Gifts, Wills and Trusts

Gifts, Wills and Trusts Glossary 1. Trust – think of it as an entity even though it is a relationship 2. Trust Corpus/Res/Estate - all the stuff held in the trust (interchangeable terms) 3. Trustor/Settlor/Grantor – the person who creates the trust, who puts the assets/$ in a. Trustor – Common Law b. Settlor – CA probate code c. Grantor - Internal revenue code 4. Beneficiary – the people for whom the trust was created 5. Income Beneficiary – the person who receives income created by the trust assets 6. Remainder Beneficiary – receives the rest of the corpus when income beneficiary dies 7. Trustee – the person who administers the trust, a fiduciary owing duties to the beneficiaries, they have a duty to preserve and protect the trust assets, their job is to invest the assets in the trust, make the distributions, keep the beneficiaries informed, to file income tax returns for the trust 8. Conservator – the fiduciary who administers the conservatorship 9. Conservatee – the person gets the conservatorship 10. Will 11. Codicil – an amendment to a will 12. Estate – an estate is what compromises all of your assets when you die 13. Intestacy – the condition in which one is in when one dies without a will 14. Testator/Testatrix/Decedent – the person who signs the will 15. Heir – the individuals who would receive the decedent’s property when he or she dies without a will, if the person dies with a will then the people who get the property are the beneficiaries, 16. Devisee – a beneficiary of a will who gets a device(real property) 17. Legatee – a beneficiary who receives personal property 18. Executor/Administrator – an Executor is the person who administers the estate when the person dies with a will and the will named the person who is to be the executor, an Administrator is the person who administers the estate when the person dies without a will, a Administrator CTA is the person who administers the estate when the person died with a will that does not name an administrator 19. Community Property with right of survivorship - just like community property but with normal community property the decedent can bequeath their half of the community property to anyone they want, but with community property with right of survivorship the dead spouse’s half goes automatically to the surviving spouse 1 TRUSTS Settlor Trustee Trust Instrument Beneficiary Corpus A trust can hold any type of property what so ever. The trustee becomes the legal owner of the assets put into the trust not in their personal capacity, but in their capacity as trustee, after the trustor grants the property to the trustee. The beneficiaries do not have legal title to the property in the trust at that time. Trust Instrument has to cover: Who the beneficiaries are Who the trustee is, who has legal title to these assets Who the successor trustee are Who are the beneficiaries at any given point in time Generally the trustee will be able to do anything with the property in the trust that a legal owner of property can do, but the settlor can put almost any limitations on it. Only if the trust instrument is silent on the issue at hand do you look to the probate code, and if both the trust instrument and the probate code are silent you look to state case law. Revocable Trusts (100k estate exception for probate) Revocable can be revoked any time by the settlor. In general a revocable trust is a living trust, something a person creates for the purpose of avoiding probate when they die. The only reason for having a revocable trust is to avoid probate. A revocable trust avoids probate by making all of your assets owned by the trustee not the individual when they die so they don’t have to go through probate. So you can have yourself be the trustor, the trustee, and the beneficiary, and in that way avoid probate. The tax id number is your social security number. Irrevocable Trusts (100k estate exception for probate) Irrevocable Trusts nothing the settlor can do to revoke it. Why would you create an irrevocable trust instead of just giving them the money?  To control when the beneficiaries get the money  Asset protection, money you put into a irrevocable trust cannot be reached by creditors  Tax purposes, to save estate and gift taxes because those assets leave you estate right then and appreciation on them will not be included in your estate at death  Avoids probate because you no longer own the assets Inter Vivos vs. Testamentary Trusts Created during settlor’s life versus upon their death. A will can create a trust, so it would come into place upon the settlor’s death. All revocable trusts are inter vivos. But not all inter vivos trusts are revocable All testamentary trusts are irrevocable, because you are dead. 2 Other types of trusts: Spend thrift trust – every irrevocable trust is a spend thrift trust, because it has a spend thrift clause in it, it says that the beneficiary cannot assign their interests in the trust and the creditor’s of the beneficiary cannot attach the interest in the trust Charitable trust – just a trust that has a charity as one of the beneficiaries, includes many tax benefits Dynasty trust – a trust that exists for more than two generations, historically trusts have been subject to the rule against perpetuities they still are so these trusts cannot exist in many cases, but there are some states that have abolished the rule against perpetuities as with regard to trusts Credit/Decedent’s trust – a trust creased so that the surviving spouse is not subject to estate taxes. Not taxed at wife or children’s death Marital/Qtip trust – A qualified terminable interests property trust. If the income goes to a surviving spouse and no one can appoint the property during their life, it qualifies for the marital deduction Survivor’s trust – A Revocable trust that is created upon the decedent’s death which is funded with the surviving spouse’s assets. QPRT – a trust into which you place your personal residence Insurance – exists only for tax reasons 3 WILLS Executor (or the term that applies) Testator Beneficiary Will Estate Three ways in which a will can dispose of property: Direct disposition – leaving the property outright to beneficiaries Testamentary trust – “I leave a million dollars in cash to Kathy” and then a bunch of conditions Pour-Over will – a will without any dispositive provisions, it just says that anything left in my estate not in my revocable trust pours over to my revocable trust when I die, when ever you have someone sign a revocable trust you have them sign a pour over will as well. It allows your assets to avoid probate. The Probate Process The person named as executor or who thinks they should be the administrator files a petition for probate asking for a hearing in probate court. Notice is sent to everybody who is a beneficiary of the will or who is a relative so they can show up at the hearing and challenge the will. The judge issues letters of administration to the executor saying they can administer the estate, and from then on they have to handle things. Every time the executor wants to do something he has to get approval of the court, so everything takes a long time. If a will says create this testamentary trust upon that trust, then those assets go through probate. How do you avoid probate?  Revocable trusts  Assets with beneficiary designations attached to them, pay on death designations with a beneficiary designation  Assets held in joint tenancy with right of survivorship  Assets held in an irrevocable trust do not go in probate, because you have no interest in them, you do not own them.  If you die with assets in your name under 100k they do not have to go through probate. The trustee of the revocable trust just files a certificate saying the total assets are less than 100k and therefore do not have to go through probate, and then the bank has the authority to turn over the assets to the trustee. So if a person has assets less than 100k there is no reason for them to have a revocable or irrevocable trust. Probate Court A division of the superior court here in CA a division of the trial courts. Operates with rules of civ. pro. Judges cycled in and out. The things that have to go through probate court are anything discussed in this class, anything that has to do with trusts but for most trusts you would never have to go to probate court. Sources of Law If you have a question about how something is supposed to happen you almost always go to the trust instrument, if it is silent then you look to state legislative probate law, and to then to probate court case law. If is very rare that something in the trust instrument would violate the law. The tax law is almost exclusively federal. Professional Responsibility Issues Multiple Representation (ex. husband and wife) – if you have a potential conflict of interest you need written consent from all the parties for you representing them, if there is an actual conflict of interest you have to withdraw Things that are an actual conflict of interest are like kids putting too much pressure on mom and dad to give more tax free gifts, or one party you are representing wanting you not to tell one of the other parties something 4 Attorney for Fiduciary – when you are representing a trustee, executor, or conservator you need to remember you are not representing the beneficiary Attorney for Testator – someone comes into your office wanting to set up a trust or draft a will you do not represent the eventual beneficiaries of that trust or estate but you do have some duties to them, there are two theories under which they can sue you one a tort theory that you are causing foreseeable harm, and the second a third party beneficiary doctrine under contract law, in CA both theories work Community/Separate Property – separate property is any property the spouse brings to the marriage and any property that is receive by the spouse as a gift during the marriage, and any rents or appreciation earned on that property during marriage Community property is anything either spouse earns during marriage, but these characterizations can be altered by a prenuptial agreement or a transmutation(after marriage) Community property is divided 50/50 and separate property is kept entirely by the spouse to whom it belongs You can only give away half of community property when you die even if you say you are giving away more Powers of Appointment – something inserted into a trust to give more flexibility in the future, powers of appointment can be broad allowing them to appoint the trust to anyone, or narrow like she can only appoint it to her children, for tax purposes there are two kinds of powers of appointment a General power of appointment where the person can appoint the property to himself, his estate, his creditors, or to the creditors of his estate, a Special power or a Limited power cannot be appointed to any of those people Conservatorships – a guardianship for an adult that becomes incompetent, they are bad things, the process is similar to the probate process, it is very difficult to get one put into place, a conservatee is the person who is incompetent, a conservator is the person appointed as a fiduciary for the conservatee, two different kinds a conservatorship of the estate who manages the person’s finances and a conservatorship of the person who manages the conservatee’s daily affairs including making medical decisions How to avoid a Conservatorship:  Have all of your assets in a revocable trust, if you are the trustee it will have a provision that when you are no longer the trustee such and such a person will fill in as the successor trustee and then you don’t need any court approval  If you don’t have your assets in a revocable trust the next best way to avoid it is a power of attorney that says when I become incompetent this person is designated as my agent to manage my financial affairs, but banks and brokerage firms will look more carefully at a power of attorney than a revocable trust Entity Review Creator Entity Legal Title /Fiduciary Beneficial Interest Testator/Decedent Estate Personal Representative Beneficiaries/Heirs Settlor Revocable Trust Trustee/Settlor Settlor Settlor Irrevocable Trust Trustee Beneficiaries Court/Conservatee Conservatorship Conservator Conservatee Principal Agency Agent Principal Testator/Deced. Special Administration(Probate) Special Administrator Benef./Heirs Court/Conservator Temporary Conservatorship Temporary Conservator Conservatee Distribution Methods for Decedents sheet, D decedent, X dead, O still alive Per Stirpes/Right of Representation Use when:  The most common in governing instruments, wills and trusts. In CA if somebody says I leave this to my descendants you follow this method. Method:  Under this method the estate is divided equally among the children. Then the subsequent generation gets equal shares of their parent’s share, and not an equal share of the original estate, even if their parents are dead. 5 Equal Share Method/Per Capita With Representation Use when:  You use this in CA when somebody dies intestate.  