56

My brother has a problem with money; twice personally bankrupt, 3 marriages and 2 kids (from the 2nd marriage).

Our mother is getting old and getting worried. She worries that if she wills him money, he will spend it and nothing will be left for the grandchildren. If she wills the money directly to the grandchildren I worry he will suffer in old age through lack of funds as they might not want to look after him.

Is there some vehicle where the money could be placed, that would allow him a comfortable existence in old age living off the interest (but unable to touch the capital), that would then be automatically transferred to his children?

We are talking about 500,000 GBP - not a terrific amount of money, but something at would make 10,000 GBP @ 2% return.

EDIT: We looked at "Trusts". But these typically have a management fee of 50K+ a year. Considering the amount of interest/revenue generated by the estate, this is not a viable solution.

  • 4
    Can she split the money in 3 part (him and the two kids)? – the_lotus May 27 at 17:28
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    I do not believe all trusts, have a management fee of 50K/yr. This is surely a question of how much management is to be done. – Quora Feans May 28 at 16:37
  • 2% return!!!??? You really should do a little research into what university endownents are and how they are invested... – Harper May 28 at 19:08
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    500k is not an insignificant amount. That is life-changing for most people. – JPhi1618 May 28 at 19:08
83

You do need a trust - but the fee is for professional trustees. If your mother appoints some people she trusts as unpaid trustees, then it's free. You are the obvious choice, but she will need some more trustees in case you die or lose competence before your brother dies.

The trust should be written that the capital is held in trust for the grandchildren, but the income is to go to their father (or similar). Your mother might want to consider a clause allowing some portion of the capital to be released to the grandchildren before their father dies with his permission (deposit on a house or similar). She might not either - that could easily set up a situation where a child puts pressure on the father, or where the father pressures the child to ask for a release of capital and then give it to the father.

My inclination would be to reduce the discretion of the trustees as much as possible, so that your brother heaps all his opprobrium on your mother (who will be dead, so won't care), rather than on the trustees.

This is not something that can conceivably be DIY'ed. Your mother will need a proper solicitor (not a legal assistant or something). The will will cost a four figure sum - this is not a trivial area of law.

Depending on everyone's ages, it might be appropriate to appoint the grandchildren as trustees (or appoint you now, and then change that to the grandchildren when they are both adults - it can't be more than 18 years from now, which isn't that long). Choice of trustees is definitely something your mother should consult the solicitor on.

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    A trustee that isn’t a trust company need not be entirely unpaid. The trust can be written to allow for anything from compensation for expenses to compensation for time. Also while this may be a workable solution, there is a significant chance of creating a lot of animus between the brother and the trustee. There is only so much someone can do to protect someone from themself. I agree that reducing the trustee discretion is a good measure in this case. – T. M. May 27 at 17:14
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    Like T.M. says, when appointing yourself as the trustee, think about the relational impact it might have between you. Maybe it's something that doesn't matter to you, but it does have the potential to make him hate your guts. Money's like that sometimes... – Cullub May 28 at 13:47
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    Just to emphasise what the answer says, DO use a lawyer for this. Trust law is complicated and you can easily screw up in a multitude of ways if you try to do it yourself (e.g. in some circumstances the beneficiaries can replace the trustees with "friendlier" ones, or can even collapse the trust) . If you just use the lawyer for the initial setup, it should be a relatively small one-time fee relative to the amount of money in the trust fund. – JBentley May 30 at 12:53
7

When you say 'wayward' I assume he might have a drinking/gambling/addiction/loose women problem, and that any sum of money on his hands won't last long.

One further possibility you might want to consider is to make him life tenant of a property (see Wikipedia for an intro). That would grant him the right to live at a certain apartment, but not be able to sell it. He could also rent a share of it, and at least get some cash in hand.

Also assess his situation as to how much state pension he could get at the official gov site - how much, whether you can increase it, and so on.

