New Jersey Law

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Using Trusts to Protect the Assets of a Non-spouse Beneficiary

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One alternative to outright distribution of assets to beneficiaries is the creation of a trust. A trust is an entity that is created by the person who is deciding how their assets should be handled after their death. This person is often referred to as the “grantor” or “donor.” Trust can be used for a number of reasons, but a primary one is for the donor to control the use of the assets after they are gone.

A donor may be concerned with protecting assets given to non-spouse beneficiaries, such as children or even unrelated beneficiaries who the donor considers to not being good at managing money, or are facing claims, divorce, or other financially adverse situations, or where the donor wants to create limits or otherwise control the assets after death. Although outright distribution to adult children may be simple, it lacks any controls that a parent, grantor, may consider appropriate and necessary.

First, a critical issue in the creation of a trust is the selection of a trustee. A trustee can be a relative, a friend, a professional advisor, or an entity such as a bank or other financial institution. It is important that the trustee is a trusted person or entity that has a good knowledge of financial matters, and preferably has the same values or can be trusted to implement the values of the person creating the trust. If there are minor children, it must be determined whether the guardian of the children should be the same person as the trustee. This is a decision that is based solely upon the desires and values of the person creating the trust and designating the guardian.

Trusts can be created to protect the assets from potential claims against the non-spouse beneficiary. This can include claims arising from a divorce and general claims by creditors of the beneficiary. Under New Jersey equitable distribution laws, assets bequeathed or gifted to children are generally protected in the event of a divorce. This protection may be eroded, however, if the funds are commingled with the marital assets. Risks can also be presented if the beneficiary is subject or potentially subject to claims or suits arising from a negligent act or from the beneficiary’s financial difficulties. These concerns can be addressed through the careful creation of a trust by use of a number of provisions, including use of a “spendthrift” clause that precludes both the voluntary and involuntary transfers of an interest in the trust assets; although in some circumstances courts have provided for limited exceptions for such things as claims for child support, alimony, and taxes.

Trusts can also be created to motivate children to take certain actions, achieve certain goals, and even to retain certain values. Trust can include provisions that set parameters for distribution of trust assets. For example, a trust can provide that the assets will be distributed at a certain age, but earlier if, for example, the child obtains a graduate degree. Provisions could require certain values be maintained such that the child remains faithful to a particular religion, maintain gainful employment. Trust provisions could also discourage behavior by preventing the trustee from making distributions if, for example, the trustee determines that the child has a gambling or substance abuse problem. Although some restrictions may be considered void for public policy reasons, such as a requirement to marry within a particular faith, the provision in the trust could create the necessary fear in the beneficiary to comply with the parent’s wishes. Trusts may also be created for the lifetime of a child; that is, that is not fully distributed to the child during their lifetime, but providing them certain benefits such as income, or for use in certain purposes, such as for investment in business, assuming that the investment is approved by the trustee.

Another significant use of a trust is to protect and provide for beneficiaries with special needs. One of the considerations is how Medicaid interacts with the estate plan. Careful planning is needed to avoid jeopardizing the child’s eligibility to receive government substantial disability and health benefits. The assets of parents are considered for a child under eighteen for eligibility for these government benefits. After eighteen the assets of the parents are no longer relevant. As a result, a parent should not leave a bequest directly to a special needs child, but rather, place it in a special needs trust. Parents often consider leaving the estate to their non-special needs children with the expectation that they will care for the special needs child. The use of the trust, as with the other trusts referred to in this article, allows the grantor (in this case the parent) to control the use of the trust assets. It certainly stands to reason that the sibling can remain the trustee, but it allows the assets to be dedicated to the special needs child. Interestingly, similar considerations may be employed when a child wishes to leave assets to their aging parents. These trusts must be carefully written, and must take into account the specific rules that apply in each state.

The laws regarding taxation of estates, including, as well as eligibility for governmental assistance for people with special needs, are subject to change. As a result, it is important to review your estate plan every few years.




DiFrancesco, Bateman, Kunzman, Davis, Lehrer & Flaum PC (http://www.dbnjlawblog.com) is a full service law firm in New Jersey which provides a broad range of legal services.

The information contained in this blog is intended solely for informational purposes; it is a advertising publication of DiFrancesco, Bateman, Kunzman, Davis, Lehrer & Flaum P.C.This publication is intended to alert recipients of developments in the law and is not intended to provide legal counsel, advice or opinion on any specific facts or circumstances. The contents are intended as general information only. You are urged to consult a member of this firm or your own attorney concerning your particular situation and any specific legal questions you might have.