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.
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.
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.