I. INTRODUCTION TO ESTATE PLANNING [1] THE PROBATE ESTATE Page 30-31: Transfer of Decedent’s Estate: Probate v. Non-probate 1. Probate and Non-probate Property Probate assets: property that passes under the decedent’s will or by intestacy o May require court proceedings Non-probate assets: property passing under an instrument other than a will o Does not involve a court proceeding, but survivor/beneficiary must file decedent’s death certificate o NB: if beneficiary designation is non-functional or invalid, then the assets become probate o Includes: 1. joint-tenancy property both personal and real- survivor relieves property of descendant’s participation example: real estate, bank accounts, brokerage, mutual funds 2. life insurance- proceeds are paid by insurance company to named beneficiary 3. contracts with ―payable on death‖ provisions- bank, employer, corp. distributes to named beneficiary example: pension plans, IRAs, Keoghs, contracts (NB: NOT real property in FL) 4. interests in trust- trustee holds property for the benefit of named beneficiaries example: may have life estates, remainders, or other interests may be revocable or irrevocable if created by the decedent EXCEPTION: if the decedent has testamentary power of appointment over assets, will must be admitted to probate o BUT: the trust assets are distributed directly by the trustee to the named beneficiaries and do not go through probate People Who Settle Estates: o Executor: Named in a will to manage decedent’s estate. o Administrator: Manages estate of a person who died intestate. o Personal Representative: An administrator in Florida. Who owns what? o Title o Possession o Paid
Page 40-48: Estate Planning Problem Facts: Wendy (41) was married to Brian, had a child Michael (20) Howard (43) has raised Michael but not formally adopted him Howard and Wendy have two daughters- Sarah (14) and Stephanie (11) Wendy has a sister Lucy who is married to John who have two kids Wendy has a brother Simon who is married to Antonia who have no kids Wendy has another sister Ruth who is unmarried and does not have children Michael is NOT married to Candace (33) and they have a child and they have 1 child Andy (1) Wendy’s parents are both alive, Robert (61) and Zoe Wendy has a maternal aunt Fanny Howard has a sister Carol who lives with their mother Margaret (63) Howard’s father Frank (60) is dead from a heart attack H&W have lived in the same state (FL) for the duration of their marriage Howard is an industrial design engineer, same firm 8 years, $70k/year Wendy was a teacher, now is a lawyer, $65k/year, salary will soon surpass H’s No unusual health problems
1
Objectives: 1. To avoid probate Reality: to avoid administration of probate because it is slow, cumbersome, and costly Wills control probate assets 2. To eliminate as many inheritance taxes as possible Reality: FL and most state do not have state inheritance taxes, federal inheritance taxes start on $2M, then $3.5M 3. Priority should be to look at what would happen if H dies tomorrow What will happen to his family, their welfare What does H want to do with respect to his step-son Michael o NB: in FL, if Michael is not named in the will, he is disinherited and doesn’t get anything What about alternate guardians for the children? Clauses in H’s will: First: just debts clause o Pay funeral expenses first Second: names Wendy the executor o Should always include an alternate executor Third: gives remainder interest in his mother’s house to his sister Fourth: Problems: o Generally, ―children‖ does not include stepchildren Fifth: gives power to the executor o PR have default powers given by the state Sixth: gives Lucy guardianship rights o Trusts are a better alternative Important Reminders: lower probate value = lower administration cost everything you do in you will, you need to mirror in your non-probate assets Questions: 1. Which of H’s assets are probate? a. Tangible Personal Property: $20k, Powell decided $10k (1/2 of it) is probate, rest is non-probate FL and CL: ownership is based on title o If title in H’s name alone- then it is H’s probate estate o If title in H&W’s names- then it is non-probate because it is tenancy by the entirety o If title in 2 unmarried names- then it is probate- tenancy in common w/ no right of survivorship EXCEPTION: if they explicitly say joint tenancy If no title, look to who possesses it o If H&W use it together- then is presumptively tenancy by the entirety, non-probate If no title, no use, look to who paid for it b. Residence: $160k, $0 is probate Held in joint tenancy- right of survivorship (non-probate asset) $70k mortgage o Does not have to be paid off at H’s death (unless he says so in will), but payments must regularly be made o Good ideas: Could insure H’s life in this amount, or create a trust for the children in case W dies o Bad ideas: Mortgage insurance (expensive) c. Lot and Cabin: $75k, $75k is probate Title is in H’s name only, no right of survivorship (can make W joint-tenant to make it non-probate asset) Since is it in another state, you must open probate administration in that state o NB: best to put real estate in another state in non-probate form d. Bank Accounts: Checking accounts: $3K, $0 is probate
2
e.
f.
g.
h.
o ―H or W‖- joint tenancy, right of survivorship, non-probate o NB: put spouse’s name on all checking accounts to liquidates assets quickly Savings account: $7k, $0 is probate o Account is in W’s name only (would be probate asset at her death) CD: $20k, $0 is probate o It is in both their names, right of survivorship, non-probate IRA: $30k, $0 is probate o Beneficiary designation- H designated W as beneficiary, non-probate NB: remember, if beneficiary is non-functional or invalid (eg. if W dies first) then it becomes probate Mom’s house: $20k, $20k is probate H’s future interest is vested, non-probate NB: Dad should have passed it in fee simple (not life estate) to mom, with remainder to H and sister Could stick his interest into a trust or right of survivorship for his sister, but that is expensive and this is a modest asset Investments General Corp stock: $80k, $80k is probate (in H’s name alone) Varoom mutual fund: $30k, $30k is probate (in H’s name alone) American Growth mutual fund: $40k, $0 is probate (has a right of survivorship) Union stock: $90k, $0k is probate (in W’s name alone- would be in her probate estate) Life Insurance: $125k, $0 is probate (beneficiary- right of survivorship) Types: o Term: if you die w/in term (usually 1 or 5 years) then they pay your beneficiary o Ordinary: company pays face value on death if you’ve continued to pay the premiums o Participating: owners of policy are company’s shareholders o Group term: available only to certain groups Indemnity provisions: o Double indemnity provision: if the cause of your death is an accident, the policy pays double o Triple indemnity provision: if the cause of your death is an accident on a common carrier, the policy pays triple Beneficiaries: o Name one because then the policy is not subject to creditors o NB: H should not name W as primary and estate as secondary- if W dies first- then this is probate o NB: Insurable interests: if someone takes a policy out on you, they must want you to live Pension Plan: non-probate asset (named beneficiary- right of survivorship) NB: cannot change beneficiary without her present and contemporary consent
2. Which assets can be devised to charity? (Probate assets) a. $10k of TPP b. lot and cabin $75k c. remainder interest in his mom’s house $20K d. gen corp stock $80k e. varoom mutual funds $30 f. the rest is either W’s property or held in some form of right of survivorship (home, bank accounts, American growth stock) g. about ¼ of his wealth is probate h. his current home, his insurance proceeds, and his security when he retires (IRA, pension plan) are not touched by the will- bad! -------------------------------------------------------------------------------[2] PROFESSIONAL RESPONSIBILITY Page 48-54: Professional Responsibility Practice law ethically, competently, and efficiently/economically
3
1. Duties to Intended Beneficiaries Simpson v. Calivas- Duty of reasonable care is owed to intended, foreseeable third party beneficiaries- if not, named, and unnamed beneficiaries can sue. Facts: Suit is filed against the lawyer for what happened in probate court- in contract (that you contracted w/ the testator to do a specific job: draft a will that accurately reflects what he wanted- you botched it), and tort (lawyer was negligent) lawyer’s defense: 1. no duty owed to the plaintiff (the beneficiary of his client- the testator) a. in tort you need to be in privity 2. collateral estoppel: probate ct found that the testator’s intent was to give the wife everything Issue1: whether an attorney who drafts a testator’s will owes a duty of reasonable care to intended beneficiaries?contractual issue (Hayer v. Flagg says if contractual, then statute of limitations is rolling- continuous breach) Does beneficiary have standing for breach of contract/negligence of attorney? Hold1: yes, there is a duty, limited to those in privity of contract, but an EXCEPTION is when the risk to persons not in privity is apparent (emphasis on foreseeability of injury to intended beneficiary)- Lucas v. Hamm specifically: the intended beneficiary can state a cause of action simply by pleading sufficient facts to establish that an attorney has negligently failed to effectuate the testator’s intent as expressed to the attorney o look at the testator’s intent in the will not necessarily extrinsic evidence o the clause was against the rule of perpetuities you can see the lawyer’s interest though because potentially everyone could be a third party beneficiary- the narrower view is that you can only look at the will and what it says o Powell has problem with the narrow view- sometimes the will should be interpreted in the best light- see Espinosa Rule1: a non-party to a contract who has no remedy for breach of contract is subject to an exception for thirdparty beneficiaries third-party beneficiary status necessary to trigger this exception exists where ―the contract is so expressed as to give the promisor reason to know that a benefit to a third party is contemplated by the promise as one of the motivating causes of his making the contract.‖ On the tort side- most states have abolished the privity barrier On the contract side- they give the third-party beneficiary rationale Issue2: whether the trial court erred in ruling that the findings of the probate court on testator intent collaterally estopped the plaintiff from bringing a malpractice action Hold2: probate court determines the testator’s intent as expressed in the language of the will, and is always permitted to consider the surrounding circumstances of the testator, and where terms of a will are ambiguous, extrinsic evidence may be admitted to the extent that it does not contradict the express terms of the will. If testators intent was to include all of the property- then there is no action in contract or tort Rule2: collateral estoppel is only applicable if the finding in the first proceeding was essential (identical and necessary) to the judgment of that court- Rest. 2nd of Judgments §27, but even an explicit finding of actual intent by a probate court cannot be the basis for collateral estoppel Issue and evidence are not really the same- probate proceeding was about 4 corners of thw ill, while the other proceeding was about the testator’s intent o But the argument was that the failure to see this evidence (the lawyer’s notes) was the lawyer’s fault Espinosa FL has a more restrictive (narrow) rule: limit: intended beneficiaries are only those named in will Facts: guy writes/executes a will when he has children, then he has another daughter- wants to revise his will to include his daughter, but he wants to make other changes to his will which he and his lawyer argue over which prevent the execution of the new will with the new clause for the daughter. The lawyer advises him to make a codicil (amendment) to the will until they can agree on the other issue, but does not provide for the new daughter, then he dies before the will can be executed. Daughter claims a section of the estate under 732.302- FL courts said no- one of the effects of making a codicil re-dates the will to that date- therefore this will was executed after you were born and you cannot invoke that statute. Issue: is she a third party beneficiary and thus can she sue the lawyer?
4
Hold: No, FL held she cannot sue the lawyer because of lack of privity- she was not named in the will (FL is in a minority of states here) Rule: When the will is effective under its own terms, no one can argue that there should have been something else/different in the will if the will is valid and effective FPC 732.301- Permitted Spouse surviving spouse is given intestate share if marriage occurs after execution UNLESS: 1. provision has been made for, or waived by, the spouse by prenuptial or postnuptial agreement; 2. the spouse is provided for in the will; or 3. the will discloses an intention not to make provision for the spouse **share of the estate that is assigned to the pretermitted spouse in accordance with 733.805 FPC 732.302- Pretermitted children children born after execution of will are given intestate share UNLESS: 1. it appears from the will that then omission was intentional, or 2. testator had 1+ children when will was executed and devised all estate to the parent of pretermitted child and that other parent is survived the testator and is entitled to take under the will. **share of the estate that is assigned to the pretermitted spouse in accordance with 733.805
5
II. INTESTACY: AN ESTATE PLAN BY DEFAULT [3-5] THE BASIC SCHEME Page 59-83: The Basic Scheme Section A: The Basic Scheme 1. Introduction Intestate: dying without a valid will- the default rule o Partial intestacy: if a will is so poorly drafted that it disposes of only part of the probate estate o Personal property: governed by the law of the state where the decedent was domiciled at death o Real property: governed by the state where the real property is located Intestate Estate (UPC §2-201, FPC 732.101): any part of a decedents estate no effectively disposed of by will passes by intestacy to decedent’s heirs. Heirs apparent: persons who would be the heirs if A died- they have an expectancy, but not a legal interest o Expectancy cannot be transferred at law, but a purported transfer of an expectancy for adequate consideration may be enforceable in equity as a contract to transfer 2. Share of Surviving Spouse (UPC §2-102, FPC 732.102) UPC §2-102: (1) Spouse gets everything if the decedent’s kids and parents are all dead OR all the decedent’s kids/grandkids are also the spouse’s. (2) Spouse gets the first $200,000 plus ¾ of the balance of the intestate estate if the decedent leaves a parent but no kids/grandkids. (3) Spouse gets the first $150,000 plus ½ of the balance if decedent leaves no kids and the spouse has kids/grandkids that are not the decedent’s. - Penalty for spouse having kids from other relationships. (4) Spouse gets the first $100,000 plus ½ of the balance if one or more of the decedent’s kids/grandkids are related to the spouse. - The rest is divided equally among the decedent’s kids. FPC 732.102 (1) Spouse gets everything if decedent leaves no kids/grandkids (2) Spouse gets the first $60,000 plus ½ of the balance if the decedent and spouse have kids/grandkids. - No penalty for spouse having kids from other relationships. - This includes if the wife is pregnant with the husband’s child when the husband dies. (3) Spouse gets ½ of the intestate estate if decedent leaves kids/grandkids who are not related to the spouse Uniform Simultaneous Death Act (UPC §2-104, §2-702, FPC 732.601) o UPC §2-104, §2-702 An heir, devisee, or life insurance beneficiary must live 5 days (120 hours) after the decedent to inherit from them (requires clear and convincing evidence). Otherwise, they are treated as if they predeceased the decedent. In drafting wills, lawyers prefer to say ―to my wife if she survives me by ___ days,‖ usually 30, 60, or 90. (Powell thinks 5 day period is too short) o FPC 732.601 **note this applies to probate estate AND non probate transfers **designed to avoid double administration and taxation (1) if insufficient evidence of other than simultaneously- property disposed of as if benefactor survived (2) if beneficiaries die- insufficient evidence of other than simultaneously- property divided into as many equal parts as there are successive beneficiaries and the parts distributed to those who would have taken if each designated beneficiary had survived
6
(3) if joint tenants/tenants by entirety die- insufficient evidence of other than simultaneously - property distributed ½ as if one had survived and ½ as if the other had survived, proportional to the amount of joint tenants (4) life insurance insured and beneficiary die- insufficient evidence of other than simultaneously - proceeds of policy are distributed as if insured had survived the beneficiary Janus v. Tarasewicz (―sufficient evidence‖ means any evidence, not necessary to determine how much longer one survived the other- just that one survived by an INSTANT is sufficient.) Rules: o Survivorship is a fact which must be proven by a preponderance of the evidence by the party whose claim depends on survivorship o it is not necessary to determine the exact moment at which survivor survived decedent, or by how long survivor survived decedent. Domestic Partners and Intestate Succession: o Should cohabiting domestic partners be treated like spouses for purposes of intestate succession? HI: reciprocal beneficiaries, VT: civil unions, CA: domestic partners, MA: same-sex marry for residents o Problem: transsexual marriage?
3. Shares of Descendants: Order of Intestacy (UPC §2-103, FPC 732.103) UPC §2-103 (1) Surviving Spouse. (2) Descendants (and descendants by representation). - Representation: If one of your kids is dead, that kid’s children split the share - Daughters and sons-in-law are always excluded. (3) Parents. (4) Descendants of Parents (siblings and their descendants—decedent’s nephews and nieces). (5) Grandparents (or their descendants, split between maternal and paternal sides, and if none, to greatgrandparents). (6) Escheat to the State (2-105 No Taker: if there is no taker, the intestate estate passes to the state) FPC 732.103 (1) Surviving Spouse. (2) Lineal Descendants (kids and grandkids of deceased kids). (3) Parent(s). (4) Siblings (and descendants of dead siblings). - Known as ―collateral kindred.‖ (5) 1/2 to Paternal Kindred and 1/2 to Maternal Kindred. (a) Grandparents. (b) Aunts and Uncles (and descendants of dead aunts and uncles). (6) If no paternal or maternal kindred, any other surviving kindred. (7) If no kindred, everything goes to the kindred of the last deceased spouse of the decedent. (8) Escheat to the State. (FPC § 732.107) Representation o English/strict per stirpes: divide the property into as many shares as there are living children of the designated person and deceased children who have descendants living Treats each line of descendants equally Followed in 14 states Florida, FPC 732.611: devises to be per stirpes- unless will provides otherwise Ex: Bob has 2 kids, A and B. A has one kid, C. B has 2 kids, D and E. A and B both die before Bob. If they survived, each would have gotten half Bob’s estate. A’s half goes down to C. B’s half is split between D and E.
