ISSUES IN ESTATE LITIGATION

Sponsor: Probate & Trust Law Section CLE Credit: 1.0

Friday, May 13, 2016 9:00 a.m. - 10:00 a.m.

Rooms 207-211 Kentucky International Convention Center

Louisville, Kentucky

A NOTE CONCERNING THE PROGRAM MATERIALS

The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program, in dealing with a specific legal matter have a duty to research original and current sources of authority.

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TABLE OF CONTENTS The Presenters ................................................................................................................. i Issues in Estate Litigation ................................................................................................ 1

Introduction .......................................................................................................... 1 Procedural Issues ................................................................................................ 1 Substantive Issues ............................................................................................... 4

THE PRESENTERS

Margo L. Grubbs Grubbs Law, PLLC

327 West Pike Street Covington, Kentucky 41011

(859) 341-2500 margo@grubbslaw.com

MARGO L. GRUBBS is the founding partner of Grubbs Law, PLLC and maintains a general practice with an emphasis in family law, medical negligence, catastrophic personal injury, wrongful death, discrimination issues, criminal defense, and general litigation. In addition, she is a Certified Family Mediator and General Mediator and a Certified Life Coach in Enneagram Studies. Prior to becoming an attorney, Ms. Grubbs served as District Detective, 16th Judicial District, Office of Commonwealth Attorney and as a Department of Public Safety Officer at Northern Kentucky University. She received her B.S. from Northern Kentucky University and her J.D. from Salmon P. Chase College of Law. Ms. Grubbs is a member of the Cincinnati, Northern Kentucky, Kentucky, and American Bar Associations, Kentucky Academy of Trial Attorneys, American Trial Lawyers Association, and the Salmon P. Chase American Inn of Court, where she served as President, 2001-2003. In addition, she is a Kentucky Bar Foundation Life Fellow. Brian M. Johnson Dickinson Wright, PLLC 300 West Vine Street, Suite 1700 Lexington, Kentucky 40507 (859) 899-8704 bjohnson@dickinsonwright.com BRIAN M. JOHNSON is a member of Dickinson Wright and practices in its Lexington office. His practice is focused in the areas of fiduciary litigation, toxic tort and environmental litigation and energy law. Mr. Johnson received his B.S. from Transylvania University and his J.D. from the University of Kentucky College of Law. He is admitted to practice before the United States Supreme Court and is a member of the Kentucky and Ohio Bar Associations. Mr. Johnson is listed in Kentucky SuperLawyers and Best Lawyers in America.

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ISSUES IN ESTATE LITIGATION Brian M. Johnson

I. INTRODUCTION

Many commentators expect estate-related litigation to increase in the coming years, due largely to the changing demographics of American society. Americans are living longer, sometimes resulting in less assets remaining to be inherited and more elbowing for those assets. Dementia is becoming an increasing problem with the aging population,1 creating more opportunities for the exercise of undue influence, or at least perceptions that undue influence is being exercised, upon the elderly. The potential for abuse has increased with the availability of estate planning forms on the internet, allowing people to create estate planning documents for others and persuading them to execute the documents. Other features of American families also raise issues that have been the subject of litigation and are likely to continue to generate litigation. Blended families present unique challenges in planning for the disposition of assets at the death of one of the parents. Adoptions carry estate planning consequences that are sometimes overlooked. The failure to update documents following divorce may lead to an undesirable and unintended disposition of certain assets. This presentation will discuss some of the procedural issues with estate litigation and highlight some of the issues courts have addressed and are likely to continue to see in coming years.

II. PROCEDURAL ISSUES

A. District Courts Have Jurisdiction over Most Matters Involving the Probate of an Estate

1. KRS 24A.120(2): District courts have exclusive jurisdiction over

"[m]atters involving probate, except matters contested in an adversary proceeding. Such adversary proceeding shall be filed in Circuit Court in accordance with the Kentucky Rules of Civil Procedure and shall not be considered an appeal."

2. Many of the district court's actions involving probate matters may

be challenged by appealing to the circuit court (e.g., approval of final settlement of estate).

