In their February  11, 2008 Trusts & Estates article, Corporate Trustees Beware,  Samantha E. Weissbluth and Erika Alley, both of Foley & Lardner, LLP, in Chicago  discuss the case of Janice Galloway Trust, No. C5-04-200042 (Minn. Dist. Ct. 2007).   A corporate fiduciary was sued for breach of fiduciary duty on the theory that it failed to do estate planning.

Weissbluth and Alley point out that while the corporate trustee won the case, it might not be that way the next time:

"But it’s surprising the amount of attention the trial court paid to what seems like a cut-and-dry breach of fiduciary duty claim. And, given the court’s emphasis on the facts in this case, it seems possible that a different set of facts and different experts testifying for the beneficiaries would have meant a decision against the fiduciary."

In Galloway, U.S. Bank as trustee was criticized for not contributing the assets of a QTIP trust to a Family Limited Partnership.  In a very long opinion the court discussed whether or not the trustee had a duty to invest in the FLP (no).  And discussed whether or not it was a good idea for various tax reasons (maybe so and maybe not).

The children who were beneficiaires and saw the QPRT reduced by $10.2 million in estate taxes when their mother, the income beneficiary, died, objected to the payment of trustee’s fees to U.S. Bank on various grounds, including that the bank had breached its fiduciary duty to the children as remaindermen by failing to contribute the QTIP’s assets to a FLP.  They claimed this technique would have resulted in a substantial valuation discount for estate-tax purposes.

The trial court dismissed all of the children’s objections — except for one breach of fiduciary duty claim.

Weissbluth and Alley describe the court’s reasoning:  "Janice wanted to keep her financial affairs private and did not want to involve her children in her estate planning. She was not particularly close with either of her children and did not always approve of how they handled money. Also, Janice had rejected even simple estate-planning techniques recommended by her estate-planning attorney. Clearly, she was not interested in engaging in planning as complicated as a partnership."  (And what does that have to do with it?  She was not the trustee.)

The bank’s marketing materials were examined.  And of course, they said they did estate planning. (Doesn’t everyone?)   But the materials made it clear that clients should depend on their outside advisors (rather than the bank) to implement estate-planning strategies.

Weisbluth and Alley’s advice:

"Although the bank was ultimately found not liable, based on the Galloway court’s decision, corporate trustees would be well-advised to carefully document meetings with clients regarding estate planning and ensure that their marketing materials are clear in directing clients to rely on outside advisors when implementing estate-planning techniques."

I always thought there should be some procedure to validate a will before the testator’s death.  After all, the testator is the best source of evidence about his or her intent.  And the best time to assess a testator’s capacity or susceptibility to undue influence is at the time the will is made, right?  It always seemed bass-ackwards that these issues had to wait for probate when the best evidence was no longer available.  Maybe not anymore  – if the theory of this California case is adopted in other jurisdictions:

This excellent article is a must read:

"Barred by Lunatics Law: How a preexisting substituted judgment order can preclude posthumous challenges to a will in California (and possibly elsewhere): the lesson of Murphy v. Murphy"  By Samantha E. Weissbluth, senior counsel, and John P. Mounce, summer associate, Foley & Lardner LLP, Chicago, published in "Trusts and Estate Fiduciary Litigation Update," August 20, 2008

The authors describe the case:  "The decision, in Murphy v. Murphy, 164 Cal. App. 4th 376 (Cal. App. 1st Dist., June 26, 2008), held that a posthumous challenge to a will was barred by collateral estoppel insofar as those issues were in fact litigated or could have been litigated in a substituted judgment proceeding while the decedent was still alive.

The common law substituted judgment doctrine as applied to property issues dates back to the English Lord John Scott Eldon’s Court of Chancery in the early 1800s. It was built upon a tradition of the king holding for safekeeping the property of “lunatics” within his realm."

In Murphy, a son, William Jr.,  was disinherited.  The holding, as reported by the authors:

"On appeal, the court found that William Jr. was collaterally estopped from litigating the validity of his father’s estate plan—because he had had the opportunity to do so in the substituted judgment proceeding.

The court first noted that the issues presented by William Jr.’s claim (undue influence, fraud and the existence of the oral testamentary agreement) involved the same underlying “factual allegations” as the issues under consideration at the substituted judgment proceeding, even though they weren’t actually litigated there."

The court, with a rather long chain of reasoning, concluded that any matter that was “within the scope of the action, related to the subject-matter and relevant to the issues” was close enough to be barred, and William Jr.’s claims met such standards. 

Their advise:

"Those of you with clients in dicey family situations in which you worry about a posthumous contest might want to weigh the risks, costs and public nature of a conservatorship proceeding (or some kind of declaratory judgment action if permitted in your state) to try and bulletproof your client’s plan."

