This is an article from Horn & Johnsen (https://hornjohnsen.com/) in Madison, Wisconsin, that we thought others may find helpful.
Well-drafted and comprehensive trusts should contain certain language we often refer to as “spare tire” provisions. For example, you might not have any beneficiaries now who are receiving government benefits based on a disability, such as Supplemental Security Income (SSI) or Medicaid, but the reality is that we are all just one accident away from disability. So, why not include language stating that if a beneficiary is receiving government benefits based on limited income and/or assets when they inherit their share of your trust, the trustee can convert that beneficiary’s share to a special needs trust (also known as a supplemental needs trust)?
By including these provisions, you have protected your beneficiary’s inheritance. You’re allowing the beneficiary to continue receiving necessary benefits and still be able to access his or her inheritance without penalty. Without these provisions, your beneficiary may be required to “spend down” his or her inheritance in order to qualify for government benefits.
Even if all your beneficiaries are currently responsible adults with no creditor issues, problems could arise in the future. What if one of them is involved in a lawsuit due to an auto accident or a bankruptcy due to unanticipated family medical expenses? In this scenario, assuming your trust contains language providing your beneficiaries with creditor protection (often referred to as “spendthrift provisions”), you can protect your beneficiary’s inherited assets from certain types of creditors.
Finally, what if one of your beneficiaries, perhaps a grandchild, develops a substance abuse problem – whether it’s alcohol, prescription drugs or illegal narcotics – or a gambling addiction? In such a case, it may be dangerous to provide that beneficiary with any cash distributions, regardless of his or her age. If your trust contains the necessary language, your trustee could have the discretion to protect that beneficiary as necessary. Your beneficiary’s inherited assets could then be used for rehabilitation or for help with living expenses. However, the trustee would not be obligated to distributed cash directly to the beneficiary until the addiction issue is resolved.
What We Hope
As estate planning attorneys, we hope our “spare tire” provisions are never needed. However, in the rare circumstances when these provisions are needed, the families we work with are relieved that their parents (and their estate planning attorneys) had the foresight to prepare for these possibilities.
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