Water Rights in Utah Estates

Most Utahans don’t need to think about where their water comes from.  They turn on the tap, and their water is supplied by a utility company to which they pay a monthly bill.

There are, however, two other methods of water supply and ownership.  Some Utahans (mostly in suburban and rural areas) own shares in the water companies that supply their water.  Other Utahans (mostly in rural areas) own water rights directly.

Shares in water companies are generally owned separately – and transferred separately – from the real property to which the water is supplied.  Simply buying a parcel of real estate does not necessarily result in a purchase of the associated water company shares.  Thus, the buyer of a home should make sure that he or she acquires the appropriate water company shares.

Water rights (as opposed to water company shares) are essentially interests in real property, and they generally accompany the real property with which they are associated.  For uses attached to land (such as domestic use, stock use or irrigation), water rights are said to be “appurtenant” to the real estate.  A transfer of the real property automatically transfers appurtenant water rights.  However, the water rights can be, and sometimes are, severed from the real property.  When this occurs, the buyer of the real estate should make sure he or she is also acquiring the associated water rights.  Indeed, even if the water rights have not been severed from the ownership of the real property, it is prudent to specifically identify and transfer the water rights in the deed that transfers the real property.

After the owner of water rights dies, problems can arise when real property is transferred from his or her estate if the estate is then closed without transferring the water rights.  This can happen if the person administering the estate does not know that the water rights exist and does not think to address the issue.  Title to the water rights then remains “stuck” in the name of the decedent.  It is often years, or even decades, before anyone realizes that this has occurred.  But when the owners of the land try to sell it, and the buyer enquires about the water rights, a headache can arise for everyone involved.  (This problem is less likely to occur with water company shares because mail from the water company will usually continue to be sent to the decedent’s address, giving family members notice that the shares exist.)

Fixing the problem of “hung water rights” may require obtaining an order from the probate court transferring the water rights to the persons who are entitled to them.  If a probate was previously opened for the decedent’s estate, the probate may need to be re-opened.  If the decedent left a valid will that was admitted to probate, the water rights will pass under the terms of that will.  If the decedent did not leave a will, the water rights will pass to the decedent’s closest living relatives under Utah’s rules of intestate succession.

If no probate was ever opened, and if more than three years has elapsed since the decedent’s death, a petition for determination of heirship will probably be needed, in which case the water rights will pass to the decedent’s closest living relatives under Utah’s rules of intestate succession, even if the decedent left a will.  (Utah imposes a three-year limitations period on the admission of a will to probate.  If no will is admitted to probate within three years of the decedent’s death, the decedent is conclusively presumed to have died intestate, i.e. without a will.)

Transfer of the water rights may be easier if the title to those rights was held in the decedent’s revocable trust.  If the rights were held in the revocable trust, the successor trustee named in the trust should have the authority to distribute them to the appropriate beneficiaries, without court involvement.

Thus, from an estate administration perspective, it is important to make sure the executor of the estate or the successor trustee of the revocable trust knows that the water rights or water shares exist and distributes them along with the other estate or trust assets soon after death.  This can be facilitated by directing the trustee’s attention to the water rights in documents that accompany the estate plan.

For discussions of probate in Utah and revocable trusts in Utah, see “Basic Estate Planning Information” on this website.

Rust Tippett is the author of this blog post.

Copyright 2014 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

 

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Warner v. Warner

In Warner v. Warner, 2014 UT App 16, a 15-year long dispute between the trustees of a trust and the trust beneficiaries, the Utah Court of Appeals affirmed the district court’s ruling that the trustees were required to pay a portion of the beneficiaries’ attorney fees from the trustees’ own personal funds.  The district court found that the trustees had in bad faith prepared a proposed order that was “180 degrees different” from what the court had ruled.  The court applied Utah Code §78B-5-825(1), which permits an award of attorney fees to the prevailing party where the other party’s actions were without merit and in bad faith.  The court limited the award to the fees the beneficiaries incurred in response to the trustees’ bad faith conduct.

