AUGUST 22, 2011 VOLUME 18 NUMBER 30
Of course it usually makes sense to place your estate planning wishes in the hands of your lawyer to make sure documents are correctly drawn and your wishes carried out. Lawyers can be very protective of what they perceive as their clients’ wishes and best interests, and sometimes that can even get in the way. Take, for instance, the will and trust of Missouri resident William R. Knichel.
Mr. Knichel had two grown children. He also had a 20-year relationship with Anita Madsen. In 2002, shortly after he was diagnosed with brain cancer, he signed a new will and powers of attorney. He named his children as his agents and left his entire estate to the two of them.
At about the same time Ms. Madsen began living with — and taking care of — Mr. Knichel. Two years later, he decided that he wanted to put her in charge of his finances and leave a significant portion of his estate to her. He transferred his home and one bank account into joint tenancy with her, and named her as beneficiary on his life insurance policy.
In 2004, Mr. Knichel and Ms. Madsen made an appointment with St. Louis attorney Charles Amen, of the law firm Purcell & Amen. Mr. Amen prepared a new will and powers of attorney, and a living trust. These documents named Ms. Madsen as personal representative, agent and trustee. The trust was intended to hold Mr. Knichel’s retirement assets, and to distribute them in three equal shares to his two children and Ms. Madsen.
One unusual provision in the trust document: Mr. Amen himself was named as “special co-trustee” with some specific powers. He was to make final decisions about distributions among the beneficiaries, to decide whether any beneficiaries could challenge Ms. Madsen’s administration or distribution decisions, and act as arbitrator if any disputes did arise. Then Mr. Amen and Ms. Madsen began the process of transferring Mr. Knichel’s retirement assets into the trust.
Among the accounts they tried to transfer to the trust was an IRA held at UBS Financial. For reasons not spelled out in the reported court opinion, UBS declined to change the IRA — even though Mr. Amen and Ms. Madsen made several attempts. When Mr. Knichel died a few months later, his children were still named as beneficiaries, rather than the trust.
Mr. Amen continued to work with Ms. Madsen to try to get UBS to change the beneficiary designation, but unsuccessfully. Ultimately UBS distributed the IRA account to the two children. Mr. Amen advised Ms. Madsen to simply make an equivalent distribution from the other trust assets to herself. She did that, and also paid herself a $6,000 fee as trustee and Mr. Amen’s fees of $2,400 for his representation of her as trustee.
In the three years after Mr. Knichel’s death, his children regularly requested a full accounting from Ms. Madsen and Mr. Amen. They did not receive complete information and so, in 2007, they filed suit against Ms. Madsen and Mr. Amen. They specifically sought removal of Mr. Amen and his firm as special co-trustee, arguing that there were multiple conflicts of interest in acting in that capacity while also representing Ms. Madsen, and that Mr. Amen had breached a fiduciary duty to treat the trust’s beneficiaries impartially.
After the trial judge denied Mr. Amen’s motion to dismiss the lawsuit, he withdrew as attorney form Ms. Madsen individually and as trustee. As a result of the proceedings, the court ultimately removed Ms. Madsen as trustee and Mr. Amen and his firm as special co-trustee, froze the trust’s assets and ordered Ms. Madsen to return distributions she had made to herself, her fees and the fees she had paid Mr. Amen. The Judge specifically found that Mr. Amen had breached his fiduciary duties as special co-trustee, because he had not been impartial to the three beneficiaries in his advice and representation of Ms. Madsen.
Mr. Amen appealed the finding. The Missouri Court of Appeals summarily dismissed his appeal, finding that he was not an “interested person” within the meaning of Missouri’s version of the Uniform Trust Code. He did not have a property right in (or a claim against) the trust itself, according to the appellate judges. Consequently, he had no standing to claim that the trial judge had made a mistake.
The Court of Appeals noted that this was not the first case they had heard in which members of Mr. Amen’s firm had named the firm as “special co-trustee.” In an earlier case, Mr. Amen’s partner had named the firm as “special co-trustee” in a trust for a man who was at the time the subject of a guardianship proceeding. When that man’s children dismissed their guardianship petition, Mr. Amen’s partner attempted to appeal the dismissal; the appellate court ruled in that case that he lacked standing to bring the appeal.
