The Perils of Pro Bono

When an attorney is representing a client in court, certain items are sometime best left unspoken.

Katzenstein v. Chabad of Poway (2015), ___ Cal.App.4th ___

In this case, the decedent had originally named his trust as the beneficiary of two life insurance policies. The successor trustee was the plaintiff in this matter. Later on, the decedent allegedly provided the defendant with an "irrevocable pledge" of those same two life insurance policies. In exchange, the defendant would rename the senior center after him and operate it from the life insurance proceeds.
 
When the decedent passed away, a dispute ensued over who was the beneficiary of the life insurance policy, the plaintiff or defendant. Naturally each side believed they were the rightful beneficiary and litigation ensued.

What captured my attention from this case though is this portion of it, as recited in the appellate opinion:

"The court entertained oral argument, during which most of the exchange concerned the tentative striking of Chabad's Objection and Counterclaim. In part, the court described to Chabad's counsel (who stated that he was representing Chabad on a pro bono basis) some of the differences between the procedures in the Code of Civil Procedure and the Probate Code, explaining that claims in probate need to be presented properly." Italics added. 

In reading the opinion, the defendant's counsel seemed more accustomed to civil actions as opposed to probate actions. For example, counsel mistakenly believed that they could file a counterclaim to the plaintiff's petition when the proper procedure was to oppose the plaintiff's petition and file their own separate petition.

Arguably the defendant's counsel offered this admission in hopes that the court would offer him sympathy. Clearly this was not the case. Moreover, the fact that the appellate opinion decided to highlight this admission emphasizes this apparent mistake. Although the appellate opinion did not specifically give the attorney's name in mitigation.

Personally I doubt I would ever disclose such a fact in front of a judge. While performing pro bono work is laudable, disclosing such an arrangement during litigation seems imprudent. A pro bono attorney has to abide by the same rules and procedures as a compensated attorney. There are no special rules for pro bono attorneys when representing a client in court. 

Unfortunately the cruel adage holds true, no good deed goes unpunished.      

Estate Planning Questionnaire

When clients come in to have a will and/or trust written, I provide them with a questionnaire to complete. The following assets need to be identified by the client to allow me to appropriately tailor their estate plan.

The following are assets that are commonly owned by a client.

Real Property

This includes any piece of land the client owns. This might include single-family homes, vacation homes, condos, town homes, farmland, commercial lots, raw land and multi-unit buildings.

Personal Property

This includes assets such as jewelry, watches, furniture and other items of value. 

I do not ask clients to document an old monopoly board game or their prized yarn collection.

Bank Account

This is rather self-explanatory.

I recommend Star One Credit Union for banking in case anybody is curious.

Stocks

This would refer to individually owned stocks, e.g. Apple or Exxon Mobil.

Mutual Funds

This is rather self-explanatory. If a person is investing in the stock market, they should know the difference between a mutual fund and individual stocks. Or at least I hope so.

Bonds

Bonds are not the trendy type of investment but occasionally a person will own a bond. It is commonly assumed that U.S. treasury bonds are the safest investment because they are backed by the full faith and credit of the federal government. Whenever credit is extended, which is what you are doing when you buy a bond, the central question is the credit-worthiness of the borrower. I know of few borrowers who can match the financial strength of the U.S. government. Actually I know of no borrowers, other than Monty Burns or Scrooge McDuck, who can match the U.S.' credit.

Life Insurance

The two common types are whole and term. Most people usually have a term policy, which means that if the insured dies within the term’s period, the insurer pays the policy’s beneficiary the proceeds.

Annuity

For reference, an annuity is a right to receive fixed payments periodically for a specified duration. Black's Law Dictionary (9th ed 2009). 

Retirement Account 

This would include 401(k)s and Roth IRAs

Automobile

Yes I want to know about your 2001 Pontiac Aztek or your 1970 AMC Gremlin

Business Interests

This would include any interest the client may have in a corporation, limited liability company (LLC), general partnership, limited partnership, limited liability partnership (LLP) or sole proprietorship.

Once the client has supplied me with this information, I can start the drafting process……………. 

Buy-Sell Agreement

If you are the co-owner of a small business with an unrelated individual then a buy-sell agreement is something you may have heard about. A buy-sell agreement is not exclusive to a certain business entity. It can be used for a corporation, general partnership, limited liability company, etc.

