NEWSLETTER Trusts and Estates Published by the Virginia State Bar Trusts and Estates Section for its members Volume 22, No. 13 Fall 2015 Message from the Chair assisted Virginia CLE in presenting the 34th Annual Jennifer E. Shirkey, Chair Trusts and Estates Seminar this Fall. Topics included Trusts and Estates Section a survey of federal and Virginia law developments, the evolving concept of marriage in Virginia, modifying On behalf of the Board of Governors of the Virginia trusts under the Uniform Trust Code, asset protection State Bar Trust and Estates Section, I’m pleased to trusts, and ethics. Earlier, we co-sponsored a webinar on introduce the Fall 2015 edition of our Trusts and Estates advance medical directives (AMD) with the VSB Special Newsletter. Committee on Access to Legal Services. Attendees This issue includes four timely articles. First, John agreed to either accept a pro bono referral to draft an Midgett suggests it’s time to revisit Virginia’s augment- AMD or financially contribute to a pro bono legal ser- ed law and adopt the approach used in the most vices organization in exchange for the free webinar. recent version of the Revised Uniform Code. Our Board of Governors welcomes your suggestions The RUPC moves away from Virginia’s current spousal for future Section activities. Please feel free to contact support-based concept toward a view of marriage as an me or any other Board member with your ideas. Our economic partnership, with the surviving spouse’s share contact information is on the last page of this newsletter varying based on the length of marriage. The Virginia or on our Section website at http://www.vsb.org/site/sec- General Assembly may consider this proposal when it tions/trustsandestates/te-board-of-governors. S convenes in January. In our second article, Sandy Sanders discusses the reasoning and impact of the Virginia Supreme TABLE OF CONTENTS Court’s recent no contest clause decision in Rafalko v. Georgiadis. He describes useful practice hints in light Reassessing and Revising Virginia’s Elective Share of the opinion. Next, Thomas Repcyznski explores “de Laws: Toward a more uniform and equitable result. John T. Midgett ...... 2 facto” wills—when a document failing to satisfy Virginia Code Section 64.2-403’s formal execution requirements No Contest Clauses in Virginia After Rafalko v. Georgiadis: Constitutional and might still be accepted as a valid will. He helpfully Concerns summarizes cases decided on this topic to date. Finally, Elwood Earl “Sandy” Sanders, Jr...... 7 Kelly Pinckard offers valuable tips to put a smile on your “De Facto Wills”: ’s Dirty Commissioner of Account’s face when reviewing your Little Secret? next fiduciary accounting. Thomas W. Repczynski ...... 12 Many thanks to Lauren Jenkins, our Newsletter Tips from a Fiduciary Accounting Professional Editor, and Jennifer Schooley, our Assistant Newsletter (a.k.a. How to Delight Your Commissioner of Accounts) Editor, for their work in producing this edition. We Kelly J. Pinckard ...... 17 encourage anyone interested in contributing to upcoming Board of Governors...... 22 newsletters to contact Lauren or Jennifer. In addition to the newsletter, our Section once again

The Trusts and Estates Newsletter is published by the Virginia State Bar Section on Trusts and Estates for its members to provide information to attorneys practicing in these areas. Statements, expressions of opinion, or comments appearing herein are those of the contributors and not necessarily those of the Virginia State Bar or the Section on Trusts and Estates. Fall 2015 Trusts & Estates Newsletter

Reassessing and Revising Virginia’s Elective Share Laws: Toward a more uniform and equitable result. By John T. Midgett

On January 1, 1991, the concept of the “augment- The concept of the augmented estate was taken ed estate” became effective as the basis for measuring from a version of the (UPC) the forced or elective share of a surviving spouse in that originated in 1983.4 It incorporated concepts the estate of a deceased spouse.1 Prior to January from the federal estate and tax law in defining the 1, 1991, the forced share was limited to a fraction2 size of the spouse’s elective share. Virginia has not of the decedent’s net probate estate with respect to adopted the UPC in whole, and has instead adapted personal property plus whatever rights the surviving parts to existing laws, creating a fairly unique appli- spouse’s dower or curtesy interest gave the surviving cation of “uniform” concepts. spouse in the deceased spouse’s real estate. Today, The elective share portions of the UPC were the same fractions apply, but to the statutorily defined substantially revised by the National Conference of augmented estate. Commissioners on Uniform State Laws in 1990,5 Non-vested rights of dower and curtesy, as well and re-organized and clarified in 19936 and again in as existing separate equitable estates, were abolished 2008.7 Virginia essentially adopted a version that effective January 1, 1991.3 had, by January, 1991, passed its prime. As we near Under prior law of dower and curtesy, many prac- the silver anniversary of the adoption by Virginia titioners felt that the surviving spouse’s forced share of the elective share, the deficiencies of our current was not adequately defined, and there were numerous statutes and the revisions to the UPC signal a need for ways to defeat or minimize the election of a forced change. share and disinherit the surviving spouse: Virginia’s elective share statutes contemplate a model that is designed to provide support to the 1. Non-probate transactions such as insurance, surviving spouse. The Revised Uniform Probate joint property, and inter vivos trusts were not Code (RUPC) instead brings the elective share laws included in the spouse’s forced share; in line with a contemporary view of marriage as an economic partnership.8 This is the same view already 2. Separate equitable estates in both real estate employed in the divorce arena through equitable and personal property were outside the scope distribution, and at death in the eight (8) community of the spouse’s forced share; property states. In many common law states, such as Virginia, the law has not quite caught up. 3. There was no way to make a forced share The concept of married persons being treated as election in ; one is not new in the law. The “unity of person” is an important element in the creation of tenants by 4. Gifts could be used to reduce the decedent’s the entirety property. A pooling of income between estate and frustrate the surviving spouse’s spouses is permitted for income tax filing under claim; and “married-filing jointly.” A partnership theory of 5. A spouse who had been adequately provided marriage has been described “as an expression of the for during lifetime could “double dip” by presumed intent of husbands and wives to pool their 9 adding forced share property to property fortunes in an equal basis, share and share alike.” acquired during lifetime or non-probate prop- The RUPC version of the elective share differs erty acquired at death. from Virginia’s current elective share statutes in three

page 2 Fall 2015 Trusts & Estates Newsletter (3) major ways: had the surviving spouse been the decedent.20

1. The RUPC considers the assets of both spous- The second major change between the RUPC and es, not just the decedent’s assets, in determin- Virginia’s statutes is the “buy-in” period: a gradual ing the pool of assets available for determin- vesting schedule that embodies the partnership theory ing the elective share;10 of marriage.21 Virginia’s current elective share pro- vides for a full one-third (1/3) (or one-half (1/2) in 2. The RUPC provides a set distribution of fifty some instances) of the decedent’s assets regardless of 11 percent (50%) of the marital assets, but the length of the marriage. The RUPC provides for multiplies this portion by increasing percent- a “buy-in” period, the effect of which will decrease 12 ages based upon the length of the marriage; or even eliminate the entitlement of a survivor in a and short term, late in life marriage, preventing the unin- tentional “disinheritance” of the decedent’s family.22 3. The RUPC provides a protective device for The “buy-in” period provides for a minimal elec- elective share claims made on behalf of an 13 tive share claim for marriages of less than one (1) incapacitated spouse. year, with increasing percentages until fifteen (15) years of marriage have elapsed, at which time both Under the UPC and Virginia law, the surviving spouses are fully “vested” in the estate of the other.23 spouse in many cases can only claim a one-third (1/3) This “buy-in” period removes the inequitable results share in the decedent’s assets, not fifty percent (50%) when an elective share claim is made for a short-term of the combined assets that an economic partnership marriage, affecting a partial disinheritance of the chil- would presume.14 dren of the decedent. Let’s look at some examples of Under Section 2-203 of the RUPC, the elective how this revised approach might work: share percentage of fifty percent (50%) is applied to the value of the “marital property portion of the aug- Assume that Husband and Wife had been mented estate.”15 Under the RUPC, the augmented married for two (2) years at Husband’s death. estate equals the value of each spouse’s combined At Husband’s death, he owned $3,000,000 assets, not merely the value of assets titled in the in assets, while Wife owned just $10,000 in decedent’s name.16 The augmented estate consists of assets. Under the current elective share laws four (4) distinct elements: in Virginia, if Husband died first, Wife would 1. The value of the decedent’s net probate be entitled to make an elective share claim estate;17 for fifty percent (50%) or $1,500,000 unless Husband was survived by children from a 2. The value of the decedent’s non-probate prior relationship, in which case Wife would transfers to others, consisting of will substi- be entitled to an elective share claim of one- tute type inter vivos transfers made by the third (1/3) or $1,000,000. decedent to persons other than the surviving spouse;18 Under the RUPC, Husband and Wife’s com- bined assets of $3,010,000 comprise the aug- 3. The value of the decedent’s non-probate mented estate. The marital property por- transfers to the surviving spouse;19 and tion is fifty percent (50%) of $3,010,000 or $1,505,000. If Husband were to die first, 4. The value of the surviving spouse’s net assets Wife would be entitled to $180,600 as a two held at the decedent’s death, plus any property (2) year marriage would entitle the surviv- that would have been included as the surviv- ing spouse to twelve percent (12%) of the ing spouse’s non-probate transfers to others marital property share ($3,010,000 multiplied

