San Diego Estate Planning Lawyer Blog

Articles Posted in PROBATE

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Normally when we talk about estate planning, we assume there will be an estate with sufficient assets to provide for a person’s heirs. What happens if you die with more debts than assets? In legal terms, this is known as an “insolvent estate,” and California law establishes certain rules to deal with such a situation.

California’s Order of Priority for Estate Creditors

First of all, even if you have a will, you cannot use it to avoid paying certain obligations. For example, you cannot direct the executor of your estate to give all of your money to your children and not pay your creditors. California law sets an order of priority for paying any debts from the assets of an estate. Some debts are given higher priority than others, and much like a bankruptcy case, the lower priority creditors may receive nothing from an insolvent estate.

The highest priority debts are those for “expenses of administration” related to the estate or its property. So if you own a house, the expenses necessary to keep the house running, or sell the property, would be considered an expense of administration. This category also includes such things as court costs and attorney fees.

The second-highest priority is for secured creditors. This most commonly refers to a mortgage on a property. Any such mortgage must be paid off before any lower-priority debts are paid.

The third-highest priority is for funeral expenses. This is followed by expenses of the deceased person’s final illness, i.e. medical bills.

The fifth-highest priority is for what is known as a “family allowance.” This refers to any amounts needed for a spouse or dependent child’s ongoing maintenance while the estate remains open. The specific amount of any such allowance is determined by court order.

The sixth-highest priority is for any claim for unpaid wages. In other words, if the deceased person hired someone as an employee and failed to pay wages for whatever reason, that employee would have a claim at this priority level. Finally, all remaining “general debts” share the lowest priority. This includes any unsecured debts such as credit card balances or money owed on a promissory note. General debts also include any unsecured portion of an otherwise

It should be noted that as a general rule, there is no priority within a given class. However, all debs within a given class must be paid before any debts of a lower priority. So, for instance, if a person dies and leaves two unpaid credit card bills, neither has priority over the other. If there is not enough money to pay both, the law requires each creditor be paid a “proportionate share” from the available assets.

Get Advice from an Estate Planning Attorney

Insolvent estates still require a good deal of administration. That is why you should not ignore estate planning even if you expect to have an insolvent estate. If you need assistance from a qualified California estate planning attorney, contact the Law Office of Scott C. Soady in San Diego today.

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Estate planning is especially important when you own property in more than one state. Although your will is generally subject to the law of the state in which you reside at the time of your death, there may be a need to open an additional (or “ancillary”) estate in any other state where you own real estate or other property outside of California’s jurisdiction. In some cases, your estate may be liable for another state’s taxes.

Brothers Fight Over Nebraska Property in California Court

Here is a recent example. A California husband and wife created a living trust and transferred all of their property into it, including two pieces of farmland in Nebraska that the wife’s family had owned for more than a century. According to the terms of the trust, after the couple died, the trust’s assets were to be equally divided between their two children. The trust also required a division of the trust into “A” and “B” subtrusts after the first spouse died. This is a common estate planning tool used to keep the surviving spouse’s property in trusts separate and apart from the deceased spouse’s property.

In this case, the wife passed away first. The husband, as the surviving spouse, then subdivided the trust, placing one parcel of the Nebraska farmland into the “A” trust (representing his property) and the other parcel into the “B” trust (representing his deceased wife’s interest).

After the husband died in 2012, the two brothers became co-trustees of the trust. One issue they had to deal with was Nebraska’s inheritance tax. While most states, including California, do not impose inheritance taxes, a handful still do. Under Nebraska law, children who inherit more than $40,000 worth of property from a parent must pay tax. The tax rate is 1% of the “clear market value” of the inherited property above the $40,000 exemption.

One of the brothers hired a Nebraska attorney to assist him with determining the inheritance tax owed. They ultimately filed an accounting with the Nebraska probate court stating the “fair market value” of both parcels was approximately $228,000. The court ultimately accepted this calculation as the “clear market value” and assessed the inheritance tax accordingly.

