L.A. Times / Don Bartletti ~ Reading Cinemas Movie Theatre

The Los Angeles Times is reporting on a family estate dispute and court drama thatis affecting the Los Angeles-based movie theater chain Reading InternationalInc. which has dozens of cinemas around the world, major real estate holdings, and a nearly 200-year history with roots in the railroad and coal business. The adult three children of Reading’s late chief executive, James J. Cotter Sr., are waging a battle for control of the company.

This case is more complicated than the typical estate dispute in that it involves a public company but it has some allegations that are common to many of them such as whether the father had capacity to amend the trust, breach of fiduciary duty and undue influence.

The Los Angeles Times reported that the issues began after James J. Cotter Sr., a Los Angeles businessman, resigned as CEO and chairman in August 2014 because of declining health, leaving son James Cotter Jr. in charge. Cotter Sr. died in September 2014 at age 76. Shortly thereafter, his two daughters went to court, alleging their brother improperly convinced their father to add him to a trust that would control the voting shares of the company.

The article notes that Ellen and Margaret Cotter’s court papers claimed that James Cotter Jr. unduly influenced their father while he was in the hospital after suffering a fall in his home. The daughters said their father lacked “the knowledge and understanding necessary” to make such financial decisions. The daughters contend that after their dad was admitted to the hospital, their brother convinced an estate attorney to draft an amendment to the trust that made him a co-trustee. They allege he lied to Margaret by saying the changes were made based on videos he took of their father expressing his wishes. 

Technology and Online Tools Can Help Executors of Estates While Executor Works With Probate Attorney

Technology is making it easier to save and share information and the probate and estate administration world is no different. Clients can use Excel spreadsheets, Dropbox and other file sharing tools with us and beneficiaries.

The New York Times recently had an article "Online Tools Can Ease the Burden of Being an Executor of an Estate" and it recommended an interesting online database tool called EstateExec that has gotten good reviews. It is an interactive tool that allows an executor to list and track financial assets, personal property, debts and then share it online with a lawyer or other beneficiaries and family members. It also has timelines and checklists (so court hearings for approval can be entered) which provides a transparency to the process which helps others understand why it can take months in the probate court system.

While this does not eliminate the need for a probate attorney in an estate with assets, the will is complex or where there is a likelihood of litigation, it has good checklists and is a useful tracking device. It can also be helpful for very small estates that do not need probate court. 

Part of our practice is focused on using technology where possible to make it easier for our clients. Older clients are not as technology based but things are changing and we can take advantage of all the tools available to us to make probate administration easier and faster. 

Posted by Henry (Hank) Moravec III
Office: 626-793-3210
Email: hm@moravecslaw.com

Who Gets Grandma's Antique China? Do Not Forget the Minor Details and Sentimental Items in Estate Planning.

We have had two cases in the last couple of years where one of the attorneys from our office had to spend days sitting with the disputing relatives in estate cases while they took turns going through personal property and effects of their relative. 

Not only was this emotional for the parties but costly from a legal fee standpoint. The parties required it since without cousel present, it could not be accomplished for a variety of reasons.

A recent New York Times article by finance writer Paul Sullivan, When Dividing Assets the Little Things Matter (4/15/16) gives all of us a reminder and good ideas on how to not overlook the personal items that may not have as much monetary value as cash, real estate, securities but have sentimental value as well as some monetary value. 

When relatives go in and take personal property without agreement between the parties this can be a huge source of future conflict.  Photographs are often important, for example, but with scanning companies this can be taken care of as long as one relative has not taken the albums and refused to cooperate. 

This is something that one can do themselves by making lists, taking photographs or videos, etc. We find, however, that for our senior clients it is often overwhelming for them to do. We can send a paralegal or attorney to your home to assist the process which is then covered by the attorney-client privilege and is part of the estate planning process. This can even be done when parents or grandparents decide to downsize and move to avoid family disputes. 

For the do-it-yourselfers, there is a company FairSplit that has an interesting concept of having licensed insurance adjusters come to your home and take photographs and videos of all items and list them with price based on square footage. This company also has a less expensive online option where you do the listing yourself. 

As attorneys we can incorporate this and monitor it so the parties keep track and it is used for the final reports. With technology, there are a lot of tools that can make this entire process easier and less expensive. Lesson is though not to forget the small details and personal mementos, and get help to get it done. Advance planning and hiring someone is far less expensive than legal fees later and less painful than fractured families later. 

Posted by Henry (Hank) Moravec

Probate and Trust Administration Top Posts

 The other day I was looking through all the stats on the blog, to see the most popular posts.  In first place is What happens when someone dies without a will?  with 1550 views.  If you liked that one, check the  2013 related post: What happens when someone dies without a will? Does joint tenancy save the day? The rest of the top five posts of all time on the blog are:

2. Recent California Decision On Breach Of Trust & Trustee Fiduciary Duties   with 1010 views.

3. Recent California Decision Highlights Trustee's Breach Of Duties And Misconduct When Trustee Is Also A Beneficiary  with 961 views

4. What Is Undue Influence In California Probate Courts? with 740 views, and 

5. Potential Estate Tax Implications Of J.D. Salinger's Death  with 490 views.

We feel that there is an overall theme developing here, since the most viewed posts are probably connected with what people are searching for on the Internet and what brings them to the blog.  

As a technical matter, the permanent change to a $5,000,000 exemption per person means that for many people, estate taxes are no longer an issue which would drive estate planning.  It is a huge difference to not so long ago when the exemption was only $600,000.

However, family relationships cannot be legislated, and the conflicts which develop after death are very much unaffected by tax laws.  If one child thinks that their sibling unduly influenced Mom, well, that is simply an issue which will always be around.

We see our practice in disputed matters steadily expanding, so these stats are not surprising to us. 

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney, A Partnership.
For a free 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is www.moravecslaw.com

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108.

Litigation in the Probate Courts Part II, How Long Does it Take?

