Category Archives: Administration of Trust

August 1, 2016

Issuance of IRS Estate Tax Closing Letters

by Kimberly Rutherford

After Carol Warnick’s blog of December 14, 2015 briefly discussed the new procedure enacted by the Internal Revenue Service (the “IRS”) regarding the issuance of Estate Tax Closing Letters (“closing letter”) only if specifically requested by the taxpayer for all estate tax returns filed after June 1, 2015, we decided to watch closely to see what happened with our requests for closing letters.

The IRS’s website of “Frequently Asked Questions on Estate Taxes” had been previously updated on June 16, 2015, and addressed the issue of when a closing letter could be expected. The IRS asked that taxpayers wait at least four months after filing the Estate Tax Return to make a request for the closing letter.  The website also included a chart detailing when the IRS will and won’t issue a closing letter.

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July 18, 2016

Seeking Clarity in the Distribution of Mineral Interests from a Decedent’s Estate

by Andy Lemieux, Elizabeth Meck, and Jessica Schmidt

As any practitioner who has dealt with the distribution of mineral interests from a decedent’s estate knows, dealing with these interests can be tricky and the process is not always clear. This is particularly true when old interests have not been distributed properly at the time of death. Thankfully, recent decisions in Colorado, as well as updates to certain provisions of the Colorado Probate Code, provide some clarity to this process.  A recent decision in Utah also provides clarity about who is entitled to the proceeds of production from oil and gas operations when life tenants and remaindermen are involved.

Specifically, Colorado just updated its statutes governing the process for the determination of heirship, found in the Colorado Probate Code at Colo. Rev. Stat. § 15-12-1301, et. seq.  A sub-committee of the Trust and Estate section of the Colorado Bar Association carefully reviewed the existing statutes, coordinated efforts with other sections of the bar, and with the approval of the Trust and Estate section, presented revisions to these statute sections as part of the omnibus bill, SB 16-133, in February 2016.  The committee’s goal was to address the issues Colorado practitioners have experienced in trying to distribute these interests from dormant or previously-unopened probate estates and to make the process to distribute previously undistributed property, including mineral interests, more clear.  SB 16-133 was signed by Governor Hickenlooper on May 4, 2016, thereby adopting the revisions recommended by the committee.  A copy of the Bill as enacted can be found here.

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July 5, 2016

Colorado’s New Digital Assets Act

by Morgan Wiener

You may have previously read on this blog about digital assets, the impact they have on the administration of trusts and estates, the need for fiduciaries to access digital assets, and the privacy concerns that come along with such access. In order to address these issues, Colorado has recently enacted the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”). This new act will be effective as of August 10, 2016 and can be found at C.R.S. § 15-1-1501 et seq.

RUFADAA addresses these issues by setting forth the circumstances under which a fiduciary is allowed (or may gain) access to digital assets, while also taking into account the privacy interests of the testator, settlor, protected person, etc. (for ease of reference, I will generally refer to these people as the “Person”). RUFADAA also takes into account the interests of the custodians of the digital assets; a custodian is defined as the person or entity that carries, maintains, processes, receives, or stores a digital asset of a user and includes entities such as banks, Google, Yahoo, and Facebook. RUFADAA places paramount importance on the intent of the Person and limits a fiduciary’s automatic access to the content of the Person’s digital communications absent their consent or a court order.

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June 20, 2016

Colorado Uniform Trust Decanting Act

by Rebecca Klock Schroer

The Colorado Uniform Trust Decanting Act (“Act”) was recently signed by the Governor and it will become effective August 10, 2016.   The legislation is large, complex and important for both estate planners and probate litigators.

Decanting allows a trustee to distribute the assets of one trust (“first trust”) to a second trust (“second trust”) under specific circumstances. The Act applies to an irrevocable trust, other than an irrevocable trust held solely for a charitable purpose. Colo. Rev. Stat. § 15-16-903. Decanting is used, among other things, to correct drafting errors, change the situs/governing law of a trust, alter trustee provisions (e.g. trustee succession, create a directed trustee arrangement, reallocate trustee powers), alter powers of appointment, add special needs provisions, and comply with changing tax laws.

