Trusts and step-children

anovaguyOctober 3, 2007

My wife and I both have children from a previous marriage.

We intend establishing trusts to ensure that the surviving spouse as well as the children of the deceased spouse get to share in the income from each trust - and upon the death of the surviving spouse the balance in the trust will be distributed to the children.

We are meeting with an attorney who specializes in estate planning and trusts next week. In the meantime, I am wondering how others have handled the issue of property distribution when it comes to children from a first marriage - and especially how trusts have been used to take care of the surviving spouse's needs as well as those of children from a first marriage.

I'd like for us to be somewhat informed about alternative approaches used prior to meeting with the attorney.

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Do be aware that standard Revocable Trust language generally does not allow the surviving spouse to access principal on the deceased spouse's portion of the estate, which will become Irrevocable (the survivor's portion of course, remains Revocable).

Restrictions are common on the Deceased principal, so it is up to you to decide: do you want the Survivor to have full use of the principal or only partial use? If partial, under what circumstances may the Survivor use the dividends and/or interest? The standard is health, education and maintenance - this means gifts, travel or entertainment must come from the Survivor's own estate, not the Deceased. You can change this to allow full access, even though this is unusual - we did this.

It is imperative in a Trust that you keep your trustee and beneficiary list up to date, including the successors/contingents. We needed have very intensive discussions with an estate attorney over my MIL's trust because she and her deceased husband had never updated their trust since making it 25 yrs prior. The successor trustees and contingent beneficiary list was woefully out of date and would not have served her best interests.

Do not automatically assume the people you like best will be adequate trustees, especially in a sibling situation. Sometimes the best person to pick is someone who is not only honest but neutral.

Be aware that unless you specifically request language that a trustee can be reimbursed for time at current professional rates, a trustee does not normally get paid for the considerable amount of time they will spend overseeing your wishes. Expenses are always paid by or reimbursed from the estate, however.

When it's your spouse that's not a big deal, but in our case it is a relative by marriage - she would have to take off work on her own vacation time or unpaid to deal with our estate, which we felt was not fair. I have settled estates and it takes a LOT of time, at a period when you are grieving yourself. I would be happy never to do it again, believe me; it is a burden, never a joy.

You may wish to be very specific about the handling of real estate property once both Trustors pass away. Probably more disputes have occurred over RE than anything else. Heirs can get into a sentimental mindset and act in illogical ways which often irreparably damage sibling relations.

As an old saying goes, "Never say you know anyone until you have split an inheritance with them!" It is unfortunately all too often a true proverb.

My sister acted in ways that astonished me (and even her own husband) when our eldest sister died. To this day I wouldn't trust her with any portion of our estate; she just turns into another person entirely when money is involved. This is not an uncommon behavior, so dont assume your children will all "play nice and not run with the scissors."

This is especially true as your children marry. The standard assumption is that if your child dies while married, their spouse and/or children inherits. But what if you donÂt like their spouse? Think about what you want to do in this type of situation.

Make sure the package includes pour-over wills, power of attorney, durable healthcare power of attorney INCLUDING the HIPAA releases. It is up to you to copy your doctors with the healthcare POA. The attorney may or may not transfer your home title to the trust; ours included it in the set fee but YMMV depending on where you live.

Be aware that anytime you go see a health specialist or get admitted to a hospital, you or your spouse should bring a copy of the appropriate health POA along. The HIPAA regulations are woefully vague and each doctor, specialist and hospital has their own way of interpreting how to obtain permission to discuss someone's medical records. In an medical emergency, this can be very important.

This is also why whoever is your primary successor Trustee after the surviving spouse, should be kept up to date and know where all these documents can be found. And they need ACCESS to a copy of these documents in an emergency without having to go to a judge to obtain legal approval. They need to know the name and phone number of your lawyer as well as where you bank (which branch you have your safety deposit box in, for instance).

All these documents should be checked over any time there is a life-changing event: divorce, sale of a home, death/marriage of a family member.

Good luck and may everything go smoothly for you.

