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CATEGORIES:  Estate planning, wills, trusts, elder law, asset protection, creditor protection, Winston Salem, North Carolina, NC.

A Common Story

During our first meeting, I’ll frequently hear a client story that goes something like this:

“When I pass away, I can’t give any of my assets to my son Johnny.  He plays fantasy football and bets on football teams.  Unfortunately, he’s a terrible better and I think he has lost thousands of dollars.  His wife Judy is about to split up with him.”

Such financially risky heirs frequently fall into one of the following categories:

  • Spendthrifts (can’t manage money or consistently waste money);
  • Substance abusers (drugs or alcohol);
  • Immature adults;
  • Gamblers;
  • Heirs with creditor or bankruptcy problems;
  • Heirs facing divorce or other legal challenges;
  • Heirs with untrustworthy spouses, close relatives, or associates.

The Discretionary Trust

In many cases, disinheritance is not the only solution for such financially risky heirs.  I may instead structure a testamentary “discretionary trust” within a will document, or a discretionary subtrust within a trust document, to safely award assets to a financially risky heir.

The client selects a trustee (a “manager” of the trust legally obligated to act in the best interests of the beneficiary), and back up trustees, to make future distributions to the heir.

I’ll agree with the client on a “distribution standard,” which provides directions to the trustee(s) stating what types of expenses to the risky heir are permissible.

“HEMS” represents the most common “ascertainable” (measurable) distribution standard.  When in place, this means that the trustee can only make distributions from the risky heir’s trust for that heir’s “Health, Education, Maintenance, or Support.”  Distributions to buy alcohol or to pay off a gambling debt would be off limits.  If needed, a discretionary trust may be set up so that the trustee may make direct purchases on behalf of a risky heir, so that the risky heir never has a chance to spend the assets unwisely.

Protecting Against the Risky Heir’s Creditors

Discretionary trusts are legally valuable, because they protect any assets being held or to be distributed by a will or trust document from lawsuits or creditors of the risky heir.  In addition to protecting the risky heir’s assets, when assets are also being held in trust for other beneficiaries, the risky heir’s potential lawsuits or creditors cannot jeopardize the other beneficiaries’ trust assets.

In North Carolina, in order to protect against creditors, the trustee must be granted the full discretion (complete autonomy or independence) to either make or not make distributions to the risky heir within the will or trust document.  Discretionary trusts protect against creditors in North Carolina when structured as follows:

  • The amount to be received by the beneficiary, including whether or not the beneficiary receives anything at all, is within the discretion of the trustee; or
  • The trustee has no duty to pay any particular amount to the beneficiary, but only has a duty to pay sums, in the trustee’s discretion, that he determines are appropriate for the support, education, or maintenance of the beneficiary. N.C. Gen. Stat. § 36C-5-504

If Dad worries that the assets he wants to leave for his daughter Sue may be jeopardized by his son Johnny’s gambling debts, setting up a discretionary trust for Johnny in Dad’s will or trust documents protects Dad’s assets left for both Johnny, and Sue.

A discretionary trust may be set up for any length of time needed, and may be drafted to protect the assets left for a risky heir for that heir’s entire lifetime.

If a client is considering leaving assets to a financially risky heir, a discretionary trust may be his or her best option for safely benefiting that loved one.