ESTATE PLANNING AND TRUSTS: ONE SIZE DOES NOT FIT ALL
Quite often when a client calls requesting an estate plan, rather than asking specifically for that, they’ll simply say: “I need a trust.” I’ve always found this statement rather intriguing. After all, if you felt you had a health issue, such as a sudden bout of abdominal pain or indigestion, would you go straight to the doctor and order an appendectomy? Probably not. While you may have your suspicions as to the proper resolution for your medical problem, it’s usually best to withhold the self-diagnosis in favor of allowing the professional to fully evaluate your circumstances, and make an appropriate recommendation. In the same way, while a trust may be the estate-planning tool that works in most situations, it is not always right to assume that it’s the proper approach in every situation.
At its most base level, a trust is simply a legal tool for holding or managing property. However, as noted below, the ability to control property through a trust can have many side benefits.
A trust is significantly distinguishable from a corporation, limited liability company “LLC” or similar entity. It’s important to note that a trust exists as a “property management tool” for the individual(s) or entity that formed the trust (the settlor), whereas, the corporation or LLC is a separate and distinct legal “person”, for all purposes, from its founders.
A trust can be revocable or irrevocable. A revocable trust, commonly referred to as a living trust, offers tremendous flexibility and may be cancelled or revoked, in whole or in part, or amended at any time during the settlor’s lifetime. An irrevocable trust cannot be revoked either for the duration of the trust, or for the period specified in the trust. Irrevocable trusts are utilized less frequently as most settlors wish to maintain control and ownership, regardless of how indirect, over property placed in the trust. Therefore, irrevocable trusts are often used to effectively “gift” property to a trust. While this may have implications for gift tax purposes, it can also decrease the size of the settlor’s estate, thereby reducing estate taxes, where applicable.
Here are some considerations as to why you may or may not want to include a trust as part of your comprehensive estate plan:
Tax Considerations
As noted above, an irrevocable trust, properly implemented, can potentially reduce estate taxes by lowering the total value of the gross estate. A basic revocable trust, on the other hand, does not help you to reduce or avoid any estate taxes, unless it is properly written to include certain tax avoidance techniques such as a marital deduction trust, or bypass trust, which can save substantial estate tax dollars for families over time.
Many have been misled into believing they should rush into creating a trust just to avoid taxes. However, it is important to note that for the year 2012, the federal estate tax exemption limit is $5,120,000 per person, and there is no state estate tax in California. This means that, in 2012, a married couple would have to have assets in excess of $10,200,000 before any estate tax would be owed at all. If you are in this category and estate taxes are still a concern, then there are other estate planning tools you need to be thinking about that will not be addressed in this article. For the rest of us, it should be obvious that tax considerations alone do not provide the motivation to create a trust, at least for 2012. Note that, at this writing, the exemption is scheduled to drop to $1,000,000 per person – or $2,000,000 per married couple – in 2013. Most practitioners believe Congress will take action to raise this limit to some amount between $3.5M and the current level before the new rate becomes effective, as has been the case in the past. However, gambling on what Congress might do does not seem like a safe estate planning strategy.
Avoidance of Probate
Probate is the legal process that occurs after death, whereby an individual is appointed by the court to ensure payment of the final expenses and distribution of the assets of the decedent’s estate. It is most often a very time-consuming and costly process. Under California law, assets that have been transferred to the trust, and certain others that are considered to be “non-probate” assets (Those assets that are held in joint tenancy, community property with right of survivorship, and “pay on death” accounts, which automatically transfer upon the death of the decedent to the co-owner, by operation of law), are exempt from probate. Therefore, if a trust is properly funded and maintained as such, the trust will allow the heirs to avoid the time and expense of probate upon the settlor’s death.
This last point is particularly important. Many people have a false sense of security after creating a trust through the use of fill-in-the-blank, generic methods such as online sites or, worse yet, attending seminars that are set up in hotels and put on by “trust mills” that are passing through town. These methods are problematic for many reasons. The two main concerns are: a) each individual’s situation is different, and it is tantamount to malpractice to use the same documents for everyone without fully considering that individual’s circumstances and specific needs, and b) neither of these methods guarantees that the trust will ever be funded with the assets. Simply put, you can form a trust, but if the assets are never put into the trust, it is a completely wasted effort. Without question, at least 50% of the trusts that our firm has looked at over the years, that have been created through one of these two methods, have never been funded. Because the settlor’s properties, financial accounts and other assets were never moved into the trust, the document is useless and a probate will be required upon the settlor’s passing regardless of the trust’s existence (Assumes the settlor has a minimum amount of assets subject to probate).
