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.

If you went to the trouble to create a California estate plan that includes a revocable Trust, durable power of attorney for financial assets, and a healthcare directive, you probably have a capacity provision in each of these documents.  The capacity provision says that your successor Trustee or successor agent (under the durable power of attorney) will take over when you have lost your capacity.  When is that exactly?

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Do you have capacity now or later?

The problem with people who have lost their capacity to make decisions is that they don’t always (or ever) know it has occurred.  And they may not like people telling them they lost their capacity to make decisions.  So how do you determine if a parent or family member has wandered into incapacity—the type of incapacity that triggers a successor Trustee or agent to act?

Is there a Doctor in the house?

Most Trusts and durable powers of attorney have a clause that states how capacity is to be determined.  And most capacity clauses require a letter from a treating physician stating that the person in question has become incapacitated, or unable to make financial decisions. 

The problem, however, is that obtaining a doctor’s letter is not always feasible.  For one thing, you may have to ask for the letter in the presence of your parent or family member with the capacity problem, which might be uncomfortable if he or she insists on having capacity.  Or maybe you do not have access to a person’s physician.  Or maybe the physician states that he or she is not qualified to make a diagnosis on capacity—requiring a trip to a specialist in neuroscience or psychology. 

If you can’t beat ‘em, joint ‘em.

You have two options:

(1) have a conversation with your parent/family member to explain why a doctor’s letter is needed and how it will help them to properly manage their financial affairs, or

(2) avoid the capacity issue altogether and instead have the person resign as Trustee or add you on as a co-Trustee to help manage the Trust assets. 

Sometimes asking to be appointed a current co-Trustee is easier to discuss with a parent than telling him or her that they have lost their capacity (the difference between “Mom you’ve lost it” versus “Mom can I help you with paying your bills?”).

There is no easy way to make this transition, but the more open you can be about the various options you have, the better for everyone involved.

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. 

There are times when people try to implement an estate plan, but things go awry.  And that can happen when an attorney makes a mistake in drafting a California Trust or Will resulting in legal malpractice.

Bringing and prosecuting a legal malpractice case against an attorney who improperly drafted a California Living Trust or Will is complex, to say the least. It is particularly difficult because knowledge of three distinct areas of law is required for a hopefully successful outcome. First, you need to understand the law as it applies to estate planning (i.e. Living Trusts, Wills, etc.); you also need to understand the rules of civil litigation; and finally, you need to understand the rules and laws as they apply to insurance and bad faith insurance litigation.

Estate Planning: It takes years of experience to become a good estate planning attorney. Over the years, Trusts and Wills have become more complex due to multiple asset classes owned by individuals, married couples with children from previous marriages, and ever changing Trust, Will and Tax laws. Competition between attorneys that provide estate planning services is intense. What used to be only available from large and well-known law firms is now readily available across the spectrum of service providers–now large, medium, small, and solo law firms offer estate planning services. Even nonlawyers provide “assistance” in drafting estate plans. The costs for these estate plans range into the thousands of dollars to as low as $50 through several web-based providers. Unfortunately, with the intense competition between these providers, mistakes are made when attempting to convey the intent of the Trustors (the persons creating the Trust or Will) in the Living Trust or Will. This leads to beneficiaries being harmed if they do not receive the inheritance the Settlors intended. In all events, to successfully bring a successful malpractice claim in this area, one must have a good understanding of California estate plans, including Trusts and Wills.

Civil Litigation: Litigation is the process of filing a lawsuit, preparing for trial, and going to trial. The entire litigation process in California generally takes two to five years to complete. The majority of time in litigation is spent on discovery, which includes depositions, interrogatories, requests of admission, and demands to produce documents. Once discovery is completed the trial court will set a trial date. At trial a jury or a judge hears the case. The lawyers make opening statements, present evidence during direct and cross examination, and make a closing argument making their case why their client should prevail. The litigation process comes to a close with the jury or judge making a decision in favor of the plaintiff or defendant. One must not only understand the law as it relates to estate planning, but also civil litigation, to successfully prosecute a legal malpractice claim pertaining to California Trusts and Wills.

Insurance and Insurance Bad Faith Litigation: Most drafting attorneys have professional malpractice insurance, which covers the attorney up to a set amount for any lawsuit filed against them for legal malpractice. For example, if an attorney has an insurance policy of $1,000,000, then the insurance company who issued that insurance policy to the attorney will pay up to $1,000,000 for a successful litigation claim made against the attorney for legal malpractice. This is where an attorney bringing the legal malpractice lawsuit can do a lot for their beneficiary clients.

