By Thomas J. Murphy
Murphy Law Firm, Inc.
Presented to the Maricopa County Bar Association
December 18, 2008
PROBATE v. NON-PROBATE and SMALL PROPERTY ARRIDAVIT
- Non-probate – title passes by operation of law:
- Jointly titled property
- Retirement plans with beneficiary designations
- Life insurance and annuities with beneficiary designations
- Payable-on-death accounts
- Beneficiary deeds
- Trust assets
- Small property affidavits – ARS 14-3971
- $50,000 or less of personal property
- $75,000 or less of real property, less liens and encumbrances
- Assessed value, not FMV is used
- Must wait six months after death
- Filed in probate court
- Probate estate
- Whatever is not covered by either of the above
- Typically, property titled only in the name of decedent or where no beneficiary is designated
PROBATE – INFORMAL V. FORMAL
- Informal – ARS 14-3300 et seq.
- Typically, where no dispute exists
- Conducted via pleadings – no hearings required
- Four months to file objections to will or appointment of Personal Representative
- Formal – ARS 14-3400 et seq
- For disputes regarding how estate will be distributed – will contests, etc
- Lost will – ARS 14-3415
- Hearing with notice is required
- Notice by publication is required – ARS 14-3403
- Bond required unless all beneficiaries waive it
ADMINISTERING THE ESTATE
A. STATUTORY REQUIREMENTS
Spousal Allowances – Beware of who gets paid first
#1. Homestead allowance – ARS 14-2402
Provides for $18,000.00 to a surviving spouse that takes priority over all claims except administrative expenses. The homestead allowance is chargeable against any benefit or share that passes to the surviving spouse or minor or dependent child by the decedent’s will, by nonprobate transfer pursuant to section 14-6102 or by intestate succession, unless it is otherwise provided by the decedent’s will or by the governing instrument for a nonprobate transfer. To determine the homestead allowance under this section, a survivorship interest in a joint tenancy of real estate is considered a nonprobate transfer pursuant to section 14-6102.
#2. Exempt property allowance – ARS 14-2403
In addition to the homestead allowance, the decedent’s surviving spouse is entitled from the estate to a value that is not more than seven thousand dollars in excess of any security interests in that estate in the following:
- Household furniture.
- Personal effects.
#3.Family allowance – ARS 14-2404
The decedent’s surviving spouse and minor children whom the decedent was obligated to support and children who were in fact being supported by the decedent are entitled to a reasonable allowance in money out of the estate for their maintenance during the period of administration. Prior versions of this statute limited this allowance to $1,000 per month for twelve months. This allowance is payable to the surviving spouse, if living, for the use of the surviving spouse and minor and dependent children. Otherwise this allowance is payable to the children or to persons who have the care and custody of these children.
B. NOTICE TO CREDITORS, BENEFICIARIES AND STATE AGENCIES
Notice must be given to all interested parties, defined as “any heir, devisee, child, spouse, creditor, beneficiary and other person who has a property right in or claim against a trust estate or the estate of a decedent, ward or protected person”. ARS 14-1201(26) & -1401. For an informal probate, notice must be given within thirty days of the filing of the application. ARS 14-3306. For a formal proceeding, fourteen day notice must be given before the hearing. This means notice by publication as well as the customary mailing. ARS 14-3403. As to creditors, a personal representative shall publish a notice to creditors once a week for three successive weeks in a newspaper of general circulation in the county where the probate was filed as well as written notice to all known creditors. ARS 14-3801
Never pay a debt of the decedent without first receiving a claim IAW ARS 14-3804. It is amazing how many creditors do not respond to a creditors notice, thereby forgoing their claim.
Never pay a claim before the four month period closes. While family members may be adamant that there are no creditors or that all creditors are known, this may not be so, especially if a long illness preceded death. A large medical bill not covered by insurance or Medicare can wipe out an estate.
Warn non-probate transferees that they take subject to creditors claim. For instance, a payable-on-death beneficiary on a bank or brokerage account can be reached by a creditor of the decedent. ARS 14-6102. One big exception to this is life insurance and annuities that often pass creditor-free. The Arizona Supreme Court held in May v. Ellis, 208 Ariz 229 (2004), that insurance policies are protected from creditors of the deceased insured’s probate estate. Legislation passed in 2005 expressly extends the May holding to life insurance policies and annuities by amending ARS 20-1131 and 33-1126. The former $25,000.00 cap has been eliminated for policies and annuities that are at least two years old and name a family member as beneficiary
Make sure that the payment of all debts is coordinated through the attorney’s office since creditors claim should be mailed to the attorneys’ office. This will insure that the correct amount is paid on a properly presented claim.
