A Message to Clients . . . Avoiding Probate Court Litigation
By Karen S. Gerstner
Karen S. Gerstner is a member of the Houston, Texas, firm of Karen S. Gerstner & Associates, P.C.
When I was a young lawyer, I attended a meeting with several attorneys to discuss certain “contested matters” that had arisen after the death of a widower who died survived by four children. I was shocked to hear one of the seasoned attorneys say, “If all decedents had only one child, my workload would decrease to nothing.” Whether you go back to Cain and Abel, or only as far back as the Smothers Brothers (“Mom always liked you best”), sibling rivalry is the chief factor in many disputes arising after a parent dies. Many laypeople attribute all litigation to greed, but in the case of family situations, often much more is involved than simply greed. Sometimes children hold deep-seated resentments, which may be based on perceived unfair treatment by a parent or sibling, often going back many years. Sometimes the last living parent is the only “glue” holding the children in the family “together” (if they ever truly were, in fact, “together”). Sometimes parents have unrealistic expectations about family.
What Is Probate Court Litigation?
The terms “contested matters” and “litigation” are often used interchangeably. Both refer to situations that may require court action to resolve a dispute or fix a problem. Some contested matters do not involve animosity between the parties, while others definitely do. If the matter surfaces because of a person’s death or mental incapacity, then any necessary court proceeding will usually be filed in a court that has “probate jurisdiction.” Many urban counties have specialized courts to handle decedents’ estates and mentally incapacitated persons. In other communities, these matters may be heard in a court that handles a number of different matters, including probate matters. Most of the matters handled by probate courts, such as admitting wills to probate and appointing executors, are routine and not contested. Routine probate matters can be handled very efficiently.
“Contested matters” handled by probate courts (aka “probate court litigation”) is a broad term that includes a variety of situations, including, but not limited to,
• will contests (a challenge to the validity of a will);
• will and trust construction suits (a request that the court make a determination regarding the legal meaning or effect of particular wording used in a will or trust);
• guardianship contests (a fight over (1) whether a guardian should be appointed for a particular individual who allegedly has lost his mental capacity (and did not do any advance planning, such as executing powers of attorney), and (2) if so, who should be appointed as the guardian to make medical decisions and handle financial matters for that mentally incapacitated person);
• trust modification and trust reformation suits (a proceeding that requests the court to change (or “fix”) the terms of a trust because something is wrong with the way the trust is worded);
• trust termination suits (a legal action brought to terminate a trust because the purpose of the trust has been fulfilled or can no longer be fulfilled); and
• breach of fiduciary duty actions (suits by beneficiaries against an executor, trustee, guardian, or agent alleging that the fiduciary failed to act in accordance with the law and/or the instrument appointing her and thereby caused damage to the beneficiaries).
Besides sibling rivalry, another high-risk factor for probate litigation is the so-called “second marriage” situation. Many people marry for a second (or even third or fourth) time without signing a premarital agreement (“Pre-Nup”) before the wedding. Many people, including the media, still mistakenly believe that the sole purpose of a Pre-Nup is to specify how their assets will be divided on divorce. Although such matters can be addressed in a Pre-Nup, estate planning lawyers are more concerned with the “messy issues” that develop on death (they have an optimistic attitude that their clients’ marriages will work out; they have a pessimistic attitude when it comes to death, however—all of their clients will die someday). The Pre-Nup is one of the best ways to avoid probate litigation on death. It can also avoid a very expensive “forensic accounting” on the death of the first spouse. Many people mistakenly believe they own certain assets as their separate property (perhaps simply because the asset was in existence before the marriage and/or is titled solely in their name) when, in fact, their property may have become community or marital property, in whole or in part, during the marriage. It is better for living persons to create the necessary documentation regarding the ownership of their assets, even if it involves a pre- or post-marital agreement, than to have family members fight over these matters on the death of their spouse or parent. Not to be too harsh, but it appears irresponsible (and, perhaps, also “penny wise and dollar foolish”) for persons who own any significant assets to enter into a second marriage without a Pre-Nup. Even if the spouses in a second marriage are themselves happy to treat all assets on hand on the death of the first spouse as joint or community property, unless the proper legal documentation is in place, there is nothing to prevent one or more children of the deceased spouse from claiming otherwise after the death of their parent. This is the classic probate court litigation case: children of the first marriage versus the spouse of the second marriage.
