I’ve written earlier (January 2006) about the Uniform Transfer to Minors Act, which provided a simple and inexpensive way to gift to minors without having to set up an elaborate trust. UTMA accounts end automatically when the minor gains legal capacity at age 18 or 21. But what about adults who are facing the possibility of incapacity? Isn’t there a correlative mechanism for them?
Happily, the answer in Colorado is yes. Since 1999 there’s been a creature called a Custodial Trust. Its declared aim is to provide an inexpensive way to establish a simple trust for the benefit of an adult. For the most part, it is intended for people who may sense early stages of dementia and want to make sure their finances are appropriately cared for should the situation deteriorate to the point of incapacity. The statute governing custodial trusts provides that incapacity does not terminate: the custodial trust; the designation of any successor trustee(s); the authority of the trustee; or the ability of third persons to rely upon actions of the custodial trustee.
The beauty of these things is their simplicity and their flexibility. There is no loss of control by the beneficiary since it is the duty of the custodial trustee to be responsive to the direction of the beneficiary (if not incapacitated) in the management, control, investment and retention of trust property. You can declare the trust for yourself, or another person can put resources into that trust for your benefit. You can have yourself as both the trustee and the beneficiary. Parents with an adult child with diminished capacity for handling money can create one for that child’s benefit, or husband can create one for wife and vice versa. Most important of the attributes of a custodial trust is the provision for continuity in the event of the incapacity of the beneficiary. Where future incapacity is the concern and the individual has named himself as primary custodial trustee, it would be very important to nominate a successor trustee should the principal become incapacitated.
Custodial trusts are really the next step up in formality from a financial power of attorney, although the two are by no means exclusive. The nice thing about custodial trusts is that you are able to set aside certain accounts, property, or a specific amount of money and dedicate it to the welfare of the named beneficiary. As long as that beneficiary retains capacity, (or if the incapacity is temporary and is restored), the trust can be dissolved.
The official commentary to the statutes state that the legislature’s purpose in adopting the act was to take care of people who “are not very affluent” or who had attorneys who did not specialize in estate practice. There are some situations, however, where more is required. For adult children suffering some form of incapacity and receiving public assistance, a custodial trust might have the untoward effect of disqualifying them from benefits. For them, supplemental needs trusts can provide a benefit without jeopardizing their entitlements.
Planning for incapacity takes thought and deliberation and should always be carefully tailored to the circumstances. After all, there is a variety of tools in the legal toolkit, of which the custodial trust is just one. Identifying the right tools and adapting them to your situation is the good lawyer’s job. Now, if we could just find one of those .. ..