Wills and Trusts -- Pepperdine Law -- Mendoza _1_

WILLS AND TRUSTS OUTLINE SPRING 2007 PROFESSOR MENDOZA WILLS Intestacy: An Estate Plan by Default A. The Basic Scheme a. Intro i. Intestacy is norm ii. Partial intestacy 1. will is poorly drafted and disposes of only part; state of domicile at death governs disposition of personal prop, law of state where decedent‘s real prop is located governs distribution of real prop iii. UPC § 2-101. Intestate Estate (a) Any part of a D‘s estate not effectively disposed of by will passes by intestate succession to D‘s heirs except as modified by decedent's will. (b) A D may expressly exclude someone in will. If that person survives D, prop that would have gone to her passes as though she disclaimed iv. NOTE: Meaning of Heirs and Transfer of an Expectancy 1. heir – heir must survive D 2. heir apparent – person who is alive has no heirs, only ―heirs apparent‖ 3. expectancy – an expectation to take by an heir apparent a. not a prop interest b. not transferable c. exception: if heir apparent agrees to transfer expectancy for valuable consideration; then tries to avoid enforcement, ct of equity will enforce agreement if fair and equitable under circumstances. b. Share of Surviving Spouse i. Typical state statute [non community prop] 1. Surviving spouse a. 100% if no surviving issue, parents, or issue of parents b. 50% if D has one child (alive or dead but survived by issue) or no surviving issue but surviving parents or issue of parents c. 33% if more than one child (alive or dead but survived by issue) 2. Issue equally 3. parents equally 4. issue of parents equally 5. grandparents equally 6. issue of grandparents equally 7. next-of-kin by degree of relationship 8. Escheat to state 100% ii. UPC § 2-102. Share of Spouse [favors surviving spouse, escheats to state sooner] 1. Surviving Spouse a. 100% if no issue or parents b. 100% if all D‘s issue are also issue of surviving spouse and surviving spouse has no other issue c. $200K + 75% of rest if no issue but surviving parent; or d. $150K + 50% of rest if all issue are also issue of surviving spouse and surviving spouse has other issue. e. $100K + 50% of rest if one or more issue not issue of surviving spouse 2. Issue Equally 3. Parents Equally 4. Issue of Parents Equally 5. Grandparents/issue a. 50% to paternal gparents or survivor; otherwise to their issue equally b. 50% to maternal gparents or survivor; otherwise to their issue equally c. If no surviving gparents or issue on one side, all to other side 6. Escheat to State 100% Page 1 of 32 iii. Marriage Requirements 1. Rule: term “spouse” assumes that couple has gone through a valid marriage ceremony 2. cohabitants – if state recognizes CL marriage and they meet requirements – ok 3. married but separated still count as married 4. abandoning spouse may be disqualified from inheriting from other spouse iv. Survival Requirements 1. RULE: To be eligible to receive prop from D, a taker must “survive” D. If claimant fails to meet survival requirement, claimant is treated as having predeceased D. 2. CL – survived D by a millisecond (preponderance standard) a. Codified in Uniform Simultaneous Death Act b. Janus v. Tarasewicz – poisoned Tylenol 3. Modern – survived D by millisecond (C&C standard) 4. UPC § 2-104 120-hour approach a. To take must prove by C&C evidence that survived D by 120 hours (5 days) 5. Analysis: a. Did claimant actually survive D? b. Did claimant legally survive D? 6. Wills and nonprobate instruments a. Survival requirement is a default; if other express clause, than that one applies. c. Shares of Descendants i. Rule: If no surviving spouse, or surviving spouse but he or she does not take all of D’s prop, both typical intestate scheme and UPC give prop to D’s issue equally. ii. Which issue take? 1. issue of predeceased children take in their place ―by representation‖ 2. if person takes, his or her issue do not 3. absent adoption, only blood relatives qualify as heirs iii. Three basic distribution systems 1. English Per Stirpes – always make first division of D‘s prop at first generation of descendants, whether there are any live takers or not; then drop by bloodline. 2. Modern per stirpes – make first division of D‘s prop at first generation where there is alive taker; then drop by bloodline 3. Per Capita at Each Generation – always make first division of D‘s prop at first generation where there is a live taker, drop by pooling – combine and distribute equally among eligible takers at next generation iv. Misc. Rules 1. Individual can opt out of these approaches by executing a valid will or nonprobate instrument 2. UPC § 2-106 has adopted the per capita @ each generation approach v. NOTE: Negative Disinheritance – an express statement in parents‘ wills disinheriting a child. 1. CL - would have to devise entire estate to other people 2. UPC § 2-102(b) – authorizes negative will. Barred heir is treated as if he disclaimed his intestate share, which means he is treated as having predeceased the intestate. d. Shares of Ancestors and Collaterals i. RULE: If no descendant, spouse or parent, remote ancestors or collateral kindred take. ii. Table of Consanguinity 1. Collateral kindred – all persons related by blood to D but not descendants or ancestors 2. First line collaterals – descendants of D‘s parents (brothers/sisters) 3. Second line collaterals – descendants of D‘s grandparents, other than D‘s parents/issue 4. If no spouse, descendant, or parent, in all jurisdictions intestate prop passes to brothers and sisters and their descendants iii. If no first line collaterals, states differ as to who is next in line of succession 1. parentelic – intestate scheme starts w/ D‘s immediate family and then moves out along collateral lines; keeps going out by collateral lines until line w/ a live taker. Per stirpes, modern per stirpes and per capita at each generation approaches apply depending on state 2. degree-of-relationship – focuses of degree of relationship b/t D and claiming relative, regardless of which parentelic line the taker is in. Count degrees of relationship b/t D and relative, closest take to the exclusion of more remote. 3. Tie-breaker: Some jurisdictions start w/ parentelic approach but at some point switch to the degree of relationship approach Page 2 of 32 iv. Conservative Codes 1. Laughing Heirs  UPC § 2-103: no inheritance beyond gparents and their descendants. v. Liberal Codes 1. CA - 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! vi. NOTE: Half-Bloods 1. defined: relative who share only one common parent as opposed to traditional relationship where siblings share both parents 2. CL: only whole-blooded relatives are entitled to inherit 3. Modern/UPC/Majority: half-bloods the same as whole-bloods 4. Modern/Minority: permit whole-blooded relative to take more than half-blood B. Transfers to Children a. Meaning of Children i. RULE: To qualify as an issue, a party must establish a parent-child relationship ii. Adopted Children 1. Split a. General Rule: adopting parents step into shoes of natural parents, adoption severs parent-child relationship w/ natural parents. Child cannot inherit from and through natural parents and vice versa. Child inherits from and through adoptive parents and vice versa. Adoption is not revocable if relationship turns sour. b. Stepparent adoption exception: i. Adoption does not affect parent-child relationship b/t adopted child and natural parent who is married to adopting stepparent ii. Adoption establishes a parent-child relationship b/t adopting stepparent and child w/ full inheritance rights iii. Adoption does not completely sever parent-child relationship w/ natural parent of same gender as adopting stepparent. Natural parent loses right to inherit from child. 1. HYPO: H and W are married. 4 children: A, B, C, D. H dies. W remarries H2. H2 adopts A, B, C, and D. H‘s brother dies intestate, w/ no surviving spouse, issue or parents. Can H‘s children take from deceased natural uncle‘s estate? a. Hall v. Vallandigham – Applied general adoption rule to stepparent adoption scenario. Parent-child relationship w/ natural parent is completely severed. b. Modern trend/UPC: can still inherit from/through natural parent of same gender as adopting stepparent. c. Adult Adoption i. Generally, treated same as child adoption ii. Unless instrument expresses a contrary intent. iii. Adoption of adult spouse  some cts skeptical 1. Minary v. Citizens Fidelity Bank & Trust Co. – a. D‘s child adopted wife and died w/ no children so she could take under his mother‘s will. HELD: though legal, adoption thwarted remote ancestor‘s intent. 2. Equitable Adoption a. Traditional: Requirements (contractual in nature) i. An agreement b/t natural parents and adoptive parents to adopt child (written, oral, or implied) ii. Natural parents fully perform by giving up custody of child iii. Child fully performs by moving in and living w/ adoptive parents iv. Adoptive parents partially perform by taking child in and raising child as their own v. Adoptive parents die intestate b. O’Neil v. Wilkes – i. First requirement not satisfied b/c aunt lacked legal custody and authority to enter into agreement. Dissent argued: (1) courts apply rule it to promote equity, (2) that doctrine should apply any time child is led to believe that he or she was adopted. iii. Posthumous Children – conceived before, born after father‘s death. Child can take. iv. Children born out of wedlock – Page 3 of 32 1. CL: considered ―illegitimate‖ and cannot inherit/ though natural parent; vice versa 2. Modern trend: Child automatically has P-C relationship w/ natural mom and can inherit from/ through natural mother. But from/through natural dad requires proof of paternity. b. Gifts to Children: Advancements – i. Do inter vivos gifts count against heir‘s share of D‘s probate estate???? 1. CL: If parent makes an inter vivos gift to a child, irrebuttable presumption arises that gift is an advancement that counts against child‘s share a. hotchpot – all inter vivos gifts to child are added back into parent‘s probate estate to create ―hotchpot‖. Hotchpot is divided equally among D‘s heirs. Any advancement received by child is subtracted from that child‘s share of hotchpot. b. HYPO: D died intestate w/ 3 children: A, B, C. D gave A inter vivos gifts totaling $25K. D gave B inter vivos gifts totaling $50K. D gave C inter vivos gifts totaling $75K. D died w/ estate of $150K. How much does each child take? i. Inter vivos gifts are added back to create hotchpot. Hotchpot here is $300K. Hotchpot is divided equally: A, B, and C each get $100K. Because A received $25K inter vivos, A receives only $75K. Bc B received $50K inter vivos, B receives only $50K. And because C received $75K, C receives only $25K. 2. Modern trend/UPC § 2-109: Inter vivos gifts do not constitute an advancement unless writing indicates that donor intended such C. Bars to Succession a. Homicide i. RULE: Where a party who is otherwise entitled to take from D kills D, the equitable principle that one should not profit from one’s own wrongdoing argues against permitted killer from taking. 1. Jurisdictional split a. Passes to killer because statutory probate scheme so instructs b. Killer is barred bc one should not profit from one‘s own wrongdoing c. Legal title to D‘s prop passes to killer, but constructive trust is imposed to prevent unjust enrichment, and court orders prop to be distributed to next in line to take. ii. Is criminal conviction required? No. Criminal conviction is conclusive. In civil case, if killer, under preponderance of evidence would be found criminally accountable, killer is barred from taking. b. CPC § 259. Abuse of Elder or Dependent Adult Decedent 1. (a) Any person shall be deemed to have predeceased a decedent…where: a. (1) It has been proven by C&C evidence that person is liable for physical abuse, neglect, or fiduciary abuse of D, who was an elder or dependent adult. b. (2) person is found to have acted in bad faith c. (3) person has been found to have been reckless, oppressive, fraudulent, or malicious in commission of any of acts upon D, AND d. (4) D, at time acts occurred until time of death, was substantially unable to manage his or her financial resources or to resist fraud or undue influence… c. Disclaimer – decline to accept testamentary gift i. Three elements of a valid gift: 1. intent to make a gift 2. delivery 3. acceptance – devisee can disclaim, not accept testamentary gift ii. RULE: Disclaiming party is treated as having predeceased decedent. Property is distributed to next eligible taker under various rules of who takes in event taker predeceases D. iii. Benefits of Disclaiming 1. Redistribute prop a. Post-mortem estate planning. i. HYPO: D dies intestate survived by spouse and 2 children. If children are both adults, they can disclaim interests to increase share to surviving spouse. Treated as predeceased D. As long as children have no issue, D is now treated as if he or she had no surviving issue, in which case more of D‘s prop passes to surviving spouse. 2. Avoid estate and gift tax consequences a. If one accepts prop, then gives ti to next taker in line, gift tax consequences of transfer may result. But…if one disclaims and legal effect is simply to pass prop in question to next taker in line, disclaimer has no gift tax consequence. Page 4 of 32 b. HYPO: 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 intestacy to A‘s child, B, who is O‘s niece. Thus, to pass prop on to A‘s child w/out a gift or estate tax being levied on it when it leaves A‘s hands, A may decide to disclaim inheritance. 3. Income tax a. Also, if B is taxed at a lower income tax rate than A, A‘s disclaiming inheritance will save income taxes bc any returns on prop will be taxable at B‘s lower rate 4. Avoid creditors a. If taker disclaims, prop will not go to creditors b. If gift is rejected = taker never had a prop interest and creditors cannot reach it. c. Exception - federal government as creditor i. Troy v. Hart – D died intestate survived by 2 sisters, 1 brother who was on Medicaid. Bro executed disclaimer transferring his share to sisters. HELD: against public policy to permit Medicaid recipient to disclaim interest and continue to receive public aid. iv. UPC § 2-105. No Taker [Escheat] If there is no taker under the provisions of this Article, the intestate estate passes to the [state]. Wills: Capacity and Contests A. Mental Capacity a. Test of Mental Capacity i. Requirements 1. must be an adult (18+) 2. must be capable of knowing and understanding in a general way the a. nature and extent of prop b. natural objects of bounty, and c. disposition of that prop, and d. able to relate these elements to one another and form an orderly desire re disposition of prop ii. In re Estate of Wright – 1. Witnesses testified that T was crazy when executed will. Rule: presume capacity. B. Insane Delusion a. Defined: a false sense of reality to which a person adheres despite all evidence to the contrary. b. Different than a mistake – mistake is susceptible to correction if testator is told truth. c. Rules: i. MAJ Rational Person Test – if rational person couldn‘t reach same conclusion under circumstances, belief is insane delusion (less protective of T‘s intent) 1. In Re Honigman – Crazy H thought W was cheating. Contestants presented sufficient evidence to show insane delusion. ii. MIN Any Factual Basis Test – if there is any factual basis to support belief, belief is not an insane delusion (more protective of T‘s intent) iii. Causation 1. Only part of the will influenced by insane delusion fails. 