Always check the recorder’s website for any liens or judgments. If the person died while receiving AHCCCS benefits, a TEFRA lien may have been filed IAW ARS 36-2935. AHCCCS can assert a claim to recoup the net amount it has paid for services provided by medical contractors, for Medicare premiums and for insurance co-payments or deductibles. The largest of these will be the payments to medical contractors that, for most nursing home residents, will amount to approximately $2,500 per month. According to section 4.17 of AHCCCS’ State Plan, the claim can be asserted against any real estate in which the deceased person had an ownership interest and any other property subject to probate. There are four main exemptions to the estate recovery process. First, federal regulations limit estate recovery to medical services rendered to persons over the age of 55. Second, estate recovery cannot be asserted against a surviving spouse. Third, it cannot be asserted if the deceased person is survived by a child under the age of 21. Finally, it cannot be asserted if the deceased person left a surviving child of any age who is blind or is disabled under the criteria set forth by Social Security. Simply put, AHCCCS can only pursue an estate recovery claim against an unmarried person with no minor or disabled children.
These claims are usually filed with the probate court, either as a demand for notice if no probate has yet been filed or as a creditor’s claim. But, beginning in August 2005, AHCCCS began to issue liens against an AHCCCS’ patient’s residence. Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), states were authorized to issue liens on the real property of Medicaid (ie, AHCCCS) patients who were over the age of 55 years and who were residing in a nursing home for at least 90 consecutive days. (Transfers from one care facility to another will not interrupt the 90 day period.) These liens are a means to enforce AHCCCS’ estate recovery claims. They do not create any new basis for claims.
C. COLLECTING, MAINTAINING AND MANAGING ASSETS AND INVENTORY PROBLEMS
One would think that, in this age technology, that locating assets should be a simple matter. Unfortunately, the primitive, time-consuming and age-old methods still prevail. This means a thorough search of the decedent’s residence that must be done by family members, for a number of reasons. Cash and other valuables can be kept in the strangest places and can be easily stolen once located. Items that may seem of no importance to a non-family member made hold untold value to the family. Be particularly wary of others finding the original will that may disinherit certain family members – I have seen these mysteriously disappear.
Collecting financial records is key to determining the assets and debts of a decedent. Cancelled checks, tax returns, deeds and bills will provide leads. Safe deposit boxes can also be a revelation but warn the family that you never know what you may find there, such compromising photographs or letters describing wild and/or embarrassing indiscretions. Have all mail forwarded to the Personal Representative. Compile a list of all advisors, past and present – accountants, financial advisors, insurance agents, etc. – and contact them. Run an unclaimed property check, such as through www.unclaimed.org or www.missingmoney.com, both administered through the National Association of Unclaimed Property Administrators that is a non-profit organization affiliated with the National Association of State Treasurers.
An estate checking account should be established early on, in the name of the Personal Representative. It should read something like “John Smith as Personal Representative of the Estate of James Jones”. This will require submitting a form SS-4 to the IRS to obtain a tax identification number since a bank will not open an account without it. The bank will also require a death certificate and the letters of personal representative. Advise the client at the very outset to order at least 15 to 20 copies of the death certificates. Mortuaries often only order a half-dozen or so, but every bank, brokerage house, insurance company and title company will insist on an original copy although they will often return them later.
All bank and brokerage accounts should be retitled in the name of the Personal Representative. Thought should be given to consolidating the accounts. Explain the Personal Representatives that the step-up in basis should eliminate any taxable gain on the sale.
Make sure homeowner’s insurance is maintained on any residence and automobile insurance is in place on any vehicles.
Within 90 days of appointment, the Personal Representative must either a) file an inventory and send a copy to those interested parties who have requested a copy or 2) not file the inventory but provide copies of the inventory to all heirs and devisees. ARS 14-3706 A revised inventory must be similarly provided or filed if other estate assets are subsequently discovered or a significant change in value has been established. ARS 14-3708.
Appraisers may be hired to establish a value. This must be disclosed in the inventory. ARS 14-3707. The appraisal does have important consequences, such as being the most logical source to establish a step-up in basis.
THE DUTIES OF A PERSONAL REPRESENTATIVE – THE STATUTES
Before trying to understand the vicissitudes of the case law in this area, it is more helpful to examine the statutes as a starting point in determining the nature and extent of a PR’s duties.
When do the duties begin?
Obviously, a PR’s duties commence upon appointment. ARS 14-3701. But many attorneys do not realize that the statute also recognizes that “the powers of a personal representative relate back in time to give acts by the person appointed which are beneficial to the estate occurring prior to appointment the same effect as those occurring thereafter. Prior to appointment, a person named personal representative in a will may carry out written instructions of the decedent relating to the decedent’s body, funeral and burial arrangements. A personal representative may ratify and accept acts on behalf of the estate done by others where the acts would have been proper for a personal representative.”
What are the duties as set forth in Title 14?
ARS 14-3703(a) sets forth the basic concepts:
- “A personal representative is a fiduciary who shall observe the standards of care applicable to trustees as described by section 14-7302 and the duties of accounting applicable to trustees as provided in section 14-7303. A personal representative is under a duty to settle and distribute the estate of the decedent in accordance with the terms of any probated and effective will and this title, and as expeditiously and efficiently as is consistent with the best interests of the estate”.
Once appointed, a PR must prepare an inventory “listing it with reasonable detail, and indicating as to each listed item, its fair market value as of the date of the decedent’s death, its nature as community or separate property and the type and amount of any encumbrance that may exist with reference to any item”.
