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.
You would like to make sure that your children get along after you are no longer around to tell them to behave, wouldn’t you? Although you may not anticipate any disagreements, you know that money can change relationships, and you have seen how the death of a parent can interfere with sibling relationships. Perhaps you have considered including a “no-contest” provision in your will or trust, and you wonder: Would that help maintain family harmony?
The name lawyers usually apply to such no-contest provisions is revealing. We call them “in terrorem” clauses — meaning that they are intended to terrorize anyone who would otherwise receive a share of the estate from filing any contests. But do they actually work? They can, but they seldom do. Why not?
The primary reason is simple. Say your plan is to leave everything to your three children, in equal shares. Since that is exactly what would happen if you had no will (or trust — in terrorem provisions can be used in trusts, too), there is no incentive for any of them to contest your estate plan anyway. No one else would receive anything even if your documents were successfully challenged, so there is simply no need to include a no-contest clause.
Maybe your plan is different. Say one of your children has already received a significant share of your property, or you disapprove of his or her life choices. You want to disinherit that child, and you want to make sure he or she does not contest your plan. In this situation the in terrorem provision is not going to make much difference — since the disinherited child receives nothing anyway, providing that they will be disinherited if they contest the documents is not much of a deterrent.
All right. Let’s say you really want to make the point. You agree to leave a small share of your estate — perhaps a few thousand dollars — to the disfavored child, and then include an in terrorem provision. Will this work?
It might. Obviously, the beneficiary who is slated to receive something but who will lose it for contesting will have to think twice about filing any objections. You should know, however, that Arizona law (like the law of a number of other states) limits the effectiveness of the provision. If your disgruntled heir has “probable cause” to file an objection — even if he or she is ultimately unsuccessful — the in terrorem provision will not be enforced. (For one illustration of how this might work, consider the 2000 Arizona Supreme Court case of Matter of Shumway, which we described in an “Editor’s Note” to our 1999 article on the Court of Appeals decision in the same case.)
We do not include many no-contest clauses in wills and trusts we draft for our clients. They probably do no harm, except that they would leave our clients with a false sense that they had protected against family conflicts. If conflict avoidance is important to you, we need to come up with a better plan — like including a requirement that any contest be submitted to arbitration or mediation. We can discuss specific ideas for your particular situation.
Carmen DiCesare, age 82, may have been a little confused when he visited the local branch of Prudential Savings Bank in south Philadelphia that day in August, 2000. By the time he left the bank he had made major changes in his estate plan, and the bank’s branch manager and assistant branch manager had benefited from Mr. DiCesare’s situation.
What Mr. DiCesare apparently wanted to accomplish was to arrange for direct deposit of his Social Security checks into a passbook savings account at Prudential. Frances Mazzei, the branch manager, told him that he would need to have his original passbook with him to set up the direct deposit account, and he told her that he had lost the book. She then helped him to open a new account, and to transfer his existing Prudential account balances.
One of the documents Mr. DiCesare signed that day was a note prepared by Ms. Mazzei that said “I want to put the account in trust to Frances Mazzei and Lucia Sqiieri.” Ms. Squitieri (the note misspelled her name) was the assistant branch manager. The two women even called bank President Thomas Vento to check on whether the account titling was permissible; Mr. Vento did not advise them not to set up the account. The two women then held on to Mr. DiCesare’s passbook, giving him only a copy.
The “in trust for” language, of course, meant that the two women would receive Mr. DiCesare’s account upon his death. They assisted him in transferring almost $250,000 into the new account, and then moved $430,000 from another bank into the account. The balance was then $680,454.63, with another $709 deposited each month by Social Security.
When Mr. DiCesare did die ten months later Ms. Mazzei and Ms. Squitieri removed and spent the account balance. Mr. DiCesare’s estate then brought suit against Ms. Mazzei, Ms. Squitieri and Prudential Savings Bank itself.
After recovering $156,000 from Ms. Mazzei and Ms. Squitieri, the estate obtained a judgment against them and the bank for the remaining balance. Prudential and the two women appealed.
