Does Your Estate Plan Account for Your Incapacity? ​Benefits of a Durable Power of Attorney

A frequently overlooked part of the estate planning process is deciding who will help you manage your financial affairs if you’re ever incapacitated and unable to manage them yourself. In reality, the likelihood of you needing someone to act on your behalf at some point in time is statistically quite high; accidents happen every day. In order to address the possibility of an eventual incapacitating event, diligent clients (with the help of their estate planning attorney) ensure they have the appropriate documents in place should the need ever arise. Specifically, by executing a Durable Power of Attorney, they have, in advance and with thoughtful consideration, chosen exactly who will help them if or when they need help.

What is a Durable Power of Attorney – An Overview

A Durable Power of Attorney (“DPA”) is a legal document that outlines who will make decisions for you, what decisions that person can make, and when that person can make them.

A Power of Attorney “Agent” is the person or persons you specifically name in your DPA document to act for you if you are ever incapacitated and unable to manage your affairs yourself.

The powers contained in a DPA are generally financial in nature, and usually do not give your named DPA Agent the authority to make any medical or healthcare-related decisions for you. Since we can’t predict what events may transpire in the future, a DPA can and should be quite broad, and drafted to cover a number of different possible scenarios.

This Power of Attorney is “durable” in that it survives a declaration of incapacity. In fact, you can even describe in the document itself what constitutes an incapacity event, or specify who exactly determines whether or not you have the capacity to make decisions (such as your primary care doctor, two licensed physicians, or a panel of family members, for example).

Who should I appoint as my Durable Power of Attorney Agent?

The short answer is: anyone you trust to make legal, business, and financial-related decisions for you.

If you’re married, your spouse is typically listed as your first Agent. This will allow him or her to manage any bank accounts that are in your name alone, or to file your joint-tax return, for example. In addition, it is always advisable to list backup agents as well, especially in the event you and your spouse become incapacitated together, or one of you pre-deceases the other.

Further, a person named as a DPA Agent is under no obligation to act, and may not want to or be able to help you when the time comes (maybe because of their own incapacity). Additionally, an Agent can always resign later on down the road, so having a “next in line” to pick up where your first named Agent left off is always a good idea.

The only real limitation is that a DPA Agent has to be an adult–so your very responsible but not-quite 18 year old child would be a bad choice, at least for now. Keep in mind, however, DPAs are completely modifiable and easily amendable, so when he or she reaches adulthood, you can have your DPA updated accordingly.

When does a POA become effective?

Your Agent usually cannot begin acting on your behalf unless and until there is a formal declaration of incapacity. However, sometimes people chose to make their DPA “immediate”, which means the named Agent can start helping them out upon execution. While this sounds like a really scary thing for some, in the appropriate situation, it is ideal. For example, perhaps an aging parent is starting to need more and more help, and we don’t want to wait until they’re technically “incapacitated” to help them. A few other scenarios where an immediate DPA can be useful is when someone is going out of town for an extended period and would like their Agent to manage their affairs while they are away, or they are going in for a medical procedure and want to ensure they have someone in place that can manage things for them if they end up needing a little extra help while they recover.

How long will my POA last?

Duration: The duration of a DPA can be indefinite, or it can be limited to a specific period of time in advance. Likewise, a DPA can be used long-term or just temporarily. If you are incapacitated for a short time, your Agent can act for you until you regain the capacity to begin acting for yourself once again. If you never regain capacity, your pre-selected Agents can continue caring for you for an unlimited amount of time.

Caveat: Although DPAs are usually indefinite, that doesn’t necessarily mean they will be accepted forever. I advise my clients to revisit and “refresh” their DPA documents every few years. Even if they do not want to change their appointed Agents, it’s nice to get “fresh ink” on the document, which ensures banks and other financial institutions will accept them without hesitation as they reflect the relatively recent wishes of the Principal.

Revocation & Amendment: You are free to revoke your DPA entirely, or you can simply amend it to reflect your current wishes. Things change and relationships are fluid. Obviously if you no longer want a person you had previously named as your DPA Agent handling your affairs, you should update the document to reflect your change of heart. Like I tell my clients: you have to plan for what you know now. So, if you know you do not want your brother managing your affairs, don’t list your brother as an Agent. You can always update your DPA down the road when he gets his act together and you feel confident in his judgment.

