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Haters and Big Spenders: Trust Drafting for Challenging Family Dynamics

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Haters and Big Spenders: Trust Drafting for Challenging Family Dynamics

Families are unique social constructs with unique challenges. Accordingly, estate planning attorneys must anticipate and draft for these challenges if they do not want clients (and the estate plans) to be subject to probate or estate administration court battles. This program covers applicable laws, rules, and regulations for drafting trusts that address three of the most common, yet challenging, family dynamics: hostile family members, spendthrift beneficiaries, and family factions. We will also review hypotheticals to provide hands-on examples of provisions that can be helpful in keeping the peace or at least keeping clients from nasty court battles.

Transcript

- Hello, thank you for viewing this presentation on Trust Drafting for Challenging Family Dynamics. I hope you find the materials and information shared helpful in your overall understanding of estate planning and useful for servicing your clients. My name is Max Elliott and I am the founder and managing attorney of the law offices of Max Elliott, a boutique estate planning and estate administration firm, servicing clients in Chicago, New York and Florida. Before I begin, I must thank the team at Quimbee for giving me the opportunity to share knowledge and insights about today's topic. I also want to thank my incredible associate attorney team who helped with the research, Sam Aaron Berg, Ashley Lindsey, and Ruth Stein. Finally, I'd like to take this time to thank the academy. Just kidding. Let's get started. Today's presentation, haters, and big spenders drafting trusts for challenging family dynamics covers three primary issues, spendthrifts, co trustees, and trust challenges. These issues will be considered in light of the Uniform Trust Code, UTC, yet internal revenue code, the IRC, and common law interspersed and at the end are hypotheticals for us to review as well. Now, most of you are probably familiar with trusts, right? Their terminology and their purposes. Well, today's focus will be on revocable living trust. Some folks say revocable, but revocable living trusts that become irrevocable on the settlor's death and will also consider testamentary trusts. Other irrevocable trusts like asset protection trusts, eyelets, charitable remainder trusts, and so forth are outside the scope of this presentation. Still, even if you are a trust smithster, you may still learn something new in this refresher section. And so I hope you do. The definitions and terminology in our presentation today are derived from the three sources mentioned earlier, the Uniform Trust Code, the internal revenue code and common law. Now participating as an observer with the Uniform Laws Commission, I can attest to the great effort that is involved in creating uniform laws. Hundreds of hours are volunteered by scholars, practitioners, and professionals in fields related to the particular legal subject to codify common law, strengthen statutes and provide lawyers across the country with a more cohesive legal framework. Hence, it's the reason why I generally reference a uniform law, if possible, in presentations. And additionally, it just allows me to share with practitioners. And a word about the presumption baked in today's presentation with respect to the Uniform Trust Code UTC, the uniform law commission's work has resulted in the UTC or some version of it being adopted by 36 states. If you practice in a jurisdiction that has adopted the UTC or a version of it, you should review the entire code because today's presentation only addresses provisions relevant to our topic and presumes that you're familiar with fundamentals of trust drafting. If your jurisdiction hasn't adopted the UTC, you should nevertheless become adept at drafting uncomplicated trusts under your statutory rules first before drafting for challenging family dynamics, right? Because if family members are hostile and willing to sue each other, bringing an action against the attorney who prepared the instrument that resulted in them being disinherited, for example, would not be an uncommon, is not an uncommon thought. It's quite the converse. So baby steps. Now, the UTC defines a trust as an instrument signed by the settlor, which includes terms and also amendments declaration of trust, trust agreement, and trust instrument for all practical purposes are interchangeable terms. So let's just keep that in mind. The UTC does not define instrument, however, and depending on your jurisdiction, an instrument may also be an electronic record, a digital record requiring more or less formalities, making signing more convenient for our clients, but we need to keep in mind that when we're talking about trust documents, they may not be pages. It may actually be just an electronic record on somebody's computing device. Now trust amendments are usually accompanied by restatements and generally require the same formalities as the original instrument. So if the original instrument or record has two signatures and a notary, then of course your amendments and restatements should also follow suit. And one may presume that a settlor is also the trust creator, but that's not always the case. As a UTC explains, a settlor is one who contributes or donates property to a trust, when the settlor is also the trust creator trust terms are evidence of the settlor's intent to establish the trust and the manner by which the trust estate is to be administered. So consider this example, A executes a declaration of trust agreement, where A is the initial beneficiary during A's lifetime, with B as the primary beneficiary upon A's