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Estate of Macnee

California Court of Appeals, Fourth District, Second Division
Jan 27, 2012
No. E052996 (Cal. Ct. App. Jan. 27, 2012)

Opinion

NOT TO BE PUBLISHED

APPEAL from the Superior Court of Riverside County No. INP021332, James A. Cox, Judge.

Schlecht, Shevlin & Shoenberger and John C. Shevlin Objector and Appellant.

Nethery & Ofseyer and D. Martin Nethery for Petitioner and Respondent.


OPINION

CODRINGTON J.

I

INTRODUCTION

This probate appeal concerns a dispute about whether the probate court has the discretion to order a family allowance to be paid from the income or principal of the subject estate. Petitioner and appellant, Daniel Patrick Macnee (Macnee), decedent’s surviving spouse, appeals from a court order to pay a family allowance to Macnee from the estate’s income, rather than from the estate’s principal. (Prob. Code, §§ 1303, subd. (e), 6540.) Macnee argues that sections 16335 and 16340, part of the Uniform Principal and Income Act (§§ 16320-16375) (UPIA), require the probate court to order a family allowance to be paid from principal.

All statutory references are to the Probate Code unless stated otherwise.

Respondent Suzanna Szalai Gyorgy (Szalai), decedent’s niece, argues that the UPIA does not apply and that the probate court has the discretion under section 6540 to order the family allowance paid from either income or principal. Szalai protests that paying the family allowance from the estate’s principal would provide Macnee with a windfall and reduce the amount of the estate that eventually will be distributed to Szalai upon the death of Macnee.

We reject Szalai’s argument that her motion “correcting” the order is not appealable. An order granting, denying, modifying, or terminating a family allowance is appealable. (§ 1303, subd. (e).) We also reject Macnee’s assertion that Szalai’s motion had to be verified. (§ 1021.)

After reviewing the record, we conclude the probate court did not abuse its discretion by modifying how the family allowance is paid to Macnee. (Estate of Hafner (1986) 184 Cal.App.3d 1371, 1399, citing Estate of Secord (1948) 84 Cal.App.2d 783, 785-786.) We hold that sections 16335 and 16340 do not apply in this case. The governing statute is section 6540.

We affirm the probate court’s order ordering payment of the family allowance from income not principal.

II

FACTUAL AND PROCEDURAL BACKGROUND

Macnee married Klara S. “Baba” Macnee in 1988. Baba died on July 10, 2007.

Macnee and Baba had no children but Macnee had two children, Jennifer Macnee and Rupert Macnee from a previous marriage. Baba’s niece is Szalai, of Budapest, Hungary. Baba’s cousin, Hella Tarnawski, is the special administrator of the estate.

Baba executed two wills, one in December 2003 and one in June 2007. The 2007 will provided that the estate’s assets would be distributed to two trusts, with income to be paid to Macnee during his lifetime. Upon Macnee’s death, the estate’s assets would be distributed to Szalai. No provision was made for Rupert or Jennifer.

After this appeal was filed, a will contest between the Macnee children and Szalai was settled in February 2011, allowing the 2007 will to be admitted to probate. The special administrator filed a petition for settlement in July 2011, subject in part to the resolution of the appeal.

A. The March 2008 Petition

In March 2008, Macnee filed a petition to receive a family allowance under section 6540. Macnee alleged the value of decedent’s estate was more than $5 million, including cash on hand of about $724,000, a residence valued at $685,000, and securities valued at about $3.683 million. Petitioner alleged he had a monthly income of about $5,000 and monthly expenses of about $13,000, including $7,000 for home medical care. He requested a monthly family allowance of about $8,000, to be paid from the principal of the estate.

Szalai objected to the petition, including the amounts listed for Macnee’s monthly income and expenses and the reasonableness of the proposed family allowance.

At the hearing before Judge James A. Cox in April 2008, the court asked Macnee to supply further documentation.

B. The August 2008 Amended Petition

Macnee filed an amended petition supported by voluminous documentation. Macnee claimed he had a shortfall of about $29,000 between net income and household and personal expenses for the 11 months between July 2007 and May 2008. Because of Macnee’s debilitating arthritis, the home medical expenses were expected to increase from about $2,400 monthly to a net amount between $5,700 and $5,950, justifying a family allowance of $5,000 monthly paid from the assets of the estate.

Macnee further alleged that, under the 2007 will, he was entitled to receive all the net income from the estate, thus entitling him to distribution of the income earned during probate administration. Macnee estimated the estate’s income was approximately $88,000 annually. He proposed “the estate can distribute a substantial portion of this income on an on-going basis” without paying Macnee more than he would receive under the 2007 will. In the alternative, under the December 2003 will, Macnee was also “entitled to distribution of the net income of the decedent’s estate up to the sum of Five Thousand Dollars ($5,000.00) per month....”

