Wednesday, April 27, 2016

But I Don’t Like or Trust My Child’s Spouse! Trusts, part two

In the post immediately prior to this post, I discussed the use of a trust to prevent a spendthrift child from squandering his or her entire share of the parents estate.  This form of trust has another purpose as well.

Consider the situation where mom and dad really dislike or do not trust their child’s spouse (for fun, let’s call him or her the “evil spouse”).  They don’t want the evil spouse to have access to their child’s share, lest the evil spouse divert those assets and use them for purposes that Mom and Dad never intended.  Customarily the parents intend that the child’s share pass on to the next generation at the death of the child, but if the evil spouse can access the assets, he or she may have other ideas.  So what are Mom and Dad to do?

The answer again is to establish a trust for the benefit of their child.  Such a trust will be substantially the same as the one described in the last post.  While the purpose of a trust for a spendthrift child is to protect against inappropriate spending, the purpose of a trust in this case is to keep the evil spouse from getting access to the assets so long as they remain in the trust.  The evil spouse will have access only to those assets which have been distributed outright to the child.  The child has the option to maintain assets in trust to keep the assets beyond the reach of the evil spouse.   This will prevent the evil spouse from commandeering the assets meant for the child.  Mom and Dad will rest much easier knowing that the evil spouse only has access to the trust assets to the extent their child chooses to request outright distribution, and one can only hope that the child has the wherewithal to prevent the evil spouse from spending the assets in ways that were not intended.

The Spendthrift Child: Trusts Part One

I often work with clients who have adult children, and as is typical, wish to leave their estate to their children in equal shares.  Customarily, at the death of both parents, the shares for adult children will be distributed to each outright, free and clear of all trusts.  But sometimes one of the children is financially irresponsible, and the parents are uncomfortable simply handing over that child’s share of the estate outright.  There may be concern that the child will not manage his or her share responsibly or in the way that the parents intended.   So how do parents of such a child protect that child’s share of the estate and prevent such events from occurring?

The answer is  for the parents to create a trust, and maintain the share for the spendthrift child in that trust for the life of the spendthrift child as beneficiary of that trust.  Most often, the trust will be in the form of a testamentary trust contained in each parent’s Will.  Upon the death of  the second parent, the share for the spendthrift child will not pass outright, but instead will pass to the trust established for his or her benefit.  The trustee appointed to oversee the trust will have the authority to make distributions of income and principal to the beneficiary, in the trustee’s discretion for the “best interest and general welfare” of the beneficiary.  The trustee may release trust assets to the spendthrift child for purposes consistent with the language of the trust and has broad discretion to do so. 

The parents must appoint a trustee to manage and distribute trust assets according to the foregoing standards.  If the siblings have a good relationship, the parents may appoint one of their other children as trustee, knowing that the trust assets will be made available to the beneficiary for appropriate purposes without acrimony.  If the parents are concerned about straining the relationship among their children, however, naming one child to act as trustee for another may be a poor choice.  In that case, the parents might identify an independent person or corporate trustee to serve.  Such a trustee is likely to be more conservative about making distributions only according to the specific language of the trust.

Whatever the terms of the trust may be, the establishment of a trust to hold the share of a spendthrift child is an effective way to ensure that the spendthrift child will not fritter away the whole share in ways that are inconsistent with the parents’ intentions.