3. "[I]t should be clear that the statutes, read together, require (1)

that all proceedings for the admission to probate of a will or codicil be commenced in the district court; (2) that the district court must either admit or reject the instrument; and (3) that the district court

1 A February 14, 2013, report of the Alzheimer's Association predicts the number of Americans suffering from dementia will increase to 13.8 million (a 300 percent increase) by 2050.

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retains jurisdiction over the matter until such time as a will contest, or adversary proceeding, is commenced in the circuit court." Mullins v. First American Bank, 781 S.W.2d 527, 528 (Ky. App. 1989).

B. Circuit Courts, However, Have Jurisdiction over Will Contests

1. KRS 394.240(1): "Any person aggrieved by the action of the District Court in admitting a will to record or rejecting it may bring an original action in the Circuit Court of the same county to contest the action of the District Court. Such action shall be brought within two (2) years after the decision of the District Court. The parties may, in the same action, or in a separate action if the validity of the will is not in issue, seek construction, interpretation or reformation of a will."

2. Any party challenging the admission of a will to probate must also

file a notice in the records of the county clerk.

a. KRS 394.240(2): "Upon filing an adversary proceeding in Circuit Court in matters involving probate whether in a testate or intestate proceeding or an action pursuant to subsection (1) of this section, the plaintiff shall forthwith lodge a notice of the action in the office of the county clerk of the county in which the will was admitted to probate or rejected, or if in an intestate estate in the office of the county clerk of the county in which the estate was probated. Such notice shall state the name of the testator, the style of the action, the court in which the action has been filed, the file number assigned to the action by the clerk of the court in which it has been filed, the nature of the action, and the date on which the action was commenced. Said notice shall be signed by plaintiff or his attorney and no jurat shall be necessary. The county clerk shall record and index said notice as if it were a will."

b. Although KRS 394.240(2) says the plaintiff "shall" file the

notice of action, failure to do so will not result in the dismissal of the will contest action. Justice v. Conn, 724 S.W.2d 227, 228 (Ky. App. 1987).

C. Federal courts may resolve claims involving an estate provided the issues

do not impact the probate of the estate. But where the resolution of the case would affect the probate process of the estate or the manner in which assets of the estate are to be distributed, federal courts will decline jurisdiction under what is known as the probate exception to federal jurisdiction.

1. Markham v. Allen, 326 U.S. 490 (1946): The Alien Property

Custodian, acting under the Trading with the Enemy Act, sought to recover property that would otherwise have passed to German

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legatees. The decedent's American heirs had previously filed an action seeking a declaration that the German legatees were ineligible as beneficiaries, thereby enabling the American beneficiaries to take the entire inheritance.

The Supreme Court acknowledged the probate exception and provided the history behind it. Prior cases had decided that probate matters were not "cases or controversies within the meaning of Article III of the Constitution"; thus, the federal courts did not have jurisdiction over them. Other cases had determined that the equity jurisdiction conferred by the Judiciary Act of 1789 did not extend to probate matters. The Supreme Court found the probate exception did not apply because the "effect of the judgment was to leave undisturbed the orderly administration of decedent's estate in the state probate court and to decree petitioner's right in the property to be distributed after its administration." Id. at 495.

2. Marshall v. Marshall, 547 U.S. 293 (2006): More recently, the Supreme Court addressed this exception in connection with claims asserted by Anna Nicole Smith (Vickie Marshall) against her stepson arising out of her husband's estate. Smith/Marshall filed a claim for tortious interference with a gift she alleged her late husband had intended to make to her. Her stepson had filed an adversary proceeding in Smith/Marshall's bankruptcy case alleging she had defamed him.

The Supreme Court held the probate exception did not apply to Smith/Marshall's claims: "Thus, the probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent's estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court. But it does not bar federal courts from adjudication of matters outside those confines and otherwise within federal jurisdiction." Id. at 311-12. As Smith/Marshall was seeking a judgment against her stepson for having interfered with the alleged gift, and was not attempting to recover that amount from the estate through a challenge to the probate proceedings, her claim could properly be resolved in federal court.

