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.

Estate planning is a process. It involves people—your family, other individuals and, in many cases, charitable organizations of your choice. It also involves your assets (your property) and the various forms of ownership and title that those assets may take. And it addresses your future needs in case you ever become unable to care for yourself.

Through estate planning, you can determine:

• How and by whom your assets will be managed for your benefit during your lifetime if you ever become unable to manage them yourself.
• When and under what circumstances it makes sense to distribute your assets during your lifetime.
• How and to whom your assets will be distributed after your death.
• How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself.

Many people mistakenly think that estate planning only involves the writing of a will. Estate planning, however, can also involve financial, tax, medical and business planning. A will is part of the planning process, but you will need other documents as well to fully address your estate planning needs.

The purpose of this article is to summarize the estate planning process, and illustrate how it can help you meet your goals and objectives. You will discover that estate planning is a dynamic process. Just as people and assets and laws change, it may well be necessary to adjust your estate plan every so often to reflect those changes.

2. What is involved in estate planning?

There are many issues to consider in creating an estate plan. First of all, ask yourself the following questions:

• What are my assets and what is their approximate value?
• Whom do I want to receive those assets—and when?
• Who should manage those assets if I cannot—either during my lifetime or after my death?
• Who should be responsible for taking care of my minor children if I become unable to care for them myself?
• Who should make decisions on my behalf concerning my care and welfare if I become unable to care for myself?
• What do I want done with my remains after I die and where would I want them buried, scattered or otherwise laid to rest?

Once you have some answers to these questions, you are ready to seek the advice and services of a qualified lawyer. Such a lawyer can help you create an estate plan, and advise you on such issues as taxes, title to assets and the management of your estate.

3. Who needs estate planning?

You do—whether your estate is large or small. Either way, you should designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself.

If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets.

If your estate is large, your lawyer will also discuss various ways of preserving your assets for your beneficiaries and of reducing or postponing the amount of estate tax which otherwise might be payable after your death.

If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. And your assets will be distributed to your heirs according to a set of rules known as intestate succession.

Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse will have priority in inheritance ahead of the state.

Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.

4. What is included in my estate?

All of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry.

Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance).

The value of your estate is equal to the “fair market value” of all of your various types of property—after you have deducted your debts (your car loan, for example, and any mortgage on your home.)

The value of your estate is important in determining whether your estate will be subject to estate taxes after your death (see #11) and whether your beneficiaries could later be subject to capital gains taxes. Ensuring that there will be sufficient resources to pay such taxes is another important part of the estate planning process.

5. What is a will?

A will is a traditional legal document which:

• Names individuals (or charitable organizations) who will receive your assets after your death, either by outright gift or in a trust.
• Nominates an executor who will be appointed and supervised by the probate court to manage your estate; pay your debts, expenses and taxes; and distribute your estate according to the instructions in your will.
• Nominates guardians for your minor children.

Most assets in your name alone at your death will be subject to your will. Some exceptions include securities accounts and bank accounts that have designated beneficiaries, life insurance policies, IRAs and other tax-deferred retirement plans, and some annuities.

Such assets would pass directly to the beneficiaries and would not be included in your will (see #13).

In addition, certain co-owned assets (see #12) would pass directly to the surviving co-owner regardless of any instructions in your will. And assets that have been transferred to a revocable living trust (see #6) would be distributed through the trust—not your will.

6. What is a revocable living trust?

It is a legal document that can, in some cases, partially substitute for a will. With a revocable living trust (also known as a living trust, revocable inter vivos trust or grantor trust), your assets are put into the trust, administered for your benefit during your lifetime and transferred to your beneficiaries when you die—all without the need for court involvement.

Most people name themselves as the trustee in charge of managing their living trust’s assets. By naming yourself as trustee, you can remain in control of the assets during your lifetime. In addition, you can revoke or change any terms of the trust at any time as long as you are still competent. (The terms of the trust become irrevocable when you die.)

