More Ammo for Estate Planners: Estate of Schellenbarger

In California, if you die without an estate plan (or "intestate" in legal jargon), California law determines who gets what, no matter how unfair it may be. That's what the Court of Appeals for the Sixth Appellate District (Los Angeles) has held in Estate of Schellenbarger.

Mom and Dad were married briefly in the early 1960s. They had a daughter Michele. In 1962, when Mom was pregnant with their son Lesley, Dad left and moved to Michigan. Lesley was born in 1963. Mom and Dad got divorced in 1964. Dad never saw his son Lesley.

Lesley died intestate in 2004. He had no wife, domestic partner, children, or issue of deceased children. Under California law, his estate would go to his parents if living. The court appointed Mom administrator of Lesley's estate. She also petitioned the court to deny Dad from taking any of Lesley's estate as an intestate heir. The trial court denied the peitition, and the court of appeal affirmed. "'[C]an a bad guy luck into an inheritance, and is there an equitable way to avoid it?' [the trial court] answered the second question with a 'no.'" The court of appeals observed that there is no provision in the intestate succession law to deny a parent from inheriting because they were not present as a parent. "We accordingly reject the argument that the failure to pay child support or the lack of a meaningful parent-child relationship affects Clifford's rights as an intestate heir. If that were the rule, it would rewrite the laws of succession."

Estate planning attorneys often talk about how you lose control over your estate if you do not have an estate plan. Here it is in black and white. The only way to avoid your estate from falling into the wrong hands is to have an estate plan, whether it's a will or a trust.

And don't think you can put it off because you're relatively young. Lesley died at age 41. A major reason for having an estate plan is because you cannot plan with any accuracy when you might die.

So, if you don't have an estate plan, or if you do have a plan that's out of date, make a resolution to take care of it in 2009.

Still. Here.

I realized when I went to post this that it has been nearly six weeks since my last post. Part of that is good news. I have been so busy with work that I haven't had the time that I have had previously to devote to this. The rest of it is laziness. Anyway, onward.

I am pleased to announce an article I wrote in the MacArthur Metro, a local newspaper here in Oakland. You can read it here. It's entitled "How Safe is My Money," and it's a brief piece about the economy and what you can do to protect your nest egg. Not directly about estate planning, but close enough.

It's the holidays, so future posts will be somewhat infrequent. Don't despair, we're all busy these days.

The Future of Same Sex Couple Planning (married or not)

Yesterday, California voters passed Proposition 8, which amends the California Constitution to limit marriage to a union between a man and a woman. What does this mean going forward? Here are some observations:

All Previous Same-Sex Marriages Are Still Valid

All same-sex weddings performed between the California Supreme Court's decision in In re Marriage Cases (2008) 43 Cal. 4th 757, on May 15, 2008, and midnight, November 3, 2008 will remain valid. California Attorney General Jerry Brown said yesterday that, because Proposition 8 was not retroactive, it will not apply to same-sex couples who got married in California before Election Day. Attorney General Brown also said that the State of California would defend the validity of the marriages if they are challenged.

Estate Planning is Unchanged

As I have previously posted, most estate planning tools are developed to deal with federal law, particularly federal tax law. The federal Defense of Marriage Act (or DOMA, 1 USC sec. 7) was passed by Congress in 1996 and essentially prohibits the federal government from recognizing same-sex marriage. This means that even legally married same-sex couples cannot take advantage of federal tax laws including unlimited tax-free transfers between spouses, joint filing of tax returns, etc.

From an estate planning prospective, this means that, legal same sex marriage or not, special estate planning is needed for same-sex couples to get around the restrictions of DOMA.

Registered Domestic Partnerships are Unaffected

The text of the amendment, which is only one sentence long, refers only to marriage. Same-sex couples can still register as domestic partners in California. Under California law, registered domestic partners are given all the same rights and duties (including community property and California tax filing) as married couples.

Conclusion

Legally, at least, life goes on pretty much as it did before. Symbolically, it's quite a different story.

Keep Those Beneficiary Designations Updated!

I have been doing some research on Federal preemption of California community property law by ERISA. If you are still awake after reading that, you'll love what's next:

In Emard v. Hughes Aircraft the Federal Ninth Circuit Court of Appeals held that ERISA law does not preempt California community property law. While that might not move you to dance in the streets with joy, consider the facts of the case. Wife married Husband 1 in 1975 and named him as the beneficiary of the life insurance policy she received from her job at Hughes Aircraft in 1981. Wife and Husband 1 divorced in 1985. Wife then married Husband 2 in 1986. She never changed her beneficiary designation even though she purchased additional insurance through Hughes while she was married to Husband 2 (that means Husband 1 was the named beneficiary on the new policy as well). Wife died in 1995 without an estate plan. Husband 2 sued Husband 1, among others, to get the benefits of the life insurance policy she purchased while married to Husband 2.

This case is significant not because of the issue of federal ERISA preemption, but because it shows what a mess can be created if you do not keep your beneficiary designations current. Think of how much in attorneys fees were generated in suing for the benefits, losing, and then appealing.

Remember: you should review your designations every year, and certainly when you get married, divorced, widowed, or when you have children. This is probably not the first thing on your mind when these events occur, but the consequences of ignoring it can be pretty serious.

My Schedule for the Week of Nov. 3

Starting today, I will be posting about conferences and seminars I will be attending or presenting. Here's my schedule for the week of November 3 through 8:

Nov. 4 - Bernstein Private Wealth Symposium
Hotel Nikko, San Francisco 8:30 - 1:30. You can read more about it here. The Bernstein symposium will focus on the roots of the current financial mess, and the potential for opportunities. Since much of estate planning is about preserving wealth for future generations, this should be informative.

Nov. 6 through 8 - State Bar of California Taxation Section Annual Meeting
Grand Hyatt, San Francisco. This is a three day event covering all manner of topics related to taxation. I will be attending seminars on taxation related to estate planning, wealth transfer and other trust and estate related issues.

These two conferences should provide a host of topics for future posts. Stay tuned!

DOMA Challenged on First Amendment Grounds

Charles Merrill has filed a lawsuit with the Federal Tax Court claiming that the Defense of Marriage Act violates the Establishment Clause of the First Amendment to the U.S. Constitution. This comes to us from the Tax Prof. Blog.

The Establishment Clause is an interesting choice. I would have picked the Equal Protection Clause, since restricting marriage to a man and a woman would seem to deny same sex couples a fundamental right (to take advantage of certain tax laws such as the unlimited marital deduction). But what do I know?

I will try to follow this as best I can.

Death, Divorce and the Surviving Spouse

Recent case law is a trove of potential blog topics. Estate of McDaniel (2008) 161 Cal.App.4th 458 (if you're keeping score) addressed the intersection of death and divorce. The court held that the wife was not a "surviving spouse" where the husband died after the two had instituted divorce proceedings, divided their property pursuant to a stipulated judgment, but where the final termination of the marriage was not yet in effect.

Husband and wife entered into a stipulated judgment in July 2005 dividing their property and dissolving their marriage, with the final termination to become effective in October 2005. In the meantime, the couple tried to reconcile and signed, but did not file, a dismissal of the dissolution action. Husband died in a motorcycle accident in September 2005.

The court held that because the couple had separated their community property, confirmed their separate property, and accounted for and waived their marital property rights, the wife was not entitled to inherit husband's estate because she was not a surviving spouse pursuant to probate code section 78.

Estate planning is geared toward expecting the unexpected. That extends to estate planning's intersection with family law. Here, had the couple filed the dismissal of the divorce before husband's untimely death, the court would likely have held that wife was entitled to inherit the estate. As an attorney, this is obvious, but I'm sure that husband and wife's priorities were a little different.

Gifting with Depressed Asset Values

The Wall Street Journal strikes again. In October 18's Money Matters column, Anne Tergesen writes about taking advantage of depressed asset prices and low interest rates to make gifts during your lifetime. This would take the assets out of your estate, and if done properly allow you to transfer the assets tax free.

Among other things, Ms. Tergesen writes that a transferring a depressed asset, such as shares of stock, to a family member could be a benefit when the asset price rebounds. The methods include Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATS). Read the column to get a brief overview of what these instruments are, and then call an attorney for more information.

