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.”

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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.  

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.

Want to know why beneficiaries lose Trust and Will cases?  They fall prey to the “greedy heir” defense.  The greedy heir defense goes like this: a beneficiary challenges the wrongful acts of a Trustee and the Trustee responds by saying the beneficiary is just greedy.  Or an heir who has been disinherited challenges a Trust or Will (or an amendment to a Trust and Will), and they are described as greedy.

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Legally speaking, greed is not a proper defense to either a Trust accounting or a Trust or Will contest.  But these cases are heard and decided by Judges in California, and Judges are people too.  While Judges may be constrained by the law, they also have discretion to decide the facts of a case—who is right and who is wrong.  And it’s just human nature to want to decide against a “greedy” person. 

How do you counteract the greedy heir defense?  As a beneficiary or heir, you have to appear reasonable in what you are arguing and how you present your case in Court.  That means, at times, you can’t go after every little issue or every little argument.  You have to be strategic and decide what’s worth fighting over and (sometimes more importantly) what isn’t.  It’s not what’s important to you that matters, it’s the impact your arguments have on the Judge that counts.

For example, typically Trust and Will litigation involves various family members arguing over an estate.  They have a long history together and may have years’ worth of arguments, insults, and general bad acts that have built up over time.  Many times litigants want to focus on something the other side did many years ago because they think it shows some pattern of behavior or establishes that the other person is rotten.  But these past insults are rarely worth bringing into Court.  They take too much time to explain to the Judge and the Judge usually could care less about past disputes.  In litigation, you’re living in the here and now—so what you argue needs to be well crafted and to the point.  There may be one or two examples of past bad acts that are relevant, but probably not worth mentioning. 

Instead, a beneficiary or heir needs to focus on the relevant facts of the case.  If the Trustee has not properly managed the Trust, what did they do and why was it not proper?  That alone is enough to establish a breach of Trust and hold the Trustee liable.  The fact that the Trustee may have also been a jerk for many years is not so relevant.  This isn’t Family Feud, it’s trial.  Stay on task and be strategic about the arguments you make.  The more focused your arguments, the less “greedy” you appear in Court.

In our last post we set out three general categories of information you need to know to be successful in trust and will litigation.  They were:

  • Civil procedure—things like motions and demurrers
  • Civil discovery—written discovery, depositions, and expert designations
  • Rules of evidence—including foundation, hearsay, relevance, etc.

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Civil procedure we discussed.  Now let’s tackle civil discovery. 

The Discovery Act was instituted to (get this) make trials easier and more fair to all parties.  But so much of litigation has become bogged down in the use, and misuse, of discovery.  Rather than preparing a case for trial using discovery, many lawyers seem to be using discovery for the sake of harassing people and forcing settlements. 

But discovery is far more important than simply using it for harassment.  It is best used for its intended purpose—to prepare a case for trial.  And if you are serious about going to trial (which you should be), then discovery will help you get there, and make trial easier to conduct.

Discovery can be broken down into (1) written discovery, and (2) oral discovery (i.e., depositions). 

Here is a quick breakdown of the most commonly used discovery devices and a quick statement about what it is, when to use it, and some basic rules (not all the rules, just the basics you should know):

1.         Document demands

What are they?  Document demands are used to request relevant documents from the opposing party.  They are also called “Requests for Production of Documents.”

What’s their best use?  They are best used to determine what documents, if any, the opposing party has to support that party’s claims or defenses.  Used properly, they can help establish the universe of documents that will be used at trial.

What are the rules?  In requesting documents, you have to describe the category of documents you are looking for with reasonable specificity.  For example, “all documents relating to the Smith Trust” would be a proper description of trust documents, and any documents relating to the trust documents. 

The opposing party has 30 days in which to respond to document demands once they are served, plus an additional 5 days if the demands are served by mail, or 2 days if the demands are served by overnight delivery.  For more information take a look at Code of Civil Procedure (CCP) Section 2031.010 as so forth.

2.         Interrogatories

What are they?  Interrogatories simply ask questions of the opposing party, which must be answered in writing under penalty of perjury.  Interrogatories come in two forms: form interrogatories (which are pre-printed by the Judicial Council), and special interrogatories (which are drafted by a party or a party’s attorney).  Form interrogatories are basic questions provided on a pre-printed form.  Special interrogatories are drafted by a party or attorney and ask whatever relevant questions are necessary to determine the facts, witnesses or documents the opponent is using to support his claims or defenses.

