MAY 9, 2011 VOLUME 18 NUMBER 17
Let us give you some insight into how hard it can be to figure out how to interpret estate planning documents. At the same time we hope to explain why it is important to keep your own estate plan up to date.
Timothy M. Donovan was a successful New Hampshire businessman. Beginning in the 1980s he started his own company, Optimum Manufacturing, and built it into a leading manufacturer of optical housing, mirror blanks and satellite components.
At age 52, Mr. Donovan was married for the second time. He had no children from either marriage, but he had close relationships with his mother, his brothers and a niece and nephew.
In 2005 he signed a will and a living trust. The terms of his will were straightforward: he left all of his personal property, real estate — almost everything he owned — to his wife. There was one huge exception, however: he left his stock in Optimum Manufacturing, the real estate on which the plant was located, and any other interest in Optimum to his living trust.
Apparently Mr. Donovan had wrestled with what to do about the company he had built. His trust included detailed provisions about what was to happen to Optimum Manufacturing. His trustee was to continue to run the business for a short time, and then arrange for its sale. If possible, it was to be sold to employees of the company. If not, it was to be put on the market. Once the company was sold, the proceeds were to be divided into percentages. Forty-five percent would go to his wife, twenty-five percent to his mother, twenty percent was to be divided among his brothers, niece and nephew, and ten percent would go to the trustee. After distributing the Optimum sale proceeds in those percentages, everything else in the trust was to go to his wife.
So far, there is nothing extraordinary about Mr. Donovan’s estate plan, and it looks like it would be easy to understand and implement. But in 2008, things changed. Mr. Donovan sold his company to Corning Specialty Materials, a subsidiary of the giant Corning, Inc. The sales price: $15 million. The proceeds from the sale went into Mr. Donovan’s name individually, and not to his living trust.
Just under a year later Mr. Donovan (who was also an avid and accomplished pilot) died,tragically, in a glider crash. He had not updated his estate plan, and so questions now arose about what should happen to proceeds from the sale of Optimum Manufacturing.
You be the probate judge for a moment. Assume for the sake of your ruling that all the Optimum proceeds were held in one or more identifiable accounts, and that they had not been commingled with other funds (we don’t know that to be true, but let’s keep the legal issues simple for a moment). Assume, also, that Mr. Donovan’s wife’s name has not been put on those accounts. Tell us, judge: what happens to the $15 million?
You want some precedent? How about the recent case of Estate of Donovan, decided on April 28, 2011, by the New Hampshire Supreme Court? It would be hard to find anything more clearly on point.
The legal term for what happened in Mr. Donovan’s case is ademption. When property is sold, lost or no longer part of the estate at death, it is said to be “adeemed,” and a specific bequest of that property therefore fails.
In some circumstances the identifiable proceeds from a sale of specifically named property must be distributed as if the original gift still operated. That can be true when the “ademption” is involuntary, for instance — such as when the state condemns a parcel of property that has been listed in a will and the proceeds from that condemnation are still held in a separate account. But that was not the situation in Mr. Donovan’s case.
The problem is made slightly more interesting by the fact that Mr. Donovan had signed both a will and a trust. Since the sale proceeds were still in his name, they were governed by the will — which said that everything but Optimum Manufacturing was to go to his wife. That was what the probate judge decided, and the New Hampshire Supreme Court agreed.
Imagine, though, that Mr. Donovan had put the sale proceeds into an account titled in his trust’s name. Would the result have been any different? No, said the Supreme Court. His trust also left everything but Optimum stock to his wife, and the ademption principles would apply to the trust just as they did to Mr. Donovan’s will and estate.
There is no grade, nor any reward, for correct answers, but how did you do as a probate judge?
MARCH 7, 2011 VOLUME 18 NUMBER 8
Two weeks ago we answered some of our readers’ frequent questions, and we solicited more. We heard from several of you with good questions of general interest. Among those (with identifying information and some details stripped out):
My wife and I do not have any obvious family member to handle our estates. Whom should we name as executor? Most (but not all) married couples will leave administration of their estate in the hands of the surviving spouse after the death of one spouse. Most (but not all) will name one or more of their children to act in the case of simultaneous death, or upon the second death. But what are your choices if you do not want to name your children, or if you have no children?
Of course you can name other family members to handle your estate. Some clients even name parents, although of course it is uncommon for parents to live longer than their children. Siblings, grandchildren, cousins can all be good candidates. Cousin Emily, the lawyer in Illinois, might be a perfectly good candidate. Same for nephew Dale, the CPA in California.