Though the circumstances and the legal arguments were somewhat different, the result was the same — dismissal of the appeal. The appellate court was equally unimpressed, incidentally, by Mr. Amen’s other argument — that he would be required to report the finding of breach of fiduciary duty to professional licensing boards and might get in trouble with them, too. In Matter of Knichel, August 16, 2011.
The Knichel case raises a legal question separate from Mr. Amen’s standing to appeal the finding that he breached his fiduciary duty. What is a “special co-trustee,” and what are the duties and powers of such a position?
Under Arizona’s version of the Uniform Trust Code (which is not identical to Missouri’s), the position spelled out in Mr. Amen’s trust would probably be analogous to a “trust protector,” at least to the extent that Mr. Amen’s “special co-trustee” could change the respective shares of beneficiaries. Arizona’s legislative decision to expressly limit any fiduciary duty to beneficiaries might complicate that designation and the analysis of a similar case if one were to arise in the Arizona courts.
JUNE 27, 2011 VOLUME 18 NUMBER 23
We have written before about Arizona’s new Trust Code, and the Uniform Trust Code on which it is based. The “new” law (it became effective on January 1, 2009, so it’s not that new any more) included a number of changes to the way trusts have worked in Arizona for decades. One of the minor, but interesting, provisions is the formal creation of a position called “trust protector.”
To be clear, there was nothing prohibiting inclusion of a trust protector before the new law. So far there are no court cases to help flesh out the powers and duties a trust protector may be given. But we do now have a statute — Arizona Revised Statutes section 14-10818 — which gives clear authority for inclusion of this unusual beast.
So what is a trust protector? The person establishing a trust is permitted to include someone who would have the authority to make changes to the trust even after it becomes irrevocable — even, in fact, after the death of the original trust creator. That means you could name your sister (or your father, or your best friend from college, or your lawyer or accountant) to be the person who could make changes to the trust after your death, to protect the beneficiaries from unintended consequences — or from themselves.
There are no very serious limitations on the trust protector’s possible authority. The Arizona statute gives a handful of illustrations of the powers you might give the protector, but it doesn’t limit you to those ideas. Here are the powers the legislature thought you might want to consider:
The power to remove the trustee and appoint a new one. Worried that the bank might become too bureaucratic, or too expensive? A trust protector can help take that worry off your plate. Worried that your son might not be equipped to really handle the trust after your death? Trust protector to the rescue.
The power to change the applicable state law. Do you think Iowa, or Oregon, or Georgia might be a better state to allow your trust’s purposes to be carried out (or reduce state income taxes, or extend the time for the trust to continue after your death)? We suggest those states precisely because they are not now noted for especially trust-friendly rules — but who knows what might happen in the future? A trust protector could monitor those developments and make a change when it makes more sense.
Ability to change the terms of distribution. What if your daughter is embroiled in a messy divorce just at the time your trust is scheduled to dissolve and pay out to her? Or if your son is just about to declare bankruptcy? Or your grandson has just been diagnosed as mentally ill, and really needs a special needs trust to handle the inheritance you have left him? A trust protector could be given the power to change the date of distribution, or to establish a special needs trust, or whatever needs to be done.
Amend the trust itself. You can even give a trust protector the power to amend the trust’s terms. That might include taking advantage of future tax alternatives, or giving a larger share to a grandchild who really needs help, or reducing the inheritance of a child who doesn’t need a full share.
These powers are illustrative, not mandatory. In other words, you can tailor your trust protector’s powers and duties to your own situation and your personal comfort level.
A trust protector can be very powerful, very helpful and very dangerous. It should be obvious that not everyone will want to establish such a super-powerful position in their trust. For those concerned about the difficulty of planning for an uncertain future, however, the trust protector might just be a very comforting and useful tool.
That all begs the question asked in our headline. Do you need a trust protector? Perhaps. We think maybe the first question should be: is there someone (other than your trustee) whom you completely trust to “get” exactly what you want done with your estate after your incapacity or death? If not, your trust is probably not a good candidate for inclusion of a trust protector. But if you do have that person in mind, then let’s talk about how to use them.
