Connecticut's Probate Court System Losing Money

Legal Blog Watch brought to our attention last week the curious fact that the State of Connecticut’s Probate Court system is losing money - - according to reports, $20,000 each day (“Connecticut Probate Court on the Verge of Bankruptcy”). The report was also carried by Hartfordbusiness.com.

The story seems odd since you would think that a court system could always raise fees. Hartfordbusiness.com suggests a partial explanation in that courts in wealthier suburbs and make money on estates but subsidize the cities where the courts deal mostly in guardianships which don’t make money (and possibly insolvent estates). According to Legal Blog Watch, the courts bear the expense of paying outside counsel to represent indigent children and the mentally disabled.

 One wonders, given the title of the Legal Blog Watch, can the probate court go to bankruptcy court? 

 

In any case, this story is a little “off topic” for us since on the surface it has little to do with managing or learning from litigation. But, we can learn strategic management lessons from the plight of the probate courts. Without claiming special expertise in the management of Connecticut’s probate courts, there are some obvious characteristics that we could question from a management perspective:

 

  • Probate courts are organized and spread out at the level of cities and towns, rather than consolidated at the county level or into more efficient and larger districts;
  • Probate courts are supposed to be self-sustaining but are also burdened with the mission to subsidize the indigent;
  • Apparently, there is subsidization across geographic lines with the consequence that the suburban towns now subsidizing the cities are not likely to support fee increases;

The overriding goal of the probate court system apparently is to be close to the individual cities and towns. Each town has its own probate court and judges are elected. The State will probably correct the current financial problem appropriately without much controversy. But, as a learning experience, this temporary glitch demonstrates how elements of the operating “model” of an organization can present challenges to its success.

Life Insurance Litigation: Actor's Death Within Contestabilty Period Leads to Lawsuit

The West Virginia Business Litigation Blog summed up the situation well when the Estate of the late actor Heath Ledger sued a life insurer for $10 million:

Not even the rich and famous (or their beneficiaries) are immune from the decisions of insurance companies.

 

The quote and post is by Jeffrey V. Mehallic and entitled “Actor’s Estate Sues Insurance Company for $10 Million Policy” and the case, with a link on the WVBLB post is LaViolette v. ReliaStar Life Insurance Company, Civil Action No. 2:08-CV-05514 (C.D. Cal. 2008).   

 

The Estate alleges “post-mortem underwriting, delaying payment on the policy while it investigates whether the death was a suicide within the “contestability period” and, therefore, not covered. In brief, the insurer is investigating whether there were misrepresentations about drug use on the insurance application. As reported by WVBLB, the actor’s death was ruled accidental although abuse of prescription medications was mentioned. The insurer claims that since the actor died within the “two-year incontestability period,” its investigation is legitimate.

 

Here’s our “takeaway” from this sad story: Clients should remember that the “incontestability clause” of life insurance policies creates a two-year period within which life insurance claims can be contested for the exclusion of suicide and fraud in making the application. This two-year period is a safeguard against “adverse selection,” for example, against the possibility that an individual contemplating suicide buys a policy and then commits the act. In addition, however, if the life insurance policy application was not completed accurately and with care, the company can investigate for other reasons why it should not be required to pay the claim if death occurs within the two years after the policy was issued. If a proper cause is found, it can return the premiums paid and deny the claim for the benefits of the policy.

 

Thus, it is important to complete the policy application carefully. When purchasing life insurance, one hopes it is never needed and certainly not needed within the first two years. Unfortunately, unexpected tragedies do occur.

 

Avoiding Litigation You Can't Manage: Planning Your Estate and Talking About It

You will not be around to manage any litigation that might arise over your estate. 

That’s why we took notice of a recent New York Times article by David Cay Johnston which made an excellent case for informing your beneficiaries about the particulars of your estate plan. (“Learning to Share”). 

Essentially, the point of the article is that being up front about your plans may be difficult but will serve you well in the long run. Quoting Mitchell Gans, a law professor at Hofstra University, the Times points out the particular problem that occurs when the plan is not an equal distribution among the beneficiaries and the less favored beneficiaries react with anger:

 

Kids do get angry at being cut off, but if you say nothing their anger will be directed not at you, but at the favored child. You need to ask yourself, ‘Why should this kid be the target of the anger?’ Why would you do that to them?