Privacy
A will that is entered into a probate proceeding becomes a public document. Likewise, all court filings of the assets, liabilities and information regarding distributions during the course of a probate also become accessible to public scrutiny.
A trust, on the other hand, is only accessible to outside eyes on a limited basis. It can become public in the event that the trust comes under the jurisdiction of the court for some reason. Certain others, such as bankers and financial agents, may require access to certain portions of the document for verification purposes, on an as-needed basis.
Will Substitute
Having a will that leaves all of your property to your heirs or other designees does mean that you do not need to have a trust. However, having a trust does not mean that you will not also need to have a will. In fact, every estate plan should include a will regardless of whether or not a trust is created. In the case where a trust was created, the attorney typically creates a “pour-over” will. The purpose of the “pour-over” will is to ensure that if any property is inadvertently left out of the trust, this will “pours over” the property into the trust upon the death of the settlor. So long as the non-trust, probate assets do not exceed the statutory limits (currently at $150,000) a probate should not be necessary.
Costs
The cost of creating an estate plan that includes a trust is higher than one with only a simple will. In addition to the cost of the document itself, supporting documents such as Grant Deeds and change of ownership reports for real and personal property, financial accounts and other potential assets can significantly add to the cost of the estate plan. These costs are often justified based upon the value of the estate and the estate planning objectives and goals of the settlors.
Other Considerations
With any estate plan it’s important to review and update the documents as required. This can be somewhat easier to do when there is not a trust involved. For example, the standard trust includes a list of the property that was placed into the trust. A will does not. Therefore, the trust Schedule of Assets should be updated as properties are bought and sold, or financial institutions are changed. Where an estate plan includes only a will, updates will likely be required less often such as when children or grandchildren are born, or there are other reasons to modify beneficiary provisions.
Often when real property is refinanced, certain financial institutions will not make loans to properties that are held in trust. It may be necessary to take the property out of the trust for the duration of the loan refinance. Always be sure to check that you are not violating the conditions of any property mortgage by transferring your property into a trust.
Conclusion
A trust can be a critical component of your estate plan. However, it’s important to make an informed choice before deciding to include a trust as part of your estate plan. Please don’t get the impression that our firm is opposed to the inclusion of trusts in our client’s estate plans. In fact, just the opposite is true. For most of our clients, a trust is the right way to go. It’s just that the “one-size-fits-all” approach to estate planning is reckless and raises serious concerns that individuals are not receiving proper advice based upon their specific needs. Don’t be afraid to ask tough questions. After all, you’re paying for the time. The issues are too important, and you deserve the right answers that apply to you – not somebody else.
Stephen Gizzi is the Managing Partner of Gizzi & Reep, LLP, a general practice law firm in Benicia, where he practices as an attorney, mediator and arbitrator. In addition, Steve serves as a Judge pro tem with the Solano County Superior Court and is also on the Faculty of the National Judicial College where he teaches Civil Mediation.
Stephen Gizzi is the Managing Partner of Gizzi & Reep, LLP in Benicia. He is an attorney, mediator and serves on the faculty of the National Judicial College in Reno, NV. The information in this article is intended to be general in nature and does not constitute legal advice. Consult your own legal counsel for your particular circumstances.
Elevate Your Estate
Get connected with the pros at the Vacaville Home and Garden Show
People local to the Vacaville area may have grown familiar with the Vacaville Total Home & Garden Show over the last 20 years. Under new ownership as of 2010, JN Productions, LLC is bringing it back again this year, not once, but twice. The first show is the usual time of year, April 20-22. The second show will be a Fall Home and Garden Show, held in October. They also have two more events planned for October including an Oktoberfest and the Vaca Total Hunting & Fishing Expo. All events will be held at the Nut Tree in Vacaville.
