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ElderLaw News

ElderLaw News is a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is brought to you by The Estate Planning & Elder Law Firm, P.C., William S. Fralin, Esq., President.

Spendthrifts: Preserving Your Estate for Your Children

Protecting and preserving your estate for your children after your death has become much more challenging in the face of the current economic climate.

With the financial collapse of 2008 and subsequent recession, the perilous nature of the European market, our country's debt crisis, and the fears of another recession, many people are concerned about the long-term stability of the assets left to their children. Very often, however, market conditions are not the biggest threat to the inheritance you leave to your children; rather, the unpreparedness of your own children to manage their inheritance may pose the biggest threat. According to a recent poll, 75% of heirs felt either completely unprepared or only somewhat prepared to handle the management of their inheritance.

Fortunately, there are several solutions to protect against the diminution of such assets, either through mismanagement or creditor issues. One of the most common solutions to preserving your assets for your children is the creation of a spendthrift trust. A spendthrift trust is a trust that restrains the voluntary and involuntary transfer of a beneficiary's interest in the trust. Such a trust is often established when the beneficiary cannot effectively manage the beneficiary's own financial affairs, or, similarly, as an asset protection tool to protect the trust's assets from the beneficiary's debt and creditors.

The following are several considerations when using a spendthrift trust:

Trust termsMost spendthrift trusts are irrevocable, provide discretionary as well as mandatory payout provisions, and may even direct partial or full payments of the trust assets to the beneficiary upon reaching certain age requirements.

The terms of the trust should also explicitly provide spendthrift provisions. For example, the trust should be a spendthrift trust to the maximum extent permitted by law, providing that no interest in the trust shall be subject to a beneficiary's liabilities or creditor claims, assignment, or anticipation.

The spendthrift trust should also provide protections against the beneficiary's creditors. For example, if the trustee determines that a beneficiary would not benefit as greatly from any outright distribution of trust income or principal because of the availability of the distribution to the beneficiary's creditors, the trustee shall instead expend those amounts for the benefit of the beneficiary (i.e., the trustee can directly pay the beneficiary's bills − such as rent and medical costs − instead of giving money to the beneficiary outright which may then be reached by creditors). This direction is intended to enable the trustee to give the beneficiary the maximum possible benefit and enjoyment of all the trust income and principal to which the beneficiary is entitled.

Finally, the spendthrift trust can prevent marital claims against the trust assets in case of the beneficiary's divorce. This is done by providing that all benefits granted to a beneficiary of the trust shall be the separate property of such beneficiary (as distinguished from marital property, community property, quasi-community property or any other form of property to which such beneficiary's spouse might have a claim or interest arising out of the marital relationship).

TrusteeOne of the most important decisions you must make is who to appoint as trustee of the trust. Often, another family member is asked to serve as the trustee. There are many reasons, however, to consider appointing a corporate trustee (or co-trustee). The corporate trustee—such as a bank or trust company—has experience managing money and can provide valuable guidance. It is also much easier for a corporate trustee to make unbiased decisions, especially when various family dynamics are in play.

Trust ProtectorsA growing trend is to also appoint one or more trust protectors, defined as a person or persons who are authorized to direct the action of the trustee. The use of a trust protector can be a valuable tool when you have appointed a corporate trustee of the trust. The addition of a trust protector allows you to appoint a familiar, trustworthy person to oversee the trustee. Depending on your desires, and the applicable state laws, the trust protector may be given the power to (i) modify distribution or administrative provisions; (ii) remove and replace the trustee; (iii) consent to or veto exercises of trustee discretionary powers, such as investments and distributions; (iv) resolve disputes between beneficiaries and the trustee; and (v) terminate the trust.

The attorneys at The Estate Planning & Elder Law Firm can assist clients with their estate, financial, insurance, long-term care, veterans' benefits, and special needs planning issues.


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The Estate Planning & Elder Law Firm, P.C.

The Estate Planning & Elder Law Firm, P.C. is an elder law firm. We represent older persons, disabled persons, their families, and their advocates. The practice of elder law includes estate planning, estate and trust administration, powers of attorney, advance medical directives, titling of assets and designations of beneficiaries, guardianships, conservatorships, and public entitlements such as Medicaid, Medicare, Social Security, and SSI, disability planning, income tax planning and preparation, care management, and fiduciary services. For more information about The Estate Planning & Elder Law Firm, P.C., please visit our website at http://www.chroniccareadvocacy.com.

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