This will guarantee at least that he does not become homeless and completely destitute. With the NHS as almost for free, he would have his basic needs covered.

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    If you go down this route, I think you'll still need some protected cash reserves and source of income to fund ongoing property maintenance and any the sort of large emergency expenditure property can occasionally require. I'm aware of a case where this hasn't been thought about and the life tenant lives a hand-to-mouth existence in a large but rapidly crumbling ruin. If they had more flexibility, they could sell it, downsize and release some capital to generate income, but they can't. – timday May 28 at 23:33
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    @timday in that case the property needs to be actively managed. The safest way to have an actively managed property is to have a complex with many rental units; he gets one. You can't have emergency funds, because hand-to-mouth types are really good at having "emergencies"! – Harper May 30 at 13:56
  • @Harper: we don't know the details, and I was imagining the worst about her brother when I answered (basically a black hole for money). Anyway, half million should suffice for 2 units, however, maybe he's the type that would feel patronized in such a scheme. – Quora Feans May 30 at 15:41
  • @QuoraFeans The hand-to-mouth feeling patronized is even more of a certainty than continuous "emergencies". The human ego is simply not built to endure the continuous fail that is bad money habits. – Harper May 30 at 15:44
6

It looks like the United Kingdom has annuities. It might be possible to set up an escalating annuity with a provision that on the death of the beneficiary the principal would go to his heirs (presumably his children).

Another possibility might be a lifetime annuity combined with life insurance. Or a lifetime annuity with some of the money and some of the money left to the children at whatever age.

I would try talking to life insurers about this.

  • 3
    The UK does have annuities - but they are of the sort where you give the insurance company £lots, and they give you £little every month until you die. When you die, they get to keep the capital. – Martin Bonner May 27 at 12:47
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    Be careful that without a proper trust dictating who controls the annuity, if the annuity is passed on to the son, the son may be able to sell that annuity back to the provider, and obtain a lump sum to spend as he pleases. – Grade 'Eh' Bacon May 27 at 15:31
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    @Grade'Eh'Bacon No matter how locked down the annuity is, the brother can still sell his future stream of income for a lump sum. There are always people willing to give bad deals to give someone a lump sum. – T. M. May 27 at 17:16
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    @T.M. If the annuity income is passed through a trust, the brother would not be able to sell the rights away on his own. – Grade 'Eh' Bacon May 27 at 17:57
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    @Grade'Eh'Bacon Not sure about the UK, but in the US selling the right to structured settlements is apparently common, usually on unfavourable terms. 1 2 – CodesInChaos May 27 at 20:47
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The answer is a trust, but the kind you want is quite specific. You want to ask a solicitor to set up for you, what is called a protective trust.

In the UK, that's a name given to a trust whose specific intention is to prevent the beneficiary from wasting the trust money that's intended to support them, and to "insulate" the money from any claims, if they get into debt or bankrupt. Typically the beneficiary is a relative one wants to be sure of long term supporting, like ones child, so it remains intact even if they mess up badly or get into debt, or might fritter it away or spend excessively, rather than measure it for long term use. It's exactly what you want.

But where you are mistaken is in how a trust works, because you don't need a lawyer or trust manager to manage it, or their fees. A trust can be managed by anyone, or any group - the trust deed specifies how it is to be managed, and you can specify that to match your needs.

You will want an lawyer to draw up a trust deed and advise on how to word it, to meet your needs, but that's a one-off cost and should be anything from £1500 - 7500 ish, at a guess, depending on the work involved and fee rate of the firm. The trust deed itself will say how it's managed, and what costs are to be permitted to be incurred, and the solicitor will make suggestions and ask how you want it to work, and be managed, as part of drafting the trust deed.

