Posts Tagged ‘Arizona Court of Appeals’

Conservator Properly Appointed for Missing Homeless Man

AUGUST 10, 2015 VOLUME 22 NUMBER 29

Late in 2012, Mark West was driving a car that struck and injured Don Barnes (both names have been changed) in the Phoenix area. Barnes hired an attorney to sue West, but because the attorney was unsure of Barnes’ ability to understand the proceedings, he sought appointment of a “guardian ad litem to represent Barnes’ interests in the lawsuit.

The guardian ad litem had a hard time staying in touch with Barnes, and eventually decided it was necessary to seek court appointment of a conservator for Barnes’ estate — which consisted solely of the personal injury lawsuit. Arizona law provides for appointment of a conservator for someone who has disappeared, and so a proceeding was initiated.

West (the driver), through his attorneys, objected to the conservatorship. He noted that Barnes was mentally ill and homeless, that he had claimed to be from Montana, and that he appeared to have returned to that state — or somewhere else. Barnes had criminal citations in six different states over the years, and West’s attorneys insisted that he had no significant connection to Arizona.

The probate court disagreed, and appointed a conservator for Barnes. West appealed that order (technically, he filed what the courts call a “special action,” but that’s a distinction that only lawyers find interesting).

The Arizona Court of Appeals agreed to address the question, but upheld the appointment of a conservator for Barnes. The statute permits appointment of a conservator for someone who has “disappeared,” ruled the appellate judges, and the plain meaning of “disappear” includes a situation when someone used to be in Arizona and now can’t be found.

Conservatorship proceedings are supposed to be initiated in the subject’s home state or, if they do not have a home state, in a state with significant connections to the person. The facts that Barnes was in Arizona when he was injured, and that he has a lawsuit pending in the state now, amount to significant connections with Arizona. Furthermore, he hired an attorney in Arizona before he disappeared, and he has a sister living in the state.

The Court of Appeals ruling clarifies that a conservatorship (of the estate) can be initiated in Arizona even if the subject has disappeared — in fact, the disappearance is the basis for a conservatorship in a case like this one. Woestman v. Hon. Russell, July 28, 2015. Could the same logic allow appointment of a guardian for a missing person? Probably not, since “disappearance” is not itself a ground for appointment of a guardian (of the person).

There are also procedural problems with both conservatorship and guardianship over someone who can not be located — though the problems would be much more challenging in the case of a guardianship. The process requires appointment of a court investigator, who is supposed to interview the subject of the proceedings and visit the place where they would reside.

There is a potential exception to that requirement for conservatorships based on disappearance (or, interestingly, “detention by a foreign power”), but conventional practice still includes appointment of an investigator. Similarly, a medical evaluation is customarily required (though the court may skip the medical review). Obviously, it may be impossible for either an investigator or a medical expert to evaluate a missing person.

One other legal point arose in West’s challenge of the conservatorship: Barnes’ attorney argued that he had no standing to even participate in the probate proceeding. Both the trial judge and the appellate court agreed, however, that West was an “interested person” because he had a potential claim for court costs if Barnes’ lawsuit ultimately failed. That permitted him to raise procedural objections to the conservatorship proceeding.

How often are conservatorships required for missing persons (as opposed to people who have become incapable of handling their affairs because of mental health issues, or dementia)? Rarely, but still more commonly than you might think. In addition to homeless people who may be difficult to trace (and who may have financial assets), there are also crime victims who may have business interests to manage while their whereabouts are unknown. Not infrequently, of course, the “missing” person may reappear even as the proceedings are underway.

Conservator Not Required to Unwind Protected Person’s Estate Plan

JUNE 8, 2015 VOLUME 22 NUMBER 21

When an aging parent begins to fail, and a scheming caretaker appears to take advantage, what should concerned children do to respond? Should they consider a report to Adult Protective Services (in Arizona, 1-877-SOS-ADULT, or 1-877-767-2385), or file a court proceeding, or take some other action?

The short answer is “yes.” That is, the children of a vulnerable adult victim of abuse, neglect or exploitation should make a report to Adult Protective Services (the above phone numbers or APS’s online site give more details), and consider stepping in to protect the parent with court proceedings, judicious use of existing powers of attorney and family support.

Sometimes court involvement will be necessary, and family members may be ill-equipped, or uncomfortable, about acting. In Arizona and in a number of other states, there is an industry of private, professional fiduciaries who can act to help protect the vulnerable senior. [In the interest of fair disclosure, Fleming & Curti, PLC, and several of the individual lawyers frequently act as conservator, trustee, agent under a power of attorney or personal representative of an estate — though we had no connection with the case we describe in this week’s Elder Law Issues.]

Mark Simpson (not his real name) was just the kind of aging parent described above. In the course of about a year, he had given his car title to a new caretaker, named her as joint owner on his bank accounts, included her as a beneficiary on his annuities and gave her a general, durable power of attorney. When the caretaker tried to use the power of attorney to change the “payable on death” designation on Mark’s remaining accounts from his sons to the caretaker, someone at the bank called one son (let’s call him Scott) to let him know something was amiss. Scott contacted Entrust Fiduciary Services, Inc., an Arizona company which acts as fiduciary in similar cases, and they began an investigation.

Entrust Fiduciary asked the court to be appointed as temporary conservator a few days later. Once appointed, they fired the caretaker and filed a report alleging that she had been exploiting Mark. They also gave formal notice of the proceedings to Scott and to Mark’s other son, Louis — who had not, up to that point, responded to their requests.

