What We Can All Learn from Diller v. Richardson – Part II

My last post discussed the facts of the Diller v. Richardson No. A162139 (Cal. Ct. App. Mar. 17, 2022) case. As you will recall, the Estate Planning attorney who helped the Dillers draft their plan during life subsequently helped the surviving spouse, Sanford Diller, dismantle that plan shortly before Sanford’s death. Thomas Richardson served as the Estate Planning attorney for the Dillers during their lives. After Helen Diller died, Richardson penned a letter to Sanford Diller explaining how Sanford could achieve his Estate Planning goal of disinheriting his sons completely, notwithstanding that Sanford’s then-deceased wife’s plan was irrevocable. You may be wondering how the attorney could make such a promise. Interestingly, as the attorney who drafted the Estate Plan, he was aware of an escape hatch that he had built into the plan. He used that escape hatch to his client’s benefit. Neither of these acts on their own indicates any wrongdoing; however, as this second part of a two-part series will demonstrate, Richardson’s acts breached his fiduciary duties and ethical duties owed to his various clients.

Smartly, Richardson included a provision designed to allow extraordinary distributions of principal from the Marital Trust for Sanford’s benefit. In addition, Richardson included provisions in the Marital Trust that prohibited Sanford from making these distributions to himself. Notably, Sanford was serving as a co-Trustee of the Marital Trust. Instead, the trust agreement required a disinterested Trustee to make these additional principal distributions from the Marital Trust. In this situation, that made sense. Remember that the Marital Trust contained the vast majority of Helen’s $1.2 billion and although Helen and Sanford had marital strife, none of the facts suggest that Helen ever considered disinheriting Sanford. Until this point, Richardson behaved appropriately and exercised good judgment on behalf of his clients.

Not so smart was Richardson’s decision not only to serve as the “disinterested trustee” but also to fail to act in a disinterested manner. Richardson delivered a plan to Sanford whereby he would help Sanford deplete the principal of the Marital Trust by exercising the power of the disinterested trustee to make extraordinary distributions of principal. When a trust agreement gives the Trustee sole or absolute discretion, beneficiaries have a difficult time convincing a judge to compel a Trustee to make distributions because judges give great deference to the Trustee’s discretion. Richardson breached his various duties by exercising his discretion in such a way that disregarded the fiduciary duty that he owed to the remainder beneficiaries of the Marital Trust: Ronald and Bradley Diller. As a disinterested Trustee, he distributed all the principal of the Marital Trust to Sanford. Richardson knew that Sanford planned to disinherit his sons and acted as the instrumentality to allow him to do it. Ordinarily, that would not be enough to cause anyone to bat an eye, after all, attorneys help their clients disinherit their children every day. What makes Richardson’s acts egregious, however, is that as soon as Richardson agreed to serve as co-Trustee of the Marital Trust, he owed fiduciary duties to those same children he helped Sanford disinherit. Those fiduciary duties changed things and meant that Richardson had to consider not only Sanford but also Ronald and Bradley. Richardson could have resigned as co-Trustee or made smaller extraordinary distributions and arguably avoided this result. He chose neither of those options.

Richardson needn’t have done anything further to breach his duties as co-Trustee and his duty of loyalty to Helen as a former client. As you may have guessed, though, that’s not where the story ends. Richardson not only was instrumental in depriving Ronald and Bradley of their inheritance by depleting the Marital Trust, but after doing so, thwarted Ronald’s attempts to obtain information about the Marital Trust, Survivor’s Trust, and Family Trust and used the threat of a no-contest clause to deter Ronald from suing him. In fact, Richardson and his law firm took on nine conflicting roles ranging from serving as Helen and Sanford’s long-time Estate Planning attorneys, to serving as counsel for both Helen’s estate and Sanford’s estate, to acting as litigation attorneys to defendants in Ronald’s action. Thankfully, the judges in this and the related cases removed both Richardson and his firm from their fiduciary roles and barred them from serving as attorneys in the conflict.

