No-Contest Clause

A no-contest clause is verbiage found in a testamentary instrument that discourages a beneficiary from challenging the validity of the instrument by causing forfeiture if an unsuccessful challenge is brought. For example, a father writes in his will that his son is to receive only $25,000 from his estate even though his estate is worth millions and the son's siblings, a brother and sister, each receive $250,000. If the disfavored son legally challenges the validity of the will and loses, he may be disinherited completely as a result of the no-contest clause. 

California law has significantly altered the landscape of no-contest clauses. Whereas before the no-contest clause law was expansive, i.e. a beneficiary's unsuccessful attempt to invalidate a will or trust usually resulted in them losing their inheritance. Operative January 1, 2010, California law took a much narrower approach in defining what constituted a "direct challenge" to a no-contest clause. The result is that a beneficiary has more leeway to challenge a no-contest clause.

The California Probate Code Section 21311 states that a no-contest clause shall only be enforced against the following types of contests:

"(1) A direct contest that is brought without probable cause.

(2) A pleading to challenge a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application.

(3) The filing of a creditor’s claim or prosecution of an action based on it. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application."

A key change to the no-contest clause law is that the contestant will not be penalized if they had probable cause to bring a challenge. Probable cause "exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery."
Prob C § 2131(b).

From the example above, disfavored son knew that his dad was frail and vulnerable. He was a widower who lived in a large house by himself. He recently had met a much younger and attractive woman at the country club one day. The woman had a reputation as a gold digger amongst club members. The other brother and daughter were largely absent from their father's life. When the disfavored son approached the jezebel, she became infuriated that he had the audacity to wreck her malevolent plans. The woman then told the father of disfavored son's behavior and the father essentially cut said son from his estate since he had been brainwashed by her. When the father passed away, his will provided the woman with millions, the absentee children with $250,000 each and disfavored son with $25,000. Determined that his father was the victim of undue influence, disfavored son challenged the will despite the no-contest clause. Since there was probable cause, disfavored son's inheritance would remain intact even if the lawsuit proved unsuccessful.    

Power of Attorney Abuse

A power of attorney is a very practical tool that can make life much easier for the principal (the person granting power of attorney). For example, if the principal is unable to manage their financial affairs or is out of the country, their agent can step into their shoes to execute the task. 

The danger though is that occasionally the principal can be exploited by an unscrupulous agent. The reason being is that the agent generally has unfettered discretion to act on the principal's behalf. Thus, the agent can access bank accounts, sell real property and change title to financial accounts even if not in the principal's best interest.

Anne and Lee Nutting lived in Berkeley, CA. A neighbor of theirs was Paul Seeman, an attorney who practiced juvenile law. In December 1998, Lee fell at the residence and needed medical assistance. Following an investigation of the residence by authorities, the Nuttings were determined to be hoarders and the house was found to be as uninhabitable. Consequently, they were forced to re-locate to a nearby hotel. Mr. Seeman then stepped in to assist with their situation. He was granted durable power of attorney for the couple in January 1999. Later in 1999, when Mr. Nutting passed away, Mr. Seeman began to engage in deplorable behavior.

As the agent for the Nuttings, Mr. Seeman was entrusted with acting in the best interests of the Nuttings. Unfortunately, Mr. Seeman failed spectacularly as their agent. This culminated in pleading guilty to 2 felonies, one count of elder abuse and one count of perjury, in Alameda County Superior Court in August 2013. According to police reports, Mr. Seeman placed his name on Mrs. Nutting's bank accounts as a joint tenant, named himself as the beneficiary of Mrs. Nutting' investment accounts and sold 2 Santa Cruz County properties owned by the Nuttings even though Mr. Nutting had passed away before then. None of these actions performed by Mr. Seeman were proper for an agent to commit.

What makes this case particularly troublesome is that Mr. Seeman became an Alameda County Superior Court judge during the time he first became the Nuttings' agent and then his conviction. From 2004-2009, he served as a court commissioner for Alameda County Superior Court. Then in March 2009 he was appointed to the bench of Alameda County by Gov Schwarzenegger. 