The Court also prohibited the trustees from reimbursing themselves from trust funds for the payment of their own attorney fees that were incurred in connection with their bad faith conduct.  The Court held that Utah Code §75-7-1004(2) permits reimbursement from trust funds only where the trustees act in good faith.

The Court further rejected the trustees’ request that the beneficiaries (rather than the trust) be required to pay other attorney fees incurred by the trustees in the litigation.  However, the Court declined to address the district court’s ruling that Utah Code §75-7-1004(1) does not apply to trustees seeking reimbursement from trust funds, but rather applies only to persons who don’t have any official status that would otherwise entitle them to reimbursement.

In an amended opinion issued in response to the beneficiaries’ petition for rehearing, the Court of Appeals awarded the beneficiaries attorney fees that they incurred in defending against the trustees’ appeal of the district court’s ruling.

For an in-depth discussion of payment of attorney fees in Utah trust disputes and reimbursement of trustees’ attorney fees from trust funds, see The Utah Law of Trusts & Estates, a comprehensive online legal reference treatise that is available on this website.

Rust Tippett is the author of this blog post.

Copyright 2014 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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Snow, Christensen & Martineau v. Lindberg

In Snow, Christensen & Martineau v.  Lindberg, 299 P.3d 1058 (Utah 2013), the Utah Supreme Court held that the terms of a reformed trust were so dramatically different from the terms of the original trust that the attorneys for the original trust were not required to disgorge privileged attorney-client information to the Special Fiduciary of the reformed trust and were not disqualified from representing parties adverse to the reformed trust.

A Utah district court had reformed the original trust several years earlier under the doctrine of cy pres.  While application of the cy pres doctrine requires that the trust be reformed in a manner that reflects the settlor’s intent and preserves the essential purposes of the trust, the Utah Supreme Court affirmed the reformation at that time on the basis of the defense of laches, without evaluating whether the reformation was consistent with the requirements of cy pres.  In the Snow opinion, the Court explained that the reformation of the trust had in fact been improper.  The original trust’s purpose was the advancement of the FLDS church and its tenets, while the reformed trust was to be administered according to secular, humanitarian principles.  The Court explained that, absent the defense of laches, the reformation would have been set aside in the prior proceedings.  The trust had nonetheless been reformed, and the reformed trust, with purposes far different from the purposes of the original trust, was a separate and distinct entity from the original trust.  The attorney-client relationship that existed between the law firm and the original trust did not therefore extend to the reformed trust.  Not only was the law firm not required to disgorge privileged attorney-client information to the Special Fiduciary of the reformed trust, but it was prohibited from doing so by Rule 1.9(c) of the Utah Rules of Professional Conduct.

The Court rejected the law firm’s contention that a charitable trust is merely a fiduciary relationship that exists between the trustees and the beneficiaries, and is not an entity capable of being a client for purposes of the attorney-client privilege.  The law firm argued that the attorney-client relationship existed only with the trustees of the original trust, not with the trust itself.  However, the Court held that, under Rule 504 of the Utah Rules of Evidence, the original trust was an entity capable of forming an attorney-client relationship.  The Court explained that, under Rule 504, it is the trust that holds the privilege and the trustee who claims the privilege on behalf of the trust.  Nonetheless, as noted above, the Court held in favor of the law firm because the reformed trust was an entirely different entity from the original trust.

For an in-depth discussion of trusts in Utah, see The Utah Law of Trusts & Estates, a comprehensive online legal reference treatise that is available on this website.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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Estate of Malloy

In Estate of Malloy, 288 P.3d 597 (Utah App. 2012), the court of appeals affirmed the district court’s ruling that the decedent’s divorce did not revoke the designation of his former spouse as the beneficiary under his life insurance policy because the express terms of the insurance manual stated that divorce alone would not constitute a revocation.

The decedent married Wife A in 1989.  The following month, he purchased a $50,000 federal employees group life insurance policy and designated Wife A as the beneficiary.  The decedent and Wife A were divorced in 2004.  In 2006, the decedent married Wife B.  He died in 2009 without having changed the beneficiary designation.  The insurance company paid the death benefit to Wife A, and Wife B brought an action arguing that the divorce revoked the beneficiary designation.