    Bookmark   October 3, 2007 at 12:10PM
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jkom51, thanks for the comprehensive and informative response. It is helpful.

As I mentioned, we will be using an attorney to draw up the necessary documents and to provide advice but the basic structure and restrictions regarding the use of funds is something that we intend providing the necessary information.

The basic structure we are contemplating is for the primary source of income for the surviving spouse to be from the funds in that individual's trust. The income from the deceased spouse's trust would be distributed between the surviving spouse and the children of the deceased spouse on a monthly/quarterly basis. Upon the death of the surviving spouse all of the principal would then be distributed to the children of the first deceased spouse.

My wife and I are pretty much in agreement with the provisions of the trust and the amount of assets in each trust would be approximately equal.

Our thinking on the real estate which is primarily our residence - in which we have considerable equity - is that the surviving spouse would obviously get the use of the property during his/her lifetime and thereafter the proceeds on sale would be distributed equally to the two trusts.

The trustee in each instance would be the spouse in whose name the trust has been established but upon the death of the first spouse, the trustee would be a financial institution - this hopefully would remove the potential for conflict between the surviving spouse the children of the deceased spouse as to the use of the funds in the trust.

    Bookmark   October 3, 2007 at 2:08PM
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Write out a list of questions in advance of your meeting with the attorney. The only dumb question is the one not asked. And if your attorney is a good one, every facet of revocable living trusts should be explained to you in agonizing detail - after all, that's what you're paying for.

There are three parties involved here: the Grantor (person who creates the trust); the Trustee (could be yourself if you decide to manage it yourself during your lifetime and have ability to do so or it could be whomever you designate to manage the trust according to the terms you set); and the Beneficiary(ies); (this could be the grantor him/herself and the grantor's spouse during his or her lifetime and the grantor's beneficiaries after the grantor's death.)

There may be a little confusion here regarding a revocable trust becoming irrevocable upon a death - what becomes irrevocable is the ability to revise or change the original grantor's wishes - not necessarily the survivor's use of the assets. And we're going on the assumption that each party will have his/her own living trust funded with previous marriage assets and cojoined assets and the spouses are the primary beneficiaries.

From my own experience - and my brother and I are doing the preliminary work on divinding trusts now that both parents are deceased...

My parents both created self-directed revocable living trusts with each other as beneficiary and my brother as trustee - and as long as either was still alive, my brother and I did not benefit. Each trust was a separate vehicle, assets were bought and sold and they grew or declined depending on the economic climate. Upon my Father's death, his trust became a family trust with the assets still administered by my brother for the benefit of my surviving Mother. Now with her death, the family trust dissolves and is available, along with my Mother's trust assets, for equal distribution between my brother and me as stipulated.

And it is true; there is no oversight making sure the distribution is equitable - so make sure the trustee and successor trustee is someone you trust will follow your wishes. Money or the anticipation of money can bring out the worst in some people.

The attorney would suggest the best ways to include children from previous marriages - if they're minor children there are different issues; like preventing an ex from access to the inheritance, etc. If they are adults and if there's an unfortunate untimely death some rethinking of inheritances would be involved depending on wording of bequests - percentages to be adjusted for surviving named heirs as opposed to children of deceased heirs, etc.

Per stirpes is a method for distributing the estate of a deceased individual. Per stirpes (which is Latin for "per branch") specifies that each branch of the deceased person's family receives an equal share of the estate, regardless of how many people are in that branch. For example, if A and B are the children of the deceased, but B is also deceased leaving children C, D, E, F and G (the grandchildren of the original person), then A would receive one half of the estate and each of B's 5 children would receive one-tenth of the estate (essentially, they are dividing B's half).

But if you and your spouse have discussed things and have a basic idea as to what you want to do, you're well on the way. As recommended, keep good records, up to date information available to those who might need it. The trust process is a very comfortable way of handling affairs. Not to mention avoiding probate and, in some cases, many thousands in inheritance taxes.

