Wills and Trusts -- Pepperdine Law -- Mendoza _2_

WILLS AND TRUSTS MENDOZA FALL 2007 CHAPTER 1: TRANSFER OF THE DECEDENT’S ESTATE1 1. Probate and NonProbate Property a. b. Probate – property that passes under the decedent‘s will or by intestacy Nonprobate (will substitutes) – property transferred by instrument other than will2 i. Nonprobate property includes the following: (1) Joint tenancy properties (real and personal) – right of survivorship (2) Life insurance – passes to beneficiary according to the contract (3) Contracts with Payable-on-death (POD) Provisions – contracts with banks, employers, or other persons to distribute property held under the contract at the decedent‘s death (i.e. pension plans, IRAs, Keoghs, 401K‘s) (4) Interests in Trust – property distributed to beneficiaries by the trustee Distribution Procedures for Probate and Nonprobate Assets: i. Nonprobate Assets (1) No court Proceeding (2) Assets are distributed in accordance with the terms of the contract or trust or deed ii. Probate Assets (1) May require a court proceeding to probate the will or find intestacy (2) Assets are distributed under a will or to statutory intestate successor c. 2. Administration of Probate Estates a. Personal Representative – oversees the winding up of a decedent‘s affairs3 i. Two Kinds (1) Executor / Executrix – named person in will who is to execute the will and administer the probate estate (2) Administrator / Administratrix – person in charge of administering the estate, but not named by decedent because there is no will or will does not name personal rep (a) administrator is chosen from the following statutory list: (i) surviving spouse, children, parents, siblings, creditors ii. Principal duties include: (1) Inventory / collect assets of decedent (2) Manage assets / administers the estate Why someone should have a will: 1) Designate who takes your property after you die (otherwise, it is the legislature that is deciding who is to take the property) 2) Statute is trying to protect family and the likely course of succession in a family 3)You can choose your personal representative if you have a will 4) You can designate the guardian of the minor children 5) Waive a bond and save probate fees 6) Tax savings 2 Where there are P.O.D. designations the following are Nonprobate Assets –> savings accounts, joint checking accounts, employer‘s pension plan, gov‘t bonds, ordinary life insurance policy 3 Probate Court appoints, control of, and holds accountable personal reps 1 (3) iii. Receive and pay the claims of creditors and tax collectors (1041) (a) judgement creditors (lawsuits against decedent) (b) government (estate and gift tax form 706 must be prepared and returned) (4) Clear any titles to cars, real estate, or other assets (5) Distribute the remaining assets to those entitled Fiduciary Bond – a surety bond required of a trustee, administrator, or executor to ensure the proper performance of duties (1) Majority – bond requirement may be waived and routinely is waived 3. Introductory Terminology a. Real Property i. Testate (1) A testator devises real property to devisees ii. Intestate (1) Real property descends to heirs Personal Property i. Testate (1) A testator bequeaths personal property to legatees ii. Intestate (1) Personal property is distributed to next-of-kin Statute of Descent and Distribution – statute governing intestacy – names the same persons intestate successors to both real and personal property i. Heirs – those persons designated by applicable statute to take a decedent‘s intestate property, both real and personal. (1) Heir Apparent – no present interest, there is an expectancy ii. Next-of-Kin – same as heirs b. c. 4. Summary of Probate Procedure a. Opening of Probate – state law oriented i. Primary / Domiciliary Jurisdiction – jurisdiction where the decedent was domiciled at the time of death (county probate court) ii. Ancillary Administration – required for real property located in another jurisdiction (other state) to prove title in the situs state‘s recording system and to subject those assets to probate for the protection of local creditors iii. Statutes detail the issuance of Letters Testamentary (executors) and Letters of Administration (administrators) authorizing the person to act on behalf of the estate. Supervising the representative‘s actions i. Majority – actions of the personal representative are supervised by the court ii. Minority – personal representative handles administration of the estate informally without court order Closing the estate i. Judicial approval of the personal representative‘s action is required to relieve the representative from liability. Majority of states do not permit ex parte proceedings, but require prior notice to b. c. d. e. f. g. interested parties i. Petition for letters must be accompanied by an affidavit stating that the statutory notice requirements have been met Uniform Probate Code (UPC) provides for both ex parte probate (i.e. informal probate) and notice probate (i.e. formal probate) i. Person asking for letters can choose formal or informal probate ii. UPC 3-301 sets forth requirements for informal probate iii. UPC 3-705 – within 30 days after appointment, the personal representative has the duty of mailing notice to every interested party iv. Formal probate is a judicial determination after notice to interested parties under UPC (any interested party can demand formal probate) v. UPC 3-108 – Statute of Limitations – three years from date of death (1) Presumption of intestacy is conclusive Time for Contest – dependent upon a statute in the particular jurisdiction Nonclaim Statutes – claims must be filed within statutorily prescribed period, or creditors are barred from filing i. Creditors are usually notified of the requirement to file claims only by publication in a newspaper after probate proceedings are opened. (1) Supreme Court has held that Due Process Clause requires that known or reasonably ascertainable creditors receive actual notice before they are barred CHAPTER 2: INTESTACY: DEFAULT ESTATE PLAN 1. The Basic Intestacy Scheme a. Intestacy i. Intestate – dying without a valid will (1) Intestacy is the default rule ii. Partial Intestacy – occurs when property the decedent owns is not capture by the will and thus does not pass through the will4 iii. UPC §2-101 Intestate Estate (1) Any part of a decedent‘ estate not effectively disposed of by will passes by intestate succession to the decedent‘s heirs as prescribed in this Code, except as modified by the decedent‘s will (2) (minority) A decedent by will may expressly exclude or limit the right of an individual or class to succeed to property of the decedent passing by intestate succession. Individual is treated as having disclaimed his or her interest. Share of the Surviving Spouse i. UPC §2-102 Share of Spouse 5 6 b. Ineffective disposition of the property results in an intestate estate where everything that does not pass through the will passes through the intestacy statute 5 e.g. – Howard has two children by Wendy. Wendy has two children by Howard and a child by a previous marriage. If Howard dies before Wendy intestate, what will be Wendy‘s share under UPC 2-102? —> first $150,000, plus ½ the balance of the estate. What if Wendy dies intestate before Howard, what is Howard‘s share? —> first $100,000, plus ½ the balance of the estate. What if Howrard dies intestate and Wendy does not have a child by a previous marriage? —> Wendy takes the entire estate 6 If Property does not fall under 2-201 it falls to 2-103 4 c. The intestate share of a decedent‘s surviving spouse is: (a) the entire intestate estate7 if: (i) no descendant or parent of the decedent survives the decedent; or (ii) all of the decedent‘s surviving descendants are also descendants of the surviving spouse and there is no other descendant of the surviving spouse who survives the decedent: (b) the first $200,000, plus 3/4's of any balance of the intestate estate, if no descendant of the decedent survives the decedent, but a parent of the decedent survives the decedent (c) the first $150,000, plus ½ of any balance of the intestate estate, if all the decedent‘s surviving descendants are also descendants of the surviving spouse and the surviving spouse has one or more surviving descendants who are not descendants of the decedent (d) the first $100,000, plus ½ of any balance of the intestate estate, if one or more of the decedent‘s surviving descendants are not descendants of the surviving spouse ii. Domestic Partners (1) Defense of Marriage Act – restricts extension of spousal rights to samesex couples under federal programs and provides that states can not be forced to recognize same-sex marriage (a) 35 states enacted similar statutes for state programs (b) 3 banned same-sex marriages (c) 3 enacted legislation granting same-sex couples inheritance and other spousal-type rights: (i) Hawaii – reciprocal beneficiaries (ii) Vermont – civil unions (iii) California – domestic partners 1) gives full rights to a spousal intestate or elective share a) applies to: i) same-sex partners of any age and ii) opposite-sex couples in which at least one of the partners is 62 or older Shares of Heirs Other than Surviving Spouses i. UPC §2-103 Share of Heirs Other than Surviving Spouse (1) Any part of the intestate estate not passing to the decedent‘s surviving spouse under Section 2-102, or the entire estate if there is no surviving spouse, passes in the following order to the individuals designated below who survive the decedent: (a) To decedent‘s descendants by representation (b) If there is no surviving descendant, to the decedent‘s parents (1) 7 The virtue of this ―entire estate‖ provision is that it avoid guardianship of the minor children (c) (d) equally if both survive, or to the surviving parent (half states) If there is no surviving descendant or parent, to the descendants of the decedent’s parents or either of them by representation; If there is no surviving descendant, parent, or descendant of a parent, but the decedent is survived by one or more grandparents or descendants of grandparents, half of the estate passes to the decedent‘s paternal grandparents equally if both survive, or to the surviving paternal grandparent, or to the descendants of the decedent’s paternal grandparents or either of them if both are deceased, the descendants taking by representation; and the other half passes to the decedent‘ maternal relatives in the same manner; but if there is no surviving grandparent or descendant of a grandparent on either the paternal or the maternal side, the entire estate passes to the decedent‘s relatives on the other side in the same manner as the half.8 b. Shares of Descendants i. Rule (all states) – after spouse‘s share is set aside, children and issue9 of deceased children take the remainder of the property to the exclusion of everyone else10 (1) Representation (all states) – when one of several children has died before the decedent, leaving descendants, that child‘s descendants represent the dead child and divide the child‘s share among themselves (see charts on pgs. 73 & 74) ii. Three Basic Systems of Distribution: (1) English Per Stirpes (England and 14 states) (a) property is divided into as many shares as there are living children of the designated person and deceased children who have descendants living (what if no descendants living?). The children of each descendant represent their deceased parent and are moved into their parent‘s position beginning at the first generation below the designated person. (2) Modern Per Stirpes (½ states including CA) (a) If children of decedent are alive, distribution is the same as English per stirpes (b) If no children of decedent are alive, the estate is divided equally (per capita) at the first generation in which there are living takers and provides for representation of any deceased descendant on that level by his or her descendants (3) Per Capita at each Generation (UPC) E.g. – Decedent has a first cousin on the mother‘s side and two first cousin‘s on the father‘s side. Under the UPC, the maternal cousin would get a one-half share and the paternals cousins would split a half. Under California‘s rule, 6402, the cousin‘s would get a per-capita share (generational share under modern per stirpes) 9 Descendants 10 Sons-in-law and daughters-in-law are excluded as intestate successors. Property will escheat to the state before it passes to sons/daughters-in-law 8 c. Initial division of shares is made at the level where one or more descendants are alive, but the shares of deceased persons on that level are treated as one Hotchpot and are dropped down and divided equally among the representatives on the next generational level (see charts on pgs. 75,76 & 77). iii. Negative Disinheritance – an express statement in one‘s will disinheriting a child (1) American inheritance law says that disinheritance is not possible by a declaration in a will without giving the property to someone else (a) UPC §2-101(b) – authorizes a negative will which can bar an heir and treat them as if disclaimed in their intestate share (see §2-101 above) Share of Ancestors and Collaterals i. Terminology: (1) Collateral Kindred – all persons related by blood to the decedent but who are not descendants or ancestors (a) First-line Collaterals – descendants of the decedent‘s parents, other than the decedent and the decedent‘s issue (b) Second-line Collaterals – descendants of the decedent‘s grandparents, other than decedent‘s parents and their issue (2) Laughing Heirs – persons so distantly related to the decedent as to suffer no sense of bereavement, laughing all the way to the bank ii. Rule (Half of states)(UPC) – When there are no descendants, after deducing the spouse‘s share, the decedent‘s parents take. (1) Rule (all states) – If decedent is not survived by a spouse, descendant, or parent, intestate property passes to brothers and sisters and their descendants. If there are no first-line collaterals, there are two schemes used to determine takers11: (a) Parentelic – intestate estate passes to grandparents and their descendants, and if no grandparents to great-grandparents (b) Degree-of-Relationship – intestate estate passes to the closest of kin, counting degrees of kinship (2) UPC §2-103 – does not permit inheritance by intestate succession beyond grandparents and their descendants (3) California – probate code extends intestate succession to stepchildren, mothers-in-law, fathers-in-law, brothers-in-law, and sisters-in-law – but not to sons-in-law or daughters-in-law (4) Half-Bloods (a) Majority – treat half-bloods the same as a relative of whole blood (UPC §2-107) (b) Minority – half blood given half share (c) Minority – half blood takes only when there are no wholeblood relatives of the same degree (d) Minority – half bloods don‘t take at all Share if No Takers (a) d. 11 (see Table of Consanguinity on pg. 79) i. e. §2-105. No Taker [escheat] (1) If there is no taker under the provisions of this Article, the intestate estate passes to the state. Simultaneous Death i. Rule – A beneficiary must survive the decedent to succeed to the property of the decedent.12 ii. Uniform Simultaneous Death Act (old rule) (1) if there is no sufficient evidence of the order of deaths, the beneficiary is deemed to have predeceased the donor. (a) ‗Survivorship‘ must be shown by a preponderance of the evidence13 14 iii. UPC §§2-104 and 2-702 / USDA (modern rule) (1) an heir, devisee, or life insurance beneficiary who fails to survive by 120 hours (5 days) is deemed to have predeceased the decedent (a) ‗Survivorship‘ must be shown by clear and convincing evidence15 (2) Exception: (a) One-half of the property is distributed as if A survived and one-half as if B survived if property is held in: (i) Joint tenancy, (ii) Tenancy by the entirety, or as (iii) Community Property TRANSFERS TO CHILDREN 1. Meaning of Children a. Adopted Children – two ways for an individual to be adopted16 i. Statutory Adoption (1) Adopted Child (a) Transplantation Theory of Adoption – a child is severed from the prior family tree and right to share from a paternal parent and bloodline is taken away.17 It is a ―condition precedent‖ that the beneficiary survive the decedent 12 13 Janus v. Tarasweicz – A husband and wife were poisoned by Tylenol. Both were rushed to the hospital and both later died. The husband had an insurance policy. Insurance policies, as contracts, are nonprobate assets that pass to beneficiaries by the terms of the contract. The wife was the primary beneficiary under the contract and the husband‘s mom was the secondary beneficiary. The insurance company determined the husband died first. Thus the proceeds of the insurance contract passed under the terms of the contract to the wife, who died very shortly after her husband. The proceeds thus turned to cash in the wife‘s probate estate. Since she did not have a will, they passed under the intestacy statute to her mother. The husband‘s mother sued and the court determined there was sufficient evidence ( a preponderance of the evidence indicated the husband died first) to believe that the proceeds should have passed to the wife. 14 Simultaneous death problems occur more in intestacy because well-drafted instruments typically require a beneficiary to survive the decedent by 30 or 60 days. A provision may be inserted into the will that defines ‗survivorship‘ in a quantitative amount – i.e. ―Survivorship means [x] days.‖ It is smart to include such provisions because even though the UPC and USDA provide for a 120 survivorship period, a beneficiary may lack higher brain function, but their family insists their hear and lung functions are fine. 15 This rule applies even where there are disparate disasters at different points in time. The beneficiary must survive the decedent by 120 hrs. 16 Adoption is not revocable like a marriage (see Doris Duke) 17 Hall v. Vallandingham – Vallandingham passed away leaving his wife and four children. His wife remarried to one Killgore. Kilgore adopted the Vallandingham‘s four children as his. Earl‘s brother died unmarried and childless. His sole heirs were his brothers and sisters and their descendants that would take by representation. The four children claimed they represented their father and could take under their uncle‘s will. –> The court held that when Kilgore adopted the four children, their ability to inherit from their natural father his collateral or lineal relatives. The law ii. (i) removes the right to Dual Inheritance UPC §2-114 Parent and Child Relationship (minority) (i) An individual is the Child of his [or her] natural parents, regardless of their marital status. (ii) An adopted individual is the child of his or her adopting parent or parents and not of his or her natural parents, but adoption of a child by the spouse of either natural parent has no effect on (I) the relationship between the child and that natural parent or (ii) the right of the child or a descendant or the child to inherit from the other natural parent (iii) Inheritance from or through a child by either natural parent or his or her kindred is precluded unless that natural parent has openly treated the child as his or hers and has not refused to support the child (c) (Majority) Adopted children are presumptively included in gifts by donor to the ―children‖ ―issue‖ ―descendants‖ and ―heirs,‖ ―heirs at law‖ (2) Adopted Adult (a) (majority) An adult person, married or unmarried, may adopt any other person, minor or adult (i) (S/A) Whether adopted adults are included in gifts to classes such as ―children,‖ ―issue,‖ or ―descendants‖ (b) (NY minority) Adoption of an adult lover is impermissible (i) Sexual relationship is incompatible with parent-child relationship (3) Adopted Spouse (a) (KY majority) the practice of adopting a spouse is an act of subterfuge that thwarts the intent of the testator18 Equitable Adoption19 (1) Rule: Adopted child has a right to take upon intestacy if: (a) Agreement (oral or written) between natural parents or guardian and adoptive parents to transfer custody of the child20 (b) Natural parents fully perform by giving up custody of the child (c) Child fully performs by moving in and living with the parents (d) The adoptive parents partially perform by taking the child in and raising the child as their own (fail to complete paperwork (b) expressly disallow dual inheritance. 18 Minary v. Citizen’s Fidelity Bank & Trust – Adoption of an adult for the purpose of bringing that person under the provision of a preexisting testamentary instrument when he clearly was not intended to be so covered should not be permitted. The court distinguished Bedinger where the adopted wife was allowed to inherit because the will directed the estate to be paid to the ―heirs at law of Robert‖ thus the testamentary intent of the testator as it appeared on the face of the will gave Robert the ability to choose the heirs he wished to collect under the will. The court overruled Bedinger. Beginger‘s lawyer could have suggested a special power of appointment which would give her sons the ability to give their wives life estates. 19 Rationale: the child is the innocent party . The natural parents and adoptive parents failed to complete the contract.. Same line of reasoning denies foster parents of equitably adopted children the right to inherit from the child because they have no excuse as an innocent party. 20 O’Neal v. Wilkes – (technical application)(modern trend) court denied the equitable adoption claim holding that a legal custodian does not have the right to consent to the adoption of a child, as that right is specifically retained by the child‘s natural parents or guardian. The court found no guardianship petition was fild and thus the Aunt who had physical custody of the child and contracted for the child‘s adoption was not under a legal obligation to care for the child, but a familial obligation. The dissent argued that the court should have considered the equitable nature of the rule, even though the doctrine is based in contract. The dissent would allow equitable adoption anytime the child believed he she was adopted. b. c. to adopt child legally though) (GA / CA Modern Trend) – equitable adoption is based on contract and promise or intention to adopt must be proven by clear and convincing evidence (3) Equitably adopted children can inherit from: (a) Foster parents (only ‗from‘ not ‗through‘) (i) foster parents and relatives cannot inherit from child (b) Natural parents (can inherit ―through‖ as well) Posthumous Children i. Posthumous – child is conceived before, but born after her father‘s death ii. Rule: where, for the purposes of inheritance or determination of property rights, it is to the child‘s advantage, the child is treated as in being from the time of conception rather than birth. (1) Gestation Period: (a) Rebuttable Presumption that the normal period of gestation is: (b) (Common Law) 280 days (c) (UPA) 300 days Nonmarital Children i. (all states) permit inheritance from mother ii. (Majority) permit inheritance from father (1) Paternity – can be established by evidence of: (a) subsequent marriage of parents (b) acknowledgement of the father (c) adjudication during the life of the father (d) clear and convincing proof after his death iii. (UPA) Parent-child relationship extends to every parent and child, regardless of the marital status of the parents. (1) Presumption of parent-child relationship between father and child if: (a) while child is less than two, father lives in the same household as the child and openly holds out the child as his natural child, or (b) father acknowledges his paternity in a writing that is filed with an appropriate court or administrative agency (2) 2. Advancements a. Advancement – a payment or gift to an heir during one‘s lifetime as an advance share of one‘s estate (pre-payment of intestate share) i. (Common Law) Presumption that a lifetime gift to a child is an advancement (1) To avoid application, the child has the burden of establishing the lifetime transfer was intended to be an absolute gift (inter vivos – irrevocable surrender of control)21 ii. (Many states reversed CL) Lifetime gift is presumed not an advancement (1) To avoid application, the proponent has the burden of establishing the Favorable lifetime transfers are not necessarily evidence that the testator wanted that child to receive less at death, especially in the circumstance where the child has a hard time making ends meet. There may be more reason to believe that the testator wanted to child to receive a greater share of the estate. 21 iii. iv. v. lifetime transfer was intended to be an advancement (Other states) Statutes declare a gift is not an advancement unless it is declared as such in writing signed by the grantor or grantee (All states) If a gift is treated as an advancement, the donee must allow its value to be brought into hotchpot – blending of items of property together to ensure equality of division22 UPC §2-109 Advancements (1) If an individual dies intestate as to all or a portion of his or her estate, property the decedent gave during the decedent‘s lifetime to an individual who, at the decedent‘s death, is an heir is treated as an advancement against the heir’s intestate share only if (i) the decedent declared in a contemporaneous writing23 or the heir acknowledged in writing that the gift is an advancement or (ii) the decedent‘s contemporaneous writing or the heir‘s written acknowledgment otherwise indicates that the gift is to be taken into account in computing the division and distribution of the decedent‘s intestate estate (2) For purposes of subsection (a), property advanced is valued as of the time the heir came into possession or enjoyment of the property or as of the time of the decedent‘s death, whichever first occurs (3) If the recipient of the property fails to survive the decedent, the property is not taken into account in computing the division and distribution of the decedent‘s intestate estate, unless the decedent‘s contemporaneous writing provides otherwise 3. Guardianship and Conservatorship of Minors a. Guardianship of the Person i. Guardian – responsible for the minor child‘s custody and care24 (1) no authority to deal with the child‘s property (2) guardianship terminates when the minor reaches the age of majority ii. Natural Guardian – As long as one parent is alive and competent, they are considered the child‘s natural guardian (1) If both parents die and their wills do not designate a guardian, the court will appoint a guardian from among the nearest relatives Property Management Options i. Guardian25 (1) Guardian of the Person – No authority to deal with the child‘s property (2) Guardian of property b. 22 Assume the decedent leaves no spouse, three children, and an estate worth $50,000. One daughter, A received an advancement of $10,000. To calculate the shares in the estate, the $10,000 gift is added to the $50,000, and the total of $60,000 is divided by three. A has already received $10,000 of her share; thus she receives only $10,000 from the estate. Her siblings each take a $20,000 share. If instead A had been given property worth $40,000 as an advancement, A would not have to give back a portion of this amount (we know decedent wanted A to have at least $40,000) 23 Because the UPC requires a writing, it virtually eliminates the doctrine of advancements from the law of intestate succession 24 One of the principal reasons for creating a will is to designate a guardian. Guardians determines where the minor lives, how the minor is raised and educated, and when the minor receives medical care 25 Expensive and inflexible – strict court supervision, time-consuming, each trip to court costs money for attorney‘s fees and court costs. The ward often ends up with less property than at the beginning. (a) (b) (c) (d) ii. iii. Conservatorship26 (1) Conservator (UPC / Uniform Guardianship and Protective Proceeding Act (UGPPA) (many states)) – guardian renamed conservator (a) Appointed and supervised by court (b) Title – conservator has ―title as trustee‖ (c) Investment Powers – similar to a trustee (i) Accounting – One annual trip to the courthouse Custodianship (1) Custodian (Uniform Transfers to Minors Act; Uniform Gifts to Minors Act (every state)) – holds property for the benefit of a minor (a) Transfer – property may be transferred to a person (including donor) as custodian for the benefit of the minor (i) Banks, brokers and other financial institutions provide standard forms for custodianship (ii) Facility of Payment Clause – (in well-drafted wills) allows assets that would have been distributed outright to a minor to be paid instead to a custodian or even to the parent or guardian of the minor (iii) UTMA §6 – allows the fiduciary to make payments to a custodian 1) Payments to custodians over $10,000 require court approval (b) UTMA §14 Discretionary Power – For the minor‘s benefit so much of the custodial property as the custodian considers advisable for the use and benefit of the minor, without court order and without regard to (I) the duty or ability of the custodian personally or any other person to support the minor; or (ii) any other income or property of the minor which may be applicable or available for that purpose (c) UTMA §12 Fiduciary – Custodian is a fiduciary and subject to ―the standard of care that would be observed by a prudent person dealing with property of another.‖ (d) UTMA §12(e) – Custodian is not under the supervision of the court (i) No accounting to the court necessary 1) Interested party may require one if she wishes (e) Investment Powers – right to manage and reinvest property Trusts27 Title – guardian has no title to the minor‘s property Investment Powers – none without court order Income from property – can only be used to support the ward Duty to preserve the minor‘s property and deliver it to the ward at age 18 iv. 26 Streamlined administration allows higher net returns on the assets, more flexibility in investments, and a greater chance of meeting the financial needs of the child 27 Most flexible v. Postpone possession until the donor thinks the child is competent to manage the property (2) Contingent Trust – (contained in well-drafted wills) created for a minor beneficiary where named adult beneficiaries predecease the testator leaving minor children as contingent or substitute takers. Variations on Transfers to Minors (1) Guardian ad litem (most states) – attorney appointed to represent a minor in a suit (2) Social Security Administration and Veteran’s Administration – allow the designation of a representative payee or substitute payee to receive benefit checks on behalf of a minor or incompetent (3) Bequest of other property to a minor can be satisfied by delivery to the minor‘s parents (4) Many states have laws permitting the person rep to pay small sums from the decedent‘s estate to the custodial parent (5) UPC §5-104 – authorizes administrators of intestate estates to transfer up to $10,000 to a custodian without a court order (1) BARS TO SUCCESSION 1. Homicide a. Slayer Statutes (Vast Majority) – statutes enacted to prevent a slayer from taking by decent and distribution from the estate of his victim. i. Statutory Forms: (1) Rule: legal title passes to the slayer and may be retained by him (a) Rationale: devolution of property of a decedent is controlled entirely by the statutes of decent and distribution and imposing an additional punishment for the slayer‘s crime is not provided for the criminal statute (2) Rule: legal title does not pass (a) Rationale: equitable principles state that no one should profit from their fraud or crime. (i) Criticism: judicially engrafting an exception to the statute ―unwarranted judicial legislation‖ (3) Rule: legal title passes to the slayer but equity holds him to be a constructive trustee for the heirs or next of kind of the decedent28 (a) Rationale: disposition avoids judicial engrafting on statutory laws, title still passes to the slayer, but the slayer is compelled to convey property to heirs of the deceased in equity. (4) UPC §2-803 – killer is barred from succeeding to the nonprobate and probate property (a) Killer is treated as having disclaimed the property and under the disclaimer statute, a disclaimer is treated as having predeceased the victim 28 In re Estate of Mahoney – Howard Mahoney died instestate of gunshot wounds. His wife was charged with the crime and convicted of manslaughter. b. Other statutory provisions: (1) Statute draws the line at vol man and invol. man. (a) Rationale: vol man is the intentional and unlawful killing with real design and purpose to kill, even if the result of sudden passion or provocation. Invol man is involuntary. (2) Killer Predeceases Victim – S/A whether the killer‘s heirs should take (a) (NY) inasmuch as the killer‘s devisees are ―innocent,‖ they are allowed to take (b) (IL) refused to apply statute literally (3) Criminal Conviction (a) UPC §2-803(g) (majority) (i) Criminal Conviction of a felonious and intentional killing is conclusive (ii) Acquittal is not dispositive of the acquitted individual‘s status as a slayer (iii) Absence of Conviction – upon application of interest person, the court must determine whether under the preponderance of the evidence the individual would be found criminally accountable for the killing (iv) Plea of Guilty to a Lesser Crime than specified in the slayer statute will not prevent the killer from being barred in a civil proceeding. (b) Insane Killers – no chargeable as a constructive trustee because they lack the intent necessary to fall under the statute CA Prob. Code §259 Abuse of Elder or Dependent Adult Decedent i. Any person shall be deemed to have predeceased a decedent...where all of the following apply: (1) Proven by clear and convincing evidence that the person is liable for physical abuse, neglect, or fiduciary abuse of the decedent, who was an elder or dependent adult (2) Person is acted in bad faith (3) Person was reckless, oppressive, fraudulent, or malicious in the commission of any of these acts upon the decedent (4) The decedent, at the time acts occurred and thereafter until the time of his or her death, was substantially unable to manage his or her financial resources or to resist fraud or undue influence ii. 2. Disclaimer a. b. Disclaimer – heir or a devisee declines to take the property i. Rationale: reduces taxes or keep property out of the hands of creditors Common Law i. Intestate – treats the heir‘s renunciation of title as if title had passed to the heir and then from the heir to the next estate successor ii. Testate – devisee can refuse to accept the devise, thereby preventing title from passing (1) All gifts (inter-vivos or testamentary) require acceptance Modern Statutes c. d. (Majority)(UPC) disclaimant is treated as having predeceased the decedent29 (1) Thus the property does not pass to the disclaimant and the disclaimant makes no transfer of it (tax purposes) ii. Time Limit for Disclaiming Interest30 (1) (Majority) – within 9 months of the creation of the interest (2) Uniform Disclaimer of Property Interests Act (UDPIA) – no time limit (3) IRC §2518 – within 9 months after the interest is created or after the donee reaches 21, whichever is later (a) only ―qualified disclaimers‖ can avoid gift tax liability iii. Avoiding Creditors (1) Relation Back Doctrine (Majority)(UDPIA)(UPC) – disclaimer takes effect as of the time of the intestate‘s death. (2) (Minority) an insolvent debtor may not disclaim to avoid creditors (a) Tort creditors and child support and alimony creditors (3) Federal Tax Lien (a) Power to channel estates taxes is an exercise of dominion over the property which warrants the conclusion that the disclaimant held ―property‖ or a ―right to property‖ subject to gov‘t liens Medicaid Considerations i. Disclaimer – will be held valid where a medicaid recipient disclaims an interest and voluntarily impoverishes himself, but: (1) the takers will take the interest in constructive trust subject to any claims the State has against the estate for benefits improperly paid to the Medicaid recipient (2) Rationale: The right to renounce an intestate share is irreconcilable with the principle that public aid is of a limited nature and should only be afforded to those who demonstrate legitimate need ii. Exemptions For Property Transfers (1) Homes transferred to a spouse (2) Trusts transfers for certain disabled persons iii. If medicaid recipient dies leaving a probate or nonprobate estate, the state may look to theses assets to recover benefits already paid to the recipient iv. Rule: it is a criminal act of a person who ‗for a fee knowingly and wilfully counsels or assists an individual to dispose of assets‖ to become eligible for Medicaid i. CHAPTER 3: WILLS: CAPACITY AND CONTESTS 1. Capacity a. b. 29 Rebuttable Presumption of Testamentary Capacity Restatement §8.1 The Test of Mental Capacity31 E.g. O dies intestate, survived by one sister, A. If A disclaims, A is treated as having predeceased O, and O‘s estate will pass under the intestacy law to A‘s child, B, who is O‘s neice 30 Most disclaimer statutes provide that a disclaimer relates back for all purposes to the date of the decedent‘s death c. Be an adult (18+) Capable of knowing (memory) and understanding (mind) in a general way: (1) The nature and extent of his or her property (2) The natural objects of his or her bounty (3) The disposition that he or she is making of the property (4) Capable of relating these elements to one another and forming an orderly desire regarding the disposition of the property Attorney’s Obligations d. An attorney may rely on her own judgement regarding the client‘s capacity, she does not have to make an investigation of it. i. Unethical to draft a will under circumstances where there is reason to believe the individual is not competent ii. Attorney can engage in a conversation with the testator in front of the witnesses to let them see the interaction and capacity i. ii. 2. Why Require Mental Capacity? a. b. c. d. e. f. g. Will should be given effect only if it represents the testator‘s true desires A mentally incompetent man or woman is not defined as a person Law requires mental capacity to protect the decedent‘s family Public acceptance of law rests upon a belief that legal institutions, including inheritance, are legitimate, and legitimacy cannot exist unless decisions are reasoned Assures a sane person that the disposition the person desires will be carried out even if the person later becomes insane Protect society at large from irrational acts Protect senile and incompetent testators from exploitation 3. Insane Delusion a. Definitions i. Mistake – susceptible to correction if the testator is told the truth ii. Delusion – a false conception of reality iii. Insane Delusion – a delusion (which impairs TC) to which the testator adheres against all evidence and reason to the contrary.32 33 (1) It is not a psychiatric concept, but there is a social component34 Jurisdictional Split i. Rational Person Test (Majority) – if a rational person in the testator situation could not have drawn the same conclusion, the delusion is insane b. 31 In re Estate of Wright – There was no evidence of insanity, hallucinations, or delusions just isolated acts of idiosynracies, moral or mental irregularities or departures from the normal. There was not evidence that the acts directly beared upon and had influence on the testamentary act. 32 E.g. ―All Irishmen have red hair‖ 33 In re Honigman – Honigman, one month before his death, executed a will purporting to cut off his wife from more than her statutory share of his estate and instead devising it to his brothers and sisters because he had believed his wife was having affairs. The court found his beliefs were an obsession and clearly established by a preponderance of the evidence there was presented a question of fact as to whether it affected the will he made shortly before his death 34 In re Strittmater – Numerous memoranda and comments written by Strittmater were found in books espousing her hatred for men. The court state her paranoid state and delusions caused her to leave her estate to the National Women‘s Party, and organization she was heavily involved in. Today this case would come out differently. ii. iii. Factual Basis Test (Minority) – if there is any factual basis at all for the testator‘s delusion, it is not deemed insane Causation (all) – the insane delusion must have caused the testator to dispose of his or her property in a way that the testator would not have (1) Only the part of the will caused by the insane delusion fails; if the entire will was caused by the insane delusion, the entire will fails. 4. Undue Influence a. Undue Influence – when one influences the testator to the extent that the will expresses the influencer‘s intent, not the testator‘s intent35 i. S/A whether undue influence also applies to nonprobate transfers and lifetime gifts (1) Restatement – applies to all donative transfers Rule: to trigger a rebuttabal presumption of undue influence, the contestant has the burden of proving by clear and convincing evidence36: i. A confidential relationship existed (plus something more) ii. Jurisdictional Split on what ―something more‖ is (1) Some jurisdictions (a) influencer procured the will (2) Pennsylvania (a) Person enjoying the relationship received the bulk of the estate (b) The decedent‘s intellect was weakened (3) Restatement (a) There were suspicious circumstances around the will‘s making iii. Comment H to §8.3 Suspicious Circumstances (1) In evaluating whether suspicious circumstances are present, all relevant factors may be considered, including: (a) the extent to which the donor was in a weakened condition, physically, mentally, or both, and therefore susceptible to undue influence; (b) the extent to which the alleged wrongdoer participated in the preparation or procurement of the will or will substitute; (c) whether the donor received independent advice from an attorney or from other competent and disinterested advisors in preparing the will or will substitute (d) Whether the will or will substitute was prepared in secrecy or in haste (e) whether the donor‘s attitude toward others had changed by reason of his or her relationship with the alleged wrongdoer (f) whether there is a decided discrepancy between a new an previous wills or will substitutes of the donor; b. In re Estate of Lakatosh – Roger Jacobs befriended 70 year old Rose Lakatosh. He visited her once a day and drove her to appointments and ran her errands. Roger suggested Rose give him a power of attorney which she executed and at the same time changed her will giving all but $1000 of her nearly 300,000 estate to Roger. The lawyer who drafted the will was Roger‘s second cousin to whom Roger referred Rose. A tape recording of the execution ceremony of the will indicated that Rose had a weakened intellect. The court found the three elements were easily met 36 Proponent must first prove the validity of the will, which is easily done by showing due execution 35 b. c. d. e. whether there was a continuity of purpose running through former wills or will substitutes indicating a settled intent to the disposition of his or her property; and (h) whether the disposition of the property is such that a reasonable person would regard it as unnatural, unjust, or unfair, for example, whether the disposition abruptly and without apparent reason disinherited a faithful and deserving family member Rebuttal Rule: alleged influencer can show: i. Clean hands (good faith) ii. Testator‘s free will Severance – Those portions of the will that are the product of undue influence may be stricken and the remainder allowed to stand if the invalid portions can be separated without defeating the testator‘s intent. No-Contest Clauses – provides that a beneficiary who contests the will shall take nothing, or a token amount, in lieu of the what the beneficiary would have taken37 i. Rule: (Majority)(UPC) – courts enforce a no-contest clause unless there is probable cause for the contest ii. Rule: (Minority) – enforce no-contest clauses unless the contestant alleges forgery or subsequent revocation by a later will or codicil, or the beneficiary is contesting a provision benefitting the drafter of the will or any witness thereto iii. Rule: (California) – provides a procedure for a declaratory judgement that a particular suit will thwart the intention of the testator and trigger a nocontest clause Bequests to Attorneys i. Jurisdictional Split (1) Rule: Presumption of undue influence arises when an attorney-drafter receives a legacy. (a) Exception: when the attorney is related to the testator. (b) Rebuttal Rule: Rebuttable by clear and convincing evidence provided by the attorney (2) California – statute invalidating any bequest to a lawyer who drafts the will unless the lawyer is related by blood or marriage to the testator (a) Exception: permitting a bequest to a non-related lawyer drafter if the client consults an independent lawyer who attaches to the document a ―Certificate of Independent Review‖ (g) 2. Fraud a. Fraud – occurs where someone intentionally misrepresents something to the testator, with the intent of influencing the testator‘s testamentary scheme, and the misrepresentation causes the testator to dispose of his or her property in a way that he or she would not have otherwise (causation issue) i. Misrepresentation – a person must intentionally misrepresent something to a 37 No contest clause could inhibit a lawsuit proving forgery, fraud, or undue influence, thus nullifying the safeguards b. c. testator, knowing it to be false when he or she makes the misrepresentation Two Forms of Fraud: i. Fraud in the Inducement – occurs when a person misrepresents a fact. The misrepresentation does not go to the terms of the will per se, but concerns a a fact that is important to the testator and may induce the testator to dispose of their property differently in light of the misrepresentation.38 ii. Fraud in the Execution – occurs when a person misrepresents the character or contents of the instrument signed by the testator, which does not in fact carry out the testator‘s intent. Restitution: i. Where probate court cannot do justice by refusing probate, the will may be probated and the court with equity powers can impose a constructive trust on one or more of the beneficiaries 3. Duress a. b. Duress – overtly coercive undue influence Rule: a donative transfer is procured by duress if the wrongdoer threatened to perform or did perform a wrongful act that coerced the donor into making a donative transfer that the donor would not have otherwise made (causation issue)39 CHAPTER 4: WILLS: FORMALITIES AND FORMS 1. Execution of Wills a. Attested Wills i. Function of Formalities (1) Evidentiary – ensuring document offered for probate truly reflects the testator‘s last wishes as to who should take his property (2) Protective – make it more difficult for fraudulent claims to be brought by protecting the testator‘s intent as expressed in the properly executed will (3) Ritualistic – impresses upon the testator the finality of the act he or she is performing (4) Channeling – encourages individuals to consult an attorney to draft and supervise the execution of their wills, thereby facilitating probate and decreasing admin. costs ii. Formalities Comparison of Statutory Formalities Statute of Frauds (1677) Writing Wills Act (1837) Writing Uniform Probate Code (1990) Writing Puckett v. Krida – Nurses convinced their live-in patient that her family was misappropriating her money and had patient give them power of attorney 39 Latham v. Father Divine 38 Signature Subscription Signature Attestation & Subscription of Attestation & Signature of 2 Attestation & Signature of 2 3 witnesses Witnesses witnesses (1) UPC §2-502. Execution; Witnesses Wills; Holographic Wills (a) Except as provided in subsection (b), a will must be: (i) in writing (ii) signed by testator or in the testator‘s name by some other individual in the testator‘s conscious presence and by the testator‘s direction; and (iii) signed by at least two individuals, each of whom signed within a reasonable time after he [or she] witnesses either the signing of the will as described in paragraph [2] or the testator’s acknowledgement of that signature or acknowledgement of the will.40 41 (Testator does not have to witness the witnesses sign!) (b) A will does not comply with subsection (a) is a valid holographic will, whether or not witnessed, if the signature and material provisions of the documents are in the testator’s handwriting. (c) Intent that the document constitute the testator’s will can be established by extrinsic evidence, including, for holographic wills, portions of the document that are not in the testator’s handwriting (2) “Presence” in the execution of the will. (a) Two tests: (i) Line of Sight Test (traditional approach) – testator must be capable of seeing the witnesses in the act of signing 1) doesn‘t actually have to see them, just has to be able to if he were to look (ii) Conscious Presence Test (modern trend) – witness is in the presence of the testator if the testator, through sight, hearing, or general consciousness, comprehends that the witness is in the act of signing (3) Order of Signing (a) Traditional – testator must sign the will before either witness signs (b) Modern – if the parties sign as part of one ceremony, a witness may sign before the testator signs or acknowledges the will (4) Signature (a) Typically anything the testator intends as his or her signature42 (i) partial signature will not qualify under strict compliance In re Groffman – Groffman‘s will was deemed invalid and not admitted for probate because he did no acknowledge his signature to the witnesses simultaneously. Thus he did not stick to the formalities of the Wills Act 41 Stevens v. Casdorph – none of the parties acknowledged their signatures in front of the other as required by the Wills Act. 42 In re Pavlinko’s Estate – court would not admit a will to probate where the couple mistakenly signed their partner‘s will. 40 iii. iv. Signature by another – will may be signed by someone other than testator, as long as the person signs the testator‘s name, in the testator‘s presence, and at their direction. Look to statute. (5) Addition After Signature (a) Subscription – requires testator to sign ―at the foot or end‖ (b) If a handwritten line is added after the testator signed the will, the will would be admitted to probate, and the line would be an ineffective codicil (6) Videotaped or Electronic wills (a) No court has upheld a videotaped will. (7) Attestation Clause (a) No required, but make out a prima facie case of a duly executed will, thus facilitation probate. (8) Notarization (a) Witnessing a deed does not suffice, it must be notarized to be recorded in the county recorder‘s office (b) A will cannot be signed by a notary, unless the notary intends to be a witness (9) Purging Statutes (a) Purging Rule: (UPC)(1/3 states) An interested witness is purged of the benefit the witness received in excess of the benefit the witness would have received if the will had not been executed. (i) A will or provision thereof is not invalid because the will is signed by an interested witness (ii) Subsequent disclaimer is inefficient to transform an interested witness into a disinterested witness.43 (b) Rebuttable Presumption Rule (CA) an interested witness gives rise to a rebuttable presumption that the devise was procured by duress, menace, fraud, or undue influence. (i) If the interested witness rebuts the presumption, he or she gets to keep the gift Dispensing Power (minority) – allowing a court to dispense with any formality as long as a will was clearly intended. (1) The effective minimum requirement for admitting a document as a will is an intent that the document be a will.44 Conflict of Law Principles (1) Law of decedent‘s domicile at death determines the validity of the will insofar as it disposes of personal property (2) Law of the state where the real property is located determines the validity of a disposition of real property (b) Estate of Parsons – Three people signed Geneve Parson‘s will as attesting witnesses. Two of the witnesses (Nielson and Gower) were named in the will as beneficiaries. Neilson filled a disclaimer of her $100 bequest. Distant relatives of Parsons claimed an interest in the estate on the grounds that the devise to Gower was invalid under Probate Code Section 51 because there was only one disinterested witness at the time of attestation 44 E.g. – the following was admitted to probate: All Tai-Kin Wong‘s —> Xi Zhao, my best half (signed and dated). The court deemed the arrow not a word, but a symbol of no fixed meaning 43 v. vi. Safeguarding a Will (1) Common Practice – lawyers retain a client‘s will in their files and the client is given a photocopy of the will on which the location of the original is noted (2) Correct Practice – original will should be delivered to the testator, and should only be kept by the attorney upon specfic unsolicited request of the client (3) Statutes (many states)(UPC) – permit deposit of wills with the clerk of the probate court before death (a) rare practice to actually do this though Mutual Wills (1) Where the signing parties mistakenly execute the will of the other person, the parties may: (a) Probate the will that decedent intended to sign, but didn‘t (b) Probate the will the decedent did sign, and reform it (2) There is a jurisdictional split as to whether a mutual will can be reformed: (a) Formalistic – the signature of the testator is required by the Wills Act and without it the will fails45 (i) reformation requires nearly rewriting portions of it to substitute names and ―his‖ with ―hers,‖ etc. (b) Equity – where the dispositive provisions are identical in each will, equity demands the will be probated with the donor‘s intent (i) Significance of a variance is explained by the documents together and the surrounding circumstances b. Holographic Wills (minority) i. A valid holographic will must be: (1) in Writing (a) Jurisdictional Split on the extent the writing must be in the testator‘s own handwriting: (i) First Generation (9 states) – entirely, written, signed and dated46 47 48 (ii) Second Generation (5 states) – signature and material provisions of the holograph be in the testator‘s handwriting 45 In re Pavlinko’s Estate – A husband and wife accidently executed the will of the other spouse. The court refused to admit the will to probate where it did not conform with the letter of the law 46 Estate of Thorn – the court struck down the testator‘s handwritten will because he had stamped the name of his home, Cragthorn, twice within its text 47 Estate of Dobson – Testator consulted a banker who wrote in the side margins some numbers and added to the devise a tract of land ―including all mineral and oil rights.‖ The court refused to probate the will because it was not entirely in the testator‘s handwriting. 48 Estate of Mulkins – Case decided under first generation holographic will statute requiring that the will be entirely in the handwriting of the testator. Court treated the preprinted language of the will as ―mere surplasage‖ to be ignored. The dispositive language is thus in the handwritten parts on the printed will form. These parts must convey testamentary intent. The court held the printed words were not essential to the meaning of the handwritten words and upheld the will ii. c. Codicil i. Codicil – a testamentary instrument (will) that amends an existing will52 (1) cannot devise the entire estate, then it would be a revocation ii. Republication by Codicil – codicil redates the underlying will Third Generation (UPC)(9 states) – signature, material portions and extrinsic evidence is allowed 1) Extrinsic evidence includes portions of the will that are not in the testator‘s handwriting (b) Pre-Printed Forms (i) The will is a valid holograph if the pre-printed words are not essential to establishing testamentary intent49 (2) Signature of testator (a) Rule (majority) – holographic will may be signed anywhere on the will, but if not signed at the end, there may be doubt as to whether the decedent intended his name to be a signature Conditional Wills – wills that contain an express clause conditioning their being given effect upon some event occurring. (1) Rule (majority): Presumption the language does not mean that the will is to be probated only if the stated even happens but is, instead, merely a statement of the inducement for execution of the will50 51 (iii) 2. Revocation of Wills a. Revocation by Writing or Physical Act i. Rule: (All states) A will may be revoked in one of two ways: (1) Subsequent Writing (a) express revocation ―I hereby revoke my prior will‖ (b) executed with testamentary formalities (2) Physical Act (majority) (a) i.e. destroying, obliterating, or burning the will53 ii. Rule: (All states) Oral Declaration is inoperative iii. UPC §2-507. Revocation by Writing or by Act (1) A will or any part thereof is revoked: (a) By expressing a subsequent will that revokes the previous will Estate of Johnson – printed words of the will were essentail to establish testamentary intent and hence were material provisions 49 50 Eaton v. Brown – tesetator wrote a holographic will saying ―I am going on a journey and may not return. If I do not, I leave everything to my adopted son.‖ The testator returned and died some months later. The Supreme Court ordered the will probated because the will was made in contemplation of death and thus evincing a testamentary intent. 51 In re Kimmel’s Estate – Kimmel wrote ―if enny thing hapens all the scock money in the 3 Bank liberty lones Post office stampls and my home....‖ the court held that the letter to his sons was testamentary in character and further the court found that the will was not conditional 52 In re Estate of Kuralt – Kuralt sent his lover a letter written in extremis stating ―I‘ll have the lawyer visit the hospital to be sure you inherit the rest of the place in MT. If it comes to that.‖ The dissent stated this indicated Kuralt would execute a codicil at a future date, it was not an intention that the letter be testamentary in character. The dissent characterized the language as precatory (advise, suggest) and not characterizing a direct bequest 53 Thompson v. Royall – Kroll executed a valid will. A valid codicil later was executed by Kroll. The document was prepared by Judge Coulling. Kroll later told her attorney to destroy the will in her presence, but it was preserved instead as memoranda to be used in the event she decided to execute a new will. Coulling wrote on the back of the manuscript cover that the will was ―null and void and to be only held by H.P. Brittain instead of being destroyed as a memorandum for another will if I desire to make same.‖ Kroll signed it. Kroll died October 2, 1932 leaving numerous nephews and nieces, some of whom were not mentioned in the will an estate valued at $200,000. Some of the beneficiaries offered the will and codicil for probate. – > Admitted to probate because revocation of a will by cancellation within the meaning of the statue contemplates marks or lines across the written parts of the instrument or a physical defacement, or some mutilation of the writing itself, with the intent to revoke. b. c. d. e. or part expressly or by inconsistency; or 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 or part or if another individual performed the act in the testator‘s conscious presence and by the testator‘s direction. (i) Revocatory act – burning, tearing, canceling, obliterating, or destroying the will or any part of it iv. Revocation of a will revokes attached codicils, unless the codicil states it stands alone Partial Revocation by Physical Act i. Jurisdictional Split (1) Modern Trend (Majority)(UPC) (a) (majority) permits the revoked gift to fall to the residuary, but not a gift outside the residuary (b) (minority) permits the revoked gift to fall to the residuary or outside the residuary (2) (Minority) (a) ignore the act in question an give effect to the will. Revocation by Inconsistency i. A subsequent will revokes the previous will by inconsistency if the testator intends that the subsequent will replace the previous will ii. A will that does not expressly revoke the prior will but makes a complete disposition of the testator’s estate is presumed to replace the prior will Lost Wills i. Rule: A Rebuttable Presumption that the testator revoked a will arises when a will last in the testator’s possession cannot be found54 ii. (Majority) A will that is lost or destroyed without the consent of the testator, or is destroyed with the consent of the testator, but not in compliance with the revocation statute, can be admitted to probate if its contents are prove by clear and convincing evidence iii. (Minority) Statutes prohibit the probate of a lost or destroyed will unless the will was in existence at the testator‘s death (and destroyed thereafter) or fraudulently destroyed (including a method not permitted by statute) Dependent Relative Revocation i. If a will was validly revoked (in whole or part), the courts will ignore revocation if: (1) the revocation was based on mistake of law or fact, and (2) the testator would not have revoked if he’d known the truth55 (b) Harrison v. Bird – Daisy