Law News and Tips
Some time ago, an older couple came into my office to do their estate planning. She was 85, and he was 86.
As with all of my clients, I had sent them an estate planning questionnaire that helps me to gather information I’ll need to make a recommendation on a plan that would work for them. It asks for family information, financial information, and the names of the people they would want to take care of things when they are no longer able to do things for themselves either due to disability or death.
Right in the middle of the questionnaire is a page that is mainly blank. It asks the client to tell me what they want to have happen to their property on their death. The can write it out; they can do a diagram; or they can draw pictures. Based on that, I develop a plan.
When I was meeting with this older couple, they had brought in their questionnaire. They had completed the family information. The financial information was pretty detailed and told me what I needed to know. They also had listed the people they wanted to handle things when they couldn’t. However, they had left the center page completely blank. This was kind of odd.
So I asked, “What do you want to have happen to your property when you’re gone?” And the wife burst into tears. I don’t mean that she just started weeping. It was kind of like wailing.
I was really surprised. I had never had a client do that before. So I turned to the husband and said, “I’m sorry. What did I say?” He leaned forward a little and in a very gravelly voice, he said, “Aw, don’t worry. She just doesn’t want to admit we’re gonna die.” Talk about denial. Now to her credit, the only time she had even been in a hospital was when her two boys had been born, but still.
People often tell me that they are going to come see me to get a will or a trust done. My standard response is, “OK, but just don’t die in the meantime.” I know it’s a little insensitive, but it is the hard truth.
Nobody wants to think about death, much less their own. It’s hard to comprehend for one thing: one minute you’re here, and the next, you’re gone. It can be pretty depressing.
However, not planning seems kind of irresponsible to me. If you have minor children, you don’t want them to end up in foster care or have your life insurance be administered by the probate court. You don’t want your estate to be probated generally. I would think you want to be able to name the person who is going to take care of your kids and administer your assets.
So when is the best time to plan your estate? Honestly, it’s right before you die. But no one knows when that day will come except maybe when it’s already upon you. We all know people who have died suddenly from a heart attack or some freak accident. We know other people who were struck with a debilitating disease in the prime of life. We never know when our time will come.
So when is the right time to plan your estate? Now. Don’t wait until it’s too late.
I spend a lot of time talking to people about the benefits of trusts. The bottom line is that they avoid probate. As I’ve explained in other articles (columns), probate can be slow, freezing cash and other accounts, so the mortgage, utilities, and other necessary expenses can’t be paid; probate is a public process that can open your private business for general inspection; and probate can be expensive. So why would anyone forgo a trust and only use a will?
There are a few instances when a will is the way. Trusts cost a little more than wills, and for young families, a little added expense can be a large burden. In that case, a will would be far better than to ignore estate planning altogether.
If a young couple with children die without doing any planning, their children’s lives will be caught up in the court system. First, there is the question of who will take care of the children. When working with couples with young children, this may be the most hotly debated (if not contested) issues. She never really liked or trusted his brother, Billy, who is his best buddy. He never really thought much of her sister, Lucy, to whom she is deeply devoted. Even so, I’ve never met a couple who wanted their children to become wards of the state and possibly bounced from home to home. By means of a will, they can name guardians for their children.
In addition, couples don’t really want their assets managed by the probate court, or public administrator. With young families, these assets are typically life insurance proceeds, but they can be substantial. Young children cannot open a bank account; they cannot make investments; they can’t even pay bills. Someone has to be put in charge. Without a will, that would end up being the public administrator and the assets would be in what is called a conservatorship.
Once a conservatorship is set up and the assets are transferred to it, there is the question of how to invest the assets for the good of the children. Most parents would want the assets to be invested for a total maximum return within some conservative limits: nothing very risky – maybe some blue-chip stocks; maybe some bonds.
With a conservatorship, that won’t happen. The assets will be invested in CDs and money market funds; all government insured. Typically, those investments don’t even keep up with inflation. The assets may actually be losing money against inflation.
And then there are expenses. The conservator cannot pay for food, housing, utilities, or anything without a court order, and the court will minimize expenses to conserve assets.
Finally when each child reaches 18, they will get their separate share outright. That rarely seems to be a good idea. Even a relatively small amount to an 18-year-old is a fortune. As I’ve discussed in other articles (columns), too much money too soon can ruin a child. Mercifully, I was saved from that burden.
Parents can avoid the consequences of a conservatorship by having a will. A will allows them to provide for a trust to take care of their children. Until the youngest reaches a certain age, the assets can go into a common trust. Once the youngest has reached the age where they should have completed college, then the common trust assets can be divided and distributed to separate trusts for the benefit of each child. Problem solved.
