November 19, 2015

Estate Tax in 2016

An annual occurrence for the IRS the past couple of falls has been to announce an increase in the estate tax threshold.  When the estate tax was re-instituted a couple of years ago, it became pegged to inflation. Thus, in periods of inflation, the estate tax would rise as well.

Recently this announcement was made by the IRS. Below is an overview of the federal estate tax exclusion amount since 2001 and includes the recently announced exclusion amount for 2016.

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2010                   Repealed                      0%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%  

The applicable exclusion amount for 2016 represents a $20,000 increase from 2015.

Married couples who are U.S. citizens can take advantage of martial deduction trusts or portability to shield up to $10.9M from the estate tax.

The above limit for 2016 pertains to decedents who pass away in 2016. You cannot pick which year you want to apply to your estate. Sorry. Thus, if the decedent passed away at 11:59pm on December 31, 2015, the exclusion amount for 2015 would apply, not 2016. A decedent's death certificate will invariably list their date of death.

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.    

You can read the IRS' announcement here. There are also other tax announcements in the notice.

November 4, 2015

In Re Conservatorship of Person and Estate of Moore

When an attorney becomes the trustee of a client's trust, trouble usually ensues. The following published decision is representative of this. 

In Re Conservatorship of Person and Estate of Moore, __ Cal.App.4th __ (2015) 

Attorney William Salzwedel was retained by Lester Moore to assist with amending his estate plan and filing an elder abuse action against his daughter. The elder abuse action stemmed from Mr. Moore's daughter, Poppy Helgren, questioning Mr. Moore about large monetary gifts Mr. Moore was providing his girlfriend. In fact, according to the appellate opinion, Ms. Helgren did nothing wrong. Ms. Helgren became concerned about this after being notified from Mr. Moore's doctors that he "suffered from dementia and lacked the capacity to handle his affairs."

In October 2010, Mr. Salzwedel had Mr. Moore "sign the following documents: (1) a partial revocation and modification of the Trust, naming appellant as temporary successor trustee of the Trust; (2) Moore's resignation as trustee; and (3) a Durable Power of Attorney appointing appellant as Moore's attorney-in-fact."

In December 2010, Ms. Helgren "filed a petition for conservatorship. A few months later, she filed a second petition to determine Moore's capacity to execute the estate planning documents."

Mr. Moore, through Mr. Salzwedel, to put it mildly, vigorously objected to the conservatorship petition. The resulting fees and charges was reflective of that. Later Mr. Salzwedel was removed as trustee in May 2012 by the probate court and it ordered him to account for his expenses. 

The details of the accounting were eye-opening.........

"The probate court noted that the accounting listed $474,348.01 in opening inventory and cash receipts and that appellant paid himself $148,105.11 in fees, or 31.22% of the conservatee's reported trust estate, . . . plus another $32,288.21, or another 6.81% of the conservatee's reported trust estate, in related professional and litigation fees."

"The expert witness expenses ($27,515.13) were also excessive. Appellant retained Edward Hyman, Ph.D., a psychologist, from Northern California who billed at the rate of $495 an hour. Doctor Hyman charged $6,000 for travel time and billed 23.25 hours ($11,508.75) on January 6, 2012 for "report writing" and a psychological assessment. The trial court found that appellant could have hired an medical expert from UCLA to make the psychological evaluation for $2,500. Appellant also paid a "celebrity psychiatrist," Dr. Carole Lieberman, $7,500 to evaluate Moore but the doctor never wrote a report or testified. In an e-mail, appellant admitted that Doctor Lieberman's fees were shocking and that Doctor Hyman's travel fees were an embarrassment. Appellant paid another attorney-doctor, Alan Abrams, $3,000 to review some medical records. The trial court found that $2,500 was a reasonable fee for Moore's psychological evaluation and that "everything else was wasted money and wasted time."

Predictably, the appellate court upheld the "$96,077.14 judgment surcharging him for excessive attorney's/trustee's fees ($70,044.99), medical expert fees ($25,015.13), and costs ($1,017.02)."

October 23, 2015

Duties to a Non-Client?

A lawyer owes various fiduciary duties to a client. These include the duty of loyalty, confidentiality, competence, etc. A list of these duties can be found in the California Rules of Professional Conduct (CA Attorney Ethics Rules). 

