Some estate plans make use of a “five-or-five” provision to help reduce the estate tax.  In the recent decision in Estate of Cairns (Sept. 15, 2010) 188 Cal.App.4th 937, the court had to interpret such a five-or-five provision many years after the death of the testator.

As the court explained, “Margaret Cairns executed a will in 1975, and died in 1977.”  The will established a testamentary trust.  The court continued.  “The five-or-five provision of the will [ ] specified: ‘The Trustee shall also pay to my son during his lifetime, from the principal of the trust, such amounts as he may from time to time request in writing, not exceeding in any calendar year, non-cumulatively, the greater of the following amounts: Five Thousand Dollars ($5,000.00) or Five Per Cent (5%) of the value of the principal of the trust, determined as of the end of the calendar year.’”

The trust was administered for many years after the death of Mrs. Cairns.  Eventually, demands were made for trust distribution in periods after the right to receive the funds arose. The court held that such requests were not time-barred.  Explained the court,

“As we read the provision, the beneficiary may make multiple demands from ‘time to time’ for distribution of Trust assets for a calendar year as long as the total amount demanded is no greater than $5,000 or 5 percent of the value of the principal of the trust.  The directive that the request must be non-cumulative refers to the total amount of the permissible distributions in a calendar year, not the date by which the demand must be exercised.  Finally, the total maximum distribution available to the beneficiary in any given calendar year is not ascertained or determined until the ‘end of the calendar year.’”

The court continued.  “Thus, if the 5 percent distribution is elected, the beneficiary will not even know the amount of the permissible demand until after the calendar year has concluded and an accounting is completed. The beneficiary may often not have adequate information to make a prudent decision as to which five-or-five election – five percent or $5,000 – is appropriate during the calendar year.”

The trustee disputed such interpretation under applicable tax law. The court swept aside these objections, stating “We reject Kenneth’s contention that the trial court’s interpretation of the instrument also is not in accord with applicable provisions of federal tax law.  We deal in the present case with an issue of interpretation of a trust document, which implicates state rather than federal tax law.  Further, Kenneth’s suggestion that under these tax rules, the beneficiary’s right to the disbursement lapses if the power is not exercised, is in keeping with our determination of the meaning of the five-or-five provision.”

This analysis seems incomplete. True, the court was obligated to review the written trust agreement. The court also was obligated to consider the circumstances under which the trust agreement was drafted. The circumstances included the tax rules applicable at the time that the will was drafted. The interpretation should have taken these circumstances into consideration.

The court made the following findings. “We therefore interpret the five-or-five provision to mean: during his lifetime [the beneficiary] is not required to make a single demand for distribution of principal during each calendar year in which the maximum total amount of the distribution is calculated.”

OK, that makes sense.

“He may make multiple written demands for distribution of principal from time to time within a single year, as long as the total amount requested for any single calendar year does not exceed the annual 5 percent or $5,000 maximum.”

Agreed. That’s what the document states.

“The proscription against non-cumulative requests prohibits him from making demands for less than the maximum amount for one calendar year, then seeking to add the amount not requested for that year to the distribution the next year.”

Agreed again. The distributions were to be noncumulative.

“The total maximum distribution amount available to him, whether it is 5 percent or $5,000, is calculated as of the end of each calendar year.”

Again, that’s the document states.

“And, he must make his demands for distribution before the end of the next calendar year after the determination of the value of the principal of the Trust to avoid the ban against non-cumulative distributions ‘in any calendar year.’”

This prevents the beneficiary from requesting distributions many years after the fact.  In conclusion, “We have found that the Trust does not require [the beneficiary] to exercise his right to a principal distribution in a given calendar year to receive the distribution related to that same year. Thus, he was not required to make his demands for the year 2007 in the year 2007. The ban on cumulative distributions required him to demand principal distributions not in excess of the five-or-five maximum for the year 2007 by no later than the end of 2008.”

In the end, a sensible interpretation.

Estate of Cairns (Sept. 15, 2010) 188 Cal.App.4th 937

Conventional wisdom is that a safe deposit box is a safe place to store valuable belongings.  And that’s true, as long as the owner keeps track of the contents of the safe deposit box.

Yet, I have handled a case in which a bank denied, in writing, the existence of a safe deposit box in the decedent’s name.  A few months later, when presented with the key to the safe deposit box, the bank “found” the box and we recovered thousands of dollars in U.S. government bonds.

The plaintiff in Gabriel v. Wells Fargo Bank (Aug. 30, 2010) 2010 DJDAR 14579 did not fare as well.  In Gabriel v. Wells Fargo Bank, the decedent held a safe deposit box.  The widow learned of the safe deposit box 16 years after her husband’s death.  In the box was a non-negotiable certificate of deposit in the face amount of $976,691.60, payable to the widow.