APRIL 25, 2011 VOLUME 18 NUMBER 15
Last week the Arizona Legislature adjourned for the year. Just before closing down the session legislators adopted a number of new measures dealing with probate court, trusts and especially guardianship and conservatorship matters. Most of the bills passed by the legislature are still awaiting the Governor’s signature, but all are expected to be signed and to become law on July 20, 2011 (except that at least one of the new laws will be delayed until December 31, 2011). Among the ones affecting our clients:
House Bill 2211. This new law clarifies that some guardians have the power to admit their wards to inpatient mental health treatment. That authority has long existed, but has been difficult to actually implement. The new law aims to make it easier for guardians, and to clarify that the guardian also has the authority to consent to continuing medical treatment during and after admission. As was the case before the new law, this kind of authority requires a special court proceeding at the time of the guardianship hearing (or later, if mental health issues arise), and the mental health authority has to be renewed every year.
House Bill 2402. Two apparently unrelated issues are addressed in this new bill. First, the legislature has created a procedure for suspension of the driving privileges for someone who has had a guardian appointed. Second, this new law inserts a relatively simple way of appointing a guardian and/or conservator — at least initially — for the subject of a civil commitment proceeding. Under prior law both issues were unclear, leading to the oddity that the judge who heard extensive testimony about a patient’s mental illness and need for a guardian and/or conservator could do nothing about that need. Similarly, the ability of the court to suspend a ward’s right to drive had been uncertain, though prior law implied that the court might have that power.
House Bill 2403. Arizona’s legislature adopted the Arizona Trust Code (a version of the Uniform Trust Code), after a couple of false starts, three years ago. Each year since then the legislature has been asked to tinker with the provisions, and it has consistently agreed. This year’s technical corrections are mostly minor, and hard to work up much excitement about — but they are improvements.
House Bill 2424. Though this bill started life as a comprehensive revision of guardianship and conservatorship, it concluded its legislative odyssey as a stripped-down version. As adopted, it simply creates a Probate Advisory Panel to address needed improvements in the guardianship and conservatorship process. The Panel will include two guardians (of a child or sibling), two conservators (of a parent), one public fiduciary, one private fiduciary, one attorney, one judge and a clerk of court.
Senate Bill 1081. Arizona has long allowed you to name a guardian for your minor children in your will, and to let that person be appointed in a summary proceeding if no one objects. This new law permits a similar proceeding for your incapacitated spouse or adult child. The bill spells out a mechanism for lodging the nomination after your death, and requires notice to the allegedly incapacitated spouse or child. If they do not object, the guardianship can issue automatically.
Senate Bill 1499. This new legislation is the most far-reaching of the bills listed here. It was adopted in response to a series of articles in Phoenix-area newspapers about alleged abuses and huge fees in guardianship and conservatorship proceedings. Of the bills listed here, this is the only one which does not become effective on July 20 — it takes effect on December 31, 2011, to give practitioners some time to figure out what changes will need to be made. Among the provisions of Senate Bill 1499:
Several changes attempt to address abuse of the legal process. Arbitration is encouraged and can be required. Repetitive filings can be sanctioned. In general terms, the losing party in a contested proceeding can be assessed costs and attorneys fees to be paid to the ward or estate.
Any guardian, conservator, or attorney who intends to seek payment from the ward’s estate will need to provide a description of how the fee will be calculated. That information must be provided with the first filing in the proceeding. Any billing must be given to the conservator within four months of the work being done or the fees will be deemed waived.
Wards will now have the right to request a new guardian or conservator, and the court must approve the change if it is in the ward’s best interest. A change of guardian or conservator does not require a finding that the current fiduciary has done anything wrong — this provision permits the change based on the ward’s wishes rather than misbehavior of the fiduciary. Any other interested person (a family member, for instance) may also request the change, with the same result.
