Saturday, December 26, 2009

Congress Has Adjourned Without Making Changes In Estate Tax Law: Evaluating Your Estate Plan

Congress has adjourned for the year without making any changes in that tax law. Statements have been issued to the effect that the Senate will take up Estate Tax reform in early January, so the issue is still up in the air.

It seemed incredible that Congress would allow some unknown number of days to elapse in January of 2010 during which there would be "no estate tax" yet pass a retroactive bill later.

The concept of "retroactive tax law" is not a strange one, it actually happens almost every year. Most of the time, though the "retroactive" laws apply to the income tax, and such bills benefit taxpayers. This year, there are a significant number of deductions which expire on December 31, 2009 and have not been extended to 2010. Most are expected to be extended "retroactively" sometime in the first quarter of 2010, but most people will pay no attention.

Similarly, at the level of tax regulations (one step below actual statutes or, to put it another way, at the level of "interpretation" of existing statutes) it is common for the Treasury Department or the IRS to issue a formal Notice which states, for example that the tax consequences of a certain type of transaction are under review. Later, often several months to more than half a year later, actual regulations are issued which apply to transactions which occur after the date of the formal Notice.

But the Federal Estate Tax is not a regulation, it's an actual statute, and to politicians on both sides as a concept it appears to draw a strange mix of importance and casual disregard. For example, in early December, the House of Representatives passed an Estate Tax Bill which provides that the current law would remain in effect. The House could have included this bill as part of a mandatory Defense Funding Bill (which I understand had to be passed in 2009) but, apparently because the House figured that the Senate was busy with Health Care, decided not to do so. So it's important enough to pass a bill, but not important enough to actually get it done before the end of 2009.

If it's considered funny, at some level, to make fun of heirs who are greedily waiting for an inheritance, the concept of no estate tax for a defined period of time takes this area of "humor" to a whole new level. The jokes are already starting to flow, at the Huffington Post, Steven Clifford weighs in with a list of things that parents ought to take a second look for now that there is no estate tax in a couple of days, including children removing the steering wheels on their cars or sending texts to parents while the parents are driving.

So as of now, the law remains that the tax will disappear in 2010 before reverting in 2011 to the old rate of 55 percent for estates worth more than $1 million. Thus, if Congress does not act, the repeal is only for 2010. After that, the tax is to be reinstated at pre-2001 levels.

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt. In addition, under today’s law, when heirs sell inherited property, no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner. (If your parents pass on stock worth $2 million that they bought for $200,000, and you sell it for $2 million, you owe no tax on the $1.8 million gain.)

But the big issue today is not the status quo, its retroactivity, what it means, and how it would work. An estate does not have to file an Estate Tax Return and pay the estate tax until nine months after a person’s death. The Senate could wait, then, until the summer to decide on the estate tax and make it retroactive to the beginning of the year.

This does not mean retroactivity will be easy to navigate. Many estate plans name individual relatives (i.e., non-accountants, non-tax lawyers, and certainly "non" Trust Companies) as the executors of Estates or the Trustees of Trusts. Most, if not effectively all, of these individuals are unaware of their personal liability for estate taxes owed. It's almost a statistical certainty that some individual trustee will try to distribute all assets to "beat" the enactment of any law, only to discover that when the law is passed later that they have liability.

It will be an interesting January.

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/

Thursday, December 10, 2009

Lesson For Beneficiaries Opposing Sale Of Assets Or Suing Trustee: Act In Good Faith. Court Upheld $226,000 Fee Award Against Losing Beneficiaries

There are times when beneficiaries can challenge the sale of an asset but it is important to determine whether such a challenge is in good faith. A recent California case shows what happens when a probate court determines that the beneficiaries are opposing the sale in bad faith and that their lawsuit against the trustee is in bad faith. The beneficiaries ended up being charged with $226,000 in attorneys' fees and had their future trust distributions reduced by that amount.

Our firm handles many estate disputes but it is always important to assess the risks and benefits. In addition, it is important to not let emotions alone drive the litigation. This recent case is a lesson on how beneficiary disputes can go wrong. In a case decided on December 2, 2009, Rudnick v. Rudnick, the California Court of Appeal held that
a probate court had authority to charge approximately $226,000 in attorney fees generated defending a trustee’s proposed sale of an asset solely against the shares of the minority of beneficiaries who brought the challenge in "bad faith."

The probate case was in Kern County. This was a complicated trust (RET) which 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 trust was intended to expire in 1974, but the Court of Appeal ruled in 1999 that it would continue to exist for a reasonable time until either the assets were sold or a majority of beneficiaries elected to terminate it. Trustee Oscar Rudnick petitioned the probate court for instructions on consummating the sale to real estate investor CIM Acquisition Group and a proposed distribution after a majority of RET beneficiaries (60 percent) gave their approval.

Thethree minority beneficiaries (Philip Rudnick, Robert Rudnick and Milton Rudnick) brought their challenge when they claimed that the Rudnick Estates Trust’s principal asset—the 68,000-acre Onyx Ranch, located in the Sierra Nevada Mountains just outside of Bakersfield—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 minority beneficiaries sued the trustee in probate court.

After extensive litigation, Kern Superior Court Judge Robert S. Tafoya made the award against the minority beneficiaries (Philip Rudnick, Robert Rudnick and Milton Rudnick) after concluding it was unfair to burden the majority of beneficiaries who approved the sale by a vote of 60 percent.
Judge Tafoya also determined that their opposition was primarily for the purpose of causing unnecessary delay and in bad faith.

Reasoning that a Kern County judge had the equitable power to make the award, the court upheld an order reducing the shares of three beneficiaries who sought to keep the trustee from closing the $48 million sale of a ranch on time. Judge Tafoya, concluding that the minority beneficiaries’ opposition was unfounded, awarded approximately $226,000 in attorney fees and costs to the trustee and ordered the fees charged against the minority beneficiaries’ future trust distributions.

The beneficiaries appealed, but Justice Bert Levy said that Judge Tafoya had authority for the award under the broad equitable powers that a probate court maintains over the trusts within its jurisdiction. The decision written by Justice Levy set forth the rule of 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.”

In an unpublished portion of the opinion, Justice Levy also concluded that Judge Tafoya did not abuse his discretion in making the attorney fees award. “[T]he court determined that appellants had demonstrated their ‘intent to derail any sale approved by the majority,’” he said. “In the court’s opinion, appellants had made their position clear, ‘namely that they oppose any sale of the Onyx Ranch unless it involves wind energy development’ and hoped to disrupt the sale by preventing respondent from closing by the due date…." Justice Levy concluded that “[o]n this record, it cannot be said that there was no reasonable basis for the probate court’s ruling.