The Pennsylvania Superior Court upheld the judgment against all three defendants. The court quickly determined that Mr. DiCesare was vulnerable, and that Ms. Mazzei and Ms. Squitieri had developed a relationship of trust with him that made them liable for the loss.
As for the bank’s liability, the court ruled that Mr. DiCesare’s estate did not have to show that Prudential had violated any law or regulation. The fact that senior management knew what the two branch officers were doing, and did nothing to stop their actions or even inquire, was enough to make Prudential liable for the entire $563,767.40 judgment. Owens v. Mazzei, April 7, 2004.
Antonia Quevillon, then age 70 and in poor health, consulted attorney Carl Baylis about her estate plan. Mr. Baylis prepared a living trust for her, and arranged transfer of apartment buildings she owned into the trust’s name. The trust named Mr. Baylis himself as co-trustee—to serve along with Ms. Quevillon’s daughter Estelle Ballard.
Ms. Quevillon died shortly after the trust was executed. For the next twenty years Mr. Baylis and Ms. Ballard acted as co-trustees, managing the trust’s property.
A dispute arose between the trustees and the beneficiaries (other than Ms. Ballard) over whether the apartment buildings should be sold. Ms. Ballard resisted efforts to sell the buildings, probably at least partly because she lived in one of the apartments rent-free, and most of her living expenses were paid by the trust.
Although Ms. Ballard eventually agreed to sale of the properties, she did not cooperate with actual sales. Finally the other beneficiaries sued both trutees for breach of their fiduciary duties. The lawsuit ultimately resulted in a judgment against Mr. Baylis personally for almost $1 million; in addition, Mr. Baylis was ordered to repay the trust $27,000 he had used to defend and settle an earlier lawsuit against him by the beneficiaries.
Mr. Baylis responded to the judgment by filing bankruptcy. If successful, the bankruptcy proceedings would result in discharge of all his debts, including those owed to the beneficiaries of Ms. Quevillon’s trust.
Bankruptcy rules, however, permit the court to refuse to discharge debts for breach of fiduciary duty—without specifying precisely how to apply the exception. Mr. Baylis argued that his behavior was not a “defalcation,” the term actually used by the bankruptcy code, and the Bankruptcy Court agreed. It permitted his debt to the trust to be discharged.
The Massachusetts Federal District Court next heard the case, and it reversed the Bankruptcy Court determination, thereby denying Mr. Baylis relief from his debt to the trust and its beneficiaries. Mr. Baylis appealed again, and the First Circuit Court of Appeals permitted most of the debt to be discharged.
The appellate court distinguishes between non-dischargeable debts based on bad acts by the debtor (like embezzlement, or injuries from driving while drunk) and those based on public policy (like taxes and student loans). Finding that defalcation as a fiduciary is more like the former category, the court looked for evidence of either specific intent or recklessness on the part of Mr. Baylis. Finding none, it authorized discharge of most of his debt. Mr. Baylis, however, must still repay the $27,000 spent in defending the lawsuit against him. In re: Baylis, December 10, 2002.
Last week Elder Law Issues reported on Arizona’s new “Beneficiary Deed” statute. A law passed by the Arizona legislature this year creates a new, simpler way to pass title to real property, without any requirement of probate and avoiding the cost of establishing a living trust.
A number of readers had questions about the new deed form. Questions included:
When can I sign a beneficiary deed?
Most laws take effect 90 days after the legislature adjourns. Adjournment is now scheduled for Thursday, May 10. If the legislature actually adjourns that day, the new law will be effective (and beneficiary deeds will become an available choice) on August 3, 2001.
Will the recipients under a beneficiary deed receive the benefit of stepped-up basis for income taxes?
Yes. To explain: when you inherit property from another, you usually do not have to pay income taxes on the increase in value of that property during the prior owner’s life. For purposes of calculating the income tax on capital gains, your “basis” in the property is said to have been “stepped up” to its value on the date of death of the person who left it to you. Beneficiary deeds will reach the same result.
How will beneficiary deeds affect ALTCS (Medicaid) recovery rights?
ALTCS is Arizona’s long-term care Medicaid program. When it provides benefits, the program has a claim against the recipient’s estate. Under current law that claim can only be collected in a probate proceeding. Since the beneficiary deed will avoid the probate process, ALTCS’ claim will not be levied against the property. This makes beneficiary deeds particularly attractive to ALTCS recipients and their families.