3. Wisecarver v. Moore, 489 F.3d 747 (6th Cir. 2007): A group of beneficiaries sued other beneficiaries alleging they had exerted undue influence on the testator to execute a will. They also asserted that the defendants had breached their fiduciary duties and engaged in fraud. The district court dismissed the case under the probate exception, but the Sixth Circuit reversed in part. As the claims for breach of fiduciary duty and fraud sought damages directly from the defendants rather than challenging the validity of

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the will, those claims were not subject to the probate exception and could be filed in federal court. The claims challenging the validity of the will, however, involved "the probate or annulment of a will and thus are barred by the probate exception." Id. at 751.

III. SUBSTANTIVE ISSUES

As noted above, families in which there are competing groups of beneficiaries are the most likely sources of estate litigation. Do the decedent's children suffer from poor family relationships with one another? Are there competing groups of children and stepchildren? Is a potential beneficiary's inheritance affected by adoption? And what role does a divorce play in estate-related litigation? A. Will Contests

1. As noted above, these cases are required by statute to be resolved in circuit court. The district courts do not have jurisdiction over "matters contested in an adversary proceeding." Where a beneficiary believes a will was procured through the exercise of undue influence, the beneficiary may challenge the district court's decision to admit the will to probate.

2. The will must actually be admitted to probate before a will contest

action may be brought. A beneficiary cannot preemptively file a will contest action.

3. Bye v. Mattingly, 975 S.W.2d 451, 455 (Ky. 1998): for a will to be

valid, the testator must at the time of executing it: "(1) know the natural objects of her bounty; (2) know her obligations to them; (3) know the character and value of her estate; and (4) dispose of her estate according to her own fixed purpose."

4. Typically, will contests will revolve around the alleged undue

influence exercised over the testator to cause her to execute a will that does not properly carry out the testator's intent and would lead to an unfair distribution of assets in favor of the person exercising influence over her.

5. Rothwell v. Singleton, 257 S.W.3d 121 (Ky. App. 2008).

a. "The essence of a claim of undue influence is that prior to or during the execution of the will, the testator was so inappropriately influenced that she no longer possessed the free will to dispose of her property in accordance with her own judgment."

b. "Because it is usually subtly imposed and exerted without

witnesses, direct proof of undue influence is generally unavailable."

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c. Courts, therefore, look for "badges of undue influence," which include: "[A] physically weak and mentally impaired testator, a will which is unnatural in its provisions, a recently developed and comparatively short period of close relationship between the testator and principal beneficiary, participation by the principal beneficiary in the preparation of the will, possession of the will by the principal beneficiary after it was reduced to writing, efforts by the principal beneficiary to restrict contacts between the testator and the natural objects of his bounty, and absolute control of testator's business affairs." Id. at 125 (citing Bye, 975 S.W.2d at 457 (internal citations omitted)).

6. The burden of proving the invalidity of the will rests upon the party

seeking to prove it was executed as a result of undue influence.

Crump v. Chenault, 156 S.W. 1053 (Ky. 1913): "The rule is well settled that, after due execution is proved by the propounders, the burden of showing that the instrument is invalid because" it was, "procured by the exercise of undue influence is upon the contestants. This must be shown by evidence at least tending to establish that undue influence was exercised upon the testator."

B. Breach of Fiduciary Duty

1. Cases involving claims of breach of fiduciary duty do not fall within the probate exception to federal court jurisdiction, as the claims are against the executor, individually, as opposed to challenging the manner in which the assets of the estate are to be distributed.

2. Breach of fiduciary duty claims may be barred as a result of

proceedings in the district court, however. The approval of an estate's final settlement that is not appealed to the circuit court bars a separate action for breach of fiduciary duty. In Maratty v. Pruitt, 334 S.W.3d 107 (Ky. App. 2011), the beneficiaries of an estate filed an action in circuit court alleging that the administratix of the estate had breached her fiduciary duties. Before that case was filed, however, the district court had approved the final settlement of the estate. The administratrix appealed the district court's decision, as it did not approve certain amounts to which she believed she was entitled. The beneficiaries did not appeal, but instead filed an action in circuit court claiming the administratrix had breached her fiduciary duties. The circuit court dismissed the action, and the Court of Appeals affirmed that decision, holding that the proper mechanism for challenging the actions of the administratrix was through an appeal of the approval of the settlement. Because the beneficiaries did not pursue that avenue, their claims in the circuit court action were barred.

