User:CheshireKatz/Trusts

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http://www.law.nyu.edu/studentorgs/sba/outlines/upperlevel/trustsestates/Outline%20-%20Fall%202006%20-%20T&E%20-%20Sitkoff.doc

http://www.law.nyu.edu/studentorgs/sba/outlines/upperlevel/trustsestates/Sitkoff.Trusts&Estates.Fall2006.doc

Contents

Crib Sheet[edit]

Standard Undue Influence Test & Alternative Undue Influence Test
Susceptibility Opportunity Motive Actual Influence Confidential Relationship Suspicious Factors
illness to participate in
will & impose
influence
usually money unnatural disposition,
change of will
attorney-client Susceptibility
Unnatural Disposition
Change in Will
Participation by CR in Will
Absence of Independent Advice


Fraud test
Will or part of will is void if testator was: Absent that Element, then...:
Willfully deceived (re: facts) No deceipt, pursue UI or Duress instead
Intended to induce change to will No Mens Rea
Caused (actual) change to disposition Coincidence
Different from otherwise intended. Preaching to choir


Principle A Will is interpreted as:
Wills Act Formalities (WAF) Validly Executed only if (1) Written, (2) Signed, (3) Attested to, & (4) Otherwise in Compliance with State Law*
Traditional Attestation Signed &
Attested to
if
(1) Two Disinterested
Witnesses Signed & ...
(2) Each Saw Testator & the Other Witness Sign
Substantial Compliance Attestation (2) Testator (A) Signed in their Conscious Presence or (B) Acknowledged Signature when they Signed
Holographic (HG) Attestation (1) Material Provisions written in Testator's handwriting & ... (2) State Law Permits
Material Portions HG Attestation (1) Bequests & Benefactors
HG Codicil Attestation (1) Clearly identified by a Holographic Codicil & ...
Dispensing Power Attestation (1) Clear & Convincing Evidence Testator Intended Document to be Will & ...
Lack of Testamentary Capacity Void to the Extent
that Testator. . .
Lacked the Ability to Know his (1) Property, (2) Next of Kin, (3) Plan of Disposition, & (4) How All Fit Together
Fraud or Misrepresentation Was (1) Willfully Deceived, (2) by one Intending to Induce Change in Will, (3) Causing a Disposition (4) Different from Otherwise Intended
Standard Undue Influence (1) while Susceptible, (2) made an Unnatural Disposition in the interest of one with (3) Motive & (4) Opportunity to influence
Alternative Undue Influence made changes (1) in the interest of one held in a Confidential Relationship & (2) characterized by Suspicious Elements of...
(A) his Susceptibility, (B) Unnatural Disposition, (C) Change in Will, (D) Participation by CR in Will, (E) Absence of Independent Advice
Revocation by Subsequent Will Presumed
Intentionally
Revoked
in its Entirety, where Implied by (A) Inconsistencies or (B) Expressions in a Subsequent Validly Executed Will
Revocation by Physical Act (A) Missing or (B) Found with Torn, Marked, or Defaced Text
Revocation by Operation of Law Inconsistent with subsequent (A) Marriage, (B) Divorce, (C) Children born, or (D) a Triggered Slayer Statute
Partial Revocation in Part, where (1) Clauses Altered after Execution, (2) Testator's Intent Best Served**, & ... (3) State Law Permits
Integration Including Any Document
(1) Intended to Be
Part of the Will & ...
(2) Present at the Will's Execution
Incorporation by Reference (2) Clearly Identified
in the Will & ...
(3) Completed prior to Will's Execution
Statutory Bricabrac Lists (3) Signed by the Testator, (4) Limited to Precise Tangible, Moveable Property Bequests***, & ... (5) State Law Permits
Interpolations Excluding any unattested additions, unless
(1) handwritten amendments to a holograph & ...
(2) State Law Permits
Republication by Codicil Executed as of the Date of the Last Codicil,
so long as doing so accords w/ Testator's Intent.
*Some States also require inclusion of Date or Publication ("This is my Will").
** Dependent Relative Revocation Doctrine: Compromise by states that permit partial revocations, but not holographic interpolations
*** Excludes money, securities, & real property

Other[edit]

Substantial compliance (Near Miss): Testator met the purpose of the wills act formalities → talk about how it meets the functions

  1. ritual function → went through the ceremony
  2. evidentiary function → there are signatures
  3. protective function → no undue influence

In a state that allows partial revocation, where a testator crossed out a part of a will in an attempt to change, a court will make the change or ignore the revocation entirely under the DRR doctrine.

Courts will ignore mistakes and disregard improper efforts to make changes, but it will NEVER read anything improperly attested into the will.

I leave all to my sibilings - T.T. prior to marriage, intestate share to spouse, to children born, will remainder to siblings, omitted spouse, pretermitted spouse
Will written prior to divorce, most states will exclude gifts to spouse.
UPC applies to all instruments

Contracts to make a will & not to revoke
compensation for services is negotiated to be a bequest
mutual life-estate rights of survivorship (better handled by trust)
A's Will → "So long as B wills the same to A, LE to B & remainder to C."
fall under contract law = fewer formalities
quantum meruit - not for close relatives

Will Substitutes[edit]

Life insurance - owner/beneficiary
owner can change beneficiaries
Advantages
  1. Instant estate for young
  2. Term life is cheap - preferred form for young people
  3. Average face value $193K
  4. Whole life face value $72K
Not part of augmented estate
Pension funds
employer pensions/social security
spouse has claim (ERISA, Soc. Sec)
defined contribution - cash element & required annuity
defined benefits - annuities
private pensions
IRAs
Joint-tenancy (implied Right of Survivorship)
Desirable for passing property through probate
inferior to will substitute
is captured for augmented estate at 1/2 value
exception - bank accounts
primitive trust (may not even be known to co-owner)
Revocation
Missing? Trust presumed to survive (Wills presumed revoked).
Trusts revoked by means specified in trust or failing specification, clear & convincing evidence.
Divorce? Partially revokes trusts & wills (but not pensions)
Not all states extend divorce revocation to trusts
Courts may extend revocation to trust on equitable basis
Employer Plans automatically revoked at divorce absent QDRO (Qualified Domestic Relations Order)
Social Security - Spouse of 10 yrs (not revocable by divorce)
Trustee refuses? Court appoints trustee
Elective Share
Some states apply elective share to probate only
Illusory transfer test - constructive fraud
Control - property in estate if decedent exercised control
Augmented estate - almost all transfers (check for exceptions)

Lapse[edit]

  1. General rule - If beneficiary predeceases, gift "returns" to estate, to residue or intestacy whether specific or general devise
  2. Residue of residue
    Residue of my estate to A, B, & C. C predeceases.
    Most states distribute a share of residuary devise to other residuary devises
    Minority rule - C's share passes by intestacy
  3. Anti-lapse statutes
    "Save gift to specific beneficiaries (blood relatives)"
Examples
T leaves estate to A & B. B predeceases. B has two sons, C & D. B takes residue of residue.
3B 3-44 - Specific Devise
b. any amount of a condemnation award for the taking of property unpaid at death
c. any proceeds unpaid at death on fire or casualty insurance on, or other recovery for injury to, the property
Class gift

Court looks for -

  1. all individuals stand in same relation to T
  2. size of group subject to fluctuation
  3. property is divided on fractional basis

Example

$1M to my children is a class gift
$100K to each of my children
group label creates presumption of a class
list of names (with or without group) does not create a class
Exceptions - R. Alan Smith
  1. personal usage
  2. "mere details" such as address
  3. testator misused legal language
  4. mistaken belief that child is dead
  5. CT statute minor scrivener's error
Elective share
  1. Option to take required minimum due to wife rather than what testator bequested in the will
  2. Community property states spouse automatically gets half
    Don't have a forced share (though do have intestate share)
  3. Some states like CT applied forced share to probate
  4. Estate inclusion tests
    Illusory transfer test → intent oriented
    Control test → can testator get it back
Omitted spouse
Marriage after will was executed, presumed omitted by mistake
2 approaches
Do nothing, offer elective share
Give her an intestate share (might only apply to probate property)
Augmented Estate
Includes amount of each gift over $3K
3B 8-3
CT - 1/3 of probate estate
Some courts (not in CT) have extended "probate estate" to include "illusory transfers" (transfers where decedent retained control
Ademption
If a specific devise is not in the T's estate at death, the gift adeemed fails
Exceptions:
Balance of purchase price
Unpaid condemnation award
Unpaid proceeds of casualty insurance
Property owned as result of foreclosure
Property sold by a guardian
Elements of a trust
  1. Intent
  2. Res-property
  3. Definite beneficiaries or a charitable beneficiary
Intent to create a trust
  1. Terms & tenor of the words
  2. Definiteness or distinctness of property involved
  3. Ease of determining trust purpose
  4. Interests & motives of the donor
  5. Financial dependence of recipients
Examples:
A devises Blackacre to B "hoping he will keep it in the family." No, mere wishes are insufficient
M's will leaves "$100,000 to my daughter, D, wishing her to use such amounts as she thinks appropriate for the care of my uncle, U." The residue of M's estate is left equally to her son, S, & to D. There is other evidence: In recent years, U has survived on a combination of social-security benefits and funds provided by M. Yes (2,4,5)
A bequeaths $50,000 to B to be used for the support of his wife and himself.
Property for purpose of trusts
  1. Trademark, patent, or copyright, even an unpatented invention or un-copyrighted literary production
  2. Interest of a beneficiary of a life-insurance policy
  3. Reversionary interests, or remainders (contingent, vested, or vested subject to being divested)

Class Notes to be sorted[edit]

Advantages of Contract for Beneficiaries[edit]

Standard Rules of Contracting Apply

  1. Evidence question (at least one)
    1. Provision in the will explaining contract
    2. Ret in will to contract
      Extrinsic evidence of contract
    3. a writing evidencing contract & signed.
  2. Creditor status

Quantum meruit: Payment due where other party has already performed

The butler paid a pittance, but promised a portion of the will.
The nurse who cares for elder for nominal pay, but promised bulk payment after passing.

Non-probate Transfers/Planning for Incapacity[edit]

Wills substitutes:

Revocable & ambulatory (don't take effect until death)
Can be changed at any time
Effectively, wills without probate

Trusts[edit]

Three parties in a trust:

Settlor - Donor of funds
Trustee - Holds legal title
Beneficiaries - Equitable title

Settlor can give gift with lots of terms & conditions

(Uh-oh!) Rule Against Perpetuities - permits Settlor to control property for at least 90 years

Kinds of trusts:

  1. Testamentary Trust: Constructed within the will, funded out of estate
  2. Irrevocable lifetime trust: Constructed, funded, & completed during lifetime, cannot be retaken.
    "Income to settlor for life, remainder to SHU." Right to devise sold to SHU.
  3. Revocable lifetime trust: Settlor gives property to trustees & avoids probate, but can revoke at anytime
    All the advantages of a trust, plus all the advantages of will.
    Post-Farkas all states have validated revocable trusts by statute

Farkas bought stock and set up trust

Farkas (settlor) → Farkas (trustee) → Farkas (beneficiary) (remainder to Williams)
Contestants in probate claim Farkas hasn't given anything, so this is a will non-compliant with Wills Act
Williams has no recourse against Farkas, because Farkas can just revoke. Farkas has only one fiduciary duty, which is to not give away the trust. Even then Williams can only go after the estate.

Functions of Wills Act met by Trusts:

Ritual Function (emphasize seriousness)
Evidenciary Function (evidence for probate court)
Protective Function (caution against signing under duress)

Uniform Trust Code (UTC) §603(a) - While a trust is revocable, the duties of the trustee are owed exclusively to the settlor.

(Beneficiary has no cause of action against trustee, if settlor incapacitated.)
Capacity
Testamentary trust: testamentary capacity
Irrevocable lifetime trust: capacity for gift
Revocable lifetime trust: testamentary capacity
Intent (to create a trust, enforceable obligation to use the property for another)
Usually intent is in document
Formalities (Minimal)
Some transfer of property
Declaration by the owner that he or she holds property as trustee
Exceptions: Land (without a writing - SoF) & six states require wills act type formalities.
Operation of law / Court in equity
Constructive trusts

Some probate doctrines now being applied to will substitutes

Pilfas - Writes trust and disinherits son. Post-death, son can't find trust instrument. Under probate, mild presumption of revocation by physical act. However, trust itself said it could only be revoked by writing a letter to himself.

In a case where a third party is the trustee, then a problem arises if trustee can't rely on trust not being revoked except as specified. The whole benefit of a trust is that it can be relied upon and enacted immediately at death.

Court resolves problem by saying if trust specifies a mode of revocation, that's it. If not, then any evidence is admissable

Restatement: Revocation can be carried out by any means that provides clear and convincing evidence.

Which doctrines will be attached to non-probate transfers?

No
Revocation by physical act - 3rd party trustee would've needed to be informed
Pilfas - If trust provides method of revocation, then that is exclusive.
UPC & Restatement - Provisions not exclusive, clear & convincing evidence suffices
Accessible to creditors?
Only revocable trusts (& joint-tenancies & Payable-On-Death) and only during lifetime
No access to life insurance policies
Yes
Presumption of irrevocability
Preserved from IRS (taxes), elective share, creditors, bankruptcy
Under UPC - revocable, unless explicity stated otherwise
1973 - will leaves estate, life insurance, & pension plan to trust
1978 - divorces & insurance → marianne
1981 - dies
Trust functioned as will, so revocation by operation of law still applied
Pour-over trust

Combines multiple Payable-On-Death & Life Insurance policies into a single trust divided among beneficiaries as specified.

PODs, Life Insurance go straight into trust
Other assets (house, stocks, cash) & will probated before entering pour-over trust
Only applies to standby trust, testamentary trust is entirely probated.


UTATA - Uniform testamentary additions to trusts

Will may devise property to a trust,
established or
to be established and either
funded or
in writing and identified in the will
The trust may be amended or revoked
The trust does not thereby become a testamentary trust

Life Insurance[edit]

Insurance policies are not insured, ins. company goes bankrupt you get nothing (except some states offer minimal funding for defaulting insurers)
Insurance contracts are much less susceptible to claims of undue influence

Passes free from
  1. income tax
  2. creditor claims
  3. state estate/inheritance/death tax
  4. elective share (disinherited spouse)

Cross-channel transfers → generally (90%) not permittted
In most states divorce revokes a will but not insurance, PODs, intervivos trusts, pension plans
A will can never transfer policy benefits, however, a will may be able to create a testamentary trust in which the policy beneficiary is deemed a trustee and the beneficiaries are subsequently named (not all states allow though)
Meretricious (str8 or gay) relationships → Insurance policies superior to wills, b/c family is likely to contest, insulated from undue influence claims.

Choosing a policy[edit]

Choosing company
Credit worthiness of company
Ranked by AM Best, Standard, & Poor's (Should have A or above from all firms)
Price comparison - Consumer Reports & Preferred Risk Pools
No cash value of insurance policies

Smokers suffer terribly in regard to insurance premiums

Choosing kind
Term life
Term life policies run out after 20 years (97% never pay out)
Right to renew at end of term is great benefit toward end of life when not otherwise able to access insurance.
Whole life
Combines savings with insurance
Premium is high but remains level

Creditors[edit]

Probate
  1. clear title ← joint-tenancy & trusts
  2. pay creditors
  3. distribute property
Revocable inter vivos trusts - IRS & Creditors
Life insurance
proceeds - Exempt except for cash value
retirement plans - Exempt by statutes
real property in JT - can't by either (a few allow creditors to attach)
POD & joint bank accounts - Yes (under UPC, creditors can reach)

End of Life[edit]

For fear of being kept on life support (pain, draining estate, dying with dignity)

  1. Health Care Directive
  2. Durable power of attorney ("not affected by subsequent incapacity, continuing until death")
    May create springing power of attorney at point of incapacity
    States require notary or two witnesses (none of which may be the attorney)
    Fiduciary relationship (duty entirely to principal, cannot be self-serving, except to extent explicitly contracted)
  3. Combination
Powers of attorney
  1. Right to determine which treatments are acceptable

Interpretation[edit]

Plain Meaning Rule[edit]

When the language of the will is not ambiguous, the courts will not admit extrinsic evidence of the testator's intent or meaning.

When does court admit extrinsic evidence of the testator's intent? Argue for patent or latent ambiguity.

Martin dies, survived by sister, Josephine. "Everything to Joseph." Martin knows no Joseph. Read to mean

Rule: If will makes sense, no corrections will be made.


Restatement/UTC - Langbein & Wagner (sp?)

§11.1 - An ambiguity in a donative document is an uncertainty in meaning that is revealed by the text or by extrinsic evidence other than direct evidence of intention contradicting the plain meaning of the text.

§12.1 - A donative document though unambiguous, may be reformed if it is established by clear & convincing evidence

(1) that a mistake of fact or law in expression or inducement affected specific terms of the document and
(2) what the donor's intention was.

[For this purpose], direct evidence of intention contradicting {the plain menaing of the will}

  1. Plain Meaning Rule
  2. Restatement - corrects for mistakes of fact or law
  3. Will controls except if this contrary to the probable intent of the testator

Examples

  1. Lawyer drafts will, Word perfect drop cl.12, "Clock to Sarah," under old rule, Sarah gets nothing
  2. Mahoney v. Grainger

Probable intent rule in NJ

Examples of traditional exceptions:

  • Mistakes in description of persons or property ("details of identification"_
  • A few cases of scrivenors error
  • Personal usage
  • The testator drafter the will himself and didn't know the meaning of legal terms.

Lapse[edit]

Lapse - Beneficiary dies before testator

General Rule - Gift goes to intestacy or residue
Exceptions
Anti-lapse statutes save the bequest for issue of blood relatives (not spouse)
(Some states) residue of a residue goes to other residuary beneficiaries
Class gifts (deceased's share goes to other class members). Anti-lapse applies to blood relative class members.

Anti-lapse - saves gift for descendants of relatives

NH - Direct descendants
NY - Siblings & their descendants
NJ (3b-3-35) - Grandparents & their descendants

Class Gifts[edit]

What is a class?
The testator was group-minded
  1. Members all stand in same relation to testator
  2. Membership can grow & shrink (exact payout)
  3. Share are undetermined until death
  4. Gifts phrased as fractional, not specific (1/4 rather than $1000 each)
  5. If the gift is to a group like "my RAs"
    To (list of names), presumption of no class
    To a group, 1, 2, 3..., no class.

What's the effect? Right of survivorship.

Ademption[edit]

What is ademption?
A doctrine that describes a gift in a will that is wiped out either because
  1. The gift is no longer in the estate or
  2. the person who was supposed to get the gift got it during the life of the testator (ie. like an "advancement" in intestacy)

The doctrine applies only to specific devises. Duh.

Special cases
Stocks
Acts of independent significance - if language is generic
Forced or incomplete conversions of the property
Replacement property (minority of states)

Order of receipt[edit]

  1. Family allowance & homestead are set aside
    Homestead may be fee simple or life estate
    Most states cap value at $15,000
    Family allowance - maintains fam in standard to which accustomed
    NY - Max. 1 yr
    NJ - While probate is open, in good faith
  2. IRS
  3. Creditors - lawyers
  4. Family - devisees

Social Security & Pensions[edit]

Social Security
Non-waivable
Absolute right of surviving spouse
Right of farmer spouses if married for more than 10yrs
Pensions
Defined benefit - paid in annuities
If you die young,
Defined contributions - can be taken in various forms
Relies on market strength, could fold & leave nothing
ERISA
For Employer provided pensions
Non-working spouse entitled to pension in form of annuity
Can't contract that right away until 90 days before realized
Qualified Domestic Relations Order (QDRO)

Elective Share[edit]

For the purposes of [the elective share], the state includes the assets held in an inter vivos trust

  1. Created by the decedent and
  2. Over which s/he alone retained a lifetime power to direct the use of trust assets for his or her benefit

(as, for example, by the exercise of a power of appointment or by revocation of the trust)

(Archaic) CT Stat. Share

The statutory share is a life estate of one-third in value of all the property passing under the will, real and personal, legally or equitably owned by the deceased spoused at death.

  1. "Life estate" → reflects patriarchal support policy, if left actual property s/he'd squander it away
  2. "passing under the will" → limited only to probate, there could be nothing left
Three approaches to application
  1. Only probate estate (CT)
  2. Plus Illusory transfers (applicable in most states) → attempts to defraud without loss of control/possession
  3. Augmented estate → Net probate estate plus transfers during marriage
    1. in which decedent retained life estate
    2. of revocable trusts
    3. of property held in JTROS (real estate - statute captures half; bank accounts - statute captures fractional interest)
    4. of the excess beyond $3K gifted to any individual within 2 years of death (death bed gifts)
      Only required to calculate estate and only seized if one-third of the estate can't be given to spouse otherwise.
Transfers excluded
Made with the written consent or joinder of surviving spouse
life insurance, accident insurance, joint annuity, or pension payable to a person other than surviving spouse or domestic partner
Augmented estate Satisfaction
Probate Estate
at Death
Decedents non-probate
transfers to surviving spouse
Survivor's own assets
Marriage-time
transfers
w/retained control
Survivor's
non-probate transfers

NJ3B:8-6: Augmented estate also includes property decedent gave survivor

  • Interest in a trust/life estate
  • Insurance proceeds
  • Annuity or pension plan
  • Survivor's share of community property
Example 1
  1. A leaves A Jr. 100K LI Policy
  2. A gave others 600K in Revocable Trusts
  3. A owned 200K Prop with wife B in JT
Elective Share of AE = 233K [RTs + his 1/2 of JT] (not LI)
Claim against rest of estate = 33K [233K - her 1/2 of JT (own assets) - his 1/2 of JT (decedants non-probate transfers to her)]
Example 2
  1. Cash 100K (100K all property)
  2. Blackacre (not in JT) 200K (200K all property)
  3. Debts -150K (-150K all debts)
  4. LI for daughters 500K (0K No LI Policies)
  5. Whiteacre JTROS w/daughter 1,000K (500K 1/2 JT)
  6. House given to other daughter retained life estate 1,000K (1,000K whole retained life-estate)
Augmented Estate = 1650K

Creditor's rights to trust property[edit]

Whose trust is it anyway?
Difference of opinion
England - The Beneficiaries
America - The Settlors
Mandatory vs. Discretionary
Mandatory trust - Beneficiaries, time, & amount of distributions are fixed
Trustee must pay out income - no more (can't breach in emergency), no less
eg. Income to Mary for life, remainder to children
Discretionary trust (2 kinds) - Distributions are at the trustee's discretion
Pure Discretionary Trust
Discretionary w/Standards - Instructions to trustee
Typical Mandatory Trust
Income interest annuity w/ remainder to A at age X
Pure Discretionary Trust
Read as "to be used for B, as A in his sole + absolute discretion may determine
Despite broad discretion, not free from liability
Fiduciary obligations:
  1. Good faith
  2. Willful neglect
Exculpatory clause cannot override these
Discretionary w/Standards - Instructions to trustee
Support Trust - To maintain standard of living
Flexibility to deal with Medical Emergencies, Children born, Inflation
Medical Trust - For medical expenses
Educational Trust - For school expenses
Spendthrift Provision
B cannot transfer his interest and it cannot be reached by creditors
So B can't use it to secure a loan, because creditors can't go after it.
Protective Trust
"to B unless creditors try to attach his interest, then to A"
Example
For the use of Cindy's education (degree program, accredited university), then for the use of Cindy's childrens' education (same), then to be distributed to Cindy's children when the youngest reaches age 21.
Doris w/4 children
Investments that return $0.5-1M
  1. Mary, a painter; does well some years, less well others, but generally responsible
    Discretionary Trust w/Standard - Support Trust (taking into account other resources) "for her comfortable support"
    Can still sue for abuse of discretion
  2. Ian, with MS; Entering assisted living,
    To Ian "support" until he needs full time care, pure disc/supplemental needs trust (so medicaid can't reach).
    Difference in price for better accommodations, therapy, television, periodic outings, hair & nail care, dental treatment, paid family visitations
    Medicaid can reach any benefit that beneficiary could reach except
    1. Trust created by spouse
    2. Trust created by spouse
  3. George, a gambler, squanders anything given to him
    Spendthrift provisions, pensions under Erisa
  4. Bob, hardworking lawyer, public interest work, salary is 30K/yr
    Mandatory trust w/ discretionary provision for emergencies
Creditors who can reach a support trust
Spouse and children
Possibly tort creditors (courts go either way)
People who supply necessities
IRS
Some statutes: Excess over the amount needed for support or fractional interest in support trust

Examples

Miss P. "To Kermit as Trustee, income to Moi for 20 years, distributed to moi."
Not allowed: Trustee is only beneficiary
Miss P. "To Kermit & Miss P. as trustees for Miss P".
Miss P. "To Kermit as trustee for Miss P. & her descendants"
Allowed, but creditors may access any trust you create to the extent that you benefit
Tom Cruise "assets in trust, life estate to self, remainder to Suri."
Creditors cannot attach life estates

Alaska & Delaware - allows self-settled, spendthrift trusts

Mandatory trust fixes distributions leaving Trustee little discretion re: distribution

SpendThrift Provision - restraint on alienation

Pure Discretionary trust → trustee pays out in his pure discretion
Discretionary w/Standards → Support Trust

Beneficiary can compel payout
Creditor cannot attach the interest

Duties by Trustee[edit]

Duty of Loyalty[edit]

Trustee is to administer the trust in the sole interest of the beneficiaries (may not consider his own interest or 3rd party)

(a) no self-dealing
(b) no conflict of interest
(c) duty of impartiality btwn beneficiaries

Self Dealing → Transactions with no other eyes on them

Conclusive presumption of fault (Trust Wins!)
Can set aside transaction
Recover the profit from the transaction
Affirm the transaction
Examples
buying from or selling to the trust
borrowing from (loaning to trust)
Exceptions
  1. Approval of Court (Presumption of Good Faith)
  2. Authorization of trust instrument
  3. Approval of all beneficiaries
  4. Trustee Compensation
  5. Some self-employment (ie. Attorneys) (Rebuttable presumption of bad faith)
  6. Advancing money for the trust
  7. Mutual funds
  8. Transactions with other funds
Hartman v. Hartle
A, B, & C are children of S. B's husband is executor. At auction, C buys house for B. B resells to D at profit.
Nothing done wrong, NO SELF DEALING!
Recision (where no innocent buyer), Recover profits from transactions
T sells $1M painting to Trust, buys $1M house from Trust
Court may order rescision

Conflict of Interest → Interests of trustee & beneficiary are in conflict

Rebuttable presumption of wrongdoing
Rebuttals
Independent Appraisals of Deal & Financial Planning
Court Approval (can't evaluate substance of deal)
Beneficiaries' consent helps considerably (but not sufficient)
Exculpatory clause
Liability remains for
Bad faith
Utter inaction

Duty of Prudence[edit]

Obligation to hand over some decisions to experts

Sub-duties to Prudence
Duty of reasonable care in selection of agents
Duty to monitor
Duty to outline objectives

Examples of trustee investor neglect

No credit check
Mortgages on property
Didn't do homework on valure
Didn't take possession of security
interest only payments on mortgage

Courts will not read exculp clauses to relieve trustees of duty of good faith or for willful neglect

Gift & Estate Tax[edit]

Lifetime Gifts
Not a gift where Settlor retains control/power to:
Modify or Revoke
Alter disposition (to such of my kids as I shall appoint by will)
Alter or revoke in conjunction with a non-adverse party
Govern use by external standard of discretion, which might use up the whole of the trust
Exclusions (Do Not Apply to Future Interests)
Annual Exclusion ($12K/person/recipient/year)
Gift must be given in good faith (not to subvert IRS)
eg. Each year, husband & wife each give each of five children $12K (2 x 5 x $12K = $120K all excluded)
Marital Exclusion - Transfers to spouses
Children's Tuition & Healthcare Exclusion
Charitable Donations Exclusions
Obvious disadvantages (loss of control, taxes, etc.)


