Messy estate/inheritance question

[Slow But Steady]

Did my scandalous title draw you in? I'm probably going to put my question to the attorney who prepared our family trust, but I'm curious if anyone else has had a similar experience.

My dad passed away at age 85 in May from Alzheimer's disease.

He and his wife had a trust that called for about 70% of his separate property to be distributed to my brothers and me. The remaining amount, invested in a muni bond fund, was to be held in a decedent's trust to provide income for his wife in case she needs it. The way their trust was written, all their community property was to be divided between a decedent's trust and a survivor's trust.

The primary purpose of the decedent's trust is to provide income for the survivor. The language of the trust says that the principal of the decedent's trust can be used only after the principal of the survivor's trust is exhausted.

My dad's wife has just one child, a daughter who has very little in the way of savings. The daughter has MS, so she is likely to have lots of medical expenses.

The way the original trust was written causes some problems, because if my dad's wife needs expensive assisted living, the inheritance for her daughter could become seriously depleted. To avoid such an outcome, I proposed, and my brothers agreed, not to fund the decedent's trust, and instead keep all the assets together in one trust. That way, if my dad's wife needed expensive care, my brothers and I would share in the burden, instead of it coming all from my stepsister's inheritance. We thought we were being generous to make this proposal.

Our intention was that the portion of my dad's separate property (inherited from his dad) would remain in the decedent's for income purposes, but the principal wouldn't be used until the community property was exhausted. That's the way the original trust was written. We were quite surprised when her lawyer proposed an agreement that said Dad's separate property would be used first.

When I told my dad's wife that we couldn't agree to that, there was quite a blowup. I won't bore you with the details. Suffice it to say that I don't want to go through that again.

(I hope you've enjoyed our family's dirty laundry. I'm finally getting to the question.)

In my email to the attorney telling her what we could agree to, I mentioned that my dad's rollover IRA (now inherited by his wife) should list my step-sister as beneficiary for 50% and my brothers and me as beneficiaries for the other 50%.

The attorney's response, which was otherwise agreeable, said that beneficiaries are now set up that way, but that the IRA is not part of the trust, and Dad's wife can change them any way she wants at her sole discretion. (Note that the IRA was their community property, and I believe it should be divided like the other community property.)

So, finally, the questions:

1. Is it legal for Dad's wife to change the beneficiaries to leave his sons out?

2. Can we negotiate language saying she won't do that into the agreement we're making about the decedent's trust?

3. Am I a jerk for thinking this way?

Wow... this got quite lengthy. If you made it this far, I'd be pleased if you would share your insights.

Thanks!

 

[joeea]

I mentioned that my dad's rollover IRA (now inherited by his wife)...

the IRA is not part of the trust, and Dad's wife can change them any way she wants at her sole discretion....

If I understand what you wrote...

If the IRA is inherited by dad's wife, then it's not part of the trust, right?
If dad's wife inherits the IRA, she can (and should) designate beneficiaries for it however she chooses.

Can we negotiate language saying she won't do that into the agreement we're making about the decedent's trust?

You can attempt to negotiate anything you like. It takes two sides to agree to such a negotiation.

 

[GalaxyBoy]

First of all, sorry for your loss and sad to hear of family friction.

The “I” in IRA stands for individual so it’s not community property. The couple may have treated it that way (like DW and I do) but not legally. Therefore, if the spouse inherited it, she can do what she wants with it.

 

[Slow But Steady]

The home state is California, a community property state. FindLaw says "Community property states follow the rule that all assets acquired during the marriage are considered community property.

Did that change when my dad passed away?

 

[OldShooter]

Yes, you really do need an attorney.

Dad's trust cannot be changed by the beneficiaries simply agreeing to do so. If you all do agree (or if you do not), your attorney should petition the court to bless the agreement or settle the dispute. DW was in the trusts and estates business at a major bank and it was not uncommon for them to go to court to resolve issues. Usually those were due to bad drafting/inconsistencies but the principle is the same. if you violate the terms of the trust without legal blessing, you are open to personal liability if someone successfully argues that they were injured by your action. Even if they agreed at the time.

