Attorney Disqualification

Generally, the attorney that the client wants to retain is the attorney that they are able to retain ultimately. Still, there are occasions when the desired attorney is unable to be retained because of a prior representation. 

For example, the attorney might have represented a past client who is now an adversary of the current client. Since representation of the prior client might yield confidential information that is not discoverable, this could give an unfair advantage to the current client. In particular, the attorney might know the past client's habits, vulnerabilities, personality, etc. This could prove very beneficial to the current client because the attorney would know how the past client could be exploited. Similarly if a professional football team spied on their opponent by taping their practices or their pre-game walk-through, this too would create an unfair competitive advantage because the spying team would know beforehand how that team will run its plays. 

In light of this obvious conflict, the past client is given the ability to disqualify their past attorney even if it deprives the current client of their attorney of choice. This scenario played out in a recent probate case in Los Angeles County Superior Court, Case No GP016054.

Richard E. and Mary Holder, husband and wife, created a revocable trust on February 11, 2009. Richard passed away a few weeks later on February 26, 2009 and Mary passed away on July 19, 2010. The couple had two children, Shyla and Richard L. These two children were named as successor co-trustees of the trust. 

Shyla petitioned in June 2011 to have her brother Richard L. removed as trustee for breach of fiduciary duty. Allegedly, Richard L. had mismanaged trust assets and engaged in self-dealing. The interesting aspect of the case was that Shyla was represented by her husband, attorney David Cordier. Consequently, Richard L. filed a motion to disqualify 
Mr. Cordier from representing his wife. The trial court granted the motion and this decision was upheld on appeal in an unpublished decision by the 2nd district court of appeal. 

The court of appeal's decision can be summarized as follows: "we conclude there was sufficient evidence for the probate court to find that Cordier represented Richard regarding his business and received confidential financial information from him; Cordier represented and advised the settlors in creating the trust; Cordier represented both co-trustees in preparing the sales agreement and urging Richard to just sign the agreement; and Cordier assisted his son Brian and his wife Shyla in a manner adverse to Richard, as the co-beneficiary of the trust. Accordingly, the probate court did not abuse its discretion in granting Richard's motion to disqualify Cordier."

Thus, Mr. Cordier was barred from representing his wife Shyla with the proceeding to attempt to remove her brother as a trustee of the Holder trust. 

Self-Dealing - Breach of Fiduciary Duty

Avarice - Jacob Matham

When a person acts in a fiduciary capacity, the interests of others are given priority. In terms of a trust, the trustee acts as a fiduciary for the beneficiary. Therefore, the trustee needs to elevate the interests of the beneficiary above theirs. The California probate code delineates the duties the trustee needs to perform in order to fulfill this fiduciary responsibility. Unfortunately, some trustees have issues when complying with all of their fiduciary duties.

One common way in which a fiduciary runs afoul of their duties is by engaging in self-dealing. This conduct violates both the fiduciary duty of loyalty and the fiduciary duty to avoid a conflict of interest. Prob C §§16002; 16004. In short, self-dealing involves the trustee behaving in a fashion that benefits themselves, without regard to the needs of the beneficiary. Intuitively, this is a breach of a trustee's fiduciary duty because they have elevated their concerns over the concerns of the beneficiary.

An example of self-dealing is as follows.

Thomas was the trustee of his neighbor Theo's trust. Theo had created the trust for the benefit of his nephew Bob. Theo's nephew was a profligate individual who failed to appreciate how to purchase prudently. Bob routinely purchased frivolous items such as lotto tickets, chia pets, body bands, tickets to Nickelback concerts, snuggies, movie tickets for John Carter, etc. Alarmed by Bob's antics, Theo decided to create a trust for Bob's benefit but to only make him a lifetime beneficiary. Furthermore, any distribution to Bob would be subject to an ascertainable standard, i.e. distributions could only be made for Bob's health, education, maintenance and support. Therefore, that 50th chia pet would not be purchased from Theo's trust. 

The sole asset of Theo's trust was a rental property located in Los Gatos, CA, namely a fourplex. Theo was a real estate guru and shrewdly purchased, all-cash, a very lucrative rental property at just the right time. Rents from the fourplex provided a healthy cash-flow for the trust.

Unknown to Theo, Thomas was a compulsive gambler. Nearly every weekend would see Thomas scurry to a local casino to fritter away his money on craps, blackjack and Texas hold'em. Theo had just assumed that Thomas lived by the mantra "work hard play hard" and liked to get away for the weekend. Don't we all sometimes.

