testamentary trust question

[rodi]

Backstory:
- MIL has dementia. My husband is her conservator/guardian of finances (and a BIL is guardian of person/medical). She is 95. Her will cannot be changed given her guardian status. It states that a portion of the estate be put into a trust for one of her children who has mental health issues and is on disability. My husband and his sister are named as trustees.

- BIL who will be the beneficiary has lead a hard life (mental illness, periods of homelessness, drug abuse) but is currently doing ok, on his meds, living in a good, stable, supportive group home. But his health is far from great given the hard life he's lead. The testamentary trust allows funds to be disbursed to his benefit without effecting his SS Disability income.

Question:
- On MIL's death this trust is created and funded as part of probate of her estate. What happens if BIL (beneficiary) dies before the funds are depleted? Since it is not owned by BIL, does it go to the trustees (my husband and his sister)? Does it go back to MIL's estate to be redistributed?

 

[MichaelB]

Question:
- On MIL's death this trust is created and funded as part of probate of her estate. What happens if BIL (beneficiary) dies before the funds are depleted? Since it is not owned by BIL, does it go to the trustees (my husband and his sister)? Does it go back to MIL's estate to be redistributed?

This is a special needs trust. When it is written, the disposition of the assets after death of the beneficiary needs to be defined. There are two options, One option is to return unused funds to the grantor’s estate, where they will be distributed the same as all other trust assets. A second option is to name beneficiaries directly in the special needs trust.

If the special needs trust has not yet been written and the disposition of unused funds has not been determined, the trustees might find themself
in a conflict of interest if they appoint themselves as beneficiaries. In that case, returning unused funds to the original grantor estate or trust looks like the conflict free option.

 

[ChrisC]

I would be surprised if the Special Needs Trust created in MIL's Will did not specify contingent beneficiaries in the event that trust funds were still around after the primary beneficiary died. There should be something in the Trust or Will that covers this possible event. We had a similar situation and my MIL's Irrevocable Trust (made while she was living and not a Testamentary Trust) is primarily for the benefit of her only son (my BIL), but the contingent beneficiaries are her grandchildren. My wife is the Trustee of that Trust and the Trust can only be used for BIL's benefit while he's alive.

 

[pb4uski]

+1 I would think that how any unused trust money would be distributed when the trust beneficiary dies would be provided for in the trust documents. I think that typically it would go to the other heirs of the will... the trust beneficiaries siblings... in equal shares. But it could be designed differently.

It would not go to the trustees (other than if by conincidence the two trustees are the only other heirs to the will other than your disabled BIL)... the trustees job is to administer the trust.

 

[Brat]

Oregon has a special needs trust https://oregonsnt.org/

There may be something similar available in your state.

 

[rodi]

Well... There is no trust YET. And one cannot be established yet because MIL is declared incompetent and so she can't set one up. Additionally the funding will be based on the final estate value - which is unknown at this time as she is still spending down her money to fund her memory unit care.

The directions are just a line in the will saying that BIL's share should be put in a trust managed by my husband and his sister. There is no way to establish that trust prior to probate of MIL's estate. SIL was reviewing the will and called DH to ask what the heck this was about. Googling says it is called a testamentary trust and is sometimes used for minor children, sometimes for spouses that are in long term care funded by medicaid... or in my BIL's situation, on permanent disability where an inheritance could effect his benefits.

The will does not address beneficiaries of the testamentary trust. The will, in general, divides the estate between the 5 siblings - with BIL's 1/5 equal share going into this trust.

 

[pb4uski]

Then since the will is silent on the disposition of any remaining trust assets the trustees have latitude to make those decisions when they set up the trust.

It sounds like MIL recognized that your disabled BIL would not be capable of handling an inheritance and therefore opted to put his inheritance in a trust managed by two of his siblings. Good for her.

If your disabled BIL died before your MIL, what would happen to his "share" of the estate? If I were a trustee I would be leaning to setting up the trust so any residual trust assets are distributed similarly.

 

[rodi]

Thanks all. Because this is a will (vs trust) to put any funds back into the grantors estate would mean reopening probate. My husband is going to propose that he be the 'active' trustee (SIL doesn't really want the job), and set up the trust so that it goes to the remaining siblings (without Hubby included). This avoids conflict of interest.

