Common Mistakes When Serving As Trustee

My last post discussed the pros and cons of institutional trustees vs. family member trustees.  Regardless of whom is serving as trustee, in the course of my law practice there are common themes which repeatedly arise in the area of trust disputes and litigation.  Specifically, it is easy for trustees---especially inexperienced family member trustees---to make mistakes when administering a trust.  Some of these were nicely summarized in a recent article, published in Barron's Penta, entitled "The Five Biggest Ways To Bungle A Trust." 

(1) Not Keeping Good Trust Records---The Arkansas Trust Code, and presumably trust laws in most if not all other states, contain requirements mandating that trustees provide beneficiaries with accountings of trust assets, income, expenditures, etc.  The timing and extent of those accountings can vary based upon certain factors, including whether one is an income beneficiary or a remainder beneficiary.  However, at all times the trustee is to act in the interest of the beneficiaries, which includes maintaining comprehensive and accurate records.  Trustees who do not keep such records act at their own peril, as gaps and inaccuracies in documentation (even if purely innocent) can create an aura of suspicion and sometimes later liability for breach of trust, breach of fiduciary duty, etc. 

(2) Not Diversifying Trust Investments---Another duty which too often goes unfulfilled is the trustee's obligation to properly diversify trust investments.  Just because the trustee might handle their own investment portfolio in a certain manner does not mean that the investments are being properly handled with regard to the beneficiaries of the trust.  For example, if the beneficiary is an elderly person in need of income, having the trust's assets invested in 100% tech stocks is not likely to be deemed a wise investment strategy.  Arkansas has a Prudent Investor Act which must be reviewed and followed, and it is based upon a well-recognized uniform act that is utilized in many other jurisdictions as well. 

(3) Not Distributing Trust Assets Fairly---A trustee owes a fiduciary duty to current beneficiaries, as well as to remainder beneficiaries.  Sometimes this can create problems when a duty to one conflicts with a duty to another.  Also, sometimes in the case of family member trustees, the trustee is herself a beneficiary (e.g., perhaps the father named his daughter as trustee of his trust after his death, but also named her as a beneficiary like his two sons/her two brothers).  Especially when no trustee fee is involved (see below), we have seen cases in which the trustee is tempted to take extra distributions, etc. as purported justification for being saddled with the extra time and work associated with acting as trustee.  This can be dangerous as it can constitute an actual impropriety, or at least suggest an appearance of impropriety.  It is therefore wise to maintain clear and well-documented records of all distribution decisions.

(4) Not Properly Handling The Trustee Fee---The fact is that administering a trust can involve a lot of work.  It can be very profitable, which is precisely why institutional trustees exist.  Families often do not want to see their assets being consumed in part by the fees of an institutional trustee (notwithstanding some of the advantages to using one), and so often a family member is named as trustee.  The family member, however, might have a time-consuming occupation and/or an active family life.  Adding the trustee duties on top of an already-busy schedule can naturally trigger a desire for some sort of compensation associated with the extra work.  Whatever the trustee fee arrangement is (assuming trustee fees are paid at all), similar to asset distributions discussed above it is wise for there to be a well-documented record of how trustee fees will be paid, when they will be paid, and how they will be calculated.

(5) Not Watching Your Back---A trusteeship has been viewed as involving the highest duty owed another under the law.  It entails a tremendous amount of responsibility, and should not be lightly regarded.  Individuals named as trustee in a trust instrument often view it as an honor, which is fine so long as the trustee treats it as such.  However, money has an uncanny way of sometimes causing people---including trustees and beneficiaries---to engage in actions and behavior which they (and others) perhaps never previously conceived.  Occasionally this will result in nasty disputes between trustees and beneficiaries which can ultimately erupt into actual litigation.  A trustee might innocently take on that "oath of office," so to speak, never imagining that they might someday be mired in stressful, expensive disagreements with once-close friends or family members.  On that note, typically the trustee's dispute is not with the person who named them as trustee (i.e., in a revocable trust situation the grantor of the trust can simply remove or change the trustee)---instead, the fight will frequently be with the children or grandchildren of the grantor. 

Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.

Family Member Trustees vs. Institutional Trustees

When a trust is formed, one of the many decisions that must be made by the "settlor" (the one who forms the trust) is who will serve as trustee.  The settlor may also select multiple trustees ("co-trustees," who serve with each other) and later ("successor") trustees (who may serve after the original trustee can no longer serve [death, disability, etc.] or for some other reason [resignation, removal, etc. of the original trustee]. 

The selection of trustee is an important one because they have a fiduciary obligation to carry out the terms of the trust and the desires of the settlor.  Because the trustee exercises great power and discretion over money and property, the pros and cons of family member trustees vs institutional trustees should be considered.  Trust disputes often relate back to whom, and how, was selected to serve as trustee.  

FAMILY MEMBER TRUSTEES
Family members such as spouses and children are frequently named as trustees, but this selection occasionally results in trouble down the road due to sibling rivalries and the trustee's lack of knowledge and experience.

Advantages of family member trustees include a familiarity with the beneficiaries, and possibly the trust property as well; and a common willingness to serve with little or no compensation.

Disadvantages of family member trustees include an inability or disinclination to carry out the duties of a trustee; favoritism or unfairness toward certain beneficiaries; the need for a successor trustee at the resignation, incapacity, or death of the trustee; the lack of insurance coverage in case of liability; and tax consequences if the trustee is also a beneficiary.

INSTITUTIONAL TRUSTEES
Institutional trustees include such entities as banks and trust companies, which have their pros and cons as well.

Advantages of institutional trustees include expertise and competence at carrying out trustee duties, such as adherence to the prudent investor rule; impartiality with regard to trust property and beneficiaries; avoidance of the problem of successor trustees; the possibility of additional services such as tax reporting or money management; and sufficient insurance coverage in case of liability.

Disadvantages of institutional trustees include greater administrative costs; a lack of familiarity with the beneficiaries ; and an inability to administer certain types of trust property, such as real estate. 

Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.

Recent Articles On Alzheimer's Disease, And Trustee/Beneficiary Relationships

There is not much to this post, primarily because the articles referenced below already thoroughly discuss the issues.  Specifically, both articles shed light upon two common problem areas which can often eventually erupt into estate, trust and probate disputes. 

The first article is from the New York Times and addresses the effect of Alzheimer's Disease and dementia upon an individual's ability to control and account for their finances.  Given our aging population and ever-increasing life expectancy, it's recommended reading for everyone as this concern affects innumerable families in this country. 

The second article is from the Wall Street Journal and touches upon the often-tense relationship between trustees and beneficiaries.   It may especially be interesting and insightful for anyone who already acts as trustee or who may eventually act as a trustee in the future.

Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.

Mediation As An Alternative To Inheritance Litigation

Lawsuits are not the only way to resolve disputes, and arguably are not even the best way.  Litigation can be financially expensive, time-consuming, and emotionally tolling.  Especially in the context of estate, trust and probate litigation, the disputes often involve persons who know each other, including relatives, friends, and business associates.  Accordingly, in addition to the expenditure of money, time and emotions, litigation can sometimes involve harm to the relationships between the litigants. 

Because of the foregoing concerns, different types of alternative dispute resolution have been developed over the years.  One of these methods, in particular, is conducive to the issues arising in inheritance-related disputes.  Specifically, mediation generally involves a third party called a "mediator" who is specially trained to attempt to bring the adverse parties to a compromise and settle their differences.  Unlike the judge or jury, or an arbitrator, a mediator does not resolve the dispute for the parties but instead aims to facilitate a final resolution that the parties reach on their own.  There are many such mediators in Arkansas (e.g., Hamlin Dispute Resolution, ADR, Inc., etc.), and we have successfully used them in the past on behalf of our own clients.  A good article in the New York Times this weekend also discusses mediation in the elder law context. 

