Fiduciary Solutions Symposium Recap

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by Kelly Cooper

Last week, we held our first Fiduciary Solutions Symposium.  We want to thank each of you that came and participated.  We enjoyed seeing all of you and getting a chance to catch up with you over breakfast.

For those of you that couldn’t attend, here is a brief recap.  When we discussed topics that we wanted to present at the Symposium, we kept coming back to the constantly evolving and changing nature of our practices.  Whether it is taxes, ADR or changes in state laws, things never stay the same.  As a result, we decided to discuss a variety of topics and the trends we are seeing each day in our practices.  It was difficult to narrow down the topics to two hours of content, but we ended up discussing the following issues:

  • Digital Assets
  • Social Media and Use in Litigation
  • Gun trusts
  • Civil Unions/Same Sex Marriage and related tax issues
  • Reformation and modification of trusts and decanting
  • Apportionment and allocation of taxes and expenses in administration
  • Baby boomers and the “Silver Tsunami”
  • Migratory Clients and Differing State Laws
  • Trends in Alternative Dispute Resolution
  • Assisted Reproductive Technology

 We had so much fun that we are taking the show on the road and will be in Salt Lake City on November 12th.  We hope to see you there.

Charities are Beneficiaries Too!

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by Jody H. Hall, Paralegal

“No, you cannot have it.  The trust is a private document” – Well, maybe, but not to the exclusion of the beneficiaries, and I mean ALL of the beneficiaries, named in that testamentary instrument.

Prior to returning to Colorado a few months ago, I worked in the Legal Department for a national charity where the responsibility of my team (totaling more than 8 attorneys, paralegals and staff) was to represent the charity’s interests in trust and estate matters around the country.

Coming from a background as a trusts and estates paralegal for well-respected law firms, I was absolutely shocked at the number of times that attorneys or fiduciaries (both professional and individual) would respond in the negative to a request for a copy of the will or trust or financial information regarding the gift of which we had just received notice.  There seemed to be this prevailing attitude that, because we were a non-profit organization, we would simply take whatever we were given or what was left over and be grateful for it, even in large trusts or estates where the designated gift was a portion or entirety of the residuary estate.  Unfortunately there was not a consistent understanding that if Charity XYZ and Cousin Sue are each to receive one-half of the residuary estate, they need to be treated equally.

Most charities do not intend to be adversarial or difficult.  Any money spent on legal fees reduces the ultimate charitable gift of the donor; however, they have a fiduciary obligation to the ultimate beneficiaries of their particular mission to ensure they receive everything to which they are ENTITLED!  In Colorado, that means a copy of the terms of the trust which affect the interest; other jurisdictions require a complete copy of the instrument, including codicils and/or amendments.  Almost every jurisdiction requires providing at least some information about the assets or accountings.

As with many things in life, upfront communication is usually the best policy.  My experience working for a “professional beneficiary” has reinforced and taught me several things about good estate and trust administration communications.  Provide an initial notification as soon as possible at the beginning of the trust or estate administration.  Provide periodic updates.  If there are assets that may take some time to sell, litigation or any other factors that may delay the distribution, let your contact know and they will calendar their system accordingly.  I know that I was less likely to question or challenge things when I received regular contact from the attorney or fiduciary.

So if the Decedent has been deceased for several years and you are just now sending a check for several hundreds of thousands of dollars as their first notification of the gift under a will or trust, do not be surprised if the charity requests additional information (including, but not limited to, the testamentary documents, an inventory or list of assets and an accounting) before signing a waiver or release.  After all, charities are beneficiaries too!

Description or Condition?

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by Kelly Cooper

Lawyers that regularly litigate in the probate world always have an improbable story to tell.  Here is one of those stories that ended up in front of the North Dakota Supreme Court last year: 

A couple, Lee and Robyn, were engaged and planned to be married on July 18, 2009.  On June 26, 2009, Lee and Robyn signed a prenuptial agreement that required Lee to make gifts to Robyn and her daughter upon his death. 

Also on June 26, 2009, Lee executed a Will that contained the provisions to comply with the requirements of the prenuptial agreement.  The Will gave property to Robyn, describing her as “my wife, Robyn.”  The Will also stated, “My spouse’s name is Robyn Risovi and all references in this Will to “my spouse” are to her only.”  However, a footnote followed stating, “This Will has been prepared in anticipation of the upcoming marriage of …Lee Paulson and Robyn Risovi set for July 18, 2009.” 

Lee died on July 15, 2009 – three days before the wedding. 

