A SPECIFIC REFERENCE TO A POWER OF APPOINTMENT OR TO THE INSTRUMENT THAT CREATED THE POWER IS SUFFICIENT AS PROBATE CODE SECTION 632 DOES NOT MANDATE IDENTIFICATION OF THE CREATING INSTRUMENT

In 1979 Arthur and Hildis O’Connor created the Arthur P. O’Connor and Hildis M. O’Connor Family Trust (the Trust) naming their children, Brian, Astrid, John, Kevin and Eric, as beneficiaries. The Trust allocated equal shares to each living child, then directed the establishment of one trust for Brian, Astrid and Devin (Eric predeceased his parents) and a separate trust for John.

John held a power of appointment over his interest in the Trust that, if not exercised, would pass to the other trust beneficiaries. A power of appointment is a power conferred by the owner of property upon another person to designate the persons who will receive the property. A valid exercise of that power of appointment required “a will specifically referring to and exercising this general testamentary power of appointment.” John died in 2014, leaving a will which provided: “I exercise any Power of Appointment which I may have over that portion of the trust or trusts established by my parents for my benefit or any other trusts for which I have Power of Appointment I exercise [sic] in favor of my brother [Kevin].” Kevin, as John’s named executor, petitioned the court to probate the will and sought to establish the validity of the power of appointment. Brian and Astrid, the other trust beneficiaries, contended John’s exercise of the power of appointment was invalid under Probate Code section 632 because it failed to satisfy the trust’s specific-reference requirement. The probate court granted the petition and found the reference in John’s will to the power of appointment was sufficiently specific to satisfy the trust’s terms and Section 632. Brian and Astrid appealed.

In re Estate of O’Connor, 26 Cal.App.5th 871, the Fourth District Appellate Court affirmed, finding that the language in John’s will recited not only the existence of a power of appointment, but also the trust and the donors of the power, John’s parents, satisfying the trust’s specific-reference requirement because it reflected John’s knowing and intentional exercise of the particular power of appointment granted to him under the Trust. Section 632 requires either a reference to the trust or a reference to the power but it does not require both, and therefore the reference in John’s will to the power was sufficient under the terms of the Trust. The language also ensured that John made a conscious exercise of the particular power granted to him, satisfying the specificity requirement of Section 632, which precludes a mere “blanket” clause and thus avoided the danger of an unintentional exercise of another power John might hold.

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Is Rent Control Coming to the City of Sacramento

As more California cities face ever-increasing rents and displacement concerns, tenants’ rights groups are more and more pushing rent control as the solution. California is set to be a big battleground for the issue in November when voters will consider Proposition 10, a ballot measure to repeal the Costa-Hawkins Housing Act which prevents cities from restricting residential landlords from raising rents to market levels after a tenant vacates and from imposing rent control on units constructed after 1995, single family homes and/or condominiums.

The Coalition for Affordable Housing, the principal backer of Proposition 10, argues that housing costs have increased so dramatically that families with modest incomes are priced out of the market. Opponents of the initiative, led by two PACS organized by the California Apartment Association and the California Rental Housing Association, assert that capping investor returns will stifle development. It is reported by real estate brokers who handle multifamily sales that the initiative is leading apartment owners to sell when they might not otherwise choose to do so at this time, and that the numbers of offers to purchase these units have declined from one to ten offers to one to three offers over the last year. While the outcome of Proposition 10 on November’s ballot remains to be seen, the matter is provoking zealous debate between housing advocates and investors.

Here in Sacramento, which had an eviction rate in 2016 that was 2.5 times the national rate, and more than 26,000 Sacramento renters paying 50 percent or more of their income for rent, Mayor Darrell Steinberg has proposed a three-year 5% percent rent cap that would only apply to units that are at least 20 years old. Among other things, Mayor Steinberg supports allocating funds from the rent increase to pay for repairs and improvements to the properties.

