WILLS AND TRUSTS Missed First Class. ½ 2nd Class The Law (1) Uniform Probate Code (“UPC”) (2) State Codes Tree of Sanguinity: (1) Spouse (2) Children (3) Parents (4) Siblings (5) Further Removed Per Stirpies? People lower on the tree step into the shoes of the people higher up if they higher ups are dead. O A B DEFG C A and B Predecease O. Strict Per Stirpes: DEFG would share the half and C would get a half Modern Per Stirpes DEFG & C would each get a 5th. Half Bloods (1) Most States don’t have any distinction between half and full blooded kin. (2) Old English Rule said half bloods can’t inherit. Identifying Children: (1) Natural Children (2) Posthumous Children Issues a. Conceived before but born after fathers death. b. To child’s advantage to be treated as in being since conceived and shall be treated as such if born alive. c. Rebuttable Presumption if over 280 days after ‘fathers’ death. d. (3) Adopted Children Issues a. Statutory Adoptions i. Adoption of Minor Children 1. Hall v. Valendingham a. Rule: (Maryland, Marjority) Once a child is adopted, the adopted child loses all rights of inheritance from its natural parents. b. Child is severed from prior family tree and is treated as being attached only to the new family tree. c. UPC (Minority, i.e. TX): Does not sever the relationship when the children are adopted by the step father. d. CA (§ 6451): Similar to UPC. ii. Adoption of Adults 1. Minery Case a. Adoption of a Spouse – causes problems b. Wife gives life estate to husband, then to son james, then to son Thomas, then to Alfred, then to surviving heirs as determined by the laws of intestate succession in Kentucky. Property held in trust. c. Thomas had 2 Children. Alfred adopted his wife to step her in line in front of the kids. d. Kentucky law provides for the adoption of adults. e. Court held they found this troubling, ruled: f. Adoption of an adult for the purpose of bringin into line under a previous testamentary instrument is counter to the intent and purpose of the adoption laws and so shall not work for those purposes. 2. Adoption is not revocable like marriage. b. Equitable Adoptions i. Oneal v. Wills Case 1. Adoption occurs on principles of equity on whether or not a person should be treated as a child of the decedent even though there has not been a formal adoption. 2. Law allows a person who was accepted and treated as a natural op adopted child to share in the inheritance of the foster parents property. CA § 6455 3. Dissent says look to the activity of the foster parents 4. This case has been greatly criticized. (4) Advancements (P. 114) a. Common Law Rule (greatly criticized): Amounts were treated as an advancement unless they are specifically discusssed as not an advancement. b. UPC 2-109: Not an advancement unless the parties say that it is. c. CA Rule is similar § 6409: Calls for monies that are paid are not considered an advancement unless specified. (5) Guardianship a. If you die intestate the court decides who will be the guardian. Court uses criteria that may preclude the wishes of the natural parent. b. Guardians are appointed by the court and are often times a lawyer the judge is familiar with. All costs of the guardian are taken out of the estate. All actions of guardian must be approved by the court. c. CONSERVATORSHIP: UPC and Uniform Conservatorship Act of 1977 enact a conservatorship system. i. It is more flexible than guardianship. d. Custodianship (P.188) e. Trusts (P. 119) i. Most flexible of all property arrangements. (6) Bar to succession of property through Intetacy a. Cases in which an otherwise eligible take is barred: i. Conditions of Barring: 1. Homicide a. In Re Estate of Mahony b. Wife kills husband and wants to receive property through intestacy. c. Courts may allow killer to inherit, because putting a stay on inheritorship is another form of punishment beyond jail not called for in the law. d. Stays to the killers taking under the tree of consanguinity can be created or implemented by: i. By statute ii. By Court created law of equity by ignoring the consanginuity statute. iii. Constructive Trust to prevent unjust enrichment. Legal title passes to the next in line 1. Constructive Trust is a legal fiction 2. It separates legal title from beneficial title. 3. Legal title vests in the trustee 4. The benefit of the title (the property) rests in the beneficiary. e. Court created a constructive trust with the outcome tied to whether she voluntarily or involuntarily killed him. i. Here the legal title vests in the trustee, the court, and ii. The beneficial title vests in the next person in the tree. iii. Beneficiary can sell /transfer /pledge the property as the constructive trust is a legal fiction. f. UPC § 203 Bars a killer from succeeding to probate and non probate property. (Goes beyond a normal intestacy statute). g. When is it sufficient to prove culpability? i. Intestacy is a civil issue. Doesn’t have anything to do with criminal law. ii. A criminal acquittal doesn’t take them out of the woods. Must see if they are not guilty under the lower preponderance f the evidence standard. 2. Acts Not Homicide a. CA: Abuse of Elder or Dependent Adult b. Others: Abandonment c. China: is the party worthy of taking? 3. Voluntary Disclaimer “I don’t want” a. Disclaimer Interests are treated per strict per stirpes b. Three Elements of a gift: i. Intent??? ii. Delivery iii. Acceptance 1. Under common law an intestate successor cannot stop property from passing to them. 2. If there is no acceptance… 3. CA Has a disclaimer statute.. c. Gift and Estate Tax imposed on the value. i. One reason a person might disclaim is for gift and estate tax purposes. ii. If the parent disclaims it might go to the child who has a lower tax rate. iii. A person might disclaim to keep the property away from creditors that the heir has. 1. Disclaimer must meet the requirements of the Internal Revenue Code § 2518 to not be taxable. a. Qualified Disclaimer = a disclaimer that is made within the 9 months after the interest is created or after the donee reaches 21 whichever is later. 2. This does not work if the creditor is the federal government. a. Power to channel the estates assets warrants the conclusion that property is held or a right to property is held, and it is therefore subject to federal lien. (7) Mental Capacity – Chapter 3 a. Test i. Person must be capable of knowing to have capacity to make a will; it is not knowledge in fact. ii. Knowing and understanding relates to 4 things: 1. know nature and extent of his or her property 2. The natural object of his or her bounty 3. The disposition she is making of the property 4. Capable of relating the elements to one another and forming an orderly desire with regard to the disposition of the property. iii. This is a low threshold. iv. It is however an ethical violation as a lawyer to participate in a will when the person doesn’t have a sound mind. v. Is capacity to engage in a contract is a higher standard than (a) that to make a will or (b) an intervivos gift. vi. This is to help keep donors from becoming impoverished during life, so government doesn’t have to take care of them. vii. b. Why is it Required c. Issue of Insane Delusion. i. In Re Strittmater ii. In Re Honigman 1. Mr. Honigman did not include his wife in his will. 2. Issues: Was Mr. Honigman suffering from an insane delusion or was he of sound mind? 3. Rule: (P. 152 middle of page) Two Part Test: a. If person persistently believes facts which against all evidence and probability do not exist, he is under an insane delusion, and b. There is causation. 