Wills, Trusts & Estates Prof Blog

Companies Sign Brief Urging Supreme Court to Outlaw DOMA

On Wednesday, Facebook, Apple and Microsoft joined with hundreds of other companies to urge the U.S. Supreme Court to strike down the Defense of Marriage Act (DOMA).  

278 employers signed on to a friend -of-the-court brief before argument in the high court.  The brief they signed says,"'DOMA forces the businesses to administer dual systems of benefits and payroll, and imposes on them the cost of the workarounds necessary to protect married colleagues.'"

Only section 3 of DOMA is being challenged before the Supreme Court.  Section 3 defines "marriage" as a legal union between one man and one woman as husband or wife, and defines "spouse" as a person of the opposite sex who is a husband or wife.  

See Companies Ask Court to Outlaw DOMA, UPI.com, Feb. 27, 2013. 

Five Things to Think About After Having a Baby

Estate planning attorney Michael F. Brennan offers the following changes that new parents should consider making in their estate plan after having a baby: 

1. Consider guardians and trustees: When choosing a guardian, it is best to consider the physical location of the guardian, their lifestyle, religious, political and moral beliefs, and their financial situation. It is also very important to ask your potential guardian selection if they want to serve in that position. 

2. Review who should receive your assets: Go back and look at previous wills, retirement accounts, insurance policies, real estate titles, and TOD account designations to ensure they properly reflect any new wishes you might have after your child's birth. 

3. Think about education: With the rising cost of education, you might want to start setting aside money for your child's education.  Among other ways to accomplish this, you could set up 529 plans or create educational trusts for children. 

4. Retitle assets to avoid any unnecessary transfer delay: Transferring assets to a living trust can be a way to get around the potentially slow process of probate that is required to legally transfer many assets of a deceased individual. 

5. Gifts and taxes: For those couples whose assets are worth more than $10.5 million, to minimize tax liability, it is a good idea to discuss ways to reduce the value of the estate through trusts and gifting prior to death. 

See Alan Moore, 5 Changes to Make to Your Estate Plan When You Have a Baby, Serenity Financial Consulting, Feb. 25, 2013. 

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

Article on The Demise of Dynasty Trusts

Lucy A. Marsh (Professor, Sturm College of Law at University of Denver) recently published her article entitled The Demise of Dynasty Trusts: Returning the Wealth to the Family, 5 Est. Plan. & Community Prop. L.J. 23 (2012).  The introduction to the article is available below: 

 

Recently, a flurry of state legislation has made it possible for an individual to create a long-term private trust, called aDynasty Trust, in close to one-half of the states of the United States. What is unusual about Dynasty Trusts is that they may be established to last for 150 years, 1,000 years, or some other extremely long period of time, depending on the jurisdiction.

Many lawyers, banks, and tax advisors are rushing to try to persuade their clients to set up such Dynasty Trusts, claiming that such trusts will provide a way of protecting the clients' descendants for the next 1,000 years or so.

But who is likely to derive the most benefit from the existence of Dynasty Trusts? Upon close inspection, it seems clear that in reality, corporate fiduciaries-hereafter simply referred to as banks-are likely to reap the major benefits from aDynasty Trust, rather than the descendants of the settlor. That may explain why the banks lobbied so hard to try to get states to adopt the legislation that made Dynasty Trusts possible.

This article is designed to try to speed the demise of Dynasty Trusts by bringing some common sense to the discussion ofDynasty Trusts. It is time for people to feel confident in leaving assets to their children and grandchildren, rather than to the banks.

After an introductory review of some of the fundamentals of a trust, Part II of this article will attempt to illustrate why banks have lobbied so strongly for Dynasty Trusts and why the existence of such trusts may cause serious problems. Part III will discuss the attractions of Dynasty Trusts. Part IV will point out how little money would actually be available for remote descendants of the settlor of a Dynasty Trust after 1,000 years. Part V will discuss historical experience with fractionalization of beneficial ownership. Part VI will suggest several clear, relatively simple solutions.

 

The Testator’s Signature on the Self-proving Affidavit Does Not Cure Lack of Signature on the Will

The testator’s signature on the self-proving affidavit does not cure lack of signature on the will. The named executor offered for probate a two-page document purporting to be the decedent’s will. The testator and the witnesses had initialed page one but only the witnesses signed page two; the testator’s signature did not appear on the will. The testator and the witnesses did sign the self-proving affidavit accompanying the will. The trial court denied probate, a divided intermediate appellate court reversed, and the Tennessee Supreme Court reversed and denied probate. The court held that the will was not signed by the testator because the self-proving affidavit is a separate document which is not part of the will and stated that the court has no authority to relax the statutory requirements for properly executing a will.

