Time to Make Amend...ments.
Keith Davidson discusses how to amend your California Trust.
For our email subscribers: click on the title link to view this video on our website.
In Trusts we Trust: When should you create a Trust in California?
I have heard it a million times before: “I don’t need a Trust because ____________” you fill in the blank: I don’t have enough money, I won’t care when I’m dead, California probate is easy, my wife and I own everything in joint tenancy…there’s many, many excuses and misinformation regarding Trusts in California.
In California, a probate must be opened for anyone dying with more than $150,000 in personal property (things like bank accounts, brokerage accounts, stocks, bonds, etc); or more than $50,000 in real property (which in California is almost all real property). That means that if you own a home, regardless of whether the home has a mortgage or not, your estate will likely have to go through probate before it can transfer to your heirs.
Probate is no easy task. See our prior posts on probate here and here. It can take 12 to 18 months (or more) to complete, and it costs a lot. For even a modest estate worth $500,000, the statutory attorneys’ fees alone are $13,000. Add in another $13,000 for the executor and anywhere from $1,500 to $2,000 in hard costs (such as court fees, probate appraiser fees, publication of notice, etc.) and the total probate fees and costs can be around $28,000 for a $500,000 estate. That’s far more than the typical fee for a lawyer to prepare an estate plan, which can run from $2,000 to $3,000 on average.
How about estate taxes? Luckily, California does not have an estate tax or inheritance tax. But the Federal Government does have an estate tax, and the current estate tax limit is $5 million (plus a little more for inflation). That means that anyone with an estate worth less than $5 million will pay no tax.
There was a time when a Trust was necessary to save substantial money on estate taxes, back when the estate tax limit was only $600,000. Now that the estate tax limit is $5 million, most people don’t need a Trust to save on estate taxes. But a Trust still saves the trouble and expense of probate if you own real property or have more than $150,000 in personal property. It also allows for someone to manage your financial affairs if you ever lose capacity, which is reason enough to have a Trust.
Still not convinced? That’s okay because us lawyers make far more money on estates where proper planning is not done. We would much rather earn a big, fat probate fee or spend years litigating your estate after you’re gone. Not planning is a great way to make a lawyer a beneficiary, and maybe even the biggest beneficiary, of your estate.
That may sound a bit jaded, but I have learned over the years that no matter how much sense planning makes, many people just won’t do it. If you really want to save money, time, and trips to the Courthouse, it’s time to put your Trust in Trusts.
The Mystery Amendment...Powers of Appointment
Did you know that amending a California Trust is not the only way to “amend” a Trust? Sounds like a riddle, but it’s actually a concept known as a “power of appointment.”
A Trust amendment is a simple way to change a California revocable Trust. And an amendment can change any part of the Trust provisions, from the distribution section, to Trustees, to Trustee powers—anything can be changed on a revocable Trust. Amendments are done by the Trust settlors (the people who created the Trust in the first place).
But the Trust distribution provisions can also be changed using a device known as a power of appointment. The power allows a named person to appoint the assets among certain beneficiaries. Sometimes the power is given to one of the Trust settlors and sometimes it is given to a third party (usually one of the beneficiaries). It’s like giving a gift using someone else’s money.
Here’s how they work:
1. Creation of a Power of Appointment. A power of appointment is created by reference to it in the Trust document. The power is created by language that goes something like this:
“Upon the death of the Surviving Settlor, the Trustee shall distribute the remaining balance of the Trust estate to such person or persons as the Surviving Settlor shall appoint and direct in any writing delivered to the Trustee, other than a Will”
This is just one example. Powers of appointment can vary widely, and can be limited or general in how they are applied.
2. Exercise of a Power of Appointment. Once a power of appointment is created in a Trust, it must be exercised. “Exercised” means that the named person who has the power to change the distribution of Trust assets puts his or her intent in writing.
The general rule is that a power of appointment must be exercised as specified in the Trust that creates the power. Typically, the Trust language requires the power to be exercised by a writing, other than a Will, signed by the power holder and delivered to the Trustee. Why “other than a Will?” Because exercising a power of appointment in a Will can be problematic. A Will is not officially deemed a valid Will until it is approved by the Court and entered into Probate. And we use Trust’s in California to avoid probate, so you rarely want to have a procedure to exercise a power of appointment that forces you to use something (i.e., Probate) you are trying to avoid. But if a Trust specifically states that it is acceptable to exercise a power of appointment by Will, then a Will is sufficient.
Once a power of appointment is exercised in writing, it governs the distribution of the Trust assets and it supercedes the distribution section in the Trust.
3. Failure to Exercise Power of Appointment. If the person given the power to exercise a power of appointment fails to do so, then the power is ignored and the Trust distribution section goes into effect as it is last written in the Trust after any amendments by the Trust settlors.
A power of appointment is an effective and flexible way to give a named person the power to vary the Trust distribution terms—a way to amend a Trust without doing an amendment.
