Bucquet v. Livingston

• Decision Date: 03 May 1976
• Parties: Barbara BUCQUET et al., Plaintiffs and Appellants, v. David LIVINGSTON, Defendant and Respondent. Civ. 36445.
• Court: California Court of Appeals Court of Appeals

Page 514

129 Cal.Rptr. 514

57 Cal.App.3d 914

Barbara BUCQUET et al., Plaintiffs and Appellants, v. David LIVINGSTON, Defendant and Respondent.

Civ. 36445.

Court of Appeal, First District, Division 2, California.

May 3, 1976.

Hearing Denied July 1, 1976.

Noland, Hamerly, Etienne & Hoss, Salinas, for plaintiffs-appellants.

John B. Marchant, Sedgwick, Detert, Moran & Arnold, San Francisco, for defendant-respondent.

TAYLOR, Presiding Justice.

Barbara Bucquet, her husband Howard, and their children, who are the beneficiaries of an inter vivos trust, brought this action for legal malpractice against David Livingston, ¹ an attorney who drafted the trust instrument for the settlors, Barbara's parents, for the purpose of minimizing all taxes payable on the death of both. This appeal is from a judgment on the pleadings in favor of the attorney as to the sixth, seventh and eighth causes of action ² of the amendment to the complaint, on the basis of our opinion in Ventura County Humane Society v. Holloway, 40 Cal.App.3d 897, 115 Cal.Rptr. 464, ³ as well as a stipulation between the parties in open court. ⁴ The precise question before us is whether the allegations of the complaint state a cause for malpractice insofar as the attorney should have known about the provisions of Internal Revenue Code section 2041, and advised the settlors of the potential tax consequences of the inclusion of a general power of appointment, and that this failure to advise the settlors of the adverse tax consequences of the retention of the power of appointment during George's life damaged the beneficiaries. As the amendment to the complaint alleged that on the death of George the full value of the trust, rather than merely a life estate, was taxed to Ruby, George's wife, for California inheritance tax purposes in the amount of $50,000, and Ruby also incurred additional federal and state gift taxes, as well as attorney's fees, we have concluded that the judgment must be reversed.

When a judgment has been rendered on the pleadings, the sole question on appeal is whether the complaint states a cause of action (Burnand v. Nowell, 84 Cal.App.2d 1, 2, 189 P.2d 796; Union F.M. v. Southern Cal. F.M., 10 Cal.2d 671, 673, 76 P.2d 503). Accordingly, all of the allegations of the complaint must be taken as true (Gill v. Curtis Publishing Co., 38 Cal.2d 273, 239 P.2d 630). The pertinent facts, as appear in the amendment to the complaint and the record ⁵ before us may be summarized as follows:

In July 1961, the settlor employed the attorney to perform the services necessary for the review and planning of his estate, and that of his wife, with the object of minimizing and avoiding federal estate taxes and California inheritance taxes otherwise payable at the death of each of them. Thereafter, the attorney prepared a revocable inter vivos trust specifically designating the beneficiaries, and George paid the attorney his fees. Both George and the attorney intended that the trust would accomplish the following: 1) on George's death, one-half of the principal would be available to Ruby, and would qualify the marital half for the marital deduction, pursuant to the federal estate tax (Int.Rev.Code, § 2056); 2) the other (or nonmarital) one-half would be available to Ruby during her lifetime but would not be subject to any federal estate tax or state inheritance tax at her death, and would pass ultimately to the beneficiaries.

George and Ruby executed the separate trust agreements prepared by the attorney in 1961. Only George's agreement is in issue here as it provided for the marital deduction as to one-half of the total assets. As to the nonmarital one-half, the trust agreement provided that the net income was to be paid to George during his lifetime and, if she survived him, to Ruby. Upon the death of the last survivor, the net income was to be paid to their only child, Barbara; on Barbara's death, the trust corpus, after payment of $175,000 to Barbara's husband Howard, was to be divided among their children.

The trust included the following language in Article IX: 'George, or after his death or adjudicated incompetency, Ruby, if she is living, shall have the power at any time, by an instrument in writing delivered to the Trustees, to modify, alter, revoke, or terminate this agreement in whole or in part. . . .' Thus, the entire trust was made revocable by George, or after his death, by Ruby.