Speer executed will in November 1989 in which she name Harrison as the main beneficiary of her estate. Speer‘s attorney retained the original and Harrison was given a duplicate copy. Speer telephoned her attorney March 4, 1991 and advised him she wanted to revoke her will at which time Speer‘s attorney in the presence of his secretary, tore the will in four pieces and mailed them to Speer with a letter informing her that he had ―revoked‖ her will. Speer died in September of 1991 at which time the postmarked letter from her attorney was find but the four pieces of the will were not. –> The burden shifted to Harrison who did not present sufficient evidence to convince the trier of fact that he absence of the will from Ms. Speer‘s personal effects was not the result of Ms. Speers destroying and thus revoking the will 55 LaCroix v. Senecal – Dupre left her residuary estate to her nephew and a friend. Dupre left a will and codicil thereto. The codicil revoked the residuary clause of the will. The only difference between the two documents being the name of her nephew beneficiary. The codicil was signed by Senecal‘s husband and thus Senecal was purged from her gift in item five. –> Dupre‘s intention to revoke the will was conditioned upon the execution of a codicil which would be effective to continue the same disposition of her residuary estate 54 f. there is an alternative plan of disposition that fails, or the mistake is recited in terms of the revoking instrument or, possibly, is established by clear and convincing evidence Revocation by Operation of Law – Divorce i. Probate Transfers (1) Rule (Majority) – divorce revokes any provision in the decedent‘s will from the divorced spouse (2) Rule (Minority) – revocation only occurs if divorce is accompanied by a property settlement ii. NonProbate Transfers (1) Rule (Majority)(CA) – divorce does not apply to will substitutes. Testator must make an independent effort to change beneficiaries56 (2) Rule: (Minority)(UPC) – divorce revokes the designation of the divorced spouse as a beneficiary of a life insurance policy, pension plan, or other P.O.D. contract. iii. UPC §2-804 Revocation of Probate and NonProbate Transfers by Divorce; No Revocation by Other Changes of Circumstances (1) Divorce or annulment revokes (unless expressly provided otherwise in a governing instrument): (a) Any revocable disposition or appointment of property former spouse or former spouse‘s (b) Any provision conferring a power of appointment on the divorced individual‘s former spouse or spouse‘s relative (c) Any nomination of a divorced individual‘s former spouse or spouse‘s relative to serve in any fiduciary or representative capacity; and (i) e.g. personal rep, executor, trustee, conservator, agent, guardian (d) Severs the interests of the former spouse in property held by them as joint tenants at the time of divorce or annulment, transforming the interests into equal tenancies in common (e) Provisions of the governing instrument are given effect as if former spouse and relatives of former spouse disclaimed all provisions revoked by this section (3) (4) 3. Components of a Will a. b. Doctrine of Integration i. Rule – those pieces of paper that are physically present at the time of execution, intended to be part of the will, constitute pages of the will. Doctrine of Republication by Codicil – will is treated as re-executed (republished) as of the date of the codicil57 58 Cook v. Equitable Life Insurance Society – Cook purchased life insurance naming his wife at the time as the beneficiary. The two later divorced and Cook failed to change the beneficiary designation. Cook remarried and had a son. Cook executed a holographic will specifically devising his life insurance policy to his wife. The issue was whether Cook could change the beneficiary designation by will. —> the court refused to give affect to Cook‘s provision in his will because public policy requires that the insurer, insured, and beneficiary alike should be able to rely on the certainty that policy provisions pertaining to the naming and changing of beneficiaries wil control 57 E.g. – if testator revokes a first will by executing a second will and then executes a codicil to the first will, the first will is republished and 56 i. ii. (Majority) Applies only to a pre-existing validly executed will (1) if purported will is not valid, the valid codicil will be it‘s own will (NY Minority) a properly executed codicil validates a will originally invalid for want of testamentary capacity, undue influence, or revocation but does not validate a will defectively executed because of improper attestation c. d. e. Incorporation by Reference i. UPC §2-510 Incorporation by Reference (1) Any writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permit its identification59 UPC §2-513. Separate Writing Identifying Bequest of Tangible Property i. A will may refer to a written statement or list to dispose of items of tangible personal property not otherwise specifically disposed of by the will, other than money. Additionally, it must: (1) be signed by testator (2) Describe the items and devisees with reasonable certainty. ii. The writing may be: iii. referred to as one in existence at the time of the testator‘s death; iv. prepared before or after the execution of the will; v. altered by the testator after its preparation; vi. one that has no significance apart from its effect on the disposition of will Doctrine of Acts of Independent Significance i. UPC §2-512. Events of Independent Significance (1) Will may dispose of property be reference to facts and events outside the willhave significance apart from their effect upon the dispositions made by the will, whether they occur before or after the execution of the will or before or after the testator‘s death.60 61 (a) Execution or revocation of another‘s will is no such event the second will is revoked by implication 58 E..g. – Jurisidction has an interested witness statute purging any gift to an attesting witness. In 1998, T Executes a will devising his property to A, which A and B attest as witnesses. In 1999 T executes a codicil bequeathing $5,000 to C, which C and D are witnesses to the codicil. In 2000 T executes a second codicil bequeathing C a diamond ring, which D and E are witnesses to. Under the doctrine of republication by codicil, the will and first codicil are deemed re-executed in 2000 by the second codicil, which has two disinterested witnesses. A and C are not purged of their gifts 59 Clark v. Greenhagle – 1972 – Greenhagle assisted Nesmith in drafting a document entitled ―MEMORANDUM‖ and identified a list of 49 specific bequests. 1976 – Nesmith modified the 1972 list but did not include a bequest of the farm painting. Nesmith executed a valid will in 1977 naming her cousin, Greenhagle as executor and principal beneficiary of her estate entitling him to receive all of Nesmith‘s tangible personal property upon her death except those items which she ―designated by a memorandum left by her and known to Greenhagle, or in accordance with her known wishes,‖ to be given to others living at the time of her death. 1977 – Nesmith executed a codicil to her will. 1979 – Nesmith‘s notebook contained an entry indicating she wished ―Ginny Clark‖ to received the farm painting above her fireplace. Two nurses testified that this was her intention as she indicated to them 1980 – executed two a codicils to her 1977 will amending bequests and deleting others. 1986 – Nesmith died and Greenhagle distributed her bequests with the exception of the painting which he wished to keep for himself –> 1972 Memorandum was incorporated by reference into the will. Literal interpretation of ―memorandum‖ in the will is not warranted. The cardinal rule is the testator‘s intent shall prevail. Court found that Nesmith intended to have the ability to modify bequests in her will without having to formally modify the will itself, thus she reserved the right to make these wishes apparent in a notebook. The notebook is a written instrument intended to restructure the distribution of her tangible personal prop. 60 Testator‘s will provides ―I give $1,000 to each of my sons-in-law, I give all the stuff in my garage to my brother, Bob, and I leave $10,000 to each of the persons I will identify in a letter I will leave for my executor.‖ At the time the testatrix executed the will, she had two daughters, neither of whom are married. Thereafter, both daughters married, the testatrix bought a new lawnmower that she stored in her garage, and the testatrix wrote a letter to her executrix telling her to give $10,000 to Carolyn and $10,000 to Kristin – > The last clause has an effect on who takes under the testatrix‘s estate, thus the two girls do not take. 61 E.g. ―The automobile I own at death‖ ―to each person who shall be in my employ at death‖ – property must be identified by acts that have a significance separate from the will. The will cannot motivate the acts CHAPTER 5: NONPROBATE TRANSFERS AND PLANNING FOR INCAPACITY 1. Introduction to Will Substitutes a. Pure Will Substitutes62 i. Life Insurance – revocable until death and the interests are ambulatory – that is nonexistent, until the testator‘s death ii. Pension Accounts – beneficiary designations that pass the owner‘s interest to the persons of his choice in the event that he dies before exhausting the account in its retirement payout phase iii. Bank, Brokerage, and Mutual Fund Accounts – P.O.D.‘s (1) Joint Bank Accounts – The owner of property arranges to take title jointly, he supposedly creates a present interest in his donee-cotenant (a) privilege of withdrawal – either [cotenant] may consume the account (b) cotenant may not even know that he has been designated (c) cotenancy designation is revocable and ambulatory (2) Street Accounts – beneficial owner of the securities may deal with the securities as though he has not made the cotenancy designation, but on the owner‘s death the cotenant succeed to the securities or other account proceeds iv. The Revocable Inter Vivos Trust – owner retains both equitable life interest and the power to alter and revoke the beneficiary designation. (1) only nomenclature distinguishes the remainder interest created by such a trust from the mere expectancy arising under a will Imperfect Will Substitutes – resemble complete life transfers i. Joint Tenancies – used commonly for both real estate and securities and occasionally for automobiles and other vehicles (1) cotenant acquires an interest that is no longer revocable and ambulatory (2) both cotenants must ordinarily join in any subsequent transfer (3) survivor obtains marketable title without probate (a) a death certificate is sufficient b. 2. Life Insurance, Pension Accounts, Bank Accounts, and Other P.O.D Arrangements a. Payable on Death Provisions i. Jurisdictional Split (1) (Majority) UPC §6-101. Nonprobate Transfers on Death (a) A provision for a nonprobate transfer on death in an insurance policy, contract of employment, bond, mortgage, promissory note, certificated or uncertificated security, account agreement, custodial agreement, deposit agreements, compensation plan, pension plan, IRA, employee benefit trust, conveyance, deed of gift, marital property agreement, or 62 Pass pursuant to contract even though testamentary in nature b. other similar written instrument of is nontestamentary. (i) Does not require survivorship (2) Traditional Rule (Minority) – P.O.D. designations in a contract are invalid attempted testamentary acts not executed with the formalities required by the Wills Act.63 ii. Third Party Beneficiary P.O.D. Provisions – are valid under UPC64 iii. UPC does not impose right of survivorship on P.O.D. contracts (but it does on joint accounts and T.O.D.‘s Life Insurance i. Reasons for Insurance (1) Personal (a) Living expenses for family (2) Business (a) Protect a partnership or closely held corporation to buy out the decedent‘s share or give the decedent‘s family enough cash to pay estate taxes (provides liquidity) (b) Redemption Agreement – An insured buy-sell agreement (agreement funded with life insurance on the participating owner's lives) ensures the buy-sell arrangement is well-funded and guarantees money when the buy-sell event is triggered. (c) Cross Purchase Agreement – details how ownership transfers if the owner dies ii. Forms of Insurance (1) Whole Life – combination product involving both life insurance and a savings plan (a) Include a forced savings feature where the premiums remained fixed at the same amount (more expensive) (b) Cash Surrender Value – amount available in cash upon cancellation of a policy before it becomes P.O.D. (2) Universal / Variable Life – allows more investment options and greater flexibility (3) Term Life – no savings feature. If the life insured dies while the contract is in force – usually one year to five years – a stated sum is payable to the beneficiary (a) No cash surrender value because there are no savings (b) May provide for optional renewal of insurance coverage for an additional term without regard tot life insured‘s state of health at the time of renewal (c) May provide a conversion option iii. Power to Change Life Insurance Beneficiary by Will (1) Rule: (Majority) – Violates public policy (see Cook) Wilhoit v. Peoples Life Insurance – Court would not recognized a P.O.D. provision in a contract under the theory that P.O.D. designation in a contract of deposit are a testamentary act not executed with the formalities required by the Wills Act. 64 Estate of Hillowtiz – Husband was partner in an ―investment club‖ with a partnership agreement that had a provisions that his widow be paid $2,800 ―in the event of the death of any partner...his share will be transferred to his wife, with no termination of the partnership.‖ The executor argued that the third party beneficiary P.O.D. provision violated the Wills Act as a testamentary act that failed to provide the formalities required under the Wills Act. The court held that P.O.D. provisions pass pursuant to the contract. 63 c. d. Pension Accounts i. Federal law permits death beneficiaries to be put on these plans, including pension and profit-sharing plans, Keogh plans, 401K, and IRA‘s ii. Form and Substance (1) Pension plans consist almost entirely of financial assets (2) Contributions are tax-deferred (a) Earnings on qualified plan investments accrue and compound on a tax-deferred basis (b) Not until the employee retires and begins to receive distributions of his pension savings that he pays income tax on the sums distributed (3) Most people have lower taxable income in their retirement years than in peak earnings years (4) Pensions are designed to promote lifetime exhaustion of the accumulated capital (5) The mechanism by which pension wealth is consumed is annuitization iii. Annuities65 – a payment ever year for the rest of the beneficiary‘s life (1) Shift financial risk of living too long to pension or insurance Co (2) Defined Benefit Plan – employer promises to pay an annuity on retirement (3) Defined Contribution Plan – employee and employer make contributions to a specific pension account for the employee (a) Leads to lump-sum payouts on the death of the worker and her spouse (b) Tax-advantaged savings account that concludes with a nonprobate transfer iv. ERISA (1) Pre-emption – ―shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan (2) State Law relates to an ERISA plan ―if it has a connection with or reference to such plan.