Obama and McCain on Estate Taxes

Yesterday was the last debate between Barack Obama and John McCain before the election. Although they did not tread much new ground in their comments, one area that was covered (at least a little bit) was taxes.

And speaking of taxes, what are the candidates positions on the estate tax? As I posted previously, Obama favors freezing the estate tax at the 2009 level ($3.5 million exemption, 45% rate), whereas McCain's plan is for a $5 million exemption and a 15% rate, which matches the capital gains tax rate.

A major issue, on which both candidates seem to agree is portability. Basically, it means that married couples could use their spouse's exemption in their estate. This was reported on in yesterday's Wall Street Journal. Here's how it would work: Currently, each spouse's estate gets an exemption (for 2008 it is $2 million, increasing to $3.5 million in 2009) before the estate tax is assessed. When one spouse dies, and they leave their estate to the surviving spouse, it passes free of taxes (note: this is for opposite-sex spouses only at the federal level, courtesy the Federal Defense of Marriage Act.) to the surviving spouse. The surviving spouse, however, only gets to use their exemption. For example, if Husband dies and leaves his $2 million estate to Wife, and Wife has an estate of her own of $2 million, she will now have an estate of $4 million, but currently only a $2 million exemption. If Wife were to die this year, she would have estate tax exposure on the $2 million she inherited from her Husband. With portability, she could use her husband's $2 million exemption and avoid estate tax exposure. This would make estate planning somewhat less complex for opposite-sex married couples.

The primary purpose of estate planning should not be tax avoidance, but in reality, it plays an major role. Even with portability, there are many non-tax reasons for trusts of various complexity. That's a post for another time.

Forfieted Deposit as Damages in Failed Probate Sale

In Estate of Felder, the California Second Appellate District upheld the award of $48,000 as damages for a buyer's withdrawal from the purchase of real property in a probate sale. The $48,000 was the amount of the buyer's deposit.

California Probate Code section 10350 allows the seller to recover damages from a buyer who pulls out of a transaction involving real or personal property after the court has approved the sale. The damages can include the difference between the original buyer's purchase price and the price the property later sold for, plus expenses made necessary by the purchaser's breach, and other "consequential" damages. The court here held that the first buyer's breach caused a total of over $55,000 in damages. The court ordered that the buyer forfeit his $48,000 to cover the damages caused by the breach, even though the actual damages were higher.

The buyer appealed, claiming that the court had no authority to order the forfeiture of the deposit. The Court of appeals upheld the lower court's order, noting that "The estate was entitled to retain the entire $48,000 as statutory damages and not as a deposit."

If you are involved in a probate sale of real property, you can get damages if your buyer withdraws after you have received court approval of the sale. If you are buying property subject to a probate court approval, BEWARE, you could be on the hook for serious damages if you cancel after the court has approved the sale.

Estate Planning During Economic Catastrophe

I'm not an alarmist, but like you, loyal readers, I'm a little freaked by all the economic news. On the TV last night I watched esteemed economics professors using phrases like "classic bank run." And this was on News Hour on PBS!

So, what does this have to do with estate planning? Well, during times like this, you might be inclined to put your estate plan on the back burner. Don't. Here's why: your need for an estate plan doesn't go away because of economic uncertainty. If you don't have a plan, you should still get one. If you do have a plan that is out of date, you should still get it updated.

The fact is that estate plans can be expensive, and during times like these, you probably want to hang on to as much cash as you can for security. Here are some tips for keeping as much of that cash as possible, while still getting a plan in place:

Get a Will Instead of a Trust

Estate planning attorneys like to recommend trusts because they are more flexible than wills, they avoid probate (which can be expensive, time consuming, and is a public court record), and they can be set up to assist you if you become incapacitated. Because they can do so much more than a will, they are much more complicated documents. Because they are much more complicated documents, they are more expensive to prepare. If you want an estate plan, but cannot afford a living trust, a will might do for now. Let's look at the following scenario:

A married couple in their late 30s with two children under the age of 5. They own their own home worth about $550,000 (titled as community property), each have about $100,000 in separate 410(k) plans from current and previous employers, and each have $500,000 life insurance policies with 30-year terms naming the other as beneficiaries. They also have about $35,000 in checking and savings accounts. All of their assets are in California and are community property.

In a perfect world, an estate planner would recommend a living trust that is split into two trusts on the death of the first spouse (one for the surviving spouse, and another funded with the deceased spouse's estate that bypasses the surviving spouse to ensure something for the children), and trust for the children that will pay the money outright to them when they turn 25 or graduate from college. Such a plan would avoid probate, would ensure that there is some money to be inherited by the children when the surviving spouse dies, and would ensure that they children don't get the money before they are ready to handle it. In the world of living trusts, this is a more simple plan, but it is still a pretty complex document. It can also be very expensive to prepare.

Can you achieve the same result with a will? Not really, but you can come close. With the wills, you can create a trust with your estate, but you cannot split the estate into two trusts on the death of the first spouse. Because the assets are all community property each spouse's estate is half of each asset. That becomes tough to split when it is not held in cash (like the house). Although each spouse could leave their estate to their children in trust (rather than to each other), it would likely result in the liquidating of the estate assets in order to properly fund the trust. Since the surviving spouse would probably want to stay in the house, each spouse should give their estate to the other spouse. The house would automatically transfer to the surviving spouse because it is titled as community property. The surviving spouse would receive the insurance proceeds and 401(k) as beneficiary.

Their might not necessarily be a probate on the death of the first spouse. Assets held jointly (like the house) do not go through probate. Assets with beneficiary designations (like the life insurance and the 401(k)s) also don't go through probate. If a person's probate estate is less than $100,000, then probate can be avoided. Here, the actual assets subject to probate are less than $100,000, so probate can be avoided on the death of the first spouse. (The surviving spouse will probably not be able to avoid probate because the house will no longer be held jointly, and the proceeds from the life insurance will be held by the surviving spouse alone.)

To keep the will-based plan as simple as possible, they could leave their estates to each other, and if their spouse does not survive them to their children in a California Uniform Transfers to Minors Act (CUTMA) account. This holds the money in an account, and distributes the money to them outright when they reach an age between 18 and 25. The will can also name guardians for their children while they are still minors. They can execute durable powers of attorney for financial decisions in the event they become incapacitated, and advance health care directives for their medical decisions.

This is much more simple, and less expensive, to prepare than a living trust. It has some drawbacks, but it is far better than no plan at all.

If you are considering an estate plan, but are uncomfortable with the expense of getting a living trust, a will may be a good alternative. Once the ecomony picks up, and you feel better about spending the money on your estate plan, it can always be amended to include a trust.

Don't let economic uncertainty keep you from putting together that you know you should have.

Witness Requirement for California Wills relaxed

Wills are relics of an ancient era, and the laws surrounding them are often incompatible with our modern world, and sometimes internally inconsistent. For example, if you print out your will from a computer or pre-printed form, it must be signed by you and two other people, who either saw you sign the will or can acknowledge your signature, and who know that the document they are signing is your will. You can also handwrite your own will. If you do, then you don't need anyone to witness your signature. Also, if you execute a living trust, your signature doesn't necessarily need to be witnessed by anyone in order be valid. Why is the law so much more strict for pre-printed wills?

The State of California recently took steps to make my rhetorical question moot. On July 1, 2008 Governor Schwarzenegger (I am never going to get used to that) signed into law a revision of Probate Code section 6110 relxing the formal witnessing requirements of a pre-printed will. In the latest issue of the California Trust and Estates Quarterly, published by the State Bar of California's Trust and Estates section, Silvio Reggiardo III writes about the changes. Basically, a pre-printed will no longer has to be signed by two witnesses in order to be valid, if the person trying to enforce the will (usually the executor) can show by clear and convincing evidence that the person who wrote the will intended that the document be their will despite the lack of witness signatures.

