Domestic Asset Protection Trusts: The Next State Trend?
Sharon L. Klein i
Many states have recently enacted or introduced decanting legislation and several
states have recently enacted or introduced directed trust legislation. As part of
continuing efforts for states to stay competitive, domestic asset protection may be the
next trend.
Virginia recently enacted asset protection legislation, which will become effective July 1,
2012. Now Ohio becomes the latest state in which asset protection legislation has been
introduced. One of the reasons for the introduction of detailed legislation in Ohio on
May 23, 2012 is reportedly to enhance the attractiveness of Ohio as a jurisdiction in
which to remain, rather than having residents move to other states to protect their
wealth.
Included in the Ohio proposal is the Ohio Legacy Trust Act, which contains detailed
asset protection provisions.
Virginia’s asset protection legislation was signed into law by the Governor on April 4,
2012.
Virginia – Domestic Asset Protection Legislation Enacted
The new Virginia law allows assets transferred by a settlor to an irrevocable trust to be
protected from creditors if the following conditions are met:
1. The trust is irrevocable;
2. The trust is created during the settlor’s lifetime;
3. The settlor is a discretionary beneficiary only pursuant to the discretion of an
independent trustee, and there is at least one other beneficiary;
4. The trust has at least one trustee who resides in Virginia or is an entity
authorized to engage in trust business in Virginia who materially participates in
the administration of the trust within Virginia;
5. The trust expressly incorporates Virginia law to govern the validity, construction
and administration;
6. The trust includes a spendthrift provision; and
7. The settler does not have the right to veto trust distributions.
Among other reasons, the trust will not be deemed revocable merely because the settlor
has a special testamentary power of appointment or because the trust instrument
expressly provides for the direct payment of income taxes attributable to trust income or
the reimbursement to the settlor for such tax payments.
There is a five-year statute of limitations for creditor’s actions, which runs from the date
of transfer to the trust. A subsequent transfer to the trust will not reset the running of the
limitations period. Each limitation period commences on the date of each respective
transfer, and a distribution to a beneficiary is deemed to have been made from the latest
transfer.
A trust established in another jurisdiction that is moved to Virginia, and meets all the
statutory requirements, will be treated as a transfer to the trust on the date the trust is
moved.
Ohio Legacy Trust Act – Domestic Asset Protection Legislation Proposed
The proposal allows for the creation of a “legacy trust” by which a “transferor” is given
the ability to make a “qualified disposition” of assets and remain a beneficiary through
actions of a “qualified trustee.” The transferor must sign a notarized “qualified affidavit”
before or contemporaneously with the qualified disposition and provide that the
transferor will not be rendered insolvent, does not intend to defraud creditors, has no
pending/threatened court actions and does not contemplate bankruptcy.
Creditors would generally be prohibited from bringing any action against any person
who made or received a qualified disposition, against any property held in a legacy trust
or against any trustee of a legacy trust. A creditor can bring an action to avoid a
qualified disposition on the grounds that the disposition was made with specific intent to
defraud the specific creditor bringing the action.
If the creditor was a creditor before the qualified disposition, the action must be brought
by the later of (1) 18 months after the qualified disposition or (2) 6 months after the
qualified disposition is or could reasonably have been discovered if the creditor files a
suit or makes a written demand for payment within 3 years after the qualified
disposition. If the creditor became a creditor after the qualified disposition, the action
must be brought within 18 months. The burden is on the creditor to prove the matter by
a preponderance of evidence. The court must award attorney’s fees and costs to the
prevailing party. Protection is provided for trustees and attorneys involved in the
creation and administration of a legacy trust.
Any person can serve as an advisor of a legacy trust, except that a transferor can act as
an advisor only in connection with investment decisions. Advisors are considered
fiduciaries.
The transferor may retain the right to veto distributions from the trust, remove and
appoint advisors or trustees, hold a special testamentary power of appointment and be
a discretionary income or principal beneficiary.