Heath Ledger, famous for his protrayal of Ennis Del Mar in Brokeback Mountain (2005). died January 22, 2008.  He had just finished filming the latest Batman movie, The Dark Knight, where he played The Joker:  The Clown Prince of Crime. The Harlequin of Hate. The Ace of Knaves.

According to The New York Times:

"Heath Ledger’s will left nothing to his former girlfriend and their 2-year-old daughter because it was filed in Australia in 2003 and never updated after they became part of his life, The Associated Press reported. A copy of the will, filed in Manhattan Surrogate’s Court, shows that Mr. Ledger, a native of Australia, left everything to his parents and three sisters."

Is this deja vu?  When Anna Nicole Smith died, her Will left everything to her deceased son and made no mention of her baby daughter Danielynn.   

Joann Grossman and Mitchell Gans, in their article, "Heath Ledger’s Estate: Why Daughter Matilda, Who Was Left Nothing in Her Father’s Will, Might Have a Claim to Everything" examines the issues of where Heath Ledger was domiciled, which jurisdiction’s law will govern the distribution of his estate, and whether the tabloid reports about another child fathered many years ealier are true.

Matilda is what the law refers to as a "pretermitted heir" –   a child who was accidentally omitted from her parent’s will.   According to Grossman and Gans, if New York law applies (New York being the place where Ledger was living and where he died) Matilda woudl be entitled to a portion of her father’s estate suince she was born after the execution of his will.

We all seem to take for granted that Matilda is Ledger’s child.  However, to have rights to inherit under  New York law, since Ledger wasn’t married to Michelle Wiliiams (Matilda’s mother), there must be either 1) an adjudication of paternity, 2) a written acknowledgment of paternity, or 3) other "clear and convincing evidence" and the father has "openly and notoriously acknowledged" the child as his own.  Grossman and Gans report that Ledger’s name appears on Matidla’s birth certificate and that he lived with Michelle and Matilda for the first year of her life.

Under New York law, if the testator had no children when the will was executed, the omitted child gets what would have been his or her intestate share of daddy’s etate.  In this case –  that would be the whole thing!    But what about other children?  The tabloids report that Ledger fathered a child in Aurtrailia while he was in high school.

If there is another child, and if Ledger is considered the father under New York law (or maybe under the law of another jursidciton based on a case brought by that child or hir or her mother) then New York law leads to the conclusion that Ledger intended to omit that child, and thus probably intended to omit all children.  That would leave Matilda out in the cold.

What’s the moral of the story?  Keep your will updated!  Don’t fall into the trap of thinking its just a fill-in-the blank form that, once completed, need never be looked at again!  Estate planning really has very little to do with forms.  Ask Matilda.

 

UPDATE:  Johnny Depp, Jude Law, and Colin Farrell, the 3 actors who stepped in to complete Heath’s role in "The Imaginarium of Dr. Parnassus" donated thier earnings from the film to Heath’s daughter Matilda.

Blogging credit to David S. Luber and Gerry W. Beyer.

Jonathan G. Blattmachr, a partner at Milbank, Tweed, Hadley & McCoy LLP, has published "Reducing Estate and Trust Litigation Through Disclosure, In Terrorem Clauses, Mediation and Arbitration"  in the Cardozo Journal of Conflict Resolution, 9 Cardozo J. Conflict Resol. 237 (2008).

He suggests six methods to reduce the risk of litigation with respect to trust and estate matters:

1.  Advise Inheritors of Inheritance Plans.    Especially when children of the decedent are treated unequally, will contests and litigation arise from disappointed feelings of entitlement.  Telling the children ahead of time what their shares will be may avoid a later dispute. Blattmachr even suggests that one could enter into a contract (for consideration) with such a person that he or she will not object to the validity of the document. (Of course, as Blattmachr says, "advising a child that he or she will not receive an equal share may have adverse effects even if it prevents litigation after death."   You think?)

2.  Use a Revocable Trust in Lieu of a Will.  Since a revocable trust can be funded and operate during lifetime, it is difficult to contest on the grounds that the individual was unaware of its terms.  When the Settlor of the trust dies, there is no need to begin a court proceeding to "prove" the validity of the trust, such as there is for a will.

3, Use an Irrevocable Trust in Lieu of a Will or Revocable Trust.  An irrevocable trust is even less likely, in Blattmachr’s view, to be challenged than a revocable trust.  Irrevocable trusts can be drafted in such a way so that transfers of property to them are not completed gifts.  Alternatively, making a transfer that is a completed gift, paying gift tax, and filing a gift tax return disclosing details may be additional evidence that the transfer was truly intended.  Again, Blattmachr believes that a lifetime trust that is significantly funded is less likely to be challenged.

