Wills & Trusts
- 1 Wills
- 1.1 Probate
- 1.2 Defining Key Terms
- 1.3 Intestacy
- 1.4 Elements of a Will
- 2 Will Substitutes
- 3 Issues About Transfer at Death
- 3.1 How Spouses Share (or not) Property
- 3.2 Changed Circumstances (Wills)
- 3.3 Acts of Property Holder (Intestates and Wills)
- 3.4 Acts of Beneficiaries
- 3.5 Changes in Property
- 3.6 Changes in Domicile
- 3.7 Gifts to Charity
- 4 Trusts
- 4.1 Overview
- 4.2 Creating a Trust
- 4.3 Beneficiary Interest
- 4.4 Reformation, Modification and Termination
- 4.5 Charitable Trusts
- 4.6 Powers of Appointment
- 4.7 Trustee’s Role
- 5 Legal Issues
Wills[edit | edit source]
Probate[edit | edit source]
Process[edit | edit source]
- Gather the assets
- Letters testamentary from probate court allow PR to do this.
- Pay the creditors
- Notify all interested parties (anyone with a stake: named in will, would inherit under intestacy, any financial/pecuniary interest in decedent’s estate)
- Publication for unknown creditors; certified mail to known creditors; non-claim probate statute SOL usu. 4 months (sometimes a bit longer); PR may have to “reasonably investigate” to find creditors; “best notice practicable under the circumstances.”
- Distribute the remainder to the people entitled to it
- Survival, disappearance
- Guardianships (used to be appointed by probate court for incompetents—vy. expensive, some modifications to make less onerous); guardian of property (must be court appointed) v. guardian of person (parents of minor children automatically guardians).
Probate court’s questions: is there a valid will?
Probate process is the same regardless of whether there is a will or not. Personal rep/executor handles a will. Administrator handles a non-will, non-probate estate.
Every estate has to be administered but not every estate has to be probated.
Jurisdiction[edit | edit source]
Probate court of decedent’s domicile at death has jurisdiction. Up to the borders of the state. After that, must do ancillary probate in another state. Probate courts issue “letters testamentary.” Many states have small-estate affidavit process (affidavit plus copy of the will).
Exceptions to the probate process—generally give property to family members before creditors (ex.: homestead exemption (UPC: surviving spouse or children get a $225,000 homestead allowance);
Exempt Property (usu. personal property; UPC $15K allowance; support allowances).
Defining Key Terms[edit | edit source]
Survival[edit | edit source]
- C/L definition was to survive by “an appreciable instant of time”—anything measurable will do.
- UPC 2-104: Must survive by 120 hours to “survive”
- Uniform Simultaneous Death Act: when no sufficient evidence that one party survived by 120 hours, treat each decedent as if they had survived (i.e., don’t transfer property to other party and then distribute to other party’s estate)
- UPC: if not heard from for 5 years, presumed dead.
Familial Terms[edit | edit source]
- Heirs are defined by statute. Usually: spouse, children, parents, siblings.
- Ancestors: lineal ascendants
- Descendants: lineal descendants
- Collaterals: related by blood (maybe adoption) but are not ancestors/descendants
- Marriage is generally valid if it was valid where performed and does not violated a significant public policy concern. Common law marriage: Agree to be married; Cohabitate as husband and wife – implied sexual relations; Held yourself out to community as husband/wife.
Intestacy[edit | edit source]
30-40% of Americans die intestate. Generally about blood relationships (or adoption, but not step); go down the levels identified below until you find a person, then stop.
- Spousal share: states divide this differently (1/2 to each spouse/kids; 1/3 spouse, 2/3 kids)
- UTC 2-102 (and Ore): if all kids also kids of spouse, spouse gets everything (“conduit theory of inheritance”)
- If there are stepkids and full kids—all born to surviving spouse, spouse gets $225K plus ½ of remainder
- If there are kids from previous marriage, spouse gets $150K plus ½ remainder
- If no kids, but parents survive, spouse gets $300K plus 3/4 remainder
- UPC: adopted kids are fully kids, treat as genetic
- Parents may be barred under UPC 2-114 for bad conduct
- Next of kin (closest blood relation not mentioned above)
- Stepchildren (about 1/3 of states put stepkids before the state) [UPC modification in 2008]
- Escheat to the State (UPC: No Taker Provision)
UPC does not go beyond descendants of grandparents!
“Putative spouse” protected in UTC; ditto non-marital children. Half-kids inherit like kids in most states, in some states they take a half share. “Equitable adoption”—adoptive parents never formalize relationship, child still inherits from them.
Open areas: posthumous reproduction; same-sex marriage; stepkids.
Dead people do not inherit, but their descendants represent them.
You never inherit while your parents are alive.
Textbook describes detailed example of intestacy shares (below) on pages 73-74.
Per Capita[edit | edit source]
- Divide estate by number of survivors and share equally. No state/UPC does this for survivors of different generations.
Representation: Common-Law Per Stirpes[edit | edit source]
- Divide estate into the number of surviving children (if any) and deceased children who left grandchildren. Each vertical line gets 1 share; if child is dead but left grandchildren, they equally share their dead parent’s share. (If your parent is dead, then grandparent dies, you are better off being an only child.)
Representation: Modern Per Stirpes[edit | edit source]
- 1969 UPC/Oregon does this
- Identify first generation to have survivors. Divide into number of survivors in that generation and number of dead folks with kids. Each survivor in that generation gets 1 share, then the children of dead folks divide up each of their parent’s shares. (Again, if grandpa dies, you’re better off being an only child.)
- Differs from C-L per stirpes in that that it doesn’t make the first cut of shares until there is a survivor in a particular generation—so if great-grandma dies and all of her children were already dead, the initial division into shares doesn’t happen until the parent generation. In C-L per stirpes, even though the entire grandparent generation was dead, the initial division into shares would happen there.
