January 27, 2016

Residuary Clause in a Will

An important clause to include in a testamentary document such as a will is a residuary clause. This clause serves as a catch-all for any item that is not specifically distributed in the document. The benefit of including a residuary clause is that it serves as a safeguard in case the person fails to distribute their entire estate through specific gifts. Otherwise, the asset or assets will be distributed to their next of kin, i.e. intestate succession. The following example illustrates this point.

Mo Mozart was a widower who had no children. Mo's estate was mainly comprised of a home and bank account. Yes, Mo had a austere existence. Mo decided one day to write a will without the assistance of a lawyer. He found an online will template that was palatable to him. Unbeknownst to Mo, the online form did not contain a residuary clause.  

Mo devised his home to his close friend Bob Beethoven and his bank account to another close friend, Harry Handel. Both were musicians like him. I hope you can see the musical angle here. He also named the two of them co-executors.     

One of the reasons Mo decided to write a will was to make sure that his next of kin, Bo Mozart, his brother, did not inherit his estate. Mo was disappointed that Bo opted to become a professional mime instead of pursuing a career in music like the rest of his family. Mo believed that his will would ensure that Bo did not inherit from him. Or so he thought........

When Mo passed away, his will was submitted to the local probate court by Bob and Harry. An inventory and appraisal of his estate showed that in addition to his house and bank account, Mo had many items that were not accounted for in his will, notably musical instruments.

Bo was notified of the probate because he was next of kin (this is required by CA law). When Bo realized that Mo had not specifically mentioned the distribution of his musical instruments in the will and it contained no residuary clause, he petitioned to be named the beneficiary of the musical instruments. Due to those two aspects, the musical instruments became part of Mo's intestate estate. See Probate Code § 21111(a)(3) This meant that the musical instruments were treated as if Mo wrote no will. Therefore the musical instruments would be distributed to his next of kin, i.e. Bo. Naturally Mo wanted to avoid this scenario. Unfortunately Mo was not given proper legal advice when he wrote his will. Alas Mo could not change his will from beyond the grave and Bo became a beneficiary of Mo's estate.

January 14, 2016

People v. Craig

Probate proceedings rarely mushroom into a criminal proceeding. However, in the case of a forged document, a criminal prosecution can arise. Herein lies the story of a forged will and an eventual criminal conviction.

People v. Craig, Los Angeles County Superior Court Case # GA086289

Sherry Behrle was a dependent adult living in Tujunga, CA. Due to her age and physical condition, she was assisted by a caregiver, Kelli Dawn Craig. Ms. Behrle passed away on April 14, 2010. Ms. Behrle's brother visited her residence the next week and was informed by Ms. Craig that Ms. Behrle had penned a will that distributed her entire estate to Ms. Craig. Or so it seemed........

According to the unpublished appellate opinion (Appellant is Ms. Craig/Lundquist and Norman were co-conspirators):

"Los Angeles Police Sergeant Robert Grant investigated the present case and interviewed appellant. Appellant told Grant the following. Appellant had known Behrle a long time and had been her caregiver during the latter part of Behrle's life. On April 28, 2010, appellant, Lundquist, and Norman created a will that was submitted to the probate court. Norman actually created the will, and Lundquist and Norman were going to be witnesses. Appellant signed Behrle's signature on the will and signed Behrle's initials on the witness page. At some point when appellant, Lundquist, and Norman were completing the will, they realized Lundquist and Norman had signed the wrong date, i.e., April 28, 2010, on the witness page. A new witness page was signed with the date February 8, 2010.

Grant had appellant identify where she had signed or initialed the will. Appellant circled and initialed where she had signed. She did the same thing on the second page (the witness page) of the will. The interview was tape-recorded but the recording was lost. The will (People's exh. No. 16), with appellant's circling and initialing, was admitted into evidence."  