4. Facts: There was evidence spouse was independently wealthy, and Frank had left his property to some poor relatives in Europe. 5. Dissent: Sufficient evidence to support causation outside of delusion. 6. Majority: That insane delusion was in fact linked to disposition. Will was rendered null so look to the intestate succession statute in the state. 7. Rule: When an insane delusion and causation are found the clause in the will that is suspect or the entire will may be struck down. 8. Mistake: May be corrected if the testator is told the truth. a. General Rule: Courts do not reform or invalidate wills because of mistake. b. Except: Mistake can fall under fraud, and then the general rule would not apply. d. Undue Influence i. Undue Influence = Coercion. 1. It is only when the will of the person who becomes a testator is coerced into doing that which he or she does not desire to do. 2. General Rule: 4 requirements a. Testator: Must have susceptibility b. Influencer: Must have motive c. Must have been Opportunity d. Must affect disposition of property in the will. 3. Estate of Lakatosh (P. 159) a. Burden of Proof: On the one who is asserting undue influence has the initial burden. 4. Can Show Undue Influence By: a. Directly b. By Presumption i. Procurement of the will by the confidant ii. Restatement (P. 160 comment H) 1. Under suspicious circumstances. iii. When alleged influencer is an attorney 1. Lipper v. Weslow 2. The question presented is if there is evidence of undue influence 3. Was control over the mind of the testator exercised and substituted with the will of another. But for test. 4. Testator Statements in the will must be absolutely correct. 5. A Will is a public document. 6. There is testamentary libel. 7. Whenever the attorney is going to get more under the will than under intestacy, it is a good time to punt to another lawyer. 5. Remedy: a. Constructive Trust b. Denying Probate? e. Fraud i. In order for fraud to be used as a basis to strike down a provision or all of a will must show: 1. Intent to deceive testator, with 2. Purpose of influencing the testamentary distribution. ii. Fraud can be: 1. In the inducement a. O’s parent H induces O not to execute a will in favor of A by promising O H will transfer the property to A. b. If there is intent to deceive here, then fraud can be alleged in the inducement. 2. In the execution a. If O bring H a document O says is the will and it is not in fact the will and H executes it believing it is a will. iii. Remedies: 1. Deny Probate of the Will 2. Impose a Constructive Trust on the recipient to avoid unjust enrichment. Court could impose in addition to denying probate, as an equitable remedy. a. See page 193 para. 2. b. Even if someone is innocent relative to the fraud, but someone else is guilty, that will not stop the remedy of constructive trust from being imposed. iv. Puckett v. Krida P. 187 1. Caregivers accused of fraud for lying to the testator by saying her relatives were wasting her money and wanted to put her in a nursing home. (8) WILL FORMALITIES a. Absent the requisite formalities the will will fail and property will be distributed per the intestacy statute in that state. i. Requirements (See each states law) ii. UPC § 502 1. Must be in Writing a. UPC & CA 2. Must have signature of the testator a. UPC in testators consciences presence b. CA: Signed by one of the following i. Testator ii. In Testator’s name by some other person in testator’s presence iii. By the Testators direction or conservator 3. Must have signature of the attesting witnesses a. UPC: 2 Individuals within reasonable time after he or she witnessed the signing of the will or testators acknowledgement of the will or signature. b. CA: Must be witnessed as signed by at least 2 persons, each of whom, i. Are present at the same time, witness the signing, or the testator’s acknowledgement of his signature or will, and sign the will. c. Case law: Depending on the jurisdiction, some states require the witnesses to be contemporaneously present in same place, others don’t. i. 1982 – England got rid of the present at same time requirement. ii. Some states have a “line of sight” test. 1. Testator need not see the witnesses sign, but he must be able to see them should he look. iii. Order of Signing: 1. Tesatator Must be First iv. What Constitutes a Signature 1. Does it have to be at the bottom of the document? 2. Videotape wills? 3. Computer Files as wills? a. Many jurisdictions do not allow. v. Attestation Clause 1. It is a self proving affidavid 2. The will can be admitted to probate even if the witness predeceases. vi. Interested Witnesses 1. Interested Witnesses (recipient of property under the will) are disqualified, and not counted as a witness. 2. Disclaiming the property – it goes to the point of the creation of the interest. a. Except: Purging Statutes (P. 215) Apply purging statute first, then disclaimer statute. vii. Jurisdiction Over a Will 1. Probate will be opened in each state in which there is real property, so should make sure the will is valid in each of the 50 states. 2. See Recommended method of executing a will on P. 215. 3. Three witnesses + a notary, in a closed room all witnessing the signing. viii. Common Law Notary 1. Just Verifies the identity of the person ix. Civil Law Notary 1. Opines on the validity of the document. x. Safeguarding a Will 1. Either the client or the lawyer can keep the original 2. Ethics alert for lawyers: only ok if have long time relationship with the client. xi. Testamentary Intent 1. b. Traditional (Strict Compliance) Approach: i. A reliable will is denied probate even on harmless error. ii. c. Formalities serve 4 functions in the law: i. Ritual 1. Reinforces the gravity of the act ii. Evidentiary 1. Increases the reliability of the evidence iii. Protective iv. Channeling 1. Standardizes to way wills are written and executed. (9) Execution and Determining the Authenticity of Wills a. Attested Wills b. Holographic Wills c. Must have testamentary intent d. Extrinsic Evidence i. P. 204 (UPC § 1990) – Intent that the document constituted the testators will can be established using extrinsic evidence, including non-holographic areas of the will. ii. Cal. Prob Cade: Extrinsic Evidence is admissible to determine if a document constitutes a will, or to determine the meaning of a will or a portion of the will if the meaning is unclear. iii. The printed portion of a will cannot be given dispositive effect, but it can be used to show what the hand written words mean. iv. Mulkins Case: 1. Treated printed words as surplus. 