October 15, 2014

Deathbed estate planning

Haste makes waste.

Unfortunately when people engage in extremely expedient estate planning, disastrous results can occur. The reason being is that legal issues are not identified and addressed due to a shortage of time. Consequently, the neglected legal issues ultimately materialize and injurious results flow.

An example of extremely expedient estate planning and its attendant disastrous outcome occurred in in the case of Mohr v. Mohr, San Bernardino Superior Court Case # PROPS1100603. According to the unpublished court of appeal opinion stemming from the case:

"Carol Slocum (decedent), the 76-year-old mother of seven children, had emergency surgery on June 26, 2011. She was in a coma for five days thereafter. In late July 2011, she was placed in a rehabilitation facility. After her condition worsened, she was admitted to a hospital emergency facility on August 2, 2011.

After her treating physicians told her she was terminal, decedent decided she needed to see her children as soon as possible. Terry, who lived with decedent, was able to arrange for most of his siblings to be at the hospital on August 3, 2011. He also arranged for a notary public (notary) with a deed to come to the hospital that day. Decedent executed the deed on that date. It served to transfer her residence from her name alone into the names of herself and Terry as joint tenants. Decedent died intestate on August 12, 2011."

Unsurprisingly, Sherri Mohr sued her brother Terri Mohr to invalidate the deed citing undue influence. 

The statement of the trial court's decision, in pertinent part, read:

"Terry brought a notary and a deed to this meeting and did not tell [decedent]. She never had the opportunity to discuss a Grant Deed with an attorney or her other children. [Decedent] knew she was dying. She was so very vulnerable to coercion. The fact that the notary told her it was a Grant Deed really does not overcome the undue influence that was present. [Decedent] knew that she had always wanted her children to share and share alike. When she was presented a document to sign, she signed it without knowing its true impact. Terry had taken advantage of his mother."

Consequently, the trial court ruled in Sherri's favor and this decision was upheld on appeal.

October 9, 2014

Heggstad Petition

A Heggstad petition is a tool used to judicially transfer real estate into a revocable trust when the settlor failed to do so during their lifetime. That is, the settlor created a trust but never formally transferred their real estate into the trust via a deed.  

A Heggstad petition is a common procedure for a number of reasons. 

First, many people engage in do-it-yourself estate planning and fail to appreciate the finer details of funding their trust. Simply because you declare real estate to be a trust asset does not formally make it a trust asset. Instead one must transfer title from themselves to themselves as trustee of their trust to do so. 

Second, many lenders will not do a re-finance if title is held in the name of the trust. The lender will insist that the borrowers transfer title out of their trust and into their own names before the lender will extend credit. The problem is that borrowers occasionally forget to transfer their home back into the trust once the re-finance is complete. The borrowers then pass away with title being in their names instead of the trust's name.    

The Heggstad petition needs to be filed in the county where the principal place of administration of the trust is located. Prob C § 17005. For instance, if the trustee lists Campbell, CA as the principal place of administration, Santa Clara County Superior Court is the appropriate court. A common practice is for attorneys to put down their office address as the principal place of administration. This allows the attorney to file a Heggstad petition in their "home" county. By filing in the attorney's home county, it is more convenient for the attorney because of reduced travel time and the probate judge is arguably more familiar with the attorney if they appear in their courtroom regularly. I always utilize this practice given the benefits of doing so and wonder why all attorneys do not.
In order to file a Heggstad petition, the petitioner must cite the relevant probate code section that authorizes the probate court to have jurisdiction over the matter. The relevant probate code section is Prob C § 850(a)(3)(B). It reads in relevant part:

(a) The following persons may file a petition requesting that the court make an order under this part:
(3) The trustee or any interested person in any of the following cases:
(B) Where the trustee has a claim to real or personal property, title to or possession of which is held by another. 

Once the petition is filed and the order granted, the attorney has a certified copy of the order recorded in the county where the real estate sits. The recorded order serves as proof of the transfer of title to the settlor's trust.

October 2, 2014

The Dangers of Do It Yourself (DIY) Estate Planning

The Eternal Struggle: Client, Attorney and Fees
A common reason why some people balk at writing a trust or will through an attorney is because of the cost. The familiar refrain goes that why pay an attorney in excess of a thousand dollars when you can find a document online or just draft something yourself, a holographic instrument. Furthermore, a self-represented person does not have to meet with the attorney multiple times to review the documents and can conclude the process rather expediently.

One of the pitfalls with this line of thinking, there are many, is that a person almost always does not fully understand the ramifications of their decisions. A hypothetical fill-in document can be completed in mere minutes but can have a lasting effect. Moreover, there is no second chance opportunity when writing a trust or will essentially. A court is very reluctant to re-write a testamentary instrument. So do it once, do it right.