Attorney Commentary: This case is a lesson for all beneficiaries to consider when deciding to challenge the sale of an asset especially where the majority of beneficiaries has approved the sale. The downside of filing this lawsuit against the trustee in this case was paying the attorneys' fees for their own attorneys and for the other side. An expensive lesson.

We aggressively represent our clients but it is important to remember that if we are representing the trustee that there are fiduciary duties to the beneficiaries. Similarly, if we represent the beneficiaries we need to ensure that there is evidence demonstrating good faith if we decide to challenge the trustee's actions in court.

Posted by Henry (Hank) J. Moravec, III, a partner at Moravec, Varga and 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 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.

Friday, December 4, 2009

House Bill Extends Current Estate Tax - Will Legislation Make It Through Senate?

With a year-end deadline approaching, the House moved to prevent a repeal of the estate tax from taking place next year, voting instead to approve a permanent extension of the current levy.

But the legislation may not make it through the Senate. That means the tax could lapse entirely next year, based on the provisions of Bush-era legislation.

The House bill exempts the first $3.5 million of an estate, or $7 million for married couples, and taxes inherited wealth above that at 45%, the same as the 2009 rate. It passed by a vote of 225 to 200, largely along party lines, with most Democrats in favor and Republicans in opposition.

If the legislation isn't completed before January 1, the estate tax would vanish in 2010, which is how the Bush-era tax cuts were designed to work. If the matter remained unaddressed, the tax would return in 2011 at the old Clinton-era rate of 55%.

In 2001, when the current law was adopted, Republican demands for a permanent repeal were beaten back by concerns over the deficit, forcing them to settle for a one-year repeal instead. This is why we are facing this issue now.

As an estate planner, I do not like the potential for wild swings in tax rates. A permanent resolution of this tax issue by the House would allow families and business owners to plan with certainty rather than this unusual and unpredictable tax policy that has been in effect since 2001.

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/

Tuesday, December 1, 2009

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/

Thursday, November 19, 2009

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.

Monday, November 16, 2009

Estate Planning Tool: Using "Caregiver Contracts" For Family Members Who Take Care Of Elderly Relatives

In prior posts, I have discussed minimizing the risk of probate litigation between family members. Such disputes often arise when parents or relatives decide to leave unequal inheritances to the beneficiaries, sometimes to reward the person who has taken on significant family caregiving duties.

Studies show that nearly 25 percent of adult Americans provide long hours of voluntary care for older or sick family members and friends. These numbers are likely to grow as the population ages and more people live longer. According to an AARP study, family caregivers provide more than 20 hours of care a week and the average length of time spent providing care is 4.3 years. Many caregivers must balance family duties with their day jobs with many having to make adjustments to their work life, including taking time off for doctor appointments or even giving up their jobs entirely.

The October 21, 2009 online edition of the Wall Street Journal had an article on this topic entitled "Getting Paid To Take Care Of Mom Or Dad" which raises the increasingly common idea of families entering into caregiver contracts or arranging payment for care. The article is at:

These payment arrangements are increasingly becoming a part of estate planning. Rather than leave uneven inheritances for their heirs, those that need care are sometimes entering into formal "caregiver contracts," in which adult children or other relatives are hired, for modest salaries, to take care of elderly or disabled family members.

These arrangements, also called personal-service or personal-care agreements, help reward family members for the significant amounts of time, effort and money they often spend taking care of an elderly relative. They also can help reduce the size of a person's estate and may prevent battles between siblings and other family members. As I often emphasize, communication with other siblings or relatives about these contracts is important in order to help minimize family tensions later.

There's another key reason for this arrangement. It is more difficult to qualify for Medicaid/Medi-Cal long-term-care coverage where there have been outright gifts to family members. The rules preventing outright gifts are meant to prevent seniors who have the means to pay for their own care from obtaining Medicaid/Medi-Cal, which is intended for poor patients.

However, if set up properly, caregiver contracts shouldn't be considered gifts to children because the patient is receiving a real service in return. Medicaid isn't likely to disqualify a senior for making those payments to his or her children or relatives if you there is an arm's length, commercially reasonable contract, in writing, ahead of time.

To establish that the contract is commercially reasonable, you should specify what duties the caregiver is expected to perform and then contact local home-care agencies or geriatric-care managers to establish the market value of those services in your area. Such duties can vary from payment of bills, household management, preparing meals to arranging doctors appointments and driving for social outings. Depending on the services provided, the pay can range from $15 per hour to $100 per hour. Some families choose to pay a discounted rate to family caregivers, which is also acceptable.

As with all estate planning documents, it is preferable to set up the caregiver contract when the incapacitated adult is of sound mind, as the arrangements can become far more complicated if a person acting as power of attorney signs the contract.

The contract should also specify whether the payment will be done in one upfront lump sum based on the senior's life expectancy --a technique often used for Medicaid/Medi-Cal-planning-- or in regular weekly or monthly payments. It's also prudent to create safeguards to prevent a caregiver from taking the money and not performing the services, such as depositing the upfront lump sum payment into an escrow account to be paid over time.

There are also tax consequences to consider. The compensation is considered ordinary income, so the caregiver has to pay income taxes on the payment. Also, depending on how the contract is structured, Social Security and other payroll taxes may have to be withheld.

At the same time, the estate planning attorney and family should research whether there are other sources of funding you can use to pay family members. Some long-term-care insurance policies, such as those that pay lump-sum "indemnity" benefits, may be used to pay family members who provide care. This is the time to see if you already have a policy or whether you should consider obtaining one. The coverage may allow you to pay family members for their caregiving services.

Where appropriate, we generally set up these contracts as part of a more-comprehensive estate plan, including power-of-attorney documents, trusts and pourover wills, but where there is an existing trust, it can be reviewed and amended to provide for this caregiver arrangement.

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/

Saturday, November 14, 2009

Frequently Asked Questions About Including Provisions For Pets In Trusts

Over two-thirds of pet owners treat pets as members of their families while 12% to 27% of pet owners include their pets in their wills and/or trusts. Many pet owners want to make sure that even if they can't take care of their pets due to death or disability, those animals will be provided for and well cared looked after.

Sometimes people make informal arrangements with a relative or friend to care for their pets. Sometimes this can work out but things can go wrong. What if the new owner doesn't have the money to provide care for your pet? What if a there's a dispute as to who should get the pet? What if something happens to the new owner? What if the new owner's pet and your pet don't get along?

If you don't have a will or trust, your pet will go to your next of kin as determined by state law. Many pets end up in shelters if the next of kin is unable or unwilling to care for the pet.