Expiration: Finally, DPAs expire at death. Let me repeat that: DPAs expire at death! In my practice, I’ve learned that most people don’t know this, and always look remarkably shocked when they find out. As one of my clients put it, “So you’re telling me that my Power of Attorney expires when I expire?” Yes, that is exactly right.

To put it another way, your named Agent will be able to help you between your incapacity and your death, but not afterward. So, while your Agent can manage your affairs for you because you’re incapacitated, they can’t continue managing those affairs for you upon your death by virtue of being named your DPA Agent.

I Have a Trust – Do I Still Need A DPA?

Yes. You absolutely do. A DPA is designed to work in conjunction with your Trust in that it is used to control assets outside of trust title. Examples of assets outside of your trust that would be managed by a DPA Agent (rather than Successor Trustee) include: managing retirement accounts, paying your debts, applying for government benefits, making support payments, managing your business, etc.

Now this does not mean your DPA Agent and your Successor Trustee have to be different people—in fact, the same person can act for you in both capacities. There are certainly benefits of having the same person in both roles, but there are also practical and logistical implications to consider as well. The best course of action is to sit down with your estate planning attorney and decide what will be best for you and your specific situation.

What if I don’t have a DPA? Then what?

If the time comes and you are no longer able to manage your own financial affairs, but the appropriate planning was not done in advance (i.e., you did not execute a DPA), a conservatorship action will be brought before a court, and a judge will decide who handles your affairs for you. Of course, this will cost you or your loved ones in both time and money—who will foot that bill?; but perhaps even more concerning is the chance that the person the court appoints to manage your affairs is someone you would have never picked yourself. Remember, you’re incapacitated at this point- you will have no meaningful say in the matter without a DPA.

Summary

People often think of an Estate Plan as something that will come into effect upon their death; but comprehensive estate planning will also provide guidance in the event of incapacity. A well-crafted DPA can be used to seamlessly transition the financial affairs of the Grantor/Principal into the hands of the people they know and trust, without court intervention, and in accordance with their wishes.

The attorneys at Gehres Law Group, P.C. are pleased to offer a complimentary evaluation to discuss your estate planning needs. Please remember this information is general in nature and does not constitute legal advice. Nothing in this article should be construed as forming an attorney-client relationship. For specific advice concerning your particular situation, consult personally with an estate planning attorney.

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CALIFORNIA USURY LAWS: What you should know before lending or borrowing money

Introduction

Many business owners and individuals incorrectly believe they can charge any amount of interest to which the parties agree. However, unlike many contract terms, rates of interest charged by non-exempt lenders is limited in California to ten percent (10%) per year, even if the borrower is otherwise willing to pay a higher rate (or begs for a higher rate). If your promissory note or loan agreement exceeds this rate, then it is usurious unless it fits within one of the exemptions, set out below. As a non-licensed lender considering charging a higher rate, any credible business lawyer will have this advice: “Don’t do it!” The risk for civil damages and even criminal charges being brought against you is very real.

What is Usury?

Simply put, usury is the charging of interest beyond the rate permitted by California law. In other words, any rate beyond that set by state law is considered usurious and unenforceable. To prevent lenders from usurping the intent of usury laws by characterizing “interest” as other fees, bonuses, or miscellaneous charges, our courts have typically interpreted the term broadly to include anything of value that is received directly or indirectly by the lender from the borrower regardless of the nature or form of the consideration.

Non-exempt lenders may charge a maximum of  (i) 10% interest per year (1% per month) for money, goods or things used primarily for personal, family or household purposes; or, (ii) for other types of loans (home improvement, home purchase, business purposes, etc.), the greater of 10% interest per year, or 5% plus the Federal Reserve Bank of San Francisco’s discount rate on the 25th day of the month preceding the earlier of the date the loan is contracted for, or executed. Any consideration charged on a loan by a non-exempt lender which exceeds these rates is usurious and may lead to legal action against the lender.

