Death and Taxes Blog

If you grew up in the 1980's like I did, you know that the question "Who's The Boss?" has a few possible answers: Angela, Tony, or maybe Mona.

But on a more serious note, the question of "Who's the boss?" in a probate or trust context is more difficult to answer. On the one hand, you have the fiduciary (trustee, executor, or administrator); on the other hand, the beneficiaries. If there's a conflict between the two, who wins? Does one always control?

Here's the difficulty: the relationship between fiduciary and beneficiary is not a straightforward one. A fiduciary does have title to property, and handles the administration of the estate or trust. Some fiduciaries think this means that they are "in charge," and they attempt to make beneficiaries feel like second-class citizens. This isn't right. While a fiduciary is in one sense "the boss," they are also required to follow the terms of the Will or trust, and also owe a number of duties to the beneficiaries.

To take an example: a trustee may have title to real estate, but the trustee might be required (under the terms of the trust instrument) to sell the real estate and distribute all or a portion of the net proceeds to the beneficiary. The trustee HAS to do this, or risks running afoul of the law.

That being said, the beneficiaries get the benefit from trust or estate property, but may not be authorized to interfere with the day-to-day administration. A typical Will or trust may allow a trustee to sell real estate without requiring beneficiary consent. (Of course, if the sale is done incorrectly for some reason, the beneficiary may have some legal recourse, via objecting in a court proceeding.)

Attorney Timothy L. Bertschy has a nice article (here, but you must be a member to view it) in this month's Illinois Bar Journal, entitled "Personal Liability of an Executor or Trustee - Time for a Change."

The article focuses on whether a personal representative can be held personally liable (under contract or tort law) for actions taken on behalf of an estate or trust. You might be surprised to learn that, under Illinois law, the answer is typically "yes." This is surprising, and contrary to the more modern laws encapsulated in the Uniform Probate Code and the Restatement (Second) of Trusts. Both the UPC and the Restatement protect the personal representative from personal liability so long as the claim arose out of the personal representative's duties. The author suggests that Illinois follow the UPC and the Restatement (and modern caselaw from other states), and limit the personal liability of personal representatives.

Informality is the enemy of estate and trust administration. What do I mean by that? I mean that, when a decedent handled his affairs informally prior to death, or when informality reigns following his death, then you can be assured of a mess. Let me share three examples:

1. Ray Danner died in August of 2008. As this article explains, Mr. Danner made a number of loans prior to his death. His estate is now trying to collect on these loans. The defendants' defense:

“It was the accepted practice of the parties that Danner would loan the money with the expectation of repayment only if the entity were profitable. The parties have no reason to believe other than that in this case.”

If that's true, then -- yikes! I don't know if I want to live in a world where someone is loaned money and signs a note, yet all of the parties understand that the loan needn't be repaid.

2. I am involved in a series of connected probate cases. The cases involve three siblings and their aunt (who predeceased them). The aunt died in 1999 -- since then, very little has been done with respect to her property. So it sits, vacant, awaiting sale and distribution to her 35 heirs (because the aunt died without a Will). But wait! We now find out that perhaps the property wasn't owned by the aunt at all, but rather by her sister. And did I forget to mention the "agreement" that may or may not have existed between two siblings, in which they tried to bypass probate by informally dividing up the property of deceased relatives?

3. Remember Redd Foxx? The star of "Sanford and Son," a surprisingly blue standup comedian, and the man who once remarked that “[t]here's nothin' uglier than an old white woman"? Mr. Foxx died 19 years ago, but his estate is still... in the Red(d). (Sorry, couldn't resist. I'll be here all week.) His estate owes back taxes, but what's been collected or done since his death? Not much of anything, it appears. Is there money to pay the bill or, if not, does the estate own anything that could be sold? The article is here.

The Economist's Charlemagne blog has a really interesting article this week about the European Commission's guidelines for inheritance involving assets in more than one EU country. The link is here.

