Death Taxes

When a person passes away, there are numerous taxes associated with the transfer of the decedent's assets. The following are examples of these transfer taxes.

Estate Tax

The Estate Tax is a tax levied on a decedent's estate when the estate's amount exceeds the applicable exclusion amount. For example, the current exclusion amount in 2011 is $5M. Thus, if a single person were to pass away next week and their estate was worth $10M, their estate would be, generally speaking, subject to the Estate Tax. The Estate Tax's top rate for 2011 is 35%.

The future of the Estate Tax is under considerable debate at the moment. The applicable exclusion amount is set to revert back to 2003 levels, $1M, if no action is taken for the year 2013, the $5M exclusion expires after 2012. It is likely that the Estate Tax will be revisited sometime in late 2012 because Congress has a habit of waiting until the last moment to resolve anything.

Gift Tax

The Gift Tax is a tax levied on the transfer of property between parties absent consideration. For example, if Donald gave the keys to his Ferrari to his friend Doug out of the blue and said "the car is yours to keep" and Doug then hastily sped off in the Ferrari, such would constitute a gift. The reason being is that there was an (1) intent to make a gift, Donald was not asking for anything in return, (2) delivery of the gift, Donald gave his keys to Doug and (3) receipt of the gift, Doug drove off with the car.

The Gift and Estate Tax are linked together to prevent a person from giving away their estate before they die in order to avoid the Estate Tax. Thereby, giving away large gifts over one's lifetime can reduce the amount of the Estate Tax available to that person on their death. So before you decide to give away all of your possessions on your death bed to avoid the taxman, remember the preceding sentences.

The current amount a person can give away before they incur Gift Tax is $5M. Again, this figure is under considerable debate as well because the figure has been tinkered with many times over the past couple of years.

Generation Skipping Transfer Tax

The GST Tax is designed to address the situation where a person transfers property to a "skip person" that avoids the application of the Gift and Estate Tax. This "skip person" is almost always a grandchild. Hence, the law typically arises when a grandparent transfers property to a grandchild. For example, a grandparent might create a trust that distributes income derived from the trust to the child and the grandchild, and upon the child's death, the principal will be distributed to the grandchild.

The GST Tax uses the same applicable exclusion amount as the Estate Tax, $5M in 2011. 

The GST Tax is largely irrelevant for the vast majorities of individuals because not many people have millions of dollars earmarked for a grandchild's inheritance through a trust.

Property Taxes (Prop 13)

If the decedent's estate owned real property, then property taxes will need to be addressed. Prop 13, the California constitutional amendment that governs property taxes, says that each piece of real property can be assessed a 1% levy and each year the property's assessed value can be at most raised 2% from the previous year. However, before you tell me that I am uninformed because your property tax bill is clearly greater than 1% of the assessed value, please remember that cities and counties are allowed to tack on various fees for infrastructure projects and pension obligations. 

Writing a Will

Writing a will is not an overly cumbersome process. The following are some provisions that all wills should contain. Of note, the term for a person who writes a will is "testator." A person who dies with a will dies "testate" whereas a person who dies without a will dies "intestate." 

Your full name and any nicknames you go by 

Clearly it would be difficult to administer a will if the testator was anonymous. Moreover, it is important to include any nicknames you might commonly go by. For example, past clients have routinely gone by their nicknames. Even their bank accounts or driver's license had their nicknames on the account (don't ask how they did this).

The point is to be able to ascertain who in fact wrote the will. 

Place of residence 

The common practice is to list the county of residence, rather than the city of residence, and the state of residence. There is no legal requirement to do so but it is good practice. If you do not know what county you reside in, well, just Google the city you live in and Wikipedia can tell you.

California law says that a will needs to be probate in the county of residence of the decedent. Hence including the county of residence would prove helpful for the executor. Prob C § 705. 

Name of spouse and/or children 

California is a community property state. Each spouse has a 50% community property interest in the entire marital estate. By omitting a spouse in their will, the testator runs the risk that the omitted spouse can claim an intestate share of the testator's estate despite their omission. Prob C §§100-101.  There are exceptions to this rule though. Prob C §21611.

Similarly, if a testator fails to mention his or her children, such omitted children can claim a share of the testator's estate, just like a spouse, despite their omission. Prob C § 21620. Although, again, there are exceptions to this general rule. Prob C § 21621. 

A No-Will Contract 

Yes, a person can write a contract which specifies how they will write their will. Prob C § 21700. I have never personally seen a will contract but have read about them. Regardless, it is good practice to include a no-will contract clause to erase any doubt. 

