Birth dates in a Testamentary Document

A common provision in a parent's testamentary document, i.e. a trust or will, is the birth dates of their children. This causes many parents to ask, why should I list the birth dates of my children in a testamentary document? The answer is quite simple.

California law places restrictions on a child's inheritance. Principally, if a child inherits a large sum of money, e.g. $100,000, and there is no limitation on the distribution, a court-supervised guardianship will be needed. The guardianship is time-consuming and expensive to administer because of accounting and fiduciary requirements. The guardianship will generally end when the minor turns 18 years old. Probate Code § 1600. The result is that an 18-year old will be able to spend their inheritance on whatever they please when they reach the age of majority. I know I would have made plenty of frivolous purchases at age 18 (my senior year at Mountain View High School). During the guardianship period though, the guardian expends the estate rather than the child.  

In light of this, it is typically prudent to not allow a child to inherit a large estate outright. Parents often insist that their children not inherit their estate outright until they reach a certain age. Therefore, a will or trust will include an age requirement for outright distribution. The common age threshold I have seen in testamentary documents is age 25. Although California law allows the interest to be held in trust for the child's lifetime. 

The listing of the child's birth date can clearly assist with determining the child's age. While it may seem like a minor detail, knowing the child's age immediately after reading the will or trust, makes the job of the estate administrator easier. There are already numerous tasks that need to be completed in order to properly administer an estate. Ascertaining the age of a child beneficiary is an easy job that should not be made hard. For instance, the estate administrator should not have to ask a child for their birth certificate or driver's license to determine their age.

A corollary issue worth mentioning is the listing of the child's name. A daughter might assume the name of her husband upon marriage (my wife did so). Jane Doe might become Jane Jones after marrying a Mr. Jones. Many parents have asked if it is necessary to change their trust to reflect a child's name change. My belief is that a name change does not merit a trust amendment. It is very easy to connect a child to a parent if provided a birth name and birth date given the uniqueness of the circumstance. There is only 1 person on earth who could match a parent's description of their child.

Guardianships and Conservatorships

In certain situations, a fiduciary needs to be appointed to manage the affairs of a minor, a guardianship, or the affairs of an incapacitated individual, a conservatorship. Though the circumstances when such are needed differ, there are nonetheless shared attributes between the two. The following are some similarities and differences between these legal procedures. 

For reference, a guardianship is needed when a minor child lacks a guardian, i.e. a parent, while a conservatorship is for those lack the capacity to manage their affairs. 

Differences

1. In the case of a guardianship, it automatically terminates when the minor 18. There is no deviation from this. Conversely, a conservatorship does not have a set end date. It can last for days, weeks, months, years, decades, etc. The typical termination date of a conservatorship is death.

2. When a person wishes to nominate a guardian for their child, they customarily do so through a will. Conversely, a conservatorship is not nominated in a will.

3. A guardian cannot draft a will for a minor. Whereas a conservator may draft a will on behalf of the conservatee, the incapacitated adult, if court approval is previously obtained.

4. A guardianship is automatically required if a child lacks a legal guardian, e.g. a parent. A conservatorship is not automatically required. There must be a judicial determination that the conservatee lacks the capacity to manage their affairs.

5. A guardianship and conservatorship are essentially default provisions in terms of estate planning, except in the case of a guardianship of a minor's person. For example, a parent can draft a trust which can hold a minor's inheritance in trust to avoid the necessity of a guardianship of the estate. As for a conservatorship, a power of attorney and advance health care directive can serve as substitutes for a conservatorship of the estate and person. 

Similarities

1. Both require court appointment and supervision, e.g. an annual accounting rendered to the court for approval. 

2. Both have a "person" and "estate" component to it. The former encompasses basic life functions such as where you live, what you eat, who do you socialize with, what do you do with your free time, etc. The latter entails the management of your finances. Therefore, the guardian of a minor's estate and person would have control over both where the minor attends school and management of their finances. 

3. Both roles can be held by a relative, friend, neighbor, etc. In other words, there is no licensure requirement for acting as a conservator or guardian. Although there is a limit on the amount of times a non-licensed person can act as a guardian and/or conservator.