A different proposal known as the Tenant Protection and Relief Act is being put forward by councilmembers Rick Jennings, Steve Hansen and Eric Guerra. In addition to immediate solutions, such as mediation of rent increases greater than 6%, 18-month leases to provide tenant security, fair notice to tenants facing rent increases and funding for Sacramento’s Self-Help Housing program, their proposal includes long-term solutions consisting of an affordable housing fund geared to development of shovel-ready housing for seniors, veterans and formerly homeless veterans, and an assortment of affordable housing initiatives.

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Changes in Conservatorship Law to Help Alleviate SF & LA Homeless Problem?

The California Legislature is proposing new law to help San Francisco and Los Angeles address chronic homelessness.

SB-1045 would change CA’s conservatorship law to allow local officials to examine serious mental illness and substance use within their communities and use evidence of “frequent detention for evaluation and treatment pursuant to Section 5150” of the Welfare and Institutions Code to establish a conservatorship of the person.  Section 5150 allows police officers to detain a person deemed a threat to themselves or others, involuntarily and for up to 72 hours.  Under the new law it must also be shown the proposed conservatee was denied treatment, that his or her previous outpatient treatment was insufficient or that outpatient treatment would be insufficient to address the proposed conservatee’s serious mental illness and/or substance abuse problems.  SF Mayor-elect London Breed has characterizes this proposal as an “expansion” of the conservatorship laws needed for people “who clearly need help and clearly can’t make good decisions for themselves.”

At the same time though others are challenging California’s existing conservatorship system.  On August 16 a coalition of disability rights advocates issued a press release announcing a “first of its kind” lawsuit filed in Sacramento, CA against the California court system seeking to remedy what the group considers systemic discrimination in connection with involuntary conservatorships.  The issue as the coalition sees it is that despite having the right to do so, courts consistently fail to appoint legal counsel to assist people with mental and communication disabilities with their defense.

The SF Chronicle reports SB-1045 has already passed the full Senate and Assembly Judiciary Committee, and its prospects for passage apparently look promising.

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Probate Court Cannot Hear Case Concerning Insurance Policy Where Estate Not A Named Beneficiary and Policy Not Claimed to Be Part of Estate.

After the wife from a second marriage objected to an order confirming title to certain insurance proceeds to the sons from a first marriage, the Court of Appeal held the order was void and reversed. The insurance policy named the wife as the primary beneficiary and the sons as contingent.  However, as the result of a subsequent divorce involving husband and the second wife, “full ownership” of the policy was awarded to the husband.  Thereafter husband failed to change the primary beneficiary designation in the policy, but indicated in his updated estate planning that he did not want the second wife “to inherit anything (from him)” and subsequently died.

In the probate proceedings involving husband’s estate, the sons petitioned the Probate Court for an order confirming title to personal property and to be designated the rightful beneficiaries of the policy (PC 5040, 9611). The sons relied on the Probate Court’s inherent equity jurisdiction and prevailed.

Ultimately, the wife successfully objected that the Probate Court lacked jurisdiction because the policy was not alleged to be part of the decedent’s estate, which the sons were forced to concede. The Court of Appeal ruled in the wife’s favor, holding the Probate Court’s statutory jurisdiction is “limited and special” – and that without subject matter jurisdiction the underlying court was without “the power to hear or determine (the) case.”  The appellate court’s ruling thus voided the Probate Court’s order on jurisdictional grounds without resolving the underlying controversy and in doing so sent a strong message to estate planning and family law attorneys to remember to remind their divorcing clients of the importance of changing their beneficiary designations.  Estate of Post (2018, First Dist., Div. One)

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TRUST PROVISION CANNOT PROTECT FORMER TRUSTEE’S ATTORNEY-CLIENT COMMUNICATIONS FROM DISCLOSURE TO SUCCESSOR TRUSTEE

In Morgan v. Superior Court, 23 Cal. App. 5th 1026, the Court of Appeal denied Petitioner Thomas Morgan’s petition for writ of mandate and/or prohibition from the lower court’s formal order and minute order on the grounds that the orders improperly required him to turn over documents protected by the attorney-client privilege.  The case turned on the validity of a provision in the trust that expressly allowed Morgan to shield his attorney-client communications from the successor trustee.  The Court held the provision was void as a matter of public policy.