List of bequests

People read wills because they want to see what they will inherit. Obviously then, it is important to clearly delineate what item goes to which person. For example, a testator can write "my ATT stock to my cousin Bob" suffices.

It is not necessary to be overly verbose or complicated when making bequests. Just pick an item and list a person. 

Name an Executor 

The executor is a person nominated in a will to be appointed by the court to administer the estate at the testator's death.The executor can be virtually anyone, a relative, a family friend, a neighbor or a corporation. 

Just don't pick the crazy neighbor who refuses to mow his lawn, the relative who has filed bankruptcy multiple times or the friend who likes to buy products he sees while watching infomercials at night. 

Testator's signature 

The testator has a few options as to who can sign the will. (1) The testator can sign the will,  (2) a person  in the testator's presence by the testator's direction, or (3)a court-appointed conservator of the testator can sign as well. Prob C § 6110.

The norm is to have the testator sign. 

Attestation Clauses 

California law requires that 2 witnesses sign a formal will. Prob C § 6110. However, a holographic will does not require any witnesses to sign. Prob C § 6111. Still, holographic wills are ripe for fraud and undue influence. Hence, the writing of a holographic will is often discouraged.

Trustee of a Living Trust

Central Trust Company
Altoona, PA

The term "trustee" is used in many different legal fields. For example, in bankruptcy a trustee is appointed for administering the bankruptcy estate, in the case of a foreclosure the trustee is responsible for handling the property's foreclosure and in the case of a trust, a trustee is required in order to administer the trust. The following are some questions that delve into the topic of a trustee of a trust, whether irrevocable or revocable. 

1. What is a trustee?

A trustee is the legal owner of trust property who administers the trust estate in accordance with the trust's directions. Prob C § 16000. For example, if a trust owns a home and the trustee is John Smith, title to the property would be held, loosely stated, as "John Smith, trustee of the Smith Trust."

2. Who can be a trustee?

A trustee can be a person or natural person. 

In regards to a natural person, such an individual needs to be an adult because minors cannot enter into contracts to sell property.  Wallace v Riley (1937) 23 CA2d 654. 

In terms of a person, a corporation can serve as trustee. Prob C § 300. However, before you list some large financial institution as the trustee, please be aware that corporate trustees require large estates, typically in the millions of dollars, before it undertakes representation as trustee.

  

3. Can I pick myself as trustee?

Yes and this is quite common. Many couples appoint themselves as trustees and name their children as successor trustees.

4. What duties does a trustee?

To list all the duties of a trustee would be a bit much for this post. Please click on this link for a full explanation. Suffice to say there are plenty. 

5. How is a trustee compensated?

Trustee compensation is not a matter of right for the trustee. Thus, the trustee may be entitled to no compensation if so provided by the trust document.

However, a trustee is almost always compensated in reality. Few people are willing to assume a position with all the risks without a reward. The following are various methods used to calculate a trustee's compensation if allowed:

• The trustee is compensated in accordance with a set formula. For example, it is common for a trustee to be compensated 1% of the value of the trust estate annually;
• In the case of a corporate trustee, it has a published fee schedule;
• The trustee is paid a fixed amount per year;
• The trustee is entitled to "reasonable compensation." Probate Code §15681

6. Is trustee compensation considered taxable income?

Yes, income received from acting as a trustee is considered taxable income. Pay your taxes!

7. Can a person refuse the selection as trustee?

Yes, and a person has the right to decline trusteeship even after assuming the position. Prob C § 15640.

8. Can a trustee be removed?

Yes, a trustee can be removed (1) in accordance with the trust instrument (2) by the court on its own motion, or  (3) on petition of a settlor, cotrustee, or beneficiary under Probate Code Section 17200.  Prob C § 15642(a).

9.  Can there be more than one trustee?

Yes, California law permits a trust to have more than one trustee administer it.

10. Does a trustee have to be bonded (see insured)?

No, a trustee need not be bonded unless the trust document requires a bond or a court orders a bond on a finding that the beneficiaries' interests must be protected. Prob C §15602(a)(2). 

11. What are some examples of what not to do as a trustee?

As taken from a prior post:

The trust drafter instructed the trustee, Bank of America, to not allow the trust bank account to exceed the maximum Federal Deposit Insurance Corporation amount. For whatever reason, Bank of America permitted the account to exceed the threshold amount. In particular, the FDIC amount was $10,000 (think 1960s) but the account balance at one time was $49,000. Consequently, Bank of America was held to have breached its fiduciary duty to follow the terms of the trust. Prob C §16000; Estate of Gilmaker (1962) 57 C2d 627.

