January 13, 2017

Spendthrift Clause and Creditors

A common, albeit erroneous, legal assumption is that a beneficiary's interest in a trust with a spendthrift clause is bullet-proof. That is, the beneficiary's interest cannot be attached by a third-party so as to prevent the beneficiary from enjoying the full benefits of the trust. In certain circumstances, however, a third-party can attach a beneficiary's interest in a trust and direct payments to be made to them and not the beneficiary. A recent unpublished appellate opinion highlighted this example.

Power v. Power, Sonoma County Superior Court, Case # SCV252844

Estranged husband was a 1/6 beneficiary of a trust established by his mother. The trust contained a spendthrift clause. It read in pertinent part that the beneficiary "cannot anticipate, assign or encumber the beneficiary's interest in income or principal. Similarly, a creditor of a beneficiary cannot subject the beneficiary's interest in income or principal to the creditor's claims or to legal process before the beneficiary actually receives a distribution." 

Estranged wife obtained a spousal support judgment against estranged husband. She then sought to attach estranged husband's interest in the trust to satisfy her judgment. The co-trustees balked and estranged wife sued to compel payment from them.

Since estranged wife had a support judgment, she could avail herself of Probate Code § 15305. The statute provides that a support judgment creditor may, under certain circumstances, attach a beneficiary's interest in a trust. The relevant section reads "whether or not the beneficiary has the right under the trust to compel the trustee to pay income or principal or both to or for the benefit of the beneficiary, the court may, to the extent that the court determines it is equitable and reasonable under the circumstances of the particular case, order the trustee to satisfy all or part of the support judgment out of all or part of future payments that the trustee, pursuant to the exercise of the trustee’s discretion, determines to make to or for the benefit of the beneficiary." Probate Code § 15305(c).

The trial court found that the "none of Mark's creditors that have been paid directly from the Trust are preferred or secured creditors. For the most part, these debts are owed to the limited partnership and the Trustees have scrupulously seen to it that Mark pays his debts to his birth family, while leaving Patricia with no funds." It should be noted that the trustees feared reprisal from the estranged husband who threatened to sue them if they paid even "one dollar" to his estranged wife. Hence, it was not as if the trustees refused to satisfy the support judgment whimsically.

On appeal, the trial court's decision to have the co-trustees pay the support judgment directly from estranged husband's share of the trust was upheld.

December 26, 2016

Trust Administration - Principal Place of Administration

Santa Clara County Superior Court
When a trustee provides notice of a trust's existence to the beneficiaries, it must include where "the address of the physical location where the principal place of administration of the trust is located, pursuant to Section 17002." Prob C § 16061.7(g)(3). "The principal place of administration of the trust is the usual place where the day-to-day activity of the trust is carried on by the trustee or its representative who is primarily responsible for the administration of the trust." Prob C § 17002(a). While seemingly an irrelevant clause, the place of administration can be salient. Although, it should be mentioned why an address in California is even needed to be included in the first place. 

When a trustee designates a principal place of administration, this provides jurisdiction to the applicable county superior court in case judicial relief is needed. For example, if a trustee designates an address in Campbell, CA as the principal place of administration, then Santa Clara County Superior Court would be the appropriate venue for judicial relief. Each California county (there are 58 of them) has a county superior court located in it. Thus any address in CA will have a local county superior court. Just trust me on this.

From a legal perspective, county superior courts are not all the same. One county superior court may view probate matters differently than other county superior courts. For instance, Santa Clara County Superior Court is very receptive to Prob C § 850(a)(3)(B) petitions (commonly known as Heggstad petitions). In particular, Santa Clara County Superior Court allows for these petitions to be heard ex parte (which essentially means there is a minimal waiting period for the case to be heard by the judge) and does not hyper-scrutinize the evidence needed to have the petition be granted. The difference between having a Heggstad petition be granted or not is often enormously consequential. If granted, it typically avoids the necessity of probate for the petitioner. 