2. Knocked out surplus and re-construed the will. 3. Rule: Strict Confromance sometimes leads to different results in different courts. v. Johnson and Mueter 1. Court struck down the will as not being a valid holographic will. i.e. no testamentary intent. 2. Nothing was left after the pre-printed words were eliminated. 3. Johnson tacitly overruled by (P. 244) restatement. vi. Kuralt Case 1. Testamentary Intent vs. Dispositive Intent 2. “Codicil” = A testamentary Instrument that amends but does not replace a previous testamentary instrument. a. Can be printed or holographic. b. Clear and Convincing Evidence?? 3. In this case, the district court said document expresses a future intent to make a will. 4. Supreme Court said it was a valid codicile a. Case holds for the position that: the intrinsic evidence was focusing ???? b. There is a difference between dispositive intent and whether or not this document that is now being signed is intended to be the last will and testament. vii. Apply Extrinsic Test to the pre-printed text (non holographic text). 1. Clear and Convincing Evidence must show that a document was indeed intended to be the last will and testament. (10) Revoking a Will a. A will can be revoked by writing or physical Act i. Generally: Guided by statute 1. A will is subject to revocation or modification during a testator’s lifetime. 2. All states permit revocation of a will in one of two ways: a. By a subsequent writing executed with testamentary formalities (the best way) i. Revoke the prior will and add a subsequent writing replacement. b. Can also revoke a will by a physical act, such as destroying (by burning) a will. i. Oral declarations without more is inoperative in every state. c. If will is not revoked in a manner permitted by statute it is admissible into probate. d. UPC § 1990: A burning, tearing or canceling is a revokatory act on the will whether or not the burn tear or cancellation touched any of the words on the will. i. Previous statutes said must destroy words on the will. e. CA § 6120 Revocation i. Subsequent Will ii. Being Burned Torn or othersise destroyed with the intent and for the purpose of revoking by the testator or another person in testators presence and by testator’s direction. f. In order for you to have a valid revocation you need to do the act called for by the statute and you need to have the intent to revoke. g. Remedies for takers under the will: i. Malpractice against advising attorney ii. Constructive Trust because of unjust enrichment on account of innocent misrepresentation by lawyer. ii. P. 252 -b. Court Doctrine: of Dependent Relative Revocation. (11) Major Will Doctrines i. Integration ii. Republication by Codicil iii. Incorporation by Reference 1. Will can reference outside documents that are to be used in the distribution of property. The Requirements: a. Will must express the intent to incorporate the outside doc. b. Must be described by reasonable certainty c. Document must be in existence when the will was executed. iv. Acts of Independent Significance b. Clark vs. Greenholden i. Testatrix wanted to give painting to her buddy. ii. References a memo that the deceased wrote 5 years earlier. 1. It is referred to in the will 2. It was NOT existence when the will was made 3. The document was described with reasonable certainty. iii. However: Document must have been known to administrator. iv. There was a valid will and valid later codicile. 1. Under the doctrine of republication by codicil, the date of publication of the will is brought forward to the date of the codicil, which allows the document that was not in existence at the time of the original will to be ‘in existance’ and therefore incorporated by reference. c. Johnson v. Johnson i. Minority Rule: A codicile validly executed operates as a republication of the will no matter what defects existed in the earlier document. (in effect cures the will) ii. Majority Rule: Republication by codicile only works where there is a preexisting valid testamentary Instrument. d. ACTS OF INDEPENDENT SIGNIFICANCE i. Doctrine: Bottom of P. 285 ii. UPC: iii. CA Probate code mirrors UPC (12) NON-PROBATE PROPERTY (& Will Substititutes) a. Definition: ??? See below. i. Courts are not involved. b. Distribution of property through some devise other than intestacy, such as by a will. c. Vast Majority of property people own in our society. d. Non probate property is passed through a will substitute. i. Life Insurance 1. Insured, Beneficiary, Owner a. If it is an insurance contract, or agreement related thereto, it passes pursuant to the agreement and is considered testamentary. b. If not, it must meet capacity, intent, writing, signature, and attestment. c. Case: Willhoit i. Insured: Husband ii. Beneficiary: Wife iii. Issue: Husband dies, wife gets life insurance payout, Husbands will said all property goes to son. No contest, then She dies. Inheritors fight over proceeds. iv. Issue: Whether or not the insurance contract is a valid will substitute. 1. Payable on Death docs are a valid will substitute. a. Pension Agreements b. Safety Deposit agreements v. Rule: The only way it would be a valid will substitute is if it is an insurance contractor or agreement related thereto. 2. Role in Corporations: a. Cross Purchases i. Remaining owners as beneficiaries buyout the interest of the deceased with life insurance proceeds so the money (and not the stock in the company) flow to the inheritors. b. Redemptions i. Law Firm as beneficiary. Uses life insurance proceeds to buy shares of the deceased and retires them. 3. Role in creating liquidity a. When assets are non-liquid, a death can cause an estate tax that is no easily paid without selling the assets (such as real estate). Life insurance can add the liquidity needed to pay the tax. 4. Types of Life Insurance a. Whole Life /Universal Life b. Term Life i. Pay-outs: 1. Lump Sum 2. Annuity 3. Principle and Interest ii. Pension Accounts 1. Contribution to Pension Account is treated as a deduction. 2. Assets kept in a trust like entity that is not taxed to the individual. (investment grows tax free) 3. Tax doesn’t occur until there is a distribution. (usually when the person retires and are usually in a lower tax bracket). a. This allows for a deduction when earning peak income, asset grows without a tax bite, then pay taxes at a lower rate. 4. ERISA – Federal Law a. ERISA says estate administrator need only look at the pension plan to determine who takes the property when the owner deceases. b. ERISA trumps state statutes to the contrary based on constitutional principles. c. iii. Bank, Brokerage and Mutual fund Accounts 1. Signatory card controls unless there is clear and convincing evidence of intent to have a convenience account (i.e. an agency account). 