The fiduciary duty of care sets the minimum level of diligence and competence we expect of trustees, objectively measured by reference to what a “reasonable” or “prudent” person would do in like circumstances, and informed by industry norms and practices. As I previously wrote here in the context of trustee investment decisions, the duty of care focuses on process, not end results. Which means a trustee’s compliance with this duty is evidenced most directly by its practices and procedures.

Think like an auditor:

Talk of fiduciary duties makes sense in the abstract, but what kind of hard evidence is going to help you — a litigator — win your next trustee mismanagement case? Answer: think like an auditor. Whether you’re playing defense or offense, you’ll want to plan your discovery strategy by acting like a bank auditor evaluating your trustee’s practices and procedures. The goal here is to gather up the evidence (documents + witness statements) needed to answer one basic question: would the trustee “pass” or “fail” its next audit. If the answer is “fail,” then it’s a safe bet your trustee hasn’t complied with its fiduciary duty of care.

The OCC’s Comptroller’s Handbook for Fiduciary Activities:

Thinking like an auditor may sound like a good idea in concept, but, you might ask, how’s a working litigator to pull this off? One option is to purchase a trustee auditing manual, such as Sheshunoff’s Trust Department Policies and Procedures, and use it to design your “audit”. Another is to use a free resource, such as the OCC’s Comptroller’s Handbook for Fiduciary Activities. I like the second option better.

As explained by Jacqueline C. Zipser in What OCC Regulation of Corporate Fiduciaries Means to the Practicing Attorney, if a corporate trustee scores below a certain rating on its OCC audit, bad things can happen, including a loss of its bank trust powers. Again, this same evidence should also determine if your trustee’s complied with its fiduciary duty of care. Here’s how Ms. Zipser describes the OCC’s rating system:

The OCC uses the Uniform Financial Institutions Rating System (UFIRS) to evaluate a national bank’s fiduciary operations. Each bank gets a composite rating based on five factors: management, adequacy of operations and controls and audits, quality of earnings, compliance with laws and regulations and governing instruments, and asset management. The ratings go from a high of 1 to a low of 5. A rating of 1 indicates strong performance by the bank and the least degree of supervisory concern. A rating of 2 indicates that the bank is fundamentally sound. A 3 rating indicates general adequacy. A rating of 4 indicates the presence of at least one major problem and 5 indicates very weak performance and a high degree of supervisory concern. Regulatory Compliance Associates, Inc., Sheshunoff Trust Department Policies and Procedures Manual 9-3 (2001) [hereinafter Sheshunoff].

If the OCC assigns a rating of 3, 4 or 5, additional supervision will be imposed. Additional reports will be required, examinations will be more frequent. The OCC may issue a cease and desist order for a 4 or 5 rated bank, preventing it from opening any new fiduciary accounts until deficiencies are remedied. The OCC can also revoke a bank’s trust powers.

The OCC’s trust-department handbook is foreign territory for most estate planners. It shouldn’t be. Even if you never intend to use it as a litigation tool, it’s the kind of resource that will set you apart as a practitioner. According to Ms. Zipser, your existing (or future) corporate trust department clients live and die by these regulatory compliance issues. If it’s that important to them, shouldn’t it be for you? Here’s another excerpt from Ms. Zipser’s excellent article:

Based on an unscientific survey of trusts and estates attorneys, the OCC intrudes into the consciousness of those practitioners rarely, if at all. The most common response when I ask the question is, “The what?” . . .

In contrast to the drafting attorneys, trust officers are aware of OCC regulation on a daily basis. It affects just about every area of trust administration. We can’t forget about it, because most banks will have an on-site examination from the OCC every year. Some exams are more detailed than others, but trust officers always know that a bank regulator is looking over their shoulders.

Hat tip:

Hat tip to Stephen Salley, a Partner with Banyan Family Business Advisors LLC, whose recent LISI article entitled Trusts & Their Trustees: The Housekeeper in the Soap Opera, pointed me to the OCC handbook.

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William (Bill) Glasko of Miami, Florida has been on a winning streak lately. Last year he notched an impressive win before the 4th DCA in an appeal involving a tricky creditor-deadline issue, which I wrote about here. Bill followed that win with another appellate-court victory this year before the 3d DCA in Estate of Maher v. Iglikova, — So.3d —-, 2014 WL 1386660 (Fla. 3d DCA April 09, 2014), a case I wrote about here involving Florida’s pretermitted child statute.

I asked Bill to share some of the lessons he drew from the Maher case with the rest of us and he kindly accepted.

[1] What strategic decisions did you make in this case that were particularly outcome determinative at the trial-court level? On appeal?

In this case, the Decedent unknowingly conceived a child who was born prior to the making of his will. The child was not discovered by the Decedent until after the will was executed. The argument at the trial court level was straight forward – the plain language of the statute requires that the child cannot be pretermitted unless he or she is born after the will is executed. This child was born before the will was executed. At the appellate court level, the strategy shifted to the assertion of the appellate court’s role in interpretation and modification of statutes. On appeal, I emphasized what I perceived as a ‘failsafe’ in that the Decedent had made minimal provisions for a class gift to “children” which meant that the appellee had not been “omitted” from the estate – another reason why the child could not meet the statutory definition.

[2] If you had to do it all over again, would you have done anything different in terms of framing the issues for your trial-court judge? On appeal?

At the trial court level we were shocked that the court not only ruled against us on a Motion for Summary Judgment, but went on to adjudicate the ultimate issue of the pretermitted child in favor of our opponent without further proceedings. The appellee in her answer brief cleverly asserted that the “after discovered” child (rather than the “after born” child) should be treated as an “after adopted” child; who would take under the plain language of the statute: The statute provides that after born or after adopted children are pretermitted. On appeal , I focused on the appellate Court’s restrictions in modifying statutes. I also pointed out that paternity in our case was adjudicated after birth, and I drew a distinction between “adoption” and “adjudication of paternity” – the former establishing new rights, and the latter adjudicating an pre-existing relationship. I asserted that the appellate Court would go beyond its authority by modifying the statute, and argued that the relationship could not be construed legally as “adoption”. If I had it to do again, I would have made that distinction at the trial level. To the credit of appellee’s counsel, I didn’t consider it.

[3] Looking back from your perspective as a litigator, do you think there’s anything that could have been done in terms of better estate planning while Mr. Maher was alive to avoid this litigation or at least mitigate its financial impact on the family?

Estate planners know that people do not like to confront estate planning – there is something morbid about it. The reality is that our clients must reexamine everything with every life change. A new baby, a better job, an inheritance, marriage, divorce, adoption, everything warrants a fresh look at the current state of the “plan”. As litigators, we make our living in litigation resolving the problems that arise from inadequate planning. If we get in early enough, we can help the client make provisions to avoid unnecessary litigation. The money spent planning before death pales in comparison to the potential cost of resolving conflict after death. In this case, had the Decedent consulted his attorney upon learning of the child and made specific provisions in his will to include or exclude the child, the litigation would have been avoided.

[4] Any final words of wisdom for estate planners and probate lawyers of the world based on what you learned in this case?

My primary areas of practice are probate litigation and family litigation. I routinely advise my family clients on estate planning and insurance issues as they come out of marriages and reevaluate their relationships. This is the perfect time to caution “fresh starters” on the importance of estate planning. We should all be diligent in attacking the potential problems before they arise.

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In 2004 James Maher’s small twin-engine plane went missing somewhere over the jungle between Honduras and Costa Rica. His body was never found.

Maher executed a valid will in 2001. Under F.S. 733.209 Maher’s heirs are permitted to petition to administer his estate while he’s missing; however, no personal representative can be appointed until a court determines he’s dead. So how do you do that in the absence of a body? If someone’s missing for over 5 years or there’s direct or circumstantial evidence of death, under F.S. 731.103 a court can enter an order declaring that person dead (see here, here). That’s what apparently happened in this case. In 2009 (five years after Maher went missing) the probate court entered an order determining him to be dead, and shortly thereafter admitted his 2001 will to probate.

