I'm over 21 and competent - can my money still be held in trust just because the will said so?

This reader wrote to me to ask about his inheritance that is being held in trust. It's not that unusual for people to want to receive their inheritances outright, rather than having them held in trust. However, collapsing a trust through the courts is not necessarily easy.

Here's the question:

"When my grandfather died about 7 years ago, he left me a large sum amd specified in the will that it must go into a trust that my mother controls. However I would gain control of it once she dies. I was over the age of 21 at the time the will was created, and I am not mentally incompetent. Is it legal for my mother to still maintain control of my money just because it said that in the will? If I hired a lawyer to try to gain control of my own money, what is the likelihood of winning?"

Is it legal for your mother to follow a legally valid will? Of course it is.

Generally speaking, we can't just pick the parts of the will we like (such as getting money) and ignore the parts we don't like (such as having the money held in trust).

You mentioned a couple of common reasons that money is held in trust. One is that a beneficiary might be a minor, though the age of 21 that you mentioned seems random. Another is that a beneficiary might be mentally incompetent. However, these are not the only reasons that trusts are set up. Perhaps your grandfather was worried that you might blow the money. Maybe he worried that your marriage was shaky and he didn't want you to lose your inheritance to a divorce. Perhaps you have creditors or a gambling problem or an addiction.

Keep in mind that your grandfather is not obligated to explain to you why he wanted to set up a trust, nor does he need your approval. He gave you a gift and this is the gift he chose to give, for his own reasons.

One part of your question makes me wonder if you really understand this trust, or even if there is a trust for you at all. It's possible that the will leaves a share of the estate to your mother, and you would only have inherited if she had passed away before your grandfather did. This is how the majority of wills are set up. You talk about control of the money, which is what trustees do, not what beneficiaries do. It's odd that your grandfather would give you "control of" a trust for yourself.

It's also odd that a trust that's all about you would be focused on the death of another individual (your mother) unless you're a contingent beneficiary. By that I mean that it's possible that your grandfather did set up a trust for you by leaving your mother a life interest in some assets, with you to receive anything that's left at the time she passes away, as opposed to you "controlling" assets left at her death. I'd need a little more information to be confident that I understand your situation.

Assuming that you are correct and there is a trust for you, before making any decisions about trying to collapse the trust in court, check the wording in the will carefully. There will be clauses that impact the administration of the trust, and perhaps some that specifically address closing the trust early. For example, some trusts are written so that if the sum becomes quite small, the trust can be wound up.

You don't say whether the trust gives you a fixed monthly amount, or whether your mother has the discretion to pay money out to you on an "as-needed" basis. The amount of discretion given to the trustee is important, as sometimes the trust is written so that the trustee can decide to pay out the capital of the trust in full if she feels like it.

There might be other relevant information, such as the trust being established to pay for your education. If you've already completed your education, you might argue that there is no reason to hold it in trust any longer.

There is quite a lot of legal detail and argument involved in determining the point at which a beneficiary's interest in a trust vests in the beneficiary. The exact wording of the trust will matter. Whether there are any beneficiaries after you will be relevant too.

If you do hire a lawyer, why not start by having the lawyer read the will and interpret for you exactly what you inherited, and the terms on which it was inherited? Often the only lawyer involved in an estate acts for the executor, not the beneficiary, so you may never have received legal advice on your situation. You might just find, as I mentioned, that the will already contains wording that will help you without having to resort to long, difficult, expensive litigation.

Gay NYC judge challenges will ordering him to marry woman

The attached story from NBCNews.com talks about the will of a wealthy man who set up trusts for his grandchildren. The man, Frank Mandelbaum, had included a clause in his will that said the trust would exclude any children who were adopted by his son Robert while Robert was single, and exclude any biological child Robert might have if Robert didn't marry the child's mother within six months.