2. Three Types of accounts: 3. Joint Tenancy with Right of Survivorship a. Funds belong to all parties listed. b. In life it is a conveyance of property. c. Imperfect will substitute because you cannot change it. 4. Payable on Death 5. Agency a. Strictly account for convenience of second party, it is the first parties property. iv. Revocable Intervivos Trusts v. Joint Tenancies. 1. Estate of Hillowitz a. Rule: Will substitutes are valid testamentary transfers if they meet the requirement of passing through contract. b. Partnership agreement in which the husband was a partner. c. There was a clause in agreement saying upon death, the partnership interest flows to the wife and the partnership continues. This is a payable on death will supplement. d. Executors said it was not an attested document so not a valid will substitute. e. Rule: Court disagreed, saying first principle of a valid will substitute is a valid contract, and that a valid payable on death contract does not affect the will, it happens outside the will. f. UPC: § 6-101 (P. 330): Non-probate transfers on death. 2. Divorce: Cooke Case: a. Is a will substitute revoked by a divorce? b. Spouse has a life insurance policy, when they divorced. c. Spouse with insurance remarried. Then died. His will said pass insurance policy to son of second wife. d. The insurance beneficiary was never changed. If the insurance had been a will, it would have been revoked by the subsequent will. But since it is a valid will testament it was not superceded. e. RULE: An Attempt to change a life insurance beneficiary by a will is invalid. If you want to change the beneficiary, you must change the policy information with the insurance company. f. Practical Note: Revoke will and change beneficiary designations after a divorce. g. UPC: 2-804: Divorce revokes the designation of the divorced spouse as beneficiary of all paid on death contracts. (13) WILL SUBSTITITUES i. Overriding Factor: 1. Courts Do not want to reform a will. 2. No Reformation 3. No Extrinsic Evidence 4. Two Rules: 5. Plain Meaning Rule (i.e. No extrinsic evidence rule). P. 366. a. Reason: The will has been subjected to many tests, and in a form to achieve many functions. Parol Evidence would essentially abandon these protected functions. There are exceptions. b. Exceptions to the Plain Meaning Rule i. Extrinsic evidence is allowed to bring in questions about capacity. 6. No Reformation Rule (P. 366) a. Reformation is an equitable remedy that would be to make the will what the testator intended to say. Courts normally take position they do not have the power to do this. b. Latent Ambiguities: i. Mahony v. Grainger Case: 1. All of estate real and person given to heirs at law living at time I decease, to be spread equally. 2. There is extrinsic evidence that shows the testator intended to leave to 25 cousins, but there is an aunt that the lawyer did not know about who would take all under this language. 3. This is a latent ambiguity that is not in the will. 4. Issue: Court needs to determine if it will allow the extrinsic evidence to show what the testator meant. 5. Hold (min): No extrinsic evidence allowed. 6. Rule in other Juris: extrinsic evidence is allowed to clarify latent ambiguities. ii. Rule: There can also be relief when there is lack of capacity or mistake. iii. Arnheiter Case 1. Will wanted to bequeath property listed as the wrong address. 2. Executric petitioned court to change the address. 3. Court said couldn’t do it by reformation, but did it by using ‘mere erroneous description doctrine’ to allow a change in description. 4. There really isn’t any functional difference between both documents – they are giving effect to extrinsic evidence about what testator intended to say. 7. When the Heir Apparent Dies before the Intestate Decedent we have an issue of heir apparent. a. General Rule: is designee dies first, the designation fails. There is always a requirement of survivorship. i. Gift is said to ‘lapse’ ii. A properly drafted will should say who will take the property in the event of a lapse. iii. In the event of a class gift, the proportion changes is the class size changes, but it does not drop out of the class. 1. Does not lapse in same manner as that of devises to individuals. 2. If a class member predeceases the testator, the surviving members of the class divide the total gift including the deceased members share. iv. Anti-Lapse Statute: If the gift lapses, and the will is silent, and there is no class gift, look to this statute to determine who takes. Focused on bloodline. Substitutes in a new beneficiary. Has certain requirements found in statute: 1. Allen v Talley P 393 2. Right of Survivorship (P. 395) a. Phrase “living bros and sisters” intends that living siblings will participate in ownership of estate 3. Jackson v. Schultz: Limited Nature of Anti-Lapse Statute a. Court said ‘and’ is interchangeable with ‘or’ in cases where interpretation is critical to avoid intestacy. b. Footnote 19: Anti-Lapse Statute has been broadened in some cases: c. CA: Applies to devises to kindred of testators spouse but not to devises to the spouse. (Brothers in law can take, but not step children). v. If none of the above is in effect, there is an order of lapsing: A specific gift that lapses falls to the residuary. A residuary gift that lapses goes through intestacy. vi. Some states (CA) adhere to the no residue of the residue rule in the case of more than one residuary, where one lapses, that property passes through intestacy. 1. UPC: Residuary gift that lapses will be shared by the other residuary takers. b. Void Gifts: i. Where a depose is dead at the time the will is executed, or the taker is an animal that is ineligible, then the devise is void and treated as lapsed. c. Three Rules: i. English Per Stirpes ii. Modern Per Stirpes iii. Generational Per Capita ii. iii. Ademption by Extinction 1. Only relates to specific devises 2. Two Rules in Different Jurisdictions: a. Identity Theory (Mass): If specifically devised item not in testators estate, the devise is extinguished. Intent is irrelevant. i. i.e. is testator sold or gave the property devised in the will away before testator dies. ii. UPC 2-606(a)(6) b. Intent Theory (CA): If your specifically devised item not in testators estate, divisee entitled to cash value of the item, if in tent of testator can be shown. i. Intent Theory is used in the UPC. ii. UPC 2-6065 (abandoned identity theory and embraced intent theory). iii. Ex. devisee has to prove her aunt did not have the intent to adeem. 1. Burden of proof on divisee. c. Exception: If there is merely a change in form of the asset, the devise is not ademed. 