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June 6, 2016

Recent IRS Statistics

by Kelly Dickson Cooper

For our litigation clients, a fiduciary’s failure to consider the tax impact of their actions can be the genus for litigation and anticipated tax savings can be the engine that drives a settlement.  For our fiduciary clients, it is important for them to ensure that transfer taxes are minimized for the benefit of their beneficiaries.  For our planning clients, tax planning is a key component in determining the best structure for their wealth transfer planning.  Given the importance of transfer taxes in our practice, we wanted to highlight a few items from the IRS 2015 Data Book relating to estate and gift tax returns:

Number of Tax Returns filed during 2015

  • 36,343 estate tax returns (545 from Colorado)
  • 237,706 gift tax returns (4,492 from Colorado)

Amounts Collected

  • Estate tax returns  – $17,066,589 collected
  • Gift tax returns – $2,052,428 collected

Percentage of 2014 Tax Returns Audited in 2015

  • 7.8% of all estate tax returns
    • Gross estate less than $5 million – 2.1% audit rate
    • Gross estate greater than $5 million but less than $10 million – 16.2% audit rate
    • Gross estate greater than $10 million – 31.6% audit rate
  • 0.9% of all gift tax returns

Results of Audits

  • 22% of estate tax returns examined had no change
  • 34% of gift tax returns examined had no change
  • 70 estate tax returns and 135 gift tax returns had unagreed recommended additional tax
  • 543 estate tax returns and 43 gift tax returns resulted in tax refunds

March 14, 2016

Your Fiduciary Duty to Invest “Prudently”

by Elizabeth Meck

As promised, this is the second post in a series on the fiduciary duties of a trustee. In the first blog in this series, we discussed the fundamental duty of loyalty. In this post, we will discuss the trustee’s duty to exercise care and skill in the management and investment of trust assets.

Acting in the best interests of the trust and the trust beneficiaries, a trustee has the duty to protect and preserve trust assets and, generally, to make the assets productive. In making investment decisions and managing trust assets, the trustee must further abide by the “prudent investor rule,” which requires a trustee to exercise reasonable care, skill and caution. See Colo. Rev. Stat. §§ 15-1.1-101, et. seq. (the “Uniform Prudent Investor Act”) and §§ 15-1-1101, et. seq. (the “Uniform Management of Institutional Funds Act”).

Pursuant to the prudent investor rule, a trustee should consider broad investment factors, such as: current economic conditions, effects of inflation or deflation, tax consequences, the nature of closely-held business interests, alternative investments, expected returns on income and capital, other resources of the trust or trust beneficiaries, the need for liquidity versus preservation of capital, the production of income, the special value or relationship of a particular asset to the trust or the beneficiaries, diversification of investments, and more. See, Restatement (Second) of Trusts § 227. Additionally, while it is important to note that Colorado courts have not officially adopted the Restatement (Third) of Trusts, one could refer to § 90, which lists five helpful “principles” of the prudent investor rule. Generally, any single investment will not violate the prudent investor rule and the trustee should manage the trust portfolio as a whole taking into account these considerations.

The trustee must also abide by any specific instructions in the trust instrument. He should exercise caution in doing so, however, because there are many instances in which blindly following the trust terms may result in unreasonable investment decisions. For example, if the settlor instructs the trustee that he is not required to diversify investments in the case of a closely-held family entity, the trustee would still want to closely monitor the performance of such investments to ensure that the closely-held entity value is not plummeting to the point that the beneficiaries’ interests may be significantly impaired.

It is important to note that poor performance of investments alone will not subject the trustee to a claim for breaching his duties to prudently invest. Beneficiaries frequently and incorrectly think they will have a claim against a trustee simply for poor performance. The trustee, however, will be able to overcome such a claim so long as the underlying investment decisions were reasonably made.

Colorado law does authorize a trustee to hire professionals and to delegate certain aspects of investing and portfolio management. However, the law does not allow for wholesale delegation and the trustee should exercise great caution in hiring professional advisors or fund managers. See Colo. Rev. Stat. §15-1.1-109 (trustee has the authority to delegate investment and management functions, but must engage and monitor such professionals carefully); see also GEORGE G. BOGERT, ET AL, The Law of Trusts and Trustees § 557; Colo. Rev. Stat. §15-1-804(2)(x)(I)(trustee has the power to “employ attorneys or other advisors to assist the fiduciary in the performance of his or her duties” (emphasis added)).