Case Study:

Estate of Maher v. Iglikova, — So.3d —-, 2014 WL 1386660 (Fla. 3d DCA April 09, 2014)

Maher wasn’t married when he died, but he did father two children, a son and daughter, with two different women. At issue in this case was whether the daughter he fathered in 1999, whose existence he was unaware of until 2002, should be considered a “pretermitted” child under F.S. 732.302 for purposes of his 2001 will. I’ve previously written about pretermitted children in the context of actor Heath Ledger’s death. The pretermitted-child issue was also raised by the recent death of actor Philip Seymour Hoffman.

As a pretermitted child, Maher’s daughter would be entitled to 1/2 of his estate as an intestate heir, regardless of what his 2001 will might say. Although Maher’s will did provide for a class gift for his “children,” I’m guessing it wasn’t as generous as a 1/2 intestate share (otherwise, why sue?).

Does an adjudication of paternity = “adoption” for purposes of Florida’s pretermitted child statute? NO

The purpose of our pretermitted-child statute is to avoid an unintentional or inadvertent disinheritance of a child. Under F.S. 732.302 there are three elements that must be satisfied for a child to be pretermitted. The child must be: (1) omitted from the will, (2) born or adopted after the making of the will, and (3) have not received a part of the testator’s property equivalent to a child’s part by way of advancement.

The child’s mother argued her daughter should be considered Maher’s pretermitted child because her adjudication of paternity wasn’t completed until 2005, about 4 years after Maher executed his 2001 will, and this post-will-execution adjudication was the functional equivalent of a post-will-execution adoption. There’s some logic to that argument, and maybe that’s what the law should be. But changing the law’s a job for the legislature, not our courts.

Despite the clear text of the statute, the Miami probate judge bought into the argument in favor of daughter’s pretermitted-child status. On appeal, she didn’t fare so well. According to the 3d DCA, an adjudication of paternity is not equivalent to an adoption, and if you think the statute’s too narrow, you need to get the law changed by legislation, not by court order.

[U]nder the plain and obvious meaning of the statute, A.M.I. is not a pretermitted child because she was born before the execution of the decedent’s will. Iglikova argues that an adjudication of paternity should be equated with an adoption that took place after the execution of the will. We decline to adopt such a rationale, as the two are distinct. “‘Adoption’ means the act of creating the legal relationship between parent and child where it did not exist.” § 63.032(2), Fla. Stat. (2010). However, adjudication of paternity merely acknowledges an existing relationship. See e.g. Guerrero v. Staglish, 400 So.2d 190, 191 (Fla. 1st DCA 1981). In addition, it is not within the purview of this Court to expand the meaning of the statute when its language is clear and unambiguous. Accordingly, we hold that the trial court erred when it denied Taran’s motion for summary judgment and determined A.M.I. is a pretermitted child.

An “insider’s” view:

For an insider’s view of this case, you’ll want to read this interview of one of the attorneys on the winning side of the case.

Aldrich v. Basile, — So.3d —-, 2014 WL 1240073 (Fla. March 27, 2014)

If you make your living drafting wills or enforcing them in court, here’s what this case should NOT be about for you: inflicting post-mortem punishment on a woman for engaging in DIY estate planning (which was the slant reflected in this short ABA piece reporting on the case).

Instead, what this case is really about is how strict compliance with Florida’s execution formalities for wills and codicils, which are meant to be intent-serving devices, ironically produced intent-defeating results.

Part 1: Ms. Aldrich’s 2004 will:

This story has two acts, only one of which was addressed in the 1st DCA’s underlying decision (which I wrote about here). Part 1 involves an “E-Z Legal Form” the testatrix, Ms. Aldrich, wrote her will on in April 2004. Under that will Ms. Aldrich listed all of the assets she owned at the time and stated she wanted those assets to go to her sister Mary Jane Eaton, if she survived here, otherwise to her brother James Michael Aldrich. Ms. Aldrich’s will didn’t contain a residuary clause, nor did she otherwise provide for who should receive any after-acquired assets. If nothing had changed in the five years between 2004 (the year Ms. Aldrich signed her will) and 2009 (the year she died) all would have been well. But the facts did change. Her sister predeceased her, leaving new assets (cash and land) to Ms. Aldrich.

Ms. Eaton did die before Ann, becoming her benefactor instead of her beneficiary. Ms. Eaton left cash and land in Putnam County to Ms. Aldrich, who deposited the cash she inherited from Ms. Eaton in an account she opened for the purpose with Fidelity Investments.

Since Ms. Aldrich’s 2004 will didn’t address who was to receive this after-acquired property and her form will didn’t contain a residuary clause, she was deemed to have died partially intestate by the 1st DCA (see here), a conclusion upheld by the Fla. S.Ct. in this opinion for very practical reasons: if your will doesn’t tell us what to do with all of your stuff when you die, we don’t ask our probate judges to fill this gap on a case-by-case basis, instead we apply the one-size-fits-all distribution scheme found in our intestacy statutes:

There must be a clause in a will that alludes to the after-acquired property in order to avoid distribution of that property through the intestacy statute. Although Mr. Aldrich was the sole devisee under the will, without a residuary clause or general devises, only the property specifically referenced passes to him under the will. Further, if a testator does not allude to after-acquired property in any way, a court would have difficulty deciding how to divide the after-acquired property between multiple beneficiaries. In that instance, the court would be required to equitably distribute the testator’s property. This is a task that has been reserved for the Legislature and has been accomplished through the intestacy statute. See §§ 732.102, 732.103, Fla. Stat.

Also, according to the Fla. S.Ct., if we limit ourselves only to the four corners of Ms. Aldrich’s 2004 will, one could reasonably conclude her intent was to NOT pass her after-acquired property to her brother.

Further, section 732.6005(2) states that “[t]he rules of construction expressed in this part shall apply unless a contrary intention is indicated by the will.” § 732.6005(2), Fla. Stat. (emphasis added). The will in the instant case does in fact indicate a contrary intention to that proposed by Mr. Aldrich. The testator’s will specifically devised all possessions “listed,” to Mr. Aldrich. Therefore, it is clear that the testator did not intend for any property not listed to be distributed by the will.

Bottom line: if we limit ourselves to the four corners of Ms. Aldrich’s 2004 will, the outcome of this case is perhaps unfortunate, and great advertising for why DIY estate planning can be a problem, but not particularly troubling. Here’s and excerpt from Justice Pariente’s concurring opinion on the dangers of using store-bought form wills:

While I appreciate that there are many individuals in this state who might have difficulty affording a lawyer, this case does remind me of the old adage “penny-wise and pound-foolish.” Obviously, the cost of drafting a will through the use of a pre-printed form is likely substantially lower than the cost of hiring a knowledgeable lawyer. However, as illustrated by this case, the ultimate cost of utilizing such a form to draft one’s will has the potential to far surpass the cost of hiring a lawyer at the outset. In a case such as this, which involved a substantial sum of money, the time, effort, and expense of extensive litigation undertaken in order to prove a testator’s true intent after the testator’s death can necessitate the expenditure of much more substantial amounts in attorney’s fees than was avoided during the testator’s life by the use of a pre-printed form.

Part 2: Ms. Aldrich’s 2008 codicil:

But there’s more to this story than Ms. Aldrich’s 2004 will. After her sister died in 2007 Ms. Aldrich hand wrote a note (which was in effect a codicil to her will) making clear her “true” intent was to leave all of her estate, including the after-acquired assets she inherited from her sister, to her one surviving brother, James Aldrich. This is part 2 of the story, and for me it changes everything. Here are the key facts as stated by the court:

Ms. Aldrich’s sister, Ms. Eaton, died on November 10, 2007. Administration of Ms. Eaton’s estate was concluded and an Order of Discharge was entered on July 23, 2008, leaving Ann Aldrich personal and real property. Two days later, Ann Aldrich opened an investment account to deposit the inherited money. Evidence in the record suggests that, later that year, Ms. Aldrich attempted to draft a codicil to her original will. Along with the original will was a piece of paper bearing the printed title “Just a Note” and dated November 18, 2008, below Ms. Aldrich’s handwriting and signature. The handwritten note read as follows:

This is an addendum to my will dated April 5, 2004. Since my sister Mary jean Eaton has passed away, I reiterate that all my worldly possessions pass to my brother James Michael Aldrich, 2250 S. Palmetto, S. Daytona FL 32119.

