Trusts and Estates Outline Spring 2012 - Professor Sterk

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TRUSTS AND ESTATES OUTLINE, SPRING 2012 I. INTRODUCTION a. Probate/Nonprobate Transfers i. Probate 1. The probate system only applies to assets owned by the decedent at death 2. No-Will If there is no will, a close relative will generally petition for an appointment as her personal representative (traditionally called her administrator) a. when more than one person is interested in becoming administrator, local statutes will generally prescribe priority among the applicants 3. Will If there is a will naming an executor, the executor will petition for letters of testamentary which entitle the executor to serve as the decedents personal representative a. the personal representative then bears responsibility for collecting all of the assets b. the personal representative will offer the will for probate, she will have to prove that the will was properly executed and she will provide notice to persons who might have reason to contest the will ii. Gifts 1. Lifetime gifts are the most obvious form of non-probate transfers. 2. Gruen v. Gruen a. Issues: Whether a valid inter vivos gift of a chattel may be made where the donor has reserved a life estate in the chattel and the donee never has had physical possession of it before the donors death? Holding: Yes. i. Donative Intent: 1. Requires the donor intend to make an irrevocable present transfer of ownership; if the intention is to make a testamentary disposition effective only after death, the gift is invalid unless made by will. 2. Once the gift is made it is irrevocable and the donor is limited to the rights of a life tenant and not an owner ii. Delivery: the delivery necessary to consummate a gift must be as perfect as the nature of the property and the circumstances and surroundings o the parties will reasonably permit 1. there must be either physical delivery of the subject of the gift or a constructive or symbolic delivery such as by an instrument of gift, sufficient to divest the donor of dominion and control over the property iii. Acceptance: law presumes acceptance on a valuable gift 3. Gifts causa mortis: a. however, gifts made on a death bed can be taken back if the gift was made in contemplation of death, and included an implicit condition that the car would revert back to the person who made the gift iii. Joint-Interests 1. If two parties hold property as joint tenants or as tenants by the entireties, when the first of the two dies, the property passes to the other automatically, and there is no probate proceeding (taken by the terms of the instrument) 2. Franklin v. Anna National Bank a. Issue: Whether there was clear and convincing evidence that a gift by Mr. Whitehead to Goddard for his bank account was not intended to be a gift in joint tenancy? b. Holding: No, the decedent did not intend to make a gift to his account.
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c. Synopsis of Rule of Law: A joint tenancy account presumptively creates a

gift unless the party claiming adversely proves by clear and convincing evidence that a gift was not intended. d. Reasoning: The decedent made Goddard and then Franklin a signatory for his own convenience, in case he could not get his money and not with intent to effect a present gift. The decedents attempts to change the account show his consistent view of the account as his own. The surrounding circumstances show decedents concern for his health and his relatively brief use of Goddard and Franklin to assure his access to his funds. The money in the account should have been found to be property of the estate. e. When is the presumption rebutted? i. Whitehead changed his mind and sent new letters, which shows it was the person he wanted to be his caretaker, not his beneficiary Joint Accounts During the Depositors Lifetime a. most courts have traditionally treated joint accounts as giving each party a right to the money he or she deposited in the account b. in NY, by statute, a deposit of property in a joint bank account with a right of survivorship creates a presumption that the depositors have created a common law joint tenancy Joint Accounts at Death a. courts generally enforce survivorship provisions in joint bank accounts assuming (1) that the depositor did not revoke the survivorship provision during his lifetime, as Mr. Whitehead did in Franklin and (2) that decedents estate does not introduce clear evidence that the now-deceased depositor established the joint account only for convenience P.O.D. Accounts a. Since its at death it needs will and needs testamentary formalities and since the depositor does not typically comply with those formalities when making a P.O.D. designation courts often held the designation invalid Uniform Probate Code a. provides that depositors may open either single-party or multiple-party accounts, and provides that either type of account may have a P.O.D. designation, an agency designation, or both i. in addition, a multiple-party account may be either with or without a right of survivorship b. UPC Section 6-302 authorizes registration of securities in beneficiary form whenever a security is owned by one individual or by two or more individuals with right of survivorship. Beneficiary form is defined as a registration which indicates the intention of the owner regarding the person who will become the owner of the security upon the death of the owner
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INTESTATE SUCCESSION
Why Intestate Succession? People dont always write wills for various reasons, their familys shouldnt be deprived of property We are trying to at least duplicate what we think people would do if they wrote wills We dont have investigation into what the decedent would want, we have a fairly rigid scheme, this is to save time and money, and most lawyers would not be able to do this intestate succession statutes reward exclusively family members (typically spouses and lineal descendants); blood relatives generally dont take even if they are lineal descendants spouses and lineal descendants take first, then collateral relatives if there are no spouses and lineal descendants 2
The Importance of Intestate Succession 1) Some people execute wills that are wholly invalid. Courts may invalidate wills and if the decedent has left no prior will, the intestacy statute directs distribution of decedents estate 2) Testator may have executed a valid will that fails to completely dispose of all of testators property. When that occurs, the property that testators will fails to distribute will be distributed in accordance with the intestacy statute 3) A will sometimes refers to the heirs of a particular person, either the heirs of the testator himself, or the heirs of some other person. Heirs is ambiguous 4) Intestate succession is often important for determining who has standing to contest a will a. Share of Spouse i. Patterns in Wills 1. the result in most wills, is a decedent leaves almost all of his assets to the spouse in a traditional family 2. when there are multiple spouses, it is not all left to one spouse ii. Uniform Probate Code 2-102, The intestate share of decedents surviving spouse is (1) The entire estate if: (i) No descendant or parent of the decedent survives the decedent, or (ii) All of the Ds surviving descendants are also descendants of the surviving spouse and there is no other descendant of surviving spouse who survives D. Why? Because we trust the surviving spouse to provide for joint children. (2) The first [300,000], plus three-fourths of any balance of the intestate estate, if no descendant of D survives D, but a parent of D survives D. (3) The first [250,000], plus one-half of any balance of the intestate estate, If all of Ds surviving descendants are also descendants of surviving spouse but the surviving spouse has one or more surviving descendants who are not descendants of D. (4) The first [150,000], plus one-half of any balance of the intestate estate, If one or more of Ds surviving descendants are not the descendants of the surviving spouse iii. NY EPTL 4 - 1.1 The provisions of NY Law that apply when there is a spouse are 4-1.1 (a)(1) & (2) (a) If a decedent is survived by: (1) A spouse and issue, fifty thousand dollars and one-half the residue to the spouse, and the balance thereof to the issue by representation.** (2) A spouse and no issue, the whole to the spouse. ** Representation is defined in 1-2.16 iv. Hypos: 1. Charles dies, with $400,000 in his estate has his wife and his sister. a. Under the UPC, the wife would get everything when there is no mother, but when there is a mother it changes, and the wife gets 375,000 and the mother gets 25,000, Under NY EPTL, use Section 4-1.1, and the wife would get everything 2. Marla died with a $400,000 estate, survived by her husband Norman and their daughter Olive. a. (1) under the UPC, Norman would get the entire estate ($400,000) using 2 102 (1) (ii) rational for this provision is because it is Normans child he is going to share in it with his daughter, and wants the daughter to be accounted for and under NY EPTL Norman gets $225,000 and Olive gets the rest, we know in all of the hypotheticals, Norman will take the same, unlike the UPC
b. (2) Marla had a son, Peter under a prior marriage, Norman had no children other than Olive. Under the UPC use 2-102(4), and Norman gets the first $150,000, plus of the balance and then the rest goes under 2-103, and Olive and Peter split the remainder. c. (3) Now there is no Peter, Marla only has Olive, but Norman has Quentin from a prior marriage. 2-102(3), Norman takes 225,000 + half the balance and Olive takes the rest under 2-103(a)(1) d. (4) Now Norman and Marla have children from previous marriages, 2-102(4), since Marla has children outside the marriage, and Norman gets 150,000 plus half the balance and the remainder will split between the two descendants of Marla, Peter and Olive, under 2-103(1) v. Rationale for UPC Variations 1. The assumption is the surviving spouse wouldnt provide for the decedents descendants from another marriage a. We want to protect the other child, so we limit the surviving spouses amount b. When the surviving spouse has other children, we know they might want to treat all their children equally, so we give them more money but were still limiting the amount to guarantee their joint child gets some share vi. The Effect of Divorce 1. Estate of Goick a. Rule: If a PR has not been named under a will and there are no devisees, the decedents surviving spouse has priority for appointment. i. A final divorce decree _ the ex is not the surviving spouse for purposes of intestate successionbut a final order must be issued. b. Reasoning: Before his death, Michael knew he was not divorced, and the divorced was never final. There marriage was never final. c. The brother and sister have no standing to object, bc they would not benefit from the estate, but the mother is a creditor of the estate so she has standing i. Need a personal stake in the property to contest d. A spouse usually takes priority in claiming to be a personal representative , even a spouse that is subject of a divorce proceeding b. Lineal Descendants i. General Rule: a nearly universal feature of intestate succession statutes is that a decedents direct lineal descendants take to the exclusion of collateral relatives 1. When an intestate decedent is survived by a spouse, the lineal descendants succeed to that portion of the estate which does not pass to the surviving spouse ii. General Rule: Any living descendant of the decedent cuts off the right of the descendants own children to inherit. iii. Strict Per Stirpes 1. This approach divides the intestate estate at the level of decedents children, whether or not decedent has any surviving children, and then divides the share of each deceased child among that childs descendants a. For example, if A, B, C & D predeceased X the estate would be divided into 4 shares. E, F & G would share As (for one-twelfth each) iv. Modern Per Stirpes 1. This approach divides the intestate estate at the closest level of descendants in which there is at least one person alive at decedents death, and then divides the share of each deceased descendant in that generation among the descendants of that deceased descendant
a. So, if one of the children survived X, this would look like strict per stirpes, but if all of the children predecease X divide the estate into 8 shares and each grandchild takes v. UPC 2-103. Share of Heirs Other Than Surviving Spouse a) Any part of intestate estate not passing to Ds surviving spouse, or the entire estate if there is no surviving spouse passes in the following order (1) If there are surviving descendants - to Ds descendants by representation (see infra 2-106). (2) If there is no surviving descendant - to Ds parents equally if both survive, or to the surviving parent. (3) If there is no surviving descendant or parent - to the descendants of Ds parents or either of them by representation. (4) If there is no surviving descendant or parent or descendant of a parent, but D is survived by one or more grandparents or descendants of grandparents (A) of estate to Ds paternal grandparents equally if both survive, or to the surviving paternal grandparent, or to the descendants of Ds paternal grandparents or either of them if both are deceased, descendants taking by representation and (B) of the estate passed to Ds maternal relatives in the same manner. (5) Provided; if there is no surviving grandparent or descendant of a grandparent on either side, the entire estate passes to Ds relatives on the other side in the same manner as the did. vi. UPC 2-106 Representation (b) Ds Descendants If under 2-103, Ds estate or part thereof passes by representation to Ds descendants, the estate or part thereof is divided into as many equal shares as there are (i) Surviving descendants in the generation nearest to D which contains at least one surviving descendants, and (ii) Deceased descendants in that generation who left surviving descendants, if any. Each surviving descendant in the nearest generation is allocated one share. Any remaining shares are recombined and then divided in the same manner among the surviving descendants of the deceased descendants as if the surviving descendants who were allocated a share and their surviving descendants had predeceased D. (c) [Collateral Heirs] Descendants of Parents or Grandparents If, under 2-103(3) or (4), Ds estate or part thereof passes by representation, to descendants of Ds deceased parents or either of them or to the descendants of Ds deceased paternal or maternal grandparents or either of them; The estate or part thereof is divided into as many equal shares as there are (i) Surviving descendants in the generation nearest the deceased parents or either of them , or the deceased grandparents or either of them, that contains one or more surviving descendants, and (ii) Deceased descendants in the same generation who left surviving descendants, if any. Each surviving descendant in the nearest generation is allocated one share. Any remaining shares are combined and then divided in the same manner among the surviving descendants of the deceased descendants as if the surviving descendants who were allocated a share and their surviving descendants had predeceased D. 1. New York Representation a. New York is the same as under the UPC vii. Problems X A E M F G NO B H P C IJK D L QU
1) X has 4 children, A, B, C, D and C and D are dead, under strict per stirpes 4 shares and same under modern: Under UPC: Would start by dividing into 4 shares, under UPC 2-106(b), then each surviving descendant, A and B here, get a share, then we take the remaining shares, combine them, and then go to the next generation down and wipe out the grandchildren whose parents received, and pretend that X is only survived by C and Ds children and grandchildren, and there are now 4 grandchildren and they each get 1/8 of the estate, equal shares of the of the estate. NY statute makes the same provisions as the UPC 2) A, B, C, D, G & L predecease X. UPC Closest level with living descendents is grandchildren, so we divide the estate into the number of shares = (# of living relatives in that generation) + (# of deceased relatives in that generation that left issue). In this case that is 6 + 2 = 8. So we divide the estate into 8 shares of $15,000 each and give one share to each of the surviving grandchildren. There is $30,000 remaining in the estate, so we look for the next generation with living relatives, which in this case is the great-grandchildren and we divide the remaining estate into shares = (# of living children in that generation) + (# of deceased children in that generation who died with issue). In this case that is 4 + 0 = 4. So, we divide the $30,000 into 4 shares of around $7,000 and give N, O, Q and U $7,000 each. Strict per stirpes divide estate by 4 shares because there were 4 children and then you distribute the 4 shares to each childs descendants. If a child of A B C or D is deceased, their grandchildren take the share. Modern Per Stirpes closest level to X that has surviving descendants, which is grandchildren, so we divide it by 8. 3) A, E, F & G predecease X. UPC Closest level with living descendents is the children. $120,000/(3+1) = $30,000 so B, C & D each get $30,000. There is $30,000 left in the estate. The next level with living descendents is the great grandchildren (all of As children are dead), so $30,000/3 = $10,000 and M, N and O each get $10,000. Strict Per Stirpes: B C and D get a and then M gets half of and N and O get of that. Modern Per Stirpes: Same result as Strict per stirpes. 4) A, B, C, G & H predecease X. UPC Closest level with living descendents is the children $120,000/(3+1) = $30,000 so D gets $30,000 and there is $90,000 remaining in the estate. The next level is the grandchildren, so $90,000/(5+2) = $12,857 and E, F, I, J, K and L each get $12,857. This leaves about $26,000 in the estate. The next level is the great-grandchildren, so $26,000/(3+0) = $8,666 for N, O & P. 5) A, B, C, D, F, H & P all predecease X. UPC The closest level with living descendents is the grandchildren, so $120,000/(6+0) = $20,000 _ E, G, I, J, K & L each get $20,000. Note that we do not count F and H because they did not leave issue!! c. The Share of Ancestors and Collateral Heirs i. Collateral relatives include brothers and sisters, nieces and nephews, cousins and all other relatives who are not direct lineal descendants or ancestors 1. parents generally take to the exclusion of other relatives 2. brothers and sisters are next ii. Relatives Through Marriage 1. Virtually all intestate succession statutes exclude relatives by marriage, other than decedents own spouse iii. Estate of Locke 1. First cousins of the decedents that are 5th degree removed, on the paternal side, are entitled to an equal share of the decedents estate as first cousins that are 4 th degree removed on the maternal side. 2. Rule: When there is a statute regarding representation by a maternal and paternal grandparents side, it is clear that the statute does not restrict representation until the first line of descendants is met on either side. iv. UPC 2-103 Parentelic System 1. Parents or descendants of parents (brothers, sisters, and their descendants. 2-103(a) (3)) take to the exclusion of other collateral relatives 6
a. Surviving parent if only one survives b. Representation to the descendants of parents should be by representation (2106 and 2-103 combined) 2. Descendants of grandparents (uncles, aunts, their descendants, 2-103(a)(4)) take to the exclusion of more remote ancestors a. If there are descendants on the maternal and paternal side, then the estate is split in half, and if only survived by decedents on one side, then the entire estate passes to that half 3. Example: If X dies survived by a sister A and five nieces and nephews (children of two predeceased siblings, how should the estate be distributed? Under UPC 2101(3), the estate passes to the descendants of Ds parents or either of them by representation. So, we would divide the estate into three shares (1 living sibling + 2 siblings who died leaving issue) and the surviving sibling would take. There are 5 living relatives in the next generation, so we divide by 5 (UPC and NY). 4. Under the UPC, when a decedent is not survived by any descendants of grandparents, decedents step children and their descendants will take decedents estate and in the absence of step-descendants 2-105 says the estate escheats to the state v. Laughing Heir Statute Under NY 1. New York (a)(6) cuts off at grandchildren of such grandparents, if the decedent is survived by other issue of grandparentsbut under (a)(7) great grandchildren of grandparents can take if they are the only living descendents on either side. vi. Problems on Page 99 d. Defining the Modern Family i. Half-bloods 1. UPC 2-107. Kindred of Half Blood a. Relatives of the half blood inherit the same share they would inherit if they were of the whole blood b. Problem H and W have three children, A, B, C, W dies and H marries X and has D, A dies with will that leaves her property to B, B dies and is survived by Cs child E and Ds two children F and G - E, F and G all take a third equally (UPC) 2-107 - Under Oklahoma, distribute equally, same as UPC o However, under Oklahoma, if half came from W, then E gets all that money and then they split the remaining money equally - Florida statute, if B has an estate of $100,000 E gets 66,000 ad F and G get 15,000 2. NY 4-1.1(b) a. For all purposes of this section, decedents relatives of the half blood shall be treated as if they were relatives of the whole blood. 3. Florida/Mississippi a. Florida and a few other states say that if decedent is survived by relatives of the half-blood and relatives of the whole blood in the same degree, the relatives of the half-blood take half as much as the relatives of the whole blood b. Mississippi says whole blood relatives take to the exclusion of the half-blood relatives ii. Adoption 1. Estates of Donnelly a. An adopted child may not inherit form her natural grandparents under RCW 11.04.085, which says that an adopted child shall not be deemed an heir of his natural parent? 2. UPC 2-118. Adoptee and Adoptees Adoptive Parent of Parents
a. A parent-child relationship exists between an adoptee and the adoptees adoptive parent or parents 3. UPC 2-119. Adoptee and Adoptees Genetic Parents (NY) a. General rule is a parent-child relationship does not exist between an adoptee and the adoptees genetic parents b. 2-119(b) is in play in this case (Stepchild Adopted by Stepparent) i. 2-119(b)(2), this case would come out differently and she would be considered an heir or grandchild of John ii. UPC recognizes the problem in the Estates of Donnelly c. 2-119(c) for when another family member adopts the child 4. UPC 2-113. Individuals Related to Decedent Through Two Lines a. An individual who is related to the decedent through two lines of relationship is entitled to only a single share based on the relationship that would entitle the individual to the larger share. 5. Adult Adoptions a. Estate of Brittin i. Issue: Whether the natural children of an adult adoptee are descendants of the adopting parent for purposes of inheritance? ii. Holding: Yes. Petitioners deceased father, as an adopted child, obtained the right of succession as decedents legal heir. Adopted and natural children are placed in the same position. iii. Rule: In Illinois, an adopted child is a descendant of the adopting parent for purposes of inheritance from the adopting parent and from the lineal and collateral kindred of the adopting parent. For such purposes, an adopted child also is a descendant of both natural parents when the adopting parent is the spouse of a natural parent. e. Simultaneous Death i. Uniform Simultaneous Death Act 1. If the title or devolution of property depends on priority of death, and there is no sufficient evidence that the persons have died otherwise than simultaneously, the property of each person shall be disposed of as if he or she had survived. ii. Estate of Villwock 1. Rule: Because it is beyond medical ability to fix an exact moment of death inconsistencies in the time of death by medical professionals are not incredible as a matter of law and will not require the application of the Simultaneous Death Act. iii. UPC 2-104. Requirement that Heir Survive Decedent for 120 Hours An individual who fails to survive (in gestation or an individual born before decedents death) D by 120 hours is deemed to have predeceased D for purposes of distributing Ds estate by intestate succession, (and homestead allowance and exempt property). Individual is deemed to have predeceased D unless it is established by clear and convincing evidence that the individual survived D by 120 hours. This section shall not apply if it would result in escheat to the State. Statute avoids problems of providing sufficient proof ; but dont want to extend the period too much so as to avoid delays of distribution Statute is designed both to effectuate Ds intent and to avoid litigation over the precise moment of Ds death. This provision is extended to property held in joint tenancies with right of survivorship, directing that if it cannot be proven by clear and convincing evidence that one co-tenant survived the other by 120 hours, each co-tenants shall be distributed as though he or she survived the other(s) iv. Problem Roland and Nancy died intestate, Roland dies right away and Nancy dies on the way to the hospital, each survived by 4 children from previous marriages
a. Under UPC, 2-104, each of their estates passes to their children, the UPC wants to avoid one survivors children getting the others entire estate i. If they had children together also, his estate would have passed to both but some would have gone through Nancy f. Disclaimer i. Effect of Disclaimer: If an individual disclaims an interest in property, the estate will be distributed as if that person had pre-deceased the decedent. E.g. If mom dies survived only by a daughter, who has two children of her own and the daughter disclaims, the mothers property will be distributed to the two grandchildren as if the daughter had predeceased the mother. ii. Reasons to Disclaim: Why would anybody disclaim? (1) To prevent creditors from getting at the assets see Estate of Baird, below; (2) To avoid higher taxes by accepting more money into an already large estate. iii. Estate of Baird 1. Anticipatory disclaimers of expectancy interest created by intestacy are not contemplated or authorized by RCW 11.86. 2. Rule: At common law and under our current statute, a properly executed and delivered disclaimer passes the disclaimed interest as if the disclaimant died immediately prior to the date of the transfer of the interest. So long as a disclaimer is properly executed and timely delivered, the legal fiction of relation back treats the interests as having never passed to the intended beneficiary or heir at law. 3. Interests that may be disclaimed include: the whole of any property, real or personal, legal or equitable, or any fractional part thereof, any vested or contingent interest in any such property. Interest includes, but is not limited to, an interest created by intestate succession. a. Why didnt James just do it again after his mothers death? i. If he waited for after his mom to die, he would have already declared bankruptcy and therefore it would have been revoked anyway ii. If the bankruptcy law as displacing state law, then the bankruptcy would prevail b. Tax: when a disclaimer gets in the way of federal tax liens, the disclaimer wont defeat a federal tax lien i. See Drye case in note 4 on page 149. The USSC held that an heir, by deciding whether to disclaim, effectively determines who will receive property. This power to channel the estates assets to determine who receives assets constitutes property subject to the governments tax lien. iv. UPC 2-1103. Scope of Disclaimer v. 2-1105. Power to Disclaim; General Requirements; When Irrevocable vi. 2-1106. Disclaimer of Interest in Property g. Advancements i. Common Law: at common law, a substantial gift to a child by a parent raised a presumption that the gift was an advancement of the childs inheritance, and that the gift should be charged against the childs intestate share. The presumption was rebuttable, but the burden of proof was on the child to demonstrate that the parent did not intend an advancement ii. UPC 2-109: The UPC reversed the common law presumption and requires a writing to show that the gift was intended to be an advancement. iii. Problem Hypo: Decedent dies with 3 children, and before her death gave one of the 3 children $30,000 to buy a house. The other children think shouldnt divide the state equally by intestate succession. What is the result?
