Posts Tagged ‘Indiana’

Challenge to Three-Year-Old Trust Reformation is Dismissed

JANUARY 9, 2012 VOLUME 19 NUMBER 2
With the increased emphasis on (and use of) living trusts for estate planning, we lawyers are seeing more and more cases in which an old trust needs modification. Perhaps the tax laws have changed since a parent or grandparent died. Maybe what once made sense is less defensible in light of modern investment thinking, or the cost of living has caught up with what once seemed like a generous bequest. Family dynamics, always fluid, can change the reasonableness of a decades-old estate plan. Everyone knows someone whose family was once considered wealthy, and now is considerably less so. Any of those scenarios — and dozens of others — can be the basis of a desire to change something that seemed set in stone when the plan was adopted.

That’s when lawyers begin talking about trust reformation or modification. In recent years we have begun talking about decanting — pouring the contents of an older trust into the vessel of a new trust document. Not every state permits decanting, though, and state laws vary in how they approach modification of trusts. That can lead to uncertainty, family friction and even litigation.

Take, for instance, the recent Indiana case involving the trust — and the family — of John and Ruth Rhinehart. In 1997 Mr. and Mrs. Rhinehart established an irrevocable trust for the benefit of their daughter, Julie R. Waterfield. They placed $4 million in the trust, and provided that at least $100,000 per year would be paid to their daughter. When she dies her trust will divide into three new trusts — one for each of her children. Each of those trusts will pay $25,000 per year to the grandchild for whom it is set up.

That was certainly a generous gift, and should help provide for the welfare of the Rhinehart’s daughter and grandchildren for decades. In fact, the trust has grown — as of 2009 it was worth about $22 million. What could possibly be wrong with the Rhineharts’ largesse?

Sometime shortly after the trust was created, Julie Waterfield made a pledge to Indiana University – Purdue University Fort Wayne (IPFW). She promised the University $1.5 million so that a new recital hall could be built in the campus’s new music building — a building, incidentally, named after her parents.

There was only one problem with her pledge. By late in 2002, stock holdings she had expected to use for the donation had become worthless. It appeared that the only way for her to meet her pledge would be to increase the annual payments from the trust established by her parents. She would need not $100,000 per year, but more like $275,000.

She and her lawyer approached the trustees about how to reform the trust to permit the larger distributions. Everyone agreed that if she could get the approval of all of the future beneficiaries, the trust could be modified. The trustees engaged Ms. Waterfield’s lawyer to complete the process, and he filed a court proceeding seeking an increase in the distribution. The Indiana court approved the increase, conditional on getting all eighteen potential beneficiaries — current, future and contingent — to sign consents.

At a family meeting in December, 2002, all three of Ms. Waterfield’s children signed the agreement to reform the trust. One of them requested a copy of the full agreement, and the trust’s lawyer sent him a copy a few days later. Ms. Waterfield’s distributions were increased and, presumably, her pledge fulfilled.

Three years later, two of Ms. Waterfield’s children expressed concern about the increase in their mother’s distributions. They argued that their signatures on the agreement to reform the trust had been obtained by fraud, and they brought suit against their mother and the corporate co-trustee of the trust. Ms. Waterfield and the trustee argued that it was too late — that the statute of limitations on such an action ran out two years after the change was approved. In any case, they insisted, there was no injury to Ms. Waterfield’s children: there would be plenty of money available to fund their annual $25,000 distributions. The trial judge agreed and dismissed the lawsuit.

The Indiana Court of Appeals agreed. The appellate judges noted that both sons’ signatures were on the agreement, that they acknowledged they had gotten a letter from the lawyer which claimed it enclosed a copy of the agreement, and that it strained credulity to think that they would have failed to ask for the referenced enclosure if it had not in fact been in the envelope with the letter. In other words, their cause of action — if they had one — was known to them at least by the date of that letter. In Indiana, the statute of limitations on such an allegation of breach of fiduciary duty is two years — the Waterfield children waited more than a year too long before filing their lawsuit.

