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Hi, this is Keith Davidson at Albertson & Davidson.  And in this video, I want to discuss step-parents.  And I don’t mean to disparage step-parents, there’s a lot of very good step-parent and step-child relationships out there.  But, there’s also some bad ones.  And a lot of times we’re asked, “Can my step-mom or step-dad, can they change the estate plan after my parent dies?”  So, typically, in this scenario, maybe you have a father who married somebody new and that’s your step-mom.  And then your father passes away and you always thought you had a good relationship with your step-mom, but after your dad passes, things start to get a little strained and awkward and you start to wonder can she actually change the estate?

In some cases, it might actually get downright hostile and maybe the step-mom actually tells you, “I’m changing the estate and I’m leaving it all to my kids and I’m not going to leave your father’s share to you after all.”  And you wonder, can she do that?  And the answer is maybe.  And that’s a typical lawyer answer, right?  But it depends; it depends on what your father did when he planned out his estate.  Or, if he didn’t have any planning at all, that could be a real problem.

So the best case scenario would be if your father had created a trust prior to his death, he has the right to leave assets to step-mom and that’s fine.  But, typically, what you’d want to see is that he left money to step-mom in a trust.  So she can use that money for her care and support during her lifetime, but she can’t change the ultimate distribution of it.  Whatever’s leftover after step-mom passes, has to go to you.  But that only works if your dad created a trust and if he had a trust created that had those type of terms in it that allowed the step-mom to use the assets but not control them.  That required that the assets go to you after death.

If your father didn’t do that, then you probably are not going to be entitled to his share of the estate.  And so what happens a lot of times is, either your father leaves everything to the step-mom, in which case she can do whatever she wants after your father dies, and she can cut you out.  Or, he just doesn’t plan at all and things just pass to the step-mom because it’s in joint tenancy or she’s the beneficiary on life insurance, or whatever the case may be.

So when these things are not planned out and if the assets actually pass to step-mom after your father passes away, then you’re really in trouble, because the step-mom can do whatever she likes.  She becomes the owner of those assets and she can do whatever she wants with them as the owner.

The fact that your father may have had a family home that you grew up in and lived in and has been in the family for decades, the law doesn’t care about that – if your father didn’t plan it out property.  And so that’s really the big question.

So anytime somebody approaches us and says, “Can step-mom change the estate after my father passes away?”  The first question we’re going to have is, “Well, what did your dad have in place?  Did he have a trust?  Did he have a will?  Did he have something that we can look at to see if you, as a child, have any rights to any of those assets?” And if you were to tell us that no, he didn’t have any of those things, then chances are, you’re out of luck.  And that’s a little something about the downfalls of step-parent and step-children relationships when it comes to passing assets.

 

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This is Stewart Albertson with Albertson and Davidson, and I want to talk to you about an issue that we do see from time to time called advances on inheritance. Advances on inheritance are essentially a loan that mom or dad makes to one child. They don’t want to be unfair in giving that loan to one of their children when they have several other children. So they basically tell the person they made the loan to, well that is an advance on your inheritance so that when I die, you’re going to have to take that into account based upon whatever your share of my estate is.

There’s a real problem with advances on inheritance though because the probate code has some technical requirements that must be met to qualify as an advance on inheritance. Otherwise, that payment of money from a parent to a child will be looked at as a gift.  If it’s a gift that makes a big difference because when the estate is distributed after mom and dad have passed away it’ll be distributed equally between all of the children without taking into account the “loan” that was made to one of the children during lifetime.

So how can you tell the difference between an advance on inheritance and a gift? The advance on inheritance can be proven in three primary ways. There’s actually a fourth way, but that gets a little complicated. If you really want to look into this, you can go to Probate Code section 21135, and you can read how you establish an advance on inheritance there.

Generally, the way you prove an advance on inheritance is:

  1. The trust or will terms themselves have in there saying, I’m giving $100,000 loan to my son Johnny, and when I die, this counts as part of his inheritance at the time he receives his ultimate distribution. That’s the first way that an advance on inheritance can be included and be supported by the evidence.
  2. The next way you can establish an advance on inheritance is did your mom or dad have a writing outside the trust or will that simply says: I hereby am making a loan to Johnny and after I die, that should be considered as part of his inheritance for distribution purposes. That would be the second way that you can establish an advance on inheritance.
  3. The third way is you have Johnny acknowledged in a writing that he’s already receiving some of his inheritance by way of a loan prior to mom and dad passing.