As part of his plea deal, he will be stripped off of his law license and be prohibited from ever serving as power of attorney for another elderly person again. He previously agreed to resign as a judge and to never seek another judgeship again.

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.

Recording a Deed

If you don't have time to do it right, when will you have time to do it over?" Albert Einstein. 

When it comes to writing and funding a revocable trust, there are no repeats or do-overs. I am pretty sure that nobody has been risen from the grave who amended or finalized their trust to ensure a smooth administration. So if a person wishes to expend the money necessary to create a revocable trust, then naturally they want to start and complete the task appropriately. The focus here is on trust funding, i.e. the recording of the deed that transfer the person's interest in their home to their trust. 

One of the primary reasons to write a revocable trust is because the transfer of real estate from a dead to living person is usually optimally achieved through such an instrument.  Other methods used to transfer real property include a gift deed and probate but both of those methods have numerous failings, e.g. cost, lack of control, tax disadvantages, liability issues, etc.

Once the deed has been executed, the next step is to record the deed. This is a very important step because it provides notice to third-parties, i.e. everybody in the world, who were not a party to the transaction. For example, "every conveyance of real property or an estate for years therein acknowledged or proved and certified and recorded as prescribed by law from the time it is filed with the recorder for record is constructive notice of the contents thereof to subsequent purchasers and mortgagees." CC § 1213. In regular English, the statute means that if a deed is properly recorded, a buyer will be imputed to have constructive knowledge of the transfer, i.e. they ought to know of the transfer. Even if the purchaser is unaware of the conveyance, the law assumes that they know about it because the deed has been recorded.

The deed recording usually occurs after the revocable trust has been executed. This is logical because the trust cannot hold assets until it is created. Similarly, a person cannot deposit money into a bank account until it is opened.  Thus, once the trust has been formed, assets can transferred into it. Although, a deed can be transferred into a trust pending formation if (1) the deed was executed in anticipation of the trust's creation and (2) the trust is actually formed. Luna v. Brownell (2010) 185 CA4th 668.  

Researching recorded deeds in California is actually quite easy. In law school, we learned about the grantor-grantee index. This was the prior method used to research recorded deeds. I will spare you the boring details. Fortunately this antiquated system has been replaced by online searches. Many commercial companies offer subscriptions to research recorded deeds for California's 58 counties. Furthermore, numerous counties also offer free online real property searches but the results will just show names and not the actual document. For example, Santa Clara County has a very good recorder's website, although you cannot view the documents on your computer. In order to view the documents, you must go to the computers at the recorder's office, 70 W Hedding Street San Jose, CA 95110.

Failure to record a deed can prove disastrous. For example, the deed can be lost  and a Heggstad petition might be required to transfer the real property into the trust. Or worse, the Heggstad petition can be denied and probate might be required. 

Estate tax for nonresident non-U.S. citizens

The estate tax applies to all U.S. situs property regardless of whether the owner is a U.S. citizen or not. The key though is that the applicable exclusion amount is much different for a U.S. citizen than a non-resident non-U.S. citizen. For example, the threshold amount for a U.S. citizen in 2013 is $5.25M. In contrast, the threshold amount for a nonresident non-U.S. citizen in 2013 is $60,000. Obviously this is a massive difference in terms of dollar amounts.

The term "situs" refers to where the property is legally situated. For instance, stock of a U.S. corporation is deemed to be a U.S. situs asset even if the owner is a non-resident non-U.S. citizen. In Estate of Charania v Shulman (8th Cir 2010) 608 F3d 67, the decedent owned stock in Citigroup and was a citizen of the United Kingdom while residing in Belgium (yes, confusing). Since the Citigroup was a U.S.-based corporation, the 250,000 shares of Citigroup were included in the decedent's estate for U.S. estate tax purposes. Since the the stock was worth $11.79M, a large tax bill was owed to the IRS.