The ward’s right to name his or her own choice of guardian and/or conservator is strengthened. The person named in a power of attorney, for instance, should ordinarily be one of the highest-priority candidates for appointment, unless there is evidence that that person has acted inappropriately.
As before, a conservator must file an inventory of the protected person’s assets. Now the conservator must attach a consumer credit report to that inventory.
The subject of a conservatorship and other interested persons can now request that the conservator let them review financial and billing records as often as monthly.
In addition, Senate Bill 1499 makes a number of other, less significant, changes. Fiduciaries and their attorneys, and anyone involved in a contested guardianship or conservatorship proceeding, needs to review the new law to see how it will affect new and existing proceedings, and what changes need to be made in reporting and practices.
Want to learn about why you need a trust? No problem: there is a class for that, and they’ll even buy you lunch if you’ll just listen to their pitch. Want to learn whether you need a trust? It’s a little harder to locate good advice, but still there are resources available.
But what if you already have signed a trust, and just want to understand what you are supposed to do? That information can be especially difficult to locate. That’s why we offer our popular “Trust School.”
We will be offering our next two-hour program (formally titled “Now You Have a Trust”) in Tucson on Saturday, July 18. We will offer a continental breakfast, and we promise to answer your questions about the trust you have already signed. As always, our clients and their family members and invited guests may attend at no charge; others are welcome on a space-available basis and for a nominal $25 enrollment fee.
Who should come to Trust School? Anyone who has signed a trust but wants to understand it better, plus the individuals named as successor trustees. Accountants, brokers, insurance agents and other professionals are also welcome and will have a chance to get their questions about trusts answered.
If you are comfortable that you understand your trust document and the rules under which your trust operates, you might not need to attend. There are recent changes in the law, however, that might make your understanding of the trust somewhat dated. Among the changes:
Arizona has now adopted a version of the Uniform Trust Code. That will have little or no significant effect on many trusts, but some (particularly those that are irrevocable or become irrevocable after the death of one spouse) may be profoundly affected by the new law. We will explain the most important changes in the law and address your questions about what the changes mean for you.
The level at which estate taxes are imposed has climbed yet again — this time to $3.5 million. For most people that means that they never need to worry about incurring an estate tax, although the future remains a little cloudy and a few states (not including Arizona) have adopted state estate taxes that are triggered at lower levels.
There are recent changes that affect IRAs and other retirement savings accounts. Minimum withdrawal amounts and charitable gifts have both been altered for the 2009 calendar year.
If you are interested in attending our Trust School, you should contact Yvette at our office. You can reach her at our general office number: (520) 622-0400. If July is a bad time for you, we have scheduled a second session for September 29, 2009; details will be available closer to that date.
Revocable living trusts have become immensely popular for estate planning in the past few decades. Once used primarily for commercial endeavors (like railroads, steel manufacturing and the like) and management of the assets of only the wealthiest families, trusts have in recent years become commonplace. As a result, the law governing living trusts has evolved more quickly during that time period than in earlier centuries, and new laws have been adopted to clarify trust rules and direct administration of trusts. One major rewrite of trust law, the Uniform Trust Code, has been adopted in a handful of states—and both adopted and repealed in Arizona within the last year.
Several other states, including Kansas, adopted the Uniform Trust Code very quickly after it was proposed. Lawyers expected the new law to generate a flurry of litigation, as the courts interpret the effect of trust law changes. One of the first of those new court cases has been decided by the Kansas Supreme Court.
At issue was the trust established by Eula M. Somers, who died in 1956 (the Trust Code applies even to long-standing trusts). Ms. Somers directed that $100 per month should be paid to each of her two grandchildren, Susan Somers Smiley and Kent Somers, who were then 7 and 5, respectively. When both of them die, the trust is scheduled to terminate and the balance is to be distributed to the Shriners Hospitals for Children.
At Ms. Somers’ death the trust held $120,000. Because the monthly payouts were small, the trust grew to over $3.5 million by 2001.
The Uniform Trust Code permits income beneficiaries (like Ms. Somers’ grandchildren) and remainder beneficiaries (like Shriners Hospitals) to agree to terminate trusts in at least some circumstances. An agreement to terminate the trust may not, however, violate a “material” trust provision.