So one situation where a will might be appropriate (or sufficient) is when a young family needs to do some planning but is on a tight budget. Sometimes a will might be the best planning tool for the elderly as well. In any event, a general power of appointment, and a medical directive should be included in the mix. It would be a very rare instance when no estate planning is the solution. Rather, no planning is first step to problems.
I clearly remember Charlie as he was leaving my office that day. He had just signed his trust, and I’d asked him if he wanted any help re-titling his assets into his name as trustee. With a twinkle in his eye, he smiled and said, “Don’t worry. I’ll take care of it,” and he walked out my door.
Maybe three years later, Charlie’s granddaughter called. Charlie had died as a result of a boating accident. Actually, it was a rafting accident. In March, while testing a raft on which he and some buddies were going to float down the Mississippi, a la Huckleberry Finn, he had fallen into Mark Twain Lake, caught pneumonia, and died. Charlie and his buddies were in their 80s. He certainly knew how to live life.
Charlie had named his granddaughter as his successor trustee. I started to explain to her what was involved in administering a trust. I was talking about having to prepare a list of assets to start an inventory, and she interrupted me. She said Charlie hadn’t done any of that stuff.
I was confused. She explained that Charlie had never funded this trust by re-titling his assets into his name as trustee. She told me he’d said that if he funded this trust, he felt that he would be telling God he was ready to die. Charlie wasn’t ready to die, so he hadn’t done anything. Now, everything needed to be probated.
Creating a trust is only the first part of a trust-based estate plan if one of your main goals is to avoid probate (which it almost certainly would be). Unless you also retitle your assets in your name (or in the case of a husband and wife, names) as trustee(s), the assets in an individual’s name at his or her death will have to go through probate.
So what’s involved in retitling assets into your trust?
There are two ways to transfer assets into a trust. Several years ago the Missouri legislature passed a law that allows you to just designate the trust, such as the “Betty Smith Trust.” Maybe I’m being too formal or old-fashioned, but I don’t like to do that.
You see, trusts do not technically “exist” like a corporation or an LLC. A trust is a contractual relationship between the person making the trust (the “grantor”), the person holding the trust property (the “trustee”), and the person for whom the trust assets are being held (the “beneficiary”). Under the law, the same person can be all three of these people, but it doesn’t have to be that way. So although you can name the trust, per se, as the owner, I think the better practice is to name the individual trustee as the asset owner.
We generally recommend that some assets be transferred directly into the trust. Investments and savings accounts fall into that category. Checking accounts may or may not be put directly into the trust, depending upon whether the grantor(s) is/are single or married.
The trustee should be named as the beneficiary for other assets. Use a beneficiary deed for your house and other property to make financing easier. Use a transfer-on-death (a “TOD”) beneficiary designation on your car to avoid problems with your lender and to simplify things with the license bureau. The beneficiary on life insurance should be the trustee (as trustee, of course) to avoid probate in case the grantors die close together in time. Name the trustee as the primary or contingent beneficiary of an IRA (yes, the IRS allows this under certain circumstances) to avoid accelerating the tax on your IRA assets.
You can also avoid probate by naming individuals as either joint owners or as direct beneficiaries, but this defeats the purposes of the trust and creates other problems as I have discussed in other articles.
If you watch TV, read magazines or newspapers, or even look at billboards, you get kind of a funny picture of our society. Our media is filled with emaciated, augmented women and men who must spend 8 to 10 hours a day at the gym. And they’re all young, healthy, and apparently well-adjusted and happy. We all know that this picture is kind of a cruel parody of life.
People are kind of messy. They come in all kinds of shapes and sizes and with different personality types. Although none of us really wants to talk about it, according to the Census Bureau about 20% of the population has special needs. Those special needs can be emotional, psychological, or physical. And they can vary in intensity from almost imperceptible to crushing. Those needs can be long-lasting or they can be life-threatening. Reportedly about half of those with special needs suffer from a “severe” disability. Life is way more complex than we see in the media.
For parents of special needs children, this makes life challenging. They may need special medication; they may need special equipment, including chairs and lift; and they may need special care.
Being maybe a little more sensitive to this than many people, I see families struggling to care for their special needs children all the time. It may be special education, therapy, or home modifications. And then there are the daily care needs.
But the scary question is what happens when both (or either) mom or dad is/are unable to provide that care? What happens when mom and dad are gone? Is there still some way to provide for them?
In planning the estate of people with special needs children, there are several options available, although in my mind only one good one. For instance, you could simply leave that child out of your will or trust. Leave them nothing. After all, they are probably on some government benefit programs. They’ll be taken care of, right?
Well, yes and no. The government programs are God-sends for most people in these situations, but they really only provide the minimums. It’s kind of Spartan, even under the best circumstances. So that’s probably not a great solution.
