Lessons from Litigation: No-Contest Confusion Helps a Church

by Jonathan A. Nelson

Virginia has a long and storied relationship with no-contest (or ‘in terrorem’) clauses, where a beneficiary can be cut out of an estate or trust if they bring a legal challenge to the testamentary document or certain incidents of administration.  Many people writing estate plans see such clauses as an antidote to family dissention, protection against a particular black sheep, or just a way to provide a final “don’t tread on my estate plan” from the grave.

As with any sharp tool, these clauses must be used with care; not appreciating their dangers can have unintended consequences. A Virginia Supreme Court case from 1956,  Womble v. Gunter, provides a stark warning of this possibility.  The Court begins with a near-Dickensian opening paragraph presaging the conflict to come:

George F. Parramore, Sr., died testate on June 4, 1945. His somewhat complicated will, including five codicils, was duly probated and Benj. T. Gunter, Jr., and Quinton G. Nottingham qualified as executors. The testator devised and bequeathed all of his property in various amounts and proportions to his ten living children and numerous grandchildren.

In all, there were thirty named family beneficiaries among the six documents.  The Will had a no-contest clause, which ended with, “Should all my legatees and devisees contest my will, then my entire estate shall pass to Christ Episcopal Church in Eastville.”  Although not discussed in the opinion, once admitted to probate, the will and all five codicils became treated as one document, with the result that a challenge to even one portion became a challenge to the whole unless fully successful. 

The hitherto amicable family descended into dissention, centered on a suit to invalidate the will.  When the dust had settled, the trial court concluded that all thirty beneficiaries had challenged the will and lost any benefit from the estate. 

Although not in the Supreme Court record, I think it a good assumption that at least some of the codicils reflected changes between the interests of the different beneficiaries and changes of who the executors would be; further, because the changes were by codicil, the beneficiaries could see the changes over time.  This seems supported by the court’s finding that the family had fractured, “charging each other with misrepresentation, fraud and deceit,” and the suit brought “to satiate their dissatisfaction and impatience.”

The Virginia Supreme Court dealt with a number of questions raised by different groups of beneficiaries:

• Does it matter if the contest was brought in good faith or with probable cause?  Not here.

• Does it matter if a contestant withdrew before the final order?  No, they still brought the contest.

• Does it matter if a beneficiary was a minor and the contest was brought by a representative?  No.

Of importance for estate planning, the Court interpreted the clause strictly by the terms used in the will:

The court is not concerned with whether an heir or a devisee receives the property of a decedent. The normal freedom of the owner to dispose of his property as he sees fit should not be curtailed unless the disposition violates some rule of law or is against public policy.

Used indiscriminately, a no-contest clause can create difficulties resolving genuine disputes (such as working through this series of documents or ensuring a fiduciary is handling matters correctly), can disincentivize compromise (once the suit was filed, all benefit was lost unless successful), and may result in a more severe penalty than desired.

In Virginia, no-contest clauses are still upheld on the exact language actually used, as described in Hunter v. Hunter (Va. 2020):

We have reconciled these competing values by stating that no-contest provisions are simultaneously “strictly enforced” and “strictly construed.”  By strictly enforced, we mean that we will enforce the provision without any wincing on our part concerning its alleged harshness or unfairness — so long as the testator or settlor clearly intended the forfeiture.  By strictly construed, we mean that the intent to forfeit must be very clear. .    

So, for instance, a grantor of an irrevocable trust with a no-contest clause who is also its sole beneficiary forfeits his rights as beneficiary if he challenges the trust trying to get his money back.  McMurtrie v. McMurtrie (Va. 2021, unpublished).

Much of the animosity between George Parramore’s family members seems to have come not from the litigation itself, but in recriminating each other over the application of the no-contest clause.  Ultimately, the only winner was Christ Episcopal Church in Eastville, which was probably not the result Mr. Parramore was hoping for.    If you are thinking of using a clause like this, discuss the details with an attorney who has seen how they have been applied in administration and litigation so you get the result you are looking for when the terms are “strictly enforced” and “strictly construed.”

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Fiduciary Boot Camp: 7 Trustee Missteps to Avoid

by Jonathan A. Nelson

We recently talked about helpful steps to get started as a trustee.  Below are a few things to watch out for; getting them wrong can have big consequences.  Note that this list is going after the inadvertent or inexperienced mistakes, not intentional misdeeds.