To avoid problems and be assured that your pet will be cared for after you die or are disabled, consider making more formal provisions for your pet's care. Remember: you can't leave money in your will to your pet. The law treats pets as property and you can't leave property to other property (your pet).

However, one thing you can do to make sure your pet will always be well provided for is to make your decision legally binding by including it in your revocable living trust and pourover will. The laws of the state of California allow for trusts for the care of pets or domestic animals for the life of the animal. In California, this is governed by California Probate Code Section 15212.

For those who reside outside California, a summary of pet trusts state by state is on the Humane Society website at: http://www.americanhumane.org/assets/docs/protecting-animals/PA-laws-pet-trusts.pdf

In a prior posting, I discussed the amendment in July 2008 of California's permissive pet trust statute to make it a more modern statute with enforceable provisions in post entitled "Protecting Your Pets in California":

Making provision for your pets in your will and trust is becoming more common. Some people have bought "pet trusts" online while neglecting to take care of their own estate planning. In estate planning for our clients, it is relatively simple to make a provision for your pets. Here are some frequently asked questions and things to think about when you want to make a provision for your pet in your trust and pourover will:

1. Do you to want to be sure your pet receives proper care after you die or in the event of your disability?

If so, as part of your trust you will want to give enough money or other property to a trusted person or bank (the “trustee”) who is under a duty to make arrangements for the proper care of your pet according to your instructions. The trustee will deliver the pet to your designated caregiver (the “beneficiary”) and then use the property you transferred to the trust to pay for your pet’s expenses.

2. How do I decide on the individual to name as the beneficiary (my pet’s caregiver)?

Selecting the caregiver is obviously important. You should name at least one, preferably two or three, alternate caregivers in case your first choice is unable or unwilling to serve as your pet’s caregiver. In addition, to avoid having your pet end up without a home, consider naming a sanctuary or no-kill shelter as your last choice. Here are some things to consider in making the decision on who to name as caregivers:

· Is he or she willing to assume the responsibilities associated with caring for your pet?

· Is he or she able to provide a stable home for your pet?

· How will his or her family members (including pets) get along with your pet?

3. What type of instructions can you leave in the trust provisions relating to your pet?

You can have significant control over your pet’s care after you pass or are disabled. For example, you can specify who manages the property (the trustee), the pet’s caregiver (the beneficiary), what type of expenses relating to the pet the trustee will pay, the type of care the animal will receive, what happens if the beneficiary can no longer care for the animal, and the disposition of the pet after the pet dies.

Before you create the provision for your pet, think about specific instructions you may want to specify for the pet's caregiver (beneficiary):

· What are the pet's food and diet; daily routines; grooming; toys; exercise and socialization needs?

· What are the pet's medical needs? Who is the preferred veterinarian and boarding place?

· What amount of compensation, if any, do you want to pay the caregiver? Will the caregiver agree to care for your pet without compensation?

· How do you want the caregiver to document pet expenditures for reimbursement?

· Do you want the trust to pay for liability insurance in case the animal bites or otherwise injures someone?

· How do you want the trustee to monitor caregiver’s services?

· How can the trustee identify the animal (I have seen one case where a replacement animal was obtained so the caregiver/beneficiary continued to receive compensation from the trust)

· How do you want the disposition of your pet’s remains, such as burial, cremation, memorial, and so on, to be handled?

4. What is the advantage of an inter vivos or living trust in terms of taking care of my pet?

An inter vivos trust takes effect immediately and thus will be functioning when you die or become disabled. This avoids delay between your death and the property being available for the pet’s care. An inter vivos trust, however, has start-up costs and administration fees.

A testamentary trust, in contrast, is less expensive in some ways because the trust does not take effect until you die and your will is declared valid by a court (“probating the will”). However, there may not be funds available to care for the pet during the gap between when you die and your will is probated. In addition, a testamentary trust does not protect your pet if you become disabled and unable to care for your pet.

5. How do I "fund" my pet trust?

First, what is "funding"? Funding means to transfer money or other property into your trust for the care of your pet. Without funding, the trustee will not be able to provide your pet with care if you become disabled and after you die.

You need to consider a number of facts in deciding how much money or other property to transfer to your pet trust. These facts include:

· The type of animal and its life expectancy (especially important in case of long-living animals such as parrots);

· The standard of living you wish to provide for your pet including providing for care when the caregiver is out-of-town;

· Any medical conditions, payment for vet insurance, and your desire to provide for future medical treatment;

· Whether the trustee is to be paid for his or her services;

· Adequate funds should also be included to provide the animal with proper care, including boarding for times the caregiver is on vacation or unable personally to provide for the animal.

· Consider the size of your estate and how you can fund the care of your pet. If your estate is sufficiently large, you could transfer sufficient property so the trustee could make payments primarily from the income and use the principal only for emergencies.

On the other hand, if your estate is small, you may wish to transfer a lesser amount and anticipate that the trustee will supplement trust income with principal invasions as necessary. Or you may consider funding with life insurance or direct transfers of property (such pay on death accounts of annuities, bank accounts, and retirement plans). Be sure to consult with your estate planning attorney about the correct way of naming the trustee of your pet trust as recipient of these funds.

· Consider whether transferring a large amount of money or other property to your pet trust will encourage your heirs and beneficiaries to contest the trust.

· Consider funding with life insurance. This policy may be one you take out just to fund your pet trust or you may have a certain portion of an existing policy payable to the portion of the trust for your pet. This technique is particularly useful if you do not have or anticipate having sufficient property to transfer for your pet’s care. Life insurance “creates” property when you die which you may then use to fund your pet trust. Be sure to consult with your estate planning lawyer about the correct way of naming the trustee of your pet trust as a beneficiary.

· Consider making the caregiver or trustee different than the “remainder beneficiary” (the person or entity who will receive any remaining trust property after your pet dies). By not making the caregiver the remainder beneficiary, the caregiver has more of an an incentive to keep your pet alive.

· Consider what would happens if the trust runs out of property before your pet dies. If no property remains in the trust, the trustee will not be able to pay for your pet’s care. Perhaps the caregiver will agree to continue to care for your pet with his or her own funds. If the caregiver is unwilling or unable to do so, you should indicate in your pet trust the person or organization to whom you would like to donate your pet.

6. How do I provide for my pet in my estate plan?

Consult with an attorney who specializes in estate planning. If you want to ensure that your pets are properly cared for, you should address these issues sooner rather than later. It is common to put these type of projects off and we are skilled at helping our clients begin and go through the estate planning process including provisions for pets. By considering and answering the questions above, you will be well-prepared to work with an estate lawyer.