In the first installment of this series of posts, we talked about the general aspects of probate litigation, and what to expect if you find yourself involved in a case.  In this post I will talk about how long each phase of a case may take, and what a litigant can expect along the way.  Often, the timing of a case is as important as the substance of the claims.

A case breaks down into the following segments:

A. Pleading, or the making of allegations by one side and the corresponding denial of allegations by the other side.  Pleading alone can take several months.  In a Probate case, it is rare for one party to file any sort of motion, the other party to receive it and object, and for the parties to both agree with the Court to move to the next stage in anything less than about four months, sometimes much longer.  The other factor is that in a Probate case there are often more than two sides.  Each beneficiary of an estate could have a different view of a matter.

B. Discovery, or additional fact finding.   Additional fact finding always takes time.  For example, let say that the matter at issue is a beneficiary demanding an accounting.  Well, the court may say "when can you have that accounting done?"  The party may respond "in three months."  Then the court orders it filed, and of course the other side gets time to examine it and have specific objections, which might take a couple of more months.  So now you could easily have taken a year.

C. Preliminary Orders, which are Orders from the Court to keep the case moving along.  There may be some preliminary orders along the way, but those could be expensive to get and are always time consuming.  To continue with the example above, a typical case may start with a beneficiary accusing the trustee of some act and asking that the trustee be removed.  However, if there has not been an accounting filed the court will want to see that first, and that may take a few months.

D.  A formal mediation. At this point a year or so may have gone by, and the parties are already growing tired.  At this point the Court will offer the parties a chance to mediate the matter before a private mediator.  Often, this is the point at which the case settles.  Mediation can be very helpful, since it is often in mediation that, for the first time, one side hears how the other side's arguments and their arguments are viewed by an unbiased third party.

E.  An Evidentiary Hearing.  Thiis is what most people consider "a trial" to be, or what they think of by "going to court."  Not only do the first four steps often take more than a year to complete, it now may take a year to get a hearing date on a matter that will take more than a couple of hours of evidence.  Two years with no resolution feels like a long time, and it is.

F.  Appeals, if any.  An actual appeal, with briefing schedule to the appellate court, could be another year.  Often, appeals are filed simply to create the possibility of additional settlement discussions.

As you can see, the rather extreme length of time it can take to obtain a court order is a factor in the dispute,  independent of the actual merits of the claim.  Time is a factor which simply must be discussed with the client, because not only is "time" an issue, but costs rise along with time.  There is no positive way to really spin this, but this is why most cases settle -- it would simply take too long and cost too much to achieve complete victory.

At Moravec, Varga & Mooney we have extensive experience with disputed matters and the various phases of a case.  We have found that it is a great help to a client to give them an honest appraisal of how long a case can actually take.  It can be an extremely bad thing if a lawyer is "too optimistic" about how quickly a client can get a case to a judge.  If the client does not understand the time and costs involved, the time and cost can simply overwhelm the merits of the case, which can be a disaster if the case is actually a good one.


Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney, A Partnership.
For a free 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is www.moravecslaw.com

The Los Angeles area office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108.

What Happens When Someone Dies Without a Will? Does Joint Tenancy Save the Day?

One of the features of Blogger is that you can see the list of the most popular posts on a blog.  Currently our number one post is "What happens when someone dies without a Will?"    It is easy to see why this would be a popular search, since it may well be true that a very large number of people die without a Will or a Trust, which is known as dying "intestate" (the technical legal term). 

The chap to the right looks very satisfied with himself.  He may have been thinking "I have my property sorted out and I did it all by myself!"  However, he may well have simply created a minefield for his heirs.

Our post from 2009 addressed the basic question of what happens in an intestate estate administration.  That post set forth the basic ways in which property can be transferred when someone dies without a Will or Trust: (I) by small estate declaration, (II) by "contract" or (III) through a probate proceeding.

In this post I will elaborate a bit on what by "contract" means.  We use "contract" to cover a wide range of non-probate transfers.  The most common may be the joint tenancy.   Joint tenancy means that title to a piece of property, either personal property, such as a bank account, or real property, is in the name of two or more people as joint tenants.  The long phrase is "joint tenants with right of survivorship" and what it simply means is that when any joint tenant dies, upon proof of death, the property passes to the other joint tenants.

Joint tenancy has always had one advantage going for it -- simplicity.   It is not a big deal to put a bank account into joint tenancy, you just fill out the appropriate form at the bank.  For real property, a deed is required, but these days many people attempt to fill out their own deed and often are successful.  When real property is purchased, the escrow company can simply put the title into joint tenancy at the request of the buyer.

However, joint tenancy has a number of disadvantages, which can run the gamut from annoying to serious:

1. It assumes order of death.   For estate planning purposes, properly drafted documents take into account variables in who dies first.  At best, if a parent puts a child on as a joint tenant and the child dies first, it is a waste of effort.  At worst, if the child is put on only one deed with the intent of that particular property going to that child, and ultimately to that child's children or spouse, and the child dies, then the property reverts to the parent, and does not go to the child's heirs.

2. It provides no protection against disability.  One of the benefits of a revocable trust is that it applies if the settlor (or creator) of the trust becomes disabled.   Putting property in joint tenancy does not have any management upside -- both joint tenants must executed any documents of sale or financing.  So if a parent puts a property in joint tenancy and becomes incompetent, that parent could not execute any documents with respect to that property, and problems could easily arise.

3. No creditor protection on first death. Another issue with a simple joint tenancy between husband and wife is that the change in tax laws has perhaps led some to ignore other, non tax issues.  For example, a couple who are in no danger of amassing an estate worth $10 million could have all of their assets in joint tenancy, and thus if one dies all goes to the survivor.  However, this does not deal with: creditors of the surviving spouse, everything from potential remarriage to medical bills.   With a trust, half of the couple's net worth would have been protected.  Plus, upon the death of both parents a probate would be necessary.

