by Jeffrey W. Jones, Esq.
We often draft “beneficiary-controlled asset protection trusts” for our clients who have complete faith in their beneficiaries’ ability to manage the trust assets, but want to protect the assets against creditors and predators. We also include a provision allowing the beneficiary-trustee to step aside in favor of an independent trustee if the beneficiary wants a distribution that is not within the “ascertainable standard” of health, education, maintenance and support. These trusts are designed to come as close as possible to giving the beneficiary complete control of the assets, without actually crossing the line that would allow a judge to grant access to a creditor.
The beneficiary controlled asset protection trust we recommend for our clients’ responsible beneficiaries has the following characteristics:
1. Each beneficiary is the trustee of his or her own trust.
2. The trust provides that the beneficiary/trustee has the discretion to distribute the income and principal of the trust (as much or as little of it as the beneficiary/trustee wishes) to himself or herself for the “beneficiary’s health, education, maintenance and support”. To illustrate how broadly the IRS and the Courts have interpreted the word “support” in this context, consider this discussion in a legal treatise often cited in court opinions, the Restatement Third, of Trusts §50, Comment d(2)):
A support standard. . . “ordinarily entitles a beneficiary to distributions sufficient for accustomed living expenses, extending to such items as regular mortgage payments, property taxes, suitable health insurance or care, existing programs of life and property insurance, and continuation of accustomed patterns of vacation and of charitable and family giving. Reasonable additional comforts or ‘luxuries’ that a special vacation of a type the beneficiary had never before taken, may be borderline as entitlements but would normally be with the permissible range of the trustee’s judgment, even without benefit of a grant of extended discretion. . . . A support standard normally covers not only the beneficiary’s own support but also that of persons for whom provision is customarily made as a part of the beneficiary’s accustomed manner of living. This generally includes the support of members of the beneficiary’s household and the costs of suitable education for the beneficiary’s children. . . . the terms ‘support’ and ‘maintenance’ do not . . . authorize distributions to enlarge the beneficiary’s personal estate or to enable the making of extraordinary gifts.”
3. In determining what the beneficiary “needs”, the beneficiary/trustee may, but need not, take into account any other sources of income or support available to the beneficiary;
4. If the beneficiary/trustee wants to make a distribution that goes beyond “health, education, maintenance and support” (generally a distribution for which the beneficiary cannot demonstrate “need,” even applying the broad standard discussed above), the beneficiary/trustee can temporarily appoint an “independent trustee” (one not related to or employed by the beneficiary/trustee in any other capacity) to consider and then make (or not make – but the beneficiary gets to choose the independent trustee) the requested distribution;
5. Upon the death of the beneficiary, any assets left in the trust will pass outright to the issue of the beneficiary; and
6. To keep the next generation from looking too closely over the beneficiary/ trustee’s shoulder, the beneficiary has a limited power of appointment, exercisable by will, that allows him or her to appoint (re-direct) all or part of the trust to some other issue of the Settlor or to a public charity instead of to the child or grandchild that is causing problems. It has been said that “the power to appoint is also the power to disappoint,” and it is our belief that this is an excellent way to keep the next generation of beneficiaries in line while their parent is still alive and entitled to the benefits of the trust.
A beneficiary-controlled asset protection trust can include other features, if you wish. If, for example, you wanted to allow your child or other beneficiary to obtain funds from the trust to buy a house or a business or make a down payment on such a purchase, the trust could provide guidance to the independent trustee about such matters. (In many cases it might be a good idea for the trustee to purchase the house and allow the beneficiary to use it.) We have dealt with this issue in the past by putting a provision in the trust which says that, as settlor, it is your intent that the independent trustee should consider making a distribution of funds for such purpose or (to provide continued asset protection) instead use trust funds to purchase the home or business in the name of the trust, for the use and benefit of the child who is the beneficiary. This kind of non-binding expression of your intent can provide very helpful guidance to the independent trustee.
A third-party asset protection trust can be created and funded while you are alive, as an irrevocable trust (excellent for reducing taxable estates), as a final disposition “what happens after my death” (or “after my surviving spouse’s death” for married clients) provision in your Revocable Living Trust, or as a testamentary trust in your Will.
The information presented on this website is general in nature and not intended to be legal advice. No attorney-client relationship will exist with Jones, Kuriloff & Sargent, LLC unless we agree in writing after a personal consultation. Please contact us for a consultation on your particular situation.