In your trust agreement, you will also name a successor trustee (a person or institution) who will take over as the trustee and manage the trust’s assets if you should ever become unable to do so. Your successor trustee would also take over the management and distribution of your assets when you die.

A living trust does not, however, remove all need for a will. Generally, you would still need a will—known as a pour over will—to cover any assets that have not been transferred to the trust.

You should consult with a qualified estate planning lawyer to assist you in the preparation of a living trust, your will and other estate planning documents. Also, keep in mind that your choice of trustees is extremely important. That trustee’s management of your living trust assets will not be automatically subject to direct court supervision.

7. What is probate?

Probate is a court-supervised process for transferring a deceased person’s assets to the beneficiaries listed in his or her will.

Typically, the executor named in your will would start the process after your death by filing a petition in court and seeking appointment. Your executor would then take charge of your assets, pay your debts and, after receiving court approval, distribute the rest of your estate to your beneficiaries. If you were to die intestate (that is, without a will), a relative or other interested person could start the process.

In such an instance, the court would appoint an administrator to handle your estate. Personal representative is another term used to describe the administrator or executor appointed to handle an estate.

Simpler procedures are available for transferring property to a spouse or for handling estates in which the total assets amount to less than $100,000. The probate process has advantages and disadvantages.

The probate court is accustomed to resolving disputes about the distribution of assets fairly quickly through a process with defined rules. In addition, the probate court reviews the personal representative’s handling of each estate, which can help protect the beneficiaries’ interests.

One disadvantage, however, is that probates are public. Your estate plan and the value of your assets will become a public record. Also, because lawyer’s fees and executor’s commissions are based on a statutory fee schedule, a probate may cost more than the management and distribution of a comparable estate under a living trust.

Time can be a factor as well. A probate proceeding generally takes longer than the administration of a living trust. Discuss such advantages and disadvantages with an estate planning lawyer before making any decisions.

8. Can I name alternative beneficiaries?

Yes. You should consider alternative beneficiaries in the event that your primary beneficiary does not survive you. And if a beneficiary is too young or too disabled to handle an inheritance, you might consider setting up a trust for his or her benefit under your will or living trust.

Once you have decided who should receive your assets, it is very important that you correctly identify those chosen individuals and charitable organizations in your will or trust.

Many organizations have similar names and, in some families, individuals have similar or even identical names. An estate planning lawyer can help you clarify and appropriately identify your beneficiaries.

9. Who should be my executor or trustee?

That is your decision. You could name your spouse or domestic partner as your executor or trustee. Or you might choose an adult child, another relative, a family friend, a business associate or a professional fiduciary such as a bank. Your executor or trustee does not need any special training. What is most important is that your chosen executor or trustee is organized, prudent, responsible and honest.

While the executor of a will is subject to direct court supervision and the trustee of a living trust is not, they serve almost identical functions. Both are responsible for ensuring that your written instructions are followed.

One difference is that the trustee of your living trust may assume responsibilities under the trust agreement while you are still living (if you ever become unable or unwilling to continue serving as trustee yourself).

Discuss your choice of an executor or trustee with your estate planning lawyer. There are many issues to consider. For example, will the appointment of one of your adult children hurt his or her relationship with any other siblings? What conflicts of interest would be created if you name a business associate or partner as your executor or trustee? And will the person named as executor or successor trustee have the time, organizational ability and experience to do the job effectively?

10. How should I provide for my minor children?

First of all, in your will, you should nominate a guardian to supervise and care for your child (and to manage the child’s assets) until he or she is 18 years old. Under California law, a minor child (a child under age 18) would not be legally qualified to care for himself or herself if both parents were to die. Nor is a minor legally qualified to manage his or her own property. Your nomination of a guardian could avoid a “tug of war” between well-meaning family members and others.

You might consider setting up a trust to be held, administered and distributed for the child’s benefit until the child is even older. Many living trusts will include a provision creating children’s trusts, when minors are possible beneficiaries.