4.  Use an In Terrorem Clause.  If the testator lives in a state that will enforce it, an in terrorem clause (or disinheritance clause) could be used.  Or the testator could direct that his will be probated in a state that does enforce such clauses.  A lot of trust and estate litigation is not about the validity of the document, it is about its interpretation or about actions taken by the fiduciary.  In order to reduce this type of litigation, an in terrorem clause can cause a forfeiture of a beneficiairy’s interest if such a challenge is made.

5. Use Mediation or Arbitration Provisons.  Arbitration or mediaiton cannot be used with respect to the challenge of a document’s validity unless the parties agree to it. Using an in terrorem clause to cause forfeiture if the parties will not participate can be used.  This could stop claims that are filed only to harass other beneficiaries or to delay distributions to others.  Another approach would be having the parties enter into a contract agreeing to arbitration before the transfer.

 6. Use a Conidtion Precedent to a Beqeust as an Alternative Method of Causing Participation in Mediation or Arbitration.   Since a person cannot be forced to participate in arbitration or mediation unless the law provides for enforcement, consideration must be given to how to get parties to use these methods.  One can use the carrot instead of the stick. Parties can be gvien a benefit if they consent to use arbitration or mediation instead of resorting to court.

In a decision filed April 17, 2008, the Pennsylvania Superior Court turned what we know about wills and joint property on its head.  In In re Estate of Amelia J. Piet, the court ruled that joint accounts did not pass to the surviving joint owner because the accounts were made joint after the execution of a will that would have provided a different disposition.

The concept of a ‘convenience account’ has long been part of the law of the Commonwealth.  20 Pa.C.S.A. §6304 of the Multiple Party Accounts Act provides:

"(a) Joint Account. – Any sum remaining on deposit at the death of a party to a joint account belongs to the surviving party or parties as against the estate of the decedent unless there is clear and convincing evidence of a different intent at the time the account is created."

The Allegheny County Orphan’s Court, after hearing, found that for the accounts in question, there was no evidence to overcome the statute’s presumption and that the accounts passed to the surviving joint owner.

The Superior Court said they would not "blindly adhere" to the section 6304(a) ownership presumption, because  the testamentary intent of the testator would be frustrated.    (In other words, they are  not going to follow the statute.)  The court held that the previously executed will "trumps" the joint registration of the bank accounts.   Have you ever heard of anything like that?

The court cited In re Estate of Novosielski (a troubling case in its own right – see an excellent discussion of Novosielski and of the Piet case by Attorney Thomas K. Johnson II in Dechert LLP’s newsletter) to support its holding even though that case can be readily distinguished on its facts as pointed out in the dissenting opinion.

In a lone dissent, Judge Maureen Lally-Green says "It has been the law for centuries in the Commonwealth that regardless of what is devised in a will and to whom it is devised, a testator can gift away any or all assets during his or her lifetime as long as donative intent and delivery are present.  The gifting can occur in many forms from an outright inter vivos gift to a gift that occurs in a joint tenancy with rights of survivorship by the death of one joint tenant and the passing of the gift to the survivor.  All such gifts take effect outside of the estate that passes by will."

Further:  "I do not believe that the creation of a joint account with a right of survivorship alters the testamentary scheme.  Rather, such an account alters the amount of the estate,  The execution of a will does not prevent the testator from subsequently altering the amount in the estate as he or she sees fit. such as by the creation of a joint account or through inter vivos gifting."

What do we do now?

Does this mean that whenever we administer an estate we must determine when joint property is created and if it is after the last Will, we must seek to recover it for the estate?  Does the same thing apply to beneficiary designations? 

Here is the advice of Attorney Thomas K. Johnson II: 

"It seems likely that the Pennsylvania Supreme Court or the Legislature will have to address this issue in the near future.  For now, however, attorneys, financial institutions and joint account holders need to be aware that they may need to change their current practice to carefully document the creation of any joint account as consistent with a prior will or to anticipate the issue when drafting wills and address the issue of after-created joint accounts by expressly stating that such accounts may be created and are not inconsistent with the testator’s wishes."

 Thank you to Lancaster Attorney Will Campbell for pointing out this very troubling decision.

 

 


"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 

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. People need alternative means for resolving disputes.

Mediation, as a means of dispute resolution, is widely used in divorce and child custody disputes, and is becoming more common in general civil litigation matters. There is a growing interest in using mediation to solve disputes related to wills and trusts.

