Posts tagged with "irrevocable trust"

Probate Courts Hearing a Conservator’s Application to Transfer Income from a Conserved Person’s Estate Must Provide Notice to All Parties Who May Have an Interest in the Estate

In a recent case before the Superior Court of Connecticut, a named beneficiary of a will filed an appeal to reverse a probate court order that authorized the conservator of his benefactor to transfer all her assets into trusts.  The conservator brought a motion to dismiss the appeal based on  lack of standing.  The court held that the named beneficiary had standing to file his appeal and denied the motion to dismiss.

In January 2008, the probate court appointed John Nugent (“Nugent”) as the conservator of the person and the estate of Josephine Smoron.  In April 2009, the Nugent applied to the probate court to approve the creation and funding of a revocable trust and an irrevocable trust for Ms. Smoron.  At the time of the May 2009 probate court hearing, Samuel Manzo (“Manzo”) was a named beneficiary under Ms. Smoron’s will. The probate court approved Nugent’s application and authorized the creation and funding of the two trusts; however, the hearing was held without providing notice to Manzo or other named beneficiaries of Ms. Smoron’s will.  Nugent, in his capacity as conservator, established and funded the trusts by quitclaiming real property owned by Ms. Smoron to the irrevocable trust and by depositing over $218,000 of her assets to the revocable trust.  Pursuant to the terms of the trusts, upon Ms. Smoron’s death, the proceeds were to be distributed to three churches, with no provisions for the beneficiaries named under will.  In June 2009, Ms. Smoron died.

Nugent argued that Manzo’s appeal of the probate orders authorizing the creation and funding of Ms. Smoron’s trusts must be dismissed because Manzo was a “mere prospective heir” under Ms. Smoron’s will and, therefore, lacked a sufficient legal interest to challenge the rulings of the probate court.  However, in the instant case, the Superior Court found it to be a provable fact that Manzo was a beneficiary of Ms. Smoron’s will rather than a prospective heir.

Connecticut law specifically requires the probate court to hold a hearing and provide notice to “all parties who may have an interest” in the estate before authorizing a conservator to transfer his conserved person’s property.  Conn. Gen. Stat. § 45a-655(e).  The same law further provides that the probate court should also consider the provisions of an existing estate plan before authorizing the conservator to make transfers of income or principal from the estate of the conserved person.  The Superior Court found that, as a named beneficiary under Ms. Smoron’s will at the time of the May 2009 order, Manzo had both an interest in the estate and an interest in ensuring that the probate court considered Ms. Smoron’s will as part of the existing estate plan.  Therefore, Manzo should have received notice of the probate court hearing.

Therefore, the Superior Court held that, as a named beneficiary under the will, Manzo was aggrieved by the May 2009 probate court order, should it be permitted to stand. Pursuant to that order, Nugent not only placed Ms. Smoron’s assets in the trusts, but he also designated three churches as beneficiaries of the trusts upon Ms. Smoron’s death. The court characterized these actions as effectively disinheriting Manzo and nullifying any provisions that had been made for him under Ms. Smoron’s will.  Based these facts, the trial court determined that Manzo was a proper party to invoke the jurisdiction of the court.

The Superior Court denied Nugent’s motion to dismiss and permitted Manzo to go forward in the Superior Court of Connecticut with his appeal of the probate court orders authorizing the creation and funding of trusts for Ms. Smoron’s estate.

Should you have any questions relating to wills, trusts, estate planning or other personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Manzo v. Nugent, X04HHDCV105035142S, 2012 WL 1959076 (Conn. Super. Ct. May 8, 2012)

Property Conveyance May Satisfy the Statute of Frauds Requirement to Create a Trust

In a recent case before the Connecticut Superior Court, two daughters sought a declaratory judgment as to the validity of an unsigned document purporting to be their deceased mother’s trust agreement and quiet title to a contested piece of real estate.  The daughters contended that the trustees held the contested property in fee simple; therefore, the real estate was not part of the mother’s estate to be distributed in accordance with her will.  The trial court concluded that the trust was validly created and the contested real property was a trust asset.

The original executed copy of the mother’s 2004 trust agreement could not be found after her death.  Two of her daughters sought a court judgment declaring that an unsigned copy of their mother’s trust agreement created a valid and enforceable inter vivos trust, They contended that an irrevocable trust had been created in August 2004 when their mother executed and recorded the warranty deed that conveyed the contested property to the trust because the conveyance and circumstances surrounding it manifested their mother’s clear intent to create that trust.  The remaining heirs denied these allegations and raised several special defenses, including that the unsigned trust agreement did not comply with the Statute of Frauds, that the deed was invalid, that one or both of the daughters exerted undue influence over their mother and that their mother lacked capacity when she created the trust.

