Probate litigation

Caselaw Update: In re Phillip B. Begley Torch Lake Trust

Read the full opinion here:

Another case that demonstrates the importance of thorough planning for assets that have sentimental value.

On October 1, 1993, Phillip B. Begley executed the Torch Lake Trust, which held securities, and cottages on Torch Lake. The settlor also had property on Old Mission Peninsula, and property in Arizona. Huntington National Bank was appointed successor trustee in 2010, shortly before the settlor’s death. The cottages generated rental revenue, but from 2011 to 2013, the annual cost of maintaining the cottages exceeded this revenue. Additionally, there was testimony that Ann Begley, the setelor’s surviving spouse, required in-home care, which was costing about $178,000 per year. The trust officer testified that if the Torch Lake Cottages were sold, the money from the sale would be invested in a fashion to generate income for Ann Begley’s future care.

On September 15, 2013, Huntington received an unsolicited offer to purchase the Torch Lake Cottages for $1.4 million cash, which was above its appraised value. Huntington notified the beneficiaries, who disagreed on a course of action. Three beneficiaries supported the possible sale, two beneficiaries did not want trustee to sell the Torch Lake Cottages to anyone, and one beneficiary was noncommittal. Moreover, some of the beneficiaries believed that pursuant to the Torch Lake Trust, Huntington was required to obtain consent from the settlor’s children before it could sell the Torch Lake Cottages. Huntington, on the other hand, believed that it was not required to obtain consent because none of the children had directed the sale. Therefore, Huntington filed a petition for instructions on October 17, 2013, requesting the trial court enter an order allowing the disposition of the trust assets, including the Torch Lake Cottages, without the consent of the settlor’s children.

Section 4.7(b) of article IV of the Torch Lake Trust, addressed the sale of the cottages, and provided:

(b) Sale of Cottages. Settlor’s children may direct Trustee to sell one or both Cottages if they decide that the Cottages no longer serve the purposes envisioned by Settlor. Settlor’s children must approve the sale of the Cottages unanimously or unanimously less one vote. Trustee shall decide the terms of any sale in Trustee’s sole discretion. Trustee may, in its discretion, reinvest the proceeds in another cottage to be held and administered under the terms of this Trust, or invest the proceeds from the sale as Trustee deems advisable. It is Settlor’s intent that if a Cottage is sold, that the purchasers shall be one or more of his descendents who desire to acquire that Cottage for their use and enjoyment.

The Court determined that Section 4.7(b) required that the Trustee attain the consent of the Settlor’s children before a sale of the Cottages. The provision was not limited to only those sales directed by the beneficiaries. The court looked to the expressed intent of the settlor in Section 4.7(b), and determined that the cottages could only be sold if the children determined that retaining the cottages no longer served the purposes of use and enjoyment.

TAKEAWAY: This case shows the importance of careful planning for assets that have sentimental value, such as a family cottage. These kinds of assets are the number one cause of litigation and hurt feelings between family members. Make sure your estate plan covers:

1. How an asset can be sold.
2. Who can sell an asset.
3. How to compensate beneficiaries who don’t want to enjoy that asset.
4. The rights of beneficiaries to retain or purchase the asset for their own enjoyment.
5. Management of that asset between several beneficiaries, including how taxes and maintenance are apportioned.

Unfortunately, sentimental assets like this can also cause irrational attachments that can harm others. When faced with massive long term care costs, or a market downturn, it may be necessary to sell assets. Requiring unanimous consent of the beneficiaries to sell an asset can be detrimental. Instead, carefully delineate the discretion of a trustee, determine if there should be triggering events to require a sale, or nominate a trust protector to monitor the actions of the trustee.