Wednesday, September 2, 2009

Six Methods To Reduce Estate And Trust Litigation During The Estate Planning Stage

In reviewing some articles regarding reducing litigation in the estate and trust context, there is an article that gives insight at the planning stage. Jonathan G. Blattmachr, a partner at a New York law firm, Milbank, Tweed, Hadley & McCoy LLP, published "Reducing Estate and Trust Litigation Through Disclosure, In Terrorem Clauses, Mediation and Arbitration" in the Cardozo Journal of Conflict Resolution 9 Cardozo J. Conflict Resol. 237 (2008).

In this article, he suggests six methods to reduce the potential for litigation. Although these are not guaranteed ways of avoiding litigation and every estate plan is different, they are useful to consider in the estate planning stage. There are other methods as well, but the methods referenced in this article are a good starting point:

1. Advise Inheritors of Inheritance Plans. Especially when children of the decedent are treated unequally, will contests and litigation arise from disappointed feelings of entitlement. Telling the children ahead of time what their shares will be may avoid a later dispute. Blattmachr even suggests that one could enter into a contract (for consideration or something of value) with such a person that he or she will not object to the validity of the document. Blattmachr notes, however, that "advising a child that he or she will not receive an equal share may have adverse effects even if it prevents litigation after death." Thus, informing inheritors of the plans could cause family problems in the present.

2. Use a Revocable Trust in Lieu of a Will. Since a revocable trust can be funded and operate during lifetime, it is difficult to contest on the grounds that the individual was unaware of its terms. When the Settlor of the trust dies, there is no need to begin a court proceeding to "prove" the validity of the trust, such as there is for a will.

3. Use an Irrevocable Trust in Lieu of a Will or Revocable Trust. An irrevocable trust is even less likely, in Blattmachr's view, to be challenged than a revocable trust. Irrevocable trusts can be drafted in such a way so that transfers of property to them are not completed gifts. Alternatively, making a transfer that is a completed gift, paying gift tax, and filing a gift tax return disclosing details may be additional evidence that the transfer was truly intended. Again, Blattmachr believes that a lifetime trust that is significantly funded is less likely to be challenged.

4. Use a Disinheritance Or No Contest Clause. If the testator lives in a state such as California that will enforce it under certain circumstances, a disinheritance clause (also called an in terrorem clause for the Latin word "in fear") could be used. The goal here is to prevent beneficiaries from causing a legal ruckus after the testator is gone. A lot of trust and estate litigation is not about the validity of the document, it is about its interpretation or about actions taken by the fiduciary. In order to reduce this type of litigation, a disinheritance clause can cause a forfeiture of a beneficiary's interest if such a challenge is made. The entire estate plan must be consistent with this clause.

With the advent of passage of Senate Bill 1264 which enacts Probate Code Sections 21310-21315 effective January 1, 2010, California's "no contest" law has been significantly weakened. This weakening affects wills and trusts that became irrevocable after January 1, 2001 and later. "No contest" clauses traditionally penalize parties who attempt to attack a will or a trust. Now, it will be significantly easier to attack a will or a trust in California.

5. Use Mediation or Arbitration Provisions. Arbitration or mediation cannot be used with respect to the challenge of a document's validity unless the parties agree to it. Using a disinheritance clause to cause forfeiture if the parties will not participate can be used. This could stop claims that are filed only to harass other beneficiaries or to delay distributions to others. Another approach would be having the parties enter into a contract agreeing to arbitration before the transfer.

6. Use a Condition Precedent to a Bequest as an Alternative Method of Causing Participation in Mediation or Arbitration. Since a person cannot be forced to participate in arbitration or mediation unless the law provides for enforcement, consideration must be given to how to get parties to use these methods. One can use the carrot instead of the stick. Parties can be given a benefit if they consent to use arbitration or mediation instead of resorting to court.

When creating estate plans or trust documents it is important to consider the potential for litigation and whether it should be addressed prior to the death or after the death of the people creating it. While much can be done prior to death to resolve potential disputes and keep communications open, often issues only arise after the death of the trustees. During the estate planning stage, this is the time for you to consider what can be done to reduce the likelihood of estate and trust litigation.

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm is located at 2233 Huntington Drive, Suite 17, San Marino, CA 91108. The firm website is http://www.moravecslaw.com/

Moravecs has some of Los Angeles' best probate attorneys who can help you reduce the risk of trust litigation or represent you to achieve the best possible result in California trust litigation or Los Angeles trust litigation.