Property is in decedent's estate for tax purposes if:

  1. Xfers at Death (retained life estates, joint tenancies, PoDs, etc.)
  2. Revocable Xfers (Powers of appointment, life insurance proceeds)


Gifts to Minors Examples
Ted transfers $12K to an irrevocable trust for his minor child, Alice. Trustee has discretion to use Income & Principal for Alice's benefit, until Alice is 21 & she receives entirety.
A. If Alice dies before 21, Principal to Br'er Brad. NO.
B. If Alice dies before 21, Principal to Alice's heirs at law. NO.
C. If Alice dies before 21, Principal to whomever Alice designates, or if none, Br'er Brad. YES, b/c adverse party.
Crummey Trusts
$12K payments to child's trust, each with 30-day right to withdraw, but if not withdrawn, future withdrawal subject to conditions.


Q. Mother xfers house worth $250K to kids on understanding that she be allowed to live in it until her death. Worth $550K at death.
Tax consequence? At xfer, completed gift of remainder, estate tax on whole $550K.
Q. What if no life estate term, but unspoken agreement? Collusion impermissible.
Qualified Terminable Interest Trusts (QTIP)
W & H are each entitled to $2M excluded from estate tax. How to maximize this $4M exclusion?
Presume W has $10M & H has $0. If W dies leaving $10M to H, then H dies, leaving $10M to kids, only $2M are excluded.
Solution: W leaves H $8M & QTIP Trust of $2M, a life estate for H, remainder to children (credit shelter trust).
Conditions:
  1. Spouse must be entitled to all income for life, paid at least annually. Interest not alienable.
  2. At death, trust may (but need not) give special power of appointment.
Benefit: This qualifies for the marital deduction. The settlor may elect to have the property taxed in his own estate or in the surviving spouse's estate.
Example: Bill has two children by an earlier marriage, Tanya & Chuck. He wants to provide for his second wife, Betsy, but wants his estate to go to T & C after his death.
  1. What arrangement? → Life Estate
  2. If Bill creates a QTIP and elects to have the property taxed to Betsy, who pays estate tax & when?
  3. If Bill creates a QTIP and elects to have the property taxed to himself, who pays estate tax & when?
  4. If Bill establishes two trusts, one under the terms of (2) above & the other under the terms of (3) above, what is the maximum Bill could leave Betsy as a life estate and pass to his children w/o any tax bing paid? → $4M.


Joint Tenancy taxes
When A creates JTw/RoS with B. A furnishes all consideration. Does A owe tax at that moment? Yes. Gift Tax.
If the tenancy isn't severed & A dies first. B now owns whole property tax consequences for A? A is taxed on the whole & is credited for gift tax.
If B dies first, property reverts to A At A's death she owes... A owes tax on whole, credit for gift tax.


Pensions & Annuities
If decedent can choose beneficiary of pension/death benefits, he is taxed.
IRA, personally purchased annuity, etc.
In what case can't he choose? Employee pensions → ERISA/Social Security
(What kind of benefits can't decedent enjoy in life, but there is a death benefit? Life insurance.)


Owner of life insurance vs. beneficiary of life insurance
Hillary can buy life insurance on her own life naming Bill as beneficiary.
Policy for $1M - when she dies it's taxed to her.
Is this fair, since she had no right to life insurance value? She can change beneficiary, even make designate it to her estate (huge tax consequence).
How to avoid? Xfer ownership of policy: Gift the yearly cost to him (marital deduction) & letting him buy the policy.
H creates a trust. Gives trust insurance policy or trust takes out a policy on her life.
Beware of estate tax consequences of taking out LI on own life, benefits to someone else.


Estate Tax Examples (presumed uses up $12K excl already used up)
A to B $1,250.0K → Gift Tax $448.3K - Lifetime Credit $345.8K = Total 102.5K
In '06, A to B $1,300.0K → Gift Tax $448.3K + (43% * $50K) | $448.3K + ($21.5K) | $469.8K - Lifetime Credit $345.8K = Total 124K
In '07, A to B 500K (Lifetime $1,800K) → Recalc Gift Tax $555.8K + (45% * $300K) | $555.8K + ($ . K) | $690.8K - Lifetime Credit $345.8K - Amt Paid $124K = Total $221K to IRS
In '07, A bequeaths to B $500K (Lifetime $1,800K) → Recalc Gift Tax $555.8K + (45% * $300K) | $555.8K + ($ . K) | $690.8K - Lifetime Credit $780.8K - Amt Paid $124K = Total -$214K to IRS (so nothing)
O creates trust, income to O for life, remainder to A. O dies in 2000.
In 1990, Gift tax on remainder due
No $12K exclusion for gift of future interest
In 2000, Estate tax on the whole trust → Receives credit for gift tax already paid
Retained life estates
Mom "sells" house to children in exchange for a $250K mortgage note. Each year, she pays them rent equal to their payments to her of interest (but not principal) on their mortgage. Each year she forgives $20K of the mortgage.
Permissible
Father sells his farm to his children and leased it back from them. Father paid market rent. Rent was not offset interest paid to father.
Father sold remainder interest in his ranch to his two sons for the value of the remainder interest. Reserved life estate. Code found transfer was full consideration.
Trust gave 80% of income to settlor's adult son during his life, balance to be added to principal. Subsequent beneficiaries were widow and issue. Father is the trustee until his death.
Art. 4: Trustees may increase payments to son if necessary for sickness or changed circumstances. Also, trustees may stop payments, if in son's best interest.
Art. 7: Trustees have broad administrative power regarding type of investment, allocation to income or principal, in good faith.


As of '07, we have a lifetime gift tax credit on $1M ($345.8K) and a credit at death of $2M ($780.8K). Effectively, if history of gifts under $1M

Gift tax stays at $1M, Estate tax increments.
Also exclude $12K/recipient in gifts
2036
If decedent transferred property (w/o full consideration) but retained
  1. a right to enjoy it or a right to the income
  2. a right to designate who shall enjoy the income or possession, the property is still in his estate for estate tax purposes


Tax Rates & Unified Credits for '04-11
For Decedents Dying During Top Estate Tax Rate Applicable Unified Credit Exemption Equivalent
2004 48% $555,800 $1,500,000
2005 47% $555,800 $1,500,000
2006 46% $780,800 $2,000,000
2007 45% $780,800 $2,000,000
2008 45% $780,800 $2,000,000
2009 45% $1,455,800 $3,500,000
2010 Repealed N/A N/A
2011 55% $345,800 $1,000,000


Gift & Estate Tax Schedule for '06
If taxable property is over: But not over: Then taxes are:
$0 $10,000 18%
$10,000 $20,000 $1,800 plus 20% of amount over $10,000
$20,000 $40,000 $1,800 plus 22% of amount over $20,000
$40,000 $60,000 $1,800 plus 24% of amount over $40,000
$60,000 $80,000 $1,800 plus 26% of amount over $60,000
$80,000 $100,000 $1,800 plus 28% of amount over $80,000
$100,000 $150,000 $1,800 plus 30% of amount over $100,000
$150,000 $250,000 $1,800 plus 32% of amount over $150,000
$250,000 $500,000 $1,800 plus 34% of amount over $250,000
$500,000 $750,000 $1,800 plus 37% of amount over $500,000
$750,000 $1,000,000 $1,800 plus 39% of amount over $750,000
$1,000,000 $1,250,000 $1,800 plus 41% of amount over $1,000,000
$1,250,000 $1,500,000 $1,800 plus 43% of amount over $1,250,000
$1,500,000 $2,000,000 $1,800 plus 45% of amount over $1,500,000
$2,000,000 $Infinity $780,800 plus 46% of amount over $2,000,000

OVERVIEW[edit]

  1. Traditional default rules
    1. Intestate Succession
      1. Default rules
      2. Succession problems of children
      3. Bars to succession (e.g., killing the testator)
    2. Testate Succession
      1. Opting out
      2. Interpretation
        1. Wait until the best witness is dead, then try to figure out what it means
        2. Extrinsic evidence
      3. Will Contests (is this really the will?)
      4. Limitations
        1. Traditional family → Should working partner with most of property in his name be able to cut the non-working partner out of the will?
        2. Children and behavior → marrying within the faith
    3. Trusts → settelor transfers property to third party (trustee). Trustee manages property for benefit of one or more beneficiaries.
      1. Asset protection → Spend-thrift trust
      2. Legacy Trusts → putting your own money in a trust
      3. Charitable trusts
      4. Dead Hand Control → Rule Against Perpetuities
  2. Probate transfers vs. Non-probate transfers
    1. most property transfers nonprobate
    2. free market competitor to court supervised probate system
    3. tremendous success a “stinging indictment” to the probate system
  3. Policy reform movements
  4. Incapacity planning
  5. Malpractice → “a mine field of ethical problems”

Examples[edit]

Questions[edit]

Hey, is that a will?

Section 1

Is it in writing?

  1. If so, is signature attested to?
    1. If so, is it otherwise in compliance with state will requirements (publication, date, etc.)?
      1. If so, then the will succeeds.
      2. If not, move on to Section 2.
    2. If not, move on to Section 2.
  2. If not, move on to Section 3.
Section 2

Does this state accept holographs?

  1. If so, are all the material provisions printed?
    1. If so, is this a material portions state?
      1. If so, are the bequests & benefactors handwritten?
        1. If so, then the will succeeds.
        2. If not, move on to Section 3.
      2. If not, move on to Section 3.
    2. If not, then the will succeeds.
  2. If not, move on to Section 3.
Section 3

Is this a dispensing power state?

  1. If so, then is there clear & convincing evidence to know decedent intended this document to be his will?
    1. If so, then the will succeeds.
    2. If not, then the will fails.
  2. If not, is this a substantial compliance state?
    1. If so, was the purpose of the wills act formalities met?
      1. If so, then the will succeeds.
      2. If not, then the will fails.
    2. If not, then the will fails.

Flowchart[edit]

 
 
Formalities:
Is the will
in writing?
 
 
 
 
 
 
 
Holographs: Does state
accept HGs?
 
 
 
 
 
 
 
 
Curative: Is this
a dispensing power state?
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Move on to
Curative
 
Attested by
witnesses?
 
 
 
Move on to
Curative
 
Attested by
HG codicil?
 
 
 
{{{ PC }}}
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Move on to
Holographs
 
Otherwise complies
(date or publication)
 
 
 
Will
Succeeds
 
Is this a material
portions state?
 
{{{ SC }}}
 
{{{ JC }}}
 
{{{ SC }}}
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Move on to
Holographs
 
Will
Succeeds
 
 
 
Move on to
Curative
 
Handwritten bequests* succeed.
For rest, move on to
Curative.
 
 
{{{ SC }}}
 

* The benefactor of each request must also be handwritten.


INTESTATE SUCCESSION[edit]

STATUTORY FRAMEWORK[edit]

Traditional Intestacy[edit]

  1. Dying w/o a will → Default rules apply to probate property
    1. Personal property governed by law of domicile state
    2. Real property governed by law of state
  2. Partially intestacy – will only covers part of the property; Usually covered by a residuary clause
  3. Policy Considerations
    1. Where would most people want their property to go? How do we figure out what most people want?
    2. Simplicity and administrative expediency
    3. Protecting the family
    4. Expressive function of the law (domestic partnership and intestacy)
  4. Importance of intestacy
    1. Standing – who can sue to challenge a will
    2. Determines undefined terms in wills (Who is a “child”?)
    3. Rules that help us address situational problems: Simultaneous death, “slayer rules”
    4. Forced Share for spouses and descendants.
  5. Heir → person who takes under intestacy statute; before death they are heirs apparent
  6. Spouse → Traditional law gives most/all of property to spouse; Splitting property between kids and parents requires appointment of guardians

Intestacy under UPC → Spouse (parents, descendants)[edit]

  1. Spousal share: §2-102
    1. 2-102(1)(i): No Descendants, No Parents → all to spouse
    2. 2-102(1)(ii): All to spouse if Descendants are also spouse’s kids, and spouse has not other kdis
    3. 2-102(3): $150k plus ½ to spouse if spouse has other kids who are not decedent’s kids
    4. 2-102(4): $100k plus ½ to spouse if spouse has if one or more of descedent’s kids are NOT spouses kids
    5. 102(2) $200K + ¾ to spouse if no kids, but parent of decedent survives
  2. Order of succession if no spouse:
    1. 2-103(1) → Descendants take first
    2. 2-103(2) → parents take (equally if both survive) if there are no descendants
    3. 2-103(3) → brothers and sisters (“descendants of decedent’s parents) by representation (per capita at each generation)
    4. 2-103(4) → ½ to each of maternal grandparents and paternal grandparents (or all to one side if no survivors on other sice) – per capita at each generation
    5. 2-105 → no laughing heirs: escheats to state of no spouse, descendents, parents, siblings or grandparents/GD
  3. Underlying issue → balancing administrative costs and the need to fit every pattern

Other spousal issues[edit]

  1. Duration of marriage
    1. UPC doesn’t take into account duration of marriage, except in terms of forced shares
    2. NOTE: Default is what you would want if you didn’t say otherwise, but forced share is an area you can’t contract out of.
  2. Partnership Theory of Marriage: The longer you’ve been married, the more you’ve contributed to the partnership
  3. Domestic Partnership → Unmarried cohabitating people, regardless of gender. odds are people want domestic partners to inherit their wealth
    1. Uncertainty is the best argument against succession rights for unmarried partners
    2. UPC standard → two people living in the same household in a marriage like relationship
  4. Spousal Estrangement → relevant for elective shares

Simultaneous death[edit]

  1. Default rule → must survive decedent in order to inherit (unless will specifies otherwise); much more important in 20th century with proliferation of automobiles and air travel
  2. Uniform Simultaneous Death Act (1940, rev. 1953): If there is no “sufficient evidence” of survivorship, the beneficiary is deemed to have predeceased the donor.
    Problem: What does “sufficient evidence” mean??
  3. UPC 2-702 → must establish survivorship by 120 hours, or will be deemed predeceased. Issues:
    1. What is the role of the common disaster? Should statute worry about common incident? Should it just worry about time?
    2. What is life and death?
    3. 100 vs. 120 hours?
  4. Janus → Stanley and Teresa both take Tylenol (later found to be laced with arsenic). S pronounced dead that evening; T pronounced dead 3 days later. Stanley’s insurance policy names Teresa as beneficiary, with mother as alternate beneficiary. Stanley’s mother sues Teresa’s father for life insurance policy. IL app court upholds trial court. Under IL version Uniform Simultaneous Death Act, T survived S; money goes to her Dad.

Shares of Descendants[edit]

  1. In all states, after spouse, descendants get the rest
  2. Issue: what do you do when some descendants are dead, and they leave descendants of their own?
  3. Representation → people represent their predeceasing ancestor (F and G [grandchildren] represent their dead father C [child of A].
  4. Per Stirpes Rules: A has 2 kids (B and C), both of who predecease him. B’s child is D, and C’schildren are E and F
    1. English per stirpes (“by the blocks”)system – divided at first generation after decedent ; D gets half, E and F each get ¼
    2. Modern per stirpes (per capita w/ representation) – divide at first generation at which someone is living. D, E and F each get 1/3
    3. Both systems generally lead to same result – only differs when decedent has grandchildren but no child
    4. Ambiguity → look to local intestacy law to define per stirpes
  5. UPC 2-106: Waggoner’s per capita at each generation; pooling at each generation; “equally near, equally dear,” horizontal equity
    1. A has one living child (D). three living grandchildren; E (from B), F and G (from C).
    2. D gets 1/3, 2/3 drop down
    3. E, F and G each get 2/9 (1/3 of 2/3 )

Ancestors and Collaterals[edit]

  1. Parentillic system
    1. Parents and their descendants
    2. Grandparents and their descendants
    3. Great grandparents and their descendants
    4. Great great grandparents and their descendants
  2. Balancing concerns:
    1. Problem of the laughing heir → people find out they get the money
    2. Problem of not having family → don’t want property to go to state
  3. Degrees-of-relationship system: See Table of Consanguinity (page 79)
    1. Everybody gets a number
    2. Great grandparents, uncles and aunts, nephews and nieces are all the same (#3)
    3. Split intestate property between people of nearest degree
  4. Massachusetts compromise --> Degree of relationship with parentilic system
  5. Step family → don’t count in most states
  6. Half Bloods →
    1. American rule – they count (UPC §2-107
    2. English rule – they’re out
    3. Scottish rule – get half

Opting Out - Negative Disinheritance[edit]

  1. Traditional law – can only disinherit if you dispose of property otherwise
  2. UPC 2-101(b) → Right to exclude; shares of expressly excluded parties pass as if disclaimed by those parties

PROBLEMS REGARDING CHILDREN[edit]

Adopted children[edit]

  1. Adoptive children take from adoptive family for intestacy purposes; no “double dipping”
  2. UPC 2-113 → individual related through 2 lines is entitled to only one share (the larger share): prevents double inheritance
  3. Problem: children adopted by step-parents
  4. Hall → Earl’s four minor children later adopted by widow’s husband. Earl’s brother dies intestate, unmarried and childless. Court holds that new adoption cuts off rights of intestacy from biological father’s family. This result must be right, because then an adopted child would have superior rights to natural children.
  5. 2 competing theories of adoption, which may lead to different results:
    1. Transplantation → stick child into a completely new family. People would probably want to cut the child off from intestate succession
    2. Step-Parent adoption → spouse of minor adopts. People might want to keep the kids
  6. Differs by state: MD holds transplantation, TX allows inheritance from both
  7. UPC 2-114(b) → a custodial natural parent spouse adoption does not cut you off from the other side of your family

Adult and spousal adoption[edit]

  1. Adult Adoption → wipes off other collaterals and descendants, common scenario in same sex partnerships. Family of wealthier partner often challenges adoption
  2. Spousal adoption → if parent’s will says to my sons and their descendants. Adopt a spouse if there is no descendant
  3. Minary v. Citizens Fidelity Bank & Trust Co. (KY 1967) → Amelia M dies and creates trust for benefit of James, Thomas and Alfred. Remainder to pass “to my then surviving heirs.” Alfred adopts his wife, which in order to amker her grandchild of Amelia
    1. Court rejects Stranger to the adoption rule: that adoption of adult for purpose of making an heir, works for purposes of adoptive parent only and doesn’t affect other family members
    2. Adoption is of wife legally binding and not against public policy per se
    3. Court looks to primacy of the donor’s intent and overturns lower court ruling that wife is an heir: practice of adopting for inheritance as “an act of subterfuge” that “thwarts the intent” of the donor.
    4. NY law → sexual relationship is incompatible with parental relationship
    5. UPC 2-705(c) → we interpret the class in accord with the local intestate rules, EXCEPT children can only be added on to estate if they are adopted as minor
    6. NOTE: UPC 2-705(b) → X (biological child) is not considered “A’s Descendant” for purposes of construing a dispositive provision of transferor other than A (e.g, A’s father’s will) if X’s Mom and A were never married, and X never lived with A or any of his family as a minor.

Posthumous child[edit]

  1. Child born after you die but conceived while you were alive; typically father killed in war while wife is pregnant
  2. General Rule → child must be born w/in 280 days of father’s death
  3. Policy: if it’s in child’s advantage to be deemed in being en utero, we consider it so, if the child it in fact born alive
  4. UPC 2-108 → individual in gestation at a particular time is treated as living at that time if individual lives 120 hour or more after birth.

Non-marital children[edit]

  1. Traditionally cut off
  2. General Rule → deemed to be child of mother; and child of father if paternity is proved
  3. Uniform Parentage Act if father acknowledges paternity or if child is less than 2 and father lives in same home and acts like father, paternity is established.
  4. Policy: proof of mother exists, but father is harder to prove
  5. UPC 2-114(c) → natural parent cannot inherit from or through child unless natural parent has openly treated child as his and has not refused to support

Posthumously Conceived Child[edit]

  1. Posthumously conceived child as non-marital child. One of the parents was already dead at conception, and dead people cannot be married.
  2. Hecht → Hecht banks some sperm then dies. Will leaves property to his kids, leaves some (including banked sperm) to girlfriend. Court holds that genetic reproductive material is property that you can bequeathed; ordered sperm to girlfriend. Girlfriend never conceived, but court never dealt with question of whether or not such a child would be a child of Hecht.
  3. Woodward → Warren has leukemia, banks samples of sperm in case procedure makes him sterile. 2 years after death, wife gives birth to girls and applies for social security benefits, appeals government denial.
    1. Law: child entitled to SS benefits if child would inherit under state intestacy laws.
    2. Government → non-marital children or posthumous children born after 280 days, so they don’t take.
    3. Court → descendants are persons who trace lineage to deceased ancestors. Balancing test:
      1. Best interests of kids → more money is definitely best interests
        1. could be a case in which there could be trouble for children under foreign law
        2. What about best interests of older sibling born during father’s lifetime?
      2. Administrative simplicity: filation is easy and parites waived issue of time limits
      3. Reproductive rights and consent of the parent → In this case, consent was given in the case of sterility.
    4. Restatement → child must be born w/in a reasonable time and under circumstances indicating that decedent would have consented
    5. Uniform Parentage Act → need written consent to posthumous conception
      See §§ 201-204 for general parentage rules
    6. CA → deemed to be born w/in life of decedent if
      1. clear and convincing evidence of child
      2. w/in 4 months notice was served upon administrator of estate that there is genetic material and possibility of posthumous consent
      3. child in eutero w/in 2 years of the
    7. Policy concerns: Protect creditors, Clear title

Advancement → money distributed during the decedent’s life?[edit]

  1. Traditional rule → life time gifts are set off against your inheritance. Child who received $100,000 has share offset by that amount
  2. Policy: Keeping the playing field equal → want to give everyone equal money
    1. Problem: isn’t a gift during life indication that parents wanted child to have more?
    2. Problem: valuation. How do you value a pony as a birthday gift?
    3. Problem: What counts? Direct gifts? College tuition?
  3. UPC §2-109: Need writing. If there is no writing specifying this is an advancement, then we don’t consider it as such (writing must also must say that property is advancement if recipient predeceases decedent)
    1. One who did a writing would probably also have a will
    2. Evidentiary standard effectively killed the doctrine
  4. Hotchpot Example → Mike Brady dies with $50,000
    1. Gave $10,000 to Bobby
    2. Add 10 and 50 → $60,000
    3. Greg gets $20,000
    4. Peter gets $20,000
    5. Bobby gets $10,000
    6. If advancement is larger than share of hotchpot, then share is 0. Gift during life is evidence that parents want you to have the money

Management of children’s property (116-120)[edit]

  1. Guardians of the property are a bad idea – limited powers, court reports all the time
  2. Custodianship → better
  3. Want: Will that names a guardian for children with a trust.
  4. Facility of payment clause → fiduciary may disperse payments to child’s guardian

BARS TO SUCCESSION[edit]

Involuntary Bars to succession - slayer statutes[edit]

  1. Policy: slayers shouldn’t be able to inherit because of deterrence (less likely to kill if you won’t get) and Probable intent of testator
  2. Three options for states w/o slayer statute
    1. Legal title of property passes to slayer who keeps it. Easterbrook would say let legislature hande the problem
    2. Legal title will not pass to slayer b/c of equity principle that no one should profit form their own fraud/crime (Riggs v. Palmer → 16 year old Elmer poisons grandpa and Cardozo says no).
    3. Constructive trust → Slayer is constructive trustee for rightful taker. Equitable remedy: person who owns legal title to property holds it for the benefit of person who should have property. If you get property in a manner that would result in unjust enrichment, you have a duty to give property back to rightful owner.
  3. Mahoney - M dies intestate of gunshot wounds from spouse. Probate courts give inheritance to parents, NOT to murderous spouse. VT has no slayer statute, and intestate statute gives spouse first $8,000 (which is larger than estate in this case). Court imposes constructive trust
  4. Determining who takes: Treat Killer as if he had pre-deceased the decedent and distribute accordingly; if intestate – go to next interstate taker
    NOTE: killer’s child may take: it’s good enough that killer doesn’t get money. Lots of other incentives not to kill Dad
  5. UPC 2-803 → disinherits for “felonious and intentional” killing; as if killer had disclaimed share
    1. Criminal conviction is dispositive
    2. acquittal is not dispositive (preponderance of evidence standard)
  6. Mercy Killings → slayer statute doesn’t override will, but still prevents intestate succession

Voluntary Bars to Succession - Disclaimers[edit]

  1. Money skips recipient as if she pre-deceased decedent
  2. Reasons: Insolvency (avoid creditors) and taxes (only one taxable event instead of two)
  3. Provided you make disclaimer within NINE MONTHS transfer to next taker is regarded as transfer from decedent!
    1. Relation back → your predeceased status relates back to date of decedent’s death
  4. NOTE: In Disclaimer and per capita at each generation, disclaiming interest ONLY passes to next generation beyond disclaimant (doesn’t got back into pool for “equally near, equally dear) See UPC 2-1106(b)(3)(A) [CHECK THIS OUT].
  5. Avoiding creditors: minority of states do not allow insolvent beneficiary to disclaim to avoid creditors; Federal government does not allow disclaiming
  6. Drye v. US: Drye has $325,000 in tax liens and is set to inherit $233,000 from Mom. Drye’s daughter gives money to lawyer in trust for benefit of Drye in spendthrift trusts that creditors cannot reach
    1. GINSBURG → tax lien speaks to property or rights to property. Operative definition is property under federal law. Since disclaimant exercises control of property by making decision to send it to next person, IRS can attach
    2. NOTE: sophisticated decedents will just write a will and skip the Drye’s of the world
    3. Is this a “screw the poor” rule? Have decedent write a will while living in order to skip the insolvent party, but the poor won’t do this.
  7. See UPC §§ 2-1105, 2-1106

WILLS[edit]

WILL CONSTRUCTION[edit]

Wills Act Formalities[edit]

  1. Problem: best source of information to interpret a will is dead
  2. Formalities used to overcome difficulties
  3. Challenge → design system of formalities that give us comfort and confidence at a reasonable costs (least false negatives)
  4. Gulliver & Tilsen’s 3 purposes
    1. Ritual/cautionary function → impress upon decedent the seriousness of the event:
      1. make sure person is in state of mind to understand seriousness of event
      2. testator will have intent of finality of transfer
    2. Evidentiary function → witnesses saw testator sign
    3. Protective function → protect testator
  5. Langbein’s channeling function: if wills all look the same, it’s easier to interpret them. If you comply, you know your will be followed.
  6. Formalities
    1. Writing
    2. Signature (some states require signature at the foot)
    3. Attestation (signature by witnesses)
    4. Some state require publication (“This is my will”)
  7. In re Groffman (British case) → Court invalidates a will signed by two witnesses, but each signed while other was out of the room. British wills act requires signature to be made or acknowledged by testator in front of 2 or more witnesses present at same time both witnesses must be present at the same time
    1. Parameters are clear and easy to follow; If he can’t manage to get the “cumbrous Leigh” into the room, who knows if the rest is valid?
    2. Traditional rule → even the slightest defect invalidates the will.
  8. Stevens v. Casdorph → Will invalidated because witness did not see testator sign the will. Bank manager has M sign will and takes it to teller to witness. Everyone agrees that witnesses did NOT see Miller sign the will. Court recognizes substantial compliance (term of art).
    1. Testator did NOT sign in presence of witnesses, and vise-versa
    2. Slippery slope argument
  9. Wade (mentioned in Cadorph) → if first witness signed while 2nd witness was not there, will may be valid if he acknowledges his signature in the presence of the testator and the second witness (substantial compliance?)
  10. In re Estate of Waite→ will denied probate when testator did not complete signature in presence of witness, because her hand was shaking.