However, unknown to many probate attorneys, this inventory need not be filed with the court. To preserve privacy, the PR may elect not to file the inventory but “he must deliver or mail a copy of the inventory to each of the heirs in an intestate estate, or to each of the devisees if a will has been probated, and to any other interested persons who request it”. ARS 14-3706(b).
When preparing the inventory, it is important that accurate, defensible appraisals are obtained. These values are presumed to be correct, affording some protection to the PR. ARS 14-3707, In Re Torrey’s Estate, 54 Ariz 369 (1939). But the use of appraisers is subject to the reasonableness standards set forth in ARS 14-3703. The use of unqualified appraisers can cause great problems for a PR. For an extreme example, see Nelson v. Rice, 198 Ariz 563 (CA2, 2000), where paintings worth $1 million were sold by a PR for $60 after the PR obtained the opinion of an appraiser who admitted he did not appraise fine art.
The PR is under a continuing duty to update or supplement an inventory if the initial inventory is “erroneous or misleading”. ARS 14-3708.
The PR has considerable authority in searching for information on the estate’s assets. If the PR believes that “a person is suspected of having concealed, embezzled, conveyed or disposed of any property of a decedent, or possesses or has knowledge of deeds, bonds, contracts or other writings which contain evidence of or tend to disclose the right, interest or claim of a decedent to any property, or the will of a decedent, the court may cite that person to appear before the court and may examine that person on oath on the complaint”. ARS 14-3709(b).
At such a hearing, “the court may order that person to turn over the documents or disclose knowledge to the personal representative and may commit the person cited to jail until the order is complied with or the person is discharged according to law”. ARS 14-3709(d).
The PR also has the right to sue and be sued on behalf of the estate. ARS 14-3703(c); In Re McCabe’s Estate, 11 Ariz App 402 (CA2, 1970).
Self-dealing by the PR is always a dicey proposition, but it is permitted if it is in conformance with the terms of the will. ARS 14-3713.
THE NATURE OF FIDUCIARY DUTIES—THE BIG FIVE
A Personal Representative (PR), like any fiduciary in Arizona, has fiduciary duties to the immediate clients and derivative duties to beneficiaries, creditors and other interested parties, although the full reach and extent of those duties is not entirely clear. Counsel must be very familiar with the holdings of the five main cases that, to the extent they exist, set the parameters of these duties, particularly as they exist to the attorneys representing PRs and other fiduciaries. They are:
Fickett v. Superior Court, 27 Ariz App 793 (CA2, 1976);
Estate of Shano, 177 Ariz 550 (CA1, 1993);
Estate of Fogelman, 197 Ariz 252 (CA1, 2000);
Wetherill v. Basham, 197 Ariz 198 (CA2, 2000);
Capitol Indemnity Corp. v. Fleming, 203 Ariz 589 (CA2, 2002).
However, the recent enactment of Arizona Trust Code also included some statutory changes that appear to take aim at the concept of derivative duties. The act creates a new ARS 14-5652 that states:
“ABSENT AN EXPRESS AGREEMENT TO THE CONTRARY, THE PERFORMANCE BY AN ATTORNEY OF LEGAL SERVICES FOR A FIDUCIARY, SETTLOR OR TESTATOR DOES NOT BY ITSELF ESTABLISH A DUTY IN CONTRACT OR TORT OR OTHERWISE TO ANY THIRD PARTY. FOR THE PURPOSES OF THIS SUBSECTION, THIRD PARTY DOES NOT APPLY TO THE PERSONAL REPRESENTATIVE, SETTLOR OR TESTATOR.”
This new stature will take effect January 1, 2008. In most instances, it will not apply to acts that predate the effective date or to wills and trusts drafted before then
Fickett v. Superior Court, 27 Ariz App 793 (CA2, 1976)
This is the granddaddy of the cases dealing with derivative duties in which Stanley Feldman, later Chief Justice of the Arizona Supreme Court, litigated the case on behalf of the beneficiaries. Fickett dealt with a guardian who was stealing from his ward. The attorney did not know of the theft and maintained that, absent fraud or collusion between the attorney and the stealing guardian, he owed a duty only to his client, the guardian. The beneficiaries alleged that the guardian’s attorney owed a duty to the beneficiaries to discover the theft and was negligent in not discovering it.
The Arizona Court of Appeals held that “when an attorney undertakes torepresent the guardian of an incompetent, he assumes a relationship not only with the guardian but also with the ward.” 27 Ariz App at 795.
However, often overlooked in the Fickett holding was the court’s emphasis that any determination of liability “involves the balancing of various factors, among which are the extent to which the transaction was intended to affect the plaintiff, the foreseeability of harm to him, the degree of certainty that the plaintiff suffered injury,the closeness of the connection between the defendant’s conduct and the injuries suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm”. 27 Ariz App at 795
Estate of Shano, 177 Ariz 550 (CA1, 1993)
Shano applied Fickett to a decedent’s estate. The essential facts in Shano are that, two days before his death, the decedent executed a holographic will that excluded his wife and several of his children. The decedent was undergoing a divorce and named his companion and several, but not all, of his children as beneficiaries. Attorney Maksym had Ms Garrison, the companion, appointed as special administrator. When the spouse and disinherited children filed an objection, that authority was revoked and an independent fiduciary was appointed. That fiduciary later hired Mr Maksym as co-counsel. The spouse and disinherited children then objected to Mr Maksym’s continued involvement in the case, especially since the PR had undertaken actions against their interest.
