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Children have been earning large sums in
entertainment and sports for years and only a small fraction of those
children and their parents have handled their finances as required by
the laws which protect a child with money. This article deals only
with children who enter into contracts described in Family Code §6750.
Generally speaking, this includes children who are employed in any
aspect of film, theater, television, sports, radio, music or literary
industries. Interestingly, it does not include models.
Up until Jan. 1, 2000, the earnings of these
children belonged to their parents and were not the child's money.
Only the money set aside in Coogan accounts, if any, was the child's
money. However, in the case of many contracts which were
court-approved, the parents were required by the court to relinquish
their rights to the child's earnings, and under those contracts the
child's earnings did belong solely to the minor.
Production companies seek court approval of
minor's contracts so that the child cannot exercise his or her legal
right to disaffirm the contract before attaining the age of majority,
currently age 18. Prior to Jan. 2, 2000, the minor owned his or her
earnings under such contracts which included this clause. Under those
contracts and all minor's contracts after that date, whether or not
court approved, 100 percent of the minor's earnings now belong to
the minor.
Many people thought that the required set aside
for children whose contracts were approved by the courts better
protected those children than those whose contracts were not
court-approved; so the amendments to the Coogan law effective on Jan.
1, 2000, have been believed to better protect such children by
expanding the set aside to all such contracts. However, it only is a
small fraction of the child's money set aside. Prior to 2000, 25
percent of a minor's earnings from a court- approved contract were
generally set aside for the minor; in some cases 30 percent was set
aside. Today, only 15 percent is required to be set aside, without
regard to court approval (Family Code §6752).
Earnings belong to the minor
However, the real advantage in protecting
children and their earnings is that all of their earnings belong to
them and the laws which protect these minors and those third parties
that deal with these minors are the guardianship laws under the
California Probate Code.
Where a minor is to be paid money, it is
incumbent upon the minor's parents, who are entitled to receive the
money under Family Code §6750, to seek authority from the Probate
Court under the guardianship law to determine how the money is to be
held, managed, invested and spent (Probate Code §§3411 and 3413).
This article assumes that no guardianship exists. The minor's funds
include all monies belonging to the minor plus any amount to be paid
to him or her including monies which are to be set aside under the
Coogan law. It does not include funds held under a custodianship under
the California Uniform Transfers to a Minor Act (CUTMA) (Probate Code
§3400).
Payments to parents
Depending upon the amount of the minor's funds,
the court may authorize payments to the parents under the following
circumstances:
1. Appointment of a guardian of the minor's
estate to whom all monies are paid (Probate Code §3413).
2. Payment to a custodianship under CUTMA
(Probate Code §3413(b)).
3. Payment to the county treasurer (§3413(a)).
4. If the minor's funds do not exceed $20,000,
the court may authorize and determine an investment that is in the
best interest of the minor (Probate Code §3413(b)).
5. If the minor's funds do not exceed $5,000,
the payment may be made directly to the parents who must account to
the minor for the funds when he or she attains age 18 ((Probate Code
§3413(d)).
Where the minor has the prospect of earning large
sums, the court is most likely to require the creation of a
guardianship. In fact, with all of the various legal arrangements in
which the minor may become involved, the guardianship is the
recommended course of action because it protects both the minor and
all third parties with whom the child will be dealing.
Without a guardianship, all of the minor's
dealings with third parties may be disaffirmed by the minor ((Family
Code §6710). There is no authority for anyone to make agreements on
the minor's behalf, except for the guardian of the estate of the
minor or the minor himself or herself ((Family Code §6700). The
agreements and actions of the guardian of the estate may not be
disaffirmed. The minor's power to contract is limited by Family Code
§6701 and his or her right to disaffirm is limited by Family Code
§§6711-6713. A minor has no right or power to delegate his or her
authority to anyone (Family Code §6701(a)). Only the probate court
has that authority, which the court may delegate to a guardian of the
minor's estate by issuing letters of guardianship to the guardian.
What other financial dealings are we talking
about where all parties will want to be assured that the agreements
are legally binding and not voidable by anyone? At its simplest, this
includes the hiring and payment of attorneys, business managers,
talent agents, sports agents, literary agents, insurance agents, etc.
Many of these arrangements have been considered impractical or
impossible because these contracts cannot be approved by the court in
a minor's contract proceeding.
However, they may be entered into with the minor's guardian
of the estate.