You could also just leave them their fair share of your estate in trust with the trustee appointed to take care of things. The problem with this option is that these trust funds will in all likelihood be treated as “available funds” which will be counted in calculating the child’s financial need. These funds will probably result in the termination of their state aid until those assets are completely used up.
You could also leave a share of your estate to another child with the understanding (but not the obligation) that they will use the money for the benefit of the special needs sibling. My experience is that this arrangement imposes an awkward burden on the non-disabled child. Also, over time, that money gets mixed up (co-mingled) with other assets. Without meaning to, the money gets absorbed into the person’s other assets and becomes indistinguishable. Finally, those funds can be exposed to the non-disabled child’s creditors and caught up in a divorce.
In the final analysis, the best option under these circumstances is a special needs trust (an “SNT”). A special needs trust is a trust for the benefit of a disabled child. Although such a trust can be set up by the individual (a “self-settled trust”) for his or her own benefit, using his or her own assets (such as insurance proceeds from a debilitating accident), that is not what I am talking about here.
This is a “third-party SNT”. The statute approving third-party SNTs specifically refers to trusts established by parents, grandparents, or guardians, so it is clear those trusts are acceptable. However, courts in most states have authorized the rights of siblings, friends, or caregivers to establish these trusts as well.
The trustee of such a trust generally cannot provide for housing or food ( there are exceptions). However, the trustee can clearly provide for the disabled child’s care by family members; medical services and equipment not covered by government programs; housekeeping, grooming, and meal preparation; certain household costs; certain computer and communication equipment; televisions and tablets; home decoration; vehicles or other transportation; vacations and travel costs; and the list goes on.
One of the drawbacks of a self-settled SNT is that on the beneficiary’s death, the trust will probably have to repay the government for any amounts the beneficiary received before making any distributions to family members. Not so with the third-party SNT. With a properly drafted trust, there is no reimbursement obligation. The remaining trust assets can go to the surviving family members.
Esther was in a bad marriage. Her husband drank a lot, and when he was drunk… well, let’s just say it was a bad marriage.
He couldn’t hold a job, so Esther did what she could to support them. One day she happened to see a University of Tennessee football game. She didn’t know the first thing about football, but she thought the cheerleader uniforms were really cute. She had an idea.
She put her dilapidated sewing machine on the kitchen table, and she started to sew. She sewed several different sizes of little girl versions of the cheerleader uniforms. Then she went to the University of Tennessee bookstore. She showed the little uniforms to the manager who scoffed at them. But Esther was so persuasive, the manager agreed to take them on consignment. No investment on her part; but if they sold, she agreed to pay Esther
That was a good weekend for the University of Tennessee. They won their game. Whenever that happens, the bookstore is busy. And that weekend, they were particularly busy.
Early Monday morning Esther’s phone rang. It was the bookstore manager. It turns out that all of Esther’s little uniforms had sold. In fact, there were backorders. The manager placed a big order.
But Esther had a problem. She only had one old sewing machine, 24 hours in a day, and a big order. So she talked to a few friends there in Alamo, Tennessee, and they came to help, all bringing their own dilapidated sewing machines. Sewing in Esther’s kitchen, they filled that order, and more orders came in from the bookstore.
It’s hard to keep a good thing quiet, and college football is really competitive. Several other schools heard about and tracked down Esther. She had more orders than she and her friends could fill out of her kitchen and dining. The local bank made her a loan, and she built an extension off her kitchen. Pretty soon, 25 of the local ladies were sewing little cheerleader outfits, even for hated rivals.
A man from a neighboring state heard about Esther’s business, and he came to visit her. He had this idea about a chain of stores. Esther didn’t necessarily understand everything he said, but she liked Sam. She also had more money than she had ever imagined. She bought some Walmart stock. Needless to say, she did well with that investment. Who says investing is hard?
I never heard what happened to Esther’s husband, but he evidently was quietly out of the picture.
Esther was getting older. She didn’t have any children. She wasn’t interested in leaving her estate to her nieces and nephews. A lot of money (or even a little money in Alamo, Tennessee) can really ruin a kid.
There are a lot of things that motivate people to give to charities. Sometimes it’s just a sense of altruism… it’s the right thing to do. Other times it’s a desire to leave a legacy and have a building named after them.
In Esther’s case, she was a religious woman. She recognized that God had had a hand in creating her wealth. So she contacted her church about creating an endowment.
When I met her, she was pretty much out of the business. She came to meet me in St. Louis so she could go to a Cardinals game. She’d only heard the games on the radio. Having no connections, I was only able to get tickets for seats way at the top of the stadium in left field. She was ecstatic.