The Court of Appeals ruled that Mr Maksym had a conflict of interest that precluded him from any further representation of the estate. The central portion of the Court’s reasoning is as follows: “First, the lawyer is being compensated from the estate or trust, not by the fiduciary personally. His duty of loyalty and competence thus runs beyond the fiduciary to those whose property is being managed by the fiduciary.” Jeanette K. Geiser, et al, Arizona Probate Code Practice Manual, § 1.6 at 5 (3rd ed. 1989). As discussed above, the surviving spouse is one whose interest in the community property is managed by the personal representative.Second, in Fickett, although the guardian and not the attorney controlled the affairs of the guardianship, we held that the attorney for the guardianship owed a fiduciary duty to the ward.A stronger case exists for imposing a similar duty on the personal representative’s attorney, who generally has some control over the administration of the decedent’s estate. Because of his superior knowledge and position of trust, the attorney for the personal representative is in an excellent position to exert a positive influence on the personal representative to properly discharge the latter’s fiduciary duty to the surviving spouse.The attorney representing the personal representative is more likely to exert such influence if the attorney’s duty to the surviving spouse is congruent with that of his employer, the personal representative. “We turn now to the question of whether Maksym represented conflicting interests. We begin with the principle that the attorney for the personal representative of an estate must be neutral and should not favor the interests of any claimant to the estate.Ronald E. Mallen and Jeffrey M. Smith, 2 Legal Malpractice, §26.5 at 602 (3rd ed. 1989). Thus, Maksym owed the same duty of fairness and impartially to Thelma as he owed to all the beneficiaries of decedent’s holographic will, including Garrison.But, because Maksym also represented Garrison in probating the holographic will, he owed to her as a client a duty of undeviating and single allegiance. See Parsons v. Continental National American Group, 113 Ariz. 223, 227, 550 P.2d 94, 98(1976). Consequently, when Maksym undertook the representation of Fiduciary, and with such representation the corresponding duty to Thelma of fairness and impartiality, he undertook the representation of conflicting interests”.
Estate of Fogelman, 197 Ariz 252 (CA1, 2000)
Then came Fogelman, a case that raises as many questions as it answers.
In Fogelman, the PR was apparently a friend of the decedent’s family and was nominated in the will. He was also an attorney employed by Snell & Wilmer. Snell also represented a number of the creditors, none of whose claims were disputed. The problem was that the estate was insolvent while there was a $1.5 million dollar life insurance policy that had beneficiaries that were different from those under the will. The will directed that all estate taxes be paid out of the residue.
The PR was in a precarious situation since, if the terms of the will were followed, the probate beneficiaries would get nothing while the $1.5M went to the insurance beneficiaries. The PR wanted the insurance beneficiaries to pay a pro-rated portion of the taxes. This, however, meant that the creditors of the probate estate would benefit since there would be more assets in the probate estate from which to be paid.
The Court of Appeals skewers the PR. It reverses the trial court’s holding that there was an ethical violation, but upholds the trial court’s finding of a breach of fiduciary duties to the beneficiaries:
- the duty to serve the best interests of successors is equivalent to the duty of fairness and impartiality and that this duty runs to both beneficiaries and creditors. But the PR, whose firms also represented several creditors as clients, owed a higher duty of undivided loyalty to those clients, thereby creating a conflict of interest. The PR could not have fulfilled their duty to the creditors without compromising the duty to the (beneficiaries) for any monies paid to creditors of the insolvent estate were rendered unavailable to the beneficiaries. See Shano, 177 Ariz. at 556, 869 P.2d at 1209. If they fulfilled their duty of undivided loyalty to the creditor-clients, Appellants could not have been fair and impartial toward the successors; and if they were truly fair and impartial toward the successors, they could not have fulfilled their duty of single and undeviating allegiance to the creditor-clients”.
Thus removal of the PR was required.
The problem with Fogelman is that the Court gave precious little practical guidance as to how these competing duties interact and exactly to whom these duties run. Exactly how fair and impartial does a PR have to be to a creditor since the interests of the creditor will almost always conflict with the beneficiaries of the estate? What if the beneficiaries insist on objecting to a claim that the PR thinks has merit? What if the PR is also a beneficiary?
Two non-probate cases in the year following Fogelman added to the sense that the concept of derivative duties was beginning to overwhelm conventional notions of the attorney-client relationship. In Kresner v. Quarles and Brady, 201 Ariz 413 (CA1, 2001), two parties, both represented by counsel, were negotiating the purchase and sale of a business. Quarles and Brady represented the purchaser but agreed to prepare and file a UCC financing statement. The statement was improperly done and this worked to the seller’s detriment when the purchaser went bankrupt. The Court of Appeals ruled that Quarles and Brady owed a duty to the seller even though there was no attorney-client privilege and the seller was represented by another attorney.
