I’m working on some materials for a CLE presentation entitled Remedies in Fiduciary Litigation. I’ll be giving it October 18, 2017 at the Lancaster Bar Association. Its also on the program for PBI’s Estate Law Institute in Philadelphia on November 14-15, 2017. Most of the equitable remedies available to beneficiaries whose interests have been harmed by an executor or trustee date back hundreds of years to the common law in England. But they don’t really do the job today. They are not adequate remedies. Here is an example:

What can a beneficiary do if she things the executor of the estate is paying too much in legal fees and taking too big of a commission as executor? The problem is how to get that issue before a court.  You will see that the deck is stacked against the objecting beneficiary. How does it work?

1. The executor must file an account for adjudication in order to get the matter before the court. There is no deadline for this. If it seems like it’s taking too long, and after being asked nicely the executor refuses, the beneficiary must go to court to compel an accounting. Unless the executor has a very good reason, usually the court will order him to file an account, in maybe three months.

2. One hopes the executor would file the account in the allotted three months. He may ask for an extension. He may just not file the account. In which case, back to court the beneficiary must go to have him held in contempt. (Remember all these trips to court require an attorney and legal fees, paid personally by the beneficiary.)

3. OK. We get an account filed for adjudication. Now the beneficiary, through her attorney, must enter objections to the accounting. This is a legal pleading and it is a "once and done" opportunity. The objections have to cover everything. If you forget something, or don’t mention it in the objections, you lose your rights to pursue it,

4. Next the executor, through his attorney, (who he is not paying personally but who is being paid out of the estate which further reduces what the beneficiary will get, right?) will answer the objections, presumably denying everything and saying he did no wrong.

5. Now the parties must prepare for litigation in earnest. They will seek discovery, that is production on both sides of relevant documents, records, and statements on which the accounting is based. Perhaps there will be depositions of the executor and others involved in the estate. There may be motions. It may be necessary for the beneficiary to hire an expert witness in order to prove that the executor breached his fiduciary duty. Again, the beneficiary is paying out of her own pocket for all of this,

6. Eventually, if the matter can’t be settled, it will be schedule for hearing – after months or years.

7. In the meantime, while all this is going on, the executor is holding all of the estate’s assets and has made no distribution. And he doesn’t have to. The executor is entitled to hold distributions until the approval of his account. That means the beneficiary can go for years, getting nothing from the state, and personally funding this litigation.

8. At the hearing thee will be testimony about what the executor did, what the attorney did, what is usual and customary to be received as compensation for each, citation of cases, and in many instances a duel of exert witnesses, one for the beneficiary saying the fees are excessive and one for the executor saying that they are not.

9. Time passes and then the judge will issue an-ruling and hopefully an opinion. In my experience, it is rare for fees to be significantly reduced. They may be chipped away at a bit, but tit is not very likely that they will be reduced enough to begin to cover the beneficiary’s attorneys fees

10. So is that beneficiary’s remedy adequate? I say ‘no.’

If you’re spending your childrens’ money, you are probably breaking the law.  Parents often overstep their authority when dealing with their children’s money as shown in this case:  Werner v. Werner 2016 PA Super 2210.

Mother was custodian for two accounts for the benefit of her daughters under the Pennsylvania Uniform Transfer to Minors Act, 20 Pa. C.S.A. §5301 et. seq. ("PUTMA"). The original amount in the accounts when they were created in the mid 1990’s was $125,000.   Mother withdrew the funds from the PUTMA accounts in 2010 when they were worth $252,688.90 and purchased a house which she titled in her name alone.  When the house was purchased the daughters were 15 and 16.

In 2013 the daughters began a proceeding against mother asking for an accounting and alleging that she had violated her duties as custodian by misappropriating the daughters’ property.  The daughters also sought payment of their attorneys’ fees.

The Orphans’ Court ruled that mother violated her duty as custodian under PUTMA and as damages the daughters were entitled to receive the entire proceeds from the sale of the house – $507,000.  The request for attorneys’ fees was denied.  The Superior Court upheld the Orphan’s Court.

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.

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."

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.

"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.

 

Philadelphia coin dealer Israel Switt died in 1990. In 2003, 13 years after Switt died, his daughter and grandsons drilled open a safe deposit box in Switt’s name and found 10 rare gold coins.

The coins were 1933 Saint-Gaudens double eagle $20 gold coins and were valued at approximately $80 million. The coin is named after its designer, the sculptor Augustus Saint-Gaudens. The Philadelphia Mint struck 445,500 double eagles at the height of the Great Depression, but it pulled them back weeks later as President Franklin D. Roosevelt ordered U.S. banks to abandon the gold standard. Not only were no more gold coins to be issued for circulation, people had to turn in the ones they had.

It became illegal for private citizens to own gold coins unless they clearly had a collectible value. This law was enacted during desperate times to prevent the hoarding of gold currency. Since there would be no more gold currency issued in the U.S., the Mint melted down the 1933 run of Gold Double Eagles and converted them to gold bullion bars by 1937.

