Vol 48 No. 1 January - February Docket. Official Publication of the San Mateo County Bar Association

Transcription

1 Vol 48 No. 1 January - February 2012 Docket Official Publication of the San Mateo County Bar Association In the Dark of Night on a Pitching Deck From the Trenches to the Benches Bankrupt and Loving It Postcard from the Open Ocean The Stork Club THE DOCKET 1

2 Tales from the Dark Side: Ten Tips for Estate Planners Seeking to Avoid Estate Litigation B y j e f f r e y r. l o e w, e s q. Leo Tolstoy wrote in Anna Karenina: Happy families are all alike; every unhappy family is unhappy in its own way. The first step in avoiding estate litigation is to observe and recognize the root causes of the unhappy family who inevitably become your estate planning clients. Some of these root causes of future estate litigation may include: (1) sibling rivalry an unequal distribution (or perceived unequal distribution) of assets or even of affection among the testator s children; (2) generational conflict as when children of a first marriage are disappointed their parents wealth goes to second spouses or caretakers instead of to them; (3) demographics the elderly population in California is growing twice as fast as the general population, leading to increased litigation concerning the elderly and their estates; (4) an increase in wealth and in the value of assets - 6 THE DOCKET throughout the Bay Area, significant wealth continues to be created, and the value of real estate, while not what it was a few years ago, still provides sufficient incentive to attack an estate plan and pursue settlement. So, what can estate planners do to head off litigation at the pass? As someone who s practiced as an estates and trusts litigator as well as an estate planner, I m here to report back from the Dark Side i.e., the world of litigation with ten tips on how estate planners can try to keep their clients and their heirs out of that unpredictable, chaotic world. Tip #1: Full Disclosure Keep the Skeletons Out of the Closet Many clients prefer to hide their estate plan behind the veil of confidentiality. However, it may be possible to defuse potential litigation by disclosing the dispositive plan and the rationale behind it. Jeffrey R. Loew s practice focuses on trust and estate litigation, probate and trust administration, estate planning, conservatorships, and civil litigation. Mr. Loew is a founding partner of Burns Loew, serving clients throughout the Bay Area with an office in Mountain View and a San Mateo office scheduled to open in the Spring of Mr. Loew currently serves on the Executive Committee of the Trusts and Estates Section of the SMCBA, and was named as a Northern California Super Lawyers Rising Star in 2009, 2010, and Mr. Loew received his J.D. from the University of California, Berkeley, School of Law (Boalt Hall). Still, it may be difficult to persuade wary clients that surprise is the worst approach to ensure one s testamentary wishes are carried out without dispute. Some clients refuse to confront their beneficiaries out of fear of conflict, or being pressured to change their plans. A shy or fearful client, particularly one who s afraid of his or her own children or grandchildren, may feel the estate plan is the only way to express his or her true feelings, or avoid unwanted pressure and complaints. While acknowledging the client s concerns, you owe it to your client to do all you can, under the circumstances, to ensure his or her estate plan is upheld upon his or her death, and that it doesn t lead to unnecessary conflict among the survivors. Disclosure is a powerful tool in this regard. Tip #2: Family Meetings Family members will often (though not always) go along with the testator s wishes if the wishes are presented directly at a family meeting. The testator s explanation of his or her desires, and of the testamentary plan to carry out those desires, may be enough to persuade family members not to attack the estate plan. The explanation by the testator also provides direct evidence of competence and freedom from undue influence. It may be advisable, depending on the circumstances, to have an attorney present to explain the details of the estate plan.

