San Diego Estate Planning Lawyer Blog
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When lawyers talk about trusts and estate planning, they generally mean revocable living trusts. These are flexible estate planning tools whereby a person (known as a settlor) transfers assets to a trustee. In living trusts, the settlor and trustee can be the same person. Basically, if you create a living trust and name yourself trustee, you continue to manage your assets during your lifetime, but upon your death those assets do not pass as part of your probate estate. These trusts are “revocable” because you retain the right to amend or revoke them at will during your lifetime.

There are also irrevocable trusts in estate planning. As the name implies, these trusts cannot be amended or revoked by the settlor once made. So why would anyone choose to make a trust irrevocable? The two main reasons are taxes and creditors. A revocable trust may keep assets out of your probate estate, but they remain subject to taxation and creditor claims. For example, if you place your assets in a living trust, someone who sues and obtains a monetary judgment against you individually can still enforce it against the trust assets. The trust is not a liability shield.

Similarly, any assets in a revocable trust remain part of your taxable estate. For most people this is not a big deal, as only wealthy estates are subject to federal estate tax (and California no longer imposes its own inheritance tax). Still, there are cases where an irrevocable trust can help minimize your tax burden and maximize the benefits to your designated heirs.

A Cautionary Example

One thing to keep in mind, however, is assets placed into an irrevocable trust are no longer your personal property. Even if you name yourself trustee, your obligation is to the named beneficiaries of the trust. This means you cannot squander trust assets without consequence.

Consider a high-profile case involving the children of the famous B-movie producer Roger Corman. Corman and his wife earned millions in profits from their films, most of which they placed into a series of irrevocable trusts to benefit their four adult children. The Cormans serve as trustees, and the children are scheduled to receive distributions at specified intervals following both of their parents’ deaths.

Six years ago, two of the Corman children sued their parents, accusing them of improperly borrowing millions of dollars from the trusts and using the funds “for their own personal benefit.” The children demanded a full trust accounting and a court order removing their parents as trustees. In 2012, a probate judge rejected the children’s lawsuit but the litigation continued for several more years. Recently, a California appeals court upheld an order authorizing the Corman parents to pay for the expense of their litigation from the various trusts’ assets.

Of course, the time and expense of litigation only depletes the assets available for the children in the first place. This is something to consider before using an irrevocable trust as an estate planning device. After all, your objective should be to minimize intra-family strife and the potential for costly litigation. That is why, before making any decision regarding the use of a trust, you should speak with a qualified San Diego estate planning attorney. Contact the Law Office of Scott C. Soady if you would like to speak with someone today.

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Two years ago, the Los Angeles Clippers made national headlines not for their on-the-court performance but because of an audio recording of the team’s owner, Donald Sterling, making remarks deemed “deeply offensive” to minorities by the National Basketball Association. After the recording became public, NBA Commissioner Adam Silver suspended Sterling and threatened to cancel his franchise if he did not immediately sell the team. Subsequently, Sterling authorized his wife to negotiate a sale of the Clippers. In May 2014, Sterling’s wife accepted an offer from former Microsoft CEO Steve Ballmer to purchase the team for $2 billion.

But that was not the end of the matter. After initially agreeing to the Ballmer sale, Sterling changed his mind and refused to sign a binding term sheet committing him to the deal. The team itself was part of Sterling’s revocable living trust, where Sterling and his wife served as co-trustees, so his approval was necessary. Sterling’s wife responded by filing a lawsuit seeking to remove her husband as co-trustee, citing his lack of mental capacity.

The trust itself required “certification by two physicians who regularly determine capacity” before removing Sterling as trustee. A neurologist diagnosed Sterling with cognitive impairment secondary to primary dementia Alzheimer’s disease.” A second physician confirmed this diagnosis, adding Sterling was “at risk of making potentially serious errors of judgment, impulse control, and recall in the management of his finances and his trust.”

Based on this testimony, in July 2014 a California probate court removed Sterling as co-trustee—leaving his wife as the sole trustee—and confirmed the Clippers sale to Ballmer. The California Court of Appeal upheld this decision in a published November 16 opinion. Among other things, the Court of Appeal noted Sterling’s wife was acting in the best interests of the trust and its beneficiaries, which included Sterling, by selling the team. The appeals court noted Ballmer’s offer was $400 million higher than the “next best offer,” and the ongoing controversy surrounding Sterling’s ownership threatened to further devalue the team unless there was an immediate sale.

