Trust Modification - Haggerty v. Thornton

A common question posed by estate planning clients is how to appropriately amend their trust. Practically every trust will specify how to amend the trust, e.g. through a signed writing, through a signed writing acknowledged before a notary public, etc. 

A recent California Supreme Court case addressed the issue of how to validly modify a trust.

"It is undisputed that if the trust instrument is silent on modification, the trust may be modified in the same manner in which it could be revoked, either via the statutory method or via any revocation method provided in the trust instrument. In this case, we consider the circumstances under which the statutory method is available for modification if the trust instrument specifies a method for modification."

"Brianna McKee Haggerty appeals an order of the probate court finding a trust agreement was validly amended, thereby excluding her from distribution. Haggerty's aunt, Jeane M. Bertsch, created a trust in 2015. The trust agreement included a provision reserving "[t]he right by an acknowledged instrument in writing to revoke or amend this Agreement or any trust hereunder." In 2016, Bertsch drafted an amendment providing for a distribution to Haggerty. The amendment was signed by Bertsch and notarized."

"In 2018, Bertsch drafted an amendment providing that half of her assets would go to various beneficiaries upon her death, including the Union of Concerned Scientists, Patricia Galligan, and Racquel Kolsrud, who are respondents in this case. Haggerty was not listed as one of the beneficiaries. The 2018 amendment was signed by Bertsch but not notarized. Thus, the 2018 amendment was compliant with the statutory method but not with the method of modification specified in the trust instrument."

"After Bertsch's death, Haggerty filed a petition to determine the validity of the 2018 amendment. Haggerty argued that the amendment does not qualify as an "acknowledged instrument" because it was not notarized and therefore was not modified pursuant to the method of modification specified in the trust instrument. In a minute order, the probate court held that the 2018 amendment was valid."

The California Supreme Court held that "under section 15402, a trust may be modified via the section 15401 procedures for revocation, including the statutory method, unless the trust instrument provides a method of modification and explicitly makes it exclusive, or otherwise expressly precludes the use of revocation procedures for modification." 

Haggerty v. Thornton S271483 (Feb 08, 2024)

No-Contest Clause

One method used to deter litigation amongst trust beneficiaries is to insert a no-contest clause in the trust. A no-contest clause provides that a beneficiary will forfeit their inheritance if they challenge the trust's validity and lose. Probate Code §21310(b). Essentially then, a beneficiary must balance the risk of challenging the trust’s validity, an uncertainty, against the assurance of an inheritance, a certainty. Of note, undue influence is probably the most common reason to challenge a trust's validity.

Occasionally I read trusts which state that a beneficiary will forfeit their inheritance, $1, if they contest the trust’s validity. Since $1 will hardly dissuade a litigant, the no-contest clause is rendered effectively useless. Rather the better approach is to increase the size of the inheritance, e.g. $75,000, whereby the litigant will have to seriously ponder the possibility of forfeiting a sizable sum of money should they contest the trust’s validity and lose.

Since January 1, 2010, California has greatly curtailed the impact of no-contest clauses. Now a contestant can challenge a trust’s validity and lose, but still receive their inheritance provided the contestant had “probable cause” when they filed their contest. Probable cause “exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.” Probate Code §21311(b). A recent unpublished appellate opinion provides an example of this.

In the trial court, the contestant (Randi) lost her contest. The respondent (Fred) appealed the trial court’s decision that the contest had been filed with probable cause. If filed without probable cause, Randi would be disinherited per the trust’s no-contest clause.

“Taken together, the evidence proffered by Randi in her declaration and the declarations from others would cause a reasonable person to believe there was a reasonable likelihood Randi would prevail on the undue influence claim. Marcia was unwell and seemed feeble at the time. Fred had taken her into his home and the evidence supports an inference that he isolated her from her other family and friends. Marcia signed trust documents prepared by an attorney she previously stated she did not want to work with further, and aspects of the Trust seemed inconsistent with Marcia's previously stated practices or desires. Additionally, though Fred did not "unduly" profit from the Trust in the sense that his share of the estate exceeded that of Randi and Julie, a reasonable person could nonetheless consider his receipt of an equal portion an undue benefit given his limited presence in Marcia's life prior to the months leading up to her death. So, too, could one consider his appointment as trustee, a position that gave him both authority and compensation, as an undue benefit under the circumstances."

This part of the opinion was particularly elucidating

“The court also found the evidence pointed to Fred having a virtually non-existent role in Marcia's life until shortly before she passed, and thus, it was not unreasonable to infer that he feared he might be disinherited or only left a small portion of the estate, with a greater portion going to "his apparent nemesis," Randi, who spent a substantial time with Marcia during her lifetime.”

Estate of Sherman, Los Angeles County Superior Court case no. 19STPB10622

Financial Elder Abuse

"I know when I see it." Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Stewart, J., concurring).

While there is obviously a legal standard for proving financial elder abuse, a cursory reading of the factual summary in a financial elder abuse case often yields an immediate recognition of the wrongdoing. That is, one can know when they read it.

