Avoidable Litigation as a Threat to the Assets of An Estate

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by Carol Warnick

It wasn’t that long ago when the real threat to the financial well-being of a person’s estate was death taxes.  People were concerned about losing close to 50% of their estate to taxes without proper planning.  But with the increased exemption amounts, death taxes are not a big issue in most cases.  But something else is taking its toll on the hope of a smooth and simple passing of assets at death, and that is litigation. 

Much of the current estate litigation relates to family disputes, some of which might have been avoided through better estate planning.  But a certain amount of these family disputes would have occurred anyway simply because the families were upset enough to litigate over anything once mom and dad have passed away.  There is a different type of litigation beginning to crop up, however, that may create just as many problems for an estate as family in-fighting, and one which can be totally prevented.  I am speaking of litigation over wills and trusts drafted with forms obtained over the internet.

Unfortunately, with the increased exemption amounts (currently $5.43 million per person) and since many people no longer need tax planning they are more apt to decide they can do their estate planning documents themselves and not involve an attorney.  While self-drafted wills are not new and have been creating estate administration problems for years, I believe that the current ease of finding forms on the internet, making a few changes, and printing them at home will likely make this a more significant problem in the future. 

Cases are starting to crop up regarding mistakes made by consumers using internet forms.  One Florida case is a good example.  The case is Aldrich v. Basile, 136 So. 3rd, 530 (Fla. 2014).  In this case, Ms. Aldrich used a form and listed all the assets she owned at the time (her home and its contents, an IRA, a car and some bank accounts) and stated they should go to her sister.  If her sister didn’t survive her, she listed her brother as the one to receive everything. 

As luck would have it, her sister predeceased her and left her some additional assets which weren’t listed in Ms. Aldrich’s will because she didn’t own them when she drafted her will.   Either because the internet form didn’t contain one or because Ms. Aldrich took it out when she printed the will because she thought all her assets were covered, there was no residuary clause in the will.  As a result, after a trial court decision, an appellate court reversal, and ultimately an appeal to the Florida Supreme Court, it was decided that the listed assets would go per the will but the after-acquired assets inherited from her sister would pass through intestacy, bringing in two nieces who were the daughters of Ms. Aldrich’s deceased brother to share in the estate.

Although the living brother offered a note left by Ms. Aldrich and other extrinsic evidence that Ms. Aldrich intended all of her assets to go to him, the court refused to consider them because of the “four corners” doctrine. There was no ambiguity within the four corners of the will, therefore no extrinsic evidence was admitted.

It is easy to see how Ms. Aldrich could have simply deleted the residuary clause thinking she didn’t need it, but it is very unlikely that a competent lawyer drafting a will would make that mistake.  If the lawyer had made the mistake, there would potentially have been recourse through the lawyer’s malpractice insurance. It seems that the ease of which will and trust forms are now available on the internet and the fact that many people don’t need a lawyer’s expertise for tax planning under current law will combine to create many more of these problems.  Such problems lead to costly litigation with really no recourse for the families of those “do-it-yourselfers.”

Several states have looked at the issue of whether or not legal form providers are violating unauthorized practice of law statutes, but the cases are by no means consistently decided.  While such issues are being sorted out, the old adage “buyer beware” certainly applies with regard to do-it-yourself wills and trusts. 

A concurring opinion in the Florida case summed it up as follows:

Obviously, the cost of drafting a will through the use of a pre-printed form is likely substantially lower than the cost of hiring a knowledgeable lawyer.  However, as illustrated by this case, the ultimate cost of utilizing such a form to draft one’s will has the potential to far surpass the cost of hiring a lawyer at the outset.  In a case such as this, which involved a substantial sum of money, the time, effort, and expense of extensive litigation undertaken in order to prove a testator’s true intent after the testator’s death can necessitate the expenditure of much more substantial amounts in attorney’s fees than was avoided during the testator’s life by the use of a pre-printed form1.

 1Aldrich v. Basile, 136 So. 3rd 530, 538 (Fla. 2014). 

Using a Private Judge in Trust and Estate Litigation

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by C. Jean Stewart

In 1981 the Colorado Legislature approved a measure allowing parties to litigation to hire a former judge to serve on their case instead of the judge assigned by the district.  C.R.S. §13-3-111 and Rule 122, CRCP.  In some states, California, for example, this system is called “private judging.”  In Colorado, it is simply called “appointed judges.”  Under the new ICCES filing system the title is “judge pro tem.” 

After the appointment, all of the costs of the case, including the “appointed judge’s fees and costs,” must be paid by the parties “at no cost to the state.”  The appointed judge, or the parties, may later return the case to the original judge and the appointment terminates.

Cases with appointed judges are not procedurally different than routine court cases in Colorado; they are neither more nor less private.  Pleadings are filed in the normal course and records are maintained as part of the routine court files; the Rules of Civil or Probate Procedure apply as appropriate and decisions are appealable.  However, each case will constitute a single or small caseload for the appointed judge and consequently will receive heightened attention and speedier resolution.