With her agreement I name Sheila Aldrich Schuh, my niece, as my personal representative, and have assigned certain bank accounts to her to be transferred on my death for her use as she seems [sic] fit.

The note/codicil was signed by Ms. Aldrich and one witness, her niece. So what’s the problem? The note fell short of the two-witness requirement needed for a validly executed codicil, which means it’s legally unenforceable.

Although Ms. Aldrich signed the “addendum,” the signature of Sheila Schuh, Mr. Aldrich’s daughter, was the only other signature that appeared on the face of the document; therefore, the document was not an enforceable testamentary instrument under the Florida Probate Code. See §§ 732.502(1)(b) Fla. Stat. (2004) (requiring signature of the testator along with two attesting witnesses); 732.502(5), Fla. Stat. (2004) (codicil must be executed with the same formalities as a will).

Clearly, Ms. Aldrich’s true intent, as reflected in her 2008 codicil, was to pass all of her “worldly possessions” to her brother, James Aldrich. As observed by Justice Pariente in her concurring opinion:

Unfortunately, I surmise that, although this is the correct result under Florida’s probate law, this result does not effectuate Ms. Aldrich’s true intent. While we are unable to legally consider Ms. Aldrich’s unenforceable handwritten note that was found attached to her previously drafted will, this note clearly demonstrates that Ms. Aldrich’s true intent was to pass all of her “worldly possessions” to her brother, James Michael Aldrich.

If Florida’s strict-compliance approach to will/codicil execution formalities is blocking our courts from effectuating what appears to be Ms. Aldrich’s “true” intent, then maybe her DIY estate planning isn’t the problem here, maybe it’s Florida law that needs fixing.

Could Florida’s new will-reformation statute save the day? NO

In recent years there’s been a movement in many American states away from the all-or-nothing formalism that produces the kind of intent-defeating results we see in the Aldrich case. This movement’s been crystallized in two Uniform Probate Code provisions, the first, UPC § 2-805, loosens the rules for when drafting errors in wills can be corrected (or “reformed”), and the second, UPC § 2-503, codifies the “harmless error” rule for technical execution defects. As I reported here, in 2011 Florida adopted its version of UPC  § 2-805 (F.S. 732.615). This is a good first step, but it’s not a cure all, and it’s probably not the right tool for the Aldrich estate.

As noted in the Florida Bar’s amicus brief, our new will-reformation statute’s meant to correct drafting mistakes that occur at the time the will is signed, not rewrite wills that no longer reflect a person’s testamentary intent based on after-the-fact changed circumstances, which is what happened in the Aldrich case (i.e., her will was fine in 2004, it stopped being fine after-the-fact when sister died in 2007). According to the amicus brief:

In 2011, the legislature created section 732.615, Florida Statutes, which allows a court to reform mistakes made by a testator in his or her will even if the mistake does not appear on the face of the will. . . . [However,] this law does not permit the speculative inclusion of words and intent. See Morey v. Everbank, 2012 WL 3000608, 7 (Fla. 1st DCA July 24, 2012) (interpreting equivalent reformation statute for trusts and holding reformation cannot be used to adjust to changed circumstances or after-thoughts of a settlor).

In the Morey case, which I wrote about here, the 1st DCA expanded on this point as follows:

Reformation is not available to modify the terms of a trust to effectuate what the settlor would have done differently had the settlor foreseen a change of circumstances that occurred after the instruments were executed. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers. at cmt. h (2003) (Reformation is not “available to modify a document in order to give effect to the donor’s post-execution change of mind … or to compensate for other changes in circumstances.”).

So if F.S. 732.615 isn’t the answer, what is? Think: “harmless error” rule.

Harmless error rule:

Florida’s already taken the first important step away from intent-defeating, all-or-nothing formalism by adopting its version of UPC  § 2-805 (F.S. 732.615). Maybe it’s time we took the next logical step and adopted UPC  § 2-503, the UPC’s harmless error rule as well. Under the harmless error rule a noncomplying will is treated as if it had been executed in compliance with the statutory formalities, if the proponent establishes by clear and convincing evidence that the decedent intended the document as his or her will. If this rule were in place today, Ms. Aldrich’s “true” intent, as reflected in her 2008 codicil, would have likely prevailed. UPC  § 2-503 provides as follows:

Although a document or writing added upon a document was not executed in compliance with Section 2-502, the document or writing is treated as if it had been executed in compliance with that section if the proponent of the document or writing establishes by clear and convincing evidence that the decedent intended the document or writing to constitute:

(1) the decedent’s will,

(2) a partial or complete revocation of the will,

(3) an addition to or an alteration of the will, or

(4) a partial or complete revival of his [or her] formerly revoked will or of a formerly revoked portion of the will.

Professors John H. Langbein (Yale) and Lawrence W. Waggoner (Michigan) report in Curing Execution Errors and Mistaken Terms In Wills that the UPC’s harmless error rule for technical execution defects has already been adopted in 8 states (Colorado, Hawaii, Michigan, Montana, New Jersey, South Dakota, Utah, and Virginia).

Harmless error rule = less litigation:

But wouldn’t this kind of rule open the door to more estate litigation? According to Langbien and Waggoner, evidence from jurisdictions that have adopted the rule indicates otherwise, it actually leads to less litigation, not more.

[T]he harmless-error rule actually prevents a great deal of unnecessary litigation, because it eliminates disputes about technical lapses and limits the zone of dispute to the functional question of whether the instrument correctly expresses the testator’s intent. Persons who under the strict-compliance rule would have benefitted from proving an intent-defeating technical defect now lose the incentive to do so under the new rule, because under the harmless-error standard the court will validate the will anyhow.

Below is the abstract for Curing Execution Errors and Mistaken Terms In Wills, in which Langbien and Waggoner sum up the current state of affairs on this front and encourage working probate attorneys to run with these ideas, even in jurisdictions — like Florida — that have yet to legislatively adopt both legs of the UPC’s reform agenda (i.e., in the absence of UPC-type legislation, look to authority/ideas contained in the new Restatement of Property).

Recent years have seen a remarkable change emerge in the way American courts treat cases involving errors in the execution or the content of wills. The courts have traditionally applied a rule of strict compliance and held the will invalid when some innocuous blunder occurred in complying with the Wills Act formalities, such as when one attesting witness went to the washroom before the other had finished signing. Likewise, the courts have traditionally applied a no-reformation rule in cases of mistaken terms, for example, when the typist dropped a paragraph from the will or the drafter misrendered names or other attributes of a devise; the court would not correct the will no matter how conclusively the mistake was shown.

Leading modern authority in a number of American states has now reversed the strict compliance and no-reformation rules. Both by judicial decision and by legislation, the courts have been empowered to excuse harmless execution errors and to reform mistaken terms. Section 2-503 of the Uniform Probate Code treats a noncomplying will as if it had been executed in compliance with the statutory formalities, if the proponent establishes by clear and convincing evidence that the decedent intended the document as his or her will. The new Restatement of Property endorses the harmless-error rule.

The new Restatement authorizes courts to reform mistaken terms in a will. The new Restatement’s reformation provision, which has now been codified in § 2-805 of the Uniform Probate Code and § 415 of the Uniform Trust Code, provides that a court may reform any donative document, including a will, “to conform the text to the donor’s intention if it is established by clear and convincing evidence (1) that a mistake of fact or law, whether in expression or inducement, affected specific terms of the document; and (2) what the donor’s intention was.”

