Recent Case Law Update

This is something I haven't done much of, but I think is important. So here goes.

California Antideficiency Statute Does Not Apply to "True" Guarantors

California passed antideficiency statutes during the Depression. They are codified in California Code of Civil Procedure sections 580a, 580b, 580d and 726. The law basically says that if you go into default on your home mortgage, for example, and the bank sells the property in a foreclosure sale for less than what you own on the mortgage, the bank cannot get a judgment against you personally for the difference (or "deficiency").

William and Janyce Hustwitt were guarantors of a loan to their irrevocable Investment Trust, secured by a trust deed for certain real property in Newport Beach, California. The Trust defaulted and the lender, which was actually another trust, foreclosed on the property. The lender sold the property for about $388,000 less than what was owed on the loan, and then sued the Hustwitts for the deficiency under their guaranty agreements. The trial court awarded the deficiency amount, plus interest, to the lender.

The Hustwitts appealed on the grounds that the antideficiency law applies to guarantors, and that in any event they were not "true"guarantors because they were too closely related to the debtor (which was their Investment Trust) as beneficiaries and trustees of the trust.

The appeals court didn't buy it. California law is clear that the antideficiency statute does not apply to guarantors. The antideficiency statute is intended to protect debtors. A guarantor is a separate and independent obligation from that of a debtor. The antideficiency laws do not protect the guarantors.

The appeals court also didn't buy the Hustwitt's argument that they were not "true" guarantors. Sometimes a debtor (or "principal obligor") will take on additional liability as a guarantor of the debt. Courts in California have held that this does not create any additional obligation on the part of the debtor, and that they are therefore not "true" guarantors. Thus, the antideficiency statutes would still apply, and the fact that the debtor is also a guarantor is irrelevant.

Here, the Investment Trust that held the property was an irrevocable trust with a corporate trustee. Although the Hustwitts were the settlors of the trust, they were only secondary, and not primary beneficiaries. The court held that this arrangement removed them from personal liability for the trust's obligations, and also limited their beneficial enjoyment of the property. The court concluded that they were "true" guarantors, and that the antideficiency statute did not apply.

The upshot of this case is that, although irrevocable trusts are a great tool for limiting your liability in and exposure to certain downsides, they are not a "get out of jail free" card. You cannot have it both ways - being protected from the liability of an obligor while taking advantage of certain protections afforded an obligor.

The case is Talbott v. Hustwitt and it was decided in the Fourth Appellate District of California (Orange County). You can read the entire decision here.

"Spending It All" is Not an Estate Plan

Last Saturday there was an interesting article in the New York Times about how increasing costs and other factors may reduce the potential inheritances of heirs. The article talks about how increased life expectancy, changes in social security and medicare laws, the decline of pensions, increases in health care costs, divorce, declining home equity, lifetime transfers of wealth, and other factors will deplete most estates, leaving little or nothing for the children.

One of the biggest obstacles I come across as an estate planner is "I don't need an estate plan. I plan on spending it all." This is a close cousin to the ever-popular "I don't have anything. Why do I need a will?"

My mantra about estate planning is "Control, Control, Control." The most important thing that an estate plan gives you is control. Control not only over who gets your money when you die, but over who makes decisions about your health care and personal care if you are incapacitated, who administers your estate when you die, who will take care of your children if they are under 18 and you are unable to take care of them, and on and on. Most of the control you get over your estate plan has little or nothing to do with how much money you have.

The problem with the "I intend to spend it all" philosophy is that presupposes that you know exactly when you will die, and have planned your spending accordingly. Most people don't know exactly when they are going to die. This goes for healthy young people as well as the terminally ill. I have talked to people who were told they had six months to live - 10 years ago. People on death row don't even know exactly when they are going to die. They just know, like everyone else, that it's going to happen some day. It has happened where death row inmates have died from natural causes while awaiting execution (just type "death from natural causes while on death row" into Google). It is because of this uncertainty that you should have an estate plan in the first place.

The concerns in Ron Lieber's column are real. Many people don't have a ton of money, and assuming they live long enough, we can only hope that they have enough to meet their needs as they get older. But don't construe this as a reason for not needing a living trust, durable power of attorney for personal care, or advance health care directive, among other things. The fact is that, if you live long enough, and are no longer able to take care of yourself, you will need someone to make the decisions relating to the concern in Mr. Lieber's article. A complete estate plan gives you control over your estate and affairs. That control is not dependent on how much money you have to give away (or even if you have any money to give away).

California Same-Sex Marriage, A Sort-Of Victory

The United States recently took another step toward remembering that it has a Constitution that it is supposed to follow by allowing same sex couples to marry in California. I am a Trust and Estate attorney, not a Constitutional scholar, but I cannot see how banning same-sex marriages is not a violation of the equal protection clause of the 14th amendment to the Constitution of the United States. If you know, maybe you can help me out.

As you may have heard, the California Supreme Court ruled unconstitutional a law limiting marriage in California to a union between a man and a woman. You can read the decision here. (WARNING: it is 172 pages long!)

While there were celebrations-a-plenty over the recent weddings performed (as well as some protests by people who appear in the media to be more than a little nutty) in City Halls across the state, the real impact of all this is pretty much nil. The fact is that California domestic partnership law already gives same sex couples all of the legal rights and privileges of married couples. The major problem is that many of the most important rights and privileges of married couples are Federal. And under the Defense of Marriage Act, Federal law does not recognize same-sex marriage.

So what the State of California (and the Commonwealth of Massachusetts) giveth, the Feds taketh away. This means all Federal tax laws, including the unlimited marital deduction and married income tax filing status, are not available to legally married same-sex couples.

What does this mean for estate planning? Basically, it means that a lot of the planning must still be done as though the couple is unmarried and unrelated. This can create a more complicated estate plan, particularly if there are estate or gift tax issues. Fortunately, there are very good estate planning attorneys who specialize in planning for same-sex couples, and can structure their plan to account for the lack of rights under federal law. As always, you should choose your estate planning attorney very carefully. Talk to a lot of attorneys and others whom you trust. Almost as important as the expertise of the attorney is how comfortable you feel with your counsel. Estate planning is a process that you will engage in for the rest of your life, so it is important that you make the choice of counsel very carefully.

Who's up for challenging the Constitutionality of the Defense of Marriage Act?