The term “dysfunctional family” is often used by lawyers who handle probate litigation (one of my former law partners liked to explain his practice by saying he represents “dysfunctional families with wealth”). By definition, a family involves multiple people who have wants and needs and must interact with each other. It is easy for dysfunction to arise in families, especially if resources must be shared. Family relationships can be very rewarding, but they also can be very hard. It appears that many misunderstandings arise because of the fact that people do not always communicate clearly with each other, leading to unresolved issues. Sometimes it is just too painful for people to address issues that really should be addressed. Estate planning lawyers are not psychologists, but they understand the difficult situations some people are in. They are able to help clients deal with difficult issues in a proactive way: “An ounce of prevention is worth a pound of cure.” This is particularly true when it comes to avoiding probate litigation. Some people say they do not care what happens after they are dead. But, if there is probate litigation after death, even the decedent’s favored beneficiaries suffer. Good planning is the answer.
Factors That Could Lead to Probate Litigation
Here is a list of some of the factors (in no particular order) involved in probate litigation, grouped by categories:
Creating a “Nonstandard” Estate Plan
Some examples included estate plans that (1) “cut out” a child, (2) treat children differently, (3) create overly detailed trusts attempting to “control from the grave,” and (4) make gifts to mistresses. It does not matter if the person creating the plan has “good reasons” for doing what he is doing. A nonstandard estate plan increases the odds for probate litigation after death. It’s just a fact.
The Second Marriage Situation
As previously noted, if the Pre-Nup or Post-Nup does not clearly define the ownership of assets by couples who were married previously, the potential for litigation on the death of a spouse is much greater (especially if there are children from the prior marriage). If assets are not cleanly divided between the surviving spouse and the children from the prior marriage, problems can arise. Life insurance can sometimes be the best way to separate the interests of the deceased spouse’s children from the surviving spouse and provide for both of them. The use of trusts can help, but the trust must be carefully structured. Probate litigation is more likely with plans that create a trust for the surviving second spouse (1) with the children of the first marriage as permissible current beneficiaries of the trust along with that spouse; (2) that gives the surviving spouse a power of appointment over the trust, especially if the trust assets can be given to beneficiaries other than the decedent’s children; and (3) in which either the surviving spouse or a child of the deceased spouse (or both together) is the trustee(s)—this type of trust is usually best handled by an independent trustee such as a bank or trust company.
Not Appointing the Right Fiduciary
Serving as the executor of an estate, the trustee of a trust, or an agent under a financial power of attorney requires a huge commitment of time and effort and absolute honesty. When determining who should be named in these important fiduciary positions, the personality traits and skills of the appointee should be carefully considered. It would be a big mistake to name someone in one of these fiduciary positions who
• does not communicate well with the beneficiaries,
• does not read (or listen to) and follow the instructions of the attorney advising him,
• procrastinates in getting things done,
• is not 100% trustworthy,
• may be susceptible to the (bad) influence of his or her spouse or someone else,
• is arrogant, conceited, or a “know it all,”
• is disorganized and/or loses things, and
• is lacking in common sense.
Further, it is often a mistake to name two people to act together as co-fiduciaries (unless both individuals are extremely mature, sensible and well-adjusted, good communicators, and good at coordinating their efforts).