2. If insane delusions exist but don‘t affect dispositions, entire will stands. C. Undue Influence (UI) a. UI is substituted intent --- when one influences T to extent that will expresses influencer‘s intent, not T‘s intent. Can include coercion (usually mental, not physical) b. Apply 1st: Burden Shifting Approach i. Presumption of UI arises if: 1. there was a confidential relationship between D and testator 2. D receives bulk of T‘s estate 3. T was of weakened intellect ii. If these are satisfied, a presumption of UI arises and burden shifts to D to rebut presumption 1. Lipper v. Weslow – T disinherited grandchildren (children of dead son). Even though surviving son lived next door, T was old, etc, there was no causation because T told people that she wanted to disinherit grandchildren. c. Apply 2nd: Traditional Approach – Challenger must be prove that i. T was susceptible to undue influence ii. influencer had motive to exercise UI iii. influencer had opportunity to exercise UI; and Page 5 of 32 iv. Disposition of estate is result of UI 1. Estate of Lakatosh – T was susceptible, old, and lonely. Influencer had time and no $$. Influencer was only one visiting her and had power of attorney. Held: UI. d. NOTE: No-Contest Clauses i. Defined: provides that B who contests will takes nothing or a token amount if loose contest ii. MAJ: enforce no-contest clause unless there is probable cause for contest iii. MIN: enforce no-contest clauses unless contestant alleges forgery or subsequent revocation by a later will or codicil, or beneficiary is contesting a provision benefiting drafter of will or any witness thereto. e. NOTE: Bequest to Attorneys i. Undue influence – presumption of UI arises when an attorney-drafter receives a legacy unless atty is related to T. Presumption can be rebutted by C&C evidence provided by atty. 1. CA: Bequest to atty-drafter is invalid unless atty is related by blood or marriage to T. Exception: client can consult independent atty who attaches ―Certificate of Independent Review,‖ (gift if not due to UI, fraud, or duress) D. Fraud a. Defined: Intentional misrep, made knowingly and purposely to influence T‘s testamentary scheme that causes T to dispose of prop in way which T would not have otherwise. b. Misrepresentation i. Must be made w/ both: 1. intent to deceive T; and 2. purpose of influencing testamentary disposition c. Two ways fraud occurs in testamentary setting i. Fraud in inducement – when a person misrepresents facts, thereby causing T to execute a will, to include particular provisions in wrongdoer‘s favor, or to refrain from executing or revoking a will ii. Fraud in execution – when a person misrepresents character or contents of instrument signed by T, which does not in fact carry out T‘s intent. d. Remedies: i. Strike will ii. Strike will (or clause) that T would have revoked but for misconduct. iii. Impose constructive trust on parties who took D‘s probate prop and order prop distributed to parties who would have taken prop had D executed original will E. Duress a. Defined: ―wrongdoer threatened to perform or did perform a wrongful act that coerced donor into making a donative transfer that donor would not otherwise have made.‖ b. Latham v. Father Divine - D had will that gave everything to Father Divine, but later expressed her desire to give her assets to cousins. D‘s conspired to kill and did kill her. Constructive trust on Father. i. CT may be imposed where there is no fraud if court thinks unjust enrichment would result c. Tortious Interference w/ Expectancy i. Rule: Where a third party has committed misconduct [must prove fraud or UI] in testamentary process, those who would have taken but for misconduct can also sue third party for tortious interference w/ an expectancy. 1. Benefits of tort action: a. Not a will contest for purposes of no-contest clause b. Potential punitive damages c. Longer SOL – begins when party discovers/should have discovered misconduct. Wills: Formalities and Forms A. Execution of Wills a. Whether a will has been properly executed is a fxn of 2 variables: (1) jurisdiction‘s statutory Wills Act Formalities, and (2) jurisdiction‘s judicial philosophy as to what degree of compliance w/ Wills Act formalities b. Function of Formalities i. Functions Served by Formalities Testamentary Intent 1. Evidentiary – ensuring that doc offered for probate truly reflects T‘s last wishes as to who should take his or her prop 2. Protective - making it more difficult for fraudulent claims and by protecting T‘s intent as expressed in properly executed will 3. Ritualistic – impressing upon T finality of act he or she is performing a. Nonexistent during holographic will execution Page 6 of 32 4. Channeling – cumulative effect by encouraging individuals to consult an atty to draft and supervise execution of their wills, thereby facilitating probating of will and decreasing admin costs. c. Attested Wills ATTESTED WILLS Formalities Writing Signature Traditional/ CL MUST have writing. Oral wills invalid. Writing must be signed. Signature is anything T intends as signature. No requirement that individual sign full name, but if a person intends to sign full signature and doesn‘t complete it, general rule is that partial signature doesn‘t qualify as person‘s signature. Will may be singed by someone other than T, as long as person sings T‘s name, in T‘s presence, and at T‘s direction. Direction must be express. T is required to sign or acknowledge in presence of at least 2 Ws, who are present at same time. Ws must sign will, and in some jurisdictions, Ws must know that what they are signing is T‘s will. Line of Sight Test – Actor who has to perform in presence of second party has to perform specified act so that second party either sees or has opportunity of seeing the act. Modern/UPC Must have writing. Oral wills invalid. Writing must be signed. UPC doesn‘t require signature at end. Signing by Another Witnesses Where another signs for T, in T‘s presence and at T‘s direction the test for requirement that other sign in T‘s presence is conscious presence test UPC doesn‘t require Ws to be present at same time for any reason, even when T signs or acknowledges. Conscious Presence Test – Presence is defined by whether the party, in whose presence the act has to be performed can tell from sight, sound, and general awareness of events that required act is being performed. Cts still require some interaction b/t parties. W may sign will before T signs or acknowledges, as long as all parties sign will as part of one ceremony—as long as no one leaves room during execution ceremony UPC §2-502 – requires W to sign ―after‖ witnessing T perform. (1) same (2) ct might be willing to simply strike provision below signature and hold that whatever is above signature is valid. (3) Same (4) Same Presence Order of Signing T has to sing will before either W can sign. If either W signs before, must resign again after T signed  otherwise not valid. Writing Below Signature Delayed Attestation (1) if jdxn requires will be subscribed, writing below signature raises issue of whether will was subscribed. If added temporally after will was properly executed and subscribed, og will is valid and writing added later is null and void (assuming not own codicil) (2) If jdxn requires that will be subscribed, and writing below signature was added temporally before will was signed, will was not signed at end  CL = invalid (3) If jdxn does not require that will be subscribed, and writing below signature was added temporally after will was executed writing is not considered part of will. Will as it existed when it was executed can be given effect, but writing added later cannot be given effect (unless qualifies as codicil) (4) If jdxn does not require will be subscribed as long as writing below signature was added temporally before will was executed, whole will is valid, including writing physically below signature. If statute requires Ws to sign in T‘s presence, W must sign will at same time a T, in presence. If statute does not expressly require W to sign in T‘s presence, modern trend permits Ws to sign will later, even after death of T, as long as W sign within in reasonable time period. Page 7 of 32 1. Attestation Clause – makes out a prima facie case that will was duly executed 2. Interested Witness a. 5 Approaches i. CL – IW not permitted to testify in court. If IW is one of necessary W to will, w/o his or her testimony, whole will fails ii. VOID gift - By voiding gift to IW, W‘s ability to testify is restored, will can be probated, but W‘s gift is void. iii. Purging Approach – This approach adopts argument that a witness has a conflict of interest only extent he or she stands to take more under will than he or she would otherwise and purges IW only of his or her excess interest under will. 1. Calculate (1) how much W would take if will were not valid and (2) how much W stands to take under will. iv. Rebuttable presumption of Misconduct – If IW rebuts presumption of misconduct, he or she gets to keep whole gift under will if not, apply purging approach. v. Abolish - UPC abolishes IW doctrine all together 3. NOTE: Safeguarding a Will a. Usually client keeps will in safe place, such as safe deposit box or among valuable papers at client‘s home b. Sometimes a will cannot be located at death i. This can lead to presumption of revocation – see below c. Sometimes attorneys keep will and client keeps a photocopy i. Prob: may have appearance of soliciting business, an unethical practice. 4. Swapped Wills a. Traditional Rule: If two individuals have “mirror” wills prepared and they are accidentally switched, will is a nullity i. In re Pavlinko’s Estate b. Modern Trend: Cts more concerned w/ T‘s intent and less concerned w/ Wills Act formalities. Cts have stretched some existing doctrines to validate an accidentally swapped will. i. Misdescription doctrine – Ct takes EE to determine extent of misdescription and then strikes words that constitute the misdescription. Ct does not, however, insert any words or rewrite will  just strikes words that constitute misdescription and check to see if enough words are left to give effect to T‘s intent. c. Scrivener‘s error: Under mod trend, if there is C&C evidence of scrivener‘s error, and C&C evidence of its effect upon T‘s intent, extrinsic evidence is admissible to establish and to correct error. 5. Two Wills in One a. In re Snide – D and W intended to execute mutual wills at common execution ceremony, but each accidentally signed the other‘s will. Ct emphasized obvious nature of mistake and noticed that two wills constituted reciprocal elements of a unified testamentary scheme which were executed as part of one unified execution ceremony. The Ct ruled that will had been properly admitted to probate. ii. Modern Approach 1. UPC § 2-502. Execution; Witnessed Wills; Holographic Wills – a. A will must be: i. [Testamentary Capacity] ii. [Testamentary Intent] iii. In writing; iv. Signed by T or in T‘s name by another in T‘s conscious presence and by T‘s direction; and v. Signed by at least two individuals, each of whom signed w/in a reasonable time after he or she witnessed either signing of will or T‘s acknowledgement of that signature or acknowledgement of will b. A will that does not comply is valid as a holographic will, whether or not witnessed, if signature and material portions of doc are in T‘s handwriting. c. Intent that doc constitute T‘s will can be established by extrinsic evidence, including for holographic wills, portions of doc that are not in T‘s handwriting. Page 8 of 32 2. Curative Doctrines a. Substantial Compliance b. Harmless error d. Holographic Wills i. Introduction 1. Slightly over half of states and UPC recognize holographic wills 2. defined: a will written by T‘s hand and signed by T; attesting Ws not required ii. Requirements 1. MUST be in writing 2. MUST be signed – anything T intends as signature qualifies. Only T can sign a holographic will. 3. dated a. SPLIT – UPC doesn‘t require it to be dated 4. handwritten a. SPLIT i. First Generation Statutes: Entirety – all in T‘s handwriting + dated Second Generation Statutes: Material provisions – those provisions that affect disposition of T‘s prop ii. Third Generation Statutes: 1990 UPC approach – only material provisions, not entire instrument be in T‘s handwriting. And extrinsic evidence can be procured. 5. Testamentary intent (important in holographic wills bc no ritualistic function) a. Material provisions – i. Strict Compliance – intent must be discernable exclusively from T‘s handwriting. Ct ―whites out‖ any material not in T‘s handwriting and then assesses what is left to see if testamentary intent can be established. 1. Estate of Johnson – after deleting all printed material, left w/ who took and word ―estate.‖ Too ambiguous, will invalid ii. UPC Approach – testamentary intent can be derived from handwritten material, non-handwritten provisions, or other extrinsic evidence. 6. Judicial approach a. SPLIT approaches i. Strict Compliance – since W requirement is not required here, remaining requirements are so important that absolute strict compliance required ii. Flexible – bc holographic wills are intended to permit layperson to execute w/out cost of an attorney, cts should apply a looser standard 1. In re Estate of Kuralt –T wrote, ―I‘ll have lawyer visit hospital to be sure you inherit rest of the place in MT...‖ Ct emphasized that word ―inherit‖ indicated intent to make a testamentary transfer of prop. Doc was a holographic codicil to his will. b. Codicil – testamentary instrument that amends a prior will; it does not replace it. iii. Conditional Wills 1. express clause conditions effect of will upon occurrence of some event 2. Cts usually view them w/ disfavor  explanation for why person didn‘t get around to executing a will usually valid 3. Ambiguous, but often found in holographic wills because done by laypersons. B. Revocation of Wills a. RULE: Wills are executed inter vivos but are not effective until death. If T changes mind after executing a will, T can revoke it, replace it, or amend it at any time. A will may be revoked by (1) act, (2) by writing, (3) by presumption, and (4) by operation of law. b. Revocation by Physical Act i. RULE: A T can revoke a will by act if (1) act is destructive in nature (tearing, burning, obliterating, scratching, and so on) and (2) T has intent to revoke when act is performed. Someone other than T can perform act as long as it is in T’s presence and at his or her discretion. ii. CL: act has to affect at least some of words of will iii. UPC § 2-507/MOD: act need not affect words of will as long as act affects some part of will c. Revocation by Writing Page 9 of 32 i. RULE: A T can revoke a will by writing if writing qualifies as a will (either attested or holographic). A subsequent will can revoke a prior will either expressly or implicitly (through inconsistency), and either in whole or in part (in which case it is a codicil). ii. Express Revocation 1. ―I hereby revoke my prior will‖ iii. Revocation by Inconsistency 1. subsequent will disposes of D‘s prop inconsistently w/ prior will 2. Prior will is revoked to extent of any inconsistencies iv. Will versus Codicil 1. Subsequent will completely revokes prior will  subsequent will becomes sole will 2. Subsequent will partially revokes/amends prior will  subsequent will is a codicil and prior will is valid to extent it is not revoked by codicil 3. Codicil – (1) is a will and must abide by Wills Act, (2) is a will that merely amends an existing will rather than completely replacing it. UPC 2-507 4. Exception: A handwritten amendment to holographic will is valid holographic codicil, even if such amendment doesn‘t qualify as valid holographic will in their own right. v. Mixed wills and codicils 1. holographic codicils to attested wills are valid 2. attested codicils to holographic wills are valid vi. Revocation of codicil/will 1. Revocation of codicil doesn‘t revoke underlying will 2. Revocation of will revokes all codicils thereto. vii. Writing as revocation by act 1. Thompson v. Royall – Writing did not qualify as revocation by writing bc notation didn‘t qualify as valid will (not attested bc not witnessed and not holographic bc material provisions not in T‘s handwriting). Writing didn‘t qualify as revocation by act bc handwriting did not touch any of written portions of will as required under CL approach. 