3 If there are unequal distributions, it may be important to disclose the reason. Explanations can address the doubts and anxieties that otherwise would arise after the testator s death. Explanations also may minimize feuds between siblings or other relatives by showing it was the testator s genuine intentions that brought about the decision. Tip #3: Witnesses to the Execution The signing of the estate planning instruments must be carefully planned to aid in defending a document from later claims of incompetence, undue influence, or other alleged defects. The testimony of a subscribing witness is given more weight than that of a nonsubscribing witness. Estate of McDonough (1926) 200 Cal. 57. Ideally, the witnesses should know the testator well, and should be good judges of whether the testator has capacity and whether he or she is acting free of undue influence. However, often legal personnel, with experience in these areas, can also be observant and effective witnesses. Tip #4: Advise the Testator to Consult with His or Her Physician The testator s treating physician may be the best witness to competency if he or she is alerted to the potential that the patient s wishes may later be challenged. In addition, the physician can help assure the will or trust is executed during a period of lucidity and a record is maintained of the patient s capacity. The attorney should make sure the physician understands the elements of testamentary capacity so he or she can conduct an evaluation with those elements in mind. If the client agrees, you may find a geriatric specialist, neurologist, or neuropsychiatrist and have the specialist prepare a detailed report for your file. Tip #5: Take Good Notes An attorney s notes and memos can be compelling evidence in a contest. It is best to maintain careful notes of the comments of the testator explaining his or her goals and decisions. If capacity or undue influence may become an issue, the drafter should make notes describing how capacity was assessed and record observations and conclusions. There are, however, conflicting views on this practice. Some argue the mere fact the drafter felt the need to assess capacity proves that the client s competency was in doubt. One way to address this concern is for a drafting attorney to apply a consistent procedure to assess the capacity of elderly testators, even if that procedure is in simply the form, for example, of reviewing the testator s extended family tree and understanding of his or her property. Such a consistent procedure would refute the charge that the attorney had special concerns about a given testator. Tip #6: Don t Go to the Tape Some estate planners use a video recording to help establish the capacity of the testator. In most cases, however, such a video can do more harm than good, and it s a technique probably best avoided, except in the limited circumstances described below. Advantages. A video of a capable testator can be a powerful tool to deter litigation or push a dispute toward settlement. For example, the phrase mild or moderate dementia is used to describe the condition of virtually any elderly adult who becomes confused about the identity of the President of the United States or simply his birthplace. If a contesting attorney has heard stories from his client about the testator s alleged dementia or incompetence, a video may convince the attorney the decedent in fact was competent and able to articulate his or her wishes and choices. Disadvantages. There are no reported California decisions involving videotaped wills or trusts. In this writer s experience, however, the potential risks outweigh the rewards. If it s true that video adds ten pounds, it is just as likely to deduct fifty IQ points. If a testator or settlor is inarticulate, forgetful, or fragile, a videotaped record is not advisable. An elderly person may become anxious or confused by the videotape procedure. The time required to set up the equipment and script the event may push him or her into exhaustion and the appearance of incompetence. The cases I ve handled involving videotapes (where the videotape was prepared either by prior counsel or opposing counsel) have had varying results: One video would likely have helped ensure that the testator s testamentary wishes were carried out, and the case settled. The testator performed adequately, as she was still mentally sharp and not especially frail. In two other cases where video recordings had been prepared by prior counsel in one case and by opposing party in another case the video recordings were ill-advised and poorly executed. In each case the elderly testator looked extremely frail and tentative and was clearly confused by the process, and the attorney had to ask her leading questions which she struggled to answer. In one of these cases, the subject was a testator who was twice examined by a neurologist who provided relatively favorable reports on her capacity, suggesting even more strongly that a video recording was unnecessary and counterproductive. Each of these cases settled, but in neither case did the video recording assist in defending the challenged estate plan. Tip # 7: No-Contest Clauses (Even Under the Current Law) Can Be a Deterrent In prior decades, a no-contest clause was a powerful tool for discouraging post-death litigation. Under the Probate Code, a no-contest clause means a provision in an otherwise valid instrument that, if enforced, would penalize a beneficiary if he or she files a contest with the court, generally by forfeiting an interest the contesting beneficiary would otherwise receive under the instrument. Probate Code section 21310(c). In the past, a contestant could generally trigger a no-contest clause simply by filing a pleading challenging a provision of the instrument containing the clause, so long as the contestant s action was not THE DOCKET 7