The goal is to force the insurance company to settle the lawsuit early on for the policy limits. If the goal is reached, the beneficiary obtains monetary damages for the loss they sustained by the drafting attorney’s malpractice without having to undergo the entire litigation process, which is time-consuming and extremely stressful. To implement the goal the attorney for the beneficiary simply needs to make a “reasonable” settlement offer (usually just inside policy limits) to the drafting attorney and the drafting attorney’s insurance company. If the insurance company refuses to pay the policy limit, it’s very likely the insurance company will be responsible for any judgment amount over the policy limit. This generally causes (and motivates) the insurance company to settle for policy limits.  Or if the company still refuses to settle, then it sets the stage for a bad-faith action against the insurance company down the road.  Either way, it’s a benefit to the beneficiary-plaintiff. Insurance and Insurance Bad Faith Litigation are perhaps the most misunderstood aspects of successfully bringing a legal malpractice lawsuit. You must know this area of the law.

Each of these three areas can be complex in their own right.  And in attorney malpractice cases in the California Trust and Will arena, you’ll need to combine knowledge of all three areas to be successful.

Feel free to call me if you have any questions about initiating and prosecuting a legal malpractice lawsuit against a drafting attorney. Also, if you would like the letter our firm sends to insurance companies for these types of cases, let me know.

California Trust and Will litigation is like building a puzzle.  There are a lot of moving parts in most cases and trying to figure out how and when to put the parts together can be confusing.

The Fourth District Court of Appeals recently set Trust litigators straight on how and when a Trustee can be sued by Trust beneficiaries, in a case titled “Estate of William A. Giraldin” (2011, No. G041811).  Associate Justice William W. Bedsworth authored the opinion that holds beneficiaries have no standing to sue a Trustee for alleged breaches of fiduciary duty that occurred while the Settlor (which is the Trust creator) is still alive and had the power to revoke the Trust.  My first reaction: What???

In Estate of Giraldin, the decedent, William Giraldin had created a revocable, living trust.  Although he was the “Settlor”, because he created the Trust, he appointed one of his five sons, Tim, as the successor Trustee.  The Trust was revocable by William Giraldin during his lifetime and, therefore, under Probate Code Section 15800, the Trustee, while acting as Trustee during William’s lifetime, only owed duties to William—not the named Trust beneficiaries (Williams’ other four sons)..  In other words, the Probate Code specifically states that the Trustee does not owe any fiduciary duties to the children of William (who are “contingent” beneficiaries so long as William is alive) until after William’s death.

The problem in Estate of Giraldin revolved around a large investment William made, over $4 million, into a start-up company owned, in part, by his son Tim.  After William created the Trust, and made his investment in Tim’s company, William stepped down as Trustee and allowed Tim to act as Trustee of his Trust.  But Tim was acting at William’s direction.

As might be expected, the start-up company William invested $4 million in did not survive, and William’s wealth plummeted as a result.  After William’s death, the other siblings were not happy that William invested so much of his money into Tim’s company only to have it disappear (I would imagine that had Tim’s company been successful, the other siblings would have been quite happy).  So Tim’s siblings sued Tim for breach of Trust claiming, among other things, that Tim never should have allowed William to invest in the company and lose his $4 million.

The Trial court agreed with Tim’s siblings and awarded a surcharge against Tim in excess of $4 million (yikes!).  Tim naturally chose to appeal that ruling and Justice Bedsworth gives us new law with a ground-breaking result for Trust litigation issues—he reversed the surcharge.  Tim owes nothing!

Before Estate of Giraldin, it was generally assumed that while beneficiaries could not sue a Trustee while the Settlor was alive, they could do so after the Settlor’s death.  The beneficiary could receive both an accounting of actions that took place before the Settlor’s death and even ask for a surcharge for any breach of Trust that occurred during that time.  This was based on Evangelho vs. Presoto (1998) 67 Cal. Appl. 4th 615.  Not so fast, says Justice Bedsworth.  He overrules the concepts set down in Evangelho.

Instead, the Court states that when a Trust is revocable by a Settlor, the only duty a Trustee owes is to that Settlor.  Therefore, there is no basis, and even no standing(!), for beneficiaries to seek an accounting of Trust actions or assert a breach of Trust for actions taken during that time.  What about breaches that the Trustee incurs, but the Settlor could not assert due to the ill-health or lack of capacity of the Settlor?  The Court says that can be taken up by the Settlor’ successor’s-in-interest, which usually means his Executor or surviving heirs.  But that type of action must assert wrongs against the Settlor, which did not occur in this case.