You also use this if the governing instrument is silent as to which method to use. Method:  This is only different from the Per Stirpes method when all of the children are deceased, then you don’t divide it among the children, just equally among the grandchildren. Per Capita at Each Generation Method:  If some of the children are deceased you take the amount the dead children would have gotten and divide it equally among the children. If all the children are dead then you do the same thing as under the Equal Share Method. Intestacy Arises when:   When you have property that you do not know how to divide, so it arises when the property is not joint tenancy property, there is no designated beneficiary, the assets are not held in a revocable trust, and there is no will saying where the property goes. A situation where you may have intestacy is where somebody challenges the will and it is invalidated. Allocation:  Community property goes to surviving spouse  If the decedent was married separate property is determined by looking at §6401 which says: o (c) As to separate property the share of the surviving spouse or surviving domestic partner is as follows:  The all of the separate property if the decedent did not leave any surviving issue, parent, brother, sister, or issue of a deceased brother or sister.  One-half of the separate property in the following cases:  Where the decedent leaves only one child or the issue of one deceased child.  Where the decedent leaves no issue but leaves a parent or parents or issue of one or both of the parents.  One-third of the separate property in the following cases:  Where the decedent leaves more than one child  Where the decedent leaves one child and the issue of one or more deceased children.  Where the decedent leaves issue of two or more deceased children.  After any surviving spouses: o First you look to allocate to the decedent’s issue under the distribution charts o Then under §6402 and the chart on p. 92 to the issue of the decedent, the issue taking equally if they are all of the same degree of kinship or the decedent, but if of unequal degree those of more remote degree take in the manner provided in Section 240. o If there is no issue to the decedents parent or parent’s equally (subject to §6402.5 which says before you give it to the parents of the decedent or the issue of the parents you have to ask if the decedent had a spouse that predeceased within the past 15 years, if so then you before you give property to their parents or to the decedents of the parents you may have to give the property to relatives of the predeceased spouse if that spouse had an interest in the property when they were alive, so like community property, or things the predeceased spouse left to the now newly dead spouse. o If there is no surviving issue or parent, to the issue of the parents or either of them, the issue taking equally if they are all of the same degree of kinship to the decedent, but if of unequal degree those of more remote degree take in the manner provided under the equal share method. o You can continue where this leaves off at §6402(d) and the chart on p. 92 The Uniform Probate Code p. 72 - Under the UPC sections 2-102 through 2-105 the distribution goes as such o Surviving spouse takes 6 o 100% if no issue or parents or 100% if all decedent’s issue are also issue of the surviving spouse and surviving spouse has no other surviving issue or  $200k + 75% of rest if no issue but surviving parent; or  $150k + 50% of rest if all issue are also issue of surviving spouse and surviving spouse has other issue;  $100k + 50% of rest if one or more issues not issue of the surviving spouse. Any property not passing to a surviving spouse passes as follows:  Issue – equally  Parents – equally  Issue of parents – equally  Grandparents / Issue of Grandparents – 50% to paternal or equally to their issue. 50% to maternal or equally to their issue. If no surviving grandparents or issue on one side then all to the other side.  Escheats to State – 100%   Adoption - In general an adoption severs the relationship between the adopted child and the natural parents and establishes the relationship between the child and the adopting parents. - What constitutes a child is always governed by the governing instrument. If it is silent you look to the probate code. The general principals of the probate code on this issue are in Andy’s notes. - However adoptions do not always sever the relationship. o If one biological parent dies and that parent’s spouse adopts the dead spouses child there is not necessarily a severing of the relationship between the dead biological spouse and the child. o If parents get divorced, and one parent remarries and the new spouse adopts the child, that doesn’t sever the relationship between the old spouse and the child. o If a spouse “A” dies, and the remaining parent remarries, and the new spouse adopts the child, this does not sever the relationship between the old spouse “A” and the child. - Adult adoptions can exist in CA but they have to be approved by the court. o Example: If you have a fellow who is a beneficiary of a trust. At his death he has power of appointment in favor of only his descendants. He decides to give it to her girlfriend. Can he adopt his girlfriend?  Under CA 21115(b) – she would not be considered a child of that parent  unless the girlfriend lived while a minor as a regular member of the household of the adopting parent or  of that parent’s parent, brother, sister, or surviving spouse. - Equitable adoption – an adoption that takes place after the decedent dies, you show by clear and convincing evidence that there was a parent child relationship, things like public recognition of a parent child relationship, where they thought there was a legal adoption, financial support, living together as parent and child, if the child took the parent’s surname Out of Wedlock Births Under §6452 neither the natural parent nor a relative of that parent inherits from that child unless both the parent or relative of the parent acknowledged the child, and the parent or relative of the parent contributed to the support of the child Half Blood - CA 6406 – half blood is full blood Step and Foster Relationships Ca 6454 – a parent child relationship can exist for the purposes of inheriting FROM the child if the relationship began during the person’s minority and establishing that the foster parent would have adopted the person but for a legal barrier. Unborn §6407 – Relatives of the decedent conceived before the decedent’s death but born thereafter inherit as if they had been born in the lifetime of the decedent. Cohabiting Partners 7 o o Surviving spouse stuff 6401 (look to section above under basic distribution under intestacy). Domestic Partners CA 37(a) – you can get the benefits of 6401 if you file a domestic partnership with the Secretary of State. This can include different sex and same sex partnerships. Simultaneous Death - §6403 and §2104 of the UPC - If husband and wife die simultaneously, within 120 hours, 5 days, then they are deemed to have predeceased each other, neither inherits from the other if they are intestate. It is designed to avoid the injustice of the relatives of the second spouse to die getting everything. §6402.5 may make this unnecessary. Advancements - If somebody dies intestate and has three kids. Under the laws the kids would split it three ways. What if the decedent gave one of the children a gift of money prior to death, should the kid have to deduct the gift or not? Under the common law there was presumption that this was a advance on inheritance. Currently the law presumes no advancement. CA 6409 . UPC o The presumption can be rebutted and the gift can be considered and advancement. If the decedent declares in a contemporaneous writing that the gift is an advancement against the heirs share of the estate or the heir acknowledges in writing that the gift is to be so deducted or is an advancement. Homicide - §250-258 you cannot inherent from somebody you killed - This is feloniously and intentionally killing. - This includes intestacy, joint tenancy, designated beneficiaries, etc. Mental Capacity - An individual of 18 years of age or older who is of sound mind may make a will. CA 6100(a) o 6100.5. (a) An individual is not mentally competent to make a will if at the time of making the will either of the following is true:  (1) The individual does not have sufficient mental capacity to be able to  (A) understand the nature of the testamentary act,  (B) understand and recollect the nature and situation of the individual's property, or  (C) remember and understand the individual's relations to living descendants, spouse, and parents, and those whose interests are affected by the will.  (2) The individual suffers from a mental disorder with symptoms including delusions or hallucinations, which delusions or hallucinations result in the individual's devising property in a way which, except for the existence of the delusions or hallucinations, the individual would not have done. Being a Conservatee does not mean that you don’t have the right to make a will - Section 1871(c) – states that the mere fact that somebody is a conservatee does not mean that they do not have the right to make a will. o Reasoning is that just because somebody doesn’t have the ability to manage their financial state, does not mean that that person does not have testamentary intent. CA §§ 810 – 812 The Rebuttable presumption of capacity to make decisions. - These statutes apply to the whole variety of things we do in this course including trusts, wills, etc. o Under 810(a) – there is a rebuttable presumption that all persons have the capacity to make decisions and to be responsible for their acts or decisions. o 811(d) – The mere diagnosis of a mental or physical disorder shall not be sufficient in and of itself to support a determination that a person is of unsound mind or lacks the capacity to do a certain act. o Capacity to make decision – look to 812. - 811 – says presumption of capacity to make a decisions is rebuttable, and evidence of that capacity is provided in sections 811(a) o (1) Alertness and attention, including, but not limited to, the following: 8 -  (A) Level of arousal or consciousness.  (B) Orientation to time, place, person, and situation.  (C) Ability to attend and concentrate. o (2) Information processing, including, but not limited to, the following:  (A) Short- and long-term memory, including immediate recall.  (B) Ability to understand or communicate with others, either verbally or otherwise.  (C) Recognition of familiar objects and familiar persons.  (D) Ability to understand and appreciate quantities.  (E) Ability to reason using abstract concepts.  (F) Ability to plan, organize, and carry out actions in one's own rational self-interest.  (G) Ability to reason logically. o (3) Thought processes. Deficits in these functions may be demonstrated by the presence of the following:  (A) Severely disorganized thinking.  (B) Hallucinations.  (C) Delusions.  (D) Uncontrollable, repetitive, or intrusive thoughts. o (4) Ability to modulate mood and affect. Deficits in this ability may be demonstrated by the presence of a pervasive and persistent or recurrent state of euphoria, anger, anxiety, fear, panic, depression, hopelessness or despair, helplessness, apathy or indifference, that is inappropriate in degree to the individual's circumstances. 812 provides that there are various laws and warns to look to 813. Evidenciarily how do you prove these things? - Doctor’s records  But look at 810 through 812 you need to establish a deficit in one of the mental functions and the doctor’s report would need to have focused on one of those functions  Also the doctor’s file is probably not going to be taken on the same day as the day he signed the will he could have gotten better for example - Attorney’s testimony, even though the attorney has an incentive to say that he was not deficient and I let him sign anyway - What did he say or do - Did he tell the attorney why he wanted to do it - Did he tell other people - with a holographic will the testator himself writes it - you can look to see if there was a series of wills that essentially did the same thing - you could look at the testimony of friends and family - If you have doubt if your client has testamentary intent you can try and stave off claims that he did not have testamentary intent by having them write a letter as to what they want, use a video camera but that raises problems like why did you video tape it or if the guy has a bad day that could come out in discovery that you tried to record a video tape, the best thing to do in advance is to give a physician the test in the probate code and have the doctor’s examination be at the same time that the testator signs the will, you could just put a memo in your file of you saying that he knows what is going on on the day he signs the will. Undue Influence - §6104 If you can show undue influence and that the person you exercised the undue influence and caused something to be received under the will that part of the will will be thrown out and they get nothing at all. - There is no definition of undue influence in the probate code you have to look at the case law. - It is not enough that the testator just has worries in his mind actual pressure must be exercised. - In the case law there is a rebuttable presumption of undue influence if there was a confidential relationship and the person actively participated in the preparation of the will and they unduly benefited from the will. - Standard: Under §8252 you need to show undue influence by a preponderance of the evidence. - You can have undue influence if you do it for your own benefit or for someone else’s benefit. - Evidence of undue influence: o An unnatural disposition of property o Whether or not the person you suspect was there when the will was signed o Whether or not the person you suspect helped procure the will in anyway o Whether the testator is susceptible to undue influence 9 o o Whether or not there was a confidential relationship between the testator and the person who may have exercised undue influence, a family member, a doctor, a attorney The opportunity to exercise undue influence like do they live next door. Disinterested Witness Requirement - In order for a will to be fully valid it has to be signed by two disinterested witnesses (don’t get something under the will). §6112(c) If a will is by a witness who gets something a presumption is created of undue influence. The presumption does not apply if the witness is a person to whom the thing that is given is given solely in a fiduciary capacity.  If he cannot rebut he will get what he would have had the will not existed.  If you are an interested party present at the signing, and you can’t rebut the presumption of undue influence  AND you would have gotten more under a prior will or intestacy, then you are limited to the smaller amount, even if it is in the later “influenced” will.  But if somebody can come in and provide affirmative evidence that you actually did exercise undue influence under §6104 you get nothing under any circumstances - If a gift is made to the spouse of a witness it would be arguable either way whether 6112 would kick in. - If a gift is made to a witness’ adult child that would be hard to argue the presumption under §6112 does not kick in. - If there is a bequest in either a will or trust to the attorney who drafted the instrument, anyone who works in the attorney;s office, or anyone related to the attorney, then that provision is invalid. o Exception if the attorney is a family member of the testator or settlor o Exception Certificate of Independent Review – if an unrelated client leaves you something and you draft the will, you can have another uninterested attorney can interview your client, that attorney can sign a certificate of Independent Review, and then it will cleanse the 21350 rule. o Remember that this is only a presumption which can be rebutted. - Policy: Should there be a comparable rule for trusts: o No you don’t have to be concerned with undue influence with revocable trusts because it is an operative document for a time while the testator is alive and so you have time to see if there is undue influence and it could be dealt with while the settlor is alive. But what if he dies the next day and the dispositive provisions of what happens when the settlor dies are not operative until the settlor dies and don’t kick in and nobody knows about them until the settlor dies. Will Contests A will contest occurs when somebody who is a beneficiary or a will or trust comes into the probate court and says this will is invalid. A “no contest clause” says if you challenge this 2004 will and you lose you get nothing under the 2004 will. - No contest clauses are construed in favor of challenger - 21304 - Challenges that don’t violate no-contest Clauses – 21305 these do not violate the clause: o Exercising fiduciary duty – if you don’t think the trustee is doing a good job o Pleading regarding the removal or appointing of a trustee o Reformation of will or trust o Modification of a trust o etc…. o §21307 says a no contest clause is not enforceable against a beneficiary if the beneficiary contests a clause that benefits a person who drafted or transcribed the instrument, a witness who benefits, or a person who benefits who gave direction to the drafter concerning dispositive provisions, who directed the drafter to include the no contest clause, but not if the deceased required the provisions. - Petition to know whether a challenge would violate the no-contest clause - 21320 – If you have a petition you want to file re a trust or will, but you want to know whether it will violate a no contest clause, then you can ask the probate court whether it will violate the clause or not. - Alternatives to Using a No-Contest Clause o If you are worried about a contest to your will you can hold the property in joint tenancy, or beneficiary designation or you can use an incentive bequest that says you get this if you challenge the will, you could also use an incentive bequest in conjunction with a no-contest clause. 10 FORMALITIES OF EXECUTION Wills – 2 witnesses Trusts – just a signature, but you generally get it notarized Deeds – only needs to be notarized if recorded, but it is valid even if you don’t it just can’t be recorded, it does not need witnesses either Powers of Attorney – must be either notarized or signed by 2 witnesses Contacts - signature Affidavits – Jur At(you swear that the information is true) Policy: A notary is probably the most secure, more than one witness that know the person very well is also very strong. Which of these documents do you think need the most protection? Probably wills because when you submit a will the person is dead. What about trusts? You could argue with a revocable trust you probably don’t need as much protection as you do for a will because once a trust is signed it is going to be a while before the settlor dies so is going to be operational for a while and you can discovery any funny stuff. But for all you know he could die the next day, and when you create a revocable trust it is operative during you life and you can do what you want to do with it while you are alive, but the aspects that govern what happens when you die are not really active while you are alive and people generally don’t know what those provisions say so they really aren’t operative while you are alive. What about powers of attorney? Powers of attorney by definition are only operative while you are alive, there are only two kinds of a power of attorney one where you give your agent the power to manage your assets, and the second is where you give your agent the power to manage your health care decisions when you are unable to do so. And nobody is going to enter into a transaction with the agent unless they are absolutely sure there is a valid power of attorney. What about contracts? You probably don’t need as much protection because it is unlikely the person is going to die the next day, the contract is probably going to be executed soon unlike a will, and generally there is an opportunity to find out if some funny stuff is going on. What about deeds or oral contract? You probably don’t need that much protection. Formalities for Wills §6110 (a) says a will(or codicil) has to be in writing (c) you need at least 2 witnesses present at the same time either: seeing the will being signed or the testator saying he signed it UPC §2502(a) p.226 Essentially the same as the CA code, but the witnesses don’t have to be there at the same time. Most states have laws that say they will respect a will if it is executed in conformity with the laws of the state in which it was executed(signed), the state in which the testator lived when he signed it, or the state where the testator lived when he died. How does it work when you have a document to be probated? When you submit a will for probate courts they court does not know whether the witnesses were in the same room when it was signed. One way to find that out is to look to §8220 which says you just need one of the witnesses to come and testify to the court. Usually they just sign and affidavit that it was signed in conformity with law. But even that is not reality today you have a self proving will, a will that says where witnesses sign that they are in the same place and that the will was property executed, and then they don’t need to sign an affidavit. 