Litigation Alert

• Publication year: 2019
• Author: By Jeremiah J. Moffit, Esq.,* Catherine M. Swafford, Esq.,*

LITIGATION ALERT

By Jeremiah J. Moffit, Esq.,* Catherine M. Swafford, Esq.,*

Matthew R. Owens, Esq.,* and Courtney A. Sorensen, Esq.*

AN ADMINISTRATOR IS NOT "INCAPABLE OF PROPERLY EXECUTING THE DUTIES OF THE OFFICE" UNDER PROBATE CODE SECTION 8502(b) UNLESS HE OR SHE SUFFERS FROM PHYSICAL OR MENTAL INCAPACITY, OR IS A MINOR

Estate of Sapp (2019) 36 Cal.App.5th 86

The Fourth District Court of Appeal held that the meaning of "incapable" in Probate Code section 8502(b) refers to physical or mental incapacity or minority.

The decedent died testate owning numerous parcels of real property. The court appointed decedent's granddaughter as administrator. She petitioned for instructions concerning disposition of the estate, arguing that the decedent's will was ambiguous regarding whether the real property should be sold or retained for disabled heirs. The trial court ordered her to sell the estate's properties. In the 14 years following the order, the court approved the sale of four properties, but the administrator made no other progress in distributing the estate. Two beneficiaries filed petitions to remove the administrator based on her substantial delays in administration. They also argued she acted in bad faith because she tried to convince the beneficiaries to accept $10,000 in lieu of their beneficial interests. The trial court granted the removal petitions under Probate Code section 8502(b) on the ground the administrator was incapable of properly executing the duties of office. The administrator appealed.

The Court of Appeal affirmed the ruling on different grounds. The administrator was not "incapable" of executing the duties of office within the meaning of section 8502(b), which applies to instances of physical or mental incapacity, or minority. However, the administrator was "otherwise not qualified" to execute the duties of office under section 8502(b) due to her delays, her disregard of the court's order, her failure to effectively market the estate's real property, and her bad faith and lack of impartiality towards beneficiaries. Additionally, the beneficiaries did not need to prove intentional wrongdoing in their removal petitions. The court could and did properly remove the administrator on the ground of waste under section 8502(a).

STATES MAY NOT TAX TRUSTS BASED SOLELY ON IN-STATE RESIDENCY OF TRUST BENEFICIARIES

North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (2019) 588 U.S. ___ [139 S.Ct. 2213]

The United States Supreme Court held the due process clause of the Fourteenth Amendment of the United States Constitution prohibits states from taxing trusts based solely on the in-state residency of trust beneficiaries.

The settlor, a New York resident, formed a trust for the benefit of his children. The trust was governed by New York law. The trustee had absolute discretion over distributions to the trust beneficiaries. The trustee divided the trust into three subtrusts, including one for the settlor's daughter. The daughter moved to North Carolina in 2005 and lived there until 2008. During the daughter's time in North Carolina, the trustee, who was not a North Carolina resident, made no distributions to the daughter or her children. Nevertheless, the North Carolina Department of Revenue assessed tax on the income attributable to the daughter's subtrust, resulting in a total tax of approximately $1.3 million for tax years 2005-2008. The trustee paid the tax and then sued in state court, arguing the tax as applied to the daughter's subtrust violated the due process clause of the Fourteenth Amendment to the United States Constitution. The trial court agreed and held the law to be unconstitutional as applied to the daughter's subtrust because the state lacked the required minimum contacts with the trustee to impose tax. The appellate court and the North Carolina Supreme Court both affirmed. The Department of Revenue sought review by the United States Supreme Court.

The United States Supreme Court affirmed. In the context of state taxation, the due process clause limits states to imposing only those taxes that bear a fiscal relation to protection, opportunities, and benefits given by the state. The presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries if the beneficiaries have no right to demand that income and are uncertain ever to receive it. By taxing the daughter's subtrust under such circumstances, the North Carolina law violated the due process clause of the Fourteenth Amendment.

An analysis of the application of the Kaestner decision to California fiduciary income...