If a parent abandons a child, should that parent be allowed to inherit if (years later) the child died without a will?

Historically, both parents have had a legal right to inherit from a child who died without a will, if that child died with no spouse, no registered domestic partner, and no descendants. This has long been the law in California, even in cases where a parent abandoned the child from birth, sometimes resulting in grossly unfair results.

For example, in one California case, a husband abandoned his pregnant wife, stranding her with no means of support in New Mexico. His wife gave birth to their son. The husband never communicated with his son and never provided any support. Yet when the son died 42 years later in California without a will, without a wife or registered domestic partner, and without descendants, the father was entitled to half of his son’s estate (sharing with the mother). (Estate of Shellenbarger (1975) 14 Cal 3rd 831.)

This grossly unfair result has been changed by new California Probate Code 6452 (a) (3), which prevents a parent from inheriting from a child who dies without a will if:

The parent left the child during the child’s minority without

an effort to provide for the child’s support or without communication

from the parent, for at least seven consecutive years that continued

until the end of the child’s minority, with the intent on the part

of the parent to abandon the child. The failure to provide support or

to communicate for the prescribed period is presumptive evidence of

an intent to abandon.”

 

What is reasonable trustee compensation?

Under California law, trustee compensation must be “reasonable” if there are no criteria or other guidelines set forth in the trust. (Probate Code section 15681.)

Often, trusts simply say that the trustee is entitled to “reasonable compensation” without any definition or any guidelines  to help determine the amount of trustee compensation. In those cases, California law provides for the following guidelines to consider when determining or approving trustee compensation (California Rule of Court 7.776):

  1. The gross income of the trust.
  2. The success or failure of the trustee’s administration.
  3. Whether the trustee possessed unusual skill, expertise, or experience.
  4. The amount of time spent by the trustee in performance of trustee duties.
  5. The custom and practice in the community.
  6. The charges of corporate trustees for trusts of similar size and complexity.

Applying these legal guidelines to each case requires application of the fact and circumstances of each case, as well as case law and the practices of the local courts. Strategy is often involved in asserting or opposing trustee compensation claims.

In contrast, a living trust can be drafted to specify the amount of trustee compensation and define the amount in different ways.

Copyright James J. Phillips 2014

Who should be successor trustees of your living trust?

In selecting a successor trustee for a living trust, people often gloss over the complications involved and think in terms of such broad generalizations as “manage my estate” and “take care of my beneficiaries.” In reality, a trustee performs very specialized functions.

The trustee must prudently invest assets, consider distribution requests, keep accurate records, file tax returns, account to the beneficiaries, and carefully weigh often complex legal and tax issues. The trustee must obey strict duties for the benefit of your beneficiaries, being financially liable to them if the trustee violates those duties. Also, being trustee is usually a time-consuming, frequently thankless job.

               For living trusts, a trustee is needed for at least three separate situations:

  1.  First, who serves as trustee for you if you became incompetent? 
  2. Second, who serves as trustee upon your death to administer and distribute your trust?
  3. Third, who serves as trustee of ongoing trusts created on your death for your beneficiaries?  (In each of those three contexts,  successor trustees should be named.)

            The personal attributes of the trustee should be of paramount importance in the selection process. A trust that works for tax purposes will be of little benefit if an imprudently selected trustee dissipates the trust assets through poor administration.

There are four possible choices for trustee:

  1. A family member;
  2.  A trusted friend;
  3.  A corporate trust department:
  4.  A private fiduciary.

As discussed below, each choice has advantages and disadvantages. Factors to consider include: reliability, integrity, and financial responsibility; willingness and ability to devote time to the job of trustee; relationship to the beneficiaries; personal dynamics among the beneficiaries; judgment, experience, impartiality, and potential for conflict of interest; and the size and type of trust assets.

