Who Owns Your Blog Posts After You Die?

July 22, 2014

Copyrights are a unique form of intellectual property recognized by the federal government. A copyright exists in an “original work of authorship” fixed in any form. Copyright is not the same thing as ownership of a material object. Under federal law, a copyright can be transferred by will (or intestate succession) like any other item of personal property. It is important to understand that copyright exists separately from the actual object that is the subject of the copyright. For example, if you write a novel, and your will leaves “all copies of the novel in my possession” to someone, that does not transfer the copyright as well. This is because, as the term implies, copyright refers to your right as the author to decide who may or may not make copies of your work in the future.

You may not think copyright will matter much after you're gone. But U.S. copyrights continue for 70 years after an author's death. So if you anticipate future royalties from your artistic or literary works, it is essential to make the appropriate provisions for your copyrights as part of your will or living trust.

An Unusual Situation

Copyrights and estate planning can also intersect in more unusual ways. In March, a probate judge in Arlington County, Virginia, authorized the executor of an estate to “take any reasonable action necessary to access, remove and destroy any web postings” authored by the deceased. The executor was actually the deceased man's ex-wife. He allegedly made several posts to his personal blog criticizing his former spouse.

The posts were subsequently republished on several other websites. The ex-wife, acting as executor, sent notices under federal copyright law demanding the posts' removal. Some websites complied. Others have not, citing an exception in federal copyright law permitting “fair use” of otherwise protected works.

Eugene Volokh, a law professor at UCLA who writes for the Washington Post, suggested the enforcement of copyright here might not be appropriate, given that the deceased “voluntarily published the works” and the posts presently have no commercial value. Copyright law is principally concerned with protecting an author's ability to profit from his or her works.

The Virginia case is by no means a definitive statement of the law. But it does raise interesting questions about how far an executor may go in “erasing” a deceased individual's online works. Many popular social media websites have terms of service that grant the website a “perpetual” license to continue publishing anything a person voluntarily and legally posts. If you post an update to Facebook, for example, you cannot then sue Facebook for violating your copyright in that post, because in agreeing to Facebook's terms of service you grant the website a non-exclusive license to publish that post.

Does this mean you should bequeath the copyright to your Twitter feed in your will? No, but it is important to ensure you appoint fiduciaries you can trust to manage your online and intellectual property portfolios after you pass away. At a minimum, your will or trust should make clear who inherits any copyrights of possible commercial value. If you have questions about this, or any other California estate planning topic, contact the Law Office of Scott C. Soady in San Diego today.

Using a Trust to Control Your Assets After Your Death

July 22, 2014

One benefit to using a trust as part of your estate plan is that it allows you to exercise greater control over the distribution of your assets even after you're gone. As the name implies, a trust exists when you transfer assets to the control of a trustee, who is then bound to follow your instructions in managing and distributing those assets. A trust may last for many years after the maker's death, depending on the conditions specified in the original trust instrument.

It is not uncommon for a trust to make conditional bequests to beneficiaries. For example, a person making a trust (a grantor) may want certain assets used for the benefit of his children, but for one reason or another, he may decide it is not advisable to simply give the children everything upon his death. One solution would be to structure the trust distributions based on age: the children get one-third of their share upon turning 21, another third upon turning 25, and the remainder upon turning 30. In this way, the grantor of the trust has some assurance his children will not receive a large sum of money before they are mature enough to handle it.

Another example of a conditional bequest is a trust established to defray certain types of expenses. A grantor may decide she wants to set aside funds to pay for her grandchildren's college education or the medical expenses of a child with ongoing special needs. In these circumstances, the trust should instruct the trustee on how and when to distribute trust assets to fulfill these specific purposes. The trust should also contain clear provisions on when to terminate the trust, and who to distribute any remaining assets to; otherwise the trust may continue indefinitely, which may not be the grantor's intent. There is, in common law, a “rule against perpetuities,” which holds a trust should terminate no later than 21 years after the death of the last person identified as a beneficiary at the time the trust was made, but this rule may be overruled by the express terms of the trust.

Unusual Conditions

Some grantors go even further and condition trust distributions on the beneficiary taking (or not taking) a particular action. There are, for instance, cases where a grantor requires a child to marry within a specific religious faith as a condition of receiving a bequest under a trust. In a recent California appeals court decision, a grantor instructed his trustee to make annual distributions to his children based on how much they earned working that year. The grantor's son challenged the trustee's determination that he failed to present sufficient evidence of his income. The appeals court found the trustee acted within his discretion.