Utah Code §75-2-804 provides that a divorce revokes all revocable dispositions of property to the former spouse, except as provided in the governing instrument.  In this case, the insurance policy and the beneficiary election form were silent on the subject, but the insurance policy manual expressly provided that divorce alone would not revoke the beneficiary designation, and further stated that the owner of the policy would have to complete a new beneficiary designation election form in order to remove a former spouse as a beneficiary.  The district court ruled that the insurance manual was incorporated by reference into the beneficiary election form, and the court of appeals declined on procedural grounds to disturb that ruling.

For a discussion of estate planning in Utah, see Basic Utah Estate Planning on this website.  For a discussion of the effect of a divorce on an estate plan, see the blog: “Divorce and Estate Planning in Utah” on this site.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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The Utah Asset Protection Trust: Should it hold a Residence?

Can a Utah asset protection trust (UAPT) hold a personal residence or a vacation home?  Yes.

The Utah asset protection trust statute (Utah Code §25-6-14) contemplates the transfer of a personal residence to a UAPT inasmuch as it permits the trust to authorize the settlor’s use of real or personal property that is held in the trust.  The statute also provides that the settlor’s use or occupancy of a residence held in the trust does not constitute a payment or delivery of trust assets to the settlor that could otherwise be reached by the settlor’s creditors.  And the statute expressly permits a QPRT (qualified personal residence trust) to be a UAPT.

When considering a transfer of a residence to a UAPT, it is good to keep in mind the following:

First, the $250,000 exclusion from capital gain tax upon the sale of a residence (under I.R.C. §121) may be preserved even after the residence is contributed to a UAPT if (but only if) the trust is a grantor trust for income tax purposes.

Second, the 45% property tax discount that is available for primary residences in Utah should be available even if the residence is held in a UAPT.  Eligibility for the discount depends on the use of the property, not ownership.

Third, Utah Code §75-7-816 appears to require that a deed transferring real property to a UAPT indicate on its face that the trust is an asset protection trust.  This requirement was enacted in connection with Utah’s prior asset protection trust statute, but applies to the new statute, as well.

Fourth, when contributing a residence to a UAPT, one should consider how expenses associated with the residence will be paid.  Such expenses might include property taxes, homeowners’ insurance, HOA dues, maintenance expenses and, if the residence is mortgaged, principal and interest payments.  The expenses could be paid by the trust, as where the necessary amounts are pre-funded into the trust or are contributed to the trust on a monthly or yearly basis.  Making regular contributions to a UAPT may be inconvenient inasmuch as doing so would require the execution of an affidavit under section 5(m) of the statute each time a contribution is made.  Alternatively, the settlor could pay the expenses directly.  If the settlor pays the expenses directly, it may be advisable to have a rental agreement in place that spells out the terms of such payments.  The statute does not expressly permit, prohibit or otherwise address the method of payment of such expenses.

Fifth, if the residence is mortgaged, the transfer may trigger a due-on-sale clause or otherwise violate certain covenants in the loan documents, and may therefore require the consent of the lender.  Because the residence is not income-producing, the lender may require a personal guarantee from the settlor before consenting to the transfer.  The statute neither expressly permits nor prohibits such a personal guarantee.

For a discussion of asset protection in Utah in general, go to www.utahassetprotection.org.  For a more detailed discussion of Utah asset protection trusts in particular, go to that site and also see related blog posts on this site.

For information on estate planning in Utah, see Basic Utah Estate Planning on this website.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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Hillcrest Investment v. UDOT

In Hillcrest Investment Company v. Utah Department of Transportation, 287 P.3d 427 (Utah App. 2012), the Utah court of appeals explained that a trust beneficiary can bring an action against a third party on behalf of the trust under the following circumstances:  (1) where there is no trustee; (2) where the trustee fails to do so; (3) where the trustee cannot be subjected to the jurisdiction of the court; and (4) where the beneficiary’s interests are hostile to those of the trustee.  The court noted that, while Rule 17 of the Utah Rules of Civil Procedure permit the trustee, as the holder of legal title to the trust assets, to bring suit without joining the trust beneficiaries, the Rule does not prevent a trust beneficiary from bringing an action under the appropriate circumstances.