You also might consider transferring assets to a custodian account under the California Uniform Transfers to Minors Act to be held for the child until he or she reaches age 18, 21 or 25.

11. When does estate planning involve tax planning?

Estate taxes are imposed upon estates that have a net value of $2 million or more. That amount will increase to $3.5 million in 2009. In 2010, the estate tax will disappear completely.

Then, unless Congress passes an extension, the exemption will revert back to $1 million in 2011. For estates that approach or exceed these amounts, significant estate taxes can be saved by proper estate planning, usually before your death or, for couples, before one of you dies.

Keep in mind that tax laws often change. And estate planning for tax purposes must take into account not only estate taxes, but also income, capital gains, gift, property and generation-skipping taxes as well. Qualified legal advice about taxes and current tax law should be obtained from a competent lawyer during the estate planning process.

12. Does the way in which I hold title make a difference?

Yes. The nature of your assets and how you hold title to those assets is a critical factor in the estate planning process. Before you take title (or change title) to an asset, you should understand the tax and other consequences of any proposed change. Your estate planning lawyer will be able to advise you.

Community property and separate property. If you are married or a registered domestic partner, assets earned by either you or your spouse or domestic partner while married or in the partnership and while a resident of California are community property. (Note: Earned income in domestic partnerships, however, may not be treated as community property for federal income tax purposes.)

As a married individual or registered domestic partner, you may continue to own certain separate property as well—property which you owned prior to the marriage or domestic partnership. A gift or inheritance received during the marriage or partnership would be considered separate property as well. Separate property can be converted to community property (and vice versa) by a written agreement (it must conform with California law) signed by both spouses. However, taking such a step can have significant tax and other consequences. Make sure that you understand such consequences before making any such change.

Tenants in-common. If you own property as tenants in common and one co-tenant (co-owner) dies, that co-tenant’s interest in the property would pass to the beneficiary named in his or her will. This would apply to co-tenants who are married or in a domestic partnership as well as to those who are single.

Joint tenancy with right of survivorship. Co-owners (married or not) of a property can also hold title as joint tenants with right of survivorship. If one tenant were to die in such a situation, the property would simply pass to the surviving joint tenant without being affected by the deceased person’s will.

Community property with right of survivorship. If you are married or in a registered domestic partnership, you and your spouse or partner could also hold title to property as community property with right of survivorship.

Then, if your spouse or domestic partner were to die, the property would pass to you without being affected by the deceased person’s will.

Married couples and registered domestic partners also have the option of jointly holding title to property as community property. In such a situation, if one spouse or partner were to die, his or her interest would be distributed according to the instructions in his or her will.

13. Are there other ways of leaving property?

Yes. Certain kinds of assets are transferred directly to the named beneficiaries. Such assets include:

• Life insurance proceeds.
• Qualified or non-qualified retirement plans, including 401(k) plans and IRAs.
• Certain “trustee” bank accounts.
• Transfer on death (or TOD) securities accounts.
• Pay on death (or POD) assets, a common title on U.S. savings bonds.

Keep in mind that these beneficiary designations can have significant tax benefits and consequences for your beneficiaries—and must be carefully coordinated with your overall estate plan.

14. What happens if I become unable to care for myself?

You can help determine what will happen by making your own arrangements in advance. Through estate planning, you can choose those who will care for you and your estate if you ever become unable to do so for yourself. Just make sure that your choices are documented in writing.

If you set up a living trust, for example, the trustee will provide the necessary management of those assets held in trust. You should also consider setting up a durable power of attorney for property management to handle limited financial transactions and to deal with assets that may not have been transferred to your living trust. By doing this, you designate an agent or attorney-in-fact to make financial decisions and manage your assets on your behalf if you become unable to do so.

And by setting up an advance health care directive/durable power of attorney for health care, you can also designate an attorney-in-fact to make health care decisions for you if you ever become unable to make such decisions.

In addition, this legal document can contain your wishes concerning such matters as life-sustaining treatment and other health care issues and instructions concerning organ donation, disposition of remains and your funeral.

