Creating a restricted trust for a beneficiary

Many families have a beneficiary that could be described as a "vulnerable beneficiary". This vulnerability can arise in any one or more of the following scenarios:

- a spendthrift beneficiary,

- a beneficiary financially insolvent or subject to claims from creditors,

- suffers from addiction to drugs or alcohol, or

- mentally or physically disabled.

In these circumstances, it may be appropriate and in the beneficiary's best interests for their share of the estate or a portion of it to be placed into a restricted or protective trust. The trust limits the beneficiaries' access to the capital or income of the trust. Typically, we describe a beneficiary who falls into this category as a "restricted beneficiary" and their share of an estate held in a separate trust, called a "restricted trust".

A Will can nominate one or more beneficiaries that fall into this category, depending on the needs of the beneficiary. An Executor can be given directions on how the restricted beneficiary can have access to the assets of the trust for their benefit. The options available include:

1. No access to the capital or income of the trust. The trustee decides how it is applied;

2. no access to the capital of the trust with all income paid to the restricted beneficiary;

3. no access to the capital of the trust with a fixed income amount being paid;

4. Limited access to the capital of the trust with full access to the income; or

5. Use only of the capital of the trust (e.g. property) but no income paid.

A will-maker can determine which of these options is most appropriate for any particular beneficiary they identify as vulnerable and not likely to properly manage their share of the estate for their best interests. They can also decide how long the trust operates and when it will end.

A will-maker should carefully choose who will be the trustees of a restricted trust and what restrictions are placed on access to capital or income. They should also be asked if they accept the responsibility in the decision-making granted to them for the life of the trust.

Inherit’s legal bot and the resulting Estate planning report will help you and your client identify a range of options available to their vulnerable beneficiary for discussion with a nominated Inherit panel lawyer.