11 Holographic wills are an exception to the formalities of execution. A holographic will is a will where the material provisions are in the testator’s own handwriting or a commercially printed form will. UPC 2502(b) - Holographic wills do not need to be witnessed. - However it must have testamentary intent (“who gets what”) and testator’s signature. o Testamentary Intent = the intent that the document in question was be the decedent’s will. - Rationale is that since will is in TS’s own handwriting, need less protection from undue influence, mental capacity, and has TS’s signature Statutory wills are form wills that appear in the probate code and if you use that will it is deemed to be a valid will, you still need two witnesses. Substantial compliance doctrine If you have clear and convincing evidence that the decedent wanted a particular document to be their will that document will be given effect Revocation of Wills §6120 a will or any part there of is revoked by any of the following: (a) A subsequent will which revokes the prior will or part expressly or by inconsistency. (b) Being burned, torn, canceled, obliterated, or destroyed, with the intent and for the purpose of revoking it, by either (1) the testator or (2) another person in the testator’s presence and by the testator’s direction. Revival of a Will - assuming a testator validly executes will 1, and thereafter validly executes will 2 that expressly or implicitly revokes will 1, and thereafter validly revokes will 2 intending to give effect to will, the jurisdictions are split over what the testator must do to “revive” will 1. - CA would not revive will 1 unless there is some evidence the testator wanted it revived there is a presumption against it. - The UPA makes the same presumption but reverses that presumption if there is a partial revocation. Doctrine of Dependant Relevant Revocation If a will is revoked based on a mistake of fact or law (like that a new will will be valid) because he tore up the will in mistaken belief the revoked will be given effect. The mistake has to appear on the face of the document that revokes the prior document or there has to have been an alternative disposition like a new will. What does it mean for a codicil to republish a will? There are four circumstances where this becomes important:  When the codicil redates the will  When one of the witnesses to an earlier will was interested you can then have a later codicil signed by two disinterested witnesses  You could have a codicil republishing an old will and then effectively squeezing out an newer will  A codicil could revive a will that had been revoked Incorporation by Reference - CA section 6130 (this section codifies the common law). o A writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permit it’s identification. Acts of Independent Significance A way a potential testator can alter his or her estate plan without conforming to the formalities of execution required in a will. §6131 o A will may dispose of property by reference to acts and events that have significance apart from their effect upon the dispositions made by the will, whether the acts and events occur before or after the execution of the will or before or after the 12 testator's death. The execution or revocation of a will of another person is such an event. Formalities in for Trusts There is no legal requirement that it be notarized A trust can be amended in any way that the trust instrument says it can be amended We are talking here about revocable trusts for obvious reasons If the trust says nothing about what it takes to be amended then it would just take what is needed to form a trust Changed Circumstances - Section 6560 – Share of Omitted Spouse. - They refer to when a testator fails to provide by will for the testator’s surviving spouse who married the testator after the execution of the will o (a) spouse gets ½ of community property o (c) spouse gets as much of separate property as if intestate, but not > than ½ of separate property. o Section 6561 – The above rule only applies if the omission was unintentional  If the estate plan was updated after marriage then 6560 doesn’t apply  Also 6560 doesn’t apply if a separate trust was set up for the omitted spouse. o 21610 – Parallel provision for trusts. - Section 6570 – Child born or adopted after execution of will. o Shares in estate as if the testator had died intestate o 6571 – child doesn’t receive a share under 6571 if either (a) omission was intentional, (b) testator had one or more children and devised substantially all the estate to the other parent of the omitted child. or (c) testator provided for the child by transfer outside of the will (trust etc. ). o 21620 – Parallel provision for trusts Divorce §6122 says that if after executing a will the testator’s marriage is dissolved or annulled all dispositions to the former spouse are revoked, any effort to name the former spouse as a fiduciary (like a trustee, or power of appointment), it is not revoked if in the will you specify that you don’t want it to be revoked there is NO analogous provision for trusts Contracts to Make a Will Under §2100 they are valid, but they are a very bad idea because they almost always result in litigation You would have it when you have a husband that wants to leave property to a wife but he wants to make sure that when she dies she leaves it to the kids, but in that situation it is almost always better to put it in trust for the wife for life and then to the kids because you have to make sure the provisions between the contract and the will are absolutely parallel Ambiguity When can you introduce extrinsic evidence to resolve an ambiguity in a will? Three kinds of Ambiguities: Patent Ambiguity – an ambiguity that appears on the face of the instrument Latent Ambiguity – an ambiguity that if you had more information you would know that the document does not read right (like my friend Bill who live at … and the guy really doesn’t live there) No Ambiguity but wrong  CA: – you can allow in extrinsic evidence for patent ambiguity, and to see if there is any kind of latent ambiguity. o And you can allow the extrinsic evidence for the latent ambiguity to clarify the latent ambiguity: o Rule Detail: When extrinsic evidence comes in, in light of that evidence if the language of the will presents 2 or more meanings, then the extrinsic evidence may be used to prove the meanings. §6111.5 - Codification of Russell Rule – Extrinsic Evidence is admissible to determine whether a document constitutes a will pursuant to 6110 or 6111, or to determine the meaning of a will or a portion of a will if the meaning is unclear. o “Extrinsic evidence always may be introduced initially in order to show that under the circumstances of a particular case the seemingly clear language of a will describing either the subject of or the object of the gift actually embodies a latent ambiguity for it is only by the - 13 - introduction of extrinsic evidence that the existence of such an ambiguity can be shown. Once shown, such ambiguity may be resolved by extrinsic evidence….” Russell §21102 – the interpretation is of a will is not governed by what a testator intended to say but rather is governed by what he did say in the instrument. The same principals under the Russell case apply to trusts. The courts have developed rules of construction like 21120 which says if there are two ways to interpret an instrument you want to interpret it in a way so that every word is given a meaning and is not superfluous. History Historically under the common law the plain meaning rule applied, under the plain meaning rule you could allow in extrinsic evidence to resolve a patent ambiguity but not a latent or no ambiguity. There are three problems with the plain meaning rule:  It is not always easy to identify which ambiguities are patent and which are latent.  With a very rigid adherence to it causes the intent to be often ignored  The courts often ignored it and tried to stretch to fit things within the definition of a patent ambiguity in order to allow in extrinsic evidence Policy: Extrinsic Evidence Policy: In the interpretation of a will or trust the testator or settlor’s intent is the most important thing but there is a tension with not wanting to allow in to much extrinsic evidence, there is a role for the formalities that they say that this is finally what he decided he wanted to do despite everything he said in the past Lapse/Anti-Lapse Statutes What happens if the beneficiary with a SPECIFIC BEQUEST dies before the testator? You have to look to the governing instrument, if the instrument is silent the question is too lapse or to not lapse 5 Questions for getting through a Lapse/Anti-lapse situation - Is the governing instrument explicit? - Is deceased beneficiary a relative of Decedent? o If they are a relative of the decedent you are under the anti-lapse statute 21110 or else you are under 21111 the lapse statute - Does governing instrument have language of “Survivorship”? o Language of survivorship is stuff like property goes to B is B survives me o If so then you are out of anti-lapse statute. - If anti-lapse, which issue of deceased beneficiary take? o According to the rules of intestacy. §240 - If lapse, who takes? o The residue. If the property lapses the property goes to, the residue, the people who in the will get everything else after the specific bequests If it does not lapse under an anti-lapse statute then it goes to the dead beneficiary’s descendants The common law rule was lapse §21111 – what happens to property when a lapse happens and is not covered by anti-lapse statutes: (a) Except as provided in subdivision (b) and subject to Section 21110, if a transfer fails for any reason, the property is transferred as follows: (1) If the transferring instrument provides for an alternative disposition in the event the transfer fails, the property is transferred according to the terms of the instrument. (2) If the transferring instrument does not provide for an alternative disposition but does provide for the transfer of a residue, the property becomes a part of the residue transferred under the instrument. (b) If a residuary gift or a future interest is transferred to two or more persons and the share of a transferee fails for any reason, 14 and no alternative disposition is provided, the share passes to the other transferees in proportion to their other interest in the residuary gift or the future interest. California Anti-Lapse Statute: - Antilapse statute – in CA §21110 – o (a) if a transferee fails to survive transferor, than the issue of the transferee take in the beneficiaries place in the manner of § 240. (so basically as if the beneficiary had died intestate. )  240 – intestacy distribution. o (b) antilapse does not apply if the will or trust expresses to the contrary. A requirement that the transferee survives the transferor constitutes a contrary intention. o Only applies if the transferee is a relative/kindred of the transferor o Applies to both trust and wills Changes in the Testator’s Property Types of Bequests: - Specific Bequest – A gift of any specifically identifiable property. - Pecuniary Bequest/General Bequest – A gift of a dollar amount. (I give to A $100k) (it there isn’t the money in the estate then assets in the estate will have to be sold to meet the gift) - Demonstrative Bequest – General gifts from a specific source. “I give my brother a $100k to be satisfied out of my Exxon stock” – executor is supposed to sell Exxon stock, and give money to brother. (if the stock is not there when you die then he still gets the $100k just not out of the stock) - Residue - a residuary gift is a gift that gives away all of the testator’s property that has not otherwise been given away. (“everything else”) Things that can happen to property in the Estate: Ademption, abatement, advancements: Ademption – the bequested property is no longer in the estate when the testator dies, if it is a specific bequest then the person gets nothing §21133 (conservatorship exception below) - Abatement – when there isn’t enough property to go around. A bequest is removed for lack of resources. o First you look to the instrument to see which gifts abate first. o If it is silent then:  The first thing to abate is the residue,  Then the pecuniary bequests  Specific bequests are the last to abate and they don’t really abate at all. - Advancement – when you give property to a person who is a beneficiary or an heir. The question then becomes is it in addition or is it an advancement of that gift. o Presumption is that there is no advancement unless there is something in writing indicating that it is. Which of these problems can happen to each type of bequest? Ademption