Without guessing at your needs, this is an example of what such a trust might be like (in layman's terms), although its obviously not intended to be exactly how you need it:

The sum of £____ is to be put into a protective trust, for the benefit of.Mr XXX, of Address YYY, and, at the trustees sole discretion, any partner, spouse, or descendant of XXX. The trust is to be managed by 3 trustees - my cousin AAA, my sister BBB, and my grandson CCC. In the event of their resignation, incapacity, or death (insert here rules for how new trustees are chosen).

Mr XXX or his appointed representative shall be entitled to attend and participate in any discussion about the use of the trust funds or the management of the trust, to appoint an auditor, to obtain answers to reasonable questions, and to have full access to minutes and records, to receive prompt copies of all communications sent to trustees, and to be notified of all matters pertaining to the trust at the same time as other trustees, but shall be entitled to (no vote/a deciding vote only) in any decision of the trustees.

(Aim of trust, how funds shall be used, if they can be pledged or used as security, exceptional circumstances, reversion when XXX dies or what if he marries or has kids, procuring professional advice, paying tax, investments, expenses, other stuff).

Signed as a deed

Me

Witnessed by:

Whoever

You want a decent solicitor who will draft it with care. But the end result will be that if you have family or others you trust, you can leave them to manage it thereafter, rather than a professional firm. Just make sure the beneficiary has the rights they need, to ensure that they can't get screwed out of anything and can have some kind of say if desired. See my rough example above for some of the rights you might consider. Your solicitor should cover this area more specifically after discussing it with you.

4

A trust is what you need.

However a trust which costs £50k/pa to manage is either ripping you off or for management of +£5 million in assets.

I would suggest you start with an Accountant (not a lawyer) to investigate setting one up. Note: any decent accountant will give you a free 15-30min initial consult

You are going to need an accountant to prepare the tax reports for the trust each year anyway. Anything they can't do, they can advise how to (e.g., ask your lawyer to do xyz)

A decent accountant should have template trust constitutions/deeds for exactly this scenario (or one very similar).

Cool, So you are gonna get a trust, Now what?!?

I would suggest splitting the inheritance into N pots. One for each benefactor. Since you or your brother may end up with another kid, you need to be able to re-balance the pots. Given that, make sure you have a clause to that effect in the deed.

It is very important to keep separate pots (bank accounts, etc), to make management easer and so that any hard feelings (which turn into accusations of mismanagement) don't jeopardising the children's inheritance.

Each 'pot' is invested into an index fund. An index fund is a good investment for this kind of thing. Low fees, diverseified (so spreading risk), and historically have 'good' returns (7-11%).

Unless you have a compelling reason (e.g., experience) just use a normal bank to buy the index fund shares; don't go through a broker or financal adviser (or ask another question here on Money SE on the best way to buy index funds for a trust like this). You should be able to find an account which has no annual fees, doesn't charge a commission on returns or growth (like a financial adviser might), only charging brokerage when you buy or sell the shares.

The children's pots should be setup to reinvest profits back into the fund. Your brothers pot should pay out into a bank account nominated by him.

Note: not reinvesting the children's portions is effectively bleeding (stealing) away their inheritance to inflation

Have a trust rule that when the child turns 18, at the trustees discretion, they may release some of their pot, for something significant (e.g., house deposit, or say £10-15k for a gap year 'Grand tour') and/or start receiving some of the returns as cash. However I would first walk them through the compounded growth from the initial inheritance. It would be a wise idea to teach them the benefits of investment. (Since they probably won't get to learn that from their father)

When the children turn something like 21-24 (old enough to not be under undue influence of their father, and mature enough to manage 'winning the [inheritance] lottery'); have a rule that gives them full control of their pot. Perhaps at that time, also let the brother cash in their pot, so you can wash your hands of that part.

There is only so much you can do to help someone manage their money. I think the above plan, gives a good balance of control and easing the children into dealing with their inheritance, while protecting the inheritance from bad financial judgement.

I would also suggest having your mother draft a letter outlining that they have split the inheritance N ways 'the same for all' but your brother gets the "bonus" that they can get the interest out early. That way your brother can't contest the will; saying that they are getting cutout unfairly. Which is a risk you really want to avoid.