4. It is easy to forget.  A joint tenancy is so simple that its easy for a person to forget they even have set one up.  We have had many instances where one of the contingencies discussed in this memo occurs and the client, or the client's children, are surprised to learn of  a joint tenancy property or account set up years before.

5. It does not verify actual ownership interest.  This is a real nuts and bolts problem.  For example, take refinancing or sales of property.  Once a person is a joint tenant, they have to sign off on all of the documents relating to that property.   A second point that comes up is whether, when a couple puts a child on a deed as a joint tenant, if they intended a specific gift.  The IRS generally says "no" but the County Assessor, who is looking to re-assess property, may say "yes."  In California, the Proposition 13 property taxation system always needs to be considered.

The other, most common way an interest in property can pass is by "beneficiary designation" which I will cover in another post.

For now, the main thing to consider is that estate planning is all about "planning" for various contingencies.  Many clients are unaware of all the possible contingencies which might affect them.  That is where we can help, since we have experience with just those contingencies a client might miss.

When it comes to sorting out an estate of a person who dies intestate, many of the same contingencies a client should have considered while alive are triggered.   This is where our expertise again is of great help to clients, because just as much planning can occur after a person dies as before.

The majority of the work in our practice, in terms of hours spent, is always on post death administration, be it sorting out an intestate estate or resolving a dispute.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney, A Partnership.
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. The firm website is www.moravecslaw.com

Litigation in the Probate Courts, Part I - What Will Happen If Someone Files A Lawsuit In Probate Court?

What Will Happen If Someone Files A Lawsuit In Probate Court?

One common question that arises in the area of our practice which focuses on resolving disputes among executors, trustees, and beneficiaries is: "what will happen if someone files a lawsuit in Probate Court?" It's the client's  "nickle" if legal fees mount up, so its not only a fair question, but a critical one.

The answer to that question is something everyone who is focusing on their own estate planning ought to know, and something a person who is involved in an estate administration should absolutely know. Not knowing can lead to bad decisions which are difficult and expensive to fix at a later date. I will explore this topic over a series of posts.

The "normal functions" of the Probate Court are simply:
-- to figure out who is entitled to the property of someone who died, and
-- to also administer the estates of people who can no longer legally take care of themselves (guardianships and conservatorships).

This series of posts will focus on the estate and trust litigation process, but the possibilities for disputes in guardianships and conservatorships are just as frequent and can be even more frustrating.

Difference Between Civil Litigation and Probate Litigation

What I often tell clients is that there is a big difference between general civil litigation and probate litigation.  In general civil litigation: the vast, vast majority of disputes (which are not a matter of divorce proceedings) involve an insurance company as the ultimate paying party. General civil matters end up essentially boiling down to a war of attrition, where the insurance company who is defending the matter finally decides what the case is worth to go away. There are also a large contingent of employment related disputes, where you substitute an employer (usually a large one, since small employers do not have large amounts of money)  for the insurance company.

In a probate or trust dispute litigation, however, there is rarely, if ever, an insurance company involved, the matters tend to be highly emotional (more on that below). The first "stage," if you will, is sorting out the dispute from the actual amount in dispute.

For example, in a $100,000 estate, the maximum amount in dispute is a maximum of $100,000. In a $1,000,000 estate, the maximum amount in dispute is $1,000,000 and so on.

Emotional Losses Can Exceed The Monetary Loss (Case Study)

The most common emotion we see is a client who has an "emotional loss" which far exceeds the monetary loss. Here is a case study in this which is common in our practice.

A brother was certain his sister had been taking advantage of their father prior to and after their father's death. In the first few hours of investigating, we found $40,000 had been improperly transferred. We wrote a demand letter and the sister agreed to reimburse the estate. Since the sister and the brother were splitting the estate --  that $40,000 improper transfer was worth $20,000 to the brother (the sister was entitled to the other half).  At this point, the brother had spent only a few thousand dollars in attorneys' fees.

Then, a very familiar emotion kicked in.  The brother was upset that his sister had taken $20,000 that should have gone to him. Brother also became upset that he had to hire an attorney to protect his rights. Based on this emotion, he embarked on a hunt to see what other improper transfers or expenses his sister "might" have made in the estate.  After many more thousands of dollars in legal fees -- and at least a hundred hours of his own time -- he found a trip to the Home Depot  for $325 that the sister charged to her father that she should have paid herself.

In the end, the case settled because both brother and sister realized that there was only so much involved  and that a search, involving lawyers, for total certainty, was simply too expensive.  They would both (especially our client) have to be satisfied with what I would call "partial certainty"  - they did not know for certain that every nickel had been accounted for, but they did know that the overall result was relatively fair, and that more litigation was not worth it.

One reason that the case settled with a relatively small attorney cost was that opposing counsel was an experienced probate attorney who knew, from the beginning, how to advise his client about her duties and moreover, that the case should settle.  In future installments, I will tell a horror story or two about what can happen if a general civil litigator is involved in a probate litigation.

Probate Litigation Lesson 

We all have parents. Many of us have siblings. In any case no one has a perfect relationship with all members of their family. Thus, the lesson to be learned from the above story is that the death of a parent and an inheritance can fray almost any family bond.  Before you make a decision based on those very understandable emotions, call us or any experienced probate lawyer. Although it may not seem like it, it could save you quite a bit of money down the road.

As a trustee or executor, you can be sure not to make an inadvertent mistake that riles up beneficiaries for no reason. As a beneficiary, you can be sure not to throw allegations at a trustee who may actually be doing their best.  Either way you can replace emotions with knowledge, which is always a good deal.

An experienced and honest probate lawyer will help you create a strategy from the outside and not simply capitalize on the normal emotions that are inherent in these cases. When you need to be aggressive - they will also know how to be efficiently aggressive to help you win or obtain the best possible result.


Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney, A Partnership.
For a free 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. The firm website is www.moravecslaw.com

The firm's office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108 and there is ample free parking.

