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Estate Law Report
An Annual Report Exclusively For Our Clients
WHAT AM I HERE AFTER?
You, your Trust and Incapacity
The preacher came to call the other day and said, “At your age you should be thinking about the hereafter!” I told him, “Oh, I do think about the hereafter all of the time. Whether I am upstairs, in the kitchen or down in the basement, I ask myself, what am I here after?”

This is the direction that almost all of us are traveling. It starts with the occasional word that you just can’t recall, and progresses to the friend or acquaintance whose name just won’t come to mind, no matter how hard you try. It isn’t easy trying to look intelligent and carry on a conversation while going through the alphabet in your mind, trying to find the first letter of that darned name so others don’t think you’re getting senile. When it does come, an hour or a day later, you want to rush back to those with whom you were speaking and declare your recollected success! And yet, the phone number you had in 1965, and even what Aunt Jane wore to the wedding, 20 years ago, comes easily to mind.

Like computer hard drives with a gazillion giga-bytes of ROM (the old stuff called “Read Only Memory”), but not much RAM (the new short term stuff called “Random Access Memory”) as we get older, our long-term memory fills up the brain and the short-term memory has less space to operate. Worse, the brain actually shrinks, up to 10% by the time we near retirement age.

The legal profession has left it to the medical profession to determine when we reach a point called “Incapacity.” Gerontologists, neurologists, and other doctors, actually have a standard “capacity test”, that results in a scaled score relative to a diagnosis of mild, moderate or severe incapacity. However, a physician may declare a patient incapacitated even without application of any standardized tests. Once this occurs, in writing, a significant legal impact is triggered.

First, an incapacitated person may not execute legal documents with validity. One cannot execute a financial or health care power-of-attorney, a trust, or a will, once incapacity occurs. Whether by stroke, Alzheimers, senile dementia or accident, the label “incapacitated” stops the power of decision making with regard to legal matters as well as many other areas. Questions loom large once a declaration or medical incapacity has occurred. “Who can pay my bills for me?” “Who can make my medical decisions?” “Can I change my estate planning?” The answers are simple: No one, no one and no way.

The resolution of incapacity issues must take place in advance. The financial and health care powers-of-attorney (Advance Directive), as well as trusts and wills, must all be executed while a person has capacity. This does not mean that it is necessary to know when Washington crossed the Delaware or even who is buried in Grant’s tomb. The necessary capacity to execute any of these legal documents is a basic knowledge of who the beneficiaries are, who will be handling the decision making, and an understanding of the general nature and character of one’s assets. Absent a medical declaration of incapacity, whether or not an individual is in fact incapacitated, and thus unable to execute legal documents, is often a grey area.

In our trusts, we have a standard “Incapacity Definition” clause which requires that two doctors, familiar with your condition, both verify in writing that you can no longer handle your personal affairs. This “two doctors’ letters” standard triggers, in our trusts, your replacement as a trustee with your successor trustee (usually your child) who then arises to all the rights, powers and privileges that you had in operating your trust estate, before you were incapacitated. Other trusts that we review sometimes have a “one doctor’s letter” standard which is a little less protective with respect to your maintaining control of your trust. We have, on too many occasions, also found trusts with the incapacity standard further reduced to being defined as, “in the opinion of the successor trustee.” This can allow your child to take over if they determine that you are incapacitated. We like to call this the “You don’t look so good” clause. We amend such trusts to the “two doctors’ letters” standard whenever we find them.

It is an extremely rough road for those who have reached a medically declared state of incapacity without executing a trust or powers-of-attorney. The destination for that scenario is called Conservatorship. This is a lengthy, expensive and adversarial legal process where anyone who determines to do so, can attempt to take control of you and your estate, thus reducing your rights back to that of a child. Thereafter, your conservator makes your decisions and operates your finances for you.

Similarly, in a married couple scenario, where one spouse has been deemed medically incapacitated, we often receive requests from the well-spouse to amend the couple’s trust or obtain a financial or health care power-of-attorney for the incapacitated spouse. None of those things are possible at that point. If a community property trust estate is being dealt with, the well-spouse may withdraw their one-half of the community property trust assets, as well as any separate property trust assets that they own, and do a different trust with regard to their portion of the trust estate. However, the trust estate of the incapacitated spouse becomes irrevocable upon incapacity, requiring a court process called a “Substituted Judgment Trust” to make any changes at all.

Some of us are foresightful and wise enough to recognize when our ability to make good decisions regarding our health care and/or financial issues has been compromised to the point where we should step down as trustee and allow others to assist us. In a case where a trusted individual is our successor trustee, we can execute legal documents called “Resignation of Trustee and Appointment of Successor Trustee,” allowing our successor to take over. This is a sensitive decision and has many ramifications, not the least of which is the increased responsibility to the new trustee, along with their exposure to liability from other beneficiaries of the trust for the handling your trust assets. Anytime a change in trustee is contemplated, whether by resignation or by doctor incapacitation, you should consult us for a discussion of the impact of these scenarios and for the execution of necessary documents to allow for continuity in handling the trust estate assets.

In our trusts, the incapacity definition provision, when triggered by the standard two doctors’ letters, allows the successor trustee to act upon all trust assets just as if a power-of-attorney were already in place. However, if there are any assets outside the trust (not titled correctly, even though they probably should be), a financial power-of-attorney would allow you to appoint someone to handle such assets or make decisions pertaining to issues not within the control of the trust (i.e., retirement fund and IRA elections).

