Some issues to consider when you create a trust

Here’s another story that shows the importance of picking a good trustee – someone who will adhere to your wishes and prevent disputes down the road.

It’s also proof that just because someone has died, that doesn’t mean they cant be the source of a lawsuit – so carefully drafting your document can save a lot of headaches.

Henry Hansen set up a trust to benefit his two daughters, Mildred and Ruth.  The trustee was to pay income to the daughters, and if either daughter needed additional money due to illness, the trustee was to provide it from the principal.  When both daughters had died, the remaining money was to go to his grandchildren. 

Mildred died in 1986 and Ruth died in 2005.  However, Ruth’s executor filed a lawsuit, claiming that in the last years of her life, the trustee had failed to pay her money from the principal to support her in her illness. 

In effect, the lawsuit pitted the creditors of Ruth’s estate against Henry’s grandchildren, both of whom claimed they were entitled to the money.  The dispute ended up in the Nebraska Supreme Court. 

The grandchildren claimed Ruth’s estate couldn’t complain because the trustee had discretion to decide how much to pay her.  But the court said that wasn’t true.

While the trustee had discretion to decide how much Ruth needed, the trustee didn’t have discretion to ignore her needs altogether and refuse to pay money from the principal if Ruth really was ill and needed money.

The grandchildren also argued the trustee had no right to pay any money to Ruth’s estate.  The purpose of the trust was to support Ruth in case she became ill – and now that she had passed away, paying money to her estate wouldn’t fulfill that purpose.  All it would do is benefit her creditors.

But the court said that Ruth’s executor had the right to enforce the trust to the same extent that Ruth would if she were still alive.  This case points out 3 important considerations:

1)      Be careful in choosing a trustee.  Choose one you feel confident will follow your instructions- because if they don’t, disputes are bound to occur.

2)      Be clear exactly what kind of decision-making authority you want to give to the trustee.  Some trusts say a trustee should provide for someone’s general welfare, but in fact give the trustee complete discretion as to whether to pay any money at all.  Some trusts require a trustee to pay money in certain circumstances, but give the trustee discretion to decide how much is appropriate.  And some trusts contain very detailed instructions.  Think about which kind of trust you feel most comfortable with.

3)      After a beneficiary dies, do you want his or her estate to be able to enforce rights to the trust funds? If not, it might be possible to provide otherwise in the trust depending on the circumstances.

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