Posts Tagged ‘Wills’

Is It Important to Avoid Probate? Why, or Why Not?

SEPTEMBER 10, 2012 VOLUME 19 NUMBER 35
Earlier this year we wrote about how to avoid probate. We told you at the time that we might later address whether to avoid probate. This week we’re going to tackle that topic.

You might be thinking something like: “‘whether to avoid probate’? Isn’t that foolish? Of course I want to avoid probate.” There is simply no question that the whole process of probate (by which we mean the court proceeding required to transfer a decedent’s assets to his or her family or the beneficiaries named in a will) has gotten a bad name. Our purpose here is not to try to rehabilitate the public image of probate, but to give you some of the details about how the process works. Armed with that, you can decide how bad probate really is, and how badly you want to try to avoid it for your estate.

First, a handful of generalizations. Please note that they are generalizations, not absolute truths:

  1. Probate is not as bad as it was a half-century ago. When Norman Dacey published “How to Avoid Probate!” in the mid-1960s, the negative image of the probate process was already widespread. His book galvanized opposition, and popularized the notion of revocable living trusts as an efficient probate avoidance tool. It also woke up the legal establishment; within a decade, a number of states (including Arizona) had adopted the Uniform Probate Code, which had been crafted to simplify the process. Even states which did not adopt the Uniform Probate Code drew a lot of the ideas and processes from it. The result: in most (but not all) states probate has gotten much, much simpler.
  2. Relatively few deaths result in a probate proceeding being filed. For example, the Tucson area probably sees about 10,000 deaths a year (extrapolating from U.S. Census data for Arizona, which reported 46,000 deaths in 2008). Yet only about 1,300 probates were filed in Tucson last year — and that number includes cases where a trust was filed for review, interpretation or supervision. We predict that similar numbers — about 10% of deaths leading to a probate proceeding — will apply in other jurisdictions, too.
  3. Avoiding the probate process does not, by itself, have any effect on taxes and does not prevent family fights. As to the former, there are no income taxes due upon receipt of an inheritance regardless of whether it comes through probate or not. Estate (or inheritance) taxes are a different animal; there is no estate tax in Arizona, and no federal estate tax (in 2012) on an estate of less than $5.12 million. But the value calculation is not based on probate estates — it is applied to trusts, joint tenancy, beneficiary designations and anything else the decedent owned or had control of just before death.
  4. There is tremendous state-to-state variation. There are a number of states in which one item or another from the list below would completely change your analysis. DO NOT use this guide to judge whether you want to avoid probate in California, in Texas, in Ohio — in fact, in any state other than Arizona. Ask your local lawyer about your state. Feel free to share this article and go over the list, but do not be the least bit surprised if his or her answer is completely different, based on your state’s laws. (Incidentally, if you, gentle reader, are an attorney practicing in a different state — please feel free to comment about how, precisely, you would adjust our advice for your state. We’d be happy to include such comments on our website, along with your contact information. We won’t vouch for your accuracy, but you do know your state law way better than we do.)

Let’s get started. We propose to set up a series of the most common objections to probate, and then explain how seriously you should consider those objections.

Probate is expensive. It does cost something to go through the probate process. There are filing fees, publications of notice in local newspapers, and lawyer’s fees. They can be substantial. But one thing about the Uniform Probate Code: it moved states from a fixed percentage of the value of the estate to a “reasonable” fee. In general terms, that has meant average fees about 1/3 of what they were under the old fixed-fee schedules. Still more than some people want to pay, but much less than they have heard about. Did you read that some celebrity’s estate paid 40% of its value in fees and taxes? Well, we bet that (a) most of that was taxes and (b) there was a will contest. If your competence is going to be challenged, avoiding probate may not reduce that cost. If your estate pays taxes, avoiding probate will not change that.

It is also important to remember that avoiding probate does not mean avoiding lawyers — and costs — altogether. Resolving the division and distribution of a living trust (a popular probate-avoidance device) will cost some money. It will probably be considerably less than the probate cost, but it won’t be $0. And accountants are still likely to be involved (there are, after all, the same number of tax returns to file either way).

Probate means public disclosure of private matters. Not any more. Or at least, not in Arizona. No inventory has to be filed in the probate court (a copy gets sent directly to beneficiaries, but it need not be filed in court). No formal accounting is required (assuming, of course, that no one objects to the administration of the estate). Anything with confidential information can be filed in a sealed envelope with the court. In short, the only thing publicly available is likely to be the text of your will itself (plus, of course, the fact of your death). That may be enough of a violation of privacy that you want to avoid the process, but for most people that’s not terribly invasive.