As the article indicates, this is really a dispute between Britain (England and Wales) and the other 26 EU countries. Most EU countries have some form of forced heirship -- that is, the decedent's children must inherit a portion of the estate (in equal shares), and -- with some rare exceptions -- cannot be disinherited. Such a concept of "forced heirship" is totally alien to people in Britain and in the US (and, obviously, our concept of total testamentary freedom is foreign to the other 26 EU countries).

This is a Canadian article, but it applies the same here in the US -- "Tough times making even probate practice riskier."

The main thing I've seen is more financial stress on the heirs. Most of them didn't expect a huge windfall, but probate has been turned from a net gain to a net loss (at least in the short term). Often the heirs are the children, and the bad real estate market has forced them to assume all expenses related to their parent's home (real estate taxes, utilities, sometimes even a mortgage) while they wait for it to be sold.

Illinois typically requires the seller of real estate to furnish a disclosure, pursuant to this statute, regarding the condition of the property being sold. That makes sense, doesn't it? However, when the property in question is part of a decedent's estate, disclosure is more difficult (if not impossible). Let's say that I'm handling my aunt's estate. She lives in Chicago, I live in Florida, and I fly in a couple of times after her death to work on my duties as executor. I go to sell the house -- am I really in a position to opine on the condition of the property? No, of course not. Luckily, the legislature agrees; as a result, the Residential Real Property Disclosure Act is not applicable in the following situations:

(1) Transfers pursuant to court order, including, but not limited to, transfers ordered by a probate court in administration of an estate....

(3) Transfers by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust.

See 765 ILCS 77/15.

I don't really have any answers here, but let me tell what I see on the ground with respect to probate estates. Obviously, there's a problem, just like there is with the rest of the economy. The main problem is (no surprise) with real estate and liquidity.

When an individual dies owning a house, the house is usually sold. In this market, that's a difficult proposition. That means the beneficiaries will have to figure out what to do with the house, starting with the payment of taxes and expenses. If Mom dies with a house valued at 200K, and a 100K mortgage, somebody is going to have to make the mortgage payments, keep the utilities turned on, and pay the real estate taxes. Is there money in the estate to do that? Often there isn't. Or, if there is money in the estate, there's not enough to make these payments for months on end.

The other thing about probate is that it takes some time to get going (I think a trust would be the same way, actually). If Mom dies, the beneficiaries grieve, and they try to find time to clean out the house, get things in order, etc. That means it can be 3+ months before someone says, "we need to figure out what to do with the house." Is renting an option? I suppose so, but most beneficiaries don't want to run a business, which is what renting property really is. Are you ready to interview renters, get a lease prepared, monitor the property, make sure repairs are made, etc.? Also, renting means that you really aren't planning to sell the property anytime soon (nobody wants to rent a house that's constantly being shown, or that they'll have to vacate upon sale).

One solution, although an imperfect one, is to rent out the house to a family member. This raises some issues of conflict of interest, but those can be dealt with, especially if all family members understand and agree. If you can find someone to help you break even (a renter willing to essentially pay the monthly mortgage, utilities, and taxes), it may make sense to take that offer.

One of the things that I emphasize as an estate planner is "making things easy" for the people who will ultimately handle your estate, by getting yourself organized. That saves them a lot of aggravation, and will also save your estate a fair amount of money, as no one will need to pay an attorney $200+ per hour to figure out how many bank accounts you had, or whether you executed a Will.

Columnist Christopher Yugo espouses the same philosophy in this Q&A regarding stock certificates. As a probate attorney, stock certificates are a real nuisance (and it sounds like Mr. Yugo has had the same experience). The best approach is to set up a brokerage account, and let an investment professional take care of fulfilling all necessary transfer agent requirements.

I've blogged about the strange case of Seth Tobias before, here. Now (here) there is news of a potential settlement.

Mr. Tobias's brothers were previously attempting to use the so-called "slayer statute" to argue that Mr. Tobias's widow, Filomena, was involved in his murder and should therefore be disinherited.

Presumably Mr. Tobias's brothers are dropping their claim for a share of the estate.

