Well-drafted and comprehensive trusts should contain certain language we often refer to as “spare tire” provisions. For example, you might not have any beneficiaries now who are receiving government benefits based on a disability. Things such as Supplemental Security Income (SSI) or Medicaid. The reality is that we are all one accident away from disability. Therefore, why not include language providing that, if any beneficiary is receiving the type of government benefits only available to those individuals with limited income and/or assets at the time they inherit their share of your trust, or if a beneficiary needs to qualify for such assistance at some time in the future, then your trustee has the option of converting that beneficiary’s share to a special needs trust (also known as a supplemental needs trust)?
By including these provisions, you have protected your beneficiary’s share by allowing the beneficiary to qualify for benefits when needed while also making the beneficiary’s inherited assets available for certain “luxuries” the government will not provide for in order to improve his or her life? The alternative is that, without these provisions, your beneficiary may be required to “spend down” his or her inheritance before he or she can qualify for benefits.
Similarly, even if all of your beneficiaries are currently responsible adults with no creditor issues, what if one of them is involved in a future lawsuit due to an auto accident or a bankruptcy proceeding due to unanticipated family medical expenses? In this scenario, provided your trust contains language providing your beneficiaries with creditor protection when needed (often referred to as “spendthrift provisions”), you can protect your beneficiary’s inherited assets from certain types of creditors.
Finally, what if one of your beneficiaries, perhaps a grandchild, develops a substance abuse problem – whether it’s alcohol, prescription drugs or illegal narcotics – or a gambling addiction? In such a case, it may be dangerous to provide that beneficiary with any cash distributions, regardless of his or her age. If your trust contains the necessary language, your trustee could have the discretion to protect that beneficiary as necessary. Your beneficiary’s inherited assets could then be used for rehab and for help with living expenses. However, the trustee would not be obligated to distributed cash directly to the beneficiary until the addiction issue is resolved, if ever.
What We Hope
As estate planning attorneys, we hope our “spare tire” provisions are never needed. However, in the rare circumstances when these provisions are needed, the families we work with are relieved that their parents (and their estate planning attorneys) had the foresight to provide for these possibilities in advance.
If you are interested in exploring your own estate planning options, contact us today to set up your free initial consultation!