How to Deal with a Troublesome Trust Beneficiary
I am trustee for two trusts with my brother as beneficiary. The trusts require that I distribute 3% of the combined trusts’ value each year with discretion to distribute more. He is 62 years old in good health and I have an advisor who has invested conservatively. My brother is very difficult to deal with always requesting large distributions, most of which I have refused. He is very hostile to me and I am tired of dealing with him. I know that I can turn this over to a corporate trustee but I am inclined not to since he has a very bad history of dealing with money, including bankruptcy, two foreclosures, allowing girlfriends and spouses to take advantage of him. A corporate trustee would not know this history and I fear the money would be squandered in a short time.
The trusts’ language allows me to buy annuities and life insurance. My thought is to buy an immediate annuity that will last his lifetime with a payout that would be higher than what he currently receives. I would also use a portion of the trust assets to buy a single premium life insurance policy on his life that would have the remaindermen as beneficiaries. This would remove me from his constant complaints and accusations of mismanagement of his trusts and would provide him with a constant source of income for the rest of his life. Once he starts social security this year he would be receiving a total of about $50-55,000/year. Any thoughts if this is a wise plan and meets my fiduciary duty? I would want him to sign some sort of legal document that he understands this plan and holds me harmless going forward.
That’s an interesting concept and certainly has some merit. The potential problem with it is if circumstances occur during which your brother should receive no income. For instance if he were to require nursing home care, he might not be able to qualify for Medicaid coverage if he were receiving annuity income, or the Medicaid coverage might simply pay the difference between the annuity payment and the nursing home cost. With a trust, on the other hand, he could qualify for Medicaid coverage and the trust could pay for other services for him, such as regular visits from a geriatric care manager. Of course, the 3% mandatory pay outs would have to continue and that money would go to the nursing home.
Another alternative would be for you to serve as co-trustee with a corporate trustee. The corporate trustee would take on all of the heavy lifting, but you would still be involved to provide the new trustee with background and perspective.
In either case, I think you’re right to require that your brother sign off on the change. I’d probably give him a choice of the two options and advise him to seek legal counsel. This would give him a sense of control and further protect you from complaints in the future should your brother regret his decision.