Representation: UPC Per Stirpes[edit | edit source]
- 1990 UPC; views family more horizontally
- Identify first generation to have survivors. Divide estate into the number of people in that generation who either survived or left surviving children. Each survivor gets one share. At next generation, pool all the remaining money and repeat process, so that it is redivided among all survivors or folks who left kids. (No penalty for having lots of siblings.)
Elements of a Will[edit | edit source]
Find out what your client wants and clearly write it down! Don’t rely on statutory presumptions—you have no idea where they will die domiciled! If you give a gift to a non-relative say why very clearly—or find another way to give it.
Intent, Capacity, Formalities
Written instrument, following formalities, disposing of property, exercising power, appointing fiduciary, or making other provision for administration of estate, which is revocable during life.
UPC allows a “negative” will—one that does not dispose of anything but simply limits disposition (“nothing to Bill.”) Most states will not allow this.
Testamentary Intent/Capacity[edit | edit source]
Intent: Person must be exercising testamentary intent—intent that this document control events when testator dies, but not until then. Must be more than statement of future intent to write a will. (Extrinsic evidence cannot be used to show testamentary intent in almost all juris.)
Capacity: Testator must be able to * Know nature/extent of property
- Know “natural objects of testator’s bounty”
- Understand basics of property disposition
- Understand how these inter-relate
Capacity must exist at time of execution—but if person is incapacitated before/after may be evidence against capacity at execution. Evidence re capacity can be medical, or lay observational (everything eccentric grandpa did comes in). States often require 18 years old.
Mental Deficiency: generally lacks capacity (UPC allows conservator to make will for incapacitated person in some circs)
Insane Delusion: belief unsupported by rational explanation—if a provision is result of delusion, that provision fails (could fail an entire will).
Undue Influence: May void entire will, or just a provision; courts look at:* Existence of a confidential relationship
- Influencer/Beneficiary participated in some part of the will’s preparation
- Extent of secrecy and haste
- Extent that new plans changed earlier plans
- Extent that beneficiary’s benefit is unwarranted/unfair
- Existence of independent advice
- Susceptibility of Testator to undue influence
- Anything in Influencer’s past that suggests fraud
Short cut: confidential relationship PLUS suspicious circumstances
Tortious Interference with Expectancy: Not handled in probate court—separate civil tort case.* By fraud, duress or other tortious means, interferes with a 3rd party’s inheritance
- Damages are cash—no ruling on validity of will, etc.
- Since not in probate court, not subject to short SOL of probate claims statute.
- About ½ of states recognize this tort
Fraud* Fraud in factum (scriverner puts in own terms and Testator signs)---can’t be probated if doesn’t reflect Testator’s intent
- Fraud in the inducement—get Testator to execute will based on a factual lie (your other son is dead). Note: bad opinion (I think your other son deals coke) is not a fraud.
- Voids will to extent that it interferes with Testator’s intent
Formalities in Execution[edit | edit source]
Formalities serve various purposes:# Evidentiary function
- Ceremonial function (creates caution)
- Protection against over-reaching (having 2 witness prevents duress, etc.)
- Channeling function (do/communicate things in a known way)
“Strict Compliance doctrine”: requires strict compliance with detailed requirements of statute. Although UPC is less persnickety than older wills statutes, most UPC juris still require strict adherence to the UPC terms they have adopted.
- Basically, pen on paper. No videos, no tapes, no word documents. (UPC: In Writing)
- A few exceptions for sailors/soldiers on active duty or ill person in extremis, limited to low value personalty
- Act of authentication for all that comes above (initials, “Dad”, etc. ok as long as intended to authenticate). (“I Bill Smith being of sound mind…” is not a signature—it’s an act of identification. Some states allow signature anywhere on document, but as practical matter sign at bottom of doc.) Post-scripts can be a real problem. Traditional view: inclusion of an unsigned post-script voided whole will; modern view: may salvage the part of will above the signature.
- Most states allow “witnessing” of an acknowledged signature, rather than actual sight
- Proxy signatures allowed in cases of illness (UPC allows this); statute may require testator to ask or direct proxy to sign (passing pen may be an implied request).
- Attesting witness: knows what they are signing; Subscribing witness: does not. If juris requires publication, can’t have a subscribing witness.
- In Testator’s Presence
- Traditional test: Line of sight (with exception for blind folks); modern view (where presence is required at all): within awareness of testator.
- UPC: no presence requirement, signature must be “within a reasonable time of witnessing the testator sign the will, or a reasonable time of testator acknowledging the signature”
- By Competent Witnesses
- Some states say witness must be disinterested (post-execution disclaimer won’t cut it, b/c interested at time of execution)
- Some allow salvaging the will by invalidating gift to the interested witness (make them disinterested) or give them the lesser of the gift or the amount they would get without the wil—“purging statute”
- UPC does not invalidate a will because signed by an interested witness (although may discount their testimony)
- Other formalities
- Publication of the will—“This is my will, please witness it.”
- Minority of states require order of signing (testator, then witnesses). UPC and majority allow it all in “a single transaction.”
- Attestation clauses/self-proving affidavits—not required, but often useful. Rebuttable presumption of truth. UPC allows self-proving affidavits.
- Holographic wills
- Accepted in 50% of states
- Don’t require witnesses
- Some states: Must be fully written in testator’s hand
- UPC: signature and “material portions” must be in testator’s hand
- Courts may ignore non-handwritten parts (like hotel letterhead) as surplusage
- Strict compliance: rule in 41 states; must hit the bullseye
- Substantial compliance: rule in 8 states (and perhaps Oregon); looks at how close you got to the mark (not about intent)
- Excused Non-Compliance/Harmless Error: Focuses on intent; UPC says if there was harmless error, proponent can overcome with clear and convincing evidence that decedent intended document to be a will/revocation/alteration/revival, document will be treated as such.
