Posts Tagged ‘charitable remainder trust’

Figuring Out What Court Has Jurisdiction Over a Trust

AUGUST 24, 2015 VOLUME 22 NUMBER 31

One of the best things about establishing a living trust is that you are helping to minimize the likelihood that any court will ever be involved in the administration of your estate. That can save costs, avoid conflicts and give you peace of mind. But sometimes courts do get involved, even when that’s not what you wanted. Then you might face a question that, frankly, even lawyers don’t think about enough: in what court does one sue a trust (or its trustee)?

If you have established a trust, or are a trustee, it’s likely that the trust document itself tells you that the law of a particular state applies. But that’s a different question. Just because a trust is governed by the law of, say, Arizona — it does not necessarily follow that the Arizona courts are the ones to resolve a given trust dispute.

That dichotomy was on full display in a recent Arizona Court of Appeals case, and its outcome might surprise you (and, not incidentally, a fair number of lawyers). The dispute started as a simple lawsuit against an individual, and ended up deciding an important trust principle.

Richard Henderson (not his real name) established three charitable remainder trusts between 1990 and 1994. The trusts were, for our purposes, similar. Each involved Richard putting a fixed dollar amount into a trust that named a charity as beneficiary, but each provided that Richard would receive a percentage of the trust’s value each year until his death.

Why did Richard establish these trusts? The record is not clear, but we can assume that at least one purpose was to benefit the charitable beneficiaries, and to receive an income tax deduction for a portion of the amount he put into trust each year.

But we can figure out a number of the elements of Richard’s charitable remainder trusts: he was the trustee of each trust at the time the underlying litigation began, and he had control over where the annual payments were sent. He had no ability to reach the principal of his own trusts — they had to be irrevocable under federal tax law. But he still received an annual benefit from each trust.

Then Richard got into financial trouble. In 2014, Wells Fargo Bank secured a judgment against Richard for $2.5 million, and began to collect some of that judgment from him and from his revocable living trust. But it couldn’t reach the charitable trusts, since Richard himself could not reach the principal of those accounts. Wells Fargo then initiated proceedings to collect enough information so that it could seize the annual distributions due to Richard from the trusts — before they ever got to Richard.

Richard responded by resigning as trustee. He traveled to Florida (this turns out to be a key part of the story) and met with a representative of a Bahamian company named International Benefits Management Corporation (IBMC). While in Florida, Richard exercised his authority under the trust to name his own successor, and he turned over all the books and records to IBMC.

Under the terms of the trust, IBMC now paid most of Richard’s living expenses directly, and it even paid his ex-wife the spousal maintenance he owed her. Only after most of his bills were paid did IBMC send any money to Richard.

Wells Fargo Bank cried foul, and sued Richard and IBMC. Once it had been served with the complaint, however, IBMC objected that it had no business in Arizona. It did not have offices in the state, it had not sent representatives to meet with Richard, and it did no business directly in Arizona. IBMC’s only connection to Arizona was that the beneficiary of three trusts it administered lived in the state, and it sent checks to him, his ex-wife, the Maricopa County Assessor (for Richard’s property tax bills) and a handful of other Arizona vendors. IBMC moved for dismissal of the complaint against it.

The Arizona probate judge overruled IBMC’s objections, and found that it had conducted business in Arizona. The Court of Appeals, however, reversed that holding and ordered dismissal of the complaint against IBMC.

In its opinion, the court of appeals explained that IBMC did not administer the trusts in Arizona. It did not have offices in the state, and it did not agree to jurisdiction by taking over a trust that had been administered in Arizona prior to its acceptance. By traveling to Florida, turning over all the books and records and naming IBMC as successor, Richard had managed to involve the new trustee without its ever acceding to Arizona’s jurisdiction. Hoag, et al v. Hon. French/Wells, August 18, 2015.

Would the answer be different if Richard’s trust documents declared that they should be interpreted pursuant to Arizona law? Actually, they might have said just that — such language would be common in trusts written in Arizona by an Arizona attorney, and the court opinion is silent about whether there is a similar provision in any or all of the trusts Richard established. But the language of the opinion makes clear that the question is not about Richard’s behavior but the personal jurisdiction over IBMC.

The court would likely have reached a different conclusion if the trusts had expressly indicated that any trustee was subject to the jurisdiction of Arizona courts. Language like that would be uncommon, but not rare. Arizona law permits the settlor of a trust to direct that the trustee will be subject to Arizona courts, but Richard’s trusts did not.

What does this mean for more common circumstances, including those where a trust beneficiary wants to sue the trustee? In general, this opinion stands for the proposition that any lawsuit against a trustee probably needs to be brought in the state (or country) where the trustee resides and/or administers the trust. That will usually be true regardless of where the beneficiary lives or where the trust was written. Of course, slight changes in facts may lead to major changes in outcome, so anyone facing this issue should consult competent legal counsel — but don’t be too surprised if the legal result is not the intuitive one.

Despite the Lawyers’ Best Efforts Heirs May Contest Estate Plan

NOVEMBER 22, 2010 VOLUME 17 NUMBER 36
Our clients usually have similar goals in their estate planning. They want to take care of their children. They may want to leave something to charity. They usually want to minimize taxes that they, their estate or their beneficiaries might have to pay. And they often tell us they want to make sure there is no quarrel among their beneficiaries, and that the process will not be contentious. We tell our clients that we understand, and that we will do what we can to meet those goals, but that the last one is hard to assure. We have no control over what the beneficiaries might do, and we simply can not promise that there will be no contest or litigation.