Szalai filed an objection, challenging the amount of Macnee’s expenses, and proposing a family allowance of $3,000 monthly.

At a hearing before Judge Cox in September 2008, Macnee argued he was entitled to all the estate income, at least $88,000 annually, and more than the $60,000 annually he was requesting. The court executed an interim order for about $38,000, plus $3,000 monthly, to be paid from the estate’s principal.

At a hearing before Judge Harold Bradford in October 2008, Macnee argued the annual income of the estate was about $116,000, which Macnee was entitled to receive under either the 2003 or the 2007 will: “[A]ny net income earned by the estate during these pendency [sic] will accrue to the petitioner’s benefit.” The court increased the family allowance to $5,000 monthly, to be paid from principal.

C. Szalai’s Motion to Correct Clerical Error

Two years later, in October 2010, Szalai filed a motion to modify the October 2008 order, changing payment of the family allowance to be made from the estate’s income, not from its principal. Between July 2007 and August 2010, Macnee had been paid almost $160,000 as a family allowance. The motion argues the family allowance “payments should be deducted from [Macnee’s] income interest—and not deducted from the inheritance of the residuary beneficiaries.”

In opposition, Macnee’s lawyer, John C. Shevlin, filed a declaration explaining that the references to the estate’s income in the amended petition were intended to answer the court’s concern that Macnee was seeking to increase his standard of living and to explain to the court that the proposed family allowance was less than Macnee would receive from the 2007 will, under which Macnee was the life tenant and Szalai was the remainderman. Shevlin asserted that the amended petition did not ask for the family allowance to be paid from the estate income and the family allowance did not include an amount to cover the income tax obligation that Macnee might incur if the allowance was paid from the estate income rather than principal.

The court issued a tentative ruling granting Szalai’s motion. The court made the following written findings and order: “[Macnee’s petition] made numerous references to the Income being made in the estate, and correctly alleged the petitioner’s right to net income under the will’s testamentary trust provisions (which would accrue from the date of death). The petition all but stated and substantially inferred that the family allowance was to be paid from the estate’s net income.” The court found that the word “principal” was used inadvertently and that the court did not intend to order payment of the family allowance from the estate’s principal. The court acknowledged its discretion to make an allocation and further reasoned that “this estate earns substantial income, and also, that this surviving spouse is only entitled to an income interest from the estate. Under these circumstances, to allow the family allowance to be paid solely from principal would result in a windfall to the spouse at the expense of the residual beneficiaries of the testamentary trust.” The court ordered its previous 2008 order to be amended, “nunc pro tunc to date of entry, to provide that the family allowance shall be paid from net distributable income, and that if such income is insufficient to pay the ordered amount, the balance shall be paid from principal.”

Macnee promptly appealed.

III

DISCUSSION

A. General Principles

Sections 6540 and 6541 provide that the probate court may order a reasonable family allowance to be paid out of an estate as necessary for the maintenance of a surviving spouse during administration of the estate.

The right to receive a family allowance is independent of the right to inherit: “[B]y nature and definition the latter right is different from the former. (In re Noah (1887) 73 Cal. 583, 588; Estate of Brooks [1946] 28 Cal.2d 748, 752.)” (Estate of Wiedemann (1964) 228 Cal.App.2d 362, 369.) “The statutory right to a family allowance (§ 6540 et seq.) does not depend upon heirship or equate with the right of inheritance, but instead, rests upon the claimant’s right to support at the time of decedent’s death.” (Estate of Shellenbarger (2008) 169 Cal.App.4th 894, 899, citing Estate of Hafner, supra, 184 Cal.App.3d at p. 398.)

The Rutter Group practice guide comments as follows: “Decedent’s testamentary intentions are irrelevant in determining the surviving family members’ right to a family allowance. Rather, such payments are in addition to and not in lieu of a beneficiary’s interest in the estate income or corpus. Indeed, there may be cases where a family allowance will not necessarily harmonize with decedent’s estate plan and, in certain instances, may in fact frustrate it. [¶]... [¶]... it may be necessary to sell estate property in order to raise the cash necessary to satisfy a family allowance order. This step is generally not advisable if there is other nonprobate property available to discharge the family’s support needs... if there is income-producing property, the income from which will be distributed to the spouse in any event during administration. Or it may be necessary to use principal to satisfy the order, in effect amending decedent’s will if that principal had been left to a third party.” (Ross, Cal. Practice Guide: Probate (The Rutter Group 2010) ¶ 7.70, p.7-18, and ¶ 7:73, p. 7-19.)

