Structuring will to protect profligate heir

[scrinch]

My brother is coming to visit soon, and one of the things he wants to discuss when he is here is his will. He married late, about 9 years ago, to a divorcee with two grown sons. He brought around $0.5M in assets to the marriage, and she brought only debts. Now assets are 2-3 times what they were when they were married, and he has learned why she only had debts...she pays no attention to spending and she regularly gambles until nothing is left in the account. They currently keep their money separate except for a single, small account, so her habits haven't had much of an impact on their combined assets so far.

My brother hasn't made a will yet, and now finally wants to get around to it. He wants to take care of her future in case of his early demise, but he understands that if he leaves assets directly to her, they will likely be squandered quickly by her either directly or through the influence of her siblings. His assets are about evenly divided between real estate (3 rentals owned solely by him and their home which is owned jointly) and retirement accounts (401k and IRA). While I acted as executor for my father's estate, I really know very little about wills and trusts. I certainly will recommend that he talk to a lawyer about this, but I wanted to get ideas about what alternatives are available to him to financially protect her as an heir from her own financial indiscipline. Should he look into creating some sort of trust now? Or upon his death? How should he title his property, and how should he handle designating beneficiaries on his retirement accounts?

So aside from the lawyer suggestion, any ideas?

 

[donheff]

He could deal with this through a trust that she doesn't manage. This is not a DIY project. It is easy to screw things up. And hard to be sure that whoever managed the trust would really do what he wants.

It sounds like he has no heirs of his own to worry about. think if I had this problem I would buy a joint life, inflation protected SPIA that covered essential expenses. I would just dump the remainder in Wellington and leave it to her with a caution to take out no more than 5%/year. Simple and DIY. All he would need is a simple will or no instrument at all.

 

[2B]

If he is happy to leave everything to her, why does he need to save her from herself? He'll be dead. If he wants others to inherit he definitely needs a lawyer.

Laws differ widely between US states. If they are in a community property state when he dies, he can't just leave "his" accounts to whomever he wants. She is entitled to part of whatever gains there have been. It may be possible for her to challange who he may leave his IRA or 401k to. Many states will give these accounts to a spouse no matter who may be named unless they have signed off this right.

A way to handle all this is with a "post-nup" but that may not go over very well.

 

[athena53]

Laws differ widely between US states. If they are in a community property state when he dies, he can't just leave "his" accounts to whomever he wants. She is entitled to part of whatever gains there have been. It may be possible for her to challange who he may leave his IRA or 401k to. Many states will give these accounts to a spouse no matter who may be named unless they have signed off this right.

I'm not a lawyer but have set up a Revocable Trust. Background: I'm 62, DH is 76, all the assets are in my name (DH's choice; he doesn't want to manage them). I think this can work for your brother's purpose. In our case, if I go first, my brother (a CPA) becomes Trustee and has broad discretion to take care of DH, including long-term care if needed. We both trust my brother to take good care of DH, and DH is pretty low-maintenance.

If DH is gone, DS is the primary beneficiary. DS is 30, extremely responsible, says he doesn't want my money. (He does, however, like the idea of having funds for the education of their little girl and any future siblings). My brother will be trustee and will release funds at his discretion although there are provisions that DS gets a certain amount every 5 years (can't remember if it's a % or $$) regardless. DS also shows little interest in managing money and is very generous to his church. Not to the extent that we're concerned about it but my brother will be a good backstop if DS wants to liquidate the trust to build a school in a developing country at the expense of his own and his family's future security. Brother is also a practicing Christian who tithes on his income but owns 3 houses and lives quite well.

Anyway- DH did have to sign a document stating that he understood that what he'd get under the provisions of the trust might be less than the default % of the estate that our state would allow. (I think in most states that's 2/3.)

So, your brother could set up a trust that released funds in a structured way but SIL might have to sign off on it to prevent her contesting it if your brother dies first. Definitely something to discuss with a lawyer- they handle situations like this all the time.

