December 16, 2014
When a beneficiary files suit against a trustee of a revocable trust, the petition should contain at least some shred of evidence. Otherwise, the beneficiary runs the risk of pursuing a frivolous suit.
The consequences of such can be quite damaging. For example, a court can, inter alia, deduct the trustee's attorney fees from the beneficiary's portion of the trust. See Estate of Ivey (1994) 22 Cal.App.4th 873. Since lawyers are well-compensated this amount can easily reach the tens of thousands of dollars.
While this can be seen as a deterrent for a beneficiary interested in filing suit, it should not be a significant deterrent. A prudent trustee will hire an attorney to litigate the matter because they are ill-equipped to handle the rigors of litigation. While the requirements for filing suit are not incredibly intricate, some degree of clarity and precision is required. Unfortunately a petition filed by a non-attorney is likely to have errors in it, e.g. improper formatting, improper citations, etc. From personal experience, many probate petitions by non-attorneys I have read were lacking.
The California Professional Conduct rules, which apply to all California attorneys, require that the attorney not pursue a frivolous suit. See Cal Rules of Prof Cond 3-310. If a beneficiary then hires an attorney to litigate the matter, they should take solace in the fact that the attorney also faces consequences for filing a frivolous suit. Alternatively stated, the attorney too has skin in the game. Violation of an ethical rule can lead to professional discipline such as suspension or disbarment. Thus, the beneficiary should reasonably believe that the attorney will file suit only if the case has some merit to it. If the attorney deems the suit as being frivolous, that should give the beneficiary a potential early indication of how a judge might view the matter.
Still, eventual success or failure does not ultimately determine whether a suit is frivolous or not. The focal point is whether there was some shred of evidence for the suit. A suit involving a close-call is not frivolous. For example, a beneficiary sues a trustee for failing to sell oil company stock given the recent collapse in oil prices. The beneficiary could cite financial analysts who think crude oil has not bottomed out yet. In turn, the trustee could defend their decision and cite financial analysts who think oil prices will rebound next year. Regardless of the outcome, there are arguments for both sides. Hence, the notion of the suit being frivolous would not be present.
December 12, 2014
If a beneficiary sues a trustee and is successful, they are generally not able to recover their attorney fees from the trust. Hence, the beneficiary will have to personally bear the out-of-pocket costs.
However, an exception to this rule is when a beneficiary sues a trustee on behalf of themselves and other beneficiaries which recovers or preserves a common fund for their benefit. In such a case, the probate court has the discretion to award attorney fees from the trust to the moving beneficiary. See Estate of Gump (1982) 128 CA3d 111. This is known as the "common fund doctrine."
One reason for the common fund doctrine is to prevent the free rider program. If one beneficiary successfully sues, invariably they will expend a large sum of money on attorney fees. Yes, attorneys do not come cheap. In turn, it is quite possible that the moving party will expend all of their inheritance on attorney fees just so they can get what is arguably theirs. Conversely, the other beneficiaries, assuming they are co-equals, reap the benefits of the moving party's litigation efforts. However, they did not have to expend any funds to reap the benefit. Thereby, they can be considered "free riders" or roughly speaking a "mooch." The common fund doctrine can thus ensure that a moving beneficiary is not unfairly punished for doing a good deed.
In theory this sounds complicated, but is easier to grasp with a little explanation.
Assume that a rich uncle leaves behind a large estate that is to equally benefit 10 of his nieces and nephews for their lifetime. The uncle names his brother as the trustee. The principal asset of the trust is a shopping complex located in Los Gatos, CA.
The brother initially does a competent job in executing his fiduciary duties but quickly becomes overwhelmed by the responsibilities of commercial leasing. The brother becomes derelict in his duties by not enforcing lease agreements, collecting rent late and inadequately maintaining the property. This causes a substantial reduction in the amount of profit the trust reaps. This decreased profit trickles down to the nieces and nephews in the form of reduced distributions.
One nephew then decides that it would be prudent to have the trustee removed for breach of fiduciary duty and replace them with a professional fiduciary. This nephew is the only beneficiary who is wealthy enough to fund a trustee removal petition.
He hires a local probate litigation attorney and has the brother removed as trustee, albeit at the cost of $50,000. The nephew asks for reimbursement of his attorney fees, citing the benefit to the other beneficiaries. In particular, the professional fiduciary will be able to increase the amount of rent collected from the property which will equally benefit all the nieces and nephews through larger distributions.
In such a case, the nephew may receive reimbursement from the trust for their attorney fees. Although, it should be noted that this remedy is discretionary. Simply because a beneficiary petitions for it and the facts indicate that a common benefit has been achieved for the beneficiaries, such does not obligate the probate judge to award it. The probate judge has discretion to do so or not.
December 4, 2014
Generally speaking, when a person receives Medi-Cal services past the age of 55, upon their demise their estate is required to reimburse the state of California for such services. See Welfare & Institutions Code §14009.5. This process is commonly known as "Medi-Cal reimbursement."
While the term "Medi-Cal reimbursement" might seem innocuous, in reality it is quite formidable. The California Department of Health Care Services ("DHCS"), the government agency tasked with the process, has collection methods and is willing to use them. This invokes the story of the late Cecelia Galaviz Garcia. Douglas v. Castillo, Los Angeles County Superior Court Case # BC484100
Ms. Garcia received $147,190.64 in Medi-Cal benefits during her lifetime. Thus, upon her death, her estate would be liable for this $147,190.64.
Ms. Garcia was a joint tenant, along with her brother Richard Castillo Sr., for a home located in Los Angeles, CA. Due to this joint tenancy, Ms. Garcia and Mr. Castillo Sr. each owned a 50% interest in the home.