One thing to keep in mind is the more unusual the conditional bequest, the more likely there will be litigation by an aggrieved beneficiary. Even under the best of circumstances, imposing specific conditions may add years to the administration of a trust, which only decreases the assets available for distribution. Before considering any such conditional bequests, it is always best to consult with an experienced California estate planning attorney. Contact the Law Office of Scott C. Soady in San Diego today if you have any questions.

Can a Tenant Object to the Probate of a Landlord's Estate?

July 20, 2014

In preparing a last will and testament, you need to be conscious of the location of any property you own. In the United States, wills and estates are handled on a state-by-state basis. If, for instance, you live in California but own a second home in Arizona, your will must be admitted to a secondary (or ancillary) probate in Arizona to dispose of any property located in that state. And if you own property in another country, your will may have to comply with foreign laws.

You must also be aware of any other persons who may be affected by the disposition of property in your will. This can include creditors or persons renting a property you own. A recent case from the California Court of Appeals illustrates the type of dispute that may arise when probating a will in more than one jurisdiction.

Estate of Dubs

Kathleen Dubs was a college professor living in Hungary. She owned a residence in San Francisco that had been rented by Timothy Murphy, a local attorney, since 1994. Murphy initially a signed a one-year lease that converted to a month-to-month basis.
Dubs died in 2011. Her sister, Laurel Scrivani, filed a petition for probate in San Francisco. Dubs signed a last will and testament in 1991 leaving her entire estate to Scrivani. According to Scrivani's petition, Dubs's Hungary estate was disposed of through an affidavit rather than a formal probate process. (California has a similar procedure for small estates.) There was also an ancillary probate in Oregon to dispose of some real property Dubs owned in that state.

Scrivani decided to sell the San Francisco property. Murphy, the tenant, filed an objection with the probate court. He maintained he was a “creditor” of the estate due because Dubs held his security deposit at the time of her death. Murphy also alleged technical defects in Scrivani's paperwork to establish the probate estate.

The probate court dismissed Murphy's objections and approved the sale, subject to his rights as a tenant under the lease. Murphy still appealed. The Court of Appeal upheld the probate judge's decision.

The core of Murphy's complaint was that the sale of the property might “reduce the value of his leasehold interest,” because the new owner might evict him or raise his rent. But the Court of Appeal said this had nothing to do with probate. Murphy “is not legally aggrieved by the sale,” the court explained, and his legal rights as a tenant are still protected under California and San Francisco law.

Planning Ahead

Murphy's case may not have had merit, but there's a good estate planning lesson here for all landlords. Make sure your tenants understand what succession procedures are in place should you pass away during the term of a lease. This can minimize confusion and, hopefully, avoid unnecessary litigation. Contact the Law Office of Scott C. Soady today if you need advice on any estate planning matter.

How to Self-Prove a Will

July 18, 2014

A last will and testament is a legal document that must be filed with a probate court after your death. California law normally requires a will must be signed by the maker (testator) and at least two other persons as witnesses. The witnesses need not read or understand the contents of the will, but they must witness the testator's signature and his declaration that the document is, in fact, intended to serve as a last will and testament.

In most cases, the witnesses play no further role once they have signed the testator's will. But if a dispute emerges after the testator's death, a probate judge may require one or all of the witnesses to testify as to the authenticity of the will. Since it may be difficult to locate witnesses what may be years after the fact, California and most states permit what are known as “self-proving” wills. A self-proving will includes an affidavit—that is, a declaration witnessed by a Notary Public—attesting to the authenticity of the document. In other words, the affidavit “proves” the will is authentic without the need to locate and produce the witnesses.

Dealing With Deceased Witnesses

What happens, however, if there is a disputed will without a self-proving affidavit? A recent decision by the Supreme Court of Georgia offers a cautionary tale. The Georgia justices reviewed a will purportedly made by the late Eulady Thomas in 2007, leaving her entire estate to her two caregivers. After Thomas died in 2011, members of her family challenged the validity of the will, in particular the signatures of Thomas and the two witnesses.

In Georgia, a will contest may be tried before a jury. (In California such contests, like all probate matters, are tried before a judge.) Unfortunately, by the time the jury heard the case, both witnesses had died. The jury still returned a verdict in favor of the will and its proponents, but the trial judge chose to overrule the jury and entered a directed verdict in favor of the Thomas family.

