Posts Tagged ‘probate estate’

Is Dispute Inevitable When Two Children are Named as Co-Trustees?

MAY 18, 2015 VOLUME 22 NUMBER 19

So often our clients assure us that their children are different from other children. Our clients know that their children will fundamentally get along. They are sure that there will be no big problems when they die, and that the children will communicate and cooperate. Fortunately, that turns out to be the case for our clients. But other lawyers’ clients seem to be very different.

Betty Lundquist (not her real name) must have thought her two daughters could work well together, because she named them as successor co-trustees of the revocable living trust she set up. She directed that the daughters (Peggy and Lisa) were to split her estate equally. She also signed a “pour-over” will, directing transfer to her trust of any assets not already properly titled at her death. For whatever reason, she named Lisa as the sole personal representative of her probate estate.

Betty had actually transferred pretty much everything to her trust, and so probably envisioned that there wouldn’t be much need for a probate at all. As she approached death, however, things were already getting tense between Peggy and Lisa. The day before Betty’s death, Peggy and her husband tried to transfer some of her trust accounts into their own name. They got the original will and trust documents from Betty’s accountant, and declined to share them with Lisa. Peggy was living in Betty’s home, and wouldn’t let Lisa even into the home to look at — and inventory — their mother’s belongings.

When Betty died in 2011, Lisa filed an emergency petition with the probate court seeking release of the original will and other documentation. She ultimately was appointed personal representative, and Betty’s will was admitted to probate. Peggy thereafter refused to co-sign trust checks to pay Betty’s bills, or motor vehicle affidavits to transfer car titles.

Eventually the probate proceedings were wrapped up, though the sisters were still not getting along. Finally, Lisa filed a request for payment of her mother’s estate’s expenses — including her attorneys fees for the probate proceedings themselves. Peggy responded by arguing that Lisa should have been disinherited because she filed the probate proceedings at all. Her logic: Betty’s will and trust provided for automatic disinheritance for anyone challenging her estate plan, and Lisa’s filing of a probate proceeding amounted to a challenge of their mother’s plan to avoid probate altogether.

The probate court approved payment of attorneys fees of $8,081.20, and a little more than $7,000 of other costs incurred in administration of the estate. Since the bulk of Betty’s estate was actually in her trust, the probate judge also ordered that the payments would come from the trust to the extent necessary. Peggy appealed both the approval of attorneys fees and the order that the trust should pay the fees.

The Arizona Court of Appeals ruled that the attorneys fees were appropriate and reasonable, and upheld the order. Furthermore, it agreed that the probate court had the authority to order payment from the trust — even though the trust had not been submitted to the court for oversight. According to the appellate court, both the trust’s language and Arizona law provide for payment of the decedent’s expenses — including probate and administrative expenses — from trust assets. Johnson v. Walton, May 14, 2015.

Peggy’s argument (that no probate proceedings were even needed) might have carried more weight if the Court had not been convinced that she actively interfered with the orderly administration of her mother’s estate. In fact, with even a modicum of cooperation Betty’s daughters might well have had a smooth, easy and inexpensive trust administration, and no need for any probate proceedings. That is a common result in similar circumstances — especially when one of the children is put in charge and they behave responsibly and honestly. (Of course, the person in charge need not be one of the children — but that is the choice we see most often.)

Was Betty’s mistake putting her two daughters in joint charge, and assuming they would work together? It’s always hard to figure out exactly what else might be going on when reading a Court of Appeals opinion, but if the joint authority didn’t cause the problem, it certainly did not help prevent the later dispute.

Our usual advice: rather than appointing two (or more) children with equal authority, we suggest you default to a choice of the one person who is most responsible, most widely respected among your beneficiaries, most available and most trustworthy. For clients who tell us that each of those terms applies best to a different child, we suggest that they use some method to make a single selection (coin flips work in extreme cases). Fortunately, though, our clients’ children all get along, all work beautifully together and never have disputes. Just like our own children.

More Definitions for Estate Planning Terms

FEBRUARY 10, 2014 VOLUME 21 NUMBER 6

Last week we gave you short definitions of some common estate planning terms, like “will” (and “pourover will”), “trust” (including both “living” and “testamentary” trust), “grantor trust” and more. This week we want to continue that project with another batch of common terms:

Durable power of attorney — sometimes called a “financial” or “general” power of attorney. The key is that the power of attorney continues (or becomes effective) even if you become incapacitated. This is simultaneously the most important and most dangerous document that most people will sign with their estate planning. Why dangerous? Because it gives such broad, mostly unchecked power to someone else to handle your finances.