Some clients — occasionally even those with children — may choose to have a professional named to handle their estate. In that case there are at least four types of choices to consider:
1. Bank trust offices. Not all trust companies are related to banks, so we do not mean to limit the choice to bank trust companies — but the image of a bank officer acting as trustee is at least a little bit familiar to most. The good news: it is likely that your bank trust department will still be around, even long after your death. Even if it changes names, or merges with another bank, it will still exist and be identifiable. We can safely predict what the bank trust office will look like, and how it will make its decisions, even well into the future; we have several centuries of experience to draw on in describing how a trust company works.
There are two problems with trust companies for many of our clients. First, the banks have begun to set their fees and selection criteria to favor larger estates. For many banks, that means that they are not interested in acting if your estate does not exceed a million dollars in value — though many banks’ minimums are half that, and banks will often accept estates that are less than their stated minimums.
The other objection we often hear to naming a bank: they tend to be an expensive option. To administer a continuing trust, most banks will charge between 1% and 1.5% of the value of the trust each year (although the precise figures vary widely and are often negotiable). To handle the administration of an estate that will be closed in a year or so, the bank may charge 3%-5% of the value of the estate — or more, if there are complicated assets, difficult administration issues or a modest estate.
Banks also tend to be very conservative organizations, with plenty of rules and a complicated decision-making hierarchy. They may decline to handle real estate, for example, or have a very methodical and inflexible approach to investments or to making distribution decisions. For many clients that is exactly why the banks are a comfortable choice. For others, that can make them look less attractive.
2. Professional fiduciaries. In recent decades an industry of non-bank private fiduciaries has grown up in Arizona (and in many other states). There is even an organization of professional fiduciaries — the Arizona Fiduciaries Association. If your estate is too modest to interest the banks, or if you anticipate that there will be a need for a lot of personal oversight (if, for example, you want to set up a special needs trust for your child who has a disability), the non-bank fiduciaries may be an option.
The good news: the ranks of professional fiduciaries include social workers, accountants, lawyers, money managers, and individuals with a variety of backgrounds and interests. There is a high likelihood that you can locate someone who will be a good fit for your personal situation.
There are a number of problems with naming professional fiduciaries to handle your estate, however. First, the individual fiduciary is probably (we might even say “likely”) mortal. They might not outlive you, in fact — and they probably won’t still be around to handle the trust you set up for your great-grandchildren. Unlike the centuries-long experience with bank trust companies, we do not yet know what the professional fiduciary industry will look like decades into the future.
Private fiduciaries can also be expensive. Many private fiduciaries will charge hourly rates (which tends to save some of the expense, though it can actually increase the cost). Some will charge amounts similar to those charged by bank trust companies — though they may provide additional services, like care management, in those similar costs.
3. Other trusted professionals. Many of our clients choose to name their accountant, or their investment adviser, or their lawyer, to handle their estate. Yes, that can sometimes mean they name our office, and we are willing to name ourselves in documents we prepare — though we encourage clients to think of us as a last choice.
The good news: if you name someone who has already been involved in your life you increase the likelihood that the “fit” will be good. As you continue to work with the person named in your estate plan, you can periodically re-assess that fit and modify your estate planning if it becomes an issue. You will also have a fairly good idea of how rates are set, and whether the costs are reasonable.
As with other non-institutional fiduciaries, one big problem with the professional adviser is (how do we say this delicately) a general lack of immortality. Your accountant’s firm may continue for years after your own accountant dies (or retires), but are you comfortable in predicting that it will have the same values, principles and personality?
4. Friends. Sometimes clients name long-time friends to handle their estates. They may reason that friends’ values and reliability are known quantities. Friends, in turn, are likely to know your values and to make decisions in a way that you would have approved, had you still been around to monitor the administration of your estate.
The good news: friends tend to be less expensive than most of the professional choices, and there is indeed a high likelihood that they will know your family situation and personal values. If you name a close friend, however, you should periodically pull out your estate plan and reconsider whether it remains the right selection — our personal relationships do tend to fluctuate over time.
The bottom line: there often is not a perfectly obvious answer. It can be challenging to balance costs, availability (over the long term) and suitability to come up with the best choice to handle your estate. And we haven’t even discussed the differences between naming a personal representative for your will (the more modern term for the commonly-used “executor”), a trustee for your trust (what many people actually mean when they say “executor”) and an agent for your power of attorney (the role that is often most important while you are still alive). Maybe another day. In the meantime, keep those questions coming.
