The Future of the Federal Estate Tax

Yesterday Democratic presidential candidate Hillary Clinton proposed two changes to the federal estate tax regime. Depending upon who you ask, the federal estate tax is also known as the inheritance tax or death tax.

First, she would increase the maximum tax rate to 65% (the current top rate is 45%).  This rate would be levied on the excess of estates that exceed a certain monetary threshold. In 2016 the amount is $5.45M. For instance, if an estate was worth $2M in 2016, no federal estate tax would be due, but an estate worth $20M in 2016 would incur federal estate tax liability.

Second, Ms. Clinton would eliminate the step-up basis rule that allows beneficiaries to receive inherited property with a new tax basis. For example, assume widow Lila purchases a home in San Jose, CA for $100,000 in 1990. She passes away intestate in 2016. Her sole heir is her only child, son Lucky. The value of the home is now $1M as determined by a probate referee. Lucky sells the home during probate for $1M in 2016. Since Lucky's basis is $1M, due to it being stepped-up, Lucky would not pay capital gains tax. Under Secretary Clinton's proposal, Lucky would not receive a stepped-up basis for the property. Previously President Obama suggested elimination of the same tax structure, which he phrased the "trust fund loophole." There has been no movement on this bill though.

Conversely Republican presidential candidate Donald Trump has proposed repealing the federal estate tax. That is, there would be no tax on a person's estate when they pass away, regardless of the size.    

Obviously each candidate views the federal estate tax markedly different.

What should be mentioned about either proposal is the necessity of an act of Congress for implementation. The Office of the President, the executive branch, can enforce laws but cannot pass laws. Whereas Congress, the legislative branch, can pass laws. So while Ms. Clinton or Mr. Trump can propose whatever law they want, ultimately both branches of Congress, the Senate and the House of Representatives, need to agree on a bill to amend the federal estate tax.

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This blog offers no opinion on the strengths and/or weaknesses of either proposal. This post is strictly for informational purposes. Please do not contact me with your political viewpoints on the matter or which candidate you will be voting for in the upcoming presidential election. I am not affiliated with either campaign or any presidential campaign for that matter. Thank you. 

Trustee Removal

When a beneficiary files a petition it concludes with requests for various forms of relief, e.g. compelling the trustee to submit an accounting, instructing the trustee, determining the validity of a trust provision, determining questions of construction of a trust instrument, approving the modification or termination of the trust, authorizing or directing transfer of a trust or trust property to or from another jurisdiction, etc. Prob C § 17200.

Generally speaking, a court can only grant what the moving party has requested in the petition. For instance, if the petition asks to instruct the trustee to rent a commercial property that has been kept intentionally vacant for years, the order would presumably relate to that subject matter as opposed to something else. In simplistic terminology, "you get what you asked for." 

Still, a probate court is one of general equity. Getty v. Getty (1988) 205 Cal.App.3d 134, 141-142. Thus it can fashion remedies that it sees fit in certain situations, i.e. order something in the interests of "fairness." One example where the probate court can acts on its own motion (known as sua sponte) is removal of the trustee. Prob C § 15642(a). Although  invariably the trustee's conduct will be the primary instigator of this. Hence, it is not as if the probate court would issue orders capriciously.

For example, assume a disgruntled beneficiary petitions for an accounting by the trustee, but not for the removal of the trustee. The trustee has never provided an accounting to the beneficiary and the settlor passed away years ago. The clear language of the trust directs the trustee to provide an annual accounting to the trustee. Furthermore, the beneficiary made repeated attempts to contact the trustee prior to filing the petition but to no avail. Thus, the beneficiary has a credible argument as to why an accounting should be provided.

First, the trustee asks for, and receives, numerous continuances to file the accounting. Second, the accounting the trustee ultimately files is replete with inaccuracies and misleading statements. Third, the accounting also fails to conform to court standards. Prob C § § 1060 - 1064. Cumulatively, the trustee has failed to fulfill their fiduciary duties.

At that point, a trial court is perfectly able to remove a trustee on its own motion. However, in practice, a trustee is typically suspended and then later permanently removed.   