What’s their best use?  Both form and special interrogatories are an important tool to gain knowledge about the other side’s case and position.  They are best used to determine the facts, witnesses and documents the other side intends to rely on at trial to support its claims and defenses.

What are the rules?  A party is limited to using only 35 special interrogatories, however, additional interrogatories can be used so long as they are accompanied by a declaration setting forth why the additional information is necessary.  And special interrogatories can only contain one question per interrogatory—no compound questions allowed.

The opposing party has 30 days in which to respond to interrogatories once they are served, plus an additional 5 days if the interrogatories are served by mail, or 2 days if the interrogatories are served by overnight delivery.  See CCP Section 2030.010 as the related provisions.

3.         Requests for Admissions

What are they?  Requests for Admissions ask the opposing party to admit certain facts as true.  If admitted, then the fact is conclusively presumed true for purposes of trial.  An opposing party does not have to admit a fact as true, they can deny it, but if that fact is later proven true at trial, then the party who denied it may have to pay the opposing party’s attorneys’ fees to prove the fact at trial.  

What’s their best use?  Admissions are best used to either (1) establish as true some basic, uncontested facts of the case, or (2) authenticate documents.  Once a document is admitted as authentic, then there is no need to lay foundation for that document at time of trial.  In other words, it makes trial easier to prepare for and conduct.  It’s rare for an opposing party to admit a damaging fact in a Request for Admission.

What are the rules?  Each party is limited to 35 requests for admission, unless accompanied by a declaration supporting the need for additional requests.  The requests are unlimited when asking an opposing party to authenticate documents.

The opposing party has 30 days in which to respond to a request for admission once they are served, plus an additional 5 days if the admissions are served by mail, or 2 days if served by overnight delivery.  See CCP 2033.710 as so forth.

4.         Subpoenas

What are they?  Subpoenas are used to obtain documents and the testimony of witnesses who are not a party to the lawsuit.  Subpoenas are most commonly used to obtain things like bank records, medical records, and other third-party documents. 

What’s their best use?  Subpoenas are best used to obtain independent information.  For example, in a trust accounting the only way to be sure that the information being reported by the trustee is accurate is to subpoena the bank records and double check the trustee’s work.  Once independently verified through the bank records, an accounting can be relied upon as being accurate.

What are the rules?  Subpoenas must be personally served on the party who has the documents or witnesses you need.  And there are special requirements you must follow whenever you are seeking records of a consumer.  See CCP 2020.010.

5.         Depositions

What are they?  A deposition is when a party gives live testimony under oath in front of a certified court reporter.  Even though the testimony is given outside of court, it has the same weight and use as if it were in court.

What’s their best use?  Depositions have two main functions: (1) to gather information that otherwise cannot be obtained through other discovery mechanisms (or to confirm information already obtained), and (2) to establish and lock-in the facts the opposing party intends to testify to at trial.  Since a deposition is given under oath, the testimony can be used at time of trial to impeach a witness.

What are the rules?  Technically, you can only depose a given person once.  The deposition must be taken within either 75 or 150 miles of the witness’s residence depending on whether the place of deposition is in the same County as the lawsuit.  See CCP 2025.010 and related provisions.

Once you know what type of information you are looking for, you can choose the appropriate discovery method and start finding out the facts of your case.

You can take a look at our informal description of disocvery in our handouts on What to Expect in Your Written Discovery, and What to Expect At Your Deposition.

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:

  1. 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.
  2. 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.
  3. 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. 
  4. 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.
  5. 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.
  6. 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.
  7. 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.

How do you get a private trustee to take action?  A parent dies, one or more of the kids take over as trustee, and nothing happens.  The assets of the Trust aren’t gathered together (called marshaling assets), notice is not given to the beneficiaries (as required under P.C. section 16061.7), beneficiaries are kept in the dark, real property is not sold and sometimes the trustee goes so far as to move into the property and live there rent free.  It is a common occurence, and yet none of it is allowed under California Trust law; what is a beneficiary to do?

Under California law a trustee owes countless duties and obligations to the beneficiaries, and the beneficiaries owe no duties whatsoever to the trustee.  The law presumes that trustees will discover what their duties are and then follow them.  But for private individuals acting as trustee, they often make the mistake of believing that they can do whatever they want now that they are “in charge.”  Not true.  While parents who create a trust can do whatever they want (because as the settlors of the Trust they have that power), successor trustees are not so lucky.  Successor trustees owe duties to the other beneficiaries and must act under the duties and obligations imposed on trustees.

