The Ultimate No-Contest Clause--Russian Style.
A no-contest, or in terrorem, clause, is frequently used in wills, trusts and other estate planning documents to minimize the likelihood of a disgruntled beneficiary challenging the estate plan. The phrase ‘in terrorem’ is Latin meaning ‘to frighten’ or ‘terror’. The basic concept is that if a beneficiary launches an attack on the estate plan and is not able to convince a court to change it, then that beneficiary loses any gift under the estate plan. A typical no-contest clause might reduce an expected intestacy gift (perhaps 50% of the estate), down to something smaller, perhaps 10% of the estate. Under this hypothetical, if the beneficiary accepts the estate plan, he receives the 10% gift, but if he challenges the plan (hoping to receive 50%) and loses, he receives nothing. No contests clauses are quite common in California and have been the subject of evolving legislation and extensive litigation.
Now from Russia comes penalty that exceeds anything dreamed up by the most creative estate planner. On February 12, 2008, Badri Patarkatsishvili, described as a post-Soviet Oligarch, died of a massive heart attack leaving an estate allegedly valued at billions of dollars. According to his family, Mr. Patarkatsishvili did not leave a will. In a recent Los Angeles Times article, a Russian-born New York lawyer named Emanuel Zeltser appeared at Mr. Patarkatsishvili’s wake and advised the grieving widow that her late husband had signed a secret will naming him and a half-cousin as executor. During the following month, attorney Zeltser and the half-cousin sought access to Mr. Patarkatsishvili’s global investments. Mr. Patarkatsishvili’s family sued in U.S. federal court, accusing the two Americans of trying to loot the huge estate with forged documents. The family called Zeltser's documents "invalid …" noting that several "appear to be forgeries".
According to the Los Angeles Times, attorney Zeltser had a very colorful background. Born in Siberia, Zeltser immigrated to Texas in 1974 and in 1990, was admitted to practice law in New York. During his time in the United States, Zeltser has been sued at least three times for alleged fraud including one New Jersey case where a jury concluded that Zeltser had wrongfully seized a business and was ordered to pay more than $2 million in damages. In 1993, attorney Zeltser was retained by a Russian bank, but was later accused of using his position to steal as much as $6 million of investment accounts. An attorney for the bank declared that Zeltser was a "career con man" who "forges documents on a routine basis."
In early March, Zeltser met several times with Boris Berezovsky, another Russian oligarch and former business partner of Mr. Patarkatsishvili. While Mr. Berezovsky backed Mr. Patarkatsishvili’s widow, Zeltser allegedly proposed they work together instead and drafted an agreement to secretly divide most of the assets between them, leaving only 15% for the family. On March 11, 2008, the offer was rejected when Messrs. Zeltser and Berezovsky shared a meal at a London restaurant. After the meal, Zeltser allegedly boarded Berezovsky's private jet believing that he was heading to Miami, but instead landed in Minsk, the capital of Belarus. Zeltser was arrested at the airport and charged with economic espionage and using false official documents to defraud Mr. Patarkatsishvili’s estate. After a closed-door trial, Zeltser was sentenced to three years in Penal Colony #15 in eastern Belarus, where he remains to this day.
I can think of at least a few clients over the years that would love to include such a clause in their estate planning documents. While not possible in the United States, attorney Zeltser’s case certainly presents a cautionary tale for those fighting over estate planning documents in other jurisdictions.
Does it make sense to file probate to save a failing asset?
The shrinking values in the real estate market are truly frightening these days. I have received reports that values are falling less to approximately 25% of peak values (i.e. a 75% decline in value). I have even seen reports of homes being listed for as little as $100.00 in certain parts of the country. In recent weeks, I have encountered several situations where precipitous valuation declines impact the decision of whether to commence a probate proceeding.
The typical situation involves a decedent-borrow who was struggling to remain current on his mortgage and/or found himself with an ‘underwater’ property (i.e. a property where the loan balances exceed the fair market value). With the death of the borrower, it is not usual that the loan is not being paid and frequently there are few resources available to make such payments. Sometimes the loan is already in foreclosure and literally weeks away from auction.
Recently, I encountered one situation where, at best, the estimated fair market value of a condominium was approximately $200,000 with equity remaining of approximately $10,000. With the mortgage several months in arrears and the foreclosure process already started, the heir wanted to know if the property could be ‘saved’ or somehow the foreclosure process could be stopped. While it is within the probate court’s power to temporarily stop an asset sale, most courts are reluctant to issue an injunction if it will be a useless act. With little cash in the estate it was not clear that filing a probate proceeding to save the real property from foreclosure would be a productive exercise.
Using this situation as an example, if the property would be sold, typical property sale commission and closing costs are approximately five percent of the gross sales price or, in this circumstance approximately $10,000. Moreover, to process the probate, the costs and statutory fees alone, which are measured on the gross value of the asset (not the equity), would exceed $15,000.00. With more in minimum costs and fees to handle the matter, what would remain in the estate? Under these circumstances, nothing would be left for the heirs or beneficiaries. Worse yet, the executor could easily lose money filing the proceeding, especially if non-probate assets (such as the administrator’s personal assets) are used fund the administration process.
It is entirely possible that other assets justify or require a probate filing. It is also possible that an administrator can negotiate to reduce outstanding loan balances which would warrant a probate filing. Painful as it may seem, however, sometimes the best course of action may be to do nothing. Naturally, such an important decision should never be made without deliberate consideration, counsel and an understanding of the personal risks associated with electing to lose the real property to the lender.
