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.

Ensuring Another Bite at the Apple

This post is NOT about Steve Jobs.

Instead, it is about the court's propensity to allow parties to fix problems with their pleadings, rather than using their powers to dismiss an action for good.

Frank Dito was 94 when he married 28-year-old Elenice, who was from Brazil.  Elenice worked as a housekeeper for Frank and his then wife Roseana.  Frank and Elenice married two years after Roseana died.  The two signed a prenuptial agreement.  Frank and his former wife Roseana had an estate plan that Frank never updated after Roseana died.  When Frank died in 2007 (when he was over 100 years old), Frank and Roseana's daughter filed a petition for probate of Frank's pourover will, which identified Roseana as his wife.  Elenice filed petitions to set aside the prenuptial agreement as unenforceable, and to take a share of her husband Frank's estate as an omitted spouse.  The court ruled that Elenice was the surviving spouse of Frank, that she was entitled to a share of his estate as an omitted spouse, and that the prenuptial agreement was unenforceable.

After the court's ruling, Frank's daughter filed a petition alleging that Elenice committed financial elder abuse against Frank, and that under the Probate Code, she should be deemed to have predeceased Frank, taking nothing under his estate.  Elenice demurred on the grounds that Frank's daughter's petition was barred by the doctrine of Res Judicata because the court had already concluded that Elenice was an omitted spouse and was entitled to a share of Frank's estate.  The trial court agreed, and sustained the demurrer without leave to amend.  Frank's daughter appealed.

The appellate court reversed the lower court's ruling.  Res Judicata only works where the same "primary right" is at stake.  Here, the appellate court found that the primary right in the first action was whether Elenice was entitled to a share of her husband Frank's estate as an omitted spouse.  The primary right in the second petition was that of Frank not to be abused or defrauded.  Since the two actions arose from different primary rights, the doctrine of Res Judicata did not apply.

The appellate court did find other reasons for the trial court to sustain Elenice's demurrer, but those reasons could be cured by amendment to the petition, and so the appellate court held that the demurrer should be sustained with leave to amend.

In my 10-plus years as a litigator, I cannot remember a single instance of a court sustaining a demurrer without leave to amend. Not that it hasn't happened to me.  I just can't think of any right now, which suggests to me how rare it is.  Courts are very averse to taking away someone's day in court, and will usually only throw something out entirely in extreme situations, such as where a statute of limitations has expired.  Courts are much more willing to pull the trigger once a case has been argued on its merits.

Estate of Dito, 2011 Cal.App. LEXIS 1104.

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.

New Legislative Proposals

The Trusts & Estates Section of the State Bar of California has introduced new legislative proposals. Some have a potentially far-reaching impact.

• Disposition of Remains - would add conservators of the person and estate to the list of persons who may control the disposition of remains.
• Directed Trusts - Would add a chapter to the Probate Code specifically authorizing the use of directed trusts, and make other conforming changes.
• Repeal of Rule Against Perpetuities - Just like it sounds.
• Elective Administration of Decedent's Estates - Would permit certain beneficiaries to choose between "elective" administration and formal administration of a decedent's estate.
• Clarification of Principal and Income Act - pertains to the characterization of amounts received from business entities.

More details on these proposals are posted on the State Bar's Sections website. I will be posting more analysis of the repeal of the rule against perpetuities and elective administration of estates. These are proposals are at this time only being submitted to the State Bar Board of Governors for possible introduction in the California legislature in 2011.

Thanks to Kaysi Holman of the Alameda County Bar Association for bringing these proposals to my attention.

Of Disqualified Persons and Totten Trusts

This is a tale of a settlor's change of heart and an attorney's inadvertence. Only it's not a tale, it's real. Anyway, Lucia Howrey opened a "Totten Trust" account at Bank of America naming her step-daughter on the signature card as the beneficiary. Later, Lucia executed a revocable trust and identified the account as a trust asset. Lucia also named Gabriella Reeves as the beneficiary of the Bank of America account. Garbriella's son drafted the trust. Lucia died in April 2009. The step-daughter claimed she was the owner of the account because her name appeared on the signature card. On appeal, she argued that Gabriella was disqalified from receiving the money because she was the mother of the drafting attorney.

Under California Probate Code section 5302, the amount left in a Totten Trust account belong to the named beneficiary of the account on the death of the sole trustee of the account unless there is clear and convincing evidence of a different intent. Here, the California Court of Appeals affirmed the Ventura County Superior Court ruling that the Lucia's revocable trust identifying the bank account as a trust asset and Gabriella Reeves as the beneficiary was sufficient evidence of such a different intent. So, the step-daughter could no longer collect the balance in the account as the beneficiary of the Totten Trust.

Here's where the attorney inadvertence comes in. Because Gabriella was the mother of the drafting attorney, there is a rebuttable presumption that she is a "disqualified person" under Probate Code section 21350. The step-daughter's attorney never raised the disqualification issue in his moving papers, and referred to it only obliquely at the hearing. The step-daughter was barred from raising the issue on appeal.

Araiza v. Younkin.

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.

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).

Settlement Agreements are Not Trusts!

From Trust & Estate Prof Blog: the Georgia Court of Appeals held that an exculpatory clause in a settlement agreement and release is not a trust amendment.

Curtis Mayfield, Jr., the musician, had a trust that held, among other things, the rights to his body of work. The beneficiaries settled with the trustee, received a distribution, and executed a settlement agreement and release. As with all good settlement agreements, the beneficiaries released all claims against the trustee. The beneficiaries then brought a lawsuit against the trustee for fraud, negligence, etc. The trustee filed a motion to dismiss, referring to the release language in the settlement agreement. The trial court granted the motion to dismiss, holding that the release violated Georgia law prohibiting a trust instrument from relieving a trustee for their own breach of trust.

The court of appeal reversed. The settlement agreement was not a trust instrument, and thus trust law did not apply. The court held that the release of liability was valid for negligent acts, although it might not be valid for intentional acts, as such a release would violate public policy.

I realize this is GA, and not CA, law, but there are similiarities. The GA law relied on by the court in concluding that the settlement agreement was not a trust is essentially the same as CA law: intention to create a trust (Prob. Code section 15201); trust property (Prob. Code section 15202); a valid purpose (Prob. Code section 15203); and a beneficiary (Prob. Code section 15205). Settlement agreements don't fall into these categories and therefore are not trusts. So, trust law limiting the ability of a trustee to exculpate him or herself from liability does not apply to a settlement agreement.

So, there are two things to take away from this, even under California law: (1) settlement agreements are not trusts, and (2) releases of liaibility in settlement agreements are governed by contract law, not trust law.