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Beware the Boilerplate: Lessons from Donald vs. Shelly Sterling

The recent battle between Donald and Shelly Sterling over control of the Los Angeles Clippers basketball team provided a valuable lesson for clients who have created trusts, or are considering creating trusts.  Not only is it critical for those who create trusts to understand the dispositive provisions of their trusts, but they also need to understand the so-called “boilerplate” provisions included in their trusts.

“Boilerplate” typically refers to the standard provisions that are included in legal documents such as contracts, trusts, powers of attorney, and wills.  In trusts, the boilerplate language usually refers to procedural and more general provisions concerning various aspects of the trust and how it is to be administered.  However, in the Sterling situation, the case turned on the meaning and use of certain “boilerplate” language.

The critical “boilerplate” language in Sterling dealt with the way in which a trustee would be deemed unable to continue to act as trustee of the trust.  The court determined that the trust language was clear and its procedures properly followed by Shelly Sterling.  As a result, Donald was deemed incapable of continuing to act as trustee.  This allowed Shelly to proceed and sell the Clippers for $2 billion to Steve Ballmer, which was in the trust’s best interest, and which avoided the NBA seizing control of the team.

One valuable lesson learned by the Sterling case is that those who create trusts need to understand the “boilerplate” language in their trusts, including provisions like the ones at issue in the Sterling case.  These provisions are designed to address situations that may arise in the future, and chances are that some of them will not be applicable to a given person’s situation.  However, there is no way to predict which provisions will become at issue in the future, which is why it is critical for those who create trusts to understand these provisions and ensure that they accurately reflect their intent.

Forget Hamlet. “To Click or Sign, THAT is the Question!”

In daily life today, most of us put our electronic “John Hancock” on the screen every day, whether at the grocery store, drug store or other businesses.  We’re used to it as a perfectly valid way to seal- the-deal for routine retail transactions.

But what about other forms of documents, such as business contracts or wills and trust? Are electronic (no ink, no paper) signatures valid?

The answer is MAYBE.

For more than ten years, the US has been a signator to The Electronic Signatures in Global and National Commerce Act (ESIGNA) which makes e-signatures just as valid as the ‘wet signatures’ on paper. “E-signatures” come in many forms, such as:  (1) typing a signature into a space as directed on a form; (2) copying and pasting a scanned versions of the signer’s name; (3) using one of the cryptographic technologies available that scrambles information of the sender and allows the receiver to unscramble; or (4) clicking that ubiquitous, “I ACCEPT” button before software is enabled.

So, the ESIGNA allows business to proceed efficiently with the foregoing methods of “e-signatures.”

But some documents still MUST be signed the old-fashioned way in order to be valid.  What is “old fashioned?”  Using a pen and signing your name on piece of paper. These types of documents include:

  • WILLS, CODICILS AND TRUSTS
  • DOCUMENTS RELATING TO ADOPTION AND DIVORCE
  • COURT ORDERS, NOTICES AND OTHER DOCUMENTS LIKE PLEADINGS AND MOTIONS
  • NOTICES/DOCUMENTS RELATING TO
    • DEFAULT, FORECLOSURE, EVICTION, REPOSESSION
    • CANCELLATION OF HEALTH OR LIFE INSURANCE BENEFITS
    • HEALTH & SAFETY PRODUCT RECALLS
    • TRANSPORTATION OF HAZARDOUS MATERIALS

You’ll notice that the above list has a common thread – all the types of documents mentioned pertain to personal, health and safety issues.  And even if you do have that original document, whether you need to provide a copy of that original “wet signature” document for a transaction here or abroad  (from  filing a deed with the county record or  applying for a foreign tax subsidy) will depend on a number of factors, including the intent of the parties.

In today’s marketplace for routine business transactions between private parties, contracts often have a clause that provides: A facsimile copy and signature or electronic signature shall be deemed an original for all purposes herein.

People routinely sign contracts, scan them into their computer and send those scanned signature pages around the globe for counter- signature with the parties honoring the scanned documents as originals.  Keep in mind, however, that you should consult with your lawyer to make sure that your particular document has been properly executed and maybe even notarized or given an “Apostile” status as required for some purposes internationally.

Property Tax Relief for Seniors

A wise man once said, “the only two things certain in life are death and taxes.” Although we have very little control over when the first occurs, many of us go to great lengths to try to minimize the “ouch” factor of the second. When my parents turned 70, they felt the 3,000 square foot home they lived in for over 30 years was way too much for them. They knew they could sell their home for a lot of money and buy a smaller home very easily. However, my parents were worried about paying a much higher annual property tax bill year after year, since they believed that their new property tax would be based on the price they paid for another home.  Luckily, I found two constitutional amendments passed by California voters that provide property tax relief if you are 55 years and older.  If you live in a “principal residence” in California for at least 5 years, are 55 years or older, buy a replacement property of “equal or similar value” within 2 years of the sale of your principal residence, and timely file a form BOE-60-AH with the County Assessor’s Office you may be able to transfer the tax basis from the home you sell to your new home.  There are certain conditions that must be met to be eligible. My parents sold their home and bought a newer smaller home, with less maintenance, for about the same price.  As a bonus, they were able to transfer the property tax base of $3,000 a year from the home they sold to their new home, saving them approximately $7,000 per year.  Without the exemption, my parents’ property taxes would have increased to approximately $10,000 per year.

