Contracts to Make Wills or Trusts

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by Carol Warnick

Does the fact that a husband and wife create “mirror-image” wills or trusts mean that they have entered into a contract with their spouse to maintain the dispositive provisions in the document?  The law in Colorado is very clear that no contract exists merely because the documents are “mirror-image” or reciprocal.

Pursuant to Colo. Rev. Stat. § 15-11-514, a contract to make a devise may be established only by:

(i) provisions of a will stating material provisions of the contract, (ii) an express reference in a will to a contract and extrinsic evidence proving the terms of the contract, or (iii) a writing signed by the decedent evidencing the contract. The execution of a joint will or mutual wills does not create a presumption of a contract not to revoke the will or wills. (emphasis added).

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Trump Foundation Admits to Self-Dealing

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by Kelly Dickson Cooper

The rules and regulations surrounding the operation of family foundations contain traps for the unwary and prohibit self-dealing transactions.  We regularly help families navigate the complex rules regarding self-dealing transactions for private foundations.

These self-dealing rules tripped up the Donald J. Trump Foundation, which has admitted that it has engaged in self-dealing.  How do we know?  A private foundation is required to file a Form 990-PF each year and that return requires a foundation to answer questions regarding its activities and transactions.  The following question caused issues for the Trump Foundation: “During the year did the foundation (either directly or indirectly): Transfer any income or assets to a disqualified person (or make any of either available for the benefit or use of a disqualified person)?  By answering “Yes,” the Trump Foundation has admitted that a self-dealing transaction occurred.  The Trump Foundation’s Form 990-PF (and many other foundations’ returns) are available through www.guidestar.com.

New Fiduciary Act Brings Both Progress and Uncertainty

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by Matthew S. Skotak

You may have previously read on this blog about digital assets, the impact they have on the administration of trusts and estates, the need for fiduciaries to access digital assets, and the privacy concerns that come along with such access. In order to address these issues, Colorado recently enacted the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”). This new act became effective on August 10, 2016 and can be found at C.R.S. § 15-1-1501 et seq.

RUFADAA is a significant leap by the State of Colorado to catch up to the digital age.  Prior to the passage of the law, the pervasive use of electronic banking and investing has posed a problem for many fiduciaries. Without the receipt of paper statements, personal representatives, financial agents, trustees and conservators have had a difficult time locating an individual’s assets, sometimes leading to an exhaustive search of several banking and financial institutions before asserts are uncovered. Read more

Recent IRS Statistics

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by Kelly Dickson Cooper

For our litigation clients, a fiduciary’s failure to consider the tax impact of their actions can be the genus for litigation and anticipated tax savings can be the engine that drives a settlement.  For our fiduciary clients, it is important for them to ensure that transfer taxes are minimized for the benefit of their beneficiaries.  For our planning clients, tax planning is a key component in determining the best structure for their wealth transfer planning.  Given the importance of transfer taxes in our practice, we wanted to highlight a few items from the IRS 2015 Data Book relating to estate and gift tax returns:

Number of Tax Returns filed during 2015

  • 36,343 estate tax returns (545 from Colorado)
  • 237,706 gift tax returns (4,492 from Colorado)

Amounts Collected

  • Estate tax returns  – $17,066,589 collected
  • Gift tax returns – $2,052,428 collected

Percentage of 2014 Tax Returns Audited in 2015

  • 7.8% of all estate tax returns
    • Gross estate less than $5 million – 2.1% audit rate
    • Gross estate greater than $5 million but less than $10 million – 16.2% audit rate
    • Gross estate greater than $10 million – 31.6% audit rate
  • 0.9% of all gift tax returns

Results of Audits

  • 22% of estate tax returns examined had no change
  • 34% of gift tax returns examined had no change
  • 70 estate tax returns and 135 gift tax returns had unagreed recommended additional tax
  • 543 estate tax returns and 43 gift tax returns resulted in tax refunds

Personal and Family Lending: New Federal and Colorado Regulations

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by Desta K. Asfaw

There have been a number of recent changes to the mortgage lending laws.   Under current law in Colorado, certain private loans secured by residential real estate may be subject to compliance with strict licensing and other requirements.   Failure to comply could potentially result in misdemeanor charges and/or fines.