Estate of Chastain, No. E2011-01442-SC-R11CV, 2012 WL 5828609 (Tenn. Nov. 16, 2012).

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

CLE on Irrevocable Trusts and Virtual Representation Statutes

ALI CLE is sponsoring a telephone seminar/audio website entitled, Refining The Irrevocable Trust Using Your Jurisdiction's Virtual Representation Statute, on Wednesday, March 20, 2013 on 1:00 - 2:00 p.m. EST. Provided below is a description of this program:

Whether it's a marital trust, family trust, insurance trust or dynasty trust, applicable provisions can be construed in different ways:

• What did the grantor intend?
• Can a change be made without seeking court intervention?
• Whom do you have to tell? And whom should you tell?
• If you cannot avail yourself of your jurisdiction's virtual representation statute, can you resolve the issue by way of a Trust Protector or other means?

Join ALI CLE's expert, Benjamin Feder, as he explores the answers to the above and other questions.

Article on Marital Property Characterization in Trusts

James L. Musselman (Professor of Law, South Texas College of Law) recently published an article entitled, Separate But Equal: Proposal For Harmonizing the Rules for Marital Property Characterization of Beneficial Interests In and Distributions From Trusts With Those Applicable to Similar Types of Property, 5 Est. Plan. & Community Prop. L.J. 55 (Fall 2012). Provided below is the introduction:

The marital property rules currently used in Texas for characterizing beneficial interests in and distributions from trusts have not been formulated and applied consistently by the circuit courts. Thus far, the Supreme Court of Texas has not resolved this inconsistency. To make matters worse, the circuit courts currently do not use rules logically consistent with the marital property rules generally applicable to characterization of similar types of property. This article will describe the different approaches circuit courts have used and the different rules they have developed. The article will also propose the adoption of standard rules that will harmonize all of these approaches and allow the rules for characterizing beneficial interests in and distributions from trusts to exist in logical parity with the rules for characterizing similar types of property.

Under the inception of title doctrine in Texas, marital property is characterized as separate or community property. Property is characterized at the time of its acquisition and retains that character until the marriage is dissolved. Ownership interests in and distributions from organizations that constitute legal entities are subject to special rules.The marital property subject to characterization is the ownership interest in the entity. Because the entity-not the spouse-owns the property, it is not marital property subject to characterization. Thus, property owned by a corporation or partnership is not marital property of a spouse owning an interest in the entity; instead, the marital property is the ownership interest in the entity, such as the corporate stock or partnership interest. In addition, income earned by a corporation or partnership belongs to the entity and not to a spouse owning an interest in the entity until the entity distributes the income to the owner.

In some jurisdictions, a trust is a legal entity separate from the owners of the beneficial interests in the trust. If that is true under Texas law, then the rules for characterizing beneficial interests in and distributions from trusts should be consistent with the rules for characterizing ownership interests in and distributions from other separate entities, such as corporations and partnerships. However, none of the characterization rules currently used by the circuit courts are consistent with the rules applicable to other separate entities. The Supreme Court of Texas has ruled in cases not involving marital property law that trusts are not legal entities at all; rather, they constitute a fiduciary relationship between the trustee and the trust property. Accordingly, the property interest owned by a trust beneficiary is simply an equitable interest in the trust property. If that is also true under Texas marital property law, then the rules for characterizing beneficial interests in and distributions from trusts should be consistent with the rules for characterizing ownership interests in and income earned by other types of income-producing property. However, none of the characterization rules currently used by the circuit courts are consistent with those rules either.

This inconsistency exists because trusts are created for many different reasons and, as a result, take many different forms. Many trusts are structurally complex, and courts have struggled to apply marital property characterization rules to them in a consistent manner. The result is a hodgepodge of different approaches and rules applied by the various circuit courts. The problem is confusion for litigants and trial courts attempting to determine applicable rules for characterizing interests in and distributions from trusts. Therefore, a logical and consistent set of rules is necessary.

Section II of this article will describe the marital property rules not only for characterizing income-producing property and the income produced by such property, but also for characterizing the ownership interests in and distributions from separate entities other than trusts, such as corporations and partnerships. Section III will discuss the issue of whether a trust is, or should at least be treated for marital property characterization purposes as, a legal entity separate from the owners of the beneficial interests in the trust. Section IV will describe the different approaches utilized by the circuit courts, and the different rules they have developed as a result, to characterize beneficial interests in and distributions from trusts. Section V will propose standard rules that will (1) harmonize these various approaches and rules currently used and (2) allow the rules for characterizing beneficial interests in and distributions from trusts to exist in logical parity with the rules for characterizing similar types of property, regardless of whether a trust is treated as a separate legal entity or not. The source of the legal reasoning underlying these proposed rules is the United States Supreme Court, which utilized such reasoning to resolve a complex issue that arose in the first two decades after the adoption of the United States federal income tax.

