In spite of good intentions when establishing your Living Trust estate plan, there are events that may occur between when you set up your plan and after your death when your wealth is distributed. For example, let’s say you left your assets “free of trust”, meaning outright in one lump sum, to your three children who are grown, responsible and able to take care of themselves. But shortly after your death, your son’s business fails and the money that he is to receive will now fall into the hands of his creditors! This certainly was not the way you intended your wealth to be used. For this reason we have a provision in our trust document called “Compelling Reasons”.
As we all know, life has a way of taking turns that are not as we planned. The benefit of including “Compelling Reasons” in your trust document is that if certain events occur at the time of the distribution of the estate, then the trustee handling the estate can withhold distribution to the beneficiary. When, in the Trustee’s discretion, the compelling reason for the postponement of the distribution ceases to exist, the distribution can then be made.
Here are a few examples of “Compelling Reasons”
- The beneficiary is under a certain age and deemed not responsible to handle a large sum of money at that age.
- The beneficiary has an alcohol or drug addiction.
- The beneficiary is influenced by someone or a group that may sway them to turn their inheritance over to them, such as an abusive relationship or a cult.
- A pending marital separation or divorce could cause the money to end up in the hands of the ex-spouse.
- Potential financial difficulty or proven inability to manage money. In order to protect the beneficiary from their creditors, the money would be placed in a trust.
- A serious tax disadvantage may authorize the trustee to withhold an estate distribution.
- If the beneficiary is receiving needs based government assistance such as Medicaid, housing or SSI, a special needs trust would be set up so the beneficiary can receive their inheritance but also continue to receive their important government benefits.
Providing flexibility in your estate plan is important. Including “Compelling Reasons” allows the Trustee the discretion to withhold distribution to protect your legacy from ending up in the wrong hands.