That same year, the Arizona Supreme Court weighed in with Paradigm Insurance Co. v. the Langerman Law Offices, 200 Ariz 146, 149 (2001) that held that :
- As a practical matter, “an attorney is deemed to be dealing with a client when it may fairly be said that because of other transactions an ordinary person would look to the lawyer as a protector rather than as an adversary.'” In re Pappas, 159 Ariz. 516, 522, 768 P.2d 1161, 1167 (1988) (quoting In re Neville, 147 Ariz. 106, 111, 708 P.2d 1297, 1302 (1985)). Thus, a purported client’s “belief that [the lawyer] was their attorney” is crucial to the existence of an attorney-client relationship, so long as that belief is “objectively reasonable.”
Wetherill v. Basham, 197 Ariz 198 (CA2, 2000) & Capitol Indemnity Corp. v. Fleming, 203 Ariz 589 (CA2, 2002).
These two cases deal with attempts to expand the reach of derivative duties in a probate context. While Fogelman is oddly not mentioned in either case, its shadow looms large and the beneficiaries obviously thought the trend of the law favored a very broad reach for the derivative duties.
Wetherill involved the disinheritance of an adult child who sued the attorney who drafted the trust alleging that the attorney owed a duty to her under Fickett and Shano. The Court of Appeals disagrees on the theory that the adult child was never an intended beneficiary of the parent’s actions in changing the trust. The attorney was hired to undertake actions that were directly adverse to the child, namely to eliminate the child as a beneficiary.
Capitol Indemnity dealt with an attorney who represented a conservator who stole $235,000 from the protected person. The surety was liable for most of this and sued the attorney claiming that the attorney owed it a duty under Fickett and Shano. The surety also claimed a right of subrogation to the protected persons who may have duties breached to her by the attorney.
The Court of Appeals again uses the intended beneficiary theory to deny that a duty was owed to the surety by the conservator’s attorney. The Court also rules that a right to sue for legal malpractice is not subject to subrogation and is not otherwise assignable.
Liability dangers to the PR
Many PRs are blissfully unaware that that they are personally liable for “improper” exercise of the PR’s powers. The PR is held to the same standard as a trustee, which the prudent man standard. ARS 14-3712 & -7302. A trial court has authority to impose an interest charge on a PR for unreasonable delay in settling an estate. Matter of Ford’s Estate, 25 Ariz App 115 (CA2, 1975). A PR has the duty to correct mistakes, such as erroneously filing tax returns. Matter of Estes’ Estate, 134 Ariz 70 (CA1, 1982).
Protecting the PR
Given the statutory duties and the judicially recognized derivative duties that a PR faces, how does the probate attorney make sure that the PR is protected from liability? I frequently use two concepts – disclosure and court approval.
The big D
The PRs that I represent get one word drilled into them time and again: disclosure, disclosure, disclosure. When in doubt, disclose. Disclose so much and so often that the beneficiaries become sick of hearing from the PR. “Fair disclosure” can prevent an interested party from later objecting to the disclosed transaction. ARS 14-3713
Court approval after proper notice can foreclose a party from later raising objections to the transaction. Dockery v. Central Arizona Light & Power, 45 Ariz 434 (1935). Failure to obtain that approval leaves the PR at risk of personal liability. Downing v. Skluzacek, 61 Ariz 322 (1944). This is particularly so when a significant claim, such as a wrongful death claim, is settled. Court approval and proper notice (ie, involvement of all beneficiaries) will afford protection to the PR from later attack. Costello v. Cunningham, 16 Ariz 447 (1915) but the key is that all beneficiaries – each and every one – must be given notice and an opportunity to participate in the settlement. ARS 14-3952, Wilmot v. Wilmot, 203 Ariz 565 (2002)
The most common form of court approval concerns the submission of an accounting. Simply stated, this is “put up or shut up” time. The same procedure for submitting an accounting is used for decedent’s estates, conservatorships and trusts. Disputes usually occur in two settings. One is that, in Maricopa County, the accounting guidelines of the court accounting are enforced in excruciatingly strict fashion. Those guidelines, which do not correspond to any GAAP formats, are available online at www.superiorcourt.maricopa.gov/ssc/forms/pdf/pbipf52i.pdf.
One of the most useful functions that practitioners can provide to their clients is scrutinize the accounting before it is submitted to make it “court accountant proof”. This means making sure it is in the proper format. Many accountants are unfamiliar and quizzical about the format of the probate court accountant. Our job is to educate them on what is required since, even if every dime is accounted for, the accounting will be rejected if the format is not strictly adhered to.
In making an accounting “court accountant proof”, the liberal use of footnotes is encouraged. In other words, if there is a large expenditure whose appropriateness is not readily apparent, then the fiduciary needs to explain it. This is best done through the use of footnotes. This is much more likely to result in a recommendation from the court accountant.
