January 30, 2018

Beneficiary's Suit


If a trust has suffered an injury, the correct party to bring suit is the trustee. However, there is an exception to this rule.

"[W]here a trustee cannot or will not enforce a valid cause of action that the trustee ought to bring against a third person, a trust beneficiary may seek judicial compulsion against the trustee. In order to prevent loss of or prejudice to a claim, the beneficiary may bring an action in equity joining the third person and the trustee." Saks v. Damon Raike & Co. (1992) 7 Cal.App.4th 419, 427-428. 

The following illustration is how the above rule can happen in real life.

Father, as settlor and trustee, creates a trust and funds it with his home. Later in life, father encumbers the property with a reverse mortgage. Father then passes away in October 2014 and an acquaintance becomes the successor trustee. The beneficiary of the trust after father is son.

Following father's death, the lender informs the successor trustee that they intend to initiate foreclosure proceedings unless the loan can be paid off or the property sold. In turn, the successor trustee hires a real estate agent to market the property.

The lender records a notice of foreclosure sale in June 2015 with a sale date scheduled for July 2015. The property is ultimately sold at the July 2015 foreclosure sale. However, the lender does not property notice the successor trustee or their real estate agent of the foreclosure sale. In October 2015, the successor trustee informs the lender that they have accepted an offer to purchase the property.

Son and the successor trustee ultimately sue the lender for various causes of action, principally stemming from the lack of notice of the foreclosure sale. Son's complaint is dismissed by the trial court because he sued in his capacity as a beneficiary. On appeal, the California Court of Appeal gives him another chance with his lawsuit:

"Although plaintiff did not expressly assert a claim against Mack as trustee of the Menefield trust in the operative complaint, he does argue on appeal that he can allege Mack "failed or refused to hire a lawyer to maintain the action to recover the trust property, even after the court held that a wrongful foreclosure cause of action had been stated." This offer is sufficient to allow plaintiff the opportunity to join Mack in the wrongful foreclosure lawsuit against MTC. If plaintiff amends the complaint accordingly, he would appear to have standing to sue for wrongful foreclosure."

The above excerpt is from the unpublished case, Menefield v. MTC Financial Inc., Los Angeles County Superior Court case # BC610391.

December 20, 2017

Estate Tax in 2018


Due to the passage of the Tax Cuts and Jobs Act of 2017, the estate tax exemption amount for 2018 has been changed as reflected below.

Year                   Amount Excluded        Maximum Tax Rate
 
2001                   $675,000                      55%

2002                   $1M                             50%
 
2003                   $1M                             49%
 
2004                   $1M                             48%
 
2005                   $1M                             47%
 
2006                   $2M                             46%
 
2007                   $2M                             45%
 
2008                   $2M                             45%
 
2009                   $3.5M                          45%
 
2010                   Repealed                      0%
 
2011                   $5M                             35%
 
2012                   $5.12M                        35%
 
2013                   $5.25M                        40%
 
2014                   $5.34M                        40%
 
2015                   $5.43M                        40% 
 
2016                   $5.45M                        40%  
 
2017                   $5.49M                        40%         
 
2018                   $11.2M                        40%

November 30, 2017

Estate Tax in 2018


Below is an overview of the federal estate tax exclusion amount since 2001 and includes the recently announced exclusion amount for 2018:

Year                   Amount Excluded        Maximum Tax Rate

2001                   $675,000                      55%

2002                   $1M                             50%

2003                   $1M                             49%

2004                   $1M                             48%

2005                   $1M                             47%

2006                   $2M                             46%

2007                   $2M                             45%

2008                   $2M                             45%

2009                   $3.5M                          45%

2010                   Repealed                      0%

2011                   $5M                             35%

2012                   $5.12M                        35%

2013                   $5.25M                        40%

2014                   $5.34M                        40%

2015                   $5.43M                        40% 

2016                   $5.45M                        40%  

2017                   $5.49M                        40%         

2018                   $5.6M                          40%

The estate tax is pegged to inflation. One can see how the estate tax has incrementally increased since 2011.

What looms over all of this is pending legislation that affects the estate tax. The House of Representatives' tax bill would increase the exemption and eventually phase out the estate tax. The Senate's tax bill would increase the exemption but not phase it out. What the future holds for the estate tax will likely be decided in the next couple of weeks.

To be clear, the above represents the federal estate tax. A state is free to impose or not impose it owns estate tax regime. For example, the State of New York has a separate estate tax whereas the State of California does not.

October 26, 2017

Joint Bank Account


A typical financial arrangement between an elderly parent and a child is for parent and child to be joint bank account holders. This allows the child to pay various bills for their parent. When the parent passes away, an inevitable legal issue arises. That is, (1) did the parent create the joint account with the intent that it pass to the child upon their death or (2) did the parent simply create the joint account with the intent that it be accessible as a matter of convenience for the child to pay the parent's expenses. If (1), the child receives the bank account as the surviving joint account holder. If (2), the parent's estate receives the bank account and it is distributed via their will or intestate succession.