Before you read any further, answer this question: should Robyn receive the gifts under the Will even though she was not yet Lee’s wife?

Technically, one of the questions before the North Dakota Supreme Court was whether the term “wife” being used to describe Robyn in the Will resulted in a conditional gift or whether the term “wife” was a merely a description.  In addition, the North Dakota Supreme Court had to determine whether the prenuptial agreement, which was not effective since the marriage did not occur before Lee’s death, had any impact on the interpretation of the word “wife” in the Will. 

The North Dakota Supreme Court held that the Will was unambiguous, the term “wife” was only descriptive, and ordered distribution to Robyn.  The Court held the prenuptial agreement had no effect on the interpretation of the Will for a variety of reasons.

This is just one more example of the ways that the best laid plans are derailed by unexpected events.

Estate Planners Alert: Are Your Clauses Coordinated? Are Your Terms Clearly Defined?

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by Carol Warnick

What is the definition of the "residuary" of a trust or a will? Is it clearly defined in all of our documents or do we assume that it will be easy to figure out? Or do we even think about it since we clearly know what the residuary is? I have seen several instances lately where the actual residuary was not well-defined in the document and thus became the subject of very expensive litigation.

It is not just a matter of who gets what assets, but since taxes and administrative costs often come out of the residuary, it is important to make sure it is clear what that means. In one instance I have seen, it was clearly defined where taxes were to be paid from, but very unclear as far as administrative expenses are concerned. In some estates or trusts, that might not be such a big deal because the costs may be fairly nominal. However, there may be unexpected circumstances. (What percentage of our trusts/estates actually don't have something expected arise?) What happens if the trust or estate, through no fault of its own, becomes embroiled in litigation between the beneficiaries or if the fiduciary has to defend the document against an undue influence claim? The allocation of administrative expenses in that situation can create additional litigation even after the first lawsuit has been resolved.

Remember that the attorneys chosen by a beneficiary to litigate such an issue very often are not lawyers with a background in trusts and estates. As such, they are not familiar with what many of us consider the "common sense" assumptions we make with trust and estate administration. General trust and estate concepts that we work with every day will not be recognized by attorneys outside of this practice area. When other attorneys in a litigation case ask me for authority for such concepts, the actual authority is often hard to come up with. "Because we all know that is the way it is," is not a helpful comeback. In addition, how many of our state court judges actually have a trust and estate background?

It may make sense to have someone else in your office read through the will or trust (perhaps with a prepared checklist) to look for problems like this that may arise. Often, when drafting, we become so engrossed in the document and adding in all of the "special things" that our clients request in their documents, that we don't see it when provisions don't track in the document. Often we have added in other language, and possibly deleted a sentence or two here and there, and unwittingly created another problem that we don't see because we are too close to the document. Such a problem may not only relate to defining the residuary for the purpose of tax and cost apportionment clauses, but could also easily create issues with tax clauses, conflicting powers given to the fiduciary, unintended consequences related to trustee removal and replacement, or other types of problems. Another option would be to let the document sit for a day or two and then reread it. This has to be done with a critical eye, however. It is still easy for the drafting attorney to not look critically at how the provisions might be interpreted or to think about what unintended circumstances might occur. As drafters, we know the family (or so we think) and we just tend to look to see how the document will play out in the circumstances we expect to occur.

The more trust and estate litigation I do, the more critical I become about the documents that I draft. If there is a way for a clause to be interpreted differently by a beneficiary who has a beef with the way the assets are being divided, you can bet it will be read that other way and will provide fodder for a lawsuit. It behooves all of us who draft to look for clauses in our documents that might be unclear or might be the subject of multiple interpretations. In doing so, there will be less work for those of us who litigate these cases, but we will all have happier clients years down the road.

Trying to Do the Right Thing – Ethics and Estate Planning

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by: Kelly Cooper

Many readers of this blog are familiar with (or even attended) the CBA’s Trust and Estate Section’s Estate Planning Retreat two weeks ago in Snowmass Village.  As always, the Retreat was a great time to reconnect or catch up with our colleagues who work in the estate planning and administration areas and attorneys who do estate planning, administration and litigation.  More importantly, each year the Retreat presents an opportunity for attorneys from all over the state to discuss issues and exchange ideas with each other in small groups.  This year, Jean Stewart and I hosted one of those small discussion groups.  Our discussion group focused on ethics and the conflict and confidentiality issues that arise during the course of representing a family – from the initial representation of a couple for estate planning, to representing the family business, pre-nuptial agreements for the couple’s children, divorces, the differing treatment of children (Greedy, Needy and Speedy), and eventually, the disability or death of a client.

