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Procedure for enforcing a QDRO against a retirement plan if the QDRO is processed incorrectly

In the event that an Alternate Payee or Participant affected by a QDRO believes that the Plan Administrator has processed the QDRO incorrectly, the proper ERISA procedure should be followed to first object to the QDRO, make an official claim for benefits, and ultimately pursue federal litigation under ERISA.

A QDRO can be processed incorrectly in a variety of ways such as refusing to honor the QDROs provisions regarding the form of benefit, timing of benefit commencement, or calculation of the ultimate benefit amount. The federal district court has subject matter jurisdiction on over such lawsuits pursuant to ERISA.

401k Withdrawal

Sample MSA Language When There is a Retirement Plan Loan from Marriage

 

How Do You Handle A Retirement Plan Loan in a Marital Settlement?

Retirement plan loans are one of the most complicated aspect of QDROs to understand and handle correctly. A retirement plan loan is not actually “debt” as most attorneys understand that term. Instead, retirement plan loans can be thought of as a distribution, and generally should not be equalized with other types of debt (like credit card debt) in a family law divorce case. Here’s why.

When a participant from a retirement plan applies for a loan, the participant’s investments are sold in order to pay out the loan proceeds to the participant. Conversely, when the participant repays the loan balance, the participant retains their own loan payments and interest. Thus, in general, the account balance of a retirement plan already reflects a reduction for the loan.

It’s Important to Ensure One Party Is Not Hit Twice Financially

This can be a complicated analysis and not every plan is the same, but it is important to remember if there is a retirement plan loan, special attention should be given to make sure that one party is not hit twice with the financial aspect of the loan. Below is some common Marital Settlement Agreement language that may be helpful with regard to handling a retirement plan loan (see bolded sentence).

The parties agree that there is a community property interest in Husband’s [PLAN NAME]. The community property interest shall be determined by taking the account balance as of the Date of Separation, plus any contributions made after the Date of Separation that were earned during marriage, and adjusting that balance by investment earnings or losses in the Plan assets from the Date of Separation until the final date of distribution to Wife. Wife shall receive a 50 percent (50%) assignment of the community property interest using a Qualified Domestic Relations Order (“QDRO”). Any loans taken out during the marriage shall reduce the community property interest. The parties agree to jointly retain [QDRO ATTORNEY NAME] to be the neutral attorney to prepare the QDRO. The parties shall each pay half of [QDRO ATTORNEY NAME] fees and agree to cooperate with the QDRO process including providing all documents and information necessary for the preparation of the QDRO.

As always, different language may be appropriate on a case by case basis if there are unique facts.

attorney-client-privilege-image

Does the Attorney-Client Privilege Apply After the Death of a Client?

What Happens To Privilege When a Client Dies?

The Basics of Attorney-Client Privilege

Pursuant to Business and Professions Code section 6068, subd. (e), an attorney must maintain inviolate a client’s confidences.  The only exception in that statute is that an attorney may, but is not required to, reveal confidential information to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual.

But, the Evidence Code and applicable case law provide that the rules applicable to disclosure of a client’s confidences change after the client dies.

Evidence Code section 955 provides that an attorney may only claim the attorney-client privilege on behalf of a client if the attorney is authorized to claim the privilege under Evidence Code section 954(c).

The Importance of Holder of the Privilege

Evidence Code section 954(c) provides in relevant part: …”[the lawyer] may not claim the privilege if there is no holder of the privilege in existence…”  (Emphasis added.)

Evidence Code section 953 defines “holder of the privilege” and provides in relevant part: “…‘holder of the [attorney-client] privilege’ means:

(c) The personal representative of the client if the client is dead…”

This subsection expressly limits the holder of the attorney-client privilege to the personal representative, i.e. an executor, administrator or special administrator appointed by the court.  Simply being nominated in a will does not make one a “personal representative.”

Statement from the California Supreme Court on Privilege After Death

The California Supreme Court, in analyzing Evidence Code sections 953, subdivision (c) and 954, stated: “Taken together, these two sections unambiguously provide that only a personal representative may claim the attorney-client privilege in the case of a deceased client.”  (HLC Properties Ltd. v. Super. Ct. (2005) 35 Cal.4th 54, 65.)  The Court went on to conclude that when there is no personal representative the attorney-client privilege terminates.  (Id. at 66.)