1. Delay getting set up.  There can be a lot of paperwork and time needed in the early steps as trustee, especially dealing with financial institutions and sending notices.  The trustee is responsible for what happens to Trust assets if they aren’t promptly secured (including the bank account Shifty Eddie has a debit card to or the high-risk investments Uncle Fred talked mom into making).  Sometimes a little step – like getting family tree information – is needed for another time sensitive step, like mandatory sending of notices to the people on that family tree.  Delays can compound, so it is important to act early.

2. Inadequate document retention.  The trustee needs a good grasp on what he is managing and the ability to act quickly.  There are processes to follow and forms to submit.  There will be periodic tax requirements.  There may be (as is the case in Virginia) unwaivable obligations on the trustee to provide a lot of information to beneficiaries whenever requested.  These duties use information which can be relatively easy to provide if the trustee maintains his or her accounting information in good order, but which can be a nightmare to try and recreate down the road.  Worse, if the trustee can’t produce the required records (e.g., documentation supporting the expenses underlying a reimbursement to the trustee), the trustee may be liable for paying back the trust from his or her personal funds.

3. Hiding the ball.  Disclosures and notices are there for good reasons, and have an added benefit of helping the trustee communicate and build trust with the beneficiaries.  This is even true when working through inadvertent errors or mistakes – a trustee fixing something right away is often met with good will and avoidance or waiver of additional consequences.  Something as simple as obtaining authorization beforehand for a grey area (like selling an asset to a family member) usually helps the trustee keep the confidence of the beneficiaries.

4. Unauthorized disclosures.  The trust instrument gives the trustee his or her marching orders.  Sometimes this includes direction for information to be withheld or kept confidential.  A beneficiary’s spouse who is about to leave them may try to figure out what hasn’t been distributed yet; a beneficiary’s creditor may make aggressive threats even though the trust has a valid spendthrift clause.   The trustee must be aware of these instructions, because giving information improperly can make the trustee liable for beneficiary losses that come from that disclosure.

5. Mistiming transactions.  Even leaving aside timing for mandatory distributions, making things happen at the right time is important.  A few examples: Failing to distribute income or incur administrative expenses in the same tax year as the income it relates to can result in the trust having to pay unnecessary taxes.  Failing to get forms to beneficiaries early enough for them to file their own taxes can create problems for them individually.  Failing to take a fiduciary fee at the right time can lead to the trustee losing that fee.

6. Commingling assets.  Depending on the nature of the trust, there may be multiple subtrusts, business entities owned by the trust (for instance, an LLC holding a rental condo), other related trusts with the same trustee, or individual and estate accounts that are not in the trust.  Some of these can be held in a single account, others cannot, and all involve keeping the separate accountings up to date.  Even if money is needed to avoid losses in one subtrust (e.g., replace the roof on a house), it may not be as easy as just moving it from another account and calling it a loan.

7. Losing sight of the purpose of the trust.  The previous six missteps may sound like the job of a trustee is rigid, but this is the balance to that: one reason the living, thinking trustee is there is because not everything goes according to plan.  If the trust assumed there would be enough money to pay for college and to keep up the house, or didn’t anticipate a beneficiary’s mental illness, or faces an unanticipated tax bill because of a legislative change, the trustee may need to be proactive in seeking a modification of the trust to meet this new challenge.  Sometimes this happens through a court, sometimes by an agreement of the beneficiaries, and sometimes that power is granted to the trustee by the trust.  But in every case, the responsibility of the trustee is to look after the needs and interests of the beneficiaries, not just follow instructions.

Sound difficult?  It can be, and it is important to have the right legal and accounting advisors to guide you in understanding your state’s laws and your duties under the governing document. 

Next in the Fiduciary Boot Camp series: What are the “Fiduciary Duties?” Are They Different for Executors, Trustees, Conservators, or Custodians?

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

LAW UPDATE: Mandatory Training Coming for Guardians of Incapacitated Adults

In the 2024 legislative session, the Virginia General Assembly has a training requirement for guardians of incapacitated adults.  It will be a course relating to the duties of guardians, what information the annual reports should contain, and facilitating the incapacitated adult’s participation in decisionmaking.  This requirement will apply immediately for guardians appointed on or after July 1, 2025.  For existing guardianships, this course will have to be completed by January 1, 2027.