It takes a long time to go through the probate process. It can, but it doesn’t have to. Most probates can be closed once a four-month waiting period is completed. Given ordinary delays in getting things filed, that usually means the probate process is wrapping up at about six months after filing. Of course there are exceptions. We have decades-old probates hanging around in our office. We once took over a probate that had languished for over forty years. It happens. But it is not inherent in the probate process. PS: we closed that 40+-year-old probate with two phone calls and one court filing. It took about two more weeks. We apologized to the now-elderly heirs for an unconscionable delay. They said they had wondered why they’d never gotten their small inheritances. But they had never called to ask the prior lawyer what was taking so long — it wasn’t until the lawyer’s death that that particular sad little file got closed up.

Probate proceedings are easy (easier?) to contest. This one is correct, although not (for most people) a very big deal. If you have disinherited a spouse or child, you might want to consider a living trust. Your will isn’t literally easier to contest than your trust — the same principles apply in both cases. But probate does mean that there’s already a court file, and a letter has to be sent out to the disinherited heir (which might invite a contest that they otherwise wouldn’t get around to filing).

Why isn’t this a big deal for most people? Because most people don’t deviate very much — or even at all — from what would have happened if they did not sign a will or trust. If you don’t leave anything to your long-lost cousin in Colorado, she doesn’t have any basis for contesting your will OR your trust — because she wouldn’t inherit even if you were batty as a bedbug (is that the right metaphor?). If you had no will or trust your estate would go to your spouse and kids in some proportion. Your goofy cousin will never get any part of your estate (unless you die without spouse, children, siblings, nieces, nephews, parents, grandparents, uncles or aunts), so a will contest is pretty much a theoretical idea for most of our clients.

If you own real estate in more than one state, the cost and trouble of probate will be magnified. Yup. And we can’t tell you how hard or expensive it will be to handle the probate in the other state. You’re a good candidate for a living trust. Note, however, that we’re going to have to go to the expense of getting that other state’s real estate transferred into your trust, and that’s going to increase the cost of creating the trust in the first place.

So what does it all mean? Should you be trying to avoid probate? Probably, but maybe not if it’s very expensive to do so, or you aren’t too worried about your heirs incurring some additional costs, or you haven’t decided exactly what you want to do. If you decide probate avoidance isn’t too important we won’t call you foolish or misguided.

But are there any positives about probate? Any reason to want to have your estate go through the probate court? Well, we’re well beyond our usual self-imposed word limit for this week, so we’re going to leave you with that question as a cliffhanger. But we can promise that next week, when we answer it, our weekly newsletter will be shorter.

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Claimant Must Prove Undue Influence, Lack of Capacity

AUGUST 27, 2012 VOLUME 19 NUMBER 33
It has been some time since we wrote about the concepts of undue influence and lack of testamentary capacity — and the differences between these two legal concepts. A recent Minnesota appellate case strikes us as a good opportunity to revisit challenges to wills and trusts based on allegations of mental shortcomings.

Linda Samson (not her real name) was a widow, living in her own home in Minnesota. She had two children, a son and a daughter. She and her late husband had created a living trust several years before her husband’s death; it provided that after the second spouse died, the remaining estate would be divided into three shares. One share would go to the couple’s daughter, another to their son, and the third to their son’s wife.

In 2003 Linda was diagnosed with “early-state Alzheimer’s disease.” In 2006 she signed an amendment to her trust deleting both her daughter and daughter-in-law (and leaving everything to her son). In 2008 she signed two deeds to her home — one transferred her home out of the trust and into her name alone, and the second one transferred her home from her name into her son’s name (but reserving a life estate for herself).

Between her initial Alzheimer’s diagnosis and 2008 Linda’s medical records periodically referred to her memory loss but indicated that she was stable. She continued to live at home, though with some assistance. She had a sharp mental decline in the summer of 2008, and by fall of that year a home health agency was recommending 24-hour care. She moved into a nursing home in the spring of 2009, was enrolled in a hospice program and died in June of that year.

Linda’s daughter objected to the 2006 amendment to Linda’s trust and to the 2008 transfer of her home. She argued that her mother lacked the capacity to sign either of those sets of documents, and/or that her brother must have unduly influenced their mother to his own benefit (and her detriment).

The probate judge heard testimony from several people who knew and/or treated Linda. Two expert witnesses hired by her daughter, both doctors, had reviewed Linda’s medical records but had never met her. They testified that her capacity was obviously diminished, and that it would have been possible to unduly influence her.