Furthermore, according to the appellate judges, the growth of the trust to $22 million — despite several years of increased distributions to Ms. Waterfield — adequately protected her sons’ interest so that they were not injured by the trust reformation. The Court of Appeals rejected their argument that the trust itself was injured by what they insisted was fraudulent behavior. The beneficiaries do not have the authority to bring their action on the basis of injury to the trust, but must show injury to themselves, according to the Court. Matter of Waterfield v. Trust Co., December 30, 2011.

Would the answer have been different in Arizona? Possibly. But it is more likely that the process itself would have been different in Arizona. With adoption of the Arizona Trust Code (a version of the Uniform Trust Code) it has become easier to modify or reform a trust. Some modifications can be done without the court’s involvement at all. Perhaps more importantly, it has become somewhat easier to clearly begin the running of the statute of limitations on claims against trustees under Arizona’s new law.

Share

Trust Created by Spouse Using Power of Attorney is Validated

JUNE 14 , 2010 VOLUME 17, NUMBER 19

Suppose for a moment that you are trying to get your financial affairs in order. You have been married for many years, and your spouse is gradually losing the capacity to make financial or planning decisions. You are pretty sure you know what your spouse would want, but he (or she) is no longer able to articulate those wishes. Is there anything you can do?

That was the dilemma facing Ollie Phillips, an Indiana resident. His wife Donna no longer had capacity to sign estate planning documents — or to manage her own affairs if anything should happen to him. The couple had earlier signed durable powers of attorney naming one another as agents, and both had identical wills leaving everything to one another and, on the second death, to charity (Mr. and Mrs. Phillips had no children).

In early 2008, 18 months after Donna Phillips had been diagnosed as suffering from dementia, Ollie Phillips signed a new living trust and transferred all the couple’s assets into the trust’s name. The trust named Mr. Phillips as trustee and a friend, Elizabeth Shoemaker, as successor. It provided that all the couple’s money would be used for the benefit of Mr. and Mrs. Phillips until both had died and, after the surviving spouse’s death, everything would be transferred to Ms. Shoemaker. Mr. Phillips signed all of the documents using his wife’s power of attorney.

Did Ollie Phillips have the power to effectively change his wife’s estate plan using the power of attorney? The question would be moot if he had outlived his wife, but he did not — he died less than a year after setting up the trust.

Shortly after Mr. Phillips died, another friend was appointed as guardian of Mrs. Phillips’ person and estate. The new guardian moved to set aside the trust Mr. Phillips had created, but after two days of hearings the trial judge upheld the trust and ordered the guardianship estate to pay the trustee’s legal fees incurred in defending the trust itself.

The Indiana Court of Appeals agreed with the trial judge. Of particular interest to the appellate court was the evidence adduced at trial about Mrs. Phillips having told the lawyer who drafted the trust that Ms. Shoemaker was “like a daughter” to the couple. The judges also pointed out that Mrs. Phillips remained the sole beneficiary of the trust until her death, and that there was no evidence that the trust was being mismanaged in any way. Evidence that Mrs. Phillips had more recently said that she thought Ms. Shoemaker was “money hungry” was not sufficient to allow the guardian to revoke the trust. The appellate court also agreed that Ms. Shoemaker’s legal fees to defend the trust should be paid by Mrs. Phillips’ estate. Matter of Phillips, May 17, 2010.

Does the Phillips case stand for the proposition that an agent can change the principal’s estate plan using a power of attorney at any time? No, it certainly does not. But in a specific case, with some indication of the wishes of the now-incapacitated person, and with a broadly-drawn power of attorney, it might be possible to make at least some changes. Among the safeguards in this case: the fact that Mrs. Phillips, if she once again became able to make decisions, could change the trust, and the involvement of a lawyer who interviewed her and worked with her to try to figure out how much her capacity (and wishes) could be protected.