“Fairfield, Vacaville, Vallejo, Dixon, Napa … We have all these areas, so we can provide a show that people can come to here, without having to drive to San Francisco or Sacramento,” says Nicole Arabia, co-founder of JN Productions, formerly the Queen of Marketing. Queen of Marketing was developed to help local businesses plan events and promotions. When Arabia approached Bob Bock, creator of the home and garden show, she encountered an offer she couldn’t refuse. “I contacted the owner and asked him if we could help him with his marketing,” she says. “Next thing we know, he asks us if we’d like to purchase the home and garden show. So we did.”
The show was a big undertaking – so big that Arabia and her business partner, Jodi McGuire, co-founded JN Productions just for the show. “This was a huge leap going from a ribbon cutting to putting on a 300-exhibitor event,” says Arabia. They weren’t completely on their own, however, as Bock stayed in as a consultant for their first year. “He mentored us through that whole year to make sure that it was another successful year,” says Arabia. Last year was JN Productions’ first go as the sole producer of the event. “It was really good,” she says. “We had 20,000 people come through in three days.” They expect similar results this year.
As far as who should attend this show, the answer really is anyone. First-time homebuyers, investors that are purchasing a home that could be in foreclosure and needs some fixing up, and even current homeowners. “What we’ve noticed is the homeowners these days may not be doing heavy construction in their home,” says Arabia. “A lot of homeowners are into taking it slow and getting back into just updating their homes—painting, new carpet, floor remodeling.”
All sorts of exhibitors are expected at the event as well. “From painting to electrical to landscaping,” says Arabia. Insulation companies, glass companies, awning systems, solar, bathroom, spa companies, pool companies, construction companies, the whole gamut. Brandy Davis, Marketing Assistant for JN Productions, adds, “We do have arts and crafts as well, it’s not just all big construction, heating and air. We also have barbecues, patio furniture, knick knacks, all kinds of stuff that you would consider at an arts and crafts fair.”
Arabia mentions that individuals who are looking to do some work on their home might want to wait until the home and garden show, as they could find a better deal for what they’re looking for. “A lot of these vendors will have special discount pricing just for the show,” she says. “Check out the show before you get into something; a lot of these vendors come with their ideas too.” And Davis agrees. “If there’s anything you want to do with your home, any ideas, there’s going to be so many people there,” she says. “You don’t actually have to buy anything if you don’t want to, but you’re going to have all these people that are specialists in their field, so you’ll actually be able to go in there and ask.”
They haven’t forgotten about the younger members of the community either. Kids Growing Strong will have their own corner at the event and will have activities for children. Solano Agriculture will be present, handing out seed packets for people to take home. There will also be planting opportunities for kids. “They can plant something at the show and then take that with them,” says Davis. “Also, we’re partnering up with Home Depot so they’ll have a booth there and the kids can interact with them. Painting on tiles, different things like that.”
Something new to the event this year is the presence of BatBuilder.com. “They have this crazy, amazing car,” says Arabia. She describes is as a combination of the batmobile and a battlebot. “That’s a huge draw for kids,” she says. “We’re trying to have a little bit of everything for everyone.” And if you’re not sold yet, most people like food and beer, which will also be present. “We’ve got some really great food vendors, and beer gardens as well.”
Another new thing this year is the timing of the event. “This year Earth Day falls on the Sunday of the show,” says Davis. “We are letting all of our clients know that it’s Earth Day and we’re hoping they might do something special.” So make sure to bring some sustainability questions with you as well.
“One of the things that we really hope people will walk away with is a knowledge of businesses that are around this area,” says Davis. “We’re hoping that people that want to make changes or improvements on their home will be able to do so by way of our show because of certain discounts. Overall it’s just helping out the community.”
Admission to the event is $7 for adults. $2 for kids age 12 and under. There’s also a $2 off coupon in their directory that can be picked up at Home Depot stores throughout Solano County. Keep up with their latest news at www.vacahomeshow.com.
Matt Larson is a writer/actor/comedian who shamelessly promotes his Vallejo Comedy shows in his byline. He encourages you to visit www.vallejocomedy.com. Woot!
Education: A Private Matter?
Is it the smaller class sizes and low student/teacher ratio? Perhaps it’s the wide variety of arts and athletic extracurriculars, or maybe it’s simply family tradition. Whatever the rationale, there are many reasons why families choose a private school education for their children.