On the other side, the lawyer who prepared the trust amendment and the deeds to her house testified that, though he had not met his client before, she seemed to be able to explain her reasoning for the changes and she knew who her children were and what she was doing. He testified that she had told him that it saddened her that her daughter was not very involved in her life, but that she was pleased at the extra care and attention she received from her son and his son, her grandson.

Both the initial and the follow-up sets of appointments with the lawyer had been arranged by Linda’s son, but in both cases (he testified) it was at her request. Although the lawyer had met with both Linda and her son initially, further discussions were with Linda alone; the transfer of the house had actually been initiated by the lawyer rather than either Linda or her son. The lawyer pointed out that it didn’t really change the disposition of her estate at all, since Linda’s son was already the sole beneficiary of her trust estate.

There was one odd moment, according to the lawyer’s testimony. During one of the interviews with Linda he sought to establish that she knew her family members and the relationships (a key part of the standard for determining testamentary capacity). When he asked Linda about her daughter, she said that she was sorry that they were not closer, that the daughter was on her third husband (in fact, her husband had just died), and that her daughter had suspected that she, Linda, had had an affair with the husband. When the lawyer expressed surprise and asked follow-up questions, Linda dismissed the idea and said she had gotten confused; that had been the plot of a biblical story she had read.

After trial, the probate judge ruled that Linda’s daughter had not proven that her mother lacked testamentary capacity OR that her brother exercised undue influence. The judge noted that the supporter of questioned documents has the burden of proof that the documents were executed properly. After that, though, the contestant of a will or trust has the burden of proving allegations of undue influence or lack of testamentary capacity. Linda’s daughter introduced testimony that there could have been undue influence, and that Linda’s capacity might be suspect — but her burden had been to prove that there was undue influence, or that Linda actually did not understand what she was signing.

The Minnesota Court of Appeals agreed, upholding the probate judge’s ruling. The appellate judges had the same understanding of the burden of proof, and saw no reason to set aside the probate judge’s findings. Linda’s last trust changes, and the transfer of her home to her son, were both upheld. In the Matter of the Smith Living Trust, August 20, 2012.

This Minnesota case is not the most eloquent on the subject, and of course it would have little or no precedential value in Arizona. The opinion is also “unpublished,” which means that the Minnesota Court of Appeals decided that it should not be cited as precedent even in Minnesota itself. Still, there are several reasons we like the decision and call attention to it here:

  • It is a nice exposition of the “burden of proof” issue, pointing out that many will and trust contests lose not because the proponent of the document prevails but because the contestant fails. Generally speaking, the person who challenges a will, trust, deed or other estate planning document has to overcome the presumption that the signer was competent and knew what he or she was doing.
  • It describes the sorts of things a good lawyer should do to protect the validity of documents he or she prepares. The lawyer met with Linda alone (we would have liked it even better if he had never met with Linda and her son together, but at least he dealt primarily with Linda directly), the deed change was prompted not by Linda’s son but by the lawyer himself, the lawyer could testify that he routinely took steps to assure that his clients are competent and aware of what they are doing.
  • On the other hand, the contestant had to rely, as is often the case, on inference and reconstruction. The contestant’s two expert witnesses had never met Linda, and their opinions were consequently guarded (they said that she was susceptible to undue influence, but they could not testify to the extent of any influence they might suspect).
  • Perhaps most importantly, the opinion makes clear that even someone with a long-standing diagnosis of dementia might still be able to sign estate planning documents. Testamentary capacity (the ability to sign a will) is not immediately compromised by virtue of a dementia diagnosis; Linda had carried her diagnosis for several years but still had the capacity to understand the nature of her trust change, to identify her family members and to describe what assets she wanted to pass to her son. The fact that she had one episode of fairly serious confusion did not prevent her from signing her new trust.
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Some Persistent Myths About Probate Exploded

JULY 2, 2012 VOLUME 19 NUMBER 25
It’s a slow week (with the Fourth of July holiday breaking it up on a Wednesday) and it’s too hot to think about actual controversies this week. So let’s take a minute to clear out some longstanding items we’ve been meaning to get around to. One thing we’ve meant to do for quite a while is to try to explode some common myths about legal issues — and particularly about the probate process. Here are some of the mistakes we most commonly hear from clients, questioners and (occasionally) professionals who have given not-so-good legal advice to our clients:

If you want to avoid probate, you should sign a will. Sorry, but that doesn’t help. Upon your death a probate proceeding will have to be initiated to transfer property owned in your (individual) name alone, with not beneficiary designation. Property that doesn’t meet that description will ordinarily not need to be subjected to probate. Signing a will does not change that answer in any particular. For that matter, merely signing a trust does not change the answer, either. The way a trust can help you avoid probate is by creating an entity which can become the owner of your property; that entity (the trust) does not “die” with you, and so assets transferred to its name should not be subject to the probate process. But it is the funding of the trust (that’s what lawyers call the process of retitling your assets to the trust’s name) that avoids probate.

