History of Estate Tax Law

There was a period, before the year 2000, when the estate tax law had been fairly consistent for a long period of time, and certain estate planning devices had become standardized. In those days, estate taxes were high (55%), and estate tax exemptions were low ($600K from 1986 to 1995; raised to $675K by 2000), so that the estates of many middle income people were subject to estate tax.

The Classic Estate Tax Scheme

Since most people’s estates were subject to tax, estate plans for most people required provisions to avoid taxes. The method generally used was to segregate the settlors’ property into several piles, with each pile governed by particular tax rules, in order to minimize and avoid taxation.

One such tax rule is that, for the most part, death transfers to a spouse are not taxable. Another rule was that each spouse has to use their tax exemption when they died or it would be lost. As a consequence, if the entire estate of the first spouse to die (“decedent spouse”) was passed to the “surviving spouse” (second spouse to die) – tax free because transfers to a spouse are tax free – then, when the surviving spouse died, and property passed to children or other third parties, all of the assets would pass, but there would be only one exemption remaining. The children would have to pay a heavy estate tax.

For example, lets say a couple – we’ll call then “Mr. X and Mrs. X” – had $2M dollars. When “decedent spouse” Mr. X died, he left everything to Mrs. X, the surviving spouse.  No tax was due at that time, since an inter-spousal transfer is tax free. However, when Mrs. X, died, the entire amount of the estate, the whole $2M, would be passed to the children. Since only one $600K exemption would be available, the difference between that amount and $2M –  $1.4M – would be taxable. At 55%, the tax on $1.4M would be $770K, leaving the kids only $1,230,000.  Ouch.

Mr. X’s exemption was not used when he died, and was not available to use when the estate is passed to the children. Wouldn’t it have been better if there was some way to use that exemption?

Well, Mr. X could have given some of the money directly to the children at his death.  The problem with that is that surviving spouse Mrs. X needs that money to live on during her lifetime. Normally, a surviving spouse hopes to live on the income from the assets, and not the principal, during their lifetime, so as not to deplete the amount going to the beneficiaries. For example, if Mrs. X could earn 5% annually by investing her $1.4M, she would have $70K a year. That’s OK, but it would be even better if she could have the interest on the entire $2M: at 5%, this would be $100K. Unfortunately, Mr. X gave the kids the 600K difference when he died.  What was needed was some way that the 600K could go to the kids when Mr. X dies, but yet still be available for Mrs. X to invest and to live off the income.

The solution was something called the Bypass Trust. In this type of trust, as long as the principal will eventually go to the children, and Mrs. X doesn’t have any ability to change that, she would be able to use the income from the trust during her lifetime. The principal “bypasses” her estate for tax purposes, but she is allowed to obtain the income. Thus, when Mr. X dies, an amount, up to the amount of his $600K exemption, could be deemed for tax purposes to pass directly to the children instead of to Mrs. X by being immediately put into a trust for the children. The terms of the trust are that Mrs. X could have the income from the trust, during her lifetime, and the principal would go to the children when she died.

It worked like this: $600K went into the kids trust while a $1.4M “marital trust” was funded for Mrs. X. She would have the income from all $2M but only $1.4M is deemed to be in her estate.[1] Then, at her death, her $600K exemption would be deducted from her $1.4M, so that only $800K ($1.4M – $ 600K) would be taxable, instead of $2M. Since 55% of $800K is $440K, there would be a net tax savings of $330K ($770K – $440K).  Furthermore, at her death, the kids would receive both the proceeds of the trust established by Mr. X ($600K) – tax free since it was already charged against Mr. X’s deduction- as well as Mrs. X’s estate. The children would receive a total of $1,560,000, instead of only $1,230,000, without the Bypass Trust.

With Bypass Trust

And remember that Mrs. X had all $2M to use for income during her lifetime, giving her an extra $30K a year.

The Use of Formulas Instead Of Dollar Amounts

So, some money would go to the surviving spouse, in a “marital trust”, and some would go to the children, in a “bypass trust”.  But how much should go into each? At the time the estate plan was created, no one could know exactly how much would be in the estate when Mr. X would happen to die. If the document simply said “put $600K into the bypass trust and put $1.4M in the marital trust” there would be a problem if the eventual amount of the estate was less than $1.4M. If, for example, there was only $1M was in the estate at the time of Mr. X’s death, the gifts would fail. There would not be enough money to fund both gifts.

So, because the amount could not be known ahead of time, estate plans did not specify an amount for each trust; instead a formula was used. The formula was that as much money as possible would go into the “bypass trust”, up to the amount of $600K, while the remainder would go into the “marital trust”.  Or, it could be the other way around.

And this system worked pretty well until the millennium.

Congress Changes the Numbers And Creates Uncertainty

Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, under which the amounts of the estate tax would gradually decrease, and the estate tax exemption would increase, each year, until the tax was would be only 45% and the exemption would be $3.5M by 2009.  The estate tax would phase out entirely in the year 2010: there would be no estate tax. However, unless congress passed something to replace the Act by the end of 2010, the law would end, and the tax would revert to 35%, and the exemption credit would be $1M thereafter.

Since the amount of tax and exemption was going to change every year, it became impossible to state the dollar amount limit of how much should go into the bypass trust. Therefore a new type of formula was used: assets would go into the “bypass trust” up to the amount of whatever the exemption would happen to be when the decedent spouse (Mr. X) died, and the rest would go into the “marital trust”. That was not a difficult change, and many estate plans were already written that way, since the amount of exemption was subject to some change even in the 1990’s, although more infrequently.

But there was still a problem. By 2009, the amount of the exemption would be so large – $3.5M – that provisions for funding the marital and bypass trusts would become meaningless. There would simply be no tax on most estates. In fact, in 2010, there would actually be no estate tax. Many clients did not want to pay extra for a more complex estate plan which included provisions to avoid taxes, when they might not have to use them. If their estate was only $1M or $2M, why should they have to have a complicated trust, when the likelihood was they would have no estate tax?

The answer was that there was great uncertainty about what would happen in 2010, since, unless a dysfunctional congress acted, the exemption would revert to $1M. In many states, like California, it was not unusual for a middle class estate to exceed $1M since, during the real estate boom of the mid 2000’s, even average homes could cost that much. Given that, you would still want the marital/bypass trust formula to be in your estate plan.

So, weighing the cost of have to pay for a more complicated bypass/martial trust estate plan, with the risk that portions might become meaningless, against that cost of what would happen if they were not in place and the exemption was reduced to $1M – which could result in negative tax consequences – clients faced a dilemma. Pay more now or risk having a higher estate tax.  My advice was that if the estate was likely to be more than $1M, it was preferable to create the more complex trust. Not everyone accepted that advice.

The Current Tax Law Situation- And More Uncertainty

Despite Washington gridlock, Congress managed to enact a new estate tax law in 2010, known as TRA 2010 (“TRA 2010?).[2] The essential feature of TRA 2010 was that it created the largest estate tax exemption ever – $5M, while reducing the estate tax rate to the lowest ever – 35%.  Furthermore, the law created “portability” for the estate tax exemption. This means that in an estate plan for both spouses, the decedent spouse’s exemption can be freely transferred (by filing an IRS Form) to the survivor spouse, so that he/she may use all of the couple’s combined exemption. Portability ended the need for the traditional bypass trust to accomplish the same result.

However, this tax law will “sunset” out of existence on December 31, 2012, and unless something is done by Congress, once again the tax will revert, this time to 45% with the exemption amount of $1M, and no portability.

Some practitioners argue that Congress can do nothing since this is an election year, and so this reversion is the likely scenario. Others think that a $3.5M exemption and 35% tax is likely, since that is the position of the Obama administration. Others are sure that the Estate Tax will finally be repealed once and for all. Whether portability will survive is another unknown.

With all of the uncertainly, the practice of leading estate planners has now become to include optional and discretionary tax saving devices which allow the surviving spouse to determine, at the death of the decedent spouse, whether to use a bypass trust, and how much to put in it, based upon the tax law in effect at the time. Once such device is called the “disclaimer trust”, under which all of the estate assets go in the surviving spouse’s marital trust, but the survivor can decide to “disclaim” a portion, which would go into a bypass trust. Otherwise, the bypass trust would not be used.

This seems like the prudent way to go for couples with more than $1M, and crucial for those   with estates of $3.5M or more. This still has the drawback of requiring the creation of a more expensive complex estate plan which might end up not being necessary if the exemption remains high. Also, it puts a burden on the surviving spouse, who has to engage attorney and accountant to help make tax and estate planning decisions, soon after the death of their spouse. But the alternative is that the estate might end up being drastically reduced by taxes.

Until Congress finally does what is right and creates an estate tax system that is rational and can be relied upon, and which cannot be changed for decades at a time, or, provides that the law in effect when an estate plan is made will be the law that rules it’s implementation, then it will be necessary to have estate plans periodically reviewed and amended to account for changes in the state of the law.

