- Posts by William Keeler, Jr.Principal
Licensed in Oregon and California, Bill has tried cases involving estates, trusts and conservatorships throughout Oregon, California and neighboring states, and has been designated as an expert witness in trust, estate and ...
Playing out in a Los Angeles courtroom over the next few weeks is a battle between the Internal Revenue Service (IRS) and the executors of Michael Jackson's estate over how much value there was to his name and image at the time of the superstar's death in June of 2009. At stake could be as much as $1 billion in estate taxes and penalties.
The need to decide what a trustee should or shouldn’t do, at least under English law, goes back as far as the 12th century and the Lord Chancellor’s establishment of the Courts of Chancery. It may not have gotten much better as trust litigation is certainly an expanding field with the kinds of disputes between trustees and beneficiaries expanding, at least in part as a result of tax-driven trust strategies and special needs trusts.
Who are these people? In many instances the affinity between a trustee and the beneficiaries of a trust depends on how each came to the party. Selecting fiduciaries by the settlors of trusts run to themes repeated and familiar to estate planning attorneys. Among those choices, although not an exhaustive list, often is the surviving spouse (whether or not the parent or step-parent of beneficiaries), the eldest or the perceived most competent child (or grandchild, or niece, or nephew), the aunt or uncle of the beneficiaries, private fiduciaries, corporate fiduciaries and trusted consultants including accountants, investment managers and attorneys. A quizzical decision seen is the choice of co-trustees from opposite branches of a blended family. A variation on that theme is a step-child remainderman beneficiary selected to serve together with the surviving spouse. Obviously there are as many if not more varieties of beneficiaries, including the very common surviving spouse as a lifetime income beneficiary with children or grandchildren as remainder beneficiaries. Those beneficiaries may be the second (or third or more) spouse, natural and/or step-children and continuing sub-trusts for the benefit of any of those. Adding charitable beneficiaries and their development directors brings a certain flavor to the relationship between trustee and the beneficiaries. The significance of trustees coming from such a diversity of persons, entities and combinations of the same as well as the variety among those named as beneficiaries is that the continuum in the relationships between trustees and beneficiaries is almost infinite.
Why conflict? It’s a given that there will be tension between income beneficiaries and remaindermen visited upon the trustee and which can range from questioning investment decisions or the interpretation of principal and income rules, to objecting to invasion of principal and even claims of breach of the duty of impartiality. Since a common tax-driven estate stratagem for a couple involves the creation of separate trusts at the first death, some irrevocable, some with required distribution of income and the right to trust assets be made productive, some with provisions for invasion of principal based on any number of criteria and most with remaindermen beneficiaries whose beneficial interests are impacted by any invasion (and who may or may not be entitled to be told what is happening in the administration of the trust).
What’s to argue? Sometimes trustees just don’t do what they are supposed to do or beneficiaries demand they do what they shouldn’t. But conflict among them can also be a bewildering assortment, including interpretation or what does the trust say, investing or what is the trustee doing with the assets, distribution or when and what should be given to the beneficiaries, reporting or what is being told to the beneficiaries by the trustee, accountings or are all the assets there or at least traceable, delegation or is the trustee hiring the right people, compensation or is the trustee overpaid and the broader issue of breach or is the trustee doing something wrong. Trusts that give the trustee discretion present their own problem as a trustee might reasonably believe that absolute or sole discretion means the trustee can do whatever they want. Yet most states (ORS § 130.715) temper that discretion with a requirement of good faith and consideration of the purposes of the trust and the interests of the beneficiaries.
What about elder beneficiaries? Beneficiaries who are under a disability, including just the ravages of age often have no one to look out for their beneficial interests. This can mean that even with a trustee investing properly, taking appropriate compensation, asking the court to approve accountings and providing all the appropriate information relevant to the beneficiary’s interest something is missing. An older beneficiary, even a surviving spouse who never handled the finances, and who just so happens to lack the ability to understand the information provided by the trustee, may not be willing or able to ask for what he or she needs. Should there be a new obligation or duty for a trustee whose beneficiary is elderly or the beneficiary of a special needs trust? Such a trustee ought to be active in seeking information on the beneficiary’s condition and abilities and, when that ability is lacking, consider an advocate who will communicate on behalf of the beneficiary with the trustee.
Tom Clancy, who died in October 2013 at age 66, was best known for his many New York Times # 1 bestsellers in the techno-thriller spy genre he invented, but the author was not as renowned in the obscure world of estate tax allocation. That changed a bit in late August.
