Posts Tagged ‘Trust administration’

Beneficiaries Permitted to Modify Trust Terms by Agreement

OCTOBER 19, 2015 VOLUME 22 NUMBER 38

Not every client we speak with wants to set up a trust for generations of descendants, but some do. The notion of allowing assets to grow for two or three (or more) generations can be attractive.

It is difficult, of course, to imagine what one’s grandchildren and great-grandchildren will be like when they grow up. There’s another challenge that is less obvious, though — what will the economy, the legal environment, and the very notion of trust planning look like in, say, 80 years?

We’re not particularly good at predicting the look of the landscape at the turn of the next century, but occasionally we get a little insight into the problem when considering the plans made several generations ago. Trusts can easily live for a century, and the problems facing trust beneficiaries today might or might not have been considered when those trusts were drafted.

That’s what Pennsylvania’s intermediate appellate court had to deal with in a recent case it considered. At issue was the trust established by Edward Winslow Taylor in 1928. Mr. Taylor died in 1939, and the trust became irrevocable. It continues — altered in at least two fundamental ways — since then.

Originally, the trust named The Colonial Trust Company as trustee. Two years later he amended the trust to change the trustee to The Pennsylvania Company for Insurance on Lives and Granting Annuities as trustee, since it had assumed the business of the initial trustee in a merger. In the following eight decades, a series of mergers and buyouts had left Wells Fargo Bank, a national bank and trust company, as trustee.

The trust initially paid its income to Mr. Taylor’s daughter, Anna Taylor Wallace. When she died in 1971, she used her power to direct the trust income to her oldest son, Frank Wallace, Jr. Upon his death in 2008, the trust was divided into four separate trusts — one for the benefit of each of his children, with each then being worth a little less than $2 million. Each trust will continue until 2028.

A lot has changed in the practice and law governing administration of trusts since the 1920s. As just the latest illustration, Pennsylvania, where these trusts are administered, has adopted the Uniform Trust Code (as has Arizona). Trusts written almost a century ago seem hopelessly dated today.

Two years ago, three of the four trust beneficiaries suggested updating the language of the trust to reflect more modern thinking. One change they wanted to make: they argued that the trust should be modified to allow the four of them, if they chose, to change the trustee from Wells Fargo to a new corporate trustee.

Though no beneficiary objected to the change, Wells Fargo did object. The bank convinced the Philadelphia judge that the new Pennsylvania Trust Act did not allow such a change, even if the beneficiaries had all agreed. The beneficiaries appealed.

In the appellate court, the beneficiaries argued that all they were doing was to modernize the trust’s language. The inclusion of a power to change trustees, they insisted, would be considered commonplace today. Furthermore, the Pennsylvania version of the Trust Code clearly permitted modifications so long as all beneficiaries (and the original settlor, if he had still been living) agreed.

Not so fast, insisted Wells Fargo. The scholars who drafted the Uniform Trust Code had clearly indicated that their intention was not to permit a change of trustee by modification of the trust document — even if all the beneficiaries did agree. The bank pointed to the comments written by the uniform code’s drafters in support of their argument.

The appellate court, in a split (2-1) decision, sided with the beneficiaries. According to the majority opinion, the comments written by the drafting committee shouldn’t even be consulted unless there is ambiguity in the language of the statutes. Here, there is not — the Pennsylvania Trust Act permits beneficiaries, acting together, to make a change that includes the power to change trustees.

The dissenting judge would have found that removal of a trustee is a different matter from other trust amendment provisions. In fact, the Pennsylvania statute includes a specific method for trustee removal — and the agreement of the beneficiaries is not a method included in that separate statute. The specific trustee removal provision should have governed over the general modification provision, in the view of the dissenting judge. Trust of Edward Taylor, September 18, 2015.

As we note above, Arizona has also adopted a version of the Uniform Trust Code. Does that mean that an Arizona case would be decided the same way? Perhaps not.

Arizona made small but significant changes to the uniform law before adopting it. Those changes might well compel the opposite result — and particularly where the question appears to have been a close question even under Pennsylvania’s version of the uniform law.

Nonetheless, we like to see discussion about the Edward Winslow Taylor case, for at least these three reasons:

  1. It highlights how much hubris is involved when we “plan” for management of assets a century or so after our own demise. That doesn’t mean it can’t be done, or even that it shouldn’t be tried — but it does remind us that flexibility is key.
  2. We presume that Mr. Taylor was a descendant of Edward Winslow — a signer of the Mayflower Compact. While we’re not descended from Mr. Winslow, we are descended from his sister. It makes us feel proud to see that this (our) patrician family remains relevant today.
  3. “We” in this case means your author and his brother Steven. Not only does Steven now live in Philadelphia (where Mr. Taylor’s trust is administered and was litigated), but October 19 (the day of publication for this little newsletter) happens to be his birthday. It’s a small world, with plenty of odd circles to keep us mildly entertained (and by “us”, here I mean me).

Happy birthday, Steve.

Tax Issues for Trusts — Simplified

JULY 29, 2013 VOLUME 20 NUMBER 28

Judging from the questions and comments we get here, taxation of trusts is one of the most confusing issues we regularly write about. We’re going to try to collect the most important rules here for your convenience. Note that we will not try (in this summary) to touch on every exception, every caveat — we want to try to spell out some of the major categories of trusts and of taxation, and see if we can help you figure out what tax issues you have to face. We will try to give very concise answers, a little explanation and a warning about some of the more common or important exceptions in each category.

Do I need to get an EIN for my revocable living trust?