NOVEMBER 15, 2010 VOLUME 17 NUMBER 36
When we help you plan your estate our goal is to figure out who you would want to be in charge of your finances and personal affairs, who should receive your assets and in what proportion, and what you want done at a future time when you are unable to take care of things yourself. Our purpose is to figure all of that out and reduce it to writing — and to assure that your wishes are clearly and legally expressed. That is why we ask you all of those annoying questions about what should happen if your heirs or agents should die before you. That is why we spin out those disturbing scenarios of multiple deaths and incapacities, of family break-ups and failures.
There is a point at which it no longer makes sense to try to figure out every eventuality, and we recognize that we will not cover every conceivable sequence and circumstance. There are principles of probate law that help fill in the blanks for common issues — but sometimes they are not obvious, or do not seem quite right. Then the probate court may have to interpret a will or trust, or figure out the legal effect of the document.
A simple illustration of this principle arises in the Florida probate court interpretation of Cecelia Lorenzo. Her will was properly drawn up, and it was clear. Half of her estate was to pass to her brother, and the other half to her sister’s husband. If either of those recipients died before her, she directed that the deceased beneficiary’s share should go to his wife. That seems obvious, and easy to interpret.
The problem with Ms. Lorenzo’s will did not appear obvious at the time it was written. Later, but before her death, both her brother and her sister-in-law died. That meant half of her estate was supposed to pass to one of two people who were no longer living.
Long-standing principles of construction almost addressed the problem. Under the laws of Florida (the same rules apply in Arizona), if the will does not provide otherwise a deceased beneficiary’s share passes to the named beneficiary’s children if he or she dies before the will’s signer. One catch: that principle only applies if the named beneficiary is a relative (in Florida’s case, that means “descended from the testator’s grandparents”).
So, to recap: Ms. Lorenzo’s will left half of her estate to her brother, who was surely descended from Ms. Lorenzo’s grandparents. Her brother died after the will was signed but before Ms. Lorenzo died. Her will said that in that event her brother’s half of the estate was instead to go to her sister-in-law — who was not descended from Ms. Lorenzo’s grandparents. Does that mean that the two children of Ms. Lorenzo’s brother (and his wife) receive the brother’s share, or not?
The probate court said yes, the niece and nephew should share half of Ms. Lorenzo’s estate. The Florida Court of Appeals said no, and reversed the probate judge’s holding. Because the will named Ms. Lorenzo’s sister-in-law in the event that her brother predeceased her, the bequest was to a person who was not a blood relative. That meant the bequest lapsed as a result of the deaths of Ms. Lorenzo’s brother and sister-in-law, and her entire estate passed to her sister’s husband, who had been named to receive the other half. Lorenzo v. Medina, November 10, 2010.
That might have been Ms. Lorenzo’s intention, but it seems unlikely. If the scenario had been reversed, with her brother-in-law and her sister dying before her, the result would have been the opposite — and it is hard to imagine that she intended opposite results in the two scenarios. More likely, she (and her lawyer) just didn’t think through every permutation, and then she didn’t update her will after the deaths of her brother and sister-in-law.
The court opinion doesn’t tell us how old Ms. Lorenzo’s will was at the time of her death. We are left to speculate about how long she had known of the deaths of her brother and sister-in-law, and whether she had ever considered what effect their deaths had on her own estate plan. But there is another lesson to be learned from Ms. Lorenzo: it is a good idea to update your estate plan every five years or so, just to be sure your intentions are not overtaken by family circumstances.
SEPTEMBER 20, 2010 VOLUME 17 NUMBER 29
There is a lot of mythology, misunderstanding and just plain confusion about wills and probate. Sometimes the reported cases don’t help clarify what makes a will valid, when it is subject to challenge or even what might be a will.
The general rule is clear, and ancient. The Parliament of England adopted the Statute of Wills in 1540, and a version of its requirements can still be found in every U.S. state. One of the most important principles from the Statute of Wills: a valid will must be in writing, and must be signed by two witnesses. That is still the law in most common law jurisdictions, and it is certainly the law in Arizona.
But wait. Perhaps you have heard about “holographic” wills; they do not have to be witnessed at all. The basic rule in states which permit holographic wills (Arizona is one) is that the material provisions must be in the handwriting of the person, and signed. You can see those rules might amount to a lawyer’s field day — what are “material provisions,” and how are courts supposed to interpret the incomplete or even contradictory provisions of a handwritten document?
