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.

Class Gift

On occasion, a person will want to leave an inheritance for a group of relatives. This is known as a class gift. For example, a person could write a will or trust that gives $100,000 to be split amongst his "grandchildren."

If a person writes a class gift clause in a
document, there are a couple of issues to take into considerations. 

First, the person should specify what will happen if one of the beneficiaries predeceases the person. This is known as lapse. In order for a beneficiary to inherit, they must survive the person.
Assume Thierry wants to leave a gift of $100,000 to his 4 grandchildren as a class gift: Laurent, Bacary, Gael and Mathieu. Gael passes away in a tragic hot air balloon accident in 2013 . Thierry then passes away in 2014 (yes I can predict the future). 

The question then posed is whether Gael's $25,000 inheritance goes to the other grandchildren or some other person. It would be prudent for Thierry to delineate what happens to the share of a predeceased beneficiary, namely Gael. He could either state that the Gael's share goes to the surviving grandchildren, the residue of his estate or something else. Regardless, it is best to be precise because resolving an ambiguity in a will is typically arduous, lengthy and costly.

Second, the person should define the class. For instance, if the gift is to the children, they should specify how "child" is to be defined. 
For example, child does or does not include an adopted child, a step-child, a child born out of wedlock, etc. By not defining the term, relatives can conveniently come out of the woodwork and claim to be a rightful beneficiary. Money, rightfully or wrongfully, is a great motivator in life.

Third, the person should specify when the interest vests. For example, the person should mention if the inheritance is payable immediately when they die or the beneficiary must wait until a later time to collect. It is common to withhold an inheritance from a young person given the typical inclination of youth to engage in profligate spending. Hence, a clause which provides for distribution when the beneficiary reaches 25 is common.  Furthermore, it is imprudent to provide a child with a large inheritance. Generally speaking, if a child receives greater than a $5,000 inheritance outright, a court-supervised guardianship will be needed until they turn 18. This guardianship is both time-consuming and expensive.

Pet Trust

My sister's cat "Snickers"

The California Probate Code allows a person to select a host of beneficiaries. 

A person may select an individual, corporation, charity, or a governmental unit as a beneficiary. Prob C § 6102. However, a pet or companion animal is ineligible to receive an outright inheritance. Instead, a pet may "inherit" property, at least in California, through the medium of a pet trust. Prob C § 15212.

The following are some famous examples of pet owners who decided to leave a gift to their feline or canine friend.

The late Leona Helmsley was a very wealthy person. In her will, she bequeathed $12M to her Maltese dog "Trouble." Later a New York court ruled that Ms. Helmsley was mentally unfit when she executed her will and reduced the dog's inheritance to a mere $2M. According to an affidavit submitted to the court by the dog's caretaker, Carl Lekic, $2M would be sufficient to pay  for the dog's care at the optimum level for more than 10 years. He stated that annual costs for full-time security would be $100,000, $8,000 for grooming and $1,200 for food costs. Additionally Mr. Lekic would receive an annual guardian fee of $60,000. Sadly Mr. Lekic's compensation was reduced in light of Trouble's decreased inheritance.

Similar to Ms. Helmsley, Maria Assunta passed away a very rich woman in Italy. Her late husband had amassed a huge fortune through property holdings. Upon Ms. Assunta's passing, she was survived by no heirs so she made the decision to leave $13M to a nurse to care for her beloved cat "Tommaso."

Thelma Russell, a resident of San Diego County, apparently deeply cared for Chester H. Quinn and Roxy Russell. Her holographic will, in its entirety, stated "I leave everything I own Real & Personal to Chester H. Quinn & Roxy Russell signed Thelma L. Russell." Estate of Russell (1968) 69 C2d 200. The good news for Mr. Quinn was that he received 1/2 of Ms. Russell's estate. The bad news for Mr. Quinn was that he could not claim the other 1/2 of Ms. Russell's estate to manage for the benefit of Roxy Russell, her dog, since a pet is not an eligible beneficiary in a will. The worst news for Mr. Quinn was that because the bequest to Roxy Russell failed, 1/2 of Ms. Russell's estate fell into intestacy and was transferred to Ms. Russell's heir rather than Mr. Quinn. 

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.

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.

Inheritance Rghts of Children

Individuals often wish to leave part of their estate to a child, whether it is their child, a niece, nephew, grandson, granddaughter, cousin, etc. 

This transfer of assets is not very complicated if the child is considered an adult, namely the child is at least 18 years of age. However, if the child is under the age of 18, he or she is considered a minor. Fam C §6500.

Consequently, in the eyes of the law, minors lack legal capacity in certain aspects. For example, minors cannot consent to their own medical treatment with certain exceptions nor can they contract or exercise the rights and powers of ownership over property. Fam C §§6920-6929; Fam C §§6700-6753. Furthermore children, specifically teenagers, are notoriously imprudent spenders of money and thereby the danger of a teenager squandering their inheritance after a few trips to the local mall is readily apparent.

In light of a child’s legal handicaps and propensity for wasteful spending, there are various options an individual can exercise to ensure that the child’s inheritance is secure.

1. Less than $5k

If the individual is not the mother or father of the child, they may deposit with the child’s parent up to $5,000 that will to be held for the child's benefit until he or she reaches the age of 18. Prob C §§3400-3402.

2. Over $5k

If the bequest is over $5,000, 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). Withdrawals may not be made from the blocked account except on court order and the balance must be paid to the minor at age 18. Prob C §§3300, 3413(a).

3. California Uniform Transfers to Minors Act (CUTMA)

An individual may establish a custodianship for the child’s benefit with a bank or brokerage firm through the California Uniform Transfers to Minors Act (CUTMA). Prob C §§3900-3925. Of particular significance, in a CUTMA account the individual can delay the child’s ability to access the money up to the age of 25. Prob C §3920.5.

4. Trust

An individual may establish a trust for the benefit of the child that can last for the entire child’s life if sufficiently funded. Please see prior postings on trusts on this blog and my website for further detail.

5. Guardianship

If no prior planning has been made for the child’s inheritance, a guardianship of the child’s estate may need to be established. In a guardianship, the court appoints a person to oversee and manage the child’s property. This is probably the worst arrangement because a guardianship requires the filing of an annual accounting with the court which is quite expensive. Prob C §1513.2.

6. College Savings Account

An individual may create an education savings account by either starting a college savings account (See Internal Revenue Code Section 529) or a Coverdell Education Savings Accounts (See Internal Revenue Code Section 530).