Care Custodian

California law generally prohibits a "care custodian" from being the beneficiary of a decedent's estate. Prob C § 21350(a)(6).

For example, Carl is the in-home attendant for Daniel, an elderly man who lacks the ability to take care of himself independently. Carl would be considered Daniels' care custodian and would generally prohibited be from inheriting through Daniel's estate whether via trust or will. Although if Carl is connected to Daniel through blood, marriage or other means per Prob C § 21351(a), the transfer is permissible. Similarly, if the will or trust "is reviewed by an independent attorney who (1) counsels the client (transferor) about the nature and consequences of the intended transfer, (2) attempts to determine if the intended consequence is the result of fraud, menace, duress, or undue influence, and (3) signs and delivers to the transferor an original certificate" of independent review, the transfer is permissible under this scenario as well.   

The rationale behind the law is that a dependent adult is often in a vulnerable position. He or she relies on the care custodian to assist them with daily life activities such as bathing, dressing, eating, etc. Naturally then, the dependent adult can easily be manipulated by the care custodian because "you do not bite the hand that feeds." This is not to conclude that all care custodians are conniving, rather the law simply reflects a natural consequence of the relationship. A dependent adult is in a vulnerable position.     

A recent superior court case revolved around the issue of a care custodian receiving an inheritance. According to the trial's transcript, William Kuhner wrote a trust in 2006 which left his entire estate to his daughter Donna Martens. In March 2009, Mr. Kuhner was diagnosed with end-stage congestive heart failure which necessitated continuous care. Thereafter, Ms. Martens hired a neighbor of her father's, Annette Rae Robinson, to be the in-home attendant, i.e. the care custodian. 

Mr. Kuhner's condition deteriorated to the point where a physician concluded on May 20, 2009 that he lacked the capacity to handle his finances. Regardless, Ms. Robinson took Mr. Kuhner to various attorneys in hopes of amending the 2006 trust. Furthermore, Ms. Robinson had Mr. Kuhner sign a quitclaim deed which transferred title to her, although the deed was incorrectly drafted as Ms. Robinson did not account for the fact that the home was owned by the trust and not Mr. Kuhner individually. 

According to the unpublished opinion, Ms. Robinson eventually was able to have Mr. Kuhner amend his trust.

"On June 30, 2009, while Robinson was present, Mr. Kuhner executed an amendment to the 2006 Trust (the 2009 Trust Amendment) that disinherited Ms. Martens, made a gift of $20,000 to Robinson, left all of Mr. Kuhner's real and personal property to Ms. Robinson, and made Ms. Robinson the successor trustee upon Mr. Kuhner's death. Mr. Kuhner died on July 14, 2009, two weeks after the 2009 Trust Amendment was executed."    

Ms. Robinson and Ms. Martens then litigated the issue of who was the beneficiary of Mr. Kuhner's estate. The 2006 trust gave the estate to Ms. Martens while the 2009 amendment gave the estate to Ms. Robinson. Eventually, the trial court judged sided with Ms. Martens, as Ms. Robinson was determined to be a care custodian. The decision was then upheld on appeal.

Author's Comment: The unpublished opinion does not cite any facts to support Ms. Robinson's claim that this was a permissible transfer. Her conduct is, at first blush, highly questionable. She seemingly coerced an infirm man to amend to his trust to cut out his daughter, to the benefit of herself, weeks away from dying. Hence I assume that Ms. Robinson's attorney at trial presented some facts to support her case which is not reflected in the unpublished opinion.

If you have any questions please call my office, (408) 866-8382 for a complimentary consultation or email me, s.miri@mirilaw.

Who Can Initiate Probate?

To begin probate, California law specifies which persons are eligible to do so. Typically the petitioner is seeking to become the personal representative, the person who will represent the interests of the estate.  Depending on who the person is, the personal representative can be known by the following terms: (1) executor, (2) administrator, (3) administrator with the will annexed, (4) special administrator, (5) successor personal representative, or (6) public administrator. Prob C §58(a).

According to California law, "any interested person may commence proceedings for administration of the estate of the decedent by a petition to the court for an order determining the date and place of the decedent’s death and for either or both of the following: (1) Appointment of a personal representative. (2) Probate of the decedent’s will. Prob C § 8000. The question then becomes, what is the definition of an "interested person."

Consequently California law defines the phrase "interested person" to be the following individuals: (1) an heir, (2) devisee, (3) child, (4) spouse, (5) creditor, (6) beneficiary, or (7) any other person having a property right in or claim against the estate of the decedent that may be affected by the proceeding; (8) any person who has priority for appointment as personal representative; and (9) a fiduciary representing an interested person. Prob C § 48. 