If you have any of those three, chances are you can establish an advance on inheritance.

As you can see, this is not always easy to do. If there is money that is given to one child, a lot of money, say several hundreds of thousands of dollars to one child and not to the other, and there’s nothing to establish an advance on inheritance, what is the argument the child makes who received the money during the parents’ lifetime? And that is, it was a gift. If it’s a gift, it won’t be chargeable against their share of the estate. It won’t be an advance on inheritance.

 

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This is Keith A. Davidson from Albertson and Davidson. In this video, I want to talk to you about the differences between Wills and Trusts. A lot of times people think that Wills and Trusts are the same thing, that they’re the same type of documents, and they really aren’t. Wills and Trusts are very different, and so let’s start with a discussion of Wills, and then we’ll talk about Trusts and you can see the differences between the two documents.

Wills are testamentary documents, and what that means is they only come into effect, they only actually are created, upon somebody’s death. Now you go ahead and create the Will and write it down and sign it prior to death, but it doesn’t operate until after death. For Wills, there’s a lot of what we call formalities that you have to follow.

To have a valid Will, you have to have it in writing. It has to be signed by the person who’s creating the Will, and a typewritten Will has to be witnessed by two witnesses, or it has to be in the testator’s own handwriting. That’s what we call a holographic Will. If you don’t meet those formalities when you create a Will, then the Will simply isn’t going to be valid. That’s something that is unique to Will’s. You’re not going to have that with Trust.

After somebody passes away, a Will cannot operate over their assets until you take that Will to court and you have the court admit the Will to probate. That’s where the court decides whether the Will is valid or not, and until the Will is admitted to probate, nothing can happen with that Will. You can’t administer it. You can’t manage the decedents assets. It has to go through this court process in order to operate and then the Will ultimately will dictate how the assets pass out of probate and to the beneficiaries who are intended to receive them. And that’s generally how a Will works.

A Trust is very different because most people create what we call a living Trust. In legal terms, we would call that an inter-vivos Trust, meaning that it’s created during your lifetime and it actually operates during your lifetime. So the Trustee of your living Trust can manage your assets, can make management decisions over those assets, and it operates even if you lose capacity. That’s different from a Will because the Will never helps you if you lose capacity, but a Trust does. And then after you passed the Trustee can administer that Trust without having to go to court.

Trust don’t require any court oversight in order to be administered. And in order to create a Trust, all you have to do is have something in writing and signed. You don’t technically even need to have it notarized, although most Trusts are notarized and they probably should be, but that’s not a legal requirement that they be notarized.

Trusts tend to be a lot more flexible because you can leave your assets to your children or your beneficiaries, and you can have all sorts of flexibility in how you leave your assets to them. So, you can leave something in a child’s Trust that holds their assets until a certain age, or you can leave something to your grandchild and also hold that until they reach a certain age. There’s all sorts of flexibility that you can build into your Trust that is much harder to do under a Will because the Will has to go to court and through the probate process in order to be administered.

So that is some differences between a Will and a Trust, and I think you’ll see that they’re very different documents.

Trust and will disputes are confusing because the way you see your family and their assets can be very different from how the law sees it.  You may see your family as one group of people related by blood.  If one of your siblings is taking advantage of your parents, then you should be able to step in and help protect them.  Or if your parents pass away and their assets are not being distributed according to your parents’ desires, then you should be able to place all the assets in a big pile and force a proper distribution among your family members.Asset Puzzle.jpg

Well not so fast.  The law makes things complicated because it does not see these issues as a “family” problem.  Instead, the law sees individual people, each with their own set of rights—some rights being enforceable now and some being enforceable later (if at all). 

For example, if a parent is being controlled by one sibling and that sibling has taken control of the parents’ trust, you cannot simply demand a Trust accounting from the bad brother or sister.  Why not?  Because you do not have a current right to do that.  When a parent creates a revocable Trust the Trustee only owes a duty to the Trust creator (called a Settlor—i.e., the parent).  Therefore, only a parent can demand an accounting from the Trustee—no one else has that right and no one else can enforce the parents’ rights.  The exception is if a conservator is appointed on behalf of the parent, then the conservator can exercise the parent’s right and force an accounting from the Trustee.  Once the parent dies and the children become vested beneficiaries of the Trust, then the children can demand an accounting (including an accounting for the period while the parent was still alive). 

