Probate Litigation in the News

 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.

 

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

Continue Reading Return of the Legally Dead

In May 2012, we wrote about the final settlement of Brooke Astor’s Estate.  Her son, Anthony Marshall,  was sentenced in December 2009 to one to three years in prison.  He was convicted of 13 felonies and one misdemeanor. 

Now – that would be December 2012 – 3 years after the sentencing, his lawyer is arguing he shouldn’t have to go to prison.

So after 3 years he’s still not in jail.  I guess there really are different laws for the rich.

Stephen Rex Brown writing for The Daily News:

"THE DISGRACED son of Brooke Astor pleaded for mercy in appeals court Thursday, arguing he didn’t deserve to die behind bars.

Anthony Marshall, who was convicted in 2009 of taking advantage of his mother’s dementia and plundering millions from her $200 million fortune, watched from a wheelchair as his lawyers argued prison amounted to a death sentence.

Lawyer John Cuti noted Marshall, 88, suffered a ministroke during his trial and had already paid back $12 million.

“You want to send this man to prison, after he’s already paid back the money, so he can die there?” Cuti asked.

Prosecutors countered Marshall should serve his sentence of one to three years as a sign the state will stick up for the mentally fragile.

“Society will understand (when) we defend our most vulnerable citizens,” prosecutor Gina Mignola said. “This was a very long and concerted effort to loot his mother’s estate.”

Astor, the grande dame of New York society, died in 2007 at 105.

A ruling is expected next year."

 

 

 

The executor of the estate of a Houston man who died in September 2010 filed a negligence and negligent misrepresentation suit against Baker Botts on Oct. 10, alleging the firm made an estate-planning error that will cost the estate more than $1 million.

Read more here.

The errror stems from failing to file a gift tax reutrn and paying gift tax.

 

We wrote about Brooke Astor’s Estate and the litigation involving her son and lawyer.  A perfect example of financial abuse of the elderly. 

Philip M. Bernstein of The New York Probate Litigation Blog reports on the final settlement here.  Read the New York Times report here.

 "Mrs. Astor’s storybook life took a nasty turn in her later years, when Philip Marshall accused his father of mistreating his grandmother in her dementia and sought to have a guardian appointed for her. The allegations that Mrs. Astor’s son had left her living in squalor in her multimillion-dollar Park Avenue apartment led to a trial that shocked a social stratosphere in which Mrs. Astor rubbed elbows with the likes of Henry A. Kissinger, David Rockefeller and Annette de la Renta. But a court evaluator found no validity to the abuse allegations.

Following months of testimony, Mr. Marshall and Mr. Morrissey were convicted of most of the counts they faced. The most serious conviction for Mr. Marshall was for first-degree grand larceny for giving himself a retroactive pay raise of $1 million for managing his mother’s finances. "  NYT

 

 "Power tends to corrupt, and absolute power corrupts absolutely."

                                                                                            – Baron Acton

 Financial abuse of the elderly is a crime. Michael Ostrowski, a 42-year-old from New York, was appointed as temporary guardian for his grandfather who has dementia. While serving as guardian, he misappropriated over $300,000 and lied to the probate court (we call that perjury) and insurance companies. He took $250,000 from his grandfather’s bank account and did not file a 2006 federal income tax return.

This is an Al Capone story. Remember the notorious gangster in the Prohibition-Era Chicago? He is perhaps most infamous for his alleged involvement in the St. Valentine’s Day Massacre in which 7 victims were murdered, not to mention scores of other crimes. What did he go to jail for? Income tax evasion.

The thieving grandson in our story was charged by the U.S. attorney with mail fraud, conspiracy, interstate transportation of stolen property, receipt, possession, concealment and disposition of stolen property having crossed a state boundary; engaging in a monetary transaction in property derived from specified unlawful activity; and failure to file an income tax return. He pleaded guilty to all these items.

Michael was sentenced to two years in prison followed by 3 years of supervised release. He was ordered to pay restitution in the amount of $100,459 to MassHealth and $85,751 to the IRS. The Judge also ordered forfeiture of $179,000 and the things he had purchased with his ill-gotten gains: a Sony Bravia flat-panel television, a 39mm semi-automatic assault rifle; and a $37,000 GMC Sierra pickup truck.

Since the grandfather was in Massachusetts, and Ostrowski took the stolen money back to New York where he lived, the diversity of jurisdictions made it eligible to be a federal matter. Not filing an income tax return is also a federal charge. So the fed’s involvement was necessary. But there is no mention of state involvement for the mismanagement, amounting to fraud, by means of the Power of Attorney.

Financial abuse of the elderly is a huge problem. The National Center on Elder Abuse (NCEA) published a report and recommendations entitled "Forgotten Victims of Elder Financial Crime and Abuse." They describe many challenges. "Many elderly victims fail to report crimes or abuse to the police or even to their own families out of shame or embarrassment."

