Locating Trust Assets

One of the primary functions that a trustee is entrusted with undertaking is inventorying and appraising the decedent's trust estate, i.e. the assets in the trust. Naturally this can be a difficult situation because the decedent will typically not keep meticulous records of each and every asset they own and its value. Instead a collection of documents will probably comprise the decedent's trust estate. The trustee then must piece together these documents to complete the decedent's financial puzzle. This is not the easiest task to accomplish.

Clients typically ask if there is a short-cut or easier method to search for a decedent's financial assets rather than comb through voluminous amounts of paperwork. Though not a fail-safe answer, an excellent source of financial information is the decedent's income tax return. Either federal or CA is fine because both ask relatively the same questions. Since a person is basically obligated to maintain their tax records for at least a couple of years, it is reasonable to believe that a recent tax return can be uncovered. Granted some people do not do this, but I would like to believe that a person responsible enough to write a trust would also be responsible enough to retain tax returns for a certain period of time.

An income tax return typically yields relevant financial information because people naturally like to invest in income-producing assets. Call me crazy. Rarely, if ever, have I seen, read or heard about a decedent who kept all of their money underneath their mattress. Suffice to say this is not the most prudent way to maintain your assets. Instead I have heard of countless decedents who have invested their money in stocks, mutual funds, business interests, rental properties, certificate of deposits, etc. 

For instance, if the decedent has a bank account, they will probably receive a 1099-Int to reflect the interest income they  received. The threshold amount for issuing a 1099-Int is quite low, $10. Also, many banks will issue a 1099-Int regardless of the interest income amount. Hence, it is probable that if the decedent had a bank account, they will receive a 1099-Int form from that financial institution the following year. Furthermore, if the decedent owned stock, they might receive form 1099-Div. Additionally, if the decedent had an interest in a partnership, they would receive a K-1 statement. Finally, if the decedent had a rental property, such would be reflected on Schedule E on form 1040.

Fortunately though, real property is usually the most valuable asset in a decedent's trust estate. Moreover, locating real property in California is quite easy, unlike other financial assets. There is no national database for bank accounts for example. Many county recorders offer as-is online searches that can be used to search for a decedent's interest in real property in that particular county. For instance, Santa Clara County has an excellent grantor-grantee website that can be used to discover what property a "Constance Malerick" or a "M.E. Miri" own in Santa Clara County now or in the past.

Trust Modification

One should not be penny-wise pound-foolish when amending a trust

There are many issues in life that, at first blush, require ostensibly only a slight tweak, gentle nudge or subtle adjustment. For example, a leaking faucet, a malfunctioning toilet or a porous roof are just a few of the many items that many Americans (think they) can fix themselves. Yet many people mistakenly assume that a slight modification to their trust requires only a small notation here or there. Yet, when that person passes away, typically their do-it-yourself efforts will have yielded disastrous results which they naturally did not anticipate. The reason being is that amending a trust is not as simple as putting pen to paper without any preparation.

A California Court of Appeal decision, King v. Lynch (2012) 204 CA4th 1186, held that if a trust calls for a certain modification method, that method must be used to validly amend the trust. 

Many trusts have a requirement that any modification be in writing and be acknowledged before a notary public. The rationale behind the latter requirement is to curb fraud. If nobody can attest to the modification by the person, fraud suspicions will naturally arise. Thus, the need for a notary who can certify that the person who signed the trust amendment is in fact who they say they are. In particular, the notary is required to obtain proof of identification from the signatory. This most often comes in the form of a driver's license.

In practice, there are numerous cases out there where the person who wrote the trust (called a "settlor") decides to amend their trust without the assistance of counsel. This usually manifests itself through strike-outs and insertions in the trust document. For instance, the settlor may cross out the name of one beneficiary and replace it with another beneficiary by writing in the replacement's name above the former beneficiary's name. As mentioned, a trust document will commonly require that any amendment be notarized to curb fraud. Yet in reality, the settlor blindly ignores that notarization requirement and forges ahead with the amendment, even though the amendment is on, at best, shaky legal ground per King. This neglect of the notarization requirement can be attributed to the lack of legal training by lay people.

I am not sure what compels a person to engage in this behavior because a person can easily spend $2,000 for a trust and then be unwilling to amend it for a fraction of that cost. The British phrase "penny wise pound foolish" comes to mind.

The obvious takeaway is that if a person decides to amend their trust, it is prudent to retain an attorney to amend it. Otherwise, you can have an estate planning disaster that will end up costing far more than if an attorney had been retained to handle the amendment.

