Wills, Trusts & Estates Prof Blog

Caution Against Elder Investment Fraud

The Consumer Financial Protection Bureau recently requested more information about the elderly as targets of fraud.  In response, the non-profit Investor Protection Trust released a survey about elder exploitation that revealed 20% of Americans over age 65 have been the victims of financial swindle.  

USA Today offers a first step to help prevent elder investment fraud from happening to loved ones.  First, figure out exactly where your loved elder's money is going.  If there has been an unsuitable trading practice, you can try to deal directly with the broker-dealer about it, but if that doesn't work, you can file a complaint with the Financial Industry Regulatory Authority.  

See Christine Dugas, Protecting the Elderly From Investment Fraud, USA Today, Feb. 23, 2013. 

New Estate Planning Forms in the ALI CLE Online Library

ALI CLE recently released new forms for estate planning in the online library.  You can buy select forms individually or buy the set of the newest forms at a discounted price.

Please click here to see the newest forms in estate planning. 

Reclusive Man Leaves His Estate To Actors He Never Met

Ray Fulk of Illinois had no friends or family left at the time that he died and so when it came time to write his will he decided to leave $5,000 to his favorite charity and the remainder to his two favorite actors. In the end, he left $1,000,000 to Kevin Brophy and Peter Barton. Fulk was a reclusive who lived on a farm. He was so isolated that he would often bathe in a creek when he had no water during the winter. He was not married and had no children or other close relatives. Based upon Illinois intestacy law, Fulk's estate would have likely gone to relatives that he did not know. Fulk wanted to ensure that that would not happen so he wrote a will "leaving $5,000 to the Anti-Cruelty Society in Chicago and the rest to these two strangers, whom he called 'my friends.'"

See Stephanie Moll and Alan Singer, Recluse Leaves Estate To Actors, Bryan Cave: Live, Death and Taxes, Feb. 21, 2013.

Facebook and Twitter Allow Posts Post-Mortem

There is one sobering fact about death that we all must face, which is that we cannot take the things that we hold dear with us. Blog posts and items that we place on Facebook or Twitter are no different. Once we die, we cannot continue to update our Facebook pages and send tweets to our followers. Well, technology has changed all of that again. Now, "[t]echnology companies are making it possible for you to send a prewritten email, Facebook status update or Tweet after death." DeadSoci.al is the company behind this technology. While the founder sees it as a way for us to say a final goodbye, others are looking to take it to another level. Some hope that technology will enhance to the point where there will be a way to ensure that a person's Twitter account stays active and provides regular updates that are suppose to mimic the user's personality.

See Tools Allow Facebook, Twitter Posts After Death, Fox 19, Feb. 22, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

In North Carolina, Bill Passes to Eliminate State Estate Tax

On Wednesday, the House Finance Committee in North Carolina voted 24-10 to approve a bill that would eliminate the state's estate tax.  Republicans say that the death tax unfairly punishes farm and small-business owners who have passed down wealth generation after generation.  Democrats argue that the repeal would effect very few people--only 0.2 percent of North Carolinians are required to pay the tax. 

See Derek Medlin, Estate Tax Bill Clears House Committee, NCCapitol, Feb. 20, 2013. 

CLE on Contesting, Correcting, and Changing Your Estate Documents

On Wednesday, February 27, 2013, the American Bar Association is hosting a Live CLE Webinar and Teleconference entitled Contesting, Correcting and Changing Your Estate Documents--Why Your Documents are Alive Even After You're Dead! The CLE will be from 1:00 p.m. to 2:30 p.m. Eastern. The description available on the website is below:

This panel will address litigation issues involving commonly drafted estate planning documents for owners of closely held businesses, including actions for rescission, interpretation, modification and reformation of wills and trusts. Topics shall include undue influence, lack of capacity, change in circumstances, ambiguities, correcting mistakes, and related procedural and evidentiary issues which planners need to know. It will include a discussion of national trends, common estate planning pitfalls, and best practices to address potential future litigation or disputes involving your legal work.

For more information or to register, please click here.