- One court’s test: question is whether defect is harmless in light of statutory purposes, not in light of satisfying each statutory formality in isolation.
- Substantial compliance, or excused non-compliance, is wills-talk. Very very rare for court to “reform” a will as it will routinely do for a contract. (Most likely when court is trying to avoid taxes.)
Will Contests[edit | edit source]
Standing:* Direct: someone who benefits under will or intestacy (financial interest)
- Indirect: Fiduciary (trustees, guardians, conservators) usu. has standing on behalf of minor/incapacitated party. Secured creditors of an heir who would have inherited under old will or intestacy—some courts allow standing, some don’t.
Protective planning:* Written explanations of why testator has made these decisions (avoid testamentary libel). Client should use own voice; perhaps leave explanation outside of the will (so isn’t “published” for libel purposes).
- No-Contest clauses:
- Not all juris will allow
- Bait the trap—give disinherited something to stave off their desire to sue.
- Oregon allows (not all states do) UNLESS 1) reason to believe will revoked or 2) is forgery (both factual qs, unlike undue influence; 3) if you are a fiduciary representing someone else (relieve fiduciary from risk of suit for not representing charge properly)
- UPC: if you have probable cause for bringing contest, you don’t lose anything (which kills the no contest clause)
- Marriage avoids almost all contests
- Adoption may help—not all states will recognize it if it is done for probate purposes only.
- Mediation/arbitration clauses valid in some juris
- Lifetime gifts
- Conduct: pick excellent witnesses and do the decision-making process really well.
The time to win a will contest is when you execute the will, not when the testator dies.
Constructive trust: not a trust; term means something court creates to prevent unjust enrichment
Components of a Will[edit | edit source]
Filling a blank in a will: * Incorporation by reference
- Acts of independent significance
- Powers of appointment (later)
Incorporation by Reference* Writing must be in existence when will is executed
- Will must describe writing as being in existence when will is executed [UPC does not require this]
- Will must describe it sufficiently well to identify it
- Writing must fit the description
- Will must show an intent to incorporate the writing into the will
- May not incorporate a future document…. Except UPC 2-513 allows for a list of tangible property (jewelry, furniture, etc.)
- If juris doesn’t have UPC 2-513, codicil, intervivos transfer, gift in will to executor of all these items and the executor will distribute as directed from a letter.
Acts of Independent Significance
A document that exists for reasons outside the will (payroll register; library catalog).
Interpretation[edit | edit source]
Patent ambiguity: one that is obvious on its face (“I give A one of my two houses in Toledo.”)* Traditional rule: no extrinsic evidence allowed in to resolve
- Modern rule: extrinsic evidence OK
Latent ambiguity: one only obvious when go outside the document (“my cousin in Urbana”—one in Urbana, IL and one in Urbana, OH).* Traditional rule: extrinsic evidence OK to address latent ambiguity
- Modern rule: no change
Generally, extrinsic evidence is inadmissible for testamentary intent.
UPC allows rules of construction to interpret will (extrinsic).
Very rarely court will allow extrinsic evidence in to determine if there is an ambiguity present at all (per text book) but extrinsic evidence generally not allowed to create an ambiguity (per Vail).
Courts like to interpret, rather than reform, wills but will essentially take reformation action and label it interpretation. Find mistake>>>create ambiguity>>>bring in extrinsic. Don’t call it reforming. (Will reform to avoid taxes.)
Revocation/Revival[edit | edit source]
- Revocation is getting rid of a will
- By writing (expressly, or perhaps impliedly) or by physical act (damage to the document—details depend on local law—burning the paper, “cancelling” the words)
- Presumed to be destroyed/revoked if it was in testator’s possession and went missing
- UPC (not widely accepted): in writing, or by any tearing, burning, cancelling, obliterating or destroying which does NOT need to reach the text on paper, as long as intended to revoke.
- UPC: if new will disposes of all property, presumed to revoke old will (unless shown otherwise by clear and convincing); if new will does not dispose of all property, presumed to be a supplement. (Will 2 revokes Will 1 only to extent they are inconsistent)
- Best to do it expressly in writing in a new will (I revoke all previous wills)
- Operation of law: if get divorced, many states will revoke provisions related to ex-spouse; if get married or born after will drafted, many states allow intestate share
- If there are duplicate originals, must revoke both. (See “Changed Circumstances” below)
- Revival is bringing back a previous will
- Generally (and Ore), although Will is not effective until death, revocation of Will 1 is effective immediately on executing Will 2. Will 1 needs to be republished, reexecuted, etc.
- UPC: revoking Will 2 does not revive Will 1 automatically; it is a matter of intent. If intended to revive Will 1, it did so.
- Dependent Relative Revocation (think of it as Conditional Revocation)
- Courts imply a conditional revocation: “I revoke Will 1 [on the condition that Will 2 is valid].” If Will 2 is invalid, person dies intestate, so court implies condition.
- It’s a fiction—no one ever thinks they are being conditional; they assume Will 2 is valid.
- UPC: Rule of 2nd Best. Testator can’t have what he wants (Will 2), so compare Will 1 and intestacy and give whichever is closer to intent expressed in Will 2.
- REMEMBER: if Will 2 was invalidly executed, it cannot effectively have revoked Will 1.
Contracts Regarding Wills[edit | edit source]
- If the contract is valid (under contract law), it can modify testamentary freedom.
- Offer, acceptance, consideration
- UPC says oral contracts may not modify testamentary freedom, but states vary on whether oral contract may modify
- Middle path: oral contract may modify will if consideration is unequivocally referable to the promise/contract
- Oral contract may not convey real property (statute of frauds)
- Existence of a contradictory contract does NOT prevent admission of will to probate. Instead, will is admitted and contract is enforced in probate step 2 (pay the creditors).
