Author Topic: Estate planning question  (Read 677 times)

frugaldrummer

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Estate planning question
« on: October 27, 2019, 07:43:02 AM »
The recent deaths in my family have lit a fire under me to get my estate planning in order. Iím looking for ideas however on how best to handle my house in my plan.

Situation: divorced, 3 young adult children, none have any money, all have challenges (Aspergers, mental health issues). Two work but one doesnít make enough to live away from home, the other is going through a rough patch in his job due to health problems (does live away). Third currently unemployed.

Current Assets: $550k in 401k and IRA, house worth $575k with current mortgage balance $170k. No current life insurance policy.

Ex-husband (their father): assets probably worth $1.6 - $2.0 million but has a much younger wife (heís 59, sheís 42, kids are 27-31. He has some kind of a trust but I assume given his wifeís age my kids might never see an inheritance from him or not until they are very old, since the wife could theoretically outlive my kids. Living with their dad in the event of my death is not really an option.

Goal: divide my estate evenly between my three children.

The problem is that the equity in the home (about $400k) is too much if I were to give the house to one child - they would have to buy their siblings out to the tune of $100k and would not qualify for a mortgage of that size. But two of my kids are currently living with me and I wouldnít want them to have to turn around and sell the house immediately if I were to die suddenly. Thereís enough to do after someone dies without having to get a house ready for sale.

I expect to live for a long time but want a plan that would work if I got hit by a bus tomorrow . Looking for ideas about how to handle the house part:
Split the retirement accounts evenly and put the house in a trust so any kids who wanted to could live in it for the next five years (while paying mortgage and taxes) but then it must be sold and split three ways or one buys out the others? Would preserve a home for the two living with me but seems like a rats nest of potential problems. 

Leave the house to one with the understanding that he will buy the other two out of their share in two years ( again, not likely to be able to afford the mortgage although if he had rental income from renting extra bedrooms during that time might allow him to qualify; would leave him cash poor though.)

Buy enough life insurance ($800k) to even it all out and be able to give a paid off house to one and $600k to each of the others. This would be expensive as Iím early 60ís but might only be needed for ten years.

Iím sure there must be other solutions Iím not seeing. Please weigh in but remember my goal is to divide things evenly, and no one childís needs are greater than the others. (Btw this is not the family home they grew up in but the house I bought 9 years ago after my divorce. )

Dee18

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Re: Estate planning question
« Reply #1 on: October 27, 2019, 08:05:44 AM »
My cousin recently died. She had a live in caregiver for the last 5 years.  The terms of her will are that the caregiver can live in the house for up to 12 months (must pay utilities, but that is all). Then house will be sold and proceeds distributed among various heirs. I think giving your children a year to decide on new homes would be reasonable.  It doesnít sound like a $575,000 home would be the right choice for any of your children.

ctuser1

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Re: Estate planning question
« Reply #2 on: October 27, 2019, 08:22:12 AM »
Is your ex also has a trust then presumably he is also thinking about this issue.

If so, it would be far more useful if you were to work with him and see if you can cover complimentary aspects of the kids needs.

Estate planning is a rather complicated topic with many aspects to consider. I have not really seen this forum to really discuss things on this issue in the level of detail that you *need* to get into. Bogleheads has several experts on this topic. Bruce Steiner (bsteiner) is a practicing attorney who regularly posts there. Then there is one guy who used to work in the trust departments of banks.

I would recommend that you talk to your ex, learn as much on this topic as possible by reading forums (like will take you 6 months to a year of intensive research) and then go together to some estate planning expert specializing in special needs. The expert will cost between $1500 to < $10k, depending on the kind of estate/trust setup you design - but that will likely be money very well spent. I know this forum has a strong DIY theme, but this is a topic where you do not want to DIY. You want to learn a lot (so that you can ask the right questions) and THEN you want to engage the experts.

Some of the topics you (and your Ex) will encounter and need to learn about:
1. Special needs trust.
2. ABLE accounts and how they interact with SNT (#1).
3. SSI eligibility, and how that interacts with #2 and #1.
4. SSDI-DAC, and how to optimize that.
5. Medicaid eligibility (very state dependent) and how to retain eligibility with #1, #2 and #4.
etc. etc. etc.
 

frugaldrummer

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Re: Estate planning question
« Reply #3 on: October 27, 2019, 09:49:22 AM »
None of them quite qualify as disabled. The Aspergerís is very mild and he works full time. Anxiety, depression, addiction and in one, a joint hypermobility issue are the other things. We are in a state with expanded Medicaid. All are capable of working but none are likely to achieve financial security without help.

