Do You Have Trust Issues? Considerations in Funding Trusts

A trust is an entity that holds title to assets for distribution to its beneficiaries for a particular purpose and that provides for distributions of these assets by the trustee to the beneficiaries according to the terms of a trust document. A beneficiary may be a person, a charitable organization, or an animal. The person who sets up the trust (the Grantor) decides which assets will be used to fund the trust, determines the purpose of the trust, and sets the standards for the timing and reasons for making distributions to the beneficiary. For example, an education trust provides for payment of expenses related to education, while a special needs trust can provide supplemental support for a beneficiary who receives government benefits. Other trusts are intended for the general support of its beneficiaries and might provide for distributions for the beneficiaries’ maintenance, education, support, and health. A pet trust typically provides for distributions for pets’ veterinary care, food, and general comfort (treats, toys, and companionship) so the Grantor’s pets can enjoy the same standard of living after the Grantor dies.

In establishing a trust, whether it is a testamentary trust created by a Will or a trust created during the lifetime of the Grantor, it is important for the Grantor to have a clear understanding of the purpose of the trust and whether the assets designated to fund the trust are sufficient for that purpose. If a trust is not sufficiently funded, the Grantor’s intended purpose for establishing the trust may be frustrated, and the beneficiary may also be frustrated when they discover that a trust they believed would fund a Stanford education through graduate school only has enough money to pay for two years of tuition at the local community college.

Recently, I was present in the courtroom for a hearing involving a trust matter in which the beneficiary’s expectations of the manner in which the trust could support her diverged from the reality of the funds available for distribution to her in the trust. The beneficiary, who had a limited ability to earn income, wanted the trust to purchase a modest house for her. The trustee refused to grant this request. The trustee was concerned that, if the trust purchased the house for the beneficiary, the trust’s assets would be depleted and the trust would not be able to continue to make distributions to the beneficiary to pay for other expenses – or to pay for expenses related to maintenance, insurance, or taxes for the property. In this case, the judge found support for the trustee’s decision to not purchase property for the beneficiary. Instead, the trustee was authorized to continue to make distributions from the trust to supplement the beneficiary’s rent payments.  The beneficiary was not happy.

The hearing did not address whether the Grantor who established the trust for this beneficiary ever intended for the trust to purchase a house for the beneficiary. If the Grantor had intended for the trust to provide a house for the beneficiary to live in during her lifetime, their intent failed, because the trust lacked the assets to purchase a house. It is also possible that the Grantor of this trust understood that it would be modestly funded and never intended for trust to provide more than supplement rent on an apartment for the beneficiary.  One way or another, this trust failed to meet expectations, perhaps those of the beneficiary, or perhaps those of the Grantor.

How can such a result be avoided? The best advice is to consult with advisors when considering establishing a trust to make sure that the trust will be sufficiently funded for its purposes, or, if the funds available for the trust are modest, that the trust’s purpose is crafted in a manner that sets up reasonable expectations of the intended beneficiary. (An exception should be noted here for pet trusts. A cat’s expectations are seldom reasonable.) Do you have a question about trusts? We’re happy to help!