These new obstacles stem from provisions of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), and the Colorado Mortgage Loan Originator Licensing and Mortgage Company Registration Act (“CMLO Act”).

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Thoughts from the Bench on Trust and Estate Litigation

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by Carol Warnick

I recently read an article in the Utah Bar Journal1 that provides thoughtful insights into the area of trust and estate litigation in Utah based upon a recent survey to current and past Utah district court judges. As a trust and estate litigator who actively practices in Utah, Colorado, and Wyoming, I was most interested in what the district court judges had to say about the trust and estate cases they had either tried or dealt with on summary judgment motions. Some of their observations are particularly important to any lawyer practicing in this space either as an estate planner or a trust and estate litigator. Planners most certainly benefit from understanding these controversies from the judge’s perspectives, since it is the planner’s documents that will be front and center in the litigation of any contested case.

One of the most important points set forth by Mr. Adams is to remind the parties that the assets everyone is fighting about actually belong to someone else. The person who sets up the will or the trust gets to decide who gets the assets, and that decision doesn’t have to be logical or even what others might consider “fair.” It may also contravene what the decedent has previously stated orally to a family member or members. But the court is placed in the position of doing its very best to see that the decedent’s estate plan, whatever it may be, is carried out.

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Your Fiduciary Duty to Invest “Prudently”

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by Elizabeth Meck

As promised, this is the second post in a series on the fiduciary duties of a trustee. In the first blog in this series, we discussed the fundamental duty of loyalty. In this post, we will discuss the trustee’s duty to exercise care and skill in the management and investment of trust assets.

Acting in the best interests of the trust and the trust beneficiaries, a trustee has the duty to protect and preserve trust assets and, generally, to make the assets productive. In making investment decisions and managing trust assets, the trustee must further abide by the “prudent investor rule,” which requires a trustee to exercise reasonable care, skill and caution. See Colo. Rev. Stat. §§ 15-1.1-101, et. seq. (the “Uniform Prudent Investor Act”) and §§ 15-1-1101, et. seq. (the “Uniform Management of Institutional Funds Act”).

Pursuant to the prudent investor rule, a trustee should consider broad investment factors, such as: current economic conditions, effects of inflation or deflation, tax consequences, the nature of closely-held business interests, alternative investments, expected returns on income and capital, other resources of the trust or trust beneficiaries, the need for liquidity versus preservation of capital, the production of income, the special value or relationship of a particular asset to the trust or the beneficiaries, diversification of investments, and more. See, Restatement (Second) of Trusts § 227. Additionally, while it is important to note that Colorado courts have not officially adopted the Restatement (Third) of Trusts, one could refer to § 90, which lists five helpful “principles” of the prudent investor rule. Generally, any single investment will not violate the prudent investor rule and the trustee should manage the trust portfolio as a whole taking into account these considerations.

The trustee must also abide by any specific instructions in the trust instrument. He should exercise caution in doing so, however, because there are many instances in which blindly following the trust terms may result in unreasonable investment decisions. For example, if the settlor instructs the trustee that he is not required to diversify investments in the case of a closely-held family entity, the trustee would still want to closely monitor the performance of such investments to ensure that the closely-held entity value is not plummeting to the point that the beneficiaries’ interests may be significantly impaired.

It is important to note that poor performance of investments alone will not subject the trustee to a claim for breaching his duties to prudently invest. Beneficiaries frequently and incorrectly think they will have a claim against a trustee simply for poor performance. The trustee, however, will be able to overcome such a claim so long as the underlying investment decisions were reasonably made.