3. Examples: a. When cash in a bank account put in a CD, or used to purchase stock. i. The bank account was a specific devise, ii. Or, 187 acres bequeathed, but the owner actually owns the stock of the corporation that owns the acres. iii. Court ruled these are only a change in form. b. Testator uses property written in will to be devised to buy a rolls Royce. Would devisee get the Rolls? Under UPC, yes, it is replacement property. b. Specific and General Devises with regard to Company Assets i. Modern Rule: 1. A Specific Devise not only takes the shares a will says, but also any accretion thereto (Stock Split or Dividend) ii. Old Rule: There is some kind of a dichotomy. c. Satisfaction of General Pecuniary Bequests (P. 413) i. Ademption by Satisfaction 1. When testator establishes a general devise (i.e. $50k to my son), then subsequent to the establishment of the will gives the general devise to the person who is supposed to take. a. Does the son get another $50k? i. Old Strict General Rule: No because of ademption by satisfaction. 1. Follows from doctrine of advancements in intestacy. 2. Intent Requirement: Look to the intent of the testator, but because difficult to obtain, some states require intent must be shown in writing. 3. If not intent, then not an ademption by satisfaction and can take the general devise as well. ii. Doctrine of Exoneration of Liens 1. Common Law Rule: Devisee took property and residuary got debt???? iii. UPC 2-607 1. Reverses Common Law rule and says divisee must take subject to mortgage. 2. Mortgage is taken ‘subject to’: which means devisee is not personally liable for the mortgage because devisee never agreed to be responsible for the note. iv. Abatement 1. When the estate has insufficient assets to pay debts as well as all the listed devisees. 2. Can only have a devise after debts have been paid. 3. What happens when not enough money to distribute in the manner in which the will called for? a. Residuary gets crammed down first. b. General Devisee c. Specific Devisee d. Demonstrative Devisee?? 4. UPC (Changed common law): P. 414 Case 8: a. If the testamentary plan would be defeated by abatement, the shares of the specific devise shall be abated to the extent required to give effect to intent of testator. (14) CHAPTER 6: CONSTRUCTION OF WILLS AND CHANGES IN PROPERTY AFTER EXECUTION OF WILLS a. A person can only dispose of property that they own. b. Property Ownership Systems: i. Separate Property System (75% of country population). 1. Each spouse owns their own property. 2. The wage earner is deemed to own the property. 3. ii. Community Property System (p. 455) (25% of country population). 1. Property acquired in marriage co-owned 2. Can own separate property a. Prior to marriage property b. Property received by gift /bequest or devise is separate property 3. Can only devise the one half of the community. 4. Widowers Election a. Step up in Basis: The basis of the property received by the devisee is the FMV at the death of the testator. i. b. Wife transfers community assets into a life trust with a life estate, then 100% of the asset can be devised upon death. c. Tax Law deems this a sale transaction, so can be a problem. 5. iii. Alaska: You get to choose one or the other system. (15) DIS-INHERITANCE & MARRIAGE?????? a. In all states except Louisiana, children have no protection from intentional disinheritance by the parents. b. We do need protection from an unintentional omission. i. The omission of a child born after the execution of a will is protection by state statutes designed to protect against the unintentional disinheritance of such child. c. Azuance v. Azuance (around P. 479) i. Testamentary Trust 1. A trust created by a will ii. When a client wants to do a codicil to a will, the first question a lawyer should ask is: has there been any change to your family situation? iii. Defined Term: “Pretermited” iv. Court Holds: There are cases under which the strict rule of republication by codicil would not apply if you can show the intent of the testator that it should not apply. 1. Court looks at the codicil and if someone not included, and the person has been borne, it is evidence of intent to disinherit. v. UPC 2-302: Un-mentioned children are cut in on what is given to the rest of the children. d. Suing for Malpratice: i. Old Rule: Standing requires being an actual beneficiary. 1. Florida: Intended Beneficiary Status must be clear on the face of the will. ii. Maj. Rule: Any person who was an intended beneficiary may sue for malpractice. (16) TRUSTS a. A trust is a legal fiction. A device where Property has a bundle of rights attached to it. Each right can be divided into two categories. i. Legal title 1. Held by Trustee a. The manager of the property b. Fiduciary Level of Care i. Duty of Loyalty and Prudence. ii. No Self Dealing iii. Duty to inform and account to beneficiaries. ii. Equitable Title 1. Held by Beneficiary a. Gets the income & corpus b. The Settlor /Trustor creates the trust and puts the property into the trust. i. A trust that is created during the life of the settler is referred to as an intervivos trust. ii. A Trust created by will is a testamentary trust. iii. c. Types of Trusts: (FIRST STEP IN ANALYSIS: DETERMINE TRUST TYPE) i. Revocable Trusts ii. Irrevocable Trusts iii. Testamentary Martial Trust iv. Trust for Incompetent Person v. Trust for Minors vi. Discretionary Trusts d. Requirements of a Trust (P. 490) i. A settler can declare property is held in trust. 1. Oral ok for personal property 2. Written required for real property. ii. The property must be sufficiently delivered to indicate that settler intends the trust to be binding. 1. Trustee’s acceptance is not critical in the creation of the trust. 2. In order for the trustee to have a fiduciary obligation, must accept the appointment. a. An affirmative act may be sufficient to accept the appointment (Uniform Trust Code). b. Test: Would a reasonable person conclude that X has accepted the trusteeship. iii. Resignation: 1. CL: Court order or consent of beneficiaries required 2. UTC: May resign on 30 days notice. e. Doctrine of Modification (P. 574) i. Difficult unless are in a state with the UTC in effect or a trust protector appointed. ii. In US, Settlor’s Plan locked in. iii. In UK, beneficiaries can modify Settlor’s Plan. iv. UTC States: (P 577 bottom) § 412(a): Court may modify the administrative or dispositive terms of a trust of terminate the trust because of circumstances not contemplated by the settlor, so long as it is done in accordance with the settlor’s probably intention. v. UTC § 416: Allows a modification to achieve the settlor’s tax objectives. 1. Definitions: a. “Equitable Deviation” – (P. 577) b. “Trust Protector” or “Trust Advisor” – (P. 579) T devises property to X a bank in trust to pay the income to A for life then to distribute the property to A’s children. T also names Y, a person not competent to be a trustee, as the trust protector. Trust protector could replace the trustee with another fiduciary. Can also approve changes to dispositive items in trust. 