Naturally the question then becomes what constitutes an heir, creditor, etc. The following are definitions of an heir and devisee.

An heir is a person who would inherit the decedent's estate if the decedent did not write a will pursuant to the laws of intestate succession. Prob C § 44. This is a fancy way of saying that a person's estate goes to their next of kin if they did not write a will. For example, John, a widower was a wealthy land-owner who resided in Los Gatos, CA. He had 3 children, Heathcliff, Hugo and Henry. John despised lawyers because he believed them to be devilish and avarice. Consequently, John never planned his estate and he died without having penned any estate planning instrument(s). His 3 sons, as heirs, would each be entitled to commence probate proceedings in Santa Clara County because they would inherit his estate through intestate succession.

A devisee is a person named in a will as the beneficiary of either personal and real property or both. Prob C § 34. For instance, from the above example, if John had wrote a will and named his son Heathcliff as the beneficiary of his Rolex watch, then Heathcliff would qualify as a devisee.    

If you have any questions please call my office, (408) 866-8382 for a complimentary consultation or email me, s.miri@mirilaw.

Community Property and Separate Property in a Will

Renoir's Bal du moulin de la Galette -
Musée d'Orsay - Paris, France

 

A person cannot give away more than they own. In other words, you cannot write a check that cannot be cashed. In terms of marital property, known as community property in California, at-death transfers are no different.

When a decedent is married prior to passing, his or her estate is divided into community and separate property portions. In short, community property is basically property acquired during marriage that was the result of marital labor such as wages from a job. Separate property is basically any property acquired before marriage and any property that was obtained via gift or inheritance. 

For example, Homer and Whitney were married when Homer passed away tragically in a hot air balloon accident in 2013. Homer's estate consisted solely of a $100k bank account which he used to deposit his paychecks and Renoir's Bal du moulin de la Galette which he received as a gift from his late uber-wealthy uncle. Suffice to say, Homer was a simple man. The bank account would be considered Homer's community property whereas the Renoir would be considered Homer's separate property.

In terms of distributing assets at death, California law says that the decedent's will may dispose of up to 1/2 of the community property and all of their separate property. Prob C §§100(a), 6101. 

From the above example, Homer is entitled to devise $50k to whomever he sees fits. Although in nearly every case, the deceased spouse will name the surviving spouse as their beneficiary. In regards to the separate property, Homer can bestow upon any lucky recipient the Renoir. Even if Homer devised the Renoir to somebody other than Whitney, she would not have the ability to contest the devise.   

In relationships where the spouses are on their first marriage, issues of devising more than the permissible share of the community property are seldom found. One would be very hard-pressed to find an example where the deceased spouse devised his or her share of the community property to somebody other than the surviving spouse. The rationale being is that if you died married, then you probably loved your spouse and thus wanted them to be the beneficiary of your estate. Call me crazy.

Conversely in blended relationships, i.e. marriages involving a second or third marriage, disposing of community property can be more problematic as the concern is that if the surviving spouse is named the beneficiary, the deceased spouse's estate might trickle down to a step-child as opposed to a biological child. The reason for this is because once a spouse dies, the community estate ends (Obviously the surviving spouse can re-marry but just go with me on this). The surviving spouse is then free to leave their estate to anybody. 

For instance, assume Homer had a child from a prior relationship, Sampson. Whitney despised Sampson and Whitney wrote her will which devised her estate to her brother Bill. Naturally Homer would want his estate to end up with Sampson instead of Bill. Hence, Homer writes his will to leave his portion of the community property, namely 1/2, to Sampson out of concern that Sampson will not receive anything when Whitney dies.  

If you have any questions please call my office, (408) 866-8382 for a complimentary consultation or email me, s.miri@mirilaw.

Parent-Child Exclusion and Rental Property

The parent-child exclusion can be enormously beneficial to children who seek to maintain ownership of inherited real estate. In short, the parent-child exclusion essentially allows a parent to transfer to their child the property tax basis of their primary home plus up $1M in assessed value of other real property. This can be a boon to children because property purchased many decades ago has a low property tax basis which makes keeping the home desirable. 

For example, one client I represented a few years ago inherited a home from his late mother who purchased her home in the 1960s. Since the transfer qualified for the parent-child exclusion, the son was able to "inherit" his mother's property tax basis, which was minimal. Hence, his property tax payments were around $600 whereas without the benefit of the parent-child exclusion his property tax payments would be around $5,000. While this does not seem like an eye-popping discrepancy, this payment is annually made. Therefore, the property tax savings are magnified given that the son can reap the benefits for years to come.      