7
o
Modern per stirpes/per capita with representation: first look to see whether any children survived the decedent- if so then distribution is the same as English, if not then the estate is divided equally, at the first generation in which there are living takers Treats each line beginning at the closest living generation equally Followed in 25 states- preferred Original UPC Ex: In the above example, C would not get A’s full 1/3 share. D and E would not have to split B’s 1/3 share. Instead, because all members of the generation closest to Bob are dead, the shares are divided evenly at the next closest generation. Thus, C, D, and E would all get 1/3 shares. Per capita at each generation: Professor Waggoner: surviving children take equal shares, and the children of deceased children divide the rest equally Treats each taker at each generation equally with the other takers at that generation The premise of this approach is that those equally related to the decedent should take equal shares Codified in UPC 2-106(c) Followed in 12 states
o
Negative Disheritance: an express statement in the will disinheriting a child. Not possible by a declaration in a will to disinherit a child unless the entire estate is devised to other persons, otherwise the child will take what is not devised under intestacy. o UPC 2-101(b) changes this and authorized a negative will- treats the negatively disinherited child as if he disclaimed his intestate share, which means he is treated as having predeceased the intestate
4. Shares of Ancestors and Collaterals (UPC §2-103, FPC 732.103- see above) FPC: does not extend to distant relatives, only first 3 columns UPC: if no surviving heirs, look to last living spouse and see if she would have any surviving heirs Collateral Kindred: all persons who are related by blood to the decedent but who are not descendants or ancestors o First line collaterals: descendants of the decedent’s parents, other than the decedent and the decedent’s issue (brothers and sisters) o Second line collaterals: descendants of the decedent’s grandparents, other than decedent’s parents and their issued (aunts and uncles) If there are no first line collaterals, the states differ as to who is next in the line of succession o Parentelic system: the intestate estate passes to grandparents and their descendants (aunts and uncles) and if none, to great-grandparents and their descendants (great aunts and great uncles), and if none to great-greatgrandparents and their descendants until an heir is found. This is what it is like in Massachusetts- next of kin to equal degree, but not in Florida- in Florida only look at descendants of grandparents o Degree of relationship system: the intestate estate passes to the closest of kin, counting degrees of kinship One for each generation, up from the decedent to the nearest common ancestor of the decedent and the claimant, then down t the claimant from the common ancestor Laughing heirs: remote collaterals (laughing all the way to the bank because they’re so distantly related that they suffer no sense of bereavement) 5. Halfbloods UPC 2-207: In a large majority of states, a relative of the half blood is treated the same as a relative of the whole blood FPC § 732.105: When some siblings are full blood and others are half blood, the half-bloods receive half as much as full bloods; if all are half-blood they shall receive the same amount. -------------------------------------------------------------------------------------[6-8] TRANSFERS TO CHILDREN
8
Page 83-126: Transfers to Children Section B: Transfers to Children 1. Meaning of Children a. Adopted Children Once a child is legally adopted, it becomes a stranger to his biological family—its relationship with them is severed. The child is treated as a natural child of its adopters, and it is unconstitutional not to allow them to inherit from members of their adoptive families. Adoption is NOT REVOCABLE FPC § 732.108: (1) The adopted child becomes a lineal descendent of its adopted parents, not of its natural parents. Exceptions… (a) adoption of a child by the spouse of a natural parent (i.e. step parent) has NO EFFECT on the relationship b/t the child and the natural parent or the natural parent’s family (b) adoption of a child by a natural parent’s spouse who married the natural parent after the death of the other natural parent has NO EFFECT on the relationship b/t the child and the family of the deceased natural parent (c) orphan adoption: adoption of a child by a CLOSE RELATIVE has no effect on the relationship b/t the child and the families of the deceased natural parents (2) a person born out of wedlock is a lineal descendant of his mother and is one of the natural kindred of all members of her family. The person is also a lineal descendant of his father and is one of the natural kindred of all members of his family if: (a) natural parents married before or after the birth of the person even though the marriage is void (b) the father’s paternity is established before or after his death (c) the father acknowledges paternity in writing UPC 2-113: individuals related to decedent through 2 lines are entitled to only a single share based on the relationship that would entitle the individual to the larger share UPC § 2-114: When a parent’s new spouse adopts the parent’s child, the adoption has no impact on that child’s right to inherit from the other parent (even if other parent is not dead) and that natural parents relatives, but the natural parent’s relatives may not inherit from the adopted child UPC § 2-114: A parent cannot inherit the property of his biological child unless that parent has treated the child as his own and has not refused to support the child. Explicit Adoptions o Adopted child Hall v. Vallandingham adopted child has no inheritance from natural dead parent or relatives Facts: children could not inherit from natural paternal uncle because father was dead and mother had remarried, stepdad adopted them, state statute said child loses all rights from natural parent if he is adopted (because they can adopt from adoptive-step-parent) Rule: because an adopted child has no right to inherit from the estate of a natural parent who dies intestate, it follows that the same child may not inherit through the natural parent by way of representation- states have the power to regulate how property passes. o Adopted adult Minary v. Citizens Fidelity Bank & Trust Co. can adopt an adult, but not a spouse or lover, or not for the purpose of indirectly changing the will Facts: H adopts W to make her heir under his mother’s will, doesn’t pass in court Rules: You can adopt an adult, but not a spouse or a lover But in the states that don’t use that rule, the alternative is that the adoption of an adult for the purpose of brining that person under the provisions of a pre-existing testamentary instrument when he clearly was not intended to be so covered should not be permitted.
i.
9
o
stranger-to-the-adoption rule: rare rule where the adopted child is presumptively barred from taking under a will, whatever generic word is used (children, issue, descendants, heirs), except when the donor is the adoptive parent
ii. Equitable (Virtual) Adoptions o equitable adoption (virtual adoption): when adoptive parents take child into home and raise him but do not formally adopt, an oral agreement to adopt between adoptive and natural parents is inferred and specifically enforced in equity against adoptive parents- they cannot deny a formal adoption took place o permits an equitably adopted child to inherit from the foster parents, but foster parents (and their relatives) cannot inherit from the child o focus on the ample evidence of a close, loving relationship o there is reliance on the agreement- either by natural parents (M&F) or child (C) o Can C adopt from his virtually adopted sibling? Most jurisdictions say no- inheritance stops w/ inheritance from H&W West Virginia allows this though o O’Neal v. Wilkes virtual adoption not enforced in equity between parties that had no legal right to contract for the adoption Facts: Hattie’s aunt finds couple to care for her after being moved around a lot, but Hattie cannot inherit from them because her aunt did not have legal capacity to make this virtual adoption arrangement Rule: Contract adoption requirements: made between persons competent to contract for the disposition of the child o Legal custodian: a person to whom legal custody has been given by court order and who has the right to physical custody of the child and to determined the nature of care, etc. Aunt does not have the right to consent to the adoption of a child- reserved only for a child’s parent or legal guardian. o Familial obligation: different from legal obligation- no authority to contract b. Posthumous Children typically involves a child who is conceived before, but born after, her father’s death for inheritance purposes, the child is treated as in being from the time of conception rather than from time of birth rebuttable presumption of 280 days preceding birth for gestation- if longer than that, then child can submit issue to a jury FPC § 732.106: A baby conceived before its father death but born after his death can inherit intestate. c. Non-marital Children (Children Born Out of Wedlock- fillius nullius) UPC § 2-114: For the purposes of intestate succession, a person is a child of his natural parents regardless of their marital status. FPC § 732.108: A child is always considered a lineal descendant of its mother and her family. But it is only considered a lineal descendant of its father if… (a) The natural parents ―married‖ before or after the child’s birth, even though the attempted marriage is void, (b) Paternity is established by court adjudication before or after the father’s death, OR (c) The father acknowledges his paternity in writing. Common Law: To inherit from their father, a non-marital child must… (a) Present evidence of a subsequent marriage of its parents. (b) Show that the father acknowledged it. (c) Have the court adjudicate paternity during the life of the father. (d) Show clear and convincing proof of paternity after the father’s death. Hecht- A woman is allowed to conceive her late husband’s children through post-mortem artificial insemination, but the children are not allowed to inherit from their father Tremble v. Gordon- What kind of restrictions can states put on non-marital kids?
10
o NY said they will not allow the child to est. paternity after death Equitable legitimation doctrine: where a formal adjudication of paternity is required by statute for inheritance, a non-marital child can inherit from the father if there is clear and convincing evidence of paternity and of the father’s intent that the child be treated as an heir.
d. Reproductive Technology and New Forms of Parentage Posthumously conceived child- conceived after father’s death through artificial insemination- are nonmarital children (because the marriage ceases at one’s death) Woodward v. Commissioner of Social Security (posthumous conception- not posthumous birth) Facts: woman gets pregnant w/ twins from dead husbands frozen sperm- do they enjoy inheritance rights from him? Rule: balancing test 1. best interest of the child (always the test if it is a posthumous birth case) Illegitimacy is stigmatizing Powell says- is this just financial or a broader picture? o If financial- then it is always in their best interest to receive an inheritance o If broader, as case implies- this might end up pitting them against each other 2. state’s interest in the orderly administration of estates, and Are their other heirs? Paternity tests Powell says family members have an interest in this so that it doesn’t drag on o But that interest is limited to intestate share- has almost no relevance to SS eligibility in the abstract question except that the question is tied to inheritance rights (not really important then in SS) 3. deceased’s reproductive rights and consent interest He must consent not only (1) to posthumous reproduction, but also (2) to support any resulting child (burden on surviving parent to prove it) o If both yes- then we have harmonized the reproductive rights of the decedent Powell says putting your sperm in banks is not enough to prove you want posthumously conceived children o Also- court does not tell us what evidence would be sufficient to show his consent Rest 3rd has more relaxed rule: circumstances indicating that decedent would have approved of the child’s right to inherit, and born w/in a reasonable time- frozen sperm is clear indicator UPA 707 has a stricter evidentiary rule: the deceased is not a parent of the resulting child unless the deceased consented in a record that if assisted reproduction were to occur after death, the deceased would be a parent of the child Cali statute- 3 prong test: 1. clear and convincing evidence that he specified in a signed, witness writing, that surviving spouse could use it for posthumous conception, 2. that notice of the possibility of claim by such person be given to distributor of property w/in 4 months. 3. the child was in-utero w/in 2 years of decedent’s death. e. Surrogate Motherhood and Married Couples: Johnson v. Calvert: Parenthood in surrogate mother cases should not be determined by who gave birth or who contributed genetic material, but should turn on the intent of the parties as shown by the surrogacy contract o but in some states these agreements violate public policy f. Assisted Reproduction and Same-Sex Couples: Adoption of Tammy: Both the natural mother and the adoptive mother had post-adoptive rights and that the adopted child would inherit from and through both mothers as the child of each King v. SB: When 2 women involved in a domestic relationship agree to bear and raise a child together by artificial insemination of one of the partners with donor semen, both women are the legal parents of the resulting child But again, in some states these agreements violate public policy
11
2. Advancements Common Law: Any large lifetime gift to a child is presumed to be part of that child’s future inheritance. The child has the burden of proving it was not an advancement. UPC § 2-109: Gifts are treated as advancements unless either party acknowledges in writing that it was just a gift or that it was definitely an advancement. o Donor has to write it at the time gift is given, but donee can write about it whenever FPC § 733.806: Lifetime gifts to heirs are not treated as advancements unless expressly declared in a contemporaneous writing by the decedent or acknowledged in writing by the heir. o The property is valued at the time the heir possessed it, or at decedent’s death- whichever comes first o If recipient of property does not survive decedent, property is NOT taken into account in computing the intestate share UNLESS the declaration or acknowledgement provides otherwise o Powell says this kills doctrine of advancements o That person will not just want to control the one gift in writing, will just want to write a will Hotchpot: The value of the gift (assessed at the time the gift is given) is subtracted from what the child would have gotten under the will. The gift goes into a hypothetical estate called a hotchpot, where it is considered as a share of that child’s intestate inheritance. o If A is advanced less than his share would have been- the advancement gets added to the pot and then divided equally and then A’s advancement deducted from his share. o If A is advanced more than his share would have been, he gets that and stays out of the pot and the estate will be equally divided between the other heirs.
3. Guardianship and Conservatorship of Minors Who will take care of the children and manage their property if both parents die? a. Guardian of the Person: has the responsibility for the minor child’s custody and care - court appoints this from the nearest relative - terminates when the minor reaches the age of majority, dies, or is adopted - should choose an alternate too b. Property Management Options 1. guardianship of the property: (usually the same person as guardian of the person) - default one - doesn’t take title, cannot change investments w/o court order - manages the assets of the child - preserves the specific property left the minor and deliver at 18 - if court approves sale/lease/mortgage- can only use the income from the property to support the ward 2. conservatorship: guardian of the property was renamed this and given ―title as trustee‖ - more flexible powers - more streamlined administration - terminates when minor reaches the age of majority or dies 3. custodianship: is given property to hold for the benefit of a minor - property may be transferred to a person (including the donor) as custodian for the benefit of the minor (best interests) without court permission - can be created by banks, brokers, and other financial institutions - facility of payment clause in a will or trust indicates this as well - the Uniform Transfers to Minors Act allows the fiduciary to make payments to a custodian, but require court approval - transfer property at 18 or 21 - has right to manage the property and to reinvest it, but subject to the standard of care that would be observed by a prudent person dealing with property of another
12
4. trusts: most flexible of all property arrangements - trust can postpone possession until the donor thinks the child is competent to manage the property - contingent trust- if testator has no children or if they are grown, for minor beneficiaries - more expensive because it is crafted for each client’s needs - more duties on trustee to account, they just don’t have to account to the court - if a corporate trustee, this is usually included in the fee 5. variations on transfers to minors: -guardian ad litem: for litigation - representative payee or substitute payee to receive benefit checks on behalf of a minor or incompetent - facility of payment clause- testator makes cash bequest to a beneficiary who is a minor- goes to minor’s parents or those having custody Set up Guardianship Cheapnominate a guardian Running Highcourt is heavily involved Low- no court Medhave to do acctg Opportunity High- guardians are limited in investments (land, FDIC, bonds ensured by govt) Low- freedom of investment Low- authorized to invest in anything Pot No- each child is separately handled Ends ends at 18 Avoid P-bate No Who pays? Child
Custodianship Ch 710 Trust
Really cheap High- well drafted
No- each child sep. Yes- major adv
Max 21 Complete
No Yes
Child Taxed to trust if kept in
----------------------------------------------------------------------------------------------[9] BARS TO SUCCESSION Page 126-140: Bars to Succession: Homicide, Disclaimer Section C: Bars to Succession 1. Homicide Common Law: Killers cannot inherit from their victims. Legal title to the property passes to the slayer, who must manage the property until the court imposes a constructive trust for the benefit of the victim’s heirs. Slayer must then distribute the property. UPC § 2-803: Cannot inherit intestate (or by will) from somebody you’ve murdered. Killers cannot profit from their wrongs. No need to prove motive for killing was to inherit. Killer is treated as having disclaimed the property. o UPC §2-1106 treats a disclaimant as having predeceased the decedent FPC § 732.802: If you ―unlawfully and intentionally kill‖ someone, you cannot inherit from them intestate or by will. Killer is treated as if he predeceased the victim. Florida courts impose constructive trusts for both murders and manslaughters. o Joint Tenancy: When one joint tenant kills the other, distribute the property as if the slayer tenant were dead. Estate becomes a tenancy in common, and slayer gets nothing. o Tenancy by Entirety: If wife kills husband, their interests are severed. Wife keeps her own interest but does not inherit her husband’s interest through right of survivorship—husband’s interest goes to his heirs. o Named Beneficiary: who kills is not entitled to the property, but his progeny can inherit UPC §2-803- Criminal Conviction: Conclusively bars you from inheriting. But acquittal does not necessarily allow you to inherit—the court can determine, by preponderance of the evidence, that you are criminally accountable for the murder, barring you from inheriting.
13
o A few states allow you to inherit after involuntary manslaughter. In re Estate of Mahoney slayer is constructive trustee Rules: o legal title passes to slayer, but equity holds him to be a constructive trustee for the heirs or next of kin of the decedent constructive trust is nothing but the formula through which the conscience of equity finds expression prevents the slayer from profiting from his crime but does not apply an additional penalty slayer should not be permitted to improve his position by then killing, but should not be compelled to surrender property to which he would have been entitled if there had been no killing cannot be a constructive trustee if insane during crime or if he had a vested interest in the property (to which he would have been entitled if no crime had occurred) when the result shocks the conscience of the court, the court can intervene and adjust the ownership This court in VT lacked the jurisdiction to impose a constructive trust o the line is drawn between voluntary and involuntary manslaughter and not manslaughter and murder- the court will ONLY intervene if it was an INTENTIONAL killing- if it was unintentional- you can still take
2. Disclaimer Common Law: If you refuse to accept property through intestacy, the law treats your renunciation as if title had passed to you (taxed), and you transferred it to the next intestate successor (taxed again). Thus, the property gets taxed twice. o Wills are viewed as offers to make a gift. UPC § 2-801: A person disclaiming a gift is treated as if he had predeceased the decedent (no transfers involved). o A disclaimer relates back, for all purposes, to the date of the decedent’s death. o Allows insolvents to disclaim gifts to avoid letting their creditors get it. FPC § 732.801: A person can disclaim any interest in property. o A disclaimer relates back to the date of the decedent’s death for all purposes. o Does not allow an insolvent to disclaim to avoid creditors. o A guardian can disclaim for a minor/incompetent/incapacitated/dead person if the court thinks doing so is in everyone’s best interests and is not detrimental to the person’s best interests FPC 739: if you’re a beneficiary under a will or taking an inheritance, you have the right to say no thanks if you do that in writing before you accept the bequest or inheritance.
