Posts Tagged ‘trustee’

Why We Do What We Do

JANUARY 9, 2017 VOLUME 24 NUMBER 2
At Fleming & Curti, PLC, we represent seniors, people with disabilities and the family members who work with and support them. We also frequently act as trustee, agent, conservator or guardian for that population. It’s hard to capsulize exactly what we do, but if you ask any of us you’ll notice that we beam while attempting to characterize our work.

We have very good friends in California doing similar work at the Golden State Pooled Trust. The founder of that organization, attorney Stephen Dale from The Dale Law Firm in Pacheco, California (and his lovely wife Terri, who is instrumental in operation of the Trust), is a great friend and inspiration as well. He also does a very good job of capsulizing what we do, and why we do it.

Steve shared two stories about his trust beneficiaries this week. We think they perfectly explain the spark in our eyes when we explain our work, and we asked his permission to pass them along. See if they don’t make you think you want to work in this field, as well:

I want to share two stories with you that, for me, really bring home why we do this. One story is of triumph, the other is of hope.

So let me begin with the story of triumph. Mrs. B came to the Golden State Pooled Trust with a large settlement and our job was to keep her qualified for Medicaid because she lived in a skilled nursing facility. The first time I met her I visited her in the nursing home and my impression was that this was a woman who had completely lost interest in life — and the world seemed to have lost interest in her.

I asked Mrs. B what she would like me to do with the funds that would help her – and she pretty much was unresponsive. She hadn’t been out of bed in years without assistance and when I asked her if she would like to do things outside of the nursing home she rolled over away from me. I talked to the nursing staff who were caring and engaged to get their input – but there were limits on what they could do.

I called Sage Eldercare and I asked that a care manager be assigned to her and an assessment made about what could be done. They assigned Janeane to the case and through a series of thoughtful assessments Janeane had determined that she was probably capable of being ambulatory but needed more physical therapy than she was currently receiving.

Janeane began to implement a plan to fulfill that need and over time Mrs. B began to improve. She was asked again – what would she want to do other than stay in bed all day. Her answer: go to church.

Janeane secured private care staff to accompany her and off to church she went. Then her world expanded more, going shopping and occasionally going to excursions like the zoo. We at the Golden State Pooled Trust would get these wonderful progress reports, and we would pass them on to our board who loved each one.

The only harsh call I ever got from Mrs. B was once when her helper was late – and she wanted me to know she was a busy woman and needed to know when her helper would arrive so she could do some shopping. Was this really the shell of a woman I had met years earlier?

Mrs. B had been in decline for the past month, and sadly she passed away last week. As sad as her passing is, it fills my heart with joy and pride that her years under our care (primarily because of the actions of Sage and their staff) were made better and she lived a quality of life that would not have been possible but for their vigilance.

Now for the story of hope. Mr. F came to us recently and is a young man with many physical challenges and pretty much getting no services or oversight beyond his meager benefits. Mr. F got a modest settlement and is dependent on Supplemental Security Income and Medicaid and of course our job is to keep him qualified for benefits.

As often happens, we got off to a rocky start. His primary need beyond existing benefits is housing, and the first couple of weeks we made arrangements for short term housing which would be thwarted and cause our staff to have to bail him out of his situation to avoid having him literally be thrown out in the streets. He arranged for a room in what appeared to be a pretty unsafe part of his city, but it was unlikely this would be appropriate for the long term. Then he started making unbelievably inappropriate requests – and he was truly annoying me. This case was really going to be a challenge.

Clearly, we were not connecting – so I called ElderCare Services and arranged for a care manager to do an assessment and create a plan to get this under control. Brenda was assigned to the case, and she wanted a Golden State Pooled Trust staff member to go with her on the first assessment; reluctantly, I agreed.

So off they went to meet with Mr. F. and several hours later they returned. The report I received was that Mr. F is living in a place of incredible squalor – and that beyond the filth of his closet sized room, the entrance to his building is basically inaccessible for his physical needs. The other part of the report was that Mr. F was thankful for the visit, and appears to be committed to work with Brenda. Is it possible that we could do more than keep a roof over his head until the funds run out?