The requisite elements of a valid and enforceable trust are: (1) a trustee, who holds the trust property and is subject to duties to deal with it for the benefit of one or more others; (2) one or more beneficiaries, to whom and for whose benefit the trustee owes the duties with respect to the trust property; and (3) trust property, which is held by the trustee for the beneficiaries.  Goytizolo v. Moore, 27 Conn.App. 22, 25, 604 A.2d 362 (1992).  According to the Restatement of Trusts, if the owner of property declares himself to be the trustee of the property or transfers it “in trust” for a named person, such writing sufficiently demonstrates the purpose of the trust to satisfy the writing requirement of the Statute of Frauds.  Restatement (Second) of Trusts § 46 cmt. (a) (1959).

The daughters alleged that the August 2004 warranty deed conveying the contested property to their mother’s inter vivos trust satisfied the Statute of Frauds because it set forth the trust property, the beneficiaries and the purpose of the trust with reasonable definiteness. Because the warranty deed transferred the property from the mother individually to the inter vivos trust, it was as if the property was transferred “in trust” for a named person and the warranty deed was a declaration of a passive trust.  They also contended that because the mother signed the warranty deed as trustee, she was declaring herself to be the trustee of the property for the beneficiaries of the inter vivos trust.   Although the court concluded that the execution of the warranty deed by itself funded rather than created the inter vivos trust, the court also concluded that the warranty deed was sufficient evidence to satisfy the Statute of Frauds.  The deed was a writing signed by the mother demonstrating that she manifested an intent to create the trust and impose the duty of a trustee upon herself.  Additional testimony from witnesses at the trial supported the court’s conclusion that the mother executed the trust agreement, along with her will and the warranty deed, in August 2004 as part of her overall testamentary plan and that unsigned copy of the trust agreement submitted by the two daughters was a true copy of the agreement which established the terms of the agreement.

The heirs contesting the trust alleged that the August 2004 warranty deed conveying the contested property to the mother’s inter vivos trust was invalid because the deed named the trust rather than the trustee as the grantee of the property.  According to the Connecticut Standards of Title, a grantee of real property must be in existence and have capacity to take and hold legal title to land at the time of the conveyance.  A trust does not have such capacity:  the trustee, or other fiduciary of the trust, is the appropriate grantee.  See Connecticut Bar Association, Connecticut Standards of Title (1999), standard 7.1, comments 1 and 4.  Connecticut law, however, provides that deeds with certain defects are considered to be valid unless an action challenging the deed and a lis pendens are recorded in the town land records within two years of recording the defective instrument.  Conn. Gen. Stat.  § 47-36aa(a).  This statute covers defective deeds made to grantees that are not recognized by law as having the capacity to take or hold an interest in real property.  Conn. Gen. Stat.  § 47-36aa(a)(4).  Because the heirs contesting the trust did not file an action challenging the validity of the deed within two years of its recording, the trial court concluded that the August 2004 warranty deed had been validated by the operation of the statute, which confirmed the conveyance to the grantee and any subsequent transfers of the interest by the grantee to any subsequent transferees.

The heirs contesting the trust alleged that the trust was void because one or both of the two daughters seeking to enforce the trust exerted undue influence over their mother during its making.  Undue influence is the exercise of sufficient control over a person in an attempt to destroy his free agency and constrain him to do something other than what he would do under normal circumstances. Connecticut case law sets out four elements necessary for a finding of undue influence:  (1) a person who is subject to influence, (2) an opportunity to exert undue influence, (3) a disposition to exert undue influence, and (4) a result indicating undue influence. Gengaro v. New Haven, 118 Conn.App. 642, 649–50, 984 A.2d 1133 (2009) (internal quotations omitted); see also Dinan v. Marchand, 279 Conn. 558, 560, fn.1 (2006).  The heirs contesting the trust argued that their mother was susceptible to undue influence because of her medical condition and fear of being placed in a nursing home.  They also alleged that one or both of the daughters who were seeking to enforce the trust were in a position to influence her because they had medical and financial control over their mother.  At least one of the two daughters, who was the oldest female in a family of eleven, had the disposition to exert such influence. Finally, they argued that the terms of the trust revealed the extent of that influence because the terms benefitted the daughters seeking to enforce the trust.  However, based on the testimony of witnesses at trial, the court concluded that the mother was not under any undue influence when she executed the trust and other testamentary documents in August 2004.