page 3 Fall 2015 Trusts & Estates Newsletter by 50% multiplied by 12%). Because Wife by or on behalf of an incapacitated spouse. Under already owns $10,000 of property, she would the Uniform Power of Attorney Act, if a power of satisfy her elective share claim by obtaining attorney grants general authority to act on behalf of $170,600 of Husband’s assets. a principal with respect to estates, trusts, and other beneficial interests, the agent could “[d]emand or Assume, however, that under the same cir- obtain money or another thing of value to which the cumstances Wife dies first. The calculation principal is, may become, or claims to be entitled by of Husband’s elective share claim would be reason of an estate, trust, or other beneficial interest, exactly the same, fifty percent (50%) of the by litigation or otherwise.”24 The RUPC specifi- combined assets multiplied by the twelve per- cally permits an agent under a power of attorney, a cent (12%) marriage factor yielding $180,600; conservator, or a guardian to make the elective share however, Husband already owns property in claim on behalf of an incapacitated spouse; however, excess of that amount, and would not be able unlike Virginia’s current statute, any property used to to possess any of Wife’s assets as a result. satisfy the incapacitated spouse’s elective share claim will not be paid outright to the claiming spouse, but Assume the same facts, but fast forward will be held in a custodial trust for the benefit of the twenty-eight (28) years into the future where incapacitated surviving spouse.25 the parties have been married for thirty (30) This custodial trust is treated as if it had been years. Combined assets of $3,010,000 would created by the decedent spouse and does not give the yield the marital property share at a fifty per- incapacitated spouse or anyone acting on the inca- cent (50%) rate or $1,505,000. Wife would pacitated spouse’s behalf a power to terminate the be entitled to one hundred percent (100%) trust.26 of this marital property share less the value While the surviving spouse is incapacitated, the of Wife’s own assets, yielding a claim of expends as much or all of the trust property as $1,495,000 of Husband’s assets ($3,010,000 advisable for the health, maintenance, and support of multiplied by 50% multiplied by 100%, less the surviving spouse.27 Upon the death of the surviv- Wife’s $10,000). ing spouse, the remaining trust property is distributed pursuant to the residuary clause of the will of the first Finally, under the same long term marriage, spouse to die.28 had Wife died first, Husband would be enti- This provision allows an incapacitated spouse to tled to one hundred percent (100%) of the receive a benefit from the decedent spouse, but with- marital property of the combined assets or out unduly enriching the family of the incapacitated $1,505,000. Because Husband’s individual spouse at the expense of the decedent spouse’s fam- assets exceeded that amount, Husband again ily. would not be able to take any portion of The RUPC also has several minor differences Wife’s property as a result of the elective with Virginia’s current law, mostly as a result of the share claim. unique modifications made by the General Assembly when the elective share statute was first passed in Clearly, the RUPC results in a more equitable 1991.29 treatment, not only for the parties to the marriage, but Current Virginia law provides that property gifted to their children. by the decedent in the calendar year of death, or in The third major change contemplated by the any of the five (5) preceding calendar years is brought RUPC is the treatment of elective share claims made back into the augmented estate to the extent the gifts by an incapacitated spouse. exceed the annual gift tax exclusion for the year in Under Virginia’s current statute, there is no which the gift is made.30 explicit procedure for making an elective share claim The RUPC, as did the original UPC, only requires

page 4 Fall 2015 Trusts & Estates Newsletter a two (2) year “look back” for gifts made by the of other jurisdictions is not helpful in resolving dis- decedent (or in the case of the RUPC, the surviving putes under our current statutes. spouse).31 The time for change of our “support based” elec- Virginia’s current augmented estate statute pro- tive share system is now and the adoption of the vides for an additional bonus to the surviving spouse RUPC version of the augmented estate will bring of risk-free interest at the legal rate (six percent (6%)) Virginia and its citizens more in line with present-day from the date of the decedent’s death to the date of economic expectations arising out of marriage. S satisfaction of the elective share.32 Under the RUPC, the surviving spouse’s claim is treated as a general pecuniary bequest.33 By treat- John T. Midgett is a Principal in the Law Firm of Midgett & ing the elective share claim as a pecuniary bequest, Preti PC. His practice is concentrated in the related areas of interest would not begin to run on the unsatisfied estate planning, administration and taxation, estate litigation portion beginning at the date of the decedent’s death, and family business planning. but would instead begin to run at the expiration of Mr. Midgett is a graduate of the University of Virginia, where he attained a Bachelor of Arts degree, with Distinction. one (1) year after the date on which the beneficiary He is a graduate of the T. C. Williams School of Law at the is entitled to receive the pecuniary amount.34 Given University of Richmond, where he was a member of the Law the difficulty in setting any hearing, contested or Review. otherwise, on the dockets of the courts within one (1) Mr. Midgett is a nationally known speaker on topics relat- year of making an elective share claim, elimination ing to estate planning, taxation, probate, elder law, and family of the interest penalty running from the date of death businesses. He has also written and lectured to other attorneys, (not qualification of a ) would accountants, and trust officers in the related areas of estate result in a more equitable result for the decedent’s planning, taxation and administration for the continuing educa- personal representative and the decedent’s family tion required in the various professions. while still protecting the surviving spouse if satisfac- In addition to his practice and speaking schedule, John tion of the claim was not made in a timely manner is actively involved in the Virginia Bar Association Trusts & following determination of the amounts due. Estates Section (Vice Chairman 2015-2017), the Hampton While the provisions of the RUPC are significant- Roads Estate Planning Council (President 2010-2011), and the ly different than current Virginia law, by considering Duke University Estate Planning Council. John has served as Chair of the Trusts & Estates Section of the Virginia State Bar assets of both spouses in determining the augmented in 2008-2009, and is a Past President of the Hampton Roads estate value, by providing a variable benefit based on Gift Planning Council and the Norfolk-Tidewater Chapter of the length of marriage, and by protecting the family of Society for Financial Service Professionals. In May, 2006 he was the decedent in the event of a claim for elective share elected by the Board of Directors of the National Association of by an incapacitated spouse, these differences are Estate Planners & Councils as an Accredited Estate Planner®, more in line with the evolving “partnership theory” of and writes and edits the Technical Corner for the AEP® Alert. marriage versus Virginia’s antiquated support based John has been rated as “AV” in the areas of estate planning and provisions. Legislation to adopt these provisions of administration, the highest designation available to attorneys in the RUPC has been proposed and will be considered the Martindale-Hubbell® Law Directory. John has been named by the General Assembly beginning in the January, to Virginia Business Magazine’s Legal Elite, a Virginia “Super 2016 term. The adoption of an elective share process Lawyer” and has been included in the 2006-2015 editions of based on the RUPC will provide practitioners and the The Best Lawyers in America®, and was named in 2013 and courts with interpretive guidance as provided by the in 2015 “Lawyer of the Year” for Trusts & Estates Litigation comments made by the Uniform Law Commission for the Hampton Roads area. He is a Fellow in the American College of Trust and Estate Planning Counsel. X and by common law through decisions made on similar statutes adopted by other states. Currently, Virginia with its unique take on the 1983 version of (Endnotes) the UPC stands alone, and reliance on common law 1. See Act of Apr. 9, 1990, ch. 831, 1990 Va. Acts 1354 (codi-

page 5 Fall 2015 Trusts & Estates Newsletter fied as amended at VA. CODE ANN. § 64.2-305). 14. See UNIF. PROBATE CODE § 2-201 (UNIF. LAW 2. See VA. CODE ANN. § 64.1-16 (1989). Under prior law, COMM’N 1983); VA. CODE ANN. §§ 64.2-304, -305. the forced share was limited to one-half (½) if the decedent was 15. RUPC, supra note 8, § 2-203. not survived by descendants and one-third (1/3) if the decedent 16. Id. § 2-203(a). was survived by descendants. 17. See id. § 2-204. 3. See 1990 Va. Acts 1354 (codified as amended at VA. CODE 18. See id. § 2-205. ANN. § 64.2-301). 19. See id. § 2-206. 4. See J. William Gray, Jr., Virginia’s Augmented Estate Sys- 20. See id. § 2-207. tem: An Overview, 24 U. RICH. L. REV. 513 (1989-1990). 21. VA. CODE ANN. § 64.2-304. 5. UNIF. PROBATE CODE § 2 (UNIF. LAW COMM’N 22. See RUPC, supra note 8, § 2-203(b). 1990). 23. See id. 6. UNIF. PROBATE CODE § 2 (UNIF. LAW COMM’N 24. VA. CODE ANN. § 64.2-1632(B)(2). 1993). 25. See RUPC, supra note 8, § 2-212. 7. UNIF. PROBATE CODE § 2 (UNIF. LAW COMM’N 26. See id. § 2-212(c). 2008). 27. See id. § 2-212(c)(2). 8. See UNIF. PROBATE CODE pt. 2, cmt. at 71 (UNIF. 28. See id. § 2-212(c)(3). LAW COMM’N 2010) [hereinafter RUPC] All references to 29. See 1990 Va. Acts 1354. the “Revised Uniform Probate Code” or “RUPC” refer to the 30. VA. CODE ANN. § 64.2-305(A)(3)(d). Uniform Probate Code as revised in 2010. 31. See RUPC, supra note 8, § 2-205(3)(C). 9. See MARY ANN GLENDON, THE TRANSFORMATION 32. See VA. CODE ANN. § 64.2-304; VA. CODE ANN. § 6.2- OF FAMILY LAW (1989). 301. 10. RUPC, supra note 8, § 2-203. 33. See RUPC, supra note 8, § 2-209(e). 11. Id. § 2-202(a). 34. See VA. CODE ANN. § 64.2-425(A). S 12. Id. § 2-203(b). 13. See id. § 2-212(b).