Transferring Wealth to Generation X-Box
To be honest I have lost track of how we refer to different generations. I know baby-boomers and generation X, I’ve heard tell of generation Y, but I’m lost after that. So let’s just call everyone under age 21 as of now “generation X-Box.” How do you deal with the transfer of wealth to generation X-Box?
The reason Trust and Will litigation lawyers are in business today is largely due to sibling rivalry—just like children fighting over an X-Box, they fight over a parent’s assets. And parents have a hand in that as well, sometimes not planning the transfer of their assets or sometimes planning in a way that defies reality. For example, parents like to put the oldest child in charge after they are gone, is that a good idea? Maybe or maybe not depends on the personal traits of the oldest child.
Sometimes none of the children should be appointed to act as successor trustees because there’s just too much discord among the children. That’s when parents need to be realistic. There are other options, such as corporate trustees or private, professional trustees, that can do a great job administering the Trust while they remain above the fray created by sibling rivalry.
In fact, some sibling rivalries are so explosive, that just having one child acting over another is enough to create an atmosphere of doubt and mistrust—which could be justified or just perceived. Either way, tensions mount and Trust matters boil over into Court action. That’s great for the lawyers, no so good for the Trust and its beneficiaries.
Further, family dynamics are become more complicated with people being married multiple times and having children from different marriages. Then the tension truly shoots through the roof when the children of one parent are fighting with the children of the other parent.
What’s the answer? Not every potential conflict can be resolved with planning, but there is much that can be done with a proper (and realistic) estate plan. Here are some lessons we have learned from our year’s of litigating trust and will messes that can help in passing wealth to generation X-Box:
- The Oldest Child doesn’t always know best. It is common for parents to name a child as their successor trustee, and sometimes multiple children. The problem is that (1) not every child is ready to handle that type of responsibility—especially where the law requires that the trustee treat all beneficiaries fairly—(2) sometimes the mere fact of having a child in charge causes problems with the other children. The solution: be realistic with your choice of co-trustee. If your going to name a child, pick the right one, make sure they can handle the job of trustee and that they understand their duties as trustee (few people really understand their duties). Or consider using either a corporate trustee or a private, professional trustee. Private, professional trustees are a great alternative because they charge less than corporate trustees (usually) and provide more hands-on attention to the Trust administration.
- Co-Trustees can lead to Co-headaches. Some people think the solution to sibling rivalry is to put all the kids in charge, that way no one can complain about being left out. Bad idea. Children who can’t get along should not be expected to work together in managing the Trust and its assets. The better solution is to find a neutral third party. A trusted friend or advisor, a private professional trustee, or a corporate trustee—anyone other than the children.
- Messy Amendments = Happy Lawyers. Want to help keep lawyers employed? When you go to amend your Trust or Will don’t do it with the help of a lawyer. Instead, write on the document, in the margins without signing it, or write on the back of a napkin, or use a computer program without knowing how to complete the amendment. All of these techniques will end up in a mess of a plan, and a messy plan means good business for lawyers because there’s more to argue over.
- Information is Key – don’t be shy about what you want. And whoever is placed in charge needs to know the duties and obligations they are undertaking. Share at least some basic information with your successor trustee. You don’t need to show them your Trust or Will, but tell them you have it, where it is kept, and what you expect when the time comes.
- Don’t be Afraid to Lay Down the Law – if you’re going to disinherit someone, tell them beforehand. I know it is hard to do, but it can save those children who are not disinherited a heap of trouble after you are gone.
- If you really want a personal memento to go to one child, give it to him or her while your still alive. Small personal items can be easily lost, misplaced, overlooked or stolen. And nothing ignites family discord like fighting over the smallest personal item. It may have no economic value, but there’s tons of emotional value and that will keep the fire of litigation burning for years.
- Make sure your assets are properly titled. There’s nothing more frustrating than seeing a perfectly good Trust go to waste because the decedent’s assets were not titled in the name of the Trust. Hopefully there is a pour-over Will that transfers the assets to the Trust, but that’s not always the case. So some assets pass under the Trust, some pass under the Estate, and some may even pass under joint tenancy.
These are just a few of the biggest issues we see on a daily basis. When it comes time to sit down and plan your estate, give these items some thought and be sure you are ready to hand your estate to generation X-box with as little fighting as possible.
Domestic Asset Protection Trusts: Improving financial longevity
I will admit that I am not the biggest proponent of asset protection devices. Primarily because there seems to be a lot of schemes and scams sold under the guise of "asset protection." But not every asset protection device is bad. In fact, there are some very good, and legitimate (and, yes, legal), asset protection strategies. Our friend and colleague, Michael Hackard, at Hackard Law in Sacramento, was kind enough to submit this guest post on the subject of domestic asset protection trusts, one of the legitimate forms of asset protection. Hope you enjoy this informative post:
THE SUBTITLE: I struggled a bit for an appropriate subtitle regarding Domestic Asset Protection Trusts (DAPTs). I wanted the subtitle to be descriptive, to underscore the benefits of DAPTs and to neither overstate nor understate the trusts’ advantages. While such trusts have limitations, they can substantially improve “financial longevity” for individuals and families.
