Case Summary Highlights Potential Pitfalls in Estate Planning

Cam McGilivray, Trust Officer and In-house Councel

In the Court of Appeals of the State of Washington

Division III

In the matter of the Estate of:                                                              No.  31757-9-III

MARGARET WIMBERLEY,

                                         Deceased.                                                           

 

CASE SUMMARY

As an estate planning attorney or someone choosing a trustee, the published case from the Court of Appeals, Division III, In Re Estate of Wimberley, 186 Wn. App. 47, 349 P. 3d 11 (2015) serves as a cautionary tale for naming family members as trustee or personal representative .  In the summer of 2015 this case was on appeal to the Washington State Supreme Court, but the Court has agreed with our position and denied review.   The purpose of this newsletter is to highlight several issues that are relevant to estate planners and families faced with a decision of who should be a trustee, in an effort to help prevent families from falling into these same pitfalls. (The published case is available here)

SUMMARY OF FACTS

C. W. and Margaret Wimberley entered into a community property agreement in the late 1960s.  Some 30 years later, the couple created a revocable living trust and funded it with virtually all of their assets.  The couple also executed pour over wills and a letter of intent which revoked the community property agreement.  The trust was the core of the Wimberleys’ estate plan.

When C. W. died in 2002, his one-half share, pursuant to the terms of the trust, was to be kept in two irrevocable decedent’s trusts and Margaret’s was to be kept in a revocable survivor’s trust.  Margaret, who was 85 when C.W. died, failed to segregate the assets and fund the decedent’s trusts. In 2007, she compounded the problem by hiring an estate planning attorney to create an amendment that purported to state that she had authority to not fund the decedent’s trusts and change their dispositive provisions.  In 2008, the same attorney created another amendment which removed Margaret as the trustee and appointed her son, James, in her place.  At that time, James had been living with his mother for many years.  During complex negotiations between the family shortly before her death in August 2010, Margaret was not totally agreeable to her estate planning, and she consulted another attorney who, in his written opinion, “became very concerned about manipulation that may be occurring with Margaret by her son, [James].”  Additionally, the 2008 amendment appointed the attorney who had drafted it as the “trust protector” to uphold the original intent of the trustees (presumably both C. W. and Margaret) and “appoint a new trustee if necessary.”  However, also during this time, Margaret, through her attorney/trust protector, tried to close the decedent’s testamentary trust, move assets around in contradiction of the original estate planning, did not fund the decedent’s trust, and did not account for or properly invest the trust’s liquid assets. 

After Margaret died, James remained as trustee and was appointed as personal representative of her estate.  He then, in contravention of his parents’ plans, deeded the family home to himself, used trust funds to pay for personal expenses, and transferred huge sums of trust estate cash to himself.  Meanwhile, the trust protector was also acting as his attorney. 

In 2011, Margaret and C. W.’s other son, Wesley, petitioned the Yakima County Superior Court to remove James as trustee and personal representative and also to remove the trust protector.  The court removed James as both the trustee and personal representative upon finding that he breached his fiduciary duty.  The court also removed the attorney trust protector.  The court appointed us as successor trustee and personal representative and asked us to do a forensic accounting and propose a distribution.  The accounting proved to be a complicated shell game.  Nevertheless, we found that $254,437.91 was misappropriated, unaccounted for, or missing.  We gave James several months to reply to our draft accounting before presenting our findings to the court.  There was no response from him until three days before the hearing when his new attorney dumped a response brief which contained 225 pages of documentation – all of which was either irrelevant, not on point, or tended to obfuscate the issues.   The trial court eventually agreed with our findings and approved our accounting in June 2013.  In addition, the trial court awarded our trustee fees for preparing the accounting and attorney fees for litigating it.  James appealed.

In January 2015, after nearly two more years of litigation the Court of Appeals, Division III, affirmed the trial court’s decision.  James then sought review by the Washington State Supreme Court.  Review was denied in September 2015.  Thus, the Division III ruling was upheld.

Lessons Learned

Relationship between a community property agreement and a trust

When the couple entered into a community property agreement prior to the creation of the trust, the conveyance of all property to the trust effectively terminated the community property agreement.

Duty to fund a decedent’s trust

A surviving spouse who is a trustee of a decedent’s trust has a fiduciary duty to follow the language of the document and fund that trust.  This duty is also incumbent on her successor trustee to the extent that if this is not done it is a breach of fiduciary duty.  Additionally, a surviving spouse cannot change the terms of a decedent’s trust. 

Payment of attorney and trustee fees

RCW 11.96A.150(1) states in part:

• The court may order the costs, including reasonable attorneys’ fees, to be paid in such amount and in such manner as the court determines to be equitable.  In exercising its discretion under this section, the court may consider any and all factors that are deemed to be relevant and appropriate, which factors may but need not include whether the litigation benefits the estate or trust involved.

• “In determining whether an award for attorneys’ fees is appropriate, the trial court must consider whether the litigation and the participation of the party seeking attorney fees cause a benefit to the trust.” Allard v. Pacific National Bank, 99 Was.2d 394, 407, 663 P.2d 104 (1983).  The appellate court found that our “petition benefitted the trust because it expedited the administration of the trust prolonged for three years by James’s mismanagement and self-dealing with trust funds, and his unwillingness to cooperate with Trefts’ subsequent management of the trust.”  Therefore, the appellate court upheld the trial court’s order for James to reimburse the trust for the litigation.

Family members as trustees

The age-old lesson that parents have difficulty learning is that naming a child as a fiduciary in a family with a history of contention will only result in expense, heartache, and potential breaches of fiduciary duty.

Beware of the trust protector (our commentary) 

The appellate court confirmed the trial court’s decision to remove the trust protector.  The lower court found that a conflict of interest existed which disqualified the trust protector, which culminated in his removal.  This removal was likely based upon:

1. The trust protector had a conflict of interest by representing both the trustee (James) and the trust.
2. The trust protector did not perform his duty to replace the trustee (James) who he knew was:  not accounting, making inappropriate distributions to himself, and ignoring basic trust laws.  

3. The term of employment of the trust protector was that he would not take a fee.  As an estate planning attorney and trust protector, he took a fee from the trust for the erroneous amendments to the trust.  This highlights an obvious conflict of interest.

These specific findings are not part of the record which was submitted to the Court of Appeals

Newly enacted Chapter 11.98A RCW, which becomes effective on July 24, 2015, clearly states that a trust protector, as a statutory trust advisor, has a fiduciary duty with respect to the scope of authority the trust protector is granted in the governing instrument.  The trust protector must exercise this fiduciary duty in accordance with the terms and purposes of the trust and act solely in the interests of the beneficiaries.  Furthermore, a trust protector must always act in good faith and with honest judgment.  A trust protector should know and follow trust laws and beware that he or she could be held accountable for a breach of fiduciary duty by a trustee. 

In summary

In summary, we are often called to resolve difficult family conflict and are frequently appointed by the court to replace family trustees who have failed.  The cost of mismanagement can often take a significant portion of the estate to resolve, and ruin relationships in the process.  We always recommend families and their attorneys to consider these potential costs when assessing whether to hire a professional trustee.

Print Date:  Summer 2015