Share

Non-Lawyer Trust Preparation Group Shut Down in Indiana

MAY 3, 2010  VOLUME 17, NUMBER 15

United Financial Systems Corporation looks like they can do it all. According to their website (which you will have to look up for yourself — we don’t want to point to it since it still includes information about how to sign up for the activities that have now been prohibited), they can tell you how to plan your estate, retirement, insurance needs, health care — even your funeral arrangements. There is a disclaimer that lets you know they do not practice law (and do not give investment advice). The Indiana Supreme Court begs to differ.

In a disciplinary action three weeks ago, that state’s high court found that UFSC was “an insurance marketing agency,” and it was practicing law. The company was ordered to stop selling living trusts, to give every client a copy of the Court’s opinion, to offer refunds to all clients they had worked with in the past four years, and to pay the costs and some of the attorney’s fees associated with the proceeding. A handful of lawyers were included in the disciplinary process; most agreed to end their involvement with UFSC (and the practice of participating in non-lawyer legal work) and were dismissed from the case.

What was UFSC doing? It had “Estate Planning Assistants” (non-lawyers) contact prospective customers to tell them about the importance of estate planning. If the customer signed up for the $2,695 living trust package, the salesperson collected $750 to $900 and helped the customer fill out a questionnaire.

That questionnaire was then sent to one of several attorneys UFSC hired to prepare living trusts, wills and powers of attorney. The attorney would be paid $225, and would make one telephone call to the client to discuss the estate plan. Once a trust and supporting documents were prepared the signing was handled by another UFSC salesperson — for another $75 slice of the total fee.

The person handling the signing, whose title was usually “Financial Planning Assistant,” also had access to the customer’s financial information (remember that questionnaire?) and could make recommendations about investment changes. One common proposal was to liquidate other investments in order to purchase an annuity — which, incidentally, would yield a significant commission for the Financial Planning Assistant and UFSC.

The Indiana Supreme Court’s opinion details one extreme example of the effect of this marketing juggernaut. The 72-year-old woman was persuaded to liquidate $500,000 worth of Exxon Mobil stock — the bulk of her entire net worth — in order to purchase an annuity. The result: she incurred a $132,000 income tax liability and her salesperson received a $40,000 commission. State of Indiana ex rel. Indiana State Bar Association v. United Financial Systems Corporation, April 14, 2010.

Would UFSC face the same result in Arizona? Probably not. While the unauthorized practice of law is prohibited by court rule, Arizona repealed its criminal statute decades ago. The Arizona Supreme Court has not been active in reviewing such cases, and indeed has even created a “certified document preparer” classification for non-lawyers who “assist” clients in creating wills and trusts.

How can you avoid being taken advantage of by non-lawyer “estate planners” or “document prepapers”? Lawyers tend to think the best answer is the simplest one: hire a lawyer for your legal needs. If you are approached by a “finanical planning assistant” or something similar, you might want to ask “assistant to whom?”

If the salesperson assures you that they have a crack team of estate planners, tax advisers and financial consultants, ask for a few names, titles and credentials. Above all, be very cautious of any person or group who also happens to sell annuities or other insurance products. Not all insurance salespersons are questionable, but practically all questionable non-lawyer “estate planners” sell insurance products.

Share

Father’s Body, Moved Once, Need Not Be Moved Yet Again

APRIL 13, 2009  VOLUME 16, NUMBER 36

Is it just us, or is the incidence of family disputes over funeral and burial arrangements on the rise? A recent court case from Indiana makes us think maybe there are still more variations on a theme we thought had long since been played out.

Sherman Warren died in 1970 and was buried in Barbourville, Kentucky. His wife Isabella then moved to Indiana, to live with their youngest daughter. When the daughter died, she was buried in the New Haven, Indiana, cemetery. In 2005, Isabella Warren petitioned the Kentucky courts for authority to disinter her husband’s remains and move them to Indiana.

A year later, four of the couple’s children petitioned the Indiana courts for authorization to once again disinter Mr. Warren’s remains, and to return them to his original burial plot in Kentucky. At the time their mother secured authorization for the first move, the children argued, she was already incompetent, and the Kentucky court order was therefore fraudulently obtained. While that court action was pending Isabella Warren died, and was buried next to her husband and their daughter—in Indiana.

