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 and your clients.

TRUSTS:  MANDATORY PROVISIONS VERSUS DISCRETIONARY PROVISIONS

Last month’s Newsletter discussed “Mandatory Trusts” and how under certain circumstances, creditors can “step into the shoes” of Trust beneficiaries and require the Trustee to pay distributions to a creditor that would have otherwise been paid to the beneficiary.  

DISCRETIONARY TRUSTS

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

If the Trust contains words such as “may” in describing the Trustee’s duties to a beneficiary of the Grantor, (not including the Grantor who may also be a beneficiary), then the Trust should be determined to be a “Discretionary Trust”.  If the Trust uses words such as “shall” or “must”, then the Trust can be considered to be a “Mandatory Trust”.

CREDITOR’S RIGHTS

If the Trust terms are considered to be “discretionary”, and depending upon the wording in the Trust, the Trust assets will be protected from creditors of the “non-Grantor” beneficiary.  Oklahoma recognizes that a discretionary interest of proceeds of a Trust is not a right to a distribution, but is only a “mere expectancy”.  60 O.S. Section 175.89(1).  A creditor has “no greater rights in a discretionary interest than the beneficiary”.  60 O.S. Section 175.89(3).  Therefore, a creditor cannot “compel a distribution that is subject to the discretion of a Trustee”.  60 O.S. Section 175.89.

However, when a Trustee does exercise its discretion and distributes income or principal to a beneficiary, any amount distributed can be ordered to be paid to creditors.  Also, when the Trustee makes income available to the beneficiary, the Court can “redirect” the payment from the beneficiary to the creditor.  First National Bank of Enid v. Clark, 1965 OK 71, Paragraph 14.

UNFORTUNATE   ERRORS GRANTORS COMMONLY MAKE

Very regrettably, many times Grantors’ Trusts are drafted in a manner which inadvertently creates a Mandatory Trust, rather than a Discretionary Trust, which would protect the beneficiary’s share of the Trust assets.  

For example, Grantors frequently request the Trust terms require the assets stay in trust for several years after the Grantor’s death.  The reasoning for holding assets in trust for years beyond the Grantor’s death are wide and many, but the common thread is the Grantor’s intent to protect the Trust assets from unnecessary risk of loss.  Unfortunately, many times the Grantor’s intent to protect the assets is not enforceable, and the Trust assets are subject to attack by creditors, because of the wording of the Trust, regardless of the fact that the assets are to “stay in trust” for a period of time after the Grantor’s death.

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.

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 and WTO Advisors.  Alyssa may be contacted at: (405) 241-1600, or by email at Alyssa@WealthTrustOk.com.