UPC says that some significant evidence that a gift is an advancement, otherwise we treat it as an inter vivos gift Presumption against advancement Assumption testator considered it a gift over and above the estate
If it was an advancement: $90,000 + $30,000 = $120,000. $120,000/3 = $40,000. Se each child is entitled to $40,000, but As share is reduced by $30,000, so she gets $10,000 and the other two children get $40,000. WILLS a. Will Execution i. Formalities (1) The protective function (2) The ritual function (3) The evidentiary function; and (4) The channeling function Procedures to Follow: 1. The will should be in final form, pages securely fastened and numbered 1 of _. 2. The will should contain an attestation clause and if the state authorizes it, a self-proving affidavit 3. There should be at least two disinterested and competent witnesses present. Use three witnesses if there is a risk of a will contest. 4. Prior to the execution ceremony, allow the witnesss time to form an opinion about the capacity and mental state of the testator. 5. Bar will beneficiaries from the room during the execution ceremony. 6. Once the ceremony begins, allow no interruptions and let no one leave the room. 7. Ensure that testator, witnesses and the attorney can see and hear one another. 8. Ask the testator if the document is her will, and if she wants to sign it; once the witnesses have heard the answer, the testator should sign the will under the witnesses careful gaze 9. Ask the testator to declare to the witnesses that the instrument is her will, and to ask them to sign the will. Read the attestation clause aloud to the witnesses before they sign it. 10. Have the witnesses sign their names and addresses. As they sign, witnesses should be able to see the testators signature. Safekeeping: Executing more than one will is you have to worry about what happens if all of the wills are not found could be a presumption that testator provoked it o Should only execute one copy, but what do you do with that copy? good practice to have the client hold it somewhere safe, unless you dont think the client has a safe place to put it 1. UPC Section 2-502. Execution; Witnessed Wills; Holographic Wills a. Requires only that the testator sign a written document, and that at least two other individuals sign the document within a reasonable time after witnessing the testators execution or acknowledgement of the will b. Witnesses need not be present during testators execution of the will, nor must witnesses sign on testators presence c. The testator can even dispense with witness formalities if they acknowledge their signature on the will before a notary 2. Morris v. West a. Rule: According to the Texas Probate Code, the witnesses are required to sign their names in the presence of the testator, must be in the same room. 1 III.
ii. Signature Requirement 1. UPC 2-502 2. A testator must sign his will: a. almost any imaginable signature will do if it makes a visible impression on the paper and the testator intended the impression to be his signature 3. Proxy: Most acts will allow the testator to sign by proxy if the proxy signs at the direction or request of the testator and in the testators presence iii. Witness Requirement 1. NY EPTL Section 3-3.2. Competence of Attesting Witness Who is Beneficiary; Application to a Nuncupative Will (page 238) a. Does not make the will invalid but deprives the witnesses from their benefit under the will b. in NY, it is explicitly required that testator inform the witnesses that the document is a will c. Problems under NY i. Niece, and 2 daughters benefiting 1. (a) niece and a neighbor witness the will o The will isnt invalid just because we have an interested witness, but under (a)(1) need 2 other witnesses o The will is not invalid itself, the person who witnesses does not take 2. (b) daughter and neighbor a. Daughters disposition would get cut out from the will under (1) but if they would take under intestate succession (3) if that value does not exceed the value in the will 2. Choosing Witnesses: We want to be able to find the witnesses later ; Do not want witnesses to be beneficiaries; Want credible witnesses, and witnesses who are articulate, etc; Want to make sure the witnesses were in the same room as the testator 3. UPC 2-502 a. Notarization is an alternative to witnesses 4. Attestation Clause a. An attestation clause is not required in any state, but it creates a presumption that the will was validly executed and that the events described in the clause actually occurred b. Present-tense and helps to probate the will even if the witnesses dont have recollection of the execution ceremony 5. Self-Proving Affidavit a. A self-proving affidavit is attached to the will and signed by the witnesses, the testator and a notary at the time of execution b. The affidavit itself is sufficient to get the will admitted to probate, and often eliminates the need to find the witness to establish a foundation for the will at testators death c. Past-tense (signifying the witnesses has acted in their duties as a witness) d. It is a substitute for witness testimony at a hearing or other legal proceedings and it will get the will to probate iv. Execution Ceremony v. Salvage Doctrines 1. Estate of Hall a. Rule/Reasoning: The Joint Will revoked all previous wills and codicils made by either Jim or Betty. Furthermore, the court found that, after they had 1
executed the Joint Will, Jim directed Betty to destroy the Original Will. There is testimony from Betty where it is believed that the Joint Will was not final in form, but that they believed it to be good. Jim and Betty reasonably expected the Joint Will to stand as a will until the lawyer provided one in a cleaner, more final form. Sandra points to no other evidence that suggests that Jim did not intend for the Joint Will to be his will. b. Under UPC if it was notarized that is enough without witnesses, notarization is a substitute for witnesses c. UPC 2-503: includes a dispensing power, where even if the document is not executed in the right formality, if there is clear and convincing evidence that the decedent intended the document to constitute the decedents will vi. Holographic Wills (A will that the testator writes themselves) 1. Does not normally require witnesses b. What Constitutes the Will i. Doctrine of Integration and Incorporation by Reference 1. Integration a. Permits us to treat the four pages as a single integrated will, when first 3 pages are not signed but the 4th is. Documents have to be present at execution in order to be valid b. How to avoid problems: i. Should put together a single document to avoid any potential problems ii. Should number pages consecutively and indicate it is page 1 of 6, 2 of 6, etc. iii. Have the testator initial every page iv. Should just prepare any entirely new document, and take precautions to protect against claims pages were substituted v. Make sure that no page or paragraph stops or ends at a top of a page so it looks like its all one document 2. Incorporation by Reference a. Permits a court to give effect to a will which disposes of property in accordance with an unattested document, so long as: i. The document was in existence and was complete prior to, or at the time the will was executed ii. The testators will must evince a clear intent to incorporate the document into her will iii. The will must be clearly and specifically describe the document so that there is no doubt the identity of the document to which testators will refers 3. Estate of Norton a. Reasoning: However, as to the second Watson requirement, that the reference be in terms so clear and distinct that full assurance is provided that the six page document was intended to be incorporated, we conclude that propounders claim fails. While decedent had the codicil stapled to the document designated as his will and inserted the documents in an envelope that had typed on the outside Will there exists no reference within the codicil itself that is in terms clear and distinct designating the six pages as the document to be incorporated. b. Norton signed the codicil and someone else pulls out the will and attaches it to the codicil, do we know this was the will we wanted the codicil to be attached to? 1
i. We do not know that at the time Norton signs it he has the right piece of paper in front of him when he signs and attaches the codicil ii. We do not know what will he was referring to 4. Clark v. Greenhalge a. Issue: Whether a probate judge correctly concluded that specific, written bequests of personal property contained in a notebook maintained by a testatrix were incorporated by reference into the terms of the testatrixs will? Holding: Yes b. Rule: A properly executed will may incorporate by reference into its provisions any document or paper not so executed and witnessed, whether the paper referred to be in the form of a mere list or memorandum if it was in existence at the time of the execution of the will, and is identified by clear and satisfactory proof as the paper referred to therein. c. Reasoning: It appears clear that Helen Nesmith intended by the language used in Article 5th of her will to retain the right to alter and amend the bequests of tangible personal property in her will, without having to amend formally the will. d. We look at extrinsic evidence when it is clear but lists are problematic because there is no way to ensure that all of the entries were made by the testator e. UPC 2-513 would not help because the note was not signed 5. UPC 2-510. Incorporation by Reference a. A 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 6. UPC 2-513. Separate Writing Identifying Devise of Certain Types of Tangible Personal Property a. Allows testators to have the ability to distribute items of tangible personal property by using modifiable lists b. Note: This doesnt apply to stocks & bonds or other intangible property. c. May be prepared before or after the execution of the will d. Only need testators signature 7. Advising a Client Who Wants to Leave Different Property to Different People Who Express an InterestWithout Having to Redraft Her Will a. Provisions added after the will cannot be incorporated by reference. She could make inter vivos gifts, but then she cant use the property anymore and cant change her mind. b. She could devise the property to someone she trusts with a request that s/he distribute the property in accordance w/ her subsequent memo. This doesnt create enforceable obligation, but if she trusts the person, it is the best she can do. ii. Facts of Independent Significance 1. Permits a court to give effect to events which would change the disposition of testators estate after execution of testators will, so long as those events have significance apart from a change in testators dispositive scheme 2. Relevant in two situations: a. When life events change a testators beneficiary designation b. When events change the character of a bequest 3. UPC 2-512. Events of Independent Significance a. A will may dispose of property by reference to acts or 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 1
the testators death. The execution or revocation of another individuals will is such an event. 4. In re Tiplers Will a. Rule: It is frequently necessary to resort to extrinsic evidence to identify the persons who are to take or the subject matter of the disposition. b. The beneficiaries of husbands will, will probably not change on a whim c. Event of independent significance, we are not afraid someone will substitute a new document d. Whoever happens to be a beneficiary of her husband at death should get her estate e. It indicates who the beneficiaries would be c. Construction Problems Created by the Time Gap Between the Will Execution and Death i. Classifying Devises 1. General Devise A general legacy is one which may be satisfied out of the general assets of the testators estate instead of from any specific fund, thing or things. It does not consist of a gift of a particular thing or fund or part of the estate distinguished and set apart from others of its kind and subject to precise identification. A general legacy has a prerequisite of designation by quantity or amount. The gift may be either of money or other personal property. 2. Specific Devise A specific legacy is a gift by will of property which is particularly designated and which is to be satisfied only by the receipt of the particular property described. 3. Demonstrative Devise a devise of a particular amount of money to be drawn from a specified fund 4. Residuary Devise A residuary devise is the sweep up clause in the will that distributes all of the property that has not been described as either a specific, general or demonstrative devise. It is usually the last dispositive clause in the will. ii. Abatement 1. Abatement rules determine the order of priority among various devisees when the value of the estate is insufficient to satisfy all of the devises in the will 2. In re Estate of Potter a. Holding: Yes. The trust provision in favor of Mrs. Potters son constituted a general legacy while the will provision in favor of Mrs. Potters daughter constituted a specific legacy. Thus, under the circumstances, the general legacy abated prior to the specific legacy with the result here being that Mrs. Potters daughter should receive the residence. b. Rule: It is our further opinion that general devises abate before specific devises. The presumption is that the testator intended that all the legacies provided in for his will would be paid in full and that he contemplated that his estate would be sufficient to meet this requirement, but his good intentions are no protection for his legatees and devises from the just claims of his creditors or from costs of administration. 3. UPC Section 3-902 Distribution; Order in Which Assets Appropriated; Abatement (a) Priority among various devisees when value of estate is insufficient to satisfy all devises Creditor claims and administrative expenses enjoy priority over all claims of estate beneficiaries. (not written expressly in 3-902) (1) Property not disposed of by will abate first.
(2) Residuary Devises everything left over abate second (why: take the risk that residuary may take nothing after significant specific and general devises are fulfilled ) (3) General Devises a designated amount of money (includes a devise equal to value of certain item) (4) Specific Devises particular, non-fungible property (includes stock, money in bank acct) abate last. Demonstrative Devises devise of particular amount of money to be drawn from specific property (i.e., $10K from sale of my stamp collection) treated as a specific devise up to the value of the specified property, and general devises for the balance. Sophisticated lawyers rarely draft demonstrative devises Abatement is default rule of construction, (b) if T wants devises to abate in a different order, she can so provide. T should provide for situation where her assets diminish after execution of the will. 4. Default Rules Can (and Should) be Altered by Specific Provisions in the Will a. A will can express a preferred order of abatement. For example: i. If my estate is less than $120,000 I would like my wife to take the entire estate. But if my estate is more than $120,000, I direct ii. If the specific and general devises amount to more than 20% of my estate, then I leave my entire estate to my husband. b. Basically, we can use express language to make sure that the residual legatee does not get screwed 5. Ratable Abatement Within Each Class a. Example: Suppose the value of testators estate, after payment of creditor claims, and after distribution of all specific devises, is valued at $100,000. Suppose further that testators will made general devises totaling $250,000. The $100,000 will be distributed ratably among the general devisees. Since the funds available to satisfy general devises equal 40% of the total general devises, each devisee will receive 40% of the devise. Thus, if the will devised $80,000 to one general devisee, that devisee will take $32,000 (40% of $80,000) b. If a specific devisee whose property is sold to pay expenses, then he is entitled to contribution from other specific devisees c. UPC 3-902(b) Ratable Abatement Within Each Class i. Abatement within each classification (general/specific/residuary) is in proportion to the amounts of property each of the beneficiaries would have received if full distribution of the property had been made in accordance with the terms of the will. 6. Iowa Statute, Section 633.436 General Order for Abatement (page 289) a. They condition the surviving spouse, and the last thing to abate is the property devised to a surviving spouse 7. Problems Problem 1: Potter has created 3 different kinds of devises - The devise to the house at Sunset Lane is a specific devise, the daughter gets an identified piece of property - The son gets a general devise, he gets cash, he does not get anything specific property, the cash can come from anywhere - Gertrude gets residuary devise, whatever is left over At Mildreds death the house is worth $100,000 and securities valued at $1,000,000, now the house is worth $300,000 and the securities were worth $200,000 - specifically devised property goes to the specific devisee, so would give the house to Helen - specific devises abate last, paid off first - Give Edwin $200,000 in the estate and nothing is left for Gertrude Problem 1 page 290
start with the specific devise and give Bob the speedboat the devise in 3, is a demonstrative devise and you treat the cars value as a specific devise, and then give $10,000 to Fran from the car we now have $110,000 worth of general devises and have $55,000 left we will not settle the residuary devises iii. Exoneration of Specific Devises 1. Exoneration at common law held that a specific devisee is entitled to have the mortgage paid at the expense of the residuary estate unless it appeared, from the will itself or surrounding circumstances, that testator intended the devisee to take subject to the mortgage 2. Nonexoneration, is the specific devisee takes subject to a mortgage lien unless testators contrary intent appears from the will or surrounding circumstances 3. UPC 2-607 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 debts iv. Apportionment of Taxes 1. Many states have enacted a statute so every beneficiary, not just the residuary devisee would bear the tax burden 2. Wills often include direction against apportionment, an instruction that tax claims should be treated as claims against the estate, reinstating the common law abatement rules for tax claims, and putting tax claims on the same footing as other claims v. Ademption 1. Common Law a. If the specifically devised property was no longer part of testators estate at testators death, the devise was adeemed and the beneficiary received nothing i. Policy: Ts devise of a specific property shows intent for Beneficiary to have that particular property not the value thereof. 2. McGee v. McGee a. Holding: Yes, the legacy was sufficiently susceptible of identification to tender it a specific one, and it was adeemed by the purchase of the bonds. b. Rule: Ademption by extinction, a legal consequence that may attend a variety of circumstances occasioned either by operation of law or by actions of a testator himself or through his guardian, conservator, or agent. c. Reasoning: It was the testatrix intent that her grandchildren only get what was in her account at her death and not the proceeds from investments. d. Identity Theory of Ademption: ademption is irrespective of Ts intent. Ct must focus only on whether devise was specific and whether the propery was part of Ts estate at Ts death. e. There is nothing the grandchildren can take under this bequest (specific devise) i. they take nothing if there is not anything in the banking account 3. UPC Section 2-606 (Presumption of Non-Ademption) (a) A specific devisee has a right to the specifically devised property in Ts estate at death and: (1) (5) [gives specific devisee the value of property in several classes of cases where it appears unlikely that T would have intended ademption of the devise.] (a)(1) is for rights to the specific devisee even when the transfer is the result of an affirmative act by the testator (sale proceeds) (a)(2) and (3) entitled the specific devisee to any unpaid condemnation or insurance proceeds resulting from taking of or injury to specifically devised property 1
(a)(4) entitles the specific devisee to property acquired by the testator as a result of foreclosure on specifically devised property (a)(5) property is replaced (6) Unless the facts and circumstances indicate that ademption of the devise was intended by T or ademption of the devise is consistent with Ts manifest plan of distribution, [Beneficiary gets] the value of the specifically devised property to the extent the specifically devised property is not in Ts estate at death and its value or replacement is not covered by paragraphs (1) through (5). 2-606 (a) is where the devisee has rights to property that might not be the specific devise itself (b) says if someone acts for testator when they have no capacity then the specific devisee has the right to the proceeds because we assume the testator was not changing the disposition by disposing the property (e) incapacitated principal McGee would come out differently b/c there is no evidence that T intended specific devise to adeem. 4. UPC 2-605 Increase in Securities a. If a T executes a will that devises securities [which T owned at the time], the devise includes additional securities owned by T at death to the extent that additional securities were i. Securities of the same organization acquired by reason of action initiated by the organization or any successor, related, or acquiring organization, excluding any acquired by exercise of purchase options. i.e., Stock Dividends ii. Securities of another organization acquired as a result of a merger, consolidation, reorganization, or other distribution by the organization or any successor, related or acquired organization, or i.e., stock from merger iii. Securities of the same organization acquired as a result of a plan of reinvestment. b. Distributions in Cash before Ts death do not pass with the securities [devised] 5. UPC 2-609 Ademption by Satisfaction (a) When T gives a beneficiary a specific devise during Ts lifetime ( advancements) and leaves that beneficiary the same specific devise, such testamentary devise is adeemed by satisfaction only if i. Will provides for deduction of the gift, or ii. T declared in a contemporaneous writing that the gift is in satisfaction of the devise or that its value is to be deducted from the value of the devise, or iii. the devisee acknowledged in writing that the gift is in satisfaction of the devise or that its value is to be deducted from the value of the devise. Presumption of NON-ademption by satisfaction (c) If devisee predeceases T [see Lapse], gift is treated as satisfaction unless Ts contemporaneous writing provides otherwise. vi. Lapse 1. Common Law Lapse Rule: When a named beneficiary predeceases T, the devise lapses back to the testators estate and the beneficiaries estate would get nothing 2. Effect of Lapse:
a. General and Specific i. if a specific or general devise to an individual beneficiary lapses, the devised property generally passes into the residue of testators estate b. Residuary i. if teststor devises the residue of her estate to a single devisee, and if the devise lapses, the residue passes by intestate succession 1. suppose however, testator devises the residue of her estate to more than one devisee and one of the devisees predeceases the testator, and the antiplapse statute does not save the devise? 2. The entire residuary should be distributed to the other residuary devisees; no intestacy should result unless all of the residuary devisees die before testator (UPC 2-604 and NY adopt this rule) 3. Anti-Lapse Statutes a. Generally preserve the devise only for the ISSUE of the deceased devisee, not for the deceased devisees will beneficiaries. (Except in Maryland) i. Antilapse statutes only operate if beneficiaries are closely enough related to the decedent (whose devises are actually saved depends on jurisdiction) b. New York 3-3.3(a)(2) i. Only applies to devises to testators issue or siblings by representation ii. Testators issue or siblings, if predeceased, must leave issue, and the issue take by representation iii. Class gifts to issue, brothers, or sisters have the same rule, except no benefit shall be conferred hereunder upon the surviving issue of an ancestor who died before the execution of the will in which the disposition to the class was made c. Virginia i. Applies to devises made to testators grandparents or to issue of testators grandparents by representation d. New Hampshire i. Saves all lapsed gifts regardless of the relationship of the devisee to the testator ii. The heirs in the descending line of a legatee or devisee, deceased before the testator, shall take the estate bequeathed or devised, in the same manner the legatee or devisee would have taken it if he had survived. e. UPC 2-603(b) (Class Gifts and Anti-Lapse) (page 317) i. antilapse applies to grandparent, a descendant of a grandparent, or a step-child of either T, or the donor of a Power of Appointment exercise by Ts will ii. (b)(2) is for class gifts iii. (b)(4) alternative beneficiaries f. UPC 2-603(b)(3): i. conditional survival terms are not (words of survivorship), in the absence of additional evidence, a sufficient indication of an intent contrary to the application of this section ii. suggests that if I make a gift to my surviving children, and one child survives and one dies but has left 2 children, issue of the deceased child would share
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iii. the reason for this is people dont contemplate their beneficiaries will die, leaving issue iv. UPC says, in effect, that language of survivorship is an insufficient basis for finding an intention to supersede the UPCs antilapse provisions! Class Gifts at common law, if one or more members of the class predeceased the testator, that members devise lapsed, and the remaining members of the class divided up the lapsed devise a. drafters should use multi-generational language unless the testator wants to exclude issue of deceased class members b. Example: To my husbands four children, $60,000. 1 of the 4 predeceased the testator, leaving issue. c. $60,000, the members who are eligible to take get to take under VA so divide 60 by 3, the predeceased child of husband is not a descendant of a grandparent d. If testator had left to her own children, then antilapse would apply and it would pass to deceased childs descendants Void Devises at common law, a lapsed devise was a devise to a person who died between the time of will execution and the time of testators death, by contrast, if the devise was to a person who had died before the time of will execution, the devise was a void devise a. modern antilapse statutes generally apply to save both lapsed and void devises b. in some jurisdictions, however, the distinction remains important when class gifts are involved, for instance, the NY antilapse statute Simultaneous Death and Antilapse Statutes a. 120 hour survivorship requirement applies to lapsing unless will provides otherwise (UPC2-702(b)) b. if dont survive for 120hrs, deemed to have predeceased c. But, UPC2-702(d) does not require 120hrs survival if: i. (1) the governing instrument contains language dealing explicitly with simultaneous deaths and that language is operable under the facts of this case ii. (2) the governing instrument indicates that an individual is not required to survive an event, including the death of another individual by any specified period OR expressly requires the individual to survive the event by a specified period; but survival for the specified period must be established by clear and convincing evidence. When Does the Will Override the Antilapse Statute a. Estate of Rehwinkei (Washington State Case) i. The Washington Statute, is broader than NY and Virginia, covers all blood relatives of testator ii. Issue: Whether, under the anti-lapse statute, the son of the testators niece, who predeceased the testator by one month, is subject to inherit the disposition that the niece would have obtained had she survived the testator? iii. Holding: No, the gift to Fossums mother lapsed when she predeceased the testator. The language of distribution to those who are living at the time of my death manifests the testators clear intent that the anti-lapse statute not apply. The trial court did not err in granting the Estates motion for summary judgment.
