Structuring a Trust Under Indiana Law
Under Indiana law, a grantor has a great deal of flexibility in structuring a trust. The trust could be structured to mandate the distribution of income and/or the distribution of principal at certain times or ages. Trusts with such provisions provide some “certainty” as to when and how the child will receive assets from the trust. However, such “certainty” also decreases the asset protection elements of the trust. Very generally, the more rights or certainty that a beneficiary has with respect to an interest in a trust, then the more likely it is that a creditor may be able to reach or attach such interests in the trust. Also, obviously, a creditor of a beneficiary can reach any income or assets after the same have been distributed to the beneficiary.
A trust can also be structured to provide a great deal of discretion and/or flexibility as to when or if distributions are made from a trust. For example, the trust document might grant the trustee the absolute discretion to distribute income and/or principal if the trustee determines that a distribution would be in the best interests of a beneficiary. Similarly, the trust document might grant the trustee the discretion to withhold an otherwise scheduled distribution. The trust document may provide guidance to the trustee by listing factors that the trustee should consider before deciding to make or withhold a distribution. For example, the trust document might instruct the trustee to consider whether the beneficiary is gainfully employed, whether the beneficiary seems to be involved in addictive behaviors, and whether the beneficiary entered into a prenuptial agreement that expressly excludes all interests in the trust as marital property in the event of a divorce. Such provisions in a trust document are typically not intended by a client to harm or hinder the child/beneficiary, but rather to protect assets for the benefit of such child/beneficiary.
Loeb v. Loeb: Important to Estate Planning Attorneys
When reviewing the issue of whether an interest in a trust should be considered marital property in a marital dissolution, estate planning attorneys look to a key case in Indiana: Loeb v. Loeb, 301 N.E.2d 349 (Ind. 1973).
In Loeb, Gertrude Loeb, a widow, established an irrevocable trust and placed closely held corporation stock in the trust. The terms of the trust instrument provided that Gertrude would receive all of the income from the trust during her lifetime. It appears that the trustee did not have the discretion to distribute principal of the trust during Gertrude’s lifetime. Upon Gertrude’s death, the trust was to terminate and all trust property was to then be distributed in equal shares to Gertrude’s three children.
More than ten (10) years after Gertrude established the trust, her son, Edward, was involved in a divorce proceeding. Edward’s spouse argued that Edward’s future interest in the trust was “vested” and thus was an asset to be included in the marital estate and divided. The Loeb court stated that the test is not whether Edward’s interest in the trust is “vested,” but, rather, whether Edward’s future interest in the trust is “so remote” that it should not be included in the marital estate. The Loeb court held that Edward’s future interest in the trust should not be included in the marital estate.
The reported opinion in the Loeb case is a little sparse on the facts. For example, the case does not mention the health or age of Gertrude, who the trustee of the trust was, who could change the trustee of the trust, or who could serve as successor trustees. It seems to me that, in a particular situation, the factors mentioned in the preceding sentence could be relevant to a court’s determination as to whether a future interest in a trust is “so remote” that it should not be included in the marital estate.
If a parent is concerned about a possible divorce of his/her child after the death of the parent, the parent should consider creating an estate plan with a testamentary or revocable trust that is drafted to give an independent trustee a great deal of discretion as to whether income and/or principal is distributed to the child – in an effort to make the child’s future interest in the trust “so remote” that it should not be included in the marital estate in the divorce proceeding. The parent may wish to review and revise his/her estate plan after the child’s divorce proceeding is concluded.