FPC 739: Time Limits on Disclaimers: o To escape the federal gift tax, disclaim up to 9 months from decedent’s death. o Florida’s period is longer than the federal period- must do it in writing before you accept the bequest or inheritance But if the interest is a contingent interest, you must disclaim 6 months from the date the contingency is resolved. o If these time periods conflict, you must meet the shorter time period. Cannot disclaim a gift in favor of someone else (gift requires acceptance by donee) Disclaimers cannot be rescinded!!! If you disclaim so your kids get your share, only your interest gets passed to them. o Ex: O dies intestate, leaving 2 kids, A (alive) and B (dead). A has 4 kids, B has 1. Both A and B are given 1/2 shares of O’s estate. B’s 1/2 goes to his 1 kid; A’s 1/2 share is split between his 4 kids. A cannot disclaim his share so there are no heirs at the child level, thus making the inheritance split evenly between the 5 grandkids. If A disclaims, his kids will still only get his interest, which is 1/2. Drye v. US disclaimant cannot avoid federal taxes by trying to pull one over on federal govt Rules: o the power to channel the estate’s assets warrants the conclusion that Drye held the property, or at least a right to it, subject to the govt’s leins o Drye’s disclaimer relates back to the date of his mother’s death so it flows directly from her to his daughter, but the disclaimer does not trump the federal tax lien. o If you have unforeseen future debts, then you can disclaim
14
Troy v. Hart cannot disclaim a gift to avoid Medicaid getting at it Rules: o if a recipient renounces an inheritance that would cause him to be financially disqualified from receiving benefits, then that should incur the same penalty of disqualification that acceptance would have brought about and render the recipient liable for any payments incorrectly paid by the state in consequence. If not, it would be way against public policy. o disclaimers are irrevocable- treated as if he had accepted the inheritance and gave them to his sisters and then cannot go on Medicaid because it is a disqualifying factor -------------------------------------------------------------------------------------------
[10, 11]: THE PROBATE PROCESS Page 30-40: Administration of Probate Section B: Transfer of the Decedent’s Estate 2. Administration of Probate Estates a. History and Terminology personal representative oversees decedent’s affairs, duties: 1. inventory and collect assets 2. manage the assets during administration 3. receive and pay the claims of creditors and tax collectors 4. clear any titles to cars, real estate, or other assets 5. distribute the remaining assets to those entitled executor: person to administer estate is named in will must give bond unless the will waives this requirements administrator: person is not named in will probate court appoints them- usual order: surviving spouse, children, parents, siblings, creditors die testate (with will): devise real property to devisees, bequeath personal property to legatees die intestate: real property descends to heirs, personal property is distributed to next of kin b. Summary of Probate Procedure Petition for Administration: Can be filed by anyone who is an heir under state intestacy statutes, anybody named in the will, or anybody with an interest in the estate (creditors). Probate the Will: Anybody who physically possesses the will is obligated to bring it forward (civil liability is imposed if they don’t). Court declares the will is decedent’s ―final and last will.‖ It can be contested at this point (which increases costs). Appoint an Administrator or Personal Representative: (PR) Can be family, friend, or lawyer (expensive). Many testator’s name the PR in their will. Post a Bond: PR does this to ensure they will perform their duties and not steal from the estate. Banks named as PR do not have to do this. Bond amount is proportionate to value of personal property in estate (not real property, which cannot be stolen). Cost of the bond is an administration expense, paid for by estate assets. Wills can waive bond requirements—routinely done to cut expenses. Letters of Administration: Provides PR with written authority to deal with decedent’s affairs. Many are required for large estates (expensive). Florida gives you 20 when you petition for administration. Notification: Send notice of administration to interested non-creditors that estate is open and running (spouses, kids, beneficiaries of the will, heirs at law). Notify creditors. In Florida, send actual notice to all known and reasonably discoverable creditors. Publish notice (and contact info) in the newspaper in the county where the estate is being administered. This starts a short period of limitations: 3 months after the first day of publication, all creditors who have not presented claims are barred (including government, but not IRS). If notice is not filed, this period is 2 years.
15
Inventory: PR prepares inventory list of estate assets within 2 months of decedent’s death. Typically, lawyers are asked to do this, which gets expensive. Closing: Simple estates can be finished in one year. If not, you must go to court and explain why you are not done yet. PR cannot be compelled to distribute the estate before 6 months of decedent’s death.
Florida Probate Procedure: o Choosing a PR: (FPC § 733.301—733.305) Testate Estates: (1) PR named in will, (2) PR elected by those interested in the estate, (3) devisee under the will, (4) capable person. Intestate Estates: (1) Surviving spouse, (2) PR elected by those interested in the estate, (3) closest heir (or best qualified of closest heirs), (4) capable person. A ―capable person‖ cannot work for the court or any probate judge. PRs must be over 18, no felony convictions, mentally/physically able to do duties. If not domiciled in Florida, must be an adopted child/parent of decedent, or related by lineal consanguinity (or the spouse of someone who is). Can be a trust company or state/national bank. o Bonds: All PRs and fiduciaries (except banks and trust companies) who get letters of administration must post a bond, unless waived by the will or by the court. Court determines value of bond. o PR’s Powers: (FPC 733.612) Can retain decedent’s assets, perform/refuse to perform decedent’s contracts, receive assets from other fiduciaries, invest funds, buy/sell personal property, make repairs/alterations to property, enter into a lease, remove natural resources from property, abandon valueless property, manage stocks/securities, insure decedent’s assets, borrow money, pay taxes on estate, employ people to help, prosecute/defend claims, sell/mortgage/lease personal property, continue any unincorporated business, exonerate PR, distribute estate, make partial distribution to beneficiaries, and execute any instrument needed to exercise his powers. Can only sell real estate if court approved and in best interests of estate. (§ 733.613) Successor PRs have the same powers. (§ 733.614) o Notice of Administration: PR must give notice to decedent’s spouse, beneficiaries, trustees and trust beneficiaries, and people who may get decedent’s exempt property. PR is not liable for giving notice to or failing to give notice to someone, if done in good faith. Interested persons can object to the validity of the will, qualifications of PR, venue, or jurisdiction within 3 months of service of notice of administration. o Notice to Creditors: Publish notice to creditors, who get 3 months to file claims or else they are barred (unless court extends time period). Excludes mortgage claims, liens on property, and IRS. (§ 733.701— 733.702) No claims allowed from anybody after 2 years of decedent’s death, even if letters of administration were never issued. Some property is exempt from creditors—it goes directly to surviving spouse or children. (§ 732.402) Household furniture, furnishings, and appliances up to $10,000. Cars in decedent’s name used by the family. Pre-paid college tuitions (not in statute, but generally accepted). o Order of Payment of Expenses: (§ 733.707) PR must pay in the following order. (1) Costs of administration, PR compensation, and attorneys fees. (2) Reasonable funeral expenses, not over $6,000. (3) Debts and taxes. (4) Reasonable medical/hospital expenses for last 60 days of decedent’s last illness. (5) Family allowance. (6) Debts incurred after death through continuation of decedent’s business. (7) All other claims. Private Contract: Interested people can privately contract to change their shares. (§ 733.815)
o
Florida Streamlined Small Estate Administration Procedures: (Ch. 735) Disposition Without Administration: (§ 735.301) Estate qualifies if the Probate Estate (PE) – Exempt Property (EP) < Medical Expenses and Funeral Costs for the Last 60 Days.
16
o
Estate does not qualify if it contains real property. Write an informal letter telling the court how and why the estate qualifies (virtually worthless) Summary Administration: (§ 735.201) Estate qualifies if Probate Estate (PE) – Exempt Property (EP) < or = to $75,000. Benefits: No inventory, no PR, no notice to creditors, immediate distribution to beneficiaries. Used for estates containing both personal and real property. If estate contains real property, creditors have 2 years to make claims. Only concerns the probate estate, so very rich people can manipulate their assets, putting them in nonprobate form to bring their probate estate down to less than $75,000 to make administration go faster.
Miscellaneous Estate Administration Rules: o Title Clearing: To have the title to a car changed out of a dead spouse’s name, the surviving spouse can go to the DMV, certify she is entitled to the car under the intestacy statute and that she is the spouse, and the DMV will reissue a new title without letters of administration. o Savings Accounts: Banks will not release money to you in an account not in your name, even if it’s in your dead spouse’s name, without letters of administration. Banks can be liable. Power of Attorney: o Similar to a guardian. Has authority to manage a borderline incompetant’s property and transfer assets into a trust that has already been created. No accounting. o A person can choose their Power of Attorney while still competent, allowing them to plan for the possibility of incompetance. Power only lasts as long as the person is still competant—once judicially declared incompetant, the power ceases. People appoint them to help sick/demented people so they don’t have to get a court order declaring them incompetant (embarrassing). Provides bulletproof protection against a declaration of insanity. c. Is Probate Necessary? o Can be avoided if prop owner during life transfers all his prop into joint tenancy or a revocable or irrevocable trust or executes a contract providing for distribution of contract assets to named beneficiaries on his death o Probate gives us: 1. ability to cut off creditors claims by publishing and sending notice. We know 3 months later that there are no outstanding creditors If we fail to send notice, they have 2 years to make a claim and can collect from assets already distributed 2. ability to collect the decedent’s assets from the letters of administration 3. ability to re-title the property
17
III. WILLS: FORMALITIES AND FORMS A. EXECUTION OF WILLS NB: an issue devisavit vel non: whether the purported will is valid or not [12-14] ATTESTED WILLS Page 199-236: Attested Wills 1. Attested Wills a. The Function of Formalities Will statutes: every state has them- complicated requirements for executing a will, not valid unless all requirements are met Four functions: 1. ritual (cautionary) function: the performance of some ceremonial for the purpose of impressing the transferor with the significance of his statements and thus justifying the court in reaching the conclusion, if the ceremonial is performed, that they were deliberately intended to be operative. 2. evidentiary function: requirements of transfer may increase the reliability of the proof presented to the court 3. protective function: protecting or safeguarding the testator at the time of execution of the will against undue influence or other forms of imposition 4. channeling function: it is easier to determine a person’s wishes at death if they are channeled into a will with standardized formalities- a safe harbor should we instead ask whether a formality promotes the intent of the testator at an acceptable administrative cost? Basic formalities: 1. writing 2. signature by the testator 3. attestation by witnesses Important Acts 1. Statute of Frauds (1667) 3 witnesses, but did not have to be present at the same time, and testator could sign anywhere 2. Wills Act (1837) 2 witnesses, but both must be present when the will is signed or acknowledged, must be signed at the end of the will (called a subscription) 3. Publish: A few states require that the testator must publish his will by declaring before his witnesses that it is his will 4. UPC adopts less strict requirements of the Statute of Frauds but reduces the required number of witnesses to 2, but don’t have to sign w/in presence of each other, just w/in a reasonable time (facts & circumstances test)
b. The Formalities in Action UPC §2-502: Execution; Witnessed Wills, Holographic Wills (a) except as provided in (b- holographic wills), a will must be (1) Must be written. (2) Signed by the testator. Someone else can sign for the testator in his presence and at his direction Doesn’t matter where signature is on the will (3) Signed by at least 2 witnesses who signed in a reasonable time after witnessing the will. Or, witnesses can acknowledge the testator’s signature together—must have been able to see the testator’s signature on the document ―if they bothered to look.‖
18
Witnesses can sign within a reasonable period after testator’s death. Interested witnesses can sign and still collect unless there is evidence of undue influence.
FPC § 732.501—732.504 Wills… (1) Must be written. (2) Signed by the testator. Must sign at end of document after the document is completely finished. o In FL- ―at the end‖ is a time requirement not location requirement- jury question Can be signed at the end by someone else in testator’s presence and at his direction (and that person can still serve as a witness). Testator must be over 18 (or emancipated) and competent. (3) In the presence of 2 attesting witnesses, who sign in the presence of each other. Can acknowledge testator’s previous signature. Must sign before testator’s death. Interested witnesses can sign and still collect unless there is evidence of undue influence. Signatures: o Testator must sign first, then witnesses. o Testator must complete signature while both witnesses are still present or it’s invalid. o An actual signature is not necessary: an X, a mark, and initials are valid, as long as the act of signing is complete (can write ―Jen‖ if intended to write ―Jen,‖ but not ―Jen‖ if intended to write full name). o Never sign on back of will. Never leave blank space between text of will and signature. Addition after signatures: o if it was added after the testator signed the will, then will admitted to probate and line is ineffective as a subsequent unexecuted codicil o if it was added before the testator signed the will, but it is just below the signature, you have to look at what the statute says Presence tests: o Line of sight test (old rule): testator does not actually have to see the witnesses sign but must be able to see them were he to look Exception is for blind people o Conscious presence test (new rule): the witness is in the presence of the testator if he through sight, hearing, or general consciousness of events, comprehends that the witness is in the act of signing o UPC §2-502(a) dispenses with the requirement that the witness sign in the testator’s presence o FPC doesn’t have a presence test- Powell says probably conscious presence test would apply In re Groffman technicalities of a statute must be complied with, what is “presence” Hold: will not admitted to probate because both witnesses were not in the room at the same time when he acknowledged his signature like the Wills Act of 1837 required Rule: you must comply with the technicalities of the statute- if it requires presence of both witnesses at the same time of acknowledgement of your signature- it means just that- line of sight test Stephens v. Casdorph technicalities of a will statute must be complied with + testator has intent, “presence” Hold: will not admitted to probate because the witnesses were not in the presence of the testator because he was in his wheelchair at the teller’s desk and they were at their desks when they signed it Rule: line of sight test Dissent: Wade narrow exception: ―that if a witness acknowledges her signature on a will in the physical presence of the other subscribing witnesses and the testator then the will is properly witnessed‖ Safeguarding the will 1. Notarization: most states require this to keep a record in county recorder’s office 2. Attestation clause: recites that the will was duly executed
19
o o o
Must be signed by testator and both witnesses. Without this clause, the burden of proving valid execution falls on the proponents of the will. With this clause, the burden shifts—the will is presumptively valid. Delayed attestation: UPC §2-502(a) says witnesses must sign w/in reasonable time
3. Self-proving affidavit: Just like the attestation clause: states that the will has been properly executed. o A notary must sign in addition to the testator and both witnesses. o Creates a conclusive presumption that the will is valid—can be immediately admitted to probate. o Can be added later o UPC §2-504 authorizes 2 kinds: 1. a combined attestation clause and self-proving affidavit (one-step)- testator and witnesses only signs once 2. one of each (two-step)- testator and witnesses must sign the will itself and the attached affidavit 4. Who keeps it? o UPC §2-515 provides for the deposit of a will in court for safekeeping Not available in FL (costs money to run a will registry- our courts are underfunded) o Safe deposit box If in your name alone, family may not be able to get to it without opening administration o Also many people have their own safes Should be fireproof If lawyer cant find client’s will in his home- presumption of revocation o Lawyer should not keep it- unethical business soliciting practice o Banks, as your fiduciary, will keep it Disinterested witness statute: o Some states have these, but not UPC or FPC. Prevents undue influence. o Wills must be signed by 2 disinterested witnesses: if an interested witness signs, their gift is void, but the will itself is not void. o Gifts made to spouses of signing witnesses are void under these statutes. o Lawyers as Witnesses: should not witness their own client’s will (may need to testify later, so they must withdraw). o Purging Statutes Under UPC §2-505, an interested witness does not forfeit a devise under the will Judge interest at the time the will is executed 1. Disclaimer relating back to the death is not far enough b/c the person had an interest at the time of execution If you reaffirm your will and it is executed by persons not interested, then the interested person’s (who witnessed the original will) problem is gone o Estate of Parsons discusses the disinterested witness statute when it was still good law Rule (abolished): disinterested witness statute: beneficial devises to interested witnesses are void
Switched Wills o At CL, a person must intend to sign their own will (testamentary intent)—thus, if they accidentally sign another person’s will and execute it, they lack intent, and the will is invalid. Extrinsic evidence of testator’s true intent not allowed. o UPC Dispensing Provision § 2-503 Authorizes courts to dispense with technical formalities in order to probate a will that otherwise has too many technical problems to be valid, as long as there is clear and convincing evidence that decedent intended the document to be his will. Every technical requirement is subject to this provision (two witness requirement, attestation clause). o Substantial Compliance Test: Determine whether the UPC rules were substantially complied with.
20
o o
Joint will- a single document that serves as the will of more than one person Not good practice, notorious for litigation In re Pavlino’s Estate signing the wrong will is not a mistake the court will rectify, formalism Hold: court refused to admit reciprocal (mutual) wills to probate which had been accidentally signed by H and W on each others. Rule: wills must express the testator’s intent, and signing the wrong one fails to do that. The court will not alter or re-write a will to accomplish equity or justice. Dissent: they are reciprocal- look at the 8 corners of the 2 of them to determine intent In re Snide opposite outcome of Pavlino- court will correct genuinely innocent mistake Hold: court admitted reciprocal wills to probate which had been accidentally signed by H and W on each others Rule: this is a case of genuine mistake, their wills were in the wrong envelopes, denies the formalistic view that the intent attaches to the document prepared rather than testamentary scheme it offers. - Testamentary intent attaches to the content of the pages, not the pages themselves
o
c. Curative Doctrines UPC §2-503: Harmless error rule o If the proponent of the document or writing establishes by c&c evidence that the decedent intended the writing to constitute (i) the decedent’s will, (ii) a partial or complete revocation of the will, (iii) an addition to or an alteration of the will, or (iv) a partial or complete revival of his formerly revoked will or of a formerly revoked portion of the will. o In re Estate of Hall no witnesses for a draft will, still stands as enforceable- harmless error rule- look at c&c evidence Rule: Harmless error rule- If 2 individuals do not property witness the document, MCA provides that the document may still be treated as if it had been executed under certain circumstances. One circumstances is if the proponent of the document establishes by c&c evidence that the decedent intended the document to be his will.
