Recent newspaper stories reporting on multimillion dollar lawsuits involving two of the wealthiest families in the United States, the Pritzkers (reported here by the New York Times) and the duPonts (reported here by the Daily News), are interesting for many reasons. The angle I find most interesting is to ask myself what could have been done to avoid litigation in the first place. Both cases seem to revolve around disputes over the administration of family trust funds (versus a zero-sum dispute over a set pot of money by conflicting parties). Without knowing more about these cases, I’d guess the manner in which the subject trust agreements were drafted is in all likelihood at least partly to blame for the current litigation. Trust documents that may (either initially or over time) govern huge sums of money and span several family generations must be drafted with (1) enough specificity to accomplish the original founder’s goals while (2) also allowing for enough flexibility to work through unforseen future contingencies – without having to go to court. A poorly drafted trust agreement gives the parties only two choices: do nothing or sue. A properly drafted trust agreement provides multiple options for conflict resolution/avoidance between those two extremes. As I previously wrote here, the amount of wealth flowing into multi-generational trusts or “dynasty trusts” is skyrocketing (current estimates are in the $100 billion range). In the absence of carefully drafted trust agreements, more trust litigation of the type reported above seems inevitable.

  • The following are excerpts from the New York Times article on the Pritzker trust litigation:

The Pritzker clan, [Chicago’s] first family of fortune and philanthropy, has been riven by accusations of betrayal, self-dealing and conflicts of interests, according to court records unsealed here Tuesday. The revelations come halfway through a secretive decade-long process in which the Pritzkers must untangle and liquidate huge holdings, including their signature Hyatt hotel chain and the 60 companies in the $6 billion Marmon Group, in order to divide the assets by 2011. The family fought fiercely to keep the records sealed – and the schism secret – but The Chicago Tribune successfully sued to bring them to public light. The current fight began in July 2000, months after Jay Pritzker’s funeral, when six of the cousins – Dan, James, J. B., John, Linda and Tony – wrote the others questioning “whether the structure of our family enterprise needs to be updated.” Quoting “Great Grampa Nicholas,” the cousins worried that as the growing clan developed divergent interests, members would “feel unfairly treated, and that strains and tensions may develop among people who should be a loving family.” Their letter said information about the family’s fortune was too tightly held and asked for more independence in making charitable gifts. “We do not want a divisive process that leaves hurt feelings,” it said. But when the requests were refused, the cousins hired lawyers, and soon conference rooms were filled with documents. They settled about 18 months later, devising a 10-year plan, and went to court only for a limited proceeding to make the agreement binding on future generations. (Emphasis added.)

  • The following are excerpts from the Daily News article on the duPont trust litigation:

He’s a direct descendant of one of America’s wealthiest families, but Alexis du Pont de Bie Sr. says he’s now “literally destitute and homeless” – at least by du Pont standards. He grew up in a house with 20 bedrooms and 13 bathrooms, set on a 260-acre estate in Delaware, but now he sleeps on the sofas of kindhearted friends. He once had a trust fund worth $7 million, but now it’s worth only $2.7 million – trimming his monthly allowance to $3,000. De Bie is suing two management companies, Tredegar Trust Co. and Middleburg Financial Corp., both of Virginia, for mismanaging the trust fund, forcing him to live on a working-class salary. Neither Tredegar nor Middleburg returned calls for comment. The suit seeks $60 million – $10 million based on what the trust would be worth had it been properly invested and $50 million in punitive damages. It also seeks to have a new trustee appointed. (Emphasis added.)