A legacy trust must:
1. Have at least one trustee who resides in Ohio or is an entity authorized to act as
trustee in Ohio who materially participates in the administration of the trust;
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2. Expressly incorporate Ohio law to wholly or partially govern its construction and
administration;
3. Expressly state it is irrevocable; and
4. Include a spendthrift provision.
The new law would apply to all qualified dispositions made on or after the legislation’s
effective date.
In addition to the Legacy Trust Act, other significant changes to Ohio law are proposed,
including the following:
Increase in Homestead Exemption
The interest in a residence that is exempt from creditors would increase from $20,200 to
$500,000.
529 Plan Exemption
The current exemption for certain payments or rights to assets in accounts, such as
IRAs, would be expanded to 529 Plans.
Reimbursement of Income Taxes to Grantors of Intentionally Defective Grantor
Trusts
Whether or not the trust contains a spendthrift provision, a trustee's discretionary
authority to pay directly or reimburse the settlor amounts for income taxes payable on
trust income will not subject those amounts to the claims of the settlor’s creditors.
A similar provision was recently enacted in Virginia (effective as of July 1) and another
(modeled on current New York law) is pending in New Jersey, but has not yet passed
either house.
Payment of Beneficiary’s Expenses Permitted
Regardless of whether a beneficiary is subject to creditors’ claims, a trustee can pay
any expense of a beneficiary permitted by a trust instrument. Even if the payments
exhaust the trust funds, the trustee will not be liable to a beneficiary’s creditors.
Administrative Fiduciaries Have No Other Responsibilities
If a fiduciary is appointed to handle only administrative duties, the fiduciary will have no
duties other than administrative duties specifically described and will have no obligation
to perform investment reviews or make investment recommendations if there is an
investment director.
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Sharon Klein is the Managing Director & Head of Wealth Advisory
Lazard Wealth Management LLC
30 Rockefeller Plaza
New York, New York 10020
Phone Number: 212-332-4504
Fax Number: 212-830-5023
E-Mail: [email protected]
www.lazardwm.com
This material is written by Lazard Wealth Management LLC for general informational purposes only and
does not represent our legal advice as to any particular set of facts and does not convey legal,
accounting, tax or other professional advice of any kind; nor does it represent any undertaking to keep
recipients advised of all relevant legal and regulatory developments. The application and impact of
relevant laws will vary from jurisdiction to jurisdiction and should be based on information from
professional advisors. Information and opinions presented have been obtained or derived from sources
believed by Lazard Wealth Management LLC to be reliable. Lazard Wealth Management LLC makes no
representation as to their accuracy or completeness. All opinions expressed herein are those of the
author and made as of the date of this presentation and are subject to change.
Copyright  2012. All Rights Reserved
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, please be
advised that any tax advice contained in this communication (including any attachments) is not intended
or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal
Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter
addressed herein.
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A 40% Discount on a 100% Partnership Interest?
(Estate of Lockett i )
By Lance Hall, ASA *
When Mrs. Lockett’s health declined, she was moved into an assisted living
facility and a family limited partnership was formed. Two years later, after going
through a number of advisors, ceding durable power of attorney to her two sons,
and executing a new limited liability partnership agreement, Mrs. Lockett funded
the Partnership with cash and marketable securities from her Trust and from her
personal assets. Later, the Trust was dissolved and Mrs. Lockett became the
sole owner of the Partnership. The Partnership agreement listed the two sons as
general partners, but the sons never contributed any assets to the Partnership
and their interests in the agreement were listed as zero. On the Partnership tax
returns, Mrs. Lockett was listed as the 100-percent owner of the Partnership and
the income tax returns allocated 100 percent of the income to Mrs. Lockett.
Soon after the funding of the Partnership, loans were made from the Partnership
to the various children. These loans, in most cases, were evidenced by loan
agreements, with interest payments due at particular times and with no terms for
principal payments. The children missed scheduled payments on interest,
although some interest and principal was paid.
After the funding, the Partnership also purchased some rental real property. Mrs.
Lockett also retained sufficient assets outside of the Partnership for her care.