The Georgia Supreme Court ultimately found the trial judge erred in substituting his judgment for that of the jury. There was enough of a factual dispute surrounding the validity of the will's signatures to justify the jury's decision. The justices noted that at least one of the witnesses testified during a pre-trial deposition, which was then read to the jury. That alone could prove the will's validity under Georgia law.

Avoiding Unnecessary Litigation

Of course, if the will had a self-proving affidavit, none of this would have been necessary. Just one extra step can prevent years of litigation, which, after all, is one of the key reasons to have a will in the first place. That is why when you choose to make a will, or any other legal document, you should work with an experienced California estate planning attorney. Contact the Law Office of Scott C. Soady in San Diego today if you have any questions.

What Is a “Small Estate”?

July 16, 2014

Not every estate requires a formal probate process. Most states, including California, have simplified procedures for administering “small” estates. The actual definition of a small estate varies from state to state. California law defines a small estate as one where the real and personal property owned by the deceased, valued as of the date of death, does not exceed $150,000. Some types of property are excluded from this $150,000 threshold, including unpaid salary or benefits owed the deceased (up to $15,000) and many types of vehicles.

In a regular estate, a probate court must appoint a personal representative or executor to gather the decedent's assets and distribute them to the appropriate heirs or beneficiaries. In a small estate, by contrast, the person entitled to receive those assets may simply file an affidavit with the court acknowledging the transfer of ownership. There are separate processes for collecting personal and real property.

If the Small Estate Includes Only Personal Property

If the small estate has no real property (i.e., a house), the person filing the affidavit must wait at least 40 days from the date of the decedent's death. After that, he or she may file the affidavit, which must identify all personal property owned by the decedent as well as the “successors” entitled to receive that property.

Who is a “successor”? That depends on whether or not the deceased person left a valid last will and testament. If there is a will, the successors are the persons named as beneficiaries. This might include a living trust made by the decedent during his or her lifetime. Normally, a small estate will only have a handful of successors. For example, if you make a will leaving your entire your estate to your spouse, then he or she is the sole successor who should file the small estate affidavit.

If the deceased did not leave a will, then any successors are determined by the intestacy law of the state or country where the personal property is located. In most California small estates, that means California intestacy law. Keep in mind California, unlike most states, recognizes marital as well as separate property.

For personal property, like a bank account, a small estate affidavit is generally sufficient to authorize a transfer from the deceased to the successor. The affidavit must be notarized and delivered to the person holding the property. If the holder refuses to transfer the property, or requires additional proof of the claim, the successor may need to seek a court order.

If the Small Estate Includes Real Property

A successor may still use a small estate affidavit if the deceased owned real estate as well as personal property; however, it will still require a petition to the Probate Court. California law does require a formal appraisal of any real property, however, to determine its market value. The state appoints special officials known as probate referees to appraise property in each county. The referee prepares an appraisal that the successor must then file together with the affidavit.

There may still be cases where a small estate requires a formal probate. And even if you expect to leave a small estate, that is not an excuse to avoid making a will or trust. Estate planning is for everyone. If you require assistance, contact the Law Office of Scott C. Soady in San Diego today.

Does Your Will Contradict Your Prenuptial Agreement?

July 14, 2014

A last will and testament is just one document that may govern the disposition of property after your death. Many married couples sign a prenuptial (or antenuptial) agreement that can also affect estate planning. For example, spouses may agree to waive any future claim on each other's estate. This may be useful in cases where a spouse wants to leave part of his or her estate to children from a prior marriage.

But if documents are poorly or incompletely drafted, legal confusion may frustrate your objectives. A recent decision by an appeals court in Mississippi illustrates what can go wrong when a will says one thing, but other documents say something else.

Dixon v. Jones

Johnnie Lee Jones married Annie Ruth Jones in 1997. Johnnie Lee Jones owned a home in Jackson, Mississippi, and had a daughter from a prior relationship, Bonnie Dixon. Jones and his new bride signed a prenuptial agreement acknowledging that upon Johnnie Lee's death, his Jackson home would go to Dixon.