The provisions of the new Restatement and the Uniform Probate Code endorsing the harmless-error and reformation rules for American law bring new opportunities and responsibilities for probate lawyers. The older conventions of the strict-compliance rule and the no-reformation rule are now open to challenge everywhere. Lawyers processing probate matters need to be alert to the opportunity they now have to raise issues that used to be foreclosed. Sad cases of defeated intent that used to be beyond hope may now be remediable. Innocuous formal defects can be excused, and mistaken terms can be reformed, but only if counsel sees the issue and brings it forward and, in jurisdictions that have not codified the new rules, if the court is hospitable to them.

Lesson learned?

Florida’s always been at the forefront when it comes to inheritance law, and that includes the trend away from intent-defeating formalism. Step one was the 2011 passage of F.S. 732.615, Florida’s new will-reformation statute. Sad cases of defeated intent caused by obvious drafting errors that used to be beyond hope may now be remedied. That was a good beginning, but it’s not a cure all. Whether a person’s testamentary intent is carried out shouldn’t turn on innocuous execution defects and the type of “gotcha” litigation it spawns. We’ve gone half way, now we need to take the next logical step and adopt the UPC’s harmless error rule.

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Readers of this blog know I’m a big fan of mandatory arbitration clauses in wills and trusts, which are expressly authorized by statute in Florida (see here). Mandatory arbitration is often good for everyone involved in an estate dispute. Grantors are assured that their private lives remain out of the courts and therefore free from public exposure. Fiduciaries can protect estate and trust assets, while limiting their liability, thus reducing the overall cost of administration. Beneficiaries can avoid the emotional damage and cost of protracted litigation. And the public doesn’t have to fund a legal process in which the wealthy battle over their inheritances.

Which is why an article recently published by John T. Brooks and Jena L. Levin of Foley & Lardner in Chicago caught my eye. Entitled Enforceability of Mandatory Arbitration Provisions in Trust Agreements, the article does a good job of summarizing Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013), a recent Texas Supreme Court decision upholding a mandatory arbitration clause in a trust. What’s most interesting about this case is that the court upheld the arbitration clause on testamentary-intent grounds — in the absence of a specific authorizing statute.

Even though we have a specific authorizing statute in Florida (F.S. 731.401), the Texas opinion is helpful for Florida lawyers because it points the way towards universal enforceability of arbitration clauses — even if challenged in a jurisdiction (like Texas) that has NOT adopted specifically authorizing legislation. The key here is to think “conditional” gift. By accepting a share of the estate, the beneficiaries also accept the strings attached to that gift, including the mandatory arbitration clause. Here’s an excerpt from Enforceability of Mandatory Arbitration Provisions in Trust Agreements:

In a unanimous opinion, the Texas Supreme Court reversed the appellate court and concluded that the arbitration clause was enforceable against John for two reasons. First, as the settlor, John’s father determined the conditions attached to his gifts, and the father’s intent in this case was to arbitrate any disputes over the trust. Second, the Texas Arbitration Act requires enforcement of written agreements to arbitrate. Although such an agreement requires mutual assent and a party typically manifests his assent by signing an agreement, the Rachal court recognized that assent may be proven by the beneficiary’s acceptance of the benefits of the trust and/or his suit to enforce the terms of the trust. Applying the doctrine of direct benefits estoppel, the court held that John was bound by the arbitration clause. While John could have disclaimed his interest in the trust or challenged the validity of the trust entirely, because he attempted to enforce rights that wouldn’t have existed without the trust, he was estopped from challenging the arbitration provision therein.

 While there’s sudden newfound clarity in Texas with respect to this particular question, the state of the law remains wide open in the vast majority of states, as there are very few statutes governing enforcement of an arbitration clause in a trust agreement and virtually no published decisions analyzing whether such a clause is enforceable against trust beneficiaries. Depending on the language of the particular state’s Arbitration Act and on the courts in that state apply doctrines of equitable estoppel, the Rachal opinion may prove to be very instructive for courts around the country if and when they’re faced with this issue of first impression in their jurisdiction.

For those of you looking for sample arbitration clauses specifically tailored for wills and trusts, there are two good resources to start with: the sample clause published by the American Arbitration Association or “AAA” (click here) and the sample clauses provided in a 2005 ACTEC article entitled Resolving Disputes with Ease and Grace. The ACTEC article contains a sample clause incorporating the type of conditional-gift language that seems to have won the day in the Rachal case.

What divorce attorneys do and what trusts-and-estates lawyers do overlaps all the time. Often that overlap occurs at the planning stage, when working together on drafting a pre-nuptuial or marital settlement agreement, but not always. Sometimes it happens in the probate context, which appears to be the case in this instance.

McDonald v. Johnson, — So.3d —-, 2012 WL 246468 (Fla. 2d DCA January 27, 2012)

Paul D. McDonald lived quite a life. Among his many accomplishments was founding the McDonald Construction Corporation (MCC), a large and apparently successful construction company in Lakeland, Florida. Mr. McDonald was survived by descendants of his first marriage as well as a second wife, Sandra Gill McDonald. (Blended family: think automatic litigation red flag!) The 2d DCA’s opinion doesn’t go into MCC’s ownership structure post Mr. McDonald’s death, but I’m guessing it remained closely held, and the majority owners (either directly as shareholders or indirectly as trust beneficiaries) were descendants of Mr. McDonald’s first marriage.

At issue in this opinion was whether Mr. McDonald’s second wife could subpoena MCC’s confidential business records to figure out if she should assert an elective share claim. Whether or not the elective share claim  made sense apparently turned on whether the appreciation in value of Mr. McDonald’s MCC stock (which he’d previously transferred to his revocable trust) was a marital asset (as defined by F.S. 61.075). Note the overlap between core inheritance and family law issues going on here. Also, as to why this discovery issue was litigated to the extent it was, my guess is that MCC’s run/owned by folks who aren’t exactly thrilled by the prospect of second wife gaining access to their private financial affairs (e.g., who’s getting paid what). As explained by the 2d DCA, the trial court said NO to the MCC subpoena:

To assist her in deciding whether to take the elective share, see § 732.201, Fla. Stat. (2010), the surviving spouse sought financial information from MCC that she asserted was relevant to determining whether the value of MCC’s stock had increased during the marriage due to the efforts of the decedent. See § 732.2155(6)(c). The probate court ruled that the MCC stock was not part of the probate estate, and therefore, the information requested was not relevant. It further ruled that the value of the MCC stock is excluded from the surviving spouse’s elective share calculation pursuant to section 732.2155(6).

Can second wife subpoena MCC’s business records in connection with a potential elective-share claim? YES

What’s most interesting about this case isn’t why the 2d DCA reversed (“quashed”) the trial court’s discovery order, it’s how the court tied together two tricky statutes (one familiar mostly to probate lawyers and the other familiar mostly to divorce attorneys) to addresses a question that apparently hasn’t come up before. All parties agreed the discovery order being litigated turned on an interpretation of subsection “(c)” of section 732.2155(6), which cross references to F.S. 61.075. According to the 2d DCA, “[t]here are no cases interpreting subsection (6)(c),” which provides as follows:

(6) Sections 732.201-732.2155 do not affect any interest in property held, as of the decedent’s death, in a trust, whether revocable or irrevocable, if: . . . (c) The property was a nonmarital asset as defined in s. 61.075 immediately prior to the decedent’s death.

