Assume you have a case involving a $55 million trust created under “Grandfather’s” Will, that provides for a life-time trust for his son (“Father”), containing the following testamentary power of appointment (“POA”):
[T]hree quarters (3/4) [of the Trust estate] shall be distributed to [Father’s] then living issue as [Father] shall by his Last Will and Testament appoint, and in default of appointment, to his then living issue on the principle of representation.
In his Will, Father exercised this POA in a way that disinherited or “excluded” one of his three children (i.e., one of Father’s “then living issue”). Is that legal? The answer to that question depends in large part on whether the POA is deemed to be exclusionary or nonexclusionary.
Is it exclusionary or nonexclusionary?
If it’s exclusionary, Father was authorized to disinherit (i.e., “exclude”) his child, if it’s nonexeclusionary, he wasn’t. The POA’s ambiguous on this point because it doesn’t explicitly say one way or the other. So what’s the default presumption? Under English common law, POAs were deemed to be nonexeclusionary unless expressly stated otherwise, which means every member of the class covered by the POA was presumed to be entitled to a “substantial” and not “illusory” share of the trust. (This presumption’s been abolished by statute in England).
As noted by the only Florida appellate court to address this issue directly, the old English rule was “unworkable” in practice “because it put the burden on the donee of the power to try to figure out how little could be directed to a nonfavored member of the class. If a court later determined that amount to be illusory, the entire power of appointment would fail.” Ferrell-French v. Ferrell, 691 So.2d 500, 501 (Fla. 4th DCA 1997). Not surprisingly, the Ferrell court adopted the opposite presumption: “We hold that a power of appointment is [exclusionary], unless the donor expressly manifests a contrary intent.” Id. at 502. By the way, this presumption was applied (if not explicitly stated) in Cody v. Cody, a 1st DCA case I wrote about here. Florida’s approach also reflects the modern trend, as stated in Restatement (Third) of Property (Wills & Don. Trans.) § 17.5 (2011):
A power of appointment whose permissible appointees are defined and limited is either exclusionary or nonexclusionary. An exclusionary power is one in which the donor has authorized the donee to appoint to any one or more of the permissible appointees, to the exclusion of the others. A nonexclusionary power is one in which the donor has specified that the donee cannot make an appointment that excludes any permissible appointee or one or more designated permissible appointees from a share of the appointive property. In determining whether a power is exclusionary or nonexclusionary, the power is exclusionary unless the terms of the power expressly provide that an appointment must benefit each permissible appointee or one or more designated permissible appointees.
Case Study
Sefton v. Sefton, — Cal.Rptr.3d —-, 2015 WL 1870302 (Cal.App. 4 Dist. April 24, 2015)
Grandfather’s trust was created under a Will he executed in 1955, which apparently remained unchanged through the date of his death in 1966. At that time California’s courts still followed the old English rule, which deemed POAs to be nonexclusionary unless the donor explicitly expressed a contrary intent. In 1970, California reversed this presumption by statute. Father died in 2006. Disinherited son filed suit in 2010, challenging his Father’s exercise of the POA excluding him from the trust. The case dragged on for four years.
For disinherited son (and his lawyers), it must have been a gut-wrenching roller coaster ride of a case: disinherited son lost not once, but twice at the trial court level. In both instances he kept his case alive only after winning long-shot appeals, ultimately resulting in his share of the $55 million trust going from 0% to 1/3. (The California appellate court ruled that Father’s exercise of the POA was invalid under the pre-1970 controlling law, which meant the POA failed, which meant disinherited son was entitled to a 1/3 intestate share of the trust).
Is litigation financing the wave of the future for estate litigants?
Estate litigation is a highly-specialized, labor intensive endeavor. Which means it’s expensive, and there aren’t a lot of lawyers who do this kind of work full time. Result: heirs with decent prospects of inheriting significant sums often have to abandon legitimate claims simply because they can’t afford to prosecute them. Sometimes this problem is solved by the attorney taking the case on a contingency-fee basis. But that’s a risky proposition, which again means legitimate claims that should prevail on the merits are often abandoned for economic reasons. That didn’t happen in this case. Why? Because the claimant found a third-party lender willing to finance the cost of his legal representation.
Litigation financing has been around for a long time (especially overseas), but remains somewhat controversial in the U.S. If done right, these deals are both legal (as explained by the 4th DCA in Kraft v. Mason, 668 So.2d 679 (4th DCA 1996)) and ethical (as explained by the Florida Bar in Ethics Opinion 00-3, and the ABA in this white paper). Estate litigants facing off against well-funded opponents are especially vulnerable to financial pressure to abandon legitimate claims. For the right kind of case, litigation financing can level the playing field.
I predict we’ll see more of these deals as the industry matures and gains wider acceptance among lawyers and their clients. The law firm on the winning side of the California case was Van Dyke & Associates, and the lender was Law Finance Group (LFG). Here’s an excerpt from LFG’s press release on the case:
“From the outset, we understood the significant uphill battle we were facing. With the trial court having granted our wealthy opponent’s demurrer without leave to amend, our disinherited client’s case was entirely in the hands of the court of appeal. As a case of first impression, the outcome was anything but certain. LFG stepped in to assist us when we needed them most. Together, we debated the merits and analyzed the probability of success. After two separate appeals, we finally emerged with a total victory for our client. Many others believed in the case, but few had the wisdom to invest in it. Only one had the resources to fund it to the finish line. Thanks again LFG.” – Richard S. Van Dyke, Esq., Managing Partner, Van Dyke & Associates, LLP
The Sefton II opinion can be reviewed at: http://www.courts.ca.gov/opinions/documents/D065898.PDF
For more information regarding Law Finance Group’s trust and estate litigation finance practice, please contact: Wendy A. Walker at (212) 446-6767 or wwalker@lawfinance.com.
Stay tuned for more!