May 18, 2016

Giraldin revisited

In re Estate of Giraldin (2012) 55 Cal.4th 1058, the California Supreme Court held that remainder trust beneficiaries have standing to sue a trustee, who was not the settlor, for alleged breach of fiduciary duties committed during the period of time when the trust was revocable. In Giraldin, the father, who was a settlor and trustee, appointed his son as successor trustee while the father was still alive. The son then proceeded to make poor management decisions that caused trust assets to lose significant value. The father then died and his other children sued the son for breach of fiduciary duties.

An unresolved question from the Giraldin decision was whether remainder trust beneficiaries have standing to sue if the settlor and trustee are the same person and alleged mismanagement occurred during the period of the trust's revocability. In a recent published opinion, the California Court of Appeal answered in the negative.

Babbitt v. Superior Court of Los Angeles County,
__ Cal.App.4th __ (2016)

Mary Lynne Babbitt and Leland Babbitt created a marital trust in 1998. When Mr. Babbitt passed away in 2014, the marital trust bifurcated into a Survivor's Trust and a Decedent's Trust (the classic A-B trust scenario). A step-daughter of Ms. Babbitt, Carol McCormack, was the 50% remainder beneficiary for each trust. 

Ms. McCormack was displeased with the information she received from Ms. Babitt. In particular,  "McCormack questioned what had happened to the trust assets that had not yet been transferred into the trust, including the fate of at least $800,000 i[n] cash accounts held in Leland's name within approximately 24 months of his death. For this reason, McCormack asked the court to compel Babbitt to provide a 'full report of the activities of the trust and account of the assets . . . for the period May 5, 2011 to the present."

"The court granted McCormack's petition and ordered Babbitt to account as to the activities of the trust from May 5, 2011 to the present. Babbitt prepared an accounting, but it only included information for the time period of May 5, 2014, the date of Leland's death, through March 2015."

On appeal, the appellate court found that the trial court had overreached and reversed finding that "Leland and Babbitt owed their duties as trustees only to themselves before part of the trust became irrevocable, and they did not need to account to the beneficiaries for the disposition of trust assets during that time." Thus, the accounting Ms. Babbitt had to produce was for only the period of time after Leland passed away, May 5, 2014 onward.

May 5, 2016

Transferring Property into a Trust

When a person transfers real property, it is typically required that the person's appropriate title be listed on the deed. For example, if John Smith owned 123 Green Street as trustee of their trust, the deed would show that designation. Failure to denote John Smith's designation on the deed would normally invalidate the transfer. However, a recent appellate case surprisingly did not follow that line of thinking.

Carne v. Washington, Fourth District Court of Appeal, Case # D067756

In 1985, Mr. Liebler executed a revocable trust and funded it through a recorded deed, the Via Regla property. In 2009, Mr. Liebler executed an irrevocable trust. It stated, "I transfer to my Trustee the property listed in Schedule A, attached to this agreement." The Via Regla property was listed on Schedule A. However, Mr. Liebler never executed a deed transferring title for the Via Regla property to the 2009 Trust.

On October 3, 2012, Mr. Liebler passed away.

A dispute then arose regarding ownership of the Via Regla property, i.e. was its disposition controlled by the 1985 Trust or the 2009 Trust? Since the beneficiaries for each trust differed, litigation ensued.

A beneficiary of the 1985 Trust argued that no valid conveyance had occurred because Mr. Liebler never transferred the property out of the 1985 Trust. Mr. Liebler transferred the property to his 1985 Trust in that same year and title remained in the 1985 Trust until his death in 2012. Therefore, the 1985 Trust should control according to the 1985 Trust beneficiary.

Conversely, the beneficiary of the 2009 Trust argued that Mr. Liebler "only failed to execute a deed of transfer through ignorance, oversight or negligence." Thus, the 2009 Trust should control according to the 2009 Trust beneficiary.

The trial court agreed with the 1985 Trust beneficiary, finding that a unilateral declaration regarding the Via Regla property was insufficient to transfer title to the 2009 Trust. A deed transferring title from the 1985 Trust to the 2009 Trust was needed.    

On appeal, the appellate court reversed finding that Galdjie v Darwish (2003) 113 CA4th 1331 permits a conveyance involving a revocable trust even if the individual did not state their title, i.e. trustee, on the document provided the individual has the power to transfer real property. Since the 1985 Trust was revocable and Mr. Liebler had the power to transfer real property, his declaration in the 2009 Trust was sufficient to convey title of the Via Regla property to his 2009 Trust.

Of note, the opinion made multiple references to Estate of Heggstad (1993) 16 Cal.App.4th 943, albeit to note that this published decision was inapposite to Heggstad.