Both of these attorneys-in-fact lose the authority to make decisions on your behalf when you die.

If you have not made any such arrangements in advance and you become unable to make sound decisions or care for yourself, a court could appoint a court-supervised conservator to manage your affairs and be responsible for your care.

The court’s supervision of the conservator may provide you with some added safeguards. However, conservatorships can also be more cumbersome, expensive and time-consuming than the appointment of attorneys-in-fact under powers of attorney.

In any event, even if you appoint attorneys-in-fact who could manage your assets and make future health care decisions for you, you should still document your choice of conservators in case a conservatorship is ever necessary.

15. Who should help me with my estate planning documents?

• Can I do it myself? Yes. It is possible for a person to do his or her own estate planning with forms or books obtained at a stationery store or bookstore or from the State Bar. At the very least, a review of such forms can be helpful in preparing you for estate planning. If you review such materials and have any unanswered questions, however, you should seek professional help.
• Do I need a professional’s help? It depends. If you do seek advice, keep in mind that wills and trusts are legal documents that should only be prepared by a qualified lawyer. Many other professionals and business representatives, however, may become involved in the estate planning process. For example, certified public accountants, life insurance salespersons, bank trust officers, financial planners, personnel managers and pension consultants often participate in the estate planning process. Within their areas of expertise, these professionals can assist you in planning your estate.

The State Bar urges you, however, to seek advice only from professionals who are qualified to give estate planning advice. Many professionals must be licensed by the state.

Ask the professional about his or her qualifications. And ask yourself whether the advisor might have an underlying financial incentive to sell you a particular investment, such as an annuity or life insurance policy. Such a financial incentive could bias that professional’s advice.

Unfortunately, some sellers of dubious financial products gain the confidence and private financial information of their victims by posing as providers of estate or trust planning services.

16. Should I beware of “promoters” of financial and estate planning services?

Yes. There are many who call themselves “paralegals”,  “trust specialists,” “certified planners” or other titles that suggest the person has received advanced training in estate planning.

California is experiencing an explosion of promotions by unqualified individuals and entities which only have one real goal—to gain access to your finances in order to sell insurance-based products such as annuities and other commission-based products. To better protect yourself:

• Consult with a lawyer or other financial advisor who is knowledgeable in estate planning, and who is not trying to sell a product that may be unnecessary—before considering a living trust or any other estate or financial planning document or service.
• Ask for time to consider and reflect on your decision. Do not allow yourself to be pressured into purchasing an estate or financial planning product.
• Know your cancellation rights. California law requires that sellers who come to your home to sell goods and services (not including insurance and annuities) that cost more than $25 must give you two copies of a notice of cancellation form to cancel your agreement. You, the buyer, may cancel this transaction up until midnight three business days later. You have 30 days to cancel insurance and annuity transactions.
• Be wary of organizations or offices that are staffed by non-lawyer personnel and that promote one-size-fits-all living trusts or living trust kits. An estate plan created by someone who is not a qualified lawyer can have enormous and costly consequences for your estate. Do not allow yourself to be pressured into a quick purchase.
• Be wary of home solicitors who insist on obtaining confidential and detailed information about your assets and finances.
• Find out if any complaints have been filed against the company by calling local and state consumer protection offices or the Better Business Bureau.
• Insist on the person’s identification and a description of his or her qualifications, education, training and expertise in estate planning. Also, keep in mind that legal document assistants are not permitted to give legal advice. And paralegals must work under the direct supervision of a lawyer. (As a precaution, ask to speak directly to the supervising attorney if you are not given an opportunity to do so.)
• Always ask for a copy of any document you sign at the time it is signed.
• Report high-pressure tactics, fraud or misrepresentations to the police or district attorney immediately.

17. How much does estate planning cost?

It depends on your individual circumstances and the complexity of documentation and planning required to achieve your goals and objectives.