iv. Rule: A presumption arises in favor of the operation of the anti-lapse statute. However, the intent on the part of the testator to preclude operation of the statute must be clearly shown. v. Drafting Solution: take out language to those living at the time of my death; and add and if any predecease, to their issue; i.e. use multi-generational language 1. Ask Leo what he wants, explain what if these beneficiaries are dead, who do you want to take? 2. Use language that make it clear who takes and not their issue 8. Morse v. Sharkey (Michigan/UPC) a. Rule: When a will only makes the gift to persons who survived the testator there is nothing to go to the issue of others who died before he did. b. Reasoning: The group is limited by the phrase that survive me. Thus, the inclusion of this express limitation necessarily precludes those siblings who predeceased Alice Raymond from taking a portion of the testators estate under the residuary clause. c. Drafting Solutions: i. Say you wanted the property to only go to surviving brothers and sisters what would you say 1. To my brothers and sisters that survive me, and not to the issue of deceased brothers and sisters ii. Say you wanted the issue to take and the antilapse statute to apply 1. to my brothers and sisters and their issue by representation 9. Problems Ts will includes the following dispositive provisions: 1. $30k to sister, S 2. $40k to husbands brother, B 3. $50k to Uncle, J 4. $5 to brother, C 5. remainder to sisters daughter, N and husbands daughter, D in equal shares At Ts death, estate valued at $200,005. Ts husband predeceased her, and T died childless. How should Ts estate be distributed under NY if S, B and J predeceased T and (a) S survived by daughter, N and husband T and her will left all prop to T; B survived by daughter E, to whom eh left his entire estate; J was survived by son K, to him he left his entire estate: - testamentary disposition to issue or brother or sister, it does not lapse - gift to S is saved, because she is Ts sister so $30k to Nancy (S daughter) - Bernie is not a brother, sister or issue so it lapses (40k) - Uncle Js gift lapses also (50k) - C takes his $5 - Residuary clause gets divided equally $85k each which means Nancy gets 85+30 and D gets 85k (b) same facts as (a) but N also predeceases 1. N survived by Husband S dies w/o issue so devise of $30k lapses $200k would pass to residuary o D would get $200k b/c she was only surviving residuary legatee o Most rules say if a residuarys interest lapses, it goes to the rest of the residuary (NY) 2. N survived by son, V Ss $30k doesnt lapse S has issue V is lineal descendant so he gets $30k. Residuary:
N isnt covered by antilapse statute b/c she is niece of T, not issue or sibling her residuary lapses and goes to D
Problem Under Virginia (a) - Samantha is protected by the VA statute, so Samanthas bequest goes to her daughter Nancy - the bequest to Uncle Jim is also valid, since he is a descendant of a grandparent and it goes to his son, Kurt gets - Bernies gift still lapses - $5 still to cCarl - remainder goes between Debbie and Nancy again - VA statute covers more of the family (b)(2) Samanthas goes to Victor, Bernies lapses, Uncle Jims goes to Kurt, Carl takes $5, and residuary goes to Victor, Nancy and Debbie (descendants of grandchildren) Class Gift Problem T leaves $100,000 to nieces and remainder to American Red Cross, Ts only sister had A, B, C, D (A and B still alive), C who died before T leaving E and D died childless Virginia Statute: - Ds share lapses because she has no issue - C has a son, E, so her share will not lapse and will go to E - A and B are still alive - A, B, and E take 1/3 of the $100,000 NY Statute: - only A and B would take, E and D would not take - the NY Statute (3) says issue, brothers, or sisters as a class, and this is to nieces, so it is just divided by A and B Change hypo, and these gifts were to individuals not a class gift ($25,000 to A, B, C and D) Under Virginia: - A and B would take their share, E would take Cs share, and Ds share would go to the residuary and the Red Cross would take Under NY: - A and B take and C and Ds gifts lapse and go to the residuary estate (Red Cross) vii. Execution and Death d. Will Construction i. Negative Disinheritance 1. when a testator disinherits someone but does not account for how the property will be distributed, then that person will take through intestacy 2. the testator has to make affirmative provisions for other people for the courts to not rule this way ii. Reading the Will as a Whole 1. Generally: when a will provision creates an ambiguity obvious on the face of the provision, courts will, as a matter of course, look to the rest of the will to resolve the ambiguity a. Example: Testator makes a devise of personal property to my daughters Jane and Jane, and then later in the will gives the residue of her estate to my daughters Jane and June 2
2. Matter of Marine Midland Bank, N.A. a. Holding: No, the plain meaning of the word children should apply. b. Rule: Primary function is to effectuate the testators intent and the words used to express that intent are to be given their ordinary meaning. c. Reasoning: The testator was plain, precise, and orderly, and appellants claim to a gift in this trust remainder by implication would wrongly extend the plainly expressed and universally understood words. The order of testators priorities is straightforwardly expressed in paragraph Fifth. Thus, if neither issue nor children survived one brother, the other brother or his children or his issue would take to prevent a lapse. d. Plain meaning approach by the court, the testator should have used the same word throughout the will, to avoid ambiguity e. Drafting Solutions: i. Should use the same words throughout ii. Avoid single generation words like children or nieces etc iii. Want to say to my brothers and sisters or there issue iii. Extrinsic Evidence a. Courts often say that extrinsic evidence is admissible to shed light on testators intent only when the will itself is ambiguous 2. Estate of Carroll a. Holding: No, the will was clear and unambiguous and extrinsic evidence was not needed. b. Rule: Under the law applicable to wills, the Court must give effect to words clear in meaning and capable of ready definition. Only when the terms of the will as written are not plain or when the will cannot be given effect as written because of some latent ambiguity may the Court consider outside evidence for the purpose of ascertaining intention. Words with a well-known technical meaning should be construed according to their technical meaning unless a contrary meaning clearly appears from the context of the will after considering the will as a whole. c. How did the court conclude that the word nieces and nephews are not ambiguous when we have a dictionary definition that contravenes the courts ruling? i. Archie used words like my, possessive ii. The court says all the legal sources dont mean the children of a spouses siblings iii. To figure out what words mean we have to figure out what sources are in play iv. The court believes they should look at legal definitions 1. Sterk thinks they should look at legal and non-legal definition because that his what testator will be thinking of 2. Need to be more specific in the will, Lawyers should know that nieces and nephews have a different legal meaning iv. Mistake 1. Mistake of Fact a. Gifford v. Dyer i. Holding: No mistake, she did not intend to give him anything. The testatrix would have made the same will had she known her son was living. ii. Rule: 1) The mistake must appear on the face of the will, and 2) it must also appear what would have been the will of the testatrix but for the mistake. Thus, where the testator revokes a legacy, upon the 2
mistaken supposition that the legatee is dead, and this appears on the face of the instrument of revocation, such revocation was held void. iii. Hypo: I leave nothing to my nephew John because he has been trying to put me into a nursing home. John says that is a mistake I never tried to admit her into a nursing home. Should John be able to then inherity? 1. what would the Gifford court say need to know the will of the testator but for the mistake, and if we dont know thats not enough 2. Mistake in the inducement claims are claims that are likely to be very unsuccessful (claim against the world) 3. Mistakes on the face of the will is like misspelling a name but the name is referred to and we can tell the mistake 4. Sometimes we know there was a mistake but we dont know what the mistake was, need to correct the will, since can tell from the will 2. Scriveners Error a. Knupp v. District of Columbia i. Issue: Whether the will, which specified in the 6th paragraph that the residual estate should pass to the person in the 8th paragraph, but the 8th paragraph did not name a residual legatee, should be passed to a legatee based on extrinsic evidence? Holding: No. ii. Rule: The testators intent is the guiding principle. If the intent is clear from the language of the will, the inquiry ends there. However, if the language upon its face and without explanation, is doubtful or meaningless a court may examine extrinsic evidence in order to understand the will. There must first be ambiguity. 1. Adding a beneficiary is something the court is not willing to do 2. The court might be more willing to cross out a beneficiary than add one who is not in the will at all 3. In crossing out, we are giving through intestacy 4. Malpractice action? a. Would have to prove were the intended beneficiary e. Revocation i. Introduction 1. Generally: a. There are 3 ways to revoke a will: 1) revocation by a subsequent written instrumenteither by an express clause of revocation or by inconsistent subsequent provisions; (2) revocation by a physical act to the original will either to the paper the will is written on or to the writing on the paper and (3) revocation by operation of law due to a change in the circumstances of the testator ii. Revocation By Subsequent Written Instrument 1. UPC 2-507. Revocation By Writing or By Act (a) A will or any part thereof is revoked: (1) by executing a subsequent will (most common) that revokes the previous will or part thereof expressly or by inconsistency, or (2) by performing a revocatory act on the will, if performed by T w/Ts intent to revoke the will in whole or part (or by another if they performed the act in Ts conscious presence and by the Ts direction). Ex: burning, tearing, canceling, obliterating, or destroying the will or any part thereof. (revocation by physical act does not involve a lawyer and causes problems as to intent of the action) 2
(b) If a subsequent will does not expressly revoke a previous will, the execution of the subsequent will wholly revokes the previous will by inconsistency if T intended the subsequent will to replace rather than supplement the previous will. [see (c),(d)] (c) T is presumed to have intended a subsequent will to replace rather than supplement a previous will if the subsequent will makes a complete disposition of Ts estate. If this presumption arises and is not rebutted by clear and convincing evidence, the previous will is revoked. (d) T is presumed to have intended a subsequent will to supplement rather than replace a previous will if the subsequent will does not make a complete disposition of Ts estate. If not rebutted by clear and convincing evidence, the subsequent will revokes the prior will only to the extent it is inconsistent; both wills are operative to the extent they are not inconsistent. 2. Gushwa v. Hunt (New Mexico case) a. Rule: 1) NM requires executing a subsequent written will that revokes the previous will or part expressly or by inconsistency, or a will or codicil or any part of either is revoked by a subsequent will, codicil, or other writing executed with the same formalities required for the execution of wills declaring the revocation. (2) A will is revoked by performing a revocatory act on the will if the testator performed the act with the intent and for the purpose of revoking the will. b. Reasoning: There has to be an exacting attention to forms, as well as intent to validate a revocation. If the decedent intended to revoke the Will, it was not by drafting a subsequent will, but by performing a revocatory act on the photocopy of the Will. The act of revocation does not explicitly require that the act be performed on the original or on an executed original, such a requirement is implicit in the statutory term will, and this was not done here. It was executed on a photocopy. c. The problem in Gushwa might be uncertainty about what testator wanted to do (Sterk) d. The lawyer supervised a revocation that would bring about litigation 3. Codicils a new document that alters a prior existing will. a. Advantages to codicil: i. dont need to make a whole new will just to add a provision ii. if you revoke a codicil, the rest of the will remains intact b. Should not use codicils to revoke wills: really no need for codicils now b/c we have computers and it is no problem to just reprint a new will i. still need formalities with codicil 4. Problems Page 367, Question 1, I hereby revoke all wills I have previously made testator then signs and dates the document - this is not a subsequent will, no disposition of assets - no witnesses, no testamentary formalities - we dont want people to so quickly write off a document without thinking about it - undue influence Question 2, two witnesses, they sign the will and attest to the revocation, would this document be given effect? - Is this document a will? - We know it wants to revoke the will but it is a subsequent will? - The court in Gushwa would say no its not enough and could read the UPC to justify this result Hypo: 2006 testator executes a document in accordance with testamentary formalities and leaves house to son Sam, then new document, 3 yrs later, leaves personal property to daughter Jane, testamentary formalities - could both documents count because they dont conflict? - 2-507(d) if testator intends the subsequent will to supplement rather than replace a previous will if the subsequent will does not make a complete disposition of the testators estate
Testator writes a will that gives all property to Sam, next will all personal property to Jane - 2-507(b) is this a case where the testator intended to replace? - Need to know intention - (c) and (d) give us presumptions - If the presumptions do not operate then we have to do an inquiry into what testator intended - (b) is a general principle iii. Revocation by Physical Act 1. Generally: usually occurs when there are markings on a document, what do you do with this will (problem 1) what happens when you dont find the will at all at testators death (problem 2) 2. Witnesses: we want witnesses for revocation by a physical act 3. Presumptions: a. Testator revoked it (tore it up) i. Like in Gushwa if the testator does not have the will, there can be no presumption that it was revoked ii. Examples: Lawyer has the will, or it is in a safe-deposit box iii. The testator has to have the will in his possession last for this presumption b. It was accidentally lost i. If the will is not found, there is a presumption that the testator revoked the will ii. This presumption depends on the testators control, and if there are others who would benefit from the wills revocation and had access to the will before or after the testators death c. Somebody other than the testator destroyed the will d. Presumption can be rebutted with clear and convincing evidence 4. Partial Revocation: a. If T makes markings on a will (ex: crosses-out or cuts-out a bequest) courts will give effect to partial revocation if the effect is merely to increase the residuary devise (UPC); but if there is an increase in other individuals some courts wont allow for it i. If the partial revocation changes construction of other devises, courts are less willing to revoke that part b/c this is to a testamentary disposition, which must be accompanied by formalities. ii. Most jurisdictions do not allow a T to directly change or modify (as opposed to revoke) a provision for a devisee by physical act. 5. Ward-Allen v. Gaskins a. The 1992 will cannot be probated in its entirety. Further proceedings are necessary to determine whether Anna Creech revoked her 1995 codicil. If so, then much of her property will be treated as if she died intestate. If not, the codicil should be admitted to probate. We reverse and remand for further proceedings consistent with this opinion. b. Rule: A will or codicil or a part thereof, after it is revoked, may not be revived otherwise than by its re-execution, or by a codicil executed as provided in the case of wills, and then only to the extent to which an intention to revive is show. c. Reasoning: The revocation of the second will in a prior case did not reinstate the earlier will. In this case, the codicil had been properly executed, and no evidence was presented suggesting that the deceased had revived the earlier will by re-executing it or executing a new codicil. Thus the parts of the will at issue have not been revived and should not be issued for probate. There was uncertainty to where the original codicil is and it needs to be resolved. 2
d. A copy of the will can be probated if there is no will and there is evidence e. Revocation of a Copy: The court says the revocation of the copy is no good but if they can prove that the original is withheld lawfully then the beneficiaries can hold on a constructive trust 6. NY SCPA Section 1407. Proof of Lost and Destroyed Will a. A lost or destroyed will may be admitted to probate only if: i. It is established that the will has not been revoked, and ii. Execution of the will is proved in the manner required for the probate of an existing will, and iii. All of the provisions of the will are clearly and distinctly proved by each of at least two credible witnesses or by a copy or draft of the will proved to be true and complete iv. Revocation by Operation of Law 1. Generally: a person has executed a will and leaves money to husband, to children and a variety of other relatives of both herself and her husband they then get divorced a. testator would probably not want her husband to share in her estate after divorce b. it might effect other dispositions c. many states take the stance that divorce only gets rid of the bequest of the spouse 2. UPC 2-804. Revocation of Probate and Nonprobate Transfers By Divorce; No Revocation By Other Changes of Circumstances (b) Revocation Upon Divorce - Except as expressly provided by Will, a court order of divorce or annulment: (1) Revokes (i) any revocable disposition made by T to his/her former spouse or to a relative of the former spouse, or (ii) any nomination of former spouse or relative to serve in fiduciary/representative capacity. (d)Effect of Revocation the rest of the Will is given effect as if the former spouse and relatives of former spouse disclaimed the revoked provisions, or in the case of nomination to fiduciary or representative capacity as if they died immediately b4 divorce or annulment. (e) Revival if Divorce Nullified provisions revoked herein are revived if they get remarried or divorce or annulment is nullified. (f) No Revocation for Other Change of Circumstances!! ****Some Jurisdictions provide for revocation by Marriage (not in UPC) 3. Pre-Marital Wills a. In some states it revokes the entire wills b. In some states marriage does not revoke the will, but the new spouse would be entitled to take an elective share c. In other states the new spouse would be a pretermitted or omitted spouse and the will would not be revoked, but the spouse would get his omitted spouses share and the balance of the wifes probate estate would pass under her wills d. UPC 2-301, which takes into account gifts under the will to testators issue by prior unions and to the surviving spouse i. It is designed to help the decedent who truly forgot to do a new will, so it can be avoided v. Revival and Dependent Relative Revocation 1. Common Law: The testator died intestate 2. Generally What happens when testator has a will, writes a new will, and revokes the 2nd will without writing a third will 3. UPC 2-509. Revival of Revoked Will:
a. (a) If a subsequent will that wholly revoked a previous will is thereafter revoked by a revocatory act under 2-507(a)(2), the previous will remains revoked unless revived. The previous will is revived if it is evident from the circumstances of the revocation of the subsequent will or from Ts contemporary or subsequent declarations that T intended the previous will to take effect as executed. i. When 1st will is wholly revoked by 2nd will, and 2nd will is revoked by act, presumption that 1st will remains revoked without more b. (b) If a subsequent will that partly revoked a previous will is thereafter revoked by a revocatory act under 2-507(a)(2), a revoked part of the prior will is revived unless it is evident from the circumstances of the revocation of the subsequent will or from Ts contemporary or subsequent declarations that T did not intend the revoked part to take effect as executed. i. When 1st will is partly revoked by 2nd will, and 2nd will is revoked by act, presumption that 1st will is revived ii. Ex: a codicil that is revoked by revocatory act revives the 1 st will. c. If a subsequent will that revoked a prior will in whole or in part is thereafter revoked by another later will, the previous will remains revoked, in whole or in part, unless it or its revoked part is revived. The prior will or its revoked part is revived to the extent it appears from the terms of the later will that T intended the previous will to take effect. i. When 1st will is party or wholly revoked by 2nd will, and 2nd will is revoked by 3rd will, presumption that 1st will remains revoked unless 3rd will intends to revive 1st will. 4. Problem under UPC 2-509 Suppose testator wrote a will in 2003, and then wrote a second will in 2009, explicitly revoking the 2003 will. In 2011, testator burned the 2009 will, but did not execute a new will and died in 2012. a. If what the 2009 did was to revoke the 2003 will, and then the 2009 will is revoked, then the presumption 2003 will is also revoked unless it is revived b. When is it revived? If there is evidence from the circumstances of the revocation of the subsequent will or from the testators contemporary or subsequent declarations that the testator intended the previous will to take effect as executed c. Presumption against revival that is not conclusive against the UPC 5. Oliva-Foster v. Oliva a. Holding: The trial court correctly applied the doctrine of dependent relative revocation, and concluded that even if the 2002 will would be found invalid, the 1995 will would be revived and create the same result. Affirmed. b. Rule: The doctrine of dependent relative revocation states that if a testator mutilates or destroys a will with a present intention of making a new one immediately and as a substitute, the new will is not made, or, if made, fails of effect for any reasons, it will be presumed that the testator preferred the old will to intestacy, and the old one will be admitted to probate in the absence of evidence overcoming the presumption. i. DRR = Didnt Really Revoke c. Reasoning: Patrick only tore up the 1995 will after the creation of the 2002 will. Patricks act of instructing the 1995 will to be torn apart was clearly conditional on the creation and legitimacy of the new 2002 will. These facts indicate that Patrick destroyed the 1995 will because he intended the 2002 will to take its place. d. Testators intent is key!
6. Problems Page 383, Problem 1. Testator validly executed will number 1, which left Blackacre to Nephew and the residuary estate to Yale. (a) Testator now executes will #2, which leaves BA to Niece and residuary to Yale. Then burns will #2. - dies intestate, under UPC 2-509(a) (b) Testator executed a codicil to will 1. The codicil provide BA to Niece. The codicil was later burned. - a revoked part of the will is revived (partial revocation) under 2-509(b) and therefore we would reinstate the will the way it was - the assumption is you left the will intact and just wanted to revoke the codicil Page 387 Problem 1 - can we probate the 2002 will? No, not executed in front of witnesses - could try to probate the 1995 will under DRR, without DRR it goes through intestate succession o if we use DRR it will be distributed based on the 1995 will, which left his children out, against his intention o if we reject it then it goes intestate and the children would get something and the wife would get something - DRR is a second best solution, since it avoids intestate succession but doesnt reflect testators final wishes Problem 2 - there is an independent intention to revoke the 1995 will, but DRR will not be applied - DRR gives the court an ability to figure it out - If its conditional they will say it is revoked and go to the other if not they will revoke both and use intestate succession - The validity of the mistake does not matter f. Will Contracts i. Limits on the Power to Revoke: Joint Wills and Will Contracts 1. Garrett v. Read (Reciprocal Wills) a. Rule: (1) Extrinsic evidence is admissible in connection with the instruments themselves to show that separate wills, which are mutual and reciprocal in their bequests and devises, were executed in pursuance of an agreement between the testators, notwithstanding the absence of recitals in the wills designating or referring to such agreement. b. (2) The intention of the testator as garnered from all parts of the will is to be given effect, and that doubtful or inaccurate expressions in the will shall not override the obvious intention of the testator. Factors in determining whether a will is contractual are: (1) a provision in the will for the distribution of property on the death of the survivor; (2) a carefully drawn provision for the disposition of any share in case of a lapsed residuary bequest; (3) the use of plural pronouns; (4) joinder and consent language; (5) the identical distribution of property upon the death of the survivor; (6) joint revocation of former wills; and (7) consideration, such as mutual promises only need some. c. (3) A single instrument may be both a will contractual in nature, and a contract testamentary in nature; as a will it is revocable but as a contract it is enforceable; and although a contractual will revokved by execution of a second will, cannot be probated, it may nonetheless ne enforced as a contract against the estate of the testator breaching it. d. Reasoning: Separate wills, without mention of an agreement between the testators, may be contractual wills if that interpretation is supported by the evidence. The 1984 wills were nearly identical, leaving the entire estate to the 2
surviving parent and then to the children and one set of grandchildren, evenly divided. They communicated their wishes and wanted the surviving spouse to ensure that the children of the deceased parent were included if the estate was not consumed during the surviving parents lifetime. e. Joint Wills: when parties execute joint wills, courts often find contract obligations even when the language imposing binding obligations is less than crystal clear 2. UPC 2-514. Contracts Concerning Succession a. Reciprocal wills alone are not evidence that a couple contracted not to revoke, and provides that such a contract can be established only if: i. 1) The will has to contain provisions stating the material terms of such a contract, 2) the will refers to such a contract and the terms of the contract can be proven by extrinsic evidence, or 3) the decedent signed a separate contract b. Garret would come out opposite under UPC b/c NO presumption of will K by mutual or joint wills 3. Shimp v. Huff (Joint Will) a. Facts: Lester Shimp married his first wife, Clara in 1941. Lester and Clara executed a joint will where they made the will irrevocable. They used plural words like us and mutually gave to whichever of them survived the two the entire estate. There were certain devises that had to be taken care of when the survivor died. In Shimp I, it was found that the Shimps had executed their joint will pursuant to and in accordance with a valid, binding contract. Lester then married Lisa Mae and they remained married until his death. Lester was not survived by any children. b. Issue: Whether Lester Shimps second wife, upon his death, is entitled to receive an elective share and a family allowance under Maryland Law, when Lester had previously contracted, by virtue of a joint will with his first wife, to will his entire estate to others? Holding: Yes. c. Rule: Subsequent wife may take elective share of deceased Hs estate over contract beneficiaries of a Will K between H and his former wife. d. Reasoning: The court adopted a pro-marriage policy and said that the general principle is that contracts in restraint of marriage are void as against public policy, while anything which tends to prevent marriage, or to disturb the marriage state, is viewed by the law with suspicion and danger. Claims to an elective share should be afford priority over the claims of beneficiaries of a contract to make a will. e. H never breached the K because he never made a new will (W2 sought her elective share under statute) i. If he had breached, the K beneficiaries would have taken before the Elective Share was satisfied because they would then be creditors 1. Instead, they view the beneficiaries as legatees and NOT as K creditors, since Hs will conformed to the terms of the K (he never made a new will). g. Illustrative Will *** See Class Notes IV. CONTESTING THE WILL a. Testamentary Capacity i. Generally it is hornbook law that testator can only execute a valid will if testator has testamentary capacity. The UPC provides that an individual 18 or more years of age who is of sound mind may make a will (UPC 2-501). Incapacity is the state of mind at the time the testator drafts the will. 2
ii. The testator must be 18 years old and of sound mind. Sound mind requires the testator to have the ability to know (1) the name and extent of his or her property, (2) the natural object of his or her bounty, (3) the nature of the testamentary act he or she is performing and (4) how all of these relate to constitute an orderly plan of disposing of his or her property iii. Barnes v. Marshall 1. Holding: Testimony proved that Marshall was not of sound mind and did not have the requisite mental capacity when he executed his will and codicils. 2. Rule: Evidence not too remote, of mental unsoundness either before or after the wills execution is admissible, provided it indicates that such unsoundness existed at the time the will was made. There can be no question, however, but that evidence concerning testators mental condition long prior to the execution of the will is admissible if it ends to show his condition at the time of said execution. 3. Lay testimony is allowed, but there is a limit: a. WHY allow Lay Testimony: T is dead so lay testimony can be the best that we have (D cant be examined by Drs.) i. They were able to observe testator in every day life ii. Lay witness become necessary to lay foundation of medical history iii. Can become a basis for the jurys decision b. LIMIT to Lay testimony: Lay witness may not state conclusion that T was of unsound mind without first relaying the facts upon which such conclusion was made. 4. Reasoning: It is obvious that each witness detailed sufficient facts upon which to base the opinion stated. Those facts went far beyond a mere showing of peculiarities and eccentricities. They were clearly inconsistent with the conclusion that testator was of sound mind. 5. Hypo: Testator writes a will, lacks capacity and revokes all wills, then the revocation will not be effective, and the past will, will come into place 6. when testator drafts a will at a time we think he is no longer acting rationally and takes out heirs is when we want to invalidate the will 7. the standard for capacity for wills law is considerably lower than for a contract iv. Wilson v. Lane 1. Holding: No, there is no testimony, expert or otherwise, that was offered to establish that at the time the will was executed, Greer suffered from a form of dementia sufficient in form or extent to render her unable to form a decided and rational desire regarding the disposition of her assets. 2. All that is required to sustain the will is proof that a testator was capable of forming a certain rational desire with respect to the disposition of her assets. Eccentric habits and absurd beliefs do not establish testamentary incapacity. 3. Reasoning: A vague reference to senile dementia cannot eliminate testamentary capacity. 4. The difference between this case and Barnes is her will did not differ from societal norms v. Lucid Intervals 1. a proponent of the will, will try to say that the testator executed the will during a lucid interval, a period during which testator did have sufficient understanding to make a ill 2. Daley v. Boroughs: The court upheld the will relying on the evidence of lay witnesses, combined with a possibility of a lucid interval vi. Justification for Capacity 1. Need to protect family members who contributed to Ts assets but arent recognized b/c of Ts disease. 2. Will may not reflect Ts true intent but-for the illness. vii. Standing to Contest 3
1. Typically, testators heirs, and any beneficiaries who would take larger amounts under prior wills, have standing to contest a. That is, people with a financial interest in invalidating the last will have standing to contest the will b. courts divide, however, about whether the creditors of an heir, or of the beneficiary of a prior will, have standing to contest c. Trustees under prior wills generally can contest b/c they have a financial interest as title holders. viii. Proving Incapacity 1. Jury courts treat testamentary capacity as a question of fact a. the proponents of the will, will have to argue that there was no evidence to support the jury verdict, or in other words, that reasonable jurors could not have differed as to testators capacity b. in some states, proponents may be able to argue that the jurys verdict was against the great weight and preponderance of the evidence c. There are two other avenues: i. they can argue that the trial court improperly admitted certain testimony (Barnes) ii. they can argue that the trial court issued improper instructions to the jury 2. Burden of Proof a. some states hold that the proponents of the will bear the burden of proving capacity b. others hold that the contestants bear the burden of proving incapacity c. UPC provides that contestants have both the initial burden of proof and the ultimate burden of persuasion on issues of incapacity 3. Medical Experts occurs when the physician has and has not examined the testator a. Hypo: Doctor examined Marshall in 1968, close to his death, is that relevant? i. Should be, examined him close to death and has come forward with testimony ii. Suppose the doctor hadnt seen him since 1940, would that evidence be admissible and usable to support the jurys verdict? iii. If you know the physicians testimony is he couldnt be better, the contestants will say, it is relevant b. Medical testimony by people who have not examined i. Why is that evidence admitted? 1. Barnes Might be the only opinion we have, or the testimony from examining physicians is so sparse and we want the jury to have other evidence c. Estate of Berg (holding that trial court properly considered, but gave little credence to, medical testimony by physicians who had never examined testator during his lifetime) d. When medical testimony by someone who has not examined is the only testimony mental capacity is not a triable issue ( Estate of Van Patten) ix. Insane Delusion Rule 1. Dougherty v. Rubenstein a. Holding: The court found that while James was suffering from a delusion that Jay had stolen his money, the delusion was not an insane delusion. b. Rule: Insane delusion rule: The type of unsoundness of the mind that will invalidate a will, for lack of capacity, if the delusion produced the disposition made in the will. The testators delusion must have been insane and his will must have been a consequence of the insane delusion. 3
c. Insane Delusion is a belief in things impossible, or a belief in things possible, but so improbable under the surrounding circumstances, that no man of sound mind could give them credence. i. A false belief for which there is no reasonable foundation concerning which the testators mind is not open to permanent correction through argument or evidence. d. Reasoning: The delusion entered the mind of James when he was a resident, not by choice, of the nursing home, which for him was a terrible experience that he blamed completely upon Jay. Jamess delusion that Jay also betrayed him by stealing his money was a generalization, albeit not a logical one, drawn from his true belief that Jay had been the decision-maker who had kept him in the home until his sisters rescued him. e. Hypo: Say he writes in the will he cut out Jay because Jay stole money and there is no evidence that Jay stole money or forced his father into a nursing home, does Jay win? i. We need to know what testator would need to do but for a mistake which would need to be on the will ii. What if the mistake is not on the face of the will but the father has told friends he cut Jay out because he stole money from him? 1. A mistake contest would not succeed here x. Duty of an Attorney to Determine Ts Capacity 1. Gonsalves v. Superior Court a. Doctor Testimony: There was conflicting doctor testimony on her capacity. b. Lawyer Testimony: Gonsalves stated that when she met Dvorak, she was well-rested and alert. She told her that her closet living relative were her niece, Picardo, and a nephew. She stated that she did not want to leave anything to Picardo. She wanted to include disinheritance language in her estate planning documents because she felt Picardo might try to contest the will. There was even a videotape of testimony. c. Issue: Whether an attorney can be held liable to a third party beneficiary, for not investigating the testamentary capacity of his or her client? d. Holding: No. An attorney who fails to investigate the testamentary capacity of his or her client is not liable in tort to a former beneficiary disinherited by the will drawn by the attorney. The attorney obviously is not liable in contract since the disinherited person is not a third party beneficiary of the contract between the attorney and testatrix. e. Reasoning: The primary duty is to the client. This rule dos not apply here because the beneficiary can contest on a lack of capacity. It would also be an intolerable burden to place upon attorneys. It would put an attorney in the position of potential liability to either the beneficiary disinherited if he or she draws the will or the potential beneficiary if he or she refused to draw the will. Third, the potential for such liability would unjustifiably deny many persons the opportunity to make their wills. f. Problems on page 442:s b. Undue Influence i. Generally when contestants challenge a will based on undue influence they argue that the written will does not reflect the testators true intent. The contestants generally argue that the written will reflects the successful effort of a will beneficiary to substitute his own wishes for those of a testator susceptible to the beneficiarys influence ii. Suspicious Circumstances + Confidential Relationship 1. Haynes v. First National State Bank of New Jersey
a. Facts: After death of 1st of Ts daughters, T moved in with 2nd daughters family. At 2nd daughters insistence, T cut out 1st daughters family from her will. Lawyer who drafted Ts will was lawyer for 2 nd daughters family and daughters husbands business. b. Holding: There must be clear and convincing evidence. c. Rule: Undue influence has been defined as mental, moral or physical exertion which has destroyed the free agency of a testator by preventing the testator from following the dictates of his own mind and will and accepting instead the domination and influence of another. The burden of proving undue influence lies upon the contestant unless the will benefits one who stood in a confidential relationship to the testatrix and there are additional circumstances of a suspicious character present which require explanation. d. Elements to rebut the presumption: i. The first element necessary to raise a presumption of undue influence, a confidential relationship between the testator and a beneficiary AND 1. a relationship of trust and intimacy, where parties might assume that each has the others best interest in mind (must be abused) 2. When T consults this person does T rely on their confidence and does T have an expectation that the party is acting in Ts best interest 3. where T relies or is dependent on the beneficiary because of Ts weakness or where reliance naturally exists in such relationships ii. The presence of suspicious circumstances, which, in combination with such a confidential relationship, will shift the burden of proof to the proponent. Such circumstances need to be no more than slight. 1. ex: confidential relationship between beneficiary and Ts attorney. (present in this case) 2. ex: drastic change in Ts testamentary dispositions which favored the beneficiary in question. (present in this case) 3. ex: dispositions to other than Ts natural objects of affection. e. Conflict of Interest: There must be imposed a significant burden of proof upon the advocates of a will where a presumption of undue influence has arisen because the testators attorney has placed himself in a conflict of interest and professional loyalty between the testator and the beneficiary. f. Where Ts attorney is conflicted, there is a high potential for undue influence, and the presumption of undue influence must be rebutted by clear and convincing evidence. g. Reasoning: There was a confidential relationship here. Dutrow was dependent on her sole surviving child with whom she lived and upon whom she relied for companionship, care and support. This was a relationship sustained by confidence and trust. There were suspicious circumstances here. There was a confidential relationship between the testatrix and her attorney, who was also the attorney for the daughter and the daughters immediate family. There was a drastic change in the testamentary dispositions of the testatrix, which favored the daughter. It is clear that Buttermore was in a position of irreconcilable conflict within the common sense and literal meaning of professional responsibility rules. h. Drafting Solutions What should Buttermore have done?