The trial court read this statute to mean it applied only to nonmarital assets. Since second wife’s elective-share claim depended on the opposite conclusion (i.e., appreciation of the MCC stock was a marital asset), the trial court concluded the elective-share statute didn’t apply, thus no discovery. When it comes to discovery disputes, arguing for a narrow ruling (i.e., limiting discovery) is always an uphill battle. So it’s no surprise the 2d DCA read the statute way more expansively than the trial court, opening MCC’s doors to second wife’s subpoena of its business records. Here’s why:

We conclude that the fact that section 732.2155(6)(c) cites to section 61.075 without a specific citation to the subsection defining nonmarital property indicates the legislature’s intent that the entire statute, which defines both marital and nonmarital property, is to be considered in determining whether the property in the revocable trust was nonmarital at the time of death. The definition of marital assets includes “[t]he enhancement in value and appreciation of nonmarital assets resulting either from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both.” § 61.075(6)(a)(1)(b), Fla. Stat. (2010). In other words, if the value of the MCC stock in the decedent’s revocable trust increased pursuant to the terms of section 61.075(6)(a)(1)(b), that increase would not be excluded from the elective share under section 732.2155(6)(c). Thus, to the extent the information sought by the surviving spouse is necessary to her determination whether the MCC stock value was enhanced during the marriage due to the efforts of the decedent, it is relevant.

Accordingly, we grant the surviving spouse’s petition for writ of certiorari and quash the probate court’s order sustaining the Respondents’ objections to her discovery request.

Lesson learned?

When a case is being litigated, the process is often much worse than the outcome (even if you lose at trial). One reason for this dynamic is the wide-ranging and open discovery process encouraged by Florida law. There’s lots of good reasons for our generous discovery rules, but (like everything else) they can be abused. And when that abuse happens, a tool that’s supposed to discourage litigation by narrowing the issues in dispute is instead improperly used as a “club” against an adversary. I’m not saying that’s what’s going on in this case, but it’s possible.

So what’s it all mean for divorce attorneys and trusts-and-estates lawyers working on these kind of cases at the planning stage? You need to factor in creative post-death elective-share litigation when crafting marital agreements. Even if her elective-share claim is unsuccessful, the discovery afforded to a second wife often viewed as “hostile” by the family members of the first marriage can’t be overlooked.

By the way, reading between the lines, I think the risk of abusive discovery tactics was hinted at by the 2d DCA when it made clear that just because it was ruling against the estate’s categorical discovery objection (which turned on a very specific reading of 732.2155(6)(c)), didn’t mean the target of the subpoena, MCC, was barred from asserting all of the generally applicable discovery objections open to it once the subpoena was served. In other words, the game’s not over yet.

Our holding does not affect MCC’s right to file objections to any subpoena it is served in conjunction with the surviving spouse’s discovery request. See Fla. R. Civ. P. 1.351.

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Cody v. Cody, — So.3d —-, 2013 WL 6171299 (Fla. 1st DCA November 26, 2013)

The wills at the center of this case were ticking time bombs from the moment Mr. and Mrs. Martin signed them in 2007. Mrs. Martin died later that same year. Mr. Martin died in 2010. When both parents passed away, their wills devised their home and surrounding 12.5 acres in Pace, Florida (a small town in Florida’s Panhandle) to one of their three sons, Buford Cody, to divide among their heirs “as he sees fit and proper.” Here’s how the two key clauses of the will at issue in this case were drafted:

I devise the house and 12.5 acres located at 2800 Myree Lane, Pace, FL 32571, to . . . my son, Buford Cody, to divide between my heirs, as he sees fit and proper. . . . All the residue of my estate . . . shall be divided among my heirs, as [Buford Cody] see[s] fit.

What?! Not surprisingly, when mom and dad passed away Buford’s brothers didn’t waste any time filing a lawsuit asking the court to construe dad’s will in a way that effectively re-wrote it by dividing the estate “into roughly three equal shares” for the couple’s three sons. Mistake number one: the challengers filed their will-construction suit before the will was even admitted to probate. This kind of procedural sloppiness is easy to deal with if your judge doesn’t go along with it. Unfortunately, that wasn’t the case in this estate.

The Order Construing Will must be reversed for several reasons. First, the probate court’s order construing will is premature because the record does not contain an order admitting the will to probate or appointing Buford Cody the PR under the provisions of the will. “A will may not be construed until it has been admitted to probate.” § 733.213, Fla. Stat. While Mr. Martin’s will is self-proving, pursuant to section 732.503, Florida Statutes, and is thus admissible to probate without further proof pursuant to section [733.201], the probate court has not actually admitted the will to probate.

The power of social convention:

What’s most interesting about this case isn’t that they got the procedure wrong, it’s what it tells us about how estate planners need to anticipate the power of social convention when drafting wills, and how these conventions can undermine any estate plan that falls outside of the traditional “all to spouse, then to my children in equal shares” box. We usually speak of this problem in terms of litigation “red flags.” But what do we really mean by that phrase? In my opinion it’s any estate plan that falls outside of the social conventions typical to your local community.

If my will gives everything to one of my three sons to divide among my heirs as he sees fit, can he keep it all for himself? YES

According to the 1st DCA, “the will’s lack of restrictions on Buford Cody’s discretion to share the property with his brothers gave him the authority to divide it in any way he saw ‘fit,’ including no division at all.” In other words, 2 of the Martins’ 3 sons were effectively disinherited (which is contrary to the social norm followed by most parents). Ergo: litigation red flag! So what happened? The trial court basically ignored the clear text of the will and entered an order “construing” it in a way that divided the estate in equal shares among the three surviving sons. That result may have seemed “equitable” (as defined by the judge), but it certainly wasn’t what Mr. Martin’s will said. Bottom line, you can’t re-write someone else’s will to better suit your own subjective sense of fairness, so saith the 1st DCA:

Mr. Martin’s directive to the PR to divide both the real property described, and any residuary estate not specifically devised, “between my heirs, as he sees fit and proper” does not require the PR to equally divide the property. When a will devises estate property to a person, expressing the testator’s hope that the person “will honor all of [the testator’s] ‘requests,’ ” then “the unambiguous language of the [will] devises the entire residuary to [that person], who then has the discretion to honor [testator’s] requests.” Glenn v. Roberts, 95 So.3d 271, 273 (Fla. 3d DCA 2012). As stated in In re Estate of Barker, 448 So.2d 28, 31–32 (Fla. 1st DCA 1984):

The court may not alter or reconstruct a will according to its notion of what the testator would or should have done…. It is not the purpose of the court to make a will or to attempt to improve on one that the testator has made. Nor may the court produce a distribution that it may think equal or more equitable.

See also Owens v. Estate of Davis, 930 So.2d 873, 874 (Fla. 2d DCA 2006).

Here, Mr. Martin’s devise to Buford Cody vested Buford’s interest in the real property upon Mr. Martin’s death. § 732.514, Fla. Stat. The will’s lack of restrictions on Buford Cody’s discretion to share the property with his brothers gave him the authority to divide it in any way he saw “fit,” including no division at all. The fact that his brothers disagreed with his actions did not render the will ambiguous or invalidate any portion of the will. In addition, the will did not provide any requirement that the brothers agree on a distribution of the estate property. The will specifically provided Buford Cody with the power and authority to decide how the property would be divided. The probate court’s orders . . . determining a particular division of the real estate as the court saw fit usurped Buford Cody’s authority under the will without legal basis.

Lesson learned?

Chalking this case up to “judicial activism” would be a mistake. Anytime a client signs a will that deviates from the traditional “all to spouse, then to my children in equal shares” social convention, he or she needs to take extra precautions. Why? Because if the will gets challenged the single most important witness — the testator — is dead, so he obviously isn’t around to explain to an overworked and underfunded probate judge why “yes”, the will says exactly what he meant it to say.

Hindsight is 20-20, but based on the 1st DCA’s opinion, if the will at issue in this case had contained a few extra lines making clear the estate was to go exclusively to Buford Cody, making clear that any reference to a division among heirs was completely precatory, and also explaining the testator’s intent, the legal fees and family acrimony inherent to this kind of litigation might have been avoided. If you’re looking for a solid checklist of defensive estate planning techniques, look no further than Will Contests — Prediction and Prevention by Prof. Gerry Beyer of the Texas Tech University School of Law. Here’s what Prof. Beyer has to say about incorporating explanatory text into a defensive-planning strategy:

EXPLAIN REASONS FOR DISPOSITION

An explanation in the will of the reasons motivating particular dispositions may reduce will contests. For example, a parent could indicate that a larger portion of the estate is being left to a certain child because that child is mentally challenged, requires expensive medical care, supports many children, or is still in school. If the testator makes a large charitable donation, the reasons for benefiting that particular charity may be set forth along with an explanation that family members have sufficient assets of their own. The effectiveness of this technique is based on the assumption that disgruntled heirs are less likely to contest the will if they realize the reasons for receiving less than their fair (intestate) share.