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No Contest Clauses in Virginia After Rafalko v. Georgiadis: Constitutional and Common Law Concerns By Elwood Earl “Sandy” Sanders, Jr.

No contest or in terrorem clauses in wills and Claims. I intend to eliminate the pos- trusts have long vexed the courts in the United States, sibility that any beneficiary of mine and Virginia is no exception. The standard form of a will challenge the decisions that I have no contest clause is that if legal action is taken (or in made concerning the disposition of my some cases threatened) to contest the validity of a will assets during my lifetime or at my death, or trust document, the beneficiary loses the bequest if and my Trustee shall take all appro- the contest fails. Courts are troubled by these clauses priate steps to carry out this intent. because there is a conflict between: (i) the desire to Accordingly, I direct the following: uphold the ’s or settlor’s right to testamentary freedom and the prevention of family litigation; and 1. Absent proof of , dishon- (ii) the abhorrence of a legal forfeiture and access to esty, or bad faith on the part of courts for redress of grievances. The Supreme Court my Trustee, if any beneficiary or of Virginia discussed these clauses in 19561 and potential beneficiary under this trust 20092 decisions, but revisited the issue in the recent agreement shall directly or indi- case of Rafalko v. Georgiadis decided on November rectly, by legal proceedings or oth- 5, 2015.3 erwise, challenge or contest this Rafalko involved a trust which originally allowed trust agreement or any of its provi- the settlor’s two sons and the settlor’s second wife sions, or shall attempt in any way (who was not the sons’ mother) to receive the corpus to interfere with the administration of the trust share and share alike.4 In 2012, the set- of this trust according to its express tlor amended the trust to provide that the sons would terms, any provision I have made in not take under the trust until after the death of the this trust agreement for the benefit much younger second wife.5 The upset sons tried to of such beneficiary shall be revoked persuade their father to change his mind to no avail.6 and the property that is the subject When the father died in late 2012, the sons engaged of such provision shall be disposed in several actions to indicate their intent to contest the of as if that contesting beneficiary trust: and all of his or her descendants • One of the sons sent a letter to the father’s had predeceased me. Absent proof estate planning attorney asking the attorney to of fraud, dishonesty, or bad faith on preserve all records for a possible contest.7 the part of my Trustee, the decision • The sons wrote a letter to their stepmother ask- of my Trustee that a beneficiary or ing to terminate the trust by the agreed action potential beneficiary is not qualified of all beneficiaries. If the stepmother did not to take a share of the trust assets agree to the trust termination, the sons would under this provision shall be final.9 seek to have the amendment invalidated due to and lack of testamentary It seems that the clause would potentially come capacity.8 into effect for the letter to the stepmother and maybe The sons received an unpleasant surprise when even the letter to the lawyer who drafted the trust. they finally read the trust; the trust had been amended The no contest clause did not require actual legal to include a particularly severe no contest clause: action to trigger it. The language also states that the L. No Contest Clause and Release of decision of Rafalko (the trustee) is final subject to her

page 7 Fall 2015 Trusts & Estates Newsletter acting in bad faith or fraud or dishonesty as to wheth- There is no discussion by the Court on any pub- er this clause comes into play. The trustee did indeed lic policy or constitutional exception to no contest decide after consultation with legal counsel that the clauses, and none have been cited in Virginia law; sons’ actions had violated the no contest clause.10 however, there is precedent in other states favoring a As a result, the sons and their descendants would no restrictive view of no contest clauses. Public policy longer take under the trust.11 The sons then filed suit and constitutional issues do exist, and where appro- seeking a declaratory judgment that their actions did priate, need to be pled and argued. not invoke the no contest clause and that the sons and their descendants did not forfeit their interest under I. Public Policy and Constitutional Issues the trust.12 The majority rule in the United States allows The circuit court held that the no contest clause and enforces no contest clauses; however, there is an had not been triggered. The clause only applied to the important exception: the clause does not apply if the provisions of the amendment and did not apply to the legal contest was made in good faith and with prob- provisions of the trust agreement that had not been able cause.18 Furthermore, the Restatement (Third) amended.13 Upon Rafalko’s request for reconsidera- of Property agrees: “A provision in a donative docu- tion, the trial court held that Rafalko had acted in bad ment purporting to rescind a donative transfer to, or faith when she determined that the sons had violated a fiduciary appointment of, any person who institutes the no contest clause.14 a proceeding challenging the validity of all or part of The Supreme Court in a 4-3 decision, authored by the donative document is enforceable unless prob- Justice Goodwyn, did not reach the merits of the case. able cause existed for instituting the proceeding.”19 Rather, the Court held that the trustee did not assign “Probable cause exists when, at the time of instituting error to the trial court’s finding that the no contest the proceeding, there was that would lead a clause only applied to the trust amendment and not reasonable person, properly informed and advised, to the provisions of the trust itself.15 Thus, because conclude that there was a substantial likelihood that there is an independent, unappealed basis for the the challenge would be successful.”20 circuit court’s decision, the court cannot do anything The Mississippi Supreme Court cited a number but affirm the trial court;16 however, the Supreme of authorities in support of its holding in the case of Court did cite one of the leading cases on no contest Parker v. Benoist that no contest clauses are enforce- clauses: able where good faith and probable cause were pres- No contest clauses in trusts that are part ent.21 The Mississippi court cited the reasons for of a testamentary estate plan are given upholding no contest clauses: full effect, as they are in wills. Keener v. Keener, 278 Va. 435, 442, 682 The Restatement does acknowledge that S.E.2d 545, 548 (2009). Furthermore, forfeiture clauses may serve a valuable our case law is clear that such clauses, purpose in deterring “unwarranted chal- while enforceable, are to be strictly lenges to the donor’s intent by a disap- construed. We construe a no contest pointed person seeking to gain unjusti- clause strictly “according to its terms.” fied enrichment,” or preventing “costly Id. litigation that would deplete the estate or besmirch the reputation of the donor,” or When determining whether a benefi- discouraging “a contest directed toward ciary’s actions have triggered a no con- coercing a settlement—the so-called test clause, we strictly construe the lan- strike suit.” However, enforcing such guage of the clause because the drafter a provision without a probable-cause chose the language and forfeiture is exception would defeat “the jurisdic- disfavored in the law. Id. at 442-43, tion of the court to determine the valid- 682 S.E.2d at 548-49.17 ity of a donative transfer.” Essentially, the Restatement reasons that unlimited

