Spoiling for a Fight: Estate Planning and the Family Dynamic

Estate planning and litigation help each other out. As an attorney, having experience in estate planning will make you a better litigator because, among other things, it helps you understand and spot the issues. There is little doubt (at least in my mind) that being a litigator makes you a better estate planner because it gives you a front row seat to what doesn't work, and why.

In Teselle v. McLoughlin, the estate plan was big and complex. It also was amended. One of the amendments may have removed property from the trust, or maybe it didn't. When the settlor died, the successor trustee distributed the property that may or may not have been removed from the trust as though it was still in the trust. Litigation ensued.

Complaints were filed. Demurrers were filed. Amended complaints were filed. More demurrers were filed. Finally, a motion for summary judgment was filed (after over two years of litigation). The motion was granted (in part because the plaintiff was one day late in filing their opposition!). An appeal was filed. The appeals court held that the summary judgment should not have been granted, so back to the trial court we go.

Most of the controversy is from the language surrounding the piece of property. The original trust called for the property in one brother's trust to be exchanged with property in the other brother's trust on the death of either brother. The one brother amended his trust, and removed a piece of property from the list to be exchanged with the other brother's property. When the first brother died, the trustee exchanged the removed property anyway, and then sued to get it back when they concluded that the property should not have been exchanged. The defendant argued that removing the property from the list in the trust did not mean the property was no longer in the trust and subject to the exchange agreement.

During the course of the litigation, the drafting attorney signed a declaration that the property was removed in the amendment because the brother intended to sell it. It was never sold. The attorney declared that the brother never intended to remove the property from the exchange agreement as long as he owned it.

Could clearer drafting have avoided this litigation? Maybe. The parties did seem very committed to fighting with each other, and there were (many) other issues in the lawsuit, but communicating the intent of the settlor is the most important job of an estate planner. Part of that is looking for the potential red flags of future litigation. Honestly, if the family is not getting along, it may not matter how carefully the plan is drafted. But it's better to know in advance because it may help the attorney counsel the client against a gift that may cause conflict.

Confusing Facts, Not so Confusing Law

It's been said that bad facts make bad law. It can also be said that confusing facts make confusing law. Or at least hard-to-read law.

Darrell Prindle shot and killed his estranged wife Angela in May 2002. He also shot and injured several others, including Angela's sister Jessica. Angela's mother Earline opened a probate in July 2002. In May 2003, Jessica sued Darrell and Earline (as administrator for Angela's estate) for negligence in failing to warn her that Darrell would return to the residence. Earline notified Traveler's insurance of the lawsuit and asked them to defend the estate. Jessica made a policy limits demand against Traveler's for $100,000. Travelers rejected the claim and refused to defend the estate. Jessica did not make a claim against the estate before the exipration of the deadline.

The matter went to trial, and the judge found the estate liable to Jessica for $7 million. The estate assigned their insurance bad faith claim against Travelers for failing to defend and indemnify to Jessica in exchange for Jessica's agreement not to execute the judgment against the estate. Jessica and the estate then sued Travelers for bad faith (which if successful would open Travelers to liability in excess of the policy limits of $100,000). Jessica finally made a late creditor's claim against the estate for the $7 million, and also filed a petition to allow the late claim. The estate asked the court to approve the late filing of the claim, or at least to acknowledge that the estate's actions constitute a waiver of the claim filing requirement.

Some background is in order. Typically, a creditor has four months from being notified of a probate to file a claim against the estate. If they fail to meet that deadline, they can file a petition for the court to approve a late claim. The court here held that the estate did not have the power to allow the filing of a late claim, but also found that the estate's actions constituted a waiver.

This case is all about insurance. The estate had only about $16,000 in it, so there was no way they would be able to pay the $7 million judgment. Travelers argued that because Jessica's claim was not timely filed, they were off the hook. The court disagreed. Because Travelers refused to indemnify and defend the estate, Travelers is on the hook for the $7 million judgment just as much as Earline is as administrator of the estate. The court held that the estate waived the right to refuse a late claim by Jessica (because they were aware of the claim before the deadline expired), so Travelers, as the insurer of the estate, cannot use the late filing as a defense to their obligation to pay.