7 Strategies To Reduce Potential For Probate Litigation

The increase in probate litigation in our practice continues.  We had speculated last year that this might be due to the economy and shrinking real estate values in California. Even when litigation is necessary, and we have had to aggressively defend our clients or trustees -- we know that litigation can be costly, time-consuming and destructive to family relationships.

Accordingly, I wrote a post a couple of years ago addressing the question of how to reduce the risk of litigation in the estate and trust context during the planning stage. Although these methods are not guaranteed ways of avoiding litigation and every estate plan is different -- the ideas here are useful starting points to consider in the estate planning stage.

We had previously listed six strategies to reduce the potential for litigation, but please take note of the new number 7, which recent experience has shown may be the most effective:

1. Advise Inheritors of Inheritance Plans. 
Especially when children of the decedent are treated unequally, will contests and litigation arise from disappointed feelings of entitlement. Telling the children ahead of time what their shares will be may avoid a later dispute. One could enter into a contract (for consideration or something of value) with such a person that he or she will not object to the validity of the document. Be careful however, that advising a child that he or she will not receive an equal share may have adverse effects even if it prevents litigation after death. Thus, informing inheritors of the plans could cause family problems in the present. This will vary from family to family.

2. Use a Revocable Trust in Lieu of a Will. 
 Since a revocable trust can be funded and operate during lifetime, it is difficult to contest on the grounds that the individual was unaware of its terms. When the Settlor of the trust dies, there is no need to begin a court proceeding to "prove" the validity of the trust, such as there is for a will.

3. Use an Irrevocable Trust in Lieu of a Will or Revocable Trust. 
 An irrevocable trust is even less likely, in my experience, to be challenged than a revocable trust. Irrevocable trusts can be drafted in such a way so that transfers of property to them are not completed gifts. However, there are other risks and issues with irrevocable trusts that must be considered.

Alternatively, making a transfer that is a completed gift, paying gift tax, and filing a gift tax return disclosing details may be additional evidence that the transfer was truly intended. Again, I believe that a lifetime trust that is significantly funded is less likely to be challenged.

4. Use a Disinheritance Or No Contest Clause. 
If the testator lives in a state such as California that will enforce it under certain circumstances, a disinheritance clause (also called an in terrorem clause for the Latin word "in fear") could be used. The goal here is to prevent beneficiaries from causing a legal ruckus after the testator is gone. A lot of trust and estate litigation is not about the validity of the document, it is about its interpretation or about actions taken by the fiduciary. In order to reduce this type of litigation, a disinheritance clause can cause a forfeiture of a beneficiary's interest if such a challenge is made. The entire estate plan must be consistent with this clause.

With the advent of passage of Senate Bill 1264 which enacts Probate Code Sections 21310-21315 effective January 1, 2010, California's "no contest" law has been significantly weakened. This weakening affects wills and trusts that became irrevocable after January 1, 2001 and later. "No contest" clauses traditionally penalize parties who attempt to attack a will or a trust. Now, it will be significantly easier to attack a will or a trust in California.

To review Senate Bill 1264, go to: http://info.sen.ca.gov/pub/07-08/bill/sen/sb_1251-1300/sb_1264_bill_20080707_enrolled.pdf

5. Use Mediation or Arbitration Provisions. 
Arbitration or mediation cannot be used with respect to the challenge of a document's validity unless the parties agree to it. Using a disinheritance clause to cause forfeiture if the parties will not participate can be used. This could stop claims that are filed only to harass other beneficiaries or to delay distributions to others. Another approach would be having the parties enter into a contract agreeing to arbitration before the transfer.

6. Use a Condition Precedent to a Bequest as an Alternative Method of Causing Participation in Mediation or Arbitration. 
Since a person cannot be forced to participate in arbitration or mediation unless the law provides for enforcement, consideration must be given to how to get parties to use these methods. One can use the carrot instead of the stick. Parties can be given a benefit if they consent to use arbitration or mediation instead of resorting to court.

7.  If a particular beneficiary shows signs of being difficult, make the gift to that beneficiary a specific gift.  
The wisdom of this particular method has been illustrated by a current matter in our office.   Consider the difference between  giving a beneficiary 20% of the estate, or $1,000,000. If the former, that beneficiary may object to the valuation of all of the estate assets, i.e. "I don't think that property is worth $1,000,000, I think it is worth $1,500,000.  You are trying to under value it!"   If the latter, the specific gift may be paid in cash or currently valued securities, thus vastly reducing the area of dispute.  If the assets are of a sufficient value to draft the plan this way, much argument may be avoided.

When creating estate plans or trust documents it is important to consider the potential for litigation and whether it should be addressed prior to the death or after the death of the people creating it. While much can be done prior to death to resolve potential disputes and keep communications open, often issues only arise after the death of the trustees. During the estate planning stage, this is the time for you to consider what can be done to reduce the likelihood of estate and trust litigation.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and Mooney, A Partnership. For a free 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.

With respect to probate, Hank Moravec has over 20 years' experience as one of the best Los Angeles probate attorneys and Los Angeles probate litigation attorneys and is available should you need legal advice regarding your own or a family member's situation. For a consultation, You can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 or (818) 769-4221 to request a consultation.

The firm website is http://www.moravecslaw.com/. 

Trust Administrator Charged With Grand Theft, Perjury and Forgery In Ventura County California

We see numerous cases where there are allegations of wrongdoing in the administration of estates, however, a recent case turned criminal. On February 13, 2012, the Ventura County District Attorney's Office arrested Geoffrey Charles Sjostrom (DOB 09-25-1954), of Simi Valley, and charged him with nine felony charges, including grand theft, perjury, forgery, and the aggravated white collar crime enhancement. His bail was initially set at $200,000.

The criminal complaint alleges that Mr. Sjostrom was a friend of Francis J. Copland, who died in 2005. Before Mr. Copland died, he prepared a trust and a will, naming Mr. Sjostrom to administer both. In his estate documents, Mr. Copland left all of his property to family members. After Mr. Copland's death, Mr. Sjostrom failed to probate Mr. Copland's will and failed to properly account for Mr. Copland's trust property.