2. MOD trend – might qualify as valid revocation by act bc act affected some portion of will. Might also qualify as revocation by writing d. Revocation by Presumption i. Rule: Where will was last in T’s possession and cannot be found after T’s death, presumption arises that T revoked will (by act). Presumption can be rebutted if proponents prove by preponderance that more plausible explanation exists for why will cannot be found. If presumption is rebutted, will is not revoked, and under lost will doctrine, will can be probated if its terms can be established by C&C evidence. 1. Lost Will Doctrine: If presumption doctrine doesn’t apply or it applies but presumption is rebutted, will is not revoked---but it cannot be found. Lost will doctrine then applies, and will should be probated if there is requisite evidence of its terms. 2. Harrison v. Bird - Atty‘s act of tearing one of duplicate ogs was not valid revocation bc not done in T‘s presence. But, b/c pieces that were mailed were not found, presumption doctrine applied. Also, doctrine revokes all duplicate ogs found after T‘s death. e. Dependent Relative Revocation 1. RULE: Even if a will is validity revoked (in whole or in part), it may be possible to probate will if revocation was based on mistake (of fact or law) and if T would not have revoked if T had known truth. Cts tend to apply doctrine only if (1) there is a failed alt scheme (relates to mistake of law) or (2) if mistake is set forth in writing that revoked will and mistake is beyond T’s knowledge (relates to mistake of fact) ii. Examples 1. revocation by act situation a. A  ―I give $10K to B.‖ A decides B deserves more so draws line through $10K and writes $20K. A dies. ―$20K‖ is a failed holographic codicil bc no signature, not all mat provisions are in handwriting. B would get nothing bc valid revocation (line drawn) based on mistake. B should invoke DRR to get $10K. 2. revocation by writing a. A  ―I hereby give $10K to B.‖ A hears B married C and A is pissed. A properly executes codicil that provides, ―I hereby revoke my gift to B in light of her marriage to C.‖ B never married C. A dies. B should invoke DRR to get $10K. 3. tendencies a. usually, where revocation is by act, mistake is mistake of law b. usually, where revocation is by writing, mistake is mistake of fact Page 10 of 32 Revival i. Assuming a T validly executes W#1, and thereafter validly executes W#2 that expressly or implicitly revokes will #1, and thereafter validly revokes W#2 intending to give effect to W31, the jurisdictions are SPLIT over what T must do to “revive” W#1. 1. English Approach – When W2 was revoked, W1 was uncovered and is valid 2. American Approach a. MIN Approach – T must reexecutes W1 to revive it (or incorporate by reference into valid new will). Must go through will act formalities again. b. MAJ/UPC Approach – to revive W1, T just has to intend to revive it i. If revoked W2 by act, any evidence of intent ok ii. If revoked W2 by writing, intent to revive W1 must be set in new will (W3) g. Revocation by Operation of Law i. RULE: Where T divorces, all of provisions of will in favor of ex-spouse are automatically revoked by operation of law unless will expressly provides otherwise. 1. modern trend/UPC – doctrine also applies to will substitutes ii. Marriage/Birth of Child  omitted spouse, omitted child doctrines iii. In some jurisdictions, doctrine also applies to ex-spouse‘s family and other probate instruments. C. Components of a Will a. Integration of Wills i. Scope of will starts w/determination of what constitutes pages of will. Integration provides that those pieces of paper that are physically present at time of execution and that T intends to be part of will constitute pages of will. b. Republication by Codicil  executing codicil to will ―reexecutes‖ and ―republishes‖ underlying will i. General Rule – A codicil has effect of reexecuting, republishing, and thus redating underlying will, BUT if redating underlying will appears inconsistent with T‘s intent, cts do not have to redate will. ii. Preexisting Will – classifying will as codicil implicitly presumes a preexisting valid will. If underlying will is not valid, ―codicil‖ is not a codicil, but rather its own freestanding will (even if it doesn‘t dispose of T‘s prop). As a will, it doesn‘t automatically reexecute and republish invalid will, but may still be possible to use valid will to give effect to testamentary wishes expressed in invalid will through incorporation by reference. 1. Exception – some states don‘t recognize incorporation by reference. iii. Curative powers – If potential probs w/ og will execution ceremony that do not affect its validity in whole, probs may be cured by republication by codicil doctrine. As long as problem is not present when codicil is executed, codicil‘s execution is deemed to reexecute and republish underlying will, thereby curing possible problem in will. c. Incorporation by Reference i. UPC § 2-510 – A valid will can incorporate by reference a doc that was not executed w/ Wills Act formalities as long as 1. will expresses intent to incorporate doc 2. will describes doc w/ reasonable certainty a. low threshold for first 2 requirements 3. doc being incorporated was in existence when will was executed. a. Clark v. Greenhalge - T created will (1977, codicil #1 May 1980, codicil #2 Oct. 1980 (republished)). T created memo (1972, 1976) and notebook to dispose of prop. (1979). HELD: will was broad enough to include both memo and notebook, and that will described notebook with reasonable certainty. b. Simon v. Grayson - Letter was created after will was executed, so it could not have been incorporated into will as initially executed. 4. UPC § 2-513 APPROACH – T can give away his or her tangible personal prop via a list not executed w/ Wills Act formalities even if list is created AFTER will is executed, as long as will expressly states such intent. ii. Johnson v. Johnson – Montrose Church Case!! - Single page instrument was offered for probate as decedent‘s will (not signed or witnessed). At bottom of page, in decedent‘s handwriting: ―To my brother James I give ten dollars only. This will shall be complete…D.G. Johnson.‖ Typed portion of paper didn‘t qualify as a will. Bottom handwritten portion did qualify as a valid holographic will. I: Can scope of valid holographic will be expanded to give effect to testamentary intent expressed in typed paragraphs that did not qualify as a will. a. Republication by Codicil – underlying will is invalid. Holographic will cannot be codicil. Republication by codicil cannot be applied. b. Integration – typed material cannot be integrated into holographic will at bottom of page f. Page 11 of 32 Incorporation by Reference – best argument. Reference to ―This will shall be complete…‖ arguably constitutes an adequate reference to typed portions of page to satisfy low threshold for will expressing intent to incorporate and describing doc w/ reasonable certainty. Typed portion of page was in existence when handwritten provisions were added. d. Acts of Independent Significance i. RULE: A will may refer to an act or even that is to occur outside of will, and that act or event may control either who takes under will or how much a B takes ,as long as reference act has its own significance independent on its effect on will. ii. UPC § 2-512: A will may dispose of prop by reference to act outside of will (who takes or how much a B takes) as long as referenced act has significance independent of its effect on T‘s probate estate. iii. AIS permits T to ―change‖ provisions of will w/o having to execute a codicil. Counterargument is that will is not really being ―changed‖ bc language of will reference an act that occurred outside of will and was performed for reasons independent of its effect upon T‘s will. Although act may affect who takes under T‘s will, act has its own significant independent of its effect on will. iv. Example: ―I give 1. $1K to each of my son-in-laws, 2. all of stuff in my garage to my bro, Bob, and 3. $10K to each of the persons I will identify in a letter I will leave for my executor‖ 4. At time, T has 2 unmarried daughters. Then they got married. T bought lawnmower and put in garage. T wrote letter to executor to give $10K to C and K. a. Analysis i. (1) Act is that of daughters getting married. T doesn‘t have to write codicil for new sons-in-law to take ii. (2) Act is putting things in and taking things out of garage. T doesn‘t have to write new codicil each time she puts something in garage iii. (3) letter has NO independent significance because it only deals with who takes under the will. c. WILL SUBSTITUTES: Non Probate Transfers and Planning for Incapacity A. Life Insurance, Pension Accounts, Bank Accounts, and other Payable-On-Death Arrangements a. Life Insurance i. Agreement: 1. if insured dies while covered by policy, co will pay benefits to B designated in policy 2. no Wills Act formalities needed ii. Types 1. Whole Life – insured purchases coverage for whole life at upfront purchase price 2. Term life - insured purchases coverage for a fixed period of time. iii. CL RULE: only type of K w/ POD clause that qualified as valid nonprobate transfer was a life insurance K. 1. Wilhoit v. Peoples Life Insurance Co. rd iv. Modern Trend/ UPC APPROACH § 6-101: All 3 party B Ks w/ POD clause are valid 1. Estate of Hillowitz - Terms of written partnership agreement included an express POD clause that provided that upon his death, his share of club was to go to his W. Executors of estate challenged validity of POD clause, claiming it was an invalid testamentary transfer. Ct applied modern trend and held clause valid as a valid K w/ POD clause. v. SUPERWILLS 1. defined: will permitted to change terms of a will substitute 2. General rule: superwills rejected in most jurisdictions 3. Cook v. Equitable Life Assurance Society - T purchased life insurance policy and designated his wife Doris, as B. Then he and Doris divorced, and he married Margaret. Insurance policy provided that owner of policy may change B by written notice. T never gave written notice, but after his marriage to M he executed a holographic will that expressly stated that he was giving insurance policy to M and his son. Ct declined to adopt superwill doctrine. Bc T had failed to comply w/ terms of insurance policy for how policy B could be changed, og designation of Doris as a B controlled. 4. UPC – adopts superwill doctrine only if K permits B of policy to be changed by a subsequently executed will. b. Pension Accounts Page 12 of 32 i. Involve creation of prop right in a fund of $$ to be used by individual upon retirement. ii. Defined Benefits Plan – funded by employer, and employee is entitled to a fixed benefit for remainder of lifetime iii. Defined Contribution Plan – each month, employer and employee contribute a fixed % of employee‘s salary to account set up for individual. Upon retirement, individual has rights to funds iv. Federal Regulation Employee Retirement Income Security Act of 1974 (ERISA) 1. Egelhoff v. Egelhoff - H died w/out changing his B designation. Wash statute provided that divorce automatically revokes B designation in favor of ex-spouse in all revocable nonprobate arrangements. ERISA expressly preempts state laws insofar as they may ―relate to any employee benefit plan.‖ HELD: Wash statute was preempted because it (1) would control who receives benefits under an ERISA plan and (2) interfered w/ nationally unified plan of administration. c. Multiple-Party Bank and Brokerage Accounts i. RULE: Historically, banks and brokerage houses forced parties interested in creating multiple party accounts to use the joint tenancy account if that is not what parties indented. ii. Three intentions depositor might have when opening a multiple party account 1. a true joint tenancy 2. a convenience/agency account 3. a POD account iii. Cts take extrinsic evidence to determine depositor‘s true intent 1. Franklin v. Anna National Bank of Anna a. T had caretaker #1 added to account access it when they needed $$. Then T asked bank to remove C#1 and change to C#2. Ct found C&C evidence that when W added G‗s name to account, he intended an agency account. 2. UPC APPROACH: upon death of any party, it is presumed that there is a right of survivorship. Presumptions control distribution of $$ in account unless C&C evidence of a contrary intent exists. B. Joint Tenancies in Real Prop a. No interest passes when a joint tenant dies b. JT can be severed inter vivos and converted into tenancy in common, but mere execution of a will does not sever JT c. Nothing is left for creditors of a deceased JT to reach  must assert claims while JT is still alive Construction of Wills A. Mistaken or Ambiguous Language in Wills a. Traditional Approach: No Extrinsic Evidence, No Reformation i. CL – reluctant to admit EE to held construe a will could lead to fraud. 1. MAJ: Plain Meaning Rule – in construing and giving effect to a will, words used in will should be given their plain meaning. EE is generally not admissible to show that T used words to mean something other than their plain meaning. EE is admissible to help construe a word or phrase in a will if there is an ambiguity. a. Mahoney v. Grainger - T left to ―heirs at law‖ intending to give to cousins but she actually had an aunt. CT applied plain meaning rule and found that phrase ―heirs at law was not ambiguous‖. Extrinsic evidence was not admissible to establish a meaning for phrase ―heirs at law‖ that was inconsistent w/ plain meaning of that phrase. 