Posts Tagged ‘living trusts’

Some Questions We’re Being Asked a Lot Lately

APRIL 29, 2013 VOLUME 20 NUMBER 17
You probably have read that Congress has made big changes to the estate tax system. More accurately, Congress has made “permanent” the big (but piecemeal and temporary) changes introduced over the past decade. We hear a lot of questions from our clients about what those changes mean. Here are some of the more common questions we get asked:

Should I revoke the living trust I signed a few years ago? The answer is almost certainly no, but it might require some explanation.

Trusts (and here we generally mean revocable living trusts) have been useful for the past few decades, and help address a number of concerns. They can make it easier for you to avoid the necessity of probate of your estate. They can provide more efficient and clear-cut management of your assets if you become incapacitated. They can spell out any limitations on your heirs’ access to your estate after your death. And (especially for married couples) they can help minimize estate taxes — or at least they have traditionally been useful for that purpose.

The federal government’s change in estate tax limits means that very, very, few estates of decedents will pay any estate tax whatsoever. But does that mean that your trust will no longer be helpful?

Even though your estate will likely not be subject to any estate taxes, the other benefits provided by your living trust will continue to be available. Probate avoidance is still easier with a trust. So is protection of your assets in the event you become incapacitated. So is control over your children’s inheritance.

If you had not already created a living trust, the recent changes in tax law might make it less compelling for you to sign a trust today. But if you have already created your trust, there is little likelihood that you will be better off by revoking it. The only real downside to creating a trust (in most, nearly all cases) is the cost (our fees) and the difficulty of transferring assets into the trust (the “funding” process). You’ve already incurred both of those, so it probably makes little sense to undo your trust now.

Do my spouse and I still need a two-trust arrangement? It has been common in Arizona (and other community property states) for a husband and wife to create a single, joint trust that divides into two trusts upon the first death. Those trusts are sometimes called “survivors” and “decedents” trusts, or “family” and “marital”, or more simply A and B trusts. Many practitioners think they are outmoded now — and they might be right.

The recent tax law changes make permanent the concept of “portability” of the estate tax exemption. That means that when one spouse dies, the surviving spouse gets to keep the deceased spouse’s $5 million estate tax exemption (it’s actually even better than that, since the $5 million figure is indexed for inflation and has already risen to $5.25 million). No fancy trusts are necessary to allow a combined estate of up to $10.5 million (or more) to completely escape federal estate tax.

For a number of reasons, though, some lawyers favor keeping the two-trust split in place. There might be a state estate tax to consider (there isn’t in Arizona, but perhaps you have property in another state where there is an estate tax). There is still the generation-skipping tax issue, if you are putting money in trust for your children (which we favor) or leaving money directly to grandchildren.

This issue takes a lot of individualized consideration. The answer may depend not only on the size of your estate, but also who you intend to leave your money to and whether you will be leaving it in trust. Suffice it to say that married couples with combined estates of well under the $5 million threshold probably don’t need the two-trust arrangement, while couples worth more than twice the $5 million figure likely do. But even those generalizations are uncertain — your mileage definitely might vary. Talk to your lawyer.

What if my spouse died several years ago, and an irrevocable trust was set up — do I still need to keep it going? It might well turn out that you don’t, but you may not have control over the question.

For couples worth more than a few hundred thousand dollars a decade ago, the division into two trusts was commonplace. If one spouse has already died the division might well have already taken place. If so, the irrevocable trust files separate tax returns, has its own EIN (Employer Identification Number — the trust’s equivalent of a Social Security Number) and has requirements that some form of accounting information is provided to the ultimate beneficiaries. Would it be advisable (or even possible) to terminate that trust?

It might, particularly if the total value of the irrevocable trust and the living spouse’s own estate does not exceed $5 million. Recent changes in Arizona law might make it easier to terminate the trust and save the cost and hassle of administering it. But it is not always easy to terminate the irrevocable trust, and there may be some costs associated with doing so. Talk to your lawyer. You might find yourself discussing merger, termination or “decanting” of the irrevocable trust.

Are these changes really permanent, or will we be revisiting everything again in two years? This really looks permanent — or at least permanent for the next decade or two. Can Congress revisit the estate tax? Yes, of course. Have they done so over the past fifteen years? Yes, repeatedly. Is there any move afoot to make further changes? Yes, some politicians talk about eliminating the estate tax altogether. But even with all that said, there is little indication that any serious changes are going to be discussed in the next few years. And even if Congress significantly lowered the estate tax limit, the result would be that the tax could affect a handful more than the half-percent (or so) of people who now need to worry about estate taxes.

Estate Planning in 2013 — Is It Time To Make Changes?

JANUARY 14, 2013 VOLUME 20 NUMBER 2
Congress acted (not just at the last minute, but after the last minute). The update to the estate tax provisions is permanent, or at least what passes for permanent in the world of taxes and politics. So does that mean you need to make changes to your estate plan?

In a word, yes. Mind you, that answer does not apply to everyone — but it does apply to most middle-class married couples and wealthy individuals and couples.

For a decade now we’ve been telling clients that they will need to revisit their estate plans once the scheduled changes in the tax law were resolved. They are now resolved. Of course Congress could act again, and make further changes — but that seems unlikely, and probably would only happen after a lot of discussion. In other words, you should treat the current federal estate tax law as likely to outlast the life expectancy of your estate plan.

What needs changing, and how do you know if you are a candidate for change? Of course we can only answer that after a consultation, and for that you need to make an appointment and bring us detailed (and, for existing clients, updated) information. But here is a preview of what you are likely to talk with us about:

Do you have an existing A/B (or marital/bypass, or survivor’s/decedent’s) trust split in your plan? You probably do if you are married, if you are worth anything close to $1 million (or more), and if you had your estate plan prepared in the past quarter-century or so. Do you still need that trust split? Likely not. Does it hurt anything to have it in your plan? Maybe — it might make your estate plan unnecessarily complicated, but it might actually have negative income tax consequences.