“I think everything really boils down to the smaller environment,” says Lafayette resident Nicola Hemmerling, who currently has two boys attending Bentley – the Lafayette private school known for academic excellence. (Her two older boys are Bentley grads and are now attending college.) “Teachers have very close, caring relationships with students. Small class sizes allow for a vibrant, discussion-based style of learning. One of my boys also describes Bentley as a place where he can really be himself, and not try to fit into any particular group: ‘It’s much less cliquey,’ he says.”
Mary Murphy, Director of Communications at Seven Hills School, cites this sort of diversity as just one of the appealing factors for which families choose this independent preschool through 8th grade private school, located on nine acres of former ranchland, just up the hill from Heather Farm Park in Walnut Creek. “Seven Hills students are a diverse bunch, along racial, ethnic, socioeconomic and family structure lines,” says Murphy. “There is no specific profile. What Seven Hills families have in common though is the belief that, from the preschool play yard all the way through the 8th grade trip to Japan, our teachers have created an academic environment in which curiosity, exploration, experimentation, responsible risk, creative problem-solving, success and failure are all part of a foundational learning experience. It all starts here.”
With pride, Murphy points out one of the more ethereal features of her school – the sheer beauty of the surroundings. With a creek running through the playgrounds, gardens here and there, and views of Mt. Diablo and its foothills at every turn, there is plenty of space to explore.
But it takes more than beauty and small class sizes to lure families to spend hard-earned money on hefty annual tuition fees rather than education that is offered freely in the public sector. In the three counties served by this publication, there are 31 public school districts, encompassing a multitude of elementary, middle and high schools. Several of these public school districts are consistently rated among the top in the state. Lamorinda and Diablo corridor residents routinely cite the excellent public schools as the number one reason for their move to the area. “Many high-performing public schools/districts demonstrate outstanding student success,” says retired Acalanes Unified High School District Superintendent John Stockton. “Unfortunately, private schools are not subject to the same level of assessment required of public schools. There are many high schools that offer highly successful advanced placement programs, experience great student success in college entrance exams and demonstrate exemplary student achievement on standardized assessments, while serving diverse communities.”
Stockton, who now consults on education issues, also notes that many private schools are cost prohibitive to the average-income family, citing that some Bay Area private schools cost more than public post-secondary schools. “I do believe that parents are justified in seeking out the school environment in which their students will achieve their full potential,” says Stockton. “However, I do believe that public schools can provide excellent educational experiences for almost every student.”
Nicola Hemmerling concedes that public high schools offer a lot more bells and whistles than the smaller private schools. Big bands, football teams with homecoming hype, and large musical and theater productions are typical high school aspects that her boys miss. She also cites the social convenience of a local student body. “With classmates in your neighborhood, getting together with school friends is easy,” she says.
At St. Patrick-St. Vincent diocesan Catholic preparatory high school in Vallejo, students typically score above the national, state and local averages on tests such as the PSAT, SAT and ACT. Virtually all of the graduating seniors go on to college with approximately 70% of the class going straight to four-year colleges. The student body is an ethnically diverse group composed of 530 boys and girls. Students enjoy class sizes ranging in number from 24 to 32 students.
Sheila Williams, director of admissions at St. Patrick-St. Vincent, is a third generation alumna of the school and the parent of two children who have had the SPSV experience. “My daughter, a recent graduate and currently a freshman in the UC system, would say that she was able to really develop and hone her skills as a writer at SPSV,” says Williams, whose son is currently a sophomore at SPSV. “And my son enjoys the classroom, but his true passion is on the playing field.” SPSV produces student athletes – there were 10 college signings last year from the school. Over 70% of the student body is involved in sports and an even higher percentage participates in multiple extracurricular activities.
Though Williams cites the previous statistics as reason enough for families to choose SPSV, she references “community” as a major factor. “SPSV grads make connections to classmates, faculty and staff that will last a lifetime,” she says. “I still have close contact with many of my classmates 26 years after graduating. I see many of the kids who graduated around me hold positions of leadership in our grammar schools, civic groups, even raising money for local and national charities. We currently have more than 17 alumni who have returned to SPSV to work as faculty/staff and many more who help coach.”
