Category Archives: Trusts

TX Court Holds Drafts of Trust Are Discoverable

In In re Rittenmeyer, a Texas case, the mother of the decedent was the executor of his estate.  Among other claims, the decedent’s wife alleged that there was a new will that superseded the 2011 Will admitted to probate. The wife sought discovery of drafts of wills prepared after the 2011 Will, trust documents where the decedent was a beneficiary, and communications reflecting the decedent’s intentions regarding providing for the wife. The mother objected to the discovery requests and asserted that the documents were privileged. The wife maintained that the documents are exempt from privilege by Texas Rule Evidence 503(d)(2), which provides that the attorney-client privilege does not apply “if the communication is relevant to an issue between parties claiming through the same deceased client.” Id.The trial court granted the wife’s motion to compel, and the mother filed a petition for writ of mandamus.

The court of appeals discussed the law regarding Rule 503(d)(2):  Texas jurisprudence contains scant authority addressing the exception found in Rule 503(d)(2).  Texas courts have applied the exception to information such as the discovery at issue here wherein a party contends a decedent’s will does not reflect the decedent’s true intent. See, e.g., In re Paschall,2013 Tex. App. LEXIS 1254, 2013 WL 474368, at *7 (trust documents not privileged because the documents are relevant to parties’ claims that they are the decedent’s heirs at law and their assertion that the trust into which the estate was poured is invalid); see also In re Tex. A&M – Corpus Christi Foundation, 84 S.W.3d 358 (Tex. App.—Corpus Christi 2002, orig. proceeding) (permitting depositions of decedent’s counsel regarding decedent’s intentions and capacity where Foundation alleged decedent’s gift to the Foundation was planned and valid whereas estate contended the gift to the Foundation was procured through fraud).

Courts in other jurisdictions have also exempted similar discovery from the attorney-client privilege where, as here, the dispute is between the executor or representative of the estate and someone claiming rights under the decedent’s estate. See Remien v. Remien, No. 94 C 2407, 1996 U.S. Dist. LEXIS 10114, 1996 WL 411387 (N.D. Ill. July 19, 1996) (discovery not subject to the privilege because the dispute arose “between parties who claim through the same deceased client” where the daughter and the co-executors of the father’s estate both claimed property rights through father, and the documents at issue were relevant to that dispute which centered on the father’s intentions regarding the distribution of stock); see also Petition of Stompor, 165 N.H. 735, 740, 82 A.3d 1278, 1282-83 (2013) holding that attorney’s file was not privileged because it was relevant to determine whether the petitioner unduly influenced the parents at the time they executed their estate plan in 2004 and to ascertaining whether the 2004 estate plan documents reflected the parents’ true intent).  The court held that the case at issue was similar to the other Texas cases cited above in that it involved a dispute between a decedent’s estate and a party who claims to be a beneficiary under the estate either through a subsequent will or because the probated will does not reflect the decedent’s intentions.

The court concluded: “Under these facts, we conclude the trial court was within its discretion in applying Rule 503(d)(2) to the discovery, determining that the parties claim through the same deceased client, and compelling relator to produce that discovery.”Id.

What is a dynasty trust?

1. What are dynasty trusts?
Most trusts — bank accounts held by one person, a trustee, for the benefit of another person or group — come with expiration dates. A few states, including Delaware and South Dakota, permit trusts to last forever. People from across the U.S. can open dynasty trusts in these states.

2. Why are they getting popular now?
The tax overhaul of 2017 doubled — to $11.2 million for an individual and $22.4 million for a married couple — the amount that can be passed to heirs without triggering estate and gift taxes. However, these higher thresholds are only in place until 2025 giving the rich a potentially limited opportunity to pass more wealth to family members tax-free while also exerting some control over how heirs spend their inheritances.

3. Why use a trust in the first place?
Trusts protect assets from creditors and former spouses. They can enable clever financial maneuvers that maximize the estate and gift-tax exemption. And trusts give donors some control over how the money is spent. For example, a donor can limit withdrawals so money can only be used for college, to purchase a home, or other specific purposes.

4. Why choose a dynasty trust?
Under the previous estate tax limits, many wealthy Americans already had set up trusts for the benefit of their children. If you wish to make your grandchildren or great-grandchildren rich, a dynasty trust can make that easier.

5. How do they work?
They can be funded with cash, stock or other assets, and structured to pay each generation only some of the trust’s proceeds while the rest of the money grows free of estate and gift taxes. While trusts or their recipients generally need to pay taxes on income and gains, they don’t owe capital gains taxes until assets are sold. With the right planning, a trust funded up to the maximum threshold tax exemption amount could be worth far more than that.

What is a Trust Protector?

A trust protector is a party designated in a trust agreement with certain limited powers intended to protect the trust.  A trust protector is not needed while you are alive, if you are the trustee and beneficiary of your own living or revocable trust.  However, eventually you will die and the successor trustee will step in to administer the trust. 

