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Deciding How to Leave Money to Others
Published March 29, 2021
You have finally gotten around to focusing on your estate planning and have taken that first step by contacting an estate planning lawyer. Now you have to decide who gets what (or does not get) upon your demise. These are difficult decisions and are often complicated by the fact that you may not wish to leave your hard-earned assets to someone who may not be responsible with money or has different values than you. If you leave money to this person outright, they are free to do with it as they please. One possible solution might be a trust.
There are many different types of trusts (several of which we have discussed previously in this column) and one size does not fit all. This is definitely not a form you want to download from the internet and plug into your estate plan. Your particular trust must be drafted with specific provisions designed to meet your (and the beneficiary’s) needs. The only way to accomplish this is to have an in-depth discussion with your estate planning attorney to make sure he/she knows what your objectives are. Being able to tailor the trust to meet your particular needs is one of the primary benefits of utilizing a trust instead of leaving money outright to someone.
If you wish to protect the beneficiary from him/herself or from creditors, you might consider a spendthrift trust. It is usually a good idea for someone other than the beneficiary, such as another family member, a bank or other fiduciary, to be the trustee. The trust then spells out how the trustee is to use trust assets for the beneficiary. Whoever creates the trust can add as many specifics as he or she desires. If you are the creator of the trust, consider: 1) how much freedom you want the trustee to have when making distributions, and 2) how much certainty you want the beneficiary to have for when funds might be available.
You can be very specific and allow the trustee to make distributions for purposes you specifically state in the trust document. Or, if you prefer, you can give the trustee some flexibility to pay for things that are not specifically stated in the trust but fall within the spirit of what you would have provided for if you were around to make these decisions. This allows the trustee to adapt to changing circumstances and be flexible, when appropriate. Another option is to place your complete faith in the trustee and allow the trustee to make decisions that the trustee believes are in the best interests of the beneficiary. In this scenario, the trustee would be empowered to make distributions, or not, in the trustee’s sole and unfettered discretion.
If you choose to give the trustee limited discretion, you may wish to consider other provisions which can help guide the trustee in making the right decision. For example, you might give the trustee the power to decline to make distributions if a beneficiary becomes involved with drugs, alcohol, or gambling. The trust could authorize that payments for emergency situations go directly to medical facilities, and not to the beneficiary.
These types of trusts typically include “spendthrift” language to further protect beneficiaries. By doing so, you should be able to protect the trust assets from the creditors of the beneficiary by prohibiting a beneficiary from using the trust as security for a loan or to satisfy debts.
If you like, you can also use trusts to promote values that are important to you. For example, you might allow for distributions to pay for education, charitable work or other endeavors that you deem appropriate.
When speaking with your estate planning attorney, you want to make sure you discuss the amount of flexibility you wish your trustee to have. This will help avoid disputes and litigation after you are gone. Drafting a trust to protect beneficiaries requires a careful balance of the trustee’s duty and the potential needs of the beneficiary to make sure that your intent is carried out. Contact us with additional questions by calling 914-684-2100 or click here.
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