As the surviving joint tenant, Mr. Castillo Sr. became the sole owner of the property by operation of law. However and most importantly for this blog post, through this inheritance, Mr. Castillo Sr. also became liable for his sister's Medi-Cal bill up to the value of her estate. That is, Mr. Castillo Sr. could not inherit a net deficiency from his sister's estate. So if Ms. Garcia's estate could not equal the Medi-Cal bill, Mr. Castillo Sr. would not be liable for the overage. Rather, his liability would be limited to the value of her estate.
Mr. Castillo Sr. notified the DHCS of his sister's passing in January 2010 and DHCS in turn provided Mr. Castillo Sr. with the bill in a letter dated April 14, 2010. For reasons unknown, Mr. Castillo Sr. ignored the notice and sold the property for $230,000 on September 28, 2010.
In the following years, the DHCS issued demand letter after demand letter to Mr. Castillo Sr. for reimbursement of his sister's Medi-Cal benefits. Eventually, the DHCS sued Mr. Castillo Sr. and obtained a judgment for $74,801.73 plus post-judgment interest. Mr. Castillo Sr. appealed the judgment and the trial court's decision was upheld in an unpublished opinion by the California Court of Appeal.
The obvious takeaway from this case is to not ignore a demand letter from the DHCS. As shown by the case, it is a creditor that will use collection efforts to satisfy its claim. Due to neglect, Mr. Castillo Sr. unfortunately now has at least a $74,801.73 judgment against him.
November 26, 2014
A familiar refrain goes "you get what you pay for." For people unwilling to hire an attorney for estate planning matters, the results can be disastrous, expensive and essentially irreversible. The following is an example of such.
Jenkins v. Teegarden, (2014) ___ CA4th ___
The defendant was the caregiver and friend of the decedent, a widower. In 2007, the decedent executed a quitclaim deed which transferred a home to the defendant. The defendant herself prepared the quitclaim deed by using a preprinted form she had purchased from Staples. Although she failed to properly identify the grantor, she used the decedent's individual name instead of his name as trustee of his revocable trust (the actual owner of the property).
In her deposition, the defendant stated that the "only consideration that she gave for the quitclaim consisted of one dollar and her friendship." Yet during the trial, she testified that "pursuant to an oral agreement with Perry, she also gave (1) $100,000, which went into improvements to the house, (2) her $45,000 equity in a different house, and (3) her services (Author's comment: obviously changing your story is not the best maneuver).
The most relevant fact of the case was that the defendant was the drafter of the quitclaim deed. This indisputably created a conflict of interest. As the drafter, she had a direct interest in seeing that the decedent sign the quitclaim deed because she would benefit from it. Similarly, a sure-fire method for professional discipline is for an attorney to write themselves into a trust or will they draft for a client under normal circumstances (see the story of former California attorney James D. Gunderson and Leisure World).
Had the defendant acted prudently, she would have told the decedent to retain an attorney to facilitate the transfer. By engaging in do-it-yourself lawyering, the defendant exposed herself to litigation at the trial and appellate court level (and maybe the CA Supreme Court). This case surely cost her tens of thousands of dollars in attorney fees and countless hours litigating it.
A prudent attorney would have spotted the issues associated with the case and told the defendant that a "certificate of independent review" is advisable for this type of transfer. If such was obtained, the conveyance to the defendant from the decedent might have been valid. In turn, years of litigation might have been avoided. Unfortunately, the defendant opted for the inexpensive and expedient route, and suffered the calamitous consequences.
November 19, 2014
When a successor trustee assumes office, one question that naturally arises is, how much can I be compensated? Or in common verbiage, how much can I be paid? A trustee, like most people, will want to be compensated for their time, especially if they are a non-beneficiary. People do not like to work for free. Moreover, given the liability of being trustee, this further compels a trustee to seek payment because liability will attach regardless if compensation is taken.
The trust instrument controls the rate of compensation. However, I have never seen or heard about a trust that provided for a specific compensation rate, e.g. $___ per hour. Rather, it is customary to state in the trust that the trustee is entitled to "reasonable compensation." Probate Code § 15681. Usually this entails an hourly rate. Consequently, this requires that the trustee keep time sheets for record keeping. A good rule of thumb is to list for each instance at least (1) the date of services rendered, (2) the services rendered and (3) the amount of time expended. Also, it is good practice to keep all receipts and invoices.
The trustee is generally required to provide an annual accounting to each beneficiary. Probate Code § 16063. The accounting requires that the trustee list their "compensation for the last complete fiscal year of the trust or since the last account." Probate Code § 16063(a)(3). Naturally a beneficiary may want to see documentation that substantiates compensation for the trustee. Hence, the necessity of time sheets, receipts and invoices. The "I just guestimated my time and winged it from there" is not the way to go. I can assure you of that.
If the trustee does not adequately document their time, this may cause their compensation to be reduced or denied. Probate Code § 16420(a)(7). The reason being is that a trustee owes "a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration." Probate Code § 16060. It is reasonable to expect a trustee to document their time given that it takes minimal effort and they are being compensated for their time.
Another aspect of trustee compensation is to handle assignments in a reasonably efficient manner. In the words of the Disney character Scrooge McDuck, "work smarter not harder." (I watched the cartoon "Ducktales" as a child). For example, I read that an attorney-trustee charged $525 to pick up a will from another attorney's office. His hourly rate was $375 and the amount of time he expended was 1.75 hours. See Williams v. McCullough, Los Angeles County Superior Court Case # SP006932. Given the ubiquity of email, a prudent maneuver would have been to simply email the office and ask them to mail it to the attorney-trustee.