I can’t argue with the facts. Having cash in a personal bank account is easier than having to go through a trustee when you want or need access to trust funds. But, what if I told you that it could be just as simple? One of our goals is to help clients remove the barriers that are present and to more effectively embrace the benefits of the tools we use. It is entirely permissible for the same person to serve as trustee and beneficiary of a trust. We touched on this briefly in the previous articles but its impact wasn’t fully detailed. When someone serves as the trustee and a beneficiary of the trust the end result is that it is very similar to having the funds in their own personal bank account. The only major distinction is that, as trustee, they are bound by the terms of the trust and still must adhere to the terms of the trust as it relates to distributions to themselves or other beneficiaries. However, with proper planning prior to the establishment of the trust, this isn’t a real impediment at all. A trustee will make a determination that a distribution is appropriate under the terms of the trust (either there will be a discretionary standard to review – health, education, maintenance or support test, or there will be a mandatory requirement that a distribution be made – all income distributed out annually). This broad discretion often gives the trustee sufficient justification for making a distribution to themselves as beneficiary for one of the above delineated tests. So, due to this flexibility to administer the trust for their benefit as a beneficiary, the excuse that it is easier to have the money in their personal bank account is overcome. That simply is not a good reason to forego the creditor protections.
And I don’t want it to appear that a trust is only a viable vehicle to hold cash or cash equivalents (securities, bonds, etc.). A trust is a fabulous place to hold a variety of assets such as real and personal property. If a surviving spouse has a desire to purchase a new house or a new car it may make more sense to allow the trust to purchase that property rather than distributing the funds out the spouse and allowing the spouse to purchase such asset in their individual name. Again this is due to the protection that trust assets have when they are owned by the trust and the lack thereof when the property is owned outright. A house held in trust would not be subject to division in a subsequent divorce, it would not be subject to the claims of creditors and it could reduce the future cost of administering the surviving spouse’s estate when that spouse passes away.
But what about the children, if I pass away and they are in their early 20’s I don’t want them serving as their own trustee. Well, the old method for drafting trusts was a bit flawed in my estimation. If you review trusts that were drafted several years ago you will see a consistent pattern when dealing with children. Most parents believed that when their children reached 25, 30, 35 or some older age that they would then be responsible enough to handle this money outside of trust. Well, that may in fact be true but what a disservice you just did to your children to expel that money from the trust and the amazing protections that it enjoyed. The money would be distributed out of the trust and delivered to the beneficiary. That beneficiary would then hold legal title to that property and it would then, immediately, be subject to the claims of his creditors. The method that I use for drafting my trusts recognizes that our children should be mature enough at 30 or 35 to begin the process of managing their own trust. So, instead of terminating the trust and distributing the money outright we use a trust succession plan. The most common method for doing this is to allow the child, at age 30, to elect to step up and begin to serve as co-trustee of the trust. This gives them an opportunity to learn about the trust from a different perspective than they have occupied previously. Normally we leave them in this position until the reach the age of 35. At 35 we give them the right, at their discretion, to then assume the role as sole trustee of the trust. It is our hope at that point that they have learned how to administer the trust and had a chance to appreciate the value and benefit of having assets inside the confines of a trust.
But what if my child, even at 35, is not able to make those decisions? Well, stay tuned for the next installment where we will talk about the uniform trust code and the remarkable ability to keep your trust up to date. It is now a living, breathing dynamic instrument that is subject to be re-visited if necessary. Also, we will be talking about a few new trust options that have found their way into the Tennessee trust code over the past few years. The most exciting such option in the realm of creditor protection is the Tennessee Investment Services Trust. This is one you will want to read about because we are fortunate to live in a state that is leading the way in trust options.
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