Iraqi Heir Loses Half of Estate, Blames Bank After years of litigation, plus an appeal to Georgia’s Supreme Court (see Namik v. Wachovia Bank of Ga., 612 S.E.2d 270 (Ga. S. Ct. 2005), the Court of Appeals in Georgia recently upheld a $1.1 million judgment against Wachovia Bank of Georgia for failing to avoid estate taxes on trust assets held for a non-resident-alien (“NRA”) (see Wachovia Bank of Ga. v. Namik, 620 S.E.2d 470 (Ga. Ct. App. August 25, 2005). Although the latest appeal in this case was published in August of 2005, the trial took place in 2002. Here’s an excerpt from this 2003 newspaper story regarding the facts of the case:

The case tests to what extent a bank can be held responsible for investment decisions that expose an estate to higher taxes. The issue is clouded, however, by the bank’s unsuccessful efforts to contact the client, who died in an Iraqi prison. Issam Namik, son of retired Iraqi general Ibrahim Namik Ali, claims Wachovia mismanaged a living trust his father established with the bank in 1989. The bank, he claims, failed to follow Ali’s instructions and unnecessarily exposed the $3 million estate to $1.4 million in estate taxes. In December 2002, a Fulton County probate judge ordered the bank to pay $1.1 million to the estate. According to documents in the trial and appeals courts, Ali came to Atlanta in the spring of 1989 to visit his son. While he was here, he set up a living trust at Wachovia. Ali bought three certificates of deposit, two for $350,000 and one for $2.65 million. The bank sent Ali to trust officer Thomas Slaughter, who set up the revocable living trust with the understanding that when the largest CD matured, the proceeds would fund the trust. Ali told the bank he wanted the funds invested only in U.S. government backed investments, and Slaughter set down Ali’s instructions in a memo, according to court documents. The largest CD matured in September 1989, with $2,780,380 rolling into Ali’s trust. A new trust officer tried repeatedly to contact Ali, using the phone number and addresses Ali had provided earlier that year, but failed. Namik claimed he ordered the bank to stop trying to contact his father because Ali had been arrested on his return to Iraq and was in danger. Meanwhile, in order to avoid what it thought would be a 30 percent income tax withholding requirement, Wachovia parked the funds from the Ali trust in a tax-free Fidelity money market account while awaiting further instructions from Ali. Those instructions never came. Ali, arrested immediately and without explanation upon his return to Iraq, died in custody in May 1990. Namik didn’t learn of his father’s death until 1992 and did not inform the bank until 1994. Wachovia didn’t receive a death certificate until 1995, and that’s when the legal struggle began. (Emphasis added.)

Lesson Learned: U.S. situs assets held by non-resident-aliens (“NRAs”) are subject to U.S. estate taxes (see IRC § 2101 and IRC § 2106). Avoiding this tax is so simple U.S. corporate trustees run the risk of getting sued when beneficiaries learn that dad’s savings account just got chopped in half to pay easily avoidable U.S. estate taxes (which is what happened to Wachovia in this case). In this case Wachovia learned that short-term U.S. treasury bills (under 183 days) are subject to U.S. estate tax, while long-term U.S. treasury bills are not (see IRS Technical Advice Memorandum 9422001). Any corporate trustee that services NRA clients owes it to itself (and its shareholders) to know these tax situs rules cold.

Estate tax returns are complicated and technically demanding for even the most experienced attorney or CPA. Add to that mix the pressure sometimes applied by family members who are flabbergasted by the amount of tax they have to pay.

This story should be shared with any client tempted to push the envelope or play the audit lottery with the IRS when it comes to estate taxes. As reported here, a Texas lawyer is going to JAIL for intentionally falsifying an estate tax return. Here are a few excerpts from the linked-to story:

U.S. District Judge Robert Junell sentenced Ashley, 44, to two years in federal prison Tuesday on two charges related to tax fraud. Ashley was also ordered to pay $5,200 in fines and will be on supervised release for two years after he is released from prison.

Ashley admitted that during the preparation of the tax return of his father’s estate, he directed his secretary to type four backdated gift deeds falsely reflecting that his father, Connell D. Ashley, had deeded a certain portion of a ranch he owned to his sons in 1989, 1990, 1991 and 1992, a news release said. In fact his father had not truly begun to deed portions of the ranch to Stephen Ashley or his brothers until 1993, the release said.