But because the widow could not prove a negative (specifically, because she could not prove that Wells Fargo Bank had not already paid out on the certificate of deposit), she lost at the trial court and on appeal.

That’s a bitter pill, and a strange decision.  Here are the facts and the holding.
“On June 22, 1988, Hideo purchased a certificate of deposit from Wells Fargo in the amount of $976,691.60, payable to his wife Kuniko.  Interest from the certificate was to be placed in a savings account held in Kuniko’s name.  Hideo apparently placed a receipt from the bank for the certificate of deposit account in a safe deposit box at the bank which was also in Kuniko’s name.”

Sounds like great facts.  “Hideo died in November 1991 . . . In April 2002, Wells Fargo opened the safe deposit box because the rental fee had not been paid and the box was presumed abandoned.  It found the certificate of deposit and in June 2006 sent it to the California Controller’s Office as unclaimed property.”

Still going strong.  “In August 2007, Kuniko received a letter from the controller’s office informing her that it was holding the contents of a safe deposit box from Wells Fargo. The controller sent her the contents of the box, which included the receipt for the certificate of deposit. This was the first time that she learned of the existence of the certificate of deposit or of the savings account . . . Kuniko sued Wells Fargo, claiming that it failed to pay her the money in the accounts.”

What more do you need?  A lot, according to the court.  “The court granted summary judgment in favor of the bank, finding that despite the absence of definitive records, Wells Fargo had presented sufficient evidence of its normal business practices to establish that no funds remained in either account.”

Are you wondering what went wrong?  You should be.   Here’s how Wells Fargo got away scot-free.  “Wells Fargo has no records indicating that any funds from the CD account or the savings account were ever transferred to the State Controller’s Office as unclaimed property.  If any unclaimed funds remained in either of these accounts, those funds would have been escheated to the State Controller’s Office and Wells Fargo would have records of that fact.”

OK, so the bank did not pay out the funds to the state as unclaimed property.  What happened to the million dollars, which was payable to the widow?  “Wells Fargo [determined] that neither account was open, and that no records existed which would show when those accounts had been closed or how much money had been in the account when they were open.”

Watch the train wreck unfold before your eyes.   “Wells Fargo’s evidence establishes that the absence of specific Wells Fargo records infers that the certificate of deposit was withdrawn.   Since there is no evidence that plaintiff Yamamoto’s late husband did not withdraw the funds, and no evidence that the terms of the certificate of deposit account did not permit him to withdraw the funds, plaintiff Yamamoto is unable to meet her burden of producing evidence on an essential element of her claim.”

Really?  The widow loses?  Said the court, “At trial Kuniko would have the burden of proving nonpayment.”  Well. The widow said she never received the money.  Isn’t that enough?

No way, said the court.  “Wells Fargo submitted the declaration of the operations manager of the bank’s unclaimed property department who is responsible for monitoring dormant accounts and reporting escheated property to the State Controller’s Office.  Her declaration states that ‘it is Wells Fargo’s policy and practice to maintain account records for seven years after the account has been closed.’”

No tickee, no laundry.  Or, because the bank has no records, the widow loses.  “Wells Fargo’s evidence that no money remained in the accounts shifted to Kuniko the burden of presenting evidence sufficient to create a triable issue as to nonpayment, and her possession of the receipt and her testimony were insufficient to do so.  The trial court therefore properly granted summary judgment in favor of Wells Fargo.”

The moral of this story – make sure that your family knows how to find your valuable possessions.  Also, bankers have a powerful lobby, and the laws favor them to an unreasonable degree.

Gabriel v. Wells Fargo Bank (Aug. 30, 2010) 2010 DJDAR 14579

It’s remarkable how persons come out of the woodwork after a relative’s death, claiming that they should get a share of the decedent’s estate.  Especially when the decedent left money to someone not related by blood who helped care for the person in his or her declining years.  In this case, the wicked step-daughter.

The recent situation in Estate of Austin involved this all-too-familiar pattern.  The court set the facts as follows.  “Prior to Donald Austin’s death, Donald’s mother passed away and his brother, Wesley Austin became successor trustee of the mother’s trust.”

“In April or May 2007, Wesley and his wife, Janice, learned Donald would receive funds from the mother’s trust.  Wesley and Janice went to see Donald at the nursing home and asked what he wanted to do with the funds.”

This did not sit well with Donald.  “On their third visit in three weeks, Donald had decided he wanted Debra to have the money.  [Debra was the daughter of Donald’s ex-wife.]”