2. However, when a termination is contrary to a material purpose of the settler, a trust will not be allowed to terminate. a. Spend Thrift Trusts are not allowed to be terminated prior to the time provided for in the trust. i. Note 4(a) UTC 411(c) Existence of a Spendthrift clause is not presumed to constitute a material purpose of the trust. b. Support Trust – Same as Spend Thrift c. Discretionary Trust -Same d. Trust for Minor Children – Same i. Can’t terminate and get money before hit the certain age. vi. Case: In Re Estate of Brown 1. Facts: a. Trust shall be used to provide an education for the children of the Settlors nephew, Wilson Brown. b. Remainder for care, maintenance and welfare of Nephew (Wilson Brown) and his wife for the remainder of their natural life. c. Remainder to Children. 2. Issue: Wilson Brown wants to terminate the trust to get money early. a. Terminating a trust early causes the life beneficiaries to get everything and the remainder interests are terminated. 3. Analysis: a. If this is a support trust, then Wilson cannot terminate. b. This is not a support trust because Wilson can take all of the income and some of the principle. 4. Hold: Remainder and Life beneficiaries join in petition to terminate the trust. Court refuses. a. Court gave great deference to the Settlor’s wishes. Even though the education of the children had been met, the support of Wilson has not been met. Wilson wanted to terminate the trust because the Trustee was getting a fee to admin the trust. Court still didn’t terminate based on the US doctrine. f. Revocable Trusts v. Irrevocable Trusts i. Only a settler can revoke a trust. ii. Maj. If created by written instrument, irrevocable, unless there is an express of implied provision that allow revocability. 1. No revocation in a will. iii. Min. Trust is deemed to be revocable unless there is language that makes it irrevocable. (CA & TX) (UTC § 602(a)). 1. UTC allows revocation in a will. g. Interests in Trusts i. Are generally alienable, 1. Except if it is a support trust. h. Administration of Trusts i. Trustee Removal 1. Can be removed for breach of fiduciary duty. 2. UTC: (P. 586) ii. Power of Appointment 1. Special Power of Appointment allows modification of the nature of the residuary gift. 2. To provide for flexibility, a. Install a trust protector. (new) b. Use a power of appointment (traditional way) i. Allows Settlor to postpone and delegate the decision about who should receive a future interest in the trust. ii. Settlor does not have to make the decision. iii. Who can have a power of appointment: 1. Beneficiaries 2. Trustee 3. Someone not related to the property at all. 3. General Powers of Appointment: (P 589) a. A power exercisable in favor of the donee, his estate, his creditors, or the creditors of his estate. b. Holder of General Power of Appointment is deemed to be the owner of the property. i. Problematic for estate tax reasons. ii. Imposed on the value of the property you own when die. This means that property you own because of appointment must be included. Very problematic. c. Donee holds the power d. The Object is the person in who’s favor the power may be exercised i. Object becomes an Appointee when power is exercised. e. The appointee is the person that is designated… f. A taker in default of appointment is a person who takes when the donee fails to exercise the power. g. What rights if any do the creditors of the donee of a general power have with respect to the appointed property? i. Irwin Union Bank Case. h. Bottom Line: Donee treated like the true owner. 4. Special Power of Appointment a. A power not exercisable in favor of the Donee. b. A person who holds a special power is not deemed to be the owner of the property for estate tax purposes. c. The donee of a special power of appointment is deemed to be acting more in the capacity of an agent for settler. d. Bottom Line: Donee treated like agent. 5. Testamentary Power of Appointment a. Can only be exercised through a will. b. No other agreement is binding. c. Case: i. Facts: Upon divorce, signs separation agreement agreeing not to change the will. ii. Issue: Is the exercise, in favor of his former spouse, valid? iii. Can only exercise a testamentary power of appointment through a will. iv. Argued that the power of appointment was released in the separation agreement, which has the same effect as a failure to exercise and the property in trust goes to the default takers. v. Plaintiff argued that since they relied on the agreement to appoint a Power of Appointment they are due restitution. 6. Lifetime Power of Appointment a. Exercisable during the life of Settlor 7. P. 591 Note 2: a. Special power of appointment: Property belongs to the donor. i. Relation Back Doctrine: Donee is not deemed to be the owner of the property. iii. Once a Power of Appointment has been created it may be: 1. Released a. Has effect of failure to exercise. 2. Exercised i. Exercise the power of appointment using a specific writing – although that is not required. ii. Isabella Case: Is a residuary clause in a will sufficient to act as an exercise of a power of appointment? 1. NEED MORE INFO ON TESTAMENTARY EXERCISE! 2. NY Law excercises both a general and special power of appointment unless the will says otherwise. 3. MASS: Residuary clause exercises only a general power of appointment. iii. General Rule: Trust instruction is jurisdictionally appropriate in the domicile of the testator. iv. Notes on P. 613: Even blending clauses may not be enough. Suppose that the donee residuary clause gives all property and property with power of appointment to A. 1. Under UPC this is ineffective to exercise the power of appointment. b. Ineffective i. Lapse 1. When beneficiary dies before donee dies. 2. Specific Devise: a. Goes to Residuary 3. Residuary Devise a. Falls our of will and goes to intestacy. 4. There are Anti-Lapse statutes that step in and prevent a lapse from occurring. ii. Fraud: 1. No taking iii. Doctrine of Capture 1. What happens when there is a failure to exercise a general power of appoitnemtn, the takers in default take, there are no takers in default, the property passes to the donors estate, unless the doctrine of capture applies. 2. P. 617 – Capture occurs when the donee of a general power of appointment manifests an intent to assume control of the appointed property for all purposes and not just for the limited purpose of giving effect to the expressed appointment. 3. Commonly manifested when the donee blends the assets. 4. Case 9 P. 617: If capture applies, donee’s estate takes. 5. Only applies in cases where donee has a general appointment.. c. Effective d. Improper Exercise i. A contract to enforce a testamentary exercise is not enforceable. ?? 3. Failure to Exercise a. Property goes to the taker in default. b. A release of the power of appointment has the effect of a failure to exercise. c. If the donee of a genral power fails to exercise, property passes in default of appointment, if none, property reverts to donors estate. d. If donee of a special power fails to exercise and there is no default, if the objects are of a limit class, then can pass to the objects of the limited power??? P. 618.. iv. P. 602 – Powers to Consume. v. Rule of Marshalling of Assets 1. Rules as to general bequests. a. Pro-rata reduction 2. In trusts: a. Can only use trust property for the exercise of the power of appointment. (17) CONSTRUCTION OF TRUST WITH FUTURE INTERESTS a. Be very careful as precision in language is of paramount importance. b. Types of Future Interests in a Transferor i. Reversion 1. All types of Reversions are vested interests. 