A word of caution though, regarding appointing a power-of-attorney agent who is a different person than the successor trustee under your trust. Such an action causes what we call “dueling powers”, since both the successor trustee and the financial power-of-attorney holder may compete for and be in conflict over actions to be taken. Unless there is a particularly good reason for it (and that would be unusual) a financial power-of-attorney should be given to the person who is already named as the successor trustee under the trust.

If you do not have a current Advance Directive Health Care Power of Attorney (AD) and you lose your capacity to execute one, you are on the road to conservatorship or other court battles. This was well evidenced by the recent case of Terri Shiavo. Because Terri did not have an AD and she was unable to make medical decisions for herself, everyone from the neighbors, to the ex-spouse, to her parents and the legislature had an opinion on how her affairs should be handled. Neither your spouse nor your children have the right to make medical decisions for you, once you are incapacitated, unless they are named as agents under a properly drafted Advance Directive Power-of-Attorney. This $100 document, done in advance, can permanently cure more potential problems than most other estate planning documents combined.

When it comes to incapacity issues, having your trust, AD and financial powers-of-attorney in place is even easier than trying to put the car keys or your wallet in the same place every time, so that you can still find them as your short-term memory diminishes. Conflicts among and between family members, revolving around the grey area of diminishing capacity of a parent, are one of the fastest growing areas of trust litigation. We recommend that you give full consideration to “the hereafter” and come in immediately for a trust review when you sense issues arising in this area.
THE SILVER LINING IN DECLINING REAL ESTATE VALUES
If you’ve read a newspaper, watched the news, or left your house at all in the past three years, you may be aware that most home values just aren’t what they used to be. It’s sad but true: owners of Sacramento-area real estate have suffered significant declines of up to 30% in their property values in recent years. Yet there is a silver lining in the midst of this gloom: you may be eligible for a reduced property tax bill!

Many years ago (before 1975), property taxes in California were calculated each year based on a parcel’s fair market value (“FMV”) in that tax year. However, when the FMV of real estate began to increase dramatically each year, many people could not afford to pay their increasing property taxes. Much to the relief of homeowners everywhere, an ingenious politician (not an oxymoron!) proposed Proposition 13.

Proposition 13 was passed in 1975 to help stop escalating property taxes. This law establishes the value in that year (or the year of purchase if the property was purchased after 1975) as the “base year” value for the calculation of property tax. Annual increases of a property’s base year value are limited by Proposition 13 to a maximum of 2%. The actual property tax is calculated each year by multiplying the assessed value by the county tax rate (usually about 1%). But that wasn’t the end! Within a few years, another intelligent politician (or maybe the same one!) proposed Proposition 8.

Proposition 8 was passed in 1978 to recognize situations in which a property’s value decreases below the Proposition 13 base year value. Under Proposition 8, the county Assessor may adjust a property’s assessed value downward if the value in that year falls below the base year value. In other words, having your home value go to pot may save you money when it comes time to pay property taxes!

For example, take Jim and Mary Homeowner. Tired of the cold weather in Alaska, Jim and Mary retired in 2005 and moved to Sacramento. They purchased their lovely Tudor-style home for $400,000 in that year. Their property tax was 1% of the fair market value, or $4,000. By January 1, 2006, the market value of the property had declined to $300,000. Under Prop 8, the County Assessor reduced the assessed value to $300,000 for the 2006-2007 assessment roll. As a result, the property tax was reduced by $1,000 (from $4,000 to $3,000). Jim and Mary used the extra money to take their grandchildren to Disneyland.

To see if your real estate is eligible for a downward reassessment of its property tax basis, contact your County Assessor. In Sacramento County, for example, the Assessor’s Office website (www.assessor.saccounty.net) lists some properties that are eligible for an automatic reduction of property taxes by street. For the 2007-08 tax year, 50,000 tax bills were automatically reduced.

If you believe your home may be eligible for reassessment, contact your county Assessor’s office for a “Decline in Value Assessment Review Request” form. Request that the Assessor’s office review of your property’s tax basis. If the Assessor’s office reviews your property and determines it is not eligible for reassessment, you may file an appeal of your assessment with your local Assessment Appeals Board under the County Board of Supervisors. You must file the appeal within 60 days of the date the bill or notice was sent. There is nothing to lose by making this effort.
OUR LIPS ARE SEALED
It may seem natural to some clients to have their children or other family members involved while discussing their trust or estate planning with our attorneys. However, this decision may create more problems than it solves.

A trust is a legal document in which you grant the authority to others to carry out your wishes in the event of death or incapacity. A meeting with an attorney to organize or change a trust is a confidential meeting where you must speak candidly. Generally, no one besides the makers of the trust and the attorney should be present at appointments for the formation, change or signing of the trust. Attorneys are held under strict confidentiality guidelines and protective rules of attorney-client privilege. Your family members are not.

Remember, you are under no legal obligation to disclose the nature of your estate planning or your assets to other family members. One common idea goes something like this: “I don’t want any fighting, so I want my family to be involved every step of the way”. While clients hope this strategy will resolve potential family conflicts, it often leads to strained Relations, especially if changes are made. Also, a child who was not present at such meetings could have resentment over not being included and could even have grounds to challenge the trust.

In some cases, children have sometimes exerted undue influence over a parent, causing the child’s wishes to be the ones carried out rather than the parent’s wishes. While this is normally not the case, the very appearance created by a third party being present during the attorney-client meeting can give others an opportunity to contest a trust.

These are some of the reasons why the Law Offices of Kimber B. Goddard do not usually permit children, or other family members, to be present with you during office appointments. There are some exceptions to this rule, so please contact us ahead of time if you would like to bring someone to your meeting.