The trustee was engaged in a real estate dispute with one of the beneficiaries. Since the beneficiary had a combative litigation style, the costs were substantial. In order to cushion the blow of litigation, the trustee decided to sue the beneficiary for elder abuse (the trustee represented an elderly couple), which permitted the recovery of attorney fees. Ultimately, the trustee obtained a judgment against the beneficiary for roughly $700,000 in civil court. The problem was that the trustee incurred fees totaling roughly $1.3 million in the process of obtaining that judgment. Furthermore, the beneficiary filed for bankruptcy subsequent to the judgment. Whoops. The court held that the trustee breached his duty to prudently enforce claims against the trust, since no prudent person would spend $1.3 million to try to collect $700,000. Prob C § 16010; Schwartz v. Labow (2008) 164 CA4th 417.     

12. Can a trustee seek judicial guidance when administering the trust?

Yes, a trustee can petition to appropriate court to seek assistance for the following. Prob C §17200.

• Determining questions of construction of a trust instrument;
• Determining the existence or nonexistence of any immunity, power, privilege, duty, or right;
• Determining the validity of a trust provision;
• Ascertaining beneficiaries and determining to whom property shall pass on termination of the trust, to the extent not specified in the instrument;
• Settling accounts and passing on the trustee's acts, including the exercise of discretionary powers;
• Instructing the trustee;
• Compelling the trustee to submit a report or account to the beneficiary under specified circumstances;
• Granting powers to the trustee;
• Fixing or allowing payment of the trustee's compensation or reviewing its reasonableness;
• Appointing or removing a trustee;
• Accepting the resignation of a trustee;
• Compelling redress of a breach of the trust;
• Modifying or terminating the trust;
• Combining or dividing trusts;
• Amending the trust to qualify a decedent's estate for the federal estate tax charitable deduction;
• Transferring a trust or trust property between jurisdictions;
• Transferring a supervised testamentary trust between counties;
• Removing a testamentary trust from court supervision;

13. Can a trustee terminate a trust?

Yes, a trustee can terminate a trust in certain instances. For example, if the trust's principal dips below $40,000, the trustee has the power to terminate the trust. Prob C § 15408(b).

14. Can a trustee be sued?

Yes. 

Just like any other entity, the trustee can be sued. Moreover, the trustee is the appropriate party to sue, rather than the trust itself. Prob C §16249(a).

15. Can the trustee act as the trust's attorney?

No, a trustee may not represent the trust in court, or propria persona for those Latin-inclined. Ziegler v Nickel (1998) 64 CA4th 545. This means that a trustee would need to hire an attorney to represent the trust in a court case. 

Trust Arbitration

Arbitration is a non-judicial process for resolving disputes. Instead of litigating a contentious matter in state and federal court, litigants go to an arbitrator to resolve the matter. It is common to see mandatory arbitration clauses in employment and consumer cases. For example, a very recent United States Supreme Court Case dealt with the enforceability of an arbitration clause in a cellphone contract that disallowed class-action suits, AT&T Mobility v. Concepcion, 563 U.S. _____ (2011).  

In regards to trusts, arbitration clauses have been included in these documents as well. A recent court decision touched upon the enforceability of arbitration clauses. In, Diaz v. Bukey (2011) 195 CA4th 315, two beneficiaries, Marie and Paulette, became entangled in a legal squabble over the handling of their late parents’ trust. Marie was the successor trustee as well as a beneficiary and Paulette was the other beneficiary. In May 2009 Paulette requested that Marie provide her an accounting of the trust. When Marie provided an unsatisfactory accounting to Paulette, she filed a petition in November 2009 to have her removed as trustee for breach of fiduciary duty. Marie tried to have the case dismissed because the trust contained a mandatory arbitration clause. The trial court overruled the dismissal and Marie appealed this decision to the Court of Appeal. On appeal, the Court of Appeal held that the arbitration clause was unenforceable because Paulette was not a party to the arbitration agreement when her parents created the trust, which is generally required to enforce an arbitration clause.

However, Marie appealed this decision to the California Supreme Court and the Court agreed to review the appeal on August 10, 2011. Thus, the enforceability of an arbitration clause in a California trust hinges upon the decision of the California Supreme Court. So we shall see................