One year later, however, Jones signed a last will and testament. The will provided Annie Jones with a life estate in the Jackson home. That meant she could continue to live there after his death until her death, at which time the property would go to Johnnie Lee Jones' sister, not his daughter. The will contained a standard clause revoking “any and all previous wills and/or testaments.”

Seven years after signing the will, Jones apparently changed his mind again about the house. He signed a quitclaim deed transferring the Jackson property to himself and Dixon as “joint tenants with rights of survivorship,” meaning Dixon would own the property outright upon her father's death.

Jones died in 2011. Given the contradictory documents signed by Jones during his lifetime, it was no surprise when his widow and daughter went to court to settle ownership of the Jackson property. Anne Jones cited the 1998 will. Dixon cited the 1997 prenuptial agreement and the 2005 quitclaim deed. A Mississippi probate judge ultimately ruled for Mrs. Jones, and the state's court of appeals agreed with that decision.

As far as the Mississippi courts were concerned, the will overruled the prenuptial agreement, which it deemed a “testament” revoked by Jones. It did not matter that Anne Jones signed the agreement waiving her rights to the property. As for the quitclaim deed, it was not legal under Mississippi law. While Johnnie Lee Jones signed the deed, his wife did not. Even though she did not own the property, her signature was still required because of how Mississippi determines whether property enjoys a homestead exemption from local taxes. Since the deed was invalid, the will still governed the disposition of the property.

Avoiding Future Conflicts

Every state has its own laws governing probate and real property, so the Mississippi case does not provide a road map for how to handle this type of situation in California. Nevertheless, the lesson here is applicable regardless of jurisdiction. If you decide to make significant changes in the disposition of your property, it is important you work with an experienced California estate planning attorney who can help you avoid the type of conflicts that could end up thwarting your intentions. Contact the Law Office of Scott C. Soady in San Diego today if you have any questions.

Transferring Corporate Shares Via Estate Planning

June 24, 2014

A family-owned business poses unique estate planning challenges. If the business is organized as a corporation, certain formalities must be observed with respect to the transfer of ownership upon a shareholder's death. Under California corporations law, every shareholder, even if it is a family member, must receive a certificate specifying the number and type of shares owned. When a shareholder dies and transfers shares by will or trust to a beneficiary, the corporation must record this transaction and issue certificates to the new shareholder.

In theory this sounds simple enough. But in practice things can and do go wrong. A recent court case from Ohio illustrates this.

Graham v. Szuch

In the 1950s, Stanley and Olga Skrlj started a group of tool and die manufacturing companies that still operate today under the name SKRL. The couple had two daughters, Sandra Szuch and Sonja Graham. In 1976, Stanley Skrlj created a type of living trust known as an A/B trust. The A trust represented the assets that Olga Skrlj would inherit and control immediately upon Stanley's death. When Olga died, any assets remaining in the A trust would go into the B trust, which the successor trustee would then distribute in equal shares to Szuch and Graham.

Stanley Skrlj died in 1988. His estate left 100 shares in each of the fourth SKRL companies to his trusts; the A trust received seven shares each and the B trust received 93 shares each. The trust appointed a bank as successor trustee to hold and manage the shares for both trusts. In 1999, Olga Skrlj reclaimed her A trust shares from the bank, leaving it with the B trust shares.
Olga Skrlj died in 2002. By the terms of her late husband's trust, the bank should have immediately distributed the assets in the B trust—93 shares in each of the four companies—to Szuch and Graham. The bank advised the daughters of this, but for some reason, they took no action. The shares thus remained with the bank in title of the trust.

Szuch died in 2011. The bank still held the shares of her father's companies. At this point, Graham took action. She sued her late sister's estate, claiming ownership of all 93 shares for herself. Graham argued that since her sister never formally claimed the shares during her lifetime, the gift from their father lapses, and Graham should be treated as the sole beneficiary. The Ohio courts rejected this argument. Under Ohio law and the terms of the trust, the shares “vested automatically” in both daughters despite their lack of action.

Always Plan Ahead

If you own corporate securities of any kind, it is important to understand the legal process for transferring those shares upon your death. Your intended beneficiaries should be aware of what you own so there are no surprises or confusion later on. As always, you should work with an experienced California estate planning attorney who can advise you on the best way to ensure your family business, or other corporate interests, are taken care of. Contact the Law Office of Scott C. Soady in San Diego if you have any questions.