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.

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.

The firm website is http://www.moravecslaw.com/. The firm is located at 2233 Huntington Drive #17, San Marino, CA 91108. There is ample free parking adjacent to the firm's office.
The firm is a boutique estates and trust law practice specializing only in Estate Planning, Probate, Trust Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law.

The office is located in San Marino, California, a suburb of Los Angeles in the San Gabriel area located 20 minutes from downtown Los Angeles. The firm represents clients throughout California and its attorneys appears in probate court throughout Southern California.

Saturday, October 24, 2009

Will The Estate Tax Disappear: WSJ Article And Our Prediction

The Wall Street Journal has an October 23, 2009 article entitled "Will The Estate Tax Disappear? Changes in the Way Inherited Assets Are Valued Could Cost Heirs and Cause Hassles."

A copy of the article can be found at: http://online.wsj.com/article/SB10001424052748704224004574489581033118194.html?mod=WSJ_hpp_sections_personalfinance#articleTabs%3Darticle

By way of background, in 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was enacted to provide for a 10 year federal estate tax phase-out plan. From 2002 through 2009, the portion of an estate exempt from federal estate tax was gradually increased from $1 million to $3.5 million and the federal estate tax rate decreased from 50% to 45% until the magical year of 2010 when the federal estate tax would disappear for one year.

Under current law, the federal estate tax is scheduled to reappear in 2011 with a much lower federal estate tax exemption of $1 million and a maximum federal estate tax rate as high as 55%, unless legislation is passed to change the law. Notably, the federal gift tax remains in existence in 2010, despite the non-existence of the federal estate tax, with gift tax rates equal to the highest individual income tax rate (expected to be 35% in 2010).

The point raised in the WSJ article is the "step-up in cost basis" that all assets receive when an owner dies. The way the law is currently written, if the estate tax goes away, so does the step-up in cost basis. According to the article, that's where the problem lies.

Step-up means that the property heirs receive is valued as of the date of death. The WSJ article gives an example where if Grandma leaves a grandchild stock selling for $75 a share that was bought in 1970 for $2 per share -- the heir's "cost basis" in the stock is $75. If the grandchild then sells the stock for $80, the taxable gain is $5 per share.

However, if Congress fails to extend the current system for 2010, then at the owner's death all assets would retain their original cost, called "carry-over basis." Under this system the heir's stock would have a cost basis of the original $2 per share rather than $75. If he then sells the stock at $80, the taxable gain would be $78 instead of $5—a huge difference.

Now for the bigger question: is Congress going to allow the estate tax to disappear in 2010?

Although the House and Senate have introduced numerous bills addressing federal estate tax reform, the four main bills to watch are (1) the Pomeroy Bill (H.R. 436), (2) the Baucus Bill (S. 722), (3) the Mitchell Bill (H.R. 498) and (4) the McDermott Bill (H.R. 2023). Further, another source of possible changes to the federal estate tax can be found in the Treasury’s recently released General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals (the “Greenbook”), which reflects the Obama Administration’s revenue proposals and contemplates federal estate tax reform.

Although nothing is certain -- except death and taxes -- it is anticipated that Congress will pass legislation before the end of the year to continue the current federal estate tax exemption of $3.5 million per individual and a maximum federal estate tax rate of 45% for one more year until a more permanent bill is passed in 2010.

In fact, the House and Senate versions of the 2010 budget resolution (H. Con. Res. 85 and S. Con. Res. 13) both as proposed by the respective Budget Committees and as passed by the House and Senate respectively, allow for 2009 estate tax law to be made permanent.

Overall, I predict that we can expect that the federal estate tax will not disappear in 2010, but will continue in its present form with some modifications.

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/

Saturday, October 17, 2009

WSJ Article On How Estate Tax Exemption Could Mean There's A Trap In The Bypass Trust Or Credit Shelter Provision Of Your Will

On October 15, 2009, the Wall Street Journal had an article entitled "Is There A Trap Lurking In The Language Of Your Will?" The article is a good reminder as to why it is critical to have your will reviewed every few years, especially if there is a significant event in your life or the law changes.

Why could there be a "trap" in your will? Since 2001, the federal estate tax exemption has stepped up from $675,000 to its current level of $3.5 million per individual or, with planning, $7 million per couple. Thus, people who have not updated their wills could have some unintended consequences if this exemption increase has not been taken into consideration.

For example, in many wills and trusts, lawyers often put a "credit shelter" or "bypass" trust provision into the will of each partner in a married couple. This allows the couple to take full advantage of both individual exemptions. At the death of the first spouse, some assets go into a bypass trust that the other can draw on if necessary. These assets escape tax at the second spouse's death and pass directly to heirs.

As the WSJ article explains, when the estate tax exemption was $2 million and below, bypass trusts were especially important to those who were affluent but not hugely wealthy. Used properly, they helped shelter the greater part of a couple's assets from estate tax. If each spouse instead left all his or her assets outright to the other, in many cases the value of one exemption was lost and unnecessary taxes had to be paid upon the death of the second spouse.

The current trap mainly affects those couples who benefited most from bypass trusts in the past—those with up to, say, $4 million in assets. The problem lies in the wording of many wills drafted even a few years ago, which often directs that the "full amount" of the estate tax exemption go into the bypass trust when the first spouse dies. If the language of the will hasn't changed while the exemption has grown, the bulk of a couple's assets could in some cases wind up in a bypass trust after the death of the first spouse, leaving the survivor with little or nothing outright.

For example: A couple with $4.5 million of assets made wills in 2002, when the exemption was $1 million. At the time, the wife's share consisted of their $750,000 home and $250,000 in other assets, with the rest belonging to her husband. The will's language directs the full exemption amount into a trust at his death, with the income to the spouse for life and the remainder to heirs—which, if he died in 2002, meant $1 million would go into the bypass trust, and $2.5 million would transfer to his wife. But if he dies in 2009 or 2010—assuming the exemption remains at $3.5 million—she would get nothing outright. All of his assets would go directly to the bypass trust.

One New York estate planning attorney was quoted in the article discussing a bad family situation where the husband signed a will in 2000 leaving the "full exemption" amount in trust for his children and the rest of his estate to his wife, thinking this would split his $2 million estate down the middle. When he died in 2008 without updating the will, the exemption had risen to $2 million, so the bulk of the estate bypassed the wife. She was left only with the house and some cash of her own.

As the article notes, writing a will or trust is not something you do once, place in a safety deposit box and then forget about it. It needs to be reviewed when the law changes, when there are life changes and every few years to ensure it reflects your current intentions and plans. Updating your will and trust does not have to be expensive and can save you and your family from facing unintended consequences.