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

A mediator is not a therapist and does not act like one. But a mediator can provide for an airing of differences before they reach critical mass for an explosion. While there is no technical legal requirement that a mediator be a lawyer, considering the complex property law and tax issues presented in the trust and estates field, it seems to me that an effective mediator would almost have to be lawyer. The mediator must be able to assess the relative strengths and weaknesses of the parties’ arguments and must be completely independent with respect to all the parties.

Mediation in Estate Settlement

The death of a family member 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 left in tatters or completely destroyed. Not only is the inheritance consumed by fees, but the family is consumed by anger and hatred.

While widely used in divorce and child custody disputes, 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.)

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 judgment. 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 an apology.

Mediation in Trustee-Beneficiary Disputes

Who has not heard beneficiaries complaining about trustees? Often beneficiaries are critical of the trustee’s investments, the trustee’s exercise (or non-exercise) of its discretionary powers, the Trustee’s unresponsiveness. Often the beneficiary does not understand the restrictions on the trustee’s actions, and the trustee fails miserably to communicate effectively. The Trustee- Beneficiary relationship can begin to resemble the caricature presented in the old TV sitcom starring Lucille Ball as Lucy Carmichael who is always conniving against Mr. Mooney (Gale Gordon), the trust officer who administered her deceased husband’s trust for her.

Many disputes of this nature can be solved by mediation before the parties become polarized in litigation. When the trustee’s exercise of discretion is involved, mediation is the best answer. Seldom can a trustee be forced to exercise discretion and seldom can a beneficiary be reconciled to a steady diet of “no” from the trustee for every request.

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 that can be given to 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 Mom and Dad are afraid to tell the kids what they’ve done in their estate plan, they are leaving 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.

Mom and Dad need to be shown that spending some time and money now on a process of mediation can save thousands of dollars later and, more importantly, can preserve family relationships that are more precious than money.

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 care givers and medical personnel. Disputed guardianships are perfect for mediation – nothing is worse than the public airing of dirty linen that a contested guardianship hearing brings out.

As far as the estate planning documents themselves go, it is entirely possible to include provisions that require the parties to submit disputes to private mediation rather than resort to the courts. Many 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, family.

Both Attorney’s fees and Executor’s commissions were reduced in Janiga Estate (O.C. Div. Phila.) 28 Fiduc. Rep. 2d 219, opinion by Judge Herron.

Decedent left an estate valued at $1,024,425.21 and a  will that devised two parcels of real estate to the Executrix, made some specific bequests, and divided the residue between two charities.

The Attorney General of the Commonwealth of Pennsylvania, as parens patriae, filed ten objections to the account and a hearing was scheduled. At that hearing, the Attorney General stated that various objections had been resolved, except for the objections that the executrix commission of $34,000, the attorney fee of $45,000( the Account incorrectly listed attorney fees as $40,000, but during the hearing it was disclosed that attorney fees had actually totaled $45,000) and the accountant fee of $31,000 were  unreasonable and excessive based on the nature of this estate.

(Here is the math:  That’s a total of $110,000 in fees –  a whopping 10.73% in an estate whose assets apparently consisted of a house, tangible personal property and bonds.)

The Attorney General claimed that the bulk of estate administration was completed by October 2004 (which consisted of the Executrix distributing property to herself and family members)  but due to the neglect of the executrix and estate counsel, distribution was not made to the charities until 2006.

The AG also asserted the the executrix failed to monitor the legal and accounting fees billed to the estate.

The court said:  "While a schedule for computing fiduciary and attorney fees was set forth in Johnson Estate, 4 Fid. Rep. 2d 6 (Mont. City. 1983) based on percentages related to the size and nature of estate assets, the Pennsylvania Superior Court has more recently emphasized that “[e]gregious error is committed when a court awards commissions and fees simply on a percentage basis without inquiry into the reasonableness of the compensation.” In re Preston, 385 Pa. Super. 48, 57, 560 A.2d 160, 165 (1985). A methodology for determining attorney fees has been set forth by the Pennsylvania Supreme Court in LaRocca Estate, 431 Pa. 541, 546, 246 A.2d 337, 339 1968).

Held:  "On this record, therefore, the payment of $45,000 in attorney fees was unreasonable. It will
therefore be reduced by half to $22,500. The executrix will therefore be surcharged in the amount
of $22,500 for that excessive payment and her claimed commission of $34,000 will likewise be
reduced by half to $ 17,000. Consequently, the surcharge that she must return to the estate is
$39,500. A crucial factual consideration in reducing these fees and surcharging the executrix is that the beneficiaries whose interests were neglected were charities. . . ."

Thank you to the July 2008 edition of Fiduciary Review which reported on the Janiga Estate.  Fiduciary Review is edited by J. Brooke Aker, Richard L. Grossman, James L. Hollinger and Frances A. Thomson, 60 East Penn Street, Norristown PA 19404

 

 

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