Unlike an “outsider,” a family member knows you and the personalities involved. A family member may also serve for free, although my experience is they usually are paid.  However, there can be significant disadvantages to having a family member as trustee. The family member may lack experience in the crucial functions performed by a trustee. The family member trustee may be subject to pressure or influence by beneficiaries. Throwing a family member in the middle of family hostilities by naming him or her as trustee could become a ticking time bomb that eventually may explode. Ask yourself whether the proposed family member trustee will be susceptible to influence by other family members. Will the family member tirelessly withstand the beneficiary who is constantly asking for funds?  Will the family member resist the temptation to play favorites among beneficiaries? The very intimacy that seems to make a family member an ideal choice can be a burden and disadvantage sometimes. Also, conflicts of interest may arise when the family member is both a trustee and a co-owner of trust property or a beneficiary.

In considering a trusted friend as an option, be mindful that being a trustee for someone else’s trust is time-intensive and can entail a high degree of personal liability. A friend should not be expected to serve as trustee for free. As with a family member, the trusted friend probably is inexperienced in trust administration and will require assistance from a lawyer, an accountant, and possibly a financial advisor.

A corporate trust department employs individuals with specialized training and experience in all the diverse areas involved in trust management and administration. A trust department employs lawyers, tax specialists, investment professionals, and trust administrators. This team of individuals should possess a higher degree of knowledge across all these areas than almost any one individual. A corporate trustee provides neutral and objective supervision, treating all beneficiaries in the same way. Corporate trustees also have the accounting and record keeping capabilities required for trust administration. They can provide accounting which distinguishes between principal and income and can track investment information, such as cost basis and current yield.  Certainly, a corporate trustee will charge a fee for serving. That fee should be compared against the fee charged by an individual trustee plus the accountant and attorney’s fees incurred by the individual trustee.

In California, another option involves nominating a California private fiduciary. As with corporate trustees, private fiduciaries could be interviewed, with their potential services and fees described. (See Professional Fiduciary Association of California’s web page http://www.pfac-pro.org  and Department of Consumer Affairs Professional Fiduciaries Website  http://www.fiduciary.ca.gov )

Your trustee is bound by several legal duties, including the duty to be prudent, the duty of loyalty, and the duty of impartiality. Other duties include the duty to identify and collect property, the duty to protect property, the duty to account to your beneficiaries, the duty not to delegate unwisely, and the duty to carry out the purposes of your trust. These are complicated duties. A trustee can be held personally liable for losses that occur if such a fiduciary duty is violated.

In selecting a trustee, ask yourself these questions: (1) Is the trustee capable of handling the types of assets that will be held in the trust?; (2) Is the trustee capable of, and inclined to, resolve problems that may arise with the trust and its beneficiaries?; (3) Is the trustee capable of managing the trust investments?; (4) Will the trustee be able to devote the time and attention needed to avoid problems?; (5) How well will the trustee get along with the beneficiaries? Will there be hostility or antagonism between the trustee and a beneficiary?; (6) Is the trustee capable of communicating with the beneficiaries?; (7) Will the trustee’s greed prevent proper trust administration?; (8) Will the beneficiaries respect and accept the trustee?; (9) Is the trustee capable of understanding and fulfilling the fiduciary duties and responsibil­ities of trusteeship?; (10) Is the proposed trustee likely to suffer major personal problems (health, family, or financial)?; (11) Do the beneficiaries have inflated ideas of their financial needs?  If so, can the trustee handle them?; and (12) What compensation may the trustee receive?

Some clients prefer the option of the successor trustee working in conjunction with special trustees. For example, if you nominate a corporate trust department or California private fiduciary as trustee, you could nominate as special trustees the individuals in your life whose judgment you trust. Those individuals could be given many powers over the trustee. For example, the special trustees could nominate the trust department or private fiduciary to serve as trustee, fire that trustee, and replace it with another trust department or private fiduciary as trustee. The special trustees could be entitled to regular accountings and status reports.  You could also require the trustee to confer with the special trustees prior to any significant changes to the trust assets. Special trustees could even be given a veto power over the trustee’s proposed actions.   (You can also use the special trustee concept when your trustee is a family member or friend.)

