- Dennis Fordham
- Posted On
Estate Planning: Drafting flexibility into the living trust
Life is not static and neither should be anyone’s living trust.
Adjustments have to be made when compelling circumstances arise which necessitate alternative approaches.
For that reason a well drafted living trust should provide contingency planning alternatives.
Unforeseen circumstances could relate to the settlors themselves, to the trust assets, or to the beneficiaries.
Let us consider some possible scenarios and how a trust could be drafted to provide suitable alternative solutions.
First, the settlor's own circumstances could dramatically change.
A settlor might require admission into a skilled nursing home and wish to apply for Medi-Cal assistance to help pay the costs.
In that case, the settlor’s trust might authorize gifting of assets to family in order to accelerate his or her eligibility and/or to preserve the gifted assets against eventual estate recovery by Medi-Cal of assets exempt for eligibility purposes only after then settlor dies.
Second, the assets that are available to distribute to the beneficiaries could be significantly different than those the settlor owned when he or she drafted the trust.
Some or all of the important original trust assets that were specifically devised may have been given away, sold, and new ones acquired.
Also, debts owed by the decedent may wipe out a large portion of the estate leaving much less to be distributed to any beneficiaries who receive a percentage of the remaining trust estate.
For these reasons, a trust may provide alternative distribution schemes consistent with the decedent’s wishes should the estate be dramatically changed.
Third, the beneficiaries own life situations at the time of distribution may be significantly different.
That is, some beneficiaries may have died, may be receiving needs based SSI or Medi-Cal benefits, may have debt issues, may be involved in a divorce, may be incarcerated or otherwise incapable of managing their own affairs. Thus, the trust may authorize the trustee to pursue more appropriate alternatives.
Specifically, in the case of a deceased beneficiary, the trust may permit the trustee to distribute to alternative beneficiaries if a primary beneficiary, who survived long enough to inherit, has died prior to receiving the full inheritance – such alternative beneficiaries could either be named in the deceased settlor’s trust instrument or, if authorized, in the deceased beneficiary’s own will pursuant to a power of appointment.
In regards to a beneficiary receiving SSI/Medi-Cal, the trust could redirect the inheritance into a special needs trust to assist such beneficiary.
In the case of beneficiaries who have creditor or divorce issues, the trust could authorize the trustee to withhold all or part of distribution for any period of time up to an including the beneficiary’s entire lifetime and to utilize the withheld inheritance to assist the beneficiary.
Lastly, regarding a beneficiary who is incarcerated or otherwise incapable of managing an inheritance, the trust may authorize that the trustee either retain and manage the inheritance in further trust or use the inheritance to purchase a single premium annuity for the beneficiary (to stretch out the payments over the beneficiary’s lifetime or term of years).
As more time passes since when the trust was drafted the more changes occur and the more likely it becomes that the original plan as conceived will become either partially or completely inappropriate given the new circumstances.
It is, therefore, only good planning to draft flexibility into a trust to allow the trustee maneuvering room to respond to unforeseen circumstances.
Needless to say, the foregoing discussion underscores why one’s estate plan should be reviewed by an attorney periodically – at least every five years – and sometimes sooner if events necessitate in order to make necessary adjustments to ensure its continued appropriateness.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .