Judges bound to follow letter of the law, no matter the result

Often, judges will try to get the right result, even if it means doing legal gymnastics to get there.  But not always.  In Estate of Irving, 2011 Cal.App.Lexis 1515, Irving Duke made a will that provided for a gift of his entire estate to his wife.  He also provided that if he and his wife died simultaneously, then his estate would divided equally and distributed to two charitable beneficiaries.  There was no provision for what would happen to his estate if he outlived his wife.  Mr. Duke outlived his wife by five years, and died without issue (children, grandchildren, etc.).  Based on a strict reading of the will, there was no place for his property to go, meaning by outliving his wife, his will created an intestacy.

The charities filed a petition for probate of Mr. Duke's estate and asked the court to rule that Mr. Duke intended that his estate was to be distributed to them.  In support of this, they introduced evidence of Mr. Duke's intent including copies of annuity agreements favoring the charities, and testimony from witnesses of conversations where Mr. Duke confirmed his intent to give his estate to the charities.  Mr. Duke's  nephews, who would receive his estate if there was an intestacy, objected.

The court ruled that the language of will was unambiguous, even if it didn't make sense, and even if it appeared that Mr. Duke's intent was to give his estate to the Charities if he outlived his wife.  Becuause the language was clear, the court could not consider extrinsic evidence to determine Mr. Duke's testamentary intent. 

The court was not happy with its own ruling, as evidenced by this closing language:

Recognizing “that a will is to be construed according to the intention of the testator, and so as to avoid intestacy” (cites), perhaps the rule regarding the admission of extrinsic evidence should be more flexible when a testator's conduct after an event that would otherwise cause his will to be ineffective brings into question whether the written word comports with his intent. ... Perhaps it is time for our Supreme Court to consider whether there are cases where deeds speak louder than words when evaluating an individual's testamentary intent.

Wow.  They are practically begging the charities to appeal their decision, and for the California Supreme Court to reverse it.

For all you estate planners out there, let this be a lesson to you: draw a diagrm of your plan.  It will help you find holes like this one.  It is too expensive and time-consuming to rely on a ruling from the California Supreme Court to fix your error.  Assuming there is an appeal.  And the court Supreme Court agrees with the Court of Appeals' plea.

Automatic (for the most part) changes in 401k beneficiaries

Always with their finger on the pulse, the WSJ recently published this article on changes that occur to 401k beneficiaries when a participant spouse gets divorced, remarries or dies without changing the name of his or her former spouse as beneficiary.  The rules surrounding IRAs and 401k plans are incredibly complex, and for 401k plans, there is the additional complexity of ERISA laws, which preempts California community property laws in most cases.

Wall Street Journal on Disinheriting a Child

The WSJ published an excerpt from a new guide by Rachel Emma Silverman on how to effectively give one of your children less money than the rest.  I work strenuously to talk clients out of this because it will in most cases cause resentment between the child who gets less and any other children or beneficiaries.  Nevertheless, clients sometimes have good reasons for doing it.  Ms. Silverman does a good job of summarizing what to think about if you are considering an unequal distribution plan.

Reminder: Trusts 101 Seminar September 19

On Mondy, September 19, 2011 I will be speaking on drafting revocable trusts and ethical issues for estate planning attorneys at the Oakland Marriot. In addition, Veronica Cerruti will be giving an overview of trusts, and will talk about irrevocable life insurance trusts. Daniel Newbold will speak on using trusts for tax reduction, and grantor trusts. Wrapping it all up, Christing Beraldo will speak on trusts for the disabled. It is part of the all-day seminar "Trusts 101" put on by National Business Institute. For more information, click here.


Hope to see you there!

Mental Capacity and Trusts

Trusts are essentially contracts. The creator of the trust contracts with the trustee to hold certain property for someone's benefit. In California, revocable trusts have almost completely replaced wills as the method to dispose of a person's property when they die. The problem is, the mental capacity necessary to execute a will is different than the mental capacity necessary to execute a contract. Testamentary capacity to make a will is quite low. To execute a will, you basically have to know: (1) what your property is, (2) who the people you are giving your property to are, and what you are giving them, and (3) that you are making a will and what that means. Capacity to enter into a contract is higher. When someone is alleged to lack the capacity to execute a trust, which is essentially a will substitute, which standard do you use?

The answer, of course, is it depends. Mom and Dad executed a trust in 1992. Mom died in 1993. Dad, who had started a relationship with Girlfriend while Mom was still living, amended the trust to make substantial gifts to Girlfriend. Not surprisingly, when Dad died, Children petitioned to have the amendments set aside on the grounds that Dad lacked capacity, and was unduly influenced by Girlfriend to make the gifts to her. Girlfriend claimed the lower will capacity was all that was needed, whereas the Children alleged the higher contract standard applied.

The California Court of Appeals for the Second District (Los Angeles) held that, where a trust or trust amendment closely resembles a will in content and complexity, the lower testamentary capacity for wills is proper. In other words, if the trust is a will substitute, the level of capacity needed to execute it should be no higher than that necessary to execute a will.

Although trusts have been used as will substitutes in California for over 20 years now, the law is still catching up in the reconciliation between the law of wills and the law of contracts.

Andersen v. Hunt, Case No. B22107

How much is enough? The Clear and Convincing Evidence Standard

How much proof do you need to meet the "clear and convincing" evidence standard to show a person intended a writing to be their will? In Estate of Stoker, the court of appeals for the Second Appellate District shows us in, shall we say, colorful detail.

The fact start out ordinary enough. Steven Stoker signed a will and trust in 1997. He died in February, 2008. His will nominated Destiny Gularte as the executor of his will. She petitioned the court for probate in March 2008, and sent a notice to the beneficiaries of the trust per Probate Code section 16061.7 and 16061.8, notifying them that they had 120 days to contest the trust.

In April 2008, Steven's daughter Denine petitioned the court to probate a later, handwritten will, signed in August 28, 2005. That will revoked the 1997 trust and gave his estate to his two children equally. There were no witness signatures to this will, but there were two witnesses to Steven's signing of the will. One witness testified at trial that Steven told her to get pen and paper. He then dictated the 2005 will to her, he then signed it and told her this was his last will and testament. Another witness saw Steven sign the will.

This was not all, though. Perhaps feeling the need to drive home the point unequivocally that he intented to revoke the 1997 will, he then, in front of the witnesses, proceeded to urinate on the original of the 1997 will, and then burn it.

The court first held that the petition to probate the 2005 will was sufficient to constitute a contest of the 1997 trust, since the will states specifically that it revokes the trust.

The court then got to the fun part. The Probate Code in California was amended in 2009 to allow wills that do not necessarily follow the formalities required for a valid will if it can be shown by clear and convincing evidence that the testator intended the will to be his or her last will when they signed it. (Prob. Code section 6110 (c)(2).) The court of appeal upheld the trial court's ruling that the clear and convincing evidence standard was met, that Steven Stoker intended to revoke the 1997 will, and that he also intended the 2005 will to be his last will.

Now you know what it takes to meet the clear and convincing evidence standard to show that an otherwise defective will (no witness signatures) was intended to be the testator's will. I will not, however, go so far as to counsel my clients to urinate on and then burn the wills they intend to revoke. If they want to do that it is up to them. I will say, though, that if they do decide to take that extra step, the Court of Appeals for the Second District will conclude that it meets the clear and convincing evidence standard.

More on the estate tax

This Sunday New York Times article talks about the new estate tax law. It hits the typical highligthts - $5 million estate tax exemption, portability for (opposite sex) married couples. One topic of interest is gifting. The new tax law increases the lifetime gift tax exemption to $5 million, matching the estate tax exemption. The problem is one of timing, though. This law is set to expire at the end of 2012, with the 2001 law coming back into effect if Congress doesn't act. This means - and stop me if you've heard this before - the estate tax gift tax exemptions will go back to $1 million.

If you are one of those who are able and inclined to give away $5 million in the next two years, you could concievably be in a bind if the gift tax exemption goes back to $1 million. In this case, you may have to pay gift tax on $4million. Several things have to happen for this nightmare scenario to play out, though. First, you have to give away $5 million dollars by December 31, 2012. Second, Congress must let the law lapse and the gift tax exemption return to $1 million. Third, you have to die after 2012 while the the exemption is less than $5 million. Fourth, do you really need me to go to fourth?

As you might have thought by now, and as I've posted before, the universe of people this applies to is exceedingly small. Most people don't have $5 million to give away. Most people who do have $5 million don't want to give it away. Most people who do have $5 and want to give it away probably won't do it in the next two years.

Making sure you don't inadvertently expose your estate planning client to unnecessary taxes is important, but it is not the only thing we do as estate planners. Keeping a perspective on all this, and planning for your client in the real world, is just as important.

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.

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.

Definition of "Care Custodian" Narrowed, Somewhat

In California, a gift in a will or trust by a "depdendent adult" to a "care custodian" is presumed invalid. I put those phrases in quotes because they are defined in the Probate Code and also in case law. The phrase "care custodian" has been particularly problematic for estate planners because it has been defined in case law rather broadly to include non-professionals (including friends and acquaintances) who provide health services or social services to a dependent adult (anyone over age 64, or a person between 18 and 64 who is an inpatient in a 24-hour health facility.) The law seemed broad enough to include anyone who helped a dependent adult in any way.

The recent case of Estate of Austin has helped clarify the definition of care custodian somewhat. The decedent was 72 years old, suffered from a broke hip, and had recently undergone triple bypass surgery. The decedent's ex-wife's daughter (ex step-daughter?) helped to prepare meals, drive him to doctor appointments, and "other unspecified helping out." The court of appeals concluded that this "could not reasonably be characterized as substantial, ongoing health services or social services" and held that she was not a care custodian, so the decedent's gifts to her were valid.

DIY Estate Planning Reviewed in NY Times

I swear I didn't learn about this NY Time article when I wrote yesterday's post. Tara Siegel Bernard used LegalZoom.com, Quicken WillMaker Plus and a program called Legacywriter to prepare wills (Tara lives in New York, where the vast majority of estate plans are will-based), and then had New York estate planning attorney Laura Twomey review the plans. The verdict: although it is possible to do it yourself, there are still a lot of questions that arise thare require an attorney's help.

This will probably not be enough to discourage the true do-it-yourselfer, but it illustrates how taking the law into your own hands will always entail some level of risk.

Estate Planning as Commodity

A recent article in California Lawyer magazine profiled LegalZoom.com, the self-help website co-founded by Los Angeles attorney Robert Shapiro. The article starts with the rather ominous proposition that the website will put many lawyers out of business. Yeah, sure, it's hyperbole aimed ag generating interest, but there is something to it, especially for estate planners.

There are a great many people out there who believe that a will or a trust as a mostly boilerplate document that doesn't require paying a lawyer several thousand dollars to prepare. They believe they know who they want to name as their fiduciaries and who they want to leave their estate to. Whether their estate planning ideas will actually work is another story, and it is doubtful that using services like LegalZoom or will drafting software or storefront document preparation businesses can provide the necessary guidance to such people, or whether doing so would constitute practicing law without a license.

Nevertheless, as more people look to the internet first for solutions to whatever issues they face, places like LegalZoom.com will become more popular. Consider how the internet has changed the travel industry, or financial management. As an estate planning attorney, it will inevitably get more difficult to compete with these low cost options. At the same time, there are still people out there who would never try to prepare an estate plan on their own. I think there is room for both kinds of people, and there will continue to be room for at least as long as I plan to practice law.

I don't see this trend as a threat to my livelihood. But, then again, I also litigate trust and estate matters, including disputes that arise out of drafting errors and poor planning...

