Recent California Decision On Breach Of Trust & Trustee Fiduciary Duties - Uzyel v. Kadisha

A recent decision from the California Court of Appeal (10 S.O.S. 5529) serves as an incredible reminder about the duties of a trustee not to engage in self-dealing even if the trustee believes he or she is also acting in the best interest of the trust and beneficiaries.

It also demonstrates how long these cases can take to run through the courts. The lower court trial lasted for almost four years before it went to the appellate courts.

In this case, the Court of Appeal affirmed a judgment against trustee Neil Kadisha, a venture capitalist and philanthropist who is reportedly one of Los Angeles’ wealthiest residents, for actions arising from two trusts he was administering for a young widow. The lower court found that Neil Kadisha used the trusts for his own benefit. Neil Kadisha served as the trustee of two trusts.

The beneficiaries, Dafna Uzyel and her children Izzet and Joelle Uzyel (collectively the Uzyels), filed petitions for breach of trust against Kadisha and terminated the trusts. After a nonjury trial, the trial court awarded the Uzyels over $59 million in compensatory damages and disgorgement of profits, plus $5 million in punitive damages and over $13 million in attorney fees. The Court of Appeal upheld the lower court's findings and also added about $20 million in prejudgment interest to the judgment.

Justice Walter Croskey, writing for the Court of Appeal, cited numerous instances of self-dealing by Mr. Kadisha, who agreed to assist then-28-year-old Dafna Uzyel, who had a 10th grade education and spoke little English, after her 40-year-old husband died unexpectedly. Rafael Uzyel had emigrated from Israel with his wife and two children and had a successful export-import business.

Mr. Kadisha appealed the judgment, challenging the awards on several claims, the punitive damages, and the attorney fee award. The Uzyels also appealed, challenging the denial of relief on some of their claims, the denial of prejudgment interest on some claims, the punitive damages, and the costs award.

This case raised several questions concerning a trustee’s liability for breach of trust under Probate Code Section 16440(a). With respect to these questions, the Court of Appeal concluded:

(1) tracing is not required for the disgorgement of profits made by the trustee “through the breach of trust” under section 16440(a)(2);

(2) the fact that an act is consistent with or even compelled by the duty of prudent investing does not excuse a trustee from liability for breach of the duty of loyalty, including liability for appreciation damages as lost profits under section 16440(a)(3);

(3) the determination as to which of the statutory measures of liability “is appropriate under the circumstances” under section 16440(a) is reviewed for abuse of discretion;

(4) an investment loss resulting from a breach of trust should be offset against a profit resulting from a breach of trust only if the breaches were not separate and distinct;

(5) prejudgment interest is mandatory on an award of damages under section 16440(a)(1); and

(6) the absence of an express provision for prejudgment interest under section 16440, subdivision (a)(3) does not preclude an award of prejudgment interest under Civil Code section 3287, subdivision (a) on damages awarded under that provision.

Citing legal treatises and the 3d Restatement of Trusts, Justice Croskey wrote: “A trustee is strictly prohibited from administering the trust with the motive or purpose of serving interests other than those of the beneficiaries....A trustee also is strictly prohibited from engaging in transactions in which the trustee’s personal interests may conflict with those of the beneficiaries without the express authorization of either the trust instrument, the court, or the beneficiaries...."

"It is no defense that the trustee acted in good faith, that the terms of the transaction were fair, or that the trust suffered no loss or the trustee received no profit. This is known as the no further inquiry rule...Such a transaction is voidable at the election of the beneficiaries, and other remedies may be available, including an award of profits that the trust would have made if not for the breach of trust.”

Mr. Kadisha argued, among other things, that many of the challenged transactions, such as a sale of Qualcomm stock in 1992 at the time the investment was properly classified as risky, were in the trusts’ best interests. But a trustee cannot enter into a transaction solely for his personal benefit, even if it makes economic sense from the trust’s point of view, Croskey wrote.

Croskey said the additional prejudgment interest, which the trial judge denied as a matter of equity, had to be added to the award under Probate Code provisions setting forth remedies for breach of trust.

