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Greenlake66

Irrevocable trust per parent?

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My sister and I are working with an attorney and mediator to draw up an irrevocable trust that will satisfy both of us.

My parents are both alive but living in a memory care unit - dad has Alzheimer's and mom has dementia.

 

Needless to say, old family issues have surfaced in trying to create a trust in which I can "trust" my sister.  She has POA with my parents and we have disagreed on many things including my parents care.

I should mention that we live in different states, 3000 apart - she lives in the same town as my parents.

 

We had a conference call today with the attorney, a mediator and my sister and brother-in-law.  The "solution" they found is to create two separate trusts - one is which I am the trustee for my mother, the other in which my sister is the trustee for my father. 

 

While this seems very unconventional to me, I don't know what the potential risks of setting up the trust/trusts in such a way would be.

 

Can anyone comment as to whether this is anything they have ever seen take place in the establishment of a trust??

 

Thank you.

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The idea of having two trusts is highly unusual, but that is the least questionable of the issues that might be involved.

 

The main issue is that you say your sister has a POA from your parents.  A POA nominally allows a designated agent (attorney in fact) to act on behalf of her principal as set out in the power.  However, in the situation you described it would appear that your sister intends to create a trust in which she might be the beneficiary.  I would question whether the power would allow that.  An attorney in fact is authorized to act for the principal but owes the principal strict fiduciary duties to do so only as it benefits the principal.  In other words, an attorney in fact usually cannot give the principal's assets to herself.  I have not read the power of attorney in question but that thought comes to mind immediately.

 

Second, I wonder why it is necessary to create these trusts in the first place.  Trusts, especially irrevocable trusts, are normally used as an estate tax avoidance technique.  That would imply that the value of the joint estate is in excess of the estate tax exemption which, as I recall, is in the neighborhood of $5,000,000 dollars. (I am sure Tax Counsel will correct me on that.)  If that is the case, the IRS might very well perk up its collective ears and query whether a last minutes creation of trusts by apparently incompetent taxpayers will be honored.  It would also require the filing of gift tax returns which might eliminate any estate tax savings.

 

Another attempted use of such trusts is to eliminate the estate of the elderly in order to qualify for medicaid.  Rest assured that the medicaid folks have seen this before and will not be happy.  They will undoubtedly claim these trusts are fraudulent conveyances (look it up) and have the trusts set aside.

 

Okay, I am mentally wandering.  It is not clear how the attorney you mentioned above fts in this matter.  Was he retained to represent your sister, both of you, or your parents.  I would strongly suggest you get your own attorney and present all the facts to her.

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[M]y sister . . . has POA with my parents

 

Please explain what you mean by this.  A POA (power of attorney) is a document by which one person (the principal) grants another person (the agent or attorney-in-fact) the power to deal with third-parties on the principal's behalf.  A POA may be extremely broad or it may cover a very limited subject matter.  For example, I could grant my friend power of attorney for the sole purpose of selling my car.  Or, I could give my friend power of attorney to make any and all medical decisions on my behalf in the event I am unable to make such decisions on my own.  With that in mind, I assume you meant to say that both of your parents gave your sister a POA for some purpose.  Correct?  If so, what is that purpose (i.e., what is the scope of the POA)?

 

 

 

we have disagreed on many things including my parents care.

I should mention that we live in different states, 3000 apart - she lives in the same town as my parents.

 

Maybe you already know this, but your disagreement with decisions made within the scope of the POA given to your sister is legally irrelevant.

 

 

 

We had a conference call today with the attorney, a mediator and my sister and brother-in-law.  The "solution" they found is to create two separate trusts - one is which I am the trustee for my mother, the other in which my sister is the trustee for my father.

 

It seems that someone is (and perhaps both of you are) wasting a bunch of money (hopefully not your parents' money unless).  Why on Earth would you have a mediator involved (is there a case pending in court)?  And whom does the attorney in question represent (given some of your comments, I'm assuming not you)?  Finally, what is the problem to which having separate trusts is the solution?

 

 

 

Can anyone comment as to whether this is anything they have ever seen take place in the establishment of a trust?

 

Have I ever heard of a situation in which a husband creates a trust and a wife creates a separate trust?  Sure.  But I can't conceive why it would matter.  Even if this were the first time ever that this happened, why would that matter?  The only things that should matter are whether it's legal and a good idea.  Certainly, it's legal for each person in a marriage to have a separate trust, but we don't know anything about how the trusts will be set up or what assets will be placed into each trust, so we can't comment on the legality of any details.  In particular, there's no way of knowing whether you and/or your sister have the legal authority to create the trusts in question for your parents (although one would assume that's not an issue if a lawyer is involved).  Nor do we have the slightest way of assessing whether this is a good idea.  As noted in the prior response, your post tells us nothing about why the trusts are being created in the first place.

 

The one thing I can comment on is that having two trusts is inherently more complex and expensive than having one trust.  If the reason for having two trusts is because you and your sister can't help behaving like children for the sake of your parents, that's a really dumb reason to do it.  If the two of you can't get along, perhaps neither of you should be involved.  It's also not clear why it makes any sense to create a trust with a trustee who lives on the other side of the continent from the person for whose benefit the trust exists.