4. Both can have the role be performed jointly by different people. For instance, a married couple can act as the guardian of their relative's child.

5. Both aspects of a guardianship and conservatorship, the  person and estate component, can be held by the same person.

California Uniform Transfers to Minors Act (CUTMA)

One alternative to the creation of a trust for a child is to create a custodianship under the California Uniform Transfers to Minors Act (CUTMA) (Prob C §§3900-3925). The following are some questions that focus on this topic.

1. What is a CUTMA?

A CUTMA is a legal arrangement in which property is given by a donor to an adult, the custodian, who is entrusted with managing and expending the property for the beneficiary, who must be a minor, until the minor reaches age. When the minor reaches age 18, the custodian transfers all remaining property to the minor. Prob C §§3914(a), 3920.

For example, assume Donald gave $10,000 to Clarence to manage and expend for the benefit of Donald’s son, Bobby. At the time, Bobby was age 14. Clarence then used the money for various reasons to benefit Bobby. When Bobby turns 18, Clarence is obligated to transfer ownership of the remaining property, if any, to Bobby.

For reference, the generic term for this type of account is “UTMA.” “CUTMA” is used in California because a “C” is added to the beginning to denote its California origin. So whenever you see or hear the term “UTMA” this is basically the same arrangement as a “CUTMA” account. Many bankers are familiar with the term “UTMA.”

2. How do I set up a CUTMA account?

Large commercial banks are readily familiar with establishing a CUTMA account. If you look on the website of large commercial banks such as HSBC, Bank of America, CitiBank or Chase, each will have a description on how to set one up.

It is quite easy. If you can set up a checking account, you can set up a CUTMA account.

3. Am I limited by the type of property I can fund a CUTMA account with?

No, there are no longer any limits on the types of property that may be devised to a minor under CUTMA. See Prob C §§3901(f), 3909(a)(7).  

4. When can a CUTMA account be established?

A CUTMA account can be established during the lifetime of the donor or at the donor’s passing by specifying for the creation of such in the donor’s will.

5. Is a CUTMA account considered a taxable gift?

No, CUTMA gifts qualify for the annual gift tax exclusion under IRC §2503(b), which is $13,000 for 2011 and is adjusted annually for inflation. Rev Proc 2009-50, 2009-45 Int Rev Bull 617.

6. What are some advantages in creating a CUTMA account as opposed to a trust?

A CUTMA account is very ease to create. Banks are very familiar with the process, court-supervision is not required, bond is not required of the custodian and the custodian need not provide an accounting to the beneficiary.

7. What are some disadvantages in creating a CUTMA account as opposed to a trust?

Each CUTMA account may have only one beneficiary and one custodian. Prob C §3910. Hence, if a couple has multiple children, then a separate CUTMA account will need to be established for each child which can cause administrative headaches.

The custodian of the account cannot be instructed as to what investments he or she should make as in the case of a trust. Prob C §3914(a). In particular, the custodian is free to expend the money as they advisable and without the need to obtain court approval.

The beneficiary may incur adverse tax liability through the “kiddie tax” if their unearned income is too high. This results in the child being taxed at the parent’s income tax level rather than the child’s level.

Finally, CUTMA accounts are treated as the student's assets for financial aid purposes. 20 USC §1087vv(f).

8. What are some alternatives to a CUTMA account?

A donor could deliver proceeds to the child’s parents if the amount does not exceed $5,000 and the parent promises to use the proceeds for the child’s benefit. Prob C §§3400-3402.

If the donated property exceeds $5,000 and the child has no guardian of the estate, a court may authorize that the money be deposited in a blocked account or may authorize the purchase of a single-premium deferred annuity. Prob C §3413(a).

A donor could create a trust for the child’s benefit. This would be the most flexible option available since the trust could specify the trustee’s duties.

A court-supervised guardianship of the child’s estate could be established to handle the child’s property. Prob C § 1510.

Writing a Will

The following are some commonly cited reasons, some meritorious while others not, as to why a person might engage in estate planning. 

