United States: Recent Cases Of Interest To Fiduciaries - August 27, 2015

Strange v. Towns et al., 769 S.E.2d 604 (Ct. App. GA, March 4, 2015)

A Georgia Court of Appeals determined that a settlor validly amended her living trust through the execution of a durable power of attorney during her lifetime

Facts: Pauline Strange created the Pauline Strange Inter Vivos Trust in 2001 naming herself as initial trustee. . In 2011, Pauline amended the trust to name her son Tony Strange and her nephew and sister (the "Towns") as successor co-trustees. In July 2012, Pauline executed a general durable financial power of attorney, which provided that Tony would be the executor of her estate and trust. While somewhat ambiguous, the power of attorney stated that the document was intended for Tony's sole benefit in the management of the trust of which he had full ownership. One month later, Pauline sent a letter to the estate planning attorney who prepared the 2011 amendment to her trust, advising him that her trust needed to be revised to appoint Tony as trustee of her trust and executor of her estate. The letter also mentioned that Pauline had executed a document to revise the trust in the event Pauline died before the trust was amended. Two months later, Pauline died before any formal amendments to the trust documents could be prepared by the estate planning attorney to whom she had directed the letter.

Tony filed a declaratory judgment action seeking a determination that he was the sole trustee of Pauline's trust pursuant to the power of attorney. The trial court denied Tony's petition and found that Tony and the Towns were co-trustees of the trust.

Holding: On appeal, the Georgia Court of Appeals reversed the judgment of the trial court and held that Tony was the sole trustee of the trust. The court found that under the terms of the trust, the document could be amended at any time by a "duly executed written instrument." The court found that Pauline's power of attorney showed Pauline's clear intent to name Tony as sole successor trustee.

The court also rejected the trial court's finding that the power of attorney was not properly notarized. The Towns' argument that the August 2012 letter showed that another trust amendment document was required to appoint Tony as sole trustee did not persuade the court. The court observed that the August 2012 letter also requested a change to Pauline's will to name Tony as sole executor. Such a letter confirmed that Pauline had previously changed the successor trustee designation in her power of attorney. The court found no further, more formal trust amendment was required to confirm that Tony was the sole successor trustee of Pauline's trust.

Practice Point: Amendments to estate planning documents can exist in strange places. For trustees, this case highlights the importance of a careful review of the decedent's estate planning documents to make sure that any will, codicils, trust amendments and ancillary trust administration documents are in the file and their impact understood. For drafting attorneys, this case underscores the importance of getting the draft estate planning documents out to the client for review, and then scheduling the documents' execution without delay.

In re: Eleanor Pierce (Marshall) Stevens Living Trust, 159 So. 3d 1101 (Ct. App. LA, February 18, 2015)

Court upholds an appointment of a trust protector as valid under Louisiana law

Facts: Eleanor Pierce Marshall Stevens created a living trust in 1979. In 2000, Finley Hilliard began serving as trustee. The trust was amended on several occasions, including the 2006 appointment of Preston Marshall as trust protector. A 2007 amendment to the trust gave the trust protector the power to remove the trustee and appoint a successor trustee.

In 2009, the trustee resigned as trustee of the trust, conditioned upon the appointment and acceptance of a successor trustee. One week later, the trustee, still acting on behalf of the trust as trustee, filed a trust modification action with the court to amend the successor trustee provisions of the trust to provide that upon a vacancy in the office of the trustee, that the trust protector would become a co-trustee of the trust and be required to name a co-trustee of the trust. The modification also sought confirmation that the trustee was authorized to resign as trustee of the trust. The court granted an order allowing the requested modification to the trust's trustee succession provisions.

In 2010, the IRS sought payment from the trustee for unpaid gift taxes attributable to indirect gifts Stevens received from her ex-husband. The government asserted that the trustee violated the federal priority statute when the trustee took actions in the administration of the trust to pay trust expenses and make charitable distributions before paying the gift taxes. In separate federal litigation, the trustee, along with a co-defendant estate executor, were held personally liable for the gift taxes under the federal priority statute.

In this case, the trustee sought to undo his 2009 conditional resignation as trustee under the theory that the resignation was never effective because the trust protector never accepted the office of co-trustee or acted to name another co-trustee of the trust. The trustee also sought indemnification from the trust to pay attorneys' fees and bond premiums.

The trust protector contacted the IRS seeking a determination of whether the IRS would regard distributions from the trust to pay attorneys' fees and bond premiums as a further violation of the federal priority statute. To no one's surprise, the IRS confirmed it would deem such distributions a further violation of the statute.

The trial court subsequently entered an order finding that effective in 2013, the trustee had both effectively resigned and been removed as co-trustee of the trust by the trust protector. The court viewed this removal as consistent with the authority granted to the trust protector through the 2007 trust amendment. The trustee appealed.

