Estate Planning in California

Stepped-Up Basis

2012-01-25T16:27:00.000-08:00

Whenever a person sells an asset, whether personal or real, the person needs to determine cost basis of the item to ascertain whether or not the sale results in a taxable gain. For example, John purchases 118 Green Street in CA for $100,000 in 1985. The cost basis would be $100,000. If, generally speaking, John ever sold the property for greater than $100,000 such sale would result in a taxable gain.

One of the prime benefits of acquiring real property through inheritance is the application of "stepped-up basis." The result of stepped-up basis is that a person who inherits real property receives a new cost basis which is pegged to the fair market value of the asset at the date of the decedent's death. IRC §1014(a); Rev & T C §18031. Yes, that is how it is written in tax terminology. For example, from above, John purchases 118 Green Street for $100,000 in 1985. Due to real estate appreciation (just go with it), John's home gradually increases in price to $700,000 in 2012. John then dies in a tragic hot air balloon accident in 2012 in Morgan Hill, CA. John's heirs would be entitled to claim $700,000 as the cost basis of the home. Subsequently, when John's heirs sell the home, the starting point for a taxable gain would be $700,000, whereas the starting point for John would be $100,000. Though capital gains tax is much lower than regular income tax (see Mitt Romney tax return for 2010), it still is roughly 25% combined for federal and state, that is California. When you multiply that by 600,000, the result is a rather large number. Thus, it is quite clear that stepped-up basis affords heirs an enormous tax savings because they are not liable for the appreciation that has accumulated over the years. Rather, the heirs can take advantage of the new date of death value of the asset. The common result is that heirs of real property often pay little to nothing in capital gains taxes if they sell the inherited property shortly after receiving it.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Suing a trust instead of a trustee

2012-01-20T11:10:00.000-08:00

One of the more common fallacies in regards to trusts is the notion that a trust itself is the appropriate party to sue. Instead, the trustee of the trust is the appropriate party to sue. This distinction was raised in a recent California court case with unfortunate results for one party.

Portico Management Group, LLC V. Harrison

Portico Management Group, LLC contracted with the Harrison Children's Trust and the Harrison Family Enterprise II, a limited partnership, to purchase an apartment building it owned jointly. Naturally, the sale was never completed and Portico sued the Trust and limited partnership, and ultimately was awarded $1.6M through arbitration. In 2007, Portico had the arbitration award entered by the trial court but judgment was entered against the Trust rather than the Trust's trustees. Portico then sought to enforce the judgment against the Trust but the Trust's trustees objected because Portico had obtained a judgment against the wrong party, the Trust as opposed to the Trust's trustees. The trial court ruled in trustees' favor and Portico appealed.

The appellate court affirmed the trial court's decision because the trustee is the real party in interest, not the trust itself, and thus judgment had been entered against the wrong party. Still, even though the arbitrator incorrectly listed the wrong party as the judgment debtor, Portico had an opportunity to correct this mistake by either utilizing the arbitrator or the trial court within certain time periods. Yet, Portico failed to act in a timely manner and deprived itself of the opportunity to correct this mistake. Thus, the appellate court ruled that Portico could not levy upon trust assets for recovery.

The obvious takeaway from this case, is that if a litigant ever sues a trust, they must name the trustee in the complaint or else you might end up with a judgment against an entity, namely a trust, that does not fall within the statutory definition of a judgment debtor and recovery will be thwarted.

Modifying an Irrevocable Trust

2012-01-13T10:57:00.000-08:00

The Berkeley Court handles probate matters in Alameda County

Though the name suggests otherwise, an irrevocable trust can be modified through a number of ways. A previous post discusses how to amend a revocable trust. The following are permitted methods to change a California irrevocable trust. Most of the methods do require court approval.

1. All trust beneficiaries consent. Prob C §15403.

This method is generally allowed provided that neither of the following apply (1) "the continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust.the modification will not" or (2) the trust contains a spendthrift clause.

If neither (1) or (2) apply, the beneficiaries can petition the appropriate probate court for modification.

One of the problems with this method is that sometimes beneficiaries do not live in the same area or there are beneficiaries that are minors or unborn. Thus, obtaining the consent of all beneficiaries can be a challenge.

2. All trust beneficiaries and the settlor consent. Prob C §15404(a)

Generally speaking, no court order is needed for this method.

3. At least one beneficiary and the settlor consent. Prob C §15404(b)

This method is allowed provided that the interests of the non-consenting beneficiary or beneficiaries is not substantially impaired.

4. Principal is uneconomically low. Prob C §15408

Following the submission of a petition to the court, if it "determines that the fair market value of the principal of a trust has become so low in relation to the cost of administration that continuation of the trust under its existing terms will defeat or substantially impair the accomplishment of its purposes," modification is permitted.

Or, if the trust principal is $40,000 or less, the trustee is empowered to terminate the trust immediately.

5. Changed circumstances. Prob C §15409

This is most common with charitable trusts as a settlor might name a charity as a trust beneficiary but the charity merges with another charity or dissolves prior to death. For example, assume that Samuel Settlor designates an animal shelter in Los Altos, CA as the sole trust beneficiary. Prior to Samuel's death, the animal shelter dissolves for lack of funds to operate and donates its remaining assets to the animal shelter in Mountain View, CA. Upon Samuel's death, the Mountain View animal shelter would petition the probate court to modify the trust whereby it would become the trust beneficiary because of its connection to the Los Altos animal shelter.

The legal term for substituting one charity for another to fulfill the settlor's intent in a trust modification case is called "cy pres." Try to incorporate that term into your conversations to either (1) impress your friends, co-workers or family (2) confuse them or (3) raise their ire by using legal jargon in an every day conversation.

6. Conform the trust to tax laws. Probate Code §§21520-21526

Since a principal reason to write a trust is consideration of tax laws, a trust can be modified to achieve the tax objective the trust was intended to fulfill.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Types of Irrevocable Trusts

2012-01-04T15:52:00.000-08:00

The majority of trusts that are drafted are known as revocable or living trusts. However, some people write irrevocable trusts as well if the situation dictates the necessity for such. The following are some of the more common irrevocable trusts:

Life Insurance Trust (commonly known as a ILIT)

In this type of trust, parents gift money to their children to pay the life insurance policy premiums, which are taken out for the parent's lives, and the parents then designate the children as the policy's beneficiary. An ILIT provides the benefit of reducing the parent's taxable estate for Estate Tax purposes and provides the children with liquidity to satisfy Estate Tax obligations. For example, the parents might gift $26,000 to their children annually to purchase the largest life insurance policy they can obtain. When the parents pass away, the proceeds from the policy will not be included in his or her gross estate for Estate Tax purposes. In turn, the children will reap sufficient liquidity to pay any Estate Tax liability. Generally speaking, the IRS requires prompt payment of the Estate Tax, hence access to large quantities of cash is needed to pay it. Unfortunately, you cannot barter services with the IRS as a form of payment so money is needed to pay them off not your impressive karaoke skills.

Crummey Trust

This type of trust allows a parent to gift the maximum annual exclusion amount, $13,000 in 2012, to their child's trust. The name is derived from the court case which recognized its validity, Crummey v Commissioner (9th Cir 1968) 397 F2d 82. Basically, a parent tells their child that they are gifting their Crummey Trust $13,000 and the child has the right to withdraw said funds within a specified time period if they so desire. Invariably the child will not withdraw the funds whereby the funds become part of the child's trust. If this seems like a big charade to you, then you can think prudently.

Charitable Trust

Since the Estate Tax allows a charitable deduction, a wealthy individual might write a trust which benefits a recognized charity to offset the Estate Tax. There are two types of these, a charitable remainder trust ("CRT") and a charitable lead annuity trust ("CLAT"). In a CRT, individuals are designated as beneficiaries for a specified period of time, with the remainder interest passing to charity. In a CLAT, the formula is reversed, the charity is the initial beneficiary for a specified period of time, with the remainder interest passing to named individuals.

Special Needs Trust (commonly known as SNTs)

A SNT is a trust designed for individuals who are disabled with the goal of retaining the individual's public benefits such as Medi-Cal and Supplemental Security Income while simultaneously allowing them to receive property. There are two types of SNTs, a First-Party Specials Needs Trust and a Third-Party Special Needs Trust. In a First-Party SNT, the disabled individual themselves creates the trust. For example, the individual is awarded a substantial judgment for a personal injury claim and creates the First-Party SNT to maintain eligibility for public benefits. Conversely, with a Third-Party SNT, some person other than the disabled individual, almost always the parents, creates the trust for the individual.

Qualified Domestic Trust (commonly known as a QDOT)

In the case of a couple, the Estate Tax is not an immediate concern should one spouse away. The reason for this is because one spouse is allowed to transfer to the surviving spouse an unlimited amount of property upon their passing. IRC §2523. For example, if Jack and Jill were collectively worth $250M and Jack suddenly passed away in a tragic hot air balloon accident, Jill would have no immediate concern of paying the Estate Tax since Jack could leave his entire to her absent Estate Tax liability. Although Jill's estate would have to pay the Estate Tax once she passes away. Regardless, the major qualification for the unlimited marital deduction is that the surviving spouse be a U.S. citizen. IRC §2056(d).

If the surviving spouse is not a U.S. citizen, the couple can write a QDOT to take advantage of, albeit partially, the marital deduction for Estate Tax purposes. The nuances of a QDOT are beyond the scope of this brief post because the requirements are rather technical and more importantly for you the reader, quite boring. However, a prior post is dedicated to this topic.

There are many other types of irrevocable trusts. I focused on the above trusts because I see them in use most frequently.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Estate Tax in 2012

2011-12-30T15:33:00.000-08:00

Since the end of the year is very much upon us, this brings changes to tax law. In particular, the Estate Tax is set to be changed, albeit ever so slightly, in 2012.

1. What will be the federal Estate Tax limit in 2012?

The federal Estate Tax limit in 2012 will be $5,120,000. This was announced by the IRS on October 20, 2011.

2. What was the federal Estate Tax limit in 2011?

The federal Estate Tax limit was $5,000,000 in 2011. When the prior Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the exemption amount was increased to $5M in 2011 and would be indexed for inflation in 2012. The $120,000 increase for 2012 reflects that.

3. What about the California Estate tax in 2012?

There is no California Estate Tax in 2012 for people who pass away after December 31, 2004.