The Estate filed a tax return, taking a 40-percent discount on the assets within
the Partnership. At trial, the Estate and the IRS stipulated to the undiscounted
value of the underlying assets in the Partnership. The value of the notes was
listed at face value with no discounts.
The questions before the Court were whether (a) Mrs. Lockett held the assets
individually or in the Partnership, and (b) the loans were gifts or loans.
The Court’s Analysis
Existence of Partnership
While the Estate tried to argue that the two sons held 1 percent general partner
interests (or in the alternative, an 11.68 percent general partner interest), the
Court could find no evidence of property contributed by the two sons or gifts of
Partnership interests to the two sons. In fact, the Court noted that all of the
income tax returns always listed Mrs. Lockett as the 100-percent owner and
allocated 100 percent of the income to her.
Moreover, the Court noted that after the dissolution of the Trust, Mrs. Lockett
directly owned 100 percent of the Partnership. Further, the Partnership
agreement provided that the Partnership would be “dissolved upon the
acquisition by a partner of all the interests of the other partners.” As a result, the
Court ruled that the Estate was the direct legal owner of all of the underlying
assets of the Partnership and no discounts were warranted.
The Notes
Despite not following the terms of the note agreements, the fact that there were
signed agreements and some payments had been made, led the Court to
conclude that the notes were valid and were not disguised gifts. Two small notes
had no loan agreements and were deemed to be gifts.
Summary and Conclusion
Someone was not paying attention. You can not have a single owner partnership.
Unfortunately, there is no “mulligan” in tax law.
The notes should have been valued at fair market value. The interest rates
appeared to be at the Applicable Federal Rate. However, with no term for
principal payments, it would make valuing the notes difficult.
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T.C. Memo. 2012-123 (April 25, 2012)
Mr. Hall is a Managing Director of FMV Opinions, Inc., a national valuation and investment
banking firm with offices in New York, San Francisco, Irvine, Chicago, and Dallas. Mr. Hall heads
up FMV’s estate and gift tax valuation practice. He may be reached at [email protected]. Additional
information regarding FMV Opinions, Inc. can be accessed at www.fmv.com.
*
Real Estate Partnership has a Legitimate and Significant Nontax Business
Purpose
(Estate of Stone – T.C. Memo. 2012-48, February 22, 2012)
By Lance Hall, ASA *
The central issue in Estate of Stone was whether a partnership, supposedly
formed to develop certain real property which was never developed, had a
legitimate and significant nontax business purpose and, if so, did transfers of
partnership interests fall under the bona fide sale for adequate and full
consideration exception to Section 2036(a).
Background
Mr. and Mrs. Stone owned 740 acres of mostly undeveloped woodlands
(“Property”). Their son built a home and lake near the Property. The Property
fronted the lake. The family felt that the Property, now situated on a lake, would
be ideal for residential development. Mr. and Mrs. Stone wanted their large and
extended family to participate in the development of the Property. Accordingly,
Mr. and Mrs. Stone formed a partnership (“Partnership”) to hold the property.
The purpose of this Partnership was to “simplify the gift-giving process” and to
“guard against partition suits, which could cause the land to be divided into
smaller tracts.”
Over a four-year period, the Stones gifted 98 percent of the Partnership, in
limited partnership interests, to their 21 children, their children’s spouses, and
their grandchildren. No valuation discounts were taken on the gifts made.
Subsequent to such gifts, two of their children went through divorce proceedings.
The non-family spouses’ interests in the Partnership were exchanged for
property from the Partnership or “valuable consideration in a financial settlement”
as part of the divorce.
As the Property was never developed, the Stones terminated the Partnership’s
bank account and paid the $700 annual property taxes from their personal
account. Each of the limited partners had access to the Property.
Five years after the final gifts were made, Mrs. Stone died.
Section 2036(a)
Quoting from the Court, “Section 2036(a) is applicable when three conditions are
met: (1) the decedent made an inter vivos transfer of property; (2) the decedent’s
transfer was not a bona fide sale for adequate and full consideration; and (3) the
decedent retained an interest or right enumerated in section 2036(a)(1) or (2) or
(b) in the transferred property which he or she did not relinquish before death.”
