The Trustee: Part 1…Picking a Trustee

As I have stated numerous times in my newsletters, I am not an automatic proponent of creating trusts for people. I will tailor an estate plan for a client depending on the needs of the client. However, many times creating some form of trust is necessary. The basics of trusts can be found by clicking here. One of the most important roles in the success of a trust is the trustee. Thus, making sure that the correct person is named trustee and that the trustee understands their role, responsibilities and whether a corporate trustee should also play a role in your trust is vital to ensure the settlor's intent.

A trust divides property into beneficial and equitable/legal titles of the property. A trustee holds the legal title to trust property for another person, called a "beneficiary." The trustee has a "fiduciary" role with respect to the beneficiaries of the trust. A trustee's fiduciary responsibility means the trustee must take into account the needs of both the current beneficiaries and any "remaindermen" ¹ named to receive trust assets upon the death of those entitled to income or principal now. As a fiduciary, the trustee will be held to a very high standard, meaning the trustee must pay even more attention to the trust investments and disbursements than the trustee would for trustee's own accounts.

At the outset, most clients will start off naming themselves and possible their spouse as co-trustee. Normally, this does not create an issue. But, appointing a successor trustee, or the trustee that subsequently will take over for the client-trustee upon the client's death or incapacity, can be a concern. In a similar vein, naming a co-trustee to act in conjunction with an elderly single client could also be an issue. The client should select the most appropriate person to be named the successor trustee, or co-trustee to ensure the settlor's intent is fulfilled.

The question then becomes: who does the client-settlor rely on to implement the trust language into action?

Because of the important role of a trustee; there are certain overarching criteria that usually make a good trustee. Key characteristics of a good trustee are integrity and judgment. Trustees will need to weigh the importance of different competing interests of beneficiaries with different needs and trying to determine what meets the settlor's intent. Trustees also need to be responsible, organized and mature.

Depending on the terms, a trust can last for many years, and being a trustee is a big responsibility. The person being named trustee could take on the trustee role for many years. That means a heavy burden for someone, even if that person is compensated. Overseeing a trust can consume an inordinate amount of time. The duration of the trust also might mean you do not want to name someone may pass on before become successor trustee or maybe too old to the point they do not want to deal with the hassles of being a trustee.

Another question to ask is: does naming this person as trustee makes sense as a business decision? Trustees have investing, accounting, and legal responsibilities. If the potential trustee is trustworthy but does not understand money, he or she may not be the best choice. A trustee can choose to hire professionals for these jobs. The key is whether the trustee will have good judgment in knowing when to seek professional assistance.

Overseeing a trust also requires following numerous requirements. Those requirements include: filing tax returns on time, sending notices to beneficiaries, and keeping up with changes in the law that might alter a trustee's responsibilities. A potential trustee that does not have time to keep up with the law or hire agents to aid the trust in meeting these requirements might not be wise choice.

In short, the person named as trustee should be the person the client believes is the most responsible person in the trust creator's circle of relatives, siblings, children or others. That person will follow through with the necessary legal requirements to oversee the trust but also most meet the settlor's intent in establishing the trust.

The next several months' newsletters will go into more issues related to trustees and their powers.

Basics of Estate Planning: Spousal Election

I guess I should say this is not only an estate planning issue, unless someone wants to take the steps to disinherit their spouse, but also an issue related to probate or post-death actions by a spouse. As demonstrated in Steve McNair's estate, the spousal election can be an important action taken to ensure that a surviving spouse receives an inheritance from the decedent-spouse.

Spousal election is the method used in certain states for a spouse to claim a portion of the estate of a deceased spouse who attempted to disinherit the surviving spouse by will. Generally, the disinherited spouse can elect to claim a portion, usually between one-third (1/3) and (1/2), equal to what they would have received if the decedent had died intestate.

The spousal election was initially created to limit the state's liability for the financial up-keep or maintenance of the surviving spouse, if the dying spouse had assets that could be used to support the surviving spouse. The state wanted to provide the dying spouse some ability to control their own assets but also to prevent the surviving spouse from falling into poverty and then becoming a ward of the state, if it could be prevented.

Each state has varying spousal election rules, but, like intestate, familial relationships can impact the amount a spouse can elect. For example, in Virginia, the surviving spouse shall be granted the right to an elective share in the amount of one half of the augmented estate if there are no surviving children of the deceased, and one third of the augmented estate if there are surviving children of the deceased.

The mechanics of the spousal election are rather simple. A decedent-spouse drafted a will that disinherits the surviving spouse completely or partially, but for less than the statutory share a surviving spouse would have been able take under intestate provisions. The surviving spouse must elect, or file, with the courts within a certain time, usually within six (6) months after the date of death of the decedent-spouse. This informs the personal representative, beneficiaries and others that the surviving spouse is asserting the spouse's rights to the spousal election.

One benefit of the spousal election is that the assets that can be claimed by the spouse are not limited to only probate assets. The elective share is generally calculated using all the assets the decedent-spouse held in ownership at death. This is sometimes referred to as the augmented estate. This calculation prevents the decedent-spouse from effectively disinheriting the surviving spouse by either gifting away assets before death or by tying up assets in devices; such as trusts or joint accounts, that benefit third parties after the decedent-spouse's death.

