An “off-label” trust is not a formal legal term but a useful way to describe trusts that are adapted creatively for purposes beyond their traditional uses. Borrowing the term from prescription medications, where a drug is used successfully for an originally unintended purpose, “off-label” describes a novel or special-purpose trust.
Trusts, whether revocable or irrevocable, are inherently flexible tools. They are used in estate and financial planning, as well as asset management. Their structure can be tailored to meet a wide range of specific, sometimes unconventional, needs.
Trusts are both designed and drafted, usually by lawyers. All well-drafted and properly funded trusts avoid probate of assets at death. Dynasty trusts avoid probate for as long as the trust dictates, sometimes for generations or perpetually.
All well-drafted trusts address the incapacity of a decision-maker through a succession of designated roles, such as trustees, trust protectors (who oversee trust administration), or surrogates (who act on behalf of incapacitated parties). Beyond these benefits, trusts offer advantages specific to certain assets or property types, addressing their unique challenges.
The most important of attribute of a trust over a business entity, to many clients, is privacy. Unlike business entities, which are established and regulated under state and federal law, trusts are private arrangements subject to minimal government oversight. Business entities in most states require initial establishment through a state government and periodic reporting. States have inherent authority to request or inspect documents and records from business entities. Most state governments lack inherent authority over trusts. Additionally, a revocable trust and some irrevocable trusts can operate without a separate tax identification number, requiring no separate tax return.
In recent years, more states have adopted statutory trust codes, but these typically do not regulate trust purposes beyond confirming that trusts must be created for a legal or lawful purpose. These codes formalize the enforcement of common law regarding trustees’ duties, such as fiduciary responsibilities in managing assets and the duty to notify and inform beneficiaries. A well-drafted trust should incorporate these requirements to ensure statutory compliance and inform trustees of their responsibilities.
Most trusts are marital, domestic (e.g., unmarried cohabitating persons), or single-person trusts serving as will substitutes to avoid probate. However, trusts can be created by anyone or any group and have evolved to provide solutions for a variety of challenges and interests. Below are examples of “off-label” trusts.
Trusts for General Shared Property Ownership
Instead of a partnership, limited liability company (LLC), or joint ownership, a trust can hold and manage shared property, such as a family vacation home, a hunting cabin and/or land, a community garden, or conservation property. Using a trust offers several advantages:
-Centralized Management: A trustee oversees maintenance, expenses, and usage schedules, preventing disputes among co-owners (e.g., siblings or cousins) common in partnerships or tenancy-in-common arrangements. In a trust, management and financial burdens can be alleviated for those least willing or able to participate.
-Flexibility: The trust terms can specify rules for use (e.g., who gets the property during hunting season), cost-sharing, and what happens if a beneficiary wants out or dies.
-Continuity: Unlike a partnership, which may dissolve upon a partner’s death, a trust continues seamlessly with successor trustees and beneficiaries.
-Dispute Resolution: A trust can incorporate alternate dispute resolution techniques, such as mandatory arbitration or mediation, to reduce litigation costs.
-Protection from Third Parties: Trusts shield assets from third parties, such as ex-spouses, creditors, or predatory interlopers.
-Avoiding Probate: Trust-held property bypasses probate, ensuring the asset remains intact without court delays or costs.
Land trusts, such as those in Illinois, are often used for privacy or joint ownership. I practiced law in Illinois from 1988 to 2000, during that time transitioning several real estate syndicates and limited partnerships to Illinois Land Trusts to minimize regulatory compliance and expense.
For example, a revocable living trust could hold the property during the grantors’ lifetimes, allowing them to retain control, then convert to an irrevocable trust upon their death with detailed instructions for heirs on managing and enjoying the property. Alternatively, an irrevocable trust with tax benefits or creditor protection can manage either a whole property or just mineral interests for a family in perpetuity. These “off-label” uses sidestep the complexities of partnership or entity agreements while leveraging the trust’s ability to govern long-term, multigenerational ownership.