The case involved a dispute over UDOT’s condemnation of real property owned by various family trusts.  UDOT and the trusts entered into a contractual resolution of the dispute in 2002.  In 2008, Hillcrest Investment Company filed suit alleging breach of contract by UDOT.  The district court granted UDOT’s motion for summary judgment on grounds that Hillcrest lacked standing.

Hillcrest argued that, in 2006, the remaining land in the family trusts had been conveyed to Hillcrest, as a beneficiary of the trusts, and that the trust’s contract rights under the settlement were part of that conveyance.

The court of appeals reversed the district court’s summary judgment order, holding that a genuine issue of fact existed as to whether Hillcrest could enforce the trusts’ contract rights against UDOT.  In addition to noting that a beneficiary of a trust can bring suit on behalf of the trust in the circumstances described above, the court also observed that where the legal title and beneficial interests become united in one person, those interests merge, the trust terminates, and the person can bring an action against a third party.  The beneficiary may thus maintain a suit related to trust property against a third party if the beneficiary is entitled to immediate distribution of the property or is already in possession of the property.

For an in-depth discussion of probate and trust litigation issues in Utah, see The Utah Law of Trusts & Estates, a comprehensive online legal reference treatise that is available on this website.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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Estate of Valcarce

In Estate of Valcarce, 301 P. 3d 1031 (Utah App. 2013), the Utah court of appeals affirmed the district court order admitting to probate an unsigned copy of the decedent’s 1991 will.

Two of the decedent’s brothers had submitted the will for probate.  Another brother contested the will.

The  attorney who drafted the will testified that he had no specific recollection of the decedent signing the will, but the fact that there was only an unsigned copy of the will in his file (and not the intended original) and the fact that the decedent had paid the bill for the preparation of the will led the attorney to believe that, consistent with his office’s customary procedures, the decedent must have signed the will, two secretaries in the attorney’s office must have witnessed the will, and the attorney himself must have notarized the self-proving affidavit.

One of the proponents of the will who was not a beneficiary under the will also testified that, six months before the decedent’s death in 2010, the decedent had shown him a signed copy of a will that was signed in the early 1990s and that had substantially the same provisions as the unsigned will that was submitted for probate.  The same brother also testified that he found a different signed will in the decedent’s home after her death, that he gave that will to the contestant, and that the contestant threatened to destroy it.

The court of appeals first held that, under Utah law, the proponent of a will must make a prima facie showing of due execution by a preponderance of the evidence.

As noted above, the attorney (who claimed to have notarized the self-proving affidavit) testified at trial, but neither of his secretaries (who allegedly witnessed the will) testified.  The court of appeals held that the attorney’s testimony satisfied the requirement under Utah Code §75-3-406 that the testimony of one attesting witness is required to probate a will.

The court also observed that, in adopting the Uniform Probate Code, the Utah legislature intended to validate wills whenever possible.

The court further sustained the trial court’s factual findings that the decedent’s will had in fact been properly executed and not revoked.

The appeals court concluded, therefore, that the trial court’s admission of the unsigned will to probate was proper.

For a discussion of estate planning in Utah, see Basic Utah Estate Planning on this website.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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Estate of Hannifin

In Estate of Hannifin, 2013 UT 46 (filed August 2, 2013), the Utah Supreme Court held that the provisions of the Utah Probate Code pre-empt and supersede the doctrine of equitable adoption for purposes of intestate succession.

The Court had previously recognized the validity of equitable adoptions in Utah for purposes of intestate distribution in In re Williams’ Estates, 348 P.2d 683 (Utah 1960).