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i. Should have explained the conflict of interest, could recommend another lawyer or get informed consent ii. Say to Dorcas it is not even in your interest for me to draft this will, because you are opening up the will to a contest iii. Just disclosure might not make Dutrow understand the validity of the conflict Model Rules of Professional Conduct 1.7(b) (Sterk thinks this is a 1.7(b) case).
iii. Will of Moses 1. Facts: Ts will gave her estate to Holland. T had relationship w/ Holland (a lawyer), but an independent Lawyer drafted her will. Holland was her lawyer for other matters and was her boyfriend. 2. Hold: Undue influence 3. Reasoning: It is clear that the attorney-draftsman did no more than write down, according to the forms of law, what Mrs. Moses told him. There was no meaningful independent advice or counsel touching upon the area in question and it is manifest that the role of the attorney in writing the will, as it relates to the present issue, was little more than that of scrivener. Moses was in ill health, she was an alcoholic, and was an aging woman infatuated with a young lover, 15 years her junior, who was also her lawyer (susceptible to undue influence, suspicious). 4. Dissent: The presumption of undue influence did not arise. a. Yes there was a confidential relationship, BUT b. The suspicious circumstances referred to had nothing to do with the preparation or execution of the will c. Fact that she chose to leave most of her prop to the man she loved instead of to her siblings is not such an unnatural disposition of her prop to render it invalid. d. Even if presumption did arise, it was overcome. i. 2nd lawyer did ask questions concerning who was likely to contest, whether Holland influenced her, etc. 5. A marital relationship rarely brings about undue influence claims iv. Spiritual Advisors although mortmain statutes are on the wane, courts continue to scrutinize gifts to religious organizations for signs of undue influence. The spiritual advisor need not benefit personally for the gift to be suspect v. Nursing Home Operators and Other caregivers it can be suspicious c. Fraud causes testator to execute a will consists of statements which are false, which are known to be false by the party who makes them, which are material, which are made with the intention of deceiving testator, which deceive testator, and which cause testator to act in reliance upon such statements i. True statements cannot be fraud ii. Non-Disclosure does not usually amount to fraud, however, in Rood v. Newberg, the court found that non-disclosure could amount to fraud if the non-disclosing party owed a duty to the testator 1. in this case, there was a confidential relationship between the will beneficiary and testator, which gave rise to a duty to disclose to testator that she was mistaken in her beliefs and the court upheld the probate courts invalidation of certain testamentary bequests to the beneficiary iii. Problem on page 470 d. Tortious Interference i. Estate of Ellis 3
1. Facts: Grace Ellis executed a will in 1964 naming Shriners Hospitals for Children as beneficiary of her estate if she died without direct descendants. In 1999 she executed a new will name James Bauman as sole beneficiary. Bauman was the pastor of the church of which Ellis was a member. When Ellis died in 2003, the 1999 will was admitted to probate. It was not until 2006 that Shriners became aware of its interest in the 1964 will. Ellis subsequently gave Bauman powers of attorney over her health care and property, and changed title to more than $1 million of her assets to Bauman, and purchased gifts and an automobile for him. 2. Shriners Argument: That it is a tort, not a will contest, and a tort action for intentional interference with inheritance is distinct from a petition to contest the validity of a will. 8-1 should not apply in this case. 3. Rule: Intentional interference with inheritance one who by fraud, duress or other tortious means intentionally prevents another from receiving from a third person an inheritance or gift that he would otherwise have received is subject to liability to the other for loss of the inheritance or gift. This widely recognized tort does not contest the validity of the will, it is a personal action directed at an individual tortfeasor. 4. Elements: (1) the existence of an expectancy; (2) defendants intentional interference with the expectancy; (3) conduct that is tortious in itself, such as fraud, duress, or undue influence; (4) a reasonable certainty that the expectancy would have been realized by for the interference; and (5) damages. 5. A remedy will be a judgment against the individual defendant, and where the defendant has himself received the benefit of the legacy, a constructive trust, an equitable lien, or a simple monetary judgment to the extent of the benefits thus tortiously acquired. 6. Reasoning: Shriners did not choose to forgo an opportunity to contest the probated will. It never had that opportunity. Once the 1999 will was admitted to probate, and the six month jurisdictional period had passed with no will contest, having been filed, the validity of the will was established for all purpose. Shriners would have been limited in a will contest because $1 million was an inter vivos gift to Bauman. 7. Hypo: Suppose Shriners had notice, could they have got everything they wanted in a will contest proceeding, therefore, notice wouldnt even matter a. There was an inter vivos transfer, cant undue that transfer in a will contest proceeding b. Even if the later will is revoked, wont get anything provided in the inter vivos transfer 8. Shriners is seeking punitive damages, and with tortious interference you will try to seek punitive damages, might be more remedies than will contest, statute of limitations wont toll 9. Can a tortious interference claim be brought when the person bringing the claim had not been referenced in a prior will? Say the first will in this case is to Bauman and Grace wants a new will for Shriners and not Bauman. Can you bring a tortious interference claim? a. Sterk thinks the answer is left open b. Have to have an expectancy that is interfered with c. Can you have an expectancy without an unexecuted will d. Claim would be hard but there is an avenue for relief for someone standing in the way of a new will but there is never a certainty ii. Anna Nicole Smith Case 1. Facts: Smiths husband promised her that he would leave her half of his estate. H instructed attorney to arrange a significant gift to Smith. H asked other attorney to prepare a catch-all trust for Smiths benefit. Neither of these projects were completed b/c Hs son, P, fired the 1st lawyer and conspired with the other to prevent 3
the drafting and execution of the documents that would have accomplished the gift. Smith made a claim for assets in probate ct but lost. Smith then filed claim for tortious interference with a gift in bankruptcy ct. a. Harder for her to prove an expectancy here b/c not a blood relative and no will was written including her as a beneficiary. b. Case came up in bankruptcy proceeding so ct more willing to entertain tortuous interference case in that context. c. Ct found P liable, and awarded Smith punitive damages, citing Ps bad behavior during discovery. e. Planning for Contests a major part of the lawyers job is to plan for the contest that seems likelyor even inevitable i. Three Strategies to protect will contest: 1. Obtaining Evidence of Capacity a. Good planners take steps to generate and preserve favorable evidence of the testators capacity and independence b. Counsel should have arranged for Seward to explain why he chose to exclude the children, and why he chose to favor Basia c. Sometimes counsel advises the testator to write this explanation in a letter, or counsel works with the testator to prepare an affidavit 2. Involving Potential Witness a. Another common precaution is to arrange for persons who are likely to survive the testator to inform themselves about his condition at the tie of the making of the will, so that they can testify about the subject in the event of contest b. Medical experts c. People who have been long familiar with testator d. The witnesses should write affidavits 3. The No-Contest Clause ii. Seward Johnson Case 1. Facts: Seward Johnson wants to leave most of the property to his wife, and not leave to his children. This case shouts out will contest since he has lots of children, very young wife. 2. What Johnson Should Have Done: a. Should have gotten a more comprehensive report from the doctor and get someone to make a statement with descriptions, what questions were asked, etc b. No harm to getting a physician to testify, in this case there were no witnesses that were strong c. Obtained evidence of capacity d. Write a document where he says this is what he intends, explain wasnt close with his kids, etc and indicate there were reasons he cut out his children. He gave money to all of his children with inter vivos gifts and they werent responsible so should say that e. Could videotape the execution ceremony, but if you videotape you would want him discussing the provisions in the will and make him appear rational at the time i. there is a risk of videotaping the will ii. have to be careful how client will come across f. How do you get Seward Johnson to agree to these things (ie a psychiatric evaluation) i. have to tell him the likelihood of success is small and we are taking the actions to limit the risk of a successful contest 3
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ii. have to mange the client iii. No-Contest Clauses 1. Example: if any beneficiary challenges my will, his bequest is cancelled into residue of my estate. 2. No-contests clauses require the contestants to make an evaluation of the likelihood that the contest will prove successful, if the likelihood is small, the contestant might choose not to contest, in order to preserve whatever provisions testator made for the contestant a. the court in Haynes held the no-contest clause unenforceable because the contest was made in good faith and based on probable cause b. You are really bringing construction proceedings, not challenging on undue influence or incapacity, not really a will contest 3. No-Contest Clause in Seward Johnson Case: a. it would depend on how much is in the no-contest clause b. $500,000 would probably not save a no contest but Seward does not want to give a lot c. Sterk does not think a no-contest clause would be effective here d. Only if you leave a significant amount of money to the people you are trying to cut out and avoid contest from e. Class: If you are really worried that a whole bunch of people might want to exclude the class if one contests the will 4. UPC 3-905. Penalty Clause for Contest A provision in a will purporting to penalize any interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings a. this reduces deterrent value of no-contest clauses and of leaving children a small amount. b. there may be nothing T can do to prevent a contest to the will if probable cause exists. c. If a contest is successful the no challenge clause is revoked then they take under a previous will or by intestate succession if there wasnt a previous will 5. NY and California a. CA has recently amended its statutes to bar enforcement of no contest clauses against beneficiaries who have probable cause b. In NY, no-contest clauses are enforceable even against contestants who have probable cause i. NY, however, makes an exception for contests based on allegations that the will was the product of forgery or that the will was revoked 6. Ante-Mortem Probate and Other Tolls for Reducing Will Contests a. Could we avoid questions of undue influence, capacity, etc. if we had a probate proceeding while testator was still alive? b. Problems with this approach: i. Ts reserve the right to change will until they die so it would be a waste of resources to probate a will that may end up changing. ii. Ts do not want to face family members who they are leaving out of the will would rather let them fight amongst themselves after T dies c. Some states allow these proceedings but generally, they are not used for these reasons. GLBT Testators a majority of states withhold marital privileges from same-sex partners, individuals in those partnerships cannot be assured of an intestate share of his or her companions property. In more and more states, committed same sex couples have elective share and intestacy rights, as well as all other rights that a spouse may have under applicable probate code 3
i. Will of Kauffman 1. Issue: Whether Walter Weiss, exercised undue influence on Robert Kaufman, and that is why Kaufman made him the beneficiary and executor of his estate? Holding: Yes, the will was denied probate. 2. Rule: There are two categories of undue influence: 1) the gross, obvious and palpable type of undue influence which does not destroy the intent or will of the testator but prevents it from being exercised by force and threats of harm to the testator or those close to him; 2) the insidious, subtle, and impalpable kind which subverts the intent or will of the testator, internalizes within the mind of the testator the desire to do that which is not his intent but the intent and end of another. 3. Reasoning: Weiss willfully alienated Robert from his family. Weiss was involved in each of Roberts wills, and copies were in a vault which only Weiss had access to. The fact that the will was prepared by competent attorneys is a relevant circumstance but does not preclude a finding that undue influence here involved was active, potent and unaffected by the interposition of independent counsel. 4. Dissent: Believed the issue was did the will represent the intrinsic wishes and will of the testator, or was it the product of the command of Weiss which the testator did not really want to follow, but was unable to resist. However, believed the proponents, against Weiss veracity, motion should be dismissed. 5. How Lawyers Could Avoid Problems: a. The letter was bad, never mentioned the real relationship, it was disingenuous compared to the relationship they actually had b. No-contest clause might have been helpful, but would have to leave some to intestate heirs, and if money isnt the primary concern they might be more enraged and contest, for the no contest to work the money must really matter c. Non-probate transfer, joint bank account, would show Robert viewed Walter as a natural beneficiary, would have to make sure it was not just for convenience. d. When is the cause of action for undue influence for a inter vivos gift, might run the statute of limitations e. Cant change your mind though, which would make it hard if something happened f. lifetime agreements with testators family of origin g. charitable remainder trusts h. Adult adoption of partner so he takes by intestate succession. i. Problems: if they break-up, how do you divorce a child? Also, weird to view them as parent and child. ii. Olive Watson case, adopted same sex partner, that doesnt turn out so well, especially if the relationship goes south V. ESTATE TAXATION a. General Principles i. Federal: under current law, individuals with less than $5,000,000 in assets and married couples owning less than $10,000,000 in assets are exempt from federal transfer tax entirely, while individuals who die with estates greater than that amount face a marginal tax rate of 35% 1. Estate planning to avoid taxation has became less important to many clients 2. There is still an enormous incentive for testators with this amount to reduce their burden ii. State: state tax rates are universally lower than 35% rate, state death and inheritance taxes often affect estates far smaller than $5,000,000. Nevertheless, because state death, inheritance
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and estate taxes vary significantly from state to state, we provide only limited treatment of them here 1. Usually the state tax constitutes a deduction against federal 2. State tax kicks in at smaller amounts but smaller rates also Mechanics of the Federal Estate Tax 1. Under current law, the estate tax basically imposes a 35% flat-rate tax on transfers in excess of the exemption amount 2. The gross estate is used to determine the overall estate and once the gross estate is calculated, you subtract $5,000,000 from it, multiply by .35 and that is the tax rate 3. Example: Take $8million estate, subtract $5million and have $3million and multiply it by 35% and have about $1,050,000 of estate tax Unified Credit a unified credit against the estate tax applies to both the estate and gift tax Annual Gift Exclusion 1. 26 USC 2503(e) explicitly excludes payments made as tuition to educational institutions, and payments made to providers of medical care 2. Note that to qualify for the exclusion, the payments must be made directly to providers; if your mother pays you $20,000 to reimburse you for amounts you paid to your law school, your mother has made a gift that does not qualify for the tuition 3. in the case of gifts other than gifts of future interests in property, made to any person by the donor during the calendar year, the first $13,000 of such gifts to such person shall not be included in the total amount of gifts made during such year Integrating Gift Tax and the Estate Tax 1. The donor will not, however, be obligated to pay any gift tax until the donor has used up the $5,000,000 lifetime exemption from estate and gift taxes 2. The value of property given away is essentially frozen for federal transfer tax purposes 3. If an owner expects the value of property to appreciate often, they might find it advantageous to give the property away before the appreciation occurs Inter Vivos Gifts 1. Examples of why a lifetime gift might not be the best option a. some people might need or want their assets during their own lives b. the tax exclusive advantage of lifetime gifts does not apply to gifts made within three years of death i. Section 2035(b) of the code mandates that gift takes be paid on gifts made within three years of death be added back into the decedents estate for purposes of computing the estate tax c. there is a significant income tax advantage to passing property through ones estate rather than by inter vivos gift: the stepped up basis d. the donors cost basis travels with the gift when the donor makes an inter vivos gift, by contrast, when a testator passes an asset through the estate, the estate beneficiarys basis is the value of the asset at the time of transfer Income Tax Consequences 1. would lose what is called a stepped up basis at death 2. $500,000 of stocks and now worth $800,000, if you sell them you generate income tax, but if you die with them, the beneficiaries take a cost basis based on the $800,000 so they dont generate any income tax consequences when they sell them 3. Wouldnt want to give them away during life because they take the same cost basis 4. Have to balance income tax consequences with inter vivos gifts 5. Problems page 515 a. Donor has 1000 shares of stock bought 5 years ago for a total price of $1million and it is now worth $5million (HiFlier) and 1000 shares bought 8 years ago for a total of $4million and still worth $4million (SlownSteady) 3
i. would give away Slow N Steady because there is no increase in value ii. if you chose HiFlier you would have adverse income gifts right now, so not saving as much total iii. there are incentives to make gifts (Sterk) ix. Martial Deduction 1. The estate tax is treated as a tax on transmission of wealth between generations 2. The marital deduction permits the married couple to avoid taxation on transfers to each other, whether during their lifetimes or at death, and also to defer taxation until the death of the surviving spouse 3. Portability reduces the need for lifetime estate planning (gives a married couple $10 million to work with) 4. Section 2010(c)(5) makes it clear that the surviving spouse may only make use of a deceased spouses unused exemption when the deceased spouses executor files an estate tax return and makes an election on such return authorizing use of any unused exemption at the surviving spouses death 5. Wife no longer has an incentive to make inter vivos gift and the husband has no incentive to leave the property to someone other than the wife 6. Problems a. Problem page 517, Ben has $1million and wife has $2million i. unless Ben thinks his business is going to boom, exemptions wont matter and he might be able to dispense with the accountant ii. he needs to accumulate 2 million before his death for not paying his accountant to bite him iii. have to be careful b. Hypo: Husband has 10 million and wife has 2 million i. unlimited marital deduction, so if the husband leaves all 10 to the wife, there is no tax at his death, the 12 million would be at her death ii. the husband would file an estate tax and the wife would have 10 million dollar exemption x. Charitable Deductions the estate tax is paid for by the government VI. TRUSTS a. Overview of Trusts a trust is a device for transmission of wealth a trust is an entity in which ownership is divided between the trustee (who is sometimes said to hold legal title to the trust property) and the beneficiaries (said to hold beneficial title) the trustee, not the beneficiary has the right to manage the trust property, but also has the obligation to manage the property in the beneficiarys interest, not the trustees own interest by creating a trust, the settler can repose management responsibilities in a trustee who is up to the task a settler concerned that her children might have differing needs after her death might not want to leave each child outright bequests, but might prefer instead to confer on a trustee discretion to distribute money among the children according to their needs, or according to the settlers more explicit directions a trust may reduce tax and avoid creditors settlors often create trusts to maintain control over property (and, indirectly, over people) past their own deaths by using a trust, the settler can accomplish both objectives; the settler can direct the trustee to pay income to the husband for life, and to distribute the principal to the children at the husbands death
Reasons for using a trust over a life estate: 1) when a life tenant and remaindermen share ownership of property no one person has power to sell a fee simple interest in the property, but if a trustee owns the property under a properly drafted instrument that includes a power of sale, the trustee could exchange the unproductive property for other property that better meets the needs of the intended beneficiary or beneficiaries 4
2) A legal life tenant has no power to lease the property for a period beyond the expiration of the life estate, but a trustee can 3) When ownership is divided between a legal life tenant and remaindermen, the life tenants management responsibilities are often murky, but when the owner of property creates a trust, the owner vests decisionmaking power in the trustee and the trustee decides what repairs are necessary and whether sale or lease of the property would be advisable. With respect to potential buyers and tenants, the trustee has the powers of a fee owner b. Creation of Trusts i. Trust Requisites: The Trustee, the Beneficiary, and the Property (there must be a beneficiary and there must be property) 1. The Trustee a. General Principles the trustee is the person or entity who holds legal title to the trust property the primary obligations of the trustee are to manage and distribute trust property exercising due care the trustee cannot act out of self-interest as it carries out these duties As in contract, so in trust, the autonomy of the parties is not wholly unrestrained, there are obvious public policy prohibitions against trusts for illegal purposes. There are also limits on self-serving exculpation clauses in trust that echo the unconscionability protections in contract, thus, in trust as in contract, the courts will intervene against market failure b. Trustee Requirements i. trustees must act in good faith, in the best interests of the trust beneficiaries and in accordance with the settlors objectives ii. in addition, most state courts would decline to enforce a trust provision purporting to shield a trustee from liability for grossly negligent or reckless actions iii. many states impose non-negotiable requirements that the trustee notify trust beneficiaries of the existence of the trust, the identity of the trustee, the nature of the beneficiaries interests, and their right to receive information about trust management 1. several states go further and impose a non-waivable duty to provide regular accountings to the beneficiaries iv. when the trust instrument does not account for these contingencies, a court will appoint a trustee to fill the vacancy and assure continuation of the trust c. Merger Doctrine i. the same person may not be sole trustee and sole beneficiary and it will terminate the trust and merge if they are ii. as long as there is one trustee who is not a beneficiary, or one beneficiary, however contingent her interest who is not the trustee, the trust will be valid 2. The Need for Identifiable Beneficiaries a. the requirement that trusts have identifiable beneficiaries is designed, in part, to assure that someone has the power to enforce the trust b. Moss v. Axford it is enough if the testator uses language which is sufficiently clear to enable the court by extrinsic evidence to identify the beneficiary. If by such evidence the court can make the identification necessary to give effect to the intention of the testator, the devise will be sustained c. Courts have held that a trust benefit to my friends is not valid since it is not an identifiable group and fails to meet the definite beneficiary requirement d. Restatement 46. Members of an Indefinite Class as Beneficiaries 4
i. (1) Except as stated in (2), where the owner of property transfers it upon intended trust for the members of an indefinite class of persons, no trust is created ii. (2) If the transferee is directed to distribute the property to such members of the indefinite class as the transferee shall elect, the transferee holds the property in trust with power but no duty to distribute the property to such class members as the transferee may select; to whatever extent the power is not exercised, the transferee will then hold for revisionary beneficiaries implied by law e. UTC 402(c)/Common Law i. a power in a trustee to select a beneficiary from an indefinite class is valid. If the power is not exercised within a reasonable time, the power fails and the property subject to the power passes to the persons who would have taken the property had the power not been conferred ii. Common Law would say the money goes directly into the hands of the people who would take if the instrument is invalid f. Trusts for Pets i. Honorary Trust 1. an honorary trust operates like a power or a conditional gift, that is, a trust for an animal would not fail outright, but the trustee would be entitled to take the trust funds so long as the trustee used them for the animals benefit 2. if the trustee failed to use the funds for the animals benefit, or if the animal died, the honorary trust would fail, and the property would pass back into the residue of the settlors estate, or, if the honorary trust were the residuary bequest, by intestate succession ii. NY/UPC/UTC: authorizes a settlor to designate an individual with power to enforce trust obligations. If the settlor fails to designate such an individual, the statute authorizes a court to appoint someone to enforce the trusts terms. g. Trusts for Noncharitable Purposes i. lack an identifiable beneficiary and were unenforceable at common law ii. a few states have enacted statutes authorizing trusts for specific purposes, such as the NY statute that allows trusts for the maintenance of graves and burial plots iii. Restatement 47 Trusts for Noncharitable Property 1. even though no specific beneficiary, trustee has power but not duty to distribute (has 21 years to apply property to designated purpose) 2. assumes residuary beneficiaries of settlors estate (or heirs) have incentive to sue if trustee doesnt use property for pets benefit 3. if he doesnt exercise power property go to heirs at law (no obligation to use $ to pay identifiable beneficiary) who would take if provision were invalid iv. Uniform Trust Code (UTC) 409 1. trustee has power AND duty to accomplish settlors aims may be applied only to its intended use, unless there is excess property 4
3. Trust Property a. mere expectancy of property invalidates a trust, there has to be property, the property has to be identified (Brainard v. Commissioner) b. Speelman v. Pascal held that the secretary had acquired an enforceable right to the future profits in a play that was not already made because the rights were assigned c. The property must be definite and ascertainable, there is no trust property if the property description is so indefinite that it cannot be ascertained d. Standby trusts may not be funded with any assets during testators lifetime, and trustees have no duties until the trust becomes funded at the testators death (UTC validates them) ii. Trust Formation: Capacity, Intent, and Formalities 1. Capacity a settlor must have capacity to create a valid trust a. the capacity standard for a revocable trust is the same as that for wills b. if the trust is irrevocable, the capacity standard varies depending upon the reason for the trusts creation. If the settler uses the irrevocable trust as a gift substitute, she must meet the capacity standard that is required for outright gifts c. the settler of an irrevocable trust must also understand the effect that the disposition may have on the future financial security of the settler/donor and of those who may be dependent on him or her 2. Intent to create a Trust: The Precatory Language Problem a. In order to create a private express trust, a settler must express an intent to impose an enforceable duty on the trustee b. Precatory words words of request or entreaty which creates doubt whether an absolute gift or trust is intended c. Spicer v. Wright i. Facts: The third paragraph of the will stated My estate of every kind and description, personal and real estate, etc., I give to my sister, Anne Beecher Wilson to be disposed of as already agreed between us. ii. Issue: Whether the language of Mrs. Spicers will, read in context with the extrinsic evidence, is sufficient to establish an intent to create an express trust; if so, that trust fails for indefiniteness and a resulting trust arises. iii. Holding: No, a trust was not created. The language of the will was precatory, and the extrinsic evidence was insufficient to render that language imperative or to establish a testamentary intent to impose a legal obligation to make a particular disposition of property, and no express trust was intended or created and there was an absolute testamentary bequeath to Miss Wilson. d. Levin v. Fisch i. Facts: The will stated that it was Berthas desire that each year out of the annual proceeds, rents and revenues from such property during such year so received by my said daughter and son they pay to my sister Mrs. Laura Fisch. ii. Issue: Whether the above evidence is precatory or mandatory? Holding: Mandatory, it was the intention of the testatrix that the words of desire as used in the will were a positive directive. iii. Rule: The court will look to the expressed intent of the testator, as found from the context of the will and surrounding circumstances;
and words which, in their ordinary meaning, are precatory will be construed as mandatory only when it is evidence that such was the testators intent. iv. Reasoning: There was evidence that sister was ill and needed to be taken care of. The testator made other gifts to appellee and her daughter of clothing and money. The record shows appellee was in poor health and unable to work full time and that her income was approximately $300.00 per month. v. it is my desire is the language she uses, seems to be a preference rather than an obligation (Sterk) 3. Trust Formalities a. Goodman v. Goodman (oral statement created trust) i. Issue: Whether Gladys held Clives property in trust? ii. Holding: Yes. A reasonable interpretation of the evidence is the repudiation occurred in 1991 when Gladys told Scott for the first time she deserved Clives money and would not give him anything. iii. Rule: This was an express trust, and the statute of limitations on an express trust action beings to run when the beneficiary of the trust discovers or should have discovered the trust has been terminated or repudiated by the trustee. iv. Reasoning: The testimony supports the view that Clive intended Gladys to hold the property until the children reached majority or were mature enough to handle it. v. Why do we give more for the oral statement for a trust than the oral statement for the gift? 1. It is possible to deliver it here and it was delivered, with a trust you cant just deliver it more 2. There is some evidence that she was holding the property in trust, she was making the payments vi. Writing: most jurisdictions purport to require writings for trusts of land vii. UTC allows oral trusts, but would require that the trusts terms be proved by clear and convincing evidence, a higher standard than that employed by most states viii. Florida has will like formalities ix. NY EPTL 7-1.17 for valid inter vivos trust: 1. must be in WRITING - signed by settlor and at least 1 trustee, and 2 witnesses OR notary 2. Goodman would come out differently in NY b. Declaration of Trust vs. Transfers in Trust i. a trust settler may create an inter vivos trust by declaring that she holds the trust property, as trustee, in trust for named beneficiaries, or by transferring the trust property to someone else as trustee for the benefit of the named beneficiaries ii. a trust document that creates a trust and names someone other than the settler as trustee is often called a deed or trust c. Delivery i. when a settler transfers the property in trust to someone else as trustee, the settler must deliver the trust property to the named trustee ii. in NY, no trust is created unless and until settler transfers title to real property to trustee and re-registers the stock in trustees name