In many cases today there will not be a court-appointed personal representative because prior to death the decedent transferred all of her assets to a trust.  And, a trustee is not a personal representative.  (Prob. Code §58.)  Accordingly, in situations where there is no personal representative, then there is no holder of the privilege and the attorney cannot assert the attorney-client privilege on behalf of a deceased client.

Exceptions to Attorney-Client Privilege Without a Personal Representative

An attorney should also be aware that even when the attorney-client privilege is not terminated because there is a personal representative, the Evidence Code provides exceptions to the attorney-client privilege in several situations, primarily involving a decedent’s estate planning, which require the attorney to reveal the client’s confidential information.  (See Evid. Code §§956-962.)

Evidence Code section 957 provides:

“There is no privilege under this article as to a communication relevant to an issue between parties all of whom claim through a deceased client, regardless of whether the claims are by testate or intestate succession, nonprobate transfer, or inter vivos transaction.”

Evidence Code section 960 provides:

“There is no privilege under this article as to a communication relevant to an issue concerning the intention of a client, now deceased, with respect to a deed of conveyance, will, or other writing, executed by the client, purporting to affect an interest in property.”

In Summary, Careful Evaluation is Required

The above authorities show that after the death of a client an attorney must carefully evaluate whether she is still required to maintain a client’s confidences.

 

Man Evaluating Property

Proposed Treasury Regulations Aim to Reduce Valuation Discounts on Family Gifts

Significant Changes for Family Gifts

On August 4, the Treasury Department issued proposed regulations under Internal Revenue Code Section 2704 that, if enacted, would significantly limit the applicability of valuation discounts to certain intra-family transfers.

Gift and Estate Tax Implications

In many cases, this limitation would prevent individuals from discounting the value of gifts of real property or business interests made to the individuals’ family members, causing the individual to use more of his or her gift tax exemption amount when making lifetime gifts.

Likewise, the proposed regulations would significantly limit the use of valuation discounts when calculating the size of the gross estate of a decedent, thereby increasing the value of the estate for estate tax purposes and the amount of estate tax payable.

Public Hearing in December

The public hearing on the proposed regulations will not be held until December 1, 2016, and thus the regulations will not become final this year.  Although we believe it is unlikely that the regulations will become final in their present form, we do expect that regulations limiting the availability of valuation discounts for certain intra-family transfers will become final – probably in 2017.

Explore Gifts in 2016 vs. 2017

For that reason, if you are considering making a gift of an interest in real property or a business, we suggest that you at least explore the option of doing so in 2016, rather than waiting until 2017 when the tax results may be less favorable to you.

Hand Signing Document

The California “End of Life Option Act”

California is the fifth state in the United States to legalize aid-in-dying through a law called the End of Life Option Act.

This law permits a competent, terminally-ill patient to request a prescription for a drug that can be used to end his or her life. Participation in the law is entirely voluntary for physicians, patients, pharmacists and others. Patients and physicians who choose to participate must carefully follow the steps set forth in the law in order for their actions to be considered lawful and appropriate.

The purpose of this writing is not to take a position, either in favor of the Act or against the Act.  The sole purpose is to objectively explain the California End of Life Option Act law (the “Act”) that was signed October 5, 2015, and became operative on June 9, 2016.

California’s new End of Life Option Act allows terminally ill patients to obtain a prescription from their attending physician for medication to end their life. The patient then administers the medication themselves.

To be eligible for medical aid in dying under California’s law, an individual must be:

  • An adult: a person 18 years of age and older;
  • Terminally ill: an incurable and irreversible disease that has been medically confirmed and is expected to result in death within six months; and
  • Mentally capable of making their own healthcare decisions.
  • Further, to be eligible, an individual must also be
  • A resident of California;
  • Acting voluntarily;
  • Making an informed decision that includes being given information about all other end-of-life options;
  • Informed that they may choose to obtain the aid-in-dying prescription but not take the medication; and
  • Capable of self-administering and ingesting the aid-in-dying medication.

In addition to the requirements listed above, certain steps must be followed in order for a person to qualify for aid-in-dying medication. It is estimated that the average length of time between requesting and receiving a prescription will between 15 days and three months and requires at least two doctor visits.

Two California physicians must agree that a person is eligible to use the Act. One physician prescribes the medication, and the other physician gives the consulting opinion.