“Wesley and Janice called Debra and asked her to come to the nursing home. Wesley handed the first check to Donald, who signed it, handed it to Debra, and said, ‘Here, this is yours.’  Wesley received the second check from the life insurance company; he took it to Donald, who signed it over to Debra and told Wesley to take it to her. Wesley delivered it to Debra personally. The remaining four checks were written by Donald to Debra. The six checks were dated between April 5 and July 10, 2007, and totaled approximately $185,000.”

The testimony at trial indicated that, at the time the checks were given to Debra, Donald was 72 years old and a resident of a nursing home.  He had been placed in the nursing home because his health had declined and he was unable to care for himself after suffering a broken hip and undergoing triple bypass surgery.  The parties did not dispute that he was a “dependent adult” within the meaning of California law.

Donald’s daughter, Dawn, was outraged after his father’s death that she [Dawn] did not get the money.  So she did what any reasonable person would do.  She sued Debra.  The court would have none of it.

Dawn’s theory was that Debra was a “care custodian” under California law and therefore ineligible to take from Donald.  Specifically, “Dawn contends Debra was a ‘care custodian of a dependent adult. as that term is used in Probate Code section 21350, and is therefore a person disqualified from receiving a transfer of property from that dependent adult.”

The trial court found that Dawn did not meet her initial burden of proving Debra was a disqualified transferee under section 21350, subdivision (a). It concluded Dawn failed to prove Debra met the definition of a care custodian.  This finding was affirmed on appeal.

Explained the court, “The definition [of care custodian] is not limited to paid professional care givers; it includes a person who provides health services or social services to a dependent adult as a result of a preexisting personal friendship with the dependent adult.”

However, Debra did not fit the definition.  According to the court, “Donald made the gifts to Debra while he was residing in a nursing home.  There was no evidence Debra was providing any health or social services to him at that time. The evidence showed that Donald had been able to take care of himself, and Debra did not provide assistance to him, until he broke his hip in October 2006 and had triple bypass surgery three weeks later.”

Furthermore, “There was no evidence Debra was ever a paid live-in caregiver for Donald . . . Debra’s services were much more limited, consisting only of driving Donald to the doctor, preparing some of his meals, and unspecified helping out. ¶ Substantial evidence supports the trial court’s conclusion that Debra did not become Donald’s care custodian as a result of the limited services she performed for him while he was not in a nursing home.  Dawn failed to carry her burden of proving Debra was a disqualified transferee.”

It seems like the court reached a fair and reasonable decision.  Donald favored the person who was closer to him, and the court respected his wishes.

Estate of Austin (Sept. 15, 2010) — Cal.Rptr.3d —-, 2010 WL 3565739

California provides a one-year statute of limitations for claims against a deceased person.  If a claim exists against a person as of the time of that person’s death, an action based on such claim must be filed within one year after death or forever be barred.

Caveat – This rule assumes that the claim existed on the date of death.  If, for example, the claim is based on a promissory note which does not come due and payable until a later date, then the one-year statute of limitations is not controlling.

The court in Estate of Ziegler did not like the facts with which it was presented.  Here is the opening from the recent opinion.

“The statute of limitations serves noble public policies.  It promotes justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.  Its operation in particular cases, however, can be sadly inequitable.”

“This is just such a case.  The equities in favor of claimant Richard H. LaQue could hardly be more compelling.  LaQue and his wife provided food, care, and companionship to their neighbor, Paul Ziegler, when Ziegler was sick and alone.”

“At first, they did so out of the goodness of their hearts.  Eventually, however, a grateful Ziegler insisted on entering into a written agreement – the validity of which is unquestioned – that in consideration of continued care, LaQue would receive Ziegler’s home upon Ziegler’s death.”

“On the other hand, the equities in favor of appellant W.C. Cox and Company (Cox) are slim to none.  Cox is a soulless corporation in the business of locating missing heirs.  It is acting as the attorney in fact for nine residents of Germany who claim to be Ziegler’s heirs.”

“After Ziegler died without a will, LaQue simply moved into Ziegler’s former home, unopposed. He did not see the need to file any claim in connection with Ziegler’s estate until about a year and three weeks after Ziegler’s death.”

“Alas for LaQue, Code of Civil Procedure section 366.3, subdivision (a) provides: ‘If a person has a claim that arises from a promise or agreement with a decedent to distribution from an estate or trust or under another instrument . . . an action to enforce the claim to distribution may be commenced within one year after the date of death, and the limitations period that would have been applicable does not apply.’”

The contract provided as follows:

“November 10, 2005

“2:15 p.m.

“I Paul Daniel Ziegler home owner of 820 E. G St in Colton, California 92324, am signing over my home and property to Richard H. LaQue Sr.”

“This written agreement between myself and Richard is for the exchange of my care and daily meals. This written note will be immediately active if and when I no longer can reside in my home due to death.”