Though his settlement was significant, he doesn’t have unlimited funds. With the right guidance he is fully capable of becoming self-supporting someday, and graduating from the ranks of the lost and forgotten. I am so glad that we have Barbara on the job, and my expectation is that with her guidance we will find Mr. F a safe and appropriate place to live, and maybe we can get him connected a healthier community and set his life on a path that will change his life for the better before his funds run out.

We have many stories in our little pooled trust, and my hope is that we will have many more to come and the services we provide will continue indefinitely. Yes, our folks are almost universally difficult with challenges sometimes that are hard to understand until we dig below the surface.

Even so, Mrs. B’s personal effect on my life was to give me hope and pride in our staff, and our partners that include many care management agencies. For myself and all at the Golden State Pooled Mrs. B’s final years with us  has made our lives better. For Mr. F, we have an opportunity to change the trajectory of his life – how cool is that?

How cool, indeed.

Trustee Has Duty to Monitor His Lawyer’s Behavior

AUGUST 29, 2016 VOLUME 23 NUMBER 32
Are you a trustee, or named as successor trustee for a family member or friend? We regularly advise people in your circumstance that they should get good legal advice. Once you’ve done that, however, you are not absolved from any liability if things go wrong.

A trustee is generally permitted to delegate some duties to others — especially to professionals. So it makes sense, and might even be required, for a trustee to hire a stockbroker, or an accountant, or a lawyer. But the ability to delegate is coupled with a duty to monitor the professional.

At least that’s the law in Arizona, and probably also the law in any state that has adopted the Uniform Trust Code. It’s also the law in California, as it turns out — even though California has not adopted the Uniform Trust Code. How do we know? Because of Terry Delgado (though we’ve changed his name for this narrative).

Terry was named as successor trustee on his mother’s trust. After her death late in 2011, he took over, and began managing her trust property. That included two pieces of real estate in the San Francisco area, several bank accounts and some personal property items. Her trust directed that it should be distributed equally between Terry and his two sisters.

When they hadn’t gotten any information about the trust after two years, Terry’s sisters wrote to the lawyer who had been handling the trust administration. They asked for an accounting, distribution of some of the trust’s holdings, and information about what would happen to the real estate. They got nothing back in response. They did, though, get a notice from Terry’s lawyer that one of the properties was being listed for sale. They wrote back saying that they thought the property needed work done before it was sold, and demanding that they get information about what had happened and what might be proposed.

A court hearing was set for six weeks later. Three days prior to that hearing, Terry’s lawyer filed a motion to continue the hearing, claiming that he (the lawyer) had been ill and needed to be involved in the preparation of any accounting. The probate judge conducted a hearing anyway, and decided Terry’s power as trustee needed to be suspended. The judge appointed a professional trustee to take charge temporarily, and ordered Terry to file a complete accounting with the court within six weeks from that hearing date.

Instead, Terry’s lawyer filed a motion to reconsider the order suspending Terry’s powers as trustee. The lawyer claimed that, because of his illness, he had been sleep-deprived and unable to complete the accounting. He had also been working on an accounting in connection with the related estate of Terry’s mother’s late husband. Furthermore, Terry himself had been unable to complete the accounting because of his work schedule and his lawyer’s illness.

At the same time, Terry’s lawyer filed an entirely separate pleading on behalf of the real estate agent who had been hired to list the property. That pleading objected to any change in trustee, and noted that the real estate agent’s company might file a claim against the estate if the listing were to be canceled.

On the last day set by the probate judge, Terry’s lawyer filed an accounting on his behalf — on the wrong forms. The accounting revealed that up to that point, Terry’s lawyer had charged the trust something more than $320,000 in fees — $350 per hour for 916.15 hours.

The probate court received the accounting and set a hearing to review it for two months later. During the delay, Terry’s lawyer filed his own declaration. It apologized to the probate judge for the delays, acknowledged that he had filed the wrong kind of accounting, described his health problems and promised to get the proper accounting filed before the new hearing date already set.

