A Discussion Forum for the Mississippi Estate Planning Community
Category Archives: Contests & Disputes
The 12th District Court of Appeals in Tyler Texas affirmed a lower court’s decision denying the appellant’s application for probating a will 13 years after the testator’s death. It should be a wakeup call for anyone whose family members may have owned land at one time or another in areas of the country that may now be sources of rich deposits of oil, gas, or other minerals. Since I recently became the financial caregiver for my parents who do own mineral interests in Louisiana and Texas, this case certainly hits close to home.
In the Estate of Everett H. Rothrock, Deceased, Jerry E. Rothrock appealed the trial court’s order denying his application to probate his father’s will as a muniment of title. In one issue, Jerry contends the trial court erred in determining that he was in default for failing to probate his father’s will within the statutory period.
Section 73(a) of the Texas Probate Code states as follows:
(a) No will shall be admitted to probate after the lapse of four years from the death of the testator unless it be shown by proof that the party applying for such probate was not in default in failing to present the same for probate within the four years aforesaid; and in no case shall letters testamentary be issued where a will is admitted
to probate after the lapse of four years from the death of the testator.
In 1986, Everett H. Rothrock, Jerry’s father, signed a will appointing Jerry as the independent executor of the will and naming him as the sole beneficiary of the estate. Everett died on June 5, 1994. In September 2008, Jerry was notified by an oil and gas landman that Everett owned mineral interests in Cherokee County, Texas. On October 6, 2008, Jerry filed an application to probate Everett’s will as a muniment of title.
At a hearing on the application, Jerry testified that, in gathering Everett’s assets between 1985 and 1986, he investigated whether Everett owned any land. According to Jerry, Everett told him that he had sold all of the real property he had received from his parents and that he did not have any real property left.
The Court of Appeals upheld the lower court’s decision stating, “Because Jerry did not probate Everett’s will within four years after his death, relied upon a family agreement, and failed to show reasonable diligence, the evidence is factually sufficient to support the trial court’s finding that Jerry was in default. The trial court did not err in denying Jerry’s application to probate Everett’s will as a muniment of title.”
Adding insult to injury is the fact that according to court documents, Jerry was also a “very successful lawyer in Washington, D.C. and that about half of his practice dealt with oil and gas law.”
Karo v. Wachovia Bank, N.A., 2010 U.S. Dist. LEXIS 46929 (May 12, 2010) A Virginia federal district court grants summary judgment in favor of Wachovia Bank as co-trustee on claims of breach of fiduciary duty arising out of loss in value of bank stock comprising 65 percent of the trust portfolio.
In 1966, Rosalie Karo created a trust for the benefit of her husband Toney, her son Drew, and her grandson W.A.K. (a minor), with Toney and Central National Bank as co-trustees. The trust was originally funded primarily with Central National Bank stock. Through a series of mergers, Wachovia Bank became co-trustee and the trust assets included Wachovia stock that constituted 65 percent of the trust portfolio. Read more of this post
Bank of America v. Carpenter, 2010 Ill. App. LEXIS 440 (May 24, 2010) The Illinois Court of Appeals reversed a trial court’s modification of trust terms to shorten the duration of a trust and affirms summary judgment in favor of Bank of America as trustee on claims of breach of fiduciary duty for failing to seek construction of trust terms.
Hartley Harper died in 1932, and under his will established a trust to provide income first to his wife for her lifetime, then to his brother Frederick for his lifetime, and then in equal shares to Frederick’s children and their descendants per stirpes. The trust provided for the termination of the trust upon the death of all of Frederick’s descendants, and the distribution of the trust assets upon termination in equal shares to Hartley’s step-daughter, step-grandson, and sister-in-law, or their descendants per stirpes. The trust also included a perpetuities savings clause that provided for the termination of the trust 21 years after the death of the last survivor of “all the beneficiaries named or described who are living at the date of [Hartley’s] death”. Read more of this post
In Doherty v. JP Morgan Chase Bank, N.A., 2010 Tex. App. LEXIS 2185 (March 11, 2010), the Texas Court of Appeals removed the corporate trustee for refusing to make a mandatory trust distribution while the beneficiary’s request that the trustee resign was outstanding.
