Fully authorized and court-enforced trusts have been with us a long time, at least since 1560.[1] But standard trusts, even if they continue for as long as the law permits, always undergo a change after the death of one who makes the trust. Put simply: someone has to become the new beneficiary, because the first beneficiary has died. The law calls this, broadly, “disposition.” What happens to the trust upon the death of the one who makes the trust, is called the disposition of the trust (or the disposition of the trust’s assets). If your trust doesn’t clearly spell out its disposition at your death, then you don’t have a very well-written trust.
For almost as long as trusts have been around, there have been other fundamental questions about them. How long can they last? Can the beneficiaries access the trust assets at will, despite the presence of the trust itself? The law supplied answers to these questions, and the way in which it did created two broad options for how any person who makes a trust can have that trust (and its assets) disposed of at their death: (1) outright, free of trust, directly to the beneficiary, or (2) continuing in further trust for the benefit of the beneficiary.
So, first, the law said no trust can last forever. While this principle has been greatly extended in modern times, it’s still there.[2] So, all trusts must end, and thus have an “outright, free of trust” disposition, eventually. But, also from the very beginning of trusts, the law has said that a trust can survive the death of the one who makes it.[3] This is why trusts “avoid” probate, they don’t die like a person does, and thus they don’t have to die when the person who made them does.
Second, the law initially answered the question of access in a very surprising way. The initial answer was that once a beneficiary, who was no longer a minor, wanted access to the trust’s assets, the beneficiary could get those assets.[4] If a beneficiary could indeed access the trust assets upon majority age, then functionally there wasn’t any difference between an outright disposition and a disposition in further trust, once the beneficiary was old enough.
However, American courts soon broke with this holding,[5] and now all states embrace a conception of trusts that means a trust can’t be terminated, unilaterally by a beneficiary, until its purposes have been accomplished. Thus, a trust can continue far beyond the death of the trust’s maker, and if the terms of the trust so state, a beneficiary can’t directly access the trust assets at will, until the trust says that beneficiary can, or the trust survives (in Arkansas) 365 years.
So, this is the second broad form of a disposition after death: having the trust continue on for the benefit of the beneficiary, but with the trust still in existence, and the beneficiary and trustee both bound by the terms of the trust, until those terms are accomplished. For planners, these kinds of trusts (that continue on for children) are referred to as “GST Trusts.”[6] Informally, they are often referred to as “sub-trusts,” since they are “created under” the original trust.
Now come the bigger questions: (1) what are the major differences between these two broad options, and (2) how should a person making a trust choose between them?
The answer to the second question is the shortest: ideally, by engaging the services of a qualified planner who has familiarity with not just the general trust law considerations, but the income and transfer tax consequences involved, as well.
The answer to the first question can be broken down into three major parts: (1) asset-protection differences, (2) gross estate inclusion differences, and (3) marital property comingling considerations.
First, asset protection. In Arkansas, property held in an irrevocable trust that contains a spendthrift clause in the trust document enjoys robust creditor protection.[7] Obviously, property held outright enjoys only the standard bankruptcy protections, which in Arkansas aren’t much.
Second, property held in a properly-drafted and administered GST Trust[8] is not includible in the gross estate of either the trustee or the beneficiary, even if the same individual happens to occupy both those roles.[9] Property held outright is definitely included in the gross estate for estate tax purposes.[10]
Third, in Arkansas, property inherited from parents is not marital property[11], but property that is inherited from parents outright is often not kept separate, over time, in a way that allows it to be clearly identified as such. Conversely, property that remains titled in a GST Trust[12] is forced to be separately identifiable for as long as it is held in the trust. If the property fits under the definition of “non-marital property” and is easily identifiable, then it should not be subject to consideration for equitable apportionment in a divorce.[13],[14],[15]
So, after having read the above, hopefully the reader now gets the “GiST” behind continuing property in further trust after the trust’s maker has passed, and the importance of seeking out qualified counsel when making the decision, and of course, when composing one’s trust and other estate planning documents in general.
Should you have any questions reguarding trusts or estate planning, please contact one of our qualified estate planning attorneys.
[1] Bartie v. Herenden (Ch. 1560)
[2] Ark. Code Ann. § 18-3-101(a)(2).
[3] The Duke of Norfolk’s Case, 3 Ch. Cas. 1 (1682).
[4] Saunders v. Vautier, 49 Eng. Rep. 282 (Ch. 1841).
[5] Claflin v. Claflin, 149 Mass. 19 (1889).
[6] While these trusts can qualify as “GST Trusts” as referred to and defined in Internal Revenue Code § 2632(c)(3)(B), the appellation “GST Trust,” as used in general estate planning, is often broader than the regulatory definition, and even planners do not always tightly distinguish between the two when using the term.
[7] Ark. Code Ann. § 28-72-707.
[8] The larger meaning of “irrevocable continuing trust for the benefit of a child and further descendants” is what is meant here, and not the narrower technical meaning found in Internal Revenue Code § 2632(c)(3)(B).
[9] Treas. Reg. § 20.2041-1(c)(2).
[10] Internal Revenue Code § 2031.
[11] Ark. Code Ann. § 9-12-315(b)(1).
[12] Broader meaning intended.
[13] The author expresses zero opinion on what a judge in a given divorce proceeding would actually do, and is only referring to the basic statutory rules set forth.
[14] GST Trusts (broader meaning) can be reached for child support in Arkansas. Smith v. Smith, 2023 Ark. App. 521 (2023).
[15] Dozier v. Dozier, 2014 Ark. App. 78, 2, 432 S.W.3d 82, 83 (2014).