Does your existing trust have “disclaimer trust” provisions? If so, you might consider revising to take them out. They probably don’t hurt anything, other than to make your estate plan that much more complicated, and to distract you from your real concerns — taking care of your family, supporting your favorite charitable cause(s), or whatever is truly important to you and your estate plan.

Are you a surviving spouse, living with an already-funded bypass/credit shelter/decedent’s trust? You might be able to make changes. State laws vary, and circumstances vary even more — but at least in Arizona there might be some opportunity to simplify  your life, reduce administrative costs (like annual tax returns) and even save your heirs a few dollars in income tax liability.

Has it been more than five years since you last visited a lawyer? If so, it’s time to update your estate plan anyway — just think for a moment about where you were five years ago, what you didn’t yet know about your family, your finances or whatever has changed. Even with no congressional action it would have been time to revisit your estate plan if it’s been that long.

Have your circumstances changed very much since your last estate planning visit? Have you gotten a new child or grandchild? (Mazel tov!) Have you moved to a new state,  married or divorced, become significantly more wealthy (or less)? Bought a vacation home in another state? Become interested in a new charitable undertaking? If any of those things describe you, it’s time to talk to your estate planning lawyer.

Are you worth between about one million dollars and five million dollars (make that ten million for married couples)? Then you are in the group of people who most need to check in with your estate planning lawyer.

Is this just a thinly-disguised attempt to drum up business? No. We’re in total agreement if you have someone else doing your estate planning and you go back to them. We obviously can’t handle your estate planning if you don’t live in Arizona, and it’s difficult for you and us if you live outside of southern Arizona. We just want to encourage everyone to update their estate plans in light of the relative permanence in the federal estate tax rules.

What bad things happen if you make an appointment with your estate planning attorney? Well, you will probably have to write a check — but of course the cost of failing to plan is usually much higher than the cost of planning. You will also have to gather some information — but we are more interested in round numbers and rough conceptions about your assets than in picky details about which stock investments have done well or precise values of your family business. We strive to make your visit no more unpleasant than a routine dental checkup.

That reminds us. We need to call our dentist.

I Just Want to Put My Daughter’s Name On My Deed

NOVEMBER 5, 2012 VOLUME 19 NUMBER 40
We hear that request all the time. “I want to make it easy for her when I die — just put my daughter’s name on the deed,” client after client insists. When we resist, they think we are acting too much like lawyers.

There are no statistics out there, but we think that most of the time this arrangement works out just fine. But most of the time isn’t a very comfortable place to be. We counsel clients not to put their children’s names on the title to their property — any property, but especially real estate and most especially the home — while the client is still alive. Let us try to explain ourselves, and offer up some alternatives.

First, what do clients mean when they say something like “put my three sons’ names on the deed”? Do they mean that they want to put the property in joint tenancy, with the client and three children as co-owners? Or do they mean that they want to continue to own the property themselves, but have it pass automatically to the three sons on the client’s death? Because if they get us to put the property in joint tenancy, that is a completed gift now, not a contingent gift that becomes completed at death. If the client decides in two years to remove one of her sons, or to sell the house, or to leave one son’s share to his kids rather than his wife — it’s too late. The deed has been done, as the saying appropriately suggests. Any later change will require the agreement — and signatures — of all three sons.

That was the problem that faced Hazel Jackson (not her real name) in a case decided by the Arizona Court of Appeals recently. Hazel had asked her lawyers (not our firm) to put her daughter’s name on her deed, and they had prepared a deed transferring her Sun City winter home into joint tenancy between her and her daughter. A decade later, she figured out that she had made a mistake — she had meant, she said, to sign a “beneficiary deed” (more about those later) so that her daughter would receive the property easily at her death. She hadn’t meant to give her daughter a present interest in the home.

Hazel asked her daughter to sign over the interest that Hazel had inadvertently given to her, but the daughter refused. Hazel filed a lawsuit to compel her daughter to return the gifted interest, but the court threw out her lawsuit. The Court of Appeals agreed, ruling that unless Hazel could show that the deed she had signed was actually invalid (e.g.: not properly signed, not witnessed correctly, or the product of duress or fraud) the lawsuit was properly dismissed. Hazel’s “misunderstanding of the legal effect of the warranty deed is not a legitimate basis on which to invalidate the deed,” said the Court. Johnson v. Giovanelli, October 25, 2012.

Note that Hazel was arguing that she had signed a deed different from the one she intended to sign. Her claim would have been even weaker if she had argued “yes, I meant to sign a deed when I did — but things have changed and I no longer want my daughter’s name on the title to my house.”

The Court of Appeals decision does not explain what has changed between Hazel and her daughter to make her want to change the title to the house. We can only report that we see similar concerns raised from time to time — often because family relationships change, or a parent decides a child’s inheritance should be protected from spouses, children, or creditors.

What about the “beneficiary deed” that Hazel claimed she had meant to sign? Would that have solved the problem? Perhaps — it would at least be worth considering, and would have allowed her to change her mind a decade later.

Beneficiary deeds require some explaining, too. They are unfamiliar to many people — the very concept is only about two decades old (that’s very young in property and estate planning law, which was mostly laid down five or six centuries ago). Only about a third of the states have approved the idea — including Arizona, which was one of the early adopters, but not the first. We have written about beneficiary deeds before, and often prepare them for our clients. But they are not the perfect solution for every “put my daughter’s name on the deed” situation.

When is a beneficiary deed not the right answer? It is not the best way to handle children who can not handle money, or who receive public benefits. It can create more trouble than benefit in larger families (eight siblings owning equal interests in a property can be a formula for gridlock that even a Congressperson could admire). It may not deal very well with the possibility that a child dies before you do (would you want his share to go to his wife, his kids or back to your other children? What if he remarries first? What if he is in the process of getting a divorce?). But for Hazel, who apparently had only one child and who intended her daughter to receive everything outright, it might well have been the easiest and best answer.

