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.