Posts Tagged ‘fiduciary duty’

Things to Consider When You’re Named as Successor Trustee

NOVEMBER 2, 2015 VOLUME 22 NUMBER 40

When a family member dies, you will need to address a number of items. One that might come up: handling the revocable living trust they created.

If you are named as successor trustee you will have a number of obligations you need to discharge. You might need help from a lawyer and/or an accountant; you should not hesitate to consult one or both to figure out how much help you do need. Many of the successor trustees who consult us can do just fine without continuing legal help, but the process is not always easy or obvious.

We can provide you with an introduction to the considerations involved in handling a trust after the death of the trust’s settlor. Before we start, though, these caveats/warnings are appropriate: we’re only writing about Arizona law, and your situation might be very different than the other facts we assume here. Any questions in your mind about what needs to be done? Ask a lawyer.

With that in mind, here are some of the issues to consider shortly after the death of someone who named you as successor trustee:

What law applies? It’s not always obvious. If your mother signed her trust in Arizona and lived and died in Arizona, and you live in Arizona as well, her trust will almost certainly be governed by Arizona law. But what if she lived in another state and you live in Arizona? Or if the reverse is true? Or the trust says that another state’s law will apply?

The general rule: the law of the state where the trustee lives usually applies. That’s you, not your now-deceased mother. If you are the trustee, start by talking with a lawyer in your own community, and ask her whether she is the right person to advise you (of, if not, if she can refer you to someone in the right state).

Notice to beneficiaries. The law of many states — including Arizona — requires specific written notice to the beneficiaries of a trust after you take over as trustee of an irrevocable trust. Did you manage the trust for a time before your father’s death? Ask your lawyer about the applicable state law. This is an area where state laws differ.

Arizona says that notice is due within sixty days of a trust becoming irrevocable (as, for instance, upon the death of the settlor):

Within sixty days after the date the trustee acquires knowledge of the creation of an irrevocable trust or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, whether by the death of the settlor or otherwise, shall notify the qualified beneficiaries of the trust’s existence, of the identity of the settlor or settlors, of the trustee’s name, address and telephone number, of the right to request a copy of the relevant portions of the trust instrument and of the right to a trustee’s report as provided in subsection C.

That’s Arizona Revised Statutes section 14-10813(B)(3). Note that it refers to a list of items the notice must include. You can read that description at the same link, but it basically requires information about the settlor, the trustee, the trust and its assets.

Identifying the beneficiaries. Who is a “beneficiary.” Suppose your father’s trust says that if you, all your children, and all your cousins die in a common accident, everything goes to a charitable organization. Does that mean that all notices have to be sent to that charity, too? Not necessarily.

Arizona defines people and organizations who need notice (they are called “qualified beneficiaries”) to include everyone who is entitled to (or even can receive) income or principal right now, plus anyone who could receive trust money if one thing happened (like the death of a beneficiary). That’s a bit of a simplification, but it should help figure out who is entitled to notice. The details are in Arizona Revised Statutes section 14-10103(14). It’s a little hard to read and interpret — talk to your lawyer about it if you have any difficulty figuring out who is a “qualified beneficiary.”

Review the trust. Not just the parts identifying the beneficiaries, or the list of successor trustees. Read the entire trust. It might tell you to do more than the law requires. In some cases, it might tell you that you can do less than the minimum spelled out in the law — though sometimes those provisions are ineffective. Talk to your lawyer if you have any questions about minimum or maximum requirements.

Certificate of trust. When your mother signed her trust, she probably created a short (two- or three-page) document that listed the trust’s name, her status as trustee and the name of her successor trustee (among other things). You will probably want to prepare a similar document as successor trustee, and it might need to be filed with the County Recorder’s office in any county where the trust owns real estate. Arizona Revised Statutes section 14-11013 tells you what you might include in that certification, but it doesn’t provide a form. Having a hard time finding a good form? That’s because every case is so different — depending on how many and who the beneficiaries are, what kinds of assets the trust holds, the relationship of the successor trustee, and other things. Ask your lawyer for help.

Taxes. You knew that taxes would be an issue, right? Someone (and it’s probably you) will need to sign and file a final federal income tax return for the part-year they lived. The trust will be a separate taxpaying entity, and will need to secure a taxpayer ID number (an EIN) and file at least one federal income tax return. There will need to be state income tax returns for the state where your family member lived, and for the trust in one or more states. This is a good item to discuss with your accountant.

