Fresno Lawyer – Randolf Krbechek

In the recent decision in Citizens Business Bank v. Carrano (Nov. 05, 2010), the court sensibly applied the rules for construing a will to the interpretation of an estate planning trust.  This is an appropriate result, considering that the trust was intended to serve as a substitute for will.  However, the law authorizing such a result is not as clear as it should be, at least under the statute.

The facts make for an entertaining read.  According to the court, “Charles and Serena Papaz created the Papaz Family Trust on August 2, 1966.  Charles and Serena ha[d] one child, Christopher.  Christopher fathered three children out of wedlock.”

The lawsuit concerned one of the grandchildren, Jonathan.  The matter of Jonathan’s conception was unusual, to say the least.  The court found that, “Christopher (the son) met Jonathan’s mother, Kathy Carrano, when he was shot in the leg in 1984.”

“Kathy was Christopher’s physical therapist while he was in the hospital and she continued to care for him during his recovery at his parents’ home.  One night, Christopher gave Kathy a drug and had sex with her without her knowledge.  Jonathan was conceived that night.”

Only in California, you might say.  But wait, the story gets better.  “Kathy was married to another man at the time. Jonathan was born in August 1985.  Kathy and her husband raised Jonathan as their child.  A few years after he was born, Kathy learned that Jonathan was Christopher’s son and not her husband’s.  Jonathan was never formally adopted by Kathy’s husband.”

“Christopher, however, appeared to be aware that Jonathan was his son from the beginning.  He bragged to his friend, Vahe Tatoian, when Kathy was pregnant that, “I know this is my kid.’”

Christopher led a troubled life.  “In December 2006, Christopher became paralyzed from his neck down and could no longer speak.  In January 2007, Kathy told both Jonathan and Charles [the grandfather] that Christopher was Jonathan’s biological father.  Jonathan introduced himself to Charles, saying, ‘I am Jonathan, your grandson, Christopher’s son.’  Charles ‘reached over and grabbed [Jonathan’s] hand and said, ‘I know.’”

After Christopher’s death, an issue arose as to who was entitled to inherit under the trust.  The trust provided for distributions to Christopher’s “then-living issue.”  The matter wound up in court when “Citizens Business Bank, as trustee to the Papaz Family Trust, filed a petition for an order ascertaining beneficiaries and determining entitlement to distribution.”

Held the court, “The ultimate question in this case is whether the Papaz Family Trust’s definition of ‘issue’ includes Jonathan.  Jonathan argues that the term ‘issue’ in the trust instrument is unambiguous.  We agree.”

First, the court applied basic contract law, stating that “whether an ambiguity exists in a writing is an issue of law subject to independent review on appeal.”  Then the court reached out and connected trust law with the law of wills, as follows:

“Our Supreme Court’s opinion in Estate of Russell (1968) 69 Cal.2d 200, 205-206, lays the foundation for our interpretation of a trust instrument: ‘The paramount rule in the construction of wills, to which all other rules must yield, is that a will is to be construed according to the intention of the testator as expressed therein, and this intention must be given effect as far as possible.’”

Now, I agree with this analysis, specifically, that estate planning trusts should be construed by rules similar to those applicable to the law of wills.  The Carrano court makes an explicit link between the two bodies of law, a link that is not always followed, either in case law or in statute.

The court continued.  “The rule is well established that where the meaning of the will, on its face, taking the words in the ordinary sense, is entirely clear, and where no latent ambiguity is made to appear by extrinsic evidence, there can be no evidence of extrinsic circumstances to show that the testatrix intended or desired to do something not expressed in the will.”

The court found that the word “issue” had a statutory definition which included all three of Christopher’s children, regardless of the unusual circumstances by which Jonathan was conceived.  Stated the court, “typically, latent ambiguities arise where two persons or things answer the description of a bequest, or where there is a mistaken description and one or more persons match a portion of the bequest . .  However, extrinsic evidence is not admissible to change a testator’s intent.”

Having found no ambiguity in the word “issue,” the court ruled in favor of Jonathan, concluding that, “Just as in Estate of Russell, we are not at liberty to rewrite the Papaz Family Trust to attach restrictions to the term ‘issue’ that Serena and Charles did not expressly include.”

The court reached the right decision for the right reasons, but I am not positive that the line connecting law of wills to the law of trusts is quite as straight as the court would have us believe.

Citizens Business Bank v. Carrano (Nov. 05, 2010) — Cal.Rptr.3d —-, 2010 WL 4371042

The recent decision in Lickter v. Lickter (Oct. 27, 2010) — Cal.Rptr.3d —-, 2010 WL 4231300 highlights of three important points.  First, a trust beneficiary does not have standing to pursue a claim on behalf of the trust after the beneficiary has received his or her distribution pursuant to the trust.  This may seem like a common-sense answer, but it took a published appellate decision to affirm the point.