It is possible, however, for this technique to backfire. The explanation may upset some heirs, especially if they disagree with the facts or reasons given, and thus spur them to contest the will. Likewise, the explanation may provide the heirs with material to bolster claims of lack of capacity or undue influence. For example, assume that the testator’s will states that one child is receiving a greater share of the estate because that child frequently visited the aging parent. Another child may use this statement as evidence that the visiting child unduly influenced the parent. If the explanation is factually incorrect, heirs may contest on grounds ranging from insane delusion to mistake or assert that the will was conditioned on the truth of the stated facts.

The language used to explain reasons for a disposition must be carefully drafted to avoid encouraging a will contest or creating testamentary libel. An alternative approach is to provide explanations in a separate document that could be produced in court if needed to defend a will contest, but which would not otherwise be made public.

Is this kind of protective drafting guaranteed to work? Heck no! Might it have worked? No one will ever know for sure. But this I do know: anytime a client signs a will that deviates from traditional social convention, he or she needs to take extra precautions. As explained in Prof. Beyer’s article, defensive, pre-suit estate planning involves all sorts of tools. One of those tools is defensive drafting designed to be so blindingly obvious that no one — not even an overworked/underpaid judge who thinks your will is morally reprehensible — will have any doubt it’s exactly what your client wanted. This kind of estate planning may cost a little more up front, but when compared to the cost of litigation, it’s a bargain.

NPR’s Planet Money did a great piece on Living Wills entitled The Town Where Everyone Talks About Death. The report draws a direct line between good estate planning (which always involves a Living Will) and good economic policy. Who knew?

As always, the reporting was excellent. It’s a radio show, so if you didn’t catch it the first time around you’ll want to listen to the podcast. Here’s the show’s intro:

George Phillips has his death planned out. His wife Betty has planned hers. They have filled out an advance directive, outlining how they want to die.

Their neighbors across the street have filled out the same paperwork, as has the family next door. In fact, in La Crosse, Wisconsin, you’re unusual if you don’t have a plan for your death. Some 96 percent of people who die in La Crosse have an advance directive or similar documentation. Nationally, only about 30 percent of adults have a document like that.

In this community, talking about death is a comfortable conversation — neighbors gossip about who on the block hasn’t filled out their advance directive.

It’s become such a comfortable conversation basically because of one guy in town. Bud Hammes works as a medical ethicist at a local hospital called Gundersen Health System. For years, he was called when someone’s dad had a stroke, was in a coma, on machines. Bud would sit down with the family and try to help them figure out what to do next. And every time, he says, the discussion was excruciating.

“The moral distress that these families were suffering was palpable,” he says. “You could feel it in the room.”

Most of the time, Bud says, they’d be talking about a patient who had been sick for years. Why not have that conversation earlier?

So Bud started training nurses to ask people ahead of time, would you like to fill out an advanced directive. It took a while but the idea caught on.

Nurses started asking patients questions like: If you reach a point where treatments will extend your life by a few months and side effects are pretty serious, would you want doctors to stop, or continue to do all that could be done? And a lot of patients said: Stop.

And stopping, of course, is less expensive than continuing treatment.

“It turns out that if you allow patients to choose and direct their care, then often they choose a course that is much less expensive,” says Jeff Thompson, CEO of Gundersen.

In fact, La Crosse, Wisconsin spends less on health care for patients at the end of life than any other place in the country, according to the Dartmouth Health Atlas.

Reducing costs wasn’t the reason La Crosse has its advance directive program. Bud Hammes was trying to help their patients, and the reduction in spending was an accident. But now, lots of other communities want to copy the La Crosse program.

Bud Hammes thinks this is the moment his big idea in La Crosse might actually go national. The Affordable Care Act encourages providers to figure out how to reduce spending. Bud is getting calls from hospitals and doctors, and he’s putting off retirement to help them make the rest of America look more like La Crosse.

Tim Newell, the nephew of the late Elizabeth Banks,  sued Johns Hopkins University in 2011, charging that Banks conveyed her family’s 138-acre dairy farm to Hopkins in 1989 for $5 million — far below its market value — with the understanding that the university would protect it from the encroaching commercial development she disdained.

Banks died in 2005. According to Bank’s family, she envisioned a small campus with extensive green and open space. Which may have been the university’s original plan as well. But a lot’s changed in the 20+ years since the farm was sold/gifted to Hopkins (Ronald Reagan was still president in 1989!). Whose vision should control the Banks-family donation 20+ years after the fact is at the heart of the Newell case, which is headed to Maryland’s highest court (the Court of Appeals).

Newell v. Johns Hopkins University, 215 Md. 217, 79 A.3d 1009 (Md. App. November 21, 2013)

The Banks family has lost twice so far, first at the trial court level and then in the linked-to opinion above at the Court of Special Appeals (Maryland’s intermediate appellate court), both of which ruled in favor of Hopkins and its plans for the farm land, as reported in Johns Hopkins vs. MoCo farm: Whose wishes should prevail?, a cover story on the case that recently ran in the Washington Post Magazine:

Johns Hopkins University and Montgomery County plan a $10 billion “science city” that could surround the farm with nearly 5 million square feet of commercial space. Banks’s heirs say this plan bears no resemblance to the small, bucolic research campus Banks thought she had been promised when she sold the land in 1989 at a cut rate to Hopkins. She had no intention of selling for any other reason to the university. Family members say Hopkins is acting more like the commercial developers Banks had rebuffed repeatedly. The family is mounting a legal challenge, so far without success.

[A trial court and Maryland’s intermediate appellate court] have said Hopkins can move ahead with its plans. Now Banks’s heirs are making a last attempt to stop the project, to prove their claim that Hopkins is reneging on a deal.

The impact of the Belward Farm case could extend well beyond Hopkins and Montgomery. It is being closely watched by institutions that receive millions each year in charitable donations. Many receive donations with instructions attached, but would prefer to use the gifts for other purposes.

Banks’s heirs say her intentions were always clear: She did not want massive development, and she thought she had been promised a place of learning and research, not commerce. Hopkins says the university is keeping to the terms of the written deal, and any other representations that might have been made by university officials, or that the family thought were made, were never written into the sales contract and therefore don’t matter.

Now judges on Maryland’s Court of Appeals, 50 miles away in Annapolis, will have to decide: Is Hopkins playing by the rules? Was Elizabeth Banks betrayed?

A fundamental failure to manage expectations:

At its core, the Hopkins case and other donor-intent cases like it (including the Florida Bower Foundation case I wrote about here and the Princeton University case I wrote about here), represent a fundamental failure to manage expectations. Donors making large gifts are often wooed for years (as Banks was in this case). They expect to be treated like valued members of a community, not adverse parties in a contract negotiation. Here’s an excerpt from the Maryland appellate court opinion reflecting this point:

Mr. Newell’s answer to one interrogatory suggests that the Family views the spirit of the Contract differently than Hopkins does:

[Hopkins] represented that the campus would be occupied and developed by [Hopkins] for [Hopkins] as a university campus, including all the things that would go along with that. This was done in an atmosphere of trust and confidence where it wasn’t thought necessary to spell out “do’s” and “don’t’s” in extensive detail.

Hopkins, on the other hand, had very different expectations: Banks made a deal, now she has to live with it. This position may seem harsh, but it’s clearly the right answer as a matter of law. Here again from the Maryland appellate court opinion:

[B]ecause we agree with the circuit court that the operative provisions of this Contract are not ambiguous, the inquiry ends there—not because we find that Hopkins’s vision for the Farm necessarily is true to the Family’s (we make no such finding), but because the unambiguous words the parties used to memorialize their agreement limits Hopkins’s future development of the Farm only in terms of how it uses the Farm, not in terms of scale or density or ownership structure.