What’s the other choice? A living trust. They aren’t the answer to all problems, either, but if you have lots of different pieces of property, or lots of children, or a desire to benefit children and others unequally, or a child with special needs, creditors, an unhappy marriage or other reasons not to leave property to them outright — in all of those cases a living trust is more likely to be the right answer for you. Let’s talk. But please understand that if we start the conversation with “I just want to put my daughter’s name on my deed” you’re likely to get a little pushback from us. It’s because we want to do a good job for you, and we have seen some things.

[By the way: much of what we say here also applies to your bank accounts, brokerage accounts, and other assets. We just wanted to focus on the deed to your house right now.]

LLC Interest Not Transferred to Trust During Life, is Subject to Probate

OCTOBER 8, 2012 VOLUME 19 NUMBER 37
Bear with us. This story will be a little dense and involve more difficult legal issues than we usually like to tackle. The good news: at the end you get an honorary law degree. Well, not really — but you’ll probably deserve one.

Matt Silver (not his real name) had a living trust, and had transferred nearly all of his assets to the trust. He was also a “member’ of a limited liability company — an LLC — but he had not gotten that LLC interest transferred to the trust before he died in 2007.

A short side-excursion into LLCs is in order. These popular business entities have been around since 1977, when Wyoming first introduced the concept. They merge some of the advantages of a corporation (including the ability to shield the individual participants from potential personal liability for claims and lawsuits) with some of the advantages of partnerships (including tax treatment as if the LLC members were partners — thereby avoiding corporate income taxation). The business participants are usually called “members” and the entity is governed by its operating agreement.

But a type of entity that was invented in 1977 is still pretty new by legal standards. Heck, two of the partners at Fleming & Curti, PLC, were already practicing law when Wyoming came up with this new idea (to be fair, Robert Fleming and Tom Curti were just one year into their law practices when the Wyoming legislature acted). Note, as an aside, that “PLC” at the end of the law firm’s name: even we are a limited liability company (the “P” denotes that we are a professional limited liability company — a type of LLC restricted to professionals like lawyers). Bottom line: that all means that the rules governing LLCs are less clear than those governing corporations, partnerships, trusts and other types of business and personal associations.

Back to Matt. He had not gotten his LLC interest transferred to the trust. That meant that it might be subject to the probate process — thereby increasing the complexity and cost of getting it to his heirs. But it also created a larger problem: Matt’s death meant that there was only one remaining member of the LLC, and he could reform the LLC in such a way that Matt’s interest could be bought out at “book value.”

Another side-excursion, to discuss “book value.” That means the carrying value on the books of a business organization — essentially, the contributions of the partners, shareholders or members (depending on the type of business entity). Book value is often (not always) far less than the market value of the partnership interest, shares or (in the case of LLCs) membership interest. In other words, if Matt’s LLC membership interest was part of his probate estate it would be worth far less (the court opinion does not tell us how much less, so we use the scientifically accurate “far less” metric) to his heirs than if his trust was the member.

Back to Matt again. The surviving LLC member filed a probate, alleging that a Personal Representative (what we used to call “Executor” — we’re not going into another side-excursion for that one) was necessary to complete the forced liquidation of Matt’s LLC membership. His trustee objected, claiming that Matt’s LLC was part of the trust — and that the surviving member should be estopped from claiming otherwise.

“Estoppel” is an interesting legal concept. Basically, the argument is that even though something may not be true, the court may sometimes tell at least some people that they may not raise objections. Usually, the person whose objection is not permitted has done something, said something, or benefited in some way from treating the thing as true. They are said to be “estopped” — barred — from saying otherwise.

Back to Matt. His trustee argued that Matt, the other LLC member and other people in Matt’s life had met shortly a year before Matt’s death. At that meeting the other LLC member had said that he supported Matt’s efforts to transfer the LLC into his trust, and that he would do “whatever was needed” to help complete the transfer. Even though Matt apparently never followed up, his trustee maintained, the remaining LLC member should be estopped from claiming that the LLC had not been transferred to the trust.

Confused yet? We warned you that this was a little dense. Maybe if we get right to the resolution we can make a couple points that will help you with your own estate planning.

The probate judge agreed with the surviving LLC member. Matt had failed to transfer his LLC interest to the trust, and his business partner was now the sole member (and able to force liquidation of Matt’s interest at book value). It was Matt’s inaction, not the surviving member’s change of heart, that had prevented the transfer. The Arizona Court of Appeals upheld the probate court’s ruling, and noted that even if Matt had signed transfer documents he probably would only have transferred his interest, not his membership, in the LLC. In other words, even if he had completed the transfer his business partner would be the sole LLC member — unless the operating agreement was also amended to name the trust as the member, not just the owner of Matt’s share. Matter of Estate of Shiya, October 2, 2012.

So why did we pick this dense fact pattern, and what is the takeaway message? It is simply this: it is not enough to complete your living trust planning, even if you get it just right and the lawyer writing the trust perfectly captures your wishes. “Funding” the trust is the key. Assets have to be retitled to the trust’s name, and that can sometimes mean more than just changing names on the title, or just signing a batch of documents. Funding can require some follow-up, and some continuing maintenance.

A smaller takeaway point from Matt’s case: avoiding probate is not always the only issue to be considered in trust creation and funding. There may be other consequences — good or bad — flowing from the decision to create and fund a living trust. In Matt’s case, it looks like an effective transfer into the trust might have given Matt’s chosen successor trustee to step into Matt’s shoes and act as member of the LLC — and (not incidentally) significantly increase the value of his interest in that LLC.

We Suggest Two Positive Things About Probate — But Not Too Vigorously

SEPTEMBER 24, 2012 VOLUME 19 NUMBER 36
Two weeks ago we wrote about why you might want to plan your estate with an eye toward avoiding probate. We hope you concluded, with us, that the probate process may not be as onerous as one would believe based on its bad reputation. We concluded with a promise that we would next try to identify any reason you might actually want to be sure that your estate “goes through” probate.