Bona Fide Sale
“In the context of family limited partnerships, the bona fide sale for adequate and
full consideration exception is met where the record establishes the existence of
a legitimate and significant nontax reason for creating the family limited
partnership and the transferors received partnership interests proportional to the
value of the property transferred. The objective evidence must indicate that the
nontax reason was a significant factor that motivated the partnership’s creation.
A significant purpose must be an actual motivation, not a theoretical justification.
A list of factors to be considered when deciding whether a nontax reason existed
includes: (1) the taxpayer standing on both sides of the transaction; (2) the
taxpayer’s financial dependence on the distributions from the partnership; (3) the
partners’ commingling of partnership funds with their own; (4) the taxpayer’s
actual failure to transfer the property to the partnership; (5) discounting the value
of the partnership interests relative to the value of the property contributed; and
(6) the taxpayer’s old age or poor health when the partnership was formed.”
The Court’s Analysis
The Court determined that the Stones’ desire “that their children, their children’s
spouses, and their grandchildren work together to develop and sell homes near
the lake” met the legitimate and significant nontax business purpose requirement
under Section 2036(a).
“Where a taxpayer stands on both sides of a transaction, we have concluded that
there is no arm’s-length bargaining and thus the bona fide transfer exception
does not apply. However, we have also stated that an arm’s-length transaction
occurs when mutual legitimate and significant nontax reasons exist for the
transaction and the transaction is carried out in a way in which unrelated parties
to a business transaction would deal with each other.
“We have already found the existence of a legitimate nontax motive for the
transaction between decedent and [the Partnership]. We also believe decedent
received interests in [the Partnership] proportional to the property she
contributed. Therefore, this factor does not weigh against the estate.”
While agreeing with the IRS that the Partnership “failed to respect some
partnership formalities,” the Court believed that “Other factors…support the
estate’s argument that a bona fide sale occurred. First decedent and Mr. Stone
did not depend on distributions from [the Partnership] as no distributions were
ever made. Second, decedent and Mr. Stone actually did transfer the woodland
parcels to [the Partnership]. Third, there was no commingling of partners’
personal and partnership funds, as [the Partnership] had no funds. Fourth, no
discounting of [the Partnership] interests for gift tax purposes occurred ….
Finally, the evidence presented tended to show that decedent (and Mr. Stone)
were in good health at the time the transfer of the woodland parcels was made to
[the Partnership].”
Accordingly, the Court concluded that “the bona fide sale prong is satisfied.”
In regard to the full and adequate consideration requirement, the Court stated,
“We have already found that decedent had a legitimate and actual nontax
purpose in transferring the woodland parcels to [the Partnership]. We therefore
find that the transaction was not merely an attempt to change the form in which
the decedent held the woodland parcels and that the full and adequate
consideration prong is satisfied.”
Summary and Conclusion
This case provides a well articulated set of considerations that a partnership
must largely comply with in order to avoid the inclusion of a transferred asset in
the estate under Section 2036(a). What is confusing about this case is that it
leaves us with the question of whether the Court would have reached the same
conclusion, had the Stones taken valuation discounts when gifting interests in the
Partnership. It is this author’s belief that the lack of valuation discounts merely
help support the fact that motives, other than testamentary transfers, were
significant considerations and that the Court would have reached the same
conclusion had valuation discounts been taken.
*
Mr. Lance Hall is a Managing Director of FMV Opinions, Inc., a national valuation and
investment banking firm with offices in New York, San Francisco, Irvine, Chicago, and Dallas. Mr.
Hall heads up FMV’s estate and gift tax valuation practice. He may be reached at [email protected].
Additional information regarding FMV Opinions, Inc. can be accessed at www.fmv.com or by
calling 800.622.0519.