The second area of disputes will concern the appropriateness of expenditures. This usually will have one of two aspects. One concerns documentation – what was the expense for? Practitioners must keep in mind that, for a person in declining health, family members or other interested parties are often very unaware of the costs of care or the amount of hours that caregiving entails. Receipts and time logs can go a long way towards minimizing conflicts on these matters and family members serving as fiduciaries cannot be reminded enough of this.
The second aspect will involve disputes regarding the amount of time expended or fee rate charged. Fees must be in a reasonable amount. ARS 14-3719, -5414, –7202 & -7206 It is hard to provide much practical advice in this area since it is usually so fact-intensive and the courts’ rulings are very inconsistent. If a family member is serving as fiduciary and wants to draw a fee, remind them that any fee is taxable income.
The most important consequence of obtaining approval of an accounting is that closure is provided. Absent fraud, a court approval of an accounting forecloses a later challenge to expenditures or other aspects of administration. Estate of Thurston, 199 Ariz 215 (CA1, 2000); Estate of Shano, supra; Estrada v. Arizona Bank, 152 Ariz 386 (CA2, 1987); Matter of Estate of Olivas, 132 Ariz 61 (CA2, 1982); Roberson v. Teel, 20 Ariz App 439 (CA1, 1973); In re Sullivan’s Estate, 51 Ariz 483 (1938).
Another very useful technique is submitting a Petition For Instructions as authorized under ARS 14-3704. When a PR is in doubt on the proper course of action, the easiest and best procedure is to file a petition for instructions. In The Matter of CVR Irrevocable Trust v. Retter, 202 Ariz 174 (CA1, 2002). This is simply a petition setting forth the quandary that the PR is in and seeks guidance or approval from the court for a particular course of action. This author has successfully used this petition many times for authorization for gifting, either for ALTCS or estate tax purposes.
Such a petition can avoid the liability exposure suffered by a PR in cases like Downing v. Skluzacek, 61 Ariz 322 (1944) and Graybar Electric Co., v. McClave, 91 Ariz 223 (1962)
Removal or Surcharge of the PR
Removal of the PR may be appropriate if it would be in the best interest of the estate, ARS 14-3611, or if waste, embezzlement or mismanagement by a PR is proven. Barth v. Platt, 52 Ariz 33 (1938). A surcharge may also be sought. ARS 14-3808(d) & -7306(d)
This is where it gets ugly but removal and/or surcharge of the PR is easier said than done.
Cause for removal and/or surcharge of a fiduciary is quite broad, usually couched in terms like “best interests of the estate”, breach of fiduciary duty or fraud/misrepresentation. See ARS 14-3611, 14-5429 14- 7301 et seq.
Procedurally, it is easy to get tripped up if the practitioner is not intimately familiar with the procedural rules. If a probate has been opened, a petition for order to show cause is filed. If no probate proceeding is pending, a new cause of action must be commenced which means the filing of a complaint. An OSC petition is usually a motion that means an underlying action has already been filed. Either way, the first hearing is only a return hearing – nothing more than a ten-minute status conference. Do not have a parade of witnesses scheduled since there will be no evidentiary hearing.
Don’t forget to notice the surety if a bond has been posted. ARS 14-3606 & -7304. Any OSC petition should include a consideration of an allegation of breach of fiduciary duties is appropriate. And a surety can raise defenses that a fiduciary did not, so inclusion of a surety at the outset is often, but not always, the best course of action.
If financial exploitation is been alleged, a settlement is much more likely when the alleged exploiter is informed of the draconian penalties that can be imposed under the statute dealing with financial exploitation of a vulnerable adult, ARS 46-456; Davis v. Zlatos, 467 Ariz Adv Rep 17, 123 P3d 1156 (CA1, 2005). The penalties include mandatory forfeiture of an inheritance, treble damages, punitive damages, attorney fees and court costs.
An issue that is being more frequently made concerns allegations that the PR is abusing her authority as PR by acting to further her own interests and not those of the estate. Estate of McCabe, 11 Ariz App 555 (CA2, 1970); Raestle v. Whitson, 119 Ariz 524 (1978); Estate of Nolan, 56 Ariz 366 (1940)
A PR and any agent of the PR are entitled to “reasonable compensation”. ARS 14-3719 & -3721. This is a fact-driven determination where the trial court has considerable discretion. The court will look to the amount of time, labor and skill of the PR and attorney. Estate of Wiswall, 11 Ariz App 314, 325 (CA2, 1970). See Estate of Wright, 132 Ariz 555 (CA2, 1982) where fees for the PR and counsel amounted to $72,000 in a $330,000 estate but the estate involved the sale of 66 separate parcels of land.
As long as a PR litigates a matter in good faith, the PR’s attorney is entitled to reasonable fees, even if the PR is unsuccessful or there was no benefit to the estate. Estate of Gordon, 207 Ariz 401 (CA1, 2004); Estate of Killen, 188 Ariz 569 (CA1, 1996). The court is not bound to follow the terms of the fee agreement between the PR and attorney if the fee appears unreasonable. Estate of Smith, 131 Ariz 190 (CA2, 1981); In Re O’Reilly’s Estate, 27 Ariz 222 (1925).