Then there are “nuncupative” wills. They are not permitted in Arizona at all, but some states allow them. They are oral statements of the wishes of someone on their deathbed. In states recognizing nuncupative wills, they may be limited to items of personal property like jewelry, small amounts of cash or even items with no economic value. You might (depending on which state you are living — and dying — in) be able to say “I want my dad’s pocket watch to go to Harry” but not “I want Harry to have my $100,000 T-Bill.”
The Uniform Probate Code, promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and adopted in 19 states (including Arizona) provides some new ways to let people express their wishes — and, arguably, to increase legal fees in some cases. Under recent amendments to the Uniform act, a will that is unsigned or not signed properly could still be a valid document if it can be shown by clear and convincing evidence that the individual intended it to be treated as a will. We should stop a moment to point out that although Arizona adopted the Uniform Probate Code back in 1973, the more recent revisions have not been adopted. Arizona still requires all wills (except holographic wills) to be witnessed by two people.
When might the new section of the Uniform Probate Code be useful? How about the sad case of Louise Macool, who died in New Jersey in 2008?
Mrs. Macool’s husband of forty years had died just a month before she made an appointment to see her long-time lawyer. She brought along a handwritten note to tell the lawyer what she wanted. Her old will left everything to her late husband’s seven children equally (she had no children of her own, but had helped raise his children). Her note said, cryptically, “get the same as the family Macool gets — Niece — Mary Rescigno” and some other changes she wanted to discuss.
Mrs. Macool explained the note to her lawyer. She wanted to add her niece, Mary Rescigno, to her will, along with another niece. While she was still in his office, the lawyer picked up his dictation equipment and dictated a will for her review and signature. Then she left the office to go to lunch; she would make an appointment to review the will after her attorney’s staff had transcribed it and he had a chance to review it for accuracy.
Sadly, Mrs. Macool never saw the draft will. Within the hour after she left her lawyer’s office she died.
The lawyer’s staff prepared the draft will, apparently not knowing of Mrs. Macool’s death. Relying on the Uniform Probate Code language, Ms. Rescigno then asked the probate court to admit the unsigned document as Mrs. Macool’s last will.
The probate court heard a day of testimony and argument, then declined to admit the draft document as a will. The probate judge agreed that Mrs. Macool’s intent in meeting with the lawyer was to change her will to include Ms. Rescigno, but decided that some sort of signature was required on the document.
The New Jersey appellate court agreed with the result, but not the reasoning. Requiring a signature on the document would make it essentially a duplication of the holographic will provisions, ruled the appellate judges. Mrs. Macool’s draft will could be admitted to probate if she had had a chance to review it and indicate that it reflected her wishes. Her handwritten notes, meanwhile, did not amount to a holographic will — they would need her signature.
The trial judge had declined to admit the draft document to probate as Mrs. Macool’s will, but he had agreed that Ms. Rescigno’s lawyer should be paid from Mrs. Macool’s estate. New Jersey’s probate rules expressly authorize payment of attorney’s fees for someone who “had reasonable cause” for even a failed contest. Ms. Rescigno’s lawyers had submitted bills totaling $34,433; the probate judge had cited his personal “policy reasons” in reducing the fee by about 15%.
Even though her lawyers had been unsuccessful the appellate court approved of the payment to Ms. Rescigno’s counsel. In fact, they reversed the probate judge’s reduction of the claimed fees. According to the appellate court, there was no indication that the hourly rates were unreasonable our out of line with prevailing rates, or that the claimed hours were not actually worked. In Re Probate of Alleged Will of Macool, September 16, 2010.
JULY 26, 2010 VOLUME 17, NUMBER 23
Imagine a couple, each married for the second time. Perhaps each has children from a first marriage. Perhaps the couple has been married for years — even decades. They think of all the children as “their” children, even though they fully understand that the other spouse’s children are stepchildren.
One of the spouses — let us say the husband — dies. He leaves his interest in the family home, together with all the couple’s accumulated wealth, to his widow; his will specifies that on the second death all of the children share the estate equally. His children remain in contact with their stepmother for the next decade, though that contact lessens over time. When she dies, what happens to the home, the bank accounts and the remaining wealth?
This scenario plays out again and again. Most often, the deceased husband’s will is irrelevant. If the property all passed to the wife without restrictions, she is free to change her will, to transfer the property into trust, to spend it or even to give it away. But that is not always the case.
Ralph and Elaine Lawson married in 1971. They owned 12 acres of Iowa land as “joint tenants with right of survivorship.” They had three children between them: Ralph’s son and daughter Roger and Le Ann, and Elaine’s son Lonnie. Just to complicate things further, Ralph later adopted Lonnie.
