Husband and wives rarely retain separate attorneys when creating an estate plan. When the spouses sign a conflict waiver, and if they have an actual conflict, is it waivable?

Kevin Mohr, in “Unwaivable Conflicts of lnterests” (Los Angeles County Bar Association, County Bar Update, August 2012 Vol. 32, No.7), points out five unwaivable conflicts, number four of which is: “the lawyer is precluded by duties to one client from making sufficient disclosure to the other, rendering the latter’s informed consent unobtainable.”

Where a couple comes to an estate planning attorney to create a joint revocable trust, assume they present the attorney with deeds showing that they bought a piece of real estate together and that it was subsequently deeded from husband and wife to “husband, a married man as his sole and separate property.” The attorney suggests that the couple transfer their joint assets into a joint trust and transfer this particular real property into a trust of which only the husband is the settlor, trustee and beneficiary. The wife quickly says that she was taken off of title during a refinance only because her credit was bad and that both of them want the attorney to help them deed the property back to their community property before it is transferred to the new joint revocable trust. The attorney asks the husband if this is correct, and the husband (quietly) says yes.

If the attorney is uncomfortable discussing the consequences of deeding the property and of waiving the Family Code Section 2640 reimbursement right, or if the attorney is afraid to disclose divorce ramifications in his conflict waiver, he should decline the representation. (Section 2640(b): “In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of division.”)

But are discussing and disclosing enough?

The clients have not told the attorney that the original 30 percent down payment came from the husband’s separate property. The husband is afraid to reveal this to the attorney because he thinks his wife would think he is thinking about divorcing her (which for sake of argument he is not).

New California Rule of Professional Conduct 1.7(b) requires informed written consent “”if there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with another client.” And New Rule 1.7(d)(1) provides the additional requirement of competent and diligent representation to each affected client (“The lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client”).

Due to the additional requirement of subparagraph (d): “There are some matters in which the conflicts are such that even informed written consent may not suffice to permit representations.” See Comment 8 to New Rule 1.7, citing Woods v. Superior Court, 149 Cal. App. 3d 931 (1983); Klemm v Superior Court, 75 Cal. App. 3d 893 (1977); Ishmael v. Mulligan, 241 Cal. App. 2d 520 (1966).

Suppose the attorney’s conflict waiver states that the attorney has urged the husband to obtain separate representation, that the husband has declined, and that the husband acknowledges being informed that had he obtained a separate attorney, he would have a chance to express all of his reservations about the transmutation in an environment where his wife was not in the same room with him, and that the husband still refused and declined to do this.

If this husband and wife later divorce, the husband’s divorce attorney may tell the husband that he should never have transmuted the real estate without the estate planning attorney insisting that the husband retain separate counsel. The husband’s divorce attorney may further tell him that because of the statute of limitations, the husband has a limited time within which to sue his estate planning attorney. The husband’s divorce attorney or the husband’s malpractice attorney may contend that the estate planning attorney’s conflict of interest is non-waivable and that even if it were waivable, that the actual waiver contained an insufficient disclosure.

The California Supreme Court ruling in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Company, Inc., 2018 DJDAR 8765, held a conflict waiver to be unenforceable as against public policy when the law firm failed to disclose a known conflict with a current client because “An attorney or law firm that knowingly withholds material information about a conflict has not earned the confidence and trust the rule is designed to protect.” In our fact situation, the attorney has not knowingly failed to disclose anything. The attorney cannot make a disclosure regarding the husband’s separate property down payment because his clients have not disclosed this to him. Should the estate planning attorney have known that the husband would have had reservations which would prevent the attorney from obtaining the very information needed for obtaining informed consent?

One idea would be for the estate planning attorney to tell both clients that he is neutral on the issue of their deeding the property back to community property and that he is neutral on the issue of the husband waiving his Family Code Section 2640 reimbursement right, but that he is willing to give the husband and wife the names of two family law attorneys so that each spouse could be represented by a separate attorney in deciding whether or not to transmute.

It is likely, because of people’s aversion to incurring legal fees, that this couple would not have gone to separate attorneys. The couple may alternatively decide on their own to have the transmutation handled by a mediator, by a paralegal, or by an escrow in order to incur lower fees. It would be safer for the estate planning attorney not to endorse any course of action other than the couple obtaining separate lawyers.

Has the estate planning attorney provided competent legal representation to the husband when the attorney cannot determine whether the husband has shared his true feelings with the attorney because the wife is sitting in the same room? Alternatively, if the estate planning attorney vigorously explained the negative divorce ramifications to the husband, has the estate planning attorney provided competent legal representation to the wife? Would the wife contend that the attorney had no business trying to talk the husband out of the transmutation?