The will causes a problem for Robert, who is gay. He is married to a man, and he and his partner have a two-year-old son. Robert says that his father was accepting of Robert being gay and in fact socialized with Robert and his partner. Robert believes that the trust in the will should include his son, though the letter of the will would appear to exclude the son. (You'll note that the will doesn't in fact order him to marry anyone, despite the sensational headline NBCNews attached to the story).

Robert is challenging the will. The issue will be whether the father's instructions are to be taken strictly literally, or whether they are to be interpreted as intending to exclude children who are not born within a stable relationship. Both are interesting arguments, and you can read more about them and get more facts about the case by clicking on the link below to read the story. It's a truly interesting case.

Gay NYC judge challenges will ordering him to marry woman

Ten reasons you might want a trust in your will

Whether or not a trust in your will would be useful depends only in part on how much money you have to deal with. Trusts in wills (called testamentary trusts) are not only for those with multi-million dollar estates; they can also be very useful for people like you and me. Although many people shy away from the idea of a trust because they believe it must be complicated, in reality it's more simple than you might think.

A trust is created in a will whenever your trustee (usually your executor) holds onto money or property for someone else, i.e. one or more beneficiaries of your estate. The terms of the trust such as when the beneficiaries are paid and how much they are paid are set out in your will, by you.

A trust is put into a will to serve a particular purpose, and in this post I'd like to briefly describe the top ten common purposes:

1.  A child inheriting under a parent's will can inherit the entire share on the day they reach the age of majority. A trust can be used to hold that share,or some part of it, until the child is older and more mature.

2.  A trust can protect a child who is hopeless with handling money by ensuring that a pre-determined amount is paid to the child on a monthly or yearly basis.

3.  A child with a drug addiction can be protected by a trust that pays for basic necessities such as rent, but does not make the whole share available at once.

4.  The share of a handicapped child can be managed for the child's lifetime in a way that brings the parents peace of mind, while at the same time doesn't cause the child to lose valuable provincial health benefits.

5.  A spouse who is already in a high tax bracket may not want the additional income that would be earned once a share of the estate is received. Setting up a trust for the spouse's share allows the tax to be earned (and paid) by the trust rather than the spouse.

6.  In the case of a second marriage, using a trust would allow a person to give a surviving spouse the use of assets (such as the family home) for that spouse's lifetime, after which the assets could go to the children of the first marriage.

7.  A trust can be set up to provide for emergency funds for any vulnerable family member - a child, an elderly parent - to be used when and if they are needed, with any remainder going to the family members you specify.

8.  A trust provides funds for the taxes, insurance and upkeep on an asset that is used by more than one beneficiary, such as a lake cottage.

9.  Funds that are held in a trust are safe from creditors of the beneficiary (except in the case of bankruptcy).

10.  If a beneficiary's marriage breaks down, funds held in trust are generally not held to be matrimonial property, and are therefore not lost to the beneficiary's divorce.

As you can see, these are things that affect even those of us with modest estates. If your lawyer is suggesting a trust for your will, keep an open mind to see if it would work for you.

Can my will allow funds to go to guardian of my children?

This reader has asked a very good question about helping a guardian with the cost of raising minor children in the event that the child's parents have passed away. I know a lot of other parents wonder about the logistics of getting funds to the guardian too, so I think many of you will find this post interesting.

Here's the question:

"I'm preparing my will. I have 2 minor children. I've appointed a guardian for the 2 kids, in the event that my wife & I pass away. A trust will be set up for the kids. How do I specify or bequest funds to the guardian to help with the cost of raising my 2 kids? I assume the guardian cannot withdraw funds from the trust until kids reach legal age."

One of the real beauties of testamentary trusts (i.e. trusts that are set up in your will) is that you can tailor them to meet your needs. You will be able to arrange for your guardian to receive funds if that's what you want. May I add that I hope you are not trying to draft something as important as your children's financial futures by yourself. Ask an experienced lawyer for help with the drafting to avoid your kid's inheritances ending up as court fees.