An Agreement Executed Before Entering into Domestic Partnership Survives the Later Marriage of the Parties

Before entering into a registered domestic partnership under California law, a same-sex couple executed a domestic partnership agreement which waived all property claims arising from the partnership including those arising on death.  The parties later married during the brief period in which same-sex marriages were legal in California.  One of the parties then died and the other claimed the rights of a pretermitted spouse.  The intermediate appellate court affirmed denial of the claim, holding that the agreement was enforceable as a pre-marital agreement and that the parties’ subsequent marriage did not invalidate the agreement.  Estate of Wilson, 150 Cal. Rptr. 3d 699 (Cal. Ct. App. 2012).

Special thanks to William LaPiana (Professor of Law, New York Law School) for bringing this case to my attention.

Article on Reforming Medicare

Daniel P. Kessler (Professor, Law School, Graduate School of Business, and Hoover Institution, Stanford University) recently published his article entitled Reforming Medicare, 65 Tax L. Rev. 81 (2012). The introduction to the article is available below: 

As the Congressional Budget Office's Long-Term Budget Outlook shows, Medicare is not fiscally sustainable in its current form.  Under plausible assumptions about government revenues, continuation on the current path of health care entitlement spending will lead the debt held by the public to exceed 100% of GDP by 2021 and approach 190% by 2035.  This "fiscal gap" cannot be closed through revenue increases. At current spending levels, even the increases in taxes on high-income individuals proposed by the Obama administration (through the estate tax, top income tax rates, capital gains and dividend taxes, and re-imposition of the phase-outs of itemized deductions and personal exemptions) will not stop U.S. debt levels from rising at an increasing rate. 

There are three schools of thought on how to reform the program. The first would transform it into a marketplace of regulated, private plans with government-provided subsidies for the premiums. This "premium support" model has been proposed most recently by Senator Ron Wyden and Congressman Paul Ryan, but versions of it have been suggested by Alain Enthoven, Gail Wilensky, the Domenici-Rivlin Debt Reduction Task Force, and the National Bipartisan Commission on the Future of Medicare. The second would empower an independent commission to issue recommendations for reform that would be required to be implemented if Congress fails to achieve savings targets. President Obama and the Congress adopted this model in the recent health reform law through their creation of the Independent Payment Advisory Board (IPAB). The third would leave the program basically as it is, and seek to control spending by changing the way that it pays doctors and hospitals. These payment reforms, known as "bundled payment," involve consolidating payments for an "episode of care," for example, the hospital charges, surgeon's fees, and follow-up visits for a hip replacement. The idea behind bundling is to create incentives for providers to manage care better, which would ultimately lead to better value.

Proponents of the first two approaches emphasize the role of public choice failures. According to their reasoning, Medicare spending benefits doctors, hospitals, other health care providers, and the elderly (who are identifiable and organized) but hurts future taxpayers (who are neither) in the form of increased public debt that must ultimately be repaid. As a consequence, politicians seeking re-election have the incentive to expand the program beyond the point that would be in the long-run public interest.

These approaches see premium support and IPAB as mechanisms to commit Congress to limit spending by delegating responsibility for particular cuts to an entity that is less subject to political pressure. In the case of premium support, the institution is the market. The magnitude of and the formula behind the support payment would be determined through the political process, but decisions about which benefits and/or payment rates to cut would be determined by supply and demand (although subject to significant political oversight through regulation). In the case of IPAB, the institution is the appointed board. Recommendations made by the board would move to Congress for fast-track consideration, and if Congress does not act, would be required to be implemented by the Secretary of Health & Human Services.

Proponents of the third approach emphasize technical flaws in traditional Medicare's reimbursement rules, which reward providers for delivering services rather than value for money. This view has more confidence in traditional Medicare's ability to adapt to a more constrained future and/or less confidence in premium support and IPAB as commitment devices.

Because each approach has strengths and weaknesses, the choice between them involves a series of trade-offs. This Article describes the terms of these trade-offs and evaluates how the three approaches are likely to perform. It proceeds in four parts. Part II describes the first set of trade-offs, between premium support and IPAB on one hand, and bundled payment on the other. Premium support and IPAB involve broad changes to the Medicare program; bundled payment is more narrow but targeted. Part II explains why broad, fundamental reform is necessary to make the program sustainable. It also explains why successful reform must be able to precommit to spending limits. It therefore favors premium support and IPAB over bundled payment alone (although, as discussed below, bundled payment reforms are likely to be complementary and should therefore be part of either premium support or IPAB).