Law enforcement personnel sometimes fail to recognize crimes when they see them. When abuse involves the misuse of legal documents, (e.g. the forging of wills or powers of attorney, or inducing mentally incapacitated persons to transfer titles of their homes), it is often viewed as a "civil matter." Investigators may be well into cases before it occurs to them to find out if victims are being over medicated or under-medicated (homicide cases involving victims who are poisoned or starved for financial gain are becoming increasingly common).

Unless these patterns are recognized, victims may be dead and cremated before the investigator makes the connection."

Financial crimes are often very difficult to prove. Important documents may have been destroyed.. Many victims do not make good witnesses owing to the same dementia that rendered them susceptible to abuse in the first place.

Investigating and prosecuting financial crimes is very time-consuming and labor intensive. These property crimes are often viewed as "less serious" than violent crime.

What is the answer? Some commentators suggest that there needs to be more up-front monitoring, instead of punishing people after the fact. The durable power of attorney is popular technique for incapacity planning. But it comes with grave danger of abuse. However, the use of a power of attorney allows complete control of the principal’s assets. Special care should be given to granting the agent the authority to make gifts.

Here are some steps that could help: 1) require registration of powers of attorney in the same jurisdiction in which a guardianship action would be brought so there is notice of who is acting for whom; 2) once the principal becomes incapacitated, require the agent to file an annual accounting; 3) require an agent to produce an accounting on the death of the principal. The flexibility of the durable power of attorney and its usefulness in avoiding guardianship are very important. But the power is so broad and sweeping that abuse is rampant. What other fiduciary is permitted to act without providing accountings?

True, any of these steps make the duties of the honest agent more burdensome. It is ever so. Good people do not need laws to tell them to act responsibly. The law needs to prevent the bad people from abusing the elderly.

 

"A verbal contract isn’t worth the paper it’s printed on."

                                                                                                            Samuel Goldwyn 

Kelly Phillips Erb a/k/a Tax Girl drolly described this recent Tax Court case on her blog for Forbes. Mr. Seward was a regular customer at the Waffle House in Grand Bay, Alabama. From time to time he would buy lottery tickets in Florida that he would share with friends and give as tips to employees at the Waffle House. (Lotteries are illegal in Alabama.) Waffle House waitress Tonda Lynn Dickerson received a lottery ticket from Mr. Seward as a tip. Tonda Lynn’s ticket from Mr. Seward won $10 million (paid over 30 years or $5 million as a lump sum) in the Florida lottery.

The other Waffle House employees claimed there was a standing verbal agreement to share any lottery winnings among them; and further, it was agreed that the winner would buy Mr. Seward a new pickup truck.

That’s not the way Tonda remembered it. She didn’t share her winnings with her co-workers. Her co-workers and Mr. Seward sued her for breach of contract and fraud. The good news for the co-workers was that the court held that there was an oral agreement to share winnings. The bad news was that, under Alabama law, contracts related to gambling (illegal in Alabama and including playing in lotteries) are unenforceable. Ouch. Your typical Pyrrhic victory – winning the battle and losing the war.

Meanwhile, back at the ranch, Tonda Lynn was doing some tax planning for her winnings. She formed an S corporation called 9 Mill, Inc. along with some members of her family. When claiming the winnings, Tonda signed the ticket in the corporation’s name. Tonda Lynn retained 49% of the stock in 9 Mill, Inc. and her parents and siblings split the remaining 51% of stock.

Enter Toya Sue Washington, an attorney with the Estate and Gift Tax Division of the IRS. Toya Sue looked at the transactions involving the corporation and transfer of ownership to family members and determined in 2007, quite rightly in my opinion, that Tonda Lynn had made taxable gifts. Toya Sue assessed Tonda Lynn $771,570 in gift tax.

Tonda Lynn challenged the IRS assessment. Her theory? She said that she and her family had an agreement that if any one of them ever won the lottery, they would share it. Sound familiar? The result? The Tax Court held that even if the family did have an agreement, just like the agreement with co-workers at the Waffle House, it would be unenforceable under the same state law that found that similar agreement to be a contract related to gambling and, thus, unenforceable. One has to wonder why she thought there would be a different result this time around.

It wasn’t a complete loss at Tax Court though. Even though Tonda Lynn was found to have made a gift, the value of the gift was discounted because at the time of the transfer, her claim was publicly embroiled in litigation with the Waffle House co-workers and Mr. Seward. Therefore, the value of 80% of the prize (the part subject to suit) was discounted 67% because of the cost, hazard and time delay of litigation. The result from the Tax Court (T.C.) is that the value of the gift was discounted 53.6%. The tax court decision came down 13 years to the day from the date of the winning ticket.

