United States: Estate & Trust Litigation

This article starts with a California case offering a lesson in how to get property out of a trust.

Next, one more state apparently joins the trend of abandoning the traditional percentage attorney fee arrangement in estate administration. This case upended the long-standing practice of district judges in Clark County, Nevada of routinely awarding attorneys’ fees in probate based upon the gross value of the estate.

Many attorneys assume that if the property designated in a bequest is not in existence at death, the bequest is adeemed. This is not necessarily the case, as explained by the Illinois court in Bollman which held that the application of ademption depends upon the decedent’s intent.

Readers from states like Illinois that still have a Dead Man’s Act rendering certain testimony by an interested party inadmissible will want to read the summary of our second Illinois case (Gunn), wherein the Appellate Court overturns prior precedent and delves into whether or not a nonoccurrence is an "event" for purposes of the statute.

In National City, our third Illinois case, courts are reminded that the decision as to the best use of the trust corpus is not entrusted to the trial court, however wise and well-intentioned, but to the settlor.

Next from Georgia, an interesting case as to when an executor’s duties begin to run.

Finally, individuals or entities considering accepting a trustee appointment may want to read this article’s Risk Management Tip.

Before agreeing to act as trustee, there are five factors to consider. First, the risk profile and profitability standards. Perhaps the greatest risk management tool is to avoid trusts with high risk profiles, and those which, regardless of risk, do not meet with the trustee’s profitability standards.

Second, the trust instrument. A potential trustee should review the trust document for ambiguities, inconsistencies, potential tax problems and potential conflicts of interest as well as the trustee provisions (most importantly, the exculpatory clauses, if any).

Third, the nature of the trust assets. The potential trustee must be sure that he, she or it is capable of handling the specific trust assets. For example, being trustee of a trust which controls a closely held business is very different from a trust which is made up solely of marketable securities.

Fourth, beneficiary and co-trustee information. The potential trustee should learn as much as possible about the trust beneficiaries, including their family history and familial relationships (in particular, any history of family tension or prior litigation between family members). If co-trustees are involved, it is extremely important for the potential trustee to become familiar with the other trustees and learn as much as possible about the other trustees’ respective reputations.

Fifth, whether a successor trusteeship is involved. An analysis of the scope of liability of a predecessor trustee should be conducted as well as a thorough examination of the successor trustee’s duties.

Also, the successor trustee should inquire as to why the trusteeship is being changed and attempt to assess the litigious nature of the beneficiaries and, if applicable, the cotrustees. The best advice that we can offer is "when in doubt, decline".

Heaps v. Heaps, 21 Cal.Rptr.3d 239 (Nov. 19, 2004)

In Heaps, the California appellate court affirmed a judgment that required the decedent’s second wife to pay over assets that she originally thought were the decedent’s (and later thought were hers) to the children of the decedent’s first wife. The court held that the proceeds from sale of trust property that the decedent and his first wife held as joint tenants remained in the decedent’s trust because one of the trust’s provisions required the trustees to do more than simply change the form of title to the property in order to remove it from the trust.

In 1985, George and Barbara Heaps ("Wife #1") executed a joint revocable living trust, with both spouses acting as trustees. The trust was to become irrevocable upon the first spouse’s death and would then split into a family and marital trust. The couple placed their residence in the trust via a quitclaim deed. The couple gave the deed to their attorney, but the attorney failed to record it. Four years before Wife #1’s death, the couple sold the residence for $320,000 and took title to a promissory note and all-inclusive deed of trust as joint tenants. Upon Wife #1’s death, the trust became irrevocable.

In 1996, George and Mary Ann Heaps ("Wife #2") created their own family trust and executed a quitclaim deed transferring any interest in the residence and in the all-inclusive deed of trust to the new trust. After George’s death in 2002, Wife #2 transferred all the assets from that trust to her own revocable trust.

After his death, George’s children from his first marriage discovered the existence of the 1985 trust and sued. The lower court held that the proceeds from the sale of the residence remained in the 1985 trust and the 1996 and 2002 transfers were effectively conversions of property not belonging to either George or Wife #2. Wife #2 appealed.

The appellate Court affirmed the lower court’s decision. The Court was not persuaded by Wife #2’s argument that, by taking title to the residence sale proceeds, George and Wife #1 were exercising their power to remove assets from the trust. The Court reasoned that, pursuant to the trust’s terms, withdrawing trust asserts required something more than simply taking title in a form that would be in some name other than the trust’s name. Specifically, Section 1.06 of the trust required a "duly executed instrument" to amend the trust (the Court noted, in dicta, that because the couple were their own trustees, a memo to themselves would have sufficed). Moreover, the trust had a "landmine" provision (Section 5.06) that, according to the Trust, made it too easy and convenient for the trust to hold property – this provision specified that title to trust property could be held in any manner. Therefore, by saying that title to trust property could be held "in any way", this provision necessarily meant that selling an asset and taking title in a name other than the trust’s name would not, by itself, take property out of the trust. The Court held that the clear intent of this provision was so that it would be easy to ignore the trust’s existence and still maintain assets in the trust. The Court showed off its technological prowess in using a computer, stating, "there is a price to be paid for such convenience. In computerese, section 5.06 made "remain in trust" the default setting. Some affirmative action beyond merely a change in form of title on the part of the trustors was required to click off the default."