Tuition and Medical Expenses Gifts Aren’t Taxable

It’s been said, “It is better to give then to receive.” I think we can all agree it is much better to receive without worrying about paying taxes.  Under current federal law, most individuals can receive annual gifts of up to $13,000 without being subjected to a federal gift tax. This amount is set to increase to $14,000 in 2013.  While many may know about the $13,000 gift-tax exclusion amount, many may not know that there are two exceptions that provide for greater gifting opportunities without taxation.  One is when the gift is for tuition and the other is when the gift is for medical expenses.  Any amount paid for someone else’s tuition directly to a “qualifying” educational institution is excluded from the gift tax calculation.  “Qualifying” educational organizations include those where their primary function is formal instruction.  The organization must maintain a regular faculty and curriculum with students that attend where the educational activities are conducted.  Also, if the organization has non-educational activities, these must be incidental to the educational programs. A comprehensive definition of “qualified” medical expenses can be found in Internal Revenue Code Section 213, but includes payments for medical insurance and long-term care services such as cost of nursing homes or assisted living facilities, if provided by a licensed health care provider.  However, it should be noted that “qualified” medical expenses do not include cosmetic surgery, unless to correct a birth defect or disfigurement.

*This does not constitute tax or legal advise. Please contact your tax professional to make sure any such "gifts" qualify.
How Should You Take Title to Your Home?

We are often asked by clients “How should I take Title to My Home?”  It is important to make sure you have titled your home and any other real property correctly to insure that your real property passes to your heirs.  There are 3 common ways people hold title to their homes:

Joint tenancy: If real property is held in a joint tenancy, the owner who dies first does not control what happens to the property after his death.  A house will pass to the surviving joint tenant outright and the surviving joint tenant has discretion and control to leave the asset to whoever she wants.  And if the property is in the surviving joint tenant’s individual name at the time of her death, the property will need to go through probate before it is finally distributed.  Further, under current law, the surviving joint tenant only receives a one-half step-up in basis on the property and may end up paying capital gain on one-half of the property after the first joint tenant’s death.

Community Property with Rights of Survivorship: Holding title as community property with rights of survivorship will take care of the capital gains issue.  However, like a joint tenancy property, he who dies last wins!  In other words, the property will pass outright to the surviving spouse, who can then distribute the property as she sees fit and may disregard the deceased spouse’s wishes.  Further, if the property is still in the surviving spouse’s name on her death, then the property will need to be probated.

Revocable Living Trust: Property titled in a revocable living trust will avoid the probate process.  Further, both spouses will have input into how the property passes.  Finally, if the transfer of the property to the Trust is done correctly, the surviving spouse will avoid paying capital gains on sale of the property.

Naming Beneficiaries on Your Retirement Plans

We are often asked whether one should name individuals or their Trust as the designated beneficiary on their retirement plans.  There is no one answer to this question.  In other words, it depends!   Here are some considerations when naming beneficiaries on your retirement plans:

Do you and your spouse have different heirs? Naming your spouse, individually, as the beneficiary does not insure that your retirement plan will be passed to your beneficiaries upon your spouse’s death later on.

Do your retirement assets make up a significant part of your estate? If so, then leaving them individually to your beneficiaries may use up your estate tax exemption and reduce the amount available to fund your credit shelter or bypass trust.

How much control do you want to give to your beneficiaries? In naming a beneficiary individually, he will have full control over the assets (and can spend frivolously).

When will your spouse need to take distributions? In naming your spouse individually, you preserve the option for your spouse to “roll-over” the retirement account, and defer distributions (as well as its tax consequences) for a later day.  However, if you name your Trust, your spouse may be required to take distributions immediately after your death (and therefore pay taxes too).

Everyone should review their beneficiary designations frequently to make sure you have made the proper designation.  Work with your estate planning attorney to make sure you have made the proper designation which will accomplish your goals.

You May Not Always Be Your Own Trustee

The focus for many people when they create a Trust is the distribution of their assets at the time of their death. We are seeing more clients who are living past their ability to direct and maintain their own finances. Make sure your Estate Planning documents are clear as to what you want for yourself in the event that a Conservator is appointed for you or in the event your Successor Trustee takes control of your finances during your lifetime.  What care and level of living do you want? Do you want to remain in your home for as long as possible despite the cost of home healthcare? Do you want annual gifts that you make to continue during your lifetime? Remember your Agent for Power of Attorney does not have authority or control over your Trust assets. If a Lease needs to be renewed or a Certificate of Deposit needs to be renewed and the assets are in the Trust name it will take the power of your successor Trustee to direct those assets.

 

Estate Planning for Young Families: Protecting Your Assets and Passing on Your Values

Preparing your estate plan can feel like a daunting task, but once your estate plan is completed, it is a comfort to know that just in case something happens to you, your family is protected. Many young families preparing an estate plan are focused on the distribution of assets to their children and who will be handling it. What young families also need to consider is what important family values they would want passed on to their children. Appointing a guardian is the first step. Choosing someone who shares your core values and life priorities ensures that your values will be implemented. Many times the guardian of your children will not be the same person best suited to handle your children’s finances. This financially responsible person is known as a trustee. If your children’s guardian and trustee are not one in the same, you should make sure your plan appoints a trustee who will work well with your guardian and who is aware of your child’s needs. Your estate plan should document your core values and goals for your children so that both your guardian and your trustee are able to carry out your wishes. This plan is an evolving document and will change as your family grows and your values change. You should make sure to review your plan frequently (at least every 5 years) to reflect changes in your family, family relationships and growth of your children.