It is worth noting that a different law passed by the legislature this year may undo some of this benefit. “Non-probate transfers” (including beneficiary deeds, living trusts and joint tenancy bank accounts, but not real estate held as joint tenants) may now be challenged by creditors, including ALTCS.
Why would anyone want to create a living trust now?
Beneficiary deeds will be a valuable new estate planning tool, but will not replace other options. Perhaps most importantly, a beneficiary deed will not help a married couple take advantage of the maximum estate tax exemption if their combined estates exceed the taxable level (currently $675,000).
Trusts remain a more effective way to control property after death (for a disabled or spendthrift child, for example). Trusts can be used for real property outside Arizona. Another advantage for trusts: a single amendment can change your entire estate plan, rather than requiring new deeds and beneficiary designation changes on each individual asset.
For those who already have established living trusts, the beneficiary deed probably represents a step backward. For those now considering their options for the first time the beneficiary deed may be an attractive, low-cost choice for estate planning.
In 1984, Stanley McGill sent a $7,000 check for his 1983 tax liability to the government by the April 15 deadline. McGill was supposed to send in only $700; he was apparently confused and made out his check incorrectly. He never filed his tax return, and died in 1988.
McGill’s daughter discovered the payment while taking care of her father’s estate. She filed a return and requested a refund of overpaid taxes. Although the IRS agreed that McGill had money coming back, they pointed out that a taxpayer only has two years from payment of a tax (or three years from filing) to claim a refund. McGill had not made his claim on time.
The trial court agreed with the IRS, and the daughter appealed. The Court of Appeals, saying that “it would be unconscionable to allow the government to retain money that it … may have only received due to a 93 year-old man’s senility,” ordered the District Court to conduct an inquiry into McGill’s capacity at the time he made the payment.
Between 1972 and 1987, Mary Parsons was systematically exploited by her physician and a lawyer he hired. During that time, they arranged to make “gifts” to themselves worth millions of dollars. The gift taxes (paid from Parsons’ estate) totaled over $11 million.
Parsons discovered the thefts and sued; she recovered the “gifts.” Then she tried to recover the gifttaxes.
The IRS once again argued that it was too late to claim a refund, but this time they won. Since $7 million of the taxes had been paid within the last two years, Parsons did get that money refunded, but she still paid over $4 million in taxes because of the fraud.
Cases with such large overpayments are rare. Still, the principles apply to smaller tax issues as well.
U.S. Chief Justice Burger’s Last Will
Late last year newspaper stories related a compelling tale about the need to involve an attorney in estate planning. It seems that the late Warren Burger, former Chief Justice of the United States Supreme Court, had written his own Will and had failed to take advantage of basic estate tax savings techniques. The notion that the top judge of the highest court in the land would make such a mistake seemed wonderfully ironic.
The only problem with story: it simply wasn’t true. Justice Burger’s estate plan was complete, and his Will was just fine. Suggestions that he cost his estate almost a half million dollars by failing to consult an estate planning lawyer were wrong, and the real problem was that the lawyer who made the claim had incomplete information.
Does the Burger Will show that others can do the same thing? It is worth remembering that Chief Justice Burger was an accomplished attorney and an intelligent jurist. He also could claim friendship with of the most prominent attorneys in the country. His $1.8 million estate was more complicated than most, but he had access to good information.
There is one thing Chief Justice Burger might have done differently if he had consulted an estate planning specialist. Most would have suggested that he create a living trust precisely to avoid the probate process and public scrutiny of his Will and estate.
Older residents have been besieged for the past decade with promotions for Revocable Living Trusts (which always seem to be Capitalized). What are they and are they always good things? Should everyone have one? A list of the advantages and disadvantages might include:
Avoiding Probate. If all your assets are held by a trust there will be no estate to take through the probate process. Of course, the same would be true if you designated beneficiaries on all your accounts, held property as joint tenants with right of survivorship or simply gave it all away during your life, too. And probate is neither as expensive nor as lengthy as opponents describe (listen to the horror stories closely–you will note that they tend to be old stories and from a handful of states with old-fashioned probate laws, like California).