At Seven Hills (which celebrates its 50th anniversary next fall), faculty and staff often say it’s the teachers who create the school’s special environment. “What we mean is that well-trained, experienced, motivated and engaged teachers, who are encouraged to find professional development opportunities and work in an environment of collaboration and collegiality, will bring all that perspective to bear in the classroom,” says Murphy. “Our teachers have created an educational continuum on which a student moves from one grade to the next with great confidence and competence. Our teachers do not use state standards as a goal but just as a jumping-off point. This autonomy allows teachers to guide students in the mastery of content while teaching them to think critically, articulate clearly and express themselves uniquely.”
With 384 students currently enrolled, Seven Hills is below state-mandated teacher/student ratios for each age. Kindergarten through 5th grade classes have 18 students while middle school classes count 19 per classroom. When asked what Seven Hills offers that a public school education cannot, Murphy cites a) a clearly stated mission, shared by administrators, teachers, parents and trustees, guides every decision; b) a strategic map for the future; c) financial stability; d) smaller class size; e) professional development that inspires and energizes their teachers; e) a tight parent community; f) teachers who love what they do; and g) a spirit of philanthropy, which funds physical and program improvements, as well as socio-economic diversity.
“Add to all of this, a warm, nurturing school community in which each child is really known and we graduate students who are ready academically, socially, and emotionally for their next academic adventure,” says Murphy.
Sheila Williams acknowledges that while a student can receive a great education in a public school, many public schools are cutting back on enrichment and extracurricular activities due to state budget issues. SPSV fine arts programs such as drama, visual arts and choir are programs that are fully supported at her school. “SPSV students are able to take advantage of all that High School has to offer,” she says. “We have seven award-winning choirs that have competed in Washington DC and Europe. We have 18 different sport programs. Students may be a part of our Campus Ministry, ASB or Retreat Team which participate in a school wide leadership program.”
Noting the financial constraints that a private education might create for many, Williams acknowledges her own decision to invest in her children’s education, “There are things that we as a family might not be able to do as a result of making this SPSV education a reality for our kids. But it is the right choice for our family and the investment has a superb rate of return.”
A Third Choice – Charter Schools
In addition to traditional public schools and private options, there exists a third choice: Charter Schools. A charter school offers a twist on public education – there is no tuition and charters are open to any student and are funded with public dollars. The difference from traditional public schools is that charters are given the flexibility to make decisions at the school level, allocating budgets and designing curriculum to best meet the needs of the students attending the charter school. In a traditional public school, these decisions are made at the district level.
Another difference is that charter schools are schools of choice, meaning that parents and students choose to attend the charter school. They are not assigned as in the traditional district-run system. Families are making a decision that a charter school provides the curriculum, culture and learning environment in which their particular student will thrive. When demand for spots at a charter school exceeds the spots available, the charter school then holds a random lottery to determine which students will be offered a spot.
There are nine charter schools in Contra Costa County, five in Napa County and seven in Solano County. Adam Miller is Chief Operating Officer for the California Charter Schools Association where he provides management and strategic leadership, specifically in the areas of internal operations and membership services. Miller says that each parent and student have different reasons for attending a specific charter school depending on the student’s needs and what the charter school offers. “The reasons will be as unique as each and every charter school,” says Miller. “For example, reasons could vary from the emphasis on a college prep curriculum at a high school charter to a unique learning model such as Montessori at another charter, to an appreciation for the smaller school size at another.
“Generally speaking, parents appreciate the flexibility that a charter school has to align all of its resources to meet its mission of providing a high quality education to its specific group of students,” continues Miller. “Parents also appreciate the increased accountability at charter schools. In exchange for more flexibility, charters have increased accountability. A charter school must continually seek renewal from its authorizer, usually on a five-year cycle. If the charter school does not meet certain benchmarks, for example, academic performance, the charter school may not be renewed, so the stakes are higher. Also, of course, as a school of choice, charter schools are accountable to parents. If the charter school is not providing a quality education to its students, the parents will vote with their feet, pulling the students out of the school. Charter schools empower parents.”
For more information on California’s diverse charter school choices, visit www.calcharters.org.
Fran Miller is a freelance writer and regular contributor to Lafayette, Alamo and Danville Today newspapers. She lives in Lafayette with her husband, Dan and two teenaged boys, Aaron and Ben.
Real Estate: 23’s a charm? Could this be my final move?
