Passing money from one generation to the next in trust can have its pitfalls. Often when a trust is created, the ultimate beneficiaries are not even born. How is the person creating the trust to know how their grandchildren will turn out if they are still running around in diapers or if they have never been born?
Unfortunately, many trusts that were created years ago are more basic than the sophisticated trusts we have today. They often do not contain all the bells and whistles that can add flexibility for unforeseen circumstances. For instance, older trusts often require distribution to a grandchild at age 18 or 21. Modern trusts, by comparison, often keep the monies in trust longer or allow a beneficiary’s parent to decide to keep the monies in trust longer. Sometimes, the age of distribution is extended until the child is older, say age 30, and sometimes, the monies are held in trust throughout the beneficiary’s lifetime. There are several reasons why people want to extend the age of handing over an inheritance to a child, including prolonged adolescence, substance abuse, gambling addictions, and the possibility of undue influence, among others.
If you have a family trust that requires distribution to a child who is not ready to handle a large distribution of cash, you have options. Here are five actions you should consider taking:
- Exercise your power of appointment – this may be the simplest option if it is available to you. A power of appointment is the ability to change the terms of how your child will receive the monies. Exercising the power sends the monies to a new trust that you create. For instance, you can require that instead of giving the child the monies at age 21, the monies continue to be held in trust for the child’s life. Typically, you exercise the power of appointment by modifying your will to direct the trust funds to a new trust. You will need to consult with your attorney to determine whether the underlying trust instrument allows you to take this action.
- Decant – If exercising a power of appointment is not an option, you can check to see if the underlying trust or state law will allow you to decant the trust assets to a new trust with different trust terms. Decanting a trust is similar to decanting a bottle of wine. You pour the old trust assets out of the old trust and into a new trust. The new trust will contain terms protecting the assets from outright distributions to the beneficiary.
- Non-Judicial Settlement Agreement – Another option may be to sign a non-judicial settlement agreement or NJSA. An NJSA allows for the trustee and certain interested parties to modify the trust terms without court intervention, even if the trust is irrevocable. You will need to verify that state law will allow you to enter into an NJSA, and you may have to give notice to the child or ask the child to sign the agreement. This may be problematic if the child refuses.
- Self-Settled Trust – If you feel the child would be amenable to a change in trust terms, you can have the child create a self-settled trust. This is simply a trust that the child creates themself. The child would then transfer the trust assets they receive to this new trust. Often, the new trust will be irrevocable, meaning the child cannot change it, or it can only be amended with the consent of a third party, such as the child’s parent.
- Court Order – If all else fails, you may have to go to court and ask the court to modify the trust terms. Depending on the severity of the situation, such as a drug addiction where a large amount of cash could have potentially fatal effects, this may be your only recourse.
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