There are several things that could limit a spouse's ability to assert their elective rights. For instance, a pre-nuptial agreement, post-nuptial agreement or a marital separation agreement may negate the spousal election. Second, in some jurisdictions, if the spouse claims the elective share, they get that amount, but nothing else from the estate. Some jurisdictions will also reduce a spouse's elective share by the amount a spouse inherits through the will or a trust.

In short, there are legal mechanisms in place to prevent a married person from disinheriting their spouse with a will but a surviving spouse needs to be aware of those mechanisms to assert their rights.

Estate of the Month: Gene Upshaw

In somewhat of an ironic twist of fate, this spring many people watch as the NFL labor discord between the National Football League owners and National Football League Players' Association ("NFLPA") splashes across the sports page, which likely miss a tangentially-related probate litigation. The probate litigation arises from the death of the last executive director of the NFLPA, Gene Upshaw.

Gene Upshaw was a player for the Oakland Raiders of the American Football League and later the NFL. On August 17, 2008, he was diagnosed with pancreatic cancer. He died shortly after, on August 20, 2008 ² from the disease. Upshaw died leaving behind a wife, two sons from his current marriage and a son from a previous marriage.

Prior to August 20th, Upshaw had no will. He only executed a will the day that he died. The will gave his entire estate to his second wife, Terri Upshaw. It also name Terri Upshaw trustee and executor. Two of Upshaw's friends witnessed the execution of his will on his death bed in the hospital.

First, second marriages and bringing together two families always requires some form of planning because there will always be discord. See here, here, and here. Not sure I have to say anything else about that.

Second, the will was signed the day of his death. Upshaw's son from his first marriage sued alleging that Upshaw was not conscience at the time of the execution of his will and that his will was invalid, thereby stating Upshaw died intestate and Terri Upshaw should be removed as trustee and executor. Under Virginia intestate law, where Upshaw resided upon his death, if the will was deemed invalid, then Terri Upshaw would have only received one-third (1/3) of Upshaw's estate and Upshaw's three children would share the other two-thirds (2/3).

Generally, the requirements for the valid execution of a will in most states include:

1. Must be in writing;
2. Must be signed by the Testator (or by some person in his presence and by his direction); and
3. Must be attested in the presence of the Testator by 2 or more credible witnesses.

During pre-trial discovery, Terri Upshaw testified that one of Upshaw's friends was directed by Upshaw to sign his will for him. At the time of Upshaw's execution of the will, both of Upshaw's friends signed the attestation clause in Upshaw's will stating he signed his will. But, at the filing of Upshaw's will in the Fairfax County Register of Wills, Upshaw's friends stated that Upshaw did not sign the will. Upshaw's friends stated that one friend executed Upshaw's will under his direction. Upshaw's son argued that one of Upshaw's friends could not execute the will for Upshaw and also be a witness to that execution.

Unfortunately, the litigation was settled at the courthouse steps and how a court would have ruled on the validity of Upshaw's will cannot be known. However, it does demonstrate that waiting to execute a will on one's death bed can raise validity issues.

The other aspect I found interesting was the deferred compensation owed to Upshaw at the time of his death. Terri Upshaw filed an inventory of Upshaw's estate that listed a value of his estate at $19.7 million. The bulk of his estate was in the form of $15 million payout from the NFLPA's Players Inc. licensing arm. There was also a separate payment from the NFLPA "for past due compensation owed to decedent" of $1.73 million.

A deferred compensation fund is money an employee earns but agrees to receive at a later date. The money is typically invested, and taxes aren't paid until the money is given to the employee. A deferred compensation fund can be controlled by a beneficiary designation or by a will, depending upon on the fund terms. Specific details of how Upshaw's $15 million fund worked are not available. Upshaw's owed compensation is a different matter and would have been controlled by the will because there would have been no beneficiary designation just like most other paychecks. It certainly becomes clear why there was a litigation and settlement. Terri Upshaw had a great deal at risk.

Now, the question I am sure to get is: how does someone owed $1.73 million in compensation apply to the average person? Very simple. Many people receive a bonus for work they accomplish through the year. Many times that bonus is not paid out until many months after it is earned - thus, it is "past due compensation." That outstanding owed compensation is part of someone's estate, if they pass away in between the time of the bonus is awarded and the payout is made.

A personal representative's duty is to ensure that money gets to the right person and is just another issue that needs to be planned.

¹ A remainderman is a person who inherits, or is entitled to inherit, property upon the termination of the estate of the former owner. Usually this occurs due to the death or termination of the former owner's life estate, but this can also occur due to a specific notation in a trust passing ownership from one person to another.

² Many NFL fans lament that Upshaw's death occurred 3 months after the NFL Owners opted out of the collective bargaining agreement. Upshaw would have likely been the lead negotiator during the current round of labor talks. Many commentators have noted that he avowed to ensure a deal was completed between the players and owners because he wanted to retire after this last negotiation. Instead, he passed away, and there is now a lock out imposed by the owners and a strong possibility of canceled NFL games.