4 exempt due to certain policy limitations. The law was changed as of January 1, 2010, rendering no-contest clauses effective to penalize a far narrower scope of actions. The most significant limitation of the new current statutory scheme is that it now penalizes only contests brought without probable cause, a term that has not yet been satisfactorily defined. Notwithstanding the weakening of the law, a no-contest clause may still help prevent or discourage an attack on an estate plan, given the risk remains that an unsuccessful contestant may be totally disinherited. Keep in mind the complaining beneficiary has to receive some significant gift from the estate plan, or the no-contest clause will be ineffective. There will be no further punishment for attacking the document if the contestant has been disinherited anyway. Tip #8: Avoid Contributing to a Presumption of Undue Influence Minimizing, controlling, and documenting the drafter s contacts and communications with beneficiaries is important where an undue influence claim may be asserted that is, a claim that the testator would not have made the challenged gift unless he or she was under the improper influence of another person. An attorney s role is crucial in this analysis because a presumption of undue influence arises if the person accused of undue influence actively participated in the preparation or execution of the testamentary documents. If so, it may be the legal duty of the document s proponents, generally the trustee or executor, to defend the challenged gift. Avoiding this presumption is vital. It is in many cases the only presumption the attorney has any control over, among the three prongs for shifting the burden of proof, i.e., (1) a confidential relationship, (2) undue benefit, and (3) active procurement the active participation by the beneficiary in the instrument being obtained and executed. Despite these concerns, the testator may insist a son or daughter be present for the execution. This puts the drafting attorney in a genuine dilemma. The presence of a beneficiary in the room at the time of signing may make defending the document more difficult after the testator s death. It s in your and your client s interest to try to persuade the client to have the person out of the room, at least for the signing itself, if at all possible. Tip #9: Beware of Disqualified Beneficiaries Presumptively Invalid Transfers. Probate Code sections and their successor statutes, Probate Code sections , represent a broad remedial statutory scheme that shifts the normal burden of proof in establishing an undue influence claim. The scheme is intended to protect trustors and testators from certain individuals who are uniquely positioned to procure gifts from elderly persons through fraud, menace, duress or undue influence. Graham v. Lenzi (1995) 37 Cal.App.4th 248, 256. Sections and establish a presumption of menace, duress, fraud, or undue influence when a gift is made to a disqualified person. Under section and its recent successor statute, section (effective January 1, 2011), no provision of an instrument is valid to make a donative transfer (i.e., an inter vivos or testamentary gift) to certain disqualified beneficiaries, including: (1) the drafter, (2) a fiduciary of the testator who causes the instrument to be transcribed, (3) a care custodian of the testator, or (4) a close relative or employee of any of the above persons. Gifts made to prohibited transferees are invalid unless one of the exceptions under Probate Code sections and applies, which include: (1) a gift to a close relative of the testator, (2) where an independent attorney counsels the donor and executes a Certificate of Independent Review (discussed below), or (3) where the prohibited transferee, in limited circumstances, establishes by clear and convincing evidence that the transfer was not the product of fraud, menace, duress or undue influence. Certificate of Independent Review. The presumption of invalidity due to 8 THE DOCKET