- Joint/reciprocal wills are not a presumption of contract not to revoke (UPC)
- Contracts to not change a will (after I die, you can’t change your will) are almost always fail.
Will Substitutes[edit | edit source]
Pigeon-hole theory of law: even though a number of things deal with transfer at death, they have different labels and very different governing law. In the old days, they were kept completely separate. In the U.S., the tradition is increasingly to apply wills rules (or to combine wills and non-wills rules) to non-wills transfers. But change is very slow.
Substitutes include: life insurance, revocable trusts, pension, joint accounts, lifetime gifts. Each requires different formalities from wills.
Traditional/Current rule (showing cracks): You can’t change a will substitute by will. (Ex.: can’t redirect life insurance from Bill to Steve in will when insurance policy identifies Bill as beneficiary.) UPC allows a will to change a trust (but not all will substitutes)—a minority position. Washington has extreme law allowing any non-probate asset to be changed by will if specifically identified.
Lifetime Gift[edit | edit source]
Irrevocable, gratuitous, present transfer* Donative intent
- Release control over the property
- Delivery of subject matter of the gift (physical transfer, historically hand to hand)
- Constructive (car keys) or symbolic delivery (car title) are exceptions to actual physical transfer. If physical transfer is impossible, these won’t do it.
- R3d Property says any kind of delivery will do—not clear that the courts will agree.
- Delivery can be to an agent of donee
- Donee doesn’t have to know about it
- Acceptance of the gift (courts assume this unless donee says otherwise)
People try to game this with deeds: make out the deed to son but tell him not to register title until they are dead. Deeds are made effective at transfer (hand off to the donee). So, if given to son, that may be ok. If left in desk drawer for him to find after death, not ok.* Cases either say this is an ineffective attempt to make a testamentary transfer with a disguised deed, or that it is an effective transfer of remainder interest with a retained life estate.
Gifts made in fear of death (CL—gifts causa mortis)—can be automatically undone by surviving the peril, changing your mind, or predecease of the donee.
Problems with gifts to children: need a guardian to administer. Costly and slow. Uniform Gifts to Minors Act allowed gift given to a custodian for the benefit of the minor—broad powers. Not subject to court supervision but can be forced to explain actions. Problems: only 1 custodianship for 1 minor (no gift to 2 minors at once with 1 custodian); when reach majority (18 or how state defines) must get all of the remaining money given to them.
Joint Interests[edit | edit source]
Joint tenancy (with right of survivorship): the poor man’s will. Wonderful probate avoidance device, but not a great estate planning device.
Both owners’ creditors can attach. Either tenant can sever by conveying interest—tenancy in common. Most courts (not Oregon) will NOT allow a parent to rescind a joint tenancy once they realize it’s a bad move.
- Convenience accounts: principal/agent accounts—banks don’t like the potential for liability.
- Joint survivorship accounts: banks want people to use these.
- Multi-party accounts: UPC created a section on these… funds belong to depositor during lifetime and to surviving account owner at death.
- POD (Payable on Death) bank account: statutes allow these although not consistent with wills laws
- TOD (Transferable on Death) account: Register stock as “A, TOD to B”. Almost all states have this for stock. TOD Deeds are not a present conveyance and are revocable.
- Totten Trusts: account labelled “A as trustee for B.” When A dies, B owns it. But B has no rights during lifetime (as you would expect for a real trust). Court: this is tentative trust, perfected by A’s death. No such animal exists, this violates wills law too, but courts allow it.
- Lifetime Trusts: (See below)
Issues About Transfer at Death[edit | edit source]
[edit | edit source]
Community v. Separate Property
Property is characterized by state of domicile upon acquisition; once characterized, it keeps that characterization forever.* But, if liquidated and moved around may change form.
- California is community property state, Oregon is separate. Lots of community property in Oregon as folks move in from community property states.
- People may contract around community property standards.
- Community property states may apply rules to non-married, cohabitating couples.
Elective Share Statute
When spouse is deliberately disinherited, surviving spouse entitled to a share of the estate, regardless of disposal to others. Public policy assumption: you may not disinherit your spouse. (May contract around.)* Community property states don’t have this, because they don’t need it. All separate property states (except Georgia) have this.
- Abatement funds the spouse’s share. (Some states have special rules how to apply abatement in case of an elective share.)
- Traditionally 1/8 to ½ of “net estate” (probate estate after debts). Can lead to gameplaying around moving things out of estate via non-probate transfers (sometimes courts will find these transfers illusory or fraudulent and void them).
- 1969 UPC: created “augmented estate”—probate estate plus trusts/joint tenancies/life insurance. Surviving spouse gets % of augmented estate. Many states adopted this too. (IRS-like approach to control.)
- Criticized for ignoring how much surviving spouse had. 1990 UPC took “partnership approach”—mirrors divorce—Augmented Estate plus Property of Surviving Spouse and Spouse’s Intervivos transfers to others—spouse presumptively entitled to percent. Oregon took same approach, prior to 1990.
- 1990 UPC also phased in presumptive percent amount over time. At 15 years, spouse entitled to half.
Changed Circumstances (Wills)[edit | edit source]
Divorce (revocation)* Just about every state, failure to revise a will post-divorce will revoke any gifts in favor of former spouse. Some will revoke gifts to former spouse’s relatives.
- UPC automatically revokes gifts to spouses and their relatives.
- NOTE: does not apply to will substitutes (ex.: life insurance) must change those post-divorce or will stay in effect benefitting ex. Oregon is one of the few states to apply wills rules to a will substitute in some cases.
- UPC: says its rules apply to all governing instruments (wills and substitutes). Most states haven’t accepted that. Per Vail, goes beyond UPC’s scope to pre-empt divorce laws where both parties paid for life insurance premiums, etc.
