When are testamentary trusts appropriate?

The Facts: I have always believed that trusts were for people with money and that I would not need to create a trust in my Will, since my net worth is modest.

The Questions: Are there circumstances when someone with modest means should consider a trust?

The Answer: Absolutely! It is unfortunate that there are so many people like you who believe that trusts are only for the wealthy. As a result, steps that could be taken to insure that assets pass only to beneficiaries who are mature, responsible and competent, or pass in a manner that protects the interests of beneficiaries who may not meet that standard are oftentimes overlooked.

For example, if a beneficiary under a Will suffers from alcohol abuse or is addicted to gambling and the Will directs the executor to make an outright distribution to that individual, there is a chance that the bequest will be squandered or used in a manner that is detrimental to the beneficiary. However, if the Will includes language creating a testamentary trust and dictates that the bequest go into that trust for the benefit of the beneficiary, the trustee can insure that the trust funds are used in manner that truly benefits the beneficiary. The trustee can use trust funds to cover the cost of the beneficiary’s housing, food, school or medical treatment, and can be given discretion to make outright distributions to the beneficiary if the trustee feels doing so is in the beneficiary’s best interest. Clearly, by having funds go into a trust rather than being distributed outright to a beneficiary who may have issues, the assets in the trust are protected and are more likely to be used in a responsible manner.

In addition to creating a testamentary trust for a beneficiary who suffers from substance abuse or an addition, testamentary trusts are useful when beneficiaries are too young to handle an inheritance, when they have credit problems and/or judgments filed against them, when they are in the midst of a divorce or when they have a habit of making poor choices when it comes to money. Even when a beneficiary is mature and responsible, some people create testamentary trusts for such beneficiaries to insure that the funds passing to the beneficiary will be available throughout the beneficiary’s lifetime.

By including trusts in a Will, a person can dictate exactly how the funds in the trust are distributed, what the trust fund can be used for and when the beneficiary may enjoy the benefits of the trust. Distributions can be made annually, or when the beneficiary attains a certain age, or may be left entirely to the discretion of the trustee. As long as the distribution of the trust fund is not contingent upon events that are contrary to public policy such as illegal activity, the person creating the trust has a great deal of latitude in dictating the terms of the trust. Since the costs associated with testamentary trusts similar to the ones described above are minimal, these trusts are appropriate even when the share of an estate passing into the trust is modest.

Trusts can take many forms and can be created to address any number of circumstances. To insure that you understand your options and the benefits of trusts, even when the value of the assets going into the trust is modest, you should consult an estate planning attorney with expertise in this area.

This article first appeared in the June 23, 2016 issue of the Times Beacon Newspapers.

Linda M. Toga, Esq. provides legal services in the areas of estate administration and planning, real estate and litigation from her East Setauket office.