Under the doctrine of equitable adoption, as articulated in the Williams case, a person who was never formally adopted by the decedent could nonetheless inherit from the decedent under the laws governing intestate succession if the person’s biological parents had agreed to relinquish all rights with respect to the person in return for the decedent’s agreement to adopt the person.

In Hannifin, the Court held that the provisions of the Utah Probate Code that specifically prohibit step-children and foster children from inheriting under the rules of intestate succession pre-empt the doctrine of equitable adoption.  The Court also reasoned that the Probate Code and the doctrine of equitable adoption are mutually inconsistent because the Probate Code prohibits inheritance from both the natural parents and the adoptive parents, while such “dual succession” is a central feature of equitable adoption.  Finally, the Court explained that the uncertainty and complexity that accompany the vague standard announced in the Williams opinion run contrary to the Probate Code’s objectives of simplicity, clarity and predictability.

For a discussion of the rules governing intestate succession in Utah, see Basic Utah Estate Planning on this website.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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United Effort Plan Trust v. Jessop

In United Effort Plan Trust v. Jessop, 296 P.3d 742 (Utah 2013), the Utah Supreme Court affirmed the district court’s ruling that the beneficiaries of a charitable trust lacked standing to enforce the trust.

The Court noted the general common law rule that beneficiaries may not bring a suit to enforce a charitable trust.  The Court explained that the rationale for the rule is that a large shifting class of beneficiaries, if permitted to maintain a suit, would produce a flood of litigation that would deplete the trust’s finite resources and cripple its ability to pursue its charitable objectives.

The Court also acknowledged an exception to the rule that is recognized by some other states.  The exception takes into account two factors:  First, whether the class of beneficiaries is clearly defined and limited in number.  Second, whether the beneficiaries’ challenge relates to enforcement of a fundamental fiduciary duty or merely to an ordinary exercise of the trustee’s discretion.

The Court held that the district court could have reasonably found that the trust’s class of beneficiaries was so large and indefinite that vexatious litigation could overwhelm the fulfillment of the trust’s charitable purposes and that the sale of the property in question was an ordinary exercise of the trustee’s discretion.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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Divorce & Estate Planning in Utah

As a general principle, in Utah, when a person gets divorced, provisions for his or her former spouse in his or her estate plan are automatically revoked, by operation of law.  Utah Code §75-2-804 provides that all revocable gifts made to the former spouse and the former spouse’s relatives are revoked upon divorce.  Thus, divorce revokes all gifts made to the former spouse and the former spouse’s relatives in a will, in a revocable (living) trust, in a retirement plan beneficiary designation, on a pay-on-death (POD) account, and in a life insurance policy beneficiary designation (where the insured spouse owns the policy).  (Of course, the divorce does not revoke gifts to one’s own children, even though they are also the former spouse’s children.)

Section 75-2-804 also provides that divorce revokes all revocable nominations of fiduciaries in favor of the former spouse or relatives of the former spouse.  Thus, any nomination of the former spouse or a relative of the former spouse as a personal representative in a will, and any nomination of the former spouse or a relative of the former spouse as a successor trustee under a revocable trust, is revoked by divorce.

The statute also provides that a divorce severs a joint tenancy, converting it into a tenancy-in-common.  Divorce thus terminates the right-of-survivorship feature that is characteristic of joint tenancy.

Irrevocable gifts and irrevocable fiduciary nominations are not revoked by divorce.  Thus, the provisions of an irrevocable trust remain intact, notwithstanding the divorce, unless the terms of the trust expressly provide otherwise.

The automatic revocation provisions are designed to accomplish what most people would want for their estate plans upon divorce.  They are intended to “fix” the divorced person’s estate plan even if he or she does not get around to actually revising the plan before he or she dies.  It is nonetheless important to consult an attorney and to revise one’s estate plan after getting divorced in order to ensure that your assets will be distributed in the manner you intend.

For a discussion of estate planning in Utah, see Basic Utah Estate Planning on this website.

Rust Tippett is the author of this blog post.

Copyright 2013 UNLEPI, LLC, a Utah limited liability company.  All Rights Reserved.

This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, LLC.  The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.

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