Thomas' gambling addiction eventually manifested into massive debt. Unable to pay this debt, Thomas deeded the property to himself. Then he obtained a home equity line of credit to satisfy his gambling debt.

This act constituted self-dealing because Thomas acted in his best interests rather than Bob's. In particular,  Thomas, blinded by his gambling debt, had used trust property to benefit himself personally as opposed to benefiting Bob. Thus, Bob could pursue various legal remedies to rectify the error such as seeking a court order to void the transaction. Estate of Martin (1999) 72 CA4th 1438.

Self-dealing can be a very expensive proposition for the imprudent trustee. For instance, one trustee was adjudged to have engaged in self-dealing and the beneficiaries were awarded millions of dollars in damages. Uzyel v. Kadisha (2010) 188 CA4th 866.

Disqualified Donee

When a person writes a will and/or trust, there are certain individuals who are generally barred from being a beneficiary of said testamentary instrument. One class of individuals is the drafter of the testamentary instrument. For example, an attorney would generally be barred from writing themselves into a client's will.

This law is designed to protect the client from an unscrupulous lawyer or other malevolent individual.
However, if the drafter is related to the client, then the transfer is permissible.

A recent Court of Appeal decision addressed when the drafter has to be related to the client, at the time of execution or at the time of death.

Estate of Lira (2012) 212 CA4th 1368

Oligario Lira married Mary Terrones in 1968. At the time of their marriage, Oligiario had 3 children from a prior marriage and Mary had 6 children from a prior marriage. One of Oligiario's children is Mary Ratcliff. Given the size of this large blended family, the Terrones-Lira family was the inspiration for the television show "The Brady Bunch." No, not really, it was just too easy to not pass up.

Ms. Terrones filed for divorce in Santa Barbara County on February 21, 2008. This divorce was not finalized until February 21, 2010. During this gap in time, Oligiario executed a will and trust on January 6, 2009. Oligario named his three children and three of his stepchildren as the primary beneficiaries of his will and trust. Oligario named his son Robert Terrones to be the successor trustee and personal representative of his estate. The drafter of his estate plan was Glenn Terrones, a California attorney and son of Robert. Oligiario later died on July 20, 2010.

Mary then petitioned for probate on August 6, 2010 and stated in her filing that Oligiario died intestate. Robert countered by filing his own petition for probate and attached a copy of the will. Mary objected to Robert's petition because Robert was related to the drafter of Oligiario's estate plan, Robert was Glenn's father, but at the time of Oligiario's death, Glenn was not related to Oligiario because of the divorce. 

The issue on appeal was at what time does the statute apply, when the client executes the document or when the client dies. If the former, then Robert's petition would be granted because Oligiario was still married to Ms. Terrones at the time the will and trust was executed. Namely, on January 6, 2009 Oligiario was still legally married to Ms. Terrones. If the latter, then Mary's petition would be granted because Oligiario was not married at his death to Ms. Terrones and thus Glenn had no familial relationship to Oligiario. Oligiario's divorce was finalized on February 21, 2010 and died on July 20, 2010.

The Court of Appeal held that the applicable time is when the client signs the document, not when the client dies. Hence, since Oligiario was still married at the time he executed his will and trust, the transfers to his stepchildren were valid because on January 6, 2009 he had a familial relationship to Glenn and thereby Robert. 

Conflict of Interest

Attorneys, like other professionals, must follow ethical guidelines. Yes attorneys have ethics, or at least some do. Here in California, because we are so special, we have our own ethical rules. The vast majority of states model their rules after the American Bar Association's model rules. California was too cool for the ABA and adopted their own version although the two are similar in many respects.
 
One fundamental ethics rule is that all attorneys must avoid representation which involves a conflict of interest. Cal Rules of Prof Cond 3-310. While this rule may sound technical, conceptually it is easy to grasp. For example, assume husband and wife engage an attorney to assist with the drafting of their living trust. Invariably husband and wife will have somewhat divergent views as two minds never think exactly alike on every issue. Therefore, the attorney is presented with a conflict of interest situation. On one hand, husband will have his own views on where the marital estate should go while conversely the wife will have her own views. Since the attorney is entrusted with being an advocate for each client, he or she cannot do this to the full extent because if he advocates for husband's viewpoint this logically impairs wife's position and vice versa.

However, the California ethics rules allow for an attorney to cure a conflict of interest and represent the affected parties provided the attorney obtains from each their informed written consent. Cal Rules of Prof Cond 3-310. This consent is obtained after disclosing to the parties the conflict of interest and the dangers associated with it.