Attorney Comments: Where there is a conflict of interest or possible conflict of interest, obtaining written consent or legal advice is important at the outset. The fiduciary duties a trustee holds to the trust and beneficiaries impose serious legal duties that sometimes get overlooked especially where the trustee is also a beneficiary (which was not the case in Mr. Kadisha's case). Trustees should seek legal advice before making decisions that could cause them potential liability and exposure. In Mr. Kadisha's case, it seems he obtained legal advice and then ignored some of it to his later detriment.

Mr. Moravec is a very experienced estate planning, trust administration and probate litigation attorney. He has more than 20 years' experience in probate and is extremely dedicated to his clients and helping them create a plan that is tailored to their wishes, finances, helps avoid probate and taxes, and takes into account their families' unique situation.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. His email is hm@moravecslaw.com

The Los Angeles area office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210. 

Financial Planning's Fraternal Twin Is Estate Planning. New York Times' Article "Estate Planning Step 1: Recognize You Are Going To Die"

Estate planning has been called “the fraternal twin of financial planning.” A financial plan devises a strategy of accumulating wealth and preparing for retirement, long life, ill health, college educations for children, and so on. An estate plan determines the best means of disposing of the accumulated wealth and for supporting loved ones after you die.

A recent New York Times article entitled: “Estate Planning Step 1: Recognize You Are Going To Die” is a useful reminder of why an estate plan is part of sound financial planning. The article confirms that the first step in working on an estate plan is to accept that you are going to die at some point. The article is excellent in explaining how estate planning is a process since you can only plan with what you have at the moment or for the children or grandchildren or wife/husband you have at the moment. You need to keep things under periodic review.

You also need to ask yourself some questions: Will a trust help you ensure that your children do not inherit money in one lump sum or avoid tax liability? Do you want to leave more to one adult child than another? Do you want there to be asset protection for your spouse? Are you an American residing overseas or with property overseas? Do those countries have forced-heirship laws? What are the advantages to avoiding probate? There are a lot of questions that an estate planner can help you assess as part of your financial and estate planning and these are just the tip of an iceberg. It is also important to assess each family's unique circumstances and financial situation.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.

Court Upholds Medicaid-Planning Annuity Purchase -- Income Stream From An Annuity Is Not An Asset For Medicaid Eligibility

An interesting and useful case was decided in Connecticut federal court last month regarding whether the income stream from an annuity can be treated as an "asset" for Medicaid (or here in California Medi-Cal) eligibility. The decision was in favor of the annuity owner whose husband was in a nursing home.

On August 30, 2010, a federal court in Connecticut ordered the state Medicaid agency to determine the eligibility of an institutionalized applicant without regard to his wife’s purchase of a single-premium annuity, which converted assets to income. It rejected the agency’s attempt to treat the annuity as an asset, which would have put the applicant over the resource limit until the couple spent down about $180,000. The agency’s denial of assistance was based on the wife’s failure to cooperate, specifically, her refusal to sell her interest in the annuity as it directed. The case is Lopes v. Starkowski (U.S.D.C. Conn., No. 3:10-CV-307, August 10, 2010).

The Annuity

The terms of the annuity provided that no interest in it could be sold or transferred, including the right to payment of the income. The spouse named the state agency as remainder beneficiary up to the amount expended for her husband’s care as required under the Deficit Reduction Act (P.L. 109-171) and state regulations. Payment of the premium depleted the couple’s assets by about half, and the amount remaining was close to the resource allowance allowed to a community spouse under Soc. Sec. Act §1924.

Court Holding

The federal court found that the Medicaid agency violated federal law when it demanded that the wife sell the annuity. Soc. Sec. Act §1902(a)(10)(C)(i) requires that the agency’s methodology for determining financial eligibility for Medicaid for institutional care be no more restrictive than the methodology used for the Supplemental Security Income (SSI) program. The SSI program treated annuities with similar terms as income, not an asset that the spouse could be required to sell. The applicant and spouse were granted judgment as a matter of law.

Attorney Commentary

Estate planning with respect to Medi-Cal eligibility has become a more important consideration given the costs of health care, long-term care and longer life spans. One of our partners Bentley Mooney was at the forefront of this issue in California and continues to write and speak about it. Thus, our firm is uniquely situated to address these issues for our clients where it could be an issue.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

Mr. Moravec is a very experienced Los Angeles estate planning attorney, Los Angeles trust attorney and Los Angeles probate attorney. He has more than 20 years' experience in estate planning and is extremely dedicated to his clients and helping them create a plan that is tailored to their wishes, finances, helps avoid probate and taxes, and takes into account their families' unique situation.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.