2. personal usage exception – if T has always referenced person by a name other than person‘s true name, and T uses that name in will, cts take EE to show that T always called person by that name and to show that person called by nickname is person who is supposed to take gift, not person whose true name actually matches name used in will. ii. Patent v. latent ambiguity 1. patent – ambiguity on face a. At CL, EE not admissible to help construe ambiguity 2. latent – hidden ambiguity becomes apparent when ct tries to probate will a. At CL – EE admitted. EE is necessary to establish ambiguity. i. BUT…cts will not add words to will or ―rewrite‖ will. b. Latent Ambiguity Doctrines Page 13 of 32 i. Equivocation – where language in will fits more than one object or person equally well  ct takes EE to determine which of objects or people is intended object or person. ii. Misdescription  arises where description of object or person in will appears fine on face of will, but when ct goes to apply it, no object or person matches exact description, but one exists that almost matches description. b. Slouching Toward Reformation: Correcting Mistakes W/out the Power to Reform Wills i. Causes and Effects of Will Defects 1. Modern Trend a. Ct killed Plain Meaning Rule. Cts take surrounding circumstance evidence at time T executed will to determine ambiguity in will. Distinction b/t latent and patent ambiguities are abolished. EE is admitted anytime there is an ambiguity. Cts take EE to reform a will if there is C&C evidence that (1) will contains a mistake; and (2) its effect on T‘s intent. b. EE can be admitted anytime there is a patent or latent ambiguity. c. EE allowed to correct mistakes in light of T‘s intent 2. Arnheiter v. Arnheiter - T‘s will had executor sell her interest in ―304 Harrison Ave.‖ But T owned ½ interest in 317 Harrison. Ct applied misdescription doctrine, admitting EE to establish misdescription, striking misdescription, then construing ambiguity as referring to only prop on Harrison in which she did have an interest. 3. Estate of Gibbs - T devised prop to Robert J. Krause that lived in Milwaukee. But, T didn‘t know Robert J.…knew Robert W. Krause. Ct said it was a reformation. Ct allows will to be reformed when an address is wrong or if an initial is wrong. c. Openly Reforming Wills for Mistake rd i. Restatement 3 of Prop  cts can reform any donative doc, even where there is no ambiguity to conform to donor‘s intent if there is C&C evidence (1) that a mistake of fact or law affected specific terms of doc and (2) of donor‘s intent. B. Death of Beneficiary Before Death of Testator a. Survival Requirement – anyone taking from a decedent must survive decedent. i. CL – by preponderance ii. MODERN/UPC – by clear and convincing b. Lapse – if B fails to survive, gift lapses i. Why? It is presumed that T intended B personally to benefit from gift. If B dies and there is no lapse doctrine, gift passes to B‘s estate to be distributed either to B under predeceased B‘s will or to predeceased B‘s heirs---neither of whom the T may have met. Reasonable presumption that if named B predeceased T, T would prefer that gift be revoked. c. Failed gift – gift may fail if void, lapses, made to ineligible taker (pet) or may violate RAP i. if specific gift fails  to residuary clause; or intestacy ii. if general gift fails  to residuary clause; or intestacy iii. if residuary gift fails  to intestacy iv. If multiple takers in residuary clause, and it fails as to one or more but not all, jurisdictions are SPLIT as to what happens to part of residuary clause that fails 1. CL – ―No residue of a residue‖ rule  if part fails, it goes to intestacy a. Estate of Russell - T‘s valid holographic will: ―I leave everything I own Real and Personal to Chester H. Quinn and Roxy Russell. Roxy was a dog. Ct ruled that fact that R was dog was a latent ambiguity and EE was admissible. Dogs are not eligible Bs so gift to R failed. Gift to R was in residuary clause and ct applied ―no residue of a residue‖ rule and R‘s half fell to intestacy. 2. MODERN/UPC APPROACH – Ts intent was for all to pass to via will and nothing should pass through intestacy d. Antilapse Statutes i. Presumption that T would prefer that gift fail where beneficiary predeceases T arguably does not apply were B is sufficiently related to T and B has issue who survive T. In that situation, antilapse statutes presume that T would prefer that gift go to predeceased B‘s issue rather than fail. Presumption can be rebutted, but only by an express contrary intent expressed in will. Virtually all states have adopted anti-lapse doctrine…details vary. ii. UPC § 2-605 – Antilapse statutes provide that (1) where there is a lapse, and (2) predeceased B meets statutory degrees of relationship to T, and(3) predeceased B has issue who survive T, lapsed gift goes to issue of predeceased B (4) unless will expresses a contrary intent 1. lapse requirement, can occur in following ways: Page 14 of 32 2. 3. 4. 5. a. actually predeceased b. disclaimer c. constructive trust imposed requisite degree of relationship a. descendants vs. a larger pool of Bs (CA --- Any B who is related to T or T‘s spouse, current or form) Survived by issue – must survive B and T. T by 120 hours. a. CX: Simultaneous Death Contrary intent – a. Anti-lapse doctrine is based on presumed intent. If B is related closely enough to T and is survived by issue, T is presumed to have preferred that gift o to issue of predeceased B rather than fail. This presumption is rebuttable , but contrary intent must be expressed will under most anti-lapse statutes. b. Allen v. Talley - T devised all of prop ―to my living brothers and sisters, A,B,C, D, E, to share and share alike…‖ A, B and C predeceased T, each survived by issue who survived T. Ct held that use of word living constituted an express contrary intent barring application of anti-lapse. Spouses – anti-lapse does not apply to spouses  although norm is for issue of predecesed spouse to also be issue of T, this is not always the case. a. Jackson v. Shultz - Although state‘s anti-lapse statute did not cover spouses, ct reasoned that words and and or are interchangeable when construing wills. Rather than T‘s will devising his prop to ―W and her heirs‖ (which is classic drafting language to indicate that W took a FSA but no interest passes to her heirs) ct construed express language of will to read ―to W or her heirs‖ (thereby giving W‘s heirs a gift-over in the event W predeceased the T). Ct‘s construction had same effect as applying anti-lapse to W. e. Class Gifts i. Defined: a gift to more than one individual that intrinsically includes a right of survivorship ii. Analysis – Look at these factors to determine if trust is intended. 1. How did T describe Bs? 2. How did T describe gift? 3. Do Bs share a common characteristic? 4. What is T‘s overall testamentary scheme? iii. Rstmt 3d Prop: Wills and Other Donative Transfers §§ 13.1, 13.2 1. If gift describes Bs (1) only by group label, a rebuttable presumption arises that gift is class gift, (2) only by name, gift is not class gift and (3) by both group label and individual names (or number of Bs) a rebuttable presumption arises that gift is not class gift. a. Dawson v. Yucus - T had 1/5 interest in farm. Devised interest ½ to A and ½ to C (on husband‘s side). C died. Anti-lapse did not apply bc state required predeceased B to be a descendant. I: Was this a class gift?? Against class gift: B‘s were each named, were on H‘s side of family but there were other relatives alive as well. Last clause was to one individual and gave right of survivorship. Thus, she knew how to create such survivorship right. Despite express statement that T wanted her interest in farm to return to H‘s side of family, ct held that gift to nephews was not class gift. Gift to gene lapsed and fell to residue b. In re Moss - By putting newspaper interest in trust and giving his W only life estate interest in income, T clearly indicated he did not want his W to take a share outright. If gift to niece failed and not saved by class gift doctrine, nieces share would fall to residuary and go outright to W. Ct applied class gift doctrine bc it meshed w/ overall testamentary scheme to limit W‘s interest in newspaper to life estate. C. Changes in Prop After Execution of Will a. Characterization of Gifts i. Specific – T has specific item in mind (i.e. car or piece of jewelry) ii. General – general value (i.e. money) iii. Demonstrative – general gifts from a specific source iv. Residuary – gift that gives away all of T‘s prop that has not otherwise been given away. b. Ademption by Extinction i. T makes specific gift in will and thereafter item in question is transferred. What, if anything, should the beneficiary take? 1. CL: irrebuttable presumption arises that T indented to revoke gift. Page 15 of 32 ii. Two Theories 1. MAJ Identity Theory – if specifically devised item is not in Ts estate, gift is extinguished. T‘s intent is irrelevant a. Wasserman v. Cohen - Trust directed TR to convey ―12-14 Newton Street, Apt Building‖ to B. S never transferred building to trust. Instead, sold it. Residuary clause of will transferred her residuary estate to trust to be disposed of pursuant to terms of trust. Ct found that gift of apartment building was adeemed. B asked court to consider EE as to D‘s intent when she sold apartment building. Pursuant to identify approach, ct refused to consider extrinsic evidence. B took nothing. 2. MIN Intent theory – if specifically devised item is not in Ts estate, B may still be entitled to cash value of item if B can show that this is what T wanted. T‘s intent is key. 3. Effect on residuary – residuary taker looses out under intent because value of specific devise is pulled out of residuary. Residuary devisee typically argues that there was ademption by extinction under the identity theory 4. Avoidance doctrines a. Bc ademption is such a harsh doctrine, a number of avoidance doctrines have arisen: (1) classify gift as general, not specific, so ademption doctrine does not apply; (2) if item is still in T‘s estate but it has changed, argue that change is merely one in form, not substance, in which case B is still entitled to item; or (3) construe will at time of death, not execution, and give B matching item in T‘s estate at death even if that is not item to which T was referring when will was executed. 5. Softening doctrines a. A couple of doctrines that soften impact of ademption have also arisen: (1) if, as a result of transfer of item that was subject of specific gift, T is owed an outstanding balance, outstanding balance goes to B; and (2) if specific gift was transferred while a conservator or durable power of attorney agent was acting for T, beneficiary is entitled to monetary equivalent of net sale price. iii. UPC § 2-606 Nonademption of Specific Devises; Unpaid Proceeds of Sale, Condemnation, or Insurance; Sale by Conservator or Agent. 1. Replacement Prop exemption a. Where T owns prop at death that was acquired to replace prop that was a specific gift in his or her will, B of specific gift gets replacement prop. 2. Outstanding Balance Doctrine a. Whether prop is transferred voluntarily or involuntarily, if T is owed $$ at time of death as a result of transfer of prop subject to specific gift, outstanding balance is given to beneficiary of specific gift. c. Stock Splits and the Problem of Increase i. CL – specific or general. Specific – change is due to a stock split, beneficiary takes additional shares. General – B does not take additional shares following stock split. ii. Modern – even if gift of stock is general, intent was to give a % interest in co  thus if stock splits, B gets all. d. Satisfaction of General Pecuniary Bequests i. CL – if T makes inter vivos gift to his or her child and child is also a B in T‘s will, a rebuttable presumption arise that inter vivos gift counts against child‘s testamentary gift ii. Modern Trend/UPC – if T makes inter vivos gift to anyone who is also a B under his or her will, gift does not count against B‘s testamentary gift unless writing evidences such intent e. Exoneration of Liens i. CL – if a specific gift is burdened w/ debt absent contrary intent expressed in will, it is presumed that B of specific gift is entitled to have debt completely pad off (out of residuary clause) so that B takes gift free and clear of debt. ii. Modern – B takes subject to debt absent an express clause directing that debt is to be satisfied before gift is made f. Abatement i. If at time of death T has made more gifts than he or she has assets doctrine of abatement states that residuary gift should be reduced first, general gifts second and specific gifts last. Restrictions on the Power of Disposition: Protection of the Spouse and Children A. Rights of the Surviving Spouse a. Rights of a Surviving Spouse in Community Prop Page 16 of 32 i. Basic Information 1. While prop acquired before marriage and gifts acquired during marriage by either spouse are his or her separate prop, all earning acquired (and any prop acquired w/ such earnings) during marriage by either spouse are community prop. Each spouse has an undivided ½ interest in each CP asset. Upon one spouse‘ death, each CP asset is divided in half. Surviving spouses half is immediately and outright, thereby insuring that each spouse has a share regardless of which spouses acquired it. Deceased spouse‘s ½ goes to probate where he or she can devise it to whomever he or she wishes. ii. Putting the Survivor to an Election 1. D conditions a devise to surviving spouse on surviving spouse agreeing to deceased spouse being permitted to give away some of the surviving spouses prop. b. Migrating Couples and Multistate Prop Holdings i. Separate Prop State  Community Prop State 1. Wage earner spouse dies. Surviving spouse is entitled to 50% of their community prop, but they have not community prop. Not protected unless a. Quasi community prop – treated like community prop ii. Community Prop State  Separate Prop State 1. non wage earning spouse gets community prop share outright, deceased spouse half goes to probate. Surviving spouse can try to claim an additional one third or one half interest in deceased spouse‘s probate prop. c. Spouse Omitted From Premarital Will i. Estate of Shannon - T, unmarried widower, executed will leaving all prop to daughter, saying all others get $1. T remarried and died w/o revising will. W claimed pretermitted spouse. Daughter claimed that clause gave her $1; she was taken care of outside will. Ct said clause as not written w/ new marriage in mind. Ct held evidence insufficient to show that T intended the $$ to be in lieu of new wife taking under will and granted her a pretermitted spouses share of his estate. ii. UPC § 2-301 – Entitlement of Spouse; Premarital Will (a) If a T‘s surviving spouse married T after T executed will, surviving spouse is entitled to receive, as an intestate share, no less than value would have received if T had died intestate, that neither is devised to a child of T who was born before T married surviving spouse and who is not a child of the surviving spouse nor passes to child of descendant unless: (1) it appears from will or other evidence that will was made in contemplation of T‘s marriage to surviving spouse; (2) will expresses intention that it is to be effective even if marries again; or (3) T provided for spouse by transfer outside will and intent that transfer be in lieu