iii. the Restatement suggests the delivery of the trust document would satisfy the delivery requirement iv. Most courts hold that when a settler declares herself trustee, delivery is unnecessary so long as the trust declaration clearly identifies the trust assets, reasoning that the settler cannot deliver property to herself d. Constructive and Resulting Trusts i. the constructive trust is not really a trust at all, but a remedial device used by courts to achieve results which do not easily fit within other doctrinal frameworks ii. a resulting trust generally arises when a settler intends to create a trust, but the trust fails for some reason c. Using Trusts as an Estate Planning Tool i. Providing for Minor Children 1. testamentary trusts might better carry out a parents objectives than a revocable inter vivos trust 2. a well drafted will that provides for minor children should contain two key provisions; a. first, the testator should nominate a custodial guardian to assume primary care of minor children in the event the children are left parentless. b. Second, the will should create a testamentary trust for the childrens benefit 3. a parent also may wish to transfer non-probate assets such as a retirement account or the proceeds of a life insurance policy, to minor children a. the testator can consolidate the administration of those assets by naming a trustee as beneficiary of those assets, this enables all of the testators assets to be administered as part of the same trust 4. Problem Page 549 Wife (sole breadwinner) has baby son (Paul) and husband (John) a. would want to create a trust, naming someone as trustee, and what the trustee is supposed to do with it b. Would want to leave in principal not income so if he needs more in a certain year he can have it c. Might have other children so should provide for them in the trust instrument she is drafting ii. Building Flexibility Into the Estate Plan: Support Trusts and Discretionary Trusts 1. Generally: Support and discretionary trusts enable the testator to account for events not known at the time the testator dies or at the time a settlor creates an inter vivos trust. They also enable a testator to provide for the unknown needs of incapacitated beneficiaries. 2. Support Trusts giving the trustee power to pay income for the support of a named beneficiary. A pure support trusts imposes a mandatory duty on the trustee; the trustees responsibility is to ascertain what the beneficiary needs for support, and then to pay that amount to the beneficiary. 3. Discretionary Trusts the settlor imposes no mandatory obligation on the trustee. Instead the settlor gives the trustee discretion to pay income (and/or to invade principal) for the benefit of one or more described beneficiaries 4. Hybrid Trust a settlor requires the trustee to pay income to the beneficiary and to invade the principal if necessary to provide for the income of beneficiarys support (discretionary language is combined with language that, if taken alone, would be deemed to create a pure support trust). 5. Wells v. Sanford
a. Issue: Whether the assets of a testamentary trust should be used to support a woman who has been declared incompetent before her own assets, as controlled by her guardian, are used? b. Holding: Yes. The trust assets should be directed to support Nora, irrespective of her own assets. c. Rule: Unless something appears in the will indicating a different purpose, it is ordinarily presumed that the testator intended the beneficiary to be supported and maintained from estate income or from sale of part of the corpus. d. Reasoning: If Hiram intended that his mother uses her own assets first, than he would control his mothers bounty as well. 6. Marsman v. Nasca a. Issues: Does a trustee, holding a discretionary power to pay principal for the comfortable support and maintenance of a beneficiary, have a duty to inquire into the financial resources of that beneficiary so as to recognize his needs? If so, what is the remedy for such failure? b. Holding: Yes. The exculpatory clause was held effective. c. Reasoning: The direction of the trust was to pay Cappy such amounts as they shall deem advisable for his comfortable support and maintenance. This language has been interpreted to set an ascertainable standard, namely to maintain the life beneficiary in accordance with the standard of living which was normal for him before he became a beneficiary of the trust. 7. Dunkley v. Peoples Bank & Trust Co. a. Hold: the trustee bank breached its fiduciary duties to the remainderman, condemning the practices of the banks trust department b. the trust said to pay what was desirable from time to time for the health, support in reasonable comfort, education, best interests, and welfare i. the trustee paid a lot of money to the beneficiary for a new house without really inquiring what it was for and without knowing how much the beneficiary had 8. Problem page 551 Husband is 75, has children from prior marriage. Wife is 68, wants to provide for her but not her children from a prior marriage. Who should be trustee and what powers should be provided? a. Have to be careful with who you name trustee, could name wife or sister or a bank, but the bank doesnt know the family situation and the wife and sister might have incentives (could have co-trustees) b. Power i. like Marsman no discretion over income (all to W), principal for support based on trustees discretion 1. advantages: a. administrative ease trustee just gives income to W, no discretion b. if no discretion to exercise less likelihood of litigation 2. disadvantages: a. income may be more money than wife needs b. income may not be enough so then must use discretion over principal (which invites litigation from remainder beneficiaries) ii. like Wells put income and principal into one pot require trustee to make payments as necessary for maintenance/support 1. disadvantages:
a. allowing trustee discretion for ANY payments to W invites litigation either by W saying she isnt getting enough, or by remainder beneficiaries saying trustee paying too much iii. like Dunkley 1. no distinction, as much net income and principal as possible 9. Restatement a. a discretionary power conferred upon the trustee to determine the benefits of a trust beneficiary is subject to judicial control only to prevent misinterpretation or abuse of the discretion by the trustee b. it is contrary to sound policy and a contradiction in terms, to permit the settlor to relieve a trustee of all accountability. Once it is determined that the authority over trust distributions is held in the role of trustees, words such as absolute or unlimited or sole and uncontrolled are not interpreted literally c. a trustee must act honestly and in a state of mind contemplated by the settlor d. a trustee cannot act in bad faith or for some purpose or motive other than to accomplish the purposes of the discretionary power. 10. Spray Trusts when the trustee has discretion to spray the income among the various beneficiaries this form of a discretionary trust is sometimes called a spray trust or a sprinkle trust iii. Avoiding Probate 1. Avoiding Probate Without the Use of Trusts a. Totten Trusts are bank accounts held in trust for designated beneficiaries, valid in most states i. Totten trust accounts are not really truststhe depositor retains full control over the accounts during her life. She can withdraw funds or close the account at will, and she owes no duty to the designated beneficiaries b. P.O.D. Accounts and Contracts with P.O.D. Provisions i. UPC Section 6-305. Form of Registration in Beneficiary Form Registration in beneficiary form may be shown by the words transfer on death or the abbreviation TOD or by other words pay on death or abbreviation POD, after the name of the registered owner and before the name of a beneficiary ii. UPC Section 6-306. Effect of Registration in Beneficiary Form The designation of a TOD beneficiary on a registration in beneficiary form has no effect on ownership until the owners death. A registration of a security in beneficiary form may be canceled or changed at any time by the sole owner or all then surviving owners without the consent of the beneficiary iii. Section 6-307 goes on to provide that at the death of the owner, securities in beneficiary form pass to the beneficiary or beneficiaries who survive the owner c. Joint Accounts d. Joint Tenancies with Right of Survivorship i. joint tenancies do not pass through probate, but instead pass automatically to the joint tenant who survives 2. Avoiding Probate Through the Use of Revocable Inter Vivos Trusts a. Revocable Living Trusts (Inter Vivos Trusts) Will Substitutes
i. you are not actually passing anything throughout your life and they are enforced in every state ii. it is a remarkably flexible mechanism that allows the settlor to retain almost total control over her property while avoiding probate iii. the settlor will make herself the trustee and the life beneficiary, give herself broad management powers, including the power to revoke the trust and invade the principal, and will designatesubject to revocation, of coursethose people entitled to take the remaining property at settlors death iv. most estate plans that employ a living trust also include a pour over will v. a settlor will ordinarily create an irrevocable trust when her goal is to make a gift, and a revocable trust when her goal is to avoid probate vi. must explicitly reserve right to revoke common law presumption that trusts are irrevocable w/o consent of beneficiaries 1. UTC takes opposite approach makes default rule revocable (not adopted everywhere) b. Sample Revocable Trust look at notes*** c. No-Contest Clause i. increasingly, settlors are inserting no-contest clauses in revocable trust instruments ii. in the absence of careful drafting, these clauses can cause confusion about whether raising issues in probate court can trigger the trusts no-contest provision d. Pour Over Wills i. Generally: a settlor who wishes to devise her assets in further trust may use an inter vivos trust and a pour over will to consolidate the management and distribution of her probate and non-probate assets after her death 1. Example: settlor can execute an inter vivos trust document and then a pour over will provision that distributes her residuary estate to the trustee of the inter vivos trust ii. Problems associated with pour over wills: 1. Heirs would argue that the pour over provisions in the wills were invalid because they directed that probate assets be distributed in accordance with an invalid testamentary document (the revocable trust) 2. In the case of the unfunded standby trust, heirs also argued that the trust was invalid because it lacked property, one of the requirements iii. Trustees arguments 1. Incorporation by reference a. At common law, doctrine of incorporation by reference would not be able to be used to pour the property into the trust instrument because the documents might have changed and it would be unclear 2. Facts of independent significance iv. Clymer v. Mayo 1. Holding: A valid inter vivos trust was established and that its trustee may properly receive the residue of her estate.
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f. g.
h. i. j. k.
2. Rule: A devise or bequest may be made to the trustee or trustees of a trust established or to be established by the testator including a funded or unfunded life insurance trust, although the trustor has reserved any or all rights of ownership of the insurance contracts, if the trust is identified in the will and the terms of the trust are set forth in a written instrument executed before or concurrently with the execution of the testators will regardless of the existence, size, or character of the corpus of the trust. v. UPC 2-511. Testamentary Additions to Trusts 1. validates pour over gifts to standby trusts even if unfunded prior to settlors death a. courts usually validate pour over trusts b. the majority of states have enacted either a version of the Uniform Act, or an equivalent statute validating will provisions which pour assets into inter vivos trusts Heaps v. Heaps i. Facts: trust provision required writing to revoke/amend trust probably to avoid litigation. H and W put house into trust probably to avoid probate and potentially to protect children from subsequent spouse ii. if house never sold would have remained in trust for H (after W dies), trust would become irrevocable and 2nd wife has no claim to house iii. W and H sell house in return for deed of trust issue is whether proceeds/deed of trust remains in trust? iv. W dies H and 2nd W take title to house as joint tenants so wife claims she now has interest in house and transfers to her own trust v. Hold: relevant statute says doesnt matter how title is held H and W had to take affirmative action to remove property from trust and they didnt 2nd wife cant take The Pros and Cons of Avoiding Probate have to pay for probate but also have to pay trust commissions during the settlors life (page 588-89) The Need to Plan For Incapacity i. revocable living trusts can make the transition to old age or incapacity less awkward ii. the settlor can provide for a successor trustee to assume management of trust assets in the event of settlors incapacity iii. this avoids the need for a costly, time consuming and possibly painful guardianship or conservatorship proceeding Privacy Concerns a trust, is private, unlike a will which is filed in court, and the trustee need not divulge the contents of the trust document to any third party Minimizing the Chance off a Successful Will Contest i. remainder beneficiaries of revocable trusts do not have standing to challenge the trust provisions during the settlors life Asset Management Funds the trustee can be someone with expertise in finance Protecting the Spouse Against Revocable Trusts
i. when settlors spouse challenges a revocable inter vivos trust as illusory because the settlor retained full control over the trusts assets until the moment of death, the spouse often prevails ii. NY takes this position includes revocable trusts as testamentary substitutes in computing the estate against which the surviving spouse may elect l. Changed Marital Circumstances and Revocable Trusts UPC divorce revokes revocable dispositions m. Committee on Professional Ethics v. Baker i. Facts: Financial planner advised people to get revocable living trusts then referred them to Baker with already outlined terms of what to include in trust. Baker did not use independent professional judgment did not advise clients against revocable trust just wanted referrals (conflict of interest) ii. challenge not brought by clients but other lawyers who felt diminishing source of income by using financial adviser iii. ethics opinion found marketing programs of living trusts improper iv. found Baker aided financial planner in unauthorized practice of law baker acting merely as scrivener v. unclear if lawyer must turn down repeated referrals by someone suggesting same treatment (i.e. revocable will) if that is actually the best option for that person iv. Protecting Beneficiaries from Creditors 1. Support Trusts and Discretionary Trusts a. General Common Law: a creditor of the beneficiary steps into beneficiarys shoes entitled to whatever beneficiary entitled to i. ask whether trustee is required to make a payment to beneficiary b. Garnishment: court order directing $ or property of third party (here trust property)be seized to satisfy debt owed by debtor to a plaintiff creditor c. Support Trust: trustee only required to make payments for support/maintenance i. a creditor who is not providing support is not entitled to garnish beneficiarys interest in the trust 1. would frustrate intent of settlor provided $ to be used for particular purpose, beneficiary doesnt have right to use $ for anything else so if creditor claim not for support uses, beneficiarys right not subject to garnishment 2. BUT if creditor loaned money to beneficiary for something used for beneficiarys support creditor would be able to garnish and trustee obligated to pay creditor ii. HYPO credit card company w/ judgment against support trust beneficiary can garnish on income from support trust 1. the trustee has a legal duty to make sure the beneficiary of the trust gets income payments 2. the credit card company can, no matter what kind of trust, can reach the money in the beneficiarys hand, and here there is no provisions iii. if creditor is LL seeking rent $, trustee must pay LL b/c that used for support of beneficiary
iv. support trusts protect beneficiaries from creditor claims (unless credit used for support) but also limit trustees power to use trust funds for anything other than support d. Discretionary Trust: trustee not required to make payments, use discretion (better for creditors at common law than support trusts) i. creditors can garnish on payments but trustee can choose not to make payments at all ii. order of garnishment basically saying trustee doesnt have to use discretion to make payments, but if he does, payment must go directly to creditor iii. if trustee makes no payments trust is tied up gives creditor bargaining power 1. beneficiary has incentive to settle w/ creditor 2. beneficiary may reveal other sources of income iv. If a trustee ignores the lien and makes a payment directly to the beneficiary instead of the creditor, the trustee will be held personally liable to that creditor e. UTC 501 and 504 (no distinction between support and discretionary trusts) i. The only creditors with power to compel a distribution are those whose claims are based on alimony and child support ii. Under the UTC, creditors are barred from complaining if the trustee fails to make a distribution for goods or services that the trustee is obligated to provide to the beneficiary f. Wilcox v. Gentry i. Issue: Whether, if the trustee exercises its discretion and makes a payment on behalf of the beneficiary, whether such payment is subject to the creditors garnishment? Holding: Yes ii. Rule: The Restatement (Second) of Trusts Section 155(2) states Unless a valid restraint on alienation has been imposed in accordance with the rules state in Section 152 and 153, if the trustee pays to or applies for the beneficiary any part of the income or principal with knowledge of the transfer or after he has been served with process in a proceeding by a creditor to reach it, he is liable to such transferee or creditor. g. Hypos: i. Hypo: Now we have a support trust for the education and support of the beneficiary, and the beneficiary charges on your clients credit card bills 4 star hotels around the world? 1. does the creditor have any right to garnish the trust assets? No 2. the trustee is only allowed to pay money for support and education 3. the trustee does not have the power to make payments for 4 star hotels, so the credit card company cannot garnish an interest the beneficiary doesnt have 2. Spendthrift Trusts a. the most common mechanism for keeping trust assets away from a beneficiarys creditors is inclusion of a spendthrift provision in the trust instrument i. Example: The interests of my trust beneficiary, whether in trust income or trust principal, shall not be capable of assignment, anticipation, or seizure by legal process. 5
b. General Rule: Spendthrift provisions are valid only if they prevent both voluntary assignments and involuntary garnishment by the beneficiarys creditors c. Rationale for Spendthrift Trusts: i. insulating beneficiaries from any claims by their creditors ii. we are thinking of a settler who is creating the benefit of a trust for someone else iii. what reason is there for allowing a settler to limit creditors from obtaining money from their kids 1. during the life of the settler they can control money, so the creditors shouldnt have a claim against the settlors money d. Attack on Spendthrift Trusts: i. could mislead potential creditors ii. since cant assign interests may be hard for individual to obtain credit iii. encourages beneficiaries to rack up debt if they know creditors cant reach assets iv. inter vivos trust not on public record creditors cant always find out about spendthrift v. tort debtor insulated from creditors even though liable (Scheffel) e. Broadway National Bank v. Adams i. MA Supreme Court established the validity of spendthrift trusts ii. founder of the trust was the absolute owner, he had the right to provide the money as he saw fit f. Nichols v. Evans i. the court stated that spendthrift trusts are not unfair to creditors, because creditors can ascertain the restrictions on the beneficiarys income and choose whether to extend credit, which is true in the computer age g. Scheffel v. Krueger i. Trust: The trustee is to pay all of the net income from the trust to the beneficiary, at least quarterly, or more frequently if the beneficiary in writing so requests. The trustee is further authorized to pay any of the principal to the beneficiary if in the trustees sole discretion the funds are necessary for the maintenance, support, and education of the beneficiary. The beneficiary may not invade the principal until he reaches the age of fifty. ii. Spendthrift Clause: The beneficiary is prohibited from making any voluntary or involuntary transfers of his interest in the trust. iii. Issue: Whether the plaintiff, as creditor, can avoid the defendants spendthrift clause because of a tort lawsuit? Holding: No. iv. Rule: In the event the governing instrument so provides, a beneficiary of a trust shall not be able to transfer his or her right to future payments of income and principal, and a creditor of a beneficiary shall not be able to subject the beneficiarys interest to the payment of its claim. h. NY: in every jurisdiction except NY, you must include spendthrift language, in NY, every trust is spendthrift, unless the settler includes language that it is not i. Other Limits on Power to Shelter Income from Creditors i. a number of states have enacted statutes purporting to give creditors the right to reach a debtors interest in a spendthrift trust to the extent 5
that the debtors interest exceeds the debtors needs for education and support j. UTC 503. Exceptions to Spendthrift Provision i. even if a trust contains a spendthrift provision, a beneficiarys child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance, or a judgment creditor who has provided services for the protection of a beneficiarys interest in the trust, may obtain from a court an order attaching present or future distributions to or for the benefit of the beneficiary 3. Creditors Rights in Self-Settled Trusts, Including Off-shore and Domestic Asset Protection Trusts a. SELF-SETTLED SPENDTHRIFT TRUST spendthrift trust created by a settlor for their own benefit i. until recently all US courts held self-settled spendthrift trusts unenforceable, and creditors entitled to reach settlor-beneficiarys interest no concern by settlor about other beneficiaries, only created so settlor can avoid creditors ii. also applied to self-settled discretionary and support trusts creditor can reach maximum amount which trustee could pay to settlor or apply for his benefit iii. if 2 people create reciprocal spendthrift trusts for each others benefit both treated as self-settled spendthrift provisions will be ineffective iv. BUT b/c of foreign asset protection, some states now allow domestic asset protection trusts b. UTC 505. Creditors Claim Against Settlor c. FTC v. Affordable Media, LLC. i. settlors create trusts in Cook Islands to insulate assets from creditors w/ trustee in Cook Islands (who US has no jurisdiction over) ii. settlors removed as co-trustees in event of duress - argue they have no control over $ 1. but they are protectors which allows them to tell trustee how to distribute money (can tell trustee to give to creditors, until resign as protectors) iii. FTC seeking repatriation of assets but settlors resigned as protectors iv. court finds settlors in contempt saying had no control over $ while they were protectors = bad faith contempt until pay off creditor v. Trust Protectors 1. Usually, someone other than the settler is named trust protector 2. a trust protector in an offshore jurisdiction is someone granted to control the administration of the trust, with respect to such matters as removal and replacement of trustees, control over discretionary actions of the trustees, etc. 3. the point is to give someone not subject to US control the authority 4. if the trust protector is a US person (and thus subject to the authority of the US), the trust instrument will typically give the protector no affirmative powers, but only veto powers, with the consequence that a US court will be unable to
compel the protector to force administration of the trust in a certain manner 5. trust protectors have fiduciary duties d. Domestic Asset Protection Trusts i. no state has gone as far as the Cook Islands, but several states have authorized trusts in which the settler can maintain a beneficial interest free from creditor claims 1. Alaska, DE, Nevada and Rhode Island were at the forefront 2. So far, enthusiasm for asset protection trusts has been limited to lightly populated stateswhere most of the trust business is likely to come from out of state and where most of the creditors left out in the cold will also be out of staters 3. The UTC and the Restatement do not authorize self-settled spendthrift trusts e. Delaware Provisions i. Requirements: 1. trustee must be individual resident of state, or qualified trust or banking institution doing business in state 2. trustee must have some administrative duties 3. settlor must physically locate some of trust assets w/in state 4. must be a discretionary trust and irrevocable with a spendthrift clause ii. Why use domestic asset protection trust instead of Cook Islands? 1. affordability do not know fees of offshore banks, or attorney fees to set it up 2. comfort a. putting yourself at mercy of Cook Islands dont know stability of place b. would have to go to Cook Islands to litigate if anything goes wrong c. more comfort knowing your money is in DE than Cook Islands iii. DE statute intricate set of provisions allowing people to set up trusts that insulate from creditor claims in some but not all situations f. Delaware Statute Problems (Page 635-36) 1. a) What provisions should go in the trust? - 3570, needs to make a qualified disposition, means a disposition by means of a trust instrument - subdivision a says the trustee must be a resident of the state, or a Delaware bank (gives business to DE) - subdivision f says if a transferor wants to be a co-trustee with a DE bank or trustee does not mean the disposition wont be qualified as a qualified disposition - has to be irrevocable, and it has to include spendthrift provision (c) - if the language doesnt include a spendthrift provision than it is not qualified under DE b) She cannot be the sole trustee, would not be qualified. She can have a certain amount of income distributed to her, can have all the income retained (a (5)). Her instrument cannot exceed 5 percent in the amount she can receive. The DE statute says you can vary income but cant go over 5 percent (wont make the trust revocable) 2. Ames transfers all of her money but $50,000 to trust in Delaware. Bank in NY has a judgment for $100,000. - she created the trust after the judgment was made against her - she now owes the money she owes to someone to set up the trust - Delaware might be concerned to take someone who is the defendant in a tort case - would it be a fraudulent transfer if she made an outright transfer to her daughter - what statute entitles NY Bank to the assets under the trust? 5
- 1304 is when we decide if a transfer is fraudulent - under 1304 have to see if there was actual intent and look at the factors under subsection b - (b)(4) is important because she was sued - (b) (5) also, if she transferred almost all her money, good chance the court would decide this is a fraudulent transfer - 3574 tells us that a qualified disposition should be avoided to an extent - 3573 has limitations for support or alimony, or someone who dies and has personal injury - 3572 no action against the beneficiary unless the action is brought pursuant to 1304 or 1305 - under 3572 (b) are ways we can get to the trust What is she came to you in this situation and said wanted to create asset protection trust? - would say it wont help her, the transfer is voidable, so would ask her about her past - tell her it will be fraudulent or illegal but if she insists on you doing it you have a problem Hypo: Ames ex-husband obtains a judgment against her for alimony after she sets up the asset protection trust. - 3573(1) - Will be successful Hypo: Martha Stewart sues for personal injuries she got in Ames home, in January 2008, can she enforce the judgment? - 3573(2), this is after the trust is set up so the trust would be protected v. Planning for Incapacity and/or the Costs of Institutional Care 1. Revocable Living Trusts a. Generally i. a revocable trust can facilitate planning for old age ii. an elderly settlor can name a professional fiduciary trustee and delegate management of the assets to the trustee for as long as the trust endures iii. if the settlor prefers to retain control over her assets for as long as possible, she may name herself trustee, and provide for a successor trustee to assume control if and when the settlor becomes incompetent b. Westerfeld v. Huckaby The settlor attempted to provide for incapacity through the following language in the event of my death or legal incapacity, I hereby nominate and appoint as successor trustee: Arthur L. Huckaby to be successor trustee i. This will eat up assets and need litigation for what is a legal capacity, might want to find other people who will make the determination of legal capacity 2. Government Health and Medical Benefits a. Generally i. Health Care 1. Who is going to pay for it? 2. Can you avoid having those assets used to pay off the government? 3. The problem can arise when we have a settlor trying to provide for children or spouses or when they are trying to create a trust for the person who held the property to begin with ii. Medicaid 1. federally funded program that provides assistance to people of modest means 2. it is administered by the states and states can develop specific rules about who qualifies 5
3. the resolution is state specific b. Estate of Gist (support/discretionary trusts created by someone other than the beneficiary) i. Trust: The trust for Elenore was a discretionary trust with a spendthrift clause. ii. Issue: Whether the district court correctly allowed the state to enforce its Title XIX lien against a trust containing a spendthrift clause? iii. Holding: Yes, because the trust is a discretionary trust with standards, we conclude our common law allows the State to recover its lien for necessities supplied to the beneficiary from the trust, in spite of the spendthrift provision. The lack of symmetry between Medicaids eligibility requirements and Medicaids ability to recover from an estate does not preclude recovery. iv. Rule: Iowa law under Title XIX the provision mandates that all medical assistance provided on an individuals behalf by the state be paid back upon the individuals death. Interests in trust are considered property under the provision. c. Supplemental Needs Trusts i. a supplemental needs trust provides the beneficiary with comforts and additional medical support that he or she would not be entitled to have if she depended entirely on governmental assistance. If the trust is properly drafted, the trust principal will not be counted as an available resource for Medicaid, social security, and other governmental benefits ii. to qualify, the trust document should prevent the trustee from paying for the beneficiarys basic support needs, and must expressly state that the trusts purpose is to provide care that supplements specific government benefits to which the beneficiary is entitled iii. the trust instrument should give the trustee complete discretion to make distributions and it should direct that the trust should be administered to ensure that the beneficiary does not lose his or her eligibility for benefits iv. the state has no right to reimbursement from a supplemental needs trust at the beneficiarys death; the assets will be distributed as provided in the trust instrument d. Self-Settled Trusts and Incapacity (Cohen v. Commissioner i. Cohen The trustees, however, shall have no authority whatsoever to make any payments to or for the benefit of any Beneficiary hereunder when the making of such payments shall result in the Beneficiary losing her eligibility for any public assistance or entitlement program of any kind whatever. It is the specific intent of the Grantor hereof that this Trust be used to supplement all such public assistance or entitlement programs and not defeat or destroy their availability to any beneficiary hereunder. ii. Comins trustee shall make no distributions of principal under this paragraph to a primary Beneficiary during or with respect to any time during which such primary Beneficiary is institutionalized. iii. Kokoska The trust estate shall be used to the maximum extent possible to supplement such Benefits as are received by the Primary Beneficiary.