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3. The fiduciary obligation owed by an executor to the estate is very high.

Bryan v. Security Trust Co., 176 S.W.2d 104, 107 (Ky. 1943): The duty owed by a trustee to a beneficiary is "that of uberrima fides, or utmost fidelity. As trenchantly stated by the distinguished jurist, Chief Judge Cardozo, in Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546, 62 A.L.R. 1: 'Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.'"

4. Traditionally, breach of fiduciary duty claims in the estate context have involved excessive fee charges and conflicts of interest. These general categories are probably still the major areas of litigation.

5. Excessive fees.

a. Kentucky's legislature has set a maximum fee that may be charged by an executor.

KRS 395.150(1): "The compensation of an executor, administrator or curator, for services as such, shall not exceed five percent (5%) of the value of the personal estate of the decedent, plus five percent (5%) of the income collected by the executor, administrator or curator for the estate."

b. The fee is based on the value of the personal property of the probate estate and is not based on the value of real property held by the estate.

c. The fee may be increased based upon extraordinary

activities undertaken by the executor.

KRS 395.150(2): "Upon proof submitted showing that an executor, administrator or curator has performed additional services in the administration of the decedent's estate, the court may allow to the executor, administrator or curator such additional compensation as would be fair and reasonable for the additional services rendered, if the additional services were: (a) Unusual or extraordinary and not normally incident to the administration of a decedent's estate; or (b) Performed in connection with real estate or with estate and inheritance taxes claimed against property that is not a part of the decedent's estate but is included in the decedent's estate for the purpose of asserting such taxes."

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d. A lawyer acting as executor of an estate may not take both a statutory executor's fee and a legal fee "absent approval of such an arrangement in the will." Hale v. Moore, 289 S.W.3d 567, 584 (Ky. App. 2008).

e. In Hale, the executor of the estate of Claudia Sanders, the

widow of Col. Harlan Sanders, took a fee based on the gross estate rather than the personal property and income of the estate. The executor also argued that the fee was warranted based on extraordinary services performed on behalf of the estate. The Court of Appeals disagreed, finding there was no proof in the record to support the argument.

f. Ethical issues also arise when an attorney acts as an

executor of an estate. In Kentucky Bar Ass'n v. Profumo, 931 S.W.2d 149 (Ky. 1996), the Supreme Court reviewed a decision of the Board of Governors imposing a suspension from the practice of law upon an attorney who took a large executor's fee, attorney's fee, and fee as a real estate broker in connection with the sale of the decedent's home. The Court emphasized that "any abuse of a fiduciary position can and should lead to disciplinary action by this Court when an attorney is involved." Id. at 151. Finding the actions of the lawyer to be egregious, the Court held that the "degree of discipline recommended by the Board of Governors is too lenient by far," rejecting its recommendation of a one-year suspension and instead imposing a three-year suspension.

6. Conflicts of interest.

a. A significant estate and trust case has been on-going for

years in the federal court in Covington, and a bench trial concluded near the end of 2015. As of the submission of these materials, the judge was considering post-trial submissions and had not decided the case.

i. Osborn v. Griffin involved the disposition of

interests in a large family business, with certain siblings challenging actions taken by others who had control of their parents' interests in the business.

ii. In September 2014, the court decided a number of

issues through a lengthy opinion providing the history of the conflict. In summary, some of the beneficiaries, who were actively involved in the family business, arranged for the transfer of shares of stock in the business to themselves prior to their father's death. Part of the arrangement included

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transfers of shares to grandchildren, with those shares subsequently being purchased by the beneficiaries at a discounted price. The children who were not working in the business did not receive shares through this plan, and there appears to have been a dispute as to whether they received notice that it was happening.

iii. The beneficiaries who were involved in the

business were acting as executors of their mother's estate, which owned some of the shares, as well as trustees of a trust established by their father, which also held shares. Accordingly, the court addressed the fiduciary duty issues in terms of both executor and trustee responsibility, treating the duty as the same in both instances.