of a testamentary provision is shown by T‘s statements or is reasonably inferred from amount of transfer/other evidence. (b) In satisfying share, devises made by will to T‘s surviving spouse, if any, are applied first, and other devises, other than a devise to a child of the testator who was born before T married surviving spouse and who is not a child of the surviving spouse or a devise or substitute gift. B. Rights of Issue Omitted from the Will a. Protection from Intentional Omission i. The Domestic Approach 1. can disinherit a child, except in LA ii. A Look Abroad: Family Maintenance Statutes 1. Lambeff v. Farmers Co-operative Executors & TRs Ltd. (Australia) - H married W and had D. 10 years later he and W separated and H established relationship w/ B, his defacto W. G and B had two sons. He died and left estate to sons. D petitioned court for share of estate. Noted that her father ignored her. Ct noted that she was better off than sons but awarded her some of the money. b. Protection from Unintentional Omission i. Azcunce v. Estate of Azcunce - T executed will that established trust for W and 3 children. T‘s th wife gave birth to 4 child. T went to atty to have will revised to provide for new child, but there were questions as to T‘s available assets. T executed a codicil that changed his co-TR and coth personal rep. T died. 4 D claimed omitted child status. Ct applied republication by codicil, redated will to after D‘s birth and ruled that D was not an omitted child bc she was born before the will was executed. ii. UPC § 2-302 Omitted Children 1. Same as traditional doctrine w/revisions as follows: a. Applies to children born or adopted after will Page 17 of 32 b. Evidence that failure to provide of child was intentional must be in will c. If other children, this is simply used to calculate omitted child‘s share i. If no children  omitted child gets intestate share, unless T devised all to other parent ii. If one or more children  omitted child gets portion taken out of their share which should be equal for all children TRUSTS Trusts: Creation & Characteristics A. Introduction a. Background i. Defined: A trust is a bifurcated gift/legal devise where prop is transferred by a settlor or trustor into a trust, trust divides up the prop into legal title (held by TR) and equitable title (held by beneficiary). b. The Parties to a Trust i. Settlor – party who creates trust ii. TR – party to whom S transfers trust prop; holds legal title to trust prop and manages prop for duration of trust iii. Beneficiaries – parties who hold equitable interest in trust; parties to whom TR owes a fiduciary duty c. Trust Purposes i. Anything! ii. Avoid probate iii. To hold prop for minor iv. Estate planning/tax planning v. To influence B‘s behavior d. A Trust Compared w/ a Legal Life Estate B. Creation of a Trust a. Requirements i. (1) settlor must have intent to create trust ii. (2) must be trust prop iii. (3) beneficiaries must be ascertainable iv. (4) possibly a writing b. (1) Intent to Create a Trust i. Intent to vest beneficial interest in a third party. No technical words are necessary. Will not fail for want of TR (Ct will appoint) 1. Lux v. Lux - Ct ruled that use of phrases ―shall be maintained‖ and ―shall not be sold‖ indicated intent to create a trust. Ct appointed executor of estate TR. 2. Jimenez v. Lee – Grantors made trust. Father was TR. Daughter was beneficiary. Grantors clearly indicated that $$ given to father was for daughter‘s edu. Thus there was intent. ii. Precatory trust – outright gift from donor to donee, but donor includes language that expresses hope, or the wish---but no legal obligation that prop be used for benefit of another. iii. Equitable charge 1. creates a debtor/collector relationship 2. What if equitable charge is for $1,000 and property goes up to a 1million. Creditor can‘t take more when property increases. iv. Failed gifts – donor has intent to make gift, but it fails for want of delivery, donee may try to save failed gift by recharacterizing donor‘s intent as intent to create a trust. 1. Hebrew University Association v. Nye (1961) – Gift of library collection failed for want of delivery. E never referred to herself as a TR nor acted like TR w/ respect to prop. Ct found no evidence to support a declaration of trust. 2. Hebrew University Association v. Nye (1966) - HUA brought forth evidence that E expressed intent to make inter vivos gift of library to HUA, she gave HUA a memo containing a list of contents of library. Ct held that in light of her intent to make a gift of library, memo constituted constructive delivery constituting an inter vivos gift. Trust upheld b/c delivery. c. (2) Necessity of Trust Prop i. Trust must be funded to be valid Page 18 of 32 1. Act of Funding – some prop MUST be transferred to trust a. Unthank v. Rippstein - A wrote a letter to B saying that he would send her ―$200.00 cash every month for next five years.‖ A died. HELD: (1) insufficient evidence of intent to create a trust or of any funding, (2) letter expressed merely a gratuitous promise to make future gifts that failed for want of delivery. 2. What Type of Prop Interest is Adequate to Fund a Trust? a. Anything one thinks of a prop interest except expectancies and future profits i. Expectancies in Trust 1. Brainard v. Commissioner – Taxpayer said any profits from stock investment were to be given to family after paying himself reasonable compensation. No evidence that taxpayer owned any stock at time he declared the alleged trust, and he had no prop interest at that time in any possible future profits. HELD: declaration constituted nothing more than a gratuitous undertaking to create a trust in future when profits were realized and were coupled w/ intent to create a trust. b. Future Profits as Inter vivos gifts i. Speelman v. Pascal - P wrote a letter to sec‘y: 5% of profits of play as present for her work. P died. HELD: Yes, note transferred future profits c. How do we reconcile these two cases????????????? i. Potential for tax fraud in Brainard led to the court‘s decision…but the decision actually doesn‘t mention tax fraud or potential for tax fraud ii. Writing in Speelman and oral in Brainard iii. Donor currently owned means of producing profit in Speelman (the rights to produce the play). In Brainard, there was no evidence that he owned any stock when he made his promise. ii. NOTE: Taxation of Grantor Trusts 1. In Brianard, taxpayer was trying to avoid taxes by shifting income generated by stock trading from himself, as settlor, to income Bs, who were in a lower tax bracket. Such tax avoidance is not longer available. Where settlor retains sufficient dominion and control over trust, trust is known as a grantor trust and settlor is deemed owner of income generated for tax purposes. d. (3) Necessity of Trust Beneficiaries i. There must be ascertainable beneficiaries bc interest is transferred automatically and TRs need to know to whom they owe a fiduciary duty. 1. Clark v. Campbell - T left his tangible personal prop to his TRs to give to his friends as TRs shall select. HELD: friends was not an objectively ascertainable formula. Trust failed for want of trust beneficiaries. 2. In re Searight’s Estate - T‘s will left his dog to A, and directed executor to deposit $1K in bank to pay A 75 cents/day to care for dog for its life. Money being paid to A was for benefit of dog, not own benefit; T‘s intent was to create a trust for benefit of dog. Although technically trust should fail for want of beneficiaries bc dog cant be one, ct held trust qualified as honorary trust and could continue as long as A was willing to honor terms of trust. e. (4) Necessity of a Written Instrument i. RULE: Terms of trust MUST be in writing if (1) trust is an inter vivos trust that includes real prop, or (2) trust is a testamentary trust. ii. Oral Inter Vivos Trusts of Land  Inter vivos Trusts 1. IV trust defined – typically IV trusts don‘t have to be in writing unless trust holds real prop (then, SOF concerns) 2. CL – oral trust involving real prop cannot be enforced due to SOF 3. MOD trend – constructive trust imposed and TR must distribute real prop to intended Bs – not in trust, but outright. 4. Remedy—failed IV trust: Where S executes deed transferring real prop to TR, and S and TR orally agree on terms of IV trust but deed is silent as to trust, trust fails for want of writing. At CL, the ―TR‖ is permitted to keep real prop as own bc strict application of SOF bars evidence of oral trust agreement to vary terms of deed. Under mod theory, constructive trust is imposed on ―TR‖ to prevent unjust enrichment, and TR will be ordred to transfer prop to intended Bs. a. Hieble v. Hieble - Grantor had cancer, deeded real prop to son and daughter. Children orally agreed to return prop if she wanted it. Deed made no mention of Page 19 of 32 oral agreement. Son refused to convey prop back. Son did not deny oral agreement, but asserted it was unenforceable under SOF. Ct ruled that presence of confidential relationship, lack of consideration and conduct of parties shifted BOP to defendant to show no trust by C&C evidence. Son failed to carry BOP. Ct imposed constructive trust on behalf of mother. iii. Oral Trusts for Disposition at Death  Testamentary Trusts 1. T trust defined – typically created in T‘s will, must be a writing pursuant to Wills Act Formalities. Where T Trust fails for want of writing, issue is whether relief should be a constructive trust or a resulting trust. Answer turns on whether failed T trust is secret or semi-secret trust. a. Secret trust – t trust that fails bc terms of trust are not set forth in will. On face of will, secret trust looks like an outright gift to a devisee. It is a ―secret‖ trust bc there is nothing on face of will that indicates that T intended devisee to take prop as a TR, not as a devisee, w/ beneficial interest in some third party. Cts had to admit EE to determine that devisee was supposed to take as a TR, cts use EE to impose a constructive trust on devisee…to transfer to intended Bs. b. Semi-secret trust – t trust that fails bc terms of trust are not set forth in will. ―semi-secret‖ bc there is something express language of will that indicates or at least hints at, fact that devisee was not intended to take prop for his or her own benefit. Cts do not need EE to realize that devisee is not to take beneficial interest, so cts will not take EE to identify intended Bs. Gift to devisee as TR fails. Cts impose resulting trust and give prop back to settlor/testator. Typically, prop falls to residuary clause, or if failed t trust was residuary clause, to intestacy. i. Olliffe v. Wells - T devised residuary estate to A ―to distribute in his discretion to carry out wishes which I have expressed to him or may express to him‖ Bc express language in will indicated that A was to take prop not for himself, but for benefit of others, but terms of trust were not in will, ―semi-secret‖ testamentary trust failed. Ct imposed a resulting trust on A. Bc failed testamentary trust was residuary clause of T‘s will, prop fell to intestacy where it was distributed to heirs. 1. resulting trust – reverts back to settlor ii. MOD Rule – constructive trust should be imposed on secret and semisecret [T wouldn‘t really want it going to residuary or intestacy] C. Rights of Beneficiaries to Distributions from Trust a. Mandatory trust – T must distribute all income on a regular basis b. Discretionary trust – T has discretion over when to distribute income and/or principal, or how much to distribute. Bc of TR‘s fiduciary duties to Bs, however, TR still has a duty to inquire and a duty to act reasonably and in good faith in exercising his or her discretion. i. Marsman v. Nasca - S created t trust that required TRs to pay income to her H quarterly ―for his comfort and maintenance.‖ S died. H had financial probs and TR gave H minimal amount ($300) and asked H to explain why he needed $$. H didn‘t reply, TR didn‘t follow up. HELD: TR breached duty to inquire into H‘s situation and breached his discretion in not disbursing more principal to H. 1. NOTE: Extended Discretion a. If TR has simple discretion unqualified by adjectives such as sole, absolute, uncontrolled, courts will not substitute their judgment for that of TR so long as TR acts ―not only in good faith and from proper motives, but also w/in the bounds of reasonable judgment.‖ 2. Note: Exculpatory Clauses i. Protects TR against liability for breach of trust absent ―willful neglect‖ 1. double edged swords a. can deter frivolous lawsuits by B‘s who don‘t like TR‘s actions b. reduce TRs incentives to pay attention to beneficiary‘s plight 2. Exculpatory clauses usually upheld but construed narrowly a. Unenforceable if bad faith, reckless disregard, intentionally D. Rights of Beneficiary’s Creditors a. General rule – against public policy to use trust to shield one‘s assets from one‘s creditors b. Creditors rights – can reach debtor‘s prop as long as prop interest in question is transferable. Page 20 of 32 Scope of creditor‘s rights – can reach beneficiary‘s interest in trust i. Mandatory trust – creditor can force TR to distribute income pursuant to trust just as B could have. TR MUST distribute income to creditor ii. Discretionary - creditor cannot force TR to distribute prop (absent showing of abuse of discretion as applied to beneficiary in question, not creditor) d. Discretionary Trusts i. UTC § 504 1. Creditor of B may not compel a distribution that is subject to TR‘s discretion, regardless of presence or absence of a spendthrift clause, even if there is a standard limiting discretion or TR has abused discretion unless a. (1) TR has not complied w/ a standard of distribution or there has been an abuse of discretion, and b. (2) distribution is ordered to satisfy a judgment or court order against B for support or maintenance of a child, spouse, or former spouse. e. Spendthrift Trusts i. Defined – prohibits beneficiaries from transferring their interest ii. Rule: generally valid and enforceable iii. Exceptions 1. judicial exceptions a. certain creditors are not subject to spendthrift clauses: (1) ex-spouses entitled to spousal support (can take from income only), (2) children entitled to support (can take from income or principal—B‘s for principal in own right) (3) creditors who provide basic necessities (4) tax claims by state or fed gov‘t 2. intentional torts a. Scheffel v. Krueger - K‘s grandmother set up trust for his benefit. He had mandatory interest in income, discretionary as to principal, and trust had spendthrift clause. K sexually assaulted a minor. Criminal conviction and $500K tort judgment against him. Mother of victim sought to reach K‘s interest in trust to satisfy judgment. Despite equities of claim, ct ruled spendthrift clause barred reaching K‘s assets. 