As these articles demonstrate, Richardson behaved badly. Stories like this undermine the public trust in attorneys. Richardson breached the duties that he agreed to undertake both as a Trustee and as an attorney. Richardson gives all attorneys a bad name and he and his ilk contribute to the proliferation of lawyer jokes. They do little for the profession. Even more unfortunate for Richardson, regardless of his behavior before or after, most of his professional contacts will remember him for this. If you have doubts about your attorneys’ loyalty or the advice that they have provided, it’s time to talk to an experienced Estate Planning attorney who understands what it means to be a compassionate counselor and advisor. Guess who that Estate Planning attorney is. Me, Bob.

What We Can All Learn from Diller v. Richardson

Through the years, I often commented that I serve as a counselor, sounding board and advisor for my clients. Clients call on me to fill many roles in addition to the ones for which they hire me. It’s a natural evolution of the attorney/client relationship. After all, clients trust me with their secrets, desires, and goals. I know the inner workings of their family, including who has creditor issues, who spends too much, who has health concerns, and who suffers from addiction. With my experience, I create Estate Plans with escape valves to address changes in the law and beneficiary circumstances because they understand the importance of flexibility in an Estate Plan. Change is inevitable and that they can best serve their clients by allowing the plan to evolve over time. This first part of a two-part series will detail the extensive facts of Diller v. Richardson, No. A162139 (Cal. Ct. App. Mar. 17, 2022), a case that highlights the many issues that arise when an attorney serves in one of these roles and disregards their duties as an officer of the court and as a fiduciary. The second part will explore what went wrong along with some of the safeguards that could have prevented litigation.

The Diller case has a long procedural history and several related cases beyond the scope of this article. The salient facts follow. Helen and Sanford Diller were married and had three children together: Ronald, Jackie, and Bradley. Ronald was close with his mother and Jackie was close with her father. The case makes clear that tension existed between the paired parent-child relationships and between Helen and Sanford themselves. The opinion makes no mention of whether Bradley was close to either parent, likely because he was not part of the litigation.

The Dillers created the “DNS Trust” in 1981 and amended it several times over the years. Ultimately the Dillers created the Sixteenth Amendment and Complete Restatement of the DNS Trust which was at issue in the litigation that ensued after the death of both Helen and Sanford. The Dillers’ Estate Planning attorney, Thomas Richardson, drafted a document that created four sub-trusts upon the death of the first spouse: a Marital Trust, a Survivor’s Trust, a Family Trust, and a reverse QTIP Marital Trust. The DNS Trust included a provision that allowed the surviving spouse to appoint a co-trustee of the Marital Trust of which that surviving spouse was serving as Trustee.

Helen died first in 2015. Ronald testified that his mother, Helen, intended to leave a legacy for her family, meaning that some portion of her estate would pass to her children and grandchildren. While his father was alive, Ronald did not seek copies of any of the estate planning documents, nor was he provided with any. It was his understanding that after his father, Sanford, died, he would receive his inheritance but that in the interim assets would be held in irrevocable trusts for Sanford’s lifetime benefit. Shortly after Helen’s death, Sanford decided that he was unhappy with the plan that Helen and he had established and sought to change it by disinheriting his sons, Ronald and Bradley. Every day surviving spouses decide that they do not like the plan to which they had agreed while the now deceased spouse was alive and seek to change it. Usually, the surviving spouse has the option to change only the portion of the plan relating to their own assets, or the Survivor’s Trust. Usually, the surviving spouse cannot change the terms of the Family Trust and almost never can they change the terms of a Marital Trust. The Diller case proves the exception to these rules.

The terms of the Marital Trust called for distributions of all net income to Sanford, along with distributions of principal for his health, education, maintenance, and support, in his accustomed manner of living. Finally, the Marital Trust contained a provision that allowed distribution of additional principal as the Trustee, excluding any Interested Trustee, may from time to time determine. The Trust Agreement carefully defined an Interested Trustee as anyone who was a current or future beneficiary of income or principal of the DNS Trust. Remember that Sanford had the power to appoint a co-Trustee for the Marital Trust. He appointed the Estate Planning attorney that he and Helen had used during Helen’s life, Thomas Richardson. Richardson qualified as a disinterested trustee under the terms of the trust agreement and having drafted the trust agreement arguably knew and understood the intentions of both parties better than any other individual.