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is

Sunday, October 11, 2009

What Happened To NFL Player Sean Taylor's Mother When He Died Without A Will And Left Entire $5.7 Million Estate To 18 Month Old Daughter?

An article in the September 30, 2009 Washington Post regarding the death of young NFL Redskin player Sean Taylor reminds us what can happen when someone dies without a will or any type of estate plan.

Sean Taylor was a first-round pick in the 2004 draft, signed a seven-year $18 million contract with the Washington Redskins, and became the team's starting free safety after the third game of the season. He quickly gained a reputation as an outstanding athlete, and in 2006 was named to the 2007 Pro Bowl. He was young and probably did not think about estate planning.

Sean Taylor helped support his mother Donna Junor, and bought her a home. On November 26, 2007, a terrible tragedy happened when an armed intruder broke into Taylor's Florida home and shot the football player in his leg. The bullet struck his femoral artery and, despite several hours of surgery, Taylor died at the hospital on November 27. He never regained consciousness.

Taylor died without a will, and Taylor was not married. Most of Taylor's $5.8 million estate went to his 18-month old daughter (now 3) who lives with her mother. His father took possession of the contents of a $328,000 joint account that he shared with the football player, and Taylor's sister received the proceeds of a $650,000 life insurance policy. His mother, however, received nothing. Nor did his grandmother, great-grandmother, two of his half-siblings or any of the cousins or relatives who had grown accustomed to his financial assistance.

According to the article, Taylor's mother was left with possessions that carry costs and fees that she says exceed her income as a substitute teacher since she cannot find a full-time job. She could not pay the real-estate taxes last year on the townhouse she bought in 2005 with the $222,000 her son had given her. Another tax bill is due at the end of November. Taylor's mother said she doesn't have any of his memorabilia, either. All of it either was auctioned to raise money for the estate, or, she says, collected by Taylor's father or the mother of his daughter.

Taylor sister was quoted in the article stating that she understood the frustration over the way her late brother's assets were distributed since she thought he would have wanted it to be different. The article can be found at:

Attorney Comment: The article painted a picture of financial hardship for the mother and it is hard to say whether anyone should feel sorry for her or not. Nevertheless, the article is a reminder of the necessity for planning especially when there are assets and family members who you want to provide for in the future. It certainly is not wise for the daughter to have access to the entire estate when she turns 18 years' old. Nor does it seem like it would have been Taylor's plan to leave his mother nothing from his estate.

However, it is clear that Taylor could have better protected himself, his daughter, his mother, his family, and his assets by making an investment in his estate plan before his untimely death. It is a reminder for all of us to take the time and energy to engage in estate planning.

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/

Thursday, October 8, 2009

Astor's Son Convicted Of Stealing From Mother's $180 Million Estate When She Had Alzheimer's Disease

In a rare criminal case involving a will dispute, Anthony Marshall, the 85 year old son of Brooke Astor (legendary New York society matriarch) was convicted on Thursday, October 8 after a 5 month jury trial.

Mr. Marshall was found guilty of 14 of the 16 counts against him, including: (1) one first-degree grand larceny charge (the most serious he faced); (2) offering to file a false instrument, and (3) conspiracy. A second defendant in the case, Francis X. Morrissey Jr., a lawyer who did estate planning for Mrs. Astor, was convicted of forgery charges. Sentencing is set for December 8, 2009 in the New York court.

Jurors convicted Mr. Marshall him of giving himself an unauthorized raise of about $1 million for managing his mother’s finances. Prosecutors contended that Mrs. Astor’s Alzheimer’s was so advanced at age 101 when her will was amended that there was no way she could have consented to this raise and understood the other complex changes to her will and the financial decisions that benefited Mr. Marshall.

Mrs. Astor, whose fortune was estimated at more than $180 million when she died two years ago at 105, was well known for channeling large sums toward New York charities and cultural institutions like the Metropolitan Museum of Art and the Bronx Zoo.

Defense lawyers had argued that Mrs. Astor was lucid when she bequeathed money to her only child Mr. Marshall, and that he had legal power to give him gifts while she was alive. Mrs. Astor's last will, dated in 2002, left millions of dollars to her favorite charities. Changes to that document in 2003 and 2004 awarded Mr. Marshall all of his mother's property, instead of placing it in a trust as she had initially stipulated.

The jurors heard testimony from prominent friends of Mrs. Astor regarding her Alzheimer's and inability to recognize them. The witnesses included Henry Kissinger, Barbara Walters and Annette de la Renta. The prosecution portrayed Mr. Marshall as driven by his wife, Charlene, to obtain more money and obtain control of the estate.

Today's New York Times article on this case can be found at:

Usually these types of allegations are handled in probate court. The civil case will now proceed now that the criminal case is concluded. One of the core issues in the civil case will be whether Mrs. Astor was mentally competent when she signed the 2002 will, which was amended in late 2003 and again in early 2004. Those later revisions gave her son more control over her estate, and in the process she reduced the amount of money she left to the New York universities, libraries, parks and museums she had spent much of her life supporting. There is an earlier version of the will which directed more money to charity.

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/

Wednesday, October 7, 2009

WSJ Article "Transferring Wealth Via The Bank of Mom & Dad" - Low Interest Rate Loans Via SCINs, GRATs & IDGTs

The October 3, 2009 Wall Street Journal had an article entitled "Transferring Wealth Via the Bank of Mom & Dad." The article addresses in detail some sophisticated estate planning tools (SCINs, GRATs and IDGTs) that are used by closely held family business companies and those who want to transfer more wealth to their heirs tax-free. The article addresses how falling interest rates can be used to transfer more wealth to family members tax-free via intra-family loans and transactions.

A copy of the article can be found at: http://online.wsj.com/article/SB125452042817860431.html

The article gives an example regarding the applicable federal rates in October 2009. Under the rates set monthly by the IRS, you can make a nine-year fixed-rate loan to your child for as low as 2.63%. This allows the child to borrow at a very low rate. In addition, you and your spouse could forgive up to $52,000 of the loan annually ($26,000 if the child is single), reducing their future estate tax liability without triggering current gift taxes. There are numerous rules regarding written agreements, collection of payments and the loan itself that need to be followed so the IRS does not accuse you of planning it as a gift all along.

There are three tools discussed in the article. A Self-Canceling Installment Note (SCIN) is a technique used to sell an asset, usually shares or partnership interests in a closely held family business, in exchange for an interest-bearing promissory note. An appropriately structured SCIN will remove the future appreciation in the family business from the seller’s estate. In addition, if the seller dies prior to the maturity of the promissory note, the then-outstanding principal amount of the note may be excluded from the seller’s gross estate. The article makes a SCIN look simpler than it is and there are numerous requirements that must be met in order for the IRS to respect the validity of the cancellation provision.

