A Recipe for Disaster… Improper Planning for Stepchildren

It is no secret that,  when parents get remarried, one of the biggest issues, either financially or emotionally, is dealing with stepchildren and step-parenting. The issues become even more apparent when the biological father or mother dies. A recent case shows what happens when there is little planning or thought for the issues that arise upon such a death.

In Dowdy v. Dowdy, Dennis, who had 3 children prior to the marriage, and Betty, who had 2 children prior to the marriage, were married. In 2006, they created a family trust which owned 2 parcels of real estate. Dennis and Betty were the settlors, trustees and beneficiaries of the trust while they were living. The trust named certain children of both as successor trustees and the trust provided that distributions were to be made to all children at both of their deaths.

In 2008 Dennis died. In 2011 Betty amended the trust and removed her stepchildren as beneficiaries and as trustees. Betty sold the real estate and Michael, one of Dennis’ children who was named as a successor trustee, argued that  the seller should make the check payable to Betty AND Michael, as co-trustees. The title company only made the check payable to Betty, as trustee.

Michael then filed a petition in the lower court asking for an injunction to preserve the proceeds of the real estate and argued that the amendment was invalid as it was signed after Dennis’ death and that the trust was irrevocable after Dennis’s death.  The lower court granted the injunction.

The appellate court reversed the lower court and determined that Michael was not entitled to an injunction and that he could not prevail. The court reviewed the trust document and determined that IF Betty was the sole trustee and sole life beneficiary, then she could sell the real estate.

Michael, however, argued said that he was a co-trustee with Betty under the terms of the trust.

The trust language provided… “[i]n the event of the death of each of the Initial Trustees…the Settlors nominate and appoint…Michael….and ….”(emphasis added). Michael argued that he would step in after the death of Dennis because the language meant that he would step in at the death of EITHER initial trustee. The court determined that the successor trustees  would be trustees ONLY at the death of BOTH of the initial trustees.

Further, other language in the trust document provided that, after the death of “each of the Settlors” (emphasis added), then the successor trustees were to distribute the assets to all the children. If this language was interpreted to mean that on the death of the first Settlor, then all assets would be distributed, such an interpretation would negate other trust language which provided that the trust assets could be used for the benefit, support, and maintenance of the initial primary beneficiaries, Dennis and Betty, or the survivor (emphasis added).

Thus, whether or not the amendment was valid, Betty always had the right to sell the real estate and use the proceeds.

ADVICE:  While this case did not directly address whether the amendment was valid, you can see the perils when a  married couple (with stepchldren) are trustees and beneficiaries of a trust. ANY  time you have stepchildren involved, then you must carefully consider what happens when the biological parent dies. I strongly recommend providing for those stepchildren in a separate manner so as not to involve the step-parent if, at all possible. You could use life insurance or other assets to provide for the biological children.

New Word of the Week: Vel Non.. a Latin term for the existence or nonexistence of an issue for determination. For example, in the above case, the court stated that “Betty was the sole beneficiary of the trust regardless of the validity vel non of the 2011 amendment”.   Thus, whether the amendment was valid or not, Betty was the sole beneficiary.

GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY! Cool

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