Conclusion

If you have an estate plan that was created prior to 2010, and/or does not have any provision allowing for options which can be used by the surviving spouse to allocate the decedent spouse’s estate for tax purposes, it might be a good idea to have the estate plan looked at by an estate planning attorney. This is imperative if there is a good chance that one spouse might pass away in this year. And, I would urge everybody to have their estate plan checked in 2013 once it is clear what the new law will be.

[1] Normally, her estate would be placed into a trust called the “marital trust”, which ensured that she would get the income, and have some right to take the principal as well, but the remaining principal would go the beneficiary children. In the bypass trust, only income goes to the surviving spouse, and the children get all of the principal.

[2] For a fuller discussion of TRA 2010, please see my article “Estate Tax Law Changes: 2011, 2012 and Beyond” (ã Terry Traktman, 2011), available elsewhere on this website. The instant article is not intended as a complete treatment of the subject, and does not contain discussion of all aspects of that law.

© Terry J. Traktman, July, 2012, all rights reserved.

The materials in this article are not intended to constitute, and do not constitute, legal advice. The materials are general in nature, and may not apply to particular factual or legal circumstances. Anyone accessing the materials should not act upon them without first seeking legal counsel. The information in this article does not create an attorney-client relationship with Terry Traktman or Traktman Law Office; clients are accepted only in accordance with and after certain formal procedures, and legal advice rendered only after completion of those procedures. Moreover, the materials are not intended to constitute, and do not constitute, a solicitation for the formation of an attorney-client relationship; no attorney-client relationship is created through your use or receipt of the materials.

Gifting in 2012

For the remainder of 2012, the gift tax exemption is $5,120,000 per person (there was a 2012 inflation adjustment), which would be doubled for a married couple.  The tax rate is 35%. You can make annual tax-free gifts of $13,000 ($26,000 if married) to as many individuals as you want. If you give more the exemption amount, the excess is a taxable gift. You can pay the gift tax now, or not, in which case, it will be taxed upon your death as estate tax. The exemption is a unified gift/estate tax exemption credit, which is a limit on the total transfer, no matter whether given as a lifetime gift or through your estate. If you use your unified credit while you are living, it’s applied to gift tax; if you use it after you die, it’s applied to estate tax. Both exemptions are portable (currently): can be transferred between spouses.

The way this works is that you must report any gift in excess of the annual tax-free limit to the IRS by filing an informational gift tax return (Form 709) for the year in which the gift is made. You can then either pay the tax or not. If you do not pay, your unified exemption credit will be decreased by the amount. When you die, the IRS will know how much of the exemption you have used in lifetime gifts, and how much is left over for use against estate tax. The amount of exemption which has not been used will be deducted from the total of all gifts, both lifetime and testamentary. The remainder is subject to taxation.

You should note that you can give gifts of revocable living trust assets the same as from any other source. Under prior law, gifts made from trust assets within three years of death were considered by the IRS to be in your taxable estate at death; under current law these gifts are now considered the same as if they were made directly from you.

Would Making A Gift in 2012 Lock in the $5M Exemption or 35% Tax Rate?

At first glance, it may appear that you can give millions of dollars away in 2012 as gifts, subject to the large current gift tax exemption and low tax rate, to lock in that those rates, in case the exemption amounts and tax rates change negatively.[1] However, you must recall that the gift and estate taxes are unified, so that the effective exemption and tax rates will be those in existence when you die.  For example, you might give $3.5M in 2012 and choose not to pay gift tax, but instead rely on the $5M exemption, thinking you will have $1.5M in credit left. But, what would happen if the unified exemption is only $3.5M in the year you die? You will have no exemption credit left to shield the rest of your estate from taxation.

The same reasoning applies to the tax rate. You might think that would be a savings by paying gift tax on the transfer at the current to tax rate of 35%, instead of paying estate tax on the same asset when you die, at a rate which might be 55%. However, it does not work like that. The rate that matters will be the rate in effect at the time of death. If that rate is 55%, then the 35% paid at the time a gift was made would be an underpayment, so that the difference would have to be made up at the time of death.

There’s no escaping the grim reaper or the grim taxman.

So, Is There Any Benefit to Making Inter Vivos Gifts Above the $13K Exclusion?

Yes, there is. One clear benefit is that by making a lifetime gift and paying the gift tax,  you will remove the amount of gift tax actually paid from your estate. If, instead, you keep an asset in your estate until you die or give it without paying the tax, the amount you would have paid in gift tax on that asset (if you had paid it) would still be in your estate. This makes your taxable estate larger and increases the amount of estate tax your estate would have to pay. In effect, you would be paying a tax on the tax!

You might think that merely removing the amount of tax seems a small benefit; however, it can be substantial. For example, assume you have completely used up your gift tax exemption through prior gifts and, as a result, now must pay the full marginal 35% gift and estate tax on any further gift or bequest. You want to give your kids an additional $1 million.  If you give your children a gift of $1M and pay the tax, the current gift tax, at 35%, would be $350,000.  This means that it would cost you a net $1,350,000 to give your kids $1M. Put differently, by paying the tax now, $1,350,000 would be removed from what would be in your taxable estate.  If you don’t pay the tax, that extra $350,000 will still be in your estate when you pass away. To pay tax on $1,350,000 would cost you $472,500 (35% of $1,350,000 = $472,500).  That’s $112,500 more than if you gave the $1 million as a lifetime gift and paid the tax.

On the other hand, this example assumes that you have already used up your entire unified credit, so that the additional full $1M gift (and the tax on it) would be charged at the marginal tax rate of $35%. Not everybody is in the situation of having used up their entire credit on lifetime gifts and wanting to give more. In fact, very few would be in that situation. I point this out to emphasize that any tax strategy should only be employed after a complete analysis of your specific situation in conjunction with legal and financial advisors. 

Gifts of Appreciated Assets

Another advantage of making lifetime gifts would be the case of giving assets that are appreciating in value, since any income and appreciation which accrue after the gift would also be removed from your taxable estate.  If you have stocks worth $500K today, which would be worth $750K on your death, it might make sense to give them as a lifetime gift. The estate/gift  tax on $500K would be $175K, while on $750K it would be $262,5000, a saving of $87,500.

However, you must carefully weigh estate tax savings against the capital gains the recipient may have to pay upon later sale. When the recipient sells the asset, capital gains tax must be paid on the difference between the selling price and the cost basis. With death transfers, capital asset bases are generally “stepped-up” to current levels; on the other hand, inter vivos gifts of appreciated assets maintain our original cost basis (plus any gift tax paid). When the recipient sells the asset, capital gains tax would be paid on the difference between the selling price and original cost basis, which is what you paid for it.

Currently, the maximum federal long term capital gains rate is 15%, considerably lower than the estate tax. So, there could be a real benefit to both you and the beneficiary to make it a lifetime gift. Nonetheless, you must calculate what you paid for the asset, what it’s worth now, what you think it will be worth when you die, your current health, and if the recipient plans to sell or keep it. And keep in mind that you cannot be sure of the tax rates and exemptions which will be in effect at your death.

Conclusion

While there may be instances in which it would be beneficial to make gifts in 2012, this determination must depend upon an analysis of the actual circumstances of your estate and of the costs and benefits to both the estate and the beneficiaries, and not the mere idea that gift transfers are “free” or “cheap” in 2012, as opposed to any other time. The law at the time of death will be what matters.

One further consideration: remember that if you give away assets as a gift, you no longer have them for your lifetime. Think of old King Lear.

© Terry J. Traktman, July, 2012,  all rights reserved

The materials in this article are not intended to constitute, and do not constitute, legal advice. The materials are general in nature, and may not apply to particular factual or legal circumstances. Anyone accessing the materials should not act upon them without first seeking legal counsel. The information in this article does not create an attorney-client relationship with Terry Traktman or Traktman Law Office; clients are accepted only in accordance with and after certain formal procedures, and legal advice rendered only after completion of those procedures. Moreover, the materials are not intended to constitute, and do not constitute, a solicitation for the formation of an attorney-client relationship; no attorney-client relationship is created through your use or receipt of the materials.

Overview

Is Estate Planning Tax Obsolete?

One might think that these rules make estate tax planning unnecessary for all but the wealthiest people: (individuals with estates above $5M and couples with estates above $10M). However, bear in mind that the estate tax rules which apply to one’s estate are not those that exist when the estate plan is created, but those which will be in effect when the they happen to pass away.

During the decade of the 2000’s, I often explained to my clients that tax planning was needed on account of uncertainty. During that decade, the exemption amount changed almost annually until 2009, when it became $3.5M, after which the tax disappeared entirely in 2010. No one knew what would happen after that. It was assumed that a final fix would be created in 2010. Unfortunately, this did not happen; only a temporary system was put into place. So the uncertainty remains. No one knows what will happen when the 2010 law sunsets at the end of 2012.