Ruling for Mr. LaQue, “the trial court reasoned that the applicable statute of limitations would run from breach of the contract and that the contract had not been breached.”  This finding was reversed on appeal, because “LaQue’s claim here is indistinguishable from a claim on a contract to make a will.  The agreement was a promise to transfer property upon death. It could be performed only after death, by the decedent’s personal representative, by conveying property that otherwise belonged to the estate.”

Here’s where Mr. LaQue loses the case.  If there had been a will in his favor, such will would have controlled.  Instead, there was a contract providing for distribution at death, which contract was subject to the one-year statute of limitations.

Yet, there is a question is whether the document was a contract, or a will substitute.  If the written document could have been a construed as a will – a disposition of property not effective until death – then Mr. LaQue stood a chance.

But the court of appeal did not reach this issue, stating that, “Even though the agreement was worded in the present tense, it required some further action by the Administrator (representing Ziegler) to make the transfer happen.  The notion that the title was instantly transferred, although appealing, is a legal fiction; actually, the estate continued to hold the title.”  (Which suggests that the agreement might have been a will substitute.)

Estate of Ziegler (Aug. 31, 2010) — Cal.Rptr.3d —-, 2010 WL 3398883

Whether a person has sufficient mental capacity to make a will can be a difficult question.  Historically the law has set a low bar for capacity to make a will.

The recent decision in In re Estate of Manuel focused on a fight over attorney’s fees.  The dispute under the discovery laws involves a thorny question – When can attorney’s fees be recovered if a request for admission is denied, but the fact is then proven at trial?

Only a portion of the decision is published in the official reports.  However, in the unpublished portion of the opinion, the court offered a solid discussion of testamentary capacity, based on this issue:

“Brown denied that decedent possessed testamentary capacity at the time she executed the July 24, 2003 will.  We therefore must consider whether Brown possessed a reasonable basis, supported by the evidence, to believe decedent lacked testamentary capacity.”

The statute states that an “individual does not have sufficient mental capacity to be able to (A) understand the nature of the testamentary act, (B) understand and recollect the nature and situation of the individual’s property, or (C) remember and understand the individual’s relations to living descendants, spouse, and parents, and those whose interests are affected by the will.”   Probate Code section 6100.5(a)(1).

The court applied the rule of law to the facts of the case.  “Testamentary capacity must be determined at the time of execution of the will.  Incompetency on a given day may, however, be established by proof of incompetency at prior and subsequent times.”

Now comes a more difficult point.  “Where testamentary incompetence is caused by senile dementia at one point in time, there is a strong inference, if not a legal presumption, that the incompetence continues at other times, because the mental disorder is a continuous one which becomes progressively worse.”

Yet, “dementia” is a not a one-size-fits-all diagnosis – the labels is applied to a number of different symptoms.  The court continued.  “However, it has been held over and over in this state that old age, feebleness, forgetfulness, filthy personal habits, personal eccentricities, failure to recognize old friends or relatives, physical disability, absent mindedness and mental confusion do not furnish grounds for holding that a testator lacked testamentary capacity.”

For the estate planner, the question whether a person has sufficient mental capacity to make a will can be very difficult to answer.  “In this case, Brown possessed substantial evidence that decedent lacked testamentary capacity.”  But that was not the end of the matter.

“Indeed, while the trial court’s determination that decedent possessed testamentary capacity is supported by substantial evidence, had the trial court reached the opposite conclusion, it would have survived a substantial evidence challenge on appeal.”

“Brown relied on the following evidence at trial:  (a) decedent’s stroke in 1999; (b) the two Mini-Mental State Examinations in 1999, which showed substantial mental impairment; (c) an expert opinion that it is unlikely decedent’s condition would have improved after two similar evaluations in 1999; (d) the 1999 diagnosis of probable Alzheimer’s disease; (e) the testimony of relatives regarding decedent’s lack of improvement; (f) the expert opinion of Dr. Neshkes; (g) Wilson’s verified complaint in the Campbell action; and (h) decedent’s deposition testimony six months after the will was executed, in which she demonstrated a lack of testamentary capacity, by her failure to remember and understand her relations to Wilson and the Campbells.”

So who was correct?  It’s a factual matter for determination by the trial court.  “This constitutes more than sufficient evidence for Brown to have denied the request to admit that decedent possessed testamentary capacity.   The trial court’s implicit conclusion to the contrary was an abuse of discretion.  Therefore, Wilson should not have been awarded any attorney fees with respect to the issue of testamentary capacity.”

Alas, this useful analysis was deleted from the final published opinion.

In re Estate of Manuel (August 10, 2010) — Cal.Rptr.3d —-, 2010 WL 3133553