At that hearing, the probate court permanently removed Terry as trustee. It appointed the neutral fiduciary who had been acting temporarily, and noted that no acceptable accounting had yet been filed. At a later hearing on Terry’s lawyer’s request for a reconsideration, the probate judge reaffirmed the same orders.

Terry appealed to the California Court of Appeal. That court upheld the removal and the appointment of a new fiduciary. The appellate judges noted that Terry had every right to hire an attorney to represent him as trustee, but that he had an obligation to monitor his attorney and to see to it that his duties were properly discharged.

Terry’s attorney had created a serious conflict of interest by appearing in the same proceeding on behalf of someone who asserted a claim against the trust, ruled the appellate court. The attorney’s assertion that there was no “actual” conflict of interest in the dual representation did not relieve Terry of his duty.

It is perfectly permissible, ruled the appellate court, for a trustee to hire a professional — like an attorney — to handle trust business and to delegate authority to that professional. The trustee, though, is still required to monitor the professional, and to hire a more suitable alternate if the attorney is unable to handle the assignment — whether that is because of illness, unfamiliarity with trust administration procedures, or otherwise. Desbiens v. Delgman, August 10, 2016.

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.

Exercise of a Power of Appointment Should Follow the Document

JUNE 29, 2015 VOLUME 22 NUMBER 24

Clients are often unfamiliar with the concept of a “power of appointment.” If they don’t know what it is, they can be excused for not knowing whether they have one, or how to use it.

Suppose Thomas leaves $10,000 to charities in his trust, but gives his brother Richard the authority to choose which charities. What Richard has is a power of appointment. Because Thomas says that only charities qualify, Richard’s power of appointment is said to be “limited” — in this case, limited to charitable organizations.

Now suppose that another portion of Thomas’s trust says that his other brother (you knew he would be named, Harold, didn’t you?) can decide how to distribute $10,000. Harold’s power of appointment could go to anyone — including to Harold himself. It is a “general” power of appointment.

As you can imagine, it would be good for Thomas to spell out what Richard and Harold have to say, or sign, in order to let the trustee know whom they have selected to receive their respective gifts. Since Thomas had his trust prepared by a capable lawyer (with a sense of whimsy), it says that “the power specified herein may be exercised by Richard delivering a signed, notarized document on blue paper to the trustee on a Wednesday before noon, Mountain Standard time.” Harold’s power of appointment is identical, except that it specifies green paper and afternoon delivery.

Can Thomas impose those (silly) requirements on the proper exercise of the powers of appointment he is giving to his two brothers? Of course he can — nothing in the law of trusts requires sober, businesslike language. The signer of a trust has considerable leeway to impose pretty much any technical requirements he (or she — or they) wish.

That’s the principle involved in a recent Arizona appellate decision. It involves a trust established by a husband and wife, and a power of appointment given to whichever spouse survived the other.

William and Mary Quick signed a joint, revocable trust in 1985. As is often the case, the trust was for their own benefit so long as both lived, and continued to be for the benefit of the survivor upon the death of the first spouse. One unusual provision was included in the trust, though: upon the death of the first spouse, the entire trust would become irrevocable, assuring that the couple’s two sons would receive everything upon the second spouse’s death.

The opinion does not explain whether William and Mary’s two sons were to receive equal shares under the trust’s default terms, but let us assume that they were. One thing the trust did provide, though, was that the surviving spouse would have a limited power of appointment, and could change the shares of the two sons after the first spouse’s death. The only requirement for exercise of the limited power of appointment was that it had to be done by a will, and that the will had to make specific reference to the power of appointment.

Mary died in 2003. A year later, William apparently decided that he wanted to change his sons’ shares of the trust. How did he do that? He signed a new trust document — a “restatement” of the trust — which altered the distribution shares upon his death. William lived for several years after the trust restatement was signed, but no further changes were made before his death, and he did not refer to his power of appointment in his will.