Louis objected to Entrust Fiduciary’s petition to be appointed as Mark’s permanent conservator, and so the temporary appointment was continued long enough for a hearing on the permanent petition to be scheduled and conducted. Six months later, and before that permanent hearing, Mark died.

Louis opened a probate on Mark’s estate, and objected to Entrust Fiduciary’s final report in the conservatorship. According to Louis, a conservator has a duty to protect heirs from the loss that might occur if estate planning decisions are not unraveled. Entrust Fiduciary argued that their only duty was to Mark, and that they protected his assets from loss during his life. The probate judge agreed with Louis, and ruled that a conservator has “a duty to protect the estate assets and the estate plan … includ[ing] not only the protected person but the beneficiaries of the estate plan.”

The Arizona Court of Appeals disagreed. While it is true that a conservator is required to consider the protected person’s estate plan, it does not follow that a conservator must protect the interests of ultimate inheritors. The conservator’s duty is to manage the protected person’s assets to help prevent waste and dissipation, and to use the property for the benefit of the protected person. It is not to protect heirs.

Louis had also argued that Entrust Fiduciary had not timely recorded its conservatorship documents, apparently believing that such a recording would have voided the beneficiary deed signed by Mark in favor of the caretaker. The court correctly notes that even if Entrust Fiduciary had recorded the proper documents before Mark’s death, it would have taken more actions to invalidate the existing deeds, and a conservator is not obligated to initiate those proceedings (though they are permitted to do so).

After Mark’s death, his son Louis had filed an action against the caretaker to undo the transactions she had initiated before being fired. That action resulted in a settlement, and an unspecified portion of the assets she had gotten were returned. That, notes the appellate court, is the proper way to determine the validity of questioned documents — not to have a court-appointed conservator favor one possible beneficiary (or group of beneficiaries) over another. Entrust v. Snyder, May 28, 2015.

Trust-Owned Property Is Not Proper Subject of Arizona Beneficiary Deed

JUNE 1, 2015 VOLUME 22 NUMBER 20

Arizona is one of about a dozen states permitting “beneficiary” deeds. Some states have the same concept but use a different term, like the inelegant “revocable transfer on death” deeds. The basic idea: you can sign a deed to your real property which acts like a beneficiary designation — just like your insurance policy, your bank or brokerage account, or other assets that can be held in such a fashion (including, in Arizona at least, your vehicles). If you want to, you can change the beneficiary (or simply delete any beneficiary) later, by signing a new beneficiary deed.

While they are often not a good substitute for more thoughtful estate planning, Arizona beneficiary deeds can help people avoid the expense and delay that the probate process might engender. They can act as a simple planning device for people who do not want, or do not need, to incur the cost of creating a living trust and transferring assets into the trust’s name.

Here’s one way we often use beneficiary deeds: sometimes a client creates a revocable living trust but does not want to transfer real estate into the trust’s name immediately. They can sign a beneficiary deed naming the trust as ultimate recipient of the property, avoid the probate process and gain the other benefits of trust planning (like the easy ability to impose limits on the future use or transfer of the trust’s property). Of course, after a client has gone to the trouble and expense of establishing a living trust, it usually makes sense to just transfer real estate into the trust’s name — but sometimes the beneficiary deed can work as part of the plan.

A recent Arizona Court of Appeals case described how not to use beneficiary deeds in connection with trusts. The background: Alexandra Granger (not her real name) was in her late 70s when she completely rewrote her revocable living trust, naming her attorney Whitney L. Sorrell as successor trustee. Her Scottsdale-area home had already been transferred into the trust’s name.

Three years later Alexandra signed a beneficiary deed, as trustee. The deed purported to leave her home to her attorney upon her death, though it would otherwise have passed according to the trust’s terms without the necessity of probate. It is unclear why Alexandra would have wanted to sign the beneficiary deed.

A few years later, when Alexandra was 89, she resigned as trustee of her own trust and turned over finances to attorney Sorrell. Although the court decision does not explain why, just one year later she revised her trust again — naming a new trustee and removing Sorrell. No change was made to the beneficiary deed. Alexandra died a few weeks later.

The attorney filed Alexandra’s earlier documents with the probate court, and asked for appointment as her personal representative. The person named in the last amendments objected, and sought probate court approval of those new documents. Mr. Sorrell then asked the probate judge for a ruling that he was entitled to Alexandra’s home by virtue of the beneficiary deed she had signed as trustee.

The probate judge denied the request, and the Arizona Court of Appeals last week ruled that he was right. A beneficiary deed must follow the language of the statute, ruled the appellate court, and that requires that it be signed by an individual owner, not a trustee. Besides, as the appellate judges noted, a beneficiary deed only takes effect when the property owner dies, and a trust does not “die” with its settlor — so a beneficiary deed for a trust-owned property is a meaningless document. In Re Ganoni, May 28, 2015.

Buried in the facts of Alexandra’s case is an unanswered question: is it permissible for a lawyer to receive any inheritance from a client? Generally speaking, it is not — but that question is actually not addressed (and certainly not answered) in last week’s reported case. Still, it is worth noting that there are rules about attorneys inheriting from clients.

