1. The Law of Prohibited Transferees

If you’re like me, you would think that lawyers who draft Wills shouldn’t add themselves as beneficiaries (“I leave my entire estate to my beloved son…lawyer”).  Unfortunately, a few bad apples ruin the bunch, and a few bad lawyers disagreed with my opening sentence.  Thanks to them, we now have sections of the California Probate Code designed to prohibit certain people from taking under a Will or Trust—referred to as “prohibited transferees.”[1]  The law is intended to lock the gates to an estate from people who are in a position to take advantage of the Will creator.

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Who are these “prohibited transferees”?  Some are obvious like the lawyer drafting the Will or Trust is a prohibited transferee.  So is anyone related by blood or marriage to the lawyer drafting the Will or Trust, and anyone in partnership with the lawyer drafting the Will or Trust.  We don’t want to benefit the lawyer, his or her family, or his or her business partners.  It also extends to others such as caregivers of a decedent and fiduciaries (people who may already be acting as trustee, agent, or conservator for the person who creates the Will or Trust).

But the law provides an exception to this rule where the prohibited transferee is related by blood or marriage to the Will or Trust creator.  So I can draft a Will for my mom and I am still allowed to take a gift under her Will because we are related.

2. The Court clarifies family relationships relating to Prohibited Transferee law

The California Court of Appeal for the Second District recently clarified what it means to be related to the person creating a Trust or Will, in Estate of Oligario Lira (decided December 26, 2012, published January 22 2013).  Oligario Lira married his wife, Mary Terrones, in 1968.  Oligario had three children from a prior marriage and Mary had six children from a prior marriage.  On February 21, 2008, Mary filed for divorce from Oligario, but the marriage was not legally terminated by the Court under February 21, 2010.  After the divorce filing, but before the legal termination, Oligario created a new Will (on January 6, 2009) naming his three natural children, and three of his stepchildren as beneficiaries.  The Will was created by his step-grandchild who was an attorney.

Oligario died on July 20, 2010, and a dispute arose between his natural child, Mary Ratcliff, and his stepson, Robert Terrones.  Mary’s main claim was that Robert was a prohibited transferee because Robert was related to the attorney who drafted the Will and Trust.  Under PC Section 21350(a)(2), such a relationship precludes Robert from inheriting under the Will.

Robert argued that he was exempt from the rule of prohibited transferee because he was related by marriage to the decedent (Oligario).  Just as I can create a Will for my mom and receive a gift, so too can Robert receive a gift from a Will created by his lawyer-son if Robert was related to Oligario.

The question turned on whether or not Oligario and Robert were related for purposes of this issue.  Robert argued that at the time the Will was signed, he was still related to Oligario by marriage.  Only after the marriage was legally terminated would that relationship end.  Mary argued that at the time of Oligario’s death Robert was not related and that should be the time for measuring family relations, not the time of signing the Will.

The trial court sided with Robert and the Appellate Court agreed.  Writing for the Court, Justice Perren held that the statute is properly interpreted to measure family relationships at the time the Will is signed.  Here, since the Will was signed before the court had legally terminated the marriage, Robert and Oligario were still related by marriage.  The fact that they were no longer related by marriage at the time of Oligario’s death is irrelevant (according to the Court). 

A rather shocking result for Mary, who did not consider Robert as a family relation after the divorce.  But one wonders if the Court was swayed by the longevity of this marriage.  It lasted from 1968 to 2010 (42 years), and there could have been some relationship between Oligario and Robert that had nothing to do with their legal status as “family” members. 

Sometimes the law and feelings about family members don’t mix well.  A great result for Robert, who unlocks the gates to his share of this estate. 

 


[1] The Prohibited Transferee Sections of the Probate Code starting as 21350, were replaced effective January 1, 2011 with Probate Codes section 21380.  The new code section continues the old law, with the only real difference being that prohibited transferees can try to overcome the prohibition if they can prove by clear and convincing evidence that the decedent wanted them to have the stated gift.

We spend a good deal of time discussing the shortcomings of individual Trustees.  But there are a few tips that beneficiaries should know to try to make a Trust administration go a little smoother.

