A wealthy California real estate mogul passes away. Immediately, his wife starts fighting with the children regarding who will get the money. This wife, who was the mogul’s fourth, is not the mother of any of his children and was, in fact, 30 years his junior. With the amount of money at stake, both sides are willing to fight hard and make sure that the other side only gets the bare minimum under the law.
Several years before, the now-deceased father gave his two sons and one daughter $10 million each from his business funds. He wrote a one-line entry in his ledger that he is providing his children with this money so that they can purchase houses and send their children to private school. There is no suggestion in the ledger or any other business document that the amount was repaid.
Using the ledger, the wife heads to probate court where her attorney argues that the $30 million, plus applicable interest for the past 40 years since the father made that payout, should be part of the deceased’s estate because it is an unpaid loan that needs to be repaid. The children refute this notion, stating that it was a gift from their father and is therefore not applicable to his probate estate.
In commercial law, there is the term “alter ego” that is usually applied when a person becomes an alter ego of a business. That is to say, for example, suppose someone organizes a business as an LLC under California law. When this occurs, the LLC and the person, in a legal sense, are two distinct entities. Suppose, however, a person pays his personal cellphone and car insurance bill from the LLC’s funds. In that event, the LLC is at risk of losing its separate entity status because it is acting as the alter ego of the person. If the LLC is sued, the opposing party may be able to collect from the person’s individual assets despite forming an LLC.
The same may applicable in the above case. The wife can argue that the payment to the children was a loan that was the alter ego of the father and therefore not a present. Had the father provided the money from his personal funds then an alter ego argument would be hard because, despite the loan language, the father never intended that the children would have a repayment obligation. However, because the funds are from a business account, the wife would argue that the business acted like an alter ego with the intent of providing a loan.
The children would counter that it was a present and it came from business funds because that is where their father was most liquid. It was not the alter ego of the father; it was a practical way to transfer $30 million.
This would likely be a difficult course for a California Probate Court to determine.
Considering drafting a will? Is a trust the proper option for you? Speak with the firm of Melanie Tavare, a Bay-area trusts and estates attorney.