My ex will not adjust his plans to accommodate our kids; I believe he has a trust so that his wife is cared for on his death, but once she dies the rest goes to our kids (rather than a new husband of hers). Pretty standard. And as I stated his young wife might very well outlive my kids so Iím not counting on their inheritance from him helping them.  Our relationship is not cordial enough to discuss this with him.

Your questions do bring up an issue I hadnít thought of though - IF one of my kids were to become disabled in the future, how would their inheritance affect their qualifying for aid? Does owning a home or an inherited 401k disqualify you from aid? Would a trust protect them?

Iím definitely going to use an estate planner, just trying to educate myself first about my options so I can get it done efficiently with them without paying extra.

frugaldrummer

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Re: Estate planning question
« Reply #4 on: October 27, 2019, 10:03:25 AM »
Dee 18 - where we live this is a median price home. For my oldest son (mild Aspergerís) the house might be a good thing - heís extroverted and could rent a couple rooms to nerdy friends, that would cover property taxes, utilities and pay half the mortgage - would be cheaper than rent. A two bedroom apartment type condo in our area would be $350k and up. None are likely to want to leave the state.

Iím seeing though through this discussion that if my goal is for them all to be financially ďsafeĒ if I die in the next ten years, I may want to add a ten year term life policy. If Iím not here to guide them to self sufficiency Iíd like them to have enough of an inheritance to buy a home or have their retirement secured.

SwordGuy

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Re: Estate planning question
« Reply #5 on: October 27, 2019, 10:32:46 AM »
If they can't afford to live on their own, they can't afford to be living in that house and paying mortgage payments while they are there.

Sell the house and let them use the proceeds the way that they need to.

Keep it simple.

ctuser1

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Re: Estate planning question
« Reply #6 on: October 27, 2019, 11:22:07 AM »
My ex will not adjust his plans to accommodate our kids; ...
...Our relationship is not cordial enough to discuss this with him.
Could it be possible for your "estate planning attorney" or whoever you hire reach out to him and ask to either speak with him or his attorney? With the sole aim of avoiding unintended conflicts in the two estate plans that can cause issues later for the kids?

Your questions do bring up an issue I hadnít thought of though - IF one of my kids were to become disabled in the future, how would their inheritance affect their qualifying for aid? Does owning a home or an inherited 401k disqualify you from aid? Would a trust protect them?
There are many such issues that are not obvious at the first glance. :-( You would need to read the forums several months to a year to make sure you are even aware of all such more common gotcha's and issues. Then, armed with that "general" knowledge, you need to talk to a professional whose job is to bring out all questions/issues specific to your circumstances and state and other jurisdiction specific laws. There is no short cut if you want to do it right.
If you do your research properly (i.e. don't waste attorney's time explaining obvious stuff), then I was told it will cost between $1500 (cheap, mostly one-size-fits-all estate plan/trust setup etc) to somewhere around $10k (detailed estate setup). Your needs will likely fall somewhere in this range, possibly on the higher side due to the special needs considerations.
Coming back to your specific question - house ownership *can* interfere with SSI and medicaid eligibility depending on state laws, and yes it is possible to use trusts to avoid these specific issues.

I am no lawyer. I'm just repeating what I have read in the forums. So take it for what it is worth.

« Last Edit: October 27, 2019, 11:24:29 AM by ctuser1 »

frugaldrummer

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Re: Estate planning question
« Reply #7 on: October 27, 2019, 12:05:43 PM »
In my state the house would not interfere with medicaid but would possibly affect SSI.

As for the comment about home ownership, rent for a two bedroom apartment in our area is $2,000 per month and up. If son kept the house and rented out a couple bedrooms, he could cover much of the mortgage and taxes with rent. Yes heíd have to tighten his belt to afford utilities etc. but I think he might be better off than renting.  Still, if I took out a life insurance policy so that he would get some extra money that could pay off the mortgage and even things up with his siblings that would be even better.