William was the sole trustee of the trust after Mary’s death. Assuming all assets were community property (which we don’t actually know to be true), half of the trust’s assets came from “his” share of the community. We can also reasonably assume that the trust permitted him, as trustee, to dip into the trust’s principal and distribute it to himself, at least in some circumstances. So was his failure to refer to the power of appointment in his will a problem?

One of the couple’s sons thought so, and a legal dispute was inevitable. Both brothers joined in asking the probate court for instructions: was William’s apparent exercise of his power of appointment valid? Should the trustee make distributions between them based on William and Mary’s original scheme, or rely on William’s restated trust document from after Mary’s death?

The probate court decided that what William had done was ineffective. Since the original trust became irrevocable on Mary’s death, and it required William to make any changes in his will, that was what was required. The original division between the two sons would be upheld.

The Arizona Court of Appeals agreed. It was not good enough that William almost did it right. Nor was it sufficient that William had the authority, and his wishes were clear. The trust required that the limited power of appointment must be exercised in William’s will, and that the will specifically refer to the power itself. William’s will did not exercise the power of appointment, or even refer to the original trust (or, for that matter, the restated version). Quisling v. Quisling, June 16, 2015.

Assuming, for the sake of education, that William really did mean to change the distribution shares of his two sons, what should he have done? The easy answer is that he should have followed the trust’s instructions: he could make the change by simply referring to the trust in his will, and no change needed to be made in the trust document itself.

Under Arizona law, though, that probably was not his only choice. William might have been able to “decant” the irrevocable trust into a new trust. He might have been able to withdraw some, most or even all of the trust’s principal and put it into his own name (and, subsequently, a new trust). He might have been able to avoid disputes by entering into an agreement with his two sons about how to handle the trust for the rest of his life and even after his death. But by simply restating the trust, without more, he failed to accomplish his goals. The lesson: exercise of a power of appointment must follow any instructions given with the power itself.

Does Your Existing Trust Split Into Two Shares On a Spouse’s Death?

MARCH 9, 2015 VOLUME 22 NUMBER 10

A letter from a reader asks: “My husband and I set up a revocable trust which will divide our assets in half when one of us dies. This was to avoid estate taxes.  Now that estate taxes are no longer a problem, are there still benefits to splitting our assets when one of us has died?”

What a great question!

The short answer: if your combined estate is well under the $5.43 million threshold for estate taxes (in 2015), there is probably no tax reason for splitting the trust on the first death. If your combined estate is less than two times that figure, the answer is probably the same. But that’s not to say that there’s no reason to provide for a split of the trust — it’s just not a tax reason.

Here are some circumstances in which you might still want to split your trust — not necessarily in half, but into two shares — on the first spouse’s death:

  • You might worry about what will happen with the surviving spouse after one spouse dies. Will he or she remarry? Become infirm and susceptible to influence from people outside the family? Begin to favor one child over the others, or disfavor one child? If you feel strongly that “your” share of the estate (and here we’re talking as much about a “moral share”, if you will, as a legal share) needs to be locked down if you die first, then you might still want to provide for a trust split on the first death. Let us talk — and by “us” I mean you, your husband and your lawyer, all together.
  • You might feel like some of the assets are really yours, not your spouse’s. Did you receive a substantial inheritance that you have kept separate? Did you bring more assets to the marriage? Is there a particular asset (your home, or a summer cottage where your children spent every summer, or stock in a family business, or something similar) that you feel particularly strongly about passing to your children? Time for us to talk.
  • Is this a second marriage, with children from prior marriages? We should probably discuss how the two of you feel about the likely connection the surviving spouse will maintain with stepchildren.
  • Does your spouse have a problem managing money, or completely different ideas from yours about how to invest or maintain assets? Guess what — we need to talk.
  • Do either (or both) of you own real property in another state? Because the estate tax answers might be different.

Note a common thread here: there are no easy, pat answers. Each consideration means we need to talk through what’s important to you and to your spouse, and what is legally possible — and efficient.