The topic of the California Estate Tax is very popular apparently. It was easily the most commonly used keyword to reach my blog in 2011. For instance, "California estate tax 2011" was used 1,495 times to reach my blog and "California inheritance tax 2011" was used 767 times to reach my blog.

4. What does the Estate Tax limit mean?

The figures just mentioned represent the threshold amount before tax is owed. For example, if a person passes away with an estate worth $300,000 in 2012, then no Estate Tax is due. However, if the person is worth $100M when they pass away in 2012, then it is likely that the estate will have to pay the Estate Tax. It is not a certainty however that a very affluent individual will be liable for the Estate Tax as there are deductions a person may make to avoid the Estate Tax. For example, it is quite common for the rich (or 1% for you Occupy Wall Street sympathizers) to leave a sizable portion of their estate to charity which thereby avoids the Estate Tax if the donation is large enough. IRC §2055(a).

5. Which year's Estate Tax law applies to a particular estate?

The laws in effect when a person passes away is the applicable law. For example, if a person passes away in 2011, the the limit is $5M, if a person passes away in 2012, then the limit is $5,120,000.

I have been asked on multiple occasions whether or not the year in which the trust or will was written dictates which Estate Tax law applies. No, it does not. Although it is easy to see why a person would want such a scenario. If the Estate Tax was changed, hypothetically-speaking, to a $3M exemption for 2013, people would obviously prefer to have either the 2011 or 2012 law apply because of the greater exemption limit.

Conversely, if you are inclined to leave the IRS your money, despite the inapplicability of the Estate Tax, you may due so by sending a check to the following address:

Attn Dept G
Bureau of the Public Debt
P. O. Box 2188
Parkersburg, WV 26106-2188

6. What does the future hold for the Estate Tax?

The current Estate Tax system is set to expire in 2013 and the exemption amount will revert back to $1M then. Consequently, the next election in November 2012 will greatly impact the specifics of the Estate Tax. Democrats are inclined to lower the Estate Tax limit and Republicans are inclined to increase or possibly abolish it. Thus, the victor in 2012's elections will have the opportunity to craft future Estate Tax legislation.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Care Custodian

2011-12-22T14:30:00.000-08:00

Certain individuals are considered to be, generally speaking, prohibited beneficiaries of a person's estate. For example, an attorney who drafts a will or trust for a client is generally barred from being a beneficiary under the will or trust. Prob C § 21350(a)(1). This should not come as a mystery to anybody.

Another prohibited transferee is a "care custodian." Probate Code Section 21362 defines a "care custodian" as one who provides health or social services to a dependent adult, but it excludes those who provided services without remuneration if that person had a personal relationship with the dependent adult:

1. At least 90 days before providing those services;
2. At least 6 months before the dependent adult's death; or
3. Before the dependent adult was admitted to hospice care.

The rationale behind the law is to protect a dependent adult from the nefarious conduct of a care custodian who can easily manipulate the adult into naming the care custodian as a beneficiary. This can be a very easy situation to envision. The care custodian is often entrusted with ostensibly parental duties for the dependent adult. For example, the care custodian often clothes, feeds, bathes and transports the adult on a daily basis. The pair can then easily form a close bond. Aided by this close relationship, the care custodian can easily influence the adult into writing them into their will or trust.

However, despite the foregoing, a dependent adult may still make a valid transfer to a care custodian if an independent attorney has provided a certificate of independent review ("CIR") after performing his or her due diligence in regards to the proposed transfer. Prob C §§21351(b), 21384. Moreover, the drafting attorney needs to inform the dependent adult of the need for the CIR, since the proposed transfer will fail without one, or else the attorney may liable for professional malpractice. Osornio v. Weingarten (2004) 124 CA4th 304. The use of the term "independent attorney" denotes that the attorney cannot otherwise be involved with drafting the document. Thus, if the dependent adult hired one attorney to write a will and named a care custodian a beneficiary, a second attorney would be needed to draft the certificate of independent review.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Pet Trust

2011-12-15T17:00:00.000-08:00

My sister's cat "Snickers"

The California Probate Code allows a person to select a host of beneficiaries. For example, a person may select an individual, corporation, charity, or a governmental unit as a beneficiary. Prob C § 6102. However, a pet or companion animal is ineligible to receive an outright inheritance. Instead, a pet may "inherit" property, at least in California, through the medium of a pet trust. Prob C § 15212.

The following are some famous examples of pet owners who decided to leave a gift to their feline or canine friend.

The late Leona Helmsley was a very wealthy person. In her will, she bequeathed $12M to her Maltese dog "Trouble." Later a New York court ruled that Ms. Helmsley was mentally unfit when she executed her will and reduced the dog's inheritance to a mere $2M. According to an affidavit submitted to the court by the dog's caretaker, Carl Lekic, $2M would be sufficient to pay for the dog's care at the optimum level for more than 10 years. He stated that annual costs for full-time security would be $100,000, $8,000 for grooming and $1,200 for food costs. Additionally Mr. Lekic would receive an annual guardian fee of $60,000. Sadly Mr. Lekic's compensation was reduced in light of Trouble's decreased inheritance.

Similar to Ms. Helmsley, Maria Assunta passed away a very rich woman in Italy. Her late husband had amassed a huge fortune through property holdings. Upon Ms. Assunta's passing, she was survived by no heirs so she made the decision to leave $13M to a nurse to care for her beloved cat "Tommaso."

Thelma Russell, a resident of San Diego County, apparently deeply cared for Chester H. Quinn and Roxy Russell. Her holographic will, in its entirety, stated "I leave everything I own Real & Personal to Chester H. Quinn & Roxy Russell signed Thelma L. Russell." Estate of Russell (1968) 69 C2d 200. The good news for Mr. Quinn was that he received 1/2 of Ms. Russell's estate. The bad news for Mr. Quinn was that he could not claim the other 1/2 of Ms. Russell's estate to manage for the benefit of Roxy Russell, her dog, since a pet is not an eligible beneficiary in a will. The worst news for Mr. Quinn was that because the bequest to Roxy Russell failed, 1/2 of Ms. Russell's estate fell into intestacy and was transferred to Ms. Russell's heir rather than Mr. Quinn.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Estate Tax legislation

2011-12-09T15:18:00.001-08:00

The Estate Tax is definitely one estate planning topic that captures the attention of many. The following are two competing bills that seek to amend the Estate Tax. I contrasted three main topics of the Estate Tax, and the Gift Tax because of its close association to the Estate Tax, that each bill addressed.

I am by no means endorsing or opposing either bill in any way.

Rep. Jim McDermott (D-Wa), The Sensible Estate Tax Act Of 2011.

1. Applicable Exclusion Amount

The applicable exclusion amount for 2012 is slated to be $5M plus inflation. Rep. McDermott's bill would decrease the applicable exclusion amount to $1M in 2012.

2. Estate Tax Rate

The Estate Tax rate is currently set to be 35% for 2012. Rep. McDermott's bill would increase the Estate Tax rate to 55% for 2012.

3. Gift Tax Exemption

Rep. McDermott's bill would peg the Gift Tax exemption to the Estate Tax exemption. Hence, if the Estate Tax was $1M, since Rep. McDermott's bill passed, then the Gift Tax exemption would also be $1M.

Rep. Kevin Brady (R-Tex), The Death Tax Repeal Permanency Act Of 2011.

1. Applicable Exclusion Amount

Rep. Brady's would repeal the Estate Tax. Therefore, no tax would be imposed on a decedent's estate, regardless of the size, for the estates of decedents dying on or after the date of the enactment of the Death Tax Repeal Permanency Act of 2011.

2. Estate Tax Rate

Since Rep. Brady's bill would abolish the Estate Tax, then clearly there would be no Estate Tax rate. For clarity's sake, Rep. Brady's bill would effectively make the multiplier "0."

3. Gift Tax Exemption

Rep. Brady's bill would make permanent the $5M Gift Tax exemption.

Probate terms

2011-12-01T08:14:00.001-08:00

Probate law has certain terms that have specific legal meanings to them. The following are some of those terms.

Abatement

Definition: The reduction of testamentary gifts. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent decides to leave $50,000 in his will to his friend Larry Appleton with the balance, known as the residuary, to his other friend Homer Thompson. When John wrote his will, his estate was worth $500,000 in liquid assets. However, when John passed away, due to his profligate spending, his estate was only worth $30,000. California laws on abatement say that Larry is entitled to the remaining $30,000, not Homer. Prob C § 214029(a). However, the default rules of abatement can be altered in a will. Prob C § 21400.

Ademption

Definition: Property that was listed in the person's will that is not in his or her estate at the time of their death. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent states in his will that his friend James Rodgers is to receive his prized red Ferrari 308 GTS, which was featured in the movie National Lampoon's Vacation. (I have watched that movie about a thousand times now). John then sells his Ferrari to pay off his credit debt and passes away in a tragic hot air balloon accident shortly thereafter. John's gift of the Ferrari to James is therefore adeemed. James will then need to prove, in order to inherit replacement property from John's estate, that there is no sufficient proof to conclude that John intended for the gift to fail. Estate of Austin (1980) 113 CA3d 167. For example, James will argue that John sold the car because he intended to pay off his credit card rather than avoid having James inherit his Ferrari.

Beneficiary

Definition: "A person to whom a donative transfer of property is made or that person's successor in interest." Prob C § 24.

Example: John Negligent leaves, in trust, a beach home in Santa Cruz for his nephew Bobby Smithson.

Class gift

Definition: A gift to all individuals matching the description of the class. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent writes a will and leaves his entire estate to his "nieces." When John write his will, he has 4 nieces but at the time of his death he has only 1 niece. Since the devise was to a class of members, rather than individuals, the remaining niece is entitled to inherit the entire estate rather than split the estate with the heirs of the predeceased nieces.

In contrast, a gift made by Katherine Moore in her will to "Carrie D. Griffin and her sister, Anna M. Davis, equally divided" was found not be a class gift. Estate of Moore (1955) 135 CA2d 122. Thus, Anna could not inherit the entire gift even though Carrie had predeceased Katherine.

Creditor

Definition: "One to whom a debt is owed." Black's Law Dictionary 8th ed. (West Group, 2004)

Example: John Negligent runs over a defenseless old lady in the Santa Cruz mountains on a dark and stormy night. The old lady's family sues sues John for wrongful death and wins. While on appeal, John passes away due to an unforeseen traffic accident. The victim's family is a creditor of John's estate and may assert a creditor's claims during John's probate.