The costs may vary from lawyer to lawyer. Generally, the costs will include the lawyer’s charges for discussing your estate plan with you and for preparing your will, trust agreement, power of attorney or other necessary legal documents. Some lawyers charge a flat fee for estate planning services. Others charge on an hourly basis or use a combination of both types of fees.

Your will is a legal document in which you give certain instructions to be carried out after your death. For example, you may direct the distribution of your assets (your money and property), and give your choice of guardians for your children. It becomes irrevocable when you die. In your will, you can name:

• Your beneficiaries. You may name beneficiaries (family members, friends, spouse, domestic partner or charitable organizations, for example) to receive your assets according to the instructions in your will. You may list specific gifts, such as jewelry or a certain sum of money, to certain beneficiaries, and you should direct what should be done with all remaining assets (any assets that your will does not dispose of by specific gift).
• A guardian for your minor children. You may nominate a person to be responsible for your child’s personal care if you and your spouse die before the child turns 18. You may also name a guardian-who may or may not be the same person-to be responsible for managing any assets given to the child, until he or she is 18 years old.
• An executor. You may nominate a person or institution to collect and manage your assets, pay any debts, expenses and taxes that might be due, and then, with the court’s approval, distribute your assets to your beneficiaries according to the instructions in your will. Your executor serves a very important role and has significant responsibilities. It can be a time-consuming job. You should choose your executor carefully.

Keep in mind that a will is just part of the estate planning process. And whether your estate is large or small, you probably need an estate plan.

2. Does a Will Cover Everything I Own?

No. Generally speaking, your will affects only those assets that are titled in your name at your death. Those assets that are not affected by your will include:

• Life insurance. The cash proceeds from an insurance policy on your life are paid to whomever you have designated as beneficiary of the policy in a form filed with the insurance company-no matter who the beneficiaries under your will may be.
• Retirement plans. Assets held in retirement plans, such as a 401(k) or an IRA, are transferred to whomever you have named as beneficiary in the plan documents-no matter who the beneficiaries under your will may be.
• Assets owned as a joint tenant with right of survivorship. Assets such as real estate, automobiles, bank accounts and stock accounts that are held in joint tenancy with right of survivorship will pass to the surviving joint tenant upon your death, and not in accordance with any directions in your will.
• “Transfer on death” or “pay on death.” Certain securities and brokerage accounts include a designation of one or more beneficiaries to receive the assets in that account when the account owner dies. The names of the beneficiaries are preceded by the words “transfer on death” or “TOD.” Other assets, such as bank accounts and U.S. savings bonds, may be held in a similar form using the owner’s name and the beneficiaries’ names preceded by the words “paid on death” or “POD.”
• “Community property with right of survivorship.” Married couples or registered domestic partners may hold title to their community property assets in their names as “community property with right of survivorship.” Then, when the first spouse or domestic partner dies, the assets pass directly to the surviving spouse or partner without being affected by the will.
• Living trusts. Generally, assets held in a revocable living trust are distributed according to the instructions in the trust regardless of the instructions in your will-with no need for court supervision. You can name yourself as the initial trustee of your living trust (most people do), and then name a successor trustee to manage the trust if you become unable to do so. With a living trust, your assets are managed for your benefit during your lifetime and then transferred to your beneficiaries when you die without court supervision. For more detailed information, see the State Bar pamphlet entitled Do I Need a Living Trust? (See #1 for information on ordering pamphlets.)
• Your spouse’s or domestic partner’s half of community property. In California, any assets acquired by you and your spouse or registered domestic partner from earnings during your marriage or registered domestic partnership are community property. You and your spouse or registered domestic partner own equal shares of those assets. Your will, therefore, affects only your half of the community property. Assets that either of you owned before your marriage or registered domestic partnership, and gifts or inheritances acquired later, are usually separate property. Your will affects all of your separate property assets.