DEFINITION: Alaska has been the leader in updating its trust laws and has some of the most expansive asset protection laws in the United States. Alaska was the first state in the country to allow “self-settled” trusts. The advantages and a description of “self-settled” are delineated in the website of one of Alaska’s leading trust companies.
Alaska has the best trust spendthrift statutes for both the grantor and other trust beneficiaries. Alaska provides for "self-settled" spendthrift trusts which allows the grantor to set up an irrevocable trust, be a discretionary beneficiary and avoid having the assets be subject to creditor claims of either the grantor or any other beneficiary. Also, the assets in such a trust may be excluded from the grantor's taxable estate even though the grantor is a trust beneficiary. . . Alaska has no special "class" of creditors which, unlike the laws of other states, would permit those creditors to attach the assets of the trust. Alaska allows creditors to attach trust assets in a self-settled trust only upon proving by actual fraud (and not "constructive" fraud).[1]
ADVANTAGES: As the above definition reflects, “self-settled” spendthrift trusts allow the grantor to establish an irrevocable trust while still being a discretionary beneficiary of the trust. A grantor is the creator of a trust and is the person who initially places his or her assets into a trust. Thirteen states now have some statutory frameworks that allow for self-settled trusts. Not all statutes are the same, and the level of protection available to grantors varies widely. That said, the remaining states that do not allow “self-settled” trusts follow the common law rule that generally prohibits the establishment of a trust with your own assets to benefit yourself.
ASSET PROTECTION AND THE DANGERS OF LITIGATION: The New York Times recently addressed one of the realities facing American families: The United States is the most litigious society on earth.[2] I purposefully did not describe asset protection as “insuring financial longevity” because asset protection does not provide absolute insurance from the potential of runaway litigation. It does improve the probabilities of financial longevity and should address an orderly wealth transfer with effective tax planning. Self-settled spendthrift trusts are only part of asset protection. A number of other multiple entity structures are also important to effective planning.
SUCCESSES AND FAILURES: All states recognize the attorney-client privilege. The attorney-client privilege provides that what is said and written between a client and his or her lawyer is confidential and protected from disclosure to others. The “ethical duty of client-lawyer confidentiality is quite extensive in terms of what information is protected. It applies not only to matters communicated in confidence by the client but also to all information relating to the representation regardless of whether it came from the client herself, or from another source.”[3]
The attorney-client privilege precludes much storytelling in the domestic asset protection field. Suffice it to say that some circumstances will preclude the utility of DAPTs while other circumstances will present “golden opportunities” for domestic asset protection that substantially improves family and personal “financial longevity.”Asset protection successes are successes that rightly belong in the zone of confidentiality and constitutional rights of privacy. Asset protection failures are often the focus of news stories or the cautionary tales of creditors’ lawyers.
CAVEATS: Wealth preservation planning is an ongoing process. Attorneys competent in the field must be aware of the ethical and legal issues that are part and parcel of asset protection. On the one hand an attorney might be vulnerable for failing to counsel a client about asset protection; on the other hand the same attorney must be cautious in counseling clients who wish to protect their assets from creditors. The asset preservation available in Domestic Asset Protection Trusts is evolving. Not many years ago self-settled spendthrift trusts were not allowed in the United States. Now the trend, although not cascading, is for their allowance. The impact of this trend and the statutes that accompany it will be part of “the life of the law” and its evolution through “experience.”
The life of the law has not been logic; it has been experience . . . The law embodies the story of a nation’s development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics. (Holmes, Selections from the Common Law, The Mind and Faith of Justice Holmes (Random House 1943), 51.)
It is likely that the role of Domestic Asset Protection Trusts will be tested, expanded, at times contracted, explored, updated and judicially articulated as time goes on. That said, their utility for estate planning should at the very least be considered and weighed for their applicability. Our observation in “Successes and Failures” is an appropriate close to this article: Some circumstances will preclude the utility of DAPTs while other circumstances will present “golden opportunities” for domestic asset protection that substantially improve family and personal “financial longevity.”
© Copyright Michael A. Hackard, 2012. All rights reserved.
[1] Alaska Trust Company (August 10, 2012), available at http://alaskatrust.com/index.php?id=89 (last viewed August 10, 2012).
[2] Rubin, More Money Into Bad Suits, The New York Times, Nov. 16, 2010, available at http://www.nytimes.com/roomfordebate/2010/11/15/investing-in-someone-elses-lawsuit/more-money-into-bad-suits (last viewed August 10, 2012).
[3] Sue Michmerhuizen, Confidentiality, Privilege: A Basic Value in Two Different Applications, Center for Professional Responsibility (May 2007) available at http://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/confidentiality_or_attorney.authcheckdam.pdf (last viewed August 10, 2012).
The Empty Will: Why a California Will or Trust May Not Control Your Assets after Death.
You may think that a California Will or Trust controls the distribution of all your assets after your death. You may be surprised to learn just how meaningless a Will or Trust can be depending on how your assets are titled.