Here's how it would work: Joe prints out a will using a pre-printed will drafting program. He signs it, but no one signs the will as a witnesses, even though two if his friends saw him sign the will. Joe dies, and the executor of the will submits the will to the court for probate. The executor presents the evidence from the two friends who saw Joe sign the will, and there is no evidence of any other document that was intended to act as Joe's will. It is up to the judge to determine whether this meets the "clear and convincing evidence" standard, which is greater than the "preponderance of the evidence" standard used in civil courts, but less than the "beyond a shadow of a doubt" standard in criminal courts. If the judge decides that the evidentiary standard is not met, then the will is not valid, and Joe's estate is distributed per California law applying to people who die without a will.

While this change in the law helps modernize will execution standards, it is still more onerous than the standard for executing a trust. This is yet another reason why a living trust is superior to a will. Trusts are much more flexible, and are less likely to be invalidated on arcane technical grounds.

Ambiguity in Charitable Gifts

A gift in a will setting up a charitable trust is valid, even if the gift does not specify any particular charity or class of charitable recipient. In Estate of Clementi, The Fourth District Court of Appeals upheld an Orange County Superior Court ruling that allowed the following language from a will:

"I give the balance of my assets to a charitable foundation or trust in my
name to be run by Richard Weisz. If Richard Weisz is not alive when I die, then I
appoint his son, Frank Weisz[,] to run my charitable foundation or trust."

The court held that the general policy in California is that charitable gifts are highly favored and that a charitable gift in a will must be liberally construed to uphold its validity.

While this policy is admirable, it can create problems for the trustee who then must administer the trust with no guidance as to how to direct the funds. This is yet another example of how an estate plan must be carefully drafted in order to make sure the wishes of the client are carried out. Sometimes a person may have a charitable intent, but has no real idea who to give their estate to. At those times, the estate planning attorney should ask a lot of questions to try to get an idea of what kinds of charitable organizations may fit with the client's charitable impulse. Are there any friends or loved ones with a medical condition that they would like to donate money to? Is there a specific group of people who the client would like to help (seniors, orphans, veterans).

A crucial part of estat planning is for the attorney to ask questions and listen carefully to the client. That is the key to drafting a plan that is clear to all involved.

Gift Taxes and You

I haven't posted much on the gift tax. (actually, I haven't posted at all about the gift tax). But there is a first time for everything.

Joel Schoenmeyer posted on how to take full advantage of the Federal annual gift tax exclusion. You can read the post here. Currently, you can make a gift of $12,000 per year to anyone you want without having to pay taxes or even file a gift tax return. In 2009, the exclusion goes up to $13,000.

Under Mr. Schoenmeyer's plan, you could make a $12,000 on December 31, 2008, and then a $13,000 gift to the same person the next day on January 1, 2009, for a total of $25,000, tax free and without even filing a return. And you can do this for as many people as you want.

Many people use gifting to reduce the size of their estates in order to avoid or reduce estate tax exposure. The disadvantage of this is that, since you really can't predict when you are going to die, you run the risk of giving away too much of your estate too soon.

Thanks to Mr. Schoenmeyer for his useful post!

Be Careful with Mediation Confidentiality

Mediation of disputes in the world of Trusts and Estates is not as common as it is in civil litigation generally. Nevertheless, it can be very useful in settling things among beneficiaries, or between beneficiaries and trustees, or among heirs and executors.

In California, documents prepared during a mediation are confidential, except when they are not. The default is to protect these documents from disclosure in litigation in order to foster more open discussion, but this confidentiality can be waived.

Whether the children of Thresiamma Thottam waived this confidentiality was the Estate of Thottam matter. The children disputed the division of property after the death of their mother. They agreed to mediate the matter, and signed an agreement that protected the confidentiality of proceedings "except as may be necessary to enforce any agreements resulting from the Meeting."

During the mediation, a chart was prepared showing an allocation of the assets of the mother's trust. The children all initialed the chart. Afterwards, disputes arose over the language of the settlement agreement memorializing the distribution and incorporating a copy of the chart. One child sued the other two for breach of the settlement agreement. The other children filed motions to keep the chart out of evidence, claiming that it was confidential under California. The trial court agreed, but the court of appeal did not, and reversed the trial court's decision.

The court of appeal held that California law provides an exception to mediation confidentiality where all parties agree in writing to waive it. The court found that the agreement the parties signed waiving confidentiality where necessary to enforce any agreements resulting from the meeting constituted a valid waiver under California law. They also held that the chart initialed by all parties was just such an agreement, although they did not rule on whether the chart was enforceable.

I think there are two important lessons from this case. First, remember that by law, all writings in a mediation are confidential. Be careful not to sign anything that could constitute a waiver of this confidentiality if you want to make sure that what happens in the mediation stays in the mediation. Second, if you come to a settlement, make sure that the document memorializing the settlement is clear and unambiguous. Even though the court did not rule on whether the chart in this case was enforceable, it frightens me to think that a chart, with no terms and nothing other than initials of the children, can be used as evidence of a settlement.

Legal documents sometimes seem pointlessly long and detailed. But there is often a very good reason for it.

CA Widow Cannot Use Husband's Frozen Sperm

The California Court of Appeal for the Third Appellate District (Sacramento) today held that a widow cannot obtain the frozen sperm of her husband, who requested that the sperm be destroyed upon his death.

Technically, the court upheld the probate court's denial of the widow's motion for preliminary distribution of the frozen sperm.

Iris and Joseph Kievernagel contracted with an IVF clinic to help Iris have a baby. Joseph did not want children, but agreed to the IVF because Iris did want them, and he was worried that Iris would divorce him if he did not agree. In completing the paperwork for the IVF clinic, Joseph signed a document entitled the "IVF Back-Up Sperm Storage and Consent Agreement." The Agreement stated that the sperm sample was Joseph's sole and separate property, and that he had two options for the disposition of the sample upon his death or incapacity: donation to his wife or disposal. The box for disposal was checked. The Agreement was filled out by Iris, and signed by Joseph.

After Joseph died in a helicopter crash, Iris was appointed Administrator of his estate. She filed a petition for preliminary distribution of the sample. The court denied the petition, citing that the Agreement indicated Joseph's intent that sample be destroyed, and noting that there was no contrary evidence of Joseph's intent.

The Court of Appeals upheld the trial court's ruling. The court noted that "gametic material," with its potential to produce life, is a unique type of property that is not governed by the general laws relating to gifts of personal property or transfer of personal property upon death. It also held that Joseph's "right of procerative autonomy" allowed him to control the disposition of his sperm, and that since this was not a frozen embryo, Iris' right to procreative autonomy was not implicated. The court noted that if Iris could only become pregnant with Joseph's sperm, then her rights would be implicated, but that this was not the case.

The court punted on the issue of contract law. Throughout the decision, the court used contract law language, but in the end it based its decision on the intent of Joseph. The court did note a French court decision holding that contract law did not apply to gametic materials.

The court concluded that the intent of the donor controls the disposition of sperm on the donor's death. What if Joseph had a will or a trust that stated that Iris was to receive the sample upon his death? Presumably, the court would see this as evidence of changed intent. As practitioners, we must make sure that the intent of estate planning client is being carried out, and that the estate planning documents don't contradict or conflict with other documents.

You can read the full decision here.

NY Times Article on "Learning to Share"

Earlier this week, I attended a workshop on mediating estate plan disputes. One of the biggest topics of discussion was how involved the heirs or beneficiaries should be in the preparation of an estate plan. Opinions varied widely, but most agreed that the more likely it was that a dispute would arise once the plan went into affect (i.e. when the testator died), the more important it was that the heirs and beneficiaries be involved during the planning process - espcially if the intention was to leave someone out, or to give them less than others.

Not to be outdone, the NY Times printed this article in yesterday's edition. They discuss how children fight over their parents' estates, and how to avoid the conflict. One person profiled, Eric Zeller, started the process of discussing his estate with his children early on. He intended to leave his estate to various charitable entities rather than to his children, so throughout their lives, he talked with them about how to make their own way in the world. As they grew up, they did not have the expectation that they would get their Father's money, and they became independent.

Not everyone agrees that a parent should leave nothing to their children in order to keep them from being too dependent on their parents. But whatever your intentions are, you should make them known to your children, relatives, friends, and anyone who may believe they might get a piece of your estate. It's not a guarantee against disputes, but it's certainly better than keeping it to yourself.