Substantial Compliance test: if there is c&c evidence that the purposes of formalities- the evidentiary, cautionary, protective, and channeling functions- were served despite a defective execution, the will is admitted to probate o In re Will of Ranney substantial compliance test rids wills of rules of formality, attestation clause was signed, even thought will was not Rule: doctrine of substantial compliance: although a document was not executed in compliance with §2-502 (formalities), the document is treated as if it had been executed in compliance with that section if the proponent of the document establishes by c&c evidence that the decedent intended the document to constitute his will. Designed to cure the inequity caused by the hash and relentless formalism of the law of wills Boren rule follows strict formalities and does not embrace substantial compliance This court is in the minority in advocating the substantial compliance test Attestation clauses: facilitate probate by providing ―prima facie evidence‖ that the testator voluntarily signed the will in the presence of the witness. Permits probate of a will when a witness forgets the circumstances of the will’s execution or dies before the testator. Affidavits: sworn statements by eyewitnesses that the will has been duly executed. Performs the same functions of an attestation clause, and has the further effect of permitting probate w/o requiring the appearance of either witness. Main difference is that in an attestation clause, the attestant expresses the present intent to act as a witness, but in the affidavit, the affiant swears that the will has already been witnessed. Legislature envisioned the will, including the attestation clause, as independent from such an affidavit Allen v. Dahl no substantial compliance in FL- must literally comply, except for revoking the will?
21
Dispensing power: allows for the probate of a document that was not properly executed if the court ―is satisfied that there can be no reasonable doubt that the deceased intended the document to constitute his will.‖ o Codified in 1990 in the UPC §2-503: courts are directed to look not at weather the purposes of formalities were served (as in substantial compliance), but at whether the decedent intended the document or writing to constitute the decedent’s will ------------------------------------------------------------------------------------------
[15, 16] HOLOGRAPHIC AND CONDITIONAL WILLS Page 236-251: Holographic and Conditional Wills 2. Holographic Wills UPC § 2-502(b): Will that is written and signed in testator’s own handwriting with less than two witnesses. FPC 732.502(2): Florida does not permit holographic wills!!! But handwritten wills are valid if they are properly executed with two witnesses. Can be signed anywhere, but should be signed at the end. First Generation Statute: Entirely written, signed, and dated Some states require holographic wills to be entirely in testator’s own handwriting (no stamped words, no preprinted words, no stationery printing, no preprinted dates). Estate of Thorn: the court struck down the testator’s handwritten will b/c he had stamped the name of his home twice w/in the text and the statute required the whole will to be in his handwriting In re Wong: arrow was deemed not a word but a symbol of no fixed meaning Other states use tests to determine whether to validate a will with printed material on it… Surplus Test: Allows courts to ignore certain printed material on a will that is not critical to the will’s meaning. See if the will still makes sense if you take out the printed material. UPC Material Provisions Test: If the court can identify the property and its beneficiaries, the will is valid despite extra printed material. Second Generation Statute: ―material provision‖ 1969 UPC required that only the ―signature and material provisions‖ be in his handwriting (legislative version of the surplus test) Third Generation Statute: ―material portions‖ and extrinsic evidence allowed the requirement that the ―material provisions‖ be handwritten was changed to ―material portions‖: a holographic will is valid if signature and material portions of document are in testator’s handwriting also allows extrinsic evidence to be used to establish testamentary intent, so courts can look at printed words in addition to handwritten ones Estate of Mulkins: court held that the important thing is that the testamentary part of the will be wholly written by the testator and signed by him Estate of Johnson: will could not be admitted to probate on the ground that the printed words of the will were essential to establish testamentary intent and hence were material provisions (bad idea) Estate of Muder: a testator who uses a preprinted form, and in his own handwriting fills in the blanks by designating his beneficiaries and apportioning his estate among them and signs it, has created a valid holographic will.
Kimmel’s Estate holographic will- has testamentary intent “if enny thing happens” and a form of signature“father” Rule1: intent: if a holographic will was not intended to be a will, but has testamentary intent given its context, it can be admitted as a will Rule2: signatures: when the statute says you must sign your will, it doesn’t have to be your name, just your intent to sign the will needs to be shown- even by X or by mark Conditional Wills: (rare) Wills that are only executed if a certain condition occurs.
22
Avoid language that appears conditional. Courts construe language that looks conditional as being not conditional, unless its clearly unambiguous that it was meant to be conditional. Eaton v. Brown: if a will has conditional character upon some event- that does not mean that the will is to be probated only if the stated event happens, but is, instead, merely a statement of the inducement for execution of the will, which can be probated upon death from any cause Estate of Harris about H trapped under tractor who scratched his last will into its fenderadmitted to probate because often holographic wills are written in extremis when the testator is close to death, and sometimes under heart-rendering circumstances In re Estate of Kuralt (holographic codicil made in extremis is valid- look at circumstances, intent) Conditional bequests are common and you can bequeath a gift on a condition that must be met -------------------------------------------------------------------------------------
B. REVOCATION OF WILLS [17-18] BY WRITING OR PHYSICAL ACT Page 251-259: By Writing or Physical Act 1. Revocation by Writing or Physical Act Thompson v. Royall majority rule: must physically mutilate a will with the intent to revoke it Rule: only a subsequent will or codicil, or some writing declaring an intention to revoked the same, and executed in the manner in which a will is required to be executed, or by the testator, or some person in his presence and by his direction, cutting, tearing, burning, obliterating, canceling, or destroying the same, or signature thereto, with the intent to revoke. 2 things are necessary: 1. the doing of one of the acts specified 2. accompanied by the intent to revoke-animo revocandi *Proof of either w/o proof of the other is insufficient
Oral Revocation: Not allowed by many states, will be admitted to probate By Writing: 1. Express Revocation ( FPC 732.505 revocation by right) Best way to revoke a will. Write on a sheet of paper your intent to revoke your will. Execute the paper the same way you would execute a will. To revoke, write CANCELLED or VOID across the language of the will, not on the back or on blank space. The writing should mutilate, deface, erase, or otherwise ―touch‖ the written wordsThompson v. Royall UPC §2-507 says the demarcation just has to be on the physical page Putting an X through the attestation clause 2. Revocation by Inconsistency: (UPC § 2-507, FPC § 732.505) Revoke your first will by executing a second will that expressly revokes the first one or is inconsistent with the first one. Even if the second will does not expressly revoke the first one, if it gives away the testator’s entire estate, courts presume the second will was intended to replace the first. If the second will does not give away the testator’s entire estate, courts will consider it a codicil. Codicil: testamentary instrument that amends a prior will it does not replace it. If the second document seems to dispose of all property, but something was forgotten that was named in the first will: Look for intent to revoke original will and residuary clause- UPC Label does not control, the dispositive provisions do- UPC FPC doesn’t really give guidance on either of these problems
23
Two ways to interpret an inconsistent will and codicil… Cumulative Construction: (preferred) Construe them as if they are not inconsistent. Substitutional Construction: Later codicils always replace earlier codicils.
By Physical Act: (UPC §2-507, FPC 732.506) Revocatory Act: Testator (or someone authorized by the testator in his presence and at his direction) can perform a ―revocatory act‖ to revoke the will, which means to tear, destroy, cancel, obliterate, or burn the will or any part of it. FPC- if a will has evidence of tearing, burning, or other attempt at destruction, there is a rebuttable presumption that the act was done by the testator who has CAPACITY to do it and with the intention of revoking it. UPC- accepts conscious presence test Your state does not need this statute for you to be able to revoke your will by physical act Copies: Testator must physically destroy the actual will, not just a copy of it. If there are multiple executed copies of the actual will, revoking one executed copy will revoke all executed copies. If client has executed multiple copies and loses one, lawyer’s copy cannot be probated. If testator destroys a copy of his will, believing reasonably and in good faith that it was his actual will, no revocation has occurred, but the intent to revoke was present, so courts will nonetheless establish a ―constructive trust‖ for the would-be beneficiaries. Missing Wills: If testator had possession of the will when he died, but it cannot be found among his belongings after his death, the presumption is that he destroyed (revoked) the will. Harrison v. Bird Harrison v. Bird- presumption can be rebutted by the proponent of the will Lost Wills: If a will is lost, destroyed without the consent of the testator, or destroyed with the testator’s consent but without complying with revocation statutes, it can be admitted into probate if its contents can be proved. FPC § 732.207: Any interested person can establish the terms of a lost or destroyed will and offer it to probate. Specific content must be proved by 2 disinterested witnesses. Lost Will Statutes: (Florida) Proponents of a will must prove by clear and convincing evidence that… (1) There was a will that had been properly executed. (2) The will was lost or destroyed invalidly. (3) The contents of the will and intent of the testator (proved by showing lawyer’s copy). Partial Revocation: FPC 732.506- revocation by physical act- does not recognize partial revocation of a will by physical act, only by signing and executing a codicil UPC § 2-507: Allows a testator to physically revoke part of his will by drawing lines through unwanted provisions. Once gifts get crossed out, that property passes through intestacy. other states a will cannot be revoked in part by an ACT of revocation it can be revoked in part only by a subsequent instrument. Reasons: 1. canceling a gift to one person necessarily results in someone else taking the gift, and this ―new gift‖ can be made only by an attested writing Estate of Malloy: partial revocation by physical act would not be permitted where the intent and effect of the change would result in a substantial enhancement of another bequest. 2. permitting partial revocation by physical act offers opportunity for fraud. Partial Revocation and New Dispositions: Sometimes a testator will cross out an old provision and write in a new one. A holographic change to a type-written will must be signed in order to be effective. But a holographic change to a holographic handwritten will does not have to be signed. What if you cross out $10k and write in $15k and sign by it- is new gift effective? 2 questions: 1. has the $10k been revoked? 2. is the new $15k given?
24
Jurisdictions that permit holographic wills (UPC) Those that permit partial revocation by physical act (common jurisdiction) Holographic: yes- holographic changes to a holographic will in a holographic jurisdiction is effective- X takes $15k (signature helps but is not necessary- a holograph is a work in progress) Typewritten: no- $10k has been revoked because jurisdiction permits partial revocation by physical act, but you cannot add to a nonholographic will with a holograph and have it be given effect- X takes $0* *$10k using DRR Also- If you signed through the whole clause with the $10k and rewrote/signed it with the $15k- courts separate the 2- courts remove the handwritten portion and look at it separately- there are 2 separate documents- a typewritten one, and a holographic one for $15k to X that stands on its own- court will give effect because it’s a complete disposition- X takes $15k
Those that do NOT permit partial revocation by physical act Holographic- yes- holographic changes to holographic wills in holographic changes are permitted in holographic jurisdictions- the court will conclude that $10k has been revoked by inconsistencysubstitutional (as opposed to cumulative because intent doesn’t show that)- not by physical act revocation- X gets $15k Typewritten- no- original gift not cancelled, new changes not effectedholographic changes to typewritten wills are not effective, even in holographic jurisdictions. X gets $10k* * But if we struck the whole clause, X would get $15k because the change would be effective and the 10K would be revoked by inconsistency (must be signed because it must be able to stand on its own)
Jurisdictions that do NOT permit the holographic wills Those that permit partial revocation by physical act (common jurisdiction): $10K is revoked, but new gift is not effective- have to comply with wills statutes. X gets $0* *$10K using DRR below- revocation based on mistake of law can be revoked if but for that mistake T never would have made that revocation- discretionary Those that do NOT permit partial revocation by physical act (FL): X takes $10krevocation is ineffective (certainty- but out of whack w/ what the testator really wanted)
-----------------------------------------------------------------------------------------[19, 20] DEPENDENT RELATIVE REVOCATION (DRR); REVIVAL Page 259-269 2. Dependent Relative Revocation and Revival Dependent Relative Revocation (DRR): DRR: If the testator revokes his will based on a mistake of law or fact, the revocation is ineffective if the testator would not have revoked his will had he known the truth. Determine whether the testator would have revoked the will but for the mistake. Used in jurisdictions that allow partial revocation by physical act but do not allow holographic changes. Here, if testator crosses something out and writes something in, neither change is
25
effective and the beneficiary takes nothing. This was not the testator’s (rebuttable) presumed intent, so the court uses DRR to cancel the revocation and reinstate the original gift. In a jurisdiction that allows holographic wills, the change will be permitted IF the entire will is hand written AND a valid holograph. Not a perfect system; does not give testator what he wanted, just next best thing. When Courts Use DRR: (a) If ineffective gift is significantly smaller than original gift, court will not use DRR. Beneficiary gets nothing. (―I leave $10,000 $1,000 JLM to X.‖ X gets nothing.) (b) If ineffective gift is smaller than original gift, court uses discretion in applying DRR. (―I leave $10,000 $8,000 JLM to X.‖ X will probably get $8,000) (c) If ineffective gift is larger than original gift, court almost always uses DRR to undo the revocation. (―I leave $10,000 $20,000 JLM to X.‖ X will get $10,000.) Florida does not allow DRR!!! (because we don’t allow partial revocation) BUT a common application of it can be (not partial- but total revocation can be) If a physical act revocation was based on a mistake of law that new will was effective- court can undue physically destroyed revoked will using DRR. If court doesn’t use DRR, then will2 is still invalid- estate will pass by intestacy If court uses DRR, then will1 will be admitted to probate Compare to will2 and see which of the above 2 is closer to it LaCroix v. Senecal radical application of DRR, partial revocation, court undoes an express recvocation Rule: if a testator cancels or destroys a will with present intention of making a new one immediately and as a substitute and the new will is not made, or if made, fails of effect for any reason, it will be presumed that the testator preferred the old will to intestacy, and the old one will be admitted to probate in the absence of evidence overcoming the presumption
Estate of Alburn DRR does not apply when the testator destroys the later will with the purpose of reviving the earlier will- must look at the evidence to determine this NB: this is an outdated and minority view and is actually a question of revival Revival: CL: If you make a second will to revoke your first will, then you revoke the second will, the first will comes back into effectiveness automatically (unless the second will expressly revokes the first one). UPC § 2-509 and Half the States: The first will can be revived only if there is evidence to prove that the testator wanted it back (use extrinsic evidence of circumstances or testator’s contemporaneous or subsequent oral declarations). (a) if a subsequent will that wholly revoked the previous will is itself revoked by physical act, the presumption is that the previous will remains revoked. (b) if a subsequent will that partly revoked the previous will is itself revoked, the presumption is that the previous will is revived. FPC § 732.508: (no revival) If you revoke a second will that had revoked your first will, the first will does not automatically come back, even if you wanted it to. Must either re-execute your first will or republish it by codicil. FPC § 732.509: When you revoke a will, you revoke all codicils to that will. FPC § 732.508(2): When you revoke a codicil, the original will/codicils are reinstated as if the revoked codicil had never been executed -------------------------------------------------------------------------------------
[21] REVOCATION BY OPERATION OF LAW Page 269-270: Revocation by Operation of Law 3. Revocation by Operation of Law: Change in Family Circumstances Divorce
26
UPC § 2-804: Divorce revokes all provisions in a will made for the ex-spouse. Severs all joint interests in property (turns into tenancy in common). Also revokes an ex-spouse’s name as beneficiary of a life insurance policy, in pension plans, POD contracts, and TOD securities. FPC § 732.507: Same as UPC, but will not revoke ex-spouse’s name on life insurance.
Marriage UPC § 2-301: If testator marries after making his will and does not rewrite it to add the new spouse, the spouse receives an intestate share, unless it appears from the will that the omission was intentional or the spouse is provided for by a will substitute. FPC § 732.301: Same as UPC, but includes pre-nuptial agreement exclusion. Birth of Children UPC § 2-302 & FPC § 732.302: A child born after the execution of its parents will, who is not provided for in the will, gets an intestate share, unless it appears the exclusion was intentional. CL: marriage followed by birth of issue revokes a will executed before marriages, but this rule is disappearing --------------------------------------------------------------------------------------------
SECTION C: COMPONENTS OF A WILL NB: these doctrines answer the question of what is a will? [22-24] WILL COMPONENTS: INTEGRATION; INCORPORATION BY REFERENCE; REPUBLICATION BY CODICIL; FACTS OF INDEPENDENT SIGNIFICANCE Page 271-286 1. Integration of Wills All papers present at the time the will is executed that are intended to be part of the will are indeed part of the will. Pages not physically present or present but not intended to become part of the will are not part of it. All pages should be securely fastened before testator signs, should have internal coherence (―page 1 of 5‖), and testator should initial every page. Estate of Beale: witnesses signed the last page of a ―pile‖ of papers- testator sent a couple pages to his secretary to retype them which changed the executor, which she did, she initialed his name on it, he died- original will admitted to probate, not the changes 2. Republication by Codicil When you execute a codicil, your will automatically gets redated to that date applies only to a prior validly executed will and where updating the will carries out the testator’s intent FPC 732.5105 Two doctrines that permit extrinsic evidence to resolve the identity of persons or property: 3. Incorporation by Reference UPC § 2-510 & FPC § 732.512 (not NY): Any writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permit its identification. can apply to incorporate into a will language or instruments that have NEVER been validly executed. In NY: look to see if the document that originally written was properly executed (not whether it was legally permissible)- if so then it can be republished by codicil Simon v. Grayson since the letter was dated prior to the date of the codicil, which republished the will, it complied w/ the requirement that an incorporated document be in existence on the date of the republished will.
