Is Your Estate Plan Unconstitutional?

By John O'Grady

Michael Bensal, through his investment LLC, obtained a bank loan guaranteed by the U.S. Small Business Administration to open a fast food business. Bensal personally guaranteed repayment. The business failed and Bensal’s LLC defaulted on the loan. The bank sued and won a summary judgment against Bensal individually, then assigned the judgment to the SBA for collections.

The SBA had been unsuccessful in recovering the judgment amount from Bensal when, several years later, Bensal’s father died and left him a significant inheritance through a trust. Bensal disclaimed his inheritance, and the money seemingly passed to his two daughters pursuant to the California Probate Code Section 283 which provides that such a disclaimer is “not a voidable transfer.” The SBA filed a fraudulent conveyance action seeking to void the transfer and reach the inheritance on the ground that the Supremacy Clause of the US Constitution means that federal law overrides state law where there is a conflict between federal and state statutes.

The SBA prevailed on appeal in the Ninth Circuit, so that Bensal’s inheritance went to the SBA and not to his daughters. Bensal’s father could have considered disinheriting his son in favor of his granddaughters. Your good intentions are not enough. Consult an experienced estate attorney with all the facts affecting you and your beneficiaries before resting in peace. Small Business Administration v. Bensal U.S.9th Cir. No. 14-17404 (2017).

Trust Beneficiaries Have a Duty to Pay Attention

A few years ago Beverly Morgan was the beneficiary of a $725,000 trust while she lost her home because she was unable to make the monthly payments.

Beverly failed to inquire about her pending inheritance and whether it could have helped her save her home. So she sued the trustees, claiming that they were responsible for the “lost opportunity” of saving her home.

The lower court and the appellate court found that the trustees had not damaged the trust or Beverly and that her loss was due to her passive approach to her rights as a beneficiary. The moral of the story is that trust beneficiaries are expected to take responsibility for themselves. Ask questions of the trustee if you have any doubts about your rights as a beneficiary Williamson v. Brooks,7 Cal. App. 5th 1294 (2017).

About the author:

John O’Grady leads a full service estate and trust law firm in San Francisco.