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Wednesday, June 20, 2018

Part I of IV Parts: Five Keys CPA’s Should Know to Avoid Probate (and Trust) Problems & Litigation

Sooner or later every CPA will have clients or members of a client’s family that will require either a probate administration, or a trust administration or both. In many cases, the probate and trust administration process may be uneventful, and everything will go smoothly for the clients and the family.  When that is the case, that’s great!  However, there is a new reality emerging in probate and trust administrations in Florida and around the country, which is increased litigation.  In some cases, it may be fair to say that we are seeing some very aggressive instances of law suits and litigation.  The purpose of this article is to provide some suggestions to help identify issues before things become unmanageable, and hopefully to mitigate or protect our clients from the possibility of costly litigation.

For purposes of this article, let’s agree that many of the issues that are problematic or may become problematic for a probate administration are generally applicable to trust administrations as well.  Although there are definite and distinct differences between probate and trust administrations, we’ll take this opportunity to discuss both types of administrations together, referring to each as simply “estate administrations.” If a particular circumstance arises in our discussion that merits being distinguished as to either probate or trust administrations, we’ll simply point that out.  In this way, we hope that this article will provide you with some basic but useful information for both probate and trust administrations.

As a starting point, it will be helpful for us to consider the underlying general or cultural facts or circumstances that are imposing pressure on estate administrations which can lead to disputes resulting in lawsuits. As a threshold issue we should recognize that the Florida courts (as well as many other state courts) are seeing an increase in estate litigations. Most practitioners that I speak with agree that there are three or four significant factors which seem to be driving this increase in litigation.  Perhaps one of the most significant factors is the increase in the values of the estates subject to administration.  On the probate side, we might concede that there is not necessarily an increase in the value of probate estates, particularly in Florida, due to the fact that many affluent clients utilize revocable trusts in order to avoid probate, leading to a result that there may actually be a statistical decrease in the values of estates subject to probate. However, sometimes even the best of estate plans don’t work out as anticipated, which can lead to assets being subject to probate that were intended to fall under trust administration.  We will discuss this later in the article. On the trust side, however, it seems that asset values are ever increasing.  More and more clients are putting more and more assets into trusts in Florida as more individuals and families with substantial wealth make their residence in Florida as they flee the high taxing jurisdictions of the north and northeast and migrate from Latin America and other areas around the globe.

In addition to more wealth being subject to trust administrations, generally speaking, I believe most people will agree that over the last several decades we’ve seen an increase in litigation in the United States. Just ask any neighbor or friend if they have recently experienced the pain of a notice of lawsuit, whether from a minor traffic accident or some incident in their community association or even social club or church.  Litigation in general has been on the rise in the U.S. for the last fifty years. There may be many different reasons for the increase in litigation, nationwide and in Florida, but whatever the factors are that are driving this phenomenon, we certainly see it being manifested in estate litigation. One anecdotal reference might make the point; when my father was an estate planning attorney in Boca Raton forty years ago, he occasionally would contact a charity on behalf of a client’s estate to inform them that one of the firm’s clients had left a legacy to the charity.  In the early seventies and eighties, those types of calls would typically be met with a gracious “Thank you!” and something along the lines of, “Please let the family know how much our organization appreciates the generous donation.  Please let us know if there is anything we should do between now and the appropriate time for the distribution of the gift.” More typically today, when I have a similar type of a situation, when initial contact with the charity is made, very often the response I get from that call is something like, “Thank you for your call, please hold while we connect you to our attorney so that you can discuss this bequest in more detail.”  Now, we should not in any way fault the charities.  This world is a good bit more complicated in 2018 than it was in 1973.  For one thing, the charity may be concerned that they must follow strict protocols, to ensure that they (the charity) themselves do not get sued for the possibility of breach of their fiduciary duties to their charitable entity or beneficiaries.  Whatever the reason, the takeaway is simply that we all must be a bit more careful and thoughtful in how we conduct administrations of estates.

Of course, another factor that complicates all our lives is that our cultural and societal mores have changed over the last several decades. For example, in the sixties, there was a certain stigma associated with divorce.  Just watch a rerun of The Graduate and you’ll immediately see the point. Today, in 2018, approximately 51% of all people who marry in the U.S. get divorced.  The result of this cultural phenomenon is that many of today’s estate planning clients have second, and even third marriages.  A natural result of multiple marriages is that many families have children from different marriages which result in beneficiaries from different parents being heirs of the decedent.  Multiple marriages, even if only two, means that the surviving spouse may be the decedent’s second spouse. In those cases, you may have a surviving spouse/beneficiary of the decedent who is in a conflicting or at least potentially conflicting position to the natural heirs (children of the decedent from a prior marriage).

All of the above facts and social realities lead to a potentially nearly perfect storm of complications, conflicts (real or possible), significant assets in play, and stakeholders who may benefit or be hurt by the administration of the estate in a litigious environment.  In some cases, due to complexities of our law of wills and trusts, a simple turn of a phrase within a will or trust may result in one person inheriting millions while disinheriting another; or one beneficiary receiving significant tax benefits while another gets little or none; or one beneficiary obtaining creditor protected assets, while his or her sibling is left with creditor exposed assets. These are only a few of the reasons why we are seeing more litigation in estates and why probate and trust administration attorneys and other professionals like CPAs and investment advisors, who have important roles to play in the estate administration, must be informed, aligned, and coordinated with the other key professionals in estate administrations.  In many if not most cases, CPAs whose clients are going through the probate or trust administration process should become active participants in the process.