Marriage, Birth (partial revocation/amendment)* Substantial number of states provide a share to a new spouse/child who arrives after a will was already executed.
“Forgotten” Spouses and Children
Not specifically disinherited. Not really “forgotten” or you wouldn’t have testamentary capacity.* Statutory presumption: if you leave kids out we assume you did so in error. Translation: if you want to disinherit your kids you must say so. (Mention them or leave a small gift.)
- Pretermitted child: gets intestate share (which may be nothing). Oregon: if left out of will written after birth, get nothing; but if “after acquired” and born/adopted after will, get intestate share. Other states don’t make this distinction.
- Pretermitted spouse: choice of intestate share or elective share.
- Pretermitted spouse/child rules apply only to wills, not to will substitutes. (Even in the UPC.)
- Some statutes protected grandkids whose parents were pretermitted children.
Acts of Property Holder (Intestates and Wills)[edit | edit source]
Advancement (Intestate)* Not all jurisdictions recognize. Many don’t.
- Traditional rule: Lifetime transfers presumed advances on intestate share. No end of litigation. Presumption reversed by many states—writing required.
- UPC: only if advancement stated in writing is it real—otherwise a gift is just a gift.
- Do “hotchpotch” calculation: (estate PLUS gifts)/ (number takers) = share. Subtract gift from share of taker who got it. If advancement was LARGER than share, you don’t have to give anything back.
- Some states will hold advancement against a grandchild when parent (who got it) predeceases grandparent. (Branch theory of the family)
Satisfaction (Wills)* Fewer jurisdictions recognize this than Advancement
- If given a gift in the will, then later give a substantial lifetime gift, we presume gift was an intended early payment.
- CL: satisfaction applied only to pecuniary gifts (not property).
- UPC: written evidence of intent to satisfy a testamentary bequest is required
- Court may look at extrinsic (even parol) evidence of intent, although advancement requires a writing.
- Ore. Statute on intervivos trusts applies satisfaction doctrine to them. Not clear at all how application of satisfaction to will substitutes will shake out in the long run.
Provisions Contrary to Public Policy
Generally, testamentary dispositions that impact freedom to marry or practice of religion are not upheld. But many times they are.
Acts of Beneficiaries[edit | edit source]
Disclaimer* Mostly invoked to correct problems in estate planning, usu. tax consequences. Also to avoid creditors.
- Effect is as if disclaimer had pre-deceased donor. May mean that disclaimer’s children inherit by representation.
- UPC allows disclaimer and allows a will to direct disposition in event of disclaimer.
|Federal Tax Law||State Law|
|Defines disclaimer for tax purposes; if you disclaim, you don’t pay tax. But if you give it away, you pay gift tax.||Defines disclaimer for property purposes.|
|Qualified disclaimer (avoids taxes): not allowed to direct where disclaimed property goes; must be irrevocable.||Many, but not all, states simply adopt the Federal tax law provisions.|
The difference btw a property interest and an expectancy? It’s whatever the court says it is. A “mere expectancy” cannot be transferred, but a future contingent interest can be. * Two exceptions where you can assign your expectancy:
- If you contract to transfer it for a fair consideration (unlike Esau who sold his birthright for a mess of pottage) –court will treat as a contract.
- Where you release your expectancy back to the source; if get fair consideration, court will treat as an advancement. If parties agree in advance that $X is the value of the intestate share, and later the decedent becomes very very rich, that’s too bad for the recipient—no increase in the share.
Misconduct* CL courts: allowed killer of ancestor to inherit; or, allowed inheritance but then imposed constructive trust; or, refused to allow inheritance (judicial activism).
- UPC (and most states): “Felonious and intentional killing of decedent revokes any revocable disposition made in a governing instrument” (will and will substitute—includes life ins.).
- Joint tenancy: courts treat differently: some allow transfer of title, since you already owned it; some say it makes it a tenancy in common, so you only own 50% of it.
- Preponderance of the evidence.
- Conviction is conclusive; some states say guilty plea is too.
- Treat as if slayer predeceased (so their heirs may get something)
Changes in Property[edit | edit source]
Types of Gifts[edit | edit source]
Classification of Gifts* Specific: identified, particular property
- General: General pecuniary benefit
- Demonstrative: general in nature, but paid for from a specific source ($10K paid from my ABC account)
- Residual: everything else
Dividends and Stock Gifts* Doctrine of accretion (the rule of increase): if dividend issued after death, recipient gets stock and dividend, but not if dividend issued before death.
- If stock splits after will executed but before death, recipient gets new number of shares showing same % ownership stake.
- Litigation around issue of a stock dividend—treat as split or cash dividend?
- UPC: devise of securities will include additional securities acquired “as a result” of testator’s ownership
What if there are problems with property in the estate?[edit | edit source]
When the property mentioned in the will is no longer in the estate.* Old rule: review intent of decedent—did they intend gift to fail if not in the estate?
- Identity Test: if specific gift is not in the estate, you get nothing. No inquiry into intent. This is the “overwhelming” US rule since 1760s. Courts made exceptions to include insurance proceeds covering the specific bequest, or purchase price it were sold. (Unless sold by a guardian or conservator)
- UPC: brings back the intent inquiry.
- It’s a wills doctrine, not a trust doctrine, but in case of a pour-over will (below) a court may apply it to the trust document. (UPC does not apply it to a trust.)
Partial failure; estate isn’t big enough to pay all gifts. * CL: Abate gifts in reverse order of specificity. 1) residual, 2) general, 3) specific and demonstrative. If abate within a specific class of gifts, everyone takes a proportional hit.
- Most states follow CL, even though spouse is usually residuary legatee.