death and C as the remainder beneficiary to B. A is identified as the settlor. But the trust says nothing about how it should be funded, B funds the trust by giving shares of stock to A per a valid intra-family loan agreement, who are the settlors in this example? Or is there just one? Well, yeah, you got it right. A and B are the settlors because the valid loan agreement sufficiently evidences B's donative intent toward the trust. The UTC defines a beneficiary as a person with a present or future beneficial interest in a trust whether the interest has vested or is contingent, or a beneficiary is a person other than a trustee who is a holder of a power of appointment. Now a power of appointment is basically the authority to determine the disposition of trust property, the Uniform Laws Commission, and most states have lost governing powers of appointment. And I actually presented all those magical mechanisms for Quimbee too. So you may wanna check out that presentation, the Uniform Trust Code, and it's adopted versions. Also explain the various types of beneficiaries. So yeah, there's more than one. And one very important type is the qualified beneficiary, a qualified beneficiary for all intents and purposes is a beneficiary who would receive trust property at the establishment of the trust or on its termination. For example, if the primary beneficiary is alive at the time of the settlor's death, then the primary beneficiary is a qualified beneficiary. If the primary beneficiary pre-deceases the settlor, then at the settlor's death, the remainder beneficiary is also a qualified beneficiary. Now, one of the issues we'll be covering is spendthrift beneficiaries, accordingly, it's important to understand the implications of course, of spendthrift clauses, which are defined by the UTC as trust provisions that prohibit the voluntary or involuntary transfer of beneficiary interests. As stated earlier, trusts are revocable where the settlor can change the trust during their lifetime trusts are also irrevocable where generally speaking changes to the trust can't be made. However, given the trust decanting is prevalent in most jurisdictions. The more important feature of an irrevocable trust is that it results in a completed gift. Yeah, trusts also come in grantor and non-grantor flavors as provided by the internal revenue code. A grantor trust is a trust where a person owns all or part of the trust property for income tax purposes. That is any income tax liability caused by the trust property is attributed to the trust property owner. Now that type of trust property owner is referred to as a grantor and a trust with property owned by a grantor is right, you got it, a grantor trust. So in other words, if trust property owned by the settlor generates a tax that is incurred by the settlor then the trust is a grantor trust and the settlor is also known as a grantor, and generally most revocable living trusts are grantor trusts. And let me also kind of go back and talk about irrevocable trusts. They are generally completed gifts using powers of appointment though, sometimes irrevocable trusts do not result in completed gifts for generations. Now moving on, remainder beneficiaries or even current beneficiaries, don't incur a tax liability. If the settlor has retained a reversionary interest in the property. So let's say for example, that A established a trust for A and B with C as remainder beneficiary, the trust is funded with stock, A is the settlor, and A and B are current beneficiaries receiving income in the form of dividends from the stock, right? This income is reported on A and B's joint tax return. The trust also provides that if A dies first, then A's share of income shall go into A's estate. So in this example, A is the grantor, even though the income is reported on A and B's joint tax return. Another example per the IRC states that even if A distributes income to pay a life insurance premium for A or B, who is A's spouse, let's say, then A is the grantor and will be liable for any tax attributed to that trust property, generating that income used to pay the life insurance premium. Next, a holder of a power of appointment that can be exercised. Even if a reversionary interest is retained by someone other than the holder results in the holder being considered a grantor. Now, even if a person does not control all the trust property with respect to the IRC, that person is still considered a grantor in certain circumstances, for example, A owns a life insurance policy and uses income from the life insurance policy to pay for their grandchildren's annual summer camp. From previous examples, we know A is the grand tour in this case, right? But what happens when A's grandchildren stop attending camp and A determines that, okay, this income is going to be used for my great-grandchildren, but they're not born yet. Well at this point, the income then reverts to A's estate unless A states otherwise, but they didn't, they're just gonna save it. So it reverts to A's estate. And so A is still the grantor. What if A gives B their child, a power of appointment over the income? Well, then B becomes the grantor. Now let's consider further examples. Let's look at example two, where Jamal and their cousin Robin contribute shares of stock to a trust naming the trust as the owner of these shares, as trustee, Jamal sells a portion of the shares and allocates other shares to a subtrust that is not effective until Jamal's death, designating the trust as a contingent beneficiary of these shares that subtrust is now the contingent beneficiary. So who are the settlors? Yes, Jamal and Robin. Jamal controls the shares and the income is reported on Jamal's tax return. So Jamal is yes, the grantor. What about Robin's tax return? Well, depending on the facts, Robin is not only