California usury laws can be found in various sections of the California Civil Code and the California Constitution, including:

• California Const. Art. XV §1 (Previously passed as Art. XX §22)
• California Civil Code §§1912-1916.12
• California Civil Code §§1916-1 to 1916-3 (Constitutional provisions implemented here)
• California Civil Code §§1917-1917.006
• California Civil Code §§1917.060-1917.069
• California Civil Code §§1917.160-1917.168
• California Civil Code §§1917.610-1917.619
• California Commercial Code §§9201-9208
• California Corporations Code §§25116-25118
• California Financial Code §§22000-22064
• California Government Code §§5900-5909

Note: Cal. Civ. Code §1916-1 permits a maximum interest rate of 12% per annum. However, it is presumed that the 10% maximum of the Constitution at Art. XV §1 would prevail where a conflict arises.

Remedies for Usurious Interest Rates

The previously cited Constitutional provision clearly states that usurious contracts are unenforceable, raising the possibility that the lender may not be able to recover its principal. However, California courts have held that wherever possible, a contract will be construed so as to make its effect non-usurious. See Thomassen v. Carr, 250 Cal. App. 2d 341 (1967). In addition, the underlying intent of the usury laws are to prevent a lender any excessive profit, not their principal.

Nevertheless, applicable sections of the California Code go further than disgorging unlawful interest by assessing civil and even felony criminal penalties against lenders who violate usury laws. Section 1916-2 of the Civil Code can work to prevent a lender from collecting any interest on a loan that contains a usurious rate of interest, as well as delay repayment of the loan principal. It provides, in relevant part:

Any agreement or contract of any nature in conflict with the provisions of this section shall be null and void as to any agreement or stipulation therein contained to pay interest and no action at law to recover interest in any sum shall be maintained and the debt can not be declared due until the full period of time it was contracted for has elapsed.

Subsection 1916-3(a) further provides for treble damages for usurious payments and Subsection (b) allows for criminal penalties as well:

(b) Any person who willfully makes or negotiates, for himself or another, a loan of money, credit, goods, or things in action, and who directly or indirectly charges, contracts for, or receives with respect to any such loan any interest or charge of any nature, the value of which is in excess of that allowed by law, is guilty of loan-sharking, a felony, and is punishable by imprisonment in the state prison for not more than five years or in the county jail for not more than one year.

Depending on the nature of the lender, any willful violation of the usury laws may also be a violation of Business & Professions Code §17000, et. seq., which exposes a lender to criminal liability. In sum, our business lawyers advise non-exempt lenders to steer clear of charging usurious interest rates, which can ultimately cost them significant amounts of money and their freedom, or consider fulfilling the criteria of one of the many exemptions which permit lenders to charge higher rates of interest.

California Usury Law Exemptions

Following are a brief description of some exemptions to California’s usury laws:

• Licensed Lending Institutions: Licensed lending institutions engaged in the business of making consumer and/or commercial loans such as banks, savings and loans, credit unions, finance companies, horticultural or dairy cooperative associations, bank holding companies and their subsidiaries, and pawn brokers are exempt from California’s usury laws (although regulated through other laws, including federal law). See California Financial Code §5102, §7675 §15000, §21000, §21200, §22002, §22009, §22303, and §28000; Home Owners Loan Act of 1933, 12 U.S.C.A §1464(5)(c)(4)(B) and the Building and Loan Association Act of 1931 (as amended).

 

• California State and Local Public Retirement Systems

 

• Loans Secured by Real Property or Used to Purchase, Build, or Improve Real Property: If properly originated and negotiated, such loans are typically exempt when made or arranged by a licensed real estate broker. See California Civil Code §1916.1.

 

• Seller Financing – Seller Carryback Loans: When a seller of real estate finances the purchase for the buyer with a note secured by a deed of trust, the financing is commonly referred to as a seller carry back loan.

 

• Most Retail Installment Contracts and Revolving Accounts: Some types of these contracts/accounts are regulated by industry specific laws.

 

• Credit Cards

 

• Licensed Pawnbrokers: Regulated by California Financial Code §21000, et seq.

 

• Loans to Certain California Businesses: See California Corporations Code §25118;

Whether you are a borrower or lender, it pays to reach out to an experienced business lawyer beforehand in order to avoid the potential for costly litigation. For lenders, a simple loan can turn into a devastating learning experience without the proper knowledge and planning. An ounce of prevention can be worth a pound of cure when it comes to deciding on an appropriate interest rate on your loan or note.