Exoneration* Specific gift transfers free of any outstanding mortgage
- UPC: no right to exoneration
Lapse (Failed Gift)
You have to be alive to take. If predecease testator, no take. Except….* Most states passed anti-lapse statutes—presume testator wanted lineal descendants to take, so they are substituted.
- Statutes vary—some apply to every gift in will, some apply only to gifts to blood/adoption kin, or to only gifts to sibling or child.
- In order to avoid, must very clearly use words of survivorship (to X if he survives me) per UPC
- Failed residuary gifts: traditional rule was to put into intestacy; now, most states give failed residuary gifts to other residuary legatees
Changes in Domicile[edit | edit source]
Nature of property is determined by the law of state of marital domicile.* Movement between community property and separate property states can complicate matters. As can purchase of property in one state while domiciled in another.
- Most states have adopted Uniform Disposition Act—no right of election to the deceased spouse’s half of community property (no double-dipping). Election applies only to separate property owned by dead spouse.
Gifts to Charity[edit | edit source]
“Mortmain” statutes designed to prevent clergy from encouraging death bed gifts. Invalidated gifts to charity if less than 30 days before death; gave standing to spouse/descendants. Mostly statutes removed now on equal protection (to charities) grounds. Avoid with intervivos gifts or provisions which avoid standing (to charity, alternatively to a non-spouse/non-descendant.)
Trusts[edit | edit source]
Overview[edit | edit source]
A trust is a legal title with obligation to use for the benefit of another. (Settlor puts the property in trust of a trustee (who may be self) for benefit of beneficiary .) Trustee has “bare legal title” and beneficiary has “beneficiary title.” Trust is NOT a legal entity, like an LLC. It’s a relationship. It creates an enforceable obligation on someone (trustee) to use the property for benefit of beneficiaries. It’s an equitable obligation, not a legal/contract obligation.
Types of Trust* A “testamentary” trust is created in a will (different from a pour over trust which already exists); other form of trust is a “living” trust.
- Declared trust=trustee is the settlor; 3rd Party Trust=trustee is 3rd party
- Revocable trust may be revoked during settlor’s life time (UTC default rule is any trust not characterized is revocable); Irrevocable trust may not be revoked (old CL rule was any trust not characterized was irrevocatble)
Estate planning tool: “Pour over wills” (2 document estate plan). Will: my estate to my trust; Trust: contains all the dispositive language (trust already exists, but may only come into property when testator dies). Courts hated this because it seemed to thwart wills laws (since trusts didn’t have the same formalities). People love it. Trusts are not overseen by probate court, so dispositions are private. States were all over the map, but came to adopt approach of UPC 2-511 (Testamentary Additions to Trusts—allows will to leave property to existing trust or testamentary trust).
Creating a Trust[edit | edit source]
Requirements:# Intention to create fiduciary relationship
- Capacity: older (still prevalent) view is that it’s the capacity to transact business
- Property (delivered)
- No property, no trust. Cannot have a trust for a “mere expectancy” (ie, season tix)—future property isn’t property. However, a contingent remainder (future interest) can be property.
- As long as the property interest is transferrable, may be used as basis for trust.
- Cannot be the sole trustee and the sole beneficiary. Must have someone you can sue. So, ok to be sole trustee and one of several beneficiaries, or sole beneficiary and one of several trustees.
- Living people do not have “heirs”
- Beneficiaries do not need to be in existence when trust is created, but must be ascertainable (vest or fail within rule against perpetuities). (Not all states will accept this rationale—may require living, identified beneficiaries.)
- Unidentified beneficiaries: “children” (generic term but good enough—look outside trust for acts of independent significance); “relatives” (probably too vague, unless defined by intestacy statute); “friends” (not identifiable enough). Must be specific enough for a judge to evaluate trustee performance against a standard.
- UTC now allows trustee to have power to select from an indefinite class (“such of my friends as my trustee selects”) by treating it as a power of appointment, not a fiduciary
- “Purpose Trust”: used to be void without human beneficiary, not so any longer (pet care trusts). Non-charitable purpose trusts (flowers on my grave) last 21 years (or longer, by statute, or “life of my pet.”)
- Can appoint individual and/or entity. Banks don’t like to share trustee duties with a person.
- Trustees are liable for misfeasance by one another unless take steps to remedy.
- Trustees, traditionally, need to act unanimously. (Can set an odd number to allow majority decisions.)
- When trustees deadlock, must ask court for instructions. Slow and expensive.
- Trustee is entitled to reasonable compensation (usu. % of corpus)
- May appoint trustee (bank) and trust advisor/director (uncle) to advise trustee. Not clear if trust advisor/director is a fiduciary.
- Valid Trust Purpose
- Lawful, Achievable, Not Against Public Policy (ie, forcing marriage/divorce or religious practice; or frivolous/capricious).
- Can do an “incentive trust”—if you get your degree and hold a job, you get income.
- Observance of Formalities
- Significant variation by state. Some require writing or meeting wills formalities. Most states, and UTC, allow oral trusts of personal property. (Real property governed by statute of frauds.)
- Secret trusts—absolute gift on the face of transaction, with oral agreement on side.
- Courts don’t like secret trusts, but don’t like unjust enrichment, either. Will generally admit oral/extrinsic testimony and create constructive trust for the intended beneficiaries.
- Majority view will admit extrinsic evidence for latent or patent ambiguities in trusts (like wills). Majority: create trust for benefit of heirs. Minority: create trust for benefit of intended beneficiaries.
Resulting Trust[edit | edit source]
If private express trust fails (in whole or part for any reason), court may create a resulting trust. Essentially, implying a gift to fill the gap. Common example: “in trust for my spouse for life” and then no additional gift to dispose of the property.
Beneficiary Interest[edit | edit source]
Mandatory Trusts[edit | edit source]
Income Trust: Trustee must make distribution of income. Means that there must be income each year, which limits investment options a lot.