Mr. Clancy's $83 million dollar estate, which included an interest in the Baltimore Orioles as well as a large real estate holding in Maryland and a World War II tank, ended up owing almost $16 million in transfer taxes. Unfortunately the author's Will, according to the decision from a Baltimore probate judge, contained "inartfully drafted" direction on who should pay that tax.
The question presented to Judge Lewyn Scott Garrett was whether Alexandra Clancy, the decedent's second wife, and their child should have to pay estate taxes on the two-thirds of the estate they received from the author. Aligned against the widow were the four children from Mr. Clancy's first marriage who, in an interesting twist, argued Mrs. Clancy should get a larger share of the assets which, however, would be reduced by having to bear a portion of an even greater estate tax.
In many estate plans the provisions that determine who will be responsible for estate taxes can be almost an afterthought and not even deliberated with the client. When an estate that will be subject to estate tax is planned and there actually is a conversation about whose share will pay that tax, many clients prefer that discussion be simple and are often willing to accept the default estate tax allocation provision contained in the statutes of the state in which they reside. But simplicity may still not be realized. The default under the common law is that taxes are paid from the residue, but many states, Maryland included, consider equitable apportionment and have complicated estate tax apportionment statutes. When the taxable estate which is subject to such tax includes marital deduction provisions, retirement plans, accounts with surviving joint tenants or pay on death provisions, life insurance policies, partnership interests, one or more trusts and different categories of heirs and beneficiaries, the complications over who pays how much of the estate tax can increase.
For Mr. Clancy’s estate tax, Judge Garrett took the position that the language in his Will showed an intent that Alexandra Clancy not be responsible for estate tax on her share of his estate.
Another famous person’s estate made headlines last week when publications such as Forbes and Rolling Stone reported a Los Angeles jury awarded $7.4 million to the estate of the late Marvin Gaye for accidental copyright infringement. The victorious litigants were actually the children of the late singer and songwriter, Nona Gaye, Frankie Gaye and Marvin Gaye III, referred to in the jury verdict as the Gaye Parties. Before deciding that Pharrell Williams and Robin Thicke, referred to as the Thicke parties in the verdict, had infringed the copyright to Mr. Gaye’s 1976 song, Got To Give It Up in their 2013 hit song, Blurred Lines, the jury first had to find by a preponderance of the evidence that the Gaye Parties owned a valid copyright to their father’s composition.
Mr. Gaye, who died in 1984 after being shot by his father, failed to leave a Will thereby joining a long and distinguished list of famous personalities who died intestate. The estate was probated years ago and resulted in the singer and songwriter’s “intellectual property” passing to his children.
Rumors began as people noticed the similarities between Blurred Lines and Got To Give It Up and Mr. Williams and Mr. Thicke launched a preemptive strike by filing an action against the Gaye children for declaratory relief in the United States District Court in the Central District of California (Case No. CV13-06004-JAK). That lawsuit sought a determination that Blurred Lines was the result of their own independent efforts and not surprisingly the children counter-claimed. Although the jury found the infringement of the copyright wasn’t willful, they awarded $4 million in copyright damages and the balance as profits from the infringement.
Intellectual property such as copyrights pass to the heirs of a deceased artist under federal law although the identity of those heirs where there isn’t a Will is determined according to state law. Someone who dies without a Will is considered intestate (without a Last Will and Testament). The rules of intestate succession are common sense and similar from state to state. In California, where Mr. Gaye was living at the time of his death, those rules are found in the California Probate Code (see Probate Code §6402). Nevertheless, it is the U.S. Patent Office which actually controls the ownership of a copyright and issues the documents which establish ownership. The U.S. Patent Office is not the only federal entity which controls the transfer of a decedent’s assets. For example the ATF (Bureau of Alcohol, Tobacco, Firearms and Explosives) regulates the transfer of Class III firearms to a decedent’s heirs.
We’ve seen it before: the caregiver becomes the primary or only heir of the Will executed shortly before death and the family files a contest. That same drama is being played out before a Probate Judge in Cook County, Illinois over the estate of one of the most beloved of Chicago sports heroes, Ernie Banks.
Regina Rice has been taking care of Mr. Banks for a number of years and filed a Will for probate in Chicago which Ernie executed at the offices of Illinois attorney Byron Faermark just three months before he died. Initially Elizabeth Banks, the estranged wife, had been given control of the estate on the claim that her husband died intestate. The Cubs legend, a member of Major League Baseball’s exclusive 500 home run club, was survived by Elizabeth as well as twin adult sons and a daughter from prior marriages. The Will offered by Ms. Rice, whose initial estimate of the probate estate was a mere $16,000, states that Mr. Banks was making no provisions for his wife and children, “not for a lack of love and affection for them and for reasons best known by them”. The minimal probate estate value may not be unusual if there are non-probate assets (for which Ms. Rice will need to account) since the Will is a pour-over instrument to the Ernie Banks Declaration of Trust dated October 17, 2014. The terms of the Trust remain, for now, undisclosed except that Ms. Rice is the trustee and the widow has asked for a hearing on the validity and circumstances of the Will.