I suppose the rule here is that when an estate waives the claim filing deadline, that waiver can extend to others who might benefit from the claim filing deadline, such as an insurer.

The other lesson is that Travelers could have gotten out of this for $100 grand, but is now on the hook for $7 million.

Safe Harbors and Jilted Children

Chris and Cindy adored their parents James and Mildred. James and Mildred did what a lot of married couples do in their later years, they created a trust to benefit them during their lifetimes, minimize the affect of estate taxes on their deaths, and distribute their assets to their children. This is the story of how all that planning can be threatened by undue influencers, and how the family can fight back.

Mildred died in 1994, about two years after they created the trust. The trust was split into three trusts: one revocable trust for James, and two irrevocable trusts designed to minimize estate tax exposure. Chris was named as the successor trustee to his father James.

Enter Flora Ibarra. A few months after his wife's death, James became romantically involved with Flora, and she then moved in with him and became his full-time caregiver. Eventually, Flora got James to amend his revocable trust nine times, giving Flora and her family greater shares of his estate, and removing Chris as successor trustee. James also exercised a power of appointment he had over the assets in one of the irrevocable trusts, and sold property in the trust to his revocable trust (which now had Flora and her family as beneficiaries). Flora also isolated James from his children Chris and Cindy. Finally, in one of the amendments to his trust, he added a long and draconian no-contest clause that would disinherit anyone who tried to challenge the provisions of the trust.

James died in 2006. Chris and Cindy did not find out about this until they got a probate notice and a notice of change of trustee. Chris then learned of the nine amendments to the revocable trust. Chris was now trustee of the two irrevocable trusts, which still named him as successor trustee, so he began to look into the assets of those trusts. The trust over which James had the power of appointment had no assets, and the other irrevocable trust had about $177,000 in it. Chris knew that prior to his mother's death, the trusts had over $7 million in assets.

Chris believed Flora Ibarra unduly influenced James to change his revocable trust and take the money out of the irrevocable trusts using his power of appointment to benefit her and her family. He sought to contest the changes, but he knew that the no-contest clauses would disinherit him. He filed a "safe harbor" petition, which asked the court whether his proposed challenges would be a contest subject to the no-contest clause.

Chris was smart, though. His challenge was as trustee of the irrevocable trusts, not as a beneficiary of his father's revocable trust. As trustee, he had a duty to marshall the assets of the irrevocable trusts, which had been siphoned off for Flora's benefit using the power of appointment. Flora, naturally, argued that this was a contest, and he should be disinherited.

The court disagreed with Flora. A trustee has a duty as a fiduciary to administer the trust, and cannot be subject to a no contest clause for exercising that duty. The probate code (at section 21305(b), if you're interested), specifically states that a pleading challenging the exercise of a fiduciary power is not a contest.

Although all the drafting under the sun cannot protect an estate from the Flora Ibarras of the world, the probate code and the courts do their best to keep the undue influencers in check.

Bradley v. Gilbert.

Notice is Notice, or, When Probate Attorneys Attack

Sometimes, in a the middle of an otherwise mundane appellate court opinion, you get a snippet if the flavor of the underlying litigation. In Estate of Kelly, there was just such a whif.

The rule of law should keep most probate attorneys on their toes. Stanley Kelly died leaving an estate of over $1 million. His father, E. George Kelly, petitioned the court for letters of administration (which is what you do so you can probate the estate). George also notified Human Rights Campaign, Inc. (HRC) that it was the beneficiary of several of Sanley's bank accounts. George filed a petition stating that Stanley died without a will or trust (i.e., he died intestate), and asking the court to approve distributing Stanley's estate to himself as the sole heir. HRC responded with a petition to probate a handwritten (or "holographic") will by Stanely leaving his entire estate to them. George claimed that the time period for HRC to admit the holographic will had expired, and so they could not receive Stanley's estate under the will. The court held that the clock never started ticking on the time period for admitting the holographic will because George never gave HRC notice of the petition for letters of administration. George argued that he did six different things that communicated to HRC that he was probating Stanley's estate, all of which effectively notified HRC that he was the administrator. The court was having none of it, and held that Notice means Notice. The only thing that starts the clock ticking for someone to admit a will to probate is Notice using the proper Judicial Council form. Sorry, George, but HRC gets to admit to probate Stanley's holographic will giving his $1 million estate to them.