One dilemma though that parents face when deciding how to structure their estate is with rental property. While rental property fits within the "other real property" parameters of the parent-child exclusion, the issue of personal liability remains. That is, if a person owns rental property in their individual name, they are personally liable for the debts of the rental property. For instance, if the tenant slips and falls, the tenant may sue for redress of injury in hopes of obtaining a judgment against the landlord/owner. If successful, this judgment can be then be attached to the rental property, and more importantly, the individual himself. Thus, the personal assets of the individual, e.g. bank accounts, stocks, bonds, mutual funds, etc., are subject to attachment. 

One way to shield oneself from personal liability in this situation is to create a business entity to own the real estate. Under this scenario, the landlord/owner would ordinarily not be personally liable for any judgments that arise from ownership of the rental property. It would be reasonable to say that at least thousands of Californians have established LLCs for this purpose, i.e. own rental property to avoid personal liability. 

The problem is that the California code does not permit real estate owned through a business entity to be eligible for the parent-child exclusion. Penner v. County of Santa Barbara (1995) 37 CA4th 1672. In Penner, a parent's unsuccessful  attempt to transfer real estate to her children via a limited partnership resulted in the property taxes being increased from $337,276 to $2,300,000 because it did not qualify for the parent-child exclusion. The court noted that "property must be transferred from one natural person to another" to qualify for the parent-child exclusion. Since the partnership, a business entity, was not a natural person, it failed to qualify for the parent-child exclusion.

A parent owning rental property is thus faced with two competing issues, (1) the parent-child exclusion and (2) liability protection. In this case, a parent cannot have their cake and eat it too seemingly. Either the parent can keep the rental property in their individual name and risk personal liability, or they can transfer the rental property into a business entity, typically an LLC, but lose the potential benefit of the parent-child exclusion. One solution to this dilemma is to purchase umbrella insurance for the rental property and keep the rental property in the individual's name. This method maintains eligibility for the parent-child exclusion and minimizes the effects of personal liability because of the availability of insurance proceeds. The problem is the potential cost of an umbrella policy and the policy limits for an umbrella policy. In law, much like life, there is no perfect solution.

 If you have any questions please call my office, (408) 866-8382 for a complimentary consultation or email me, s.miri@mirilaw.

Estate Tax in 2014

When a deal was reached to avert the fiscal cliff back in December 2012 (how time flies), the baseline for the estate tax was made permanent. Whereas before the estate tax was subject to periodic renewal, or repeal as in the case of 2010, the American Taxpayer Relief Act of 2012 ("ATRA") ushered in a permanent baseline estate tax amount.  This baseline amount, $5M in 2010 dollars, would be indexed to inflation for the upcoming years. The chart below shows how the estate tax has increased incrementally since 2010.

Of note, the ATRA is subject to amendment or repeal, but such would require an act of Congress and Presidential approval. Previously the estate tax needed re-authorization periodically because the law lacked the required number of votes to make the baseline amount permanent. This changed when the ATRA received enough votes to make it permanent in the U.S. Senate. This was welcome news to attorneys and clients because the estate tax is no longer, presumably, a moving target that is subject to the whimsical nature of politics.

Since the estate tax was pegged to inflation, the IRS has recently released the inflation adjusted figure for 2014. For decedents who pass away in the year 2014, the applicable exclusion amount will be $5.34M. In plain terms this means that if a decedent passes away in 2014 and their estate is equal to or less than $5.34M, no estate tax will be due. 

The decedent's estate includes basically any asset wherever located. In other words, pretty much everything you own, regardless of location, is valued for estate tax purposes. However, few estates are actually affected by the federal estate tax given that the applicable exclusion amount is quite large. Still, this post is only dedicated to the federal estate tax and each state is free to impose their own estate tax. For example, you may be reading this article and be domiciled in New York state (hat tip: Google Analytics), which does impose an estate tax. For reference, California does not impose an estate tax.

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%

Also of note is the fact that the annual exclusion amount for gift taxes will continue to be $14,000 for 2014 per the same IRS memorandum. This is the same figure that is used for 2013. 

In plain English, this $14,000 figure represents the maximum amount a person can gift to another person in the 2014 calendar year without having to deal with gift tax liability. This total does not include payment of tuition, payment of medical expenses, charitable donations and gifts between spouses as those are considered exempt gifts. 

If you have any questions please call my office, (408) 866-8382 for a complimentary consultation or email me, s.miri@mirilaw.