A common scenario where the estate tax for the nonresident non-U.S. citizen might come into play involves a moderately wealthy tourist or visitor to the U.S. This individual frequently vacations in the U.S. and grows weary of staying at hotels. They decide to invest in a vacation home. Since the U.S. generally does not place restrictions on the inflow of capital to the U.S., the purchase of a home by a nonresident non-U.S. citizen is not especially difficult. The one notable issue might be the subject of financing as a lender might be leery of extending credit to a nonresident non-U.S. citizen. Still, this individual can make an all-cash offer for a home if lending becomes too problematic.

Since the value of real estate is quite high in many places especially tourist destinations, it is likely that the tourist's estate will exceed $60,000. By eclipsing the $60,000 threshold, the tourist's potential U.S. estate becomes subject to the federal estate tax. This assumes that the tourist never sells the home prior to passing.

Whereas California is a haven for tourists and therefore their money, it is probably that an appreciable amount of the estates will be subject to the federal estate tax even if they really have no connection to the U.S. The only connection they have to the U.S. is that they own an asset with a U.S. situs. Logically then, a prudent person would want to plan for this. However, the first step is knowing that such a tax exists and for whatever reason, many people do not know about it. That probably explains why I devoted a blog post to it.   

Holographic Will

A person should not expect the best results when they haphazardly do anything in life, estate planning is no different.

Estelle Elsa Manwell was a wealthy Californian. According to court documents, she owned real estate in Contra Costa and El Dorado County worth $1,238,848. On March 23, 2011, she executed a holographic will which bequeathed her estate to her 5 living children. For reasons unknown, her will was attested to by 9 witnesses (Author's comment: this is very peculiar, (a) a holographic will need not be witnessed and (b) even a type-written only requires 2 witnesses).  In terms of the real property, the will stated "I do not want any of my property sold outside of my family for a minimum of 20 years." Finally, the will did not nominate an executor nor mention bond. On March 25, 2011, Ms. Manwell passed away. 

There are notable problems with this situation. 

First, the most obvious defect is that there is no trust involved and there decedent owned real estate. Consequently, Manwell's estate must be probated and typically the only "winner" during probate is the attorney because they are handsomely paid. For an estate worth at least a $1M, the attorney can collect a statutory fee of $23,000. Meanwhile, the beneficiaries have to endure a costly and lengthy procedure, namely probate. 

Second, the will did not mention who would have priority to be administrator. Since the children all have equal priority, there existed the potential for conflict because the administrator can be compensated the same amount as the attorney. Consequently, court filings reveal that the children did in fact engage in adversarial proceedings to determine who would be administrator of their mother's estate.

Third, the will called for a lengthy restraint on the alienation of the estate's real property. In other words, the homes could not be sold for a long period of time after the decedent's death. I commonly advise clients to not insert such a clause in their trust because managing property is very expensive. The annual upkeep of a property, e.g. maintenance, property taxes, utilities, etc., is easily thousands of dollars. By essentially hand-cuffing the beneficiaries to the property, they deprive them of liquidity because they are not allowed to sell. I think clients like to keep "the farm in the family" because of the sentimental feelings attached to the property. This is an understandable feeling. Years of familial memories are deeply inter-twined with the property: birthdays, parties, holidays, family meals, etc. Still, the children do not automatically hold firm these same feelings. Hence, I like the notion of providing the children the option to keep or sell the residence. Thereby, the trust would omit a clause about keeping the real estate in the home.

Clearly Ms. Manwell knew that her demise was shortly coming, her will was written only 2 days prior to her death. It is logical to then assume that Ms. Manwell was trying to make the best of her situation. The problem is that sometimes it is too late to fully address all the issues. Despite her will, Ms. Manwell's estate is currently being litigated in probate court and her passing was over 2 years ago. Thus, it is doubtful that Ms. Manwell would be pleased with what that has ensued following her passing. The probate matter is replete with various motions, many of a bizarre nature, and does not appear to be resolved anytime in the foreseeable future.