23’s a charm? Could this be my final move? I sit down, pen in hand, to list the number of residences in which I’ve dwelled during my half-century lifetime. My list is based on what I’ve been told of the pre-kindergarten years, what I very vaguely recall of the following five years, and what I can distinctly remember from age ten and on. I come up with 23 – half of these being prior to high school graduation and thus, beyond my control. The other half, no doubt, the result that which I’d merely become accustomed. Up until I bore my children, I thought that packing all my worldly belongings into large boxes was just a regular chore, like doing the laundry or clearing the table.
As a minor, led by my parents to one residence after another, it never occurred to me that children might live in just one home before leaving the nest. The idea of residential permanence simply didn’t exist for me. The only consistent thing in my young life was always being the “new girl”. Yet, I thrived. I even recall the most painful of all our moves (in the middle of high school) with fondness. Those two years at Skyline High School are when I fell in love with Oakland.
But now, many years and many moves later, I find myself firmly ensconced in my Bay Area suburb, living happily for the past 13 years in our rancher-turned-craftsman home. My kids started, and will end, their public school education in Lafayette. They have friends with whom I have no doubt they will know for the rest of their lives. The fields and swimming pools in the area are alive with memories of their various sports endeavors. They are grounded here and will forever have a history in this one place. I can’t really relate.
My frequent childhood moves were precipitated, and necessitated, by my dad’s job. We moved mostly during the summers, only once during the middle of a school year. We once moved to a different home in the same town, which entailed a school change. My two brothers and I thought nothing of it. It was all we knew. I found myself actually welcoming these new starts. A fight with a best friend meant nothing to me – I knew I’d be moving away shortly anyhow. Everyone in our family was adept at packing our belongings, and equally adept at purging. To this day, I have a hard time holding onto anything that has outgrown its usefulness. (I’m still ashamed that I gave away the outfit worn by my first born when he returned from the hospital.)
Reality settled in after our last family move – the summer between my sophomore and junior years of high school. I was no longer the malleable young girl who eagerly entered into each new adventure. I spent the first trimester in tears, missing friends and feeling profoundly lonely. I finally became aware that it was not standard practice to uproot and move during the middle of one of the most tumultuous periods of life. I tried to maintain my previous friendships, but in a pre-cyber world without texting, email or Skype, it took a great deal of effort.
Despite this difficult high school experience, I couldn’t get the rolling stone out of my system. I moved five times during my four years in college. It had become habit. I blew through seven more abodes between graduation and marrying my husband, whose big brown eyes were the initial attractant. Psychologists might surmise that the underlying allure was the stability he represented. Born and raised in the San Francisco home in which his parents still live, Dan had told me early-on during our dating that he had no intention of ever leaving the Bay Area. I was intrigued. Who ever heard of such perpetuity?
During our 21 years of marriage, we have lived in only three homes – and our children have only known our current one. I’ve never lived in one place for so long, and it has taken some meditation and deep breathing to be comfortable with the concept of a future in this one town and one home. Admittedly, the value of community longevity has often been lost on me. But I’m learning. The girl who once simply turned and walked away from misunderstandings has finally learned the value of real friendships, and the need to nurture them. I’ve learned to not pass judgment, and I’ve learned to avoid gossip. I’ve learned what it’s like to really become vested in a community and to be an active participant in civic and school affairs. And I’ve learned the value of providing roots to my two boys.
A couple of years ago, we had the opportunity to purchase a different home in our same town. We had always admired this particular home’s mature oaks that were visible from the bike path – oaks, that my astute son pointed out, left prickly leaves on the huge lawn. “Why have a big backyard if you can’t run around barefoot?” he asked. Prickly oak leaves-be-damned, and with a sure-buyer ready to pounce on our home, we were poised to sign the paperwork when my younger son, eyes filled with tears, asked, “Why are we moving? I love our house; I love my room; I love our street!”
As a child, it had never occurred to me to voice such opinions. It was revelatory for me to hear my own child’s plea for permanence. In that moment, I wanted to provide him the option that had never been available to me – the option to plant his roots a little deeper. At the eleventh hour, we backed out and did not make an offer.
My lack of attachment to any one residential area equals a fuzzy memory. Anything prior to age ten is a blur. I can remember a few faces and names, but I can’t recall details. I love that my boys’ roots allow them to easily recount all of their grade school teachers. I love that the kids who were in their kindergarten class are now in their high school classes. I love that our daily drive past the little league field sparks my son’s homerun memory. And I love that my boys are, and always will be, the “cool big kids” to the three little cuties that live next door.