Lois Doherty was the sole current beneficiary of a trust created in 1972 under her late husband’s will with JP Morgan Chase Bank (or its corporate predecessor) as trustee. The trust provided for mandatory income distributions to Lois, and also stated that the trustee “shall” distribute principal as Lois requested for her comfort, health, support, maintenance, or to maintain her standard of living. The trust further provided that Lois’s “right to withdraw principal” was to be liberally construed.
Lois had a general testamentary power of appointment over the trust, and, in default of the exercise of her power, the trust assets were to be distributed at her death to her husband’s descendants, or, if none, to Texas A&M University. The trust allowed Lois to appoint a successor trustee if the trustee failed or refused to act.
In 2005, Lois suffered a stroke and moved in with her daughter. In order to provide funds to renovate her daughter’s home to accommodate her disability and to provide for her living expenses, Lois asked the trustee to distribute all of the remaining trust assets to her outright and free of trust. The trustee asked for at least two written estimates for the costs of the home renovations. The trustee refused to distribute the balance of the principal without a court approved release out of concern for the potential remaindermen (notwithstanding Lois’s general power of appointment). The trustee observed that Lois’s other agency account had available cash to cover Lois’s needs.
Thereafter, Lois’s attorney requested that the trustee resign, which the trustee refused to do without full judicial releases. Lois then sent two estimates for the home renovations, but the trustee refused to distribute assets for the renovations because of the request that the trustee resign, and preferred that the successor trustee decide whether to pay for the renovations. In its internal files, the trustee marked Lois’s request as “denied.” In 2006, Regions Bank informed the trustee that Lois had appointed the bank as successor trustee, and asked the trustee to immediately transfer the trust assets. Nine months later, Lois sued to approve the appointment of Regions Bank as successor trustee on the grounds that the trustee refused to act, and also sought her attorneys’ fees and costs.
The trial court granted summary judgment in favor of the trustee. On appeal, the Texas Court of Appeals reversed and entered judgment in Lois’s favor on the grounds that (1) the trustee conceded that the costs of the renovations would be proper under the distribution standard in the trust agreement, (2) because of this, the distribution for the renovations was mandatory and not discretionary under the particular language of this trust agreement, and (3) because the trustee was required to make the distribution and refused, the trustee failed to act as trustee giving rise to Lois’s right to appoint a successor trustee.
This case underscores the “damned if you do, damned if you don’t” dilemma that often faces corporate trustees.
In N.K.S. Distributors, Inc. v. Tigani, 2010 Del. Ch. LEXIS 104 (May 7, 2010) a Delaware Chancery Court denied a motion by a trust beneficiary to compel production of communications between attorney and trustee on the grounds of the attorney client privilege for advice in connection with matters adverse to the beneficiary.
Bob Tigani was the trustee of a 1986 trust for his own lifetime benefit, and also had the power to appoint the successor beneficiaries of the trust from a class including Bob’s sons, Chris and Bob, Jr., and their descendants. In 2000, Bob exercised his power to name Chris as sole successor beneficiary of the trust. The trust was the majority shareholder of N.K.S. Distributors, Inc.
In litigation between Chris and the company, Chris moved to compel production of communications between Bob and his counsel concerning the trust. Bob’s counsel refused to produce document on the basis of attorney client privilege. The court rejected Chris’s argument that under Riggs National Bank v. Zimmer a trustee must produce to a beneficiary all communications containing legal advice pertaining to the trust or the trustee’s performance of his duties. The court distinguished Riggs on the basis that in this case, Bob’s attorneys were advising Bob on problems with the company that Bob believed Chris was causing, and therefore the legal services could not deemed to be performed for Chris’s benefit.
The court noted that nothing in the law provided justification for the beneficiary of a trust to receive privileged documents where, as in this case, the documents were prepared on behalf of a trustee in preparation for litigation between a successor beneficiary and the trustee. The court further distinguished Riggs on the basis that Chris’s interest in the trust was contingent and subject to Bob’s power, and therefore he was entitled to lesser rights than a primary beneficiary.
In Dolby vs Dolby, The Virginia Supreme Court ruled that debt owed solely by testator and secured by Virginia property held as tenants by the entirety must be paid by the estate and does not pass to the surviving tenant, notwithstanding arguably contrary provisions of testator’s will.