But litigation then broke out between the two brothers in California court. Under an amendment to the trust adopted by the parents while they were still alive, one of the brothers had an option to purchase the farmland before the trust assets were subsequently divided into the “A” and “B” sub-trusts. This did not happen after the mother’s death, however, and the father apparently excluded any mention of this option when he later signed a restatement of the trust. Nevertheless, the brother holding the option sued to enforce his rights.

The other brother unsuccessfully challenged this claim. The probate court, and later the California Court of Appeal, held the option remained valid at least to the parcel in the father’s “A” trust. The brother was therefore entitled to purchase that piece of property based on the value assessed for Nebraska inheritance tax purposes.

Need Estate Planning Advice?

The above case is an illustration and not a complete statement of the law on these subjects. If you need advice from an experienced San Diego estate planning attorney on how to deal with your own property as part of a trust, contact the Law Office of Scott C. Soady today.

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It is never a good idea to avoid estate planning. While California law does provide for the distribution of estates without a will—that is, persons who die intestate—this often ends up costing your estate (and heirs) additional time and money. In addition, if you do not make a will, you forfeit any say over who will take responsibility for your assets as executor, which can lead to further delays in settling your affairs.

Lack of Will, Grandson’s Litigation Delays Distribution of Oakland Woman’s Estate

Intestate estate distributions can also be more complicated than you might think. Consider this recent California case, which is provided here merely as an illustration and not a complete statement of the law. The deceased in this case was an elderly woman who died without a will. She left one “significant asset,” her home in Oakland. One of the deceased’s granddaughters was named her personal representative of the estate. She apparently failed to perform her duties as personal representative, however, and four years later, the court named her attorney—who said he was “unable to reach his client”—as special administrator just to get a formal accounting of the estate filed.

There was also a longstanding legal dispute over the title to the grandmother’s property. Another grandson claimed to be the lawful surviving joint tenant. After several years of litigation, a California court determined this grandson only owned a one-sixth interest in the property, leaving the remaining five-sixths with the estate.

And who was entitled to that five-sixths? At the time of the grandmother’s death, she was survived by two daughters, who were each entitled to half of the estate. Unfortunately, several years had elapsed since the estate began and both daughters had died. One of the daughters also did not have a will, so her share of her mother’s estate had to pass under intestacy law. The intestate daughter was survived by a husband and three children, including the grandson who already owned one-sixth of the Oakland property. Under California law, the husband received one-third of the estate (or a 5/36 interest in the property) while the three children split the remaining two-thirds (leaving the one grandson with a 14/54 interest and his two siblings with a 5/54 interest each).

The grandson appealed the probate court’s decision, maintaining he was still entitled to the entire property. The California Court of Appeal rejected the appeal, citing a lack of any demonstrable error on the part of the probate judge.

Need Help Making a Will?

The estate above has been stuck in court for nearly eight years. If you want to avoid such an unnecessary and convoluted fate for your own estate, it is imperative to make a will as part of a comprehensive estate plan. An experienced California estate planning attorney can assist you with all aspects of the process. Contact the Law Office of Scott C. Soady in San Diego today if you would like to speak with an attorney right away.

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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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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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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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Many people avoid making a will because they assume they will die without leaving a probate estate. And while estate planning can help keep many assets out of probate, you should always prepare for unexpected claims that may arise after your death. For example, if your death is the result of medical malpractice or a defective product, a probate estate may be necessary to pursue civil litigation against the responsible parties. Recently a California appeals court addressed such a case involving the estate of a one-time Hollywood star whose death prompted an extended legal fight between his sister and a biological child he later acknowledged as his own.

In re Estate of Johnson

Troy Donahue was a well-known Hollywood actor during the 1950s and 1960s best remembered for co-starring in the 1959 film A Summer Place with Sandra Dee. Although married four times, Donahue died unmarried in 2001. In 1987, Donahue met a woman who claimed to be his biological daughter. She was adopted at birth in 1964. Donahue nevertheless accepted the daughter as his own and maintained a relationship with her and her children until his death.

Donahue, whose real name was Merle Johnson, died without a will. Donahue’s obituary reported the cause of death was a heart attack. But the daughter later received information suggesting the use of the prescription drug Vioxx caused her father’s death. In 2005, the daughter hired a lawyer to join a class action against Vioxx’s manufacturer. But this required opening a probate estate for her father in California.

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