Finally, the heirs contesting the trust argued that the trust agreement was void due to their mother’s lack of capacity.  Specifically, they argued that there was evidence that their mother did not understand the terms of the trust agreement because when she later wanted to sell the contested property, she discovered that she could not. The mother had medical and neurological conditions, including a stroke in 2003 and terminal cancer in 2006; therefore, she was preoccupied with her health and was concerned about being placed in a nursing home. Furthermore, she loved all of her children and wanted them to be treated equally and fairly, but the terms of the trust are unfair to some of the beneficiaries.

Capacity to make a trust is the same as the capacity to make a will or other testamentary instrument. Connecticut statutory law generally requires that at testator be “any person eighteen years of age or older, and of sound mind.” Conn. Gen. Stat. § 45a-250.  Case law establishes the test for testamentary capacity as “whether the testator had mind and memory sound enough to know and understand the business upon which he was engaged at the time of execution.”  City National Bank and Trust Co.’s Appeal, 145 Conn. 518, 521, 144 A.2d 338 (1958).  Testamentary capacity is assessed at the time the instrument is executed, and not on the testator’s ability years later to remember the contents of the instrument.  Therefore, based on testimony from several witness at trial, the court concluded that the mother had sufficient testamentary capacity to create an enforceable inter vivos trust at the same time she created her other testamentary documents.  Furthermore, the mother’s expressed wishes were to preserve her property for her children and grandchildren; the court concluded that the trust was the most plausible legal means to carry out these wishes.

The trial court concluded that the trust was validly created and the contested real property was a trust asset.  Therefore, the unsigned copy of the trust was an expression of the intent of the mother, in her capacity as grantor, and was a valid and enforceable trust instrument.

Should you have any questions relating to trusts, estates and other personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Ciccaglione v. Stewart, CV074008040, 2012 WL 671933 (Conn. Super. Ct. Feb. 8, 2012)

Where the Grantors Intend a Trust to be Modified Jointly, A Surviving Grantor May Not Make Unilateral Modifications After the Death of the Co-Grantor

Whitehouse v. Gahn, 84 A.D.3d 949  (N.Y. App. Div. 2011)

In a case before the Appellate Division of the Supreme Court of New York, a trust beneficiary appealed a New York Supreme Court decision that declared the trust amendment naming her as sole beneficiary to be void and unenforceable.  The Appellate Division affirmed the lower court ruling and remitted the case for an entry of judgment.

In their lifetimes, the mother and father, as grantors, established an irrevocable trust naming their three children as the beneficiaries of the trust estate, which consisted of the family home.  The trust instrument expressly reserved for the grantors a limited power of appointment to change or alter the remaindermen.  Approximately five months after the father died, the mother executed an amendment to the trust, naming the daughter as its sole beneficiary.  Less than one month after the amendment was executed, the mother died.  The two children who were removed as trust beneficiaries sought a declaratory judgment in the Supreme Court to declare the amendment void and unenforceable.  The court decided in their favor, and the daughter who had been named sole beneficiary appealed the decision.

According to New York case law, a trust instrument is to be construed as written and the grantor’s intent is to be determined solely from the unambiguous language of the trust instrument itself. Mercury Bay Boating Club v. San Diego Yacht Club, 557 N.E.2d 87 (N.Y. App. Ct. 1990); see Matter of Wallens, 877 N.E.2d 960 (N.Y. App. Ct. 2007); Matter of Chase Manhattan Bank, 846 N.E.2d 806 (N.Y. App. Ct. 2006).  The Appellate Division found that the terms of this trust instrument were unambiguous, and clearly expressed the grantors’ intent that their three children share the trust estate equally.  These unambiguous terms may not be altered by a separate provision of the trust which may allow the plural usage of “grantors” to be interpreted as a singular “grantor.”  The Appellate Division held that because the trust agreement allowed an amendment to be made with the joint consent of the grantors, a surviving grantor may not unilaterally amend the trust after the death of the co-grantor.  Therefore, because only the mother executed the amendment to the trust, it was void and unenforceable.

New York law permits a court to amend an irrevocable, unamendable trust if its grantor and all the beneficiaries consent to the amendment.  N.Y.  Estates, Powers and Trusts Law § 7-19.  Because that did not happen in this case, the Appellate Division found further reason to determine that the purported amendment was void and unenforceable.

The Appellate Division of the Supreme Court remitted the matter to the Supreme Court where it originated for entry of judgment declaring that the amendment to the trust was void and unenforceable, and that all three children were beneficiaries of that trust.

Should you have any questions relating to trusts, estate planning or personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Use a Irrevocable Life Insurance Trust (ILIT) to Shield Your Policies From Estate Tax

Many clients are surprised to learn that the death proceeds of their life insurance are subject to estate taxation. They believe that life insurance escapes estate taxes and passes to their loved ones intact.

