LIVING TRUSTS

Published on: November 15, 2013

Providing for a Disabled Child Through a Special Needs Trust

Special needs trusts are an estate planning device that allows a person to leave part of his or her estate to a disabled beneficiary without affecting that beneficiary’s government benefits. For example, let’s say you have an adult child who is permanently disabled and receives Social Security and California Medicaid (Medi-Cal) benefits. Leaving that child a large inheritance might disqualify them from continuing to receive those benefits. And if the child’s disability renders them unable to handle their own finances, any inheritance you leave them may simply be squandered.

A special needs trust addresses this situation by distributing assets from your probate estate (or existing living trust) to a trustee, who could then make payments for the benefit of the disabled child-but not to the child directly, as that would constitute income for Social Security and Medi-Cal purposes. The special needs trust would continue for the duration of the child’s lifetime. Like most trusts created as part of an estate plan, the special needs trust would become irrevocable upon your death, meaning your child or the successor trustee could not unilaterally modify or revoke it.

A special needs trust is usually the best way to provide for a disabled child in your estate plan. If you think a more informal arrangement might suffice, consider a recent decision from the California Court of Appeals. In this case, which is described here for informational purposes only, a father decided to leave his entire estate to one daughter with only an oral promise she would provide for her disabled sister after his death.

Published on: November 8, 2013

Making a Federal Case Out of Your Estate

by Scott C. Soady

Estate planning is intended to prevent disputes from arising after your death. Of course, good intentions aren’t always enough. Even the most carefully planned estate may be subject to fighting among aggrieved relatives or other would-be heirs. In some cases, these fights can tie up the courts (and your estate) for many years.

For the most part, when lawsuits do arise over a trust or estate, things are handled at the state level. In California, the superior courts act as probate courts to resolve matters like will contests or petitions to remove a trustee. The decisions from these courts may then be appealed to the California Court of Appeals, and, in rare instances, to the California Supreme Court.

Federal courts generally stay away from probate matters. As far back as 1789, when Congress created the federal courts, the probate of estates was considered a purely state affair. But this probate exception to federal jurisdiction is not without limits. In 2006, the U.S. Supreme Court said federal courts could hear cases that touched upon probate matters if the underlying dispute involved a subject (such as tort law) that was normally subject to federal jurisdiction.

Published on: October 25, 2013

Understanding the Consequences of a “No-Contest” Clause In Your Will or Trust

by Scott C. Soady

The whole point of making a will or trust is to prevent disputes over the disposition of your estate after your death. One way to protect your estate plan is to include a no-contest provision in your trust or will. Basically, a no-contest provision states that if a person tries to challenge any part of your trust or will in court-and fails-he or she forfeits any inheritance from your estate. No-contest provisions have long been recognized by courts, and in 2010, the California legislature expressly recognized such provisions in the state’s Probate Code.

A recent California Court of Appeal decision demonstrates how this works in practice. In this case, the court upheld a no-contest clause. Please note this case is discussed for illustrative purposes only and should not be construed as a binding statement of California law.

A Son Tries to Change His Mother’s Trust (and Loses)

Published on: October 16, 2013

Think Carefully Before Naming Multiple Trustees (Or Executors)

by Scott C. Soady

The purpose of California estate planning is to prevent your children or other family members from fighting over your assets after you’re gone. But even the best intended plan can go awry. A recent California case demonstrates the problems that may arise when one child is charged with overseeing the distribution of an estate to another child.

This case is discussed here for informational purposes only and should not be construed as an authoritative statement of California law. The subject of the case is the estate of Lydia Wezel, who died in 2006. In 1991, Wizel established a trust as part of her estate plan. She intended her two children, Jill Wizel and Robert Brown, to benefit from the trust after her death. Lydia Wezel transferred her home into the trust and instructed her successor trustees to distribute the property to Jill Wizel. The balance of the trust estate, less a few gifts specified by Lydia Wizel, would be divided between Jill Wizel and Brown.

Upon Lydia Wizel’s death, the trust named Jill Wizel and Edward Ezor as co-successor trustees. Within a few months, questions arose regarding Jill Wizel’s competency to serve as trustee. According to court records, she was hospitalized for psychosis and had a history of drug, alcohol and gambling addiction. Ezor knew about Wizel’s problems but did not act to remove her as co-trustee. Instead, he took advantage of the situation, paid himself a $10,000 fee for his “services” as trustee without actually carrying out the trust’s instructions. Notably, he failed to properly divide and distribute the balance of the trust assets to Wizel and Brown.

Published on: October 3, 2013

Changes to a Living Trust Leads to Breach of Contract Claims

by Scott C. Soady

Estate planning is supposed to prevent arguments among family members after you pass away. But even the best-laid plans are subject to changes in family relationships. One recent California appeals court decision highlights what can go wrong when a deteriorating marriage intersects with inheritance.

Please note this case is described here for informational purposes only and should not be construed as legal advice. The subject of this case is a home in Alameda County owned by the late Henry Rodriguez. In the late 1990s, Rodriguez asked his niece, Mirian Duncan, and her husband Edward to move into his home. Rodriguez had recently underwent heart surgery. He wanted the Duncans to help care for him and his home. In exchange, he promised to give them the house after he died this is known as a care contract.

