You Want What Going Where?

One of the many benefits of planning your estate in advance is the flexibility inherent in the documents, particularly in trusts.  You can change the character of property ownership, transfer property during life and after death, and have your assets managed seamlessly through incapacity and after death.  However, sometimes the amount of flexibility allowed in estate planning encourages people to get creative with their distribution plans without fully contemplating the benefits and drawbacks of doing so.  If you are creating a complex distribution plan, it is vital to get good advice from your attorney and a well-drafted estate plan.

There are a number of important advantages to trusts that continue after they have become irrevocable, which usually occurs after the death or incapacity of the settlor.  When a portion of the trust becomes irrevocable after the first spouse’s death, for example, it can ensure that certain assets are distributed according to the deceased spouse’s wishes.  This is especially true where one spouse might disinherit the step-children after the first spouse’s death.

In other cases, it may be useful to have ongoing, irrevocable trusts to accommodate the special needs of a beneficiary or to prevent a young beneficiary from burning through their entire inheritance on wasteful spending, poor investment choices, or creditor attacks.  Trusts may also be set up to fulfill particular purposes, such as a QMap Trust to help the Settlor qualify for Medi-Cal benefits, or a QVap Trust to help the Settlor qualify for VA Aid & Attendance Non-Service Connected Disability Pension.

Although there are plenty of good reasons to have a complex distribution scheme in your estate plan, it is important to consider whether the costs will ultimately outweigh the benefits.  An ongoing trust requires ongoing administration, which means at a minimum accounting, tax returns, attorney fees, and trustee fees.  If the value of the trust is minimal, it may not be worth the expense of ongoing administration.  Additionally, the trust assets must be able to maintain themselves.  For example, if there is real estate, the mortgage, property tax, utilities, and other expenses may need to be paid from other trust assets.  Similarly, if there is an insurance policy contained in trust, there must be sufficient trust assets or income to pay the premiums.  Without sufficient liquidity, it could become necessary to dispose of the primary asset in the trust, which may defeat the purpose.

Finally, the longer your trust will be administered the more contingencies you must anticipate; successor trustees ought to be individuals who can be expected to survive the terms of the trust or trust companies.  Additionally, the beneficiaries may not survive their entire distribution and contingent beneficiaries must be chosen.  It is possible in a long-term trust that the primary beneficiaries will ultimately be individuals you have not met or are not even born yet!

Depending on your specific concerns and goals, knowledgeable advice is essential to an effective plan.  Additionally, careful drafting can help avoid ambiguities and disputes that may arise in the course of ongoing administration.

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