Ill-conceived or “Faulty” Planning
There are so many examples of “bad estate planning” that it is impossible to list all of them here. Some are the result of incompetence and/or lack of experience on the part of the attorney who prepared the plan. Others are the result of individuals trying to do things themselves that are not well thought-out. Some examples include (1) a person writing his or her own will or codicil (unless the instrument is a handwritten codicil that disposes only of personal effects); (2) having a customized estate plan prepared by an attorney who lacks the necessary expertise to draft nonstandard provisions; (3) creating a group trust for adult beneficiaries (that is, one trust out of which the trustee can make distributions currently to any of several persons); (4) appointing one child as the trustee over another child’s trust; (5) buying too many annuities (these assets are almost impossible to deal with effectively in an estate plan); (6) an executor, trustee, or agent (“fiduciary”) not hiring an attorney to represent and advise him, at least initially; (7) an executor hiring a lawyer who lacks the necessary expertise to help with the post-death matters when the will contains tax and other “sophisticated” estate planning; (8) a fiduciary not hiring an accountant to prepare all required income tax returns and provide relevant tax advice affecting the estate, trust, and/or the beneficiaries; (9) a trustee not hiring an investment advisor or agent to assist her with managing the investments of the trust; (10) a parent not explaining or discussing his estate plan (at least in general terms) with his children; (11) a person signing a will or codicil on her “death bed” or while suffering from a serious illness; (12) a person naming a minor (a person under age 18) as the direct beneficiary in a will or living trust or as the beneficiary of life insurance, IRAs, retirement plans, and so on; (13) attempting to dispose of nonprobate assets (such as assets that pass by beneficiary designation) in the will; (14) arranging for the complete disposition of assets in a nonprobate manner by using “multi-party accounts” (such as JTWROS and POD/TOD), leaving the executor with no funds to pay debts, taxes, and expenses after death; (15) attempting to dispose of all assets individually, rather than using percentages (at least for the bulk of the estate); and (16) in a taxable estate situation, having a plan that disposes of assets passing outside the will differently from assets passing under the will and not properly coordinating the tax consequences of the dispositions.
Other Difficult Situations
Other situations that are always more difficult to plan for and that increase the need for solid planning to avoid probate litigation (and other problems) include (1) heterosexuals living together who have not executed a “nonmarital cohabitation agreement” to avoid a “common law spouse” lawsuit on death; (2) gay and lesbian couples who do not do “special additional planning” to place their partners in a secure position of control (to override state law priority statutes) and to arrange for the unassailable transfer of assets to their partners on death (tax planning also can be harder because the estate tax marital deduction is not available to gay and lesbian couples); (3) making unreported “taxable gifts” during life (a taxable gift is a gift that is more than $12,000 per person per year (the current annual exclusion amount)); (4) making gifts during life to just one child and not to all children in equal amounts; (5) failing to tell the estate planning attorney about an illegitimate child or child from a prior marriage; and (6) failing to organize the client’s financial and other important information to enable the executor of the estate to do a good job.
Failure to Follow Up
This category includes the client (1) failing to review the estate plan on a periodic basis (estate plans become outdated very quickly now); (2) failing to do the necessary “homework” incident to the estate plan (such as re-titling accounts and completing beneficiary designation forms as instructed so that nonprobate assets are coordinated with the client’s estate plan in his will or trust); (3) failing to change the will, account titles, and beneficiary designations after marriage or divorce; and (4) failing to re-title all the assets in the name of the living trust before death if the intention is to avoid probate completely.
How to Avoid Probate Litigation
Don’t do things that could cause serious legal consequences without first discussing them with legal or other advisors. Come in for a “check up” on a regular basis and be prepared to discuss every issue and concern. Follow through on necessary “homework” such as account titling and beneficiary designation matters (see above). Plan ahead for possible mental incapacity by having the appropriate documents in place. Make sure the persons appointed to fiduciary positions are completely trustworthy and responsible.
If a nonstandard estate plan is being implemented, use stronger techniques (such as a funded living trust) and additional provisions (such as a “no contest” clause). Consider creating a “will wall”: a series of wills executed over a lengthy period of time, designed to make it undesirable for a relative who the client wishes to “cut out” (or treat less favorably) to contest the will, so that if the last will is successfully contested, the contestant will still have to contest the prior will, which, through advance planning, would have been prepared to provide even less generous gifts to the contestant than the last will (and so on).
In discussions with family members, the client should explain the reasons for the plan being implemented, although the client will need to be careful to state the reasons in a way that is calm and rational (“incendiary” statements will only add fuel to the fire and could be detrimental in a will contest).
Not all probate litigation can be prevented, of course, but a large portion of probate litigation can be prevented by good planning. Good planning is what estate planning is all about.
|P R O B A T E & P R O P E R T Y|
Vol. 22 No.2