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    The fact you say "$50k", and "lawyer" rather than "solicitor" makes me suspect you are American. In the UK, a financial advisor can advise how to invest the funds, but the OP absolutely will need a solicitor to draw up the will and the deed of trust. I don't think an accountant would be appropriate to do either (unless they were also a financial advisor, which some are). – Martin Bonner May 28 at 7:53
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    @StianYttervik ??? My friend who is a chartered accountant was a partner at Deloitte. There's no way she would waste her time on financial advising. – Martin Bonner May 28 at 8:28
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    @MartinBonner hah. I rewrote the sentence mid comment, it was supposed to be the other way around. Mea culpa. But, to be fair when you are a partner at an accounting firm, you are not doing much accounting - you are telling others to and then signing their work afterwards =P – Stian Yttervik May 28 at 8:35
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    As an American, I have no idea what UK fees are, but a top-drawer trust law firm charged me less than $500/hour to set a trust up. GBP 50,000 sounds like a serious misunderstanding of the request. – Andrew Lazarus May 28 at 23:47
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    @AndrewLazarus In the UK at least, professional trustees often charge high fees because they take on a great deal of risk in terms of personal liability. I'm also guessing that in OP's case he has been offered an investment management service rather than merely disbursing income. Regardless, £50k is pretty crazy. You could hire a full time investment fund manager in that ballpark. – JBentley May 30 at 19:01
3

First, all due respect, if you're talking 2% returns and £50k/year for management, then you should recognize your own limitations: your own knowledge of money has its limits, and that is relevant because there are lots of strategies available that are beyond your experience. Of course, that is a very hard thing to hear, because money habits are deeply ingrained psychologically.

How endowments work

The idea of having a lump-sum support your brother is very solid. It's not far from an endowment - which is a funding strategy used by universities and other not-for-dividend entities. An endowment is a pile of money that makes money. The "made money" is reinvested into the endowment (as a hedge against bad years and inflation), and a prudent amount of 4-7% is drawn off to fund projects. The investment strategy closely scrutinized by experts, and must adhere to a reliable standard.

Endowments take advantage of the fact that the scary thing about stock investing is actually volatility, the tendency to go up and down abruptly in the short term. In the long term, markets always go up at a very healthy pace. And that is typical: investments with the highest average growth also have the highest volatility. An endowment manager doesn't care about volatility because she's playing a LONG game. Not only can she be in stocks, she must be by law, because that's where the growth is. Allowing an endowment to rot away in a 2% bond would get her dragged in front of a magistrate.

An endowment is investing for a "some back every year, forever" whilst a trust serves a person with a finite lifespan - so it's not quite the same. It's prudent to start backing out of the volatile stock market as the person gets old enough that the market wouldn't have time to recover from a downturn before the money is needed. Or, the fund could be managed as a "forever fund", and simply assigned to their children.

If you read Pride and Prejudice, and hear about how Mr. Darcy was a "man of 20,000 pounds a year", that's more or less how that worked. The "endowment" wasn't generally traded stocks like today, it was other holdings; but the point is that "endowment" is owned by the family, he inherited it, and he will pass it on to their progeny.

Set up a trust - but it's an arms race

I discussed the endowment so you can have a foundation of what to expect from a trust. Since it serves a financially irresponsible person, the financial engine is similar, but the wrapper must be somewhat different.

First and foremost, it must be protected against squandering. I hardly need to tell you not to give him access to the lump-sum. However, beneficiaries want to spend. They tend to view themselves as the "victim" of a trust, and they really want to bust the trust and get to the underlying lump sum. Discouraging the stupid from busting their trusts, is precisely where the "Fable of the Goose that lays Golden Eggs" came from.