Astrue v. Capato: The U.S. Supreme Court Decides a Genetic Link Is
Not Enough To Be A Parent
Kristine S. Knaplund i
On May 21, 2012, the Court issued its decision in Astrue v. Capato. In an unanimous
opinion by Justice Ginsburg, the Court sided squarely with the Social Security
Administration, thus giving Chevron deference to a federal agency’s interpretation for
the seventh time in the past five years. The case involved two children conceived after
their father’s death using his frozen sperm; their application for Social Security survivors
benefits was denied on the ground that they did not qualify as his “children” because
they were not entitled to inherit from him under applicable state law. The Third Circuit
reversed, holding that the undisputed biological children of a deceased wage earner
and his widow are the wage earner’s “children” within the meaning of the Social Security
Act.
At issue was the meaning of the term “child” in the Act, which states in Section 402(d)
that “[e]very child (as defined in § 416(e) of this title) … of an individual who dies a fully
or currently insured individual … shall be entitled to a child’s insurance benefit.”
Section 416(e), in turn, defines “child” as “(1) the child or legally adopted child of an
individual.” The Third Circuit agreed with the Capatos that the meaning of “child” in the
statute was plain: it meant the biological child of a married couple. The Supreme Court
found some “conspicuous flaws” in this definition. First, nothing in the statute
demonstrates that Congress meant to include only the children of married parents;
similarly, the Court found no indication that “child” was limited to biological offspring, as
the Third Circuit had found. Finally, the Court noted that, even if the Third Circuit
definition had been adopted in this case, “it is far from obvious” that the Capato twins
would be included. In Florida, as in many states, death ends a marriage, and so they
would not qualify as “marital children” in any event.
The Court then turned to Social Security’s interpretation of the word “child.” In the
agency’s view, a third section of the Act -- Section 416(h) -- must be considered in
addition to Sections 402(d) and 416(e). Section 416(h)(2)(A) provides: “In determining
whether an applicant is the child...of a fully or currently insured individual for purposes
of this subchapter, the Secretary shall apply such law as would be applied in
determining the devolution of intestate personal property by the courts of the State in
which such insured individual ... was domiciled at the time of his death.” Although
Section 416(e) does not specifically reference Section 416(h), in the Court’s view there
was “no need to place a redundant cross-reference.” It cited earlier versions of the Act
and similar provisions for determining a spouse, surviving spouse, or parent of an
insured individual, none of which included such a cross-reference. Thus, being the
genetic child of the wage earner is not sufficient to qualify; the child must satisfy one of
the provisions of Section 416(h), such as demonstrating that she is entitled to inherit in
intestacy. The SSA’s interpretation, the Court continued, furthers the core purpose of
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survivors benefits, which are designed to protect dependent family members “against
the hardship occasioned by [the] loss of [the insured’s] earnings.” While not all children
who inherit in intestacy under state law will be dependent on the wage earner, the Court
called this a “workable substitute” in place of individual determinations.
Does this mean that postmortem conception children are “treated as an inferior subset
of natural children who are ineligible for government benefits simply because of their
date of birth and method of conception,” as the Capatos argued? Not in the Court’s
view, or in the view of several courts of appeals: treating these children differently is
rationally related to the government’s interest in targeting benefits to those dependent
on the wage earner. It also minimizes the administrative burden of proving dependency
on a case-by-case basis.
Finally, the Court found that the SSA’s interpretation was at least reasonable, and thus
entitled to deference under Chevron.
The Court’s decision resolves a split among the courts of appeals regarding the
appropriate definition of a “child” for these benefits. All circuits will now look to one of
the gateway provisions of Section 416(h) in making this determination. Ironically,
however, the ultimate disposition of these cases will still vary from state to state, in part
because state laws of intestacy are far from uniform, and in part because many states
have yet to address the specific issue of inheritance by children conceived years after a
parent’s death. Seventeen states have enacted laws on this issue: thirteen states allow
postmortem conception children to inherit in intestacy, while four states do not. In
another five states without specific statutes, courts have split on the issue: three have
allowed inheritance, while two have not. That leaves twenty-eight states in which the
outcome is uncertain. The SSA has received over one hundred applications for
survivors benefits from children conceived postmortem, with the rate of applications
increasing significantly in recent years.