I agree that if the IRA is now hers, it's game over for anyone else's opinion on beneficiaries. She gets to decide. But I am just SGOTI; ask your lawyer.

Finally, tactics: You absolutely should not be negotiating directly with her lawyer. Get your guy on board and that becomes his responsibility. In fact, once you have representation the other side's lawyer is not permitted to contact you. There are many reasons for things to be handled this way. One important one is that it prevents situations where you are in direct contact with her attorney and make a response of some kind that, if you had counsel and/or if you had taken time to think, you would not have made it. The winners in negotiations are those who take their time; her attorney's interest is to rush you into decisions.

 

[Slow But Steady]

Yes, you really do need an attorney.

Dad's trust cannot be changed by the beneficiaries simply agreeing to do so. If you all do agree (or if you do not), your attorney should petition the court to bless the agreement or settle the dispute. DW was in the trusts and estates business at a major bank and it was not uncommon for them to go to court to resolve issues. Usually those were due to bad drafting/inconsistencies but the principle is the same. if you violate the terms of the trust without legal blessing, you are open to personal liability if someone successfully argues that they were injured by your action. Even if they agreed at the time.

I agree that if the IRA is now hers, it's game over for anyone else's opinion on beneficiaries. She gets to decide. But I am just SGOTI; ask your lawyer.

Finally, tactics: You absolutely should not be negotiating directly with her lawyer. Get your guy on board and that becomes his responsibility. In fact, once you have representation the other side's lawyer is not permitted to contact you. There are many reasons for things to be handled this way. One important one is that it prevents situations where you are in direct contact with her attorney and make a response of some kind that, if you had counsel and/or if you had taken time to think, you would not have made it. The winners in negotiations are those who take their time; her attorney's interest is to rush you into decisions.

When I talked to my lawyer early on, he said it wasn't terribly difficult for Dad's wife and all the named beneficiaries to make an agreement not to fund the decedent's trust. Trusts were often set up that way for tax reasons, he said, but changes in the amount that can be passed on without inheritance tax make it unnecessary.

My step-mom's lawyer is calling it "Agreement to Intentionally Breach Trust," but the concept is the same.

I know I should probably call my lawyer, but step-mom will get angry if I slow things down, and "Why do we need separate lawyers among family?"

As you can probably tell, our relationship is tense. Especially with my youngest brother. He was a handful, but he's still angry that she made Dad kick him out when he turned 18.

What a mess!

 

[target2019]

https://www.investopedia.com/ask/answers/081815/can-i-put-my-ira-trust.asp
Is trust the beneficiary of the IRA? If not...she (beneficiary) gets.

 

[Slow But Steady]

https://www.investopedia.com/ask/answers/081815/can-i-put-my-ira-trust.asp
Is trust the beneficiary of the IRA? If not...she (beneficiary) gets.

No, she was the beneficiary of the IRA. My brothers and our stepsister were contingent beneficiaries.

So far, nobody has ventured to answer my last question, "Am I a jerk?"

 

[RockyMtn]

So far, nobody has ventured to answer my last question, "Am I a jerk?"

I don't think you are being a jerk. You and your brother are doing something very nice for her daughter and your step sister if I understand this correctly.

To insure that the aid doesn't go beyond what you intended I would get the attorney to at least take a look at it.

 

[rodi]

I think you're not a jerk on the trust/decedent trust/survivor trust issue.

I think you're kind of being a jerk on the IRA. (You asked... so there you have it.) Contingent beneficiaries are just back ups if the primary beneficiary dies first.... Your dad clearly declared your step mom is primary beneficiary. If he intended you and your siblings to receive some of the IRA on his passing he could have given your stepmom a percentage - and you and your siblings a percentage. He didn't. Period. You have no claim, right, or expectation for anything from the IRA.