In response to Sanford’s request to make changes to the DNS Trust, Richardson wrote a letter to Sandford indicating that the Marital Trust and Family Trust were irrevocable because of Helen’s death. He reminded Sanford that he had the power to amend only the Survivor’s Trust. Richardson went on to propose to Sanford that he, as the disinterested Trustee of the Marital Trust, could distribute all assets of the Marital Trust to Sanford as beneficiary thereby allowing Sanford to do indirectly what he could not do directly – make changes to the Marital Trust by depleting it and putting the assets in the Survivor’s Trust. It’s difficult to understand why the attorney who drafted the plan would put in writing the way by which he was going to help the surviving spouse defeat the plan. Yet, that’s exactly what Richardson did.

Richardson transferred the entire principal amount of the Marital Trust totaling over $1.2 billion to Sanford, notwithstanding that Sanford already had $1.2 billion of his own money. This obliterated Helen’s Estate Plan and Richardson absolutely knew and understood that. It seems clear that Richardson breached the duty of loyalty and impartiality that he owed to the remainder beneficiaries of the Marital Trust created under the DNS Trust, Ronald, and Bradley, among other things. Let’s not forget that Richardson created Helen’s Estate Plan and represented her during her life and arguably owed her some duties as well.

After receiving all assets from the Marital Trust, Sanford transferred those assets to his Survivor’s Trust and disinherited his sons, Ronald and Bradley. Sanford died thereafter in 2018. After Sanford’s death, Ronald sought information regarding the plan and his inheritance. Richardson, or members of his law firm, advised Ronald that he was the beneficiary of a trust containing $3 million of which Richardson was the sole Trustee and for which distributions would be made to Ronald for medical emergencies and financial exigencies only, as determined by Richardson in his capacity as Trustee. Ronald sought copies of all his parents’ Estate Planning documents, including the DNS Trust. Richardson’s law firm denied that request and actively discouraged Ronald from seeking copies of the documents by reminding him of the no-contest clause in the documents. Shortly thereafter, Ronald initiated a lawsuit against his sister, Jackie, who was serving as the Trustee of the Survivor’s Trust.

In the interest of brevity, this article ignores the procedural posture of the case, but read it because it’s fascinating. The next article in this series will detail how the Estate Planning attorney used a provision that he inserted to protect the plan to undermine Helen’s plan and deprive Bradley and Ronald of approximately $400,000,000 each and explore the numerous ways in which the attorney was the worst actor in all of this – stay tuned!

529 Plans – The “Holy Grail” of Estate Planning

Ah, summer…it’s here! The time for barbeques, baseball, beaches, and … Internal Revenue Code (the “Code”) Section 529 plans (“529 plans”)? Yes! As we enjoy the lazy days of summer (spring), let’s get a jump start on thinking about the new school year, which means now’s the perfect time to look at your Estate Plan, especially as it relates to educational goals for your children, grandchildren, and other loved ones. As they say, it’s never too early to start planning. A 529 plan, otherwise known as a Qualified Tuition Program (“QTP”) offers a tax-sheltered way to save for education expenses. State agencies and educational institutions sponsor 529 plans and each sets its own plan requirements within the federal framework. For a helpful guide to the various 529 plans.

529 plans come in two varieties. The first is a prepaid tuition plan that allows the owner to lock in tuition rates at eligible public and private universities and colleges. Most states guarantee that the funds in the plan will keep pace with tuition. Most of these plans do not offer a way to cover other types of expenses, such as room and board, and generally require the beneficiary to reside in the state in which the donor establishes the plan. The other variety of 529 plans, the savings plan, addresses these issues. The savings plan allows the donor to save for qualified education expenses, including tuition, room, board, textbooks, and even computers (if required by the school). The 529 savings plan may represent the “Holy Grail” of Estate Planning as this article explains.