What do you think?

Keep Your Special Needs Trust Up to Date When You Move!

Remember your Special Needs Trust when you or your child with special needs moves. Kevin Urbatsch, a special needs trust attorney in San Francisco, relates this article that gives useful information for people on the move who have special needs trusts.

While most benefits for those with special needs are federal, many are provided by the state (such as Medi-Cal). If you move to another state, you will need to re-visit the process of getting state-specific benefits. If you have a special needs trust that deals with the state benefits, the trust will need to be changed to reflect the new state benefits.

Thanks to Mr. Urbatsch for this useful info.

Summary Administration: It's Not for Everyone

In the recent California case of Bonanno v. Connolly, the Court of Appeals for the Second District held that a spouse who waited until after most of a large estate was administered in a probate proceeding was estopped from filing a spousal property petition under Probate Code section 13652. The case didn't lack for drama. Louis Bonanno had a daughter, Jacqueline. Louis had a girlfriend, also named Jacqueline (!). Jean and Louis had been separated for 12 years when he died intestate (without a will) in March 2003. Jean and Louis were in the middle of divorce proceedings at the time of his death. Louis was living with his girlfriend Jacqueline at the time of his death.

Not surprisingly, a big fight ensued. Connolly was appointed administrator of the Louis' estate (although Jean and Louis were still married, Jean was not entitled to priority as administrator because she and Louis were in the middle of a divorce and were not living together when he died). Jean filed a petition claiming that she was entitled to all of the joint tenancy property she held with Louis, and all of his other property. Jean also sought half of the property Louis transferred to girlfriend Jacqueline. Not to be outdone, girlfriend Jacqueline filed a peititon to determine an interest in Louis' estate, based on a palimony claim based on an oral agreement she entered into with Louis about 12 years before he died. Connolly objected to both Jacqueline and Jean's petitions.

The parties resolved their dispute in December 2003 splitting the estate among the three of them. Because of disputes over the language of the settlement agreement, a final agreement was not signed until March 2006. Connolloy administered the estate, paying off creditors and gathering the assets.

Jean, apparently having developed an affinity for the legal system, filed her spousal property petition under Probate Code section 13650 in May 2006. She claimed that she was entitled to summary administration of all the assets of the estate except those distributed to Connolly and Jacqueline under the March 2006 settlement agreement. Estate property disposed of under this summary administration is not considered part of the probate estate, and is not included in the calculation of statutory administrator or attorney fees. If granted, Connolly's (and her attorney's) fees would be reduced from $58,000 to about $23,000 each. For three years' work.

The court of appeals held that Jean was estopped from seeking summary administration under Probate Code section 13650. Most of the administration of the estate had already occurred: assets had been gathered, creditors notified and paid. It would be inequitable for Jean to get all the advantages of a full probate administration without having to pay the fees of a probate administration.

There are some good nuggets to take away from this case:

• Don't assume you know what the size of an estate is before it has been inventoried. Many clients come to me and say "what do we need to go through probate for? Grandma didn't have any money." The original estimate of Louis' estate was $600,000, but after the administratory, Connolly discovered that his estate was greater that $4 million! This included many assets and real estate no one knew about.
• A probate administration can take forever. Louis died in March 2003. This appellate court decision was filed in July 2008. Five years and four months is a long time to wait for your inheritance. And your attorney fee.
• Summary administration is not always the best way to go. Although it may save time, you cannot take advantage of some of the protections of a full probate administration - most notably the notice to creditors. In a probate, once notice to creditors has been sent, they have generally about four months to file a claim. After that four months has passed, the creditors are out of luck. No such mechanism exists under a summary administration. There is no time limit to when a creditor can file a claim, and a surviving spouse can be personally liable for the decedent's debts chargeable against the estate.

James Brown Estate Auction Update

James Bernstein over at New York Probate & Estate Litigation Blog posts that a court in South Carolina has ordered that the Auction of Mr. Brown's estate go forward. Read his post for more details.

Avoiding Probate in a Small Estate

In California, as in many other states, if an estate is small enough, it can avoid probate. California allows for "summary administration" of estates of less than $100,000 by affidavit. What this means is the successor(s) or beneficiary(ies) can prepare a declaration that includes certain required information and present it to the holder of the property in the estate, and are entitled to receive the property.

Although California sets forth the requirements of the affidavit for content and presentation to the holder of the property in Probate Code sections 13100-13104 and 13106.5, there is no approved form to use. So, if you want to start a summary administration, you must draft (or hire an attorney to draft) the form yourself.

Other states, including Illinois, have such forms for use by beneficiaries. Joel Schoenmeyer posts on his excellent Death and Taxes blog about the Illinois form. You can't use it here in California, but it is an example that perhaps the Judicial Council, which is responsible for approving such forms here, may want to consider.

Estate of the God Father of Soul

Heirs - named, disputed and otherwise - are fighting over the goodies in James Brown's estate. The NY Times reported over the weekend about how the planned auction of items from the GFOS's estate is being postponed while the dispute is dealt with.

So, if you were planning on getting one of those glittery jumpsuits, or some unused hair product, you're gonna have to wait a little while longer.

Remember, when planning your estate, don't be shy. Tell your estate planning attorney about ALL your potential heirs, and whether or not you expect anyone will contest your estate. Better to get it over with now. No one likes posthumous surprises.

Estate Tax plans of Obama and McCain

The Tax Prof Blog has posted about the proposed estate tax plans of the two candidates. Their feed is from an article in the Wall Street Journal.

Basically, Obama proposes to make the 2009 levels permanent. A $3.5 million exemption and a 45% tax rate.

McCain, while not advocating a total repeal, comes pretty close. He proposes a $5 million exemption and a 15% rate, which would match the capital gains rate.

Whatever your philosophy is on the estate tax, or taxes in general, at least we now have some guidance of how the estate tax question will shake out. I haven't shied away from my opinions in this blog, but right now, I'm not really in the mood. Besides, it's the Fourth of July. So stop thinking about taxes and go out there and have some fun! Celebrate the 232nd anniversary of our declaring our independence from Great Britain! Which was prompted by a tax revolt.

Alright, fine. Maybe the Fourth is about taxes.

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?

Should You Donate Special Assets?

Further to my visit with Mr. Moskowitz a couple weeks back, the topic of donating assets to charity came up. Mr. Moskowitz, whose insights are always, well, incisive, is of the opinion that, if you have a special asset that has value, and you have a favorite charity or charities, the charity would be better served if you sold the asset and donated the cash.

Let's say you have a collection of rare books, and, as a bibliophile, you love the library. A good fit, yes? Donate the collection to the library. But is it a good fit? What most libraries need is money, not more books. Chances are your local library's facilities are too small as it is, and probably cannot handle the extra books. What they really need is more money to buy more shelves, fix that leaky roof, replace those old computers. The library may have nowhere to put the books, and my just stuff them in some damp corner in the basement, or worse, dispose of them. There was a minor controversy when the San Francisco Public Library moved to its new facility. It actually had less shelf space for the books, and many books, including rare first editions, were simply thrown away. It happens.

Another factor is administration. The process of transferring the books to the library may not be as easy as it seems. What if the library rejects the gift? They not want more books, but I cannot imagine they would turn down cash. Also, what if your collection is gone by the time you die (maybe it was stolen, or it went up when the house burned down)? Gifts of specific items are always fraught with administration headaches.

There are, of course, situations where donating a special asset makes sense. If, for example, you have a rare Bugatti (I guess they're all rare), and the Blackhawk Auto Museum has been chomping at the bit to have the car for years. That donation makes sense, and avoids many of the problems above.

You are likely very attached to your collections. The idea of having them live on in an institution you admire is certainly a noble sentiment. But thoroughly consider whether the institution is in a position to accept your collection, whether they are in need of money instead, or are even able to fully appreciate the significance of your largess. They may be better off with the cash.

