Delaware Supreme Court Emphatically Affirms Spendthrift Protection

The Supreme Court of Delaware, on appeal from the Court of Chancery has emphatically upheld spendthrift protection in trusts in the case of Mennen v. Fiduciary Trust International of Delaware. The Chancery Court opinion can be found here. The Supreme Court affirmed here . A judgment of $88 million was placed against a trust beneficiary, George Jeff Mennen ("Jeff"). The judgment arose from Jeff's alleged bad faith and willful misconduct as individual trustee of a trust established by his father for the benefit of his brother John. Section 3536 of Title 12 of the Delaware Code gives protection to beneficiaries of third-party spendthrift trusts.  The holders of the judgment in this case tried to get the court to recognize a public policy exception for tort claimants who are "persistent wrongdoers" that would allow them to recover from Jeff 's Trust. The answer was "no." The report of the Masterr, which was adopted by the Chancery Court , spells out the reasoning.

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No Deduction for Interest on Loan to Pay Estate Tax

In Koons v. Commissioner  Case No. 16-10646 (4/27/2017) the 11th Circuit denied the interest deduction for interest on loan to pay estate tax.

Decedent’s revocable trust included a 70% interest in an LLC which had over $200 million in liquid assets.  The estate’s liquid assets were insufficient to pay the estate tax.  The executors refused the offer of a distribution from the LLC to pay taxes and instead, borrowed $10,750,000 from the LLC at 9.5% interest to pay the tax.  No payment was due for 18 years and the principal and interest were scheduled to be repaid in 14 installments between August 2024 and February 2031.  No prepayments were permitted.

The projected interest was $71,419,497 which was taken as a deduction on the estate tax return.

The IRS claimed a $42,771,586.75 estate tax deficiency and a $15,899,463 generation-skipping tax deficiency.

The estate relied on the Estate of Graegin v. Commissioner, 56 T.C.M. (CCH) 387 (1988)  which permitted interest deductions, holding that  “expense incurred to prevent financial loss to an estate resulting forced sale of its assets to pay estate taxes are deductible administration expenses.”

In Koons, the 11th Circuit held that the interest deduction is properly denied if the estate can pay its tax liability using the liquid assets of an entity but elects to obtain a loan from the entity and then repay the loan using those same liquid assets.

Malpractice Suit Can't be Brought by Beneficiary in Unexecuted Document

 Estate of Agnew v. Ross, 152 A.3d 247

Individuals who are not named in an executed testamentary document do not have standing to bring a legal malpractice actions against testator’s attorney, as purported third-party beneficiaries.

In November 2003, the testator Robert Agnew retained defendant-appellant Daniel Ross, Esquire, to draft various estate planning documents.  Over the next several years, Ross drafted various amendments to both the Revocable Trust and the Will.  As of 2010, Agnew's Will bequeathed specific gifts of cash and property to selected friends and family members.  The remainder interest in the trust was to be distributed to Muhlenberg College, Temple University, Chestnut Hill College and Drexel University

In March 2010, Agnew was admitted into a hospice program.  During that summer, appellee Margaret Alzamora, contacted Ross and told him Agnew wanted to make changes to his estate plan.  She advised  Ross that the residue of Agnew's Revocable Trust was no longer to be distributed to the three colleges indicated in the 2007 Trust Amendment, but now was to be divided into five equal shares between appellees.

Ross drafted an amendment to the Revocable Trust (the 2010 Trust Amendment), which continued to provide for gifts in the amount of $250,000 to four colleges, but expressly provided that the residue of the assets of the Revocable Trust was to be distributed to appellees.  Ross also drafted a revised Will, which provided various monetary gifts to appellees and their children.

Agnew signed the new will but he did not sign the trust amendment.

To the extent the attorney has drafted testamentary documents, which have been fully executed by the testator, such documents are conclusive evidence the testator intended to benefit the named beneficiaries, and we hold individuals who are named only in unexecuted, consequently invalid documents — such as appellees with respect to the 2010 Trust Amendment — may not claim status as third-party beneficiaries of the legal contract between the testator and his attorney, and may not achieve a legacy through alternate means, such as a breach of contract action. The trial court correctly determined appellees' claims fail as a matter of law, and the Superior Court erred in reversing that determination.

Can an Agent Under a Power Of Attorney Create a Trust?

A Power of Attorney is a very important and useful tool. It is often used in elder care so that the named agent can manage the finances of the principal. While the agent under a power of attorney can do many things, some things are prohibited. For example, an agent under a power of attorney cannot make a will for the principal. Can the agent make a trust?