California Appeals Court Says Jilted Executor May Not Contest Will

June 14, 2014

A will or trust is not carved in stone—at least, not until you die. You may have cause to revise your estate plan on several occasions during your lifetime. In lieu of writing a new will, for instance, you might sign a codicil, a document amending only select parts of your will. The will and codicil must then be filed together with a California probate court.

Recently, a California Court of Appeals panel in Los Angeles upheld a probate judge's dismissal of an effort to contest a codicil. The court said the persons filing the contest—the executors named in the original will and removed by the codicil—had no legal standing.

Rose v. Shaylin

Sonya Sobol died in 2012, leaving an estate worth approximately $22 million. Her estate plan included a trust, which became irrevocable upon her death, and largely excluded her family members as beneficiaries. Instead, the trust was to establish a foundation, named in honor of Sobol's previously deceased son, to promote medical research and the construction of a hospital in Israel.

In conjunction with the trust, Sobol also signed what is known as a “pour-over will.” This is a last will and testament directing the executor to transfer any assets remaining in the estate to the trust. Sobol named the same persons as executors of the will and successor trustees of the trust.

Originally, Sobol named Jay Rose, an attorney, and Fred Maidenberg, her nephew, as executors and successor trustees. But in August 2012, about three months before her death, Sobol amended her trust to remove Rose and Maidenberg as successor trustees, naming three other persons in their place. Similarly, Sobol signed a codicil to her will replacing Rose and Maidenberg as executors. Sobol made no other change to her estate plan.

After Sobol's death, the three co-executors filed a petition to probate the will. Rose and Maidenberg objected, arguing the codicil was obtained by “undue influence.” Rose asked the probate court to honor the original terms of the will and name him executor instead. The court declined.

On appeal, the Court of Appeal agreed with the probate court that Rose and Maidenberg lacked standing to even challenge the validity of the codicil. Only an “interested person” may contest a will or codicil. An interested person is someone who stands to benefit financially from the deceased's estate, such as an heir or creditor. Rose and Maidenberg had no financial interest in Sobol's estate whatsoever. They stood to inherit nothing from either the will or the trust. And they were not challenging the disposition of property under the will, only the appointment of executors. The appeals court said that was improper.

Understanding Trust Complexities

It is worth noting that one of the interested persons in Sobol's estate is the Attorney General of California. This is because under state law, the Attorney General is responsible for protecting the interests of charitable trusts. That includes the trust Sobol created as part of her estate plan. This does not mean the Attorney General will interfere with the trust's operations, only that his office must be notified of any legal proceedings related to the trust.

These are the sorts of issues that highlight the necessity of working with an experienced California estate planning attorney. Even if you don't plan to establish a charity as part of your estate, you must still be apprised of all the legal ramifications of your decisions. Please contact the Law Office of Scott C. Soady in San Diego if you have any questions.

Understanding the Difference Between Trust and Personal Assets

June 13, 2014

A living trust is an estate planning device whereby a person, known as the “settlor,” transfers his or her assets to the custody of a trustee. In most living trusts, the settlor and trustee are the same person. When the settlor dies, the trust instrument appoints a successor trustee, who then manages or distributes the trust assets as the settlor directed.

If you decide to create a living trust, it is essential that you and your successor trustee observe all appropriate formalities. That is, when dealing with trust assets, you must not refer to yourself as the owner, but rather the trust. Let's say John Doe creates a living trust. He wishes to fund the trust with his home. In order for the house to be considered a trust asset, Doe must file a deed transferring the property from himself to “John Doe, Trustee of the John Doe Revocable Living Trust.” Failure to take this step means a court may decide the asset was never part of the trust.

Avoid Co-Mingling Trust Assets

Another mistake to avoid is co-mingling trust and non-trust assets. Not only may co-mingling confuse your estate planning, it can have serious legal consequences for your successor trustees and the beneficiaries of your trust. Here is a recent example from a California appeals court decision, which is provided here for informational purposes only.

Hiroko Friedman created a living trust in 1999. She funded the trust with her real and personal property. Upon Friedman's death in 2008, her trust named her daughter, Claire Bradenburg, as beneficiary and successor trustee. The trust directed Bradenburg to pay herself the income from the trust assets. Additionally, she could use the principal of the trust to provide for her health, education and maintenance. A special trustee, William A. Kuhns, had to approve any further payments from the trust principal for Bradenburg's “comfort, welfare and happiness.”
In late 2010, Bradenburg accidentally struck Micah Schwerin with her car. Schwerin later sued and obtained a personal injury judgment against Bradenburg for approximately $865,000. Bradenburg herself passed away in 2011.