    Bookmark   October 3, 2007 at 3:35PM
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Guess I did a little preaching to the choir since you've obviously given this a lot of thought.

Among my parents' trust documents, they each had what was called an "unrecorded warranty deed" which gave the house to the surviving spouse for their lifetime.

For some reason, I don't believe the house was used to fund the trusts but held outside like pensions, etc. Think it was because my Father had a bit of the control freak in him and thought keeping the house out would keep him from ever having to go into a nursing home. As luck would have it, he never spent time in a nursing home.

    Bookmark   October 3, 2007 at 4:07PM
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duluth, thanks so much for your excellent suggestions. Posting on this forum has been a productive exercise in terms of obtaining some great feedback.

Our situation is complicated primarily because of the issue of step children - not that this is unusual in today's environment. We are trying to minimize the potential for conflict between the surviving spouse and any step children down the line. Part of the thinking in providing a regular income to the step children upon the death of their parent is to "satisfy" their need for some sort of inheritance - which they probably would expect to be their right. If there were no step children involved, one's children would probably fully expect that any assets should be used for the surviving parent. The dynamics do change when there are step children involved. There are no minor children involved - so that complication does not exist.

The point about care needed in selection of the successor trustee is well made. During our life times we would obviously be the trustees - and upon the death of either spouse the trustee would be a financial institution since that would hopefully provide some level of detachment and objectivity in complying with the terms of the trust. With all the goodwill in the world, making the surviving spouse and/or the step children the sucesssor trustee/s would appear to be a prescription for conflicts down the line.

Our wills have a non-contestible clause - namely, if any beneficiary contests any provision of the will, it would effectively void that beneficiary's right to inheritance, assuming of course that the contest were unsuccessful. I don't know if it is possible to have a similar provision in the trust document to provide a disincentive against contesting the terms of the trust.

    Bookmark   October 4, 2007 at 8:36AM
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The validity of a trust is more difficult to challenge than the validity of a will.

Contesting a will or trust usually rests on one or two of the following factors: undue influence in executing the will or trust, or that the person executing the will or trust lacked mental capacity to execute the will or trust at the time it was executed.

It would be interesting if all the literature provided simple yes or no answers to questions: i.e. inserting non contestable clauses in trusts. It must be possible as I could find no information specific to the contrary.

Again anecdotal, we have had only one instance of someone challenging a trust; that of an elderly aunt, a childless widow - not the terms, but the naming of a financial institution as trustee. The challenge lacked merit.

I'll be going through the creation of a trust myself shortly. Fortunately, I have no unusual complications.

    Bookmark   October 4, 2007 at 1:19PM
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I'm still confused. My husband and I were married 4 years ago and we both bring adult children into the marriage. Currently we own two houses. My parents left me an inheritance and I used it to purchase the home they built. There is approx 100k+ equity in it. We are thinking of selling it and putting the money into the other house. My husband told me if he dies he wants his 401k to go to his children and I get the house (mortgage & equity). What I'm worried about is if I die. If I die the house will go to my husband and my children will get nothing. He knows I want the house passed to my children because it has been in the family a long time and he said he would but it depends on how much its worth at that time. I'm worried about this. Is there anything I can do to protect my childrens interest in this before I take the money from the first house and invest it in the second? I mean if I die in two years and my husband lives another 20 he can take out equity loans, meet someone else and possibley marry...etc etc. I'm worried.

    Bookmark   October 19, 2007 at 11:20AM
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You need to consult with an attorney who specializes in estates, elder law, etc. If you want to make absolutely sure YOUR adult children are beneficiaries of any assets YOU brought into a second marriage, I'd start making arrangements to that effect myself and soon. A self-directed revocable living trust may be just the vehicle you need to have your plans carried out to the letter. Or there are other means to explore with competent legal advice.

As much as we would like to believe it's so, trusting that someone will "do the right thing" is no guarantee. And your husband could have the same fears about his own children getting left high and dry if he predeceases. Whatever you do, make sure your own possible future comfort and needs are addressed... heirs can get what's left.

