Estate Planning, Probate & Elder Law Attorneys

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» Dunn v. Patterson: A Rant

I can't remember a recent judicial opinion I've disagreed with more than the Illinois 3rd District's opinion in Dunn v. Patterson.

The facts of the case are fairly simple:

Charles and Charlotte Dunn had Lawrence Patterson, an attorney, prepare estate planning documents for them. Those documents (trust and powers of attorney) state in relevant part that the Dunns may not amend or revoke their documents unless Lawrence Patterson consents (or they get a court order allowing the amendment or revocation).

The Dunns apparently then went to another attorney, and asked that second attorney to write Patterson a letter, stating that they wanted to remove the above "consent" language. Patterson replied, "You have to come and see me if you want me to do that."

At some point, the Dunns took Patterson to court, arguing that the above provisions should be void because of public policy. The trial court ruled for the Dunns, but the 3rd District reversed.

One of the 3rd District's points is that, in Illinois, you can sign documents with so-called "third-party consent" provisions. I understand that, but it seems clear to me (as a practicing estate planning attorney) that Patterson put the consent provision in the documents for one main reason: he wanted to intimidate the Dunns into continuing to use him as their attorney. In this respect, Patterson's conduct is a mere extension of the shady practice (used by some estate planners) of maintaining possession of the original estate planning documents of their clients. (This is done in the hope that more business -- either future estate planning or probate work -- will come the attorney's way because the clients are too embarrassed to switch attorneys, or don't know any better.)

And yet the 3rd District essentially takes Patterson's rationale for the provision ("to prevent elder abuse") at face value. Is Patterson a doctor? If not, then how would Patterson know whether the Dunns are competent to amend or revoke their documents? The 3rd District doesn't tell us. The Court states that "[o]ut here in the cornfields of Illinois and, we suspect, sometimes in the large metropolitan areas of Illinois, one's lawyer is often his or her most trusted friend and advisor with respect to major life decisions." But was that the case? In the facts section, the Court tells us only that the Dunns hired Patterson to do his estate plan. There's no evidence that he was a trusted friend or advisor.

The 3rd District also doesn't address another (to my mind) key issue: was Patterson named as a fiduciary in the documents? If so, then Patterson had everything to gain by preventing the Dunns from changing their documents (and, potentially, forcing him out). (Some attorneys routinely name themselves as fiduciaries in their clients' documents. And, of course, they bill their clients' estates and trusts for all of their work.) The Court instead seems to take pity on Patterson, and state that his actions are "admirable and consistent with the highest ideals of the bar." I don't know what's worse: Patterson's actions, or the fact that the entire Court seems to have ignored what's really going on here. Hopefully this case will go to the Illinois Supreme Court and be reversed.

» The QTIP, Part 2

Let me add a little bit of a wrinkle to the discussion in my last post, by introducing the concept of the state estate tax. This is extremely relevant to the new Illinois QTIP statute.

Yes, most states (including Illinois) have an estate tax. But, in the past, this tax was hard to spot. Why? Because, on the federal estate tax return, you would get something called a "state death tax credit" (essentially, a credit for state estate taxes paid). And most states (again, including Illinois) had what was known as a "pick-up tax" or "sponge tax," meaning that their estate tax was equal to the state death tax credit. That made the state estate tax look almost invisible. If you owe a federal estate tax of $6 million, that's what you pay in total, but instead of all $6 million going to the federal government, a portion (equal to the state death tax credit) goes to Illinois.

Then things got even trickier. In 2001, legislation was passed raising the (federal) exemption amount over time. (Allow me to sound old: when I started practicing law, in 1996, the exemption amount was $600,000. In 2001 it was $675,000. Now it's $3.5 million.) That meant less estate tax revenue for the states with a sponge tax. To makes matters even worse, the state death tax credit was phased out. These two changes meant much less estate tax revenue for most states, so most of them hit upon a solution: change their estate tax from a pick-up tax to a real, bona fide estate tax.

That's what Illinois did, but the state set its exemption amount (also called the "exclusion amount") at $2 million instead of $3.5 million. You can imagine the problem that that causes -- most estate plans are drafted to minimize the federal estate tax. So, as I explained previously, if you are married and have a $5 million estate, it's easy to pay no estate tax upon your death:

$3.5 million to family trust (no estate tax on this, ever, because it equals the exemption amount)
$1.5 million to marital trust (no estate tax on this because of marital deduction; will be taxable in surviving spouse's estate)

But if you set up your trusts like this, then you will owe Illinois estate tax, since $3.5 million exceeds the Illinois exclusion amount.

Next time: the Illinois QTIP.

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