‖66 Multiple-Party Banking and Brokerage Accounts i. Joint and Survivor Account (Permitted by UPC) (1) Jurisdictional Split (a) Rebbtuable Presumption (Majority) – The instrument creating a joint tenancy is presumed to create a joint tenancy, unless an different intent is shown by clear and convincing evidence67 If O has an annuity and dies one year after getting starting to receive payments, O‘s heirs or devisees would not receive anything under a pure annuity. An annuity with slightly reduced payments can be bought in return from a promise to make at least 5 or 10 years of payments to o or his heirs or devisees 66 Egelhof v. Egelhof – Washington statute provides that the designation of a spouse as the beneficiary of a nonprobate asset is revoked automatically upon divorce. The Court had to decide whether ERISA preempts the state statute. The Court held that the statue did pre-empt the state statute because the WA statute interfered with nationally uniform plan administration because the state law affected ERISA‘s requirement that plans be administered, and benefits paid, in accordance with plan documents. 67 Franklin v. Anna Naitonal Bank of Anna – Mr. Whitehead is going blind and has his deceased wife‘s sister, Enola Goddard, move in with him to care for him. Mr. Whitehead and Goddard signed a signature card for a savings account. The back of the card states that all funds deposited are owned by the signatories as joint tenants with a right of survivorship Goddard was replaced by Enola Franklin as Whitehead‘s caretaker. Whitehead had Franklin deliver two letters to the bank requesting that Franklin‘s name be added to the account. The bank president stated the bank would not remove the signature from a signature card based on a letter and Goddard was the last signature. Enola Franklin and Goddard now are fighting over whether Goddard takes the savings under a right of survivorship —> money is the property of the estate because evidence showed the decedent 65 ii. iii. iv. Conclusivity (Minority)(UPC) – joint account conclusively establishes a right of survivorship. (2) Both A and B have the right to draw. The survivor takes the balance of the account. (a) Banks like joint accounts because they don‘t have to do a transfer P.O.D. account (permitted by UPC) (1) Joint Account in which only A has the right to draw. (a) B takes the balance at A‘s death Agency account (aka – convenience account)(Permitted by UPC) (1) Joint account in which A intends B to have the right to draw, but not take the balance at A‘s death (a) Not a will substitute Securities (1) Uniform Transfer on Death Security Registration Act (a) Permits securities to be registered in a transfer-on-death (T.O.D.) form (b) UPC – imposes survivorship on beneficiaries of T.O.D. (b) 3. Joint Tenancies in Realty a. Joint Tenancy or Tenancy by the Entirety i. Upon death of one joint tenant, the survivor owns the property absolutely, freed of any participation by the decedent (1) Decedent‘s interest ―vanishes‖ ii. Joint tenancy in land gives the joint tenants equal interests upon creation and require agreement of all the tenants to take important actions iii. A person who transfers land in joint tenancy cannot, during life, revoke the transfer and cancel the interest given the other joint tenant (1) Imperfect will substitute (as opposed to a pure will substitute which is revocable) iv. Joint tenant cannot devise her share by will v. A creditor of a joint tenant must seize the joint tenant‘s interest during life because the joint tenant‘s interest vanishes as death CHAPTER 6: CONSTRUCTION OF WILLS 1. Mistaken or Ambiguous Language in Wills a. Terminology i. Patent Ambiguities – Ambiguity that appears on the face of the will ii. Latent Ambiguity – Ambiguity that does not appear on the face of the will, but manifests itself when the terms of the will are applied to the testator‘s property or designated beneficiaries iii. Two kinds of latent ambiguity: (1) Equivocation – description fits two or more people or things equally intended the account to be a convenience, not a gift. He wished for Goddard to pull money out for him the event that he could not. (2) b. Rules i. Restatement Third of Property: Wills and Other Donative Transfers (1) ―Controlling consideration in determining the meaning of a donative document is the donor’s intention. The donor‘s intention is given effect to the maximum extent allowed by law.‖ ii. The Traditional Approach: No Extrinsic Evidence, No Reformation (1) Majority of jurisdictions follow one of two traditional rules (a) Plain Meaning (i) extrinsic evidence may be admitted to resolve some ambiguities, but the plain meaning of the words of the will can‘t be disturbed by evidence that another meaning was intended68 1) (Minority) – extrinsic evidence not admissible to clarify a patent ambiguity (b) No Reformation iii. Personal Usage Exception (1) If extrinsic evidence shows that the testator always referred to a person in an idiosyncratic manner, the evidence is admissible to who that the testator mean someone other than the person with the legal name of the legatee iv. Correcting Mitakes Without the Power to Reform Cause Effect Lack of Volition Undue Influence Duress (relief granted) Effect Mistaken Terms Fraud (relief granted) well (ie. ―to my niece Alica‖ when the testator has two nieces name Alicai) Description does not exactly fit any person or thing, but may partially fit two or more people or things (more common) Intentional Wrongdoing Innocent Acts v. Lack of Capacity Mistake Insane Delusion (no relief) (relief granted) Falsa demonstratio non nocet (mere erroneous description does not vitiate (1) Where a description of a thing or person consists of several particulars and all of them do not fit any one person or thing, less essential particulars may be rejected provided the remainder of a description clearly fits69 Mahoney v. Grainger – Sullivan executed a valid will that contained a residuary clause devising and bequeathing ―to my heirs at law‖ the residue of her estate. Her sole heir at law at the time of her death was her maternal aunt. There is evidence that when she contacted an attorney ten days before her death that she told the attorney that she had 25 first cousins that she wanted to share in the residue of the estate. —> Where no doubt exists as to the property bequeathed or the identity of the beneficiary, there is no room for extrinsic evidence Arnheiter v. Arnheriter – Will directed executor to ―sell my undivided one-half interest of premises known as No. 304 Harrison Avenue, Harrison, New Jersey.‖ Decedent owned property on 317 Harrison Avenue but not 304. The number of the address was rejected and the remainder of the description fit because the decedent owned property at Harrison Avenue 69 68 vi. Details of Identification (1) In the face of a rule against reformation, details of identification which are highly susceptible to mistake should not be accorded such sanctity as to frustrate an otherwise clearly demonstrable intent.70 (a) Courts should receive evidence tending to show that a mistake has been made and should disregard details when proof establishes the highest degree of certainty that a mistake was made 2. Death of Beneficiary Before Testator a. Introduction i. Lapses – all gifts made by will are subject to a requirement that the devisee survive the testator. (1) Lapses can occur when: (a) Devisee predeceases the testator (b) Bequests are made to animals (devise is void) (c) Devisee is dead when the will is executed ii. Class Gift – surviving members of the class divide the proceedings71 iii. Specific or General Devise – at common law, the devise falls into the residue72 iv. Void Devise (1) devise to a devisee dead at the time the will is executed (2) devise to a dog or cat73 Anti-Lapse Statutes – substitutes another beneficiary for the predeceased devisee i. Does not prevent the lapse, it informs who takes ii. Rule: Substitutes other beneficiaries (usually issue) for the dead beneficiary if certain requirements are met (1) Some statutes apply only to descendants, others may apply to grandparents (2) Default rule – applies unless the testator indicates that is not apply. iii. UPC §2-605 Antilapse; Deceased Devisee; Class Gifts (1) If a devisee who is a grandparent or lineal descendant of a grandparent of the testator is dead at the time of execution of the will, fails to survive the testator, or is treated as if he predeceased the testator, the issue of the deceased devisee who survives the testator by 120 hours take in place of the deceased devisee and if they are all of the same degree of kinship to the devisee they take equally, but if of unequal degree, then those of more remote degree take by b. 70 Estate of Gibbs – Will devised 1% to Robert J. Krause at 4708 North 46th Street in Milwakee. Couple that devised the 1% knew a Robert W. Krause who did not even live at that address, the only thing. The court corrected the mistake despite acknowledging a rule against reformation. 71 E.g. – T bequeaths $10,000 to the children of A (class gift). One child of A, named B, predeceased T. At T‘s death, T is survived by another child of A, named C. Because this is a class gift. C takes B‘s share, or the entire $10,000. 72 E.g. – T‘s will bequeaths her watch (a specific devise) to A and $10,000 (a general bequest) to B. The residuary devisee is C. A and B predecease T. The watch and the $10,000 go to C. 73 Estate of Russell – Will devised ―everything I own Real & Personal to Chester H. Quinn & Roxy Russell.‖ Section 27 of the Wills statute enumerates those entitled to take by will – ―Dogs aren‘t included among those listed in Section 27" latent ambiguity here because when you apply the terms of the will you find out that Roxy Russell is a dog and under the laws of the California, a dog cannot be a devisee. CA followed the minority rule at that time so the lapsed gift passed to Russell‘s heirs at law by intestacy. iv. v. representation. One who would have been a devisee under a class gift if he had survived the testator is treated as a devisee for purposes of this section whether his death occurred before or after the execution of the will. Default Rule – statute applies only when the testator fails to evidence a ―contrary intention.‖ In many cases it is necessary to determine the whether the language of the will indicates that the testator has a contrary intention (1) Jurisdictional Split (a) (Majority) – an express requirement of survivorship states an intent that the antilapse statute not apply (ie. ―if he survives me‖ would not be enough to create survivorship) (b) (Minority)(UPC) – words of survivorship such as in a devise to an individual ―if he survives me,‖ or in a devise to ‗my surviving children,‘ are not, in the absence of additional evidence, a sufficient indication of an intent contrary to the application of this section74 (2) Rule: ―and‖ can be held to read as ―or‖ when doing so will carry out the testator‘s intent in will construction cases to prevent lapse75 (a) ―and assigns‖ not ok because grantor cannot create a substitutionary gift in which the assigns take by substitution76 Lapses in Residue (1) Residuary Clause (no-residue-of-a-residue rule) (minority) (a) If the devise of the entire residue or part thereof lapses, the heirs of the testator take the entire estate or part thereof by intestacy (2) Modern Trend (majority) (a) Where there is a lapse of the residuary, the other residuary beneficiaries take c. Class Gifts i. What is a class? – test is said to be whether the testator is “group minded” (1) Use of a class label (ie. A‘s children, nephews, nieces) (2) Beneficiaries described by their names, but forming a natural class ii. Rule: (Common Law) – if a class member predeceases the testator, the surviving members of the class divide the total iii. Restatement §13.1 Class Gift Defined – How Created (1) A class gift is a disposition to beneficiaries who are described by a group label and are intended to take as a group. Taking as a group means Allen v. Talley – Shoults bequeathed to her ―living‖ brothers and sisters everything she owned to share and share alike. Only her brother Claude and sister Lera were alive when Shoults died. ----> Court held that they must give words their common and ordinary meaning absent a contrary expression. If the court can give ―a certain or definite legal meaning or interpretation‖ to the words of the instrument, the instrument is unambiguous; and the court may construe it as a matter of law. 75 Jackson v. Shultz – ―I give, bequeath and devise unto my beloved wife, Bessie H. Bullock, all my property real, personal and mixed wheresoever situate and of whatever nature and kind, to her and her heirs and assigns forever. Bessie does not have the requisite relationship under the anti-lapse statute to trigger the anti-lapse statute. She is the wife, instead of a named beneficiary under the statute. Here, you can rescue the gift by the anti-lapse statute or the common law doctrine (gift falls to the residue and if no residue or takers to intestacy – which is what happened here) ―to Bessie and her heirs and assigns‖ normally means ‗fee simple‘ –> the court said that given the circumstances, its an ―or‖ not an ―and.‖ That makes the gift a substitutionary gift that shows the intent of Leonard to make her heirs or assigns the sub beneficiaries. 76 Hofing v. Willis 74 iv. v. Membership of class is not static, but subject to fluctuation until the time when a class member is entitled to distribution; (b) Upon distribution, the property is divided among the thenentitled class members on a fractional basis (2) If the terms of the disposition identify the beneficiaries only by a group label, the disposition creates a class gift, unless the language or circumstances indicate that the transferor intended the beneficiaries to take as individuals Restatement §13.1 Class Gift Distinguished from Disposition to Beneficiaries Taking as Individuals – How Created (1) If the terms of the disposition identify the beneficiaries only by name, without any reference to a group label, the disposition does not create a class gift, but is to the beneficiaries taking as individuals (2) If the terms of the disposition identify the beneficiaries (i) by a group label and (ii) either by name or by the number of beneficiaries who then fit the group label, the disposition is presumed not to create a class gift, but is to the beneficiaries taking as individuals. 77 78 (a) The presumption is rebutted if the language or circumstances indicate that the transferor intended the beneficiaries to take as a group. Application of Antilapse Statutes to Class Gifts (1) (Majority) – Antilapse statutes expressly apply to class gift (a) In states where the statute is unclear, courts reason that antilapse statutes are designed to carry out the average testator‘s intent and the average testator would prefer for the deceased beneficiary‘s share to go to the beneficiary‘s descendants (2) (Minority) – antilapse statutes do not apply to class gifts79 (a) Surviving class member(s) take. (b) If a class member predeceases the testator, their share drops to the residuary (unless a survivorship is intended) (a) Dawson v. Yucus – devise stated ―One half to my interest therein to Stewart Wilson, a nephew, now living in Birmingham Michican and One-half of my interest to Gene Burtle, a nephew, now living in Mission, Kansas.