Pennsylvania Fiduciary Litigation : Pennsylvania Trusts and Estates Lawyer & Expert Witness : Patti Spencer Law Firm : Fiduciary Litigation, Planning : Lancaster, Harrisburg, Philadelphia, Pennsylvania

Tracey Rich writes  for the National Law Journal about using a company's website against them.  Check out: Find Evidence on Your Opponent's Web Site.  Rich reports:

"Browsing a party's Web site will only show the information that the Web site owner currently wants visitors to see. Sometimes, the most valuable information about an opposing party is the information that has been changed or removed. Fortunately, there are ways to see older versions of Web pages. Pages that were changed recently can be viewed through Google's cache feature. Pages that were changed months or years ago may be available through the Internet Archive, also known as the Wayback Machine. Viewing these older versions of Web pages avoids the privacy risks discussed above: The copied pages are not on the company's Web site, so the company has no record of the researcher's activities. "

Read about software that provides "enhanced cookie management."  Its one thing to find the information - but will your opponent know that you know?

Thank you to Disciplinary Board of the Supreme Court of Pennsylvania July 2008 Attorney E-Newsletter for pointing out this useful article. 

Addendum:  If you are interested in digital evidence, check out this ALI-ABA course:  Digital Evidence: Generation, Admissibility and Weight Considerations

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The failure of IndyMac Bank has caused many bank depositors to ask questions about FDIC - the Federal Deposit Insurance Corporation. According to FDIC 10,000 IndyMac customers could lose as much as $500 million in uninsured deposits. FDIC will pay claims between $4 billion and $8 billion to insured depositors. FDIC representatives predict that there will be more bank failures, but “it will be within range of what we can handle.”

What will the FDIC pay?

All types of deposits are covered - checking, savings, money market deposit accounts, and certificates of deposit. The amount covered is the account balance plus accrued interest up to the date of the bank’s closing and up to the insured limit. FDIC does not cover stocks, bonds, mutual funds, life insurance or annuities.

The basic FDIC insurance amount is $100,000 per owner per insured bank. Accounts maintained in different categories of ownership may be separately insured up to $100,000 so that it is possible to have deposits of more than $100,000 at one insured bank and still be fully insured.

There are 8 ownership categories that may be separately insured at the same bank.  The following 8 categories summarize the information available in the FDIC's publication, Your Insured Deposits.:

1. Single Accounts. All single accounts owned by the same person at the same insured bank are added together, and the total is insured up to $100,000.

2. Certain Retirement Accounts. This category qualifies for $250,000 in insurance. It includes traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRA’s, Section 457 deferred compensation plan accounts, self-directed 401(k) plans, and self-directed defined contribution qualified plans, and self-directed Keogh plan accounts.

3. Joint Accounts. For joint accounts owned by people where each co-owner has equal rights to withdraw funds from the account, each co-owner’s share of every account that is jointly held at the same insured bank is added together with the co-owner’s other shares, and the total is insured up to $100,000. For example, a husband and wife could have $200,000 in a joint account and the deposit would be fully insured. Using different social security numbers or reordering the order of names on joint accounts has no effect on how much insurance is available.

4. Revocable Trust Accounts. An “informal” revocable trust account is a pay-on-death (POD) account, an “in trust for” (ITF) account, or a “Totten trust.” “Formal” revocable trusts are created by a trust document as part of an estate plan. All deposits that an owner has in both informal and formal revocable trusts are added together, and the insurance limit is applied to the total. When two insured banks merge, the deposits from the assumed bank are insured separately for 6 months. This period gives the depositor a chance to move the account if necessary.

The owner of a POD (or other “informal” trust) account is insured up to $100,000 for each beneficiary if the account is properly titled, the beneficiaries are identified by name on the deposit account records of the bank, and the beneficiary is a spouse, child, grandchild, parent or sibling. Adopted and step children, grandchildren, parents and siblings also qualify. Note that the owner or grantor does not count for this insurance.

5. Irrevocable Trust Accounts. If the bank account records disclose the trust relationship, the beneficiaries are identifiable from the bank’s records, and the amount of each beneficiary’s interest is not contingent, then the interest of a beneficiary of an irrevocable trust established by the same grantor and held at the same bank are added together and insured up to $100,000. For irrevocable trusts, beneficiaries do not have to be related to the grantor. But since these trusts often contain conditions or give trustees discretion to make distributions, coverage for these accounts is often limited to just $100,000.

6. Employee Benefit Plan Accounts. This insurance “passes through” the plan administrator to each participant’s share.

7. Corporation/Partnership/Unincorporated Association Accounts. Deposits owned by one of these entities are insured separately up to $100,000 and are insured separately from the personal accounts of the entity stockholders, partners or members. Accounts held in sole proprietorship accounts or DBA (doing business as) accounts are not included in this category but are added to the owners other single accounts.

8. Government Accounts. These are deposits of the United states, any state, county, municipality or political subdivision, or an Indian tribe. Each official custodian of time and savings deposits of a public unit is insured up to $100,000. Demand deposits are separately insured up to another $100,000. Pubic deposits maintained in out-of-state banks are limited to a maximum of $100,000 in coverage per official custodian.

Any recovery of uninsured amounts will depend on the sale of the banks assets and may take some time. Not all uninsured amounts are paid.

Deposits with each FDIC-insured bank are insured separately from any deposits at another insured bank. You can have $100,000 in as many banks as you wish!

