Saturday, December 24, 2022
Unfortunately, litigation sometimes occurs after death and can involve family members. The issues can be unique and may also be the result of misunderstandings, the lack memorializing understandings, or simply family members not getting along.
In today’s post, I highlight three recent cases involving the estate of a decedent. Hopefully, a review of these cases will provide some insight as to the issues that can arise at deaths in hopes of avoiding them in the future.
A look at recent cases involving estates – it’s the topic of today’s post.
Government Agency’s Interest in Estate Attaches Before Nursing Home’s Judgment Lien. A nursing home sought to recover fees from a decedent’s estate that the decedent incurred while a resident. The Iowa Department of Health and Human Services (Department) had paid the deceased’s medical fees to the nursing home and filed a claim in probate seeking to recover $395,612.12. The estate executor filed a report and inventory showing the gross value of probate assets as $51,016.20, with $45,000.00 of the value attributed to the decedent’s home. The nursing home claimed it had a right to the value of the home to pay for the debt owed to it via a judicial secured lien, but the Department claimed it had a priority position. The trial court agreed with the Department. The nursing home argued on appeal that its secured lien was not subject to the probate code’s classification of debts and charges statutory provision, claiming instead that its judicial lien was on the real estate the decedent owned. However, the appellate court pointed out that the real estate was a homestead to which the judgment lien did not attach and would not attach upon the decedent’s death merely because the decedent had no heirs. The appellate court determined that the Department could recover from the decedent’s estate as it existed immediately before death, including her home with the homestead exception still in effect because the nursing’s home judgment would not attach until after the death. The appellate court affirmed the trial court’s grant of summary judgment for the Department. In re Estate of Rice, No. 21-1868, 2022 Iowa App. LEXIS 936 (Iowa Ct. App. Dec. 7, 2022).
Economic Benefit Not Required for Trust Funds to Pay Attorney’s Fees. The grantor created a trust naming his three daughters as beneficiary. However, before death, the grantor agreed to give one of his daughters the homestead in return for helping him on the homeplace during his life. However, this agreement was not memorialized in the trust due to a drafting error. One of the daughters objected to the alleged pre-death agreement and also objected to part of the trust being used to pay off debts immediately. The trial court determined that the evidence was sufficient as to the grantor’s intent to respect the pre-death agreement, but did not allow that daughter use funds from the trust to pay attorney fees on the basis that the litigation did not benefit the trust. On appeal, the appellate court reversed in part. The appellate court noted that state law allows a court to award “attorney’s fees from trusts administered through the court as well as in probate and guardianship proceedings” when the litigation benefits the decedent’s estate and when the litigation resulted from the executor’s negligence, fraud, or inactivity. The appellate court determined that an economic benefit was not necessary to award fees, but that other non-economic benefits were sufficient. Consequently, the appellate court determined that the litigation involving the trust resulted in the trust being administered in the way intended the grantor intended and that this was sufficient to be considered beneficial. In addition, the court found that the fact that the daughter to receive the homestead was a beneficiary of the trust had no bearing on the attorney fee issue. The appellate court reasoned that to not allow beneficiaries to use trust funds to litigate issues would discourage strong claims from being brought. Ultimately, the appellate court held that the trial court abused its discretion by denying the motion for attorney fees based on its erroneous view that an attorney fees award "required" an economic benefit to the trust and that fulfilling the intent of the settlor was not a basis for awarding attorney fees. The appellate court held that the trial court should not have discounted the efforts to reform the trust to align with the settlor's undisputed intent simply because the daughter benefitted from the successful outcome of the litigation. The appellate court, however, determined that the trial court did not err when it determined that the litigation on the issue of mortgage payments did not provide the trust with an economic benefit because the successful litigation did not provide the estate with income it could not have otherwise obtained from a different renter. In re Petersen Land Trust, No. 29745, 2022 S.D. LEXIS 139 (S.D. Sup. Ct. Nov. 23, 2022).
Surviving Spouse Removed as Co-Trustee. The decedent established a revocable living trust in 2000 to continue his farming operation and benefit his wife as the primary beneficiary and his two sons as the other beneficiaries. Effective upon the grantor’s death, the trust named the surviving wife as a co-trustee and the decedent’s cousin as an independent co-trustee. The trust specified that the independent trustee could distribute income and principal to any of the beneficiaries at the independent trustee’s discretion. Upon the wife’s subsequent death, the trust was to be divided into two separate shares, one for each son, and funded with the remaining trust undistributed income and principal. Upon the decedent’s death in 2014 the trust contained about $2,385,000 in assets, most of which were nonliquid. Most of the assets had to be liquidated to pay debts that the decedent incurred during life, including part of the decedent’s farm that was sold in 2018. After payment of debts $112,048.34 remained in the trust. The trust was divided into a marital and a nonmarital share and at the time of the decedent’s death only the nonmarital half was funded. Without the cousin’s knowledge, the wife withdrew $104,161.34 of the $112,048.34 for her own personal expenses. This amount was more than the wife had a right to receive that year from the trust. In addition, the Farm Service Agency (FSA) deposited farm-related funds directly into the wife’s account instead of the trust account. The cousin requested that the FSA deposit the funds into the trust instead of the wife’s account, but the FSA refused citing the wife’s name as the first named trustee and the only one with the right to change where the funds should be sent. Soon after this, the cousin filed an action to remove the wife as a trustee for mishandling the funds. The trial court removed the wife as a co-trustee. The wife appealed. The Kansas Uniform Trust Code (KUTC) specifies that a court may remove a trustee if “the trustee has committed breach of trust.” A breach of trust is a violation of the trustee’s duty to the beneficiaries. To determine if the wife committed a breach, the appellate court looked to the decedent's intent for management of the trust. The language of the trust gave the exclusive discretion over distribution of the trust’s income and principal to the cousin as the independent trustee. The trust stated that, “whenever a power of discretion is granted exclusively to my Independent Trustee, then any Interested Trustee who is then serving as my Trustee is prohibited from participating in the exercise of the power of discretion.” The appellate court found the wife was an interested trustee because she was both a trustee and beneficiary, so she should not have exercised any discretion over the distribution of the funds of the trust. The appellate court agreed with the trial court that the wife repeatedly disregarded the terms of the trust and tried to take advantage of being a co-trustee. The language of the trust agreement was clear that the wife’s discretion should have been restricted and her acts prohibited. The wife failed to show the trial court abused its discretion by removing her as a co-trustee and affirmed the trial court’s decision. In re Link Zweygardt Trust No. 1., No. 124,760, 2022 Kan. App. Unpub. LEXIS 616 (Kan. Ct. App. Dec. 2, 2022).
The issues that can arise post-death are numerous. These cases are merely a sample of what can happen.