The opinion in T.C. Memo 2012-60 written by Judge Wherry is worth reading. Here are the section headings in the Findings of Fact: I. She’s Got a Ticket To Ride; II. Family Values; III. "Inc."-ing the Deal; IV. Eye on the Booty; V. House of Waffling; and VI. Looking a Gift Horse in the Mouth.

That’s not all. Before her big win, Tonda Lynn Dickerson had been married to a man named Stacy Martin, but she and Martin divorced before she won the $10 million. After she won the lawsuits brought by the co-workers and Mr. Seward, Tonda’s ex forced his way into Tonda’s pickup truck and drove her from Grand Bay across the state line to Jackson, Mississippi. Once there, Tonda pulled out a .22 caliber pistol from her purse, shot and wounded her abductor. Tonda was not charged, and Martin was expected to be charged with kidnaping.

 

 

 

If you are divorced, or you advise clients who are divorced, this is important. The Pennsylvania Supreme Court has ruled that the federal Employee Retirement Income Security Act (ERISA) takes precedence over the Pennsylvania statute that removes divorced spouses as beneficiaries. What this means is that unless your employer’s plan contains a provision to the contrary, if you are divorced and your ex-spouse is still named as beneficiary of your qualified plan; it is payable to the ex-spouse! That is without regard to Pennsylvania state law, without regard to any order from a Pennsylvania Court, and without regard to any provisions in a property settlement agreement or other contract. It’s really true.

It is very common for spouses to divorce but fail to update their estate plans, including beneficiary designations. This has not been a big problem because Pennsylvania law (20 Pa.C.S. § 6111.2) provides that if an ex-spouse is designated as a beneficiary on a life insurance policy, annuity contract, pension, profit-sharing plan or other contractual arrangement providing for payments to the spouse; any designation which was revocable at the time of death is ineffective, and the beneficiary designation is construed as if the ex-spouse had predeceased. If the designation or a separate contract (such as a property settlement agreement) provides that the designation is to remain in effect even after the divorce, then the designation remains effective. This statute produced the result that most people wanted: the ex-spouse is not the beneficiary. No more.

The legal issue is whether or not the federal law, ERISA, which provides that a qualified plan benefit is payable to the named beneficiary, is superior to, or "trumps" Pennsylvania state law that modifies the beneficiary based on circumstances, in this case, the divorce of the plan participant. The legal doctrine involved is called "federal preemption" and is based on the supremacy clause of the U.S. Constitution: "This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding." In other words, certain matters are of such a national, as opposed to local, character that federal laws preempt or take precedence over state laws. As such, a state may not pass a law inconsistent with the federal law.

In 2001, the United States Supreme Court in Egelhoff v. Egelhoff, 532 U.S. 141 (2001), set the precedent that any state statutes having a "connection with" ERISA plans are superseded by ERISA. David Engelhoff divorced his wife and did not change his beneficiary designations on his qualified plans. Washington state law provided that on divorce, the beneficiary designation of his wife was revoked. However, his ex-wife successfully claimed the benefit asserting that since she was the named beneficiary and ERISA preempts state law she gets the benefit.

Closer to home, the Pennsylvania Supreme Court case decided an almost identical case on November 23, 2011,in re Estate of Sauers, York County, Supreme Court of Pennsylvania, Middle District (No. 78 MAP 2009). Paul and Jodie Sauers divorced in 2002, and Paul did not change the beneficiary on a $40,000 employee group life insurance plan subject to ERISA. Paul died in 2006. The Court held that the Pennsylvania statute which provides that Jodie, now an ex-spouse, does not receive the death benefit was preempted by ERISA – the benefit was payable to her, the ex-spouse. (The only question is why in the world didn’t the lower court follow Egelhoff.)

The Court explained that the state probate law at issue "gives a Pennsylvania court the power to enjoin a plan administrator from discharging his fiduciary duties in accord with federal law, while concomitantly subjecting the plan administrator to civil liability in federal court. …

"This Hobson’s choice, of being forced to choose between applying either state or federal law, at the potential peril of disregarding a state court order to evade federal liability, is exactly what the preemption provisions of [section]1144(a) of ERISA, as interpreted by the [U.S. Supreme Court], intended to avoid. Such potential not only ‘relates to,’ but also surely violates, the uniformity requirements and objectives of ERISA."

What to do? If you are divorced, make sure you have changed all of your beneficiary designations.

If you are a plan sponsor, consider amending your ERISA plan to include a provision that would automatically revoke a pre-divorce spousal beneficiary designation.

 

Does this apply to IRAs? Probably not, because IRAs are not governed by ERISA for most issues. To be safe, change IRA beneficiaries too.