Second, draftspersons should be careful in how they handle pour over provisions in wills.  It is common to couple an estate planning trust with a pour over will.  By such standard estate planning documentation, the pour over will transfers any assets into the trust that were not already titled in the name of the trust at the time of the trustor’s death.

Yet, this can lead to an awkward circumstance if the asset consists of a claim for personal injury to the trustor, such as wrongful death or elder abuse.  Depending on how the pour over will was drafted, such claim may pass to the trust, to be prosecuted in the name of the trustee for benefit of the trust and its beneficiaries.  Draftspersons may wish to consider modifying their pour over wills to provide that such claims for personal injury are the property of one or more named persons, rather than property of the trust.

Third, this case emphasizes the importance of making pecuniary bequests to persons whom the trustor wants to preclude from attacking the trust.  If the trustor makes a gift of $0.00 a potential beneficiary, then the beneficiary has no reason not to attack the trust.  If the beneficiary loses, he still gets nothing; if he wins, then he gets something under the trust.

In this case, the beneficiaries who wanted to launch a challenge received specific bequests, which requests were distributed to them by the trustee.  By such distribution, the trustee prevented an attack on the trust.

Here’s how the court addressed the matter.  “The underlying facts are largely irrelevant. For our purposes, it is sufficient to say that Lois died in August 2007 at the age of 91, leaving property in a trust, of which Robert became the trustee. The terms of the trust provided that upon Lois’s death, $10,000 each would be distributed to plaintiffs and the entire residue of the trust would then be distributed to Robert.  If Robert predeceased Lois, the residue was to be distributed to Maggie and Kate.  If Maggie and Kate also predeceased Lois, the residue was to be distributed to their children or, if none, to Lois’s living children by right of representation.”

“Plaintiffs Joshua and Jezra Lickter sued their father (Robert Lickter), their half-sisters (Maggie and Kate Lickter), and their half-sisters’ mother (Mary McClain) for elder abuse and other related causes of action that had belonged to their grandmother (Robert’s mother), Lois Lickter, when she died.  Plaintiffs claimed they had standing to commence and maintain the action under Welfare and Institutions Code section 15657.3(d).”

Explained the court, “The primary issue in this case is who is entitled to commence and/or maintain an elder abuse action after the elder who was allegedly abused has died . . . As we will explain, just because plaintiffs were beneficiaries of Lois’s trust did not make them ‘interested persons’ for purposes of pursuing this elder abuse action under subdivision (d) of Welfare and Institutions Code section 15657.3 . . . Plaintiffs were former beneficiaries of Lois’s trust, as they already had been paid the amounts they were owed under the trust. Thus, plaintiffs had no such interest in this elder abuse action.”

Bravo for a pithy and direct analysis.  “Because Robert was Lois’s only surviving child, and because neither Maggie nor Kate had children, the residue of Lois’s trust would be distributed to plaintiffs under the terms of the trust if Robert, Maggie, and Kate all were deemed to have died before Lois.”

Here is the heart of the issue.  “It has long been clear under California probate law that a person who can claim the title of ‘heir’ is not necessarily an ‘interested person’ for purposes of instituting or participating in a particular proceeding in a probate case.  The question, rather, is whether the person – whether an heir, devisee, beneficiary, or other person – has an interest of some sort that may be impaired, defeated, or benefited by the proceeding at issue.”

Now shines the beauty of the specific bequests to the beneficiaries who wanted to institute the action.  “Here, when the trial court granted summary judgment, plaintiffs had no right in or claim to Lois’s trust estate by virtue of their status as former beneficiaries of Lois’s trust because all of the interest they had in Lois’s trust had been satisfied when they were each paid the $10,000 Lois left each of them.”

“Thus, they were no longer beneficiaries of the trust, let alone beneficiaries with ‘a property right in or claim against the trust estate which could be affected by the’ elder abuse action. For this reason, the trial court did not err in concluding that they did not have standing as ‘interested persons’ under subdivision (d)(1)(C) of Welfare and Institutions Code section 15657.3 in their role as beneficiaries of Lois’s trust.”

To drive the point home, the court further held that, “In other words, contrary to plaintiffs’ assertions, it is not true that Robert’s payment of the $10,000 each plaintiff was owed from the trust terminated their standing to pursue this action as beneficiaries of Lois’s trust. The fact is that plaintiffs’ status as beneficiaries of Lois’s trust never gave them standing to pursue this action because the beneficial interest they had in the trust estate was not one that could have been ‘affected by’ this action.”

Hat’s off to a clear, concise, and absolutely accurate decision.

Lickter v. Lickter (Oct. 27, 2010) — Cal.Rptr.3d —-, 2010 WL 4231300

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