There are some downsides to splitting the trust on the first death. For one, it probably increases the cost of managing the trust. It certainly increases the responsibility of the surviving spouse to account to the children, and maybe (depending on your trust’s terms) even grandchildren or others. It might (but probably won’t — we don’t want to alarm you unnecessarily) actually increase income taxes. It probably will mean that the surviving spouse has some limitations in how they deal with the portion of the trust that becomes irrevocable on the first death — and that can be emotionally troubling. And remember that what’s sauce for the goose — well, you know the rest of that aphorism.

Incidentally, the same answers apply to a couple who never did set up a trust that splits on the first death. Even though taxes may not compel such a split, it might be a choice that makes the couple feel more comfortable about what will happen after the first death.

Here’s a thought experiment for you: we find that it’s relatively easy for married couples to imagine what life would be like if one spouse died (though it may not be pleasant to contemplate). What’s more challenging is to imagine what life will be like ten, or fifteen, or twenty years after your spouse dies — or (harder still) what life will be like for your spouse twenty years after you die.

The same client goes on:

“Is the second trust still vulnerable to nursing home expenses?”

Another good question. It takes a little explaining, but the journey should be worth it.

If you set up a trust for yourself (let’s assume you are single for a moment) and then enter a nursing home, your assets will probably not be protected from the cost of the nursing home. That’s an overgeneralization — there are actually some kinds of trusts that might protect your assets from long-term care costs. But they will usually have been in place for five years, and be very restrictive. For the moment, let’s just go with “no, the trust you create for yourself is not safe from nursing home costs”.

If your spouse dies and leaves his or her entire estate to you outright, then the trust you set up will look the same. Even if you and your spouse set up a joint trust and then he or she dies, leaving you with the power to revoke the whole trust, that will be the same as the trust you set up with your own assets. So no, the trust that does not split into two shares on the first death will not (usually) protect against nursing home costs.

But if your joint revocable trust splits into a revocable and an irrevocable share on the first death, the answer may be different. If that seems like a likely scenario, or you particularly want to pursue protection from long-term care costs, then that may be another reason for considering a split on the first death — even though there is still no estate tax reason to make the split.

This client keeps asking really good questions:

“What if my husband decides to make large gifts out of the second trust. Can he do that ?”

Sorry to be a lawyer here, but the answer is: “it depends”. Mostly it depends on the language of the trust.

Of course there’s another reality. If the surviving spouse is the trustee of the trust, and the trust terms say “whatever else he/she does, he/she is not to give a single cent to my worthless brother Arnold,” and the surviving spouse gives a few thousand dollars to Arnold, who is going to enforce the trust’s terms? The children? They likely won’t find out about it until well after it happens, and you know how likely Arnold is to pay the money back, right?

Once again, this question needs to be the subject of more discussion with your lawyer. But what excellent questions.

Important note: These off-the-cuff answers are just that, and they really should encourage you to discuss the questions with your lawyer in some depth. If you are not an Arizonan, they may not be correct at all. If we are not your lawyers, you might get a different answer, or at least different emphasis. These are actually hard questions.

“No-Contest” Clause in Trust Can Be As Effective As Will Provision

JANUARY 19, 2015 VOLUME 22 NUMBER 3

When we prepare wills and/or trusts for our clients, they often ask if they should include a “no-contest” provision. Typically, they want us to add language that would penalize anyone who challenges the validity of their estate planning documents.

Are such provisions effective, or even permitted? We explain to our clients that no-contest clauses can be effective — but they presume that the possible contestant has something to lose. There is no point in writing a will or trust that says something like “I hereby leave nothing to my son Barry, and if he contests this he will be disinherited.”

That aside, no-contest provisions can be a way of avoiding legal complications among beneficiaries and the person in charge of handling an estate. We have written before about the difficulty in interpreting and applying such provisions, but there is no doubt that there are circumstances in which such a clause (also sometimes called an “in terrorem” provision) can be beneficial.

A no-contest provision can sometimes be worded more broadly, and become a much more powerful, if blunt, instrument. Take, for instance, the circumstances behind a recent Arizona Court of Appeals decision.