Conversely, other counties take a much more stringent approach in hearing Heggstad petitions, e.g. they require a noticed hearing (which means the case will be heard in 30-60 days) and certain evidence is needed to have the petition be granted.

In light of the foregoing, I designate my office as the principal place of administration for the client to ensure that they have access to Santa Clara County Superior Court, even if the client lives outside Santa Clara County (which has happened a few times).

December 14, 2016

Transferring Trust Property

One of the primary rules when administering a trust is for the trustee to follow its terms. Probate Code §16000, Penny v Wilson (2004) 123 CA4th 596. For example, if the trust provides for an equal distribution of trust assets to 4 beneficiaries, then logically each beneficiary would receive a 25% interest. A trustee cannot simply deviate from the terms of the trust arbitrarily.

A recent unpublished appellate opinion detailed the interesting story of one trustee. 

Kiwata v. Kiwata, San Francisco County Superior Court, Case # CGC14542957   

"Years ago, Richard and Howard's parents, the Kiwatas, and their aunt and uncle, the Hironakas, acquired property in San Francisco on Collins Street. Each couple initially had a one-half interest in the property.

The Kiwatas transferred their interest into the Kiwata Family Trust, of which Richard became the trustee.

The Hironakas first transferred their interest into the Hironaka Revocable Trust and then, in late 2008 after the death of one of the Hironakas, partly into the Hironaka Family Trust (65.41 percent of the one-half interest) and partly into the Yoshiko Hironaka Surviving Spouse's Trust (34.59 percent of the one-half interest). Over several years, ending in May 2013, a series of deeds resulted in absorption of the survivor trust's interest into the family trust, such that the Hironaka Family Trust eventually owned all of the one-half interest. Upon the death of both Hironakas, Howard became the trustee of the Hironaka Family Trust, with Richard as successor trustee if Howard can no longer perform trustee duties.

In the meantime, earlier in 2013, Richard recorded two deeds. The first, recorded in February and executed by Richard as trustee, purported to transfer the Kiwata Family Trust's interest in the Collins Street property to the Richard Kiwata Family Trust. However, at his deposition, Richard conceded he never actually created the Richard Kiwata Family Trust. The second deed, recorded in March and executed by Richard as supposed cotrustee, purported to transfer 37.5 percent of the Collins Street property from the Hironaka Revocable Trust to Richard, individually. However, as just described, the Hironaka Revocable Trust by then had no interest in the property (the interest having been transferred in 2008 to the Hironaka Family Trust and Yoshiko Hironaka Surviving Spouse's Trust). Further, according to Howard's trial testimony and the trust documents, Richard was never a trustee of any Hironaka trust."

In short, for the February 2013 deed, Richard transferred a property interest to a trust that never existed. For the March 2013 deed, Richard transferred a property interest from a trust that no longer existed and was never a trustee of said trust. Naturally both deeds were declared void by the trial court for the aforementioned reasons. This decision was upheld on appeal.

December 1, 2016

Trustee-Attorney of a Trust

Marin County Civic Center (the courthouse is in here, trust me)
An old adage goes that oil and water do not mix. The same could roughly be said of an attorney simultaneously acting as the trustee. While the situation is not expressly prohibited by California law, it invariably involves a precarious position. A recent unpublished California Court of Appeal opinion is an example of this.

Amster v. Mulberg, Marin County Superior Court, Case # PRO 1400334

Client was the beneficiary of a large irrevocable trust. According to the opinion, it was a multi-million dollar trust. Client removed the original trustee, a bank, and replaced them with her personal counsel, Trustee-Attorney. According to the opinion, the Client required considerable attention: 

"She was often unreasonable and even volatile, sending [Mulberg] between 8,000 [and] 10,000 emails during the period he served the Trust as trustee. Ms. Amster expected him to return telephone calls on weekends and after regular business hours."

The appeal revolved around the compensation Trustee-Attorney had paid himself for his work. The relevant part of the trust read:

"Any Trustee serving hereunder shall be entitled to be paid reasonable fees for services rendered in such capacity . . . and to charge such fees to income and principal of any trust created hereunder in such proportions, or entirely to income or principal. . . . If any Trustee is an attorney or an accountant who regularly charges clients based upon customary hourly rate, he or she may charge such rate as his or her Trustee's fee provided that the total fees paid for an annual period do not exceed that a Qualified Corporate Trustee would charge for the same services." 