When a person is alive, his assets are viewed as belonging to him. When that same person dies, however, his assets suddenly become separated into distinct legal entities that may have nothing to do with one another. And each legal entity has its own set of rules and procedures governing its distribution.
For example, let’s say you have one living parent (we’ll call her Mom), she has three children and she owns the following assets:
- House—A home titled in the name of her revocable Trust, which lists all three children as equal beneficiaries,
- Bank Accounts—A checking and savings account at Citibank titled jointly in her name and her oldest son’s name (we’ll call him Adam),
- Brokerage Account—A brokerage account titled jointly with her youngest son’s name (we’ll call him Bob),
- Retirement Accounts—An IRA and 401(k) with all three of her children designated as equal beneficiaries, and
- Life Insurance—that names her only daughter as the sole beneficiary (we’ll call her Cindy).
While Mom is alive she can do whatever she likes with her assets. She can open and close accounts, she can move money into or out of her revocable Trust, she can even name different beneficiaries for her life insurance policies. It’s all just one big pot.
But when Mom dies, things change. All of the various assets become essentially locked into whatever state they were in prior to Mom’s death. And each entity has its own, independent distribution scheme.
That means, for example, that the assets will pass in different ways:
- House—passes to the three kids equally under the terms of Mom’s revocable Trust,
- Bank Accounts—pass to Adam ONLY, because he is the surviving joint tenant (neither the revocable trust nor any Will control this asset after Mom’s death),
- Brokerage Accounts—passes to Bob ONLY as the surviving joint tenant,
- Retirement Accounts—pass under the beneficiary designations to the three children equally, and
- Life Insurance—passes to Cindy ONLY as the sole named beneficiary.
Even if Mom had a Will, the Will would not control any of these assets because none of the assets are passing under Mom’s estate. They all bypass the estate because the assets are held in so many different probate-avoidance vehicles. In fact, even the revocable trust controls very little of this estate—the House only. Since the other assets were not titled in the name of the Trust, none of them pass in accordance with the Trust terms.
Mom may have thought that ALL of her assets would be divided equally among her children because that’s what her revocable Trust stated. But Mom couldn’t be more wrong. When setting up accounts in a certain form—such as joint tenancy or assets with designated beneficiaries (like life insurance and 401(k) accounts)—those forms control the assets after death. In other words, the title to an asset has significant legal meaning after death. Yet so many people create things like joint tenancy accounts without fully appreciating the consequences of their actions.
Further, if you are going to contest how an asset passes, then you better know which legal entity you need to go after. If you sue the Trust based on an asset that does not belong to the Trust, then you’re going to waste a lot of time and money going down a deadend road.
Give a Little After You're Gone: The benefit of charitable giving at death.
Most of us are not capable of giving billions to charity, like Warren Buffet and Bill Gates But charities, to be successful, don’t need billions (they’d love to have billions, I’m sure, but most operate on far less than that).
Most people make modest charitable gifts to their favorite charity, university or church during their lifetime. But the amount of gifts each of us is able and willing to make during our lifetime is somewhat limited by our resources. For example, you can't give your house to charity while you’re alive because you need it to live in; giving it away would be absurd.
What if I told you that you could make a very large charitable gift (large being relative to your own individual resources) to your favorite charity, university or church and never feel the pain of losing your hard-earned assets? It can be done as part of your California Trust or Will planning by leaving a charitable gift upon your death.
Think of the power you have. Making a gift to charity at death is often referred to as “planned giving” or charitable estate planning. Charitable planning can take many forms, and can get pretty fancy if you want, but it can also be extraordinarily simple by just naming a charitable beneficiary in your Trust or Will.
Now I am not suggesting that you leave all you have to charity (unless you want to), and cut out your children or other heirs entirely. But I am suggesting that by making a little room in your California Will or Trust for a charitable cause, you can give a gift far bigger than you are able to give during your lifetime and still have plenty left over for your children.
For example, let's say you have a home, a rental house and some money in the bank. During your lifetime, you live in your home--you don't want to give that up. And you rely on rental income from your rental, while the money in the bank acts as a safety net in case you need more care and assistance as you grow older. So there is not much room in your finances for a large charitable gift while you are alive.
But upon your death, if you gave let's say a quarter of your rental property to charity, that could be a significant gift. Even if the rental home is only worth say $200,000, one-fourth of that would be $50,000! Could you imagine giving $50,000 to charity during your lifetime? No. But as part of your estate plan, a generous gift can be made to the charity of your choosing and your children still receive the remainder of your assets.
Do you think $50,000 is too much? Make it $10,000, that's still a larger gift than you can make while alive.
There are many good causes out there that would be overjoyed to receive a gift of $10,000. And they often remember your gift by any number of recognitions. Also, your children can participate in the charitable gifts, including having them make decisions on how the money is spent and the programs that are sponsored by your gift.
The point is, giving “till it hurts” is much easier to take when you are not here to feel the “hurt.” And making some room for charity in your Trust and Will is a great way to leave a legacy that will be long remembered by those in need, without hurting those you love.