    Bookmark   October 25, 2007 at 5:31PM
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>>I don't know if it is possible to have a similar provision in the trust document to provide a disincentive against contesting the terms of the trust.It is possible. We did this, specifically because our lawyer pointed out that our two heirs, in the eyes of the law, had no more right to our estate than several other relatives - she actually drew out a genealogy during our first meeting, which she said she does as standard practice. When she drew it out for us, we could see the potential for dispute, and instructed her to put in language specifically disinheriting anyone not mentioned in the trust.

>>There may be a little confusion here regarding a revocable trust becoming irrevocable upon a death - what becomes irrevocable is the ability to revise or change the original grantor's wishes - not necessarily the survivor's use of the assets. This was not correct in our MIL's instance. According to our estate attorney, NO changes can be made to the terms of the Original Trust regarding deceased's portion of the Estate. California is a community property estate; her deceased spouse's share of the estate was exactly 50% of everything, including the house sale proceeds. Mind you, the house wasn't sold until four years after his death. Didn't matter, his estate was entitled to half of the money.

If the Original Trust did not specify the heir/spouse can access the principal upon demand, then THEY CANNOT. In fact, even the Certified Financial Planners we met with, when we moved my MIL's accounts to them, were extremely surprised she was allowed to broach principal. They said in over twenty years' of business with hundreds of clients, they had seen this allowed only once before.

This is because there were two Trustors in the Original Trust. The death of one makes that share of the Trust Irrevocable. Only upon the death of BOTH, does the Trust dissolve and the assets are completely disbursed, so nobody cares any longer about paying out principal vs interest.

Actually, there is a way to change an Original Trust, but it's incredibly cumbersome and expensive. You must get everyone named - successor trustees and primary & contingent beneficiaries - to sign a letter saying they agree with the changes you are proposing. IF they all agree and sign, a lawyer can take the letters to a judge and get the terms of the Original Trust changed. But they all must agree, or it's no dice. Our attorney said it's a minimum $2K every time she has to show up before a judge.

>>Again anecdotal, we have had only one instance of someone challenging a trust; that of an elderly aunt, a childless widow - not the terms, but the naming of a financial institution as trustee. The challenge lacked merit. Interestingly enough, a friend of ours is in the process of defending her inheritance from a trust set up by someone who was not a blood relation. She did not take our advice about making sure to use a good estate attorney, saying she was "too busy" and "he didn't have any family anyway, so there was no one to dispute anything."

Now, six months after the estate was disbursed to her, she had to hire an attorney to defend herself against a lawsuit challenging her inheritance. It is quite possibly frivolous - she has documentation, assuming she can find it in the boxes packed up when she bought a new house and moved out into the country - but she still has to defend herself and will be out the legal fees and considerable anxiety/hassle.

    Bookmark   October 26, 2007 at 2:19PM
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Might be interesting to start a new Trust thread. I can only speak from the situations I know so suggesting someone to engage good legal counsel is about as far as I'm willing to go.

Did find out in the interim, as you noted also, jkom, it is possible to write in disincentive/disinheritance clauses. You can write in pretty much anything you want.

We're in the process of dissolving and distributing my recently deceased Mother's trust now. It's almost frightening how simple these things are to accomplish when everything was thoughtfully and competently executed in the first place. (Dare I say as opposed to downloading something off the internet and hoping for the best?) And spending the money to have things done right was a very good investment. Really, the last thing left to do is file her 2007 tax returns at the oppropriate time.

There were no complications, no unusual circumstances, no heirs beyond my brother and myself - and each of us being financially comfortable in our own right, no squabbling over how assets were divided, aside from discussing the kinds of assets we had a fondness for and wanted in our portfolios. And no one out in the wide world to emerge from the woodwork and make any kind of claim at a future date.

As soon as I get confirmation of all the transfers, I can go ahead with creating my own self-directed trust. What I do find helpful in these forums is in the formulation of a list of questions to ask my lawyer; the list is growing.

    Bookmark   October 26, 2007 at 3:08PM
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