At a late February hearing Judge James Riley approved a request from the slugger’s widow for leave to file a citation to discover assets (not an order, as widely reported, that the caretaker provide a full accounting of the estate). Also the Judge converted the estate from independent to supervised jurisdiction, which resulted in Ms. Rice needing to seek the Court’s permission before selling or moving any assets. Earlier there had been a battle over the disposition of the body, with Ms. Rice wanting cremation and the family seeking a burial. However, that dispute was resolved with Mr. Banks’ burial at Graceland Cemetery and left the funeral home claiming a significant sum. Just this past weekend the Chicago Cubs organization stepped up to the plate and said they would take care of those funeral expenses.
Illinois has joined other states in seeking to protect against caretakers taking advantage of the elderly by recently adding a presumption under its Probate Act (755 ILCS 5/4-a) that there has been undue influence if a Will benefits a caregiver. This is similar to what California has had in place for a number of years (California Probate Code § 21380).
However the Illinois statue only applies to Wills signed after January 1, 2015 and the Will in question was executed in October of 2014.
On a side note, another pending battle over a famous estate is that of Robin Williams who committed suicide in August of 2014. Those litigants are his widow (from a three year marriage) and his three children. Mr. Williams’ estate plan has more going for it than many that wind up in Court, including a prenuptial agreement in late 2011 and a Trust, amended in January of 2012 which the spouse claims is consistent with the terms of that agreement. Most recently there have been pleadings to interpret the Trust language as to personal items to go to the children such as memorabilia, jewelry, watch collections and the contents of the actor’s home.
The decision of a Los Angeles probate judge this past Monday provides a glimpse not only into the private lives of owners of an NBA franchise, but also into arenas which often confront elderly couples – trusts, competency, accusations of undue influence, mental examinations, and conservatorships.
Judge Michael Levanas, in the Sterling Family Trust matter, evaluated the testimony of both Shelly Sterling and Donald Sterling, found Mrs. Sterling to be more credible and issued a tentative oral ruling giving her authority to move forward with the sale of the Los Angeles Clippers for $2 billion to former Microsoft CEO Steve Ballmer. Mrs. Sterling entered into the sale as the sole trustee.
Many husband and wife trust agreements contain trustee provisions similar to that found in the Sterling Trust, allowing one spouse to take over administration of the trust if two doctors find the other spouse to be mentally incompetent. An organic brain disease, such as dementia or Alzheimer’s disease, that results in progressive mental decline, often does not provide a clear line demonstrating lack of competence. This leaves room for debate on when precisely an individual should no longer have a “say” in his or her affairs and whether decisions made during a time of vulnerability should be binding at a later time.
One issue Donald Sterling’s attorneys argued to Judge Levanas was that Shelly Sterling had tricked him into being examined by the two doctors. Earlier this month, Mr. Sterling’s attorneys had unsuccessfully argued that medical privacy rules such as those under HIPPA (the Health Insurance Portability and Accountability Act) and the California Confidentiality of Medical Information Act should keep out the doctors’ testimony. Counsel for Mr. Sterling also argued that Mr. Sterling had revoked the trust last month. That revocation, if upheld, would have caused $500 million in trust debt to become due. Yet another argument from Mr. Sterling ,which didn’t impress Judge Levanas last week, was that he should be allowed to put on testimony as to the ‘intent’ of the trust document.
The July 28th ruling was an oral decision, and like many probate orders is appealable, but Judge Levanas indicated there would not be a stay of the ruling during the pendency of the anticipated appeal. Since the NBA put a September 15th deadline on the sale, that aspect of the order was especially good news to Mr. Ballmer, Mrs. Sterling and the NBA.
Usually, a fiduciary (either an executor or a trustee) may hire and pay his or her attorneys from estate or trust funds. Moreover, the law (statutes or code sections), and some trusts and wills, impose upon a fiduciary the duty to defend the trust or will. Fiduciaries almost always have the duty of loyalty and of neutrality towards all the beneficiaries, but that doesn’t always prevent the fiduciary from taking sides. Where a fiduciary uses trust or estate funds to defend a will or trust, the opposing beneficiaries end up at an economic disadvantage – and that advantage can determine who will prevail.