Living will — a document by which you give directions about how you would like to be cared for (or what care you would prefer not to have) at the end of life. That’s not the only time the living will is effective (or important), of course, but that’s what people usually think of. This is the document you might sign to direct that you not receive artificially-supplied food and fluids at a time when you are no longer able to make decisions yourself. OR you might direct that you DO want food and fluids (and/or other care) provided in such a situation.

Health care power of attorney — you can designate someone else to make medical decisions for you if you become unable to make or communicate decisions yourself. That person is called your “agent” or “attorney-in-fact,” and the document that names them is your health care power of attorney. That’s the term usually used in Arizona, by the way — other states might use different terms for the same concept.

Advance directive — any document by which you provide for medical decision-making in the event that you become incapable is called an advance directive. The most common advance directives are health care powers of attorney and living wills, but there are others. In Arizona, for instance, you might have an advance directive about mental health care decisions, or rejecting resuscitation measures, or even giving someone authority to decide when you should stop driving. These are a little bit more specialized, and you should talk with your attorney about them.

UTMA accounts — UTMA stands for “Uniform Transfers to Minors Act”, and it refers to a law that has been adopted in some form in every American state. It amounts to a simple sort of mini-trust set out in the law — rather than pay to have a trust set up for a minor, you can simply make a gift to a UTMA account. That makes it easy and inexpensive. It also means that you are stuck with the terms of that legislative trust, but it’s one way to make gifts to children and grandchildren.

529 plans — as long as we’re writing about children and grandchildren, we should mention these popular methods of making gifts. “529” refers to the section of the Internal Revenue Code which both permits and governs these accounts. Once again, it is a simple and inexpensive way to make a gift to your child or grandchild, provided that the primary purpose of your gift is to pay for future educational costs. Ask your attorney (and also your accountant and financial planner) for more information and direction if this idea seems appealing.

“Crummey” trusts — sometimes called “irrevocable life insurance trusts” (or abbreviated as ILITs), these trusts are a method of transferring assets (often, but not always, life insurance) to future generations without making the gift outright and absolute. The nutshell version: you make a gift of less than the annual exclusion amount (see below) to a trustee, and the trustee notifies the beneficiary that they can take out the gift. When they don’t remove the gift, for tax purposes the transfer is treated as having been made by the beneficiary, so the gift is deemed to have been completed. These trusts are often used to allow gifts of the annual premium amount for life insurance, or to make gifts without giving the beneficiary a chance to misspend the gift.

Annual gift tax exclusion amount — there is a tremendous amount of misunderstanding about this concept. In 2014 you can make a gift of up to $14,000 to any person without having to explain yourself to the Internal Revenue Service or anyone in the federal government. Your spouse can do the same thing — even if it is your money that funds the gift. You (and your spouse, if he or she participates) can do the same thing for as many individuals as you’d like. Here’s the misunderstanding part, though: if you give, say, $20,000 to one person, that doesn’t mean you pay an gift tax, or you have to get government approval. It just means you have to file a gift tax return — and if the amount you total up from all of those returns over your lifetime gets to $5,000,000 (it’s actually more than that, but we’re trying to make this simple) then you might have to pay a gift tax. This $14,000 figure, by the way, has absolutely nothing to do with Medicaid eligibility (yes, you can make a $14,000 gift — but it might make you ineligible for Medicaid even though it’s blessed by the IRS).

And, finally, this perennially popular concept/term:

EINs — “Employer Identification Numbers” are issued by the Internal Revenue Service for probate estates, trusts, and other entities that might have to file income tax returns. When someone asks for your “TIN” they mean that they want either your individual Social Security Number or the appropriate EIN. Even if the trust or estate does not have employees (and even if it never will) it still gets an Employer Identification Number (EIN). Does your trust need to have an EIN issued? That is an enduringly popular question, which we have addressed several times before (and undoubtedly will again).

Finders Keepers? Losers Weepers?

JUNE 4, 2012 VOLUME 19 NUMBER 22
Richard Scott (not his real name) had a propensity to hide things away. His children knew that, and they knew that when he died they would have to go on a treasure hunt — literally for treasure.

Mr. Scott lived in the same house in Paradise Valley, Arizona, for a number of years. During that time he had let the property deteriorate somewhat. When he died in 2001, his two daughters spent seven years just cleaning up, fixing some of the most urgently-needed items, and looking for his stashes of money, gold, stocks and bonds. In fact, during that seven-year period they found hundreds of green military ammunition cans stuffed with valuables.

Finally Mr. Scott’s daughters, believing that they had found pretty much everything, sold the house. Because of the disrepair they listed the property “as-is” and sold it to a young couple with that limitation. The new owners set to work remodeling their new “fixer-upper” property.