Short answer: no.

More detail: if you created a trust, put your money in it, and retained the right to revoke it — the IRS doesn’t think of it as a trust at all. It is not a separate taxpaying entity. Not only do you not need to get an Employer Identification Number, you can’t get one. A revocable living trust is always a grantor trust, and it does not file its own tax return.

Important exception: if you are trustee of a revocable living trust created by someone else, you can get an EIN but you are not required to do so. Even if you do get an EIN, the trust does not file a separate trust tax return.

I am setting up a special needs trust for my child, who has a disability. I plan on leaving his share of my estate to the trust. Does it need an EIN?

Short answer: probably not — yet.

More detail: while you are still alive you probably will be the “grantor” of the trust for tax purposes — and that may even be true if the trust is irrevocable. Probably you will pay the taxes on any income the trust receives (note: your contributions to the trust are not “income” for tax purposes). But probably this is not important — you really are probably asking about what happens when you die and your estate flows to this trust. THEN it will need an EIN and it will file its own tax returns. Probably it will be what the IRS calls a “complex” trust.

Important exception: if the trust is both irrevocable and immediately funded, it probably does need an EIN even before you die and leave a larger share of your estate to it.

My daughter’s special needs trust was funded with money from a personal injury settlement. Does it need an EIN?

Short answer: almost certainly not.

More detail: even though it is irrevocable, and even though your daughter is not her own trustee, this trust is almost unquestionably going to be a grantor trust for tax purposes. That means it does not need to have a separate EIN; it uses your daughter’s Social Security number as its taxpayer identification number.

Important exception: although it does not have to get an EIN, this kind of trust may get an EIN. But even if it does, the trust does not file a separate income tax return — all the trust’s income gets reported on your daughter’s individual return.

My father established a revocable living trust to avoid probate, and he died earlier this year. Do I need to get an EIN for his trust? Can I just keep using his Social Security number?

Short answer: Yes, you do. No, you can’t.

More detail: With your father’s death his trust became a different entity. It is no longer a “grantor” trust, so should be filing its own income tax returns for the rest of the calendar year of his death and for the future (if the trust continues).

Important exception: While the trust should have its own EIN, it will only have to file a return if it earns $600 in income in any one year after his death. So if the trust gets resolved fairly quickly, and/or does not hold any income-producing property, it may not need a tax return. In that case, and that case only, it may also not need to have a separate EIN.

As a separate exception to the general rule, note that there are some limited circumstances in which your father’s trust may not have to use a calendar year. That can have significant favorable income tax consequences, so be sure to discuss the tax issues with your accountant and/or attorney.

My wife and I created a joint revocable living trust. She died two years ago, and I was simply too busy dealing with everything to do anything about the trust. Are there tax issues I need to resolve, or am I going to get into trouble for not doing anything quickly?

Short answer: You probably are not in any serious trouble, but you should talk with an accountant and/or attorney soon. Don’t continue to put it off, please.

More detail: It may be that nothing needs to be done regarding your trust. It may be that your trust was supposed to be divided into two shares upon the first death. It may be that such a division no longer makes tax sense — but it might still be necessary to deal with it. It’s too hard to generalize about all those possibilities, and your lawyer needs to look at the trust document AND know how assets are titled. Make an appointment and start gathering information. If you don’t do anything before your own death, your children (or whomever you have named as ultimate beneficiaries) will have a much more complicated time dealing with it than you do now. Incidentally, in our experience it is fairly rare that a surviving spouse does not want to make any changes whatsoever — even if all you want to do is to accelerate the pace at which your children receive your estate, it is a good idea to meet with your attorney.

Important exception: If you are certain that your trust does not require division into separate shares on the first spouse’s death, AND you still want the same people to administer your estate, AND you still want everything divided the same way as the original document provides, then it may not be necessary to make any changes. Most lawyers will tell you that it still makes sense to update powers of attorney and your will to remove your late wife’s name (just so your back-up agent doesn’t have to produce a death certificate before banks and doctors will talk with her), but it may not be critical to do so. Still, talking with lawyers is kinda fun, and almost everyone should do it more often.

There you have it. Our most-asked-about trust taxation questions, with simplified answers. Please be careful about this information, though — there is a lot of nuance we have glossed over. Talk to your accountant and your lawyer to confirm what we have told you here before relying on it. Our goal is to give you a bit of a roadmap, not to answer complex legal questions with oversimplified generic answers. But we hope we have helped.

Trust Administration Dispute Ends Up Costly for Complainant

MAY 20, 2013 VOLUME 20 NUMBER 20
One of the reasons people create living trusts is to reduce the likelihood of disputes among family members. In fact, any well-written estate plan — whether it involves a living trust or not — should focus at least partly on that worthwhile goal. Most estates do get settled without disputes, and those with disputes are often easily resolved because the trust, will, and beneficiary designations are clear. But if family members are determined to be fractious, no amount of careful planning can completely remove the risk of a costly dispute.

Take the revocable living trust of Lorraine Bird (not her real name). It was prepared by a lawyer in 2003, and it contained straightforward provisions: most of Lorraine’s property was to be divided in half, with one half to go to her son Greg and the other half to her son Tony’s two children. Tony was named as successor trustee. like many revocable trusts, the document included a “Schedule A” listing the assets that Lorraine was transferring to the trust’s name.

The first problems arose when Lorraine started writing on the trust document directly. In 2004, 2006 and twice in 2008 she wrote on Schedule A, indicating what should happen to some items of her property. Also in 2008, while she was in hospice, she had Tony’s wife write out an amendment to the trust indicating that, among other things, her gold coins should be divided between her two sons. Lorraine died shortly thereafter, apparently without having her trust looked at or formally updated by her lawyer.