 

[Dimsumkid]

Seems like your brother might need something like our trust setup for our teen. The trust is setup to pay 1/3 of our estate at ages 25, 30 and 35. You could do something like this or pay out every X years up to Y times after brother's passing. At least the sister in law won't go broke right away and hopefully will learn financial survival skills.

 

[scrinch]

It sounds like he has no heirs of his own to worry about. I think if I had this problem I would buy a joint life, inflation protected SPIA that covered essential expenses.

That's right. No other heirs. Could (or should) he do this with pre-tax money in retirement accounts? Or are you suggesting that he sell the properties and buy the SPIA with the equity?

 

[scrinch]

Seems like your brother might need something like our trust setup for our teen. The trust is setup to pay 1/3 of our estate at ages 25, 30 and 35. You could do something like this or pay out every X years up to Y times after brother's passing. At least the sister in law won't go broke right away and hopefully will learn financial survival skills.

Is this a trust that is already set up, or will it be set up when your estate is being settled? Are assets already in the trust?

 

[donheff]

That's right. No other heirs. Could (or should) he do this with pre-tax money in retirement accounts? Or are you suggesting that he sell the properties and buy the SPIA with the equity?

I was actually thinking of what I would do if my spouse was irresponsible. I would want everything liquid (for us all but the house already is) and structured in a no-brainer fashion - thus the SPIA and Wellington (or substitute a coach potato set of index funds). For your BiL I don't know anything about his properties, his interest in managing them while he is alive, whether they derive more net income than he would get with an annuity after selling/taxes. You can annuitize retirement accounts. You can annuitize taxable assets (sold rental properties). He would need to figure out whether such an approach is attractive to him or something to postpone until he is dead. If the former -- he could sell everything and structure it simply. He probably needs advice here to figure out the costs and tax implications. If the later, he needs even more extensive advice since someone will need to manage or sell the properties, manage the trusts, buy SPIAs (if he goes that route), etc. I can't imagine just leaving the properties and accounts to a daffy spouse who probably belongs in gamblers anonymous. She would be a prime target for bad guys out to take everything away from her - her kids might be among the potential bad guys from your description.

 

[Dimsumkid]

Is this a trust that is already set up, or will it be set up when your estate is being settled? Are assets already in the trust?

You set up the trust first, then retitle your assets afterward. Can't move anything into the trust without the trust documents. If the estate is being settled and the assets aren't there, it's too late.

 

[ER1970]

Many states will give these accounts to a spouse no matter who may be named unless they have signed off this right.

A way to handle all this is with a "post-nup" but that may not go over very well.

+1. In most states money earned during marriage and debts are both marital, regardless who earned or who spent more. You can't just "decide" whom you want to leave your assets to, or liquidize the assets/change the titles without your spouse's knowing. It can be considered hiding assets, and cost your brother a fortune if the wife decides to bring it to court.

A postnup is the way to go. Also, tell your brother this is serious matter. So STOP consulting relatives, and please, find a professional to help him!

 

[photoguy]

What does the spouse think about this plan? Does she recognize the need for help and is willing to go along?


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[pb4uski]

You're on the right track. He needs to have some structure such as a trust where she can't have ready access to the assets but she is the beneficiary of the assets. The way my Dad's trust was set up is that it was set up and assets put into the trust when he was living. When he was living, he was the trustee and the beneficiary of the trust. When he died, I became the trustee and my mom became the beneficiary. When mom passes, then the trust calls for the assets to be liquidated and the proceeds distributed to his children.

He could make a bank trust department or Vanguard's trust department the trustee upon his death and his wife the beneficiary and then decide who he wants to benefit after his wife dies.

In any event, he will want to use counsel to set up the trust consistent with the laws in his state.

 

[Letj]

Isn't the fee for using vanguard or a bank trust exhorbitant?


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