With that as our paradigm, lets consider Five Keys to Avoid Probate (and Trust) Administration Problems & Litigation.

#1 Identify and Communicate

The first thing our firm does when opening an estate administration is to do our best to identify the stakeholders and their relationships to the decedent and to each other from the outset.  The threshold identification is straight forward. For example, starting with the personal representative (the term used in Florida for an executor), or in the case of trusts, the Trustee, the question becomes: Is the fiduciary the surviving spouse, one of the heirs, a professional fiduciary (attorney, CPA or trust officer) or is the fiduciary a friend or colleague of the decedent?  It is critical to identify this in the early stages and it will inform many important decisions throughout the administration of the estate. 

It is also vital to identify any potential conflicts of interest at the very start of the process. The second step in the point of inquiry may be less obvious; ask yourself if there are there any apparent or obvious conflicts or potential conflicts of interests between the fiduciary and beneficiaries.  If the personal representative or Trustee is the surviving spouse, are there potential or inherent conflicts with other beneficiaries, such as children from a prior marriage?  Or even if the beneficiaries are children of the fiduciary, are there inherent conflicts or potential conflicts if for example the fiduciary has an income interest in the trust and are the children (minors or adults) the remaindermen beneficiaries? Obviously, the more the Trustee distributes out to the income beneficiary, the less there may be to ultimately distribute to the remaindermen at the death of the surviving spouse.  The surviving spouse may want to focus on investing for income while the children may want to focus on investing for long term growth.  If the fiduciary is an adult child of the decedent, is there a surviving spouse who is not related by blood to the fiduciary? Again, this is an important question of fact which may point to a potential for conflicts. For example, son of decedent (from first marriage) managing estate or trust assets in such a way as to maximize the ultimate value of the estate for the remaindermen while minimizing the benefits to the income beneficiary (surviving spouse, who is not his mother).

Is the fiduciary a bank or trust company?  If so, are they will have their own methods of administration and it is always best to make certain that there are clear communications and expectations in that regard as well. Corporate Fiduciaries are often more conservative than individual fiduciary, probably because the banks see a great deal of litigation and they want to manage the estate in such a way as to hopefully minimize the possibility of lawsuits.  When dealing with a corporate fiduciary, it is a good idea to get clear communication and expectations on timelines for future distributions, payment of debts, payments to reimburse family members for things like the funeral, wake or shiva, etc. 

If the personal representative or Trustee is a friend, colleague, former advisor, or employee of the decedent, there needs to be clear communication as to expectations, ongoing communication between the attorney and the fiduciary, and between the fiduciary and the beneficiaries, creditors, etc. These points are critical to establish in the early stages of administration so that, to the extent possible, we may avoid issues that otherwise might arise due to either poor communication or inappropriate expectations.

It also may be helpful to keep in mind that in many cases, several or possibly all of the beneficiaries of the estate may have little to no experience with estate administrations. In fact, in the case of a family member serving as an executor or Trustee, it may be the first experience the fiduciary has had in this role.  In those circumstances it is vital that a framework of the estate administration be communicated to all the stakeholders as soon as possible. In most if not all cases the executor, the CPA and the estate attorney should take steps to make certain they are all unified and on the same page as to expectations on timelines as well as coordination on the duties and responsibilities each will undertake.

Here is a short list of questions that we very frequently hear on estate administrations depending on different facts and circumstances: How long will this administration take?; How soon before (some) distributions can be made?; Will all creditors be paid and if so, will they be paid before or after the beneficiaries?; What if the surviving spouse wants more income from a trust where the children of a prior marriage stand to receive the remainder of the trust on the death of the surviving spouse? Who decides what is the appropriate balance in trust assets?;  What if there is little money in the estate but substantial assets in the decedent’s revocable trust? Does the trust have to fund obligations of the estate?; How does homestead work in Florida?; What if some of the children of the prior marriage worked for the decedent in a closely-held business, but other children (beneficiaries) did not?; How will the closely-held business continue to operate?; How will the personal representative be compensated?;  How much will the attorney and CPA get paid?; and How much will have to be paid in taxes?

The best way to answer all those questions depends on a myriad of different factors. It would be my suggestion that all those questions and dozens more should be anticipated and coordinated by the attorney and the CPA. Anticipate the key questions and then consider the best way to handle them based upon the underlying facts of the estate administration at hand.  Each of the questions listed above resulted in litigation in various matters that we have seen over the years.  It is also true that many of those questions when handled carefully and thoughtfully by the parties and the professionals might allow the estate to avoid or at least mitigate the possibility of litigation.  Identify all the stakeholders, review the file carefully from the outset with a mindfulness of the possibility of litigation, and if the clients and the professionals work together, arguments and perhaps even litigation may be avoided.

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