Then life (in the form of a family visit and a trip to the fantastic ruins at Chaco Culture National Historic Park) intervened, and we missed getting back to you on this topic. We do hope no readers are inconvenienced by what we are sure was growing dramatic tension.

We’re back and ready to address the positives about probate. “It isn’t as bad as you think” simply is not enough to recommend the probate process, and so we need to lay out all the affirmatively good things that can happen by virtue of having your (or a family member’s) estate subjected to probate. We think we will be brief.

We can think of two positive things arising from the probate process. Others might quibble (and in fact we hope they do — comments are solicited below) and insist that we have overlooked a third, or even a fourth. But the truth is that there are not many affirmatively good things flowing from a probate proceeding. Here are our two:

1. Creditor protection. If your estate goes through the probate process, there is a formal mechanism for giving notice to creditors and giving them a short time — in Arizona, four months — in which to perfect their claims. At least in theory (there are some exceptions) that means you can cut off unknown creditors fairly quickly after a death, and their claims do not linger to be asserted against heirs months or even years later. This feature of probate is often particularly attractive to doctors, lawyers, architects — any professional who might conceivably be sued for malpractice.

This “benefit” is often illusory, however. In Arizona, and in a growing number of other states, you can give creditors notice (by a combination of mailing and publishing in local newspapers) and cut off claims not made within the same four-month period even if no probate has been filed. Check with your local attorney to see if your state has a similar provision.

2. Judicial finality. What we mean by this is that, particularly in contentious family situations, the person administering your estate might actually benefit from the knowledge that once a probate judge has decreed that everything was done correctly, unhappy heirs are cut off from pursuing additional legal proceedings.

This, too, is somewhat illusory. Suppose you choose to establish a living trust to avoid the probate process, and your successor trustee wishes she had access to the courts to make sure her siblings don’t threaten to act for months or years after your estate has been settled. Well, your successor trustee can choose to submit your trust to the probate court’s review, just as if there had been a formal probate proceeding.

In our experience, family members tend to overestimate their ability to get along with siblings and others affected by the handling of your estate. It might be that your daughter, whom you have named as successor trustee, chooses not to seek probate court approval — and later regrets it when your son challenges everything she did months or even years later. But, as we say, this is a fairly faint recommendation for a decision to force your estate through the probate court.

So how do the pluses and minuses stack up, and what do we think you should do about it? Here’s the executive summary:

There are very few cases in which administration of an estate will not be simpler and less expensive if a living trust is established — and fully funded — rather than requiring that the estate go through the probate court and process. Though there are some theoretical benefits to probate, they tend not to be too compelling in individual cases. But the real test is a cost-benefit analysis: will your family save enough (cost and hassle) from your decision to establish a living trust to justify the increased expenditure by you, right now?

As part of that analysis, how likely is it that the estate plan you create today will be the one in place when you die? In making this calculation, remember that most people really do need to revisit their estate planning documents about every five years, or even more frequently.

As you review this material, please remember two things:

  1. We live and practice in Arizona. Not every state has the same relatively simple probate process, but in some states probate is even simpler and less expensive. That means that the cost-benefit analysis we describe has to be made in your state, preferably in consultation with an estate planning attorney familiar with your state’s law and practices.
  2. Reasonable minds can and do differ. Few things generate the heat and passion among estate planning attorneys (we tend to be a pretty mild bunch) that you can get from the “do you need a living trust” question. We’ll post pretty much any response we see from other practitioners or regular folk, but ultimately you need to talk to a local attorney and get the straight scoop from her or him before making a final decision.

Is It Important to Avoid Probate? Why, or Why Not?

SEPTEMBER 10, 2012 VOLUME 19 NUMBER 35
Earlier this year we wrote about how to avoid probate. We told you at the time that we might later address whether to avoid probate. This week we’re going to tackle that topic.

You might be thinking something like: “‘whether to avoid probate’? Isn’t that foolish? Of course I want to avoid probate.” There is simply no question that the whole process of probate (by which we mean the court proceeding required to transfer a decedent’s assets to his or her family or the beneficiaries named in a will) has gotten a bad name. Our purpose here is not to try to rehabilitate the public image of probate, but to give you some of the details about how the process works. Armed with that, you can decide how bad probate really is, and how badly you want to try to avoid it for your estate.

First, a handful of generalizations. Please note that they are generalizations, not absolute truths:

  1. Probate is not as bad as it was a half-century ago. When Norman Dacey published “How to Avoid Probate!” in the mid-1960s, the negative image of the probate process was already widespread. His book galvanized opposition, and popularized the notion of revocable living trusts as an efficient probate avoidance tool. It also woke up the legal establishment; within a decade, a number of states (including Arizona) had adopted the Uniform Probate Code, which had been crafted to simplify the process. Even states which did not adopt the Uniform Probate Code drew a lot of the ideas and processes from it. The result: in most (but not all) states probate has gotten much, much simpler.
  2. Relatively few deaths result in a probate proceeding being filed. For example, the Tucson area probably sees about 10,000 deaths a year (extrapolating from U.S. Census data for Arizona, which reported 46,000 deaths in 2008). Yet only about 1,300 probates were filed in Tucson last year — and that number includes cases where a trust was filed for review, interpretation or supervision. We predict that similar numbers — about 10% of deaths leading to a probate proceeding — will apply in other jurisdictions, too.
  3. Avoiding the probate process does not, by itself, have any effect on taxes and does not prevent family fights. As to the former, there are no income taxes due upon receipt of an inheritance regardless of whether it comes through probate or not. Estate (or inheritance) taxes are a different animal; there is no estate tax in Arizona, and no federal estate tax (in 2012) on an estate of less than $5.12 million. But the value calculation is not based on probate estates — it is applied to trusts, joint tenancy, beneficiary designations and anything else the decedent owned or had control of just before death.
  4. There is tremendous state-to-state variation. There are a number of states in which one item or another from the list below would completely change your analysis. DO NOT use this guide to judge whether you want to avoid probate in California, in Texas, in Ohio — in fact, in any state other than Arizona. Ask your local lawyer about your state. Feel free to share this article and go over the list, but do not be the least bit surprised if his or her answer is completely different, based on your state’s laws. (Incidentally, if you, gentle reader, are an attorney practicing in a different state — please feel free to comment about how, precisely, you would adjust our advice for your state. We’d be happy to include such comments on our website, along with your contact information. We won’t vouch for your accuracy, but you do know your state law way better than we do.)

