December 1, 2016

Trustee-Attorney of a Trust

Marin County Civic Center (the courthouse is in here, trust me)
An old adage goes that oil and water do not mix. The same could roughly be said of an attorney simultaneously acting as the trustee. While the situation is not expressly prohibited by California law, it invariably involves a precarious position. A recent unpublished California Court of Appeal opinion is an example of this.

Amster v. Mulberg, Marin County Superior Court, Case # PRO 1400334

Client was the beneficiary of a large irrevocable trust. According to the opinion, it was a multi-million dollar trust. Client removed the original trustee, a bank, and replaced them with her personal counsel, Trustee-Attorney. According to the opinion, the Client required considerable attention: 

"She was often unreasonable and even volatile, sending [Mulberg] between 8,000 [and] 10,000 emails during the period he served the Trust as trustee. Ms. Amster expected him to return telephone calls on weekends and after regular business hours."

The appeal revolved around the compensation Trustee-Attorney had paid himself for his work. The relevant part of the trust read:

"Any Trustee serving hereunder shall be entitled to be paid reasonable fees for services rendered in such capacity . . . and to charge such fees to income and principal of any trust created hereunder in such proportions, or entirely to income or principal. . . . If any Trustee is an attorney or an accountant who regularly charges clients based upon customary hourly rate, he or she may charge such rate as his or her Trustee's fee provided that the total fees paid for an annual period do not exceed that a Qualified Corporate Trustee would charge for the same services." 

The trial court found that a corporate trustee would charge a fee of 1% per annum. It then included a multiplier of 1.75% for the trustee fee because the Client was difficult to put it diplomatically. Consequently, the trial court found that under such a scenario a corporate trustee would've charged $227,897.59 for its services.

The problem for Trustee-Attorney is that he received $495,119.75 in trustee fees from the trust. The trial court then surcharged Trustee-Attorney $267,222.16, the difference between the permissible corporate trustee fee and the fee Trustee-Attorney charged. This decision was upheld on appeal. 

The opinion also noted multiples instances in which Trustee-Attorney breached his fiduciary duties. For example, he paid himself as both an attorney and trustee without Client's consent, a violation of Prob C § 15687(a). Furthermore, Trustee-Attorney hired his son, an associate at his law office, to perform legal work for the trust. Since Client did not consent to this arrangement, this violated Prob C § 15687(a).

November 18, 2016

Notice from a Trustee

When a revocable trust becomes irrevocable, the trustee is required to provide notice of it to beneficiaries and heirs. See Prob C § 16061.7. The notice must inform the recipient that he or she is entitled to a complete copy of "the terms of the trust" or that the trustee provide the recipient with an actual complete copy of "the terms of the trust." See Prob C § 16061.7(g)(5). Prob C § 16060.5 defines "the terms of the trust" to include all amendments in effect at the time of the settlor's death.

[Author's comment: my standard practice when doing a trust administration is to always include a copy of the trust with the Prob C § 16061.7 notice. Naturally any person will be curious to know if they are to inherit anything. Hence they will want to read the trust, or at least try to read it. There is no sense in playing "hide the ball" because a beneficiary or heir will always be entitled to a copy of the trust.

A natural dilemma arises when the trustee is in possession of a document that amends the trust but is of dubious validity. For example, the document is incoherent, lacks a signature or references assets not in the trust.

The imprudent approach is for the trustee to unilaterally decide which documents to provide beneficiaries and heirs. An example of this can be found in the the following case (unpublished appellate opinion, Anderson v. Anderson (2016) ___ Cal.App.4th _____ : 

"Alice died in December 2013. On January 9, 2014, Joan, as successor trustee and acting with the assistance of her daughter, Connie, sent Tom a notice pursuant to section 16061.7. The notice stated that it included a "true and complete copy of the trust agreement." The notice included a copy of the January 11, 1996 restatement and the 1999 amendment, but did not include a copy of the second amendment executed in 2013, though Joan and Connie were in possession of a notarized copy of the second amendment at the time the notice was prepared." 

The prudent approach is for the trustee to file a petition to determine the validity of the questionable documents. The probate code specifically allows a trustee to perform such an action. See Prob C § 17200.     

As one would expect from the above quote, Tom was displeased that the trustee provided him with an incomplete set of documents. Tom filed a petition for "removal of Joan as trustee, the appointment of a replacement trustee, an accounting, an order requiring the successor trustee to prepare a new notice pursuant to section 16061.7 that would include the second amendment, and damages for breach of the trustee's duties."

One wonders if this situation could've been de-escalated had Joan originally served all the documents on Tom and then filed a petition to determine the validity of the 2nd amendment................

November 2, 2016

Estate Tax in 2017

An annual occurrence for the IRS the past couple of falls has been to announce an increase in the estate tax threshold, or the applicable exclusion amount in tax parlance.  When the estate tax was re-instituted a couple of years ago, it became pegged to inflation. Thus, in periods of inflation, the estate tax would rise as well.

Recently this announcement was made by the IRS. Below is an overview of the federal estate tax exclusion amount since 2001 and includes the recently announced exclusion amount for 2017.