Minimizing Estate Taxes. If your estate is over $600,000 in value (including life insurance) and you are married, a proper trust will help minimize your estate taxes on the death of either spouse. However, if your estate is less than $600,000 there will be no tax anyway. And a trust is not the only way to take advantage of estate tax savings; a proper will may accomplish the same result.
Protecting Against Incapacity. A trust is wonderfully helpful in managing your assets if you later become incapacitated. Of course, a durable power of attorney can accomplish the same result.
Controlling Your Estate After Death. If you feel strongly about how your estate will be used after your death, a trust may be just the thing to ensure your wishes are followed. For example, you may want to leave money to your children, but not let them touch the principal. Or you may want to require your heirs to abstain from alcohol in order to receive benefits. A trust can impose such conditions on the recipients of your estate. Of course, a will can include the same kinds of restrictions.
Should You Have a Trust?
Trusts are a great estate planning tool. The variety and flexibility of the instruments is legendary. But the biggest drawback to living trusts is usually the cost of preparing them. Typically, a trust may be as much as ten times the cost of a comparable estate plan based on a will and durable powers of attorney. Computer software, non-lawyer preparers and form books may be less expensive, but they typically do not explore the full range of benefits or dangers of trust planning.
Some Rules of Thumb
You should seriously consider a living trust if:
Your estate is over $600,000
You own real property in more than one state
You are specifically concerned about future incapacity (for yourself or a spouse)
You have a disabled child or beneficiary
You wish to delegate management of your property to a professional
You own significant life insurance policies
You wish to control the use of your property closely after your death
Otherwise, a trust may simply be more estate plan than you need. Of course, you should consult your lawyer to determine whether a trust makes sense for you.
Some recent court cases of note to those caring for or working with elders:
Trust Not Changed by Divorce
Horace and Victoria Collins were married when Horace prepared his living trust. He left half of his separate property to his wife and most of the rest to his grandchildren. Later, the couple divorced. Horace died without changing his living trust.
Arizona’s statutes provide that, when a person divorces, his will is automatically modified to disinherit his former spouse. He may choose to change his will after the divorce, and may even leave property to his “ex”, but until he makes a change or renews his will, the law will effectively rewrite his will.
Horace’s grandsons argued that the same provision should apply to living trusts. By their logic, Victoria would be “written out” of Horace’s trust, on the assumption that Horace would have done the same thing himself if he had gotten around to it.
The Pima County Superior Court Judge disagreed. He ruled that the statute on revising wills applies only to wills, and not to living trusts. Some evidence existed that Horace intended to leave Victoria in his trust, even after the divorce, but the judge ruled that Horace’s intentions need not be demonstrated. In re: Horace Collins Revocable Trust, August, 1994.
[Effective January 1, 1995, a new Arizona law will change this rule. In addition, life insurance benefits and other beneficiary designations will be automatically changed by divorce--Ed.]
Trust Invalidated Despite Attorney’s Involvement
Agnes Rick was already suffering from dementia when her husband of fifty years died in 1990. Afterwards, neighbors helped her with meals, transportation and bill-paying. One of those helpful neighbors was stockbroker John Sailer, Jr.
In 1992, Ms. Rick conveyed a large parcel of land to a corporation owned by Sailer. He also took her to an attorney who, at his suggestion, prepared a living trust and power of attorney naming Sailer as fiduciary and giving him an option on her home at a below-market price.
Ms. Rick’s niece brought a conservatorship proceeding, alleging that Mr. Sailer was taking advantage of her. The attorney who prepared the documents, along with his associate and his secretary, testified that Ms. Rick knew what she was doing. The Delaware trial judge rejected their testimony, while indicating that he did not doubt that the witnesses genuinely believed they had carried out Ms. Rick’s wishes at the time.
The judge noted that the drafting attorney was not Ms. Rick’s regular attorney, but was selected by Mr. Sailer, and that he did not know about her medical history, family background, failing memory or dependence on others. Had the lawyer known, the judge said, he surely would have asked more detailed questions. In the Matter of Rick, 1994.