A Grantor-Retained Annuity Trust (GRAT) may enable you to transfer future appreciation on an asset to your heirs. If you outlive the term of the trust, most commonly two or three years, then a portion of the gain on the assets will move to your heirs free of gift or estate tax. If you die before the term of the trust expires, however, the assets revert to your estate and are taxable.

An Intentionally Defective Grantor Trust (IDGT) involves making a partial gift to a trust, which then purchases the rest of the asset in installments. IDGTs (sometimes pronounced "idjits") are sometimes preferred to GRATs, because IDGTs move an asset out of your estate immediately. There are advantages and disadvantages of the IDGT technique which are not addressed in the WSJ article.

The costs and benefits of a SCIN, GRAT or an IDGT must be carefully evaluated on a case-by-case basis. In appropriate circumstances, these tools provide families and family business owners with valuable estate planning tools to transfer the business or wealth to the next generation.

As with any sophisticated estate planning: do not try this at home or try to do it yourself. These tools demand the expertise of a trust attorney who specializes in estate planning.

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

Posted by Henry (Hank) Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or contact Hank (626) 793-3210 for a complimentary consultation about your own situation. The firm website is http://www.moravecslaw.com/

The firm is a boutique estates and trust law practice specializing only in Estate Planning, Probate, Trust Administration, Beneficiary and Trustee Representation, Tax Law, and Nonprofit Law.

The office is located in San Marino, California, a suburb of Los Angeles in the San Gabriel area located 20 minutes from downtown Los Angeles. The firm represents clients throughout California and its attorneys appears in probate court throughout Southern California (Pasadena estate planning attorney, Los Angeles estate planning attorney, Santa Monica estate planning attorney, Pomona estate planning attorney, Torrance estate planning attorney, Long Beach estate planning attorney, Van Nuys estate planning attorney, Santa Barbara estate planning attorney, Orange County estate planning attorney, Riverside estate planning attorney, San Bernardino estate planning attorney).

Saturday, October 3, 2009

California Court Rules Daughter Cannot Annul Father Richard Pryor's Marriage Or Set Aside Bequests To Stepmother After His Death

On September 28, 2009, the California Court of Appeal issued two companion decisions relating to the estate of Grammy award-winning comedian and actor Richard Pryor.

The court rejected an attempt by Pryor's eldest daughter Elizabeth to annul her father’s marriage to stepmother Jennifer Pryor and void certain gifts and bequests to her stepmother. The daughter's goal was to invalidate Pryor's most recent will and reinstate an earlier will in which he split his fortune between his six children. The Pryor probate litigation has been pending for more than four years.

Richard Pryor married Jennifer Pryor in 1981 and they divorced one year later. Shortly thereafter, Richard Pryor was diagnosed with multiple sclerosis and his condition began to deteriorate. His ex-wife Jennifer Pryor became Richard Pryor’s care custodian in 1994. At that time, there was an earlier will in place in which he split his fortune between his six children.

In 2001, Richard and Jennifer Pryor were remarried pursuant to a confidential marriage license. Elizabeth Pryor apparently did not learn of this marriage until after her father died of a heart attack in 2005. By this time -- both before and after his remarriage -- Richard Pryor had revised his estate plan to leave substantial assets to Jennifer Pryor rather than his six children.

After his death, daughter Elizabeth prior filed two actions. First, styling herself as successor in interest to her father, she petitioned to annul the marriage under Family Code Sec. 2211(d) on the grounds of fraud. She claimed her father's signature on the marriage certificate was forged.

Second, she filed a probate proceeding seeking to set aside various gifts, bequests, and transfers of property or assets made by her father to Jennifer between 1994 and 2005. Legally, she was seeking to use Probate Code Section 21350 to presumptively disqualify Jennifer, who was a care custodian, from receiving a donative transfer from a dependent or elder adult. Elizabeth argued that her stepmother Jennifer may not invoke the spousal exception to this presumption because the marriage was the product of undue influence and fraud.

Elizabeth did not win on either ground in the family law or probate courts. The same judge presided over both matters in the superior court. She then appealed.

On appeal, Elizabeth lost both cases. In the family law matter which is the subject of a companion appeal, Pryor v. Pryor (No. B207398), the Court of Appeal affirmed the denial of Elizabeth's petition to annul the 2001 marriage between Jennifer and Richard on the ground of fraud.

In the probate matter, the Court of Appeal declined to recognize an exception to the rule under Probate Code Section 21350 that a spouse may receive a donative transfer from a dependent or elder adult for marriages allegedly obtained by fraud and undue influence. The appellate court found no support in the language of section 21351, subdivision (a), or in the legislative history, which would make the spousal exception to the presumption of invalidity unavailable to a spouse who allegedly persuaded the transferor to marry through undue influence or fraud.

A copy of Estate of Pryor, CA Court of Appeal, 2nd Appellate District, Div. 4, Case No. B207402 can be found at:

Attorney Comments: First, this case brings to light the conflict that can exist between children of a prior marriage and a stepparent. Second, the failure to disclose to the children the marriage and the changes to the will or estate plan can also increase the likelihood of probate litigation.

Third, there are ways to document that there is no incapacity or fraud. For example, doctors can be used to assess the capacity of a person to make a will or trust. In some cases, there can be limited ability to speak (which happens in some advanced muscular sclerosis cases).

Because most trouble arises from disappointed potential beneficiaries, a doctor (such as a psychiatrist or neurologist specializing in geriatrics) as part of his examination should ask whether the testator has ever made a will before and who is now going to be excluded and why. Doctors and attorneys must understand the legal tests for testamentary capacity.

Attorneys can also document these issues and show their client's intent and capacity in that they understand their prior wills, their assets and the proposed disposition. Videotaping may be used to help prevent accusations of forgeries at a later date. In other words, good planning can help minimize the risks of probate litigation after the death of a loved one and provide strong evidence in the event of a challenge.

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/

Thursday, October 1, 2009

Estate Litigation: Martin Luther King Jr.'s Children Wrangle In Court Over Estate

Once estate or probate litigation happens, there are probably many silent prayers that there be a peaceful resolution. Litigation among family members is often very stressful, disruptive and sometimes emotionally painful.

It's not often, however, that such prayers become public. On September 29, 2009, the Rev. Joseph Lowery, a follower of the Rev. Martin Luther King Jr. invoked the spirit of the civil rights icon and his wife, Coretta, in praying for a peaceful resolution to the legal battle among the King children. He led dozens of clergy, civil rights veterans and others in prayer at the Kings’ crypt in Atlanta.