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Neil Hendershot has an excellent post today on Pennsylvania's Filial Support Statute.  He quotes Professor Katherine Pearson's sidebar in the Summer 2008 issue of Adventures in Law and Aging, "“SO, WHAT IS THIS ‘FILIAL SUPPORT’ THING?” and provides many citations to useful resources.

This is a signifcant moral as well as legal issue.   What is your obligation to your parents?

A parable:

A frail old man went to live with his son, daughter-in-law, and young grandson. The old man's hands trembled, and he often spilled his food. He dropped a good piece of china, breaking it. Exasperated, the son and daughter-in-law made the old man wooden bowls and spoons and told him to eat in the kitchen while the rest of the family ate in the dining room. One day, the little boy was playing with wood scraps on the floor. "What are you making?" his parents asked. The boy answered proudly, "I am making wooden bowls and spoons for you, so that when you are old you can eat in the kitchen just like grandpa." The words so struck the parents that they were speechless. That evening the husband took Grandfather's hand and gently led him back to the family table. For the remainder of his days Grandfather ate every meal with the family and no one seemed to care any longer when a fork was dropped or the tablecloth got soiled.

History:

Filial responsibility is the personal obligation or duty that adult children have for protecting, caring for, and supporting their aging parents. Filial responsibility is recognized as a moral duty in most cultures and religions. Is it a legal duty? The duty of parental support is created by statute. Under ancient common-law, an adult child had no duty or obligation to contribute to the support of his parents. In England, a statute changed this in the 17th century. The Elizabethan Act of 1601 for the Relief of the Poor, provided that “[T]he father and grandfather, and the mother and grandmother, and the children of every poor, old, blind, lame and incompetent person, or other poor person not able to work, being of a sufficient ability, shall, at their own charges, relieve and maintain every such poor person.” These Elizabethan poor laws became the model for the United State legislation on the same subject.

In Pennsylvania:

In Pennsylvania, the first law imposing a duty of filial support is found in the Act of March 9, 1771, which required that children support their indigent parents if the children were of sufficient financial ability. This was obviously designed to relieve state and local authorities from the burden of supporting poor persons who had relatives of financial means who could care for them. The current formulation of the law has been on the books since 1937.

An example of its enforcement is the 1994 Pennsylvania Superior Court case, Savoy v. Savoy which involved an elderly parent whose reasonable care and maintenance expenses exceeded her monthly Social Security income. The Superior Court found that she was indigent and affirmed the lower court’s order directing her son to pay $125 per month directly to her medical care providers.

In July 2005, the Pennsylvania legislature passed an Act which, among other things, moved the filial support provision in the Pennsylvania statutes to a central position in its Domestic Relations Code. The law reads: “all of the following individuals have the responsibility to care for and maintain or financially assist an indigent person: (i) the spouse of the indigent person, (ii) the child of the indigent person, (iii) the parent of the indigent person.”

Little enforcement?

Historically, these filial responsibility laws have rarely been enforced. Some states that have these statutes on the books have never enforced them at all.

Why so little enforcement? One of the main reasons is that the government has taken over this traditionally familial responsibility. Since the 1960's federal law (U.S. Code Title 42 §1396a(a)(17)(D)) has barred the states from considering the financial responsibility of any individual (except a spouse) in determining the eligibility of an applicant or recipient of Medicaid or other poverty programs. In other words, even if family members have a legal duty to support a loved one, the federal government places the burden on taxpayers. In the words of Matthew Pakula, “The moral duty receded as society evolved, family life changed, and government created a variety of federal and state programs to meet the needs of the poor.”

As the pending financial crisis of how to pay for the care of the nation’s elderly looms, the issue of family responsibility is coming to the fore. Medicaid is the major funding source for long-term care. If a person consumes his financial assets and his income is low enough, he qualifies for Medicaid coverage. Medicaid paid $60 billion for long term care in 2002. An increasing number of persons are transferring their assets in order to qualify for Medicaid. Their children receive their assets, and the taxpayers pay the bill for their care. Medicaid has become an inheritance protection plan. Enforcement of filial responsibility statutes could bring a stop to this.

Ouch

Here is an idea that has been put forward: Allow states to consider an adult child able to pay toward care of an indigent parent unless the child files a public notice that they are not responsible for the debts of the parent, foreswears any inheritance rights and consents to the revocation of any trust set up for their benefit by the parent.

But maybe the carrot works better than the stick. Look at what Korea has done: Since 1999, children who live with and support the parents get more inheritance. A person who has supported his or her parent for a considerable time will get 50% more added to his or her share of inheritance. This is called the "filial piety inheritance system."

Honor thy father and mother. The Talmud teaches that `honor' means the son must supply his father with food and drink, provide him with clothes and footwear, and assist his coming in and going out of the house.

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It sounds like something out of a Jane Austen novel --  a lawsuit for breaking an engagement.   That's exactly what happened in Florida this week, when a woman was awarded $150,000 after suing her former fiancé for calling off their wedding.  RoseMary Shell she said she left a high-paying job in Pensacola primarily because her ex-fiance, Wayne Gibbs, made a promise to marry her, and she relied on that promise and gave up a lot of things, and she suffered significantly for it.  Gibbs broke off the engagement 3 days before the wedding by leaving a note in the bathroom.  Shell says the break-up was not because of her debts.

Here is Prof. Gerry Beyers' post on whether pre-engagement agreements are now needed.

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And stay out of trouble!

More and more agents are being asked to account for  their actions and more and more litigaiton is aimed at agents who abuse their powers, especially by making gifts to themseles.  Learn how to do it right and stay out of trouble.