Guess I better get on a diet so I can get down to a more favorable (less expensive) life insurance health category .

Catbert

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Re: Estate planning question
« Reply #8 on: October 27, 2019, 01:21:41 PM »
Are all your children capable to handling a large sum of money?  If not, you might need to set up some sort of trust to dole out money monthly. 

Another thing to consider when dividing up assets is that taxes work differently for different assets.  Life insurance isn't taxable; traditional IRA/401k are taxed as income when distributed; basis in the home is re-set upon your death.

frugaldrummer

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Re: Estate planning question
« Reply #9 on: October 27, 2019, 02:11:30 PM »
Yeah good point about the taxes - I will run an analysis to make sure all come out pretty even (both my parents were CPAs, I know how to do the math :)    )

All three are capable of handling their own finances. The one with a history of addiction could always relapse, but is quite stable at the moment, and Iím reluctant to single him out as the only one needing to have his money controlled by someone else. I could put everyoneís inheritance into a trust but Iím likely to outlive any responsible family member who could be trustee.

TVRodriguez

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Re: Estate planning question
« Reply #10 on: October 27, 2019, 05:36:35 PM »
All three are capable of handling their own finances. The one with a history of addiction could always relapse, but is quite stable at the moment, and Iím reluctant to single him out as the only one needing to have his money controlled by someone else. I could put everyoneís inheritance into a trust but Iím likely to outlive any responsible family member who could be trustee.


I would likely recommend setting up a revocable trust (and pourover will) for yourself, consider putting your assets in the trust during your life (not the retirement accounts, which must be owned individually), consider naming the three kids as equal beneficiaries at your death, and have each of their shares be held in trust with distributions at the discretion of the trustee.  A good trustee can decide at that time, perhaps with some financial, legal, and/or accounting advice, whether to pay out the beneficiary's share or to keep it in trust and pay it out over time.  A good trustee can take into account whether any distribution would affect any benefits the child receives or whether addiction is an issue.

The bolded part above is the sticky issue you and a lot of other people face.  Some of my clients who have good relationships with their exes choose to name the ex as the trustee for their common children.  Others name family members and friends in a list, sometimes 5 people deep.  Others opt to name a bank or trust company, but they have to be careful to find one that will take on a smaller trust.  Sometimes they can be named as a co-trustee to serve with a family member or friend.  That way the friend can assist but not be fully responsible for all paperwork (tax returns, accountings), and the friend can also point to the trust company if they want not to be blamed for not making a distribution or something.  But of course the bank will take 1% or more in assets under management annually.

I will say that I would not leave the house to just one child, and I would not leave specific instructions about whether to sell the house or not, as you cannot predict what will be the best route at that time.  If you name them all as equal beneficiaries, then at least they would each have equal rights. 

As for the retirement accounts, I often have clients name adult children individually in percentages, and that way the children can turn the IRAs into their own "stretch IRA," but if any of them may need to receive government benefits, I would talk to an elder law attorney in your state to determine if owning an IRA would interfere with those benefits.  Also, know that if you name the child as the bene of an IRA, they may not choose to stretch it but may choose to cash it out and pay the tax due--and if they are suffering from an addiction, then it's all gone.  So in that case, it may be better to name the trust as the beneficiary and lose the ability to stretch it.  Protect them from themselves.

I almost NEVER recommend leaving specific assets to specific people because what you own today may change tomorrow.  I handled an estate where someone had specifically left one account to one niece and another account to another.  Then she liquidated one of the accounts to get a better rate, and she died before she could rewrite her Will.  So the niece who was supposed to get that account got bupkus.

Dave1442397

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Re: Estate planning question
« Reply #11 on: October 27, 2019, 06:26:10 PM »
My neighbor's mother died and her will stipulated that her son could live in the house as long as he wanted. Unfortunately the son has issues that prevent him holding down a job, so three years later my neighbor finds out that he hasn't paid the taxes since his mother died, and nothing has been maintained, leading to water ingress and other problems.

She finally got him out of the house, spent six months clearing it out and fixing it up, and sold it. She said by the time she paid the back taxes (NJ, so think $10k/year), all the other unpaid bills, including all the repairs, there was nothing left. It was just a big hassle for everyone.