Interested witnesses[edit]

  1. Estate of Parsons → Three witnesses sign: Nielson (gets $100), Gower (gets real property) and Warda (notary). Court finds fraud and undue influence even though witness subsequently diclaimed $100. Witnesses must be disinterested at the time of signing.
  2. purging statute → purge witness of whatever benefit they would get from will (i.e., whatever they wouldn’t get anyway under intestacy)
  3. CA → rebuttable presumption of undue influence or duress if one of the witnesses is interested
  4. UPC 2-505(b): signing by interested witness does not invalidate the will

Reciprocal and Mirror wills[edit]

  1. Reciprocal wills → husband and wife with wills that are the same that leave everything to spouse, and if spouse doesn’t survive to the kids
  2. Pavlinko: “switched wills case.” First will never probated; husband dies and both documents brought to probate. Court throws out both wills (would need to change all the words; nonsensical
    1. Intent problem → didn’t sign document he intended to be his will
    2. NOTE: couples didn’t speak English
  3. In re Snyde → Probate court admits will signed by Harvey (worded as if it was Rose’s, but appellate division reverses
    NOTE: All adult children agree to will, but guardian ad litem opposes on behalf of minor child


Substantial Compliance[edit]

Clear & Convincing Evidence that the Purpose of the Formalities has been Served (near miss)
  1. Makes the most difference for those without lawyers to ensure compliance
  2. Presence → Occurs w/in your conscious presence (seeing, hearing, etc.)
    1. Line of sight test → testator doesn’t have to actually see witnesses sign, but must be able to do so
    2. Conscious presence test → valid of testator through sight, hearing or general consciouness comprehends that the witness is in act of signing
    3. UPC §2-502(a) dispenses with presence requirement (testator’s acknowledgement of his own signature or of the will is sufficient)
  3. Signature → some just say sign; some say sign at the end (subscription);
    1. Order of signatures → testator must sign first (Wheat v. Wheat, Conn. 1968), but some states say order of signature doesn’t matter (Waldrep v. Goodwin, Ga. 1973).
    2. Initialing on each page → cures problem of fraudulent addition of each page
    3. In re Weber’s Estate → bank prez brings will to car; customer signs on dashboard; prez signs; prez takes it to teller box; teller signs. Court invalidates will, because testator could not see pen and will on teller’s desk as teller signed; won’t allow formalities “to run wild”
  4. UPC 2- 502(a)
    1. Writing
    2. Must be signed by testator or in testator’s name by someone else at the testator’s direction in his presence
    3. Will must be signed by 2 people as witnesses w/in a reasonable time after they witnessed testator sign or testator’s acknowledgement of his signature or of the will
    4. Groffman wins under 2-502, but not Casdorph does not (witness didn’t see him sign his will)
  5. In re Ranney → Ranney hires attorney to have will done. No attestation clause, but self-proving affidavit designed to be signed after the will is signed and attested (language swears under oath that they previously signed the will). Court held substantial compliance
    Langbein’s test is adopted (NJ – p. 229)
      1. does non-complying document express the decedent’s testamentary intent?
      2. Does its form sufficiently approximate the Wills Act formality to enable the court to conclude that it serves the purposes of the Wills Act
  6. See § 2-504 on self-proving wills
  7. Substantial compliance is understood in light of wills act formalities → talk about how it meets the functions
    1. ritual function → went through the ceremony
    2. evidentiary function → there are signatures
    3. protective function → no undue influence
  8. Boren error → people sign affidavit but not the will
  9. Purpose of the doctrine is to remove “procedural picadillos”
  10. Policy: Langbein’s argument → this is how nonprobate world works, our world can work this way, too

Dispensing Power[edit]

Clear & Convincing Evidence that "testator" intended this document to be his will (far miss, might not even be signed)
  1. Hall → Jim Hall and 2nd wife Betty Lou sign draft will that lawyer (Cannon) tells betty and Jim that if they sign it and he notarizes it, it will be valid until they get the final draft; no witnesses are there. Court upholds admission to probate.
  2. NOTE: Joint will is a terrible idea; like per se malpractice
  3. NOTE: of all formalities that we’re dispensing with, attestation is the easiest
  4. §2-503 → document considered valid if you can establish by clear and convincing evidence that the testator intended the writing to constitute:
    1. The decedent’s will
    2. A partial or complete revocation of the will
    3. An addition to or alteration of the will
    4. A partial or complete revival of his [or her] formerly revoked will
  5. Test is a test of the document!!!
    1. Clear and convincing evidence that document is supposed to be a will
    2. “dispense with formalities”
    3. Does NOT say we go wherever we want

Dispensing Power vs. Substantial Compliance[edit]

  1. Can’t apply dispensing power, if you don’t have a state statute
  2. Can possibly apply substantial compliance without a state statute
  3. Electronic will is better under dispensing power, but not as good under substantial compliance
  4. Substantial compliance in Queensland Australia
    1. It became a “near miss” in Australia
    2. Writing seems absolute necessary
    3. No probate with missing signature (except switched wills)
    4. Attestation error is usually forgiven
  5. South Australia Dispensing Power → If there is clear and convincing evidence that decedent intended document to be his will, admit it to probate

Holographic wills[edit]

  1. Holographic wills as dispensing power (a-historical)
  2. Holograph wills compared to formalities
    1. Ritual → does writing it out by hand it impress upon the testator solemnity of event?
    2. Protective function → how does this assure us testator didn’t do this at gunpoint? It has all the reliability of a ransom note
    3. Evidentiary function → handwriting possibly evidence?
  3. Progression of holographs
    1. Originally, the entire document had to be in the testator’s handwriting.
    2. 1969 UPC First material provisions and then material portions only had to be entirely in the testator’s handwriting.
    3. Current UPC: look at extrinsic evidence, including non handwritten words, to show the rest of the form was meant to be a will.
      1. 2-502(b) → material portions and signature must be in handwriting
      2. 2-502(c) → you may look to extrinsic evidence to show that document is in fact the decedent’s will, including portions of the document not in testator’s handwriting
  4. Kimmel’s estate → George Irvin’s letter “if I come I have some very valuable papers I want you to keep for me so if enny [sic] thing happens . . . [everything] goes to George Darl and Irvin Kepp.” Signed “Father” Court affirmed probate.
    1. Writing, signature is questionable, no attestation
    2. Testatmentary intent → “if enny thing happens” “Kepp this letter, lock it up it may help you out.” What other intent could there be?
    3. Father thinks the letter might have legal force, that it would govern the distribution of the estate, but he probably doesn’t think it’s a will
  5. Conditional will → “I’m going on a journey, if I don’t return give everything to my adoptive son.” Even if testator returns and then dies, will can go to probate Eaton v. Brown (HOLMES and Supreme court)
  6. Estate of Harris: Harris gets pinned under his combine, takes his knife and writes on fender of tractor, admitted to probate
  7. Estate Dobson (WY 1985, p. 241) → Banker says you’ve misstated some of your property; marks up will, not in testator’s handwriting; wouldn’t allow will to probate
  8. Fill-in-the-blank form wills: Fails traditional test, but as holographs they’re not entirely in the handwriting of decedent
    1. Estate of Mulkins → 1st generation statute; Court found printed portions to be mere surplusage, but the handwritten portion sufficient to establish testamentary intent; holograph upheld
    2. Estate of Johnson → holograph denied probate: More scant portions of language in handwriting. Only intent language was my six living children as follows; “To John M Johnson 1/8 of my estate”
    3. Estate of Murder → court upheld holograph under same statute as Johnson; Printed paragraph said “I give to” followd by handwriting: “My wife Retah F. Muder, our home and property in Shumway, Navajo Count, car . . .” Clear testamentary intent; why ignore printed words when testator clearly did not
  9. In re Estate of Kuralt → CBS new reporter has longterm relationship with Pat Shannon;
    1. Court held the letter to be a holographic will based on extrinsic evidence that the document represented what Kuralt would’ve wanted. Court focuses not on extrinsic evidence that this document was meant to be a will but instead on extrinsic evidence proving that this is what Kuralt would’ve wanted to do.
    2. NOTE: This is NOT what substantial compliance and dispensing power were trying to get at;We have neither of will with substantial amount of formalities, nor extrinsic evidence that this was intended to be a will.
    3. Last point → he knew how to make a holograph when he wanted!
1989 1994 April 1997 June 1997 June 1997
Holograph bequeaths
all real property
in MT to Shannon;
NY will bequeaths
all to wife revoking
all previous;
Letter gifts 20 MT acres
to Shannon (disguised
as sale) w/promise
of 90 more acres
Letter promises to rewrite
will to ensure that Shannon
inherits as promised
Dies before finishing
distribution of acreage

REVOCATION OF WILLS[edit]

Revocation by Writing[edit]

Subsequent writing must be executed with Wills Act formalities (same functions at issue). 2 scenarios in which this happens

  1. We could have a paper that simply says “I revoke any and all wills I currently have” with a signature and attestation.
  2. We could have simply a new will, leaving us with two duly executed wills that comply w/ the Wills Act.
    1. wholly inconsistent w/ the earlier document, revokes it
    2. partially inconsistent w/ the earlier document, we call it a codicil b/c it only amends and does not supersede
    3. NOTE: codicil is dependent on underlying will; revocation of will revokes codicil.
  3. Revocation by Physical Act → Must physically deface will or signature thereto with intent to revoke
    1. Rule is a product of popular expectations
    2. Presence requirement
    3. Revocation of original revokes all copies
    4. A lost / destroyed will that is lost or destroyed w/o the consent of the deceased can be probated if its contents are proven
  4. HARRISON v. BIRD → Rebuttable Presumption that testator destroyed the will if we know that testator had the will and we can’t find it after death.
    1. Speer executed a will naming Harrison as her main beneficiary; copy with Harrison, original with lawyer. Lawyer tore the will into 4 pieces at Speer’s request over the phone; sent her letter with pieces; found letter but not pieces.
    2. Statute says revocation must be “in the presence of the testator” so this is not a valid revocation at this point.
  5. THOMPSON v. ROYALL → Lawyer wrote on back of will “this will is null and void” and testator signed. Holding: was not a valid revocation.
    1. Writing and signature, but not signed by witnesses
    2. NOT valid revocation by holograph; Just the signature is in her handwriting, but material portions are not.
    3. NOT a physical act; no canceling/mutilating of the will: written on the back only and did not deface the words
    4. absurd result: intent to revoke is clearer here than in Harrison
  6. UPC 2-507: Revocatory act on the will includes burning, tearing, canceling, obliterating or destroying the will or any part of it. This is a revocatory act whether or not the act touched any words on the will.
    Would cover Thompson case
  7. Lesson : Revocation of wills has as many pitfalls of execution – you have to follow the same formalities. If you’re destroying the will, it has to be by the testator and under the traditional rule, must affect the words of the will.

Dependent Relative Revocation[edit]

  1. Rationale: testator wouldn’t have made the revocation if she knew what the actual result would be. DRR gives you your second-best outcome.
  2. LACROIX v. SENECAL: Need proper intent to revoke/modify: Will leaving ½ of her estate “Nelson” and ½ to Senecal. After executing the will, testator becomes concerned: Nelson’s his given name was “Marcisse;” executes codicil changing the grant to Marcisse. Senecal’s husband was a codicil witness; purging statute said Senecal couldn’t take and her part would go to the intestate heir.
    1. Holding: No proper testamentary intent; wouldn’t have executed this codicil if she had known that doing so would’ve excluded Senecal.
    2. Rule: If the testator would not have done this revocation if he knew the true state of the world (the result), we can ignore the revocation.
  3. Example #1: 262, N. 1 → T’s will bequeaths $1000 to her nephew and crosses that out and writes in $1500 and then initials and dates the change in the margin. T dies.
    1. In a state that allows partial revocation by physical act…
      1. not valid under the Wills Act for writing, b/c no witness.
      2. may be valid as a physical act (changed the words on the page.)
      3. not a valid holograph even in states that permit holographs: need the rest of the will as extrinsic evidence
    2. DRR: States that do not allow partial revocation by a physical act will give nephew $1000 and say the change isn’t valid. Between $0 and $1000, we know T would’ve rather given him $1000
  4. Example #2 → Will says “I leave all my property to John” and then I cross out “John” and write in “Nancy.” Nancy can’t take b/c this wasn’t executed w/ wills act formality. Ignore the revocation and give to John or go to intestacy and say the original will was revoked?
    1. If Nancy was T’s wife, maybe we go to intestacy b/c we think you wanted it to go to your wife so would’ve revoked if you knew the will to Nancy couldn’t take effect.
    2. We ignore revocation if, we think the testator never wouldn’t have changed if he knew result would be intestacy
    3. If we don’t know preference for John over intestacy, go to intestacy.
  5. ESTATE OF ALBURN → 1955 “Milwaukee Will” devising jewelry and furnishings to grand-niece Henkey and her residual estate to four friends. 1959 “Kankakee Will” expressly revoked the earlier will and devised a will to Henkey, the four friends and now Robert too. Alburn moved back to Wisconsin to live with brother, Edward, showed him ripped up Kankee (valid revocation); told Edward’s wife that she wants the Milwaukee will.
    1. Holding: Kankee will entitled to probate
    2. If she knew she was going to intestacy, she never would’ve revoked Kankakee (thought she had revived it).
    3. As a policy, this opinion is stupid; should just go back to Milwaukee which is what she wants.
  6. UPC 2-509
    1. (a) If the revoking instrument – will 2 – wholly revokes will 1, the revocation of will 2 by physical act doesn’t revive will 1 unless proponent shows decedent intended to revive will 1.
      NOTE: Alburn’s intent to revive Milwaukee would work.
    2. (b) If will 2 revoked will 1 in part – will 2 was a codicil – and you revoked will 2, we assume you want to revive will 1 absent proof that you did not intend that.
    3. (c) If will 3 revoked will 2, which revoked will 1, will 1 stays revoked, except to the extent that will 3 shows an intent to have will 1 effective
    4. UPC 2-509 and 2-503 squeezes out DRR: if the evidence was good enough for us to ignore revocation under DRR, we should just go to first best instead of going to second best.
    5. UPC 2-507 Comment on DRR → explains the intersection of 2-509 and 2-503 and why after the two we won’t see DRR under UPC.

Revocation by Operation of Law[edit]

  1. UPC 2-803: Slayer Statute is a kind of revocation by law
  2. DIVORCE → UPCC 2-802, 2-804: Treat all bequests to the divorced spouse as if the divorced spouse had predeceased you
    1. Non-probate transfers: UPC 2-804(b) covers nonprobate transfers (for divorced spouse as well as relatives), but most state statutes don’t cover this, so the divorced spouse still gets nonprobate transfers.
    2. good matrimonial practice would include a waiver of any benefits by reason of the other one’s death.
  3. MARRIAGE → Some states do a revocation on marriage unless the will contemplates the later marriage, so new wife would take.
  4. BIRTH OF KIDS → Some states give subsequently born children a share.
  5. Correction of mistakes; trying to accomplish what you would’ve done had you known you needed to.

CONTRACTS RELATING TO WILLS[edit]

Contracts to make a will[edit]

  1. Form: Decedent offers bequest in exchange for services/care during life
  2. Contracts to make will vs. wills lacking formalities:
    1. Wills are gratuitous transfers
    2. We are now in the realm of contracts: consideration and statute of frauds (contracts must be in writing and signed)
  3. If no Will: Most courts will give me the value of the bequest I was promised
    1. NOT specific performance; can’t get around the Wills Act
    2. Really damages
  4. Key things
    1. Statute of frauds
    2. Measure of damages → constructive trust that give you expected value of damages
    3. restitution in some states (value of property that would have been transferred) if failure to satisfy statute of frauds, i.e., no writing.

Contract not to change a will[edit]

  1. Mutual wills between spouses: fear that surviving spouse abandons joint estate plan and goes in another direction
  2. Joint will → First partner dies, second partner revokes joint will
    1. Pre-UPC → First person plural pronouns imply contractual understanding
    2. UPC 2-514 → abrogates presumption of contract in joint will
    3. NY doesn’t make assumption without a writing
    4. Remember: joint wills are a bad idea
  3. Mirror (reciprocal wills) → UPC and most states actually require a specific writing that there is an understanding, either within the will or a separate letter
  4. Via v. Putnam → FL case privileges second spouse over contract that surviving spouse will leave assets to kids. Edgar and Joanne execute reciprocal wills leaving all to survivor and remainder to kids. Edgar dies, new wife is Rachael goes after her piece of Edgar’s estate
    1. Valid contract not to change wills Contract vs. statute favoring spouse
    2. Court → looks to public policy. If Edgar has creditors, the spouse stands behind the creditors. Children are not given creditor status; spouse winns
      Support theory of elective share → take care of surviving spouse, then let kids try to get their money
    3. NOTE: Partnership theory of elective share → implicit terms of economic agreement between spouse to leave each other estate of property jointly accumulated. Was Legislature thinking about short term second wife when they drafted statute?
  5. Summary of cases: most cases enforce contract
    1. in every case, man outlives wife, kids try to enforce contract against second wife
    2. less property partner (wife who doesn’t work) is trying to get control of marital property through will contract
  6. Problems with elective share → 1/3 isn’t enough in 30 year marriage; way too much for marriage of 6 months
  7. Tricky situations:
    1. What if surviving spouse gives away 90% of assets?
    2. What if she wins $100 million in lottery, and estate was for $100,000? Is this changed circumstances?
  8. Solution to problems: make a trust

UPC 2-514[edit]

Contract to make a will or no to revoke a will only established by

  1. Provision of a will stating material provisions of contract
  2. Express reference in a will to a contract and extrinsic evidence proving terms
  3. Writing signed by decedent evidencing contract
  4. Joint or mutual wills does not creat presumption of contract not to revoke

Will Contests[edit]

Lack Capacity[edit]

  1. Policy of Intent: only want to give will effect if it reflects donor’s true intent
  2. 4 part test of mental capacity (p. 141)
    1. Know nature and extent of your property
    2. Know natural objects of your bounty (family, kids, spouse, etc.)
    3. Know disposition of property that you are making
    4. Be capable of relating theses elements to one another and for an orderly desire regarding disposition of property
      Test is about capability; don’t actually need to know anything
  3. In re Estate of Wright → court upholds will of man who did lots of bizarre things: lived in little shack filled with dirt and junk, once gave witness fish soaked in kerosene, paper flowers on barren shrubs, drunk.
    1. Rule: can’t destroy capacity by showing a few isolated acts, idiosyncracies, departures from normality, foibles, etc. No indication that any of these things here impair testamentary capacity.
    2. If witnesses believed testator was incapacitated, they shouldn’t have drafted the will and witnessed it
  4. Lucid interval → Doesn’t matter if you generally fail the test if you have lucid moment of execution
    1. Will requires less competence than a deed: Lifetime transfer affects transferors welfare, Post-mortum transfers are protecting other people
    2. Marriage requires less capacity than a will (NOTE: creating intestate succession)
  5. Insane Delusion → If you hold a belief despite all evidence to the contrary, that can void your testamentary intent
    1. Rule: Part of will caused by insane delusion fails
    2. Majority view → even if some factual basis, if a rational person in your situation would not have held this view, then it’s an insane delusion
    3. Minority approach → there can be NO EVIDENCE for your view
    4. 2 step process:
      1. challenger proves delusion
      2. proponent of will must show basis for testator’s belief
    5. Strittmater → Court strikes down gift of entire estate to National Woman’s Party because of paranoic condition. She had been party member for 19 years, but contesting cousins say incontrovertible aversion to men, neurotically feminist. Probably a dated case.
    6. Honigman → Representative insane delusion case. Overturns appellate ruling against jury verdict and orders new trial. Wife challenges will making smallest possible gift (to satisfy elective share requirement) on ground that he had an insane delusion that she was cheating.
      1. He had admitted that he was “sick in the head” and did strange things like hiding in the bushes, made strange accusations
      2. 4 disputed incidents (if true) could have led him to believe in affair
      3. Rule: burden to prove delusion is difficult, once burden is met proponent’s duty is to provide a reasonable basis for T’s belief.
      4. Dissent: no proof of delusion; reason to favor siblings over wife.
    7. Prof. Leslie (pp. 154-155) → courts make decisions based on their perceptions of merits of claims

Undue Influence[edit]

  1. Definition: influence that rises to the level of coercion
  2. Must show:
    1. susceptibility
      evidence for: Diminished capacity such as old age, illness, & dementia
      evidence against: activity, managing business/affairs, "clever things"
    2. disposition/motive (almost always money)
    3. opportunity - trusting relationship
      fiduciary - attorney-client, doctor-patient, clergy-parishioner
      dependence - psychological or physical
    4. result - rebuttable by context
      1. leaving property outside family, even small sums to friends/caregivers
      2. distributing money vastly disproportionately to children
  3. Most states say need something besides circumstances
    1. secrecy and haste in forming will
    2. independent legal advice
    3. sudden departure from long-term estate planning
  4. Restatement (Third)
    1. § 8.3 → (a) will invalid to extent that transfer was procured by undue influence, duress or fraud. (b) Undue influence if wrongdoer exerted such influence over donor that it overcame the donor’s free will and caused the donor to make a donative transfer that the donor would not otherwise have made.
    2. Comment H → presumption of undue influence if confidential relationship and suspicious circumstances surrounding preparation, execution or formulation of donative transfer
      1. weakened condition
      2. wrongdoer participated in preparation or procurement of the will (some states require procurement)
      3. whether donor received independent advice from attorney
      4. whether will was prepared in secrecy or haste
      5. attitude toward other hand changed by reason of relationship
      6. discrepancy between new and previous wills
  5. Sitkoff → the test is nonsense.
    1. Was there coercion?
    2. chick-sexing → you know through experiencing
  6. Lakatosh: Old woman in poor health, cut off from family, leaves Roger everything but $1,000. Will drafted by Roger’s first cousin (to whom she was referred for an unrelated legal matter); Roger siphons off $128k; makes gift of $70k to Patricia, whom Rose doesn’t know. Rose revokes PoA in 1990, dies in 1993 w/o revoking the will. Spent end of her life in filth.
    1. TEST to raise a presumption of undue influence
      1. Confidential relationship → almost a fiduciary concept; she
      2. Person enjoying the relationship received the bulk of the estate
      3. Weakened intellect → elderly women, helpless to protect herself

No contest clauses[edit]

Anybody who contests the will loses their benefits

  1. If you win a contest, clause has no effect, but loser doesn’t get anything
  2. Need to “bait the trap” → leave alternative amount. Lipper no contest clause was worthless because no risk to contestants
  3. Effects.
    1. Positive side: help us block unmeritorious contests
    2. Negative side: discourages meritorious contests
    3. Some states enforce strongly, others don’t
    4. Probably Cause Compromise → don’t enforce no contest clause if there is probably cause for contest
  4. Russell → Senator, US judge, etc. has 3 kids. One kid loses contest against the trust. children bring suit to enforce the no contest clause
    RULE: No contest rule are not enforceable (NC, SC) if the challenger has probably cause
  5. Ryan → 6 of 10 kids contests will; mentally impaired; 2 of his daughters were always present when other kids came to visit him
    1. Question: “is there enough to trigger the policy of discovery.”
    2. COURT → not a lot of undue influence; Testator continued to go to office at 4th circuit until shortly before death. He called a former law clerk, said he thought there’d be a contest, wanted him to rep grandkids in that event, went and had himself examined by a psychiatrist
    3. “If it didn’t hold up under these facts, then such a clause would never be enforceable”
    4. Sanction side of case → she has to pay her lawyers fees. She continued the litigation w/o any legitimate purpose
      NOTE: She lied under oath → signed an affidavit making claims that the testator promised to treat kids equally, that Williams kids were preventing her from seeing her dad; deposition says opposite of affidavit
  6. NY law → before you bring a contest, you are entitled to some discovery to figure out if you have probably cause.
  7. Lipper v. Weslow → Sophie’s will gives to her two kids, leaves out 3 grandchildren from deceased son (with clause saying why). Son who was a lawyer, lives next door and wrote the will. Court finds in favor of the will; she had a right to do what she did, and there’s no evidence she wasn’t of sound mind.
  8. Ways to anticipate a contest:
    1. letter by testator’s hand (recital) → can backfire since any facts provided are open to dispute
    2. stenographer
    3. write a memo to the file (she was alert, lucid, etc.)
    4. video → could be bad if she looked bad
    5. Bait the trap!
    6. have psychiatrist declare you competent (risk of bad evaluation)
    7. Irrevocable trust

Bequests to the lawyer[edit]

  1. Most places hold presumption of undue influence
  2. A lawyer right next to leisure world did 7,000 wills that gave him benefits; CA now requires certificate of independent review
  3. In some states, presumption is only there if you’re NOT relate or if you cut out of other relatives (would probably have to settle the case)
  4. Rule 1.8(c) → shouldn’t draft instrument giving you a substantial gift unless donee is parent
  5. Moses → Will drafted by another lawyer in favor of lawyer/lover is ivalid. Disfigured alcoholic Fanny leaves her whole estate to lover (lawyer) who is 15 years younger than her. She went to another lawyer, wrote up the will, mailed her a draft, she tells him to leave more to lover
    1. no meaningful independent advice of counsel; lawyer/draftsman did no more than write down what Mrs. Moses told him
    2. DISSENT → suspicious circumstances have nothing to do with the preparation of the will. Lover didn’t even know about will
    3. Case seems like a moral judgment
  6. In re Kaufman’s will → court finds undue influence when artist from wealthy family leaves everything to male lover/financial consultant; ignores the fact that Walter paid the bills and ran the household, Robert wrote letter to his family explaining the importance of the role that Walter played in his life. Another moral judgment case.
  7. Seward Johnson → 4 kids received large kids in the form or trusts and were never in will after that; J&J founder left fortune to Basia – housekeeper turned lover.
    1. NOTE: successive wills and Kids will have to contest each will; looking at 20 years of litigation
    2. Counsel Mistakes: Done in afternoon when testator was tired
      1. Could’ve kept better records of what he wanted
      2. Lawyer took large commissions ($7 million)
      3. No affidavit by testator saying the he knows he could name someone else as executor or paying her less fees
  8. Rule: in NY lawyer needs to have affidavit in order not to have commissions cut in half; Needs to disclose the information that lawyer was entitled to less

Fraud[edit]

  1. Fraud in the inducement → Induce testator to sign instrument by giving false information about the circumstances (e.g., tell testator family is dead); cured through constructive trust
  2. Fraud in the execution → Instrument says something different than the testator thinks it does. E.g., tell someone will leaves things to kids when it leaves them to lawyer’s family
  3. Estate of Carson → Alpha dies leaving everything to younger husband, Gamble. It turns out that they were never really married (he had another wife). Court lets case go to jury; fraud may not have been cause of bequest. She may have been grateful for opportunity to have love at end of her life.
  4. Puckett v. Krida →: nurses provide full time care for Nancy Hooper got power of attorney failed to overcome presumption of undue influence and fraud. They played on her fears that relatives were going to send her to nursing home, persuaded her that niece was spending all her money, sequestered her.
    1. Overlap with undue influence
    2. Doctrinal difference; fraudulent will means there was deceipt; will is probated and constructive trust imposed
  5. Latham v. Father divide → Testator leaves it all to Father Divine, who settles with next of kin: Π (1st cousins) allege:
    1. Testator had another will drawn up, which should would have executed
    2. ∆s prevented her from signing the new will – undue influence, fraud
    3. ∆s killed her by having a surgeon perform fatal operation
    4. Remedy → constructive trust
    5. NOTE: Second will is reliable enough to take $ from probated will, but not enough to just probate itself. Why?
  6. Pope v. Garret →Some but not all of the heirs prevented Carrie from executing will for benefit of friend, Claoytonia. Court probated earlier will; declares intestacy, constructive trusts on heirs for benefit of Claytonia
    1. Note: Constructive trust is not a matter wrongdoing of constructive trustee; it remedies the unjust enrichment distribution
    2. Not all the takers in Pope were wrongdoers
  7. NOTE on Remedies: If you lack capacity or there is undue influence, you go back to last point in time before undue influence or when there was competence: prior will or intestacy. Fraud/duress goes to constructive trust

Tortious interference with Expectancy[edit]

  1. Tortuous interference with expectancy → tortuous conduct that blocks someone from receiving property they otherwise would have received
    1. Most courts require plaintiff to exhaust probate remedies first
    2. Courts are split on whether or not to even recognize this tort
    3. Restatement recognizes it
  2. Marshall v. Marshall → Vickie Marshall (Anna Nicole Smith) claims husband’s son tied a lot of money up in an annuity which only would have paid off if he were to live more than five years; emptied trusts that were meant for her; Court awards her $89 million
    1. 9th Circuit → vacate on grounds of probate exception
    2. Supreme Court reverses this decision and says it’s not probate exception


COMPONENTS OF A WILL[edit]

Integration[edit]

  1. Will includes everything the testator intended to be part of the will that is present during execution
  2. In re Estate of Beale → can’t probate history prof’s with 2 pages replaced pages 12 and 13, because all pages weren’t in the will when executed.

