Department

Keeping Current - Probate

Keeping Current—Probate Editor:

Prof. Gerry W. Beyer, St. Mary’s University School of Law, One Camino Santa Maria, San Antonio, TX 78228–8603, gwb@ProfessorBeyer.com. Contributors include: Dave L. Cornfeld, Claire G. Hargrove, Christopher L. Harris, and William P. LaPiana.

Keeping Current—Probate

offers a look at selected recent cases, rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.

CASES

ADULT ADOPTION: Individuals adopted as adults are treated as descendants.

In Commerce Bank, N.A. v. Blasdel, 141 S.W.3d 434 (Mo. Ct. App. 2004), the court held that adult adoptees were the descendants of the adopting parents’ parents and were therefore entitled to share in the remainders of trusts created by their grandparents.

ARBITRATION: Arbitration clause in a trust is not binding on the beneficiaries.

Inter vivos trusts contained provisions requiring the arbitration of all disputes, including those between beneficiaries and the trustees. In Schoneberger v. Oelze, 96 P.3d 1078 (Ariz. Ct. App. 2004), the court held that a state law that requires the enforcement of arbitration provisions contained in written contracts did not apply because the trust agreement was not a written contract.

CONTENTS: Contents of house do not include personal property erroneously described as located elsewhere or stocks.

The testatrix’s holographic will devised her house and its contents to the personal representative, specifically mentioning silver, crystal, and antiques. A separate paragraph referred to jewelry and coins “temporarily” held at a bank, but no disposition of them was made. The residue was given to charity. The jewelry and coins, as well as the stock certificates, were found in the house when the testatrix died. The court held that the gift of the contents did not include this property. In re Estate of Lewis, 93 P.3d 605 (Colo. Ct. App. 2004).

DISCLAIMERS: Partial disclaimer must be express.

A son was a beneficiary of his mother’s lifetime trust. After her death, her personal property was divided among the beneficiaries, including the son. The trustee then reduced the remaining trust assets to cash, but before distribution the son purported to disclaim all of his interest as a beneficiary. In an action by a creditor of the son, the court held that the son’s acceptance of the personal property barred the disclaimer, which could not be treated as a partial disclaimer of the cash. Whitney v. Faulkner, 95 P.3d 270 (Utah 2004).

DIVORCE: Income from an irrevocable trust is not subject to equitable distribution.

In In re Marriage of Guinn, 93 P.3d 568 (Colo. Ct. App. 2004), the court held that a mandatory income interest in a trust created by a third party, which provided that the trustee had the power to select investments, to determine what was principal and what was income exercising reasonable discretion, and to allocate receipts and expenditures between principal and income, was not property subject to equitable division on divorce.

ESTATE CREDITORS: Ability to reach nonprobate property does not subject life insurance proceeds to creditors.

The court determined that the state’s enactment of Uniform Probate Code § 6–102, which makes transferees of nonprobate property liable for claims and allowances to the extent probate property is insufficient “except as otherwise provided by law,” does not overrule the statutory exemption from creditors’ claims for life insurance proceeds. May v. Ellis, 92 P.3d 859 (Ariz. 2004).

FIDUCIARY DUTY: Executors of all types of probate methods are subject to the same duties.

Local law provides for “nonintervention” probate, and an executor of a nonintervention estate may be removed only for causes “specified” by statute, including any cause or reason thought sufficient by the court. In In re Estate of Jones, 93 P.3d 147 (Wash. 2004), the court held that the reference to any cause held sufficient by the court applied even to a nonintervention personal representative, stating emphatically that all personal representatives are held to the same standard of fiduciary duty.

GROSS ESTATE: Family limited partnership property is part of the decedent’s gross estate.

In Turner v. Commissioner, 382 F.3d 367 (3d Cir. 2004), the Third Circuit affirmed the Tax Court’s decision in Turner v. Commissioner, 84 T.C.M. (CCH) 374 (2002), which held that property transferred to family limited partnerships was part of the decedent’s estate under Code § 2036. There was an implied agreement with the partners allowing the decedent to retain the enjoyment and economic benefit of the transferred property. The transfer was not a bona fide sale because it was not motivated by legitimate business concerns. The partnerships did not carry on legitimate business operations, nor did they provide the decedent with any benefit beyond estate planning. The decedent’s transactions were motivated solely by tax planning. Accordingly, the decedent’s estate included the partnership property and not just the partnership interests.

MALPRACTICE: A nonclient beneficiary may bring a malpractice action.

Montana has joined the growing number of states that permit nonclient beneficiaries of an estate plan to bring a malpractice action against the attorney who drafted a defective estate plan. The court explained that the multi-factor balancing test that many other states apply may be appropriate in deciding precisely what duty attorneys owe to nonclients in an estate planning context. Stanley L. and Carolyn M. Watkins Trust v. Lacosta, 92 P.3d 620 (Mont. 2004).