Under Pennsylvania law, PEF Code Section 5603 an agent's powers are limited as follows: "(b) Power to create a trust.--A power "to create a trust for my benefit" shall mean that the agent may execute a deed of trust, designating one or more persons (including the agent) as original or successor trustees and transfer to the trust any or all property owned by the principal as the agent may decide, subject to the following conditions: (1) The income and corpus of the trust shall either be distributable to the principal or to the guardian of his estate, or be applied for the principal's benefit, and upon the principal's death, any remaining balance of corpus and unexpended income of the trust shall be distributed to the deceased principal's estate. (2) The deed of trust may be amended or revoked at any time and from time to time, in whole or in part, by the principal or the agent, provided that any such amendment by the agent shall not include any provision which could not be included in the original deed. (c) Power to make additions to an existing trust.--A power "to make additions to an existing trust for my benefit" shall mean that the agent, at any time or times, may add any or all of the property owned by the principal to any trust in existence when the power was created, provided that the terms of such trust relating to the disposition of the income and corpus during the lifetime of the principal are the same as those set forth in subsection (b). The agent and the trust and its beneficiaries shall be answerable as equity and justice may require to the extent that an addition to a trust is inconsistent with prudent estate planning or financial management for the principal or with the known or probable intent of the principal with respect to disposition of his estate."

There is more and more litigation over the scope of the power that may be exercised by an agent under a power of attorney. Disputes arise over gifts, joint ownership and changes of beneficiary. Where trusts are concerned, though, the law is pretty clear.

Abuse of a Power of Attorney is a Crime

According to the American Bar Association Commission on Law and Aging, too many criminal justice professionals lack awareness in the role they can play in holding offenders accountable. An agent who violates the duty owed to the principal may have committee one or more crimes. The agent may have violated state and federal laws, including laws on

  • Exploitation
  • Embezzlement
  • Forgery
  • Fraud (e.g. credit card fraud, tax fraud, welfare fraud)
  • Larceny
  • Money Laundering
  • Theft

The National Center on Elder Abuse provides resources for social service agencies and the justice system. They help with response and prevention strategies for elder and vulnerable adult abuse. While mistreatment of the elderly and adults with disabilities have traditionally been viewed as family matters, criminal justice systems are adapting to better address elder abuse and neglect as a criminal issue.

 

AARP’s Public Policy Institute has produced a report written by Lori A. Stiegel and Ellen M. Klem of the ABA Commission on Law and Aging. The report explores the problem of the abuse of powers of attorney and how state legislatures can provide protection. The report can be downloaded here.

Also, see a National Center of Elder Abuse Fact Sheet: Durable Power of Attorney Abuse: It’s a Crime Too.

 

Here in Lancaster County, Pennsylvania, the Office of the District Attorney investigates and prosecutes elder abuse. In addition, abuse can be reported at the Lancaster County Office of Aging

New PA Orphans' Court Rules

The Pennsylvania Orphans’ Court Procedural Rules Committee published a proposal for new Orphans’ Court Rules in April 2013 with a comment period was open until June 13, 2013. After comments, some revisions were made. The Pennsylvania Supreme Court adopted these proposed new rules by Order dated December 1, 2015 with an effective date of September 1, 2016.

At the same time all local rules will be automatically repealed, except for local rules regarding adoption, guardianship and abortion control ACT proceedings. Any local rules that are desired by local courts or bar associations must be submitted to the Orphans Court Procedural Rules Committee no later than June 1, 2016 to determine that they are not inconsistent with these new proposed rules.

The Rules are intended to standardize procedures throughout the Commonwealth, as the Committee’s Report states:

"These new statewide O.C. Rules are intended to acoojmplish the following three objections:

(1) promote a standard statewide practice and reduce variations caused by reliance on local practice;

(2) provide clear procedures to practitioners and judges throughout the state, espeically those in counties without dedicated orphans’ court divisions; and

(3) harmonize orphans’ court proceedings with general civil practice to the extent possible."

The text of the new rules can be found here.

The Rules Committee is also working on revising the various orphans court forms such as petitions for adjudication to bring them up to date in light of these new rules, with the goal of having them being approved by the Supreme Court by the September 1, 2016 effective date.

Who Has Standing to Challenge the Actions of an Agent Under a Power of Attorney?

Recent changes were made to Pennsylvania's power of attorney statute by Act 95 which was enacted in 2014 and amended Title 20, Chapter 56 of the PEF Code. All of the Act's provisions have been effective since January 1, 2015.

PEF Code Section 5601.3(d)(1) provides that an agent shall not be required to disclose receipts, disbursements or transactions conducted on behalf of the principal unless ordered by the court, during the principal's lifetime requested by the principal, the principal's guardian, another fiduciary for the principal or a governmental agency, and after the death of the principal by the personal representative or a successor in interest to the principal's estate.