In fact, in the Estate of Giraldin matter, the only wrongs asserted by the beneficiaries is that they should have had an extra $4 million to split among themselves.  Everyone agreed that the Settlor wanted to invest in Tim’s company and had the capacity to do so.  They merely asserted that Tim should have stopped William from investing how he liked.  The Court disagreed, saying that during the Settlor’s lifetime, since the Settlor has the power to revoke the trust, the Trustee must do as the Settlor directs.  This is true even if the investing decisions are foolish. 

Had the beneficiaries been asserting wrongs committed as against William, then it may have been a different story.  Or if the investing had occurred after William died, when the Trustee owned a duty to his siblings as vested trust beneficiaries, there would have been a different outcome.  But under these facts, the Trustee gets a free-pass because he based his actions on the directions of the Settlor.

Giraldin is a well-reasoned and well-written opinion and makes sense on the facts of that case.  But the downside of a case like this is that the new argument for every Trustee acting while the Settlor is alive is going to be “the Settlor made me do it”—no matter whether that is true or not.  It will then be up to the beneficiaries to show whether that is true. 

How does your trust help you while you’re alive?  Many people think of trusts as death planning instruments–the type of thing that only operates upon your death.

But trusts have a critically important role to play while you are alive in the event you lose capacity.  People are living longer and the likelihood of being physically able, but mentally unfit is growing.

Without a trust plan in place, a person and his money cannot be easily cared for. In fact, a court supervised conservatorship is required to manage the person and estate of people who lose mental capacity, but have no other safeguards in place for the management of their money and personal care. 

Unfortunately, conservatorships are costly, time consuming and expose everything (and I mean everything) to ongoing court supervision.  In other words, your life becomes an open book and the court decides who will make decisions for you and then tries to oversee those decisions as best it can….yikes!

Since a conservatorship takes place in court, it provides a ready forum for lawsuits.  It’s not uncommon for a person’s children to fight over who should be named as the conservator.  And those types of lawsuits can be nasty business.

But a well planned trust can avoid all of that because under the trust terms, you appoint a successor to manage your money if you ever become incapacitated.  You should also have a Health Care Directive in place so that you can name someone to make your medical decisions.  With these two documents properly prepared, your personal care and your assets can be quietly and easily managed until you return to full mental capacity.

So the next time someone tells you that a trust isn’t necessary because it only takes effect after you’re dead and gone, think again.  That trust may save you a lot of time, money and public scrutiny while you’re still alive.

Fifty years ago, most assets passed from an individual who died to his or her family by way of Probate (by Will or Intestacy both of which require Probate). Probate is a strict, expensive and time-consuming Court process that must be completed before assets can ultimately being transferred to family members.

But today, we own assets differently than we did fifty years ago. Most of us have bank accounts, retirement accounts, life insurance, and perhaps Living Trusts. These four types of assets (or financial vehicles) constitute the core of the so-called “Nonprobate Transfers” or “Will Substitutes”, meaning each of these assets pass outside Probate if properly designated.

California law expressly allows these Nonprobate Transfer assets to pass outside the probate process, even though these assets do not comply with the formal requirements for execution of a Will (read more about the Formalities and Intentionalities of Will creation.) Accordingly, individuals can rely on beneficiary designation forms that identify who gets his or her bank accounts, life insurance, and retirement accounts at his or her death without regard to what a Will states. As a result, with proper planning, an individual’s entire estate can pass at death to his or her family members outside of the Probate system. In fact, this is one of the primary reasons why estate planners created Revocable Trust—to avoid Probate altogether.

Let’s take an example, Stewart owns the following assets:

  • a home worth $400,000;
  • a rental property worth $350,000;
  • two bank accounts totaling $60,000;
  • a retirement account totaling $500,000; and
  • life insurance with a death benefit of $1 million.

Stewart’s total estate is worth $2,310,000. If Stewart’s estate passes by a Will or Intestacy, it must go through the Probate system. The attorney’s fees on this size of an estate would result in fees of approximately $40,000 (read more on how Probate fees are calculated.)

On the other hand, Stewart’s entire estate could pass by way of Nonprobate Transfers (also known as Will Substitutes), as follows:

  • Stewart’s (i) home and (ii) rental property are owned by his Living Trust, which designates the beneficiaries of his home and rental property.
  • Stewart’s (i) bank accounts, (ii) retirement account, and (iii) life insurance have “beneficiary designation” cards filled out designating who gets these assets on Stewart’s death.

Now Stewart’s entire estate passes outside of the Probate Court process.

Ultimately, these types of Nonprobate Transfers (or Will Substitutes) function as a private system of transferring assets at death—usually requiring less time, fewer rules, and a lower cost than Probate requires.