Valuation of Special Assets

I have been away in New York City for the past week (which explains my posting gap). While my wife and I were there, we had the good fortune to stay with some close friends. Our friends Joel Moskowitz and Sally Bernstein live in the Gramercy Park section of Manhattan. Joel owns his own business designing and selling hand tools for woodworking (check out www.toolsforworkingwood.com), and is an avid collector of rare books about woodworking and antique tools. We got to talking about the value of his collections, and I suggested that, in a typical estate administration, such a collection would be valued by an appraiser or an auction house when determining the value of the estate.

Joel was adamant that a typical appraiser or auctioneer wouldn't know the first thing about the true value of the rarest books or tools in his collection, and wouldn't value them correctly. And he's right. For most of the ordinary things people own (cars, clothing, furniture), a typical appraiser would be appropriate to value the estate. But what do you do with the book about woodworking from the early 19th century, of which there are only three or four copies in the whole world? Chances are the typical appraiser wouldn't even recognize the rarity of the book, much less be able to appraise it properly.

Joel's concerns point out a not-too-rare challenge in estate planning. If you have any kind of special asset, such as a collection of rare items, or anything that is unusual or difficult to value, it is critical to specifically identify it, and to name appraisers and others who could properly value it. As estate planning attorneys, it is our job to make sure that any special assets have been properly identified and that their valuation and disposition is properly accounted for. Things to think about when you are listing the items you own are:

• What special collections (such as coins, books, antiques) do I have?
• Are there any rare or unusual items that I have inherited or have been given as a gift?
• Are there any other special assets in my estate (such as mineral rights or copyrights)?
• Who do I know is an expert in valuing these assets?
• If I don't know any experts in valuation, who do I know who can at least know and understand the rarity of the asset?
  

For most special assets, particularly financial ones such as mineral rights or copyrights, your estate planning attorney can find an expert to value them. But for obscure and unusual items, you may know exactly who should be valuing them. My friend Joel knew the names of three people whom he trusts to properly value the rare books in his collection. If you know those people, make sure you identify them to your attorney, so that the valuation can be done accurately. As practitioners, it is our job to identify special assets, and to ask the client about assets we are unfamiliar with.

I don't mean to knock most appraisers, who are hard working and knowledgeable, and would in most cases at least know they are looking at a rare or unusual item, and would know to call in an expert. But why take that chance? They might now know the same experts you do. If you know someone whom you trust to value your collection, you should make sure to tell your estate planning attorney.

Good estate planning relies on good information. Getting it and providing it are the responsibilities of both the attorney and the client.

Privacy of Trusts Challenged

A post recently in the Wills, Trusts and Estates Prof Blog mentioned a paper written by Frances H. Foster, the Edward T. Foote II Professor of Law at Washington University in St. Louis. The St. Louis connection lets me finally post one my favorite photos I took during a trip there several years ago.

But I digress. I have not read the full article, but the gist of it, from the Prof Blog, is that the issue of trust privacy has not been properly addressed by reformers, and that the "human cost" of trust privacy should be considered when discussing how the laws related to trust privacy should be reformed.

Presumably, the main concern here is that because trusts are private, they can be created and administered outside the purview of interested parties. So family members, heirs and relatives would not be able to know who the beneficiaries of a trust were, how the trust assets are to be distributed, and what the trustee is doing with the trust assets.

Living tusts, unlike wills, do not go through probate when the settlor, or trust creator, dies. This means that there is no automatic court supervision of the management and distribution of a trust on the death of the settlor, as there is with a will. That does not, however, mean that the court never gets involved with trusts. When a settlor dies or when a trustee changes, California Probate Code section 16061.7 requires the trustee to notify the beneficiaries of a trust, the heirs of the settlor, and where the trust is a charitable trust subject to the supervision of the California Attorney General, the Attorney General. This allows these parties time to challenge the trust, for example. California law also requires trustees to prepare accountings of the trust administration, which is designed to keep beneficiaries up to date on the trust's inner workings. Interested parties can also contest the trust in much the same way that they can challege a will.

While it is true that there is no automatic court supervision of trusts, there are many court procedures for making sure that individuals' interests are protected in a trust. It is certainly debateable whether a trust must be made public in the way that a will is when many of the challenges available to a will are also available to a trust.

Estate Planning Symposium (not so) live blogging

Last Friday and Saturday I attended an Estate Planning symposium put on by Continuing Education of the Bar. Speakers included practitioners from San Francisco, San Mateo, and Contra Costa counties. The conference was loaded with very useful and up-to-date information on bypass trusts, marital deduction, generation-skipping transfer tax, and other important topics, but the biggest takeaway was this:

"Estate planning is a process and not an event."

Preparing an estate plan is not something that happens all at once. It may start with a phone call to an attorney, followed by filling out a questionnaire, either by yourself or with the attorney, and then a conversation with the attorney. The conversation is where the planning really begins, because it is there where all of the imporatant information is conveyed: who you are, who your family is, what your goals are. The process of turning this into a coherent plan is not a simple one, and it doesn't end once the will or trust is drafted and signed by you. Your life may change. Your goals may change. The laws may change. The plan, if it is prepared properly, should be structured to accommodate changes, but it must be looked after and cared for.

With that in mind, many practitioners believe that it is therefore impossible to properly do your job with a flat fee arrangement. I have been a great supporter of the flat fee because I believe it fosters creativity and efficiency for attorneys. But I also acknowledge that it may limit an attorney's options, particularly where an estate plan may evolve and become more complicate than either the attorney or their client had originally anticipated.

I don't believe that hourly billing is inherently bad. Nor do I believe that a flat fee for an estate plan is always a bad idea. The most important thing in regard to fees is making sure your client knows that they are getting for their money, and is not surprised by how much it costs.

Off to School

I will be attending a two-day conference on Estate Planning put on by Continuing Education for the Bar (CEB), a joint venture btween the University of California and the State Bar of California. Yes, that's a Friday and a Saturday. All day both days. I am dedicated to my craft.

In the meantime, you can read my guest post on Susuan Cartier Liebel's excellent blog Build a Solo Practice, LLC.

I will be posting on interesting items from the conference.

Investing Prudently Amid Turmoil

Regardless of how a trust is structured, a trustee has a fiduciary duty to invest the trust assets. With all the chaos in the markets these days (look here for the gloom), a trustee may be inclined to look at their mattress as the safest investment vehicle. As any student of the markets knows, however, there are always opportunities amid the crises.

Take stocks, for example. While the Dow has dropped about 10% from its all-time high of 14,279.96 on October 11, 2007, it is only down 2.4% from where it was a year ago. And the U.S. isn't the only place to invest money. European stocks have been pounded over the past year, but the markets in South America, South Africa, Hong Kong, Indonesia and India have all performed very well (this doesn't however take into consideration any erosion of returns cause by the declining dollar, which is another float in the parade of horribles).

Commodities, which include oil, corn and gold, are almost universally way up. It's impossible to know when anything is at the top of its price, but I think it is safe to say that the current upward price pressure cannot last much longer. Once the prices get too high, demand will fall off, and the prices will begin to drop. There is already some indication that demand for gasoline, which is comfortably over $4.00 a gallon here in California and is the only reason anyone cares about the price of oil, is beginning to fall. Commodities such as corn, soy and other food crops will probably be the object of government intervention at some point if their prices don't level off, and there is some amount of speculation built into their price because of their potential as an alternative to oil as a fuel source.

What is a trustee to do? Don't panic, you are a trustee after all. Look to the professionals. Ask your financial advisor for help. If you don't have one, get one. Make sure the trust allows you to hire an advisor and to pay them out of the proceeds of the trust. It's part of your job as a trustee.

I could go on about how and where to look for opportunities. They are out there. If you are a fiduciary, it is important to surround yourself with a trusted financial advisor who can help navigate these waters, which seem filled with sharks, icebergs, alligators, and what have you.

The mattress is never as good as it looks, anyway.

Of Trusts and Unitrusts

I have been given the opportunity to represent a trust regarding the possible conversion of the trust to a unitrust.

In California, as elsewhere I suspect, unitrusts are used to take advantage of federal tax laws related to the powers of trustees to invest the trust funds. There are other reasons for unitrusts as well.