. . .

The Family no doubt believes it has been genuinely aggrieved by the way that Hopkins seeks to implement the Contract, and we do not mean for an instant to diminish its anger or disappointment if Hopkins’s current vision for the Farm deviates from what Ms. Banks or other Family members thought would happen. But again, our task is to examine the agreement the parties did sign, not the agreement that one or the other now wishes they had negotiated instead. And although it may seem cold to hang our decision on rules of construction, certainty in contracts is important too, especially when the language of the contract is unambiguous.

By the way, the result is the same whether Banks received fair consideration for her farm, or the deal was a part gift, part sales transaction. Here again from the Maryland appellate court:

[I]t makes no difference whether this transaction is characterized as a sale, a gift, or both. The existence (or not) of charitable intent may bear on questions related closely to that intent, such as formation of a charitable trust . . . or whether and how to save a charitable bequest no longer capable of execution in the construction of a will . . . but not to the pure contract interpretation question presented here.

Lesson learned?

The last thing any university or charitable foundation needs is to end up on the receiving end of a donor’s lawsuit. Even if you win, you still lose in terms of bad PR and squandered resources: a lesson the folks at Princeton University learned the hard way just a few years ago in their litigation with heirs to the A.&P. grocery fortune (see here). The lengthy litigation was an embarrassment to Princeton, and a worst-case scenario for university development officers. Even without going to trial, each side spent more than $40 million in legal fees. This is no way to run a charity.

So what’s the solution? Do a better job of managing expectations. How do you do that? Start with a clearly drafted gift agreement, then adopt institutional policies ensuring your donors and the development officers working with them understand exactly what to expect going forward. In The Unraveling of Donor Intent: Lawsuits and Lessons, by Kathryn Miree and Winton Smith, the authors provide this model form of gift agreement and, just as importantly, solid policy recommendations for charities seeking to better manage donor expectations and long-term gifts:

Charities also have much to learn about the management of long-term gifts. Change in the effectiveness of a long-term gift is inevitable, although it is always less clear how that need for change will manifest. The best approach for charities is to plan for change and manage those changes wisely. Consider these five recommendations:

1) Develop standard gift agreements for use in planning long-term gifts that provide flexibility over time and encourage donors and their advisors to use these agreements. The standard gift agreement should include either term-limits on donor gift restrictions or make provision for change in the document subject to certain triggers.

2) Review current gift agreements with living donors to identify documents that may need changes. It is far easier to craft solutions or alternatives during the donor’s lifetime than to struggle with the options for change after the donor’s death.

3) Once the gift agreement (and amendments to the agreement) are complete, keep the documents in a safe place. This seems obvious, but too many charities are unable to put their hands on key donor documents even 20 years after the gift – and have little chance of finding those documents after 50 or 100 years. Gift purposes become more a matter of folk lore than legal reality. (Institutional policies are the smartest way to ensure consistency.) Also keep records of planning sessions and donor conversations. These contemporary recorded observations may be valuable to later generations in interpreting donor intent. Some charities include these records as a part of board minutes (when the gift is reported and accepted) because these records are retained as a matter of law.

4) Adopt policies and procedures governing long-term gift management that includes donor stewardship, reporting, and the process for initiating gift changes. Stewardship involves engaging in regular communication with donors and their families about the use and outcomes of the gift. Engaging with lower generations helps build relationships that may later avoid conflict. The donor’s descendants may not have the same goals, objectives, or perspectives as the donor. In fact, they rarely do. Sharing the donor’s conversations, goals, and regular reports on how those objectives are met are powerful tools in managing expectations. The policies should also create an internal committee to that provides oversight of long-term gift management, and identifies problems early.

5) Avoid crisis management. When things begin to go bad – either because of disagreements with family members or an unanticipated turn in the road – address the issues early. In most cases, it will be beneficial to involve family or original advisors to provide input about options. Problems generally grow worse – and relationships deteriorate – when no action is taken. Just deal with it.

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Asset protection planning’s a high risk practice area that many estate planners “dabble” in. In my opinion, that’s a big mistake. Why? Because this kind of work is a minefield of potential liability for lawyers, no matter how careful you think you are or how legitimate your planning advice may be.

But the money’s good, right? Probably not. No matter how good the fees may seem (especially when compared to traditional estate planning), properly weighed, I believe asset protection planning is a classic example of lawyers taking on “uncompensated risk” (a term used in finance that we always tell our fiduciary clients is a big no-no). Even if only 1 asset-protection case in 100 blows up on you, this is no way to run a law practice.

Viewed in retrospect by an unsympathetic judge who has lost all patience with your deadbeat client, your perfectly legitimate legal advice might all of a sudden morph into a scheme (nothing good ever comes of a “scheme”) to defraud creditors . . .  and you, as lawyer (not your client), all of a sudden become the target of some judge’s scornful attention (and maybe a malpractice claim to boot).

And you can’t chalk this kind of risk up to rookie mistakes either. Both of the cases discussed below involve experienced practitioners. These aren’t “rogue” solo’s desperately trying to stay afloat by taking whatever client falls through the door. These are seasoned pro’s. And yet, they’ve been drawn into the kind of position no one wants to be in: playing defense in someone else’s lawsuit.

CASE NO. 1:

James Grieff v. [lawyer/firm], Circuit Court, Miami-Dade County, FL (Case No. 13-21888-CA).

Apparently there’s a good bit of support for using spousal agreements for asset protection planning (click here, here). Well, what might seem like solid, perfectly legitimate legal advice in the cozy confines of your office when Mr. and Mrs. debtor walk through the door with a tale of woe and ask you to please help them fend off evil creditor’s ill-gotten judgment (or threatened judgment), can end up looking entirely different when the you-know-what hits the fan and all of a sudden you find yourself on the receiving end of decidedly unflattering headlines, like: Client who lost $6M to pin-up ex-wife sues lawyer for advising him to put money in wife’s name, which appeared in the ABA Journal. Here’s an excerpt:

Facing a $2 million clawback suit by the bankruptcy trustee in the Bernard Madoff case, an Atlanta entrepreneur says, he sought advice from the New York office of [firm].

They referred him to asset protection specialist [lawyer] in the firm’s Miami, Fla., office, alleges now-former client James Greiff in a recent malpractice suit, and, following [lawyer’s] advice, he transferred some $6 million in assets to his wife via a postnuptial agreement. Three months later she filed for divorce, and at that point, contends Greiff in the Miami-Dade Circuit Court suit, the [firm] special counsel abandoned him and began representing his wife, reports the Daily Business Review (sub. req.). . . .

Although Greiff tried to invalidate the postnuptial agreement, claiming it was a sham, a divorce court in Florida upheld it in 2012, the article recounts. He is now reportedly penniless and living with his mother.

[Lawyer] declined comment but his law firm called the suit meritless and said it intends to mount a vigorous defense.

Assume everything defendant asset-protection lawyer did in this case was perfectly legal and he at all times acted in the best interest of his client. It doesn’t matter! The risk of this outcome was always present, and even if lawyer wins the malpractice suit, he still loses: no one’s paying him to engage in the litigation he now finds himself the target of (a cost that will likely dwarf his fees in this case by many multiples), nor will any of the publications reporting on the case run eye-catching headlines when the malpractice claim is ultimately resolved (even if lawyer wins across the board).