This new trustee may not have your best interests at heart when administering the trust.  For instance, the trustee may start to milk the trust for fees and reimbursement of expenses for whatever reason, draining the trust assets.  Another bad scenario involves the trustee with a grudge against one or more beneficiaries, where the trustee has no intention of treating the beneficiary properly.  A trustee has a duty to treat all beneficiaries in a fair and impartial manner, but you will not be around to see that they do.  The only recourse is expensive litigation. 

How does a trust protector help in these situations? By using his or her powers to change trustees.  A trust protector provision should have three sections:

(1) Empowering the protector to terminate the trustee and appoint a new trustee;

(2) Empowering the protector to appoint successor protectors; and

(3) Stating that the protector is not a trustee and owes no fiduciary duties to anyone and has no duty to act.

Needless to say, you need to nominate a person to be a trust protector only whom you greatly trust.  Any trust agreement may benefit from a trust protector provision including irrevocable trusts.


How To Change an Irrevocable Trust – Decanting

Just like you decant a fine wine from a wine bottle into a new one, you can decant the assets of a not-so-fine irrevocable trust into a new trust. A revocable trust is, by definition, subject to revocation or amendment, so no need there. Decanting means changing, updating and modernizing an irrevocable trust.

The trust agreement itself may allow this, but in Arizona, the law addressing decanting is found at Arizona Revised Statutes 14-10819, “Trustee’s special power to appoint to other trust.” Essentially, it states that unless the terms of the instrument expressly provide otherwise, a trustee who has the discretion to make distributions for the benefit of a beneficiary of the trust may exercise — without prior court approval — that discretion by appointing the estate trust in favor of a trustee of another trust if the exercise of this discretion:

  1. Does not reduce any fixed nondiscretionary income payment to a beneficiary.
  2. Does not alter any nondiscretionary annuity or unitrust payment to a beneficiary.
  3. Is in favor of the beneficiaries of the trust.
  4. Results in any standard applicable for distributions from the trust being the same or more restrictive standard applicable for distributions from the recipient trust when the trustee exercising the power is a possible beneficiary under the standard.
  5. Does not adversely affect the tax treatment of the trust, the trustee, the settlor (the original trustmaker) or the beneficiaries.

Typical reasons to decant include correcting ambiguities or drafting errors, changing the trust’s situs to a more favorable place, splitting up or combining trusts to achieve administrative cost savings, or broadening a trustee’s powers under the new trust. This would include the power to distribute income and principal to beneficiaries resulting in certain tax savings. A trust can also be decanted from a settlor trust to a non-settlor trust or vice versa, reversing the responsibility of who pays income taxes.

Revocable Trusts: A Good Idea?

What is a living or revocable trust?

A trust is a legal way of holding, managing, and distributing property. Every trust must have four elements: (1) a creator of the trust, called the “trustor” or the “grantor” (2) assets, also called the “corpus” (3) a person who holds, manages, and distributes the assets, called the “trustee” and (4) a “beneficiary,” the person for whose benefit the trust is created.

A living trust is revocable.  In most revocable trusts, the trustor, trustee, and beneficiary are all the same person.

Who does not need a trust?

There are some people who will not benefit from a living or revocable trust.  Those who are married without significant assets and without children who intend to leave their assets to each other, for one.  Any other persons who do not have significant assets and have very simple estate plans also do not need a living trust.  Finally, anyone who wants court supervision over the administration of his or her estate should not have a living trust. (The assets remain in the trust, there is no “estate.”)  Probate can often be avoided without using a living trust, by setting up “payable on death” accounts, making beneficiary designations, holding assets jointly, etc.

Why do people create trusts?

By creating a revocable trust, people can avoid probate.  Also, these trusts avoid conservatorships because if you become disabled, a trustee is already in place to manage your assets for you.  And, you won’t have to deal with lawyers and courts.

However, revocable trusts can be and are contested, just like a will.  And, administering a trust after your death is not cost-free.  Even if probate is avoided, the successor trustee will seek help from a lawyer to make sure the debts are paid, all of the necessary tax forms filed, and the assets are properly distributed to your beneficiaries.

What are some myths about these trusts?

Living trusts always avoid probate.  After death, the revocable trust will not cut off the claims of creditors against the trust assets.  So, many times the successor trustee will open a probate estate anyway to require the creditors to file claims within the time required by law or be barred from collecting claims against the estate.

Living trusts are no more effective than wills in saving state and federal estate taxes.

Who should have a revocable trust?

People who want to avoid probate.  The trustee administers the trust and makes distributions based on the trust provisions — no court involvement is necessary.

People who value privacy.  A trust usually remains private, but a will becomes a public document as soon as it is filed with the court for probate.

People who own property in another state. Real estate is probated where the property is located.  If you live on a farm in Pennsylvania and also have a vacation condo in Arizona, you’ll have two probates.  A trust avoids this because the property is part of the trust and there is no estate to probate.  The trustee administers the trust, including both properties.  

People who live or spend a significant amount of time in a state where probate is time-consuming, burdensome, and costly.