Posts Tagged ‘successor trustee’

Things to Consider When You’re Named as Successor Trustee

NOVEMBER 2, 2015 VOLUME 22 NUMBER 40

When a family member dies, you will need to address a number of items. One that might come up: handling the revocable living trust they created.

If you are named as successor trustee you will have a number of obligations you need to discharge. You might need help from a lawyer and/or an accountant; you should not hesitate to consult one or both to figure out how much help you do need. Many of the successor trustees who consult us can do just fine without continuing legal help, but the process is not always easy or obvious.

We can provide you with an introduction to the considerations involved in handling a trust after the death of the trust’s settlor. Before we start, though, these caveats/warnings are appropriate: we’re only writing about Arizona law, and your situation might be very different than the other facts we assume here. Any questions in your mind about what needs to be done? Ask a lawyer.

With that in mind, here are some of the issues to consider shortly after the death of someone who named you as successor trustee:

What law applies? It’s not always obvious. If your mother signed her trust in Arizona and lived and died in Arizona, and you live in Arizona as well, her trust will almost certainly be governed by Arizona law. But what if she lived in another state and you live in Arizona? Or if the reverse is true? Or the trust says that another state’s law will apply?

The general rule: the law of the state where the trustee lives usually applies. That’s you, not your now-deceased mother. If you are the trustee, start by talking with a lawyer in your own community, and ask her whether she is the right person to advise you (of, if not, if she can refer you to someone in the right state).

Notice to beneficiaries. The law of many states — including Arizona — requires specific written notice to the beneficiaries of a trust after you take over as trustee of an irrevocable trust. Did you manage the trust for a time before your father’s death? Ask your lawyer about the applicable state law. This is an area where state laws differ.

Arizona says that notice is due within sixty days of a trust becoming irrevocable (as, for instance, upon the death of the settlor):

Within sixty days after the date the trustee acquires knowledge of the creation of an irrevocable trust or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, whether by the death of the settlor or otherwise, shall notify the qualified beneficiaries of the trust’s existence, of the identity of the settlor or settlors, of the trustee’s name, address and telephone number, of the right to request a copy of the relevant portions of the trust instrument and of the right to a trustee’s report as provided in subsection C.

That’s Arizona Revised Statutes section 14-10813(B)(3). Note that it refers to a list of items the notice must include. You can read that description at the same link, but it basically requires information about the settlor, the trustee, the trust and its assets.

Identifying the beneficiaries. Who is a “beneficiary.” Suppose your father’s trust says that if you, all your children, and all your cousins die in a common accident, everything goes to a charitable organization. Does that mean that all notices have to be sent to that charity, too? Not necessarily.

Arizona defines people and organizations who need notice (they are called “qualified beneficiaries”) to include everyone who is entitled to (or even can receive) income or principal right now, plus anyone who could receive trust money if one thing happened (like the death of a beneficiary). That’s a bit of a simplification, but it should help figure out who is entitled to notice. The details are in Arizona Revised Statutes section 14-10103(14). It’s a little hard to read and interpret — talk to your lawyer about it if you have any difficulty figuring out who is a “qualified beneficiary.”

Review the trust. Not just the parts identifying the beneficiaries, or the list of successor trustees. Read the entire trust. It might tell you to do more than the law requires. In some cases, it might tell you that you can do less than the minimum spelled out in the law — though sometimes those provisions are ineffective. Talk to your lawyer if you have any questions about minimum or maximum requirements.

Certificate of trust. When your mother signed her trust, she probably created a short (two- or three-page) document that listed the trust’s name, her status as trustee and the name of her successor trustee (among other things). You will probably want to prepare a similar document as successor trustee, and it might need to be filed with the County Recorder’s office in any county where the trust owns real estate. Arizona Revised Statutes section 14-11013 tells you what you might include in that certification, but it doesn’t provide a form. Having a hard time finding a good form? That’s because every case is so different — depending on how many and who the beneficiaries are, what kinds of assets the trust holds, the relationship of the successor trustee, and other things. Ask your lawyer for help.