3. child support a. Shelley v. Shelley - S created trust for son. Son‘s interest in income was mandatory and discretionary as to principal. Trust also authorized TR to disburse principal to son, or his children in an emergency. Trust had standard spendthrift clause. S‘s son owed both alimony and child support to ex and children. HELD: Creditors were not subject to spendthrift clause. Both ex and children were entitled to reach sons‘ mandatory interest in income and principal, but bc son‘s interest was discretionary, they could not force TR to make disbursements of principal to them as creditors. Bc children were Bs of principal in their own right, TR‘s failure to disburse principal as Bs was an abuse of discretion. Children were entitled to payments of principle in their capacity as Bs not Cs. iv. Support trusts – requires TR to pay as much income as necessary for B‘s support and edu v. UTC §§ 502, 503 1. § 502 Spendthrift Provisions a. (a) A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a B‘s interest. b. (b) A term of a trust providing that interest of a B is held subject to a ―spendthrift trust‖, is sufficient to restrain both voluntary and involuntary transfer of B‘s interest. c. (c) A B may not transfer an interest in a trust in violation of a valid spendthrift provision and a creditor or assignee of B may not reach interest or a distribution by TR before its receipt by B. 2. § 503 Exceptions to Spendthrift Provision a. (a) In this section, ―child‖ includes any person for whom an order or judgment for child support has been entered in this or another State. b. (b) A spendthrift provision is unenforceable against: i. (1) a B‘s child, spouse, or former spouse who has a judgment or court order against B for support or maintenance; ii. (2) a judgment creditor who has provided services for protection of a B‘s interest in trust; and c. Page 21 of 32 iii. (3) a claim of State or US to extent a statute of State or fed law provides. (c) A claimant against which a spendthrift provision cannot be enforced may obtain from a court an order attaching present or future distributions to or for benefit of B. Court may limit award as is appropriate under circumstances. E. Modification and Termination of Trusts a. Introduction i. A trust ends naturally when all trust principal is distributed pursuant to terms of trust. Under special circumstances, terms of trust may be modified or trust may be terminated prematurely ii. Various situations 1. If revocable  settlor can terminate or modify on her own 2. Three parties have interest in trust  can all agree to modify or terminate 3. If settlor and all beneficiaries consent  trust can be modified or terminated w/out consent of TR 4. If settlor has no interest in trust (irrevocable), and all Bs and TR consents  trust can be modified or terminated. TR owes fiduciary duty to Bs to comply w/ terms 5. If all Bs consent, but T objects, and S is dead, jurisdictions are split a. English approach – B‘s can modify b. American approach – TR has duty to S‘ intent  more dead hand control b. Modification i. if unforeseen circumstances frustrate S‘s intent and all B‘s consent, ct will order modification 1. In re Trust of Stuchell - S‘s trust provided that upon death of last surviving grandchild, trust principal was to be distributed equally to issue of grandchildren, per stirpes. One issue was mentally retarded and received Medicaid. Trust Bs proposed modifying trust to provide that institutionalized taker‘s share be continued in trust so that trust funds would be used to supplement, rather than replace, his current public assistance benefits. HELD: no unforeseen change in circumstances that substantially impaired S‘s intent, and that proposed modification was intended to make trust more advantageous to B. Ct declined to modify. ii. UTC § 412 Modification or Termination Because of Unanticipated Circumstances or Inability to Administer Trust Effectively 1. (a) Ct may modify admin or dispositive terms of a trust or terminate trust if, bc of circumstances not anticipated by settlor, modification or termination will further purposes of trust. To extent practicable, modification must be made in accordance w/ settlor‘s probable intention. 2. (b) Court may modify admin terms of a trust if continuation of trust on its existing terms would be impracticable or wasteful or impair trust‘s administration. 3. (c) Upon termination of a trust under this section, TR shall distribute trust prop in a manner consistent w/ the purposes of trust. iii. NOTE: Reformation and Modification for Tax Advantages 1. trusts can be modified to further a S‘s apparent tax minimizing objectives iv. NOTE: Trust Protectors 1. TP can be given powers and control over trust similar to those held by S of revocable trust, thereby increasing trust administration flexibility in that TP can change trust in response to changed circumstances. Whether a TP owes Bs a fiduciary duty is still up for debate, probably don‘t. UTC likes TPs c. Termination 1. Claflin Doctrine a. Consistent w/ trad Am approach of protecting S‘s intent, under C doctrine, TR can block premature termination of trust, even if all Bs consent, if trust has an unfulfilled material purpose. If, no purpose and all B‘s consent, TR cannot block b. In re Estate of Brown - D‘s testamentary trust authorized TR to use income and principal for edu for D‘s nephew‘s children. Upon completion of that purpose, income and principal were to be used for care, maintenance and welfare of nephew and his wife so that they could live well for their lives. Upon death of survivor, trust res would go to their living children equally. When edu purpose was fulfilled, Bs petitioned to terminate trust. TR objected. HELD: trust expressed material purpose that nephew and wife were to be assured life long support through TR‘s management of trust res. Ct declined to terminate trust. ii. NOTE: Revocable Versus Irrevocable Trusts 1. MAJ – trust is irrevocable unless trust expressly provides otherwise 2. MIN – trust is revocable unless provides otherwise c. Page 22 of 32 3. Revocation by Will a. Traditional rule – will cannot revoke inter vivos trust unless trust expressly authorizes it b. UTC and Rstmt – will can revoke a revocable trust unless trust expressly provides for how it is to be revoked. d. TR Removal i. UTC § 706 – Ss are given standing (along w/ Ts and Bs) to seek removal; T can be removed if 1. there is a material breach of trust 2. infighting among co-TRs substantially impairs its administration 3. trust has underperformed persistently and substantially relative to comparable trusts 4. due to changed circumstances, change of TR is in Bs best interests Building Flexibility Into Trusts: Powers of Appointment A. Introduction a. Overview i. In trust, party who holds POA has ability to direct a TR to distribute some or all of trust prop regardless of distributive provisions of trust. While a POA may be given to anyone, if a power to appoint prop held in trust is created, power is usually given to one of trust Bs. b. Terminology i. Donorparty who creates POA ii. Donee party who holds and has right to exercise POA iii. Appointive prop prop that is subject to POA; prop that donee may appoint iv. Objectsclass of individuals to whom prop may be appointed; group of eligible appointees in whose favor power may be exercised v. Appointees individuals to whom prop is actually appointed; individuals whose favor power is actually exercised vi. Takers in default individuals who are identified in instrument creating power who are to take prop if donee fails to exercise power c. Types of Powers i. General – one that may be exercised in favor of donee, donee‘s estate, creditors of donee, creditors of donee‘s estate ii. Special – one that donee can exercise in favor of anyone except donee, donee‘s estate, creditors of donee, or creditors of donee‘s estate. iii. Inter vivos – one that must be exercised, if at all, by writing or deed executed by donee inter vivos. iv. Testamentary – one that must be exercised, if at all, by donee at death, typically in his or her will d. Does Appointive Prop Belong to the Donor or the Donee? i. If general appointment, appointive prop belongs to donee. ii. If special appointment, appointive property belongs to donor (relation back doctrine) e. Creditors rights – creditor may reach debtor‘s prop to satisfy debt. POA is a personal right, not prop interest. Creditors cannot reach power. Creditors of a donee may be able to reach appointive prop if power is exercised. i. Special power – donee of special POA has no right to appoint prop to herself or to use it for her benefit. Donee is merely agent for donor w/ power to appoint prop for benefit of others. Creditors of donee of special POA have no right to reach appointive prop ii. General power – 1. CL - not a prop interest; merely an offer to donee to have some power over donor‘s prop. Donor is still owner of prop until power is exercised (i.e. power is exercised) a. Irwin Union Bank & Trust Co v. Long - As result of divorce, P owed V $15K. V sued TR of trust P had interest to satisfy her judgment. Trust granted P right to w/draw up to 4% of principal/year. HELD: right to w/draw was a general POA over 4% of trust res per year. Ct applied traditional view that donee of general POA has no prop interest in appointive prop unless and until power is exercised. Bc P did not exercise power, V had no right to reach any of prop. b. MOD – creditors of a donee of general inter vivos POA can reach appointive prop even absent an exercise of power by donee. iii. NOTE: Tax Considerations for Powers 1. General power – holder of general POA is generally treated as owner of prop over which she holds power. If prop generates income, it is treated as donee‘s income for tax purposes. Page 23 of 32 2. Special power – holder of special POA is generally NOT treated as owner of prop. B. Creation of a Power of Appointment a. Intent to Create a Power i. POA is created as long as one has intent to create discretionary power in one party, over prop held by another party, to direct the one holding prop to transfer prop. No technical words are necessary to create POA, only intent to create discretionary power. Precatory words DO NOT constitute intent absent additional evidence such as intent. ii. Note: POA can be created only in a living person b. Powers to Consume i. A power to consume constitutes an inter vivos general power of appointment. If party is given a LE w/ power to consume principal, power to consume is deemed to constitute a general POA if power to consume is not limited to an ascertainable standard relating to health, education, support or maintenance of holder of power to consume. 1. Creation – careful drafting is required to distinguish bt LE w/ power to consume and FSA 2. Rule of Repugnancy – any interest or condition that is inconsistent w/ a FSA is deemed null and void. If an instrument purports to convey a general interest (no limitations), and then attempts to make a gift of whatever is left over upon death of grantee, express attempt at creating a gift-over upon death of first grantee is not sufficient to create a LE w/ a power to consume. Rather it will be construed as creating a fee simple in first taker, w/ attempted gift-over void. a. Effect – favor of fee simple absolute over LE w/ power to consume 3. Sterner v. Nelson – T  W with full power to make any disposition, then to daughter if any left. Upon W‘s death, daughter claimed W had LE w/ power to consume. Ct applied rule of repugnancy and held that H‘s grant to W, w/ absolute power to dispose of as she may desire, was a FSA, and attempted gift over to daughter upon W‘s death of any remaining prop was void as incompatible w/ FSA. C. Release of a Power of Appointment a. Release – bc POA is discretionary, w/o fiduciary duty attached, donee has no duty to exercise it. Failure to exercise occurs if donee dies w/o exercising it. Right to release power exists at all times. Release can be partial or complete i. Partial – does it relate to (1) prop that may be appointed, (2) to whom the prop may be appointed, (3) to when power may be exercised b. Testamentary Power – exercisable only on donee‘s death. Primary purpose of making power testamentary is to make sure that donee waits as long as possible before exercising power of appointment  forces donee to take into consideration all changes that occur during lifetime before deciding whether and how to exercise the power. i. Contract to exercise – any attempt at exercising testamentary power inter vivos is null and void (there is a c/a for restitution) ii. Release – testamentary POA may be released inter vivos iii. Contract versus release – if substantial effect of K is same as effect of release, may courts will enforce agreement as an inter vivos release of testamentary power 1. Seidel v. Werner - D held testamentary POA and K‘ed inter vivos to make, and not revoke, a will that exercised his POA in favor of children, for their support until they reached 21, at which they would receive principal equally. 4 months later, D executed a will exercising his testamentary POA in favor of new W. HELD: K to exercise testamentary POA null and void. Children attempted to characterize K as release of testamentary power. Ct analyzed effect of release and effect of K and ruled that two were not substantially the same. Ct declined to construe K as a release, but Ct held that children were entitled to restitution from D‘s probate estate. D. Exercise of a Power of Appointment a. Intent – donee must have intent to exercise power b. Exercise by Residuary Clause in Donee‘s Will i. MAJ – standard residuary clause that does not make any reference to POA does not exercise either a general or special testamentary power of appointment that T may have held ii. MIN – standard residuary clause adequately expresses T‘s intent to exercise a general POA that T held, but not a special power that T held 1. Beals v. State Street Bank & Trust Co - Residuary clause of T‘s will created a trust for W for life, then daughters for life, then principal to be paid as appointed by her will. In default of appointment, prop would be paid to daughter‘s heirs. Daughter #1 asked TRs to distribute most of principal in her trust to her H‘s office so he could manage it, which TRs did. Then D#1 executed partial release of her power limited her power to appoint Page 24 of 32 prop to descendants of T. When D #1 died, TRs still held $ 88K in trust for her. Her will made no express reference to POA but her residuary clause gave rest of her prop to issue of her sister M. Ct applied minority rule that residuary clause is deemed to exercise a general POA but not a special POA. Ct ruled, that although power was a special power of appointment at time of D‘s death, by virtue of her partial release, her actions showed that she treated appointed prop as if it were her own and that the rationale for general POA should be applied---her residuary clause exercised the power. iii. UPC – residuary clause expresses intent to exercise POA if (1) power is general POA and creating instrument does not contain a gift-over in event power is not exercised or (2) T‘s will manifests an intention to include prop subject to power. iv. Blending residuary clause – includes w/in residuary clause a generic reference to a POA T may hold. Under UPC generic reference is not enough to exercise any POA may permit EE to show intent. v. Lapse and Anti-lapse 1. general power – cts have applied lapse and anti-lapse 2. special power – anti lapse cannot be applied bc appointive prop would end up in hands of issue who were not eligible takers under express terms of power. Modern trend does apply anti-lapse statutes to