Trusts For A Lifetime

In various posts we have talked about the use of trusts – revocable trusts to manage assets and avoid probate, generation skipping trusts to benefit descendants of several generations, irrevocable trusts to remove life insurance from your taxable estate, special needs trusts for disabled beneficiaries, to name just a few. As a side benefit most trusts help to protect the assets in the trust from the beneficiary’s creditors.

A trust can be written to hold the assets until a beneficiary reaches a certain age, or to distribute the assets in percentages when the beneficiary reaches specified ages.  The thinking behind this “age based” distribution is that a beneficiary may not be able to handle the principal at a young age, but should be able to as she grows older.  But in almost all cases, I advise my clients to create the trust to last for the lifetime of the beneficiary. The beneficiary may not be more skillful at handling money or become more reliable as she grows older, and creditors may have claims at any time during the beneficiary’s life.

Often clients react: “But I want my son/daughter to be able to use the inheritance.”  I explain that the beneficiary will have access to the funds if the trust has a distribution standard allowing the trustee to distribute principal for health, support or education.  In fact, the beneficiary can act as her own trustee, giving her the right to invest the funds as she wishes, and make distributions for her needs.

Moreover, the beneficiary can be given what is called a “power of appointment” to name in her Will the people who will receive any trust assets remaining at her death.  The power of appointment gives the beneficiary the same power as she would have had, had the inheritance been given to her outright. The power to say who gets the property is just short of ownership.

And you can limit the power of appointment.  Say you don’t want your daughter to give any balance of the trust to her nephew, with whom she is close, because he is estranged from the rest of the family. You can limit the power of appointment to allow her to distribute the trust assets at her death to anyone other than the nephew, or to only your direct descendants, or only among her then surviving siblings. You can make the power broad or narrow, and tailor it to the family situation.

Because trusts can be written with (almost) as much flexibility as you want, I see no reason not to use a trust for the life of the beneficiary. And a broad power of appointment can give your beneficiary the control she would otherwise have to pass the assets on to someone else.

 

Questions regarding this article may be sent to Publications@Capehart.com.

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