Divorce, Car Accidents, Mortgage Crisis
And Other Reasons To Use A Trust
Rob Wrubel CFP®, AIF®
Special needs trusts are a key step in the process of planning for the future needs and high quality of life for your special needs family member. They can help provide a funding source for your special needs family member above and beyond those paid by government resources.
Families with special needs members frequently ask the same question, “Why use a trust? I plan to leave the money to a brother or sister who will do the right thing.”
Is a special needs trust really a necessary part of planning for your family? Or are you better off leaving the share of inheritance intended for your special needs family members to a sibling or other trust person and hope for the best?
Imagine a family consisting of one surviving parent, age 70, and two children, ages 35 and 40. The older child is a man with Down syndrome is the 40 year old. The sister who is 35 is married with two children of her own. The parent has a net worth of $800,000 – $300,000 in a house with no mortgage and $500,000 in investment assets. The parent lives off a pension and social security and has no immediate need to use the investment assets for daily living expenses.
The mother is reviewing her estate plan and options for giving her money to children and charities that have supported her son when she dies. For purposes of this newsletter, she decides to give it all to her children.
One option is to leave all $800,000 to the 35 year old sister and request that half of the money be used for the brother with Down syndrome. The sister is financial secure, able to handle and save money and would do her best to help her brother.
Another option is to leave $400,000 for the brother in a special needs trust with the sister as trustee and the other $400,000 to the sister.
Mom likes the idea of leaving it all to the 35 year old. She has a proven track record with money and Mom knows the sister will do anything and everything for her brother. It seems simpler and easier to do and she wants any money not used for the brother to go to the sister anyway.
Is there really any risk to this plan?
Unfortunately, the risks to the brother with Down syndrome increase dramatically if Mom chooses the first option and leaves her entire inheritance to the sister.
Right now, Mom pays lots of expenses for her son with Down syndrome. Mom pays his cable bill, zoo membership, trips to the movies and other entertainment, makes sure his clothes are new and fit right and many other regular expenses not covered by Medicaid.
When Mom passes away the sister can continue to pay for all these expenses if she chooses. It is legally hers with no obligation to provide any support so there is no requirement that she continue to do so. This might not be an issue in this family but attitudes and actions sometimes change when money changes hands.
This is not the biggest risk to the brother. The money, not in a trust, is the legal property of the sister. Unfortunately, this means that there are several common circumstances where some or all of the brother’s money is at risk.
Divorce. The common statistic is that 50% of marriages in the US end in divorce. Some portion or all of the inheritance money could become a family asset split in half as a result of the divorce. Potentially $200,000 of the “brother’s” money could be claimed by the spouse. The sister might have to use part of her asset base to pay for attorney’s fees and other expenses in the divorce and could be tempted to touch a portion of the brother’s share.
Accident and injury. Most drivers do not get into accidents. Yet, we all carry insurance to protect ourselves and others in the event that we do. Unfortunately, the sister could get into an accident, cause injury to another and get into a lawsuit. She might not even be at fault. There is the chance through a lawsuit her assets could be used to pay an injured party. The judgment could take all of the money in her name, including the amount she considered to be used for her brother.
Unforeseen financial disasters. The mortgage and housing crisis of 2007/2008 showed many families that taking too much debt to buy an illiquid asset can have negative results. Foreclosures and bankruptcy filings shot up five and six years ago. The housing crisis caught people across the range of incomes and asset values as the trend towards bigger mortgages relative to housing values kept going. Unfortunately, the sister could have been caught in such a situation or she and her husband might have become unemployed. In any case, her financial situation has an impact on her brother’s quality of life when money is left to her.
These are just a few instances where money left to the sister puts the brother with Down syndrome’s money at risk. None of these issues would have the same impact if the money had been left into a special needs trust with the sister as trustee.
His money remains untouched in the case of her divorce.
His money cannot be claimed in a lawsuit against the sister.
His money cannot be used for her to secure a loan or be used to collect a loan.
Money in special needs trust belongs to the trust and must be used for the beneficiary. No other person has a legal right to this money as long as the trust has been drafted correctly.
My “Blueprints” model for planning for special needs families includes finding with and drafting a special needs trust. We work with families before they sit with the attorney to discuss long-range issues impacting the special needs person and to help identify which assets should be left to the trust.
Call me today if I can be of help.
Rob Wrubel CFP®, AIF®, is a Senior Vice President – Investments with Cascade Investment Group, member FINRA & SIPC. Rob is also a father of a daughter with Down syndrome. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.719-632-0818