The course has not yet been developed by the Virginia Department of Aging and Rehabilitative Services and I do not have information on when they will finish writing it or how guardians will be able to take the course.  The course only needs to be taken once, but a certification regarding whether the guardian has taken the course will be required on every annual report.  If someone is a guardian of more than one person (which could be familial or professional), they will not need to take the course again if the previous course was completed within the prior 36 months.  The legislation anticipates that for attorneys the course will be eligible for Continuing Legal Education credit. 

If you are looking for more information, you can read the full text in Senate Bill 291 (2024 Session), in its final form in Chapter 587 of the Acts of Assembly - 2024 Session.

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Lessons from Litigation: Draft for Longevity so You Don’t “Barr” Your Rights

by Jonathan A. Nelson

The Virginia Court of Appeals recently issued an unpublished opinion regarding a 1914 right of way easement used for logging, in Barr v. Garten Development, LLC.  An unpublished opinion is not precedent, but does yield practical advice.  Here are two lessons for drafting documents we can gain from the 100 years of history in this case.

First, keep the certainty of change in mind.  In Barr, the 1914 Deed establishing the right of way reserved the right to place across the land “a broad gauge railroad, and for narrow gauge railroad tracks to and from any mines… [and] wagon roads.”  Had the deed stopped there, the subsequent changes in transportation (coupled with the economic realities which led to releasing the mineral rights in 1979) might have decided this case before it started. 

Fortunately for the owner of the easement, the attorney in 1914 included a catch-all phrase reserving “all necessary rights of way… and more particularly for the proper ingress and egress….”  These were enough for the Court of Appeals to find the right of way included improving an unpaved road to the standards of the Department of Forestry for use by logging trucks.

I can see the benefit of applying this principle in a number of contexts. If I am writing a medical directive and someone has a strong preference regarding, say, being put on a ventilator, am I leaving enough flexibility and authority for the agent if the technology is radically different in ten years?  If I am creating a trust making sure minor children are taken care of, do I also write it so that if it doesn’t kick in until they are 50 they aren’t treated like children?  When crafting a transition plan for a family business, have I adequately provided for what happens if someone dies before the transition is completed?  Not everything can be anticipated, but attorneys should balance details and principles so we don’t build any time bombs into the documents.

Second, keep the terminology of previous documents as they were used, even if the language seems antiquated or just different from your usual wording.  A 1979 deed included a release of some rights; the landowner, who didn’t want logging trucks driving on a new and improved road over their land, argued that the release included the 1914 right of way.  The Court found, however, that the release of “all restrictions, easements and mineral rights” did not include the right of way because “on the face of the 1914 Deed, the terms ‘easement’ and ‘rights of way’ are not used interchangeably.”  Regardless of what the 1979 landowner thought he was getting, since abandonment of a right of way has to be “clear and unequivocal” on the face of the deed, he didn’t get it, and it may have been because the attorney drafting the deed didn’t preserve the original word usage.  If necessary, provide explanations of how the terms are used going forward, but don’t omit it; tell the story.

Sometimes attorneys need more time or documentation than a client expects, but this lost continuity is exactly the kind of issue we want to avoid – if we put land into a trust in a way that a divorce decree or premarital agreement prohibited, or try to transfer ownership of an LLC in a way that triggers a buyback with tax consequences, we aren’t doing the client any favors.  It is also a caution to those drafting their own documents, using online forms, or working outside their expertise: if you miss a term of art or don’t understand that in 1914 attorneys used a word differently, you may inadvertently create a big problem that we will read about in a Court of Appeals opinion.

