May 2019 Update
Chapter 1: Overview of Estate Planning Practice
The sample forms for client communications have been adapted so they can be used for either an individual client or married clients. See §§1.62, 1.65, 1.66, 1.67.
Chapter 2: Ethical Considerations
The chapter discusses the revised Rules of Professional Conduct, which became effective November 1, 2018. A section has been added to discuss the new rule on duties owed to prospective clients. Cal Rules of Prof Cond 1.18. See §2.15A. Although the revised rules have dispensed with describing conflicts as “actual” or “potential,” the concepts remain largely the same. See §2.19. Note that for fee-sharing agreements, the timing of when the client’s consent must be obtained has changed. Cal Rules of Prof Cond 1.5.1(a)(2). See §2.24. A fee obtained under a flat fee agreement must be retained in the attorney’s trust account, unless the attorney makes specific disclosures, and for flat fees exceeding $1000 obtains the client’s written consent. Cal Rules of Prof Cond 1.15. See §2.24.
Chapter 4: Additional Property Transfer Obstacles for Married Persons and Registered Domestic Partners
In Lazar v Kroncke (9th Cir 2017) 862 F3d 1186, the Ninth Circuit court held that Arizona’s revocation-on-divorce statute was not preempted by ERISA or other federal IRA regulations when neither ERISA nor the federal IRA regulations govern who is required to be paid IRA proceeds. See §4.18.
The question whether the title presumption in Evid C §662 overcomes the community property presumption in Fam C §760 in a bankruptcy case when the spouses acquire property from a third party as joint tenants has been certified by the Ninth Circuit to the California Supreme Court in Brace v Speier (In re Brace) (9th Cir 2018) 908 F3d 531. In its entirety, the certified question reads: “Does the form of title presumption set forth in section 662 of the California Evidence Code overcome the community property presumption set forth in section 760 of the California Family Code in Chapter 7 bankruptcy cases where: (1) the debtor husband and non-debtor wife acquire property from a third party as joint tenants; (2) the deed to that property conveys the property at issue to the debtor husband and non-debtor wife as joint tenants; and (3) the interests of the debtor and non-debtor spouse are aligned against the trustee of the bankruptcy estate?” See §§4.41, 4.48. See also §§26.46, 26.48.
Two recent cases address the relationship between a transmutation agreement and the presumption of undue influence if one spouse gains an unfair advantage over the other. In Marriage of Kushesh (2018) 27 CA5th 449, the court held that an interspousal transfer grant deed was a valid transmutation agreement but remanded the case to decide whether undue influence was exerted. In Herrara v Pons (SD Cal, May 16, 2018, No. 17-cv-2392-GPC-NLS) 2018 US Dist Lexis 83556, the district court held that the express declaration requirement was met when interspousal deed granted Husband property as “separate property” but the transaction created an unfair advantage because there was a lack of disclosure and a failure of adequate consideration and Husband did not adequately rebut the presumption of undue influence. See §§4.46, 4.49. See also §26.48.
Chapter 5: Wills
Effective January 1, 2019, the legislature amended the anti-lapse statute to specifically exclude the spouse of the transferor from the definition of a kindred transferee for anti-lapse protection purposes. Prob C §21110(c). See §§5.44, 6.22, 7.35–7.36.
In Estate of Stockird (2018) 30 CA5th 558, the court of appeal held that the definition of transferee found in the anti-lapse statute in Prob C §21110(c) does not apply to the definition of transferee in Prob C §21111(b) governing distribution of failed residuary gifts, with the result that the decedent’s aunt by marriage was a transferee even though she was not kindred, and because the aunt had died and the will did not provide for an alternative disposition, the lapsed gift should have been distributed to the other residuary beneficiary. See §5.44. See also §6.22.