The next round of problems arose after her death, when Tony (the successor trustee) gave Greg the keys to their mother’s house. Greg removed some items; Tony asked for a listing of what Greg had taken, but the list he got back did not account for all the missing items. Tony hired a lawyer to assist him in administering the trust, and pursuing Gary for more detail about the property in his possession.

The most valuable item in Lorraine’s trust was a piece of real estate northeast of Phoenix. At first Greg wanted it sold and the proceeds divided between him and his niece and nephew. In fact, though he didn’t have any authority, Greg put a “For Sale” sign on the property and listed his own phone number. He also offered to let his niece and nephew buy out his interest in the property. Later he changed his mind, and insisted that his brother should distribute the property to the three beneficiaries and let them decide how to handle it.

Tony had the property appraised, and his children approached Greg with the appraisal results in hand. They offered to buy out his interest for $325,000. If he didn’t want to do that, they would sell him their interest for the same amount. Greg refused, and instead offered to purchase their interests for a total of $153,000. Then Greg filed a civil lawsuit against his niece and nephew, asking the court to divide the property. He also filed a complaint against his brother, alleging that Tony had breached his duties as trustee by not distributing the property in kind, had made allegations of theft against him, and had favored his own children over Greg in his handling of the trust.

The judge consolidated the two actions, and conducted a three-day trial. There were a number of questions to answer, including:

  • Did Lorraine’s handwritten notes on Schedule A modify her trust?
  • Was the separate amendment prepared by her daughter-in-law valid?
  • Did the trust require distribution of her property in kind? If the trust was unclear, is there a presumption in favor of in-kind distributions?
  • Who should pay the cost of the legal proceedings to resolve these questions?

At the very end of the trial, Greg and his niece and nephew struck a deal on the property: Greg bought out their interests for $325,000. There were still a number of issues to resolve, however, and the judge ended up making eight separate rulings. She found that Tony had not breached his fiduciary duty, but that Greg had initiated most of the problems by his own actions. She also ruled that Greg pay a total of $176,466 to the other parties for attorneys fees, and another $4,979.19 in costs.

Greg appealed, arguing that Tony had mismanaged the trust by not distributing the property in kind, pursuing him for personal property that turned out to have little economic value, and various other alleged breaches. Among them: Greg insisted that by asking his own son to help find a real estate broker for the property, without telling Greg, Tony had favored one trust beneficiary over the others. Similarly, Tony’s daughter had sent Tony an e-mail calling Greg names; when Greg later learned about it he insisted that Tony had breached his duty to all the beneficiaries by not promptly sharing that e-mail.

The Arizona Court of Appeals upheld the trial court ruling in pretty much every respect. It was not a breach of fiduciary duty to talk with one beneficiary without sharing every detail with the others. Tony did not violate his duty to resolve the trust administration just because Greg beat him to the courthouse with a petition asking the court to determine whether the handwritten amendments were valid. Even if there was an argument that Tony should distribute the property in kind, it was rendered moot by Greg’s agreement with his niece and nephew resolving the dispute. Greg’s own misbehavior made it inappropriate for him to complain about the cost of getting him to comply with the trustee’s requests for information about personal property he had taken from his mother’s house. It was proper to charge him the attorneys fees and costs incurred in defending his lawsuit. Perhaps most tellingly, the Court of Appeals added more costs and attorneys fees, awarding Tony and his children their requested fees and costs for having to respond to the appeal itself. In re Bower Revocable Trust, May 14, 2013.

It is worth pointing out (again — we make this point with some regularity) that the dispute was both expensive and time-consuming. In addition to approximately $200,000 in fees and costs Greg was ordered to pay for Tony’s and his children’s lawyers, Greg presumably had significant legal fees for his own side of the litigation. The Court of Appeals decision was rendered more than four years after Lorraine’s death (and that was speedier than most similar cases in our experience).

Are there clues and tips in Lorraine’s story that could help other families avoid similar costly delays in handling estates? Yes, there are several, including at least these:

  1. Don’t modify your estate planning documents by writing on them directly — even if you date and sign the changes (Lorraine didn’t). Although Lorraine might have paid a couple thousand dollars to have the changes done right, that would have been less than 1% of the total legal cost generated when she did not do that.
  2. Do your children not get along? Then include some language directing how to resolve disputes. Consider a mandatory arbitration provision in your trust as a way of speeding up dispute resolution — such a provision could prevent any beneficiary from forcing a complicated court proceeding.
  3. Are you administering a trust with a contentious beneficiary? Even though you may not have to, you might want to consider complete disclosure and transparency, and do not hesitate to affirmatively seek court direction rather than let problems fester and perhaps become intractable.
  4. Are you pretty sure you’re right, and your sibling/trustee/beneficiary is wrong? Do a reality check, and then do it again — there is a real risk that you could end up paying everyone’s legal fees.

Accounting Requirements for Irrevocable Trusts in Arizona

FEBRUARY 4, 2013 VOLUME 20 NUMBER 5
Arizona adopted a version of the Uniform Trust Code in 2008, to be effective at the beginning of 2009. The UTC has been the subject of much discussion across the country — it has been adopted in about half the states, and soundly rejected in a few others. Despite all that discussion, however, there are relatively few court cases addressing what the UTC provisions actually mean.