page 8 Fall 2015 Trusts & Estates Newsletter enforceability of forfeiture clauses frus- as the testator sees fit, but the clause is disfavored trates the fundamental purpose of the because it works a forfeiture.30 The Keener court courts to ascertain the truth.22 seemed to say Womble rejected the good faith and probable cause rule on its merits.31 The court discussed the need to truly determine My research did disclose some potential English the intent of the testator.23 Further, will contests common law precedent that adopts the good faith and sound in equity and that equity requires all litigants to probable cause exception to a no contest provision.32 act in good faith.24 The court also cited a provision Because English common law is the rule of decision of its state constitution that ensures access to courts.25 in this Commonwealth,33 an argument can be made Virginia has no such provision in its constitution.26 (and it must be cited at trial and on appeal with care) that require Virginia courts to adopt the good faith II. Did Virginia Adopt the Good Faith and and probable cause exception to no contest clauses.34 Probable Cause Exception? The Supreme Court of Virginia in 1956 dis- III. Is Knowledge of the No Contest Clause cussed the good faith and probable cause exception Necessary? in Womble v. Gunter,27 and elected not to apply it There are no Virginia cases on point, but other because it was not pled either at trial or on appeal: states’ precedent is not encouraging with respect to It is unnecessary, however, for the court whether a beneficiary’s knowledge of a no contest at this time and in this case to pass upon clause impacts its enforcement.35 In Alper v. Alper, the question whether good faith, prob- the New Jersey Supreme Court held that the contest able cause and reasonable justification of one beneficiary barred all of the other beneficiaries afford a defense to a “no contest” pro- (even a minor child) from taking under the will.36 vision in a will. This is a question that The court did not draw a distinction between the must be affirmatively established by the knowing and unknowing potential takers. parties making the allegation. It was not made an issue in the pleadings other IV. Practice Tips than as heretofore stated. No testimony There are several practice tips that can be learned bearing on the question was introduced from the Rafalko opinion: except the opinion of one witness, who 1. Although no contest clauses are disfavored, did not state the facts upon which he they will be strictly enforced. The trial court based his conclusion, nor was the ques- in Rafalko adopted what could be argued was tion raised in the lower court. It is well a strained interpretation of the no contest settled that this court will not determine clause to avoid the issue of its effect37 and the questions not raised in the court below. Supreme Court decided the case on the unre- “We do not consider matters which lated issues of the existence and sufficiency are not presented in the pleadings or of the assignment of error probably to avoid involved in the issues of the case in the effect of the clause. If you have to draft the trial court. New contentions first such a clause, use very clear language as to appearing in the petition for appeal are what constitutes a contest, and that the clause beyond our review of the case.”28 if in an amendment to a trust (or a to a will) applies to the entire trust or will. Do not In effect, the question was barred by the contem- assume the courts will uphold the no contest poraneous objection rule; however, the Court also clause just because it is in the document. held that those minor children who contested the will 2. If you are considering challenging a will or through their next friend were also barred from taking trust, make sure you have the most recent ver- under it.29 The Court called for a strict interpretation sion of the will or trust.38 of the no contest clause based upon upholding the 3. If you must litigate in spite of the no con- testator’s intent to distribute the testator’s property test clause, argue every ethically conceivable

page 9 Fall 2015 Trusts & Estates Newsletter point at both trial and on appeal. 1917). 4. Finally, the no contest clause may need legis- 19. RESTATEMENT (THIRD) OF PROP.: WILLS AND lative reform. At least one state has adopted DONATIVE TRANSFERS § 8.5 (AM. LAW INST. 2003). the good faith and probable clause exception The Uniform Probate Code has codified the enforcement of a no as a statute.39 I do not think this article is a contest clause when there is probable cause. UNIF. PROBATE proper place to advocate such a reform, but CODE § 2-517 (UNIF. LAW COMM’N 2010) (“A provision in the General Assembly could consider it. S a will purporting to penalize an interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceed- ings.”). Elwood Earl “Sandy” Sanders, Jr., earned his JD at the 20. RESTATEMENT (THIRD) OF PROP.: WILLS AND University of Alabama in 1983 and is an Appellate Procedure DONATIVE TRANSFERS § 8.5 cmt. c. Consultant with Lantagne Legal Printing in Richmond, VA. 21. 160 So. 3d 198 (Miss. 2015). Sandy is extensively published in law reviews throughout the 22. Id. at 205 (citations omitted). nation and is also published in several Virginia legal publi- 23. Id. at 206. cations such as the Virginia Lawyer and the 24. Id. at 205, 212. Newsletter. He was Virginia’s first Appellate Defender, has 25. Id. at 205 (“All courts shall be open; and every person for appellate experience and conducts CL on appellate procedure to an injury done him in his lands, goods, person, or reputation, local and specialty bar associations. Sandy also teaches online shall have remedy by due course of law, and right and justice for Nazarene Bible College and was also an adjunct faculty shall be administered without sale, denial, or delay.” (quoting member at the School of Continuing and Professional Studies at MISS. CONST. art. 3, § 24)). At least one other court applied the University of Richmond, VCU Business School, and also the similar clauses in the state’s constitution. See In re Keenan’s T. C. Williams School of Law. X Will, 205 N.W. 1001, 1006 (1925) (“Every person is entitled to a certain remedy in the laws for all injuries or wrongs which he may receive in his person, property or character; he ought (Endnotes) to obtain justice freely and without being obliged to purchase 1. See Womble v. Gunter, 198 Va. 522 (1956). it, completely and without denial, promptly and without delay, 2. See Keener v. Keener, 278 Va. 435 (2009). conformably to the laws.” (quoting WIS. CONST. art. I, § 9)). 3. See Rafalko v. Georgiadis, No. 141533 (Va. Nov. 5, 2015). 26. I suppose a clever litigant could argue due process and 4. See Rafalko, slip op. at 1. access to courts (and should do so), but it is not likely to be suc- 5. See id. cessful. 6. See id. at 2. 27. 198 Va. 522, 528 (1956). 7. See id. 28. Id. (citations omitted). 8. Id. It is amazing that the sons, one of whom is an attorney, 29. Id. at 532. did not first ask for a copy of the trust before they acted. 30. See id. at 532. The Court in Rafalko said something very 9. Id. at 2-3. similar in an introductory manner. See Rafalko v. Georgiadis, 10. Id. at 4. No. 141533, slip op. at 7 (Va. Nov. 5, 2015).Fairfax County 11. Id. Circuit Court Judge Stanley P. Klein held that Keener was con- 12. Id. trolling and upheld the no contest clause. See In re Estate of 13. Id. at 5-6. Rohrbaugh, 80 Va. Cir. 253 (2010). 14. Id. at 6. 31. See Keener v. Keener, 278 Va. 435, 443 (2009). 15. Id. at 14. 32. See Powell v. Morgan, 2 Vern. 90, 23 Eng. Rpt. 668 (Chan- 16. Id. The Supreme Court also held there was sufficient evi- cery 1688); Morris v. Borroughs, 1 Atkyns. 404 (1739); Loyd v. dence to find bad faith by the trustee in the timing of the deci- Spillant, 3 Pere William’s Rpts. 344 (1734). sion to invoke the no contest clause (three months) in spite of 33. VA. CODE ANN. § 1-200 (English common law is the rule the sons’ attempt to disavow their earlier letters and threatening of decision in the Virginia courts unless a decision is repugnant actions. The sons also signed releases promising not to chal- to the Virginia Constitution or Bill of Rights). This statute has lenge the trust legally. Id. at 11-13. teeth in the prior cases. See Weishaupt v. Commonwealth, 227 17. Id. at 7. Va. 389 (1984) (extensive discussion of English cases on mar- 18. See South Norwalk Trust Co. v. St. John, 101 A. 961 (Conn. tial rape) and Campbell v. Commonwealth, 246 Va. 174 (1993)

page 10 Fall 2015 Trusts & Estates Newsletter (After discussion of English common law and the Virginia stat- of attainder, but those arguments have not yet prevailed over utes, the Court held forgery of a public record does not require innocents who would have taken from a slayer in administration prejudice to another). of the anti-slayer statutes. If applicable, that issue should be 34. It is important to note that this was not argued in Rafalko. researched and argued. 35. In Rafalko, the sons did not know about the no contest 37. See Rafalko, slip op. at 24-25 (Mims, J., dissenting) (“The clause prior to the activities that were considered triggering circuit court ruled that the words ‘this trust agreement’ as used events. See Rafalko v. Georgiadis, No. 141533, slip op. at 3 in the September amendment applied only to that amendment (Va. Nov. 5, 2015) (“Neither Basil nor Paul were aware of the itself rather than to the entire trust agreement as amended and September amendments to the trust until after Paul had sent the restated on August 27, 2012. However, the September amend- letters.”). ment is not a trust agreement. . . . Consequently, the words ‘this 36. 65 A.2d 737, 741 (N.J. 1949) (finding that the forfeiture trust agreement’ as used in the September amendment must refer of the minor’s bequest did not violate public policy); see also not to that amendment alone but to that amendment together Tunstall v. Wells, 144 Cal. App. 4th 554 (2nd Dist. 2006) and collectively with the August 27, 2012 trust agreement it (Alper followed but California has some public policy excep- amends.”). tions to no contest clauses such as forgery; constitutional claims 38. Section 64.2-775 of the Code of Virginia requires the trust- rejected and other cases cited); Commerce Trust Co. v. Weed, ee to provide the beneficiary with a copy of the trust instrument. 318 S.W.2d 289, 302 (Mo. 1958) (rejecting probable cause I recommend using that statute first before any legal action is exception and barring those taking under the rights of a contest- taken or threatened. ing party from taking under will). I have grave questions on 39. See ARIZ. REV. STAT. ANN. § 14-2517 (adopting section barring innocent beneficiaries for the contest of one particular 2-517 of the Uniform Probate Code). S beneficiary. The U.S. Constitution, art. 3, § 3 forbids “corrup- tion of blood” as a punishment for treason and also forbids a bill

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“De Facto Wills”: Estate Planning’s Dirty Little Secret? By Thomas W. Repczynski

