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Financial Planning > Trusts and Estates > Trust Planning

Trusts for Difficult Situations

By Jonathan E. Gopman, Michael Sneeringer

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When considering ways to try to make sure that loved ones are provided for after death, practitioners make specific provisions for the care of a client’s children, parents, and favorite charities.

Clients have the right to spell out in detail upon what terms and when their children will receive their money and who has the responsibility of making decisions for them. Clients can make a gift to charity and request that it be used to establish a scholarship for a specific class of individuals. Additionally, clients can even make provisions for payments to grandchildren that will be effective many years following his death.

Be aware, however, that if trust provisions attempt to unreasonably modify or control the lives of intended beneficiaries, these gifts may not be legally enforceable, depending on the laws of the state, how the courts interpret public policy, and the degree of control.

— (Related on ThinkAdvisor: Estate Planning: The Family Limited Partnership Strategy)

Some questionable trust provisions include a gift to a public college to be used only for scholarships for a specific religious group; a gift to a child but only if he renounces all contact with the cult with which he is presently associated; and a gift in trust for a grandchild but only if she marries someone of the grantor’s faith (compare that with a gift to a grandchild who is being raised in a different faith from that of the grantor, providing that the grandchild take at least one college course on the grantor’s religion).

If clients have strong feelings about a particular provision that he or she would like to place in trust, practitioners should strongly recommend that said provisions be researched for ease of use and applicability. The practitioner needs to understand the validity and enforceability of such provision in the governing law state of the trust.

Some clients have specific ideas and goals that go beyond these situations. Many of these ideas find their way into trusts, even though their enforcement may, in certain instances, be quite difficult. For example, leaving money to children or grandchildren, providing they do not smoke or use drugs or leave money to persons depending on their marital status. Many people may want to provide for a son-in-law or daughter-in-law, for example, especially if there has been a long and happy marriage, however, not if the son-in-law or daughter-in-law is not living with and married to their child at the time the gift becomes effective. In that case, a husband and wife could make a gift in trust to their daughter-in-law, providing that she is married to and living with their son when the second of them dies.

Spendthrift Provisions

As a further precaution, the trust should contain a spendthrift provision, which prohibits the assignment of any interest or distributions from the trust to creditors of the beneficiary. That means a beneficiary could not go to Las Vegas and use his or interest in a trust as collateral. In most states, this will prevent general creditors from reaching any of the trust assets, and, in some states, it can bar a beneficiary’s spouse from attacking the trust assets or claiming that they are marital property and therefore subject to the spouse’s claim against the trust beneficiary’s assets.

Image: Cathy Yeulet/Thinkstock

(Image: Cathy Yeulet/Thinkstock)

Substance Abuse Issues              

If the child in question has an alcohol or substance abuse problem, the trust might provide that only funds necessary for food, clothing, and shelter be disbursed—and that payments be made directly and only to the people providing the food, clothing, and shelter, not to the child.

The trust can be set up to withhold trust assets until and unless two doctors are willing to certify that the child has been drug free for a specified period of time.

Incentives could be provided in return for documenting that they have met specified “drug free periods” or for meeting other accomplishments important to the client. The issue with these types of trusts though is that the smart drug addict beneficiary could always find two doctors willing to certify such specific period of time as such “doctor shopping” has become commonplace. Additionally, unless the trustee is a corporate fiduciary, many individual trustees do not have the time or resources to follow a beneficiary’s every move.

Family Disharmony

In the case of an unsettled marriage, domestic and/or offshore asset protection trusts could provide only income for the child and specify in the event of a divorce that all income is to be paid to or for the benefit of the couple’s children or to another child. This may prevent the divorcing spouse from reaching trust principal.

The possible solutions to difficult problems are almost endless if the practitioner is creative. For example, trustees can be instructed to reward or discourage behavior, such as:

  • Achieving grades in school that are appropriate to the abilities of the beneficiary.
  • Gainful full-time employment.
  • Entrepreneurial endeavors in starting new businesses.
  • Charitable or volunteer work.
  • Thrift and financial responsibility, such as regular savings and the avoidance of unnecessary debt.
  • Regular religious worship (but see below).
  • Abstinence from alcohol, drug, or other substance abuse, or promiscuous sexual behavior (although this may be difficult for the trustees to monitor and enforce).

Unfortunately, many clients face serious day-to-day problem situations. Similar problems could arise in caring for children or other relatives who are dependent on drugs. Additionally, often clients have a brother or sister in serious financial difficulty whom the client has been giving financial assistance during his lifetime. The client might have a child who has joined a religious or political cult that would confiscate any funds given directly or for the benefit of the child in trust. The client might have a child or other relative who has broken the law or may very well do so in the near future. The client might have a son or daughter who is in the process of going through a second or third contested divorce with all of its inherent financial problems.

Although these problems will obviously not disappear after death—and no trustee will be able to deal with them with the same knowledge and background that the client has, oftentimes after years of practice—a trust may be the only plan that can be established to handle the problem situation in the best possible way when the grantor is no longer able to do so. The reason a trust is the preferable solution is that only through a trust can the grantor set money aside for the beneficiary, while at the same time give the trustee as much flexibility as possible to deal with whatever may arise.

— Read Clients Regret Their Irrevocable Trusts? Try the ‘Decanting’ Solution on ThinkAdvisor.

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