Generally speaking, an Arizona attorney is not permitted to prepare estate planning documents which leave any “substantial” gift to the lawyer — even if the client is competent and fully apprised about the possibility of conflict. Almost all of the American states have adopted versions of the American Bar Association’s “Model Rules of Professional Conduct,” and Ethical Rule 1.8(c) (as adopted in Arizona) makes the prohibition clear: “A lawyer shall not solicit any substantial gift from a client, including a testamentary gift, or prepare on behalf of a client an instrument giving the lawyer or a person related to the lawyer any substantial gift unless the lawyer or other recipient of the gift is related to the client.” In other words, even if a client knows the rule, and insists that the lawyer write herself into a will, the lawyer is required to refuse.

Does that mean that Alexandra’s attorney violated ethical rules? It is not clear from the reported decision — the key missing piece of information being whether he prepared the beneficiary deed in question. There is not a similar prohibition in Arizona against a lawyer naming himself or herself as successor trustee, but the intertwined relationship the Court of Appeals describes certainly raises questions about the arrangement.

Is Dispute Inevitable When Two Children are Named as Co-Trustees?

MAY 18, 2015 VOLUME 22 NUMBER 19

So often our clients assure us that their children are different from other children. Our clients know that their children will fundamentally get along. They are sure that there will be no big problems when they die, and that the children will communicate and cooperate. Fortunately, that turns out to be the case for our clients. But other lawyers’ clients seem to be very different.

Betty Lundquist (not her real name) must have thought her two daughters could work well together, because she named them as successor co-trustees of the revocable living trust she set up. She directed that the daughters (Peggy and Lisa) were to split her estate equally. She also signed a “pour-over” will, directing transfer to her trust of any assets not already properly titled at her death. For whatever reason, she named Lisa as the sole personal representative of her probate estate.

Betty had actually transferred pretty much everything to her trust, and so probably envisioned that there wouldn’t be much need for a probate at all. As she approached death, however, things were already getting tense between Peggy and Lisa. The day before Betty’s death, Peggy and her husband tried to transfer some of her trust accounts into their own name. They got the original will and trust documents from Betty’s accountant, and declined to share them with Lisa. Peggy was living in Betty’s home, and wouldn’t let Lisa even into the home to look at — and inventory — their mother’s belongings.

When Betty died in 2011, Lisa filed an emergency petition with the probate court seeking release of the original will and other documentation. She ultimately was appointed personal representative, and Betty’s will was admitted to probate. Peggy thereafter refused to co-sign trust checks to pay Betty’s bills, or motor vehicle affidavits to transfer car titles.

Eventually the probate proceedings were wrapped up, though the sisters were still not getting along. Finally, Lisa filed a request for payment of her mother’s estate’s expenses — including her attorneys fees for the probate proceedings themselves. Peggy responded by arguing that Lisa should have been disinherited because she filed the probate proceedings at all. Her logic: Betty’s will and trust provided for automatic disinheritance for anyone challenging her estate plan, and Lisa’s filing of a probate proceeding amounted to a challenge of their mother’s plan to avoid probate altogether.

The probate court approved payment of attorneys fees of $8,081.20, and a little more than $7,000 of other costs incurred in administration of the estate. Since the bulk of Betty’s estate was actually in her trust, the probate judge also ordered that the payments would come from the trust to the extent necessary. Peggy appealed both the approval of attorneys fees and the order that the trust should pay the fees.

The Arizona Court of Appeals ruled that the attorneys fees were appropriate and reasonable, and upheld the order. Furthermore, it agreed that the probate court had the authority to order payment from the trust — even though the trust had not been submitted to the court for oversight. According to the appellate court, both the trust’s language and Arizona law provide for payment of the decedent’s expenses — including probate and administrative expenses — from trust assets. Johnson v. Walton, May 14, 2015.

Peggy’s argument (that no probate proceedings were even needed) might have carried more weight if the Court had not been convinced that she actively interfered with the orderly administration of her mother’s estate. In fact, with even a modicum of cooperation Betty’s daughters might well have had a smooth, easy and inexpensive trust administration, and no need for any probate proceedings. That is a common result in similar circumstances — especially when one of the children is put in charge and they behave responsibly and honestly. (Of course, the person in charge need not be one of the children — but that is the choice we see most often.)

Was Betty’s mistake putting her two daughters in joint charge, and assuming they would work together? It’s always hard to figure out exactly what else might be going on when reading a Court of Appeals opinion, but if the joint authority didn’t cause the problem, it certainly did not help prevent the later dispute.

Our usual advice: rather than appointing two (or more) children with equal authority, we suggest you default to a choice of the one person who is most responsible, most widely respected among your beneficiaries, most available and most trustworthy. For clients who tell us that each of those terms applies best to a different child, we suggest that they use some method to make a single selection (coin flips work in extreme cases). Fortunately, though, our clients’ children all get along, all work beautifully together and never have disputes. Just like our own children.

Financial Exploitation Case Leads to Judgment, Disinheritance

MARCH 2, 2015 VOLUME 22 NUMBER 9

We hear variations on this same story once every week or so. Dad (it might be Mom, or Aunt Bridget, or a long-time family friend) seemed to be adrift after his wife (her husband, her long-time companion) died. Then he met this woman who moved in with him (or moved her to his town), cut off family contact, got a power of attorney signed and proceeded to transfer assets.

Too often there’s not much we can do about the story. The money may be all gone (the people who take advantage of seniors in this fashion are often drug users, gamblers or marginal characters themselves). The family member might actually want to live with the person everyone sees as an exploiter. Sometimes it’s hard to even locate the victim.