A simple fact is that the death of a loved one is already a stressful experience.  If, for example, that person's estate is perceived to not have been distributed in the manner in which that decedent intended (or perhaps in a way in which a would-be recipient originally anticipated it), long-simmering feuds can rise to the surface and minor misunderstandings can erupt into major conflicts.  Occasionally it's too late, but the relationships of the persons involved can frequently be maintained, and their disputes ultimately resolved,  by mediation.  Drawn-out court battles can be avoided or at least minimized, and the money and property in dispute can be preserved instead of exhausted on the litigation process.  Mediation is confidential as opposed to occurring in the public eye, can be scheduled by the parties at their convenience rather than subject to the limited openings in a Court's docket, and takes place in a neutral conference room rather than in an often-intimidating courtroom. 

Not every dispute is ideal or appropriate for mediation, but it can and should be considered as an alternative method of dispute resolution.  

Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.

Stealing From Grandma And Grandpa---Inheritance Theft

A recent lengthy but interesting series of stories (Part I and Part II) on the odd heiress, Huguette Clark, appeared to prompt a good article yesterday from Bob Sullivan, who covers Internet scams and consumer fraud for msnbc.com.  Mr. Sullivan's posting focuses upon allegations and situations involving elder financial abuse, which is a significant portion of my own law practice.  I suggest that you read the article when you have a free moment, as it extensively summarizes a growing issue in this country and is obviously one in which you may very well have an interest if you regularly read or have merely stumbled upon my Blog.  

Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.

Inheritance Hijackers: Who Wants To Steal Your Inheritance And How To Protect It

At the recommendation of a client, I have recently started reading a fascinating book entitled Inheritance Hijackers:  Who Wants To Steal Your Inheritance And How To Protect It (Ovation Books 2009) written by a Florida attorney named Robert C. Adamski.  The book is primarily written for beneficiaries and potential beneficiaries of an inheritance.  Mr. Adamski's book sets forth an extensive discussion of the growing phenomenon which he calls "inheritance theft," and which of course is a primary component of what I do in my own law practice as well (representation of beneficiaries, but also fiduciaries such as trustees andexecutors, in estate, trust and probate litigation).  "Inheritance theft" is defined on page 2 of the book as "the act of diverting assets from the intended recipient to another person[.]" 

 

While the book is available for sale at Mr. Adamski's own website, Amazon.com, and I'm sure other places, a good overview of the phenomenon can be found below which is directly from a prior post by Mr. Adamski: 

1.  Who steals inheritances?

Inheritance theft is a crime of opportunity committed by those we place our trust in. These are family members, close associates, care givers and others we depend on as we grow older. Inheritance hijacking is always a surprise to the victim, who never expected a trusted family member or friend to betray their trust.

2.  Who are the victims of inheritance hijacking?

There are always two classes of victims. The first is the person who intended to give the inheritance. The second is the person or persons who were the intended recipient of the inheritance. As we age we are all potential victims because we become weaker in our physical and mental ability. We then are forced to rely upon and put our trust in others. This gives the trusted persons the opportunity to hijack our inheritance.

3.  How are inheritances hijacked?

The hijacker's bag of tricks includes undue influence, duress, forgery, theft by an administrator, marriage, and more. Administrators of probate estates and trusts are common hijackers. They have the opportunity and ability to take advantage. Marriage is the 'Silver Bullet" in the world of inheritance theft because it is all but impossible to overturn a marriage which hijacks an estate. Care givers earn the trust of their victims and as a result are often inheritance hijackers. An important element of inheritance theft is the trust which is gained by the hijacker and later betrayed. Without that element of trust it would be very difficult to hijack an inheritance.

4.  How can I determine if my inheritance is at risk?

Take the Inheritance Risk Quiz at www.ProtectYourEstate.Net to determine the risk to the inheritance you intend to give or the inheritance you expect to receive.