First, let me clear up an error. You said that you assume the guardian can't withdraw funds until the kids reach legal age. That's not the case. The kids can't inherit until they are of legal age, but that certainly doesn't stop you from channeling funds to a guardian to help pay for their expenses.

Keep in mind that normally under a will the guardian of the children and the trustee of the children's money are two different people. The money is held in trust NOT by the guardian but by the executor/trustee. Look at your will. It gives powers to the trustee and places restrictions on the trustee in anticipation of the trustee safeguarding the children's inheritances.

There are three general ways in which guardians usually receive money under a testamentary trust. You can use any of them or all of them depending on your situation.

The first is to state in your will that a certain amount per month will be paid to the guardian on a regular basis. You would choose the amount by balancing out the amount the child will inherit, how long the trust is to exist etc. You would state the amount in the will. The money is to be used for the child's clothing, food, medications, and the child's share of household expenses.

The second is to provide the guardian with a lump sum of money at the time he or she takes over as guardian.The money would be used for something like renovating the guardian's home to make room for your children, or buying a larger vehicle to accommodate your children.

The third is to provide an encroachment on an as-needed basis on the funds held in trust. You can state the kind of thing that is to be considered, such as education expenses or living expenses. The guardian would have to ask the trustee for the money on behalf of the child, as the trustee is the one safeguarding the funds.

While considering this question, check your life insurance policies to see who you have named as beneficiaries. If you have named one or more of your children, the money is not going to be held by your executor. It will be held by the insurance company until the child reaches legal age, and paid all at once on the 18th birthday (or 19 in some provinces). If you want insurance money to be controlled by your executor on the same terms as the rest of your estate, you should look into naming the estate as the beneficiary.

I've boiled down some fairly complicated concepts to the bare bones here. I caution you again against trying to draft a trust on your own. While testamentary trusts are flexible, there are still a lot of rules to be followed in order to create a valid trust. I strongly urge you to talk this over in detail with an estate-planning lawyer.

Trusts for minors are flexible enough to suit almost any purpose

Children who inherit under the wills of their parents or grandparents cannot legally receive the money until they reach the age of majority, so their funds are held in a trust until that time. In other cases, a trust may be established until a child reaches a higher age, or until some other contingency occurs.

In this post I'm not going to extol the virtues of trusts in general. That's a post for another day. Today I want to talk about how flexible trusts can be.

One area in which flexibility allows you to tailor your trust to your specific needs is defining when a beneficiary will receive the funds in trust. As mentioned already, any age, as long as it is at least the age of majority, may be chosen. The funds don't all have to be paid at the same time, and many parents like to stagger payments to their children over a number of years. For example, a trust in a parent's will might state that the child will receive 1/4 of her inheritance at age 18, a further 1/4 at age 21 and the balance at age 25. Or the parent might stipulate that the funds be paid out in equal annual instalments for, say, ten years.

Another area of flexibility is encroachment, or the taking of money on an as-needed basis in between the set payments mentioned already. For example, if the child in the previous paragraph needed money at age 20 to attend university in another country, perhaps she could have an advance on her inheritance. At the time the will is made, the parent can decide which kinds of things (e.g. medical, educational, emergencies) are important enough to allow for encroachment.

Other contingencies may be added. For example, I've written a number of trusts in which a child receives a greater sum of money each year if she is attending university or college full time than she would if she did not attend school. I've also written trusts in which children are given a large lump sum on their wedding day.

When a family has younger children, the funds in trust can be funnelled out to the guardian of the children on a monthly basis to provide for the child's share of household expenses. This helps to prevent the family who takes on the children on the parent's death and acts as guardians from experiencing a financial hit because of the children.

The parent also has the flexibility to name a trustee for the trust. It can be the same person as the executor, or someone completely different. If the trust is going to be a long one, such as holding funds to age 25 for a grandchild who is only 3 years old currently, the parent may choose a trust company for the job.