Attorney Fees - Hourly, Flat and Contingency

When a client hires an attorney, one question that always arises is the fee arrangement. The client is obviously interested in knowing how the attorney will be paid. The three generally understood fee arrangements are (1) hourly rate, (2) flat fee and (3) contingency fee. There can be a combination of the two, e.g. an attorney will charge an hourly rate but agrees to cap their fee at a certain threshold such as $10,000. Still, the fee arrangements mentioned comprise the vast majority of cases. Each of these fee arrangements is typically associated with various estate planning arrangements.

In the case of litigation, e.g. a will or trust contest, an hourly rate can be expected because the attorney will not know the amount of time that has to be invested in the case. The case could take only take a few days or could take months depending on the circumstances. Furthermore, litigants are entitled to appeal which can only lengthen the amount of time the case takes. In these cases, the attorney will ask for an up-front retainer, $2,500 or $5,000 for example. 

A flat fee arrangement can be found in the case of estate planning. Many attorneys have a general sense of how long an estate plan will take to draft, review and execute (trust, will, power of attorney, etc.). For example, if the attorney bills at $250 per hour and has a thorough in-person consultation with the prospective clients, they should be able to reasonably estimate the time it will take to complete the estate plan. So if they estimate that it will take 10 hours to complete the project, they could bill $2,500. From experience, clients invariably insist that they have an "easy estate plan" and hence the fee should not be much. This is simply not true. Even if the client has a nuclear family and wishes for the distribution to go to the surviving spouse and then to the kids, such requires at least a couple hours of work to get the process started. The clients have to provide the attorney with various asset information, the attorney has to incorporate those assets into the estate plan, the clients have to review the estate plan with the attorney to make sure that what is written reflects their true intentions and only after this can the documents be executed. While not hyper technical, it is not something that can be slapped together in an hour as some people erroneously believe.

A contingency fee arrangement can often be found where a client has a disputed or unknown interest in a will, trust or estate but lacks the funds to pay the attorney. For example, the client might have originally been a trust beneficiary but right before the settlor's death, the item specifically devised to the client was sold for some reason. Many clients mistakenly assume that attorneys are generally receptive to contingency fee cases. The problem is that many clients are often overly optimistic in terms of describing their case. The client has, in all probability, never brought a case before so they have no experience to make a judgment. Attorneys, conversely, when deciding on whether to take a contingency fee case look to both the underlying facts and the possibility of recovery. A judgment without a recovery is essentially worthless. So if an abusive trustee is penniless, it is doubtful there is much to recover for the prevailing client.  

Specific Performance

Many past clients have inherited real estate, e.g. a home, from their parents whether through probate or a trust. Frankly, it is almost logical that a child would inherit real property from a trust given that real property ownership is almost always a condition precedent for writing a trust. The reason being is that assets held in trust, such as real property, avoid probate. A California probate is notoriously known for being long and expensive. Furthermore, there is generally no better transfer method of  real property than through a trust.

These clients have often insisted that the property be sold promptly given that they do not have the same emotional attachment to the property as did their parents and the favorable tax treatment afforded inherited real property (see step-up in basis). This inclination to sell is understandable but there is an important variable to ponder when making a decision to sell real property, the remedy known as specific performance.

Real property, in the eyes of the law, is considered a unique item. No two parcels of real property are alike. Each house on any street has its own unique blend of characteristics. When a seller and buyer have entered into a contract to convey real estate, the consideration at issue is unique. The law presumes that no amount of money damages can compensate the buyer when the seller has breached a contract to sell a unique asset such as real property. Thus the law affords in such cases the buyer an equitable remedy known as "specific performance." This remedy requires that the seller transfer the property to the buyer provided certain certain conditions are met. For reference, the remedy usually awarded in a breach of contract case is money damages, i.e. the amount necessary for the non-breaching party to reap the benefit of the bargain (yes classic legalese.     

The relevance of specific performance is that once a seller decides to sell the property, the seller may be forced to transfer the property even if they change their mind during the course of the transaction. In practice this means that if a seller and buyer have entered into escrow, the ball is in the buyer's court. The seller can generally only opt of the contract for a breach by the buyer, e.g. failure to waive the physical inspection contingency within the agreed upon time. Conversely, the buyer can opt of the contract without liability during the contingency period. For instance, the physical inspection report might reflect significant termite damage or a rotting roof.   

While most clients do not change their minds about selling mom's home mid-stream, i.e. in escrow, it is prudent to be aware of the consequences for doing so.