5 fraud or undue influence that arises under Probate Code sections or does not apply if the instrument is reviewed by an independent attorney who (1) counsels the client (transferor) about the nature and consequences of the intended transfer, (2) attempts to determine if the intended consequence is the result of fraud, menace, duress, or undue influence, and (3) signs and delivers to the transferor an original certificate, with a copy to the drafter, that substantially follows the form provided in Probate Code sections 21351(b) or (depending on when the instrument became irrevocable). Changes in the New Statutory Scheme. Section 21380, et seq. became effective January 1, 2011, and supersedes former section 21350, et seq., except for documents that became irrevocable before that date. The new law substantially follows the prior statutory language, with the following notable changes: The definition of care custodian was significantly recast. It presumptively disqualifies gifts to care custodians only if the dependent adult signs the instrument during the period in which the care custodian provided services to the client, or within 90 days before or after that period. This addresses prior law which held that even a long-time friend of the testator could become a care custodian, and thus a disqualified beneficiary, if he or she provided any broadly defined health or social services to the testator, with or without compensation. The new law allows the drafting attorney to prepare the certificate of independent review for transfers to care custodians (though not for transfers to drafting attorneys or fiduciaries). A definition of independent attorney was added, to provide guidance on who may sign a certificate of independent review. Prob. Code Potential Liability for Estate Planning Attorneys. Sections and may create duties and potential liability for estate planning attorneys. Osornio v Weingarten (2004) 124 Cal. App.4th 304 (cited in the official Commentary to sections and 21380, et seq.), holds an estate planning attorney may owe a duty of care to advise a testator to obtain a certificate of independent review for the benefit of a potential beneficiary known to be a care custodian. A breach of this duty may give the third-party beneficiary standing to bring an action against the attorney. (Id.) Tip #10: Be Aware of the Ethical Guidelines for Representing Incapacitated or Vulnerable Clients So what can an estate planning attorney do when he or she believes the client may be incapacitated or subject to undue influence? In California, unfortunately, the jury is out on whether and to what extent an attorney may act to protect the client from himself or herself in such circumstances. The ABA Rule. ABA Model Rule 1.14(b), which reflects the majority rule in the United States, holds as follows (emphasis added): When the lawyer reasonably believes that the client has diminished capacity, is at risk of substantial physical, financial or other harm unless action is taken and cannot adequately act in the client s own interest, the lawyer may take reasonably necessary protective action, including consulting with individuals or entities that have the ability to take action to protect the client and, in appropriate cases, seeking the appointment of a guardian ad litem, conservator or guardian. But this is not the rule in California. The California State Bar s Opinion. The California State Bar in 1989 issued an ethics opinion barring the attorney from seeking conservatorship of his or her own client, or from seeking other assistance for the client where the attorney believes the client is suffering from incapacity or subject to undue influence that might influence his or her estate planning. See California State Bar Standing Committee on Professional Responsibility and Conduct Formal Opinion No : ( LinkClick.aspx?fileticket=pNXKAO8 aina%3d&tabid=840). Dissent By County Bar Associations. In contrast, a 1999 opinion from the San Francisco Bar Association states that a lawyer may, but is not required to, recommend appointment of a conservator or make limited disclosures to a third party such as a physician to achieve the client s best interests. Bar Assn. of San Francisco Ethics Opinion No The Bar Associations of San Diego County and Orange County have taken similar positions in ethics opinions. Given this uncertainty, the drafter should exercise care before taking affirmative steps to protect the client from himself or herself. Simply refusing to make the requested changes may shield the attorney from being a defendant or witness in a future lawsuit, but does not ensure that the client s best interests are protected, given the possibility that another attorney may make the requested changes. Note drafting attorneys generally owe no duty to beneficiaries under a current or prior instrument for failing to ascertain a client lacked capacity. Moore v. Anderson Zeigler Disharoon Gallagher & Gray (2003) 109 Cal.App.4th 1287; but see Osornio v. Weingarten (2004) 124 Cal.App.4th 304 (see above, concerning an attorney s failure to obtain a certificate of independent review). Conclusion It s very possible none of the precautions described above will deter would-be beneficiaries from commencing litigation, if they simply believe they should have received more under the testator s estate plan. If you are unable to avoid a post-mortem dispute, you may want to keep in mind that ADR and, in particular, mediation are very effective in resolving estates and trusts litigation disputes, given the benefits of maintaining control of the case and managing the emotional dynamic. And, at the end of the day, estates and trusts litigation frequently involves found money, and therefore the outcome does not have to be a zero-sum game. m THE DOCKET 9