iv. The court found that the controlling beneficiaries

had breached their fiduciary duty, owed as trustees, to keep the other beneficiaries reasonably informed of their interests in the trust. See Osborn v. Griffin, 50 F. Supp. 3d 772, 795 (E.D. Ky. 2014) (citing JP Morgan Chase Bank, N.A. v. Longmeyer, 275 S.W.3d 697, 701 (Ky. 2009).

v. The court also found, "perhaps most fundamentally,

an executor has a duty to distribute the assets of the estate either as directed by the will or provided by law." Id. (citing Schlickman v. Citizens' Nat'l Bank of Covington, 129 S.W. 823, 826 (Ky. 1910)).

b. Priestley v. Priestley, 949 S.W.2d 594 (Ky. 1997), is

important in a couple of respects. In Priestley, the decedent's wife acted as his attorney-in-fact prior to his death and as the administratrix of his estate. Acting as his attorney-in-fact, the wife engaged in a number of transactions that effectively transferred assets they held jointly into her own name. She also structured a settlement of her husband's claim against a hospital such that she would receive the bulk of it rather than having him receive it, thereby avoiding those funds ultimately becoming part of his estate. The decedent's children, who were born of a former marriage, sued the decedent's wife in her capacity as both attorney-in-fact and executrix.

With regard to the transactions in which the wife engaged as attorney-in-fact, the court found that she had breached her fiduciary duty by placing her own interests above those of her husband's. For example, the settlement agreement that she structured allocated 80 percent of the funds to her

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loss of consortium claim, while only 20 percent was allocated to the injuries her husband had sustained. Because the wife had a "duty as administratrix to marshal the assets of the estate and collect sums which might have been due the decedent for benefit of the estate (KRS 395.195), it was in [the wife's] personal interest to ignore her own possible defalcation." As a result, her "interests were hopelessly in conflict." Id. at 598.

c. Priestley left open the question of whether the heirs had standing to pursue claims against the wife as attorney-in-fact. Id. ("Inasmuch as this litigation was commenced after the decedent's death and after the appointment of a personal representative, we need not decide whether an expectant heir or other interested person may be heard when it appears that an attorney in fact, pursuant to KRS 386.093 durable power of attorney, is engaging in waste, fraud or mismanagement.") Instead, Priestley held that the decedent's children could recover through their breach of fiduciary duty claim against the wife in her capacity as administratrix of the estate. To do so, the court had to find that the wife breached her fiduciary duty as attorney-in-fact, which in turn created an obligation on the wife as administratrix to pursue that claim.

d. The standing of a beneficiary to pursue a claim against an

attorney-in-fact remains subject to debate. In Ingram v. Cates, 74 S.W.3d 783 (Ky. App. 2002), the court held "it is debatable whether standing exists for a potential beneficiary of the grantor of a power of attorney to claim breach of fiduciary duties. During the life of the grantor, the right of a potential beneficiary is only an expectancy." Id. at 787. In Ingram, the court affirmed the dismissal of all of the claims as time-barred; thus, it did not need to reach the standing issue.

e. In the unpublished decision of Ferland v. Kraus, No. 2001-

CA-002405-MR, 2003 WL 21039551, at *4 (Ky. App. May 9, 2003), however, the Court of Appeals held that "causes of action by heirs against a person serving as attorney-in-fact were expressly allowed by the Kentucky Supreme Court in [Priestley], where the action was brought by the heirs following the death of the person for whom the attorney-in-fact had served." That statement, however, seems to be an imprecise interpretation of Priestley.

C. Tortious Interference with Inheritance

1. Restatement (Second) of Torts §774B (1979): "One who by fraud, duress or other tortious means intentionally prevents another from

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receiving from a third person an inheritance or gift that he would otherwise have received is subject to liability to the other for loss of the inheritance or gift."

2. This claim has never been formally recognized by Kentucky courts

in a published decision, but has been implicitly recognized in unpublished decisions.

3. The case that plaintiffs most commonly point to as having adopted

the theory is Allen v. Lovell's Adm'x, 197 S.W.2d 424 (Ky. 1946), in which the defendant allegedly destroyed a will that would have provided an inheritance to the plaintiff. Much of the opinion dealt with the issue of whether a destroyed will may nonetheless be probated, with the court holding that it could be if sufficient proof of its contents was otherwise available. If the destroyed will could be probated, the remedy would be to have it admitted to probate rather than pursuing a claim based on its destruction. Only if the admission to probate of the destroyed will would be "inadequate or will not afford relief" would the tort claim be available.

