Articles Posted in Wills & Trusts

A family’s trust dispute got new life when the California Supreme Court reversed an an appellate court ruling, and determined that a group of contingent beneficiaries did, as a matter of law, have standing to sue the trustee of a family trust for breaching his duties by making a large, risky investment in a company that the trustee co-owned. In deciding Estate of Giraldin, the court concluded that, under California law, because the trustee’s actions could harm the contingent beneficiaries and contravene the wishes of the deceased trustor, they had standing to sue.

In 2001, William Giraldin began considering investing $4 million, roughly 2/3 of his wealth, in a technological start-up company created by Patrick Giraldin, his son. Patrick’s twin, Tim, was also a partial owner. Soon thereafter, Bill created a new revocable trust, which essentially replaced the previous revocable trust he established in 1997, naming all of his children as contingent beneficiaries. In one key difference between the trusts, however, Tim, not Bill, served as trustee of the trust. Bill ultimately decided to make the investment, with the funds coming from the trust.

The start-up proved unsuccessful and, by the time Bill died in May 2005, his investment was largely worthless. Four of Tim’s half-siblings sued him, claiming he violated his fiduciary duties to the trust’s beneficiaries. The suit claimed that Tim’s mismanagement deprived Bill’s seven other legal children of the benefit of the trust.

The trial court ruled in favor of the four children. The court concluded that Tim acted to serve his interests, and those of the start-up, at the peril of his father and the trust.

The California Court of Appeal reversed. The court determined that Cal. Prob. Code 15800 made clear that, during Bill’s lifetime, Tim’s duties were to his father alone, not his siblings (as trust beneficiaries). During’s Bill’s lifetime, the Court of Appeal concluded, Tim’s siblings were akin to heirs named in a will, possessing no rights until Bill died and the trust became irrevocable. Thus, the siblings lacked standing to sue for his pre-May 2005 conduct as trustee.

The California Supreme Court disagreed, however. The high court agreed that the siblings could not sue based on alleged financial harm they suffered during Bill’s lifetime, and could not sue while Bill was alive, but concluded that they could assert a claim after Bill’s death, based upon harm to Bill caused by Tim’s actions during Bill’s lifetime. “Because a trustee’s breach of the fiduciary duty owed to the settlor can substantially harm the beneficiaries by reducing the trust’s value against the settlor’s wishes, we conclude the beneficiaries do have standing to sue for a breach of that duty after the settlor has died,” the court wrote.

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A “no contest” clause is an item inserted into many wills and/or trusts to reduce the likelihood that a beneficiary will mount a court challenge to the document. The California legislature modified the statute governing no contest clauses in recent years, attempting to simply the law regarding these provisions. In the process, however, the state’s new statute creates some potential traps for the unwary beneficiary.

Under California law in effect before 2010, will or trust contests were a high-stakes, all-or-nothing proposition. For example, if a woman had a will that left her estate equally to her son and daughter but, shortly before her death and during a visit from her daughter, she created a new will, with a no contest provision, leaving 75% of her assets to the daughter, and 25% to the son, then the son would face a risky dilemma if he contested the new will. If he won, the first will would govern, and he would receive one-half of his mother’s estate; lose, and the no contest clause from the second will would take effect and he would receive nothing.

Finding the penalty of total forfeiture excessively punitive, the legislature changed the law, effective 2010. The new law states that forfeiture clauses are generally not enforceable against challengers if they had probable cause for bringing the action.

Beneficiaries should remain mindful, though, that there are indirect ways to trigger a forfeiture clause, some of which are not necessarily intuitive. In a 2002 case, Estate of Gonzalez, a group of siblings offered their father’s 1992 will for probate, which contained a no contest provision. A fourth sibling, Jorge Gonzalez, submitted for probate a 1998 will. The court concluded that the 1998 will was the result of Jorge’s undue influence, that Jorge knew the will was not valid and, by offering it for probate, he effectively challenged his father’s first will, and did so without probable cause. As a result, the no contest clause within the 1992 will was enforceable and Jorge received nothing from his father’s estate.