In 1987 Ralph and Elaine signed identical wills. Each left everything to the other. On the second death, the wills provided that fifty percent of the combined estate would go to Lonnie, twenty percent each to Roger and Le Ann, and ten percent to the couple’s church. The wills contained an unusual provision: each included language that indicated the couple had agreed “that neither will change our will” without the other’s consent.
Ralph died first. The property passed to Elaine automatically because of the joint tenancy title, so Ralph’s will was not filed with the Iowa probate courts.
A few years later Elaine changed her estate plan. First she transferred the acreage to her son Lonnie, reserving a life estate for herself. Then she signed a new will, leaving the same proportions of her estate to Lonnie (50%), Roger (20%) and Le Ann (20%), but changing the church which would receive the remaining 10%. Shortly after that, Elaine died.
Roger and Le Ann sued to enforce the terms of their father’s and stepmother’s original wills. They alleged that the wills amounted to a contract, that Elaine’s transfer of the property to Lonnie violated that contract, and that the court should impose a trust upon the property to secure its return to the original beneficiaries. The trial judge reviewed the two wills and agreed with Roger and Le Ann.
The Iowa Court of Appeals upheld that ruling, ordering the imposition of a trust on the 12 acres. The language of Ralph’s and Elaine’s wills made it clear, according to the appellate judges, that their intent was to prevent the survivor from changing the estate plan by a new will or by transferring property during lifetime.
Lonnie argued, unsuccessfully, that the reciprocal wills should not prevent transfers of the acreage because it did not come into Elaine’s estate by virtue of Ralph’s will. The court dismissed that objection, noting that the language of the wills was broad enough to encompass any estate planning technique, whether it might be a will, a gift, or a living trust. The appellate judges also rejected Lonnie’s argument that his parents’ wills should not have been admitted to the court proceeding; the wills were not being admitted to probate, said the judges, but were being admitted to prove a contract. Consequently, the standards and requirements for admission were those governing contract documents rather than wills. Cunningham v. Lawson, July 14, 2010.
Would Arizona courts reach the same result? It is not completely clear, since the law of reciprocal wills (sometimes called mutual or contractual wills) is not well developed. What is clear in Arizona law is that reciprocal wills can be enforceable; what is less clear is whether they might prevent lifetime transfers of property by the surviving spouse.
One reason that the law is less than clear is that truly reciprocal wills are uncommon. Arizona’s probate code makes clear that the mere fact that wills are identical does not mean they embody a contract not to change the terms; in order to make the agreement binding it must be expressly stated in the wills or in a contractual document. Because that is uncommon, there is little law interpreting such terms.
What is more clear is that the question we hear so often is usually easy to answer. “Does my stepmother [or stepfather] have the right to leave the house she inherited from my dad [or mom] to her kids from her prior marriage?” Absent a clear contract not to change the will, or a trust provision prohibiting the transfer, the answer is likely to be: “I’m sorry, but yes.”
Suppose for a moment that you are trying to get your financial affairs in order. You have been married for many years, and your spouse is gradually losing the capacity to make financial or planning decisions. You are pretty sure you know what your spouse would want, but he (or she) is no longer able to articulate those wishes. Is there anything you can do?
That was the dilemma facing Ollie Phillips, an Indiana resident. His wife Donna no longer had capacity to sign estate planning documents — or to manage her own affairs if anything should happen to him. The couple had earlier signed durable powers of attorney naming one another as agents, and both had identical wills leaving everything to one another and, on the second death, to charity (Mr. and Mrs. Phillips had no children).
In early 2008, 18 months after Donna Phillips had been diagnosed as suffering from dementia, Ollie Phillips signed a new living trust and transferred all the couple’s assets into the trust’s name. The trust named Mr. Phillips as trustee and a friend, Elizabeth Shoemaker, as successor. It provided that all the couple’s money would be used for the benefit of Mr. and Mrs. Phillips until both had died and, after the surviving spouse’s death, everything would be transferred to Ms. Shoemaker. Mr. Phillips signed all of the documents using his wife’s power of attorney.
Did Ollie Phillips have the power to effectively change his wife’s estate plan using the power of attorney? The question would be moot if he had outlived his wife, but he did not — he died less than a year after setting up the trust.
Shortly after Mr. Phillips died, another friend was appointed as guardian of Mrs. Phillips’ person and estate. The new guardian moved to set aside the trust Mr. Phillips had created, but after two days of hearings the trial judge upheld the trust and ordered the guardianship estate to pay the trustee’s legal fees incurred in defending the trust itself.