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1. Patience is a Virtue.  It takes time to properly administer a Trust estate.  Assets have to be gathered together, real property has to be refurbished and sold, personal property has to be collected, jewelry has to be appraised, the list goes on and on.  Trustee’s are not allowed to take too much time to administer the Trust, but it can’t be done overnight either.  So how much time does a Trustee have to administer a Trust?  The legal standard is a “reasonable” amount of time.  But there is no definite definition of “reasonable,” it varies from case to case.

For example, a Trust with a single house in it, that needs to be fixed up a little (but not completely refurbished) and then sold, should have the house listed for sale within 3 or 4 months of the Settlor’s date of death.  The entire Trust administration should be concluded within a year or less. 

If there are other issues that need to be resolved, such as multiple real properties, difficult stocks to sell, or anything else out of the ordinary, then a year to 18 months may be more reasonable.

If it is a complex Trust estate that is subject to Federal Estate Taxes, with multiple properties and complicated partnership, then 18 months to 2 years may be more like it. 

The bottom line is to give the Trustee some room to act.  That doesn’t mean you have to wait forever, but a little patience can go a long way.

2. Information Overload.  Every beneficiary has the right to information regarding the assets of the Trust.  Information requests must be reasonable, however.  Beneficiaries are not entitled to see every bank statement every month.  Some Trustees do share that information, and it’s never a bad idea to do so, but the law does not require it.  What the law does require is sharing information when it is reasonably asked for and providing regular (as in annual) accountings of the Trust activity.

3. Back-seat Driver/Arm-Chair Quarterback.  Beneficiaries are not in control of the Trust.  It may seem odd that you have no say over money and assets that belong to you, but that’s how Trusts work.

The Trustee of a Trust is the legal owner of the Trust property; whereas the beneficiaries are the beneficial owners.  That means the Trustee, and only the Trustee, gets to call the shots on how property is held, invested, etc.  Of course, the Trustee can’t just do whatever he or she wants.  A Trustee must follow the Trust document and must adhere to Trust law under the California Probate Code.  Between the Trust and Trust law, there is a mountain of duties and obligations the Trustee must obey—but that’s the Trustee’s job to figure out, not the beneficiaries. 

4. Open Lines of Communication.  Being a Trustee can be a thankless job because Trustee’s have all of the duties.  While Trustees have a duty to communicate with their beneficiaries, beneficiaries should also try to communicate clearly with the Trustee.  That means being clear about what you want, responding to requests for information from the Trustee, and generally being cooperative regarding Trust business—to the extent it is reasonable to do so.  I’m not saying beneficiaries have to go along with whatever the Trustee is doing, but clearly communicating your goals and desires is important. 

5. Call the Professionals.  Trustees have the right to hire professionals to advise them.  This includes lawyers, accountants, and financial planners—all acceptable advisors that a Trustee can hire and pay for out of the Trust estate.  Of course, the Trustee should also follow the professionals’ advice, which is where many Trustees go wrong.

6. Who’s Your Lawyer?  The trustee’s lawyer is NOT your lawyer.  If the Trustee hires a lawyer, the lawyer represents the Trustee, in his or her capacity as Trustee.  The lawyer does NOT represent the Trust or any of the Trust beneficiaries.  This is a common misconception.  Many beneficiaries believe that if a lawyer represents a “Trust” then that lawyer must represent the beneficiaries too.  Not true.  Lawyers don’t represent Trusts, they represent Trustees.  That may not sound like much of a difference, but legally it’s a huge difference.  Trusts are NOT like corporations, they cannot act independently of their Trustee.  Trust’s act through Trustees, and Trustees can hire lawyers and other professionals to represent them—and only them.  Beneficiaries should keep this in mind whenever they talk to the Trustee or the Trustee’s lawyer.  If a beneficiary wants some independent legal advice, he needs to hire his own lawyer for that.

7. The Written Word.  Document everything you do and say during the course of a Trust administration.  It never hurts to keep notes of what has occurred and what action you have taken in response.  While you hope that these cases don’t wind up in Court, Court action is always possible.  And if that occurs, better to be ready for it by having a clear record of what occurred and when. 

