April 24, 2015

Beneficiary's Objections to a Probate Petition

When a trust beneficiary objects to a trustee's petition, the objection(s) must be limited to the scope of the petition. Otherwise, the objection will be disregarded.  "Evidence offered on an unpleaded claim, theory, or defense is irrelevant because it is outside the scope of the pleadings." California Bank & Trust v. Lawlor (2013) 222 Cal.App.4th 625, 637, fn. 3.

The following example illustrates this point.

Bobby is the lifetime beneficiary of a trust established by his late affluent uncle who lived in Monte Sereno, CA. To guard against trustee malfeasance, the trust required that an annual accounting be filed with the local probate court. The trust's main asset was a duplex in Santa Clara that produced a steady stream of income. Still, Bobby believed that the trustee, Tom, was not charging market-rate rent given the recent surge in rent. Bobby demanded that Tom increase rent for each unit but Tom objected, citing that tenant turnover was quite low over the years. Tom believed that if he charged at or near market-rate rent, he could cherry-pick the right tenants. These tenants would then stay at the property for years instead of leaving after a year. The transactions costs of finding new tenants, i.e. cleaning and repairing the unit, were quite high. Hence, Tom believed his strategy was prudent because ultimately it reaped a greater profit for the trust. The short-term cost of charging at or near market-rate rent was eclipsed by the long-term gain of avoiding costly tenant turnover.    

When Tom filed his accounting, it indicated that rent was $2,200 for each unit. Upon receiving the accounting petition, Bobby scoured Craigslist for duplex rentals in Santa Clara. He found that most duplex rentals in Santa Clara rented for $2,400 a month. In Bobby's objection to the Tom's accounting petition, he argued that Tom should be removed as trustee for breach of fiduciary duty. In particular, Bobby argued that Tom's refusal to charge more in rent was preventing the trust property from being productive and not in furtherance of the purposes of the trust. See Probate Code § 16007.

The problem with Bobby's objection is that the accounting petition was not the proper avenue to seek removal of Tom as trustee. While Bobby could object to the contents of the accounting petition, e.g. he could object if Tom could not substantiate expenses and costs. He was not in a position to seek removal of Tom as trustee because the pleadings were limited to the accounting. If Bobby wanted Tom removed as trustee he would have to file his own petition under  Probate Code § 17200(b)(10). Bobby could not piggyback on Tom's accounting petition for purposes of seeking his removal.

April 16, 2015

Vested Benficiary and Contingent Beneficiary

Two terms that can describe a beneficiary of a testamentary instrument are "vested" and "contingent." There is a stark difference between the two terms. The former means that the beneficiary has a present interest in the estate, i.e. they can receive distributions now. The latter means that the beneficiary has a possible future interest in the estate, i.e. they may or may not receive a distribution down the line.

This distinction can be very consequential when administering an estate. The reason is that, generally speaking, certain rights inure to a vested beneficiary and not a contingent beneficiary. One of those rights is the ability to receive an accounting. "The trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed." Probate Code § 16062.

The following example illustrates the difference between a vested and contingent beneficiary.

Thomas, a widower from Campbell, CA, created a revocable trust that named his daughter Dawn as the sole beneficiary upon his death. The trust permitted the trustee to spend as much or as little as the trustee deemed necessary on Dawn's health, education, maintenance and support. If any property remained in the trust after Dawn's passing, such property would be distributed to Thomas' nephew Ned.
When Thomas dies, his trust becomes irrevocable and sets in motion the trust's distribution scheme. If Dawn survives Thomas, she becomes a vested beneficiary. She is considered a vested beneficiary because she satisfied the one requirement to become the sole beneficiary of Thomas' trust estate, outlive him. On the other hand, Ned becomes a contingent beneficiary if Thomas passes away and Dawn survives Thomas. The reason is that Ned may or may not receive anything upon Dawn's death, assuming Ned survives Dawn. The trustee may or may not expend the entire trust estate on Dawn during her lifetime. This decision on whether or not to expend the entire trust estate on Dawn is up to the trustee's reasonable discretion.

Going forward, Dawn would be eligible to receive an annual accounting under Probate Code § 16062, given that she is a vested beneficiary. Ned however would not be eligible to receive an annual accounting under Probate Code § 16062, as he is merely a contingent beneficiary. 