Finally, a trustee should keep in mind that uninformed beneficiaries are uneasy beneficiaries. Not only is it a good idea for a trustee to provide information to the beneficiaries as to investment and asset management decisions, Colorado law requires the trustee to keep beneficiaries “reasonably informed” and to provide accountings to beneficiaries upon reasonable request. Colo. Rev. Stat. § 15-16-303. Keeping beneficiaries informed as to investment decisions not only provides peace of mind to the beneficiaries, but may provide the trustee with an argument particularly in the situation where the beneficiaries have consented to risky or unusual investment strategies. See Beyer v. First Nat. Bank of Colorado Springs, 843 P.2d 53 (Colo. App. 1992).

In sum, the trustee has a duty to continually observe and evaluate investments to ensure that they are consistent with the purpose of the trust, current economic conditions, and the needs of the current and remainder beneficiaries. So long as the trustee exercises reasonable care in investment decisions, exercises care in selecting and hiring investment advisors and professionals, follows the general principles of prudent investing, and keeps the beneficiaries informed, the likelihood of a claim against the trustee for improper investment decisions may be reduced.

February 29, 2016

The High Cost of Death

by Morgan Wiener

How many of you have heard your clients complain about the various fees and costs they have to pay after the death of a loved one or the expense of going through the probate process? Well, the next time you hear someone complain, you might want to tell them to be glad they don’t live in England! (Full disclosure: I’ve spent time living and working in England, and it’s a delightful place, even if a little pricey.)

The Financial Times recently reported on a proposal to raise the cost of obtaining probate in England and Wales. Under the proposal, the fees for obtaining probate through the courts, which the Financial Times states is necessary for personal representatives to be able administer an estate, will increase from £155 (or £215 if a lawyer is used) to up to an astonishing £20,000 – or approximately $28,000! The proposed fees would be charged on a sliding scale so that estates valued up to £50,000 (approximately $70,000) would pay no fees, and estates valued above £2 million (approximately $2.8 million) would pay £20,000. These proposed fees would be in addition to any inheritance tax that is owed.

The revenues raised from the proposed fees would go towards the court system and are expected to raise up to £250 million per year.

Practitioners in England and Wales are concerned that the new fees would be especially difficult for cash-poor estates to pay. As with many estates in the United States, the value of many estates in England and Wales is largely comprised of real property. With property prices being so high – the average home price in London is a reported £536,000 – many relatively modest estates would be subject to significantly higher fees under the new proposal and may not have the cash to pay them.

The Ministry of Justice for England and Wales is continuing to consider the proposal and is soliciting comments through April 1. For more information from the Financial Times, click here.

January 25, 2016

Colorado Supreme Court Upholds the Strict Privity Doctrine for Attorney Malpractice Claims

by Kelly Dickson Cooper

The Colorado Supreme Court upheld the strict privity doctrine for attorney malpractice claims by nonclients and reaffirmed that an attorney’s liability is limited to when the attorney has committed fraud or a malicious or tortious act, including negligent misrepresentation. Baker v. Wood, Ris & Hames, case number 2013SC551 (2016 CO 5).

In Baker, the dissatisfied beneficiaries sued the attorneys for their father and alleged as follows:

  • The attorneys failed to advise their father of the impact of holding property in joint tenancy.
  • The attorneys failed to advise their father that failing to sever those joint tenancies would frustrate his intent to treat his children equally with his stepchildren.
  • The attorneys’ actions allowed the surviving spouse to change their father’s estate plan after his death.
  • The attorneys drafted documents for the surviving spouse that were different from their father’s original plan.
  • The beneficiaries were the intended beneficiaries of the client’s plan, that the attorneys failed to advise the beneficiaries of the relevant facts, and that they had suffered damages as a result.

The beneficiaries asked the Colorado Supreme Court to adopt the “California Test” or the “Florida-Iowa Rule” and set aside the strict privity rule. The Court rejected the adoption of both tests and reaffirmed the strict privity rule. The Court also held that the beneficiaries’ claims would fail under both the California Test and the Florida-Iowa Rule.