There’s more. This list is far from complete. It’s an attempt to give you some idea of what you’re facing, and to help you figure out whether you need to consult a lawyer. Not sure? That’s the best evidence that you need to get good legal counsel.

How to Get in Trouble for Your Handling of Your Child’s Money

JULY 6, 2015 VOLUME 22 NUMBER 25

Management of a trust can be difficult, and the responsibilities imposed on a trustee can be considerable. Sometimes that last part is not obvious, since trusts are often unsupervised — that is, no court is involved in the handling of most trusts, and there is no “trust cop” monitoring trustee decisions or expenditures. Even though there may not be immediate consequences, however, mishandling of a trust can lead to real problems for the trustee.

Handling any trust is a challenge. Let’s see if we can make it even more difficult:

  • If the beneficiary of the trust is a minor child, the trustee’s problems increase. Parents are expected to provide most of the support for their children, so the trustee should be looking to parents for expenditures before using trust funds. Does that mean the trust can not be used until the child reaches majority? No. The trustee must balance the current needs, the future expectations, and the ability (and, sometimes, the willingness) of parents to provide support.
  • Now let’s have a parent of the minor child act as trustee. The problems just got even more complicated. If the parent/trustee decides to use money from the trust for something that parents would ordinarily provide, does that mean that the parent/trustee is making the decision in his or her own interest? Perhaps — it’s at least enough of a problem to make trust administration more challenging.
  • Not content with that level of confusion, let’s add one more: the child who is a beneficiary of the trust also has special needs, will have very high future financial needs, and is currently receiving public benefits (like SSI payments, and/or Medicaid coverage). Everything just got more complicated again — the trustee’s decisions about distributions may well have consequences for those benefits, or for future care needs.
  • Difficult enough? Let’s add a final element: the trust is subject to the oversight of a court — we’ll call it the probate court (though that will not always be the court’s name). Now there are tax considerations for administration of the trust, the trustee’s choices (even when well-meaning) might be self-interested, trust language and/or distributions might have an effect on benefits eligibility and, as if all that were not enough, once a year the probate court will need to pass judgment on everything the trustee has done in the previous year.

That’s the background for a recent case that illustrates how things can go wrong. As it happens, this week’s case study does not actually involve a special needs trust (the money was held in a guardianship account — what we would call a conservatorship account in Arizona — subject to the court’s oversight) or a minor child (though the beneficiary was the disabled adult child of the person who got in trouble for mismanagement of the funds). In other words, the facts weren’t even as complicated as those sketched out above — and yet there were serious consequences.

What went wrong?

Sandra Ochoa (not her real name) was injured at birth. A medical malpractice case resulted in a substantial net settlement — part of which was used to purchase a structured settlement annuity that paid over $15,000 per month. A court in Illinois had approved the settlement and, after Sandra turned 18, the probate court appointed her mother Vivian as guardian of her estate (again, in Arizona we would call Vivian “conservator,” but the rules would be pretty much the same).

At the time of Vivian’s appointment, Sandra lived with her in her home in California. Vivian’s husband (Sandra’s stepfather) and Vivian’s son (Sandra’s brother) also lived in the home.

Two years later Vivian’s husband changed jobs, and the entire family moved to Florida. Vivian used Sandra’s money to make a down payment on a house in Florida, and then to make the monthly mortgage payments. She also paid herself a salary of several thousand dollars per month to take care of Sandra, and charged expenses related to her vehicle to Sandra’s funds, as well.

When Vivian filed her first annual accounting with the Illinois court, the judge raised questions about all the expenditures Vivian was making. Vivian prepared a proposed budget, under which she would pay herself $4,000 per month for caretaking, another $1,500 per month to a relief caregiver, about $1,000 per month for vehicle expenses, and $3,800 per month for the mortgage payment.

The probate court appointed someone to review Vivian’s accounting and her use of her daughter’s money. The report filed with the court noted that Vivian was using Sandra’s money to support not only Sandra, but the entire family. The court removed Vivian and appointed the public guardian (a government office in Illinois; not every state has a similar office) as the new guardian of Sandra’s estate. The public guardian then sued to recover money from Vivian. That process ultimately resulted in a $421,621.73 judgment against Vivian.