The probate court removed Mr. Sjostrom as trustee and ordered him to account for Mr. Copland's property. At that point, Mr. Sjostrom allegedly filed a sworn declaration claiming Mr. Copland had exhausted his bank accounts when he died. A successor trustee was appointed and discovered this information was false. The successor trustee found that Mr. Copland had money in various accounts when he died and that then trustee Mr. Sjostrom methodically took more than $250,000 from those accounts by means of check and ATM withdrawals. If convicted of all charges Sjostrom faces up to 11 years in state prison.

Thus, apart from the fiduciary duties that administrators have to beneficiaries and the estate, it is critical to remember that basic criminal law can come in play if there is misappropriation of funds or pleadings filed under the penalty of perjury.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney, A Partnership. For a free 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.

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. There is ample free parking adjacent to the firm's office.

The San Fernando Valley office is located at 4605 Lankershim Boulevard, Suite 718, North Hollywood, California 91602-1878.

Five Tips for Trustees

We represent trustees and being a trustee is a job with tremendous responsibility. Since trusts have become popular estate planning tools, we have seen numerous instances where they are traps for the uninformed trustee. The trust has specific wishes and demands and expects that they will closely followed, and it is the trustee's duty to make sure that happens.

Being a trustee can be a thankless job. It can subject even the most honest person with good intentions to litigation. If you are asked to serve as trustee, weigh your decision carefully since a trustee's duties may become complicated and mired in disputes.

Here are tips that we give our trustee clients:

1. Read the trust with the aid of a trust attorney. Since the trustee is required to administer the trust according to its terms, reading all the terms of the trust and understanding the terms is important. Not all trusts are the same and in many cases it is important that the trustee read the document carefully and be assisted by an attorney familiar with trust administrations.

2. Provide annual accountings. Certain trusts are specific as to what the trustee may receive as compensation (for example, a fixed fee or a percentage of the value of the assets). But some trusts only provide for "reasonable compensation" to be paid to the trustee which can mean different things to different people. To avoid problems, keep track of the hours you spend on trust-related duties. If there is a dispute regarding compensation, be prepared to show the actual amount of time devoted to trust matters.

California Probate Code Section 16062 requires a trustee to provide the beneficiaries with annual accountings that explain the trust's income and expenses. Once the accounting is finished, serve it on the beneficiaries immediately since service triggers the three-year statute of limitations. For example, if a trustee does not serve the accounting, the statute of limitations for filing a challenge will not begin to run.

3. Track inventory. Do not assume the trust is in effect because the documents have been signed. Make sure the assets in questions were actually transferred into the trust and vested in the name of the trustee. If this has not been done, exercise best efforts to bring the trust's assets in to the trust as soon as possible. Locate all potential trust assets, and determine whether any that have not yet been transferred to the trust can still be included.

4. Get good legal advice and insurance. The best protection against a potential lawsuit is to get good legal advice and to purchase an insurance policy covering errors and omissions. Without insurance coverage, a trustee's personal assets could be at risk if an unhappy beneficiary files a lawsuit.

5. Remain neutral. Lawyers such as myself who are asked to serve as trustees are often caught in the middle. On the one hand, I will serve the trustee's interest as set forth in the trust instrument. On the other hand, I must pay attention to the interests of the beneficiaries who probably include close family and friends of the trustee. The same applies to laypersons who serve in this capacity.

The trustee's actions will be watched and possibly challenged by any beneficiary who feels he or she was treated unfairly.

There is an exception to the need to remain neutral and that is when the trust is revocable (such as while the settlor is still alive). In that situation, the trustee's duty is to the settlor and not the remainder beneficiaries; the trustee should act only in the settlor's best interest. Estateof Giraldin, 199 Cal.App.4th 577 (2011).

If you are the trustee, it may not be possible to avoid litigation but if you follow these tips it will help you avoid litigation traps. If you are a trustee and need legal advice on how to fulfill your duties, feel free to contact us.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga & Mooney, A Partnership.
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.
The firm website is http://www.moravecslaw.com/.

The San Gabriel Valley office is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108.

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. 

Can My 401(k) Or IRA Be Part Of My Estate Plan? Can I Designate My Trust As A Beneficiary?

No longer are traditional pensions the norm. Today is the age of the 401(k), Roth 401(k), 403(b), 412(i), the SIMPLE, the SEP, the IRA, and the Roth IRA, among others. In our practice, we help our clients incorporate their varying investment vehicles into their estate plan and understand how to designate and change beneficiaries to be consistent with their estate and trust plans.

Common Question: Can I designate my trust, multiple individuals or favorite charity as a beneficiary in my 401(k) or IRA?

Answer: Yes, but each designation comes with separate issues which are discussed below. In addition, designations set forth in a will or trust are generally ineffective unless the proper designation forms have been completed with and submitted to the investment company.

What Do I Need To Bring To My Estate Planning Session Regarding 401(k), IRA And Similar Plans?

1. Bring copies of current 401(k), IRA and related investment plan statements. All the information you provide to us is confidential and attorney-client privileged. We need the statements so we can obtain:

(1) the present value of 401(k) or similar assets;

(2) the name of their managing institution;

(3) the name of the investment representative, if any; and

(4) respective contact information.

In addition, this helps us educate our clients about the true nature of their investment vehicle. Sometimes a client may believe they have a 401(k) but it is really an annuity, IRA or other investment vehicle, and possibly subject to different rules.

2. Contact your plan manager prior to our planning session and determine the current primary and alternate beneficiary of record. The proper contact is usually found in the upper right or left portion of the 401(k) statement.

3. Begin the process of determining the percentage of assets you want to allot to each beneficiary. This information will be finalized and provided before the estate plan is finalized.