Parts III and IV explore the second set of trade-offs, between premium support and IPAB. Part III documents why IPAB is unlikely to commit Medicare to a sustainable spending path, why premium support is more likely to do so, and other advantages of premium support. Part IV describes the key drawback of premium support: It may allow providers greater ability to exercise market power, market power that is currently checked by traditional Medicare's ability to bargain on a nationwide, take-it-or-leave it basis.

Part V concludes. It acknowledges that neither premium support nor IPAB may provide sufficient political cover to enforce sustainable spending limits; that bundled payments have the potential to improve Medicare's efficiency; and that the drawbacks of premium support are nontrivial. Because bundled payments have been unable to achieve savings of the magnitude necessary to close the fiscal gap, and IPAB carries a greater risk of allowing the fiscal gap to widen to unacceptable levels, Part V concludes that fundamental change in the form of premium support is the best alternative, even if its prospects for success are uncertain.

The Cinderella Estate-Planning Problem

Recently, EstatePlanning.com published an article that compared Cinderella to a familiar estate-planning story that has existed since ancient times. The story begins when Cinderella's stepmother takes control of her husband's estate after his death. She benefits herself and her two daughters leaving Cinderella with nothing but work to be done. Using Cinderella's assets is a problem of asset succession that cannot be fully addressed through legislation. Typically, adults are the people managing minor assets. This is often what leads to the Cinderella problem.

However, there are some remedies to this problem. One remedy is the use of 'fiduciaries'. A 'guardian ad litem' represents a minor's interest in court. Another remedy is the judge. In probate court, judges address this issue by aggressively protecting the interests of minors. Unfortunately, these are not solutions just remedies that address the problem after the problem has already manifested itself. The parents of modern-day Cinderellas failed to plan for common risks and life situations. People who eventually secure a competent attorney do have a cause of action they can bring to court. This planning requires that lawyer is both an advocate and a counselor.

See Ahmed Shaikh, An Estate Plan for Cinderella's Parents, EstatePlanning.com, Feb. 14, 2013.  

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Son Accused of Killing Parents To Gain Inheritance

In the United Kingdom, Stephen Seddon is on trial for the murder and attempted murder of his parents, Robert and Patricia. The prosecution in this case stated that the reason that Stephen wanted his parents dead was because he needed money and was set to inherit a good sum of money from his parents. The prosecution alleged that this is what led Stephen to make two attempts on his parent's life, one successful and one unsuccessful.

In his first attempt, the prosecution claimed that Stephen attempted to drown his parents by staging a car accident in the local canal. "The jury was told that when firefighters arrived at the scene Stephen Seddon was standing on the roof of the car. He was told to get off because he was making the car sink. His parents were trapped in the back seats." Stephen's story about what happened in this incident was inconsistent at best, but his parents did survive this attempt. The prosecution claims that this led to the incident in question where Stephen is accused of shooting his parents and making it look like a murder-suicide. Stephen denies all the allegations against him.

See Becky Johnson, Son 'Killed His Parents For Inheritance', SkyNews, Feb. 20, 2013. 

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

Widow Leaves $27 Million Estate To Alzheimer's Group

A widow from southern California named Helen Banas lived a life uncharacteristic of her wealth. She lived in a modest home and away from the public's eyes. When she passed away her neighbors were surprised to earn of her wealth. Ms. Banas died with an estate worth $27 million and without children. Ultimately, she decided to give her entire "estate to the Alzheimer's Association of Orange County." Of the donation, $10 million of the doantion will go to the national association.The donation she gave is reportedly the largest in the charity's history. 

So how did Ms. Banas obtain such a vast amount of wealth? Well, she reportedly inherited a large sum from her husband who was a stockbroker. She then went on to build her assets through carefully investing her assets. Ms. Banas' friends stated that she wanted to give her money to the Alzheimer's associations because her mother suffered from the same disease.