4. In 2003, the Court of Appeals addressed the claim in O'Brien v.

Walker, No. 2002-CA-000976-MR, 2003 WL 22799031 (Ky. App. Nov. 26, 2003). The trial court had denied the plaintiffs' motion for leave to amend their complaint to assert a claim for tortious interference with an inheritance. The Court of Appeals affirmed the trial court's decision, not because it refused to recognize the claim, but because the allegations "simply [did] not rise to the level of tortious conduct under Section 774B."

5. The Court of Appeals addressed the issue in the same manner in

Simmons v. Simmons, No. 2012-CA-000383-MR, 2013 WL 3369421 (Ky. App. July 5, 2013) (opinion ordered not to be published on June 11, 2014). There, the court found that "while Kentucky has never overtly recognized and adopted this cause of action, neither has it been rejected." But since the "appellants failed to establish a prima facie case," the court did not decide whether it would recognize the claim.

D. IRA/401(k) Designation to Divorced Spouse

1. Generally, the designation of a spouse as the beneficiary of an

IRA or life insurance policy will not be affected by divorce. Kentucky courts have consistently held that the owner of the policy or the IRA must change the beneficiary designation to avoid having those funds ultimately distributed to an ex-spouse.

2. The leading case on this issue is Ping v. Denton, 562 S.W.2d 314

(Ky. 1978). The decedent had designated his wife as the beneficiary of his life insurance policy, and they subsequently divorced. After her former husband died, the ex-wife filed a claim to the proceeds, and the insurance company paid them to her

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pursuant to the beneficiary designation. The estate later sought to recover those funds, but the court held that the proceeds were properly paid to the ex-wife because the designation had not been changed. See also Hughes v. Scholl, 900 S.W.2d 606 (Ky. 1995) (same).

3. In Sadler v. Buskirk, No. 2013-SC-000809-DG, 2015 WL 9242917

(Ky. Dec. 15, 2015), the Supreme Court agreed that Ping and Hughes remained the governing cases on this issue, but reached a different outcome based on the language of the property settlement agreement executed in connection with the divorce in issue. Although the decedent had not executed a new beneficiary designation for his IRA, he and his ex-wife had agreed to "make no claim upon any interest owned by the other, now or in the future," in the accounts they owned, specifically including individual retirement accounts. Because the ex-wife had agreed to make no claim upon the decedent's IRA, she was prohibited from obtaining those proceeds notwithstanding that she was still designated as the beneficiary of the account.

4. A case currently pending in the Court of Appeals raises a similar

issue. In Haste v. Moore, the executor of an estate argued that an IRA beneficiary designation should be disregarded because the decedent intended to change it but failed to do so before he died. The circuit court rejected the argument, finding that the designation was binding, and the executor appealed. As of the submission of these materials, the case has been assigned on the merits but not decided.

E. Adopted Children

1. Situations involving adopted children also occasionally give rise to litigation, largely because adoptions lead to unintended consequences with regard to the distribution of estate assets.

2. KRS 199.520(2): "Upon granting an adoption, all legal relationship

between the adopted child and the biological parents shall be terminated except the relationship of a biological parent who is the spouse of an adoptive parent."

3. An adoption in Kentucky is "a complete breaking off of old ties."

Arciero v. Hager, 397 S.W.2d 50, 53 (Ky. 1965). 4. As a result, an adopted child may not inherit from his biological

parents. Sluder v. Marple, 134 S.W.3d 15, 16-17 (Ky. App. 2003) (holding an adopted child may not pursue action for wrongful death of biological father).

5. Consider, for example, the situation in which a child's mother has

a son from her first marriage, then remarries and her new husband adopts the child. The child would not be able to inherit

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from his biological father's parents in the absence of a specific provision in their estate plan that would allow him to do so.