Copyright James J. Phillips 2014

 

Who should serve as guardian of the person for your minor children?

Every parent knows how important it is to select a guardian for minor children. Many parents find this decision to be terribly stressful.

Here are some tips to help with deciding whom to nominate as the guardian of your child if neither parent is living  (or if both parents became incompetent).

In California, there are two types of guardians, guardian of the estate and guardian of the person. The guardian of the estate deals with any assets left to a minor child (not in trust for the minor). This article deals with the guardian of your child’s person.

First, in considering the guardian of the person, take into consideration all of the possible candidates, from Mom’s relatives to Dad’s relatives to your friends and the parents of your child’s friends.

Of course, no one is required to act as guardian simply because you nominate them. So eliminate those whom you know would decline to act.

With your remaining list of possible candidates, consider these factors:

  1. Do you want the person only if that person remains married to the current spouse? Or is marital status irrelevant?
  2. Who has a genuine interest in your child’s welfare and best interest?
  3. Who has a present relationship with your child (and, ideally, your family)?
  4. Does the person possess your desired personal attributes for raising your child? (What are the personal attributes that are important to you?)
  5. Will the person seek the help that you would want in raising your child?
  6. Does the person have your desired level of integrity and stability to do what is in your child’s best interest?
  7. Will the person provide the social, financial, educational, moral, and religious upbringing similar to what you would have provided?
  8. Will the guardian work well with your child’s trustee (who has control of your child’s financial inheritance)?

I recommend that nominations of guardian include alternate choices. Your written nomination of guardian should be part of your estate planning documents and consistent with your trust for your minor child.

It is essential that you review your selection frequently, especially as your child gets older and as changes happen in your life and residence and in the lives of those whom you nominated as guardians of your child’s person. Revisit this annually.

In California, the determination of who serves as guardian is made by the court’s determination of what is in “the best interest of the child.”

In California, Probate Code 1514 requires the court to appoint the parent’s nominee who petitions for the position of guardian of the person “unless the court determines that the nominee is unsuitable.” But the law gives the court the ability to consider the child’s preference and to consider what the court believes is in the child’s best interest under the circumstances at that time.

In California, any relative or “other person on behalf of the minor” may seek to become the guardian of the minor’s person. Relative is defined as a spouse, parent, step parent, sibling or half sibling, uncle, aunt, nephew, niece, first cousin, “grand” or “great” relatives, and the spouse of those persons. (Probate Code 1513 (g).) Person on behalf of the minor would include whomever the minor’s parent nominated as guardian. Also, in California, once the minor is 12 years old, the minor may petition for appointment of guardian of the person of the minor’s choosing. (Probate Code 1510 (a).)

Copyright James J. Phillips September 2014

Your durable general power of attorney is an essential part of your estate plan

In planning  how to have your financial affairs managed by others if you become unable to manage your financial affairs, it’s not enough simply to have a revocable living trust because there are many financial transactions that legally cannot be handled by the trustee of your living trust. For example, if you become incompetent, your successor trustee cannot do any of the following (in the capacity as trustee):

  • Prosecute or defend a personal injury lawsuit;
  • Invest in or withdraw money from your IRA, 401(k), or pension plans;
  • Sign your income tax returns or represent you in tax disputes;
  • Engage in Medi-Cal planning;
  • Gain possession of those of your assets not titled in the name of your trust; etc.

Hence, a durable general power of attorney is an essential part of a Californian’s estate plan. In a durable general power of attorney, you authorize another person to act as your agent (also known as your attorney-in-fact) in the event that you become substantially unable to manage your financial affairs or substantially unable to resist the fraud or undue influence of others.

