Lately a couple of sad cases have crossed my desk, reminding me once again of yet another do-it-yourself (DIY) estate planning mistake - the secret trust. A secret trust is created when an individual entrusts property to another person with the understanding that the second person (let's call him the "trustee") should hold the property for the benefit of a third person (let's call him the "beneficiary"). The problem is, none of this is in writing. It's secret.
EXAMPLE 1: Here's a really common example. A couple is in a second marriage. They each have children from their previous marriages. Husband owns the home in which they live as his sole and separate property and wants to leave it to his children after he passes, but he does not want to leave his wife homeless either, so he leaves it to his wife in his will, if she survives him, with the "understanding" that she will leave it in her will to HIS children. Guess what actually happens. Yep. She leaves it to HER children, disinheriting her late husband's children.
Sometimes the surviving spouse does this intentionally, i.e. she consciously and willingly dishonors her late husband's wishes, and most of the time there is, unfortunately, nothing that husband's children can do to remedy this.
Sometimes the surviving spouse does this unintentionally, i.e. her will left everything to her children, of course, and when she inherited the house she forgot to update her will to make special provision for it to go a different direction.
Mom and dad have two children, a son and a daughter. Son is disabled. Knowing that son is going to have a tough time in life, mom and dad build a house for son. Son moves into the house, which is still in mom and dad's name. Mom passes and the house is now in dad's sole name. Dad is concerned that son will not be able to manage the legalities of home ownership on his own, so he leaves the house in his will to his daughter with the understanding that she will hold it for the benefit of her brother. Daughter honor's dad's wishes after dad dies, paying the taxes and insurance on the house while allowing brother to live there. Daughter passes without a will and her husband inherits the house. Daughter's husband is now trying to qualify for supplemental security income (SSI), which is needs-based. He can't qualify because he owns this home in which he does not reside.
But wait! It's not really his, right? He is holding it in trust for someone else, right? Yes, but how is he going to prove that after years of paying the taxes and insurance on the property as if it was their own (he late wife's and his).
Can he just "gift" it to his brother-in-law or a trust for his brother-in-law now (something that should have been done in the first place)? Yes, he "can", but that gift will disqualify him for SSI for several years.
If there any solution? Perhaps. Daughter's widower could petition a court to declare that he does not own the house outright, that he holds it in trust for his brother-in-law, i.e. it is not "his". But remember what I just wrote a few sentences earlier about daughter's widower trying to qualify for SSI. That means he is nearly broke and has low or no income. There is no way he is going to be able to afford an attorney to pursue expensive litigation.
Both of these sad scenarios could have been avoided with proper estate planning. If your situation is "complicated", do yourself and your family a favor and give us a call. The planning options are almost endless. For every complication there is usually a very elegant solution to ensure that your wishes are carried out without creating unnecessary complications or disappointments for your loved ones.