6. Conversely, a child adopted by a person is "presumed to be within

the class designated in [that person's] will as 'children,' 'heirs,' or 'heirs at law,' unless a contrary intent is shown." Vega v. Kosair Charities Comm., Inc., 832 S.W.2d 895, 897 (Ky. App. 1992). In Vega, the testator's use of the term "issue of the body" was held to show an intent that only biological children should inherit from him; thus, his adopted child was excluded as a beneficiary.

F. Trust Issues

1. As more families have turned to trusts to facilitate their estate planning, much of the litigation that would traditionally have been handled in the context of probate or estate litigation is now handled in the context of trust litigation.

2. In 2015, the Kentucky Legislature adopted the Uniform Trust Code

("UTC"). Although there are a number of important provisions of the UTC, this presentation will focus on provisions that are particularly significant in the context of trust litigation.

3. KRS 386B.2-030 provides the district and circuit court with

concurrent subject matter jurisdiction of any proceedings involving trust matters. If a proceeding is initially filed in district court, it will remain there unless a party files an action in circuit court regarding the same subject matter within twenty days of receiving notice of the district court action, in which even the district court is divested of jurisdiction.

4. Wiggins v. PNC Bank, Kentucky, Inc., 988 S.W.2d 498 (Ky. App.

1998), addresses the issue of a conflict of interest presented where a trustee manages two trusts in which the life beneficiary is the same but the remainder beneficiaries are different.

a. The trustee in Wiggins was held, on appeal, to have

breached its fiduciary duty by invading the principal of one trust instead of using funds from the other.

b. That decision was based largely upon KRS 386.820(2),

which requires court approval for such distributions under those circumstances. Although many former statutes governing the administration of trusts were repealed with the enactment of the UTC, this statute was not.

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5. Middleton v. PNC Bank, NA, No. 2012-CA-002142-MR, 2014 WL 5510872 (Ky. App. Oct. 31, 2014).

a. Large trust case involving breach of fiduciary duty claims.

At this point, this is the only case to discuss the application of the Uniform Trust Code to trusts that pre-date its enactment.

b. "The Middletons contend that the Trustee's actions should

be evaluated in light of the recently-enacted Uniform Trust Code. KRS 386B.1-010 et seq. They focus on KRS 386B.11-040(1)(a), which provides that Code 'applies to all trusts created before, on, or after July 15, 2014,' and subsection (1)(c), which provides that the Code applies to 'judicial proceedings concerning trusts commenced before July 15, 2014 ...' However, this provision is qualified by subsection (1)(e), which specifies that '[a]n act done before July 15, 2014, is not affected by this chapter.' Although these sections seem contradictory, we find that they can be reconciled in context. While the procedural provisions of the Uniform Trust Code apply to all trusts, the Code does not retroactively impose new standards for trustees' acts prior to the statute's effective date. Since all of the conduct at issue involved the Trustee's acts between 2001 and 2007, we conclude that any substantive provisions of the Code do not apply."

6. One of the duties that trustees owe to beneficiaries is the duty to

keep them informed. The extent of this obligation was addressed in Longmeyer, supra, where a former trustee advised some of the beneficiaries that they had been removed as beneficiaries under suspicious circumstances. When the settlor of the trust died, the removed beneficiaries filed a will contest challenging the validity of the recently-created estate plan that eliminated their expectancy interests. Those beneficiaries settled the case with the executor, who had prepared the new documents and was receiving $100,000 per year as trustee, and the executor sued the former trustee for breach of fiduciary duty, claiming it breached its duty of confidentiality by advising the beneficiaries of the change in the estate plan. The circuit court granted summary judgment to the former trustee, finding it had an obligation to keep the beneficiaries reasonably informed of the circumstances of the trust. The Court of Appeals reversed that decision, but the Supreme Court agreed with the trial court, finding KRS 386.715 required the trustee to advise the beneficiaries of the change despite the fact that they merely had an expectancy interest since the trust was revocable.