U.S. Attorney Johnny Sutton said in a news release that Stephen Ashley also had his father’s former secretary forge a signature on the false deeds and had false notary records created.

Source: You and Yours Blawg

Smith v. Smith, 2005 WL 3439889, 30 Fla. L. Weekly D2845 (Fla. 5th DCA Dec. 16, 2005)

Both in the divorce context and for estate planning purposes, reviewing beneficiary designation forms for insurance policies, IRAs, and pension plan benefits is one of those “to do” items that often gets left to the end. Well, this case should be the sort of cautionary tale you may want to share with those clients who never quite get around to signing their change of beneficiary designation forms.

As part of Mr. and Mrs. Smith (that’s their real names) divorce, they signed a marital settlement agreement (prepared by Mrs. Smith) splitting everything up including, at least they thought, their respective insurance policies, IRAs and pension plans. Unfortunately for the beneficiaries of Mr. Smith’s estate, he sat on the change of beneficiary designation forms for a year and half before he died – without having executed the forms (oops!). Seminole County Trial Judge Nancy F. Alley sided with Mr. Smith’s estate, and ruled that the marital agreement was enough all by itself to entitle the estate to the disputed funds generated by Mr. Smith’s life insurance policies and retirement plan benefits. The Fifth DCA said not so fast, reversing the trial judge based on the following:

In Cooper v. Muccitelli, 661 So.2d 52 (Fla. 2d DCA 1995) (“Cooper I”), the Second District Court of Appeal held that “without specific reference in a property settlement agreement to life insurance proceeds, the beneficiary of the proceeds is determined by looking only to the insurance contract.” Id. at 54. The Florida Supreme Court affirmed, saying that a contrary holding would put insurance companies in an “impossible position.” Cooper v. Muccitelli, 682 So.2d 77, 79 (Fla.1996) (” Cooper II”). The high court pointed out that despite specific and clearly worded language in an insurance contract, a carrier could never be certain to whom to pay the proceeds. The lesson from Cooper I and Cooper II is that while it may be possible in a marital settlement agreement to waive one’s right as a beneficiary of insurance policies, that waiver can only be accomplished if the waiving party specifically gives up his or her rights to the “proceeds” of these policies.FN1 Otherwise, one must look only to the beneficiary designation made by the insured and filed with the insurer. In the present, case the marital settlement agreement fails to make specific reference to the proceeds of the life insurance policy in question, and the decedent, in the words of the Florida Supreme Court in Cooper II,”did just what he needed to ensure that the proceeds would go to [Ms. Smith]-he did nothing.” Cooper II, 682 So.2d at 79. He had a year and a half to execute change of beneficiary forms as required by his policy of insurance, but for whatever reason, he did not do so. Thus, Ms. Smith is entitled to the proceeds of the life insurance policies. (Emphasis added.) FN1. Obviously some other language such as “death benefits” would likely suffice.

The Fifth DCA came to the same conclusion with respect to the decedent’s IRAs and pension plan benefits: no change of beneficiary form means the disputed funds go to the original beneficiary – Mr. Smith’s ex-wife.

If you’re like most attorneys whose practice includes probate litigation, you rarely have a chance to attend the Probate & Trust Litigation Committee meetings. Even if you can’t go to the meeting, you may want to take a look at the committee-meeting materials (which I’ve posted here and here). The committee is involved in several initiatives (all of which are discussed in the posted materials) that could have a big impact on your practice, including:

  • Contestability of Revocable Trusts.
  • Fiduciary Lawyer-Client Privilege.
  • Use of trust assets to pay attorneys’ fees of the trustee in litigation against a beneficiary.
  • Enforcing arbitration clauses in Wills and Trusts.
  • Appealing Orders entered in a Probate Proceeding.
  • Collateral Attack on the Validity of Marriage after Death Based Upon Undue Influence.
  • Enforceability of Exculpatory Clauses in Wills.

