California Trust, Estate & Probate Litigation

Think the law is always black and white?  Think again…at least when you are thinking of Trust vs. Will capacity.  From a legal perspective, capacity as it relates to Will and Trust creation is confusing—even for us lawyers.  Primarily because California Courts have not always applied consistent standards in evaluating capacity to make a Trust.

Will capacity is an age-old standard that can be broken down into three main elements (See Probate Code Section 6100.5):

1. The decedent must be able to understand the nature of the testamentary act (i.e., they must know they are creating a Will),
2. Understand and recollect the nature and situation of their property (not details, but general knowledge of their property), and
3. Remember and understand their relationship to their relatives and those that will benefit from the Will.

This three-part test is referred to as “Testamentary Capacity,” and it applies only to Wills.  Well it used to apply only to Wills, but Justice Steven C. Suzukawa, of the Second District Court of Appeals, changed that last year with the Court’s ruling in Anderson vs. Hunt.

Before the Anderson decision, it was generally believed that to validly create or amend a Trust, a settlor (the person creating the Trust) must meet the higher burden of contract capacity.  Unlike Testamentary capacity, contract capacity requires a person to understand (See Probate Code Section 812):

1. The rights, duties and responsibilities created by or affected by the decision,
2. The probable consequences for the decisionmaker and, the persons affected by the decision,
3. The significant risks, benefits and reasonable alternatives invoiced in the decision

Testamentary Capacity does not require any of these elements.  In other words, a person can create a Will without knowing the duties and responsibilities it creates or the probable consequences of the decision.  Plus there is no requirement for a decedent to know the reasonable alternatives to creating a Will.  As you can see, contract capacity is a higher standard to meet than is Testamentary Capacity.

In Anderson, the Court decides, for the first time, that the lower standard of Testamentary Capacity can apply to the creation of a Trust amendment where the amendment’s “content and complexity, closely resembles a will or codicil.”  In Anderson, since the Trust amendments at issue merely changed the percentages of the trust estate that the settlor wished each beneficiary to receive, the Court concluded that the amendment was like a Will and, therefore, Testamentary Capacity applied. This is a classic example of bad facts make bad law. This decision has far reaching negative ramifications for Trust amendments. 

THE PROBLEMS WITH ANDERSON

1.         When does a Trust Amendment look like a Will?  Good question to which no one knows the answer.  We know changing a few percentages is enough for a Trust amendment to look like a Will, but what else fits into that category?  How about changing the name of a successor Trustee?  Or changing the powers and duties of the Trustee?

The problem with the Court’s ruling in Anderson is that we don’t know where it stops because what one person may consider a simple amendment, someone else may decide is too complex.  Therefore, what standard must a settlor meet in order to amend his or her Trust?  We can’t be sure which standard is appropriate until a Court (likely several Courts of Appeal) rules on it.

2.         What about other Will formalities?  Wills use the lower test of Testamentary Capacity because Wills also have other formality requirements that do not apply to Trust amendments.  For example, Wills must be in writing, signed by the testator (the person creating the Will), and witnessed by two independent witnesses. 

The witness requirement is unique to Wills.  In California, we do not notarize Wills.  In fact a notary on a Will does not make a Will valid.  Instead, a Will must be witnessed by two disinterested witnesses (meaning two people who are not beneficiaries under the Will).  The policy behind requiring witnesses is to ensure that the Will is signed by the testator without undue influence, duress, fraud or at a time when the testator lacks capacity.  Of course, the witnesses don’t always serve this purpose.  There are times when a Will is witnessed when a testator lacks capacity; but still, the witness requirement provides some safeguard against wrongdoing.

No such safeguard is required of a Trust amendment.  An amendment usually only requires the signature of the settlor.  And while Trust amendments are often notarized, there is no legal requirement that an amendment be notarized—just a single signature of the settlor is sufficient (unless the Trust terms state otherwise, which most don’t).

Since a Trust amendment does not require witnesses, it should be judged using the higher level of contract capacity to be sure it is done properly.  Otherwise, Trust amendments should require at least two witnesses as is required for Wills.  But the Anderson Court can’t have it both ways.  It essentially treats a Trust amendment like a Will, yet does not require all the formalities of a Will.  This is a dangerous precedent.

3.       Is incorporation of the whole Trust in a Trust amendment complex or simple?  Another problem with Anderson arises when the settlor creates a “simple” Trust amendment that includes language in the amendment stating that the original trust (usually signed years before) is once again ratified and confirmed. The original trust is almost always going to be “complex” in nature. So does Testamentary Capacity still apply in a case where an original (and complex) trust is ratified and confirmed in a “simple” Trust amendment? Or does contract capacity apply in that case?  We don't know the answer to that question.

