Trusts - what are they and how do they work? Califorina Edition.

July 3, 2015 8:43 PM

My adult brother has no income save my parents' monthly stipend. He is unable/unwilling to work. When they pass away, if he receives half their estate (which is not super large), he is likely to spend it all at once and then be without income or means of support. I am asking my parents to change their will to give my brother support for the longest time, so that he is not disabled and homeless on the streets as an older man, and so that I can minimize the impact on my own finances. What kinds of trusts or other legal mechanisms exist to help with the long term financial stability of a legally "competent" but life-skills-wise not competent adult?

My brother is totally financially dependent on my parents. He has a lifetime of poor financial management behind him, and a string of weird, failed, creative projects and semi-legal "get rich quick" projects that have put him thousands of dollars in debt to various friends and strangers. His mobility and physical and mental health are declining and he has about zero percent chance of getting a job. He is not likely to qualify for disability, (although he is applying - a process I have tried to assist with with little luck due to our not great relationship). He is very challenging, likely extremely depressed, seems to behave like people with personality disorders, and generally hard to collaborate with.

I have asked my parents to set up some sort of trust, so that when they die, he doesn't just blow whatever he inherits, and instead has an ongoing source of income for at least some years. This impacts me because I will be his sole option for support after he runs out of their money.

My parents aren’t rich, but between their house and other assets, depending on how long they live etc, there could be a few hundred thousand dollars for my brother after they’re gone. Given his history, he is likely to quickly blow any large lump sum of cash paying off debts and “investing” in weird shit or just spending money on stuff. I’m not interested in letting him become homeless, and I’m the only close relative or whatnot, so I will be the only option of supporting him when he runs out of money.

To postpone the inevitable, I think it would be best if any inheritance gets metered out to him over time instead of handed to him in a giant check. My parents are very resistant to this. My hope is to research exactly what options there are, and then I can campaign for this option over the long-run.

So, in California, what specific types of trusts or other mechanisms are there to do this? As much detail as you know is welcome and appreciated.

If you think I should talk to a lawyer, can you be specific about what type of lawyer to look for, and what specific types of trusts to ask them about and why? Talking to a lawyer will surely be part of the process at some point but I need some information now to talk with my parents about and for finding the right lawyer.

Thanks!

posted by anonymous to Work & Money (12 answers total)

You must do this with a lawyer involved. A big part is who are the trustees. Memail me for more on this as I can't put it online, but this was done for a relative of mine and when one trustee left for very good reasons, two of the other trustees abused their position to delay payments etc and it's been a nightmare sorting out. It could have been avoided if the person setting up the trust had been more hard-nosed about the details and less emotionally involved.

Another option to look at is insurance annuity policies, but they can be cashed in I think.
posted by dorothyisunderwood at 9:01 PM on July 3, 2015 [3 favorites]

Google "spendthrift trusts"
posted by banishedimmortal at 9:06 PM on July 3, 2015 [1 favorite]

Yes, need a lawyer. But one possibility is for the trustee of the estate to be required to buy your brother a Single Premium Immediate Annuity . That will convert your brother's share from a lump sum into a stream of payments over the course of his life. Then there's no need for the trustee to be involved long-term.
posted by mono blanco at 9:10 PM on July 3, 2015

In fact, they could do that for both of you. That way both brothers are being treated exactly the same, which may make your parents less resistant to the idea. (Assuming you too are willing to forgo a lump sum for an annuity.)
posted by mono blanco at 9:17 PM on July 3, 2015 [2 favorites]

Your parents should speak to a lawyer who specializes in trusts. As I read your question I thought of a special needs trust, which is a particular kind of trust for a disabled person, but I am not a trusts lawyer. There are lots of different types of trusts out there and a competent attorney should be able to easily determine what the best course of action is for your parents.
posted by stowaway at 9:22 PM on July 3, 2015 [1 favorite]

This is a very complicated area of law, and dorthyisunderwood is right. A huge amount of what you can do depends on who the trustee is. Some of the best planning basically depends on the trustee acting on the best interest of the beneficiary (in this case, your brother) when they have no duty, under the terms of the trust instrument, to do so. Explaining why is a bit complicated, but can sorta be boiled down to the idea that if the trustee MUST do something then the income stream to your brother can more likely be diverted from your brother by some judgment or legal contract your brother may unwisely enter into.

This is why I think mono blanco is wrong. An annuity is an instrument that can most likely be sold or assigned (a legal contract) or be diverted by some judgment which would then leave your brother without an income.

Special Need and Spendthrift Trusts can go wrong in lots of ways. If your brother needs this type of protection from himself, you'll need to find a good lawyer and a good trustee. Good lawyers can be found anywhere, I can put you in touch with dozens, even if they cost a pretty penny.

Good trustees? Man, I wish I knew. That's going to be your real bottleneck.
posted by bswinburn at 10:17 PM on July 3, 2015 [3 favorites]

My father passed away in January, and we just finished setting up a trust for my mom to take care of her needs and protect her assets. The (Los Angeles based) estate planning attorney we used was helpful, friendly and professional and did everything for a flat fee. Memail me if you want his contact info. Good luck.
posted by Anoplura at 10:26 PM on July 3, 2015

Another question for lawyers: I understand* there are entities who will buy such income streams—no doubt at a significant discount. If true, your brother could still trade this in for a lump sum payment that would be considerably less than your parents left him.

*Disclaimer: my entire knowledge of the subject comes from late-night TV commercials.
posted by she's not there at 10:28 PM on July 3, 2015 [1 favorite]

Sorry, I should have read more carefully. Bswinburn already addressed this and he/she actually knows something about the subject.
posted by she's not there at 10:31 PM on July 3, 2015 [1 favorite]

Another point to be aware of is that, in some jurisdictions, a trust like this for a sole adult beneficiary is hard to make watertight. That's because of the rule in Saunders v Vautier, which allows the beneficiary in this position to simply collapse the trust, set aside any restrictions on how they receive income, and take the capital. (I don't know if California has this rule). If it does exist in California, the trust has to be carefully drafted to make sure that your brother isn't the only person beneficially entitled to the money; if he is, and California recognises Saunders v Vautier, he won't have to abide by your restrictions. A trust that does the stuff you want it to for one adult, who doesn't want to be limited by the terms of the trust, is quite a complex instrument and you need an estate planning lawyer to help with drafting it.
posted by Aravis76 at 11:20 PM on July 3, 2015 [1 favorite]

An obstacle to using a trust in many states is that most commercial trust companies (primarily the banks that identify themselves as, e.g., Gargantua Bank & Trust) have minimum fee schedules that are prohibitive for a trust with assets under $200,000 to $300,000 or so. They simply don't want the small client.
posted by yclipse at 4:19 AM on July 4, 2015 [1 favorite]

My family went through this when my grandparents died and wanted to leave money for my uncle. The state they were in had some strange laws about trusts, so they wound up making their lawyer and my mother the trustees.

This was a disaster when the grandparents died. It absolutely ruined my mother's relationship with her brother, as she was the one who had to say no to all his requests for extra payments, etc. Essentially, it turned her into a proxy parent and made my uncle grow to really dislike her.

So for the sake of your relationship with your brother, talk with your parents about keeping you out of his trust arrangements if at all possible.
posted by yellowcandy at 11:40 AM on July 4, 2015 [3 favorites]