Decedent

Definition: "A dead person." Black's Law Dictionary 8th ed. (West Group, 2004)

Example: Self-explanatory. I will avoid making a potshot at a recently deceased celebrity.

Disclaimer

Definition: "Any writing which declines, refuses, renounces, or disclaims any interest that would otherwise be taken by a beneficiary." Prob C § 265

Example: Homer Thompson is the first named beneficiary of John Negligent's large estate, his uncle. However, Homer has enormous credit card debt and multiple judgments against him. Rather than have his creditors inherit his uncle's estate, Homer disclaims his interest in John's estate so that it transfers to the second named beneficiary. For reference, this is legal. Prob C § 283.

Executor

Definition: An individual nominated in a will to be appointed by the probate court to administer the estate of the decedent's death. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent nominates in his will that Freddy Freebird to be the executor of his will.

Fiduciary

Definition: A person who is required to act for the benefit of another person, on all matters within the scope of their relationship; one who owes to another the duties of good faith, confidence and candor. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: An executor hires an attorney to handle a decedent's probate. The executor is a fiduciary for the decedent's estate and the attorney is a fiduciary for the executor.

Heir

Definition: Any person, including the surviving spouse, who is entitled to take property of the decedent by intestate succession under this code. Prob C § 44.

Example: Harry is married to Wendy but the couple decides never to have kids. Harry passes away in a tragic rafting accident on the Colorado River in Arizona. At the time of his passing, Harry did not write his will. Wendy is considered Harry's heir.

An heir is basically a person's next of kin.

Intestate

Definition: A person who has died without a valid will. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Irwin decides to write a will but can only locate 1 witness, his neighbor, to sign his type-written will. On the way home from having his will countersigned by his neighbor, Irwin is run over by a pizza delivery guy. Irwin has died intestate because a type-written will requires 2 witnesses. Prob C §6110.

Issue

Definition: All his or her lineal descendants of all generations, with the relationship of parent and child at each generation being determined by the definitions of child and parent. Prob C § 50.

Example: Harry and Wendy, a married couple, have two children, Sonny and Denise. Denise then gets married and has a child, Gwynn. Harry then passes away in an unforeseen blender accident. Harry's issue would be considered Sonny, Denise and Gwynn.

Lapse

Definition: A devise to a beneficiary that fails because the beneficiary has either predeceased the testator or has failed to live until a certain point in time. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Thomas devises to Bobby his home in Los Altos, CA free and clear, 650 Rosewood Court. Bobby unexpectedly passes away before Thomas succumbs to mortality. Bobby's inheritance is a nullity because he has failed to survive Thomas, namely the gift has "lapsed."

Minor

Definition: An individual under 18 years of age. Fam C §6500.

Example: Uh, not needed?

No Contest Clause

Definition: A clause in a will or trust that disinherits a beneficiary should they contest a will or trust. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Thomas writes in his will that his son, his sole heir, shall only receive $10,000 of Thomas' $1,000,000 estate. The remainder of the estate will go to Thomas' drinking buddy Barney. The will also contains a no contest clause which states that Thomas will forfeit his $10,000 inheritance if he chooses to pursue litigation in hopes of overturning the will for whatever reason.

Pretermitted Child

Definition: A will, made by a parent, that fails to account for a child. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Harry writes his will in 2000. In 2002, Harry marries Wendy and they have a child named Doris in 2004. In 2011, Harry passes away after toppling a vending machine after he tried to grab the last Diet Mountain Dew from it. Doris is a pretermitted child because Harry's will does not account for her. In light of this, Doris may be able to claim an intestate share of Harry's estate.

The companion to a pretermitted child case is the pretermitted spouse, in which the husband fails to account for the wife in his will.

Residuary

Definition: A residuary gift is a transfer of property that remains after all specific and general gifts have been satisfied. Prob C §21117(f).

Example: Thomas pens a will with the following stipulations (1) $15,000 to my Uncle Buck (2) $20,000 to my neighbor Al Bundy (3) my Honda Accord to my friend Larry Appleton and (4) the residual to Pancho Villa. When he dies Thomas' estate has (1) $100,000 in cash (2) $300,000 in Exxon Mobil stock (3) a home in Beverly Hills, CA (4) a Honda Accord and (5) a Rolex Oyster Perpetual.

Villa, as the residual beneficiary is entitled to $65,000 in cash, all the Exxon Mobil stock, Thomas' house and his watch.

Rule Against Perpetuities

Definition: A nonvested property interest is invalid unless one of the following conditions is satisfied:

(a) When the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive or (b) The interest either vests or terminates within 90 years after its creation.

Example: William Randolph Hearst, the media baron, wrote in his 1951 will that his trustee was to operate his business, which is estimated to be worth billions of dollars, as long as they see fit and without time limit. Due to the rule against perpetuties, the trust is expected to last until 2040. Hearst v Ganzi (2006) 145 CA4th 1195. The reason for this is because by 2040, the trust will have failed to vest or terminate within 21 years of Hearst' death and it will be 90 years since the trust's creation.

Testator

Definition: A person who has made a will.Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Pretty sure an explanation is not needed here.

Trustee

Definition: One who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Thomas writes a trust and leaves property to his son Samuel. However, since Samuel is a minor, Thomas entrusts the property to Theo to hold in trust until Samuel becomes an adult.

The list of duties a trustee owes a beneficiary are expansive and there is significant liability involved with this undertaking.

Trustor (or Settlor)

Definition: One who creates a trust. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Every trust has three components, a trustor (or settlor), the person who creates the trust, the trustee, the legal owner of trust property and the beneficiary, the equitable owner of the property.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

No Taxpayer left behind

2011-11-23T15:16:00.001-08:00

When a person passes away, there are numerous taxes associated with the transfer of the decedent's assets. The following are examples of these transfer taxes.

Estate Tax

The Estate Tax is a tax levied on a decedent's estate when the estate's amount exceeds the applicable exclusion amount. For example, the current exclusion amount in 2011 is $5M. Thus, if a single person were to pass away next week and their estate was worth $10M, their estate would be, generally speaking, subject to the Estate Tax. The Estate Tax's top rate for 2011 is 35%.

The future of the Estate Tax is under considerable debate at the moment. The applicable exclusion amount is set to revert back to 2003 levels, $1M, if no action is taken for the year 2013, the $5M exclusion expires after 2012. It is likely that the Estate Tax will be revisited sometime in late 2012 because Congress has a habit of waiting until the last moment to resolve anything.

Gift Tax

The Gift Tax is a tax levied on the transfer of property between parties absent consideration. For example, if Donald gave the keys to his Ferrari to his friend Doug out of the blue and said "the car is yours to keep" and Doug then hastily sped off in the Ferrari, such would constitute a gift. The reason being is that there was an (1) intent to make a gift, Donald was not asking for anything in return, (2) delivery of the gift, Donald gave his keys to Doug and (3) receipt of the gift, Doug drove off with the car.

The Gift and Estate Tax are linked together to prevent a person from giving away their estate before they die in order to avoid the Estate Tax. Thereby, giving away large gifts over one's lifetime can reduce the amount of the Estate Tax available to that person on their death. So before you decide to give away all of your possessions on your death bed to avoid the taxman, remember the preceding sentences.

The current amount a person can give away before they incur Gift Tax is $5M. Again, this figure is under considerable debate as well because the figure has been tinkered with many times over the past couple of years.

Generation Skipping Transfer Tax

The GST Tax is designed to address the situation where a person transfers property to a "skip person" that avoids the application of the Gift and Estate Tax. This "skip person" is almost always a grandchild. Hence, the law typically arises when a grandparent transfers property to a grandchild. For example, a grandparent might create a trust that distributes income derived from the trust to the child and the grandchild, and upon the child's death, the principal will be distributed to the grandchild.

The GST Tax uses the same applicable exclusion amount as the Estate Tax, $5M in 2011.

The GST Tax is largely irrelevant for the vast majorities of individuals because not many people have millions of dollars earmarked for a grandchild's inheritance through a trust.

Property Taxes (Prop 13)

If the decedent's estate owned real property, then property taxes will need to be addressed. Prop 13, the California constitutional amendment that governs property taxes, says that each piece of real property can be assessed a 1% levy and each year the property's assessed value can be at most raised 2% from the previous year. However, before you tell me that I am uninformed because your property tax bill is clearly greater than 1% of the assessed value, please remember that cities and counties are allowed to tack on various fees for infrastructure projects and pension obligations.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Writing a will

2011-11-17T14:28:00.001-08:00

Writing a will is not an overly cumbersome process. The following are some provisions that all wills should contain. Of note, the term for a person who writes a will is "testator." A person who dies with a will dies "testate" whereas a person who dies without a will dies "intestate."

Your full name and any nicknames you go by

Clearly it would be difficult to administer a will if the testator was anonymous. Moreover, it is important to include any nicknames you might commonly go by. For example, past clients have routinely gone by their nicknames. Even their bank accounts or driver's license had their nicknames on the account (don't ask how they did this).

The point is to be able to ascertain who in fact wrote the will.

Place of residence

The common practice is to list the county of residence, rather than the city of residence, and the state of residence. There is no legal requirement to do so but it is good practice. If you do not know what county you reside in, well, just Google the city you live in and Wikipedia can tell you.

California law says that a will needs to be probate in the county of residence of the decedent. Hence including the county of residence would prove helpful for the executor. Prob C § 705

Name of spouse and/or children

California is a community property state. Each spouse has a 50% community property interest in the entire marital estate. By omitting a spouse in their will, the testator runs the risk that the omitted spouse can claim an intestate share of the testator's estate despite their omission. Prob C §§100-101. There are exceptions to this rule though. Prob C §21611.

Similarly, if a testator fails to mention his or her children, such omitted children can claim a share of the testator's estate, just like a spouse, despite their omission. Prob C § 21620. Although, again, there are exceptions to this general rule. Prob C § 21621.

A No-Will Contract

Yes, a person can write a contract which specifies how they will write their will. Prob C § 21700. I have never personally seen a will contract but have read about them. Regardless, it is good practice to include a no-will contract clause to erase any doubt.

List of bequests

People read wills because they want to see what they will inherit. Obviously then, it is important to clearly delineate what item goes to which person. For example, a testator can write "my ATT stock to my cousin Bob" suffices.

