My mother set up a trust for my sibling who stole $100,000 from the bank. Can trust be taken?
My mother died a few years ago.
The three siblings were given equal shares, but the mother set up a trust for one sibling that was untrustworthy. I am the hope of our child. The brothers defrauded the bank out of $100,000 and there is a civil judgment against them. Criminal charges are pending.
We were told by the attorney who acted as the original mother’s attorney that the trust was written as a special needs trust, and that the creditors would not be able to follow it. Does that still apply to fraud cases? Can it be caught?
Portable Brothers
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Total irrevocable reliability provides powerful protection.
Your mom sounds like a smart woman – and a caring parent. (For the purposes of this column I will assume he is your brother). A spendthrift trust is irrevocable and is designed to protect the beneficiary’s estate from creditors, civil lawsuits resulting from an alleged $100,000 bank fraud and/or, most importantly, their financial irresponsibility.
A special needs trust is similar to a speedrift trust in that it is also irrevocable and protected from creditors. A special needs trust is also a special, discretionary trust, but designed to provide for a beneficiary with a disability without excluding them from government benefits such as Medicaid or Social Security Disability Insurance.
Regardless of the name of the trust, it must be “irrevocable” and “fully optional.” Your brother must not own the trust or have power over the shares. If so, the creditors will probably not be able to take over this trust. The trust simply gives him money on demand and, depending on the rules, can easily stop payments.
And now for the caveat. Spendthrift trusts do not block letters. Several US states, in fact, have significant exceptions that may allow certain creditors to access trust assets. These are the most common claims for child support or apony, federal and state tax obligations, government-related debts, and, in some areas, debts owed by victims of fraud.
In some jurisdictions, a victim of fraud – such as a defrauded bank – may argue to be treated as a special class of creditors with direct access to trust funds. Some courts may be less willing to extend trust protections to such cases, although courts do not strike down spending protections simply because the beneficiary’s underlying conduct was wrongful.
In your brother’s case, criminal proceedings can create exposure through restitution or confiscation orders. Any such actions to seize assets within the trust will have to go through the courts in the county where the trust is based, which may be different from your state or the state of the borrower. None of this guarantees that the creditor will actually succeed in accessing the trust.
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“Protection is part of the story,” says Commonwealth Life and Legacy Counsel, an estate planning and senior living firm in central Virginia. “Grantors typically instruct the trustee to distribute funds only when certain needs arise. Those needs include “medical or dental care, education and job training, basic living expenses such as housing or groceries if desired.”
Overseeing payments to your brother not only prevents him from wasting money, but helps family wealth pass down one generation, adds the law firm. “Because heirs receive smaller installments, the investments within the trust continue to grow over time. That long-term thinking often leads to better financial behavior.”
The trust no longer has a family. That means not only that creditors such as a bank that wants to return $100,000 to your brother so they don’t take assets, “money placed in a spendthrift trust usually stays out of the marital property pool during a divorce.”
Revocable living trusts do not provide shelter to creditors. Because the grantor has the power to convert or liquidate them, the assets remain fully exposed to debts, lawsuits and bankruptcy claims. The good thing is that they are flexible estate planning tools created during a person’s lifetime and can be changed or terminated by the donor at any time.
This arrangement is unusual. The goal is to leave your children equal(ish) shares, but you don’t want to leave one child, who is addicted and/or has other behavioral problems, a lump sum. That would be unwise and probably lead to disaster in terms of his mismanagement of those funds and the temptations that would lead him astray.
Some families establish an irrevocable discretionary trust or protective trust that requires the family member in question to attend Alcoholics Anonymous or Narcotics Anonymous meetings and/or provide proof of sobriety. Contributions may be limited to medical expenses, counselling, education and/or food.
Any money received by your brother is open to prosecution.
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