Income (“SSI”).

The acceptance of SSI benefits comes with a limitation regarding what the disabled person can financially receive from other persons including their parents.  This poses a unique problem when preparing an estate plan for a family with a special needs relative.

Fortunately, in New York and many other states, parents and other relatives can establish a trust known as a special needs or supplemental needs trust for the benefit of their disabled child or relative.  Special Needs Trusts provide supplemental benefits to the disabled person beyond the benefits provided by the governmental assistance they receive.  In order to preserve their benefits, the trust must be structured in a specific manner.

There are two types of special needs trusts-trusts created with the disabled persons assets and trusts created by third parties including the disabled person’s parents.  The first type is created when the disabled person receives a direct payment from a settlement or a bequest under a will. The disabled person’s legal guardian serves as the Grantor of the trust and upon the disabled person’s death, the remaining assets are first used to repay any advancements made to Medicaid. Any additional assets remaining are distributed to the disabled person’s then living relatives.

The second and more common type of trust is created by a third-party, typically the disabled person’s parents.  During the parents’ lifetime or at their death, the trust is funded and the trustee of the trust makes payments of the trust assets on behalf of the disabled person.  Unlike the first type of special needs trust, upon the disabled person’s death, the remaining assets go directly to the named remainder beneficiaries without any reimbursement made to Medicaid.

Unlike most trusts, special needs trusts are limited with regard to the distributions it can make to its beneficiary.  In New York, there is a statutory requirement that the trust must only make distributions once all governmental benefits are exhausted.  Additionally, while many trusts are used for the health, education, maintenance and support of their beneficiary, a special needs trust can only be used to provide additional comforts to the disabled person.  This can include entertainment, an assistant for the disabled person and any other services not covered by government benefits.

In addition, the trust instrument must make clear that the disabled person can never have direct access to the trust’s assets nor can they have any discretion over the distributions made to him or her.  With all these unique restrictions, it is essential that the person selected to be the trustee is not only aware of how these trusts must be managed, but also must be willing to take a very hands on role in managing the trust for the disabled person’s benefit.

The care of a person with special needs is incredibly important to that person’s family.  Many families try to do everything they can to make their disabled relatives feel as normal and as much a part of the family as their other family members.  But, when it comes to their financial well-being and ensuring that they receive the best possible care, extra planning and extra precautions must be taken to ensure their main source of care is not threatened.

Please contact for more information about special needs trusts.