special powers. vi. UPC §§ 2-608, 2-704 § 2-608. Exercise of Power of Appointment. In absence of a requirement that a POA be exercised by a reference to the power, a general residuary clause in a will, or a will making general disposition of all of T‘s prop, expresses an intention to exercise a POA held by T only if (i) power is a general power and creating instrument does not contain a gift if power is not exercised or (ii) T‘s will manifests an intention to include the prop subject to power. § 2-704. Power of Appointment; Meaning of Specific Reference Requirement. If a governing instrument creating a POA expressly requires that power be exercised by a reference, an express reference, or a specific reference, to power or its source, it is presumed that donor's intention, in requiring that donee exercise power by making reference to particular power or to creating instrument, was to prevent an inadvertent exercise of power. c. Limitations on Exercise of a Special Power i. While we usually expect a holder of a POA to appoint prop outright to an appointee, a donnee could appoint prop in trust or even create new POA. 1. General – donee of general power can appoint prop as he or she wishes: outright, in trust, or even subject to a new POA 2. Special – Absent express authority in instrument originally creating special power, donee is to appoint prop outright. a. MOD trend – permits donee of special power to appoint either in trust or even subject to new POA as long as both donee and objects of new power are included in original class of objects. d. Fraud on a Special Power i. Occurs where donee and an eligible appointee agree that donee will exercise POA in favor of class member on condition that she share some appointive prop w/ person who is not eligible appointee  cts hold entire appointment is void, even portion eligible appointee was to obtain. E. Ineffective Exercise of a Power/ Appointment that Fails a. Allocation of Assets i. if donee of special POA expresses intent to exercise POA, but inappropriately attempts to mix appointive prop w/ donee‘s own prop in distributive clause (typically a blended residuary clause) doctrine of allocation ―unblends‖ prop to ensure that only eligible objects receive appointive prop. b. Capture i. if donee of general POA (1) expresses intent to exercise POA and (2) blends exercise w/ distributive provisions of his own will (typically a blended residuary clause) if any of appointment gifts fails for any reason, donee is held to have appointed failed gifts to himself (―captured the appointive prop‖) and failed appointive prop is distributed as part of donee‘s general assets. F. Failure to Exercise a Power a. Donor‘s intent – if donee fails to exercise POA, donor‘s intent controls what should happen to appointive prop b. Takers in Default - if instrument that created POA identifies one or more express takers in default, they take if power is not exercised c. No takers in Default – i. General power: if power is not exercised; prop reverts to donor (or donor‘s estate) Page 25 of 32 ii. Special power: if class of possible objects is relatively small and ascertainable, ct may imply that donor intended that appointive prop be distributed equally among members of appointive class rather than revert to donor (or his or her estate). 1. Loring v. Marshall - T created trust for her brothers, sisters, 2 nephews. Upon death of last B, TRs were to divide trust to benefit of wife and issue of each nephew, and if neither nephew left eligible appointees, trust fund was to be paid equally to charities. Although trust gave last surviving nephew power to appoint to his ―wife and issue‖ nephew gave his wife only a LE in income. When she died, TRs petitioned ct to determine to whom to distribute principal. Bc nephew was survived by wife, he left an eligible appointee and charities‘ only opportunity to take was defeated. Ct applied general rule, that when a special POA is not exercised and instrument that created power fails to specify an express default taker, prop not appointed goes in equal shares to members of class to whom prop could have been appointed. Construction of Trusts: Future Interests A. Introduction a. If S retains future interest, it must be a reversion, a possibility of reverter, or a right of entry. If B holds future interest, it must be a vested remainder, a contingent remainder, or an executory interest. B. Classification of Future Interests a. Future Interests in the Transferor i. Reversion – if grantor has right to possess prop after a finite estate ends, grantor has reversion 1. implied reversion – if grantor does not convey entire interest a. O  A for life. A has LE. O has reversion 2. vested – reversions are vested interests (benefits: transferable, not subject to destructability) ii. Possibility of Reverter – if grantor conveys fee simple determinable, grantor is deemed to have retained a possibility of reverter. iii. Right of entry – If grantor conveys a fee simple subject to condition subsequent, grantor is deemed to have retained right of entry in event condition subsequent occurs. b. Future Interests in Transferees i. Remainders – if B has right to possess after finite estate ends, B has remainder 1. vested remainder PREFERRED a. (1) holder of interest is ascertainable b. (2) there is no express condition precedent, in clause creating remainder or preceding clause, that has to be satisfied before remainder can become possessory. 2. contingent remainder a. CL – if contingent remainder does not vest before or at moment precedent finite estate ends, contingent remainder is destroyed. b. If there is a contingent remainder, there must be a reversion in grantor in event contingent remainder does not vest in time. i. O A for life, then to A‘s children. If A has no children…A has a LE. Bc children aren‘t ascertainable, instrument grants them a contingent remainder. O holds reversion. If A has children…A has LE, children have vested remainder subject to open. O has nothing. ii. O  A for life, then to B if B survives A. A has LE. B has contingent remainder bc there is an express condition precedent in clause creating remainder that must be satisfied before B‘s interest can become possessory. Bc B‘s remainder is contingent, O holds reversion. c. Alternative contingent remainders i. O  A for life, then to B if he makes it back from Malibu, but if B does not make it back from Malibu, then to C. A has LE. B has contingent remainder. C has alternative contingent remainder. Grantor has reversion. ii. If preceding finite estate ends early and first contingent remainder ahs not vested by or at that moment, both contingent remainders are destroyed and prop reverts to grantor. iii. Finite estate can end prematurely if there is is forfeiture, renunciation or merger. Page 26 of 32 3. remainders as class gifts a. Interest can be (1) vested to all, (2) contingent as to all, or (3) vested as to some, but still openothers can join class b. O A for life, then to A‘s children. Assume A has two children, B and C. Bc B and C are ascertainable and there is no express condition precedent, B and C hold a vested remainder subject to open (meaning new children would partially divest some of B and C‘s interests) 4. Vested remainders subject to divestment a. Created when there is an express condition precedent that may affect remainder‘s possessory interest, but condition precedent is set forth after clause creating remainder. If condition occurs, vested remainder is completely divested. b. Compare: i. O  A for life, then to B is he returns the book. A has LE. B has contingent remainder bc there is an express condition precedent in same clause creating remainder that B must satisfy before remainder can become possessory. Bc B holds contingent remainder, O retains a reversion. ii. O A for life, then to B, but if A gives book to C, then to C. A has LE. B has vested remainder. B is ascertainable and there is no express condition precedent in clause creating remainder or preceding clause. There is an express condition precedent in clause subsequent to clause creating remainder. If that condition occurs, Bs remainder would be divested and prop would pass to C instead. ii. Executory Interests – future interest held by third party and follows either a (1) vested remainder subject to divestment or (2) a fee simple subject to executory limitation 1. shifting executory interest – if party hold executory interest takes right to possession from someone other than grantor a. O A for life, then to B, but if A sells alcohol on land, then to C. 2. springing executory interest – if party holding executory interest takes right to possession from grantor. a. O  A if she goes to law school. C. Construction of Trust Instruments a. Preference for Vested Interests i. Destructibility Rule: At CL, if a contingent remainder does not vest before or at moment preceding finite estate ends, contingent remainder is destroyed. Modern trend abolishes this doctrine. Vested remainders are NEVER subject to the doctrine. ii. Acceleration into Possession 1. A vested remainder accelerates into possession at moment preceding LE ends, whether it ends naturally or prematurely. Contingent remainders cannot become possessory until all of express condition precedents are satisfied. If contingent remainder does not vest in time, at CL it is subject to being destroyed under the destructibility of contingent remainders. a. Disclaimer: if life tenant disclaims, under CL, whether a remainder accelerates into possession turns on whether remainder is contingent or vested. Under mod trend, some cts have held that it depends on T’s/S’s probate intent if he or she had known that life tenant would disclaim. To reduce high costs of administration associated w/ this rule, some disclaimer statutes expressly provide that disclaiming party is treated as if he or she predeceased the decedent, and whether a remainder accelerates into possession depends on effect of treat disclaimant so. 2. In re Estate of Gilbert - T created a testamentary elective share in trust for his W for life, and four discretionary trusts for 4 children and their issue. Upon death of his surviving W, prop in her trust was to be added to residuary trusts for children and their issue. One of T‘s sons, Lester, renounced his interest in trust. L had no children at time. W/respect to contingent remainder in L‘s unborn issue, the state had adopted the modern trend--disclaiming party is treated as having predeceasing the decedent, w/ the effect of accelerating subsequent interest. Bc L had no issue, interest in his issue was terminated though inconsistent w/ T‘s intent. Ct refused to consider a case by case approach to T‘s intent, stating that one of purposes of statute was to prevent such costs of administration. L was treated as having predeceased father w/o issue. L‘s disclaimer, coupled w/ Page 27 of 32 acceleration of remainder interest in his issue, had effect of also disclaiming any interest his after-born issue might have had. iii. Transferability 1. CL: vested remainders are transferable, but contingent remainders and executory interests are not 2. MOD – contingent remainders are also transferable 3. Spendthrift clause – S can prevent transferability of v and c remainders by including a spendthrift clause in trust. 4. Transmissibility – transmissible if party holding it has power to devise it upon death. 5. Taxation – transmissible future interest constitutes a prop interest for purposes of fed estate tax. iv. Requiring Survival to Time of Possession 1. What happens to remainderman‘s interest if remainderman dies before life tenant? a. SPLIT i. Transmissibility – remainderman‘s interest is transmissiblepasses to probate estate 1. First National Bank of Bar Harbor v. Anthony S  S for life, then to W for life, then res to 3 children. W died, and son died unmarried but survived by three children. S died  will left all prop to his 2 surviving children. Held: trust created a remainder interest in settlor‘s children, that interest was vested from moment trust was created, and that presence of power to revoke made remainders subject to divestment, not contingent. Because settlor died w/out revoking the trust or revising its terms, court ruled terms of trust were clear that interest should go to settlor‘s three children. Court applied traditional rule that son‘s vested remainder interest was transmissible and passed to his children. ii. Lapse/anti-lapse – remainderman has no interest unless he or she meets requisite degree of relationship, and even then, interest goes only to his or her issue; if not, remainderman‘s interest lapses. Trust Duration and the Rule Against Perpetuities A. Introduction a. Development of the Rule Against Perpetuities i. Conceived to regulate future interests. Future interests that run far into future permit ―dead hand‖ control when such control may not be in best interest of those affected for community. If future interests were vested, they could effectively be eliminated through transfer and merger. But if interests are not transferable, they could clog title inefficiently for decades to come. Courts developed Rule against Perpetuities to limit how long ―dead hand‖ control through nonvested future interests would be permitted. ii. Avoid problems with a savings clause. b. Summary of Rule i. Introduction 1. Rule and its policies a. RULE: No interest is good unless it must vest, if at all, w/in the lives in being at the time of its creation plus 21 years. b. If there is even one scenario, no matter how improbable, where future interest vests, but not until after running of perpetuities period, interest is null and void from moment transferor attempted to create it. 2. Why Lives in Being are Used to Measure the Period a. ―Life in being‖ is life of any person who was alive at time interest was created, however many years any person who was alive at time the interest was created lives. b. Whoever is picked to fulfill the life in being prong of perpetuities period is typically referred to as ―measuring life.‖ However long he or she lived, their life is used to measure number of years that serves as base period of perpetuities period, to which 21 years is added under second prong of the perpetuities period. Page 28 of 32 O A for life, then to A‘s first child to reach age 15.‖ A has two children, B (age 10) and C (age 13). The contingent remainder in A‘s first child to reach age 15 is subject to RAP. i. Analysis 1. Create party in whom interest will vest, but not until after perpetuities period. Here, interest can vest only in a child of A, so invalidating life has to be a new child for A. Assume A gives birth to a new child, X. 2. Then kill lives in being name in problem when interest was created. Here, A, B, and C 3. Then see if it is possible to delay vesting for another 21 years. Contingent remainder in question must vest, if at all, when A‘s first child reaches 15. X either will or will not reach age 15 w/in 21 years of X‘s birth. Interest is valid. d. O  A for life, then to A‘s first child to graduate from law school.