Arizona Elder Lawyer

A Trustee Cannot Compel A Beneficiary To Arbitrate Disputes

Trusts are generally implemented by individuals with specific goals.  Courts give great deference to the plain meaning and intent within a person’s trust.  However, a court must balance the intent of a trustor with the constitutional rights of a beneficiary.  In May 2011, the Second Appellate District Court of Appeal of the State of California squared these competing issues correctly in its published decision Diaz v. Bukey.

The Diaz Family Trust was established by the parents of two daughters in 1995.  On November 1, 2004, Bukey became the Successor Trustee.  Bukey and Diaz are sisters and beneficiaries of the Trust.  Upon the death of the surviving settlor on November 6, 2006, the Trust became irrevocable.

On May 8, 2009, Diaz requested an accounting of the financial activities of the Trust from November 1, 2004 through current.  Bukey did not adequately comply with this request.  Therefore, on November 5, 2009, Diaz filed a Probate Code Section 17200 petition to remove the trustee, appoint a successor trustee, and compel the current trustee to account and reimburse the trust.  The allegations included that Bukey breached her fiduciary duties by failing to provide a proper accounting, failing to distribute the assets of the Trust, and using Trust assets for her personal benefit.

Bukey responded by filing a demurrer and petitioned for an order to compel arbitration and otherwise stay the proceedings.  There was an arbitration provision within the Trust which read: “Any dispute arising in connection with this Trust, including disputes between Trustee and any beneficiary or among Co-Trustees, shall be settled by the negotiation, mediation and arbitration provisions of that certain LawForms Integrity Agreement (Uniform Agreement Establishing Procedures for Settling Disputes) entered into by the parties prior to, concurrently with or subsequent to the execution of this Trust. . .”

Diaz opposed the demurrer and petition to arbitrate.  The trial court overruled the demurrer and denied the petition to arbitrate.  The trial court reasoned that Diaz was not contractually bound to an arbitration clause as a beneficiary of a Trust.  Bukey claimed that the arbitration clause was binding because Diaz was a third party beneficiary affirmatively seeking benefits and the Trust was a contract.

The Diaz court rejected the theory that a Trust is a contract by delineating the cases cited as disputes between trust beneficiaries and trustees regarding trustee compensation, inapposite here.  The thrust of Diaz’s complaint were the actions or inactions taken by the Successor Trustee while purportedly acting as Successor Trustee.  The main thrust of the complaint was not that the Successor Trustee fees were excessive. 

The Diaz court looked to and adopted Schoneberger v. Oelze (1004) 208 Ariz. 591, 96 P.3d 1078 which discussed an arbitration provision within a trust that had marked similarities to the Diaz provision.  The Schoneberger court rejected claims that the trusts at issue were contracts.  In part, the Schoneberger court cited that a fiduciary relationship exists between a trustee and a trust beneficiary, such relationship not existing between contract parties.  The Diaz court did not decide whether or not arbitration could be compelled if the beneficiaries either gave their consent or consideration to attain such status.

A Trustee Who Breached Her Fiduciary Duties May Be Disgorged Of Her Beneficial Interest In The Trust To Satisfy A Surcharge Even Though A Spendthrift Clause Exists

In Chatard v. Oveross (2009) 179 Cal.App.4^th 1098, the California Second District Court of Appeal held that a beneficiary who breached some of her fiduciary duties as successor trustee and was surcharged as a result, could be disgorged of a portion of her beneficial interest in the same trust even though the trust included a spendthrift clause. 

The trust dispute ripened after the death of a surviving spouse wherein one adult child became the successor trustee.  The trust assets were required to be disbursed in part to three adult children and retained in part for four grandchildren from a pre-deceased son until such time as all of the grandchildren were over thirty years old. 

Disputes arose over whether or not real property should be sold.  The trial court determined that the sibling successor trustee failed to make trust property productive, awarded herself excessive compensation, used trust assets to pay personal expenses, and failed to distribute trust assets within a reasonable time. 

The trial court determined that the successor trustee opposed her sibling beneficiaries’ court petitions without reasonable cause and in bad faith and awarded the sibling beneficiaries’ attorney fees against the successor trustee sibling.  Personal expenses can include attorney fees which are deemed to be of a personal nature rather than incurred to aid in the administration of a trust.

The trial court held, and the court of appeal agreed, that the spendthrift clause within the trust did not insulate a beneficiary from a surcharge claim or protect that beneficiary’s interest from securing the sibling beneficiaries’ claims.

Trust Modification to Achieve Settlor’s Tax Objectives

During 2008 Arizona Revised Statute § 14-10416 was enacted.  In its entirety the statute provides:

“To achieve the settlor's tax objectives, the court may modify the terms of a trust in a manner that is not contrary to the settlor's probable intention. The court may provide that the modification has retroactive effect.”

Arizona Revised Statute § 14-10410(B) allows a trustee or a beneficiary to bring a proceeding in court to approve or disapprove a proposed modification or termination to a Trust.  The statute allows a court to wield broad discretion in these matters. 

