Tuesday, August 26, 2014

The Cruel Economics of Will Contests in Oregon - Part I

I spend a lot of time around will contests. I represent people challenging wills and people who are defending wills against challenges. I mediate and facilitate settlement of will contest cases filed by other lawyers. I write wills that I know will be contested, and thereafter testify in court about what I did. I think a lot about will contests. In this post I want talk math of will contests.
In almost every probate someone files a will and claims that the will accurately states the wishes of the decedent (the dead person) about how his or her property should be distributed. In a will contest, a challenger alleges either that the decedent died without a will or that the estate should be distributed according to the terms of an earlier will because the will admitted to probate is void. (For more on legal strategies for challenging a will in Oregon, click here.) If the decedent died intestate--that is, without a will--the State of Oregon has written one for him. A will contest always pits one proposed distribution against another.
Ordinarily, the proponent of each will is the person who will benefit most from it. If Adam is the decedent. Cain will advocate for the will that leaves everything to Cain, and Abel will advocate for the will that leaves everything to Abel. In will contests there is no way for a court to split the baby. Either Cain wins or Able wins. For this reason, will contests are a zero sum games.
Because there are only two possible outcomes--like flipping a coin--will contests lend themselves to a mathematical computation of value. If there were a hundred dollars on a table you got to flip a coin with another person to see who gets the money, you would have a 50% chance of winning the money. The opportunity to flip for the hundred dollars is worth .5 x $100, or $50. If you got to play the game a hundred times, you would win about half of the flips. If you won fifty flips out of a hundred you would take home $5,000, or $50 per flip. In the world of probabilities this is called expected value. If you only got to play once, but were not a risk taker you might agree with the other flipper not to flip at all and simply split the money. You and the other person each would take the expected value of the opportunity and walk away with fifty dollars.
No one would do a will contest for a hundred dollars, but a person might do one if there were $500,000 on the table. If Adam had died with a nice home and/or a good sized investment account, there might be this amount for Cain and Abel to argue about. Personal injury lawyers wait around hoping for a case in which there is $500,000 to divide. Probate lawyers get these cases all the time.
When you flip a coin, you know the odds of it coming up heads or tails. It is 50/50. In a will contest, however, the odds of winning are unknown. Let's assume that Abel got to the courthouse first and it is Cain that is challenging the will that favors Abel. If the odds of Abel winning are the same as flipping a coin--50/50--then the opportunity to play is worth $250,000. That is the expected value. It is also the default settlement value of the case.
Will contests, unlike coin flips, do not lend themselves to a simple calculation of the odds of winning. Emotions run high, with both sides willing to go to court because both loved Adam more than anyone else in the world and both believe they represent what Adam really wanted. If you can set emotions aside, however, the case can be evaluated in terms of chances of success in the same way as we did with the coin and the $100. Let's say that Cain's case is weak, and everyone who looks at the cases agrees that he only has a two in ten chance of winning. The math is the same as the coin flip with different numbers: .2 x $500,000 = $100,000. Cain's case is worth $100,000, and in an emotionless world, Abel would settle by taking $400,000 and giving Cain $100,000. Both Cain and Abel, like our coin flippers, walk away with the expected value of their respective cases.
(It is important here to avoid the kinds of errors that plague gamblers and politicians. First, Abel may say, "I have an 80% chance of winning this case and taking all the money. Why should I give Cain anything?" This reasoning conflates a high likelihood of something happening with certainty. The 80% chance of winning means that if you tried this case ten times before ten different judges, Abel would lose two of the cases. In real life, Abel only gets to try the case once and that once could be one of the one that loses.)
Unlike my example with the coin flip, a will contest is not free. It is like a lottery in that there is a cost to play. The cost of a will contest is the litigation costs--both attorney fees and court costs--and those costs need to be deducted from the value of the case in the same way that the costs of a lottery ticket reduce its expected value (The expected value of a lottery ticket is always less than you paid for it). So lets say that it costs $50,000 to litigate a will contest.  If Cain settles his case on an expected value of $100,000, he would owe his lawyer $50,000 (or less if he settles early) and walk away with $50,000 in his pocket.
But wait a minute, Cain knows early on that he has an 80% chance of losing his case. Thus it is quite likely that he will have to go to court, lose the case, get nothing, and end up owing his lawyer $50,000. When you don't win the lottery, you are still out the cost of the ticket. Thus, Cain faces a situation in which he must pay $50,000 for a .2 probability of receiving $500,000. Avoiding the $50,000 debt may be more important to him than the small chance of a large payoff. If Cain is wealthy and mathematically inclined he will pursue the .2 chance of getting $500,000 every time. If Cain is very poor and has no intention of paying his lawyer unless he wins he will similarly take it every time. If Cain, however, is an average guy who takes his debts seriously he may forgo both the case and the cost. The payoff may be mathematically justifiable but the risk of loss is too great.
Abel has it better. He only has a two in ten chance of getting nothing and ending up with a big bill for attorney fees. If he has a lot of money and is mathematically inclined, he will try or settle the case indifferent to the outcome because he knows that over the long run it was a wise investment. The middle class Abel will defend the case, but probably settle by giving Cain his $100,000 expected value. By settling the middle class Abel walks away with $400,000 and avoids the 20% risk of losing everything. If Cain won't settle for the expected value, Abel takes the case to court. If he wins he gets all the money and if he loses he is still middle class. The poor Abel will view the $500,000 potential inheritance as life-changing. He really does not want to walk away with nothing and continue being poor. He will settle by paying Cain somewhat more than the $100,000 expected value in order to eliminate the small risk of receiving nothing. Poverty makes for bad bargaining positions.
The expected value of a will contest is easy to figure if you can agree on the probability of success. In the real world, however, that seldom happens. Both sides think they have iron clad cases. In a subsequent post I will address the role of contingency fees on the math of will contests and then I will write about some factors that lead us to mistakes in determining the probability that a case will succeed.

