Monday, July 20, 2015

My Mother's Estate Planning: In Madame X She Trusts!

This past week, I've had to learn a few things about trusts. I'm now officially a trustee!

The whole trust issue first came up after my dad had surgery for brain cancer. We'd managed to get him to a lawyer to quickly draw up a will for the first time on an emergency basis just before his surgery. A couple of months later, he and my mom went back to a lawyer to revise the estate planning, along with my sister, and me on a conference call. The lawyer advised them to put most of their assets in a revocable trust and he drew up some documents to that effect. What I later found out, though, was that they had never actually retitled any of their accounts in the name of the trust, so it was essentially a useless exercise.

For those who don't understand what I mean, here's an version of an explanation I found online somewhere that helped me explain it. Think of a trust as an empty box. Your lawyer draws up documents that create that box. But then you have to put things in the box-- by transferring the deed to your house, or by changing the name on your bank accounts, or opening new bank accounts in the name of the trust and transferring money into those accounts.

After my dad died, my mother went back to the lawyer, and I think they set up another trust, this time just in her name. And again, no assets were ever put in the trust! I was kind of hands-off about my mother's dwindling finances at that point, as I just found it too upsetting.

So the latest trip back to the lawyer was after my mother sold her house. She had proceeds from the sale of a little over $500,000, from which some capital gains would be due, since they'd originally bought it for something like $25,000. (This calculation of capital gains exemptions on real estate would be an interesting thing to delve into in another post someday!)

At this point, that money is all my mother has. She has spent all the other money that my father left. But she had gotten it into her head that my father intended for my sister and me to inherit the house, or at least some of the money from its sale. I personally never heard him say anything of the kind-- he always seemed quite aware that he'd barely be able to stay afloat while living in that house, yet he didn't want to move, and somehow I don't think he ever really thought of us as a family where inheritances would be a very relevant issue! And knowing my mother's financial habits, I certainly didn't expect there would ever be much left to inherit once she was gone.

My sister, however, seemed to think an inheritance would be a rather nice thing to have, and I can't really blame her. She thought our dad would have liked to leave something to his grandchildren. And more pressingly, she and her husband always seem to have a little more debt than they'd like. I know they paid off some credit card debt when they refinanced their house. But somehow they still have two mortgages. And then they bought a boat! They want their kids to have a really fun family life that would be very different from how my sister and I grew up, under a cloud of worry that we couldn't afford to do anything. Unfortunately, she and her husband sometimes seem to be under a cloud of worry about debt! My sister does some occasional part-time work but is has mostly been a stay at home mom for years, so they're living on one income.

So my mom decides she wants to give us about $350,000 out of the house proceeds, to be split evenly. Her lawyer said the best way to do that was to put it in an irrevocable trust so she'd have the income from it while she's alive and the principal would go to us after her death. This idea worried me, because if my mother needed to go into a nursing home, there would be a 5-year lookback period before she could qualify for medicare, and my sister and I would have to come up with whatever her income didn't cover. I personally could afford to do that if I had to, especially if I knew I'd be reimbursed for $175,000 of expenses after my mother died. But my sister would not be able to afford it.

So I thought my mom should just keep her money to pay for her own needs, although I did worry that she would just spend it all on ridiculous things-- she seems to be one of these people who see money as a hot potato to be gotten rid of when you have it! If my mom frittered away all her cash, then I'd be stuck paying for her nursing home anyway. It's not that I don't want to care for my mother, but it makes me incredibly angry that I shouldn't have to-- if my mom and dad had both made wiser financial decisions years ago, they could have lived very comfortably and taken care of all their needs without endangering my own ability to fund my retirement. If I end up being broke when I'm older, it will be my niece and nephew feeling guilty and burdened about taking care of me, and I don't want to lay that on them.

My sister's idea for protecting my mom's money was that she should just give it to us as a gift, with the understanding that it would be there for her if she needed it. I was willing to go with that except that I thought it would look really dodgy, as if we were taking advantage of our mother. And again, I could afford to just invest that money and not use it. My sister was thinking she'd use it to pay off their second mortgage, "to help them get on a more stable footing," and that if my mother needed her money, they'd just take out a home equity loan to give it back to her. I value my relationship with my sister-- I don't want to be judgmental with her, knowing that kids are a big expense I don't have, but I thought that whole plan was a REALLY BAD IDEA!

Here's the plan that we ended up with: the lawyer drafted an irrevocable trust with a provision that the principal could be used in the case of a dire medical emergency. $350,000 went into that trust. For the rest of my mother's cash, he set up a revocable trust, and a will to cover whatever isn't in that trust. She's supposed to keep her non-trust assets below $25,000 so it's covered by simple probate, and avoids some of the usual probate process. (Or something like that, I may not be getting the terminology right here.)

The thing with trusts is that you have to have a trustee. That person or institution his responsible for carrying out the terms of the trust and has the fiduciary duty to manage the assets appropriately. My mother's first lawyer insisted that this duty had to be carried out by a financial institution and brought someone in from a local bank to offer her services. I did not like this idea. I did not see why we should have a bank investing our money when it seemed perfectly reasonable to just do it myself with some low cost mutual funds. I did some research online and became even more convinced that the fees a trust company would charge didn't make sense for the amount of money we'd be investing. I also felt that money should be invested in a relatively conservative way to preserve capital, so we'd be trading potentially lower returns in a good year for lesser losses in a bad year-- this meant losing 1-2% in fees really didn't make sense. My mom's first lawyer retired and another partner took over. Maybe he was less old-fashioned about whether a girl could capably handle such things, but he agreed that I could handle being the trustee myself. So a big packet of legal documents arrived for me to sign: the irrevocable trust with my mom as the grantor, me as the trustee and my sister and me as benfeciaries; the revocable trust with my mom as grantor and me as trustee and my sister and me as beneficiaries; and a power of attorney allowing me to act on my mother's behalf.

This is getting to be a long post so I'll follow up soon with a part 2 detailing what else I've learned about my new duties as a trustee... stay tuned!

Her income monthly from Social Security and my father's pension is about $3000.

3 comments:

T'Pol said...

I think, this worked out well for all of you. You are very capable of making sound financial decisions and I think, you will be a terrific trustee. Where will your mom live now? Just curious about her living arrangements. Her monthly income sounds decent but it depends on the area she wants to live. If she lives in a small apartment with low rent, she should be OK.

I wish she had done that soon after your dad's passing instead of spending money on the house that she would not be keeping. I am sure some of her expenses increased the value of your old home but, I am guessing she has not been able to recoup all that she has spent.

Anonymous said...

This is such an interesting post. I was kind of shocked to read at the end that your mom has 3000 to live on each month--that sounds like a lot! Does that include rent or property taxes?

Emily Berger said...

Thank you for this post and the others detailing your mother's challenges with managing money. When I first read them, it seemed interesting enough, but in recent weeks I've had a similar situation so have been revisiting your posts for guidance. Kudos to you for getting to the other side and maintaining a relationship with your mom throughout!