In the end, Justince Suzukawa’s holding in Anderson does what the Appellate Court seem to do best in Trust and Will law—make it far more confusing.  Good for lawyers who litigate these cases, bad for people trying to put their Will or Trust down on paper (and the beneficiaries whose interest are so easily torn apart).

One of the most obvious features of a revocable living Trust is that you can revoke it.  It’s right there in the name “revocable Trust.”  But you can also amend a revocable Trust because, for a long time, California courts have interpreted the power to revoke (which means to entirely do away with a Trust) as including the lesser power to also amend the Trust.  Sounds reasonable enough.

But that has now changed with the California Court of Appeal’s, Fifth District, ruling in King v. Lynch, which holds that the power to revoke may be different from the power to amend—at least in the way in which each is accomplished.

Prior to 1987, there was no statute that provided the manner in which a Trust revocation could be accomplished.  With the adoption of Probate Code Section 15401, that changed, and the law provided two distinct ways in which to revoke a California Trust: (1) revoke using the manner provided in the Trust instrument, or (2) revoke by any writing (other than a Will) signed by the Settlor and delivered to the trustee during the Settlor’s lifetime.  So if the Trust stated that a revocation required a writing signed and notarized by the Settlor, then you could follow that directive to revoke the Trust.  But you could also simply follow number 2 above and revoke by any writing (other than a Will).  In other words, either manner was available for revocation as long as the Trust did not expressly say that its manner was the exclusive way in which to revoke. 

And it was thought for quite some time that the same rules applied to amending a Trust because under Probate Code Section 15402, it said that the method of amendment is the same and the method of revocation contained in Section 15401.  So you could use the Trust terms to amend, or you could amend by any writing (other than a Will).  Each method was available for amendments as long as the Trust did not expressly say that its method was the only way in which to amend.

But now, Justice Levy has, for the first time, decided that amendment and revocations are not so similar after all.  He holds, under Section 15402 (the amendment language) that a Trust can ONLY be amended by the method specific in the Trust and NOT by any language in Section 15401 that allows any writing other than a Will.  He reaches this decision by quoting the following language of Section 15402:

“unless the trust instrument provides otherwise, if a trust is revocable by the settlor, the settlor may modify the trust by the procedure for revocation.”

He reasons that the term “unless the trust instrument provides otherwise” means that any Trust that has an amendment method stated in the Trust instrument does “provide otherwise” and therefore the statutory language for revocation under Section 15401 cannot be used for Trust amendments.

It seems like an odd ruling because there is no logical reason why the method of revocation should be any different from the methods available for amendments. 

Whatever may be in the Court’s mind, we now have a ruling that says the methods available to amend a Trust are different from the methods available to revoke.  Something good to keep in mind when amending a Trust…or when contesting an amendment to a Trust…food for thought.

Just in time for Halloween, the creation of the two-headed Trustee.  They say two heads are better than one.  So why not have two Trustees manage your Trust estate, or better yet a two-headed Trustee.

There can be strength in numbers.  And many Trusts are administered with skill and grace with two Trustees at the helm.  But not every partnership is successful.  When a two-headed Trustee decides to argue with itself, disaster abounds.

Sometimes two people appointed to act over a Trust estate simply do not see eye-to-eye.  They may disagree on investments, or distributions, or other management of Trust assets.  They each have duties and obligations to the Trust, but every Trustee can interpret how to act out those duties and obligations differently and still be within the range of reasonableness.

Worse yet, under the default rules of California Trust law, co-trustees must act unanimously if they are to act at all.  This means that one Trustee cannot simply break a deadlock by acting on his own.  One of the Co-Trustees does not have the power and authority to act alone.  Of course, the Trust document can change this requirement and allow one or both of the Co-Trustees to act alone, but Trust provisions rarely provide for that.

If Co-Trustees cannot agree on how to act or how to administer the Trust, then the horror of the two-headed Trustee comes to life because nothing gets done.  Further, the Trust administration can turn into an ugly scene of chaos and destruction taking far more time, money, and emotional toll than is typically required to administer a Trust.

Ultimately, Co-Trustees can either resign or be removed by the Court, but that takes Court action—costing time and a good deal of money.  Plus, you never know how the Court will rule when asking it to intervene in Trust affairs—it may not go your way.