27
Pullman- although deed must be conveyed during life, it was incorporated by reference into the will since the court could not add that specific language into the will (the will had said it was not going to devise the farm to her since he already deeded it to her- which was invalid)- this is a generous application of the rule. Separate Writing Identifying a Bequest: Modification of IR. Only works for property of modest value. UPC § 2-513: If a testator has a memo/list that accompanies his will, he can modify it now and then without consulting a lawyer ONLY if the modifications pertain to personal property, NOT real property or money. FPC § 732.515: Same as UPC, but the list can only refer to tangible personal property and not to property used in trade or business. Memo/list must be signed by testator (or be entirely in testator’s own handwriting in holographic states) and describe the items and devisees with reasonable certainty. Does not have to be dated or pre-date the will. Testator may alter it. May have no significance apart from its effect on the dispositions in the will. If multiple lists conflict, the most recent one revokes inconsistent provisions in old ones. Holographic codicils can incorporate non-handwritten material by reference. Thus, a holographic codicil can incorporate and republish an invalid previous will. Clark v. Greenhelge Rule: incorporation by reference- testator’s intent prevails- she intended to include her notebook of bequests, and republication by codicil republishes the will to the date of the latest codicil- so that her notebook is included as well. It seems that her intent was to be able to alter the TPP bequests after executing her will- but Powell says this violates the Wills Act. Or is the court just relaxing the rule to include TPP (only this- no cash, stocks, bonds bequests, and Powell says no things of significant value should be permitted) Johnson v. Johnson valid holographic codicil incorporates prior typed will by reference and republishes and validates it, even if it was not properly executed Rule: jurisdictions that allow holographic wills allow holographic codicils to incorporate a holographic or typewritten will.
4. Acts of Independent Significance UPC § 2-512 & FPC § 732.512: A will may dispose of property by reference to acts and events that have significance apart from their effect on the dispositions made by the will. Doesn’t matter if they occur before/after the execution of the will or before/after the testator’s death. When events and actions that occur after the execution of the will impact on the will after our death, as long as the act has some independent lifetime motive (not done solely with the purpose of changing our will), it is not a problem. Ask, Did the testator do this act with the sole purpose of changing his will? If yes, provision is invalid.
Container Cases: Sometimes a testator leaves someone items in a container (desk drawer, safety deposit box). The problem is that the items can change after the will is executed, or the beneficiary tries to ―stuff‖ the container. Gift of Home and Contents: Only includes those things that make a house a home (household furniture). Does not include car, money passbooks, certificates of title to property, etc. Containers cannot include anything with a Certificate of Title (shares of stock, money pass books). Gift of a Safety Deposit Box: Includes anything located inside (including certificates of title) because it is secure and usually kept for lifetime safekeeping -----------------------------------------------------------------------------------------
SECTION D: CONTRACTS RELATING TO WILLS [25] WILL CONTRACTS Page 286-294
28
1. Contracts to Make a Will You can enter into a contract to make a will, not to make a will, not to revoke your will, or to make a certain gift in your will. (contract law applies) Classic example: child comes to dad, tells him he has always admired his farm, dad promises to leave son the farm when he dies. Promises to leave him farm in will. NOT a contract- no consideration, just a gratuitous promise. Wills should expressly state that they are not created pursuant to a contract. Can be an oral contract (but not for real estate because of Statute of Frauds; terms must be proved by clear and convincing evidence). UPC § 2-514: To establish the existence of a will contract… (a) The will must state material provisions of the contract, (b) The will must contain an express reference to the contract and there must be extrinsic evidence proving the terms, OR (c) There must be a signed writing by the decedent evidencing the contract. FPC § 732.701: Will contracts must be executed like wills (in writing, 2 witnesses), or they are unenforceable. Can establish the existence of a will contract if its terms are in writing, if the terms of the contract are in the will itself, or if the will demonstrates that there is a contract (terms can be proved by extrinsic evidence). Does not have the part-performance/detrimental-reliance doctrine in this instance Breach: Breach is allowed, but the wronged party can sue. If one party dies without fulfilling the contract, the will gets probated, then the contract beneficiary can sue for quantum meruit or a constructive trust. The rights of direct and third-party beneficiaries do not disappear at their death—they can leave their contract rights to anyone in a will. 2. Contracts to Revoke a Will Can enter into a contract not to revoke your wills, binds you at your devises, no extra consideration needed Classic example: deals with reciprocal wills Joint Wills: One instrument executed by two people (usually husband and wife) as the will of both. When husband dies, it’s executed as his will; when wife dies, it’s executed like hers. Mutual Wills: Separate wills of two people that contain similar or reciprocal provisions. Joint and Mutual Wills: A joint will that devises property in accordance with a contract. Is there a presumption that the couple explicitly agreed not to change their will? UPC & FPC 732.701(2): Will contracts are never implied. In FL, while both are still alive, contract can be revoked, only becomes binding on one’s death A few states say contracts are always implied in mutual wills. Pretermitted Shares and Will Contracts: Majority Rule: (NY) Third-party beneficiaries to a will contract prevail over a spouse’s pretermitted share of the will. Minority Rule: (FPC 732.207) A spouse’s pretermitted share in her dead spouse’s estate supercedes a contractual will provision leaving the dead spouse’s estate to others. To avoid the spouse getting a share, make them sign a pre-nuptial agreement or republish your will upon marriage. Via v. Putnam: W2 got pretermitted (intestateO share at H’s death even though H and W1 (who died) contracted to give her property to her kids.
29
V. INTERPRETATION OF WILLS
[31-32] MISTAKEN OR AMBIGUOUS LANGUAGE IN WILLS Page 365-387 SECTION A: MISTAKEN OR AMBIGUOUS LANGUAGE IN WILLS 1. The Traditional Approach: No Extrinsic Evidence, No Reformation No Reformation Rule: Courts will not reform wills!!! Court is there to interpret intent from words in wills, not write wills! Extrinsic Evidence: Can only be used to explain the circumstances under which the will was signed. Usually objective and verifiable Personal Usage exception: Can be used to show that the testator always referred to someone using a nickname (which explains why that person’s real name is on the will). if you could show that this particular testator had an idiosyncratic way of referring to something/someone- evidence of that is admissible in interpreting that part of the will Can be used to show that a will was not intended to be valid, meant to be fake (Fleming v. Morrisonmistress case). Plain Meaning Rule: (old rule) If the words of a will have a plain meaning, you cannot introduce extrinsic evidence that another meaning was intended. Figure out what the word means, NOT testator’s intent says nothing about words that do not have a plain meaning Reasonable Interpretation Rule: (new rule) The court will hear extrinsic evidence of any reasonable interpretation of the testator’s words. The words AND and OR may be substituted for each other in arriving at a proper construction of a will, if doing so would carry out the testator’s obvious purpose. Mahoney v. Granger plain meaning rule: “heirs” means heirs at law- table of consanguinity (aunt), not T’s intended more distant heirs(25 cousins) Rule: Plain meaning rule: When the words in your will have a plain meaning, you cannot use extrinsic evidence to ascertain a different meaning for them Exceptions: Evidence of circumstances surrounding the will’s execution are always admissible (tend to be objective and verifiable). Look at the relationships between the Testator and intended v. actual beneficiaries, past conduct with them, etc. Also, in this case, the fact that ―heirs‖ was plural- meant to mean more than one person?
Patent Ambiguity: Appears on the face of the will (rare). At CL- EE is NOT allowed to clear up this type of ambiguity!! (can still show evidence of circumstances) I leave my entire estate as follows: ¼ to A, ¼ to B, ¼ to C- meaning that if you just read that will, you will see there is a problem because it doesn’t dispose of entire estate. Latent Ambiguity: Does not appear on the face of the will—appears when the terms of the will are applied to the testator’s property or designated beneficiaries. At CL- Can use EE other than the testator’s oral statements to clarify.
* Most states have eliminated this distinction between patent and latent, and the court will admit EE to clear up the ambiguity- do not like to admit testator’s oral declarations (unless they were to attorney)
30
Other Ambiguities Equivocation: where your description of the property or beneficiary to receive it actually fits 2 separate persons or property interests. Court does not like adding words though. Description fits no one: Where the word in the will doesn’t meet anybody or any property- if evidence shows that testator was close to someone who kind of fits this description, the court will construe the testator’s intent
* Want to get into a recognized basket to get EE allowed
2. Slouching Toward Reformation: Correcting Mistakes Without the Power to Reform Wills Not possible under traditional law False Description Remedy: where a false description is not strictly followed- court will delete something from the will but will NOT add something to remedy it. Ignores the wrong description- address, nickname, etc. Typically the scrivener’s error (the one the attorney makes) is the one most deserving of remedy Scrivener’s Errors: Evidence of a scrivener’s error (drafting mistake) is allowed, even if the will is unambiguous. Can be proved by objective facts by people who have no interest in the estate. If the error is proved, courts will hear EE that the lawyer did not draft the will according to what the testator wanted. Rules of Mistakes: If intentional wrongdoing causes a mistaken term in a will (fraud), that term can be struck or its effect undone. If a lack of volition ahs an innocent cause (lack of capacity), the will is not given effect. If a particularly mistaken belief about a member of the testator’s family influences the testator’s dispositive scheme, the courts sometimes remedy this mistake by calling it an insane delusion but if the mistaken term has an innocent cause (mistake), then no relief is available to correct the error. Arnheiter v. Arnheiter false description doctrine-it’s really a round-about-way of reformation Rule: false description doctrine- excise incorrect description (house number) then use EE to determine correct description (actual address) Estate of Gibbs when the proof establishes at the highest degree of certainty that a mistake was in fact made, then courts should receive evidence shoting that the mistake was made and disregard the details Rule: false description + mistake- Court will not insist on literal compliance when a mistake is genuinely made (like middle initial), the court can ignore it and then admit EE to ascertain the correct person.
3. Openly Reforming Wills for Mistake Gifts by Implication o Doctrine of Probable Intent- court places itself in the position of the testator and decides how the testator would have probably responded to the contingency. o Construction-EE admitted to show that testator meant to make someone a beneficiary and not an executrix Courts will add substitute mistakes by the scrivener such as ―youngest‖ for ―oldest‖ when it was clearly intended, and a clause that was omitted ½ way through by computer error but was in every other document. Problem: lose the safe harbor of the will Langbien’s malpractice concern- remedy the error rather than let the lawyer get sued in tort o Would permit EE in all errors if there was c&c evidence- also position of Rest 3rd §12.1 Florida says you can NOT reform wills- FL SC cases say this- need FL SC to reform or legislative assist o BUT FL had no case law on revocable living trusts (will substitutes) o Court conceded that the scrivener’s error in a revocable trust can be remedied under FL law (contrary to the law for wills in FL which cannot be remedied)
31
o
New trust code- effective July 1, 2007- Has a provision titled Reformation- follows Rest 3rd of Prop- allows reformation of trust whether or not it is ambiguous or scrivener’s error, if you can provide by C&C evidence that the mistake has occurred and what the settlor’s intent would be But Florida will not explicitly ―reform‖
Erickson v. Erickson Court openly, up front, reforms the will (will executed 2 days before marriage contrary to statute) when it comes to scrivener’s errors only if the will would have expressed T’s intent BUT FOR that mistake Court overrules previous decision- based on Justice Peter’s dissent in Erickson: Rule: if a scrivener’s error has misled the testator into executing a will on the belief it will be valid, EE of that error is admissible to establish the intent of the testator that his or her will be valid. Reasons: We remedy intentional misrepresentations (fraud or intentional deception)- admit EE and make the correct provision happen through a constructive trust there is no discernable difference b/t fraudulent misrep and unintentional misrep because they are remedied in the same way there is a concern about a floodgate of litigation- but this wont be true if we restrict it to scrivener’s errors alternative when you have a scrivener involved- gets into the torts system as a malpractice action, lawyer’s don’t want this (tort suits cost much more than reformation) risk of subversion of testator’s intent although signing a will creates a strong presumption that the will accurately represents the intentions of the testator, that presumption is rebuttable --------------------------------------------------------------------------------------------[33-35] DEATH OF BENEFICIARY BEFORE TESTATOR Page 387-405; 522-527 SECTION B: DEATH OF BENEFICIARY BEFORE DEATH OF TESTATOR 1. Introduction Anti-lapse statute: if a devisee doesn’t survive the testator, the devise lapses (fails), but this statute substitutes another beneficiary for the predeceased devisee under certain circumstances Void devise- where a devisee is dead at the time the will is executed, or the devisee is a dog or cat or some other ineligible taker, the devise is void. Estate of Russell devise to dog is void, CL puts it in intestacy (ancient rule), and Powell says the argument should be made that a will is made to reject intestacy and thus the no residue of a residue rule should be rejected Rule: if leaving stuff for animal- it is void in a will, but you can put it in trust
2. Anti-lapse Statutes For the answer look at: a. instrument first b. state statute- sometimes this trumps the instrument c. common law- always has an answer
Instrument: Every valid will should state what happens if the gift lapses. Florida: (majority rule) Words like “to A if A survives me” negates application of anti-lapse statutes. UPC: (minority rule) Those words are not themselves sufficient to negate application, must be more, such as “not to A’s descendants.” State Anti-Lapse Statutes: Default rules—they apply unless testator indicates he doesn’t want them to. Most states specify the issue for the predeceased devisee
32
UPC § 2-605 & FPC § 732.603: specifically designed to modify the CL rules to give a different answer if T and B are related (if so, this comes into play, if not related, CL comes into play) If the devisee dies before the testator, but he is of a specified relationship to the testator and is survived by issue who survive the testator, the issue are substituted for the predeceased devisee. Descendants of the devisee take per stirpes in place of the dead devisee. FPC: strict per stirpes UPC: modern per stirpes ―Specified relationship‖ means only testator’s grandparents and lineal descendents of the grandparents (includes step-children). Gifts to everyone else lapse unless the will substitutes someone else for the dead devisee. Hypo: 10K to the children [X,Y, Z, C] of my brother E [Z is dead- 2 kids Q and R] CL says Z’s share goes to the other kids, X, Y, C FPC 732.603(1): Anti-lapse statute would give Z’s share to Q and R because they are descendants FPC § 732.604(1): A devise (other than a residuary devise) that fails falls into the residue. Codifies the CL rule without disturbing class gifts Applies the same to void gifts and lapsed gifts FPC § 732.604(2): (Abolishes CL ―no residue of a residue‖ rule)- If the residue is left to two people, and one of their devises fails for any reason, it goes to the other residuary devisee. If the residue is left to more than two people, and one fails, it goes to the remaining devisees in proportion to their interests in the residue. Basically treats residuary gift as a class CL: default rules if will doesn’t specify what happens when devisee predeceases T specific or general devise- if the devise lapses, then it falls into the residue residuary devise- if the devise of the entire residue lapses, the heirs of T take by intestacy no residue of a residue rule- if the residue is left to more that one person, and one of them predeceases T, his share passes by intestacy and not into the remaining residue CL difference b/t void gifts (always pass by intestacy) and lapsed gifts (drop to the residue)
Words of survivorship in your will will block the anti-lapse statute from applying But, UPC says when you attach words of survivorship to a gift in a will, you do not negate application of the anti-lapse statute drafting advice: make client’s intent clear by providing what happens if the intended devisee does not survive the testator nonprobate transfers- under law of wills, beneficiary is required to survive the testator in order to take. If B does not survive, an anti-lapse statute may be applicable if its terms are met. Should this be applied to nonprobate transfers? a. POD designations- UPC- beneficiaries of both POD and TOD accounts must survive depositorbecause by contract, survivorship is required b. revocable trusts- traditionally no requirement of survivorship is implied when a remainder is created c. joint tenancies- no anti-lapse statute applies
3. Class Gifts Class- If the testator is ―group-minded‖ o Class label- in describing the beneficiaries, such as ―to A’s children‖ or ―to my nephews and nieces.‖ o Individual names forming natural class- may be deemed by the court to be a class after EE has been admitted showing the T would want the survivors to divide the property. o Should name them as individuals if you don’t want to bring in potential other members of the class Rest §13.1- class gift defined- how created
33
(a) a class gift is a disposition to beneficiaries who are described by a group label and who are intended to take as a group. Taking as a group means that: (1) the membership of the class is not static, but is subject to fluctuation by increase or decrease until the time when a class member is entitled to distribution, and (2) upon distribution, the property is divided among the then-entitled class members on a fractional basis (b) If the terms of the disposition identify the beneficiaries only by a group label, the disposition creates a class gift, unless the language or circumstances indicate that the transferor intended the beneficiaries to take as individuals. Individuals: Whether you name them first or put the class descriptor first then name them, most courts say you are manifesting an intent to give it to individuals and not a class, and anyone else falling under that class who is not named will not get a share of the estate Rest §13.2- class gift distinguished from disposition to beneficiaries taking as individuals- how created (b) if the terms of the disposition identify the beneficiaries only by name w/o any reference to a group label, the disposition does not create a class gift, but is to the beneficiaries taking as individuals (c) if the terms of the disposition identify the beneficiaries (i) by a group label and (ii) either by name or by the number of beneficiaries who then fit the group label, the disposition is presumed not to create a class gift, but is to the beneficiaries taking as individuals. Presumption is rebuttable if language/circumstances indicate testator intended them to take as a group. CL: class gift treated differently than gift to individuals- if the devise is to a class of persons, and one member of the class predeceases the testator, the surviving members of the class divide the gift, including the deceased member’s share o Construe class gift at the time T dies o Class gift doesn’t lapse until all beneficiaries that make up the class predecease T o Class closing rule: cant leave the class open for all potential members of class (like child born after T’s death during administration Note: application of anti-lapse statutes to gifts: almost all states apply their anti-lapse statutes to class gifts and most statutes expressly so provide. In states where the statute is unclear, courts reason that the anti-lapse statutes are designed to carry out the average testator’s intent and that the average testator would prefer for the deceased beneficiary’s share to go to the beneficiary’s descendants rather than to the surviving members of the class. However, in some states, anti-lapse statutes do not apply to dispositions to class members who die before execution of the will. Hypos Suppose the gift is $10k to the children of my employee E (children are x,y,z- z has 2 kids q & r), residue to R1 and R2 o Before T dies, E has another child, C o Wills speak as of the date of the decedent’s death o This is a class gift- the takers can expand in size, or the share of each member can decrease Suppose E had a child (D) after T’s death during administration o No- D does not take o Class closing rule: cant leave the class open for all potentially born children of E Suppose X dies w/ a will leaving his property to his wife Mrs. X o Y, Z, C share, not Mrs. X- under CL beneficiary must survive the testator- X had no interest in D’s estate while D was alive- so he had nothing to pass o If X had died after E but during administration- Mrs. X can take his share Suppose Z predeceases- do his children Q and R get anything? o No- the gift is to the children of E- 1/3 to X, 1/3 to Y, 1/3 to C o If you want devisee’s children to take if he predeceases T, you need to use a multigenerational class descriptor: descendants-how do you want the division amongst them to occur? Strict per stirpes (FL statute uses this), modern per stirpes, UPC? , issue What if the residual beneficiary predeceases?