Colorado law does authorize a trustee to hire professionals and to delegate certain aspects of investing and portfolio management. However, the law does not allow for wholesale delegation and the trustee should exercise great caution in hiring professional advisors or fund managers. See Colo. Rev. Stat. §15-1.1-109 (trustee has the authority to delegate investment and management functions, but must engage and monitor such professionals carefully); see also GEORGE G. BOGERT, ET AL, The Law of Trusts and Trustees § 557; Colo. Rev. Stat. §15-1-804(2)(x)(I)(trustee has the power to “employ attorneys or other advisors to assist the fiduciary in the performance of his or her duties” (emphasis added)).

Finally, a trustee should keep in mind that uninformed beneficiaries are uneasy beneficiaries. Not only is it a good idea for a trustee to provide information to the beneficiaries as to investment and asset management decisions, Colorado law requires the trustee to keep beneficiaries “reasonably informed” and to provide accountings to beneficiaries upon reasonable request. Colo. Rev. Stat. § 15-16-303. Keeping beneficiaries informed as to investment decisions not only provides peace of mind to the beneficiaries, but may provide the trustee with an argument particularly in the situation where the beneficiaries have consented to risky or unusual investment strategies. See Beyer v. First Nat. Bank of Colorado Springs, 843 P.2d 53 (Colo. App. 1992).

In sum, the trustee has a duty to continually observe and evaluate investments to ensure that they are consistent with the purpose of the trust, current economic conditions, and the needs of the current and remainder beneficiaries. So long as the trustee exercises reasonable care in investment decisions, exercises care in selecting and hiring investment advisors and professionals, follows the general principles of prudent investing, and keeps the beneficiaries informed, the likelihood of a claim against the trustee for improper investment decisions may be reduced.

Colorado Supreme Court Upholds the Strict Privity Doctrine for Attorney Malpractice Claims

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by Kelly Dickson Cooper

The Colorado Supreme Court upheld the strict privity doctrine for attorney malpractice claims by nonclients and reaffirmed that an attorney’s liability is limited to when the attorney has committed fraud or a malicious or tortious act, including negligent misrepresentation. Baker v. Wood, Ris & Hames, case number 2013SC551 (2016 CO 5).

In Baker, the dissatisfied beneficiaries sued the attorneys for their father and alleged as follows:

  • The attorneys failed to advise their father of the impact of holding property in joint tenancy.
  • The attorneys failed to advise their father that failing to sever those joint tenancies would frustrate his intent to treat his children equally with his stepchildren.
  • The attorneys’ actions allowed the surviving spouse to change their father’s estate plan after his death.
  • The attorneys drafted documents for the surviving spouse that were different from their father’s original plan.
  • The beneficiaries were the intended beneficiaries of the client’s plan, that the attorneys failed to advise the beneficiaries of the relevant facts, and that they had suffered damages as a result.

The beneficiaries asked the Colorado Supreme Court to adopt the “California Test” or the “Florida-Iowa Rule” and set aside the strict privity rule. The Court rejected the adoption of both tests and reaffirmed the strict privity rule. The Court also held that the beneficiaries’ claims would fail under both the California Test and the Florida-Iowa Rule.

The Court put forth the following rationales for upholding the strict privity rule in Colorado:

  • It protects the attorney’s duty of loyalty to the client and allows for effective advocacy for the client.
  • Abandoning strict privity could result in adversarial relationships between an attorney and third parties. This could result in conflicting duties for the attorney.
  • Without strict privity, the attorney could be liable to an unforeseeable and unlimited number of people.
  • Expanding attorney liability to nonclients might deter attorneys from taking on certain legal matters. The Court reasoned that this result could compromise the interests of potential clients by making it more difficult to obtain legal services.
  • Casting aside strict privity would increase the risk of suits by disappointed beneficiaries. Those suits would cast doubt on the testator’s intentions after his or her death when he or she is unavailable to speak.
  • The beneficiaries have other avenues available to them, including reformation of the documents.
  • A personal representative can pursue legitimate claims on behalf of a testator.