In 2002, Cornelius Dolby purchased a house in Virginia and executed a promissory note with the house as security for the debt and in 2005 refinanced the note. In 2006, Mr. Dolby married and thereafter deeded the house to himself and his wife as tenants by the entirety with survivorship.
Mrs. Dolby was never added to the note and did not assume the debt. Shortly thereafter, Mr. Dolby executed a new will that in part directed his executors to pay his debts, but also provided that the executors were not “required to pay prior to maturity any debt secured by mortgage, lien or pledge of real or personal property owned by me at my death, and such property shall pass subject to such mortgage, lien or pledge.”
Mr. Dolby died in 2006, and Mrs. Dolby and two other family members acting as co-executors filed a suit for aid and guidance as to whether the estate or Mrs. Dolby was required to pay the note. Mrs. Dolby, individually, asserted that the debt was payable by the estate, and Mr. Dolby’s children asserted that the debt passed to Mrs. Dolby with the property. The trial court ruled in favor of the children that the property passed to Mrs. Dolby subject to the debt.
On appeal, the Virginia Supreme Court reversed on the grounds that: (1) Mrs. Dolby was not added as a joint obligor on the note and did not assume the debt, and the debt remained as Mr. Dolby’s sole obligation at his death; (2) Mr. Dolby’s will directed the payment of all of his legally enforceable debts; (3) the exception in Mr. Dolby’s will for real property owned by Mr. Dolby at this death did not apply because, as a result of the tenancy by the entirety, Mr. Dolby’s interest in the property did not survive his death but rather passed to Mrs. Dolby by operation of law and outside the will; and (4) a testator cannot lawfully direct the executor of his estate not to pay lawfully enforceable debts based on the testator’s sole and personal obligation, or charge such debts against property that passes outside the testator’s estate.
Dr. Gerry W. Beyer, Texas Tech University School of Law professor and editor of The Wills Trusts & Estates Prof Blog, has published a new paper discussing will contests and drafting techniques designed to avoid them. The abstract of his paper is below.
An estate planner must always be on guard when drafting instruments which may supply incentive for someone to contest a will. Anytime an individual would take more through intestacy or under a prior will, the potential for a will contest exists, especially if the estate is large. Although will contests are relatively rare, the prudent attorney must recognize situations which are likely to inspire a will contest and take steps during the drafting stage to reduce the probability of a will contest action and the chances of its success.
This article begins by discussing the situations where a will contest is more likely and then discusses a wide range of techniques which may be helpful in preventing will contests.
The complete 38 page paper can be downloaded in pdf format via the link below.
In In re Eiteljorg, 951 N.E.2d 565 (Ind. Ct. App. 2011), the case involves claims of breach of fiduciary duty by the Administrators of the Estate of Sonja Eiteljorg, and the Co-Trustees of a Q-Tip Trust that was funded from the estate of her late husband, Harrison Eiteljorg. A second marriage for both, Sonja and Harrison had three children between them: Roger was the stepson of Harrison, and the biological child of Sonja. Nick and Jack were Harrison’s children by a prior marriage.
After Sonja’s death, the remainder beneficiaries of the Q-Tip Trust had demanded a distribution of $2,000,000, and the trustees offered $1,000,000 because they estimated the estate could be liable for a further $2,000,000 in federal estate taxes. The intermediate appellate court, over a dissent, affirmed a lower court’s finding that the trustees had breached their duty to administer the trust according to its terms by failing to make a timely distribution. Ultimately, the trustees were ordered to distribute $1,500,000 plus lost interest from the original date of the request, until the date of distribution. The real damage however is likely to be a family that is broken apart.
In preparing their estate plan, the Eiteljorgs do what many families do in an attempt to ensure that no family member is left out: Sonja named Roger as executor in her will, and Harrison named Sonja, Roger, Nick, and Jack all as co-trustees of the Q-Tip trust at his death. The court record states: “[h]armony was short-lived among the co-trustees, though, as they subsequently found themselves mired in major disagreements about the proper allocation of trust assets.” Sound familiar? Sonja and Roger resigned as co-trustees after a settlement agreement was reached with Nick and Jack. It’s worth noting that the trust held approximately $6.5 Million in assets.