It will still be a bit messy on another front, when MIL passes. One of the six siblings died earlier this year. He had no wife/kids so it went to his siblings, except the disabled BIL.) MIL's will was per stirpes, so dead BIL's probate will need to be reopened (unless MIL passes before the probate is done... it's still open) to distribute the funds to the 4 remaining siblings. His will didn't specify a trust - just a "wish" that the 4 remaining siblings 'take care' of the disabled BIL with their extra money.

 

[rodi]

FWIW - I am really glad we spent money on a living trust (vs will) for hubby and I. Opening and closing probate seems like a PITA.

 

[ChrisC]

Well... There is no trust YET. And one cannot be established yet because MIL is declared incompetent and so she can't set one up. Additionally the funding will be based on the final estate value - which is unknown at this time as she is still spending down her money to fund her memory unit care.

The directions are just a line in the will saying that BIL's share should be put in a trust managed by my husband and his sister. There is no way to establish that trust prior to probate of MIL's estate. SIL was reviewing the will and called DH to ask what the heck this was about. Googling says it is called a testamentary trust and is sometimes used for minor children, sometimes for spouses that are in long term care funded by medicaid... or in my BIL's situation, on permanent disability where an inheritance could effect his benefits.

The will does not address beneficiaries of the testamentary trust. The will, in general, divides the estate between the 5 siblings - with BIL's 1/5 equal share going into this trust.

I hate to tell you this but that is a trust and it's a testamentary trust that is very defective as a drafting matter. The intent of MIL is clear. I'm afraid when the time comes for this is to be implement, you'll have to get guidance from the Probate Court on how to administer this Trust.

 

[pb4uski]

Thanks all. Because this is a will (vs trust) to put any funds back into the grantors estate would mean reopening probate. My husband is going to propose that he be the 'active' trustee (SIL doesn't really want the job), and set up the trust so that it goes to the remaining siblings (without Hubby included). This avoids conflict of interest.

It will still be a bit messy on another front, when MIL passes. One of the six siblings died earlier this year. He had no wife/kids so it went to his siblings, except the disabled BIL.) MIL's will was per stirpes, so dead BIL's probate will need to be reopened (unless MIL passes before the probate is done... it's still open) to distribute the funds to the 4 remaining siblings. His will didn't specify a trust - just a "wish" that the 4 remaining siblings 'take care' of the disabled BIL with their extra money.

It isn't a conflict of interest for a trustee to be a beneficiary as well. It is very common. For both of my parents trusts, my sister and I are the co-trustees and we are also beneficiaries.

Check with an attorney but I don't think that there is any need to reopen probate. If a beneficiary has passed then their heirs just replace that beneficiary. So dead BIL's inheritance from MIL would be distributed to his living siblings (including disabled BIL) since he has no kids.

I'm curious as to why the distribution of dead BIL's estate bypassed by disabled BIL. Was that in dead BIL's will?

 

[rodi]

I'm curious as to why the distribution of dead BIL's estate bypassed by disabled BIL. Was that in dead BIL's will?

It was intentional and spelled out in the will. Disabled BIL is bipolar and does well when he's on his meds... but makes HORRIBLE life choices when he's off his meds. Drug use, disruptive behavior (which has gotten him kicked out of several living situations) etc. The thinking/worry was that if he came into a large chunk of money - he would celebrate with drinking and drugs and basically kill himself or do damage to others. Remaining/surviving sibs have periodic zoom calls and have agreed to dole out the money as needed... right now they are looking at dead BIL's money earmarked for him going to pay for some serious dental work that he needs.

Back to the original question of MILs will. She specifies the trust *and* that no more than 10% be dispersed per year.

Neither estate are huge. Both around $200k total, before taxes, probate fees, legal fees... etc...

 

[pb4uski]

From what you wrote, it sounds like when MIL dies that each of her living children should get 1/4 of the estate with the 1/4th for disabled BIL going into a trust that will be managed by your DH and his sister as named trustees. IOW, what would have gone to dead BIL would instead be distributed to his siblings instead.

