Estate Administration

Executor’s Fees

Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

 

Settlor left the bulk of her estate to testamentary trusts for Son, Daughter, and Grandchildren. Son was named as the executor of her estate and the trustee of the trust. Because of valuation, taxation, liquidity, and related issues, it took about eight years before Son began to fund the trusts and make distributions. During this time, Son took over $2.8 million in executor fees. Daughter sued alleging that these fees were excessive. The jury determined that the fees were unreasonable by approximately $2.2 million but the trial court reduced the award to about $660,000 after taking into account the tax savings realized by deducting the excessive fees from Settlor’s federal estate tax return. (This is an application of the benefits rule.) Daughter appealed.

Daughter asserted that it was unjust to permit Son to retain $1.5 million in excessive fees merely because the fees resulted in a reduced tax burden. The court first addressed the potential application of Probate Code § 241 which permits the court to deny the statutory fee if the executor does not manage the estate prudently. Because Settlor’s will provided that Son receive just and reasonable compensation, the court concluded that Probate Code § 241 does not apply.

The court next examined whether the trial court properly applied the benefits rule to reduce the amount of damages against Son for the excessive fees. The Texas Supreme Court used the benefits rule in Nelson v. Krusen, 678 S.W.2d 918 (Tex. 1984), when it refused to recognize a cause of action for wrongful life and stated that the court must offset any special benefits the plaintiff receives which results from the negligence. The court discussed, however, that the collateral source rule prevents a tortfeasor from obtaining the benefit of payment conferred upon the injured party from sources other than the tortfeasor. In this case, the estate tax deduction from the IRS is a different source than the tortfeasor and thus Son should not have the excessive fees reduced by the tax savings. The court also examined cases from the United States Supreme Court, Texas appellate courts, and courts in other jurisdictions. The court then concluded that the trial court erred in offsetting the tax savings from the amount of excessive fees. Despite the fact that the estate will be enriched by an extra $1.5 million, “it is more appropriate for the estate to obtain the benefit of a windfall than to let [Son] keep $1.5 million in fees the jury found was unreasonable.” Lee, at 780. The court further found that there was sufficient evidence to support the jury’s finding that Son took $2.2 million in unreasonable executor fees.

Moral: Executors should document their fees by keeping detailed time records and consult with attorneys and other experts as to how to compute reasonable fees.

 

Estate Administration

Management by Executor

Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

 

Settlor left the bulk of her estate to testamentary trusts for Son, Daughter, and Grandchildren. Son was named as the executor of her estate and the trustee of the trust. The estate consisted primarily of non-income producing real property. Son either did not sell or delayed in selling various parcels of property. Daughter sued Son for breach of his fiduciary duties in failure to timely sell this property. The jury found that Son breached his duties and provided the date on which the sale should have occurred and the likely amount of those sales. The trial court decided to disregard the jury findings. Daughter appealed.

The appellate court agreed that it was permissible to disregard the jury findings because they were too specific. Instead of merely asking jury if Son breached various duties (e.g., to diversify, transform nonproductive assets into productive assets, generate income), Daughter asked the jury to decide if Son had a duty to accept two specific offers. The evidence the jury used to determine the value of the property at these times were the unaccepted offers themselves which the court considered too uncertain and speculative. There was insufficient evidence to support the amount of proceeds Son would have received had he sold the properties.

Moral: Evidence for damages for breaching a duty to sell assets needs to include proof of the property’s market value at the relevant time established by reliable methods. Evidence of unaccepted offers will be deemed too uncertain and speculative to support a jury finding.

 

Estate Administration

Independent Executor

Removal

Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

 

Settlor left the bulk of her estate to testamentary trusts for Son, Daughter, and Grandchildren. Son was named as the executor of her estate and the trustee of the trust. Son engaged in a variety of questionable activities such as charging millions in executor fees, taking an extremely long time to fund testamentary trusts, and failing to diversify assets. Daughter asked the trial court to remove Son as executor and the trial court refused.

The appellate court affirmed. Son breached several duties and the trial court clearly had the discretion to remove Son under Probate Code § 149C. However, removal is not mandatory; instead, it is discretionary with the court as demonstrated by the statute’s use of the word “may.” The court examined Son’s conduct in light of the seven part test for abuse of discretion set out in Geeslin v. McElhenney, 788 S.W.2d 683, 685 (Tex. App.—Austin 1990, no writ). The court then found that the trial court did not abuse its discretion in refusing to remove Son because its decision was not arbitrary, unreasonable, nor without reference to guiding rules and principles. The appellate court admitted that it may have reached a different conclusion than the trial court but that was not relevant to the issue.

Moral: Strong evidence must be presented at trial to remove an independent executor from office. Appellate courts are extremely reluctant to reverse a trial court’s decision not to remove an executor from office.