When you agree to serve as attorney-in-fact under a Power of Attorney you become the Agent of the Principal. A Power of Attorney is a grant of authority. It authorizes and permits an Agent to act but does not require the agent to act. The Agent is not obligated to serve. However, an Agent may have a moral or other obligation to take on the responsibilities of agent, especially if the Principal was relying on him or her to do so. Once an Agent begins to act, he or she has a duty to act prudently. An Agent is held to the highest standards of good faith, fair dealing, and loyalty with respect to the principal. The Agent must always act in the best interest of the principal.

That fact that the Principal has named you as her agent does not mean that the Principal cannot act for herself. So long as the Principal is competent, he or she can do anything, including undoing something you may have done as Agent. Obviously, communication with the Principal is key. As long as the Principal is competent, his or her Power of Attorney can be revoked by written notice to you.

What should you do and not do when you are acting as an Agent?

1. Read the Power of Attorney in which you are appointed as agent. Not all Powers of
Attorney are alike. Some are General Powers of Attorney and grant full powers to do anything the Principal could do with regard to financial matters. Others are limited to specific actions. You can only do the things the document authorizes you to do. A Power of Attorney is not a license to take over the Principal's affairs and do things your way. As an Agent it is your duty to carry out the instructions and wishes of the Principal.

2. Sign the Power of Attorney, if required. For Powers of Attorney executed after April 11,
2000, the Agent must sign an oath in which he or she promises to fulfill his or her duties before the Agent can use the power.

3. Make several copies of the original Power of Attorney. Give a copy to each entity with
which you transact business on behalf of the Principal. Banks, brokerage houses, mutual funds, and insurance companies, sometimes insist that you use their own in-house Power of Attorney forms. Find out what forms these institutions require. Have your Principal sign these forms while he or she is still able.

4. Make a complete inventory or list of all of the Principal's assets and income sources.
You need to do this so that you know what you are responsible for, what resources are available, and so that you can keep property such as real estate and motor vehicles properly insured. If you have many assets to manage, consider a custodial account with a financial institution. As Agent, you are responsible for keeping the assets safe.

5. Sign as Agent. When signing documents as an agent, always make clear that you are signing on behalf of the principal. Sign your name and follow it with at least ", Agent" or better, the phrase, "as agent for _____________." Complete the phrase with the name of the principal. If you sign correctly, you will avoid personal liability. The exact wording is not important. Just make sure you indicate that you are signing oh behalf of your Principal, not for yourself. If you sign your name with no indication of your capacity as Agent for another you may be personally responsible.

6. Separation. Always keep the Principal's assets separate from your own. Do not
commingle them.

7. Keep good records of all your Principal's assets and income and all of your actions as
Agent. Keep copies of all statements and all transactions. Use a single checking account. The checks will act as receipts and the checkbook register as a running record of your expenditures.

8. Possible duties. In the course of managing the Principal's financial affairs, the Agent
may need to do any one or more of the following: pay the everyday expenses of the Principal and his or her family; buy, sell, maintain, pay taxes on, and mortgage real estate and other property; apply for and collect government benefits including Social Security, Medicare, Medical Assistance, or other government benefits, invest in stocks, bonds, and mutual funds; handle banking transactions; buy and sell insurance policies; file and pay the Principal's income taxes; operate a business; claim inheritances; transfer property to a trust the Principal created; handle litigation in which the Principal is a party; manage the Principal's retirement accounts.

9. Borrowing and Selling. You may not use the Principal's assets for yourself. Unless the
Power of Attorney document specifically says so, you may not borrow money from the Principal even if you are paying it back at the same or a higher interest rate you would pay a bank. You should not sell any of the Principal's property to yourself, your friends, or your relatives even at a fair price unless the Power of Attorney makes it clear that you can.

10. Gifts. You may make gifts only if the document specifically authorizes gifts. You are to
use the money for the Principal's benefit, and donations and gifts without being specifically authorized are not considered to be for the Principal's benefit. The document may permit limited gifts, that is limited in amount (such as the federal annual exclusion amount) and limited to a particular class of donees.

11. Communicate. Avoid misunderstandings by communicating with the Principal's family
members about how you are managing the principal's affairs.

12. Hire the help you need. An Agent may hire accountants, lawyers, brokers, investment
advisors, or other professionals to help with the agent's duties, but may never delegate his or her responsibility as agent. The reasonable costs of these services are expenses that should be paid from the Principal's assets.

13. Fees. Whether or not the Agent is entitled to a fee for his or her services depends on the
document and the circumstances. In most situations where a family members is the Agent and the Agent's duties are fairly simple, there is no compensation paid to the agent. If, however, the Agent is burdened with substantial responsibilities (such as running a business), payment may be appropriate. If the Principal wants to make sure the Agent is paid, the Powers of Attorney should establish the criteria for payment.

Small articles bought for use exclusively by the Principal such as clothing and toiletries can be paid out of pocket and reimbursed from the principal's funds later. Mutual use expenses, such as for gas and insurance for the Principal's car that the Agent also uses may only be reimbursed to the extent of the Principal's use.

Fees for services such as cleaning the Principal's house and yard, feeding the Principal, or doing the Principal's laundry are legitimate fees, but only if charged at a reasonable and customary rate. Charging twenty five dollars an hour for cleaning house is not reasonable unless you do it for a living for others and normally charge that amount. If you do the taxes for the Principal, running the numbers through a tax program would not entitle you to the same fee charged by a CPA unless you prepare taxes for a living.