5.  How do I protect the inheritance I intend to give or the inheritance I expect to receive?

Self education and proper estate planning are the first steps. But it does not end there. It is vital to understand how inheritances are hijacked and how to guard against inheritance hijacking. The book, INHERITANCE HIJACKERS: Who Wants to Steal Your Inheritance and How to Protect It, was written to help people protect their families from inheritance theft. Learn more about the book at www.ProtectYourEstate.Net

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I have not yet finished Mr. Adamski's book, but can already tell that I will be recommending it to beneficiary-clients, and potential clients, who anticipate possibly receiving inheritances.  The book contains an immense amount of valuable information for a very reasonable price. 

Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.

Arkansas Court Of Appeals Rules Dying Woman Not Competent To Execute Deed

Sorry for no posts as of late---I've been tied up preparing for, and then engaged in, a lengthy trust litigation case in which the jury, after a 6 day trial in Pulaski County Circuit Court, returned a significant verdict for our clients.  I'm just now trying to catch up on other work, but hope to resume regularly updating this blog again soon. 

One case that I read about since my last blog post demonstrates that although it is difficult to prove the invalidity of a deed, will, trust, etc. by proving that the person signed the will was not competent (whether due to mental illness, undue influence, duress, etc.), occasionally such claims are successful.  For example, in Munzner v. Kushner, 2010 Ark. App. 196 (an appeal from Washington County Circuit Court), the Arkansas Court of Appeals affirmed the trial court's ruling that a deed transferring property was invalid due to the incapacity of the grantor.

Specifically, a mere 36 hours before her death, Mrs. Kehoe executed a deed conveying her home to her brother, Mr. Munzner.  Mrs. Kehoe apparently had to sign the deed with an "X" as she was too weak to finish the signature of her name when she lost her place.  Her daughter, Ms. Kushner, sued asserting the invalidity of the deed.

At trial, Mrs. Kehoe's doctor testified that just prior to her death she had been administered morphine (utilized for severe pain and suffering), a medication that fights anxiety and sedation, a medication which causes confusion, and a powerful narcotic.  The doctor testified that it would be ill-advised to make any life decision while taking any of the medicines and that they would have impaired her ability to make decisions related to her property. 

On the other hand, friends and relatives who spoke to Mrs. Kehoe that day testified that she was competent.  Moreover, Mrs. Kehoe's attorney, who spoke to her about the deed on that day, also stated that she was competent. 

After considering all of the evidence, the trial court ruled that because Mr. Munzner was Mrs. Kehoe's brother and she had a close confidential relationship with him, he had the burden of proving that his sister was competent to make the deed.  This was especially the case in light of the lack of any consideration (exchange of money or property) for the deed.  The trial court then found that Mrs. Kehoe had been too mentally impaired to execute the deed and ordered it set aside.

Mr. Munzner appealed but the Court of Appeals affirmed.  Specifically, the Court held that Mrs. Kehoe's mental impairment was debilitating to the point that she could not function appropriately to execute the deed regardless of whether she may have been exposed or susceptible to any undue influence.

Under Arkansas law, the determination of whether a deed is void because of the mental incapacity of the grantor is generally measured by her mental ability at the time of execution of the deed.  Andres v. Andres, 1 Ark. App. 75, 83, 613 S.W.2d 404, 409 (1981).  If the grantor is mentally competent at the time that the deed at issue is executed, the deed will be deemed valid.  Id.  In this case the Court held that Mrs. Kehoe's mental impairment was so debilitating that she was unable to function in a capacity to execute the deed, due to her medication and due to her medical condition.  Because the trial court placed great weight upon the physician's opinion, and because a trial court generally has great discretion with respect to considering the credibility of the various witnesses who testify at trial, the Court of Appeals did not find that there was sufficient reason to reverse the trial court's ruling.   

Matt House can be contacted by telephone at 501-372-6555, by e-mail at mhouse@jamesandhouse.com, by facsimile at 501-372-6333, or by regular mail at James, Fink & House, P.A., Post Office Box 3585, Little Rock, Arkansas 72203.

Removal Of A Trustee Under Arkansas Law

My previous blog post generally discussed principles associated with the removal of executors or personal representatives of an estate.  This post is similar except that it analyzes this issue in the context of trusts rather than estates.  Every trustee of a trust, and every beneficiary of a trust, should be aware of these principles as well.  