Even though the issues of parentage and inheritance have traditionally been left to the
individual states, the peculiar case of postmortem conception children would benefit
from a national standard. The purpose of the benefits is to replace the deceased wage
earner’s income, in cases in which the children could reasonably have expected to rely
on that income. A postmortem conception child, by definition, has been conceived long
after the insured’s death, and has no legal claim to support from the decedent. The
states that allow such children to inherit in intestacy, and thereby qualify for Social
Security survivors benefits, do not advance that purpose.
Plain English Summary
The United States Supreme Court decided unanimously that a child conceived and born
after a parent’s death cannot rely solely on a genetic connection to the deceased parent
in order to qualify for Social Security survivors benefits. Siding with the Social Security
Administration’s interpretation of the law, the Court held that all children, including those
born via assisted reproduction technology, must either demonstrate that they would be
eligible to inherit from their late parent under state law or satisfy one of the statutory
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alternatives to that requirement. The SSA’s interpretation was more consistent with the
core purpose of the Act, which is to protect family members who depend on another
family member’s income from hardship if that family member dies.
Kristine S. Knaplund is a Professor of Law at Pepperdine University School of Law, and she is the Vice
Chair of the ABA Elder Law, Disability Planning and Bioethics Group. Professor Knaplund has written
extensively on the legal and ethical issues that arise when children are conceived and born years after a
genetic parent has died, including articles in the Arizona Law Review, Kansas Law Reform, the Duke
Journal of Gender Law and Policy, the Michigan Journal of Law Reform, and the ABA Real Property,
Trust and Estate Law Journal. She is an Academic Fellow of the American College of Trust and Estate
Counsel, and serves as Vice Chair of the ABA Elder Law, Disability Planning and Bioethics Group. This
article was originally published on SCOTUSblog on May 22, 2012.
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Hot Topics Case Summaries
Lee-ford Tritt i
The recent decision in Astrue v. Capato, No. 11-159, highlights a rapidly evolving
divergence within the law of trusts and estates—a tension between traditional definitions
of parentage and emerging notions of parentage stemming from advancements in
reproductive technologies. In Capato, the United States Supreme Court unanimously
held that posthumously conceived children (children conceived through in vitro
fertilization after the death of a parent) were not automatically entitled to survivor
benefits under the Social Security law. In so doing, the justices overturned a U.S.
appeals court's ruling for a New Jersey woman who was seeking benefits for her twins
conceived by artificial insemination after her husband's death. In its decision, the
Supreme Court acknowledged that the Social Security Administration longstanding
requirements for eligibility of child survivor benefits depends partly on whether the
applicable state law would allow a posthumously conceived child to inherit property in
the absence of a will. Further, the Court opined that this requirement is closely aligned
with one of the core purposes of the Social Security Act--that survivor benefits are
intended only to help children who lost their source of support due to the unanticipated
death of a parent. New Jersey law, the state law at issue, bars children conceived
posthumously from inheritance unless named in a will. Capato's only beneficiaries
named in his will were his wife, their son and two children from a previous marriage.
Therefore, the twins did not fall within the definition of “child” for purposes of survivor
benefit eligibility. Note, however, that the Supreme Court did not hold that all
posthumously conceived children are precluded from eligibility. The Court narrowly
determined that the Social Security Administration’s practice of looking to state law in
order to define “child” is valid.
In In Re Estate of Soker, 193 Cal. App. 4th 236 (2011), California’s first application of its
recently passed “harmless error rule,” the court validated a will even though the
instrument lacked the requisite witness signatures. The Testator had executed a valid
will in 1997 in which his then-girlfriend, Destiny, was the primary beneficiary. In 2005,
the Testator handwrote and signed a new will. Unfortunately, the 2005 will lacked any
witness signatures, which are required under California’s will formality act. In addition to
signing the 2005 will, the Testator, in order to revoke the 1997 will, urinated on the
original copy of the 1997 will and then attempted to burn it (yes, revocation by
urination™--also note that the Testator’s name was Soker). After the Testator’s death,
Destiny attempted to admit the 1997 will to probate. The Testator’s daughter
challenged the probate of 1997 Will because it had been revoked and submitted the
2005 will to probate. The court applied the “harmless error” rule for the first time in
holding that the 2005 will was valid notwithstanding the lack of witness signatures.