However,  a lawyer generally does not owe such duties to a non-client. Moore v. Anderson Zeigler Disharoon Gallagher & Gray (2003) 109 Cal.App.4th 1287, 1294. Furthermore, an attorney does not owe a duty to non-clients to ascertain a client competence's when making a trust or will revision. Id. at 1290.

In Moore, decedent's children sued the estate planning attorney for malpractice. Just prior to his passing, decedent was in poor health. According to the appellate opinion "by June 2000 Clyde was extremely sick, debilitated, and confused. Clyde had undergone chemotherapy and was under the influence of powerful medications, including pain medication." Nevertheless, the attorney drafted and decedent executed an amendment to his trust. The amendment was executed on June 21, 2000 and decedent passed away on June 23, 2000. Hence, at most, decedent had 48 hours to live when he executed the amendment. 

This amendment reduced the distribution to some of the children. Litigation then ensued between the beneficiaries. 

Surprise surprise.

Once the litigation had settled, they then sued the estate planning attorney and his law firm for malpractice.   

The plaintiffs, non-clients, sought to impose a duty on the attorney to ascertain decedent's mental capacity and since decedent was extremely ill, the attorney acted negligently in "failing to 'assure, confirm and document' that Clyde had capacity and was competent to execute his will and trust amendments."

The Moore Court rejected imposing such a duty, finding that determining "testamentary capacity is often difficult and the potential for liability to beneficiaries who might deem any investigation inadequate would unjustifiably deny many persons the opportunity to make or amend their wills." 

"Factors which might suggest lack of testamentary capacity to some attorneys do not necessarily denote a lack of capacity. It has been held over and over in this state that old age, feebleness, forgetfulness, filthy personal habits, personal eccentricities, failure to recognize old friends or relatives, physical disability, absentmindedness and mental confusion do not furnish grounds for holding that a testator lacked testamentary capacity." (Estate of Selb (1948) 84 Cal.App.2d 46, 49."  

October 9, 2015

Standing to Appeal in a Probate Matter

When a civil litigant loses at the trial court in California, they have two options. They can either (1) accept the result of the case or (2) appeal the decision to a California appellate court, the Court of Appeal. For reference, a civil case might be a breach of contract case, a landlord-tenant dispute or a personal injury matter. 

The same holds true for a probate litigant who loses at the trial court. They can either (1) accept the result of the case or (2) appeal the decision to the appellate court. However, the ability to appeal also extends to an heir or beneficiary that did not participate in the case at the trial court. Estate of Zabriskie (1979) 96 CA3d 571. A probate litigation matter might be a will contest, a trust contest or a trustee removal petition.

The ability of a non-party heir or beneficiary to appeal is an exception to the general rule that the appealing party must have participated in the trial court proceedings and been aggrieved by a ruling. CCP § 902. The ability of a non-party heir or beneficiary to appeal is very important because it allows them to not be bound by an adverse ruling they were not a party to originally. Hence, an adverse ruling at the trial court is not fatal to their claim if for whatever reason they did not participate in the trial court proceedings. The following example illustrates this point.

Wilbur is a wealthy bachelor who lives in Monte Sereno, CA. His heirs are his brother Bob and sister Sally. Prior to his passing, Wilbur is coerced into leaving his entire estate to his caretaker through a trust (a general no-no in California). When Wilbur passes away and Bob is provided a copy of Wilbur's trust, he discovers that the caretaker is the sole beneficiary of Wilbur's estate. Bob then files an action to invalidate the transfer because the caretaker is presumptively a prohibited transferee of Wilbur's estate. 

However, Bob is of modest means and can only afford an incompetent attorney. Since Wilbur's caretaker can access trust funds to defend herself, she hires very experienced counsel and Bob's petition to invalidate the transfer is denied because of his attorney's incompetence.

During this time, Sally is backpacking through Europe and therefore is unaware of the proceedings and did not participate. When Sally returns, Bob informs her of the trial court's ruling. Since Sally is more affluent than Bob, she hires a seasoned attorney to appeal the decision even though she was not a party to the trial court proceedings. The seasoned attorney prevails on appeal and Bob and Sally are made the beneficiaries of Wilbur's estate, as the court of appeal invalidates Wilbur's trust due to the distribution to the caretaker. 

