Legacy Planning – The Importance of Sub-Trusts for Estate Planning

At Choi Law Firm, we understand the significance of creating trust plans that cater to our clients’ specific needs. When it comes to selecting trust beneficiaries, clients often have considerations such as minor children, grandchildren with special needs, disabilities, substance abuse issues, or the need to qualify for public benefits. In such cases, it becomes crucial to hold a beneficiary’s share in trust for their benefit rather than providing it to them outright. While families may have a clear idea of who they want to care for, it’s equally important to understand how to care for those we love. Each beneficiary’s individual circumstances should be taken into account. This is where sub-trusts come into play.

Understanding Sub-Trusts for Estate Planning

Sub-trusts are separate trusts that can be created under a will, revocable living trust, or irrevocable trust. These trusts serve as powerful tools, enabling you as the grantor to provide distribution instructions for each beneficiary based on their unique needs and circumstances.

Trusts for Minors

It is never advisable for a child under the age of 18 to receive a large distribution of assets outright. When a minor child inherits a significant sum of money, it often requires the appointment of a conservator—a court-appointed guardian of finances. Conservators are responsible for managing a minor’s assets under court supervision, which means they must seek court permission for any payments made on behalf of the minor beneficiary. Instead of leaving a substantial amount directly to a minor, structuring a trust for their benefit is a better approach. In this scenario, a trustee manages the child’s assets and can make payments for their health, education, maintenance, and overall support. This standard, known as an “ascertainable standard,” prevents the trust assets from being considered the beneficiary’s own assets while providing for their essential needs.

Beyond Age 18

While there are legal ramifications for naming minor beneficiaries, there are also practical considerations for beneficiaries who have reached the age of maturity but are still very young. Consider a scenario where a 19-year-old receives a $100,000 inheritance from their grandparents’ estate. Even if the teenager is well-educated and responsible, they may be tempted to use the money imprudently. To address this, our clients typically choose when their beneficiaries are allowed to inherit from their trusts or estates outright. For example, it is common to restrict a beneficiary from receiving an outright distribution until the age of 25. Even at 25, the beneficiary usually receives only a percentage of their inheritance, known as a payout. Payouts can be structured for specific ages, such as 25, 27, and 30. The final age at which the sub-trust will terminate, and the beneficiary will receive the balance of the sub-trust outright, is determined by the client. By these advanced ages, the beneficiary is often close to completing higher education and tends to be more responsible overall. Sub-trusts with staggered payouts offer grantors the flexibility to make decisions that are in the best interest of each beneficiary.

Special Needs Trusts

Perhaps the most critical type of sub-trust is the special needs trust, which provides supplemental funds to enhance the quality of life for disabled beneficiaries without jeopardizing their eligibility for vital assistance programs. Special needs trusts, also known as supplemental needs trusts, can be structured to meet the specific requirements of disabled beneficiaries while preserving their access to asset and income-based benefits. Similar to other sub-trusts, a trustee is named to manage the trust funds for the beneficiary with special needs. The trustee can make payments for expenses such as medical care, therapy, education, recreational activities, and anything not covered by government programs. Consequently, these supplemental needs trusts act as an additional layer of support for your most vulnerable beneficiaries.

Creditor Protection

Another crucial advantage of sub-trusts is the protection they offer against potential creditors. Placing assets in an irrevocable trust generally shields them from the beneficiary’s personal creditors. As long as the beneficiary cannot compel a distribution by the trustee, these funds are not considered the beneficiary’s individual assets and are not subject to creditor claims. This protection becomes invaluable if the beneficiary faces significant personal debt, lawsuits, or divorce. By keeping assets within a trust, protected by a trustee subject to ascertainable standards, you can ensure that your intended beneficiaries receive their rightful share without it being depleted by unforeseen circumstances.

Take Control of Your Legacy

At Choi Law Firm, our attorneys specialize in offering flexibility and customization options to address the unique needs and circumstances of each family we serve. We recognize that estate planning is not merely about determining who receives what. Thoughtful estate planning requires a comprehensive plan for each distribution to every beneficiary. By including sub-trusts in your will or trust, you gain a powerful level of control over the legacy you leave behind. With our expertise and support, you can ensure the security of your loved ones’ futures, regardless of the circumstances they may face.