Joint Tenancy Bank Accounts: The pitfalls of using joint tenancy in California estate planning
Joint tenants beware. Placing assets in joint tenancy presents a number of pitfalls in Califonria estate planning. We discuss a few of those pitfalls in this video. For those viewing this blog by email subscription, you can click on the title for a link to the video.
The Backdoor Beneficiary: How Your New Spouse is Automatically a Beneficiary of Your Estate in California
Love and marriage may go together (like a horse and carriage...), but marriage and estate planning may be another story.
If a person creates a Will or a Trust in California and then subsequently marries, that person's new spouse automatically becomes a beneficiary of the Will and Trust by operation of law. Many times people mistakenly believe that if their spouse is not mentioned in their existing estate plan, s/he will not receive anything after death. And this may be exactly what the parties intended. Especially with second marriages where each spouse may already have their own assets and they would rather leave those assets to their children rather than to their spouse at death.
But California law says otherwise. The law is referred to as “omitted spouse” and it assumes that if a Trust or Will is made before marriage, and never changed to reflect the new marriage, then the new spouse gets his or her share of the estate.
This result can easily be avoided, however, by simply updating your estate plan to reflect the new marriage. If the Trust and Will documents reflect an intent to disinherit the new spouse, then that overrides the law of omitted spouse.
If avoiding the omitted spouse law is so easy, then why are attorneys called upon to litigate so many omitted spouse cases? Primarily it's because the law of omitted spouse is not widely known or even understood. In fact, it's usually a huge surprise to the children after a parent dies. The children believe that since the spouse is not mentioned in the estate plan, he or she should receive nothing from the estate. The children are outright stunned when they find out how omitted spouse automatically opens the door for the new spouse into the estate as a beneficiary.
The lesson is to remember that marriage raises many issues and rules that can have a significant effect on a person's property rights (especially in California because we are a community property State). Taking the time to review and update an estate plan either shortly before, or immediately after, marriage can help avoid future litigation.
Tired of the Retirement Mess: How Failing to Plan for Retirement Accounts = Planning For Litigation in Your Estate
If your goal is to help keep lawyers employed (and that’s an excellent thing to do in my opinion), then do not change your beneficiary forms on your retirement accounts when you do your estate planning.
By retirement accounts, I mean things like 401(k), 403(b), Pension, and IRA type accounts to name a few. These types of accounts are not able to be held in a Revocable Trust, instead they pass by beneficiary designation. But all too often, people will go through the work and expense of preparing an estate plan using a Revocable Trust, but then neglect to check the beneficiary forms on their retirement accounts.
The beneficiary designation on a retirement account governs regardless of anything stated in a Trust or Will. Your Trust or Will could leave everything to your children equally, but if your beneficiary designation names only one child, then that one child takes the entire retirement account.
If that is your intent, to leave a particular account to a single child, then fine. But neglecting to plan how retirement assets will pass, means full employment for lawyers. Fine with us lawyers...not so great for the children left behind to litigate the mess.
Worse yet, if your retirement account has no beneficiary named, or the named beneficiary dies before you do, then oftentimes the retirement assets will pass to your Probate Estate, which means they must pass through the Court process of probate before being distributed to your heirs.
The bottom line is that failing to plan for the distribution of your retirement accounts often means you are planning on litigation in your estate.
Coping with Incapacity: How Trust Planning Is Life Planning
How does your trust help you while you’re alive? Many people think of trusts as death planning instruments--the type of thing that only operates upon your death.
But trusts have a critically important role to play while you are alive in the event you lose capacity. People are living longer and the likelihood of being physically able, but mentally unfit is growing.
Without a trust plan in place, a person and his money cannot be easily cared for. In fact, a court supervised conservatorship is required to manage the person and estate of people who lose mental capacity, but have no other safeguards in place for the management of their money and personal care.
Unfortunately, conservatorships are costly, time consuming and expose everything (and I mean everything) to ongoing court supervision. In other words, your life becomes an open book and the court decides who will make decisions for you and then tries to oversee those decisions as best it can....yikes!
Since a conservatorship takes place in court, it provides a ready forum for lawsuits. It's not uncommon for a person's children to fight over who should be named as the conservator. And those types of lawsuits can be nasty business.
But a well planned trust can avoid all of that because under the trust terms, you appoint a successor to manage your money if you ever become incapacitated. You should also have a Health Care Directive in place so that you can name someone to make your medical decisions. With these two documents properly prepared, your personal care and your assets can be quietly and easily managed until you return to full mental capacity.
So the next time someone tells you that a trust isn't necessary because it only takes effect after you're dead and gone, think again. That trust may save you a lot of time, money and public scrutiny while you’re still alive.
Would You Pass a Legal Checkup?
Here is another business law offering that I published in our local Corona Business Monthly. We come across many business issues in our Trust and Will litigation practice, so it never hurts to discuss business law concerns.