Although a contribution to a 529 plan does not produce an income tax deduction at the federal level, it may qualify for a state income tax deduction. Depending upon the plan chosen, 529 plans offer flexibility in allowing the donor to choose investments. The Code imposes no tax upon the income earned by the 529 plan. In fact, the income may never be subject to tax, depending upon the distribution of the income from the plan. Distributions from the 529 plan used for the beneficiary’s qualified education expenses for students at colleges, junior colleges, technical schools, and even at primary and secondary schools (up to $10,000 per year) do not have income tax consequences for the beneficiary or anyone else. If the donor uses the distributions from the 529 plan for something other than education expenses the earnings become taxable and could be subject to a 10% penalty.

Second, contributions to a 529 plan may qualify for the gift tax annual exclusion ($17,000 per year per person in 2023). In fact, an individual may utilize up to 5 years of annual exclusions up front in funding the plan. That benefit comes with a price in that if the donor dies within 5 years of funding the plan, the Code includes the value of the annual exclusions for the years into which the donor did not survive in the donor’s taxable estate. Thus, if the donor contributed $85,000 ($17,000 * 5) to the plan in 2023 and then died in 2026, the Code includes $17,000 ($85,000 – ($17,000 * 4 = $68,000)) in the donor’s taxable estate. Regardless of the date of death, any growth in the funds stays out of the donor’s taxable estate.

Typically, if a donor retains control over assets, the Code includes the value of those assets in the donor’s taxable estate. A 529 plan offers a unique benefit in this respect because the donor of the 529 plan maintains control of the plan by retaining the ability to change beneficiaries, choose investments, and make distributions, yet the Code excludes the value of the assets in the plan from the donor’s taxable estate upon death. However, this power in the owner cuts both ways. The successor owner has the same powers and could direct the funds away from the intended beneficiary. If the donor wanted to restrict the successor owner from redirecting the funds for their own benefit or for the benefit of another beneficiary, the owner could use a trust to hold the 529 plan. Of note, structuring the 529 plan in this manner restricts the beneficiary to use one annual exclusion, rather than the 5 that an individual owner could otherwise use to fund the plan upfront.

A donor contributing to a 529 plan receives yet another bonus in the form of bankruptcy protection. If the debtor files for bankruptcy and has made contributions to a 529 plan, the funds will remain protected if the plan meets certain requirements: (1) the donor contributed the funds at least two years prior to filing for bankruptcy; (2) the donor established the 529 plan for the donor’s children, grandchildren, step-children, or step-grandchildren; and (3) the donor’s contributions do not exceed the 529 plan’s maximum contribution limit per beneficiary (which can be in excess of $500,000). Here again, the 529 plan allows the donor to retain control yet protects the plan in a bankruptcy proceeding. The 529 is an asset like no other.

Finally, SECURE 2.0 passed at the end of 2022 provides yet another benefit for taxpayers with 529 plans. Now those taxpayers will be able to use funds for something other than qualified education expenses without income tax consequences. The Act allows taxpayers to convert up to $35,000 from a 529 Plan to an IRA. The Act imposes several restrictions on the 529 Plans allowed to take advantage of this rollover as follows: the Plan must have been maintained for 15 years prior to the rollover, the amount converted for a year cannot exceed the aggregate amount contributed to the 529 Plan in the 5 years prior to the rollover, the amount must move directly from the 529 Plan to the IRA, and the amount, when added to any other IRA contribution cannot exceed the contribution limit in effect for that year. This provision becomes effective for 529 Plan distributions after December 31, 2023.