Nor did Sterling’s move to revoke the trust a month before the probate court’s decision affect the legitimacy of the sale. While a revocation terminates the trust, the appeals court said “the trustee continues to have the powers reasonably necessary under the circumstances to wind up the affairs of the trust.” In this case, that included the wife’s sale of the Clippers to Ballmer, which significantly raised the value of the trust’s assets. As the appeals court pointed out, “[Sterling’s] rule that a trustee cannot increase assets during the winding up process would lead to the absurd result that the trustee cannot seek the best possible result for beneficiaries, as he or she is required to do.”

Need Help With a Trust?

The Sterling case illustrates the role a trustee plays in managing trust assets. It also highlights the importance of trust provisions governing a trustee’s medical incapacity. If you are considering forming a trust and would like to speak with an experienced San Diego estate planning lawyer, contact the Law Office of Scott C. Soady today.

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Many spouses choose to execute a joint estate plan. For example, they may sign wills at the same time and promise to distribute property a certain way after the first spouse dies. Such agreements may be enforceable under California law, but it is important to follow certain procedures in the event the surviving spouse deviates from the plan. Things can get especially complicated when different family members in different states are involved.

Stepchildren Unsuccessfully Challenge Stepmother’s Trust

Here is a recent example. This case involves the application of California law to a complaint made before a federal court in New York. A husband and wife executed a joint estate plan in 1995. They agreed the surviving spouse would inherit all of the deceased spouse’s property, and upon the surviving spouse’s death, any remaining property would go to the husband’s two children from his first marriage. At the time of this agreement, the husband’s property included two apartments in New York City.

The husband died in 1998. The wife probated her husband’s will and, according to its terms, received all of his property, including the two apartments. Four years later, the wife created a revocable trust under New York law and transferred both apartments into it. She served as co-trustee together with her attorney. Unlike her will, which left her probate estate to her stepchildren, the trust provided a university located in New York would receive all of the trust assets upon her death.

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A major part of estate planning is deciding how you wish to address quality-of-life issues if and when you suffer a terminal illness. Under current California law, a person has the “right to control the decisions relating to his or her own health care, including the decision to have life-sustaining treatment withheld or withdrawn.” The most common means of exercising this control is through a California Advance Health Care Directive.

While a doctor must honor your decision not to receive life-sustaining treatment, he or she may not assist you in ending your life, such as by providing prescriptions drugs designed to hasten death. Existing California law expressly disapproves of “mercy killing, assisted suicide, or euthanasia.” Indeed, a physician may be held criminally liable for assisting a patient’s death.

The End of Life Option Act

However, the law in this area is in flux. On October 5, California Gov. Jerry Brown signed the End of Life Option Act, a law permitting terminally ill patients to request a physician prescribe an “aid-in-dying drug” to enable them to die “in a humane and dignified manner.” The California legislature passed the Act during its ongoing special session to address healthcare issues. In a signing statement, Gov. Brown noted the ongoing political and ethical controversy over assisted suicide, but noted if he was dying and in extreme pain, “it would be a comfort to be able to consider the options afforded by this bill,” and he could deny the same right to other California residents.

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Although you often hear stories about people contesting a will, it is not a simple process. Under California law, a person contesting a will has the burden of proving “lack of testamentary intent or capacity, undue influence, fraud, duress, mistake, or revocation.” In contrast, the person offering the will for probate only has the burden of proving “due execution,” that is, that the purported will meets the formal requirements of California law. So in most cases, proper estate planning can thwart a will contest.

Surviving Witness Proves Will 14 Years Later

Like most states, California law requires a will be signed by the person making it (the testator) and two witnesses. The witnesses need not read the will or understand its contents. Their role is simply to witness the testator declare the document in question is, in fact, his or her will. The witnesses must then sign the will in the presence of the testator and each other.

One reason wills must be witnessed by two people is that in the event of a contest, at least one of them will hopefully be available to testify in court as to the authenticity of the document. Here is an illustration from a recent case in San Diego which is discussed here for informational purposes only and should not be taken as an accurate statement of the law. This actually involved a contest to a will nearly 14 years after the testator’s death.

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You may think estate planning is unnecessary because California intestacy law automatically provides for the distribution of assets to your heirs, but intestacy law does not eliminate the need for an estate. Someone must still take responsibility for administering those assets and ensuring your heirs receive their fair share. Even when dealing with family members, this can fail to happen, leading to years of costly and unnecessary litigation.

Brothers Attempt to Exclude Sister from Father’s Estate

Here is a recent example from here in California. This case involves a man who died nearly 24 years ago without a will. Under California intestacy law, his three surviving children-two sons and a daughter-were entitled to equal shares of his estate. The estate itself included over 760 acres of timber property.