From my perspective, it seems as if the appellate court wanted to elevate substance over form. Mr. Liebler's form in handling the transfer of the Via Regla property was poor. Any competent estate planning attorney would've insisted that Mr. Liebler execute a deed transferring title to the 2009 Trust from the 1985 Trust. Still, it is rather easy to see what Mr. Liebler wanted to accomplish, i.e. title to the Via Regla property be vested in the 2009 Trust. The proof being that Mr. Liebler clearly expressed in the 2009 Trust that he wanted the Via Regla property to be part of the 2009 Trust (see Schedule A).          

April 21, 2016

Modifying an Irrevocable Trust

A revocable trust can naturally be changed. The relevant probate code section provides "unless the trust instrument provides otherwise, if a trust is revocable by the settlor, the settlor may modify the trust by the procedure for revocation." Prob C § 15402. Interestingly, an irrevocable trust can also be changed. Although it is not as easy to modify an irrevocable trust. 

The probate code provides various methods in which an irrevocable trust can be modified. One method that has become increasingly popular is modification on the grounds of "changed circumstances." This law is found in Prob C § 15409. It provides:

(a) On petition by a trustee or beneficiary, the court may modify the administrative or dispositive provisions of the trust or terminate the trust if, owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust. In this case, if necessary to carry out the purposes of the trust, the court may order the trustee to do acts that are not authorized or are forbidden by the trust instrument.

(b) The court shall consider a trust provision restraining transfer of the beneficiary’s interest as a factor in making its decision whether to modify or terminate the trust, but the court is not precluded from exercising its discretion to modify or terminate the trust solely because of a restraint on transfer.

The principal reason why the "changed circumstances" avenue is more available now is because of the immense growth in the estate tax exclusion amount. The chart below displays the exclusion amount from 2001 - 2015. 

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%

Many people in the 1990s and 2000s were (rightly) under the belief that their estate would be subject to the estate tax. Thus they would execute what is commonly referred to as an A/B Trust to maximize the amount that could be shielded from the estate tax. However, since the estate tax exclusion amount has risen substantially, many couples do not need an A/B Trust.

The problem is that in a A/B Trust situation, upon the death of the first spouse to pass away, the split of the marital estate into two separate trusts, an A Trust and B Trust, is mandatory. Thus, there is the creation of an irrevocable trust when one spouse passes away, the B Trust. However, the B Trust's main purpose is to minimize the estate tax. If the estate tax is not an issue, then the B Trust loses much of its importance. Therein lies where a petition under Prob C § 15409 to eliminate the B Trust comes into play. Typically, the surviving spouse will ask a probate court to order that the B Trust be terminated because of the changed circumstances. Although in a case I had both parents were deceased and the successor trustees sought to eliminate the B Trust.

April 7, 2016

Interpretation of a Will

Santa Clara County Superior Court
Words matter. Words in a will matter more you could say. This brings us to the story of a recent unpublished appellate decision regarding the interpretation of a will.  This stemmed from a trial court decision in Santa Clara County Superior Court. Case # PR128527.

The late Ethel Josephine Hinz penned a will entirely in her own handwriting. The holographic will read, in its entirety, as follows:

"I, Ethel Josephine Hinz; aka as E.J. Hinz; declare that this will, is my only and last testament. 

"I, name my son, Lester F. Hinz, Jr., as sole heir and executor to manage estate affairs. 

"In the event of any challenges to said estate, I hereby authorize said Executor to dispense the amount of $1.00, one dollar, to any claimant. 

"I am confident that my son, as Executor, will also subscribe to my wishes, along lines that were discussed previously and privately in the past. A simple cremation, without ceremony is the wish of Ethel J. Hinz."

Since the value of the estate exceeded $10M, there were naturally interested parties in this matter. These parties included Lester's wife and two grandchildren of Ms. Hinz (Lester passed away after his mother). The three of them composed the heirs of Ms. Hinz's estate.

The crux here revolved around the phrase "I, name my son, Lester F. Hinz, Jr., as sole heir and executor to manage estate affairs." The trial court invalidated the will as it found that extrinsic evidence could not resolve the ambiguities regarding the aforementioned phrase. The will was found to be ambiguous because it was not clear if Ms. Hinz intended for Lester to be the sole beneficiary or was acknowledging that Lester was her sole child. Due to extrinsic evidence not yielding a clear answer of what Ms. Hinz meant, the trial court invalidated the will. Therefore, Ms. Hinz's estate passed by intestate succession to her heirs, i.e. Lester's wife and her Ms. Hinz's two grandchildren. However, Lester's wife appealed the decision to the 6th District Court of Appeal. On appeal, the trial court's decision was reversed. 

The majority opinion found that the will was unambiguous, i.e. the only interpretation of the word "heir" as used in the will was "beneficiary." Therefore, the Court of Appeal found the will to be valid and instructed the trial court to award 100% of Ms. Hinz's estate to Lester's wife.          