Numismatic historians speculate that Philadelphia Mint cashier George McCann somehow sold or gave the coins to local coin dealer Israel Switt, our decedent. We may never know for certain how these coins left the Mint, but there is a general consensus among scholars that George McCann exchanged about 20 of the 1933 Double Eagles headed for melt down and replaced them with earlier dated Double Eagles.

Apparently Switt had 19 of the coins at one time, and one of them found its way to the collection of King Farouk of Egypt. King Farouk had legally exported his coin before the theft was discovered, and the Secret Service was unable to recover his specimen through diplomatic channels.

After King Farouk was deposed in 1952, his 1933 Double Eagle briefly appeared on the market, but when it became clear that U.S. authorities still wanted to confiscate it, it vanished again! More than 40 years later, British coin dealer Stephen Fenton showed up with it in New York, and the Secret Service finally seized it during a sting operation during which they purportedly negotiated to purchase the coin. Fenton fought a long legal battle during which the coin was stored in the Treasury Vaults at the World Trade Center. Only 2 months before the terrorist attacks of September 11, 2001, the litigation was settled and the famous coin was moved to Fort Knox. Fenton and the U.S. Mint compromised: the coin would be sold at auction, the proceeds to be split 50/50 between the Fenton and the Mint.

When Israel Switt’s children drilled open the safe deposit box, they found the coins in a gray paper Wanamaker’s department store bag. Switt’s daughter, Joan Langbord, gave the coins to the Philadelphia Mint to be authenticated and identified. What happened? The government seized the coins with no compensation to the estate.

The government said it was government property stolen in the 1930s from the U.S. Mint; and, therefore, they had a right to take it.

According to Adam Klasfeld writing for Courthouse News Service, in July 2011, the Langbords tried to convince a federal jury that the coins could have escaped the Mint legitimately through a "window of opportunity" between March 15 and April 5, 1933. The government’s star expert, David Tripp, acknowledged gold coins could have left the Mint during that window, but he added that there were no records that 1933 Double Eagles did.

Last week, Judge Legrome Davis of the Eastern District Court of Pennsylvania, stated that, "the coins in question were not lawfully removed from the United States Mint." He wrote further in his decision: "The Mint meticulously tracked the ’33 Double Eagles, and the records show that no (legal) transaction occurred… What’s more, this absence of a paper trail speaks to criminal intent. If whoever took or exchanged the coins thought he was doing no wrong, we would expect to see some sort of documentation reflecting the transaction, especially considering how carefully and methodically the Mint accounted for the ’33 Double Eagles."

The Langbord family will be filing an appeal to address the issue in the 3rd Circuit.

The decedent’s estate held contraband coins valued at $80 million. They were seized by the government. Sound familiar? It recalls the Rauschenberg "combine" work, "Canyon" valued at $65 million by the IRS for estate tax purposes even though it is illegal to possess or sell it.

To be consistent, shouldn’t the IRS be claiming estate tax on Israel Switt’s coins? And if they don’t, why should the Rauschenberg estate have to pay tax on artwork that is illegal to own or sell?

To be poor and independent is very nearly an impossibility.

                                                                    William Cobbett, Advice to Young Men, 1829

On May 21, 2012, the Supreme Court decided the case of Astrue v. Capato. This case may have consequences beyond the question the Court decided based on its deferral to state law.

Karen Capato, widow of Robert Capato, was artificially inseminated nine months after her husband’s death. She delivered twins and applied for Social Security survivors benefits for them.

The Social Security Administrator, Michael Astrue, declined to pay, citing Florida intestate law that 1) declares a marriage is over at the death of one of the spouses and 2) that posthumously conceived children are not intestate heirs.

Mrs. Capato pointed to 42 U.S.C.S. 402(d) which states that "[e]very child (as defined in section 416(e) of this title" of a deceased insured individual "shall be entitled to a child’s insurance benefit." Section 416(e), in turn, defines "child" to mean: "(1) the child or legally adopted child of an individual, (2) a stepchild . . . and (3) . . . the grandchild or stepgrandchild of an individual or his spouse . . ."

Mrs. Capato prevailed at the Third Circuit Court of Appeals, but the Commissioner appealed to the Supreme Court.

At that point, it looked like Mrs. Capato would prevail. But wait, there’s more. Section 416(h)(2)(A) further addresses the term "child." "In determining whether an applicant is the child or parent of [an] insured individual for purposes of this subchapter, the Commissioner of Social Security shall apply [the intestacy law of the insured individual’s domiciliary State]."

Thus, there are two definitions of "child" in the Code, one loosely defined and one that defers to state law. One might see another 5-4 decision brewing but the decision was for the Commissioner 9-0. Unanimous!

Reasoning was that even though state intestacy laws vary from state to state, it was better to let a few more people qualify for benefits and leave the decision out of the federal government’s hands than to restrict benefits but increase the workload of determining who is a child in every single case.

Also considered was Congress’s intention to "provide dependent members of a [wage earner’s] family with protection against the hardship occasioned by the loss of [the insured’s] earnings." Since posthumously conceived children never were dependent on those earnings, it stands to reason that their income should not be insured unless state law happens to include them.

