Trusts Are NOT Just for the Wealthy! 7 Common Situations Where Trusts are Used by the Average Person
Written by: Wills, Trusts, & Estate Administration
When you hear the term “trust,” or hear someone talking about setting up a trust, or having a trust, or being a trust beneficiary, what thought comes to mind? That the person must be wealthy, right? While trusts are often a common tool in estate planning for the wealthy, they are much more common, and much more practical and useful, than you might ever think for the average person.
This brief article will describe 7 common situations where trusts are frequently and regularly used by those who do not fall in to the category of “wealthy.” These trusts can be either inter-vivos trusts, which are created and funded while you are still alive for the benefit of someone else, or testamentary trusts, which are created through your Last Will and Testament and only come in to being upon your death.
1. Trusts for Special Needs Children (minors and adults)
My March 2017 article touched on this in some detail. But in terms of planning for a special needs child, a parent (or other generous friend or relative) really only has a few options: (1) disinherit the child so as to not jeopardize the individual’s governmental or needs-based benefits, (2) an outright gift to the individual, which will cause a loss of those benefits, or (3) a Special Needs Trust, which will supplement those benefits without causing a loss of the same. These trusts must be carefully drafted to comply with laws, and contain some very specific provisions that you would not see in a ‘regular’ trust.
2. Trusts to benefit an elderly parent(s) who might survive you
As our population and baby boomers (and their parents) age, and as life expectancies continue to increase due in large part to medical advances, it has become more common to see a parent outliving his or her children. It is thus becoming more and more common to see an adult child have a provision in his or her Will which sets aside some sum of money to ensure the elderly parent is provided for. Upon the death of that parent, you can then direct to whom any remaining funds in the trust are distributed. If the trust is provided for under your Will, and your parent in fact does not survive you, the trust simply is not funded, and it is not even necessary to change your Will to remove the provision.
3. Trusts for children with drug or alcohol issues
Every parent at some point worries that their child will abuse drugs or alcohol. Too many see those fears come to reality. With the current Opioid crisis in this country, these fears may be greater than ever. If you have a child with alcohol or chemical dependency issues, a trust can be a way to protect that child from his or her own behavior. This type of trust may continue for the child’s entire life, it may continue to a set age, or it may continue until the child can demonstrate he or she has been clean and sober for some period of time.
4. Trusts for children with financial issues
Whether it’s prior bankruptcies, foolish spending habits, gambling, risky business enterprises, or other financial issues, one way to ensure that the assets you leave to your child will be there to provide some basic level of support or financial backstop is to leave the assets in a trust. It will be protected from bankruptcies, protected from foolish or irresponsible spending, and protected from being invested in risky enterprises. These type trusts often provide for either discretionary income in the Trustee’s discretion, or even fixed payments over the term of the trust or the child’s lifetime.
5. Trusts to protect assets from a subsequent divorce, or a subsequent remarriage
a. There are many parents who worry that they will leave assets to a married child, the child will get divorced, and the ex-spouse will then walk away with half. It’s not a completely invalid concern, though inherited assets are generally protected from a division of marital property as long as the child has not taken action to make it become marital property (e.g., added the husband to the account). However, an extra measure of protection is to place the assets in trust for the child.
b. From another angle, a concern of many spouses (whether a first or subsequent marriage) is that if all assets are left outright to the surviving spouse, that spouse might remarry, and whether intentionally or through being taken advantage of, a future spouse will get access to the inheritance such that in the end it either is not available for the spouse, or alternatively does not pass to your children. This can easily be remedied by creating a trust, and at the same time ensuring the surviving spouse is well and adequately provided for during the remainder of that spouse’s life.
6. Trusts to protect a spouse (especially with a family history of Alzheimers, dementia, etc.)
This concern is not dissimilar from number 5 above, where a spouse has concerns that the surviving spouse might remarry and the assets be accessed by the new spouse. The issue is the same: protecting the assets for the benefit of the spouse, but not some other person. We’ve all heard stories of the widow who gives all of her money to some televangelist, or some charity. Or the predator who marries the old widow or widower for his or her money and no other reason. What is so difficult here is this: You may trust your spouse completely. You may know that he or she would never let a future spouse come in and wrongfully take, use or waste the assets you leave to your spouse. But what you can’t know or control is what happens when your spouse subsequently develops dementia or Alzheimers. Who will look after them? Who will make sure the assets you leave remain intact? How can you be sure your spouse will not be taken advantage of as he or she ages and lives for years after your death? Too many people in my opinion have a negative view of spousal trusts (“I can’t believe my spouse did not trust me enough to leave me assets outright”). This isn’t about trust. This is about protection, and protection from events that neither of you have control over, where you do not have a crystal ball to know what the future holds medically for your spouse and his or her competency as he or she ages. And where there does exist that family history for Alzheimers or dementia, why not plan with that in mind?
7. Trusts for the benefit of a wealthy or professional child
You’re thinking, wait, what?? Why does a parent need, for example, to create a trust for their physician daughter? The answer is simple. To protect the assets from the potential future claims of medical malpractice claimants. Your net worth may pale in comparison to your successful surgeon child. But as a physician, your child will also run the risk of significant medical malpractice lawsuits. By leaving his or her inheritance in a trust, you can ensure that regardless of what befalls them from a plaintiff patient, you have protected assets for child and his or her needs that cannot be reached by a judgment creditor.
In summary, don’t let the term “trust”scare you. Don’t think trusts are only for the wealthy. These are all common concerns, that can be easily addressed through relatively simple (in most cases) trust work, most often as part of your Last Will and Testament. Seek competent counsel from an estate planning attorney who specializes in Wills, Trusts and Estate Planning.