As any estate planning attorney will tell you, estate planning is important, because the future is uncertain. But it is that very uncertainty that makes estate planning more difficult. In the past, estate planning options, like certain trusts, offered protections from creditors or taxes at the expense of flexibility. Planning for flexibility in your trust is possible, with the proper guidance.
None of us has a crystal ball. We all want to provide for our loved ones as thoroughly as possible, but there’s no foolproof way to predict what their needs and capabilities will be. You probably want your beneficiaries to have access to trust distributions when they truly need them, but not so much access that you might as well have left them the assets outright.
Below are a few options for creating a trust with the flexibility to meet your beneficiaries’ unforeseen needs, while protecting their interests.
Some trusts provide for distributions to be made to beneficiaries at certain intervals or ages, or upon certain life events, such as graduation from college. There are a couple of potential problems with this approach. Creators (settlors) of trusts often pick these ages or milestones in an effort to ensure beneficiaries are mature enough to handle distributions, but there’s no guarantee that they will be. Another problem with such trusts is that if distributions are mandated at certain points, creditors of beneficiaries may be able to reach those distributions.
Enter the discretionary trust. As the name suggests, the power to make distributions is within the trustee’s discretion. A trust may be completely discretionary, giving more decision-making power to the trustee, or the settlor can establish standards for distributions. A common standard is that the trustee may make distributions in their discretion for health, education, maintenance, and support (HEMS).
Because beneficiaries are not entitled to trust distributions, they have no property interest in them; only a “mere expectancy.”
Because beneficiaries are not entitled to trust distributions, they have no property interest in them; only a “mere expectancy.” Because they have no property interest, trust assets are generally beyond the reach of beneficiaries’ creditors—not to mention beyond the reach of beneficiaries who might dissipate them.
Another option is for the settlor to grant the trustee discretion not to make otherwise-planned distributions if the beneficiary’s circumstances would make a distribution unwise. For example, making a distribution to a beneficiary who suffered a brain injury and relies on means-tested government benefits could cause them to lose eligibility for their benefits. Likewise, a beneficiary who has developed a drug addiction might dissipate their funds and possibly overdose. In that situation, withholding a distribution would be more in the best interests of the beneficiary than making one.
Limited powers of appointment give beneficiaries the right to appoint trust assets to another person or persons, generally at their death. Let’s say Adam, the settlor, creates a trust with his daughter Beth as beneficiary. Beth has three young children, Carol, David, and Eleanor. She intends to give each child an equal share in trust assets.
However, after the children are grown and Beth is nearing the end of her life, she realizes that might not best serve their needs. Carol has become a CEO and is independently wealthy. David is a social worker doing commendable work, but earning little money. Eleanor is a stay-at-home parent dependent on her husband’s limited income. If Adam has granted Beth limited powers of appointment, she will have the flexibility to direct assets to the children who are in the greatest need.
The term “decanting” suggests pouring wine from one container into another. It is possible to do something similar with trusts. Assets from an old trust can be “poured into” a new trust with different terms that will better serve the needs of beneficiaries at the current time.
In Michigan, there are two types of trust decanting. Administrative decanting addresses minor, administrative changes, such as adding the power to remove a trustee or changing the method of determining trustee compensation. Dispositive decanting affects trust provisions addressing who receives what from the trust, when, and how. Dispositive decanting makes possible major changes, such as removing a beneficiary, or changing from mandatory distributions to discretionary ones.
Decanting a trust is often done when the original trust, for some reason, is no longer sufficient to achieve the grantor’s intentions.
Especially for trusts that are intended to be in effect over a long period, a trust protector can offer needed oversight and flexibility. A trust protector is not the trustee, but a separate person or entity who has powers over the trust.
A trust protector’s role is to address issues that were not anticipated or foreseeable when the trust was created. The trust protector may be able to change beneficiaries, replace or remove trustees, alter administrative provisions, and have input into investment decisions.
If you want the benefits of a trust, such as probate avoidance and control over assets, but want to preserve flexibility for unforeseen circumstances, contact an experienced Michigan estate planning attorney to discuss options, We invite you to contact our law office with any questions you may have about planning for flexibility in your trust.