Some of the scenarios of what the estate tax law might become in 2013 include: 1- Congress could extend the current system; 2- Congress could adopt the 2009 regime or a compromise version of it: $3.5M exemption, a tax rate of anything from $35% to 55%, and either portability or non-portability; 3- Congress could do nothing, in which case the law would revert to a $1M exemption and 55% tax rate. Of course, 4- Congress could repeal the estate tax entirely. It seems that while “death and taxes” are certain, death taxes are anything but.

There are several approaches to trust drafting that one can take in response to this uncertainty. A basic premise of trust drafting aimed at minimizing estate taxes is to create trust vehicles which permit use of the full amount of all possible exemptions, particularly the full estate tax exemption available to each spouse. Clearly, it would be nice to know beforehand what the amount of the exemption available would be and whether these would be portable, particularly as to estates which are somewhat less than the current exemption amounts.

Take, for example, a couple with an estate of $4.5M. If the tax law remains as it is, they will pay nothing in estate taxes, because each is entitled to a $5M.exemption. But what if the exemption amount is reduced to $3.5 with no portability (as proposed by President Obama during negotiations which led to TRA 2010)? There would be $1M at risk of taxation (at 55%, that could be as much as $550,000) unless planning is done. And, even if portability survives, will the survivor remember to file the tax election? What if the exemption amount is lowered to $2M? What if Congress fails to act at all (certainly not out of the question), and the exemption is reduced to $1M. How should one proceed in the face of uncertainty?

One can simply take the current numbers at face value and plan on re-drafting or amending after 2013 if the law changes significantly. But this may require many trusts to be redrafted. Or, one can plan every estate for the worst case scenario: that the exemption and tax amounts will revert to what they would be if no action is taken by congress ($1M and 55%). Well, while that would be a safe alternative, it would require many clients to pay for estate planning services they may not end up needing. My approach is to discuss the issue with the client, in the context of their particular financial situation and the probabilities of what might happen in the future, and find out what suits them best.

Most people with relatively small estates (less than $2M) opt for a basic trust which assumes there will be no estate tax issue, and which therefore does not include tax minimizing features. The likelihood of the “worst case scenario” is slight, since even the democrats appear to agree to a $3.5M exemption. This saves the client money in the short term, and, only in the unlikely event that the exemption is drastically reduced, would it be necessary to add an amendment to the trust, once the law becomes clear.

Those with middling amounts ($2-7M) usually want inclusion of tax minimizing devices which are optional and discretionary, so that they can be employed only if needed, depending upon the final shape of the law. They pay more in the present for the inclusion of these provisions, but can rest assured that their estate plan is prepared to handle eventualities without the need for amendment.

Those with large estates (above $7M) should assume that tax-minimizing provisions are required, in some cases fairly elaborate ones; these must be drafted in a manner which maintains maximum flexibility.

Additional consideration must be given to the gift tax and generation skipping tax. “Gift tax” is of concern where the estate owners have given beneficiaries lifetime gifts of more than the annual allowable gift tax exemption (currently now $13,000) in any one year. “Generation-skipping tax” is of concern whenever a lifetime or testamentary gift is given to a beneficiary who is more than a single generation removed forn the giver, (i.e. grandchildren, etc). Under the previous system, there were distinct exemptions for lifetime and generation skipping gifts, so that the total available exemption might be far greater than the estate tax exemption. Indeed, for large estates, it became a strategy to give assets away by lifetime gifts, and to spread the wealth around to many recipients, in order to reduce the size of the estate left at the time of death. However, under the 2010-2012 system these exemptions were unified, so that if each gift, no matter which type, would deplete the total amount of exemption available. Clearly, it is difficult to use these techniques where it is uncertain whether the exemption will remain unified. Accordingly, for the present they can only be made available as discretionary options, which can be used if available; but this is less than satisfactory, since they cannot be relied upon.

Conclusion

So, if you have heard that only the extremely wealthy need to be worried about estate tax planning, think again. The uncertainty makes it all the more necessary to consult an attorney and make an estate plan, if you haven’t, or to have your existing plan re-checked if it was not recently drafted, to make sure that your estate is ready for whatever happens. Learn more about our Estate Planning Services here.

Trust Funding Is Not Always Included With Trust Drafting

Unfortunately, many of the firms which draft trusts do little to assist their clients with trust funding, with the result that the client’s estate planning expectations do not come to pass. These firms ceremoniously give their client a handsome binder containing numerous important-looking documents, and assure them that those documents will do the trick. The attorney (or paralegal) may mention something about “trust funding”, and point out a page at the back of the trust upon which the client is supposed to list the trust assets. However, after the client takes the binder home and starts to fill out this page, questions arise: “Well…which things should go in the trust and which should not? Is it enough to list things here or do I need to do something more? I wish I understood more about this.”

Consequences of Failure to Properly Fund

Creation of a living trust document is only part of an effective estate plan. For the plan to be effective it is equally important to ensure that the assets are properly treated. It may not be appropriate for all assets to be placed in the trust. Further, different classes of assets must be placed in the trust by different means. For some assets, simply listing them on the “trust asset” page will be sufficient to transfer them into the trust; for many other important assets, that is simply not enough. These assets must be formally placed in the trust by transferring title to the asset from yourself as an individual to yourself as trustee of the trust.

For instance, assume you have a joint bank account in the name “John Doe and Mary Doe”. The account must be changed so that it goes into the name of “John Doe and Mary Doe, Trustees of The John and Mary Doe Living Trust”.  If you don’t do this, the account will remain a “joint account”, which means that, instead of the proceeds being distributed as you have planned in the trust document, the proceeds will simply go to the surviving spouse as their individual property. This may result in unintended consequences. The estate plan may have assumed that the account proceeds were to go into a bypass trust[*] specially set up to use the decedent spouse’s estate tax exemption. If, instead, the account goes to the surviving spouse directly, rather than into the bypass trust, the decedent spouse’s exemption may be lost, and the surviving spouse may not have sufficient exemption of their own to shelter the entire estate. As a result, taxes may become due which could have been avoided.

Or take, for example, real property assets. Real property must be formally transferred into the trust by deed. If this is not done, that real property would have to go through Probate: this would be costly and would delay when the beneficiaries could receive their inheritance. I can’t tell how often failure to transfer a property into the trust results in added expense and distress upon the death of a settlor[†].  Real property, time share ownerships, bank accounts, brokerage accounts, business interests, other investments, and all large value personal property, e.g., a motor home, boat or plane, all should be formally transferred into the name of the living trust by various means.

On the other hand, as seen, some assets should not be placed into the Trust at all, and it would be a mistake to put them in. For example, in many instances a small bank account should be left outside of the trust so that there will be a modicum of immediate financial resources for the survivors when the settlor passes away.  Also, in many cases, pensions, retirement accounts and life insurance policies are intended to be distributed directly to the beneficiaries named in those instruments;  placing them in the trust would have negative consequences. For instance, the IRS allows many pensions and retirement accounts to be rolled over into the name of the beneficiary, instead of being paid in a lump sum payment, which avoids the tax consequences of immediate possession of the full amount of the asset.  A lump sum payment of hundred of thousands of dollars may be disastrous.

Proper Trust Funding

When I draft an estate plan, my practice is to thoroughly discuss with the client which assets should or should not be placed in the Trust, to advise the client which assets need to be formally transferred, how each class of assets is to be transferred, and also to assist the client in carrying these transfers out. To do anything less is irresponsible in my book. Yet, I find that it is the standard practice of many firms to just give the client the binder and show them the door.

We start by ascertaining exactly what you own, by creating a thorough list of all of your assets, and discuss which should go into the trust and which should not.  Once we have identified those to be transferred to the trust, we prepare formal Exhibits which list those trust assets to be included in the trust, and attach these exhibits to the trust. I think this is preferable to simply telling you to do it. This list can form a checklist which can be utilized to ensure that everything that is supposed to go into the trust is transferred.

Basic personal property (furnishings, etc) may simply be listed; that is sufficient to transfer them. Next we look at real property: this must be formally transferred by deed. Having a deed prepared may be a daunting task for people unfamiliar with real estate procedure. To make this easy, we provide deeds to transfer real property, and assist in having these notarized and recorded in the official county records. We also assist with subsidiary documents which county assessors need and which – if not done – may lead to reassessment.

When bank or brokerage accounts are involved, we review the periodic statements to see what name the account is in. If it is not in the name of the trust, the bank or the brokerage company must be contacted: they will have forms which can be filled out, notarized and returned to the institution in order to make the change necessary to place the account in the name of the trust.

As these changes are made, you can use the list attached to the trust as Exhibits to see that everything is accomplished. Also, when you open new accounts or purchase new real property, make sure you start by opening those accounts or having the property transferred in the name of the trust (if that is intended), and remember to add them to the list. Failure to do so will not prevent them from being in the trust so long as they are properly created or transferred in the trust name – but it is good to keep the list updated for your records.  This will also assist the successor trustee, so they will have a complete list to work form at your death upon your death.