The Court held, “We further believe that the strict privity rule strikes the appropriate balance between the important interests of clients, on the one hand, and non-clients claiming to be injured by an attorney’s conduct, on the other.” As a result, the strict privity rule remains intact in Colorado.

Mediator’s Moment—Obstacles to Successful Mediation

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by C. Jean Stewart

A successful mediation requires that the parties feel satisfied both with the process and with the outcome. Several obstacles can interfere with the parties reaching satisfaction on either or both standards. Counsel often contribute to this failure. Here are some tips on avoiding these disappointments and helping clients achieve a satisfactory outcome.

  1. Reluctance to participate. One obstacle to successful mediation is the failure of parties to engage in a meaningful process. Some are fearful that discussing the issues underlying litigation could be perceived as a sign of weakness and hence adopt intransigent positions that yield no room for meaningful exchange. Unfortunately lawyers can sometimes get caught in this trap as well. Particularly in emotionally charged litigation, where attorneys come to identify with their clients’ positions, counsel may decline to work cooperatively on peripheral issues or even on the primary conflict in the case because of concern that talking about the dispute itself will undermine their litigation posture. In my experience, calmly and rationally explaining to opposing counsel/parties why and how one has come to a position rarely if ever diminishes the argument and, in fact, often contributes to the other side’s better understanding of the conflict and, ultimately, to resolution.
  1. Misunderstanding of Opposing Party’s Position. One of the most common obstacles that I see in mediating estate and trust cases is a complete misapprehension of the feelings, attitudes and positions of the other side. Unfortunately, many attorneys contribute to this roadblock. As part of my preparation for mediation, I require both counsel and the parties to present brief statements of position. In too many mediation statements, I learn that the arguments and positions expressed are based on a total misunderstanding of what the other side is thinking and has expressed to me in their presentation of the case. It is hard to overestimate how many times I have been told “We want to settle but the other side doesn’t” – by both sides! As a mediator, I work hard to get the parties and their counsel to devote appropriate time to active listening in advance of or during the mediation session to try to separate these misunderstandings from reality.
  1. Negotiating Styles. While almost everyone has had some life experience with negotiations, even if only in the experience of raising children (think toddlers and teenagers), many people, including many lawyers, have immature notions of the theory and practice of negotiations. When parties and their counsel are spending a majority of their time focused on how to negotiate, they frequently lose sight of the important issues in the mediation and fail to reach a resolution that meets their needs and puts the litigation to rest. Parties and lawyers who cling to notions about the effectiveness of techniques like “we refuse to make the first offer,” or “if we offer ‘x’ they will counter with “y” and then we will offer “z”, etc., etc. or “this is absolutely our last offer,” are often relying on inappropriate notions of what contributes to effective negotiation and have lost sight of the real issues and personalities in the case at hand.

Statutes of Limitation in Probate Litigation: Friend or Foe?

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by Elizabeth Meck

Generally, the statute of limitations for the probate of a will or any action related thereto is three years after the death of the testator. See § 15-12-108(1), C.R.S. (2015); Matter of Estate of Kubby, 929 P.2d 55, 56 (Colo. App. 1996). Section 15-12-108(1) states that “[n]o informal probate or appointment proceeding or formal testacy or appointment proceeding . . . may be commenced more than three years after the decedent’s death… [.]”

Statute of limitations issues related to wills frequently arise in the context of will contests, which fall within the three year statute of limitations set forth in § 15-12-108(1). A will contest may be initiated in one of two primary ways: (i) by filing a petition in the appropriate court to request determination of the validity of the will instrument itself (or whether another valid will exists or any valid will exists at all); or (ii) by filing an objection within an existing probate proceeding in which a will has been probated formally or informally. Will contest actions include those in which the will signing itself is called into question (e.g., the adequacy of the witnesses, the number of witnesses present, fraud, mistake, and, if the will is a handwritten document, whether it meets the requirements of a holographic will under Colorado law under § 15-11-502), or the capacity of the testator to execute a valid will is in question.