Her endowment has helped several poor congregations in her denomination and has supported several outreach ministries. Without her gift, none of that would have happened. It’s funny what a little idea can grow into and how much good you can do with it. As far as she was concerned, Esther had received a gift from God, and she only wanted to give it back. What an idea!
There used to be a fashionable restaurant in Ladue where some of my clients liked to meet for lunch. To get to the dining room, you had to go through the bar. I like to eat lunch around 11:30 to avoid the wait, so we’d be there before the rush.
As I would walk through the bar area late in the morning, I was always surprised at how many people (primarily older men) were sitting at the bar. It seemed as if they had been there quite some time since they were well on their way to somewhere else.
One trust officer I know once referred to these gentlemen as “trust-babies.” Their parents had made huge fortunes. They left their estates in trust to their children. All the kids had to do was collect dividends, royalties, and/or annuities. For a number of them, it seemed as if life had very few challenges, so they ended up sitting at a bar before 11:30 in the morning.
Although we all want to provide for our kids, we don’t want to ruin them, and large amounts of money, particularly at an early age, can do just that. Most of us can only wish we had to deal with vast sums of money, but wealth is a relative concept. Even smaller amounts can ruin teenagers and young adults.
In many studies of the formation and development of the brain in adolescnets, neuroscientists have discovered that the frontal lobe of the brain – the part that asks, “Is this a good idea?” – isn’t fully formed until we are in our mid-20s. Teenagers and young adults lack insight, that deeper understanding of the consequences of our actions.
It is also true that kids can develop bad habits that stick with them for life. We all probably do things repeatedly that we started doing when we were teenagers, and changing any of those habits is really tough. I believe that if we routinely act a certain way when we are young and our brains are more plastic, habits get ingrained.
I knew a kid in college who on his 21st birthday inherited not one but two insurance companies. Yes, they were small, but their stock dividends were more than a 21-year-old needed to have to live on. Even though he’d been a pretty good student before, he never finished school.
We work hard to accumulate wealth to take care of our families, yet that wealth may become a stumbling block (if not a barricade) to a productive life for our children. Careful planning can help avoid that. Certainly you should not just give your children a large sum of money outright. As I often tell my clients, we would’ve been prudent and responsible with a lot of money ourselves, but can we really trust our kids?
Until a child reaches an age of some maturity, I usually recommend that clients leave their money in a discretionary trust with an older relative or friend or a trust company as the trustee making investment and distribution decisions. Who that trustee is depends on the size of your estate, and who your family members are.
Growing up in the 60s, I had sort of an idyllic idea of family life from the TV shows. We watched, for instance, “Leave It To Beaver.” June was the perfect mom who was always impeccably dressed, calm, and beautiful. Ward never seemed to work that hard but was able to provide a nice home, furnishings, and cars. Wally was Beaver’s model brother. And of course, there was Beaver, who was always getting in trouble, but it was always sophomoric hi jinx; nothing really dark and sinister. The sinister dimension was covered by Eddie Haskell, but even he was kind of innocent. All of the problems were relatively minor and resolvable in the course of a single episode.
Almost all of the family shows followed the same pattern: The Andy Griffith Show; The Brady Brunch (I never did watch that show); My Three Sons; and even Bonanza. It was a great formula, but it wasn’t real.
As enjoyable as these shows were, they didn’t then, and they don’t now, present a real picture of actual family life. Families are complicated because there are people involved, and people are complicated. Most all of us want to be “normal,” but I’m not even sure what that means anymore.
From birth, people have different personalities… sometimes drastically so. Childhood traumas (for instance, the death of a close family member) can mold a person in many ways. And then there are the actual psychological and emotional conditions that develop apparently for no reason at all. All of these things make life much more challenging.
Many times in estate planning, we deal with these situations by creating “special needs trusts.” These are trusts that provide the beneficiaries with extra benefits that will jeopardize state aid. But that may not be the total answer.
We have recently been running into a number of families with adult children who lived at home and for one reason or another were unable to live on their own. When mom and dad died, they were still in the house without any real options. Family members had to step in, have a brother or sister declared incompetent, and have them put in some sort of a facility. Hopefully family members will be supportive, but that doesn’t always happen.
There is not a single, simple answer to these kinds of problems. If a disability is too severe, then maybe some sort of group home is necessary. Someone should be ready to jump in and assume guardianship of the person and custodianship of the assets. If the disability is mild, then maybe he or she can live independently with minimal supervision. But all of that needs to be planned out upfront so that the ball doesn’t get dropped.
And then there’s the question of the child’s inheritance. If things are left to him or her outright, will people take advantage of them? If it is left in a trust for their benefit, will that jeopardize their state benefits? If it is left in a special needs trust, will that be too restrictive if they don’t receive state benefits? If you leave it to another family member, will it actually be used for the benefit of the intended child?