There are other probate code sections that Ned could invoke if he wanted details about the trust's administration. The issue with these other probate code sections is that they are not as clear as Probate Code § 16062. For instance, Probate Code 16061 states "on reasonable request by a beneficiary, the trustee shall report to the beneficiary by providing requested information to the beneficiary relating to the administration of the trust relevant to the beneficiary’s interest." Clearly such is an example of ambiguous legal language that makes people ponder in bemusement. What is relevant to one person can reasonably be considered irrelevant to another. Whereas an accounting under Probate Code Section 16062 has specific requirements of what must be mentioned in it. Hence, an accounting will almost invariably be more informative than an information request under Probate Code 16061.

April 10, 2015

Probating a Lost Will

When a person who wrote a will, the testator, passes away the will needs to be lodged with the appropriate probate court in California. If the person was domiciled in California at death, the county of domiciliary has jurisdiction. For example, if the decedent was a domiciliary of Campbell, CA at death, Santa Clara County Superior Court would be the proper venue for the will lodging.  

Naturally, a problem arises when the original will cannot be located. This can result from a number of scenarios, e.g. the testator lost it, the testator accidentally destroyed it or the testator gave the will to a forgetful person, etc. I've heard  attorneys erroneously state that the original will is required to commence probate. However, Probate Code § 8223 holds otherwise.  

Probate Code § 8223 reads: "the petition for probate of a lost or destroyed will shall include a written statement of the testamentary words or their substance. If the will is proved, the provisions of the will shall be set forth in the order admitting the will to probate."

For purposes of illustration, assume that Tom penned a will. He gave the original will to his friend Carl, the sole beneficiary and nominated executor of Tom's estate. Tom was concerned that his overbearing niece, Allison, his heir, would try to pressure him into making her the sole beneficiary of his estate. Tom's attorney also retained a copy, albeit a duplicate copy.

Tom eventually passes away and Allison commences probate. She argues that since no will can be found amongst Tom's possessions at his home, he died intestate, i.e. without a will. Therefore, as next of kin, she should be appointed administrator and sole beneficiary of Carl's estate. Unfortunately Carl was horribly disorganized and simply could not find the will amongst his belongings when he heard that Tom had died. Still, Carl remembered that Tom had hired an attorney to write his will. Carl calls the attorney and explains Tom's passing. Seeing no ethical issue, the attorney agrees to release the will to Carl. He then petitions the court to be appointed executor in light of Probate Code § 8223. That is, even though the original will was essentially lost, the duplicate original was sufficient because Carl convinces the court that he simply misplaced the original will. Carl does this through his own declaration and the declaration of the attorney who wrote Tom's will.

March 25, 2015

Ukkestad v. RBS Asset Finance, Inc. - Heggstad Petition

A Heggstad petition is a commonly filed probate petition in California. The petition is filed under Probate Code § 850. The purpose of the Heggstad petition is to obtain a court order confirming that a particular piece of property, typically real estate, is part of the trust estate. 

The common reason to file a Heggstad petition is because the settlor failed to formally transfer the property into the trust. For example, in the case of real estate, the settlor failed to execute a deed which transferred their interest in the property to their trust. Recently, a California Court of Appeal decision clarified the specificity needed in terms of real estate when filing a Heggstad petition.

Ukkestad v. RBS Asset Finance, Inc., __ Cal.App.4th __ (2015) 

Just prior to his death in 2012, Larry Gene Mabee executed a restatement of his trust. However, Mr. Mabee unfortunately did not execute trust transfer deeds for two parcels of real estate which he owned in his individual name. Thus when Mr. Mabee passed away, title to the two parcels was not in the trust's name. One of the successor co-trustees, Daniel Ukkestad, petitioned the probate court in San Diego County to have the two parcels be confirmed as trust assets. The trial court denied the petition and Mr. Ukkestad appealed.

According to the opinion, a key fact in the case was that "the Trust Instrument does not describe the Two Parcels by reference to any specific identifying information unique to those properties, such as the address or legal description of the Two Parcels." Conversely in the Estate of Heggstad (1993) 16 Cal.App.4th, the trust there did describe the property with some particularity. The trust's schedule of assets referred to the property in question as “Partnership interest in 100 Independence Drive, Menlo Park, California.” Id. at 946. Still, the Court of Appeal opined that a sufficient description had been made by Mr. Mabee given that the trust stated: 

"The Grantor [i.e., Mabee], by the execution of this instrument, hereby assigns, grants and conveys to the Trustees of this instrument all of the Grantor's right, title and interest in and to all of his real and personal property, including all Tangible Personal Property, stocks, bonds, cash, mutual funds and promissory notes, all amounts on deposit from time to time at any bank, savings and loan association or investment institution, real property, leases on real property, interests in business entities and all other property owned by the Grantor, wherever situated. . . . The Grantor intends this assignment to be effective as of the date of this instrument even though other documents may be necessary to perfect title to such property in the name of the Trustees."