Abatement Specific Y N Pecuniary N Y Demonstrative N Y Residuary N Y - Advancement N Y Y N §21132(a)(3) If you own stock and you leave some of it to somebody but then before you die the corporation mergers or has a stock split then the beneficiary would get all the shares that resulted from that merger or stock split, unless the instrument says otherwise If you have been placed in a conservatorship and you have been deemed incapable, and you made a will “I leave a my 100 shares of Exxon to A” And the conservator sells your shares of Exxon, and they are not there. Then they are not adeemed, and A gets the value of whatever it was that was left to A. 21134(a) Everything discussed here applies to revocable trusts as well §21131 when you pass real estate subject to a mortgage the beneficiary gets the property subject to the mortgage - - 15 - §21135 the same presumption that the gift is not an advancement unless there is clear evidence to the contrary that the decedent wanted otherwise exists for gifts in the case of a will as for life time gifts in the case of intestacy Family Protection If you have an estate subject to probate of less than 20k then the court has the discretion to ignore the will and give the property to the spouse or minor children, in doing so the court can consider their other assets, what they are received outside of the probate estate, their needs, the Testator’s intention and why he might have done what he did, the needs of the other heirs the Testator did chose to take care of. For other estates there are other forms of family protection: Temporary help during the period of probate administration, an allowance out of the estate to the family of the deceased, called family allowance. The court has the authority to give a probate homestead, meaning they can continue to live in the family residence for a period of time but not longer than as long as the spouse is alive, or until the children reach 18. The court can give them exempt property, property exempt from creditors, like small amounts and family heirlooms. A widow’s election, a situation where the husband purports in a will or trust to leave both his half and her half of the community property to someone other than the wife, and the wife says okay but I still get the rest of the stuff for me under the will or she can go the other way around and say I want my half and forget the other stuff for me under the will. Pretermitted Spouses and Pretermitted Children Spouse: - If a person executes a will and is not married and then later gets married but the will is not updated and does not provide for the new spouse the probate court says she gets what she would have received if there was intestacy but no more than half of the separate property plus all of the community property. - 6560, 6561 for spouse Child: - A pretermitted child who was born after the will was executed and was not provided for. - 6570, 6571 for child Trusts - 21610 – 21613 – applies rule to trusts PROBATE How do you avoid probate?  Revocable trusts  Assets with beneficiary designations attached to them, pay on death designations with a beneficiary designation  Assets held in joint tenancy with right of survivorship  Assets held in an irrevocable trust do not go in probate, because you have no interest in them, you do not own them.  If you die with assets in your name under 100k they do not have to go through probate. The trustee of the revocable trust just files a certificate saying the total assets are less than 100k and therefore do not have to go through probate, and then the bank has the authority to turn over the assets to the trustee. So if a person has assets less than 100k there is no reason for them to have a revocable or irrevocable trust. (Real estate title exception) The Probate Process A. Appointment of Personal Representative – executor if there is a will, or administrator, or administrator CTA. 1. Petition for Probate filed – information like who are the issue, beneficiaries, etc. 2. Set for hearing – about 6 weeks 3. Lodge Will – a copy of the original will with the signature 16 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Notice of hearing – to all of the beneficiaries named in the will, and all the people who would get something in intestacy Notice Published in newspaper Proof of service filed – proof of notice Request for Special Notice – anybody can request this Objections – if there are any objections to the petition for probate, if somebody wants to contest a will it could happen here Calendar Notes will let you know if you have done all of these things to the clerk’s satisfaction or if there are still procedural defects in the petition for probate, they come out a week before the hearing so he can clear some things before the hearing, they will also ask questions and you have to then file a supplement which answers those questions 24 hours before the hearing. Continuation Hearing - at the hearing the judge will determine whether to grant IAEA powers to the personal representative. i. IAEA – independent administration of estates act. Under the IAEA one of three things can happen. 1. 1) either the personal rep is given no powers – must get court approval for everything. He should not buy assets, sell assets, borrowing or lending or encumbering property for the estate. 2. 2) limited powers or – somewhere in between. Basically buy and sell property, borrow and encumber property on behalf of the estate. But only with personal and not real property. 3. 3) full powers – He can do all that he can under partial, but also with real estate. 4. Without IAEA, he has to file a petition, and wait 2 months to do anything. ii. How does court decide to or not to grant powers. If the will is silent then the judge has discretion. Factors include: 1. If the personal rep is only beneficiary of the estate, then he is likely to get full powers. 2. If there are no objections then they will probably get full powers. 3. If the rep has no interest courts are reluctant. Bond – typically in the amount of the assets in the estate(calculated as personal property plus real estate if the personal representative has full powers) as is specified in the petition for probate, written instrument governs whether to require a bond or not is up to the discretion of the judge, the bond is usually the amount the personal representative could run away with so if he has full authority under IAEA it will cover even the value of real estate i. courts like to impose a bond on people with full powers, to avoid criticism if the executor absconds with the cash. ii. Bond companies usually get a bond premium of 0.25% of the estate per year iii. The bond must be in place before the personal representative is appointed Duties & Responsibilities – a document that must be signed by the personal representative. before the personal rep. is appointed Letters Issued – The personal rep gets a letter that shows the world that he is a fiduciary of the estate. They are called letters testamentary if there was a will or letters of administration if it is intestacy, the letters will show whether or not the personal representative has full or limited powers under the IAEA B. Preliminary Management Responsibilities of the Personal Representative 1. Marshal Assets – put them in the name of the personal representative 2. EIN – employer identification note, a taxpayer id number for the estate 3. Pay Bills/Notice to Creditors – personal representative must notify creditors of decedent and tell them that they have 4 months to do something, for small bills the personal representative can pay it himself out of the estate, for other things he needs court permission to pay the creditor or else he can become liable to the beneficiaries 4. 4 Months to file Creditor Claim - personal rep must notify creditors of decedent and tell them that they have 4 months to do something. 5. Inventory – the personal representative has to file an inventory with the court listing all of the assets in the estate and their values, if it is substantially higher than what was listed in the petition for probate the bond might have to be adjusted upward 17 C. D. E. F. G. Probate Referee – before the inventory is signed the probate referee has to actually value the assets and approve the inventory, you want to tell him what you think the value of the assets are and why you think so Management of Assets 1. Sale of Assets 2. Sale of Real Estate – if you don’t have full powers you have to publish in a newspapaer notice of intent to sign a sales contract stating some future date on which you will sign the contract, then you sign a contract which is conditional on them not being outbid at the probate hearing, once the real estate is sold the amount of the bond has to be adjusted upward if the personal representative had limited power because he can run away with more now 3. Adjustment of Bond - adjusted upward once real estate is sold. 4. Payment of Taxes – the personal representative has to pay all taxes 5. Accountings – the personal representative has to make an accounting each year saying: what income has come into the estate in the past year, a list of disbursements made, the assets and liabilities at the beginning and end of the year 6. Litigation – if there is litigation going on in the estate it is his responsibility to manage the litigation Distribution 1. Petition for Preliminary Distribution - gives some initial money to beneficiaries, give if there is more than enough in the estate 2. Final Account & Petition for Final Distribution – a final account is just the last accounting, the petition for final distribution is where you tell the court we have done everything we need to do and this is who should get what 3. Order for Final Distribution – closes the estate, serves as a deed to any real estate, it may have a testamentary trust created in it 4. Receipts filed with Court Statutory Fees – fees for the executor, administrator, personal representative, and the personal representative’s attorney are set by statute, for small estates it can be as much as 4% and it gets down to 1% Special Administration – something you request if you need action in a hurry. If it is granted, you have a temporary estate and personal representative and will be able to do what the emergency requires, once the real personal representative is appointed his authority trumps that of the temporary one, the special administer holds title to the assets and signs any contracts Ancillary Probate – a probate in a different state for assets held in that state, you take the letters of administration issued in the first state and take it to the other state and ask for an ancillary probate and then the person who was personal representative in the first state will also be the personal representative in the other state 6. The procedure is basically the same for intestacy as in the case of a will. Purpose of Probate:  The purpose of probate is to provide an orderly method for the distribution of the decedent’s assets and to make sure that the right people are getting the property. Probate is designed for the protection of the beneficiaries. The ultimate goal is to get the order for final distribution which says who gets what at the end of the probate. If the what you get is real estate then you take the order for final distribution and it is the deed that you record at the county recorder’s office. Post-Mortem Trust Process A revocable trust is almost identical to the probate process but much simpler mainly because you don’t need court approval. - Successor trustee steps right in – no appointment process. - Usually no bond - 16061.7 Notice – decedant has died, trust exists, is now irrevocable. To all beneficiaries and heirs, and if they ask for a copy of the trust you have to send it to them, no requirement that you contact creditors - Objections - Creditor Process – similar to probate They have 1 year to contest unless you give them notice then they have 4 months. Ordinarily trustee will pay all the debts. No requirement for the contract. - Marshal Assets – same as personal rep in probate. Identify assets, put them in trustees name. Trustee has authority to do whatever she has to do in managing the assets. She has pretty broad powers. 