Now for the interesting part. The factual statement in the opinion contained this passage: "The bigger picture was that the Administrator and his counsel had superfiduciary duties 'not to mislead the court, and they have duties to make sure that the estate is probated and tha tit follows the wishes and intent of the decedent.' The court rejected the argument that counsel for the administrator was placed in an adversarial position; his duty was to probate the estate, not to obtain a distribution for [George] Kelly." In other words, counsel, remember who your client is! The attorney George hired represented the Estate of Stanley Kelly, not George as sole heir. Somehwere along the way, this attorney lost sight of this, and fought for George over the estate. I can't help but think that court was, in part, bringing counsel back in line by using the "strict construction" of the notice requirements of Probate Code section 8226.

Although I love the phrase "superfiduciary duties," I must admit I fear that it is going to start showing up fairly regularly in pleadings.

Back with More Trouble from the Astors

Yes, yes, it's like ducks in a barrell, but the Astors have been so good to the world of estate planning and litigation that I feel almost duty-bound to report.

The N.Y. Times today had this article on the similarities between the recent fighting over Brooke Astor's will, and the fight nearly 50 years ago over her husband Vincent's will. Vincent Astor's half brother, John Jacob Astor VI, was left out of Vincent's will, so he contested it. John VI argued that Vincent was unduly influenced to change his will, which Vincent had done 26 times. Allegations of drunkenness, lack of mental capacity, and other sordid behavior flew freely. In the end, John VI, who was born to John Jacob Astor IV's second wife four months after he died in the Titanic, settled with Vincent's estate for $250,000. Vincent's estate was worth hundreds of millions of dollars, so the settlement was, really, "go away" money. In fact, Brooke Astor's long time attorney Louis Auchincloss claimed that the $250,000 was less than the cost of the attorney's fees if the matter had gone to trial.

Two-hundred fify thousand dollars in attorney's fees? In 1959!? The very rich are different from you and me.

Keep Those Beneficiary Designations Updated!

I have been doing some research on Federal preemption of California community property law by ERISA. If you are still awake after reading that, you'll love what's next:

In Emard v. Hughes Aircraft the Federal Ninth Circuit Court of Appeals held that ERISA law does not preempt California community property law. While that might not move you to dance in the streets with joy, consider the facts of the case. Wife married Husband 1 in 1975 and named him as the beneficiary of the life insurance policy she received from her job at Hughes Aircraft in 1981. Wife and Husband 1 divorced in 1985. Wife then married Husband 2 in 1986. She never changed her beneficiary designation even though she purchased additional insurance through Hughes while she was married to Husband 2 (that means Husband 1 was the named beneficiary on the new policy as well). Wife died in 1995 without an estate plan. Husband 2 sued Husband 1, among others, to get the benefits of the life insurance policy she purchased while married to Husband 2.

This case is significant not because of the issue of federal ERISA preemption, but because it shows what a mess can be created if you do not keep your beneficiary designations current. Think of how much in attorneys fees were generated in suing for the benefits, losing, and then appealing.

Remember: you should review your designations every year, and certainly when you get married, divorced, widowed, or when you have children. This is probably not the first thing on your mind when these events occur, but the consequences of ignoring it can be pretty serious.

DOMA Challenged on First Amendment Grounds

Charles Merrill has filed a lawsuit with the Federal Tax Court claiming that the Defense of Marriage Act violates the Establishment Clause of the First Amendment to the U.S. Constitution. This comes to us from the Tax Prof. Blog.

The Establishment Clause is an interesting choice. I would have picked the Equal Protection Clause, since restricting marriage to a man and a woman would seem to deny same sex couples a fundamental right (to take advantage of certain tax laws such as the unlimited marital deduction). But what do I know?

I will try to follow this as best I can.

Ambiguity in Charitable Gifts

A gift in a will setting up a charitable trust is valid, even if the gift does not specify any particular charity or class of charitable recipient. In Estate of Clementi, The Fourth District Court of Appeals upheld an Orange County Superior Court ruling that allowed the following language from a will:

"I give the balance of my assets to a charitable foundation or trust in my
name to be run by Richard Weisz. If Richard Weisz is not alive when I die, then I
appoint his son, Frank Weisz[,] to run my charitable foundation or trust."