The buyers hired a contractor to do some of the remodeling. Almost immediately, one of the contractor’s employees stumbled upon a green ammunition can in the walls of the kitchen. Then the employee went looking for more; he found two other cans in the walls of an upstairs bathroom. Altogether the three cans held about $500,000 in cash.

You can probably see the legal question coming. Who owned the cash? Did it belong to the employee who found it, his boss (the contractor), the home owners, or the daughters of the prior owner?

The Arizona Court of Appeals decided the question just last week. Their answer: the money still belongs to Mr. Scott’s estate.

Generally speaking, according to the appellate court, the old “finders keepers, losers weepers” logic of the schoolyard does not apply in courts. The cases dealing with found property tend to divide the property into one of four categories: mislaid, lost, abandoned or treasure trove. Each of those categories is handled slightly differently.

Property can be mislaid if the owner puts it someplace (for safekeeping, perhaps) and then forgets about it. A finder of mislaid property must return it to the rightful owner. Of course, this category assumes that it is possible to determine the intention of the original owner when he or she placed the property where it was later found.

Lost property, on the other hand, is accidentally or inadvertently misplaced. This category might include, for example, the cash that slips from your pocket as you step over a curb, or the bracelet sliding from your wrist as you put groceries in your car. Lost property belongs to the finder — except that the original owner has the right to recover it from the finder. Note the difference between this and mislaid property: in the case of mislaid property the finder has a duty to return it to the owner.

Property can be abandoned by the owner making an affirmative decision (and acting on it) to relinquish all title to the property. This is what you do, for instance, when you haul your old sofa out to the curb and hope someone will carry it away — or when (more responsibly) you take it to a donation center and leave it with the collections person there. The finder of abandoned property has no duty to return it to the original owner. The Court of Appeals specifically noted that cash can almost never be characterized as abandoned property.

And finally, treasure trove is property that may have once been mislaid or lost, but has been in the place it was found for so long that it is verifiably antiquated and the original owner is probably dead or unknown. This category might be applied to the gold doubloons found in a rusty strongbox in an old mineshaft — and it is more the stuff of legends and stories than of actual legal controversies.

Which of these categories did Mr. Scott’s ammo cans of cash fit into? The Court of Appeals ruled that they were more likely mislaid than abandoned — the only two real choices. The only argument to treat them as abandoned was to assume that Mr. Scott’s daughters had made a conscious decision (buttressed by the “as-is” sale listing) to give up on their search for any further cash and to let the new buyers have anything they might find. The appellate judges decided that the burden of proving abandonment would rest with the new buyers, and they could not overcome the presumption that Mr. Scott and his daughters would not intentionally decide to give away cash. Grande v. Jennings, May 31, 2012.

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.

How To Avoid Probate — And What Doesn’t

APRIL 23, 2012 VOLUME 19 NUMBER 16
Let us try to demystify probate avoidance for a moment. Note that for the purposes of this description, we are not going to argue with you about whether avoidance of probate is good, bad, desirable or a foolish goal — we start here with the assumption that probate avoidance is important. Another day, perhaps, we will discuss with you whether you ought to be concerned about probate avoidance.

Definition of terms first: probate is the court process by which your estate is settled and distributed to your heirs (if you have not made a valid will) or your devisees (if you have). Confusingly, “probate” is also the term applied (in most states) to the court where probate proceedings, guardianship, conservatorship and sometimes even civil commitment and adult adoptions are conducted. We are not talking here about how to avoid probate court altogether, but just about how to keep your estate from having to go through the probate process upon your death.

Arranged (more or less) from least desirable to most, here are some of the ways to avoid probate of your estate upon your death:

Die poor. In Arizona, an estate consisting of up to $75,000 of personal property can be collected by the people who claim to be entitled to it without the need of a probate court proceeding. The affidavit for collection of personal property is widely available and usually free. Your survivors can use it to transfer title to your auto, or to collect small bank (or other financial) accounts. The statute providing for collection of small estates also provides a mechanism for the surviving spouse to get a decedent’s last paycheck, and for beneficiaries to transfer title to real property up to another $100,000 in value. Most other states have a similar law, but with dollar limits that vary widely. [Note: the small estates numbers were updated to the figures listed here by the Arizona legislature in 2013.]

Give it all away. One sure-fire way to avoid probate: give everything to your kids (or whomever you want to receive your stuff) now. The main problem with this approach should be obvious — what if they won’t let you live in your house any more, or withhold the interest you counted on them returning to you each month? Things change: you might change your mind about leaving everything to that child, or to all your children. The child you transfer assets to might marry someone you don’t trust. Worse yet, that child might die — leaving you at the mercy of his or her spouse and children. Maybe you and the child you give your stuff to will end up disagreeing about when you need to go to a nursing home, or whether you ought to get married late in life, or even take in a roommate.

