USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Ashley Huh and Matthew Perotti, Pillsbury Winthrop Shaw Pittman LLP
ing into account evolving tax law in this area, which is designed to prohibit the grantor retaining control over transferred assets, the penalty being inclusion in the estate of the grantor for estate tax purposes.
liability company (LLC) is often used to own a busi - ness; membership interests in the LLC can then be transferred to a trust to reduce income and transfer tax. Trusts can be tailored to accommodate fam - ily goals, in terms of decision making, distributions and investments. The family office or a private trust company is often used for extremely valuable family enterprises or assets. 4.3 Transfer of Partial Interest Transfers of partial interests in an entity such as a partnership or an LLC are often discounted to reflect lack of marketability and lack of control, which can result in transfer tax savings. The high concentration of wealth in California often leads to trust disputes and will contests. Trust lawsuits encompass claims against a trustee regarding the administration of a trust, lack of capacity of a testa - tor, violation of trust terms, and undue influence. More frequently, litigants sometimes assert exaggerated (or unfounded) claims, seeking a settlement, or aggres - sively use tactics such as bringing a conservatorship action to gain control over the person and property of another person. 5. Wealth Disputes 5.1 Trends Driving Disputes California’s heightened court involvement makes the probate process arduous. This process typically rang - es from 12–24 months. 5.2 Mechanism for Compensation Mechanisms for compensating aggrieved parties include: • compelling trustee to perform specified duties; • seeking a court order to prevent the trustee from furthering a breach of trust; • appointing a temporary trustee; • removing the trustee; and • imposing an equitable lien or a constructive trust on trust property. The basic objective of damages is compensation, and the theory is that the party injured by breach should
4. Family Business Planning 4.1 Asset Protection
In California, trusts are a popular and effective mecha - nism for protecting assets from unforeseen creditors of the beneficiaries. In California, selection of the situs for asset protec - tion is a critical strategy in establishing a trust. Gener - ally assets transferred to a trust are exempt from the creditor of the beneficiary, except to the extent the beneficiary has the “right” to receive them. Accord - ingly, discretion for a trustee as to how much, if any, to distribute is often preferred, compared to giving the beneficiary the “right” to receive trust assets for his or her health, education, maintenance or support (HEMS). Certain states, such as Wyoming and Dela - ware, have self settled trust laws providing that an individual may transfer assets in trust for himself or herself and avoid creditors. In general, a transfer to a trust will not provide protection against the claims of an existing creditor. This dates back to the English Statute of Elizabeth (“A transfer to evade, defraud, or delay a [known] creditor is void.”) as a fraudulent transfer. Once the situs of a trust is established, the creation of an entity, such as a private trust company or a family office, to manage family holdings is an effective tool for asset management and planning. The office can be used to manage and administer financial matters, attend to administrative matters relating to tangible assets, and manage who uses shared assets. A family office creates a clear framework for managing the complexities of owning, maintaining and growing a diversity of assets, as well as attending to succes - sion planning. 4.2 Succession Planning In California, trusts are a popular method for family business transfer tax and succession planning. In California, selection of the situs for asset protection is a critical strategy in establishing a trust. A limited
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