One of the biggest little problems in probate is how to deal with tangible personal property -- furniture, clothing, furnishings, etc. left by the decedent. Most Wills leave such property "in shares of substantially equal value" to decedents -- that language recognizes that you can't divide tangible personal property in equal shares the way you divide cash equally. But it still fails to address typical problems with this type of property:

1. What if two individuals want the same piece of property?

2. Is equality based on actual value? If so, what about sentimental value?

The problem is even worse if you have an intestacy with unequal shares. I have one of these right now -- three siblings of the decedent (each getting 1/3rd), with the last share being split among 7 children.

There's also a question of how, as a practical matter, to facilitate the distribution. Some people use the hat -- if there are 3 kids, then all 3 names are placed in a hat, and the order in which they come out is the order for the children to pick items they want. If it's Tommy, then Billy, then Alice...

Tommy picks first (choosing one item)
Billy picks second (choosing one item)
Alice picks third (choosing one item)
Tommy picks fourth (choosing one item)
etc. etc. etc.

You can add more certainty (and more complexity) to this process by having all tangible personal property appraised, and then "charging" the fair market value of property taken by each individual against that individual's share of the estate. That addresses what happens if Alice chooses all of mom's (expensive) jewelry and the other two choose only lamps and other less valuable items.

Another idea comes from this new website: edivvyup.com. Basically, the site allows you to create an auction, open only to the estate's beneficiaries. Beneficiaries get points, which they can use to bid on items. Whoever bids the most points on an item gets it.

One of the questions asked most often of me is this: "I am acting as executor (or administrator or trustee), and want to take compensation. How much compensation is appropriate?"

For the most part, the law isn't helpful on this point. Most Wills and trusts talk about "reasonable compensation," language echoed in the Probate Act:

Sec. 27‑1. Fees of representative. A representative is entitled to reasonable compensation for his services....

and the Trusts and Trustees Act:

Sec. 7. Compensation. The trustee... shall be entitled to reasonable compensation for services rendered.

Not particularly helpful -- the caselaw isn't either, really. So what is reasonable compensation? Here are some of my thoughts on the issue:

1. Reasonable compensation is whatever the beneficiaries are willing to agree to. If all the beneficiaries agree in writing that your fee is OK, isn't that per se reasonable?

2. Of course, compensation is often sought in contested cases. One thing I hear from fiduciaries: "I wasn't planning to pay myself, but my parent/siblings have been so annoying and I've put in so much work that I want to get paid!" In these cases, some persuasion may be necessary.

3. I tell fiduciaries to keep records of what they do, just like attorneys should. Be able to tell the beneficiaries what you did, and how long it took you. Presentation and detail are important -- people are more willing to consent to a $10,000 bill if you point out, in detail, what you did, and the benefit to the estate or trust.

4. The tricky part is taking the above time (let's call it 200 hours), and determining an amount from it. What's your hourly rate? I can see two approaches:

a. Set a fairly minimal hourly rate ($25 or $50), on the grounds that that's what it would take to hire someone to do fiduciary tasks.

b. Just use the rough hourly rate for your regular career. If you are an accountant and make $75 per hour, charge that. If you are a surgeon who makes $700 per hour, charge that. Of course, the higher the rate, the better chance that the beneficiaries are going to take you to court to protest. And I seriously doubt that any judge is going to allow you to take a fee based on $700 per hour.

5. One thing I run into occasionally is attorneys trying to charge their hourly attorney rate to do fiduciary tasks. I object to these attempts almost as a matter of course. It's almost an incapacity/undue influence argument. No one (or, at least, very few people) in their right mind would agree to pay someone $300 or $400 per hour to perform administrative tasks like preparing an accounting, or collecting assets. And, if the attorney/fiduciary also prepared the Will or trust that names him or her as fiduciary, then I have questions about whether the decedent understood what was happening. To me, there's little difference between leaving the drafting attorney $50,000 as a bequest (a big no-no) and leaving the drafting attorney with the ability to charge $50,000 to the estate or trust in fees. Absent signed, informed consent from the client, this seems like an abuse.

