August 15, 2014
One of the main reasons why a person writes a revocable trust is to avoid probate. The rationale is that once the person dies, the administration of their trust estate is typically a more expedient and economical method to administer than a probate estate. For example, probate takes 6-12 months to complete in California and the attorney fee is based off of the value of the estate. If the estate was worth $400,000, the statutory attorney fee is $11,000. This probate fee is higher than a trust administration fee in almost all cases because there are more steps to complete in probate than in trust administration. However, probate does have one mandatory aspect over trust administration that can be advantageous for beneficiaries, an avenue to address creditor claims.
When a person passes away, they will invariably have some outstanding debt. This might include a phone bill, a cable bill, a utility bill or a mortgage. These debts can range from the hundreds of dollars to millions of dollars, depending on the size of the estate. For instance, if a person purchased a multi-million dollar home, it would be easily conceivable that they had a $1M+ mortgage.
The second step of probate is to satisfy the claims of creditors. However, the manner in which these claims are addressed is not always the same for probate and trust administration.
In probate, the personal representative is required to provide notice to all creditors so they can submit their claim to the probate court. The personal representative can then either accept or reject the claim. Ultimately, before probate can be closed, the personal representative is required to state that all creditor claims have been satisfied. For example, in my petitions that I have I used to close probate, I say the following: "Petitioner has made all reasonable efforts to ascertain Decedent’s creditors. Notice of administration has been sent to all known and reasonably ascertainable creditors. More than 4 months have elapsed since the date letters first issued. The time for filing creditors' claims expired on January 18, 2014."
Conversely, in trust administration cases, there is no requirement that the trustee have a creditor claim procedure, i.e. open probate. Instead, California law makes it optional for the trustee if they want to open probate. Probate Code § 19010. Thus, the trustee is free to satisfy creditor claims non-judicially. Alternatively stated, the trustee can pay debts without having to provide proof to a probate judge that they have done so. Occasionally this is not an issue if the decedent had few debts or their debts were easily verifiable. Issues arise though when the decedent had contingent or unknown debts, e.g. they were a defendant in a lawsuit. Hence, it cannot be said that opening probate is disadvantageous in every respect. By forcing the personal representative to address creditor claims before a distribution is made, the beneficiaries should feel confident that there is no lingering unaccounted for debt.
August 7, 2014
Occasionally a probate client becomes disenchanted with his or her attorney, e.g. lack of responsiveness with the client or failure to file documents in a timely manner, and decides to switch attorneys mid-stream. A simple substitution of attorney form is all that is required to replace an attorney. At that point, the client can either proceed without an attorney, in propria persona as it is known, or they can hire substitute counsel. Typically the client will hire a new attorney given probate's complexities. If they hire new counsel who completes the probate process, a natural dilemma arises. How is the attorney fee apportioned between the old and new attorney?
The California Probate Code has a specific law that addresses the issue of apportionment. Probate Code § 10814 states "if there are two or more attorneys for the personal representative, the attorney’s compensation shall be apportioned among the attorneys by the court according to the services actually rendered by each attorney or as agreed to by the attorneys." Consequently, a probate judge has discretion to apportion the fee between the probate attorneys. Estate of McManus (1963) 214 Cal.App.2d 390, 400.
The logical follow-up question is, how do you apportion the services rendered between the probate attorneys? This is most easily achieved through declarations stating each attorney's hourly rate and how many hours each expended on the case. Since the ordinary attorney fee for a probate case is set by statute, e.g. a $11,000 fee for a $400,000 estate, the apportionment is prone to approximations. For instance, the old attorney bills at $300 an hour and expends 30 hours on the case, a $9,000 fee. Conversely, the new attorney bills at $250 an hour and expends 20 hours on the case, a $5,000 fee. The probate judge could then decide to reasonably apportion the fee amongst the old and new probate attorneys.
From experience, it is much easier to open probate than to close probate. In order to close probate, a petition needs to be filed on pleading paper. Whereas to open probate, such usually only requires the completion of various judicial council forms (these are fill-in templates). Hence, the attorney that completes probate would normally have more work to complete than the attorney that begins it. This increased workload naturally results in a higher fee. Thus, one would expect the attorney that concludes probate to have the larger fee request.
Finally, there is only one fee given for an ordinary attorney's fee. Cal Rules of Ct 7.704(a). Thus, even if multiple attorneys work on the case, the ordinary attorney fee is not multiplied by the number of attorneys who worked on it. Thereby a $11,000 ordinary attorney fee is not doubled because two or more attorneys worked on the case. The $11,000 ordinary attorney fee is simply apportioned amongst the attorneys.
August 1, 2014
The default California trust law is that no bond is required of the trustee unless "(1) a bond is required by the trust instrument, (2) notwithstanding a waiver of a bond in the trust instrument, a bond is found by the court to be necessary to protect the interests of beneficiaries or other persons having an interest in the trust or (3) an individual who is not named as a trustee in the trust instrument is appointed as a trustee by the court." Probate Code § 15602.
Typically most trusts do not require the acquisition of a bond, principally because bond procurement can be expensive. The bond premium is dependent upon the value of the trust estate and the creditworthiness of the trustee. Thus, many people opt to avoid the requirement of bond to spare the successor trustee the time and expense of obtaining it. However, occasionally the settlor will require the posting of bond for a non-familial trustee because of the lack of blood connection. I have seen this in a few trusts.
The purpose of the bond is to offer protection for the beneficiaries in case the trustee makes a mistake, i.e. a breach of trust. If the trustee does commit a breach of trust, the aggrieved beneficiary can seek recovery from the bond company. A breach of trust can entail a host of circumstances such as failure to abide by the California probate code or frivolous spending by the trustee. The bond company will then turn around and seek recovery from the trustee for the same amount that was paid to the beneficiary.
Many people erroneously assume that a bond is identical to insurance. Though a bond offers financial protection, it does not operate exactly like insurance. If the trustee commits a breach of trust and damages ensue, the trustee is personally liable for the amount the bond company pays the beneficiary for redress of injury. Whereas with insurance, the trustee would not be personally liable for payments made to cover their damages. Instead, the insurer generally covers the entire damages cost, provided all premiums have been paid, and does not seek reimbursement from the trustee.
In the probate context, the requirement of a bond is more common. For example, many courts have local rules which essentially require the posting of a bond for an out-of-state personal representative. The local probate court rule of Santa Clara County Superior Court on the issue reads "the Court will ordinarily require a non-resident personal representative to post bond, even if the will waives bond, unless waivers of bond from all heirs or beneficiaries are filed, in which case the Court, in its sole discretion, may not require a bond."
July 17, 2014
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.
July 10, 2014
|One should not be penny-wise pound-foolish when amending a trust|
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.
July 3, 2014
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.