Many minors are employed for long periods of time
at a location far from home. For example, a minor from Chicago may be
employed in Los Angeles on a weekly sitcom. The minor's parents may
need a home and car while residing here, but while the minor is
financially able, the parents' wealth and earnings are nowhere near
being able to manage these things. In Los Angeles County, the court
generally requires the purchase of real estate for cash. A guardian of
the minor's estate may, with court authority, purchase the
automobile and a home. A minor may not purchase real estate other than
through a guardianship.
Often for tax planning purposes a performer will
establish a personal service corporation to lend his or her services
to a production company. To the extent the minor can legally do the
transactions involved, he or she may still disaffirm. A guardian of
the estate, however, may form the corporation and enter into
agreements with attorneys, business managers, the minor and the
production company, appoint directors and officers, etc. There is no
issue of disaffirmance.
Binding contract
Music industry managers may enter into a binding
contract with the minor's guardian. The guardian can enter into a
binding contract with the music industry manager protecting both the
minor and the manager.
A guardianship of the estate of a minor is
commenced by filing a Petition or Appointment of Guardian of Minor
with the Probate Court (Probate Code §1500) in the county in which
the minor resides, or "such other county as may be in the best
interests of the proposed ward" (Probate Code §2201).
A guardianship of the estate may be commenced in
California for a nonresident minor in the county in which the minor is
temporarily living where he or she has property, or where the court
determines is in the minor's best interests (Probate Code §2202).
In Los Angeles County, if the natural parents of the minor seek
appointment as guardians, the matter may be heard ex parte, that is,
without a noticed hearing (Los Angeles Superior Court, Rules of Court,
Chapter 10, Probate Dept. Rule, §10.157(a)).
Otherwise, notice of the hearing on the
guardianship must be given to the minor, if over age 12, and to all
relatives within the second degree, that is grandparents, parents,
brothers, sisters, children and grandchildren; and to the persons
having custody of the minor, if not the parents. Notice to parents,
the minor and persons having custody of the minor must be given by
personal services and to all others by mailed notice of hearing, at
least 15 days before the hearing date (Probate Code §1511).
Generally, the guardian must be bonded to the extent of the value of
tangible and intangible personal property and one year's income from
all sources. If the minor's Coogan account is in a blocked account,
those funds and investments will not be bonded (Probate Code §2320
et. seq.).
The guardian must file an Inventory and Appraisal
of all of the minor's assets on the date letters of guardianship are
issued (Probate Code §2610(a)) and must file an accounting of the
minor's income and disbursements and report to the court all
material transactions during the first year of the guardianship and
biennially thereafter (Probate Code §2620(a)). This protects the
minor from misuse of funds by the guardian and protects the guardian
by getting court ratification of all disclosed activities.
Certain transactions of the guardian must receive
court approval prior to taking those actions. The most common of these
actions include the following:
1. The purchase of a residence (Probate Code §2571)
or any other property (Probate Code §2570).
2. The sale of real or personal property (Probate
Code §2540 et seq.)
3. Refinancing of real property, for example, to
reduce the interest rate and payments or to cash out some equity
(Probate Code §2550 et seq).
4. Payment of compensation to the guardian and
attorneys for the guardian (Probate Code §2640 et seq.)
In all matters of a guardianship of a minor's
estate, the probate courts' overriding point of view is that if the
minor's parents are living, it is their obligation to support,
maintain and educate their children and therefore the minor's estate
must be preserved for the minor until he or she attains majority.
Thus, the wisest path is to have the court
approve in advance all transactions which are unusual for the
"ordinary" family situation, particularly when they involve
substantial expenditures of the minor's estate. It would not be
prudent to take undue risks with the minor's estate given all the
fiduciary relationship among the minor, his or her parents and their
legal and financial counselors.
The most significant change in the law to protect
minors in the entertainment, literary and sports businesses was the
transfer of ownership of their earnings from their parents to
themselves. With that single change, the set aside provisions of
Family Code §6750 et seq. became insignificant in the overall
protection of the minor's earnings.
That change shifted the protection of 100 percent
of the minor's earnings to the guardianship provisions of the
Probate Code. These procedures provide mandatory protection not only
to the minor but to all those with whom the minor deals.
Bruce D. Sires is a partner with Valensi Rose & Magaram in Los
Angeles, where he specializes estate planning, tax planning, tax
litigation and probate, conservatorship and guardianship matters,
including related litigation. He is a certified specialist in estate
planning, trust and probate law.
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