September 25, 2015

No-Contest Clause

A no-contest clause in a trust is a provision that seeks to discourage a beneficiary from attempting to invalidate the trust. The clause will state that the beneficiary will receive $0.00 if they challenge the trust's validity. If the beneficiary does not challenge the trust's validity, they will receive what is provided for them in the trust, e.g. $10,000.

A no-contest clause is only meant to discourage a person who has a beneficial interest in the trust. It serves no purpose if the person has no beneficial interest. For example, if a child is disinherited by a parent, a no-contest clause will definitely not deter them from challenging the trust's validity. If they do so, they have everything to gain and nothing to lose. That is, there is no potential inheritance forfeiture because they did not stand to inherit in the first place.

California law does not look upon no-contest clauses favorably. Generally speaking, California will not enforce a no-contest clause in an instrument that became irrevocable on or after January 1, 2001 unless it involved a "direct contest" brought without "probable cause." Prob C § 21311(a)(1). 

Under Prob C § 21310(b), a "direct contest" means "a contest that alleges the invalidity of a protected instrument or one or more of its terms, based on one or more of the following grounds:
  1. Forgery. 
  2. Lack of due execution. 
  3. Lack of capacity. 
  4. Menace, duress, fraud, or undue influence. 
  5. Revocation of a will pursuant to Section 6120, revocation of a trust pursuant to Section 15401, or revocation of an instrument other than a will or trust pursuant to the procedure for revocation that is provided by statute or by the instrument. 
  6. Disqualification of a beneficiary under Section 6112, 21350, or 21380."
"Probable cause" exists if, "at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery." Prob C § 21311(b). 

The result of California's no-contest clause law is that a beneficiary can challenge the validity of a trust, the beneficiary can lose at trial and still receive their inheritance despite the no-contest clause provided they had probable cause to bring suit. Therefore, the discouragement that a no-contest clause is originally meant to instill in the mind of a beneficiary who is contemplating litigation has been definitely muted. Even defeat does not automatically render forfeiture of a beneficiary's inheritance.

September 10, 2015

Property Ownership - Evidence Code Section 662

When a person claims to own a piece of property, the first step is to ascertain title. That is, one needs to look at basically the most recently recorded deed for the property. The reason for this is that California law strongly presumes that the name on title is the actual owner. Evidence Code § 662 states "the owner of the legal title to property is presumed to be the owner of the full beneficial title. This presumption may be rebutted only by clear and convincing proof."

Ascertaining title is particularly important in estate administration. For example, if an only child can show that title to a piece of property was solely owned in the name of their parent, who was either a widow or widower, they would likely be entitled to solely inherit the property assuming the parent did not write a will. Conversely, if the only child shows that title was held in the name of the parent's trust, inheritance would not be a given for the child. An examination of the trust would be needed to figure out the beneficiaries, which may or may not include the child. Furthermore, if the parent held the property in joint tenancy, the surviving joint tenant would likely inherit the property from them regardless of whether they wrote a will or not.  In short, it is easy to see how title can dictate an outcome.

The reason for the qualification, i.e. "likely inheritance," is due to the fact that the name on title is not absolutely the true owner. A person whose name is on title could have acquired it through unlawful means. This may take the form of undue influence, coercion, duress, etc. If such means were used, there are legal remedies to reform title. However absent those circumstances, it is difficult to rebut the presumption that the name on title is not the true owner. The reason being is that one needs "clear and convincing evidence" to rebut the presumption that the name on title is not the true owner. While there is no magic formula for qualifying "clear and convincing evidence," it is a high enough standard such that a significant degree of certainty is needed to meet that threshold.  

It is worth mentioning the difference between legal title and beneficial title (also known as equitable title). The statute uses these terms when describing property ownership. The holder of legal title is the one with the authority to sell, lease, mortgage, etc. the property. The beneficial title holder is the one who can take legal action against the legal title holder for mistakes involving the property. A common example of where you see this arrangement is if a trust owns a piece of property and the trustee and beneficiary are different people. The trustee is said to have legal title and the beneficiary is said to have beneficial title. The trustee's name will be on the deed but the beneficiary's name will not. However, if the trustee commits a breach of trust, the beneficiary can sue the trustee for redress of injury.