Establishing a testamentary trust

Establishing a testamentary trust

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By Linda M. Toga

The Facts:    I want to leave a significant amount of money to my granddaughter in my will, but I am concerned that she is not particularly good with money.

The Question:  Is there a way I can leave her a bequest but be assured that the money will not be spent foolishly?

The Answer:  Yes, absolutely! Clients frequently express concern that bequests they make in their will may be squandered either because their beneficiaries lack the maturity to handle the funds in a responsible manner or suffer from some sort of substance abuse or addiction that clouds their judgment.

In such circumstances, it is best not to make an outright bequest to the beneficiary but to instead have the funds pass through a testamentary trust that you (the testator) create in your will.

In order to create such a trust in your will, you will need to identify the individuals who are going to be the beneficiaries of the trust, indicate which assets will be held in the trust and name a trustee who will administer the trust. You will also need to set forth the terms of the trust, i.e., how the trust funds are to be used, when distributions will be made to the beneficiaries, whether the trustee has the discretion to withhold or accelerate the distributions, whether distributions are contingent on the performance of the beneficiary and what will happen to the trust assets if the beneficiary dies before the trust terminates.

My clients who want to avoid a beneficiary receiving a large inheritance at an early age generally direct their trustee to distribute all of the trust assets by the time the beneficiary is 30. They sometimes have the trustee make a single distribution of the entire trust corpus at a specific age but, just as often, they spread the distributions out over time. In either case, it appears that the general consensus is that most people have learned to handle money responsibly by the time they reach the age of 30 since most of the testamentary trusts I draft terminate by the time the beneficiary turns 30.

In contrast, clients who have me prepare testamentary trusts for beneficiaries who suffer from substance abuse or addiction often include a provision that directs the trustee to continue making distributions for the lifetime of the beneficiary. Such distributions may be made to the beneficiary directly but, more often than not, the trustee is directed to make payments to third parties on behalf of the beneficiary. For example, the trustee may be directed to pay the beneficiary’s rent or mortgage or to cover the cost of insurance or tuition.

Whether the beneficiary is simply young and inexperienced or dealing with an addiction, my clients generally give their trustee discretion to distribute trust assets to the beneficiary if they believe doing so is in the beneficiary’s best interest.

As mentioned above, a testamentary trust can provide that distributions are conditioned on the performance of the beneficiary. Some people liken this feature to giving the testator the ability to control from the grave.

While that might be true, it should be noted that there are limits to how much control can be maintained from the grave. For example, while a testator can certainly direct his trustee to only distribute the trust assets upon the beneficiary’s graduation from college, he cannot condition distributions on the beneficiary divorcing his/her spouse or only marrying within the faith. Such conditions are against public policy and are unenforceable.

Despite any limitations that might exist, testamentary trusts are incredibly flexible and allow for a great deal of creativity. They can not only protect a testator’s assets from being squandered after his death, but they can protect the beneficiary against his/her own foolishness or bad habits. As such, it would be worthwhile to discuss with an attorney experienced in estate planning whether a testamentary trust is right for you and your granddaughter.

Linda M. Toga provides legal services in the areas of wills and trusts, estate planning and estate administration, marital agreements, small business services, real estate and litigation from her East Setauket office.