18 - Management of Assets Payment of Taxes – income taxes as well as estate taxes. Trustee Fees – as a general rule the trust instrument will say that trustee will get a reasonable fees, usually 1% of assets valued each year Distribution of Assets – you may have specific, pecuniary, and residual interests. The successor trustee has an obligation to distribute assets as specified. Big difference between trust and probate processes: you don’t have to go to court in the trust process. Conservatorship Process  Conservatorship of Estate vs. Consevatorship of Peron  Almost identical to the probate process  One difference is that you have to get a doctor’s examination  PVP Attorney – consists of volunteer attorneys. Represents the conservatee. Conservator would have her own attorney.  Notice  Bond – courts are very skittish about conservatorships.  Inventory and Periodic Accountings  Court Approval - you need court approval for just about everything  Termination – ends when conservatee dies or regains competence.  Conservatee Fees – fees for the conservator’s attorney, the PVP and the conservator have to be approved by court  Temporary Conservatorship – if someone is incompetent and you are about to have something like a real estate closing the other party might seek extra assurance in that case you cold get a temporary conservatorship in place if you are short in time, it will only last until a regular conservatorship can be put in place  Alternatives – you really want alternatives you never want a conservatorship if you can avoid it, the best alternative is a revocable trust (your successor trustee can step right in and manage your assets. Trust usually specifies the standard for incompetence), another alternative that is not as good is a power of attorney for asset management (the assets that would be covered by that power of attorney are all assets not held in the revocable trust) Creator Entity Legal Title Beneficial Interest Testator/Decedent Estate Personal Representative Beneficiaries/Heirs Settlor Revocable Trust Trustee/Settlor Settlor Settlor Irrevocable Trust Trustee Beneficiaries Court/Conservatee Conservatorship Conservator Conservatee Principal Agency Agent Principal Court/Decedent Special Administration Special Administrator Beneficiaries/Heirs Court/Conservatee Temporary Conservatorship Temporary Conservator Conservatee 19 TRUSTS Reasons for creating trusts Revocable trusts – the main reason is to avoid probate, if you become incompetent you don’t have to go to court to have a conservatorship set up, no income, estate, or gift tax advantages, no creditor protections Irrevocable trusts – three reasons, tax reasons, asset protection reasons, to control the distributions to the beneficiaries for an extended period of time Creation of Trusts - Competent Settlor - required for a valid trust. Test is essentially the same as in wills. 810 through 812 of the probate code to determine whether the settler had the capacity to sign the trust. - Intent - settler must have intent, usually evidenced by signing. - Legal Purpose - sometimes there is a situation where a trust is created solely to defraud creditors. They cannot be used to dissuade marriage. - Beneficiaries - can’t have trust that doesn’t have beneficiaries. - Must have trust res – you actually have to have some property that goes into the trust for that trust that to be valid. Sometimes it says that trust is funded with $10 (so that a situation cannot arise where a piece of real estate is pledged to the trust, but never acquired, and the trust therefore becomes invalid). o You can put property in trust after it is created. - Trustee – have to have somebody to be a fiduciary. (but trust will not fail for want of a fiduciary, court will appoint). - Written Instrument – in theory you can have an oral trust. Writing is not a Requirement. But for real estate the Statute of Frauds requires writing. I trust is a testamentary trust the Statute of Wills requires that the terms of the trust be in writing. Funding Trusts Revocable Trusts  If you are talking about real estate the settlor would sign the deed and you would record it, if you are assigning a partnership interest you sign the corresponding document, for assets that don’t have a recordable title in the trust instrument you mention them, technically that would also work for something like real estate but then you would not be able to sell it because the buyer’s title insurer would want to see a clean chain of deeds o Brokerage/Bank accounts – often brokers refuse to release the funds without an order from the probate court so you want to make sure to put it them in the name of the revocable trust  Assets you would not want to fund into a revocable trust  Retirement plans - as a matter of law nobody but the employee can own a retirement plan. You can make a revocable trust the beneficiary of a retirement plan.  Life insurance policies. – as a general principal it is a good idea to put these into an irrevocable trust. You could put it in a revocable trust but generally if it is a big policy you want it in an irrevocable trust. You can make the irrevocable trust be the owner of the beneficiary. Irrevocable Trusts  Basically the same principles apply, but generally you would not be the trustee Trust Distributions - Mandatory – trustee has to make them when the conditions set forth in the trust are met - Discretionary – absolute or with some conditions or limitations - Examples:  “shall” makes it mandatory. Remainder Beneficiary – gets whatever is left in the trust when the Income Beneficiary dies. Legal title of a trust is held by trustee Equitable interest is held by the beneficiaries. A revocable trust can become an irrevocable trust at death. The trust instrument will say whether it will simply disappear at death or it may become an irrevocable trust. If the assets are distributed at death then trust disappears. If the trust continues, then it becomes an irrevocable trust. Separate Share Trusts vs. Pot Trusts Separate share trusts only has one person entitled to distributions right now, a pot trust can potentially have more than one person entitled to distributions right now 20 Separate Share trusts are much more desirable than pot trusts because if has one beneficiary has huge needs and the trust has to fulfill them then principle might have to be sold and then appreciation does not accumulate. A precatory request is a statement in a will or trust of what the settlor would like to happen but it is not required that it happen. Asset Protection If an irrevocable trust has a spend thrift clause(beneficiary creditors can’t get at assets and beneficiary cannot assign interest in trust) then the beneficiary’s creditors won’t be able to get to the assets. o But the beneficiaries’ creditors can get to the distributions as they come out to the beneficiary.  One thing to do is to make all distributions discretionary so that the trustee does not distribute to beneficiaries with creditors. Things that can get to assets in an Irrevocable Trust:  Fraudulent Conveyances do not work. If the settler has creditors when he creates an irrevocable trust to a separate beneficiary to avoid paying the creditors.  Federal Tax Leins against the beneficiary in some circumstances can get to the assets in an irrevocable trust.  Spousal and Child Support  When the settlor is a beneficiary Look at drawing 3/29 Off-Shore Trusts The problem with using off-shore trusts is that the laws are never really that clear so you are not sure that creditors cannot reach it. Also you are assuming the risk of political upheaval. Also the trustee can only make discretionary distributions and they can just say no. Also if you have really put the assets beyond your reach, when you have put assets in a revocable trust for a beneficiary you have made a gift and you potentially owe gift taxes. Another disadvantage is when you move assets off-shore it is automatically treated as if you sold it and capital gain will be due if it is not cash. Finally, if you haven’t put them out of your reach enough to avoid gift tax the assets might not be protected from creditors and the income from the trust maybe taxable to you in the U.S. even if the income is not being distributed to you. Alaska Trusts Laws similar to the off-shore locations All distributions are made discretionary Because of the full faith and credit clause of the constitution some people say these trusts will not provide asset protection Power of Appointment - Gives the beneficiary the power to override the distributive terms of the trust and to direct the trustee to distribute some of all of the trust property outright to the appointees. - Either:  Lifetime – beneficiary gets to say you gets the assets during their lifetime  Testamentary – at their death the beneficiary gets to appoint the assets  Creator - is the settler of the trust and can give the beneficiary a power of appointment  Holder - is the person (usually the lifetime beneficiary of the trust) who can exercise it if he so chooses. In theory anybody can be this person.  Appointment property – property which the holder has power of appointment. o You can have the ability to appoint half the assets.  Permissible Appointees – the people who the property can be appointed to. Broadest is “anyone” or narrowly is “Betty” or anything in between. o Common is “issue of holder or charity”  General Powers – a power of appointment that the holder can exercise in favor of either: o the beneficiary, o his creditors, o his estate, or o the creditors of his estate. - Limited Powers – holder does not have the power to ANY of those four groups. 21 - Taker(s) in default – If holder does not exercise the power of appointment, then the assets go to the Takers in default. Some implications of General and Limited Powers of Appointment - General and Limited Powers of Appointment o If there is a general lifetime power, then the beneficiary/holder’s creditors can get to the assets in the trust during his lifetime. o If he has general testamentary power, then the beneficiary/holder’s creditors will be able to get the assets at his death. o If you do not want the holder/beneficiary’s creditors to be able to get the assets, then you should have limited powers of appointment. o Taxes – for tax purposes, if you have a general power of appointment, then the tax code treats the property as if it is yours and therefore it is included in your estate when you die. FIDUCIARY DUTIES Trust Administration Multiple Trustees o If you have more than one trustee they have to always act unanimously, but the instrument can trump that rule. o If you have two trustees it is generally accepted that they split the 1% reasonable fee. Bond - If trust instrument is silent then look to 15602, which means you use default rules o Individuals only required to post a bond if:  Court feels it is appropriate  If trustee is not specifically named in the trust document as a successor trustee.  