Case Study: Managing a Minefield

"The assets are taking a beating," said Goudy, 54. "If I had time, I'm sure I could become more knowledgeable. But I don't."

Being a trustee for a family member's money can be a tough job, agreed Geraldine Champion, a San Luis Obispo attorney who specializes in elder law and estate planning. The trustee is often second-guessed and blamed when problems happen. Taking on the job without having an investment background or professional help can be even more difficult and perhaps a recipe for disaster.

California recently raised its standards for trustees, holding them to higher standards and raising their liability if things go wrong, Champion explained.

"The fact is that the funds of the trust you're responsible for are being depleted fairly rapidly, and this is money that has no replacement source," Champion said. "Meanwhile, you also bear a heavy legal and fiduciary responsibility as the sole trustee."

Goudy's father made Goudy sole trustee to protect his wife from lawsuits. As an anti-abortion activist in Santa Cruz, Edith Manchester had been threatened with suits before her husband died.

But structuring the trust that way puts a larger burden on Goudy while making it difficult to do some of the financial planning that might be needed, Champion said.

Goudy believes that her father made her, rather than one of her siblings, trustee because of her position as first-born. "I'm independent and bossy and I've got a head" for learning, she explained.

An administrative assistant at Pasadena City College, Goudy works nights teaching English as a second language and hopes to move to a full-time teaching position later this year.

That doesn't leave her much time to study finance, and she describes herself as "an advanced beginner" when it comes to money matters.

Finding someone to give her professional advice about the trust proved difficult. The few financial planners who charge hourly fees typically want to take over managing the trust for an annual fee. Commission-based salespeople, on the other hand, recommended expensive annuities or other investments with up-front sales charges.

"It seems there is no low-cost way to get sound advice up front and then not have to keep paying annual fees that eat away at returns, such as in an annuity," Goudy wrote in her application for a Money Make-Over. "For those of us who want to 'buy and hold,' we need assistance at the beginning but not on an ongoing basis."

Grieving for her father, who died in 1998, has also made it difficult for Goudy to make decisions. She hasn't wanted to touch the trust's investments, which her conservative father placed almost entirely in utility stocks and bonds and in real estate investment trusts.

"It's old-fashioned investing," said Judith Martindale, a certified financial planner who reviewed the trust's investments. Previous generations prized utilities and real estate trusts for their supposed stability, but both sectors have become riskier in recent years.

Still, Goudy counts her blessings. Her siblings have been supportive--"mostly I think they're relieved that they don't have to do this." And her mother, at 80, is in excellent health.

Manchester lives independently and frugally in a paid-for mobile home; her only major expense, besides food, is the $340 a month she pays to rent her mobile home space, a sum that includes utilities. Manchester gets $374 a month in Social Security benefits, and Goudy transfers $500 to $600 a month from the trust to Manchester's bank account to pay bills.

The trust has been used for some larger expenses as well. At her children's urging, Manchester has taken trips to Hawaii, Massachusetts and Italy to visit siblings. The siblings also agreed to use some of the trust money to redecorate Manchester's mobile home.

"Dad didn't think that was important, but we did," Goudy said.

Those expenditures, plus the investments' decline in value, have reduced the trust by nearly 25% in the past year--far too rapidly for Goudy's taste.

One of the greatest financial threats Manchester faces is the cost of long-term care, both advisors said. Nursing home care costs an average $42,000 a year in California, an expense that would deplete the trust in about six years.

Goudy's family has experience with the cost of long-term care. A wealthy great-grandmother's estate was greatly depleted by around-the-clock nursing, and a grandmother spent years in an expensive nursing home, she said.

Private health insurance does not cover most nursing home costs, and neither does Medicare. Long-term-care insurance, which does pay for nursing and home health care, would cost thousands of dollars a year and be prohibitively expensive for an 80-year-old woman whose total income is less than $12,000 a year.

Medi-Cal, the joint state and federal health program for the poor, will pay for custodial nursing home care, but Manchester would have to give away or spend most of her money to qualify. Giving away assets can create other problems if not done properly; not only would Manchester lose the use of the funds, but she could become ineligible for Medi-Cal for up to 30 months if she gives away money that could have been used for her care.

Champion specializes in so-called Medi-Cal planning, saying it can help families preserve a hard-won nest egg while allowing an older relative to receive government assistance. She said her typical client is, like Manchester, a widow with $200,000 or less in assets.

The trust, however, would make such planning difficult. Champion advised Goudy to consider going to court to undo the trust, so that the assets could be more easily transferred or spent. The way the trust is written now, Manchester is entitled only to the income from the trust, although Goudy can dip into it for Manchester's health, education, support and maintenance.

Goudy said she would present the option of Medi-Cal planning to her mother and her siblings but predicted that the family would reject it.

It's not that the family objects to Medi-Cal; Goudy herself used it when her husband was in graduate school and she was pregnant with her daughter, who's now 25. But both Goudy's parents had strong religious and moral beliefs; her father was a Quaker and a conscientious objector during World War II. They transmitted a belief in living their convictions, and in self-reliance, to their children, Goudy said.

"I'm willing to look at it and listen to the experts, but that's probably the way we all would feel," Goudy said. "I think that's the way my dad felt, that you should do what you can to be self-sufficient and use those services only when it's necessary."

Champion believes that the family's resistance to Medi-Cal planning is simply naivete about the realities of caring for an elderly person who runs out of money.

"It's only theoretical to them," Champion said. "When it's really happening, they'll feel differently."

But Goudy thinks not. The siblings have already discussed chipping in to cover their mother's expenses, and Goudy knows the financial burden would fall disproportionately on the siblings who are better off, including herself.

"Some of us have assets and income. Some of us do not," Goudy said. 'We should not depend on the government to do everything for us if we've been given something to work with."

Goudy needs to move quickly, however, to ensure there is something to work with, financial planner Martindale said.

The trust is far too concentrated in far too few investments, Martindale said. Right now, about 75% of the money is invested in a single sector--utilities--with $13,000 in one utility stock, $66,500 in a utility stock mutual fund and nearly $51,000 in a utility bond fund. Much of the rest is invested in three REITS, with about $11,500 in cash.

Goudy should not try to make up for lost ground, however, by plunging recklessly into the stock market now, Martindale said. Manchester is more vulnerable to stock market drops than a younger, working person, because she cannot earn more money to make up for stock losses.

Instead, Goudy should keep a large amount in cash--at least $25,000, and preferably $50,000--so she can pay for a year or more of nursing home expenses without having to cash in other investments.

Martindale recommended the remaining money be split evenly between a total market bond index fund and a balanced fund that invests 60% in stocks and 40% in bonds. The balanced fund would give Manchester a small but manageable exposure to stocks, while the bonds in the portfolio would provide current income.

Thus restructured, the trust is likely to provide more than the $7,000 or so in annual income that Manchester needs. The excess can be spent on more trips and redecorating, donated to favorite charities or saved for a future rainy day.

Goudy expressed relief at the help and advice she got, saying she had been dismayed that there were few low-cost options for people in her position who needed help setting up a basic portfolio.

"I wish I had thought of a Money Make-Over much sooner," she said.