34
o Residue passes by intestacy What if there are more than one residual beneficiary and one predeceases? o Are the R’s a class? If so, the other surviving Rs share o Are the R’s individuals? If so, his share drops out of the will and passes by intestacy o Court in Russell case said gift failed because R1 was a dog and passed by intestacy to her heirs so the court came to the conclusion that that gift was invalid and passed by intestacy
Powell Hypos: D gives 10K in his will to G, residue to R. G predeceases D, survived by 2 children, and 2 children (from second child). Who takes the 10k? o It depends if G and D are related w/in that box (grandparent or lineal descendant of grandparent if no- covered by CL (passes to residue to R) if yes- covered by FPC 732.602. (goes to G’s descendants per stirpes- ½ to child1, ½ to child2) D gives 10K to the children of G, residue to R. child2 predeceases D, survived by 2 children. Who takes the 10K? o It depends if D and child2 are related w/in that box. If no- CL rule says this is a class gift- and when one class member predeceases T, you divide the prop up amongst the other class members. So it all goes to child1. Under FPC anti-lapse statute- GC1 and GC2 get child2’s share. D gives 10k to the descendants of G, residue to R. child2 predeceases. What happens? o This is a multigenerational class descriptor- it goes to G’s descendants per stirpes- ½ to child1, ¼ to GC1, ¼ to GC2. D gives 10k to somebody, residue to C1 and C2. C2 predeceases. What happens to his share? o At CL- it passes by intestacy to whoever D’s heirs are. o FPC- depends on the relationship: if C2 is a relative of decedent, we’re controlled by FPC 732.603 which gives his share to his descendants. If c2 and D are not related- FPC 732.604(2)- abolishes CL no residue of a residue rule and treats them as a class- giving C2’s share to C1. Allen v. Talley words of survivorship preclude application of the anti-lapse statute Rule: Specific words of survivorship (―living brothers and sisters‖) negate application of the anti-lapse statute UPC changes that rule- when you attach words of survivorship to a gift in a will- you do not negate application of the anti-lapse statute- and thus each of her 5 siblings would have taken. In FL- is this a class gift in which the siblings do not take, or does it lapse and go to the residue? Jackson v. Schultz “and” can be construed as “or” if it was put there to create a substitutional gift Facts: Leonard leaves will to wife Bessie and her heirs and assigns (she has 3 kids, he has none) Hold: unless the phrase ―and her heirs and assigns forever‖ created a substitute gift in Bessie’s heirs, the property would pass by intestacy where it would escheat to the sate b/c Leonard had no heirs. Rule: in a devise by T ―to A and her heirs‖- ―to A‖ are words of purchase (to whom prop is devised), and ―and her heirs‖ is words of limitation (what prop rights are devised), whereas ―to A or her heirs‖ can be read to include only words of purchase. Which begs the question- can and mean or? Yes if it properly construes the will. Powell says at CL you had to have ―and her heirs‖ in your will to indicate a fee simple, but they are NEVER necessary in wills. And can be construed as or because it wasn’t put there to create a fee simple, but a substitutional gift. Powell says there will always be contrary decisions- usually something behind the scenes- see: Hofing v. Willis comes out opposite - if “and” is read as “or” to substitute the gift, then its not equitable ―to A and her heirs and assigns‖ cannot be construed as an or because it would give the assigns the same rights as heirs to take by substitution which doesn’t seem equitable. Dawson v. Yucus this case came out wrong- class descriptors are used so that the court can manipulate it to achieve a certain result (usually the testator’s intent)
35
Hold: not a class gift- not made w/ usual generic class description, but is in fact 2 named individuals (nephews), there were other nieces and nephews that were left out, share of each was specified, dead nephew’s gift will lapse and fall as residue to W’s relatives Rule: to be a class, it must be named as a class or given only to persons who fall within that specific/designated class- try to ascertain testator’s intent. In re Moss this came out right but for the wrong reason, again, court should use class descriptor to achieve the testator’s intent Unstated premise: if everyone had survived- everyone would have gotten 1/6 (to 5 children and EJ). Romer says is that’s true they are both a function of each other is alive- and that is class. Powell says that’s not necessarily true- another interpretation. If everyone had survived- how would you maximize EJ’s share: EJ gets ½ (to an individual) and the children split the other ½ (a class). Romer says this forms a natural class because EJ is a niece, and the 5 children are nephews and nieces. But this T separated this for special purpose. He did not want his wife to have fee simple ownership, he just wanted her to have a life estate and pass on to Emily’s children. Hypo: Testator D leaves 100K to T as trustee to pay income to A for life, remainder to B. B is survived by a child, residue to R. Like Moss, the fact that B predeceased the testator will not be an issue presented to the court, because it doesn’t matter until life tenant A dies (where does A’s prop go- B having predeceased the testator). If anti-lapse state applies (D and B related) it goes to B’s child. In FL- devisee is defined as trustee (not beneficiary). But unless B is a devisee, anti-lapse statute can apply. But FPC cured that so now it applies to testamentary trusts as well. FPC 732.603- applies to beneficiaries of testamentary trusts that predecease the testator. Suppose A, B, R survive the testator, but although B survived the decedent, he died before A- what happens to B’s share? As soon as B survives D, he has a vested interest. (B has a wife and 2 kids, leaves everything in his will to wife). B’s probate estate includes his vested interest in D’s estate. Court will wait until A dies to figure out where B’s interest goes. So the trustee will devise that interest to Mrs. B. If B died intestate then it would pass by that state’s intestacy statute. If Mrs. B also dies during the interim, then it goes through her probate estate. Each time we track this interest through someone’s estate, we have problems: administration costs may be excessive because you may have to reopen previous holder’s estates, federal estate taxation. Powell’s cardinal rule of creating a trust– when you creates future interests in trust- you always make it explicitly contingent on the taker surviving the life tenant- never create vested remainders. And go down the line of who takes if she doesn’t survive. UPC and FPC recognize that if D was competent, converts a vested remainder into a contingent remainder732.603. UPC’s version of the statute does not require a relationship b/t B and D. When the new FPC trust code becomes effective 7/1/07, the relationship requirement will be eliminated (when B survives D but not the life tenant, A). -----------------------------------------------------------------------------------------------[36, 37] CHANGES IN PROPERTY AFTER WILL Page 405-415 SECTION C: CHANGES IN PROPERTY AFTER EXECUTION OF WILL o Doctrines that control at the end of the administration process o What happens when the beneficiary is there, but the property isn’t there? Doctrine of ademption comes into play 1. Ademption by Extinction CL: Any time the property of a specific devise is not in the estate for any reason, the gift is adeemed. Beneficiary loses out—under identity theory, he cannot produce extrinsic evidence of testator’s contrary intent. Rule presumes the testator intended to extinguish a specific gift of property when he disposed of it before his death.
36
UPC: Adopts Intent Theory—creates presumption against ademption (aka Admissibility Doctrine.) If it is obvious that the testator wanted the beneficiary to get the gift, and he didn’t intend for it to be adeemed, the court will find a way to get the gift to them. Party claiming ademption has the burden of proof. Only applies to specific devises Courts will try to avoid this doctrine by calling a specific gift something else, especially if the court thinks ademption would go against the testator’s intent. (NB: intent is irrelevant under identity theory)
Types of Devises: 1. Specific: Gift of a specific item of the testator’s property, including specific gifts of real estate in a revocable inter vivos trust. Ex: ―I devise Blackacre to John.‖ What about ―the car I own at my death (and it’s a more expensive, nicer car)- doctrine of independent significance applies, but it’s still a specific gift What if you own 2 cars at your death?- Latent ambiguity- EE admitted to show which of the 2 cars you intended to refer to, if it doesn’t clear it up, gift fails Ademption!!! 2. Demonstrative: A general money legacy payable from a specific source. Gift of a pecuniary amount, but also says where the money to fund the gift is to come from Ex: ―I leave $5,000 to be paid from the sale of Acme stock to Sarah.‖ No ademption—if the testator dies with no stock, other assets are sold to raise the money. 3. General Legacy: Testator intends to confer a general benefit, but not a particular asset. Gift of a pecuniary amount Ex: ―I give $10,000 to my daughter Diana.‖ No ademption—if the gift is not in the testator’s estate, other assets are sold to raise the money. 4. Residuary: Remainder of the estate. Ex: ―I leave residue to my wife Agnes.‖ Important: a gift of all of your estate is a residuary bequest 732.604(2) if the residue is left to 2 or more persons, the entire residue goes to the other residuary beneficiaries No ademption—residue is whatever is left over.
Theories of Ademption: 1. Intent theory: if a specifically devised item is not in the testator’s estate, the beneficiary may nonetheless be entitled to the cash value of the item, depending on whether the beneficiary can show that this was what the testator would have wanted. 3 questions: is it a specific gift, and does the testator own it at death, and is there evidence that the testator would want that gift to be adeemed? (adds his intent to the mix) court has the leeway to create a substitute gift with the proceeds of sale FPC and UPC 2. Identity theory: if a specifically devised item is not in the testator’s estate, the gift is extinguished (subject to limited exceptions- stock splits) 2 questions: is it a specific gift, and does the testator own it at death? If answer to 1 is yes and 2 is no, then at CL the answer is the gift is adeemed, beneficiary takes nothing A stock split is a change in form, not substance. A devisee of stock is entitled to additional shares received by the testator as the result of a stock split. Thus, if T leaves ―A 100 shares of Acme stock,‖ and the shares split so T has 200 shares at death, A gets all 200 shares. UPC & FPC: Treats stock splits and dividends the same. UPC §2-608: abandons identity theory and adopts intent theory, but creates a presumption in favor of ademption o Criticized for increasing litigation, and inserting a devise (―or its equivalent value‖)
37
FPC § 732.605: If testator made gift of securities instead of their value, the devisee is only entitled to those securities that are in the testator’s estate, securities acquired through stock splitting, securities acquired through merger, and securities acquired through a reinvestment plan.
Wasserman v. Cohen- Massachusetts Facts: involved a revocable inter vivos trust and a ZPQ trust holds title to this property bequeathed to Elaine (a land trust that just holds legal title)- just a convenient way to hold real estate, still owned by the testator. BUT she sold the property (for $575k) but never conveyed that interest in the trust. Issue: whether admeption by extinction applies to a specific gift of real estate contained in a revocable inter vivos trust. Hold: yes- a trust, particularly when executed as part of a comprehensive estate plan, should be construed according to the same rules traditionally applied to wills. Rule: ademption by extinction- focus is on actual existence of bequeathed property, not on testator’s intent w/ respect to it. Mass uses Identity theory, is asked to move to intent theory for gifts in an inter vivos trust, says NO Florida is an Intent theory jurisdiction, no FPC rule, but courts admit EE to find out if testator wanted gift adeemed (minority view)
Exceptions to Ademption: (UPC § 2-606 & FPC § 732.606) Guardianship Exception: If the testator’s guardian sells the property of a specific devise, the devisee has the right to the money value of the sale. FPC 732.606(1): guardianship exception for incapacitation: gives the devisee a cash legacy equal to the value of the property that is no longer in existence, including if property is taken by eminent domain when you are incapacitated FPC 732.606(2) applies when the testator is competent: When the property of a specific devise is not in the testator’s estate at his death, instead of adeeming the gift, courts have given the devisee… Any remaining balance on the purchase price of the specific property sold (plus any security interest). Any unpaid amount (at the testator’s death) of condemnation award for the property. Any unpaid fire or casualty insurance proceeds (at the testator’s death) after the property has been destroyed. Any property owned by the testator as a result of foreclosing a mortgage devised to a specific devisee. * Replacement Property: (UPC only!!!) UPC §2-606(a)(5): Property owned by the testator at death acquired as a replacement for specifically devised property. Would replace the Ford with the Rolls Royce- problem 1 p. 411 Apparently it works for real property too In FL the gift of the Ford is presumed be adeemed, if there was extrinsic evidence to show T’s intent was to give the Rolls Royce, the court will hear that * Executory Contract: (FPC only!!!) If testator contracts to sell property to somebody but the sale never goes through and testator dies, the beneficiary has the right to the remaining specifically devised property and any balance of the purchase price still owed to the testator plus any security interests.
2. Stock Splits and the Problem of Increase Stock Splits: o A stock split is a change in form, not substance. A devisee of stock is entitled to additional shares received by the testator as the result of a stock split. Thus, if T leaves ―A 100 shares of Acme stock,‖ and the shares split so T has 200 shares at death, A gets all 200 shares. o UPC & FPC: Treats stock splits and dividends the same. o FPC § 732.605: If testator made gift of securities instead of their value, the devisee is only entitled to those securities that are in the testator’s estate, securities acquired through stock splitting, securities acquired through merger, and securities acquired through a reinvestment plan.
38
Increase doctrine: arises when you die with more shares of stock (200) than you devise (100) o CL can acquire additional share by: (a) stock split- 200 (Including FL) (b) stock dividend- 100 (c) purchase- 100 o Difference b/t stock splits and dividends (need to declare earnings and profits for the latter) at the corporate level o FPC 732.605(1)(b)- if the testator intended a specific devise of certain securities, devisee has a right to their value, except if they were through a purchase option (category c) because there was additional consideration given o If there is a merger… o FPC 732.605 is premised on the statement that the testator intended a devise of specific securities and not their value then the devisee will get 200 shares, but if the testator says ―the‖ instead of ―my‖ it is not a specific then this is not a specific devise How to Avoid Ademption of Stock Gifts: (1) Classify the devise as general or demonstrative rather than specific. 1. General Devise: ―I leave 200 shares of stock to A.‖ If testator dies with no more stock, A is entitled to the value of the 200 shares anyway. 2. Specific Devise: ―I leave my 200 shares of stock to A.‖ Look for the word ―my.‖ If testator dies with no more stock, the court will say this was a specific gift, so it is adeemed. (2) Classify the inter vivos disposition as a change in form, not substance. 3. ―I leave my 100 shares of Acme stock to A.‖ Before T’s death, Acme merges with Tiger Stock, but testator never makes the change in his will. A’s gift is not adeemed. Corporate merger or reorganization is only a change in form, not substance. (3) Construe the meaning of the will at time of death rather than at time of execution. 4. ―I leave my Lincoln Towncar to A.‖ When T wrote the will, he owned a 1989 Lincoln, but owned a 1995 Lincoln at the time of his death. A’s gift is not adeemed. (4) Create exceptions. 5. For example, if the guardian of an incompetent or insane person transfers the item that is the subject of a gift, the gift is not adeemed because ademption requires a voluntary act by the testator to dispose of the property of the gift.