There is one significant exception to the rule that everything in your name has to go through probate on your death. In most states there is some sort of simple affidavit process to bypass probate for small estates. The definition of “small” varies, though. In Arizona it is (for most purposes) $50,000; if you die with assets of over that $50,000 threshold in your name alone, with no beneficiary designation, your estate will be subjected to probate.

What do we mean by that “in your name alone, with no beneficiary designation” phrase? Only property that is not held as joint tenants with right of survivorship, community property with right of survivorship, or as POD (payable on death) or TOD (transfer on death). Be careful about those ownership options, however — avoiding probate may not be worth the problems you can create by changing ownership of property.

Probate avoidance is critically important for everyone. There are two ways in which this common belief is mistaken. First, there are a small number of circumstances in which probate may actually be beneficial. Second, for the greater majority of people who ought to be thinking of probate avoidance, the cost of implementing, managing and periodically reviewing probate avoidance plans is sometimes simply not worth incurring.

Let’s deal with the first one first. When is probate actually a good thing? There are very limited circumstances where it is a good idea — but those circumstances do sometimes appear. One is where the decedent had potential claims that might be asserted against her or his estate. A good illustration: a deceased professional (doctor, lawyer, architect, accountant, nurse) who might have an unknown malpractice claim. Filing a probate, and publishing notice of that probate in local newspapers, can help cut off those uncertain and potential claims. Note, though, that in Arizona and some other states you can actually publish notice to creditors without needing to open a probate, so that argument in favor of probate is further limited.

Here’s a better one: when you are managing the affairs of someone who has died, and you know there will be disputes about what you have done, you might prefer to have the entire process supervised by the court. That doesn’t come up very often, but sometimes it can be very beneficial to your peace of mind to know that everything you do has already been blessed by the judge who has the authority to review your administration, your bills and your proposed course of action.

Let’s deal with the other side of the coin: probate avoidance is often not worth the trouble or expense. With updated probate administration rules (like those in place in Arizona for nearly forty years now), the cost, hassle, and public disclosure associated with probate proceedings have all been dramatically reduced. The cost of preparing, funding and monitoring a probate-avoidance trust may simply be more than the cost of probate itself.

Lawyers try to talk clients out of doing probate avoidance in order to protect their future probate fees. Let’s imagine for just a moment that we lawyers are as venal as that assertion suggests. So here we are, with (say) twenty years of professional life ahead of us, and you come visit us at age 60. Which is better for us: (1) we collect, say, $2,000 from you right now in order to create a probate-avoidance trust plan, or (2) we collect $500 from you today and cross our fingers that you will die before you turn 80 so we can get another $2,500 in probate fees — for which, incidentally, we will have to do quite a lot of work. Do you begin to see just how insulted we are by this popular myth?

There are a number of other reasons we lawyers might actually be better off if you sign the probate-avoidance trust, incidentally. In five years, when you come to see us to make changes, amending your trust will probably generate slightly more in legal fees than creating a new will would be. And we do count on seeing you in five years — no matter how well your estate plan is crafted, you should assume that it needs to be reviewed at about that time. Your interests and ours are mostly in alignment: we both want to get the right estate plan for you, at the most appropriate cost, and not opt either for more expense than you need or less coverage than you are entitled to expect.

I don’t need to do estate planning because my family knows what I want. Really? How do they know? Have you had a big family meeting where you detailed your wishes to everyone at the same time, and gotten them to agree that they understand and will follow your wishes? Did their wives, husbands, children and grandchildren all agree? (Because, you realize, one or more of your immediate family members might actually die before you do.) Did it all get reduced to writing to make sure everyone remembers the agreement twenty years down the road? If you did all that, congratulations — and you’ll be one of the few people we consult with who appreciate how much simpler it actually is for you to sign a real estate plan. We are also, incidentally, trained to probe the things you didn’t think about — like what happens if your estate is significantly larger or smaller, or if the kinds of assets you own are quite different, at your death? What happens if you loan (or have loaned) money to one or more of your children? How about naming a back-up personal representative? Did you even realize they are called “personal representative” instead of the more common — and inaccurate — “executor”? All of that, and more, is what you get when you hire a professional — like, for example, us.