‖ A has two children, B and C. Contingent remainder in A‘s first child to graduate from law school is subject to RAP. i. Analysis 1. Identify in whom interest must vest, if at all. Here, in one of A‘s children. Create new child for A, X. 2. Then kill lives in being when interest was created. A, B, C 3. Is it possible to delay vesting until more than 21 years after death of last life in being? Yes…void. ii. When the lives in Being Are Ascertained 1. validating lives must be in being when perpetuities period starts to run. 2. generally starts to run when instrument takes effect 3. if interest is created by will, validating life must be in being at T‘s death 4. if interest is created by deed or irrevocable trust, validating life must be persons in being when deed or trust takes effect B. The Requirement of No Possibility of Remote Vesting a. The Fertile Octogenarian – i. CL courts assume conclusively that a person is fertile until death 1. O W for life, then to her first child to have a grandchild. T dies. W is 80, and has three children A, B, C and no grandchildren. W could have another child, X, after T died. A, B, C could die and X could be first to have child  could be after perp period. ii. MOD – some states have established statutory ages b. The Unborn Widow – i. When conveyance references designated person‘s widow, it could be the current spouse, a new spouse, or a spouse that is not yet born  where conveyance grants future interest in widow, probably violates RAP 1. Dickerson v. Union National Bank of Little Rock - T‘s will created a trust that provided that it was to continue until death of T‘s 2 sons, M and C, and M‘s widow (unnamed) and until youngest child of either son reached age 25. HELD: last interest violated RAP bc abstractly it was possible that (1) M could marry a woman who was not born when T created trust (when she died), and (2) one of sons could have a child, and (3) M, C and all other lives in being alive when trust was created could died next day and (4) interest in youngest child to reach 25 would not vest until after lives in being at time of interest was created plus 21 years. c. The Slothful Executor i. B under will might die before gift is distributed from probate. To avoid this risk, some testators provide that gift is contingent upon B surviving until time prop is distributed. Such a time might occur w/in lives in being plus 21 or might take longer. Where such conveyance is created, gift may violate RAP and be void. ii. MOD – some cts have construed such clauses as implicitly containing a ―reasonable‖ time period. d. The Magic Gravel Pit and Other Marvels i. Gravel pit – T‘s will gifts her gravel pit to TR to work as long as there is gravel to be extracted, remainder to T‘s issue then living. Future interest in T‘s issue then living is void because it violates RAP. Gravel pit may remain productive for longer than lives in being plus 21 years, thereby vesting but not until after perpetuities period ii. Endless war – T‘s will gifts residue of estate to heirs alive when war in Iraq ends. War may last longer than lives in being plus 21 years. c. Page 29 of 32 iii. 21 birthday requirement - T‘s will gifts residue of her estate to A for life, then to A‘s children who st st reach their 21 birthday. CL ruled that technically one turns 21 day before one‘s 21 bday th st because that is day the 20 year is completed. Under that reasoning, one‘s 21 bday is the first day after 21 years. VOID!!!!!!!!! C. Application of the Rule to Class Gifts a. The Basic Rule: All-or-Nothing i. RAP requires that class close and interest vest to all members of class before running to perpetuities period or gift is null and void as to every member of class. ii. O A for life, then to A‘s children who reach 25. At time O dies, A has 2 children, B (age 30) and C (age 15). Gift in A‘s children is vested subject to open so it is subject to RAP. Creat new child for A, X. Kill A, B, C. Although killing A, C, and C would close class, child ;X is in class but has not met express condition precedent. VOID. st Trust Administration: The Fiduciary Obligation A. Introduction a. Essence of trust is separation of legal ownership from equitable ownership. TR holds legal title and has burden of managing trust prop. B‘s hold equitable title, bear risk of TRs actions b. NOTE: Agency Costs and Fiduciary Obligation i. Risks inherent in use of trust are analogous to risks inherent in use of an agent. In a trust, however Bs don‘t have same control over TR that a principal typically has over an agent cts are stricter in applying fiduciary duties on TRs c. NOTE: Powers of the TR i. CL – no inherent powers  only powers expressly granted in terms of trust or those necessarily implied in light of trust purposes ii. Judicial authorization – TR can petition ct of equity for authorization to undertake an action not expressly or implicitly in trust. iii. MOD – (1) jurisdiction adopts a statute that sets forth a long lit of powers it is presumed a TR would need, (2) statutorily grant TR a broad set of powers unless S expressly provides that TR is not to have one or more of granted powers. B. The Duty of Loyalty a. Scope – everything TR does must be done solely in best interests of Bs i. MUST act reasonably ii. MUST act in good faith b. Duties w/in DOL i. Duty against self-dealing 1. Hartman v. Hartle - T had 5 children. Her will appointed 2 of her sons-in-law executors of estate and directed that real prop was to be sold and divided equally among 5 children. Land was sold for $3,900, and one of T‘s sons bought it for his sister, who was wife of one of executors. 2 months later, sister sold land for $5,500. HELD: duty against selfdealing applied to spouse of fiduciary. Absent ct approval of transaction, sale was inappropriate. Sale could not be rescinded bc of subsequent sale to bona fide purchaser w/out notice of breach of trust, but sister was forced to share 1/5 of profit upon resale w/ complaining B. ii. Duty to avoid conflicts of interest 1. In re Gleeson’s Will - TR farmed and leased T‘s land. His lease was set to expire; T died; he was left to be TR. He is the tenant and landlord. This sounds bad because of ―no further inquiry rule‖. TR upped his rent, held off, shared crops, tried to do right things, but still liable under self-dealing. Could have renounced position of TR, even though felt like he owed Ta lot and wanted to be TR. He could have got advance judicial approval. 2. In re Rothko - T‘s will appointed 3 friends executors of his estate (which consisted of almost 800 paintings). Executors contracted w/ an art gallery that agreed to purchase 100 of paintings and to sell rest on consignment. In analyzing Ks, court found that two executors had a conflict of interest. One was a director and officer of art gallery receiving greater financial remuneration and status, and gallery gave favorable treatment to executor‘s own art collection. Second executor had conflict of interest because he was a struggling artist seeking to curry favor w/ gallery so it would buy and sell his paintings. Ct found that Ks were neither fair nor in Bs best interests. Ct found that third executor was aware of breaches of trust being committed by other executors and failed to act—a breach of trust, even where third executor was acting on advice of counsel. Advice of Page 30 of 32 counsel gave executor good faith, but transactions were not reasonable, and executor did not act reasonably in failing to properly assess Ks. C. The Duty of Prudence a. TR has duty to administer trust w/ such skill and care as a person of ordinary prudence would use in dealing w/ his or her own prop. Duty is an objective SOC, focusing on what a reasonable person would do, not TR‘s subjective intentions when acting. b. The History of Trust-Investment Law i. Traditional Approach – List of safe investments 1. Cts and legislatures would identify categories of investments that were presumed appropriate, but even then an investment in a particular entity or activity on list had to be otherwise reasonable and proper. Moreover, each investment decision was analyzed in isolation. Risk level or other investments and profits generated by other investments were irrelevant in assessing propriety of particular investment. ii. Model Prudent Man Investment Act 1. Abolished statutory lists and authorized any investment that a prudent man would make, barring only ―speculative: investments. Most common statement of prudent person standards is that trustee should invest with same care as a prudent person would with respect to his or her own property, taking into consideration dual goals of preserving principal while generating a reasonable stream of income c. Modern Trust-Investment Law i. Sensitivity to Risk and Return 1. Uniform Prudent Investor Act § 2 a. Focuses on actions that constitute a prudent investor and duties that go hand in hand w/ those actions. Adopts a number of express provisions that constitute innovative approaches that repudiate the old common law approach. It abolishes the duty to segregate and permits pooling of trust funds to reduce transaction costs and to achieve economies of scale. Adopts a portfolio approach to assessing trust investments performance of trust‘s investments is assessed on a portfolio, not an investment-by-investment basis key is acceptable level of risk at an aggregate level. Focus on total rate of return. 2. Estate of Collins - TR invested 50K of trust in a developer. L/T essentially lent them 50% of trust assets and took back a second lien. Value of real estate was not sufficient to absorb both first and second liens. Ct of app held that L/T did violate duty of prudence. IS this violation of duty of loyalty? There was a conflict of interest. TR owes complete loyalty to beneficiary and beneficiaries were his clients. Clear that breach of duty of loyalty occurred, however, case turned on issue of duty of prudence. Ct didn‘t like L/T invested in a second mortgage. 3. NOTE: ERISA a. Prudent investor rule governs TRs managing pension funds reg‘d by ERISA. ERISA imposes an exclusive benefit rule on TR which is analogous to duty of loyalty. Accordingly the law of trusts often is invoked in ERISA litigation, and ERISA opinions may end up affecting law of trusts. ii. Diversification 1. Uniform Prudent Investor Act § 3 Diversification a. A TR shall diversify investments of trust unless TR reasonably determines that, bc of special circumstances, purposes of trust are better served w/out diversifying. 2. The Uniform Prudent Investor Act and the Future of Trust Investing 3. In re Estate of Janes a. Timeline i. May 1973 – T died w/ probate estate of $3.5 million  lots of Kodak stock 1. three trusts a. marital trust b. benefit to selected charities c. wife‘s benefit for life, and upon death principal was to pour over to charitable trust ii. August 1973 – Trust co officers determine estates‘ expense ad how many shares of stock needed to be sold to cover the expenses iii. September 1973 – wife consented to sale of additional 1,200 shares of K stock Page 31 of 32 iv. September 1973-March 1978 = $139/share to $40/share v. 1980 – trust co filed initial accounting covering most of period in question vi. 1997 – decision b. Bank should have diversified instead of maintaining huge amount of stock in K. Bank should have taken into account that widow was 72 and needed a steady income  be less risky. Trust co failed to exercise due care and skill of a corporate fiduciary by failing to establish an investment plan upon funding; by failing to follow its own internal policies of special caution and attention cases of portfolio concentration, and by failing to conduct more than routine reviews of account in face of declining values. 4. NOTE: Calculating Damages for Imprudent Investment a. Where there is a breach of trust, trust beneficiaries are entitled to be made whole. There are three ways this can happen: (1) charge TR for resulting loss, (2) charge TR w/ any profit made, or (3) charge TR w/ any profit that would have accrued but for the breach iii. Delegation 1. At CL a TR cannot delegate any discretionary responsibilities bc S put great trust in TR and assumed that appointed TR personally would hold and manage trust prop. If TR delegates discretionary responsibility to another, such delegation violates the S‘s intent. a. Duty to supervise where TR does delegate either ministerial or discretionary responsibilities, TR still has duty to select carefully, to give adequate instructions, and an ongoing duty to monitor and supervise actions of agents to whom responsibilities have been delegated. i. Shriners Hospitals for Crippled Children v. Gardiner S created trust, income to daughter, grandchildren, and daughter-in-law, remainder upon death of last income life B to Shrines Hospital. S appointed daughter TR and grandson as successor TR. D had no investment experience so she had Grandson make all investment decisions. Grandson embezzled $300K from trust. Ct stated that while an inexperienced TR has a duty to seek expert advice w/ respect to trust investments, TR cannot delegate investment decisions completely but rather must exercise her own judgment after receiving such advice. Here, D turned over investment decision-making process completely to grandson in breach of her duty. Ct noted that it made no difference that grandson was successor TR. 2. UPIA § 9. Delegation of Investment and Management Functions a. You CAN delegate investment and management functions b. Would MJ be liable under the UPIA  She would have violated it here as well because didn‘t review. D. Impartiality and the Principal and Income Problem a. TR‘s duty of loyalty to both present and future interests translates into a duty of impartiality bt competing interests--duty to invest prop so that it produces a reasonable income while preserving principal for remaindermen. b. Dennis v. Rhode Island Hospital Trust Co - S created testamentary trust in 1920 and funded it w/ 3 downtown Providence commercial buildings. Trust provided that income was to go to S‘s living issue until 21 years after death of her last surviving child, and then to her then living issue. Remainderman sued, claiming that TR routinely complied w/ income Bs request that trust be managed so as to produce highest possible income w/out regard for principal. TR failed to recognize that buildings were depreciating in value despite income being generated and took no steps to amortize depreciation or keep abreast of declining real estate market in downtown area to determine when prop should have been sold. TR was surcharged for loss of principal occuring as a result of failure to sell overproducing prop in timely manner. c. NOTE: Principal and Income Problem i. T bequeaths a fund to X in trust to pay income to A for life and then principal to B on A‘s death. ii. Although overall interests of A and B are aligned, their specific interests may not be. 1. A (income beneficiary) will prefer investments that produce returns classified as income 2. B (principal beneficiary) will prefer investments that produce returns classified as principal iii. Modern Portfolio Theory 1. focus  total return to trust portfolio 2. TR has power and discretion, power of equitable adjustment, to reallocate total return between income and principal Bs to ensure that two groups are treated fairly while paying particular attention to larger rate of return regardless of how return is classified (income v. principal) Page 32 of 32