6. Some states determine compensation based on the value of an estate. To me, these things have little relation. The lives of the poor can be very complicated; the lives of the rich may not be.

Here's a fairly common situation:

Jack and Judy Smith die, leaving four children: Allen, Barbara, Charles, and David. Jack and Judy owned a house at the time of their death -- the same house where they raised their children. Jack and Judy had a Will, naming Allen as executor and leaving all of their property equally to their four children. David wants to purchase the house. May he do so?

The short answer is "yes." Some comments on such a purchase:

1. The executor has to make the deal at fair market value unless the beneficiaries agree otherwise.

2. Keep in mind that David already owns 1/4 of the house. So (to simplify), if the house has a value of $400,000, he's really only has to pay $300,000.

3. In some cases, the child who wants to make the purchase is living in the house already, or various children have paid to keep up the house since Mom and Dad died. That's a bit trickier, as the executor needs to prepare an accounting to make sure everyone is paid appropriately. Also, if David was living in the house after his parents passed away, he should be assessed fair market rent.

I've written before about probate real estate investors -- people who attend seminars (like this one) and then try to launch careers buying real estate in probate for pennies on the dollar, flipping the real estate, and becoming rich.

Evidently this practice is more common than ever. I recently filed court documents to be appointed as the administrator of a Cook County probate estate (long story, but there's nobody else who wants to act). The court hearing is set for next week, and all I've filed with the Court is my Petition for Letters of Administration. Yet right after I filed the Petition, I received the following letter from two different individuals (I won't mention their names or the name of the decedent, who I'll call "Ms. X"). Here's how the letters (which are essentially identical) start:

Dear Joel,

First, let [me/us] take a moment to offer [my/our] condolences on the passing of your loved one, Ms. X. While [I/we] know this can be a very emotionally sensitive period, [I/we] also understand you may be facing some serious decisions with which [I/we] might be able to assist you. The reason [I/we] are contacting you is often times...

Here the letters diverge a bit. Both letters talk about how they can help me and my family.

If you were teaching a seminar in acquiring probate real estate, wouldn't you tell people that they shouldn't send your form to every potential seller?

I previously blogged about slimy ex-judge Robert Cochonour here and here. The charitable foundation that was supposed to inherit Jay Hayden's property wants Mr. Cochonour to supply answers about where the money went; the probate judge handling the case is suggesting that this is an "exercise in futility" (here's the article).

Without absolving Mr. Cochonour of any of the blame, I have to wonder about this passage from the article:

When Hayden died of cancer in 1985, he left Cochonour in charge of his estate, most of which was bequeathed to the Jay E. Hayden Foundation.

In 2002, foundation officials started asking why they had not received the money willed by Hayden almost two decades years earlier.

If you know you are an estate or trust beneficiary, the time to ask questions is now -- do it early and often. Don't wait 17 years.

I met with a potential client last week, to talk about revisions to her estate plan. We reviewed her current documents, which show a local bank as successor trustee of her living trust. This struck me as odd, as the woman (a widow) has three grown children and a fairly short, fairly easy-to-handle list of assets (house, investments accounts, insurance). According to the woman, her previous attorney had an affiliation with the local bank, and placed the trustee language into the document on his own. The woman hadn't met with anyone from the bank (other than the attorney), and hadn't seen their fee schedule -- basically, she didn't know anything about the bank.

To me, this is a huge conflict of interest, and really no different from the attorney naming himself as trustee. Actually, it's no different from the attorney leaving money to himself from this woman's trust.

I've said it before and I'll say it again...

Q: What time is it when your attorney seeks to name himself or an entity with which he's affiliated in your estate plan?

A: Time to find a new attorney, and time to report your old attorney to the Illinois ARDC.