iv. Issue: Whether the assets in these supplemental trusts will be used to determine eligibility for Medicaid assistance? Holding: Yes. v. Reasoning: The state legislature believed that when affluent individuals use Medicaid qualifying trusts and similar techniques to qualify for the program they are diverting scarce federal and state resources from low income elderly and disabled individuals and poor women and children. This is unacceptable. If there is discretion then whatever is the most the beneficiary might under any state of affairs receive in the full exercise of that discretion is the amount that is counted as available for Medicaid eligibility. vi. Solution: suppose the trustee is told to make the income of the trust to the Zilchs and turn the remainder over to their daughter at their death 1. only the income would be used for Medicaid 2. might work for Medicaid eligibility 3. the problem is they only have access to the income, might be reluctant to part with it e. Community Spouse i. Medicaid regulations invariably require consideration of the assets of both partners to a marriage in determining whether either spouse is eligible for Medicaid benefits ii. Only by spending down the couples assets will the institutionalized spouse qualify for Medicaid, but spending down the assets to Medicaid eligibility limits will significantly reduce the community spouses standard of living iii. There is protection of a persons home and the community spouses income shall not be deemed available to the institutional spouse when they are institutionalized f. Self-Settled Supplemental Needs Trusts i. persons with disabilities can retain their resources in a special needs trust under exceptions to the amendments of the Omnibus Budget and Reconciliation ii. there are payback and pooled trusts iii. payback is paid back after the persons death (repay to the state) vi. Minimizing Taxation 1. at the death of the settlor the tax purposes are the same 2. gifts and irrevocable trusts are the same for tax purposes d. Trust Modification and Termination i. Modification or Termination by Direction of the Trust Settlor 1. Generally a. the trust settlor, who created the trust in the first placehas considerable power over trust termination and modification: b. First, the settlor, can, by appropriate language in the instrument creating the trust, reserve to herself the power to revoke or modify the trust c. Second, the trust instrument will almost invariably specify a time for trust termination and will include directions for distribution of trust assets upon termination d. a trust is irrevocable unless the settlor provides a provision for revocation (common law and NY) e. California and UTC have adopted the opposite default rule 2. Connecticut Gen. Life Insurance Co. v. First National Bank of Minneapolis
a. Revocation Clause: Donor reserves the right to amend this agreement from time to time in any and all respects; to revoke the trust hereby created, in whole or in part; and to change the identity or number or both of the trustee or trustees hereunder by written instrument executed by the donor and delivered to any trustee or to donors wife if no trustee is acting at a particular time during donors lifetime. b. Sample Clause on page 674 is more effective*** c. Rule: It is the general rule that where a settlor reserves the power to revoke a trust by a transaction inter vivos, as for example by notice to the trustee, he cannot revoke the trust by his will. d. Reasoning: The court said it is important for maximum protection for the trustee to be provided for all major changes to be made by the notice to the trustee. The trustee would wish to know of any major change in its duties; revocation or amendment of the trust would constitute as major a change as an increase or decrease in the number of trustees. e. Restatement says that when a settlor fails to specify how a revocable trust should be revoked, the trust may be revoked in any way that provides clear and convincing evidence of settlors intent to do so f. There is no common law for revocation of a trust by physical act, but comments in the UTC say it can be done by various acts including a physical act or oral statement ii. Modification or Termination by Consent 1. Adams v. Link (paying income for life is a material purpose) a. Agreement: During the probate appeal, a compromise was reached between Foeppel, the NY Assoc. for the Blind, and the three heirs at law. The agreement was the heirs would withdraw their appeal, and 15 percent of the residuary would go to the heirs, 37 percent to the NY Assoc. for the Blind and 48 percent to Foeppel and $15,000 for a trust for a son of Alvin Adams and when his education was completed it would go to Foeppel. b. Issue: Whether the agreement at issue should be approved by the court? Holding: No, the provisions of the will are being drastically changed so as to abolish a trust contrary to our rule. This cannot be done. c. Rule: Conditions precedent which should concur in order to warrant termination of a testamentary trust by judicial decree are (1) that all the parties in interest unite in seeking the termination, (2) that every reasonable ultimate purpose of the trusts creation and existence has been accomplished, and (3) that no fair and lawful restriction imposed by the testator will be nullified or disturbed by such a result. The rule is made to protect the property. 2. American National Bank of Cheyenne v. Miller (no spendthrift trust, paying income for life is not a material purpose) a. Issue: Whether the beneficiaries of a trust can compel its early termination on the grounds it lacks any remaining material purpose. Whether a trustee (who is not also a beneficiary) has standing to challenge the early termination of a trust, and whether the cost of a supersedeas bond was properly allocated to the trustee individually? Holding: Yes and yes. b. Rule: A trustee has an obligation to defend the trust in order to carry out the material purpose of the trust. The trustee has the power to prosecute or defend actions, claims or proceedings for the protection of trust assets and of the trustee in the performance of his duties. (Wyoming Law) c. Restatement says beneficiaries can compel the early termination of a trust: 1) except as stated in subsection 2, if all of the beneficiaries of a trust consent and none of them is under an incapacity, they can compel the termination of 5
the trust. 2) if the continuance of the trust is necessary to carry out a material purpose of the trust, the beneficiaries cannot compel its termination. d. Reasoning: Although the grandchildren were contingent beneficiaries, and there right to the assets did not vest until they were 35 and Grant was dead, the settlors intent was to support the beneficiaries, and all of these beneficiaries have waived their support for continuation of the trust. 3. Section 65 Termination or Modification by Consent of Beneficiaries a. same rule as adopted in Miller b. comment d says the mere fact that a settlor has created a trust for successive beneficiaries does not prevent the beneficiaries from terminating or modifying the trust to reallocate the beneficial interests among themselves if they wish to do so (can have a guardian for an unborn) 4. Modification While Settlor is Still Alive a. Rule if the settlor consents to the termination, the only reason for maintaining the trust disappears. Thus, both the restatement and UTC 411(a) allow a settlor to terminate or modify a trust if all beneficiaries consent, even if termination or modification is inconsistent with the material purpose of the trust b. UTC 401(e) provides that if not all of the beneficiaries consent to a proposed modification or termination of the trust, the court may order modification or termination if the court is satisfied that (1) if all of the beneficiaries had consented, the trust could have been modified or terminated under this section and (2) the interests of a beneficiary who does not consent will be adequately protected 5. Problems page 683-84** 6. NY statute, if the beneficiaries can show continuation of the trust is economically impracticable, that the express terms of the disposing instrument do not prohibit its early termination, and that such termination would not defeat the specified purpose of the trust and would be in the best interests of the beneficiaries 7. Restatement says we dont want to take the position that spendthrift is material reason not to termination iii. Modification or Termination Without Consent of All Beneficiaries 1. Mistake a. Walker v. Walker i. There was a mistake, and the mistake will rectified. ii. Rule: A trust instrument may be reformed to conform to the settlors intent. We may require the trust to be reformed on clear and decisive proof that the instrument fails to embody the settlors intent because of scriveners error. We will look at the trust instrument as a whole and the circumstances known to the settlor on execution. We are willing to accept extrinsic evidence, such as attorneys affidavit, that demonstrates that there has been a mistake. The lawyer who drafted the trust might have crucial evidence. iii. Reasoning: It was clear that Donald wanted to minimize tax consequences. iv. UTC 415 says a court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlors intention if it is proved by clear and convincing evidence that both the settlors intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement v. UTC 416 allows a court to grant a request to modify a trust to achieve settlors tax objectives 5
2. Unanticipated Circumstances Affecting Trust Objectives a. Section 66. Power of Court to Modify: Unanticipated Circumstances i. The court may modify an administrative or distributive provision of the trust, or direct or permit the trustee to deviate from an administrative or distributive provision, if because of circumstances not anticipated by the settlor the modification or deviation will further the purposes of the trust 3. Modification or Termination to Provide for Needy Income Beneficiaries a. New York EPTL 7-1.6(b) i. as long as the original purpose of the creator of the trust cannot be carried out and that such allowance effectuates the intention of the creator VII. POWERS OF APPOINTMENT a. Terminology Classification i. Property Law A power of appointment is a power that enables the donee of the power, acting in a non-fiduciary capacity, to designate recipients of beneficial ownership interests in the appointive property ii. When the Power is not Executed: 1. Property goes back to the donors estate when the donee doesnt execute the power of appointment (agency theory) 2. if the power was general we dont know what the donor wants, intestate succession 3. if it is special, when it is special we just divide among the members in the class 4. Scope of the Power a. General and Special Powers i. General Power the donee can appoint anyone, including herself or her estate 1. included in the donees taxable estate 2. because of this, donors will sometimes find it useful to create a power that will not be construed as general but that nevertheless gives the donee broad powers ii. Special Power (non-general power) this is a restrictive power, when the donor places a restriction such as among my children or among my descendants or among my relatives iii. Restatement 1. (a) a power of appointment is general to the extent that the power is exercisable in favor of the donee, the donees estate, or the creditors of either, regardless of whether the power is also exercisable in favor of others 2. (2) A power of appointment that is not general is a nongeneral power b. Exclusive and Non-Exclusive Powers i. Exclusive When the donee is free to exclude objects of the power (courts presume exclusive power) ii. Non-Exclusive if the donor explicitly requires the donee to appoint some assets to each member of the class, we say that the power is non-exclusive, the donee may not exclude any objects of the class 1. a problem with the non-exclusive power is how much is the minimum amount that must be left to any member of the class in order for the appointment to be valid
5. Time of Appointment a. Presently Exercisable if the donor gives the donee a power of appointment that the donee is free to exercise immediately b. Postponed Power a power exercisable by the donee only after the expiration of a stated timed or after the occurrence or nonoccurrence of a specified event i. if the donor wants the donee to have as full a picture as possible when deciding how to distribute trust property, donor will specify that donee may only exercise the power by will c. Testamentary when the donor requires that the power be exercised by will iii. Powers of Appointment and the Internal Revenue Code 1. the code also defines general powers differently than state law does a. under state law, if a donee can appoint to herself, she has a general power b. under the code, if the donees power to appoint principal to herself is limited by an ascertainable standard, the power is non-general for tax purposes i. ascertainable under the code is health, education, support, or maintenance or some combination of those terms b. Creation and Exercise the donor generally creates a power of appointment in conjunction with creation of a trust i. Estate of Hamilton 1. Facts: Decedent specified, however, that this power of appointment was exercisable only by specific reference to said power in Hamiltons last will. In the event Hamilton failed to effectively exercise the power, the assets remaining in Fund A would pass to McLaughlin and Stevens. 2. Power of Appointment: In her will, Hamilton expressed her power of appointment for a will by Milton that was executed on 1966. This was not his last will, and not the will he gave Hamilton the power for (the 1982 will). 3. Hold: The power was not effectively exercised. 4. Rule: NY EPTL 10-6.1 if the donor has expressly directed that no instrument shall be effective to exercise the power unless it contains a specific reference to the power, an instrument not containing such reference does not validly exercise the power. There must be a specific reference to the power. 5. if the donee exercises the power creditors can reach it, which is one reason for discouraging inadvertent exercise in many jurisdictions ii. UPC. 2-704. Power of Appointment; Meaning of Specific Reference Requirement 1. it is presumed that the donors intention in requiring that the donee exercise the power by making reference to the particular power or to the creating instrument, was to prevent an inadvertent exercise of the power iii. Will of Block 1. Holding: Paul exercised the power. 2. Rule: In Ohio, the legislature has adopted the common law, which requires that a donee manifest a clear intent to exercise the power, NY, which the court relied on, presumed exercise, even if the will does not mention the power of appointment at all. 3. Reasoning: Nothing in the text of Paul Jr.s will gives rise to the necessary implication. The only possible indicia are: (1) the fact that this is the will of the domiciliary of a jurisdiction which would not deem it to have exercised the power (2) the fact that the presumed exercise of the power was inconsistent with its limitations; and (3) the inference that the donee knew of the existence of the power because he was a trustee of the appointive assets. 4. If he was not exercising his power, then, there is a takers in default clause and it would create two separate trusts to the twins for life.
5. Suppose Dinas will did not create a taker in defaults clause and Paul did not want to exercise, how would the appointed property be disposed of? a. It is a special power, therefore it would go to the twins anyway since we assume Dina wants it to go to the twins 6. Drafting Solution: Could say the donee is not presumed to exercise the power unless the will states the power of appointment iv. UPC 2-608. Exercise of Power of Appointment says where there is a special power, like the common law we dont presume exercise, but if it is a general power then they take NYs provision c. Scope of the Power ***look at Problems page 754-55 i. Exercising a Power by Creating Another Trust a donee could create another trust for permissible beneficiaries as long as the trust only benefits permissible appointees (objects of the power) and so long as the donor has not manifested a contrary intent. ii. With general powers, we do not even have to worry about this 1. Restatement: Except to the extent that the donor has manifested a contrary intention, the donee of a nongeneral power is authorized to make an appointment, including one in trust and one that creates a power of appointment in another, that solely benefits permissible appointees of the power. iii. Exercising a Power by Creating Another Power 1. If a general one, creating a new power presents no difficulties 2. For a special power, it is allowed when the donee appoints by giving a general power of appointment to a person who is within the class of permissible appointees, or the donee appoints by giving to a non object of the power a special power to appoint among people who are within the class of permissible appointees iv. Exceeding the Powers Scope 1. Limits on the Holder of a Special Power a. Will of Carroll i. Facts: William Carroll died leaving a will. He gave his daughter power by her last will to dispose of the property for use to and among her children or any other kindred who shall survive her. There was a takers in default clause if there was not a valid disposition. ii. Elsas Will/Trust: Left $5,000 to her brother and $250,000 to her cousin Paul Curtis, of which Paul was to give $100,000 to her husband. iii. Not valid, Curtis was a party to the attempted fraud on the power. 2. Consequences of Ineffective Appointments a. General Powers: The Capture Doctrine i. a donees appointment can be ineffective, however, if the appointee is dead, or if the appointment violates the RAP ii. a donees ineffective appointment captures the appointive property for donees estate iii. CA says it goes to the donees estate if the donee has manifested an intent that the appointive property be disposed of as property of the donee rather than as in default of appointment iv. In restatement jurisdictions, if the power is general, the property will pass through the donees estate whether or not the donee takes actions that capture the power, capture is therefore irrelevant b. Special Power i. when there is a special power, the capture doctrine does not apply, otherwise the donee would be able to turn it into a power for himself, and goes to the permissible class c. Special and General Powers: Allocation of Assets 6
i. if the donee has blended appointive assets with donees own assets, the assets should be allocated to maximize the effectiveness of donees intended dispositions v. Contracts to Appoint Releases 1. Contracts to Appoint if the contract is enforceable, the donee who was not entitled to appoint in favor of himself has now arranged to benefit from his status as donee of the special power a. courts typically hold when a power is special, a donees contract to appoint is unenforceable, at least so long as the contract benefits a person outside the class of permissible appointees b. a general power can have an enforceable contract when the power is presently exercisable c. NYEPTL 10-5.3(a) Contract to Appoint; Power Not Presently Exercisable donee of power not presently exercisable cant K to make an appointment, unless the donor and the donee are the same person i. if prohibited K is made no action for specific performance or damages, BUT promisee can obtain restitution of value given by him unless donee has exercised power pursuant to K ii. NOTES: 1. problem threat of restitution may encourage donee to comply w/ terms of unenforceable K undermining goal of assuring B exercises his judgment free of constraints b/c K still counts for something b/c B subject to liability out of his estate d. Benjamin v. Morgan Guaranty Trust Co. i. Rule/Reason: The will created a general power of appointments to Mrs. Cromwell upon her death. Any appointment made pursuant to such a contract which otherwise complies with the scope of the power of appointment is not rendered invalid by virtue of the existence of the contract. 2. Releases generally, a release assures that the appointive property will pass to the takers in default (general power), if however, the power is a special power limited in favor of a defined class, a release assures that the property will pass to the members of the defined class a. there can be a partial release, which means the donee binds herself not to exercise the power in favor of particular people b. Thus, donee can diminish the class in a special power or make a general power special c. a release from a general to a special power does not avoid tax consequences d. Seidel v. Werner i. Facts: The donee of a general power trust made a separation agreement with his former wife and their children that he would not revoke his will and he would leave his power of appointment to them. He then revoked it in favor of his third wife. ii. Issue: Whether this was a release of the trust iii. Holding: No, the separation agreement is not the equivalent of a total or partial lease of the power of appointment. e. NYEPTL 10-5.3(a) Contract to Appoint; Power Not Presently Exercisable i. 10-5.3(b) where the donor designated persons or a class to take in default of the donees exercise of the power, a release with respect to
appointive property must serve to benefit all those so designated as provided by the donor (page 771) d. Rights of Creditors i. when donor creates a special power of appointment, there is general agreement that the appointive property should not be subject to claims by the donees creditors ii. when donor creates a general power of appointment, the agency theory is considerably less persuasive: donor has given donee the power to appoint in favor of himself, his estate, or his creditors, and it is far less clear why donee, who has the power to use the appointive property to pay his debts, should not be compelled to do so iii. Equitable Assets Doctrine reflects the common law position and holds that the appointive property is subject to claims by donees creditors but only if the donee actually exercises the power 1. If the donee chooses not to exercise the power, permitting the appointive property to pass to the takers in default, then the creditors may not reach the appointive property 2. The EAD then, effectively permits the insolvent donee to choose between having the appointee assets pass to his creditors, or to the takers in default 3. If it is presently exercisable creditors can reach it iv. Restatement Treats property subject to a presently exercisable general power of appointment as the property of the donee and it is available to satisfy claims (UTC as well) 1. When property is subject to a general testamentary power of appointment, it would also make the property available to satisfy claims by the donees creditors whether or not the power is exercised, but creditors would not be entitled to reach the property until the donees death v. CA the donees own property must be used first to satisfy creditor claims, but if the donees own property is inadequate, creditors may reach appointive property, whether or not the power is actually exercised vi. NY treats a general presently exercisable power as the equivalent of absolute ownership in the donee, and hence subjects the appointive property to claims of the donees creditors 1. Creditors may reach the property whether or not the donee exercise the power 2. With respect to general testamentary powers, however, the NY statute provides that the donees creditors may not reach appointive property, whether or not the donee has exercised the power vii. NY EPTL 10-7.4 1. property covered by a general power of appointment which, when created, is not presently exercisable is subject to the payment of the claims of creditors of the donee, his estate and the expenses of administering the estate only if the power was created by the donee in favor of himself or if the postponed power becomes exercisable in accordance with the terms of the creating instrument, except in the cae of a testamentary general power e. Bankruptcy i. for the benefit of an entity other than the debtor ii. if the debtor/donee has a general, presently exercisable power, the bankruptcy code treats that power as the equivalent of absolute ownership of the appointive property, and the appointive property becomes a part of the bankruptcy estate VIII. FUTURE INTERESTS a. Classification i. What is a Future Interest? 1. a future interest is one that does not become possessory immediately upon its creation 2. even if a future interest will not become possessory for a long time, the future interest is a legally recognized and enforceable relationship from the moment it is created
3. a trustee might be liable for breach of fiduciary duty, or a waste claim, against the person with the future interest 4. a person with a future interest may sell the interest before it becomes possessory 5. a future interest has a present value to the holder ii. Categories of Future Interests the question to ask is, is the future interest created in the transferor or the transferee 1. Future Interests in the Grantor a. there is little value in focusing on these for estate planning purposes, so we treat them all as reversions 2. Future Interests in Persons Other than the Grantor: Remainders and Executory Interests a. Contingent Remainders i. Might never become possessory ii. Ask, whether the remainder is held by some ascertained person? If the answer is no, the remainder is contingent iii. If the remainder is held by an ascertained person, one must ask whether the remainder is subject to a condition precedent? If it is subject to a condition precedent, it will be classified as a contingent remainder even if it is held by an ascertained person b. Vested Remainder Subject to Complete Divestment i. If a vested remainder is subject to a condition subsequent, it is a vested remainder subject to complete divestment ii. if the conditional element is incorporated into the description of, or into the gift to, the remainder man, then the remainder is contingent, but if after words giving a vested interest, a clause is added divesting it, the remainder is vested iii. Example of a remainder subject to complete divestment: 1. To A for life, remainder to B, but if B fails to survive A, then to C 2. The clause follows the grant to B is that the clause is subsequent to the grant, therefore, it is a condition subsequent iv. Webb v. Underhill 1. Rule: When a life estate is followed by two alternative remainder interests, and the vesting of the second depends upon the failure of the first, and the same contingency decides which one of the two alternatives remainders shall take effect in possession, both interests are alternative contingent remainders. c. Indefeasibly Vested Remainder i. a remainder is indefeasibly vested when it is certain to become possessory whenever and however the preceding estates end ii. there are not events which might act to diminish or divest Ds interest, either before or after the interest becomes possessory, this too is a characteristic of the indefeasibly vested remainder d. Remainder Subject to Partial Divestment (or subject to open) i. a holder of a vested remainder subject to open might find his share of the property reduced as more beneficiaries become eligible to share the property, because the class of possibly takers is still open, his share may be partially divested by new members of the class e. Executory Interests i. a remainder cannot cut short, or divest a vested remainder in fee simple 6
1. if a future interest in someone other than the grantor would operate to cut short a vested remainder in fee, that future interest must be an executory interest 2. typically, executory interests follow vested remainders subject to complete divestment ii. executory interests arise when there is certain to be a time gap between the end of the prior estate and the time the future interest will become possessory 1. for a future interest to be a remainder, the interest must be one that may become possessory immediately upon the natural expiration of a prior estate created in the same instrument 3. Restatement Simplification a. a future interest is either contingent or vested b. the restatement abolishes the distinctions among contingent remainders, vested remainders subject to complete divestment, vested remainders subject to open, and executory interests iii. Problems*** Class Notes b. Construction of Future Interests i. The Increasingly Modest Preference for Early Vesting and Gifts to Individuals 1. No Implied Condition of Survivorship a. Three reasons why common law courts created a presumption for early vesting: i. at common law, vested interests were alienable; contingent interests were not. As a result, if an owner of land devised that land to my wife for life, remainder to my daughter, the wife and daughter could combine to sell the land to an eager party, so long as the daughters remainder was treated as vested. ii. The RAP invalidates future interests if they do not vest within the Rules period iii. Vested remainders accelerated into possession upon premature termination of preceding estates; contingent remainders did not. b. Uchtorff v. Hanson i. Facts: The section of the will at issue says that in the event that my son, Richard E. Uchroff shall survive me, I appoint the trust fund to the said Richard E. Uchtroff, as an indefeasibly vested interest in fee. In the event that my son shall not survive me, I appoint the same to a bank and to Carolyn Uchtorff, in trust, nevertheless and to hold as a trust fund for a class composed of the representative issue of the marriage of Richard and Carolyn, subject to divestment under certain circumstances. This provision is set to take place when Pearl dies, is remarried, or the death of her before Alberts death. ii. Issue: Whether Richard had a vested or contingent remainder in the trust fund once he survived Alfred? iii. Holding: Vested. On the death of his father, Richard had a vested remainder in the trust fund. iv. Rules: Upon the happening of the contingency upon which the estate in remainder is limited, the remainder becomes vested in right and awaits only the termination of the precedent particular estate to become an estate in possession.