It is not necessary to be overly verbose or complicated when making bequests. Just pick an item and list a person.

Name an Executor

The executor is a person nominated in a will to be appointed by the court to administer the estate at the testator's death.The executor can be virtually anyone, a relative, a family friend, a neighbor or a corporation.

Just don't pick the crazy neighbor who refuses to mow his lawn, the relative who has filed bankruptcy multiple times or the friend who likes to buy products he sees while watching infomercials at night.

Testator's signature

The testator has a few options as to who can sign the will. (1) The testator can sign the will, (2) a person in the testator's presence by the testator's direction, or (3)a court-appointed conservator of the testator can sign as well. Prob C § 6110.

The norm is to have the testator sign.

Attestation Clauses

California law requires that 2 witnesses sign a formal will. Prob C § 6110. However, a holographic will does not require any witnesses to sign. Prob C § 6111. Still, holographic wills are ripe for fraud and undue influence. Hence, the writing of a holographic will is often discouraged.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

What is a trustee of a trust?

2011-11-16T12:43:00.001-08:00

The term "trustee" is used in many different legal fields. For example, in bankruptcy a trustee is appointed for administering the bankruptcy estate, in the case of a foreclosure the trustee is responsible for handling the property's foreclosure and in the case of a trust, a trustee is required in order to administer the trust. The following are some questions that delve into the topic of a trustee of a trust, whether irrevocable or revocable.

1. What is a trustee?

A trustee is the legal owner of trust property who administers the trust estate in accordance with the trust's directions. Prob C § 16000. For example, if a trust owns a home and the trustee is John Smith, title to the property would be held, loosely stated, as "John Smith, trustee of the Smith Trust."

2. Who can be a trustee?

A trustee can be a person or natural person.

In regards to a natural person, such an individual needs to be an adult because minors cannot enter into contracts to sell property. Wallace v Riley (1937) 23 CA2d 654.

In terms of a person, a corporation can serve as trustee. Prob C § 300. However, before you list some large financial institution as the trustee, please be aware that corporate trustees require large estates, typically in the millions of dollars, before it undertakes representation as trustee.

3. Can I pick myself as trustee?

Yes and this is quite common. Many couples appoint themselves as trustees and name their children as successor trustees.

4. What duties does a trustee?

To list all the duties of a trustee would be a bit much for this post. Please click on this link for a full explanation. Suffice to say there are plenty.

5. How is a trustee compensated?

Trustee compensation is not a matter of right for the trustee. Thus, the trustee may be entitled to no compensation if so provided by the trust document.

However, a trustee is almost always compensated in reality. Few people are willing to assume a position with all the risks without a reward. The following are various methods used to calculate a trustee's compensation if allowed:

The trustee is compensated in accordance with a set formula. For example, it is common for a trustee to be compensated 1% of the value of the trust estate annually;
In the case of a corporate trustee, it has a published fee schedule;
The trustee is paid a fixed amount per year;
The trustee is entitled to "reasonable compensation." Probate Code §15681

6. Is trustee compensation considered taxable income?

Yes, income received from acting as a trustee is considered taxable income. Pay your taxes!

7. Can a person refuse the selection as trustee?

Yes, and a person has the right to decline trusteeship even after assuming the position. Prob C § 15640.

8. Can a trustee be removed?

Yes, a trustee can be removed (1) in accordance with the trust instrument (2) by the court on its own motion, or (3) on petition of a settlor, cotrustee, or beneficiary under Probate Code Section 17200. Prob C § 15642(a).

9. Can there be more than one trustee?

Yes, California law permits a trust to have more than one trustee administer it.

10. Does a trustee have to be bonded (see insured)?

No, a trustee need not be bonded unless the trust document requires a bond or a court orders a bond on a finding that the beneficiaries' interests must be protected. Prob C §15602(a)(2).

11. What are some examples of what not to do as a trustee?

As taken from a prior post:

The trust drafter instructed the trustee, Bank of America, to not allow the trust bank account to exceed the maximum Federal Deposit Insurance Corporation amount. For whatever reason, Bank of America permitted the account to exceed the threshold amount. In particular, the FDIC amount was $10,000 (think 1960s) but the account balance at one time was $49,000. Consequently, Bank of America was held to have breached its fiduciary duty to follow the terms of the trust. Prob C §16000; Estate of Gilmaker (1962) 57 C2d 627.

The trustee was engaged in a real estate dispute with one of the beneficiaries. Since the beneficiary had a combative litigation style, the costs were substantial. In order to cushion the blow of litigation, the trustee decided to sue the beneficiary for elder abuse (the trustee represented an elderly couple), which permitted the recovery of attorney fees. Ultimately, the trustee obtained a judgment against the beneficiary for roughly $700,000 in civil court. The problem was that the trustee incurred fees totaling roughly $1.3 million in the process of obtaining that judgment. Furthermore, the beneficiary filed for bankruptcy subsequent to the judgment. Whoops. The court held that the trustee breached his duty to prudently enforce claims against the trust, since no prudent person would spend $1.3 million to try to collect $700,000. Prob C § 16010; Schwartz v. Labow (2008) 164 CA4th 417.

12. Can a trustee seek judicial guidance when administering the trust?

Yes, a trustee can petition to appropriate court to seek assistance for the following. Prob C §17200.

Determining questions of construction of a trust instrument;
Determining the existence or nonexistence of any immunity, power, privilege, duty, or right;
Determining the validity of a trust provision;
Ascertaining beneficiaries and determining to whom property shall pass on termination of the trust, to the extent not specified in the instrument;
Settling accounts and passing on the trustee's acts, including the exercise of discretionary powers;
Instructing the trustee;
Compelling the trustee to submit a report or account to the beneficiary under specified circumstances;
Granting powers to the trustee;
Fixing or allowing payment of the trustee's compensation or reviewing its reasonableness;
Appointing or removing a trustee;
Accepting the resignation of a trustee;
Compelling redress of a breach of the trust;
Modifying or terminating the trust;
Combining or dividing trusts;
Amending the trust to qualify a decedent's estate for the federal estate tax charitable deduction;
Transferring a trust or trust property between jurisdictions;
Transferring a supervised testamentary trust between counties;
Removing a testamentary trust from court supervision;

13. Can a trustee terminate a trust?

Yes, a trustee can terminate a trust in certain instances. For example, if the trust's principal dips below $40,000, the trustee has the power to terminate the trust. Prob C § 15408(b).

14. Can a trustee be sued?

Oh yes.

Just like any other entity, the trustee can be sued. Moreover, the trustee is the appropriate party to sue, rather than the trust itself. Prob C §16249(a).

15. Can the trustee act as the trust's attorney?

No, a trustee may not represent the trust in court, or propria persona for those Latin-inclined. Ziegler v Nickel (1998) 64 CA4th 545. This means that a trustee would need to hire an attorney to represent the trust in a court case.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Trust arbitration

2011-11-02T17:27:00.000-07:00

Arbitration is a non-judicial process for resolving disputes. Instead of litigating a contentious matter in state and federal court, litigants go to an arbitrator to resolve the matter. It is common to see mandatory arbitration clauses in employment and consumer cases. For example, a very recent United States Supreme Court Case dealt with the enforceability of an arbitration clause in a cellphone contract that disallowed class-action suits, AT&T Mobility v. Concepcion, 563 U.S. _____ (2011).

In regards to trusts, arbitration clauses have been included in these documents as well. A recent court decision touched upon the enforceability of arbitration clauses. In, Diaz v. Bukey (2011) 195 CA4th 315, two beneficiaries, Marie and Paulette, became entangled in a legal squabble over the handling of their late parents’ trust. Marie was the successor trustee as well as a beneficiary and Paulette was the other beneficiary. In May 2009 Paulette requested that Marie provide her an accounting of the trust. When Marie provided an unsatisfactory accounting to Paulette, she filed a petition in November 2009 to have her removed as trustee for breach of fiduciary duty. Marie tried to have the case dismissed because the trust contained a mandatory arbitration clause. The trial court overruled the dismissal and Marie appealed this decision to the Court of Appeal. On appeal, the Court of Appeal held that the arbitration clause was unenforceable because Paulette was not a party to the arbitration agreement when her parents created the trust, which is generally required to enforce an arbitration clause.

However, Marie appealed this decision to the California Supreme Court and the Court agreed to review the appeal on August 10, 2011. Thus, the enforceability of an arbitration clause in a California trust hinges upon the decision of the California Supreme Court. So we shall see................

California Uniform Transfers to Minors Act (CUTMA)

2011-10-27T14:30:00.000-07:00

One alternative to the creation of a trust for a child is to create a custodianship under the California Uniform Transfers to Minors Act (CUTMA) (Prob C §§3900-3925). The following are some questions that focus on this topic.

1. What is a CUTMA?

A CUTMA is a legal arrangement in which property is given by a donor to an adult, the custodian, who is entrusted with managing and expending the property for the beneficiary, who must be a minor, until the minor reaches age. When the minor reaches age 18, the custodian transfers all remaining property to the minor. Prob C §§3914(a), 3920.

For example, assume Donald gave $10,000 to Clarence to manage and expend for the benefit of Donald’s son, Bobby. At the time, Bobby was age 14. Clarence then used the money for various reasons to benefit Bobby. When Bobby turns 18, Clarence is obligated to transfer ownership of the remaining property, if any, to Bobby.

For reference, the generic term for this type of account is “UTMA.” “CUTMA” is used in California because a “C” is added to the beginning to denote its California origin. So whenever you see or hear the term “UTMA” this is basically the same arrangement as a “CUTMA” account. Many bankers are familiar with the term “UTMA.”

2. How do I set up a CUTMA account?

Large commercial banks are readily familiar with establishing a CUTMA account. If you look on the website of large commercial banks such as HSBC, Bank of America, CitiBank or Chase, each will have a description on how to set one up.

It is quite easy. If you can set up a checking account, you can set up a CUTMA account.

3. Am I limited by the type of property I can fund a CUTMA account with?

No, there are no longer any limits on the types of property that may be devised to a minor under CUTMA. See Prob C §§3901(f), 3909(a)(7).

4. When can a CUTMA account be established?

A CUTMA account can be established during the lifetime of the donor or at the donor’s passing by specifying for the creation of such in the donor’s will.