Let’s get started. We propose to set up a series of the most common objections to probate, and then explain how seriously you should consider those objections.

Probate is expensive. It does cost something to go through the probate process. There are filing fees, publications of notice in local newspapers, and lawyer’s fees. They can be substantial. But one thing about the Uniform Probate Code: it moved states from a fixed percentage of the value of the estate to a “reasonable” fee. In general terms, that has meant average fees about 1/3 of what they were under the old fixed-fee schedules. Still more than some people want to pay, but much less than they have heard about. Did you read that some celebrity’s estate paid 40% of its value in fees and taxes? Well, we bet that (a) most of that was taxes and (b) there was a will contest. If your competence is going to be challenged, avoiding probate may not reduce that cost. If your estate pays taxes, avoiding probate will not change that.

It is also important to remember that avoiding probate does not mean avoiding lawyers — and costs — altogether. Resolving the division and distribution of a living trust (a popular probate-avoidance device) will cost some money. It will probably be considerably less than the probate cost, but it won’t be $0. And accountants are still likely to be involved (there are, after all, the same number of tax returns to file either way).

Probate means public disclosure of private matters. Not any more. Or at least, not in Arizona. No inventory has to be filed in the probate court (a copy gets sent directly to beneficiaries, but it need not be filed in court). No formal accounting is required (assuming, of course, that no one objects to the administration of the estate). Anything with confidential information can be filed in a sealed envelope with the court. In short, the only thing publicly available is likely to be the text of your will itself (plus, of course, the fact of your death). That may be enough of a violation of privacy that you want to avoid the process, but for most people that’s not terribly invasive.

It takes a long time to go through the probate process. It can, but it doesn’t have to. Most probates can be closed once a four-month waiting period is completed. Given ordinary delays in getting things filed, that usually means the probate process is wrapping up at about six months after filing. Of course there are exceptions. We have decades-old probates hanging around in our office. We once took over a probate that had languished for over forty years. It happens. But it is not inherent in the probate process. PS: we closed that 40+-year-old probate with two phone calls and one court filing. It took about two more weeks. We apologized to the now-elderly heirs for an unconscionable delay. They said they had wondered why they’d never gotten their small inheritances. But they had never called to ask the prior lawyer what was taking so long — it wasn’t until the lawyer’s death that that particular sad little file got closed up.

Probate proceedings are easy (easier?) to contest. This one is correct, although not (for most people) a very big deal. If you have disinherited a spouse or child, you might want to consider a living trust. Your will isn’t literally easier to contest than your trust — the same principles apply in both cases. But probate does mean that there’s already a court file, and a letter has to be sent out to the disinherited heir (which might invite a contest that they otherwise wouldn’t get around to filing).

Why isn’t this a big deal for most people? Because most people don’t deviate very much — or even at all — from what would have happened if they did not sign a will or trust. If you don’t leave anything to your long-lost cousin in Colorado, she doesn’t have any basis for contesting your will OR your trust — because she wouldn’t inherit even if you were batty as a bedbug (is that the right metaphor?). If you had no will or trust your estate would go to your spouse and kids in some proportion. Your goofy cousin will never get any part of your estate (unless you die without spouse, children, siblings, nieces, nephews, parents, grandparents, uncles or aunts), so a will contest is pretty much a theoretical idea for most of our clients.

If you own real estate in more than one state, the cost and trouble of probate will be magnified. Yup. And we can’t tell you how hard or expensive it will be to handle the probate in the other state. You’re a good candidate for a living trust. Note, however, that we’re going to have to go to the expense of getting that other state’s real estate transferred into your trust, and that’s going to increase the cost of creating the trust in the first place.

So what does it all mean? Should you be trying to avoid probate? Probably, but maybe not if it’s very expensive to do so, or you aren’t too worried about your heirs incurring some additional costs, or you haven’t decided exactly what you want to do. If you decide probate avoidance isn’t too important we won’t call you foolish or misguided.

But are there any positives about probate? Any reason to want to have your estate go through the probate court? Well, we’re well beyond our usual self-imposed word limit for this week, so we’re going to leave you with that question as a cliffhanger. But we can promise that next week, when we answer it, our weekly newsletter will be shorter.

Claimant Must Prove Undue Influence, Lack of Capacity

AUGUST 27, 2012 VOLUME 19 NUMBER 33
It has been some time since we wrote about the concepts of undue influence and lack of testamentary capacity — and the differences between these two legal concepts. A recent Minnesota appellate case strikes us as a good opportunity to revisit challenges to wills and trusts based on allegations of mental shortcomings.

Linda Samson (not her real name) was a widow, living in her own home in Minnesota. She had two children, a son and a daughter. She and her late husband had created a living trust several years before her husband’s death; it provided that after the second spouse died, the remaining estate would be divided into three shares. One share would go to the couple’s daughter, another to their son, and the third to their son’s wife.

In 2003 Linda was diagnosed with “early-state Alzheimer’s disease.” In 2006 she signed an amendment to her trust deleting both her daughter and daughter-in-law (and leaving everything to her son). In 2008 she signed two deeds to her home — one transferred her home out of the trust and into her name alone, and the second one transferred her home from her name into her son’s name (but reserving a life estate for herself).

Between her initial Alzheimer’s diagnosis and 2008 Linda’s medical records periodically referred to her memory loss but indicated that she was stable. She continued to live at home, though with some assistance. She had a sharp mental decline in the summer of 2008, and by fall of that year a home health agency was recommending 24-hour care. She moved into a nursing home in the spring of 2009, was enrolled in a hospice program and died in June of that year.