KRS 386.715 was repealed with the enactment of the UTC and replaced by KRS 386B.8-130, which requires trustees to "keep the qualified beneficiaries of the trust reasonably informed about the

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administration of the trust and of the material facts necessary for them to protect their interests," among other things. Additionally, KRS 386B.6-040 contemplates that a trustee may advise a former beneficiary of a change in the provisions of a trust, providing that a "person may commence a judicial proceeding to contest the validity of a trust that was revocable at the settlor's death within the earlier of (a) Two years after the settlor's death; or (b) Ninety days after the trustee sent the person a copy of the trust instrument and a notice informing the person of the trust's existence, of the trustee's name and address, and of the time allowed for commencing a proceeding.

7. Nonjudicial settlements.

The UTC also contains a provision that allows parties to bypass judicial proceedings to modify trusts. KRS 386B.1-090 provides for nonjudicial settlement agreements, through which "interested persons" may "enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust." These matters include: a. The interpretation or construction of the terms of the trust; b. The approval of a trustee's report or accounting; c. Direction to a trustee to refrain from performing a particular

act or the grant to a trustee of any necessary or desirable power;

d. The resignation or appointment of a trustee and the

determination of a trustee's compensation; e. Transfer of a trust's principal place of administration; and

f. Liability of a trustee for an action relating to the trust.

8. Trustee attorney's fees.

a. In the past, trustees would often pay their legal fees incurred in defending themselves against breach of fiduciary duty claims from the corpus of the trust. This practice has been disapproved, however. Instead, trustees are not permitted to recover their legal fees unless they successfully defend themselves, at which time they may seek reimbursement from the trust or, under the UTC, the beneficiaries who filed the action.

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b. Sierra v. Williamson, 784 F. Supp. 2d 774 (W.D. Ky. 2011).

A trustee was sued for breach of fiduciary duty and paid its attorney's fees from the corpus of the trust. The beneficiaries-plaintiffs filed a motion to prevent the trustee from doing so, and the court agreed that the fees should be refunded to the trust during the pendency of the lawsuit, as the action was against the trustee individually rather than against the assets of the trust. If the trustee was successful in defending itself, he would be permitted to recover his attorney's fees from the trust.

c. Estate of Gaines v. Nat'l City Bank of Ky., Nos. 2004-CA-001545-MR, 2004-CA-001610-MR, 2006 WL 2517074 (Ky. App. Sept. 1, 2006).

An Advisory Committee to a trust was permitted to pay its attorney's fees from the corpus of the trust during the pendency of the lawsuit because the trust agreement specifically provided that it could do so.

d. Uniform Trust Code, KRS 386B.10-040.

i. "In a judicial proceeding involving the adminis-tration of a trust, the court, as justice and equity may require, may award costs and expenses, including reasonable attorney's fees, to any party, to be paid by another party or from the trust that is the subject of the controversy."

ii. In the past, a prevailing trustee was generally

entitled to recover its attorney's fees from the corpus of the trust. The new statute permits a trustee to recover attorney's fees from the opposing parties themselves rather than from the trust. But it also permits prevailing beneficiaries to recover their fees from the trustee. There are no reported decisions on this statute as of the submission of these materials.

e. Cummings v. Covey, 229 S.W.3d 59 (Ky. App. 2007).

The rule is different in estate disputes. KRS 412.070(1) provides that a party prevailing in an estate litigation matter may recover reasonable attorney's fees and costs. The amount, however, is limited to the funds recovered for the estate and does not constitute a separate recovery against the executor. In Cummings, the executor was found to have breached her fiduciary duty by wrongfully spending estate money, and was ordered to repay the estate roughly $4,000. The plaintiffs sought to recover $10,000 of

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attorney's fees, but the court limited their recovery to the $4,000 returned to the estate.

9. Statute of limitations.

a. The UTC sets out the statutes of limitations applicable to actions against trustees for breach of fiduciary duty.

b. KRS 386B.10-050(2): "A beneficiary may not commence a

proceeding against a trustee for breach of trust more than one (1) year after the date the beneficiary or a representative of the beneficiary was sent a report that adequately disclosed the existence of a potential claim for breach of trust and informed the beneficiary of the time allowed for commencing a proceeding."

c. KRS 386B.10-050(4): "If subsection (2) of this section does

not apply, a judicial proceeding by a beneficiary against a trustee for breach of trust shall be commenced within five (5) years of discovery of an injury by a trustee to the rights of the beneficiary."

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