As an aside, it amazes us how often clients come to us after having given everything to their children. Things so often do not work out as planned. This is a very poor way to handle your estate planning — but it would avoid probate. We hear that those new-fangled strap-on jet packs avoid traffic jams, too — but we don’t recommend them as a means of getting to the doctors office.

Joint tenancy. People often refer to this method of holding title by its formal name: “joint tenancy with right of survivorship.” That makes the value of the title pretty clear — the surviving joint tenant(s) own the deceased joint tenant’s portion of the property upon death of one joint tenant. You can have more than two joint tenants — upon the death of any one, the survivors’ interests all increase. We liken this arrangement to a tontine — a lovely idea that combines the best elements of estate planning and lotteries.

Lawyers generally discourage the use of joint tenancy in estate planning. The problems are less obvious than simply giving away your stuff, but they are still real. You might later decide that the child you established the joint tenancy with should get a larger or smaller share of your estate — but the joint tenancy is always, by definition, an equal ownership interest with all the other joint tenants. People who favor joint tenancy as an alternative to good estate planning invariably, in our experience, seem to think it would be OK to name just one child as joint tenant, and to trust her (or him) to divide the property among siblings. That often works just fine — but it often leads to family disputes when the children have different expectations or understandings.

Other problems with joint tenancy: you subject your property to the creditors, spouses and business partners of the child you put on your title. You lose the power to refinance your home, to cash out your certificate of deposit, or to liquidate your government bonds — more accurately, you lose the power to do those things unless your joint tenant will also go to the title company or the bank with you and sign willingly.

Lawyers tend to dislike joint tenancy, except in one circumstance. Many people own their property in joint tenancy with spouses (homes are especially likely to be titled in that fashion), and we lawyers generally think that is alright. In Arizona, there is another alternative between spouses that we like a little better: community property with right of survivorship. That conveys some income tax benefits to a surviving spouse while still avoiding the necessity of any probate on the first spouse’s death.

Beneficiary designations. You probably have a beneficiary (maybe multiple beneficiaries) named on your life insurance policy, on any annuities you have been talked into buying, and on your retirement account (if there is any death benefit included). Did you know that you can do the same thing with bank accounts, stocks and bonds, and even (in Arizona and a handful of other states) real estate?

  • POD (payable on death) bank accounts — you can designate a POD beneficiary (some banks use the acronym ITF — “in trust for” — and it means the exact same thing) who has no current interest in your account but receives it automatically upon your death. You can even name multiple POD beneficiaries. And you can do this at banks, credit unions, savings and loans. Caution: if you go to your bank and say “I heard that there’s a way I can put my son’s name on my bank account” the clerk will almost always hand you a joint tenancy signature card. Make clear that you’re talking about POD designations — they are used less commonly but are a better fit for most people.
  • TOD (transfer on death) for stocks and bonds — there is a designation similar to the bank POD account for stocks, bonds, brokerage accounts and mutual funds. It is usually referred to by its acronym, TOD. It is actually more flexible than the POD designation available to banks — it allows you to designate what happens if a TOD beneficiary should die before you, for instance. Talk to your stockbroker about this titling arrangement if you think it might be a good idea for you — but talk to your lawyer first.
  • Beneficiary deeds for real estate — this one is available in only about a dozen states, but Arizona is one of those. It is like a POD or TOD designation for real estate — including your home. It only works on real estate located in Arizona or one of the other beneficiary deed states. The beneficiary deed conveys no current interest in your property, but avoids probate and vests directly in your beneficiary upon recording of your death certificate. You and your spouse can, for example, own your home as community property with rights of survivorship but upon the second death automatically transfer to your children in equal shares (with provisions about what happens if one of them should not survive both of you) upon the second death. We have written about beneficiary deeds in Arizona before, and our earlier explanations are still valid (even though our newsletter style has been updated).

What’s wrong with these beneficiary-based devices? Two things, at least: (1) they don’t provide for what happens if you make life changes that effectively adjust your estate plan (if, for instance, you live off of one account that was to go to one or two children, and thereby reduce their share of the estate) and (2) they make it hard to change your estate plan (if you decide to disinherit a child, for instance, you have to make sure to change all of the operative documents and titles). But in the right circumstance, beneficiary designations can effectively transfer your estate without probate — they act as a sort of a “poor man’s” trust.

Trusts. Which gets us to the most efficient way to avoid probate for most people — the living trust. To be clear, the trust doesn’t really avoid probate at all — but your trust assets do not have to go through the probate process and so anything you have transferred during life to the trust will avoid probate. It is the “funding” of the trust that avoids probate, not the trust itself.