The Indiana Court of Appeals agreed with the trial judge. Of particular interest to the appellate court was the evidence adduced at trial about Mrs. Phillips having told the lawyer who drafted the trust that Ms. Shoemaker was “like a daughter” to the couple. The judges also pointed out that Mrs. Phillips remained the sole beneficiary of the trust until her death, and that there was no evidence that the trust was being mismanaged in any way. Evidence that Mrs. Phillips had more recently said that she thought Ms. Shoemaker was “money hungry” was not sufficient to allow the guardian to revoke the trust. The appellate court also agreed that Ms. Shoemaker’s legal fees to defend the trust should be paid by Mrs. Phillips’ estate. Matter of Phillips, May 17, 2010.
Does the Phillips case stand for the proposition that an agent can change the principal’s estate plan using a power of attorney at any time? No, it certainly does not. But in a specific case, with some indication of the wishes of the now-incapacitated person, and with a broadly-drawn power of attorney, it might be possible to make at least some changes. Among the safeguards in this case: the fact that Mrs. Phillips, if she once again became able to make decisions, could change the trust, and the involvement of a lawyer who interviewed her and worked with her to try to figure out how much her capacity (and wishes) could be protected.
The popular conception of the probate process and the making of wills is colored by misinformation from a number of sources. Movies, books and plays provide much of the misunderstanding, building an expectation of “the reading of the will” in a lawyer’s office (it just doesn’t happen), regular will contests (they are quite rare) and regular revocation of wills. That last is especially rare, and so a recent case focusing on how one revokes a will, and what level of mental capacity it requires, is a legal gem.
Why don’t people revoke their wills more often? They do — but the nearly universal way one revokes a will is to sign a new will, which recites that any previous wills are no longer effective. It is especially rare to destroy an existing will without signing a new one. When that does happen, the person no longer has a will at all — and the state law of “intestate succession” takes effect, just as it would if there had never been a will.
So how does one revoke a will, if they are for some reason not inclined to sign a new one? There are any number of ways to do so, but the classic method is for the person to physically tear his or her own will into at least two pieces. What Bill Potts did was more elaborate: he drew lines through every line of text, applied Liquid Paper to the names of the beneficiaries he had listed in the will, wrote “void” over each paragraph, and then wrote “bastard” and “get nothing” next to some of the names. Just to make sure he had driven his point home, he later took the marked-up document to his insurance agent’s office and fed it to their shredder.
As an aside, Mr. Potts’ approach would have worked just fine under Arizona law, too. The statute in Arizona requires only that the testator (the person who signed the will in the first place) perform “a revocatory act on the will.” That includes burning, tearing, canceling, obliterating or destroying the will or any part of it. It does not include telling someone else to do any of those things, unless the testator is conscious and physically present at the time.
After Mr. Potts died the individuals named in the will sought to admit a copy to the Arkansas probate courts. They argued that Mr. Potts had suffered from “insane delusions” at the time he tried to revoke the will, and that his revocation was ineffective.
The trial in probate court primarily focused on Mr. Potts’ belief that his late wife might have had an affair with one of the beneficiaries named in his will, that another might have stolen a gold bracelet belonging to his wife. A psychiatrist testified that those beliefs were the product of a “delusional disorder.” The trial judge found that Mr. Potts’ belief about his wife’s infidelity was probably wrong, and that his poor hearing and irascible nature probably contributed to a misunderstanding about the bracelet, Still, ruled the judge, the will beneficiaries had not met their burden of showing that Mr. Potts lacked testamentary capacity when he revoked his will, and therefore the revocation was effective. Bill Potts died intestate.
The Arkansas Court of Appeals agreed, and upheld the probate court’s ruling. The appellate court spent some time considering whether there was sufficient evidence that Mr. Potts had the level of capacity needed to write a will — the same standard that would be applicable to determining whether he had the capacity to revoke a will. Although Mr. Potts frequently claimed, for example, that he had no relatives, the appellate court agreed that he probably meant that he had no surviving close relatives. Meanwhile, he could identify some, perhaps most, of his remaining distant relatives, and he just didn’t know where they lived, or even whether they were still alive.
“The evidence clearly showed that Bill was an irascible, angry, suspicious, controlling, profane and difficult man for most of his adult life,” wrote the appellate judges. That, however, was not enough to find his will revocation invalid. He had the capacity to revoke his will, and presumably he would have had the capacity to sign a new will — if he had known who he wanted his estate to go to. Heirs of Goza v. Estate of Potts, February 17, 2010.