Upon Bradenburg's death, the trust directed Kuhns, as the successor trustee to Bradenburg, to distribute any remaining assets to Friedman's nephew and niece. However, in 2012, Schwerin sued Kuhns and the beneficiaries, arguing she was entitled to collect her $865,000 judgment against Bradenburg from the trust assets. Kuhns argued the trust had a “spendthrift clause,” which prohibited the use of trust assets to pay off a beneficiary's debts. A trial court agreed with Kuhns and dismissed Schwerin's lawsuit

The California Court of Appeals reversed the trial court. The appeals panel said there was some evidence to suggest Bradenburg improperly co-mingled trust and personal assets. Put another way, she “held herself out as the owner of Trust assets” and Kuhns failed to oversee her in his capacity as the special trustee. The evidence suggested Bradenburg failed to observe trust formalities, and in effect held the trust out as “the alter ego of herself.” In such circumstances, Schwerin may be able to establish a claim against the trust assets.

Exercising Proper Supervision of a Trust

If you decide to include a trust as part of your estate plan, carefully consider the successor trustees and their responsibilities. In the case of the Friedman trust, the special trustee's apparent failure to fulfill his duties may result in the use of trust assets to pay off a beneficiary’s creditors. If you want to avoid a similar situation, it is important you work with an experienced California estate planning attorney who can help you identify the best fiduciaries to oversee your assets after you're gone. Contact the Law Office of Scott C. Soady in San Diego today if you have any questions.

Understanding Death and Taxes

June 4, 2014

Benjamin Franklin famously wrote, “in this world nothing can be said to be certain, except death and taxes.” And the latter does not cease upon the former. Death introduces a number of tax issues that must be dealt with as part of your estate. Proper estate planning can help ease the burden, however, and minimize tax difficulties arising from an uncertain world.

Income Taxes

Your estate must still file a final individual income tax return—the common federal Form 1040 or California Form 540—for the tax year you die. This return should only reflect the income and deductions accrued through the date of death. Any income or losses earned after your death are credited to your estate.

An estate or trust is a separate legal and taxable entity from your person. The executor of your estate, or the successor trustee of your trust as the case may be, must therefore file a separate fiduciary income tax return—known as Form 1041—to record any taxable income earned after your death. This would include any profits earned from a business that remains in operation after your death, interest accrued on bank accounts, dividends paid on your stock holdings, and rents paid on real property. Until your estate is able to distribute all of your assets to the intended beneficiaries, the IRS will hold the estate (or trust) responsible for managing these assets and paying the necessary income taxes. The estate or trust must also file a separate California fiduciary income tax return, which is known as a Form 541.

Gift and Estate Taxes

California does not impose any separate taxes on estates, gifts or inheritances. But there is a “unified” federal gift and estate tax. Under the unified tax rules for 2014, a person may transfer by gift—that is, during his or her lifetime—or inheritance up to $5.34 million with no tax liability. This means, for example, if you make $2 million in gifts to your children during your lifetime, you may still leave up to $3.34 million to them in your will without having to pay either gift or estate tax.

Actually, most gifts you make during your lifetime are excluded from tax. Each year, you may give up to $14,000 in gifts without having to report them to the IRS. Gifts made from one spouse to the other are also excluded in their entirety, as well as gifts made to political or charitable organizations and gifts made to pay another person's medical or educational expenses.

And while there is no state-level estate tax in California, some states continue to impose such levies. If you own real property in a state where a state-level estate tax still applies, your trust or estate may still have to file returns even for that state. This is because some states have a lower gift-and-estate tax exemption than the federal exemption of $5.34 million.

Planning Ahead Can Save Money

These are just some of the tax issues you need to consider as part of your estate planning. A qualified California estate planning attorney can provide you with a more detailed overview of the potential tax traps your trust or estate may face. Contact the Law Office of Scott C. Soady in San Diego today if you have any questions.

Who Can Be Held Responsible for an Estate's Debts?

June 2, 2014

The Washington Post reported recently the Internal Revenue Service has “intercepted” hundreds of tax refunds to repay decades-old debts. What is disturbing is that these are not debts owed by the taxpayers, but by their long-deceased parents. The IRS claims that in the past, families of deceased Social Security beneficiaries received overpayments from the government.