A legitimate argument could be made that courts should not have this much discretion over an individual’s personal financial affairs.  Courts might take care to incorporate the settlor’s intent, rather than one “that is not contrary to” the settlor’s probable intent, even if the settlor’s intent might seem eccentric.

A contested proceeding should focus upon the intent of the settlor, whether or not the settlor was represented by competent counsel and other pertinent evidence. 

If all of the beneficiaries consent to modification or termination, a petition of this nature should be promptly approved by the court.  But, rather than summarily approving these petitions, courts might better serve the public by proactively scrutinizing who might actually be affected, their ages if they are alive, their current means and current vulnerabilities, their ability to truly understand what rights might be or are affected, and the values of the potential revisions to each affected beneficiary.  The consent of the living beneficiaries should be limited in application to their specific, personal rights. 

If not all beneficiaries consent, as long as the interests of the dissenting or silent beneficiaries are adequately protected, the court should promptly approve the petition so as not to impede the Trust administration.  Whether or not beneficiaries have been “adequately protected” will undoubtedly be vigorously contested by many.

This statute does not appear to have been tested yet in any published case.

Current Superior Court Filing Fees For Maricopa County Arizona Probate Case Matters

Arizona Superior Court filing fees are mandated by statute.  Generally, the filing fee for a Petition in a Probate Case is $251.00 in Maricopa County.  A certified copy of any court record costs $26.00.  A charge of $26.00 will be assessed to seal a court file or to re-open a sealed court file.

The specific services where a fee assessment is $251.00 include the following:

• Petition in a formal testacy or appointment
• Application for informal probate or informal appointment
• Petition for supervised administration
• Petition to appoint guardian
• Petition to appoint conservator or make protective order
• Single estate application or petition under Chapter 3, Title 14 (§14-3938)
• Opposing petition in testacy or appointment proceedings or appointment of guardianship/conservatorship
• Petition for transfer of real property by affidavit (A.R.S.§14-3971(F))

 A person who opposes a contested petition and has not paid a filing fee in the matter is assessed $186.00.

The current fee for a court investigation is $400.00.  A fee of $300.00 is assessed if the court accountant is required to act.  Any post-judgment activities in Maricopa County Probate Cases will require a fee of $86.00.

Annual Federal Gift Tax Exclusion During 2010 – Update

The Internal Revenue Service just announced “Guidance For Persons Making Transfers In Trust After December 31, 2009” in Notice 2010-19. 

 

The Notice states that the Internal Revenue Service intends to issue guidance under Section 2511(c) of the Internal Revenue Code.  The Code Section was enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and amended by the Job Creation and Worker Assistance Act of 2002.  Section 2511(c) is effective for transfers made after December 31, 2009, and before January 1, 2011.

 

“Section 2511(a) generally provides that the gift tax shall apply to transfers in trust or otherwise, whether direct or indirect. Under § 25.2511-2(b) of the Gift Tax Regulations, a gift is complete when the donor parts with sufficient dominion and control as to leave in the donor no power to change its disposition.

 

"Section 2511(c) provides that, notwithstanding any other provision of section 2511 and except as provided in regulations, a transfer in trust shall be treated as a transfer of property by gift unless the trust is treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1.

 

"The Joint Committee on Taxation’s explanation of 2 section 2511(c) provides that certain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would not have been treated as transfers under the gift tax provisions in effect prior to 2010. Joint Committee on Taxation, Technical Explanation of the “Job Creation and Worker Assistance Act of 2002” (JCX-12-02), March 6, 2002.”

 

The Notice provides the following Interim Provisions:

 

“Some taxpayers may have inaccurately interpreted section 2511(c) as excluding from the gift tax transfers to a trust treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1, even though those transfers would otherwise be taxable under Chapter 12. The provisions of Chapter 12 regarding the substantive law applicable to the gift tax were not amended by EGTRRA, and those provisions continue to apply to all transfers made by donors during 2010.

 

“Section 2511(c) is an addition to those substantive law provisions and is applicable to transfers made in 2010. Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.

 

“Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1 is considered to be a transfer by gift of the entire interest in the property under section 2511(c). The provisions of Chapter 12 as in effect on December 31, 2009, continue to apply (both before and during 2010) to all transfers made to any other trust to determine whether the transfer is subject to gift tax.”

 

Regulations are expected to be forthcoming which confirm the conclusions set forth in the Notice.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Transfer Issue – Example Four

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

An issue which arises often is when siblings litigate over custody of a parent.  Sometimes, a sister and a brother will have protracted litigation in one state over who is to be appointed conservator over their mother or father.  Then, sometime after the sister wins, she wants to move both her mother or her father and herself to another state.  Will the sister have to be put through protracted litigation by her brother all over again in the second state?