For those who were not able to attend the Retreat (or just not able to attend our session), here is a summary of the issues that received the most attention during our four sessions:

  •  Do you represent couples jointly for estate planning?  If so, assume one of the
    client shares information with you and does not want the other half of the couple to know that information. Do you have an affirmative obligation to share that information with the other joint client? Do you only have to share the information if it affects the estate plan? Do you only have to share the information if it requires you to end the engagement?  Do you only have to share it if the other client asks for advice that requires you to use the information that was shared?  What conversations should you have with the couple before they become clients regarding these issues?  What type of written correspondence do you send discussing these types of issues?
  • Should you represent the family business?  This discussion did divide some of our groups and it gave rise to an important practical question.  Even if the ethical rules permit the representation, is it worth the effort required to work through the potential conflicts and the trouble that may arise in the future? 
  • Can you (or should you) continue to represent a couple during a divorce or individually after the divorce is final?  Should the terms of the couple’s separation agreement factor into your decision?
  • Should you represent one of the couple’s children, at the request of the couple, to draft a prenuptial agreement?  What if the couple is paying for your services?  What if the child’s view of the prenuptial agreement is different than the couple’s?
  • Can you (or should you) represent the couple in the sale of the family business to one of the children? 

I always enjoy the Retreat’s discussion group format because it provides a unique opportunity to pose interesting questions, pick people’s brains, challenge the status quo and hear real life war stories (there are some doozies out there!).  My thanks to all of you that participated in our discussion group and those that supported the Retreat. 

Payment of College Expenses for Beneficiaries – To Pay or Not to Pay?

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By Kelly Cooper

Fiduciary clients regularly ask me what expenses can be paid out of a trust.  Generally, this requires an examination of the terms of the trust and the applicable law.  However, even after considering the terms of the trust and applicable law, trustees are often stuck in this grey area trying to determine what expenses may be paid.  As a result, I am always on the lookout for cases that might provide guidance for trustees in exercising their discretion.  Recently, a case from New York caught my eye.  Matter of McDonald, 100 A.D. 1349 (N.Y. App. Div. 4th Dep’t 2012).

In this case, the grandfather created a trust for his twin granddaughters and appointed his daughter (the twins’ mother) to serve as trustee.  As trustee, the mother refused to pay for the twins’ college expenses and to purchase a car for their use.  The twins filed suit and asked the court to remove their mother as trustee and to award attorney fees.

The trial court removed the mother as trustee, bypassed the named successor trustee and appointed an attorney (who was not named in the trust) to serve as successor trustee.  The trial court found that the mother had failed to observe the terms of the trusts and had abused her fiduciary responsibilities and awarded attorney fees to the twins.  The mother appealed and the trial court was unanimously reversed.

In reversing and finding in favor of the trustee, the appellate court cited to Section 50 of the Restatement of Trusts and identified the following factors:

The terms of the trust.  The relevant terms of the trust were stated as follows: “[t]he Trustee shall pay or apply to or for the use of each such living grandchild of mine so much of the income, accumulated income and principal of such share at any time and from time to time as the Trustee deems advisable in [the Trustee’s] sole discretion not subject to judicial review, to provide for such grandchild’s maintenance, support, education, health and welfare, even to the point of exhausting the same.”  The trust also provided for fractional distributions to the twins at ages 30 and 32 and termination of the trust at age 35.

Other resources.  The court noted that one of the twins’ college expenses were paid in full by public benefits and that the other twin had failed to even complete the necessary applications for public college benefits and tuition assistance.  Further, the twins both had New York 529 College Savings accounts and the balances in those accounts were sufficient to pay college expenses.

Friction.  The appellate court noted that there was friction between the mother and her teenaged daughters, but found that mere friction or disharmony between a trustee and a beneficiary is not sufficient grounds to remove a trustee.   The appellate court quoted another New York case, stating, “If it were, an obstreperous malintentioned beneficiary could cause the removal of a competent trustee through no fault on the latter’s part.”

Trust Protector As A Fiduciary – To Be Or Not To Be

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by Carol Warnick

As the use of trust protectors has become more and more popular, one issue continues to surface. That is the question of whether or not a trust protector is a fiduciary or can be insulated by the trust language from being a fiduciary. It is an important question because of the duties and potential liability that could be imposed on a trust protector who is considered a fiduciary.