Next in the Lessons From Litigation series: No-Contest Confusion Helps a Church

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Fiduciary Boot Camp: So You Found Out You’re a Trustee

by Jonathan A. Nelson

Some successor Trustees have years to prepare for taking on the role. I am working on a litigation case where we agreed to a compromise trustee who is now unexpectedly having to start from scratch on only a few weeks' notice.  Regardless of how much forewarning you have, if you find yourself becoming a Trustee, what are your first steps? Here are six to get you started: 

1. Know the document. The trust document, whether a 150-page tome, a handwritten scrap of paper, or a court order memorializing an oral trust, are the Trustee’s marching orders.  You need to understand the type of trust you are managing and its purpose so that you can make correct decisions and, if necessary, obtain appropriate guidance.  You also need to know who the beneficiaries of the trust are, how beneficiary succession occurs (e.g., death before final distribution), and what outside documents may bind you.  You must discern the amounts and timing of distributions, whether they are mandatory, as well as factors for making discretionary distributions and level of investigation required to exercise that discretion.  There are also communications and filings required of the Trustee, and deadlines for both (see item #5).  Finally, it is usually a good idea to understand how your own compensation will be calculated, and whether there are limits set by the trust or by statute, before you accept the position.

2. Need to qualify? The trust document itself may not convey when and whether additional steps are required under the laws of the state where the trust came into being.  In Virginia, this may be as simple as signing a Certification of Trust, or it may require a court appearance. Even if you have an attorney in your own state, you may need to retain counsel local to the trust’s state to make sure you are properly credentialed.

3. Get an EIN. Unless you are a grantor reporting the transactions of the Trust on your own Form 1040, the Trust needs an EIN from the IRS.  There are a number of pitfalls, but two I see frequently:

   a. Do not fill out a form on a website other than www.irs.gov.  At best, spoofing websites (many show up as Sponsored Results on Google!) charge you $125 for something the IRS gives out free; at worst, they steal your SSN and try to get into your online accounts.

   b. Once you are at the right place, the IRS asks for the date of the Trust; they don’t tell you they mean that in a sense limited to the tax code.  You need the date that liability for taxable transactions starts, not the date the document was signed.  Incorrectly listing “1986” because “that’s the year dad signed his trust” can cause the IRS to send tax bills since that time.

4. Secure the assets. Regardless of whether you are the initial trustee or a successor, your liability for waste starts as soon as you become Trustee.  Whether real estate, investment accounts, or a baseball card collection, you need to know what you have oversight over, control access to it, and ensure that it is being cared for properly.  This process can take time, especially with financial institutions, so get started as soon as you can.

5. Calendar deadlines. The statutes of the Trust’s state may require written notices to beneficiaries within a certain time, the trust document may require periodic reports, and the court you qualified before may have set other deadlines.  You will have tax filing requirements as well and you may be required to make distributions on a particular schedule.  It is very easy to miss deadlines if you don’t have intentional organization for them – and plenty of calendar reminders.

6. Investment strategy.  In most states, Trustees are held to a prudent investment standard, subject to any specific instructions in the Trust, but the purpose of the Trust will determine your investment strategy – if you expect earnings to be retained in the Trust, your taxes may be better with a growth strategy involving untaxed income or unrealized gains, while if you need liquidity to keep up real estate or provide regular distributions, you may do better with an income strategy.

 Next in the Fiduciary Boot Camp series: 7 Trustee Missteps to Avoid

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Estate Planning in Practice: When an Attorney Asks a Family Member to Leave the Room

by Jonathan A. Nelson

At all stages in life, our family members play an important role in supporting and assisting us. This can be especially true with respect to matters incorporated into estate planning documents, including emergency care, aging considerations, and ensuring that survivors are provided for financially and otherwise.  There are times when it is necessary or appropriate to use professional or corporate fiduciaries, of course, but most often, relatives who live nearby and who know our circumstances, are already involved in caring for us, and have a long history of trustworthiness are the ones named to these important roles. 

When I prepare estate planning documents, the person who will be signing the documents is my client.  In my experience, it is not unusual for a key member of the family to accompany a client to the attorney’s office for the meetings needed to set up and sign estate planning documents.  Sometimes their presence is helpful; at other times, the best way for me to serve my client is to have their family member step out of the room for a time.

Some of the reasons I might ask a relative to leave the room are below. These reasons often benefit the person being asked to leave, and may help them avoid civil or criminal liability down the road.

1. Clout (undue influence) – When a client wants to benefit a specific family member, I have to discuss this separately from that person.

2. Credentialing – Before taking information from a family member on behalf of the client, I need to find out independently the nature of that relationship.