Republication by codicil[edit]

  1. Provided it is consistent with testator’s intent, will is deemed to be republished on the date of a codicil
    1. Squeeze out: Execute will #1, a few years later execute will #2, which contradicts will #1. A subsequent codicil to will #1 will republish the will as of date of codicil; Will #2 is squeezed out
    2. Sometimes, you can save an earlier document with a defect by republishing it as of the date of a later codicil

Incorporation by Reference[edit]

  1. Take unattested document and incorporate it into the will
  2. Document incorporated by reference must exist at time of wil
  3. UPC § 2-510 INCORPORATION BY REFERENCE : Any writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permit its identification.
  4. UPC §2-513 SEPARATE WRITING IDENTIFYING DEVISE OF CERTAIN TYPES OF TANGIBLE PERSONAL PROPERTY: Whether or not the provisions relating to holographic wills apply, a will may refer to a written statement or list to dispose of items of tangible personal property not otherwise specifically disposed of by the will, other than money. To be admissible under this section as evidence of the intended disposition, the writing must be signed by the T and must describe the items and the devisees with reasonable certainty. The writing may be referred to as one to be in existence at the testator’s death; it may be prepared before or after the execution of the will; it may be altered by the testator after its preparation; and it may be a writing that has no significance apart from its effects on the dispositions made by the will.
  5. Clark v. Greenhalge: testator Helen Nesmith leaves everything to Greenhalge except for changes by memorandum known to Greenhalge. 1979 notebook after the will, and 1980 codicil republishes it.
    1. Court: language in the will retains right to alter and amend bequests of tangible property w/o having to amend the will formally (thus notebook is OK as “memo”
    2. LEGAL NOTE: under the doctrine this is absolutely wrong; Hornbook law doesn’t allow people to have memorandum of tangible personal property to be changed at whim NO 2-513 in Mass in 1991
    3. Looks like executor is a bad guy and court is stretching rules
    4. Retained right to vary distribution of tangible personal property → not really an outlyer here
  6. Simon v. Gracen → give $4,000 to someone mentioned in letter dated Mar. 25, 1932, but letter dated Jul. 3, 1933. Codicil dated Nov. 25, 1933 republishes the will and allows

Incorporation by reference vs. republication[edit]

  1. Incorp by reference is reference to document not present in room
  2. Republication → brings up the date of will to the date of the codicil
  3. Johnson v. Johnson →DG Johnson is a lawyer, makes typewritten will. At bottom of typewritten page, he hand-writes “I give my brother $10 only” and Signs will himself and no witnesses.
    1. NOT a holograph: material portions no in his handwriting
    2. NO Integration: his is one big will
    3. Republication by codicil: Handwritten part is a holographic codicil which republishes the earlier will, even if it wasn’t validly executed
    4. Court → will may be so defective that it can’t probate but testamentary effect may be granted . . .
  4. UPC 2-503 Harmless Error → need clear and convincing evidence that the testator intended this to be his will. Although a document or writing added upon a document was not executed in compliance with Section 2-502, the document is treated as if it had been executed in compliance with that section if the proponent of the document establishes by clear and convincing evidence that the decedent intended the document or writing to constitute (i) decedent’s will, (ii) a partial or complete revocation of the will, (iii) an addition to or an alteration of the will, or (iv) a partial or complete revival of his [or her] formerly revoked will or of a formerly revoked portion of the will


Acts of Independent Significance/Act of Independent Lifetime Motive[edit]

  1. Doctrine: if the beneficiary or property designations are identified by acts or events that have a lifetime motive and significance apart from their effect on the will, the gift will be upheld.
  2. Independent lifetime motive for activity. if you refer to your car and buy another car, you’re probably not doing it to try to change your will. But if you refer to a desk drawer, maybe you’re changing it to affect distribution.
  3. Objection → end run around wills act formalities; ability change estate without changing will; leave safe deposit box and change contents.
  4. Explanation of the cases → Not a lot of fraud/duress happening here. You need a code, a key, a signature to get into box.
  5. UPC § 2-512: EVENTS OF INDEPENDENT SIGNIFICANCE: A will may dispose of property by reference to acts and events that have significance apart from their effect upon the disposition made by the will, whether they occur before or after the execution of the will or before or after T’s death. The execution or revocation of another individual’s will is such an event.

AMBIGUOUS OR MISTAKEN LANGUAGE IN WILLS[edit]

Ambiguous Language in Wills[edit]

Plain Meaning and No Extrinsic Evidence: Majority of J’s follow 2 trad’l rules that bar the admission of evidence to vary the terms of the will:

  1. plain meaning/no extrinsic evidence rule = ee may be admitted to resolve some ambiguities, but the plain meanings of the words cannot be disturbed by evidence that another meaning was intended
  2. no reformation rule = can’t correct a mistaken term in the will to reflect what the testator intended the will to say

Cases against the traditional rules

  1. Mahoney v. Grainger (Mass. 1933)- Helen left will devising to “heirs”. Turns out she has only one heir, an aunt, but she meant her first cousins.
    No extrinsic evidence allowed b/c no latent ambiguities in the will itself
  2. In re Estate of Smith- Testator left property to Perry Manor, Inc., meaning the nursing home, which was then sold. Court holds no ee allowed b/c language not ambiguous: money goes to corp even though no longer owns the nursing home.
  3. Gustafson v. Svenson → leave stuff to Enoch or his heirs “per stirpes.” Enoch dies with a living wife. Per stirpes make no sense if she’s his heir; attorney testifies that he didn’t intend for her to get his money, but court holds that per stirpes is NOT ambiguous

Personal usage exception: If ee shows testator always refers to a person in an idiosyncratic manner, the evidence is allowed to show the testator meant someone other than the person w/ the legal name of the legatee.

Moseley v. Goodman- leaves to “Mrs. Moseley”- testator called Mrs. Trimble Mrs. Moseley because her husband ran Moseley’s cigar store. Court allows ee.
  1. Patent ambiguity → apparent from the face of the will
  2. Courts are beginning to admit extrinsic evidence in these cases
  3. Estate of Ecoli → 25% to A, B, C; Court read to be 1/3 each
  4. Neff (p. 369): Disposable portion of estate to A and Leave my entire estate to A and B

Latent ambiguity → doesn’t appear on the face of the will but manifests itself when the terms of the will are applied to the testator’s property or designated beneficiaries. Two types:

  1. Equivocation- a description fits two or more things equally
  2. Description in will doesn’t exactly fit any person or thing
  3. Ihl v. Oetting → leaves to Mr. and Mrs. Wendell Richard Hess residing at No. 17 Barbara Circle. Hess’s divorce and Mr. Hess remarries to Verna. Court admitted extrinsic evidence that showed and intent to Glenda (first wife) who shared interest in antique

In some cases the differences between patent and latent is based on what you do or don’t know

Langbein’s Chart
  1. Rule against reformation is an outlier. E.g. dependent relative revocation—courts remedy mistaken revocation; correct mistakes when UI, LC, ID
  2. Patent/latent ambiguity→ aren’t courts really just correcting mistakes by reference to extrinsic evidence? → trend towards admitting ee to correct mistakes
Effect:
Lack of Volition
Effect:
Mistaken Terms
Cause: Intentional Wrongdoing Undue Influence, Duress (relief granted) Fraud (relief granted)
Cause: Innocent Acts Lack of Capacity, Insane Delusion (relief granted) Mistake (Mahoney) (no relief)
Execution (Fleming) (relief)
  1. Arnheiter v. Arnheiter (1956)- will says “sell half interest of 304 Harrison Ave.” Decedent had interest at 317 Harrison Ave. Court refuses to change street number. Instead use doctrine of false demonstration non nocen (mere erroneous description does not vitiate) to strike it. Without street number, rest of description is sufficient to identify property at 317 Harrison Ave.
If description contains several particulars and all don’t fit any one person/thing, can reject less essential particulars provided remainder of description fits.
  1. Estate of Gibbs → couple leaves 1% “To Robert J. Krauss now of 4708 N 46th St, Milwaukee, WI,” but their friend is actually Robert W. Krauss. Court: Gives it to W: “details of identification, particularly such matters as middle initials, street striate addresses and the like are highly susceptible to mistake, particularly in metropolitan areas”

Openly Reforming Wills for Mistake[edit]

  1. Erickson v. Erickson (1998)- testator made will right before marriage- included wife & divided ½ b/t his & her kids from prior marriages.
    1. Statute: if no contingency in will for marriage, marriage operates as revocation of will.
    2. Court- holds no contingency provided in will, but: Overrules Connecticut Junior Republic (held that ee not admissible to show scrivener’s error) and allows clear & convincing ee of scrivener’s error to establish intent of testator that will be valid post-marriage.

iii. NOTE: Admit extrinsic evidence without ambiguty

  1. Rest. 3rd Property §12.1 Reforming Donative Documents to Correct Mistakes
    1. May reform if establish by clear & convincing evidence:
    2. Mistake of fact/law affected terms
      1. What donor’s intention was
    3. Langbein: change to more intent-serving approach influenced by:
      1. rise of nonprobate system- want to unify constructional principles; nonprobate allows harmless error & reformation
      2. experience in other jurisdictions
      3. to avoid unjust enrichment (equitable remedy)
      4. spare lawyers from malpractice- malpractice doesn’t help when lawyer not culpable; unhelpful for unique property devises, or when lawyer is dead/judgement proof
    4. MA- rejects reformation of wills unless for tax; don’t want to open floodgates for more will contests
    5. Estate of Lord (2003) – 383, n.1 → changed “trust” and “trustee” to “estate” and “personal representative”
    6. HI → changes youngest to oldest
    7. NY 2002, expressly cited 12.1
  2. Fleming v. Morrison → draft fake will to sleep w/ Mary. Court hold will invalid on basis of extrinsic evidenced —lawyer/witness lacked testamentary intent b/c he knew of plan.

CHANGED CIRCUMSTANCES[edit]

Changes in beneficiaries[edit]

Predeceased cases
Default rule: Taker under the will must survive the decedent in order to take the property. Assumes testator wanted donee to survive in order to take
Lapsed gifts:
  1. Specific devise that fails falls into the residue
  2. General devise (i.e., money) falls into residuary
  3. Residuary device → falls to intestacy
Void devises → didn’t lapse, void from outset
  1. Draft will leaving something to someone already dead
  2. Draft will leaving something to a pet
Estate of Russell → holographic will left some items to niece and “everything else to Chester H. Quinn and Roxy Russell.” Roxy is a dog! Niece sues for dog’s gift under intestacy. Court doesn’t buy Chester’s interpretation that bequest was precatory to take care of dog. Dog’s half goes to intestacy. Moral judgment about testator’s relationship with Chester

No-residue-of-the-residue rule[edit]

Without the rule, lapsed residuary devises are split between other residuary takers, because existence of clause shows you’re trying to avoid intestacy
Rule doesn’t allow people to inherit failed residuary devises; once residuary gift fails, shares goes to intestacy
No longer very important
most state have elimintated this
UPC 2-604 gets rid of rules
Well drafted wills can prevent this
UPC §2-604: Failure of Testamentary Provision
(a) Except as provided in §2-603, a devise, other than a residuary devise, that fails for any reason becomes a part of the residue.
(b) Except as provided in §2-603, if the residue is devised to two or more persons, the share of a residuary devisee that fails for any reason passes to the other residuary devisee, or to other residuary devisees in proportion to the interest of each in the remaining part of the residue.

Anti-lapse statues[edit]

don’t prevent a lapse; redirect a lapsed share to somebody else
UPC §2-603: ANTILAPSE; DECEASED DEVISEE; CLASS GIFT
(b) [Substitute gift] If a devisee fails to survive the testator and is a grandparent, a descendant of a grandparent, or a stepchild of either the testator or the donor of a power of appointment exercised by the testator’s will, the following apply:
(1) …and the deceased devisee leaves surviving descendants, a substitute gift is created in the devisee’s surviving descendants. They take by representation…
(2) …if the devise is in the form of a class gift other than [to a class meaning descendants]… a substitute gift is created in the surviving descendants of any deceased devisee. …Property passes to surviving devisees and surviving descendents of deceased devisees (take by representation).
(3) “if he survives me” and “my surviving children” don’t overcome the antilapse statute without additional evidence
(4) substitute gift is superseded by an alternative devise only if devisee is expressly named.
NOTE: 2-603 is overly complex to read and NOT widely adopted.
Most firms have boiler plate that makes this provision irrelevant.
Antilapse Statutes= substitute other beneficiaries for dead beneficiary if certain requirements are met. Best guess as to what T would want.
Statute applies only if devisee bears particular relationship to testator. Typical statute provides for devise to devisee’s issue.
Range: descendants of the testator → of testator’s grandparents → all kindred
Generally does not cover spouses of these people.
Default rule: applies unless testator manifests an intent that it not apply. If it doesn’t apply & no alternate gift, common law default rules apply.
ISSUE UNDER UPC §2-603- does wording in will indicate contrary intention?
majority of cases= an express requirement of survivorship states an intent that antilapse statute not apply
Allen v. Talley (1997)- “devise to my living brothers and sisters to share and share alike”. Only two siblings left at death. Court holds language operates as words of survivorship precluding application of antilapse statute; no substitute gift to descendants of 3 dead siblings.. Testator’s intent showed to living siblings.
Jackson v. Schultz- “leave to W, her heirs & assigns forever.” Wife predeceases leaving kids from prior marriage (whom testator had raised). Antilapse statute didn’t cover descendants of spouses, so language had to be substitute gift to step-children.
“and” looks like words of purchase & limitation, so should be fee simple.
Court changes words “and” to “or”→ gift-over; avoids escheat to state and step-children get it.
[Did T adopt the wife’s kids? If he left directly to them, do their descedants get it?]

Class gifts[edit]

Characteristics
Group label
Fluctuation → membership “to my children” could have more kids
shares fluctuate when people added or subtracted
Equal shares to each member of class
Sufficient if you can show testator was “group minded”

Rule → any time I intend beneficiaries to take as a group, it’ a class gift

Surviving members divide deceased members’ share
Restatement 13.1 and 13.2
13.1 → three indicators
13.2 → presumption of no class is rebutted if language or circumstances intended beneficiaries to inherit as a group

Dawson v. Yucus → Devis ½ of interest inherited from husband to each of his two nephews, “believing as I do that farmland should go back to late husband’s side of the house.” One nephew dies, not covered by anti-lapse statute. Court holds not a class gift; dead nephew’s ½ goes to residuary.

Strohm v. McMullen → A class is defined by body of persons uncertain in number at time of the gift to be ascertained at a future time and who are all to take in equal or some other definite proportions.
Shares here were certain, named individuals
Sitkoff: rigid adherence to presumption, turning it into a rule. Law is that factors create a presumption, which can be overcome

Sullivan: To my nephews A and B, and my niece C, in equal shares, that is one-third each. Omitted to mention two estranged nieces; one nephew predecdeased her. Court avoided intestacy when A died by holding that gift was to a class and dividing A’s share equally between B and C. Iozapavichus v. Fournier → court admitted extrinsic evidence to hold that “to Bessie and Louise” was class gift to testator’s best friends In re Moss: (British Case: Daily Telegraph) to A and Children of B (two kids)

A predeceased T, so do her shares go to her kids or to Children of B
Court holds A is member of class. If T gives property to A, who is named, and children of B, and T contemplates A taking same share as members of class, it is a gift to class. A and children of B were all nephews and nieces of T (B was T’s sibling).
American law of property §22.13 says no class → doesn’t make sense for A “to lose his identity in a class of children of another.”

Most anti-lapse statute explicitly state that they apply to class gifts → those that don’t are generally interpreted to apply anyway

Changes in property[edit]

Types of devises
specific devise: “my watch”
general divise: “$10,000” - paid from estate
Demonstartive devise: $10,000 from sale of GM stock: however much GM stock you have and supplement to provide the rest
General Rules
Suppose X leaves watch and does not have watch once X dies → specific bequest adeems (“ademption by extinction”) (devise fails)
Suppose X leaves 100 but only has 80 → gift abates; gift to more than one person abates pro rata
Suppose X leaves 100 to C and rest to A and only has 80 → C gets 80 and A gets nothing

Identity theory – if a specifically devised item is not in the testator’s estate, the gift is extinguished

Conservator exception (MA)- if conservator sold property before T died, might get leftover money from sale.
Wasserman v. Cohen (p. 406) . Testator has revocable trust (assume it is will for now) and says that she leaves 1214 Newton street to Π. when she dies, she does not own 1214 Newton street. Π wants proceeds from sale. Court holds specific devise is adeemed; doctrine of ademption seeks to give effect to testator’s probable intent by presuming he intended to extinguish specific gift before death.
Advantage: easy administration, no reading into testator’s intent, don’t need to inquire why or how it disappeared
Disadvantage: if someone else stole property before death

Intent theory – if the specifically devised item is not in the testator’s intent, the beneficiary may nonetheless be entitled to the cash value of the items, depending on whether the beneficiary can show that this is what the testator would have wanted. Escape routes in Js following identity theory:

Classify the devise as general or demonstrative rather then specific
Classify the inter vivos disposition as a change in form, not substance
Construe the meaning of the will as of the time of death rather than as of the time of execution (e.g. acts of independent significance)
1990 UPC: intent theory w/ presumption in favor of ademption & exceptions

UPC § 2-606 – (a) specific devisee has a right to:

(1) balance of purchase prce owed by a prucherser on testator’s death
(2) condemnation award for taking of property
(3)proceeds unpaid at death on fire or casualty insurance or other recovery for injury to property
(4) property testator acquired as a result of foreclosure
(5) replacement property for devised property
(6) value of specifically devised property at the time of its disposition during testator’s lifetime provided it is established that ademption would be contrary to testator’s intent
Policy: we presume that testator didn’t mean for it to be adeemed → devisee can get value of specific devise or replacement property.
606(b) devisee has rights to value of property disposed of by conservator.
606(d) narrows conservator exception; if testator’s incapacity ceased and he survived for one year, then ademptions

UPC 2-605 → securities

Stock Splits → change in form, but not substance
UPC 2-605 hold this view, plus paragraph (3) includes any additional securities acquired “as a result of a plan of reinvestment”
most states have rule that if there is stock split, the person is entitled to receive additional shares.
Ademption by Satisfaction
Ademption by satisfaction applies when testator makes a transfer to a devisee during life after executing the will; creates rebuttable presumption that transfer was for satisfaction of bequest
Law killed this doctrine, requiring writing showing that inter vivos gift was meant as satisfaction.
§2-609: ADEMPTION BY SATISFACTION → (a) only if there is a writing acknowledging satisfaction (in will, contemporaneous writing, written acknowledgement by devisee. (b) For purposes of partial satisfaction, property given during lifetime is valued as of the time the devisee came into possession or enjoyment of the property or at the T’s death, whichever occurs first. (c) If the devisee fails to survive the T, the gift is treated as a full or partial satisfaction of the devise, as appropriate, in applying antilapse or residue of the residue rules.
Exoneration of liens
Leave house with mortgage on it
Traditional rule → get house and estate pays off the mortgage
Most states apply UPC §2-607 flipped default: assume don’t want lien exoneration
UPC §2-607: NONEXONERATION:A specific devise passes subject to any mortgage interest existing at the date of death, without right of exoneration, regardless of a general directive in the will to pay the debts

Order of Abatement (reduction) → When estate has insufficient assets to pay debts as well as all devises

Ordinary order of abatement:
  1. Residuary devises
  2. General devises
  3. Specific & demonstrative devises
Problem: residuary t is often intended to get the most. So, if the major bequest is the residuary, don’t give other large bequests, but slice of the residue
Provides some unlikely results→ UPC §3-902 provides that “if the testamentary plan would be defeated by” the usual order, “the shares abate as necessary to give effect to intent”.

NON PROBATE TRANSFERS[edit]

NON PROBATE TRANSFERS AND PLANNING FOR INCAPACITY[edit]

Generally[edit]

Overlaps with planning for incapacity; Use revocable trusts for both
Mode of transferring property on death outside of probate: “will substitutes”

Types
Irrevocable inter vivos trust
Bank/brokerage accounts that pay on death
Pension accounts
Life insurance

Three main questions → first two are organizing doctrinal issues

Validity → How are these valid to make the disposition if they don’t have wills act formalities?
none of the necessary safeguards (ritual, etc)
BUT instruments have a “testamentary look”
Subsidiary Law of Wills → should we apply principles of interpretation that have grown up in law of wills to determine problems that arise after death?
Reforming the probate world → what can we learn from the operation of non-probate transfers to reform probate?

Validity[edit]

Many instruments take form of contract between two people
Current situation: it’s profitable large financial institutions find that profits they make from offering this service swamp any problems
non-probate transfers are free market competitor to probate system; indicate that probate system should be changed

Revocable Trusts[edit]

Typical - settlor transfers legal title to property trustee pursuant to a writing where settlor retains power to revoke, alter, amend trust & right to income during lifetime.

All Js (TN?) recognize validity of revocable inter vivos trust.
Everywhere except NY- 2-3 page wills leave everything to pre-existing revocable trust

HOLMES QUOTE: testamentary look to inter vivos trust. In effect a perfect will substitute
Langbein: satisfies twin attributes of wills: Freely revocable and total dominion over covered property
Farkas v. Williams (IL 1955)- Farkas purchases stock issued to himself as trustee for Williams four times & signs declarations of trust.

Court holds Williams has an interest as remainder beneficiary and Farkus owed him a duty as trustee
F did not retain too much control over trust assets: ∆ would have had enforceable claim against F in some circs
NOTE: Functionally all Farkus had to do was revoke trust, and his duty would end.

Uniform Trust Code §603(a): while trust is revocable and settlor alive, beneficial rights are subject to control of, and duties of the trustee are owed to settlor only.

Acknowledging reality that revocable trust is a will substitute; “may be the most honest thing in the entire book.

Estate of Brenner (CO 1976)- execute revocable declaration of trust to himself, remainder to others. Court holds valid b/c property was conveyed to him as trustee 5 days after execution of trust, evidence of intent to create trust, and cites Farkus.

Types of trusts
Unfunded life insurance trust= when trustee of trust is beneficiary of LI policy, but doesn’t add any other funds or assets to the trust
Funded inter vivos trust= if other assets are added

Revocation by divorce - some state statutes= divorce revokes any provision in a revocable trust for ex-spouse (UPC § 2-804 provides as well)--- but fed law limits

Unified trust
Revocable LI trust & will pouring over probate assets
Declaration of trust- settlor becomes trustee of trust property;
Deed of trust- naming 3rd party as trustee
Consequences of revocable trusts
3rd party trustee can manage
Keeps title clear on property
Income & gift taxes still applicable
Good way to deal w/ incompetency
Easier to amend testamentary plan and subsequent amendments validated by UTATA
Consequences at death
Lower costs- no probate
Less delay- distributed to beneficiaries much more quickly
No SofL for creditors
Privacy- terms not recorded
Spouses can usually reach trusts
Avoid restrictions on testamentary trusts (?)
Choose the law of governing jurisdiction
Harder to contest then will
No tax advantages
Note: marketing of living trusts by nonlawyers → rise of this industry suggests amend law so will can have attributes of living trusts

Pour-over Wills and Revocable trusts[edit]

Will leaves everything to trust
Less costs → avoid probate, speed things up, save publicity; avoid ancillary probate: no longer have to go to another state to probate property in that state
funnel → instead of naming specific person as beneficiary; just list beneficiary of every non-probate transfer as trustee of revocable trust
Function of will → catch-all. You might miss something.
Standard form: name a guardian, trustee, put residuary into trust. Trust is the big document

UTATA → all states have a version of this

Exception to property requirement for trusts.
Standby trust with no property is a valid receptacle for pour-over will.
Even if document isn’t in existence at time you create will:
TRUST MUST EXIST AT DEATH and be in writing
can make amendments to trust before death
solution to doctrinal problems of incorporation by reference and independent significance
incorporation by reference: Document no longer has to exist at time of execution and can be modified

NOT a “testamentary trust” → Testamentary trust is a creation of the will; Pour-over will leaves property to inter vivos trust, no longer revocable because settlor is dead
Clymer v. Mayo (p. 313) → Mayo created a trust and made her husband beneficiary of her will, trust, life insurance, pension plans. Will leaves everything to the trust and James her husband is the remainder beneficiary of the trust. When they divorced, She remembered to change the beneficiary of her life insurance but not pension and trust. Pension falls out under divorce waiver, and parents contest the trust. Court holds

Trust is valid as a standby. She named the trustees her beneficiaries so there was a property right - they had a right to her pension, etc.
BUT Use of will substitutes to avoid probate, NOT to avoid subsidiary law of divorce.
Apparent from way trust was created and funded that the will and the trust were integrally related components of a testamentary scheme and that therefore his interest in trust should be revoked.

