Recent Fiduciary Cases of Interest to Corporate Fiduciaries: July 2010

July 8, 2010

Dolby v. Dolby – Virginia Supreme Court holds that debt owed solely by testator and secured by Virginia property held as tenants by the entirety must be paid by the estate and does not pass to the surviving tenant, notwithstanding arguably contrary provisions of testator’s will.

Schilling v. Schilling – Virginia Supreme Court holds that Virginia’s statute that allows curing of defects in the execution of a will applies to a writing signed before the enactment of the statute when the testator dies after the enactment of the statute.

Smith v. Mountjoy – Virginia Supreme Court holds that wife exceeded her authority under husband’s power of attorney and made an impermissible gift by converting property held as tenants by the entirety into property held as tenants in common and creating trusts for herself and her husband with different terms, and as a result, the conversion of the tenancy was void.

Ladysmith Rescue Squad v. Newlin – Virginia Supreme Court reverses division and commutation of a charitable remainder trust sought by the trustees and the beneficiaries upon the objection of one of the charitable remainder beneficiaries and because the court concluded that the standard for division and commutation under the Virginia Uniform Trust Code was not met.

Dolby v. Dolby, 2010 Va. LEXIS (June 10, 2010)

In 2002, Cornelius Dolby purchased a house in Virginia and executed a promissory note with the house as security for the debt. In 2005, he refinanced the note. In 2006, he married and thereafter deeded the house to himself and his wife as tenants by the entirety with survivorship. Mrs. Dolby was never added to the note and did not assume the debt.

Shortly thereafter, Mr. Dolby executed a new will that in part directed his executors to pay his debts, but also provided that the executors were not “required to pay prior to maturity any debt secured by mortgage, lien or pledge of real or personal property owned by me at my death, and such property shall pass subject to such mortgage, lien or pledge.”

Mr. Dolby died in 2006. Mrs. Dolby and two other family members acting as co-executors filed a suit for aid and guidance as to whether the estate or Mrs. Dolby was required to pay the note. Mrs. Dolby, individually, asserted that the debt was payable by the estate, and Mr. Dolby’s children asserted that the debt passed to Mrs. Dolby with the property. The trial court ruled in favor of the children that the property passed to Mrs. Dolby subject to the debt.

On appeal, the Virginia Supreme Court reversed on the grounds that: (1) Mrs. Dolby was not added as a joint obligor on the note and did not assume the debt, and the debt remained as Mr. Dolby’s sole obligation at his death; (2) Mr. Dolby’s will directed the payment of all of his legally enforceable debts; (3) the exception in Mr. Dolby’s will for real property owned by Mr. Dolby at his death did not apply because, as a result of the tenancy by the entirety, Mr. Dolby’s interest in the property did not survive his death but rather passed to Mrs. Dolby by operation of law and outside the will; and (4) a testator cannot lawfully direct the executor of his estate not to pay lawfully enforceable debts based on the testator’s sole and personal obligation, or charge such debts against property that passes outside the testator’s estate.

Schilling v. Schilling, 2010 Va. LEXIS 59 (June 10, 2010)

In 2005, Ora Lee Schilling signed a short writing purporting to be her will that was mostly, but not entirely, in her own handwriting. Mrs. Schilling died in 2008, and her son attempted to offer the writing for probate as a holographic will. The circuit court clerk refused, presumably because some of the writing on the document was from the son and not from Mrs. Schilling. The son petitioned the court to establish the writing as a will under Virginia Code section 64.1-49.1, which was enacted in 2007, and allows suits to permit probate of documents that are signed but otherwise not properly executed upon showing clear and convincing evidence of the testator’s intent.

Mrs. Schilling’s other children filed a demurrer seeking to dismiss the suit on the grounds that the 2007 Virginia statute could not be applied retroactively where the writing was signed before the enactment of the statute. The trial court agreed and dismissed the suit.

On appeal, the Virginia Supreme Court reversed on the grounds that (1) a will is ambulatory and does not speak until the testator’s death, (2) the law on the date of death applies to the determination of whether a writing is a will, and (3) since Mrs. Schilling died after the enactment of the statute, this was not a retroactive application of the statute.

Smith v. Mountjoy, 2010 Va. LEXIS (June 10, 2010)

Theodore and Evelyn Smith married in 1946. In 2006, 60 years later, Mr. Smith executed a durable power of attorney naming his wife as his agent. The power of attorney did not expressly authorize gifts. Mrs. Smith, acting as agent but unbeknownst to her husband, created two similar irrevocable trusts, one for herself and one for her husband, but Mr. Smith’s trust passed “his” assets to Mrs. Smith outright, while Mrs. Smith’s trust passed her assets to a discretionary trust for Mr. Smith. Mrs. Smith named herself as initial trustee of both trusts. On the same day she created both trusts, Mrs. Smith, individually and as agent for Mr. Smith, executed two deeds of gift conveying to each trust one-half interests in six parcels of real estate that the Smiths until then held as tenants by the entirety with rights of survivorship.