Section 9-3(j) of the Illinois Probate Act allows a decedent's creditor to act as the administrator of the decedent's estate (but only if there's no one else able and willing to act).  I don't know of many cases where a creditor would want to assume this burden, but it's important to realize that, in doing so, the creditor-administrator assumes all of the regular duties of an administrator.  For instance, the creditor-administrator owes a duty to ALL beneficiaries and creditors of the estate, not just himself.  That includes a duty to maximize the value of estate assets.  A funeral director in Connecticut who was named administrator of a decedent's estate (presumably to get his own bill paid) ran into problems with this issue, as described here:

Bridgeport Probate Judge Paul J. Ganim made clear Monday that he plans close scrutiny of Coventry funeral director Kevin K. Riley's administration of an estate in which a deceased woman's home was sold for $175,000, then resold less than four months later for $305,000.

On an almost daily basis I hear stories about how this grandson or that daughter walked off with a decedent's property immediately after the decedent's death.  The biggest problem in most of these situations is one of proof -- you may know what grandson or daughter did, but can you prove it?  The executor in this case went to the police, who quickly connected the dots in the case of grandma's missing furniture:

The antique furniture was reported missing from the residence of the late Margaret Christian, 208 Center Ave., Surgoinsville [Tennessee], on Nov. 6 by the executor of her estate, her son Elbert Christian Jr.

Surgoinsville Police Department Officer Scott Fink said he interviewed Elbert Christian, who suspected that the burglary might have been committed by a relative. Fink said it was just by chance that the next relative he interviewed, Christopher Todd Christian, 34, 2114 Main St., Surgoinsville, admitted to taking the furniture with two accomplices.

Fink said he then went to speak to the two alleged accomplices, Mike Thomas Head, 54, and Ronald Keith Nunley, 48, both of 114 Henderson St., Surgoinsville, at their home and found the majority of the stolen antique furniture there.

The three men were arraigned today.  Bravo to the executor, for not letting the grandson get away with this, and bravo to the police for pursuing the wrongdoers.

While there are Illinois statutes telling executors and trustees what they may do, there really aren't many statutory references to what they can't do, or to the general duties a trustee or personal representative owes to the beneficiaries.  These duties are generally a creature of caselaw, which makes secondary sources an important research tools when disputes arise over a fiduciary's conduct.

Take, for instance, the trustee who loans money from the trust to himself.  The first question is whether the trust document allows this (most trusts don't).  If not, the trustee may ask, "but what's wrong with doing this?"  One answer comes to us from Bogert’s Trusts and Trustees (§543(J)), which says that a trustee who loans trust funds to himself…

brings into play a conflict of private and representative interests. As lender it is his duty to get the best terms possible as to interest, security, and maturity. As debtor his impulse is naturally in the direction of getting the money at the lowest rate and often on other terms not advantageous to the lender. If he lends to himself, he cannot give an impartial judgment as to the adequacy of the security offered.

In other words, think about the terms and conditions a trustee would impose if a third-party came to him and asked for a loan from the trust.  Would he make the loan?  What would the terms (interest rate, repayment dates, etc.) be?  Even if the trustee isn't trying to put himself ahead of the trust beneficiaries, he can do so in ways large and small.

What's the penalty if a trustee loans money to himself?  Traditionally, when a fiduciary makes a loan to himself, “he is chargeable with principal and interest, or with any profits he makes thereby, at the option of the beneficiaries. Where a trustee uses trust funds in his own business, he is chargeable with principal and interest or with a pro rata share of the profits of the business at the option of the beneficiaries.” Scott on Trusts, §170.17 at 387.

This article offers a "two-fer" in terms of information: telling people how to choose an executor, and giving executors a list of their duties.

On Tuesday I spoke briefly about executors trying to honor a decedent's wishes, even when it may mean that the estate's value isn't maximized.  On a somewhat similar note comes a follow-up regarding the estate of Chicago comedy legend Del Close.  According to his Wikipedia entry, Mr. Close "donated his skull in his will to the Goodman Theatre for use in Hamlet productions, on the condition that he should receive credit in the program as Yorick." Now his executor has admitted (here - registration may be required) that "she tried to carry out Close's wishes, but pressure from the morgue caused her to instead buy [and give the Goodman] a skull from the Anatomical Chart Company in Skokie."  Alas, poor Mr. Close!  We knew him well -- and his wishes weren't honored.