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If you need a promissory note or loan document reviewed, negotiated and/or drafted, call the trusted business attorneys at Gehres Law Group for help. With more than 80 years of collective experience, we work diligently to ensure our clients’ interests always come first, whether addressing usury laws or a wide range of other business-related legal issues. Contact us today for your free evaluation.

© 2017 Gehres Law Group, P.C. This article is for general information only. The information presented should not be construed to constitute formal legal advice nor the formation of a lawyer/client relationship.

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BATTLING A TRADEMARK INFRINGEMENT LAWSUIT

What is trademark infringement? In a nutshell, trademark infringement is the unlawful use of an established trademark or a confusingly similar one with the same or similar goods or services.

Depending on the circumstances, a trademark owner who believes its mark is being infringed may file a civil lawsuit in either state or federal court. For a variety of reasons, most trademark infringement matters arise in federal court.

Proving Allegations of Trademark Infringement

How does a trademark owner prove infringement? A plaintiff alleging trademark infringement must prove (1) that it owns a valid mark, (2) that it has priority (its rights in the mark(s) are “senior” to the defendant’s), and (3) that the defendant’s mark is likely to cause confusion in the minds of consumers about the source or sponsorship of the goods or services offered under the parties’ marks. When a plaintiff owns a federal trademark registration, there is a legal presumption of the validity and ownership of the mark, as well as of the exclusive right to use the mark nationwide on or in connection with the goods or services listed in the registration. These presumptions may be rebutted in the court proceedings.

What type of evidence will the courts consider?  Courts will consider evidence addressing various factors to determine whether there is a likelihood of confusion among consumers. The key factors typically considered include the degree of similarity between the marks at issue and whether the parties’ goods and/or services are sufficiently related that consumers are likely to assume (mistakenly) that they come from a common source. Other factors that courts will often consider include how and where the parties’ goods or services are advertised, marketed, and sold; the purchasing conditions; the range of prospective purchasers of the goods or services; whether there is any evidence of actual confusion caused by the allegedly infringing mark; the defendant’s intent in adopting its mark; and the strength of the plaintiff’s mark.

Defenses to Allegations of Trademark Infringement

A defendant can use descriptive words to accurately convey information about its goods or services regardless of the plaintiff’s trademark rights. This is a form of “fair use”, and is readily recognized in the law.  Another limitation on a trademark owner’s rights is geographic remoteness, meaning that if an unregistered trademark is only used in a single state, for example, the trademark owner has no rights to assert claims against a competing trademark owner in another state.  Other possible defenses include: a) that no likelihood of confusion exists because the parties’ marks are different; b) the goods/services sold with the marks are different; c) the target consumers are different; d) the parties advertise and sell through different marketing channels; and e) the parties have coexisted for a long period of time without consumers being actually confused.

Remedies for Unlawful Trademark Infringement

If the trademark owner is able to prove infringement, available remedies they may obtain include the following: (1) a court order (injunction) that the defendant stop using the accused mark; (2) an order requiring the destruction or forfeiture of infringing articles; (3) monetary relief, including defendant’ profits, any damages sustained by the plaintiff, and the costs of the action; and, (4) in appropriate cases, an order that the defendant pay the plaintiffs’ attorneys’ fees. Given these broad remedies, the cost of losing a trademark infringement matter are often enormous.

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If you are involved in a trademark infringement matter, contact the dedicated and trusted trademark attorneys at Gehres Law Group today for a free evaluation. Our experienced trademark attorneys can provide you with an opinion as to the validity and strength of each claim and help you achieve the best possible outcome in your case.

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Are Class Action Waivers Enforceable in California?

While there is no doubt California courts have openly expressed hostility toward the enforcement of class action waivers, state court and ninth circuit court decisions finding such waivers unenforceable have been consistently reversed on appeal to the United States Supreme Court, where the waivers are contained in an agreement to arbitrate pursuant to the Federal Arbitration Act (“FAA”), which makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U. S. C. §2. The natural result of these decisions has been for more businesses and their attorneys to include such waivers as part of an agreement to arbitrate. This article provides a brief history of such rulings and discusses the current state of the law in California with regard to certain class action waivers.