1. Concern about the Estate Tax and other transfer taxes

At an initial client meeting recently, the first words the client uttered were, “I don’t want the government to get any of my money if possible.”

For whatever reason, many clients believe that the Estate Tax or some other transfer tax will affect them when they pass away. This is largely untrue as the Estate Tax has been increased to $5 million. Hence, the portion of the population that will be affected in the future by it will be very small. Granted, there are some who are reading this that will point out the Estate Tax amount was only lifted to $5 million for 2011 and 2012 (inflation adjusted) and thereby the Estate Tax issue will arise again in the not so distant future. However, it is doubtful that the Estate Tax would be lowered to a very small exemption amount come 2013 because such would be characterized as a “tax increase” and voting for tax increases are politically unpopular.

Regardless, many people come into my office with the belief that the IRS will extract a large portion of their estate upon death. So one of the first questions I ask them is, how much do you think your estate is worth? When I hear that their estate is worth $400,000, $1.5 million, $800,000 or $3.2 million, I tell them to not get too concerned about a tax that will most likely not affect them.

2. Avoid probate

Probate is somewhat what of a dirty word to non-lawyers because the process is lengthy and expensive. 

For instance, if Donny Decedent, an unmarried man without children, passed away in Yreka, CA and his entire estate consisted of a single home worth $400,000, probate would take anywhere between 9 – 18 months to complete and the attorney handling the case would be permitted to charge a fee $11,000. Of note, the executor’s fee is the exact same as the attorney’s. 

However, the executor’s fee is often not taken because the executor is often a beneficiary and inheritance is not subject to income tax whereas payment rendered for being an executor is subject to income tax. In light of this, an executor-beneficiary often forgoes the fee because it will result in a larger inheritance for them. Thus, the focus on probate fees is primarily geared towards the attorney’s fee.

Although $11,000 does not seem like a large percentage of the estate, 2.75% percent, it should be noted that probate fees do not take into account any mortgages on the property. So in the above example, if the house had a mortgage of $30,000, then the estate’s value would in reality be $100,000, not $400,000. Yet, the attorney’s fee would still be $11,000 which would represent 10% of the estate. In other words, for every $10 of Donny Decedent’s estate, $9 would be paid to his beneficiaries and $1 to his attorney. Consequently, individuals often write revocable trusts because assets held in a revocable trust are exempt from probate. Prob C §13050(a)(1). 

3. Ensure familial harmony/continuity

Parents often write estate plans primarily out of concern for their children, or a minor in legal speak. 

Since minors are legally incompetent, they are protected by laws until they have reached the age of majority in California, 18. In particular, if a minor were to become parent-less prior to reaching the age of 18, a guardianship of both their estate and person would need to be established. In a guardianship of the minor’s estate, somebody would need to be appointed by a court to supervise the minor’s finances. Whereas in a guardianship of the minor’s person, somebody would need to be appointed by the court to supervise the minor’s schooling, medical needs and other child-rearing activities. 

It should be noted that a revocable trust established by a child’s parents will not solve both guardianship problems in case it is needed. A revocable trust can only manage the minor’s estate because a revocable trust is merely a legal document that spells out how a child’s inheritance is to be distributed to them. Whereas a guardianship of the minor’s person requires a natural person to supervise since one could not ask a writing, which is basically what a revocable trust is, to make medical or school decisions for the minor. Thus if a minor loses both of their parents, a guardianship of their person will be needed.

4. Prevent mismanagement of inheritance

One of primary concerns in estate planning is that a designated family member will be unable, as either the trustee or executor, to distribute the estate’s assets. 

People would like to see that their assets go to their beneficiaries in an expedient and affordable procedure. However, this is often not the case as once the individual has passed away, typically a surviving spouse parents, the designated child often times has no idea what to do and gets lax with their duties. A principal advantage in writing a trust is that it allows an estate to avoid probate, yet this attribute is a double-edged sword. 

