Robert Mendenhall is vice president of tax and estate planning at Richardson GMP Ltd.
Elsa Koertig, 48, is a single mom and schoolteacher in Moose Jaw, Sask. She earns $65,000 annually and her daughter Ingrid is heading to university.
Ingrid’s straight As and clean sweep of provincial and national science fairs caught the attention of Ivy League schools, and her heart’s set on Princeton. She’s earned generous scholarships, but even after factoring in RESPs, the family faces a $10,000 annual shortfall.
Elsa’s coming off a messy divorce and is saddled with mortgage, car and other debt payments. But if she could access the $100,000 stock-and-bond portfolio her deceased parents left her in trust, she’d be able to send Ingrid to Princeton.
Elsa’s foggy on the details. She knows how much is in the trust, and remembers her parents saying they wanted it to fund her retirement. Can she tap the trust sooner?
Examine the document, says Robert Mendenhall, vice president of tax and estate planning at Richardson GMP Ltd. Its terms may allow the trustee to distribute assets. “You don’t want to look at terminating the trust right off the bat. It would be a lot easier to talk to the trustee and have [him or her] exercise that discretion.”
Also look for options to collapse the trust. “If the trustee’s allowed to terminate [it] and give the funds to the beneficiary, then all that’s needed is to convince the trustee that this is the right thing to do,” notes Mendenhall. Unfortunately Elsa’s parents gave the trustee no discretion and there’s no termination provision. The document says Elsa can’t access the funds until she turns 65.
Degree of difficulty
10 out of 10. To persuade the judge, Elsa will have to submit admission and scholarship letters, proof the money will be used as promised, and reasons to believe Ingrid will meet her potential.
Mendenhall stresses courts are extremely protective of settlor intentions and the interests of unborn contingent beneficiaries. A judge will override them only on compelling evidence.
Collapsing the trust is her only option.
Read: 3 tricky trust rules
Mendenhall says he’d first determine whether Elsa’s case fits the precedent established by Saunders v. Vautier, an 1841 decision allowing beneficiaries to terminate trusts set up by deceased settlors if these conditions are met:
- beneficiary is an adult and legally competent;
- the terms of the trust postpone distribution of assets to some future event, such as reaching a certain age; and
- unanimous agreements, if there are multiple beneficiaries.
In these cases, there’s no need to go before a judge. “I would give the [trustee] a legal opinion and say, ‘It fits within the rule so you can collapse the trust,’ ” says Mendenhall. Trustees must heed beneficiaries’ wishes if conditions are met.
That can be difficult.
Say a trust leaves $100,000 to Son A at age 60, but stipulates that if he dies before then, Son B gets the money when he turns 60. Son B is what’s called a contingent beneficiary. (Son B may be the beneficiary of a separate trust, with Son A as the contingent beneficiary.)
Have you thought about setting up an RESP to fund your child’s education?
So, if Son A were in Elsa’s predicament, he’d have to convince his brother to give up a possible $100,000 payday so his niece can go to Princeton. Mendenhall says good lawyers ask clients if they want the terms crafted to get around Saunders. Then, the only way to collapse a trust is to petition a judge.
One way to skirt the rule is to make the beneficiary’s descendants—born and unborn—contingent beneficiaries.
In Elsa’s case, the document says she gets the full $100,000 at age 65.
If she dies prior, the money goes to what lawyers call her issue: Ingrid, along with any future children, or grandchildren. Elsa’s parents did this because they didn’t like her husband. And, based on his numerous flings before and during the marriage, they were right to be cautious.
The $100,000 was separate from Elsa’s family assets, protecting it from divorce proceedings. Earmarking the money for Elsa’s retirement was to insure against her tendency to take on debt.
Since using the Saunders rule isn’t an option, Elsa has to rely on provincial trust law. Saskatchewan, like most common law provinces, allows beneficiaries to petition the court to terminate a trust.
Read: Help students save money
At first glance it may seem Elsa’s case is a slam-dunk. After all, what judge would prevent a star science student from going to Princeton?
But Mendenhall points out the judge has to weigh the needs of Elsa’s parents, needs of Elsa and her issue, which include the unborn. (Elsa’s daughter needn’t be pregnant for the judge to consider the interests of descendants beyond Ingrid.)
Elsa readily accepts advice to petition a judge to collapse the trust. The judge sees it her way.
Trust assets are rolled out tax-free to Elsa. She liquidates enough stock to cover Ingrid’s expenses (and her legal fees), and pays capital gains on the winners.
Dean DiSpalatro is senior editor of Advisor Group.
Originally published in Advisor's Edge
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