So there you have it. Probate avoidance in a nutshell. But wait — what’s not on that list? Did you notice? There is so much confusion about the missing item, which does not avoid probate:

Making a will. Preparing and signing your will is a good thing to do. It avoids intestate succession, which might not be right for you. It designates who will be appointed by the court to act as your personal representative. It can name the person who will be your children’s (or your incapacitated spouse’s) guardian. It can even create a trust. But it does not avoid probate.

Your will is instead instructions to the probate court. It has no effect unless and until it is admitted to probate, which another way of saying that a court has determined that it really is your last will. Clients frequently say: “thank goodness I’ve signed my will today. Now I can sleep better knowing my children won’t have to go through probate.” We say: “sit down. We have some more talking to do. Obviously we have failed to get you to understand the distinction between wills and probate avoidance.” Then we talk about living trusts.

We have more information in our YouTube channel on this subject: .

Did that help? Do you have a better idea for probate avoidance (we’ve left a couple of less common methods off)? We’d love to hear from you.

Lawyer’s Move From Representing Widow to Estate is Problematic

OCTOBER 31, 2011 VOLUME 18 NUMBER 37
Floyd Spence, a Republican Congressman from South Carolina, was a long-time survivor of a heart-lung transplant and a (separate) kidney transplant when he died in 2001, at the age of 73. He was survived by his second wife, Deborah Spence, and four adult sons from his first marriage (his first wife had died in 1978).

As Congressman Spence lay dying in a Mississippi hospital, Mrs. Spence realized that she might need legal counsel to sort out what she would receive from his estate and his congressional life insurance policy. She consulted Kenneth B. Wingate, a prominent lawyer in Columbia, South Carolina. They discussed the fact that she had signed a prenuptial agreement prior to marrying Congressman Spence, that he had initially named her as one of five beneficiaries (along with her stepsons) on his $500,000 life insurance policy, and that she believed he had changed the beneficiary designation to name her alone.

Mr. Wingate advised Mrs. Spence that she should consider entering into an agreement with her stepsons about how the estate would be divided upon Congressman Spence’s death, since there were uncertainties arising from his two different wills, the beneficiary designation and her possible rights under South Carolina law. She agreed, and a settlement of any possible dispute was quickly negotiated and signed. Congressman Spence died, as it happened, the day after the settlement was finalized. The settlement provided for a trust, to be funded with one-third of Congressman Spence’s probate assets and paying its income to her for the rest of her life.

About two weeks later, Mr. Wingate visited Mrs. Spence and informed her that he had been retained to represent the Estate of her late husband. He did not tell her that there might be a conflict of interest in that representation, and he did not ask her to acknowledge any conflict or sign a waiver. In fact, he told her that she would no longer need separate counsel, since the possible conflicts had all been resolved.

Over the next few months Mrs. Spence began to think that she had made a bad bargain. She became convinced that she would have received more from either her husband’s last will or South Carolina’s laws providing for surviving spouses. At a family meeting with her four stepsons and Mr. Wingate, however, her former attorney suggested that she should forgo her right to receive the entire life insurance policy in order to make the boys “whole again.” She did not want to agree, arguing that they should not alter her late husband’s wishes.

After the family meeting Mrs. Spence called Mr. Wingate and asked him to put his hat back on as her attorney and counsel her about the life insurance proceeds. He declined but, according to her, he did not tell her that she ought to seek new counsel or take any steps to protect her interest in the life insurance.

About a year after the Congressman’s death, Mrs. Spence filed a lawsuit seeking to set aside the agreement Mr. Wingate had negotiated for her. He promptly withdrew from representation of the Estate. Eventually the court set aside the agreement.

Mrs. Spence then sued Mr. Wingate, arguing (among other things) that he had breached his fiduciary duty to her as a former client by taking on a new client with an adversarial position. Particularly she argued that Mr. Wingate breached his duties to her in connection with the life insurance policy.

The trial judge dismissed that part of her complaint. Since the estate did not have any interest in or right to the insurance proceeds, the judge decided, Mr. Wingate could not breach any duty to her with regard to the policy. The South Carolina Court of Appeals, however, disagreed. The possibility of a breach of fiduciary duty would depend on the evidence at trial, ruled the appellate judges. The case should be returned to the trial court for further proceedings to determine whether there was in fact a breach of duty.

The South Carolina Supreme Court has now rendered its opinion on Mr. Wingate’s duties to Mrs. Spence. The state’s high court agreed with the Court of Appeals that more facts are needed, but made clear that the existence (or non-existence) of a fiduciary duty is a question of law for the trial judge to decide. In other words, the dispute was returned to the trial court for further hearings, and with an instruction to the trial judge to make a finding about whether Mr. Wingate owed a fiduciary duty to Mrs. Spence with regard to the insurance proceeds. If the judge decides that a duty has been shown, then a jury can determine whether Mr. Wingate breached that duty. Spence v. Wingate, October 17, 2011.

