The following was written by Attorney Jack E. Stephens, for the professional manual, Rules of Trust Administration in California, regarding the administration of a Living Trust on the death of a Trustor. This is Part 2 of an ongoing series.
Identifying the Players
Without a doubt, one of the most important decisions the Trustor has to make regarding the inevitable Trust Administration is who is going to carry out the terms of the Trust on the Trustor’s incapacity or death. In determining this individual, I often ask the client, “if you were in a coma for 6 months who would you truly depend on to carry on your financial affairs?” Someone, usually, readily comes to mind. If not, I begin to discuss the use of private fiduciaries or potential corporate Trustees.
The major problem for using corporate Trustees is the costs and time element for action. At least, that has been my experience. I can get much more done with a family member or a private fiduciary since I don’t have to wait for the protocol to be accomplished required of Trust companies. However, there are times when Trust companies are appropriate if there are complicated issues involved that may take some expert involvement or ongoing Trusts which may outlive an individual as Trustee.
For the most part however, family members are designated as the Successor. If this is the case, it is important to obtain some relevant information on such individual. For example, relationship with Trustor, occupation, previous experience with Trusts, state of residency, etc. Also, if the proposed Successor resides in another state, you should consider amending the Governing Law provisions of the Trust to waive §17002 of the California Probate Code and Trustee acceptance of California jurisdiction. This particular section provides that the principal place of business of the Trust is established where the Trustee resides or has his/her usual place of business. For an out-of-state Successor Trustee, the principal place of business in another state could cause a conflict of law with the state of California. Also, and more importantly, if the Successor Trustee does not act within the guidelines of the Trust, it will become difficult to gain California jurisdiction over him/her for reprimanding purposes. I had this situation several years ago and had extended litigation over the jurisdiction issue. Finally, I was awarded California jurisdiction based on the Successor Trustee’s substantial contact with the beneficiary residing in California. Believe me, it is a challenge to litigate this issue, especially in another state. Since that experience, I included a provision in my Trust under Governing Law which basically waives the operation of §17002.
The beneficiaries of the Trust are either vested, remainder or contingent. Vested beneficiaries are normally entitled to some immediate distribution although it may consist of distribution over a period of time. Even though distribution rights may be considered vested, it doesn’t mean that such distributions should be immediately forthcoming. As indicated below, statutory notices must be accomplished to all beneficiaries and heirs at law. Also, existing debts, taxes and fees must be paid to arrive at the net Trust estate to be distributed.
Remainder beneficiaries, usually are determined as a result of a life estate or term of years benefitting another beneficiary. For example, a deceased spouse may arrange a life estate for the surviving spouse in the home or investment account which will ultimately go to the children on the death of the surviving spouse. The children are remainder beneficiaries and are not vested until the happening event- death of the surviving spouse. If a child dies in the interim, he/she never becomes vested although his/her children may be so, depending on the terms of the Trust.
Finally, some beneficiaries may be contingent beneficiaries and only become vested on the occurrence of the contingency. For example, if a Trustor leaves to a child, outright and free of trust, “but if deceased at time of distribution, to such deceased child’s then living issue.” The child’s issue only become vested if the Trustor’s child is deceased at time of distribution. If not, the child takes and the contingency disappears. While I am on this subject, let me caution you about the terms in italics. A very difficult situation may arise should you utilize the following language in your Trust.
“On the death of the Trustor, the Trustee shall distribute the Trust estate to the living children of the Trustor.”
As previously indicated, the Successor Trustee must first satisfy debts, taxes and fees before the net estate is determined. Also, as we will subsequently discuss, statutory notice must be sent to beneficiaries with rights of contest available. There is a waiting period involved. What if a child dies in the interim? The question becomes, under the provision of a Trust referenced above, when does the child become vested? On the death of the Trustor, or, on distribution?
If he/she is vested on the death of the Trustor, his/her estate is entitled to such share of the Trust which could become problematic for probate of his/her estate. If he/she is vested only at the time of distribution, the child is deceased and that share never vests in such child. It will pass according to the Trust provisions. Therefore, why not be clear in your drafting and state: “The Trustee shall distribute in equal shares to my then living children” or “living children at time of distribution” or something to that effect. Because of the statutory notice waiting provisions in California, discussed below, I feel it would be prudent to specifically identify the vesting time, i.e, time of distribution.
Assisted Reproduction Technology (ART) Issues- Cal Prob. C § 249.5
A child of the decedent conceived and born after the death of the decedent will be recognized as having been born during the lifetime of the decedent, after the execution of all of the decedent’s testamentary instruments, if the child or his or her representative proves that several conditions have been satisfied.
The decedent must have specified in writing that his or her genetic material shall be used for posthumous conception and is subject to the following conditions:
- The specification must be signed and dated by the decedent;
- The specification may only be revoked or amended in writing, and must be signed and dated by the decedent;
- The decedent must designate a person to control the use of the genetic material. The person designated by the decedent must give written notice by “certified mail, return receipt requested, that the decedent’s genetic material was available for the purpose of posthumous conception.” The person designated by the decedent must give written notice to the person who has the power to control the distribution of the decedent’s property or benefits payable because of the decedent’s death (i.e. Trustee). The person designated by the decedent must give written notice to the person acting as Trustee within four months of the date of issuance of a certificate of the death of the decedent or entry of a judgment determining the fact of decedent’s death.
Additionally, the child or his or her representatives must establish that the child was in utero using the decedent’s genetic material and was in utero within two years of the date of issuance of the certificate of the decedent’s death or entry of a judgment determining the fact of decedent’s death, whichever occurs first. However, the subdivision does not apply to a child who shares his or her nuclear genes with the person who donated the implanted nucleus as a result of human cloning.
In the Estate of Kievernagel (2008) 166 CA 4th 1024 The Appellate Court held that as the husband’s separate property, he retained the right to control the disposition of his sperm under a sperm storage agreement which he desired to have destroyed after his death. The wife’s petition for distribution of the sperm to her was properly denied by the trial court.
Based on the Probate Code provision it is conceivable that a Trustee would be required to withhold distributions of the Trust estate for two years once he/she is given notice by the person in control of the genetic material. For instance, their could be additional children conceived within two years who could share in the Trust estate. If the Trustee decides to distribute the Trust estate to the existing beneficiaries, he/she does so at the Trustee’s own risk. At the same time the act of withholding may be at a great disadvantage to the other beneficiaries who may need funds for health, education, etc. It is my opinion that the law would be better served by only requiring a specific share of the Trust estate be withhold for any one or more children conceived and born under the guidelines of §249.5. This would allow the distribution of the shares to the other existing children without hindrance.
Part 3 is soon to follow.