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How To Create a Trust for Your Heirs (Part 2)

Published on: Aug 03 2020

In last week’s edition of Retirement Watch Weekly, I presented How To Create a Trust for Your Heirs.

There are a few more important provisions and clauses for setting up beneficiary trusts, so let’s get right to it.

Matching Trust:

This is another clause designed to pay out trust principal only when the beneficiary has some maturity and responsibility.

The trustee makes payments to match income earned by the beneficiary.

The payments can be for exactly the beneficiary’s salary or be a multiple of it, such as three times the salary.

You might set up the trust so that these are the only distributions or they are supplements to basic distributions.

The matching trust can be a bit unfair if there are several heirs, or it might give the beneficiary the wrong incentives or values.

An heir who is attracted to a relatively low-paying occupation will receive less than a sibling who is drawn to a higher-paying profession.

The trust might cause the heir to seek employment in a high-paying field rather than one which he or she enjoys the most or is most suitable.

So the matching trust must be used carefully.

Escape Clause:

This clause is called by a number of different names, but the meaning always is the same.

No matter how carefully you choose from and draft the provisions already mentioned, the beneficiary still might not be ready to handle a large sum of money at the time it is scheduled to be distributed.

Perhaps the grandchild got involved in a high-risk business venture, or is going through a nasty divorce.

If you don’t want your wealth distributed under circumstances such as these, the escape clause makes that happen.

The clause allows the trustee to withhold payments when it is in the best interests of the beneficiary.

Some people spell out the circumstances under which payments should be withheld.

Others realize that they cannot anticipate every circumstance, so they give the trustee a broad, general power to determine when withholding payments is in the beneficiary’s best interests.

Payments to the beneficiary resume when the situation that caused suspension of the payments is resolved and the trustee concludes a distribution is in the beneficiary’s best interests.

Emergency Clause:

Some of the saddest estate planning stories are those in which the trust creator concentrated on situations in which money was not to be distributed and ignored special circumstances under which payments should be increased.

For example, you probably would want the trust to be used if your grandchild developed special medical needs or wanted extended education.

It is a good idea to leave the trustee the power to increase payments in these and other special situations.

Marital Agreements:

Would you like a big part of your estate to end up in the hands of someone you never knew?

The wealth could end up with a second spouse or the children of a second marriage of one of your current in-laws or a future spouse of one of your offspring.

Once someone inherits part of your estate or receives a gift from you, that wealth typically is part of the person’s marital estate.

If there’s a divorce, the other spouse could receive all or part of the wealth.

You can avoid this situation by telling your children that they won’t get anything, other than income payments from a trust, unless they have valid premarital or postmarital agreements.

These agreements are very flexible, and the couple can put in whatever terms they like.

But the basic clause you want is that any gifts or inheritances from you or trusts you create are not considered marital property to be divided in the case of a divorce.

They are the separate property of the beneficiary.

For a marital agreement to be valid, each party should have separate legal counsel, there must be full financial disclosure from each party, and there must be enough time taken to contemplate the agreement.

You can’t plan for all contingencies.

But you can plan for the ones that have caused problems for people in the past.

By inserting a few carefully chosen words into a will or trust you can ensure that your children and grandchildren are cared for and reduce the probability that your estate will be squandered or wasted.

I’ll address even more important trust establishment strategies in detail in later issues of Retirement Watch Weekly. (Click this link for Part 1 of How To Create a Trust for Your Heirs.)

P.S. A guide for your heirs is a crucial element of every estate plan. That’s why I created my popular report, To My Heirs: A Book of Financial Wishes and Instructions. It’s one of the best gifts you can leave to your loved ones. Click here to get your copy and secure your family’s financial future.



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