All parties in the case must agree on the selection of an appointed judge.  The parties may request that their case be heard by a jury and the case may even be heard in the same courthouse where originally filed, if space and time are available, although cases can also be heard in rented space or in conference rooms made available at no cost by one of the parties’ attorneys.

To have a private judge appointed, the parties must submit a motion to the Colorado Supreme Court that includes all of the statutory requirements, complies with C.R.C.P., Rule 122, sets forth the parties’ request for and agreement to the appointment, and includes the proposed judge’s signed approval of the motion. The actual appointment is accomplished on an Order Appointing Judge that must be signed by the Chief Justice. The estimated fees and costs of using any appointed judge must be referenced in the Motion for Appointed Judge and deposited in advance of the appointment into an “escrow” account.

Counsel for the parties should plan a joint conference call with the proposed appointed judge to discuss the nature of the appointment, the anticipated time commitment, and any special circumstances as early as possible after it is anticipated that an appointment may be sought. Because of the nature of any case involving an appointed judge, all contacts should include notice to all parties and counsel in the case. There should be no actual or attempted ex parte communication.

The Fall of Colorado’s Same Sex Marriage Ban

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By Kelly Cooper

Starting on Monday, marriage licenses were issued in Colorado to couples regardless of sexual orientation.

This change came because the U.S. Supreme Court refused to hear cases from Indiana, Oklahoma, Utah, Virginia and Wisconsin.  What do these five states have in common?  Each of them had banned same sex marriage and had those bans declared unconstitutional by a U.S. Court of Appeals. 

In refusing to hear these cases, the U.S. Supreme Court has upheld three U.S. Courts of Appeal’s decisions declaring the same sex marriage bans unconstitutional and making same sex marriages legal in Indiana, Oklahoma, Utah, Virginia and Wisconsin. 

The impact of the U.S. Supreme Court’s refusal to hear these cases has reached far beyond the borders of those five states.  This is because every state in the U.S. is subject to the decisions made by one U.S. Court of Appeals.  For example, Colorado is situated in the 10th Circuit and the 10th Circuit U.S. Court of Appeals declared Utah’s ban on same sex marriage unconstitutional.  Since Utah and Colorado are both bound by 10th Circuit’s decisions, it is likely that Colorado’s same sex marriage ban would also be declared unconstitutional by the 10th Circuit.  As a result, various county clerks began issuing marriage licenses to same sex couples in Colorado.

Current status: There are 19 states that permit same sex marriages plus the District of Columbia.  Due to the U.S. Supreme Court’s decision not to hear these cases, five more states’ bans on same sex marriage will fall bringing the total number of states permitting same sex marriage to 24.  Due to the U.S. Supreme Court’s decision, an additional six states’ same sex marriage bans are effectively overruled, including Colorado’s.  The other five states are Wyoming, Kansas, North Carolina, South Carolina and West Virginia.  This will bring the total number of states allowing same sex marriage to 30.

 We can expect more developments and changes in this area in the near term, so stay tuned.

Using a Power of Appointment to Enable the Decedent’s Intent To Be Upheld (even if it might violate public policy)

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by Carol Warnick

Individuals have a right to give their property to whomever they see fit. However there are certain limitations that the law over time has imposed, typically based upon a public policy theory. One of those is safeguarding the institution of marriage. But isn’t testamentary freedom also a public policy? One interesting case where these two public policies clashed, but a power of appointment allowed the decedent’s intent to be upheld, was In Re Estate of Feinberg, 919 N.E. 2nd 888 (Ill. 2009). Max Feinberg was an Illinois dentist who was very tied to his Jewish heritage and wanted it preserved in his family. His trust contained a beneficiary restriction clause which read as follows::

3.5(e) A descendant of mine, other than a child of mine who marries outside the Jewish faith (unless the spouse of such descendant has converted or converts within one year of the marriage to the Jewish faith) and his or her descendants shall be deemed to be deceased for all purposes of this instrument as of the date of such marriage.

Max’s plan was to give 50% of his estate to his grandchildren in lifetime trusts, but to disinherit any of them who did not marry in the Jewish faith (or whose spouse did not convert to the Jewish faith.) When Max died, none of the grandchildren were married. Would this condition have been void as against public policy because it was a condition subsequent and attempted to restrain marriage? I think that is a distinct possibility. However, the Illinois Supreme Court did not have to address that issue because Max’s wife, Erla, altered his plan in a significant way by exercising a power of appointment give to her by Max in his document. By the time Erla died, four of the five grandchildren had married outside of the Jewish faith. Only one grandson qualified under the beneficiary restriction clause. Erla’s exercise of the power of appointment provided that upon her death, instead of a lifetime trust, $250,000 was to be given to each of her grandchildren who at the time of her death had complied with Max’s beneficiary restriction clause. If a grandchild had not complied, their share was given to their parent instead.