Your brother will likely be actively solicited by winklers (best word I can think of) who will pay a lump-sum to buy the rights to his future trust income. He is then free to squander the lump-sum. This is exactly the fate of many lottery winners who try to protect themselves by selecting a yearly annuity - the linked book was written by a former winkler. Yikes. The trustee is then obliged to make the check out to the winkler, and the brother gets nothing. It's like an anti-endowment that cancels out the endowment, except it's extremely inefficient, with the winkler collecting as much as 85% of the value because they tricked the brother. (thanks CodesInChaos).

For instance, one potential way is for the trustee to have the legal right to suspend or cancel payments at any time. Now, since the payments aren't guaranteed, the winkler won't do business with your brother, because the winkler would know the trustee would stop payments rather than let the winkler have them.

Here's my point.

This area of law is an arms race between lawyers working for trustees and lawyers working for winklers and angry beneficiaries trying to bust the trust. You need to find a lawyer who is very practiced in this particular area, and is "up to speed" on all the strategies used by both sides. This won't be an annual expense (much), but it will be a one-time expense.

Real estate is very tricky

Remember, you have a trust beneficiary who feels cheated by the trust, wants the lump sum, and has unlimited amounts of stupid at his disposal. If you use real estate, that can go wrong a bunch of ways.

If you give him the deed to the house and a stipend to care for it, that stipend will be mismanaged. The $50/month he gets to put into a "roof fund" will be squandered, so when the $20,000 roof is needed, he will be destitute.

He will likely mortgage the house to the greatest extent possible, and again squander the lump sum.

If the trustee manages an emergency fund for such repairs, one of the mechanisms that keeps stupid people broke is that whenever they have money, they suddenly start having emergencies best cured with cubic money. If they were broke and their smartphone breaks, they pay a friend $30 for his old phone. If they have $1000 and their smartphone breaks, that never occurs to them, and they honestly believe their only option was to get a new iPhone X. So his knowledge of the existence of the emergency fund will result in an endless stream of broken appliances etc.

If the trustee is actively managing the trust fund to that degree, then it becomes a battle of wills between brother and trustee, and it becomes very personal. What happens when the brother starts showing up at the trustee's house at 2AM, and the trustee says "enough, get someone else"?

Free things aren't respected. The brother will tend to trash the house, which will be a real problem for the trustee, and will threaten the trust value.

If you must do real estate, it needs to be at arm's length -- probably the best way is to own a large multi-unit building, e.g. 8 apartments, and give the brother reduced rent (so he values it) in an apartment, otherwise a normal rent contract, with normal expectations from the property manager -- except perhaps with the apartment having a right to tap his trust payments for damage. The first time he busts up a door and sees his trust payments drop £100/month, he might stop doing it. Or he harasses other tenants and the property manager handles it like he would any other tenant. Then the brother is free to live there (assuming he doesn't get evicted), or live somewhere else. Because it's a multi-unit building he's paying for, it's not personal.

Financially dumb people don't appreciate free things. But they sure know the value of a rent-controlled apartment.

1

Advice here to look into a trust is generally good. That would be the safest way to ensure that your brother does not end up destitute. But I'd strongly recommend paying for an independent trustee rather than taking that job on yourself. Even if that trustee is merely a trusted family friend. I've seen that scenario play out in several families I know, and there's no better way to poison a sibling relationship than to setup that kind of dependence. Consider also that your brother may run into wife #4 or 7, who may be more legally astute than he is, and make sure the trust would retain absolute control of the money, even if she has quintuplets

  • What do you mean by "the trust would retain absolute control of the money"? A trust is a legal relationship between trustees and beneficiaries, created by a settlor. It is not meaningful to talk of "a trust" controlling anything. It is the trustees who control the trust fund, using the powers granted to them in the trust deed, for the benefit of the beneficiaries. However, it is worth pointing out that a beneficial interest can normally be bought, sold, used as collateral, etc. in the same way as any other asset, and the OP (and his lawyer) should give consideration to this. – JBentley May 30 at 21:02

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