Even if your entire estate consists of assets held in joint tenancy, a life insurance policy and a retirement plan, there are still good reasons for making a will. For example, if the other joint tenant dies before you do, then the property held in joint tenancy will be in your name alone and subject to your will. If named beneficiaries die before you do, the assets subject to a beneficiary designation may be payable to your estate. If you receive an unexpected bonus, prize, refund or inheritance, it would be subject to your will. And if you have minor children, nominating a guardian for them in your will is very important.

3. What Happens If I Don’t Have a Will?

If you die without a will (referred to as intestate), California law will determine the beneficiaries of your estate. Contrary to popular myth, if you die without a will, everything does not automatically go to the state. If you are married or have established a registered domestic partnership, your spouse or domestic partner will receive all of your community property assets. Your spouse or domestic partner also will receive part of your separate property assets, and the rest of your separate property assets will be distributed to your children or grandchildren, parents, sisters, brothers, nieces, nephews or other close relatives.

If you are not married or in a registered domestic partnership, your assets will be distributed to your children or grandchildren, if you have any-or to your parents, sisters, brothers, nieces, nephews or other relatives. If your spouse or domestic partner dies before you, his or her relatives may also be entitled to some or all of your estate. Friends, a non-registered domestic partner or your favorite charities will receive nothing if you die without a will. The State of California is the beneficiary of your estate if you die intestate and you (and your deceased spouse or domestic partner) have no living relatives.

4. Are There Various Kinds of Wills?

Yes. In California, you can make a will in one of three ways:

• A handwritten or holographic will. This will must be completely in your own handwriting. You must date and sign the will. Your handwriting has to be legible, and the will must clearly state what you are leaving and to whom. A handwritten will does not have to be notarized or witnessed. However, any typed material in a handwritten will may invalidate the will. (A typed will must be signed by two witnesses.) It is a good idea to consult with a qualified lawyer to make sure your will conforms with California law and does not have any unintended consequences.
• A statutory will. California law provides for a “fill-in-the-blanks” will form. (This form can be printed out from the State Bar Web site. Simply go to www.calbar.ca.gov and click on Public Services and Making a Simple Will.) This will form is designed for people with relatively small estates. If there is anything you do not understand or if you are making any provisions that are complicated or unusual, you should ask a qualified lawyer to advise you.
• A will prepared by a lawyer. A qualified estate planning lawyer can make sure that your will conforms with California law. The lawyer can make suggestions and help you understand the many ways that assets can be transferred to or for the benefit of your beneficiaries. A lawyer can also help you develop a complete estate plan and offer alternative plans that may save taxes. This kind of planning can be extremely helpful and economical in the long run. Your lawyer will either personally supervise the signing of your will or will give you detailed instructions on the rules for its execution by you and two witnesses (who are not beneficiaries of your estate).

No matter what kind of will you use, the will should be solely yours and not a joint will with your spouse, registered domestic partner or anyone else.

Also, keep in mind that your will is not a living will. The term living will is used in many states to describe a legal document that states you do not want life-sustaining treatment if you become terminally ill or permanently unconscious. In California, advance health care directives and durable powers of attorney for health care decisions are used for that same purpose.

5. What If My Assets Pass To a Trust After My Death?

You may make a provision in your will for your assets to be distributed to a trust upon your death. When trusts are created under a will, they are known as testamentary trusts. With an appropriate beneficiary designation, testamentary trusts can even be beneficiaries of life insurance policies and retirement plans.

If you have a living trust, (that is, a trust established during your lifetime) then your will is often referred to as a pour over will. Such a will includes instructions to transfer all remaining assets (assets that were not transferred to your living trust during your lifetime) to the living trust at the time of your death.

For relatively small gifts to beneficiaries who are minors, you might also consider providing for transfers from your estate to a custodian under the California Uniform Transfers to Minors Act.

6. Can I Change or Revoke My Will?

Yes. You should review your will periodically. If it is not up to date when you die, your estate may not be distributed as you wish.

Your will can be changed through a codicil, a legal document that must be drafted and executed with the same procedure that applies to wills. A codicil is an amendment to your will. You must not change your will by simply crossing out words or sentences, or by making any notes or written corrections on it.