If the King family can have a family and legal dispute over the valuable estates of Martin Luther King Jr. and Coretta Scott King -- it shows that anyone can. It is apparent that the lawsuit is embarrassing to those who are intent on preserving Kings' legacy.

In July 2008, the lawsuit was filed in Fulton County, Georgia with two of the siblings claiming that a third has misappropriated money from their parents' estates. Bernice King and Martin Luther King III charge that in late June 2008, their brother Dexter improperly transferred "substantial funds" from Bank of America to accounts he controls. The Bank of America account contains funds from the estate of Coretta Scott King, who died in 2006 at age 78.

Bernice is administrator of her late mother's estate, while Dexter is president of the Estate of Martin Luther King Jr. corporation -- of which the siblings are all shareholders. The operation of that business is in disarray, with the siblings "deadlocked" in its management, according to the complaint, which charges that the company's assets are "being misapplied or wasted."

Lawsuits often result in cross-complaints and this was no exception. Dexter countersued, claiming that his siblings had improperly borrowed office space and company cars from the King Center, an Atlanta civil rights museum. He also accused Bernice of corrupting their father’s legacy by acting as host of an anti-gay-marriage rally at the center.

Recently, on September 14, 2009, Judge Ural Glanville ordered the children of the Rev. Martin Luther King Jr. to meet in their capacity as the sole shareholders of the corporation that manages their iconic father's estate. The three siblings have not held such a meeting since 2004. The removal of Dexter King as the estate's administrator was unlikely because that would require a meeting of the board of directors.

Judge Glanville also ruled in favor of dismissing some of the allegations against Dexter King, but left the question of whether he failed to act in the best interest of his father's incorporated estate to a jury. A trial on the allegation of breach of fiduciary duty could happen as early as next month.

Attorney Comments: First, like many estate lawsuits, this occurred after the death of the children's mother, Coretta Scott King, in 2006 and another sister Yolanda in 2007. The parent or older sibling is often the glue that is holding the family together and informally resolving disputes.

Second, the "breach of fiduciary duty" cause of action alleged against the brother Dexter King is a reminder to all estate trustees that they should appreciate the fiduciary nature of his or her position. The trustee may understand his or her concrete duties and responsibilities -- but when emotions are involved and family or beneficiary disputes arise, he or she may lose sight of their "fiduciary duty."

What is fiduciary duty? A fiduciary's duty requires honesty of course. In addition, it requires the trustee to have undivided and undiluted loyalty to those whose interests the fiduciary is to protect. Thus, the trustee must treat each beneficiary with loyalty and protect their interests. This becomes more complicated when the trustee is also a beneficiary. A trustee cannot favor his or her own interest over another beneficiary's interest. The trustee is not entitled to treat the property of the trust as if it were his or her own. The trustee is wearing two hats (trustee and beneficiary) and the trustee hat imposes fiduciary duties of loyalty to the other beneficiaries. The greatest exposure to litigation for a trustee arises from his or her fiduciary duties.

Not even the slightest hint of self-dealing or unfairness is acceptable in the relationship between a fiduciary and those whose interests he or she is to protect. It is sometimes difficult for a fiduciary to recognize a problem when it occurs and it can be more difficult to be truly objective. It is therefore important for trustees to carefully review their financial decisions with experienced counsel in order to insure that they are acting appropriately.

One advantage in using an attorney as counsel rather than an accountant or another professional is the protection provided by the attorney-client privilege. All communications between the trustee and his or her attorney will be privileged and not discoverable in the event of litigation. A communication with the CPA, however, where the trustee/beneficiary writes emails that he will never turn over the family house to another beneficiary without a fight could be discovered in future litigation.

In certain cases, for example, trustee's legal counsel may advise the trustee to obtain a release from the beneficiary or seek a court order before taking certain action. In other cases, the attorney may advise the trustee to immediately dispose of certain real property to a beneficiary so that the estate is no longer liable for that property (taxes, insurance, liability, etc.) and to minimize the risk that the beneficiary will have any future claim against the estate or the trustee.

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.

The office is located in San Marino, California, a suburb of Los Angeles in the San Gabriel area located 20 minutes from downtown Los Angeles. The firm represents clients throughout California and its attorneys appears in probate court throughout Southern California (Pasadena probate attorney, Los Angeles probate attorney, Santa Monica probate attorney, Pomona probate attorney, Torrance probate attorney, Long Beach probate attorney, Van Nuys probate attorney, Santa Barbara probate attorney, Orange County probate attorney, Riverside probate attorney, San Bernardino probate attorney)

Sunday, September 27, 2009

Religious Preference Clause: Illinois Supreme Court Rules In Favor Of Couple's Trust That Disinherits Grandchildren Who Marry Non-Jews

Chicago dentist Max Feinberg died in 1986. Prior to his death, he had a standard pourover will and revocable living trust. The trust had an unusual catch: His grandchildren wouldn't inherit a penny if they married someone who wasn't Jewish or whose non-Jewish spouse did not convert within one year. We could call this a "religious preference clause."

More specifically, the trust provided that upon his death, his assets would be split into a standard credit shelter trust and a marital deduction trust. Max's widow, Erla, was the lifetime income beneficiary of both trusts, and had a limited right to withdraw principal.

Upon Erla's death, the property would be distributed to Max's descendants. Fifty percent of the trust estate was to be held in further, separate trusts for Max's grandchildren during their lifetime on a per stirpital basis. The trust provided that any descendant who married outside the Jewish faith or whose non-Jewish spouse did not convert to Judaism within one year would be disinherited.

Feinberg's will gave control of the trusts to his wife, Erla. When she died and the grandchildren were to inherit $250,000 each, she followed her husband's wishes and imposed the same restrictions. By that time, four of the five grandchildren had married gentiles. Erla Feinberg's death triggered a series of disputes. One disinherited granddaughter had argued it was improper for a will to set up conditions that promote religious intolerance in people's marriage decisions or even encouraged couples to divorce.

On September 24, 2009, the Illinois Supreme Court unanimously ruled that Feinberg and his wife were within their rights to disinherit any grandchildren who married outside the faith as long as the method of doing so did not encourage divorce. The court's ruling was based partly on technicalities in the way this estate was arranged. The court did not provide a broad ruling on whether similar religious restrictions would be valid under other circumstances.

The state Supreme Court based much of its decision on the fact that Erla Feinberg's will awarded set amounts of money based on the marriage status of the grandchildren at the time of her 2003 death — either they qualified for the money or they didn't. The court said that meant the will didn't try to control what the grandchildren would do in the future and didn't offer any incentive for a particular couple to divorce.