The court held that the general policy in California is that charitable gifts are highly favored and that a charitable gift in a will must be liberally construed to uphold its validity.

While this policy is admirable, it can create problems for the trustee who then must administer the trust with no guidance as to how to direct the funds. This is yet another example of how an estate plan must be carefully drafted in order to make sure the wishes of the client are carried out. Sometimes a person may have a charitable intent, but has no real idea who to give their estate to. At those times, the estate planning attorney should ask a lot of questions to try to get an idea of what kinds of charitable organizations may fit with the client's charitable impulse. Are there any friends or loved ones with a medical condition that they would like to donate money to? Is there a specific group of people who the client would like to help (seniors, orphans, veterans).

A crucial part of estat planning is for the attorney to ask questions and listen carefully to the client. That is the key to drafting a plan that is clear to all involved.

Be Careful with Mediation Confidentiality

Mediation of disputes in the world of Trusts and Estates is not as common as it is in civil litigation generally. Nevertheless, it can be very useful in settling things among beneficiaries, or between beneficiaries and trustees, or among heirs and executors.

In California, documents prepared during a mediation are confidential, except when they are not. The default is to protect these documents from disclosure in litigation in order to foster more open discussion, but this confidentiality can be waived.

Whether the children of Thresiamma Thottam waived this confidentiality was the Estate of Thottam matter. The children disputed the division of property after the death of their mother. They agreed to mediate the matter, and signed an agreement that protected the confidentiality of proceedings "except as may be necessary to enforce any agreements resulting from the Meeting."

During the mediation, a chart was prepared showing an allocation of the assets of the mother's trust. The children all initialed the chart. Afterwards, disputes arose over the language of the settlement agreement memorializing the distribution and incorporating a copy of the chart. One child sued the other two for breach of the settlement agreement. The other children filed motions to keep the chart out of evidence, claiming that it was confidential under California. The trial court agreed, but the court of appeal did not, and reversed the trial court's decision.

The court of appeal held that California law provides an exception to mediation confidentiality where all parties agree in writing to waive it. The court found that the agreement the parties signed waiving confidentiality where necessary to enforce any agreements resulting from the meeting constituted a valid waiver under California law. They also held that the chart initialed by all parties was just such an agreement, although they did not rule on whether the chart was enforceable.

I think there are two important lessons from this case. First, remember that by law, all writings in a mediation are confidential. Be careful not to sign anything that could constitute a waiver of this confidentiality if you want to make sure that what happens in the mediation stays in the mediation. Second, if you come to a settlement, make sure that the document memorializing the settlement is clear and unambiguous. Even though the court did not rule on whether the chart in this case was enforceable, it frightens me to think that a chart, with no terms and nothing other than initials of the children, can be used as evidence of a settlement.

Legal documents sometimes seem pointlessly long and detailed. But there is often a very good reason for it.

CA Widow Cannot Use Husband's Frozen Sperm

The California Court of Appeal for the Third Appellate District (Sacramento) today held that a widow cannot obtain the frozen sperm of her husband, who requested that the sperm be destroyed upon his death.

Technically, the court upheld the probate court's denial of the widow's motion for preliminary distribution of the frozen sperm.

Iris and Joseph Kievernagel contracted with an IVF clinic to help Iris have a baby. Joseph did not want children, but agreed to the IVF because Iris did want them, and he was worried that Iris would divorce him if he did not agree. In completing the paperwork for the IVF clinic, Joseph signed a document entitled the "IVF Back-Up Sperm Storage and Consent Agreement." The Agreement stated that the sperm sample was Joseph's sole and separate property, and that he had two options for the disposition of the sample upon his death or incapacity: donation to his wife or disposal. The box for disposal was checked. The Agreement was filled out by Iris, and signed by Joseph.

After Joseph died in a helicopter crash, Iris was appointed Administrator of his estate. She filed a petition for preliminary distribution of the sample. The court denied the petition, citing that the Agreement indicated Joseph's intent that sample be destroyed, and noting that there was no contrary evidence of Joseph's intent.