Legal capacity to execute a will is known as “testamentary capacity” and requires that the testator understand what he is doing and the ultimate distribution of his property. The Colorado Jury Instructions set forth the factors to determine testamentary capacity. See CJS 3d § 34:9 (specifying that a testator must understand that he is making a will, the nature and extent of his property, how the property will be distributed, that the will devises his property as he desires, and who are the persons who are the natural persons to receive his property); see also Lehman v. Lindenmeyer, 109 P. 956 (Colo. 1910); Cunningham v. Stender, 255 P.2d 977 (Colo. 1953).

Additionally, pursuant to § 15-11-502, a testator must be an individual of eighteen years or more who is of “sound mind.” A testator must not be under the undue influence of another individual at the time he or she executed the will instrument, or suffer from an insane delusion or mental illness that materially impacts the testator’s ability to make dispositions under the will. See Breeden v. Stone, 992 P.2d 1167 (Colo. 2000) and Krueger v. Ary, 205 P.3d 1150 (Colo. 2009). Will contest actions questioning the testator’s legal capacity to execute a valid testamentary instrument as well as whether the testator was subject to any undue influence, insane delusion, or mental illness, are frequently litigated in the will and trust context and also fall within the three year statute of limitations period.

Another frequently litigated topic in the context of wills and trusts is an action for breach of fiduciary duties. The applicable statute of limitations period is found in § 13-80-101(1)(f), C.R.S. (2015), stating that all actions for breach of trust or breach of fiduciary duty must be commenced within three years after the cause of action accrues. Pursuant to § 13-80-108(6), a cause of action accrues “on the date the breach is discovered or should have been discovered by the exercise of reasonable diligence.” Clearly, this standard is somewhat vague and, as a result, issues frequently arise in determining exactly when the breach was or should have been discovered.

A very short limitations period applies when a trustee or a fiduciary has provided what is known as the “final accounting.” In this scenario, under § 15-16-307, C.R.S. (2015), any “claim against a trustee for breach of trust is barred as to any beneficiary who has received a final account or statement fully disclosing the matter and showing termination of the trust relationship between the trustee and the beneficiary unless a proceeding to assert the claim is commenced within six months after receipt of the final accounting or statement.” Emphasis added. This very short limitations period requires that the fiduciary provide to the beneficiaries an accounting that is “sufficient to put beneficiaries on notice as to all significant transactions affecting administration during the accounting period.” Colo. R. Probate P. 31.

Statute of limitations issues also arise in the context of equitable relief, which actions will be barred based on the applicable limitations period. An equitable remedy in the context of a will contest may include an action for constructive trust. For example, a constructive trust claim may arise in an undue influence action in which the rightful transferee of property from the decedent has been deprived of the property transferred because such property was transferred instead to an individual who unduly influenced the testator to devise the property to him or her instead. This equitable remedy may raise unique statute of limitations issues, however, and it is important to be aware of these issues. For example, in Eads v. Dearing, the court held that a constructive trust claim accrues at the time of discovery of the defendant’s breach of trust, not the initial transfer of property. 874 P.2d 474 (Colo. App. 1993).

Another tricky statute of limitations issue is the doctrine of laches, which may be raised as a defense in a will or trust litigation proceeding. Under the doctrine of laches, the time a claimant may raise a claim may be limited if he or she knew or was aware of the potential action and then unreasonably delayed pursuing the claim. Any practitioner should be particularly aware that the Colorado Supreme Court recently held in Hickerson v. Vessels, that the doctrine of laches may shorten the limitations period and defeat a lawsuit that was filed within the applicable statute of limitations. 316 P.3d 620 (Colo. 2014).

In the context of probate litigation, statutes of limitations can be both friend and foe depending on which side of the claim your client is on and whether relevant statutes of limitation deadlines have passed. As a result, it is always important to keep these deadlines in mind and to take action accordingly.