In this blog post, we assess the usefulness of standby trusts, an estate planning tool that is gaining some traction. A standby trust paves the way for the assets of a person to be managed by a trustee if the person becomes incapacitated.

The mechanics of a standby trust are straightforward and best described by a simple example: Let’s says John has no family or descendants, and plans to leave his property and other assets to charity after his death. However, he wants to ensure that he will be taken care of in the event that he becomes incapacitated.

His parents both suffered from dementia and were cared for in nursing homes until their respective deaths. As a successful entrepreneur, John could afford the cost of their care till the end. However, John noticed how dependent his parents had become on their caregivers and he knew that he had to ensure that he would be looked after in a similar way if he ever became mentally incapacitated. In other words, he had to create his own safety net. John was 55 years old at the time.

Estate planner’s recommendation

John’s estate planner advised him that setting up a standby trust could meet his requirements. He heeded the advice and established a standby trust. John named one of his long-time employees as his trustee, and directed the trustee to provide for his support and care should he become incapacitated. John also directed that any remaining property in the trust be distributed to charity after his death.

Years later, John’s worst fears surfaced when he was diagnosed with the onset of dementia. He quickly got his trustee to transfer his assets into his hitherto dormant standby trust. His original trustee had died, but John had already named a new trustee. One day not long after his initial diagnosis, John was found wandering in a town centre not knowing where he was. It was not the first time. His dementia had presented more quickly than anticipated.

His trustee stepped in and he was committed to his chosen nursing home. The trust took care of all his financial and healthcare needs. John’s future was secure, albeit bleak because of the dementia, thanks to the standby trust. After his death some time later, the remaining assets in John’s trust were transferred to his desired charity. The job of the trustee and the trust was complete.

A dormant living trust

John did the right thing for himself by setting up a standby trust well before his personal difficulties set in. Everything worked out in the end. It should be noted that a standby trust is set up like a living trust except that a standby trust just needs to be nominally funded. A standby living trust is dormant after inception.

In a living trust, the trustee has active duties in, for example, managing properties in the trust, collecting rent, accounting for and distributing income to beneficiaries. For a standby trust, on the other hand, the activation of administration of the trust is dictated by the settlor during his lifetime, or by default in the event of his death or mental incapacity, as in John’s case.

The standby trust is a more affordable trust structure compared to a living trust. The costs largely only involve establishment fees. Annual administration fees are minimal as long as the trust remains dormant. The idea of having a trustee administer a person’s assets when he is mentally and/or physically unable to do so himself is the key attraction of standby trusts.

We saw this in our example of John. Furthermore, if John had a wife and children, he could have named his loved ones as beneficiaries in any asset distribution, in addition to ensuring that his own care was adequately funded.  END

In the next blog post, we assess the usefulness of setting up a trust for your family.