Estate Planning for Humans

Most of the tools of estate planning (wills, trusts, etc.) are obsessed with taxes. Particularly estate taxes. Setting aside, for the moment, the fact that there is no estate tax for those dying in 2010 (see previous post), and the uncertainty of how it will return in 2011, the overwhelming majority of estates pay no estate taxes. The IRS estimates that only about 6,000 estate tax returns will be filed for those who died in 2009, when the exemption was $3.5 million. They also project that even if the applicable exclusion returns in 2011 at $1 million, only 1 percent of estates would be subject to the tax. With the estate tax affecting so few, why are estate planners so obsessed with it? Why don't planners spend more time thinking about what their documents actually say, how they are going to be implemented, how they interact with each other, and whether they really carry out the client's wishes?

Since it is much more likely than not that our clients will have no estate tax exposure (no matter what the law ends up looking like next year), perhaps now should be the time to refocus of our efforts on listening to the client, thinking about the implications of their wishes, drafting the documents to work with each other and carry out their wishes.

Let me give an example. The client has a piece of personal property that they wish to keep in family for future generations. Trust drafting considerations would be funding the trust so the property can be maintained properly, protecting the property from creditors, spendthrift children, as-yet-undetermined-future-former-spouses, etc. Perhaps these same considerations should also be addressed in the will and power of attorney, in case, for whatever reason, the house is not in the trust when your client dies. Another consideration is whether it is a good idea to keep the house in trust for future generations at all.

This is directed more at the CLE industry rather than planners themselves. We, as planners, already know that our clients have no estate tax exposure, and likely will never have such exposure. Lecturers, thinkers, and writers should perhaps spend greater efforts on the drafting component rather than the tax obsession. This would quite likely result in more readable (and likely shorter) estate plans that are much more likely to follow the client's wishes, reduce the chances of litigation, and improve the quality of our practice.

Throwing Momma From the Train(?)

I've heard twice in the past two days about an increase in deaths of rich people before December 31, 2010 to avoid estate tax when it returns in 2011.

Honestly, are people really going to off their relatives to save on estate taxes? Aren't there laws against that?

There also has been talk about Advance Health Care Directives (or health care proxies or Durable Powers of Attorney for Health Care depending on your jurisdiction) that include provisions permitting the agent to take estate taxes implications into consideration in end-of-life decisions.

Good luck enforcing that provision. Or relying on it when the one relative who isn't obsessed with estate taxes questions the wisdom of the agent to pull the plug.

I think that this will join the urban myth about estate taxes taking away the family farm (there is no known case of this ever happening, and the Internal Revenue Code is full of provisions to prevent this).

Live Blogging from the 2010 ABA STEP Conference

I'm in NYC for the 2010 ABA Skills Training for Estate Planners program. I will resist the urge to give "this is what I learned today" posts, choosing instead to post little nuggets of insight from the lecturers.

For the record, New York Law School, where the conference is held, is a mightily impressive facility. Still, it wouldn't make we want to go back to law school. A quick look at the law library alone is enough to bring on my law school PTSD. And that was 10 years ago.

Gary Coleman: Another reason to get an estate plan

As is so often the case with celebrity mortality, intense media attention is paid to the "will" as a source of potential post-mortem drama. What often is overlooked (as in the case of Michael Jackson) is that most celebrity wills are part of a trust-based estate plan, and are little more than "pourover" wills directing the executor to distribute the estate to the trustee of the trust. Gary Coleman may be different, though.

Coleman was divorced at the time of his death (despite statements to the contrary by his ex-spouse). He had no living children at the time of his death. No one has been able to find a will, trust, or other testamentary document (although Todd Bridges, the sole surviving child star from Diff'rent Strokes claims Coleman had a "secret will" that disinherited Coleman's parents).

Coleman was estranged from his parents. If no estate plan is found, then under intestacy his parents would inherit his estate. Judging by the claim of estrangement, I would venture that this was not Mr. Coleman's intent.

I've written previously on my old blog about people who die relatively young wihout a will but with intestate heirs to whom they would never want their estate to go. The only way to avoid this is with an estate plan that clearly sets our your wishes.

It's not about money. It's about control.

Thanks to Gary Beyer of Wills, Trusts & Estates Prof Blog, who has been monitoring these events closely.