 

I recommend the entire article. When we talk about the “long run” here, we are talking about a run so long that you are no longer there to smooth things over or straighten things out.

 

In our experience, estate and trust litigation is quite likely to occur where there is an unequal distribution and the beneficiaries do not find out about it until the will is offered for probate or a trustee takes charge after death has occurred. Estate and trust litigation tends to be especially bitter. We know of cases where the parties lose all perspective and dissipate large portions of the estate.  Most attorneys who practice in this field will have had similar experiences.   The majority of cases eventually settle but getting to a settlement can be a long, expensive effort.

 

We include trust and estate matters in the general category of “business litigation” (although many would not) because most of our small business clients do not create an artificial boundary between their business and their personal finances. And, it is possible to extract “better practices” from litigation developments for personal financial issues, such as estate matters, just as it is for business issues.

 

In this case, the Times article rightly suggests that the better practice, although difficult, is to communicate openly with your intended beneficiaries.

Litigating Against the IRS: Taxpayer Wins One, Loses One

A taxpayer both won and lost against the IRS in a case involving a Family Limited Partnership (FLP). The case, Holman v. Commissioner is reported and very-well summarized in a post (“Another FLP Fact Pattern: Holman v. Commissioner”) by Kimberly Martinez Lajarza in the Florida Estate Planning Blog

We sometimes comment on estate planning issues in this blog because of our broad interpretation of “business litigation.” Our business clients and readers have a very strong and personal interest in transferring the fruits of a lifetime of hard work to their chosen beneficiaries.   

Lifetime gifts are commonly used to reduce the size and tax liability of an estate large enough to be taxable. But, gifts are subject to the gift tax.

FLP’s provide a way to discount the value of the gifts made in one’s lifetime for gift tax purposes. The discount is important because it allows the taxpayer to take greater advantage of the annual exclusion (now $12,000) and the lifetime exemption (now $1,000,000) from the gift tax. For example, a 20% discount allows assets to be nominally worth $15,000 within the $12,000 annual exemption.

We have not seen the Holman case and rely on the FEPB post for the facts. Apparently, the mainstream elements of the plan (marketability and control discounts) survived the litigation but, the transfer restrictions pushed the envelope a little and did not. Another key element, in favor of the taxpayer, was that the assets were transferred to the limited partnership before gifts were made, even if only by a matter of days. 

General lessons to derive better practices: (1) leading-edge planning techniques will be scrutinized and may involve litigation so the potential returns (even larger tax savings) should justify the added risk, (2) careful planning is always in order – - consider how important the timing of the gifts was in this case.

Estate Plan By Substituted Judgment Cannot Be Contested After Death - A First from California

An appellate court in California has ruled that an estate plan created by a conservator under a substituted judgment order cannot be contested after the death of the estate owner.

The case is reported by Law.com in an article (“In Appellate First, Attacks on Wills Barred After Estate Owner Dies”) by Pamela A. MacLean of the National Law Journal.

We normally would not comment on a California case but there seem to be some general principles at work here. First, though, we should agree on terminology. While Connecticut uses the same term, “conservator,” in New York, a “guardian” would be involved, more specifically one appointed for an adult under Article 81 of the New York Mental Hygiene Law.

In general terms, someone (conservator or guardian) legally appointed to make decisions for a person who lacked capacity for decision-making created an estate plan. Substituted judgment means, generally, the plan was believed to be what the incapacitated person would have done if that person had not lacked capacity.

Most important in forming our point of view: it was done after a hearing, on notice, with an opportunity for interested parties to be heard and in accordance with a court order.

On these limited facts, one wonders why, as Law.com reports, it would be the first such decision in the nation.  I acknowledge not being able to read the entire case and reacting only to these limited facts. 

But, it seems to me a matter of common sense that if the parties had the opportunity to contest the estate plan before it was approved by the court, the same parties should not be permitted to wait until the death of the incapacitated person and then raise issues that could have been heard and determined in the earlier proceeding.

Will contests or, as is the case here, a challenge to a living trust, can be nasty affairs and can wastefully diminish the estate. There is no reason to give a potential objectant a second opportunity after failing to raise appropriate issues at a first hearing to approve the estate plan. It appears to be common sense and applicable in any state.