Seven other surviving children of the Warrens’ disagreed. They thought both parents should be left right where they were, and they (plus the cemetery and the Indiana State Department of Health) asked the court to dismiss the lawsuit. The judge agreed, ruling that there was no basis on which another move should be authorized.

The Indiana Court of Appeals affirmed the result. According to the appellate court, there was no good reason for disinterment of the couple’s bodies. Warren v. IOOF Cemetery.

Maybe the issue is older than we imagined. The Indiana court cites as authority for one of its points a 1904 Pennsylvania case involving a dispute over reinterment (Pettigrew v. Pettigrew). The court might also have cited:

  • A 2007 Pennsylvania divorce case in which the divorcing couple disagreed over whether their son’s ashes should be divided into two separate urns or interred in a single plot as originally agreed upon between the spouses (the court sent the decision back to the divorce judge with some guidance to consider a number of factors. Kulp v. Kulp).
  • A 2008 Mississippi case involving burial of a 10-year-old child whose parents had been locked in custody disputes at the time of her death. Her mother was seriously injured in the crash that killed the child, and so unable to participate in the initial burial decision (In re Spiers).
  • An Idaho case from 2007, in which the father of a minor child had kidnapped the child, moved to Idaho and changed his and his son’s name. Nine years later the son was killed in an auto accident; the mother did not learn of the death for another year. Twenty-three years after learning where her son was buried, the mother sought authorization to move his remains to the state where she lived at the time. The Idaho Supreme Court left standing the trial judge’s ruling authorizing the move (Garcia v. Pinkham).
  • A 2008 Arkansas case involving a dispute between the decedent’s ex-husband and adoptive father, on the one hand, and her mother and brother, on the other. The Arkansas Court of Appeals reversed an order refusing disinterment, and directed the trial court to weigh the factors in favor and opposed to the proposed move (Tozer v. Warden).

Most of the reported cases take the same analytical approach. The remains are treated like property, though a special, emotionally charged kind of property. In deciding whether to permit disinterment or other disruption of the remains, the courts look to the wishes of the decedent (if any), the degree of relationship of each of the contesting parties and their conduct, the length of time since the original interment, and the strength of the respective reasons advanced by the parties.

Though we do seem to be seeing more of these types of disputes, the cases have not been in Arizona. No similar family dispute is reported in the Arizona, though there is one important appellate decision involving some of the same issues. In Tomasits v. Cochise Memory Gardens, a 1986 Court of Appeals decision, the court upheld a trial court verdict of $25,000 against a cemetery after it moved the plaintiff’s parent’s remains without notice. The cemetery had accidentally sold the same plot to two different families; when the other family sued to gain possession of the plot, the cemetery followed the court’s order in that case but without giving notice to the other family.

Share

Two Life Insurance Beneficiary Designations Require Litigation

APRIL 28, 2003 VOLUME 10, NUMBER 43

When people consider “estate planning” they usually are thinking about preparing a will. Sometimes the common conception of estate planning includes preparing a trust as well, and often durable powers of attorney are also part of the plan. But two recent cases demonstrate that “estate planning” is really much more—it includes the titling of assets and beneficiary designations as well. The most carefully-considered estate plan may fail if those other issues are not also dealt with at the same time.

Lori Flanigan was divorced and had two children when she married her second husband, Craig Munson. Ms. Flanigan had two life insurance policies through her work totaling $217,600. Her divorce agreement required her to name the children as beneficiaries on her life insurance, but she had not gotten around to completing a beneficiary designation form when she died in 1995.

Her insurance policies provided that they would be paid to a surviving spouse if she had not designated a beneficiary, and so the proceeds were distributed to Mr. Munson. The children’s grandparents (who took custody after Ms. Flanigan died) then filed a lawsuit to impose a constructive trust on the remaining insurance proceeds and Mr. Munson’s home, since he had used some of the proceeds to pay off his mortgage and other debts.

