How unusual family situations can be addressed by living trusts
Living (revocable) trusts can address unique scenarios for people that need to have their questions answered regarding significant issues, such as a disabled or handicapped beneficiary, a son or daughter who refuses to get a job or needs educational assistance. What if the parents own a vacation or secondary home? A properly drafted trust can address these matters.
The Spendthrift Son
The trust may be revocable, or irrevocable and funded during the parents’ lifetime. Direction to the trustee may provide that the beneficiary only receives trust funds (dollar for dollar) based on trustee satisfaction of W-2 or 1099 forms for the previous year. Distribution should be related to the amount of effort expended in the business or profession of the child’s choice.
Disabled or Handicapped Beneficiary
There are three basic types of trusts to cover this situation.
A revocable trust that contains language giving the trustee the ability to shut off distributions to a handicapped beneficiary and will not interfere with Medicaid or Social Security eligibility payments. This has been referred to as the “spigot test”. The beneficiary is to have his supplementary needs met over and above those paid for by state or federal benefits.
A second type of trust is a Supplemental Needs Trust that must be irrevocable and not terminate before the beneficiary’s death according to latest issues of the Social Security Administration Program Operation Manual (POM). In many states, law has codified the “spigot test”. See Ohio Revised Code ‘5111.151 (2004).
A third and seldom-used trust has been enacted by some states called a Supplemental Services Trust. See Ohio Revised Code ‘5815.28. There are limitations on its use. For instance the maximum trust principal must be under two hundred thousand dollars ($200,000). The trust must have a “pay back” to the state of at least 50%. This trust may be useful if the beneficiary qualifies, developmental disabilities, mental disabilities, or eligibility through the Ohio Department of Mental Health, a board of alcohol and drug addiction or mental health services. Ohio Revised Code ‘5815.28 (B.)
Finally, if a beneficiary is disabled and is under 65 years of age, a Special Needs Trust may be allowed. See 42 U.S., C.A. ‘1396p (d) (4)(A), or applicable state statues. It is a Medicaid “pay-back” trust that must guarantee that upon the death of the beneficiary all of the remaining funds (up to the amount paid by Medicaid) must be returned to the governmental agency making payments. A probate court, guardian, or parent of the beneficiary initially may set up this trust.
Many people wish to set aside funds for the higher education of their children or grandchildren. An education-specific trust can restrict use of trust funds to the costs of college, university or trade school tuition, books, fees and supplies if the beneficiary is regularly enrolled, and restrict principal distribution until a baccalaureate degree is obtained. The trust should be irrevocable in order to be funded each year with the annual gift tax exclusion (currently $13,000 per person) and provide the trustee with an ability to withhold distributions if the beneficiary has a substance abuse problem, is involved with potential litigation, is attached to a questionable religious organization, or is physically or mentally impaired, affecting the beneficiary’s ability to manage a distribution.
Secondary or Vacation Homes
Occasionally on the death of a spouse, the surviving spouse will own a vacation home. The couple may have a number of children, one who doesn’t partake in the activities the secondary home was set up to offer, or can’t afford to maintain a home. A specific trust for this kind of property can avoid arguments between the children, fund the costs of maintenance for years, determine permitted use and terms of selling or buying out a sibling’s interest. Such a trust keeps peace in the family and provides direction, particularly if the secondary or vacation home has passed down through a number of generations.
Finally, there are many unique situations that may be addressed using trusts and issues solved with proper estate planning, advice and direction.
William “Bill” Brown, Attorney at Law
2999 E. Dublin-Granville Road
Columbus, Ohio 43231-4030