The benefit of the flexibile nature of trusts is that it allows parents to address specific situations. Trusts are not all the same because families are not all the same. The parent can use trusts to express his or her goals for the child, such as allowing for tuition fees to be paid. The trust can protect a child who has made a foolish marriage at a young age by holding the money in a trust that can't be touched by the spouse or lost in a divorce settlement. The parent can prevent a child from "blowing" her inheritance by receiving it before she is responsible enough to handle it.

A divorced parent can use a trust to ensure that any funds left to the child will not fall into the hands of the former spouse.

It's very easy to set up these trusts in your will. Any experienced wills lawyer can write a good trust that anticipates all realistic situations.

In trusts you can trust to find tax savings

This article in today's Globe and Mail discusses ways of using trusts, both those you set up while you're alive and those you set up in your will. It's an interesting article and gives plenty of examples for using trusts. Click here to read it.

Multiply the tax savings with multiple trusts

This article by Derek de Gannes is required reading for anyone interested in taxation issues regarding inheritance. Mr. deGannes does a really good job of describing both the situation and the solution in a reader-friendly way. Click here to read the article.

Protecting son from himself while protecting his inheritance

This article is American, but the issue is one that estate planners hear everywhere. What can you do about leaving an inheritance for a child with a drug addiction? The article mentions trying to plan to avoid being cut off from "Medi-Cal", which is the plan in place where the subject of the article lives, but we have similar government benefits here. Click here to read the article from the Sonoma Valley Sun.

What is a Henson trust?

A Henson trust is a testamentary (i.e. set up by your Will) trust that is used to hold the inheritance of a handicapped person. They are used in a very specific way.

A person who is severely mentally or physically handicapped to the point where he or she cannot earn a living is entitled to provincial or territorial government benefits. These benefits include a monthly sum of money for payment of accommodation and other expenses, as well as access to free or subsidized medical, dental, optical and other services. The handicapped person's family want to ensure that these benefits keep flowing to the handicapped person.

A person who receives these provincial and territorial benefits may be cut off from the benefits if they have a certain amount of assets or income. This rule is put into place to ensure that the benefits are paid to people who really need them. In Alberta, as an example, a person receiving benefits is entitled to own no more than $100,000 in assets, as well as a home and a car before the benefits are clawed back. This is known as an asset test, and the benefits program also has a means test that looks at how much income the handicapped person receives in income. If there is more than a certain amount of income, the government benefit will be reduced dollar for dollar.

This is where estate planning comes into the picture. When the parents of a handicapped person are making Wills, they have to decide how much of their estates they are going to leave to the handicapped child. If they leave too little, they run the risk that the child will not be adequately and comfortably provided for. There is also a risk that the Public Trustee could contest the Will on behalf of the handicapped child to get a greater share of the estate given to the child.

If the parents leave too much to the child, they risk cutting the child off from government benefits. Many parents tell me that the value of the medical, dental and optical benefits is very great and would drain a $100,000 trust long before the child passed away.

The solution hit upon by estate planners is to hold a share of the parents' estate in trust. It could be the whole estate or a share of it. The wording and set-up of the trust are crucial. If you simply take the handicapped child's share of the trust and leave it in a regular testamentary trust for that child and nobody else, with payments going to the child and nobody else, that money has clearly been left to the child and will be deemed as an asset of that child.

A Henson trust is set up differently. The trust is held in the name of the handicapped child as well as other people, usually the child's siblings and possibly nieces and nephews. Payments out of the trust are fully discretionary, meaning that payments are made as the trustee of the trust decides. Payments might be made to the handicapped child, or they might not, but the child has no right to demand any money be paid to him or her. Payments might also be made to the other siblings or nieces or nephews as the trustee decides. Therefore it can't be determined that any or all of the money really belongs to the handicapped child.

Henson trusts are completely legal and above board. They are effective in every province and territory in Canada, except for Alberta.

If you are interested in knowing more about whether a Henson trust would be a good idea for your family, find an experienced estate planning lawyer and talk it over.