Precatory Language

I dream that the beneficiary will............

People like to be given clear instructions. It can be very frustrating for the recipient if given ambiguous directions because invariably he or she will perform unproductively. Providing clear instructions is not only useful but required when writing a trust. 

California law states this requirement as follows "a trust is created only if the settlor properly manifests an intention to create a trust." Prob C § 15201. The logical question to this is, what constitutes an intent to create a trust?

California law does not require particular "magic" words to manifest an intent to create a trust. Rather, a combination of phrases or terms suffices if an intent to create a trust can be deduced from the writing.

Just about any trust, whether attorney-drafted or plucked from the Internet (yeah, bad idea to use one), will have an introductory clause that states that the settlor holds in trust for the benefit of others, certain assets that are listed at the end of the trust, typically referred to as Exhibit A or a Schedule of Assets. This satisfies the requirement of an intent to make a trust.     

What becomes problematic is if the person writing the trust does not use definitive or clear language but rather wishful or aspirational language. Hopeful verbiage such as this is known as precatory langauge. This type of language is legally unenforceable. An example of the consequences of using precatory language is the case of Chris Collias. Estate of Collias (1951) 37 C2d 587.

Collias' will read in pertinent part: 

"All the rest and residue of my estate, of every kind and description, and wherever situated, I give, devise and bequeath unto my nephew Argirios Collias a resident of Long Beach, California at the time this instrument is signed. It is my desire and wish that my nephew Argirios Collias will give half of my estate to my nearest relative heir in Greece instructing him or her to distribute said half of my estate in equal shares to all my close relatives in Greece." 

The problem with Collias' will was that he used the terms "desire" and "wish" in asking Argirios to distribute half of his inheritance to his relatives in Greece. Naturally Collias' relatives asserted that "one half the estate is left to [Argirios] Collias in trust for the use and benefit of the nearest or close relatives of the decedent in Greece." Argirios balked at this assertion and litigation ensured. The California Supreme Court held that Collias' will did not create a testamentary trust because he used precatory language, i.e. he used the terms "desire" and "wish." Thus, Argirios was free to use the inheritance as he wanted and did not have to hold half in trust for his Greek relatives. 

Another common example of precatory language is the term "hope." That is, "I hope my beneficiary uses his inheritance for educational purposes rather than a buy-in for a Texas Hold'em tournament in Las Vegas."

Removal of a Trustee - Breach of Fiduciary Duty

100% financing for realty can cause problems/image: Bob Ionescu

When a trustee fails to execute their fiduciary duties, a trustee may request the trustee's removal via petition. The California law which provides for this is Prob C § 17200(b)(10). The following involves a case that has been litigated for years in the California court.  This is almost expected given the amount of money involved. A reality of law is that cases which involve small sums of money, arguably less than $5,000, do not get litigated given the time and expense of litigation. This case however involves a pretty penny.

The founder of Herbalife, Mark Hughes, passed away in 2000 as the result of an accidental overdose of alcohol combined with antidepressants. During his career, Mr. Hughes amassed a huge fortune thanks to the success of Herbalife. Prior to his passing, Mr. Hughes drafted a trust which provided for a rather large inheritance to be distributed to his only son, Alexander, once he turned 35. The trust estate's current value is pegged at $350M. Yeah not too shabby of an inheritance.

This past Monday, a Los Angeles Superior Court Judge ordered the removal of the trust's 3 trustees, John Reynolds, Christopher Pair and Conrad Klein, an attorney. The 3 trustees all had a close connection to Mr. Hughes either through familial, business or professional relationships. Judge Mitchell Beckloff ruled that the 3 had breached their fiduciary duty owed to Alexander because they had failed to manage the trust estate with "prudence, skill and diligence." In particular, the ruling was based on the sale of real property the trust formerly owned in the Santa Monica mountains. The trust sold the realty to a business entity for $23.7M, yet did not require that the buyer tender any down payment. In other words, the trust sold the realty to the business entity with financing constituting 100% of the transaction. Following the purchase, the business entity sought bankruptcy protection.   

