Oftentimes, estate planners and elder law attorneys are faced with the challenge of trying to protect an aging client who is gradually descending into dementia or becoming emotionally needy, making him vulnerable to unscrupulous caregivers, friends and relatives. Typically, while the client is still in full control of his mental functions, he wants to ensure that his testamentary plans won’t be changed if he later becomes vulnerable. But he’s equally adamant about not stripping himself of control over his assets unless he’s certified as incapable of managing them (that is to say, completely disabled).

These competing desires create a serious dilemma: If the client retains the power to revoke or amend his estate plan, when he becomes vulnerable a third party might exert undue influence to persuade him to make changes contrary to his original (and presumably true) intentions. But depriving him of such power when he’s vital frustrates his desire for autonomy. Also, irrevocably transferring the client’s control to a fiduciary may create difficult gift tax issues.

A senior trust resolves these problems in a way that is acceptable to many clients. Indeed, financial advisors should consider suggesting senior trusts to elderly clients, and maybe even to younger clients, as a form of insurance against later vulnerability to undue influence.

It Happens

This general scenario is, unfortunately, all too common. The New York Times reported on one such instance on December 24, 2007, recounting the tale of an elderly man’s struggle with vulnerability. An engineer by training, 73-year-old Robert Pyle was accustomed to complete control over his affairs. However, when his wife died, he became withdrawn and seemed depressed—that is, until he met and befriended Wendy, a young neighbor and struggling single mother. Pyle encouraged her to get a menial job and began driving her to work every day. Over the next eight years, Pyle became increasingly generous, spending more than $650,000 to provide for Wendy. Too embarrassed to explain the situation to his family, he borrowed money until he was forced to sell his home and move in with his stepdaughter.

Pyle eventually filed suit under a California statute designed to protect seniors from elder abuse. He sued his mortgage brokers and banks, claiming they had defrauded him in helping him obtain loans they knew he could not afford. According to the Times, these types of lawsuits often settle. Sharon Merriman-Nai of the National Center on Elder Abuse told the Times: “Figuring out how to protect senior citizens from victimization, even when it’s caused by their own mistakes, is one of the biggest issues facing us right now…[but] we also have to figure out how to balance our desire to protect vulnerable seniors with their rights to autonomy.”

Because of Pyle’s unusual lawsuit, his story found its way into the press, but there are many similar situations that remain unpublicized. Pyle is one of many seniors whose situation emphasizes the seriousness of becoming vulnerable later in life.

Recently, a remarkably articulate couple came to our firm’s office seeking advice on these issues. Ralph, an 87-year-old successful author, and his wife Marjorie, 85 (these are their real names, used with permission), were living in a retirement community. Together they had three adult children, each of whom has one or more children themselves. Ralph and Marjorie were clear in expressing their desire that their property be divided up so that one-third was bestowed to each child (or descendants of a predeceased child), and that this plan never be altered by anyone—including their children. During the couple’s joint lifetimes, income and principal on their property would be payable to them exclusively. Gifts to children and grandchildren would continue to be made according to a pattern established over several years.

The couple wanted to retain full control of their affairs as long as they were both alive and competent. Ralph and Marjorie expressed their concern that after one of them died or became disabled, the other could become emotionally or psychologically vulnerable to the influence of a third party. If, in that situation, the spouse retained power to change the gift and testamentary plans, he or she might be prevailed upon to do so, frustrating the couple’s plans.

The Solution

As the clients requested, we’ve created trusts that become irrevocable and unchangeable when either Ralph or Marjorie dies or becomes disabled (an “irrevocability event”). Until that time, the trusts are revocable, and the couple retains full control of trust assets as sole trustees. The challenge for the estate planner is to design a trust that avoids a taxable gift to the children when the trust becomes irrevocable, but still limits the grantor’s powers sufficiently to protect the elderly person against third parties’ undue influence.

Our solution was for a special trustee to assume the role of co-trustee for each trust when an irrevocability event occurred. The special trustee—in this case, a cousin—would have to join with the grantor in any decisions regarding gifts, which were permitted to be made only to the grantor’s descendants. We call this structure a “senior trust.” It could be applied to a variety of irrevocability events identified by a client.

Few clients will walk into a financial advisor’s or a lawyer’s office and identify their need for protection during a future period of quasi-disability, as Ralph and Marjorie did. We recommend that financial advisors and estate planners let their clients know the senior trust is an option permitting them to balance the goals of autonomy with protection of the estate.

The preceding newsletter was adapted from an article in the June 2008 issue of Trust & Estates, a sister publication to Registered Rep.
*Raymond Zeitoune, an associate at the Law Offices of Celia R. Clark, PLLC, assisted in research for this article.