In the end, the Court observed: "The SSA’s interpretation of the relevant provisions, adhered to without deviation for many decades, is at least reasonable; the agency’s reading is therefore entitled to this Court’s deference . . . "

The possible fallout is that if the Supreme Court decided to refer to state law in this case even through state intestacy laws vary, it might be obliged to defer to state laws that define a marriage.

What if the Defense of Marriage Act is repealed as the President has requested? Does Capato open the door for recognition of some same-sex marriages depending on individual state law? Remember, this was a 9-0 decision. Some, and maybe all, of the Justices had to be aware of that possibility.

We often see situations where one spouse dies and the surviving spouse changes his or her will to benefit different persons than were contemplated by the first spouse. A prime example would be a couple where the man had four children by his first marriage and five with his second wife. Husband and wife make wills leaving everything to each other and if there is no spouse surviving to the nine children in equal shares.

That is exactly what happened in the York County case of the Estate of Charlotte M. Bankert. But Mr. and Mrs. Bankert did something more, they signed an Irrevocable Will Agreement when they signed their wills. In it, they agreed not to change their wills without the consent of the other, and after the death of one spouse, the survivor agreed not to change his or her will at all. There was no specific language in the contract barring life-time transfers to anyone. Their lawyer pointed out that the survivor could circumvent the agreement by making gifts to some but not all of their children, but the husband insisted there be no discussion of gifts in the contract.

Then what happened? Mr. Bankert passed away. Some time after he died Mrs. Bankert started making gifts to her five children. A couple of months before she died, she made large transfers to her five children. When she passed, the estate was significantly diminished and the 1/9 shares to be distributed to the four stepchildren from Mr. Bankert’s first marriage were much smaller (about $800) than they would have been otherwise (about $25,000).

The four stepchildren who got reduced inheritances because of the gifts made by Mrs. Bankert to her own children objected, saying that the transfers during her life violated the Irrevocable Will Agreement. They said that it was clear from the documents that Mr. and Mrs. Bankert agreed to treat all nine children the same, and the transfers violated the agreement. The five children who got the life-time gifts from their mother said the contract was not breached because it did not specifically say that their mother could not make life-time transfers to them.

Here we have the intersection of the two worlds: wills and contracts. What happens when two people make a contract not to revoke a will that has prescribed distributions, and the survivor makes lifetime gifts not in keeping with the will intent?

In general, the law of wills is based on the premise that a testator can always change his or her mind and make a codicil or an entire new will at any time. The will doesn’t become irrevocable until the testator dies.

The laws of contracts is based on the premise that an agreement between two parties intended to create a legal obligation is binding. It can be enforced in court. There are penalties for breach of contract, both standard and any that are written into the contract. A party injured by a breach of contract has the right receive damages.

The Bankert case in York County is a case of first impression we learned about in a blog post by Attorney Paul Minnich, attorney for the five children. See www.palitigationblog.com Nov, 9, 2011.

The court held that the objecting four stepchildren were entitled to a hearing on the facts to determine whether or not the agreement was breached. The court said that in order to prevail in the absence of a specific restriction on lifetime transfers in the contract , the stepchildren would have to prove (1) that the transfer were made to "evade performance"of the contract, (2) violated the deceased spouse’s contract rights (3) the gifts were (a) unreasonable in amount or represented a significant part of the surviving spouse’s estate, or substantial gifts made to only some of the surviving spouse’s beneficiaries and (b) were received without cost or consideration, and (c) received by beneficiaries who knew the terms of the will agreement.

For those not keeping score, that adds up to five requirements, the third one being an either/or requirement. The first two require proof of state of mind (evasion and fraud), tough nuts to crack. The last one requires proof that the favored children knew the terms of the will contract, another difficult task.

The action went from Orphans’ Court to Civil Court back to Orphans’ Court where the Judge was asked to make a declaratory judgment and adopt the standards listed above as a standard in Pennsylvania.

Enough ambiguity about intent regarding gifts in the contract existed to justify the judge’s hearing testimony from the lawyer who wrote the wills and the contract. She testified that she explained that the surviving spouse could make lifetime gifts to just some of the beneficiaries, thus defeating the intent to treat all children alike. Mr. Bankert refused to write any restrictions on gifts into the contract.

On appeal, the five children prevailed. The Court held "that Mrs. Bankert had an unqualified right to dispose of her property through inter vivos gifts because it did not evade performance, and it was the intent of the parties not to limit such actions. The lack of any express provisions in the Agreement that clearly and unambiguously manifest an intent to limit the surviving spouse’s right to freely transfer the property during her lifetime, along with the testimony that clearly shows it was the intent of Mr. Bankert to exclude such a provision in the Agreement, the Court must find that Mrs. Bankert was not acting in fraud, against the Agreement, or against the wishes of Mr. Bankert."

How to avoid this mess? Listen to the lawyer when a gift clause is recommended, or forget a contract and put the assets in trust and have the trustee (a neutral party, not the wife or the children) distribute the assets during the surviving spouse’s lifetime and at the death of the surviving spouse. Of course a trustee needs to be paid, but you can pay now, or….