The burden of proof is on the PR and attorney to justify their fees. Matter of Estes’ Estate, 134 Ariz 70 (CA1, 1982); In Re Elerick’s Estate, 11 Ariz App 559 (CA1, 1970)
All probate practitioners are aware of Local Rule 5.7 of Maricopa County Superior Court that governs the fee application process. This author has noticed several misunderstandings regarding the fee approval process. First, there is no statutory requirement that a fiduciary or the attorney seek court approval. Rule 5.7 simply sets forth the procedure to be followed if court approval is sought.
Second, the fee application process needs to be placed on the court calendar. This, for some reason, seems to be shrouded in mystery – court staff has frequently mentioned that they are unsure what to do with a fee application. The simplest and best way is to schedule the matter for a non-appearance hearing. In Maricopa County, this is done through court administration.
Third, the fee application is often an educational experience for the beneficiaries, many of whom have never been in court or probate court before. The itemization should be very detailed since clients and families often do not realize the amount of work that has been done outside of their presence. For an extremely helpful book on how to write an invoice, read “How To Draft Bills Clients Rush To Pay” by J. Harris Morgan and Jay G. Foonberg, written by two of the most business savvy lawyers in America and available on the ABA website.
Finally, a party challenging a fiduciary is generally not entitled to fees. Matter of Estate of Groves, 163 Ariz 394 (CA2, 1990). There is a long line of cases holding that attorneys fees arising from a breach of contract, ARS 12-341.01, do not apply in a probate or trust setting. See, most recently, Matter of Naarden Trust v. Keiber, 195 Ariz 526 (CA1, 1999).
COMMON MISTAKES IN GUARDIANSHIPS AND CONSERVATORSHIPS
- DIFFERENT STANDARDS FOR IMPOSITION OF GUARDIANSHIPS AND CONSERVATORSHIPS – Guardianships require proof of “incapacity” (not “incompetency”), defined as someone who is impaired “to the extent that he lacks sufficient understanding or capacity to make or communicate responsible decisions concerning his person”. ARS 14-5101(1). Conservatorships require proof that a person “is unable to manage the person’s estate and affairs effectively” and that “the person has property which will be wasted or dissipated unless proper management is provided”. ARS 14-5401(2). A conservatorship has a lower standard of proof, so that a conservatorship can be imposed on a person who is not incapacitated but may be unable to effectively manage their finances. Arizona Probate Code Practice Manual, Sec. 8.1
- NOTICE – failure to personally serve ward/protected person (“WPP”) who is over 14 years of age. ARS 14-5309 & 14-5405. Note that notice cannot be waived unless WPP is present at the hearing. ARS 14-5309(b) & 14-5405(b). However, once service is made, there is no requirement that WPP personally appear at hearing.
- NOTICE – failure to personally serve spouse of WPP. ARS 14-5309(b) & 14-5405(b)
- NOTICE – failure to personally serve parent of WPP. ARS 14-1401, 14-5207, 14-5309(b) & 14-5405(b). Includes long-lost parent – see #5
- NOTICE – failure to properly publish notice when person entitled to notice cannot be found, ie, long-lost father. Rules of Civil Procedure 4.1(n) & 4.2(f). Notice by publication is 2-step process:
- Step #1 –Investigation undertaken with reasonable diligence and good faith to locate person. ARS 14-1401(a)(3); Mullane v. Central Hanover Bank & Trust Co., 339 US 306, 70 SCt 652 (1950); Tulsa Professional Collection Service, Inc. v. Pope, 485 US 478, 108 SCt 1340 (1988)
Petitioner’s attorney should contact local investigator who can run county records, review local phone book, etc. Have investigator prepare written report detailing efforts undertaken to locate person. Attorney should then attach this to pleading (report of counsel or affidavit) explaining how last known address was determined.
- Step #2 – Publish in county where hearing will be held. ARS 14-1401(3) states for three successive weeks. RCP 4.2(f) requires four weeks. If last known address is within Arizona, must also publish in county of last known address. RCP 4.1(n).
- Step #1 –Investigation undertaken with reasonable diligence and good faith to locate person. ARS 14-1401(a)(3); Mullane v. Central Hanover Bank & Trust Co., 339 US 306, 70 SCt 652 (1950); Tulsa Professional Collection Service, Inc. v. Pope, 485 US 478, 108 SCt 1340 (1988)
- NOTICE – 14 days. ARS 14-1401. Be mindful of this when scheduling hearing with court staff.
- NO NOTICE, NO JURISDICTION – Failure to properly notice deprives court of jurisdiction. Ronan v. First National Bank of Arizona, 90 Ariz 341 (1962); Bowen v. Graham, 140 Ariz 593 (1984); Kadota v. Hosogai, 125 Ariz 131 (App, 1980).
- PARENTAL CONSENT – parent of minor is served but no consent of parent to appointment is obtained by Petitioner.