One concern commonly raised about the UTC has been its requirement that trust accounting information must be given to beneficiaries, including those who receive no benefit until after the death of a current beneficiary. Take, for instance, a common situation: in a second marriage, a wife establishes a trust for the benefit of her husband for the rest of his life, with the remainder to be paid out to her children (from her first marriage) after the husband’s death. Then the wife dies, leaving her house and brokerage account to the trust. Her surviving husband is trustee. Under Arizona’s version of the UTC, her children are entitled to receive at least annual reports from the husband.

But what should those reports contain? The Trust Code is less than completely explanatory. It says that the wife’s children are entitled to “a report of the trust property, liabilities, receipts and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust assets and, if feasible, their respective market values.”

In a recent Arizona Court of Appeals case, the meaning of that requirement was questioned. The history was slightly more convoluted than the scenario we describe above: the trust had been established by a husband and wife for the ultimate benefit of the husband’s two daughters. First the husband and then the wife died. The trust, by its terms, then divided into two shares — one share outright to  one daughter, and the other share to a local Certified Public Accountant as trustee for the benefit of the other daughter.

To try to make this convoluted story a little clearer, let’s identify the parties. In keeping with our usual attempt to avoid family names popping up in internet searches, and to make it easier to keep track, we’ll give everyone shortened names. We’ll call the combined trust — the original one set up by the husband and wife — the G Trust, and the trustee of that trust Geraldine. We’ll call the trust for the benefit of one daughter the S Trust, and the CPA/trustee of that trust Scott. The other daughter will be Doris.

Doris filed a court action asking for determination of the proper division of the G Trust. She noted that she had been named as beneficiary of an annuity and asked that it be determined that it was not part of the trust. Geraldine, the trustee of the G Trust, filed a proposed distribution schedule for the G Trust. Both Doris and Scott (the Trustee of the S Trust) objected, each arguing that their share should be increased. The probate court found that the annuity belonged to Doris, and that Geraldine should make her own calculation as to how to distribute the G Trust.

Months later, Scott filed a request that the court order Geraldine to file an “accounting” with the court. Geraldine objected that she had done everything the Arizona UTC required — and that all she was required to provide was a “report” under that statute. Scott argued that he was entitled to a more formal accounting. Ultimately the probate judge denied that request, finding that Geraldine’s reports (consisting of account statements and other documentation) were sufficient for Scott to protect his trust’s interest. Scott appealed.

With that background, the question before the Court of Appeals was straightforward: does the Arizona version of the Uniform Trust Code allow a beneficiary to make a demand for a formal, detailed accounting? No, ruled the appellate court. In fact, the UTC made the accounting requirements less onerous, rather than imposing more detail: the prior Arizona law had required “a statement of the accounts of the trust annually,” but that statute was repealed when the UTC was adopted.

According to the appellate decision, requiring an “accounting” would have included “establishing or settling financial accounts” and “extracting, sorting, and summarizing the recorded transactions to produce a set of financial records” (quoting from Black’s Law Dictionary 9th Ed.). The court also quoted from the commentary prepared by the UTC’s original, multi-state drafters: “The reporting requirement might even be satisfied by providing the beneficiaries with copies of the trust’s income tax returns and monthly brokerage account statements if the information on those returns and statements is complete and sufficiently clear.”

The bottom line: the main concern of the UTC is to assure that beneficiaries have the information they need to be able to protect their interests. Scott had sufficient detail that he could calculate whether Doris had received more than her share of the G Trust, and Geraldine was not required to prepare a more formal report. In the Matter of the Goar Trust, December 31, 2012.

Lawyer, Acting as Trustee, Challenged for Self-Dealing

DECEMBER 3, 2012 VOLUME 19 NUMBER 44
One of the great advantages of a trust can be the ability to bypass court supervision and review. One of the great disadvantage of a trust can be that it bypasses court supervision and review. A recent California Court of Appeals decision highlights the problem nicely — and at the same time provides a warning for trustees.

California attorney Douglas Mahaffey represented Tom Matthews (not his real name) in a personal injury action in 1992. He helped Matthews recover a $3.5 million settlement, and then agreed to act as trustee, handling his client’s money. One concern lawyer and client shared was Matthews’ possible exhaustion of the funds; they agreed that a separate trust would be set up to protect $356,967 for the benefit of Matthews’ daughter Katrina (not her real name). Mahaffey would act as trustee of that trust, as well.

Four years after Katrina’s trust was set up, Mahaffey loaned himself $210,000 from the trust. He signed a note, with an indicated rate of 8%. There was no security for the loan — Mahaffey did not pledge his home, his office or business, or any other assets to protect the trust from default. His law firm did guarantee the note, indicating that if he did not make payments the firm itself would be liable.

Mahaffey did not make payments on the loan, and did not tell anyone about it at the time. Later Matthews, the father of the trust beneficiary, found about it, and Mahaffey asked him to sign a a set of documents ratifying what Mahaffey had done with his, Matthews’, money. After Katrina reached her majority she found out about the loan and sued Mahaffey.

A California judge agreed with Katrina that Mahaffey should not have loaned himself the money, but also that his motivation included a desire to “protect” Katrina’s money from, among other things, the possibility of litigation brought by Matthews against Mahaffey. Nonetheless, the judge removed Mahaffey as trustee, ordered him to repay the loan immediately, and added interest of almost another $200,000, and imposed additional interest of $110/day for each day the sums remained unpaid.