The Appellate Court of Illinois upheld the judgment after Vivian filed an appeal. Vivian argued that her job as guardian of Sandra’s estate should be to make Sandra’s life “as comfortable and pleasurable as possible.” The appellate court agreed with the probate judge: Vivian’s use of Sandra’s money was improper to the extent that it benefited other family members, and she is liable for repayment of the considerable sums expended. In Re Estate of O’Hare, June 11, 2015.

To be clear, Vivian was tagged for two different kinds of violations: she spent her daughter’s money on things that benefited other family members (including herself) at least as much as Sandra, and she kept poor records that made it difficult to support how she had spent the money. What could she have done differently to avoid getting in trouble?

  1. A conservator (or guardian of the estate, or trustee) must keep good records. This requirement can not be overemphasized.
  2. If a non-family guardian had been appointed from the beginning, some of the expenditures might have been approved after they had been reviewed by that guardian. Vivian’s obvious self-interest (in setting her own salary, deciding on housing costs, etc.) made it much more difficult to approve payments.
  3. Vivian should have asked for prior court approval for the kinds and amounts of payments she was making. Explaining how proposed expenditures would benefit Sandra would have given the probate judge a chance to ask questions, weigh in on the appropriate approach, appoint someone to represent Sandra’s interests (and/or to make home visits to determine what would be best for Sandra) and consider all the evidence and options.
  4. Most importantly, Vivian needed to understand that Sandra’s personal injury settlement — and the monthly annuity payments — were for Sandra’s benefit, not for hers or for any other family members’. Yes, it would be more convenient for Vivian if she could use those funds for housing, pay herself a salary and just focus on taking care of her seriously ill daughter. It’s not permissible, however.

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.

Lawyer, Acting as Trustee, Challenged for Self-Dealing

DECEMBER 3, 2012 VOLUME 19 NUMBER 44
One of the great advantages of a trust can be the ability to bypass court supervision and review. One of the great disadvantage of a trust can be that it bypasses court supervision and review. A recent California Court of Appeals decision highlights the problem nicely — and at the same time provides a warning for trustees.

California attorney Douglas Mahaffey represented Tom Matthews (not his real name) in a personal injury action in 1992. He helped Matthews recover a $3.5 million settlement, and then agreed to act as trustee, handling his client’s money. One concern lawyer and client shared was Matthews’ possible exhaustion of the funds; they agreed that a separate trust would be set up to protect $356,967 for the benefit of Matthews’ daughter Katrina (not her real name). Mahaffey would act as trustee of that trust, as well.

Four years after Katrina’s trust was set up, Mahaffey loaned himself $210,000 from the trust. He signed a note, with an indicated rate of 8%. There was no security for the loan — Mahaffey did not pledge his home, his office or business, or any other assets to protect the trust from default. His law firm did guarantee the note, indicating that if he did not make payments the firm itself would be liable.

Mahaffey did not make payments on the loan, and did not tell anyone about it at the time. Later Matthews, the father of the trust beneficiary, found about it, and Mahaffey asked him to sign a a set of documents ratifying what Mahaffey had done with his, Matthews’, money. After Katrina reached her majority she found out about the loan and sued Mahaffey.

A California judge agreed with Katrina that Mahaffey should not have loaned himself the money, but also that his motivation included a desire to “protect” Katrina’s money from, among other things, the possibility of litigation brought by Matthews against Mahaffey. Nonetheless, the judge removed Mahaffey as trustee, ordered him to repay the loan immediately, and added interest of almost another $200,000, and imposed additional interest of $110/day for each day the sums remained unpaid.

The California appellate court reviewed the record (after Mahaffey appealed) and concurred with the outcome. The appellate judges noted that “the trial judge went easy on Mahaffey.” The court notes a number of items in the litany of objections to Mahaffey’s administration of the trust:

  1. The loan was self-dealing, even if Mahaffey motivation was not abjectly self-interested. He should not have loaned trust money to himself.
  2. The interest rate (8%) was slightly less than the “prime” interest rate at the time. That made the self-dealing more obvious and problematic.
  3. The fact that the note called for no actual payments — not even interest — for 10 years, and that it was unilaterally extended by Mahaffey when it came due, further showed his self-dealing. In fact, no payments were made on the note at all until 2002, and then only interest payments were made up until the time of trial.
  4. The failure to adequately secure the loan was another strike against Mahaffey. The significance of that failure was not truly evident until after the trial; the appellate court notes that Mahaffey and his law firm filed for bankruptcy after the judgment was entered but before the appeal was decided.
  5. The opinion is replete with information about another trust Mahaffey administered — the trust for Matthews, holding the rest of his lawsuit settlement proceeds. It turns out that Matthews separately sued Mahaffey for mismanagement, but that lawsuit had been dismissed because it was filed too long after Matthews learned of the items he later complained about.