5. Is a CUTMA account considered a taxable gift?

No, CUTMA gifts qualify for the annual gift tax exclusion under IRC §2503(b), which is $13,000 for 2011 and is adjusted annually for inflation. Rev Proc 2009-50, 2009-45 Int Rev Bull 617.

6. What are some advantages in creating a CUTMA account as opposed to a trust?

A CUTMA account is very ease to create. Banks are very familiar with the process, court-supervision is not required, bond is not required of the custodian and the custodian need not provide an accounting to the beneficiary.

7. What are some disadvantages in creating a CUTMA account as opposed to a trust?

Each CUTMA account may have only one beneficiary and one custodian. Prob C §3910. Hence, if a couple has multiple children, then a separate CUTMA account will need to be established for each child which can cause administrative headaches.

The custodian of the account cannot be instructed as to what investments he or she should make as in the case of a trust. Prob C §3914(a). In particular, the custodian is free to expend the money as they advisable and without the need to obtain court approval.

The beneficiary may incur adverse tax liability through the “kiddie tax” if their unearned income is too high. This results in the child being taxed at the parent’s income tax level rather than the child’s level.

Finally, CUTMA accounts are treated as the student's assets for financial aid purposes. 20 USC §1087vv(f).

8. What are some alternatives to a CUTMA account?

A donor could deliver proceeds to the child’s parents if the amount does not exceed $5,000 and the parent promises to use the proceeds for the child’s benefit. Prob C §§3400-3402.

If the donated property exceeds $5,000 and the child has no guardian of the estate, a court may authorize that the money be deposited in a blocked account or may authorize the purchase of a single-premium deferred annuity. Prob C §3413(a).

A donor could create a trust for the child’s benefit. This would be the most flexible option available since the trust could specify the trustee’s duties.

A court-supervised guardianship of the child’s estate could be established to handle the child’s property. Prob C § 1510.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Estate planning checklist

2011-10-19T15:51:00.000-07:00

A checklist of questions can be a very useful tool in achieving almost any objective. Writing a trust is no different. The following are some key questions that apply to every situation. Though the questions may be valued differently by some, the end result is that the following questions must be answered eventually.

1. Who will be the trustee?

A trustee is a required element of a trust. Every trust must have a trustee or else it will not be considered a trust. The trustee is the legal owner of trust property.

Although there is an old legal saying that goes “a trust will not fail for want of a trustee.” This means that if the office of trustee is vacant there are available legal channels to appoint a trustee. For example, California law allows a trust beneficiary the ability to petition the appropriate superior court to confirm the appointment of a trustee when the office of trustee is vacant. Prob C § 172009(b)(10).

The determination of who will be the trustee is a very important question. I always tell clients that trustee selection, along with selecting beneficiaries, comprise the two most important questions they will weigh during the process. The reason being is that trustee will have control over trust property and its administration. The trustee will ultimately be the person cashing checks, depositing money, filing trust tax returns, selling real estate, etc. Thus, whoever is selected is given an enormous amount of responsibility, and the legal liability that comes with it. The importance then of selecting a competent and attentive trustee cannot be understated. The norm is to pick a close family member or friend.

2. Who will be the beneficiary or beneficiaries?

Ah yes, who gets all your property when you pass on eventually. It should be noted that there is no right to inheritance, except for spouses in light of community property law. A child, niece, neighbor, family dog, etc. has no vested inheritance right in your estate. A person is free to leave their estate to anybody essentially, subject to spousal constraints, without any legal recourse. So you could leave your trust estate to a charity, your alma mater, the federal government or even your pet subject to certain qualifications.

Invariably the chosen beneficiary or beneficiaries are spouses and then remainder to children. For example, Harry and Wendy, a married couple, have two children Samuel and Donna. Harry and Wendy write a trust in which the surviving spouse will inherit the deceased spouse’s estate. Then when the surviving spouse passes away, Samuel and Donna will inherit such estate equally. For all but a few trusts I have written, this is the exact method of distribution that has been chosen by clients.

3. Should I even write a trust?

Writing a trust is not necessary, in my opinion, unless you own a home or have children or both. First, one of the key benefits of writing a trust is probate avoidance. Just about every asset can be disposed of through beneficiary designation. A person can list a bank account beneficiary, a stock beneficiary, an IRA beneficiary, a life insurance beneficiary, etc. The one glaring exception is that of real property. California law does not permit a person to name a beneficiary of their home. Thus the default rule for transfer of real property, generally speaking, is probate. However, real property owned in trust is exempt from probate. Yet if a person does not own real property, then this benefit is inapplicable. Second, if a child inherits a large sum of money, namely over $5,000, then a court-supervised guardianship is needed to oversee their estate. I would like to believe, regardless of contemporary economic constraints, that most parents have more than $5,000 to leave to their children. If the inheritance if distributed outside of a trust, a guardianship is likely needed. Still, if a person does not have a child, this benefit is irrelevant.

Obviously attorneys have a direct financial interest in wanting clients to write a trust. However, I never encourage clients to write a trust if it is unnecessary, namely the client(s) lack a home and children.

4. How much should we spend for a trust?

One of the great trust myths is the fallacy that writing a trust eliminates the need for post-death administration. In reality, the same steps for trust administration are patterned after the probate process essentially. The result is that there will be significant time and expense for both situations. However, trust administration is a non-judicial process whereas probate is a judicial process, which generally shortens the amount of time involved and likewise reduces the amount of cost involved. Whenever I talk about fees with a client, I always bring up that trust administration will almost always be more expensive than writing a trust. So when I quote them a fee of $1,500 hypothetically, I also include that trust administration may easily cost $5,000. The takeaway is that a person should not look at just the initial step, writing a trust, but the entire process, writing a trust and its administration, when gauging how much they are willing to spend.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Trust contest

2011-10-13T09:21:00.000-07:00

A common complaint I hear is that of a disgruntled beneficiary who believes that they have been cheated or defrauded out of their inheritance. Still, litigation in the trust field is not the easiest endeavor. Unlike garden-variety civil litigation such as a breach of contract action, trust litigation is characterized by a few distinguishing features that make it very arduous typically. The following is a brief overview of the characteristics that make trust litigation even more difficult than regular civil litigation.

Nature of Litigants

In the typical civil litigation case, the plaintiff and defendant lack a connection to each other. Even if the litigants were previously-connected, the onset of litigation will most like sever any ties between the two parties. In contrast, the litigants in a trust action are almost always family members. When the litigation ends, eventually, the parties will not be able to part ways and embark on two mutually exclusive paths in life. Instead, the litigants will still remain related. You cannot sever blood ties no matter how hard you try. Thus, these bitter litigants will see each other at every family wedding, holiday, birthday, etc. going forward. Conversely, in regular civil litigation, the plaintiff and defendant will not be connected to each other on the same level as family member litigants. These civil litigants will not frequent the same social circles, or at the very least, not on the same level as family member litigants.

Pyrrhic Victory

A Pyrrhic victory can be loosely applied to many trust litigation matters as litigants can win the battle but ultimately lose the war. The following hypothetical illustrates this point.

Assume in 1982, Samuel created a trust for the sole benefit of his daughter Belinda and named his brother Thomas as trustee. Samuel funds the trust solely with a rental property. Over the years, Belinda becomes increasingly frustrated with Thomas’s handling of the trust property. Thomas does not adequately maintain the roof, lets the plumbing become outdated and rents the unit to yokels who terrorize the neighborhood with their back-country lifestyle habits. However, Thomas is operating under a tight budget and has to very carefully expend money on the property. During this time, Thomas never once believed he was acting imprudently. Nevertheless, Belinda sues Thomas as trustee of her father’s trust in Santa Clara Superior Court for breach of trust in 2011.

A significant drawback for Belinda’s suit is that Thomas is obligated to defend the trust as required by California law. Prob C §16011. Consequently, Thomas is allowed to expend trust funds to defend the lawsuit against the trust, namely hire an attorney to defend the suit. Even if Thomas ultimately loses the suit, he could charge the attorney fees to the trust if he acted in good faith. Copley v Copley (1981) 126 CA3d 248. Moreover, if Belinda were to win her lawsuit, it is unlikely that she could recover her attorney fees from the trust. Estate of Gump (1982) 128 CA3d 111. The end result is that Belinda could win the lawsuit but acutely deplete the amount of her inheritance, a Pyrrhic victory, as attorney fees incurred by Thomas’s defense of the suit could take a huge chunk out of the trust as trust actions can easily reach six-figures if a case goes to trial and is appealed.

Cost

As is the case with any litigation matter, legal fees can rack up rather quickly. The cost of discovery, namely depositions and interrogatories, for a trust matter can be quite extensive. For example, a common reason to question the legal validity of a trust is by arguing that the document was product of “undue influence.”

Undue influence is conduct that replaces a person’s will with that of another, causing a disposition different from that which the person would have made if permitted to follow his or her own inclinations. Estate of Baker (1982) 131 CA3d 471, 480. California case law has held that the following are signs of undue influence: (1) provisions that are unnatural, cutting off from any substantial bequests the natural objects of the decedent's bounty; (2) dispositions at variance with the decedent's intentions, expressed before and after the document's execution; (3) relations existing between the chief beneficiaries and the decedent that afforded the former an opportunity to control the testamentary act; (4) a testator whose mental and physical condition was such as to permit a subversion of his or her freedom of will; and (5) a chief beneficiary under the trust who was active in procuring the execution of the instrument.

Thus, if a trust contestant believed that a person’s trust was the result of undue influence, he or she would have to marshal enough evidence to prove the five aforementioned elements of undue influence. This is by no means an easy task because you essentially have to demonstrate the person was fine until a malevolent person came into their life and wrecked their estate plan by altering it. While it is not necessarily difficult to spot undue influence, proving undue influence is another issue. In other words, undue influence is often good in theory but cumbersome in application.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Estate planning fees

2011-10-05T16:31:00.000-07:00

A common question from a homeowner who is interested in writing a revocable trust, is what are the costs and obligations, other than attorney fees, involved with the process? The following are
some topics raised by that question.