Details of the family relationships are sketchy in the reported court decision, but they involve a 1994 trust, apparently signed by Terry Simmons (not her real name) and her then-living husband, that included this language:

“If any beneficiary under this Trust, in any manner, directly or indirectly, contests or attacks the validity of … this Trust or any disposition … by filing suit against … Trustee … then any share or interest given to that beneficiary under the provisions of this Trust is hereby revoked and shall be disposed of in the same manner as if that contesting beneficiary and all descendants of that beneficiary had predeceased the Surviving Settlor.”

Fifteen years later, two of the remainder beneficiaries did file suit against Terry, who was serving as the trustee of the trust. They alleged that she had violated her fiduciary duty in a number of ways. The court ultimately distilled their objections down to nine different challenges to Terry’s administration of the trust.

Terry responded, and litigation ensued. The probate judge denied all of the objections to the administration of the trust. That left one question: had the remainder beneficiaries been disinherited by their trust contest?

Arizona has a statute governing the validity of no-contest provisions in wills, but there is no statute expressly covering similar provisions in trusts. The statute governing wills says that a no-contest provision is “unenforceable if probable cause exists” for the contestant to have filed their action. In other words, if the case had involved a will rather than a trust, the test would have been whether the contesting beneficiaries had “probable cause” to file their objections.

The probate judge applied the same standard to determine the validity of the no-contest provision in Terry’s trust. The judge found that, though the contestants were not successful, they had at least probable cause to file their contest and therefore would not be disinherited.

The Court of Appeals agreed that the same standard should apply (though they got there by a slightly different route), but disagreed on the outcome. Because the beneficiaries had made nine different complaints about the trust’s administration, ruled the appellate court, they had to have probable cause for every one of the nine challenges. It was as if, the appellate judges reasoned, the beneficiaries had filed nine separate lawsuits; each one would have to have been based on probable cause, and the mere fact that they combined all nine into a single complaint made no difference.

With that different reading of the requirement, the appellate court reversed the holding of the probate judge and ordered that the beneficiaries had been disinherited by their filing. One of the complaints they made had insisted that Terry, though she was entitled to the annual income of the trust, should have distributed it to herself only once per year, and not on a monthly basis. That was simply not the law and not required by the trust document, said the appellate court; because there was no basis for that single allegation, the no-contest provision was triggered. The court did not even have to review the other eight allegations to determine whether there was any basis for filing a contest. In Re Shaheen Trust, January 16, 2015.

What does Terry’s trust tell us about writing trusts, administering them or challenging the administration? Several things, at a minimum:

  1. In Arizona, at least, no-contest provisions are as effective in trusts as they are in wills, and clients may want to consider including them — especially in contentious families, second marriages, or other cases where everyone might not be (or stay) on the same page about what should happen.
  2. People who genuinely think that they should file a challenge need to be very cautious, and first look for any no-contest provision. If there is such a provision, any contest should start small, with only the most flagrant misbehavior included — rather than a scatter-shot challenge to a variety of actions.
  3. It may also be appropriate to include alternative dispute resolution provisions in one’s will or trust — mandating, for example, that contestants first submit to arbitration, or perhaps mediation, before filing formal challenges. This might help reduce the cost and the antagonism that occasionally appears in inheritance contests.
  4. If one beneficiary is intended to be given more latitude than others (if, for example, a surviving spouse is to be given more deference than the children — or the reverse), the trust ought to say so, and make clear that the trustee is to favor that beneficiary, and include provisions giving the other beneficiaries only those powers to inquire or object that the trust settlor wants to give them. That would help the legal system analyze the purpose and meaning of no-contest provisions if and when contests do arise.
  5. Another idea we have written about before, the concept of a “trust protector“, might be a way to allow the trust to be modified to deal with changing circumstances — like deteriorating relationships among the beneficiaries and trustees.