a settlor, but could be construed as the donor of a completed gift and we'll leave Robin's issues for another presentation. Most of us know that the primary purpose of establishing a revocable living trust is to avoid probate or estate administration, which is the court process that is required when significant assets are owned outright by a decedent. And each jurisdiction has its definition of what significant means. So, for example, in Illinois, it's $100,000. In New York, it's $30,000, yet a significant feature, another feature of revocable living trusts, that is like I said, significant is that of privacy, which can be equally important when drafting trusts for families with challenging dynamics. So wrapping up this trust refresher, settlors are generally the persons who create trusts, but other persons who donate trust property are also settlors. A trust must include terms because the terms evidence the settlor's intent, which is critical in the event of a challenge. Trusts are revocable or irrevocable. And the primary beneficiaries of revocable trusts are current and qualified beneficiaries. Trusts are also either grantor or non-grantor instruments where the trust property owner accounts for income from the trust property on their personal income tax return. The trust property owner is a grantor and the trust then is a grantor trust. Otherwise the trust is a non-grantor trust. Now, the refresher also touched on applicable laws involving trusts. This next section will review those laws even closer in light of drafting trusts for challenging family dynamics. We reviewed relevant UTC definitions in the beginning of our presentation today, which are found in section 103, in this part we'll review other pertinent provisions of the UTC. section 105 identifies the UTC's default and mandatory rules, mandatory rules govern the settlor's intent, beneficiary rights and fiduciary duties, accordingly, the sections discussed or discussing those topics are key. Now we reviewed the definition of a spendthrift clause and will kind of again, look at how they are used later. Now, section 813 provisions are mandatory governing notifying beneficiaries. And again, many jurisdictions such as Illinois adopted a version of the UTC, meaning they accepted it, but spent additional effort, revising certain provisions to establish a statute that would comport with that jurisdiction's needs as determined by its common law legislative history and current policies such as providing notice to beneficiaries of a trust's existence. Thus practitioners should be mindful of the differences if any, between their state's versions. And the provisions discussed here. Section 109 of the UTC governs waivers of notice, UTC section one 111 covers non-judicial settlement agreements, or NJSAs, which are also important mechanisms for managing squabbles that may arise during trust administration. Today's presentation, however will not address non-judicial settlement agreements because of the complexity and time required. Maybe another presentation. Article two addresses judicial proceedings, which are relevant in terms of trust modification, interpretation and reformation. Article three covers rules regarding whether outside of court proceedings trustees can represent beneficiaries and settlors during a dispute. Now, generally trustees can represent parties to a trust in a dispute if the trustee is not in an adverse position to the party. So what would an adverse position look like for a trustee? Well, a trustee who is also a primary beneficiary receiving a disproportionate share of the trust corpus should not represent a beneficiary in a dispute when that beneficiary's share is not equal to the trustee beneficiary's share because there is an inherent conflict of interest, right? Article four is a primer on trust fundamentals, creation validity, modification, and termination. Section 401 describes the three ways a trust is created, one, by transferring property into a trust, two, making a declaration of ownership over trust property in the capacity as a trustee, or three, exercising a power of appointment in favor of a trustee. Section 402 articulates the requirements a settlor must need to be able to create a trust. A settlor must have mental capacity, must identify one or more beneficiaries, determine duties to be ascribed to the trustee and respect the doctrine of merger. Deliberate consideration should be given to the issue of mental capacity because many courts like Illinois's courts, construe trusts as contracts and the capacity to contract is a higher bar to satisfy than testamentary capacity. The merger doctrine provides that if a person creates a trust and is the sole trustee and the sole beneficiary, and there are no remainder beneficiaries, then the trust is void because all functions have what, merged right within the same party. It's like, I'm giving myself a gift and that's it. So a trust like that is void. Section 404 is significantly clear. The purpose of a trust must be lawful, abide by public policy and have terms that can be satisfied. So if we think about it, a trust requiring the trustee to use part or all of the trust corpus to take a beneficiary to Mars, would've been void 50 years, but depending on the age of the beneficiary, such a trust would probably be valid now. As mentioned earlier, section 502 covers spendthrift clauses, which protect non-settlor beneficiaries from their creditors. However spendthrift clauses are useless. Just useless exercises in futility, in cases of fraudulent transfers or payments owed to the state or federal governments. Thus, if a beneficiary has a significant tax liability, a spendthrift provision won't shield them from the reach of the state treasurer or the IRS, but for other super creditors, like the beneficiary's ex spouse, the