Trusts are powerful estate planning tools that allow assets to be distributed according to specific terms set by the grantor. However, not all expenses qualify for payment from a trust. Trustees must carefully manage distributions to ensure they comply with the trust’s instructions, protect the trust’s financial health, and avoid jeopardizing a beneficiary’s eligibility for government benefits. Understanding what a trust can and cannot pay for is essential for effective trust administration and beneficiary support.
Factors That Determine Allowable Expenses
A trust’s ability to cover expenses depends on its structure, purpose and legal framework. The key factors include:
- The type of trust
- The language in the trust document
- The trustee’s discretion
- The beneficiary’s needs
Failure to follow these guidelines can lead to tax penalties, legal disputes, or the unintended loss of public benefits for the beneficiary.
Four Common Expenses Trusts Often Can Cover
Many trusts provide financial support for basic needs, though direct cash payments to beneficiaries are typically restricted. Trustees can instead cover essential expenses that may or may not include rent, utilities, groceries, and other categories.
1. Healthcare and Medical Expenses
Trusts often provide for a beneficiary’s medical needs, particularly when supplemental care is required beyond what government programs cover. Permitted medical expenses include:
- Health insurance premiums and co-pays
- Prescription medications and over-the-counter treatments
- Vision, dental and hearing care
- Home health aides, nursing care and rehabilitation services
- Medical equipment, such as wheelchairs or hearing aids
For beneficiaries receiving government aid, special needs trusts must structure medical payments carefully to avoid disqualifying the individual from Medicaid.
2. Education and Personal Development
Trust funds can support educational goals and skill development, ensuring long-term financial independence. Allowable education-related expenses include:
- Tuition for private schools, colleges, and vocational programs
- Books, laptops, and other learning materials
- Tutoring and special education services
- Continuing education and career development programs
The trust’s language will determine whether these expenses are discretionary or required.
3. Transportation and Mobility Support
A trust can fund transportation costs to help beneficiaries maintain independence and access necessary services. This may include:
- Purchasing and maintaining a vehicle (if titled in the trust’s name)
- Auto insurance and registration fees
- Public transportation passes, taxis, or rideshare services
- Modifications to a vehicle for accessibility needs
For special needs trusts, covering transportation must be done in a way that does not violate asset limits set by government programs.
4. Recreational and Quality-of-Life Expenses
Trusts can enhance a beneficiary’s life by providing funds for travel, entertainment, and hobbies. These expenses might include:
- Vacations, hotel stays and airfare
- Gym memberships and wellness programs
- Concerts, sporting events and social outings
- Hobbies such as art, music lessons, or gardening
These discretionary expenses must align with the trust’s purpose and the grantor’s intent.
Expenses a Trust Cannot Cover
Not all expenses qualify for trust payments; some could cause legal or financial complications. The most common restrictions include:
- Direct cash payments to beneficiaries, which could count as income and impact public benefits
- Gambling, illegal activities, or high-risk investments
- Debt repayment, unless the trust explicitly allows it
- Support of third parties, unless designated by the trust’s terms
Trustees must exercise caution and seek legal guidance when uncertain about allowable expenses.
Managing Trust Distributions Responsibly
Trustees have a legal and fiduciary duty to distribute funds appropriately. Mismanagement can lead to tax penalties, depletion of the trust’s resources, or legal challenges from beneficiaries. Trustees should:
- Keep detailed records of all trust transactions to ensure transparency and accountability
- Consult an estate planning attorney before approving large or unusual distributions
- Ensure that payments go directly to service providers rather than beneficiaries whenever necessary to maintain public benefits eligibility
A well-managed trust ensures financial security for beneficiaries, while protecting assets for long-term use. If you need trustworthy assistance to create and manage your trust, our law firm can help. Reach out today to schedule a consultation and get started securing your legacy.
Key Takeaways
- Trusts cover essential expenses: Living costs, healthcare, education and transportation are commonly approved expenses.
- Some payments require trustee approval: Large purchases, investments and discretionary spending must align with the trust’s terms.
- Cash payments are usually restricted: Direct distributions to beneficiaries can impact government benefits and legal compliance.
- Trustees must act responsibly: Proper documentation and legal guidance prevent mismanagement and protect the trust’s integrity.
- Planning ensures long-term financial security: Structuring distributions wisely helps beneficiaries maintain stability, while preserving trust assets.
To learn more about estate planning in the East Valley, Gilbert, Mesa and Queen Creek, schedule your free consultation with Attorney Jake Carlson by using one of the links above.
Reference: SmartAsset (Dec. 15, 2024) “How Does a Beneficiary Get Money from a Trust?”