N.Y. Times Article On Family Limited Partnerships In Estate Planning - 5 Basic Issues To Avoid I.R.S. Scrutiny

The New York Times recent article "Partnerships May Aid Your Estate, But The I.R.S. Is Watching" is a short but interesting read for those interested in how family limited partnerships are used to reduce the size of an estate for tax purposes and how the I.R.S treats them.

Family limited partnerships can help keep family interests in sync after death and protect their estate from a high tax bill, but the government wants to make sure they operate as true businesses, not solely to avoid estate taxes.

Apart from other business reasons, family limited partnerships are often used to reduce the size of an estate for tax purposes. What makes them attractive is that the value of whatever is in the partnership — buildings, a business, publicly traded stock — can be discounted because selling shares in a partnership to outsiders is difficult since all the partners are related.

The article addresses whether or not a family limited partnership stand up to the I.R.S. test. The article is a basic summary of a complex area of law. The article suggests discussing five basic issues.

1. WHY DID YOU SET IT UP? Do you have a legitimate business interest beyond lowering estate taxes because you can discount the value of the assets in them? If it is solely estate tax discount driven, there could be a problem with the I.R.S. Examples of legitimate business interests are (a) jointly managing the collective wealth of a family to gain access to better managers, and (b) operating an illiquid asset like a family business or a portfolio of buildings. The article notes that a "family can also use a partnership as a stealth prenuptial agreement since all the assets are wrapped up in the partnership and not easily dividable."

2. DID YOU DISCOUNT THE PARTNERSHIP TOO DRASTICALLY?

If you discounted the value of the partnership too drastically, the I.R.S. may not agree. The article quoted one expert that "the I.R.S. had seemed to settle on a discount of 25 percent in cases it had litigated." One problem noted in the article is that the I.R.S. has not given strict guidance on what you can and cannot do.

3. WHEN DID YOU SET IT UP? Was the partnership set up on a parent's deathbed? This could draw scrutiny. The Times cited one case involving the $10 million estate of Albert Strangi, a Texan who made his money in manufacturing and was in declining health when his son-in-law moved nearly all his assets into a family limited partnership. After seven years of litigation, the federal courts ruled that the partnership had been set up solely to avoid estate taxes. With such an I.R.S. ruling, the whole amount could be deemed a taxable gift. This Texas case is an extreme example, but it helps point out that timing as well as intent count.

4. HOW DO YOU MAINTAIN IT? For a family limited partnership to seen as legitimate, it needs to be run as a true business. This means regular meetings and audits as well as professional distributions. If you fail to do this, it can invite I.R.S. attention.

5. WHAT DO YOU DO WITH IT? Beyond tax reasons, many partnerships are set up out of a legitimate interest to keep families together after the parents die. But this is not always what the heirs want, particularly when they do not like one another. A partnership can be unwound, but how easily depends on how it was set up and cared for.

Many of the problems described above could be avoided by talking to lawyers at the formation and over regularly time periods to see if the partnership is being run properly. For example, during the formation stage it would be a good idea to address the issue of succession. Partnerships can be a useful estate planning tool but clients need to be very careful about how they’re setting up partnerships. The devil is really in the details.”

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney. For a complimentary 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221.

Mr. Moravec is a very experienced Los Angeles estate planning attorney, Los Angeles trust attorney and Los Angeles tax attorney. He has more than 20 years' experience in estate planning and is extremely dedicated to his clients and helping them create a plan that is tailored to their wishes, finances, helps avoid probate and taxes, and takes into account their families' unique situation.

He focuses his practice on Estate Planning, Trust and Probate Administration, Beneficiary and Trustee Representation, Probate Litigation, Tax Law, and Nonprofit Law. He represents clients throughout Southern California and his offices are conveniently located for clients in the Los Angeles, Orange, Santa Barbara, Riverside and San Bernardino Counties.

The firm website is http://www.moravecslaw.com/. The firm has two offices and consultations and meetings can be held at either office.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. Telephone: (626) 793-3210.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878. Telephone: (818) 769-4221.