Dear Mr. Premack: I’m writing regarding a trust that was between my mother and stepfather. My stepfather put all his assets as well as all her assets into the trust (she had property and money from a prior marriage). Stepfather managed all the assets and accounts through the trust, which was a revocable trust. My mother married him about 28 years ago. He had two adult children from his first marriage. He passed away, and although he has provided for her in the trust, she is very upset because he directed all the money and assets that are in the trust to his two children, leaving out her two children. The trust was created in 1991 in the state of Illinois and he amended it in 2004 in the state of GA without her knowledge or participation. They moved to Texas in 2006 and purchased a home where my mother resides now. The trust allows her to take 5% a year or $60,000 from the trust and gave his two children $50,000 upon his death. It says that when she passes they get the balance of the trust. She is 75 years old and in good health. Would she be better off seeking an agreement from his children to end the trust and split the assets 60/40 (her part 60 theirs 40) or stick with the trust and get 5% per year? She feels she was taken advantage of by stepfather leaving her two children out of the trust. – SS
Whether she would be better seeking a 60/40 split or taking her 5% per year depends on her life expectancy, which nobody really knows. At first glance, it seems that if she lives 12 more years, then taking 5% annually from the trust would equal the same amount as a lump sum of 60% now.
But that does not account for interest and growth. In a normal economy (which we are certainly not experiencing today) getting a 5% return on invested funds was expected. If so, taking her 5% per year from the trust would be a withdrawal of its earnings only, leaving the entire principal inside the trust for his children.
She could be better off negotiating to receive 60% of the principal now, because then she’ll have the underlying assets plus the interest earned on the underlying assets. If she were to die six months after the trust fund is split she can leave that 60% to you and your sibling. If she only takes the 5% and dies in six months, she has little to leave to you. But that is really a financial decision, and an uncertain one, because we don’t know the date of her future death or the rate of return that could be earned on the principal. And we don’t know if stepfather’s children will even entertain such a compromise.
The other issue raised by your letter deals with the legality of how your stepfather operated the trust. You say it was established in 1991 in Illinois and he put all of his and all of her money into the trust. He would not have been able to do so without her participation and agreement. Look over the original trust agreement; it is very likely your mother signed it. She may not have understood it, but if she signed then it was her responsibility to understand the effects of the trust. Having signed the trust, she would have also needed to sign various transaction authorizations to move her funds and property from her individual name to vest them into the name of the trust.
Check the paperwork from 1991. Did she convey her assets as a gift to her husband, giving up all her rights? You hope not, but if she did then he would have the kind of control you describe, and could leave everything to his kids because she gave up all her ownership and control in 1991. That would have been unwise legally, but would be very difficult to unravel after nearly 20 years of accepting the regime and benefiting from the trust.
As to the 2004 amendment in Georgia (without her knowledge or participation), she may have authorized him to make such changes under the terms of the 1991 trust. It would be unusual, but it is legally possible for her to have given over that much control to her husband. It all depends on the wording of the 1991 trust and property transfers, so she should have her Texas lawyer review it and advise her on what it says and what it means.
Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio.
Original Publication: San Antonio Express News, March 11, 2010