The economic advantages in defending what appears to be the controlling will or trust may cause the beneficiaries to ask the court to take a closer look at the real battle and determine that either the fiduciary-as-fiduciary doesn’t have a dog in the fight, or the fiduciary is really choosing a side, particularly if the fiduciary is also a beneficiary. The fiduciary could even welcome court direction. In some states, a fiduciary can avoid the duty to defend a will or trust if he or she has a good faith belief the document being defended does not reflect the testator’s or trustor’s intent. That has to be weighed against the possible claim if a fiduciary fails to defend a document, he or she may be accused of breaching fiduciary duties, resulting in removal, surcharge and, in some states, even an award of fees and costs from the fiduciary’s personal assets.
A request to the court to limit fiduciary involvement is likely to be successful when the core issue is not the validity of the underlying document, but rather a dispute about the characterization of property or the interpretation of an ambiguous provision.
One personal representative in an intestate estate (the decedent didn’t leave a will) appropriately asked the court who was entitled to inherit the decedent’s property (which went to different children and stepchildren depending upon the character of the property). The decedent’s four children had different mothers, and under that state’s intestate succession laws, any property of the decedent’s estate traceable to one mother’s ancestors would only go to that woman’s children, not to the children from the other mother. It seems, once the personal representative presented the question to the court, any further action he took would necessarily be on behalf of one set or the other of the beneficiaries. The task of tracing the decedent’s property was then properly left to the two sets of children. Yet, it took a court order to keep the personal representative from spending estate money to try to determine the source of the estate’s assets.
In community property states there can be a similar situation, where a surviving spouse inherits all of the decedent’s community property but only a portion of the decedent’s separate property. If the personal representative is the surviving spouse, it may be unfair to allow the estate assets to fund the investigation into whether certain assets were community property or separate property – the fiduciary could directly benefit from that determination (and would have an incentive to find that all property was community property). The flip side of the coin is where one of the children is the personal representative – he or she will be inclined to find that property is separate property and again be happy to spend the estate’s money on the determination.
A different situation occurs when someone who is not a beneficiary under the presumptive documents (those being attacked) tries to prevent the fiduciary from defending the documents, claiming such actions would somehow be a breach of the duty of loyalty to that person. There is no such loyalty owed until (and unless) that person is shown to be a beneficiary. For example the Washington Court of Appeals confirmed that even fiduciaries who have no personal interests in the estate have a duty to defend the will or trust in probate. But in many cases the undisputed beneficiaries can and should be able to prevent a fiduciary from using estate or trust funds to favor one beneficiary or another, especially to favor him or herself.
Almost every estate has some tax issues, whether federal or state estate taxes, real or personal property taxes or income taxes. Sometimes the tax tail can wag the settlement dog and it makes sense to ask how Uncle Sam, or the state and local taxing authorities, can contribute to settlement?
Taxes can move settlement forward particularly when one or more of the following situations apply:
1) The Decedent died while married to a second, third or fourth spouse;
2) The surviving spouse and the children from the decedent’s earlier marriage(s) do not get along;
3) The parties are made aware that by using the “marital deduction” , or a spousal exemption, taxes will not be levied on assets passing to the surviving spouse, or a trust for the surviving spouse; and
4) The surviving spouse may be able to use his or her exemption to pass additional assets to the children or others tax-free at death.
Educating the surviving spouse and adverse parties (including the children) on estate taxes and the marital deduction is seldom easy and capital gains, real property and income taxes only further muddy the waters. For example, some states exempt from reassessment real property interests that pass to a surviving spouse or to children, but not to a caregiver or siblings or a non-relative.
I’m familiar with one case in which the ancestral home, but for the settlement, would have gone to the decedent’s sister. As a result, the annual property taxes would have increased by thousands of dollars. The children were to receive a recently purchased warehouse that already was assessed high property taxes. By swapping inheritances with their aunt, the children got a property they were just as interested in, and the difference in value was more than made up for by property tax savings.
In another case, a surviving spouse, who had asserted numerous causes of action, found that a settlement which recognized her community property interests in the vacation home afforded her a step-up in basis to the date of death value and gave her the flexibility to sell the property without a significant capital gains hit.
1) Employ tax professionals (accountants, attorneys, etc.) and use them during settlement discussions;
2) Educate clients about the applicable taxes and options for reducing the same through creative settlement; and
3) Consider not only the obvious (estate) taxes but assessments, exemptions, etc. at the state and local level.
In a will or trust contest the most important witness, the decedent, is obviously not around (unavailable in legalese). Important issues are rarely resolved by the disputed document itself. The judge or the jury would love to just get a few answers from the decedent (“Were you really that mad at your daughter?”, “Did you want the caregiver to get all the money in the joint tenancy account or just want her to be able to buy groceries?”).