Beneficiary Designation Form

If you recall, as a participant in a 401(k) or other plan, you probably designated a beneficiary using a "beneficiary designation form." Forms typically require the name, relationship and date of birth of the beneficiaries. Designating individuals, estates, trusts and charities is permissible.

And married participants designating someone other than their spouse will require spouse approval. However, each designation comes with separate issues, some of which are discussed below. Additionally, designations set forth in a will or trust are usually ineffective. Investment companies require original signatures and often signature guarantees from a financial institution (i.e., bank or brokerage); notarization may not be acceptable.

If you "never" received a beneficiary designation form should contact your investment representative for assistance. Beneficiary designation forms are often available online. However, execution in the presence of a professional (or review by a professional) prior to submission is highly recommended to ensure proper execution.

What Are The Default Rules In Your 401(k), IRA Or Other Plan?

Sometimes clients have simply not completed a designation form and relied upon the plans' default rules that are in place in each plan. General rules place the spouse first, children second and the estate third. Still, each client should research his or her plan's hierarchy before relying upon defaults. An uninformed decision could wreak havoc upon the estate and estate plan.

When relying on default provisions, we educate our clients so they understand both the legal and practical effects. For example, the definition of "spouse" affects plan participants differently. Someone in a long-term relationship or same-sex relationship (or marriage) may not benefit from a default definition, unless it specifically encompasses his or her set of circumstances.

Likewise, a perceived husband in a "common law marriage" might not receive his wife's assets if the default definition does not consider him a spouse. In either event, plan assets could pass from the deceased owner to someone other than the "intended" beneficiary. Thus, we help our clients understand default provisions before using them.

Multiple Beneficiaries, Allocations And Contingent Beneficiaries

One thing that can happen is that clients have designated less or even more than 100% of their IRA or 401(k) plan's assets. Active designation of beneficiaries requires disposition of 100% of the assets. Allotment in excess of 100% often results in the payment of proceeds in proportion to the proposed allocations.

For example, when two primary beneficiaries are named and each is supposed to receive 100% of the assets, each ultimately receives 50%. Also, when two or more primary beneficiaries are named and one predeceases the plan owner, all assets should pass to the survivor beneficiary.

Clients often do not know, or understand, this possibility. Therefore, clients looking for relief from the contractual standards should consider the use of estate-planning instruments.

In addition, failure to name contingent beneficiaries results in distribution pursuant to default provisions. Without designations, assets are paid to the deceased participant's estate unless otherwise determined by law. Allocations up to 100% are required. Also, the death of one of the two or more contingent beneficiaries leaves the survivor receiving all assets.

Designating Your Trust As A Beneficiary

Participants with a trust, of any kind, can designate it as the beneficiary by inserting the trust name in the form. Designating a trust allows the plan participant to:

(1) avoid probate or administration delays and expenses;

(2) possibly enjoy creditor protection of assets; and

(3) further the trust's stated purpose using additional funds.

Depending on the terms of the trust a lump sum distribution may be required, causing a taxable event. Each situation differs.

A trust holding net, lump sum proceeds will have flexibility in management and investment. Alternatively, a trust that is eligible to continue the plan or roll it over may defer taxable gains, albeit while investing in the respective plan's products.

Conclusion

Clients participating in 401(k), IRA and other plans must make informed decisions when designating their trust, estate, charities or individuals as beneficiaries. At our firm, we take the time to review the effect of beneficiary designations with our clients.

We inform them of the positives and negatives of defaults, specific designations or using a combination of both. We discuss what happens, for example, if beneficiaries predecease the plan owner, under certain default situations, or if specifically named. We review distribution under those circumstances. We remind our clients of the ability to name trusts and charities as beneficiaries.

We handle the technical and legal aspects. Our clients do not need to become expert in these issues or feel bogged down in them since we are the experts. Instead, we focus our clients on their intent and provide them with the methods of achieving their goal.

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 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.

What Can Happen When Beneficiaries Fight Sale Of Asset Or Proposed Distribution In Bad Faith?

A recent California Court of Appeal decision serves as a reminder that beneficiaries need to consider the downside if they decide to oppose the sale of an asset and proposed distribution. In other words, beneficiaries need to analyze whether their opposition to a proposed sale or distribution is "objectively" in "good faith."

An experienced probate litigation attorney, trust and estate attorney or beneficiary attorney can often help beneficiaries see the "objective" viewpoint. Sometimes, however, emotions and long-standing disputes get in the beneficiaries' way of seeing what is best for the estate.

In December 2009, the California Court of Appeal published the decision of Rudnick v. Rudnick, 09 S.O.S. 6928. A copy of the decision can be found at the court website: http://www.courtinfo.ca.gov/opinions/documents/F056587.PDF

In this case, three of the beneficiaries of the Rudnick Estates Trust (RET), Philip Rudnick, Robert Rudnick, and Milton Rudnick, hold a minority interest in RET. We will call these three the "minority beneficiaries." Oscar Rudnick is the trustee of the RET.

The RET was created in 1965 by the beneficiaries of 11 separate trusts, which each owned an undivided interest in various real property and business entities and were managed as an integrated enterprise. Its purpose was to liquidate the trusts’ assets and distribute proceeds to beneficiaries, and any sale or disposition negotiated by the trustee was subject to approval by a majority of beneficiaries.

The litigation in this case arose after the majority of the RET beneficiaries approved the $48 million sale of the RET‟s principal asset — the 68,000-acre Onyx Ranch, located in the Sierra Nevada Mountains just outside of Bakersfield. The trustee Oscar Rudnik petitioned the Kern County probate court for instructions requesting approval of both the sale and the proposed distribution.

The three minority beneficiaries opposed this petition and claimed that the Onyx Ranch was worth substantially more than $48 million, that the trustee violated his fiduciary duty and that the transaction violated the terms of the RET.