spendthrift clauses when carefully tailored can be particularly effective. Another mechanism used to protect beneficiaries from themselves or other creditors is a discretionary trust, which is a trust that provides the trustee with the authority to withhold distributions from the beneficiary under certain circumstances. However, unlike spendthrift clauses that you know prohibit distributions to most creditors and thus are construed strictly and rarely disturbed by courts. Discretionary trust are readily subject to court orders directing the trustee to make a distribution, not withstanding the trustee's position, UTC article seven, section 703, addresses the topic of co trustees providing that they should act unanimously. Or if there's more than two, by majority. Now, occasionally a client wants their children to act as co trustees because the client has equal affection for them and the children get along well. But we all know that when the parent dies, dynamics can change, and later we'll review case law and walk through a hypothetical addressing this issue. Practitioners should also be mindful that appointing co trustees as a UTC comment state can act as a system of checks and balances, still how effective that system is depends on the relationship between the co trustees before and after the settlor's death. Hence section 706 discusses trustee year removal upon a settlor's death, a revocable trust becomes irrevocable. So guidance is needed for beneficiaries, right? If one or more of the trustees has taken what is perceived as an adverse action toward a beneficiary or in lieu of trust terms, which depending on the seriousness of the action could be deemed a breach of trust. The UTC discusses factors that would justify trustee removal. So if a serious breach of trust occurs, if the trustee's exhibiting uncooperative behavior, that is frustrating trust administration, or if the circumstances have changed significantly since the establishment of the trust. Section 706 also details the findings by which a court can remove a trustee, including, but not limited to the following. If trustee removal is in the best interest of the beneficiaries, if removal is consistent with a material purpose of the trust, and if an appropriate successor trustee is available. Now, a moment ago, I referenced a serious breach, which is a term of art and also described in article seven as follows, a serious breach, one, results in a significant injury. And I'm thinking something along the lines of disinheritance or unwarranted substantial tax liability either, but for the trustee's action or inaction. Two, is obvious and intentional conduct that a dutiful trustee would not undertake. Or three, serious breach is a combination of small breaches that when taken in total justifies trustee removal. Now trustee removal doesn't have to occur in a court proceeding, but if beneficiaries aren't satisfied with how the non-judicial process is going. They can petition the court before a decision has been rendered because there are provisions in many trusts that state that trustee decisions are binding, right? So a beneficiary can go into court before decision is considered binding. So when drafting for challenging family dynamics estate planning attorneys should be even more mindful about trustee duties and authority, especially those duties which are mandatory and non-delegable like the duties of loyalty and impartiality and carefully document decision surrounding the authority provided to ensure that the client's intentions, which rest both in gifting and administration are clearly established, right? Sometimes placing the information in a footnote or statement of intent will help mitigate uneasiness, maybe even mitigate challenge or unnecessary aggression on the part of beneficiaries or trustees. Article eight of the UTC articulates the duties of loyalty and impartiality, and also other duties, including the duty to administer the trust, which is founded upon the duty to act in good faith. Section 803 provides for the duty of impartiality, explaining that while the trustee must act impartial toward current beneficiaries, the trustee's ultimate duty is to the trust. Therefore, if the trust terms require disproportionate distributions or differing distribution schedules, a trustee following those terms is not violating their duty to act impartial. Even if the result is different treatment toward beneficiaries. Prudent administration is generally a desired attribute of trustees. However, some clients don't want their trustees constrained by the prudent investor rule and want their trustees to take action on investing trust assets. Even if the action involves small or large financial risk. Usually in these cases, the settlor generally has a high tolerance for risk, or is a financial professional and has selected a successor trustee who has a comparable risk tolerance or financial acumen. So it's important for estate planning attorneys to document these nuanced issues regarding trustee duties. Especially if you know that there may be challenge or you're dealing with challenging family dynamics, many trust provisions are governed by the internal revenue code and its accompanying regulations. Thus, this next section will review the rules and regulations relevant to today's discussion. Specifically the marital deduction rules, the marital deduction rules allow a surviving spouse to inherit assets from their deceased spouse free of estate tax. Either eliminating the tax or deferring it until the surviving spouse's death. Given this deduction is available to surviving spouses, eligibility rests on two factors. The surviving spouse must have been lawfully married, which is driven by state law and equally important in today's multinational family world. The surviving spouse must be a US