Popp ex rel. Estate of Davis v. Rex, 2005 WL 3299727, 30 Fla. L. Weekly D2760 (Fla. 4th DCA Dec 07, 2005) I’ve written before (see here) on how challenging it can be for attorneys drafting estate-planning documents to cover every issue that possibly could come up decades in the future when the document is put to the test in a probate-related dispute. Even minor mistakes/omissions can morph into years of probate litigation. Well, that’s exactly what happened in this case. The case involves the reformation of the Virginia F. Davis 1986 Irrevocable Trust (the “1986 trust”), which provided that when Mrs. Davis died it would be divided in half with one share for each of her two sons and each son’s share would be distributed in three installments-one immediately, one five years later, and the last one five years after that. Mrs. Davis died on November 2, 2000, predeceased by her husband (i.e., about 14 years after the 1986 trust was signed). The litigation in question arose in the context of probate-administration proceedings involving one of Mrs. Davis’ children, Scott F. Davis, who died without issue on November 19, 2002 (i.e., about 16 years after the 1986 trust was signed) – having received only one of the three installment payments he was originally entitled to under the 1986 trust. Under Mr. Davis’ will, the residuary beneficiaries of his estate were the Pittsburgh State University Foundation, Inc. and the WPBT Communications Foundation, Inc. According to the Fourth DCA, the 1986 trust contained the following drafting error:

The 1986 trust, as a result of a drafting error, omitted instructions as to what would happen if one of the sons died without children before he had received his installment payments. The trust provisions expressly covered what would happen if a son died with children (providing that the unpaid installments would go to those children) but stopped without going to the next step, directing where the unpaid installments should go if a son had no issue. (Emphasis added.)

Based on the following evidence, Palm Beach County Judge Gary L. Vonhof entered a final judgment reforming the 1986 trust so that the share of a deceased son without issue would go to the other son:

  • Testimony of drafting attorney in favor of the requested trust reformation;
  • Testimony of a financial advisor who worked with Mrs. Davis in connection with creating the 1986 trust, also in favor of the requested trust reformation; and
  • The text of a comparable, but separate, revocable trust established by Mrs. Davis that provided that in the event one of her two sons died without issue, his share was to go to her other son.

The Fourth DCA upheld the trial court’s ruling, based on the following:

When this court previously decided [Davis v. Rex, 876 So.2d 609 (Fla. 4th DCA 2004)], we sent the case back to the trial court to determine if the trust should be reformed. We held, citing In re Estate of Robinson, 720 So.2d 540, 543 (Fla. 4th DCA 1998), “that a trust with testamentary aspects may be reformed after the death of the settlor for a unilateral drafting mistake so long as reformation is not contrary to the interest of the settlor.” Davis, 876 So.2d at 611. This mistake must be shown by clear and convincing evidence. Robinson, 720 So.2d at 542.

Any time an attorney writes himself or one of his relatives into a client’s will, red flags should shoot up all over the place. If this same attorney is also cutting the testator’s family out of the will, the ethical and legal issues become so thick the attorney is almost guaranteeing future litigation over the will. That’s exactly what happened in a St. Petersburg, Florida, case, as reported in this newspaper story. Here are a few excerpts from that story:

The millionaire walked into the St. Petersburg law office. Harry Lieffers Jr., 76, looked over a five-page document and, with a few strokes of a pen, cut his two daughters and stepson out of his will. On that October day in 2003, Lieffers decided that his roughly $1.5-million estate would be divided equally among two people: His 43-year-old real estate agent and the agent’s 22-year-old girlfriend. “I wish to reward them for the kindness they have shown me,” the will said. The attorney who drafted the will was the girlfriend’s uncle. The document, filed after Lieffers’ death last month, is the latest point of contention in a two-year battle over Lieffers’ health and estate. Lieffers’ children say he was vulnerable because of dementia and Alzheimer’s disease. They say his real estate agent, Gerard Growney, and the attorney, Alan Watson, took advantage of Lieffers. The family has filed a complaint against Watson with the Florida Bar and plan to contest the will. * * * * Lieffers’ children know a lengthy court battle may wipe out all of the funds, but they believe Lieffers would have wanted them to push forward. “If we ever needed Dad, he was there for us,” said daughter Reibel. “We will continue to be there for him, to preserve his last wishes now that he is gone.” (Emphasis added.)