The California appellate court reviewed the record (after Mahaffey appealed) and concurred with the outcome. The appellate judges noted that “the trial judge went easy on Mahaffey.” The court notes a number of items in the litany of objections to Mahaffey’s administration of the trust:

  1. The loan was self-dealing, even if Mahaffey motivation was not abjectly self-interested. He should not have loaned trust money to himself.
  2. The interest rate (8%) was slightly less than the “prime” interest rate at the time. That made the self-dealing more obvious and problematic.
  3. The fact that the note called for no actual payments — not even interest — for 10 years, and that it was unilaterally extended by Mahaffey when it came due, further showed his self-dealing. In fact, no payments were made on the note at all until 2002, and then only interest payments were made up until the time of trial.
  4. The failure to adequately secure the loan was another strike against Mahaffey. The significance of that failure was not truly evident until after the trial; the appellate court notes that Mahaffey and his law firm filed for bankruptcy after the judgment was entered but before the appeal was decided.
  5. The opinion is replete with information about another trust Mahaffey administered — the trust for Matthews, holding the rest of his lawsuit settlement proceeds. It turns out that Matthews separately sued Mahaffey for mismanagement, but that lawsuit had been dismissed because it was filed too long after Matthews learned of the items he later complained about.

It is easy to criticize what is appears to be obvious self-dealing by a trustee after the fact. What happens time and again, however, is that trustees reach a tipping point by degrees — first rationalizing that they will pay interest rates above what the trust could get in other investments, then by adding the thought that they are good credit risks, then by rationalizing that it saves everyone time, money and taxes to keep the transaction in the trust “family.” The right answer: just say no. If you are a trustee, do not borrow money from the trust. Period.

As the Court of Appeals noted in this instance: “It is strong poison for attorneys who double as trustees to make loans to themselves.” Indeed. It is equally strong poison for any other trustee, though attorneys face the additional risk of losing their law licenses as well as being removed and surcharged for self-dealing. Although the appellate opinion does not indicate what has happened or might happen, Mahaffey could still face discipline or even disbarment by the State Bar of California. Grunder v. Mahaffey, November 7, 2012.

A critical reader might note that nothing about the description here explains our introductory observation. Trusts ordinarily do not have to be supervised by any court — that is one of the primary selling points for trusts, in fact. We generally agree. The cost of posting a bond, filing periodic accountings with a court and giving formal notice can be high, and there is often no need to seek an independent review of trustees’ behavior. But there is a trade-off involved. If the informal and extra-judicial alternative of trust planning is being considered, there really ought to be some way to monitor the trustee’s behavior.

Could Matthews, in the story told above, have demanded accountings, and more closely followed Mahaffey’s actions? Undoubtedly. Would that have prevented the self-dealing, or at least caused it to be cured earlier? Perhaps. But the very advantages of trusts (privacy, lack of formal accounting requirements and limited independent oversight) can often lead to the largest risk inherent in trust administration.

How is a thoughtful planner to respond? Pick your trustees carefully (you might, for instance, want to know how often the trustee acts in that capacity), and then provide a monitoring mechanism (accountings to a trusted third person, perhaps). It can be a challenge to balance efficiency and risk.

What Is “Elder Law”?

OCTOBER 15, 2012 VOLUME 19 NUMBER 38
At Fleming & Curti, PLC, we practice “elder law.” But what does that mean? Are all our attorneys elderly? (No) Are they all senior members of a religious group? (No) Are all our clients above a certain age? (No) Then what is the significance of the term “elder law”?

Sometimes we rebel against the term. When asked what kind of law we practice, we might say something like: “We limit our practice to guardianship, conservatorship, estate planning, probate, long-term care planning, trust administration and special needs planning.” The problem with that formulation is obvious: it seems oxymoronic to “limit” your practice to seven items — and to be complete we probably should thrown in two or three others.

No one practicing “elder law” likes the term. It is not descriptive of our clients: a significant number of the cases we handle involve children — often even toddlers — and many of our clients are middle-aged children of aging parents. It is not easy for clients to relate to: when asked what constitutes an elder or senior citizen, most of our clients immediately think of someone just a few years older than themselves.

All elder law attorneys think from time to time about better descriptions they might use. The problem with that effort, though, is that no one has come up with a better label, or even one that comes closer to describing what we do.

What do we (elder law attorneys) do? For that matter, what do we (Fleming & Curti, PLC) do? Here’s a sampling:

Guardianship and Conservatorship. In Arizona, a guardian is a court-appointed person who makes medical and placement decisions for an incapacitated adult or a minor child whose parents are not available to handle those duties. A conservator fills a similar role, but handles money; a conservator can be appointed for an adult who is unable to manage his or her finances because of a disability, or for a child. Note that there is no requirement of a finding that the child can not handle money, or that the child’s parents can not do so; a child is legally incapacitated no matter how capable he or she might be, and the child’s parents do not have any automatic right to make financial decisions for him or her (as they do for medical and placement decisions). So that means guardianship and conservatorship may be necessary for the very young, and for adults who are incapacitated — whether by dementia or by other illness or condition.

Getting a guardian and/or conservator appointed is only part of the battle. Once appointed, a guardian or conservator is answerable to the courts, and must file annual reports and accounts. It is an intensive exposure to the legal system, and very difficult to navigate without the help of counsel. Like us.

Estate Planning. We write wills, trusts, powers of attorney and other estate planning documents. Most of our clients in this area are older than, say, their mid-50s — but not because that’s who needs estate planning. Younger people (including the parents of minor children, anyone who drives a vehicle, anyone who has ever seen a doctor) also need to complete estate planning. They just tend not to until they reach an age where they see the value. As one of our clients wisely said: “the two kinds of people you hate to deal with are doctors and lawyers — and when you get older you spend a lot of time with both.”