Some additional examples of powers that can be specified  in a durable general power of attorney include:

  1. The power to engage in gift giving in order to reduce possible estate taxes on your death (see prior posts on estate tax laws);
  2. The power to continue any pattern of charitable giving that you want to continue if you became ill;
  3. The power to engage in so-called Medi-Cal planning (which is discussed in prior posts);
  4. The power to amend the estate tax portions of your living trust (to give flexibility to your documents in the event that, while you were incompetent and unable to amend  your trust yourself,  Congress changes the estate tax provisions from what you anticipated in how your trust was written);
  5. The power to create a special needs trust in your living trust for any beneficiary who becomes disabled and in need of a special needs trust at a time when you were not competent to amend your trust;
  6. The power to transfer your assets to your living trust;
  7. The power to invest, manage, and make withdrawals from your IRA, 401(k), annuities, and pension plans; etc.

Similar to your living trust, your durable general power of attorney should make clear whom you wish to serve in role of managing your financial affairs, whom the alternates are, how (and under what circumstances) that person can be removed, and to whom that person must account, report, and consult.

Coordinating the terms of your durable general power of attorney and living trust protects yourself in the event you become seriously ill.

Copyright James J. Phillips 2014

 

 

Review Your Insurance Coverage

It’s wise to review your insurance policies annually, especially the adequacy and coverage of the policies.

Confer with your insurance agent about your homeowner (or renter’s), landlord, auto, boat, business, umbrella, and liability policies to make sure that your assets are protected in the event of damage and that you are protected from the risks associated with your assets, including flood and earthquake coverage.

Check the replacement values on the policy and the liability limits and medical coverage. Also review your deductibles.

Also review your  health insurance, life insurance, disability insurance, and the long term care/home health care policies that you may have.

Too often, people get hurt from their failure to review and modify their policies as their circumstances change.

Copyright 2014 James J. Phillips

What Should You Do With Your Inheritance?

 

Over the years, I’ve seen lots of people regret what they did with their inheritance. Regrets over how their inheritance was spent or how it was invested or how it was taxed. Regrets over who later will inherit it. And regrets about what happened to their inheritance in a divorce.

Often, people tend to do something that they “wanted to do” without first  identifying all of their  “wants” or without prioritizing all of their “wants.”

So my advice to clients is to create an “inheritance plan” of how to improve your life with your  inheritance, following these four steps:

Step 1: IDENTIFY ALL OF YOUR WANTS: Without being critical or judgmental of yourself, write down all the things that you want do that involves money. Dream.

  1. Think of your present and your future.
  2. Include what wealth you want to leave on your death for others. 
  3. Identify any health, family, or financial necessities (as opposed to wants or desires).
  4. Try to fill up at least one page. For example, consider:
  • Your health wants or needs
  • Paying off debt
  • Your education
  • Your career
  • Your home or second home
  • An emergency fund
  • Helping your children (or grandchildren or others) with college
  • Helping your children (or others) buy a home
  • Increasing your income now
  • Increasing your income upon retirement
  • Reducing your income tax liabilities (or your estate tax liabilities)
  • Financial security throughout the rest of your life, including your wants for home health care or independent living
  • Travel
  • Cars and “toys”
  • If you are married, keeping your inheritance your separate property or sharing it with your spouse
  • Charity
  • Etc.

Step 2: RANK (PRIORITIZE) YOUR WANTS. Now be serious. Based on your values and your goals, rank the above wants from least important to most important. It’s a good idea to repeat this process until you find that your ranking of your wishes has not changed. When you are confident that your priorities are well informed and won’t change, then go to step 3.

Step 3: INVEST (OR SPEND) YOUR INHERITANCE ACCORDING TO YOUR PRIORTIES.  Don’t be swayed by the first “want” that hits you or by pressure from others. Be intentional. Be thoughtful. Understand any potential investment (and the tax implications) before you make the investment.  Ask your legal, tax, and investment advisors for their objective input. Spend or use your inheritance according to your most important, most valued, most long lasting “wants.” Doing this, I believe, gives you the best opportunity (a) to improve your life with the inheritance and (b) to avoid regret.