Ie if the trusteeship is appointed to  Or if required by the trust instrument. o Corporate trustees are not required to post bond. Resignation o A trustee can only resign as specified in the trust instrument, if silent §15640. o Removal §15642 o Filling vacancies §15660 basically the beneficiaries can remove the trustee if he has committed a breach of trust, if they are unfit, if there are unrecognizable differences, or if the trustee is just not doing his job. o You file a petition in the probate court requesting that they be removed. o You could put something in the trust saying the trustee has the power to name successor trustees. Fees o If the instrument is silent than a reasonable fee is given. Usually determined by looking at the fees charged in the surrounding location by that kind of trustee. If there is more than one trustee, then the 1% is generally split and doesn’t refer to 1% each. Resignation (1540) o Trust instrument governs. o If it is silent look to 1540 Removal (15642) o Trust instrument governs. o If silent §15642 says a trustee can be removed if he is unfit, or fit trustee is committing a reach of trust or isn’t doing everything. In order to remove a trustee you need a probate court. Filing Vacancies (15660) o You want to allow the trustee to be allowed to choose his successor trustee. o If there is a vacancy, that means that the trust instrument has failed to specify a successor trustee and then you have to go to court. Trustee Powers o Usually found in the trust instrument. - - - - - - - Corporate vs. Private Trustees 22 A corporate trustee is a bank or a trust company that A private professional trustee is an individual who’s job it is to act a trustee. The principle advantage of using a corporate trustee is experience, another is stability they don’t die or move to another state so you don’t have to appoint successor trustees. The disadvantages to using a corporate trustee is they have higher fees, a reasonable fee is using 1% of the corpus of the trust per year, another is they like special assets, meaning things other than cash and marketable securities, so they don’t like copyrights or real estate because they have to manage them so they are always trying to liquidate the assets and incur capital gains in the process. Also they have a tendency to merge so even if you like the way they do business it might change. And they hate to exercise discretion. The advantage of individual trustees is smaller rates, and they will me more familiar with the family which could be valuable if they have to exercise discretion. The disadvantages are they may lack expertise, and you will periodically need successor trustees. Trustee Duties - The standard of care is reasonable man standard (16040) unless he is an accountant or a lawyer. - Duty of Loyalty (16002 and 16004) – must be totally loyal, and cannot be engaged in any sort of self dealing. o Should never engage in any transactions with the trust. Including sales, purchases, borrowing or lending. o If trustee is a lawyer, do not do legal work with the trust (unless trust says that it is OK) o If trustee is an accountant, do not do accounting work for the trust (unless trust says that it is OK) o Nor with any of the beneficiaries. o Never engage in a competing business (or take away business opportunities) o Never manage another trust that competes with the trust. o Exception: If all the beneficiaries consent to the transaction, then its ok. Also, if the trust says it is ok, then it is ok  If there is a lot of money you should get court approval. (then he is protected)  Duty of confidentiality – trustee has a duty not to disclose the trust to the public.  Especially the dispositive provisions (the who-gets-what)  Duty of Impartiality (16003) - Refers to duty to treat all beneficiaries equally.  No personal favoritism,  this includes Microsoft dividend example that benefits remainder beneficiaries over lifetime beneficiaries  If the settler puts language favoring a beneficiary in the trust, then it is ok to favor that beneficiary. - If the trustee is a beneficiary of income or remainder, he still owes a fiduciary duty to the other beneficiary.  even if the remainder beneficiary has a low probability of actually getting the property  it would still be improper to engage in transactions with the trust  Duty to keep all beneficiaries informed (16060) - If the beneficiaries want to see the balance sheet trustee should provide it (also goes for the trust itself and any financial papers relating to the trust). - Trustee should provide accounting every year. - If there is a lawsuit against the trust, the trustee needs to inform the beneficiaries.  Duty of confidentiality - The terms of the trust are private. Trustee should not disclose terms of the trust to third parties especially the dispositive provisions  Sometimes may attach pieces that are necessary to satisfy certain duties. (ie to bank officers to prove trustee is actually trustee.)  Should not attach trust with petition, because petition becomes matter of public record. You can give to clerk for in camera inspection.  Duty to Administer according to trust instrument (16000)  Duty to preserve trust property (16006)  Duty make trust property productive (16007) - make sure it is producing enough income for the income beneficiary Who does the Attorney Represent? 23    If both the trustee and the beneficiary consent then you can represent both If the trustee is breaching a fiduciary duty you have to withdraw. Sometimes when the trustee is also a beneficiary, he may need two lawyers. Choice of Investment - Evolution of law:  Prudent Man Rule  Howard v. Emory – trustees should be prudent and invest for the long term not speculation, and for income. Income and safety.  2nd Restatement of Trusts – said ONLY such investments that will be safe and produce a lot of income  Modern Portfolio theory – states that those prudent investments don’t get long term growth. Economists said that the risk of different types of investments will balance themselves out.  Economists stated that this will be a higher return for similar risk. - Prudent Investor Rule – incorporates the modern portfolio theory. Trustee is not to look at investments in isolation but as a whole. Restatement of 3rd = trustee as a duty to diversify unless it is prudent not to do so. Trustee should invest for total return, look to an overall strategy for risk and return, and have a duty to diversify.  CA 16047 – prudent investor rule  CA 16048 – duty to diversify - Unitrusts – a trust where lifetime and the remainder beneficiary want the trustees to invest in the same kind of assets. A Unitrust says that it will give a certain percentage of trust assets to the lifetime beneficiary every year. So say 5% of the assets go to the lifetime beneficiary.  This makes the interests of the remainder and lifetime beneficiary’s aligned. Breach of fiduciary duty  §16400 Any breach of a duty owed to the beneficiaries is a breach of trust  16040(a) – says that there is a negligence standard, but  16461(a) the trust instrument can relieve the trustee from liability. [Settlors often want to do that b/c usually trustee is someone who he trusts.] (b) A provision in the trust is not sufficient to protect the trustee for intentional misconduct or gross negligence.  Co-trustees 1603, 16402 – co-trustees are not liable for each other’s acts, but have a duty to monitor co-trustees  Agents - 16401 – trustees have a duty to monitor agents hired by trustees, e.g. accountants, lawyers  Beneficiary Consent – 16463-16465 – provides that something that would otherwise be a breach of duty, can be OKed by beneficiaries’ informed consent. To further protect the trustee, the trustee should get the consent approved by the probate court.  Jurisdiction –17200- whenever you have a question about duties, you go to probate court  16421; 17006 – you do not have a right to a jury trial in probate court  Remedies  §16420 If there is a breach of trust you can get:  (a)(1) and (a)(2) – essentially provide that beneficiary can get specific performance if there is a breach of trust  (a)(3) – says you can get damages.  (a)(5) – you can get trustee removed.  (a)(6) – set aside trustees acts  (a)(7) compensation reduced.  16440 – if the trustee is found in breach, he must turn over  any loss to the trust.  Any profit to the trust and any opportunity costs to the trusts  additionally trustee has to pay interest. 24 Guardians Ad Litem Appointed by courts to look out for minor or unborn beneficiaries. Doesn’t have to be an attorney. Usually will represent himself as well as the beneficiary.  Minor, unborn, or unascertained beneficiaries require guardian ad litem.  Parents Disinterested – eg. if child’s parents are not a beneficiary of the trust  Parent’s interest are identical (virtual representation)  Procedure - A petition is filed with the court. A hearing is set 6 months out. Notice is sent to the beneficiaries. Then you would go into the court and file an ex parte petition to appoint X as guardian ad litem. Modification of Irrevocable Trusts  Reasons to modify irrevocable trusts - Tax laws changed - Changed circumstances - Successor trustees are not close to the family anymore - beneficiaries needs have changed - economic conditions have changed  Statutory grounds for modification - 15403 – if all beneficiaries consent then they may compel the modification of the trust upon petition to the court  If there is a spend thrift clause the beneficiaries canNOT go in and terminate it - 15404 – if the settler of the trust is alive and all the beneficiaries consent, then you don’t have to go to court to modify the trust. - 15409 – the court can modify the trust or terminate it if circumstances not known or anticipated by the settler impair the purposes of the trust - 15408 – trust can be modified if the trust becomes so small that it is inefficient for it to continue.  Procedure - 17200 you would do this by filing a petition with the probate court under 17200 and hearing would be set and at least 30 day before you have to send notice to all of the beneficiaries, you get a guardian ad litem appointed if needed, and then the court issues calendar notes a week before the hearing, at the hearing if it is recommended for approval(rfa) if no one shows up to contest it then it is terminated automatically, if it (jtd) then the judge wants to ask some questions Charitable Trusts An irrevocable trust that has a charity as a beneficiary. They are supervised by the attorney general of the state and he has to be given notice of anything happening with the trust. CRT – charitable remainder trust, a trust that has as the income beneficiary somebody designated by the settlor and the residue goes to charity, they are used for tax reasons, because the settlor gets an income tax deduction for the amount that eventually goes to the charity actuarially when the trust goes into effect, you get the present value of the amount the charity is going to receive according to an estimate of how long the lifetime beneficiary is going to live, the other tax advantage is that once assets go into the trust they can be sold without having to pay any capital gain tax CLT – charitable lead trust, the charity is the income beneficiary for a number of years and then there is a remainderment the settlor has designated Cy Pres doctrine – when a trust with a general charitable purpose expresses a particular charitable purpose, and it becomes impossible, impractical, or illegal to carry out that particular charitable purpose, rather the trust failing, the trust purpose can be modified to serve another charitable purpose within the general charitable purpose. Foundations – The purpose is for the foundation to have a chunk of money and distributes the income to charities every year. The costs are so high that it does not make sense to create unless you have like 3 million, it can be set up as a trust or a corporation, community foundations can be an attractive alternative to a private family foundation because there are less federal and state tax requirements and because the community is administering it they family does not have to pay for it, the community has a lot of expertise, and the family members as directors of the foundation can still direct the money Rule Against Perpetuities  Not very relevant because most trusts have a savings clause  21205 – the rule against perpetuities 25   21209 – statutory savings clause – any provision that violates the RAP will be ignored so the trust does not violate 21220 – if it violates the RAP then you can go to court and get it fixed. Policy: A growing number of states are repealing the rule as it pertains to trusts and allowing dynasty trusts according to Tippet correctly because the rule does not make sense with regard to trusts because a trustee can always sell the assets in the trust even if the trust is going to last into perpetuity. Future Interests The only time you would care about a remainder interest in a trust and whether or not it is vested is sometimes will care whether or not the remainder interest is transferable during the beneficiary’s life and it is is it accessible by creditors, the other reason you might care if it is vested or contingent is if you need to know when that remainder beneficiary dies if they can pass on that interest or if he does not provide for the passing of the interest can it tack for probate. If they are tackable then they are included in their estate for tax purposes when they die. If the answer to these questions is yes then they go through probate and are included in the estate at death for tax purposes. Future interests in the grantor All of these things are transferable during life and accessible to creditors unless there is a spend thrift clause in the trust. Everything except reversions and an indefeasibly vested remainder are transferable and taxable at death.  