The Court put forth the following rationales for upholding the strict privity rule in Colorado:

  • It protects the attorney’s duty of loyalty to the client and allows for effective advocacy for the client.
  • Abandoning strict privity could result in adversarial relationships between an attorney and third parties. This could result in conflicting duties for the attorney.
  • Without strict privity, the attorney could be liable to an unforeseeable and unlimited number of people.
  • Expanding attorney liability to nonclients might deter attorneys from taking on certain legal matters. The Court reasoned that this result could compromise the interests of potential clients by making it more difficult to obtain legal services.
  • Casting aside strict privity would increase the risk of suits by disappointed beneficiaries. Those suits would cast doubt on the testator’s intentions after his or her death when he or she is unavailable to speak.
  • The beneficiaries have other avenues available to them, including reformation of the documents.
  • A personal representative can pursue legitimate claims on behalf of a testator.

The Court held, “We further believe that the strict privity rule strikes the appropriate balance between the important interests of clients, on the one hand, and non-clients claiming to be injured by an attorney’s conduct, on the other.” As a result, the strict privity rule remains intact in Colorado.

October 26, 2015

Take Time Upon Termination

by Rebecca Klock Schroer

When a trust terminates, beneficiaries are understandably anxious to receive final distributions.  They often do not understand that there is a period of time after a trust terminates to allow the trustee to wind up the administration. 

For example, we recently represented the trustee of a very old trust that terminated on a date certain.  Upon termination, the remaining trust assets were to be distributed among many remainder beneficiaries.  After receiving several phone calls, we quickly learned that the beneficiaries expected to receive final checks on the termination date.  We explained that, as with all trust administrations, the trustee had to take several steps before issuing checks for the final distributions.

First, the trustee must complete a final accounting that separates income and principal.  This is necessary to determine the final distributions, particularly if the income beneficiaries are different from the remainder beneficiaries.  Next, the final expenses need to be estimated, so that the expenses can be prepaid or a reserve can be held back for future payment.  These expenses might include preparation of the final tax return, trustee fees and attorney fees. 

In Colorado, there is a statute that helps limit liability of a trustee that has issued a final accounting.  Colo. Rev. Stat. § 15-16-307 provides that a proceeding against a trustee must be commenced within six months of receipt of a final accounting showing that the trust is terminating. 

For additional security, the trustee often wants to obtain a release from each beneficiary prior to making the final distributions.  Otherwise, the trustee runs the risk of distributing the trust assets and having no assets remaining to defend a lawsuit.  If the beneficiaries refuse to grant releases, the trustee may want to seek judicial approval of the final accounting before making the final distributions. 

The law provides that the trustee may take a reasonable amount of time to wind up the trust administration. See § 1010 of Bogert’s Trusts and Trustees. In our experience, this can take from sixty days to several months or even longer depending on the facts and circumstances.  While it is understandable that beneficiaries are anxious to receive their distributions, they have to allow the trustee to properly finalize the trust administration.

September 14, 2015

Equity: Alive and Well in Colorado

by C. Jean Stewart

Historically, courts of law, presided over by judges, and courts of equity, presided over by chancellors, were separate in function and procedure.  Law courts were governed by strict rules and rights while chancellors, the representatives of the king, were said to rule with discretion, utilizing concepts of fairness, morality and conscience.

In modern times, courts of law and equity have been merged and concepts of equity have receded as a myriad of statutes and regulations have replaced the application of “conscience” in the administration of justice.  Early probate courts in America exercised equity jurisdiction.  Probate judges continue to be conscious of the equitable legacy of the courts over which they preside.  The Colorado Probate Code, adopted in Colorado in the 1970s, reminds judges sitting in probate that “Unless displaced by the particular provisions of this code, the principles of law and equity supplement its provisions.” C.R.S. §15-10-103.

Recently, the Colorado Supreme Court reaffirmed that the “probate court’s traditional powers in equity supplement and reinforce the statutory directives of the Colorado Probate Code.”  Beren v. Beren, 349 P.3d 233 (Colo. 2015) .  While the Supreme Court faulted the method used to calculate an equitable adjustment to a surviving spouse’s elective share, the Supreme Court approved the equitable award if calculated using alternative methods, including several suggested by the Court itself. 

Undoubtedly there will continue to be resistance to the application of equity in probate proceedings—particularly from counsel or parties who are at risk of suffering detriment resulting from its application. It’s hard to imagine such efforts will be any more successful in light of the current status of Colorado law.