Statutes in some states provide that divorce revokes any provision in a revocable trust for the ex-spouse

Life Insurance and other P.O.D. contracts[edit]

UPC §6-101 → Designates a large number of transfers as non-testamentary

Validates lots of P.O.D. contracts
Some form of 6-101 is adopted almost everywhere
Result → you can go to a bank and put a death beneficiary on your account so it never goes to probate
Treasury bonds → engine that got this going
Life Insurance
term life → covers you for a term, but no pay out if you survive. Useful for younger people who have young children; allows you to cover period of acute vulnerability (before children can be self sufficient) at a lower price
whole life → covers you for whole life. Given that you will die, there will be a pay out; higher premiums
Universal life (blend)

Wilhoit v. Peoples Life Insurance Co - Wilhoit’s widow returned life insurance proceeds to company to reinvest with right to withdraw, passes at death to brother. Brother predeceases her. Court enforces bequest in her will leaving money to Robert Wilhoit.

If it’s not insurance, it falls into her will and goes to Wilhoit.
If it had been insurance, couldn’t change recipient

Cook v. Equitable - remarries and will leaves Life insurance to new wife. Policy required written notice to company to change beneficiary. Court holds can’t change beneficiary designation by will;

Policy concerns: Make it easier for insurance company can pay quickly
Can get death certificate in one day
Probate can take years
Beneficiaries might need money right away
Social value in knowing there is a way to get your family the money right away when you die

Divorce - Revokes designation in will, but not beneficiary of insurance contract.

In practice use omnibus waiver to renounce any benefits you might have had as a result of marriage

UPC §2-804 - divorce revokes designation of divorced spouse as beneficiary of insurance policy, pension plan, or P.O.D. contract

NOTE: application to federally regulated pension accounts is preempted by federal law

Partnership Interests: Hillowitz → Partner in investment club designates his wife as beneficiary when he dies. Executors claim P.O.D. payment designation is invalid for want of wills act formalities

RULING: member of partnership may designate wife as beneficiary
Sitkoff: court enforces donative exchange. Takes out argument that bargain for deal is a good substitute for wills act formality
Joint Bank Accounts
Joint w/ survivorship: bank prefers administrative ease
Gift in disguise as bank account (you put it all in, and other person takes it). P.O.D. even though you’ve styled it joint account
Agency account → want person to have access to money so they can manage your affairs in incapacity
Franklin v. Anna National Bank: Man losing eyesight, tries to change joint holder name on his account, but bank refuses when he doesn’t come in person. COURT declares it an agency account, and it should go to the estate
NOTE: Some states take no extrinsic evidence approach; easier to administer

Pensions/ERISA[edit]

General Federal law permits death beneficiaries to be put on various types of savings plans for retirement. ERISA requires a death beneficiary. Irresistible tax incentives to encourage people to use pension plans:

most contributions to plan are tax-deferred
earnings accrue & compound on a tax-deferred basis (interest free loan)
distributions usually taxed at lower rates when taken out b/c less income overall at that point
Defined benefit Plans
Annuities → when you die, your spouse can get a payment for life after you die
Pension plans pay you an annuity, and when you die, it goes to spouse; when spouse dies it vanaishes

Defined Contribution Plan → employee and employer put certain amount. You can withdraw money, and pay taxes as you withdraw. Upon death spouse can withdraw and pay taxes. After spouse’s death, money goes to kids (or other devisee); i.e., remainder to designated beneficiary. Tax benefited savings plan with non-probate transfer at the end Application of subsidiary laws of wills: Slayer rules, Divorce, Common disaster
Egelhoff v. Egelhoff - divorce, 2 months later H dies intestate.

WA statute: revocation of all nonprobate transfers upon divorce
Court (THOMAS) holds ERISA preempts that statute
Dissent (BREHYER): all subsidiary rules are intended to apply; if you preempt this statute, you preempt all (including slayer rules)
THOMAS → slayer rules are not here (p. 339). That principle is long-established law, and the rules are more or less uniform
NOTE: revocation by divorce is more uniform than slayer rules

Estate of Morgan → Court holds ERISA did not preempt state simultaneous death statute
Met Life v. Johnson → Johnson tries to change beneficiary, but he checks the box for wrong plan. Court says IL substantial compliance is irrelevant, BUT federal common law includes substantial compliance.
Ahmed v. Ahmen → reads slayer rule into ERISA
Keen v. weever → under federal common law provides that when waiver and assignment of pension assets in a divorce decree are specific enough, pension plan may not pay the ex-spouse named as pension beneficiary (similar case to Egelhoff with different result) Sitkoff → reasonable minds can disagree as to statutory interpretation, but result in Egelhoff is bad policy. “Federal common law” is more uncertain Solutions: amend ERISA, revoke Egelhoff, use federal common law, amend plan terms Contract around it.

Subsidiary laws of wills - revocation[edit]

Pilafis (p. 307) → Pilafis executes revocable trusts agreement w/ self as trustee. Son (James) who was omitted from trust did a “diligent search of the house” and could not find the will or trust. James asks for intestacy on presumption that will is revoked

Will analysis → will last known to be in possession of testator; presumption of revocation if not found not rebutted by the fact that James was cut out of will and he did the search
COURT: He made an express provision for revocation, and the steps therein did not take place. Presumption of revocation rests revocation by physical act, which does not apply here.
Policy: He could have put in revocation by physical act

Rest 3rd Trusts §63: revocable trust can be revoked “in any way providing clear & convincing evidence of the settlor’s intention to do so”
UTC - unless trust instrument provides to the contrary, any kind of attempted revocation is valid provided there’s clear & convincing evidence of T’s intent and not contrary to trust instrument. UTC adopted in 15 states and pending in more

Subsidiary laws of Wills – creditors’ rights[edit]

State Street Bank v. Reiser → application of creditor rules of probate to non-probate transfers. Court holds creditors can reach assets in trust that settlor had control over to extent probate estate doesn’t satisfy debt (selltor had dumped securities money into a revocable trust and poured over estate into trust)

For federal tax purposes it counts as yours
For bankruptcy purposes it counts it as yours
To the extent that your probate estate is insufficient to pay off creditors, subsidiary law of wills will apply to revocable trusts
this is prevailing view- also UTC & Rest 3rd

UPC §6-215 permits decedent’s creditors to reach P.O.D. bank accts and joint bank accounts if probate estate is insufficient.
Other sources say revocable trusts don’t count: §330 comment O of restatement (second) of trusts; Scott on Trusts
Restatement (third) of trusts and UTC 505(a)(3) say that revocable trusts do count to extent that probate estate is insufficient

Joint tenancy in realty[edit]

Imperfect will substitute
If you name somebody else joint tenant, you can’t remove them or sell without consent
BUT at death interest vanishes, and creditors can’t touch property

INCAPACITY PLANNING[edit]

Using a trust to plan for incapacity[edit]

Make self beneficiary and trustee and reserve right to revoke, while competent
Appoint successor trustee for incompetence
Activating the clause: give right to doctor (and some relatives?)

Power of Attorney[edit]

Formalized agency relationship (“attorney-in-fact”)
Duration

Non-durable: When principal becomes incompetent, agent’s power is gone; NOT for estate planning; Incompetent person can’t oversee agent’s activities
Durable power of attorney → survives incompetence. States require specific language. New model assuming durability not yet adopted

Scope of power: 12 or 15 powers (specific duties plus “any other action I could do myself or through an agent”)

Incomplete contract → can’t anticipate all future circumstances, so just give agent discretionary power
Problem: controlling unbridled discretion

Fiduciary obligation: Ex post, the court completes the contract. After the fact, court determines if agent acted loyally and exercised due care and loyalty
Kurelmeyer → Louis executes general durable POA and wife establishes trust on behalf of Lewis as his agent-in-fact. Transfers Clearwater property to trust. Trust can pay upkeep; sale would require trust to buy Matilda a new home.

POA unambiguously gives her the “power to execute and deliver . . . trust instruments”
The power is delegable, but there is a factual question whether exercise of the power is a breach of fiduciary obligations

Advanced directives[edit]

Needs to be some form or substitutes judgment in health care matters for incompetents: “advanced directive” for certain circumstances
Criticism → can’t anticipate circumstances, so you can’t convey meaningful information in an advanced directive
Instructional directives (Mislabeled a “living will”) says what to do in various circumstances. Downsides:

sometimes situation doesn’t fit directives
can’t adapt to circumstances: sticks unless changed in writing

Proxy directive → Name someone to make the decision; can adapt to circumstances, but relying on someone else to make a judgment for you
Hybrids → Name agent to make decisions, but give expressions of what principal might want to happen
Default rules → substitutes judgment power is handed according to statutory scheme
Bush v. Schiavo → husband left to make decisions when wife is in coma. FL legislature passé statute giving governor power to override removal and order reinstatement of life sustaining measures COURT strikes down statute under separation of powers

courts have a standard of review substituted judgment, and courts upheld the judgment of the husband
Rank order of who makes the decision, and decision is subject to review

Case made publicly salient the value of advance directives
Lindgren → default rule of all lifesaving members is the opposite of what it should be; stop and only take measures if people request it
Disposition of the body our default rule is no donation, but other nations have default of donation with opt out

LIMITATIONS ON TESTAMENTARY FREEDOM[edit]

SPOUSAL RIGHTS[edit]

Forced Share and Marital Property[edit]

Separate property: each partner owns and accumulates all property in their own name (including property accumulated during marriage)

Wages belong to individual earner until deposited into joint account
Problem: disinheriting a spouse; decedent may have a ton of the property accumulated during marriage in own name

Community property → half of all money earned belongs to spouse immediately. Each spouse controls disposition of his or her half

In community property state, half of everything already belongs to survivor; no need to worry for mandatory minimum; seemingly perfect implementation of partnership theory of marriage

Quasi-community Property → solution for separate property people who move to community property state in which there is no forced share

Theories behind the Mandatory minimum
Support theory → part of the marriage is obligation to support spouse after death; Share should be just enough that spouse has what she needs
Partnership theory → marriage is economic partnership with implicit term that both parties have control over property during marriage; Share should be half (default bargain)
Forced share vs. intestate share
Intestate share → what you get when spouse left NO WILL WHATSOEVER; policy: what average person would have wanted
elective share → Forced minimum; goes against documents left at death; policy: what spouse deserved
Policy Questions
Size of the the elective share
Relevance of length of marriage
Satisfaction through a life estate
Rights of creditors with respect to elective share
Property subject to elective share (does it extend to nonprobate transfers, or can you disinherit through inter vivos trust?)

Domestic Partnerships[edit]

Argument in favor of elective share
In practice, partnership and support are taking place here
Lack of marriage is just formalist point

Cooper → same sex partners lived in Brooklyn in spousal-type relationship. Court held that NY law says “spouse,” which only applies to opposite sex couples

Size of forced share[edit]

community property: divide up property accumulated during marriage
separate property regime: don’t distinguish between pre-marital property and property earned during the marriage
Traditional rule → 1/3 of everything irrespective of length of marriage

Splits difference between half and nothing
Grew up long before partnership (Dower and Curtsey) when wife’s legal identity vanished after marriage

Length of marriage → UPC does a sliding scale (Waggoner)

5% per year, with 50% share kicking in after 15 years
Rationale → approximates commitment to the marriage over time

NOTE: default rule surviving party could waive right to entitlement
POLICY POINT: most commentators say partnership theory in effect, but the rules are NOT explainable in terms of partnership.

Life Estate[edit]

Leaving share in life estate satisfies support theory; partnership theory implies that you should be able to direct ultimate disposition
Separate property regime doesn’t allow you to direct ½ wife’s property earned during marriage after you die
Community property regime allows you to direct ½ of wife’s property earned during marriage after you die
Today → almost all states require outright bequest to meet elective share requirements; life estate in trust is allowed for incompetent spouse

Creditors[edit]

Medicaid: lose benefits for failure to elect against will.
Estate of Cross: Cross leaving everything to son, Ray. Wife (not Ray’s Mom) was in nursing home incompetent and could not decide to elect share. Guardian ad litem appointed and elects to take share, which would only leave $9,000 for Ray. Court holds it’s in wife’s best interests to take against will; if she doesn’t elect, she’ll lose Medicaid eligibility

Incompetent spouse can’t ask for share in trust for kids:
Estate of Faller (432, n.1) → assets must be taken into account when determining Medicaid coverage

UPC §2-212 - Custodial trust for benefit of incompetent surviving spouse that returns to next taker (Partnership theory everywhere but here)

What property counts?[edit]

Net Estate/Augmented Estate approach → Probate estate plus some measure of non-probate transfers
Courts gloss “estate” to mean probate estate plus some non-probate transfers
Sullivan v. Berkin → Sullivan’s revocable inter vivos trust gives income to self for life, remainder to George and Harold Cronin; pour over will excludes wife and grandson (no real money in probate estate). Court holds that trust counts as part of probate estate for future cases (but not for this case). “Estate” means property whose disposition you control at death.

“estate of deceased” in statute probably refers to probate estate
But there were probably no non-probate transfers when drafted
policy goal of statute is met through this interpretation
Court excludes this trust allowing reliance on prior rule
Assets of revocable trust are counted in equitable division in divorce. Therefore it should count here, too.

Bongaards v. Millen → Josephine has a building she held in trusts for Jean, who lives in apt w/ George. Jean uses power of appointment to make her sister the next beneficiary, and George is left w/o trust property when Jean dies.

George: property whose disposition she controlled
COURT → This was created by Mom, so it doesn’t count.
Partnership theory: it came form Josephine, not Jean
Support theory: he got the beach house (joint tenancy)
State Tests
Illusory test
Intent to defraud Test → “a fraud upon the widow’s share”
Present donative intent test
State Statutes
NY statute → CLEAR RULE; any property over which decedent has general power of appointment enabling him to appoint property to whomever he pleases
DE Statute → No probate/non-probate distinction; It counts for elective share if it’s part of the gross taxable estate; relies on IRS to figure out what’s part of estate
UPC statutory approach
the “augmented estate”
§ 2-202: elective share % based on length of marriage
§ 2-202(b): $50,000 minimum
§ 2-208: augmented estate includes net probate estate (after funeral expenses, debts, etc. 2-204), nonprobate transfers to others, nonprobate transfers to surviving spouse and surviving spouse’s property and nonprobate transfers to others.
multiply the two together

Waiver of the spousal share[edit]

By contract → prenuptial agreement; allows bargaining, used in second marriagest to keep property going to decedents of first marriage. Procedural safeguards:

full and fair disclosure: recital or property in agreement, attach a schedule of all major assets, eliminates possibility of silence
separate, independent counsel

UPC 2-213(b): waiver is NOT enforceable if not voluntary, or waiver was unconscionable and

no fair and reasonable disclosure
did not voluntarily and expressly waive right to disclosure in writing; and
didn’t have, or reasonably could not have had adequate knowledge of property and financial obligations

Policy: should we require prenuptial agreements?
Garbade: Wife doesn’t hire own lawyer (despite warnings to do so) and after death claims waiver was produced by fraud and undue influence. COURT upholds prenuptial because of no evidence of fraud; it was her own choice not to get counsel.
Grieff → prenuptial agreement between man and woman waived right of election against each other; he dies 3 months later, and wife petitions. Court remands to have full inquiry into circumstances (burden-shifting?)

Unintentional disinheritance[edit]

UPC 2-301 - omitted spouse gets intestate share against premarital will unless:

Appears will was made in contemplation of marriage
Will expresses intent to be effective notwithstanding subsequent marriage, or
Provided for spouse by transfer outside will and intent that transfer be in lieu of testamentary provision is shown by testator’s statements or reasonably inferred from amount of transfer or other evidence [contemplates non-probate transfers to show intentional omission]

Prestie: Man remarries ex-wife, dies before he can alter his will, inter vivos trust was altered to give her life estate in his condo.

NV Statute: Presumptive revocation as to new spouse after marriage unless spouse provided for in marital contract, or mentioned in way to indicate desire to disinherit AND no other evidence to rebut the presumption
Son argues that modification of trust rebuts presumption of revocation.
COURT: Modification of inter vivos trust is not admissible as evidence to rebut presumption of will revocation by marriage

RIGHTS OF CHILDREN[edit]

Intentional omission[edit]

American Rule → you can exclude your children. Most married couples here exclude their children in favor of the survivor

Policy Questions
Should their be specific grounds that are permissible to exclude?
Will contests → Malleable standards often bent by juries and courts to do what they think is right
No forced share for children may lead to excess litigation

Louisiana system → forced share for child unless there’s just cause to eliminate: Physical attack, Cruelty, Got married w/o consent of parents, Fails to speak to parents for 2 years
Family maintenance statutes: UK (and rest of Common law world): financial provision as would be reasonable for spouse to receive, regardless of necessity for support (broad discretion to judge)

can look at all facts and circumstances
lots of litigation; judge can impose own will over testamentary intent
NO forced share in these jurisdictions

Lambic → Australian abandons wife and daughter; moves in with Barbara (de facto 2nd wife) and has 2 kids with her. Total estate value $209-$220k (principal asset is caravan park). Two sons have nothing, and abandoned daughter owns apartment and has $33k/year job. Abandoned daughter sues. COURT says law is to do what a “wise and just testator” would have done; gives abandoned daughter $20,000 (just over 10%); attempt to tailor decision to match equities of situation
Tax planning → argument that family maintenance wreaks havoc on the estate planning

Unintentional Disinheritance[edit]

Class gifts allow will to change
To my descendants, per stirpes
Possibility of more children, or pre-deceasing
Mistake cases

After-born children: Most people want them included[edit]

NJ3B:5-16(a)

UPC § 2-302 - OMITTED CHILDREN
Relevant sections
(a) If T fails to provide for after-born or adopted child, they receive share in estate… (depend on how many other children T had living). Gives pro rata share (wants all children to have same amount).
(b) Doesn’t apply if:
(1)omission intentional (No extrinsic evidence allowed, intent must be clear from face of will);
(2) T provided for child w/ transfer outside of will & intent shown
(c) If T mistakenly believes that child is dead; child entitled to pretermitted share
In practice: graft kid onto estate plan. sum all property left to other kids, re-divide equally giving omitted child in same character that other kids get theirs (in trust, outright, subject to condition)
Remainder after portion was taken for pretermitted child is divided up proportionately according to bequests in will (if one gets $10k and one gets $5k in will, 3rd kid gets $5k and other 10 is proportioned 2/3:1/3).
Interpretive difficulties: What do you do if one had a trust and one had outright gift? What about proportionate shares depending on order of birth?
State pretermitted child statutes
protect children born (adopted) after execution of the will (e.g. UPC)
also protect those alive when will was executed- need clear intention to disinherit
“MO” type: for children not named or provided for in will. Must appear from will itself that omission was intentional. No extrinsic evidence allowed.
“MA” type: child takes unless omission intentional and not a mistake; extrinsic evidence allowed.

Azcunce v. Estate of Azcunce (Fl. 1991)- Estate left to spouse & three children. Patricia not in will: born after will and first codicil, but before second codicil (republication by codicil after patricia’s birth)

FL Statute: intestate share for any of his children born or adopted after making of will unless (i) omission was intentional or (ii) most of estate to other parent (and already had kids when will executed)
Court holds π’s prior status of a pretermitted child was destroyed when 2nd codicil was executed.
Sitkoff: wrong- don’t have to have republication if destroys intent.

Malpractice issues: Standing to sue atty for negligence:

Few states → old rule barring suits unless privity of contract
Most states → allow any person who was an intended beneficiary to sue- show by competent evidence
Minority rule (inc. FL)→ T’s omission must be obvious from face of will
Espinoza - Azcunce epilogue; ironically, she lacks standing for malpractice b/c her name isn’t mentioned in the will- but that’s the problem!
McAbee v. Edwards (Fl. 1976)- holds lawyer liable for malpractice when T leaves everything to daughter, then remarries. Husband got intestate share - lawyer said it was ok not to change will, daughter would remain sole beneficiary. Is this consistent with Espinoza/Azcunce?

Estate of Laura → NH Statute: “every child or issue of child not named or referred to in the will” = rule of law that omission accidental unless evidence otherwise. Court holds T who specifically names one heir in an effort to disinherit him has “referred to” the issue of that heir for purposes of the statute. Mentioning disinheritance of father constitutes intentional disinheritance of grandkids, too.
Estate of Treloar (NH 2004)- Will names son-in-law as executor, doesn’t mention daughter who pre-deceased him . Holds pretermitted grandchildren b/c no use of daughter’s name in will & reference to son-in-law as executor was just a reference, not a bequest (or denial)

Naming of non-kin ancestor is not enough to cut out grandkids
Cf. Boucher v. Lizotte (NH 1932) - “$500 to x, wife of my son y.” Court holds use of son’s name sufficient reference to disinherit him.

TRUSTS[edit]

Introduction[edit]

Trust: management relation whereby trustee manages property as a fiduciary for benefit of one or more beneficiaries. Trustee holds legal title to the property & usually can sell & replace it with property if thought more desirable. Beneficiaries hold equitable title.

Triangular relationship
S transfers property to T
T agrees to hold for benefit of B (manage it, distributions)
Bs have rights to sue T
Five common uses of trusts in estate planning
Revocable trust
Testamentary marital trust
Trust for incompetent person
Trust for minor
Discretionary trust
Settlor/donor/grantor - creates trust
inter vivos- created during life by:
declaration of trust- declares holds property in trust
requires manifestation to hold the property in trust
Can be oral & doesn’t require delivery
deed of trust- transfers property to another person
must deliver to trustee
testamentary- created by will, has to be in writing b/c Wills Act

Trustee - may be individual or corporation; settlor/third party/beneficiary

Rest 3rd - “A trust will not fail for want of a trustee”- court will name one
Have legal ownership & owe fiduciary obligations to beneficiaries: comprises duties of loyalty, prudence and other subsidiary rules.
If you don’t specify fees in the trust instrument, then you look to statutory requirements
Amateur vs. institutional trustees
professionals have more experience/expertise
institutional trustees are more expensive:
amateur trustee- friend or relative
Langbeing’s Three functions of trusteeship
Investment - initial selection & monitoring
Administration - accounting, reporting, tax filing
Distribution - interpreting & applying language of trust instrument (family member may be better suited than professional)

Beneficiaries - hold equitable interests. Remedies for breach of trust:

personal claim against trustee for breach of trust—but no higher priority then other creditors of the trustee
equity gives add’l remedies—personal creditors of the trustee can’t reach the trust property
To A for life, remainder to B: A has life estate and B has remainder Many of

NOTE: can be both trustee and beneficiary, but a valid trust requires that Trustee owe equitable duties to someone other than herself
Trust v. Legal Life Estate: legal life tenant has possession & control of property; trustee has legal title to the trust property. Trust almost always preferable to legal life estate., because it can deal with problems life tenant might encounter:

Trust can require Reinvestment of proceeds of sale
Powers of sale → can put in trust instrument: borrowing money; leasing; waste; expenses
Creditors → can’t reach equitable estates
Duties in managing property → trust law has law of fiduciary admin
Commercial uses of the trust
Before corporate form, large-scale businesses regularly organized in trust form- common law business trust= why we have antitrust law today
Trust preferred for: mutual funds; asset securitization; pension funds
29 states have codified common law business trust—statutory business trust
Trusts vs. Corporations
Separation of ownership and control: Manager is not beneficiary
BUT manager’s powers are limited by ex ante restraints imposed by S
More agencies costs concerns: no market mechanisms to police
Fiduciary obligation: bigger; It’s all we have to enforce behavior

ELEMENTS REQUIRED FOR CREATION[edit]

UTC[edit]

UTC §401 - METHODS OF CREATION: A trust may be created by

(1) transfer of property to another person as trustee during settlor’s lifetime or by will or other disposition taking effect upon the settlor’s death
(2) Declaration by the owner of property that the owner holds identifiable property as trustee; or
(3) exercise of a power of appointment in favor of a trustee

UTC §402 - REQUIREMENTS FOR CREATION: (a) A trust is created only if:

(1) capacity
(2) intention
(3) definite beneficiary or is:
(A) a charitable trust
(B) trust for care of animal
(C) trust for noncharitable purpose
(4) trustee has duties
(5) same person is not trustee & beneficiar
(b) beneficiary is definite if can be ascertained now or in future, subject to perpetuities rule

UTC §404 - TRUST PURPOSE: A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve….

Intent[edit]

Words “trust” or “trustee” not required. Sole question is whether the grantor manifested an intention to create a trust relationship. To hold “for the use and benefit” of another is sufficient manifestation of intent.
Lux v. Lux (R.I. 1972) - provision of will that real estate “shall be maintained for the benefit of said grandchildren.” Guarding tries to claim outright devise. Court says it’s a trust; appoint executor under will as trustee.

no fixed formula to create a trust; no need to name a trustee
Standard approach: Executor of the estate is the most logical choice for trustee; already picked this person for one fiduciary duty

Jimenez v. Lee (OR 1976) - Π sues father for accounting of assets in trust; claim trust arose from 2 separate gifts made for her benefit.

Court holds clear transfer of property w/ intent to vest beneficial ownership in a 3rd person. Gifts made for educational needs of π. Trust: specific purpose & property.
∆ violated duty to beneficiary
Trustee’s duty to maintain and render accurate accounts is a strict one.

Precatory language: when language of T creates merely a moral obligation unenforceable in court, e.g. “with the hope that x will do y”

Colton v. Colton - “recommend to her the care and protection of my mother”—Court concludes T intended to create enforceable trust.
Each will must be construed in accordance with language used in each particular case in light of all the circs

Gifts vs. Trusts: the delivery requirement: To have a completed gift of personal property, donor must have donative intent and transfer the property.

Delivery need not be physical:
Constructive - gives donee means of obtaining property such as a key
Symbolic - gives donee something symbolic of the object
Hebrew University Association v. Nye - Wife announces gift to library in Israel, sign newspaper release, tell others she “had given” library to π. Dies before send it.
First Trial: NO Declaration of trust: no manifestation of intent to impose upon herself enforceable duties of a trust nature; intended to make a present legal gift inter vivos.
CT Supreme Court - she didn’t behave like trustee (remand)
Second Trial - constructive or symbolic delivery. Delivery of memorandum & Wife’s acts & declarations show an intention to give & to divest herself of ownership, was sufficient to complete the gift (NOTE: didn’t deliver any volumes, which would’ve done the trick)
Sitkoff - think of this as substantial compliance.
Restatement (Third) of Property → A gift of personal property can be perfected by intent alone, IF intent is shown by clear and convincing evidence (would support Hebrew Y in Nye case)
Rest 3rd Trusts - If property owner intends to make outright gift inter vivos but fails to make the transfer, gift intention will not be given effect by treating it as a declaration of trust.
But Comment d says if manifestations of intention provide reliable evidence of intention, and there is no idiciatio nthat this purpose has been abandoned; interpret not as intention to make a gift, but as a declaration of trust. (very murky)

Trust Property → Res[edit]

A trust cannot exist w/out trust property (res). (with exception of pour over wills).
Segregation of property → differentiates trust from other debt obligations; need to “trace the corpus”
Unthank v. Rippstein (TX 1964) - Craft writes a letter to Rippstein saing he’d pay her $200/month for five years if he lives that long. Handwriting in margin binds estate to make $200 monthly payments

Court says not a holograph (Sitkoff seems to disagree).
HOLDING: TRUST ROUTE FAILS BECAUSE THERE IS NO PROPERTY. TRUST segregates separate property, DEBT is a general obligation; would have to hold entire estate in trust and give remainder to other Bs after 5 years!