 

Trusts

Trust Administration

Removal of Trustee

Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

 

Settlor left the bulk of her estate to testamentary trusts for Son, Daughter, and Grandchildren. Son was named as the executor of her estate and the trustee of the trust. Son engaged in a variety of questionable activities such as charging millions in executor fees, taking an extremely long time to fund testamentary trusts, and failing to diversify assets. Daughter asked the trial court to remove Son as trustee and the trial court refused.

The appellate court reversed. The court examined the jury findings and found them sufficient to support the conclusion that Son breached the trust in such a way as to permit removal under Trust Code § 113.082. Although this section uses the discretionary word “may,” the Supreme Court of Texas held under an earlier version of this statute that removal is not discretionary if the trustee materially violated the trust and the violation results in a material financial loss to the trust. Akin v. Dahl, 661 S.W.2d 911, 913 (Tex. 1983). Although the appellate court disagreed with the Akin court because it construed the statutory language contrary to its plain meaning, the court felt constrained to remove Son as trustee.

Moral: Removal of a trustee for the reasons enumerated in Trust Code § 113.082 is mandatory despite the statute’s discretionary language.

 

Estate Administration

Independent Administration

Costs of Removal

Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

 

Settlor left the bulk of her estate to testamentary trusts for Son, Daughter, and Grandchildren. Son was named as the executor of her estate and the trustee of the trust. Son engaged in a variety of questionable activities such as charging millions in executor fees, taking an extremely long time to fund testamentary trusts, and failing to diversify assets. Daughter asked the trial court to remove Son as executor and the trial court refused. Despite a jury finding that Son defended the lawsuit in bad faith, the court permitted Son to recover the fees for defending the action from the estate. Daughter appealed.

The court affirmed. Probate Code § 149C permits the executor to recover necessary expenses, including attorneys’ fees, if the executor defends a removal action in good faith. Because the statute does not define “good faith,” the court examined a variety of definitions and adopted a standard that has both objective and subjective components. The court determined that “an executor acts in good faith when he or she subjectively believes his or her defense is viable, if that belief is reasonable in light of existing law.” Lee, at 795.

The court then examined the evidence and determined that there was no evidence that Son subjectively believed his defense was in bad faith. In addition, there was no evidence that Son’s defense had no reasonable or arguable basis. The court thus agreed with the trial court that it was appropriate to disregard the jury’s finding that Son made his defense in bad faith.

Moral: The approach adopted by this court makes it extremely difficult for a court to deny an executor fees for defending a removal action. The egregiousness of the executor’s conduct is not relevant to whether the defense is in good faith. As long as the executor actually believes a defense is in good faith (regardless of what reality-centered executors would think) and the defense has an arguable basis (regardless of the probability of success), the court may award the defense fees.

Note that the court examined Miller v. Anderson, 651 S.W.2d 726 (Tex. 1983) (construing analogous language in Probate Code § 243), which permitted recovery even without a finding of good faith. However, the court said that permitting recovery without a finding of good faith is not the same as permitting a recovery when the jury affirmatively finds bad faith.

 

Estate Administration

Costs

Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

 

Settlor left the bulk of her estate to testamentary trusts for Son, Daughter, and Grandchildren. Son was named as the executor of her estate and the trustee of the trust. Son engaged in a variety of questionable activities such as charging millions in executor fees, taking an extremely long time to fund testamentary trusts, and failing to diversify assets. Daughter sued Son and requested that her costs and attorney’s fees be reimbursed to the trust. The trial court declined to do so.

The appellate court reversed. Although Probate Code § 245 permits recovery of the costs and attorney’s fees, Son claimed that Daughter did not carefully separate the claims covered by § 245 from those not covered (e.g., to remove Son as trustee). The court rejected this argument because all of Daughter’s claims were inextricably intertwined.

Moral: To enhance the likelihood of an award of fees, the costs associated with each claim should be accounted for separately.

 

Trusts

Damage Awards

Lee v. Lee, 47 S.W.3d 767 (Tex. App.—Houston [14th Dist.] 2001, pet. denied).

 

Settlor left the bulk of her estate to testamentary trusts for Son, Daughter, and Grandchildren. Son was named as the executor of her estate and the trustee of the trust. Son engaged in a variety of questionable activities such as charging millions in executor fees, taking an extremely long time to fund testamentary trusts, and failing to diversify assets. Daughter successfully recovered on some of her claims. However, the damage awards went to the trust, not directly to Daughter. Daughter appealed.

The appellate court affirmed. Daughter was entitled to a specified percentage of the trust’s current net income. Thus, the damage awards need to “run through” the trust so that they can be allocated between principal and income. In addition, appropriate trust expenses must be deducted to determine the amount of income to which Daughter is entitled.

Moral: Recoveries against a trustee for breach of duty are often payable to the trust, not the trust beneficiaries.



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