In Blech v Blech (2018) 25 CA5th 989, the court of appeal addressed whether a residuary gift clause that included a reference to a specific property was a specific gift. The court held that this was not a specific gift as defined under Prob C §21117(a) because the clause described how to fund beneficiary’s unconditional percentage share of the residue and the share would not fail if the estate did not include the specific gift. Thus, the gift was a gift of the residue under Prob C §21117(f). See §5.31.
Chapter 6: Revocable Trusts
In Morgan v Superior Court, (2018) 23 CA5th 1026, the court of appeal held that a trust provision permitting a trustee to withhold all of his or her communications with legal counsel from a successor trustee violates public policy and is unenforceable. See §6.40A.
Chapter 6A: Irrevocable Trusts
The new Uniform Trust Decanting Act (UTDA) (Prob C §§19501–19530) adds flexibility to existing irrevocable trusts. The Act applies to all non-wholly charitable irrevocable trusts, no matter when created, whose principal place of administration is California or which are governed by the laws of California. The decanting statute allows trustees to distribute property of an existing trust (the “first trust”) to one or more “second trusts” or to modify the terms of the first trust, without the consent of the beneficiaries or approval of the court, subject to certain exceptions. Stats 2018, ch 407. Note that there are many unresolved federal tax issues related to decanting. See §§6A.25, 6A.35. See also §13.33A.
Chapter 7: Nonprobate and Nontrust Transfers at Death
The legislature resolved some confusion that existed about the recordation of a revocable transfer on death (TOD) deed by adding subsection (d) to Prob C §5626. Stats 2018, ch 65. The new subsection (d) provides that the section of the TOD deed titled “Common Questions About the Use of this Form” does not have to be recorded. Prob C §5626(d). Probate Code §5626(d) is effective July 9, 2018, and applies to all revocable TOD deeds executed on or after July 9, 2018, and to revocable TOD deeds executed before July 9, 2018, if the transferor was alive on July 9, 2019. See §7.31B.
Chapter 9: Powers of Appointment
In Estate of O’Connor (2018) 26 CA5th 871, the court held that the powerholder’s reference to any power of appointment in the “trust or trusts established by my parents” met the specific-reference requirements in Prob C §632. See §9.39.
Chapter 11: Generation-Skipping Transfer Tax
The practitioner might want to advise clients that the temporary increase in the GST exemption through December 31, 2025, can be used to make late allocations to existing GST trusts with inclusion ratios of more than zero to reduce the inclusion ratio to zero. See §§11.28, 11.50.
Chapter 13: Taxing Income of Estates and Trusts
Modifying a trust to include charitable beneficiaries will not result in a charitable deduction for the trust unless the trust modification is ordered by the court to settle a conflict and the terms of the trust were ambiguous, or, presumably, if the highest court in the state modifies the trust. Chief Counsel Advice 201747005. See §13.11.
In Notice 2018–61, 2018–31 Int Rev Bull 278, the IRS provided guidance on the deduction for expenses incurred in connection with the administration of an estate or trust (IRC §67(e)(1)) and confirmed that such expenses are still fully deductible, and not affected by the suspension of miscellaneous deduction (IRC §67(g)). See §13.17. See also §13.65.
In the same notice, the IRS also indicated that it will issue regulations regarding the interaction of IRC §642(h)(2) (carry-over of excess charitable deduction to beneficiary in year of trust or estate termination) and IRC §67(g). See Notice 2018–61, 2018–31 Int Rev Bull 278. See §13.11. See also §§13.25, 13.82.
A new section has been added, discussing the IRC §199A qualified business income deduction as it relates to trusts and estates. See §13.20B. The IRS has issued guidance in Notice 2018–64, 2018 Int Rev Bull 460, and Prop Treas Reg §§1.199A–1—1.199A–6, 83 Fed Reg 40884 (Aug. 16, 2018). In addition, Notice 2018–64, 2018 Int Rev Bull 460, contains a proposed revenue procedure on methods for calculating W-2 wages for purposes of IRC §199A. See §13.20A.