The trial court found that a corporate trustee would charge a fee of 1% per annum. It then included a multiplier of 1.75% for the trustee fee because the Client was difficult to put it diplomatically. Consequently, the trial court found that under such a scenario a corporate trustee would've charged $227,897.59 for its services.

The problem for Trustee-Attorney is that he received $495,119.75 in trustee fees from the trust. The trial court then surcharged Trustee-Attorney $267,222.16, the difference between the permissible corporate trustee fee and the fee Trustee-Attorney charged. This decision was upheld on appeal. 

The opinion also noted multiples instances in which Trustee-Attorney breached his fiduciary duties. For example, he paid himself as both an attorney and trustee without Client's consent, a violation of Prob C § 15687(a). Furthermore, Trustee-Attorney hired his son, an associate at his law office, to perform legal work for the trust. Since Client did not consent to this arrangement, this violated Prob C § 15687(a).

November 18, 2016

Notice from a Trustee

When a revocable trust becomes irrevocable, the trustee is required to provide notice of it to beneficiaries and heirs. See Prob C § 16061.7. The notice must inform the recipient that he or she is entitled to a complete copy of "the terms of the trust" or that the trustee provide the recipient with an actual complete copy of "the terms of the trust." See Prob C § 16061.7(g)(5). Prob C § 16060.5 defines "the terms of the trust" to include all amendments in effect at the time of the settlor's death.

[Author's comment: my standard practice when doing a trust administration is to always include a copy of the trust with the Prob C § 16061.7 notice. Naturally any person will be curious to know if they are to inherit anything. Hence they will want to read the trust, or at least try to read it. There is no sense in playing "hide the ball" because a beneficiary or heir will always be entitled to a copy of the trust.

A natural dilemma arises when the trustee is in possession of a document that amends the trust but is of dubious validity. For example, the document is incoherent, lacks a signature or references assets not in the trust.

The imprudent approach is for the trustee to unilaterally decide which documents to provide beneficiaries and heirs. An example of this can be found in the the following case (unpublished appellate opinion, Anderson v. Anderson (2016) ___ Cal.App.4th _____ : 

"Alice died in December 2013. On January 9, 2014, Joan, as successor trustee and acting with the assistance of her daughter, Connie, sent Tom a notice pursuant to section 16061.7. The notice stated that it included a "true and complete copy of the trust agreement." The notice included a copy of the January 11, 1996 restatement and the 1999 amendment, but did not include a copy of the second amendment executed in 2013, though Joan and Connie were in possession of a notarized copy of the second amendment at the time the notice was prepared." 

The prudent approach is for the trustee to file a petition to determine the validity of the questionable documents. The probate code specifically allows a trustee to perform such an action. See Prob C § 17200.     

As one would expect from the above quote, Tom was displeased that the trustee provided him with an incomplete set of documents. Tom filed a petition for "removal of Joan as trustee, the appointment of a replacement trustee, an accounting, an order requiring the successor trustee to prepare a new notice pursuant to section 16061.7 that would include the second amendment, and damages for breach of the trustee's duties."

One wonders if this situation could've been de-escalated had Joan originally served all the documents on Tom and then filed a petition to determine the validity of the 2nd amendment................

November 2, 2016

Estate Tax in 2017

An annual occurrence for the IRS the past couple of falls has been to announce an increase in the estate tax threshold, or the applicable exclusion amount in tax parlance.  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 2017.

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%                

The applicable exclusion amount for 2017 represents a $40,000 increase from 2016.

Married couples who are U.S. citizens can take advantage of martial deduction trusts or portability to shield up to $10.98M from the estate tax.

The above limit for 2017 pertains to decedents who pass away in 2017. 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, 2016, the exclusion amount for 2016 would apply, not 2017. 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.