Whereas an attorney can advise a client on the various issues raised by an important testamentary decision, e.g. leave everything to my children at age 25, a self-represented person often fails to grasp such. The following are instances of mistakes I have seen a self-represented person make on their testamentary document that could've been easily avoided if they had hired an attorney.

A terminally ill parent wanted to leave their home to ostensibly their daughter. In the distribution clause of the trust, the parent named the daughter as the sole beneficiary. Yet on the trust's schedule of assets, the father listed the house as being equally split between the daughter and granddaughter, a minor. The daughter sought counsel for a Heggstad petition because the father had not transferred title to his trust prior to his passing. The obvious problem was the contradictory distribution scheme, i.e. was the house to go to the daughter exclusively or was it to be split equally between daughter and granddaughter? Any competent attorney would have spotted this clear inconsistency and counseled their client to correct this ambiguity before signing the document. 

A mother wrote a trust through an attorney that names her two children, son and daughter, as the primary beneficiaries with her grandchildren as the contingent remainder beneficiaries. A year later, she amends her trust through the same attorney, but does not alter the existing distribution scheme. That is, the amended trust still stated that the estate goes to her two children and her grandchildren are the contingent remainder beneficiaries  A few years later, the mother writes a rambling unsigned holographic document that designates the daughter as the sole beneficiary of her estate basically. Son naturally objects to the enforceability of the holographic document and prevailed in court. The obvious red flags were that the document was unsigned and the decedent did not use an attorney even though she had done so in the past. Again, a competent attorney would have counseled the decedent to sign any document which they wanted to have testamentary effect and to
follow the right procedures for amending a trust. For example, it is prudent to notarize any trust document, whether it be the actual trust, a trust amendment, a trust restatement or a certificate of trust.

September 24, 2014

Divorce and Estate Planning

Occasionally I have received phone calls from people who are contemplating divorce and would like to write a trust so that when they die, their future ex-spouse will not inherit their estate. If only life was that easy.....

The main problem is that there needs to be a judicial determination as to what of the marital estate is community property and what is separate property. 

A person can only devise what they legally own. An earth-shattering concept, I know. If an item is considered community property, e.g. a house, then one spouse may only unilaterally devise up to 50% of the home. If the spouse tries to devise more than 50% of the home, the other spouse can validly object. 

Conversely, a spouse is free to devise all of their separate property as they see fit. If the marital home is found to be separate property, then the spouse may leave the house to whomever they please and the other spouse cannot object. 

When making property characterizations, dates are of optimal importance. For example, prior to being married, any property acquired would be the acquiring spouse's separate property. See Family Code § 770. During marriage and subject to certain exceptions, property acquired then is considered community property. See Family Code § 760. Following the "date of separation" any property acquired after that is considered the acquiring spouse's separate property. See Family Code § 771. In short, there are three phases: (1) pre-marriage, (2) marriage and (3) post-separation.

The following hypothetical illustrates the different stages of property acquisition.

Hal and Wendy began dating in 2012. Hal was reluctant to marry Wendy because Wendy's parents did not approve of Hal's occupation, a medicinal marijuana dispensary owner. In late 2012, Hal purchased in his name alone an investment property, a duplex, in Santa Cruz, CA. Eventually Hal proposed to Wendy and the two eloped on January 1, 2013 in California. Following their secret marriage, the newlyweds jointly purchased a condo in San Francisco, CA. Hal also used his earnings at the time to pay the duplex's mortgage.  When recreational marijuana use became legal in Colorado on January 1, 2014, due to passage of Amendment 64, Hal stated his intentions to divorce Wendy and move there. So on January 2, 2014, Hal packed all of his belongings and moved to Boulder, CO permanently. Wendy then filed for divorce in San Francisco County. Wendy subsequently drowned her sorrows by buying thousands of dollars in jewelry. The divorce was finalized in summer 2014.

For characterization purposes, the Santa Cruz duplex is both separate property, as it was purchased before marriage, and community property as well, since Hal used marital wages to reduce the mortgage. See Marriage of Moore (1980) 28 C3d 366, 371/ Marriage of Marsden (1982) 130 CA3d 426, 439. The San Francisco condo is community property because it was purchased during marriage. The jewelry is Wendy's separate property because it was acquired after the date of separation.         

For estate planning purposes, Hal can only unilaterally devise a fraction of the Santa Cruz condo. Similarly, Hal and Wendy can each only unilaterally devise a fraction of the San Francisco condo. However, Wendy can do as she pleases with the jewelry.

September 17, 2014

Irrevocable Life Insurance Trust/Crummey Trust

An irrevocable life insurance trust, commonly known as an "ILIT," is a type of trust used to avoid the inclusion of life insurance proceeds in a decedent's estate.