The probate court concluded that the minority beneficiaries' opposition was primarily for the purpose of causing unnecessary delay in the sale and was in bad faith. The probate court then awarded approximately $226,000 in attorney fees and costs to the trustee and ordered these fees charged against the minority beneficiaries' future trust distributions. The probate court reasoned that it was unfair to burden the majority of beneficiaries who approved the sale by a vote of 60 percent.

The Court of Appeal upheld the order of attorneys' fees on the ground that the probate court, as a court sitting in equity, had the authority to charge the awarded fees against the minority beneficiaries' trust interests. The decision sets forth the law as follows: “[W]hen a trust beneficiary instigates an unfounded proceeding against the trust in bad faith, a probate court has the equitable power to charge the reasonable and necessary fees incurred by the trustee in opposing the proceeding against that beneficiary’s share of the trust estate.”

Posted by Henry J. Moravec, III. Henry (Hank) Moravec is a partner at Moravecs, A Professional Law Corporation in San Marino, California, a suburb of Los Angeles. He focuses his practice on Estate Planning, Probate Litigation, Trust Administration, Beneficiary Representation, Trustee Representation, Tax Law, and Nonprofit Law.

Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

Recent California Decision Highlights Trustee's Breach Of Duties And Misconduct When Trustee Is Also A Beneficiary

A recent California Court of Appeal decision from Division 4 highlights what can happen when a trustee who is also a beneficiary commits misconduct and breaches fiduciary duties to the other beneficiaries. The case is Chatard v. Oveross, Case No. B213392.

In sum, the Chatard case held that a trust beneficiary whose misconduct as trustee harmed the trust cannot rely on a spendthrift provision to protect her interest from other beneficiaries. The Court of Appeal reasoned that damage from the breach of duty would otherwise be sustained by the others, and held that they could hold liable a spendthrift trust beneficiary’s distributive share for a surcharge imposed due to her misconduct as a trustee.

In other words, when the trust beneficiary was held liable to the other beneficiaries for her malfeasance as a trustee -- the trustee's share of the estate (which she was to receive as a beneficiary) could be impounded to pay the over $433,000 in damages and legal fees assessed against her.

Grown Adult Child Served as Trustee

Joyce Chatard began serving as a trustee of her family’s trust in 2003 after the death of her mother, Vera Chatard, who created the trust in 1989 with her husband Frederic Chatard. The trust included a "spendthrift provision", by which beneficiaries could not assign or alienate their own interests, and those interests were not subject to the claims of beneficiaries’ creditors.

When Frederic Chatard died in 1995, the trust divided into two subparts for his wife’s benefit, and after her death their three adult children—Joyce, David and Jeanee Chatard—each received one-quarter of income and principal from one of the subparts.

The remainder of the subpart was to be split between the four children of deceased sibling Douglas Chatard when each reached the age of 30, while the other subpart was split into equal thirds among beneficiaries other than Joyce Chatard, subject to the same age restriction.

Disputes Over Trust Administration

After disputes arose over Joyce Chatard’s administration of the trust, other beneficiaries filed a lawsuit in Los Angeles County Superior Court. Judge Aviva K. Bobb, who has since retired, imposed a surcharge of more than $333,000 on Ms. Chatard for breaching her duty as trustee and an award of more than $100,000 for other beneficiaries’ legal fees and costs.

Judge Bobb held that Ms. Chatard:
(1) failed to rent or pay rent on residential property she occupied that was owned by the trust;
(2) awarded herself excessive compensation;
(3) inappropriately used trust assets to pay personal expenses;
(4) unnecessarily incurred attorney fees opposing well-founded petitions to remove and surcharge her for mismanagement; and
(5) failed to distribute her siblings’ shares of assets within a reasonable time.

Relying on Judge Bobb's judgment, an interim trustee then sought to reduce Joyce Chatard’s share by the amounts of the surcharge and attorney fees. In an interesting argument, Ms. Chatard contended the surcharge could not be taken from her share because of the spendthrift provision.

Former Trustee And Beneficiary Ms. Chatard Unsuccessfully Appeals

Judge Bobb rejected Ms. Chatard's argument and concluded that the provision was inapplicable and granted the interim trustee’s request. Ms. Chatard appealed and the Court of Appeal affirmed Judge Bobb's ruling. The Court of Appeal's decision explained its opinion as follows:

The justice explained: “Reasonably construed, the language of the spendthrift provision here suggests protection against the claims of persons foreign to the trust—‘creditors, or others’—who might use a writ of ‘attachment, execution or other process of law’ to satisfy a claim from a beneficiary’s interest. The language does not reasonably refer to the claims of fellow beneficiaries relating to a breach of trust, which might be satisfied, in the exercise of the probate court’s equitable power, by surcharging the interest of the trustee-beneficiary in the distribution of trust assets.

“In short, absent clear language to the contrary, we decline to read the spendthrift clause so as to permit the perverse result of depriving the court of its equitable power to surcharge the interest of dishonest trustee-beneficiary to compensate other beneficiaries for breaches of the trust.”

A copy of the decision can be found at http://www.courtinfo.ca.gov/opinions/documents/B213392.PDF

Attorney Commentary: This case is a reminder of what can happen when a trustee either (1) does not hire an attorney to represent and advise him or, at least initially or (2) hires the attorney and refuses to follow the attorney's advice because he or she is caught up in negative family dynamics (or some other issue) and is unable to think clearly and objectively.

If you are a trustee beneficiary it is important to remember that you owe fiduciary duties to the other beneficiaries and can be held liable for not performing those duties properly. Thus, I recommend hiring an attorney at the beginning to advise the trustee since many of the easiest mistakes to avoid are made in the first several months of an administration.

For those engaging in estate planning, this case illustrates why appointing one grown child as a trustee over another adult child's trust can be a disaster and create significant litigation. It can also be no problem depending on the person appointed, whether they are equipped to perform the duties and whether there are underlying family dynamics that could be problematic later.