The applicable law says "Sums remaining on deposit at the death of a party to a joint account belong to the surviving party or parties as against the estate of the decedent unless there is clear and convincing evidence of a different intent." Probate Code § 5302(a).

For reference, clear and convincing is a higher evidentiary standard than preponderance of the evidence but less than proof beyond a reasonable double. Most people have heard of proof beyond a reasonable double because that is the standard used in criminal cases. Preponderance of the evidence is the normal standard in civil cases.

The following is an example of how this scenario can hypothetically play out. Widowed mother and daughter venture to the local credit union to open a joint bank account. Mother's mobility is limited and she would have peace of mind if daughter could pay her household bills. Son lives in another state so he is unable to be of assistance. Prior to her passing, mother writes a will that devises her entire estate equally to her daughter and son. Mother then passes away. 

In order for the bank account to be an estate asset, son would need to provide clear and convincing evidence that mother intended for the joint bank account to pass via her will instead of to daughter as the surviving joint account holder. 

It is common to find cases where the testamentary document and the joint account arrangement conflict. The reason being is that estate planning is not always the sole impetus for titling one's financial accounts.
  
This issue was recently litigated in a recent California Court of Appeal case, In Re Estate of O'Connor (2017) ___ C4th___.

September 29, 2017

Breach of Fiduciary Duty


A typical arrangement involving a marital trust is for a child to serve as the successor trustee and be a beneficiary. That is, once both parents have passed away, the child steps into the role of trustee and their beneficial interest vests. I'd say the vast majority of marital trusts I've written follow this pattern.

The child, as the successor trustee, is obligated to properly discharge their fiduciary duties or else they can incur liability.

For example, assume the parents selected just Son as the successor trustee, but named Son and Daughter as co-equal beneficiaries. Hence Son would receive 50% and Daughter would receive 50% of the trust estate.

The trust instructs the trustee to sell the marital home within 1 year of the parents passing and to make the property productive prior to the sale. The parents both pass away in a tragic hot air balloon accident on New Year's Eve. Thereafter Son becomes the acting trustee of the trust.

The marital home on January 1 was in a habitable condition and thus could be rented immediately. Son however was addicted to social media, hacky sack and recreational marijuana use so he was unable to rent the property over the next year. The property could have rented for $5,000 a month but Son's misconduct caused any rental income to go up in smoke. 

Additionally, Son did nothing to prepare to sell the house. Although he did plant many cannabis plants on the property. Son also used trust funds to pay for personal expenses such as jazzercise classes, hair gel for his mullet and sleeveless undershirts.

Come December of that year, Daughter had become exasperated that Son had done nothing to make the house productive, wasted trust funds on personal expenses and not prepared the house for sale. 

Daughter filed a petition in probate court to surcharge Son for his breach of fiduciary duty and requested that the surcharge be satisfied from Son's beneficial interest in the trust, i.e. his 50%. Thus, if granted, Son's interest in the trust would be reduced by the amount of damages he had caused the trust. For instance, if Son caused the $200,000 in damages, his interest in the trust would be reduced $200,000 and awarded to Daughter, the aggrieved beneficiary. Such a remedy is available for breach of fiduciary duty where the trustee is also a beneficiary. See Chatard v Oveross (2009) 179 CA4th 1098.

August 24, 2017

Probate Fees


An attorney's ordinary compensation, or statutory fee, for representing a personal representative in a probate case is determined by the estate's value. Estate of Hilton (1996) 44 Cal.App.4th 890, 894-915. For example, if the estate is valued at $400,000, the attorney's ordinary compensation is $11,000. The multiplier is a percentage of the estate, i.e. 4% of the first $100,000, 3% of the next $100,000 and 2% of the next $800,000.

Ordinary compensation is payment for typical services rendered in a probate, e.g. appointment of the personal representative, preparation of the inventory and appraisal, payment of creditors, closing of the estate, etc. Extraordinary compensation can be awarded for certain services, e.g. selling estate property (quite common in probates involving real estate). Extraordinary compensation is based off the attorney's hourly rate.

If "there are two or more attorneys for the personal representative, the attorney’s compensation shall be apportioned among the attorneys by the court according to the services actually rendered by each attorney or as agreed to by the attorneys." Probate Code § 10814.

In a recent unpublished appellate decision, an attorney was not permitted to collect the full statutory fee because other attorneys had worked on the case, but did not request their portion of the statutory fee when probate concluded. 

In this case, Attorney A had assisted with the appointment of the initial personal representative. Attorney A later sought leave to withdraw. Attorney B became counsel of record and "prepared and obtained the estate's Employer Identification Number, prepared and filed forms with the Internal Revenue Service, researched title to the estate's real property, and prepared and filed a "Final" inventory and appraisal." Attorney B later filed a motion to be relieved as counsel. Attorney C then became counsel of record until probate was concluded.

Due to an unconventional method for closing the estate, Attorney A and Attorney C did not request a portion of the statutory fee. Instead, Attorney B claimed that he was entitled to the full fee. The trial court disagreed and awarded Attorney B 50% of the statutory fee. This was upheld on appeal.