Another new section has been added on the deductibility of state, local, and foreign taxes. In Prop Treas Reg §1.170A–1(h), 83 Fed Reg 43563 (Aug. 30, 2018), the IRS indicated that it will not be possible to circumvent the $10,000 cap on state and local taxes by payment through a charitable entity and claiming an unlimited charitable deduction; any charitable deduction would be reduced by the amount of any state deduction received for such contribution. See §13.20C.
A new section has been added on Incomplete Gift Non-Grantor Trusts (INGs). Note that California does not have an ING statute and makes it difficult to avail oneself of the benefit of an ING in another jurisdiction. See §13.160F.
Chapter 15: California Real Property Tax
Effective September 28, 2019, new subsection (q) of Rev & T C §62 excludes from the definition of “change of ownership” any transfer between local registered domestic partners occurring on or after January 1, 2000, to June 26, 2015. Local registered domestic partners are defined in Rev & T C §62(q)(3). Section 62(q)(2) provides for a procedure to apply for reversal of reassessments in violation of this subsection. The State Board of Equalization must develop a form for this purpose. Stats 2018, ch 919 (AB 2663). See §15.11. See also §§15.4, 15.6, 15.12.
Chapter 19: Use of Life Insurance in Estate Planning
In Estate of Cahill, TC Memo 2018–84, the decedent was treated as the owner of the cash surrender value under the economic benefit regime; further, the rights granted to the donor under the split-dollar arrangement may implicate IRC §§2036(a)(2) and 2038, and the rights of the donee may be disregarded under IRC §2703(a). See §19.86. See also §10.20.
Chapter 21A: IRC §529 Accounts and Coverdell Education Savings Accounts
Since the Tax Cuts and Jobs Act (Pub L 115–97, §11032, 131 Stat 2054) has extended the use of IRC §529 Accounts from payment of college education expenses to elementary and secondary education expenses, we changed the terminology throughout the chapter from “College Savings Accounts” to “§529 Accounts,” and from “qualified higher education expense” to “qualified education expense.” See §21A.1A.
It remains the case, though, that “qualified education expenses” are more broadly defined for Coverdell Education Savings Accounts than for §529 Accounts. See §21A.50.
Effective January 1, 2019, Welf & I C §14005.38, added by Stats 2018, ch 121, excludes §529 Account assets and distributions from consideration for purposes of determining eligibility for Medi-Cal and other state-run financial assistance programs. See §21A.43. See also §30.23.
Chapter 22: Executive Compensation and Stock Options
Chapter 22 has undergone a thorough review. Practice Tips for planning strategies have been added in §§22.16 and 22.26.
Chapter 29: Health Care Decision Planning
In Alexander v Scripps Mem. Hosp. La Jolla (2018) 23 CA5th 206, the court held that physicians who declined to administer advanced life support measures to a terminally ill cancer patient, against the patient’s health care instructions and POLST, were immune from civil and criminal liability when acting in good faith and according to generally accepted health care standards. See §29.5.
The statutory Advance Health Care Directive Form in Prob C §4701 has been amended by Stats 2018, ch 287, to include a provision relating to authorizing an agent to consent to any temporary medical procedure if necessary for purposes of the donation of the principal’s organs, tissues, or parts. See §29.22.
Last year’s legal challenge to the End of Life Option Act (Health & S C §§443–443.22) was addressed by the court of appeal in People ex rel Becerra v Superior Court (2018) 29 CA5th 486. The court held that the plaintiffs lacked personal standing, third party standing, or public interest standing; hence, the court could not reach the constitutional question and it remanded the case for further proceedings. See §29.37A.
Chapter 30: Transfers in Medi-Cal Planning
The Affordable Care Act (ACA) broadened the definition of an “institutionalized spouse” to include home and community-based services (HCBS) recipients who reside at home or in the community. The Department of Health Care Services has now provided further guidance in ACWD Letter No. 18–19 (Aug. 21, 2018) on how the spousal impoverishment provisions apply to cases with a HCBS spouse and a community spouse. See §30.23A.