Yet, individual trustees persist in not doing the right thing.  So what is a beneficiary to do?  Take action!  Fortunately, beneficiaries have rights and those rights have to be asserted and enforced.  Unfortunately, there is only one way to force a trustee to act, and that’s by going to court.  But there are some steps you can take as a beneficiary before running to the courthouse.

For example, under Probate Code section 17200(b)(7), you are entitled to information regarding the Trust and its assets, and you are entitled to accountings every six months to one year.  And the law requires that the demand for information and accountings both be submitted in writing to the Trustee.  Once sent, the Trustee has 60 days in which to respond with the requested information.  Thus, the first thing you should do is send the trustee your demand for information in writing.  Since you can’t go to court without that demand having been made and giving the trustee 60 days to respond, you might as well start the clock now.

It makes no difference if the trustee responds.  If the trustee gives you what you are asking for, great you just saved a trip to court.  If the trustee ignores your request or does not provide you with sufficient information, now you’re ready to file in Court.

What about removing the trustee?  Not the easiest thing to do, but not impossible either.  Take a look at some of our other posts about trustee removal here, here, and our video here.

The bottom line: sometimes you have to stand up for your rights.  Since private trustees don’t always understand the many duties they owe to their beneficiaries, and they don’t seem to have anyone educating them on those duties.  That’s when a beneficiary may need to educate the trustee to ensure their rights are protected.

If you’re going to do battle in Probate Court do you need to know more about Trusts and Wills or more about litigation?  The obvious answer is you need to know about both.  And while knowing about Trusts and Wills is critical, knowing a thing or two about civil litigation is also a must.

For example, under California Probate Code section 1000, the rules of civil procedure apply to actions filed in probate court (meaning all Trust, Will, and estate lawsuits).  This includes general civil procedure, civil discovery and the rules of evidence.

That sounds important, but what does it mean?  Let’s break it down into three general categories:

  • Civil procedure—things like motions and demurrers
  • Civil discovery—written discovery, depositions, and expert designations
  • Rules of evidence—including foundation, hearsay, relevance, etc.

In this post, we’ll discuss the first category—civil procedure.  The next two posts will explore the use of civil discovery and the rules of evidence in probate court matters.

Civil Procedure.

While it’s true that the rules of civil procedure apply to probate court matters, there is an exception where a different rule is stated in the Probate Code.  For example, in a civil lawsuit the defendant has 30 days after being personally served with a complaint and summons to file an answer with the Court.  In Trust and Will matters, however, an interested party has the right to appear and object for the first time at the first hearing (see Probate Code section 1043).  And in civil lawsuits a complaint does not need to be “verified” (which means signed under penalty of perjury); whereas in probate court verification is required (see Probate Code section 1021).

Demurrers and Motions.

While some of the rules are different under the Probate Code, other rules are not. For example, demurrers.  A demurrer is a funny word to describe what essentially is a motion to determine if the Plaintiff (or “Petitioner” in the probate world) has stated enough in the initial petition to make a legal claim against the defendant (or “Respondent” in probate court).  Every lawsuit has some basic information that must be stated in order to continue with the suit.  When a suit fails to state the basics, the opposing party can ask the court to dismiss the suit.  The Court, if it agrees, will usually dismiss the suit with “leave to amend” meaning the lawsuit can be re-filed with the correct information stated.

A demurrer does not test the truthfulness of the claims made in the petition, it merely determines if the factual allegations are enough to form the basis of a claim.  Demurrers aren’t always that useful in litigation, but they serve a purpose in some cases and can be used in probate court where appropriate.

The same applies to other procedures such as Motions to Strike, Motions for Summary Judgment and Motions for Judgment on the Pleadings.  All are fair game in probate court matters, although their usefulness may or may not apply in probate. 

Motions for Summary Judgment.

Take motions for summary judgment (“MSJ”), they tend to be used a lot in civil actions.  An MSJ is designed to allow the Court to decide an issue, or sometimes an entire lawsuit, where there are no factual issues in dispute.  Most of the time, MSJ’s are not granted by the Court because there’s always at least some factual issue that must be decided in a lawsuit, which can only be resolved at trial before a judge or jury.  If two people are fighting over the existence of a contract, then the facts of whether a contract was created or not can only be decided at trial.  Whereas, if the contract creation is not in dispute (everyone agrees a contract exists), then interpretation of the contract terms may only involve legal issues—not factual determinations—allowing the Court to rule on a properly filed MSJ.