The statute does not require an agent to disclose receipts, disbursements or transactions to an heir of the principal or a beneficiary under the principal's will.

What to do? Petition to have a guardian appointed for the principal. The guardian clearly has standing. But this route has its own risks. What if the Petition is not granted and no guardian is appointed? Might the principal retaliate, for example, by disinheriting the petitioner?

We need more tools and more ways to hold agents accountable. The PA Supreme Court's Elder Law Task Force suggested additional people be given legal standing to challenge the actions of someone given power of attorney.  You can read the full report here. The task force noted that nearly half the states provide legal standing to others interested in the welfare of someone who has a power of attorney handling their affairs. It said that allowing more people to challenge a power of attorney's actions could protect people from abuse.

Wells Fargo Terminated as Trustee

Thank you Gary Beyer for your post entitled "Wells Fargo Terminated as Trustee."

Beyer writes:

"On Thursday, a Circuit Judge in Wisconsin terminated Wells Fargo Bank as trustee of the Chester Bible scholarship trust, furnishing control to the Baraboo Community Scholarship Corporation (BCSC). For over a year, BCSC and Wells Fargo have disputed over the administration of the trust, which since 1991 has provided generous scholarships to Baraboo High School graduates. Yet in recent years, Wells Fargo has raised its fees for administering the fund while decreasing scholarship awards.

The judge agreed that BCSC would better serve future scholarship recipients since it is a nonprofit operated by volunteers who would administer the trust for free. "It is no longer economic to continue the trust by Wells Fargo because it failed to administer the trust effectively," wrote Judge Patrick Taggart.

Because of the legal battle, Wells Fargo charged nearly $27,000 in legal and accounting fees to the trust in 2013. Judge Taggart denied Wells Fargo's request to have its attorneys' fees be paid by BCSC."

New Rule of Civil Procedure - Discovery of Expert Testimony

On July 10, 2014 the Supreme Court of Pennsylvania ordered the adoption of new Rule 4003.5 of the Pennsylvania Rules of Civil Procedure. The rule has been modified and the following clause (4) is added: (4) A party may not discover the communications between another party's attorney and any expert who is to be identified pursuant to subdivision (a)(1)(A) or from whom discovery is permitted under subdivision (a)(3) regardless of the form of the communications, except in circumstances that would warrant the disclosure of privileged communications under Pennsylvania law. This provision protects from discovery draft expert reports and any communications between another party's attorney and experts relating to such drafts.

Enforcement of Arbitration Clauses in Trusts

Ever since George Washington included arbitration provisions in his will, this idea has kicked around.  Washington's will contained this language:

"That all disputes (if unhappily they should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chose by the disputants each having the choice of one, and the third by those two - which three men thus chosen shall, unfettered by law or legal construction, declare their sense of the Testator's intention; and such decision is, to all intents and purposes, to be as binding as if it had been given in the Supreme Court of the United States."

John T. Brooks and Jena L. Levan writing for Wealth Management reviewed the state of the law in December 2013. See their article here.

On March 11, 2014 a California appellate court refused to enforce a mandatory arbitration provision. In the case of McArthur v. McArthur, No. A137133 (Cal.App. 1 Dist. Mar. 11, 2014)

Outsourcing Justice comments on the McArthur case as follows:

"The California appellate court also refused to enforce the arbitration provision and affirmed the denial of the motion to compel. The appellate court acknowledged the Texas and Arizona decisions involving arbitration clauses in trust agreements, as well as a few other decisions involving the trust fact pattern, and the appellate court reasoned that the plaintiff sister in this case was not attempting to accept benefits under the amended trust or enforce rights under the amended trust. Instead, the plaintiff sister argued the amended trust is invalid and should be set aside. As a result, the appellate court reasoned the plaintiff sister had not consented to the terms of the amended trust, and hence the plaintiff sister was not bound to arbitrate."

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Why not mediate trust and estate disputes?

"Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser – in fees, expenses and waste of time."

                                                                                --       Abraham Lincoln   1850

Lincoln’s words are doubly true today. Our society is beset with litigation - and all too often, there are no winners, except, perhaps, the lawyers. The time for Alternative Dispute Resolution (ADR), the private resolution of disputes outside of court, has come. There are two main forms of ADR - arbitration and mediation.

In arbitration the dispute is submitted to a third party, the arbitrator, who renders a decision after hearing arguments and reviewing evidence presented in a less formal and more expeditious fashion than in court. In binding arbitration, the parties are bound by the arbitrator’s decision. In non-binding arbitration, the parties can go to court for a trial if unsatisfied with their results.