The solution, therefore, lies in choosing the right heads to put together as a two-headed Trustee in the first place.  Naming two people to act just because you think two heads are better than one may back fire if the two heads you name can’t work well together.  Do you want your Co-Trustees to be a successful working partnership or do you want to see the horrors of a bad Trust administration?  The choice is yours, put some thought into the decision and then choose wisely.

In January 2010, California once again changed the law of No-Contest clauses in an attempt to make the area easy to apply.  Hard to say if that goal was accomplished.  In this video we discuss some of the basics of California No-Contest clauses.  For those viewing this blog by email subscription, you can click on the title for a link to the video.

The omnipresent no-contest clause (originally called in terrorum clauses--as in to terrify one's beneficiaries) is meant to prevent lawsuits. The idea being that if a beneficiary contests a California Will or Trust containing the clause, then that beneficiary is entirely disinherited and loses his gift under the document (see our previous blog post on how no contest clauses work and their practical application).

But does a no contest clause apply to a beneficiary's challenge of a Trustee's actions as Trustee (i.e., challenging the management of the Trust)?  The simple answer is no.  As a matter of public policy, California law specifically precludes the application of no contest clause to the actions of fiduciaries, including Trustees and Executors (or Administrators) of Wills. In fact, the law wants beneficiaries to have the right to question fiduciaries and to contest a fiduciary's actions in managing a Trust or administering a Will, provided the contest is not frivolous.

What does this mean for beneficiaries?  Question your Trustee or Executor all you want. Nothing in the Trust or Will can stop a California beneficiary from asking about the management, investment, distributions, bookkeeping, professional fees, etc., of a Trust or Will. 

Unfortunately, many fiduciaries, especially when they are individuals, do not understand that the no-contest clause does not apply to questioning their actions and they will threaten a beneficiary with the no contest clause as a way to prevent questioning.  But this is an empty threat.

What does this mean for fiduciaries?  You must be completely transparent in your actions as Trustee or Executor. Everything you do is subject to review and questioning. Worse yet, it is the Trustee's duty to prove they acted reasonably (see our prior blog post on trustees duty). 

Being a fiduciary can be a thankless job because the fiduciary has all the burdens and responsibilities and very few benefits.

One of the advantages of creating a revocable, living Trust is the ability of the successor Trustee to quickly and smoothly take control of the Trust assets after the Settlor (i.e., Trust creator) dies.  But this can also be a burden to a beneficiary, or a disinherited heir, who intends to contest the Trust terms.  It takes time to prepare, file, and have the Court hear a Trust contest.  In the meantime, the Trustee of the Trust is typically free to go about her business managing, and even distributing, Trust assets to the named beneficiaries—an alarming prospect to a contesting beneficiary.  The Trustee may even be able to empty the Trust of assets before the Trust contest is ever resolved.

Therefore, it is the contesting beneficiary’s duty to seek assistance from the Court to freeze the Trust assets, or at least put restraints on their transfer, pending the outcome of a Trust contest (many of the same methods also apply to Will contests, but a Will cannot be administered until after an Executor is appointed and the contest will prevent an Executor from being appointed—not so in Trust administrations).

What can a contesting beneficiary do in this situation? 

In California, the rules of general civil procedure apply to Trust and Will cases.  This allows a party to a Trust or Will matter to use civil discovery procedure, civil motions, and other forms of pre-judgment relief, such as Temporary Restraining Orders and Preliminary Injunctions (CCP 525 et seq.).  Here are a few actions a party can take to preserve Trust assets:

1.            Lien on Real Property– Notice of Pendency of Action (or “Lis Pendens”, I’ll refer to it as a lien in this post) is one of the easiest ways to secure real property pending the outcome of an underlying Trust and/or Will action.  But there’s a catch.  The underlying lawsuit must involve a Real Property Claim, which is defined as one that would affect title to, or the right to possession of, specific real property.  See California CCP 405.4.  In other words, the lawsuit must directly relate to who will possess title to the real property.  Thus, suing a Trust that has real property may or may not be enough to establish a Real Property Claim. 

For example, suing a Trustee for not managing rental property correctly is not a Real Property Claim because you would not be challenging who holds title, your just challenging the management of the real property by the Trustee.  Whereas, suing a Trust for exclusion of a beneficiary who would have had a right to receive title to real property had the Trust not been improperly amended shortly before death would qualify as a Real Property Claim because it affects who ultimately will hold title to the subject real property.