Taxes. You knew that taxes would be an issue, right? Someone (and it’s probably you) will need to sign and file a final federal income tax return for the part-year they lived. The trust will be a separate taxpaying entity, and will need to secure a taxpayer ID number (an EIN) and file at least one federal income tax return. There will need to be state income tax returns for the state where your family member lived, and for the trust in one or more states. This is a good item to discuss with your accountant.

There’s more. This list is far from complete. It’s an attempt to give you some idea of what you’re facing, and to help you figure out whether you need to consult a lawyer. Not sure? That’s the best evidence that you need to get good legal counsel.

Figuring Out What Court Has Jurisdiction Over a Trust

AUGUST 24, 2015 VOLUME 22 NUMBER 31

One of the best things about establishing a living trust is that you are helping to minimize the likelihood that any court will ever be involved in the administration of your estate. That can save costs, avoid conflicts and give you peace of mind. But sometimes courts do get involved, even when that’s not what you wanted. Then you might face a question that, frankly, even lawyers don’t think about enough: in what court does one sue a trust (or its trustee)?

If you have established a trust, or are a trustee, it’s likely that the trust document itself tells you that the law of a particular state applies. But that’s a different question. Just because a trust is governed by the law of, say, Arizona — it does not necessarily follow that the Arizona courts are the ones to resolve a given trust dispute.

That dichotomy was on full display in a recent Arizona Court of Appeals case, and its outcome might surprise you (and, not incidentally, a fair number of lawyers). The dispute started as a simple lawsuit against an individual, and ended up deciding an important trust principle.

Richard Henderson (not his real name) established three charitable remainder trusts between 1990 and 1994. The trusts were, for our purposes, similar. Each involved Richard putting a fixed dollar amount into a trust that named a charity as beneficiary, but each provided that Richard would receive a percentage of the trust’s value each year until his death.

Why did Richard establish these trusts? The record is not clear, but we can assume that at least one purpose was to benefit the charitable beneficiaries, and to receive an income tax deduction for a portion of the amount he put into trust each year.

But we can figure out a number of the elements of Richard’s charitable remainder trusts: he was the trustee of each trust at the time the underlying litigation began, and he had control over where the annual payments were sent. He had no ability to reach the principal of his own trusts — they had to be irrevocable under federal tax law. But he still received an annual benefit from each trust.

Then Richard got into financial trouble. In 2014, Wells Fargo Bank secured a judgment against Richard for $2.5 million, and began to collect some of that judgment from him and from his revocable living trust. But it couldn’t reach the charitable trusts, since Richard himself could not reach the principal of those accounts. Wells Fargo then initiated proceedings to collect enough information so that it could seize the annual distributions due to Richard from the trusts — before they ever got to Richard.

Richard responded by resigning as trustee. He traveled to Florida (this turns out to be a key part of the story) and met with a representative of a Bahamian company named International Benefits Management Corporation (IBMC). While in Florida, Richard exercised his authority under the trust to name his own successor, and he turned over all the books and records to IBMC.

Under the terms of the trust, IBMC now paid most of Richard’s living expenses directly, and it even paid his ex-wife the spousal maintenance he owed her. Only after most of his bills were paid did IBMC send any money to Richard.

Wells Fargo Bank cried foul, and sued Richard and IBMC. Once it had been served with the complaint, however, IBMC objected that it had no business in Arizona. It did not have offices in the state, it had not sent representatives to meet with Richard, and it did no business directly in Arizona. IBMC’s only connection to Arizona was that the beneficiary of three trusts it administered lived in the state, and it sent checks to him, his ex-wife, the Maricopa County Assessor (for Richard’s property tax bills) and a handful of other Arizona vendors. IBMC moved for dismissal of the complaint against it.

The Arizona probate judge overruled IBMC’s objections, and found that it had conducted business in Arizona. The Court of Appeals, however, reversed that holding and ordered dismissal of the complaint against IBMC.

