Protecting property from unreliable owners


May 19, 2002|By Jonathan A. Azrael

I recently received a letter from a man in Bel Air who put his mother in a nursing home but wanted to follow her wishes of having her home transferred into his sister's name.

His concerns are that once he transfers title to the home, his sister may lose it, either by failing to pay the taxes or by some other financial mismanagement.

He also mentioned that he wanted to set up an escrow account at the time of transfer so that his sister would be required to have funds automatically withheld from her paycheck so that she would be able to pay real estate taxes, insurance and minor maintenance items. And any funds not used at the end of the year would be returned to her.

Ultimately, he wants to know if all of this is viable.

It is not unusual to have concerns about turning over valuable property to someone who is financially irresponsible. The property may be real estate or personal property, such as securities. The recipient may be a child, sibling or other relative. The issue is the same: How to let the recipient have the benefit of valuable property, with the possibility of their wasting it or losing it?

The most common solution is to transfer the property to a "spendthrift trust." In this case, a lawyer would prepare a legal trust document, naming the man as the trustee and his sister as the beneficiary. The trust instrument would state that the man holds legal title to the property for the use and benefit of his sister.

The real estate would be conveyed to the man as trustee by a deed. The property could not be sold or mortgaged without his consent, and the proceeds of any financing or sale could be held by him in trust and used for his sister's legitimate needs.

The trust is called a "spendthrift trust" because it includes a provision that would prevent his sister from selling or transferring her rights as the trust beneficiary. The trust assets would be completely protected from his sister's current or future creditors.

His sister could agree to set up an escrow account, in the name of the trust, to pay real estate taxes, insurance and maintenance expenses. The trust also could allow his sister to decide by her will who will receive the trust assets upon her death. Alternatively, the trust instrument could designate the ultimate beneficiaries.

As a trustee, the man would have a legal responsibility to use the trust assets for his sister's benefit. A successor trustee could be named in the event the man dies before his sister or becomes unable to serve as trustee.

The man should consult an attorney who is experienced in preparing trust agreements to get more complete information.

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