Property taxes

Whenever there is a “change in ownership”, the property taxes for that particular parcel of land will be re-assessed to its current the fair market value. Rev & T C §60. For example, if Bobby purchased from Sam a home for $500,000 in San Jose in 2007, Bobby’s property taxes would be based off of that $500,000 figure. Now assume that Bobby had purchased the property for $40,000 from Sam in 1979. In 2011, Bobby decides he wants to write a trust to avoid probate. However, Bobby is hesitant to write a trust and fund it with his home. He is worried that the Santa Clara County Assessor will try to re-assess his property taxes to its 2011 fair market value and in turn raise his property taxes. Fortunately for Bobby, California law is very specific in saying that a home transfer to a revocable trust is not considered a “change in ownership.” Rev & T C § 62(d)(2). Thus, the fear of re-assessment for property taxes when funding a revocable trust with a home is unwarranted.

Documentary transfer tax

In the case of a real property transaction, the transfer of a home from seller to buyer for example, there is the inclusion of a fee known as the documentary transfer tax. Rev & T C § 11911. The deed, the document which denotes the identity of the seller and buyer, must show the amount of the documentary transfer tax due. Rev & T C §11932. For reference, the tax rate is $0.55 per $500 of value (0.11 percent) sold. Rev & T C §11911.

Since a trust needs to be properly funded, whereby a trust transfer deed will need to be drafted, the documentary transfer tax becomes an issue, albeit only superficially. The reason for the superficiality is that California law states that a transfer of a home to a revocable trust is exempt from the fee imposed by the documentary transfer tax because there is no consideration tendered. Rev & T C §11930. Therefore, the documentary transfer tax is not an issue when a homeowner funds his or her trust when their home.

Income tax returns

Most revocable trusts are known as “Grantor Trusts” in IRS language. IRC §§671, 676. This means during the time that the trust is revocable, the settlor, the person who wrote the revocable
trust, is not required to file an additional tax return for the revocable trust. Hence, the creation of a revocable trust will not result in the settlor having to file more paperwork with the IRS and
California Franchise Tax Board.

Gift taxes

The inapplicability of gift tax in regards to creating a revocable trust bears mentioning to erase any confusion. There is no gift tax if you transfer property from yourself to a revocable trust that you created. A revocable trust is not a separate legal entity. Goldberg v. Frye (1990) 217 CA3d 1258. Hence, if you transfer property to your revocable trust it would be as if you handed an item from
your left-hand to your right-hand. Thus, there is no gift tax in the revocable trust creation equation because there is no third-party involved.

Recording Fees

Once a person has executed a trust transfer deed, it needs to be recorded in order to give proper notice to third-parties that the buyer is now the owner of the property. However, whereas there are exemptions with the previously mentioned fees and taxes, there is no such exemption for recording a deed. Each county has their own schedule of fees to record a document. For example, to record a deed in Santa Clara County, it is $15 for the first page and $3 for each additional page. The deed may be presented personally to the clerk-recorder or you can mail it in.

Notary Fees

It should be mentioned that a notarized signature is not required to execute a revocable trust. In that, there is no California law that says that a signature has to be notarized when executing a revocable trust. However, out of custom, a signature is notarized when executing a revocable trust.

A California notary may charge up $10 per signature when executing a revocable trust. Govt C § 8211. Often times, the attorney drafting the trust doubles as a notary and the fee is waived.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Advance Health Care Directive

2011-09-29T15:07:00.000-07:00

If a person wishes to execute an advance health care directive, they have a number of options to choose from. The following are some examples of fill-in-the-blank forms that are used:

1. Statutory Advance Health Care Directive (Probate Code §4701)

The California probate code provides a template that a person may use for an advance health care directive. It provides instruction on how to complete and execute the document. Since there is no virtually no fee for this form, other than the printing cost, the cost-effectiveness of this option is a definite plus as compared to other options. However, the person will need to self-educate themselves on the topic of medical decision-making. Consequently, I know of no attorney who advises clients to utilize this method.

2. The California Medical Association (CMA) AHCD form.

The CMA produces a form that may be purchased online at its website for a fee. The CMA form is widely-recognized by health-care providers because it is the industry’s version of an AHCD. Hence, the concern of a health care provider not honoring a CMA AHCD dissipates. The form provides very easy to understand instructions on how to complete and execute the document. I personally use the CMA or CHA form for all of my clients.

3. The California Hospital Association (CHA) AHCD form.

The CHA, another trade association, also produces an AHCD. This form is free to download.The principal difference between this form and the CMA form is the clause pertaining to the prolonging of life. For the CMA Form, there are only two situations in which an individual may indicate a preference for not prolonging his or her life, if (1) the person has a terminal condition that will result in death in a matter of months or (2) an irreversible condition that renders the person unable to make decisions and life support is needed to keep the person alive. As for the CHA form, it contains a third option for prolonging life, (3) when the likely risks and burdens of treatment would outweigh the expected benefits.

Of note, the picture is the rod of Asclepius, the Greek symbol for medicine.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Due-on-sale clause

2011-09-21T15:25:00.000-07:00

Whenever a homeowner purchases a piece of property that is encumbered by a loan, the lender will invariably attach a provision to the loan known as a due-on-sale clause. The following are some questions that address this topic.

1. What is a due-on-sale clause?

Federal law defines a due-on-sale clause as “a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent is a provision in a deed of trust that provides the lender the right to accelerate the secured obligation if the owner transfers the property.” 12 USC §1701j-3(a)(1).

2. What does this mean in everyday language?

A due-on-sale clause gives the lender the right to demand full payment of the loan immediately if the borrower tries to transfer the property without the lender’s approval

3. How does a due-on-sale clause work in real life?

Assume Bud purchases a home from Al. Bud obtains financing from a bank in order to make the purchase. Bud then executes a loan in favor of the bank, which contains a due-on-sale clause. One day Bud decides that he wants to sell the home to his neighbor Jefferson. However, in light of the due-on-sale clause, before a transfer from Bud to Jefferson can take place, the full amount of the loan will need to be paid off because Bud’s attempted transfer would trigger the application of the due-on-sale clause.

4. Are all transfers of real property subject to due-on-sale clauses?

No, the Garn-St. Germain Depository Institutions Act of 1982 carves out a number of exceptions to the general rule that a transfer of encumbered real property triggers a due-on-sale clause. Pub L 97-320, 96 Stat 1469. Although these exceptions only apply to “a real property loan secured by a lien on residential real property containing less than five dwelling units.” 12 USC §1701j-3(d). Thus, commercial property secured by a deed of trust would not be subject to the protections of Garn-St. Germain. Regardless, if the loan involves residential real property, Garn-St. Germain applies in some situations. For example, a due-on sale cannot be triggered on "a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property." 12 USC §1701j-3(d)(8).

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Living Trust Mills

2011-09-15T08:22:00.000-07:00

A noticeable problem within the estate planning field is the proliferation of living trust mills. The following are some questions that address this problem.

1. What is a trust mill?

A trust mill is an elaborate scam concocted by nefarious insurance agents that seek to deceive consumers into purchasing costly and largely unneeded financial products, namely annuities, through the guise of providing them with a living trust.

In other words, the allure of purchasing a living trust serves as the Trojan horse, and once the sales agent has gained access to the consumer, he or she then seeks to sell largely useless financial products to the unwitting consumer.

2. How does a trust mill work?

A trust mill company will publicize a free living trust seminar at a local diner, hotel or inn in a local newspaper. Since there are legal advantages for writing a trust, such as the avoidance of probate and estate taxes, consumers are naturally intrigued by this. Also, the allure of a free meal or beverage cannot be understated as well. Consequently, interested consumers will attend the seminar.

The seminar is almost always hosted by an insurance agent who uses the title "trust advisor," "senior estate planner" or "paralegal" instead of insurance agent. These aforementioned titles have basically no legal value to them because these titles do not indicate a license to practice law independently. It is simply a facade to deceive consumers into believing that the insurance agent has the requisite legal expertise. Regardless, these sales agents sign up curious consumers at the seminar who wish to write a living trust. The sales agent then makes an initial visit to the consumers’ home to gather the necessary financial information to write the trust. The sales agent passes this information on to a person to write the actual trust document. Some trust mills actually have attorneys write the living trust while others do not. The sales agent then takes the trust document to the consumer’s home for execution. At this point, the crucial part of the scam takes place.

Armed with the consumer’s financial information, the sales agent strongly encourages the consumer to consider purchasing financial products from them, which are invariably annuities. The sales agent will often say whatever is necessary to complete the sale, or lying. The reason why the sales agent wants the consumer to purchase an annuity is because of the high commissions the sales agent will receive for selling an annuity. Meanwhile, in almost all cases, the annuity the sales agent is offering is the worst possible investment for the consumer. For reference, an annuity is basically a financial arrangement where the investor is paid a fixed sum of money for a fixed number of years for making an initial lump-sum investment. While it might sound financially attractive, the annuities that these sales agents offer often have high up-front costs and severe early withdrawal penalties. The end result is that the consumer purchases an expensive and superfluous financial product, while the sales agent walks away with a hefty commission. Or in the other words, the consumer loses and the sales agent wins.

3. How can I spot a trust mill?

There are a couple of tell-tale signs for spotting a trust mill. First, the seminar is hosted by a non-attorney. Second, the flyer for the seminar will mention how an insurance agent may deliver the trust documents to the consumer. If you see either of these variables the seminar is probably a trust mill.

4. How prevalent are trust mills?

Trust mills are prevalent here in California as well as the United States. For example, in 2007, the California Attorney General reached a $7.2M settlement with American Investors Life Insurance Company, Family First Insurance Services, and Family First Advanced Estate Planning for their roles in selling high-priced annuities to seniors.

5. Who should I contact if I have been victimized by a trust mill?

You should contact your district attorney’s office and the CA Department of Insurance consumer hotline at 1-800-927-4357.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Medi-Cal

2011-09-08T16:33:00.000-07:00

One of the largest federal programs is Medicaid, which is known as Medi-Cal in California. The following are some frequently asked questions associated with Medi-Cal.

1. What is Medi-Cal?

Medi-Cal is a needs-based public benefit program that provides payment for various medical services to qualified individuals here in California.

2. What is Medicare?

Medicare is the federally subsidized health care system for individuals over the age of 65.

Yes, the fact that there is Medicaid, Medi-Cal and Medicare can be quite confusing.

3. What is a needs-based public benefit?

A needs-based public benefit is a benefit that is granted to individuals who demonstrate need. For example, those with low-incomes or are disabled are eligible for Medi-Cal because they have a need for medical services but are unable to afford it. Conversely, an entitlement public benefit is where the recipient qualifies just for the sheer fact that they are a member of a certain class of individuals, regardless of their background. For instance, Medicare is an example of an entitlement benefit because anybody 65 or older will qualify.