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A California appellate court upheld the right of the children of a man’s ex-wife to receive the distributions promised to them in the man’s will and trust. In Estate of Lira, the court rejected a daughter’s argument that her father’s ex-wife’s children were disqualified from inheriting, ruling that the ex-wife’s family was related to the man when he executed his estate plan documents and, therefore, exempt from disqualification.

Oligario Lira married Mary Terrones in 1968. Lira had three children from a prior marriage, and his wife had six. Early in 2008, the wife filed for divorce. Eleven months later, with the divorce still pending, Oligario executed a will and a trust. The documents named Oligario’s three children, as well as three of Mary’s sons, as beneficiaries of his estate, and named Mary’s son, Robert Terrones, personal representative of his will and trustee of his trust. One of Mary’s grandsons, Glenn Terrones, was an attorney and prepared the documents for Oligario. The court granted the divorce early in 2010, and Oligario died five months later.

Lira’s daughter, Mary Ratcliff, petitioned for probate of her father’s estate, stating that her father died intestate, and requesting that the court appoint her to administer the estate. Two months later, Robert filed his own petition, producing the will and asking that the court name him as executor. Lira’s daughter then argued that the law disqualified the Terrones sons from receiving anything under the will or the trust because they were related to the attorney who drafted the documents. Robert countered by contending that, because he and his brothers were related to Oligario when he signed the documents, they were exempt from disqualification.

A trial court, and the California Court of Appeal, agreed with Robert. While Section 21350 of the Probate Code, which the daughter cited, generally bars anyone who is “related by blood or marriage to, is a domestic partner of, is a cohabitant with, or is an employee of, the person who drafted the instrument” from receiving a distribution under that document, Section 21351 carves an exemption for persons related to the transferor by blood or marriage.

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A now-deceased man’s estate planning oversight yielded a dispute that will now be decided by the U.S. Supreme Court. The case of Hillman v. Maretta pits the man’s ex-wife, whom he named, and never replaced, as the death beneficiary on a life insurance policy, and the man’s current wife, who claimed that the ex-wife lost her claim to the money when she and the man divorced.

In 1996, Warren Hillman named Judy Maretta, his wife, as the primary beneficiary on his Federal Employees’ Group Life Insurance (FEGLI) policy. Two years later, the couple divorced. Hillman married his subsequent wife, Jacqueline, in 2002. Warren and Jacqueline remained married until Warren died in 2008. However, Warren never updated his insurance policy to remove Judy and name a new beneficiary.

Jacqueline filed a claim for the policy benefit, which was nearly $125,000. Judy also filed a claim for the benefit. The money went to the ex-wife, as she remained the named beneficiary under the policy. Jacqueline sued, arguing that, under Virginia law, Warren and Judy’s divorce automatically revoked the beneficiary designation naming Judy. Judy contended, and the Virginia Supreme Court agreed, that the Virginia statute did not control here. The federal statutes governing FEGLI expressly state that the order of precedence for receiving a death benefit gives first priority to “the beneficiary or beneficiaries designated by the employee,” (5 USC 8705(a)) and also that the “provisions of any contract under this chapter which relate to the nature or extent of coverage or benefits (including payments with respect to benefits) shall supersede and preempt any law of any State or political subdivision thereof… to the extent that the law or regulation is inconsistent with the contractual provisions” (5 USC 8709(d)(1).) The Virginia court determined that these federal statutes clearly pre-empted Virginia law and mandated awarding the funds to Judy.

The U.S. Supreme Court agreed to take the case as a split had emerged over the question, with the Virginia and Alabama high courts, along with the federal 7th Circuit and 11th Circuit appellate courts, ruling that FEGLI’s governing statutes pre-empted state law, but the high courts in Indiana and Mississippi concluding that the federal statutes regarding FEGLI did not pre-empt state law.