Stress can affect wellness. And legal problems can bring the kind of stress most people would rather avoid. But have you ever wondered if you would pass a legal check-up? (Probably not, because there are far more pleasant things to think about.) Here is a business check-up list that should be reviewed at least once every year:
- Annual Minutes. This is an easy one. If your business is any type of entity, such as a corporation, limited partnership, general partnership, or limited liability company, you should document the actions of your business at least once every year. This is referred to as “corporate formalities”, but it applies to all types of business organizations—not just corporations. And it’s easy to complete, usually just a page or two consisting of your activities over the past year (major activities), that are then approved by the governing board.
For example, a corporation will have minutes for the Board of Directors and minutes for the Shareholders. LLC’s will have minutes of the Managers or Members. Partnerships can have minutes of the managing or general partner, or of all the partners. The more you write down, and the more often you create minutes, the more likely your entity will be regarded as having met the necessary corporate formalities, which protects you from creditors of your business.
- Lease Agreements. If you have a lease for the property or office space in which your business operates, it’s helpful to review the lease terms at least annually. Many leases automatically implement changes each year, such as an increase in rent, a possible increase in common area charges, or a decrease of benefits to the tenant such as tenant improvement allowances. Also, many lease terms have a detailed procedure for exercising an extension to the lease term, which may require written notice to the landlord anywhere from 30 days to 120 days or more in advance of the lease termination date. Therefore, reviewing the lease terms helps ensure that you will not miss an important deadline or forget an important rent increase. It only takes a brief review of the lease to ensure you are on track.
- Business Agreements. As with leases, many business agreements have terms that automatically apply at a certain time in the future. The Agreement many automatically renew, or autormatically terminate, without advance written notice. Or there may be changes in price that kick-in without notice. Whether the agreement is for your vendors, employees, officers, or business partners, it is important to review those agreements from time to time.
In fact, it never hurts to prepare an Agreement summary where you can review the terms of each Agreement in a single spreadsheet or data table. However you care to organize the information is up to you, but taking the time to review your key business and employment agreements will prevent a forgotten term from surprising you in the future.
- Employee review. Many businesses neglect to perform annual reviews of their employees. Is it mandatory? Yeas and no. In many industries annual reviews are not legally required, but in every business they are highly recommended. An annual review procedure helps you keep tabs on employees on a regular basis and provides a chance to review each employee’s job performance, be it good, bad or otherwise. If a dispute arises in the future, the annual review process should help document any employee issues you have had in the past. If you operate without an annual employee review procedure, you do so at your own risk because you will not have any documentation to support your actions in the event you terminate an employee.
Annual employee reviews also have a positive side in that they provide a mechanism for you to praise and reward good employees too. Setting up a procedure for you to review employee performance on a regular basis (and at least an annual review), will prevent many problems down the road.
- Licensing. There are many businesses that require industry specific licensing, from contractors, to real estate brokers (and lawyers, doctors, dentists, financial planners, etc.). And every business must have a business license from the City in which they operate. Whatever licensing your business requires, you should check-up on your licensing requirements every year and be sure that nothing has changed that would cause the licensing to become invalid.
For example, when hiring employees, there is an obligation to purchase workers’ compensation insurance. For some industries, such as general contractors, failure to have workers’ compensation insurance will put their licensing in danger of being revoked. So any changes that businesses makes over the course of the year should include a quick review of licensing requirements to be sure there are no hidden traps that could cause the licensing to fail.
- Taxes, Taxes, Taxes. Every business is taxed by multiple authorities for multiple types of tax. Many businesses work with tax professionals to ensure their income tax, use and sales tax, and employment taxes are properly reported and paid. But of course there are other taxes to deal with, such as business taxes imposed by each City in which a business operates, property taxes imposed by the County on a businesses’ property, and so on. Most taxing authorities make annual reporting a mandatory requirement. But it’s also a good time to review what your tax liabilities are and how best to plan for those taxes in the future. There may be changes in the way that you conduct your business or report your income that could result in lower taxes.
Most businesses wait until the end of the year or until tax time (March to April if you’re reporting on a calendar-year basis) of the next year to ask these questions. Unfortunately, trying to do tax planning when your tax professional has a mountain of returns to complete and file is not very productive. Take the time now, in the middle of the year, to discuss your tax liabilities with your tax preparer and find out if changes should be made for the coming year.
- Health and Safety. Some businesses must comply with stringent regulations for the health and safety of their employees, such as OSHA requirements. But there are health and safety issues for every business, even those that are not directly overseen by a regulatory body such as OSHA. Every workplace has its hazards, and some prevention can go a long way to protect the health and safety of employees—and thereby protect the legal well-being of the business.
For example, having first-aid kits available in the workplace that are appropriate for the type of dangers employees may encounter in the workplace. Even in an office environment, a well stocked first aid kit can be helpful to have in case an accident occurs. Once safety measures are put in place, they should be checked, restocked, and inspected at least annually to ensure they are available when the need arises.
So how does your business measure up against this legal checklist? There may be other legal issues affecting your business on a regular basis, but these few items of regular preventative maintenance will help keep your business healthy over the years to come. Here’s to the good health of your business.