To remedy a breach of trust under the Arkansas Trust Code, the Court may:

(1) compel the trustee to perform the trustee’s duties;

(2) enjoin the trustee from committing a breach of trust;

(3) compel the trustee to redress a breach of trust by paying money, restoring property, or other means;

(4) order a trustee to account;

(5) appoint a special fiduciary to take possession of the trust property and administer the trust;

(6) suspend the trustee;

(7) remove the trustee as provided in § 28-73-706;

(8) reduce or deny compensation to the trustee;

(9) subject to §28-73-1012, void an act of the trustee, impose a lien or a constructive trust on property, or trace trust property wrongfully disposed of and recover the property or its proceeds, or

(10) order any other appropriate relief. 

See Ark. Code Ann. § 28-73-1001(b).

Also, section 706 of the Trust Code further elaborates on the removal of an trustee:

(a) the settlor, a co-trustee, or a beneficiary may request the court to remove a trustee, or a trustee may be removed by the court on its own initiative.

(b) A court may remove a trustee if:

(1) the trustee has committed a serious breach of trust;

(2) lack of cooperation among co-trustees substantially impairs the administration of the trust;

(3) because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the court determines that removal of the trustee best serves the interests of the beneficiaries;

(4) there has been a substantial change of circumstances or removal is requested by all of the qualified beneficiaries, the court finds the removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust, and suitable co-trustee or successor trustee is available.

See Ark. Code Ann. § 28-73-706(a) and (b) (emphasis added).

So, as one can tell the grounds for removal of a trustee are very broad.  Accordingly, similar to estates, those administering trusts in the State of Arkansas must take their duties seriously so as to avoid placing themselves in a situation in which their actions and inactions could be questioned.  Similarly, beneficiaries of a trust should be vigilant in monitoring the conduct of the trustee to ensure that they are properly doing their job.  In the appropriate case, Arkansas courts have not hesitated to remove trustees where the facts and circumstances warrant it. 

Removal Of An Executor (Personal Representative) From An Estate Under Arkansas Law

As previously discussed on this Blog, an executor, also known as a personal representative, is a person who is charged with the responsibility of administering an estate after another person has passed away.  They will typically do things like collect and inventory the deceased's assets, manage the property, pay the debts, and distribute property according to any will or the intestacy laws (setting forth distribution priorities for those dying without a will).

However, conflicts will sometimes arise between the executor of the estate and the beneficiaries of that estate, the latter of whom are generally supposed to receive bequests or property from the estate.  Perhaps the executor is alleged to be operating under a conflict of interest, is improperly personally benefitting from the property of the estate, or is simply not carrying out their duties.  In Arkansas, there is a specific statute that governs these conflicts and sets forth the grounds for when an executor can be removed from his or her office.  For anyone who currently is or ever anticipates administering an estate in Arkansas, or who is or ever will be the beneficiary of an estate,  it is worth getting familiar with the removal statute.

Specifically, under the Arkansas Probate Code of 1949, Ark. Code Ann. § 28-1-101 et seq., the Court appoints and issues letters testamentary to a personal representative to manage and preserve the property and rights of the decedent until distribution according to the testamentary document or appropriate intestate statute. Ark. Code Ann. § 28-48-102. It is well-established that "[t]he personal representative occupies a fiduciary position toward the heirs, and it is his duty to act toward them, as the beneficiaries of the trust administered by him, with the utmost good faith." Price v. Price, 253 Ark. 1124, 1137, 491 S.W2d 793, 801 (1973). The personal representative generally continues in that office unless removed due to one or more of the grounds set forth in Ark. Code Ann. § 28-48-105.

Ark. Code Ann. §28-48-105(a) (emphasis added) provides that:

(a)(1) When the personal representative becomes mentally incompetent, disqualified, unsuitable, or incapable of discharging his or her trust, has mismanaged the estate, has failed to perform any duty imposed by law or by any lawful order of the court, or has ceased to be a resident of the state without filing the authorization of an agent to accept service as provided in § 28-48-101(b)(6), then the court may remove him or her.

