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/

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.

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/

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/