When my FIL passed he named his kids (vs his wife) as beneficiaries... this was semi-problematic since she was entering a phase in her life where her expenses were rapidly going up (memory unit).... But... it is what it is. Ideally, IMO, he should have left his wife as primary, and kids as contingent...

This should be a reminder to all of us to understand who our beneficiaries and contingent beneficiaries are.

 

[OldShooter]

... "Agreement to Intentionally Breach Trust," ...

Exactly. And any party can land you in court with a claim like "undue influence." Similarly, someone who is not a party to the agreement, like the daughter, can take you to court at any time.

Who is the trustee? The trustee is at highest risk of getting into legal hot water and of personal liability for breach of fiduciary duty. But when the exrement hits the ventilation device it can get on everyone.

... I know I should probably call my lawyer, but step-mom will get angry if I slow things down, and "Why do we need separate lawyers among family?" ...

The answer to that question is that her lawyer is representing only her interests. That's the way legal representation and legal ethics works. If she doesn't want separate lawyers, tell her to direct her lawyer to consider everyone's best interest. He will refuse.

So: Step 1: Contact your lawyer without letting step-mom know. Step 2: With your lawyer, make a plan of action. It's possible that he will advise you to keep his involvement quiet, but I doubt it.

... As you can probably tell, our relationship is tense. Especially with my youngest brother. He was a handful, but he's still angry that she made Dad kick him out when he turned 18. What a mess!

My wife has commented more than once that estates and money bring out the worst in people and in families. Too bad, but it is what it is.

... "Am I a jerk?"

No. it sounds like you and your brothers are trying to be generous and your step-mom's attorney is trying to push your envelope. To a degree, itis his job to maximize benefits to his client, but that doesn't mean he has to be a jerk about it. You are outgunned trying to deal with an attorney on a legal matter. See Step 1 above.

 

[Fedup]

I don’t think you are a jerk regarding IRA, however, you are naive as to how it’s intended to work. I think your Dad meant for your step mom to have the IRA. Extra names were added to insure if the step mom and your dad die at the same time.

 

[RunningBum]

You're not a jerk, but I think you have a misunderstanding about inherited IRAs and what communal property means. I don't understand your explanation of all the pieces of these trusts, but I do know that when someone inherits an IRA, they can make the beneficiaries whoever they want. IMO you should have your own lawyer to explain everything to you, but you may be at the mercy of your step-mother so you may not want to negotiate through him. If you don't have a legal leg to stand on, the best you can hope for is that she'll keep at least somewhat to the spirit of your father's wishes.

The lawyer who drew up the trust, is that the same one that she is using? If not, he is your best bet to have some legal standing as he must've set it up to do more or less what you are saying, unless he screwed up. I'd focus on how the descendant's trust with your father's separate property is supposed to be protected from being drained first.

 

[target2019]

No, she was the beneficiary of the IRA. My brothers and our stepsister were contingent beneficiaries.

So far, nobody has ventured to answer my last question, "Am I a jerk?"

She is the beneficiary.
Contingent beneficiary means little since she is alive.
She gets the IRA.
That's how I see it.

 

[Another Reader]

In your shoes, I would base my accounting on the assumption that the IRA passes by beneficiary. It is not community property. Your father's wife is the sole inheritor.

The "separate property" that is to be divided is what he inherited from his father. This is where things become confusing. His separate property is divided into two parts. 70 percent is distributed to his kids, The other 30 percent is held in a trust so that the income from those assets goes to the wife. Presumably when she dies, that 30 percent goes to his kids.

The community property is also divided into two trusts, if I understand what you are saying. There was probably some agreement between the two of them to provide for her daughter. The wife is probably the beneficiary of the survivor's trust and his kids and her daughter are the beneficiaries of this decedent's trust. If all all of the survivor's trust assets are depleted, the income from this decedent's trust goes to the wife. Ultimately all the kids end up with the assets in this decedent's trust.

In your shoes, I would get copies of all the documents. Sit down as a group with the attorney that drew up the trusts to get a better understanding of what was intended and what is legally required. If you do not understand or are not satisfied with the answers, retain your own attorney and have that attorney review the documents.

