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

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

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

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

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

Outsourcing Justice comments on the McArthur case as follows:

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

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

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

The Facts:

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

Read the case here: 

How about Pennsylvania?

 

Fear-mongers have used the inter-vivos trust, also called revocable living trust, to sell books, trust kits, trust documents and other products and services. They often do this without regard to the individual’s tax and personal objectives. They scare the client by telling them that probate is a dreadfully complicated and horrendously expensive process. Then they offer to "save" the client: If you buy our estate plan which gives you a revocable living trust for $2,000 (or more) you will avoid all of this.

There is nothing wrong with a living trust. A living trust is a part of many appropriate estate plans. Living trusts can be beneficial depending on the type of assets you own, such as real estate located in several states. In addition, if you want someone else to manage your financial affairs, perhaps because you travel frequently, having a trustee of a living trust may offer fewer problems than relying on a Power of Attorney document.

But for other people, it can be a waste of money and time, or worse, it can actually defeat their intentions. In their attempt to save their heirs the perceived expense, time and loss of privacy caused by probate, other problems arise.

In fact, probate fees, themselves, are quite modest. For example, in Lancaster County, a will for a decedent with a $ 1 million probate estate can be admitted to probate for less than $300. Notice must be published in two newspapers, each costing cost about $60.

Avoiding probate by using a trust does offer some privacy. A will when probated becomes a public record which can be viewed by anyone. However, even where there is no probate property, the inheritance tax return is filed with the Register of Wills, so much of the financial information may be available to the public. In Lancaster County, inheritance tax returns are available for public inspection, whether or not the estate was probated.

Living trusts are sometimes promoted as a way to avoid excessive court supervision. However, with a living trust, you eliminate protections given to heirs in probate proceedings. A successor trustee of a trust may find it easier to succeed in illegally misdirecting your assets than would a will’s executor. Some states, Pennsylvania being one, subject wills to very little court supervision, therefore avoiding probate for this reason may be risky

A living trust does not always eliminate the need for probate. If you don’t transfer all your assets to the trust (and some assets – such as your everyday checking account or car don’t work well inside a trust) your estate will still need to be probated.

The main problem with living trusts is that they are marketed as an estate planning cure-all when they are not. Unscrupulous profiteers have discovered that preying upon fears, especially of the elderly, in regards to the estate planning process has led to the creation of estate mills.

What is a trust mill? As described by the American College of Trusts and Estates Counsel, trust mills are organization which promote the indiscriminate marketing of inter-vivos by non-lawyers; often with the assistance of local counsel. Typically trust mill organizations consist of insurance agents, financial planners, stock brokers, and other individuals who are not lawyers, but who prepare estate planning documents from various forms. Sometimes these documents are sent to local counsel for "attorney review."

A trust mill promotes its product door-too-door, on TV, radio, in seminars, workshops, and through the mail Prices can range from $25 for a do-it-yourself kit to $5,000. The trust mill advertises with slogans like "Protect your assets", "Leave more to your heirs", and "Avoid the Agony of Probate". The trust mill makes exaggerated claims of reduced taxes, exaggerates the cost of probate and the need for privacy. The prices for these living trust packages often far exceed the legal fees that would be paid to a lawyer for a true estate plan.

"Don’t Trust Trust Kits," says the Michigan Bar Association. Get it. Their web site, www.michbar.org, lists some warning signs to make consumers beware of a living trust scam:

 

An ad or salesperson promising the consumer will "save on legal fees"

The use of a salesperson. The ethics rules governing attorneys do not permit the use of salespersons.

Encouragement to purchase other products such as investments or insurance.

A "first step" in the program that is anything other than a one-on-one meeting with a licensed attorney

An offer to purchase the fill-in-the blank forms or an estate planning kit.

No permanent local office.

 

Many states have taken action against trust mills on grounds of consumer fraud and the unauthorized practice of law. Preparing a trust in Pennsylvania requires a lawyer. Pennsylvania Attorney General issued a Consumer Advisory in July 2001 about Living Trust Scams, http://www.attorneygeneral.gov/press/cons_advis/July01.cfm If you have any questions, or want to file a complaint, call the PA Attorney General’s Bureau of Consumer Protection hotline: 1-800-441-2555, or visit their website at www.attorneygeneral.gov.

The Federal Trade Commission has issued a warnings about living trust promoters, see

http://www.ftc.gov/bcp/conline/pubs/services/livtrust.pdf , as have the AARP, http://www.aarp.org/confacts/money/wills-trusts.html.

We haven’t even touched on abusive trust schemes that claim to save income taxes. If you hear words like "Pure," "Pure Equity" or "Constitutional" Trust – these schemes are even worse than the living trust scams. Don’t be taken in. These trusts are tickets to the federal penitentiary. If you are approached by anyone selling a "Pure Trust" or a "Constitutional Trust" or similar vehicle with a pitch that the trust is exempt from income taxes, notify the F.B.I. or the Criminal Investigative Division of the Internal Revenue Service. 

As Steve Leimberg says in his book, The New Book of Trusts, "The revocable trust (or, more accurately, the lack of an estate planning process that leads to the revocable trust) did not make matters better, but worse, just like the wrong surgery, the wrong drugs, or the right drugs in the wrong dosage, can make a patient worse, not better."

Trustees of Pennsylvania trusts have until November 6th 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. In other words, many beneficiaries of a trust don’t even 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.

 

In order to help you meet these new disclosure requirements we provide a handy reference guide to the PA UTA changes:

 

click here:      Handy Cheat Sheet

 

I have a limited number of these available that have been laminated.  Please e-mail me at patti@spencerlawfirm.com if you would like us to send you one. 

 

Also, here is a copy of a recent article I wrote on this topic, published in the Intelligencer Journal.

 

click here:      Reproducible Article

 

These items may be reproduced for further distribution "as is" (that means with no changes and including attribution). 

 

The cheat sheet:

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!