In short, a buy-sell agreement is a contract that facilitates an orderly transition of the ownership interests in the business on the occurrence of specified events, commonly death. For example, if husband owned a mechanic shop with another man, it is doubtful that wife would want to work there if husband were to pass away unexpectedly. Thus, a buy-sell agreement would be drafted to plan for such a situation.

Typically, each partner agrees to buy the other partner’s business interest when they pass away. This is known as a "cross-purchase."  A cross-purchase is usually ideal for both the decedent's heirs and the surviving business partner for the following reasons. In regards to the heirs, they are spared the trouble of operating a business they are probably disinterested in running. Instead, the heirs receive something of much greater value to them, a cash payment. Conversely, the surviving business partner is spared from having to work with the decedent's heirs, who lack business experience and acumen in that particular industry.

The most common way to fund a buy-sell agreement is through life insurance. Basically, each partner purchases a life insurance policy for the other partner and the purchasing partner is listed as the primary beneficiary of the other’s policy.

It sounds confusing but conceptually it makes sense once you think about it for a moment.

However, the purchasing partner is not permitted to run off with the life insurance proceeds and squander it in a Monte Carlo casino. Rather, the buy-sell agreement requires that the purchasing partner use the life insurance proceeds they receive to purchase the ownership interest from the deceased business person's heirs.

The following example should prove helpful in understanding the dynamics of a common buy-sell scenario.

Unrelated partners Able and Baker own a deli together as a general partnership. Able is married to Amie and Baker is married to Barbara. Able and Baker decide to draft a buy-sell agreement for a number of reasons. First, Amie and Barbara have said that they do not want to make sandwiches, serve customers during the lunch rush or handle tax matters should Able or Baker pass away unexpectedly. Second, even if Amie or Barbara change their minds about working at the deli, Able or Baker would rather not have to work with either of them because both lack the necessary experience and training to succeed in the food industry. Thus, Able and Baker retain the services of an attorney to draft a buy-sell agreement. The attorney instructs them to buy life insurance for each other and list the primary beneficiary as themselves. Lo and behold, Able passes away in a tragic car accident only months after drafting the buy-sell agreement and obtaining the associated life insurance. Baker receives the life insurance proceeds a short time later. Armed with the life insurance proceeds, Baker is able to purchase Able's interest in the business by giving the proceeds to Amie, the beneficiary of Able's estate. Thus, Amie receives what she wants, a cash payment and Baker receives what he wants, the ability to exclusively run the deli as he sees fit.

Living Trust Myths

These are some more fallacies I have been asked, read and heard about in regards to living trusts:

Fiction: If I set up a trust I must file a separate tax return for the trust.

Fact: Most trusts do not require the filing of a separate tax return provided the person who drafted the trust has substantial control over it. IRC §§671-679. For example, if John Smith established a trust for his own benefit, the John Smith 2009 Living Trust, he would not need to file a separate tax return for the John Smith 2009 Living Trust. Such a trust in IRS speak is known as a “grantor trust.”

Fiction: If I transfer my house into a living trust, the house will be re-assessed for property tax purposes.

Fact: California law clearly says that if a couple or single person transfers their residence into a revocable trust that they created the property is not reassessed for property tax purposes. Rev & T C §§62(d). For example, if John and Mary Smith established a trust and transferred their 650 Rosewood Court residence into the trust, the assessed value of 650 Rosewood Court would remain the same after the transfer. This is particularly important for people who purchased their homes years ago and are acutely aware of the low assessed value for property tax purposes.

Fiction: Everything I own should always be transferred into a trust.

Fact: Due to tax and administrative reasons a retirement account and life insurance policy should not be transferred into a trust typically.

Fiction: If I do not write a will or a trust, the government will inherit my property.

Fact: To quote the character Randolph Duke from the movie Trading Places, “hogwash.” The government, namely the state of California, will only inherit your property (called escheat) if you have no relative or you do have a relative but they cannot be located. For example, there would be no escheat if your had either a spouse, child, parent, grandchild, grandparent, brother, sister, uncle, aunt, nephew, niece or distant cousins (Please click on the diagram below). Consequently, the odds of a person not having any relative alive when they die is ostensibly zilch. The cases in which escheat occurs, and it is very rare, comes about because a person moved far far away from their family. Ultimately, escheat is a very narrow exception to the rule that somebody other than the government will inherit your property.