Caveat Venditor vs. Caveat Emptor – Thorsen Case Highlights How Attorney and Client Must Beware

The recent opinion from the Virginia Supreme Court in the case of Thorsen, et al. vs. Richmond Society for the Prevention of Cruelty to Animals (RSPCA) contains lessons for attorneys and clients surrounding the preparation of estate planning documents. 

The case involved the preparation of a Last Will and Testament in 2003 in which Alice L. Cralle Dumville, the testatrix (or creator of the will) desired to make sure that her estranged husband did not receive any of her estate should she die during the pendency of the divorce.  To that end, she asked an attorney, James B. Thorsen, to prepare a will leaving her assets to her mother, and if her mother predeceased, to the RSPCA.  Ms. Dumville died in 2008 having had her mother predecease her in 2007. The RSPCA was notified that they were the beneficiary of Ms. Dumville’s estate, except a problem was discovered with the will.  The will left only Ms. Dumville’s tangible personal property to the RSPCA and made no provision for her real property, which would pass by intestacy to Ms. Dumville’s two heirs at law.

Mr. Thorsen filed suit to correct the ‘scrivener’s error’ in the Circuit Court of Chesterfield County, but the Circuit Court found that the language of the will was clear in that only the tangible personal property was to be distributed to the RSPCA, while the remainder of Ms. Dumville’s assets would pass by intestacy.   The RSPCA then sued Mr. Thorsen in Richmond Circuit Court for breach of contract-professional negligence stating that it was a third-party beneficiary to the agreement between Mr. Thorsen and Ms. Dumville.  The Circuit Court agreed and Mr. Thorsen appealed to the Virginia Supreme Court arguing that (a) the RSPCA was not an intended third-party beneficiary, (b) a written agreement with any third-party beneficiary was required, and (c) the statute of limitations barred the RSPCA’s action.

In short, the Virginia Supreme Court, in a 6-1 decision, disagreed with Mr. Thorsen and agreed with the Circuit Court finding for the RSPCA.  By doing so, the Virginia Supreme Court found that a third-party beneficiary who is ‘clearly and definitely’ the intended beneficiary of a contract (even one where no written agreement exists) may sue to enforce its rights derived from the contract even though the third-party beneficiary may not know it is a beneficiary for many years (as is the case in most estate planning documents).  The lone dissenter argued that the majority was establishing a new cause of action against attorneys that should be created by way of legislation, not through the judiciary.  Furthermore, the dissent believes that the majority’s decision does not simply apply with respect to third-parties in an estate planning context, but will be applied to all legal malpractice actions.   

So, what does this mean for individuals looking to have estate planning documents prepared?  First, you should make sure you have read and understand your documents.  Otherwise, there is a chance that the estate planning documents do not capture your wishes and the result could be that unintended beneficiaries receive your estate.  Next, you may find that the estate planning process is more involved to ensure that you do understand your documents and have read them thoroughly.  And ultimately you should be working with an attorney who routinely prepares estate planning documents unlike in this case where it appears that Mr. Thorsen may not have regularly prepared wills. 

For attorneys, various commentators have said that likely there is a legislative fix in the works for the 2017 General Assembly session that may include passing a statute that allows for the correction of mistakes in wills, similar to the statute that applies to revocable living trusts.  But until then, practitioners may be unwilling to prepare wills and may only be willing to prepare revocable trusts.  Furthermore, practitioners will be watching to see if this decision is applied to other situations in which there is a potential third-party beneficiary.  Going forward, this is a case which highlights how both the attorney and the client should beware as the possibility for unintended consequences exists on both sides. #estateplanning #ThorsenvsRSPCA #thirdpartybeneficiary @bgnthebgn

Revised Elective Share Statute in Virginia

Beginning with the estates of decedents dying on or after January 1, 2017, the elective share statute to be applied in Virginia will be significantly changed.  Under current law, a surviving spouse has the right to claim one-third (1/3) of a decedent’s estate if the decedent left surviving children or descendants, or one-half (1/2) of the decedent’s estate if the decedent had no surviving children or descendants.  These calculations were based solely on the assets (or augmented estate) of the decedent.

Under the new law, a surviving spouse will have the right to claim a percentage of one-half (1/2) of the value of the marital property included in the augmented estate.  What does this mean?  First, the marital property consists of the following: (a) a decedent’s net probate estate, (b) a decedent’s non-probate transfers to others, (c) a decedent’s non-probate transfers to the surviving spouse, and (d) a surviving spouse’s property and non-probate transfers to others.  (Yes, you read correctly.  A surviving spouse’s assets are now included in the calculation.) 