For reference, if you use a $10M valuation figure, the trial court would've awarded the estate as follows:

1. Lester's wife - $5M
2. Ms. Hinz's grandchild - $2.5M
3. Ms. Hinz's grandchild - $2.5M

Following the appellate court's ruling, the distribution would go

1. Lester's wife - $10M
2. Ms. Hinz's grandchild - $0
3. Ms. Hinz's grandchild - $0

Kind of a big difference.

Granted, Ms. Hinz's grandchild can always appeal this decision to the CA Supreme Court or petition for a re-hearing.

March 25, 2016

No-Contest Clause

When a beneficiary or heir notifies the trustee that they intend to take legal action regarding the trust, this does not always trigger the no-contest clause found in the trust (assuming there is one). For reference, a no-contest clause in a trust is a provision that seeks to discourage a beneficiary from attempting to invalidate the trust. The clause will state that the beneficiary will receive $0.00 if they challenge the trust's validity and lose. If the beneficiary does not challenge the trust's validity, they will receive what is provided for them in the trust, e.g. $10,000.

A no-contest clause relates to the validity of the trust itself. For example, a beneficiary or heir could challenge the validity of a trust on the basis that it was the product of undue influence, mental incapacity, etc. However, a no-contest clause does not relate to the actions of a trustee. Bradley v. Gilbert (2009) 172 Cal.App.4th 1058, 1071. Thus, if a beneficiary filed a petition to invalidate a trust on the grounds that the trustee unduly influenced the settlor, a no-contest clause would be applicable there. However, if a beneficiary brought a challenge to remove a trustee, a no-contest clause would be inapplicable there. Therefore, a no-contest clause cannot be used as a shield by an unscrupulous trustee to absolve them of liability for breaching their fiduciary duties. 

The following case illustrates this point.

Albert Affluent is a wealthy industrialist who lost his wife in a tragic hot air balloon accident. While still in mourning, Mr. Affluent is seduced by a much younger woman who works at the country club he frequents, Gwen Golddigger. She is a law school graduate but never dedicated herself to passing the bar exam (she partied too much). Ms. Golddigger tricks Mr. Affluent into amending his a trust principally for her benefit. However, Ms. Golddigger tells Mr. Affluent to leave the old beneficiaries minor amounts and to include a no-contest clause to dissuade them from challenging the trust. Ms. Golddigger also has Mr. Affluent make her the successor trustee. She then proceeds to purchase with trust funds a fancy sports car, diamond necklace and expensive watch.

The old beneficiaries, not surprisingly, bring a petition to invalidate the trust on the grounds of undue influence. The petition also includes a request to remove the trustee for breach of trust. In the case of the former, the no-contest clause would be applicable. In the case of the latter, the no-contest clause would not be applicable.    

March 9, 2016

Equitable Remedies in Probate Court

When a litigant receives an instruction from a judge, it is always a prudent maneuver to abide by it. The judge does not issue an order for no reason.  Otherwise the litigant can encounter severe consequences as the judge can equitably resolve the matter to their detriment. This brings us to the case of an unfortunate trust litigant from a recently decided unpublished appellate opinion. Prichard v. Pergiovanni, San Bernardino County Superior Court case # PROPS1200335. 

The thrust of the appeal stemmed from this portion of the order:

"The probate court's August 29, 2013 judgment, among other things, directs plaintiff and Frank Pergiovanni to deed their respective interests in the property to defendant. Defendant, in turn, now as sole owner, is to execute a reverse mortgage on the property, and distribute one third of the proceeds to each of his siblings. The judgment provides additional instructions regarding distribution of the remaining Trust assets, and declares that when the distribution of assets in accordance with the judgment has been completed, the Trust shall be deemed dissolved."

Clearly the logical move for Defendant to make was to obtain a reverse mortgage. Did the Defendant subsequently obtain a reverse mortgage? No he did not. The judge was none too pleased..........

"After the August 29, 2013 judgment, the probate court held several hearings with respect to the status of the reverse mortgage, among other issues. Finally, on April 30, 2014, the probate court heard argument on plaintiff's "Motion for Sanctions Against Nicholas Pergiovanni, Jr.," filed December 23, 2013, asking that the court remove defendant as trustee, appoint plaintiff as the sole trustee, and order the assets of the Trust to be liquidated. The probate court granted the motion, ordering that plaintiff be appointed as sole trustee of the Trust, and granting her authority to liquidate all the Trust assets, including the house, which defendant was ordered to vacate." 

Defendant then appealed the decision of the trial judge to order that the property be sold. On appeal, the trial court's decision was upheld. The opinion found that a trial court "may apply general equitable principles in fashioning remedies and granting relief." In re Estate of Kraus (2010) 184 Cal.App.4th 103, 114. Since defendant failed to obtain a reverse mortgage, even though they were ordered to do so, the trial court was free to adopt an equitable remedy. In this case, the equitable remedy was the sale of the home even though defendant had a life estate in the property.