In its opinion, the court of appeals explained that IBMC did not administer the trusts in Arizona. It did not have offices in the state, and it did not agree to jurisdiction by taking over a trust that had been administered in Arizona prior to its acceptance. By traveling to Florida, turning over all the books and records and naming IBMC as successor, Richard had managed to involve the new trustee without its ever acceding to Arizona’s jurisdiction. Hoag, et al v. Hon. French/Wells, August 18, 2015.

Would the answer be different if Richard’s trust documents declared that they should be interpreted pursuant to Arizona law? Actually, they might have said just that — such language would be common in trusts written in Arizona by an Arizona attorney, and the court opinion is silent about whether there is a similar provision in any or all of the trusts Richard established. But the language of the opinion makes clear that the question is not about Richard’s behavior but the personal jurisdiction over IBMC.

The court would likely have reached a different conclusion if the trusts had expressly indicated that any trustee was subject to the jurisdiction of Arizona courts. Language like that would be uncommon, but not rare. Arizona law permits the settlor of a trust to direct that the trustee will be subject to Arizona courts, but Richard’s trusts did not.

What does this mean for more common circumstances, including those where a trust beneficiary wants to sue the trustee? In general, this opinion stands for the proposition that any lawsuit against a trustee probably needs to be brought in the state (or country) where the trustee resides and/or administers the trust. That will usually be true regardless of where the beneficiary lives or where the trust was written. Of course, slight changes in facts may lead to major changes in outcome, so anyone facing this issue should consult competent legal counsel — but don’t be too surprised if the legal result is not the intuitive one.

Assets Not Held As Part of Trust Pass to Different Successors

DECEMBER 15, 2014 VOLUME 21 NUMBER 45

From time to time we see appellate court decisions dealing with a common estate planning problem: after creation of a trust, changing title to assets is an essential element of completing the estate plan. Once in a while, as appears to be the case in this week’s court decision, the failure to “fund” the trust may actually be intentional. But the point is still valid. Assets not titled to (or left to) a trust will not be affected by the trust’s terms.

Actually, before we lay out the facts in this week’s case, we want to make two other points supported by the decision. First: to the extent that probate avoidance is an important part of your estate planning, just signing a trust document is not enough. But that doesn’t mean that assets not transferred to the trust will necessarily need to be probated — there are other probate avoidance choices available, whether you have signed a trust or not. Second: heirs need to look at the larger picture, not just the language of one document — be that a trust, a will, a power of attorney or a handwritten note from a now-deceased family member.

Let’s look at the facts of an Arizona Court of Appeals case issued late last week. Fred and Elena Dominguez (not their real names) had been married for years, but had no children together. Elena had four children from her first marriage. Fred and Elena created a joint revocable living trust and transferred three parcels of real property into the trust’s name in 1998.

Late in 2003 Fred and Elena sold part of their real property for $910,000. They received about a third of the sale price in cash, and took back a note for the remaining value of the property. A month later they opened an account at a local bank; that account was titled in their names as individuals, not as trustees, and Sarah, one of Elena’s daughters, was named as a joint owner.

Elena died a little more than a year after the account was opened. Shortly after that, her name was taken off the account so that it was held by Fred and Sarah as joint owners — and not as trustees.

Upon Elena’s death, the trust was divided into two shares and both became irrevocable. It wasn’t until four years later that Fred hired a Phoenix attorney to make the calculations and complete the division; the attorney incorrectly listed the joint account as a part of one of the trusts. The trust division was completed as to the remaining assets, but it took Fred two more years to notice that the listing improperly included the bank account as an asset of the divided trust. In 2011 an amended allocation of trust assets was completed by the same attorney, and approved by Fred and the then-current trustees of the trusts.

Fred himself died shortly after the amended trust division was completed. Elena’s two sons requested an accounting from the trustees; they sent a preliminary accounting and copies of some account documents. Elena’s sons filed a complaint with the probate court arguing that the trustees had failed to discharge their fiduciary duties by not collecting the assets in the joint bank account, and that the accounting did not show the proceeds of the note from the sale of the trust’s real estate.