See Calif. Widow's $27-Million Estate Goes to Alzheimer's Group, Philanthropy Today, Feb. 21, 2013.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Teleconference on 2012 Gift Tax Return Prevention

The ABA Section of Real Property, Trust & Estate Law will host a teleconference entitled, An Ounce of Prevention Is Worht a Pound of Cure: Avoiding Common Pitfalls In Preparing 2012 Gift Tax Returns, from 12:00 to 1:30 pm on March 5, 2013. Provided below is a description of the event:

Last year was an especially busy time for estate planners, with many clients making large gifts in anticipation of the Fiscal Cliff. Following this spike in transactions, most attorneys and accountants will be preparing or reviewing an exceptionally large number of federal gift tax returns in 2013.

This program will address some of the common pitfalls in the preparation of the Federal Form 709, with a special focus on:

• Reporting issues related to GST tax allocations and compliance;
• Gift splitting;
• Transfers to Crummey trusts; and
• "Spousal access trusts."

In addition, this program will provide tips for addressing mistakes on prior returns and anticipating potential audit issues.

Differences in Men and Women When Financial Decision-Making

Psychology professor Paul Greenberg purports that financial decision-making is influenced by gender differences.  Wealth psychology specialist Kathleen Burns Kingsbury brings together gender-related findings from various studies and reports that generally, men measure success in terms of beating a benchmark, while women measure success in terms of meeting their life goals and objectives.  Several physical differences in the brain tend to make women more focused on caregiving, passing legacies on to the next generation, and using wealth to improve the community.  

See Olivia Mellan & Sherry Christie, Investment Decisions: Men's Brains are From Mars, Women's Are From Venus, advisorone.com, Feb. 2013. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

Extrinsic Evidence Admissible to Determine Whether a Will Exercises a Power of Appointment

A husband and his wife executed a marital property agreement in accordance with Wisconsin law giving the survivor a testamentary non-general power of appointment over the survivor’s probate property to be exercised by specific reference to the power in the survivor’s will.  In default of appointment, the property passes equally to the couple’s three children.  The husband survived and left a will making no reference to the power of appointment which gave the residuary estate to in equal shares to two of the three children, the remaining third being divided equally among one child and her two daughters.  The intermediate Wisconsin appellate court affirmed the trial court’s finding that the will exercised the power, holding that because the donor’s intention in requiring a specific reference to exercise a power of appointment is presumed to be to prevent an inadvertent exercise and that because the will was ambiguous, the testimony of the drafting attorney that the omission of a reference to the power was a drafting error was admissible. 

See In re Estate of Shepherd, 823 N.W.2d 523 (Wis. Ct. App. 2012).

Special thanks to William LaPiana (Professor of Law, New York Law School) for bringing this case to my attention.

Trust Beneficiaries are Necessary Parties in Litigation Involving No Contest Provisions

Recently, a federal court in Virginia reviewed the issue of whether beneficiaries are necessary parties to trust litigation involving no contest provisions. This dispute was about two descendants that believed two great-grandchildren contested a trust containing a no contest clause because they opposed a co-trustee. In the case, the plaintiffs did not include Rebbecca Hudson one of the beneficiaries of the trust. Plaintiffs aware of Ms. Hudson's interest in the trust tried stipulating they would not enforce the no contest provision against Ms. Hudson. The plaintiffs did this strategically. Adding Ms. Hudson would have destroyed diversity jurisdiction. Without diversity jurisdiction the case could not be tried in federal court.

In Graves v. Vitu, the court ruled all trust beneficiaries need to be joined as parties to trust litigation over a no contest provision in the trust. As a result, the court dismissed the case because diversity jurisdiction no longer existed. The court reasoned that trying the case without Ms. Hudson might hinder her ability to care for her interests. The court held that the stipulation made would not change Ms. Hudson's status from a necessary and indispensable party to a 'disinterested bystander' in the litigation. Additionally, the court explained the alliance between Ms. Hudson and her two sisters, the two accused of violating the no contest clause, could potentially threaten her interest in the trust if evidence proved she supported her sisters. Moreover, because Ms. Hudson was not a party to the litigation she would not be bound by the judgment and could have the case retried.