“De facto wills?” you say. “Surely not in Virginia! proponent of the will must present clear and convinc- Did I miss a memo? Is the General Assembly even in ing evidence to establish that the testator intended the session?” document (or alteration) to effect a final testamentary Without so much as a tweet or a blog post, let disposition.8 If the evidence succeeds, the statute alone fanfare or a spread on the front page of Lawyers now affords recognition and legal acceptance of the Weekly, Virginia now recognizes “de facto wills.” testator’s insufficient effort. The statute expressly No one, it seems, has dared to so label them until permits admitting to probate writings “not executed now. Nevertheless, like Christmas in Seuss’s Who- in compliance with § 64.2-403” but otherwise sup- ville, de facto wills came just the same: “It came ported in court by convincing evidence of intention- without ribbons! It came without tags! It came ality and finality.9 Specifically, section 62.4-404 without packages, boxes or bags!”1 Chapter Two of provides as follows: the Virginia Practice Probate Handbook (updated in A. Although a document, or a writing added 2015) warns practitioners to “BE CAREFUL” of this upon a document, was not executed in com- “MAJOR CHANGE IN THE LAW.”2 So, how is it pliance with § 64.2-403, the document or that such a development carried no newsflash at all? writing shall be treated as if it had been The 2007 adoption (yes, I said 2007!) of what is executed in compliance with § 64.2-403 if now section 64.2-4043 opened wide the doors to prov- the proponent of the document or writing ing and probating attempts to document and effect establishes by clear and convincing evidence testamentary dispositions that would have failed that the decedent intended the document or before its enactment.4 An estates and trusts litigator’s writing to constitute (i) the decedent’s will, dream, “404” blurred a long-accepted and easily- (ii) a partial or complete revocation of the recognized “bright line” standard, replacing it instead will, (iii) an addition to or an alteration of with a fact-intensive, situation-specific approach. the will, or (iv) a partial or complete revival This relatively recent statutory shift–still only mini- of his formerly revoked will or of a formerly mally battle-tested here in the Commonwealth–has revoked portion of the will. long-time practitioners and judges alike re-evaluating what it takes for a document to be accepted as a will B. The remedy granted by this section (i) when the requirements of section 64.2-403 have not may not be used to excuse compliance with been met.5 any requirement for a testator’s signature, except in circumstances where two persons When is a will that is not a will capable of being mistakenly sign each other’s will, or a per- deemed a will? son signs the self-proving certificate to a There are now defined circumstances in which an will instead of signing the will itself and (ii) otherwise legally-deficient document intended as a is available only in proceedings brought in will be upheld as a valid will a circuit court under the appropriate provi- in Virginia. Section 64.2-404, is Virginia’s enact- sions of this title, filed within one year from ment of section 2-503 of the Uniform Probate Code the decedent’s date of death and in which all (UPC), the so-called “Harmless Error Rule.”6 The interested persons are made parties.10 rule states that certain defects may be forgiven if suf- ficient proof can be adduced that the testator intended The purpose of the Harmless Error Rule is to the faulty document to be the testator’s will.7 The allow a reviewing “court to excuse a harmless error in

page 12 Fall 2015 Trusts & Estates Newsletter complying with the formal requirements for execut- Here in Virginia, although reported cases even ing or revoking a will” in much the same manner as mentioning section 64.2-404 are practically non-exis- “has long been applied to defective compliance with tent, there have been a few occasions at the Circuit the formal requirements for nonprobate transfers,” Court level to apply the new statute. In the Estate as with life insurance beneficiary designations, for of Brown case in December, 2013, Fairfax County example.11 Case studies and evidence considered Circuit Court Judge Robert J. Smith analyzed section by the Uniform Law Commission (ULC), i.e., the 64.2-404, but ultimately rationalized around applying drafters of the UPC12, suggested that the remedial it, instead accepting a “conformed (unsigned) copy” impact of the new statute would primarily apply in of a will under the lost will doctrine.19 Judge Smith two cases: (i) failure to obtain signatures from one reasoned under the specific factual circumstances that or both attesting witnesses, so long as the will pro- the conformed copy could be admitted without apply- ponent could show that “the defective execution did ing the “saving statute” as he dubbed section 64.2- not result from irresolution or from circumstances 404, reasoning that the lost original of the same will suggesting duress or trickery–in other words, that had complied in full with the signature requirements the defect was harmless to the purpose of the formal- of section 64.2-403 prior to its loss and therefore “did ity”; and (ii) situations involving “alterations to a not need saving.”20 previously executed will” such as when “the testator In Palesis v. Hlouverakis, which may be the most adds a clause” or “crosses out former text and inserts direct application in Virginia to date, Henrico County replacement terms.”13 As noted by the ULC, “[l]ay Circuit Court Judge Catherine C. Hammond, admit- persons do not always understand that the execution ted to probate together (presumably as a single will) and revocation requirements of Section 2-502 call for both a photocopy of a 2011 and a fresh execution in order to modify a will; rather, lay signed, typed version of the 2011 will.21 Multiple persons often think that the original execution has trial witnesses testified to have seen the decedent continuing effect.”14 sign the typed copy, but none of the witnesses signed The only Virginia Supreme Court case address- the typed copy of the will. Having already consid- ing section 64.2-404 was in 2010 overturning a will ered and excluded a later 2012 will as “an elaborate contestant’s successful demurrer that had blocked fake,” undermined by “many preposterous circum- the probate of a holographic will containing several stances” and “false testimony” of the two attesting notations that were alleged to have been written by witnesses, Judge Hammond appeared to have little the will’s proponent at the specific request of the difficulty ascribing the requisite signatures to the decedent.15 The Court has not yet had occasion or earlier will as if the witnesses had actually signed.22 taken the opportunity to address the substance of sec- Despite the “unusual circumstances” of the case, tion 64.2-404;16 however, while we continue to await Judge Hammond concluded that the requisite clear substantive decisional authority in Virginia interpret- and convincing evidence standard had been met.23 ing section 64.2-404, we must look to other jurisdic- The testimony apparently supported findings that the tions that have adopted this UPC provision. In New original, handwritten will would not have remained Jersey, for example, the UPC’s Harmless Error Rule important to the testator and that the signed and has engendered a fair amount of activity. One par- typed, but “unwitnessed,” version of the document ticularly relevant example is In re Estate of Hoch.17 should be elevated to the same dignity “as if” prop- In Hoch, there was a dispute over a will that was erly witnessed under section 64.2-403. validly executed but later altered with cross-outs and Similarly, in one of several litigated matters additions that were initialed by the testator. Noting relating to the Estate of Marvin Sacks, the Arlington New Jersey’s adoption of the Harmless Error Rule, Circuit Court recently had occasion to address mul- the court applied the rule to give testamentary effect tiple facets of the statute under circumstances resem- to the testator’s alterations and to uphold the trial bling Hoch.24 The Sacks case involved section court’s admission of the revised will to probate.18 64.2-404 statutory challenges not only to alterations

page 13 Fall 2015 Trusts & Estates Newsletter to an existing will, but also to the statutory signature requirement.”29 Nevertheless, the ULC was ultimate- requirement itself. At the threshold, the respondent ly prepared to overlook as “harmless” in appropriate in Sacks sought to dismiss the petitioner’s effort to circumstances not only the attestation requirements, probate a “de facto will” by challenging the require- but also the signature requirement itself. Known for ment for a testator’s “signature” found in section refusing wholesale adoption of uniform codes and 64.2-404; however, the court explained that the acting consistent with this general approach in this respondent had improperly conflated the section instance, the General Assembly saw fit to adopt the 64.2-404 signature requirement with the provisions UPC’s saving provision without accepting the entire- under section 64.2-403 regarding “execution” of a ty of the UPC;30 however, Virginia legislators were will. Although section 64.2-404 specifically refer- collectively unwilling to be nearly as forgiving as the ences a requirement for a “testator’s signature,” it is ULC would have intended.31 With the addition of important to note that it does not require “execution” section 64.2-404(B), the Virginia General Assembly of the writing in question by the testator as would oth- clearly determined to limit the reach of UPC Section erwise be mandated by section 64.2-403. The words 2-503 (with the signature requirement alone serv- “signature” and “execution” are most certainly not ing to circumscribe the list of potentially “harmless interchangeable in this regard. errors” covered by the UPC’s form provision). By Section 64.2-404(A) actually references the exe- stopping short of mandating either attestation or exe- cution requirements of section 64.2-403 twice.25 Had cution, section 64.2-404 leaves open plenty of room the Virginia General Assembly intended the words for fact-specific litigation. Those contending that a “testator’s signature” found in section 64.2-404(B) broader read of section 64.2-404(B) encompasses a instead to mean a document “executed in compliance signature requirement and arguing that to rule other- with § 64.2-403,” then presumably they would have wise threatens a flood of litigation should recognize used the same language.26 Moreover, reading the the near absence of litigation on the issue since the word “signature” to mean “execution” or “attesta- adoption of section 64.2-404 in 2007. tion” as required by section 64.2-403 would lead to One must be careful not to read the statutory lan- an absurd result rendering section 64.2-404(A) entire- guage requiring “compliance with any requirement ly meaningless.27 Under such an interpretation, all for a testator’s signature” to relate to all requirements writings intended as wills described in section 64.2- “about” or “relating to” the circumstances of the 404 would have to be executed in compliance with signature itself. Such a reading would be inconsis- section 64.2-403 except in the two (2) circumstances tent with the statutory language and the intent of the described in section 64.-2404(B), thereby defeating Virginia drafters in adding this limitation to the harm- the purpose of section 64.2-404 in the first instance. less error provision. Generally speaking, reference to Section 64.2-404(A) expressly permits writings “not a “signature requirement” in provisions of both the executed in compliance with § 64.2-403” to be admit- UPC and other uniform code enactments in Virginia ted to probate under the relevant circumstances. It are to the more general concept merely that there was and is the primary purpose of the Harmless Error must be a signature of the testator on the document Rule’s adoption. itself.32 Section 64.2-404(B) requires a signature and differs materially in this respect from the standard Clear and convincing evidence? language proposed by the ULC. The comments to Before 2007, all wills and changes to wills had to UPC Section 2-503 note that “[w]hereas the South be signed in accordance with section 64.2-403, With Australian and Israeli courts28 lightly excuse breach- the adoption of section 64.2-404, the law in Virginia es of the attestation requirements, they have never has certainly changed. So what evidence is needed to excused noncompliance with the requirement that meet the clear and convincing standard? a will be in writing, and they have been extremely Below is a non-exhaustive list of factors to take reluctant to excuse noncompliance with the signature into account when evaluating a potential section