The probate court held a three-day hearing on Elena’s sons’ complaint. Ultimately, the judge ruled that (a) the joint bank account passed to Sarah outside of the trust and outside of probate proceedings, (b) the receipt of payments on the note was not the responsibility of the trustees and did not need to be accounted for, and (c) the accounting provided by the trustees was both accurate and adequate.

The Arizona Court of Appeals affirmed the probate court decision. The appellate judges noted that it was apparent that Fred and Elena intentionally took the proceeds from sale of the real estate out of the trust — which they were entitled to do while they were both alive — and set up the joint account. Elena’s sons had not shown that there was any mistake or misunderstanding about the transaction. Just because the underlying real estate was once owned as part of the trust it did not follow that they had to keep it in the trust after the sale.

Similarly, the trustees had no duty to account for note payments received by Fred and Elena before their deaths (and before the trustees even took over the trust). The trust terms echoed general trust law: the successor trustees were permitted to accept trust assets as they stood at the time they took over as trustees, and no evidence had shown that any improper transfers had occurred.

One interesting side fact: the two successor trustees were the two husbands of Elena’s daughters. One of those daughters, of course, had received a large bank account outside of the trust. Her brothers argued that the trustees had breached their duty of impartiality by not pursuing Sarah for the bank account, and by communicating with Sarah’s lawyers and strategizing about how to present their case. Not so, ruled the Court of Appeals. The property passed outside the trust, and the trustees were permitted to discuss the case with Sarah and her attorneys — Sarah would be a key witness in the case, after all.

Finally, the Court of Appeals approved the accountings provided by the successor trustees. They demonstrated that “trust assets were accounted for and intact.” That was all that was required of the trustees, and they met their obligations. In the Matter of the Dobyns Family Trust, December 11, 2014.

It appears as if Fred and Elena intended to change the distribution of their assets by creating the joint account outside the trust. They could have accomplished the same result by amending the trust — which they would have had the authority to do at the time of the sale of trust assets (or earlier, for that matter). That might have avoided the later challenge, but of course it might not have done so, either.

Much more often, we see cases in which changes like those Fred and Elena worked are inadvertent. “Funding” of a trust is an important part of the plan, but just as important is maintaining the funding status so that you do not accidentally change your estate plan. Of course, if you intend to make a change your lawyers will be happy to counsel and assist.

Lawyer Has Responsibility to Monitor Conservatorship Administration

OCTOBER 27, 2014 VOLUME 21 NUMBER 39

Guardianship (of the person) and conservatorship (of the estate) cases pose special problems for lawyers. Usually, a lawyer involved in such a case will have responsibilities to several different persons. To name three obvious choices, the lawyer will have duties to: the guardian or conservator the lawyer represents; the ward or protected person subject to the proceedings; and the court itself. State law varies as to how the responsibilities are divided, and what the lawyer’s duty actually is — especially when the guardian / conservator misbehaves. But there is little doubt that there is significant responsibility for the lawyer to oversee the actual administration of the guardianship or conservatorship.

A recent California Court of Appeals case describes the dilemma facing lawyers in conservatorship cases. When Deborah Delmonico (not her real name) became ill, her son Daniel hired Alameda County attorney Monica Dell’Osso to help him get control of her assets. Deborah had already signed a revocable living trust (naming Daniel as successor trustee), and most of her assets were titled to that trust. Ms. Dell’Osso filed a petition to get Daniel appointed as conservator of both the estate and person of Deborah (in California, conservatorship of the person is equivalent to what we in Arizona would call guardianship of the person). No court action was required with regard to the trust; Daniel just took over managing trust assets.

In an apparent attempt to save costs and simplify administration, Ms. Dell’Osso asked the court to waive any requirement of a bond for the conservatorship of the estate. She argued that there were no assets outside the trust, and that the trust did not require court supervision (or bonding). The court agreed, and Daniel was appointed conservator of his mother’s person and estate, without any requirement of bond.