Estate of Bowlds, 102 P. 3d 593 (2004).

John Bowlds died in 1999 with an estate valued in excess of $7,000,000. The decedent’s Will named his tax preparers as executors. The executors retained the law firm of Kyle & Kyle to represent them in administering the estate. The engagement agreement stated that the Kyle Firm would receive a fee equal to 5% of the estate’s gross value plus $250 per hour for "extraordinary" fees. The estate’s administration required satisfaction of one creditor’s claim, liquidation of highly marketable securities and distribution of property in Nevada and Louisiana. The Kyle Firm recommended that the securities be sold through three different brokers to avoid the appearance of "favoritism" arising with use of the executors’ personal broker (two of the brokers charged 5%, the other charged 1%). The executors filed an accounting seeking approval of the 5% attorneys’ fee to the Kyle Firm, extraordinary attorneys’ fees and the brokerage commissions charged by the three independent brokers.

The American Cancer Society (the residuary beneficiary of the decedent’s estate) objected to the accounting alleging, in pertinent part, that the attorneys’ fees were excessive and that the executors breached their fiduciary duties in paying the brokerage fees. The trial court held that the attorneys’ fee arrangement was reasonable based upon the State’s customary practice of awarding attorneys’ fees as a percentage of the gross estate. The court further held that the excessive brokerage commissions should be assessed against the attorneys.

The Nevada Supreme Court reversed the trial court’s findings and held that attorneys’ fees for administering a probate estate based on the percentage of the gross value of the estate are not per se reasonable and when challenged, must be independently reviewed for reasonableness based on all of the factors set forth in the rules governing awards of attorneys’ fees. The court also assessed excess brokerage commissions against the estate attorneys finding that the attorneys paid expensive non-negotiated brokerage fees and wasted estate assets. Finally, the court denied extraordinary fees to the estate attorneys (including tax return preparation fees) and denied a refund to reimburse the executors for separate counsel attorney fees to defend this matter.

Bollman v. Pehlman, 352 Ill. App. 3d 1203, 817 N.E. 2d 584 (4th Dist. 2004).

Affirming that the intent theory relating to the rule of ademption applies to testamentary trusts as well as Wills, the Appellate Court found that the Trustee/beneficiary’s actions as Trustee could not cause ademption of a specific bequest.

Testator created a testamentary trust for the benefit of his wife during her lifetime, naming his son as Trustee. One asset of the trust was a debt owed to the testator by his Company. At the surviving spouse’s death, the debt and all Company stock were to be distributed to testator’s son, and all remaining trust assets were to be divided between testator’s son and daughter. While the testator’s wife was still alive, testator’s son, as Trustee and co-owner of the Company, liquidated the Company and paid the debt owed to the trust by the Company. At the surviving spouse’s death, son, as Trustee, distributed the proceeds from the liquidation of the Company and the debt amount to himself. Testator’s daughter argued that the specific bequest of stock and the debt obligation to the testator’s son had been adeemed when the debt was paid and the Company was liquidated.

The Appellate Court disagreed, stating that Illinois law holds that a bequest is adeemed only if the testator acts in a way indicating his intent to revoke the bequest. In other words, the testator’s intentional act is required to revoke a specific bequest by ademption. Where the devised property is conveyed away by someone other than the testator, no ademption occurs under the intent theory. The actions of the Trustee cannot and did not cause ademption, and thus the court found that the testator’s son was entitled to the proceeds of the stock and the debt obligation upon termination of the trust.

Gunn v. Sobucki, 352 Ill.App.3d 785, 817 N.E.2d 588 (2nd Dist., October 22, 2004)

This case involved a coin collection that had been in the possession of Lee Sobucki’s late husband, Robert. It was undisputed that the collection was received from the Plaintiff, Edwin Gunn. Following Robert’s death, Gunn demanded the return of the coins.

The widow produced a bill of sale signed by Gunn and reciting that he received $30,000 in exchange for the coins. Over Sobucki’s objection, the trial court allowed Gunn to testify that he never received any consideration for the coins and that the bill of sale was a sham, created to prevent Gunn’s then-wife from being awarded any part of the collection in pending divorce proceedings. The trial court relied on Smith (273 Ill. App. 3d 866), a First District decision, which held that a failure to pay money is not an "event" under the Dead Man’s Act. From the ruling for Gunn, Sobucki appealed.