The Court of Appeals upheld the trial court's ruling. The court noted that "gametic material," with its potential to produce life, is a unique type of property that is not governed by the general laws relating to gifts of personal property or transfer of personal property upon death. It also held that Joseph's "right of procerative autonomy" allowed him to control the disposition of his sperm, and that since this was not a frozen embryo, Iris' right to procreative autonomy was not implicated. The court noted that if Iris could only become pregnant with Joseph's sperm, then her rights would be implicated, but that this was not the case.

The court punted on the issue of contract law. Throughout the decision, the court used contract law language, but in the end it based its decision on the intent of Joseph. The court did note a French court decision holding that contract law did not apply to gametic materials.

The court concluded that the intent of the donor controls the disposition of sperm on the donor's death. What if Joseph had a will or a trust that stated that Iris was to receive the sample upon his death? Presumably, the court would see this as evidence of changed intent. As practitioners, we must make sure that the intent of estate planning client is being carried out, and that the estate planning documents don't contradict or conflict with other documents.

You can read the full decision here.

NY Times Article on "Learning to Share"

Earlier this week, I attended a workshop on mediating estate plan disputes. One of the biggest topics of discussion was how involved the heirs or beneficiaries should be in the preparation of an estate plan. Opinions varied widely, but most agreed that the more likely it was that a dispute would arise once the plan went into affect (i.e. when the testator died), the more important it was that the heirs and beneficiaries be involved during the planning process - espcially if the intention was to leave someone out, or to give them less than others.

Not to be outdone, the NY Times printed this article in yesterday's edition. They discuss how children fight over their parents' estates, and how to avoid the conflict. One person profiled, Eric Zeller, started the process of discussing his estate with his children early on. He intended to leave his estate to various charitable entities rather than to his children, so throughout their lives, he talked with them about how to make their own way in the world. As they grew up, they did not have the expectation that they would get their Father's money, and they became independent.

Not everyone agrees that a parent should leave nothing to their children in order to keep them from being too dependent on their parents. But whatever your intentions are, you should make them known to your children, relatives, friends, and anyone who may believe they might get a piece of your estate. It's not a guarantee against disputes, but it's certainly better than keeping it to yourself.

What do you think?

Summary Administration: It's Not for Everyone

In the recent California case of Bonanno v. Connolly, the Court of Appeals for the Second District held that a spouse who waited until after most of a large estate was administered in a probate proceeding was estopped from filing a spousal property petition under Probate Code section 13652. The case didn't lack for drama. Louis Bonanno had a daughter, Jacqueline. Louis had a girlfriend, also named Jacqueline (!). Jean and Louis had been separated for 12 years when he died intestate (without a will) in March 2003. Jean and Louis were in the middle of divorce proceedings at the time of his death. Louis was living with his girlfriend Jacqueline at the time of his death.

Not surprisingly, a big fight ensued. Connolly was appointed administrator of the Louis' estate (although Jean and Louis were still married, Jean was not entitled to priority as administrator because she and Louis were in the middle of a divorce and were not living together when he died). Jean filed a petition claiming that she was entitled to all of the joint tenancy property she held with Louis, and all of his other property. Jean also sought half of the property Louis transferred to girlfriend Jacqueline. Not to be outdone, girlfriend Jacqueline filed a peititon to determine an interest in Louis' estate, based on a palimony claim based on an oral agreement she entered into with Louis about 12 years before he died. Connolly objected to both Jacqueline and Jean's petitions.

The parties resolved their dispute in December 2003 splitting the estate among the three of them. Because of disputes over the language of the settlement agreement, a final agreement was not signed until March 2006. Connolloy administered the estate, paying off creditors and gathering the assets.

Jean, apparently having developed an affinity for the legal system, filed her spousal property petition under Probate Code section 13650 in May 2006. She claimed that she was entitled to summary administration of all the assets of the estate except those distributed to Connolly and Jacqueline under the March 2006 settlement agreement. Estate property disposed of under this summary administration is not considered part of the probate estate, and is not included in the calculation of statutory administrator or attorney fees. If granted, Connolly's (and her attorney's) fees would be reduced from $58,000 to about $23,000 each. For three years' work.

