That’s What Trusts Are For
By Melissa Taylor
Why should I have a trust? The most touted answer to this question is to avoid probate. However, there are many other reasons for creating a trust that often do not get the attention they deserve. One of those is to avoid some future federal estate taxes.
Generally, if an irrevocable trust provides income for the life of a beneficiary and, upon the death of that beneficiary, specifies a new income beneficiary or terminates, the trust corpus value will not be included in the taxable estate of the lifetime beneficiary. This is commonly referred to as a generation-skipping trust when the trust benefits several generations of the grantor’s descendants. If done properly, this type of trust can avoid federal estate taxes that would otherwise be imposed on each generation.
A trust also provides a grantor a way to leave property to a beneficiary without the beneficiary’s creditors having access to the trust property. For example, a grantor can leave property in trust for a beneficiary who has a job that exposes him to liability (e.g., a doctor) in order to protect the property from the beneficiary’s potential creditors. In other words: a grantor can provide a beneficiary with an asset protection trust.
This also works well if the beneficiaries are spendthrifts or already have creditors. By leaving the estate in trust, the property can actually benefit the beneficiary rather than the beneficiary’s creditors. It also protects the estate from a beneficiary’s ex-spouse in the event of a divorce.
THE SILVER SPOON SYNDROME
Yet one more reason to leave property in trust is to avoid the so-called “Silver Spoon Syndrome,” in which one generation earns the money and later generations spend it all. The grantor who earned the money can leave the property in trust and specify the conditions that must be present before a beneficiary receives a distribution. This can help prevent beneficiaries from squandering the estate and safeguard the property for future generations. It also permits the grantor to continue to control his estate even years after his death.
For example, if it’s important to the grantor that his beneficiaries work and not be reliant on the trust fund, he can specify that no distributions be made to a beneficiary in excess of wages earned. Or if a grantor is concerned about drug or alcohol abuse, he can provide that no distributions be made during the time such abuse is taking place.
And the list goes on and on. However, there are some limitations. One of those is the rule against perpetuities, which limits the amount of time a trust can be in existence. The current version in Oklahoma provides that an Oklahoma trust can only exist until the end of the life of a currently living beneficiary plus 21 years.
Thus, if an Oklahoma grantor has only children and grandchildren living when establishing a trust, the trust can provide for each of the children and grandchildren as well as the grandchildren’s children, but only for 21 years after the death of the last grandchild living at the inception of the trust. The trust cannot provide for the great-grandchildren past this age or for any later generations.
RULE AGAINST PERPETUITIES
Recently in Oklahoma and many other states, there has been a push to abolish or modify the rule against perpetuities. Effective Nov. 1, 2015, the Oklahoma Trust Act will provide that this rule is only violated if no one has the power to sell, exchange or otherwise convey the property owned by a trust.
In other words, as long as someone like the trustee has the power to sell trust property, the rule is not violated, even if the terms of the trust do not provide for a termination date. Thus, the trust can stay in place in perpetuity.
There are some exciting implications of this change in Oklahoma. Going back to the examples mentioned above, the common denominator is that the grantor wants to protect her estate—from creditors, taxes and the beneficiaries themselves—and benefit her descendants in the method she prescribes for as long as possible.
Beginning next month, as long as grantors do not prohibit the sale, exchange or conveyance of assets in their estates, they can do this for potentially limitless future generations of beneficiaries while also controlling, for years after their deaths, how and when their estates can be spent. And, to boot, they can also avoid probate!