Is this a good strategy for a spendthrift trust?

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Topic Author
eukonomos
Posts: 93
Joined: Mon Jan 01, 2018 2:26 pm

Is this a good strategy for a spendthrift trust?

Post by eukonomos »

From my father's trust:
The Trustee shall divide the remaining trust property in equal shares among my children, ...
and
Each child shall serve as Trustee of his or her own share. ...
We can spend principal and income on our own health, education, maintenance and support but ultimately our own kids would inherit.

It is intended to be a spendthrift trust:
It is my intent, and a material purpose of the Trust, that the trust principal and income remain my child’s separate property and not a marital asset nor community property, and therefore, not subject to the jurisdiction of any divorce court or proceeding. Additionally, this trust is a spendthrift trust and shall enjoy the full benefits of spendthrift protection from creditors in accordance with the “Spendthrift Trust” provisions of this trust instrument.
These provisions include:
Delay of Distributions
Notwithstanding any other provisions of this Trust concerning distributions to any beneficiary of any Trust created hereunder (except for any Trustor of the Trust), the Trustee of any Trust created hereunder, in the Trustee’s sole discretion, may delay distributions to any beneficiary of the Trust for any of the reasons described in this paragraph. ...
reasons include lawsuits, bankruptcy, divorce proceedings, substance abuse, imprisonment, among others.

This part is interesting to me.
Removal of Beneficiary as Trustee
In the event such beneficiary is serving as Trustee during a period in which such conditions or circumstances as are described in the foregoing paragraph of this Section, such beneficiary shall cease to serve as Trustee and shall appoint an independent Trustee that is not related or subordinate to the beneficiary making the appointment, within the meaning of Section 672(c) of the Internal Revenue Code, to serve as Trustee over such beneficiary’s interest in the Trust. Should this spendthrift provision cease to apply to such beneficiary, the independent Trustee shall cease to serve as Trustee, and the beneficiary shall resume his or her role as Trustee over his or her interest in the Trust.
There is also language that says I don't need to resign if I determine that the financial risk is minimal, even with an unfavorable judgement.

So I am the trustee of this trust and I can make distributions to myself. But if any of these circumstances arise where I would want asset protection, I am no longer trustee, but must appoint another.

I only need to incur the expense of, say, a corporate trustee in the (hopefully unlikely) event that the need arises.

Does this sound like it would be an effective strategy for asset protection?

Wouldn't it be better to say I needn't resign, but only need to appoint a co-Trustee for making distributions? This could be an administrative trustee, rather than a full-service corporate trustee.

I imagine it would be best to have the alternate Trustee already lined up to avoid delays.

We are updating our own plans, so I find this interesting. We will of course discuss with the attorney we meet with.
Lee_WSP
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Re: Is this a good strategy for a spendthrift trust?

Post by Lee_WSP »

If you're undergoing any of those named perils, distributions from the trust are the last thing you need, so I would not worry so much about lining up a trustee today, but you should think about who or what you want to serve in that role. A corporate trustee is trustworthy but expensive.

A co trustee for distributions during the named perils would have a similar effect, but would most likely cost the same. I'm not sure it would ultimately matter since it's only triggered for named perils.

Also, unless the named peril goes on for a very long time and you need a distribution or you die, you may be better off just not filling it until the peril passes.

I might have written it so that if a named peril occurred the ability of the beneficiary trustee to issue distributions would be suspended except if an independent co trustee okayed it. It's just a matter of drafting and what the grantor wants though.
Topic Author
eukonomos
Posts: 93
Joined: Mon Jan 01, 2018 2:26 pm

Re: Is this a good strategy for a spendthrift trust?

Post by eukonomos »

Thank you so much for your comments.

Lee_WSP wrote: Wed Apr 07, 2021 10:24 am If you're undergoing any of those named perils, distributions from the trust are the last thing you need, so I would not worry so much about lining up a trustee today, but you should think about who or what you want to serve in that role. A corporate trustee is trustworthy but expensive.

A co trustee for distributions during the named perils would have a similar effect, but would most likely cost the same. I'm not sure it would ultimately matter since it's only triggered for named perils.
I understand some administrative trustees can do the distributions and accounting for fees well under 1% and the beneficiary trustee could still manage the asset allocations and deal with tax returns.

Also, unless the named peril goes on for a very long time and you need a distribution or you die, you may be better off just not filling it until the peril passes.
I would think I don't want too much time with no trustee. Even a short period of time might include the time when taxes need to be filed. Though if I remain a co-trustee, I could deal with that.

I might have written it so that if a named peril occurred the ability of the beneficiary trustee to issue distributions would be suspended except if an independent co trustee okayed it. It's just a matter of drafting and what the grantor wants though.
Yes, I was thinking along these lines.
Ranunculus
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Re: Is this a good strategy for a spendthrift trust?

Post by Ranunculus »

Very interesting wording, as though the spendthrift provision only springs into action once a trigger occurs. It seems a bit fraught with potential complications. Does the beneficiary alone decide when to relinquish their control to the independent successor trustee? Doesn't having the assets in trust already protect them from creditors/spouses until distributions are made? Why do you need to have an independent trustee take over at all? Are courts able to force distributions that are held in trust? I guess I'm just accustomed to thinking of a spendthrift trust as something that protects the beneficiary from themselves as much as anyone else. I hope you will post an update after your conversation with your own attorney, and I look forward to more comments from the forum.
Lee_WSP
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Location: Arizona

Re: Is this a good strategy for a spendthrift trust?

Post by Lee_WSP »

Ranunculus wrote: Wed Apr 07, 2021 2:13 pm Very interesting wording, as though the spendthrift provision only springs into action once a trigger occurs. It seems a bit fraught with potential complications. Does the beneficiary alone decide when to relinquish their control to the independent successor trustee? Doesn't having the assets in trust already protect them from creditors/spouses until distributions are made? Why do you need to have an independent trustee take over at all? Are courts able to force distributions that are held in trust? I guess I'm just accustomed to thinking of a spendthrift trust as something that protects the beneficiary from themselves as much as anyone else. I hope you will post an update after your conversation with your own attorney, and I look forward to more comments from the forum.
In its most basic form, the spendthrift trust is designed to protect the spendthrift from themselves. However, this particular trust is more like a generation skipping accumulation trust. There appears to be no trust issues with the beneficiary, however, it seems as though the beneficiary is unlikely to need any distributions and the main goal is to pass on the wealth to the grantor's grandchildren.

As such, this is one way to do it.
Doesn't having the assets in trust already protect them from creditors/spouses until distributions are made?
Are courts able to force distributions that are held in trust?
It depends on the laws of the state that apply.
bsteiner
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Re: Is this a good strategy for a spendthrift trust?

Post by bsteiner »

eukonomos wrote: Wed Apr 07, 2021 10:18 am ...
Wouldn't it be better to say I needn't resign, but only need to appoint a co-Trustee for making distributions? ...
Yes.

There are other things in the language you posted that one might do differently as well.

You might want to consider having a co-trustee from the inception. You could provide that a trustee who's a beneficiary may not participate in decisions to make distributions to himself/herself, and give the beneficiary the right to remove and replace his/her co-trustee (provided the replacement trustee isn't a close relative or subordinate employee).

Other people use other approaches, which may also work.

The language about deferring distributions suggests that the default is mandatory distributions. You might want to reverse that. In other words, instead of mandating distributions, you could give the trustees discretion to make distributions.
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