MEDICAID PLANNING: Substituted judgment standard applies.

In In re Keri, 853 A.2d 909 (N.J. 2004), the court held that a guardian of an incompetent individual may pursue a Medicaid spend-down plan. The court adopted the criteria applicable to the making of gifts by guardians for estate planning purposes set forth in earlier cases, the most important being that the ward is unlikely to recover, the assets remaining are sufficient, the donees are natural objects of the ward’s bounty, and that “there is no substantial evidence” that the ward, if competent, would not approve the plan. The court also held that Medicaid planning is not contrary to public policy.

POWERS OF APPOINTMENT: Invalid portion of appointment severed from valid portion.The husband’s trust gave his wife a power to appoint trust property among their eight children. The wife made outright appointments to some children but inappropriately appointed a portion of the property in trust with the income to be paid to one of her daughters, with a discretionary power in the trustees subject to an ascertainable standard to distribute principal among the daughter and her living descendants with the remainder to the daughter’s descendants. The court in Vetrick v. Keating, 877 So. 2d 54 (Fla. Dist. Ct. App. 2004), held that the improper appointment is best remedied by severing the invalid portion of the appointment with the remainder reverting to the trust.

POWERS OF APPOINTMENT: Unprobated will validly exercised powers.

The decedent held powers of appointment over two trusts created by her husband. Her will exercising both powers was not admitted to probate and the statutory period for probate expired. The court in Lumbard v. Farmers State Bank, 812 N.E.2d 196 (Ind. Ct. App. 2004), held that both powers were exercised even though one was specifically limited to exercise by will. The decedent did all she could during her life to exercise the powers, and the policy behind the statutory time limit on probate was not relevant.

PRIVILEGE: Disclosure to the attorney for the trustees waives the privilege vis-à-vis the successor trustee.

The attorney who had represented the trustees and disclosed documents to a second lawyer for the trustees resisted discovery of those documents in a suit by the successor trustee. In Eddy v. Fields, 18 Cal. Rptr. 3d 487 (Cal. Ct. App. 2004), the court held that the work product privilege did not apply. By disclosing the documents to the other attorney for the trustees, the lawyer effectively waived the privilege regarding these former trustees and therefore waived the privilege regarding the successor trustee.

TORTIOUS INTERFERENCE: The dead person’s statute is inapplicable to tortious interference claims.

State law authorizes a cause of action for tortious interference with a testamentary expectancy if the defendant has maliciously destroyed a will and the plaintiff is unable to reestablish the will in a probate proceeding. In In re Estate of Hatten, 880 So. 2d 1271 (Fla. Dist. Ct. App. 2004), the court held that the dead person’s statute does not apply to a tortious interference case because the defendant is being sued as an individual and not in a representative capacity.

TRUST TERMINATION: Spendthrift provision ineffective once trust terminates.

A daughter created a trust to which she assigned, among other property, any interests she might inherit from her mother. Two years later, the mother created a trust of her property for her own benefit that was to terminate on her death. The mother’s trust included a spendthrift clause prohibiting a beneficiary from transferring her interest. After the mother’s death, the daughter executed a reaffirmation of her prior conveyance. In an action by the trustee of the daughter’s trust for an accounting by the trustee of the mother’s trust, the court determined that the spendthrift provision’s effectiveness ended with the termination of the trust on the mother’s death. The daughter’s reaffirmation of her assignment was effective to transfer her interest in the mother’s trust to her own trust. Faulkner v. Bost, 137 S.W.3d 254 (Tex. Ct. App. 2004).

RULINGS AND REGULATIONS

CHARITABLE DEDUCTION: Charitable deduction is not available for a gift to a beneficiary who is a member of a religious order and who has taken a vow of poverty.

TAM 200437032.

GENERATION-SKIPPING TRANSFER TAX: Proposed regulations address procedure for severing trusts for GST tax purposes so that one trust has a zero inclusion ratio and the other obtains a ratio of one.

Prop. Reg. 145987–03.

GENERATION-SKIPPING TRANSFER TAX:Proposed regulations issued to clarify predeceased parent exception.

Two issues related to generation assignment are discussed in Prop. Reg. 145988–03. The first is the time when an interest is established or derived and includes an exception for QTIP trusts. The second addresses the treatment of an individual who could be assigned to more than one generation by providing that such a person is assigned to the youngest of those generations.

GIFT TAX: Three-year look-back period for inclusion of tax paid on gifts in the donor’s gross estate excludes date of gift.

Thus, if the donor made a gift February 1, 2000, and died on February 1, 2003, the gift tax on the gift is not included in the donor’s gross estate. TAM 200432016.