So what’s your favorite probate myth? Let us know, and maybe we’ll continue the explosions after the Fourth of July holiday.

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Lifetime Asset Transfers Voided Based on Agreement to Make Will

MAY 7, 2012 VOLUME 19 NUMBER 18
We have written about contracts to make (or not to revoke) a will before. The question comes up infrequently, and usually only in a handful of ways: can you and your spouse make an enforceable agreement that you will leave your respective estates to, say, your children no matter what? Yes, you can — at least in Arizona.

For John and Martha Lindford (not their real names), the question came up during their divorce proceedings. Martha wanted to make sure that the couple’s two children, John, Jr. and Paula, would receive at least a share of John’s estate when he died. When the couple negotiated a property division as part of the divorce, it included a provision that required each of them to “execute a Will leaving fifty percent (50%) of their respective estates in equal shares to the children and twenty-five percent (25%) to each other.”

Eleven years after the divorce was final they both agreed that it was time to modify their first arrangement. John and Martha both signed an amendment that eliminated the requirement that any share of each estate be left to the other, and instead provided that 75% of each ex-spouse’s estate would go to the two children. Six months after that modification, John remarried.

Five years after the second marriage John was diagnosed with cancer, and he began to seriously plan his estate. He amended signed a new will and modified his existing living trust; the new documents specifically left several business entities to his new wife, and provided that she would also receive an additional amount to bring her share of his estate up to 25% if it did not already amount to that much.

In the months after his cancer diagnosis, John also transferred several assets — the family home, several bank accounts and one of the businesses — to his second wife outright. When he died eighteen months after diagnosis, the effect had been to leave his second wife substantially more than one-quarter of his entire estate — although she had gotten a large part of that share by lifetime gifts, not in his will or the trust.

John, Jr., and Paula and first wife Martha filed a claim against John’s estate. They argued that the effect of his gifts and the terms of his will and trust violated the marital property agreement as it had been amended. His second wife acknowledged that she had gotten more than one-quarter of John’s assets, but argued that the agreement only required him to have a will leaving 75% to his children — and that lifetime transfers were not prohibited by the agreement.

After a two-day trial, an Arizona probate judge ruled that John’s actions violated the property settlement agreement with his first wife. The second wife was ordered to return all the assets she had received from John, so that a new division could be made and her share could be capped at 25%. She appealed the ruling.

The Arizona Court of Appeals agreed with the probate judge, and upheld his ruling. The appellate judges calculated that John had given about $2.5 million — amounting to more than one-third of his entire estate — to his second wife, and that he had done so in an attempt to defeat the agreement he had signed with his first wife. Estate of Lockett, April 26, 2012.

Should John’s and Martha’s original agreement, signed in the course of a divorce nearly two decades before John’s eventual death, effectively tie John’s hands indefinitely, and despite his later marriage, growth of his estate and changes in his family relationships? That question is larger than the legal question posed by his probate case. For good or ill, John and Martha had signed an agreement that compelled them each to leave three-quarters of their respective estates to their two children. That agreement might have turned out to have been unwise or constraining, but it was their agreement.

What formalities are required for such an agreement to be effective, and to bind the parties? Arizona law (and other states may have different provisions, so be careful about generalizing from Arizona’s example) requires a contract to make a will — or not to modify or revoke a will — to meet only very basic formal requirements. Paradoxically, it would seem that a contract which does not satisfy basic will formalities (e.g.: unwitnessed and not in the decedent’s handwriting) might qualify as an enforceable contract, thereby effectively creating a will.

What landmines and roadblocks might people considering such a contract (e.g.: the lawyers representing a couple in a divorce proceeding) reflect upon before signing? Well, the opinion in John’s probate case turned, among other things, on a letter he wrote before the agreement was signed. In that letter John reported that he intended to leave 75% of his “entire estate” to his first wife and children. When the second wife later argued that the agreement necessarily only covered his will and his probate estate (and therefore should exclude property he gave away before his death), both the probate judge and the appellate court pointed to his letter as proof that he meant the contract to include his entire estate. If that is true, it certainly would have been a good idea for the agreement to spell that out in more detail, and to cover the possibility of living trusts, lifetime transfers, creation of limited liability companies or family limited partnerships, and other arrangements.

