Posts Tagged ‘Illinois Court of Appeals’

Estate Planning is a Process, Not a Binder of Forms

JANUARY 23, 2017 VOLUME 24 NUMBER 4
There really is no question that it is important for almost every adult to have a will, and to consider signing both financial and health care powers of attorney. That is what we mean by “estate planning,” and it is important to go through the process of preparing those documents.

But that is not enough. There also are questions about beneficiary designations and other ownership arrangements. Some consideration should be given to whether a trust is necessary or important. And the whole process needs to be undertaken on a recurring basis. Signing your will is usually not the end of the process, and even when it is the whole thing needs to be reviewed again whenever you have major life changes.

Want a story that explains why you need to update your estate plan? Consider Robert Hendricks (not his real name) from Illinois. He was the father of two young sons. He and the mother of those two boys had recently undergone a difficult divorce. He wanted his sister to manage his estate, and to act as trustee for the benefit of his sons. He even signed a will making those changes — naming his sister as personal representative (executor), naming her as trustee for the boys’ benefit, and leaving his entire estate to the boys’ trusts.

Shortly after the divorce was finalized, Robert tragically took his own life. His sister initiated a probate proceeding, and his will was admitted to probate. But one of the Robert’s principal assets was his 401(k) plan, set up through his work. What would become of that retirement plan?

Robert’s 401(k) account simply did not name a beneficiary. In that case, would it pass to his estate, and thus to the trust for his sons? No, as it turns out.

Like many 401(k) plans, Robert’s spelled out what happens when no beneficiary is named. According to the plan’s summary documents, in that case the participant’s spouse would be the beneficiary, and if there was no spouse then the participant’s children would become beneficiaries. Since Robert’s divorce was final at the time of his death, that made his sons beneficiaries of his retirement plan.

Problem solved. That’s also what Robert’s will specified, right? Well, not quite. Robert’s will would have left all of his money in that trust, controlled by his sister. If his sons are the direct beneficiaries of his retirement plan, then their mother — Robert’s ex-wife — would have priority to manage the funds until the boys reached the age of majority.

Robert’s sister filed a petition with the probate court, asking to be named as the custodian of the retirement accounts for the benefit of the boys as specified in the will. The probate court agreed, and ordered the proceeds paid into accounts under Robert’s sister’s control. The boys’ mother objected, and appealed the decision.

The Illinois Court of Appeals disagreed, and overruled the probate court’s order. The appellate judges noted that Robert’s ex-wife, as the only parent of the two boys, had the clear priority to serve as conservator of their funds, or custodian of any money in a Uniform Transfer to Minors Act (UTMA) account, or in any other capacity.

Furthermore, the proceeds from Robert’s 401(k) were not within the control of the probate court, said the appellate judges. His will did not control where the proceeds went, since the summary plan documents themselves made clear that they went directly to the beneficiaries. The Court of Appeals directed the probate court to reverse its order and leave Robert’s sister out of the loop with regard to his retirement assets. Estate of Hintz, January 10, 2017.

Robert’s story is illustrative of a problem we see on a regular basis. If a client carefully considers his or her estate planning, and signs documents perfectly calculated to accomplish their goals, the inquiry (and, often, our task) is not completed. Beneficiary designations and titling arrangements can undo the best-laid plans. What’s worse: even if everything gets done, and done right, at the time of our office appointment, changes in documents, life arrangements or circumstances can undo the good work of careful estate planning.

All of that is why we ask a lot of questions about insurance beneficiaries, retirement arrangements, and financial account titling. That is also why we ask clients to come back and visit with us every five years or so — or, as in Robert’s case, when they get divorced, have children, get married, change employment arrangements or have other major life changes.

Estate planning is not a set of documents. It is a process, and it continues, morphs and develops over time.

Two Adult Adoptions Lead to Uncertain Inheritance Outcomes

JANUARY 2, 2017 VOLUME 24 NUMBER 1
You probably know that it’s possible — though state laws vary quite a bit — to adopt an adult. But have you given any thought to what effect the adoption might have on inheritance rights? That’s the sort of problem that gets lawyers (and judges) excited. Two recent appellate decisions for Iowa and Illinois address similar but different adult adoption conundrums.