The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to provide transfer procedures which would allow the sister to transfer the conservatorship from the first state to the second state without the need to re-litigate the case.  Proper Notice would be given to the brother and he could participate in the transfer proceedings.  The American Bar Association Commission on Law and Aging purports that there would be a preservation of resources by both the family and the court.  Because these are legal issues which are not unusual, residents in Arizona will be exposed to issues such as the one herein and adoption of the Act in whole or in part by the State of Arizona may be prudent.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Jurisdiction / Transfer Issue - Example Three

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

An issue which will arise more frequently as the Baby Boomer population ages is one where both parents have dementia and are living in a nursing home in one state and there are no family members that are close by who are either willing or able to check in on the parents.  In this case, an adult child and her family may want to move her parents from the first nursing home in her parent’s home state to a nursing home in the state where the daughter lives that is close to her.  What happens if the daughter cannot get her parents to voluntarily agree to move?

Under the Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act, the daughter could file for guardianship in the Probate Court of the home state.  The parents would have the opportunity to object to the petitioned for guardianship and have access to evidence and contacts in the home state.  If the daughter has success with her petition to be appointed guardian, the Act provides procedures for the second state to recognize the legal authority granted to her while continuing to give the parents the right to object to the move into the second state.  In this scenario, there would be order to the process which everyone could agree to.

The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to give both order to the legal procedures and cost-saving measures for both the family and the courts.  Arizona should give thoughtful consideration to adopting this Act either in whole or in part as it is being adopted throughout the country.  Arizona’s population is made up of people who have generally moved to Arizona from elsewhere.  It does not hold true that the entire family moved to the State of Arizona altogether, therefore, this set of facts can be anticipated to occur fairly often with Arizona being either the home state of the second state.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Jurisdiction Issue - Example Two

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

A very common issue that comes up is that while an adult is living in a nursing home in one state, she may have no relatives in that state and want to move to another nursing home in a state where she does have family.  What happens if the nursing home in the first state refuses to release her to her family living in the second state?  This does happen.

Generally, in this situation, a Probate Case would be filed either by the adult living in the nursing home or her family in the first state which is considered the home state.  The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to give clear guidance regarding which state to file a Probate Case in given these factors, which would preserve both the family’s resources and judicial resources.  Because this scenario is common and Arizona could either be the home state or the second state, it would be prudent for the Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act to be considered for adoption, either in whole or in part, in Arizona.

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – Arizona Jurisdiction Issue - Example One

The American Bar Association Commission on Law and Aging compiled and published in June 2009 a list of stories it purports to support the need for national passage of the UAGPPJA.  See my post from January 25, 2010 for an introduction of the Act.

Jurisdiction issues pertain to which state has the right or duty to hear a matter or issue a court order which affects the rights of an individual. 

An example of an issue which might arise related to which state should a Probate Case be filed in when an incapacitated adult who has traveled across state lines into Arizona to visit his adult child, then wants to go back home to Alabama and boards a flight.  During a layover in Georgia the incapacitated adult gets lost both in and out of the airport and ends up in a psychiatric ward in Georgia.  What state should the adult child file a Probate Petition in order to establish either a guardianship or conservatorship over the incapacitated adult?

The Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act purports to provide clear guidance to lawyers and judges for circumstances such as this.  With clear guidance, both financial and court resources could be preserved.  In this circumstance, the Act would provide that Alabama would be the “home state” in which a Probate Petition could be filed, unless there was an emergency.  In the case of an emergency, if the incapacitated parent ended up back in Arizona with the adult child, the Probate Case could be filed in Arizona.  Apparently the Act provides for many differing circumstances and possible outcomes.  At any rate, this scenario could easily play out and this Act should be given consideration in Arizona.   

Uniform Adult Guardianship and Protective Proceeding Jurisdiction Act (UAGPPJA) – An Introduction

The name says a lot.  This Act was approved by the American Bar Association in December 2007 and is supported by the Alzheimer’s Association, the Conference of Chief Justices, the National Association of Elder Law Attorneys, the National College of Probate Attorneys, and the National Guardianship Association. In other words, there are a great many smart people across the United States who embrace and support this Act in an effort to make these issues more streamlined.

The State of Arizona has neither adopted the UAGPPJA, nor is a bill expected to be introduced for passage in Arizona at this time.  The States that have adopted this Act include Alaska, Colorado, Delaware, the District of Columbia, Illinois, Minnesota, Montana, Nevada, North Dakota, Oregon, Utah, Washington and West Virginia.  The States giving the Act consideration include Arkansas, Connecticut, Florida, Indiana, Iowa, Kentucky, Maryland, New Mexico, Tennessee and Texas. 

The Act is an attempt to provide an effective mechanism for resolving multi-state jurisdictional disputes.  The objective is that only one state will have jurisdiction at any given time for matters of adult guardianships, conservatorships, and other protective proceedings.

Over the next few days, I will post specific examples of issues presented by the American Bar Association Commission on Law and Aging compiled and published in June 2009.  The Act is one which the Arizona Legislative Branch might want to consider studying and either adopting in full or in part after substantial input from attorneys and others who have expertise in the field.