A Brief History of Class Action Waivers

In previous cases, the U.S. Supreme Court ruled that in the event there is a state statute preventing waiver of class action suits, that state statute is superseded by the FAA where the waiver is contained as part of an agreement to arbitrate, thus allowing for enforcement of such class action waivers. In 2011, the Supreme Court expanded its earlier holdings to include not only state statutes which are now superseded, but also generally applied contract doctrines. In AT&T Mobility LLC v. Concepcion,[1] the Court was asked to determine whether the FAA preempts generally held contract doctrines, such as the unconscionability doctrine and California’s policy against exculpation. While acknowledging that the analysis required to reach its conclusion was more complex than in earlier cases, the Supreme Court ultimately found that the waivers were enforceable and instructed litigants to look to the language and history of the FAA, not generally applied state doctrines. Id.

Four years later, the Court returned to the issue in DirecTV Inc. v. Imburgia[2] and thwarted another attempt to evade the mandates of the FAA under the guise of state law contract interpretation. The California Court of Appeals reasoned that “because arbitration agreements containing class-arbitration waivers are unenforceable under California contract law, the entire arbitration agreement is unenforceable according to the express terms of the customer agreement.” Id.  In again reversing the lower court, the Supreme Court opined that, absent any federal statute to the contrary, bilateral arbitration clauses with express class action waivers will be enforced. Id. While the majority opinion assumed the California court correctly applied state law in interpreting the agreement, its decision was based on its finding that the California court’s interpretation of the agreement discriminated against arbitration clauses in violation of the FAA. Id.
A New Circuit Split

Since the Supreme Court’s Imburgia decision, there has developed a split in authority among the federal courts of appeals concerning the enforceability of employment arbitration agreements containing class action waivers. Not surprisingly, the Ninth Circuit has sided with employees and held that certain sections of the National Labor Relations Act (“NLRA”), providing for and protecting collective action by employees, render such waivers unenforceable under the FAA. So comes the argument that there is a federal statute which is contrary to the precepts of the FAA.

As sometimes occurs where opinions diverge between the federal circuit courts, the U.S. Supreme Court has agreed to hear three cases involving the enforceability of class action waivers on a consolidated basis.[3] Two of the three cases come to the Court following decisions by the federal circuit courts that the waivers are not enforceable, while the third comes out of a decision finding such waivers are indeed enforceable. While it remains to be seen how the Court will rule, if recent precedent provides instruction, the waivers are likely to be held enforceable since the Court has repeatedly acknowledged that the congressional mandate to enforce arbitration agreements strictly and consistently with their terms is not easily overcome.

Conclusion

There is little doubt that California state courts and the ninth circuit courts will remain hostile toward the enforcement of class action waivers not contained in an arbitration provision. However, because the FAA is a federal law which favors strict enforcement of arbitration agreements across the nation, every court in the United States is bound by well-settled law as decided by the U.S. Supreme Court. Therefore, arbitration agreements containing bilateral class action waivers will continue to gain increasing favor among business attorneys and others who wish to guard against the proliferation of such lawsuits. While it is important to note that certain state law claims cannot be included as part of a class action waiver, such as claims brought pursuant to California’s Private Attorneys General Act (“PAGA”), since such claims are brought by individuals on behalf of the State of California, which courts have reasoned did not sign an agreement to waive its right to be represented collectively or pursue class action lawsuits, businesses and their lawyers are encouraged to consider including a class action waiver in their arbitration agreements in appropriate circumstances. Even though the enforceability of such provisions may be affected by future Court decisions, given the current state of the law and broad reach of the FAA, as interpreted by the U.S. Supreme Court, such waivers will be found enforceable in a majority of cases.

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If you would like to learn more about class action waivers or other business-related legal issues, contact the knowledgeable business attorneys at Gehres Law Group for your complementary evaluation. We’re here to support California businesses navigate legal complexities so they can grow and thrive in any climate.

[1] AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339-52 (2011).

[2] DIRECTV, Inc. v. Imburgia, — U.S. —, 136 S. Ct. 463, 468-71 (2015).

