When creating trusts for their children, parents often struggle with the issues of who to name as trustee and how much access their children should have to trust assets. Many parents want their children to enjoy the benefits afforded by a trust (e.g., creditor protection and tax savings) but are reluctant to give a third party absolute control over their children’s ability to receive trust distributions. In these cases, parents may want to consider naming a child as a co-trustee of the trust for his or her benefit and providing this “beneficiary-trustee” with the sole power to make certain distribution decisions without the consent of any co-trustee.

A beneficiary-trustee’s power to make such trust distributions should be limited by an “ascertainable standard” in order to avoid adverse estate tax consequences for the beneficiary-trustee. An “ascertainable standard” limits distributions to those needed for a beneficiary-trustee’s health, education, maintenance, or support (“HEMS”). The standard can be customized within these categories — for example, an ascertainable standard can allow distributions for support “in reasonable comfort” or in a beneficiary’s “accustomed manner of living,” for education, including “college and professional education,” or for health, including “medical, dental, hospital and nursing expenses and expenses of invalidism.” A standard authorizing distributions of trust property for the beneficiary-trustee’s comfort, welfare, or happiness, however, will not qualify as an ascertainable standard.

Clients also should understand that a beneficiary-trustee’s distribution powers, even when limited by an ascertainable standard, may subject the trust property to creditor claims or to spousal claims in the event of a divorce or disinheritance of a surviving spouse. In addition, an ascertainable standard can limit a beneficiary-trustee’s access to trust funds when needed for purposes other than HEMS. In this case, clients may wish to appoint an “independent” (i.e., unrelated) co-trustee, who can have the authority to make discretionary distributions for any purpose considered to be in the beneficiary-trustee’s best interests. To provide checks and balances, the beneficiary-trustee can be given the power to remove and replace any independent trustee with another independent trustee.

Ultimately, for parents who wants to provide their children with a significant level of control over trust assets while retaining the potential tax and creditor protection benefits associated with a trust, this technique can offer a workable solution.