GRANTOR-RETAINED ANNUITY TRUSTS: Proposed regulations concede to Walton v. Commissioner, 115 T.C. 589 (2000).

Accordingly, a retained annuity payable for a specified term to the grantor or the grantor’s estate will be deemed a qualified interest even if the grantor dies before the expiration of the term. Prop. Reg. 163679–02.

QTIP ELECTION: QTIP election on estate tax return is sufficient to cover after-discovered assets and increased estate values after tax audit.

PLR 200430002.

LITERATURE

Divorce.

Wendy S. Goffe recommends using trusts to anticipate and minimize the effect of common post-dissolution issues in her article, Estate Planning with Trusts for Divorcing Spouses, 38 Fam. L.Q. 157 (2004).

Guardianships.

Sally Balch Hurme discusses problems that arise if more than one state is involved with the best interest of a ward in Mobile Guardianships: Finding Solutions to Interstate Jurisdiction Problems, J. Nat’l College Prob. Judges, Fall 2004, at 18.

Health Care Decisions.

Sara Beth Richardson summarizes the results of the 2003 ABA Commission on Law and Aging survey of state statutes in Health Care Decision-Making: A Guardian’s Authority, J. Nat’l College Prob. Judges, Fall 2004, at 10.

Joint Trusts.

In The Joint Trust: Estate Planning in a New Environment, 39 Real Prop. Prob. & Tr. J. 275 (2004), John H. Martin contends that the joint trust offers a flexible approach to estate planning in an uncertain estate tax environment.

Louisiana Succession.

In The Changing Concept of Family and Its Effect on Louisiana Succession Law, 63 La. L. Rev. 1161 (2003), Kathryn Venturatos Lorio traces the evolution of what is considered family under Louisiana law. A thematic approach and discussion of the historical and juristic context of recent developments is taken by J.R. Trahan in Succession & Donations, 64 La. L. Rev. 315 (2004).

Mistake.

Martin L. Fried focuses on how disappointed heirs may seek relief and remedy mistakes in a will outside of the probate process in The Disappointed Heir: Going Beyond the Probate Process to Remedy Wrongdoing or Rectify Mistake, 39 Real Prop. Prob. & Tr. J. 357 (2004).

Oklahoma Estate Tax.

Judson L. Temple explores an Oklahoma statute requiring that property subject to a general power of appointment be included in a decedent’s gross estate in The Oklahoma Estate Tax: Powers of Appointment, Contingent Remainders, and the Case of Ernest L. Sieber, 28 Okla. City U. L. Rev. 347 (2003).

Pets.In Posthumous Pet Protection Provisions, 92 Ill. B.J. 395 (2004), Helen W. Gunnarsson discusses recently enacted Illinois legislation that validates trusts for the benefit of pets.

Professional Responsibility.

In A “Rest in Peace” Guide of Estate Planning Ethics, 28 J. Legal Prof. 217 (2003–04), Catherine Houston Richardson explores the potential conflict of interest situations a drafting attorney faces in trust and estate representation.

Sanism.

In “Things Have Changed”: Looking at Non-Institutional Mental Disability Law Through the Sanism Filter, 46 N.Y.L. Sch. L. Rev. 535 (2003), Michael L. Perlin outlines his definition and theory of sanism, which he says is an irrational prejudice against the mentally disabled that influences courts to use unwarranted pretexts to achieve desired ends.

Texas.In Wills and Trusts, 57 SMU L. Rev. 1293, Gerry W. Beyer discusses recent legislative and judicial developments relating to the Texas law of intestacy, wills, estate administration, trusts, and other estate planning matters.

LEGISLATION

California enhances provisions pertaining to the appointment and monitoring of guardians, conservators, and trustees.

2004 Cal. Legis. Serv. 548.

Illinois increases the value of an estate entitled to payment by affidavit to $100,000 from $50,000.

2004 Ill. Legis. Serv. 93–877.

Illinois updates unitrust conversion statute and extends the anti-lapse statute to cover predeceased inter vivos trust beneficiaries who are descendants of the settlor.

2004 Ill. Legis. Serv. 93–991.

Michigan clarifies the statute of limitations for a beneficiary to sue a trustee for breach of trust.

2004 Mich. Legis. Serv. 314.

Michigan enacts the Uniform Principal and Income Act.

2004 Mich. Legis. Serv. 159.

New Jersey enacts comprehensive modernization of intestate succession and wills laws.

Included in the revisions is a removal of the necessity of a testator to comply with the traditional formalities of will execution if there is clear and convincing evidence of the testator’s intent for a writing to be a will. 2004 N.J. Sess. Law Serv. 132.

New York creates a procedure for a trustee or beneficiary to request that the court terminate an uneconomical trust.

2004 N.Y. Laws 359.

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