[3] See Epic Systems Corp. v. Lewis, 823 F.3d 1147 (7th Cir. 2016), cert. granted, No. 16-285 (U.S. Jan. 13, 2017); Ernst & Young LLP et al. v. Stephen Morris et al., 834 F.3d 975 (9th Cir. 2016), cert. granted, No. 16-300 (U.S. Jan. 13, 2017); and NLRB v. Murphy Oil USA Inc., 808 F.3d 1013 (5th Cir. 2015), cert. granted, No. 16-307 (U.S. Jan. 13, 2017).

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HEARSAY – WHAT IT IS AND WHAT IT ISN’T

Introduction

to the other side’s claims (if you are a defendant). How exactly you and your attorney will go about doing so will be governed by the applicable rules of evidence.

The rules of evidence will make presenting your claims or defenses akin to running an obstacle course, since they present a myriad of weapons for the other side to keep out evidence helpful to you. We will discuss one of those obstacles in this and subsequent articles — the hearsay rule.

Definition of Hearsay

What exactly is hearsay? It is generally defined as a statement made out-of-court that is introduced to prove the truth of its contents.[1] Consider this statement: “I saw the defendant run through a red light and hit the plaintiff’s car.” If that statement is made by an eyewitness while testifying under oath in court, it is not hearsay, because it is not an “out-of-court” statement. On the other hand, if you are the plaintiff whose car was hit by the defendant, and a witness at the scene says to you, “I saw him (the defendant) run through a red light and hit your car,” and you seek to testify that you heard the witness say that at the scene, the statement would be hearsay, because it was made “out-of-court.”

One of the reasons for the hearsay rule is that, in the above example, if the witness is not in court to testify, he is not subject to cross-examination by the defendant. The defendant has a right to test the witness’s ability to perceive, his bias or prejudice against the defendant, and any other matter that might cast doubt on the truthfulness or accuracy of the witness’s testimony.

Statements That Are Not Hearsay

Some out-of-court statements, however, are not hearsay, because they are not introduced to prove the truth of their contents. Consider this example: You offer to sell your car to Bob Buyer for $10,000, and Bob Buyer says: “I accept your offer and will pay you $10,000 for your car.” Bob Buyer later reneges on the deal, and you sue him for breach of contract.

You would be permitted to testify that Bob Buyer accepted your offer and agreed to pay you $10,000 for your car. That is because Bob Buyer’s statement, although made out-of-court, would not be offered to prove that he would in fact buy your car. Obviously, he has chosen not to buy your car. Instead, you are offering his agreement to pay you $10,000, because those very words spoken, whether Bob Buyer meant them or not, created a contract. In other words, Bob Buyer’s statement that he would pay you $10,000 for your car had “independent legal significance,” regardless of its truth or non-truth.

Similarly, a defamatory statement (libel for a printed falsehood, or slander for an oral falsehood) would not be offered to prove the truth of its contents. In fact, just the opposite. If someone said, for instance, that you were a criminal or a felon, and that was not true, you could sue the person who said that about you, and introduce the statement in evidence, despite the fact it was made out-of-court. That is because you would not be introducing it to prove that you were in fact a criminal or a felon, but simply to prove that the statement was made.

As your business litigation attorney can advise you, the giving of notice is also admissible in evidence, because it is not offered to prove the truth of its contents. For instance, if parties enter into a three-year contract, but the contract also provides that either party may cancel the contract before its expiration by giving the other side 30 days’ notice, the giving of 30 days’ notice by one party to the other (e.g., “I am canceling this contract effective April 30, 2017”) is not hearsay. As in the Bob Buyer example above, the statement “I am canceling this contract” has “independent legal significance” (i.e., it causes cancellation of the contract effective April 30, 2017), regardless of whether the canceling party meant what he said.

Solicitations similarly do not constitute hearsay. For instance, a newspaper or TV ad which touts the quality, durability or benefits of a product, which the product does not in fact have, would not be hearsay if offered in a lawsuit against the seller for unfair business practices. Again, the plaintiff would not be introducing the solicitation to prove it was true. Indeed, he would be seeking to prove that the statement was not true.

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Even when a statement made out-of-court is offered to prove the truth of its contents, it may be accepted into evidence if it meets one of the many exceptions to the hearsay rule. Look for a discussion of these exceptions in future installments on our blog posts by our AV-rated business and employment litigation attorney, William Tucker.