Ms. Craig, at trial, apparently had a different viewpoint of the facts:

"Appellant denied telling Grant she forged the will or gave it to Lundquist and Norman to sign, and denied preparing any portion of the will or signing it. Appellant circled items on the will because she was afraid Grant would arrest her former husband and take her children. Lundquist, Norman, and Grant lied during their testimony and only appellant told the truth. Kurt Kuhn, a forensic science consultant, examined the will and opined it suggested appellant did not sign Behrle's purported signature."

Ultimately a jury convicted her on two charges, perjury "and forgery committed by altering, corrupting, or falsifying a legal document. (Pen. Code, §§ 118, subd. (a), 470, subd. (c).) The court sentenced appellant to prison for two years."

On appeal, her conviction was upheld in an unpublished opinion.

December 30, 2015

How does Probate Work in California?

The term "probate" is often (rightfully or wrongfully) used in a negative connotation. For reference, probate is the judicial transfer of assets from a dead person, known as the decedent, to their heirs or beneficiaries. Typically people opt to write a trust whereby their estate will not be subject to the probate process when they pass away. While there are valid reasons to avoid probate, e.g. it is costly and time-consuming, an estate that must be probated does not result in irreparable harm. In an effort to dispel any myths or half-truths involving the probate process, the following is a brief explanation of it.

Probate can be splintered into three segments, (1) collection and appraisal of assets, (2) payment of debts and (3) distribution of the balance of the estate.

1. Collection and Appraisal of Assets

The first step is for a person to be appointed personal representative by the court to administer the estate. The personal representative can either be somebody nominated in a will, the executor, or they can be the decedent's next of kin if they wrote no will, the administrator. 

Once appointed, the personal representative has the authority to gather the decedent's assets. For example, if the decedent had a bank account, the personal representative would go to the bank and transfer it to an estate account.

When the personal representative has gathered all the assets, they can then appraise such assets. For some assets, the personal representative can appraise the asset themselves, e.g. a bank account. For other assets, the personal representative will need the assistance of a probate referee, e.g. real estate.

When the personal representative has completed collecting and appraising assets, they submit an inventory and appraisal of the decedent's estate to the probate court. 

2. Payment of Debts

Invariably the decedent will have some form of debt when they pass away. This can take the form of a credit card bill, a utility bill, a mortgage, a child support judgment, a tax lien, etc. The personal representative is required to provide notice to all creditors of the decedent's probate. Creditors then have to file a claim. The personal representative then makes a determination of whether to pay the claim or not. If there are deficiencies in the claim, e.g. it was not timely-filled, the personal representative can appropriately reject the claim. Ultimately, the personal representative needs to resolve all creditor claims before the final step can take place. 

3. Distribution of the Balance of the Estate

When all assets have been collected and appraised, all debts have been paid and a sufficient amount of time has elapsed, the personal representative can seek closure of probate.

To close probate, the personal representative will need to file a petition. It will contain a summary of what has taken place in the probate, e.g. when it started, who filed creditor claims, did the decedent have a will, how will the distribution go, etc. If the petition is approved, the personal representative can make distributions to the beneficiaries.

In light of the foregoing, people often ask "how long does probate take?" The common range is for probate to take 9-15 months to complete in most counties. From personal experience, the probates I've handled have taken between 7-12 months. The process can be longer if the matter is contested, e.g. there is a will contest. 

December 16, 2015

Doolittle v. Exchange Bank

California has watered down the application of no-contest clauses through recent legislation. Still, there are alternative methods to  dissuade a beneficiary from challenging a trust. For example, shifting the burden of cost as reflected in the recent appellate decision.

Doolittle v. Exchange Bank, __ Cal.App.4th __ (2015)

In Doolittle, the settlor, a very wealthy individual, was concerned about her children challenging an amendment to her trust. The trust amendment provided for a substantial distribution to her gardener.  On the same day she amended her trust, she executed a document entitled "Instructions to Successor Trustee and to Agent." This document provided, in pertinent part:

"I, Constance Doolittle, as the Trustor of the Constance Doolittle Trust UTD November 5, 1999 ('Trust'), as amended, and on behalf of myself as an individual, hereby instruct the successor trustee of the Trust and my agent under a durable power of attorney, that in the event any one or more of my attorney, my accountant, my investment counsel, my trustee, my agent, any doctor or psychologist, or any other representative of mine . . . is called upon to testify on my behalf as to my intentions or my circumstances with respect to my inter vivos gifts and estate planning documents, I hereby instruct my said successor trustee and my agent to compensate such representative at his or her regular, usual and customary rate for all time expended by such representatives with regard to such testimony."