This is the way I interpret this from what you have said and I could be totally off base. However, I think a lot of your understanding is based on the idea that the IRA is part of the community property, which it is not. The separate property owned by your father was probably intended to come to you and your siblings. It's the community property and the intent of your father and his wife when they created the trust that need better definition.

 

[Slow But Steady]

I'm not sure that either my dad or his wife understood the exact consequences of the trust as they wrote it. If they had, we wouldn't be worried about the situation where my stepmom's assisted living expenses would eat up her daughter's inheritance. I can't believe that's what he would have intended. I think they really expected her to pass first. She has a history of Alzheimer's in the family, and Dad had none, so what happened was unexpected.

Regarding the IRA, Dad and his wife (mostly his wife, in fact) described to me how it would be divided when the second of them passed on. So far, it seems that she has the beneficiaries set up to follow that plan, which does include my brothers and me. That's good.

As a defense for being a jerk about it, I offer the fact that my two brothers need the money a lot more than I do, and I'm trying to look out for them. I'd gladly give up my share of the IRA if it would ensure that they are left their shares.

Dad's wife is the trustee, so maybe she would have the most possible liability. If there's "undue influence," though, I suppose that could be me, since I'm the one who carefully read the trust and first proposed the solution.

Regarding the tense relationship, that's been going on for years, not just since my dad passed. In fact, I'm the son who gets along best with my step-mom, and the one she trusts the most.

 

[OldShooter]

Yes, as you say: Kind of a mess.

The IRA is a non-issue. Whatever it is, it is. As someone suggested, though, as part of a larger agreement you could get your step-mom to agree (in writing) not to mess with the beneficiaries.

You're not being a jerk. Your going-in offer to revise the trust is very generous.

Step-mom as trustee is problematical. Actually, to cover herself since the proposed revision benefits her, she should insist on each of you being represented. "Undue influence" in this case would be her and her attorney leaning on you and your brothers. Ditto breach of fiduciary duty. (She has a fiduciary duty to you and your brothers.) Actually I think her attorney is doing her a disservice by not insisting that you each be separately represented, just as a CYA.

Get thee to that attorney! If you explain her risk to her maybe she will actually welcome your attorney.

 

[TwoByFour]

One question - does this will predate the Alzheimer's your father had? If so, I would consider not messing with any of it. It might look odd, or not well thought out, but that puts you in the position of second guessing his intentions. You and your sibs could always give a stipend to your step mom if you're worried about her running out of money.

And no, you're not a jerk. Money and families are complicated and things easily go awry.

 

[Another Reader]

The attorney that met with the parties and wrote the trust agreement should be able to provide the information you need. He likely will not talk to you without the wife being present and agreeing to this. She and your late father were his clients.

 

[Slow But Steady]

Unfortunately, the attorney who drew up the trust is now retired. Her daughter took over the practice, but doesn't really know the history.

The last revision to the trust was made about the time Dad was diagnosed. That's the revision in which Dad agreed to leave 30% or so of his separate property in the decedents trust, to provide extra income for his wife if needed. My step-mom actually will probably not need all the income from this source.

The way this decedent's trust and survivor's trust setup is stated, the income from both trusts goes to my stepmom, but the part that comes from my dad's separate property is supposed to be used last. However, when it comes to depleting the principal, the survivor's trust is supposed to be used first.

When my step-mom passes, whatever's left in the survivor's trust goes to my step-sister, and whatever's left in the decedent's trust goes to my brothers and me.

My stepmom is in a real rush to get this done, so I think I'll tell her that she can get her lawyer to draft the agreement. In the meantime, I'll get my attorney up to speed on the situation. Then if changes are needed to the agreement, I'll let the suggestions come from him. Then I won't be the bad guy.

I'l give an update as things proceed. (Families are indeed complicated, aren't they?)

 

[Texas Proud]

I will say a few things that might not be popular...