Does this fact situation provide an illustration of what Kevin Mohr listed as unwaivable conflict number four? The point is not that there is a clear answer. The point is that the estate planning attorney should consider the possibility that his conflict is unwaivable. Deciding whether or not to represent any client always involves line-drawing, but an attorney cannot determine whether or not he has crossed a line if he doesn’t see the line itself.

Randy Spiro is an attorney in Los Angeles.

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Basis in the Era of Uncertain Estate Taxes

Except for IRAs and retirement plans, assets owned by a person at his or her death receive a new cost or stepped up basis equal to their value at the person’s death. This new basis is relevant for capital gain when an asset is sold and for purposes of depreciation. The estate tax exemption is currently $5,490,000 with an estate tax of 40% on the excess. If assets are gifted away during a person’s lifetime, then they do not receive a stepped up basis at the person’s death.

President Trump has stated that he will sign legislation which would  repeal the estate tax. If this comes to pass, it is likely that along with it the rules regarding stepped up basis at death will be modified. One possibility is that the basis of assets will only be stepped up at death on the first $10,000,000 of assets, with the remaining assets not qualifying for a step up in basis.

Because of the uncertainty regarding the estate tax and the basis step up at death, people should seek professional advice before making gifts of appreciated assets during their lifetime.

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Repeal of Federal Estate Tax?

Donald Trump is on record as favoring the repeal of the federal estate tax. With Republicans controlling the executive, legislative and judicial branches of the federal government, will repeal actually happen? Democrats will filibuster such legislation in the Senate, and it will take 60 votes to stop that filibuster. Some number of Democrats would have to join with the Republicans to get the 60 votes to stop the filibuster to enable that legislation to pass. But there may be ways to get around the 60 vote requirement, and Donald Trump is likely to explore such strategies. Stay tuned.

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Misconceptions about Financial Powers of Attorney- Each of the following statements is false

1. Financial powers of attorney allow your agent to act when you want him or her to act, but they prevent your agent from acting when you don’t want him or her to act.
2. If your bank or broker has its own power of attorney form, you don’t have to use that particular form.
3. Your agent can wait until you have become incapacitated before he or she turns in the financial power of attorney form (that you previously signed) to the bank or broker.
4. Your agent does not have the ability to use the financial power of attorney form for the agent’s own benefit.
5. If all your assets are titled in your revocable trust and you become incapacitated, your successor trustee will not be able to act unless you have previously given him a financial power of attorney.

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New IRS Form 8971

On the later of March 31, 2016 or 30 days after the filing of an estate tax return (form 706), for 706s filed after July 31, 2015, the filer is also required to file form 8971 with the IRS and to furnish persons receiving assets from the decedent with Schedule A to that form containing information on the value per the 706 of assets which that beneficiary received or will receive.

The recipient beneficiary will be subject to penalties if he or she fails to adhere to a duty to treat the items received consistently with their 706 values for the beneficiary’s income tax purposes. The filer is subject to penalties for failure to timely and/or completely file the 8971, and for failure to file a supplementary 8971 either based on assets discovered after the filing or based on changes to the 706 values that have been finalized on audit or through a court proceeding.

This filing requirement only applies for 706s which are required to be filed based on the size of the estate. This filing requirement is not required for 706s that are only filed to elect portability.

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End of Life Option Act

On October 5, 2015, Governor Brown signed Assembly Bill No. 15 authorizing the following procedure:

The patient must be at least 18 years old and has established that he or she is a California resident.

He or she has submitted two oral requests, a minimum of 15 days apart, and a written request to his or her attending physician seeking to obtain a prescription for an aid-in-dying drug in the form prescribed by the act.

The request was signed and dated in the presence of two witnesses by the individual seeking the aid-in-dying drug and was witnessed by at least two other adult persons, who, in the presence of the individual,  attest that to the best of their knowledge and belief the individual is all of the following: (A) personally known to them or has provided proof of identity. (B) Voluntarily signed this request in their presence. (C) They believe he or she is of sound mind and not under duress, fraud, or undue influence. (D) Not an individual for whom either of them is the attending physician, consulting physician, or mental health specialist.

Only one of the two witnesses at the time the written request is signed may: (1) be related to the qualified individual by blood, marriage, registered domestic partnership, or adoption or be entitled to a portion of the individual’s estate upon death. (2) own, operate, or be employed at a health care facility where the individual is receiving medical treatment or resides.

The attending physician, consulting physician, or mental health specialist of the individual shall not be one of the witnesses.