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Will Rejected in Illinois but Approved by Indiana Courts

JANUARY 30, 2012 VOLUME 19 NUMBER 4
We are frequently surprised by how much trouble people cause for their families and heirs by not taking simple steps to properly plan for their estates. One thread that often recurs involves a fear (or perhaps disapproval) of lawyers, leading to failure to get good legal advice about planning, or about the execution of documents. This week we read about a different reaction, but with the same result. Florian T. Latek didn’t trust notaries.

Mr. Latek owned a small family farm in Indiana, but he lived (and owned real property) in Illinois. In 2009, with the help of a non-lawyer friend, he wrote a letter to the lawyer for a local charity he favored. The letter began “This is my will” and it proceeded to direct distribution of his entire estate to that charity and other recipients. Then he prepared four identical copies of the document, and signed each one.

Apparently Mr. Latek realized he should have the documents notarized, but he wrote that he did not trust notaries; instead, he included his Army serial number with the note that he hoped it would “be good for any legal matters.” Then he had some — but not all — of the copies witnessed by friends, and he secreted one copy (one that had no witnesses’ signatures) behind (not in) a small safe at the Indiana farm. Less than two months later, Mr. Latek died.

Probate proceedings were begun first in Illinois. The Illinois courts initially determined that Mr. Latek had no will; later, when the friend who had helped prepare the document got in touch with the charity named in the letters, the unwitnessed version was found at the farmhouse. When the charity’s lawyer attempted to introduce that will in the Illinois courts, it was initially rejected because it did not meet the Illinois requirements for a will to be valid. Later a copy with witnesses’ signatures was located, but the lawyer could not produce the witnesses to testify about the signing of the letter in the time given by the Illinois court to prove the validity of the will. The result: the Illinois property would pass according to the law of intestate succession, to Mr. Latek’s cousins (he had no children).

Meanwhile, the charity’s lawyer filed one of the letters with the Indiana courts for admission as Mr. Latek’s last will. If admitted, it would control the distribution of the family farm. The personal representative appointed in Illinois objected, arguing that Illinois had already decided that the will was invalid and the Indiana courts were bound by that finding.

The Indiana probate judge disagreed. The will was admitted to probate in Indiana, and the lawyer for the charity was appointed to administer Mr. Latek’s Indiana estate.

The personal representative appointed in Illinois appealed in Indiana. He argued that the U.S. Constitution requires each state to give “full faith and credit” to the rulings of sister states; once the Illinois courts had rejected Mr. Latek’s letter as a will, according to this argument, the Indiana courts were required to adopt the same ruling. The Indiana Court of Appeals, however, disagreed with that argument, and upheld the Indiana probate court’s admission of Mr. Latek’s letter as his last will. Matter of Latek, January 4, 2012.

What does Mr. Latek’s estate tell the rest of us? A number of things jump out:

  • It just makes sense to get help with setting up one’s estate plan. Assuming that it will all work out, that one’s Army serial number ought to prove one’s wishes, or that notaries are unreliable are not good ideas when dealing with the legal effect of documents. It is touching to note that Mr. Latek also told the charity’s lawyer that he should “tell the judge that we were classmates and do the very best you can,” but that just makes it harder to understand why he did not consult with a lawyer he obviously knew and trusted. Would the lawyer have charged him? Of course. But his wishes might have actually been carried out, rather than two different proceedings with two different results.
  • Mr. Latek looks like a classic example of the kind of person who ought to be considering a living trust. Rather than relying on two different probate courts to come to the same conclusion, he could have transferred both his Illinois real estate and his Indiana real estate — along with all his personal property — to a trust that would have been governed by the law of one state or the other. Would that have cost him something to set up? Yes. It would also have permitted his estate to be managed and distributed in a coherent and effective way, at (ultimately) lower cost than two separate probate proceedings in Illinois and Indiana. That would especially have proven to be true when the cost of one appellate case is factored in. If you own real property in two different states, you should particularly pay attention to the outcome for Mr. Latek’s estate.
  • State laws vary with regard to the formalities of wills. Some states require notarization OR two witnesses. Some states permit unwitnessed wills to be effective, provided that they are signed and in the signer’s handwriting. But here’s a piece of news for do-it-yourself fans: ALL U.S. states would treat a will as effective if it has both two witnesses and a notary. Yes, some states require the signer, the witnesses and the notary to all have been together at the signing — so it just makes sense to do it that way at a minimum.