Additionally, I make it a practice, when having the discussion about which properties are to go into the trust and which are not, to nag my clients about the properties which are not going into the trust but have beneficiary designations.  Trust creation provides an opportunity to check that the beneficiary designations are up to date, correct and in-line with the decisions made about the estate plan.  The initial designations made when you first got a job, or took out a life insurance policy, may no longer be appropriate.

If you happen to have had the misfortune of having a trust drafted but were not assisted in funding it, and some of the funding remains to be done, we would be more than happy to help you ascertain what needs to be done and help you do it.

Conclusion

A living trust document is only part of a complete estate plan. All of the assets in an individual’s estate need to be reviewed, appropriately addressed in the living trust, or planned for accordingly outside of the trust. This ensures that the assets are passed on as the individual wishes, with estate and income tax consequences considered, and in a form which will assist in the eventual administration of the estate.

[†] A “settlor” is what the law calls the person who is making a trust and placing (“settling”) their property into it.

The Law and Pets

Historically, and in most states today, there was no way to require anyone to take care of your pet after you die. The main option was to give a friend or relative the pet to take care of, and hope they would do so. But you could not guarantee that they would, and could only rely on faith. You could not even be sure that the executor of the estate would give the animal to the right person – since the animal was a mere piece of property like furniture – unless you gave the animal to the right person as property in your will.

Some estate planners for the wealthy experimented with pet trusts; you may recall that Leona Helmsley created a $12 million trust for her dog, “Trouble”.  But, even if a pet trust was created, there was no assurance it would be carried out, since these were only considered “honorary” trusts – the assets were actually left to a designated person, and it was hoped that they would take care of the pet: however, it was not enforceable against them.

Finally, in 2009, California enacted Probate Code § 15212: “Trusts for care of animals.” This section recognized the Pet Trust as a lawful and enforceable trust, and created requirements and conditions for enforcement.[*]

The main features of the Pet Trust law are:

• A trust for the care of an animal is deemed to be for a “lawful non-charitable purpose.”
• The trust funds may be used only for the benefit of the animal, unless the trust instrument provides otherwise.
• The court must liberally construe the trust and presume that the trust language is intended to be enforceable and not honorary.
• Both an animal caretaker (“enforcer”), to have custody of the pet, and a separate trustee, to handle the money, are provided for under the law. The settlor may name both the trustee and enforcer, or the court may appoint them.
• Anyone interested in the welfare of the animal and any nonprofit charitable organization that has as its principal activity the care of animals may petition the court to enforce the trust.
• The trust terminates when the last animal dies that was alive when the settlor died (unless the settlor provided otherwise in the trust instrument).
• Unless the trust is less than $40,000, accountings must be given to the remainder beneficiaries (those who would take upon the death of the animal) as well as to any nonprofit charitable corporation (Humane Society, etc.) whose principal activity is the care of animals and has made a written request. Upon request, the animal and the trust records may also be inspected by that charity, any beneficiary or the trust enforcer.
• When the trust ends, the balance of the trust property passes: (1) according to the terms of the trust (i.e., to the remainder beneficiaries); (2) if there no remainder beneficiaries, and the settlor created the trust in a non-residuary will clause, under the residuary clause, or (3) in other cases, to the settlor’s heirs.

Of course, the law is not perfect. Some commentators have criticized the law as being unworkable and an invitation to litigation, in that it gives animal charities and “anyone interested in the welfare of the animal” the right to inspect and receive records about the animal as well as the power to petition the court to enforce the trust.  Certainly, there is the possibility of abuse of these powers.

The new law also fails to resolve some issues which have came up in previous cases. It does not treat the issue of “over-funding.”  Pet trusts have been reduced in amount when courts ruled that the pet-care fund was more than reasonable for the purpose. The $12 million  Leona Helmsley left for “Trouble” was reduced to $2 million, with the rest of the money being diverted to the benefit of human heirs.  It is unclear whether California courts will honor the settlors’ wishes about amount, or will accede to the demands of the human beneficiaries.

Despite these flaws, the law is better than what preceded it, and provides a valuable tool to be used by estate planners.

Setting up the Pet Trust

Pet Trusts may be created as an independent document, or may be created within the context of your overall estate planning. Certainly it would be more economical to have the pet trust created when you are having your will, living trust or other estate documents drawn up; it can be added as simply one more sub-trust.  If care for your pets is a concern, make sure you estate lawyer is made aware of the need, and that the lawyer is able to provide guidance and appropriate documents.

Pet trusts must cover two scenarios: there must be a testamentary trust to provide care after your death, and an inter vivos trust for when you living but unable to care for your animal because you are incapacitated or in an assisted-living facility. The lifetime care portion can be in the trust or can also be provided by a durable power of attorney.

It is important to think carefully about whom to designate as caretaker and trustee. Obviously, the caretaker must love animals, but should also be dedicated to you and the specific animal. The law will see to it that the money is available, but it can’t require love and affection. In some cases, you might consider adding a stipend for the caretaker. Remember that the money is being given to the trust for the care of the animal- the money does not belong to the caretaker. You want to make sure that the caretaker feels rewarded: particularly if you don’t specify a caretaker so that the court must appoint one.

It is also important to think about the amount of the amount of the trust. It should be adequate to cover the needs of the animal into an uncertain future time. Try to calculate all of the hidden costs. On the other hand, it should not be so much as to invite greedy humans to petition the court that it is “overfunded”.  It may be a good idea to be somewhat specific about defining your pet’s health needs, routine and care, both as a guide for those involved and as a justification for the amount to be funded.  You can also provide that any excess will go to charity and not your heirs, to remove the incentive to petition.

What if you don’t have sufficient funds to leave enough to ensure that there will always be money for the animal’s care? If you have chosen a caretaker who loves the animal, they may simply bear the burden. You could also provide an adequate fund by purchase of life insurance to fund the pet trust. Another option would be to arrange for permanent care with a shelter or animal rescue organization. Many of these will agree to provide lifetime care to your pet in exchange for a specified donation from the trust. This must be arranged while you are alive, and it is a good idea to have a written agreement which specifies the undertaking, i.e.: that the animal will be cared for during its natural life, no euthanasia, whether adoption is permitted, etc.

Conclusion

If you want assurance that your beloved pet will be cared for no matter what happens, specifically providing for that care in your estate planning can provide peace of mind. Happily, the law is finally recognizing that Fluffy in more like a friend than a piece of furniture.

[*] Probate Code § 15212: (a) Subject to the requirements of this section, a trust for the care of an animal is a trust for a lawful noncharitable purpose. Unless expressly provided in the trust, the trust terminates when no animal living on the date of the settlor’s death remains alive. The governing instrument of the animal trust shall be liberally construed to bring the trust within this section, to presume against the merely precatory or honorary nature of the disposition, and to carry out the general intent of the settlor. Extrinsic evidence is admissible in determining the settlor’s intent.

(b) A trust for the care of an animal is subject to the following requirements:
(1) Except as expressly provided otherwise in the trust instrument, the principal or income shall not be converted to the use of the trustee or to any use other than for the benefit of the animal.
(2) Upon termination of the trust, the trustee shall distribute the unexpended trust property in the following order:
(A) As directed in the trust instrument.
(B) If the trust was created in a nonresiduary clause in the settlor’s will or in a codicil to the settlor’s will, under the residuary clause in the settlor’s will.
(C) If the application of subparagraph (A) or (B) does not result in distribution of unexpended trust property, to the settlor’s heirs under Section 21114.
(3) For the purposes of Section 21110, the residuary clause described in subparagraph (B) of paragraph (2) shall be treated as creating a future interest under the terms of a trust.

(c) The intended use of the principal or income may be enforced by a person designated for that purpose in the trust instrument or, if none is designated, by a person appointed by a court. In addition to a person identified in subdivision (a) of Section 17200, any person interested in the welfare of the animal or any nonprofit charitable organization that has as its principal activity the care of animals may petition the court regarding the trust as provided in Chapter 3 (commencing with Section 17200) of Part 5.

(d) If a trustee is not designated or no designated or successor trustee is willing or able to serve, a court shall name a trustee. A court may order the transfer of the trust property to a court-appointed trustee, if it is required to ensure that the intended use is carried out and if a successor trustee is not designated in the trust instrument or if no designated successor trustee agrees to serve or is able to serve. A court may also make all other orders and determinations as it shall deem advisable to carry out the intent of the settlor and the purpose of this section.

(e) The accountings required by Section 16062 shall be provided to the beneficiaries who would be entitled to distribution if the animal were then deceased and to any nonprofit charitable corporation that has as its principal activity the care of animals and that has requested these accountings in writing. However, if the value of the assets in the trust does not exceed forty thousand dollars ($40,000), no filing, report, registration, periodic accounting, separate maintenance of funds, appointment, or fee is required by reason of the existence of the fiduciary relationship of the trustee, unless ordered by the court or required by the trust instrument.