The grandchildren and the hospital agreed that if they could each receive $150,000 in cash the balance could go to Shriners Hospitals right away. Firstar Bank, the trustee, declined to go along with that agreement because it argued that Ms. Somers’ inclusion of a “spendthrift” clause—prohibiting her grandchildren from assigning any trust income—was a material provision.
The Kansas Supreme Court agreed, and declined to permit termination of the trust. It did, however, direct the trustee to distribute all but $500,000 of the trust’s assets to Shriners Hospital, reasoning that the remaining amount would be plenty to fund the grandchildren’s monthly payments. The court also ordered payment of the grandchildren’s attorneys’ fees of over $55,000. In the first court test of the Uniform Trust Code, as it turned out, not much changed in the law of trust administration. Estate of Somers, May 14, 2004.
Arizona’s legislature first adopted the Uniform Trust Code in 2003, but lawyers in this state almost immediately raised concerns about subtle changes in trust law that would have been brought to the state with the new Code. One of the most common complaints was that the Code might allow beneficiaries to join together to terminate trusts, thereby frustrating the intentions of the original creators of trusts and, in some cases, subjecting trust assets to claims of creditors and possibly even resulting in disadvantageous tax treatment.
Less frequently discussed, but still a concern raised by the Code, is the possible effect on “special needs” trusts established for beneficiaries who receive public assistance from programs like Supplemental Security Income, Medicaid and AHCCCS/ALTCS (Arizona’s Medicaid programs). Because of the controversy, the legislature has repealed the Uniform Trust Code in Arizona; no plans are currently underway to revisit the new law, even with changes that might make it more palatable to its opponents.
[NOTE: After this article was published and circulated, the Arizona legislature delayed the effective date of the Uniform Trust Code in Arizona for two years and then took up a measure to repeal the UTC altogether. Readers need to check the current status of the UTC in Arizona rather than relying on this synopsis, prepared before the legislative review of the Code.]
After several years of work by some of the leading trust law experts across the country, last year the National Conference of Commissioners on Uniform State Laws published a proposed new law for consideration by all the states. The Uniform Trust Code (the UTC) was promptly introduced in ten states and the District of Columbia. Arizona became the fifth state to adopt the UTC earlier this year.
Many of the UTC’s provisions simply restate existing trust rules, but a few new ideas have now become law in Arizona. Among the changes facing Arizonans who either create or administer trusts:
Notice Requirements
Trust law has long required that beneficiaries be given notice of the existence of the trust and periodic accountings. What’s new about the UTC is the specificity of that requirement. Before March 1, 2004, every Arizona trustee is required to give notice of the existence of the trust to any “qualified beneficiary.” Accountings must be given to the same “qualified beneficiaries” every year. This requirement can not be written out of the trust document, so notice and accountings will be mandatory in every case.
Notices and accountings will usually have to go to anyone presently permitted to receive trust benefits, plus anyone who might receive benefits on the death of someone in the first category of beneficiaries. Among those clearly affected by the change will be surviving spouses who receive income from so-called “bypass” trusts and their successors.
Powers of Attorney
The UTC also clarifies the authority of an agent under a durable power of attorney to revoke or amend a trust. The agent will have such power only if the written power of attorney contains specific provisions and the trust itself does not prohibit an agent from acting.
Spendthrift Provisions
A trust which prevents either a trustee or a beneficiary from conveying the beneficiary’s right to future trust distributions may be described as a “spendthrift” trust. The UTC clarifies that creditors of the beneficiary of a spendthrift trust can not reach trust assets. At the same time, the UTC codifies a number of exceptions to that rule, including claims against the trust’s settlor, claims for child support and alimony, and claims by some governmental entities.
Capacity
Arizona lawmakers took out the UTC provision on the level of capacity required to establish a trust. In future years it will probably be set at “testamentary” rather than the higher “contractual” capacity level.
Effective Date
The new Uniform Trust Code becomes effective in Arizona on January 1, 2004. It will profoundly affect the administration of trusts in the state, and it will also provide several challenges for those who are considering creating a trust in the future.
