MAY 9, 2011 VOLUME 18 NUMBER 17
Let us give you some insight into how hard it can be to figure out how to interpret estate planning documents. At the same time we hope to explain why it is important to keep your own estate plan up to date.
Timothy M. Donovan was a successful New Hampshire businessman. Beginning in the 1980s he started his own company, Optimum Manufacturing, and built it into a leading manufacturer of optical housing, mirror blanks and satellite components.
At age 52, Mr. Donovan was married for the second time. He had no children from either marriage, but he had close relationships with his mother, his brothers and a niece and nephew.
In 2005 he signed a will and a living trust. The terms of his will were straightforward: he left all of his personal property, real estate -- almost everything he owned -- to his wife. There was one huge exception, however: he left his stock in Optimum Manufacturing, the real estate on which the plant was located, and any other interest in Optimum to his living trust.
Apparently Mr. Donovan had wrestled with what to do about the company he had built. His trust included detailed provisions about what was to happen to Optimum Manufacturing. His trustee was to continue to run the business for a short time, and then arrange for its sale. If possible, it was to be sold to employees of the company. If not, it was to be put on the market. Once the company was sold, the proceeds were to be divided into percentages. Forty-five percent would go to his wife, twenty-five percent to his mother, twenty percent was to be divided among his brothers, niece and nephew, and ten percent would go to the trustee. After distributing the Optimum sale proceeds in those percentages, everything else in the trust was to go to his wife.
So far, there is nothing extraordinary about Mr. Donovan's estate plan, and it looks like it would be easy to understand and implement. But in 2008, things changed. Mr. Donovan sold his company to Corning Specialty Materials, a subsidiary of the giant Corning, Inc. The sales price: $15 million. The proceeds from the sale went into Mr. Donovan's name individually, and not to his living trust.
Just under a year later Mr. Donovan (who was also an avid and accomplished pilot) died, tragically, in a glider crash. He had not updated his estate plan, and so questions now arose about what should happen to proceeds from the sale of Optimum Manufacturing.
You be the probate judge for a moment. Assume for the sake of your ruling that all the Optimum proceeds were held in one or more identifiable accounts, and that they had not been commingled with other funds (we don't know that to be true, but let's keep the legal issues simple for a moment). Assume, also, that Mr. Donovan's wife's name has not been put on those accounts. Tell us, judge: what happens to the $15 million?
You want some precedent? How about the recent case of Estate of Donovan, decided on April 28, 2011, by the New Hampshire Supreme Court? It would be hard to find anything more clearly on point.
The legal term for what happened in Mr. Donovan's case is ademption. When property is sold, lost or no longer part of the estate at death, it is said to be "adeemed," and a specific bequest of that property therefore fails.
In some circumstances the identifiable proceeds from a sale of specifically named property must be distributed as if the original gift still operated. That can be true when the "ademption" is involuntary, for instance -- such as when the state condemns a parcel of property that has been listed in a will and the proceeds from that condemnation are still held in a separate account. But that was not the situation in Mr. Donovan's case.
The problem is made slightly more interesting by the fact that Mr. Donovan had signed both a will and a trust. Since the sale proceeds were still in his name, they were governed by the will -- which said that everything but Optimum Manufacturing was to go to his wife. That was what the probate judge decided, and the New Hampshire Supreme Court agreed.
Imagine, though, that Mr. Donovan had put the sale proceeds into an account titled in his trust's name. Would the result have been any different? No, said the Supreme Court. His trust also left everything but Optimum stock to his wife, and the ademption principles would apply to the trust just as they did to Mr. Donovan's will and estate.
There is no grade, nor any reward, for correct answers, but how did you do as a probate judge?