Since the will is silent as to how any residual assets of the trust should be distributed if disabled BIL dies, I would think it would be distributed to disabled BILs 3 siblings or their heirs.

In any event, there would seem to be enough of a question that consultation with an attorney would be prudent.

 

[OldShooter]

I hate to tell you this but that is a trust and it's a testamentary trust that is very defective as a drafting matter. The intent of MIL is clear. I'm afraid when the time comes for this is to be implement, you'll have to get guidance from the Probate Court on how to administer this Trust.

Yes. And getting the court's blessing is a step that you probably don't want to bypass. If BIL is legally competent he can sue anybody and everybody including the trust. Belt and suspenders are called for.

The "10%" idea is problematic too and you'll want the court's help. 10% of what? 10% of the initial value? 10% of the current value? Note in the latter case, the trust never ends, which is only allowed in some states (recent press: South Dakota).

Another thing to consider is the trustee. A family member trustee with discretion over money going to another family member is almost a dead cert for terrible acrimony. I'd suggest that you hire a 3rd party like a lawyer as a co-trustee and let them be the bad guy on financial decisions. DW was a professional and always had funny stories, like a beneficiary coming in and saying "Grandma always wanted me to buy a Ferrari."

... In any event, there would seem to be enough of a question that consultation with an attorney would be prudent.

Here is understatement. You want someone who is on a first-name basis with all the judges.

 

[Scratchy]

Was the Will drafted by an attorney? Is the attorney still alive? It would be interesting to ask the attorney about this.

 

[ChrisC]

Was the Will drafted by an attorney? Is the attorney still alive? It would be interesting to ask the attorney about this.

This would be like going back to a surgeon who amputated the wrong leg and asking his advice on what he would now recommend. As a retired lawyer and by no means having any expertise in Trust & Estates and of course not knowing the full picture of the Will/Trust situated here, I’d seek a second opinion in this case.

This also could have been a DIY job that is obviously defective.

 

[Ginny]

In CA you can go to court NOW to establish a Special Needs Trust. It is done all the time. There are many good attorneys in San Diego that specialize in this exact situation and can advise you about setting this up correctly. Please do this as quickly as possible before DM passes.

 

[Brat]

Yes because inheriting $ WILL impact SSI, he cannot renounce it to avoid changing his status. His share of the estate needs to go directly to a Special Needs Trust.

 

[rodi]

In CA you can go to court NOW to establish a Special Needs Trust. It is done all the time. There are many good attorneys in San Diego that specialize in this exact situation and can advise you about setting this up correctly. Please do this as quickly as possible before DM passes.

Unfortunately, this isn't in CA and will not be settled in CA. Plus there's the fact that MIL can't make any changes to her will or set up a trust because she is declared incompetant due to dementia.

The will was written about 25 years ago by a lawyer in Philadelphia. She later moved to Kentucky to be close to SIL, with FIL, who passed away While in Kentucky she was declared incompetent and DH named as her legal and person guardian. Then she was moved to Philadelphia a few years later so she could be in the same facility that one of her sisters was in. (And because there were 3 children living in the area, vs 1 in Kentucky). The 3 kids there were disabled BIL, dead BIL, and recently moved to Florida BIL. The facility was declining in quality while increasing prices so she was moved to suburban Detroit where she is in a much nicer, much less expensive facility that is close to the youngest sibling (who now has guardianship of person while DH retains guardianship of finances). Youngest sibling is executor for dead BILs estate. So the guardianship has changed states (quite a legal process) 2 times. She will probably pass in Michigan - so Michigan laws, probate, etc, will be in force... The disabled BIL lives in Philadelphia and is the last of the family in PA since one brother died and one moved to the Florida this year.. The remaining siblings live in Kentucky, Florida, Michigan, and CA (us).

Yes - it would be better if she hadn't put in the call for a testamentary trust in her will, or at least declared beneficiaries for said trust. But it is what it is. At age 95, DH and SIL are trying to get ready for what will likely happen sooner than later.

Again - this is *not* a huge estate. At most $200k total before expenses right now and going down every month since her memory care living costs more than her income.