In Iowa, Marian (we’re just going to use first names here — no disrespect intended) had two adult children, Russell and Marcia. Marian’s sister-in-law Janice had no children. Janice intended to leave her estate to Russell, but under Iowa law that would mean that he had to pay a tax on his inheritance, because he was not her child.

In order to avoid that inheritance tax, Janice adopted her nephew Russell after he became an adult. That worked just fine, and avoided any tax — but what about Russell’s relationship with his biological mother, Marian?

When Marian died in 2014, her will divided her estate between “my children, [Russell] and [Marcia], share and share alike.” But was Russell still Marian’s child? Marcia argued that her brother was really her former brother, and his adoption by Janice effectively disinherited him from her mother’s will.

The Iowa probate court was not impressed with the argument, and neither was the Iowa Supreme Court. Though the adult adoption severed the parent/child relationship between Marian and Russell, Marian’s will specifically named her children. According to the state’s high court, that created a presumption that she meant to include Russell even though he might have been adopted by someone else. Roll v. Newhall, December 23, 2016.

Meanwhile, the Illinois courts were faced with a flip-side problem when Betty adopted her step-son Ron. You see, Ron’s mother and father were divorced when he was three, and he was raised mostly by his mother. His father remarried and Ron did spend considerable time (particularly in high school) with his father and step-mother.

When Ron was 21, his step-mother Betty’s mother died, leaving a trust that would ultimately flow to Betty’s children. A year later Betty asked Ron if he would be willing to let her adopt him. Betty’s father later modified his own will to specifically disinherit Ron, but Betty’s mother’s trust was already in place.

When Betty died fifteen years later, her mother’s trust was set to benefit her children. Was Ron a child for purposes of that trust? That was the question facing the Iowa probate court.

Over the objections of Betty’s other relatives, the probate court determined that the adult adoption was effective. Ron would receive a share of his adopted grandmother’s trust. The Illinois Court of Appeals upheld that ruling.

The key question in Ron’s story was whether the adoption was a “subterfuge.” If the other heirs could show that Betty’s adoption of Ron was solely motivated by her desire to make him a descendant for purposes of her mother’s trust, then they might be able to challenge the adoption.

The other relatives pointed out that Ron was an adult when Betty adopted him, that the timing was suspect (coming just a year after Betty’s mother’s estate was opened), that Ron didn’t even tell his biological mother about the adoption until Betty’s later death, and that Ron himself had acknowledged that Betty was motivated to adopt him for “estate reasons.” On the other hand, evidence showed that Ron had spent considerable time with Betty and his father after they were married, that he lived nearby at the time of the adoption, and that Ron and Betty had a close, coninuing relationship for over thirty years. The effectiveness of the adoption was upheld. In re: Estate and Trust of Weidner, December 20, 2016.

Would the same cases be decided the same way in Arizona? Perhaps not.

First of all, adult adoptions in Arizona are sharply limited. Arizona’s statute on the subject, ARS section 14-8101, permits adult adoptions only when the person being adopted is:

  1. Over age 18 but no older than 21, and
  2. A stepchild, niece, nephew, cousin, grandchild or (sometimes) a foster child of the person adopting.

Under the second test, either Russell or Ron could have been adopted just as they were in Iowa and Illinois. But both of them were over age 21 when adopted, so those adoptions could not have been completed in Arizona.

Assuming, though, that the adoptions were effective in Iowa, Illinois or wherever concluded, Arizona would honor the other state’s (different) rules. If adoptive parents Marian or Betty had moved to Arizona after adopting Russell or Ron, the same legal problems might have arisen.

One other state law difference that might have made the outcome in Marian and Russell’s case: nothing in the adult adoption statutes in Arizona requires that the existing parental relationship be dissolved. Russell could presumably be his aunt Janice’s son AND his mother Marian’s son at the same time. Of course, this outcome is harder to test — Arizona does not have an inheritance tax like Iowa’s, and so it is difficult to think of why the story might play out in the same way.

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.

Protecting Clients From Their Own Mistakes Can Be A Challenge

DECEMBER 14 , 2009  VOLUME 16, NUMBER 64

Preparation of an estate plan is more than the individual documents. A good attorney considers the client’s circumstances and wishes, and analyzes the best course of action. The process requires the attorney and the client to communicate, and to work together.