2. Reversionary Interests arise when an owner conveys less than the whole interest owned. 3. Reversionary Interests pass to heirs. ii. Possibility of Reverter 1. (Exists when a present fee simple determinable is conveyed. If the determinable condition fails to be met the reverter occurs automatically). iii. Right of Entry (aka Power of Termination) 1. Exists when the grantor conveys a fee simple subject to a condition subsequent. 2. Same as Possibility of Reverter except only created a right to re-enter, not an automatic re-entry. c. Types Future Interests in a Transferee See Problems on P. 627 i. Remainder Interests 1. Remainder Interests become possessory when all previous or simultaneously created interests expire. A remainder cannot divest a previously created interest. 2. Vested Remainder a. Interests given to presently ascertainable person with no condition precedent. 3. Contingent Remainder a. Interest given to a not presently ascertainable party, or b. Is subject to a condition precedent. ii. Executory Interest 1. Is a divesting interest 2. Allows a transferee to step in on the property in possession of another transferee in the middle of their interest when a certain condition occurs. a. “Springing”: Interrupts a right of entry or revertor (i.e. divests a transferor) b. “Shifting”: Interrupts a remainder interest. (i.e. divests a transferee) d. Questions: i. Sequence of the death’s has substantial impact on who takes. 1. Why is this? It matters if Divisee or Intestate. ii. On B’s Death, C & D become heirs. iii. If C dies before B, iv. Q 3 P. 628 – See this question. Hinges on the interpretation of the word “or”. If B has to survive D takes, if B does not have to survice C takes. “Or” means B has to survive, and is a divestment condition. So D takes. 1. If this said B “and” her heirs courts have construed it to mean survival is not necessary so B can will it to whomever he wants. e. Interests may be parsed between Settlor (Trustor) and the Trust. i. Drafting Note: Interests should be set apart by commas. ii. Trust has legal title iii. Beneficial Title held be Beneficiary 1. Beneficiary may be granted a present Possessory Interest or a Future Possessory Interest 2. Beneficiaries are transferee’s and cannot hold anything but a vested or contingent remainder or an executory interest. f. Reversionary Interests i. g. Future Interests: i. Holders of a Future Interest are not entitled to present possession or enjoyment, although they are presently existing interests. ii. Inter Vivos Alienability 1. Common Law: a. Vested Remainders are alienable inter vivos. b. Contingent Remainders and Executory Interests are merely chances at ownership, so not alienable inter vivos. 2. Modernly: Vested, Contignent, and Executory Interests are all alienable, except if there is a spendthrift clause in the trust. iii. Testamentary Alienability 1. Reversions, remainders, and executory interests are descendable and devisable, except if contingent upon surviving to the time of possession. iv. Tax Advice: Powers of Appointment are not taxable. Future Interests transferred to another are. You can give a remainderman the power to transfer his remainder at death without the remainder being subject to the estate tax. Give the remainderman a remainder contingent upon surviving to the time of possession (thereby excaping the estate tax) and a special power of appointment giving the remainderman the power to decide who takes the remainder. v. vi. P. 631 – What happens to contingent remainders when there is a disclaimer? 1. Case: In Re Gilbert a. Disclaimer occurs when someone wants to avoid the property for some reason. b. Rule: Vested remainders are accelerated into possession. c. Rule: Contingent Remainders. Uniform Disclaimer of Property Interests Act: i. Disclaimant treated as predeceasing the testator, and remainders take affect or fail proceeding on this assumption. May disclaim at any time. ii. Under Federal Tax law, a disclaimer is treated as a gift by the disclaimant to the persons who take as a result of the disclaimer, unless the disclaimer occurs within nine months after the interest is created. iii. Future Interests Valuation: depends on life expectancy and market interest rate. Tables are published by IRS. IRC §7520 vii. Uniform Probate Code § 2-707 – A New System of Future Interests for Trusts viii. Rule of Worthier Title (P. 660) ix. Rule in Shelly’s Case ( x. RULE AGAINST PERPETUITIES: Mainly Applies to Future Interests in Trusts 1. A property interest must vest or fail. 2. It must vest or fail within 21 years “after some life in being at the creation of the interest” 3. Vested Interests cannot violate the rule against perpetuities. a. If there is a problem with a vested remainder in a transferee then RAP does not apply. b. Vested = if the interest is given to a presently ascertained person and (2) it is not subject to a condition precedent other than the termination of the preceding estates. 4. RAP focuses on vesting. a. Therefore contingent remainders and executory interests may violate the rule. b. Interests that go beyond the term of RAP are void. c. Rule against remote vesting. d. Limits the time during which property may be made subject to a contingency. e. All legal and equitable contingent future interests created in transferees are subject to RAP. i. It does not apply to interests retained by the transferor. 5. Different Approaches: a. Strict Application Approach i. Is it valid at the inception? ii. A contingent future interest is void from the outset if it is not certain that the interest will either vest or fail within 21 years after the death of ‘some life in being’ at the creation of the interest. iii. Life in Being = A unit of measurement. 1. If the validating life is not in being at the creation of the interest then RAP is violated. 2. The validating lives do not have to have any connection with the family involved. We solely must ascertain if the validating lives will allow the gift to vest or fail. 3. Validating life must be in being when the perpetuities period starts to run (which is when the instrument takes effect). a. Inter Vivos: When deed or trust takes effect. b. Revocable Trust: Begins to run when the trust becomes irrevocable. c. b. Wait and See Rule 6. “Bodily Heirs” = “Issue” = Right of Survivorship 7. After Born Child Issue: 8. Problems on P. 677 1. 1. Under Strict Rule: Gift to Children of A is void because of the potential after born child who is not a life in being at the time the interest is created. 