Friday, August 15, 2014

Heir Hunters and How They Work When You Die Without A Will

I have written before about dying without a will and the fact that if you decide to do so the State of Oregon will write one for you. To figure out what will the state has written, lawyers consult a chart. If you die with children, your children get the money. If you don't have children, your parents get the money. After that your relatives get the money based upon how close a relative they are. In most cases, figuring out who gets the money when someone dies without a will is fairly easy. But sometimes it is not. When it is not, we probate lawyers run into people who make their money by finding distant heirs and taking a chunk of the inheritance in return for connecting the heirs to the probate. These folks are heir hunters.

I recently got a case in which a fellow died without a will, had no children and no living parents. His estate ended up going to a couple of elderly aunts and a fistful of cousins. The dead guy had not been the family type and therefore the relatives who stood to inherit barely knew who he was. In addition, the aunts and cousins were scattered throughout the United States. As the lawyer handling the estate it was my job to find all these relatives and make sure each one got his or her inheritance. To do this I hired a genealogist and put her to work trying to find the names and addresses of the aunts and cousins. If she found them, I would send them a notice telling them that they were entitled to an inheritance. But as I went to work trying to find these people, so did the "heir hunters." I went looking for heirs to fulfill my obligations to the court as an administrator of the estate. The heir hunters went looking for a cut of the action.

Heir hunters scour the probate filings and the death notices that must be filed in every probate. They are looking for cases like the one I described.  The heir hunter then attempts to locate the heirs before I can find them and sign them up as clients. The heir hunter tells the heir that he or she is entitled to an inheritance, but does not give the name of the dead relative or the court in which the probate is pending. The business then offers to "represent" the heir in the probate in return for a percentage of the inheritance.

If the heir signs a contract with the heir hunter the heir agrees to pay a percentage of his or her inheritance--from 20% to 50% but usually 33%--to the heir hunters. The heir hunter then refers the case to an attorney that has an ongoing business relationship with the heir hunting company. That lawyer then contacts me to tell me that he represents the heir. The rules that I must follow tell me that if person has a lawyer, I cannot talk to them directly, but can only talk to their lawyer. From that point on, I can only communicate with that heir through the lawyer for the heir hunters.

If there are a lot of heirs, one heir hunting company may end up representing many or even all the the people entitled to an inheritance. In the case I described, I found about half the heirs before the heir hunters could sign them up, but two different companies got to the remaining heirs before I could find them. The heirs that signed with the heir hunters will pay a percentage of their inheritance to the company. The ones I found will not.

You might ask what heir hunters actually do for the heirs they find. As far as I can tell--not much. So far the heir hunters in my case have notified me that they represent some of the heirs and asked me to provide them with further court filings. Neither of lawyers representing the heir hunters have filed an "appearance" in the case, something that would have entitled them to copies of all pleadings as a matter of right. I brought this up to one of the lawyers and was informed that he had not filed an appearance on behalf of his client because the filing fee was so high. It does not seem that he intends to actually do anything in the case except wait for me to finish the administration and collect his percentage.

In my experience, the heir hunters do little other than connect the heir to the lawyer doing the probate of the estate. Anything further than that--such as actually doing some work to protect their client's interest-- cuts into their profit.  I do my best to find all the heirs in cases like this. I hire a professional genealogist who charges by the hour and I pay her a lot. She will find the heirs, but sometimes the heir hunters find them  first. If I have a choice, I put her to work before I file the probate. That way I can get to the heirs before the notice is published. Sometimes, however, the probate needs to be opened quickly in order to protect estate property. In those cases it is a race, and when I lose the race the heirs lose a percentage of their inheritance.

A post like this should end with some advice. I guess my advice would be that if you are contacted by heir hunters attempt to delay. String them along while you talk to relatives--near and far--and try to find out who died. Waiting will also allow the person administering the estate time to find you. Probate administration takes a while. The heir hunter may say that action on your part is urgent, but it really isn't. Hold off and look around. If you get a lead on a dead relative who might have left you money, call the state court where you think he might have died. If you find something, look up the lawyer who is doing the probate. He will be glad to hear from you because he has probably been looking for you. Give the lawyer your address and get all your inheritance, not just the portion left after the heir hunter has taken its cut.