To that end, Rodriguez executed a revocable living trust in 1998. Rodriguez transferred his house into the trust and directed that upon his death, the property would go to the Duncans “equally, as their joint and/or marital property.” The Duncans held up their part of the deal, moving into the home and caring for Rodriguez until his death in 2007.

Published on: September 30, 2013

California Appeals Court Upholds Ex-Partner’s Right to Property Under Trust

by Scott C. Soady

Estate planning for unmarried couples in a long-term relationship presents a unique set of legal challenges. California does not recognize “common law” marriages, but in 1976, the state’s Supreme Court held that unmarried couples could enter into binding legal contracts (either express or implied) allowing them to “pool their earnings and to hold all property acquired during the relationship in accord with the law governing community property.” These so-called Marvin agreements-named for actor Lee Marvin, the defendant in the 1976 case-allow courts to look at the overall nature of a non-marital relationship and grant equitable relief in certain cases.

Marvin agreements can also affect California estate planning. Recently, the California Court of Appeal opined for a second time in a dispute between a former unmarried couple over the fate of a living trust they established to hold their common home. The case is discussed here for illustrative purposes only and should not be construed as a binding statement of California law.

An Ex-Partner Still Owes a Fiduciary Duty

Published on: September 4, 2013

Understanding the Surviving Spouse’s Obligations Under an A/B Trust

by Scott C. Soady

Survivor’s and exemption trusts-often called “A/B trusts”–are a common estate planning device used by married couples to help reduce federal estate tax liability. The A (survivor’s) trust represents the property under the exclusive control of the surviving spouse after the first spouse dies. The surviving spouse may amend or revoke the A trust like any other living trust. The B (exemption) trust represent the deceased spouse’s share and becomes irrevocable upon his or her death. The surviving spouse may continue to enjoy and benefit from property in the B trust, but the legal title remains with the trust, restricting the survivor’s ability to modify the trust’s principal.

The B trust must comply with the stated wishes of the deceased spouse. That is why the trust becomes irrevocable upon death. Recently a California appeals court weighed in on a case where the surviving spouse attempted to use the principal of a B trust to circumvent her late husband’s wishes. The case is discussed here for illustrative purposes only.

Protecting the Principal

Published on: August 15, 2013

Succession Planning for Your One-Person Business

by Scott C. Soady

Estate planning for your personal assets, such as your home, can be relatively straightforward. But estate planning for your business assets-sometimes called succession planning-presents unique challenges. The first step in succession planning is understanding the legal structure of your business and how it may interact with the probate system after your death.

Sole Proprietor

In a sole proprietorship, there is no legal or tax distinction between you and your business. In a sense, when you die, the business dies with you, and your estate may still be responsible for any business-related debts just as it would be for personal debts. Any business assets are disposed of in your will, or if you don’t make a will, according to California’s intestacy law.

Published on: July 31, 2013

How Will Estate Planning Affect My Family Business?

by Scott C. Soady

A family business can impose unique estate planning challenges. Assets like cash and stocks can be easily divided among multiple heirs. But a business is an ongoing concern, and not all family members may be part of the company. Ultimately, a business owner’s estate planning must weigh the needs of the company against the interests of other family members.

Let’s say you and your spouse own a restaurant. Your respective estate plans state that in the event of one spouse’s death, the other spouse will continue to operate the business as sole owner. But what happens after you both die?

To further complicate things, let’s say you and your spouse have three children. One child currently works in the business, handling day-to-day operations. Another child helps out occasionally but is not a full-time employee. The third child lives out-of-state and has nothing to do with the business.

Published on: July 29, 2013

Survivor & Exemption Trusts Can Shield a Married Couple’s Assets from Estate Taxes

by Scott C. Soady

Living trusts are a common estate planning device that can shield a person’s assets from the probate process. For married couples in California holding substantial assets, a more complex form of trust planning is available. Known as survivor and exemption trusts, or sometimes as A/B trusts, these special trusts can reduce the potential impact of federal estate taxes.

As of 2013, the federal estate tax exempts the first $5.25 million of a person’s estate. The law also provides an unlimited marital deduction for assets transferred from a deceased spouse to a surviving spouse. This means that when the first spouse dies, his or her entire estate-including any share of community property-may be transferred to the second spouse and no estate tax will be due, as the first spouse’s estate is considered empty. When the second spouse dies, his or her estate can then claim the $5.25 million exemption, owing federal estate tax on the surplus.

The A/B trust, however, provides a mechanism so that both spouses estates may benefit from the $5.25 million exemption. A couple initially creates a living trust to hold their assets. When the first spouse dies, this trust is then subdivided into a survivor’s trust and an exemption trust. The survivor’s (or “A”) trust represents the surviving spouse’s half of the property initially placed in trust. The surviving spouse can still modify or revoke this trust at any time. The exemption (or “B”) trust contains the deceased spouse’s share. The surviving spouse still has access to assets in the B trust, but title to the property remains with the exemption trust. This allows the exemption trust to claim the $5.25 million exemption for the deceased spouse, while allowing the surviving spouse’s future estate to keep its own exemption, thus effectively doubling the exemption on the couple’s assets to $10.5 million.