Legacy Trusts/Dynasty Trusts
Legacy Trusts/Dynasty Trusts
What is the Problem?
Many trusts require the trustee to distribute all principal in the trust to the beneficiaries at a given age, 18 or 21 or 25 or some other age at which the settlor considers the beneficiaries to be sufficiently mature. Another common method of distribution is to stagger the distributions of principal. For example, the trustee may be directed to distribute one third of the principal at age 21, one half of the balance at age 25 and the remaining principal at age 30. There are several variations on this type of distribution pattern. But, how can one be certain that a beneficiary will be capable of handling an influx of wealth at the age of 18 or 21, or 25 or 30 for that matter. Certainly young adults may lack the financial acumen to manage large inheritances. In addition to lack of experience, young adults who are newly married may experience marital problems ending in divorce. After all, the divorce rate is around 50% and the overwhelming majority of divorces occur during the early stages of the marriage. Since younger drivers are more likely to cause an accident because of their inexperience, they are more susceptible to lawsuits. Younger adults may be entering into business relationships for the first time or embarking on careers that make them target defendants in civil law suits. We live in a litigious society with a new lawsuit being filed in this country every two seconds. Predators and scam artists are prevalent. There certainly is no bright line distinguishing a good age or stage of life at which a beneficiary should have total access to trust assets. What if there were a way to safeguard the principal from creditors and predators and yet give the beneficiary control over distributions until and unless there are “storm clouds” in the way of a potential creditor. There is a way and it is called a “Legacy Trust” or “Dynasty Trust”.
What is a Legacy Trust or Dynasty Trust-A Legacy Trust, sometimes called a Dynasty Trust is a continuing trust. So, instead of requiring the trustee to distribute all principal at a certain age or ages, or at a certain stage or stages of life, such as admission to college, graduation from college, etc., the trustee is instructed to continue holding and managing the trust estate until all of the principal is expended within the trustee’s sole discretion. Some attorneys draft the trust so that the beneficiary is the trustee, having complete discretion to distribute to him with the right to resign as trustee and appoint an independent trustee if those “storm clouds” are on the horizon. This is at times referred to as “Beneficiary Directed Trust.” This, of course, provides the beneficiary with the highest level of control over the trust assets. However, in the estimation of this author, there are risks. For one, the beneficiary may not recognize the “storm clouds” soon enough. Moreover, a creditor may argue successfully that the trust assets should be subject to attachment in conjunction with a lawsuit against the beneficiary because of the high level of control, which is arguably tantamount to ownership. A more prudent approach would be to appoint an independent trustee from the beginning with complete discretion to distribute income and principal to the beneficiary.
As the term suggests, a Legacy Trust continues beyond the life of the initial beneficiary if the assets in the trust survive the death of the beneficiary. The trust provides for contingent beneficiaries so that when the primary beneficiary dies, the remaining trust assets continue to be held for the benefit of that beneficiary’s descendents and their shares are held in trust for their descendents, etc. If desired by the Settlor, the drafter of the trust can insert a power of appointment by which a beneficiary can direct that his or her share be held for a beneficiary of his or her choosing. Since these types of trusts are inter-generational, it is advisable to appoint an institutional trustee.
What is the difference between a Legacy Trust and a Spendthrift Trust ?
The two are similar in that they both protect the interest of a beneficiary from creditors and predators. If a beneficiary is susceptible to one or more creditors, a clause can be inserted into a trust prohibiting the beneficiary from pledging his or her interest in the trust as collateral in a loan transaction and, more importantly, prohibiting a creditor from attaching the beneficiary’s interest in the trust. Of course, if a distribution is actually made to the beneficiary who deposits it in a bank account or some similar depositary or investment, the distributed funds are then vulnerable. The difference between a Legacy Trust and a Spendthrift Trust is that the Legacy Trust does more than afford protection from creditors and predators. It allows for wealth accumulation from generation to generation.
If you would like to learn more about this topic, call Lori at (401) 738-1910 extension 103. She will schedule a free consultation with one of the attorneys who can help you. Rampino Law Associates will design an effective estate and/or long term care plan with your particular needs and circumstances in mind.