Monthly Update for Administration of Trusts and Asset Management.

It is our hope that our Monthly Update on various trust and financial issues will be helpful to you or your clients.

TRUSTS:  MANDATORY PROVISIONS VERSUS DISCRETIONARY PROVISIONS

As Trustee of a Trust, we are required to follow the terms of the Trust Agreement.  More frequently than we would like, we are required to deal with creditors of the beneficiaries of a Trust.  In those instances, sometimes the beneficiaries, who had been under the belief that their share of the Trust assets are protected, are stunned to find out that the beneficiary’s creditors can reach, at least a portion of, the beneficiary’s share of the Trust assets.  

All Grantors of Trusts who are intending on keeping Trust assets "in trust" for the future benefit of the Grantor’s beneficiaries should carefully review the wording of the terms contained in the Trust for the beneficiary.

MANDATORY TRUSTS

Do the Trust terms use phrases like “the Trustee shall”, or words to that effect, or does the Trust use phrases such as “the Trustee may”, or words to that effect?

If the Trust contains words such as “shall” or “must” in describing the Trustee’s duties regarding a beneficiary of the Grantor, then the Trust might be determined to be a “Mandatory Trust”.  If the Trust uses words such as “may”, then the Trust can be considered to be a “Discretionary Trust”.

CREDITORS’ RIGHTS

If the Trust terms are considered to be “mandatory”, and depending upon the wording in the Trust, a creditor can garnish the income of the beneficiary.  60 O.S. §175.25(B)(2) states that the first annual $25,000 of income for the beneficiary is protected, but all income above that $25,000 is subject to the creditor’s rights, including garnishments.

BENEFICIARY'S EFFORTS TO AVOID CREDITORS

Sometimes beneficiaries request a Trustee to keep the beneficiary’s share of the Trust assets "in trust" under the assumption that as long as the assets remain owned by the Trust, they are protected from the creditor.  That assumption is not necessarily correct.  If the Trust terms require the Trustee to distribute the beneficiary’s assets to the beneficiary in periodic intervals such as 1/3 when the beneficiary reaches a certain age, then when that distribution is due to the beneficiary, the creditor could take that distribution or a portion thereof.

RECOMMENDATION

We recommend that you review the terms of your Trust Agreements to determine if your intent is likely to be followed upon your death.  As a courtesy to those with Trusts, and while we do not offer legal advice, at no cost or obligation to you, we would be happy to review your Trust with you to give you a Trustee’s perspective of how your Trust would be administered upon your death.

DISCRETIONARY TRUSTS

Next month's newsletter will discuss "Discretionary Trusts" and their effect upon creditors.

WealthTrust Oklahoma is the Oklahoma Trust Representative Office of National Advisors Trust Company.  We are independent and hold a federal charter.  In addition to trust administration services, we offer investment management services through our firm, WTO Advisors.   

Alyssa Kaiser, CTFA, has over 30 years of experience in the trust, investment, and banking industries and is President of WealthTrust Oklahoma