Remember, you may have to justify your fees to a judge hour by hour and job by job, and if it appears you overcharged, you may find your fees cut back to minimum wage or eliminated altogether. When in doubt, undercharge and avoid that trip to his honor's woodshed.

14. Prohibitions. There are a few actions that an Agent is prohibited from doing. An Agent
may not sign a document stating that the principal has knowledge of certain facts. For example, if the Principal was a witness to a car accident, the Agent cannot sign an affidavit stating what the Principal saw or heard. An Agent may not vote in a public election on behalf of the Principal. An Agent may not make or revoke a will or codicil for the Principal. If the Principal is a trustee, executor, or other fiduciary the Agent is not permitted to act in those capacities.

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What a great idea!   Check out this site:  eDivvyUp   Its an online auction platform to use to equitably divide tangible personal property among beneficiaries.  

"eDivvyup is the leading online auction site for equitable property distribution. The concept was created to assist Estate Planners, Estate Executors or other individuals dealing with the equitable distribution of personal property. eDivvyup is focused on providing an easy-to-use solution to reduce the stress that accompanies the responsibilities of the property division of an estate. "
 

Our last post on this subject, Fighting over the Teapot, discussed the family feuds that can come up over dividng the personal belongings of the deceased.  Here is what the folks at eDivvyup say:

"eDivvyup is a new completely online application that conducts a family auction for the purpose of allowing family members to divvy up a loved one’s personal estate. Baby Boomers are at the point in their lives where their parent(s), are unfortunately going to pass away. Although this is the natural course of life, it can be a painful time.

While this new milestone for Baby Boomers is a point of significant loss, it has also proven to be a stressful time where in-fighting can occur among siblings over the prized personal possessions left behind. Family members who once shared rooms, laughter and dreams can end up enemies while fighting over a watch or a chair that once belonged to mom or dad."
 

If you try it in an estate you're settling, let us know how it works.

ADDED:

See this September 8, 2008  post:  Dividing Personal Prorerty  at WIlls Trust & Estates Prof Blog  

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How many families do you know who fought over the settlement of their Mom and Dad’s estate? In my experience, these family feuds are often over things - not money. Who gets the sterling flatware and who gets the drop-leaf table are points of contention that rip apart the family fabric.

Mom and Dad, why on earth do you think that children who fought over who gets the last cookie and who, as recently as last week, fought over who gets to stay in the beach house the third week in August will somehow miraculously change when you die? I have news for you. When you’re gone, they will fight worse than ever. Face up to it now.

Even in estates where there are no tax issues - let’s say the total value of the estate is less than $2 million - disputes over personal property can cause permanent schisms. Each child wants the teapot that was the center of every family dinner and embodiment of all memories of childhood love. The executor has to decide who gets it. What a job that is! The only way for an executor to escape with his skin is often to sell the piece - then everyone can be equally angry.

If tempers can flare over items of sentimental value, watch out when the monetary value of the disputed items rises or when the estate exceeds the federal exemption for estate tax.

Mom and Dad, don’t bring this problem on yourselves. You may have heard at bridge club that you shouldn’t mention these things in the will because then your heirs have to pay tax on them. Even worse, some estate planners might tell you that too. This is wrong. A decedent’s property owned at death is subject to estate and inheritance tax. It doesn’t matter whether the property is specifically mentioned in the will. What these “advisors” really mean is that if it isn’t mentioned in the will, it’s easier to cheat on the taxes by omitting to report the item. This is tax fraud, pure and simple. The same tax is due on a $10,000 bank account as on a $10,000 oriental rug, and it is absolutely fair and just that it be so.

Tempers may also rise when you or your Executor low-ball the value of valuable items, asking for “low” appraisals for “estate tax purposes” to try to reduce taxes. Then the property is divided up among the children using the appraised value. Surprise, surprise -- a child sells the breakfront that was part of his share for double the appraised value and his siblings call foul.

The IRS is not as dumb as you think. Most people who have valuable collectibles - jewelry, artwork, antiques - realize that they must be insured. Your average homeowners insurance policy doesn’t cover the loss of these items unless they are separately listed and valued. If you don’t report the jewelry all the IRS has to ask for is a copy of the homeowner’s policy. The IRS knows that if you live in a $300,000 house, have three expensive cars, belong to the Country Club and have a winter place in Florida then your household furnishings are worth more than a couple of thousand dollars.

If you’re afraid to talk to your kids about it, how do you think your executor (who may be one of the kids) is going to feel about it? The best thing you can do is make list of items and who should receive them. Allow your children to have input. You be the one to settle the disputes. Then make the list part of your will or at least make it a non-binding memorandum mentioned in your will.

If you can’t bear to talk about it, at least put a mechanism in your will for the division of the property. Maybe each child selects items in rotation. Who gets first choice is determined by lot.

Keep this in mind too: putting someone’s name on an item with a tag is legally meaningless. All property is passed under the will or under the intestacy statute if there is no will. It doesn’t matter if “Mom promised it to me” or if “Dad told me it would be mine.” If all the other beneficiaries agree, you may be ok. But if there is any dispute, such oral representations, tags, notes, and letters are completely without any legal effect.

Also, there are the people who say “Grandma gave it to me years ago, I just left it in her house until she died.” Even if this is true, the IRS takes the view that this is not a completed gift. A completed gift of personal property, like a corner cupboard, requires delivery. How can you prove delivery in this instance? Even if you can prove delivery by some ingenious means, to the IRS, it still looks like a transfer with a retained right to the use of the property for life and is still subject to tax in the estate.