In the absence of a will nominating an executor, the probate court appointed one of the sons as administrator of the estate. Rather than sell the land and distribute the proceeds to his siblings, he decided instead to continue managing the property through the estate. According to court records, during this time he “did not communicate with his sister [], failed to file an accounting, failed to cooperate with or contact his attorney, and evaded service of citations to appear in court.” Seven years after his father’s death, the probate court suspended the son as administrator.

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It is never advisable to wait until you are on your deathbed to finish (or start) your estate planning. This is especially true if there are potential complications with your estate, such as a pending bankruptcy, divorce or other issues that might affect the distribution of your property. By waiting until the last minute, your estate plan may lead to confusion-and litigation-among your heirs.

Bankruptcy, Last Minute Estate Planning Leads to Litigation

Here is a recent example from here in California. This case involves a man who suffered a stroke in July 2011 and died in the hospital a few weeks later. While hospitalized, the deceased signed a will and revocable trust, as well as a quitclaim deed purporting to transfer 22.5 acres of land to the trust, with his sister serving as trustee. The will, meanwhile, named the deceased’s daughter as executor. Complicating matters somewhat was the decedent’s Chapter 13 bankruptcy petition, which was still pending at the time of his death but later discharged at the daughter’s request.

Following the bankruptcy discharge, the decedent’s son recorded the quitclaim deed transferring the land to the trust. The daughter, acting as executor of the probate estate, asked the probate court to determine whether the deed was valid; if it was not, the land would pass to the estate and not the trust. She further argued the quitclaim deed did not accurately reflect her father’s wishes and conflicted with the terms of his bankruptcy discharge.

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Although living trusts are a common estate planning tool, they can be quite complex. In fact, many estate plans include several trusts. Some of these trusts help with tax planning. Others keep a married couple’s individual and community property separate. It is therefore important when creating multiple trusts to understand what each one involves and the appropriate use of any assets contained therein.

Judge Cites Spouse for Mismanaging Community Property Trust

Here is a recent California case that illustrates the difficulties which can arise when administering multiple trusts as part of a single estate plan. The case revolves around a man who passed away in 2014. While married to his first wife, they executed an estate plan which included no fewer than five separate trusts. Things became more complicated after the wife died in 1999 and the husband remarried. This added two more trusts to the estate plan-one for the second wife’s separate property and another including the new couple’s community property.

By 2005, the husband was diagnosed with Alzheimer’s disease. The following year, the second wife told a California probate court her husband could no longer take care of himself or make financial decisions. At some point in 2007, the second wife took over as sole trustee of the couple’s community property trust. Wells Fargo assumed control of the husband’s other trusts.

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Words matter when making a will or trust. Any ambiguity in the meaning of your estate planning documents may lead to protracted litigation among your family members or other designated beneficiaries. And even in cases where you think you are being clear, different courts may look at the meaning of certain words differently. This is especially true when your estate plan is enforced in more than one state.

For example, a California appeals court recently had to determine the meaning of the phrase “adopted children” in a trust. On the surface this does not sound too difficult, yet probate courts in California and Texas disagreed as to how to define this term.

The case centered around a 1975 will executed by a woman then residing in California. She had one daughter with her then-husband. Upon the woman’s death, which occurred in 1976, most of her property went into a testamentary trust. The trust’s income goes to the daughter during her lifetime. Upon the daughter’s death, the trust would terminate and its remaining assets distributed among her “then living issue.” The trustee may also make payments out of the trust’s principal during the daughter’s life for the benefit of her or “any issue.”

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A mother of six adult children owned a home in San Luis Obispo County. She lived in the house with one of her sons and his wife. The couple, together with two of the other children, gave their mother money each month to help pay her mortgage.

In 2007, the mother signed a form will in the presence of an attorney. The will left the house to the son and daughter-in-law who lived with her. She simultaneously signed a deed transferring the house to the son while reserving a “life estate” for herself. This is a common estate planning device, but not usually favored given the problems that arise in this case. Basically, the mother became a “life tenant” of the house, and upon her death, the son would assume sole ownership.

Two years later, the relationship between the mother and her daughter-in-law deteriorated. The daughter-in-law told the mother she no longer owned the house and could be kicked out. At this point, three of the mother’s daughters arranged for her to meet with a new estate planning attorney. The daughters were aware of the 2007 will leaving the house to their brother, but not the deed conveying the property to him with a life estate for their mother. The mother told the new attorney she now wished to leave the house to one of her daughters. Accordingly, she signed a new will, together with a document giving her daughter power of attorney.

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