Marital Rights Without Marriage -- How Nonmarital Partners May Receive a Share of a Deceased Partner's Estate Based Upon an Oral Promise Before Death
One of my first litigation cases was against attorney Thomas W. Dominick in San Bernardino County Probate Court. Tom is one of the best estate and trust litigators in California. To say the least, I was scared. The issue in that case revolved around whether my client had a right to his girlfriend’s real property after her death. She promised my client the property during her lifetime and he had spent money on the property, but nothing was in writing and the two were never legally married. I remember being frustrated that I could not find a legal doctrine to support my client’s claim after his girlfriend died. I was shocked that there appeared to be no real protection for long-term nonmarital partners after the death of the other partner. I ended up alleging several causes of action that were weak at best (i.e. oral promise to enforce trust in real property, quiet title, specific performance, constructive trust, and unjust enrichment—known generally as Marvin claims based on a case of the same name). Unfortunately, these claims must be brought within one year of the decedent’s date of death or they are forever time barred under the statute of limitations applied to decedents' estates. And, the girlfriend’s family waited over eight years to file a petition for probate, knowing all the while that my client continued to live in what he believed was his house (the eight year time-frame made most of my client’s claims moot).
But I had equity on my side as my client had lived with his girlfriend for almost 30 years and he had invested his own money into the home over the years. Thankfully, the case settled after Thomas and I worked out a settlement, on behalf of our respective clients, which allowed my client to occupy the home for his lifetime.
A recent Court decision would have made my job much easier in the above-referenced case. In McMackin v. Ehrheart (decided April 8, 2011) Presiding Justice Robert M. Mallano, writing for California’s Second Appellate District, Division One, discussed (as a matter of first impression) whether a Marvin claim based on a decedent’s promise to leave her nonmarital partner a life estate in real property requires the nonmarital partner to file a lawsuit within one year of her partners death, and if so, whether the doctrine of equitable estoppel can be applied to preclude assertion of the one year statute of limitations. The court concluded that the Marvin claim is governed by a one year statute of limitations, but that, depending on the circumstances of each case, the doctrine of equitable estoppel may be applied to preclude a party from asserting the one year statute of limitations.
The pertinent facts of McMackin established that nonmarital partners—Hugh and Patricia—lived together in Patricia’s home from 1987 to 2004. Hugh was never on title to Patricia’s home, but continued to occupy her home after her death. More than three years after Patricia’s death, her children filed a petition for probate, which would effectively kick Hugh out of the home leaving him with no interest in Patricia’s estate. In reply, Hugh filed a lawsuit alleging that Patricia had promised him a life estate in the home upon her death in consideration for 17 years of his “love, affection, care and companionship.” Hugh argued that the one year statute of limitations did not apply. Of course Patricia’s daughters argued that the limitation statute applied (as three years had passed). In response, Hugh argued that even if the one year statute of limitations applies, the doctrine of equitable estoppel precluded Patricia’s daughters from using it against him. The court of appeal agreed, stating the one year statute of limitation applies, but that equitable estoppel may preclude the daughters from raising it as a defense. The court of appeal then sent the case back to the trial court for determination of these issues.
Overall, McMackin is a great case to review if you run into nonmarital partner estate issues. Justice Mallano did a great job in articulating the legal analysis pertaining to Code of Civil Procedure section 366.3 and the doctrine of equitable estoppel. I think this case will be used as more people choose to live together rather than get married. Of course all of the Marvin claim messes can be avoided by proper estate planning (i.e. creating California trusts and wills).
Why Asset Protection Planning Is Not As Great As You Might Think.
At times, some people become so overly focused on asset protection that they practically throw the baby out with the bathwater to achieve the perceived goal of asset protection. It is a perceived goal rather than an actual goal because so many of the so-called asset protection vehicles don't really protect anything. Many are just window dressing designed to give a false sense of security to people. They sound good on paper or when presented in a nice notebook, but they’re not foolproof in protecting assets from creditors--not even close.
Let's walk through a few examples below to illustrate the point
Personal Residence LLCs. For some reason there has been an increase in people selling the idea of putting your personal residence into a limited liability company (call an LLC) and then giving the LLC a crazy name not associated with your own name. The idea is that once the home is in the LLC it’s protected from creditors. And because of the crazy name it cannot be found by creditors. But does this work?
No. As a litigation attorney, part of my job is to find assets. An LLC must be filed with the California Secretary of State’s office. Even if the LLC is not created here in California, it must file with California if it owns property or does business in this State. If I were to see someone living in a home owned by an LLC, all I would need to do is request a single paper from the Secretary of State and they would tell me who the owners of the LLC are, who the officers are, and the addresses of the LLC. All this info leads back to the home and I would then know the LLC is a sham--protection undone. Also, this scheme deprives the home owner of their home interest mortgage deduction from the IRS.