It is easy to criticize what is appears to be obvious self-dealing by a trustee after the fact. What happens time and again, however, is that trustees reach a tipping point by degrees — first rationalizing that they will pay interest rates above what the trust could get in other investments, then by adding the thought that they are good credit risks, then by rationalizing that it saves everyone time, money and taxes to keep the transaction in the trust “family.” The right answer: just say no. If you are a trustee, do not borrow money from the trust. Period.

As the Court of Appeals noted in this instance: “It is strong poison for attorneys who double as trustees to make loans to themselves.” Indeed. It is equally strong poison for any other trustee, though attorneys face the additional risk of losing their law licenses as well as being removed and surcharged for self-dealing. Although the appellate opinion does not indicate what has happened or might happen, Mahaffey could still face discipline or even disbarment by the State Bar of California. Grunder v. Mahaffey, November 7, 2012.

A critical reader might note that nothing about the description here explains our introductory observation. Trusts ordinarily do not have to be supervised by any court — that is one of the primary selling points for trusts, in fact. We generally agree. The cost of posting a bond, filing periodic accountings with a court and giving formal notice can be high, and there is often no need to seek an independent review of trustees’ behavior. But there is a trade-off involved. If the informal and extra-judicial alternative of trust planning is being considered, there really ought to be some way to monitor the trustee’s behavior.

Could Matthews, in the story told above, have demanded accountings, and more closely followed Mahaffey’s actions? Undoubtedly. Would that have prevented the self-dealing, or at least caused it to be cured earlier? Perhaps. But the very advantages of trusts (privacy, lack of formal accounting requirements and limited independent oversight) can often lead to the largest risk inherent in trust administration.

How is a thoughtful planner to respond? Pick your trustees carefully (you might, for instance, want to know how often the trustee acts in that capacity), and then provide a monitoring mechanism (accountings to a trusted third person, perhaps). It can be a challenge to balance efficiency and risk.

Conservator’s Accounting Approved in Contentious Proceeding

APRIL 11, 2011 VOLUME 18 NUMBER 13
The Montana Supreme Court identifies him as “J.R.” to protect him from public identification, but it is possible to get quite a feeling for him, his family and the two different conservators appointed to handle his finances. In 2006, when the legal proceedings started, J.R. was 78 years old. His wife had died three years earlier, and J.R. had become confused and vulnerable. He had five children (and three step-children); one of them, his daughter Marsha, had filed a petition asking the court to appoint a conservator to handle her father’s assets.

Just before the hearing on the petition another daughter, Robin, arrived from her home in Massachusetts and took J.R. back to live with her. She did not tell either the lawyer representing Marsha or the lawyer appointed to represent J.R. himself. It would not be her final failure to cooperate with the Montana courts.

A probate judge in Helena appointed a local private case manager as J.R.’s conservator. Seven months later she asked the judge to relieve her from the role. She could not discharge her obligations, she told the judge, because persistent family interference and undermining of her actions made it impossible to protect J.R. or his estate.

The new conservator was a Helena CPA, Joseph Shevlin. The judge chose Shevlin partly because he had a long career and excellent reputation in the accounting practice, and he was known for his estate planning expertise.

J.R.’s assets included a Helena condominium filled with his personal property, plus a brokerage and a bank account. Mr. Shevlin was instructed to sell the condo and to use J.R.’s money to help pay for his care. The judge specifically instructed Mr. Shevlin not to provide any of J.R.’s money to his family members unless it was for his direct care.

Two years later several of J.R.’s family members (and J.R. himself) filed petitions seeking to transfer the conservatorship to Massachusetts, to direct Mr. Shevlin to create a trust and transfer J.R.’s assets to the trust, to remove Mr. Shevlin as conservator, and to order him to return fees he had collected during his tenure. The probate judge held three days of hearings on those requests (and Mr. Shevlin’s objections), and ultimately entered orders removing Mr. Shevlin as conservator, appointing J.R.’s brother as successor, approving Mr. Shevlin’s accountings and dismissing claims of breach of fiduciary duty.