The decision of the Supreme Court was not unanimous, incidentally. Two of the five justices would have found that no fiduciary duty existed with regard to the insurance policy, and would therefore have upheld the partial summary judgment originally granted by the trial judge.

Is there a broader lesson in this story? Let us guess that Mr. Wingate today wishes he had declined to take on representation of the Spence estate, and stayed available to counsel Mrs. Spence as to her rights and her agreement. He may ultimately be vindicated, but that will be a less desirable outcome than never having been accused of breaching his duty in the first instance.

If You Were the Probate Judge, What Would You Decide?

MAY 9, 2011 VOLUME 18 NUMBER 17
Let us give you some insight into how hard it can be to figure out how to interpret estate planning documents. At the same time we hope to explain why it is important to keep your own estate plan up to date.

Timothy M. Donovan was a successful New Hampshire businessman. Beginning in the 1980s he started his own company, Optimum Manufacturing, and built it into a leading manufacturer of optical housing, mirror blanks and satellite components.

At age 52, Mr. Donovan was married for the second time. He had no children from either marriage, but he had close relationships with his mother, his brothers and a niece and nephew.

In 2005 he signed a will and a living trust. The terms of his will were straightforward: he left all of his personal property, real estate — almost everything he owned — to his wife. There was one huge exception, however: he left his stock in Optimum Manufacturing, the real estate on which the plant was located, and any other interest in Optimum to his living trust.

Apparently Mr. Donovan had wrestled with what to do about the company he had built. His trust included detailed provisions about what was to happen to Optimum Manufacturing. His trustee was to continue to run the business for a short time, and then arrange for its sale. If possible, it was to be sold to employees of the company. If not, it was to be put on the market. Once the company was sold, the proceeds were to be divided into percentages. Forty-five percent would go to his wife, twenty-five percent to his mother, twenty percent was to be divided among his brothers, niece and nephew, and ten percent would go to the trustee. After distributing the Optimum sale proceeds in those percentages, everything else in the trust was to go to his wife.

So far, there is nothing extraordinary about Mr. Donovan’s estate plan, and it looks like it would be easy to understand and implement. But in 2008, things changed. Mr. Donovan sold his company to Corning Specialty Materials, a subsidiary  of the giant Corning, Inc. The sales price: $15 million. The proceeds from the sale went into Mr. Donovan’s name individually, and not to his living trust.

Just under a year later Mr. Donovan (who was also an avid and accomplished pilot) died, tragically, in a glider crash. He had not updated his estate plan, and so questions now arose about what should happen to proceeds from the sale of Optimum Manufacturing.

You be the probate judge for a moment. Assume for the sake of your ruling that all the Optimum proceeds were held in one or more identifiable accounts, and that they had not been commingled with other funds (we don’t know that to be true, but let’s keep the legal issues simple for a moment). Assume, also, that Mr. Donovan’s wife’s name has not been put on those accounts. Tell us, judge: what happens to the $15 million?

You want some precedent? How about the recent case of Estate of Donovan, decided on April 28, 2011, by the New Hampshire Supreme Court? It would be hard to find anything more clearly on point.

The legal term for what happened in Mr. Donovan’s case is ademption. When property is sold, lost or no longer part of the estate at death, it is said to be “adeemed,” and a specific bequest of that property therefore fails.

In some circumstances the identifiable proceeds from a sale of specifically named property must be distributed as if the original gift still operated. That can be true when the “ademption” is involuntary, for instance — such as when the state condemns a parcel of property that has been listed in a will and the proceeds from that condemnation are still held in a separate account. But that was not the situation in Mr. Donovan’s case.

The problem is made slightly more interesting by the fact that Mr. Donovan had signed both a will and a trust. Since the sale proceeds were still in his name, they were governed by the will — which said that  everything but Optimum Manufacturing was to go to his wife. That was what the probate judge decided, and the New Hampshire Supreme Court agreed.

Imagine, though, that Mr. Donovan had put the sale proceeds into an account titled in his trust’s name. Would the result have been any different? No, said the Supreme Court. His trust also left everything but Optimum stock to his wife, and the ademption principles would apply to the trust just as they did to Mr. Donovan’s will and estate.

There is no grade, nor any reward, for correct answers, but how did you do as a probate judge?

 

Even With a Will the Probate Court May Need to Interpret

NOVEMBER 15, 2010 VOLUME 17 NUMBER 36
When we help you plan your estate our goal is to figure out who you would want to be in charge of your finances and personal affairs, who should receive your assets and in what proportion, and what you want done at a future time when you are unable to take care of things yourself. Our purpose is to figure all of that out and reduce it to writing — and to assure that your wishes are clearly and legally expressed. That is why we ask you all of those annoying questions about what should happen if your heirs or agents should die before you. That is why we spin out those disturbing scenarios of multiple deaths and incapacities, of family break-ups and failures.