To summarize, 529 plans have several benefits: (1) contributions to the plan may qualify for deductions at the state level, (2) earnings on the investments accrue income tax free as long as the funds are used for qualified education expenses, (3) most colleges and universities in the United States accept the funds for a variety of expenses, including tuition, fees, room, board, and textbooks, (4) 529 plans have high contribution limits allowing a donor to help establish a significant education fund for the beneficiary, (5) the annual per donee exclusion amount covers contributions to the plan making it possible in 2023 to contribute up to $17,000 on behalf of each beneficiary without worrying about incurring gift taxes or using Applicable Exclusion Amounts and these gifts can be front-loaded for up to 5 years at the outset, (6) the account owner retains control over the funds in the 529 plan allowing the donor to control investments and the timing of distributions, and (7) the grantor may roll extra funds in the 529 over to a Roth IRA for the benefit of the beneficiary. As this article makes clear, 529 may represent the “Holy Grail” in Estate Planning.

The Wonders and Mysteries of Wills

I often focus on Revocable Trusts and the flexibility, continuity, and protections that they provide. Of course, in addition to the foregoing benefits, trusts avoid the probate process, which can be lengthy and expensive in some states. While extolling the virtue of an Estate Plan based upon a Revocable Trust, I often explain that Wills play an important role in a comprehensive Estate Plan. I have vivid recollections of sitting across from numerous clients who asked me the question “If I have a Revocable Trust, why do I need a Will?”

Let’s start with the basics. If an individual dies without a Revocable Trust or Will, that’s referred to as dying intestate. Dying intestate occurs often enough that Illinois has created statutes to address the issue. These statutes determine distribution of your assets without any input from you or your loved ones. Many states’ intestacy laws give only a portion of assets to the surviving spouse and give the remainder to descendants, without regard for the specific needs of the individual recipients. This includes those who may have special circumstances, such as receiving needs-based governmental benefits. If you die intestate, then your estate will need to go through probate. An individual will petition a court for appointment as executor, personal representative, or administrator, which will give that individual legal authority to collect and distribute your assets. That individual likely will need to retain an attorney to understand and navigate the complex court system. A judge oversees the many steps involved in this public probate process. As the probate process is public, otherwise private information about the nature and extent of the individual’s assets and to whom they are being left would be divulged. This could allow nosy neighbors, predators, and others to pry into the lives of the individual and their loved ones.

Revocable Trusts provide the solution to the probate issue. They allow the family to forego the probate process altogether. The Trustor creates a Revocable Trust and appoints a Trustee to step into their shoes upon their death and administer the trust without court intervention. In this way, properly funded Revocable Trusts avoid probate. If, however, the decedent died with one asset titled in his or her individual name that asset needs to pass through probate. Here’s the first reason that even if you have a Revocable Trust, you need a Will. Despite the best efforts of the client and the attorney who drafted the Estate Plan, assets sometimes remain titled in the name of the Grantor (the person setting up the Trust) at death. In most states, the only way to ensure that these assets end up in the Revocable Trust is through the “Pour-over Will” that “pours” any assets passing through probate “over” to the trust. The Will acts as a backstop to the Revocable Trust. In addition, in the rare circumstance that the Revocable Trust is declared invalid, the Will can include provisions that direct passage of the assets in the same manner as was directed by the Revocable Trust.

Second, certain states allow their residents to pass tangible personal property through a separate writing without the formalities required of a Will. These documents need to follow state statutes concerning requirements for validity, but generally, these documents need only reference the tangible personal property sought to be distributed, the desired recipient of the property, and have the testator’s )the deceased person) signature along with the date signed. Usually, states that allow a separate writing require that the Will contain a direction regarding passing the tangible personal property according to such document. These states typically do not have companion statutes that allow a Revocable Trust to reference the memorandum.

Remember, most of the time, the Revocable Trust represents the gold-standard in Estate Planning. They contain flexibility, provide for continuity, avoid probate, and allow the Trustor to include protections and/or restrictions for their beneficiaries. It’s rarely, maybe never, wrong to create a Revocable Trust. Of course, the Trustor needs to ensure that they fund the Trust, otherwise, the assets pass through probate in accordance with the Will; however, that doesn’t negate the importance of the Will. As this article has demonstrated, Wills play an important role in a comprehensive Estate Plan.  A Will serves as the sole legal document to accomplish certain things and failing all else, the Will serves as a backstop to the Revocable Trust.