J.R. appealed to the state Supreme Court, which affirmed the probate judge’s orders. The appeal raised several legal issues:

  • J.R.’s attorneys’ failure to call an expert witness to testify about Mr. Shevlin’s standard of care. Although every fiduciary is held to a high standard, professionals serving as fiduciaries are required to use any specialized skills. Mr. Shevlin argued that this meant a challenge to a conservator who is also a CPA meant that an expert witness was required to provide testimony as to the standard of care and any breach. The trial judge agreed, but the Supreme Court did not. No expert testimony was required when the complaints, as here, did not touch on specialized skills. Still, the high court noted that J.R. had not met the standard of proof required anyway — and so the probate judge’s misreading of the law was of no moment in his case.
  • The probate judge had removed Mr. Shevlin as conservator, and J.R. argued that by itself demonstrated that he had acted inappropriately. Not so, ruled the appellate court — in this case, the removal was clearly because it was in the best interests of all parties and not because of any wrongdoing by Mr. Shevlin.
  • J.R. complained that Mr. Shevlin had not provided funds for his care; that the condo had been held for too long before sale and ultimately sold at too low a price; that Mr. Shevlin should have agreed to transfer J.R.’s assets to a trust in Massachusetts (to be managed by his daughter Robin and a Massachusetts lawyer retained to help get J.R. qualified for public benefits). The trial judge considered each of those allegations and determined that there were good explanations for Mr. Shevlin’s actions, and that his work was made incalculably more difficult by J.R.’s family’s refusal to recognize the conservatorship or cooperate with him. None of them merited requiring Mr. Shevlin to return his fees, and they were not the basis for his removal. The Supreme Court agreed.
  • More significantly, Mr. Shevlin (a) did not file an inventory, as every conservator is supposed to do within 90 days, and (b) did not file his first annual accounting until 19 months after his appointment, and (c) sold some of J.R.’s personal property (apparently furniture from his condo) to himself. The trial court had disapproved of each of these actions, but ultimately decided that they did not harm J.R. The first conservator had filed an inventory (though it did not include personal property in the condominium) and J.R.’s daughter Robin had demonstrated that she was very familiar with the condo’s contents. The accounting was late, but it included voluminous explanations and backup. The sale of personal property to himself clearly violated a conservator’s duty not to permit conflicts of interest, but the items had been identified as things that might be abandoned or sold rather than shipped to Massachusetts, and Mr. Shevlin did pay full value. All in all, agreed the Supreme Court, these lapses did not rise to the level that would authorize ordering Mr. Shevlin to return his fees or to remove him for cause.
  • J.R. objected both to Mr. Shevlin’s fees and those of the attorney he hired to represent him in the dispute. As to the former fees, the probate judge ruled that his rates were reasonable, the amount of work and time necessary, and his actions appropriate. As to the latter, the probate judge found that it was necessary to retain counsel to deal with a contentious proceeding and that those fees should be paid from J.R.’s estate. The Supreme Court agreed on both counts, noting that “a large number of Shevlin’s fees and those of his counsel were attributable to the failure of some of J.R.’s children to cooperate with or even recognize the existence of the conservatorship.”

In the Matter of the Conservatorship of J.R., 2011 MT 62 (April 5, 2011).

 

Durable Powers of Attorney Are Important But Dangerous

APRIL 26, 2010  VOLUME 17, NUMBER 14
A power of attorney is one of the most important, powerful and dangerous documents you will ever sign. Why is it important? Because your family has no inherent right or power to handle your finances in the event that you become incapacitated. Why is it dangerous? Because it is literally a license to steal.

Of course the agent named in your durable power of attorney is not supposed to steal from you. In fact, he or she can go to jail for doing so. But the whole point of the power of attorney is to make it easier for someone to handle your finances without court oversight, and without having to answer to banks or others. Too often agents abuse those powers of attorney.

So why is it important for you to sign a power of attorney? Because the alternative is, for most people, even more disturbing. Your family members and even your most trusted advisers are not able to handle your bank accounts, pay your bills, buy or sell property or protect against abuses by others — unless you have given them authority to do so in an appropriate document. That usually means a power of attorney.

