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Avoidable Litigation as a Threat to the Assets of An Estate
/in Administration Expenses, Administration of Estate, Administration of Trust, Court Procedures, Fees, Fiduciary Litigation, Testamentary Intent, Will & Trust Constructionby 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).
New Year Resolution: More Transparency About Estate Plans
/in Fiduciary Litigation, Testamentary Intentby Elizabeth Meck
The holidays are a time when families come together to celebrate and to share in the warmth of the season. It is a time to spend with multiple generations and to toast to another year of health and happiness. While the holidays may not feel like the perfect time to bring up heavy topics such as planning for disability or death, this is the perfect time to do so because of the multiple generations of family members gathered together.
As fiduciary litigators, we are frequently asked about the trends we see or what types of issues drive probate disputes among family members. While our answers to these types of questions do frequently include complex tax calculations or the interpretation of an ambiguous trust or will provision, we can consistently attribute a significant portion of disputes to a general lack of communication.
This lack of communication does occur in the form of beneficiaries who feel that a trustee is not providing adequate information or accountings (more on that later). However, it also occurs when family members feel left in the dark regarding their loved one’s intentions in making certain estate planning decisions. Expanding the conversation about estate planning from spouses to siblings and younger generations early on in the process, therefore, may help to alleviate some of the confusion that frequently leads to disputes once a testator or settlor is gone.
Maintaining good communication will become increasingly important as we embark on an unprecedented transfer of wealth in the coming decades. As baby boomers prepare to transfer their own accumulated assets, they may be seeing significant inheritances themselves. The result, according to experts, is that anywhere from $27 to $40 trillion will change hands between now and 2050.
This is not a problem reserved solely for the wealthy, however. Discussing the succession plan for a small family business or a modest vacation home can help to avoid strain, confusion and tension among surviving family members. Furthermore, an issue that regularly arises in probate litigation is the division of personal property. Because items of personal property carry significant sentimental value, they can become the center of intense and protracted litigation. Conversations about these sentimental items ahead of time can greatly reduce the chances of disputes surrounding the ultimate distribution of such items later on.
Finally, the more a family member knows about an individual’s estate planning intentions, the more astute the family member will be to spot and respond to potential undue influence by a third party or risky changes in the testator’s or settlor’s capacity should these issues arise in the future.
So raise a glass this New Year’s to another year of health and happiness, and then gently let your family members know that you also want to chat about their estate plan and yours. You can let them know that it is for their own good.
… And just in case you are the trustee of a trust, it is equally important that you are providing sufficient information to any beneficiaries. The New Year can be a good time to conduct a simple annual assessment of the trust and to provide any necessary updates or reports to beneficiaries.
Using a Private Judge in Trust and Estate Litigation
/in Court Procedures, Fiduciary Litigation, Will & Trust Constructionby 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.
Principal and Income Allocations — Attention to Detail
/in Administration of Estate, Administration of Trust, Fiduciary Duties, Personal Representative, Trusteeby Carol Warnick
I recently had the occasion to pull out some old CLE materials from 2001 after Colorado’s adoption of the New Uniform Principal and Income Act (UPIA). That caused me to reflect on what has happened in the thirteen years since passage of the act in Colorado. Unfortunately, there still seem to be individual trustees as well as attorneys and accountants who do not appreciate that the provisions of this act must be considered in determining such basic things as what is income and what is principal, unless that is clearly spelled out in the document.
Determinations of income and principal, in conjunction with the distribution provisions of the document, are critical to determining what each trust beneficiary is to receive. The basic thrust of the UPIA is that the document will trump the UPIA rules, but the UPIA provides a set of default rules to make such determination if the trust is silent. It also contains special rules for such things as depreciation expense, how to handle receipts from depleting assets such as mineral interests, and giving the trustee the power to adjust between income and principal under certain circumstances.
A common mistake is to allocate principal and income based upon a recollection of what the UPIA says, or worse, how it was allocated for a previous client. The first thing the trustee should do is to read the trust document because if the issue is discussed there, there is no need to look further. However, most documents don’t go into the level of specificity in all areas as the UPIA does and therefore the practitioner must rely on the UPIA. It is also important to read the correct state’s UPIA statutes as states have varied in their adoption of portions of the original uniform law. Depreciation, for example, is one area that is treated differently by a variety of states.
More and more trusts are spanning multiple generations and require trustees to manage trust assets for decades. It is important to remember that a decision made today may be reviewed years later with 20/20 hindsight, when the cost of the trustee’s decision will have been compounding for years. This means that decisions involving even low dollar amounts now can be subject to close scrutiny years later. Trustees and their agents need to be fully aware of the provisions of the UPIA and make sure to follow them.
