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

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

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

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

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

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

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

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

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

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

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

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

15 Important Tips For Picking A Guardian For Your Child Or Children

Naming a guardian is a difficult but necessary estate planning tool. While it’s difficult enough to think about not being there to raise your children, imagine a court choosing their guardian with no input from you. Imagine your relatives arguing in court over who gets your children—or having them agree but not on the people you would have chosen. That's why it's important to nominate a guardian while it's still up to you.

In our practice, we find that this is one of the most difficult decisions. In fact, estate plans sometimes get held up because this is the most difficult decision for people to make. Here are some definitions and tips to help you make this decision.

What is a guardian? A guardian is an individual, typically a family member or close friend, who can handle the responsibility of raising your child if you and your spouse (or ex-spouse) die or become severely incapacitated before your kids reach adulthood.

What is a Nomination of Guardians? If a person or couple has minor children it is very important to prepare a Nomination of Guardians to serve if both parents are deceased or incapacitated. A court proceeding in the Family Law court is required to formally approve a guardian but the court affords the written nomination of the parents great weight in making its decision. Guardianship is a court proceeding in which a judge gives someone who is not the parent: custody of a child, or the power to manage the child's property (called "estate"), or both.

Here are 15 tips to help you make your best choice for guardian for your child or children.

1: Think beyond the obvious choices. Make a list of all the people you know who you would trust to take care of your children. You do not need to limit your list to close family members. While siblings and parents can be excellent choices, consider also extended family members who are old enough to raise your children – cousins, aunts, uncles, nieces, nephews, and others.

2: Friends can make excellent guardians. Beyond family, consider close friends, families with whom your family is close, the families of your children’s friends, friends you know from your place of worship, or other adults with whom you and your children have a special relationship.

3: Do not make the decision solely about the other person's finances or the size of their house. Do not eliminate anyone from consideration because you don’t think they have the financial wherewithal to take care of your children. You can take care of the finances with what you leave. (That's what adequate life insurance is about.) You can even instruct your trustee to provide funds for your chosen guardian to build an addition to their home or move to a larger home to accommodate your children.

4: Focus on love. Consider whether each couple or person on your list would truly love your children if appointed their guardian. If they have children of their own, will your children be relegated behind their own children? Or is the couple or person sufficiently loving that they will make your children feel loved no matter what?

5: Consider values and philosophies. Ask yourself which people on your list most closely share your values and philosophies with respect to your:

•child-rearing philosophy
•educational values
•social values
•religious beliefs
•moral values

6: Personality counts. Consider whether each of your candidates has the personality traits that would work for your children.

•Are they loving? •Are they good role models?

•Do they have the patience to take on parenting your children?

•How affectionate are they? (If your family is particularly affectionate, a guardian who is loving but not physically affectionate could be damaging.)

•If they're fairly young, how mature are they?

7: Consider practical factors. For example:

•How would raising children fit into their lifestyle?

•If they’re older, do they have the necessary health and stamina? Do they really want to be parents of a young child at their stage in life?

•Do they have other children? How would your children get along with theirs? Are there potential problems if your children were to live with theirs? How easily could the problems be dealt with? (For instance, do you want to place a child who struggles in school with a high-achieving child of the same age for whom everything comes easily?)

•How close do they live to other important people in your children’s lives?

•If a couple divorced, or one person died, would you be comfortable with either of them acting as the sole guardian? If not, you need to specify what you would want to happen.

8: Look for a good – but not a perfect – choice. Most likely, no one on your list will seem perfect – that is, just like you. But if you truly consider what matters to you most, you will probably be able to make some reasonable choices. In the end, trust your instincts.

If one couple or person meets all of your criteria, but doesn’t feel right, don’t choose them. By the same token, if someone feels much more right than any of the others on your list, there’s a good reason for it. Make your primary choice, then some backup choices. It’s essential that both you and your spouse agree. If you cannot make a decision, or if you and your spouse cannot agree, an experienced counseling-based estate planning attorney can help you through the process.

9: Select a temporary as well as a permanent guardian. Temporary guardians may be appointed if both parents become temporarily unable to care for their children – for example, as the result of a car accident. Depending on your choice for permanent guardians, you may want to designate different people to act as temporary guardians.

If your choice for a permanent guardian lives a considerable distance away, choose someone close by to serve as temporary guardian. If you're temporarily disabled, you'll want your children close by. And you won't want their lives unnecessarily disrupted by moving them to a new town and school. If you have no relatives or close friends nearby, consider families of your children’s friends.