Therefore, the Court of Appeal reversed the trial court's ruling as it stated "that because the Trust Instrument states that all of Mabee's "right, title and interest" to "all of his real . . . property" is included in the Trust's assets, and it is possible by resorting to extrinsic evidence to determine that Mabee held title to the Two Parcels, the statute of frauds creates no bar to Ukkestad's petition for an order confirming that the Two Parcels are part of the Trust's assets." 

March 19, 2015

Executor of a Will (Letters Testamentary)

A statement I commonly hear, albeit erroneous, is where a person mentions that a relative or friend passed away and they are now the executor after reading their will. However, this hypothetical person is misinformed in terms of California probate law. An executor is only appointed following a court order. Simply by reading a will and seeing you are the nominated executor does not automatically make you the appointed executor of an estate. There is a process in becoming the executor.

In order to become appointed executor of a testator's estate, such person has to petition for probate with the appropriate superior court. If the decedent resided in California, "the proper county for proceedings concerning administration of the decedent’s estate is the county in which the decedent was domiciled, regardless of where the decedent died." Probate Code § 7051. If the testator was domiciled in Monte Sereno, CA but died in Auburn, CA, the proper county to petition for probate would be Santa Clara County not Placer County. Usually determining the decedent's domicile is relatively easy, you just figure out where the decedent lived permanently. Domicile is just a fancy way of saying "permanent residence" or "permanent home." Granted a permanent residence can change over time but you can only have 1 permanent residence at a time. Just try me on this one.

When a person petitions for probate, they submit to the probate court various judicial council forms and a copy of will. Form DE-111, the main document, will ask basic background information about the decedent such as where they resided, if they were married, if they had children, when they passed away, the approximate value of their estate, if they had a will, etc. The judicial council forms can be found here

If all the appropriate forms have been correctly submitted, an order for probate will be granted (Form DE-140) and at that point, an executor will be appointed (Form DE-150). If an executor is appointed, DE-150 is completed as letters testamentary. 

Once appointed executor, such person can deal with third-parties on behalf of the decedent's estate. Although third-parties will ask for a copy of letters testamentary as evidence of the executor's authority to act. For instance, a bank will ask for a copy of letters testamentary if the executor desires to access the decedent's account there.         

March 11, 2015

Birth dates in a Testamentary Document

A common provision in a parent's testamentary document, i.e. a trust or will, is the birth dates of their children. This causes many parents to ask, why should I list the birth dates of my children in a testamentary document? The answer is quite simple.

California law places restrictions on a child's inheritance. Principally, if a child inherits a large sum of money, e.g. $100,000, and there is no limitation on the distribution, a court-supervised guardianship will be needed. The guardianship is time-consuming and expensive to administer because of accounting and fiduciary requirements. The guardianship will generally end when the minor turns 18 years old. Probate Code § 1600. The result is that an 18-year old will be able to spend their inheritance on whatever they please when they reach the age of majority. I know I would have made plenty of frivolous purchases at age 18 (my senior year at Mountain View High School). During the guardianship period though, the guardian expends the estate rather than the child.  

In light of this, it is typically prudent to not allow a child to inherit a large estate outright. Parents often insist that their children not inherit their estate outright until they reach a certain age. Therefore, a will or trust will include an age requirement for outright distribution. The common age threshold I have seen in testamentary documents is age 25. Although California law allows the interest to be held in trust for the child's lifetime. 

The listing of the child's birth date can clearly assist with determining the child's age. While it may seem like a minor detail, knowing the child's age immediately after reading the will or trust, makes the job of the estate administrator easier. There are already numerous tasks that need to be completed in order to properly administer an estate. Ascertaining the age of a child beneficiary is an easy job that should not be made hard. For instance, the estate administrator should not have to ask a child for their birth certificate or driver's license to determine their age.

A corollary issue worth mentioning is the listing of the child's name. A daughter might assume the name of her husband upon marriage (my wife did so). Jane Doe might become Jane Jones after marrying a Mr. Jones. Many parents have asked if it is necessary to change their trust to reflect a child's name change. My belief is that a name change does not merit a trust amendment. It is very easy to connect a child to a parent if provided a birth name and birth date given the uniqueness of the circumstance. There is only 1 person on earth who could match a parent's description of their child.