[1] For the Definition of Hearsay pursuant to the Federal Rules of Evidence, see http://ift.tt/1FMyo9y; For the Definition of Hearsay pursuant to the California Rules of Evidence, see http://ift.tt/2n7zfy5.

 

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Expressing Your Wishes and Mitigating Tensions Through Letters of Intention

The estate planning process can be an overwhelming experience for clients. After all, we are discussing a pretty unpleasant topic (your ultimate demise), and what will happen when you’re gone. It is an inevitable part of life as we know. In some situations, there is a gap between how I, as an estate planning attorney, can draft your estate plan to meet technical and legal nuances, while you, as the Grantor, can actually convey your wishes to the people administering your estate after you’re gone. This is when we have to move beyond the legal structure and into more practical and emotional areas of estate planning.

Letters of Intent

A solution to bridge this gap is actually pretty simple, yet probably underutilized. In appropriate cases, I recommend my clients draft Letters of Intent to go along with the estate planning documents I have drafted for them. In fact, taking this extra step and writing these Letters of Intent for both your Successor Trustee and Beneficiaries, can provide you with peace of mind that your specific wishes are clearly known.

A Letter to Your Successor Trustee

A Letter of Intent to your Successor Trustee (the person who manages your estate after you have passed) can spell out your intentions, including certain goals you want your Successor Trustee to consider, or specific actions you want him or her to take, but which might not be appropriate to include in the meat-and-potatoes of the main Trust document.

For example, many estate planning clients tell me they don’t want their Beneficiaries (usually their children) to get their inheritance unless or until they obtain a 4-year degree from a university. I understand the point- they want their kids to be good, productive citizens, and not “trust fund babies” – but someone can certainly be a good, productive citizen without a 4-year degree from a university.

• Firefighters don’t need degrees.
• Steve Jobs dropped out of college. So did Bill Gates and Michael Dell.
• Some people obtain their 4-year degrees at a Community College, which is not technically a “university”.

If the Trust says your Successor Trustee may not make a distribution until a 4-year degree is obtained from a university, that is exactly what has to happen. You can see why specifying this criterion in the Trust document itself can be problematic. A better solution is to let your Successor Trustee know your ultimate intentions (good, productive citizen) via the Letter of Intent, and then let him or her decide if your Beneficiary meets that standard when the time comes.

In the letter to your Successor Trustee, you can also address your fears or concerns (i.e., a child’s spouse getting their hands on the money you’re leaving to your child or grandchildren), or examples of what you consider an appropriate use of inheritance (i.e., “I would like my children to study abroad or travel frequently with the money I am leaving them.”). Ultimately, the way it works is this: I draft your Trust to leave some discretionary power to your Successor Trustee, and you augment the Trust with a Letter of Intent that provides guidance in his or her exercise of that discretionary power.

Word of Warning: Letters of Intent are not legally binding. This means that your Successor Trustee is free to disregard the letter, and there are no legal repercussions for doing so. This, however, is what makes Letters of Intent such a wonderful tool! Our goal is to provide guidance to the Trustee without tying his or her hands. None of us can predict the future; what you want now may not be advisable or even possible in the future, but guidance provide in a Letter of Intent allows you to make your wishes and preferences know, while at the same time preserving flexibility. A well-written Letter of Intent provides guidance as to what matters to you—so it is important to be clear about what you want and why, what your ultimate goals are for your Beneficiaries, what you are expecting of your Successor Trustee, and provide examples where possible.

A Letter to Your Beneficiaries

In addition to a Letter of Intent to your Successor Trustee, I recommend also drafting letters to each one of your Beneficiaries (the people who will be inheriting from you). These letters are meant to be personal, and should not be shared with the named-beneficiary until after your death. They can be exceptionally useful because it’s you explaining your goals and wishes to them, in your own words, and hopefully with some personal touches included. (In fact, these Letters of Intent often become cherished family mementos; more like a note from mom or dad rather than merely one of the tools in in your estate planning tool-kit).