Probate Orders

Probate participants naturally appreciate consistency. If a judge rules one way in a case in 2016, then presumably that ruling will apply in 2017 as well even if the case is before a different judge. "For one superior court judge, no matter how well intended, even if correct as a matter of law, to nullify a duly made, erroneous ruling of another superior court judge places the second judge in the role of a one-judge appellate court." In re Alberto (2002) 102 Cal.App.4th 421, 427. Hence, it is error for a judge to modify a prior ruling unless there are highly persuasive reasons to do so.
People v. Riva (2003) 112 Cal.App.4th 981, 992.

Here in Santa Clara Co., we have had 3 probate judges the past couple of years, Judge Cain, Judge Persky and Judge Kuhnle. Thus it is not a given that the same judge will hear your matter for the duration of your case. Personally speaking, I've had a couple of probate matters in which the judicial assignment changed during the case.

For illustrative purposes, assume a disgruntled beneficiary petitions the court to order that the trustee provide an accounting. The judge orders the trustee to provide an accounting to the court in 4 months. Furthermore, if the accounting is acceptable, the trustee will be released from having to provide an annual accounting to the court. The beneficiary does not object to any portion of the order. Hence, the accounting would be a one-off matter. The judge who signs this order then retires and a new judge takes over the case.

Months later, the trustee files an accounting with the court. The judge is satisfied with the accounting and approves it. However, the disgruntled beneficiary vigorously argues that the trustee should be subject to ongoing court supervision on the day of the hearing. The beneficiary provides only oral testimony that the trustee "can't be trusted" because the trustee once made a bet against the Harlem Globetrotters as he believed the Washington Generals were "due." Despite the previous order that barred ongoing court supervision, the new judge agrees with the disgruntled beneficiary and orders that the trustee provide an annual accounting to the court. The trustee is well within his or her rights to appeal the order in that it directly contradicts the prior order. 

Enforcing a Court Order Through an Elisor

The vast majority of lawsuits are settled. I have read that 95% of lawsuits do not end up being decided by a judge or jury but rather through settlement.  Still, just because you have a settlement agreement, this does not necessarily mean that your matter is over. Yes your case continues.........

Settlement agreements are not self-executing. Each party to a settlement agreement is required to perform certain conditions by certain times. For example, this could entail signing a document by the end of the month, paying a debt on the 1st of the month, turning over an item to a specific party immediately or filing documents within 6 months. The potential list of conditions that could be included in a settlement agreement are ostensibly limitless. The practical limitations are one's creativity and the willingness to agree to certain terms. 

Unfortunately one party to a settlement agreement may balk at performing their side of the deal (for meritorious or idiotic reasons). In such a case, the non-breaching party can ask the court to appoint an "elisor." See Blueberry Properties, LLC v. Chow (2014) 230 Cal.App.4th 1017, 1020-1021. If a party "will not or cannot execute a document necessary to carry out a court order, the clerk of the court, or his or her authorized representative or designee may be appointed as an elisor to sign the document." (Super. Ct. San Diego County, Local Rules, rule 2.5.11.)

A recent unpublished appellate opinion highlighted how an elisor was used to execute a settlement agreement.

Bajan et al. v. Mikos et al., San Diego County Superior Court Case # 37-2008-00094754-CU-FR-CTL

A dispute arose over the ownership of a property. Eventually, after years of litigation, the parties came to a settlement agreement. One of the conditions of the settlement was that the defendants would sign deeds in conformity with the settlement agreement. Simple enough you could say.

However the defendants refused to sign the deeds. The plaintiffs then asked the court to appoint an elisor to sign the deeds in place of the defendants. The court obliged and appointed the San Diego County Superior Court Clerk to sign the deeds, who did so.

The basis of the appeal was unrelated to the appointment of the elisor. 

Settlement Agreement in a Trust Dispute

Santa Clara Co. Superior Court

Gregge v. Hugill (2016) ___ Cal.App.4th _____
 
In Santa Clara County Superior Court, a disgruntled beneficiary challenged the validity of a trust amendment citing a lack of testamentary capacity and undue influence. The trust provided for multiple beneficiaries but there is only 1 contestant, the disgruntled beneficiary. Just prior to trial, another trust beneficiary agreed to file a disclaimer, conditioned upon the case being dismissed, that arguably undercut the remedy available to the disgruntled beneficiary. The trial court was agreeable to this, citing the importance of familial harmony, and dismisses the matter.