Once in every few cases, though, it may be possible to protect the elderly victim, improve their situation and even secure a judgment against the exploiter. That’s what happened in a case that finally (after a decade of litigation) seems to have gotten resolved by the Arizona Court of Appeals.

Bridget Greene (not her real name) was 99 when she first came to the attention of Tucson lawyer (and professional fiduciary) Denice Shepherd (her real name) in 2005. Based on a report from Adult Protective Services, Denice filed a guardianship and conservatorship proceeding to extract Bridget from her “deplorable” living situation, and to begin the process of recovering some or all of her assets.

As the story developed, it became apparent that Bridget had befriended one Andrew Brice almost two decades earlier, after her husband’s death. She and her husband had no children; her closest relatives were nieces and nephews. Just two years before the guardianship/conservatorship proceeding, Bridget had moved back to Arizona after a short stint living near her nieces in Virginia. She had then signed a power of attorney naming Andrew as her agent, and transferred her home into Andrew’s name. She had also signed a new, handwritten will leaving everything to Andrew.

Denice promptly initiated an action against Andrew, seeking return of the money he had moved from Bridget’s account to his own. She recovered over $60,000 from three bank accounts, and then initiated a complaint against Andrew claiming that he had exploited a vulnerable adult.

Under Arizona law at the time (it has since been softened), a person found to have exploited a vulnerable adult would automatically be liable for three times the amount taken, plus being disinherited from receiving anything from the victim’s estate. Denice secured a judgment against Andrew for $247,531.23 (three times the amount he had taken); the handwritten will and power of attorney were also invalidated. The judgment was reduced by $65,155.99 that Denice had collected from Andrew by that time.

Bridget lived another five years after being removed from her filthy home and the “care” she had been receiving. After she died in 2010, Andrew tried to reassert the handwritten will naming him as beneficiary. He also challenged Denice’s appointment as guardian and conservator, and the award of damages and attorneys fees.

The probate judge ultimately found that Andrew had been disinherited by his exploitation, that he had no basis for seeking Denice’s removal as guardian and conservator, that Bridget’s prior will (which had left nothing to Andrew) was valid, and that the judgment against him was proper. When Andrew appealed, the Court of Appeals agreed on every point.

It is worth noting, as the Court of Appeals does, that much of probate court’s ruling against Andrew is based on his failure to proceed properly in the underlying lawsuit. He answered the complaint with a general denial, but without specific allegations that would support his argument. His response to a motion for entry of judgment against him did not challenge the factual allegations, which were thus assumed to be correct. He filed numerous pleadings and motions, but apparently without good legal advice.

The final resolution of Bridget’s guardianship/conservatorship/probate case, though, was clear. Bridget was a vulnerable adult, impaired by her diminishing mental capacities. Andrew was her caretaker (he claimed that they held themselves out as a married couple, but he acknowledged that they were never actually married), and owed her a duty not to commingle their assets or take advantage of her. He breached that duty by transferring her assets into his own name. He might have also neglected her, though the probate court never had to reach that question.

Arizona law at the time provided for automatic disinheritance of someone who exploits a vulnerable adult (it has since been changed to permit, but not require, the court to order disinheritance). It also provided for damages automatically set at three times the amount actually exploited (it has since been changed to allow the court to enter judgment of up to two times the amount of damages). The Court of Appeals upheld the orders entered by the probate court under the “vulnerable adults” statute. In Re Garner, Deceased, February 25, 2015.

Even though Arizona’s law has been relaxed somewhat, it remains stronger than the similar provisions in many other states. Although it is often hard to recover damages for abuse, neglect or exploitation of vulnerable seniors, sometimes the legal tools actually work fairly well. Similar stories might be told in other states, though we don’t hold ourselves out as experts on other states’ laws or practices. But if you know someone who has been taken advantage of in similar circumstances, we strongly suggest that you get good legal advice to consider whether there might be some recourse to recover lost assets and, much more importantly, protect vulnerable seniors and improve their lives.

Court Rejects Challenge to Living Trust After Settlor’s Death

FEBRUARY 16, 2015 VOLUME 22 NUMBER 7

Jessica Waltham (not her real name) died tragically in 2012, when her home south of Tucson burned down. She left a small estate, three sons and a bubbling dispute over the validity of her living trust.

Jessica had first signed a living trust in 2000. She titled her home, and her bank and investment accounts to the trust. She also signed a “pour-over” will (leaving the rest of her estate to her trust), and powers of attorney.

In that initial round of planning, Jessica’s trust and related documents left everything equally to her three sons. She named one son, Edward, as her successor trustee and agent on her powers of attorney.

Beginning in 2009, though, Jessica began to revise her estate plan. Over the next three years she made several changes; the last change, early in 2012, named Edward’s two sons as the primary beneficiaries of her trust, and largely disinherited all three of her sons. It still named Edward as successor trustee.

After Jessica’s tragic death, her other two sons challenged Edward’s administration of the trust. They demanded an accounting, insisted on seeing the history of documents signed by their mother, and even started a probate proceeding (though all of Jessica’s assets were titled to her trust, and her will left directed that any other assets be distributed to the trust anyway). As the proceedings continued, the two dissident brothers filed a lis pendens claim against Jessica’s house, seeking to prevent any disposition of the property while they argued about the effect of her trust and its amendments.

