June 30, 2016

Attorney as Beneficiary of a Client's Estate (Don't do it!)

Santa Barbara County Courthouse
Attorneys can receive gifts from clients. For example, one client gave me cookies during the holiday season a few years ago. Attorneys, however, should generally never write a testamentary instrument that provides a "gift" of a client's estate to them. One attorney was recently found culpable in making this grievous mistake.

Butler v. LeBouef (2016) ___ Cal.App.4th _____

The published opinion's first paragraph provided a clear preview of how the appeal would be decided:

"An ethical estate planning attorney will plan for his client, not for himself. (See Estate of Moore (2015) 240 Cal.App.4th 1101, 1103.) A license to practice law is not a license to take advantage of an elderly and mentally infirm client. As we shall explain, the factual findings of the trial court compel the conclusion that appellant used his license to take advantage of an elderly and mentally infirm person to enrich himself. The trial court factual findings are disturbing, fatal to appellant's contentions, and suggest criminal culpability."

The trial court found that attorney John F. LeBouef had authored the will and trust of the late John A Patton and made himself the principal beneficiary to a $5 million estate. Naturally, the trust and will were invalidated.

The trial court also further found against attorney LeBouef:

"In a Supplemental Statement of Decision, the trial court factually found that appellant caused the loss of the original trust instrument, which made it impossible for the court to determine the true terms of the trust. The trial court declared the will and trust invalid and removed appellant as trustee. Appellant was ordered to turn over the trust assets and pay $1,256,971 attorney fees pursuant to section 21380, subdivision (d)."

The loss of the original trust instrument was highly suspicious. According to a footnote in the opinion, "on April 24, 2012, appellant reported that Patton's house was burglarized and that the burglar took the original trust document and a laptop computer used by appellant to prepare trust documents. The burglary occurred just before appellant was scheduled to produce the document for his deposition and a forensic examination. The police suspected it was a staged burglary because nothing else was taken and the house was made to look like it was ransacked. Expensive watches and art work were in plain sight but were not taken."

The opinion concluded:

"The clerk is directed to forward a copy of this opinion to the California State Bar (Bus. & Prof. Code, § 6103.6) and the district attorney for the County of Santa Barbara. We express no opinion on discipline and/or the decision to initiate criminal prosecution." 

I do not foresee this ending well for Mr. LeBouef..........

June 17, 2016

Amanuensis - Estate of Stephens

Can a person sign for somebody else on a document without their written authorization, e.g. on a deed? The answer is yes. The legal term for this is "amanuensis." See  Estate of Stephens (2002) 28 C4th 665.

In Estate of Stephens, the decedent orally instructed his daughter to sign his name on a grant deed which vested title in the decedent and the daughter as joint tenants. When the decedent passed away, the daughter argued that the property was hers because she was the surviving joint tenant. The son argued that the property should be divided equally between the son and daughter, as stated in decedent's will. 

The California Supreme Court ultimately ruled that the conveyance was valid, citing the amanuensis rule. It provides "that where the signing of a grantor's name is done with the grantor's express authority, the person signing the grantor's name is not deemed an agent but is instead regarded as a mere instrument or amanuensis of the grantor, and that signature is deemed to be that of the grantor." In this case, the daughter's signature "was a mere mechanical act, and not an exercise of judgment or discretion." The decedent told the daughter to sign the deed on his behalf and she did so.

Still, the opinion noted that "the signing of a grantor's name by an interested amanuensis must be presumed invalid. In such a case, the interested amanuensis bears the burden to show that his or her signing of the grantor's name was a mechanical act in that the grantor intended to sign the document using the instrumentality of the amanuensis." 

The rationale for such a law is evident. A person who stands to benefit from signing a document on somebody's behalf will naturally do so under just about any circumstance. Thus to eliminate fraud, the signatory needs to show that they signed the document at the person's dictation, instead of signing the document out of self-interest.

The California Supreme Court concluded the opinion by agreeing with the trial court's determination. "Given that Shirley was an interested party to the deed, it is presumed that her signing of Austin's name was invalid. However, this presumption has been successfully rebutted in this case. The trial court found, based on overwhelming evidence, that Shirley acted as a mere amanuensis, signing the deed at Austin's direct request, albeit not in his immediate presence. Because her signature was a mere mechanical act, and not an exercise of judgment or discretion, Austin's oral instruction to Shirley was sufficient. 'It is perfectly natural for a parent to be more bountiful to one of his children who has assumed the greatest burden of care and lavished the highest degree of solicitude upon him.' Camperi v. Chiechi, supra, '134 Cal.App.2d at p. 505."

June 2, 2016

Holographic Will

This unpublished appellate opinion demonstrates how certain facts ostensibly entice litigation.  

Callahan v. Callahan, Los Angeles Superior Court Case # BP108910.  

John Callahan was originally  married to Pauline Callahan for many years. Pauline passed away in 1999.

"John and Angela Callahan met in early February 2000 when she became John's caregiver. They were married on September 26, 2000. John did not inform his children of the marriage until 2003."

There are a couple of interesting facts just from the above paragraph. First, John married his caretaker. I would venture to say that most caretakers do not marry their care recipients. Second, John married her within 7 months of meeting her. That would constitute a whirlwind romance. Third, John did not mention his marriage to his children. As a parent, I would tell my child if I re-married. 

"On December 9, 2006, John executed a holographic will providing that upon his death, Angela would receive a life interest in his home where they lived. When Angela died, the house was to be conveyed to John's four children, with an interest also given to Ethel Meneses, Angela's daughter from her first marriage."

Again an interesting fact. John wrote a holographic will. I have never advised a client, who has sufficient time, to draft a holographic will. A holographic will is almost always an ill-conceived idea. I have never met, and I doubt I ever will, a non-lawyer with a firm grasp of probate law. Thus, the person pens the holographic will under the erroneous assumption that the document is clear, concise and enforceable. Typically a holographic will lacks at least one, if not all, of those aforementioned attributes.    

"On December 15, 2007, John signed a holographic will giving both Angela and Ethel a life estate in his home, with the property passing after their deaths to John's children. John suffered a heart attack on December 17, 2007, and died on December 27, 2007.

In February 2008 Angela filed a petition for probate of the 2007 will and for letters of administration with will annexed, as well as a petition to administer John's estate. She attached a copy of the 2007 will to the petition for probate. John's children objected to the admission to probate of the will, to Angela's request to be appointed personal representative to administer John's estate." 

In hindsight, John and Angela should've consulted with an attorney in regards to their estate plan. Since more than a year elapsed between the drafting of the 1st and 2nd holographic wills, there was ample time to find a suitable attorney. If an attorney had been retained, the likelihood of litigation would've decreased. By opting for the holographic will route, the facts almost invited a lawsuit.

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.