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FOR THE PAST FOUR years, I’ve been dealing with both a revocable and irrevocable trust that my parents created decades ago. In 2020, I knew little about trusts, and my elderly parents weren’t willing or able to share much information with me. In retrospect, I don’t think they fully understood the details of either trust, instead relying on attorneys and financial advisors.
Since then, I’ve learned a lot about trusts. I’ve come to feel they’re unnecessarily complicated and allow unscrupulous advisors to take advantage of well-intentioned, but financially and legally ignorant, clients. In addition, if the trustee is a financial advisor or bank, the management fees can be significant.
In a previous article, I shared what I went through to be named trustee for the irrevocable life insurance trust (ILIT) that my stepfather and mother created in 1999. Their original financial advisor was disbarred and sentenced to 32 years in prison in 2005 for stealing millions from the trusts and estates of his elderly clients.
The subsequent trustee for my parents’ ILIT resigned several years ago without naming a replacement trustee, and later passed away. It took me 18 months and significant legal fees to get myself named as trustee. The good news: I haven’t found any evidence of wrongdoing involving the ILIT.
My parents’ ILIT was built around a second-to-die universal life insurance policy. My stepfather died in 2021, but the policy’s benefits couldn’t be distributed until my mother passed away last July.
My stepfather told me that the ILIT was created to avoid inheritance taxes. The universal life insurance policy in the ILIT was for $700,000. In 1999, the federal estate tax exemption was $650,000. But by 2023, the federal estate tax exemption had climbed to $12.92 million. While estate taxes might have been an issue for my parents when the trust was created in 1999, they sure weren’t by the time they passed away.
After my mother died, I notified the insurance company and filled out its numerous forms. I also opened a bank account with the name of the ILIT and its tax identification number. The original insurance policy documents listed the trust as the policy’s beneficiary. The trust’s name included the first name, middle initial and last name of both parents, and was dated Nov. 2, 1999.
This all happened in the first week of September 2023. A week later, I received an email message from the insurance company stating that the trust listed as the policy’s beneficiary was simply the last name of my parents, and didn’t include their first names or middle initials. In addition, according to the company’s records, the trust was dated Nov. 3, not Nov. 2.
While these differences might seem minor, they aren’t in the world of trusts and trust bank accounts, where “details matter.” The bank wouldn’t accept any deposit into the trust account because that account and the insurance policy’s payout were titled differently.
I asked the insurance company to send me any documentation it possessed. It turns out the previous trustee—the one who didn’t go to jail—submitted erroneous paperwork in 2016 that resulted in the beneficiary name change.
Throughout this process, I communicated frequently with my attorney, who specializes in elder law. She was as frustrated as I was by this bizarre situation. We discussed going through the expense and time of rewriting the trust to match the insurance company’s documents. That would have cost thousands of dollars and taken several months to get through the legal system.
After several weeks of discussions, my attorney was finally able to get a claims specialist at the insurance company to understand our dilemma. The claims specialist shared this information with the company’s in-house attorneys. They realized the errors made on their forms in 2016 weren’t legal and quickly settled the claim at the end of November.
The lesson: It’s crucial to pay attention to estate-planning documents as we age and go through life changes. Attorneys and financial advisors retire or pass away—or, as I experienced, get arrested for fraud. You can’t create such important documents and then forget about them.
Instead, the documents should be reviewed every few years with a trusted estate attorney, financial advisor or family member—and ideally all three. If you don’t, it’ll be up to your beneficiaries to deal with the potential mess. Unfortunately, those that create the trust may be hesitant to share details with family.
I’m grateful for the generosity of my parents, and I know they didn’t want the settling of their estate to be so complicated. Still, I’ve had to devote significant time and money over the past four years to sorting things out. Indeed, my experience has prompted my wife and me to discuss our wishes with our adult children and their spouses, and we’ve provided them with copies of our important documents.
Scott Martin is a semi-retired family medicine physician associate (previously known as a physician assistant) and has been practicing medicine for the past 18 years. His previous career was in academia doing research and teaching at the University of Georgia. He and his wife enjoy traveling and spending time with family. Check out Scott’s earlier articles.
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My first HD article last year was about setting up a new estate plan, which includes trusts for us and for our daughter and names a fiduciary trustee. We have a good estate attorney and fiduciary, so we’re comfortable that things were done well. But you’re absolutely right that checking in regularly is the wise thing to do.
Our primary purpose for setting things up the way we did was to provide some long-term security for our daughter, who is about to turn 30. At this moment (in our early 60s), if something happened to both of us at the same time (and we do travel quite a bit, including abroad), she’d not only inherit our house and cash and our retirement accounts but also would benefit from our term life insurance policies. We each have two, and they end in 2025 and 2029. If our plane goes down on our next trip, she would suddenly be a wealthy young woman. (If we don’t die before 2029–less so!)
We have concerns about her managing a windfall and want to look out for her 60-year-old self after we’re long gone*. Having our estates roll right into her trust that will be managed by a trustee and will distribute in increments over time gives us some peace of mind that we’re doing the best we can for her.
*I guess not necessarily, though—when she’s 60, we’d be 93…and my husband’s grandfather lived to 102!
Thanks Scott for sharing your experience. It’s a good reminder for readers to be cognizant of these situations should they be involved later down the road.
My parents also set up a trust in 1999. Everything was titled appropriately. After the last parent passed away (two years ago to this day) the estate was settled easily. The only delay we had was getting the settlement from the life insurance company.
I constantly read people complaining about how expensive trusts are, but boy did my sister, who was my parents executor, wish my parents had one. They lived in NH which has a poor reputation for probate. It took a year and an exhorbinate amount of her time to settle their estate despite it being uncomplicated.
After seeing her go through this we couldn’t get to an elder law specialist fast enough to set up our simple trust.
I’m sure my children will thank us when it comes time to settle our estate.
A second huge benefit is privacy.
It’s important to distinguish between revocable living trusts — which are designed to ease the settling of an estate — and irrevocable trusts that involve the ongoing management of assets. It’s the latter that can be very expensive and that many families come to regret.
Thank you for that distinction Jonathan. My father used a revocable living trust for his modest estate (he was a widower when he passed), and it worked great. My sister handled it with his attorney, and there was not one unkind word in the process.
Arguably, Norman F Dacey started the trusts-for-the-little-guy craze in the 1970s with his book, “How To Avoid Probate”. I still have my copy in a closet. It included do-it-yourself forms for setting up trusts. Probate at the time was an onerous process in most states. Dacey went on the popular talk show, Donahue, several times to hype his book [and made a lot of money]. But most state legislatures have simplified the probate process such that with TOD/BOD/POD mechanisms, trusts may make little sense for anyone but the uber wealthy.
I set up my mother’s estate using these TOD/POD/BOD techniques and probate of her estate was not necessary at all.
Shame on me for using abbreviations without spelling them out the first time. BOD = Beneficiary On Death; many banks & credit unions will set up your account this way. David Lancaster below identified the other two abbreviations correctly. Apologies.