citizen. The marital deduction rules like many benefits provided by the tax code don't apply to non-US citizens. Also like most benefits derived from the IRC, the marital deduction is an exception to the general rule that provides spousal gifts are in fact taxable. Therefore, a gift to a surviving spouse is taxable unless the surviving spouse is the sole beneficiary of that gift. And the surviving spouse is the only person to derive benefit of that gift during their lifetime. Another exception involves the date of death, the simultaneous death exception. So if a surviving spouse dies within six months of the deceased spouse, then the gift is not subject to taxes. Often a surviving spouse will receive a life estate to minimize estate tax exposure estate planning attorneys must specify in their instruments that the surviving spouse shall receive all income from the asset at least annually, and include a general power of appointment of the assets funding the marital deduction trust. A general power of appointment authorizes the disposition of subject assets to the power holder and their estate or their estate's creditors, accordingly, if we reconsider that spendthrift provision mentioned earlier, which protects beneficiaries from creditors, we can see that a marital deduction trust or the spendthrift clause in the trust in itself, in the whole trust, must include a qualifying provision accepting assets from the marital deduction trust from any spendthrift provision. Additionally, this general power of appointment qualifier also means that a marital deduction trust should not be subject to a HYM standard. If the estate tax is to be deferred, then the marital deduction trust should include a QTIP provision, which designates marital trust property as qualified terminable interest property, QTIPs are useful in blended family situations where the surviving spouse isn't the parent of the deceased spouse's children. But unlike a standard marital deduction trust a QTIP trust may use a limited power of appointment. Thereby restricting the exercise of the power in favor of the deceased spouse's children. For example, note here that using a QTIP requires an election be made on the estate tax return by the executor. Consequently, if the executor and trustee are different persons, the instrument should provide this direction. Now, what if there's animosity between the second spouse and the children, should the second spouse be appointed trustee over the trusts? Let us think, if the second spouse is an executor with the discretion to elect a QTIP trust, they might choose not to and allow the general power of appointment to stand. Whereby remaining assets of the trust will be subject to the surviving spouse's creditors. And that's diminishing the trust corpus for the children, woo-hoo, evil, I know. Our next hypothetical illustrates how marital deduction trusts can be used in challenging family situations. Generous Papa has remarried and wants to divide his estate between his second wife, a lawful permanent resident and children from the first wife, friends have advised him to create a marital deduction trust so lovely spouse two, LS2, won't have to pay estate taxes upon generous Papa's death. Do you think that's a good idea? Well, what's one issue. One issue to note immediately is that LS2 is not a US citizen. Accordingly generous Papa should not create a standard marital deduction trust. It just won't work. The IRC requires beneficiaries of marital deduction trusts be US citizen spouses, and a lawful permanent resident. While legally recognized as a US domiciled spouse cannot take advantage of the marital deduction trust rules. The IRC does provide a way for non-US citizen spouses to inherit some wealth without estate tax exposure through the use of a qualified domestic trust or QDOT. But it is a small fraction of what US citizen spouses may inherit tax free. So it may be more reasonable and effective to use the federal lifetime exemption for the spousal gift and limited powers of appointment for the children if generous Papas estate is relatively large and taxable. If we change the hypothetical a little whereby LS2 is a US citizen, how will the marital deduction trust work to ease tensions? Well, as written here, it might not because assets for a surviving spouse of a marital deduction trust can't be subject to a limited power of appointment unless a QTIP election is made. Thus a good practice is to include a provision that allows for marital deduction trust assets, to be treated as qualified terminable interest property. This final section on applicable laws covers common law and the cases in principles that come into play when drafting for challenging family dynamics. The first of these cases involves spendthrift provisions and is an old Illinois case, Calgary V Northern Trust Company decided in 1944, Calgary presents a really interesting fact pattern and analysis. So Edward Calgary died in 1932, before dying, he created two trusts, a life insurance trust and a testamentary trust for his surviving beneficiaries who were his spouse, Jenny, daughters Corrine and Louise, and son Chester, who lived in New York, Jenny was to receive income for life and 50% of the principle of the insurance trust. The other 50% of the principle was to be distributed to Louise and Corrine, Chester was the income beneficiary of the testamentary trust up to $200,000 until he was 50. And then the principle was to be divided between his sisters upon Jenny's death. Each trust included a spendthrift clause, prohibiting income to be paid to satisfy claims on beneficiaries or their deaths. And Louise was appointed executor. Jenny died in 1941 and Louise instructed the trustee to keep the principle in Jenny's estate so that Louise could get compensated. Corrine disagreed with this and