(f) Any beneficiary, any person designated by the trust instrument or the court to enforce the trust, or any nonprofit charitable corporation that has as its principal activity the care of animals may, upon reasonable request, inspect the animal, the premises where the animal is maintained, or the books and records of the trust.

(g) A trust governed by this section is not subject to termination pursuant to subdivision (b) of Section 15408.

After a sale is complete, there are often disputes regarding sellers’ alleged failure to disclose to the buyer material defects regarding the property, including structural problems or additions made without proper permits.

Quiet Title

When there are unsettled claims of title to real property which cloud an owner’s title, which  may interfere with or prevent sale, litigation may be used to have a judge declare those claims invalid.

Disputes with Real Estate Agents or Brokers

Realtors are held to a high standard of conduct; it is often claimed that they do not live up to that standard, and that their clients suffer loss as a result. There may be claims of breach of fiduciary duty, errors and omissions, or undue pressure to buy.

Easement and Neighbor Disputes

Easement matters may arise between neighbors, or between property owners and local government and utilities, over the validity or scope of easements, or whether they have been created by prescription or necessity. Aside form easement issues, neighbors also have disputes regarding boundaries, fences, nuisance and zoning issues.

Zoning and Land Use Disputes

Litigation often arises when Government requires developers and homeowners to abide by legal use restrictions in order to obtain permits, or seeks to enforce zoning laws against alleged unlawful uses.

Foreclosure

Foreclosures are all too common these days: lenders rely upon contractual or judicial foreclosure remedies against owners those who fall behind in payment.  Procedures must be properly carried out for the foreclosure to result in sale of the property.

Condemnation

Government may directly seek to obtain privately held property, and litigation determines what they must pay, or an owner may seek compensation when government acts through lawmaking, enforcement or policy in a manner which takes private property.

Traktman Law Office is experienced in Real Estate litigation and in the transactions which lead to disputes; we can provide transactional advice which may prevent these matters from getting to the point of litigation, or can litigate to enforce your rights if that becomes necessary.

Enforcement of Purchase Agreements

When parties to a purchase agreement fail to close escrow as contracted, a party may seek specific performance – a court order that the other party perform – or seek monetary damages for losses arising from the failure to complete the transaction.

A residential tenancy is created by a rental agreement, which may be either oral or in writing, express or implied, for a fixed term or on a periodic basis (i.e., month to month). If for a fixed term of more than one year, the lease must be in writing.  If a written agreement is used, it should identify the parties, describe the premises, specify the rent, state the rental period and starting date, rent due dates, late charges, and be dated and signed by the parties.

There does not need to be a written lease for there to be a rental agreement: many leases are by oral agreement. There can also be implied agreements – as where the landlord allows a person to move in and accepts rent.   However, a landlord may not evict a tenant for breach of a lease provision other than failure to pay rent, unless the provision breached is in a written lease. Therefore, any restrictions, such as a no pet clause, no subletting clause, late charges, etc., should be in a writing signed by the tenant.

The specific amount of rent is generally up to the agreement of the parties. However, certain cities have rent control ordinances which may limit the amounts which can be charged, or the amount of increases. The term of the rental agreement is presumed to be month to month; if the term is different, it must be expressly specified in your agreement, whether written or oral (Civil Code § 1943).  Absent an agreement to the contrary, rent is presumed to come due at the end of the term, not the beginning. (Civil Code § 1947). If the rent due date falls due on a holiday or weekend, the tenant has until midnight the next business day to pay (Civil Code Sec. § 12a, 12b).

Late charge provisions must be in writing and are valid only if reasonably calculated to compensate for the cost of processing late payments; if designed to deter the tenant from late payment, they may be deemed invalid. Late charges between 5 – 10% are generally held to be valid, although some rent control cities limit the amount.

Most terms of a periodic tenancy (i.e., month-to-month) may be changed by written notice delivered at least as long before it takes effect as the rental period.  The notice may be delivered by personal delivery, substituted service and mailing, or posting and mailing depending on whether the tenant is at the residence or his usual place of business at the time.  (Civil Code § 827).

At the conclusion of a fixed term lease, if the tenant remains in possession and continues to pay rent, the tenancy is presumed to be renewed on a month to month basis, with all the terms of the original lease intact. (Civil Code § 1945). Otherwise, the landlord is entitled to possession at the conclusion of the term and may bring eviction proceedings if the tenant fails to move out (Code of Civil Procedure §1161}.

The landlord may charge a non-refundable screening fee equal to his actual out of pocket cost, not to exceed $30 per applicant who is entitled to a copy of any credit report generated included in the charge. The parties may also contract for the tenant to prepay six months’ rent or more, in a lease which for an initial term of not less than six months. (Code of Civil Procedure § 1950.6).  A landlord you may require a co-signer to guarantee the performance of any written rental or lease agreement or lease. This guarantee must be in writing.  (Civil Code § 2819).

State law prohibits certain lease provisions which require tenants to waive certain right; these are listed at Civil Code § 1953.  Furthermore, some local city rent control ordinances require or permit other provisions.

Landlords may refuse to rent to any tenant with a pet except properly trained dogs of a protected disability classes of tenants, including the blind, visually impaired, deaf or physically disabled (Civil. Code Sec. 54.1), and a landlord may not charge an additional security deposit for a qualified dog (Civil. Code Sec. 54.2).  Landlords may not refuse to rent or continue to rent to tenants with waterbeds or liquid filled furniture who reside in a structure built after 1972. Landlords have the right to be present at the time of waterbed installation to require minimum waterbed component standards such as conformity to building code floor weight load limits, and may require the tenant show proof of insurance for a minimum $100,00.00 (Civil Code  § 1940.5).

B. Security Deposits

There is no longer a formal distinction among types of tenant deposits (i.e., security deposit , cleaning deposit, last month’s rent, pet deposit, etc.); California only recognizes a general security deposit. This is  any advance payment to the landlord to be used to remedy defaults in rent payments, repair of damage to the premises (exclusive of normal wear and tear), cleaning at the end of the tenancy, or to repair specific landlord personal property where the rental agreement so provides. Landlords may not charge any non-refundable deposits or “fees” (Civil Code § 1950.5). The security deposit may not exceed three months’ rent for furnished premises, or two months rent for an unfurnished rental. There may be an additional one-half month’s rent if the tenant has a waterbed (Civil Code § 1950.5). Payment of interest is not required by State law, but some local jurisdictions require it.

Within three weeks (21 days) of the date the tenant vacates the landlord must provide an accounting of any charges to the deposit in writing. The accounting may be mailed to the tenant’s last known address together with any refund due. Failure to do this in bad faith subjects the landlord to any actual damage suffered by the tenant, as determined by the court, plus statutory damages of up to $600  (Civil Code  § 1950.5). The landlord may not charge for reasonable wear and tear, but only for repairs or cleaning above conditions in excess of this standard.

When the landlord sells the property he must elect to refund unused tenant deposits to the tenants, with an accounting, or to transfer the unused portions of such deposits to the new owner through escrow, together with such accounting. Failure to do so subjects both the old and new owner to liability to any aggrieved tenants for damages (Civil Code § 1950.5).

C. Habitability, Maintenance and Repairs

The landlord is under an obligation to put and maintain the premises in a condition fit for human occupancy (“habitability”), except for those conditions caused by his tenant’s want of ordinary care (Civil

Code §§ 1929, 1941).  Habitability includes that the following things be provided, be in usable condition, and be up to code: weather-proofing of roof, exterior walls, and unbroken windows; plumbing; water supply of hot and cold water; heating facilities; electrical lighting; building, grounds and appurtenances clean and free of vermin at the time of renting; adequate garbage receptacles; floors, stairways and railings in good repair; adequate locks (Civil Code §§ 1941.1, 1941.3). The landlord is also obligated to wire the premises for at least one telephone line (Civil Code § 1941.4).  Some local ordinance may have additional requirements.

The landlord having the duty to maintain the premises, has the countervailing right to enter the premises to do so (Civil Code § 1954). Although a tenant may not waive his right to the foregoing habitability requirements, he can agree in writing to maintain, improve or repair these items as part of the consideration of his lease (Civil Code § 1942.1). The landlord’s obligation to repair habitability defects may be vitiated if the tenant violates his own legal obligations as to maintenance, where these violations substantially interfere with the landlord’s ability to do the repairs. (Civil Codec § 1941.2). The tenant’s obligation is to maintain his rental household in a clean, sanitary and undamaged condition (Civil Code § 1941.2)

Where the landlord fails to maintain the premises as above (i.e. the tenant requests a repair and it is not resolved in a timely manner (30 days is presumed reasonable), then the tenant has a number of remedies. No more than once a year, s/he may do the repair and deduct it from rent, or may vacate and be discharged from further obligations under his lease (Civil Code § 1942). He may also withhold the rent until the repairs are done, if the breaches are substantial and affect health and safety. A landlord may not collect rent on a premises which are substantially in breach of his obligations to maintain the premises (usually referred to as a breach of the implied warranty of habitability), and may be legally penalized for doing so (Civil Code § 1942.4). Acts in retaliation for a tenant exercising his legal rights may also subject the landlord to substantial legal penalties (Civil Code § 1942.5}.