page 14 Fall 2015 Trusts & Estates Newsletter 64.2-404 case. When assessing whether the poten- one’s own hand, however, and for at least the past 70 tially supporting evidence is sufficiently more than a years or more, such a change was ineffective per se34. mere preponderance for or against, one should con- Not so anymore since 2007 with what is now codified sider evidence of the following factors along with any as section 64.2-404. other evidence tending to support or refute whether It would seem malpractice carriers should all the document in question truly reflects the decedent’s justifiably be charging less (and litigators perhaps testamentary intentions (and not merely draft consid- more?!) now that will formality mistakes can be fixed erations) at the time the document was made: and wrongs righted with sufficient evidence of intent. • De facto will signature but no signing.33 In any event, unlike Dr. Seuss’s Grinch (and in hom- • Witnesses to the de facto will (formally “wit- age to Theodor Geisel himself) suffer not your “puz- nessed” (i.e., signed) or mere observers). zler” to be sore; not long nor hard should you need • Age of the testator at the time of the making of puzzle at all knowing now as you do, if you didn’t the de facto will. before, for safe harbor you need look no farther than • Temporal proximity of the de facto will to the “404.” S onset of testator’s terminal condition or date of death. Mr. Repczynski is a Shareholder in Offit Kurman’s Tysons • Questions or concerns (including possible Corner office. An estates and trusts litigator admitted to prac- undue influence) regarding capacity of the tes- tice in Virginia, Maryland and D.C., Mr. Repczynski has been tator. named to the Super Lawyers® annual list of Virginia Estate and • (In)consistency of the de facto will provision(s) Trust Litigation attorneys (for both 2014 and 2015). Currently with previously articulated intentions (docu- serving as Vice President and Member of the Board of the mented and undocumented) of the testator. Fairfax Bar Association, Mr. Repczynski maintains a general • (In)consistency of the manner of document commercial and civil litigation practice with an emphasis on creation with prior testamentary dispositions fiduciary disputes, creditors’ rights enforcement (including and current changed circumstances (e.g., typed creditor-side bankruptcy representation), and real estate related verse holographic, physical or mental impair- matters of all types. A former President and member of the ments impacting writing). Board of Directors of the Northern Virginia Bankruptcy Bar • Motivation(s) and incentive(s) for the de facto Association, he represents an array of lenders, businesses, and will proponent to lie. individual clients from across the country in federal, bank- • Level of independence of source of informa- ruptcy, and state court and administrative proceedings with tion. a broad range of creditors rights issues, trust and estate (i.e. • Status of the testator’s most recent prior known related) disputes, and general business and testamentary disposition documentation. issues. X • Access to the de facto will and other will(s) at issue. (Endnotes) • Credibility or impeachability of the de facto 1. DR. SEUSS, HOW THE GRINCH STOLE CHRISTMAS! will proponent’s witnesses. (1957). For as long as people have attempted testamentary 2. Frank O. Brown, Jr., Va. Prac. Probate Handbook § 2:3 dispositions of property in Virginia, they have been (Westlaw 2015). expected and required to adhere to particular formali- 3. All section references are to the Virginia Code unless oth- ties to create a presumption of validity. Exceptions erwise noted. 4. VA. CODE ANN. § 64.2-404 (formerly VA. CODE ANN. have been introduced along the way allowing for such § 64.1-49.1). circumstances as when one deems it appropriate to 5. VA. CODE ANN. § 64.2-403 sets forth the requirements dispose of one’s property exclusively in one’s own for a valid will. hand. Attempt an unwitnessed holographic change 6. See UNIF. PROBATE CODE § 2-503 (UNIF. LAW to a testamentary document not otherwise solely in COMM’N 2010).

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7. UNIF. PROBATE CODE, Art. II, pt. 5, cmt. at 138 (UNIF. 483 (2008) (“[R]ules of statutory interpretation argue against LAW COMM’N 2010) (“[T]he purpose of validating wills reading any legislative enactment in a manner that will make a whenever possible has been strengthened by the addition of a portion of it useless, repetitious, or absurd.” (quoting Jones v. new section, Section 2-503, which allows a will to be upheld Conwell, 227 Va. 176, 181 (1984)). despite a harmless error in its execution.”). 28. In support of moving in this “trending” direction away 8. See VA. CODE ANN. § 64.2-404. from the often very harsh results and generally unintended con- 9. See id. sequences of decedents having failed to adhere strictly to statu- 10. Id. tory signing formalities, the ULC cited extensively to studies 11. UNIF. PROBATE CODE § 2-503 cmt. at 142 (UNIF. LAW conducted of both South Australian and Israeli experience with COMM’N 2010). similar “saving provisions.” See UNIF. PROBATE CODE § 12. The ULC, also called the National Conference of Commis- 2-503 cmt. at 142-143 (UNIF. LAW COMM’N 2010). sioners on Uniform State Laws, considered at length similar leg- 29. See id. at 143. islation enacted in South Australia (1975) and in Israel (1965), 30. Virginia is not counted among the only 16 states to have and studies on the impact and effectiveness of the legislation adopted the UPC in its entirety. Virginia’s version of the UPC’s in these jurisdictions. See UNIF. PROBATE CODE § 2-503 Harmless Error Rule includes Subsection B, none of which cmt. at 142-143 (citing numerous reports and also noting “[t]he appears as part of UPC Section 2-503. measure accords with legislation in force in the Canadian prov- 31. Contra UNIF. PROBATE CODE § 2-503 (UNIF. LAW ince of Manitoba and in several Australian jurisdictions. The COMM’N 2010) with VA. CODE ANN. § 64.2-404(B). Uniform Laws Conference of Canada approved a comparable 32. See, e.g., UNIF. PROBATE CODE § 2-513 cmt. at 157 measure for the Canadian Uniform Wills Act in 1987”). (“The signature requirement is designed to prevent mere drafts 13. UNIF. PROBATE CODE § 2-503 cmt. at 142-43 (UNIF. from becoming effective against the testator’s wishes. An LAW COMM’N 2010). unsigned document could still be given effect under Section 14. Id. at 143. 2-503, however, if the proponent could carry the burden of prov- 15. See Schilling v. Schilling, 280 Va. 146 (2010) (remanding ing by clear and convincing evidence that the testator intended for further proceedings to allow will’s proponent opportunity to the document to be effective.”); see also UNIF. PROBATE adduce sufficient evidence under “harmless error” statute). CODE § 6-201(10)(“special requirements concerning necessary 16. See Hampton Roads Seventh-Day Adventist Church v. signatures”); VA. CODE ANN. § 8.9A-502, cmt. 3 (“signature Stevens, 275 Va. 205, 212 (2008) (acknowledging but declining requirement” referencing need for a signature) (UCC context); to consider new statute having determined the signature require- VA. CODE ANN. § 55-79.71:1(C) (Condominium Act); VA. ments sufficiently followed prior version of section 64.2-403). CODE ANN. § 55-515.3(C) (“An electronic signature meeting 17. No. A-0758-10T2, 2012 WL 1379846 (N.J. Super. Ct. App. the requirements of applicable law shall satisfy any requirement Div. Apr. 23, 2012). for a signature under any declaration or bylaw provision or any 18. See id. at *5. provision of this chapter.”) (Property Owners Association Act). 19. In re Estate of Brown, 87 Va. Cir. 353, 355-58 (2013). 33. Recognize that being signed by the decedent and having the 20. See id. at 358. signature of the decedent on the document are not necessarily 21. See 88 Va. Cir. 293, 296-97 (2014). the same. 22. See id. at 295. 34. See Triplett v. Triplett, 161 Va. 906 (1934). S 23. See id. at 297. 24. See Fain v. DaSilva (In re Estate of Marvin Sacks), CL13- 334-03, Order dated Feb. 14, 2014 (denying plea without opin- ion). The author represented Petitioner Sharon Fain in the trial court proceedings. 25. VA. CODE ANN. § 64.2-404(A) (“Although a document, or a writing added upon a document, was not executed in com- pliance with § 64.2-403, the document or writing shall be treated as if it had been executed in compliance with § 64.2-403….”) (emphases added). 26. See Hubbard v. Henrico Ltd. P’ship, 255 Va. 335, 339 (1998) (“[W]hen the legislature has used words of a clear and definite meaning, the courts cannot place on them a construction that amounts to holding that the legislature did not intend what it actually has expressed.”). 27. See Lynchburg Div. of Soc. Servs. v. Cook, 276 Va. 465,

page 16 Fall 2015 Trusts & Estates Newsletter Tips from a Fiduciary Accounting Professional (a.k.a. How to Delight Your Commissioner of Accounts)

