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2010                   Repealed                      0%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.

February 25, 2016

Drafting a Trust for a Parent

An occasional phone call I've received over the years has been from a child requesting that a trust be written for their parent.  Uh-huh, go on........

There are perfectly legitimate reasons why a child might inquire on behalf of a parent to do so, e.g. the parent might not be Internet savvy, the parent lacks a cellphone or email address to coordinate a meeting. Conversely, there are nefarious reasons why a child might do this, namely the child wants the parent to write the trust to principally benefit themselves. Sadly this brings us to the tale of the late Connie Martinez Acosta.

Prior to her passing, Ms. Acosta had a trust prepared by an attorney (who probably should've known better). The main beneficiaries of the trust were two of her children, sons Ernest and Ronald. She had seven children in total. Ernest and Ronald were to inherit an equal share in Ms. Acosta's home. However, Ronald would be solely responsible for the mortgage payments. Thus, the largest beneficiary of the trust would be Ernest. 

When Ms. Acosta passed away, a daughter challenged the validity of the trust. The crux was that Ernest had principally orchestrated the creation of the trust for his benefit. Whoops. Predictably, the trial court found that Ernest had unduly influenced his mother and the trust was voided. 

For reference, to prove undue influence, the following elements need to be proved: (1) the existence of a confidential relationship between the testator and the person alleged to have exerted undue influence; (2) active participation by such person in the actual preparation or execution of the [document], such conduct not being of a merely incidental nature; and (3) undue profit accruing to that person by virtue of the [document]. If this presumption is activated, it shifts to the proponent of the [document] the burden of producing proof by a preponderance of evidence that the [document] was not procured by undue influence. It is for the trier of fact to determine whether the presumption will apply and whether the burden of rebutting it has been satisfied. " Estate of Sarabia, (1990) 221 Cal.App.3d 605.

Here these elements could easily be proven. First, Ernest was the son of Ms. Acosta. Second, Ernest actively participated in the creation of the trust, i.e. he completed the attorney's intake sheet. Third, Ernest received the largest beneficial interest in the trust.

February 10, 2016

Attending a Court Hearing

Yolo County Superior Court
To state the obvious, it is always a prudent maneuver to attend a scheduled court hearing. If for whatever reason the litigant or the litigant's attorney cannot attend the hearing, they should notify the other party's attorney, the court, the court clerk, etc. to request a continuance. Absent extraordinary circumstances, opposing counsel will grant a continuance (I've always done so for opposing attorneys). Otherwise, the consequences can be harsh and possibly irreversible.

This brings us to the story of one unfortunate probate litigant. 

Susan Ford Frantzich was the daughter of the late Evelyn I. Ford. Ms. Ford had drafted multiple testamentary documents prior to her passing. The legal issue surrounding her estate was the admissibility of a handwritten codicil. 

(Of note, a codicil is an amendment to a will. To be valid, a handwritten codicil need not be witnessed. Hence, there is invariably a question of its authenticity because nobody saw the decedent actually write the document).   

Susan's petition was objected to by Casey S. Rogers, the grandson of the late Evelyn I. Ford. Casey sought to have the handwritten codicil (not surprisingly) be denied admission to probate. 

The Fresno County Superior Court consolidated the matters and scheduled a hearing for August 20, 2014. Inexplicably, neither Susan nor her attorney attended the hearing. The court then denied Susan's petition and granted Casey's petition.

Susan then appealed her case to the 5th District Court of Appeal. On appeal, the trial court's ruling was affirmed in a unpublished opinion:

"the record we do have reveals an appropriate basis for the probate court to deny Frantzich's petition, as it shows that neither Frantzich nor her attorney appeared at the hearing on her petition. Even if a pre-probate will contest is pending, if a contestant fails to appear at a hearing on a petition to admit a will to probate, and fails to inform the probate court of the status of the contest or request a continuance of the hearing, the probate court may infer that the objection to probate has been resolved or the contestant has elected to treat the matter as a post-probate will contest. (Estate of Horn (1990) 219 Cal.App.3d 67, 72 ["As a general rule a probate court should not be required to act on its own motion to postpone a hearing on admitting a will to probate even when a petition contesting the will is in the probate file."].) Since Frantzich did not appear at the August 20 hearing, either individually or through her attorney, the probate court was well within its authority to deny Frantzich's petition on that basis alone and to admit the will and codicils to probate on Rogers's petition."

In Re Estate of Ford, __ Cal.App.4th __ (2016)