The Fall of Colorado’s Same Sex Marriage Ban
/in Administration of Estate, Administration of Trust, Conservator, Fiduciary Litigation, Guardian, Legislation, Life Insurance, Personal Representative, Powers of Attorney, Trustee, Will & Trust ConstructionBy 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.
Your Fiduciary Duty of Loyalty
/in Fiduciary Duties, Fiduciary Litigation, Trusteeby Elizabeth Meck
The Fiduciary Law Blog recently posted an article in which we observed that “fiduciary” is a vague term encompassing many different people and several different relationships. Under Colorado law, a fiduciary includes, without limitation, a trustee of any trust, a personal representative, guardian, conservator, receiver, partner, agent, or “any other person acting in a fiduciary capacity for any person, trust, or estate.” Colo. Rev. Stat. § 15-1-103(2).
Any fiduciary must abide by the duties and obligations generally known as “fiduciary duties,” which are among the highest duties under the law. This post is the first in a short series in which we will discuss the fiduciary duties applied to trustees, when it may be appropriate for a trustee to delegate certain duties, and a trustee’s potential liability for breaching these important duties.
In the context of a trust, and as stated in the Restatement (Second) of Trusts § 2, a fiduciary relationship with respect to property arises out of the manifestation of an intention to create the fiduciary relationship and subjects the trustee “to equitable duties to deal with the property for the benefit of another person.”
The trustee’s most basic function is to hold title to and manage trust property pursuant to the terms of the trust instrument, which he must do with the utmost loyalty, good faith and honesty. Generally, the fiduciary duties applicable to a trustee are: the duty of loyalty, the duty to exercise care and skill in managing the trust assets and administering the trust, and the duty to remain impartial to all beneficiaries. This post will focus on the duty of loyalty.
The duty of loyalty, perhaps the broadest of the fiduciary duties, has been described as “inherent” in the trust relationship. George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543 (2d rev. ed. 1980). This duty requires the trustee to remain loyal to the beneficiaries of the trust in all aspects of trust administration. Restatement (Second) of Trusts § 170.1 Fundamental to the duty of loyalty is the obligation to adhere to the terms of the trust instrument itself and to undertake all actions in accordance with applicable law. Restatement (Third) of Trusts § 76; Restatement (Second) of Trusts § 169.
As defined in Scott on Trusts, the trustee’s fiduciary duty of loyalty is the “duty of a trustee to administer the trust solely in the interest of the beneficiaries.” Austin W. Scott & William F. Fratcher, Scott on Trusts § 170 (4th ed. 1987) (emphasis added). A trustee, therefore, “is not permitted to place himself in a position where it would be for his own benefit to violate his duty to the beneficiaries.” Id. Under the duty of loyalty, the trustee must refrain from engaging in any act of self-dealing or conflicts of interests that may result in increased benefit to himself. Such transactions would constitute a breach of the trustee’s duty of loyalty, may expose the trustee to personal liability, and may be voided by the beneficiaries. See Restatement (Second) of Trusts § 170 cmt. b.
Further, the duty of loyalty requires the trustee to “communicate to [all beneficiaries] all material facts” in connection with the administration of the trust. Restatement (Second) of Trusts § 170. Failure to inform beneficiaries of important decisions or material facts may not only constitute a breach of the duty of loyalty, but frequently creates feelings of distrust toward the trustee. It is important, therefore, for the trustee to remain transparent, which we discussed in a prior blog post.
The duty of loyalty applies to the administration of a non-charitable trust as well as charitable trusts. This is the case even though a charitable trust may exist perpetually. A trustee of a charitable trust must administer the trust solely in the interests of effectuating the trust’s charitable purposes. See Restatement (Second) of Trusts § 379 cm. a.
As stated above, the duty of loyalty is broad and requires the trustee to regularly ensure that he is acting solely in the best interest of the beneficiaries. It is wise for any trustee to step back occasionally to make sure that his actions as trustee are taken in accordance with the duty of loyalty.
In the next blog entry in this series, we will discuss the duty of the trustee to exercise care and skill in the management of trust assets and administration of the trust.
1For further discussion on the duty of loyalty, see Austin W. Scott & William F. Fratcher, Scott on Trusts §§ 169-186 (4th ed. 1987); and George Gleason Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 543-543(V) (rev. 2d rev. ed. replacement vol. 1993).