3. Satisfaction of General Pecuniary Bequests Ademption does not apply to general legacies- if you are short of cash, 1 of 2 things will happen: 1. you tell Diana that you don’t have cash, but have stock that’s worth 10K and will distribute to her as an alternative means. 2. personal rep will go out and sell an asset to raise cash. (youre going to need cash to pay for administration anyway) Satisfaction: Applies when the testator makes a money transfer to somebody after executing their will. The problem becomes whether this is a gift or whether it is part of that person’s share. (like advancements) Always depends on testator’s intentions. Does not apply to specific devises. Will equivalent of the doctrine of advancements CL presumption is that gifts are presumed to be made in satisfaction of beneficiaries interest under the will FPC 732.609- need written evidence that the gift is in satisfaction of the beneficiaries interest under the will If testator is a parent of the beneficiary, and after he executes his will he gives property of a similar nature to that given by the will, there is a rebuttable presumption that the gift is in satisfaction of the gift made by the will. Some states require that intention to adeem a gift by satisfaction must be shown in writing. FPC § 732.609: If a testator gives a person a gift during their lifetime, the gift is treated as a satisfaction of the devise, in whole or in part, only if (a) the will provides for deduction of the lifetime gift, (b) the
39
testator makes a simultaneous writing saying so, or (c) the devisee acknowledges in writing that the gift is in satisfaction. UPC §2-609: Intent to adeem by satisfaction must be in writing (like advancements)- no presumption of ademption by satisfaction of gift to a child
4. Exoneration of Liens
If mortgaged land is devised, does the mortgage pass with it? When you own mortgaged property and you leave it to someone, is it your intent to give them the equity in that asset, or to leave him the asset free and clear of the encumbrance (so you want the mortgage to be paid off)UNLESS the wills shows contrary intent CL: Beneficiary takes property without a mortgage—debt is paid out of the residue- lien is paid off before asset is given to the beneficiary- might have to sell assets to pay off the mortgage, or use assets as security to get another loan (at a higher interest rate) to pay it off. UPC § 2-607: Mortgage is not paid out of the residue, even if the will says so. FPC § 733.803: reverses the CL rule: a beneficiary is not entitled to have the encumbrance paid out of the residue of the estate unless there is evidence in the will that the testator wanted it.
5. Abatement
Abatement: Sometimes there is not enough property in the estate to pay creditors and fund everyone’s gifts. Some devises must be abated (reduced). UPC & FPC § 733.805: Identical. Wills can specify order of abatement; if not, the order goes… (1) Property passing by intestacy (2) Residuary devises reduced first (3) General devises reduced second (4) Specific and demonstrative gifts last to abate and are reduced pro rata UPC §3-902: if the testamentary plan would be defeated by the usual order of abatement, ―the shares of the distributes abate as may be necessary to give effect to the intention of the testator. Hypo: Blackacre to A (worth $12k) 6K out of proceeds of sale of Acme stock to B 3K cash to C Residue to D 1. At the decedent’s date of distribution, the estate owns Blackacre worth $12k, Acme stock worth 6K, and cash worth 12K. o Who gets what? o In what sequence are the gifts under the will funded? o In REVERSE sequence of FPC 733.805. o Blackacre goes to A first, then 6K to B, then 3K case to C, then 9K to D 2. At decedent’s date of distribution, the estate owns everything as above, except just cash worth 3K. o Who gets what? o Everyone gets the same except D gets nothing 3. If decedent only had 2K in cash (or in Xerox stock), A and B take the same, C gets 2K instead of 3K (either if its cash, or Xerox stock is sold), D still doesn’t get a dime
40
4. Blackacre worth 12k, Acme worth 3k, cash and other assets worth 15k o Fund specific and demonstrative first: A gets Blackacre, B gets 3k of Acme stock- but what about other 3k he was supposed to get? Either it is adeemed or funded by other assets- not adeemed because that is restricted to specific devises. Take 3k of cash or other assets to finish satisfying B’s gift of 6k. 3k of cash/other assets to C, 9k residue to D. 5. Blackacre worth 12k, Acme stock worth 0, cash of 6k. o Blackacre goes to A, but 733.805(2)- to the extent that you don’t have Acme stock to fund B’s gift, it is reclassified from being a demonstrative devise to be classified as a general devise. The effect of this is to pull it out of the first priority of funding. Now since B and C have the same level of priority, we fund them pro rata- B gets 2/3 (4k/6k), and C gets 1/3 (2k/6k) and D gets nothing in residue. Examples dealing with administration T dies with 12k Blackacre, 6k of Acme stock, cash of 12k. A would get 12k Blackacre, B would get 6k of Acme stock, C gets 3k of cash, D gets 9k of residue BUT there are costs of administration or creditors of 10k First take the 9k of residue to pay those costs, and 1K from C’s share to pay the 10k What if admin costs were 15k? Take 9k from D, 3k from C- what about 3k more? FPC says specific and demonstrative gifts are in the same category. So you have to prorate A’s and B’s interests- so 2k from A, 1k from B. But how do you get 2k of Blackacre from A? A can (1) write a check from his own money, or (2) A can get a loan for 2k from the bank pledging Blackacre as security.
41
VI. RESTRICTIONS ON THE POWER OF DISPOSITION [38, 39] PROTECTION OF THE SURVIVING SPOUSE- COMMON LAW STATES Page 417-430 SECTION A: RIGHTS OF THE SURVIVING SPOUSE 1. Introduction to Marital Property Systems In the US 2 basic marital property systems: 1. Separate property Originated in CL in England H&W own separately app property each acquires (except those items one spouse has agreed to put into joint ownership w/ the other) Whatever the worker earns is his- no sharing of earnings 2. Community property Originated in Europe- Spain/France H&W own all acquisitions from earnings after marriage in equal undivided shares Uniform Marital Property Act- ―marital property‖ 2. Rights of Surviving Spouse to Support a. Social Security: H and W can share in each other’s SS benefits—you can devise your shares to your spouse but nobody else. b. Private Pension Plans: Requires that the spouse of an employee have survivorship rights if the employee predeceases the spouse. Can be waived (bad idea), but not in prenuptial agreements. o Most of these plans are governed by ERISA which preempts inconsistent state law o Defined contribution plan: both contributed, employee gets the whole contribution at the end o Defined benefit plan: employer contributes, employee gets some percentage at the end c. Homestead laws designed to secure the family home to the surviving spouse and minor children, free of the claims of creditors o UPC Probate Homestead: (§ 2-402) Secures family home so it will go to the surviving spouse and any minor children, not to dead spouse’s creditors. Gives surviving spouse the right to occupy the family home for his lifetime. Decedent has no power to dispose of the homestead so as to deprive the surviving spouse of rights in it. Some states make the testator establish what the homestead is. Recommends a $15,000 exemption (ridiculously small). o Florida Homestead Rules: FL Const. Art. 10 § 4: Must be left to surviving spouse and minor children if there are any, otherwise it can be devised in a will to anyone, or pass through intestacy. Surviving spouse takes a life estate in the homestead, a vested remainder in the lineal descendants. Defines homestead as… 1. 160 acres of contiguous land and improvements thereon if located outside of a municipality.- no use restriction, just have to own it, OR 2. Half an acre of contiguous land on which a residence sits if located in a municipality. 3. And personal property up to $1,000 in value. Consequences of homestead exception: Creditor Protection: Homesteads are exempt from general creditor’s claims. But if you borrow money to improve your home, those creditors can get at the improved home. If you leave your homestead to somebody who is a potential heir under Florida intestacy statutes, the exemption from creditors passes at your death to that person. Tax Benefits: First $25,000 of your homestead is exempt from property taxes (saves about $800). When value of homestead is assessed each year, taxes cannot be raised by more than 3%.
42
**Art 10 §4 (c): you cannot devise your homestead to someone in your will, if O is survived by a spouse or minor child, it may be devised to spouse if there is no minor child. But constitution doesn’t say where home goes. o FPC 732.401: if home not devised as permitted by law in constitution, home goes like other intestate property. Spouse takes life estate in the homestead with it then being devised per stirpes.
Who Receives the Homestead at Testator’s Death: I. T dies with a spouse A. And no lineal descendants. Default: Homestead passes (as other property does in entire estate) in fee simple absolute to T’s spouse- FPC 732.401- cross references to FL intestacy statute Will: T has no authority to leave the homestead to anybody but his spouse- because the FL Constitution says you cannot devise your homestead to anyone except spouse if you have no minor children B. And with lineal descendants i. no minor children o Default: life estate to spouse, remainder to lineal descendants- FPC 732.401 (Powell says this is a horrible ending) o Will: can devise it to the spouse in fee simple (not in a trust, not to others)- FL Constitution permits this ii. and minor children o Default: life estate to spouse, remainder to lineal descendants (includes minor and adult children) o Will: T cannot leave home to anybody, cannot even devise to his spouse, because he has minor children- as FL Constitution states
II. T dies with no spouse
A. And no lineal descendants Default: T can give the homestead away in his will to anyone or let it pass through intestacy. Will: T can leave the homestead to anybody. B. And lineal descendants i. no minor children o Default: T’s lineal descendants get the homestead per stirpes o Will: T can leave the homestead to anybody ii. and minor children o Default: T’s lineal descendants get the homestead per stirpes o Will: T has no authority to leave the homestead to anybody but the minor childgift of homestead to someone else is automatically void If you don’t like these homestead restrictions: 1. give home to spouse as tenant by the entirety, and this cuts of the remainder interest. 2. devise it as joint tenants with right of survivorship. Have to get spouses signature on the deed too though. 3. put it into a revocable inter vivos trust- still need the joinder of W (Powell says this doesn’t work thoughFPC 732.401(5)- the provisions in your revocable inter vivos trust are devises, and since your home is not subject to devise if you have a spouse or minor child, that home comes out of the trust and goes to spouse or minor child if there is one. d. Personal Property Set-Aside: Surviving spouse has the right to set aside certain tangible personal property of the decedent up to a certain value. Exempt from creditor’s claims. Includes household furniture, clothing, cars, and farm animals. UPC § 2-403: Recommends a $10,000 set-aside. FPC: Personal property is exempt from creditors as long as it passes to your heirs—if devised to anyone else, it loses creditor protection.
43
e. Family Allowance All states have a statute authorizing the probate court to award a family allowance for maintenance and support of the surviving spouse and dependent children for a set period of time. UPC § 2-404: Allows a reasonable allowance. Cannot continue for more than one year if the estate is inadequate to pay creditors. FPC § 732.403: Allows $1,500 per month for 1 year, totalling $18,000. Allowance is not exempt from creditor’s claims, but is nevertheless difficult to get at. If probate assets are insufficient to pay creditor’s claims, the family allowance can be paid out of a revocable trust. f. Dower and Curtesy Dower: (minority view, not in Florida) Entitled a widow to a life estate in 1/3 all her husband’s land that had been seised during marriage and which was inheritable. Husband could not sell his land free of his wife’s interest. right attaches at the moment H acquires title to land or upon marriage, whichever is later. Remains inchoate (attaches as soon as H acquired the real estate so he cannot convey it without W/s joinder) until the H’s death, when it becomes possessory Curtesy: (minority view, not in Florida) Husband’s interest in his wife’s land—gives him a life estate in the entire parcel, not just 1/3, but only if the couple have children together. 3. Rights of Surviving Spouse to a Share of Decedent’s Property a. The Elective Share and Its Rationale Elective (Forced) Share: o Statutes that allow a surviving spouse to either… (a) Take under the decedent spouse’s will, or (b) Renounce the will and take a fractional share (usually 1/3 or 1/2) of dead spouse’s entire probate estate. o Designed to prevent people from intentionally or unintentionally disinheriting their spouses. o Does not include homestead and exempt property—surviving spouse gets these plus elective share. ----------------------------------------------------------------------------------------------------[40] PROPERTY SUBJECT TO THE ELECTIVE SHARE Page 438-451 b. Property Subject to the Elective Share **The ONLY 4 questions you need to know how to answer (they will be asked in various ways) 1. whether the elective share right under the UPC and FPC extends to non-probate transfers? - UPC: no, never did - FPC: they used to work, but they no longer work b/c of new elective share statute 2. is the share the spouse is entitled to a function of the length of marriage - UPC: yes - FPC: no- its 30% 3. is whether the share the spouse is entitled to takes into account the resources of the surviving spouse - UPC: yes - FPC: no 4. if I want to do right by my surviving spouse, but I’m trying to balance her interest with children I have from first marriage, can I survive the elective share right by creating a trust? - UPC: no- cannot use a trust- spouse can repudiate interest in trust and take outright share
44
- FPC: yes- if it qualifies as an elective share trust (must give W the right to income), you can satisfy elective share right by creating the proper trust 1. Extend to Non-Probate transfers? some states revocable trusts and other nonprobate transfers are not subject to elective share law of trustee’s domicile to defeat elective share claim of spouse domiciled out of state, and law of state where couple were domiciled, deeming it to have paramount interest. UPC §2-202d (1990) provides that the law of the decedent’s domicle shall govern the right to take an elective share of property located in another state. 2. Size of Shares: Common Law: Same fixed fractional share regardless of length of marriage. UPC § 2-202: Sliding scale—3% after one year, with 3% annual accruals until 50% is reached after 15 years of marriage. Also gives a $50,000 supplemental elective-share in case the surviving spouse’s own assets are below this figure based on notion that surviving spouse is entitled to some support, regardless of duration of marriage. FPC § 732.2035: Gives 30% fee simple fractional share of the dead spouse’s probate estate and most but not all, non-probate transfers, regardless of duration of marriage. Non-probate property includes revocable trusts if dead spouse was trustee, right of survivorship property, large death bed gifts made within 1 year of decedent’s death, pension plans and other deferred compensation arrangements, property transferred in satisfaction of the elective share. Non-probate property does not include life insurance proceeds. 3. Uneven Wealth: Common Law: If the wealth of the spouses are uneven, wealthier spouse can claim a share of the poorer spouse’s estate, even when there is no economic need for it. UPC: Eliminates elective share when the surviving spouse was the wealthier one. FPC: Elective share is available regardless of surviving spouse’s finances. 4. Elective Share Trust: Allows decedents to put property in a trust for their surviving spouse. Entitles the spouse to the use of the property for life and a right to an annual income. If decedent specifies, the trustee is allowed to give more than the alloted share to the spouse if needed for health, support, and maintenance, but it counts as 80 cents on the dollar against the elective share right, not 50 cents. The money in the trust reduces (counts against) the elective share of the spouse. FPC § 732.701: A spouse can waive their elective share right, in whole or in part, before or after marriage by a written and signed instrument, witnessed by 2 witnesses. No consideration needed. If done after marriage, each spouse must disclose the value of their estate; but if done before marriage, they do not have to (or they can lie).
(1) Judicial Responses Sullivan v. Burkin Facts: court held H’s trust was not testamentary and was in fact valid inter vivos trust Rule: a trust w/ remainder interests given to others on the settlor’s death is not invalid as a testamentary disposition simply because the settlor retained a broad power to modify or revoke the trust, the right to receive income, and the right to invade principal during his life Issue of widow’s interests Hold: ?? Rule: overturns Kerwin v. Donaghy to say that when a marriage is terminated by the death of one spouse, the rights of the surviving spouse should not be restricted. It is neither equitable nor logical to extend to a divorced spouse greater rights in the assets of an inter vivos trust created and controlled by the other spouse than are extended to a spouse who remains married until the death of his or her spouse. Conclusion: treats the assets of an inter vivos trust created during marriage by deceased spouse as part of the ―estate of the deceased‖ so that those assets are subject to the elective share Objective test, no consideration of the motive or intention of the spouse in creating the trust Bongaards v. Millen
45
Hold: trust property at issue is not subject to the P’s elective share for the simple reason that the trust was created by a third party and not by the deceased. Rule in Sullivan only applies to assets of a trust created during the marriage by the deceased spouse ―Estate of the deceased‖ refers to the decedent’s probate estate Notes: Other tests to determine what non-probate transfers are subject to the surviving spouse’s election 1. illusory transfer test- Newman v. Dore- revocable inter vivos trust established during marriage is illusory and invalid (replaced by NY statute now) courts following this hold that an ―illusory‖ revocable trust is not invalid, but it does court as part of the decedent’s assets subject to elective share. key is the amount of control retained by decedent spouse 2. intent to defraud test- in determining whether the decedent intended to defraud his surviving spouse of her elective share, some look for subjective intent, others look for objective evidence of intent (control retained by transferor, amount of time b/t transfer and death, degree to which surviving spouse is left w/o an interest in the decedent’s property or other means of support) 3. present donative intent test- does decedent have a present donative intent to transfer a present interest in the property? Focuses on whether the transferor intended to make a present gift. Similar objective factors are weighed.
(2) Statutory Schemes states favor a clear list of non-probate transfers that are added to the probate estate to constitute a net estate or an elective estate against which the surviving spouse may elect to take his or her statutory share
(3) The UPC Augmented Estates: UPC § 2-202: (1969) The dead spouse’s augmented estate consists of their probate estate plus certain non-probate transfers, including... Transfers where decedent retains the right to possession (survivorship) or income from the property. Transfers where decedent can revoke, invade, or dispose of the principle for his own benefit. Transfers in joint tenancy (with someone other than the spouse). Inter vivos transfers of property worth over $3,000 made within 2 years before death. Property given to the surviving spouse during life, including a life estate in trust, and property received by the spouse at death derived from the decedent, such as life insurance and pensions. 1990 UPC § 2-203: Combines the value of the following into decedent’s augmented estate… Probate estate. Non-probate transfers to people other than surviving spouse, including (a) property the decedent had power of appointment/revocation over, (b) decedent’s fractional share of joint tenancy property, (c) decedent’s ownership share in property with payable on death designations, and (d) life insurance proceeds payable to people other than the surviving spouse. Property transferred during marriage, including (a) irrevocable transfers in which the decedent retained the right to possession or income from the property for life and (b) transfers where the decedent had power over the income or property for his own benefit. Property passed during marriage and during 2 years before decedent’s death, including (a) any property that would have been included in the augmented estate had the transfer not been made and (b) any transfer of property to any person other than the surviving spouse to the extent that it exceeds $10,000 to any one donee in either of the 2 years preceding death. Non-probate transfers to the surviving spouse. Surviving spouse’s property and non-probate transfers to others that would have been included in her augmented estate had she been the decedent.
