State law

Which State Law Governs Your Will?

Suppose you live in Arizona, but you come from another state. You have a lawyer in the previous state; you ask her to write a will for you. A few years after you sign that will, you move to yet another state. Which state’s laws will govern interpretation of your will? What if your will includes a trust (a “testamentary” trust) — which state law will control the trust?

David King’s will and trust

That’s pretty much the story behind a recent Oregon court case involving the late David King — except that Arizona doesn’t happen to be involved. But the state law of Minnesota, Nevada and Oregon all were.

David King was from Minnesota. In 1995, he and his (second) wife Sandra lived in Nevada. He hired Minnesota attorney Clint Schroeder to write his will. That will created a trust for the benefit of Mrs. King; after her death, the remaining trust assets would be divided among Mr. King’s three children.

Mr. Schroeder’s wills typically included reference to Minnesota law, and Mr. King’s will was no different. The trustee was given all the powers a trustee might have under Minnesota state law. The will even included the text of the relevant Minnesota state law.

Elsewhere, though, the will directed that the state law of Nevada “shall govern all questions which may arise with respect to the interpretation of this Will or the administration of any trust established hereunder.” Why the apparently conflicting provisions? Mr. Schroeder would later testify that he inserted reference to Nevada law because Mr. King lived in Nevada at the time — but that he hadn’t really given “much thought” to the governing law question.

Mrs. King becomes sole trustee

In 2004, Mr. King died. By that time, he and Mrs. King had moved to Oregon. With his death, the will became operative — and the trust for Mrs. King was formally set up.

Initially the trust had three trustees, but two of them had stepped aside. Mrs. King, one of the three original trustees, remained as the sole trustee.

Mrs. King began making decisions as trustee that raised concerns among her stepchildren. She loaned her own son trust money. She also loaned trust money to another entity in which she had an interest. She treated receipts from oil and gas interests as income (which meant those funds would all be distributed to her) rather than partly a return of principal. She did the same thing with a corporation that the trust partly owned. According to Mr. King’s children, she also could not account for about $900,000 of trust assets.

Mr. King’s children brought an action against their stepmother in the Oregon courts. Why Oregon? That’s where Mrs. King lived, and where the trust was actually administered. But which state law would govern interpretation of the trust?

Would it be Oregon law? That’s where the trust was administered, where Mr. King had lived up until his death, and where the will had been probated (and the trust set up).

How about Minnesota law? The will specified that the trustee would have all the powers provided under Minnesota law. Although neither Mr. King nor Mrs. King had lived there for years (even at the time the will was signed), they did have some connections there.

Or would it be Nevada law? The will made the blanket statement that Nevada law would apply to the will and any trust established under it. Would that argument carry the day?

The Oregon court applies Nevada law

After Mr. King’s three children brought suit, the Oregon judge decided that Nevada law would govern the trust’s administration. Generally speaking, a person can choose the state law applicable to his or her trust — and Nevada made sense when Mr. King signed the will.

What difference would it make which state law applied? At least as between Nevada and Minnesota law, Mrs. King might have a credible argument that her actions were permissible under Minnesota state law — but not under Nevada state law. Apparently no one seriously argued for application of Oregon state law — even in an Oregon courtroom.

The Oregon judge then had to figure out what Nevada state law mandated. He determined that Mrs. King had breached her fiduciary duty under Nevada law. The judge removed her as trustee, and appointed a successor trustee.

Then the judge ordered Mrs. King to repay $913,247. He also seized two pieces of real estate, and ordered the trustee to withhold future income distributions until Mrs. King’s debt to the trust was satisfied. Finally, he ordered Mrs. King to pay the attorney fees for her stepchildren. He did not, however, authorize the trustee to withhold the attorney fees from Mrs. King’s future income distributions.

The Court of Appeals agrees — mostly

On Mrs. King’s appeal, the Court of Appeals of Oregon upheld most of the trial judge’s orders. The appellate court agreed that Nevada state law should apply, because the will said that it should. Then the Oregon judges reviewed the trial court’s application of Nevada law and agreed he had gotten it right. The surcharge was upheld, and the order withholding future income distributions was also approved.

The one place where the appellate court disagreed with the trial judge was on application of Nevada state law to the attorney fee judgment against Mrs. King. The trial judge had ruled that Nevada law on spendthrift trusts prevented attaching her future income to pay the judgment.

Not so, ruled the Court of Appeals. If a Nevada court had been handed the question, they decided, the Nevada judge would find Mrs. King’s behavior to be a breach of trust. The Nevada state law would allow the judge to redress the breach by redirecting her income interest to cover the attorney fees as well. In the matter of the Testamentary Trust Created Under the Will of King, December 5, 2018.

This entire discussion might seem a little bit like inside baseball among lawyers. But next time you ask an out-of-state lawyer to prepare a will or trust for you, this case might help explain why they suggest you talk with someone in the community where you live. Of course, if the errant reference to Minnesota law had not been in Mr. King’s will, there still would have been potential problems based on differing state law — but at least it would only have been two different states to consider.

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