There are alternatives, of course. You could create a living trust, name a successor trustee and transfer your assets into the trust. That may make it a little bit easier for your successor to handle your assets, but it does not provide any additional protection. You could simply add a trusted person to the title on each of your accounts — but that provides even fewer safeguards, and exposes your property to claims leveled against the now-joint owner of your assets.

Or you could simply hope never to need anyone to act on your behalf. Then when someone needs to act they will have to go through the process of securing a conservatorship over your estate (what some states call a guardianship of your estate). That provides better protection, but perhaps at a greater cost than you want to incur — and it means the court, rather than your family member or trusted adviser, having the ultimate authority.

That is why almost everyone we counsel ends up signing a durable power of attorney. That is also why it is so critical to make sure you have selected your agent carefully, warned them about the limitations on their authority, and provided them enough information so that they can act appropriately.

Want to know more about durable powers of attorney? Check out our new White Paper on durable powers, prepared by us for our friend and colleague Slade V. Dukes, Program Fellow for the Stetson University College of Law‘s Elder Consumer Protection Program. While there look at our White Papers on other topics, too, including Estate Planning, Guardianship and Long Term Care Planning.

Fiduciary Duty Not Breached In Limited Conservatorship Case

JANUARY 26, 2004 VOLUME 11, NUMBER 30

When the courts appoint a guardian or conservator to handle an individual’s personal and/or financial affairs, the subject of those proceedings loses virtually all of his or her autonomy and independence. At least that’s the way things have worked for centuries. In recent years, however, the guardianship system in this country has seen a small but detectable shift toward the use of “limited” guardianship and conservatorship.

Missouri law, for example, encourages a finding of “partial” incapacity rather than requiring a determination that a ward is completely incapacitated. To the extent that the ward is able to handle his or her own affairs, a finding of partial incapacity permits the court to limit the powers and responsibilities of the guardian or conservator.

That was the approach taken by the court with Elliott Scott Rogers, whose stepdaughter Donna Gardner sought appointment as guardian and conservator after Mr. Rogers had a stroke. By the time of the hearing Mr. Rogers had improved considerably. The court appointed Ms. Gardner as limited guardian and conservator, and spelled out some of the limitations on her powers. Ms. Gardner was to help transport Mr. Rogers to medical appointments, admit him to the hospital if necessary, and to assist in paying bills, writing checks and managing finances.

Over the next six months Mr. Rogers arranged for the purchase of an annuity naming Ms. Gardner as beneficiary, and hired a lawyer to prepare a new will leaving the bulk of his estate to Ms. Gardner. The checks paying for both of those items, as well as a number of personal bills of Ms. Gardner’s paid from Mr. Roger’s funds, were signed by Ms. Gardner, who was listed as a joint owner on Mr. Roger’s bank account.

When Mr. Rogers died his daughters objected to the payments for Ms. Gardner’s benefit, and the guardianship court ultimately ordered that all the money should be returned. The court also invalidated the will naming Ms. Gardner, on the theory that she had exceeded her authority when she paid the lawyer’s fee for preparation of the will.

The Missouri Court of Appeals disagreed. The whole purpose of limited guardianship and conservatorship, said the appellate court, is to encourage the ward’s autonomy and self-determination. The evidence was that Mr. Rogers understood what he was doing and wanted to benefit Ms. Gardner. It was not a breach of her fiduciary duty for her to help him achieve his goals, and she should not be ordered to return the funds. Even if Ms. Gardner’s actions had breached her fiduciary duty as conservator, said the appellate court, it would have been improper to invalidate Mr. Rogers’ will just because she wrote the check to pay for its preparation. Estate of Rogers, January 13, 2003.

The logic of the Missouri court is, frankly, a little unorthodox, but the result is unassailable. The purpose of a guardianship or conservatorship proceeding should be to protect the ward from exploitation or abuse, but to do so with the least invasive or limiting mechanism available. The court’s decision recognizes that Mr. Rogers’ level of functioning was high enough to permit him to make many of the decisions about his own finances, and the result validates those decisions.