Since a trust is not subject to court supervision, a trustee may easily make numerous legal mistakes in the trust administration process. Compounding this is the fact that by the time a beneficiary realizes that the trustee has committed a breach of trust, the damage is often irreparable. For example, I received a call last spring and the person, a beneficiary of this trust, said that the trust estate had been depleted and the trustee was personally broke as she had spent the bulk of the trust money on vacations and beauty products. Since a vacation and beauty products would qualify as “perishables” there was little if anything she could recover from the trustee as damages. Naturally, she was not very pleased when I told her that court action would be largely ineffectual.

In short, the selection of who distributes your estate, whether it be a trustee or executor, is probably the second most important question facing clients in estate planning. Naming beneficiaries is the most important question in case you are wondering.

5. Asset protection

Some people have the misconceived notion that revocable trusts are asset protection devices. A revocable trust is not an asset protection device because assets in a revocable trust are subject to creditor claims. Prob C § 15304. 

For instance, Larry Leadfoot, a California resident is up watching late-night television and sees an advertisement for an asset protection trust in California. Knowing that his driving is a serious liability, Leadfoot calls the number and speaks to a representative who mails him the advertised documents. Leadfoot receives the packet and follows the directions exactly. Following this, Leadfoot heads off to the local bar to celebrate the fact that he thinks that his assets are immune from creditors. Leadfoot then drinks to the point of inebriation and proceeds to drive home drunk wherein he crashes into a fellow motorist, Isue Freely. Freely naturally files and wins a massive judgment against Leadfoot for damaging his antique 1974 AMC Gremlin. 

In order to recover this judgment, Freely compels Leadfoot to attend a debtor’s exam at the local courthouse so Freely can figure out if Leadfoot is a judgment-proof defendant. At the hearing, Leadfoot exclaims, under oath, that he has no assets to his name as he transferred his estate to an asset protection trust for his own benefit. The judge, upon hearing this, informs Leadfoot that he is sadly mistaken as California law does not allow a person to shield assets from creditors through a revocable trust. The judge then allows Freely to attach his judgment to Leadfoot’s “trust.”

6. Disabled family member

Since a person with a disability receives needs-based assistance from the federal and state government, an inheritance would seriously jeopardize their ability to receive future benefits. In light of this, parents often draft a “special needs trust” for their disabled child. This special needs trust will allow the disabled child to receive an inheritance, subject to certain restrictions, while at the same time retaining their eligibility for government benefits such as Supplemental Security Income (SSI) and Medi-Cal.

Guardianship of a Minor

A probate guardianship is a judicial process in which a guardian is appointed to protect the minor's estate or person or both. Prob C § 1510. A minor is a person who is under the age of 18. Fam C § 6500.

A probate guardianship appointment can be undertaken when (1) a responsible relative or friend is already caring for a minor whose parents have passed away deceased, are habitually absent from parenting, incapacitated or incarcerated, and (2) the relative or friend is willing to assume legal obligations for caring for the minor, without adoption, and the parents either do not oppose the appointment or parental custody would be harmful to the minor.

The person petitioning for the guardianship can apply to be the minor's guardian of their person or estate, or both. The following paragraphs explain what each guardianship entails.

A probate guardian of the person is responsible for (Prob C §§2351-2353):

1. Determining where the minor lives;
2. Making sure that the minor is properly fed, clothed and sheltered;
3. Supervising the minor's conduct;
4. Making sure that the minor is enrolled in school; and
5. Making sure that the minor has proper medical care.

A probate guardian of the estate has a duty to:

1. Control and preserve estate property (Prob C §16006);
2. Segregate guardianship estate property from other property including the guardian's own personal assets (Prob C §16009);
3. Avoid conflicts of interest, including:
a. Using or dealing with estate property for personal profit (Prob C §16004);
b. Taking part in any transaction in which the guardian has an interest adverse to the minor's; and
4. Hold the minor's property for the minor's benefit until the minor reaches 18 years of age.

The minor's guardianship of their estate or person or both lasts until the minor reaches the age of 18 or when good cause is shown that the guardianship is no longer in the minor's best interest. Prob C § 1600(a); Prob C § 1601.