v. It is not the certainty of possession or enjoyment which distinguishes the vested remainder, but the certainty of the right to future enjoyment if the remainderman lives until the life tenancy terminates. vi. Reasoning: In this case, there is no condition for Richard. At the expiration of Pearls estate it was inevitable Richard would take. vii. Why isnt this a question of lapse? Lapse is only an issue of surviving the testator viii. Common Law: Presumes early vesting, and if the beneficiary does not survive, it is passed through his estate. Under common law, need an express condition of survival for the gift to go to the residuary clause. ix. Iowa Trust Code: Unless otherwise specifically stated by the terms of the trust, the interest of each beneficiary is contingent on the beneficiary surviving until the date on which the beneficiary becomes entitled to possession or enjoyment of the beneficiarys interest in the trust. 1. If there is no survivorship it goes back to the grantor. 2. If there is no express condition of survivorship, it goes to the issue of the deceased, if there is express condition it goes back to the grantor. x. UPC 2-707 (b)(3) words of survivorship attached to a future interest are not, in the absence of additional, evidence, a sufficient indication of an intent contrary to the application of this section 1. words of survivorship are not words that show intent 2. Express Conditions of Survivorship a. Matter of Kroos i. Facts: In the event that either of my children aforesaid should die prior to the death of my beloved wife, Eliese Krooss, leaving descendants then it is my wish and I so direct that such descendants shall take the share their parent would have taken if then living, share and share alike, to and for their own use absolutely and forever. Florence died without having descendants, before Eliese died. ii. Issue: Whether the childrens interests vested upon the death of the testator? iii. Holding: Yes, the childrens interests vested when the testator died. iv. Rule: The language here or substantially identical, creates a vested remainder in fee subject to be divested by the remaindermans failing to survive the life beneficiary, if, but only if, such remainderman leaves issue or descendants surviving. v. Reasoning: The language of the will before it said about the conditions of surviving their mother, clearly vested the interest. vi. The further language used by the testator in this case demonstrates not that he was rendering the vesting of the estates in his children conditional upon survival of the life beneficiary, but that he was willing to have those estates divested only upon the combined occurrences of two further events. 1. The estates would only divest when one of the children predeceased their mother, leaving issue. 2. The expiration of the wifes life estate, the testator then gave the remainder to his children absolutely and forever. The use of the word then as an adverb of time must be, as it long as
been, construed to relate solely to the time of enjoyment of the estate, and not to the time of its vesting in interest. 3. UPC 2-707 a. the UPC reverses the common law presumption that a future interest is vested unless the grantor specifies otherwise b. the UPC permits the share of a deceased beneficiary to pass to the beneficiary descendants c. The UPC, however, goes beyond making most future interests contingent on survival; it also changes significantly the effect of trust language designed expressly to create a survivorship condition d. The statute creates a substitute gift e. the statute reduces the number of transmissible remainders testators might inadvertently create and has the potential to reduce the tax bills of estates served by poorly-trained lawyers ii. Class Gifts 1. Increase in the Class: The Class Closing Rule of Convenience a. By using a class term like grandchildren rather than naming individual grandchildren, testator expressed an intention that the devise not be limited to grandchildren living at the time of will execution b. General Rule: When a grantor makes a class gift, membership in the class may continue to increase until at least one member of the class becomes entitled to possession of the property that is subject of the class gift i. Put another way, the class closes when one member of the class becomes entitled to take her share of the property c. Restatement 15.1 When Class Closes Rule of Convenience Unless the language or circumstances indicate that the transferor had a different intention, a class gift that has not yet closed physiologically closes to future entrants on the distribution date if a beneficiary of the class gift is then entitled to distributions i. Common Law Exception: if at the time an interest is intended to become possessory, no member of the class has yet been born, then the class-closing rule will not apply, and we will wait for the class to close naturally d. In re Evans Estate i. Issue: Whether the three grandchildren born after the testators death, but before the first grandchild reached 30, are in the class to benefit? ii. Holding: Yes, order modified so as to provide that membership in the class permanently closed when the oldest grandchild arrived at the age of 30 years, and as so modified it is affirmed. iii. Rule: When there is a gift to a class, and that class is so fixed by the terms of the bequest that there may be an interval of time during which the class may increase, then the gift is one which vests in the existing number of the class and such other persons as thereafter become members of the class. That interval continues to the point of time or event which is specified and certain. iv. if the first grandchild died before age of 30, we would not close the class until the next child reaches 30 2. Decrease in Class Membership Survivorship Again a. There are three situations of what can happen when a class gift is left to children and one child dies leaving issue: i. children means children, but we impose no survivorship requirement (Restatement) 6
ii. children means children but we impose a survivorship requirement iii. Children really means issue Hypo: After husbands death, leave gift to A, B and C, not a class gift. A is dead, leaving D. As share would go through her will to E and Valparaiso University (common law). The UPC would create a substitute gift in the issue of any children, so it would go to D. b. Usry v. Farr i. Instrument: Life estate to Lucille, and at her death same is to go to my children who may survive my wife, and to my grandchildren with restrictions as follows: Any of my children taking land under this Item shall have a life interest therein, share and share alike, with any grandchildren who take hereunder taking the part which their father or mother would have taken. Upon the death of my last surviving child title in fee simple to said lands shall vest in my grandchildren per stirpes and not per capita. ii. Issue: When title to the remainder interest under the will of Watson Usry vested? iii. Holding: The grandchildrens share vested at the time of Usrys death. This is consistent with our case law that recognizes that a vested remainder will have both a vesting of title and a vesting of possession. iv. Reasoning: Since he only gave a life estate to his children, it makes sense for the property to further go to the grandchildren who survive him. His intention of his will was to dispose his entire estate to his family. There was a strong presumption for early vesting. 3. Express Survivorship Conditions a. can expressly say need to survive b. Example: to my brother for life, with the remainder at the brothers death, to be paid to his brothers surviving children iii. Problems*** Class Notes IX. COORDINATING NON-PROBATE ASSETS WITH THE PROBATE ESTATE a. P.O.D. Accounts, Revocable Trusts, and Wills i. Araiza v. Younkin 1. Issue: Whether the beneficiary under the trust, or the beneficiary under the IRA plan is entitled to the money after the death of the IRA holder? 2. Holding: The beneficiary under the trust, because the change was made by a living trust rather than by a will. 3. California rule for Totten Trusts: Where, as here, the multiple-party account is a Totten Trust, on death of the sole trustee, any sums remaining on deposit belong to the person or persons named as beneficiaries, if surviving, or to the survivor of them if one or more die before the trustee, unless there is clear and convincing evidence of a different intent. Right of survivorship cannot be changed by will. There are methods by which the terms of a multiple-party account may be modified. a. Rights of survivorship under the CA statute cannot be changed by will 4. Reasoning: A totten trust describes a bank account opened by a depositor in his or her own name as trustee for another person where the depositor reserves the power to withdraw the funds during his or her lifetime. If the depositor has not revoked the trust then, upon his or her death, any balance left in the account is payable to the beneficiary. Here, although the signature card for the savings account named appellant as the beneficiary, there is clear and convincing evidence that Howery had a different intent at the time of her death. She established a living trust that expressly stated her intention to give the savings account to Reeves. 6
5. Kostin v. Kent (Mich. App.) held that subsequently executed Totten Trust designation supersedes disposition in revocable trust agreement 6. In NY, by statute, an explicit provision in decedents will overrides a beneficiary designation but also protects the bank 7. Drafting Solutions: Client wants to write a will, wants Reeves to be beneficiary of the bank accounts a. Lawyer should figure out and ask if there are non-probate assets, have to figure out in what form those bank accounts might be, and how the decedent holds their assets b. Ask who you want the assets to go to c. Should re fill out the beneficiary forms, typical client will not remember to do that have to coordinate the assets b. Retirement Assets i. Defined Contribution Plans these plans do not guarantee participants any specific weekly or monthly income distribution, instead, the employer makes payments on a regular basis into an account created for each employee. The employee often matches these payments with contributions of her own, building up a nest egg for retirement 1. the assets in these accounts do not necessarily pass through a clients probate estate, but rather, they pass in accordance with the payable-on-death designation the client made when the client agreed to participate in the plan ii. Nunnenman v. Estate of Grubbs 1. Issue: Whether the language in the will and the note were enough to prove that the settlor changed the beneficiary? Holding: No. 2. General Rule: It is generally held that, where a life insurance policy reserves the manner in which the change may be made, the change must be made in the manner and mode proscribed by the policy, and according to most courts any attempt to make such change by will is ineffectual. 3. Arkansas Law: A change of beneficiary can in fact be accomplished in a will so long as the language of the will is sufficient to identify the insurance policy involved and an intent to change the beneficiary. 4. Reasoning: The trial court could not reasonably find that decedent did everything reasonably possible to change beneficiaries given his failure to employ similar efforts to communicate his intent to do so to the custodian of the IRA. iii. Common Law 1. Banc of America Investment Services, Inc. v. Davis testators will explicitly leaves 25% of his IRA account to each of four relatives, but court awards account to testators girlfriend, who had earlier been named as beneficiary on the banks beneficiary designation form 2. Lincoln Life and Annuity Co. s. Caswell insurance policy passes to contingent beneficiary named on insurance companys beneficiary designation form despite explicit provision in will, executed 15 years later, devising policy proceeds to designated individuals and charities iv. New York approach to insurance policy designations stands in stark contrast to NYs approach to beneficiary designations in bank account trusts, where by statute, an explicit provision in decedents will overrides a beneficiary designation v. Kennedy v. Plan Administrator for DuPont Savings and Investment Plan 1. Issue: Whether the terms of limitation on assignment or alienation invalidated the act of a divorced spouse, the designated beneficiary under her ex-husbands ERISA pension plan, who purported to waive her entitlement by a federal common law waiver embodied in a divorce decree that was not a QDRO?
2. Holding: It did not, and the plan administrator did its statutory ERISA duty by paying the benefits to Liv in conformity with the plan documents. Although Livs waiver was not rendered a nullity by the terms of the statute, the plan administrator properly distributed the SIP benefits to Liv in accordance with the plan documents. vi. Alternatives 1. An alternative is to name the clients estate as the beneficiary a. that alternative has one significant advantage, it assures that the retirement account and the rest of the clients estate will be administered as an integrated whole even if some future lawyer redrafts the clients will without taking account of beneficiary designations 2. The other alternatives are to name individual beneficiaries or to designate a trust as the beneficiary of the plan assets c. Life Insurance i. life insurance is available in two basic forms 1. term insurance which provides a pure death benefit, the policy has no cash value, and the policy premiums reflect the risk of the insureds death during the term 2. whole life insurance the insurance company invests much of the premium to generate a cash surrender value for the insured, and to protect the insured against increases in premiums as the insured grows older ii. life insurance proceeds in some jurisdictions are insulated from claims by the insureds creditors 1. in other jurisdictions the proceeds are insulated from a spouses right of election iii. Lincoln Life and Annuity Company of New York v. Caswell 1. Issue: Whether the insureds specific testamentary disposition of the policy in her will can be deemed to constitute substantial compliance with that policys requirements for effecting a change of beneficiary? 2. Holding: No. Rule/Reasoning: The insured did nothing at all to change the beneficiary over 15 years. It was simple to send the insurer a signed request-aprocedure the insured herself had followed twice before she executed her will. X. PROTECTION OF THE FAMILY a. Introduction to Elective Share i. How the law interferes with cutting out a spouse entirely ii. Most states guarantee a surviving spouse some share of the estate iii. We have community property regime, doesnt require elective share because each spouse is a part owner iv. Elective share statutes, which is what we focus on, expressly gives a share of assets to the surviving spouse of a decedent b. Traditional Elective Share Statutes i. Sullivan v. Burkin (A presently exercisable general power trust subject to elective share) 1. Facts: H makes revocable inter vivos trust so property passes out of probate W entitled to elective share of decedents estate under MA statute but argues trust is invalid so she can get elective share of those assets 2. Rule: Assets of an inter vivos trust created during the marriage by the deceased spouse over which he or she alone had a general power of appointment, exercisable by deed or by will, is in the estate for purposes of the elective share. a. We are saying if you reserve the right to revoke or appoint trust principal for yourself, even if it is valid for other purposes, it is not valid to cut out the spouse b. the trust assets will be included in the estate 3. How could H have disinherited W after rule of this case?
a. should give away all the money or create a revocable trust that didnt reserve a power of appointment b. a client might not want to do that because you are giving up all of your assets ii. Tennessee 1. Need to prove a fraudulent conveyance 2. Sullivan would be hard under this statute since he could be cutting out wife or supporting his kids 3. Warren v. Compton iii. Missouri 1. Have to figure out what it means for a transfer to be in fraud of the marital rights of the surviving spouse c. Modern Elective Share Statutes i. UPC the position is that marriage is a partnership and we want to make sure the spouse is treated as a partner ROADMAP: o 1) determine value of augmented estate (pot of money spouses have right to share) o 2) compute surviving spouses elective share statutory percentage from 2-202 o 3) what dispositions already made for spouse, + spouses own assets, counted against elective share? o 4) if dispositions inadequate to satisfy elective share which dispositions are abated to satisfy elective share? Step 1: Compute the value of the augmented estate (pot of money subject to division) 2-203(a): - 2-204: decedents net probate estate o decedents assets that go through probate minus funeral and administration expenses, homestead allowance, family allowances, and enforceable claims - 2-205: decedents nonprobate transfers to other o 1) property owned by D immediately before death, but passes outside of probate to others i) property that D has presently exercisable general power of appointment include value of appointive property that passed for benefit of someone other than spouse or Ds estate irrevocable or revocable trust NOT CREATED BY D but D has power even if trust provides that if D doesnt exercise power it goes to someone else at death b/c D could have transferred property to himself at any time ii) Ds fractional interest in property held in JOINT TENANCY w/ right of survivorship iii) Ds interest in property or accounts held in POD, TOD, or CO-OWNERSHIP registration w/ right of survivorship iv) LIFE INSURANCE proceeds if D owned policy, or D had presently exercisable general power of appointment over policy/proceeds o 2) property transferred by decedent DURING MARRIAGE i) IRREVOCABLE TRUST that D retained right to possession or income from until death include value of fraction of property that Ds right related to ex if D only had right to income of property include only of principal but if D has right to all income include entire corpus ii) transfer by D where D creates GENERAL POWER OF APPT (can appoint to himself) D CREATES TRUST w/ general power of appointment in himself even if no reservation of right to income general testamentary power of appointment include value of property Ds right relates to o 3) property transferred by decedent during marriage and TWO YEARS before death 7
i) any property that would be included in augmented estate under 2-205(1) or (2) if Ds right hadnt terminated (by terms of governing instrument, or D transferred/relinquished right) ii) transfer of life insurance policy that would be included in augmented estate (2-205(1)(iv)) if D hadnt transferred iii) any other transfer of property only if gift to donee (other than surviving spouse) was for more than $10,000 in either of 2 years preceding death allows D to take advantage of lifetime gifts to avoid tax consequences but if it is more than that, D is doing more than trying to avoid gift tax included in augmented estate UPC 2-208(a) exclude any nonprobate transfers by D to others if D received consideration for transfer, or property transferred w/ written consent of surviving spouse
- 2-206: decedents nonprobate transfers to surviving spouse o 1) Ds fractional interest in property held as JOINT TENANTS w/ right of survivorship o 2) Ds interest in property or accounts held in CO-OWNERSHIP registration w/ rights of survivorship JOINT ACCOUNT w/ right of survivorship o 3) all other property that would be included in augmented estate under 2-205(1) or (2) had it passed to or for benefit of someone other than surviving spouse or decedents benefit all property under 2-205(1) or (2) if it passes to spouse trust not created by D, D had general power of appointment used in favor of W or D LIFE INSURANCE proceeds passed to W or Ds estate Ds right to income in irrevocable trust passed to Ds estate or W D creates trust w/ Ds general power of appt used in favor of W or D o **if spouse gets enough through nonprobate transfers from D, cant disrupt testamentary plan** 2-207: surviving spouses property and non-probate transfers to others o a) augmented estate includes value of: 1) property owned by surviving spouse at Ds death: i) spouses fractional interest in property held in JOINT TENANCY w/ right of survivorship ii) spouses interest in property held in CO-OWNERSHIP registration w/ right of survivorship iii) property passed to spouse by reason of Ds death not including homestead allowance, family allowance, social security payments 2) any property the spouse transferred to others that would be included in 2-205 if spouse were the D o c) value of property included in this section reduced by enforceable claims against surviving spouse
Step 2: Compute the value of the marital property portion of the augmented estate 2-203(b): - for a shorter marriage, the amount the spouse can elect is smaller - for a three year marriage it is only 18% - for a 15 + year marriage it is 100% o a) surviving spouse has right of election to take elective-share amount equal to value of elective share % of augmented estate, determined by length of marriage (AUGMENTED ESTATE) x (ELECTIVE-SHARE PERCENTAGE) o c) Effect of Election on Statutory Benefits if spouse exercises right of election homestead allowance, exempt property and family allowance not charged against elective-share amount in addition to it
Step 3: Compute the elective share amount 2-202(a) Elective Share Amount 50% of marital property portion of augmented estate Step 4: Satisfy the elective share UPC 2-209(b) Unsatisfied Balance of Elective-Share Amount o first use 2-204 [Ds NET PROBATE ESTATE] and 2-205(1), 2-205(2) 2-205(3)(ii) [Ds NONPROBATE TRANSFERS to OTHERS, not including 2-205(i) and (iii)] equitably apportion among recipients of probate estate, and of portion of Ds nonprobate transfers to others in proportion to the value of their interest ex - $400k probate and non-probate transfers, $100k E.S. left unsatisfied. Each transferee takes only of original grant, to surviving spouse UPC 2-209(c) if still unsatisfied balance o remaining portion of 2-205 [Ds nonprobate transfers to others] outright gifts equitably apportion among recipients of remaining portion of Ds nonprobate transfers to others in proportion to their value of the interests 1) 2-209(a)(1): Apply amounts spouse is already entitled to receive: From intestacy distribution, if any; will, nonprobate transfers from the deceased spouse 2) 2-209(a)(2): Apply the marital property portion of surviving spouses assets under 2-207 3) If the combined value of these amounts is greater than the elective share amount it is satisfied ( (unless the surviving spouse is entitled to a supplemental elective share amount under Section 2-202(b)) - if the surviving spouse is entitled to contribution from other beneficiaries of probate assets, etc - there are also other nonprobate ways to satisfy this - 2-202(b) for supplement 4) If the combined value of these amounts is < the elective-share amount . . . the surviving spouse is entitled to contribution from other beneficiaries of -- probate assets, and -- decedents non-probate transfers to others under 2-205(1), (2), and (3)(B). 5) If the elective share amount is still unsatisfied, the surviving spouse is entitled to contribution from beneficiaries of decedents remaining non-probate transfers to others. -- contribution is made proportionately ii. New York UPC vs. NY o NY doesnt have same conception of looking at D and surviving spouses assets together has equivalent of augmented estate but doesnt include any of surviving spouses own assets o NY elective-share % is fixed doesnt change based on length of marriage 1/3 of augmented estate not like UPC gives for long-term marriages ROADMAP: o 1) compute value of Ds net estate o 2) determine ELECTIVE SHARE amount ($50k or 1/3 net estate, whichever greater) o 3) what counts against elective share? o 4) how to satisfy elective share
STEP 1: Compute Value of Decedents NET ESTATE (a)(1) Ds Estate = NET PROBATE ESTATE + TESTAMENTARY SUBSTITUTES (b)(1) o (b)(1) Testamentary Substitutes
A) gifts causa mortis making gift b/c you expect to die, but if it turns out you survive you get gift back not very common B) OUTRIGHT GIFTS of property made within 1 year of Ds death if: o D didnt get full consideration o gift exceeds gift tax exclusion *tries to prevent D from intentionally avoiding elective share C) TOTTEN TRUST bank account in Ds name in trust for another person D) JOINT BANK ACCOUNT w/ right of survivorship (b)(2) amount included in elective share: o proportion of deposited funds that belonged to D surviving spouse has burden of proving Ds contribution if surviving spouse other party to transaction, presumed each contributed E) property held by: i) D and another as JOINT TENANTS or tenants by entirety o (b)(2) amount of value included in elective share: proportion of deposited funds that belonged to D or consideration paid by D for property surviving spouse has burden of proving Ds contribution if surviving spouse other party to transaction, presumed each contributed ii) D and payable on Ds death to someone other than D or Ds estate F) TRUSTS i) trust created by D where D reserves right to income for life (must have right to income until death technically for either irrevocable or revocable, but usually irrevocable) ii) revocable OR irrevocable trust created by D w/ D power to invade principal o include general testamentary power G) RETIREMENT PLAN NOT LIFE INSURANCE provision explicitly providing for life insurance was removed (insurance salesman highly represented in legislature, though bad for business if they couldnt sell life insurance as a way to avoid elective share) o in NY can buy life insurance and have proceeds not counted towards elective share H) PRESENTLY EXERCISABLE GENERAL POWER OF APPT held by D at death, or if D exercised it 1 year before his death
STEP 2: Surviving Spouses ELECTIVE SHARE (a)(2) ELECTIVE SHARE = $50,000 or 1/3 of Ds net estate, whichever is greater STEP 3: SUBTRACTIONS from Elective Share (a)(4) surviving spouse entitled to net elective share = elective share REDUCED BY: o any interest which passes ABSOLUTELY from decedent to spouse by: intestacy testamentary substitute (b)(1) testamentary disposition under Ds will o (A) if surviving spouse elects, treated like she predeceased D so does not get right to income for life must choose b/w elective share or trust interest
ELECTING instead of taking trust interest may upset testamentary scheme: o if D sets up QTIP trust w/ income to W for life (W income for life, principal to daughter at Ws death qualifies for marital deduction) if W elects instead of taking trust income, remainder passes immediately to daughter and ENTIRE TRUST WOULD BE TAXED (instead of passing tax free b/c of marital deduction) (B) not absolute if interest passed is less than Ds entire interest, OR interest in trust created by D interests in trust passed from D to surviving spouse not counted against surviving spouses elective share