See Luke Lannta, All Trust Beneficiaries Were Necessary Parties To Litgation Over A No-Contest Clause In A Trust, Bryan Cave Fiduciary Litigation, Feb. 18, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

Sudden Change of Luck

Two brothers now know what it truly means to be lucky. The Kansas natives recently purchased lottery tickets and won a $75,000 prize. As most would do, they decided to celebrate. They did so in their usual manager by lighting up a bong to smoke marijuana. However, this time was different because when one of the brothers "emptied a couple of large cans of butane lighter fluid, [it leaked] butane into the air." The gas seeped into the furnace's pilot light and it caused an explosion. 

Lucky for the two brothers, both survived. Unlucky for them the explosion caused a great deal direct and indirect damage to themselves. One of the brothers had his girlfriend take him to the hospital where he was treated for second-degree burns. Fortunately for him, he is currently in stable condition. The second brother was arrested for possession of illegal drugs "after [he told] police he had meth and marijuana in the home."

See Brothers Blow Up House Celebrating Lottery Win In Kansas: Cops, The Huffington Post, Feb. 18, 2013.

Special thanks to David S. Luber (Attorney at law, Florida Probate Attorney Wills and Estates Law Firm) for bringing this article to my attention.

Article on ATRA and its Effects on Elder Law

Robert L. Moshman (Attorney, New York and New Jersey) recently published his article entitled, Elder Law Planning After ATRA, An Interview with Bernard A. Krooks ,The Estate Analyst (Feb. 2013). As its title suggests, the aritcle focuses on the recent changes in tax law and the effect that it will likely have on elder law planning. An excerpt from the article is below:

The arrival of ATRA represents an official new non-transfer tax paradigm in which planning is focused on capital gains, asset protection, state tax issues, income taxation, and Medicaid planning. All of these areas fall under the elder law umbrella.

Elder law has unique rules, and planners must also be cognizant of the new ATRA context. Most fortuitously, one of the nation’s foremost elder law practitioners has come to our assistance. Let’s review the new planning dimensions with attorney Bernard A. Krooks.

Reminder: CLE on Solo Estate Planning Practitioners Following The Passage of ATRA

The ABA Section of Solo, Small Firm and General Practice Division, Commission on Law and Aging, and Senior Lawyers Division will host a 1.5 CLE credit hour webinar entitled, The Solo Practitioner and Small Firm's Guide to the New Frontier in Estate Planning from 1:00 p.m. to 2:30 p.m. EST on Wednesday, February 27, 2013. Provided below is a description from the ABA website:

Join our panel of estate planning experts who will address:

• The effect the American Taxpayer Relief Act of 2012 has on estate planning for clients with less than $5M in assets
• Practical insights on how to modify documents and planning to work best in this new frontier of estate planning
• The importance of efficiency and practice management in serving fee sensitive clients

Article on The Trustee and the Spendthrift

Philip J. Ruce recently published his article entitled The Trustee and the Spendthrift: The Argument Against Small Trust Termination, 48 Gonz. L. Rev. 163 (2012/2013). The introduction to the article is below: 

In the latter half of the Nineteenth Century, a mother transferred her estate, in trust, to her children in separate shares. One child, having failed at a business venture, declared bankruptcy and proposed to his creditors that he make a general assignment of all his property to them, which was understood to include the assets of his respective trust.  Unbeknownst to the creditors, the trust document contained a provision stating that if the son "should alienate or dispose of the income to which [he is] entitled ... or if, by reason of bankruptcy or insolvency, ... [the] income could no longer be personally enjoyed by [him]," his interest in the trust would cease to exist.

The trustee remained true to the language of the document.  Left holding the bag, the creditors took the predictable course and sued.  The court ruled that the insolvency of the son "terminated all his legal vested right in [the] estate, and left nothing in him which could go to his creditors, or to his assignees in bankruptcy";  the creditors, in short, were out of luck. This case, Nichols v. Eaton, demonstrated the first enforcement of a spendthrift trust provision in the American courts and was a significant departure from the English common law rules that favored creditors. 

