AUGUST 22, 2011 VOLUME 18 NUMBER 30
Of course it usually makes sense to place your estate planning wishes in the hands of your lawyer to make sure documents are correctly drawn and your wishes carried out. Lawyers can be very protective of what they perceive as their clients’ wishes and best interests, and sometimes that can even get in the way. Take, for instance, the will and trust of Missouri resident William R. Knichel.
Mr. Knichel had two grown children. He also had a 20-year relationship with Anita Madsen. In 2002, shortly after he was diagnosed with brain cancer, he signed a new will and powers of attorney. He named his children as his agents and left his entire estate to the two of them.
At about the same time Ms. Madsen began living with — and taking care of — Mr. Knichel. Two years later, he decided that he wanted to put her in charge of his finances and leave a significant portion of his estate to her. He transferred his home and one bank account into joint tenancy with her, and named her as beneficiary on his life insurance policy.
In 2004, Mr. Knichel and Ms. Madsen made an appointment with St. Louis attorney Charles Amen, of the law firm Purcell & Amen. Mr. Amen prepared a new will and powers of attorney, and a living trust. These documents named Ms. Madsen as personal representative, agent and trustee. The trust was intended to hold Mr. Knichel’s retirement assets, and to distribute them in three equal shares to his two children and Ms. Madsen.
One unusual provision in the trust document: Mr. Amen himself was named as “special co-trustee” with some specific powers. He was to make final decisions about distributions among the beneficiaries, to decide whether any beneficiaries could challenge Ms. Madsen’s administration or distribution decisions, and act as arbitrator if any disputes did arise. Then Mr. Amen and Ms. Madsen began the process of transferring Mr. Knichel’s retirement assets into the trust.
Among the accounts they tried to transfer to the trust was an IRA held at UBS Financial. For reasons not spelled out in the reported court opinion, UBS declined to change the IRA — even though Mr. Amen and Ms. Madsen made several attempts. When Mr. Knichel died a few months later, his children were still named as beneficiaries, rather than the trust.
Mr. Amen continued to work with Ms. Madsen to try to get UBS to change the beneficiary designation, but unsuccessfully. Ultimately UBS distributed the IRA account to the two children. Mr. Amen advised Ms. Madsen to simply make an equivalent distribution from the other trust assets to herself. She did that, and also paid herself a $6,000 fee as trustee and Mr. Amen’s fees of $2,400 for his representation of her as trustee.
In the three years after Mr. Knichel’s death, his children regularly requested a full accounting from Ms. Madsen and Mr. Amen. They did not receive complete information and so, in 2007, they filed suit against Ms. Madsen and Mr. Amen. They specifically sought removal of Mr. Amen and his firm as special co-trustee, arguing that there were multiple conflicts of interest in acting in that capacity while also representing Ms. Madsen, and that Mr. Amen had breached a fiduciary duty to treat the trust’s beneficiaries impartially.
After the trial judge denied Mr. Amen’s motion to dismiss the lawsuit, he withdrew as attorney form Ms. Madsen individually and as trustee. As a result of the proceedings, the court ultimately removed Ms. Madsen as trustee and Mr. Amen and his firm as special co-trustee, froze the trust’s assets and ordered Ms. Madsen to return distributions she had made to herself, her fees and the fees she had paid Mr. Amen. The Judge specifically found that Mr. Amen had breached his fiduciary duties as special co-trustee, because he had not been impartial to the three beneficiaries in his advice and representation of Ms. Madsen.
Mr. Amen appealed the finding. The Missouri Court of Appeals summarily dismissed his appeal, finding that he was not an “interested person” within the meaning of Missouri’s version of the Uniform Trust Code. He did not have a property right in (or a claim against) the trust itself, according to the appellate judges. Consequently, he had no standing to claim that the trial judge had made a mistake.
The Court of Appeals noted that this was not the first case they had heard in which members of Mr. Amen’s firm had named the firm as “special co-trustee.” In an earlier case, Mr. Amen’s partner had named the firm as “special co-trustee” in a trust for a man who was at the time the subject of a guardianship proceeding. When that man’s children dismissed their guardianship petition, Mr. Amen’s partner attempted to appeal the dismissal; the appellate court ruled in that case that he lacked standing to bring the appeal.