Agreeing with the dissent in Smith, the appellate court held that Gunn’s testimony regarding the alleged nonpayment should have been excluded. Creating a split in the Illinois appellate courts on this issue, the Gunn court held that the "nonevent analysis is nothing more than a semantic exercise." Testimony that one did not do a certain act is the equivalent – for purposes of the statute – of having done the act and is prohibited.

National City Bank of Michigan/Illinois v. Northern Illinois University, 818 N.E.2d 453, 288 Ill. Dec. 765 (2nd Dist. Ct. App. November 5, 2004).

The Donor created a Scholarship Trust to provide scholarships to "deserving persons from the Midwestern states … to enable such persons to acquire and complete their [degrees], primarily in Catholic, but also in public and private colleges and universities." The Trust was to continue for 50 years, with any remaining funds distributed to the Catholic Diocese of Rockford to provide scholarships to deserving persons. The Trust named National City Bank as Trustee and the scholarship awards were to be overseen by an Advisory Committee consisting of (1) a person appointed by the president of DePaul; (2) a person appointed by the president of NIU; (3) a person appointed by the senior judge in age of the US District Court having jurisdiction in DeKalb; (4) a person appointed by the Catholic Bishop of the Rockford Diocese; and (4) a person appointed by the president of Loyola.

Ten years after the Trust’s creation, a majority of the Advisory Committee (the "Majority") exercised its power to amend the trust when "it was necessary or advisable to enable the Trustee to carry out the purpose of the Scholarship Trust Estate more effectively." The Amendment directed the trustee to distribute 11.11% of the Trust to each of DePaul, NIU and Loyola for scholarships to students attending those universities and to distribute the remaining 66.67% to the Diocese. The Trustee filed a request for declaratory judgment on the grounds that the amendment exceeded the authority of the Advisory Committee because it improperly terminated the Scholarship Trust and was contrary to the provisions in the Scholarship Trust. The Majority denied they lacked authority to amend the Scholarship Trust and moved for summary judgment, arguing that the separation of the Scholarship Trust would eliminate many costs, permitting the award of a greater number of scholarships. The Trial Court granted the Majority's request for summary judgment, expressing its belief that the cost efficiency of the Scholarship Trust was a more important consideration than whether the Advisory Committee had the legal authority to execute the amendment.

On appeal, the Trustee argued that by upholding the amendment, the trial court improperly substituted its judgment as to the best use of the Scholarship Trust's funds for that specifically chosen by the Donor. The Court of Appeals agreed, finding that the "separation" of the Trust was an improper termination of the Trust because the separation would terminate the Trustee's fiduciary relationship. In addition, the Court of Appeals found that the amendment thwarted the Donor's purpose by terminating the independent scholarship bearing the Donor's name in favor of scholarships that would be limited to three universities and by decreasing the amount of funds distributed to the Diocese upon termination from 100% to 66.67%. Finally, the Court of Appeals found that the trial court was without authority to casually set aside the plain language of the trust as a legal "technicality," even if to do so would be the more "practical" course of action.

Stewart v. Walters, 602 S.E.2d 642 (Ga. S.Ct. September 13, 2004). In a split decision, the Georgia Supreme Court held that an executor's fiduciary duty does not pre-date the term of the executor's service. The decedent made a $50,000 gift to his son in 1995. The gift was not acknowledged by either the decedent or his son in writing as an advancement against the son's share of the estate. Upon the decedent's death in 2001, the son was appointed as executor of the decedent's estate. Decedent's daughter brought a suit against the son, claiming the 1995 gift was an advancement and should be deducted from the son's share of the estate.

Between the time of the gift and the time of the decedent's death, a new statute was passed requiring all advancements to be acknowledged in writing. The parties agreed that the new statute applied to the gift in question and also agreed that there was no written acknowledgement of the advancement. The Court of Appeals found that, despite the lack of a written acknowledgement, the son had a sacred duty as executor to acknowledge the transfer as an advancement, if that was in fact the decedent's intention. The Supreme Court majority, however, disagreed, finding that an individual who is appointed executor of the estate subsequent to a lifetime transfer cannot be in breach of any fiduciary duty imposed upon an executor at the time of the monetary transfer. The majority concluded that to impose such a duty would penalize the transferee, forcing nominated executors to decline the position, thereby thwarting the expressed desires of the testator.

The dissent agreed with the Court of Appeals that the son should reveal the truth of the decedent's intention regarding the gift, stating that all fiduciaries have the duty to act in the best interests of all of the persons interested in the estate and that requiring an executor to reveal the truth concerning an earlier transaction did not penalize the executor.

Samantha Weissbluth gratefully acknowledges the assistance of the following individuals in preparing this article: John T. Brooks, William C. Weinsheimer and Sharon C. Nelson (Chicago),and L. Elizabeth Beetz (Milwaukee).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.