Edward, acting as successor trustee, moved to dismiss his brother’s court demands, and to administer the trust (with its last amendments) according to the document itself. Ultimately the probate court agreed, and ruled that Jessica’s other sons had not standing to demand an accounting (since they were not trust beneficiaries) and had not raised sufficient evidence of any wrongdoing to require Edward to respond.

The probate judge took one step further, ruling that the filing of a lis pendens was improper. The judge imposed sanctions against the brothers, finding that they had no legitimate reason to claim any interest in the trust’s property — even if they were to be successful in the trust interpretation action, the property unquestionably belonged to the trust. The probate judge may have been moved by other actions taken by the brothers, including filing a change of address form with the Post Office to have their mother’s mail redirected to them, despite the fact that Edward was in charge of managing the trust’s (and their mother’s) property.

The Arizona Court of Appeals, ruling last week in a memorandum opinion, agreed with the probate judge. According to the appellate judges, Jessica’s two sons had no standing to demand an accounting or explanation from Edward as trustee. They had no basis for filing the lis pendens, and were properly sanctioned for doing so (and for refusing to release it when challenged). The judgment against them was upheld, and the Court of Appeals added an additional sanction of attorneys fees and costs against them for the appeal, as well. In Re the Wootan Revocable Living Trust, February 13, 2015.

The family dispute arising out of Jessica’s trust is part of a growing trend in the estate planning arena. As revocable living trusts have become more common and popular, the pace of trust challenges has picked up, as well.

One of the hallmarks of trust administration is that it usually is not supervised or monitored by the courts. Of course disgruntled heirs have the ability to seek court intervention — but the probate courts generally are slow to intervene unless there is a serious challenge by someone who clearly has a right to raise that challenge. Mere belief that something must be wrong is not enough; a challenger must have standing and an articulated reason for seeking court monitoring.

Turn the question around, though. If you were Jessica, and had decided to disinherit your children in favor of some of your grandchildren, what might you have done to reduce the likelihood of a challenge? Would it help to share your plan with the affected children? To explain your intentions in writing, or by a recorded message?

The two primary challenges Jessica’s sons raised were typical: they claimed that she must not have understood what she was doing, and that she must have been persuaded by Edward to make the changes at his request. Both are difficult to prove, and suspicion — even strong suspicion — is not enough. But would Jessica’s lawyer’s notes help show that she perfectly understood what she was doing, and that it was her own wish to make the change?

“No-Contest” Clause in Trust Can Be As Effective As Will Provision

JANUARY 19, 2015 VOLUME 22 NUMBER 3

When we prepare wills and/or trusts for our clients, they often ask if they should include a “no-contest” provision. Typically, they want us to add language that would penalize anyone who challenges the validity of their estate planning documents.

Are such provisions effective, or even permitted? We explain to our clients that no-contest clauses can be effective — but they presume that the possible contestant has something to lose. There is no point in writing a will or trust that says something like “I hereby leave nothing to my son Barry, and if he contests this he will be disinherited.”

That aside, no-contest provisions can be a way of avoiding legal complications among beneficiaries and the person in charge of handling an estate. We have written before about the difficulty in interpreting and applying such provisions, but there is no doubt that there are circumstances in which such a clause (also sometimes called an “in terrorem” provision) can be beneficial.

A no-contest provision can sometimes be worded more broadly, and become a much more powerful, if blunt, instrument. Take, for instance, the circumstances behind a recent Arizona Court of Appeals decision.

Details of the family relationships are sketchy in the reported court decision, but they involve a 1994 trust, apparently signed by Terry Simmons (not her real name) and her then-living husband, that included this language:

“If any beneficiary under this Trust, in any manner, directly or indirectly, contests or attacks the validity of … this Trust or any disposition … by filing suit against … Trustee … then any share or interest given to that beneficiary under the provisions of this Trust is hereby revoked and shall be disposed of in the same manner as if that contesting beneficiary and all descendants of that beneficiary had predeceased the Surviving Settlor.”

Fifteen years later, two of the remainder beneficiaries did file suit against Terry, who was serving as the trustee of the trust. They alleged that she had violated her fiduciary duty in a number of ways. The court ultimately distilled their objections down to nine different challenges to Terry’s administration of the trust.

Terry responded, and litigation ensued. The probate judge denied all of the objections to the administration of the trust. That left one question: had the remainder beneficiaries been disinherited by their trust contest?

Arizona has a statute governing the validity of no-contest provisions in wills, but there is no statute expressly covering similar provisions in trusts. The statute governing wills says that a no-contest provision is “unenforceable if probable cause exists” for the contestant to have filed their action. In other words, if the case had involved a will rather than a trust, the test would have been whether the contesting beneficiaries had “probable cause” to file their objections.

The probate judge applied the same standard to determine the validity of the no-contest provision in Terry’s trust. The judge found that, though the contestants were not successful, they had at least probable cause to file their contest and therefore would not be disinherited.

The Court of Appeals agreed that the same standard should apply (though they got there by a slightly different route), but disagreed on the outcome. Because the beneficiaries had made nine different complaints about the trust’s administration, ruled the appellate court, they had to have probable cause for every one of the nine challenges. It was as if, the appellate judges reasoned, the beneficiaries had filed nine separate lawsuits; each one would have to have been based on probable cause, and the mere fact that they combined all nine into a single complaint made no difference.