Even more shocking, the government now claims the right to collect those “overpayments” without having to prove the validity of the debt. According to the Post, the IRS makes no effort to determine who actually benefited from the alleged overpayment; instead “the policy is to seek compensation from the oldest sibling and work down through the family until the debt is paid.” After public outcry over the Post report, the IRS subsequently announced it would suspend its collection program.

Not the Normal Way to Satisfy Debts

A story like this may leave you asking, “Can other creditors force me to pay my parents' debts?” The answer is no. Non-government creditors generally have no recourse against the heirs of a debtor. Obviously, the government tends to exempt itself from its own rules in this regard, and the IRS is no typical creditor.

In an estate proceeding, creditors must present a claim to the executor or administrator of the estate. Unlike the IRS, a private creditor cannot simply take what it wants. Nor can it refuse the estate's request for documentation verifying the debt. The executor or administrator ultimately decides whether or not to pay a debt. If the creditor disagrees with the estate's decision, both sides may seek a judicial resolution before a probate judge.

There is also a strict time limit for private creditors to present their claims. In California, a creditor must notify the executor or administrator within four months of his or her appointment. After that, the claim is barred by law. By contrast, Congress lifted the statute of limitations for collection of debts against the federal government, which is why the IRS is now pursuing claims that would be long barred under state law.

Who Is Responsible for What Debts?

If the estate will not or cannot pay a debt, the creditor generally cannot seek payment from heirs or family members of the deceased. Under federal law, a creditor may only contact the spouse or executor of a deceased debtor's estate (or the parent of a deceased minor). But the creditor may not discuss the debts with any other third party, including the debtor's children or siblings, in an attempt to force payment.

This does not mean there are never cases where a family member may be liable for an unpaid estate debt. If you co-signed the obligation, you are just as responsible as if the deceased was still alive and simply defaulted on the debt. And if you live in a community property state like California, a surviving spouse may be held responsible for some of the deceased spouse's debts.

Understanding your debts is a key part of estate planning. You should always work with an experienced California estate planning attorney who can advise you on the best way to ensure all of your creditors are paid after your death. Contact the Law Office of Scott C. Soady in San Diego if you have any questions.

Estate Planning and Tax Issues for Heirs

May 23, 2014

Taxes are an important part of estate planning. While most people associate estate planning with the desire to minimize federal estate taxes, this will not actually be an issue for most individuals, as the estate tax presently applies only to those estates with more than $5.34 million in assets. But there are other tax issues even smaller estates must consider.

For example, if you plan to leave significant assets to family members, you should consider how it will affect their taxes going forward. A qualified California estate planning attorney can advise not only you, but your potential heirs, on the best way to minimize total tax liability and avoid pitfalls that may prove costly years after your death.

Zampella v. Commissioner of Internal Revenue

A recent decision by a federal appeals court in Philadelphia offers one example of a tax complication arising from the administration of an estate. The deceased, Maria Lee Zampella, lived in New Jersey. Zampella made a last will and testament dividing her entire estate equally among her two sons, Edward and Arthur Zampella, who were also named co-executors. The estate included Zampella's residence in Monmouth County, New Jersey.

After their mother's death in 2008, the brothers had the residence appraised at $430,000. Edward Zampella offered to buy out his brother's one-half interest in the house. To that end, Edward paid $215,000 to a settlement agent who then issued a check to Arthur. The brothers, as co-executors of the estate, then executed a deed transferring 100 percent of the residence to Edward alone.

A tax issue arose when Edward Zampella then claimed an $8,000 credit on his personal income tax return. In 2009, Congress allowed first-time home buyers to claim such a credit. The credit did not apply in cases where a person purchased the home from a related person, including a parent or a parent's estate. Edward Zampella argued he was eligible for the credit, however, because he actually purchased the home from his brother, who was not considered a “related person” under the tax code.

The Internal Revenue Service denied Zampella's credit and the Court of Appeals affirmed. Even though his brother did receive a half-interest in the residence under their mother's will, the documented transaction showed the estate transferring the entire property to Edward. Therefore, he could not claim the tax credit.

This is just one example of how multiple tax issues may factor into estate planning and administration. If you're looking for advice on how to best address tax questions as part of your own estate planning, contact the Law Office of Scott C. Soady in San Diego today.