Monday, January 31, 2011

CEB Recent Developments, 2010

I attended the CEB Recent Developments program in San Francisco on Friday. Here are some highlights:

Hearsay Rule - Evidence Code section 1260 provided an exception to the hearsay rule for an unavailable witness regarding the existence of a will. This permitted admission of a statement by a decedent regarding their will, but there was no mention of whether it applied to trusts. The authorities were mixed on whether it did. As amended, Evidence Code section 1260 explicitly excepts from the hearsay rule statements regarding whether the declarant has or has not made or amended a revocable trust. Arguably, other exceptions to the hearsay rule could be used to bring in such statements, but now you don't have to argue - they are specifically excepted.

Certificate of Independent Review There have been major changes to the presumed invalidity of transfers to "disqualified persons." These changes apply to instruments that become irrevocable on or afer January 1, 2011. One change regards who can prepare a certificate of independent review. An exception to the persumed invalidity of certain transfers (such to a care custodian of a dependant adult) is if an "independent attorney" prepares a certificate of independent review. Under the new law, the attorney who drafted the will or trust containing the transfer can perpare the CIR, but only as to a gift to a care custodian. (see new Probate Code section 21384(c).)

And speaking of care custodians - the definition has been narrowed to allow gifts to persons who assist a depdent adult "without remuneration" and had a personal relationship with the transferor: (1) at least 90 days before providing the services, (2) at least six months before the depedent adult died, and (3) before the depdent adult was admitted to hospice care (if they were admitted to hospice care. (see new Probate Code section 21362.)

Remember, these new rules apply to instruments that become irrevocable after January 1, 2011. That means that they apply to instruments you may have already drafted. It also means that the old rules apply to instruments that became irrevocable through the end of last year.

I could go on all day, but I won't. I will cover some more highlights in my next post.

Friday, January 21, 2011

Collateral Source Rule and Conservatorships

The Collateral Source Rule comes up most often in personal injury lawsuits. Let's say you have auto insurance and you are in an accident that is not your fault. The person who hit you (i.e., the "tortfeasor") is liable for the full amount of the damages he or she cause you. The fact that you have insurance that would pay the claim does not reduce what the tortfeasor would owe. The insurance is a "collateral source" of funds to compensate your for your damages, and the person who hit you cannot benefit from your diligence in maintaining insurance.

What does this have to do with conervatorships, or anything under the Probate Code for that matter? The so-called Collateral Source Rule has been stretched to include such things as government benefits payments. In Conservatorship of McQueen, 2011 Cal.App.Lexis 38, The First District Court of Appeals upheld the Alameda County Superior Court holding that Ida McQueen's SSI and Medi-Cal benefits were a collateral source, and that they should not be considered in determining the measure of damages in a breach of trust action. Ida McQueen received means-based government benefits. She was a life beneficiary of a testamentary trust established by her father that included a house as a trust asset. The defendants sold the house and distributed the proceeds to various family members and paid some expenses of the administration of the estate of Ida McQueen's father.

At trial, the defendants argued that if they distributed the proceeds of the sale to Ida McQueen, she would lose her SSI and Medi-Cal benefits, and so could never benefit from the sale of the house. In other words, she can have the benefits, or the sale proceeds, but not both. Since she is already getting the benefits, they should be allowed to keep the sale proceeds. The jury found the defendants liable for improperly selling the house and taking the proceeds. The court ordered that the defendants repay a portion of the sales proceeds to Ida McQueen as damages.

The appeals court upheld this verdict, finding that the SSI and Medi-Cal benefits were a collateral source of funds for Ida McQueen, and so should not be taken into consideration when measuring damages. The wrongdoers here should not benefit from their improper sale of the house because Ida McQueen is receiving benefits, which would be replaced by the sales proceeds. Ida could establish a special needs trust to place the proceeds in, and retain her benefits. Medi-Cal has a lien on the trust assets and can receive an amount equal to the benefits they have paid to Ida McQueen when she dies. This is analogous to the auto insurance-personal injury scenario above because a personal injury plaintiff who receives insurance money and damages from the defendant can be made to compensate the insurer and so avoid a double recovery.

The overall policy is that wrongdoers cannot benefit from their wrongs because the plaintiff has other sources of recovery for the damages caused by the wrongdoers. The court here has made clear that this extends to government benefits.

Friday, January 14, 2011

Finally! Clarity in the Estate Tax! Sort of.

First of all, Happy New Year to everyone. We have 351 days left to make this year a success.

Now to the immediate matter at hand. As you may have heard, Congress has finally acted on the estate tax, passing a bill that levies a tax on estates greater than $5 million at a maximum 35 percent rate. That means that if your estate is worth less than $5 million, and almost everyone's is, you don't have to worry about this tax. At least for the next two years. Yes, rather than passing a permanent tax bill, the government instead passed a temporary bill that expires in 2012, at which time, the pre-2001 law ($1 million exemption [adjusted for inflation from 2001], maximum 55 percent rate) comes back into effect unless Congress does something. Again.

Now, why would our government pass a tax bill that was set to expire in 2012? I can't think of anything in particular that's happening in 2012. Please email me with your ideas.

Anyway, one aspect of this temporary bill is a thing called "portability." In short, in every married couple, each spouse has a separate estate tax exemption. Under portability, the surviving spouse can apply the unused portion of the deceased spouse's exemption to his or her estate when he or she dies. Unless the law changes. Or the surviving spouse gets remarried. Maybe.

To illustrate, let's say Spouse One and Spouse Two have a total estate of $3 million, all community property. Spouse One dies with an estate worth $1.5 million. The remaining $3.5 million can be used by the surviving spouse when he or she dies, for a total exemption of $8.5 million. One catch is, the surviving spouse has to die while there is still a portability law on the books. So, if this law expires after 2012, the surviving spouse loses the additional $3.5 million exemption. Another catch is if the surviving spouse remarries and then outlives his or her second spouse. This apparently immortal surviving spouse can now only use the portability of the second deceased spouse. So, if the second deceased spouse dies with an estate worth $5 million, the hearty surviving spouse gets no additional exemption.

We should all have these problems. There are many esoteric arguments being made about how best to address the potential traps in portability. One such "trap," using the example above, anticipates the surviving spouse wins the lottery, makes lifetime gifts of $8.5 million assuming they can be made tax free, and then the law expires, or he or she gets remarried and loses the portability. Most people don't make $8.5 million in lifetime gifts, even if they have the money, so this is a planning argument that most likely will occur only in a vacuum. Or a CLE presentation.

The bottom line is, most estates will not be taxable with a $5 million exemption amount. Or even a $1 million exemption amount. Most people don't win the lottery. So, portability won't mean anything to most people. As estate planners, the best we can do is understand the issues and plan for them as they come up. Your typical client with an $800,000 estate is likely not going to need to plan with portability in mind, and will not be affected if the $1 million exemption (adjusted for inflation from 2001) comes back in 2013.

So read the new tax law, understand it, and move on. There are more immediate issues that most estates must deal with. Like family dynamic.