In my earlier post, I talked about the "essence of estate planning." I defined this essence as carrying out the intentions of the clients, whether they are the settlors, the beneficiaries, or the trustees. What if your client is the trust itself? What does that mean? How do you determine what the best interests of the trust are? Chances are the beneficiaries may be at odds, as income and principle beneficiaries often are.

Probably the most challenging thing about estate planning is walking the fine line between carrying out the intentions of the trustor and minimizing potential conflict with the beneficiaries. The system has many options for addressing this after the fact. Conversion of a traditional net income trust to a non-charitable unitrust is one of those options.

Again, keep your ears open. Listen to all the parties. What are they saying? What is it that they want?

The Essence of Estate Planning

Americans spend a great deal of their lives trying to amass financial wealth. They work very hard at it. Some achieve it, while many, if not most, do not. It is the American way, or so it seems.

For those who have achieved some measure of financial wealth, a large amount of time is spent thinking about ways to keep as much of that wealth as possible. To do this, people employ a staff of accountants, financial planners, attorneys, and others to maximize the money they have, and minimize the money that they have to pay to others (i.e. taxes). These professionals spend their time (and their client’s money) preparing ways to make as much money as possible while keeping as much as possible out of the hands of the government. Sometimes, in their zeal to avoid taxes, these professionals get themselves and their clients into trouble. Sometimes these schemes are so complex that it takes a small army of government workers to figure out how they were structured.

We refer to estate taxes as “death taxes.” Trusts are structures with the primary purpose to avoiding paying taxes, or at least to minimize the tax impact. The IRS will find a particular scheme to be an illegal tax shelter if it was prepared with the primary intent of avoiding taxes, and there is no legitimate non-tax purpose. So we find ways to explain away these tools as being primarily for some other purpose. But let’s be honest, if it weren’t for taxes, there would be little or no demand for GRATs, QTIP trusts, marital deduction trusts, or QPRTS (if this alphabet soup is foreign to you, don’t worry. You are not alone).

Why am I going on about this? Because sometimes you have to just have to give it up and pay some taxes. Some really rich people have been talking about how too much effort has been spent on tax avoidance, and how the tax code is rife with loopholes that allow people to pay a proportionately low share of taxes. These people include Warren Buffett (really rich), and Bill Gates, Sr. (not as rich as his son, but still pretty rich).

Most Americans don’t have to deal with this issue in their estate planning because they don’t have that much money in their estates. Their main concern is making sure they leave some money to friends and loved ones, and making sure that their wishes are carried out properly. That is the essence of estate planning.

I have spent a lot of time talking with other trust and estate attorneys with clients who have large estates, and most of what they talk about is how the beneficiaries and heirs complain over getting “their share” of the money, and complaining about how others are getting too much, or how others are exerting too much influence over the trustee, or how the trustee isn’t doing their job properly (read: maximizing their take). It is doubtful that the person whose money they are fighting over intended such a result. As attorneys, it is our job to structure a plan that carries out the client’s wishes while minimizing potential family discord. Easier said than done, but it is the only way to accomplish the true essence of estate planning.

Yes, It's Earth Day

Estate planning and the environment are not as far apart as you would think. Actually, they are pretty far apart, but in this post I will try to find a link.

Today is Earth Day, so we celebrate our home planet and lament what a mess we've made of it. For one day, we'll walk the two blocks to the store instead of drive, take public transit to work, maybe pull those abandoned tires out of the creek bed. Or maybe not.

If you read the New York Time, you probably saw the Magazine section last Sunday and its coverage of all things environmental. In it, there was an article about the no impact man (I sometimes feel like the no impact man, but for different reasons). Anyway, his challenge for a year was to live without generating any environmental impact. So no electricity, no garbage, walking everywhere (he lives with his wife, child, and dog in Manhattan, so it is a lot easier than those of us who don't. At least for the walking part.) The fact is, that if we change how we look at the world, and what we expect from it, then we begin to realize that a great many things are possible. We also begin to see how the decisions we make can have consequences (good and bad) that we may not have thought about when we made them.

I used to drive to the post office box I use for work. Yesterday, I realized that it was only 0.67 miles away from our house. I cannot justify driving anywhere that is less than one mile away, so I have now resolved to walk to the PO box (some more encouragement for this: I also filled up my 23 year-old diesel BMW - at $4.55 per gallon!)

Estate planning is all about thinking ahead and predicting the future - For both the attorney and the client. The decisions made today about your estate will affect future generations in ways you may never imagine. You may be mad at your children, so you respond by cutting them out as beneficiaries to your plan. In doing so, however, you will virtually guarantee a trust battle when you die.

Did the people who built the houses in this photo think about where the people who would live in them would work? Where they would go shopping? How they would get there? They probably assumed that they would just drive. As you can see in the photo, there is construction on the highway. It is being widened to accommodate increased vehicle traffic. The car in the photo is going about five miles per hour. The people who built the houses were thinking about providing housing and making money. They didn't think about increased traffic, smog, congestion, asthma, global warming, etc., but all of these things have come about because of their planning.

Estate planning is like a puzzle. The challenge is to make the pieces fit together. This requires thinking about how the plan will take effect. Similar to how we should think about the environment (since, again, this is Earth Day - so recycle your batteries!). A decision today will affect future generations in ways you may not realize right now. Think. Think. Think.

Limitations

The current issue of Harper's includes an article about how we have strayed from our understanding that the world and its resources are finite, that our knowledge and understanding are finite, and how we must re-learn to understand limitations and to work within them. Wendell Berry uses the example of artists, who use their creativity within the limitations of their chosen medium, e.g., a painter who is limited to colors and types of paints, and the size of the canvas. The challenge is for all of us to understand our limitations, and to work and think creatively within those limitations.

Trust and estate law, as is all law, is defined by its limitations. The challenge for an estate planning attorney is to craft a plan that accomplishes the goals of their client as efficiently and creatively as possible. Attorneys like to think that they know everything, and can solve any problem. This often leads to promising results for their client that are either not really possible, or that create problems that don't show up for many years.

Lawyers can't do everything. Our challenge is to listen to our clients and craft solutions based on what we hear. This does not need to result in piling on clauses in a trust document that turn it into a long, unreadable tome that tries to cover every base whether it needs to be covered or not, and may create more problems than it solves. For example, does a trust need a long, detailed instruction on creation of a special needs trust for a potential beneficiary when none of the intended beneficiaries have special needs? Should a trust contain boilerplate clauses to reduce estate tax exposure when the size of the estate is not likely to trigger the estate tax? In the litigation context, should a trust or will contest for an omitted child be attempted where there is only scant evidence that the parent lacked capacity or was unduly influenced?

Understanding the limitations of what we can do for our clients, and the limitations of our scope of representation for our clients, and drafting a thoughtful and creative solution. That makes us better lawyers, and it helps our clients in the long run, even if it sometimes means telling a client something that they might not want to hear.

More on Listening

Further to yesterday's post, Blawgletter talks about streamlining litigation. The context is business litigation, but the concept is the same: don't just do what you've always done before. Listen carefully to what you client is saying (and what he or she is not saying), and determine what they want. Then craft your litigation plan to achieve the result as quickly and efficiently as possible.

In the context of trusts and estate litigation, this may mean restructuring a trust document to allow family members to receive something where they were originally omitted as beneficiaries. At the Alameda County Bar Association Estate Planning Committee meeting I attended yesterday, the topic drifted to trust litigation. An attorney had a client who was a beneficiary of her husband's trust (husband is still living). She was concerned that her husband's children from a previous marriage were going to challenge the trust, which did not provide anything to them. One of the attorneys suggested finding a way to restructure the trust document to include a gift to the kids, and avoid the messy and expensive litigation that is likely to occur. The kids want something because they feel left out. It might not even be that much, but you have to start by listening to them. The spouse wants to avoid litigation and confrontation with the children. What does the husband want? If he wants to make his wife happy (which presumably does, and is why he is giving her everything), then he may be willing to listen to the options.

As litigators, it's too easy to fall back on the tools of our trade: pleadings, threatening letters and discovery, to "solve" problems. This piles up expenses and animosity and stress for our clients (and ourselves as well). Listening can avoid all this, and elevate the level of our practice.