George died on July 27, 1964. After George's death, Ruby as a coexecutrix of the estate employed the attorney to probate George's estate and to represent her in tax matters related to the probate of George's estate. The attorney was paid additional fees for these services. The attorney also failed to advise Ruby of the tax effect of the general power of appointment in her estate and of her ability to disclaim the power under the applicable federal and state laws. The attorney's professional relationship with Ruby continued until her death in September 1969.

After George's death, Ruby incurred California inheritance taxes on the nonmarital one-half as a consequence of her power of revocation. For tax purposes, she was treated as the owner of the nonmarital one-half of George's trust and not as a life tenant. The determination of the appropriate amount of California inheritance tax owed by Ruby also raised questions concerning the legal effect that the power of revocation would have upon Ruby's estate when she died. It became evident that the power of revocation in Ruby rendered the nonmarital one-half of the trust includable in her estate for both federal estate and California inheritance tax purposes. The record clearly indicates that George did not understand the tax consequences of the power of appointment and that the attorney corresponded with the state inheritance tax attorney as to the problems created by the power of appointment.

On March 21, 1969, Ruby executed a renunciation or disclaimer of the power of revocation in an attempt to prevent the nonmarital one-half from being included in her taxable estate. Ruby also assigned her life estate in the nonmarital one-half on the same date to make certain that none of the property in the nonmarital half of the trust would be included in her taxable estate for federal estate or California inheritance tax purposes. This assignment was executed because a substantial period of time had elapsed between the death of George on July 27, 1964, and Ruby's renunciation on March 21, 1969, and it was unclear whether the renunciation would be treated as effective or as a release.

Ruby died on September 18, 1969. The instant complaint was filed on August 10, 1970. As it was subsequently determined that Ruby's renunciation was effective and that the nonmarital one-half was not includable in her estate and passed to the beneficiaries free and clear, the parties to this action stipulated to the dismissal of the first five causes of action.

In addition to California inheritance taxes incurred by Ruby as the owner of the nonmarital one-half of the trust upon the death of George, Ruby incurred both federal and state gift taxes, allegedly a total sum of about $50,000, as a result of her renunciation of her power of revocation over the nonmarital one-half of the trust and the assignment of her life estate in the nonmarital one-half of the trust. Ruby also incurred attorney's fees in the alleged amount of $3,750 to effect the renunciation and the assignment. The gift taxes and attorney's fees were paid after Ruby's death.

On appeal, the attorney contends that: 1) George's intent was carried out since the record shows that the nonmarital one-half of the trust eventually passed free and clear of federal estate and California inheritance taxes to the beneficiaries; and 2) the gift and inheritance taxes and the attorney's fees paid were imposed on Ruby and were not chargeable to or paid out of the assets of the trust.

The attorney's first contention is based upon the stipulation in open court that the nonmarital one-half passed to the beneficiaries, free and clear, resulting in the dismissal of the five causes of action pertaining thereto. The attorney's contention, however, ignores the fact that the steps taken by Ruby that resulted in the gift tax liability were alleged to have reduced the corpus of the trust. In order to carry out George's intent, the instrument with Article IX, quoted above, could not stand. The attorney admitted that after George's death, the power of revocation resting in Ruby as a result of Article IX would have subjected the nonmarital one-half of the trust to both federal estate and state inheritance taxes, if Ruby had not taken remedial steps of renouncing her general power of appointment and assigning her life estate. The beneficiaries allege that as a result of these remedial actions forced upon Ruby by the negligent drafting of Article IX, the value of the trust and Ruby's estate were reduced so as to also reduce the share of the beneficiaries by the amounts of the additional state inheritance and federal gift tax payments, as well as the attorney's fees.

The attorney's second contention on appeal that the damage complained of was suffered by Ruby and not chargeable or paid out of the trust assets, ignores the posture of the instant matter. As indicated above, on our review of a judgment on the pleadings, all matters asserted in the complaint must be taken as true (Gill, supra at p. 275, 239 P.2d 630).

The attorney's third and major contention is that even assuming payment of the taxes and the attorney's fees from the trust assets, he had no duty to the beneficiaries sufficient to establish liability and that the judgment on the pleadings was properly granted on the basis of our opinion in Ventura v. Holloway, supra. As we said in Ventura, 40 Cal.App.3d at page 902, 115 Cal.Rptr. at page 467: 'The elements of a cause of action for professional negligence are, of course, well defined. These...