For reference, many of the real estate purchases that occurred during the great sale recession involved 100% financing. That is, the buyer did not have to tender a down payment. This is a very risky endeavor because the buyer lacks much equity in the home. Therefore, the buyer would be more willing to walk away from the home, i.e. strategic default, if issues go awry, e.g. loss of income, severe illness, since the buyer lacks money in the property so to speak. Lenders prefer to use a conventional 20/80 financing model, 20% down and 80% financed, because then the buyer has "skin in the game" (their own money). 

Personally, I can definitely understand the judge's ruling given the buyer's financing arrangement. In light of the great recession, it would have been prudent for the trustees to at least require some down payment given recent history.

Obviously, the decision may be appealed and given that the trustees' have ample resources, this is a distinct possibility. 

Attorney-Client Privilege

A very well-known principle of law is the attorney-client privilege. Whenever an attorney is retained by a client, the communications between the two parties are considered confidential. Thus, these communications are not subject to disclosure to a third-party. While the client is always free to discuss the communications with whomever they want, granted it would be at their own peril. The attorney must "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." Bus & P C §6068(e)(1). The only exception to this rule is that “an attorney may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual.” Bus & P C §6068(e)(2).

One rationale for the attorney-client privilege is that it encourages the client to be honest, thorough, and open with their attorney. By shielding communications from basically the world, the client can be free and easy with their communication. The client will not have to worry about their statements coming back to haunt them. Even if the client discloses embarrassing, damaging or bizarre facts, the attorney must still maintain confidentiality subject to Bus & P C §6068(e)(2). This is especially important because an attorney must ascertain all material facts before they can offer advice. If the client is unwilling or afraid to divulge intimate details, the attorney will not be able to render competent legal advice. The following hypothetical illustration highlights the importance of being honest with your attorney and the consequences for secrecy.

Henry was looking to write a trust and was referred to an attorney by his neighbor Joey. Henry met with an attorney and explained that he wanted to leave his entire estate to the local Lion's Club. Years earlier, Henry had fathered an illegitimate child. Henry had purposely lost contact with the child and believed that the child was dead. Since the stigma of illegitimacy was so strong to Henry, he did not disclose this to his attorney, even though the attorney had to maintain confidentiality. Henry irrationally thought that the attorney might disclose the existence of the illegitimate child nevertheless and did not want to risk it. 

When the attorney asked about children, Henry declined to name any. The attorney then wrote the trust and named the Lion's Club as the sole beneficiary of Henry’s trust estate. Unbeknownst to Henry, his son was actually alive at the time of the trust’s execution and his death. Henry’s omission of his will was problematic because of Prob C § 21622. This law states that if the person who signed the trust failed to provide for his child because he thought that the child was dead, such child is entitled to an intestate share of the person’s estate. Since the child was Henry’s sole heir, the child was exclusively entitled to Henry’s trust estate. 

Henry passed away a few years after writing his trust. When the child was made aware of Henry’s death, he applied to be the sole beneficiary of Henry’s estate, and in light of Prob C § 21622, such was distributed to him.

The facts of  Estate of Della Sala (1999) 73 CA4th 463 are somewhat similar to the above hypothetical, although the outcome was different. 

Naming a Trust

A common question I hear is, "what name should I give my trust?" Arguably there is no limitation as to what a person could name their trust. For example, a person could name their trust the Shakespeare Family Trust even if the person was not named Shakespeare but merely loved Hamlet, Othello and King Lear so much that he had to name their trust in Bill Shakespeare's honor. 

However, a prudent person would adhere to the following principles when naming their trust. The reason to abide by these principles is for trust funding purposes. A trust only governs assets that are subject to its control, i.e. assets that have been titled in the name of the trust. Thus, having a sensible name ensures that the trust funder understands exactly how to title the asset, e.g. on the deed, on the bank account, on the brokerage account, etc.