The disgruntled beneficiary then appeals and the appellate court finds reversible error, principally because the disclaimant was a non-party. The opinion noted "a settlement is an agreement among adverse parties, and Bennett did not agree to settle the case." Thus, it was improper for the trial court to dismiss the matter as it deprived the disgruntled beneficiary of the right to litigate the validity of the trust amendment.    

The opinion also notes how the settlor amended his survivor's trust multiple times. 

"In 1997, William amended the survivor’s trust, designating a fixed $900,000 to fund the grandchildren’s trust, to be distributed as stated in the 1990 trust instrument."

"In 2000, William amended the survivor’s trust by eliminating Michael’s five percent residual share and increasing Patrick’s share to 35 percent."

"In 2001, William removed Michael’s children Kathleen and Cameron as beneficiaries of the grandchildren’s trust, but he restored their status one year later."

"In 2005 William again removed Cameron as a grandchildren’s trust beneficiary."

"William executed a final amendment to the survivor’s trust on June 5, 2008, two weeks after he underwent surgery to remove a subdural hematoma. The 2008 amendment restored Michael as a trust beneficiary on equal footing with his siblings, and it restored Cameron as a grandchildren’s trust beneficiary on equal footing with his sister and cousins." 

I would not advise a client to amend their trust this many times unless they agree to a restatement of their trust. The reason being is that if a trust is amended, the heirs and beneficiaries are entitled to a copy of the trust and all the amendments. They could then see how the trust changed over time, possibly because of independent decision-making or the result of an interloper. If a restatement was used, only the restatement would need to be given to heirs and beneficiaries. Hence the heirs and beneficiaries could not piece together how the trust changed over time.

Undue Influence by a Child

A child is free to assist a parent with drafting their estate plan. However, a child cannot exert undue influence on the parent. A recent unpublished opinion involved the latter scenario for the late Elizabeth Plott.

The opening paragraph summarized the case as follows: 

"The probate court invalidated a trust amendment drafted by one of the beneficiaries—a lawyer who effectively disinherited her sibling. There is no credible evidence that the amendment manifests the intent of the beneficiaries' elderly mother. As the trial court found, the evidence "overwhelmingly establishes that the 2007 Trust Amendment is the product of undue influence."  

Key v. Tyler, Los Angeles Co. Superior Court Case # BP131447

The opinion did not present the child, Elizabeth Plott Tyler (appellant), a California attorney, and the estate planning attorney, Allan Cutrow, in a positive light. Tyler & Wilson was Ms. Tyler's law firm and MSK was Mr. Cutrow's law firm.

For example the opinion stated:

"Steege reiterated at trial that Mrs. Plott stated, more than once, that she did not trust appellant. This is because Mrs. Plott wanted to do things her way, but appellant "had her agenda" and would do things differently, which upset Mrs. Plott when she learned of it. Appellant recalled that Mrs. Plott balked at signing checks for appellant's legal bills, provoking appellant to "use[ ] my scary yelling tone." When appellant walked out of the meeting, Mrs. Plott signed the checks. At trial, appellant denied ever raising her voice at Mrs. Plott, which was contradicted by her deposition, when appellant answered, "Yes, I'm sure I did on some occasions."

Later in the opinion: 

"There is no shortage of evidence that appellant actually participated in the preparation of the Trust amendment in 2007, personally and by giving directions to others. Drafts prepared by MSK were sent to Tyler & Wilson, not to Mrs. Plott. During the drafting period, Cutrow did not communicate with Mrs. Plott in person, by telephone, by letter or by e-mail. In February 2007, appellant wrote to Cutrow, "After we left your office last time, my mother told me that she was okay with giving me a controlling interest in the business like we discussed, that she did not want to do that with my sister." Cutrow did not meet alone with Mrs. Plott, to confirm that the drafting instructions he received were what Mrs. Plott wanted, as opposed to what appellant wanted. Tyler & Wilson billing records show that appellant's employee Stajduhar attended both the presigning meeting and the meeting at which the Amendment was executed." 

The opinion mentioned that "the Plott nursing home businesses were sold for $55 million at a probate court auction." Due to the high-net worth of the trust estate, I would expect further appeals.