It may seem like a family matter to you when a sibling is wreaking havoc with a parent, but the law sees individual people with individual rights—not a family matter.

The same is true for disputes over a parents’ assets after they die.  You may see a pile of assets your parents owned while they were alive, all of which they controlled and benefitted from.  Things like their home, joint bank accounts, life insurance, retirement accounts, brokerage accounts, bank accounts, CD’s, etc.  If your parents owed all of these assets then you should be able to deal with them in a single action, just pile them on the table and let the dispute begin. (See our previous discussion on how assets pass at death.)

But after death, the law sees assets very differently.  The law places each asset in its own box that is governed by its own set of rules.  The assets titled in the name of a Trust pass under Trust law, but they have nothing to do with assets passing by beneficiary designation—like life insurance and retirement accounts.  And joint assets pass under their own law, which is different from assets held in an individual’s sole name, which passes under a Will as part of the probate estate. 

Filing a Trust contest will help to undue assets passing under a Trust, but it does nothing for assets passing by joint tenancy or beneficiary designations.  So all those life insurance proceeds and retirement accounts have to be contested in different legal actions.  It is not uncommon to have a Trust contest petition, a Will contest petition, and a third type of probate petition all in a single matter. 

Why is this all so confusing?  Thanks to a few centuries of legal evolution where people came up with new and exciting ways to side-step Wills and the probate process.  Things like Trusts, joint tenancy, and beneficiary designations were meant to make passing assets easier.  That may be true when a parent plans out their assets ahead of time.  But when things go astray and assets have been wrongly distributed, this maze of laws governing different types of assets can be a difficult obstacle to overcome.

So beware, family issue involving Trusts and Wills are far more complicated than they appear.  

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 get calls every week from California Trust, Last Will, and Estate beneficiaries complaining that they can’t get their brother or sister, who is the Trustee and Executor of their parents’ estate plan, to provide copies of the parents’ estate plan after the parents have died.

I usually suggest the following. First, send a letter to the Trustee and Executor politely requesting the entire Trust, including amendments, and Last Will for both parents. Include the following language in the letter: 

A.         Please Provide True Copy of California Will

Under California Probate Code Section 8200, you, as Executor of Mom’s and Dad’s estates, are required to deliver mom’s and dad’s Last Wills to the County Superior Court where mom and dad died within 30 days of mom’s and dad’s respective deaths. Please note, if I am damaged by your failure to deliver moms’ and dad’s Last Wills to the Superior Court you will be liable for my damages. (See Probate Code section 8200(b).)

As you are required to deliver the Wills to the Superior Court, you should have no objection in providing me with true copies at this time. If you do not provide me with a true copy of the Wills I will have no choice but to file a petition in the Probate Court requesting the Court to order you to provide me with true copies of the Wills. Please note, if I’m forced to file a petition, I will request that the Court order you to pay for the attorneys’ fees and costs associated with my petition. I hope I am not required to file a petition and you will simply provide me with true copies of the Wills on or before DATE. 

B.         Please Provide True Copy of California Trust

Under California Probate Code Section 16061.7, you, as Trustee of Mom’s and Dad’s Trust, are required to provide all beneficiaries of the Trust and all of Mom’s and Dad’s heirs with a true copy of the Trust documents, including any amendments, 60 days after Mom’s and Dad’s respective deaths.

As you are required to provide Mom’s and Dad’s Trust after 60 days of their respective deaths you should have no objection in providing me with true copies of the Trust, and any amendments, at this time. If you do not provide me with a true copy of Mom’s and Dad’s Trust, and any amendments, I will have no choice but to file a petition in the Probate Court requesting the Court to order you to provide me with a true copy. Please note, if I’m forced to file a petition, I will request that the Court order you to pay for the attorneys’ fees and costs associated with my petition. I hope I am not required to file a petition and you will simply provide me, as an heir and/or beneficiary of the Trust, a true copy of the Trust, and any amendments, on or before DATE.

If you include the above-referenced language in your letter to the Trustee, more times than not you will be successful in getting the Trustee to turn over the Trust and Will documents.

If the Trustee still refuses to provide the Will and Trust, then you must seek help from the Probate Court to force the Trustee and Executor to hand over these documents. I will explain in a future post how you get the Court’s help for obtaining these documents. 