The consequence of this document is that associated parties with Ms. Doolittle would be compensated for their time if they became involved in litigation. As anticipated by Ms. Doolittle, her children challenged the trust and objected to the validity of this cost-shifting provision. The rationale for the objection was to preserve trust funds. If the trustee had to compensate highly-paid professionals such as an attorney, accountant and doctor for their involvement in the case, their naturally would be less trust funds available for the beneficiaries. Ultimately, the appellate court found the document to be a valid trust amendment.

Naturally the attorneys for each side viewed the decision differently. 

The bank's attorney said "if a parent truly wants to leave something to someone who is not their natural heir, they can provide for the defense of that gift in the event the heirs attack it." Payne, Paul. "Battle over Marin County woman's inheritance spills into Sonoma County court." Press Democrat. Santa Rosa, CA. October 22, 2015.

Conversely, the children's attorney said the ruling was the "Full Employment Act for counsel.” Id

December 3, 2015

Joint Tenancy v. Tenants in Common

When a person changes title to real property, the process is rather easy. A deed is signed, then notarized and recorded with the appropriate county recorder. The substance of changing title though can have an extremely lasting impact. This was evident in the following case:

Perna v. Perna, San Diego County Superior Court Case # 37-2013-00032837-PR-LA-CTL

According to the unpublished appellate opinion:

"Angie [Perna] is [Carlo] Perna's daughter. On March 22, 1999, Carlo presented to a hospital emergency room in respiratory distress and was later admitted to the intensive care unit. (All further date references are to 1999.) On March 29, Carlo changed title to real property located in Chula Vista from tenants in common with his sister, Maria S. Da Luz, to joint tenancy. Carlo signed the quitclaim deed and a notary public notarized the document. On March 30, Carlo underwent a tracheotomy. Carlo later requested that he not be resuscitated and that food and medication be withdrawn. Carlo died intestate on April 5. In 2013, Angie filed a petition for letters of administration challenging the transfer. Carlo's other daughter, Connie E. Castellanos, and his sisters, Concetta R. Perna and Da Luz, objected to the petition."

The reason why Ms. Perna challenged the transfer was due to the disposition of the property. 

If Mr. Perna had left title as is, the property in question would have  been distributed to his daughters, Mrs. Perna and Connie E. Castellanos. The reason being is that a tenant in common interest is passed via intestate succession if the decedent had no will. Here the opinion notes that Ms. Perna filed for Letters of Administration which means that Mr. Perna died without writing a will. Therefore, the heirs (see next of kin) of Mr. Perna's estate would inherit his tenant in common interest through intestate succession. Presumably his heirs were his two daughters, Mrs. Perna and Connie E. Castellanos.

The problem for Ms. Perna is that by changing title to joint tenancy from tenants in common, the owner of Mr. Perna's interest in the property upon his death was Maria S. Da Luz, the other joint tenant, not his estate. The reason being that a joint tenancy interest automatically passes to the surviving joint tenant. Grothe v Cortlandt Corp. (1992) 11 CA4th 1313, 1317. Here Mr. Perna and Ms. Da Luz were each joint tenants. Thus, they each owned 50% of the property. When Mr. Perna passed away, his 50% interest automatically passed to his sister, Ms. Da Luz.

In light of this, Ms. Perna challenged the validity of the transfer. The objective was to have the deed invalidated whereby title to the property would be held as tenants in common (in which she would partially inherit) as opposed to joint tenancy (in which she would inherit nothing). 

Ms. Perna lost her appeal at the appellate level for those of you keeping score at home.

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.