 

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Patient With Dementia May Have Authored Valid Will

NOVEMBER 7, 2011 VOLUME 18 NUMBER 38
A woman has been diagnosed as suffering from dementia of the Alzheimer’s type, and she resides in an assisted living facility. She has short-term memory loss, is frequently forgetful and has difficulty with tasks like playing cards and operating her television set. Can she sign a new will?

That is the legal question posed by Clara Marsh’s will, which she wrote out in longhand and signed in 2006. Ms. Marsh died two years later, and her son and daughter ended up in a legal battle over whether the will was valid.

To be more precise, Ms. Marsh’s will actually presents two related but independent legal questions. First: was she competent to sign the will on the day she did? Second: if she was competent, did her son and daughter-in-law exert undue influence on her in connection with the new will?

A brief background is in order. Ms. Marsh had a 1996 will that left everything equally to her two children. When she moved into a condominium in 2003, she wrote to the children telling them that she intended to leave her new home to her son Richard. He had helped her with the purchase, and she explained to the children that she had placed her new home in joint tenancy (with right of survivorship) with Richard. She did not, however, sign a new will at that time.

In 2006 Ms. Marsh moved to an assisted living facility, and the condominium was sold. The proceeds from that sale then became a bone of contention between her son Richard and her daughter Elaine Grayson. Richard thought the proceeds should be put into an account in his and his mother’s names as joint tenants; Elaine insisted that the proceeds be placed in an account in Ms. Marsh’s name alone.

As the two siblings (and their respective spouses) debated how to handle the sale proceeds, Elaine’s husband John filed a guardianship petition. He alleged that Ms. Marsh had Alzheimer’s disease and dementia. Richard opposed the guardianship petition, and the relationship between the two couples deteriorated.

A month after the guardianship was filed Ms. Marsh prepared a one-paragraph will in her own handwriting. It said:

Because of all the legal problems Elaine and John are causing, I am afraid my final wishes will be ignored. To prevent this from happening, this is my new will: I leave everything to my son Richard and his wife Sam. I love you all very much.

This new will was witnessed by Ms. Marsh’s priest and the church secretary. She apparently did show it to Richard shortly after she signed it (he says he told her to “hide this someplace” and think it over), but she did not share it with Elaine or her husband John.

After Ms. Marsh’s death in 2008, Richard filed the handwritten will with the Ohio probate court. Elaine objected, arguing that (a) Ms. Marsh had been incompetent at the time of the will’s signing, and (b) Richard and his wife had exerted undue influence over Ms. Marsh to get her to disinherit Elaine. The probate court granted summary judgment to Richard, thereby dismissing the objections raised by Elaine.

The Ohio Court of Appeals agreed with the probate court on the first issue, but sent the dispute back to probate court for further proceedings regarding the undue influence count. Despite a diagnosis of dementia, and despite forgetfulness and confusion, the appellate court agreed that Ms. Marsh appeared to understand the things needed to make a valid will. She knew who her children (and in-laws) were, and even though she may not have known the precise nature of her assets she did understand what was involved with her estate. She knew she was making a will, and the effect of doing so. Summary judgment was appropriate on the question of her legal capacity to sign a will. Despite her limitations, despite her diagnosis and despite her living situation, she was able to make her new will.

But it still might be possible to show that she was subjected to undue influence, and the appellate court took pains to distinguish the two concepts. Undue influence, the court noted, is not the same as general influence — even “strong and controlling” influence. To be “undue,” influence must be so pervasive and effective as to result in the document reflecting the wishes of the influencer and not those of the signer. That is a high barrier for a will challenger to cross, but Elaine should be given a chance to introduce evidence to support her claim, ruled the Court of Appeals. In Re Estate of Marsh, October 28, 2011.

Other than the obvious (“don’t exercise undue influence over seniors”), what lessons can we take from Ms. Marsh’s story to guide our actions when working with seniors like her? We might submit a couple for your consideration:

  • Don’t forget that, while you and other family members dispute how best to handle the senior’s finances (or life), he or she may have some strong opinions and may actually feel affected by your decisions, arguments and tactics.
  • “Winning” may not be as important in family disputes as figuring out a way to get along. The cost of this particular dispute: thousands of dollars in legal fees, irreparable damage to family relationships and (and not least) psychic injury to the individual everyone was trying to protect.
  • Family disputes are sometimes about the best interests of a vulnerable family member, sometimes about dollars, sometimes about pride, and sometimes about control. In our professional experience, those last are often the most difficult ones to resolve.
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Marital Agreements and Death of One Spouse

OCTOBER 17, 2011 VOLUME 18 NUMBER 36
John and Marsha, contemplating marriage, want to enter into an agreement spelling out what will happen to their separate and community property if they later divorce, or when one of them dies. Or perhaps John and Marsha have been married for years, but are contemplating separation and maybe divorce — perhaps they want to divide their property interests now, just in case. Or maybe John and Marsha are perfectly happy in their marriage, but they both want to make sure that after one dies the survivor won’t change the ultimate recipients of their combined estate. Can John and Marsha agree to change the nature of their respective property rights and interests?