There is a point at which it no longer makes sense to try to figure out every eventuality, and we recognize that we will not cover every conceivable sequence and circumstance. There are principles of probate law that help fill in the blanks for common issues — but sometimes they are not obvious, or do not seem quite right. Then the probate court may have to interpret a will or trust, or figure out the legal effect of the document.

A simple illustration of this principle arises in the Florida probate court interpretation of Cecelia Lorenzo. Her will was properly drawn up, and it was clear. Half of her estate was to pass to her brother, and the other half to her sister’s husband. If either of those recipients died before her, she directed that the deceased beneficiary’s share should go to his wife. That seems obvious, and easy to interpret.

The problem with Ms. Lorenzo’s will did not appear obvious at the time it was written. Later, but before her death, both her brother and her sister-in-law died. That meant half of her estate was supposed to pass to one of two people who were no longer living.

Long-standing principles of construction almost addressed the problem. Under the laws of Florida (the same rules apply in Arizona), if the will does not provide otherwise a deceased beneficiary’s share passes to the named beneficiary’s children if he or she dies before the will’s signer. One catch: that principle only applies if the named beneficiary is a relative (in Florida’s case, that means “descended from the testator’s grandparents”).

So, to recap: Ms. Lorenzo’s will left half of her estate to her brother, who was surely descended from Ms. Lorenzo’s grandparents. Her brother died after the will was signed but before Ms. Lorenzo died. Her will said that in that event her brother’s half of the estate was instead to go to her sister-in-law — who was not descended from Ms. Lorenzo’s grandparents. Does that mean that the two children of Ms. Lorenzo’s brother (and his wife) receive the brother’s share, or not?

The probate court said yes, the niece and nephew should share half of Ms. Lorenzo’s estate. The Florida Court of Appeals said no, and reversed the probate judge’s holding. Because the will named Ms. Lorenzo’s sister-in-law in the event that her brother predeceased her, the bequest was to a person who was not a blood relative. That meant the bequest lapsed as a result of the deaths of Ms. Lorenzo’s brother and sister-in-law, and her entire estate passed to her sister’s husband, who had been named to receive the other half. Lorenzo v. Medina, November 10, 2010.

That might have been Ms. Lorenzo’s intention, but it seems unlikely. If the scenario had been reversed, with her brother-in-law and her sister dying before her, the result would have been the opposite — and it is hard to imagine that she intended opposite results in the two scenarios. More likely, she (and her lawyer) just didn’t think through every permutation, and then she didn’t update her will after the deaths of her brother and sister-in-law.

The court opinion doesn’t tell us how old Ms. Lorenzo’s will was at the time of her death. We are left to speculate about how long she had known of the deaths of her brother and sister-in-law, and whether she had ever considered what effect their deaths had on her own estate plan. But there is another lesson to be learned from Ms. Lorenzo: it is a good idea to update your estate plan every five years or so, just to be sure your intentions are not overtaken by family circumstances.

What is the Value of a Senior’s Life?

SEPTEMBER 6, 2010 VOLUME 17 NUMBER 28
The question addressed in a ruling last month by the Arizona Court of Appeals seems provocative. In a lawsuit based on the Arizona law prohibiting abuse, neglect or exploitation of vulnerable adults, does the very life of the abused senior have any intrinsic value? The Court’s answer: perhaps, but the lawsuit can not recover damages for the loss of that life.

Mary Winn died about a month after being admitted to Plaza Healthcare, a Scottsdale, Arizona, nursing home, in 1999. Four years later her husband George Winn filed a lawsuit against Plaza, alleging that it had violated Mrs. Winn’s rights under Arizona’s Adult Protective Services Act. Under the APSA, a vulnerable adult who has been abused, neglected or exploited may recover damages suffered as a result of that abuse, neglect or exploitation. Mr. Winn argued (on behalf of his wife’s estate) that he should be able to recover on behalf of his late wife, and that she would have been entitled to actual damages for the loss of her life, as well as punitive damages.

Not so, argued the nursing home. Mrs. Winn obviously could never have collected damages for her own death, and her estate’s recovery was limited to what she could have recovered. In fact, the estate’s possible recovery was less than her damages, since any claim for pain and suffering she experienced at the end of her life ended with her death. With no actual damages to recover, her estate could not seek punitive damages.

Mrs. Winn’s estate argued that her life had some “intrinsic” value, and that it should be recoverable. The estate conceded that she was elderly and ill when she arrived at Plaza Healthcare, and that she could not be expected to earn a salary given her age and condition. But, insisted the estate’s lawyers, a human life has some inherent value.