Resulting trusts: transferee is not entitled to the beneficial interest so interest reverts to transferor or estate; an equitable reversionary interest arising by operation of law in 2 situations:

Where an express trust fails or makes an incomplete disposition
fail to meet condition to receive trust → passes to successors
Where one person pays the purchase price for property and causes title to the property to be taken in the name of another person who is not a natural object of the bounty of the purchaser

Brainard v. Comissioner → Brainard orally states that he declares a trust of profits that he makes in his stock trading activities next year (1928). Benificiaries are wife, mother and 2 minor children (pay tax at lower rate)

Court: trust did not arise until after profits were credited on taxpayer’s books; no res at the time of declaration (profits from trading didn’t exist at time of declaration, so no property right in grantor). Profits were properly taxed to him instead of kids/wife.
Tax law: Unearned income of kids are taxed at same rate as parents (avoid transfers); Grantor trust (over which grantor has control) is taxed at grantor’s rate

Speelman v. Pascal → letter made a valid transfer of profits from Pygmalion musical that was yet to be produced (transfer of rights to receive royalties)
Restatement §41 → “An expectation or hope of receiving property in the future, or an interest that has not come into existence or has ceased to exist cannot be held in trust.” RULE: It must be an actual property right today: Contract right, Tort claim, Insurance right, Remainder

Beneficiaries[edit]

UTC §408: Trust for Care of Animal: Validates trusts which name pets as beneficiary; terminates on the death of the animal(s) UTC §409 (482): Noncharitable Trust Without Ascertainable Beneficiary: Except as otherwise provided in Section 408 or by another statute, the following rules apply:

(1) A trust may be created for non-charitable purpose without a definite or definitely ascertainable beneficiary or for a noncharitable but otherwise valid purpose to be selected by the trustee. The trust may not be enforced for more than (21) years
(2) A trust authorized by this section may be enforced by a person appointed in the terms of the trust, or if no person is so appointed, by a person appointed by the court.
(3) Property of a trust authorized by this section may be applied only to its intended use, except to the extent the court determines that the value of the trust property exceeds the amount required for the intended use. Except as otherwise provided in the terms of the trust, property not required for the intended use must be distributed to the settlor, if then living, otherwise to the settlor’s successors in interest.

Identifying the Beneficiary[edit]

Beneficiary principle: There must an ascertainable beneficiary to whom the trustee owes fiduciary duties (implies standing to sue). If not, the trustee is in effect an absolute owner

Exceptions: charitable trust, beneficiaries of a private trust may be unborn or unascertained when trust created
Unborn and incompetent beneficiaries → court names a guardian to enforce the rights for them

Clark v. Campbell (NH 1926)- will “to trustees to make disposal to such friends as they select.” Clear intent and property. However, clause does not provide for definite and ascertainable beneficiaries. “friends” has no accepted statutory or other controlling limitations

Trustees argue it was just power of appointment defeated by language
Irony: Because he tried to make it a fiduciary appointment, it’s invalid and falls back into the residue (they end up with it outright).

Marilyn Monroe will: “I give and bequeath all of my personal effects and clothing to Lee Strasberg, “it being my desire to distribute these to my friends, colleagues, and all those to whom I am devoted.” This was a gift with precatory language and indefinite beneficiaries.
NOTE: Power of appointment: when transfer to indefinite class, transferee has power of appointment & has discretionary power to convey the property.

Test of validity - if the class of beneficiaries is so described that some person might reasonably be said to answer the description, the power is valid

Pet Trusts → Pets are property and don’t qualify to receive bequests under a will. They are not ascertainable beneficiaries of trusts (no enforcement powers

Honorary trusts - person given the property has an honorary trust. May be for any specific, designated purpose that is not capricious. Has to use it for purpose; if doesn’t, passes on resulting trust to remainder beneficiaries.
Perpetuities - common law: void if can last beyond all relevant lives in being at creation of trust + 21 yrs; assume a dog can live 100 years
In re Searight’s Estate (OH Ct. App. 1950)- T devised dog to Florence & put $1,000 in bank for care (75cents/day). Court holds it a valid honrary trusts. Dismissed perpetuities problem: $1000 won’t last 21 years, even with 6% interest.
Statutory reform - UPC §2-907 & UTC 408: trust for care of pet is valid for life of the animal. Other purposes valid for 21 yrs. Intended use of trust can be enforced by individual designated for this purpose or by guardian appointed by court. At least 7 states enacted some form of this

A Writing?[edit]

UTC §407 - EVIDENCE OF ORAL TRUST: Except as required by a statute other than this, a trust need not be evidenced by a trust instrument, but the creation of an oral trust and its terms may be established only by clear and convincing evidence.
Inter vivos oral declaration of personal property is enforceable. Statute of Frauds requires inter vivos trust of land to be in writing.

Under certain circumstancess, a court will enforce an inter vivos oral trust of land or an oral trust arising at death.

Hieble v. Hieble (Conn. 1972)- → A transfers land to B, and B promises in return to transfer it to C. Not in writing, so not legally enforceable. Court uses constructive trust (not a real trusts) to prevent unjust enrichment
Pappas v. Pappas - court will not remedy unjust enrichment if π has unclean hands (e.g. father perpetrated fraud—transferred property pre-divorce).

Oral trusts for disposition at death
Oliffe v. Wells → Donovan leaves her money in trust to Rev. Wells to do what he thinks is best “to carry our wishes.” Bequest was to Rev as trustee, but unknown who Bs are, so no-one to enforce the trust. Trust is too indefinite to be carried out, so the equitable interest goes to next of kin by resulting trust.
Secret trust - no evidence on face of will of trust, but oral promise to use the legacy for specific purpose. Court allows external evidence of promise to prevent unjust enrichment. Enforceable through constructive trust in US.
Semi-Secret Trust - will indicates that B is to hold the legacy in trust, but doesn’t identify beneficiary. No external evidence of promise allowed b/c face of will shows an intent not to benefit trustee personally. Legacy will fail.
Rest 3rd Trusts - constructive trust in both circumstances, but notes current weight of authority follows enforcement of semi-secret trusts is NOT majority rule.
Importance: Secret gifts to mistrisses off the record; “kitchen table wills:” poorly advised, unsophisticated unfaithful have these problems.

RIGHTS OF BENIFICIARIES[edit]

Types of Trusts[edit]

Mandatory trusts → specify recipient and amount of payment: to A as trustee for benefit of B; income to be paid quarterly. Settlor has total control (fewer agency costs), BUT not adaptable to changed circumstances
Discretionary trust → allows discretion as to amount paid and/or recipient of payment: $1,000 trust to pay so much of income and principle as trustee sees fit to whomever in the class he wants. Gives trustee ability to adapt to circumstances, but harder to determine breaches of duty.

Support trust: amounts necessary to support x
Discretionary support trust: combines explicit statement of discretion w/ a stated support standard

Exculpatory Clauses and Discretion[edit]

UTC §814 - DISCRETIONARY POWERS; TAX SAVINGS: Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as “absolute”, “sole”, or “uncontrolled”, the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.
UTC 1008 → (a) exculpatory clause is invalid to extent it relives bad faith or reckless indifference, or was inserted as a result of trustee’s abuse of fiduciary or confidential relationship [lawyer-trustee]. (b) exculpatory term drafted by trustee is invalid as abuse of fiduciary/confidential relationship unless trustee proves exculpatory term is fair under circumstance and that settlor had adequate notice of existence and contents
Marsman v. Nasca → Sara dies and leaves 1/3 of estate in trust to second husband (Cappy) for life, and remainder to her daughter (Sally). Trustee has discretion to provide for “comfortable need and welfare” of husband. Exculpatory clause no trustee should be held liable “except for his own willful neglect or default.” Trustee gives B money and says that if needs any more money he should send a letter explaining why. No further inquiries. B dies. Sally dies; making her husband the sole owner. He sends letter to Margaret (2nd wife) evicting her from house, and Margaret sues lawyer.

Court finds that Trustee has duty of inquiry & did not meet responsibilities of inquiry or distribution.
Remedy: Instead of house, W can have amount of trust money she would’ve had if trustee had been prudent; remand for fact-finding
COURT: Fact that he drafted the provisions isn’t dispositive. No rule of law requires she get independent counsel to make clause valid; clause is valid.

Exculpatory clauses Can’t relieve of ALL liability: bad faith, reckless indifference, intentional/willful neglect are always culpable

Extended Discretion
simple discretion: courts won’t substitute their judgment as long as actions in good faith & reasonable.
unlimited discretion: courts will intervene if utter disregard of B’s interests
Rest 2nd: standard of whether trustee has acted how settlor contemplated that he act—good faith.
McNeal v MeNeal → “A trust in which there is no legally binding obligation on a trustee is a trust in name only and more in the nature of an absolute estate or fee simple grant of property”

Taking into account other resources in exercising discretion:

Scott → Presumption is that you are to receive benefits regardless of other resources (can be rebutted by trust instrument)
Restatement (Third) → presumption that trustee must take beneficiaries’ resources into account, unless trustee determines that purpose of the trust better served by not taking it into account

Arbitration clauses: Does this preserve the beneficiaries’ rights to enforce?

If you understand arbitration to being a type of enforcement, then you’ll say OK
If you say arbitration blocks enforcement, you’ll agree with AZ court
Schoneberger (note, p. 543): Donor may NOT unilaterally strip beneficiaries right to access the courts absent their consent [how does this court understand arbitration?]

Given ADR’s growing popularity, unlikely Schoneberger will be last word

CREDITOR’S RIGHTS[edit]

Creditors can attach a trust if no other protective provisions[edit]

UTC §501: RIGHTS OF BENEFICIARY’S CREDITOR OR ASSIGNEE: To the extent a beneficiary’s interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary’s interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means. The court may limit the award to such relief as is appropriate under the circumstances.

Discretionary Trust[edit]

B’s creditors have no recourse against trust
Rationale → creditor has no recourse, because the beneficiary has no rights

CAN’T put creditors in better position than beneficiary
BUT beneficiaries do have rights for breach of duty

Alternative rationale → remaindermen have rights UTC §504 - DISCRETIONARY TRUSTS: EFFECT OF STANDARD

(b) Except as otherwise provided in subsection (c), whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, even if:
(1) the discretion is expressed in the form of a standard of distribution; or
(2) the trustee has abused the discretion
(c) court may require trustee to pay equitable amount of child support, alimony, spousal maintenance, but not more than amt trustee would’ve paid had he complied with standard or not abused discretion
(d) Nothing can stop beneficiary from enforcing his or her own rights
Comment: May not be abuse of discretion to withhold payments if they’ll just go to creditors

“Cutting off procedure” - order directing trustee to pay the creditor before Bs. Trustee need not pay B, but if he does, must pay creditors first.

Hamilton v. Drogo- cutting-off-income procedure= lien attaches in period of time before property is transferred to beneficiary.
Policy: Reflects the reality that beneficiary does have some right
Encourages negotiations & settlement → blocks beneficiary from getting anything unless we strike a deal

No abuse of discretion for non-payment of debts: trustee can claim settlor didn’t want creditors to get money; Better implements the purpose of the trust

OR is it better for my beneficiaries to get 25 cents on the dollar??

If creditors didn’t have recourse against discretionary trust, beneficiaries could just make an end-run around the trustee by running up big bills and having creditors go after the trust. The only way a discretionary trust is to allow trustee not to pay creditors
NOTE: Support trusts → both UTC and restatement obliterate distinction between support and discreitionary trusts

For education, health and welfare.
Under trad’l law, creditors have no rights against beneficiaries of support trust except for people who furnish necessary svcs/support, e.g. doctors, grocers b/c they’re giving you your necessities.
Rest 3rd Trusts §60: allows creditors to stand in B’s shoes & compel a distribution
This is not actually the law anywhere
Confusing comment - T’s refusal to make distributions may not be an abuse, even if would have been abuse against B…

Protective trust: trustee pays income to A, but if creditors attach interest, mandatory income interest ceases & a discretionary trust automatically arises. Common in England, but not here b/c we have ST trusts.

Spendthrift trusts[edit]

UTC k505(a)(1) - Donor’s creditors can get at revocable trust with spendthrift clause during donor’s lifetime (not effective asset protection)
NOTE: under UTC valid spendthrift clause MUST PROHIBIT BOTH VOLUNTARY AND INVOLUNTARY transfer of interest by beneficiary

Fundamental Question → Whose money is the trust?
Trustee is a proxy for the donor, just giving money over time (creditor’s couldn’t go after Krueger’s grandma)
Trust is the money of the beneficiary. If you sue Krueger, you should be able to attach the trust

No other common law jurisdiction besides US enforces spendthrift trust
Scheffel v. Krueger: spendthrift clause in convicted sex offender’s trusts prevents victim from taking tort judgment against trust

Policy: victim screwed because Krueger’s mother had a good lawyer
Π’s arg: tort creditor is NOT voluntary creditor (negligent in investigating Δ's credit); purpose of trust can’t be fulfilled (he’s in prison)
Court: he might get out of jail; still use it for support while in jail.

Shelley v. Shelley → beneficiary of trusts disappears and claims made against trust by kids and ex-wives for support and alimony. Trustee has discretion to distribute corpus to beneficiary or his children in case of emergency where “unusual and extraordinary expenses” were incurred

Spouses can recover from INCOME ONLY; can’t touch principal because Grant’s interest is discretionary; doesn’t arise until after trustee exercises discretion
Kids can seek payment from corpus as beneficiaries b/c they’re named & construe this as emergency situation
NOTE: UTC would change and allow spouses to recover against corpus

Spendthrift does NOT protect against the US Government (IRS)

Tort Creditors
Can’t bargain in advance like contract creditors, so should they be able to reach?
Not settled law: MS court allowed tort victim to reach spendthrift trust in Sligh, but then MS legislature overruled the decision, passing legislation exempting ST from tort creditors
UTC § 503 - doesn’t recognize an exception
Rest 3rd §59 - doesn’t recognize an exception, but Comments make it questionable.

Collective action problem → trust lawyers & lobbyists are stronger than tort victims, but not spouses and children
“Station in life rule”: creditors can recover against a ST trust to amount in excess of what is needed to maintain B in his station in life.
Bank. Code § 541(c)(2), an interest in trust that is not alienable under local applicable law doesn’t fall into the bankruptcy estate. Without this, could push everyone into involuntary bankruptcy and reach trust (overcome Spendthrift clause)
UTC §502 - SPENDTHRIFT PROVISION: (a) ST provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest. UTC §503 - EXCEPTIONS TO SPENDTHRIFT PROVISION: (b) ST provision unenforceable against: (1) beneficiary’s child, spouse, or former spouse who has a judgment or court order; (2) a judgment creditor who has provided services for the protection of a B’s interest in the trust; and; (3) a claim of this State or the US…

Self-settled Asset Protection trusts[edit]

541(c)(2) of bankruptcy code (p. 557)
Interest in trust that is not alienable under applicable law is not part of bankruptcy estate
Federal law that implements state spendthrift law; without it, the whole thing falls apart

Creditor can recover against self-settled trust to the extent trustee could under any circumstances pay out property to settlor

Revocable trust → creditors can get everything (settlor has power to revoke)

States: AK and DE allow self-settled asset protection trusts, NV, ID OK (caps at $1 million)
Tort argument → The tort system is out of control. This lets people protect themselves from ridiculous tort damages
Cook Islands → can have self-settled spendthrift trust, but only if you don’t live in Cook Islands
Public choice theory → local banks and lawyers wanted the law: Brings money into state
Lines of attack: Choice of law, Public policy, Federal bankruptcy

NO good appellate decision on asset protection trust being challenged in another state, yet

FTC v. Affordable Media, LLC → informercial scammers set up trust in Cook Islands for assets. Anderson’s were co-trustess with Asia City

Court ordered Anderson’s to repatriate assets
Asia city refused to repatriate → Andersons are under duress, no longer trustees, can’t control money
Court imposed contempt: Andersons had control; inability to comply and bank’s refusal to comply appears to be precise goal of the trust
Sitkoff: Andersons really lose because of trusts protector business
In this case, they made themselves trust protectors with power to override a determination of duress
Therefore, impossibility argument fails
NOTE: District Court purged the Andersons of contempt, freed after six months in jail. FTC sued cook islands, settled for $1.2 million

In re Lawrence → $7 million trust in Mauritius, and ∆ loses securities law arbitration with $20.4 million judgment against him. ∆ argues that duress provision had removed him from control. NOT a trust protector, BUT he can change the trustees; can stick somebody I who will do what he wants. As of summer 2004, he’s still in jail
Sitkoff: maybe you don’t need complete protection; leverage in settlement will be enough to make trust useful

Policy choices
change 541(c)(2) → If you make only $125,000 excludable, then trusts will go down to that amount
full faith and credit → NY doctor with trust in Alaska. File claim in NY, and claim that AK law is against public policy. Take NY judgment to AK and claim full faith and credit: race to the courthouse
Offshores → don’t give someone discharge if you have self-settled offshore trust

====Special needs trust Many families Don’t want tort settlement property to go to incapacitated child outright, because it will all go to state to pay institutionalization costs
Compromise: Trust created for someone who is institutionalized that provides for special needs (extras they don’t get from state hospital):

Income to beneficiary
Remainder goes to government
Dual policy goals
not having someone with a lot of money collecting government benefits
allowing people to make it nicer for incapacitated relative

Lots of Complexities → who creates trust, etc. Consult an expert

FLEXIBILITY[edit]

Powers of Appointment[edit]

Problems of flexibility
Deal with problem that trust will endure after settlor’s death when she can no longer revoke
Discretionary trust is really a power of appointment in the trustee to appoint income and principal
Power of appointment in the beneficiary: Postpone and delegate decision of who should be the next beneficiary. Advantages:
polices bad behavior among descendants
allows to provide for one kid who may have a greater need
tax reasons
Vocabulary
Donor → person who creates PofA. In the case above, husband is the donor
Donee → person who receives the power to appoint (not beneficiary)
Objects → permissible class of takers to whom donee may direct the property
Object can be a donee
Apointee → recipient of property
Appointee takes the appointive property
Takers in default of appointment. If donee fails to exercise power (failure includes exercise in favor of invalid object), fate of property depends on trust instrument. If there’s nothing in the instrument, property reverts to the estate and goes to donee’s successors
General power of appointment → Any power that may be exercised in favor of donee’s estate creditors, the donee or the donee’s descendants.
May be exercised for the personal benefit of the donee
Special power of appointment: Non-general, Limited power; Anything you donee can’t exercise for own benefit is special
NOTE: Special power does not necessarily have fewer objects
Testamentary power vs. lifetime power
Testamentary can only be exercises by will
Lifetime power can be exercised during life
Donee’s rights/responsibility[edit]
Agency-type of authority

Irwin Union Bank & Trust Co. v. Long (Ind Ct. App. 1974) - W receive judgment against H from divorce decree, tries to attach trust set up by H’s mother for H. Trust: “…shall have the right to withdraw from principal…up to four percent…”

Trust created a general power of appointment in H. If trust was ST, W could get. But here he has power to choose, so could voluntarily alienate.
Relation back-doctrine—only if power exercised, is property his. Otherwise property still belongs to the donor.
When the donee fails to exercise the power, creditors cannot acquire the power or compel its exercise, nor can they reach the property.

Relation back doctrine - Trad’l view: donee of a general power has no property interest in the appointive property unless the donee exercises that power, and that the right to do so is personal to the donee.

General rule & Rest 2nd- creditors can’t recover
State statutes- creditors can reach if GP presently exercisable and other assets not sufficient for creditors;
NY says never if testamentary
Rest 3rd- abrogates rule if GPPE
UTC §505(b)(2)- creditors can reach unless 5 in 5 power (same as tax code) -→ see comment

Surviving spouse of donee: trad’lly can’t reach b/c appointive assets not in probate estate, but UPC §2-205(1)(i) allows.
Creditors of donee of a special power can never reach b/c donees can never benefit themselves. *rare to have reason to use GP unless 5 in 5.

Tax considerations
Property subject to GPA is taxable in your estate as if it were your property. So taxable when you die as if general ownership.
Exception: if you have a PoA to benefit yourself, but less then 5k or 5%, it doesn’t go in your estate (“5 in 5 power”)
NOTE: Subject of power generally exercisable falls into bankruptcy estate
SPA not taxable to your estate→ can give donee significant control over the trust property, but avoid estate taxation at the death of the donee.
Generation Skipping Tax —applies to post-1986 trusts
Each transferor has $2 million exemption, can transfer up to this amt in a trust, “dynasty trust”, which will be exempt from GST tax.
Can give B special power of appointment to allow them to choose between paying the GST tax or the estate tax.
Exceptions to not using general power: Marital deduction is not taxable under estate tax; Can exclude 11k of inter vivos gifts each year if gift is a present interest

Formula → put it in trust for benefit of child; name child as trustee may appoint so much of principal as is necessary for his health, education and welfare; upon child’s death remainder to such of my descendants as he appoints

In effect outright ownership
Kids can’t sue because it’s power of appointment
No tax when kid dies without GST.
Creditors can’t get at it either → special power
Ascertainable standard keeps it out of taxable estate, but those with standing to police the standard won’t do it because of power of appointment

UTC §505(b) - CREDITOR’S CLAIM AGAINST SETTLOR: (b) For purposes of this section:

(1) during the period the power may be exercised, the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power; and
(2) upon the lapse, release, or waiver of the power, the holder is treated as the settlor of the trust only to the extent the value of the property affected by the l, r, w exceeds the greater of the amount specified in… IRC…

UTC 505(b), Restatement (Third) of Trusts and several states have said donee of general power presently exercisable can be forced to exercise power favorable to creditors (UTC limits this to amounts over 5% or $5k by referencing Internal Revenue Code)
General testamentary power → A handful of states allow forced testamentary appointment

Creating powers of appointment[edit]

Parallels trust creation → Words power of appointment are not necessary;

problems of precatory language
Sec. 1 on p. 598 → look at all of the words together to determine PofA
Problems of exercise[edit]
Residuary clauses
Beals v. State Street Bank → Isabella Dexter has general testamentary power of appointment. Partially released power of appointment to extent that she could have appointed to anybody other than dad’s descendants (did it to get tax advantage). Dies without expressly exercising PofA. Court → Power has been exercised
Choice of law: MA court applies MA law. Law of donor’s jurisdiction (MA) trumps donee’s jurisdiction (NY) in general power (standing in donor’s shoes)
MA law → residuary clause exercises general power, but not a special power. originally a general power, so the residuary clause should work
Rule of construction of residuary clauses
Majority Js: clause does not exercise a power of appointment held by T.
Differ about face of will or ee to prove
MA flipped and takes this now
Minority Js: clause does exercise any testamentary PoA that you have
Few Js (NY): exercises PoA if the residuary devisees are objects of the power
UPC § 2-608 → in absence the appointment to be exercised by specific reference, general residuary clause exercises power ONLY if it’s a general power AND there’s not gift in absence of exercise (OR will manifests an intent to include the property subject to the power)
“Specific reference”: to prevent unintentional exercise of power, can require that power be exercised only by an instrument referring specifically to the power.
§2-704 - assumes that if you require specific reference, it was designed to avoid inadvertent reference—blending clause wouldn’t be specific enough
Blending clauses: e.g. “I give all property & all property over which I have a power of appointment.” Is ineffective b/c doesn’t make specific reference. See §2-704 comment

Exercise PofA into trust for appointees with future power of appointment:

General power of appointment → no problem. Could appoint to yourself (or your estate) and then give it back out with limitations (2 step process); law doesn’t require the straw man and allows gift with limitations
Special power → Did I want donee to be able to give it however she wants, or do we want donee to have to appoint property outright?
Old law – can’t appoint property subject to special power in further trust
restatement goes the other way
Rest 2nd Property: donee of special power can create a general power in an object of the special power or create a SP in any person to appoint to an object of the original special power.
Exclusive vs. non-exclusive
exclusive - donee can exclude entirely one or more objects of the power
nonexclusive - donee must appoint some amt to each permissible object
Rest 2nd: SPAs are presumptively exclusive

Fraud on a Special Power: a “fraud on the power” won’t be valid, e.g. if you try to circumvent the power by appointing to x w/ agreement that x will give to y.
Anti-lapse: unclear what happens if appointee dies before donee

Anti-lapse statutes typically say “bequests” or “devises” but not appointments
Susan French → “relation back” → look back as if T was doing this; he would’ve done it
General power is like outright ownership, and use antilapse statute for spouse. She could have appointed it to herself. BUT this only covers general power

Ineffective appointment → comes up more with General powers. Two salvage doctrines if ineffective:

Allocation - if you try to exercise a SP in a general bequest (residuary clause in a will). If the donee blends both the appointive property and the donee’s own property in a common disposition, allocate property to those who actually are objects and rest of estate to others.
Capture - if it looks like donee of a GPA tried to treat the property as their own, we say that you have captured the power and we treat it like you did to greatest extent possible (only when attempted exercise is ineffective or incomplete). If you exercise power of appointment, but then you leave property to invalid taker (e.g., $10k to dog and rest to Atwood), redirect $10k to valid beneficiary on theory that you have manifested intent to exercise power. Think you would have rather captured it and given to residuary beneficiary (which you could’ve done) than fail to appoint. If you knew this would’ve faild you would’ve give all to Atwood.
Failure to Exercise a Power of Appointment
If GP fails to exercise→ passes in default of appointment. If no takers in default→ to donor’s estate (pain)
If SP donee fails → takers in default. If no→ may pass to objects of the power
Loring v. Marshall (Mass. 1985) - will gives Cabot (nephew) SPA to appoint the trust principal to wife (if living at donor’s death) for life or issue. Cabot exercised power in favor of wife for life. She dies after Cabot, Jr. Who gets the remainder?
2 options → revert to Marion and her heirs OR imply gift in default of employment to Cabot, Jr.
COURT → gift in default of appointment to Cabot Jr. Marion wanted property to stay in family. By giving it to Cabot, Jr.’s estate it will stay in the family
Nothing to charities b/c private litigation already eliminated them.
RULE: When SP not exercised & absent specific language indicating an express gift in default of appointment, property not appointed goes in equal shares to members of the class to whom the property could have been appointed.
Main lesson → if you have a limited power with a narrow set of objects and no gift in default of appointment and no takers in default of appointment, court may allocate it to any valid object
Theories re failure to exercise a special power—
Implied gift in default: Rest 2nd: theory that implied gift in default of appointment to the potential appointees (as in Cabot- donees of SP have strong argument).
Imperative power theory: When creating instrument manifests an intent that the permissible appointees be benefited even if the donee fails to exercise the power.