When one of the grandchildren sued, both the trial court and the appellate court held the beneficiary restriction clause was invalid as against public policy and held that the grandchildren who had married outside of the Jewish faith would still receive their interests. The Illinois Supreme Court reversed. The Court stated that it didn’t have to deal with the issue of whether or not Max’s beneficiary restriction clause was a condition subsequent and was trying to control what the children did or didn’t do in the future. The Court only had to deal with Erla’s exercise of the power of appointment which was based upon the marital status of the grandchildren at her death —- either they qualified or they didn’t qualify.

In the last paragraph of the opinion the Court stated, “It is impossible to determine whether Erla’s distribution plan was the product of her own wisdom, good legal advice, or mere fortuity.” The Court went on to hold that “because no grandchild had a vested interest in the trust assets and because the distribution plan adopted by Erla has no prospective application, we hold that the beneficiary restriction clause does not violate public policy.” In essence, Erla’s exercise of the power of appointment in the way she did allowed the beneficiary restriction clause to be upheld.

Letters of Wishes: Helpful or Hurtful?

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by Kelly Cooper and Desta Asfaw

Most of the trusts we see instruct the trustee to consider making distributions for “health, education, maintenance and support.”  While the typical HEMS standard provides certainty in regard to taxes, it does not provide the trustee with any insight into what types of distributions the settlor wanted the beneficiaries to receive from the trust.  In addition, many trusts give the trustee broad discretion in regard to distributions (through the use of the words, “sole” or “absolute”), which puts even more pressure on the trustee to figure out if the settlor would have agreed to make distributions.  Typically, a trustee has little to no guidance from the settlor about his or her desires for the beneficiaries or his or her purposes in creating the trust (other than tax deferral or avoidance).

One solution to this problem is for the settlor of the trust to send to the trustee a non-binding letter of wishes.  Letters of wishes include personal information about the settlor and the beneficiaries, their relationships, the beneficiaries’ abilities and limitations and the settlor’s specific concerns or desires regarding each beneficiary.  Letters of wishes give the trustee more insight into the state of mind of the settlor when exercising discretion, which is helpful when exercising discretion in regard to distributions.

While letters of wishes are generally recognized in the estate planning community, there is very little law regarding the effect of a letter of wishes on a trustee’s discretion, whether reliance on a letter of wishes provides any liability protection to a trustee or if a letter of wishes must be disclosed to the beneficiaries.  If a settlor provides opinions and concerns about the beneficiaries in a letter of wishes that may be hurtful to the beneficiaries, the trustee will then be faced with the difficult decision – do you provide a copy of the letter of wishes to the beneficiaries?  If a claim for breach of the trustee’s fiduciary duty should arise, it may be that the trustee is left with no choice but to make the letter available to the beneficiaries.  In Colorado, there is no case law regarding letters of wishes so it is unknown if the letters of wishes must be disclosed to beneficiaries under C.R.S. § 15-16-303 or whether a trustee can rely on a letter of wishes when making a distribution decision.

Even with the uncertainty relating to the disclosure and use of letters of wishes, any peek into the settlor’s mind and his or her intent regarding distributions will be helpful to a trustee.  If a letter of wishes is admitted into evidence during a dispute, the letter could also prove to be compelling evidence for a judge reviewing a trustee’s exercise of discretion.

Probate and Trust Issues in Colorado’s Upcoming Legislative Session

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by Kelly Cooper

Colorado’s General Assembly will reconvene on January 8, 2014.  At this time, it appears that at least two probate and trust related issues will be the subject of debate by the Assembly.

The first is a proposed change to the Colorado Civil Unions Act that would permit partners to a civil union to file joint income tax returns if they are permitted to do so by federal law.  Under the current proposal being considered by the Colorado Bar Association, there would be changes to both the Civil Unions Act and Colorado’s income tax statutes.  This is partly in response to the issuance of Revenue Ruling 2013-17 by the Internal Revenue Service, which permits married same sex couples to file joint federal income tax returns. 

The second is a proposal to codify a testamentary exception to Colorado’s attorney-client privilege.  The necessity and proposed scope of the testamentary exception are currently being discussed by a subcommittee of the Statutory Revisions Committee of the Trust & Estate Section of the Colorado Bar Association and will likely be discussed later this week at Super Thursday meetings.

The Colorado Supreme Court has previously recognized that the attorney-client privilege generally survives the death of the client to further one of the policies of the attorney-client privilege – to encourage clients to communicate fully and frankly with counsel.  The Colorado Supreme Court has also held that a “testamentary exception” to the privilege exists, which permits an attorney to reveal certain types of communications when there is dispute among the heirs, devisees or other parties who claim by succession from a decedent so that the intent of the decedent can be upheld.

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.

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.

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.”