By Brit Burner, Esq.

Estate planning is often a family affair. While clients may come to us worried about their future, they are also worried about the future of those they will leave behind when they die. It may be a child, niece, or nephew who has had a run of bad luck, a string of bad relationships, or one that makes bad business decisions. 

Even clients who are leaving assets to children with good marriages and seemingly no debt have concerns that one of these negative situations may arise in the future for one of their beneficiaries, and then what? 

When concern about a beneficiary is top of mind, clients are often interested in hearing about the options available for leaving assets behind in a Trust for the benefit of one or multiple beneficiaries. These can be called by several names but we regularly use the term “descendants trust.” This type of trust gives creditor protection to beneficiaries, protecting their inheritance from dissipation in the event of a divorce, bad business decisions, general creditors, or any other creditors. A descendants trust can be drafted to avoid additional estate taxes at the beneficiary’s subsequent death, thereby preserving wealth for another generation. 

A descendants trust can be created for each beneficiary to protect their inheritance. These trusts are created by the client’s last will and testament or living trust, and the creating document lists the specific rules of each trust.

One of the first decisions to make is who should serve as trustee. The trustee is responsible for investing and reinvesting assets held by the trust. This can include assets invested in the market, cash, or real estate. To assist clients in making the decision of who should serve as trustee, we ask if we are trying to protect the beneficiary from themself or from others. If the beneficiary is the problem, we will recommend a family member, friend, or corporate entity serve as trustee. For concerns about creditors, divorcing spouses or other outside entities, we may recommend that the beneficiary can serve as their own trustee. 

The particular circumstances of the situation will help dictate this choice. If a close family member or the beneficiary serve as trustee, they are deemed to be “interested” rather than “independent. 

In determining allocations of principal from the trust, an interested trustee is restricted to distribution only for health, education, maintenance, and support. If there is an independent trustee, then assets can be paid for any reason at the discretion of the trustee. 

For distributions of income, a descendants trust can provide that any income generated from an asset in the trust shall be paid out to the beneficiary, although the income can also be directed to remain in the trust and distributions can be made upon the discretion of the trustee. However, the trustee must keep in mind that income that remains in the descendants trust will be taxed to the trust at its own tax rate, usually higher than that of the individual beneficiary. 

Beyond the known concerns for a beneficiary, there may be a concern for future need for Medicaid or other government benefits. The descendants trust is a good solution because it can have supplemental needs language that allows a beneficiary to maintain or apply for government benefits while maintaining trust assets to be preserved, should this become necessary. 

While some clients may feel that their assets are such that their children will not need government benefits, there are many wonderful programs for the disabled that can only be accessed by government benefit programs. This provision may or may not be applicable to future heirs and is prudent to include. The future is unknown and with the proper planning, you be sure your beneficiaries and the money you leave for them is well protected.

Britt Burner, Esq. is a Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Elder Law. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.