To set the stage, a brief discussion of trust protectors in general is in order. Some trace the beginnings of the concept to the world of off-shore asset protection trusts. Others point to thoughtful estate planners in the early 1980's who were trying to create flexible or "amendable" irrevocable trusts. While its origin is interesting, what a trust protector can and does do is obviously more important. A trust protector is a person who holds a power that when invoked is able to direct the trustee in matters relating to the trust. The power can be either a negative one or a positive one. It would be negative if it was merely the power to stop or veto some proposed action the trustee wanted to take. It would be positive if it allowed the trust protector to take action proactively, such as the power to add beneficiaries, remove or replace trustees, or even amend or terminate the trust.

Is it too trite or "lawyerly" to answer the question regarding whether or not a trust protector is a fiduciary by stating it depends? Alexander A. Bove, Jr., in his thoughtful article, "The Protector: Trust(y) Watchdog or Expensive Exotic Pet?"1 believes that the answer to the question depends not only on what the powers are that are given to the trust protector but also the identity of the trust protector. One example he gives is that of the settlor's daughter being named the trust protector and being given the power to add or delete beneficiaries. Pursuant to the power, the daughter deletes her siblings and adds her husband and children. Bove argues that in such a case, the settlor would have contemplated such action by his daughter and so the power should be considered a personal, not a fiduciary power. By contrast, however, Bove states that if the same power were given to the settlor's attorney as a trust protector, and the attorney deleted the settlor's children and added his own, it would be considered an inappropriate use of the power because it was clearly not what the settlor would have had in mind. Thus, the same power given to the settlor's attorney could only be exercised in a fiduciary capacity because he would clearly have to bear in mind the purpose of the trust and the settlor's intent.

Powers such as the power to remove and replace trustees, power to change situs of the trust, and certain types of powers to amend the trust are more likely to be powers held in a fiduciary capacity.

Some state legislatures have jumped into the fray with statutes that attempt to give direction on the question. For example, in Wyoming, 2 the trust protector would likely be considered a fiduciary. In Alaska, the statutes provide that the trust protector has no fiduciary responsibility when performing the functions of a trust protector 3.

Absent state law on the subject, as is the case in Colorado and most other states, the question will likely ultimately be resolved by thoughtfully considering both the choice of the trust protector and successor trust protectors, as well as the effect of the particular powers granted to the trust protector. Bove suggests that, as a general rule, if the trust protector is the object of the settlor's bounty, and there is no language in the trust to suggest otherwise, then the power is probably held in a personal capacity. However, he goes on to state that if the trust protector is someone who serves in an advisory capacity to the settlor – not someone the settlor would likely name as a beneficiary – then the power will likely be held in a fiduciary capacity.

There is, however, a school of thought that holds (or perhaps hopes) that simply stating in the trust document that the trust protector will not be considered a fiduciary will settle the issue. Bove states that such an analysis is like saying "regardless of what type of animal walks through these gates, it will be deemed to be a horse." He vigorously argues that despite such language that may be included in a trust document, most trust protectors are intended to exercise their powers for the benefit of the trust, and as such can't escape the reality that comes with it.

The debate is far from being over. More states are likely to pass statutes relating to the question. Since the use of trust protectors, especially in long-term trusts, is increasing exponentially, the issue will be coming before judges who will be asked to rule on the issue. In the meantime, it behooves all of us who may be either drafting trusts with trust protectors, helping administer trusts where there are named trust protectors, or litigating trusts where such powers are involved, to not only consider the issue ourselves but to also discuss it thoughtfully with our clients.

1Bove, Alexander A., Jr., The Trust Protector: Trust(y) Watchdog or Expensive Exotic Pet? , Estate Planning, Vol. 30, No 8 (Warren, Gorham & Lamont, August 2003).
2"Trust protectors are fiduciaries to the extent of the powers, duties and discretions granted to them under the terms of the trust instrument." W.S. § 4-10-711.
3 “Subject to the terms of the trust instrument, a trust protector is not liable or accountable as a trustee or fiduciary because of an act or omission of the trust protector taken when performing the function of a trust protector under the trust instrument.” AS Sec. 13.36.370(d).

Civil Unions Legislation Effective May 1, 2013

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by Kelly Cooper 

In 2012, a law that would have permitted same-sex partners to enter into civil unions in Colorado failed.  In this year’s legislative session, advocates for civil unions were successful and on May 1, 2013, the Colorado Civil Union Act will become effective. 

The Act provides same-sex partners the benefits, protections and responsibilities given to spouses under Colorado law if they enter into a civil union.  In addition, the Act provides that civil unions, domestic partnerships and other legal relationships between same-sex partners created in other states will be treated as civil unions in Colorado.