Perspectives

What do clients really want? In Estate Planning, when a client comes to their attorney for advice and to prepare an estate plan, is it avoiding estate and gift taxes that they want? Do they want to favor a certain person? Punish a certain person? The biggest challenge for any attorney, it seems, is to keep their ears open and their mouths shut. But doing this will work wonders for the relationship, because ultimately, attorneys are in the service industry. Providing a service means listening to a customer's needs and using our knowledge and experience to counsel them.

Sometimes that means doing things that stray from the script. Forget the script. Throw it away. It's only made out paper, after all, not stone.

(ok. put the script in the recycle bin, not the trash.)

Back From Outer Space

Loyal Readers:

I have not been tending to my blogging duties lately, and for that I apologize. Part of my time away has been spent studying the blogs and the web presence of others (lawyers and non-lawyers alike)for ideas about how to make this blog better. I have tons of ideas and plans.

Lots of things coming up, and lots of things to talk about. I will be attending the Alameda County Bar Association Trust and Estate section's Estate Planning meeting in a few minutes. I'll post about that when I return (live blogging is one of the plans I have, but for now it is just a plan).

Stay tuned. I promise to let no dust gather here in the future.

Charitable Remainder Trusts Revisited

Randall Dickinson pointed out another disadvantage, and potential trap, in charitable remainder trusts. In my example with the house, I had the donors living in the house as beneficiaries. The IRS sets forth private foundation rules that prohibit self-dealing (IRC section 4941). The donors in this example would be prohibited under these rules from living in the house they transferred to the trust.

Randall's comment underscores the complexity of these trusts. This should not keep someone with a charitable intent from exploring all options for their charitable giving. Charitable remainder trusts are bit one such option.

Thanks to Mr. Dickinson for his comment and input!

Charitable Remainder Trusts

With a charitable remainder trust, you name a non-charity beneficiary (the "income beneficiary") to receive payments for a period of time (usually the lifetime of the beneficiary, but it can be for a term of years). After that period of time, the trust terminates and the property in the trust (known as the remainder) is distributed to charity. The gift to the charitable remainder trust generates an income tax deduction for the value of the remainder interest (the property that the charity gets), and does not trigger any gift or estate tax if the donor, the donor's spouse, or both are the only income beneficiaries. The beneficiary receives the income from the trust during a period of time. The charitable remainder trust is also a tax-exempt entity, so the trust's sale of the assets to the charity does not generate any current capital gains tax.

Let's say you have a house that you bought in 1975 and now own free and clear. If you sell it, you will most likely have to pay a large tax on the capital gain. You could create a charitable remainder trust that allows you and your spouse to live in the house until you are both dead, at which time the house is sold to a charity of your choice. You could also create a trust that gives an asset to an income beneficiary upon your death for the beneficiary's lifetime, with the remainder to a charity.

Disadvantages of the charitable remainder trust include its irrevocable nature. Unlike a living trust, once you create the trust, you will not be able to change many of its terms. You also loose control of the asset. Our couple in the above example with the house may not be able to sell the house if they needed to, because they would no longer own it after transferring it to the trust. There are also difficulties with administration, particularly with regard to filing tax returns. There are also private foundation rules that must be followed by the charitable remainder trust.

If you have an asset that has appreciated greatly over time, and are interested in making a contribution to charity, a charitable remainder trust may be a good option.

Next, I will discuss the charitable remainder trust's close cousin, the charitable lead trust.

Charity in Estate Planning

If the tragic passing of Microsoft pioneer Ric Weiland in 2006 has a silver lining, it is in the generous charitable bequests he left in his estate plan. Mr. Weiland left a total of about $160 million to charities in his plan, including a total of $65 million to Lesbian, gay, bisexual, transgender (LGBT) and HIV/AIDS organizations, according to a story by CNN. The larges recipient of money was the Pride Foundation of Seattle.

Many people leave sizable portions, or even the entirety, of their estates to charities. These bequests can be structured in trusts that allow the charity to have the benefit during the lifetime of the donor, or after the donor's death.

I have been meaning to post about charitable trusts, and the recent news of Mr. Weiland's bequest has spurred me to action. In my next post, I will discuss charitable lead trusts, and in the following post, I will discuss charitable remainder trusts.

The Estate Tax Myth

No, estate taxes are very real. The myth is in just how many people are affected by them.

Last Friday I attended the State Bar of California's 16th Annual Estate & Gift Tax Conference, put on by the Estate and Gift Tax Committee of the Taxation section. Keith Schiller, of the Schiller Law Group in Orinda, CA, talked about discounts in estate tax planning. He put out some pretty interesting statistics:

In 1976, 7.65% of all deaths generated an estate tax return. In 2002, only 1.17% of all deaths generated one. In 2001, 108,330 estate tax returns were filed. It is projected that by 2009 that number will drop to 26,700.

What is my point? For all the talk about the "death tax" and how it is destroying the financial health of ordinary Americans, the fact is that the estate tax affects very few.

You may have heard about the pending repeal of the estate tax. Currently, the tax applies to net estates of $2 million or more. In 2009, that limit will increase to $3.5 million. The tax goes to $0 in 2010, and then returns in 2011 for estates over $1 million. The consensus is that legislators will act to either repeal the tax completely, or enact permanent estate tax legislation in one form or another. A net estate is the value of all the deceased person's property, real or personal, tangible or intangible, wherever situated. From this, deductions are taken for transfers between spouses, either outright or to qualifying trusts, for charitable contributions, and other amounts including funeral expenses, estate administration expenses, etc.

The upshot of all this is that, for most people, estate taxes are simply not an issue. So, unless you are among the very few affected by estate taxes, you don't need to worry about them when planning your estate.

Britney Spears Conservatorship

Most people, if they think about it at all, don't usually think of 26 year-old pop stars when they think of conservatorships. But that's just what happened to increasingly unstable pop icon Britney Spears on February 3, 2008. Spears, who was admitted to the UCLA Medical Center psychiatric ward on February 1, was originally supposed to be released after a 72 hour evaluation (known in California as a "5150 hold," after Welfare and Institutions code section 5150). Doctors have the discretion to extend the hold for up to two weeks if they think the patient is a danger to themselves or others. That is what happened to Ms. Spears, according the Associated Press.

According the AP story, On Friday, February 1, Los Angeles County Superior Court Commissioner Reva Goetz granted Spears' father James and her attorney Andrew Wallet as her conservators, and set a hearing for today to review the matter.

In California, a court has the power to appoint a conservatorship of an individual who is gravely gravely disabled and a danger to themselves or others. These are known as "LPS" (for Lanterman-Petris-Short Act) Conservatorships. The process requires a referral by the doctor to an investigator in Mental Health Services. In Los Angeles County, a family member can request that the doctor evaluate the conservatee. The investigator interviews the conservatee and others if necessary, and then presents a petition to the court recommending what kind of conservatorship should be established, and who should be appointed conservator. Conservators can also be designated in advance in a durable power of attorney. This may be what happened here, given how quickly this all came together.

The hearing is this afternoon on the appointment of the conservator for Ms. Spears. We'll stay tuned to this compelling, if tragic, unfolding drama...

Probate Update

In my last post, I talked about how going through probate is not necessarily the end of the world, and so should not be avoided at all costs. One of the things I downplayed was the public nature of probate. Probate is a public court proceeding. All the filings are public record and can be accessed by anyone. While most people don't have the time or inclination to want to dig through court files of people they don't know, there are those who do just that for a living. They then turn the information over to others who contact the heirs to try to sell them financial services based on their impending inheritance.

I didn't mention this as a potential downside of probate, but it is real. There are, of course, many other factors to consider when you are planning your estate. Keeping your estate private is only one possible reason to avoid probate. You should, of course, speak with a qualified estate planning attorney to discuss all the aspects of your plan.

What's So Bad About Probate, Anyway?

As I've posted previously here, living trusts are very popular these days mainly because they avoid probate. Probate is a court-supervised process where the assets and heirs of a deceased person are determined and distributed. The two most common reasons people want to avoid probate are: (1) its public nature, and (2) its cost. But depending on your estate, these two issues may not be a problem at all, and in fact, court supervision may be just what your estate needs.