Holding: On appeal, the trustee argued that trust protectors are invalid under Louisiana law. The trustee sought a declaration that the trust protector could not accept the trustee's 2009 resignation four years later because too much time had passed and the trustee had withdrawn his resignation. The Louisiana Court of Appeals rejected the trustee's arguments.

The court found no provision under Louisiana law that forbade or was inconsistent with the appointment of a trust protector. Therefore, the appointment of the trust protector was valid and not against public policy. In fact, the court observed that the trust protector's contact with the IRS regarding a possible further violation of the federal priority statute potentially protected the trust from further liability and an additional lawsuit, had additional distributions been made from the trust.

The court affirmed the trial court's order recognizing the trust protector's authority to remove the trustee. Because the court concluded that the trust protector had the authority to remove the trustee, the court determined that the issue of whether the trust protector could accept the trustee's 2009 resignation in 2013 was moot.

Practice Point: This is yet another recent case in which a court has upheld the validity of both the existence and actions of a trust protector. So long as the trust protector is acting within the scope of the authority given to the trust protector in the trust instrument, the trust protector's actions should be valid.

Colbert v. Kraek, 2015 Ind. App. LEXIS 242 (March 30, 2015)

Court gives effect to unambiguous trust funding formula

Facts: In 2008, Donald Colbert created a revocable trust agreement that provided, upon his death, the trust assets would be divided between a marital trust for the benefit of his wife, Barbro, and a credit shelter trust for the benefit of his daughter, Katherine. The marital trust was to be funded with the "minimum value [necessary] to reduce the federal estate tax to the lowest possible amount." The remaining trust assets would fund the credit shelter trust.

Mr. Colbert died in 2013 with an available estate tax applicable exclusion amount in excess of $5 million. The trust assets had a value of roughly $2 million. A suit followed to determine the proper funding of the trusts.

Based on the plain language of the funding formula in the trust agreement, the trial court ruled that the "minimum value" needed to minimize the estate tax was zero. Thus, no funding of the marital trust was required. Barbro appealed.

Law: When interpreting a trust instrument, the court must give effect to the testator's intent as set forth in the four corners of the trust instrument. A court may not, and need not, interpret unambiguous terms of a trust instrument.

Holding: The Court of Appeals of Indiana affirmed the trial court's ruling, determining that the trust instrument unambiguously stated that the marital trust would be funded only as necessary to reduce the federal estate tax due. Because the credit shelter trust was to be funded with assets valued at less than Mr. Colbert's available federal estate tax applicable exclusion amount such that no federal estate tax would be due at Mr. Colbert's death, no funding of the marital trust was required.

Practice Point: The federal estate tax applicable exclusion amount has increased dramatically over the past decade. Practitioners should revisit tax-driven trust funding formulas to confirm they still meet the needs and wishes of the client in light of the changes in the tax law.

In re Johnson, 46 Misc.3d 1213(A) (N.Y. Surr., Broome Cnty, January 12, 2015)

When last will and testament favored daughter who served as agent under power of attorney and managed testator's finances, summary judgment was not appropriate, and claims of lack of testamentary capacity and undue influence were allowed to proceed to the jury

Facts: Ruth Mae Johnson died on September 10, 2012. Prior to Ruth's death, Ruth's daughter Marjorie was her primary caregiver. Ruth lived with Marjorie and Marjorie managed Ruth's finances as agent under a power of attorney. Before her death, Ruth executed a new will that favored Marjorie and named Marjorie as executor. Upon her death, Marjorie offered the will for probate. Ruth's other children objected, asserting lack of testamentary capacity, undue influence by Marjorie, and other claims. Following certain discovery, Marjorie moved for summary judgment dismissing the claims against her.

Law: Under New York law, proper execution of a will establishes a prima facie case for capacity and a lack of undue influence. The burden then shifts to those who object to the will. To have testamentary capacity, a testator need only have a general awareness of the nature and extent of her assets. Undue influence requires evidence of a substantial nature that shows motive, opportunity, and specific acts of undue influence. However, a confidential relationship gives rise to an inference of undue influence, which shifts the burden back to the proponent of the will.

Holding: The New York Surrogates Court denied summary judgment on the issues of lack of testamentary capacity and undue influence. As for testamentary capacity, the court found that the attorney preparing the will had not explored Ruth's full asset picture with her, and accordingly it was not clear whether she had even a general awareness of the nature and extent of her assets. With respect to the undue influence allegations, relying on factually similar case precedent, the court held that a jury should decide whether undue influence existed.

Practice Point: Practitioners must exercise additional caution in preparing a will that leaves property to an agent under a power of attorney or another individual, even a family member, who handles the testator's finances. The practitioner should be sure to explore the relevant facts with the testator and to make sufficient notes of these interactions with the client. Failure to serve as independent counsel not only risks that the will might be overturned, but also subjects the estate to litigation that can be resolved only through a trial or settlement.

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