The court of appeals held that Jean was estopped from seeking summary administration under Probate Code section 13650. Most of the administration of the estate had already occurred: assets had been gathered, creditors notified and paid. It would be inequitable for Jean to get all the advantages of a full probate administration without having to pay the fees of a probate administration.

There are some good nuggets to take away from this case:

• Don't assume you know what the size of an estate is before it has been inventoried. Many clients come to me and say "what do we need to go through probate for? Grandma didn't have any money." The original estimate of Louis' estate was $600,000, but after the administratory, Connolly discovered that his estate was greater that $4 million! This included many assets and real estate no one knew about.
• A probate administration can take forever. Louis died in March 2003. This appellate court decision was filed in July 2008. Five years and four months is a long time to wait for your inheritance. And your attorney fee.
• Summary administration is not always the best way to go. Although it may save time, you cannot take advantage of some of the protections of a full probate administration - most notably the notice to creditors. In a probate, once notice to creditors has been sent, they have generally about four months to file a claim. After that four months has passed, the creditors are out of luck. No such mechanism exists under a summary administration. There is no time limit to when a creditor can file a claim, and a surviving spouse can be personally liable for the decedent's debts chargeable against the estate.

James Brown Estate Auction Update

James Bernstein over at New York Probate & Estate Litigation Blog posts that a court in South Carolina has ordered that the Auction of Mr. Brown's estate go forward. Read his post for more details.

Estate of the God Father of Soul

Heirs - named, disputed and otherwise - are fighting over the goodies in James Brown's estate. The NY Times reported over the weekend about how the planned auction of items from the GFOS's estate is being postponed while the dispute is dealt with.

So, if you were planning on getting one of those glittery jumpsuits, or some unused hair product, you're gonna have to wait a little while longer.

Remember, when planning your estate, don't be shy. Tell your estate planning attorney about ALL your potential heirs, and whether or not you expect anyone will contest your estate. Better to get it over with now. No one likes posthumous surprises.

Recent Case Law Update

This is something I haven't done much of, but I think is important. So here goes.

California Antideficiency Statute Does Not Apply to "True" Guarantors

California passed antideficiency statutes during the Depression. They are codified in California Code of Civil Procedure sections 580a, 580b, 580d and 726. The law basically says that if you go into default on your home mortgage, for example, and the bank sells the property in a foreclosure sale for less than what you own on the mortgage, the bank cannot get a judgment against you personally for the difference (or "deficiency").

William and Janyce Hustwitt were guarantors of a loan to their irrevocable Investment Trust, secured by a trust deed for certain real property in Newport Beach, California. The Trust defaulted and the lender, which was actually another trust, foreclosed on the property. The lender sold the property for about $388,000 less than what was owed on the loan, and then sued the Hustwitts for the deficiency under their guaranty agreements. The trial court awarded the deficiency amount, plus interest, to the lender.

The Hustwitts appealed on the grounds that the antideficiency law applies to guarantors, and that in any event they were not "true"guarantors because they were too closely related to the debtor (which was their Investment Trust) as beneficiaries and trustees of the trust.

The appeals court didn't buy it. California law is clear that the antideficiency statute does not apply to guarantors. The antideficiency statute is intended to protect debtors. A guarantor is a separate and independent obligation from that of a debtor. The antideficiency laws do not protect the guarantors.

The appeals court also didn't buy the Hustwitt's argument that they were not "true" guarantors. Sometimes a debtor (or "principal obligor") will take on additional liability as a guarantor of the debt. Courts in California have held that this does not create any additional obligation on the part of the debtor, and that they are therefore not "true" guarantors. Thus, the antideficiency statutes would still apply, and the fact that the debtor is also a guarantor is irrelevant.

Here, the Investment Trust that held the property was an irrevocable trust with a corporate trustee. Although the Hustwitts were the settlors of the trust, they were only secondary, and not primary beneficiaries. The court held that this arrangement removed them from personal liability for the trust's obligations, and also limited their beneficial enjoyment of the property. The court concluded that they were "true" guarantors, and that the antideficiency statute did not apply.