The breach of the implied warranty of habitability usually comes play where the tenant has failed (or refused) to pay rent, the landlord has given a three day notice to pay or vacate and initiated an eviction action. The tenant may defend by showing that the landlord’s substantially breach of the implied warranty of habitability, and that this breach devalued the rental value of the property to the tenant. The court may find that the value was reduced by some percentage (i.e., 15%, 25%), so that the total rent was not due, and thus there is no breach of the duty to pay. The rental rate would then be reduced by that amount, and the tenant will have the opportunity to pay the past due rent less the percentage within   5 days of entry of Judgment. If the tenant does so, the tenant prevails and will not be evicted. If the tenant fails to pay, the tenant is evicted (Code of Civil § 1174.2}

D. Landlord’s Right to Enter the Dwelling

The landlord may enter the tenant’s premises only for specific reasons, during normal business hours and only after the tenant has been given at least 24 hour advance notice of the landlord’s intent to enter.  (Civil Code § 1954). These reasons are: an emergency; to make necessary or agreed repairs; to show the rental to prospective tenants, mortgagees or purchasers; if the tenant has abandoned or vacated the premises; or pursuant to a court order.

E. Termination of Tenancy

Terminations may occur upon a default in a lease term, but may be terminated without default. Fixed term leases end automatically at the end of the term specified unless stated otherwise in the lease agreement. A one year lease ends on the one year anniversary of its effective date (Civil Code §§ 789, 1945). However, if tenant remains in possession and the landlord accepts a rent payment, the lease will automatically renew for a period equal to the period for which rent is paid, usually month-to-month. If no rent payment is accepted by the landlord, and the tenant fails to vacate, the landlord may proceed directly to an unlawful detainer proceeding (Code of Civil Procedure § 1161).

Many rental agreements are on a month to month basis, with no specified termination date. In this case, either party may terminate the tenancy, at will, by giving a thirty day notice terminating tenancy to the other party (Civil Code § 1946). Some rent control ordinances prohibit or restrict this right.

Many tenancy terminations are for breach of a term or condition of the rental agreement. If the agreement is oral, the landlord may ordinarily evict only for failure to pay rent. If in writing, he may evict for breach of any material term of the written lease agreement. On rare occasions, a landlord may terminate the tenancy for the creation of a nuisance or waste on the premises. In the case of nonpayment of rent, the tenant must be given a 3 day notice demanding that the rent in default be paid or, in the alternative, that the property be surrendered to the landlord. The exact amount of rent in default must be specified. In the case of a breach of another lease covenant, the tenant must be given a three day notice demanding that the lease covenant be performed and the breach be stopped, if that is possible. (Code of Civil Procedure § 1161). For example, in the case of a no pet clause, the notice would require the tenant to remove the pet within 3 days.

Any notice of termination, by default or not by default, should identify the premises, be dated, identify all adults on the premises known to the landlord, and be signed and dated by the owner or a person designated to act on his behalf. The notice must be properly delivered to the tenants, buy one of three methods: hand delivery; substituted service and mailing; or posting and mailing. Substituted service (delivery to a responsible adult at the premises) and posting and mailing, may only be used after the landlord has first attempted personal service (Code of Civil Procedure § 1162).  A 30 day termination notice may be served by registered or certified mailing (Civil Code § 1946).

If the landlord reasonably believes the tenant has abandoned the leased premises, and the rent has been in default for at least 14 consecutive days, then the landlord may terminate the tenancy and retake possession by way of a 15 day notice under Civil Code § 1951.3).

Where the termination is for default, the landlord is entitled to recover from the former tenant any rent in default, any rent lost as a result of the breach and early termination of the lease, plus any other loss which results from the default. However, the landlord must take reasonable steps to mitigate the damage, i.e., minimize the loss (Civil Code § 1953.2). In some instances, the landlord may, if the lease so provides, elect not to terminate the tenancy and allow the premises to remain vacant, and attempt to collect the rent as it comes due for the duration of the lease (Civil Code § 1951.4}.

F. Eviction Procedure and Landlord Retaliation

The remedy for the tenant who has refused to live up to his obligations under the rental agreement, or to vacate once it any lease has expired, is to evict him. A California eviction is referred to as an “unlawful detainer” and it is a special proceeding set up by statutes which provides for an accelerated process. The foundation for this process is the provision to the tenant of the requisite legal notice allowing him to cure his default and avoid forfeiture of his tenancy, or terminating his tenancy. See the section on TERMINATION OF TENANCY. Typically an uncontested eviction action takes under 30 days to complete from service of eviction notice to Sheriff restoration of the premises.

The tenancy having been terminated, whether for non-payment of rent and the use of a 3 day pay or quit notice or a 30 day quit notice, the landlord commences things by filing a complaint and having summons issued in the local municipal or superior court {Code of Civil Procedure Sec. 1166}. After service of these documents upon the tenants, they have five days to interpose a response at court (usually by filing an Answer or other pre-judgment motion) {Code of Civil Procedure Sec. 1167, 1167.3}.

If the tenants fail to appear to defend or otherwise contest their eviction, then the landlord may immediately have a clerk’s judgment for possession of the property, and can obtain judgment for any rent and other things he is entitled to later {Code of Civil Procedure Sec. 1169}.

Where the tenant answers, either party may demand a trial before a judge or jury, and this trial must occur within 21 days of the demand {Code of Civil Procedure Sec. 1170.5}.

Upon the conclusion of the trial, the court will pronounce judgment. If in favor of the tenant, the matter ends. If in favor of the landlord, the court will order that the landlord be restored to possession of the property, plus such monetary awards as are allowed {Code of Civil Procedure Sec. 1174}.

After the possession judgment is entered, the clerk will issue directing the Sheriff or Marshall to go to the premises and evict the tenant. The peace officer will deliver a five day notice to quit demanding that the occupants of the premises vacate or be evicted, and upon expiration of the five days, will physically put the tenants out and restore the landlord to possession. The peace officer will not, however, move or accept responsibility for any tenant personal property of the occupants which may remain on the premises. The former tenants have up to and including 15 days in which to reclaim their personal property {Code of Civil Procedure Sec. 1174}.

When the peace officer gives his initial eviction notice, any person who claims a right to possession of the premises may assert that right and that claim will be resolved under {Code of Civil Procedure Sec. 1174.3}.

The legal process of eviction is done by the landlord acting “In Propria Persona” or retaining an attorney. Uncontested cases usually consume 13 to 30 days. Where a tenant fights or contests their eviction, which would include at least one court hearing, the process will take 30 to 50 days to complete.

If the tenant can show that the landlord is trying to evict him, raise his rent, or otherwise increase his burdens of tenancy in retaliation for his exercise of a legal or constitutional right, then the landlord cannot recover possession from him, or enforce the rent increase or other action. Where the tenant has acted in the exercise of his rights within the past 180 days, the landlord is presumed to be acting in retaliation, and the landlord has the burden of proof of a reason for the eviction or other action. Where the eviction is for non-payment of rent, or the notice of termination of tenancy, or rent increase, specifies satisfactory cause for the action, then the tenant may still raise a defense of retaliation, but the tenant has the burden of proof of retaliation {Civil. Code Sec. 1942.5}.

G. Discrimination

California residential landlords are considered to be businesses within the meaning of the anti-discrimination statutes and are bound by them according to their terms. All persons in the state are deemed to be equal and entitled to equal accommodations, advantages, etc., despite their sex, race, color, religion, ancestry, national origin or disability  (Civil Code § 51). Age discrimination is specifically prohibited (Civil Code § 51.2), although senior housing is permissible (Civil. Code §  51.3). Landlords are liable to their tenants under the sexual harassment statute (Civil Code § Sec. 51.9}

Applicable State discrimination laws include: Fair Housing Act (Govt. Code § 12955); Senior Citizen Housing Act (Civil Code § 51.3}; Handicapped Rights Act (Civil Code § 54}:Unruh Civil Rights Act (Civil Code §§ 52-53}; Discrimination in violation of these statutes may subject the landlord to substantial penalties (Civil Code § 52}. Federal laws include Civil Rights Act of 1866; Fair Housing Act of 1968; Fair Housing Act Amendments (1972, 1988); Americans with Disability Act (1992).

[1]NOTICE: This article is not intended to constitute, and does not constitute, legal advice.  Moreover, the article is not intended to constitute, and does not constitute, a solicitation for the formation of an attorney-client relationship; no attorney-client relationship is created through your receipt or use of this article.  Anyone accessing the article should not act upon it without first seeking legal counsel. Further, the materials are general in nature, and may not apply to particular factual or legal circumstances.

Successor trustees often lack the time, resources or knowledge to personally administer the trust, and therefore may call upon legal, accounting and investment professionals for assistance.