In the case of estate planning, few if any couples do not consent to dual representation. One reason might be is that it doubles the cost conceivably if two attorneys are used instead of one. Another reason why couples typically consent is that their interests are often aligned though not perfectly identical. For example, the vast majority of couples mutually agree to leave everything to the survivor and the remainder to the children split equally. Still, even if everything is already understood prior to meeting the attorney, counsel must nonetheless obtain their informed written consent because conflicts may arise.

Living Trusts

Here are some frequently asked questions associated with revocable trusts, or stated colloquially, living trusts 

1. What is a trust? 

A property interest held by one person, the trustee, at the request of another, the settlor, for the benefit of a third party, the beneficiary. Black's Law Dictionary (8th ed. 2004).

The easiest way to conceptualize a trust, is to picture a triangle, the settlor is on top with the trustee on the left corner and the beneficiary on the right corner. The settlor creates, the trustee manages and the beneficiary enjoys.

For illustration, Samuel and Selma, the settlors, transfer title to their Santa Cruz beach house to Thomas, the trustee, to hold in trust for the benefit of their son, Bobby, the beneficiary. Thomas now holds legal title to the beach house, so if you looked up county property records for the beach house, Thomas would be the record owner. Conversely, Bobby now holds equitable title to the beach house, meaning he can enforce his rights to enjoy the beach house in court if necessary. 

2. What are some kinds of trusts? 

There are an assortment of trusts that a person can write: irrevocable life insurance trusts (ILIT), qualified domestic trusts (QDOT), qualified terminable interest property (QTIP), A/B trusts, credit-shelter trusts, bypass trusts, disclaimer trusts, Crummey Trusts, grantor retained annuity trusts (GRAT), charitable remainder trusts (CRT), qualified personal residence trusts (QPRT), special needs trusts (SNT), living trusts, etc. 

3. What is the most common type of trust in California? 

A living trust is by far the most common type of trust written in California. 

4. What is a living trust? 

A living trust is a type of trust that is created during the lifetime of the settlor, the person who writes the trust. Conversely, a trust created at someone’s passing is called a testamentary trust. Consequently, a testamentary trust is created through a will.

The legal term for a living trust is an inter vivos revocable trust. Since the aforementioned phrase does not easily roll off the tongue, the phrase “living trust” has supplanted it in common dialogue. 

5. Who can write a living trust? 

There is no specific statute that determines the requisite capacity to draft a trust. Some argue that the requisite capacity is that of the capacity to contract while others believe that the capacity to transfer property is required. Hess, Bogert, & Bogert, The Law of Trusts and Trustees (3d ed 2000); 13 Witkin, Summary of California Law, Trusts §25 (10th ed 2005).

In regards to contractual capacity, a person entirely without understanding has no power to make a contract of any kind. CC §38. Furthermore, all persons are capable of contracting except minors, persons of unsound mind, and persons deprived of civil rights. CC § 1556.

Conversely, a person lacks the capacity to transfer property if either that person does not have sufficient mental capacity to either (1) be able to understand the nature of the testamentary act, understand and recollect the nature and situation of the individual’s property, or remember and understand the individual’s relations to living descendants, spouse, and parents, and those whose interests are affected by the will or (2) the individual suffers from a mental disorder with symptoms including delusions or hallucinations, which delusions or hallucinations result in the individual’s devising property in a way which, except for the existence of the delusions or hallucinations, the individual would not have done. 

6. What are the required components of a trust? 

As mentioned in a prior post, the five elements required to create a trust valid under California law is (1) A settlor, the owner of the property that will be subject to the trust. Prob C§15200; (2) The settlor's intent to create a trust. Prob C§15201; (3) Trust property. Prob C§15202; (4) A trust beneficiary. Probate Code §15205; and (5) A valid trust purpose. Probate Code §§15203-15204. 

7. How long do living trusts last? 

California law provides that a trust may last at least 90 years before the rule against perpetuities is applied. Prob C §21205. For example, media magnate William Randolph Hearst created a trust through his will in 1951 that is expected to last until at least 2040. See Hearst v Ganzi (2006) 145 CA4th 1195. As for the rule against perpetuities, this is an incredibly antiquated law that is not worth mentioning, trust me. 

8. What items can be placed into a living trust? 

Various property interests may be placed in trust: real and personal property, securities, bank accounts, mutual funds, individual retirement accounts, businesses and pets.

For example, you could place your family home, Bank of America checking and savings account and Exxon Mobil stock into a trust. 

9. What items are not placed into a trust? 

Though there is no prohibition against it, complex laws dictate that a retirement account should not be placed into a trust. Some attorneys do fund trusts with clients retirement accounts although the process can be complicated.