filed suits to obtain her share of the principle. She also brought an action against Chester seeking to have him found incompetent, presumably to control his share of the estate. But you don't know, right? Anyway, Illinois's appellate court found in favor of Corrine with respect to the distribution from Jenny's estate. The court explained that if the estate assets remained in Jenny's estate and remember these were assets she inherited from Edward, her spouse, then her creditors could place claims on those estates, which would violate the spendthrift clauses in both trusts. The court also ruled in favor of Chester who fought Corrine's guardianship petition explaining it had no jurisdiction over him. Despite Chester being a beneficiary of an Illinois trust. The 1967 New York case, in re estate of Chance Vought Senior, addresses the issue of assignments under New York trusts that includes spendthrift clauses. So Chance Vought Senior created a trust where 50% was to go to his surviving spouse during her lifetime. And then the remaining assets were to be placed in trust for Chance Seniors' sons, Peter and Chance Jr. Now Peter was named trustee, during the lifetime of Chance Senior's widow, Chance Junior assigned his interest in the trust assets to a number of parties. Now we know why Peter was named trustee, right? Well anyway, Chance Junior subsequently predeceased Peter also leaving a surviving spouse. Peter began distributing assets to Chance Junior's creditors his estate's creditors and his estate was insolvent. However Chance Junior's widow intervened as Peter was distributing assets to creditors and claimed that Chance Junior's assignments were invalid because of his spendthrift clause. The court agreed with the widow, Chance Junior's widow, explaining that though the interest had vested in Chance junior when his father died, the spendthrift clause prohibited assignments to Chance Junior's creditors. Now a very old case from 1917 in re Briggs addresses the issue of co trustees who are also beneficiaries. John Briggs' wife appointed him as co-executor and co trustee, when she created her estate plan, John was provided a remainder interest in real property his wife had owned whereby her mother actually had a life estate. John was provided income for life and the authority to invade the principle as he deemed necessary and proper. The issue was that John was not the sole beneficiary of the principle left by his wife. So when he began using the principle to the absolute disregard of other beneficiaries, yeah, he was hauled into court. The court focused on the meaning of necessary and proper and considered additional factors such as his wife's clear affection for him as articulated in the trust instruments and his other resources. The court found that John should not have used the trust corpus like it was his own private piggy bank. And not only were there other beneficiaries, but other trustees to whom John owed a duty. In re estate of Rayloff in 1957, New York appellate case involved a removal action against a co trustee because the other fiduciaries who were also relatives didn't agree with Rayloff's actions, the estate administration case was dismissed however, because no evidence of gross misconduct was provided. And the arguments between the trustees did not frustrate the trust administration. Now recall, as I mentioned earlier, the UTC's factors for removal, discord without disrupting the administration process should not be used as grounds for removal without more. In the 1994 case involving co trustees in Ray Coleman, the co trustee probably resigned before he was removed, seeing what was coming and what was coming was the estate seeking redress in the courts. Attorney Jay Barton Kaylish was appointed by his friend and client Neil Coleman to act as co trustee. And during the one year Kaylish was co trustee, he billed and paid himself with estate funds to the tune of $75,000 and then filed a petition seeking another $80,000 for allegedly 400 hours of work. The estate challenged these actions and the trial court ruled in favor of the estate, on appeal, Kaylish argued that the trial court was in error because the ruling was not factually or lawfully grounded. When the court lowered Kaylish's fees to approximately $15,000, the court did not show its work and the court failed to give appropriate weight to Kaylish's experience and skill. The appellate court explained that fiduciary fees are determined by a facts and circumstances test and began to enumerate the facts and circumstances that the lower court used in reaching its conclusion, such as a lack of detailed invoices and the standard hourly fee for lawyers in the jurisdiction. With respect to Kaylish's skill and experience the court deemed most of Kaylish's work ministerial, not lawyering, and neither did the court find favor with Kaylish not providing notice when paying himself the $75,000, thus the appellate court affirmed the lower court's ruling. Now having reviewed case law involving spendthrifts and co trustees. This last group of cases involves the infamous in terrorem or no contest clause. And we'll start with one that actually worked, the case of James Cagney's wife's will. Now some of you who are black and white film fans may be aware of the famous movie star. James also known as Jimmy Cagney, after retiring from Hollywood, Jimmy and his wife Francis moved to their farm in New York during their marriage the Cagney's adopted two children and thus had grandchildren. Upon Jimmy's death, the grandchildren learning that their grandfather did not leave them or their mother anything went to court to object to the will though it was subject to an in terrorem clause. Jimmy Cagney was quoted to have said, I have intentionally made no provision for any grandchild of mine, because I