STEP 4: Satisfaction of Elective Share (c)(2) unless otherwise expressly provided in will elective share satisfied by ratable contribution by beneficiaries and distributed (by will, intestate succession) d. Waiver of Elective Share Rights i. Geddings v. Geddings 1. There was an attempt to waive an elective share but it was ineffective 2. Although she executed the document, the court claims she did not know enough at the time she executed the documents and waiver is unenforceable if there is a lack of fair disclosure. 3. Waiver: the right of election of a surviving spouse may be waived by a written contract signed by the party waiving after fair disclosure. 4. Fair Disclosure: contemplates that each spouse should be given information, of a general and approximate nature, concerning the net worth of the other. Each party has a duty to consider and evaluate the information received before signing an agreement. 5. Hypo, you represent Mr. Geddings, and Mrs. Geddings is willing to sign, what should you do before she signs the paper? a. Need to disclose what hes worth b. What would happen if he disclosed and something was forgotten 6. Given the opinion in Geddings, could he have put a piece of paper in front of his wife that says I waive in full disclosure 7. Waive right to elect with all assets disclosed to me and not to take more than 2% of what is left a. Geddings court would not agree ii. UPC 2-213. Waiver of Right to Elect and of Other Rights a) surviving spouses right to elect may be waived, wholly or partially, before or after marriage, by written K agreement, or waiver signed by surviving spouse b) surviving spouses waiver is NOT ENFORCEABLE if surviving spouse proves that: 1) waiver was NOT voluntary, OR 2) waiver was UNCONSCIONABLE when executed, and before execution of waiver surviving spouse o i) not provided fair and reasonable disclosure of Ds assets, AND o ii) did not voluntarily and expressly waive right to disclosure beyond disclosure provided, AND o iii) did not have, or reasonably could not have had, an adequate knowledge of property or financial obligations of D c) unconscionability of waiver issue of law for court d) waiver of all rights in prenuptial or divorce/separation agreement is waives right to elective share NOTES:
harder to void waiver than in Geddings - hard to know what fair disclosure is o if threshold too low, would be lots of litigation claiming inadequate disclosure if waiver is voluntary, probably upheld
iii. Conflict of Interest 1. Couple walks into your office and says the wife wants to waive, she will get a reasonable amount in trust. If you were the husbands lawyer, would you prepare the document without doing anything else and have them both sign it? a. should tell the wife to get her own lawyer b. to the extent the wife was not represented by counsel, there is a better chance she can succeed later in upsetting the waiver document and even if she is not successful it can eat up estate assets c. Briggs (Wyoming case) page 199 i. The document was upheld but this debate was at issue ii. Mrs. Briggs and her lawyer recommended he get another lawyer and he says no and consents to anything his wife wants e. Other Protections for the Surviving Spouse i. Homestead Allowance 1. Why? a. To preserve the debtors basic human dignity b. To relieve taxpayers of the obligation to provide for insolvent debtors c. To promote efficiency: items of personal property are likely to be worth more to the debtor than to anyone else and exempting them from creditor execution assures that they stay with the person who values them most 2. UPC 2-402 Homestead Allowance a. A decedents surviving spouse is entitled to a homestead allowance of $22,500. If there is no surviving spouse, each minor child and each dependent child of the decedent is entitled to a homestead allowance amounting to $22,500 divided by the number of minor and dependent children of the decedent. ii. Exempt Property 1. UPC 2-403 Exempt Property a. In addition to the homestead allowance, the decedents surviving spouse is entitled from the estate to a value, not exceeding $15,000 in excess of any security interest therein, in household furniture, automobiles, furnishings, appliances, and personal effects iii. Family Allowance 1. The estate administrator or executor can make payments to the surviving spouse during the period of estate administration 2. UPC 2-404 Family Allowance a. Allows the money for one year b. The allowance is not charged against any benefit or share passing to the surviving spouse or children by the will of the decedent, unless otherwise provided f. Protection Against Inadvertent Disinheritance: The Problem of the Pre-Marital Will i. Prestie v. Prestie statutory presumption that marriage revokes will 1. Held marriage revoked will W gets intestate share 2. marriage doesnt revoke surviving spouse gets elective share a. this is view taken by MOST STATES
3. Facts: Husband has executed a will and an irrevocable trust instrument. The will gives everything to the trust and the trust gives various dispositions. After it is executed the decedent marries somebody he has already married and divorced from 4. in Nevada there is a presumption that a will is revoked as to the spouse unless there is a contract, or intention in the will or the spouse is provided for 5. Presumption is you would want to provide for your spouse and if you wrote a will before you were married you were not thinking about the spouse so we treat it as a revocation of law 6. in this case, the sons argument is there is a marriage that is after the execution of the will, but he is providing for the spouse in the trust 7. If the husband had included the provisions in the will that he did in the trust, revocation probably would not have stood a. The will would be making a provision for the wife ii. UPC 2-301. Entitlement of Spouse; Premarital Will 1. assumes will reflects testators intent to benefit his issue from previous relationships, but that intent to benefit others was negated upon remarriage a. surviving spouse can take intestate share of assets EXCEPT for devises made to testators issue before marriage i. if testator leaves ALL property to his issue surviving spouse gets nothing ii. if testator leaves property to people other than issue spouse gets intestate share of assets that do not go to testators issue iii. in Prestie will didnt name particular individual, directed assets to a trust might have same result under UPC as NV statute giving wife intestate share 2. Hypo: decedent lives a will leaving the property to his 2 children and then gets married. What rights does the spouse have? The decedent has an estate of $1million. - 2-301 does not revoke the will if the testator gets married - The surviving spouse is entitled to take nothing - This supplements the Elective Share - We limit the surviving spouse because he intends to leave everything to his children Change hypo: It is now all to his sister and then he gets married. What happens? - now the decedent would be entitled to her intestate share of the estate - it would depend on what relatives the decedent has - wife would be entitled to first 100,000 + half of the remaining estate - sometimes this will give the surviving spouse more or less money g. Protection of Children: Pretermitted Child Statutes i. Generally: Most states, however, protect children against unintentional disinheritance. The statutesoften called pretermitted child statutesfall into two broad categories: 1. Those which protect only children born after execution of testators will 2. Those which protect all children who have been unintentionally disinherited ii. A decedent can expressly disinherit their children, not required to provide for children like you are a spouse 1. how do we deal with unintentional disinheritance? iii. Estate of Glomset 1. The will mentioned his son but not his daughter and the court held the daughter is allowed to take and the son is not 2. The whole estate was supposed to go to the wife and the estate went to the son if their was a common disaster 3. Why can the daughter share in the estate and not the son? a. The will did not omit John, it omitted the daughter 7
b. The Oklahoma Statute said if a child is left out unintentionally they can take 4. this statute might be forcing people to say something about their children 5. people could suggest in the will that they intentionally are leaving their children out iv. UPC 2-302 Omitted Chidren 1. Similar to Oklahoma 2. Only deals with children born or adopted after the will 3. How would Glomsett have been decided under this? a. Glomsett would not apply, these children are already alive b. UPC and NY deal with the problem where the decedent does not revise his will after children are born after execution c. If Glomsett arose in NY or UPC, the daughter would be out of luck and could not make a claim Problem 1 on page 220 - T is survived by his Wife, and daughters A, B and C. C was born after execution of the will and it provides $20,000 for A, $40,000 for B and the remainder 240,000 to W - Need to look to 2-302(a)(2)(i) o We know A and B are provided for o Limited to $60,000 (a)(2)(i) o Under (a)(2)(ii) take 60,000 and divide by 3 and Cs share is $20,000 o The $20,000 comes from abating from the other children (a)(2)(iv) Abates ratably, so since 1/3 went to C, we take 1/3 from A and 1/3 from B So A ends up with 13,333 and B ends up with 26, 667 We want to leave C with the money that was designated for children v. Heir Wars 1. Hypo: Larry Hillblom walks into your office in Oklahoma and doesnt want to leave anything to his children? a. would say dont want to leave to any children or potential children b. might want to say I may have children or if I have any children, I intentionally make no provision for them c. the Oklahoma statute is worried about the Glomset possibly and it could be children that the family thinks is dead XI. ESTATE AND TRUST ADMINISTRATION a. Estate Administration i. Do We Need to Administer the Estate? 1. personal representatives wind up a decedents affairs and trustees administer ongoing trusts 2. personal representatives are liquidators and trustees manage and dispense portfolios 3. Reasons for probate a. probate provides proof of ownership of real property to be able to sell b. probate protects beneficiaries against adverse claims to the estate assets-both by other potential beneficiaries ad by creditors c. collect assets from banks d. resolve disputes on who the beneficiaries are 4. If it was stocks and there was a broker, a broker would not make a transfer bc they are afraid someone might make a claim 5. If the decedent owned real property and you were a prospective purchaser, would need assurance the daughter acquired title 6. When you have title assets probate becomes necessary in order to make sure prospective purchasers and holders of the asset feel insulated from potential claims
Say the will names her as the executor, what does she need to get assets from a brokerage account? - she needs letter of testamentary, if the decedent died intestate she will want letters of administration and they empower her to act for the estate Suppose it turns out in addition to these assets the father had claims outstanding against him, would the administration of the estate be helpful even if it turned out there werent titled assets? - could be time barred, there is a short statute of limitations on claims against the estate but it is not triggered if you dont administer the estate ii. Where do we Administer the Estate Domiciliary and Ancillary Jurisdiction Over Probate 1. the executor might seek ancillary administration in a county in one state in which real property is located 2. however, some states do not allow executors if they are not residents of the state and relatives of the decedent to act as executors 3. two separate proceedings might need to be done iii. How the Executor Probates the Will 1. Probate in common form is an informal process in which the court admits the will to probate, tentatively, as soon as the proponent offers the will and the court determines that the proponents petition meets basic procedural requisites 2. Solemn form is structured more like litigation, the proponent petitions for admission of the will to probate and serve as a copy of her petition on the persons who are financially better off if the will is denied probate, let us say decedents intestate successors. The heirs are then required to show cause why the will should not be admitted to probate. If they dont successfully oppose the probate the will is admitted iv. Ascertaining and Maximizing the Size of the Estate: Collecting Assets and Disposing of Creditor Claims 1. Collecting Assets a. 1) The personal representative has power to sue on behalf of the estate. b. 2) The PR has power to act on behalf of the estate in settling or compromising any claims. c. 3) The PR can seek advance court approval for any prospective settlement. d. 4) The PR can approach the estate beneficiaries, and ask them to approve any compromise of settlement (by waiving any claims they might have against the PR for breach of fiduciary duty arising out of settlement of the claim) 2. Creditors Claims a. Generally the PR has the same power to settle claims against the estate that the representative has for settling claims by the estate b. Pre-Death Creditors i. if a PR distributes estate assets to beneficiaries without satisfying creditor claims, the executor remains on the hook to those creditors ii. the prospect of personal liability creates just the right incentives with respect to well-established obligations of the decedent: the rent bill, bills for medical or nursing care, and for utilities 1. these bills arrive in the mail, and the PR will promptly pay them (or compromise them, if there are disputed issues) iii. Non-Claim Statutes 1. Short statutes, short statute of limitations on creditor claims (date from decedents death) 2. Another form is from when the PR gives notice, creditors have as little as 60 days to make a claim iv. UPC 3-801. Notice to Creditors 8
v. UPC 3-803. Limitations on Presentation of Claims vi. Tulsa Professional 1. Rule: The executor needs to make reasonably diligent efforts to uncover the identities of creditors. For creditors who are not reasonably ascertainable publication notice can suffice. c. Post-Death Creditors i. Vance v. Estate of Myers 1. Issue: Whether the trustee or the estate is liable? 2. Holding/Rule: Yes, an administrator, executor, or trustee may be sued in his representative capacity and collection may be had from the trust assets for a tort committed in the course of administration, if it is determined by the court that the tort was a common incident of the kind of business activity in which the administrator, executor, or trustee was properly engaged on behalf of the estate. It follows that appellants action against appelle was proper. 3. Common Law a. suppose we have an innocent bystander injured in a bar room brawl, under the common law rule, if they wanted to bring an action, who could they bring it against i. only against the executor personally, but could get reimbursed by the estate ii. UPC 3-808(b) provides that a personal representative is individually liable for obligations arising from ownership or control of the estate or for torts committed in the course of administration of the estate only if he is personally at fault iii. 3-808(c) says that claims on obligations arising from ownership or control of the estate or on trots committed in the course of estate administration may be asserted against the estate by proceeding against the PR in his fiduciary capacity, whether or not the PR is individually liable therefore 3. Contract Claims a. under the traditional approach, a fiduciary is personally liable on her contracts, even if she signs those contracts in her fiduciary capacity b. UPC 3-808(a) rejects the traditional approach, providing instead that unless otherwise provided in the contract, a PR is not individually liable on a contract properly entered into in his fiduciary capacity in the course of administration of the estate unless he fails to reveal his representative capacity and identity the estate in the contract 4. Fiduciary Management Powers a. Estate of Kurkowski the PA SC held decedents wife liable for running the business into the ground, holding that the administrator had breached her common la duty to liquidate the estate for purposes of distribution to decedents heirs (who included children by a prior marriage) b. the PR should seek judicial approval for the continuing operation of the business v. Compensating the Fiduciary (and the Fiduciarys Lawyer) 1. How Should PRs Be Compensated a. UPC 3-701 and CA Statutes i. CA has a statutory way to determine this, CA 10800 8
1. has it done by percentage 2. higher percentage of the first amount so that smaller estates provide incentive 3. always want the executor to have something at stake 4. executor might look for more assets 5. considers how complicated the job will be and considers the total assets ii. UPC 3-721 1. the PR decides how much they should get paid 2. the court has to approve it and it has to be reasonable 3. the beneficiaries can show up to object, but if they dont, the court doesnt usually have any documents as to why that compensation is excessive 4. the court might look at something like the CA statute 2. Attorneys Fees a. How do you compensate the lawyer for the estate? i. the executors, the PR could set it ii. should we have a statutory schedule iii. why not just let the PR choose? 1. The executor might not have knowledge, might not be able to go price shopping 2. The PR might have incentives and want to get future appointments, there is potential for conflicts b. the CA statute provides for statutory compensation with some exceptions i. another is the PR determines it subject to judicial review ii. NY adopted the statutory regime for fiduciaries but not for lawyers c. Estate of Stevenson i. Issue: Whether Stevensons fee was fair? ii. Holding: No, and it was reduced to $200,000. iii. Rule: Under the Probate Code, an attorney for the administrator of an estate may be paid for extraordinary services under a contingency fee agreement if the trial court approves the agreement after a noticed hearing. Why is this not allowed if the CA court allows contingent fee agreements? o The creditors are claiming the lawyers told them to be realistic so there is something in the estate for everyone and people repaid money to the estate so that the creditors would get paid o If the creditors knew the lawyer was getting paid double his rate what they paid back into the state would only be lawyers fees o This isnt a contingent fee because agreement because the arrangement had potential to eat up the entire estate o It is not clear the creditors would benefit until the lawyers fee was paid o Under CA the fee would have been very low so why does the court allow them 200,000? If the lawyers were not going to be paid well they wouldnt have done any work The court is awarding an amount that gives creditors a percentage of the money brought in but the lawyers have done lots of work iv. Double Dipping 1. it is acceptable in some states to split the difference and reduce the compensation so that the lawyer must take less than separate executors and lawyers would get b. Duty of Loyalty
the duty of loyalty operates to ensure that the trustee acts in the interests of trust beneficiaries rather than in self-interest the duty of loyalty requires the fiduciary to act only for the benefit of the trust beneficiaries the fiduciary may not deal with the property so as to personally benefit directly or indirectly an important element of the duty of loyalty is a flat prohibition against any transactions involving self-dealing o proof of good faith or lack of personal profit on the part of the fiduciary is immaterial o it should be apparent that a sale to the fiduciarys spouse or to a 3 rd party who conveys back to the fiduciary stands on no better footing i. UTC 802 Duty of Loyalty no further inquiry rule 1. 802(b) are ways the trustee can gain advance approval to self-deal a. Courts are against approval by the beneficiaries b. The trust settlor can authorize self-dealing 2. 802(c): transactions between the trustee and related parties ii. Matter of Kinzler 1. Rule: The general rule is that, where legal services have been rendered for the benefit of the estate as a whole, resulting in the enlargement of all the shares of all the estate beneficiaries, reasonable compensation should be granted from the funds of the estate. A person standing in the relation of a fiduciary capacity, cannot deal with or purchase the property, in reference he holds that relation. 2. Absolute prohibition on self-dealing no further inquiry rule a. Voidable at the behest of any beneficiary iii. Matter of Estate of Rothko The problems were: o He sold them to a specific gallery that he had an interest in, he is on both sides of the transaction (selfdealing problems) o There is evidence the commission the gallery was going to get was more than Rothko had negotiated what should Reis have done? o He could have went to another gallery o He could have resigned as executor Hypo: Suppose Reis sold the paintings to Marlborough at the same commission Rothko had negotiated. Would the estate have a claim against Reis? o It would be tough to prove damages o The remedy would be removal o Or undoing the transaction o There wouldnt be money damages available Liability for Stamos o He sells through a gallery and he might be doing this for a favor for himself o Suppose Stamos had not dealt with Marlborough at all, couldnt the estate beneficiaries make a claim Stamos is trying to act in his best interest o He could resign o He could have got court approval or approval from the beneficiaries and you can insulate yourself from duty of loyalty claims liability for Levine o he blinded went along with what Reis and Stamos were doing o if you are a co-trustee cant just say other people did it not me o he is getting commissions as a trustee, he is obligated to administer the trust o cannot just stand by and let breaches of fiduciary duty occur o can be liable for duty of care all 3 have breached their fiduciary duties and should have taken different steps
Damages for the case - say a painting sells for $100,000 and in this case they paid a 45% commission, so got 55,000 but should have got 90,000 so they cost the estate $35,000 - if they did breach the duty of loyalty and it only cost them the amount of the breach, why should they get more? o The other problem was not only was it bad judgment, but there was an injunction enforced and they still sold the paintings o You are depressing the price o The court wants to issue a large damage award to deter this type of conduct o When we talk about breach of loyalty we have to look beyond selling to themselves or to a wife o There are other ways to exercise on self-interest - Levine could have blocked the sale or had a noisy withdrawal - Now you need a majority of trustees so his objection wouldnt do much c. The Duty of Care Fiduciary Duty of Care manage estate in best interest of beneficiaries, obtain highest price trustee has duty to give beneficiaries accounting periodically o not requires to tell beneficiaries every time he makes a payment or sells stock from trust stock have determined value based on market, no need to worry about beneficiary approval land is different - should be appraised to find out maximum value that could be obtained reason Allard required more than periodic notice to Bs by accounting must inform Bs when duty to get highest price may be affected by failure to inform Bs o Allard v. Pacific National Bank WA 1983 breach of fiduciary duties of care duty to inform beneficiaries of all material facts in connection w/ nonroutine transaction which significantly affect trust estate and interests of beneficiaries PRIOR to transaction if beneficiaries were informed of sale, could have offered higher price and obtained property, or get other bidder to raise price if informing Bs could have impact on sale price, must inform Bs (different than stocks which sell at fixed price on market) breach duty to obtain highest price for property made no effort to see what property was worth must either: o obtain independent appraisal, OR o test market to determine what willing buyer would pay PORTFOLIO MANAGMENT fiduciary duty to make prudent investments o traditional rule trustee obligated to invest all of trust assets in secured obligations (i.e. corporate bonds, mortgages) not much increase in value of assets, but limited risk to beneficiaries problem INFLATION just maintaining trust corpus leaves Bs worse off since while they get same dollar amount, not receiving same value (dollar worth less) changed rule allowed trustees to invest in common stocks (in addition to bonds) to try and combat inflation while keeping property relatively safe o Delegation - the trend has been for trustees to delegate if they dont have expertise but the trustee has to monitor UTC 807 authorizes a trustee to delegate the responsibilities of trusteeship whenever a prudent person of comparable skill would delegate those responsibilities Implications of a rule that allows a trustee to delegate: if the trustee invests in high risk stocks and there is a crash in the market, the beneficiaries have a claim against the trustee suppose now the trustee delegates investment duties to an investment advisor and we have a rule that allows the trustee to delegate
o o
could depend how much the trustee monitors say the trustee asks and the advisor says they should yield a high return and then the trustee is silent If we are allowing them to delegate what else could they do? Who bears the loss then? The beneficiaries might have a claim against the investment advisor prudent investor rule focused on individual investment would a prudent investor make same investment? modern portfolio theory any investment can be prudent as long as diversify portfolio Restatement requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust must adequately diversify portfolio to protect against risk that any one particular investment may turn sour, so there are other investments to limit risk that wont turn sour only put small percentage in risky investment if investment fails breach of fiduciary duty so trustee should make conservative investment strategies (even under MPT) SETTLOR WHO FUNDS TRUST WITH IMPRUDENT INVESTMENT (Inception Assets) trustee who succeeds imprudent portfolio not free from liability should sell most of that asset and diversify investment if will gain profit immediately o need some reason for failure to diversify immediately possible reasons: real property (ex family farm) sale of which would harm Bs adverse tax consequences may be consequences if sell all assets immediately Estate of Janes NY 1997 breach of duty for failure to immediately diversify o trustee liable for holding onto Kodak stock too long should have sold when started to drop o damages: difference b/w price stocks sold for and what they should have sold for (at time court finds prudent investor would have sold stock) o we look at the value of the stock when the trustee makes the decision prudent investor rule risky investment if investment pans out benefit belongs to trust (and Bs) trustee liable for breach of fiduciary duty if investment fails responsible for loss o trustee crazy to make this investment under prudent investor rule modern portfolio theory encourages diversification of assets can invest percentage of assets in a risky investment but dont look at investment in isolation, look at it in total w/ rest of portfolio but as trustees lawyer since lawyer will bear loss if investment goes sour, advise trustee to be conservative about investments CONFLICTING DUTIES TO INCOME AND REMAINDER BENEFICIARIES trustee could be liable for breach of duty if investment benefits either income or remainder Bs at expense of other response to problem allow trustee to make best investments w/o worrying about who benefits more, then trustee can allocate to income Bs o can adjust income payments so if corpus increases, some of benefit goes to income B need authorization by statute or from settlor o o
Insulating Trustee From Liability 8
EXCULPATORY CLAUSES - settlor/testator attempts to limit fiduciary liability o courts want to give effect to testators intent but cant completely disregard fiduciary duty no liability for negligence in making investment decisions ct likely to enforce applies for portfolio management trustee shall not be liable for selling assets to himself personally likely to enforce so long as settlor knew of provision executor or trustee shall not be liable for any breach of fiduciary duty ct less likely to enforce beneficiary wouldnt be able to do anything to stop trustee from taking all trust $ ct thinks no settlor would really want to give outright gift cant make exculpatory clause so broad that court will think no settlor would exculpate in all situations o lawyer who drafts exculpatory clause in document that names lawyer as trustee less likely to be upheld (Marsman) consent from beneficiaries o can get consent from Bs to make particular investment, or selling particular asset shield trustee from liability for breach of fiduciary duty

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c. Synopsis of Rule of Law: A joint tenancy account presumptively creates a

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