By Kelly J. Pinckard, CPA

If almost 10 years of specializing in fiduciary Inventory and Accounting Filings accounting for estates, trusts, conservatorships, and Know What is Due, When it is Due, and Why it is guardianships has taught me one thing, it is this: “If Due. Ensure your clients are in compliance with all your Commissioner of Accounts ain’t happy…ain’t of these filing deadlines: nobody happy.” • Affidavit of Notice. Within thirty (30) days It is sometimes necessary to look at something after the fiduciary qualifies on an estate, the from 10,000 feet in order to understand why a fiduciary is required to send notice to certain Commissioner of Accounts (“COA”) can be so par- individuals.2 The fiduciary must then file ticular about seemingly inconsequential or immate- the Affidavit of Notice with the clerk’s office rial transactions or assets. A COA can care as much by which the fiduciary confirms the requisite about a specific bequest of $50,000 as the COA does notices were sent.3 The Affidavit of Notice is about a specific bequest of a nominally valued, but due within four (4) months of qualification.4 sentimental, piece of jewelry. COAs are appointed • Inventory for Estate. The inventory is due by judges of the various circuit courts across Virginia, within four (4) months of the fiduciary’s and are responsible for protecting the interests of the date of qualification.5 The inventory is like beneficiaries and creditors of an estate.1 Making the a photograph taken at a moment in time: it job of COAs and their audit staff easier by preparing is a picture of the decedent’s assets as of the accountings that have anticipated and addressed all of decedent’s date of death.6 the possible questions they could ask and documenta- • Account for Estate. The first accounting is tion they could request, will put you well on your way due within sixteen (16) months of qualifying to delighting your COA. as fiduciary of an estate, and “technically” Having a background in auditing with a Big Six covers the period from the date of qualifica- accounting firm, as well as experience in internal tion through twelve (12) months after the audit and forensic accounting, I have approached date of qualification.7 Do not let this time the preparation of my fiduciary accountings first and period fool you; the COA actually wants you foremost as an auditor. In a sense, I work backwards to report the transactions from the decedent’s from what I envision the accounting should look like date of death through twelve (12) months in order to pass an audit and be approved by the COA. after the date of qualification. Although Having an accounting approved by the COA without the COA typically does not want to receive any exceptions results in a happy COA. Going above accounting reports for longer than a twelve and beyond what the COA might expect in terms of (12) month period, this is not the case for a preparing an accurate accounting history with all sup- first accounting. Unless the qualification date porting documentation and including the filing fee is within two or three weeks following the with the submission equals a delighted COA. date of death, the first accounting will typi- I have compiled some accounting tips from my cally cover a period of thirteen (13) through many years of preparing fiduciary accountings that fourteen (14) months. If the inventory is a I hope will be of use to both attorneys who dabble in photograph, the accountings are the story told probate as well as seasoned probate attorneys. from the date of the photograph (i.e., the date

page 17 Fall 2015 Trusts & Estates Newsletter of death) through the closing of the estate. unrealized. • Tax Certificate. Many COAs require the filing of a one page Tax Certificate which Automatic Withdrawals and Debits. Some COAs simply attests to the fact that all necessary encourage fiduciaries to immediately stop automated and required tax filings, both individual and payments because there is an insufficient paper trail fiduciary, have been completed and related to accurately identify the purpose for the debit. For taxes paid.8 The Tax Certificate should be example, if there is more than one real property, it filed with the final accounting.9 may be difficult to know which payment to the elec- • Inventory for Trust. The inventory for a testa- tric company is attributable to which real property. mentary trust is due within four (4) months of Other COAs may not mind the automatic debits, but the later of: (i) the date of qualification; or (ii) even in these cases it is wise to show at the outset that the first funding of the .10 the monthly automatic debit is related to a particular Similar to an inventory for a probate estate, it monthly administration expense. Know what your is a snapshot of the value of the assets when COA prefers, and provide that—preferably with a they are received by the fiduciary.11 smile. • Account for Trust. The first accounting for a testamentary trust covers the period begin- Remember there is an Order of Priority for ning with the date of qualification through Disbursements. If there are sufficient assets in the December 31st of that calendar year.12 The probate estate to pay all debts and expenses, the order first accounting is due by May 1st of the fol- of payment does not matter; however, if the estate is lowing year.13 Subsequent accountings cover insolvent, or has the potential to become insolvent, January 1st through December 31st, and the order in which debts and expenses are paid does are due by May 1st of the following year.14 matter.16 The fiduciary can become personally liable Similar to the accounting for a probate estate, if a creditor is paid out of order, is paid too much, or the accounting for a testamentary trust is a is paid at all.17 Insolvent estates are required to pay report of the trust’s transactions through- debts and claims against the estate in the following out the period. If you know the difference order: between income and principal receipts and 1. Administrative expenses of the estate (luckily, income and principal disbursements, your that includes us!); COA will be extra delighted.15 2. Certain family and homestead allowances; 3. Funeral expenses not to exceed $4,000;18 Do Not Forget to Report Gains and Losses on 4. Debts and taxes given priority under Federal Investments. One of the main reasons clients seek law; professional assistance with the preparation of fidu- 5. Medical and hospital expenses of the last ill- ciary accountings is because they cannot get their ness of the decedent, including compensation accounting to balance. One of the common reasons of persons attending to the decedent, not to for this frustration is because the gains and losses on exceed $2,150 for each hospital and nursing asset sales and dispositions are incorrectly reported home and $425 for each person furnishing on the accounting. Investments should be reported goods and services; at carrying value, increased by additions, reinvested 6. Debts and taxes due to the Commonwealth; dividends, and reinvested capital gains, and decreased 7. Debts due by the decedent acting in a fidu- by withdrawals and investment fees. Capital gains ciary capacity for another; and losses on the sales of these investments should 8. Debts and taxes due to localities and munici- be reported only when the asset is sold or otherwise pal corporations of the Commonwealth; and disposed. It is important to note that market fluctua- 9. All other claims.19 If there are estate funds tion is not reported because these gains and losses are remaining available to pay all other claims

page 18 Fall 2015 Trusts & Estates Newsletter (after paying the priority claims above), then and never do so when there are strained family rela- the fiduciary will need to prorate payments to tionships. these creditors based on each creditor’s per- centage of such creditor’s claim in relation to Refunding Bond. Protect your clients by having all the total of all other claims. beneficiaries sign a Refunding Bond. In some cases it can be argued that the Refunding Bond is only as Reimbursement of Expenses Paid by Fiduciary. good as the paper on which it is written, but better Whenever the fiduciary is reimbursed by the estate, to have a signed Refunding Bond which documents the supporting documentation required is the same as the intention of a beneficiary to refund money to the if the expense had been originally paid by the estate estate if unexpected debts of the estate come to light itself, but there is the added requirement to prove that after the estate is closed. Beneficiaries should be this expense was in fact paid by the fiduciary.20 It is made aware that had these debts come to light prior best to provide proof of payment from the fiduciary’s to final distributions, their final distribution amount own funds (e.g., check copy or copy of credit card would have been reduced by their prorated share of statement) as well as a copy of the invoice being paid. the debt anyway.