10: Consider a Guardianship Panel. Because it's difficult to predict what your children’s needs will be as they grow older, consider appointing a “Guardianship Panel” to decide who would be the best guardian when and if it becomes necessary. Choose trusted relatives and friends to make up the panel. This allows for maximum flexibility, so the most appropriate choice can be made at the time a guardian is actually needed. The Panel can consult with your children and assess their needs and desires to make the most appropriate choice based on the current situation.

11: Write down your reasons. If you’ve chosen friends over relatives, or a more distant relative over a closer one, be sure to explain your decision in writing. That way – in the unlikely event your choice is challenged by people who feel they should have been chosen – a court should readily uphold your decision, knowing you've made your choice for good, solid reasons.

12: Talk with everyone involved. If your children are old enough, talk with them to get their input as well. And be sure to confer with the people you'd like to choose, to ensure they're willing to be chosen and would feel comfortable acting as guardians.

13: Once you’ve made your choice, take steps to make sure the potential guardians you’ve chosen will have guidance and support they need. One idea is to create a set of guidelines to convey information about your children, your parenting values and your hopes and dreams for your children.

14: Set up a trust that will hold the assets you pass to your children, and instruct the trustee to provide necessary financial assistance to the guardians. You can also create specific instructions about special things you’d like the trust funds used for (for example, annual trips for your children to visit close friends and relatives, a particular summer camp, putting in a swimming pool at the guardians’ house).

15: Designate “mentors” consisting of special people in your children’s lives to help guide them in ways for which the “mentor” is particularly well-suited. For instance, the person you choose for trustee may also be a good “financial” or "educational" mentor for your children. Or you may want to designate a “spiritual” mentor, particularly if the guardians you choose have religious philosophies that differ from yours. You can also name in your estate planning documents people who you simply want to have ongoing involvement in your children’s lives. This can be a good way to include both sides of the family.

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

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

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

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

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

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

Tip Of The Week: You May Need To Alter Will

The Wall Street Journal's article on January 17, 2010 is entitled "You May Need To Update Your Will." The article relates to what I have written about this month - the recent repeal of the federal estate tax for 2010 and the uncertainty of when, how and whether Congress will pass a retroactive law.

The article is educating its readers on how the recent repeal of the federal estate tax could have one consequence families may not be aware of: some people who do not update their wills could end up leaving nothing to their spouses.

The reason this could happen is as follows. It is a common practice for people to use formulas in their wills designed to send the maximum amount of assets not subject to the estate tax into a trust, often for their children. The remaining assets are usually left to the surviving spouse.

But at this moment in 2010, there is no limit on the assets people can pass to their heirs without being subject to federal estate tax. So there are some wills and trusts where all of the assets could go into a trust and the surviving spouse would get nothing.

There is some relief for these spouses if wills are not updated since most states allow a surviving spouse to claim part of the estate even if he or she has been disinherited. However, this can be an expensive court process.

To avoid potential problems, people should review their wills with their estate planning attorney and determine if they need to revise their wills. For those people who left all assets to the trust without any to the spouse, it may be appropriate to remove the formulas and use dollar amounts instead to designate where assets should go. Another idea to consider is whether to transfer some assets to a spouse now, so he or she has sufficient funds directly in his or her name.

There are numerous planning tools - and each individual situation is different. Once the law is passed and retroactive -- as is predicted by me and most estate planning experts -- the will will need to be revisited once again. Remember to set up everything as if you would die tomorrow. Procrastination in this area can lead to many unintended consequences.

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

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

Greetings from Moravecs Law Firm

Greetings from Moravecs Law Firm

NYT Article: "A Bizarre Year For The Estate Tax Will Require Extra Planning"

Given the uncertainty in the estate tax this year which I have written about previously, estate planning may require new strategies for various wealth levels.

Paul Sullivan has authored an article in the January 8, 2010 New York Times entitled "A Bizarre Year For The Estate Tax Will Require Extra Planning." This article is a good summary of current thinking on this issue and includes some common sense advice such as having one's will and estate plan reviewed in these uncertain times.

The consensus among estate planners is that Congress will revive the estate tax and make it retroactive to Jan. 1, 2010. As the New York Times article noted having an expired estate tax is unsettling since "[t]he situation has thrown a wrench into the core tenet of estate planning: set up everything as if you would die tomorrow. What happens if the law changes by then?" This is the question all of us should ask ourselves.

The article gives one excellent example using the gift tax. Presently, the gift tax is down to 35 percent, from 45 percent, and the generation-skipping tax on assets passed to grandchildren is gone. In 2009, if a wealthy businessman wanted to give his granddaughter a gift above the exemption, he would have paid an effective tax of 74 percent on that amount. This year, the grandparent would pay only the 35 percent gift tax.

No one wants to be a test case and this uncertainty can be used as a reminder for all of us to take a look at our estate plan and wills and pay attention to the anticipated legal changes.

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

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

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.