believe it is the obligation of each parent to adequately provide for his own children during the parents' lifetime, just as I have done. And just as I believe my children should do for their children. So there was actually external evidence in support of his in terrorem clause. So during this litigation, though the grandchildren entered a settlement agreement and received part of their inheritance. What they deemed should have been their inheritance. Next, when the grandmother died, they sued again. But this time, the court in 2002, considering the totality of the circumstances strictly enforced the in terrorem clause that was in Francis Cagney's will. In 2019 in an in terrorem case Sosuric versus Amarado, a mother and children fought over the inheritance left by the deceased spouse and father respectively. Robert Sosuric left his wife Annamarie and daughters, Lynn and Lisa, his 50% share of a storage company. Roberts will appointed Annamarie as executor, provided her with a life estate in the income derived from his business interest, and then provided Lisa and Lynn with the remainder principle. He also gave Annamarie the ability to control his business as he would, so she could sell it. She could do what she will with it. Finally, the will contain as intimated and in terrorem clause. So Anna sold Robert's interest eventually for approximately $3.75 million. She then entered an agreement with the daughters to freeze the assets until the daughter's value of the net proceeds could be determined, but Annamarie did not hold up her end of the bargain. So the daughters hauled Annamarie into court. Annamarie filed a counterclaim on grounds that Lisa and Lynn violated the in terrorem clause of Robert's will the New York surrogates court ruled in Anna's favor. However, the appellate court reversed the lower court's decision based on the longstanding rule requiring in terrorem clauses, which are highly disfavored to be strictly construed, and here because the daughters didn't contest the will and didn't interfere with their mother's discretionary actions as executor, They had not, the court deemed, violated the in terrorem clause. Now like most courts, Illinois courts don't favor in terrorem clauses as these next two cases, Ruby V Ruby and Chicago Trust Company V Brierton illustrate. Ruby V Ruby is another one of those sibling rivalry cases where Irwin and Bernice Ruby were siblings who engaged in investing together, creating joint investment accounts and residing in property. That was also jointly held, held in tenants in common. In 2004, Irwin established a trust providing he and Bernice's other siblings and other parties, all assets in a brokerage account, number 1159. Irwin also provided specific bequest for other persons and charities in the amount of $255,000. Bernice was to receive a life estate of his interest in the condominium that they owned and the rest of the trust corpus, the trust also included an in terrorem clause about a month after establishing the trust to which the joint account 1159 was tied. Irwin transferred all funds from 1159 into a new account, 5122. The value of the account at that time was approximately $1.2 million. Irwin also conveyed the deed to the condominium to the trust. Irwin died in 2006 with about 1.4 million in the 5122 account. Bernese, who is trustee fulfilled the specific bequest terms, but then wrote a letter to her other siblings and beneficiaries of the trust explaining that account 1159 was empty. So you all are not gonna receive anything from that account, but I'll be nice and give you $30,000 each because your gifts had adeemed. The beneficiaries of the account 1159 filed suit, Bernese filed a counterclaim on two grounds, the doctrine of redemption, which provides that if your gift is not in the estate at the time of death, then you get zilch. And since the gift adeemed, her second point was it was revoked and thereby the challenge of ademption violated the in terrorem clause, the lower court found the in terrorem clause inapplicable, but found in favor of Bernice with respect to the ademption doctrine. Of course they appealed, the beneficiaries appealed. And the appellant court's analysis explained that that doctrine of ademption had not really been applied to trust in Illinois, but presented here brought trust distributions into the doctrine sphere. And when construing trusts the court further explained the cardinal rule for will construction applies, follow the intent of the testator or settlor with respect to trusts. Then considering the trust term contents as a description of the gift account, 1159, the court determined that Irwin's intent was to provide for the beneficiaries in his trust and ademption didn't apply regardless of the account's number, these beneficiaries were to receive its contents. This finding was further bolstered by the drafting attorney's deposition. Now in the very recent case, Chicago Trust Company V Brierton, at issue was whether the beneficiaries of an interest in an LLC violated an in terrorem provision. So John Brierton senior and his wife owned manufactured housing in Colorado. This property was the sole asset of an LLC to which they were members along with two other sons. John Sr. died in 2016 and his wife died the next year. The trustee, Chicago Trust Company, sold the property, paid the debts and was about to make the other siblings members of the LLC, when John Brierton Jr. and his brother Thomas intervened, they argued that the operating agreement governed the distribution of the net proceeds, not the trust agreement, the trustee disagreed and sought construction in the lower court, the trustee prevailed, but the brothers appealed, the appellate court affirmed the lower court's decision. And the brothers appealed again. This time, the trustee argued that John junior