Contrary to public perceptions, will contests are actually rare. In fact, few wills are written in such a way that anyone would benefit from a contest — most wills leave property to the same people who would inherit if there was no will. When there is a will contest, however, the two most common grounds are allegations of (1) lack of testamentary capacity, or (2) undue influence exerted by someone. A recent Texas case highlights the differences between those two allegations.
Evelyn Marie Reno died at age 81. She had been married twice, and left three children from her first marriage and one daughter from the second. The youngest child, Jan LeGrand, did not get along well with her half-siblings. Relationships between Ms. Reno and the three children from her first marriage were also strained — at least partially because two of them had initiated a guardianship proceeding (which was later dismissed) against their mother.
Ms. Reno spent the last year of her life in a nursing home. Ms. LeGrand visited her regularly, paid all her bills, and kept her location a secret from her half-siblings. At some point in the year before she died, Ms. Reno asked her daughter to help her prepare a new will disinheriting her other three children and leaving her entire estate to Ms. LeGrand.
The will was prepared (by Ms. LeGrand), and signed in Ms. Reno’s nursing home room. The witnesses were a hospice worker and chaplain, and the notary public was a nursing home employee. Ms. LeGrand was asked to leave the room while the three non-family members discussed the will and watched her sign it.
After Ms. Reno’s death the will was filed with the probate court by Ms. LeGrand. The three half-siblings proposed an earlier will, which left most of the estate to the four children equally.
The Probate Court ruled that Ms. Reno lacked testamentary capacity at the time the last will was signed, and that she was subjected to undue influence by her daughter. The earlier will (and a codicil) were instead admitted to probate.
The Texas Court of Appeals analyzed the findings of the Probate Court, and modified the basis for its findings — while not changing the result. The evidence, according to the appellate court, showed that Ms. Reno DID have testamentary capacity. Though she was often confused, the two witnesses and the notary agreed that the will was signed on a good day. Evidence of confusion and occasional disorientation on days before and after the will signing was not enough to overcome the testimony that she knew what she was signing, who her children were and what she intended to do at the time she signed the will.
The appeals judges agreed with the Probate Court, however, on the subject of undue influence. A key part of the evidence considered by the Court of Appeals: the fact that the will was actually prepared by Ms. LeGrand. As the Court wrote: “the fact that LeGrand personally prepared teh will without the intervention of an atotrney or other third party is significant.”
Also important to the court’s analysis: Ms. LeGrand had sole access to Ms. Reno for more than a year (during which time their mother’s whereabouts were not shared with the other three children). During that time, noted the Court of Appeals, Ms. Reno was completely dependent on Ms. LeGrand for bill-paying, care management and personal contact.
A more subtle distinction is drawn by the appellate judges with regard to Ms. Reno’s declining mental status. Though her condition at the moment of signing the will did not support the allegations of lack of testamentary capacity, her growing confusion and periodic mental weakness made her susceptible to undue influence.
Finally, the Court of Appeals notes that the will prepared by Ms. LeGrand for her mother was a complete shift from her prior wills. In each of those she made specific bequests to her four children and thirteen grandchildren, plus hospitals, her church and her pastor. The last will, however, left everything to one daughter — and this significant change in her dispositive plan was yet another indication of undue influence.
Though family members often confuse the concepts of testamentary capacity and undue influence, the legal analysis of the two different approaches to will contests is well-developed. It is also important to note that not every attempt to talk someone into making a new will is automatically subject to challenge. As the Reno court opined, in somewhat dry legalistic language: “One may request, importune, or entreat another to create a favorable dispositive instrument, but unless th eimportunities or entreaties are shown to be so excessive as to subver the will of the maker, they will not taint the validity of the instrument.”
The difference between “lack of testamentary capacity” and “undue influence” is legalistic, to be sure, but it is more than just academic. Interestingly, the Texas Court of Appeals noted that there is a difference in the burden of proof borne by the parties in the two different kinds of cases. In a case alleging lack of testamentary capacity the proponent of the will has the burden of proving that the testator understood what she was doing. In an allegation of undue influence, the challenger carries the burden of proof.
That means that each side in Ms. Reno’s case met their burden of proof. That is, Ms. LeGrand showed that her mother understood what she was doing, but the other three children demonstrated that Ms. LeGrand unduly influenced their mother. Estate of Reno, December 18, 2009.