4. What does Medi-Cal provide?

Medi-Cal provides eligible recipients with payment for hospitalization, doctors' services, prescription drugs, lab tests, home health care, nursing home care and other related medical services. Welf & I C §14132.

5. What makes Medi-Cal unique?

Medi-Cal is the only government program that pays for long-term nursing home care.

6. Who is eligible?

There are two main types of Medi-Cal beneficiaries: (1) the "categorically needy" and (2)beneficiaries whose incomes are above the supplemental security income (SSI) limit but whose medical costs would leave them impoverished.

Examples from category (1) would be persons age 65 or older and blind or disabled persons of any age who receive SSI payments. Examples from category (2) would be individuals enrolled in the following programs: Aged and Disabled Federal Poverty Level program; Aged, Blind, and Disabled Medically Needy program; 250 Percent California Working Disabled program; Institutional Deeming Waiver program; Nursing Facility/Acute Hospital Waiver program; and Transition programs.

7. Does the beneficiary of the Medi-Cal have to repay the benefits?

The precise answer is that no, the recipient of Medi-Cal benefits does not have to re-pay the benefits received. However, the beneficiary’s estate is, generally speaking, liable for the reimbursing the State of California for the amount of Medi-Cal benefits received. 42 USC §1396p(b)(1); Welf & I C §14009.5.

For example, Donna Decedent was of modest means and disabled. She received Medi-Cal during her lifetime. When Donna passed away, her estate was worth $50,000. The State of California, via Medi-Cal, paid $100,000 for Donna’s medical care during her lifetime. Donna’a estate, namely $50,000, would be subject to recovery by the California Department of Health Care Services (DHCS) for the benefits paid.

8. Are there instances when recovery is delayed or barred?

Yes, DHCS may not make a claim when there is a surviving spouse during his or her lifetime. Welf & I C §14009.5(b)(2)(A); 22 Cal Code Regs §50961(d)(2). Furthermore, DHCS may not make a claim if there is a surviving child of the deceased beneficiary who is under 21 or who is blind or permanently and totally disabled. Welf & I C §14009.5(b)(2)(B)-(C); 22 Cal Code Regs §50961(d)(3)-(4).

9. Is there a citizenship requirement for Medi-Cal?

No, there is no citizenship requirement for receiving Medi-Cal. Medi-Cal beneficiaries may be aliens lawfully admitted for permanent residence, as well as to persons Permanently Residing in the United States Under Color of Law. Welf & I C §14007.5.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Charitable Deduction - Estate Tax

2011-08-31T16:03:00.000-07:00

Americans in general are a charitable lot. Millions of Americans annually donate to community, religious, civic and athletic organizations that operate as charitable organizations. There is an immediate tax benefit to this, the charitable deduction the donor can take on their annual tax return during one's lifetime. Conversely, even at one’s passing, there is a tax benefit to donating to charity, namely a deduction on their estate tax. The following are some questions that provide a broad overview of the topic.

1. What is the charitable deduction in the context of the estate tax?

Federal law allows a U.S. citizen or resident of the United State to leave some or all of their estate to a qualified charitable organization which will reduce their estate tax liability. IRC §2055(a).

For example Danny Decedent was a resident of Campbell, CA. At the time of his passing in 2011, Danny had earned a vast fortune because he was an early investor in Google, namely $12M. Danny was concerned about paying Uncle Sam millions of dollars in estate taxes at his death, as the tax rate for estates larger than $5M was 35%. IRC §2010(c). Danny had engaged in philanthropic endeavors during his life and wanted to benefit these charities rather than have his money be sent to Washington D.C. Therefore, Danny decided to leave his entire estate to two California-based charities, HealthCare Volunteer and CACS Government Research, via his will.

Editor’s Note: The person is fictionialized while the charities are authentic.

2. What types of charities are eligible beneficiaries?

Federal law says the following charities are eligible: (1) The United States, any state, any political subdivision thereof, or the District of Columbia, but only if the contribution is used for exclusively public purposes, (2) IRC §501(c)(3) organizations established in nonprofit corporation form, (3) IRC §501(c)(3) organizations established in charitable trust form, (4) various veterans' organizations or (5) employee stock ownership plans subject to certain conditions. IRC §2055(a).

(2) and (3) are the most common beneficiaries for reference. For example, thousands of people have left money to their university or graduate school which falls under the category of (2) and (3).

3. What happens if a donor receives something in return for the donation?

When a donor receives something in exchange for their donation, a quid pro quo basically, the value of the goods or services generally offsets the value of the contribution for tax purposes. Treas Reg §1.170A. For instance, assume a late donor gives $100,000 to their beloved alma mater, San Diego State University for example, and SDSU replies by giving the late donor’s grand niece an athletic scholarship worth $40,000. Generally speaking, the donor’s estate could only claim a $60,000 charitable deduction on the estate tax return. (IRS Form 706 for those curious).

4. Is there a limit on the charitable deduction for estate tax purposes?

Federal law does not limit the estate tax charitable contribution deduction that can be claimed. IRC §2055. Thus, a person is free to leave their estate to a charity to avoid paying any estate tax. For instance, noted multi-billionaire Bill Gates may leave his entire estate, something in the range of $56B, to a charitable organization to avoid the estate tax.

5. Is it common to leave an estate to charity?

From my experience, few clients leave their estate to charity. In particular, the select few who do leave money to charity usually allocate a small fraction of their estate to charity rather than their entire estate. Individuals who leave vast amounts to charities are often the very wealthy who face an estate tax issue. This should by no means dissuade anybody from thinking about giving to charity. It is just that many parents have a sense of obligation to provide for their children. In contrast, the very wealthy do not really have that concern because their children are taken care of already. Hence, the former often leaves their estate to their spouse and children whereas the latter leaves it charity typically.

6. Are there trusts for this?

Yes, there are trusts specifically designed to achieve a charitable estate tax deduction. Examples of these include a charitable lead trust and a charitable remainder trust.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Writing a will or trust

2011-08-29T15:31:00.000-07:00

The second step when writing a will, trust or other estate planning document, after making the initial determination to in fact write one, is to select the person who will be entrusted with this responsibility. There are a number of options a person has at their disposal. The following is a brief synopsis of those options.

Yourself

Yes, you can be your own lawyer and write your own will or trust. There is no legal requirement that you be licensed to prepare your own legal documents. A person need only be licensed if they wish to represent others. The rationale behind this law is to protect the unwary consumer from an unscrupulous faux attorney who has not undertaken the required education and training necessary to be licensed.

Your local library is filled with books explaining the laws behind estate planning. Additionally, many of these books have pre-printed forms which you can use as a template. For example, Nolo Press has printed many books on wills and trusts that are perfectly suitable for individuals of modest means.

The obvious benefit in writing your own will or trust is that the expense is basically your time. You do not have to pay somebody for their services. Furthermore, you do not have to go through the trouble of conveying your wishes to a third-party and having them then memorialize your wishes. This could potentially lead to your testamentary wishes not being honored because your correspondence with the third-party might be misconstrued or misunderstood.

The downside to this arrangement is summed up by this paraphrased statement “the man who represents himself will have a fool for a client.”

Paralegal/Legal Document Assistant

California law describes a paralegal as “a person who holds himself or herself out to be a paralegal, who is qualified by education, training, or work experience, who either contracts with or is employed by an attorney, law firm, corporation, governmental agency, or other entity, and who performs substantial legal work under the direction and supervision of an active member of the State Bar of California.” Bus & P C § 6450(a).

California describes a legal document assistant as a person “who provides, or assists in providing, or offers to provide, or offers to assist in providing, for compensation, any self-help service to a member of the public who is representing himself or herself in a legal matter, or who holds himself or herself out as someone who offers that service or has that authority.” Bus & P C § 6400(c). For reference, Legalzoom is a legal document assistant.

The key distinction here is the fact that a paralegal is not permitted to independently provide legal services to consumers, whereas a legal document assistant is permitted to do so. However, neither may provide legal advice to consumers. Bus & P C § 6450(b)(1); Bus & P C § 6400(g). Hence, if a person was looking to write a will, they could enlist the services of a LDA but not an independent paralegal. If they did want to hire a paralegal, the paralegal would be under the umbrella of a California attorney or law firm.

The benefit in using a LDA is that the individual can select the appropriate forms for the consumer to fill out. For example, a LDA can provide a consumer with the correct form to complete their will. Moreover, the expense of a LDA to write a will or trust is usually not more than a few hundred dollars.

The principal drawback of a LDA is that the individual is barred from dispensing legal advice. The consumer is basically forced to self-educate themselves on the topic. Granted the LDA will direct the consumer towards the right path, by providing the correct form, but that is where their “advice” ends. If the consumer has a question about what is the difference between a rata or pro-rate distribution in a will or the legal significance of California’s anti-lapse statute, the LDA is prohibited from answering such questions.

Online Forms

The Internet is the largest commercial zone ever created. A person residing in the United States can easily purchase kiwis from New Zealand, a television from Japan, a car from Germany, a carpet from Jordan, wine from France, etc. Not surprisingly then, there are numerous websites where consumers can purchase wills and trusts templates. These sites charge a nominal fee, $30 for example, to print out a trust or will, and the consumer then fills it out.

The benefit for purchasing an online will or trust is again the price. The cost is often insignificant. Furthermore, there is more choice for consumers. In contracts with a LDA or self-education, which limits a consumer to a geographical region essentially, the Internet is home to countless sites that do not restrict access on the account of a person’s location. All that is needed to contact these sites is an Internet connection.

Like the previously mentioned methods, online forms have a host of drawbacks. First, these forms are often produced for “use” in all 50 states. Often times each state has their particularities for writing a will or trust. While the same law on wills and trusts is largely the same in each state, hold Louisiana as their legal system is based on the Napoleonic Code, it is impossible to state with certainty that a will or trust that is legal in Kentucky is legal in California. Second, the consumer still needs to engage in self-education again. While the website might provide useful information to the consumer, he or she will not be able to interact with somebody. If the person has any questions, the answer will be found through their own research, which might be flawed, rather a third-party individual.

I have personally handled matters for clients who embarked this route, namely the purchase of a will or trust online. Every single document was either incorrectly executed or had conflicting provisions. The result was that each of these documents was legally deficient. Thus, the consumer had basically purchased a problem instead of a solution.

