In the right circumstances, irrevocable estate documents can be changed.
From time to time, mistakes may occur in drafting legal documents or clients may fail to fully comprehend their meanings. A trust may inadvertently not contain a clause that is required to avoid adverse tax consequences, and these effects may not be understood or appreciated until much later. When working with clients, lawyers may explain the implications of particular documents, but that doesn't mean the client truly understands the meaning.
In other instances, changes in tax laws create unforeseen consequences that run contrary to the settlor's intent. To redress these situations, there are instances where even presumably irrevocable estate planning documents have been reformed, or in rare situations rescinded, to more accurately reflect the intent of the testator, grantor or settlor. Let's discusses some instances in which courts have permitted such documents to be reformed or rescinded.
The duty of the courts is to ascertain the intent of the testator, grantor or settlor (all of whom we'll refer to as settlors for the sake of brevity), and to the extent it can be proven that the document conflicts with that intent, the document is reformed or rescinded. In Massachusetts, where the author practices, the law is that written instruments may be reformed to conform to the settlor's intent upon a finding of clear and decisive proof of that intent. This is a high burden of proof, greater than that typically required in a civil case.
Proving a mistake clearly and decisively can be difficult, particularly when the settlor is deceased. Courts will, however, consider the written instrument and the circumstances known to the settlor or grantor at the time the document was executed. Additionally, statements made by the settlor may be admissible. The attorney who drafted the estate planning documents is a critical witness in the case. He or she is typically in a good position to comment on the settlor's intent.
Here are some examples of instances in which the court exercised its power to reform or rescind the instrument.
To Avoid An Avoidable Tax Burden
One example of when reformation may be allowed is when the court finds that the instrument, as drafted, creates tax consequences that clearly conflict with the settlor's objective. A party seeking reformation to avoid an adverse federal tax consequence will need to obtain a decision by the highest state court; a lower court decision is not binding on the Internal Revenue Service. Two examples of instances in which reformation has been allowed involve the Generation Skipping Tax and the marital deduction.
A generation-skipping transfer tax ("GST") is imposed whenever estate assets are transferred to a family member who is more than one generation removed from the settlor or testator (e.g., grandparent to grandchild). Reformation of a trust has been allowed when the settlor had established a trust that eventually distributed its assets to various trusts for the benefit of the settlor's grandchildren. The settlor sought reformation because she did not intend to trigger the GST, which imposed a significantly higher tax burden on the trust property and, therefore, wished to name her children as beneficiaries. In this case, the settlor initially held the trust in a qualified personal residence trust and, only if she failed to survive the term of the trust, did the property move into the grandchildren's trusts. The court found that the relief sought was justified under a theory of mistake in that the settlor would not have intended the higher tax burden imposed by the GST and, therefore, would have named her children as beneficiaries rather than her grandchildren.
Another instance in which reformation of an otherwise irrevocable trust has been allowed, in order to avoid unintended tax consequences, is when the trust instrument fails to utilize properly a settlor's federal estate tax marital deduction. The marital deduction allows spouses to transfer an unlimited amount of property to one another. In order for a trust to qualify for the marital deduction, it must provide qualifying income to the surviving spouse for life. In instances where the court has found the settlor intended that the trust qualify for the marital deduction, yet the instrument failed to provide a qualifying income interest to the surviving spouse, the court has allowed the trust instrument to be reformed accordingly.
To Remedy A Mistaken Belief By The Grantor As To The Legal Effect Of The Document
Though unusual, there are instances where courts have reformed or even rescinded deeds as well. Theories under which a deed may be either reformed or rescinded include mistake and undue influence. An area where mistakes may arise is in the context of life estate deeds, an estate planning tool used with some frequency by some practitioners.
Because life estate deeds are often but one part of a larger estate plan, they have been known to cause confusion on the part of the grantor. A typical estate plan includes a number of documents that may be revoked or changed at any time, such as a will, a revocable trust, a health care proxy and a power of attorney.
Some lawyers suggest life estate deeds to offer a client protection of his/her residence from creditors or to avoid probate. A life estate deed allows the current owner to deed the property to another, yet reserve the ability to live in and/or receive rent from the property until his/her death. Unlike the will, revocable trust, health care proxy and power of attorney, the life estate deed is irrevocable. Within the context of the entire estate plan, this fact may be overlooked or not adequately emphasized, particularly when the plan does not include an irrevocable life insurance trust. Lawyers may assume their clients understand that a life estate deed is no different than a typical deed in that it is irrevocable. Some elderly clients may misunderstand and believe that the life estate deed can be changed at any time prior to their death. This misunderstanding can lead to problems should the person later regret the decision to transfer property through a life estate deed, or change his/her mind about who is to receive the remainder interest.
A life estate deed may be reformed or rescinded when the grantor
mistakenly believed that the deed could be changed. As in the trust
reformation cases, a high standard of proof is required.
Another avenue of recovery seeking to reform or rescind a deed or other document may be through a claim of undue influence. Simply put, undue influence is any force that works against one's free will and constrains an individual to take any action or inaction that is contrary to what he or she would otherwise do. In many instances, a finding of undue influence necessarily rests on largely circumstantial evidence as direct evidence is, by the very nature of the claim, often difficult to establish. In this context, the grantor has the burden of proving he/she was unduly influenced.
The factual scenario under which a court may rescind a life estate deed pursuant to an undue influence claim may commonly arise in the situation whereby one who stands in a fiduciary relationship to the grantor exerts undue influence that results in the transfer. In such circumstances, the fiduciary may wish to ultimately benefit himself, while not wishing to displace the grantor during his/her lifetime. A fiduciary relationship may be found where there exists a special relationship pursuant to which an individual places particular trust in another. Common examples of fiduciary relationships are those of lawyer/client and parent/child, but they can also include relationships between caregivers and recipients. Once a fiduciary relationship is established, in some states, the burden shifts to the fiduciary to prove that the transaction in which he/she was involved was advantageous or otherwise fair to the beneficiary.
Although familial relations generally do not give rise to fiduciary duties, those relationships may become fiduciary in nature when one family member becomes dependent on the other for financial affairs or personal affairs. Even though gifts or other conveyances to family members are natural, once a fiduciary relationship is established, in some states the burden remains with the fiduciary to prove the transaction was fair to the beneficiary or that the fiduciary did not take advantage of the relationship. This circumstance will most frequently arise in the context of an elderly individual who may be under the influence of a family member, care provider or friend.
It may be possible that claims for mistake and undue influence may both arise in some circumstances. Consider, for example, the situation of an elderly individual whose cognitive abilities may be affected because of a degenerative disease or simply old age. In one case, the grantor was enfeebled with a degenerative condition that affected his mind, which made him particularly susceptible to undue influence. Given the grantor's condition, the court found he did not fully comprehend the significance of his acts. Though the court in this instance made its findings based upon the plaintiff's claim of undue influence, it appears from the court's opinion that the same result may have been achieved through a mistake claim. In a case tried by the author, however, the judge ruled that claims of undue influence and mistake were mutually exclusive.
In some circumstances, rescission or reformation is available when a document fails to reflect the settlor's, grantor's or testator's true intent. The proof must be clear and decisive but, if it is, courts will allow for the proven intent to prevail over the language of the document.
Mark S. Furman is the chairman of the litigation department at the Boston law firm of Tarlow, Breed Hart & Rodgers.