Wednesday, September 21, 2011

The Gray Sheep

What's a "gray sheep?"

You all know what a "black sheep" is, in the metaphorical sense: the black sheep is the child or grandchild who has turned out wrong, done something stupid or illegal or immoral (or some combination thereof) that has brought shame and disgrace to the family.  When it comes time to do the estate planning, the black sheep is the one who doesn't get anything--or, at best, gets some token distribution on the condition that they don't contest the will or the trust.

A gray sheep is a beneficiary who isn't quite bad enough to be a black sheep. He may have done something stupid or illegal or immoral (or some combination thereof), but whatever it was it wasn't quite bad enough to justify cutting him out completely.  There's a second breed of gray sheep, the one who has a chemical dependency problem, massive debts, a spouse that can't be trusted, or a simple lack of good sense.  The client I'm drafting the documents for still wants to give something to the gray sheep, but not directly, not in a way that puts them in control of the wealth.

As you might have guessed, gifts to gray sheep are going to be held in trust. The exact terms will vary based on the circumstances, including the amount of money or property at stake, and how gray (metaphorically) the gray sheep is and how she got that way.  Some of the terms used in gray sheep trusts include:
  • Holding the principal in trust until some advanced age (50, 55, 60, 65 even) or for the gray sheep's life.  (A lifetime trust with remainder to grandchildren presents some issues with the generation-skipping transfers tax that we will go into in a future installment).
  • Making distributions out of the trust discretionary subject to an "ascertainable standard" such as "health, maintenance, education, and support."
  • Making distributions "wholly discretionary."  Under the Ohio Trust Code, a "wholly discretionary" trust is not subject to the claims of the gray sheep's creditors-making wholly discretionary trusts extremely useful for gray sheep with creditor problems.
  • The discretionary distributions may be further subject to the approval of a trust advisor.
  • The distributions, even though they may be discretionary or even wholly discretionary, may be capped off at a certain amount per year, or limited to expenditures for certain purposes only.
  • If the gray sheep's problem is one of motivation, the trustee could be directed to make distributions in an amount determined with reference to the gray sheep's earned income.  The harder you work, the more the trust gives you.
  • Distributions could be made contingent on certain accomplishments, or on refraining from certain specified bad behavior.  I have drafted at least two trusts where the beneficiary's right to further distributions was contingent upon passing random drug tests.  If the beneficiary failed, the trustee was restricted to making distributions only to pay for rehab treatment.

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