‖ The court found that the number of beneficiaries is certain and the share each is to receive is certain (not subject to fluctuation) so the gifts were not class gifts. The share of the nephew who predeceased the grantor goes to the residuary devisees. 78 In re Moss – Testator devised his interest in a newspaper to his wife and his niece as trustees to pay the income to his wife for life and on her death ―upon trust for the said E.J. Fowler and the child or children of my sister Emily Walter who shall attain the age of twenty-one years equally to be divided between them as tenants in common.‖ The issue was whether the share of E.J. Fowler who predeceased the testator lapsed and fell tot he residue of the estate or whether instead the remainder was a class gift with Fowler and the children of Emily as members in which case the share would be reallocated to Emily‘s children. — > Court found the testator intended a class gift. 79 T, a widow, dies leaving a will devising Blackacre ―to my sisters‖ and devising her residuary estate to her stepson, S. When T executed the Will, T had two sisters living, A and B. One sister, C, Died before the will was executed, leaving children who survived T. A died during T‘s lifetime leaving two children. T is survived by B, A‘s children, C‘s children, and S. Who takes Blackacre? Assuming the antilapse statute applies to devises to sisters, inmost state B takes a one-third share, A‘s children a one-third share, and C‘s children a one-third share. In a minority of states, C‘s children do not share because C was dead when the will was executed, and Blackacre goes one-half to B and one-half to A‘s children. If the antilapse statute did not apply to class gifts, B, as the sole surviving member of the class, would take Blackacre 77 3. Changes in Property After Execution of Will a. Ademption by Extinction i. Devises: (1) Specific Devise – a disposition of a specifically identified asset80 (2) General Devise – testamentary disposition, usually of a specified amount of money or quantity of property, that is payable from the general assets of the estate81 (3) Demonstrative Devise – hybrid: a general devise, yet payable from a specific source, but secondarily payable from the general assets of the estate to the extent that the primary source is insufficient82 (4) Residuary Devise – conveys that portion of the testator‘s net estate not otherwise effectively devise by other parts of the will83 ii. Theories: (1) Identity Theory – if a specifically devised item is not in the testator‘s estate, the gift is extinguished84 85 (a) cannot bring in extrinsic evidence (2) Intent Theory – if the specifically devised item is not in the testator‘s estate, the beneficiary may nonetheless be entitled to the cash value of the item (a) UPC Rebuttable Presumptionpresumption in favor of ademption (i) Party opposing ademption has the burden of proving that ademption is inconsistent with testator‘s intent iii. Focus: (1) The focus is on the actual existence or nonexistence of the item, not the testator‘s intent iv. Escape Routes from Ademption Under Identity Theory (1) Classify the inter vivos diposition as: (a) general or demonstrative, rather than specific (b) a change in form and not substance (i) ie. corporate merger or reorganization is only a change in form, not substance (stocks) (2) Construe the meaning of the will as of the time of death rather than E.g. Gifts of Blackacre or of ―my three-carat diamond ring given to me by my Aunt Jane‖; ―my desk‖ ―my Buick‖ ―the house I own and am residing in at my death‖ 81 E.g. A legacy of $100,000 to A. If there is no $100,000 in cash in the testator‘s estate at death, the legacy is not adeemed; other assets must be sold to satisfy A‘s general legacy; 82 E.g. Testator‘s will gives B ―the sume of $100,000 to be paid from the proceeds of sale of My General Motors stock.‖ Most courts would hold this to be a demonstrative devise. If the testator owns sufficient GM stock at death, in raising the $100,000 the executor must comply wit hthe testamentary direction to sell the stock. But if the testator does not own any GM stock at death, the devise is not adeemed and other assets must be sold in order to raise the $100,000. 83 E.g. a devise to A of ―all the rest, residue and remainder of my property and estate.‖ 84 Wasserman v. Cohen – Drapkin‘s inter vivos trust ordered the her trustee distribute to Wasserman a specific parcel of property. Drapkin however, sold the property before her demise —> give was adeemed 85 E.g. – deed had not been conveyed by deed, thus passing title. There is an earnest money contract, she signs it, but dies. In her will, T leaves real estate to A. Is A entitled to the specific devise. Under intent theory, the testatrix had entered into a contract to sell the property, thus evincing her intent to adeem the property. 80 b. c. as of the time of execution UPC §2-606 Nonademption of Specific Devises; Unpaid Proceeds of Sale, Condemnation, Insurance; Sale by Conservator or Agent (a) A specific devisee has a right to the specifically devised property in the testator‘s estate and: (i) any balance of the purchase price, rogether with any sexurity agreement, owing from a prucahser to the testator at death by reason of sale of the property (ii) if no coverd in paragraphs (1) through (5), a pecuniary devise equal to the value as of its date of disposition of other specifically devised property disposed of during the testator‘s lifetime but only to the extent it is established that ademption would inconsistent with the testator‘s manifested plan of distribution or that at the time the will was made, the date of disposition or otherwise, the testator did not intent that the devise adeem.86 Stock Splits and the Problem of Increase i. Stock split – treated as a change in form, not substance. 87 88 (1) Traditional (Minority) – ask if bequest was specific or general (a) If specific, beneficiary received benefit of the split (b) If general, beneficiary received only the #of shares delineated in will (2) Modern (Majority) – absent a contrary showing of intent, a devisee of stock is entitled to additional shares received by testator as result of a stock split ii. Stock Dividends89 (1) (Minority) – beneficiary is denied dividends (analogize them to a cash dividend)90 (2) (Majority)(UPC & Restatement) – beneficiary gets them along with shares Satisfaction of General Pecuniary Requests i. Doctrine of Satisfaction (aka ademption by satisfaction)91 92 (1) If testator is a parent of the beneficiary, and (2) after executing the will, (3) transfers to the beneficiary property of similar nature to that given by the will (3) Deals with replacement property. If T executes a will bequeathing my ―Ford care‖ to A and later sels the Ford and buys a Rolls-Royce, is A entiteld to the Rolls? Must be shown to be intended as a replacement 87 E.g. – T executes a will devising 100 shares of stock in Tigertail Corp. Tigertail subsequently splits its stock three-for-one. At t‘s death, T owns 300 shares of Tigertail. Does A take 100 or 300 shares? 88 No Accretion in the equity 89 Retained earnings – Percentage of stock share 90 Bequeathed 100 shares. Stock dividend means there are 110 actually. The 10 would go to the residuary. 91 Testator makes a transfer to devisee after executing the will 92 Applies to General, but not Specific bequests. When specific property is devised by the terms of the will to a beneficiary, but is given to that beneficiary during he testator‘s life, the gift is adeemed by extinction, not satisfaction. 86 d. e. there is a rebuttable presumption that the gift is in satisfaction of the gift made by the will ii. (Minority)(UPC) – the intention of the testator to adeem by satisfaction must to be in writing (1) No presumption of satisfaction by a gift to a child Exoneration of Liens i. (Common Law) – a specific disposition of real or personal property subject to a mortgage for which the testator is personally liable, it is presumed, absent contrary language in the will, that the testator wanted the debt, like other debts, to be paid out of the residuary ii. Modern Approach (UPC) – 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 Abatement93 i. Absent indication to the contrary, devises ordinarily abate in the following order: (1) 1) Residuary 2) General 3) Specific and Demonstrative devises (2) UPC – provides that if the testamentary plan....would be defeated by the usual order of abatement94, the shares of the distributees abate as may be necessary to give effect to the intention of the testator (4) RIGHTS OF THE SURVIVING SPOUSE a. Community Property – husband and wife own earnings and acquisitions from earnings of both spouses during marriage in undivided equal shares i. Strong Rebuttable Presumption – that all property is CP. (1) All property to not be CP is separate property (a) property acquired before marriage and during marriage by gift or inheritance (b) (minority) – income from separate property is CP ii. Property that has been commingled is CP95 iii. By agreement, the parties may change property status iv. Favorable Tax Treatment (1) Any appreciation in value between acquisition and the date of the spouse‘s death is never taxed as capital gain v. Death (1) Husband and wife own equal shares in each item of community property at death (a) the deceased spouse can dispose of his or her half of the community assets Problem that arises when the estate has insufficient funds to pay debts as well as all the devises 93 94 E.g. – T executes a will which he devises $300,000 to charity B, $100,000 to charity C, and the residue of the estate to his son A. At the time of th will‘s execution, T has $800,000 in assets. T then becomes ill and undergoes an experimental treatment costing $500,000. The treatment fails, and T dies. Under traditional abatement rules, A takes nothing, B takes $225,000, and C takes $75,000. 95 Thus if husband uses community property to pay for an insurance policy. Some states hold that the policy remainds the husband’s separate property and the community is entitled only to a return of premium paid with interest. vi. b. Management (1) (Minority) – when property is commingled, the property is subject to joint management (2) (Majority) – either husband or wife, acting alone, has the power to manage community property Putting the Survivor to an Election i. Widow’s Election (CP states) – husband executes a will devising all the community property in trust to pay the income to his wife for life, with remainder to other‘s on the wife‘s death. (1) Wife is required to elect between surrendering her half of the community property and taking under the husband‘s will (2) If widow elects, widow transfers her one-half community interest to the trust in exchange for receiving a life estate in her husband‘s onehalf interest in community property (3) If widow elects against the will, she takes the one-half interest in community property to which she is entitled by law, but she forfeits the life estate in the husband‘s half of the community property (4) Estate and gift tax advantages (made in exchange for consideration), but income tax disadvantages ii. Revocable Trust – paying income to husband and wife for their joint lives and for the life of the survivor, remainder to their children or to others. (1) Revocable trust become irrevocable upon the death of one spouse (2) No estate and gift tax benefits, but also no income tax disadvantage (3) Allows for unified trust management and assurances that corpus will pass to issue upon the death of the surviving spouse Migrating Couples and Multistate Property Holdings i. Conflict of Laws (1) The law of the situs controls problems related to land (a) state may choose to apply the law of the marital domicile (2) The law of the marital domicile at the time that personal property is acquired controls the characterization of the property (that is, as separate or community) (3) The law of the marital domicile at the death of one spouse controls the survivor‘s marital rights ii. Moving from Separate Property State to a Community Property State (1) Moveable property – ownership is determined by the laws of the state where the couple is domiciled when the property is acquired96 (a) Death – law of the state of domicile at death governs the disposition of moveable property (2) Quasi Community Property – property owned by husband or wife acquired while domiciled elsewhere which would have been characterized as community property if the couple had been domiciled in the community c. Thus, if the husband is the wage earner, the property is the husband’s in a separate property state. The wife is protected by the elective share scheme. But if the couple moves to a community property state, the property is characterized as the husband’s separate property. If neither spouse works in the com prop state, there may be no community property and the wife loses the protective share system 96 d. property state when the property was acquired (a) Death – one-half of acquiring spouse‘s community property belons to the surviving spouse; other half is subject to testamentary disposition by the decedent (b) To prevent a spouse from defeating a survivor‘s quasicommunity property rights by inter vivos transfers, the surviving spouse may have the right to reach one-half of any nonprobate transfer of quasi-community property Moving from a Community Property State to a Separate Property State i. Uniform Disposition of Community Property Rights at Death Act (14 states) – provides that community property brought into the state remains community property for purposes of testamentary disposition, unless otherwise agreed (1) No elective share; each spouse gets right to dispose of their one-half share of community property by will (2) Couples must be careful to preserve community nature by taking title to new property in the name of husband and wife as CP (a) May preserve character by creating a revocable trust (b) Changing community property forgoes the income tax advantages ii. Community Property with a Right of Survivorship – decedent spouse cannot dispose of his share of the community property by will (1) Option now available in seven community property states (2) Avoid probate costs iii. California – provides that when property passes at death to the decedent‘s spouse, no administration is necessary unless the surviving spouse elects administration CHAPTER 8: TRUSTS: CREATION AND CHARACTERISTICS 1. Creation of a Trust a. Requirements to Create a Trust i. Intent to Create a Trust ii. Necessity of Trust Property (1) Rule: A property interest must be transferred to the trustee (2) Future Interests (a) Restatement (Third) of Trusts §41 (2003) (i) An expectation or hope of receiving property in the future, or an interest that has not come into existence or has ceased to exist, cannot be held in trust (b) Rule (Majority): future earnings from an existing contract can be assigned97 98 Brainard v. Comm’r – taxpayer orally declared, in the presence ofhis wife and mother, a trust of stock trading during 1928 for the benefits of his family. There was no evidence that taxpayer owned any stock at the time he declared the alleged trust, and he had no property interest at that time in future profits. The question was whether his 1927 declaration created a valid trust over the future 1928 profits. —> Held: trust did not arise until after the profits were created on the taxpayer‘s books on the ground that there was no res at the time of the declaration of trust. There was no property interest in the stocks. The settlor must manifest anew his declaration when the property comes into being. 