Insolvent Estates and Protection Offered by Debts Fiduciary Compensation. COAs generally accept, and Demands Hearing. An estate may appear to be and may even encourage, the use of an outside pro- solvent, but after further investigation is determined fessional, but be sure to know when it is appropriate to be insolvent. In situations like this, having a Debts to deduct these professional fees from your client’s and Demands Hearing and subsequently obtaining an fiduciary compensation. Increases in fiduciary com- Order of Distribution is a process that offers the most pensation may be allowed if the fiduciary provides a protection to the fiduciary.21 This process will direct written explanation to the COA detailing the manner a fiduciary with respect to the payment of debts and in which the fiduciary went above and beyond the expenses of the estate, and guide a fiduciary through responsibilities that are normally expected. Even in proper distributions to beneficiaries. While it is a these instances, however, the fiduciary must reduce longer process that involves additional fees, insolvent the fiduciary’s compensation by the fees paid to estates are one situation where it is better to ask per- any professionals who performed duties that could mission now than to ask for forgiveness later. reasonably have been performed by the fiduciary. Typically, this does not include legal fees or tax Cash Distributions to Beneficiaries. Many COAs preparation fees, but may include fees related to the do not recommend distributing cash to beneficiaries preparation of the inventory and accountings. via cashier’s checks. Typically, this situation arises only at the time of final distributions for the final Filing Fees. Calculate the filing fees correctly, and accounting. If the checks are lost, it is like losing include a check payable to the COA along with your cash. In family situations with strained relationships, submission. By doing this every time, the COA does a beneficiary may receive a cashier’s check, but a not have to waste time requesting the filing fee. fiduciary would have a hard time proving the benefi- ciary received the cashier’s check if the beneficiary Statement in Lieu – Know When Your Client Has refused to sign a receipt. Issuing a check from the Hit the Jackpot. When the stars have aligned for a estate account is preferred by many COAs. In some fiduciary, the fiduciary qualifies for the Statement in circumstances, I prefer to use cashier’s checks during Lieu of Settlement of Accounts. Know when your a final accounting due to the immediate deduction of clients qualify for this short form. Even though they funds from the estate account. I only do so, however, have qualified as fiduciary, they may not be aware in situations where I am comfortable and confident that their reporting responsibilities are significantly that the beneficiary will sign the distribution receipt, reduced by qualifying for a Statement in Lieu. This

page 19 Fall 2015 Trusts & Estates Newsletter happens when the fiduciary is the sole residual ben- COAs. The fiduciary is also responsible for filing the eficiary of an estate.22 It can also happen when final individual income taxes of the decedent (Federal co-fiduciaries are co-residual beneficiaries of an and state), as well as any fiduciary tax returns that are estate.23 The requirements for filing a Statement in required to be filed on the estate’s or trust’s behalf. Lieu are that all debts and expenses of the estate must Estates and trusts are their own taxable entities, com- be paid, all specific bequests must have been distrib- plete with their own taxpayer identification numbers. uted, and six (6) months must have passed from the For any taxable year in which an estate has $600 date the fiduciary qualified before the Statement in or more of gross income or a trust has any taxable Lieu can be filed.24 income or gross income of $600 or more, Federal and state fiduciary tax returns must be filed.25 Proper Record Keeping. Encourage your clients, if they have not done so already, to keep a meticulous Don’t Print Your Reports with Gray Shading. set of bank and investment account statements, copies Inventory and accounting forms found online have of canceled checks (front and back), and receipts or gray shading so that you may type directly in the copies of invoices paid. It is better to go overboard online forms themselves. You must eliminate the on your supporting documentation than to be lacking. shading in the online form before submitting the Fiduciary accountings are similar to telling a story, finalized form for filing. and it is best to not have pages missing from the story. Know When to Say When. In estate planning Delinquency. The word itself gives rise to bad feel- and matters of probate and , CPAs need ings, but we are in a position to turn things around the expertise of attorneys. Likewise, in matters of for these “special” clients. When clients come to us fiduciary accounting and taxation, attorneys should in a delinquent status, right out of the gate they are feel comfortable seeking the expertise of a fiduciary behind the eight ball. I have had clients delinquent by accounting professional or CPA. We can and should months; I have had clients delinquent by years; I have work together to deliver a service to our clients and had clients call me and say, “This is our most desper- to the COA that is so far superior that word of mouth ate hour. Help me Obi-Wan Kenobi, you’re my only alone will keep our firms running. S hope.” No matter the reason for the desperate call, these clients need a special kind of hand-holding, and it is during these times that we as CPAs and attorneys Kelly J. Pinckard, CPA is the founder and owner of Estate can really gain the trust and respect of our clients. It Accounting Solutions, a Virginia-based accounting firm that is also during these times that we as professionals specializes in the preparation of fiduciary accounting reports can truly be of assistance to the COAs. Oftentimes, for estates, trusts, conservatorships, and guardianships, as well delinquent clients can become a burden to the COA as all related tax returns. Kelly graduated summa cum laude and the COA’s staff, as they are often inundated with from Gettsyburg College in 1998 with a degree in economics phone calls, emails, and erroneous or incomplete fil- and a concentration in accounting. Upon graduation, Kelly ings. We can alleviate this burden by preparing these passed the CPA Exam in her first and only sitting in November reports in a way the COA could have only hoped the 1998. delinquent fiduciaries could accomplish on their own. Kelly worked as an auditor for Big Six firm Arthur “Happy wife, happy life?” No, it’s more like: “Not Andersen in Baltimore, and subsequently as an internal auditor delinquent for one more day, delighted COA.” at Johns Hopkins Hospital. Looking for a more varied experi- ence in the accounting industry, she independently contracted Other Tasks corporate accounting services in the fields of healthcare and Don’t Forget Taxes. Remember that a fiduciary is manufacturing. not only responsible for the proper administration of Currently, Kelly sits on the Board of Directors for her chil- the estate or trust and the reports that are due to the dren’s charter school and is active in her church. She enjoys

page 20 Fall 2015 Trusts & Estates Newsletter long distance running and ironman distance triathlons. X

(Endnotes) 1. See VA. CODE ANN. § 64.2-1200. 2. Id. § 64.2-508. 3. See id. 4. Id. 5. Id. § 64.2-1300(A). 6. See id. § 64.2-1300(D). 7. See id. § 64.2-1304. 8. See id. § 58.1-22. 9. See id. § 58.1-911. 10. See id. § 64.2-1300(C). 11. See id. § 64.2-1300(D). 12. See id. § 64.2-1306. 13. Id. § 64.2-1306(A). 14. See id. 15. See id. §§ 64.2-1000 to -1032. 16. See id. § 64.2-529. 17. See id. 18. If a fiduciary comes to you after having already paid in excess of $4,000 from an insolvent estate for funeral expenses, the fiduciary will be required to reimburse the estate for the amount paid in excess of $4,000. 19. See VA. CODE ANN. § 64.2-528. 20. See id. § 64.2-1311. 21. See id. §§ 64.2-550, -553. 22. See id. § 64.2-1314. 23. See id. 24. See id. 25. I.R.C. § 6012; see, e.g., VA. CODE ANN. § 58.1-381(A) (1). S

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Trusts and Estates Section Board of Governors 2015-2016

Jennifer E. Shirkey Lauren A. Jenkins Mark V. Pascucci Chair Newsletter Editor Board of Governors Lenhart Pettit, P.C. Offit Kurman Wolcott Rivers Gates Suite 201 8000 Towers Crescent Dr., Suite 1500 200 Bendix Rd Ste 300 90 North Main Street Tysons Corner, VA 22182 Virginia Beach, VA 23452 Harrisonburg, VA 22802 703-745-1821 757-470-5553 540-437-3108 Jennifer L. Schooley Robert F. Peel (Rob) Jennifer L. Moccia Assistant Newsletter Editor Board of Governors Vice Chair Schooley Law Firm, P.C. Jones, King, Downs & Peel, P.C. Rack & Olansen, P.C. Suite 230 P.O. Box 1689 Suite 220 3901 Westerre Pkwy Bristol, VA 24203-1689 249 Central Park Avenue Richmond, VA 23233 423-764-5535 Virginia Beach, VA 23462 804-270-1300 757-605-5000 Heather H. Szajda H. Michael Deneka Board of Governors C. Daniel Vaughan (Dan) Board of Governors Heather H. Szajda, PLC Secretary Deneka Law Firm, P.C. 9702 Gayton Road, Ste. 303 Vaughan, Fincher & Sotelo, P.C. Suite A Henrico, VA 23238 Suite 400 2758 Electric Road 804 317-7932 8609 Westwood Center Drive Roanoke, VA 24018 Vienna, VA 22182 540-725-5800 Dolly Shaffner 703-506-1810 Liaison James W. Garrett (Jim) Virginia State Bar C. Arthur Robinson, II Board of Governors 1111 E Main St Ste 700 Immediate Past Chair Carrell Blanton Ferris & Associates, Richmond, VA 23219-0026 Wolcott Rivers Gates PLC Convergence Center IV Forest Plaza II, Suite 310 Suite 500 7275 Glen Forest Drive 301 Bendix Road Richmond, VA 23226 Virginia Beach, VA 23452-1385 804-285-7900 x108 757-470-5551 Lisa M. Hughes Board of Governors Yates Campbell & Hoeg LLP 4165 Chain Bridge Road Fairfax, VA 22030 12/2015 703-896-1154

http://www.vsb.org/site/sections/trustsandestates/te-board-of-governors

NEWSLETTER Trusts and Estates Virginia State Bar 1111 East Main Street, Suite 700 Published by the Virginia State Bar Trusts and Estates Section for its members Richmond, Virginia 23219-0026

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