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A judge recently approved the sale of the home of former Playboy Playmate Anna Nicole Smith. The proceeds from the sale will go to the late model’s six-year-old daughter, Dannielynn. Many may remember Anna Nicole Smith for her marriage to the late J. Howard Marshall, an oil industry magnate.

According to a local news article, the home sold for $1.3 million, despite being worth approximately $1.8 million at the time of Smith’s death in 2007. The buyer is reportedly Rouzbeh Zoka, trustee of the Rouzbeh Zoka 2012 revocable trust.

Howard K. Stern, Smith’s former lawyer and now executor of her estate, reportedly stated that the sale of the home was “to the advantage of the estate and in the best interest of the interested persons.” The “interested persons” in this case is Smith’s daughter, Dannielynn.

California estate and probate law is on its face relatively straightforward, but can become very complex very quickly. When a person dies, his or her real and personal property form an estate. The estate includes any income, investments, real estate, and possessions of the person who died (known as the “decedent”). The decedent before dying or in a will may name someone–either a person or an entity, such as a bank or charity–to serve as the executor of the estate. In this case, Smith had apparently named her attorney Howard K. Stern as the executor of her estate. The executor is charged with managing the estate’s liabilities and distributing the estate’s assets to the named beneficiaries (in this case, Smith’s daughter). The primary responsibility of distributing the proceeds of the sale of Smith’s home will fall on Stern as executor of her estate.

It can become more complex when there are disputes over the decedent’s intent. For example, when a person dies, they might have named only some, but not all of his or her children in a will. Most likely, the unnamed children would contest the validity of the will, and estate litigation may ensue to determine whether the decedent intended to omit certain children or whether the omission was unintentional. This is but one example of a dispute that can arise in the execution of an estate plan. If you or someone you know is dealing with a dispute over the administration or execution of trust or estate in California, you should contact an experienced trusts and estates litigation attorney to ensure your interests are represented.

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Imagine a scenario where a parent passes away with four children and $400,000 in assets. The parent created a will stating that each child will inherit one-fourth of his estate. That sounds simple enough, right? Unfortunately, just such a scenario often turns into a long legal fight between siblings. Even in cases of modest wealth, relationships that become strained over an inheritance battle rarely recover.

Although a will can be a useful estate planning tool, it also has many shortcomings. A will is essentially a list of instructions regarding how a deceased person’s property should be distributed. A will generally has little value until an estate enters the probate process. Once an estate has entered probate, a judge will determine how assets are distributed using the will as a guide. Unfortunately, the probate process can be lengthy and expensive. Additionally, private information will likely become public during probate proceedings.

In order to avoid probate, many people set up a revocable trust, a tool that can enable you to transfer ownership of assets without going through a frequently lengthy probate process. Normally, when someone creates a revocable trust, a provision in the document provides that all of the individual’s assets are transferred into the trust upon death. The owner of a revocable trust will also choose a trustee who will manage any assets placed in the trust. A well-planned trust document will provide for possible contingencies and leave little ambiguity that may lead to later disagreements. Although litigation may still arise even after a revocable trust is created, the likelihood of conflict between heirs is lessened.

Another possible legal battle waiting to happen in many families stems from an individual’s unexpected disability or incapacitation. Although older folks tend to worry more frequently about who will make decisions for them in the event of a stroke or other illness, disability from an unexpected accident or other cause is a real risk for many young people. Because of this, everyone should create a living will that outlines what sort of medical treatment to provide in the event of incapacitation and choose a healthcare proxy who will make medical decisions on their behalf. By creating such documents, an individual may have the ability to keep loved ones from battling over their best interests before a judge.