98 Speelman v. Pascal – Pascal‘s company (which he owned a significant portion of) bought the rights to prepare and produce a musical play 97 iii. Thus future yield from an existing property right can be transferred, but property to be acquired in the future cannot Necessity of Trust Beneficiaries (1) Rule: Trust must have one or more ascertainable beneficiaries (a) Rationale: There must be someone to whom the trustee owes a fiduciary duty and who will hold the trustee accountable (2) Unborn, Indefinite or Unascertained Beneficiaries (a) Rule: Beneficiaries of a private trust may be unborn or unascertained when the trust is created (i) When the trust become effective, if the beneficiaries are too indefinite or unascertainable, the trust fails99 (3) Pets (a) Traditional Rule – Pets are themselves property an ineligible to take under a will or as trust beneficiary (4) Honorary Trusts100 (a) Restatement (Third) §47 (i) Where a trust would fail for want of ascertainable beneficiaries, it may continue if: 1) the purpose is specific and not not capricious. 2) Trustee is not under a legal obligation to carry out the purpose of the trust 3) If the trustee stops honoring the terms of the honorary trust, a resulting trust is imposed on the property and the property is returned to the settlor or the settlor‘s successor (b) RAP and Honorary Trusts (i) Common Law – An honorary trust to support a pet is void if it can last beyond all relevant lives in being at the time of creation of the trust plus 21-years 1) Pet itself is not a relevant measuring life (ii) Modern Statutes (CA)(UPC) – provide that a trust for the care of a pet animal is valid for the life of the animal or cemetery plot (5) Power of Appointment (a) Valid Power of Appointment (i) Discretionary, non-fiduciary power (ii) May have a definite or indefinite class of (i) based on ―Pygmalion‖ and a motion picture version of the play. Four months before Pascal died he wrote and signed a letter assigning royalties to his secretary from any future production of the stage version of Pygmalion and the film version and his worldwide profits. The issue was whether the letter to his secretary operated to transfer to her the enforcible right to the described percentages or royalties. – >It was no matter that at the time of the delivery of the letter there was no musical or stage version in existence. Pascal owned and could grant to another share of the moneys to accrue from the use of those rights by others. 99 Clark v. Campbell – The ninth clause of the testator‘s will read ―I therefore give and bequeath to my trustees all my property...in trust to disposal by the way of a momento from myself, of such articles to such of my friends as they, my trustees, may select. The issue was whether the bequest for the benefit of the testator‘s friends must fail for want of certainty of the beneficiaries. The proponents of the trust argued that a power was created, but the language created a trust ―trustees‖ etc. The court held that the word ―friends‖ unlike ―relations‖ has no accepted statutory or other controlling limitations. ―Where a gift is impressed with a trust ineffectively declared and incapable of taking effect because of the indefiniteness of the cestui que trust, the donee will hold the property in trust for the next taker under the will, or for the next of kin by way of a resulting trust. 100 Typically made for pets and maintenance of gravesites (b) iv. Writing (1) Oral Inter Vivos Trusts of Land (a) Transfer of Personal Property (i) inter vivos transfer of personal property is enforceable (b) Transfer of Real Property (i) Common Law – the Statute of Frauds requires any inter vivos trust of land be in writing and the SOW requires that a testamentary trust be created by a will. (ii) Modern Trend Restatement §24 1) A Constructive trust will be imposed where: a) The owner of an interest in land transfers it inter vivos to another in trust for the transferor b) no writing, as required by the SOF c) transferee refuses to perform the trust102 d) confidential relationship (2) Oral Trusts for Disposition at Death (a) Secret Trust (majority) – a testamentary trust that fails because the terms are not set forth in the will. On the face, the secret trust looks like an outright gift to a devisee. (i) A promise by the devisee to use the legacy as a trustee will be enforceable by a constructive trust 1) Courts will admit extrinsic evidence to prove there is a promise and prevent unjust enrichment (b) Semi-Secret Trust (majority) – a testamentary trust that fails because the will hints the devisee is to hold the legacy in trust but does not identify a beneficiary103 (i) Will shows on its face an intent not to benefit the beneficiaries101 (iii) Test of Validity – If the class of beneficiaries is so described that some person might reasonably be said to answer to the description, the power is valid. Restatement §46(2) (i) Where there is a transfer in trust for members of an indefinite class of persons, no enforceable trust is created, but the transferee has a power of appointment to convey the property to such members of the class as he may select 101 102 I.e. ―My issue‖ or ―anyone except the donee or her creditors or her estate‖ Hieble v Hieble – P transferred title to real property from herself alone to herself in joint tenancy with her son and daughter. P was fearful of cancer returning. She and her children orally agreed the transfer would be temporary and that she would remain in control of the property and pay expenses and taxes and once her cancer had passed, the son and daughter would reconvey the property back to her. The son refused to reconvey his interest when asked. —> the court found that under the SOF, oral agreements are unenforceable, but concluded that a constructive trust should be decreed on the basis of an oral agreement and confidential relationship 103 Oliffe v. Wells – testator devised her residuary estate to the Reverend Eleazer M.P. Wells ―to distribute the same in such manner as in his discretion shall appear best calculated to carry out wishes which I have expressed to him or may express to him.‖ (c) trustee, thus extrinsic evidence is not admitted and the legacy fails (passes to next of kin) Modern Trend / Restatement §18 (minority) (i) A constructive trust should be imposed in favor of the intended beneficiary in the semi-secret as well as secret trust 2. Rights of the Beneficiaries to Distribution from the Trust a. Two Trust Forms with Respect to Distribution: i. Mandatory Trusts – trustee must distribute all income to the beneficiary ii. Discretionary Trust – trustee has discretion over payment of either income or the principal or both. (1) Duty to Decide – safeguarding the beneficiary against an abuse of discretion is the trustee‘s fiduciary obligation (2) Duty to Inquire – before exercising his or her discretion, the trustee owes a duty to inquire as to the beneficiary‘s status and needs (a) Other Resources (Restatement) – Rebuttable Presumption that the settlor intended the beneficiary to receive his support from the trust estate regardless of the beneficiary‘s other resources (b) Scope of Duty – trustee must exercise due diligence in attempting to gather relevant information (i) where initial attempts are unsuccessful or incomplete, the trustee has a duty to follow up (3) Scope of Discretion (default standard) – after gathering all appropriate information about the beneficiary, the trustee has a: (a) Duty to Act Reasonably – objective standard – act as a reasonable trustee would (b) Duty to Act in Good Faith / Proper Motives – subjective standard – act as he or she honestly thinks are in the best interests of the beneficiaries and the trust in making decisions (4) Absolute Discretion – settlor may modify the trustee‘s duty by express language in the instrument (i.e. authorizing ―sole,‖ ―absolute,‖ ―uncontrolled‖ discretion) (a) Courts construe such language as not granting unlimited discretion (precatory trust if so) (b) Rule: (Restatement)(UTC) – trustee is required to: (i) act in good faith, (ii) with proper motives (iii) in that state of mind contemplated by the settlor that he should act (5) ―Comfortable Support and Maintenance” – term of art expressing the intent that the beneficiary is to be kept at the standard of living he or she was accustomed at the time he became beneficiary of the trust (6) Exculpatory Clauses – excuse trustees from liability except for willful neglect or default (a) Rule: clause is effective unless the court concludes that a breach of trust was committed intentionally, in bad faith, or iii. iv. v. in reckless disregard for the beneficiary‘s interest. Clause Drafted by Trustee (i) UTC Rule: clause drafted or caused to be drafted by trustee (including bank or trust co.) is invalid as an abuse of fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that its existence and contents were adequately communicated to the settlor 1) Trustee is excused if settlor was represented by independent counsel Support Trust – a trust that requires the trustee to pay as much income (an principal if required) as necessary for the beneficiary‘s support (1) Created whenever limited to the beneficiary‘s ―support,‖ ―education,‖ ―maintenance‖ (a) if required to distribute all the income for support, the trust is not a support trust because the amount to be paid is not limited to the amount necessary for support Sprinkel / Spray Trust – trustee must distribute the property to a group of individuals and has discretion as to whom to make the payments to and how much each is to receive (1) Hybrid: It is mandatory trustee distribute property, but discretionary to who and how much Mandatory Arbitration Clause – not enforceable (1) Rationale: trustor‘s right to reserve power over trust administration matters is not absolute and a trustor of an inter vivos trust may not unilaterally strip beneficiaries of their right to access the courts (b) 3. Rights of the Beneficiary’s Creditors a. Mandatory Trusts i. Rule: Creditor can force the trustee to distribute the income to the creditor pursuant to the terms of the trust just as beneficiary could have. (Must distribute income, possibly principal) Discretionary Trusts & Support Trusts i. Rule: because beneficiary has no right to payment, neither does the beneficiary‘s creditor or assignee ii. Rule (Restatement): if the terms of the trust provide for a beneficiary to receive distributions in the trustee‘s discretion, a transferee or creditor iii. Alimony and Child Support Claims Exception – There is authority that the beneficiary‘s children and spouse may enforce claims iv. Rule (UPC): Discretionary Trusts; Effect of Standard (1) Whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, even if: (a) the discretion is expressed in the form of standard of distribution; or (b) the trustee has abused discretion (2) to the extent a trustee has not complied with a standard of b. c. d. distribution or has abused discretion: (a) a distribution may be ordered by the court to satisfy a judgement or court order against the beneficiary for support or maintenance of the beneficiary’s child, spouse, or former spouse; and (b) the court shall direct the trustee to pay the child, spouse, or former spouse such amount as is equitable under the circumstances but not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion (3) This section does not limit the right of a beneficiary to maintain a judicial proceeding against a trustee for an abuse of discretion or failure to comply with a standard for distribution. (4) the provisions of this section apply even if the beneficiary is the cotrustee of the trust Protective Trusts – a mandatory trust subject to a protective provision i. Trustee is directed to pay income to A, but if A‘s creditors attach A‘s interests, A‘s mandatory income interest ceases, whereupon a discretionary trust automatically arises Spendthrift Trusts – beneficiary cannot voluntarily or involuntarily alienate her interest nor can her creditors reach her interest in the trust even if the trust provides for mandatory payments104 i. Creation (1) Rule (Majority) – spendthrift clauses must be expressly inserted (2) Rule (Minority)(NY) – all trusts are spendthrift as to income unless the settlor expressly makes the beneficiary‘s interest transferable ii. Exceptions (1) Spendthrift provision is enforceable unless: (a) the beneficiary is also the settlor, or (b) the assets were fraudulently transferred to trust (2) Child Support and Alimony Exceptions – jurisdictional split (a) Rule (Majority)(Restatement)(UTC) – judgements for child support can be enforced against the debtor‘s interest in spendthrift trusts (Corpus and Income?) (b) Rule (Minority) – spouse or child cannot reach a spendthrift trust to satisfy judgements for support (c) Rule (Minority) – statutes give power to courts to order payments from spendthrift or discretionary trusts (3) Tort Creditors Exceptions (a) Rule (Majority)(UTC) – spendthrift clause prevents tort victims of a trust beneficiary from reaching the beneficiary‘s interest (i) (Restatement) – does not recognize an exception for tort creditors but contemplates that evolving policy might justify recognition of other exceptions E.g. – T devises property to X in trust to pay the income to A for life and upon A‘s death to distribute the property to A‘s children. A clause in the trust provides that A may not transfer her life estate, and it may not be reached by A‘s creditors 104 (b) (4) (5) (6) (7) (8) (9) Rule (Minority)(GA) – torts victims are entitled to enforce a judgement against the tortfeasor‘s interest in a spendthrift trust Furnishing Necessary Support (a) Traditional Rule (Restatement)(Majority) – person who has furnished necessary support or services can reach the beneficiary‘s interest in a spendthrift trust (b) (UTC)(Minority) – rejects exception Federal Tax Lien (a) Rule (Federal) – United States can reach the beneficiary‘s to satisfy a tax claim against the beneficiary (i) Tax law trumps state spendthrift laws (b) Rule (State) – depends on applicable state statute Excess Over Amount Needed for Support (a) Rule (NY)(Several states) – creditors can reach the excess needed for support (i) Station-in-life-cycle – creditors can only reach the amount in excess of what is needed to maintain the beneficiary in his station in life Percentage Levy, Spendthrift Caps (a) Rule (Few states)(CA) – creditor is permitted to reach a certain percentage (10-30) of the income of the spendthrift trust (b) Rule (Handful of States) – cap the amount of income or principal that can be shielded by a spendthrift provision Pension Trusts (a) ERISA (i) Benefits may not be alienated or assigned (ii) Benefits may be reached for child support, alimony, or marital property rights Bankruptcy (a) Creditors cannot reach a beneficial interest in a spendth. trust (b) The Code also excludes from the bankrupt‘s estate any interest in a pension trust covered by ERISA