Trustee Not Personally Liable for Trust Business

JUNE 23, 2014 VOLUME 21 NUMBER 23

It’s a small point, but important — and the Arizona Court of Appeals reiterated it in a decision released last week. So it seems to us that it would be appropriate to call attention to this simple rule: generally speaking, a trustee is not personally liable for her (or his) actions as trustee.

There are, of course, exceptions. A trustee may so intermix her personal interests and those of the trust that she is liable both personally and as trustee. There are some trusts that will be treated as the alter-ego of the trustee — so that creating the trust does not shield the trustee from personal liability. Sometimes the trustee’s actions are so clearly wrong that she might be liable, to trust beneficiaries or others. But in the vast majority of cases, a person acting as trustee can bind the trust without exposing herself to liability.

This concept is not esoteric. It is central to the whole idea of trusts. If you name your daughter as trustee, she needs to know that she can administer the trust without exposing her own assets to liability. If you take over a trust after the death or disability of someone else, or even if you are a professional trustee, you need to be comfortable that you will not be liable for the ordinary business of running the trust.

How was this issue involved in last week’s Arizona court case? It was simple: a trust owned a piece of real estate, and the trustee signed a listing agreement to get the property sold. Later the trust canceled the listing agreement, and the listing agent sued the trust — and the trustee — for the amount specified as payable in the listing agreement upon early termination. A jury found in favor of the listing agent, and judgment was entered against both the trust and the trustee. The trustee appealed, arguing that she should not be liable for the trust’s violation of the terms of the agreement — even if she was the one who both signed and terminated the listing agreement.

The Arizona Court of Appeals reversed the jury verdict against the trustee individually, while upholding the judgment against the trust itself. There were arguments about whether the real estate agent was actually qualified to act, and whether he breached his duties to the trust — but those arguments only went to whether the trust could terminate the listing agreement without paying damages. For our purposes, the important part of the court decision is the simple observation that when a trustee signs as trustee, she is not personally liable on the contract. Focus Point/Kantor v. Johnson/Oak Acres, June 19, 2014.

This principle is actually pretty straightforward, and well-established. Why would the listing agent argue that the trustee should be personally liable in this case? Apparently because when she signed the listing agreement, she did not write “as trustee” or similar language on the contract. But, noted the appellate court, her signature only appeared once, and she couldn’t be signing that one time as both trustee and individually — and there was no dispute that the trust, not the trustee, owned the property being listed. Besides, the contract terms clearly indicated that they were between the listing agent and the property’s owner, and the trust was the owner.

Although the listing agent argued that a handful of cases from other states supported holding the trustee liable, the Arizona court disagreed. In some of those cases, noted the court, the trustee had expressly signed as an individual, guaranteeing the performance of the agreement by the trust. In one other, the trustee had failed to make the argument before the trial court (and so was deemed to have waived it). In yet another case, the officers of a corporation signed in one place as officers and another without any designation — and they were deemed to have been signing in both capacities.

So what does this simple appellate case tell trustees about the discharge of their duties? It just makes sense to clearly indicate that you sign “as trustee” when you are acting in that capacity — it helps head off any argument, even if it is otherwise obvious that you are acting as trustee. The same can be said for someone acting under a power of attorney, or for the personal representative of a decedent’s estate. Just to be safe and clear, after your signature you should write something like “as Trustee of the Pyramidal Trust Dated January 7, 2010” or “as agent for John Roe,” or “as personal representative of the estate of Jane Roe” (substituting, of course, the actual names of the individuals or entities as appropriate).

Even if you do not add that language, you probably are not creating any possible personal liability — at least in any document that is clear about your signature being in a representative capacity. Be very, very cautious, however, about language that seems to include some personal liability — if a pre-printed form recites, for instance, that you are signing “as trustee, and personally as guarantor”, take the agreement to an attorney for review before signing. At the very least, strike out the offending language. Acting properly on behalf of someone else should not cost you personally.

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.