Older people may have more complicated estate plans. They may have larger tax concerns (because they have had time to acquire more assets). They may have others (children with disabilities, spouses with failing abilities, long-time friends they have helped over the years) who rely on them and need their consideration. They also may feel somewhat more mortal. And so they tend to be the ones who get to the lawyer’s office — and hence the estate planning business seems to be (but should not be) an issue for elders.

Long-term Care Planning. Nursing home costs will likely bankrupt most families if someone has to spend more than a few months in a care facility. Planning for how to deal with that should start early, and include (among other things) long-term care insurance. But most people don’t plan for possible institutionalization. Instead, they bravely insist that “I am never going into the nursing home.” Many of them turn out to be wrong, but most of those won’t know how wrong they were until they are, well, elderly. Most (but certainly not all) of the residents of nursing homes and assisted living facilities are elderly. So the practice of preparing people for that eventuality, and of helping spouses and children get ready to place a loved one in such a facility, has come to be thought of as “elder” law.

Trust Administration. While creating and funding a living trust may avoid the probate process, that is not the same as saying that your (successor) trustee will not need any contact with lawyers or accountants. In fact, your trustee will probably need both. But even your trustee will probably be elderly by the time you die. Odds are that you will be, too. So this tends to look like a legal problem involving the elderly, though plenty of trustees are younger and a lot of people sign trusts when they are younger, too.

Probate. Some people don’t plan for probate avoidance, either because they didn’t get around to it or because they consciously engaged in a cost/benefit analysis and decided it wasn’t worth the expense (to them, at the time). Whatever. Probate administration, like trust administration, is an area of practice that often — but not always — involves people who are elderly.

Special Needs Trusts and Planning. This one has the most tenuous link to the elderly. The beneficiaries of most special needs trusts are young — often infants or toddlers. Even the parents of special needs trust beneficiaries may be young — perhaps even in their 20s. So how does this become an “elder law” issue? It’s simple: the government programs and rules that are involved in special needs trust planning, establishment and administration are the same programs and rules involved in long-term care for the elderly. But saying “I’m an elder and special needs lawyer” just doesn’t trip lightly off the tongue, and it begins to sound like we are trying to describe our own circumstances, not those of the people we strive to help.

So that’s what we do as “elder law” attorneys. Is that all we do? No, we also have a few other areas we might work in — like guardianship of minors, advance directive preparation and interpretation, or recovering from abuse, neglect or exploitation. But that’s the bulk of our work.

Feel free to come up with a better, shorter, more user-friendly term. We’ve been working on it for years, but we are confident that there is a good answer out there. Somewhere.

Special Needs Trusts: How Much Trouble Are They to Manage?

SEPTEMBER 3, 2012 VOLUME 19 NUMBER 34
I’m thinking about setting up a special needs trust for my son, who has a developmental disability. Will it mean a lot more work for my daughter, who will be handling the estate?

It’s a fair question, and one we hear a lot. No one ever asks: “could you please give us the most complicated estate plan possible?” Everyone wants things as simple as they can be.

When you think about providing an inheritance for your child — or anyone, for that matter — with a disability, there are some realities you just have to deal with. Those realities almost always lead to the same conclusion: a special needs trust is probably the right answer. There are a number of answers to the “can’t we keep it more simple?” question:

  1. In most cases there’s going to be a trust, whether you set it up or not. If you leave money outright to a person suffering from a disability, someone is probably going to have to transfer that inheritance to a trust in order to allow them to continue to receive public benefits. The trust set up after your death will be what’s called a “first-person” (or “self-settled”) trust, and the rules governing its use will be more restrictive. There will also have to be a “pay-back” provision for state Medicaid benefits when your son dies — so you will lose control over who receives the money you could have set aside. Even if no trust is set up, there is a high likelihood that your son will (because of his disability) require appointment of a conservator. The cost, loss of family control and interference by the legal system will consume a significant part of the inheritance you leave and frustrate those who are caring for your son. If you prepare a special needs trust now it sidesteps those limitations.
  2. The trust you set up will not be that complicated to manage. People often overestimate the difficulty of handling a trust. Yes, there are tax returns to file, and summary accounting requirements. Neither is that complicated; neither is anywhere near as expensive as the likely costs of not creating a special needs trust.
  3. Your daughter can hire experts to handle anything that she finds difficult. There are lawyers, accountants, care managers and even trust administrators who can take care of the heavy lifting for your daughter — or whomever you name as trustee. The costs can be paid out of the trust itself, so she will not be using her portion of the inheritance you leave, or her own money. Yes, they add an expense — but they can actually help improve the quality of life for both your daughter the trustee and your son with a disability.
  4. Your daughter does not have to be the trustee at all. We frequently counsel clients to name someone else — a bank trust department, a trusted professional, or a different family member — as trustee. That lets your daughter take the role in your son’s life that she’s really better suited for: sister. If it is right for your circumstance, you might even consider naming her as “trust protector.” That could allow her, for instance, to receive trust accountings and follow up with the trustee, or even to change trustees if the named trustee is unresponsive, or too expensive, or just annoying. Trusts are wonderfully flexible planning devices — but that does mean you have to do the planning.
  5. If your son gets better, or no longer requires public benefits, the trust can accommodate those changes. Depending on your son’s actual condition and the availability of other resources, you might reasonably hope that he will not need a special needs trust — or at least might not need one for the rest of his life. The good news: your special needs trust will be flexible enough to allow for the use of his inheritance as if there were no special needs. The bad news: that is only true if you set up the trust terms yourself — the trust that will be created for him if you do not plan will not have that flexibility.
  6. Simply disinheriting your son probably is not a good plan. Sometimes clients express concern about the costs and what they perceive as complicated administrative and eligibility issues, and they decide to just leave everything to the children who do not have disabilities. “My daughter will understand that she has to take care of my son,” clients tell us. That’s fine, and it might well work. But do you feel the same way about your daughter’s husband? What about the grandkids and step-grandkids who would inherit “your” money if both your daughter and her husband were to die before your son (the one with the disability)? What about the possibility of creditors’ claims against your daughter, or even bankruptcy? Most of our clients quickly recognize that disinheriting the child with a disability is not really a good planning technique.
  7. But who knows what the public benefits system, the medical care available, or my son’s condition might look like twenty years from now? Indeed. That’s exactly why the trust is so important.