Thomas Morgan, one of Beverly Morgan’s three adult children, was appointed the successor trustee of the Beverly C. Morgan Family Trust (the Trust) upon the death of his mother, Beverly, who was the initial trustee of the Trust.  Two years into Thomas’s tenure as trustee, Nancy Morgan Shurtleff, Thomas’s sister, moved the Court to suspend Thomas as trustee, based on his alleged misuse of his powers, alleging Thomas spent Trust funds on his personal attorneys, engaged in self-dealing and caused businesses owned by the Trust to make undocumented, interest-free loans totaling millions of dollars.  The Court initially denied Nancy’s motion, conditioned on, among other things, Thomas filing an accounting of all Trust assets used to pay his personal litigation expenses and of all loans made by or to the Trust.

Thomas filed the accounting but the Court found it grossly inadequate and, sua sponte, suspended Thomas as trustee, appointed new interim co-trustees, and ordered Thomas to cooperate with the independent trustees and to deliver communications between Thomas and any person or entity on behalf of the Trust, as well as all documents and records concerning the Trust, its transactions and assets. Thomas refused to turn over what he and his attorney described as “attorney-client communications or billing invoices,” relying on language in the Trust which expressly allowed the former trustee to withhold from a successor trustee all of his or her communications with legal counsel and statutory and case law.

The Appellate Court denied Thomas’s petition and held that such a provision is unenforceable and void as a matter of public policy as it would permit the former trustee to conceal possible evidence of intentional or grossly negligent or recklessly indifferent breach of the trustee’s duties.  A trust may thus not allow a former trustee to withhold from a successor trustee all communications between that former trustee and the trust’s legal counsel, since the attorney-client privilege vests in the office of the trustee, not in any particular person.

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IRS Takes Aim at State Tax Credit Proposed by Certain High Tax States

As many know, President Trump’s recent tax legislation, entitled the Tax Cuts & Jobs Act, included as one of its provisions a $10,000.00 total limitation on the amount of the itemized deduction for state and local income and property taxes, starting in 2018.  Some high tax states have passed legislation establishing state income tax credits for gifts to certain charitable organizations and state governmental units.  The effect on an individual’s federal income tax liability could be a fully deductible charitable contribution rather than a deduction limited to $10,000.00.  Bills in the California Senate [SB 227] and Assembly [AB 2217] reportedly propose a similar change in the state’s tax law but have not yet advanced to the Governor.

As many likely suspected would happen though, last week the Treasury Department issued Notice 2018-54 communicating its intent to issue proposed regulations addressing the federal income tax treatment of charitable gifts made by taxpayers for which they receive a credit against their state and local tax.  Based on this recent action it now appears clear the Treasury Department views these arrangements as an end-run around the new limitation on state/local income tax deduction, and intends to limit the tax benefit available from any such contributions.

 

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Couple Could Bring Action for Elder Abuse Involving Misuse of Funds Held for Their Children in Trust

The First Appellate District Court recently determined that even though funds deposited into a Trust were “owned” by the Trust, the elderly couple who funded the Trust could sue under the Elder Abuse and Dependent Adult Civil Protection Act for mismanagement of those funds under several provisions of the Act.  Mahan v. Charles W. Chan Ins. Agency, Inc., 12 Cal. App. 5th 442 (Cal. App. 1st Dist. June 2, 2017)