Modification[edit]

Modification[edit]

Creditors rights → in a world w/o spendthrift, since you can alienate your interest, there’s no functional difference between allowing creditors to attach and allowing modification

English rule: Saunders v. Vaudie → if all the beneficiaries are adults, they can come together and modify. Since they can alienate nterests, they should be able to modify/termination
Variations of Trusts Act of 1958 → allows court to decide in favor of modification for unborn and minor beneficiaries
US rule: donor can prohibit alienation; even if not spendthrift American modification/termination is more restrictive
Claflin Doctrine → no modification or termination of trust if doing so would defeat the material purpose of the Settelor.
Traditionally, we infer that spendthrift clause exists to protect beneficiary from creditors; generally don’t terminate to pay creditors
Difference in orientation: beneficiaries are owners of trust property (UK) vs. trestee standing in shoes of owner (US)
2 types of deviation
  1. Distributive deviation → want to change the payouts
  2. Administrative deviation → change restrictions on administration (i.e., kinds of securities you can invest with)
Distributive deviation[edit]

Stuchell → living beneficiaries seek modification, want ¼ share of principal that will go to mentally disabled son to be passed as discretionary supplemental needs trust, so state won’t get all of it to pay for his care.

COURT → denies modification; Donor could have drafted for this if he’d anticipated
Restatement (Second) of Trusts §167: Can change the trust if compliance would defeat or substantially impair the accomplishment of the purposes of the trust
Comment B → can’t deviate merely because deviation would be more advantageous to the beneficiaries

Impecunious widow scenario → Property to trust company in trust to pay income to my wife for life and principal on her death to my children

Income might not be enough; principal can include stock appreciation
Widow often goes to court and requests to allow trustee to pay her for principal
beneficial to one beneficiary, but it harms later recipients
Tension → respect the dead hand vs. what the dead hand would want

Trust protectors → can be used with everyday trusts; Give protector the power to change trustee, modify trust

Pros → Protection if institutional trustee gets taken over by bad bank; trustee is unresponsive
Bank will be more responsive if protector can fire them
Ability to modify trust for unforeseen circumstances (Stuchell)
Make it more tax efficient
Provide for appointment of trust protector to be named by adult beneficiaries
NOTE: This effectively give beneficiaries power to terminate the trust
Administrative deviation[edit]
Pulitzer → Said never sell newspaper’s stock. Court allows modification to preserve object of the trust: dominant purpose must have been maintenance of a fair income for his children
Langbein → ordering trustee to maintain undiversified portfolio is no different than ordering destruction of property; against public policy. Trust must be for benefit of beneficiaries; you can’t have a “purpose trust”
UTC 105(?) → mandatory rules!
Harry Markowitz → portfolio theory.
NH → allows for trusts with terms of no diversification
DE allows purpose trusts for indefinite durations
Law reform[edit]
Cal Probate Code allows court to modify provisions of trust or eliminate trust if owing to circumstance not anticipated by settlor, the continuation of trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust
UTC §412: MODIFICATION OR TERMINATION B/C OF UNANTICIPATED CIRCS OR INABILITY TO ADMINISTER TRUST EFFECTIVELY
(a) The court may modify the administrative or dispositive terms of a trust or terminate the trust if, b/c of circs not anticipated by the settlor, mod or term will further the purposes of the trust. To the extent practicable, modification must be made in accordance w/ settlor’s probable intention
(b) Court may modify admin terms of trust if continuation would be wasteful, impracticable, impair administration
(c) Upon term of trust under this section, trustee shall distribute property in a manner consistent w/ trust purposes
Restatement §65 authorizes modification w/o a showing of unanticipated circumstance and w/o donor’s consent. If beneficiary’s rationale for modification outweigh’s donor’s purpose, give it to them even without change of circumstances
Argument: if it’s easier to modify a trust, donors are less likely to make them. Current beneficiaries have it better, but future beneficiaries as a class are worse off.
Tax concerns[edit]

Everybody allows modifications

2 scenarios
Poor, incorrect drafting makes trust bad functioning. This is really reformation. “trust doesn’t say what I want it to say”
Subsequent modification of Tax makes trust inefficient
courts have reformed or modified a trust to obtain income or estate tax advantages
reformation= equitable remedy that conforms instrument to what it was intended to say
modification= equitable deviation- changes terms to achieve intent in light of changed circs
UTC §416: MODIFICATION TO ACHIEVE SETTLOR’S TAX OBJECTIVE
To achieve the settlor’s tax objectives, the court may modify the terms in a manner not contrary to settlor’s probably intentions.
3 loose ends[edit]
Langbein → Even if Pulitzer wanted to keep $ in the newspaper at all costs, restriction would not have been enforceable. It would be dead hand control
Is there an affirmative duty of trustee to seek modification
Restatement §66 → if trustee knows that circumstances warrant judicial action, there is a duty to pursue modification
UTC has nothing parallel, but you could argue that general fiduciary duty still imposes obligation
trust protectors and fiduciary duty
AK default rule → not a fiduciary
Restatement → Protector is a fiduciary
Uncertainty in default rule, so be clear about it when you draft.

Termination[edit]

Termination of Trusts
May not terminate if contrary to material purpose of settlor. Disagreement as to circumstance under which termination would be contrary to purpose of the settlor:
Majority view- spendthrift trust is a material purpose b/c whole purpose is to prevent alienation.
Discretionary trust- probably mat purpose too- esp if ascertainable standard
Generally: can’t be terminated if Spendthrift trust, B receives principal at specified age, discretionary trust, support trust - all of which state material purpose of settlor)
In re Estate of Brown: Trust to pay college tuition of nephew’s kids. Upon completion support for nephew and wife for life, remainder to kids. Kids and life tenants petition for termination after they’re all done with college
Court: termination cannot be upheld here, because material purpose of settlor has not been completed. Lifelong income for beneficiaries through the management and discretion of trustee. NOT a support trust, discretionary, nor spendthrift trust, but donor wanted there to be management and discretion of a trustee
Bizarre holding: remainder beneficiaries consented to modification. Plus don’t all trusts have trustee management as a purpose?
UTC and Rest 3rd Trusts liberalize law of trust termination
UTC §410 on Mondification and termination (a) …a trust terminates to the extent… no purpose remains to be achieved, or the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve.
Spendthrift trusts- UTC §411(c) as originally drafted- ST is not presumed to constitute material purpose. Deleted this in 2004 b/c states didn’t like.
Change in circumstances- §412 allows modification/termination if consistent w/ probable intent
Cy Pres for charitable trusts - §413 (see charitable trusts)
Uneconomic trusts- §414, §417 authorize termination of small trusts [<$50k] and combination or division of trusts respectively—due to operating expenses
UTC 414 allows for termination if value is too small [<$50k] to justify continuing costs of administration. Court has power to modify, terminate or remove trustee and appoint a new one.
UTC 417 → combination or division if the result does not impair rights of any benenficiary or adversely affect achievement of purpose of the trust
Unanimity of Bs- §411(b)- non charitable irevocalbe turst may be terminatede upon consent of all Bs if no longer necessary to achieve purpose; modify if no inconsistent with a material purpose of trust (like Claflin)
411(d) → if everybody doesn’t agree, may be approved by court if (2) interests of B who doesn’t consent will be adequately protected
Material purpose standard- Rest §65- mod/term w/out changed circs/settlor’s consent if all Bs consent and rationale outweighs settlor’s material purpose → But not law anywhere in states yet
Summary:
Traditional rule: Claflin, can’t mod/term w/out permission except in narrow circs
Modern rule: can, but have to show changed circs and probable intent of settlor

Will substitute (inter vivos) trusts[edit]

Majority rule- trust created by written instrument is irrevocable unless express or implied provision that settlor reserves power to revoke. Obviously testamentary is irrevocable b/c you’re dead
Minority rule (CA, IO, MT, OK, TX, UTC)- trust is revocable unless declared to be irrevocable.
Langbein- This rule better satisfies expectations, but no competent drafter ever leaves revocability to the default rule; this only affects “kitchen table” trusts
UTC §602: REVOCATION OR AMENDMENT OF REVOCABLE TRUST → Unless the terms of the trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust.
changing/revoking inter vivos trust through a will
Traditional rule → can only revoke in accordance with terms of trust instrument (if it says only in a certain manner, then will could be no good)
UTC 602→ can amend or revoke in any way that shows clear and convincing evidence. Restatement says same thing
Traditional rule →

Trustee removal[edit]

Not strictly speaking a modification of the trust terms
Policy questions: goes hand in hand with limitations on modification; BUT if too difficult to replace trustee, inadequate enforcement
Balance: trustee needs to be able to carry out duties over objections of trustees, but don’t want the bar to be so high so as to allow shirking of duty
Traditional rule: Dishonesty or Serious breach
Can’t remove for: non-serious breach, simple disagreements
Trustee named by donor is harder to remove. If ground for removal was known by donor, it will be hard to remove on that ground; this could be why the settlor picked the person
pattern of indifference may not be serius breach
Drafting → give family ability to switch corporate trust entities
Entity must be responsive to family, But won’t be replaced by someone under control of beneficiaries
Corporate trust entities have incentives to do a good job
Heirs Inc → Lobbies for changes in UTC rules
UTC 706(b) → authorizes settlor to bring suit to remove the trustee
serious breach of trust
lack of cooperation among co-trustees substantially impairing administration
unfitness, unwillingness or persistent failure of trustee to administer effectively (and court determines removal best serves Bs’ interests)
Official comment → longterm pattern of mediocre performance may qualify (indifference not so egregious as to be serious breach)
706(b)(4) → substantial change in circumstance or removal is requested by all of the qualified beneficiaries. Court finds that removal of trustee best serves interests of all he beneficiaries and is not inconsistent with a material purpose of the trust and a suitable cotrusttee or successor is available
In practice 706(b)(4) helps beneficiaries
Old trust says you have to pay beneficiaries $6,000/year. It’s now worth $45 million. Under 412(a) → beneficiaries claim change in circumstances. Court gives Bs the case (despite the fact that inflation is universal)
Current case → beneficiaries say that the trustee company has been lazy; Family swill send out RFP, invite top three proposals to pitch and choose on. If all Bs agree to replace with top bidder, court will let them: still corporate trustee, consistent with purpose of trust


Trust Administration – Fiduciary obligation[edit]

Fiduciary Administration[edit]

Means by which we regulate the agency problem between the beneficiaries and the trustee.
Problem: Issues change over time; Can NEVER give specific instructions for all possible circumstances
Solution: Tell trustee you can do almost anything, and we’ll measure it against your duty
History and theory → Trusts evolved as branch of law of conveyancing. At first, only duty is to give property to kids when settelor dies. Wealth today is human capital and liquid financial assets
use trust to impose financial intermediation requires giving the trustee some powers: to invest, to sell, to fight litigation
As powers get broader B’s get more vulnerable → Fiduciary duty
Replace supervision with deterrence → bank robbery analogy (penalties for robbers as opposed to bag checks)
Principal-Agent problems → agent controls the shirk/work decision. It’s not always worth it for agent to shirk
Controlling the renegade manager (still parallel to coporate law)
Sell the interest → not so easy, discretionary trusts
Voting: Elect new manager → trustees generally can’t vote; some options for removal
Take over → no corporate takeovers here
Right to sue → This is the mechanism we use
Fiduciary obligation → right to sue
Duties of Loyalty and Prudence with Subsidiary rules to implement
Duty of loyalty → Polices conflict of interests; where T puts own interest ahead of Bs
Fiduciary law has replaced narrow trustee powers
incomplete contract; fiduciary duty fills in the terms after the fact
Policy Theme: Is this morality or contracts? Incomplete contract (economics) vs. ethics of upholding settlor’s desire (“punctilio of honor” rhetoric)

Trustees’ Powers[edit]

Originally no powers besides those specifically named in the instruments
Instruments used to have laundry lists of powers, but Eventually powers found themselves in statutes. Uniform act in 1930’s adopted widely
2 types of statutes:
Statutory list of powers to be incorporated by reference: “all the powers enumerated in statute XYZ”
pros: don’t have to think of all the possibilities
cons: other states may not know statutes
Change default rule for no powers into list of powers
same problem with states and mobility
UTC 815 → all powers over trust property which unmarried competent owner has over owned property, and any powers appropriate to achieve distribution.
Can basically do anything the owner can do.
UTC 816 → enumerates the powers: third parties like to see something specific. List helps us to interpret 815 and find breaches.
Third party duty to investigate
Used to be only way to monitor trusts was to block transactions → require 3rd parities to investigate
This would slow down the economy too much today
It will almost always be the case that there will powers enumerated in the instrument or the statute
Allows trustees to transact with costs of investigation
Evolution from simple tax dodge to management regime in which powers are monitored by fiduciary duties
Powers tell us what trustees can do, but fiduciary obligations tell us whether or not exercise is valid: “existence of power however created or granted does not indicate whether or not it is prudent to exercise power under the circumstances”

Duty of Loyalty[edit]

“Sole benefit rule” → must act solely for the benefit of the beneficiary
Problem: self-dealing
Could be of benefit to beneficiary to invest in trustee’s own company
Bright line rule against self dealing
Hartman v. Hartle → Trust; will directs trustees to sell real estate and divide among children. Sell farm for $3,900 to executor’s brother-in-law, resell 2 months later for $5500. Court finds against executor for self-dealing, despite that evidence points to unfairness.
Colbrook → 2 months before C’s lease to expire, she leaves property in trust to Colbrook for kids. Short on time, C renews his own lease and leases to third party next year. Court holds breach of duty to renew own lease.
NO FURTHER INQUIRY RULE → once there is self-dealing, trustee loses unless:
Self-dealing authorized by instrument
Judicial approval
Full and fair disclosure to beneficiaries
Bs may not be in good position to judge, may be minors and incompetents that require you to go to court anyway
Policy:
Rule vs. Case-by-Case standards: Hard to prove self-dealing, but in aggregate it’s not very often that self-dealing is in best interests of beneficiaries;
channel the cases to ex ante disclosure when there is a real advantage to self dealing; Colbrook could’ve gone to judge for approval
Exceptions for institutional trustees
Banks: Bank that is a trustee may deposit trust assets in an account in its own bank, but no co-mingling
Investment funds: trustees can invest trust assets in their own funds
funds have incentives to remain competitive in the market
lowers transaction costs
double fee problems → some statues allow it (would pay fees anyway), but some don’t
Langbein favors a standard → rule has exception after exception. You’re really just screwing the poor with these rules
UTC §802 (c) - a transaction by the trustee w/ a close relative or his lawyer is presumptively voidable, not absolutely forbidden.

Duty of Loyalty Damages[edit]

Policy: Deterrence
Disgorgement of profits by trustee: Fiduciary loses everything they gained by self dealing
NOT expectation damages: can’t use contract damages based on compensating other party; no damages if deal was good
As long as you have no further inquiry rule, unless you have punitive measure of damages, you can’t deter anything. Fall right back into best interests
Trust pursuit rule: if the trustee acquires other property while wrongfully disposing of trust prop, B is entitled to enforce a constructive trust on the property acquired. Rest 2nd Trusts.
3-prong general remedy principle: make whole!
any loss from breach,
OR any profit made through breach of trust (disgorgement)
OR any profit that would have accrued if there had been no breach
Prong 3 is a debate: some courts just give you interest; Restatement, Hallbach craft hypothetical portfolio and simulate it
In re Rothko → leaves 798 paintings in trust for benefit of charity. 3 weeks after death, execs contract to sell 100 paintings for $1.8 million with $200k down w/12 interest-free annuity installments; remaining paintings put with Marlborough Galleries on consignment with 50% commissions; Daughter wins challenge.
Trustee Reiss was Director, Secretary treasure of MGallery; Stamos, failed artist, who wanted work shown; Prof. Levine knew of conflicts (not protected by legal opinion letter)
Damages: value of paintings at time of deal: what they would’ve had if there had been no sale. $9.2 million for R, S, MNY; $6.4 for Levino (no appreciation damages)
BUT it would have been prudent to sell paintings and diversify – investments would’ve appreciated less than paintings
If this were a prudence case, make beneficiaries whole, but since this is a loyalty case, make damages higher
3 interesting facets of Rothko
Major source of ambiguity over no further inquiry vs. prudence
Nice example of use of rhetoric to obscure whether or not this is a conflict that was consented to
Damages questions
NOTE: overlap between imprudence and self-dealing. If you’re being imprudent, it’s likely you’re disloyal (maybe just stupid). If you’re disloyal, you usually manifest the conflict through imprudence
Conflict vs. self dealing
Restatement, Bogart and Scott don’t seem to draw distinctions between conflict of interest and self-dealing
Treatises also collect cases in which the courts apply fairness analysis. Perhaps this is when there is conflict but not self-dealing
Standard loyalty case is self-dealing and disgorgement. Unusual to have strange asset that appreciates dramatically more than a regular asset

Multiple Trustees and loyalty[edit]

Traditional Rule: require unanimity of trustees
Modern rule: No longer need unanimity
UTC 705(a)(1) → changes the rules of resignation. Used to need permission of court to resign; can now resign with notice to other trustees
Armature trustee does it out of familial obligations: Not so hard to administer; probably put a bunch in good stocks and a bunch in good bonds
Professional trustee has financial motives: Fees and commissions; probably won’t intentionally act badly because they need to protect their business
UTC § 703 COTRUSTEES: (a) …may act by majority decision. In certain situations, remaining cotrustees may act for the trust
(f) A trustee who does not join in an action of another trustee is not liable for the action except section (g
(g) Each trustee shall exercise reasonable care to:
(1) prevent a cotrustee from committing a serious breach of trus
(2) compel a cotrustee to redress a serious breach of trust
(h) dissenting trustee not liable for joining in action if notified cotrsutee of dissent at or before time of action unless serious breach of trust.
Rest 2nd Trusts § 258: Contribution or Indemnity from Co-Trustee
Trustees are entitled to contribution from the other when liable to B for breach of trust except (a) one substantially more at fault or (b) one receives benefit
If bad faith breach, no contribution from co-t

Duty of Prudence[edit]

UTC § 804 PRUDENT ADMINISTRATION: A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirement, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
UTC 805 → trustee may only incur expensse that rae reasonable in relation to trust property, purpose of trust and trustee’s skills.
UTC 806 → trustee with special skills or expertise (or named in reliance on representiation of special skills) shall use those sills. See UPIA §2(f)
UPIA §2 → prudent man standard of care A trustee may invest in any type of investment or property, must manage risk-return based on the beneficiaries (widows and orphans vs. Bill Gates)
§3: diversification required, except for special circumstances
§4: trustee must review assets and take action concerning retention and disposition w/in reasonable time after accepting trusteeship or receiving trust assets.
Prudent Investor Rule and 3 core reforms:
Increase Attention to Risk-return tradeoff
Diversification is all but necessary
Fixing prudence to kill non-delegation doctrine
History of Standard
After South China Sea bubble, only allowed trustees to invest in “safe” investment (gov’t bonds, 1st lien mortgages); evolved to Court lists
Armory (1830) → prudent man rule; see p. 796
Mid-1900’s → most states abolish their lists in favor of Armory Prudent Man Rule
1959-1990 → Stench of the legal lists lingers; if you invest in stock that goes down, that was bad speculation and gov’t bonds always OK
Problems with old approach:
Obsession with default risk (that value of corpus will go down), but ignored inflation risk
viewed the investments in isolation, not portfolio; hingsight bias
Chamberlain’s Estate → held ommon knowledge that market was about to crash in Aug. 1929, so investing before the crash was imprudent
Late 1970’s → academic frontal assault on the Prudent Man Rule with Modern Portfolio theory/. ERISA, DE, CA and a few other states adopt a new statement of prudence
Early 1990s’ ⇒ Restatement third and Uniform Prudent Investor Act. NOTE: It took a long time to change because of lack of incentives: “for most of the [twentieth] century . . . the law has imposed the traditional standards largely on the beneficiaries of those trust settlors who failed to hire competent counsel.
Collins: Risk-return case under the old law. T’s will creates a testamentary trust for wife and kids. Lawyer/trustee loans $50k at 10% with payments of interest only for 30 months to distressed client secured by second mortgage on property COURT hold junior mortgage presumptively improper
Criticism: no focus on real problem: trust for widow and orphan that is undiversified and secured on basis of second mortgage
New law wouldn’t change results, but it would change analysis: NOT diversified, No reasonable steps to verify facts relevant to investment
Power invest vs. duty to be prudent: Collins and Explicit authorization to make any type of investment irrespective of the fiduciary law in CA
Could opt out of no further inquiry rule
Court reads language to be equivalent of §2(e) → you can invest in anything, but that doesn’t make it prudent!! Having power doesn’t answer is no the same as fulfilling duty
Socially responsible investing: UPIA §5 official comment → no form of “so-called social investing” is consistent with duty of loyalty if you sacrifice “interest of beneficiaries.” Beneficiary consent is a problem because of unborn beneficiaries.
Forcing diversification: what if settlor aware of the risks?
Langbein → trusts must be for benefit of beneficiaries. Law is about that, not dead hand benefit of Settlor’s ego
NH statute → if donor says you should not diversify, you need to diversify. DE has no statute, but lawyers swear that’s what chancery court will do.
NOTE: Restatement imposes duty to seek modification
Pulitzer: Court said instruction not to sell company stock was only because he thought it was good value; not about holding onto company
PA statute → you must diversify but only trust created after date of statute (don’t penalize trustees relying on the old rule)
Exception to diversification rule
Home is a substantial share of the trust corpus
Programmatic investment → trust holds family business
Tax and transaction costs → costs of selling and repurchasing outweigh diversification benefits (unlikely; may just need to spread out sales over time)
multiple trusts
investment in mutual fund: fund is diversified, like delegating to fund managers; must show due care in selecting a fund

Duty of Loyalty Damages[edit]

a. At a minimum we want to make beneficiary whole
Scott:
i. reimburse any loss caused by breach, or
ii. Disgorgement of any profit made through breach of trusts
iii. profits that would’ve occurred without breach (benefit of the bargain)

b. Janes → hypothetical portfolio remedy. Breach of duty by trustee who fails to diversify estate of Kodak stock, which plumits from $135 to $47/share.

i. Surrogate awards $6 million of damages (hypothetical portfolio). App Div reduces damages to $4 million (loss of capital plus interest)
ii. Higher standard of care is higher for professional trustees with this expertise. They neglected: (1) formal analysis to come up with plan; (2) following own protocols (20% limit; common trust was only 3% Kodak); (3) regular reviews during 7 years period of steady decline in valued of stock

c. Hypothetical Portfolio Damages (“total return damages”)

i. Find last date trust was prudently invested
1. ambiguity about when you should’ve sold is bank’s fault; we’ll go with most favorable story for Πs.
2. banks’ counter argument would have to be “we had lots of opportunities to be prudent”
ii. Take difference between value then and valued now.
iii. Account for growth (interst?)appellate calls this “market index damages”
iv. Problem: How to choose a portfolio
1. easy if ∆ is bank; follow common trust fund
2. NOTE: Trustee’s problem. He has to claim “there are so many ways I could’ve been prudent, so you can’t figure out how to assign damages
v. Let Π pick a portfolio, shift burden to ∆ to solve ambiguity

d. capital loss plus interest: rate determined by trial court. Use legal statutory rate for judgments not paid; superrficially cleaner, but not obvious

Delegation[edit]

a. Old Rule: no delegation - Restatement (second) §171 → duty not to delegate to others acts which he or she can reasonably perform

i. Comment (h) → can’t delegate to another the power to pick investments: this is a core function
ii. options under this rule: resign as trustee or hire advisors and write detailed memo accepting recommendations (charade non-delegation)

b. Shriner’s Hospital v. Gardner: Remainder beneficiary sues inexperienced trustee who delegated investment duty to second trustee. Trustee wins on causation; she delegated investment authority, but the loss was not caused by bad investments (2nd trustee sold) c. UTC 807, UPIA 9 → trsutee may delegated provide due care and caution in: Selection, Instruction, monitoring; not personally liable for breaches if delegation valid d. NOTE: in the event of fraud, duty of trustee who delegated to take action to recoup funds

Sub-rules of Fiduciary Law and Trusts[edit]

Duty of impartiality[edit]

a. UTC § 803 IMPARTIALITY
If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests

b. Must show due regard to the interests of both the income recipients and remaindermen

i. Income beneficiary will want most possible income (high yield)
ii. Remainderman will want the corpus to grow (capital appreciation)

c. Impartiality does NOT mean equality; don’t’ have to treat identically, standard is “due regard”

d. Dennis vs. RI Hospital Trust Co
Surviving issue (income Bs who will inherit remainder) sue trustee for failure to sell buildings whose value declined (favored rent income over corpus value). Remedy: measured damages by what buildings were sold for and what they should have sold for; difference in value plus interest; removed the trustees
i. Prudence: no appraisal or real management
ii. Bs are also income beneficiaries, so suing indicates that decrease in principal outweighed short term increase in income

e. Mulligan (note 1 – 827)

Corporate trustee is co-trustee with wife of donor, failed to persuade her to diversify or go to court.

f. Petitioning the court for instructions: Literal impartiality will mean can’t choose one or the other.

i. Would donor want waste of time and resources?
ii. Huer → Breach of duty to anvance one view over the other; punished trustees who take duty to donor personally. This destroys incentives to advocate in court

Income Principal Problem[edit]

a. Distinction is arbitrary; a dollar is a dollar

i. Rent, bond, cash dividends are income.
ii. Appreciation is principal
iii. Dividend and stock appreciation are worth the same to a person

b. Old law → head-in-the-sand

i. Use duty of impartiality to dictate the investment strategy
ii. BUT this is an added unnecessary constraint and distorts investment decisions

c. UPIA § 104 and equitable adjustment

i. Same principal and income definitions
ii. §104 → trustee has the equitable power to reclassify income as principal and vise versa
iii. Rule: if after investing prudently, the prinicipal and income rules would violate impartiality, you need to readjust

d. Unitrust

specified % of corpus to “income beneficiary.” States have unitrust conversion statutes; trustee may convert income and principal trust into a unitrust upon notice. Statute gives a % (usually 4%)

e. Heller → NY adopts both equitable adjustment power and unitrust statute. Remaindermen/trustees elect unitrust, because statute forbids them from exercising equitable adjustment power

i. COURT: As trustees they have duties to other remainder beneficiaries (No citation of “punctilio” case). NOT no further inquiry. You have to actually look at the circumstances
ii. Retroactive coverage → court says you can retroactively make trust unitrust back to date of statute

f. Unitrust, Equitable Adjustment and Taxes: To get a deduction for trust it has to be a payout of income (not principal). Reclassification if it was done pursuant to state law and between 3 and 5%. NO reclassification without statute

Other duties[edit]

a. Obtain trust assets without unreasonable delay
b. Protect trust property
c. Ear-mark trust property (take title as trust property) and No co-mingling
i. Definition of trust → fiduciary relationship over specific property
ii. Damages:
1. Old view → held liable for everything and anything
2. Modern view → only damages that result from failure to earmark or commingling

d. Almost all states have abrogated the rule with respect to institutional trustees and common trust funds

i. UTC 810(d) → allows you to commingle several funds provided you keep records of how much belongs to each
ii. Doesn’t unwind co-mingling generally

e. Policy: Benefits of both rules and standards:

i. lessens burdens of production
ii. makes standards cheaper to litigate
iii. solves problem of over and under inclusive rules
iv. some common fact patterns are per se imprudent or per se disloyal
v. atypical scenarios can claim imprudence or loyalty breach

f. Duties to disclose

i. Attorney-client privilege: Some courts say that until trustee and beneficiary are adverse trustee’s lawyer’s communications with trustee are discoverable by beneficiary. [Is there a super-agency relationship?]
ii. Major transactions: T has duty to inform Bs of material facts re transactions significantly affecting trust estate & B’s interests
iii. Involve significant amount of trust property
iv. Harder to unwind