With that different reading of the requirement, the appellate court reversed the holding of the probate judge and ordered that the beneficiaries had been disinherited by their filing. One of the complaints they made had insisted that Terry, though she was entitled to the annual income of the trust, should have distributed it to herself only once per year, and not on a monthly basis. That was simply not the law and not required by the trust document, said the appellate court; because there was no basis for that single allegation, the no-contest provision was triggered. The court did not even have to review the other eight allegations to determine whether there was any basis for filing a contest. In Re Shaheen Trust, January 16, 2015.

What does Terry’s trust tell us about writing trusts, administering them or challenging the administration? Several things, at a minimum:

  1. In Arizona, at least, no-contest provisions are as effective in trusts as they are in wills, and clients may want to consider including them — especially in contentious families, second marriages, or other cases where everyone might not be (or stay) on the same page about what should happen.
  2. People who genuinely think that they should file a challenge need to be very cautious, and first look for any no-contest provision. If there is such a provision, any contest should start small, with only the most flagrant misbehavior included — rather than a scatter-shot challenge to a variety of actions.
  3. It may also be appropriate to include alternative dispute resolution provisions in one’s will or trust — mandating, for example, that contestants first submit to arbitration, or perhaps mediation, before filing formal challenges. This might help reduce the cost and the antagonism that occasionally appears in inheritance contests.
  4. If one beneficiary is intended to be given more latitude than others (if, for example, a surviving spouse is to be given more deference than the children — or the reverse), the trust ought to say so, and make clear that the trustee is to favor that beneficiary, and include provisions giving the other beneficiaries only those powers to inquire or object that the trust settlor wants to give them. That would help the legal system analyze the purpose and meaning of no-contest provisions if and when contests do arise.
  5. Another idea we have written about before, the concept of a “trust protector“, might be a way to allow the trust to be modified to deal with changing circumstances — like deteriorating relationships among the beneficiaries and trustees.

Assets Not Held As Part of Trust Pass to Different Successors

DECEMBER 15, 2014 VOLUME 21 NUMBER 45

From time to time we see appellate court decisions dealing with a common estate planning problem: after creation of a trust, changing title to assets is an essential element of completing the estate plan. Once in a while, as appears to be the case in this week’s court decision, the failure to “fund” the trust may actually be intentional. But the point is still valid. Assets not titled to (or left to) a trust will not be affected by the trust’s terms.

Actually, before we lay out the facts in this week’s case, we want to make two other points supported by the decision. First: to the extent that probate avoidance is an important part of your estate planning, just signing a trust document is not enough. But that doesn’t mean that assets not transferred to the trust will necessarily need to be probated — there are other probate avoidance choices available, whether you have signed a trust or not. Second: heirs need to look at the larger picture, not just the language of one document — be that a trust, a will, a power of attorney or a handwritten note from a now-deceased family member.

Let’s look at the facts of an Arizona Court of Appeals case issued late last week. Fred and Elena Dominguez (not their real names) had been married for years, but had no children together. Elena had four children from her first marriage. Fred and Elena created a joint revocable living trust and transferred three parcels of real property into the trust’s name in 1998.

Late in 2003 Fred and Elena sold part of their real property for $910,000. They received about a third of the sale price in cash, and took back a note for the remaining value of the property. A month later they opened an account at a local bank; that account was titled in their names as individuals, not as trustees, and Sarah, one of Elena’s daughters, was named as a joint owner.

Elena died a little more than a year after the account was opened. Shortly after that, her name was taken off the account so that it was held by Fred and Sarah as joint owners — and not as trustees.

Upon Elena’s death, the trust was divided into two shares and both became irrevocable. It wasn’t until four years later that Fred hired a Phoenix attorney to make the calculations and complete the division; the attorney incorrectly listed the joint account as a part of one of the trusts. The trust division was completed as to the remaining assets, but it took Fred two more years to notice that the listing improperly included the bank account as an asset of the divided trust. In 2011 an amended allocation of trust assets was completed by the same attorney, and approved by Fred and the then-current trustees of the trusts.

Fred himself died shortly after the amended trust division was completed. Elena’s two sons requested an accounting from the trustees; they sent a preliminary accounting and copies of some account documents. Elena’s sons filed a complaint with the probate court arguing that the trustees had failed to discharge their fiduciary duties by not collecting the assets in the joint bank account, and that the accounting did not show the proceeds of the note from the sale of the trust’s real estate.

The probate court held a three-day hearing on Elena’s sons’ complaint. Ultimately, the judge ruled that (a) the joint bank account passed to Sarah outside of the trust and outside of probate proceedings, (b) the receipt of payments on the note was not the responsibility of the trustees and did not need to be accounted for, and (c) the accounting provided by the trustees was both accurate and adequate.

The Arizona Court of Appeals affirmed the probate court decision. The appellate judges noted that it was apparent that Fred and Elena intentionally took the proceeds from sale of the real estate out of the trust — which they were entitled to do while they were both alive — and set up the joint account. Elena’s sons had not shown that there was any mistake or misunderstanding about the transaction. Just because the underlying real estate was once owned as part of the trust it did not follow that they had to keep it in the trust after the sale.

Similarly, the trustees had no duty to account for note payments received by Fred and Elena before their deaths (and before the trustees even took over the trust). The trust terms echoed general trust law: the successor trustees were permitted to accept trust assets as they stood at the time they took over as trustees, and no evidence had shown that any improper transfers had occurred.