Linda’s daughter objected to the 2006 amendment to Linda’s trust and to the 2008 transfer of her home. She argued that her mother lacked the capacity to sign either of those sets of documents, and/or that her brother must have unduly influenced their mother to his own benefit (and her detriment).

The probate judge heard testimony from several people who knew and/or treated Linda. Two expert witnesses hired by her daughter, both doctors, had reviewed Linda’s medical records but had never met her. They testified that her capacity was obviously diminished, and that it would have been possible to unduly influence her.

On the other side, the lawyer who prepared the trust amendment and the deeds to her house testified that, though he had not met his client before, she seemed to be able to explain her reasoning for the changes and she knew who her children were and what she was doing. He testified that she had told him that it saddened her that her daughter was not very involved in her life, but that she was pleased at the extra care and attention she received from her son and his son, her grandson.

Both the initial and the follow-up sets of appointments with the lawyer had been arranged by Linda’s son, but in both cases (he testified) it was at her request. Although the lawyer had met with both Linda and her son initially, further discussions were with Linda alone; the transfer of the house had actually been initiated by the lawyer rather than either Linda or her son. The lawyer pointed out that it didn’t really change the disposition of her estate at all, since Linda’s son was already the sole beneficiary of her trust estate.

There was one odd moment, according to the lawyer’s testimony. During one of the interviews with Linda he sought to establish that she knew her family members and the relationships (a key part of the standard for determining testamentary capacity). When he asked Linda about her daughter, she said that she was sorry that they were not closer, that the daughter was on her third husband (in fact, her husband had just died), and that her daughter had suspected that she, Linda, had had an affair with the husband. When the lawyer expressed surprise and asked follow-up questions, Linda dismissed the idea and said she had gotten confused; that had been the plot of a biblical story she had read.

After trial, the probate judge ruled that Linda’s daughter had not proven that her mother lacked testamentary capacity OR that her brother exercised undue influence. The judge noted that the supporter of questioned documents has the burden of proof that the documents were executed properly. After that, though, the contestant of a will or trust has the burden of proving allegations of undue influence or lack of testamentary capacity. Linda’s daughter introduced testimony that there could have been undue influence, and that Linda’s capacity might be suspect — but her burden had been to prove that there was undue influence, or that Linda actually did not understand what she was signing.

The Minnesota Court of Appeals agreed, upholding the probate judge’s ruling. The appellate judges had the same understanding of the burden of proof, and saw no reason to set aside the probate judge’s findings. Linda’s last trust changes, and the transfer of her home to her son, were both upheld. In the Matter of the Smith Living Trust, August 20, 2012.

This Minnesota case is not the most eloquent on the subject, and of course it would have little or no precedential value in Arizona. The opinion is also “unpublished,” which means that the Minnesota Court of Appeals decided that it should not be cited as precedent even in Minnesota itself. Still, there are several reasons we like the decision and call attention to it here:

  • It is a nice exposition of the “burden of proof” issue, pointing out that many will and trust contests lose not because the proponent of the document prevails but because the contestant fails. Generally speaking, the person who challenges a will, trust, deed or other estate planning document has to overcome the presumption that the signer was competent and knew what he or she was doing.
  • It describes the sorts of things a good lawyer should do to protect the validity of documents he or she prepares. The lawyer met with Linda alone (we would have liked it even better if he had never met with Linda and her son together, but at least he dealt primarily with Linda directly), the deed change was prompted not by Linda’s son but by the lawyer himself, the lawyer could testify that he routinely took steps to assure that his clients are competent and aware of what they are doing.
  • On the other hand, the contestant had to rely, as is often the case, on inference and reconstruction. The contestant’s two expert witnesses had never met Linda, and their opinions were consequently guarded (they said that she was susceptible to undue influence, but they could not testify to the extent of any influence they might suspect).
  • Perhaps most importantly, the opinion makes clear that even someone with a long-standing diagnosis of dementia might still be able to sign estate planning documents. Testamentary capacity (the ability to sign a will) is not immediately compromised by virtue of a dementia diagnosis; Linda had carried her diagnosis for several years but still had the capacity to understand the nature of her trust change, to identify her family members and to describe what assets she wanted to pass to her son. The fact that she had one episode of fairly serious confusion did not prevent her from signing her new trust.

Is a Contract Not to Revoke Your Will Enforceable? A Good Idea?

AUGUST 20, 2012 VOLUME 19 NUMBER 32
Imagine this scenario: you and your spouse have been married for thirty years, and it is a second marriage for both of you. Each of you brought children to the marriage (your two and your spouse’s three), and all five kids were raised together from their teens as if they were each the child of both of you. You want to get your estate planning done, and you want to make sure that (a) when one of you dies, everything will go to the other, and (b) when the second of you dies — whichever that is and however long he or she survives the first to die — everything gets divided equally between the five children. Can you accomplish this?

The short answer is “yes.” But there are some issues to be considered here. One of those issues is the subject of today’s installment of Elder Law Issues: contracts to make (or not to make, or not to change) a will.

First the legal details. The principle is actually fairly straightforward. Arizona Revised Statutes section 14-2514 lays out the basic rules: “…a person may enter into a contract to make a will or devise or not to revoke a will or devise or to die intestate only by:

  1. Provisions of a will that state the material provisions of the contract.
  2. An express reference in a will to a contract and extrinsic evidence proving the terms of the contract.
  3. A writing signed by the decedent evidencing the contract.”

We have written about an Arizona case interpreting the statutory requirements before, and recently. In the case we described just a few months ago, the question was whether a decedent’s changes in his estate plan violated his divorce agreement to leave a share of his estate to his children from his first marriage — a slightly different question from the one we have posed here. (The answer, in case you were wondering and didn’t want to follow the link, was “yes” — and some of the changes he made in favor of his second wife were set aside by the courts.) We have also written about similar questions in other states — notably, an Iowa case in which a couple’s reciprocal wills were treated as creating an enforceable agreement to keep their estate plan the same.