In most probate court actions, however, almost everything is a factual dispute.  For example, if a Trustee is being accused of mismanaging the Trust assets, that’s a factual dispute.  The Court must hold a trial and hear evidence to determine whether or not the Trustee acted appropriately.  For this reason, most of the time MSJ’s are not useful in probate court.  But they are available and can be used in the right situation.

The bottom line is that if you are going to battle in Probate Court you must arm yourself with knowledge of civil procedure if you hope to be victorious.

Think you have a slam dunk legal case?  Well in my 12 years of litigation experience (all in California) I’d say there is no such thing.  But if you were to have a slam dunk case, at a minimum you would need at least five different things to come together in your favor.  Here are the five essential elements for a slam-dunk case:

  1. The Law.  The cornerstone to every slam-dunk case is having a good legal argument.  Strike that, a slam-dunk case must have a GREAT legal argument.  You would have to have the law squarely on your side.  But that law, by itself is just one element—you need more than that.
  2. The Facts.  The law is never applied in a vacuum.  There has to be facts that support the legal argument.  And typically facts can be all over the place, some good, some bad, some downright terrible.  To have a slam-dunk you would have to have all the facts on your side and they’d all have to be good.  A caveat: every party always thinks they have nothing but good facts on their side.  This is rarely the case.  Plus, facts can be interpreted differently by different people—including  judges and juries.  To have a slam-dunk case, the facts have to be indisputably good.  But facts alone are not enough either.
  3. The Equity (i.e., fairness).  Judges and juries are people and people want to right a wrong.  This means, to really persuade someone you have to be able to show them the inherent fairness of your position.  Why is your side the fair result?  Not just fair to you, but objectively viewed as being the “right” answer.  You can never underestimate the power of equity.  Even in the best of cases, a fair result is highly persuasive and can even trump the law and the bad facts. Most judges and juries find the fair result in their guts, and then back their way into the legal reasoning and support for the equitable (fair) position.
  4. Money.  Lawsuits of every kind are expensive.  The pursuit of justice takes a toll, and that toll is usually felt most keenly in the pocket book.  Even if the law, facts, and fairness line up in your favor, your slam-dunk case will die a premature death if you don’t have the money to pursue the case as far as is necessary to resolve the dispute—that means getting to an agreeable settlement or trial.  Without either (1) money, or (2) some alternate arrangement to pay for legal services (such as contingency fees for example), your slam-dunk case is just slam sunk.
  5. Time.  To successfully see a case to trial you have to be a master guru of patience.  In our court system, it can easily take 3 to 5 YEARS before you get to trial.  For example, on a case we recently filed in Los Angeles Superior Court in July, the opposing party filed a motion to challenge the pleadings (called a demurrer in legal jargon) and received a hearing date of April 5, 2013.  So we now have to wait until next year just to find out if the defendant will be required to answer the lawsuit.  That means we can’t hope to even go to trial for a very long time—i.e. years from now.  If you don’t have the time, your case won’t make it to the finish line.

In most cases you’re lucky to just have one or two of these items on your side.  In fact, in a recent case we resolved, the client had the first three, which is rare.  But there was a lack of money and time, so the case had to settle.  In other cases we go to trial, but the result is unknown (until a judgment is reached) because of weak facts, law, or equities.  I have yet to see all five of these elements come together.  But if a case ever does meet all five, then you may have the first ever slam-dunk case.  Then again, you may not because nothing is ever certain in litigation.

Every Trustee and every Executor owe an absolute duty to account.  And a Trust or probate accounting is a unique animal—it’s unlike any other type of accounting and not every accountant and/or CPA knows how to properly prepare one.

1.   Charges and Credits: What goes in must equal what goes out.

Unlike a typical business accounting, Trusts and estates don’t have a profit and loss statement or a balance sheet. Instead, they use “Credits” and “Charges.”  In the simplest of terms, they keep track of what goes in and what comes out.

For example, the Charges are the items that come into the Trust or estate (the things the fiduciary is “charged” with).  They begin with the value of assets on-hand at the beginning of the accounting period.  So if we were preparing a Trust accounting with a period that starts January 1, 2011, then we would need to provide a list of all the assets and their values as of that date.  You then add in all the receipts that come into the Trust or estate (like income payments, dividends, any positive cash flow), and gains on sale (which only applies if any capital assets are sold).