One interesting side fact: the two successor trustees were the two husbands of Elena’s daughters. One of those daughters, of course, had received a large bank account outside of the trust. Her brothers argued that the trustees had breached their duty of impartiality by not pursuing Sarah for the bank account, and by communicating with Sarah’s lawyers and strategizing about how to present their case. Not so, ruled the Court of Appeals. The property passed outside the trust, and the trustees were permitted to discuss the case with Sarah and her attorneys — Sarah would be a key witness in the case, after all.

Finally, the Court of Appeals approved the accountings provided by the successor trustees. They demonstrated that “trust assets were accounted for and intact.” That was all that was required of the trustees, and they met their obligations. In the Matter of the Dobyns Family Trust, December 11, 2014.

It appears as if Fred and Elena intended to change the distribution of their assets by creating the joint account outside the trust. They could have accomplished the same result by amending the trust — which they would have had the authority to do at the time of the sale of trust assets (or earlier, for that matter). That might have avoided the later challenge, but of course it might not have done so, either.

Much more often, we see cases in which changes like those Fred and Elena worked are inadvertent. “Funding” of a trust is an important part of the plan, but just as important is maintaining the funding status so that you do not accidentally change your estate plan. Of course, if you intend to make a change your lawyers will be happy to counsel and assist.

Does Your Personal Property Belong to Your Living Trust?

JULY 21, 2014 VOLUME 21 NUMBER 26

When you create a revocable living trust, you usually want to transfer most (maybe even all) of your assets to the trust — especially if one of the reasons for creating the trust is to avoid the probate process. A new deed to your home, a change in titling of your brokerage and bank accounts, perhaps even a new title for your car or cars are often part of the process. But what about your household possessions — furniture, art hanging on the wall, your priceless collection of antique tape dispensers, your stamp and coin collections?

Commonly (but not always) people who establish a living trust might also sign a document purporting to transfer all of their personal property to the trust. Usually this is not much of an issue, since there are no title documents for most of your personal effects, and your intended beneficiaries can just collect, disperse and/or sell the contents of your house.

But another purpose in executing a living trust is usually to reduce the possibilities for disputes among your family members. Your trust, after all, should include a comprehensive approach to your plans for distributing assets on your death. Even a well-drafted trust document, though, will not resolve all family disagreements.

Consider Cliff Cruz (not his real name). Cliff and his first wife had four children, all grown. After Cliff’s wife died in 2003, he moved to Arizona to be near some of his children — and here he met and married Geraldine.

Cliff and Geraldine took steps to arrange their estate plans. The signed a revocable living trust agreement, providing that on the death of either spouse the trust would be divided into two shares — one belonging outright to the surviving spouse, and one held in trust for the benefit of the surviving spouse but ultimately distributed to the deceased spouse’s children. They explicitly agreed that everything they owned, even those things they each brought into the marriage, would be treated as community property — which meant that each of them would henceforth own a one-half interest in all of their combined assets.

The couple also signed “pourover” wills, each leaving everything they owned to the trust upon death. They signed a deed transferring their home to the trust, along with transfer documents for all their other assets. Just to be thorough, they also signed a document which said that all of their personal property — household effects, furniture, contents of their home, and anything else — also belonged to the trust.

Cliff died three years later. Five days after his death, two of his children went to the couple’s home and removed four safes, all of Cliff’s gun collection and various other items, and took them to their homes. They argued that Cliff had given his children the contents of the safes and the guns during his life — before he even met Geraldine. In the safes: almost $400,000 worth of gold and silver coins.

Geraldine sued, arguing that her step-children had essentially stolen assets belonging to her as trustee and intended to form part of the trust for her benefit. The children responded claiming the prior gift, and arguing that the trust should be modified to reflect their right to the gold coins and guns. After months of legal maneuvering, the case was tried before a jury. Geraldine pointed to the documents and testified that she understood that Cliff had transferred everything to the trust; the children testified that Cliff had purchased all of those items as investments for the children, and had given them to his children (but held on to them for safekeeping) many years before his death.

If you were on the jury, do you know what you would have decided? Before you read on, stop a moment and see if you can make up your mind, or whether you need more information. If you need more information, what do you want to know?

After a three-day trial, the jury returned a verdict that two of Cliff’s four children had, indeed, taken property belonging to Geraldine and the trust. They entered a dollar verdict, rather than ordering return of the items; they therefore did not identify which items they believed were wrongfully taken. But the dollar amount of the judgment, just $15,000, made it hard to figure out what they thought belonged to the trust.

Geraldine appealed, arguing that the judgment made no sense. If the jury believed that trust property was taken by the children, she argued, then the judgment should have been more like $400,000.

The Arizona Court of Appeals disagreed. First, the appellate court noted, if there is any theory on which the jury’s verdict can be upheld, it will normally be confirmed. In this case, the fact that Cliff gave his children the combinations to the safes might have been sufficient proof of his “constructive” delivery of the coins and safe contents to the children prior to his marriage, even though he kept the safes themselves at his home. In that case, the jury verdict would make sense — and so it was affirmed. Covino v. Forrest, July 3, 2014.