First, some of the answers are meaningless without numbers... IOW, if you give up the trust is it $10K, $100K or millions? Same with the IRA...


As others have said, she can change the beneficiaries at any time... there is nothing you can do about it... your side agreement cannot prevent her from doing so... it can only direct the trustee what to do in case it was changed...


Unless we are talking a minimal amount of money I would follow what my dad intended... why do you think what he put down was NOT what he wanted... IOW, he left enough assets to take care of his DW and also was passing on the separate property he inherited to his side of the family...


If the time comes and step mom is running out of money you and your brothers can chip in to pay her expenses... nothing is preventing that...


Now, it is a one sided statement to the facts, but I would say step mom is the one being the jerk... she is getting more than enough and your dad made a change to even give her 30% of his separate property... why should she insist on getting 100%?




BTW, there is also nothing preventing step mom from taking money out of the IRA until it is zero so the beneficiaries will get nothing anyhow...

 

[RunningBum]

From post #1

In my email to the attorney telling her what we could agree to, I mentioned that my dad's rollover IRA (now inherited by his wife) should list my step-sister as beneficiary for 50% and my brothers and me as beneficiaries for the other 50%.

The attorney's response, which was otherwise agreeable, said that beneficiaries are now set up that way, but that the IRA is not part of the trust, and Dad's wife can change them any way she wants at her sole discretion. (Note that the IRA was their community property, and I believe it should be divided like the other community property.)

Does that mean they agreed to drain the survivor trust first? I can't tell where the contention is at this point. Is it only with the IRA?

 

[48Fire]

Wow, this has some serious challenges. Seems to me that your Dad and Step Mom put some thought into this at some point and it is what it is. I can only guess that your Step Mom is grieving at this point, and is probably not in the mood to reinvent the Trust wheels. I think you are on a slippery slope, and should proceed with some caution.

You may want to get an attorney just to get an understanding of how this will all go down. But, getting an attorney to change some of the trust details is likely to spawn more resistance. Just my opinion.

By the way, who is Durable Power of Attorney and Medical Guardian for Step Mom? This is going to be a bigger hurdle in the near term. You might be better to focus your energy on future challenges and learn lessons from this one that is already cast in stone. Just basing that on previous experiences.

Good luck Big challenges ahead.

 

[jj]

A complicated situation to be sure and emotions are running high.

As far as I see it the situation is as follows: (maybe I'm misinterpreting...)

Community property to be split 50/50. Step-mom's 50% totally for her use and can be passed to whomever she nominates. Father's 50% in trust for his sons as the remaindermen, with all income going to your step-mom during her lifetime.

Father's separate property, inherited from your grandfather, was 70% distributed to you and your brothers on your father's passing (has this happened yet?), with the remaining 30% in trust with income going to your step-mom and the remainder being distributed to you and your brothers on her death. The corpus of this 30% only to be used by step-mom after the community property assets have been exhausted.

Father's IRA has passed to your step-mom. You and your brothers have no claim on this, as although you were contingent beneficiaries, your step-mom survived your father and this is now hers to use up and set the beneficiary at her whim. I would expect her to nominate her daughter as beneficiary.

It is not clear to me the order in which assets must be depleted, but the step-mom could retain as much in her IRA as she can, by just taking the RMDs and then deplete the trust assets, first her community property, then Father's community property and then the 'separate property' assets that are in trust for her.

In which case you and your brothers' will only receive your initial 70% of his separate property assets and no more. Depending on the amount of money in each of these 'pots' you could receive far less than you have originally anticipated. I second the advice to get a lawyer to advise you.

 

[OldShooter]

OP, you are going to bring an attorney into your picture. With that, you can pretty much ignore what SGOTI has to say here.

One point, though. "Intent" has been mentioned. Even if "intent" is in writing, the trustee is not permitted to act on it except within the constraints of the trust's terms. The trust document governs. A court is also not likely to consider "intent" unless all the interested parties are unanimous on it.

Good luck. Remember, this too shall pass.