As it turned out there were assets outside the trust — extensive real estate holdings and several  Individual Retirement Accounts, at least. The total value of assets in Deborah’s name individually exceeded $1 million. According to the later complaint filed with the conservatorship court, Ms. Dell’Osso not only knew about those assets, but her office helped Daniel to collect them and administer them. She never told the probate judge about the extensive individual holdings, and so they were never court-controlled or subjected to a bonding requirement.

Eventually, Daniel simply took a million dollars worth of assets from his mother’s conservatorship estate. Once the probate court learned of his misappropriation he was removed, and a professional fiduciary was appointed to take over Deborah’s estate.

The professional fiduciary filed a lawsuit against Daniel for conversion of his mother’s property and for elder abuse. She also sued Ms. Dell’Osso for legal malpractice, arguing that she had a responsibility to Deborah and the court to inform them of the assets outside the trust, and to oversee Daniel’s administration as conservator.

Ms. Dell’Osso moved for dismissal of the complaint, making these two arguments (in addition to others not relevant here):

  1. Since she represented Daniel, she argued that the successor conservator could not sue her for malpractice — only her actual client (Daniel) would have a cause of action against her.
  2. Even if the new conservator could sue her, they would stand in Daniel’s shoes — and because Daniel had himself misbehaved, he could not have brought an action against her. Hence, the malpractice lawsuit would fail.

The trial judge agreed, and dismissed the lawsuit against Ms. Dell’Osso. The California Court of Appeals reversed that decision and sent the case back for a trial on the merits.

First, the appellate court ruled that a successor conservator can sue the prior conservator’s attorney for malpractice — at least under California law (the answer may differ in other jurisdictions). This is different from the circumstance where a family member, or intended beneficiary of a trust or estate plan (to cite two common examples) is attempting to sue the attorney for malpractice in representation of the original client.

In this case, according to the court, the successor conservator essentially stands in the original client’s shoes, and can bring the malpractice lawsuit. In fact, the court takes this analogy one step further and notes that the attorney’s confidential communications with the prior conservator will not be privileged as to the successor conservator — the professional fiduciary in this case holds the privilege, and can ask Ms. Dell’Osso about her conversations and correspondence with Daniel.

Second, the appellate court strikes down any argument that the professional fiduciary is restricted by her predecessor’s bad actions. While the court agrees that (under California law, at least) Daniel would not be able to sue for malpractice because of his own misbehavior, that restriction does not extend to his successor. In this sense she does not stand in the prior conservator’s shoes.

Two observations by the Court of Appeals seem particularly apt. One is that “an individual who is a fiduciary wears two distinct and separate hats — one as a fiduciary and one as an individual….” This complicates the relationship between a fiduciary and his or her lawyer, since the lawyer is often wearing (to continue the analogy) as many as four hats: one as attorney for the fiduciary individually, another as attorney for the fiduciary as fiduciary, a third as a protector of the interests of the subject of the proceedings, and a final hat as representative of the court and legal system.

On a very practical level, the court decision notes that any other outcome would make a successor conservator’s job impossible. “[W]hy would any competent individual agree to take over as a successor fiduciary if he or she were tarred with and shackled by the malfeasance of a prior fiduciary?” asks the court. The opinion’s answer: the successor fiduciary is not so restrained. Stine v. Dell’Osso, October 17, 2014.

Would the Stine case be decided the same way in Arizona? Probably, though there is a recent change in the law that makes it less than completely clear. Arizona’s Court of Appeals decided the landmark case of Fickett v. Superior Court in 1976, which clearly would have created a potential liability for the attorney for a conservator. Recent changes in Arizona statutes muddy the question somewhat, but probably not enough to prevent the imposition of liability in facts like these.

