Exam 15: Duties of Fiduciaries: Financial Planners, Trustees, and Executors

Correct Answer:

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Yes, a split-interest trust can also be a testamentary trust. To understand this, let's break down the concepts:

1. Split-Interest Trust: This is a type of trust where the interest is divided among different beneficiaries over time. Typically, there are two types of beneficiaries in a split-interest trust: the income beneficiaries and the remainder beneficiaries. The income beneficiaries receive income from the trust for a specified period, which could be their lifetime or a number of years. After this period, or upon a specified event, the remainder interest is transferred to the remainder beneficiaries.

2. Testamentary Trust: This is a trust that is created as part of a will and comes into effect upon the death of the individual who created the will (the testator). The trust is funded with the assets from the testator's estate, and the terms of the trust are outlined in the will.

Combining these concepts, a split-interest trust can be established through a will, making it a testamentary trust. In this scenario, the testator specifies in their will that upon their death, certain assets should be placed in a trust. The trust would then provide income to designated beneficiaries for a certain period or for their lifetimes. After this period or upon the death of the income beneficiaries, the remaining assets would be transferred to the remainder beneficiaries as outlined in the will.

For example, a testator might create a testamentary trust in their will that provides income to their spouse for the remainder of the spouse's life. Upon the spouse's death, the remaining assets in the trust could then be distributed to the testator's children or to a charity, as specified in the will.

It's important to note that testamentary trusts are subject to probate and the terms become public record, as they are part of the will. Additionally, testamentary trusts are irrevocable, meaning that once the testator dies and the trust is created, its terms cannot be changed.

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A person would create a spendthrift trust primarily to protect a beneficiary's inheritance from potential creditors and the beneficiary's own potentially irresponsible spending habits. A spendthrift trust is a type of trust that includes specific provisions preventing the beneficiary from selling, giving away, or otherwise mismanaging their future inheritance. It also prevents creditors from accessing the trust funds to satisfy the beneficiary's debts.

Here are several reasons why a person might establish a spendthrift trust:

1. **Financial Irresponsibility**: If a beneficiary is known to be financially irresponsible, the grantor (the person creating the trust) might worry that the beneficiary will squander their inheritance. A spendthrift trust can provide the beneficiary with a steady income while protecting the principal from being spent all at once.

2. **Credit Protection**: The trust can protect the assets from the beneficiary's creditors because the beneficiary does not have control over the trust assets. Creditors generally cannot reach into the trust to satisfy the debts of the beneficiary.

3. **Divorce Protection**: The assets in a spendthrift trust may be protected in the event of a beneficiary's divorce. Since the beneficiary does not have direct access to the trust funds, they may not be considered marital property subject to division.

4. **Substance Abuse or Gambling**: If the beneficiary has issues with substance abuse, gambling, or other addictive behaviors, a spendthrift trust can help ensure that the inheritance is not used to fuel these destructive habits.

5. **Special Needs**: For beneficiaries with special needs, a spendthrift trust can help provide for their care and living expenses without disqualifying them from receiving government benefits.

6. **Control Over Distribution**: The grantor can set specific terms for how and when the beneficiary receives distributions from the trust. This can include age-based milestones or requirements for responsible behavior.

7. **Estate Planning**: Spendthrift trusts can be part of a larger estate planning strategy to manage how wealth is passed down through generations while minimizing estate taxes and providing for loved ones.

In summary, a spendthrift trust is a tool for managing and protecting wealth on behalf of a beneficiary who may not be able or willing to manage it themselves. It ensures that the assets are used in a manner consistent with the grantor's wishes and provides a level of financial security for the beneficiary.