Did Drafting Attorney Violate Florida Bar Ethics Rule? Based on the linked-to story, the answer appears to be NO. Rule Reg. Fla. Bar 4-1.8(c) prohibits an attorney from preparing an instrument giving the attorney or a person “related” to the attorney any substantial gift from a client, including a testamentary gift, unless the client is related to the proposed donee. An attorney’s niece or nephew is not considered “related” for purposes of this rule. The Florida Bar will have to grapple with this case, but the overriding question for all concerned should be “why get caught up in this mess to begin with?” Contested Guardianship Proceeding as Precursor to Probate Litigation One final note, if you read the linked-to story you’ll note this family drama started out as a contested guardianship proceeding, emphasizing once again the remarks I’ve made (see here and here) regarding how these types of proceedings usually end up being precursors to probate litigation. Perhaps if someone had sought discovery of Mr. Lieffers’ will as part of the contested guardianship proceedings the parties would have found out about his will’s controversial dispositive provisions before his death and worked out these issues while he was still around to comment. Source: Thanks to Heraldblog@gmail.com for brining this item to my attention!

When I wrote about the brewing probate dispute involving Rosa Park’s estate, I mentioned that contested guardianship proceedings are often simply precursors to the real battle: probate litigation. An on-going guardianship dispute that is now receiving national attention, as described in this New York Times article, also highlights a second issue driving many guardianship disputes: forum shopping. In this case, the family is split over whether a court in Texas or one in New Jersey should have jurisdiction over the dispute. The following are a few excerpts from the New York Times article:

Lillian Glasser, by all accounts, never intended to spend her twilight years in Texas. Or her $25 million fortune. Beyond the personal drama, the case highlights the checkerboard practices of local probate courts, which govern the transfer of property from people who die or are declared incompetent. The courts are not federally regulated, but in response to a growing number of interstate disputes, the National Conference of Commissioners on Uniform State Laws is drafting nationwide probate standards similar to those in the field of child custody. “These cases are popping up all over the country,” said Terry Hammond, executive director of the National Guardianship Association, a nonprofit group of lawyers, social workers and other professionals seeking uniform standards. “The combination of the mobile character of society plus the demographics of an aging population combine to create a potentially volatile situation,” said Mr. Hammond, a lawyer in El Paso who briefly represented Mrs. Glasser’s son in the Texas dispute. To Russell Verney, an investigator with Judicial Watch, which has been studying probate courts, the issue boils down to “forum shopping.” “In my opinion,” Mr. Verney said, “this is a case about a resident of New Jersey who amassed her fortune in New Jersey and never indicated any interest in subjecting herself or her estate to the probate laws of Texas. If anyone has jurisdiction, it should be the State of New Jersey.”

Sharon B. Gardner, a Texas lawyer representing Ms. Glasser’s daughter and former guardian, Suzanne Matthews, has responded publicly to the charges being made against her client (and the jurisdiction of the Texas courts) in an e-mail message published here on the Wills, Trusts and Estates Prof Blog. As reported here, in the latest turn of events the case has wound up in Federal Court, where a judge ruled yesterday. Here are a few excerpt from the linked-to story describing the judge’s ruling:

In a sharply worded order that spanks the squabbling children of Lillian Glasser, the 85-year-old New Jersey woman mired in a nasty Texas probate struggle, U.S. District Judge Fred Biery took over a chunk of the complex case Wednesday. Calling the dispute a “legal fratricide” between sibling rivals that has consumed millions of dollars in attorneys’ fees, Biery’s order said “the end result … is the creation of a Glasser chess game in which Mrs. Glasser has become a pawn.” His ruling sends parts of the case back to Bexar County Probate Court where a trial will be held over who should become the guardian of Glasser and her $25 million estate. But because the principal parties come from three states, Biery kept control over other issues.