Step 4: Create or update your estate planning documents to reflect your wishes as to (a) how these investments are to be handled if you become ill and (b) who inherits these investments on your death. Seek the counsel of your accountant, investment advisor, and estate attorney. While you go through this process, keep your inheritance safe.

Copyright James J. Phillips 2014

Who will be in charge of your estate if you have no estate plan?

California law states who has priority to serve as administrator of your probate estate if you died without a will and with a California estate large enough to require a California probate. Specifically, a person in the following relation to the decedent is entitled to appointment as the California administrator in the following order of priority:

  1. Surviving spouse or registered domestic partner
  2. Children
  3. Grandchildren
  4. Other descendants
  5. Parents
  6. Brothers and sisters
  7. Descendants of brothers and sisters
  8. Grandparents
  9. Descendants of grandparents
  10. Children of a predeceased spouse or domestic partner
  11. Other descendants of a predeceased spouse or domestic partner
  12. Other next of kin
  13. Parents of a predeceased spouse or domestic partner
  14. Descendants of parents of a predeceased spouse or domestic partner
  15. Conservator or guardian of the decedent
  16. Public administrator
  17. Creditors
  18. Any other person (i.e. friends)

See California Probate Code Section 8461 and the exceptions at 8462-8469.

Of course, these statutory rules do not apply if the decedent had a will that nominated an executor who was willing and able to act. Nor should these rules apply if the decedent’s assets were titled properly in a living trust and with proper beneficiary designation.

Copyright 2014 James J. Phillips

Estate and trust planning for your pets

If you have pets, consider including them in your estate plan. In doing so, your documents can address:

  • Who will take your pets if you die or become incompetent?
  • Who will find them a good home?
  • How will the costs of your pets be handled?

Regarding who will take your pets or who will find them a good home, options include:

  1. Your estate documents can give your pets outright to someone you know, ideally a responsible, trustworthy person.  You can designate alternate choices to take your pets.  If you wish, funds can be given to the caregiver for each pet.  You may wish to provide detailed care and feeding instructions; or
  2. For California residents, you can use a trust to provide for your pets.  This provides a flexible method for managing the funds to care for your pets.  Funds remaining in the trust can be distributed in the manner directed by you.  With a pet trust, you should nominate a trustworthy and suitable caretaker (and alternates) or instruct the trustee regarding the trustee’s responsibility for finding a suitable home for your pets.  The pet trust can pay for all expenses related to the proper care of your pets; or
  3. When you have no suitable person to take your pets, you can leave your pets to an organization.  A number of California animal protection organizations have programs that provide permanent care or guarantee placement of companion animals when their owners die or become incompetent.  Here are some examples:
  • San Francisco Society of Prevention of Cruelty of Animals-Sido Service
  • Animal Rescue Foundation-Guardian Program
  • Berkeley East Bay Humane Society
  • California Cat Center, Inc-Lifecare Program
  • East Bay SPCA-Pet Survivor Placement Program
  • Friends of Cats, Inc-Lifetime Care
  • Helen Woodward Animal Center
  • Hopalong Animal Rescue Pet SurvivorHumane Society of Marin County
  • National Cat Protection Society-Retirement
  • North County Humane Society-Friends of Life
  • Pet Pride (Los Angeles)
  • Pets in Life-Guardian Program
  • SPCA of Monterey-Guardian Angel Future Care Program
  • Tony La Russa’s Animal Rescue Foundation (ARF)-Guardian Program
  • Valley Animal Center-No Kill Shelter (Fresno)

Your durable general power of attorney, will, and living trust can include provisions as to who will be responsible for implementing  your pet plan.

Your documents can also provide that a sum of money be given to each person (or organization) who takes each pet.

In the end, your estate documents can reflect your wishes as to who will take your pets, how they will be carried for, and what financial assistance is to be provided.

copyright James J. Phillips 2014