Though the circumstances and the legal arguments were somewhat different, the result was the same — dismissal of the appeal. The appellate court was equally unimpressed, incidentally, by Mr. Amen’s other argument — that he would be required to report the finding of breach of fiduciary duty to professional licensing boards and might get in trouble with them, too. In Matter of Knichel, August 16, 2011.
The Knichel case raises a legal question separate from Mr. Amen’s standing to appeal the finding that he breached his fiduciary duty. What is a “special co-trustee,” and what are the duties and powers of such a position?
Under Arizona’s version of the Uniform Trust Code (which is not identical to Missouri’s), the position spelled out in Mr. Amen’s trust would probably be analogous to a “trust protector,” at least to the extent that Mr. Amen’s “special co-trustee” could change the respective shares of beneficiaries. Arizona’s legislative decision to expressly limit any fiduciary duty to beneficiaries might complicate that designation and the analysis of a similar case if one were to arise in the Arizona courts.
JULY 5, 2011 VOLUME 18 NUMBER 24
Family members sometimes assume that an estate will be ready for distribution within days or weeks of a death. Those familiar with the probate process usually appreciate that it is more likely that distribution will be between six months to a year after death — and sometimes longer. When the decedent established a living trust, though, survivors often expect the final distribution to be faster. Everyone has gathered for the funeral, including out-of-town children and grandchildren — shouldn’t there be a check ready to hand out while the whole family is together?
The reality is that administration of an estate, even when a trust is involved, can take much longer. A good rule of thumb: it may still take six months to a year to prepare final income tax returns, gather trust assets, liquidate those which need to be sold (and not all will need to be sold in most cases), make calculations and actually complete the distribution. If there are more complicated issues, like estate tax liability, it may take even longer.
Delay in distribution of a trust estate was the issue involved in a recent Indiana Court of Appeals case. Harrison Eiteljorg’s will had provided a trust for his widow, Sonja Eiteljorg. When she died in 2003, the trust was to be divided into two shares — one each for Harrison’s sons Nick and Jack. Nick, a stepson and Harrison’s accountant were the co-trustees.
The trust was large — it held about $13 million of assets. That meant that an estate tax return had to be filed, and taxes totaling $6.2 million paid (remember that in 2003 tax was imposed on estates greater than $1 million). That was accomplished by late 2004, but the trustees were worried about closing out the estate and distributing the remaining assets. What would they do if the IRS disagreed with their calculations of values and imposed an additional tax liability.
At a heated meeting between the co-trustees and the two sons, Nick demanded a partial distribution of $2 million (half each to himself and Jack). The other trustees declined, saying that they worried that additional tax of up to $2 million might be imposed, and a distribution as large as Nick wanted would leave the trust with too little cash if that happened. They proposed instead to distribute $1 million to the two sons. Nick and Jack left the meeting without agreeing, and both sides hired new lawyers to battle out the timing and amount of a distribution.
A few months later Nick and Jack filed a petition with the Indiana probate court asking for removal of the co-trustees and entry of a judgment against them. Their argument: there was no reason not to distribute the requested $2 million when demanded, and failure to do so breached the trustees’ duty to the beneficiaries. The trustees answered, arguing that they needed to retain substantial liquidity until the IRS finally accepted the estate tax return (or imposed additional tax liability, if that was to be the outcome).
About a year after their original demand for partial distribution, Jack and Nick secured an order from the probate judge requiring that $1.5 million be divided between them. The co-trustees complied. The court proceedings then shifted gears to address a two-part question: did the delay in distribution amount to a breach of fiduciary duty, and (if it did) what were the damages due to Nick and Jack?
The probate judge found that the delay did amount to a breach of fiduciary duty. Nick testified that he would have put his distribution into two mutual funds, and that it would have grown significantly during the months he was deprived of its use. Jack testified that he had planned to purchase real estate in Texas, and that it would have appreciated. In addition, Nick and Jack had incurred attorneys fees totaling $403,612.81.
Based on the damages testimony, the probate judge awarded Nick $156,701 in “lost” profits from the funds he could not invest in. Jack was awarded $112,046.77 in missed real estate gains. The remaining co-trustees were ordered to pay those amounts from their own pockets, as well as all but $50,000 of the attorneys fees.
