Beverly Hills Bar Association
Legislative Updates
California Court of Appeal

March  2009

I.              CHANG V. LEDERMAN

A.       California Court of Appeal, Second District, Div. Seven; 2008 SOS 5744

B.        Full text http://www.metnews.com/sos.cgi?0309%2FB199813

C.       Case addresses whether a lawyer owes a duty of care to a non client who alleges that he or she was a potential beneficiary of the testator�s estate in the absence of an executed will or trust instrument expressly reflecting the testator�s intent. Court concluded that lawyers owe no duty of care to a non client who was previously named in a will or trust instrument executed by testator and who alleges testator intended to revise his or her estate plan to increase the gift to the beneficiary.

D.       Raphael Schumert had known Chang since 1994. They lived together for several years before marrying on August 27, 2004. In early 2004, approximately six months before his marriage to Chang, Schumert, who had been diagnosed with terminal cancer, retained Lederman, a probate attorney and estate planner, to prepare a revocable trust.

E.       The Raphael Schumert 2004 Revocable Trust, executed on March 2, 2004, provided for two specific distributions upon Schumert�s death: $30,000, as well as the furniture and television sets located at Schumer�s principal place of residence to Chang; and $10,000 to Wenna Tancio. The residue of the trust was left to Schumert�s only child Roy Schumert, in trust.

F.        On April 15, 2004, Schumert executed a first amendment to the Raphael Schumert 2004 Revocable Trust, also prepared by Lederman. The amendment reduced the sum to Chang from $30,000 to $15,000, eliminated entirely the distribution to Tancio and recited, �In all other respect, the trust remains unchanged. � 

G.       In late March 2004, Schumert executed a will to dispose of his assets in Israel. A second will was subsequently executed by Schumert in Israel following his marriage to Chang, which apparently did not provide for Chang in any way and did not expressly revoke the Raphael Schumert 2004 Revocable Trust, as amended.

H.       According to Chang�s pleading, on or about February 1, 2005, five to six months following their marriage, Schumert  instructed Lederman to revise his trust to leave the entire trust estate to Chang (with the understanding Chang would give Roy Schumert the sum of $250,000 when he turned 25.) Lederman refused and told Schumert, if he modified the trust, Schumert would be sued by his former wife, Ettie Hadar, mother of Roy Schumert. Lederman also advised Schumert he should have a psychiatric evaluation before making any changes to his estate plan. Schumert died on March 17, 2005 without making further amendments to the trust. .

I.         On April 12, 2005 Hadar, Trustee of the Raphael Schumert 2004 Revocable Trust, initiated formal probate proceeds. Chang filed an action in probate court seeking to revoke the trust and awarding her a one half interest in the estate under the �omitted spouse� doctrine.

J.        The probate court ruled the will executed by Schumert in Israel following the marriage precluded application of the doctrine and also found that the Raphael Schumert 2004 Revocable Trust was valid and had not been revoked or invalidated by the subsequent will. In addition, the court ruled that Chang�s action violated the no contest provision in the trust, which revoked the $15,000 bequest to Chang in the trust.

K.       On March 16, 2006 Chang filed a lawsuit against Lederman, asserting causes of action for breach of fiduciary duty, breach of ethical duties of attorney, professional negligence, and intentional infliction of emotional distress. The gravamen of Chang�s lawsuit, is that Lederman, in his capacity as Schumert�s probate attorney, breached his legal duty of care owed to Chang, in her capacity as an intended third party beneficiary of her husband�s will and trust, but refusing and failing to revise the trust and will to comply with Schumert�s expressly communicated intent to bequeath to her his entire estate located in the United States.

L.        The trial court sustained Lederman�s demurrer to the complaint on August 8, 2006, concluding Chang had failed to adequately allege that she was the intended beneficiary of Schumert�s testamentary documents or otherwise allege facts establishing that Lederman owed her a duty of care. The court also found she had failed to allege the necessary elements for intentional infliction of emotional distress. Chang was granted leave to amend.

M.       The first amended complaint, filed on August 28, 2008, eliminated the claim for breach of ethical duties of attorney and modified other language in the pleading. Chang now expressly alleged she was an intended beneficiary of the Trust and Lederman was retained by Schumert for the purpose of benefiting beneficiaries, including Chang, of the trust.

N.       On November 30, 2006 the court sustained Lederman�s demurrer to the first amended complaint with leave to amend. The court ruled Chang had failed to allege facts that would establish she was an intended beneficiary of the trust (other than the $15,000 gift) or otherwise allege facts establishing that Lederman owed her a duty of care.

O.       The second amended complaint was filed on January 3, 2007. Lederman�s demurrer was sustained without leave to amend on March 13, 2007. Once again the court ruled the operative facts alleged by Chang did not give rise to a duty owed by Lederman to Chang as a potential beneficiary with respect to the alleged plan to revise the trust documents to increase the gift to her. The absence of duty defeated the claims for both legal malpractice and breach of fiduciary obligation.