3. Confidentiality – Attorney-client privilege is usually voided by having a family member in the room. Especially if there is a likelihood of conflict, I err on the side of caution. The last thing one wants is a family member put on the witness stand and compelled to repeat a conversation that could have been kept confidential.

4. Comfort – I may pick up an undercurrent during the meeting (e.g., a relationship has changed, previously unanticipated questions need to be asked, or unresolved disagreements exist) that are preventing my client from feeling completely secure discussing their documents or goals.

5. Competence – Similar to the undue influence reasoning, clients are best served by documents that will hold up in court. Sometimes that means confirming that the client has sufficient capacity on his or her own to execute the documents.

Most family members recognize that being asked to step out of the room for some or all of an estate planning meeting is necessary and helpful, and that ultimately they and I are both there to support the client.

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Stages of Life & Estate Planning: Divorce

An estate plan can be as simple or as complicated as the assets involved and the people involved, and most divorces create additional complications.  Depending on the circumstances, there may even be differing phases the estate planning documents need to go through.

For example, if someone created estate plan documents with their spouse then entered a separation, they may particularly want to change their power of attorney and medical directive to protect against use by an angry spouse. A revised will can also be a good idea.  Virginia is traditionally unwilling to presume that a separation will end in divorce rather than reconciliation, so while there are certain provisions of a will that are automatically terminated by entry of a divorce decree (such as the spouse serving as Executor), during the separation period those are still operational and could even be dangerous (for instance, the Executor becomes the custodian of the decedent's attorney-client privilege and would have a right to access the divorce attorney’s files).

Upon divorce, the former spouse is removed by law from many aspects of estate planning documents even if they aren't changed, but new documents are helpful in documenting the changes, protecting against misuse of the old documents, updating to new trusted people, and filling contingencies that didn't have to be considered before.  In addition, there are times when re-including the former spouse makes sense, such as making the former spouse a successor owner of a shared child's 529 account; some changes may even be required to comply with a property settlement agreement or divorce decree, such as when a life insurance trust is mandated or a party negotiates for estate planning provisions in lieu of requiring liquidation of an income-producing asset.    

Remarriage creates a raft of new issues usually advisable to address in a premarital agreement.  Especially with a remarriage later in life, a trust may end up being necessary to allow a continuing balance after death between providing for a new spouse and for children from the prior marriage and trying to manage the inherent grounds for conflict between them.

Your estate planning attorney will probably need to see your divorce decree and property settlement agreement to ensure your new plan doesn't run afoul of your continuing legal obligations. If your attorney assisted with a joint estate plan before your separation, he or she may not be able to assist either party with planning during the separation or post-divorce, as confidential information shared in the joint plan creates a potential conflict of interest for the attorney.  

Next in this series: Retirement

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Stages of Life & Estate Planning: Emptying the Nest

by Jonathan A. Nelson

With young families, the focus in estate planning is often for their children’s guardianship and daily care.  As the children grow, the focus may shift from primarily handling worst-case scenarios to making sure assets are available for their education and then one's own wealth transition.  

Wills and Powers of Attorney likely require updates during such transitions.  Rather than using outside fiduciaries, adult children themselves may begin to fill emergency roles, become ready to handle asset administration, and help each other with continuing management.  Sometimes, having a child with special needs or one needing additional maturing means setting up special provisions, and good or bad relationships with children, children's spouses, and grandchildren can mean more dimensions.

If disposable income rises or starts to descend from an older generation, wealth accumulation may warrant strategies to minimize taxes and administration expenses.  These elements often point to creating one or more trusts to reduce the difficulty and cost of estate administration and allow for more specific or longer-term provisions.  With small businesses or income-generating real property, care may be required to ensure continued business operation; sometimes, adding business interests to trusts or writing equity purchase agreements is also advisable in order to set up seamless leadership transitions, particularly as having all the family members suddenly become managers isn't always the best plan.

Next in this series: Estate Planning and Divorce

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Stages of Life & Estate Planning: 529s and Estates

by Jonathan A. Nelson

Education savings plans authorized by Section 529 of the Internal Revenue Code are a popular investment tool designed to make education more affordable by providing a series of tax benefits, when everything goes right.

Everything does not always go right.