But that’s not the question we pose here. Assume a happily married couple in complete agreement about how their property ought to be distributed on the second death. Each wants to assure that the other won’t later change his or her mind. Can they prevent that change, and if so, how?

If you have been reading along with us, you already know that the couple can enter into an agreement that neither will change their will, and that the agreement might be enforceable to set aside even lifetime transfers of property. Other cases we have described make it clear that it is at least theoretically possible to prevent even transfers of property to a living trust, or creation of joint tenancy, that would have the effect of changing the ultimate distribution.

When our clients ask us about these kinds of arrangements (and they often do), we first counsel that it is difficult to predict what the surviving spouse’s property, living arrangements and even family dynamics will look like twenty, ten — or even five — years after the first spouse’s death. Will the surviving spouse remarry, and spend two or three decades with a new spouse, commingling assets and developing new family relationships? Do the happily married couple sitting in our office want to try to preclude that from happening in the event that one of them should die much earlier than the other?

We have seen many cases in which stepchildren remain actively — and positively — involved in the lives of their deceased parent’s surviving spouse. But we have seen more cases in which the relationship slowly unravels, and a few in which the death of the first spouse to die leads to a terrific explosion in the family dynamics. Are you sure where on the scale of step-family relationships your own family fits, and how many years it will stay in that position?

Assume that you have gotten past all those concerns, and you and your spouse really do want to lock-in your estate plan so that it is not changeable after the first death. Is an agreement that neither of you will ever change your wills the best way to accomplish your desired result? Probably not.

First of all, there are many changes the surviving spouse might see which would not affect the ultimate disposition. Perhaps your selection of executor and agent under your power of attorney was influenced — positively or negatively — by your familiarity with the strengths and weaknesses of your children’s spouses. If they divorce, or one or more spouses die — you might want to change the sequence of appointment. Same if the surviving spouse moves to be closer to one of the children after the first death, or if the family home gets sold and turned into a small condominium, or into cash.

For those couples who want to provide for a particular distribution on the second death, we usually counsel that the best way to accomplish their goal is to create a living trust — all or a portion of which can become irrevocable upon the death of the first spouse. That means (in most cases) that the surviving spouse will be accountable to his or her step-children and children for the investment, distribution and use of the trust’s assets — possibly including the family home and other property in which the children are going to be given an enforceable interest. When clients protest that they don’t want to make the surviving spouse responsible to account to stepchildren, we have to ask: what protection are  you offering your children if you give them an interest in your marital property, but don’t allow them to have any information to monitor that interest?

This planning problem is one of the most persistently troubling issues our clients face. How do you strike the proper balance between giving the surviving spouse freedom to live life as they choose, and still protect the ultimate inheritance for children? We have some ideas and experience, but we predict that you (our client) will never be completely comfortable that you have found the correct balance.

Living Trust Does Not Prevent Court Involvement After Misuse of Funds

JULY 16, 2012 VOLUME 19 NUMBER 27
Living trusts are increasingly popular and common. One of the principal attractions for most people who execute living trusts is that they can avoid the complication, cost and oversight of the courts and of lawyers. That usually means the trust signer’s family can save money and hassle.

Lack of oversight, of course, can sometimes lead to problems, including abuses. A recent Arizona Court of Appeals decision, though involving a dispute over a relatively small amount of money, can help illustrate the procedural hurdles and complications involved in providing the necessary oversight when trusts do not work out as planned.

Glenda Harrison (not her real name) had created a living trust, naming her daughter Candy and her son Jack as co-trustees. As she became increasingly unable to manage her own finances a guardianship (of the person) and conservatorship (over her estate) were initiated; Jack was appointed as sole guardian and conservator.

Among the reasons Jack was appointed as guardian and conservator was his allegation that Candy and her husband had dealt with the trust improperly. His chief complaint: Candy’s husband had loaned Glenda’s trust $9,264 but had gotten a note for $16,000, and had secured an interest in Glenda’s residence (what we all, inaccurately, call a mortgage) for the higher amount. Though the $9,264 had been repaid, Candy and her husband had not released the mortgage, claiming they were still owed the balance of the $16,000 note. As trustee of Glenda’s trust, Jack then brought a lawsuit against Candy and her husband to force them to release the mortgage, and for damages.

Candy insisted that the lawsuit in the trust’s name should be consolidated with the guardianship and conservatorship proceeding, which was granted. She did not, however, file a formal answer to the complaint itself, and Jack applied for entry of a default judgment against her and her husband. They then filed an answer, but did not hire an attorney.

About two months later, Jack asked the probate court to order Candy and her husband to transfer Glenda’s property to him as conservator, to prepare an accounting for what she had done as trustee, and to return money taken as part of the improper note and mortgage. Jack’s attorney scheduled a deposition for Candy, in order to ask her questions and get her responses on the record.

Candy asked that her deposition be put off, and reported that she had been in an auto accident and was under a doctor’s care. She included a note from her doctor saying that she should be excused “until further notice.” The probate judge agreed and ordered a thirty-day delay of the deposition, but warned Candy that she needed a more precise explanation if she wanted any further delay. She did file a request for another continuance before the new deposition date, but she neither included an updated doctor’s report nor set the request for hearing; as a result, she simply failed to attend her deposition.

Jack’s attorney filed another request with the probate court, this time seeking an award of attorney’s fees, an order that Candy and her husband actually respond and participate in the pending litigation, and payment of the costs associated with the missed deposition and court hearings involving that deposition. Candy filed a written response requesting additional delays, but the court denied the request. Neither she nor her husband showed up at the hearing.

Without any meaningful participation by Candy and her husband, the probate judge had little choice but to grant Jack’s attorney’s request that they be ordered to turn over everything they had relating to management of the trust and Glenda’s care and that they pay costs and attorney’s fees as well. After the order was entered, Candy  wrote to the court asking for reconsideration, arguing that she had not known her request for delay had been denied until the day of the hearing itself, and that she would need to appear telephonically for future hearings. The court denied this request, pointing out that Candy had “a long history” of seeking delays and failing to file required court pleadings. Judgment was entered against Candy and her husband for the underlying debt, for costs and attorney’s fees and for all the relief requested in Jack’s complaint and motions.

