ACTEC Trust & Estate Talk

Episode: Guiding Trust and Estate Disputes to Settlement

Date: November 12, 2024

Episode Overview

This episode explores the unique challenges and best practices in guiding trust and estate disputes toward effective settlement. Host ACTEC Fellow Tony Ann Cruz is joined by David Blickenstaff, Margaret Sager, and Philip C. Corbo, who share expert perspectives on the obstacles parties face, the critical need to address tax consequences, and the importance of binding all relevant parties so settlements “stick.” The discussion offers rich, practical guidance for estate planners and litigators working to achieve lasting, enforceable resolutions in even the most emotionally and procedurally complex disputes.

Key Discussion Points & Insights

1. Why Trust and Estate Settlements Are Especially Challenging

• Multiple Parties and Competing Interests: Unlike classic "A vs. B" litigation, trust and estate cases often involve a complex web of stakeholders whose interests may sharply diverge.
• Emotional Component: Emotional stakes, especially those involving family members, can often outweigh financial incentives and complicate rational negotiations.
• Financial “War Chests”: Parties may have significant resources to sustain prolonged litigation, reducing typical incentives to settle.
• Tax Complexities: Settlements often bring unexpected tax issues, requiring careful navigation to avoid adverse consequences.

“It’s almost always better for clients to settle than to duke it out in court. That doesn’t mean it’s easy to reach agreement—trust and estate disputes are especially hard to settle.”
— David Blickenstaff (02:02)

Practical Tips for Settlement Success

• Set Realistic Expectations Early: Help clients understand courts can’t “put Humpty Dumpty back together again” (02:35).
• Explain Risks Clearly: Include emotional and financial costs, including the possibility of paying opponents’ legal fees.
• Ensure Everyone Is at the Table: Avoid settlements unraveling because not all necessary parties participated.
• Encourage Transparency: Level the "information playing field" to reduce suspicion and build trust.
• Pick the Right Timing and Mechanism: Assess whether negotiation, mediation, or formal proceedings are appropriate given client dynamics and dispute complexity.

2. Tax Pitfalls and Planning in Settlement Agreements

Presented by Margaret Sager (03:56–07:22)

Major Tax Exposures to Consider

• Estate Tax: Risk of deemed retained interests (sections 2036, 2038) if a trust's settlor remains involved.
• Gift Tax: Parties giving up interests may unintentionally trigger taxable gifts. Even not objecting to certain arrangements can have gift tax consequences.
• Income Tax: Sales or exchanges as part of a settlement can constitute realization events, causing capital gains tax liabilities.
• Generation-Skipping Transfer (GST) Tax: Modifying GST-exempt trusts can jeopardize their status.

Notable Recent Example

• Cited CCA 2023-52018: IRS reversed previous position, finding a gift occurred when beneficiaries consented to a grantor trust modification that allowed the trustee to reimburse income taxes to the grantor (06:17).

“The IRS took the position that the beneficiaries made a gift to the settlor… The CCA may indicate that the IRS is waking up to these settlement tax issues.”
— Margaret Sager (06:53)

Types of Settlements to Watch

• Trust modifications, reformations, changes of situs, etc., may all have tax implications and qualify as settlement agreements under IRS scrutiny.

3. Binding All Necessary Parties: Who Must Be Involved for Settlements to Stick

Presented by Philip C. Corbo (07:22–09:58)

Identifying and Binding Parties

• Types of Parties: Fiduciaries, current/remainder/contingent beneficiaries.
• Challenges: Parties who refuse to participate, cannot be located, are minors, or have disabilities.
• Due Process: Proper notice is legally crucial. Settlements often fail if non-participants were not given sufficient and proper notification under local laws.

Virtual Representation

• Used when direct representation is infeasible (e.g., minors or unborn beneficiaries).
• Must ensure no conflict of interest between the representative and the party represented.
• Defined by statutory frameworks like the Uniform Trust Code (where applicable).

“Virtual representation is the ability for one individual to represent another… A key aspect is that there is no conflict of interest between the individual doing the representing and the person being represented.”
— Philip C. Corbo (08:38)

Participants Not Represented by Counsel

• Advise all participants of their right to independent counsel in writing.
• Document any party waiving representation to protect enforceability.

Court Approval

• Settlements approved by the court carry the force of a judgment.
• Best practice is to seek court approval for added enforceability, especially in complex or potentially contentious circumstances.

“Best practice is to have the court approve the settlement, which the court can then enforce.”
— Philip C. Corbo (09:46)

Notable Quotes & Memorable Moments

• Setting Expectations:
  “Sometimes clients seem to think the lawyer or the court can put Humpty Dumpty back together again … That’s not going to happen.”
  — David Blickenstaff (02:35)

• IRS Focus on Settlements:
  “However right or wrong, the CCA may indicate that the IRS is waking up to these settlement tax issues and so we need to be aware and on guard.”
  — Margaret Sager (06:53)

• Virtual Representation Warning:
  “A key aspect for virtual representation to be effective is that there is no conflict of interest between the individual doing the representing and the person being represented.”
  — Philip C. Corbo (08:38)

Timestamps for Important Segments

• Main Challenges in Achieving Settlement: 01:18–03:56
• Tax Implications in Settlements: 03:56–07:22
• Binding Parties, Notice, and Virtual Representation: 07:22–09:58

Conclusion

This episode delivers clear, actionable advice on steering trust and estate disputes toward enduring, effective settlement. Core themes include the necessity of realistic client counseling, preemptive tax analysis, transparent information sharing, and the legal imperatives of binding all interested parties. The collective wisdom of ACTEC fellows provides a practical roadmap for wealth planning professionals navigating these complex, emotionally charged matters.