What does Cliff’s estate plan tell us about good practice in other cases? For one thing, if you think you have given property to your children — or anyone else — during your life, you should make that clear. That is especially important if you still have some of the gifts in your possession. Especially in second-marriage cases, it would be really helpful if families talked about ownership and expectations early, before the death of a parent simultaneously raises the emotional level and removes an opportunity to simply ask for clarification. And, finally, just signing an assignment of personal property to your trust might not be enough, depending on your individual and family situation — you might be better served by sitting down and writing out your intentions and understanding.

Agent On Power of Attorney is Personally Liable for Legal Fees

MARCH 3, 2014 VOLUME 21 NUMBER 9

Let’s say that Billy signs a power of attorney, naming his friend Joyce as his agent. Later Billy becomes incapacitated, and his agent needs legal advice about her rights and responsibilities. Who will pay for their legal advice?

Generally speaking, you are not supposed to have to spend your own money for things you need to do while acting under a power of attorney, and that includes getting legal advice. But the real world can sometimes get in the way — Billy’s assets may be insufficient to pay legal fees, there may be a dispute about whether his agents are acting in his best interests, or there may be personal interests that they are simultaneously promoting.

This concern is not academic, at least for the people involved in a recent Arizona Court of Appeals decision. “Billy” in that case was Billy Preston, who was sometimes tagged as “the fifth Beatle.” He became seriously ill in 2005, and was admitted to a hospital in Phoenix; he died in June, 2006, after months in a coma.

Billy had signed a medical power of attorney in 2004, naming his friend Joyce Moore as health care agent. Joyce was already his agent — she had represented him as a musician for some years before he signed the health care power of attorney. In March, 2006, while Billy was comatose, his half-sister petitioned the Arizona probate court to be named Billy’s conservator. Although Joyce’s power of attorney put her in charge of medical, not financial, decisions, she felt that she needed legal advice. Joyce hired a Phoenix law firm to represent her; she signed a retainer agreement on March 30, 2006.

Apparently, Joyce and her lawyers did not have the same understanding of their relationship. While Joyce later testified that she thought her lawyers represented her only as health care agent for Billy, her lawyers insisted that they represented her as an individual because of her financial dealings with Billy.

Joyce insisted that her lawyers should submit their bill to Billy’s estate; whether or not that made sense, it was an impractical way to secure payment since the Billy Preston estate had declared bankruptcy. In fact, the estate sought (and recovered) some of the retainer fee Joyce had given to her lawyers, since it had come from Billy’s estate and had not been approved by the bankruptcy court.

Three years after Billy Preston’s death, Joyce’s attorneys sued her personally for about $30,000 in legal fees. Joyce argued that she was not personally liable for the bill; a fee arbitration process found otherwise, and awarded $13,550.86 in legal fees and costs to the law firm. Joyce appealed and set the dispute for trial.

After a three-day trial, an Arizona jury ruled that Joyce personally owed her lawyers $20,000. Joyce appealed the judgment. Last week the Arizona Court of Appeals upheld the award of fees and costs to Joyce’s lawyers, finding that she had not produced sufficient arguments to overcome the jury’s award. Burch & Cracchiolo, P.A. v. Moore, February 27, 2014.

The ruling itself is not actually all that revealing. Joyce represented herself for the appeal, and did not submit transcripts of the trial proceeding; in the absence of those transcripts, the appellate court ruled that she could not show that there had been mistakes in the trial court. The real value of the case, for our purposes, is a chance to explore the authority of agents under powers of attorney to hire lawyers (and other professionals).

There is little doubt that an agent can hire an attorney, accountant, physician or other professional as may be needed in order to discharge their obligations as agent. So, for instance, it would be easy to imagine a circumstance in which there were legitimate legal questions about the agent’s authority, or powers, or duties, and hiring a lawyer might well be necessary and appropriate to help figure out the answers to those questions. That lawyer’s fees would ordinarily be charged against the estate of the principal (the person who signed the power of attorney).

Similarly, it would be easy to imagine that a financial agent might need to hire an accountant to prepare tax returns or accountings, or to investigate past transactions. Those charges should be paid by the estate in most cases, too. Same thing for hiring a doctor, or a social worker, or a case manager, to help oversee care of a person who has signed a health care power of attorney.

Problems can and do arise when the agent also has business dealings with the principal before the power of attorney is signed or used — and such circumstances do happen. After all, it often makes sense to name your business associate to manage your own finances — typically they might know more about your finances than others, even family members. But that can complicate the responsibility to figure out what the attorney (or accountant, or medical professional) is doing for the agent as agent, and what is being done for the agent as an individual.

It’s hard to tease out how much of that might have been going on in Billy’s case, since the appellate record is sparse. But confusion between the lawyers’ view of their role and the client/agent’s view is not that uncommon; it’s why a fee agreement should spell out the precise relationship and who will be responsible for payment.

Typically, a lawyer’s fee agreement might provide that bills will be submitted to the principal’s estate. If they are not paid for any reason (even though that failure or refusal of payment might be challenged), the fee agreement often will provide that the agent is responsible for payment and for seeking reimbursement from the estate. Such a provision might have been in Joyce’s attorney’s fee agreement, but the appellate court did not mention it.

Does all that mean that you should refuse to act as agent because  you might incur personal expenses if things go awry? If you are very skittish about the possibility, you should consider whether it is important enough for you to decline. In the real world, however, disputes like this are rare — and your loved ones need someone to step up and take responsibility for their care if and when they are unable to do it themselves.

©2017 Fleming & Curti, PLC