The probate court exercises “broad discretion in determining the reasonableness and necessity for a family allowance.” (Estate of Hafner, supra, 184 Cal.App.3d at p. 1399, citing Estate of Secord, supra, 84 Cal.App.2d at pp. 785-786.) Courts have held that the family allowance may come from either the income or principal of the estate: “The money paid by the estate to the widow as a family allowance is quite distinct from her rights, if any, in and to the corpus or income of the estate. It is awarded to her by reason of her widowhood for her support during the administration of the estate and she is entitled to the same regardless of whether or not she has any right in and to the corpus of the estate or its income.... Under the law of California all the property of the decedent, whether income or corpus of the estate, is liable for the payment of family allowance.” (Buck v. McLaughlin (1931) 48 F.2d 135, overruled on other grounds in U.S. v. James (9th Cir. 1964) 333 F.2d 748.)

The practical effect of paying the family allowance from the principal means Szalai’s eventual inheritance would be reduced. It would also have the effect of reducing the income Macnee receives from the principal. If the family allowance is allocated to income, the principal will remain intact. In any event, there may be tax liabilities: “[Family allowance] payments also affect income tax liability: They are taxable income to the recipient to the extent of the estate’s ‘distributable net income’ for the estate’s tax year in which the payments are made... whether or not the payments were directed to be paid or were in fact paid from estate income or principal. [See Estate of McCoy v. Comm’r (1968) 50 TC 562, commr.acq. 1973–1 CB 2; Rev.Rul. 75–124, 1975–1 CB 183; Treas. Regs. §§ 1.662(a)-2(c), 1.662(a)-3(b)].” (Ross, Cal. Practice Guide: Probate, supra, ¶ 7:75, p. 7-20; Cameron v. Commissioner of Internal Revenue (Tax Court 1977) 68 T.C. 744, 748.)

B. Sections 16335 and 16340

Macnee’s primary assertion is that the sections 16335 and 16340 of the UPIA command the probate court to order the special administrator to pay the family allowance from the estate’s principal. Macnee particularly contends section 16340, subdivision (c), “require[s] that family allowances be paid first from principal and from income only if principal is inadequate to the purpose.”

The UPIA was enacted to give guidance to fiduciaries concerning their administration of estates and trusts. As explained in Witkin (13 Witkin, Summary of Cal. Law (10th ed. 2005) Trusts, § 167, pp.734-735, [emphasis added]), the Act deals with several questions affecting the rights of beneficiaries, including:

“(a) ‘How is income earned during the probate of an estate to be distributed to trusts and to persons who receive outright bequests of specific property, pecuniary gifts, and the residue?’

“(b) ‘When an income interest in a trust begins (i.e., when a person who creates the trust dies or when she transfers property to a trust during life), what property is principal that will eventually go to the remainder beneficiaries and what is income?’ [¶]... [¶]

“... The California Law Revision Commission recommended adoption of the new Uniform Act with substantive and technical revisions aimed at coordinating the Uniform Act with other California statutes, such as... the statutes governing interest and income during administration (Prob.C. 12000 et seq.; see 14 Summary (10th), Wills and Probate, §246), and ‘eliminating or restricting elements in the uniform act that could unfairly expose trustees to liability for breach of trust.’ (See 29 Cal. Law Rev. Com. Reports, pp. 245 et seq., 256.)

“(a) ‘The most controversial feature of the uniform act has been the power to adjust between principal and income accounts. Institutional trustees are concerned that the standards for exercise of the discretion are too complicated and vague, resulting in exposure to litigation over whether the discretion to adjust should or should not have been exercised....’ (29 Cal. Law Rev. Com. Reports, p. 257.)

“(b) ‘[T]he uniform act contains some statements of general fiduciary principles that would duplicate or overlap general provisions in the California Trust Law, or perhaps even result in substantive changes.’... ‘Having a convenient statement of the standard in the principal and income law is useful, particularly since it applies to both wills and trusts, but it needs to be consistent with the general Trust Law rule....’ (29 Cal. Law Rev. Com. Reports, p. 257.)

“... In 1999, California repealed the previous Principal and Income Act (former Prob.C. 16300 et seq.), adopted the new Uniform Act (Prob.C. 16320 et seq.), and made a number of conforming amendments. The Act may be cited as the Uniform Principal and Income Act. (Prob.C. 16320.) It ‘applies to every trust or decedent’s estate existing on or after January 1, 2000, except as otherwise expressly provided in the trust or will or in the Act.’ (Prob.C. 16339.) (See generally Cal Transactions Forms, 3 Estate Planning §§12:60 et seq., 12:208 et seq.; 31 McGeorge L. Rev. 463.) The Act applied only to trusts and decedent’s estates.

Macnee relies on sections 16335 and 16340. Section 16335 provides, in relevant part, when a disbursement should be allocated to principal:

“(a) In allocating receipts and disbursements to or between principal and income... a fiduciary:

“(1) Shall administer a... decedent’s estate in accordance with the... will, even if there is a different provision in this chapter.