If you have a $40,000 grand piano, by all means, dispose of it in your will. If you want your daughter to have it, bequeath it to her. The best gift you can give to your beneficiaries is to make a clear and incontestable disposition of all your property, including jewelry, furniture, collectibles and artwork. The last thing you want to bequeath to your children is a battle that will drive them away from mutually supporting each other.

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“The father buys, the son builds, the grandchild sells, and his son begs.” 
                                                                        - Scottish Proverb

 

There is an old saying, “shirtsleeves to shirtsleeves in three generations.” which means that the older generation started with nothing, worked hard and amassed wealth, and by the time their great-grandchildren are in charge, the family is back where they started, with nothing.

GenSpring Family Offices developed a game for its clients called “Shirtsleeves to Shirtsleeves" - its sort of like monopoly and is a way for wealthy parents to begin the conversation with children about money. Each player starts with $25 million. The object of the game is to get through the third generation and still have money left. ( I wonder if this is a learning experience for the children or for the parents?)

U.S. Trust, Bank of America Private Wealth Management sponsored a ground-breaking new study, released in June 2008, called"Protecting the Family Fortune." The study examines the wealth planning strategies and practices — and the behavioral traits that drive them — of ultra-affluent global family business owners.

The study found that while three-quarters of owners of family businesses valued at $300 million or more had succession plans, only 38% had actually implemented them. Further, the study showed that most individuals with succession plans in place are not focusing on tax mitigation issues (73%), even though nearly all participants (93%) reported a desire to lower the tax burden associated with transferring the business.

According to the study, almost nine out of 10 (89%) business owners were "very" or "extremely
concerned" about protecting the family's wealth, but nearly three quarters (73%) of them do not have asset protection plans in place.

Over three quarters (78%) of owners have personal estate plans. However, 89 percent have not updated them after a life-changing event such as marriage, birth or death rendering the plan obsolete.

More than half (54%) of the study participants lacking estate plans reported difficulty dealing with their own mortality, and one quarter (25%) cited a lack of time as reasons for not creating a plan.

"Most family business owners do have basic succession, trust and estate plans; however, too often, they are sitting on shelves gathering dust. Not only do these families need to act on implementing and updating their wealth planning strategies, they need more sophisticated strategies to better protect their wealth," said Mindy Rosenthal, managing director of Campden's North American Business and co-author of the research.

The U.S. Trust survey found that the majority of owners of ultra-high-net-worth family businesses have inadequate business succession, asset protection and estate planning. These families are highly successful in their businesses, but they are much less successful when it comes to passing their companies from one generation to the next. Only 15 percent of family-owned companies last past the second generation.

What’s wrong with this picture? These business owners are bright, articulate, talented, wealthy - why are they missing the boat? There are many hurdles to be overcome, most of them emotional. First, the business owner has to face his own mortality. The next hurdle is the fear of giving up control. Many people know they must do something to reduce taxes but fear giving control of assets to children. Most people want it both ways - they want to retain complete unfettered control over all their assets and also pay no estate taxes. There are techniques that permit transfer of value while retaining significant control and there are ways to protect funds. Learning about these approaches is part of the estate planning process.

Tough family decisions are another emotional stumbling block. Is there a divorce looming for one of the children? Is one of the grandchildren autistic? Will you or your spouse remarry? Who is going to control the family business after the parents are dead? Are any of the children capable of running it? Facing these issues can be so painful that they are avoided indefinitely. Then a real mess is left behind. Avoiding the problem doesn’t make it go away

Facing tough decisions like these is hard. The estate planning attorney can give you options and choices, but ultimately the tough decisions are yours to make. Do you really want to have someone else make these decisions for you after you are dead? Worse, do you want your family to be torn apart with the fighting over your estate?

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The goings on at Hershey Company are always of great local interest here in Central Pennsylvania. But of more than local interest is the litigation surrounding the management of the Milton Hershey School Trust and the attempt to sell the company.

Jonathan Klick of Florida State University College of Law and Robert H. Sitkoff of Harvard Law School have published  Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off in 108 Colum. L. Rev. 749 (2008). Here is the abstract:

"In July 2002 the trustees of the Milton Hershey School Trust announced a plan to diversify the Trust’s investment portfolio by selling the Trust’s controlling interest in the Hershey Company. The Company’s stock jumped from $62.50 to $78.30 on news of the proposed sale. But the Pennsylvania Attorney General, who was then running for governor, opposed the sale on the ground that it would harm the local community. Shortly after the Attorney General obtained a preliminary injunction, the trustees abandoned the sale and the Company’s stock dropped to $65.00. Using standard event study methodology, we find that the sale announcement was associated with a positive abnormal return of over 25% and that canceling the sale was followed by a negative abnormal return of nearly 12%. Our findings imply that instead of improving the welfare of the needy children who are the Trust’s main beneficiaries, the Attorney General’s intervention preserved charitable trust agency costs of roughly $850 million and foreclosed salutary portfolio diversification. Furthermore, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Company. Our analysis contributes to the literature of trust law by supplying the first empirical analysis of agency costs in the charitable trust form and by highlighting shortcomings in supervision of charities by the state attorneys general. We also contribute to the literature of corporate governance by measuring the change in the Company’s market value when the Trust exposed the Company to the market for corporate control. "

The authors are critical of the PA Attorney General's role:

 "Regarding trust law, our findings imply agency costs arising from the Trust’s charitable trust form on the order of $850 million, about 15% of the 2002 value of the Trust. Although the trustees controlled more than three-quarters of the shareholder votes in the Company, they failed
to impose a value-maximizing strategy on the Company’s managers. As we have seen, the market judged the Company as being $2.7 billion (or 25.5%) more valuable when the Company’s managers were expected to be subject to the market for corporate control instead of supervision by the trustees.

