Articles Posted in Emerging Issues

There is an interesting article in the Wall Street Journal discussing which taxation system to choose for those taxpayers who passed away in 2010. The choice is between the estate tax system or the modified carry-over basis rules initially in place in 2010 when the estate tax was phased out.

Previous law gradually reduced federal estate tax over the years and eliminated it altogether for decedent’s dying in 2010 subject to carry-over basis rules which could result in income/capital gains taxation. In 2011, the estate tax was to be applied to assets in a decedent’s estate over $1 million at a rate of 55%.

New law, the 2010 Tax Relief Act increases the exemption amount to $5 million for 2011 and 2012 and is retroactive to January 1, 2010. Representatives for estates of decedent’s dying in 2010 can choose between the estate tax scheme or no estate tax subject to the modified carry-over basis laws.

If the estate tax option is applied, the estate will be subject to the $5 million applicable exclusion amount at the top tax rate of 35% with a stepped-up basis. If the no estate tax regimen is applied the modified carryover basis rules with be in effect.

In August 2010, SB 105 was passed by the legislature. There is a new Probate Code Section (21362) updating the previous definition of “care custodian.” This Section addresses gifts that become irrevocable after January 1, 2011.

This Code states that a care custodian will no longer include “a person who provided services without remuneration if the person had a personal relationship with the dependent adult (1) at least 90 days before providing those services, (2) at least 6 months before the dependent adult’s death, and (3) before the dependent adult was admitted to hospice care, if the dependent adult was admitted to hospice care.”

And if all this is too confusing, or you are not certain if a gift will be disqualified under the statute, an independent attorney can provide a Certificate of Independent Review.

A Certificate of Independent Review mandates an attorney that is, well, obviously independent from the situation to counsel the client regarding the “nature and consequences of the intended transfer.” Under California Probate Code 21370, the independent attorney is described as an attorney who “has no legal, business, financial, professional, or personal relationship with the beneficiary of a donative transfer at issue under this part, and who would not be appointed as a fiduciary or receive any pecuniary benefit as a result of the operation of the instrument containing the donative transfer at issue under this part.”

As 2010 looms near, our law office has received multiple inquiries about the status of the federal estate tax exemption for the upcoming years. Generally, federal estate taxation pertains to the amount of tax your estate will be liable for at your death.

Over the years, the federal estate tax exemption amount has been subject to a graduation system that provided for the federal exemption to increase while decreasing the estate tax rate.

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, for this year (2009) each individual enjoys a 3.5 million dollar exemption as to federal estate tax. Assets over $3.5 will be taxed at 45% (compared to 55% in past years). Basically, this means that the first $3.5 million of your assets will escape estate taxation at the federal level.

Further, as the law currently stands now, in 2010, federal estate taxation will disappear only to find it reappearing in 2011 at a rate of 55% on estates with assets over $1 million.

It is thought that President Obama and Congress will act prior to 2010 to prevent the federal estate tax from being repealed and there are a several options for Congress currently being considered.

Here is a summary of some of those options:

a) The exemption of $3.5 million from 2009 is made permanent as is the 45% tax rate.
b) The exemption is indexed for inflation c) Gift and estate tax is unified d) If a decedent doesn’t use their exemption, the transfer of the unused part to the spouse will be allowed.

a) An exemption of $2 million will be permanent b) For estates between $2 and $5 million the tax rate will be 45% and for estates $5 to $1 million the tax rate will be 50% and the tax rate will be 55% on estates more than $10 million.
c) same as (c) above d) same as (d) above
a) An exemption of $5 million will be permanent b) The tax rate will equal the top rate for capital gains
Of course this discussion is simplified in an attempt to illustrate the basics of federal estate taxation and the pending changes in the law. If you would like more information consider consulting “The Green Book”, published by the Treasury Department providing general information about the pending proposals. If you have questions or are interested in estate planning, contact our office.

It has been a long time since I have posted. The long lay off was due to a sports related injury that affected my right arm. Just imagine the things you can’t do without the use of your dominant limb. It gave me a whole new respect for the disabled.

Now that my arm is practically back to new…….or rather is restore to how it was prior to the injury, I can return to the blog.

It is an interesting time for estate planning issues. Especially considering the legal machinations occurring since Michael Jackson’s passing as well as changes in tax laws and cutbacks in the courts.

Stay tuned for updates and continued information on probates, wills, estate planning, guardianships, trusts and trust administration.

Who receives your property if you die without an estate plan, if your designated beneficiary(ies) predeceases you, disclaims their interest in your gift or is found to be a disqualified transferee?

Following our example in related postings on March 11,2009 and April 4, 2009 regarding California’s Custodian Care statute (California Probate Code Section 21350), Ken was found to be a disqualified recipient of his friend’s property and was not allowed to accept any property left to him by Bob, in Bob’s Last Will and Testament.  