Successor Trustee’s Duties

Below is a summary of the basic obligations of a successor trustee of a living trust (or any type of trust, for that matter):

• Show loyalty of all trust beneficiaries. Even if the successor trustee is himself a beneficiary, as trustee he has the duty of loyalty to all the other beneficiaries, including the remaindermen.
• Deal impartially with beneficiaries. The successor trustee cannot favor the income beneficiary over the interests of the remainder beneficiaries.
• Make the trust property productive of income.  This duty is violated if the successor trustee keeps large amounts in a checking account that does not pay interest and does not grow in value.  There may be other trust assets which do not produce income, such as vacant land.  If you are administering a trust that has or acquires unproductive assets, consult with us and we can advise you as to your options.

• Invest only in prudent investments.

1. Consideration by the trustee of the purposes, terms and other circumstances of the trust.

2. Exercise reasonable care and caution as part of an overall investment strategy which   incorporates risk and return objectives reasonably suitable to the trust.

3. Diversity of investments, unless specific reasons are present not to diversify.

4. Review at investment and implementation of a formal investment plan.

5. An investments strategy that considers both the reasonable production of income and safety of  principal, consistent with the fiduciary’s duty of impartiality and the purposes of the trust.

• Account to beneficiaries and keep beneficiaries informed. Upon commencement of the trust administration, the successor trustee must inform all income and remainder beneficiaries of his acceptance of the trust.  If a beneficiary requests it, the successor trustee is required to provide that beneficiary with a complete copy of the trust document, including any amendments as well as relevant information about the assets of the trust and the particulars relating to administration.  In addition, it may be necessary to provide all beneficiaries with an annual statement of the accounts of the trust.
• Keep trust assets separate. The successor trustee must keep the assets of each trust separate and keep his personal assets separate from the trust assets.  This requires separate bank accounts, brokerage accounts, and safe deposit boxes for trust assets.  It is particularly important that you keep the assets of the Credit Shelter Trust (also know as the AB Trust or Bypass Trust) separate from all other assets, since these assets will pass tax-free at the death of the income beneficiary.  If the successor comingles any other assets in with these assets (or even simply takes the assets out of the trust and mixes them with his personal assets), in addition to breaching fiduciary obligations, the successor trustee will have subjected these assets to taxation when he dies, whereas they would not have been subjected to tax otherwise.
• Avoid conflicts of interest and self dealing. The successor trustee cannot buy assets from the trust or sell his personal assets to the trust.  He cannot favor himself as a beneficiary at the expense of any other remainder or potential remainder beneficiary.  He cannot make any distribution to anyone or any withdrawals from the trust unless specifically authorized by the trust to do so. Conflicts of interest and self-dealing is a very broad and ill-defined area.  If you are a trustee and have any concern as to any specific action or situation, consult with our law firm.
• Preserve the trust assets and uphold the trust. The successor trustee is liable if trust assets are lost, misplaced or destroyed because of inattention or negligence. The successor trustee should always be certain that all trust assets are appropriately insured.
• File tax returns and pay any tax due. Each trust has a tax year, which like the personal tax year, ends annually on December 31. The trust must have a taxpayer identification number and file a tax return no later than April 15 of the year following.  The income tax return for the trust is Form 1041, the Fiduciary Income Tax Return.  If this is not filed annually and timely, penalties and interest may be assessed.  There may be other tax returns and taxes, like the decedent’s personal tax return, which the trust may be required to file, and the successor trustee is responsible for doing so.We recommend that successor trustees consult with a qualified and experienced Certified Public Accountant.  You should not assume that your long-time CPA is necessarily experienced or qualified, since fiduciary taxation differs significantly from taxation of individuals and corporations, the types of accounting that CPA’s are generally most familiar with.  Before deciding on a CPA for the trust, determine whether that individual has experience and qualifications in this specialized area.

• Distribute income. Income generally includes interest earned on bank accounts, CD’s, bonds or mortgages, and dividends on stocks and mutual funds. The current income beneficiaries are entitled to all of the income annually.  Beneficiaries cannot choose to take less than all of the income, and the trustee is under an obligation to distribute it.  What is income? Generally, it includes interest earned on bank accounts, CD’s, bonds or mortgages, and dividends on stocks or mutual funds.  Certain types of income may also consist of principal as well as income.  If this is the case, the portion that is income is distributed and the portion that is principal is retained.  If there is any question about what is principal and what is income, consult with the trust’s CPA.
• Handle trust expenses. The administration of the trust necessarily requires certain expenditures. Example of expenses include CPA fees, legal services, the cost of insurance or real estate taxes on real estate owned by the trust.  Every check written by the successor trustee (except to pay himself trust income) and each direct charge to a trust’s bank or brokerage account, is considered a trust expenses.  Like receipts, expenses must also be appropriately apportioned between the income side and the principal side.
• Delegate investment functions if necessary. In many instances, individual trustees are not equipped to comply with their investment responsibilities. In these cases, investment professionals may be retained. The successor trustee is obligated to exercise reasonable care, judgment and caution in selecting an investment agent. Trust administration specialists may be found through brokerage houses and banks. Note that ”delegating” differs from merely obtaining investment advice.  It contemplates turning over the investment functions to an advisor as opposed to simply seeking advice, and then acting or not acting on that advice.  Even if investment functions are fully turned over to an agent, the successor trustee is still required to monitor the agent’s investment performance.A successor trustee should not assume that he has satisfied his investment responsibilities just because he has consulted regularly or occasionally with a stockbroker.  Further, stockbrokers often know less about the prudent investor rule and fiduciary duties than does the successor trustee.

• Good record keeping.  Keeping accurate, up-to-date and comprehensive records is one of the most difficult jobs a successor trustee must perform. If the successor trustee becomes disabled or dies, another person must be able to seamlessly step into his shoes and understand the current status of trust matters.  Trust records are also vital because the trustee must be able to explain any trust matter if the IRS or remainder beneficiary requests it. The CPA selected to handle the trust can be very helpful in setting up a sound accounting and record-keeping system.  If keeping records is too burdensome for the successor trustee, he can retain the trust department of a bank to do the work on a fee basis.

A “short” or “summary” probate proceeding can take as little as approximately 30 days. However, not every estate qualifies for the “short” or “summary” probate proceeding. A “full” formal probate proceeding can be completed in as little as approximately 6 months from the date that the probate petition is filed with the court to the date of distribution. But the time can run longer depending upon the creditor’s claims filed against the estate, litigation, disputes among the beneficiaries, etc. Most probates usually take six months to a year. The so-called “delay” of probate is usually not a significant problem. In most cases, family members have prompt access to joint bank accounts or life insurance proceeds. If special needs exist, the probate court may allow for preliminary distributions or a family allowance.

2. How much are the attorney’s fees?

Most attorneys charge the “statutory fee” for handling a probate. The statutory fee is set forth in California Probate Code sections 10800-10850. The statutory fee represents the maximum fee for ordinary probate legal services that may be charged by an attorney. In addition to the statutory fee, attorneys are entitled to obtain additional fees for “extraordinary services” such as handling the sale of real property during the course of the probate proceeding, or assisting in the preparation of tax returns for the estate.

3. What are the other costs that are involved in a California probate proceeding?

The term “costs” does not include attorney’s fees, but includes the initial filing fee, the publication fee for the publication of the notice of petition to administer estate and the probate referee’s fees. If the case involves litigation, there may be other costs for such things as deposition reporters, subpoenas, expert witnesses, etc.

4. Can property be transferred without probate in California?

In some instances, property can be transferred without a formal probate proceeding. Whether or not a decedent’s property can be transferred without a formal probate depends on the type of assets the decedent owned at the time of death and/or the nature and size of the decedent’s estate. Certain assets, for instance, may not be subject to probate. Life insurance, for example, usually passes directly to the named beneficiary without court confirmation. Property held in joint tenancy may also pass directly to the surviving joint tenant.

In other cases, some or all of the decedent’s assets may qualify for a “summary probate” or “set-aside proceedings.” These proceedings are less complicated alternatives to a formal probate. For example, if all of the decedent’s property goes to the surviving spouse, a summary probate proceeding can be used where a “spousal property petition” is filed with the court seeking court confirmation that the surviving spouse owns the property. This proceeding can take as little as 30 days. In other cases, if the total value of the decedent’s property otherwise subject to probate is less than $100,000, an affidavit procedure may be used to transfer personal property, and the transfer of real property can be confirmed through a relatively simple proceeding.

However, even if property can be transferred without probate, it may be beneficial to have a formal probate depending upon the nature and the size of the estate, the creditor’s claims against the estate and the original tax basis of the assets that the decedent owned at the time of death. With respect to any decedent’s estate, you should consult with an attorney and have an attorney analyze the entire estate to see if a formal probate proceeding will be beneficial to the heirs prior to taking any steps to transfer the decedent’s property without probate.

