Hey everyone, Today I am talking to Eugene Choi of Dunham and associates. Dunham offers a trust trilogy which consists of a IRA charitable trust, an IRA replacement trust and a special situations trust. Since most people know how the first 2 trusts work, I wanted to focus on the special situations trust. If you don’t feel comfortable giving all of the assets in your IRA or 401(k) or even your non qualified assets to your kids on day 1 because they don’t know how to manage money well, here’s a good way to put guardrails on your trust with a lot of flexibility. Let’s get right into it.
Eugene, can you tell me what a special situations trust is?
A special situations trust is specifically for that, a special situation. If we’re using an IRA as an example, let me give a personal story. My friends name is Rachel…let’s call her Rachel, her father had a very large IRA and tragically passed away all the sudden cause of some heart conditions and Rachel was the beneficiary of his IRA, and so Rachel received a very very large lump sum in an inherited IRA, she wasn’t very good with money and she lives in Nashville and this was a couple years ago when the Nashville housing market was booming, it still is, but she decided to take out all the assets out of that IRA and buy a house. Now, great she has a house but she wasn’t aware of the financial repercussions of taking up all of those assets out on day one because that put her into a tax bracket where the next year when she filed taxes, had an extremely hard time dealing with that and she was super stressed out and it wasn’t a good situation. A special situations trust allowed or can allow Rachel‘s dad to be able to say, you know what?, I want to put guard rails on my IRA assets. My daughter Rachel is still going to be the beneficiary but I’m a little worried that she’s not so good with money, or let’s say she had substances abuse issues or gambling issues, so I only want my IRA assets to be used to pay for my kids mortgage if they own a home. If they don’t, I want her to only be able to take out $1000 a month or something like that and then at the end of the inherited IRA time frame, they can take out everything but it puts guard rails for IRA owners to be able to decide how they want their money to be disposed of for their beneficiaries.
What are some other ways we can use a special situations trust?
A special situation trust is as creative as the owner of the trust wants to be able to get. So, again, what we’re doing is we’re changing the beneficiary of an IRA to the special situations trust. Let’s say I have three kids. One of them has special needs, one of them had gambling issues and the other one was fine, she was my golden daughter, my golden child, she’s super awesome, so with a special situations trust, I have the flexibility to say, for my son with special needs, I want to make sure that he’s protected and doesn’t lose his government benefits. That can easily be written in a special situations trust. The second individual that had gambling problems, I could say, I don’t want my son to be able to get any money. All that I want to be able to provide that I’m giving to him is these assets can only pay for his utility bills and I got his utility bills for the rest of his assets, how ever long they last. My third daughter that’s really good with money, she’s my golden child, give her $3000 a month, she can do whatever she wants with it I don’t care, you can give it to her no barred. So, that’s what a special situations trust is. It gives the owner the ability to control the assets from the grave to protect their loved ones from themselves and you can put provisions with individuals with special need on there and so there is a lot of flexibility of what you can do with a special situations trust.
Eugene, if a client is interested in doing something like this what is the process like?
The process is extremely simple. The client meets with you, Paul, you guys fill out a client questionnaire to write down their wishes and needs, send it to us at Dunham Trust Company, we will…give us a time, we’re going to send you an adoption agreement with all of the information on there and if it looks good to you and the client, you write us a check and we will send you the trust document in about a week and then you change the beneficiary to the trust and you’re done.
Are there any restrictions?
No, All we’re doing is changing the beneficiary of an IRA or your non retirement account. This special situations trust is revocable and let’s say 10 to 15 years down the line you wanted to change your mind and you say you know what?, I don’t want to put guardrails on these anymore for my children, they got their life together, I trust them, I just want to give it to them and let them enjoy it, just change the beneficiaries back children and all we’re doing because we’re changing the beneficiary during your lifetime, you use the IRA as you normally would. You still take out your RMD’s, you can still take out more principal and do whatever you want and go on vacations and buy whatever you want and it’s only at your death does this trust take into effect.
I want to thank Eugene Choi of Dunham for taking time out of his day to help explain what a special situations trust is. The trust trilogy is another value add we can offer our clients at a very affordable price especially when compared to an estate planning attorney. It’s important to note that I am not paid anything on any of these trusts but I am paid on a fee basis for the money that I manage inside of the trust.
That’s it for this one. If you would like to more about the Dunham Trust trilogy, please don’t hesitate to give us a call