Of the total value of the marital property portion of the augmented estate, the surviving spouse may be able to claim up to fifty percent (50%).  The determination of whether the surviving spouse can claim the full 50% depends on the length of marriage.  Thus, if a couple is married for 5 years, then the surviving spouse could claim 30% of the 50% elective share available or 15% of the augmented estate. 

Furthermore, under current law, certain statutory allowances are available to a surviving spouse who claims the elective share.  Those statutory allowances include the family allowance and exempt property allowance, but specifically exclude the homestead allowance.  Under the new law, a surviving spouse could claim all three allowances and still make a claim for the elective share. 

Finally, current law has no explicit process by which an incapacitated surviving spouse can make his or her claim.  Under the new law, an incapacitated surviving spouse, by way of his or her conservator or agent under a durable power of attorney, will have the ability to claim an elective share.    In addition, any elective share amount that is awarded to an incapacitated surviving spouse must be set aside in a testamentary trust and administered for the surviving spouse’s needs.  At the surviving spouse’s death, provided he or she has not regained capacity and terminated the trust, any remaining assets in the testamentary trust will be distributed in accordance with any residuary clause of the predeceased spouse’s will or to the predeceased spouse’s heirs by intestacy.  Effectively, in that situation, the elective share will not benefit the heirs of the surviving spouse.

So, how does this change impact you?  If you are considering getting married and plan on entering into a pre-nuptial agreement, or are already married and looking to enter into a post-marital agreement, the right to the elective share can be waived.  But, you should first understand the right you are waiving.  Second, if you are the conservator or agent under a power of attorney of an incapacitated individual whose spouse died leaving him or her very little, then the elective share may be a viable option depending on the length of the marriage. 

Third, in subsequent marriages, the families (i.e., children) of the first marriage are generally concerned with the distribution of their parent’s assets, particularly if the new spouse is the surviving spouse.  Now the length of the marriage is factored into the equation and the amount available to a surviving spouse is as low as 3% for less than 1 year of marriage (or 1.5% of the augmented estate).  This is a huge difference from the one-third (1/3) share available under current law and may alleviate concerns about financial exploitation. 

Thus, this change appears to be in response to shifting attitudes towards marriage, that is, marriage is an economic partnership and is less about avoiding spousal impoverishment.  And the changes to the elective share statute help bring Virginia up-to-date with the current dynamics of marital relationships.    However, as with any new law, only time will tell what tweaks may need to be made as the law is implemented and to determine whether there are any unintended consequences as a result of the changes.  #estateplanning #electiveshare #incapacityplanning #estateadministration @bgnthebgn

How Divorce Can Impact Your Estate Plan – Failure to Update an Existing Plan

Now that we have addressed property settlement agreements, beneficiary designations, real and personal property and special needs, what happens if an estate plan already exists and you do nothing to update it?  Presumably, the existing plan was prepared during the marriage and has the former spouse in fiduciary positions and named as a beneficiary.  The entire plan should be updated to reflect new trustees, personal representatives/executors, financial powers of attorney and healthcare agents.  But often, recently divorced individuals simply do not have the inclination to handle one more legal matter (particularly if the divorce was not amicable).

Virginia law has a savings clause that may apply.  Under Virginia law, if a person creates a last will and testament while married, divorces and subsequently dies without updating his or her last will and testament, the divorce “revokes any disposition or appointment of property made by the will to the former spouse.”  Va. Code §64.2-412.  In addition, any appointment of the former spouse as a fiduciary under the will, including as executor, trustee, conservator or guardian, is revoked.  However, this law does not change any financial power of attorney or healthcare power of attorney under which the former spouse may be named.  Furthermore, the law does address provisions contained in a trust agreement.  Therefore, a former spouse may have authority to act or be treated as a beneficiary unless changes are made or other state statutes apply

Moreover, if there is an irrevocable trust or “spousal lifetime access trust” (SLAT) that benefits a spouse, then there may continue to be income tax consequences to the creator of that irrevocable trust even though the parties divorce.  The regulatory and legislative history surrounding the applicable tax code sections (Sections 71, 672, 677 and 682)  is not as clear as it should be, in certain circumstances, as to whether a grantor (or creator of the trust) will still be held liable for the income tax associated with the irrevocable trust that otherwise benefits an ex-spouse.  Therefore, the trust agreement and relevant tax law need to be reviewed and a determination made regarding any ongoing tax liability.