If either physician is unable to determine a persons’ mental capacity in making the request, a mental health professional (psychiatrist or psychologist) must evaluate the person to ensure that the person is capable of making his or her own healthcare decisions.

The Act sets forth steps that both the patient and his or her physician must follow.

The following is a summary of the key steps and is not intended to be a complete restatement of the Act.

  • The patient must consult with his or her attending physician (the physician who has primary responsibility for the patient’s healthcare and treatment of the terminal illness) who must determine if the illness is terminal, meaning that the patient cannot be cured or the illness reversed and that death will likely result within six months, and that the patient has capacity to make medical decisions.
  • The patient must make two oral requests, at least 15 days apart, to the attending physician, as well as one written request. This written request must be on a form as set out in the Act. The written request must be witnessed by two persons (one of whom must be a non-relative of the patient) and signed by the patient. The patient must discuss the request with his or her physician with no one else present (except an interpreter, if necessary) to be certain that the request is voluntary.
  • The patient must then be seen by a second physician (a consulting physician) for that physician to confirm the patient’s diagnosis, prognosis, and ability to make medical decisions. If either physician questions the patient’s mental condition, the patient must then be seen by a mental health specialist to confirm that the patient has the capacity to make medical decisions.

The patient and the physician must discuss each of the following:

  • The aid-in-dying drug, how it will affect the patient and the fact that death might not be immediate.
  • Realistic alternatives to the aid-in-dying drug, including comfort care, hospice care, palliative care, and pain control.
  • Whether the patient wants to withdraw the request.
  • Whether the patient will notify next of kin, have someone else present when taking the drug, or participate in a hospice program, although the patient is not required to do any of the three things.
  • Ensure the patient knows that he or she does not have to take the drug, even though they have filled the prescription.
  •  Once all of the above have occurred, if the patient still wishes, the physician can write a prescription for the drug.
  • Before taking the drug, the patient must sign a form as set out in the Act, that states that the drug is being taken voluntarily. The patient must take the drug himself or herself.  While others may assist in preparing the medication, the patient must self-administer the drug.
  • The participation of the physician is absolutely voluntary, as is that of the patient.
  • Lethal injection, mercy killing, or active euthanasia remain a crime in California.

How does the Act affect the patient’s insurance, will, or other contracts?

The Act protects patients in that they cannot be denied life or health insurance or annuities based on requesting or taking an aid-in-dying drug. A health insurer cannot tell a patient an aid-in dying drug is covered by insurance unless the patient asks.

A health insurer cannot refuse treatment for the illness at the same time that it offers coverage for aid in dying. A will, a contract, or other agreement cannot require a patient to receive aid in dying or prevent a patient from doing so.

For additional information, please refer to the Act, Senate Bill 128/Health and Safety Code Section 443 et. seq. or contact the author.

 

 

 

Can a third party pay a client’s fees?

In certain situations, attorneys may be asked to allow a third party to pay

There are various situations that may arise where an attorney may be asked to allow a third party to pay a client’s attorney’s fees.  Examples include a parent paying for a criminal defense attorney or a divorce attorney for a child.  When a third party is paying the bills it is particularly important to comply with the applicable rules and not to confuse the client with the person paying the bills or to include the third party in confidential client communications.

Rule 3-310(F) provides that an attorney may not accept payment for representing a client from anybody other than the client unless the attorney complies with certain requirements.

No interference is allowed

First, there must be no interference with the attorney’s independent professional judgment or with the attorney-client relationship.  This means that just because a person is paying the bills she doesn’t get to direct the representation.

Confidentiality must be maintained

Second, you must strictly maintain the client’s confidential information as required under Business and Professions Code section 6068, subdivision (e).  Often a person paying the bill, particularly a parent or other close relative who is genuinely interested in helping the client, will want to be informed about what is going on in the case and offer input on the attorney’s strategy.  Also, they may want details about what services they are paying for.

However, just like in any other matter, unless the client specifically authorizes the attorney to discuss confidential or privileged information, the attorney cannot disclose anything to the third party.  An attorney should also be careful to make sure the client doesn’t feel obligated to share confidential information with the third party simply because that person is paying the bills.