2. a. B’s life is the measurement of a “life in being” so it will vest or fail within B’s life. b. Missed c. This continues to be a contingent remainder because someone has to go to Saturn. If someone goes to Saturn when B is alive it vests. If B dies and someone doesn’t go to Saturn, then it fails at B’s death. Therefore it is a valid gift. 3. Problems P. 688 a. No possibility of more children of A. So the class of the grandchildren is fixed and will close at the death of the last grandchild. e. Violates the rule. Here there is no validating life so can’t measure??? “The Rule of Conveniance only closes when the designated can take” The biggest issue is determining which life is the one to be used in validation. (18) ADMINISTRATION OF TRUSTS P. 771 a. In a Guardianship a guardian has to go to the court to ratify each action. b. Trustee as holder of legal title can deal in and with the property. i. Decision can be made without court approval of transaction. c. HOW TO SAFE GUARD AGAINST MISMANAGEMENT BY THE TRUSTEE i. Current trend is to vest trustee with broad powers. How do you make sure they are not abused? ii. Duties of a Trustee: 1. Loyalty a. Forbids the trustee from self-dealing with trust assets. b. Forbids conflict of interest actions adverse to the trust. c. Basically must act in best interest of trust to preserve and grow the assets or use for the benefit which the trust was set up. d. Defend the trust e. Reduce costs and increase efficiency. f. Hartmann Case: i. Executor has a fiduciary obligation like a trustee. ii. Violates duty of loyalty if sells property to himself (or related parties) if not previously approved by stakeholders. iii. “No Further Inquiry Rule” – Such a self dealing transaction is voidable without looking into it further. One possible remedy is disgorging the profits. g. In Re Gleeson’s Will (P 780). i. Two weeks before the lease on farm land was to terminate the testatrix died. The executor of the will was also the land owner, and had the option to renew or move. It was an inherent self dealing transaction. ii. He said it was hard as a landlord to find tenants for the land, and not renewing would be bad for the testatrix’ business. iii. Options: 1. Disclaim Trusteeship 2. Go to Court and get the deal ratified. 3. 2. Prudence a. Reasonableness. b. Old: Ordinary Prudence as a man would exercise in dealing with his own property c. Modernly: The prudent investor standard. i. Can’t identify speculative investments in isolation. Must link risk to reward. ii. Standard is geared toward a sensitivity to risk and reward and the link between the two. iii. The standard of Care P. 797 gives core principles: 1. Trustee shall consider the purposes, terms, liquidity and other variables in light of the needs of the trust. 2. Must do so in light of the trusts entire portfolio. – The standard of care applies to the portfolio as a whole, not each individual investment. a. So one bad or risk investment is not a breach of the duty in a big portfolio. d. In Re Chamberlin’s Estate i. It was common knowledge that the stock market condition in 1929 was almost sure to occur. ii. iii. Trustee’s Power to Act 1. Power vested by the trust instrument iv. How would Beneficiary know a Trustee moves property out of a Trust. 1. Trustee has an accounting requirement. a. Balance Sheet b. Income Statement v. Modern Trust Investment Law 1. Estate of Collins vi. ERISA P. 803 1. Non-ERISA trusts are governed by private trust law. 2. ERISA trusts governed by Federal Law 3. Duty of Loyalty and Duty of Prudence: a. Adopts Modern Trust Law with regard to Duty of Prudence. b. Adopts Exclusive Benefit Rule = Analogous to Trustee’s duty of Loyalty. 4. A trustee must make a decision based on market return. a. Investing based on a social cause is not allowed under Erisa. b. Diversification in light of the risk /return curve should be used under modern portfolio theory to create the best possible return. i. Types of Risks: 1. Market Risk 2. Industry Risk 3. Company Risk c. A similar Rule is found in the UPIA § 5. 5. What happens when a Trustee comes onto an estate that is already lacking in diversification. 6. Estate of Janes Case: a. ISSUE 1: Did Trustee’s failure to diversify breach the duty of prudence? b. Trustee didn’t properly diversify, lost value of estate, $4M in damages allocated to trustee. c. Bank Claimed: No duty to diversify unless hazards present. i. Look to (P. 808) history of company, profitability, management. d. Court thought that prudent person standard applies. The size of the estate, the needs of the estate, the context of the estate all apply. e. Kodak paid a very low dividend, so it was contrary to the needs of the beneficiary. f. ISSUE 2: Is a professional fiduciary held ot a higher standard than a non-professional ficudiciary? Yes. i. A trustee named in reliance upon a trustee’s special skills gives rise to a duty for the trustee to use those special skills. g. Hold: Court says trustee should have divested of Kodak shares by a Rx time. August was a Rx. Time (3 months after the testator’s death). h. Rule: If do not diversify within a reasonable time, there will be damages. i. The standard of care applied to a trustee is objective, not subjective. j. Damages: Calculation based on portfolio the bank had actually used themselves. k. Damages for imprudent investing are separate. vii. P. 820 Mary Jane Case – Trustee Liability in Delegation. 1. Would Mary Jane have been in breach in stepping aside as trustee knowing that there is a trustee to succeed her? No, it would be sufficient to absolve her of liability if she had no reason to suspect Charles would embezzle the money. 2. Uniform Prudent Investor Act (P. 820) – Does away with the non-delegation rule. a. Under UPIA trustee may delegate investment and management functions, so long as trustee behaves in a manner that is consistent with the UPIA. d. Modern Protfolio theory i. Prudent Investor Rule embraces modern portfolio theory. ii. When there are different classes of beneficiaries there may be tension because there is different classifications of investments. 1. Ex. Someone with a life estate interest in trust would want dividends, emphasis on cash flow. Someone with a vested remainder interest will want long term asset growth. iii. Equitable Adjustment Rule (Maj): Maintains the traditional distinction between income beneficiaries and principle beneficiaries. Allows discretion to allocation between income and principle, notwithstanding the source of the income itself. Trustee will adjust the various interest to embrace the idea of modern portfolio theory. iv. UniTrust (Min): An income beneficiary gets a certain % of the trust and the principle beneficiary gets a % of the trust. The distinction e. Important to take these into account when trustee may owe a duty to beneficiaries that are not similarly situation. Final Essay: Open Book Open Note Multiple choice: Closed Book Closed Note Always put in analysis. Answer question posed. Don’t analyze stipulated facts. Be on the lookout for a migrating couple. Jurisdictional issues.