- DOCTOR’S REPORT – Best to get this before you file petition to make sure you can prove incapacity or inability to effectively manage finances. Attorney should send cover letter explaining the factual situation that has lead family to seek G/C as well as providing doctor with the statutory definitions of incapacity and inability to effectively manage finances.
- DOCTOR’S REPORT – Be aware that the recently enacted Rule 129 of the Arizona Supreme Court now allows, but does not require, any medical report to be filed under seal, although copies must still be provided to all attorneys and parties of record and the probate court investigator.
- BONDING – failure to make sure prior to appointment that Petitioner is bondable. Also make sure that spouse of Petitioner is creditworthy.
- BONDING – failure to review whether bond amount is appropriate when annual accounting is filed.
- FINGERPRINTING – required for appointment of non-blood relative when WPP is minor. ARS 14-5206(b). Allow at least two months for completion of the report. Can conduct hearing in the interim but letters will not issue until report is provided to court.
- DRIVERS LICENSE – failure to address in petition and form of order whether court should revoke WPP’s driver’s license. Imposition of G/C no longer automatically revokes license. ARS 28-3153(a)(8)
- CONFORMED COPIES – always provide court staff with conformed copies, especially for pleadings filed within two weeks of hearing.
- LOSER PAYS – if Petitioner fails to prevail at hearing, Petitioner is personally liable for fees of Petitioner’s attorney and fees of WPP’s attorney. ARS 14-5314
- COURT-APPOINTED COUNSEL – Failure to inform Petitioner that WPP’s estate, not the County, pays fees of court-appointed counsel. ARS 14-5414. As a courtesy to court-appointed counsel, Petitioner should alert counsel at the outset if there are no or limited funds to pay counsel.
- COURT-APPOINTED COUNSEL – remains on case until motion to withdraw is filed and granted. Until that time, counsel must be noticed/copied on all annual accountings, reports of guardian and any other pleadings.
- COURT-APPOINTED COUNSEL IS NOT GAL – Conflicts between counsel and WPP prior to appointment of G/C may necessitate appointment of guardian ad litem, in accordance with ARS 14-1403. Court-appointed counsel advocates the positions of WPP. GAL must act in the best interests of WPP, which may differ from what WPP desires. See Ethics Opinion #2000-06 and ER 1.14.
- COURT-APPOINTED COUNSEL – DUTY TO REPORT FINANCIAL EXPLOITATION? Counsel learns during initial representation of financial exploitation of WPP who does not want to pursue the issue. Does the mandatory reporting requirement of ARS 46-454 & -456 override attorney-client privilege? Ethics Opinion #2001-02 says reporting the exploitation by the attorney is not an ethical violation but the opinion expressly does not address the implications of the attorney-client privilege. General consensus among Phoenix probate litigators is to disclose matter to court, who may in turn notify law enforcement authorities.
- FREE RENT – if Petitioner or other child is living with WPP and not paying rent, Court will require rent be paid unless very compelling reason exists.
- PURCHASE OF AUTOMOBILE – Court will frequently deny this — considers this to be an obligation of parent. If court will consider it, be prepared to address how the car will be titled, who will pay for the insurance and the amount of coverage to be purchased. Court will also be skeptical if the purchase constitutes a significant portion of the conservatorship estate. Also be prepared to discuss the maturity of the minor – is he working, how are his grades, etc?
- ALTCS PLANNING – failure to consider ALTCS planning when healthcare expenses exceed income.
- COURT APPROVAL OF SETTLEMENTS – If the case involves the settlement of a personal injury claim, be prepared to justify it. Be prepared for a thorough vetting of the terms by the probate court, even if all parties were represented by counsel, since court approval is required by the conservator for all personal injury and wrongful death claims. ARS 14-5424(c)(19) & (d); Wilmot v. Wilmot, 203 Ariz 565 (2002); Gomez v. Maricopa County, 175 Ariz 469 (CA1, 1993); Rule 17(g) of Civil Procedure. This means that the attorney who negotiated the settlement, and not the young associate, needs to appear at the hearing. If there is a structure, be especially prepared to discuss the selection of the annuity company and the cost/terms of the annuity.
- RECIEPT OF FUNDS BY FORMER MINOR – When a minor reaches the age of 18, the conservatorship must be terminated. ARS 14-5430. This includes distribution of all remaining funds. However, simply obtaining a court order to this effect is not enough. The court file cannot be closed until there is the filing of a pleading by the former minor acknowledging receipt of the funds that were the subject of the court order.
- FIDUCIARY FEES – ARS 14-5651 prohibits the payment of a fee to a guardian or conservator who is not related to the ward or protected person unless that guardian or conservator has been certified by the Arizona Supreme Court in accordance with the statute. However, I have had courts approve the payment of caregiver fees for such non-relatives.
- APPLICATION FOR APPROVAL OF FEES – file application for fees only if court approval of fees is desired. There is no requirement that all attorney fees be approved by court. ARS 14-5414. If court approval is desired, attorney should have the matter placed on court’s non-appearance calendar and should notice all interested parties of the hearing date.