Frederick Mahan, 86, and his 79-year-old wife Martha purchased two life insurance policies in the mid-1990s totaling $1 million and naming their children as beneficiaries under a revocable living Trust with their daughter Maureen as Trustee.  The Mahans also sufficiently funded the Trust to cover the $14,000 annual premium costs.  Some 20 years later, in 2012, Martha was diagnosed with Alzheimer’s and gave power of attorney to Fred to handle their affairs.  Soon thereafter, Fred began to exhibit signs of confusion and cognitive decline.  During this time, defendants helped Fred obtain casualty and earthquake insurance on the home and subsequently offered to review Fred’s life insurance plan.  When defendants discovered that the two insurance policies had accumulated a substantial cash value, they told Fred that he could use the cash value to obtain additional coverage while keeping the same annual premium cost.  They then dealt entirely with Fred, discussed none of the changes to the Trust with Maureen, and only provided her with signature pages or blank forms containing Fred’s signature as a sign of his approval.

Defendants ultimately carried out an elaborate scheme involving the surrender of one of the policies and the replacement of the other with a policy offering less coverage at a massively increased cost.  The premiums totaled $800,000, forcing the Mahans to take cash from the Trust to pay them and in effect consuming most of their intended $1 million gift to their children, including $100,000 in commissions paid to the defendants.

The Mahans and Maureen sued for negligence, breach of fiduciary duty, fraud, violation of Business and Professions Code section 17200 and for damages under the Elder Abuse Act.  Defendants countered with an attack that the Trust owned the life insurance policies and all commissions paid to them were by the Trust.  Whatever money the Mahans paid into the Trust was done voluntarily for the benefit of their children and the only proper plaintiff was the Trust, which did not have an Elder Abuse Act claim “because [it] is not 65 years old.”   The trial court ruled that the Mahans had not alleged any “deprivation of property” owned by them within the meaning of Section 15610.30 of the Elder Abuse Act since the Trust was the only party that suffered harm and dismissed the Mahans’ claims in favor of the defendants.  The Mahans appealed.

Based upon the belief that “the primary issue here is whether the Mahans have stated legally cognizable harm to themselves,” the Appellate Court reviewed the statutory text of the Elder Abuse Act and especially its provisions regarding deprivation of an elder’s “property” taken for a “wrongful use” or with intent to defraud and committed by “undue influence.”  No one disputed that the Mahans were elders, but defendants contended that they were not deprived of any “property” because the Trust owned whatever was allegedly taken, and thus defendants committed no statutory violation because they did not take the “property of an elder” to obtain the commissions they were allegedly paid.  The Appellate Court determined that the Mahans had properly alleged that they had been deprived of their rights through (1) damage to their estate plan and (2) loss of money they felt compelled to transfer to the Trust to cover the lost insurance proceed funds for their children and to cover the defendants’ commissions.  In determining that the Mahans had in fact suffered a loss to their estate plan, the Court stated that because they had had to reach into their pockets and sell assets to provide cash to the Trust– something they had never intended to have to do — they had been deprived of “property” when they were separated from their money.

In assessing the issue of “wrongful use” the Court found this case to be very similar to the issues in Zimmer v. Nawabi, 566 F. Supp. 2d 1025 (E.D. Cal. May 13, 2008) involving insurance agents who were held liable for financial elder abuse for what essentially amounted to “churning” where brokers make excessive stock trades primarily to generate commissions.  Just as in Zimmer, defendants here wrongfully obtained thousands of dollars in commissions through their false statements about the terms of the Mahans’ refinance, which defendants knew were less favorable than their previous insurance policies.

Finally, the Appellate Court reviewed the issue of “undue influence.”  Its determination that there was undue influence was based upon the defendants’ alleged expertise as insurance professionals who, upon finding two aged individuals in a state of cognitive decline, had used their influence to carry out an elaborate scheme to deprive the Mahans of their money in a manner completely inconsistent with their estate planning goals.  The Court thus found in favor of the Mahans, reversing the lower court’s ruling and remanding the case for further proceedings consistent with its opinion.

 

 

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