A spendthrift trust prohibits, either by its terms or by operation of law, both voluntary and involuntary alienation of a beneficiary's interests. Through the establishment of a spendthrift trust, the continuous flow of funds to the beneficiary theoretically "cannot be diverted by ... attachment or assignment of ... income."  So:

if A transfers to B, as trustee, $ 100,000 in bonds to hold in trust for X, with a provision that B shall pay to X the net income of such bonds, but that X shall not have the power to transfer his right to receive such income, and that the creditors of X shall not have the power to reach the right to future income in the hands of the trustee, the trust is a spendthrift trust. 
 
The purpose of a spendthrift trust is to protect a beneficiary, often when a beneficiary is not capable of managing his own affairs. As Professor Bogert's treatise states:

A settlor may consider such a trust desirable, where provision is to be made for an inexperienced, incompetent or wasteful person. If such person had the power to dispose of his right to receive the income from the trust, his incapacity or carelessness would lead him to anticipate his income and convey to money lenders and creditors the right to receive future income as it became due. If the incompetent or spendthrift can be restricted so that he can do nothing with the income until it is paid into his hands by the trustee, then the beneficiary is more likely to be protected, as least to some extent, against want. 
 
Note that a spendthrift beneficiary does not have to be "incompetent or subnormal in any way" - the beneficiary is in most cases a perfectly normal, healthy person with responsible money management skills.  A settlor may simply be watching out for the beneficiary's interests, and spendthrift clauses are found in carefully drafted trusts everywhere in the United States. 

Spendthrift trusts run into a conflict with another aspect of trusts, one that is both practical and central to corporate trustee services: efficiency. Corporate trustees must, of course, turn a profit in exchange for the investment and fiduciary services they provide. As a trust is administered over time, a trustee is very likely sending money - whether it be income checks, fixed monthly payments, or discretionary principal - to a beneficiary. Additionally, the trustee is charging its own corporate trustee fee, as well as paying any additional expenses for tax preparation, counsel, and taxes due. At some point, a trust will invariably deplete, and the balance will become very small. A corporate trustee then must perform a balancing act and determine at which point a trust is too small to justify charging a fee to manage the assets. If no fee is being charged, then the corporate trustee is providing its valuable services for free - not something any business person would likely view as an effective method of revenue management. On the other hand, allowing any windfall, even a small one, to fall into the hands of a spendthrift could be a problem for one unable to manage his own affairs.

At which point should a corporate trustee close a small trust for being uneconomical? This article will first discuss the history and development of spendthrift trusts, particularly in the Uniform Trust Code (U.T.C.). This article will then examine the controversy regarding spendthrift provisions, highlighting the desires and efforts of creditors to access spendthrift trust assets.  Next, this article analyzes the reasons for the development of small trust termination rules. Most notably among these are the demise of the rule against perpetuities (hereinafter "Rule") and two of the key legal doctrines used by courts in modifying and terminating trusts in light of the erosion of the Rule: the Claflin Doctrine and the Equitable Deviation Doctrine. The information found within these and other sources leads to this article's conclusion: when contemplating the closure of small trusts with spendthrift provisions, absent direct instruction from the settlor, a trustee should opt to administer a spendthrift trust until it depletes to a zero balance.

Lessons From Jerry Buss's Estate

This month, Jerry Buss, Los Angeles Lakers owner, died from kidney failure after a long battle with cancer. Evan Guthrie Law firm illuminates the most important estate planning lesson we can learn from Buss--protect the family business.  

It is best to pick a responsible family member with experience running the business to fill the role as successor of the business.  Buss passed control of the Lakers to his two children.  While choosing a successor is a very important step, it is also important to avoid estate taxes upon the death of the principle owner. Without planning, a large tax bill could force a sale of a business.  Trusts and insurance to cover estate taxes could help prevent this unfortunate result.  It may be best to consult an estate planning attorney and a CPA to plan for succession of a family business.

See Evan Guthrie Law Firm, Estate Planning: Lessons Learned From Lakers Owner Jerry Buss, JDSupra, Feb. 18, 2013.  

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.