His or her attending physican, consulting physician, psychiatrist or psychologist is of the opinion that he or she has the ability to understand the nature and consequences of a health care decision, the ability to understand its significant benefits, risks, and alternatives, and the ability to make and communicate an informed decision to health care providers.

He or she must have made an informed decision.

His or her decision must have been made after being informed by his or her attending physician of (1) His or her medical diagnosis and prognosis. (2) The potential risks associated with taking the drug to be prescribed. (3) The probable result of taking the drug to be prescribed. (4) The possibility that the individual may choose not to obtain the drug or may obtain the drug but may decide not to ingest it. (5) The feasible alternatives or additional treatment opportunities, including, but not limited to, comfort care, hospice care, palliative care, and pain control.

His or her attending physician must have directly and not through a designee offered the individual an opportunity to withdraw or rescind the request.

He or she has been determined by his or her attending physician to be suffering from an incurable and irreversible disease that has been medically confirmed and will, within reasonable medical judgment, result in death within six months and this determination has been confirmed by the consulting physician who has examined the individual and the individual’s relevant medical records and who is independent from the attending physician and who is qualified by specialty or experience to make a professional diagnosis and prognosis regarding an individual’s terminal disease.

He or she has the physical and mental ability to self-administer the aid-in-dying drug.

He or she has made a direct and voluntary request for a drug prescribed pursuant to this act for the purpose of ending his or her life.

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Finding The Correct Title Insurance Policy

I have sent clients of mine who have bought real estate individually and who have later transferred the real estate into a revocable trust a letter asking them to call their title insurance company to request a CLTA 107.9 endorsement to add their trust as an additional insured. In my letter, I am referring to the title insurance policy that was issued to the owner when the real estate was originally purchased. The real estate may have been refinanced one or more times after the purchase and on each refinance the lender was issued a lender’s title insurance policy. But the client/owner is not insured under the lender’s title insurance policy. Therefore, the client needs to find the title insurance policy issued to him or her or them when the property was originally purchased and the client needs to call that particular title insurance company to request an endorsement.

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Making Sure Your Title Insurance Policy Will Be In Force When You Need It

When real estate is purchased, the buyer typically also buys a title insurance policy. When the buyer later sells, if there is a problem with title to the property, the title insurance company is obligated to take care of it. It has come to my attention that some title insurance companies may deny coverage where after the property was purchased it was transferred to a revocable living trust. This problem can be taken care of by obtaining a CLTA 107.9 endorsement adding the trust as an additional insured. The small cost of obtaining this endorsement is worth it and will give the owner of real estate that has been transferred to a trust peace of mind. PLEASE TAKE THIS REMINDER SERIOUSLY AND MOVE FORWARD TO OBTAIN THESE ENDORSEMENTS FROM ALL RELEVANT TITLE INSURANCE COMPANIES AS SOON AS POSSIBLE. TELL YOUR FRIENDS ABOUT THIS TOO!

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Portability- The Best Kept Secre

Recently the IRS released statistics for federal estate tax returns (form 706s) filed in 2011, which was the first year of portability (the ability of the surviving spouse to add the deceased spouse’s estate tax exemption to the surviving spouse’s estate tax exemption by filing a timely form 706). There were 1,565 non-taxable form 706s filed for California decedents dying in 2011. It is likely that most of these non-taxable returns were filed by the surviving spouse to elect portability. Given California’s large population, this is a very low number. It is likely that many surviving spouses failed to file a timely form 706 for their deceased spouses because they did not understand that portability was available. Further, there is no guarantee that the current $5,430,000 exemption equivalent will not be lowered (President Obama has a proposal which would lower it to $3,500,000). Lets get the word out!

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Some people have recorded a document entitled homestead indicating that they want a certain dollar amount of the value of their principal residence to be protected from their creditors. Some companies even solicit people to have the company prepare and record the homestead on the homeowner’s behalf. But California law grants owners of a home a homestead, whether or not a document has been recorded. Stated differently, a certain dollar amount of a person’s personal residence is protected from creditors whether or not a written homestead document has been recorded on the home. This benefit that California law gives to homeowners is sometimes called a statutory homestead.

Recorded homesteads and statutory homesteads do not interfere with the sale of the residence.Recorded homesteads and statutory homesteads do not interfere with the placing of a mortgage (note secured by deed of trust) on the residence. Recorded homesteads and statutory homesteads do not interfere with a later transfer of the residence to a revocable living trust.

Assuming that a creditor obtains a judgment against a homeowner and that the homeowner’s equity in his or her home exceeds the dollar amount that is protected by the homestead, the creditor can force the home to be sold and the creditor can get that excess amount in satisfaction of the judgment.

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