A will that provided money year after year if the heir did not marry a gentile might not pass muster, the court suggested. That's because it would amount to a dead man trying to control actions for years to come and would encourage divorces so that people could claim an inheritance.

"Equal protection does not require that all children be treated equally . . . and the free exercise clause does not require a grandparent to treat grandchildren who reject his religious beliefs and customs in the same manner as he treats those who conform to his traditions," Justice Rita Garman wrote in a ruling that overturned decisions by two lower courts.

A copy of this interesting decision, In Re Estate of Max Feinberg, can be found at: http://www.state.il.us/court/OPINIONS/SupremeCourt/2009/September/106982.pdf

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/

Friday, September 25, 2009

California Attorney General Sues To Stop Los Angeles Nonprofit From Diverting Donations And To Dissolve The Charity

A recent case in California is illustrative of the worst nightmare for any nonprofit or charitable organization. On September 9, 2009, the California State Attorney General's Office filed a civil lawsuit to permanently stop UCLA Professor Gerald D. Buckberg, M.D., and five officers of the nonprofit L.B. Research Foundation from allegedly "diverting donations" from the charity to their own personal business ventures and medical research activities.

Under California law, "no part of a charitable organization's income or assets may inure to the benefit of any director, officer, member or private person." However, the State's lawsuit alleges that since 1997, L.B. Research Foundation's officers have used its funds to finance their own medical research, the research activities of companies in which they had a financial interest and the development of medical devices that they sold.

The State's lawsuit was filed in Los Angeles Superior Court. This lawsuit by the State only sets forth allegations, and L.B. Research Foundation and its officers are entitled to a full defense of these allegations. Simply because these allegations are set forth in a lawsuit, they cannot be presumed to be true. The lawsuit sets forth the following allegations against the charity and its officers:

- Failed to maintain adequate books and records in violation of Corporations Code section 6320;

- Breached their fiduciary duties in violation of Corporations Code sections 5233, 5260 and U.S. Code section 4945;

- Failed to maintain an independently elected board of directors in violation of Corporations Code sections 5210 and 5213;

- Filed and distributed false and incomplete reports in violation of Corporations Code sections 6215 and 6812; and

- Engaged in unfair competition in violation of Business and Professions Code section 17200. This allegation is designed to allow the State to recover attorney's fees and obtain injunctive relief.

The State is seeking to recover over $500,000 in misappropriated funds, permanently dissolve the charity, assess civil penalties of over $100,000 and prohibit the defendants from running a charity until they provide accounting statements to his office.

The alleged facts as set forth in the lawsuit are that Dr. Buckberg founded L.B. Research Foundation in 1997. The purpose, as stated in the articles of incorporation, was to assist people suffering from physical and mental disabilities. The Foundation was funded primarily by Dr. Buckberg, although it also received some donations from several other individuals and businesses.

The Attorney General's office launched an investigation in 2007. The investigation allegedly revealed that the foundation has been under the primary control of Dr. Buckberg and L.B. Research has been used primarily to fund Dr. Buckberg's research and development projects and the research of his colleagues and friends. The allegations include the following:

■ The lawsuit alleges that from 1997 through 2004, Dr. Buckberg used $120,000 in donations to produce an educational DVD for use by medical professionals. The rights to the DVD belong to The Helical Heart Company, a for-profit corporation which Dr. Buckberg owns.

■ The lawsuit also alleges that in 2000, $1 million of the charity's funds were donated to UCLA to establish an endowed faculty chair. Dr. Buckberg then purportedly applied for an appointment to the chair and, when that application was rejected, L.B. Research Foundation sued UCLA. Approximately $300,000 of the Foundation's assets have been allegedly used to pay legal fees related to that lawsuit.

■ The lawsuit further alleges that in 2003, Dr. Buckberg used $15,000 of the charity's funds to pay General Theming Contractors, LLC - which he owns -- to build plastic heart models, which he subsequently sold.

■ The lawsuit also alleges that from 2002 to 2006, Dr. Buckberg used over $50,000 of the charity's funds to pay the travel and hotel expenses of physicians whose research benefited a medical device licensed and patented by a for-profit corporation owned and controlled by Dr. Buckberg. The investigation further revealed that not all board members knew they were officers of L.B. Research or that they were even part of L.B. Research's board of directors.

■ Dr. Buckberg allegedly had sole custody of the charity's financial records and checkbook. The State also claims that very few of the board's grant-making decisions were documented and board members failed to understand that the charity's assets could not be used for their personal benefit.

Attorney Commentary: This lawsuit involves Gerald D. Buckberg, M.D., a world-recognized pioneer in the development of life-saving heart surgery techniques, which shows that even well-credentialed persons can be the subject of investigations by the State. The investigation went on for at least two years before the lawsuit was filed. It is during this time in which the nonprofit charity has an opportunity to present the facts and seek to prevent such a lawsuit.

Nonprofits should understand that it is not simply the IRS who regulates them. The California Attorney General's Office regulates charities and the professional fundraisers who solicit on their behalf. The purpose of this oversight is to protect charitable assets for their intended use and ensure that the charitable donations contributed by Californians are not misapplied and squandered through fraud or other means.

Nonprofits should understand that the Attorney General operates a regulatory program and encourages the reporting of "charity fraud. " This reporting can be legitimate or it can be frivolous complaints made anonymously by disgruntled ex-employees or persons who do not have all the facts.

The State Attorney General's Office has a 60-page publication entitled "Guide For Charities" which outlines that office's oversight over nonprofits and summarizes many of the laws applicable to nonprofits. It can be found at:

Nonprofits need to ensure compliance with the state law as set forth in the California Corporations Code regarding fiduciary duties, maintaining adequate records, maintaining an independently elected board of directors and other related laws. Compliance and obtaining proper legal advice regarding potential conflicts of interest can prevent or limit any issues arising later. A lawsuit such as the one filed here can often cripple a nonprofit and harm its fundraising even if the case is later dismissed or won in the nonprofit's favor.

Posted by Henry Moravec, III. Any questions or comments should be directed to: hm@moravecslaw.com or (626) 793-3210. The firm website is http://www.moravecslaw.com/

Mr. Moravec has a specialty in representing nonprofits and in nonprofit law. Mr. Moravec was a consultant and chapter editor for California Continuing Education of the Bar, Advising California Nonprofit Corporations, 2nd Edition 1998. In addition, he was the 1998-1999 chair of the Exempt Organizations Committee of the Los Angeles County Bar Association.