Excessive Fee in Special Needs Trust Leads to Lawyer’s Suspension

OCTOBER 17, 2011 VOLUME 18 NUMBER 36
Lawyers are ethically prohibited from charging excessive fees. Period. It doesn’t matter if the lawyer has a fee agreement calling for an excessive fee. It doesn’t matter if the negotiated fee seemed reasonable at the time, but turned out to be excessive as things developed. It doesn’t matter if the lawyer’s intentions were good, the lawyer took on quite a bit of unusual risk, or the client was smart enough that he or she should have figured out the bargain was bad. Lawyers simply can not charge an excessive fee.

Of course that strong statement often begs the real question: what is an “excessive” fee? If the lawyer takes a difficult personal injury case on a contingency basis, and then collects a very big settlement or judgment, is it excessive if her fee runs into the millions of dollars? Is it excessive if another lawyer’s percentage fee turns out to be a $2,500/hour windfall for the work done? Not necessarily, but those kinds of analyses are often used to test whether a fee is excessive.

Let’s imagine a client (we’ll call her TG) is represented by an attorney in a personal injury action. The attorney signs a standard fee agreement with her, providing a 1/3 contingency fee for his representation of her. The attorney works hard, has some hurdles to overcome, but ultimately secures a settlement of about $75,000. Is the attorney’s $25,000 fee “excessive”?

Probably not. Even if TG becomes unhappy with her lawyer, and tries to fire him after the settlement. Even if the lawyer, worried about her ability to handle the settlement proceeds, works to set up a special needs trust — which limits her access to her settlement proceeds.

Now, unhappy with her first lawyer and her special needs trust, TG hires a new lawyer — let’s call him Everett E. Powell, II. She tells Mr. Powell that she wants to get the money in her special needs trust and to spend it in whatever way she chooses. She signs a new 1/3 contingency agreement with Mr. Powell, and he agrees to try to terminate the trust.

Termination of a special needs trust can sometimes be complicated, and may even be impossible. In TG’s case, that turned out not to be the situation. Mr. Powell wrote to the trustee, expressed his client’s wish to terminate the trust, and heard back almost immediately. The trustee told Mr. Powell that he, the trustee, would resign. Furthermore, he would exercise his authority to select a successor trustee by naming Mr. Powell to the position. Then Mr. Powell could, if he chose, distribute all the special needs funds to TG and terminate the trust.

The trustee warned Mr. Powell: if you do what your client wants, and she spends the money quickly, there’s nothing to stop her from turning on you and claiming you breached your duty as trustee to protect her from herself. Mr. Powell decided that was a risk he was worth taking; he received a little more than $44,000 (representing the entire trust balance), signed a check to himself for $14,815.55 and transferred the remaining $29,429.62.

Within three days, Mr. Powell had accomplished his client’s wish to terminate the trust (though, technically, he had not; there was still a $600 balance in the trust, which slowly disappeared over a four-year period because of bank fees). Mr. Powell did not provide any accounting or tax services, and did not exercise any discretion as his client’s trustee — other than to distributed the bulk of the trust assets to her and pay himself a contingency fee.

Was his fee “excessive”? Yes, said the Indiana Supreme Court hearing officer who heard his ethics case. The hearing officer recommended discipline, and the Indiana Supreme Court agreed. Mr. Powell was suspended from the practice of law for 120 days, and required to reapply for admission to the bar if he intends to continue practicing law after that four-month period.

When imposing discipline, state Supreme Court justices usually consider aggravating and mitigating circumstances. In Mr. Powell’s case, the justices found that Mr. Powell was not remorseful, did not have insight into his mistake, did not cooperate with the investigation, and lied to TG’s first lawyer/trustee (he had represented that he intended to manage the trust and continue it for TG’s benefit). On the other hand, Mr. Powell had not had any prior disciplinary history — of course, he had only been a lawyer for a few months at the time of his misbehavior.

What made the fee “excessive”? The Court reviews the elements of an appropriate fee and offers some guidance. But there is no clear formula. The Court makes clear that a fee in excess of the amount of work actually involved is not necessarily excessive. Nor is every contingency fee suspect. But when, as here, a minimal amount of work is required in a very short period, a fee of almost $15,000 simply can not be justified. Matter of Powell, September 29, 2011.

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