(2) The court on its own motion may, or on the petition of an interested person shall, order the personal representative to appear and show cause why he or she should not be removed.

With this in mind, Ark. Code Ann. §28-48-107(a) (emphasis added) provides that "[w]hen a personal representative dies, is removed by the court, or resigns and the resignation is accepted by the court, the court may, and, if he or she was the sole or last surviving personal representative and the administration is not completed, the court shall, appoint another personal representative in his place upon the motion or petition of an interested person."

Separate and distinct from the statutory grounds for removal of a personal representative, multiple Arkansas cases also shed light on this issue. For example, in Robinson v. Winston, 64 Ark.App. 170, 175-76, 984 S.W.2d 38, 40-41 (1998), the evidence was deemed sufficient to warrant removal of the personal representative due to her attitude toward a person interested in the estate that created a reasonable doubt as to whether she would act honorably, fairly, and dispassionately in her trust, and because the tension and her continuance in the office would likely render administration of the estate difficult, inefficient, or unduly protracted. See also Matter of Guardianship of Vesa, 319 Ark. 574, 579-82, 892 S.W2d 491, 494-95 (1995) ("unsuitability" of ward’s sibling to serve as guardian of the estate, justifying removal on probate court’s own motion and appointment of neutral successor, was established by evidence of family friction among ward’s siblings which adversely affected administration of estate).

Likewise, in Guess v. Going, 62 Ark. App. 19, 23-25, 966 S.W2d 930, 932-33 (1998), testimony of the personal representative that "mother’s love" precluded her from challenging a land sale agreement that was extremely favorable to her daughter, even though the terms of the agreement made it unlikely that the heirs of the estate could ever benefit from what would have been the estate’s largest asset, established a conflict of interest making the executrix unsuitable and warranting her removal. See also Price v. Price, 258 Ark. 363, 378, 527 S.W.2d 322, 332-33 (1975) (wherein a personal representative who had persistently acted in furtherance of her own interests in a manner to deprive her step-children of any benefits from their rights of the father’s property, and who had been recalcitrant about compliance with her fiduciary responsibilities and directions of the court, was deemed unsuitable for discharge of the trust involved in acting as personal representative of the estate such that removal was appropriate).

In sum, those administering estates in the State of Arkansas must take their duties seriously so as to avoid placing themselves in a situation in which their actions and inactions could be questioned.  Similarly, beneficiaries of an estate should be vigilant in monitoring the conduct of the executor to ensure that they are properly doing their job.  In the appropriate case, Arkansas courts have not hesitated to remove executors where the facts and circumstances warrant it.

American Bar Association Releases "Legal Guide For The Seriously Ill: Seven Key Steps To Get Your Affairs In Order"

Estate, trust and probate litigation often involves allegations that elderly adults' estate planning desires were not carried out after their deaths (either by someone's intentional acts or negligence), or that those elderly adults were taken advantage of and their estate planning desires were thwarted while they were still living (albeit without their knowledge or consent).  With respect to the latter scenario, sometimes the claims are true, and sometimes they aren't.  Issues of (in)competency, illness, undue influence, and fraud are often raised in these types of proceedings.   Each case is different and we have certainly represented those doing the accusing as well as those being accused. 

But one common theme that I have noticed in virtually all of these cases is that no matter how much estate planning that the elderly person actually did, in virtually every situation they probably could have done a bit more.  It might not have ultimately made a difference with respect to whether or not litigation would have resulted, but where more planning is undertaken that can frequently result in a lesser likelihood of later conflict. 

With this in mind, thanks to a tip on the Wills, Trusts & Estates Blog, the American Bar Association has apparently just released the "Legal Guide For The Seriously Ill: Seven Key Steps To Get Your Affairs In Order."  I've given the document an overview and  would heartily recommend it to anyone dealing with such circumstances (or anyone with a loved one who is dealing with this situation).