Understanding a family's dynamics in estate planning is very important. Frequently, I have clients that come to me requesting a "simple will". For example, a couple in their mid 60s comes to my office for estate planning. They have three kids all over the age of 30. They own a primary residence, a vacation property at the beach which has been in the family for two generations that they would like the kids to receive when they pass away so that they can all use the property, and around $250,000.00 in checking, savings and investment accounts. Life insurance brings their overall estate value to just under $1.0 million - below the taxable estate level.
Since there are no estate tax issues, they want a "simple will" that gives the property to the kids in equal shares. In many situations, that type of a will might be appropriate. However, during the initial meeting I learn that the oldest child and middle child aren't on speaking terms. In fact they haven't communicated with each other in a number of years.
Delving further, I learn that the youngest child acts as an intermediary between the other siblings which has strained his relationship with each of his siblings. He also has developmental disabilities that limit his ability to work. He's receiving SSI benefits and is also receiving health care coverage through Medicaid.
The middle child has managed to rack up thousands of dollars in credit card debt and has a slight gambling problem. The oldest child is in a rocky marriage that has seen her split from her husband of 10 years on three separate occasions. She makes considerably more money than her husband since he doesn't work and their joint assets aren't significant.
What began as a fairly straightforward estate plan has become quite complex and raises the following questions:
1. How do they keep the vacation property "in the family"?
2. How do they ensure that their youngest child will continue to receive SSI and Medicaid benefits?
3. How do they ensure that their middle child won't blow his inheritance or lose it to creditors?
4. How do they protect property left to their oldest child from going to her husband if/when they divorce?
5. Who do they name as personal representative, trustee, or other legal representative responsible for administering their estate?
Following are various approaches that could be taken to resolve these questions.
1. LLC Owns Vacation Property
Setting up a limited liability company to own and manage the beach property makes the most sense to keep it "in the family" and ensure that the kids have equal use of the property when the couple passes away. The limited liability company could be formed during the couple's lifetime and they would be the original members and managers. They could do anything with the property during their lifetimes. When they both pass away their membership interests would be transferred to the kids in equal shares.
To keep the property in the family, the operating agreement could be drafted to ensure that only descendants of the couple (grandchildren, great grandchildren, etc.) can own a membership interest in the company. Other safeguards would be placed in the operating agreement to ensure creditors and ex-spouses couldn't receive a child's interest and that restrict each member's ability to transfer membership interests.
An independent manager could be named to ensure that the property is cared for properly and to ensure equal use of the property. Fights about who gets which weekend, who pays for repairs/maintenance, et cetera would be resolved by the neutral manager.
2. Supplemental Needs Trust for Youngest Child
A will leaving equal shares to each child directly could potentially disqualify the youngest child from receiving needs based government assistance. Therefore, a supplemental needs trust should be drafted into the will to ensure that the youngest child is eligible to receive needs based government assistance such as SSI and Medicaid (Oregon Health Plan) after they have both passed away. Essentially, by placing the youngest child's share of the estate in a supplemental needs trust, the property devised to him would not be considered an asset in determining his eligibility for needs based financial assistance. Without the trust he may be required to "spend down" his inheritance to a point that would make him eligible for those benefits.
A supplemental needs trust can be included in the couple's wills so a separate trust document is not necessary. If drafted properly, the trust provides that the funds may not be used for the child's basic needs, such as food, basic health care needs, clothing, and shelter. The assets can be used for a myriad of other items such as paying the child's cable and internet bill, traveling, specialized medical supplies, and various other items or services. Essentially, the supplemental needs trust will ensure that the child can live a comfortable life without having to rely solely on government benefits.
3. & 4.Spendthrift Trust for the Middle and Oldest Child
Questions 3 and 4 have the same answer: both children need a spendthrift trust to manage their shares of the estate. A spendthrift trust differs from the supplemental needs trust in that the trustee can pay for the children's basic needs as well as supplemental or other needs.
The middle child needs a spendthrift trust to ensure that: he does not gamble his inheritance away; and, that his creditors cannot receive his inheritance by garnishment or other collection methods. It's not unheard of for a creditor to garnish a child's entire inheritance before the child sees one dime of it.
The trustee would have discretion to make distributions to the child or to pay for certain services directly, such as the child's mortgage, monthly bills, etcetera. By paying for services directly, the child's creditors would not be able to garnish distributions from the trust. The trust would give the trustee the ability to deny requests for funds from the child if the trustee believed that the child was gambling or using funds improperly.
If the oldest child gets divorced after the couple has passed away, an argument could be made by the ex-spouse of the oldest child that the inheritance left to the oldest child is a marital asset. Thousands of dollars will be spent arguing over what the couple's intent was - did they intend to benefit the ex-spouse? Placing that child's share in a spendthrift trust is one way to protect that child's share of the estate and clearly state that the property held in the trust is intended to benefit the oldest child and not her spouse.
The trustee would have the final say in making distributions and the child cannot control distribution of trust assets. Most spendthrift trusts explicitly state a court cannot compel the trustee to make distributions and will state that the trustee can terminate that trust and distribute it to the other siblings or possibly the oldest child's children. The point is to keep the ex-spouse from having an interest in the trust property.
5. Independent Personal Representative/Trustee
This couple will need to appoint an independent personal representative and trustee to oversee administration of their estate and the trusts described above. Oftentimes, parents will appoint one child as the personal representative or trustee, or maybe two children. However, in this situation, a professional trustee is probably necessary due to the size of the estate, the sibling rivalries, and the need for a truly independent trustee to administer the spendthrift trusts.
The expenses associated with naming an independent trustee outweigh the risks and burdens associated with naming a family member or friend. When creditors and ex-spouses try to attack spendthrift trusts, their first argument is that the trustee is not independent - i.e., the trustee is being controlled by the beneficiary.
Could the couple appoint an aunt, uncle, cousin or close family friend to serve as trustee? Sure they can, but my response is always: "would you want to be placed in that position?" The answer is almost always no. Family and friends may want to avoid controversy; consequently, every time the middle child requests money, the trustee gives it to him to avoid a fight.
As you can see, the value of an estate isn't the only factor that should be considered in preparing an estate plan. Family dynamics oftentimes dictate what documents we prepare and what is included in those documents more than the size of the estate. Although there are situations where a shorter will is appropriate, it does not mean that the will is "simple".