The upshot of this case is that, although irrevocable trusts are a great tool for limiting your liability in and exposure to certain downsides, they are not a "get out of jail free" card. You cannot have it both ways - being protected from the liability of an obligor while taking advantage of certain protections afforded an obligor.

The case is Talbott v. Hustwitt and it was decided in the Fourth Appellate District of California (Orange County). You can read the entire decision here.

Privacy of Trusts Challenged

A post recently in the Wills, Trusts and Estates Prof Blog mentioned a paper written by Frances H. Foster, the Edward T. Foote II Professor of Law at Washington University in St. Louis. The St. Louis connection lets me finally post one my favorite photos I took during a trip there several years ago.

But I digress. I have not read the full article, but the gist of it, from the Prof Blog, is that the issue of trust privacy has not been properly addressed by reformers, and that the "human cost" of trust privacy should be considered when discussing how the laws related to trust privacy should be reformed.

Presumably, the main concern here is that because trusts are private, they can be created and administered outside the purview of interested parties. So family members, heirs and relatives would not be able to know who the beneficiaries of a trust were, how the trust assets are to be distributed, and what the trustee is doing with the trust assets.

Living tusts, unlike wills, do not go through probate when the settlor, or trust creator, dies. This means that there is no automatic court supervision of the management and distribution of a trust on the death of the settlor, as there is with a will. That does not, however, mean that the court never gets involved with trusts. When a settlor dies or when a trustee changes, California Probate Code section 16061.7 requires the trustee to notify the beneficiaries of a trust, the heirs of the settlor, and where the trust is a charitable trust subject to the supervision of the California Attorney General, the Attorney General. This allows these parties time to challenge the trust, for example. California law also requires trustees to prepare accountings of the trust administration, which is designed to keep beneficiaries up to date on the trust's inner workings. Interested parties can also contest the trust in much the same way that they can challege a will.

While it is true that there is no automatic court supervision of trusts, there are many court procedures for making sure that individuals' interests are protected in a trust. It is certainly debateable whether a trust must be made public in the way that a will is when many of the challenges available to a will are also available to a trust.

Of Trusts and Unitrusts

I have been given the opportunity to represent a trust regarding the possible conversion of the trust to a unitrust.

In California, as elsewhere I suspect, unitrusts are used to take advantage of federal tax laws related to the powers of trustees to invest the trust funds. There are other reasons for unitrusts as well.

In my earlier post, I talked about the "essence of estate planning." I defined this essence as carrying out the intentions of the clients, whether they are the settlors, the beneficiaries, or the trustees. What if your client is the trust itself? What does that mean? How do you determine what the best interests of the trust are? Chances are the beneficiaries may be at odds, as income and principle beneficiaries often are.

Probably the most challenging thing about estate planning is walking the fine line between carrying out the intentions of the trustor and minimizing potential conflict with the beneficiaries. The system has many options for addressing this after the fact. Conversion of a traditional net income trust to a non-charitable unitrust is one of those options.

Again, keep your ears open. Listen to all the parties. What are they saying? What is it that they want?

The Essence of Estate Planning

Americans spend a great deal of their lives trying to amass financial wealth. They work very hard at it. Some achieve it, while many, if not most, do not. It is the American way, or so it seems.

For those who have achieved some measure of financial wealth, a large amount of time is spent thinking about ways to keep as much of that wealth as possible. To do this, people employ a staff of accountants, financial planners, attorneys, and others to maximize the money they have, and minimize the money that they have to pay to others (i.e. taxes). These professionals spend their time (and their client’s money) preparing ways to make as much money as possible while keeping as much as possible out of the hands of the government. Sometimes, in their zeal to avoid taxes, these professionals get themselves and their clients into trouble. Sometimes these schemes are so complex that it takes a small army of government workers to figure out how they were structured.

We refer to estate taxes as “death taxes.” Trusts are structures with the primary purpose to avoiding paying taxes, or at least to minimize the tax impact. The IRS will find a particular scheme to be an illegal tax shelter if it was prepared with the primary intent of avoiding taxes, and there is no legitimate non-tax purpose. So we find ways to explain away these tools as being primarily for some other purpose. But let’s be honest, if it weren’t for taxes, there would be little or no demand for GRATs, QTIP trusts, marital deduction trusts, or QPRTS (if this alphabet soup is foreign to you, don’t worry. You are not alone).