Written consent is required

Third, the attorney must obtain the written consent of the client before the attorney may accept payment from a third party.  A good practice is to discuss payment terms directly in the engagement agreement and confirm that though a third party will be paying the bills, she shall have no authority to direct the representation or have access to confidential client information or privileged communications.

The attorney will also want to have the third party sign an agreement to confirm responsibility to pay the client’s bills.  The attorney should consider whether to have the third party sign the same engagement agreement as the client or to enter into a separate agreement with the third party.  In order to preserve any privilege as to the client’s engagement agreement, the attorney should do a separate agreement with the third party.  The agreement should also confirm that the payor is not the client, shall have no authority to direct the representation or have access to confidential client information and privileged communications.

A related issue is who is entitled to a refund of any funds remaining at the conclusion of representation, the client or the person who paid?  COPRAC Formal Opinion 2013-187 addressed this question and concluded that the attorney must return the balance to the third-party payor rather than the client, unless the engagement agreement with the client provides otherwise.  Accordingly, the attorney should also clarify return of funds in the client engagement agreement.

Home Protection

What to Do With a Residence Upon Death

Dear Sophos

 I am acting as Trustee for my dear dead Aunt Betsy.  One of the Trust assets is her California residence.  What are some of my fiduciary duties and what should I be doing with the house?

 Little Johnny

 

Dear Little Johnny:

First, as Trustee, you have a general duty to secure the residence and to preserve its value.

Assuming that the house is not passing to a specific beneficiary, after the initial 120 Notice period, you should consider liquidating, selling, the house.

During the initial 120-day period of administration, I suggest that, at a minimum, you do the following:

  • Make a detailed inventory of the house content, by photos or video, remove and secure any personal property of substantial value and empty the refrigerator;
  • Have a Locksmith change all of the locks and give you the keys;
  • Have all mail forwarded to your address and stop any newspaper delivery
  • Install an inexpensive security system that will automatically contact the security company if there is a break-in;
  • Have the yard regularly maintained, as though someone was living in the residence;
  • Talk to the neighbors and leave your telephone number with them in the event of an emergency;
  • Install a timer on several lamps, set to go on and off at different times;
  • Find the homeowner’s insurance policy and contact the insurance agent to be certain that the coverage is adequate;
  • If appropriate, have a plumber “winterize” the house;
  • Timely pay the monthly utility bills and loan payment as well as any homeowner’s association fees or at least contact the vendors to explain the circumstance.
  • Obtain legal advice from an attorney experienced in the area of trust administration.

I hope that you find this advice helpful and good luck in your capacity as Trustee.

The Sophos

Elderly Hands Holding Wedding Ring

Is a retirement plan loan considered community property?

QDRO NewWhen a participant takes a “loan” from their retirement plan, the plan liquidates investment assets in order to pay the participant cash from the plan. This means that when an account statement for a 401(k) plan states: asset balance $15,000, loan balance $5,000, there is actually still $15,000 worth of community property investments in the plan. It is worth noting that different banks report plan loans differently on statements, so the treatment of the loan should be double checked with the bank prior to arriving at a firm conclusion.

Arguably, a loan should not be thought of as a debt at all. Instead, it is way of cashing out pre-tax dollars from a retirement plan. The reason that a loan is not a debt is the subsequent loan payments made by the participant to repay the loan increase the participant’s plan balance. In other words, the participant is simply transferring funds from their checking account to their retirement plan. They are repaying themselves.

Despite the conclusion that a retirement plan loan is not truly a “debt,” there are special tax and transferability considerations to be taken into account. A participant loan is accompanied by a tax disadvantage for the participant who retains the plan because a participant repays the loan with after-tax dollars and then the participant is ultimately taxed on the benefits when they are withdrawn at retirement. Furthermore, a QDRO cannot assign a participant loan from the participant to an ex-spouse. Parties in mediation or preparing for trial may benefit from a brief analysis on how to equitably treat a retirement plan loan which can depend on the specific facts and circumstances.

The bottom line is that a retirement plan loan is unique and not generally treated as a community property debt obligation.

Retirement Benefits Feature

QDROs can be used for collecting spousal support and child support

The use of a Qualified Domestic Relations Order (“QDRO”) is an often overlooked tool for assisting family law attorneys and divorcing spouses with the collection of child support or spousal support.

A QDRO can be used against a defined benefit plan (which pays monthly benefits over a participant’s lifeme) to collect ongoing monthly child support or spousal support. The participant must be in pay status in order for the defined benefit plan to be able to pay the monthly amount.