Moreover, instead of reducing the agency costs associated with the Trust’s charitable trust form, the Attorney General’s intervention made those agency costs permanent. Without any offsetting financial benefit to the Trust, the Attorney General forced the Trust to retain an asset that was worth $850 million more on the open market than in the hands of the trustees. While the sale’s detractors argued that the sale would hurt other stakeholders, such as the residents of Hershey and the Company’s employees, one wonders whether their gain offsets the preservation of such enormous agency costs. The $850 million in Trust assets destroyed translates roughly into $67,000 per resident of Hershey, or $62,000 per employee of the Company—plus the Trust’s exposure to uncompensated risk was continued."   (108 Colum. L. Rev. 749 (2008) pp. 815-816) 

Juan Antunez gives these cites for more background information:

"[t]he Hershey Power Play in Trusts & Estates Magazine by Pennsylvania attorney Christopher H. Gadsden, and Daniel Gross's piece in Slate entitled Hershey Barred, whose subtitle says it all: How Pennsylvania officials screwed poor kids out of $1 billion by stopping the sale of the candy-maker. "

Blogging credit goes to Juan Antunez who writes the Florida Probate & Trust Litigation Blog as well as to Professor Gerry W. Beyer's  Wills, Trusts & Estates Prof Blog.

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Appointment of a Legal Guardian


If an individual lacks the mental capacity necessary to make rational choices, there are two ways recognized by the law for proving a substitute decision maker: (1) the individual, while he was still competent, designated someone to be their agent, also known as an attorney-in-fact, by signing a power of attorney, or (2) the state, acting through the courts, may appoint a substitute decision maker known as a guardian (also sometimes called a “conservator”), for the incapacitated individual.

Power of Attorney

A "power of attorney" is a document which is signed by an individual (the "principal") appointing another person or persons (called the "attorney-in-fact" or "agent") to act for and on behalf of the principal. If the power of attorney authorizes the agent to act for the principal in almost all circumstances, it is called a "general" power of attorney. If the power of attorney is effective even if the principal is disabled or incompetent, it is called a "durable" power of attorney.

A person executing a durable general power of attorney naming a husband, wife, child, or other family member as attorney-in-fact authorizes that family member to manage his or her financial and personal affairs even after incapacity, avoiding the need for any guardianship.

Spouse Has No Legal Authority

Just because you are married does not give you legal authority over the property and person of your spouse. It is absolutely essential that you give your spouse, or some other person you trust, power of attorney. If your spouse becomes incapacitated and you don’t hold his or her power of attorney, you cannot sell the home you own jointly, cannot make withdrawals from your spouse’s IRA or other retirement plan, and cannot act for your spouse in any other legal capacity. If you don’t have a power of attorney, the only other alternative is a court appointed guardian.

Guardianship

The court procedure is termed a “guardianship” in Pennsylvania, In some other states, the procedure is referred to as a “conservatorship.” The individual for whom a guardian has been appointed is called a “ward.” Sometimes the ward is referred to as an “incapacitated person,” which has replaced the old-fashioned and offensive nomenclature of an “incompetent person.” Continue Reading...

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Trustees of Pennsylvania trusts have until November 6, 2008 to comply with the new notice requirements of the Pennsylvania Uniform Trust Act (PA UTA). This new legislation requires notice to beneficiaries and interested parties of the existence of trusts.

Until now, there have been many “secret” trusts in Pennsylvania. There are many trusts whose beneficiaries don’t know that the trust exists. A trustee had no duty to tell beneficiaries about the existence of the trust they managed or to provide any information to beneficiaries about the trust, its investments, or provisions.

Secret trusts were bad enough, but the situation was exacerbated because at the same time the Pennsylvania state law of trusts has always been “beneficiary enforced,” meaning that there is no independent review of the trustee’s actions by a court or any other entity. The only way a trustee can be criticized and brought to task is by an action brought by beneficiaries. If the beneficiaries don’t know the trust exists, then they obviously can’t review the trustees actions to determine if legal action is necessary. Who is looking over the trustee’s shoulder? Many times, no one. This had been a sorry state of affairs indeed.

The Act applies only to trusts that are funded and are not going to change. Assume a Settlor creates and funds a revocable trust. As long as the Settlor is alive and competent no notice is required. If Mom’s will creates a trust for her children, the Act requires no notice until after she dies since she can revoke the will at any time while she is still alive.

But, under the new Act, trustees are required to give notice when certain events occur. The law applies not only to new trusts but also to trusts created any time in the past that are now still in existence. Following is a brief summary of the notice provisions. If you are a trustee, we urge you to get legal counsel as there are many twists and turns to the law which cannot be addressed in this short column.

There are five triggering events for sending notices to “current beneficiaries.” A current beneficiairy is a person 18 years of age or older to or for whom income or principal of a trust must be distributed currently, or a person 25 years of age or older to or for whom income or principal of a trust may, in the trustee’s discretion, be distributed currently. Here are the events and the notice requirements:

1.     Death of a Settlor (the person who created the trust.). If the Settlor died before November 6, 2006 and if the trust was revocable (including testamentary trusts) give notice to current beneficiaries, the executor of Settlor’s estate, Settlor’s spouse and children (or to their guardians) by November 6, 2008. If the trust was irrevocable, give notice to current beneficiaries by November 6, 2008.

