A trust is commonly structured to provide that at the death of the grantors (i.e., the person or people who set up the trust) all of the assets are distributed outright to the beneficiaries. This is typically done when the grantors’ children are the beneficiaries of the trust and legally adults and financially mature so there is no longer a concern they would spend the inheritance in irresponsible ways.
Even in situations like these, it’s important for a trust to have a contingency plan. In other words, a trust can be drafted to allow the trustee to hold back the inheritance from a beneficiary for certain purposes. These are the circumstances in which a trust should have a contingency plan:
1. Underage beneficiary. If the expected beneficiaries are all adults and can manage an inheritance, it’s still possible one of them could predecease the grantors and the share would then typically be for the benefit of that beneficiary’s children (i.e., the grandchildren of the grantors). In a situation like this, it’s very possible the grandchildren will be under 18 and not legally able to receive an inheritance without having to establish a conservatorship through the probate court. If this happened, the conservatorship would require the grandchild receive the balance of the inheritance at 18 years old. To avoid this circumstance, the trust can include a contingency plan to hold back the share until the grandchild reaches a certain age (i.e. 25 years old). It can also allow the trustee to use the funds for purposes like the health and education of the grandchild.
2. Beneficiary receiving Medicaid and/or SSI. Programs like Medicaid and SSI require recipients to have a very modest amount of assets to qualify and remain eligible. Any inheritance would disqualify the beneficiary from these programs. The beneficiary would then no longer have Medicaid to cover what could be very expensive health expenses and SSI to provide a monthly income benefit. A trust can include a contingency plan to hold back the distribution so that the beneficiary will continue to remain on Medicaid and SSI.
3. Beneficiary with addictions or creditor issues. A beneficiary who has drug or alcohol issues is very likely to use an inheritance in a harmful way. A beneficiary who has racked up credit card debt or has incurred significant medical debt may be at risk of having an inheritance used to satisfy these obligations. In these situations, a trust can include a contingency plan to hold back the inheritance for the beneficiary. In doing so, the trustee can avoid the funds from being used in a destructive way by the addicted beneficiary or being reached by the creditors of the beneficiary. The trustee can help the beneficiary with an addiction by paying for a successful recovery program or assist the beneficiary with creditor issues by covering the expense of an education training program that allows the beneficiary to pursue a financially secure career.
If you have any questions about including a contingency plan in a trust, feel free to contact me at phmulder@cunninghamdalman.com.