In other words, if the participant is not yet rered, the benefits will likely not be payable from the Plan under a child support or spousal support QDRO. Certain exceptions apply.

A QDRO can be used for a defined contribution plan (which has a current account balance) for the collection of spousal support or child support in a lump sum, such as arrears.

The authority for this collection activity resides in ERISA which provides that a QDRO can alienate benefits of the participant if it relates to the provision of child support, alimony  payments, or marital property rights to a spouse, former spouse, child, or other dependent and is made pursuant to a state domestic relations law. (29 U.S.C. § 1056(d)(3) (B)(ii)(I) and (II)).

Finally, it is important to note that child support QDROs and spousal support QDROs are somewhat specialized with regard to the tax consequences. Child support payments from a retirement plan are taxed to the participant, not the alternate payee.

Dividing IRAs in Divorce: Why a QDRO is not necessary to assign IRA benefits to an ex‐spouse

Contrary to popular belief, a Qualified Domestic Relations Order (“QDRO”) is not necessary to divide every type of retirement benefit. The prime example is an Individual Retirement Account (“IRA”). An IRA is not a qualified retirement plan under the Internal Revenue Code and an IRA is not regulated by the Employee Retirement Income Security Act (“ERISA”). Therefore, ERISA regulations and Internal Revenue Code section 72(t) which otherwise govern QDROs do not pertain to IRAs.

If a financial institution representative informs you that a “court order” or “QDRO” is required to divide an IRA, then your client should provide the financial institution with a copy of the Judgment and MSA which will suffice as the court order. A letter of instruction or other forms will sll be necessary, but as far as providing a court order, the Judgment and MSA will satisfy the requirement of a court order.

The good news for family law attorneys is that the process for dividing an IRA is more simplified than having a QDRO prepared. However, there are two aspects unique to IRAs that should be kept in mind:

  1. Early withdrawal penalties apply.

Unlike the transfer of plan benefits with a QDRO, there is no exception in the Internal Revenue Code that permits a spouse to avoid the early withdrawal penalty of 10% (federal) and 2.5% (California) when receiving a distribution of IRA benefits prior to reaching age 59½. In other words, if an IRA holder desires to cash out their benefits prior to reaching age 59 ½, there will be a 12.5% penalty and the distribution amount will be taxed at ordinary income tax rates. For clarity, it should be noted that if the IRA benefits are merely being “rolled over” using a “trustee-to-trustee transfer” from one spouse’s IRA to the other spouse’s IRA, then there is no tax consequence on that transfer and the benefits are held in the receiving spouse’s IRA as pre-tax benefits.

In contrast, the Internal Revenue Code provides under secon 79(t)(2)(C) that a QDRO qualifies for an exception to the early withdrawal penalty. Therefore, if the parties are planning to take any distributions of retirement benefits prior to age 59½, it may be preferable to do an  equalizing assignment with a QDRO rather than equalizing benefits with an IRA.

  1. A tax statement is recommended.

A signed “letter of instruction” with tax language is still recommended when an IRA is divided. Although a QDRO is not necessary, it is sll important to document the IRA transfer in the event that the IRS or Franchise Tax Board conducts and audit of the IRA transfer.

The typical tax statement will contain something similar to the following:

IRA Holder is the former spouse of Recipient. Both IRA Holder and Recipient acknowledge that this assignment is incident to divorce within the meaning of Internal Revenue Code secon 1041. This assignment is related to the cessation of the marriage because this assignment is required by the Marital Settlement Agreement entered into between the IRA Holder and the Recipient. After the transfer, the Recipient shall be solely responsible for all income taxes or

other tax consequences, if any, associated with the subsequent distribution of the assets to Recipient.

For reference, the above language is intended to comply with the Internal Revenue Code secon that provides for the tax free transfer of IRAs between spouses pursuant to divorce which is secon 408(d)(6). The meat of Internal Revenue Code secon 408(d)(6) is as follows:

(6) Transfer of account incident to divorce The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of secon 71(b)(2) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.

What is the end result? The division of an IRA does not require a QDRO; however, a tax statement should accompany the IRA transfer documentation to document compliance with IRC secon 408(d)(6) if the IRS or Franchise Tax Board conducts an audit.