California’s harmless error rule allows a will to be treated as complying with will
formalities if the court finds, by clear and convincing evidence, that the testator intended
the document to constitute the testator’s will. Interestingly, the court applied the rule
retroactively (the law was passed in 2008, but the will was signed in 2005).
There has been a trend in the Trusts and Estates field to promote various methods of
alternative dispute resolutions. In Rachel v. Reitz, 347 S.W.3d 305 (Tex. App. 2011),
however, a Texas appellate court bucked this trend. The Texas court invalidated an
arbitration provision in a trust instrument that would have required arbitration of any
disputes between the trustee and the beneficiaries. In this case of first opinion, the
court debated the merits of mandatory arbitration clauses in general. In the end, the
sharply divided court refused to enforce the mandatory arbitration provision. The
dissent is noteworthy in and of itself for its discussion concerning the majority’s rejection
of the expressed intention of the grantor.
States are split concerning whether a non-attorney executor or trustee may represent
the estate and/or trust (and, accordingly, its beneficiaries) in a pro se capacity (i.e.,
without an attorney). A large number of nominated executors offer wills to probate
without an attorney to represent them. Similarly, trustees are often given the power to
sue or be sued on behalf of the trust. But, in In Re Guetersloh, 326 S.W.3d 737 (Tex.
App.—Amarillo 2010.), the Court of Appeals found that a non-attorney trustee had no
right to proceed in a pro se capacity in legal proceedings. In reaching its decision, the
court opined that the trustee was not advocating on behalf of his or her individual rights,
but was instead acting on behalf of others. Because the trustee was not an attorney, he
was necessarily engaging in the unauthorized practice of law.
Inherent in trust law is a tension between the right of the grantor to specify exactly how
the trust should be administered and the rights of the beneficiaries to have the trust
administrated in an equitable manner. This tension aptly is displayed in Bellamy v.
Langfitt, --- So.3d ---, 2012 WL 385606 (Fla. DCA 2012). The beneficiaries of the trust
at the center of this case had been in litigation with the corporate trustee for years. The
parties eventual reached a settlement that was to allow the corporate trustee to resign
and permit the trust to be administered in the future without a corporate trustee. The
trust instrument, however, contained a provision mandating a corporate trustee at all
times. The parties went to court to have the trust agreement modified to strike the
mandatory corporate trustee provision. The trial court struck the provision because it
was “in the best interests of the trust’s beneficiaries.” On appeal, the DCA reversed
based in part on the clear intent of the grantor to always have a corporate trustee and
that the trust agreement contained a “no-judicial-modification” provision that prohibited
the court from modifying the terms of the trust regardless of whether it was in the best
interests of the beneficiaries.
In the Estate of Giraldini, 199 Cal. App. 4th 581 (2011), the California Court of Appeals
for the Fourth District held that the remainder beneficiaries of a revocable trust lack
standing to compel an accounting or bring an action against a third-party trustee (not
the grantor trustee) of a revocable trust for alleged wrong doing that occurred prior to
the Grantor’s death (while the trust was still revocable). The court held that the trustee
solely owes a duty to the grantor while the trust remains revocable. Although the
grantor might have lacked mental capacity to make competent decisions, the court held
that the remainder beneficiaries lacked standing because the third-party trustee simply
did not owe any fiduciary duties to the remainder beneficiaries during the period in
which the trust was revocable. This creates a split among California courts. In
Evangelho v. Presoto, 67 Ca. App. 4th 615 (1998), the Court of Appeals for the First
District held that the remainder beneficiaries of a revocable trust did have standing to
bring a claim against the third party trustee for the period when the trust remained
revocable. With the rise of financial elder abuse, keep your eyes open for more actions
like these.
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Professor of Law, University of Florida College of Law; Director of The Center for Estate Planning. J.D.,
LL.M. (taxation), New York University School of Law.