Mrs. Smith died unexpectedly in 2007 without having informed Mr. Smith of these transactions. Soon after, Mr. Smith discovered the transactions and: (1) executed a revocation of his trust and delivered notice of the revocation to Mrs. Smith’s niece, Carol, who was the successor to Mrs. Smith as trustee; (2) brought suit against Carol, as successor trustee of his trust and as Mrs. Smith’s executrix, to void the transfers of the properties and declare him the owner as the surviving tenant; and (3) demanded distributions from Mrs. Smith’s trust. Mr. Smith then died, and Mr. Smith’s sister, Jean, was substituted as a party as Mr. Smith’s executrix.

On cross motions for summary judgment, the trial court granted summary judgment in favor of Mr. Smith’s estate and held that the deeds transferring the properties to the trusts were invalid and void, Mr. Smith did not ratify the transactions, Mr. Smith’s trust was void, and fee simple title to the properties vested in Mr. Smith at Mrs. Smith’s death. Carol appealed.

On appeal, the Virginia Supreme Court affirmed the trial court on the following grounds: (1) Mr. Smith did not receive any consideration for the conversion of the tenancies by the entirety property into tenants in common property and the subsequent transfer into the separate trusts, because the trusts had different terms (with Mr. Smith receiving only a discretionary income interest but Mrs. Smith receiving outright transfers); (2) the transaction conferred a benefit to Mrs. Smith or her heirs – the possibility of obtaining fee simple ownership of the properties irrespective of the order or death – that she did not have under the tenancies by the entirety, with no corresponding benefit to Mr. Smith; (3) Mrs. Smith made a gift to her own trust that exceeded her authority under the power of attorney; (4) Carol’s argument that Mr. Smith ratified Mrs. Smith’s actions lacked merit because Mr. Smith promptly disavowed the actions by terminating his trust and filing the lawsuit, Mr. Smith had no basis to challenge Mrs. Smith’s creation of her trust, and his demand for trust distributions from Mrs. Smith’s trust was proper since the trust contained assets other than the properties at issue.

Ladysmith Rescue Squad v. Newlin, 2010 Va. LEXIS 71 (June 10, 2010)

Miller Hart Cosby died in 2004, unmarried and with no descendants. Under his will, he established a charitable remainder unitrust that provided distributions of the unitrust amount to four individuals during their lifetimes, with the remainder to be distributed at their deaths in equal shares to two charities. The will also contained a spendthrift clause. The executors and trustees under Mr. Cosby’s will brought a suit for aid and direction to resolve ambiguities under the will concerning the source of funds for the payment of debts, taxes, and costs of administration.

By 2009, only two of the unitrust beneficiaries were still living, and the value of the trust was between $5 million and $6 million (the court observed that the trustees wisely moved the trust assets from stocks to money markets before the market declined). The fiduciaries and all beneficiaries entered into a settlement agreement resolving the issues presented to the court in the suit for aid and direction.

As part of the settlement, the fiduciaries, the remaining unitrust beneficiaries, and one of the charities agreed to move the court to approve the division of the trust into two separate trusts (one for each of the charities), and to commute the trust for the benefit of one of the charities. The other charity objected to the division of the trust and the commutation.

Pursuant to the settlement, the motions were brought before the trial court, which heard arguments by counsel and reviewed memoranda of law, but no evidence was taken and the court made no express findings of fact. The trial court granted the motions, divided the trust, and ordered the commutation of the trust for the consenting charity and the distribution of the trust assets among the income beneficiaries and the one consenting charity. The objecting charity appealed.

On appeal, the Virginia Supreme Court reversed on the following grounds: (1) under the Virginia Uniform Trust Code, the trustee may only divide a trust where the division does not materially impair rights of any beneficiary or adversely affect achievement of the trust purpose; (2) the division of the trust was designed to isolate the objecting charity and eliminate its standing to object to commutation; (3) while the UTC has dramatically changed trust law, the UTC has not so altered the law as to permit beneficiaries to defeat the terms of the will merely because of the desires of the beneficiaries to receive assets right away; (4) while under the UTC the court had the authority to modify or terminate the trust due to circumstances unforeseen by the settlor, the desire of the beneficiaries to receive assets right away and their willingness to engage in litigation are not sufficient to meet this standard; (5) there was no evidence in the record that Mr. Cosby did not anticipate those risks, and therefore the moving parties failed to carry their burden of justifying the trust modification; and (6) the modification and termination of the trust would frustrate the trust purposes of providing an income stream to friends, preventing invasions of corpus, and providing credit protection.

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