In mediation an experienced neutral party attempts to assist the parties to air their concerns, understand each other’s point of view, and find a common ground. No decision is rendered; the mediator facilitates the parties’ arriving at their own solution.

Both litigation and arbitration seek a winner and a loser and are adversarial procedures - usually further alienating the parties from each other . Many professionals believe that only through mediation is it possible to resolve the dispute and at the same time achieve reconciliation - restoring and improving the relations between the parities.

Because of the possibility of reconciliation, mediation is an excellent approach for family disputes, including disputes over estates and inheritances.

Mediation in Estate Settlement

The death of a family members often sets the stage for conflict within the family. As John Gromala and David Gage point out in the November 2000 issue of Trusts and Estates: "Where estates are concerned, intricacies of fact and law can combine with emotion, misperceptions, and complicated family dynamics to form a highly combustible mixture. Mediation can put out the fires before they consume both money and family harmony."

The traditional method of settling disputes that arise in estate administration is the litigation process from the formal pleading and response, trial and appeal. This can be extremely time-consuming and astonishingly expensive. As a result of the litigation process, family relationships can be completely destroyed or left in tatters. Not only is the inheritance consumed by fees, but the family is consumed by anger and hatred.

Mediation has been widely used in divorce and child custody disputes but few jurisdictions look to mediation in disputes involving wills and trusts. The time has come to give these disputants the same chance at resolving issues and maintaining family relationships. There is nothing to stop disputants from seeking mediation privately. Parties to any dispute can seek mediation. Lawyers need to be alerted to the possibility of seeking this kind of resolution and trained away from the immediate reaction of pursuing claims in court. (A friend remarked that it takes 10 times longer to train a lawyer to be a mediator than to train anyone else; the adversarial approach must be unlearned.)

We hope that the courts will move toward recommending, or even requiring mediation before setting hearing dates.

In mediation the parties control the process, and there is no risk of an adverse decision, since the mediator does not render a decision or judgement. Nothing said during the mediation can be used as evidence later at trial. The process is completely confidential and solutions can be arrived at that could not be ordered by the court as legal or equitable remedies - for example, an opportunity to air grievances or receive and apology.

Mediation in Estate Planning

Estate planning aims at the transfer of wealth from one generation to another in a way which minimizes taxes and maximizes economic gain. At bottom, it usually involves parents making gifts to their children, grandchildren or charities. The problem is that while many clients spend hours with attorneys, accountants and financial advisors crafting an estate plan, they spend no time with their intended beneficiaries explaining what they have done and why. After Mom and Dad are gone, the family acrimony begins - brother sues brother and sisters stop talking to one another for years.

Since your typical (dysfunctional) family has trouble communicating about day to day activities such as what to have for dinner, perhaps it is no surprise that the typical family cannot and does not communicate about dying, property division, and settling estates. Nevertheless, communicating the plan and addressing the issues before death is the best gift you can give your beneficiaries.

It is not bad manners to talk about the estate plan, and it will not make matters worse. What makes matters worse is, leaving the children to fight it out after Mom and Dad are both gone. If you are afraid to tell your kids what your estate plan is you are leaving them a legacy of acrimony. A mediator will recognize that it is up to Mom and Dad what they do with their assets and that they want all family members to feel as good as possible about the estate plan and not feel cheated or disappointed. Bringing all the parties together can ensure that hidden agendas are brought out into the open, get the most buy-in from the parties and get the best protection against the plan being contested.

Mediation is not family therapy. It is a short-term process aimed at resolving a dispute while attempting to preserve family relationships. It depends on opening lines of communication and coming up with solutions.

Mediation can also be used to discuss long term care issues with parents, to determine how siblings can equitably share the responsibility of helping aging parents, and how to deal with caregivers and medical personnel.

As far as the estate planning documents themselves go, it is entirely possible to include provisions that require the parties to submit disputes to arbitration rather than resort to the courts. Many arbitration texts point out that George Washington’s will contained such a provision:

"That all disputes (if unhappily they should arise) shall be decided by three impartial and intelligent men, known for their probity and good understanding; two to be chose by the disputants each having the choice of one, and the third by those two - which three men thus chosen shall, unfettered by law or legal construction, declare their sense of the Testator’s intention; and such decision is, to all intents and purposes, to be as binding as if it had been given in the Supreme Court of the United States."

Much is at risk in estate planning, and the most important is not estate taxes. The most important factors are the beneficiaries, their lives and their relationships - in other words, your family.