Moreover, tough language of the Trust can be softened by these Letters, particularly to explain to adult-children why you left their inheritance to be managed by someone else (your Successor Trustee) rather than leaving it to them to handle right away. You can use this Letter of Intent to explain to them the reasons you made the choices you did (i.e., “It’s not that I don’t love and trust you; it’s that I think you are too young to make financial decisions without guidance, and I’d rather you work with a Successor Trustee until you’re 30 years old, and a little more established.”). Another related side-function (and ultimate benefit for your Successor Trustee) is that these letters tend to make the Trustee less of “the bad-cop” when making distributions in accordance with the Trust language (or withholding distributions from adult-beneficiaries), as the letter you have written to the Beneficiary explains your reasons for putting your Successor Trustee in charge, and the criteria you want met before a distribution is made.

Conclusion

Overall, both types of Letters of Intent can be useful, and especially powerful when used together in your estate plan. They allow the Grantor to feel that his or her voice will be heard, and their long-term goals are accurately reflected, while keeping with the technicalities of the law. Once you’ve spent the time creating and executing your estate plan, take it a step farther and draft these Letters of Intent.  Your Beneficiaries and Successor Trustees will be grateful you did.

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Look Before You Leap! Don’t Sue for an Uncollectable Judgment

When a client walks in the door and says “I really don’t care about the money, it’s just the ‘principle’ of the matter,” the wise lawyer may reply: “You shouldn’t sue for ‘principle’, unless it’s ‘principal plus interest’”, i.e. money.

The meaning of this old pun, of course, is that the only satisfaction likely to be gained in litigation is financial satisfaction. You are not likely to make your adversary weep, or leave town, apologize, or reform his cheating ways. But if you have a strong case, a “winning case” where you are likely to prevail at trial and get a judgment, and your adversary has assets against which you can collect a judgment, if and when you win your lawsuit, then you can sue for principle and principal (and interest, and maybe even attorneys’ fees).

The smart client will understand that, unless his or her trial lawyer is willing to take a case on a contingent fee basis, i.e. where the attorney will only collect attorneys’ fees from moneys the client collects from his adversary, the client is the one who is taking the financial risk. Litigation is likely to get very expensive. (If an attorney is willing to take a case on contingency, the client has little to lose by proceeding in litigation, except for time and perhaps out of pocket expenses.) It is a waste of time and money, usually, to sue a deadbeat, or a person with a long line of creditors. On the other hand, if there is an asset you can attach, a lawsuit might be very worthwhile.

Ethically, of course, attorneys are obligated to place the client’s interests first, and not recommend a lawsuit that will earn the lawyer a good fee if it will not likely earn the client a good result as well.  But human nature being what it is, his or her litigation attorney may be tempted by the legal fees.  A client should not be shy about engaging the attorney in a frank and detailed discussion about whether and how a judgment can or might be collected.  This is every bit as important as the discussion concerning the strength of the client’s case, i.e. whether he or she can win at trial and get a judgment.

Pre-Lawsuit Investigation and Analysis of “Collectability”

The question of whether a “winning case” will be “collectable” is often complex, and somewhat speculative, and can involve many issues beyond the primary question of whether the target defendant has money or assets. It may involve a consideration of whether additional defendants might be included, or where the lawsuit should be filed, in State or Federal Court, or what specific claims might be plead to trigger additional remedies for collection, what insurance might exist, etc. It will usually involve some analysis of whether pre-judgment remedies might be available, such as liens, or writs of attachment, to “freeze” assets so that the defendant(s) cannot hide, transfer, or encumber them. It may involve investigation of real estate records, corporate filings with the Secretary of State, Court records of other litigations/judgments, and even credit reports, to locate and identify assets, or competing creditors. The specifics of these considerations and inquiries are too various and complex to discuss in meaningful detail here.  But the point is, an experienced litigation attorney should conduct a pre-lawsuit investigation and analysis of collectability, and discuss it with the client, to agree on a plan of action before filing any lawsuit.

Free Consultations by Experienced Attorneys at Gehres Law Group, P.C.

The experienced business litigation lawyers at Gehres Law Group understand the importance of analyzing collectability at the outset of a case, and advising the client and planning the case accordingly. Our attorneys are available for free consultations to evaluate your case and share with you the wisdom of their experience to help you decide whether you should file a lawsuit. We encourage you to take advantage of our knowledge and decades of experience successfully representing clients in litigation.

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