Too often, however, problems arise after the attorney’s work is done. Clients are often pulled in different directions by family members, bankers, accountants, and other professionals. Television, radio, newspaper and magazine presentations aimed at mass audiences may confuse or mislead the client. Even if the client resists all of those voices, documents may get lost or inadvertently destroyed. What is a conscientious estate planner to do?

Many lawyers routinely hold on to original documents prepared for their clients. The best argument for doing so: it helps prevent accidental destruction or loss of the documents, and makes it harder for clients to make inadvertent changes.

Other lawyers do not like the practice. It takes considerable resources to manage a large collection of original documents. Holding on to originals also conveys the (false) impression that the children or other successors must return to the same lawyer later for administration of the estate.

A small minority of lawyers regularly prepare multiple originals of wills, trusts and powers of attorney. If one original document is in the lawyer’s office, at least it will not be misplaced by the client. This approach also helps reduce the concern that family must return to the same lawyer, since originals in the client’s possession can be used without the lawyer even knowing about the disability or death of the client.

Neither of these techniques does much to protect against the client becoming subject to undue — or unwise — influence. The scenario is common enough to be clichéd: the carefully considered estate plan prepared while the client is clearly competent is changed at the behest of a grasping relative or friend without the original lawyer ever being consulted or even advised.

One Illinois lawyer came up with an unusual way to protect against inadvertent or misguided changes to his clients’ estate plan. Attorney Lawrence Patterson included a provision in at least one married couple’s documents. It prohibited revocation or amendment of the estate plan without the attorney’s written consent.

Was Mr. Patterson’s approach effective? That depends entirely on how one defines “effective.” He has now been sued by his former clients AND is the subject of a pending ethics complaint through the Illinois Bar. Did he “overreach,” or was his concern for clients “admirable?”

We offer those two terms advisedly. They appear in two of the available documents responding to Mr. Patterson’s approach. Here is what has happened in the public record so far:

First, Mr. Patterson’s clients visited a new lawyer to modify their estate plan. The new lawyer wrote to Mr. Patterson, asking him to acknowledge that the clients had the right and power to do that. Mr. Patterson wrote back, telling the new lawyer that he would first need to meet with the clients to “determine whether the changes are consistent with the interests and protections embodied in the original plan.”

Rather than meet with Mr. Patterson, his clients filed a lawsuit seeking a declaration that Mr. Patterson could not control whether they amended their estate plan. The trial judge agreed, dismissing Mr. Patterson’s objections summarily and assessing legal fees and costs of $5,393.75 against him. Mr. Patterson appealed both determinations to the Illinois Court of Appeals.

Meanwhile someone (it may have been the clients, the opposing lawyer or even the judge in the trial case) notified the Illinois Attorney Registration and Disciplinary Commission of Mr. Patterson’s refusal to consent to the changes without first meeting with his (now) former clients. The Commission (which regulates lawyers practicing in Illinois) filed a two-count complaint against Mr. Patterson for what it saw as “overreaching.”

Interestingly, the first count in the ethics complaint dealt with an entirely unrelated matter, in which Mr. Patterson brought a guardianship petition against a client when she disagreed with his advice in a contested probate matter–a practice we have previously written about in another unrelated case out of Washington State. The ethics complaint against Mr. Patterson is still pending.

Then the Illinois Court of Appeals ruled on the lawsuit against Mr. Patterson. Its analysis indicated that his clients had given Mr. Patterson a fiduciary role over and above his standing as their attorney. They had made an irrevocable decision, according to the appellate court, to give him the power to oversee their estate planning changes in the future. Even though they subsequently fired him as their attorney, he remained as the arbiter of their future estate planning changes.

Far from criticizing him for his role, the Court of Appeals found his conduct to be “admirable, and consistent with the highest ideals of the bar.” The appellate court noted that the documents prepared by Mr. Patterson gave his clients the power to seek court approval of any change if they did not want to deal with him, and that his power was tempered by a duty to act as a fiduciary for his clients. “In light of the obvious expense to Patterson,” noted the appellate court with understatement, “we will leave it to other estate planners whether they wish to use this particular method of estate planning.” Dunn v. Patterson, November 18, 2009.

Note: we owe a considerable debt to the research work on Mr. Patterson carried out by Illinois estate planning attorney Joel Schoenmeyer. His excellent, entertaining and informative blog “Death and Taxes” has tackled the Patterson case, as well.

©2017 Fleming & Curti, PLC