An interesting case, Diaz v. Bukey, was decided on May 10, 2011 by California’s Second Appellate District pertaining to the issue of whether a mandatory arbitration clause in a trust applies to a trust beneficiary. Justice Steven Z. Perren, writing for a unanimous Court, held that the beneficiary of a trust who did not agree to arbitrate disputes arising under the trust may not be compelled to do so. And this decision makes sense. Under California law, only parties to an arbitration contract may enforce it or be required to arbitrate.

The Case Facts. In Diaz, parents set up a trust, which included an arbitration provision that required all disputes arising in connection with the parents’ trust, including disputes between a trustee and a beneficiary, to be settled by arbitration. After the parents’ deaths, a trust beneficiary made a filing with the probate court demanding an accounting from the trustee of the Diaz Trust. In response, the trustee filed a demurrer (a request to have the beneficiary’s filing summarily thrown out of court without a trial) and a petition asking the probate court to order the trust beneficiary to arbitrate the dispute. The trust beneficiary opposed the demurrer and the petition to compel arbitration, basing his argument on the facts that he had not agreed to nor was he a signatory to the arbitration provision in the Diaz Trust. The probate court agreed with the trust beneficiary overruling the trustee’s demurrer and denying the trustee’s petition to force arbitration. The probate court reasoned that the beneficiary was not contractually bound to submit disputes with the trustee to arbitration. The Court of Appeal agreed with the probate court and affirmed its decision.  

The Parents’ Intent. After reading Diaz, I thought about the parents “intent” being defeated by legal rules they likely were not aware of when they created the trust. All the parents knew, at the time they created the trust, was that they wanted to require all disputes pertaining to the trust to be decided at a private arbitration, rather than in the probate court. The idea behind this is that generally arbitration costs less than a full blown trial in the probate court. In any event, the parents’ intent, as reflected in their trust, was to require less formal adjudication of all disputes pertaining to their trust. Clearly that did not happen in Diaz.

Possible Solutions. How should attorneys draft arbitration clauses in trusts after Diaz? I think arbitration provisions could still be used in trusts and made enforceable against non-signatory beneficiaries after Diaz. But how? By requiring the beneficiary to agree to arbitration as a condition of receiving their gift under the Trust.  For example, if one additional sentence had been added to the arbitration provision in Diaz, I believe the beneficiary would have agreed to the arbitration. That sentence is:

“If any beneficiary under this trust refuses to agree to arbitrate any and all disputes pertaining to the trust, then that beneficiary’s (or beneficiaries’) distribution shall not be made, and that beneficiary lose any and all interests in the trust estate and shall not share in any portion of the trust estate.”

Would a trust beneficiary, who did not sign the arbitration agreement in the trust, be willing to risk an inheritance by not agreeing to binding arbitration? Not likely.

As a follow-up to yesterday’s blog post, the House of Representatives passed a package extending the Bush-era tax cuts for two more years and substantially revising the estate tax.

Writing for the Non Profit Times, Mark Hrywna reports that had Congress not acted, the estate tax would have returned to its 2001 rates beginning January 1, 2011–$1 million exemption amount with a flat tax of 55% for all amounts in excess of $1 million.

But now that Congress has passed President Obama’s negotiated package, the estate tax, for at least the next two years, is as follows: a $5 million exemption amount per individual (or $10 million per married couple), with a flat tax of 35% for all amounts in excess of $5 million for individuals (or $10 million for married couples).

For example, an individual dying in 2011 with a net estate of $6 million can pass $5 million tax-free to his/her heirs and beneficiaries. The remaining $1 million would be taxed at a flat rate of 35% or $350,000.

Married couples are allowed to combine the $5 million exemption (with the proper estate planning) allowing them to transfer $10 million tax-free to their heirs and beneficiaries. Thus, if a married couple both pass away in 2011, and their net estate is worth $12 million, then $10 million would pass tax-free to their heirs and beneficiaries. The remaining $2 million would be taxed at a flat rate of 35% or $700,000.

Much of this analysis is academic as Janet Novack, writing for Forbes, points out that fewer than 4,000 families will pay estate tax next year. But, Ms. Novack goes on to point out that individuals and couples who are not affected by the estate tax should still complete an estate plan. You can read Ms. Novack’s full article here.

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.