During my childhood moves, we never looked back. It was always about moving forward. The constant packing and resulting Goodwill giveaways didn’t allow for much reflection. My pack-rat husband and I, with my in-bred purge mentality, have managed to strike a balance. Through him, I’ve learned the value of one’s own history and that my boys just might be interested some day in holding their first and much-worn and loved teddy bears. The favored, and practically antique, children’s books which continue to fill the shelves of my in-law’s home, and which were a rich source of entertainment for my own boys, inspire me when the spring cleaning bug sets in. Through me, my husband has learned that less “stuff” means fewer headaches and that it is okay to part with the sentimental moth-eaten sweater that served no purpose but to gather dust.
So, here I am at dwelling number 23, and even though 23 is my son’s lucky number, it is still a bit early to say whether our grandchildren will come to this home to pull their parents’ favorite childhood books from the shelf. There might be one more move left in us, but for now I’m okay with having gathered a little moss. It feels right for now.
By Fran Miller – Fran is a freelance writer and regular contributor to Lafayette, Alamo and Danville Today newspapers. She lives in Lafayette with her husband, Dan and two teenaged boys, Aaron and Ben.
To Sign or Not To Sign
Ever think about how many contracts or agreements you enter into every year? Certainly, you take the time to read each one before you sign or “click” your assent, right? Be honest, do you have even a clue as to what’s in that 60-page software or user agreement that you just clicked “I Agree” to?
The truth is that most people sign contracts and click away with reckless abandon. And most of the time it doesn’t matter because everything goes as planned. The supplier provides the product or service as agreed, and the consumer pays or otherwise meets the terms that were agreed to. In fact, except for the few times when something goes wrong, or one or both of the parties don’t perform as agreed, the contract is meaningless and can gather dust. So in contract law, we say that it doesn’t matter until it matters – but then when it does matter, it can really matter.
The question arises as to how one can remain protected without having to hire an attorney every time he or she enters into a routine transaction. That answer includes several steps.
It’s first important to determine the significance of the contemplated transaction. For example, you can be justifiably less concerned when clicking your assent to the terms of your latest iPhone app than you should be when signing a loan agreement for the purchase of a car or a home. Loan agreements commit you to significant and often long-term obligations for which the ramifications for noncompliance can be substantial and costly. An iPhone app can usually be cancelled at will.
If you’ve determined that the contract/agreement is one that requires more thoughtful consideration, next identify if it is one that is subject to further negotiation, or is an “adhesion” contract. This is an important distinction for several reasons.
An adhesion contract is one that is presented in final form for acceptance and is not subject to further negotiation. It is offered by a party with superior bargaining power on a “take it or leave it” basis. Examples of adhesion contracts include cell phone agreements, insurance policies and the liability disclaimers that are always printed on the back of the claim tickets you receive in a parking garage.
If you determine that the contract you’re contemplating may be subject to further negotiation, then take advantage of the opportunity. Even some agreements that appear to be adhesion contracts, such as leases, may present opportunities for the negotiation of some material terms.
When negotiating, be aware that if a court is ever invoked to enforce your agreement, it will view its job as one of interpretation – to evaluate the legal enforceability of the terms – and rarely the “fairness” of what was agreed to. For example, in a contract for the purchase of a vehicle, it is no defense and, frankly, is a waste of time and good oxygen, to try to convince a court that you should be let off the hook from any further payments because the seller charged you too much for the car in the first place. If you knowingly agreed to the price, and you were of age to contract, sober at the time and there are no allegations of fraud or misrepresentation, you will not be protected from your own ignorance if you agreed to overpay for something.
Because adhesion contracts are not subject to negotiation, sometimes courts will refuse to uphold them if they determine that the unequal bargaining power of the parties resulted in a situation that is so unfair that enforcing the terms would be unconscionable due to the procedural circumstances surrounding the procurement of the agreement, or the substantive terms of the agreement itself.
Realize that it is an extreme case when a court will not enforce an adhesion contract. The mere fact that a contract is one of adhesion will not singularly provide the basis to relieve a party of its obligations under such an agreement.