Wilson v. Robinson, 2005 WL 3499495 (Fla. 5th DCA Dec 23, 2005) 2005->Ch0744->Section%20312#0744.312″>F.S. § 744.312 lays out the statutory preferences and factors applicable in Florida regarding the appointment of guardians. In this case Robert Wilson appealed an order entered by Seminole County Judge James E.C. Perry denying his petition to be appointed plenary guardian of his wife, Beverly Wilson (who was incapacitated due to Alzheimer’s disease), and, instead, appointing their daughter, Bambi Robinson, to serve as Ms. Wilson’s guardian. Although unclear from the opinion, it appears Ms. Wilson expressed a preference for the appointment of her husband as her guardian. On appeal, the Fifth DCA upheld the trial court’s appointment of Ms. Wilson’s daughter as plenary guardian based on the following:

“[I]n guardianship cases, as in other cases, discretionary acts are subject to the test of reasonableness, i.e., they must be supported by logic and justification for the result and founded on substantial, competent evidence.” In re Guardianship of Sapp, 868 So.2d 687, 693 (Fla. 2d DCA 2004) (citing In re Guardianship of Sitter, 779 So.2d 346, 348 (Fla. 2d DCA 2000)); see generally Canova v. Smith ex rel. S.G.S., 854 So.2d 852 (Fla. 5th DCA 2003) (upholding a guardianship decision because it was supported by substantial competent evidence). Discretion is abused when no reasonable person would take the view adopted by the trial court. Canakaris v. Canakaris, 382 So.2d 1197, 1203 (Fla.1980). The trial court’s discretion in the selection of a guardian has been described as “limited discretion” in the sense that it must be exercised consistent with the Florida Statutes. See Poteat v. Guardianship of Poteat, 771 So.2d 569, 572 (Fla. 4th DCA 2000) (citing In re Castro, 344 So.2d 270, 271 (Fla. 4th DCA 1977)). (Emphasis added.)

Fleming v. Demps, 2005 WL 3481367 (Fla. 2d DCA Dec 21, 2005)

In this case there was a dispute regarding whether $317,000 in a certain bank account belonged to the probate estate or the decedent’s niece, Ms. Henrietta Fleming, the designated beneficiary of the account. This is the sort of issue probate judges deal with every day. Which may explain in part why Hillsborough Judge Rex Martin Barbas felt it was OK to enter a final judgment ruling in favor of the estate and against Ms. Fleming without conducting an evidentiary hearing.

Ms. Fleming appealed, and the Second DCA reversed the trial judge on the following due-process grounds:

Concerning the lack of an opportunity to be heard prior to entry of the final judgment, “[d]ue process requires that a party be given the opportunity to be heard and to testify and call witnesses on his behalf, and the denial of this right is fundamental error.” Pettry v. Pettry, 706 So.2d 107, 108 (Fla. 5th DCA 1998) (citations omitted); see also Pope v. Pope, 901 So.2d 352, 353-54 (Fla. 1st DCA 2005) (same); Hinton v. Gold, 813 So.2d 1057, 1060 (Fla. 4th DCA 2002) (same). Here, the personal representative’s motion of March 1, 2004, to determine who is the rightful owner of the funds and whether the funds should be administered as estate assets or otherwise distributed to the proper owner was resolved without giving Ms. Fleming any opportunity to be heard and to present evidence on the issues. (Emphasis added.)

Lesson Learned:

The probate-administration process is often criticized as being too slow and costly. In contested proceedings, this criticism can conflict with basic notions of fairness underlying every Floridian’s due process rights. Hopefully the parties (and the trial judge) will realize this without having to incur the extra cost and expense associated with appellate proceedings.