Decanting News - Decant Without a Statute

On July 29, 2013, in the case of Morse v. Kraft the Supreme Judicial Court of Massachusetts held that the Trustee of an irrevocable trust in which the Trustees had full discretion to distribute trust principal "for the benefit of" the beneficiary, could, without consent or court approval, distribute the assets to a different trust with the same effective discretionary terms but modified in several ways, the key difference being the ability of the beneficiaries to serve as trustees, a power that was prohibited in the original trust.

The case was brought by the sons of New England Patriots owner Robert Kraft to modify a thirty-year old trust.  It will have far reaching impact.

The Facts:

In 1982, Plaintiff established the 1982 Trust, and four separate subtrusts therein, for the four sons of the Krafts. In 2012, Plaintiff, who had served as the sole and disinterested trustee of the trust and subtrusts, proposed to transfer all of the property of the subtrusts into new subtrusts established in accordance with the terms of a new master trust for the benefit of the Kraft sons. Plaintiff asked the Supreme Court to interpret the 1982 Trust to determine whether it authorized distributions to the new trust without the consent or approval of any beneficiary or court. The Supreme Court concluded that it did, holding that the terms of the 1982 Trust authorized Plaintiff to distribute the trust property in further trust for the benefit of the beneficiaries of the 1982 Trust without their consent or court approval.

Read the case here: 

How about Pennsylvania?

 

Return of the Legally Dead

 

The reappearance of Brenda Heist in May after being declared legally dead has brought me all sorts of questions.

The Pennsylvania Statute that governs the property of absentees and persons presumed dead is at 50 Pa. Cons. Stat §§5701 through 5706. Generally, if a person disappears and is absent from his place of residence without being heard of after diligent inquiry, the county court may make a finding and decree that the absentee is dead and of the date of his death.

There are notice requirements. The matter must be advertised in a newspaper of general circulation in the county of the absentee's last known residence and in the legal journal once each week for four successive weeks. Notice includes the hearing, which must be at least two weeks after the last appearance of the advertisement, when evidence will be heard concerning the alleged absence, including the circumstances and duration thereof.

An unexplained absence for seven years may be sufficient ground for finding that the absentee died seven years after he was last heard of. The seven years gives rise to a presumption but it is important to note that the court may declare an absentee dead before the expiration of 7 years. Conversely, the presumption can be overcome and a 7 year absence may not justify a finding that the absentee died. Evidence that the absent person was a fugitive from justice, had a bad relationship, was having money troubles, or had no family ties or connection to the community can be reasons not to presume death.

The fact that an absentee was exposed to a specific peril of death may be sufficient ground for finding that he died less than seven years after he was last heard of. An example would be an airplane crash. Passengers and crew of the Titanic who were not rescued by the RMS Carpathia were declared legally dead soon after Carpathia arrived at New York City.

In 2002, the statute was amended to provide that the terrorist attacks of September 11, 2001 are specific perils within the meaning of the law and a court would be justified to immediately determine that the presumed decedent died on September 11, 2001. Also, for persons presumed dead on September 11, 2001, the requirements of notice to the absentee and of the need to post a refunding bond for property distribution are eliminated.

 

What happens to the presumed decedent’s property?

The decedent’s property is administered by an executor of the will or administrator of the estate just as in the case of other decedents. However, the executor or administrator make not make any distributions to beneficiaries except by a court decree. The court, in awarding distribution, must require that a refunding bond, with or without security and in such form and amount as the court shall direct. The bond shall be conditioned that, if it shall later be established that the absentee was in fact alive at the time of distribution, the distributee will return the property to the preseumed decedednt, or if it has been disposed of, will make restitution

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Federal Jurisdiction - Probate Exception

Recommended reading: Stripping Away the Mystery of the Probate Exception   By John T. Brooks and Samantha E. Weissbluth

Federal court can hear breach of fiduciary duty claim against trustees.

We looked at this issue before in our post Make a Federal Case Out of It.

Midwest City estate planner sentenced to 10 years in prison for role in Ponzi scheme

I always say 99% of the lawyers give the rest of us a bad name.

Brianna Bailey writes for News OK:

"A federal judge has sentenced a Midwest City man who conned seniors out of their savings to serve nearly 10 years in prison and pay $4.6 million in restitution for his role in the Ponzi scheme.

Joe Don Johnson, 43, was an estate planner who drew up wills for his elder clients. He would convince the seniors to invest their life savings with the now-defunct Oklahoma City-based company Global West Funding Ltd., operated by Brian McKye.

Johnson promised his clients returns as high as 20 percent, but the bulk of the money went to pay off earlier investors, commissions to Johnson and other salesmen, as well as McKye's personal expenses, according to court documents."

Read rest of storyhere.