Guardian of Estate Must Pay Personally For Copies of Checks

AUGUST 11, 2003 VOLUME 11, NUMBER 6

The issue facing Florida guardian Barbara Keithly was simple: should she have her bank return the original canceled checks on the guardianship account, or would it acceptable to receive only copies with her monthly statement? Although the question seems simple enough, it provides an opportunity to consider the level of responsibility imposed on guardians and conservators.

Ms. Keithly had been appointed as guardian of the estate (in Arizona and some other states she would have been called “conservator”) of Donald Crosley, a Florida resident, in 1994. At the time Florida (like Arizona and all the other states) had a fairly lax system of checks on the actual work of guardians. A few years later, in the face of mounting controversies and amid news reports of abuses by guardians, Florida (again like Arizona and a number of other states) began to crack down on guardians, imposing new requirements for accounting and creating new offices for monitoring at least some of the cases.

In 2001, the Florida court appointed a “Special Monitor” to review Ms. Keithly’s actions as guardian. The judge ordered her to produce the original canceled checks on the account, so that she could show that the numbers on her accounting actually added up.

Ms. Keithly explained to the judge that she did not have the original checks. Like millions of Americans, she had opted to have the bank return only copies of the fronts of her checks, and the originals had been destroyed. Although it would have only cost $2.00 each month to have the bank send the checks back to her, it would now cost $3,300 to have the bank produce copies of front and back of each check for the accounting period in question.

The court ordered Ms. Keithly to produce the front-and-back copies, and to do so at her own expense. She appealed, but the Florida Court of Appeal upheld the order. Noting that Florida law expressly requires guardians to “obtain a receipt or canceled check for all expenditures,” and that Ms. Keithly (as a professional guardian) presumably knew that rule, the appellate court made clear that producing the copies would be her obligation. Keithly v. Vance, July 25, 2003.

The moral of Ms. Keithly’s story is simple but important: a fiduciary is held to a higher level of responsibility than he or she might reasonably be expected to exercise in handling his or her own affairs. As New York Justice Benjamin Cardozo famously wrote in 1928, “not honesty alone, but the punctilio of an honor the most sensitive, is the standard of behavior.”

Court Looks To Exact Words Of Trust To Settle Trustee Dispute

JANUARY 20, 2003 VOLUME 10, NUMBER 29

The Montana Supreme court has words to the wise for drafting and following a trust’s terms in upholding a lower court denial of a request to remove a corporate trustee. In the Matter of the Estate of Mildred I. Berthot, December 5, 2002. The Berthot case demonstrates the importance of including details about the settlor’s intentions in a trust document.

Ellen Collins and JoAnn Barrett, current beneficiaries of the Mildred Berthot trust, claimed that trustee Norwest Trust breached its fiduciary duty when it refused to increase their trust distributions beyond the annual net income payments it had made for years. Ms. Collins and Ms. Barrett sought to name a family friend as successor trustee.

The Montana high court reiterated the basic principle of trust law—that a trust should be managed to carry out the testator’s intent. It relied on Mrs. Berthot’s own words giving the trustee authority to act in the “best interest of the trust estate.” There was no provision for any distribution beyond the net income until the end of the trust. The Justices underscored the importance of the testator’s words: “While both the majority and the dissent can speculate all day as to Mildred’s reasons for setting up the trust in the way she did, the simple fact is that no one knows why. We can only go by the wording of the document itself…”

Mrs. Berthot’s testamentary trust went into effect on her death in 1962. Ms. Collins and Ms. Barrett, Berthot’s granddaughters, became the last income beneficiaries of the Berthot trust when their mother died in 1994. The Berthot trust will end after the death of both Ms. Collins and Ms. Barrett. At that point all proceeds are to be distributed equally among Ms. Collins’ and Ms. Barretts’ children, the “remainder beneficiaries” in trust parlance. Interestingly, all but one of the remainder beneficiaries supported the income beneficiaries in seeking more income. The remaining beneficiary sought to “stay neutral” by taking no position.

Ms. Collins and Ms. Barrett argued that Norwest’s breach of fiduciary duty was illustrated by the fact that it took $8,000 per year in fees when trust income was $13,000 for each beneficiary on trust capital of $1.4 million. They took issue with the trust’s overall performance, even though the court calculated that the principal assets of the trust increased 835% and the income increased by 605% under Norwest’s management.

One dissenting Justice would have allowed the change of trustee, based largely on the consent of essentially all the beneficiaries. Without help from the trust language, however, that argument failed.

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