Duty to inform or Account[edit]

a. Duty Inform → the stick;
Beneficiary’s right to go to trustee and demand information, and court will order information
b. Duty to Account
the carrot;
Trustees who make regular accountings are discharged from liability re matters specified in the accounting (avoid prudence/impartiality violations), Incentive to provide information

c. Basic rule: Bs have right to information reas related to B’s rights under the trust. If useful & helpful to B’s ability to enforce their rights, then right to get that information. If you make an accounting and B approves, you’re isolated from liability to extent that accounting was fair (induced ppl to do this)
d. UTC 813(b)(1) → upon request of beneficiary, trustee must furnish a copy of trust instrument

i. UTCC 813(b)(2) or (3): must give notice to beneficiaries of existence of trust
ii. 813(a) → You have the right to information reasonably related to your interests in the trust

e. UTC 105(b)(8)-(9) Default and Mandatory Rules--- (b) The terms of a trust prevail over any provision of this [Code] except:

i. [(8) the duty under Section 813(b)(2) and (3) to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, of the identity of the trustee, and of their right to request trustee’s reports;]
ii. [(9) the duty under Section 813(a) to respond to the request of a [qualified] beneficiary of an irrevocable trust for trustee’s reports and other information reasonably related to the administration of a trust;]

f. Restatement 173, comment c → makes clear that beneficiary always has the right to examine information reasonably related to his interest in the trust;

g. Can you have a secret will by using an inter vivos trust?
i. Rest 2nd Trusts, comment c—classic rule, B always entitled to info
ii. UTC §813(a)-(b)- T is under obligation to respond to requests for info from Bs
iii. *Note: everything in UTC is deemed default rule that settlor can contract out around except provisions in §105 that are mandatory. As originally drafted, couldn’t contract out of this if Bs were 25, but objections→ UTC bracketed (optional)- to blunt opposition & so legislatures don’t have to think about dropping whole part.

h. Fletcher → 3 separate trusts created for son (James) and 2 grandchildren, each with $50,000. son wants to see entire trust instrument

i. RULE: “trustee is under duty to beneficiary to give him upon his request complete and accurate information and to permit him or his rep to look at finances
ii. Holding: you get to see everything, because it was on trust instrument
iii. Sitkoff: See revocable inter vivos trust as a will substitution
1. settlor probably using trust to avoid will contest
2. Court can’t get around the idea she’s opted out of probate
3. He has no standing to enforce rights of other B’s; irrelevant for him to see portions of instrument not relevant to his trust
iv. Under UTC, testator could specify James can’t see, but default rule is that he can.

i. CA law (p. 337) → trustee has to provide complete copy of entire trust instrument to any beneficiary who asks for it, and to any heir who asks for it!

i. Full disclosure to people with standing to challenge will
ii. Once trust becomes irrevocable due to death, heirs get to see everything in trust (as if it were will contest)

j. Sitkoff → only have a right to see the parts of trust instrument that relate to your interests, but VA court comes holds right to see the whole thing

i. So long as you show he got the flat amount, he doesn’t have right to see anything more
ii. Maybe if there’s a % allocation, get to see everything up until division, and you could argue that seeing the rest of the data on other trusts can inform you of possible mismanagement

k. National Academy of Sciences v. Cambridge Trust Co. (Mass. 1976)- accounting is only binding on beneficiaries to the extent that there’s accurate info therein

i. Trust to W until she remarries; W and bro-in-law don’t disclose her remarriage. Bank is trustee. Beneficiaries approved accountings which mentioned payments (but never raised issues of remarriage.)
ii. Bank guilty of constructive fraud to extent that fiduciary has made no reasonable efforts to ascertain the true state of facts it has misrepresented in the accounts.
iii. Constructive fraud rule: When you make representation about your knowledge of a fact that could easily have been verified and you didn’t verify, that’s constructive fraud
iv. If speak as if you have knowledge, and you don’t, your claim is false. Payment to Florence was implicit representation that she was remarried.

l. Accountings vs. reports: Trusts often have provisions providing that judicial accountings should be dispensed w/ and accounts rendered periodically to the adult income Bs.

i. Testamentary trusts- few courts say T can’t dispense w/ statutorily required accountings
ii. Inver vivos trusts- can have a no judicial accounting provision
iii. In re Crane (NY)- says remaindermen must have right to question actions of trustee; acceptance of income B can’t be discharge of accounting
iv. Prof Westfall: if income Bs can get PoA that destroys remainder, why can’t they absolve trustees from accountability?
v. Briggs v. Crowley (Mass)- no duty to account clauses invalid as against pub policy
vi. UTC §813(c)- says “reports” instead of accountings—less rigid format.

Charitable Trusts[edit]

Introduction[edit]

a. Formation/Nature of beneficiaries → i. no ascertainable beneficiary necessary ii. Need “valid charitable purpose” iii. Trustees can choose valid charitable beneficiaries consistent with overarching purpose of trust iv. How does this compare to real beneficiary? v. Fraud problems → try to frame it as a charitable trust to make it last forever (less of a problem today) b. Modification/Cy pres → court can modify trust when purpose becomes impracticable or impossible to achieve; More liberal than with private trusts, because perpetual c. Supervision/Enforcement → state attorney general has standing to enforce charitable trusts. Does this provide real incentives? What other alternatives do we have? (Smithers) d. Taxation → if trust qualifies as charitable under Internal Revenue code rules, trust doesn’t pay income tax and contribution to trust get you a deduction either against your estate or income tax i. Subsidy ii. practice tip → charitable under state law doesn’t mane charitable under federal law and vise-versa e. Exemption from Rule Against Perpetuities → can last forever

II. Charitable Purposes a. Overlooking need for discernable beneficiary: purposes are so good, we let it go despite lack of enforcement power by discernable beneficiary b. UTC §405(a) → relief of poverty, advancement of education or religion, promotion of health, governmental or municipal purposes, or “other pruposes the achievement of which is beneficial to the community” c. UTC §405(b) → if no indicated particular charitable purpose/beneficiary, court may select one or more consistent with settlor’s intention d. Shenandoah Valley v. Taylor → “candy trust” is NOT a valid charitable purpose. Charles Henry’s trust directs them to invest and reinvest and to pay net income on the last day of the school calendar before Easter and last school day before Christmas (in equal shares) 1st, 2nd and 3rd graders. Payout to be used by such child “in the furtherance of the attainment of his or her education.” i. 2-Part Test 1. Subjectively → Intention to create charitable trust 2. Objectively → must be charitable ii. HOLDING: INVALID 1. Ascertainable beneficiaries (students) 2. BUT Rule Against Perpetuities problem → never ends 3. No valid charitable purpose e. Marsh → Testator leave bequest to provide $1 million trust for every American 18 or older (invest principal for 346 years to raise the funds). Trusteesare President, VP, speaker of the house i. violates the RAP → not sure it will vest ii. NOT a valid charitable purpose

III. Modification/Cy Pres a. Modification rules are different because: i. last forever → hard to foresee changes (polio vaccine trust?) ii. Nobody to police trusts → except attorney general iii. We’re subsidizing trusts b. Need Cy Pres when i. Impossible ii. Impractical iii. Illegal c. Test: i. General vs. specific charitable intent ii. If general intent, find another charitable that approximates the purpose in trust given the contraints d. In re Neher → Hospital Case. Mrs. Neyer Give house to village of Red Hook for use as a hospital. Village couldn’t use it for hospital, and already had nearby hospital. Village petitioned to used building as Herbert Neyer Memorial Hall. NY Ct App found general charitable intent about giving to village and memorial to husband; this is as close as practical given contraints e. Obermeyer → After several inter vivos gifts (half to general university) DR. Kimbrough’s remainder to Wash U Dental Alumni Development fund fails: first fund disbands, then dental school absorbed into med school/hospital i. Lower Court established a few chairs in his name in medical school for research in dentristy ii. MO court reads in three requirements 1. Valid charitable trust 2. Impossible, impracticable or illegal 3. General charitable intent iii. Court uses three factors (which Sitkoff things are dumb) 1. Land vs. money (money more general) 2. Reverter clause: no reverter mean more general 3. Heirs were specifically excluded or received other benefit 4. Outright vs. trust: outright is more general f. UTC/Restatement Presumption of general charitable intent: shift burden to opposing party to show no general charitable intent i. make cy pres better ii. Donor subsidized by exemptions; ensure charitable contributions iii. We could easily make a story for specific intent

g. UTC 413(a) ⇒ expands cy pres to include remedy if charitable trust becomes wasteful (~19 jurisdictions have adopted UTC) i. BUT 413(b) → provision to distribute to noncharitable beneficiary prevails over cy pres only if: (1) reversion to living settlor, or (2) fewer than 21 years since trust’s creation h. POSNER → inability to predict future means rational donor knows his intentions may be thwarted by unforeseen circumstances. Therefore, owner may be presumed to accept implicitly a rule permitting modification of terms of bequest in event that an unforeseen change frustrates original intent i. Restatement → cy pres is quid pro quo for no rule against perpetuities j. Scholarship → cy pres should be more liberal after end of rule against perpetuities k. In practice: Universities will have default clause: “if in opinion of board it becomes impossible, impractical, inadvisable board of trustees has discretion to reallocate funds in such a manner that will still maintain character of the gift.” Market check → incentives not to deviate unless you need to (otherwise you’ll get a reputation and donors won’t give)

IV. Cy Pres in Discriminatory trusts a. Limitations by gender, religion, race, etc. i. Public entities → constitutional problems; courts will cy pres ii. Private entities → local problems b. Senator Bacon left $ for park for whites only; court says gift fails: senator would rather no park than integrated park c. Home for Incurable Boys of Baltimore → racial limitation with gift over. Court cy pres original gift; otherwise it would be upholding the limitation d. Scholarship funds based on racial limitations: University could probably consider race in scholarships if achievement of a racially diverse class requires it, but probably could not maintain separate funds for race e. Religion limitations → court will probably not cy pres trust left for specific church, but this is not conditioning benefits on particular faith. f. Policy: rather than undo gift, just remove the limitation

V. Cy Pres in Absurd Cases a. Buck → Court denies trustee/foundation’s request for cy pres on trust for benefit of Marin County even after corpus shoots up from $9 million to $300 million, and foundation petitioned for cy pres i. Trustee argued 1. T chose foundation with funds for the benefit of 5 counties (NOTE: conflict of interest if they didn’t request cy pres) 2. other philanthropists of this level “reach out beyond their parochial origins” as resources grow 3. She would’ve wanted this if she had anticipated growth ii. NOT impractical → There are things that could be done iii. Slippery slope: moral sense of good use of money is not enough iv. Result: court names new fiduciaries → local officials and Marin County organizations b. UTC on Baron: → allow cy pres on grounds of wastefulness. Hallbach and English say language contemplated sudden ballooning of value out of proportion of the gift (they had Buck-type case in mind) c. Barnes Foundation → large collection of art in museum with huge restrictions on admission and times left open to public; exact instruction on where to hang. Trustees permitted to invest in low-yield government bonds (tremendous inflation risks) i. Fundamental problem: Barnes didn’t have enough $$ to do what he wanted to do. ii. 1st cy pres: Open more often (3 ½ days a week for whole year). charge $5 admission, diversify investments iii. 2nd Cy pres: Trustees petition for (and get) permission to take 50 paintings on a world tour. Raise $17 million in revenue iv. 2002 → trustees petition to be able to move museum downtown to parkway by the PMA, and other foundations will help them raise $150 million v. 1st 2004 hearing → foundation hasn’t shown enough vi. 2nd 2004 hearing → court allows them to move, but Minimizing the cy pres “damage;” Keep paintings arranged like Barnes wanted d. Barnes NOTE: After world tour Barnes Foundation took $12 million to renovate Marion facility, which will be the most expensive nonprofit administrative building in the world. Foundation would probably have to sell that next.

VI. Supervision of charitable trusts (donor standing) a. Traditional Rule: Attorney general can enforce/remove trustees. BUT will AG actually read all annual reports b. Options for policing: give standing to: i. Likely beneficiaries → they have an interest, BUT large class of beneficiaries (vexatious litigation), and may by too poor to sue ii. Donors → donor is dead; incentives for residuary beneficiaries to get bequest cancelled 1. tax problems: too much control = no deduction iii. Families → not really the donor: Robertson case → A&P fortune left to Woody-Woo at Princeton “for training of future government leaders,” but nobody from Woody-Woo goes into government jobs; fortune is now worth $750 million c. UTC 405(c) → The settlor of a charitable trust, among others, may maintain a proceeding to enforce the trust. d. Herzog → After U of Bridgeport closed nursing program in 1991, Herzog foundation asks to transfer gift to provide scholarships to nursing students. to another foundation to administer nursing scholarships. Court denies standing to foundation. i. Restatment (second) 391: Can only be enforced by attorney general. No standing for donor, heirs, representatives (no special interests) e. UMIFA §7 → If you have a gift subject to restriction, and you get permission form donor, you may deviate. i. Provision allows you protection from AG with prior donor approval for change. ii. Comment to §7: charity could ask for donor’s permission. If you don’t get it or do it anyway, you can just hope AG doesn’t sue. iii. New UPMIFA silent about donor standing. Foundations didn’t want donor standing; worried about donor lawsuits. f. Hershey Kiss-off → Illustration of problems with AG enforcement. Hershey trust owns control interest in Hershey company. Value of stock shot up when they announced a sale, indicating company could be run more efficiently. g. Smithers v. St. Lukes → NY court grants standing to donor’s estate. $10 million to St. Lukes for alcohol treatment and research center; Smithers has project approvals. Hospital cancels Gala and decides to sell building 93rd St center, use proceeds for other purposes. i. AG compromise: will return $5 million misallocated rincipal but not income, return original $1 million to endowment fund after sale of building ii. Nassau surrogate court appoints Mrs. Smithers special executrix for estate, files suit against hospital and AG iii. State Court: Makes major change in the law. 3 step analysis: 1. Associate Alumni teaches that standing is NOT exclusive in AG: “or other persons having a right to sue” a. people with special interest b. co-trustees 2. Mrs. Smither’s claim is NOT made on behalf of beneficiaries (not arguing as a surrogate of beneficiaries). Does donor have standing to sue? Does standing pass to the estate? 3. Court ignores Restatement §391: Longstanding recognition of standing for a donor such as Smithers. Never heard of an authority where donor is not able to sue. iv. Court rebuts vexatious litigation argument: Not opening up lawsuits to everybody, only to donor h. Handsman → makes sense to deny donor standing only if there will be lots of bad suits or badly litigated suits that do more harm than good. i. Questions: Can you pass standing in your estate through a bequest? If so, who gets standing by default (say you have two equal takers)? j. Tax issues: if Donor reserves right to enforce, IRS may say not a gift k. Duty analysis: Is it breach of executor’s duty to litigate if it won’t add real value to estate? l. Bishop Estate (Hawaii Trust): Own lots of land, etc. in Hawaii. Trustees get $1 million commissions. Political appointments, self dealing, etc. i. AG investigates, but Bishop Trustees are politically connected, and reappointment is blocked ii. IRS steps in and tells judge to implement better selection mechanism, put caps on commissions, etc. m. Alternative mechanisms i. Charity Monitors: Donors can transfer standing to for-profit companies who professionally monitor their charities. ii. English system: Charity commission appointed by home secretary. 1. Are incentives different from AG? 2. Are there still problems with limited resources and regulatory captures (charities are repeat players)? iii. IRS: charitable entities don’t pay taxes. iv. Charitable Quid pro quo with IRS: MUST pay out 5% per year for charitable purpose v. Posner: No perpetual existence unless you spend the money. Order all charitable entities to spend down funds received within a certain period of years. Entities become subject to market for donations.

Perpetuities and Dead Hand Control

I. Future interests a. FOCUS: Only important detail is contingent or vested (determines perpetuities b. 6 future interests on to p of 624 → mandatory taxonomy; every future interest must fit one of these i. Limited # to ease transacting ii. Stems from times when land was primary interest c. Transferor → reversion; possibility of reverter; right of entry i. FUTURE INTERESTS IN TRANSFEROR ARE ALWAYS VESTED ii. NEVER A PERPETUITIES QUESTION FOR INTEREST OF TRANSFEROR iii. To trust Co. for benefit of my life for wife (when she dies it comes back – vested interest) iv. To trsut Co. to pay income to NYU so long as they teach T&E each year (possibility of reverter/right of re-entry) d. Transferee interests: 2 basic types i. Remainder → passive; just waits for events to take place and takes or not after things happen passively ii. Executory Interest → mean people who take property away actively for failure of contingent e. Vested Remainders (p. 626) → To A for life, then to B: B has a vested remainder. Doesn’t matter what happens. f. Contingent Remainders → To a for Life, then to B, if B survives A. Doesn’t vest unless B survives A g. Special Perpetuities Status: remainder is only vested if nothing could effect share. Example To A for life, then to A’s children i. Ordinary future interest law: “vested remainder subject to open.” ii. For perpetuities purposes: it’s NOT vested!! Contingent. iii. More kids may be born → tying up property with unknown circumstances in future h. Executory Interest → prings into action if life tenant’s property is taken away. All executory interests are contingent i. To A, but if A dies w/o issue then to B. ii. To NYU, but if NYU stops teaching T&E then to B. iii. Exec interest takes property away if failure of some type of contingency. Difference is really one of jargon. i. Future Interests and Perpetuities: We worry about future interests in transferees that are NOT VESTED

II. Rule Against Perpetuities a. History: Duke of Norfolk → Several sons in era of primogeniture. First son is mentally defective; wants to figure out a way that when mentally defective son dies, dukedom passes to 2nd son, and everything else passes down the line i. Defective son takes title. Second son imprisons defective son. When he dies, second son tries to hold onto other titles; claiming perpetuities ii. Earl of Nottingham says condition is OK; dad’s control would wear out in one lifetime b. Rule: Ought to be able to control disposition for lives of people you knew, plus the minority of their children. Lives in being plus 21 years. Moment in time when we do perpetuities analysis: i. Testamentary → at death of transferor ii. Irrevocable Trust → time transfer is made iii. Revocable Trust → time trusts becomes irrevocable (typically death of settlor) – this is when property becomes “tied up” c. NOTE: Rule is NOT a limit on duration of trusts. Prohibits remote vesting of interests i. NOT mandatory to terminate trusts after lives in being + 21 years ii. BUT can be no contingencies remaining after lives in being +21 years iii. By killing future interests that don’t vest, RAP indirectly limits duration of trusts, because ultimately there will be human beings with vested interests. Humans die, then it’s over d. Main Purpose. Don’t want donor to tie up property forever with contingencies. No certainty of title, no alienability of property i. Underinclusive → doesn’t reach vested interests (still dead hand) ii. Overinclusive → no alienability issues if trustee can sell property iii. Really concern: long duration!!! Changed circumstances might render arrangement stupid.

III. Perpetuities Policy Questions and absurd results: a. Is this rule a good way of achieving underlying policies (regulating long-term reach of dead hand)? So what? Do we want to regulate reach of dead hand? (Shapira issues) Is there anything wrong with creating a perpetual trust? b. Prevent fracturing of ownership; keep property alienable i. Doesn’t apply to trust when trustee has power to sell c. Dead Hand → can’t anticipate future. Unresolved contingencies might tie the family up. d. Problem: At common law, enforce the rule mercilessly. Play the game called what might happen? i. Fertile Octogenarian: 80 year-old A could have another kid who lives 21 years after measuring lives all end. ii. Nieces and newphews Funded trusts to A for life, then to A’s nieces and nephews who reach 21. A’s siblings control the birth of more kids iii. Unborn widow: T’s son could marry woman unborn at time of T’s death. She might hold on to life estate for more than 21 years after T’s son dies iv. Slothful executor 00> Will contest could last for entire lifetime of everybody on earth plus 21 years v. Magic Gravel Pit -→ pit could last past lives in being plus 21 years vi. Perpetual War → WWII could last for two cneturies e. Saving Clauses: Language in trust instrument saying “but if any interest would not vest or fail, then trusts will terminate 21 years after death of last determined beneficiary.” i. Malpractice NOT to have a saving clause

IV. Perpetuities Reforms a. Modification, reformation→ change things to fit what we think settlor would’ve wanted had settlor known he was violating the rule i. Reformation → change the words to take care of violation ii. A number of states have statutes specifically authorizing courts to do this iii. Benefit → pass the rule iv. Costs: may not get it exactly right, requires litigation (which must be subsidized by society) b. Wait and See → (PA statute) Don’t ask what might happen, Ask what actually happened? i. Barton Leech loved this → wrote articles about how fantastic the approach was ii. Casner as reporter for restatement (second) of property writes in wait-and-see (epic battle of old law professors) iii. Form one: traditional wait-and-see: use CL RAP period and wait to see if it vests or fails and if not deal with it then iv. Form two: USRAP → something is valid if it satisfied old classic what might happen test, or you wait and see for 90 years! Period based on Waggoner’s average trust life for random sample v. Dukeminier’s objection: rule will die! If we do 90 years, nobody will remember how perpetuities works, and we won’t know why we picked 90 years.

V. real world perpetuities a. Issue is about Tax i. Nobody cares about perpetuities in land ii. Trust funds are real money → stocks, bonds, etc. iii. Question is no tax avoidance b. Trust duration is tax avoidance i. Pay tax when you create trust ii. No more tax paid until transfer of property by person who finally owns it outright iii. Anyone who transfers using a special power of appointment is NOT taxed c. 1986 → Generation Skipping Transfer Tax i. If you’ve managed to avoid estate tax, you pay GST tax (equal to estate tax rate) ii. Policy: We want a taxable transfer at each generation. Next taker on trust looks like a transfer, so we tax it d. GST Exemption: originally $1 million, now $2 million, will be $3.5 million in 2009 i. Now you can fund a trust under the exemption amount for as long as RAP will allow ii. Rule against Perpetuities matters e. States abrogating rule: i. 1986: ID, SD, WI have no rule against perpetuities (curiosities) ii. 1995 DE statute abolishes RAP → DE puts synopsis at front of statute declaring purpose to capture financial benefits of formation of capital and conduct of trust business iii. 2005: about 1/3 of state abolished RAP iv. Motivation: bring business to bankers and lawyers f. Does the cancellation of perpetuities do anything? i. Allows perpetual or “dynasty trust” ii. Only advantage is to descendants who come into being after life in being plus 21 years iii. D&K (2003) → “tidy market?” → Something in it for settlors iv. Rule only matters for people who have trusts much larger than $2 milllion g. Sitkoff study with simple graphs i. DE goes way up and NY goes down after RAP repeal ii. After GST tax takes effect, SD breaks away from ND, IA iii. Implies that about $100 billion poured into states that abolished the rule h. Compromise Proposals: i. after perpetuities, we don’t apply Claflin, and we replace with much more liberal regime. ii. Federal government regulates wealth through GST or through every 90 year tax on perpetual trusts iii. Wait and See for lawmakers: see what happens to trust formation before taking legislative action i. ASIDE: A handful of state have RAP in state constitutions (WY, NV); “monopolies and perpetuities being antithetical to public interest are prohibited” These states tend to adopt USRAP (wait and see 90 years)



Policy Reform Movements a. Shapira v. Union National Bank: Dr. Shapira leaves his residuary estate to three children in equal parts. Conditional gift to David if he marries a Jewish girl with Jewish parents within 7 years of Dr.’s death. If not, “gift over” to the State of Israel. i. Π’s Con Law Argument → Like racially restrictive covenants in Shelley, state enforcement of such provisions would be Unconst ii. Court: this is a disincentive, but not a prohibition. Like any other condition, he can marry whomever he wants but might not get $. iii. Public Policy Argument → Public policy in favor of marriage, and this condition might reduce marriage iv. RULE → REASONABLE conditions will be upheld. Reasonableness will be measured: 1. Temporally 2. Geographically v. Decision: there is ample time and opportunity to marry

b. Anglo-American starting point is testamentary freedom → Restatement 10.1 at 20, 21 i. donor’s intention is given maximum possible effect by law, given certain restraints ii. Everyone agrees that there should be some restraints (e.g., mandating murder), but what should they be?

c. Reason for allow disposition of property after death i. incentives for accumulation of wealth 1. People would spend too much if they couldn’t leave it 2. Evasion: put wealth in diamonds, false valuations, investment in human capital (largest investment today) ii. Natural law/moral argument: owner can use it how he wants

d. Dead hand Control: Restatement 10.1: controlling feature is intent of donor i. Distribution ii. Private ordering, creating wealth

e. Difficult balance between total freedom and total confiscation i. Pros of freedom: 1. Happiness 2. Wealth creation 3. Eliminates costs of policing 4. Incentives ii. Cons of Freedom → perpetuation of wealth inequality

f. Compromise: Estate Tax taxes about half

g. Resatement (Third) §29(c) invalidates trusts that are “contrary to public policy: generally frowns on restraints on beneficiary behavior, but calls for balancing of conflicting social values

h. Sherman: rejects banalcing test of “contrary to public policy” and makes principled analysis: testamentary conditions calculated to restrin legatees’ personal conduct should not be enforced.


Professional Responsibility - Malpractice a. Extrinsic Evidence: Simpson v. Calivas (p. 49) → Neeed for clarity: What does homestead man? i. Robert Senior hires Calivas to draft will. Leaves all real estate to Jr. and Life estate for Roberta in “homestead” located at particular address (house with 290 acres) 1. Probate litigation → “homestead” means the entire property 2. Roberta sells it to Jr. for $400,000 3. Lawyer’s notes: “house to wife as life estate, remaining land to son” 4. Lawyer chose word “homestead.” ii. Issue: Breach of duty iii. Holding: rejects collateral estoppel and privity defenses. In a malpractice case, we need to admit evidence of breaches of duty b. Distinction between probate and malpractice evidence i. Traditional rule → we do not allow extrinsic evidence if there is not ambiguity in the will. ii. Policy concerns over separate standards: Saves litigation costs in probate courts; malpractice suits are more efficient c. Privity defense knocked down by most states: i. Donor hires lawyer to draft the will (privity of contract with lawyer) Problem: person with standing has no injury, but person with injury has not standing. ii. Contract standard: testator hired lawyer to protect recipients iii. Tort theory: Foreseeability → this is a foreseeable injury d. Collateral Estoppel defense rejected i. Defense: You can’t argue homestead means just house, because you lost that in probate court ii. Overruled: collateral estoppel means essential to ruling; evidentiary rules are different e. FACT: states that knock down privity defense tend to allow more evidence at probate. Product of either efficiency or Public choice theory (awyers could be sued, so they lobbied to change the rules)

Professional Responsibility – Conflicts of Interest a. A, B estate plans: everything to surviving spouse b. A. v. B. (N.J. 1999) → Husband and wife hire firm to make estate plan. Another Woman (A) suing husband for paternity hires firm. i. Do they have to tell wife there is another child? He may give estate to other child; this may also affect marriage ii. Confidentiality → owe husband confidentiality iii. If you don’t tell wife, there may be violation of duty to husband iv. Resolution: disclose existence of child, but not specific names v. N.J. Rule 1.6 allows disclosure to cure fraudulent acts c. NOTE: Information did NOT come from client d. Solution: letters that detail firm disclosures of all secrets