What does that mean for your planning? If you have a child, spouse or other family member with special needs — OR if you have a loved one who may have special needs in the future — your plan should include an appropriate trust. The cost is relatively small, and the benefits are significant. There are really only three downside concerns for special needs planning:

  1. The cost. But the cost of not doing anything is probably higher — and the opportunity loss from failure to plan is especially high.
  2. The nuisance value. Yes, that does mean you need to go see a lawyer. Need a place to start? Look at the membership of the Special Needs Alliance. There’s likely someone near you who understands the importance of special needs planning.
  3. The name. Don’t want to tag your loved one as “special needs”? Then don’t. Call your trust The John Doe Maximum Opportunity Trust. Or the Panorama 2012 Trust. Or Green Acres Fund. With your lawyer’s help, customize the language of your child’s trust to speak in your voice, and to identify what you think is important. Take advantage of the flexibility offered by trust planning.

 

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.

UTMA Account Is Treated Like a Trust Account

JUNE 11, 2012 VOLUME 19 NUMBER 23
The Uniform Transfers to Minors Act is almost universally known by its initials: UTMA. A version of the Act has been adopted in nearly every US state, and the few which have not adopted it have its similar predecessor, the Uniform Gifts to Minors Act (known, unsurprisingly, as UGMA).

The UTMA is intended to make it easy to put money aside for minors. It allows someone to create a sort of trust arrangement, just by including those magic initials in the title to a bank or brokerage account — or, in fact, on any property. The account title identifies the minor beneficiary, the custodian who manages the property, and the fact that it is a UTMA account. It’s simple: just title the bank account as “Jane Doe, custodian pursuant to the Arizona UTMA for benefit of Johnny Doe.” It’s not even essential that precisely those words be used (obviously, you wouldn’t want to use them unless you were trying to give money to a child named Johnny Doe).

That is the easy part. Then come a lot of questions. Such as:

  • Who owns the money in a UTMA account?
  • Whose Social Security number should go on the account?
  • How can the money be invested? What can it be spent for?
  • What accounting requirements are involved?
  • Does the money have to be turned over to the child when he or she becomes an adult?
  • What standards apply to the handling of the money?
  • Can anyone else demand money from the account, or information about it?
  • Are there limits on how much money can go into a UTMA account? Are there limits on what kind of money can go into the account?

Once set up, the UTMA account belongs to the minor. The custodian has the ability to manage it, but does not own the money and can not use it for his or her own benefit. It should be treated like a trust for the benefit of the minor. The minor’s Social Security number should be provided to the bank or financial institution, and the minor will need to file tax returns if the income is high enough to require returns. When the minor reaches a set age (in most states and most cases, the age is either 18 or 21 — check with a qualified attorney about your state and circumstance) the custodian must turn over the funds. The minor — and the minor’s parents or other close family members — have the right to demand account information, and the custodian has an obligation to provide that information.

Those are the basic rules, but of course specific answers will depend on the details of each question. But a recent North Carolina case gives some guidance to help analyze UTMA accounts — and it provides a cautionary tale about the use and misuse of UTMA funds.

In 1996, when shares in the family business were sold, Elwood Blake (not his real name) set aside a portion of the sale proceeds for the benefit of his granddaughter, then three years old. He named his son Richard Blake as custodian of the funds, pursuant to the North Carolina version of the UTMA.

Five years later Richard Blake and his wife Elaine separated, and a bitter and protracted legal struggle ensued over property division, custody of their children and, eventually, administration of the UTMA account for the benefit of their daughter. Elaine Blake demanded an accounting from her ex-husband and ended up filing a court proceeding to secure it.

After a court battle the judge hearing the case decided that Richard Blake had mishandled his daughters funds in a number of ways. He had been unreasonable in his refusal to provide accounting information. He had made speculative investments (including putting more than $50,000 into a venture capital fund). He had used his daughter’s funds to pay her medical and dental bills, when he should have been responsible for them himself. And he had used $5,000 of his daughter’s money to make a contribution — in his own name — to a local Republican Party cause.

The judge ordered Richard Blake to return $73,269.80 to his daughter’s UTMA account. It also ordered him to repay another $58,944.24 in lost investment earnings occasioned when he misused his daughter’s money. Then it ordered him to pay his ex-wife’s legal bills for having to bring the action — her legal fees totaled another $138,531.85. Finally, it removed him as custodian from all the UTMA accounts, finding that his mishandling precluded him from being in charge of the remaining funds or the money he must put back.