Transmutation - Community Property & Separate Property

When a married couple desires to write an estate plan, one of the first questions I pose, in non-legalese of course, is what constitutes community and what constitutes separate property from the marital estate. 

The reason for this question is because each spouse may devise up to 50% of the community property and 100% of their separate property in their estate plan. For example, if a home is purchased during marriage from the wages of both spouses, such would be considered community property. Each spouse may then devise up to 50% of the home to whomever they choose, including their spouse obviously.

Clients often ask if they can change the characterization of property. The answer to this question is yes. California law expressly authorizes a couple to change the characterization of property. Family Code §§ 850-853. The legal term for this is "transmutation."  

Per Family Code § 850, there are 3 types of transmutations:

(a) Transmute community property to separate property of either spouse. 

(b) Transmute separate property of either spouse to community property.

(c) Transmute separate property of one spouse to separate property of the other spouse. 

The most common transmutation is (b). In many long-term marriages, the spouse with the separate property is often agreeable to a transmutation given the strength of the marriage. From personal experience, I have never seen a transmutation involving (a) or (c).  

In order to transmute property there needs to be an express declaration, made in writing, that includes “language which expressly states that the characterization or ownership of the property is being changed.” Family Code § 852/Estate of MacDonald (1990) 51 C3d 262, 272. There is no particular verbiage that needs to be used for a transmutation. Id. at 273. Furthermore, the writing itself must establish a transmutation, thereby no outside evidence may be taken into account. Marriage of Benson (2005) 36 C4th 1096. Hence, a spouse claiming a transmutation needs to have something akin to a "smoking gun." 

A practical approach is to use the word "transmutation" and reference Family Code § 852 so that any reader of the document knows the clear intent behind the document. 

As mentioned, the characterization of marital property is especially crucial when devising an estate plan. If a spouse received a house as an inheritance from their parent, they are free to devise the house to whoever they want. Of note, a gift received during marriage is considered separate property despite the fact that it was acquired during marriage. The other spouse has no right to object to this. The acquiring spouse could give the house to their spouse, their neighbor, their co-worker, Mickey Mouse, etc. Conversely, if the acquiring spouse decides to transmute the house from separate to community property, then the acquiring spouse may only devise 50% of the house. If the acquiring spouse decides to devise 100% of the house to their neighbor, the other spouse can validly object to this transfer.

Single Trustee or Co-Trustees?

When a person writes a trust, known as the settlor or trustor, they almost always nominate a successor trustee in the document to assume trusteeship when they are no longer available, e.g. death, illness, etc. Although, there is no legal requirement to name a successor trustee in the trust. A maxim of wills and trusts law is that "a trust will not fail for want of trustee." Thus if no successor is nominated a probate court can appoint a successor. Still, given the expense and time of judicial intervention, people opt to name a successor in their trust to avoid this.

Many clients opt to choose a single trustee instead of multiple co-trustees as a successor. One of the reasons why a single successor trustee is preferable is due to administrative reasons.

The general rule in California is that co-trustees must reach a unanimous decision when exercising their powers. Prob C § 15620. Thus, if there are 2 co-trustees, then those 2 co-trustees must jointly be in agreement as to the decision. 

For example, if one wishes to a sell a trust asset such as a house, then the other must be in agreement. While unanimity might not seem like a major hurdle, an old adage goes "reasonable minds can differ." Hence a co-trustee can make a perfectly rational decision but the other co-trustee may nonetheless balk citing an equally defensible rationale. From above, selling real estate can be a tricky predicament. The ebbs and flows of the real estate market are well-known. One trustee might want to wait until the real estate market is white hot. Another trustee might want to sell immediately given the volatility of the real estate market in recent years.

The foregoing is one of the reasons why many clients opt to select a single successor trustee instead of successor co-trustees. To always require that co-trustees be in agreement on matters pertaining to the trust can prove arduous. This is not to say that nobody ever selects successor co-trustees. Some past clients have consisted of a single co-trustee or both co-trustees.

One countervailing argument is that nominating successor co-trustees reduces the risk of mismanagement and waste. The standard beneficiaries of nearly all revocable trusts are children, so by nominating the children as co-trustees, this allocates authority equally to all the children. Hence, a single child cannot, as the theory goes, unilaterally wreak havoc because there are other co-trustees to check their authority. This sentiment has been specifically expressed a few times in the past by clients.

As in many areas of law, the selection of one or multiple successor trustees does not yield an unassailable answer. There are pros and cons to each side of the argument. Still, it is prudent to be informed of these pluses and minuses so a person can make a prudent decision.