To address the gap, litigants find people to show up and tell the court what the decedent meant…. wanted…. intended. This is different from a contract dispute where each of the parties can say “This is what I meant.” A further oddity in a will or trust contest is that the next most important and available witness to the decedent’s intent is often the lawyer who drafted the documents. This brings into play issues of attorney-client privilege. Moreover, the lawyer may have met the decedent only a few times and often years before the dispute arose.
Not surprisingly, many people are somewhat private about their wills and whom they want to inherit. This can complicate the process of finding good witnesses. Sure, a labor dispute or a divorce or even a personal injury action may be something a person doesn’t want to talk about, but the testimony of litigants in those sorts of cases gives them a chance to help or hurt their outcomes, and there are often third parties directly involved. A will contest may turn on an old letter or email, that no one can testify about, for example one in which dad writes that his son doesn’t have to repay a loan.
Another issue is that Wills and Trusts include quite a bit of “boilerplate” language that the lawyer may, or may not, have ever discussed with the decedent. Imagine the difficulty in a 10 or 20-year-old trust with a standard tax apportionment clause driven by taxes that are no longer in play. Not only did the lawyer not (and could not) consider the current tax rules when the trust was drafted, but the lawyer likely has absolutely no recollection, or notes, as to whether or not there was a discussion about the clause which is now being used to reinterpret the clause to reflect the decedent’s intent under the new tax system. In the practice of estate planning, it would be difficult to go over every such clause with a client.
With these issues in mind, when I’m going to have to try a case, I’d appreciate it if estate planners had the following information in their files:
1) a list of the decedent’s priorities, in order (e.g. is it more important to avoid taxes or maximize the wealth to a particular child);
2) notes of every substantive meeting;
3) drafts of documents with any substantive comments, or cover letters describing any changes that are made between drafts;
4) superseded documents (to show intent over a long period of time)
5) a memo to the file discussing major events that affected the estate plan (death of a beneficiary, estrangement, illness).
Estate planning attorneys who give a thought to what will help settle a future dispute or who answer the question the court can’t ask the deceased client end up doing everyone a big favor.
While every litigator is faced with the best way to obtain the necessary background information from a client in estate and trust disputes, emotions, and sometimes the family history, both of which are part and parcel of estate and trust disputes, can (and do) get in the way of ‘cutting to the chase.’
Rather than spent hours acting as a pseudo, and poorly trained therapist, consider the following alternatives:
A Narrative. Ask the client to prepare a written account. Explain that because lawyers charge by the hour, and most people can read 250 words a minute (and some at twice that speed), they will save money by writing a narrative, rather than sitting down and telling the whole story in-person.
That narrative can then be sent back to the client, highlighting what is important to the case and interlineated with the important evidentiary questions “who else knows about this fact?” and “is there anything in writing about this fact?” Because state law can restrict who can testify, and the substance of that testimony (colloquially known as application of the Dead Man’s statute), who knows about a fact can be crucial.
Interrupting Their Story. No one likes to be interrupted; however, what may seem important to the client may not be the core of the issue, conversely that which seems trivial to the client may, in fact, be heart of the matter. In an emotional, stressful arena such as estate litigation, it helps to begin with the following qualification:
- You will always know more about what happened, how it affects you, and how wrong it was then I as a lawyer will ever know;
- However, as a lawyer, I know that certain very particular details are important;
- I want you to tell me the whole story, but please understand that I’m likely to interrupt to obtain clarification and additional information where I need it (such as a date, or what particular words your mother used, or who else heard that conversation); and
- If you feel that there is additional information that I need to know, please offer that up.
Get it all. Clients rarely understand that discovery means EVERYTHING – every email, every letter, text, and Christmas card. Clients have a natural tendency to bring just the documents or emails they think are important (and they might be right). More worrisome, as individuals, trust and estate clients rarely know or understand how to preserve evidence, particularly electronic evidence. But the opposing side is going to ask for it all, so it is important to explain that to the client at the onset and put them to work compiling everything. In addition, consider hiring an outside ediscovery vendor to do an initial pull down of email, texts and other ediscovery. That avoids inadvertent deletions and provides you, as the lawyer, with some protection in the event of a discovery battle.
During most of his thirty-five years in the practice of law, Mr. Keeler has concentrated on estate and trust litigation. Licensed in Oregon and California, Mr. Keeler has tried cases involving estates, trusts and conservatorships throughout Oregon, California and neighboring states. Mr. Keeler is also certified by The State Bar of California Board of Legal Specialization in Estate Planning and Trust & Probate Law.