Public Nature of Probate

There are two main ways that your estate could be subject to probate: (1) you have distributed your estate using a will, or (2) you don't have a will or estate plan of any kind (known in the legal world as dying intestate.) If you die with a valid will, the person whom you have named as your executor or personal representative will file a petition with the court to begin the probate process. If have no will or estate plan, the petition can be filed a family member. The administrator then goes through the process of filing a list of the estate assets with the court, and notifying creditors. After the creditors are satisfied, the estate is then distributed among the heirs. This often involves selling the estate assets, which takes time.

This all involves filing papers, including the will itself, with the court. When the papers are filed with the court, they become public record. What that means is that anyone can go down to the court house and request to view the file, and get copies of documents. This might be a big issue for you, Or, it might not. You might not care if a stranger finds out what was in your will, or what your assets were. In my post on wills, I identified some very famous and wealthy people who had wills that went through probate and are now public record. Chances are, unless you are rich and/or famous, the likelihood that a stranger is going to come down to the courthouse (if they even knew which court house to go to) to look at your probate file is probably pretty low.

If you have an estate that is subject to probate, you may want to consider whether its public nature is an issue for you. If not, then you may not need to avoid it, assuming the costs aren't too high.

Costs of Probate

Costs of probate can be a big problem if your estate is large enough. I previously posted the fee schedule involved in a probate proceeding:

4% of the first $100,000
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000 (we've probably lost most of you by now)
0.5% of the next $15,000,000 (for the lucky few)
for estates above $25,000,000 (the luckier fewer), the fee is a reasonable amount to be determined by the court.

There is also a statutory attorneys' fees schedule which is the same, and is in addition to the probate court fees. So the total probate fees (not including the initial filing fee), would be the amount from the above schedule times two.

Let's say you have an estate of $1 million. That sounds like a lot of money, but if you bought your house in California 30 years ago, you might be in this category. The probate fees would be $23,000, and the attorneys fees would be another $23,000, for a total of $46,000, or an effective rate of 4.6%. Nothing to sneeze at.

Having a living trust, though, doesn't get you out of the post-death estate administration game. A living trust works like a will in that it gives instructions about what to do with the trust assets when you die. The estate still has to be administered, and the assets have to be ascertained (and probably sold) with the proceeds going to the beneficiaries (the equivalent of heirs in a will). Instead of an executor, this is done by a trustee, who charges a fee for his or her work. Will it cost $46,000? Probably not, but it will cost something. Will it take as long as a probate? Maybe, but administering a trust usually takes less time than going through probate.

The big difference is that there is no court supervision in the administration of a living trust. That is usually touted as a good thing, but it might not necessarily be. In a probate, the court is looking over the shoulder of the executor/personal administrator to make sure the estate is being administered per the terms of the will (or the the laws of intestacy if there is no will). The court doesn't do that where there is a living trust. If a beneficiary of a living trust thinks the trustee is not doing what they're supposed to be doing, they may have to bring a lawsuit, which costs court fees and attorneys fees and takes time. If that happens, the advantages of a living trust over a will start to fade.

Anybody thinking about setting up or updating their estate plan should consider all of the options, and discuss them thoroughly with their estate planning attorney. A good attorney will explain the ins and outs of these tools, and will tailor the plan to your needs and desires.

Wills

John F. Kennedy. Jackie Kennedy Onassis. Leona Helmsley. Jerry Garcia. What did they all have in common? They all disposed of their estates with wills. These days, the plain vanilla will has been upstaged by the more popular living trust (see previous post). That doesn't mean that you should ignore a will in your estate plan. Wills are still a vital and important part of any plan, even if you do have a living trust, and for many people with few assets, a will is probably the best way to handle your estate.

A will is essentially a set of instructions on what to do when you die. It only takes effect upon your death. In it, you designate someone to administer your estate (known as the executor or personal representative). You also name your heirs and identify what in your estate you want them to receive. These two aspects of wills can be handled by a living trust via establishing a trustee and contingent beneficiaries. Because of certain advantages of living trusts (e.g., no probate and generally lower administration costs) living trusts have basically replaced wills for these purposes.

But wills shouldn't be forgotten. A will is the only way to establish a guardianship for your minor children. If both parents die before the children turn 18, then the court will establish a guardian for the children unless there is a valid will in place that designates a guardian. A will is also where you leave instructions for your funeral or burial, and where you set up a power of appointment. If you have a living trust, you will still need a will to transfer your assets into that trust that you have accumulated since the creation of the trust (this is known as a "pourover will").

Wills are still sometimes the best method of disposing of an estate. In California, an estate of less than $100,000 qualifies for summary probate proceedings, and may even avoid probate altogether. You can revoke or modify your will at any time (provided you still have the capacity to do so). Wills are also generally much shorter and simpler documents, and so are less expensive to prepare.

So don't give up on the humble, time-honored will as a cornerstone of your estate plan.

Living Trusts

S0-called living trusts are in vogue as will substitutes these days. In legal speak, they are known as inter vivos trusts, but they are also known as grantor trusts and revocable trusts. Since the purpose of this blog is to discuss estate planning issues in plain language, we'll just call them living trusts.

So just what is a living trust?

A trust is a set of instructions among three parties related to the use of property for a period of time. The person who places the property into (or "funds") the trust is known as the grantor, or trustor. The person who administers the trust, i.e., who carries out the instructions of the trust, is the trustee. The person who gets the benefit of the trust is the beneficiary.

In a living trust, these three roles are usually played by the same person. By doing this, you could place your assets into the living trust, carry out the instructions of the trust (including selling the assets in the trust or adding new assets, or revoking the trust entirely) and enjoy the use of the assets. In other words, after funding the trust with your assets, life pretty much goes on as it did before.

So why would anyone want a living trust?

What happens to the living trust during your lifetime is only the first half of story. The second half is related to what happens when you die. The living trust document contains instructions for what to do with the property in the trust when you die. This includes naming someone to carry out the instructions (known as the successor trustee) of the living trust, and a new beneficiary (or beneficiaries) who get to use the trust property (known as successor beneficiaries).

If that sounds a little like what a will does, it is. The big difference between a living trust and a will is that a living trust does not go through probate. Probate is a court-supervised proceeding where your estate is gathered and distributed among your heirs. Since it is a court proceeding, it is public, and all documents, including your will, become public record. A living trust, on the other hand, does not go through probate. It is administered by the successor trustee, and the assets in the trust are distributed per your instructions. Since a trust doesn't go through the probate process, it does not incur the fees involved in a probate. Probate fees and attorney's fees are set by statute, and depend on the amount of your estate. In California, probate fees are four percent of the first $100,000; then three percent of the next $100,000; two percent of the next $800,000; one percent of the next $9,000,000; one-half of one percent of the next $15,000,000; and a reasonable amount determined by the court for amounts above $25,000,000. Attorney's fees are based on the same schedule and are in addition to the probate fees.

If you have a large estate, your probate fees could be pretty high. For example, if you had a $400,000 estate, the probate and attorney's fees would be $22,000. In contrast, a relatively simple living trust would still incur costs to administer after your death, but they should be much less than $22,000.

Another issue is time. Probate is subject to the timing of the court, which can take six months to a year or longer depending on the court's backlog and the complexity of administering the estate. The relatively simple $400,000 trust should be administered in six months or less.

So Why Would Anyone Not Want a Living Trust?

If you have a small estate, say less than $100,000, then a living trust may not be advantageous. California law allows for summary procedures for estates valued at less than $100,000, and in some cases, probate can be avoided altogether. So if your estate is less than $100,000, the only potential disadvantage to going to through probate is its public nature. If you are OK with that, then there really is no need for a living trust.

Living Trusts are something everyone should consider, particularly if you have a large estate that would result in an expensive, lengthy probate proceeding. If, on the other hand, your estate is $100,000 or less, and you're not concerned about it becoming public record, a living trust is probably unnecessary.

In my next post, I will talk about wills, and why you need one in your estate plan even if you do have a living trust.