Even though the Colorado Constitution (by a 2006 amendment) limits marriage to a man and a woman, the Act provides that all Colorado laws granting rights to man and woman spouses will now grant the same rights to partners entering into civil unions.   

This means, for example, that if partners wish to dissolve their civil union, they will need to file for a legal dissolution and that the laws regarding maintenance, parenting time, child support and property division will apply.

The Act does not alter the impact of the federal Defense of Marriage Act (DOMA), which provides that marriage is only between a man and a woman.  As a result, federal laws granting rights to spouses will not apply to partners in a civil union.  The United States Supreme Court is currently considering a challenge to DOMA.  An opinion is expected from the US Supreme Court in June 2013.  We can expect more developments and changes in this area in the near term, so stay tuned.

 

Good Lawyers With Good Clients

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In 2008 the Colorado Legislature amended the Colorado Probate Code to add Part 5 to Article 10 of Title 15.  Part 5, often referred to as “The Judges Toolbox,” contains procedures available to Colorado courts and interested persons to check the actions of errant fiduciaries and to do so early and efficiently.  We recommend this recent article in the ABA Probate & Property publication on national trends: Shutting Down a Fiduciary Who Is Misusing Trust Assets

No Contest Clauses in Trusts and Powers of Appointment: Is Colorado’s Silence an Oversight or an Opportunity?

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by Kelly Cooper

With the increasing diversity in the make up of today’s families, many estate plans now treat family members differently or disinherit certain family members completely.  When there is unequal treatment or a disinheritance, estate planners often include no contest clauses in their documents to try to avoid costly disputes and litigation after a client’s death.  Under Colorado law, a no contest clause is only enforceable against a beneficiary if the beneficiary lacked probable cause to bring a contest.  An in-depth discussion of these clauses and the probable cause exception to enforceability was posted to our blog last week, to read it, click here.  We expect the use of these clauses to increase and for clients to request these clauses as they become more familiar with them through media reports about the use of them in celebrities’ estate plans (e.g. Michael Jackson, Brooke Astor).

The topic for today is whether a contest clause in a trust agreement is subject to the same probable cause exception as a contest clause contained in a decedent’s will.  Since a revocable trust is considered a will substitute, some will argue that there is no compelling reason to treat a contest clause in a revocable trust any differently than one in a will.  While Colorado’s probate statutes are clear that a probable cause exception exists for contest clauses in wills, Colorado’s trust statutes do not contain any similar provision.  Is this silence an oversight or an opportunity for planners?  

Colorado’s silence on the question of contest clauses in trusts made me wonder how many states had statutes addressing contest clauses in trusts (enforceability and/or exceptions to enforceability).  The answer is thirteen (and is found in a great 2012 State Laws Survey cited at the end of this post) – Alaska, California, Delaware, Florida, Hawaii, Indiana, Michigan, Nevada, New Hampshire, Oregon, Pennsylvania, South Dakota and Texas.  According to the survey, another nine states have case law addressing the question of the enforceability of contest clauses in trusts, but Colorado and twenty-five states have no statute or case law on this issue.  The Uniform Trust Code is also silent on whether contest clauses in trusts are enforceable.  In light of the fact that numerous states have already addressed the issue of contest clauses in trusts, it can be argued that Colorado’s silence is purposeful.

Colorado law is also silent on the issue of a decedent can place a condition on the exercise a power of appointment.  For example, a decedent’s will may state that he exercises a power of appointment to give assets equally to A and B if no contest is filed, but that he exercises the power to give all of the assets to A if B files a contest.  While this is a conditional exercise of the power of appointment, it reads very similarly to a contest clause.  Unlike revocable trusts, which are often will substitutes, a power of appointment is not a will substitute and the argument that a power of appointment should be treated like a will may well fall short.  In addition, powers of appointment are generally exercisable in regard to trust assets, not probate assets.  Here, Colorado’s law silence on the enforceability of contest clauses in trusts may provide a real opportunity to avoid the probable cause exception, but also causes uncertainty for fiduciaries and administrators of trust assets subject to powers of appointment.

In light of the uncertainty in this area, planners may want to consider drafting trusts instead of wills for those clients who wish to include contest clauses.  When possible, planners may also want to include powers of appointment to allow for greater flexibility and to assist their clients in exercising powers of appointment to implement any plan of unequal treatment among beneficiaries.

For more information about the differing state laws in regard to contest clauses, see a great survey “State Laws: No-Contest Clauses,” T. Jack Challis and Howard M. Zaritsky, March 24, 2012.