 

With all that said, I agree with the suggestion that you consult with your own attorney and that you make sure your priorities are in the right place before you do so.

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The idea of having two trusts is highly unusual, but that is the least questionable of the issues that might be involved.

 

Perhaps that varies from state to state; in the states I practice, it is not “highly unusual” to have the two separate trusts. Indeed, there are good reasons to do it that way in some circumstances. 

 

 

 

Second, I wonder why it is necessary to create these trusts in the first place.  Trusts, especially irrevocable trusts, are normally used as an estate tax avoidance technique.  That would imply that the value of the joint estate is in excess of the estate tax exemption which, as I recall, is in the neighborhood of $5,000,000 dollars. (I am sure Tax Counsel will correct me on that.)  If that is the case, the IRS might very well perk up its collective ears and query whether a last minutes creation of trusts by apparently incompetent taxpayers will be honored.  It would also require the filing of gift tax returns which might eliminate any estate tax savings.

 

 

I will note that the use of trusts for tax savings is certainly one popular use for them, but not the only one. As for federal estate tax, the most common type of trust arrangement for a married couple is the credit shelter trust. This type of trust would be considered in estate tax panning where the total assets of the couple plus the value of taxable gifts given during their lives exceeds the amount of assets that would be covered by the unified credit against federal gift and estate taxes. For 2014 the unified credit would allow $5,340,000 of assets of a decedent to pass free of tax if no taxable gifts had been made during the decedent's lifetime. I won't get into the details of how it works other than to say that the idea is to maximize the credit available to both spouses upon their deaths, which would if they both died in 2014 enable up to $10,680,000 of assets to pass free of the estate tax. (The unified credit amount rises each year based on inflation, so more and more assets will pass tax free as the years go on.) It is important to note, however, that the credit shelter trust does not have to be an intervivos (living) trust to work. It can be a testamentary trust (a trust created from the will of the decedent). There are other types of trusts that are used to address other gift/estate tax issues that are less common, and trusts that help to save state taxes in some states that still have death taxes. 

 

The reason for doing a credit shelter trust arrangement from an intervivos trust is not driven by tax concerns but rather a reason for using trusts that you did not mention: avoiding probate. Even if the couple has assets well below what would cause a federal estate tax issue, intervivos trusts are often used to help avoid the time and expense of probate. How extensive trusts are used for that purpose varies widely from state to state because in some states probate is fairly fast and cheap and thus the need for a trust to avoid it is much less compelling in those states. In states where probate is lengthy and expensive, the use of intervivos trusts to help avoid that is quite common, even for relatively modest estates. 

 

Another attempted use of such trusts is to eliminate the estate of the elderly in order to qualify for medicaid.  Rest assured that the medicaid folks have seen this before and will not be happy.  They will undoubtedly claim these trusts are fraudulent conveyances (look it up) and have the trusts set aside.

 

In the states that I practice, the creation of an intervivos trust for estate planning would not result in the state medicaid office trying to invalidate the trusts based on a fraudulent conveyance theory. Instead, the law simply provides a lookback period (typically 5 years) and counts all gifts made in that period of time, including gifts to trusts, as assets of the medicaid applicant. That then results in a possible denial of benefits for a period of time to account for those assets. It is my understanding that most states use a similar approach. 

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Are the trust(s) you wish to design going to be signed by your parent(s) as trust maker(s)?  Given their respective dementia and Alzheimer's-diagnosis, I have a huge concern with the question of legal capacity.  If, however, they have been determined to be disabled under any existing documents and amendments may be made for tax or other purposes, then the question of their capacity will not apply.  Things such as look-back periods for gifting and the expanding reach into irrevocable trusts for nursing home reimbursement (by some states) are changing with the times, so it sounds like there could be quite a few things to consider.  Just a few thoughts -- I just signed with this Forum and this topic popped up --

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Hi there,

 

It seems from the posters comments that there are some details regarding your parents' situations, as well as some question as to the reasoning for separate trusts in the first place. Please clarify for us in a follow-up post.

 

I would also echo one of the previous poster's suggestion that you consult with your own attorney. In the meantime, please feel free to take a look at FindLaw's estate planning section for some general background information. Good luck and hope to hear from you soon!

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Let's hope that the power of attorney was signed by one of the parents BEFORE having been officially diagnosed with dementia or alzheimers, because if it was signed after they were diagnosed then the POA could be illegal/invalid depending on the laws of your state, and your attorney would want to be informed if this was the case so he could double check to make sure no assets or beneficiary designations were transferred/changed by using only a POA.  If you can afford to, you should be hiring your own trust attorney to have someone to answer your questions or to get a second opinion from so you will be confident about these proceedings--if you did not hire the current attorney, then he is not representing your best interests but will give preference to what will benefit your sister, the person who hired him and he therefore can not remain totally objective.  You and your sister also need to be considering whether a conservatorship is needed in this situation.

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