P.        As to the cause of action for intentional infliction of emotional distress which was largely unchanged from the first amended complaint, the court found Chang had failed to plead facts establishing extreme and outrageous conduct by Lederman with the intention of causing severe emotional distress. The court ordered the action dismissed; and a judgment was entered, including an award of costs, on April 3, 2007.

Q.       Chang�s appeal of the order to dismiss was rejected by the Court of Appeal. The court concluded that a �testator�s attorney owes no duty to a person in the position of Chang, an expressly named beneficiary who attempts to assert a legal malpractice claim not on the ground her actual bequest (here, the $15,000 gift) was improperly perfected but based on an allegation the testator intended to revise his or her estate plan to increase that bequest and would have done so but for the attorney�s negligence. Expanding the attorney�s duty of care to include actual beneficiaries who could have been, but were not named in a revised estate plan, just like including third parties who could have been, but were not named in a bequest, would expose attorneys to impossible duties and limitless liability because the interests of such potential beneficiaries are always in conflict. .

II.             PRIVATE LETTER RULING NUMBER 200910002

A.       The PLR is a response to a ruling request on behalf of Settlor A and Settlor B concerning the gift and estate tax consequences of a private split-dollar insurance arrangement.

B.       Settlor A and Settlor B are married and created an irrevocable trust (Trust). Under the terms of Trust, the trustee is required to distribute trust income annually to a class of beneficiaries consisting of Settlors� living issue. The trustee also has the discretion to distribute corpus to a member of the class to provide for the beneficiary�s health, education, support, and maintenance.

C.       The terms of the Trust specifically preclude either Settlor from acting as trustee. Further the Settlors have retained no powers or authority over the Trust, Trust property, or the administration of the Trust.

D.       The Trust purchased a second to die life insurance policy on the lives of Settlor A and Settlor B and proposes to enter into a split dollar life insurance agreement (Agreement) with Settlors. Under the Agreement, the Trust will continue to own the policy and will pay during the joint lives of the Settlors an amount equal to the insurance company�s current published premium rate for annually renewable term insurance generally available for standard risks. After the death of the first Settlor, the Trust will pay an amount equal to the lesser of: (1) the applicable amount provided in Notice 2001-10 or subsequent IRS guidance: or (2) the insurer�s current published premium rate for annually renewable term insurance  generally available for standard risks. The Settlors will pay the balance of the premiums.

E.       Under the Agreement, the Trust will collaterally assign the following rights to the Settlors: (1) if the Agreement terminates on the death of the survivor, the survivor�s estate is entitled to receive the greater of the cash surrender value of the policy or the cumulative premiums paid by the Settlors; and (2) if the Agreement terminates during the life of Settlor A and B , or the life time of the survivor, then within 60 days of termination, the Settlor(s) have a  right to receive from the Trust an amount equal to the greater of the cash surrender value of the policy or the premiums paid by Settlor A and Settlor B, to the extent Trust has other assets.  

F.        Under the Agreement, all incidents of ownership over the policy (including the sole right to surrender or cancel the policy, and the sole right to borrow or withdraw against the policy) are vested in the Trustees of Trust.

G.       Under Section 1.61-22(c)(1)(ii)(A)(2), A and B will be treated as the owners of the Policy, because under the terms of the Agreement, the only economic benefit that will be provided under the split-dollar arrangement is current life insurance protection. Under the terms of the Agreement, Trust will pay the portion of the premium equal to the cost of current life insurance protection and Settlor A and B will pay the balance of the premium. Settlor A and/or B (or the estate of the survivor) will be entitled to receive an amount equal to the greater of the policy cash surrender value or the premiums paid on early termination or at the death of the survivor.

H.       The IRS concluded that the payment of the premiums by Settlors A and B, pursuant to the terms of the Agreement, will not result in a gift by Settlor A and B under Section 2511, provided that the amounts paid by the Trust for the life insurance benefit that the Trust receives under the Agreement is at least equal to the amount prescribed under Notice 2001-10.

I.         The second issue addressed is whether the insurance proceeds payable to the Trust will not be includible under Section 2042 in the gross estate of either Settlor A or B.

J.        The IRS concluded that, in the present case, under the Agreement and the collateral assignment, neither Settlor A nor B held any incidents of ownership in the Policy as described in Section 2042-1(c) (2) of the Estate Tax Regulations. All incidents of ownership in the policies, including the power to change the beneficiary, the power to surrender or cancel the policy, the power to assign the policy or to revoke an assignment and the power to pledge the policy for a loan or to obtain from the insurer a loan against the surrender value of the policy are vested in the Trustee of Trust.

K.       However, the portion of the proceeds payable to the estate of the survivor of A and B will be includible under section 2042(1).