and Thomas violated the trusts in terrorem clause while the brothers finally prevailed on this issue, as the court framed their action as one questioning a proposed course of conduct, not as challenging the terms of the trust per se. So to sum up the applicable laws section per the UTC and jurisdictions that have adopted its laws trusts, can't sit silent upon a settlor's death. Certain beneficiaries must receive notice. This can create problems if beneficiaries gifts are constrained because of creditor issues. If they're receiving disproportionate gifts, if they are disinherited, or if there is animosity between fiduciary and beneficiary, therefore spendthrift beneficiaries should be informed through communications from trustees about the reason for the constraints of their interest. And that those constraints would likely be considered valid in a court of law. Beneficiaries receiving disproportionate gifts may argue with trustees on the point, but the trustees are just doing their job. And as long as communication lines stay open, even though they may be tense, the trustees just doing their job is not grounds for removal. There has to be something more. Streaming content is filled with plots about evil stepmothers or hater stepchildren. So a marital deduction trust with a QTIP that considers remainder beneficiaries may mitigate these hater plots. The UTC recommends co trustees act unanimously, but when a parent appoints oil and water to come together as a salad dressing, lemon juice might be a better idea or for our purposes, a trust protector who can break a tie if the trustees disagree or, and if the trust protector either has fiduciary authority over the decision, or the decision is not of a fiduciary or non-delegable nature, such as a duty to act, finally, in terrorem clauses are not favored and rarely work. The Cagney children probably got lucky the first time, but the courts were not sympathetic in the least the second time around. We've covered a lot of material and we have one last hypothetical to work through. So Widow Johnson has five children, Biff, Bam, Boo, Betsy, and Bugs. She has a sizeable estate that may be taxable upon her death and does not intend to remarry her state consists of residential income property, that Biff and Boo manage, a dry cleaning service that Bam manages, and a considerable portfolio managed by her trusted CFA. Betsy owns a non-profit, which Widow Johnson is a major donor and Bugs is trying to decide what college or university they're going to attend. And Bugs is a minor. Widow Johnson is adamant about having each child act in a fiduciary capacity. Would you suggest primary co trustees? No, you may recommend that each child act as a special trustee over the businesses they manage and a corporate fiduciary to oversee the entire estate. Perhaps her CFA could recommend someone. Then a trust protector should be given the ability to appoint a new trustee if the beneficiaries don't agree with the actions of the first corporate fiduciary. Now it seems that Bugs loves diamonds, he's the spendthrift child. So Widow Johnson's plan will require a spendthrift clause that is deemed a material purpose of the trust, but explain to Widow Johnson that the law such as this at UTC stipulates that student loans aren't safe from spendthrift clauses. She probably won't mind because she probably intends to pay Bugs tuition outright or have her estate do so. But if things go sideways, she will appreciate this information. We'd also recommend that Bugs has a partially discretionary trust until Bugs can consistently demonstrate financial prudence, and to comport with Bugs' spendthrift clause, a limited power of appointment might just be the carrot to place on top of Bugs' trust. And yes, children should have their own trusts. Widow Johnson doesn't want anybody to know about what's in the trust until she dies and after her death, she'd rather them not know. Well, depending on Widow Johnson's jurisdiction, the corporate fiduciary will have to inform the five B's about the trust existence. Hence, I might recommend pro rata income distributions for life and a pot for discretionary distributions on the part of the trustee, which means disproportionate distributions. Finally, the sweet loving widow doesn't want any child to receive a dime, even our little Bugs, if they challenge the will or trust. So we must explain that no contest clauses are highly disfavored. Accordingly, partially discretionary trusts might work, but those may lay the foundation for a battle of beneficiary V trustee. To mitigate that Widow Johnson's trustee might be required to provide quarterly distributions and at least annual accountings, and terms of the trust stipulate that the documentation provided with these distributions are deemed reasonable and sufficient communication, barring a dispute or medical emergency. Hence you'll need strong provisions that will protect the trustee and perhaps language stipulating that a court of law shall appoint a disinterested third party as a trustee. If there are too many instances of trying to remove the trustee, for example. Estate planning attorneys have several tools available for drafting trusts that address family challenges, the most important tools govern all our trust drafting though, listen to your client, pay attention to what's not being said, protect all parties at least try to, but really protect, settlor's intent and review boiler plate provisions because depending on the challenge, boilerplate provisions such as certain trustee powers or spendthrift clauses may need to be altered or eliminated. And thank you again for mentally participating. I hope this was helpful.

Presenter(s)

Max Elliott
Founder and Managing Attorney
The Law Offices of Max Elliott

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