The Indiana Court of Appeals had a different take on the case, and significantly reduced the damages award. First, two of the three appellate judges agreed with the trial judge that failure to distribute the funds earlier was a breach of fiduciary duty. Rather than giving Nick and Jack the profits they said they would have earned, however, the two judges limited their damages to the interest that the $1.2 million would have earned during the nine months it was delayed — and even that damage award was to be reduced by the amount of interest the money actually earned in the trustees’ hands. The appellate court also reduced the attorneys fee award to a total of $150,000 — what they called “a more appropriate assessment.” In the Matter of Trust of Eiteljorg, June 27, 2011.
One appellate judge would not have gone even that far. According to the dissenting opinion he authored, there was no breach of fiduciary duty. After all, he reasoned, the co-trustees offered to distribute almost exactly what was ordered a few months later, and Nick and Jack rejected the partial distribution plan. Retaining at least $2 million in liquid assets until the estate tax return had been accepted was a reasonable and prudent course, according to the dissenting opinion.
What lessons can we draw from the Eiteljorg case? Several come to mind:
Even with a trust, it may take months or years after a death to complete the administration and make final distribution. That is not the usual circumstance, but it can happen.
Although avoidance of litigation is one common goal of trust planning, it is not always effective. And the cost of probate or trust litigation can be significant — note that Nick and Jack incurred legal fees of about one-third of the total amount they sought as distribution, and that the question was not whether they were entitled to the money, but only when.
In addition to increasing cost, litigation can slow down the process. Here, the co-trustees were ready to make a significant distribution at the first meeting, but the court-ordered distribution (of almost exactly the same amount) was delayed for nine months.
Acting as trustee can sometimes be costly. The co-trustees in this case will be liable for at least $150,000 out of their own pockets. We can anticipate that Nick and Jack will object to any attempt to pay the trustees’ own lawyers from trust assets, or to pay any fees to the co-trustees.
When it comes time to complete estate planning, our clients usually have clear ideas about who should receive their property, what health care decisions they would want made — even how they feel about cremation, burial, organ donation and most of the other issues that must be addressed. What stumps more clients than any other issue? Who to name as trustee, personal representative (what we used to call an “executor”), and agent under health care and financial powers of attorney.
Some of the common questions we hear from clients about whom to select:
Is it acceptable to name a child who lives out of state? Yes, at least in Arizona, which does not require in-state residency for any of the various fiduciary roles. With e-mail, fax machines, overnight delivery and other modern communications options, there is usually little difficulty for your son on the east coast (or even your daughter in Japan) to communicate. In fact, we frequently observe that we may have an easier time communicating with your the Iowa sister you named as agent than your nephew who lives on the east side of Tucson.
There is one small exception to that rule, and it is more practical than legal. We generally counsel that the ideal health care agent should live near you. Reviewing medical records, talking to doctors and caretakers, and developing a clear picture of your condition is much easier for someone nearby.
Can I name several, or all, of my children as co-agents, co-trustees, etc.? Yes, though we may try to discourage you from naming multiple fiduciaries. To the extent that you are trying to avoid family disputes, it is our experience that giving everyone equal authority tends to encourage disagreements. We will probably suggest that you might want to name your daughter (the banker) as financial agent, and your son (the nurse practitioner) as health care agent — and each as back-up to the other. If you really want to give them joint authority, though, there is no legal reason not to do so.
Speaking of which, is it better to name different people to health and financial roles, or give the same person authority over everything? There is no clearly correct answer. You know your family (and their strengths and weaknesses) much better than we do. If there is one person who is capable in all areas, by all means give that person authority as health care agent, financial agent, personal representative and trustee. You can segregate the roles as a means of providing checks and balances, or to give everyone reassurance that you value their input.
Do I have to tell everyone involved who will have which authority? No. But as a practical matter, we encourage you to do so. We want your daughter to realize, for instance, that she is the one who needs to make arrangements if something should happen to you. We hate to see someone show up, ready to act — and then find out they have no role. That creates confusion, and obviously can engender hard feelings.
We hope that you will share your estate planning documents with all your family (and any non-family members named as trustee, agent, or personal representative). There is no legal requirement that you do so, but it does increase the likelihood that any problems can be worked out while you are still alive, competent and in charge of your own decisions.