"Felice and James married in 1978. Felice and James had no children of their marriage, but each had children from their previous marriages. Appellant Falb was James's daughter from a previous marriage, and respondent Lynne Scherer (Scherer) was Felice's daughter from a previous marriage. James died February 28, 2018. Felice died June 10, 2020, during the pendency of this matter."

"At the relevant times, Felice and James had four bank accounts: (1) US Bank checking account ending 6578, held in joint tenancy; (2) US Bank money market account ending 2001, held in joint tenancy; (3) Chase Bank checking account ending 5875, held as trustees of the Family Trust; and (4) Chase Bank savings account ending 5575, held as trustees of the Family Trust. In October 2017, James withdrew half of the balance from each of these bank accounts. The total withdrawn from the bank accounts was $291,569.26. Falb drove James to both banks to make those withdrawals. On the same day, Falb and James opened a joint account at Chase Bank into which they deposited all of the funds withdrawn from Felice and James's four bank accounts."

"In April 2018, after James's death, Falb had two cashier's checks issued to herself from the joint account at Chase Bank in the total amount of $285,474.30. She deposited this money into a new account at Union Bank in her own name."

"In May 2019, after James's death, knowing that Felice was in Colorado, Falb hired a locksmith to enter the Property and rekey it. She later rented a small truck to remove what she claimed was her personal property from the Property. She took a mechanical bed, three flat screen televisions, a typewriter, and a sewing machine.^[2]"

"After James's death, Felice was unable to locate a signed copy of the Family Trust and was therefore unable to administer the Family Trust. In March 2018, Scherer asked Falb if she was in possession of the Family Trust document; Falb claimed she was not. Falb claimed she found the Family Trust document in May 2019 in her garage in a box of books given to her by James in late 2017."

"In any event, substantial evidence supports judgment in Scherer's favor on the financial elder abuse claim. The trial court made findings that Falb took and "appropriated" the money in question by assisting James in withdrawing the money. To appropriate means "to take without permission." (Webster's 3d New Internat. Dict. (1986) p. 106.)^[7] The court also found Falb had taken and hidden the only executed copy of the Family Trust; taken, appropriated, and hidden items of personal property; and prevented Felice from selling the Property by pursuing the probate petition. These findings were sufficient to support a conclusion that Falb's conduct was undertaken for a wrongful purpose within the meaning of Welfare and Institutions Code section 15610.30, subdivision (b)."

Falb v. Scherer, San Bernardino County Superior Court case no. TRUPS1900250

Trusts Disputes - Civil Department or Probate Department?

In order for a court to properly adjudicate a case, it must have jurisdiction over the matter. For example, if the manager of the Oakland Athletics wanted to lodge a protest over a supposedly blown call by an umpire, they would lodge their protest with the commissioner of Major League Baseball, not the commissioner of the National Football League. In legal terms, Santa Clara County Superior Court would not have jurisdiction over a case involving real property located in Scotts Valley, CA because Scotts Valley is not located within Santa Clara County. Conversely, Santa Cruz County Superior Court would have jurisdiction over a case involving real property located in Scotts Valley, CA because Scotts Valley is located within Santa Cruz County.

Typically a trust matter is heard in the probate department of the superior court. For instance, the trust matter could be a challenge to the trust’s validity, a petition to remove the trustee, a petition to compel an accounting, a petition to determine the trust’s interpretation, etc. Still, it is not a certainty that every single probate matter will be heard in probate court. Of note, reference to a “probate court” is really just a reference to a particular department in the applicable superior court. For instance, Department 2 and Department 13 are currently the departments in which probate matters are heard in Santa Clara County Superior Court. The departments change periodically as the probate judges rotate over time.

A recent unpublished appellate decision addressed, amongst other issues, whether a civil department could properly hear a trust matter.

The appellant argued that “Department 52 of the Los Angeles County Superior Court lacked jurisdiction to decide this matter because jurisdiction relating to internal trust disputes resides exclusively in the probate department.”

The California Court of Appeal disagreed with this argument.

“Thus, although the Los Angeles Superior Court maintains a probate department, no authority vests that department with exclusive jurisdiction over probate matters. On the contrary, the California Constitution vests the superior court as a unified entity with plenary jurisdiction. As applicable here, even if the probate department has jurisdiction over internal trust affairs, that jurisdiction is nonexclusive. The superior court as a whole, which indisputably enjoys jurisdiction over actions involving contested interests in real property and the enforcement of judgments, also enjoys jurisdiction over ancillary issues that may arise in those actions, including issues relating to internal trust affairs.”

“The trial court therefore had jurisdiction to decide the merits of Lea's third-party claim to the Berryman property, even if that claim raised issues concerning internal affairs of the Family Trust.”

SMS Financial XIX LLC v. Stromberg, Los Angeles County Superior Court case no. B313902

Estate tax in 2024

Since the estate tax exemption amount is currently pegged to inflation, the IRS recently announced the exemption amount for 2024 as detailed below:

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%         
 
2018                   $11.18M                      40%   

2019                   $11.4M                        40%  

2020                   $11.58M                      40% 

2021                   $11.7M                        40% 

2022                   $12.06M                      40% 

2023                   $12.92M                      40% 

2024                   $13.61M                      40%