If the Settlor died on or after November 6, 2006 and if the trust was revocable (including testamentary trusts), give notice to current beneficiaries, the executor of Settler’s estate, Settler’s spouse and children (or to their guardians) within 30 days Trustee learns of the Settlor’s death. If the trust was irrevocable, give notice to current beneficiaires within 30 days Trustee learns of death.

2.    New Current Beneficiary A new beneficiary is entitled to notice. Examples would be a discretionary beneficiary who attains age 25, or a new beneficiary taking a deceased beneficiary’s share.

3.    Change of Trustee. This applies only to irrevocable trusts and then notice must be given to all current beneficiaries.

4.    Incapacity of Settlor. If the Settlor was adjudicated incapacitated before November 6, 2006, and the trust was revocable, then give notice to Settlor’s guardian by November 6, 2008. If the trust was irrevocable, give notice to current beneficiaries by November 6, 2008.

If the Settlor was adjudicated incapacitated after November 6, 2006 and the trust was revocable, then give notice to the Settlor’s guardian within 30 days after Trustee learns of adjudication. If the trust was irrevocable, give notice to current beneficiaries within 30 days after Trustee learns of adjudication

5.    Opt-in Beneficiaries. Give notice to any other beneficiary who has sent the Trustee a written request for notice.

What is in the notice?  Again, you should consult counsel to make sure the notice is crafted to reduce liability exposure. The notice must include the fact of the trust’s existence, the identity of the Settlor, the trustee’s name, address and telephone number, the recipient’s right to receive upon request a copy of the trust instrument, and the recipients’ right to receive upon request an annual written report of the trusts’ assets and their market values if feasible, the trust’s liabilities and the trust’s receipts and disbursements since the date of the last such report. This is big. Not only does the beneficiary learn there is a trust, but the beneficiary is entitled to a complete report of its transactions. And then the fun begins!

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Yesterday's New York Times carried an op-ed piece by Professor Ray D. Madoff  of Boston College Law School criticizing the tax policy that provides a charitable deduction, and therefore a government subsidy, for Leona Helmsley's  $8 billion trust for the care of dogs.  

Ms. Madoff points out:

" While some choose to contribute to broad public goals, the law does not require it. In recent years, charitable status has been recognized for organizations with purposes as idiosyncratic as promoting excellence in quilting and educating the public about Huey military aircraft."

                                                                                                                                             Leona Helmsley and Trouble

The policy issues are similar to those involved in the discussion of huge endowments, see our prior post on Harvard's tax exemption for its mega-endowment.

As a tax policy matter, the charitable deduction, for income tax as well as estate and gift tax, is intended to promote giving to charities to relie the burdens of government and to provide a public benefit.   As is often the case with tax incentives, taxpayers take the incentive ball and run with it - often to extreme ends.  Professor Madoof points out, quite rightly, in my opinion, that it is time to reassess this tax incentive when it results in $ 8 billion in assets being exempted from the estate tax:  

"In Mrs. Helmsley’s case, given that her fortune warranted an estate tax rate of 45 percent, her $8 billion donation for dogs is really a gift of $4.4 billion from her and $3.6 billion from you and me.
To put it in perspective, our contribution to Mrs. Helmsley’s cause equals approximately half of what we spend on Head Start, a program that benefits 900,000 children."

Blogging credit goes to Professor Paul Caron Associate Dean of Faculty, Charles Hartsock Professor of Law, University of Cincinnati College of Law.  Read his take here.  Blogging credit also to Linda L. Beale, Associate Professor at Wayne State University Law School.  Click here to read her post.

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Capacity to Contract 

Eccentricity or lack of prudence is not incapacity. In the words of Diana Romano:

“The lawyer’s task when considering the legal standard of competency is to be able effectively to distinguish foolish, socially deviant, risky, or simply “crazy” choices made competently from comparable choices made incompetently. “

People generally have the freedom to contract. Nevertheless, sometimes the law deems people unable to make decisions in their best interest. Minors, people with a mental disability, those who are in bankruptcy or people who have impaired judgment due to illness, disability, hypnosis, alcohol or drugs do not have capacity to contract.

In order to be bound by a contract, a person must have the legal ability to form a contract in the first place. This legal ability is called the capacity to contract. A person who is unable, due to age or mental impairment, to understand what she is doing when she signs a contract may lack capacity to contract.

If a person has a legal guardian and a court has made a determination that he or she is incapacitated, that person completely lacks the capacity to contract. Any contract signed by a person who has a legally appointed guardian is void. Many courts have held, however, that a person who is under legal guardianship may make a will if the person has testamentary capacity. The legal capacity required to make an enforceable contract is higher than that required to make a will.

A person may have a physical condition or illness which prevents him or her from performing at the levels expected of other persons of comparable age. If such a person cannot care for himself or herself, or acts in ways that are against his or her interests, such a person is entitled to the protection of the state to make sure they are not abused or exploited. Examples of physical conditions that can cause the loss of capacity to make contracts include paralysis, delirium, strokes, Huntington's disease, Alzheimer's disease, or dementia. Merely having the condition does not make the person incapacitated. The condition must have sufficiently affected the intellect so that the person cannot comprehend the nature and character of the transaction. If the person cannot comprehend the nature and character of his acts, any contracts or agreements such a person makes are voidable. Any contract may be ratified or disaffirmed by the person when he or she regains full capacity, or it can be ratified or disaffirmed by the person’s agent acting under a power of attorney. If the person’s condition is severe enough, the court may appoint a legal guardian.