Judges don’t like difficult beneficiaries, and it could make the Trustee look sympathetic if he had to deal with difficult beneficiaries.  Better to hold up your end of the Trust, act reasonably, and let the Trustee’s actions speak for itself—good or bad.  It never hurts to be a better beneficiary.

 

I have posted many articles on the wrongful acts of bad trustees and I am just getting started on that subject. There is always more to write about.

I can’t help but notice that there is a general lack of understanding about the burden of beneficiaries as well.  Legally speaking, beneficiaries of California Wills and Trusts do not have any legal obligations or duties to the Will or Trust estate. However, beneficiaries do have a duty that they must undertake to enforce their rights–the duty to take action.

A beneficiary of a California Trust or Will has rights.  And an heir of a decedent who is disinherited may have rights, depending on the circumstances.  But those rights lie dormant until you choose to make the effort to enforce them.  Therefore, every beneficiary has a duty to take action to enforce their rights.  No one is going to step in and make your life easy by enforcing your rights for you.  You can take the Trust or Will matter to court, but the court’s role is supposed to be as a neutral trier of fact and law, it’s not there to help you assert your rights–that’s your job.

Of course, undertaking to enforce your rights is not easy.  It takes time, money and an emotional toll as well.  But when you’re dealing with a bad trustee or a bad situation, you have little choice but to stand up for yourself.

Many times I hear beneficiaries complain how having this burden to enforce their rights is hard, unfair, and it simply should not be this way.  Trustees should do the right thing in the first place or siblings should be fair with trust distributions.  Of courses all of those complaints are true and well founded, I agree.  But complaining gets you nowhere.  You alone have the burden to stand up and enforce your rights.  The sooner you as a beneficiary accept this fact, the sooner you can move on and try to get something done.

Every beneficiary of a California Trust and Will has a basic right to information.  They have a right to see the Trust or Will document(s), they have a right to asset information, they have a right to full disclosure.  Yet not every Trustee or Executor complies with requests for information.  This video describes a beneficiary’s basic right to information.  For those viewing this blog by email subscription, you can click on the title for a link to the video.

California Trust and Will beneficiaries are subject to abuse in some cases at the hands of a rogue Trustee.  This video explains our view of an abused beneficiary.  It is important to acknowledge these cases and we fight hard to help beneficiaies who are abused.  For those viewing this blog by email subscription, you can click on the title for a link to the video.

I receive several phone calls each week from upset Trust beneficiaries asking if their brother or sister, who is the Trustee of their parents’ Trust, is required to provide copies of the Trust to the beneficiary after both parents have died. The answer is—yes—Trustees are required under California law to provide copies of their parents’ Trust, and any Amendments to the Trust, to all Trust beneficiaries.

Unfortunately, Trustees refuse time and again to provide a copy of the Trust to the beneficiaries. Usually it’s a control thing, but it may also indicate that the Trustee has mismanaged the Trust assets (while their parents were still alive or after their deaths), or is attempting to hide Trust terms they may disagree with from the rightful Trust beneficiaries.

But California law is clear, requiring Trustees to provide notice when any portion of a Trust becomes “irrevocable” (a legal way of saying the Trust can no longer be changed because both parents are now deceased) to each beneficiary of the Trust within 60 days of the Trust becoming “irrevocable.” For example, if the last living parent dies on January 1, 2011, then the Trustee has 60 days from January 1, 2011 (until March 2, 2011) to provide notice to all Trust beneficiaries that the Trust is now irrevocable (i.e. can no longer be changed), and further that the Trust beneficiaries have a right to a copy of the Trust, and any Amendments to the Trust.

If the Trustee refuses to provide you with a copy of your parents’ Trust, let them know California law requires that they provide you with (i) notice that the trust is irrevocable, and (ii) true and complete copies of the Trust, and any Amendments to the Trust. If the Trustee still refuses to provide you with copies of the Trust and any Amendments, it’s time to see an attorney.