It’s not possible to address all of the preferred contract terms for inclusion – and exclusion – in one article. However, when negotiating a contract, here are some noteworthy terms to consider:
Term – Every contract should include a defined term for the period during which it is operative and, specifically, when it terminates. Make sure the contract term is one you can live with based on your current and anticipated life circumstances and resources.
Subject Matter – Ensure the product, service or other subject matter of the contract is clearly defined and consistent with your understanding. For example, if you contract for a brand new refrigerator, verify there is no right of the seller to substitute a remanufactured or demonstrator model.
Responsibilities, Liability and Risks of Loss – At its core, the primary intent of a contract is to allocate the duties of the parties in the event that things do go wrong, there is an understanding as to which bears responsibility. Be clear about such things as:
Which party bears the risk of loss if the product is damaged in transit?
What happens if the product fails after a week? A month? A year?
Who is responsible if a third-party is injured by the product?
Who maintains “title” to the property? (Hint: Bet you didn’t know you probably don’t “own” the rights to your wedding photos.)
Are there use, resale or other restrictions on your ownership? (for example: A friend who purchased a rare breed of cat had to agree it would never be allowed to roam outdoors.)
Venue – Ensure that disputes arising under the contract are heard in your local jurisdiction. In our age of Internet commerce, many companies establish in the contract that disputes must be brought within their local jurisdiction. Do you really want a requirement to bring your small claims case for $400 in West Virginia?
Attorney Fees – In most cases, it makes sense to include a provision allowing for the prevailing party in a lawsuit to recover reasonable costs and attorney fees from the losing party. This type of provision may discourage frivolous lawsuits because there is a certain amount of risk involved when filing. However, with an attorney fee provision also be aware of the following:
You may not want to include an attorney fee provision if the other side does not have sufficient resources to pay your attorney fees. In such a case, if you’re the prevailing party, the provision could only work against you. And …
Be aware that some attorney fee provisions are written in such a manner as to only award attorney fees to one party if that party prevails in litigation. This goes in the “nice try” category. Under Civil Code §1717, a one-way attorney fee provision applies equally to both parties. Therefore, regardless of the contract language, the attorney fees will be granted to whichever party prevails.
Mediation – Mediation is a process whereby a neutral third-party assists disputants in resolving their issues by facilitating communication between the parties, rather than evaluating evidence or rendering a decision. The process is quite successful, and many contracts include a provision whereby the parties agree to attempt to resolve their disputes at mediation prior to the filing of any subsequent lawsuit.
Arbitration Clause – Beware the arbitration clause. Simply put, a binding arbitration clause in a contract allows the parties to bypass the judge, jury and courthouse and go directly to a private arbitrator. There they will receive a judgment (called an award) that, except under very rare circumstances, is final and binding (cannot be appealed), and which, according to the California Supreme Court[1], does not have to follow the law even if it causes a “substantial injustice to the parties[2].”
The frequent use of arbitration started innocently enough many decades ago as a voluntary process between contracting parties to solve the problem of lengthy court delays, logistics and rising costs of litigation. It has morphed over the years into a mandatory provision of most employment, banking, consumer, health organization and other agreements. It remains an opt-in provision for most real estate agreements. The simple click of assent, or the stroke of a pen invoking an arbitration provision makes a huge difference in the rights of the parties, and how subsequent disputes under that agreement will be handled.
This is not to say that arbitration is always a bad alternative. But it is important for contracting parties to be aware of the significant decision that is being made, and the rights that are being exchanged, when agreeing to such a provision. Also, on balance, most of us like some predictability. And knowing that an arbitrator is not required to follow the law in rendering a decision may be a bit more of a gamble that most of us are willing to take.
So the next time you decide to click that “I Agree”, or sign away like it doesn’t matter, be informed, because someday – it might matter.
Stephen Gizzi is the Managing Partner of Gizzi & Reep, LLP in Benicia. He is an attorney, mediator and serves on the faculty of the National Judicial College in Reno, NV. The information in this article is intended to be general in nature and does not constitute legal advice. Consult your own legal counsel for your particular circumstances.
[1] Moncharsh v. Heily & Blase (1992) 3 Cal. 4th 1
[2] Moncharsh v. Heily & Blase (1992) 3 Cal. 4th 1, 6