Trusts to Resolve a Complicated Probate Estate
Using a trust to manage distribution of a probate estate with many beneficiaries is a clever adaptation, especially to close probate efficiently and mitigate risks like a beneficiary’s death prolonging administration.
With many beneficiaries, probate can drag on if someone goes missing, contests the estate, or dies mid-process (triggering sub-estates). Ancillary administrations for property in multiple states can further prolong the process. Trusts simplify beneficiary sprawl by allowing interests to be conveyed to a trust earlier in the probate process, with the executor, appointed as trustee, handling administration outside the probate process according to the decedent’s will and beneficiaries’ wishes.
What if a beneficiary dies during the probate process? A separate probate estate must be established for the recently deceased, sometimes in a different county or state than the original. Even if a beneficiary of probate estate has a revocable trust to avoid probate of their assets, the interest in the probate estate cannot be transferred to the trust because it was not 'owned' by the beneficiary before death. This interest must be administered in a second probate This delays the original probate and burdens the beneficiary’s family with additional probate costs. Additionally, probate and trust estates often have different beneficiaries and outcomes. For example, spousal claims that affect distributions from an estate with a will (see my article, Second Marriage? Fund Your Trust!).
Many probate administrations, particularly those involving family farms, see beneficiaries agree to sell property to avoid ownership complexity, but few anticipate the risks, costs, and delays over time. By conveying interests to a trust, beneficiaries can lock in preferences regarding distributions. Immediately after the probate court conveys the property, deeds are prepared to transfer it to the trust, minimizing risks like a beneficiary’s death or disappearance. While this involves added expense and complexity, it is often preferable to the costs, delays, and individual burdens of subsequent probate administrations.
This approach is “off-label” because trusts are typically pre-death planning tools, not probate cleanup mechanisms. Yet, it’s a practical workaround for sprawling families or estates with complex assets, ensuring efficient estate closure.
Dynasty and Incentive Trusts
Designed for generational wealth management, dynasty trusts are often repurposed for unconventional assets, family governance, or generational incentives, such as education or successful marriages, while protecting assets from individual risks.
Incentive trusts encourage specific behaviors or achievements and discourage others. For example, a trust may condition distributions on milestones like graduating college, maintaining sobriety, or holding a job. A parent might establish a trust paying $10,000 annually to a child only with proof of full-time employment or passing drug tests, with funds held back or redirected if conditions are unmet.
Dynasty trusts with incentives can shape behavior across generations. While trusts protect wealth, incentive trusts shape beneficiaries’ life choices, functioning like a contractual agreement within a trust structure. These trusts are particularly "off-label" if they incorporate specific modern wishes like encouraging coding classes, discouraging social media engagement, or encouraging investment in digital investments.
Pet Trusts for Animal Care
Pet trusts, growing in popularity, ensure the care of pets or investment animals after the owner’s death or incapacity. I have prepared such trusts as stand-alone trusts or embedded within revocable living trusts, covering traditional pets (e.g., horses) and exotic animals (e.g., llamas, reptiles).
These trusts are funded with assets to cover expenses (food, veterinary care, grooming) and appoint a trustee and caregiver. For example, a person sets up a $50,000 irrevocable trust for their dog, with a friend as trustee and a neighbor as caregiver, ensuring the dog’s lifestyle is maintained, with remaining funds going to charity afterward. The trust can prohibit euthanasia for convenience, requiring the trustee to find a suitable owner or transfer the animal to a no-kill shelter with funds for its lifetime care to prevent abandonment.
Although increasingly common, pet trusts are “off-label” because trusts traditionally serve human beneficiaries. The Uniform Trust Code and state laws, such as Ohio Revised Code § 5804.08 and Missouri Revised Statutes Ch. 456.4-408, explicitly permit them.