The trial judge denied the grandparents their requested relief, but the New Jersey Supreme Court agreed that the insurance proceeds should go to the children. It ordered the money transferred to the children’s benefit—eight years and thousands of dollars in legal fees after her death. Flanigan v. Munson, April 3, 2003.

Daniel Lambert was not so lucky. He argued that his mother’s life insurance policy should be part of her estate, and that her will specified that he was to receive a portion of that estate. Unfortunately for him, whatever his mother’s intentions might have been she had named her daughter Suella Southard as beneficiary.

Another sibling, brother Steven Powell, was prepared to testify that their mother had always intended that the life insurance policy should be used to pay the costs of handling her estate and then distributed to the children according to her will. He was not allowed to testify, however, because of a long-standing court rule prohibiting testimony about conversations with deceased persons, the so-called “Dead Man’s Statute.” The Indiana Court of Appeals refused to permit imposition of a constructive trust on the life insurance proceeds. Lambert v. Southard, April 1, 2003.

The moral: “estate planning” requires consideration of beneficiary designations and account titles as well as signing of a will, trust and powers of attorney. Even a carefully-drafted estate plan, including a will, a living trust and both financial and health care powers of attorney, can be altered or frustrated by incorrect (or missing) beneficiary designations, joint tenancies, “payable on death,” “transfer on death” or “in trust for” account titles or other, similar arrangements.

Share

Death of Husband Ends Wife’s Right To Spousal Maintenance

OCTOBER 14, 2002 VOLUME 10, NUMBER 15
Walter and Geraldine Brown had filed for divorce before first Mr. Brown and then Mrs. Brown became incapacitated. When guardianship proceedings were initiated for both of them, the divorce proceeding was simply dismissed.

Mr. and Mrs. Brown lived in Indiana, where the language of guardianship is a little different from Arizona. What Arizonans would call a conservator is referred to as a “guardian of the estate” in Indiana. Two separate banks were appointed as guardians of Mr. and Mrs. Brown’s respective estates.

During the first months of the divorce action Mr. Brown had been ordered to pay spousal maintenance (better known as alimony) to his wife. After the dismissal of the divorce the bank handling Mrs. Brown’s estate asked the probate court to order the bank responsible for Mr. Brown’s estate to continue to make monthly payments. Mr. Brown was ordered to pay $1,600 per month to Mrs. Brown’s guardian.

Mr. Brown had been married before, and he had two sons from that marriage. Mrs. Brown had no children. Mr. Brown’s will left one-third of his personal property and a life estate in one-third of his real estate to his wife, and the balance of his estate to his two sons.

Mr. Brown died shortly after the spousal maintenance award was entered. His sons filed a probate proceeding, divided the estate in accordance with his will and began the process of closing the estate.

At that point Mrs. Brown’s guardian filed a claim against the estate for spousal maintenance that might be due for the rest of her life. After a hearing the probate court agreed and, considering Mrs. Brown’s life expectancy of 13.9 years, set the amount due from Mr. Brown’s estate at just over $160,000.

Mr. Brown’s sons appealed the judgment. Mrs. Brown’s guardian pointed out the Indiana statute (Arizona has a similar law) that allows child support payments to be reduced to a lump-sum claim against a deceased parent’s estate. In these circumstances, argued Mrs. Brown’s guardian, the court should make a similar calculation for spousal maintenance.

The Indiana Court of Appeals disagreed. In reversing the award the Court noted that there is no statute authorizing such a calculation for surviving spouses, and that the state legislature presumably could have created such a claim if legislators thought it necessary. Mrs. Brown’s spousal maintenance award, however, ended with her husband’s death. Estate of Brown v. Estate of Brown, October 2, 2002.

Although Arizona uses “conservator” rather than “guardian of the estate,” the laws of the two states are similar in other respects. The same result should be expected in Arizona, especially where no divorce proceedings have been finalized.

Share
©2014 Fleming & Curti, PLC