Justice For James Brown's Estate

As I have previously discussed, the legal battle over the estate of James Brown ended in settlement, with 50% of estate going to his charitable trust, 25% going to his widow Tomi Rae Hynie, and the other 25% to his heirs. On appeal, the Supreme Court of South Carolina in Wilson v. Dallas has overruled the settlement agreement, arguing that deal that was reached completely ignores the intent of the late-singer. Here, the court also ruled that it was clear that Brown was of sound mind when he drafted his will. As a result, the court remanded the case to the lower courts for reconsideration. The court did agree with the decision of the lower court to remove the original trustees of Brown's estate.

In particular, the justices of the court did not agree with the actions of Attorney General Henry McMaster. The justices argued that if the actions of the Attorney General were to stand, this could discourage people from donating money to charity through testamentary gifts mostly out of fear that their wishes could just be discarded. In this case, the Attorney General orchestrated a compromise among the parties that disregarded the wishes of James Brown. James had originally wanted the vast majority of his estate to go into a charitable trust for the education of needy children. The compromise, which I stated above, gave large portions of Brown's estate to people he never intended to give to, such as his self-proclaimed widow.

See Meg Kinnard, James Brown Estate: South Carolina Supreme Court Nixes Settlement, The Huffington Post, Feb. 27, 2013.

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

Round Two of Gina Rinehart Legal Battle

As I have previously discussed, the legal battle between billionaires Gina Rinehart and her three eldest children continues. Recently, Gina's children secured funds from wealthy associates to pay their legal bills down and keep their case alive after depleting $300,000 of their own money. The children hope to remove their mother as trustee of the four billion dollar family trust set up by Gina's late father Lang Hancock. Since the legal proceedings, the children have been financially cut off from the trust benefits. One of the children, John Hancock, did not receive trust benefits even years before the legal battle began. The parties will be back in court in March. The case turns on the allegation that Gina breached her duty as trustee. The trust was supposed to vest in 2011 when Gina's youngest daughter turned 25. However, Gina withheld the money. She reasoned that the costs resulting from the vesting would have left the children bankrupt. Gina declares she upheld her fiduciary duty to protect and build the inheritance. In fact, according to Yahoo Finance Gina has increased the trust asset value by some 40,000%.  

See, Rinehart Children Borrow for Family Trust Battle, Yahoo!7Finance.com, Feb. 26, 2013. 

Special thanks to Thomas Hackett (Attorney at law, Washington Attorney in an Estate Admistration and Business Planning Law Firm) for bringing this article to my attention.

Other Assets of Beneficiary Taken Into Account in Evaluating the Trustee’s Exercise of Extended Discretion.

The trust instrument directed the trustee to distribute principal and income in trustee’s sole discretion to provide for the beneficiaries’ “maintenance, support, education, health and welfare” and purported to exempt the trustee’s exercise of discretion from judicial review.  The beneficiaries petitioned for removal and replacement of trustee, their mother and daughter of the settlor, on the grounds that she refused to make distributions to pay for the beneficiaries’ college education and to purchase automobiles.  The trial court granted the petition and the appellate court reversed, holding that while the language purporting to forbid judicial review of the exercise of discretion was nugatory, it did indicate that the settlor intended the trustee to have the greatest latitude permitted by law.  The court then held that the beneficiaries had other resources, including 529 plans, adequate to pay their college expenses.  In re Trusts for McDonald, 953 N.Y.S.2d 751 (N.Y. App. Div. 2012).

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

Article on Fiduciary Litigation

Sarah Patel Pacheco (Shareholder, Crain, Caton, & Jamesrecently published her article entitled Fiduciary Litigation: Avoiding (or Minimizing) The Traps, Tribulations, and Trials, 5 Est. Plan. & Community Prop. L.J. 95 (2012).  The introduction to the article is below: 

The term “fiduciary” means “any person who occupies a position of peculiar confidence towards another.” While these appointments often arise out of a relationship of trust, the fiduciary role can be a thankless one. Once appointed,fiduciaries face a host of issues including deciding to serve, balancing divergent interests, facing threats of litigation, and accounting for and defending their own actions.

As the number of lawsuits involving the role and responsibilities of a fiduciary continues to increase, professionals representing and advising these individuals face an equally difficult job. Unfortunately, neither the Texas Probate Code nor the Texas Property Code-which contains the Texas Trust Code-provides definitive guidance for the role, responsibility, and potential liability of a fiduciary. Adherence to some central considerations and measures may allow fiduciaries to fulfill their fiduciary duties and also substantially reduce (but not eliminate) the potential claims against, and the liability of, thefiduciary. The following is a discussion of ways to reduce potential litigation in this area.