Annuity Trust: money can come from trust corpus or income; doesn’t account for inflation
Unitrust: (modern invention) pay A 4% of value of corpus annually (income, corpus, capital gains—open investment choices). Bad in extended down market.
Discretionary v. Support Trusts[edit | edit source]
Discretionary: Trustee has discretion how much to pay. Can reduce in down market. May be tied to a support standard. Institutional trustees never want to pay out. Reviewed by court under abuse of discretion standard. Even if ordered to pay by court, still up to trustee how much to pay out.
Support: provide necessaries/support.
Transfers of Interest[edit | edit source]
Debtor-creditor law: as long as you are alive, anything you can transfer, your creditors can touch. * But also: if there is a claim on an estate that exceeds the estate’s assets, creditors may go after the trust assets if you control them. How long do they have? Oregon’s statute uses a parallel process to probate, publication and 120 day SOL.
UPC applies an anti-lapse provision to trusts: If interest in trust passes to a predeceased person, it goes to lineal descendants (not via dead person’s will). UPC doesn’t say what happens if no lineal descendants, so CL practice of applying decedent’s will might apply.
Spendthrift Clause* Forfeiture restraint: if beneficiary tries to give it away, trust ends.
- Transferability restraint: set up to prevent voluntary parting with the interest.
- Majority rule in the US: Settlor’s intent controls, so a spendthrift clause will be effective
- Therefore, any interest you can’t transfer, your creditors can’t touch
- Some public policy exceptions apply, like child support (widely recognized in U.S.)
- Government entities may press claims against trust, regardless of a spendthrift clause
- Intentional tort victims may not recover against a spendthrift clause (by statute)
Generally (in Trusts without Spendthrift clauses)* Discretionary trust: beneficiary owns nothing (no right to distribution), therefore cannot be transferred.
- Some states allow garnishment of a discretionary pay out
- Mandatory trust: beneficiary owns right to payout, so can be transferred (unless trust says otherwise).
- Support trust: if adequately supported by other sources, beneficiary owns nothing (so interest can’t be transferred). If not, has right to be supported, which makes it inconsistent with the purpose of the trust to allow transferability.
Asset Protection Trusts
Set up to protect assets from your creditors—screw them out of payment. Very new that legislatures are allowing them. No appellate caselaw.
Reformation, Modification and Termination[edit | edit source]
Extrinsic Evidence to Reform* UTC allows extrinsic evidence to correct mistakes even if trust is unambiguous
- Traditional: wills (extrinsic excluded); contracts (extrinsic included); Intervivos Trusts (followed contracts, allowed extrinsic); Testamentary trusts (followed wills law, did not allow)
Modification* Administrative deviation: traditionally only allowed to prevent “defeat or substantial impairment” of the purposes of the trust.
- Dispositive deviation: traditionally would never be allowed unless trust terms allowed it (ex. discretionary)
- Modern view/UTC: both are allowed to “further the purpose of the trust” in light of “circumstances not anticipated by the settlor” provided that modification carries out settlor’s probable intent
Termination:* Settlor dictates when trust terminates (X years, when A dies, etc.)
- Trustee can agree to terminate trusts (entities never will, and only reckless individuals)
- Even if trust is irrevocable, Settlor can terminate it if can get all beneficiaries to consent (as competent adults)
- If Settlor dies, Beneficiaries can force termination (if all agree as competent adults).
- Claflin Doctrine: Beneficiaries may NOT force termination if a material purpose of the trust has not yet been achieved. (Exception: if court finds the reason to terminate is more persuasive than the unaccomplished material purpose, may allow termination.)
- Beneficiaries “as competent adults”: what if incapacitated, unidentified, not yet born, etc?
- Court can appoint guardian ad litem to represent unidentified beneficiaries’ interests, OR
- Court can allow virtual representation, assuming that there is a true identity of interests
- No judicial oversight needed to terminate (under UTC) if the trust is uneconomical
Charitable Trusts[edit | edit source]
Charitable Intent: poverty, education, religion, health, governmental or municipal purposes, other purposes beneficial to community. Lift burden from public purse.* Charitable purpose not enough to create a trust—that’s just a donation. Must have intent to create trust as well as do charity.
- “Invidious discrimination” will end charitable purpose, but targeting certain social groups (single mothers) may not. If racial discrimination involved, can be no state action.
Beneficiaries: May not have ascertainable beneficiaries (has vast amorphous class of potential beneficiaries); in fact, if all beneficiaries are identifiable, trust may not be truly charitable (too narrow).
Amend charitable trust if not longer possible or practicable to perform purpose. Two requirements# Settlor had a general charitable purpose (trust was not intended to restrict to a narrow purpose)
- If so, court finds a way to do “as near as possible” what settlor wanted.
- UTC: cy pres should be “consistent with” settlor’s purpose; makes no distinction between narrow purpose and “general, charitable purpose”
- Restatement: new purpose should “reasonably approximate” settlor’s intent
“Equitable Deviation” is a lot like cy pres, but it focuses on more on the means (administration) of getting to the settlor’s purpose (the ends). In practice, difficult to distinguish them.
Powers of Appointment[edit | edit source]
- Donor: creates power of appointment
- Must express intent to create a power of appointment, doesn’t have to be in a trust
- Donee: receives power of appointment
- Must exercise the power as described by the creating instrument and express the intent to exercise the power
- Some wills include a “blind exercise” clause, exercising any power of appointment donee testator holds (Vail thinks this is a good idea)
- Majority rule: if hold a general power of appointment, it is essentially ownership, and can effectively be exercised by donee testator’s residuary clause
- Objects/Permissible Appointees: people to whom property can be appointed
- Traditional view: power to appoint is non-exclusive and so Donee can’t exclude any object or give substantially different shares
- Modern view: special powers are exclusive unless document says otherwise, and Donee can exclude some objects or treat them differently
- Taker in Default: any well drafted power of appointment contains a default, in case donee does nothing
- Power may be allowed during life, by will, or either. If exercise a testamentary power of appointment in an inter vivos trust it is valid, as long as trust is good at moment of death.
|Federal Tax Law
Concerned with control (for tax purposes), can you appoint property to yourself?