This estate was ripe for conflict from the beginning. Second marriage, blended family, large estate, and each heir given various capacities that beg for conflict. Why pit family members against one another this way? Did the drafting attorney offer any guidance or encouragement to choose an independent trustee and executor? Did anyone ever warn them of the conflict they were setting their kids up for? Was the decision to name family members in these capacities made in order to save trustee and executor fees? If I’ve heard it once, I’ve heard it dozens of times, “Why pay someone else to do this. Our kids won’t fight over this.” Famous last words.
My wife and I just finished watching the BBC production of Charles Dickens’ novel, Bleak House, which I highly recommend. The plot centers around the estate of Jarndyce and Jarndyce which had “become so complicated that no man alive knows what it means”.
According to Cogent Research LLC, a Cambridge, Mass., research and consulting firm, IRAs and 401(k)s now account for roughly 60% of the assets of U.S. households with at least $100,000 to invest. Most people are unaware that a single sheet of paper and some tricky rules govern who will receive these assets when they die.
Qualified Retirement Plans sponsored by employers including 401k plans, defined contribution (aka profit sharing plans) and pension plans are governed by The Employee Retirement Income Security Act of 1974 (ERISA) which require that spouses of participant plans be considered as primary beneficiary unless the spouse waives his or her rights under the plan. This rule has prevailed in courts even in cases of divorce or a first spouse’s death or when the participant failed to update his beneficiary form.
Consider the case of CHARLES SCHWAB & CO. v. CHANDLER in the US Court of Appeals, Ninth Circuit. Wayne Wilson married Katherine Chandler in 2000 after having lived with her unmarried for ten years. In 2002 he opened an IRA at Charles Schwab Corp. and named his four grown children from a prior marriage as beneficiaries. The IRA funds originated from Wilson’s former employer’s 401k plan. Three years after that, at the age of 65, he died. His wife tried to claim the IRA assets, arguing for spousal protection under ERISA. But last year the U.S. Court of Appeals for the Ninth Circuit awarded them to the children, ruling that spouses have no ERISA rights to IRA benefits.
This ERISA loophole adds flexibility to participants with large 401k Plan balances, but can also undo the very protection that the law was designed to protect.
More recently, in Cajun Industries LLC v. Robert Kidder, et al., the U.S District Court ruled that a spouse was entitled to the Participant’s death benefit arising from his 401k plan even though his beneficiary designation clearly named his four children from a previous marriage as beneficiaries. Since no spousal waiver had been obtained, the default plan beneficiary was the participant’s spouse, even though she was not the named beneficiary. In this particular case, the spouse inherited the 401(k) after just six weeks of marriage.
Finally, the U.S. Supreme Court weighed in on the issue in the case of Kennedy V. Plan Administrator For Dupont Savings And Investment Plan et al. William and Liv Kennedy divorced after 20-plus years of marriage. As part of their divorce agreement, Liv waived her rights to any benefits under William’s DuPont Co. retirement plan. William never remarried. He also never changed the beneficiary designation on his retirement account from Liv. When William died, a dispute arose between Liv and the couple’s daughter, Kari Kennedy, over who had the right to the funds in the DuPont plan. After conflicting rulings in the lower courts, the Supreme Court agreed to hear the case and in a unanimous decision in 2009 held that the person named on the beneficiary form gets the money—even if that person happens to be the employee’s ex-spouse, and even if that ex-spouse waived any right to the money in a divorce agreement. Kari Kennedy was disinherited.
The lessons from these stories are plentiful. To Plan participants, let your advisors know when there are any changes to your marital status, and seek professional counsel when designating retirement plan or IRA beneficiaries. Remember, beneficiary assets are NOT controlled by your will unless your estate is the named beneficiary. To advisors, review your client’s beneficiary designation and Plan documents with the same thoroughness as you would a will, deed, or other estate document. Often the beneficiary form will control more assets than your client’s Will. To spouses of Plan participants, be aware that your rights are different under non-ERISA plans such as IRA’s than they are under traditional employer plans. A coordinated estate plan that considers all of these factors is the best way to prevent unwanted results.
For more information, see the Wall Street Journal Online article, Family Feuds: The Battles Over Retirement Accounts .