Putting your trust in trusts?

If family members are determined to be fractious, no amount of careful planning can completely remove the risk of a costly dispute.— Fleming & Curti, PLC newsletter, May 20, 2013

Trusts, both revocable and irrevocable, are becoming more and more fascinating for those of us who want to leave this world having created an estate plan that will really work the way we intend.  Today’s guest columnists, the law firm of Fleming and Curti inArizona, tell a fascinating story about a revocable trust in their state that went really, really wrong.

“One of the reasons people create living trusts is to reduce the likelihood of disputes among family members. In fact, any well-written estate plan — whether it involves a living trust or not — should focus at least partly on that worthwhile goal. Most estates do get settled without disputes, and those with disputes are often easily resolved because the trust, will, and beneficiary designations are clear.

But, consider the revocable living trust of Lorraine Bird (not her real name). It was prepared by a lawyer in 2003, and it contained straightforward provisions: most ofLorraine’s property was to be divided in half, with one half to go to her son Greg and the other half to her son Tony’s two children. Tony was named as successor trustee. Like many revocable trusts, the document included a “Schedule A” listing the assets thatLorraine, grantor and trustee, was transferring to the trust’s name.

The first problems arose whenLorrainestarted writing on the trust document directly. In 2004, 2006 and twice in 2008 she wrote on Schedule A, indicating what should happen to some items of her property. Also in 2008, while she was in hospice, she had Tony’s wife write out an amendment to the trust indicating that, among other things, her gold coins should be divided between her two sons.Lorrainedied shortly thereafter, apparently without having her trust looked at or formally updated by her lawyer.

The next round of problems arose after her death, when Tony (the successor trustee) gave Greg the keys to their mother’s house. Greg removed some items; Tony asked for a listing of what Greg had taken, but the list he got back did not account for all the missing items. Tony hired a lawyer to assist him in administering the trust, and pursuingGaryfor more detail about the property in his possession.

The most valuable item inLorraine’s trust was a piece of real estate northeast ofPhoenix. Tony had the property appraised, and his children approached Greg with the appraisal results in hand. They offered to buy out his interest for $325,000. If he didn’t want to do that, they would sell him their interest for the same amount. Greg refused, and instead offered to purchase their interests for a total of $153,000. Then Greg filed a civil lawsuit against his niece and nephew, asking the court to divide the property. He also filed a complaint against his brother, alleging that Tony had breached his duties as trustee in several specific ways.

The judge consolidated the two actions, and conducted a three-day trial. There were a number of questions to answer, including 1)DidLorraine’s handwritten notes on Schedule A modify her trust? 2) Was the separate amendment prepared by her daughter-in-law valid? 3)Did the trust require distribution of her property in kind? If the trust was unclear, is there a presumption in favor of in-kind distributions? 4)Who should pay the cost of the legal proceedings to resolve these questions?

The judge made eight separate rulings. Among these, she ruled that Tony had not breached his fiduciary duty, but that Greg had initiated most of the problems by his own actions. She also ruled that Greg pay a total of $176,466 to the other parties for attorneys fees, and another $4,979.19 in costs.  To read details of this case, check out the firm’s website at www.flemingandcurti.com

Of course, Greg appealed.  The Arizona Court of Appeals upheld the trial court ruling in pretty much every respect. Perhaps most tellingly, the Court of Appeals added more costs and attorneys fees, awarding Tony and his children their requested fees and costs for having to respond to the appeal itself.

It is worth pointing out (again) that the dispute was both expensive and time-consuming. In addition to approximately $200,000 in fees and costs Greg was ordered to pay for Tony’s and his children’s lawyers, Greg presumably had significant legal fees for his own side of the litigation. The Court of Appeals decision was rendered more than four years afterLorraine’s death.

Here are some tips for you and me.   Maybe we can avoid similar costly delays and costs in our own estates.  1) Don’t modify your estate planning documents by writing on them directly — even if you date and sign the changes (Lorrainedidn’t). AlthoughLorrainemight have paid a couple thousand dollars to have the changes done right, that would have been less than 1% of the total legal cost generated when she did not do that. 2) Do your children not get along? If not, include some language directing how to resolve disputes. Consider a mandatory arbitration provision in your trust as a way of speeding up dispute resolution — such a provision could prevent any beneficiary from forcing a complicated court proceeding. 3) Are you pretty sure you’re right, and your sibling/trustee/beneficiary is wrong? Do a reality check, and then do it again — there is a real risk that you could end up paying everyone’s legal fees.

Thank you for reading.  Stay well.  See you next week.