Who then would receive Bob’s property?  Let’s assume Bob only provided for Ken and did not provide for a contingent beneficiary in the event Ken predeceased Bob.  Or alternatively, Bob’s contingent beneficiary properly disclaimed any interest that the beneficiary might have in Bob’s estate.  

Bob’s estate would pass to his heirs at law as determined by intestate succession.  Bob’s blood line would be followed until the first level of relatives were identified and each heir at that level would share Bob’s estate. If an heir at that level is deceased, the issue of the deceased heir would take that share.

California Probate Code Section 6401 codifies to whom and in what share property will pass that is not otherwise effectively disposed of by Will or other estate distribution device as follows:

   (a) As to community property, the intestate share of the
surviving spouse is the one-half of the community property that
belongs to the decedent under Section 100.
   (b) As to quasi-community property, the intestate share of the
surviving spouse is the one-half of the quasi-community property that
belongs to the decedent under Section 101.
   (c) As to separate property, the intestate share of the surviving
spouse or surviving domestic partner, as defined in subdivision (b)
of Section 37, is as follows:
   (1) The entire intestate estate if the decedent did not leave any
surviving issue, parent, brother, sister, or issue of a deceased
brother or sister.
   (2) One-half of the intestate estate in the following cases:
   (A) Where the decedent leaves only one child or the issue of one
deceased child.
   (B) Where the decedent leaves no issue but leaves a parent or
parents or their issue or the issue of either of them.
   (3) One-third of the intestate estate in the following cases:
   (A) Where the decedent leaves more than one child.
   (B) Where the decedent leaves one child and the issue of one or
more deceased children.
   (C) Where the decedent leaves issue of two or more deceased

As Bob did not have a wife, children, siblings, etc., the gift would continue down the line and in this case stop at Bob’s second cousin.  Presumptively, these distant relatives will prevail over Bob’s intent and Bob’s property will pass to the second cousins that Bob barely knew.

The same statutory structure to determine the recepients of a decedent’s estate holds true for those who pass away without directing the disposition of their assets such as a Will.

There are anticipated changes to the California Care Custodian statute.  Assembly Bill 2034 directed the California Law Revision Commission to look at the current law and its effectiveness in protecting a dependent transferor against abuses.   The goal is to protect while at the same time preserve the rights of the transferor to make desired dispositions (absent coercion) without discouraging the altruistic person from providing services.   

The Commission has issued a recommendation for improvement to Probate Code Section 21350.
Senate Bill 105 has been introduced to implement the Commission’s recommendation.

How could Ken be disqualified as Bob’s beneficiary?

In our example posted on March 11, 2009, the contestant of Bob’s Will (Bob’s second cousin) who is attempting to circumvent Bob’s gift to Ken, will attempt to convince the court that Ken is a Care Custodian as described under Probate Code Section 21350 and invalidate Bob’s intent to bequest Bob’s property to Ken.  

Should the cousin prevail, it is logical to infer this to be an unfair resolution and that Ken logically should be able to receive Bob’s property as both were such good friends.  It is apparent that Bob appreciated Ken, especially in light of all Ken’s assistance during those last months of Bob’s life.  It also makes sense that without other family, Ken would be the logical choice as a beneficiary of Bob’s estate.

Probate Code Section 21350 provides for specific situations in which a gift to certain persons will be invalidated.  One such circumstance in which a transfer would be deemed invalid is that from a dependent adult to the “care custodian” of that dependent adult.

The question would then be, what is a care custodian?  In addition to the obvious defining attributes of what might constitute a care custodian such as the administrator or an employee of facilities providing services to dependent adults (nurses, health care workers, etc.), California Welfare and Institutions Code Section 15610.17  includes in the definition those “persons providing health services or social services to elders or dependent adults”.

Now the question becomes, what would constitute health or social services?  As a result of conflicting opinions in the lower courts, the matter was brought to the California
Supreme Court in Bernard v Foley (2006) 39 C4th 794, 47 CR3d 248.  In the court’s decision they found that an unrelated person may be a disqualified care custodian if that person provided “substantial, ongoing health services” to a dependent adult.  

There is a previous case wherein the court dismissed the notion of invalidating the transfer to a care custodian if the care giving was a direct result of a preexisting friendship and relationship.  The Bernard Court apparently didn’t agree with the whole friendship exception and added that it doesn’t matter if the care giving relationship naturally arose out of a preexisting friendship as in the case of Bob and Ken.

Then one must ask themselves, what exactly are those health and social services that, if performed by a potential beneficiary of a testamentary gift, would disqualify the potential recipient and invalidate the gift?  The caregivers in Bernard assisted the dependent adult by doing her laundry, helping her to and from the bathroom, administering oral medication, cleaning the bedroom and typically performing such acts that one would hope a lifetime friend would do for you in your time of need.