Remainder Beneficiaries Not Entitled to Trust Beneficiary’s Financial Info

SEPTEMBER 12, 2011 VOLUME 18 NUMBER 32
Imagine with us for a moment: you are the trustee of an irrevocable trust created by a now-deceased woman for the benefit of her daughter. The trust says that her daughter is to receive all the income generated by the trust. You are also given the discretion to give the daughter some of the trust’s principal if she needs it. When the daughter dies, whatever is left in the trust will go to her nieces and nephews, the grandchildren of the original trust settlor.

You have just gotten a letter from the daughter, asking you for an additional $3,000 per month to pay for her care. You know that the remainder beneficiaries — the nieces and nephews — might object to that extra distribution. What should you do?

That is essentially the problem faced by Citigroup Trust, which is trustee of just such a trust. It was established by Esther Caplan for the benefit of her daughter, and it is administered in Arizona. After Citigroup began making regular distributions to the daughter, one of her nephews questioned whether the trustee should be giving her additional funds. Eric Bistrow told Citigroup that he wanted more information about his aunt’s finances, and that he wondered whether the trust was funding a too-lavish standard of living.

To make sure that they understood the daughter’s needs, Citigroup requested (and got) tax returns and a budget. They decided to keep making the distributions, but also to ask the Arizona courts for direction.

Citigroup filed what in Arizona trust law is called a “Petition for Instructions.” They essentially asked the probate judge to tell them whether they were right to make the discretionary distributions of principal.

In the course of the proceedings, Mr. Bistrow and his attorney asked to look at his aunt’s budget, tax returns and financial information. Citigroup declined, saying that the information was private and should not be shared. How, then, would Mr. Bistrow know that they had properly considered her financial needs? The trustee suggested that it would give the records to the probate judge, and let him review them privately; if there were concerns or questions, the judge could make the decision to share them, or some portion of them.

The probate judge agreed, looked at the records, and approved the past and proposed future distributions to Ms. Caplan’s daughter. It also confirmed that Mr. Bistrow and the other nephews and nieces were entitled to statements showing how much was actually distributed, as well as how much was earned by the trust and what other expenses it incurred.

The nieces and nephews appealed, arguing that they were not being given enough input into the decision to distribute trust principal to their aunt. Their position was that they should be notified before any distributions could be made, that they should be given full financial information, and that they should be given an opportunity to weigh in on their aunt’s need for funds.

Not so, ruled the Arizona Court of Appeals. Mr. Bistrow and the other remainder beneficiaries are entitled to be treated fairly. They are entitled to know what the trustee is doing. They are entitled to ask the courts to intervene if they think the trustee has exceeded its authority. They are not, however, entitled to see their aunt’s financial records, or to vote on whether the trustee should exercise its discretion to make distributions to her. In Re the Matter of Esther Caplan Trust, September 1, 2011.

The Caplan case is focused on a narrow question, but it has broader application. It also raises (but does not answer) a number of interesting questions. It gives important guidance to trustees on how to safely exercise the discretion given by a trust document.

What are some of the lessons of Caplan? A few come to mind:

  1. Asking for court review of decisions which might be challenged should always be considered. It may be that the amount in controversy is too small to justify court involvement, or that the trustee’s decision is simply unassailable, or that the remainder beneficiaries are agreeable. But in any case in which there might be disagreement, the Petition for Instructions is a good safeguard for the trustee.
  2. Remainder beneficiaries are important, and their interests need to be considered in administering a trust. But the income beneficiary’s interest is usually paramount. Remainder beneficiaries are not in charge of trust administration.
  3. Notwithstanding that remainder beneficiaries are not in charge, they are still entitled to sufficient information so that they can determine if their interests are being adequately protected. But “sufficient information” is not the same thing as “complete information.” It may sometimes (rarely, but occasionally) be appropriate for a trustee to withhold sensitive or personal information. Usually, it would be wise to identify the information which is not being shared, so that the remainder beneficiaries can make a reasoned decision about whether to challenge that determination, too.
  4. Creative thinking can come up with solutions that protect everyone’s interests and violate none. Giving the judge a chance to review the financial records in camera (privately) was just such a creative solution.
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