MAY 20, 2013 VOLUME 20 NUMBER 20
One of the reasons people create living trusts is to reduce the likelihood of disputes among family members. In fact, any well-written estate plan — whether it involves a living trust or not — should focus at least partly on that worthwhile goal. Most estates do get settled without disputes, and those with disputes are often easily resolved because the trust, will, and beneficiary designations are clear. But if family members are determined to be fractious, no amount of careful planning can completely remove the risk of a costly dispute.
Take the revocable living trust of Lorraine Bird (not her real name). It was prepared by a lawyer in 2003, and it contained straightforward provisions: most of Lorraine’s property was to be divided in half, with one half to go to her son Greg and the other half to her son Tony’s two children. Tony was named as successor trustee. like many revocable trusts, the document included a “Schedule A” listing the assets that Lorraine was transferring to the trust’s name.
The first problems arose when Lorraine started writing on the trust document directly. In 2004, 2006 and twice in 2008 she wrote on Schedule A, indicating what should happen to some items of her property. Also in 2008, while she was in hospice, she had Tony’s wife write out an amendment to the trust indicating that, among other things, her gold coins should be divided between her two sons. Lorraine died shortly thereafter, apparently without having her trust looked at or formally updated by her lawyer.
The next round of problems arose after her death, when Tony (the successor trustee) gave Greg the keys to their mother’s house. Greg removed some items; Tony asked for a listing of what Greg had taken, but the list he got back did not account for all the missing items. Tony hired a lawyer to assist him in administering the trust, and pursuing Gary for more detail about the property in his possession.
The most valuable item in Lorraine’s trust was a piece of real estate northeast of Phoenix. At first Greg wanted it sold and the proceeds divided between him and his niece and nephew. In fact, though he didn’t have any authority, Greg put a “For Sale” sign on the property and listed his own phone number. He also offered to let his niece and nephew buy out his interest in the property. Later he changed his mind, and insisted that his brother should distribute the property to the three beneficiaries and let them decide how to handle it.
Tony had the property appraised, and his children approached Greg with the appraisal results in hand. They offered to buy out his interest for $325,000. If he didn’t want to do that, they would sell him their interest for the same amount. Greg refused, and instead offered to purchase their interests for a total of $153,000. Then Greg filed a civil lawsuit against his niece and nephew, asking the court to divide the property. He also filed a complaint against his brother, alleging that Tony had breached his duties as trustee by not distributing the property in kind, had made allegations of theft against him, and had favored his own children over Greg in his handling of the trust.
The judge consolidated the two actions, and conducted a three-day trial. There were a number of questions to answer, including:
- Did Lorraine’s handwritten notes on Schedule A modify her trust?
- Was the separate amendment prepared by her daughter-in-law valid?
- Did the trust require distribution of her property in kind? If the trust was unclear, is there a presumption in favor of in-kind distributions?
- Who should pay the cost of the legal proceedings to resolve these questions?
At the very end of the trial, Greg and his niece and nephew struck a deal on the property: Greg bought out their interests for $325,000. There were still a number of issues to resolve, however, and the judge ended up making eight separate rulings. She found that Tony had not breached his fiduciary duty, but that Greg had initiated most of the problems by his own actions. She also ruled that Greg pay a total of $176,466 to the other parties for attorneys fees, and another $4,979.19 in costs.
Greg appealed, arguing that Tony had mismanaged the trust by not distributing the property in kind, pursuing him for personal property that turned out to have little economic value, and various other alleged breaches. Among them: Greg insisted that by asking his own son to help find a real estate broker for the property, without telling Greg, Tony had favored one trust beneficiary over the others. Similarly, Tony’s daughter had sent Tony an e-mail calling Greg names; when Greg later learned about it he insisted that Tony had breached his duty to all the beneficiaries by not promptly sharing that e-mail.
The Arizona Court of Appeals upheld the trial court ruling in pretty much every respect. It was not a breach of fiduciary duty to talk with one beneficiary without sharing every detail with the others. Tony did not violate his duty to resolve the trust administration just because Greg beat him to the courthouse with a petition asking the court to determine whether the handwritten amendments were valid. Even if there was an argument that Tony should distribute the property in kind, it was rendered moot by Greg’s agreement with his niece and nephew resolving the dispute. Greg’s own misbehavior made it inappropriate for him to complain about the cost of getting him to comply with the trustee’s requests for information about personal property he had taken from his mother’s house. It was proper to charge him the attorneys fees and costs incurred in defending his lawsuit. Perhaps most tellingly, the Court of Appeals added more costs and attorneys fees, awarding Tony and his children their requested fees and costs for having to respond to the appeal itself. In re Bower Revocable Trust, May 14, 2013.
It is worth pointing out (again — we make this point with some regularity) that the dispute was both expensive and time-consuming. In addition to approximately $200,000 in fees and costs Greg was ordered to pay for Tony’s and his children’s lawyers, Greg presumably had significant legal fees for his own side of the litigation. The Court of Appeals decision was rendered more than four years after Lorraine’s death (and that was speedier than most similar cases in our experience).
Are there clues and tips in Lorraine’s story that could help other families avoid similar costly delays in handling estates? Yes, there are several, including at least these:
- Don’t modify your estate planning documents by writing on them directly — even if you date and sign the changes (Lorraine didn’t). Although Lorraine might have paid a couple thousand dollars to have the changes done right, that would have been less than 1% of the total legal cost generated when she did not do that.
- Do your children not get along? Then include some language directing how to resolve disputes. Consider a mandatory arbitration provision in your trust as a way of speeding up dispute resolution — such a provision could prevent any beneficiary from forcing a complicated court proceeding.
- Are you administering a trust with a contentious beneficiary? Even though you may not have to, you might want to consider complete disclosure and transparency, and do not hesitate to affirmatively seek court direction rather than let problems fester and perhaps become intractable.
- Are you pretty sure you’re right, and your sibling/trustee/beneficiary is wrong? Do a reality check, and then do it again — there is a real risk that you could end up paying everyone’s legal fees.