In our hypothetical, there is a very good chance that Ken would be considered a care custodian and Bob’s gift to Ken will be invalidated as a transfer from a dependent adult to a care custodian of that dependent adult.  If Ken is determined to be a disqualified beneficiary, Bob’s cousins, some whom he has never met, will receive and share Bob’s property.

You might try to say that the ne-er do well cousins are violating the Will’s no-contest clause and therefore will lose their right to receive the estate.  However, a no-contest clause will not be enforceable against a beneficiary who brings the contest on the grounds of the invalidity of a transfer to a disqualified person.

This is not an isolated case.  With the age demographics as they are these days and other contributing factors, it is not that unusual to find people leaving their estates to friends rather than remote relatives.  Despite the fact that you care for and love your lifelong buddy and want to recompense your relationship with a bequeathing gesture,  should your friend lend a helping hand in those last days, such acts of compassion and kindness could very well be penalized. 

The code’s intent is to limit, reduce if not eliminate the instances of abuse to elders and dependent adults.  Many in this category are manipulated and unduly influenced to transfer their property to persons who are not the objects of their love and affection.  Of course, in enforcing and interpreting the code, the good Samaritan and lifetime friend has been penalized.

A qualified estate planning professional will be able to advise you on how to avoid an unwanted care custodian consequence.  One method is to obtain a Certificate of Independent Review from a lawyer other than the drafting attorney.  However, the downside of this solution is that you would need to hire two attorneys. One attorney would draft the documents and the other would interview you and review your estate plan to make certain your testamentary wishes are not the result of menace, duress, undue influence or fraud.  Absent any of the aforementioned, the reviewing attorney will sign a Certificate of Independent Review.

Assuming Ken is found to be a disqualified transferee, who would receive Ken’s assets?  

California’s Custodian Care Statute – Probate Code §21350

Do you think there are any restrictions or limitations on whom you choose to receive your property at your death? Often when people execute a Living Trust or Will to designate who is to receive their property when they die, they don’t give a second thought to the possibility that the intended recipient will not be allowed to take delivery of the property.

After all, isn’t it logical to believe you can give what you own to whomever you desire? It’s your property, you worked hard for it and you should be able to give it to anyone you want, right?

Well, the good news is, for the most part, absent a bequest that is illegal or harmful you can distribute your assets to anyone. The bad news is, if certain conditions exist, your intended beneficiary might not be allowed to accept your gift.

Consider the following example.  Bob and Ken are life long friends. Both are widowers and until the death of their respective spouses, the two couples enjoyed a close relationship. And even now, Bob and Ken remain very close. Ken has three adult children but Bob has no family except some distant relatives back east that he barely knows.

One day, Bob suffers a stroke. Ken is the ever diligent friend and stays by Bob’s side. He runs errands for Bob, picks up groceries, drives Bob to medical appointments, makes certain Bob takes his prescribed medications administer, assists Bob to and from the restroom and picks up around the house a little.

Bob hadn’t changed his Last Will and Testament since his wife passed away so he contacted his estate planning attorney and changed the beneficiary of all his worldly possessions to Ken.

Unfortunately, Bob doesn’t make it through this illness and passes away. The executor of Bob’s Will files a petition for probate in the local probate court that title to Bob’s home and other assets can be legally titled and transferred to Ken.

During the probate process, Bob’s second cousin, twice removed who had never met Bob personally, inserts himself into the probate proceeding and contests the probate petition and particularly the distribution of Bob’s estate to Ken.

You might be thinking, wait a minute, these guys have known each other for years and were the best of friends long before Bob’s stroke. Ken was the epitome of a friend.  How dare this stranger show up and attempt to thwart Bob’s testamentary intent.

The cousin will allege that Ken is a Care Custodian as defined in the California Supreme Court in Bernard v Foley (2006) 39 C4th 794, 47 CR3d 248 and therefore be disqualified from receiving any of Bob’s assets under California Probate Code §21350.

Probate Code §21350 codifies situations where donative transfers will be invalidated.  One such situation is a transfer from an elder or dependent adult to a care custodian.

Welfare & Institutions Code §15610.17 includes in its definition of a care custodian those persons “providing care or services” for elder or dependent adults.

The Court in Bernard v Foley found that an unrelated person may be a disqualified care custodian if that person provides “substantial, ongoing health services” to a dependent adult.  They further stated that it doesn’t matter if the care-giving relationship naturally arose out of a preexisting friendship as in the case of Bob and Ken.

The friends of the decedent in the Foley case were found to be care custodians and therefore disqualified persons. The transfer of the decedent’s property to them was invalidated by the court. The care and services provided by Foley and his girlfriend to the dependent adult was doing her laundry, lending assistance to and from the bathroom, administering oral medication, cleaning the bedroom and other such similar tasks.

Why would Bob’s gift to Ken fail?

Contact Information