CASE NO. 2:

In re Cutuli, 2013 WL 5236711 (Bkrtcy.S.D.Fla. September 16, 2013)

Things went really bad for this debtor in California, where she resided prior to moving to Florida and declaring bankruptcy. In California, all of the debtor’s asset-protection planning not only didn’t work, it actually made things far worse: the California court entered judgment for compensatory damages for fraudulent transfers of almost $2.8 million, plus another $1.8 million in attorney’s fees, and $227,032 in interest — for a total of $4.8 million. The California court then tacked on an additional $10 million in punitive damages! See Judge orders couple to pay $14.8 million in alleged financial fraud. By the way, the risk of punitive damages in a fraudulent transfer case isn’t an aberration unique to some quirk of California law, it’s a fact of life anyone thinking about dipping a toe into one of these cases in any state (including Florida) better factor into the cost-benefit analysis. A point emphasized by WSJ blogger Jay Adkisson in this blog post, in which he states:

The sad thing is that we keep seeing some incompetent planners falsely advise their clients to the effect of “go ahead and make a fraudulent transfer, because all the creditor can do is to unwind the transfer, and so you can be no worse off”. This statement is far from reality: Not only can a fraudulent transfer lead to a denial of discharge for a debtor or exception of a particular claim from discharge in bankruptcy, but in many states punitive damages can be awarded against debtors and transferees.

On this point, a recent article by Alan Gassman & Charlie Lawrence, “Imposing Punitive Damages on Fraudulent Transfers” in Steve Leimberg’s Asset Protection Planning Newsletter Issue #235 (January 15, 2014), provides an excellent state-by-state survey of the punitive damages in the fraudulent transfer context.

Now back to the case. Against the backdrop of the California debacle, debtor hires Florida lawyer to do what? You guessed it: asset protection planning.

A big difference I see between litigators and non-litigators is the amount of email traffic generated by your typical non-litigator. If you’re not used to the threat of having your emails disclosed in litigation, you’re going to write all sorts of things in your supposed “confidential” emails that could, at the very least, be embarrassing when read in retrospect. And how did the bankruptcy trustee end up getting a hold of these emails? The court entered an ex parte order authorizing a surprise raid of the debtor’s home, which resulted in her home computer getting swiped. Yeah, that’s the sort of thing that can happen when the gloves come off. Here are key facts disclosed in the Florida firm’s email traffic, as recounted in the linked-to order above:

9. The electronic communications apparently included emails between the Debtor, Greg Cutuli, and The [Firm] attorney, [attorney], purporting to relate to “offshore info” and “information on the WY LLC in=regards [sic] to asset protection …” [ECF 866–1 at ¶ 5; 866–2]. Other emails request a “description regarding the protections offered by =the [sic] Wyoming LLC that we are about to enter into” and state “I would like to discuss=it [sic] with our accountant and one of Kathy’s attorneys.” [ECF 866–3 at p. 6 of 15].

10. One email attachment describes the “benefits of the Wyoming Close Limited Liability Company,” including a discussion of the limitations that structure imposes on creditor’s rights and specifically the limited efficacy of charging orders issued against Wyoming LLCs. [ECF 866–2 at p. 7 of 15]. Another attachment states: “Asset Protection: It is difficult for a member’s creditor to reach the assets of the LLC. Under Wyoming law, the creditor of a member can only reach distributions made to the member, but the creditor cannot force the LLC to make such distributions.” [ECF 866–2 at p. 1 of 15; and 12 of 15].

11. The Trustee contends The [Firm] holds itself out as a law firm providing estate planning and asset protection services to its clients. [ECF 866–1 at ¶ 6; see also . . .], that the email communications between the Debtor, Greg Cutuli, and The [Firm] occurred during the same time period that Greg Cutuli and the Debtor were allegedly engaged in a “conspiracy to defraud creditors” and, therefore, the Trustee should be allowed to obtain discovery from The [Firm] to determine whether assets rightfully belonging to the estate were transferred in an effort to defraud the creditors of the estate. [ECF 865–2 at 2–23; 865–2 at 23; 865–3 at 1–5; 865–4 at 1–10].

The easy dig against the firm on the receiving end of all this attention is that, fairly or unfairly, the email traffic created arguably self-incriminating statements involving “asset protection planning” by the debtor. My critique if more basic. Why get yourself involved in this kind of case to begin with? Even if your emails were pristine, you’re still going to end up playing defense in someone else’s lawsuit . . . and doing a lot of work no one is probably paying you for. Putting aside the practice-management issues raised by this kind of work, the bankruptcy court’s privilege rulings are instructive for any kind of planning work you might do. If your planning work is going to end up playing center stage in a bankruptcy proceeding, assume all of your confidential attorney-client communications are going to come out. Why? Because once your client declares bankruptcy, she no longer owns the privilege . . . it now belongs to the trustee (i.e., the party now suing your client).

As the Court has already found in its August 5, 2013 Order: “the Debtor’s attorney-client privilege is held by the Trustee and has been waived.” [ECF 869]. See In re Smith, 24 B.R. 3, 4 (Bankr.S.D.Fla.1982); e.g., In re Williams, 152 B.R. 123, 124 (Bankr.N.D.Tex.1992) (transfer of right to pursue avoidance actions also effects transfer of evidentiary privileges); In re Hotels Nevada, LLC, 458 B.R. 560, 564 (Bankr.D.Nev.2011)(trustee is successor to debtor with respect to attorney-client privilege; turnover ordered regarding debtor and non-debtor materials from law firm).

But even if there’s some viable exception to this bankruptcy rule, if the judge’s already made up his mind your client is the bad guy, and your “asset protection” work is getting blamed for making everyone’s job way harder than it has to be, expect you’ll be on the receiving end of a crime-fraud exception ruling . . . no matter how innocent you may be, which is what happened in this case.

“[F]or the crime-fraud exception to apply, ‘the attorney need not himself be aware of the illegality involved; it is enough that the communication furthered, or was intended by the client to further, that illegality.’” In re Grand Jury Proceedings, 87 F.3d 377, 381 (9th Cir.1996). Here, the Trustee has demonstrated that the Debtor and Greg Cutuli attempted to defraud creditors by transferring and hiding assets at or before the time The [Firm] was consulted, and that they may very well have used the services of The [Firm] to further a scheme to defraud. . . . As such, the Court concludes that there is sufficient evidence already in the record to indicate that when the Debtor and Greg Cutuli sought advice from The [Firm] regarding “asset protection” and “off-shore accounts,” they were in the process of committing fraud, and subsequently committed fraudulent acts after consulting with The [Firm]. . . . Whether The [Firm] was aware of the reasons the Debtor and Greg Cutuli used their services is not relevant to the application of the crime-fraud exception and this Court makes no finding on that issue. The fact that The [Firm’s] services were used during (and prior to) a scheme involving the commission of multiple acts of fraud related to the information obtained through said services is sufficient. Therefore, the Court overrules The [Firm’s] objections to the subpoena under the crime-fraud exception to the attorney-client privilege.

WSJ blogger Jay Adkisson does a thorough job of dissecting this case in a post entitled Fraudulent Transfers Trigger Crime/Fraud Exception And $10 Million Punitive Damages In Cutuli. If you’re still dead set on doing asset protection work, you’ll want to subscribe to Jay’s blog and hope you never end up on the receiving end of one of his withering assessments of botched lawyering by folks who really should know better. For purposes of this blog post, here’s an excerpt from Jay’s blog post that goes to my point: asset protection planning = DANGER FOR LAWYERS:

Folks, I’m here to tell you: Whatever planners may think of asset protection planning as a legitimate area of practice, the Courts just don’t see it that way. Instead, the Court’s see asset protection not as a legitimate practice area, but instead as debtors engaged in planning to cheat their creditors — and it is mainly because of cases like this (which, again, do not involve anything like legitimate asset protection planning) why Courts usually harbor that impression.

Let me put it another way: What might sound like a good idea to help clients while in the comfortable confines of one’s conference room, might later sound like an utterly blatant scheme to cheat creditors in the courtroom. Very simply, judges want to see debtors pay their debts, and they get mad when debtors engage in schemes to keep from paying their debts. Superficial explanation that the debtor was engaged in “estate planning” or anything else, usually falls on deaf ears when it is obvious to the Court what is really going on.