Overall, taking into account all of the considerations described throughout this series, it is clear that after a divorce (and perhaps even during a divorce), it is imperative that you begin the process of updating your estate plan to avoid the potential of having a former spouse in a position of authority during incapacity or upon death and to avoid a former spouse unintentionally benefiting from your demise. #beginthebegin #divorce #estateplanning #updateyourestateplan @bgnthebgn

How Divorce Can Impact Your Estate Plan – Special Needs

As we continue to explore the impact of divorce on an estate plan, another issue that arises is the care and support of children, particularly children with disabilities.  Presumably, the property settlement agreement will handle ongoing financial support and initial custody, but what happens during the incapacity or upon the death of a parent?  An earlier article discussed the benefits of planning for any life insurance requirements under the property settlement agreement.  But in addition to a general plan for life insurance, it may be necessary to designate the life insurance to a special or supplemental needs trust to allow the disabled child to qualify for public benefits.  The special or supplemental needs trust can be created within one’s personal estate plan (e.g., a subtrust under a Last Will and Testament or revocable living trust) or as a standalone trust created prior to incapacity or death.  Setting the proceeds of the life insurance aside in such a trust will help protect those proceeds for the disabled child’s benefit, protect those proceeds from the child’s potential creditors and allow for flexibility in public benefits planning.    

And what if the child is receiving public benefits like Social Security Income (SSI), is on Medicaid or receives a Medicaid Waiver and child support is awarded?  In that situation it is prudent to consider the creation of a self-settled or (d)(4)(A) special or supplemental needs trust to receive the child support payments.  Such self-settled trusts have very particular required provisions in order for the disabled child to maintain eligibility for public benefits, but will avoid reduction or elimination of the available benefits if properly structured and implemented.  This is an issue that should be addressed during negotiations and to include in the property settlement agreement, and therefore, not to figure out after the divorce is final.     

As for the guardianship/custody of the disabled child, how will that be handled?  If the child is a minor, then the parents will hopefully reach an agreement as to co-parenting and incorporate that agreement in the property settlement agreement (or as determined by the court if agreement cannot be reached).  For an adult child who is disabled, a guardianship proceeding to establish that the child is disabled and to appoint a guardian must be commenced.  The resulting court order will address the parents’ authority to act jointly or separately, after making reasonable efforts to contact each other, regarding the child’s medical care and housing, including (a) emergency medical treatment, (b) non-emergency hospitalizations, (e) personal care appointments, (f) immunizations, (g) routine dental and vision appointments, (h) admission to a facility, and (i) developmental assessments, among other things.  Furthermore, the court order will address what happens if a parent cannot continue acting as guardian due to incapacity or death.  Ultimately, guardianship of a child with disabilities ends up being less about which parent has the child on a particular holiday (also important) and more about the type and quality of care the child will need and how that care will be provided.

So consider the following: (1) If you are divorcing and have a disabled child, how is that child being provided for upon the incapacity or death of a parent? (2) Is eligibility for public benefits preserved through a properly structured special or supplemental needs trusts? (3) Who has authority to make healthcare decisions for the child and in what manner?   #divorce #specialneeds #estateplanning #specialneedstrust

How Divorce Can Impact Your Estate Plan – Real Estate and Personal Property

After addressing property settlement agreements and beneficiary designations, this next article in the series on divorce and estate planning discusses real estate and personal property. 

Married couples tend to own real estate together, whether as a primary residence, a vacation home or an investment property, and may have purchased a variety of personal property together, such as artwork, furnishings and the like.  Upon divorce, Virginia law dictates that all rights in real and personal property, “including the right of survivorship in real or personal property title to which is vested in the parties as joint tenants or as tenants by the entirety, with survivorship as at common law, shall be extinguished. . .”  Va. Code §20-111.  Thus, by operation of law, the ownership of real and personal property is converted to ownership as tenants in common.

Now depending on the property settlement agreement, each party will generally own fifty percent of the real and/or personal property.  In order to ensure that the real and/or personal property is used for an individual’s benefit during incapacity and distributed to his or her beneficiaries upon death, a person should consider transferring such real and personal property to a revocable living trust (the benefits of which I have discussed in earlier posts). 

Alternatively, for the real property, Virginia has the Uniform Real Property Transfer on Death Act, which allows a person to essentially designate a beneficiary for his or her real property by way of a transfer on death deed.  This deed is revocable, provided certain formalities under the statutes are followed, but allows for you to be on record to the public as to who or what entity should receive the real property.  Although it is a revocable designation, it is not that straightforward to change, particularly if you decide to do so multiple times, which may create issues if death occurs in the midst of a change.  Thus, a transfer on death deed should only be considered in certain circumstances depending on your overall estate plan.

With all that said, keep in mind that if nothing is done to handle the real and personal property, then both will pass by operation of law (and perhaps to unintended beneficiaries – think #Prince).  More control exists if real and personal property are passed through an effective estate plan, (e.g., by way of a revocable living trust) versus letting state statute decide.  So, if you are recently divorced or in the process of divorcing, ask yourself what should happen to your real and personal property and be sure to take action so the real and personal property does pass in accordance with your wishes.  #divorce #estateplanning #transferondeath  #revocablelivingtrust