By way of background, a 529 account is established by one or more Contributors (who upon providing the assets has made a completed gift which can thereafter grow tax free) and is held and administered by an Owner who does not have to be the Contributor.  The account has a Designated Beneficiary, and withdrawals from the account by the Owner are tax-free if then expended for qualifying education expenses of the Designated Beneficiary.  If the Designated Beneficiary ages out or does not need the funds, the Owner can change the Designated Beneficiary (usually to another family member to avoid tax consequences); thanks to a recent change in law, the Owner can now instead roll the account over to a Roth IRA for the Designated Beneficiary.  However, the Owner has full control of the account and can intentionally disregard the beneficiary designation if willing to pay the tax penalties for doing so.

One particular contingency is not well covered by law: if the Owner passes away and has not designated a successor Owner of the account, it becomes part of the deceased Owner's probate estate.  The Owner's Executor then has control of the 529 account, and not only can disregard the beneficiary designation, but may be required by state law to do so where creditors have not been paid or residuary beneficiaries have not consented to distribution of the account in a form continuing to benefit the Designated Beneficiary.

I suggest a few actions to help avoid this result:

1. Designate one or more successor Owners for any 529s you control.  This makes the change a non-probate transfer.

2. If you have a trust, consider making the Trustee the Owner or successor Owner.  Besides solving the succession problem, this allows greater continued control over the benefit the accounts provide, and it may be advantageous to have assets which can grow without the trust incurring income tax liability.

3. Include language in your will or trust specifically affirming 529 accounts continuing to be for the benefit of the Designated Beneficiary and giving the Executor or Trustee authority for Owner actions, including designating a new Owner.  (These provisions will be state specific and need to be tailored to how probate in your state needs to be concluded.)

Next in this series: Emptying the Nest

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

LAW UPDATE: Virginia Court of Appeals Underscores the Importance of Estate Planning ‘Boilerplate’

Fiduciary litigation can get very tangled.  In Kosmann v. Brown, decided July 23, 2024, the Virginia Court of Appeals addressed a case where a principal (“Brown”) signed on the same day a power of attorney and a revocable trust which gave certain authority over the trust to the holder agent under the power of attorney (“Monroe”).  After Brown became incapacitated, Monroe signed an amendment to the trust under the putative authority of the power of attorney cutting out the other beneficiaries in favor of herself, changing the successor trustees, and making the trust irrevocable so the changes would be permanent.

The Loudoun County Circuit Court resolved the matter before trial on purely legal grounds, determining that the action taken was outside the authority granted by the trust to an attorney-in-fact, and the Virginia Court of Appeals has now affirmed this finding.  To reach this conclusion, the Court looked in detail at the exact language of the trust and of the power of attorney and took a deep dive into the definitions built into Virginia’s versions of the Uniform Trust Code, the Uniform Powers of Appointment Act, and the Uniform Power of Attorney Act.  

The Court pointed to a few general things: (1) the trust instrument controls over a power of attorney as to whether the power of attorney can be used to change the trust, (2) an attorney-in-fact is limited to the grant of authority in the power of attorney even if the trust would otherwise allow an action, and (3) a court will look to who the ‘powerholder’ is in determining whether a power of appointment has been exercised.  

The Court also included a veiled warning to the parties - if this matter were to go back for trial, the validity of the trust amendment would still hinge on the factual question of whether the attorney-in-fact acted within the expectations of the principal, in the best interests of the principal, and in good faith.

All of those are important points for fiduciary administration and litigation.  For estate planning, this decision underscores the importance of the administrative ‘boilerplate’ language in your documents.  The Court’s result hinged on the trust’s prohibition on an attorney-in-fact exercising a power of appointment, but the finding could have been very different if the language was broader or more narrow. 

Your estate planning attorney can assess what is important or helpful for your circumstances and draft or make changes to your documents as appropriate. In my practice, I frequently customize documents for a client’s specific situation. It might be to avoid a foreseeable conflict; add extra instructions particular to a complicated asset; or give a fiduciary flexibility for changes in circumstances which may arise far in the future.  You should regularly review the terms of your documents, and whether they make sense with the people in your life, because you know them better than your attorney does. Talking through your questions with an experienced estate planning attorney will help make sure the documents you have in place work out the way you intend.

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.