Many people erroneously assume that life insurance proceeds are always non-taxable. This is not entirely accurate. Life insurance proceeds are not considered taxable income.  However, life insurance proceeds are considered part of the decedent's estate if there is incidents of ownership. For example, if John Doe purchased a life insurance policy in his own name for the benefit of his wife, the proceeds would be included in his estate at death. The inclusion of life insurance proceeds in a decedent's estate is a material concern because life insurance proceeds can easily be millions of dollars.

When a person passes away, the federal government imposes a tax on estates that exceed a certain amount. Your estate is everything you own at death essentially. Of note, California does not currently have an estate tax. This exclusion amount is $5.34M in 2014. This is pegged to inflation so it will increase in 2015. If you pass away in 2014 and your estate eclipses $5.34M, the estate tax will generally be imposed. Since life insurance proceeds can be in the millions of dollars, this can be the difference between an estate being below or above the estate tax threshold. Thus, some people opt to create an ILIT so as to avoid the inclusion of life insurance proceeds in their estate given the concern of the estate tax. Although there are additional benefits for an ILIT. 

A typical way to create an ILIT is as follows. 

Maude, a wealthy widow, has only one child, a son named Sam. Maude's estate is above the estate tax threshold. Maude wishes to reduce her estate tax liability and simultaneously benefit Sam.

Maude meets with an estate planning attorney who tells Maude about the advantages of an ILIT. Convinced of an ILIT's benefits, Maude decides to create one. The attorney tells Maude that it is best to create an ILIT by gifting the maximum annual gift tax exclusion amount, $14,000 in 2014, to her son each year through a Crummey Trust. The trustee of the Crummey Trust then uses Maude's $14,000 gift to Sam to purchase a life insurance policy for her life.

Many years pass by and each year Maude gifts $14,000 to Sam's Crummey Trust. In turn, the Crummey Trust's trustee pays the premium on Maude's life insurance policy. When Maude ultimately passes away, multiple benefits are realized. First, by gifting thousands of dollars to Sam's Crummey Trust, Maude's estate has reduced her estate tax exposure because of the decreased value of it. Second, the life insurance proceeds for Maude's policy are not included in her estate for estate tax purposes because there is no incidents of ownership. Third, Sam receives the life insurance proceeds tax free.

September 10, 2014

Undue Influence involving a California Trust

One method in which a testamentary instrument can be voided is if it is the product of "undue influence." California case law says that undue influence is dependent upon the facts and circumstances of the situation. Sparks v. Sparks (1950) 101 Cal.App.2d 129, 135. Thus, there is no set of elements which need to be established in order to show that undue influence has occurred.

However, there are situations which suggest a showing of undue influence. These include the following: (1) unnatural provisions cutting off from any substantial bequests the natural objects of the decedent's bounty; (2) dispositions at variance with the intentions of the decedent, which he or she may have expressed both before and after execution; (3) relations between the chief beneficiaries and the decedent that afforded the chief beneficiaries an opportunity to control the testamentary act; (4) a mental or physical condition suffered by the decedent that permitted the subversion of his or her freedom of will; and (5) the chief beneficiaries' active procurement of the contested instrument. (Estate of Lingenfelter (1952) 38 Cal.2d 571, 585.

An example of undue influence occurred in the case Arnold v. Fuller, Los Angeles Superior Court Case No. BP122665. Thelsey Fuller was the father of five children, Robert Fuller, Doris Fuller, Shirley Ritchey, Sandra Arnold and Steven Fuller. Prior to forming his trust, Mr. Fuller expressed his intentions to evenly divide his trust estate equally amongst his five children. Consequently, Mr. Fuller executed a trust on July 23, 2008 which evenly distributed his trust estate to his five children.

Only two months later on September 16, 2008, Mr. Fuller curiously amended the distribution clause in his trust. It read: "On the settlor's death, the remaining trust estate shall be disposed of as follows: [¶] Shirley C. Ritchey shall be given the amount of forty dollars ($40.00), Sandra Arnold shall be given the amount of forty dollars ($40.00), Steven A. Fuller shall be given the amount of ten dollars ($10.00). [¶] The remaining trust estate shall be distributed as follows: [¶] Robert Fuller shall be given fifty percent (50%) of the trust estate. [¶] Doris Fuller shall be given fifty percent (50%) of the trust estate." 


Shirley Ritchey and Sandra Arnold filed a petition to have the September 16, 2008 amendment voided, citing undue influence. The trial court determined that such amendment was the product of undue influence and voided the amendment. This judgment was upheld on appeal in an unpublished decision.  

An undue influence case can usually be easy to spot. For example, the cases I've seen involved a tortfeasor befriending an elderly person who amends their trust or will to the benefit of the tortfeasor at the cost of cutting out their children and/or grandchildren from his or her estate. Where there is smoke, there is usually a fire.......