Candy appealed (interestingly, her husband did not). The Court of Appeals was not persuaded by her arguments, and upheld the probate court’s decision and judgment. It also added an award of additional costs and attorney’s fees incurred in connection with the appeal itself. Matter of Guardianship and Conservatorship of Horrigan, July 12, 2012.

So what does Glenda’s family’s dispute tell us about trusts, guardianships and conservatorships? Perhaps not a lot, but it does offer a chance for a few relevant generalizations:

  • Signing a living trust does not guarantee that there will be no court involvement in your affairs later. It just makes the precise nature of court proceedings — when they are necessary — a little more complicated.
  • Those of us dealing with family disputes would probably generally agree that lack of court oversight can sometimes encourage abuses by the very people — your family — whom you rely on to protect you. We don’t mean to overstate this, but we will speculate that Glenda would have told her lawyer that HER children got along well and were entirely trustworthy. We hear that a lot.
  • Relatively small disputes (in Glenda’s case, only about $6,000 was involved) can lead to large judgments. The court record does not indicate, but let us guess that the total costs and fees added up to several times the amount originally in dispute.

It might be that there was no way Glenda could have avoided the problems that arose. Perhaps her daughter and son-in-law would have done the same thing regardless of her planning or lack thereof, regardless of her son’s involvement, and regardless of court oversight. It is hard to be sure about what might happen. But when we ask: “do you completely trust your daughter (or son, or grandchild, or whomever you propose to name as trustee) to behave responsibly?” please think of Glenda and understand that we are not impugning your loved one’s integrity or honesty. We have just seen too many variations on this same story.

Lifetime Asset Transfers Voided Based on Agreement to Make Will

MAY 7, 2012 VOLUME 19 NUMBER 18
We have written about contracts to make (or not to revoke) a will before. The question comes up infrequently, and usually only in a handful of ways: can you and your spouse make an enforceable agreement that you will leave your respective estates to, say, your children no matter what? Yes, you can — at least in Arizona.

For John and Martha Lindford (not their real names), the question came up during their divorce proceedings. Martha wanted to make sure that the couple’s two children, John, Jr. and Paula, would receive at least a share of John’s estate when he died. When the couple negotiated a property division as part of the divorce, it included a provision that required each of them to “execute a Will leaving fifty percent (50%) of their respective estates in equal shares to the children and twenty-five percent (25%) to each other.”

Eleven years after the divorce was final they both agreed that it was time to modify their first arrangement. John and Martha both signed an amendment that eliminated the requirement that any share of each estate be left to the other, and instead provided that 75% of each ex-spouse’s estate would go to the two children. Six months after that modification, John remarried.

Five years after the second marriage John was diagnosed with cancer, and he began to seriously plan his estate. He amended signed a new will and modified his existing living trust; the new documents specifically left several business entities to his new wife, and provided that she would also receive an additional amount to bring her share of his estate up to 25% if it did not already amount to that much.

In the months after his cancer diagnosis, John also transferred several assets — the family home, several bank accounts and one of the businesses — to his second wife outright. When he died eighteen months after diagnosis, the effect had been to leave his second wife substantially more than one-quarter of his entire estate — although she had gotten a large part of that share by lifetime gifts, not in his will or the trust.

John, Jr., and Paula and first wife Martha filed a claim against John’s estate. They argued that the effect of his gifts and the terms of his will and trust violated the marital property agreement as it had been amended. His second wife acknowledged that she had gotten more than one-quarter of John’s assets, but argued that the agreement only required him to have a will leaving 75% to his children — and that lifetime transfers were not prohibited by the agreement.

After a two-day trial, an Arizona probate judge ruled that John’s actions violated the property settlement agreement with his first wife. The second wife was ordered to return all the assets she had received from John, so that a new division could be made and her share could be capped at 25%. She appealed the ruling.

The Arizona Court of Appeals agreed with the probate judge, and upheld his ruling. The appellate judges calculated that John had given about $2.5 million — amounting to more than one-third of his entire estate — to his second wife, and that he had done so in an attempt to defeat the agreement he had signed with his first wife. Estate of Lockett, April 26, 2012.

Should John’s and Martha’s original agreement, signed in the course of a divorce nearly two decades before John’s eventual death, effectively tie John’s hands indefinitely, and despite his later marriage, growth of his estate and changes in his family relationships? That question is larger than the legal question posed by his probate case. For good or ill, John and Martha had signed an agreement that compelled them each to leave three-quarters of their respective estates to their two children. That agreement might have turned out to have been unwise or constraining, but it was their agreement.

What formalities are required for such an agreement to be effective, and to bind the parties? Arizona law (and other states may have different provisions, so be careful about generalizing from Arizona’s example) requires a contract to make a will — or not to modify or revoke a will — to meet only very basic formal requirements. Paradoxically, it would seem that a contract which does not satisfy basic will formalities (e.g.: unwitnessed and not in the decedent’s handwriting) might qualify as an enforceable contract, thereby effectively creating a will.

What landmines and roadblocks might people considering such a contract (e.g.: the lawyers representing a couple in a divorce proceeding) reflect upon before signing? Well, the opinion in John’s probate case turned, among other things, on a letter he wrote before the agreement was signed. In that letter John reported that he intended to leave 75% of his “entire estate” to his first wife and children. When the second wife later argued that the agreement necessarily only covered his will and his probate estate (and therefore should exclude property he gave away before his death), both the probate judge and the appellate court pointed to his letter as proof that he meant the contract to include his entire estate. If that is true, it certainly would have been a good idea for the agreement to spell that out in more detail, and to cover the possibility of living trusts, lifetime transfers, creation of limited liability companies or family limited partnerships, and other arrangements.

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