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A recent decision by a Riverside County Superior Court judge may affect other California estate litigation cases where the decedent passed away in 2010. That was a unique year, as the federal government failed to levy an estate tax on any assets passed on by deceased loved ones. When estate planning documents are written in California, a portion of a person’s assets equal to the current estate tax exemption will usually be transferred into a bypass trust. The bypass trust is often set up for the benefit of a couple’s children or other heirs. The remaining, taxable estate is then normally placed into a marital trust for the benefit of a surviving spouse. By placing assets into a marital trust, estate taxes are deferred until the surviving spouse dies. Under this plan, however, all of a decedent’s assets would have passed directly into a bypass trust in California in the year 2010.

In the current case, Eileen and Leonard Tweten signed estate planning documents in 2008 that outlined how the couple’s $100 million in assets would be transferred following their death. In 2010, almost two weeks prior to Eileen’s passing, the couple amended their estate plan in order to ensure Eileen’s half of the couple’s wealth would transfer to the marital trust for the benefit of Leonard rather than the bypass trust as previously arranged. Following Eileen’s death, two of the couple’s three children challenged the amendment in court and argued their mother intended for her half of the couple’s assets to pass immediately to them. The children also argued their father exercised undue influence over their mother while she was essentially on her death bed.

Earlier this month, a Riverside County Superior Court judge tentatively ruled in favor of 85-year-old Leonard, holding that the assets would transfer to the marital trust until his death. According to the judge, Leonard will enjoy the income and benefits from the assets until his death. Following Leonard’s death, the assets that were placed into the trust by Eileen will then pass to the couple’s children. Because Eileen passed away in 2010, the sum placed in the marital trust will not be subject to an estate tax regardless of when Leonard dies.

Despite the California judge’s ruling, Leonard Tweten’s relationship with his children and grandchildren is reportedly now deeply fractured. The Tweten case demonstrates why it is important for everyone, especially families with a large net worth, to reconsider their estate plan on a regular basis. Because estate tax and other laws often change from year to year, it is a good idea to consult with an estate planning attorney every year.

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California’s Fifth Appellate District held recently in King v. Lynch that amendments to a trust were not valid although they complied with Section 15401 of the California Probate Code because the amendments failed to comply with the method specified in the trust documents.

In the case, a married couple, Zoel and Edna Lynch, created a revocable trust designed to support them during their lifetimes. Both spouses were the only trustees. One article of the trust stated that it could be amended through a written instrument signed by both spouses and delivered to the trustee, as long as both spouses were still living. After the death of one spouse, the survivor retained his or her right to amend or revoke the trust. The trust documents also stated the trust could not be amended or revoked by anyone else unless authorized by a court of law.

Originally, the Lynch trust specified that an equal cash distribution be provided to each of the couple’s five children except one, David Lynch, who was to receive any remainder and become the successor to the trust following the death of both parents. Later, both parents jointly amended the trust to also provide four real estate parcels to David. In 2006, however, Edna reportedly became incompetent following a brain injury. Following her injury, Zoel modified the trust without Edna’s signature and appointed himself as the sole trustee. He also reduced the cash distribution to each child significantly through several trust amendments. Zoel did not amend David’s inheritance.

Zoel died a few months before Edna in 2010. Following the death of both spouses, David provided notice regarding the administration of the trust. A few months later, David’s siblings filed a petition seeking to have the trust amendments made after Edna’s incapacitation invalidated. A trial court declared the amendments invalid because they failed to comply with the express terms of the trust. David then appealed to California’s Fifth Appellate District.

According to the court, Section 15401 of the Probate Code provides that a revocable trust may be revoked by a signed writing delivered to the trustee unless the trust instrument explicitly states the method for revocation outlined in the document is exclusive. Section 15402 allows a revocable trust to be modified using specified procedures outlined in the code unless the trust documents state otherwise. Although David argued the modification provisions outlined in the trust were not exclusive and Zoel’s amendments following Edna’s incapacitation were proper, the Fifth Appellate District disagreed.