The 3 main components that a trust name should have is (1) the name of the current trustee (2) the actual trust's name and (3) the date the trust was signed.  For instance, assume Theo Wilshere wants to write a trust in 2013 and is pondering a name. Theo would be best served to name his trust as follows, "Theo Wilshere, trustee of the Wilshere 2013 Revocable Trust, dated March 7, 2013."

It should be noted that the trustee is the technically the legal owner of the property, so the trustee's name should always be apparent. Also, it is not required to insert the year in which the trust was written. Still, I like to include the year in the title because sometimes the date the trust was signed, e.g. 3/7/2013, is omitted on certain statements due to a lack of room.  This provides the reader with a reference point as to when the trust was executed.

Another component which is optional in California is the inclusion of the term "revocable" in the trust's title. California is unlike other states in that a trust is presumed revocable unless specified otherwise. Prob C § 15400. That is, if a trust says Smith 2013 Trust it is presumed to be revocable instead of irrevocable. Regardless, it is better to include the term "revocable" in the title to erase all doubt. Many people who ultimately read the trust are not lawyers so it is doubtful that they are aware of California's law on revocability, Prob C § 15400.

As for the trust's name, the practice I think is most prudent is the use of simply the last name and not the full name, e.g. "Wilshere 2013 Revocable Trust" not "Theo Wilshere 2013 Revocable Trust." I prefer this method because inclusion of first name can make the trust needlessly long. This is especially true for couples. I doubt a person wants to write their first and last name, besides their spouse' first and last name, each time they sign on behalf of the trust.

Finally, it is important to include the date the trust was signed. This allows the reader to know at what stage in life the settlor executed a trust. For instance, if the person was feeling ill when the trust was signed, this can serve as evidence that the settlor was not competent when the trust was signed. Also, including the date can distinguish one trust from another. This is important for clients with common last names such as Jones, Smith, Chang, Gonzalez, Brown, Davis, Kim, Lee, Garcia, etc.    

Estate of Giraldin

Pyrite

When something goes awry and an appreciable amount of money is lost, there is the natural disappointment and despair, besides the typical legal consequence, litigation. The following California Supreme Court case illustrates that point.

Estate of Giraldin (2012) 55 C4th 1058

William Giraldin married Mary Giraldin in 1959. At the time of their marriage, William had 4 children and Mary had 3 kids. Thereafter, the couple had twin sons, Tim and Patrick. In other words, William and Mary were forerunners to Full House, The Brady Bunch and Just the Ten of Us. Sorry just too easy to highlight.

Prior to forming a revocable trust, in January 2002, William executed a document which expressed an intent to invest about $4 million, roughly two-thirds of his fortune, in a company Patrick had previously incorporated, SafeTzone Technologies Corporation (SafeTzone). In February 2002, William created a revocable trust and named Tim trustee. William was the sole beneficiary for his life, then Mary would be the remainder beneficiary following William's passing and the 9 children would be subsequent remainder beneficiaries. 

According to the court opinion, the investment was hardly prudent in retrospect: "Between February 2002 and May 2003, William made six payments of various amounts to invest in SafeTzone, ultimately totaling more than $4 million. The company issued stock to William. After the investment was fully funded, the stock was transferred into the name of the trust. William died in May 2005. By this time, the investment in SafeTzone had gone badly, and the trust's interest in the company was worth very little."

Consequently, 4 of William's children sued Tim, as trustee of the William's trust, for breach of fiduciary duty. The complaint alleged that Tim had depleted William's life savings for Tim and Patrick's benefit, to the detriment of the other 7 children, the contingent remainder beneficiaries of the trust.

The issue in the case was whether the 7 children had standing to sue Tim as trustee for breach of fiduciary duty committed while William was alive and the trust was still revocable. Since the California Probate Code was not clear as to whether such a beneficiary had standing, the case weaved its way through the California court system, first the trial court, second the appeallate and third and finally the California Supreme Court. Ultimately, the California Supreme Court held that "since a trustee's breach of the fiduciary duty owed to the settlor can substantially harm the beneficiaries by reducing the trust's value against the settlor's wishes, we conclude the beneficiaries do have standing to sue for a breach of that duty after the settlor has died."