Recent Developments Involving Estates and Trusts

Overview

A key aspect of transitioning assets and family business interests to the next generation is maintaining family harmony.  Often, that is accomplished when an estate plan is properly put together and takes effect seamlessly at death.  When that doesn’t occur is when disharmony among family members can occur and disrupt the transition to the next generation.  Sometimes family dynamics prevent a smooth transition.  Other times, improper planning or technical errors in the estate plan are the cause of unfulfilled expectations. In still other situations, the estate planning techniques utilized don’t end up functioning as planned. Some recent court decisions illustrate just a snippet of the issues that can arise at death.

Some recent estate and trust court decisions – that’s the topic of today’s post.

A TOD Account as a Fraudulent Transfer?

Heritage Properties v. Walt & Lee Keenihan Foundation, 2019 Ark. 371 (2019)

The plaintiff in this case was a creditor in the decedent’s estate. Before death, the decedent created a brokerage account with $500,000 and designated the defendant as the transfer-on-death (TOD) recipient. The decedent died 18 months after establishing the account at a time when the account value was $1.1 million. Upon the decedent’s death, the $1.1 million in the account transferred automatically to the defendant outside of the decedent’s probate estate. The plaintiff filed a claim against the decedent’s estate for $850,000 which made the estate insolvent. The plaintiff sued the estate in the local trial court rather than the probate court, claiming that the TOD account resulting in a transfer of the $1.1 million to the defendant was a fraudulent transfer designed to defeat the plaintiff’s claim.

The trial court dismissed the case for lack of jurisdiction, standing and lack of sufficient evidence. On further review, the state Supreme Court held that the trial court did have jurisdiction as a court of general jurisdiction and that the plaintiff had standing to directly pursue the estate for return of an allegedly fraudulent transfer.  The Court couched its reasoning on the fact that the TOD account was not part of the probate estate. The Court also clarified that the plaintiff didn’t have to show that the decedent had actual intent to defraud the creditor. Instead, the court concluded, the plaintiff only needed to prove that the decedent made the transfer and "intended to incur, or believed or reasonably should have believed that she would incur, debts beyond her ability to pay as they became due."  That’s a rather low standard of proof to overcome.

Trust Failure 

Doll v. Post, 132 N.E.3d 34 (Ind. Ct. App. 2019)

The decedent created a trust in 2010 and amended it before his death in 2018. The trust made specific bequests to the plaintiff, two other individuals, a masonic lodge, and Shriners hospital. The trust contained a residuary clause that stated: “Residue of Trust Property: The Trustee shall hold, distribute and pay the remaining principal and undistributed income in perpetuity; subject, however, to limitations imposed by law. All the powers given by law and the provision[s] of the [T]rust may be exercised in the sole discretion of the Trustee without prior authority above or subsequent approval by any court.”

One of the people who was to receive a specific bequest could not be located. At the time of the decedent’s death, approximately $4,600 remained in the residuary, and the trustee distributed it to charity. The plaintiff moved to intervene arguing that the residuary clause failed, and the remainder should pass to her.

The trial court found that the trust document was ambiguous, and entertained outside evidence. Based on that extrinsic evidence, the court found that the decedent’s intent was to create a charitable trust and that the trustee’s act was proper. On appeal, the appellate court reversed and remanded. The appellate court determined that the trust document did not give the trustee the unfettered authority to distribute the residuary, and that the trustee was bound to follow local law. Local law specified that if the decedent’s intent was not explicit the trustee should select a beneficiary "from an indefinite class," identify a beneficiary with "reasonable certainty," or find a beneficiary capable of being "ascertained." The appellate court determined that the trustee could not find such a beneficiary and that the trust was not purely a charitable trust because some of the named beneficiaries were individuals.

The appellate court also determined that the cy pres doctrine did not apply.  The cy pres doctrine allows a court to amend the terms of a charitable trust as closely as possible to the original intention of the testator or settlor to prevent the trust from failing.  But, the cy pres doctrine did not apply, the appellate court reasoned, because the trust did not not have general granting language stating the trust’s purpose was charitable, and the charitable portions of the trust were fulfilled with the specific bequests.  Consequently, the residuary clause unambiguously failed to designate a beneficiary with reasonable certainty or a beneficiary capable of being ascertained and failed as a matter of law. The appellate court ordered the trustee to hold the residue of the estate and distribute it in accordance with state intestacy law. 

Homestead Provision Applicable in Will Construction Battle

Chambers v. Bockman, 2019 Ohio 3538 (Ohio Ct. App. 2019)

The decedent and surviving spouse plaintiff married in 2009. The couple maintained separate residences for the most part. The decedent owned his home on a 1.08-acre tract.  Adjacent to this tract but separated by a fence was the decedent’s 55-acre tract where he raised cattle and horses. The decedent owned a third tract adjacent to the plaintiffs’ own home that was used as a rental property. The decedent died in June of 2017. The defendant was appointed executor of the estate. One portion of the decedent’s will specifically left the rental property to the plaintiff. The other portion of the will in dispute stated: “All of the rest, residue and remainder of my property, real, personal and/or mixed, of which I shall die seized, or to which I may be entitled, or over which I shall possess any power of appointment by Will at the time of my decease and wheresoever situated, whether acquired before or after the execution of this, my Will, to my friend, [defendant], absolutely and in fee simple.”

The decedent’s home and farm were appraised as one property and valued at $378,000. In mid-2018, the plaintiff filed a complaint in the probate court to purchase the decedent’s home and farm pursuant to state statute. The defendant countered that the home and farm did not qualify as a “mansion house” under applicable state law because the plaintiff never lived there; the will devised the home and the farm to the defendant; and the plaintiff was not entitled to purchase the home. The probate court, holding for the plaintiff, determined that residency was not required for the statute to apply; the bequest to the defendant was a general bequest that was not specific as to the home and farm; and the plaintiff was entitled to purchase the home and farm for $378,000. The appellate court affirmed.

While the appellate court agreed that the plaintiff could purchase the home if it were a “mansion home,” the court determined that it merely had to be a “home of the decedent” rather than the residence of the surviving spouse. It satisfied that requirement. The appellate court also upheld the trial court’s finding that the decedent did not specifically devise the real estate to the defendant. The farm being adjacent to the home meant that the two properties were operated as one and that the plaintiff could buy both the home and the farm. 

Conclusion

Even the best planning can result in unanticipated consequences upon death.