Posted by Henry Moravec, III. Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/

Lesson for Trustees: Court Allows Recovery from Third Party for Ex-Trustee’s Breach of Fiduciary Duty

In a very interesting case and one that involves a little used legal theory called de son tort, the California Fourth District Court of Appeal in King v. Johnston ruled that a trust beneficiary could recover from a third party who helped a former trustee breach the trust, even though a successor trustee had been appointed. This ruling was issued in November 2009.

The Court of Appeal held that a woman had standing to sue her grandfather’s stepdaughter for inducing his widow—the stepdaughter’s mother and the trustee—to transfer trust property and mortgage it for her daughter’s benefit, and for then holding herself out as trustee after her mother’s death. This was a reversal of the trial court ruling.

The case is now remanded to the trial court and it has been instructed to rule for Tammy King on her claim that Barbara Johnston, as a third party, actively participated in the breach of trust by Lenora Gilbert, widow of trust settlor Arthur Gilbert.

De Son Tort - Common Law Principle

The Court of Appeal also directed the trial court to determine whether King could show that Johnston was liable as a trustee for breaches after Lenora Gilbert’s 2002 death as a trustee de son tort. The common law theory allows for those who wrongfully hold themselves out as a trustee and exercise authority over property to be treated as trustee and sued for any breach of duty.

King filed suit as a beneficiary, alleging Johnston induced her mother to transfer a piece of trust property to herself, without consideration, and then induced her mother to mortgage the property for a personal loan.

The bank eventually foreclosed on the property, and Lenora Gilbert lost title. King further alleged that Johnston took money and rents that belonged to the trust and used them for her own personal benefit.

She alternatively argued that Johnston had essentially taken over the role of trustee while her mother was still alive but in failing mental and physical health, and that Johnston’s actions during this period of time and after Lenore Gilbert’s death made Johnston trustee de son tort and liable for failing to properly care for and/or recover trust property.

Lack of Standing

After a bench trial, Imperial Superior Court Judge Jeffrey B. Jones ruled that King should recover nothing from Johnston because she failed to show a conspiracy between Johnston and her mother or establish that Johnston was a de facto trustee before her mother’s death, and because King lacked standing to sue Johnston without joining the current trustee—Lloyd Gilbert, Arthur Gilbert’s son—in the action.

He also concluded that Johnston had unduly influenced her mother to breach the trust and had “acted as trustee” before Lloyd Gilbert accepted the role, but ruled that King could not recover under the theory because she lacked standing.

He further declined to award King any relief on her claim that Johnston acted as trustee after her mother’s death because Lloyd was “actively recouping” the value of the trust rental income that Johnston had wrongfully retained by withholding her share of the trust distributions.

King appealed, and the Court of Appeal rejected Jones’ determination on standing.

The Court of Appeal opinion provides: “If it is true that ‘the right of the beneficiaries against the [third party] is a direct right and not one that is derivative through the trustee' . . . we see no reason why an independent claim that exists prior to the appointment of a successor trustee should be extinguished upon that appointment, and [Johnston] has offered no reason why the appointment of a successor trustee should serve to wipe out a beneficiary’s ‘direct right’ against a third party.”

Necessary Findings

The Court of Appeal also provided that the trial court erred in failing to consider and make the necessary findings as to whether Johnston’s conduct was sufficient to hold her her liable as a trustee de son tort for some or all of the trust property and, if so, whether she breached her duties and what relief would be appropriate.

The opinion states: “[O]ne should not be permitted to assume the character of a trustee and wrongfully benefit from doing so without also having to assume the responsibilities of a trustee."

Attorney Comments: This opinion and the legal theory of this case is important for trustees and beneficiaries to understand, but not just because of the legal theory. This case arose because of an extremely common factual pattern -- an elderly surviving spouse, who has more than one child (which children are not close, and do not particularly get along), the situation where the elderly surviving spouse is the trustee of a trust created by the couple jointly, and, finally, the situation where one of the children is in closer proximity to the surviving spouse.

To begin with, although it is not immediately apparent from the opinion, when one spouse dies it is typical in most estate planning documents that the deceased spouse's property, his or her separate property and one-half of the community property, is held in a trust which becomes irrevocable. The effect of the "irrevocability" is that the contingent beneficiaries of the trust (i.e., where the assets go upon the death of the surviving spouse) are sometimes fixed. In plain English, the plaintiff in this case wanted a full 30% of all of the assets as of the death of the first spouse to die, and basically felt that any transfers of any of those assets between the first and second death were improper.

It is not at all clear that this is a justifiable argument (based upon the equities), however, as the surviving spouse may well have no experience at all in acting as a trustee we often see that during the period after the first spouse dies, many trust requirements, from filing tax returns to other things, are simply ignored or not properly accomplished. So, the argument may have no equitable basis, but may be a very good argument based upon technical trust law.

This is how a carefully crafted estate plan becomes completely subject to the "spin applied to the facts," as it were. The surviving spouse may not realize that he or she cannot make gifts of property out of the trust estate, at least without observing certain formalities. Perhaps the child who lives closer is actively assisting the surviving spouse, after all, one person's "undue influence" is another person's "well deserved gift." There is no way of telling, even from a 30 page legal opinion, which of the beneficiaries is factually correct.

The one thing that is clear is that despite the almost certain inclusion of a no-contest clause in the operative documents, this family is now going through two trials and an appeal.

Had the surviving spouse consulted a lawyer during the time these transfers were made, all of the litigation could have been avoided.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravecs, A Professional Law Corporation. For a free 30 minute consultation (telephonic or in person), you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210.

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

With respect to probate, Hank Moravec has over 20 years' experience as one of the best Los Angeles probate attorneys and Los Angeles probate litigation attorneys and is available should you need legal advice regarding your own or a family member's situation. For a consultation, You can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210 to request a consultation.

The firm website is http://www.moravecslaw.com/. The firm is located at 2233 Huntington Drive, Suite 17, San Marino, California 91108. There is ample free parking adjacent to the firm's office.