The North Carolina Court of Appeals reviewed the trial judge’s rulings, and found nothing wrong. There was plenty of evidence to support the judge, the appellate court ruled, and Mr. Blake should have treated his daughter’s UTMA account like a trust. When he did not, he became liable for the misused funds, the lost interest and the legal fees incurred in protecting his daughter’s interest. Belk v. Belk, June 5, 2012.

An interesting side note: “Richard Blake” already had a checkered history with the law. A lawyer and prominent businessman, he had won a seat as a local judge after criticizing his predecessor — the judge who handled a part of his divorce proceeding. When he refused to step down from his position on the Board of Directors of an auto-parts company the North Carolina Supreme Court removed him from his judicial office and banned him from serving in any future judicial position.

Think Your Family Member Needs a Guardian? Proceed With Caution

FEBRUARY 27, 2012 VOLUME 19 NUMBER 8
Phoenix-area resident Larry Robertson (not his real name) was undoubtedly fading mentally, but he had made plans for handling his affairs. He had created a revocable living trust, signed a power of attorney and created a beneficiary deed. All those documents named a husband-and-wife team who were also his caretakers. They would receive his entire estate upon his death, and were put in charge of handling both his finances and his health care decisions while he was still alive.

Larry’s sister Betty lived in Ohio. She became concerned that the caretakers might be taking advantage of Larry, so she consulted with her local Ohio attorney, David Lynch. Mr. Lynch prepared a petition seeking Betty’s appointment as guardian of Larry’s person, conservator of his estate, and trustee of his trust. The petition claimed that there was an emergency requiring immediate action. It was signed by Betty and by Mr. Lynch — who was not admitted to practice law in Arizona. The petition was actually filed by an Arizona attorney, who did not sign it.

Once the petition was filed, an attorney was appointed to represent Larry. Another Phoenix-area attorney entered an appearance on behalf of Larry, claiming that he had prepared all of the questioned documents, that Larry had been perfectly capable of signing them, and that in fact Larry still had capacity and could make his own decisions about placement, caretakers and disposition of his property at his death.

The probate court held a hearing on the emergency petition. At the beginning of that hearing, Mr. Lynch asked to be admitted to practice law in Arizona just for the purpose of this one case — a process that is called “pro hac vice” admission. The probate judge heard some preliminary testimony, and discovered that Mr. Lynch had himself made an appointment with Larry’s attending physician under the pretense that he needed medical treatment, and that he had interviewed Larry’s physician about Larry’s condition. The judge refused to allow Mr. Lynch to be a lawyer in the case, ruling that it appeared that he might have turned himself into a witness instead.

Larry’s sister Betty then testified that she believed the caretakers might be taking advantage of her brother. In her petition she had alleged that Larry’s attending physician had told her that the caretakers seemed to be taking advantage of Larry; on the stand she acknowledged that the physician had not actually told her that he was concerned. The physician himself testified that Betty had asked him to say that Larry was incompetent, but he said that he had declined to render such an opinion.

At the conclusion of the hearing, the probate judge ruled that Betty had not shown any basis for a guardianship and conservatorship. The judge dismissed the petition, and ordered that Betty and her Ohio lawyer, Mr. Lynch, should both be liable to pay Larry’s original lawyer $6,470 in fees incurred in preparing for and conducting the hearing. The sanctions were imposed pursuant to Rule 11, a court rule governing civil proceedings which prohibits filing baseless proceedings.

Later, at a follow-up hearing set to consider whether Betty should be appointed as Larry’s trustee, the probate judge found that there was no basis for that allegation, either. By that point Betty’s entire petition had been denied; as a final blow the probate judge imposed an additional $9,651.04 in fees against Betty and Mr. Lynch — this time to pay the court-appointed attorney’s fees.

Mr. Lynch appealed the second award of fees against him. He argued that he had not been given a chance to show his own good faith in preparing the original petition for Betty. He had relied on Betty’s assertions, he argued, and that should have been all that was required.

Not so, ruled the Arizona Court of Appeals. When an attorney signs a pleading (as Mr. Lynch had done, even though he was not admitted to practice in Arizona), he or she effectively swears that he or she has made a reasonable inquiry into the facts alleged. Simply relying on the statements of the client was not enough — at least not when the witnesses to the documents were readily available, and Mr. Lynch could have simply interviewed them to see what they thought about Larry’s competence. “It appears,” wrote the appellate court, “the only effort Lynch made to verify Betty’s allegations was his inappropriate meeting” with Larry’s physician. The sanctions against Betty and Mr. Lynch, totaling over $16,000 in payments to Larry’s two lawyers, were upheld. Guardianship and Conservatorship of LaLonde, February 16, 2012.

In separate proceedings, incidentally, the Arizona Supreme Court admonished Mr. Lynch for practicing law in Arizona without being licensed in this state. The Ohio Supreme Court followed suit on October 14, 2011, publicly reprimanding Mr. Lynch in the same case.

There are at least two messages to be taken from the court-imposed sanctions against Betty and Mr. Lynch. First, it is important to make sure that you have some actual evidence of incapacity and an emergency situation before filing a petition to secure an emergency appointment as guardian for a family member or loved one. Pretty much the same can be said for a petition for appointment of a conservator, or for appointment of a successor trustee.

The second message is really addressed to lawyers more than to family members. It is not necessarily enough to rely on the assertions of your client. It is also dangerous to get so personally involved that you lose objectivity.Particularly in a time of heightened scrutiny being applied to guardianship, conservatorship and trust administration matters, it is important to have a good foundation before filing a petition that so deeply affects the personal life, independence and autonomy of a client’s family member.

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