Yes, of course, they can. Most people are familiar with the concept of a premarital agreement (sometimes called a prenuptial agreement). Less familiar, but still fairly common, is the postnuptial agreement, entered into between spouses even after they have married. Even less common are contracts not to make a new will — John and Marsha can enter into an agreement that neither will change their will without both agreeing, and thereby try to prevent changes after one of them dies.

It is important to note that each of those types of agreements must be prepared in conformance with state law — and the requirements are different for each type of agreement and in each state. That can make it very confusing to figure out how to make an effective agreement. Depending on family circumstances, relative wealth of the spouses and other factors, it might well be worth exploring an agreement. One important rule that governs at least prenuptial and postnuptial agreements: the spouses should each have separate legal counsel (that is, each should have their own lawyer).

So what happens if a couple has signed an agreement and one spouse dies? Assuming the agreement is valid and enforceable, the deceased spouse’s heirs or estate should be able to get appropriate orders effecting the terms of the agreement. What happens if the couple’s situation changes? In most cases, nothing prevents them from changing the terms of their agreement.

Here’s a common scenario: John and Marsha sign an agreement about how they will treat their property (in this case it is not going to matter whether they sign before or after their marriage). The agreement provides that neither is entitled to receive anything from the other’s estate.

After the agreement is signed, John decides to leave a substantial sum of money (or a life insurance policy, or an IRA — it doesn’t matter which kind of asset) to Marsha anyway, and he changes his will, or makes her beneficiary. If John dies, can his other heirs — the children of his first marriage, perhaps — set aside the bequest to Marsha?

Assuming the documents are properly signed, and John was competent and not subjected to undue influence, the agreement probably will not prevent Marsha from inheriting. The agreement probably did not say any will provision or beneficiary designation would be invalid — it more likely just provided that John did not have to do anything to benefit Marsha, but probably does not prevent him from leaving her anything.

That’s not the situation in a recent Florida case, however. Jeffery and Andrea Steffens’ postnuptial agreement gives some insight into how tricky it can sometimes be to figure out what the agreement means.

In 2002 Jeffrey Steffens signed his will. He left most of his estate to his wife Andrea. Five years later, though, the marriage was shaky and Jeffrey and Andrea were considering separation or even divorce. They signed their postnuptial agreement in 2007, providing that each waived any right to receive any property from the other’s estate. Two years later, when Jeffrey died, the couple was still married.

Andrea filed Jeffrey’s 2002 will and asked the probate court to appoint her as personal representative. Jeffrey’s first wife, acting on behalf of his (and her) minor children, objected, and argued that Andrea had waived the right to receive under Jeffrey’s 2002 will.

The postnuptial agreement expressly authorized either spouse to leave the other more than money by will or beneficiary designation, but it also had each spouse waiving any right to claim property from the other’s estate. Since the will had been signed before the postnuptial agreement, and since Jeffrey did not sign a new will leaving anything to Andrea after signing the agreement, the probate court agreed with Jeffrey’s first wife.

The Florida Court of  Appeals upheld the probate court ruling. Consequently, Andrea received nothing from Jeffrey’s estate, and instead it went to the children of his first marriage. Steffens v. Evans, October 5, 2011.

Was that what Jeffrey Steffens wanted, or would have wanted? It may not be clear. Andrea sought court permission to produce evidence about what Jeffrey actually intended, but the probate judge (and the appellate court) denied her the opportunity, ruling that the agreement was unambiguous.

Assume for a moment that Jeffrey was hopeful about his relationship with Andrea, and wanted his 2002 will to be effective. What might he have done? One easy step would have been to simply “republish” his will — perhaps by signing a new copy of the exact same document, or even by signing a statement that he intended the will to remain effective. It would have been important that he have two witnesses sign at the same time. Just telling Andrea — or even a third person (even, for that matter, his first wife) — what he wanted would not have been sufficient.

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If You Were the Probate Judge, What Would You Decide?

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?

 

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Some More of Our Readers’ Questions Answered

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.

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Even With a Will the Probate Court May Need to Interpret

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.

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