A tool is only useful if it works. A pocket knife with a dull blade cannot be used to whittle a stick of wood. A car with an empty gas tank won’t go far. A fireproof safe is not worth much if the owner has forgotten the combination. It’s the same with trusts. If a trust isn’t useful, it’s an obstacle.
Sadly, the story of a trust that seems not to be working very well is unfolding in a California courtroom at this very moment. Rob and Michelle were a highly successful couple when they created trusts for their children in 1993. One of the children, Nick, was less than three months old when the trust was created.
A Trust That Is Great For Tax Planning
Nick’s trust contains language that permits assets to be deposited into the trust for Nick’s exclusive future benefit. The trust was declared to be irrevocable. This means that Rob and Michelle could make contributions of money or other assets to the trust in future years, but could not dissolve the trust or change its terms. An attractive tax consequence of such a structure is that the growth in value of the investments held by the trust would not be attributed to the personal wealth of Rob and Michelle.
The trust was, in essence, a separate legal entity, and was therefore entitled to be treated as a separate taxpayer. This trust helps parents with high incomes segregate some of their income-producing investments into a trust that pays tax on the trust’s income at a lower rate than would have applied had the income been retained by the parents along with all of their other income.
A Trust That Did Not Contemplate Nick’s Possible Future Needs
As things turned out, Nick, in later years, experienced mental health issues and behavioral issues which created some question about whether he was capable of handling money wisely. Nick’s trust provides that he would receive half of the trust’s assets at age 30 and the remainder at age 35. He would be free to spend those amounts however he wished.
For reasons which are not yet publicly known, when Nick reached age 30 in 2023, he did not receive his distribution from the trust. Fast-forward to the year 2025. Nick’s parents died tragically by assault, and Nick was arrested and charged with their murder. Nick is now almost 33 years old. He is requesting that at least the half-share of the trust which would have been distributed to him at age 30 be distributed to him directly or to his criminal defense lawyer.
The trustee of the trust has refused to distribute the money to Nick. The trustee apparently questions whether this is an appropriate use of the funds and whether Nick should be allowed to receive the funds given the potential that his present mental health condition may not allow him to make proper decisions about how to spend the funds.
Needless to say, a lawsuit has been filed on Nick’s behalf to compel the release of the funds, and motions are being filed by the trust’s attorneys and Nick’s attorneys. The courtroom drama is in full swing. As of yet, no determination has been made regarding whether funds can be released to Nick for him to spend as he wishes, whether the trust will be ordered to pay money to criminal defense lawyers, or whether the funds will be used for something else.
What Went Wrong?
Fundamentally, Rob and Michelle chose to create a narrowly drafted trust. The trust they created accomplishes the goal of allowing them to shift some of their money into the separate trust for the benefit of Nick and thereby cause the income from the money deposited into that trust to be taxed at a lower rate, money which they wanted Nick to be able to enjoy when he reached what they considered to be a mature age.
Unfortunately, the language in the trust did not contemplate how the funds would be used if Nick were to become a person with special needs due to mental, physical, or emotional limitations which might develop in future years.
The trust for Nick could have included provisions enabling the trustee to hold the money in the trust for as long as Nick was a person with special needs, even if that were a permanent condition throughout his lifetime. This does not mean that the money could never be used for Nick’s benefit. It simply means there would not be a hard-and-fast requirement that, at certain points in time, the money in the trust be dumped into Nick’s lap. By allowing the trustee to retain the funds in the trust if Nick developed a special needs condition, the trustee could have protected Nick’s ability to qualify for government benefit programs and could have used the funds in the trust to supplement any benefits those programs would provide for Nick. Money could have been available for Nick to travel, receive specialized therapy, live in a supportive residential arrangement, and otherwise lead a rich life.
When Rob and Michelle created Nick’s trust, they assumed he would always be healthy, wealthy and wise. The trust reflects their optimistic expectations for Nick’s future. It proved to be a time capsule – an outdated relic from a bygone day – rather than a tool to be used in Nick’s best interest.
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