Will contests are actually quite rare. Contests over living trust provisions are even rarer. There are three good reasons that they are rare:

  1. The wills and trusts are usually valid, and any contest would be frivolous. It’s actually hard to win a proceeding contesting a well-drafted estate plan.
  2. Most people leave the bulk of their estate to the same heirs who would receive it if they did not prepare a valid estate plan. No one has any reason to contest your will if they would get exactly the same amount even if they could prove the will was invalid.
  3. The amount of money involved is most often not worth the legal expense — particularly if the likelihood of success is not good.

Sometimes, though, the amount of money, the change in distribution plans and the circumstances lead one or more beneficiaries to challenge the validity of a will or a living trust. They usually do not prevail — especially if the documents were carefully drafted and executed under the supervision of a competent attorney. But they may still raise the challenge.

That was what happened with the beneficiaries of Mercedes Kibbee’s estate. Ms. Kibbee lived in the small town of Sheridan, Wyoming. Her late husband Chandler Kibbee had been an important business executive, and the couple had ranched in Wyoming for years. In fact, Ms. Kibbee was worth about $32 million.

In 1996, after her husband’s death, Ms. Kibbee signed a trust which (at her death) would have left a trust for her daughter paying $50,000 per year, and divided the rest of her assets between trusts for her son and for her granddaughter (her daughter’s daughter). Her son and granddaughter had powers of attorney to handle both financial and health care issues for her, and were named as successor trustees. That would have exposed her estate to a substantial estate tax liability (depending, of course, on the year in which she died) of as much as half of the total estate.

In 2005 Ms. Kibbee fell and broke her hip, and ended up in a nursing home for rehabilitation. She wanted to return home, and she believed she had plenty of resources to provide whatever care she needed in her home. Her son and granddaughter thought she should stay in the care facility, and they arranged to take over as trustees of her trust and to keep her at the nursing home.

With the help of a long-time secretary and bookkeeper, Ms. Kibbee made contact with a local Wyoming attorney, Deb Wendtland. Ms. Wendtland helped Ms. Kibbee revoke the powers of attorney and remove her son and granddaughter as co-trustees of her trust. Instead she named herself and a local bank as co-trustees, and she returned to her home. The bank officer and Ms. Wendtland discussed her estate planning with her, and pointed out that she would be liable for a huge estate tax bill if she did not make changes to her documents. She was very disturbed by that prospect and asked the two to contact an estate planning lawyer to help organize her plans.

Robert H. Leonard, an experienced estate planning lawyer from Laramie, Wyoming, began visiting with Ms. Kibbee. Mr. Leonard was chosen because he was recognized as an authority on estate planning; he is, for example, a Fellow of the American College of Trust and Estate Counsel (ACTEC). At about the same time Ms. Kibbee asked her local lawyer, Ms. Wendtland, to make contact with Ms. Kibbee’s daughter and get her to visit and help with arrangements.

After many visits and much discussion, Ms. Kibbee signed a series of documents prepared by Mr. Leonard and Ms. Wendtland. She adopted a fairly complicated estate plan, which included charitable remainder trusts for her son and daughter, charitable lead trusts for her granddaughter and great-grandson, and a charitable foundation to receive much of her estate. Each document was carefully explained to her before signing, and her questions indicated that she understood them and agreed. Each document was reviewed with one or both of the attorneys and her bank trust officer. The entire plan was explained to her children and granddaughter as it was adopted.

Notwithstanding all of those careful plans, Ms. Kibbee’s son filed a challenge. He objected to the change in his mother’s estate plan, and particularly alleged that her daughter had unduly influenced her to make the changes. He argued that by the time of the signing she had become incompetent, and that the plan reflected her daughter’s wishes rather than her own. He filed his action while his mother was still alive, and argued that the successor trustee provisions should become effective immediately.

Ms. Kibbee, through her lawyers, answered the allegations and countered that she was fully competent and the planning reflected her own wishes. Unfortunately, Ms. Kibbee died just two months after her son filed his challenge.

It took more than two years to frame the legal issues for resolution, but in 2009 the trial judge dismissed all of the son’s allegations. He appealed, but the Wyoming Supreme Court agreed with the lower court and let the dismissal stand.

The preparation of Ms. Kibbee’s estate plan was comprehensive, thoughtful and reflective. It involved two different lawyers discussing her wishes with her, as well as a trust officer who was very familiar with her finances (and, by that time, with her family). She expressed her wishes clearly and consistently. On some issues, when she wasn’t sure how she wanted to proceed, she asked thoughtful questions and had heartfelt discussions with her advisers. In short, it is hard to imagine how a physically frail but mentally alert elder could have done better at addressing a complicated and difficult subject. The contest was not successful, but it was not prevented, either.

Two vignettes stand out in the Wyoming Supreme Court’s recitation of the case:

  • When Ms. Kibbee was considering whether to leave significant sums to the local YMCA for the benefit of youth programs, her advisers arranged for a group of children to visit her ranch house. They played in the pool, enjoyed a barbecue and chatted with Ms. Kibbee as she sat on her terrace in her wheelchair. She asked if they could return the next weekend.
  • When her attending physician was asked about her mental status, he described an inquisitive, playful, alert elderly woman who not only answered his questions but also challenged him. “…she had wit and intelligence, and I thought that she had kind of an ironic sort of personality where she would be almost like she was testing me,” said her doctor. “I was the so-called tester, and she was testee; but she had turned it around.”

Kibbee v. First Interstate Bank, November 5, 2010.

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