Why am I going on about this? Because sometimes you have to just have to give it up and pay some taxes. Some really rich people have been talking about how too much effort has been spent on tax avoidance, and how the tax code is rife with loopholes that allow people to pay a proportionately low share of taxes. These people include Warren Buffett (really rich), and Bill Gates, Sr. (not as rich as his son, but still pretty rich).

Most Americans don’t have to deal with this issue in their estate planning because they don’t have that much money in their estates. Their main concern is making sure they leave some money to friends and loved ones, and making sure that their wishes are carried out properly. That is the essence of estate planning.

I have spent a lot of time talking with other trust and estate attorneys with clients who have large estates, and most of what they talk about is how the beneficiaries and heirs complain over getting “their share” of the money, and complaining about how others are getting too much, or how others are exerting too much influence over the trustee, or how the trustee isn’t doing their job properly (read: maximizing their take). It is doubtful that the person whose money they are fighting over intended such a result. As attorneys, it is our job to structure a plan that carries out the client’s wishes while minimizing potential family discord. Easier said than done, but it is the only way to accomplish the true essence of estate planning.

Limitations

The current issue of Harper's includes an article about how we have strayed from our understanding that the world and its resources are finite, that our knowledge and understanding are finite, and how we must re-learn to understand limitations and to work within them. Wendell Berry uses the example of artists, who use their creativity within the limitations of their chosen medium, e.g., a painter who is limited to colors and types of paints, and the size of the canvas. The challenge is for all of us to understand our limitations, and to work and think creatively within those limitations.

Trust and estate law, as is all law, is defined by its limitations. The challenge for an estate planning attorney is to craft a plan that accomplishes the goals of their client as efficiently and creatively as possible. Attorneys like to think that they know everything, and can solve any problem. This often leads to promising results for their client that are either not really possible, or that create problems that don't show up for many years.

Lawyers can't do everything. Our challenge is to listen to our clients and craft solutions based on what we hear. This does not need to result in piling on clauses in a trust document that turn it into a long, unreadable tome that tries to cover every base whether it needs to be covered or not, and may create more problems than it solves. For example, does a trust need a long, detailed instruction on creation of a special needs trust for a potential beneficiary when none of the intended beneficiaries have special needs? Should a trust contain boilerplate clauses to reduce estate tax exposure when the size of the estate is not likely to trigger the estate tax? In the litigation context, should a trust or will contest for an omitted child be attempted where there is only scant evidence that the parent lacked capacity or was unduly influenced?

Understanding the limitations of what we can do for our clients, and the limitations of our scope of representation for our clients, and drafting a thoughtful and creative solution. That makes us better lawyers, and it helps our clients in the long run, even if it sometimes means telling a client something that they might not want to hear.

More on Listening

Further to yesterday's post, Blawgletter talks about streamlining litigation. The context is business litigation, but the concept is the same: don't just do what you've always done before. Listen carefully to what you client is saying (and what he or she is not saying), and determine what they want. Then craft your litigation plan to achieve the result as quickly and efficiently as possible.

In the context of trusts and estate litigation, this may mean restructuring a trust document to allow family members to receive something where they were originally omitted as beneficiaries. At the Alameda County Bar Association Estate Planning Committee meeting I attended yesterday, the topic drifted to trust litigation. An attorney had a client who was a beneficiary of her husband's trust (husband is still living). She was concerned that her husband's children from a previous marriage were going to challenge the trust, which did not provide anything to them. One of the attorneys suggested finding a way to restructure the trust document to include a gift to the kids, and avoid the messy and expensive litigation that is likely to occur. The kids want something because they feel left out. It might not even be that much, but you have to start by listening to them. The spouse wants to avoid litigation and confrontation with the children. What does the husband want? If he wants to make his wife happy (which presumably does, and is why he is giving her everything), then he may be willing to listen to the options.

As litigators, it's too easy to fall back on the tools of our trade: pleadings, threatening letters and discovery, to "solve" problems. This piles up expenses and animosity and stress for our clients (and ourselves as well). Listening can avoid all this, and elevate the level of our practice.