This terminology has taken over
|“General” power: power to appoint to yourself, your creditors, your estate, or creditors of your estate.
Has tax consequences; if you die holding this, property will be included in your estate for tax purposes (control), but not for probate purposes (ownership)
|“General” power: power to appoint property to anyone|
|“Non-General” power: NO power to appoint to self, own creditors, own estate, or creditors of own estate.
No tax consequences
|“Special” power: power to appoint property limited to a particular class of objects|
If exercise general power of appointment during lifetime, will be subject to gift tax (but not estate tax)
If refuse to accept the power of appointment, can avoid tax consequences. Can’t transfer or give away a power of appointment, though. May only disclaim it—written form, signed and delivered.
Two important exceptions:* If a power is limited by an “ascertainable standard” then it is not a “general power” even if you can exercise it on your own behalf. Those standards are health, education, maintenance, support (HEMS). No tax consequences.
- “5 and 5”: power to give self the greater of 5K or 5% of corpus each year is not a “general” power—no tax consequences
Trustee’s Role[edit | edit source]
Early law: protect beneficiaries by strictly limiting trustee; so trusts had extensive lists of powers identifying everything trustee could do, in order to adequately employer
Modern law: trustee has all the power over the corpus that an unmarried competent person has (UTC: powers of an owner)
Trustee has lots of powers; but the powers are controlled by fiduciary duties (loyalty and care). Duties regulate powers.
Duty of Loyalty[edit | edit source]
Self-Dealing: presumptively wrong unless settlor approved (tacitly, by setting up structural conflict); court gave prior approval; beneficiaries approved after full disclosure.* “No further inquiry rule”: CL rule that if the sale was self-dealing, can be voided even if it was for fair market value, etc. UTC wouldn’t enforce no further inquiry rule—would allow a rebuttable presumption.
- But institutional trustees may invest trust funds in a proprietary fund (and get compensation)
Conflicts of Interest: Ex. selling trust asset to family member. Best bet: get court approval in advance.
Impartiality: duty to be loyal to all beneficiaries; treatment must be equitable, but not necessarily equal
Information: nonwaivable duty to provide this to qualified beneficiaries per UTC
Duty of Care (Managing Investments)[edit | edit source]
UTC: Settlor may not modify standard of care to remove liability for bad faith, reckless indifference to purpose of the trust, or interests of beneficiaries. But may provide some other exculpatory relief.
Prudent Man: Risk/Speculation is per se bad in investments. Avoid risk as much as possible. Trustee judged on 20/20 hindsight. Can’t offset losses in one investment with gains in another—each viewed independently.* Old view; still the law in some states.
Prudent Investor: Portfolio theory. Can’t avoid general market risk, but should diversify to avoid risk in over investing in one industry or one firm. Portfolio performance judged as whole, some investments can go down as long as others go up.* Still have to take into account the needs of beneficiaries (may be current retirees v. won’t need income support for a long time)
- Modern view (Uniform Prudent Investor Act)
Delegation * Traditional rule: trustee MAY NOT delegate
- Modern rule: trustee may delegate; power to delegate and duty to act prudently in doing so (not clear that there is an affirmative duty to delegate)
- Does this make the same degree of sense for high-sophistication trustees as low? Or does it just allow institutional trustees to insulate selves in a down market?
Direction:* UTC allows settlor to name a director (or advisor) to instruct trustee. Generally, a tool to delegate certain functions. (See above, creating a trust). Very new, very little caselaw
Liability to Third Parties[edit | edit source]
- Traditionally: fiduciary could be liable for contracts entered into in their fiduciary capacity or for torts when they did no personal wrong
- UPC/Modern view: Although a trust is not an LLC, a trustee (or PR of an estate) is liable only as an agent would be liable—if they don’t disclose their agency relationship to the trust/estate.
Remedies to Breach of Fiduciary Duties (Trusts or Wills)[edit | edit source]
Mandatory arbitration clauses in trusts (as between trustee and beneficiaries) are not enforceable.
UTC lists remedies available at court order* Compel or prohibit trustee from doing something; demand accounting
- Requiring trustee to pay for damages/losses or return property
- Appoint a new administrator to the trust
- Suspend/Remove trustee
- Reduce/deny compensation to trustee
Damages are the greater of amount required to restore trust or profit trustee realized from the breach.
Co-trustees may sue each other for contribution action.
Legal Issues[edit | edit source]
Estate Tax[edit | edit source]
Levied on property you control (“incidents of ownership”)# Property you own
- Property you used to own, but gave away while retaining some control
- Control might be: right to change the beneficiary, to take loans against an insurance policy, cash in the policy
- Property you never owned, but might have (general power of appointment)
- Taxable gifts made during your lifetime (not inter-spousal
Malpractice[edit | edit source]
- SOL: Traditional rule negligence SOL began to run when will executed; Modern rule: negligence SOL begins on discovery (generally, probate)
- Privity: Traditional/strict rule: only client who wrote will could claim; Modern rule: PR/estate can claim. (41 states allow a beneficiary to claim malpractice, as well as PR). Vail is opposed to a privity bar.
- Drafting a will/trust for someone who you know lacks capacity is fraud.
- No gifts of any substance to lawyer or lawyer’s family
Choice of Law[edit | edit source]
- Personalty (personal property): law of decedent’s domicile controls
- Realty (real estate): law of situs jurisdiction controls
- Note that law of situs state may require law of domicile state to be applied