The court stated the law prior to enactment of the Probate Code provided that a trustee was required to follow the procedures outlined in a trust instrument in order to revoke the trust only where the procedure was explicitly or implicitly exclusive. Because there was no law to the contrary, the same reasoning was also applied to trust modifications. When Section 15401 of the Probate Code was written, the California Legislature codified this law with regard to the revocation of a trust. At the same time, Section 15402 was created to address the modification of a trust. According to the Fifth District, the language of Section 15402 requires any procedure for modification outlined in a trust instrument to be followed. The court held because the Lynch trust was not silent on the process for modification, any valid amendments to it had to be signed by both spouses. Since the modification method outlined in the Lynch trust instrument was not complied with when the amendments being challenged were made, the California appellate court declared them invalid and affirmed the trial court’s holding.

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Last month, California’s Fourth Appellate District recognized a claim for intentional interference with an expected inheritance (IIEI) in Beckwith v. Dahl. Prior to Beckwith, anyone who expected to inherit according to a California will or trust could only sue to overturn an instrument in probate court. In order to do so, however, a party must have standing. Anyone related to a decedent by blood would have little difficulty establishing standing in probate court. In contrast, an unmarried partner or friend who was cut out of a will at the last minute would likely be unable to establish standing.

In Beckwith, the decedent, Marc MacGinnis, was in a long-term committed relationship with Brent Beckwith. The couple lived together and at times engaged in joint business dealings. MacGinnis reportedly prepared a will on his computer that left half of his estate to Beckwith and half to his only surviving relative, Susan Dahl. Dahl was MacGinnis’ estranged sister. Unfortunately, MacGinnis failed to print or sign his purported will before his health began to decline.

In May 2009, MacGinnis underwent surgery on his lungs. Prior to surgery, he asked Beckwith to print the will he prepared on his computer and bring it to the hospital for his signature. After Beckwith was unable to locate the will, MacGinnis asked him to prepare a new one for him to sign. Prior to presenting the will to MacGinnis for signature, Beckwith emailed a copy to Dahl. Dahl responded by stating she believed creating a living trust would be more beneficial than a will. Dahl then agreed to have a friend prepare a trust document for MacGinnis to sign. Because Beckwith was waiting on trust documents from Dahl, he never presented the written will to MacGinnis who was immediately placed on a ventilator following his surgery. Less than one week later, MacGinnis died intestate after Dahl had him removed from the ventilator in accordance with physician recommendations.

Two weeks after MacGinnis died, Dahl opened probate proceedings in Los Angeles Superior Court and failed to identify Beckwith as an interested party. In January 2010, Dahl petitioned the court for final distribution of MacGinnis’ estate. When Beckwith attempted to oppose Dahl’s petition, the probate judge informed him that he had no standing in the case.

On July 20, 2010, Beckwith brought a civil action against Dahl for IIEI, negligence, and deceit by false promise. The trial court stated recognition of the IIEI tort in the State of California was a matter for an appellate court and dismissed Beckwith’s entire complaint without leave to amend. Beckwith timely filed an appeal with California’s Fourth Appellate District.

The appellate court examined whether California should recognize a tort remedy for IIEI. Previous California cases that considered the tort never expressly recognized or declined to recognize IIEI. Although the tort was not previously recognized in California, it was recognized in twenty-five of the forty-two states that have considered the cause of action. After discussing the policy considerations associated with recognizing IIEI, the Fourth Appellate District stated the tort applies in California cases where a party cannot bring a claim in probate court.

Although the appellate court recognized the IIEI tort, it ruled that Beckwith failed to sufficiently allege the requirements for the tort in his complaint. According to the court, Beckwith could not bring a claim for IIEI because Dahl’s actions were directed at Beckwith instead of the decedent. The court remanded the case after holding Beckwith had sufficiently pleaded a case for fraud against Dahl based on her alleged lies regarding the creation of a trust document.

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