To control a spendthrift Some people are just bad with money. Henry and Ida are afraid that their daughter Beverly will spend her inheritance on fancy cars and travel. Tat’s why they decide to set up a “spendthrift trust” that will release funds only for expenses related to health, education, maintenance and support.
“A spendthrift trust can be a valuable way to protect beneficiaries from spending all of their inheritance,” says Arlene Cogen, a certified financial planner and philanthropic leadership consultant based in Portland, OR (
arlenecogen.com). But she warns that it’s not a foolproof mechanism: “Bear in mind beneficiaries can be very creative when it comes to petitioning trustees for health, education, maintenance and support. Tis can create an adversary relationship between the beneficiary and the trustee. One way around that is to create a trust which provides the individual with a set income stream, so they cannot keep knocking on a trustee’s door for money.”
To obviate claims from an estranged spouse While Amy and Clark feel their son, Andy, is skilled enough to run the family business, they are concerned about his marriage to an estranged spouse. In the event of a divorce, will the spouse sue to obtain business assets?
Scroggin offers this solution: Amy and Clark establish a trust that calls for Andy to be paid a salary for his work, while the equity of the business, along with any profits, remains in the trust for protection from lawsuits. In the same way, a trust can protect business assets from the claims of creditors if the inheriting person is in debt.
To avoid claims arising from multiple marriages Multiple marriages can create their own problems. James wants to make sure that if he dies his wife Mary receives income for life from the company dividends and asset distributions, so that she can take care of their children Betty and Jack. However, if Mary should remarry and then later die, James wants to make sure
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the money from the business then goes directly to Betty and Jack, and not to Mary’s new spouse or to that individual’s own children.
Again, a trust can mandate this more complex asset distribution pattern. “Te division between ownership and benefits can be helpful when people get married more than once and have children from multiple spouses,” says Sampson.
To avoid claims arising from a childless marriage Harris and Marge have three children named Deborah, Francine and Bart. Deborah is married to a man named Frank but has no children and is not expected to. Harris and Marge are concerned that if Deborah is given some of the equity and then dies, the equity will pass on to Frank, a nonfamily person who may try to dictate business decisions, and make unreasonable demands, such as the hiring of his friends.
Furthermore, if Frank remarries and then dies, his new spouse, a stranger to the family, might end up owning a third of the business. And that person might demand an exorbitant buyout
to avoid a lawsuit. “In this example, when Deborah dies without any descendants, a trust can call for her interest to pass on to her siblings or their descendants,” says Scroggin. “Trusts often are used to assure that business interests are retained for the benefit of family members rather than passing to outsiders.”
Stay Flexible Te above scenarios illustrate the flexibility of irrevocable trusts. Tey can do all kinds of things for people who are too young to run a business, have no interest in doing so, are incapacitated, or need to be protected from their own damaging decision-making habits. Trusts solve business problems by separating legal ownership and control of a business from the enjoyment of the business assets by beneficiaries.
TPI Turf News November/December 2018
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