“(2) May administer a... decedent’s estate by the exercise of a discretionary power of administration given to the fiduciary by... the will, even if the exercise of the power produces a result different from a result required or permitted by this chapter, and no inference that the fiduciary has improperly exercised the discretion arises from the fact that the fiduciary has made an allocation contrary to a provision of this chapter.

“(3) Shall administer a... decedent’s estate in accordance with this chapter if... the will does not contain a different provision or does not give the fiduciary a discretionary power of administration.

“(4) Shall add a receipt or charge a disbursement to principal to the extent that the... will and this chapter do not provide a rule for allocating the receipt or disbursement to or between principal and income. [Emphasis added.]”

Section 16340 further provides a family allowance should be paid from principal under some circumstances: “After the decedent’s death, in the case of a decedent’s estate... the following rules apply [¶]... [¶] (c) The fiduciary shall determine the remaining net income of the decedent’s estate... by doing the following: [¶]... [¶] (3) Paying from principal all other disbursements made or incurred in connection with the settlement of a decedent’s estate... including debts, funeral expenses, disposition of remains, family allowances, and death taxes and related penalties that are apportioned to the estate... by the will, ... [Emphasis added.]”

Macnee argues that, read together, sections 16335, subdivision (a)(3), and 16340, subdivision (c)(3), mandate that a special administrator, acting as a fiduciary, must pay a family allowance from an estate’s principal and that the same mandate applies when a court orders a family allowance. Sections 16335 and 16340 involve the exercise of discretion and the actions of a fiduciary of an estate. Neither statute addresses judicial authority or discretion to award a family allowance under sections 6540 and 6541. By their express terms, sections 16635 and 16340 do not apply to the probate court. No case law applies sections 16335 and 16340 in the context of a court-ordered family allowance.

Instead, the two statutes provide that, under the UPIA, a fiduciary is required to pay family allowances from principal only if a will does not contain different provisions or does not give a fiduciary discretionary authority. The language referring to “family allowances... that are apportioned to the estate... by the will” signifies that for section 16340, subdivision (c), to apply at all, the will must provide an apportionment for a family allowance. If the will includes a family allowance, then section 16340 directs the special administrator to allocate payment from principal unless the will provides otherwise. If the will does not include a family allowance, the UPIA does not apply. In other words, if there is no will or if the will does not address the matter of a family allowance, the fiduciary must proceed under sections 6540 and 6541 to obtain judicial authorization for a family allowance.

Therefore, we interpret sections 16335 and 16340 to mean that the special administrator of a will shall pay a family allowance from principal only if the will provides for payment of a family allowance without specifying how it should be allocated. Sections 16335 and 16340 do not apply when a will does not apportion a family allowance to the estate and the court exercises its discretion to order payment of a family allowance from income. In the present circumstances, neither a will nor another instrument provides for payment of a family allowance. Instead, Macnee had to petition the probate court under sections 6540 and 6541 to obtain a family allowance. The probate court had the discretion to make the order awarding a family allowance from income.

Macnee asserts that section 16340 limits the probate court’s broad equitable powers. It is well established, however, that: “The probate court may apply general equitable principles in fashioning remedies and granting relief.” (Estate of Kraus (2010) 184 Cal.App.4th 103, 114.) The UPIA does not supplant the general equitable powers of the court, including the inherent authority to allocate payments from income or principal as appropriate. (Rudnick v. Rudnick (2009) 179 Cal.App.4th 1328, 1334.) In spite of the provisions of section 16340, it was not an abuse of discretion for the probate court to exercise its discretion in awarding a family allowance from income under section 6540.

C. Other Arguments

We acknowledge that the parties engage in detailed and highly technical arguments about the tax consequences of a family allowance. Additionally, Szalai emphasizes that Macnee seemed to base his 2008 petitions for a family allowance on the income he expected to receive from the estate. Macnee vigorously disputes this point. Nevertheless, we do not need to resolve these arguments in view of our dispositive determination that the UPIA does not apply under these circumstances where the probate court properly exercised its discretion under sections 6540 and 6541 to order the family allowance allocated to income.

IV

DISPOSITION

Section 16340 of the UPIA does not apply and the probate court acted within its

discretion under section 6540. We affirm the order of the probate court. Costs shall be paid by the estate as an expense of administration. (§ 6544.)

We concur: McKinster Acting P.J., King J.


Summaries of

Estate of Macnee

California Court of Appeals, Fourth District, Second Division
Jan 27, 2012
No. E052996 (Cal. Ct. App. Jan. 27, 2012)
Case details for

Estate of Macnee

Case Details

Full title:Estate of KLARA S. MACNEE, Deceased. SUZANNA SZALAI, Petitioner and…

Court:California Court of Appeals, Fourth District, Second Division

Date published: Jan 27, 2012

Citations

No. E052996 (Cal. Ct. App. Jan. 27, 2012)