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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

We love our kids equally by treating each of them uniquely.” One of the numerous estate planning implications of the COVID-19 pandemic is the significant increase in mental health challenges and drug and alcohol addiction issues experienced by the adult children of our clients. The WHO reported a 25% increase in anxiety and mental health disorders since the onset of the pandemic. Similarly, one in five adults report a surge in heavy alcohol use since March of 2020. By reason of student loan debts, significant inflation, and other factors, many of our clients are providing significant financial support to adult children. As in other areas of life and law, there is not one trust solution to be applied to a myriad of different challenges. Instead, a client’s post-death “testamentary trust” plan should address each child’s unique challenges. In this month’s update, I describe four types of testamentary trusts that can be customized for each beneficiary’s unique situation.

Supplemental Needs Trusts

Unfortunately, our firm has observed that well-intended advisors, including attorneys, will inappropriately utilize a type of trust called a supplemental needs trust. A supplemental needs trust is appropriate only if (1) the beneficiary meets the Social Security Administration’s definition of having a “disability,” and (ii) the value of the beneficiary’s individually-owned assets allows him or her to qualify for public benefits. A “disability “ is defined as a serious mental impairment that renders the beneficiary unable to engage in any substantial gainful activity and must have lasted, or be expected to last, for at least one year, or to result in death. The purpose of a supplemental needs trust is to allow the beneficiary the opportunity to continue to benefit from public benefits is such a manner to “order” the payment of living expenses primarily from these government benefits and only secondarily from the trust. As a result, the provisions of a supplemental needs trust are intentionally restrictive so that the government benefits are used as a primary means of support. If a trust beneficiary is receiving public benefits, the supplemental needs trust structure is critical to protect the assets and, perhaps more importantly, allow the beneficiary to continue to be eligible for public benefits. If, however, the trust beneficiary does not qualify for public benefits, a supplemental needs trust is not appropriate because it would be unnecessarily restrictive.

Mental Health and Addiction Recovery Trusts

A beneficiary facing mental health or addiction challenges (e.g., gambling, chemical or alcohol addiction) should have a trust implemented that authorizes the trustee to use trust assets in a manner to diagnose the mental health condition, to place “guard rails” on the use of the trust assets, and to assist the beneficiary towards re-engaging in work and society in a productive way. Specifically, the trust agreement should authorize the trustee to make distributions for the following purposes:

  • Employ experts to diagnose and treat the challenges;
  • Provide for the health care costs, including medications and treatments;
  • Provide financial incentives for the beneficiary to progress through various stages of recovery; or
  • Provide for the payment to third party providers to meet the beneficiary’s basic living expenses.

The trust agreement should also include provisions that allow the trustee to withhold distributions requested by the beneficiary, even for reasons ostensibly related to the living expenses of the beneficiary, if the trustee has reason to believe that such distributions will be used in a manner that harms the beneficiary’s path towards recovery. The trust agreement should include provisions that allow the trust to administer the trust as a more traditional “support” trust once the child has experienced a full recovery.

Special Purpose Trusts

Many of our clients wish for an inheritance to be used for a specific purpose, and to benefit the beneficiary in a certain manner, at a future date. For example, some may wish to provide an adult child with a cash gift towards a down payment on a residence. Other examples of a “special purpose” trust might include:

  • assisting the child or grandchild to attend graduate school;
  • assisting with the costs associated with a first wedding;
  • entering into or maintaining a business or profession; or
  • allowing the child or grandchild to make charitable gifts directly to tax-exempt organizations.

Support Trusts

Fourth, and finally, the most common trust planning structure utilized is a “support” trust. While the beneficiaries are not in a position to personal manage an inheritance, the clients desire to leave an inheritance to support the child’s living expenses. Most commonly, a support trust is structured to allow a trustee to provide for a beneficiary’s “health, education, maintenance and support.” This standard encompasses the following types of distributions:

  • “Health” generally encompasses all medical and dental expenses, physical or mental therapy, and pharmaceutical costs. It may take the form of paying insurance premiums, deductibles, or direct costs not covered by insurance.
  • “Education” refers both to the payment of tuition (including primary education, secondary education, trade or technical programs, but not graduate school) as well as room and board.
  • “Maintenance and Support” refers to distributions to assist the beneficiary in maintaining his or her standard of living.

For those of us who are blessed with more than one child, we can attest to how very different each of our children are from one another. Each child’s unique set of skills and challenges will result in a life circumstance that might dictate differing trusts provisions. As always, please do not hesitate to contact me or one of my colleagues with questions and considerations as to how best implement a testamentary trust plan unique to each child.