This confusion probably began when the client was told that life insurance is income tax-free. For married clients, the confusion is compounded by the belief that the unlimited marital deduction somehow magically insulates the client’s death proceeds from ever being taxed. Often the marital deduction merely postpones the heavy tax burden on such death proceeds until the second spouse dies.

For clients who have taxable estates, estate taxes may consume up to fifty-five percent of their life insurance proceeds.

The proceeds from your life insurance are generally includable in your taxable estate if you owned the policy or had any “incidents of ownership.” (as defined by the IRS) This is true for term insurance, cash value insurance, and even insurance provided by your employer.

“Incidents of ownership” which will cause life insurance death proceeds to be taxed as part of the insured’s taxable estate include not just policy ownership, but also the right to borrow the cash value, the right to change beneficiaries, and the right to change how the proceeds are ultimately distributed to the beneficiaries.

The Irrevocable Life Insurance Trust (or “ILIT” as it is frequently called) has proven to be a highly effective method of avoiding estate taxes without the many problems of transferring ownership of the policy to the client’s children or other heirs. An ILIT is created to own one or more policies insuring your life. The ILIT is irrevocable, meaning you cannot generally change the terms once it has been signed. You must also choose someone else as trustee of the ILIT besides you and your spouse (a knowledgeable professional is the ideal choice).

You cannot be a beneficiary of the trust, but your children may be (and usually are) beneficiaries. Quite often, the ILIT parallels the dispositive provisions of your revocable living trust or other estate planning documents, although there is no legal requirement for the ILIT to do so.

Moreover, the ILIT cannot be payable to your estate or to your revocable living trust, as your ability during lifetime to change your will or trust would result in your ability to change the beneficial enjoyment of the policy proceeds, thus bringing the policy back into your taxable estate. In addition, if you die within 3 years of placing an existing policy into the trust, it will be brought back into your estate. Hence, it is more favorable for the trust to the insurance on your life than you placing an existing policy in.

Your contribution to the ILIT represents gifts which you cannot get back. The gifts are usually used to pay the premiums on one or more policies insuring your life and which are owned by the trust. Because you cannot reclaim the policies, or receive any benefit from the trust, it would be inappropriate to have the trust own policies whose cash values you had planned to use for retirement income.

Currently, you may gift up to $14,000 per year per donee (recipient) without any gift tax implications. This exclusion is only available to gifts of a present interest, which is something you may enjoy or use now, and gifts in trust generally do not qualify, as they are gifts of a future interest, or one that will be enjoyed or used later. To avoid this limitation, your ILIT should provide that each lifetime beneficiary (who must also be beneficiary or contingent beneficiary at your death) has the right to withdraw his or her proportionate share of the contribution for a limited period of time after each contribution is made. This is known as a Crummey power and is named after a famous tax law case. A Crummey power forces what would otherwise be a future interest into a present interest that will fit the annual exclusion if the beneficiary has been given notice of a right to a withdrawal period that lasts at least 30 days.

After the expiration of the withdrawal period, the trustee may use the contribution to pay the premium on a life insurance policy. The IRS has approved the ILIT concept when all the technical requirements are met, but the IRS is notorious for challenging ILITs when the requirements are not met. Even the order in which the documents are signed is critical.

The trustee receives the death benefit upon your death. These proceeds may be distributed to your family, held in trust, or used to purchase assets from your estate or from your revocable living trust. This last option would be important if your estate had insufficient liquid assets to pay estate taxes.

The tax on your estate is due nine months after the date of death. Those with large estates often do not have sufficient cash or other assets which could be easily converted to cash within the nine month time frame. The need to pay estate taxes has caused many a farm, family business, or major real estate holding to be sold at discounted prices to pay the estate tax.

Life insurance may provide the money needed to pay the estate tax, and by having the policy purchased and held in an ILIT, the proceeds may be used to provide the needed liquidity for your estate and yet not be subject to estate tax on your death.

Married couples may wish to consider using a “second-to-die” policy which pays the death benefit only after both spouses are deceased. That is usually the exact time that the proceeds are needed to pay the estate taxes. Because no death benefit is paid on the first death, the premium is much lower than purchasing a policy which insures just one life.

Often clients try to accomplish similar results to the ILIT by having, say, their two children own the policy equally. Many problems may arise under such an arrangement. A child may predecease the parent; the policy may be attached and liquidated by a child’s creditors; the policy could be considered as the child’s property in the event of a divorce; one child may refuse to pay the premiums or may wish to borrow the cash value. The outright gift of a policy makes no provisions for your children or grandchildren. These and other issues may be addressed in a properly drafted ILIT.

If you have a taxable estate and own a large insurance policy, or are contemplating purchasing one, you would be well advised to consider how the ILIT might benefit you and your family.

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