ANALYSIS OF NOVEMBER 23, 2016 SUPREME COURT OPINION
(Posted November 23, 2016) The Supreme Court hands down one published opinion today before its Thanksgiving break. In Reineck v. Lemen, the court takes up two issues involving family trusts.
Estate-planning lawyers will recognize well the scenario: In 1991, Mom and Dad prepared reciprocal wills and trusts. They arranged for Mom’s heirs to get 60% of the trust assets of the survivor, and Dad’s children (this was evidently a second marriage for at least Dad, as Mom had no children) got the other 40%. They changed those percentages to 55% and 45% respectively in 1999.
Also in 1999, Dad signed a power of attorney, naming Mom as his primary attorney in fact and his daughter as successor attorney. According to today’s opinion, its provisions kicked in only if Frank became incapacitated.
This generates a slight digression here: Today’s opinion expressly refers to this as a durable power of attorney. The laws elsewhere might quibble with that, claiming that a power that arises only upon the occurrence of a triggering event is a springing power; a durable power takes effect immediately.
I’m not a trust-law jock, but as I see it, our statutes create a different distinction between durable and springing powers. The Code of Virginia defines a durable power not as one that takes effect immediately, but as one that is “not terminated by the principal’s incapacity.” Our Code doesn’t define a springing power, but one statute does provide for a delayed effective date, and that’s what this one seems to do: it arises upon Dad’s incapacity, and endures the period of that incapacity.
Needless to say, Dad did become incapacitated, developing dementia; but years later, Mom died while Dad was still alive. That means that Dad’s daughter was the sole attorney in fact.
Exercising authority expressly granted to her in the power of attorney, the daughter created two new trusts and transferred all of Dad’s assets into those. The new trusts benefitted the daughter and her brother, disinheriting Mom’s heirs. One day later, Mom died; the daughter then vacuumed out the assets and distributed them to herself and her brother.
Now, as you can imagine, we have fertile grounds for litigation. One of Mom’s heirs sued the daughter for breach of fiduciary duties. A court dismissed that suit because contingent beneficiaries don’t have standing to sue.
Well, we can fix that; the same heir got himself appointed curator of Dad’s estate, and filed a new suit in that capacity, thus avoiding the standing problem. But the court this time granted summary judgment to the daughter, finding that her actions in setting up and then distributing the new trusts were fully consistent with the grant in the power. In short, “Yes, she can do that.”
Before the trial court let the case go, it hit the curator with a $650,000 judgment for attorney’s fees. The court found him liable in his personal capacity, no doubt reasoning that he wasn’t curating any assets, so an award in his official capacity would be useless.
Today the Supreme Court gives a partial victory to each side. Justice McCullough, writing for a unanimous court, agrees with the trial court that the daughter’s powers did indeed include the right to revise Dad’s estate plan in this way, even though she was one of the primary beneficiaries of that revision. And the document creating the power granted unto daughter a complete release for liability for all of her actions, short of willful misconduct or gross negligence. The justices find no plausible showing of either of those two exceptions in the record.
I’ll mention one last point on this first issue before moving on to the second one. There’s a statute that spells out the duties of an attorney in fact. The curator pointed to subsection A(1) of that statute in support of his arguments. Here’s the relevant text:
Notwithstanding provisions in the power of attorney, an agent that has accepted appointment shall . . . 1. Act in accordance with the principal’s reasonable expectations to the extent actually known by the agent and, otherwise, in the principal’s best interest.
The justices agree that this language doesn’t bar the daughter from changing Dad’s trust provisions. But another subsection of the same statute might have been relevant. It requires the attorney in fact to:
6. Attempt to preserve the principal’s estate plan, to the extent actually known by the agent, if preserving the plan is consistent with the principal’s best interest based on all relevant factors, including:
a. The value and nature of the principal’s property;
b. The principal’s foreseeable obligations and need for maintenance;
c. Minimization of taxes, including income, estate, inheritance, generation-skipping transfer, and gift taxes; and
d. Eligibility for a benefit, a program, or assistance under a statute or regulation.
Now, I’m not about to go predicting what this set of justices would have done with a hypothetical new line of attack. And the curator may have had a good tactical reason not to pursue this. But to me, this looks like a plausible approach. Dad’s estate plan was unmistakable – he intended to give part of his assets to Mom’s heirs. Daughter’s new trust provisions cannot reasonably be said to have “preserved” that plan.
The second appellate issue is that whopping attorney’s-fee award. On this issue, the justices reverse. That’s because a court can’t hit an official-capacity litigant with personal-capacity liability in a situation like this.
The court declines to address the award in another context: the trial judge had awarded fees based on both the original suit, before the curator qualified, and the second suit, brought in his official capacity. The court has recently refused to allow a trial court to sanction a litigant for separate but related litigation – that’s EE Mart F.C. v. Delyon from February 2015. I suspect that if the justices had taken up this issue today, they would have ruled the same way, that you can only get attorney’s fees from the case you’re litigating. Rule 1:6 would seem to require such a conclusion.
One last observation: the daughter mentioned to the justices “that she has consumed the near totality of her inheritance in legal fees to fend off meritless litigation brought by” the curator. That might affect the justification for a remedy, but it’s no use in light of the Supreme Court’s holding about personal-capacity liability. It does illustrate, however, that in estate litigation like this, often the best thing to do is swallow your anger at the Bad Guys, and settle. Otherwise, like here, the litigants get an eventual ruling, but the lawyers wind up getting the money.