5. Who will be appointed the administrator or executor of the estate?

If the decedent left a will and named an executor in his or her will that person will most likely be appointed as the executor of the decedent’s estate unless the named executor refuses to act or is unfit to serve as executor. If the decedent died without leaving a will, the court will appoint a person to act as the administrator of the decedent’s estate. California law provides a list of relatives designating who has priority to act as the administrator of the decedent’s estate. The court will appoint one of these relatives in the order of their priority to act as the administrator of the decedent’s estate provided the person is qualified and there are no objections to his or her appointment. The parties can also request that more than one individual act as administrators of the decedent’s estate.

6. What happens if there is no Will?

If a person who resides in California dies without leaving a will, his or her property will be distributed to those individuals who constitute the decedent’s heirs under California’s laws of intestate succession. The laws of intestate succession determine how the estate will be divided based on a person’s relationship to the decedent, e.g., surviving spouse, children, other descendants, etc. Determining how the decedent’s property will be distributed also depends on how title to the decedent’s property was held as of the date of death, whether or not the decedent’s property constituted separate property, community property, joint tenancy property or property belonging to a domestic partnership. Probate of an intestate estate will still be required unless specific property of the estate is not subject to probate such as life insurance, etc. In cases of intestacy, the court will appoint an administrator to handle the probate proceeding – generally, the decedent’s closest relative. If you believe you have a claim to a decedent’s property, you should consult with an attorney immediately after the decedent’s death so that you can protect your rights to the property.

7. What happens if there is a “Living Trust”?

If the decedent left his or her assets in a trust, both the trustee and the beneficiaries of the trust should seek competent legal advice immediately after the death of the decedent.

Although a trust may not have to go through “probate,” the trustee should nevertheless obtain legal advice in order to administer the trust in compliance with the trust document and California law. Being a trustee is a serious responsibility. Each trust document is different, and the trustee is required to administer the trust in accordance with its terms. If you have been named as a trustee you should seek the advice of an attorney after the death of the decedent to review the terms of the trust and your responsibilities as trustee. If the trustee does not comply with the various legal rules and terms of the trust, the trustee may be held personally liable to the beneficiaries. If you have been named trustee, you will also be required to perform a number of tasks that require legal and tax advice. Among other things, these tasks include: providing legal notice to the decedent’s creditors, giving legal notice to the beneficiaries of the trust, filing tax returns on behalf of the trust, providing detailed accountings of the trust assets, receipts and disbursements, making distributions to the trust beneficiaries in accordance with the terms of the trust, and investing trust assets in accordance with California law and the terms of the trust.

If you are the beneficiary of a trust, it is also advisable to seek legal advice following the death of the decedent. An attorney can advise you as to whether or not the trustee is managing the trust assets properly, can insure that proper and timely accountings are provided, and that distributions are made properly. Legal advice may be needed if there is any mismanagement of the trust assets by the trustee, and, in some cases, the beneficiary may need to take legal action against the trustee.

You may be surprised to learn that there is no definitive case or statutory law determining whether the lender has a right to seek a deficiency judgment after a short sale. (But, see Update at the end of this article).  The deficiency laws expressly apply to instances where there is a foreclosure, and do not mention cases of short sale. While there are arguments to be made that that the law was intended to apply in those cases, one should be cautious when approaching a short sale, especially where the lender includes language in the short sale agreement reserving rights that they “may pursue a deficiency judgment”.  The safest approach is to negotiate with the lender to get them to agree in writing not to pursue a deficiency judgment.[†]

Discussion:

California Civil Code § 580d[‡] – the anti-deficiency statute — applies, on its face, to instances where the lender sells the property “under a power of sale contained in the mortgage or deed of trust”, i.e., in cases of non-judicial foreclosure. Thus, this code section does not expressly apply where there is a short sale *

Does other law provide similar protections in non-foreclosure cases?  Code of Civil Procedure 580b, also provides for protection against deficiency judgments, but in cases “after a sale of real property… for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment…”[§] Does this apply to short

sales? Clearly, it applies to foreclosures, which are “under a deed of trust or mortgage.” But, in a short sale, there is no sale under the power of sale in the deed of trust. The issue is whether a short sale constitutes a “sale of real property… for failure of the purchaser to complete his or her contract of sale”. One could argue that it does, but one could also argue that, since a short sale is a voluntary sale by the borrower, without any action by the lender except to agree to it, then the property is not being sold “for failure. . .to complete the contract of sale”.

Another key statute is Civil Procedure Code § 726(a), [**] which provides what is known as the “one form of action rule”:  the statute states that, where there is a mortgage, this is the only type of judicial action the lender can pursue to collect the debt represented by the deed of trust – judicial foreclosure.  Courts have determined that with the section implies a “security-first” rule: a  creditor must first proceed against the security for the debt prior to trying to enforce, by judicial action or otherwise, the underlying debt. Thus, one cannot sue the borrower directly on the underlying promissory note without first foreclosing on the real property.  Thus, other than judicial foreclosure,  the only alternative is to foreclose using the power of sale in the deed of trust.

Apart from this “one action rule” there is another rule with which it is often confused, the “single action rule”, which states that one cannot pursue the same legal right in more than one judicial action.  Hence, once a lender pursues judicial foreclosure, it cannot thereafter also sue on the underlying promissory note.

Many observers conclude that section 726 would prevent a lender from obtaining a judgment for the deficiency after a short sale, and that this section could be interposed as a defense to such a lawsuit. The argument is that a judicial foreclosure is the only judicial remedy allowed under the statute, and the only one allowing a deficiency judgment.  Since the lender must first seek to go after the security interest, and in order to do so, it must institute one or the other forms of foreclosure, the right to a deficiency cannot survive: if the lender seeks to foreclose by power of sale, it waives the deficiency; if it does so by judicial foreclosure, then that is it’s “one action”, and it has no right to institute a new action.

But, on the other hand it could be argued that the one action rule does not apply. First, in the case of a short sale, the foreclosure has not gone through to conclusion, and the matter is resolved before any foreclosure sale. Furthermore, recall that section 726 applies to enforcement of a debt or right secured by a mortgage. If a lender institutes its action on the promissory note for the deficiency after a short sale, the action is not against a debt secured by the mortgage since the borrowers themselves have voluntarily done away with the mortgage in the short sale. By the same token, there is no problem with the security first rule, as there is no security to pursue. Neither has the lender instituted any prior judicial action, so the single action rule is satisfied. one since there has been no foreclosure of any kind. so it still has one action left.

Some lenders maintain the position that they could proceed after a short sale, and even include language reserving the right to do so in their short sale agreements.  As yet, none have pushed it to the point of creating precedent one way or the other on the issue.

Given the lack of caselaw deciding the point, the most that can he said is that there probably is no right to seek a deficiency in short sale situations. Without clear precedent, the only way one could be sure a lender would not proceed against you for the deficiency after a short sale would be for the lender itself to agree in writing, to waive the deficiency. If they are reluctant to do so, this means that they may go after you it the law becomes clarified.

[†] This article is not intended to constitute, and does not constitute, legal advice.  Moreover, the article is not intended to constitute, and does not constitute, a solicitation for the formation of an attorney-client relationship; no attorney-client relationship is created through your receipt or use of this article.  Anyone accessing the article should not act upon it without first seeking legal counsel. Further, the materials are general in nature, and may not apply to particular factual or legal circumstances.

[‡] “No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage upon real property or an estate for years therein hereafter executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.”

[§] “No deficiency judgment shall lie in any event after a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale, or under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein, or under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling occupied, entirely or in part, by the purchaser.”

[**] “There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein, which action shall be in accordance with the provisions of this chapter. In the action the court may, by its judgment, direct the sale of the encumbered real property or estate for years therein (or so much of the real property or estate for years as may be necessary), and the application of the proceeds of the sale to the payment of the costs of court, the expenses of levy and sale, and the amount due plaintiff, including, where the mortgage provides for the payment of attorney’s fees, the sum for attorney’s fees as the court shall find reasonable, not exceeding the amount named in the mortgage.”

UPDATE:

After this article was written, On September 30, 2010, the Governor signed Senate Bill 931, which finally eliminated the uncertainties discussed above. In essence, the law states that there will be no deficiency judgment on residential (less than 4 units) property where the lender agrees to the short sale. Of course, they are not required to agree to the short sale.

Civil Code § 580e.

(a) No judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units, in any case in which the trustor or mortgagor sells the dwelling for less than the remaining amount of the indebtedness due at the time of sale with the written consent of the holder of the first deed of trust or first mortgage. Written consent of the holder of the first deed of trust or first mortgage to that sale shall obligate that holder to accept the sale
proceeds as full payment and to fully discharge the remaining amount of the indebtedness on the first deed of trust or first mortgage.

(b) If the trustor or mortgagor commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust or first mortgage, this section shall not limit the ability of the holder of the first deed of trust or first mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.

(c) This section shall not apply if the trustor or mortgagor is a corporation or political subdivision of the state.