You would like to make sure that your children get along after you are no longer around to tell them to behave, wouldn’t you? Although you may not anticipate any disagreements, you know that money can change relationships, and you have seen how the death of a parent can interfere with sibling relationships. Perhaps you have considered including a “no-contest” provision in your will or trust, and you wonder: Would that help maintain family harmony?
The name lawyers usually apply to such no-contest provisions is revealing. We call them “in terrorem” clauses — meaning that they are intended to terrorize anyone who would otherwise receive a share of the estate from filing any contests. But do they actually work? They can, but they seldom do. Why not?
The primary reason is simple. Say your plan is to leave everything to your three children, in equal shares. Since that is exactly what would happen if you had no will (or trust — in terrorem provisions can be used in trusts, too), there is no incentive for any of them to contest your estate plan anyway. No one else would receive anything even if your documents were successfully challenged, so there is simply no need to include a no-contest clause.
Maybe your plan is different. Say one of your children has already received a significant share of your property, or you disapprove of his or her life choices. You want to disinherit that child, and you want to make sure he or she does not contest your plan. In this situation the in terrorem provision is not going to make much difference — since the disinherited child receives nothing anyway, providing that they will be disinherited if they contest the documents is not much of a deterrent.
All right. Let’s say you really want to make the point. You agree to leave a small share of your estate — perhaps a few thousand dollars — to the disfavored child, and then include an in terrorem provision. Will this work?
It might. Obviously, the beneficiary who is slated to receive something but who will lose it for contesting will have to think twice about filing any objections. You should know, however, that Arizona law (like the law of a number of other states) limits the effectiveness of the provision. If your disgruntled heir has “probable cause” to file an objection — even if he or she is ultimately unsuccessful — the in terrorem provision will not be enforced. (For one illustration of how this might work, consider the 2000 Arizona Supreme Court case of Matter of Shumway, which we described in an “Editor’s Note” to our 1999 article on the Court of Appeals decision in the same case.)
We do not include many no-contest clauses in wills and trusts we draft for our clients. They probably do no harm, except that they would leave our clients with a false sense that they had protected against family conflicts. If conflict avoidance is important to you, we need to come up with a better plan — like including a requirement that any contest be submitted to arbitration or mediation. We can discuss specific ideas for your particular situation.
Quite often we see revocable living trusts fail because individuals do not understand the importance of changing ownership of assets to the trust. In most cases that means the unnecessary expense of a probate proceeding that could have been avoided. Sometimes the effects are more dramatic, as in a recent case decided by the Arizona Court of Appeals.
Warren Parker, Jr., bought real estate in the Phoenix area in 1983. He was married, but his wife Ruth Parker signed a “disclaimer deed” indicating that she made no claim to the property. Three years later Mr. Parker created a trust for his separate property, providing that on his death it would pass to his five children by his first wife. He also signed a deed transferring the property into the name of the trust.
A decade later he signed and recorded another deed transferring the property out of the trust and back into his own name individually. He never got around to moving the property back into the trust’s name, though when he died in 2004 his will left the property to the trust.
By that time Mrs. Parker was in a nursing home. She used Arizona’s summary probate proceeding for small parcels of real property to make the claim that she was the proper recipient of the real estate. She claimed, erroneously, that her husband had died without a will. Then she sold the property to a third party, who on the same day re-sold to yet another buyer.
Mr. Parker’s children cried foul. They filed his will and challenged Mrs. Parker’s sale, arguing that she had never owned any interest in the property and could not convey it. On the face of things, they were right — the proceedings transferring title to her could easily have been set aside. Unfortunately, the buyer had relied on her apparent ownership, and the courts (both trial and appellate) agreed that Mr. Parker’s children could not recover the property. Estate of Parker, Feb. 26, 2008.
Why would Mr. Parker have ever transferred the property out of the trust’s name and into his own name individually? The court opinion does not explain, but it would be reasonable to guess that he sought to place a mortgage on the property, or refinance an existing mortgage, and that the lender required the property to be in his own name. That happens too often, and the lender has no incentive to help the property owner to transfer the title back to the trust after the transaction is over.
Is the problem solved by Mr. Parker’s children bringing suit against their step-mother to recover the value of the property? It may be, and in fact they have filed such a suit. But remember that she is in a nursing home — it may well be that there are no assets to recover.
What does Mr. Parker’s experience teach us? At least two lessons: it is easy to undo even the carefully crafted estate plan, and beneficiaries are well advised to act quickly to protect their interests.