The advantage of using a Lis Pendens lien is that it is easy to prepare and record.  Once recorded it automatically secures the real property and prevents the property from being sold or refinanced until the lien is released.  The disadvantage of using a lien is that if you file one without a Real Property Claim at issue in the underlying suit, then you can be held liable for the opposing party’s attorneys’ fees and costs incurred to set aside the lien.  So this type of lien should only be used when there is a proper basis to do so.

2.            TRO and Preliminary Injunctions.  Trust and Will cases can be subject to Temporary Restraining Orders (TRO) and Preliminary Injunction to ensure that the Trust assets are not wasted.  But just as in civil matters, TRO’s and injunctions are not easy to obtain from the Court.  They are considered extraordinary remedies and you must establish (i) a likelihood of prevailing on your claim, and (ii) a right that cannot be adequately compensated by money damages.  The classic example is real property, which is considered unique under the law. 

However, it is possible, and I have had cases, where a TRO and injunction are ordered by the Court to ensure that a Trustee is not personally taking money from the Trust.  There has to be proof that the Trustee is taking money, but with that proof it is a possibility to obtain an injunction that will protect Trust assets until the underlying contest is resolved. 

My next post of this topic (Volume 2) will include:  (1) Petition for Instructions and Blocked Accounts, (2) Ex Parte Petition to Suspend Trustee and (3) Trustee’s Bond.

Children are a big part of Trust planning, and a big part of Trust litigation (lawsuits) when the planning falls apart (or is not done properly to begin with).  There are many factors that affect planning for children, including age, marital status, health, legal or creditor issues, and level of responsibility (or rather perceived level of responsibility by the parent).

Age Issues:

Age is easy to plan for in that a child’s trust can be created to hold assets until a certain age.  Choosing the “certain age” is a highly personal question to answer.  As a starting point, a child must be a legal adult to receive assets, which is at age 18 in California.  And most people agree that ages 19, 20, and even 21 are too young for a child to receive anything substantial.  In fact, research has shown that the Prefrontal Cortex-the part of the brain that controls reasoning and impulses-does not fully mature until age 25.  So a scientific argument can be made that age 25 is a good minimum age to work with, but does it apply to every case?  Sure, why not.  If nothing else, age 25 is a good starting point.  What about an age other than 25, like 30, 35, or 40?  That’s where personal preference comes into the mix.  Of course, it’s not an all or nothing proposition because a Trust could allow a portion of the assets to be distributed at age 25 (say ½ or 1/3), and then use other ages for the remaining distributions.  You can be as creative as you like in setting the “certain age” for distributions.

Marital and Creditor Protection Issues:

Age is only one part of the equation because keeping assets in trust for a child also impacts marital property issues and creditor protection.  By placing a child’s assets in trust it can (i) protect those assets from creditors, and (ii) help the assets retain their character as the child’s separate property (this applies in California, which is a community property state, but inherited assets are, by definition, separate property).  So as long as the assets are in trust, they have some protection in case of creditors or divorce.  This may be helpful if the child is in a high-risk profession, such as a doctor, lawyer, stuntman, dare devil, motor cross, etc.  But the protection only lasts for as long as the Trust is in existence.  If the trust provides for distribution at a certain age, such as 25, then the creditor protection ends at age 25.  The trust could continue for the child’s entire lifetime if this is a concern.  But you have to balance the inconveniences of the trust with the protection being provided. 

Health Issues:

Children with health issues can face substantial costs for medical care in the future.  A child’s trust can be created so that the child will qualify for government assistance, but have trust assets available for extraordinary expenses that add to the child’s comfort.  Known as “protective”, “Medicaid”, or “Special Needs” trusts, these devices can be helpful for children in need.  In this case, the trust would remain in existence for the child’s lifetime, so the age question is no longer a concern.

Level of responsibility:

This is the real issue parents grapple with in determining a proper age for distribution.  How responsible are your children?  Perhaps the more important question is: how do you perceive your child’s level of responsibility? 

Before I had children I had a hard time understanding why continuing trusts for children were such a big deal—let the children have their cake, I thought.  Not anymore.  As the father of two boys I now understand just how perplexing the question of responsibility can be.  I also know that every child is different and my perception of each of my children may vary from their actual level of responsibility.  And it is my perception of responsibility that matters because that is what will drive my decisions in planning for my children.

So take a good look at your individual situation and ask yourself, what do you think is best for your family?  There are many variables and options to choose from to help your children.  But your opinion is the only one that counts when creating your own trust.