The Credits, on the other hand, is a list of the things that go out, such as disbursements (a fancy word for bills and expenses that are paid from the Trust or estate), distributions (money paid to beneficiaries), and losses on sale of capital assets (assuming any such assets were sold).  Charges end with the balance of assets on hand at the END of the accounting period.

2.   The Summary Sheet.

Every accounting has a summary sheet that looks like this:

20120611.SummaryOfAcct.pdf

And then there are corresponding schedules where the detailed information is listed.

The trick is that the total Charges (what comes in) must be equal to the total Credits (what goes out + what’s left on hand).  If they are not, then the accounting does not balance—something is missing and has to be tracked down.

3.   The Power of a Calculator: It pays to add.

Whenever I sit down to analyze any Trust or probate accounting the first thing I do is grab my calculator.  It is amazing how much you can learn about the sufficiency of an accounting by doing some simple arithmatic.  This is true even if you prepared the accounting on your own computer.  Since it is relatively easy to have an incorrect formula in a spreadsheet program (such as Excel), a simple little calculator will test the sufficiency of the numbers.

And when put to the test of my simple little calculator, many accountings tell a different tale.  Take a look at this summary sheet, it appears to balance:

20120611.SummaryOfAcctIncorrect.pdf

Yet under the calculator, the numbers don’t jive.  Even though the Total Charges are the same as the Total Credits, the numbers, when added, don’t agree.  There’s obviously a problem with this accounting.

Next, I turn to the actual schedules and start adding up the numbers and totals listed there.  This can be a daunting task, since some of the schedules are multiple pages long.  Don’t be discoraged, it pays to do your homework.  Keep adding and eventually you’ll discover whether the totals are correct or not.

4.  Finding the Accounting Soft Spot.

Using the incorrect summary sheet above, once you add up the numbers on each schedule you can identify where the problem lies.  Once I know where the problem is, I can either fix it (if I am the one preparing the accounting) or attack it (if I am probing the accounting prepared by someone else).

What if all the numbers are correct, but I still think there’s something inaccurate going on behind the scenes?  Well now I know that I have to go outside the accounting document to find it.  That’s valuable information because at least I am not stuck wondering if the problem is evident from the face of the accounting.  Instead, I can get started serving my subpoenas and hunting down the problem elsewhere.

Or sometimes the numbers are correct, I just think the Trustee or Executor spent too much on some expense (such as Trustee fees).  That’s also valuable information because now I know that my entire case exists on the face of the accounting.  The amount of fees is listed, and all I have to do is argue why they are too high.

Without zeroing in on the problem, however, I would have no idea where my point of attack (or revision) would be.  So it pays to simplify the process.  Do the work, and find the soft spot in almost any accounting.

Death may be certain, but estate taxes are not.  At least not at the end of 2012 when the current Estate Tax exclusion of $5.12 million is set to expire and be automatically reset to $1 million.  With proper planning, married couples can combine their exclusions for a total amount in 2012 of $10.24 million.  At that rate, there aren’t too many estate subject to estate tax.  But if the estate tax exclusion falls back to $1 million ($2 million for couples who plan), there will be far more people affected by this tax.  Worse yet, the tax rate, currently set at 35%, will increase to a staggering 55% of asset value at time of death.

The size of your estate is based on the total fair market value of all your assets measured from your date of death.  But there are a few surprises thrown in as well.  For example, your estate inlcudes the total death benefit of all life insurance policies you own.  So if you have a $1 million term life policy (an asset that does you little good while alive) it counts towards your total estate value.  Add in a house, a retirement account, and a few bank accounts, and your estate could top $1 million easier than you think.

If you own your own business, that must be valued as well.  Your estate could end up owning a 55% tax on assets that are highly valued, but not highly liquid.  That can cause a financial hardship for your family after your gone.

So now is the time to take advantage of the increase Estate and Gift tax exclusion amount of $5.12 million. But what action should you take?  That depends on your situation.  There are quite a few different ways in which to reduce the size of your estate while also benefitting your family members.  

For example, you can fund a Trust for your children or grandchildren that can be used for educaitons, health, and support items.  You can fund a life insurance trust that allows you to pass the death benefit of an insurance policy to your children free of estate tax.  You can even create a family business (referred to as a family LLC) that could provide a way to share the wealth while also reducing your estate value.

For a few other interesting ideas, check out this article from www.nerdwallet.com’s personal financial management blog (quoting some expert advice that you may find interesting).