Legal capacity is a flexible concept. A diagnosis of Alzheimer’s suggests diminished capacity, but you can not assume that a person is incompetent to contract because of such a diagnosis. Capacity must be viewed in terms of a person’s ability to perform a specific task. A person may be competent for some tasks, but lack capacity for others.

In the Pennsylvania case of Taylor v. Avi, 272 Pa. Super. 291 (1979) 1. 415 A.2d 894plaintiff sought to void a release she had signed after a car accident in which she sustained a head injury which left her with impaired memory, decreased ability to concentrate on such things as reading, and increased irritability. Citing a 1929 will case, Lawrence's Estate, 286 Pa. 58, 65, 132 A. 786, 789 (1926), the court said that “"[f]ailure of memory does not prove incapacity, unless it is total or so extended as to make incapacity practically certain. A testator may not be able at all times to recollect the names of persons or families of those with whom he has been intimately acquainted . . . and yet his understanding of the ordinary transactions of his life may be sound."

The standard announced by the court in Taylor is that mere weakness of intellect resulting
from sickness or old age is not legal grounds to set aside an executed contract if sufficient intelligence remains to comprehend the nature and character of the transaction, and no evidence of fraud, mutual mistake or undue influence is present.

Some cases are obvious. The family of an Oregon man with Alzheimer’s succeeded in voiding his contracts - he bought 7 cars from the same car dealer in one month.

What about drinking and substance abuse? While a person may consume enough alcohol and/or drugs to reduce or eliminate his or her ability to understand what he or she is doing, such conditions are self-induced. The law does not generally allow the intoxication or drugged state to be raised as an excuse. There are cases where a contract is voidable when an intoxicated party cannot understand the nature and consequences of the transaction and the other party is aware of the intoxication. Compulsive and chronic intoxication and abuse may constitute a mental illness. A sober party who takes advantage of a vulnerable drunk may be guilty of fraud or undue influence.

Continue Reading...

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Congratulations to Attorney Kendra McGuire on her win in In re: Weidner, 2007 WL 4555334.  The PA Supreme Court struck down the Superior Court's restrictions on agents acting under powers of attorney and limitations on power of attorney documents.  See Kendra's commentary and analysis by clicking here.  In her words:

"Attempts to interpret power of attorney documents in such limited ways have been litigated repeatedly with the Superior Court applying very limited interpretations of documents and the Supreme Court confirming time and time again that power of attorney documents must be interpreted broadly. Kudos to the Supreme Court for grasping the implications of this issue, as it effects all of those, and there are many, who act under these power of attorney documents."

The attorney-in-fact in this case changed the beneficiary on the principal's life insurance policy.  The clear holding of the Supreme Court is that the power of attorney document expressly incorporated the Powers of Attorney statute and the general language shows the principal's intent to empower the agent to do any or all of the things permitted by the statute, which includes engaging in insurance transactions.  Said the Court: "[W]e hold the power of attorney at issue was sufficient to empower [the agent] to change the beneficiary of the life insurance policy."  The case was remanded for consideration of two other issues:

• Should the trial court have considered only whether the power of attorney
  authorized the attorney-in-fact to change beneficiaries under insurance
  policies, and declined to consider the principal’s expressed intent regarding
  the particular beneficiary designation under the life insurance policy at
  issue, or whether a breach of fiduciary duty by the attorney-in-fact would
  void the change of beneficiary by the attorney-in-fact, even if the power of
  attorney authorized the type of transaction generally?
• Do the pleadings establish that the principal intended to authorize the
  attorney-in-fact to change the principal’s named beneficiary during the
  principal’s lifetime without any notice of the principal?

Do you think an agent can change the principal's beneficiaries?

 

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This excellent article published in The American Journal of Psychiatry (164:722-727, May 2007) gives advice on how to document your client's capacity. Check it out:

Assessment of Testamentary Capacity and Vulnerability to Undue Influence by Kenneth I. Shulman, M.D., F.R.C.P.C., Carole A. Cohen, M.D., F.R.C.P.C., Felice C. Kirsh, LL.B., Ian M. Hull, B.A., LL.B., and Pamela R. Champine, J.D., LL.M.

The authors state:

"We can expect challenges to testamentary capacity to increase during the coming decades as the number of older adults increases. The increasing complexity of modern families, where asset disposition is sensitive and complicated, may lead to feelings of rejection and injustice and result in more challenges. Finally, the high prevalence of cognitive impairment and dementia in older adults creates a fertile environment for challenges to wills. It therefore behooves psychiatrists and other experts to be aware of the legal, medical, and psychiatric issues that underlie the assessment of testamentary capacity and the role of undue influence—two concepts that are inextricably linked and often combined in legal challenges to wills. "

                                                                   *       *       *        *       *

"The assessment of testamentary capacity and its interrelationship with vulnerability to undue influence bring together the medical and legal domains. The psychiatric and medical experts’ role is primarily to help lawyers and the courts make the best determination of testamentary capacity and to assess the role of undue influence. As the number of older people increases in the coming years, clinicians will likely be involved in these determinations with increasing frequency. Research in this area is needed, and it should involve a collaboration of the medical and legal domains to provide clearer guidelines for the assessment of these complex issues in individual cases (26). Increased awareness within the legal profession of the importance of establishing testamentary capacity at the time of the execution of a will may lead to a greater demand for contemporaneous assessments and possibly avoid a court challenge at the time the will is brought for probate. Proposals to develop "lifetime capacity assessments" for this purpose merit exploration."

 You can download a pdf copy of the article for free.  Click here. 

 

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