The trial court agreed with the nursing home, and limited the estate’s proof to just actual damages. After an informal arbitration proceeding (the estate conceded that the remaining damages were less than $50,000, and therefore subject to mandatory arbitration rules) a judgment against was entered in favor of Plaza Healthcare.

The Arizona Court of Appeals reviewed the trial court’s ruling and agreed. There is no cause of action under the vulnerable adults statute, ruled the appellate judges, for the “intrinsic or inherent value” of a deceased claimant’s life. Mrs. Winn’s estate — and her husband — recovers nothing from Plaza Healthcare. Estate of Winn v. Plaza Healthcare, Inc., August 10, 2010.

To be fair, the appellate court did not rule that there is no value to the life of an elderly, disabled and vulnerable senior. All the ruling says is that there is no right to recover under the Arizona Adult Protective Services Act for the loss of life itself.

Does that mean that Mr. Winn had no claim for his wife’s alleged mistreatment? Not necessarily — he might have been able to file his lawsuit on his own behalf if he had acted more quickly. By the time he filed it had been more than four years since his wife’s death — too late for any wrongful death action but not too late for a viable lawsuit under the Adult Protective Services Act, which had a much longer statute of limitations.

There is another interesting footnote to the Winn case. Last month’s decision from the Court of Appeals is not the first time Mrs. Winn and her estate have been before Arizona appellate judges. In fact, her case had been appealed twice before — once in 2006/2007, and again a year later. The first trip through the appellate system involved the trial judge’s dismissal — ultimately reversed by the Arizona Supreme Court — on the basis that a probate proceeding filed more than two years after the decedent’s death did not permit filing of a lawsuit in the estate’s name. A year later the Court of Appeals dismissed an attempted appeal from the trial judge’s initial refusal to allow any recovery for the inherent value of Mrs. Winn’s life. That appeal had to wait for final resolution of the entire lawsuit, which was accomplished before the current (and probably final) appeal.

Illegitimate Son Of Long-Dead Blues Singer Receives Royalties

JUNE 26, 2000 VOLUME 7, NUMBER 52

When Robert L. Johnson died in Mississippi in 1938, he was largely unknown. The 27-year-old had a musical gift, and he left a number of blues recordings. There did not appear to be any valuable property in his estate at the time, though, so no probate was initiated.

In 1991, after a resurgence of interest in Mississippi blues Mr. Johnson earned his first royalties. A probate estate was started to handle the payments and determine Mr. Johnson’s heirs.

Caroline Thompson had been Mr. Johnson’s last surviving sister, but she died in 1983. She left a will naming two of her relatives to receive her entire estate, and they claimed that they were entitled to Mr. Johnson’s estate as well, since it would have passed to Ms. Thompson.

Claud L. Johnson disagreed. Although his mother was unmarried when he was born, Claud Johnson had always been told that his father was blues singer Robert L. Johnson. His birth certificate even listed “R.L. Johnson” as the father.

The probate court at first refused to accept Claud Johnson’s claim, finding that it was too late to determine paternity of a 60-year-old man more than a half century after the death of the alleged father. The Mississippi Supreme Court reversed that decision and ordered the probate court to hold a hearing on Claud Johnson’s petition.

In addition to testimony from Claud Johnson himself the probate court received a deposition from Claud’s mother. She insisted that Robert L. Johnson was Claud’s father, that she had not had sex with anyone else at the time of conception, and that Robert L. Johnson acknowledged that he was the father. Two other friends testified that they had seen Robert L. Johnson with Claud and his mother.

Most poignantly, the court heard from a childhood friend of Claud’s mother, Eula Mae Williams. Ms. Williams testified that she and her then boyfriend spent time with Robert L. Johnson and Claud’s mother. She testified that the two couples went for a walk in the woods in the spring of 1931, and ended up having sex within sight of one another. When the lawyer for the other family members challenged her by suggesting that he would never have watched another couple making love, Ms. Williams retorted: “I’m sorry for you.”

Claud L. Johnson was found to be Robert L. Johnson’s son, and entitled to his estate. The other claimants appealed. The Mississippi Supreme Court, saying that Ms. Williams’ testimony “rings true,” agreed that the evidence in favor of Claud Johnson’s claim was clear and convincing. Estate of Robert L. Johnson, June 15, 2000.

In 1936 Robert L. Johnson recorded “Hellhound On My Trail” (among other blues songs). “You sprinkled hot foot powder all around your daddy’s door,” he sang. Indeed.

For more on Robert L. Johnson (including lyrics and, sadly, now-broken links to other resources), visit the Robert Johnson Notebooks. Considerable information can also be found at The Blue Highway.

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