Gun Trusts for Firearms Ownership
A gun trust manages ownership and transfer of firearms, especially those regulated under the National Firearms Act (NFA), like suppressors or machine guns. The trust holds title, allowing multiple trustees or beneficiaries to use the firearms without individual ATF registrations. It simplifies inheritance, bypassing probate and ensuring compliance.
For example, a collector creates an NFA trust to own a suppressor collection, naming children as co-trustees who can use the suppressors, with provisions for transferring ownership upon the collector’s death without ATF scrutiny.
Trusts typically handle real estate or cash, not regulated items like firearms, making gun trusts “off-label.” They effectively navigate complex Second Amendment and regulatory issues.
Privacy Trusts for Anonymity
Some trusts shield the identity of property owners, often for real estate or high-value assets. The trust holds title, with its name appearing on public records instead of the individual’s. A trustee manages the property, and the beneficiary retains control.
For example, a celebrity uses an Ohio Legacy Trust (OLT) or Delaware Statutory Trust (DST) to buy a vacation home, keeping their name off the deed to avoid attention, with a professional trustee handling transactions. The OLT and DST are used because they offer asset protection, though their mechanics differ. A DST protects the grantor from trust liabilities (e.g., property debts) using non-recourse financing but does not typically shield beneficial interests from personal creditors. An OLT protects trust assets from the grantor’s and beneficiaries’ creditors, provided no fraudulent transfer occurs, after an 18-month creditor claim period.
Trusts are typically for estate planning or tax benefits, not anonymity. Privacy trusts leverage the trust’s ability to obscure ownership, useful for high-profile individuals.
Business Succession Trusts
A trust can facilitate the transfer of a family business to the next generation or employees without a formal sale. The owner places company shares into a trust, with terms dictating control shifts. For example, a founder sets up a trust holding 51% of a company’s shares, transferring voting control to a daughter after she serves five years operating the business, ensuring a smooth handoff.
These trusts are “off-label” because trusts are typically for personal wealth, not business operations. They blend estate planning with corporate succession, avoiding the rigidity of buy-sell and asset purchase agreements agreements. They often incorporate future possibility of inheritance as currency to purchase current interest in a business.
Art or Collectibles Trusts
Trusts manage and preserve valuable collections (art, rare cars, wine) for future generations or charity. The trust holds the collectibles with instructions for maintenance, insurance, display, or sale. For example, an art collector creates a trust to maintain Salvador Dalí paintings, allowing children to display them, with the collection donated to a museum after the last child’s death.
Trusts typically handle liquid and tangible assets, not niche items requiring specialized care, making this use “off-label.”
Digital Asset Trusts
Trusts increasingly manage digital assets like cryptocurrency, social media accounts, or intellectual property (e.g., NFTs). The trust holds access keys or ownership rights, with the trustee tasked with transferring or deleting them. For example, a crypto investor sets up a trust holding Bitcoin wallet keys, directing the trustee to distribute proceeds over 10 years, with a clause to delete private accounts.
Digital assets involve unique concerns, such as sensitive information or high management risks, often warranting a separate hybrid Digital Assets/Privacy/Anonymity Trust. Trusts predate the digital age, so this use is a modern twist requiring creative drafting.
Charitable Lead or Remainder Trusts for Mixed Goals
Modern charitable trusts balance giving with family benefits in unconventional ways. A charitable lead trust (CLT) pays income to a charity, then the remainder to family; a charitable remainder trust (CRT) pays family first, then charity. For example, a grantor sets up a CLT to fund a community garden for 15 years, with the remainder going to grandchildren if they volunteer, blending charity with incentives.
In Off-Label Trusts: Part Two: Fandom Trusts, we will discuss fandom and hobbyist trusts.
These examples show how trusts stretch beyond will substitutes or tax shelters, tackling everything from pets to pistols to philanthropy. While “off-label trust” is not a term of art, the practice of bending trusts to unusual purposes is effective. Trust adaptability makes them a Swiss Army knife for creative problem-solving. A well-drafted trust document that anticipates family dynamics, asset specifics, or beneficiary sprawl is key.
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