You may also establish a new will and, in doing so, revoke your old will. If you get married or divorced, or establish a registered domestic partnership or terminate one, you should seek the advice of a lawyer and make a new will. You should also review your will when there are any other major changes in your family (such as births and deaths), when the value of your assets significantly increases or decreases, and when it is no longer appropriate for your proposed guardian or executor or testamentary trustee to act in that capacity.

If you have moved to California from another state and have a will that is valid under the laws of that state, California will honor its validity. It is important for you to review your will with a qualified California lawyer, however, since California law will govern the probate of your will if you live here at your death. And if you move out of state, your California will should be reviewed by a lawyer there.

7. How Are The Provisions of A Will Carried Out?

They are carried out through a court-supervised process called probate. Typically, the executor named in your will starts the probate process after your death by filing a petition in court and seeking official appointment as executor. The executor then takes charge of your assets, pays your debts and, after receiving court approval, distributes the rest of your estate to your beneficiaries.

Simpler procedures are available for transferring assets to a spouse or registered domestic partner, or for handling estates with assets under $100,000.

The probate process has advantages and disadvantages. The probate court is accustomed to resolving disputes about the distribution of assets fairly quickly through a process with defined rules. In addition, the probate court reviews the executor’s handling of each estate, which can help protect the beneficiaries’ interests.

One disadvantage, however, is that probates are public. Your estate plan and the value of your assets will become a public record. Also, because lawyer’s fees and executor’s commissions are based on a statutory fee schedule, a probate may cost more than the management and distribution of a comparable estate under a living trust. Time can be a factor as well. A probate proceeding generally takes longer than the administration of a living trust. Discuss such advantages and disadvantages with an estate planning lawyer before making any decisions.

8. Who Should Know About My Will?

No one-other than you and the lawyer who wrote the will-needs to know the contents of your will. But your executor and other close friends or relatives should know where to find it. Your original will should be kept in a safe place such as your safe deposit box, your lawyer’s safe, or a locked, fireproof box at your residence or office.

9. Will My Beneficiaries Have to Pay Estate Taxes?

Assets that are transferred to either your spouse (if he or she is a U.S. citizen) or to charitable organizations are not subject to estate taxes. Assets passing to other individuals or entities will be taxed if the net value of those assets is more than $2 million. That amount will increase to $3.5 million in 2009. Then, in 2010, the estate tax will disappear completely. In 2011, however, unless Congress changes the law, the exemption will revert back to $1 million. For estates that approach or exceed this value, significant estate taxes can be saved by proper estate planning. Usually, that planning must be done before your death and, for couples, before one of you dies. While estate planning generally focuses on estate taxes, planning must also take into consideration income, capital gains, gift, property and generation-skipping taxes as well. You should obtain qualified legal advice about taxes and current tax law during the estate planning process.

10. What Other Planning Should I Do?

• Make a list of your assets and debts. This can be extremely helpful when you are no longer around to provide such information. Make sure that your executor or other family members know where to find the list. Include your bank accounts, safe deposit boxes, stocks and bonds, real estate, and other assets on the list. Also, list the names and addresses of anyone to whom you owe money.
• Make and circulate a list of your professional advisors. Letting your family members and professional advisors know the other professionals who you work with can improve communications and encourage teamwork among your advisors, streamline tasks being done for you, and ensure that the proper people are contacted in the event of your death, sickness or incompetence.
• Set up a durable power of attorney for asset management. In this document, you appoint another individual (the attorney-in-fact) to make property management decisions on your behalf if you ever become unable to do so. The attorney-in-fact would manage your assets and be required to act solely in your best interests.
• Consider preparing an advance health care directive / durable power of attorney for health care. This document allows the person named as attorney-in-fact to make health care decisions for you when you can no longer make them for yourself. It may also contain your wishes concerning life-sustaining treatment, other health care issues, organ donation, burial instructions and your funeral.