Sub-Trusts: Everything You Need to Know

Trusts are one of the most effective tools in estate planning. A trust is indispensable when preparing assets and properties in the event of incapacitation or death. Creating a trust comes with many benefits, the chief of which are legacy preservation for your family, protection from estate taxes and creditors, and avoiding probate or court-supervised distribution of assets.

A sub-trust, often called a trust within a trust, provides the same benefit as a trust but with a more specific purpose. In this post, we focus on creating sub-trusts and how they can be a great option for your estate planning needs.

What is a Sub-Trust?

A sub-trust is a type of revocable trust or trust that the creator can change or cancel anytime while they are still living. A sub-trust is also called a secondary trust, meaning that a primary trust must be created before a sub-trust. As trusts can come in many types, names, and purposes, so do sub-trusts.

Why Create a Sub-Trust?

There are many reasons for creating a sub-trust, but the most common of these reasons are:

To set up conditions for your beneficiaries

Trustors mainly create sub-trusts to set up conditions for their beneficiaries. The most common of these conditions are reaching a certain age, getting an education, and even staying away from alcoholism, gambling, or similar activities. You can set up these sub-trusts if your chosen beneficiaries are incapable of managing the assets they are to receive from you.

To add an extra layer of asset protection

Sub-trusts allow trustors to set up conditions for beneficiaries, thus protecting the trust’s assets from unfit or financially irresponsible beneficiaries. Sub-trusts further protect assets by limiting the beneficiary liabilities. This means that the trust’s assets are protected even in the event of the beneficiary divorcing a spouse, getting into debt, bankruptcy, accidents, and other eventualities.

To manage assets with more flexibility

Families change through time and assets grow or decline. Thus, it is normal for trustors to keep modifying their beneficiaries and their conditions for receiving assets. Sub-trusts allow trustors to modify and manage their trust with flexibility while they are still living. Creating a sub-trust can help you avoid revising the terms of the trust yet still make changes in your asset planning or distribution.

To include other beneficiaries

Often, provisions for beneficiaries can’t be included in the main trust and require the need for a sub-trust. Grandchildren yet to be born or pets are some examples of these scenarios. Creating sub-trusts can help you set up the terms for providing for them to ensure that they receive their benefits when you are gone.

Common Types of Sub-Trusts

Below are some of the most popular types of sub-trusts.

Age Trust

The most common sub-trust, the age trust can be set up as a sub-trust for young beneficiaries. Using this sub-trust, the trust can name a successor trustee to manage the trust and withhold the control of the assets from the beneficiaries until they reach a certain age.

Special Needs Trust

Also called a supplemental needs trust, the special needs trust can be used as a sub-trust for beneficiaries who receive benefits such as Supplemental Security Income (SSI) or Medicaid. Through this sub-trust, you avoid supplanting or replacing their benefit program and still provide trust benefits for your beneficiaries.

Dynasty Trust

Another useful sub-trust, a dynasty trust lets you manage complex beneficiary and inheritance conditions. Through this sub-trust, you can set up separate sub-trusts for individual beneficiaries with their own conditions, trustees, and other provisions. Dynasty sub-trusts are ideally used for asset protection and flexibility.

Pet Trust

Pets are not generally considered beneficiaries. In most states, if you want to provide for the welfare of your pets, you can treat them as personal property and bequeath them to your beneficiary, in this case, the person you want to take care of your pet when you die. Alternatively, you can also make a gift of money in your will to that person in the hope that they will use this to take care of your pets. In Arizona, however, you are allowed to create a pet sub-trust which is a more legally binding way to set up your provisions for your pet upon your death.

Education Trust

Education trusts are also common for estate planning, and education sub-trusts can come in many forms. You can set up a use-it-or-lose-it type of sub-trust where the money goes somewhere else if your beneficiary fails to use it. You can also set up a common pot type where all beneficiaries have equal access to a lump sum of funds. Your choice of the sub-trust terms depends on the size of your estate, the number of beneficiaries, and other education considerations.

Unlocking the Power of Sub-Trusts: Tailoring Your Estate Plan with Precision

As you can see, trusts and sub-trusts are highly dependent on your special circumstances and purposes. They are easy to set up with the help of an experienced trust attorney, but it is critical that you choose the right fit for you and your loved ones. If you need more information on these types of trusts and sub-trusts, please don’t hesitate to give us a call or schedule a free consultation.