Attorney

A California attorney is somebody who, among other accomplishments, has passed the California bar examination, received a determination of good moral character and passed an ethics exam. Bus & P C § 6060. An attorney is obviously the most qualified person to write a will or a trust for a consumer. An attorney has the knowledge of the legalities behind wills and trusts, can advise on such and most importantly can draft documents that comport with these legalities. The main drawback for hiring an attorney is the cost.

Many consumers cringe when hearing the costs to hire an attorney, $300 per hour or $11,000 to administer a trust. This is a legitimate concern because price is often the motivating factor when purchasing a service. If a person has the option of hiring the services of somebody for $30 total or $300 an hour, this variable will weigh heavily during the decision-making process. Still, an under-appreciated aspect when deciding to hire an attorney to write a will or trust is not the upfront cost but the long-term cost. I equate this with the economics term “false economy.”

False economy basically means that the short-term savings realized by initially retaining an inexpensive good or service are ultimately eclipsed by the long-term costs due to the upfront shoddy good or service. For example, a few years ago I purchased the least expensive toaster from Target rather than spend a little extra on a brand that I had purchased before. Sure enough, the toaster malfunctioned shortly after the purchase and I was forced to buy another toaster. The expense of these two toasters easily eclipsed the cost of the toaster I originally thought about purchasing but ultimately declined. Similarly, in the context of wills and trusts, very often a consumer has made their own will, purchased an online will or hired a LDA to provide a template will. At the time, the consumer is under the impression that everything is alright because there is no immediacy for writing a will, it becomes effective only upon death. Only after their passing away do the will or trust beneficiaries get the chance to review the document and quite typically the document will be flawed.

For instance, the will does not have enough witnesses, the trust does not clearly define the inheritance of each beneficiary or the trust has not been funded, are all common pitfalls with non-attorney drafted documents. The beneficiaries are then relegated to starting from a negative position because they are given the burden of piecing together an incoherent document. The reason being is that California law clearly defines who will inherit a decedent’s estate if there is no will or trust, intestate succession. Whereas in the case of incoherent documents, California law does spell out a process for handling such but it is much more labor intensive and expensive, namely the time and cost of an attorney, than intestate succession. Ultimately a consumer is usually much better served to hire an attorney because the eventual costs are often less for an attorney than for anybody else. Yes, I know that sounds counter-intuitive but it is often true.

The few times in which I think an attorney’s services for a will or trust is not required is when a consumer is able to transfer their entire estate through non-probate transfers, provided no real property is involved.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.

Spousal property petition

2011-08-19T08:56:00.000-07:00

Spouses or registered domestic partners are given privileged status in regards to collecting the assets of their deceased partner’s estate. The following are some questions that address this topic.

1. What is spousal or domestic partner property petition?

Spousal or domestic partner property petition is where the surviving spouse or registered domestic partner collects the assets of the deceased partner without formal administration, namely probate. Prob C §§13500-13660.

2. When can a person utilize this?

This process can be utilized when a husband or wife dies intestate leaving property that passes to the surviving spouse under California’s intestacy laws, or dies testate and by his or her will devises all or a part of his or her property to the surviving spouse. Prob C § 13500. This aforementioned law also applies to registered domestic partners. Fam C § 297.5(c).

For example, assume Hal and Wendy were married in California and owned their California home as tenants in common. They purchased the home for $500,000 during marriage with funds exclusively derived from Hal’s job at the Dutch Goose in Menlo Park, CA (my favorite burger place in the Bay Area). Hal later passed away due to a tragic Vespa accident on Interstate 280 without ever having written a will. Thus, Hal died “intestate.” Under normal circumstances, Wendy would be required to go through probate to transfer the home to her. However, since Wendy is the surviving spouse, Wendy may utilize the spousal probate petition to transfer the home from Hal and Wendy to just Wendy.

3. How does a person start the process?

First, the surviving spouse or domestic partner files a petition in the superior court in the county in which the decedent spouse's or domestic partner's estate may be administered. Prob C §13650; Fam C §297.5(c). For instance, if the decedent passed away in Campbell, CA, the petition would be filed in Santa Clara Superior Court. For reference, the form used is Judicial Council form Spousal or Domestic Partner Property Petition (Judicial Council Form DE-221).

4. How does a person complete the process?

If the person complies with all the legal requirements for filing the petition, the Probate Court will sign an order confirming the transfer of the assets of the deceased partner to the surviving partner. For reference, the form used is Judicial Council form Spousal or Domestic Partner Property Order (Judicial Council Form DE-226)

5. How long does the process take?

The process should take a few months to complete. Most courts now have access to case files on the Internet, so you can look up cases to get a better idea of how long the process might in your specific county.

Alameda County has an excellent website for researching past and current cases

http://apps.alameda.courts.ca.gov/domainweb/html/index.html

6. How much are the attorney fees?

Unlike regular probate, there is no set schedule for compensating an attorney for spousal or domestic partner property probate. Also, no court approval of the agreement is required. Prob C § 13660.

7. Is the surviving spouse or domestic still liable for the decedent’s debts?

Yes, the surviving spouse or domestic partner is personally liable for the decedent’s debts. Prob C §13550; Fam C §297.5(c). Thus, the survivor cannot inherit the property absent the liabilities, if any, that are attached to it. This is consistent with other types of probate and non-probate transfers in that the beneficiary may not inherit an asset without assuming the attached liabilities. This is a sensible rule because a prudent person would agree that one should not be allowed to receive all the benefits without incurring any burdens.

The one exception to this general rule is the case of exoneration. Exoneration is where a will specifies that an encumbered piece of real property will have the encumbrance, a mortgage for example, paid off before it is transferred to the beneficiary. Prob C § 2113. However, a person must write in their will that they want exoneration to occur because the default rule is to not pay off the encumbrance prior to transfer.

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com

Trust Accounting

2011-08-10T15:54:00.000-07:00

Trust accounting is one of the primary duties of a trustee. The following are some questions that address that topic in detail.

1. What is trust accounting?

Trust accounting is the administrative function where the trustee memorializes the decisions, choices and acts made on behalf of the trust. Prob C §§16060-16064. For instance, if a trust owned rental property, the trustee would notate the rental income, the property taxes that were paid, the on-going maintenance costs, etc. in a ledger or some other record-keeping device.

2. Is the trustee solely responsible for this duty?

Yes, the trustee is ultimately responsible for maintaining an accurate trust accounting. Prob C §16062(a). However, the trustee is permitted to delegate this duty, subject to the trustee’s general supervision, to an enrolled agent, certified public accountant or an attorney. Prob C §16012(b). This is often the common result because the trustee is typically a family member who lacks the skill, time or attention to handle trust accounting.

3. Whom must the trustee account to?

The trustee must account "to each beneficiary to whom income or principal is required or authorized in the trustee's discretion to be currently distributed." Prob C §16062(a). However, if the trustee and the beneficiary are the same person, there is no duty to account. Prob C §16064(c).

For purposes of illustration assume the following facts: in August 2011, Hal and Wendy establish a revocable trust, naming themselves as co-trustees and beneficiaries, and their children as remainder beneficiaries, Samuel and Donna. Hal and Wendy choose their friend Fenton as the sole successor trustee. At which point, since Hal and Wendy are both trustee and beneficiary, there would be no duty to account to Samuel and Donna. Prob C §16064(c). Later on, Hal and Wendy tragically pass away in a hot air balloon accident that goes horribly awry in Yellowstone National Park. Fenton then steps into the trustee role and assumes all trust duties. Since Donna and Wendy are the current beneficiaries but are not trustees, Fenton would be required to provide a trust accounting to Samuel and Donna. Prob C §16062(a).

4. How often do trustees have to account?

Trust created on or after June 30, 1987, including via will, require that the trustee provide an accounting annually. Prob C §16062. Furthermore, trustees are also required to provide an accounting when there is a change of trustee and when the trust terminates. Prob C §16062. Finally, a trustee upon reasonable request by a beneficiary is required to provide the requested information to the beneficiary. Prob C §16061.

5. What happens if a trustee fails to provide an accounting?

In such case, the beneficiary may petition the appropriate probate court to compel the trustee to render to the court an accounting, provided that the trustee has not rendered an accounting within 60 days after a beneficiary's written request or in the 6 months preceding that request.

From Q3, assume the date is August 2012 and Fenton has not provided an annual accounting to Samuel and Donna. Both are concerned with Fenton’s handling of the trust as there are rumors that he has a propensity to focus on fruitless activities and has not rendered an accounting that year. On August 15, 2012, Samuel and Donna send Fenton a certified letter informing Fenton of their desire for a trust accounting in accordance with Prob C §16061. Fenton willfully ignores the request because he is pre-occupied with his fantasy baseball team and the upcoming fantasy football season. Come October 16, 2012, Samuel and Donna are entitled to petition the local probate court to compel Fenton to provide the court with a trust accounting. Moreover because Fenton, as trustee, has a duty to provide the Samuel and Donna with an accounting, he could arguably be removed as trustee for breach of trust. Prob C § 16060.

6. When is an accounting not required?

There is no trust accounting requirement if the trust instrument waives it. Prob C §16064. Yet, a court can require an accounting upon “a showing that it is reasonably likely that a material breach of the trust has occurred.” Prob C §16064.

Furthermore, a beneficiary may waive in writing the right to a report or account from the trustee. Prob C §16064. However, this waiver can be withdrawn in writing at any time "as to the most recent account and future accounts." Prob C §16064. The effect of this is to make an accounting waiver essentially useless because a beneficiary may one day sign a waiver and then nullify it the next day without recourse.

7. What are the required contents of a trust accounting?

Prob C §16063 requires that a trust accounting contain:

(1) A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.

(2) A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.

(3) The trustee’s compensation for the last complete fiscal year of the trust or since the last account.

(4) The agents hired by the trustee, their relationship to the trustee, if any, and their compensation, for the last complete fiscal year of the trust or since the last account.

(5) A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.

(6) A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.

8. Does a trust accounting require court approval?

No, not every trust accounting requires court approval. Yet certain trusts do require approval, such as specific special needs trusts or a substituted judgment trust. Prob C §2580

If you have any questions please call my office at (408) 866-8382 for a free consultation or email me at s.miri@mirilaw.com.