Changing Title to Assets. It seems a common knee-jerk reaction to have one spouse receive notice of a lawsuit and begin transferring all assets into his or her spouse’s name. Does this transfer protect the assets from a spouse’s creditor? Absolutely not. Especially if the transfer occurred AFTER notice of a lawsuit was received because it would then be a “fraudulent transfer.” We have laws that preclude the transfer of assets in the attempt to avoid a known creditor. And notice of a lawsuit is a known creditor, therefore the transfer can be undone and the asset attached by the creditor.
Off-Shore Trusts. Offshore havens such as the Cayman Islands, have historically had laws that made it all but impossible for a creditor to obtain assets located in that jurisdiction. A person looking to protect assets would place his money with a local trust company and the trust terms would not permit him to receive his own assets when under the threat of a lawsuit. And since the trust company was outside the U.S., there was no legal process that courts here in the U.S. could use to force payment from the offshore trust. The down side? Offshore trusts are not as great as they used to be. After 9/11, the U.S. government became very aggressive against offshore havens like the Cayman Islands because they were trying to root out money used for terrorism. The U.S. passed new laws requiring citizens to report any offshore transfer of money and they worked with foreign jurisdictions to obtain the open transfer of information regarding money transfers.
Finally, while a U.S. Court may not be able to force a foreign jurisdiction to act, they can make life miserable for the U.S. citizen living here, going so far as to impose jail time for not cooperating in obtaining offshore monies.
These are but a few examples of bad asset planning. Is there any good asset planning? Yes, but it typically involves planning for children and grandchildren where assets are passed onto them in a trust with creditor protection provisions.
Trust Checkup -- The Decay of An Estate Plan
If you are one of those forward thinking people who incurred the time, effort, and expense of creating an estate plan that includes a California Trust (living Trust or revocable Trust--they're the same thing), have you ever looked at it since its creation? Did you know that your estate plan can become less valuable and your Trust can become less Trust-worthy over time?
Like anything else, life brings changes. Changes in tax law, changes in California Trust law, changes in assets owned, changes in debts outstanding, and a whole host of family changes (birth, deaths, marriages, etc.). Most of these changes can have a substantial, and often negative, effect on your estate plan. While doing an estate plan is great, checking up on that plan to ensure everything is still going smoothly is key.
For example, whenever I create an estate plan that includes a Trust, my firm will assist the client in transferring assets to the Trust. Such as preparing a Deed to transfer real property in the name of the Trust. Yet, as life goes on, the client may sell the house that we transferred into the Trust and buy a new one, but forget to title the new property in the Trust's name--a huge mistake. A Trust can only control assets titled in the name of the Trust. A Trust with no assets is no longer a valid Trust (in the legal field we call Trust assets "res" (latin for thing) or Trust corpus and a Trust cannot exist without res or corpus).
Or worse yet, a client refinances his or her home and the finance company pulls the property out of the Trust (this is common practice because lenders are wary of lending to Trusts). Once the refinance is complete, the house is never put back into the Trust--another big mistake.
Transferring real property back into a Trust is an easy thing to do--just requires a Deed--but failing to do it before the Trust creator (called the Settlor or Trustor) dies creates a huge problem that could result in substantial attorneys' fees and costs.
This is just one example. The same applies to family changes, tax law changes and Trust law changes. So having your Trust and overall estate plan reviewed every two years or so is a very worthwhile activity. It will keep your estate plan on course and ensure that your plan is implemented when the time arrives.
Never Hurts to Have a Little Protection...For Your California Trust
You work hard to create your Trust and your estate plan and you want the terms of your Trust carried out the way they were drafted. But how can you be sure your named Trustee will perform as instructed after your death or upon incapacity? Sure you may have chosen a trusted person to act as Trustee, but how will they actually perform? And how will their performance be viewed by the Trust beneficiaries (i.e., usually your children and other family members)?
There are times when a Successor Trustee either violates their duties (whether it be intentional or unintentional--by not taking the proper actions), or the beneficiaries have the belief that a Trustee is not acting fairly (especially if the Trustee is also a beneficiary as when a single sibling acts as Trustee for his brothers and sisters). It does not much matter whether a breach of trust is actual or perceived because litigation (lawsuits) can result from either situation.
In comes the Trust Protector. A Trust protector is simply a special Trustee. Someone appointed in the Trust document for a very limited and specific purpose. For example, the Protector could have the final say in when to make distributions from the Trust and how much should be distributed. This provides the appearance (and actuality) of a neutral third party making an important decision rather than a self-interested Trustee.
But the Trust Protector can be used for more than that. The Trust Protector can:
- Make or consult on investment decisions,
- Have veto power over certain (or all) decisions of the Trustee,
- Have veto power over distributions to the Trustee,
- Be a tie-breaker vote between two Co-Trustees,
- Set compensation levels and advise on hiring professionals, and
- Manage certain Trust assets.
In other words, the Trust Protector can be used however you like, the sky is the limit. In fact, each time I incorporate a Trust Protector into a Trust I am amazed at how versatile the concept is and how many different ways it can be used. It is a very personal device that can provide peace of mind, along with actual peace between the beneficiaries, when the time arrives.
So get creative and find ways to help protect your Trust for the benefit of your family and beneficiaries.