reversion – if the grantor has the right to pssess the property after a finite estate ends, the grantor holds a reversion  Possibility of reverter – if the grantor conveys fee simple determinable, the grantor is deemed to have retained a possibility of reverter. - Fee simple determinable – is a fee simple that may last forever, but may end if a specified condition or event occurs, in which case the right to possession ends immediately and automatically. The right to possession reverts to the grantor under the possibility of reverter.  Right of Entry – if the grantor conveys a fee simple subject to condition subsequent, the grantor is deemed to have retained a right of entry in the event that the condition subsequent occurs. - Fee simple subject to condition subsequent – possesory estate is a fee simple that that may last forever, but it may end if a specified condition or event occurs. If the specified condition or event occurs, the fee simple does not end automatically, but rather the grantor has the right to enter the property and retake possession. Future interests in the Grantee  a beneficiary can hold either a remainder or an executory interest. - Remainder – if the beneficiary has the right to possession after a finite estate ends, the beneficiary holds a remainder.  Must be express – unlike reversions, a remainder arises only if the words of the instrument expressely grant the future interest following a finite estate to a beneficiary. Remainders are not implied. - Executory interest – an executory interest is the name of a future interest if it is held by a third party (someone other than the grantor) and it follows either (1) a vested remainder subject to divestment or (2) a fee simple subject to an executory limitation (a fee simple determinable or fee simple subject to condition subsequent, only the future interest following fee simple defeasable is held by a third party). Vested and Contingent Remainders  every remainder is either vested or contingent. A remainder is vested if (1) the holder of the interest is ascertaineable and (2) there is no express condition precedent, in the clause creating the remainder or the preceding clause, that has to be satisfied before the remainder can become possessory. If a remainder is not vested, by default it is contingent.  Generally the rule is that if the interest is accessible during life by creditors, it is transferable and taxable at death and is probatable.  When remainder beneficiary dies and he is still remainder beneficiary, is his interest passable to future generations. ? Transferable During Life/Accessible by Creditors Transferable at Death/ Probatable/Taxable At Death Reversion Yes/No Yes Indefeasibly Vested Remainder Yes/No Yes 26 Vested Remainder Subject to Partial Divestment Yes/No Vested Remainder Subject to Defeasance Yes/No Contingent Remainder Yes/No Alternative Contingent Remainder Yes/No Executory Interests Yes/No No No No No No ESTATE TAX The goal of estate planning is to get everything out of your hands so that growth happens in the hands of your beneficiaries and that growth is not taxed at 50% when you die. - CA has an estate tax calculated to make sure you pay … What is taxed?  All separate property  ½ of community property  contribution to joint tenancy property – if he put up the money for all of it then all of it will be in his estate. If there is no evidence, law presumes that he contributed 50%.  general power of appointment – any power over which the decedant held a general power of appointment. (if he could transfer the property to either his creditors, himself, his estate, or creditors of his estate.)  Trustee/Beneficiary w/ no ascertainable standard – if the trustee is a beneficiary and can distribute to him or herself, then they are taxed on the amount.  indefeasibly vested remainder interests What is not taxed?  Property left to spouse - Unlimited marital deduction  Property left to charity  First $1.5million – the first 1.5m is free from tax. Exemption increases until 2010. 2010 there is no estate tax for anyone. 2011 the exemption is back to$1m.  Property given away during life  Life/income interests or contingent remainder interests  Limited powers of appointment – if the power doesn’t give the right to transfer to yourself, your estate, your creditors and your estate’s creditors  Deductions  State death tax credit – on your federal taxes you can deduct your state estate taxes. The total of estate tax is no more when your state tax is included, b/c of a deduction. Procedure:  Form 706 - you start out with your taxable items, then you deduct your deductible items to get your AGI. You then see how much exceeds the 1.5m allowance, your lifetime gifts, then you take 50% of the remaining number. - Due 9 months after death. You can get a 6 month extension which as long as you file, it is automatic.  Appraisals of your property – these are attached to the tax returns.  Tax allocation – tax is allocated according to the trust or the will. GIFT TAX  The gift tax return is due the April 15 after the death.  CA does not have a gift tax  Even if you have given away your exemption it is cheaper to give during life so you don’t pay taxes on the appreciation.  The tax exclusive concept only works if you don’t live to long. If you die within three years of making the gift the taxes you paid will drop back into your estate at death for calculating the estate tax. What is not taxable?  First 11k per person  Medical and education expenses for an unlimited amount of people for an unlimited amount as long as the payments are made directly to the medical or education provider  In order for trusts to qualify for the 11k yearly exclusion the beneficiaries must have “cremmy powers” a power of a beneficiary to take money out of the trust when the money is put in the trust (the beneficiaries 27 must have a reasonable period of time to take out the money). However much can be taken out, is the amount that can be tax free. What is taxable?  All other gifts CAPITAL GAIN  Step-up in basis to FMV at death o all separate property and both halves of community property  If somebody is about to die and their spouse has separate property they should convert it to community property so it can get a step up in basis at death.  No step-up in basis on a gift  If there is tax due at death then you want a low appraisal. If there is no tax due at death then you want a high appraisal.  There is no step up in basis with gifts. Therefore if you give a gift it is better to give cash then appreciated property. GENERATION SKIPPING TRANSFER TAX - The estate is taxed at each generational level at 50% because it acts in conjunction with the estate tax. - The GST is 50% - 1.5m exemption - Anyone NOT related to you and 37.5 years younger than you is considered your grandchild. You can give gifts and allocate GST exemption to grandchild up to $1.5m but you must do so specifically. - People within 12.5 years of each other are considered to be of the same generation. Basic Estate Plan For Married Couple At first death - Revocable trusts provide that 4 separate trusts will be created. In community property example: - Say husband dies, his ½ of the community property (and all separate property he may have had) will go to the first three. The Surviving wife’s property (1/2 community and separate) will enter the Survivor’s trust as the Wife’s revocable trust. She will also be the trustee of that trust. - What you would want to do is allocate the remaining (left over from lifetime gifts) estate tax exemption to the first trust, the credit trust, use up and match that amount with GST exemption. Then allocate the rest of the GST exemption to Exempt marital trust. Then rest to the non exempt marital trust. Credit Trust - the purpose of this trust is to separate these assets so they are not taxed in either the husband’s estate or the wife’s, it will not be included in the wife’s estate when she dies because she only has a limited power of appointment - Not taxed at either the spouse or the children’s death - Funded with decedent’s remaining estate tax exemption - Property with the best appreciation potential - Allocate Estate and GST exemption up to the amount that is funded here with the exemption of estate tax. - Surviving spouse is trustee - Income and principal distributed under ascertainable standard - Irrevocable - Surviving spouse has limited power of appointment o Serves dual purpose. So it’s not included in wife’s estate when she dies. And asset protection. Exempt Marital Trust - the benefits of creating this trust is asset protection - Funded with remaining GST Exemption - Property with next best appreciation potential - Allocate GST Exemption (you allocate what ever is left after covering the amount in the credit trust) - If there are no taxable gifts and no erosion of the estate tax exemption, then there is no need for exempt marital trust, b/c the estate and GST will all be allocated to the credit trust. - Surviving spouse is trustee 28 - All income to must go to Surviving Spouse(this must be required and the principal must be left for the spouse to qualify for the marital deduction); Principal by ascertainable standard Surviving Spouse has limited power of appointment for asset protection Both marital trusts are taxed at the wife’s death but not at the children’s death. Irrevocable Non-Exempt Marital Trust - Funded with balance of decedent’s assets - Surviving spouse is trustee - All income to surviving spouses principal by ascertainable standard - Surviving spouse has limit power of appointment for asset protection - Irrevocable trust Survivor’s Trust - Funded with survivor’s assts - This is surviving spouse’s revocable trust - Surviving spouse is trustee. - Revocable At second death: - At the wife’s death you divide each of these by the number of kids and have 3 trusts for each of the kids. When the wife dies she will have $1.5m in GST and some Estate Tax exemption. - All are irrevocable, except survivor’s trust. Appraisal When you are appraising the assets at the first spouse’s death if there is tax due right now you want a low appraisal, if there is no tax due right now you want a high appraisal so you can get a bigger step up in basis and then you will have less capital gains when the asset is sold. 29