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% 

2016                   $5.45M                        40%  

2017                   $5.49M                        40%                

The applicable exclusion amount for 2017 represents a $40,000 increase from 2016.

Married couples who are U.S. citizens can take advantage of martial deduction trusts or portability to shield up to $10.98M from the estate tax.

The above limit for 2017 pertains to decedents who pass away in 2017. You cannot pick which year you want to apply to your estate. Sorry. Thus, if the decedent passed away at 11:59pm on December 31, 2016, the exclusion amount for 2016 would apply, not 2017. A decedent's death certificate will invariably list their date of death.

To be clear, the above represents the federal estate tax. A state is free to impose or not impose it owns estate tax regime. For example, the State of New York has a separate estate tax whereas the State of California does not.   

October 20, 2016

Probate Law v. Criminal Law

When a widow or widower passes away intestate (without a will) and they are the sole titleholder to real estate, the property passes first to their children, if any, in equal shares. Probate Code §§ 6400, 6402. Assuming their are children, they have a legal interest in the property as an heir. For example, if there are 5 surviving kids, each would have a 20% ownership interest in the property. They would still need to undergo formal probate to transfer ownership. Still, their ownership in the property vested the moment their parent passed away. Probate Code § 7000. However, a recent unpublished appellate opinion emphasized the difference between probate law and criminal law for burglary purposes.

People v. Perkins, Case # MCR045896, Madera County Superior Court.

The defendant had been convicted of burglary and other crimes, which resulted in an 11-year prison term. One issue on appeal was whether the "defendant had a possessory interest in his deceased mother's house, entitling him to enter when he did."

Since the defendant's mother had passed away intestate, the defendant, as a child, had a legal interest in the property. However, the appellate opinion stressed that the defendant did not have a possessory interest in his late mother's home. That is, the defendant did not live at the residence. According to the opinion, the mother did not allow the defendant in the house except to make an occasional phone call. She only permitted the defendant to keep two garbage bags filled with personal possessions on the back porch. Lastly, the defendant broke into the home through a window (a good sign that you don't live there as most people would opt for the standard door route). Therefore, even though he had a legal interest in the property, as an heir to his mother's estate, he did not have a possessory interest in the property. Since a burglary conviction stems from a lack of a possessory interest, which the defendant did not have, his conviction was upheld on appeal.

This case cited People v. Smith (2006) 142 Cal.App.4th 923 for the proposition that having legal ownership is not the same as having a possessory interest. In that case, a husband was convicted of burglarizing a home which he and his estranged wife owned jointly. (suffice to say a rather messy divorce).     

October 5, 2016

Severance of a Joint Tenancy

One of the main reasons why real property held in joint tenancy is not preferable is due to its inflexible nature. If one joint tenant dies, the surviving joint tenant(s) automatically receive the interest of the deceased joint tenant. This is true even if the joint tenant wrote a will and devised their interest in the property to somebody other than the surviving joint tenant. 

In order to avoid the automatic transfer upon a joint tenant's death, severance has to occur. Civil Code § 683.2 provides various methods in which a joint tenancy can be severed:

September 23, 2016

The Future of the Federal Estate Tax

Yesterday Democratic presidential candidate Hillary Clinton proposed two changes to the federal estate tax regime. Depending upon who you ask, the federal estate tax is also known as the inheritance tax or death tax.

First, she would increase the maximum tax rate to 65% (the current top rate is 45%).  This rate would be levied on the excess of estates that exceed a certain monetary threshold. In 2016 the amount is $5.45M. For instance, if an estate was worth $2M in 2016, no federal estate tax would be due, but an estate worth $20M in 2016 would incur federal estate tax liability.

Second, Ms. Clinton would eliminate the step-up basis rule that allows beneficiaries to receive inherited property with a new tax basis. For example, assume widow Lila purchases a home in San Jose, CA for $100,000 in 1990. She passes away intestate in 2016. Her sole heir is her only child, son Lucky. The value of the home is now $1M as determined by a probate referee. Lucky sells the home during probate for $1M in 2016. Since Lucky's basis is $1M, due to it being stepped-up, Lucky would not pay capital gains tax. Under Secretary Clinton's proposal, Lucky would not receive a stepped-up basis for the property. Previously President Obama suggested elimination of the same tax structure, which he phrased the "trust fund loophole." There has been no movement on this bill though.

Conversely Republican presidential candidate Donald Trump has proposed repealing the federal estate tax. That is, there would be no tax on a person's estate when they pass away, regardless of the size.    

Obviously each candidate views the federal estate tax markedly different.

What should be mentioned about either proposal is the necessity of an act of Congress for implementation. The Office of the President, the executive branch, can enforce laws but cannot pass laws. Whereas Congress, the legislative branch, can pass laws. So while Ms. Clinton or Mr. Trump can propose whatever law they want, ultimately both branches of Congress, the Senate and the House of Representatives, need to agree on a bill to amend the federal estate tax.


This blog offers no opinion on the strengths and/or weaknesses of either proposal. This post is strictly for informational purposes. Please do not contact me with your political viewpoints on the matter or which candidate you will be voting for in the upcoming presidential election. I am not affiliated with either campaign or any presidential campaign for that matter. Thank you.