46
Includes life insurance owned by decedent as subject to elective share Step 1: determine the ―elective share percentage‖ Step 2: determine the value of the ―augmented estate‖ Step 3: determine the ―elective share amount‖ (4) Note: must the surviving spouse accept a life estate? If the amount of the bequests to the surviving spouse does not satisfy the elective share, the difference must be made up either by pro rata contributions from all other beneficiaries (majority UPC rule) or from residuary estate. Under UPC 1969 and most states, if surviving spouse renounces the life estate and elects to take her share in fee simple, she is not charged for the value of the life estate UPC 1990 Charging the surviving spouse w/ the value of the life estate Powell: Community Property states o Inherent protection against disinheritance- when H&W marry and one goes out to work force and one earns salary- that’s community property, and the surviving spouse owns ½ of that at death. W owns half during life and at H’s death. When H’s probate estate is administered, only his ½ is administered. o Migrating couple problem: no protection to people who live in a separate property state (FL) and then move to community property state (CA) o Represents a partnership theory of marriage If this happens, W gets ½ of the community property in CA, and an elective share of what would have been community property in FL o It rewards long term marriages more than short term because it gives more time to accumulate community property o Administrative costs o Augmented estate had to be redefined to include the assets of both spouses, see UPC 1990 (5) Elective Share Hypo: D has a probate estate of 200K, 50k to W D has a revocable inter vivos trust of 600K, 100K to W for life D gives life tenancy of 100k to children immediately W has 100k of her own o o Original UPC: You reduce the elective share right by the amount the decedent left you o W will get 50K (that he left her) + 10K (of elective share) = 60K (30% of the probate estate= elective share total amount) Revised UPC gave a share in the augmented estate: probate estate including most non-probates o Right of survivorship, revocable trust, death bed gifts, but NOT life insurance o Original code said 50% but states differed o 200K + 600K = 800K so 400K is W’s elective share o reduced by the gift of 50K, so 400K-50K = 350K elective share total amount 2 rationales for an elective share law: o support theory- recognize an underlying duty of both spouses to support each other economically o partnership theory of marriage- fruits of the marriage should be split equally between them, it is the underlying basis for community property law UPC sides with this rationale and takes a look at community property Advantages: Takes duration of marriage into account Takes the wealth of both spouses into account Factors out inherited wealth (not community property)
o
47
Factors out pre-marital wealth Drawback: Administrative costs- have to classify each asset as community or separate property Come up with a system that has the advantages of community property system/partnership theory of marriage, yet doesn’t have the burdens UPC will mimics it by defining a constant fund but vary the fraction that the spouse is entitled to, want to eliminate tracing funds o Includes everything: D’s probate estate (200K) , right of survivorship (0K), revocable inter vivos trust (600k), death bed gifts (0k), life insurance (100k), surviving spouse’s (W’s) probate estate (100k), W’s right of survivorship, W’s gifts, W’s life insurance (just the cash surrender value), etc, everything you add of D’s you add of W’s to come up with a grand total of the augmented estate of 1million$$ o Marriage of 1 year she is entitled to 3%, 10 years is 30%, caps out at 50% o So after 10 years W gets 300,000 o Minus 50K gift o Minus twoce the elective share of what she already owns (so 60K) o So W gets 190K- comes pro rata from all of the beneficiaries of his property o Trust is construed as if she was dead so that she cannot take an elective share and her interest in the trust** so there’s not double dipping o If you go through the math, it will end up breaking even if the poorer spouse dies first o Takes into account the duration of marriage o Avoids the tracing property of community property o Disadvantage is that one admin burden (tracing asset source) for another (what does W’s wealth picture look like at D’s death)
(6) Florida’s elective share o We had the suspicion that you can avoid elective share by creating a revocable trust o Augment estate: laden with baggage, so we call it an elective estate o Our elective share is a fraction of the elective estate o Elective estate includes: probate estate, right of survivorship tenancies, annuities, revocable trusts, large gifts (10k+) within a year of D’s death, inherited wealth, premarital wealth, NOT life insurance, NOT homestead at all o Just like original UPC o What about duration of marriage? o Doesn’t say anything about support needs, but says something about moral obligation to provide economic support of your spouse o FL takes it into account- based on duration of marriage, capped at 30% (because of the homestead exception) o Ended up being scratched and was just flat 30% o Family law ppl were worried that this might carry over into divorce proceedings o They were against this because we are a community prop state w/ regard to marriage dissolution o Our elective state is 800K o Elective share is 240k (30%) o Minus 50k gift o Trust o We used to treat W as dead o We decided against this because we want to encourage trust arrangements that provide for spouse and children o Elective share trust o If you estate plan creates on of these, you spouses interest in that tturst reduces the elective share right o This kind of trust has certain attributes
48
o
Must give the right to income for life (must be assets that produce income, not non-liquid assets) o After the spouse is dead, the trust can give the rest in any manner o What is the spouses interest in the trust worth? o The interest is conveniently decreed to be worth 50% of the total trust value o If you give trustee power to distribute stuff for health, support, and maintenance, value of the trust rises from 50% to 80% o This clause reflects W’s assets in that she wont be able to exercise this right unless she is in need If you don’t want to leave you spouse this much, and want to leave her like $50k, put the money in trust o You have to give her right to income in the trust** o Add the health, support, and maintenance clause into the trust to cover the 140K shortfall (of the 190K total elective share - $50k you give her outright) o This way you only have to put $237,500k (80%) instead of 380k (50%) in the trust and she can only use it if she needs it for those reasons o Then when she dies the trust can go to his children
o
Law of unintended consequences ability to provide special needs trusts for children w/ special needs, or disabled spouse will DQ your spouse from Medicaid until she spends it down want to put a certain amount of $$ in the trust for your spouse to supplement her Medicaid put all assets in revocable inter vivos trust, to go into special needs trust after create a trust during life to eliminate elective share, but still have to give her income, and that will DQ her for Medicaid qualified special needs trust: counts dollar for dollar, to eliminate the outright elective share, and does not count as a Medicaid asset has to be created w/ approval of the court has to have non adverse trustee
49
IV. WILL SUBSTITUTES- NONPROBATE TRANSFERS [29, 30] INSURANCE, PENSION ACCOUNTS, BANK ACCOUNTS, AND OTHER POD ARRANCEMENTS Page 322-344
Chapter 5: Non-probate Transfers and Planning for Incapacity SECTION A: INTRODUCTION TO WILL SUBSTITUTES Wills are a big deal- they cost money, people don’t like to talk about their death, a vast amount of property passes outside of probate Valid non-probate mechanisms for passing property to people at your death. Living trust: if you create the trust before you die and put your property in it before you die, so when you die its titled in the name of your trust, it’s a non-probate asset and you avoid probate estate. o Most useful from the standpoint of addressing all concerns o Doubt about these when Powell was in law school- the probate system is scandalous and can be avoided by creating living trusts (author of book was directing people to invest in his mutual funds and make him trustee). Litigation about these- are they valid? FL SC held that a trust in one case was invalid. I. The will substitutes A. life insurance B. pension accounts C. bank, brokerage, and mutual fund accounts D. the revocable inter vivos trust E. imperfect will substitutes o CL joint tenancy, etc. II. The hidden causes of the non-probate revolution o Most are asset-specific o Prop that passes through avoids probate o Formal requirements of the Wills Act do not govern and do not have to be complied with SECTION B: REVOCABLE INTER VIVOS TRUSTS (see trusts next chapter) SECTION C: LIFE INSURANCE, PENSION ACCTS, BANK ACCTS, & OTHER POD ARRANGEMENTS 1. Life Insurance: shift the financial risk of dying young to insurance company Should be 6-10x your annual income, or enough for partnership/corporation to buy your share Whole life (ordinary, straight): insurance and savings Term life (pure): insurance, no cash surrender value, cheaper, can be renewed Settlement options: lump sum, annunities Non-probate asset. Not subject to Statute of Wills. Considered an inter vivos transfer (revocable)—the interest goes to the named beneficiary immediately after policy holder dies- no probate If named beneficiary dies before policy holder, policy goes to the beneficiary’s heirs. Payable on Death Provisions (POD): Common Law: PODs are always valid in insurance policies but are never valid in non-insurance contracts. UPC § 6-101: Validates POD provisions in any contract (bank accounts, securities, life insurance). FPC: Validates POD provisions in most contracts (bank accounts, brokerage accounts, securities, life insurance, and specific shares of stock), but not all. You cannot leave the policy to someone else in your will; cannot change beneficiary in your will either. Only the person named on the actual policy is entitled to it.
50
A change of beneficiary is not valid until you make the change in writing, submit it to the insurance company, and they accept it. Even though most states take a divorced spouse out of your will, they won’t take a divorced spouse out of your life-insurance policy. Change beneficiary immediately after divorce.
Wilhoit v. Peoples Life Insurance Co. Facts: Sarah married to Oscar. Oscar dies owning a life insurance policy that designated Sarah as beneficiary of the policy. This policy gives her a choice among settlement options- default is that they will just cut her a check. They agree to keep the money and pay her interest (3%/year) on the amount until she requests the full amount later. They restrict her ability to request the money in amounts and times. She doesn’t do anything to put the settlement option in play, she takes the lump sum but sends the money back to ins company under terms that look similar to the original contract. Insurance company was not obligated to accept this re-deposit, but they did. Part of this agreement is that she designated a beneficiary (her brother Robert) incase she died before she pulled the money out. Robert has a son Thomas who gets everything. Robert dies. Sarah writes a will then that devises the money on deposit w/ the insurance company to Wilhoit. Thomas, Robert’s successor claims he became entitled to those moneys through Robert’s will. Issue: What was it that Sarah really want to happen to this money? Originally she wanted Robert her brother to have it, but it is clear that when he died, she wanted Wilhoit to have it. But if this is a policy of insurance, the insurance beneficiary designation controls- which says Robert- so Thomas wins. Hold: this is no longer insurance- had she left the money w/ ins comp to begin with, it would be. But she sent the money back to them under different terms- it is no longer insurance. She is using them as a bank and depositing the money in them- it is a contract of deposit, not a contract of insurance. Common law: death beneficiary designations in other contracts other than insurance are testamentary in character and are invalid unless done w/ formalities of will. Conclusions: the court moves the money into a testamentary conveyance- because the policy holding of money was not done with the formalities of a will. It is not valid. Good end result because the person she wanted to get the money got it. But bad because it shows how these rules are skitzo- we validate insurance but not POD in contracts of deposit. Powell says they could have used better approaches: 1. while the beneficiary designation in the contract of deposit is valid, we would recognized the ability to modify that designation in your will. Ins company hates this- gives you too much power. 2. UPC says you can have a POD provision in ANY contractual relationship 3. FL will validate POD provisions on bank accounts- non-probate transfer - similar statute applies to stocks and bonds, entire brokerage accounts (TOD- transfer on death) - in FL- beneficiary MUST survive to take 4. CL will not validate POD provisions NB: court struck down a POD designation in a contract of deposit b/c it was a testamentary act not executed with the formalities required by the Wills Act. Followed traditional rule that POD designation in may contracts other than life insurance are invalid. Next case shows how this rule is being transformed by courts and legislators. Estate of Hillowitz Facts: Investment club case: Guy pools his money w/ investment club, formalized- death beneficiary provision and he designates his wife. He dies, his wife claims proceeds of investment club- contest filed that beneficiary designation is invalid. Hold: Court of Appeals hold that it is good- not invalid for being a testamentary conveyance. FL doesn’t haven’t a statute dealing with this kind of set up. This court says its valid under NY CL. Problem because earlier decision: McCarthy: beneficiary designations at death in contractual arrangements are invalid (this was for a mortgage). This court tries to distinguish this case with lame distinctions: 1. that case is limited to its facts, 2. intent in McCarthy case was to work a testamentary conveyance- no intent to give anyone anything now, 3. in the mortgage case, the named beneficiaries didn’t know they had been named as beneficiaries. Court says it is unquestionably true, as part of the partnership, you can agree that at your death your partnership interest may be divided up to the other partners because there is consideration involved. But when you give it to your wife- that is a donative transfer.
51
Rule: members of a partnership may provide that upon the death of a partner, his widow shall be entitled to his interest in the firm. Notes: 1. In Hillowitz he court analogized a partnership agreement under which a deceased partner’s interest passes to the surviving partners w/ one in which a deceased partner’s interest passes to his surviving spouse. 2. Family Limited Partnership (FLP): decedent transfers assets to partnership in exchange for limited partnership interest. His family trades assets to the partnership for limited partnership interests. When his limited partnership interests pass to his family, the value of those interests are discounted for estate tax purposes because of their lack of control rights and non-marketability Notes: Gift lapses: devisee is required to survive testator otherwise the gift lapses (under law of wills)- should this be applied to will substitutes? UPC includes an anti-lapse provision for POD designations Powell says: FPC 733.808 (1) can name a revocable trust as beneficiary of insurance (2) can name a testamentary trust as beneficiary also Cook v. Equitable Life Assurance Society: Facts: the court assumed that H’s designation of W as beneficiary of life ins policy was not revoked by their subsequent divorce Issue: was whether D could change the beneficiary designation by will. Policy terms required written notice to the company to change terms. Hold: yes, but not in this case- he did not do all w/in his power or all that was reasonably expected of him to comply with those provisions to reach his goal. Rule: equity aids the vigilant, not those who slumber on their rights. Public policy requires that they should be able to rely on certainty that policy provisions pertaining to the naming and changing of beneficiaries will control only in extreme situations. Powell says Issue: should the divorce have revoked the interest in insurance contract? Hold: UPC says yes but it has held to be unconstitutional retroactively, only good prospectively, FPC has no similar statute and so it would not be affected by divorce Notes: Superwill (hypothetical): annuls the B’s named in various non-probate instruments and names a new beneficiary.
2. Pension Accounts Favorable tax treatment A. enhancement of life expectancy B. pension wealth- tax advantages: i. most contributions to the plan are tax deferred ii. earnings on qualified plan investments accrue and compound on a tax-deferred basis iii. taxed at lower marginal rates C. annuitization eliminates succession- insures against living too long- allows people to consume their capital safely (w/o fear of running out of capital while still alive) Notes: 1. annuities are payments every year for the rest of the beneficiary’s life, shifts financial risk o Defined benefit plan- really means pension plan- employer promises to pay an annuity on retirement Contributory- you help contribute to the plan Non-contributory o Defined contribution plan- includes profit-sharing plans (shares of stock, or benefit tied to the company) 401k, 403b employer and employee make contributions to a specific pension account
52
o o
company gets to deduct the contributions under the plan Joint and survivor annuity- make annuity payments until O and his wife both die ERISA- Employee Retirement Income Security Act- deals with defined benefit plans- does federal regulation of pension plans preempt the applicability to them of the state subsidiary law of wills? If you are married, when you retire, benefit paid to you and your spouse in an annuity- jointly to you while you’re alive and then when you die to your spouse This is the required form of payment unless you and your spouse say otherwise Those restrictions do not apply to defined contribution plans- those are unilateral Some of these restrictions preempt state law Egelhoff v. Egelhoff Hold: the statute at issue here directly conflicts w/ ERISA’s requirements that plans be administered, and benefits be paid, in accordance w/ plan documents. WA statute has a ―connection with‖ meaning it ―relates to‖ ERISA plans and is therefore preempted. This is a core provision and is thus preempted. Rule: ERISA preempts state law that purports to revoke this beneficiary designation because of the divorce. The purpose of this is uniformity of law- don’t want companies to have to pay attenuation to each state’s statute. Dissent says this is going to affect other state statutes like slayer, simultaneous death, also should be viewed as a windfall
3. Multiple Party Bank Accounts: Often difficult to determine what type an account is. Banks, in absence of notification, pay the money in an account out to the person named on their paperwork without liability. Joint Tenancy Account: Both parties can draw on the account during life; survivor gets the balance. UPC: Joint tenants can only draw on money they put in the account, but the surviving tenant gets the other tenant’s money at death. Each owns half, but an undivided half, but ownership is really based on contributions into it This is presumed over an account by the entirety Giving access to your money to someone else- may not be able to keep it if you sue them to get it back Payable on Death Account: (new, only valid in Florida and a few states) Designated person cannot draw on the account during the life of the account holder, but gets the balance at the holder’s death. UPC recognizes these Wilhoit case- there was a doubt of their validity What is the impact of beneficiary predeceasing benefactor? Statutes are not well drafted in this UPC and FPC says beneficiary MUST survive What about changing the beneficiary designation? At CL, yes you can (change this on a Totten trust- same thing) UPC and FL both say that you cannot change this in your will Agency Account: Agent cannot draw on the account during the holder’s life for his own use, just for the holder’s use, and agent does not get the balance at the holder’s death. Banks don’t like this- when you lack capacity, your agent lacks capacity as well. If the bank doesn’t know that you lost capacity, they cannot be liable if your agent withdraws. Savings Account Trust: (Totten Trust) To create, open a bank account in your name in ―trust for somebody else.‖ When you die, the money in the account goes to the other person. It is basically a revocable POD account (which is how UPC sees it) Powell: In re Totten: 1. My name POD to Bob 2. My name as trustee for Bob- NY court held it was valid- Totten trusts- valid at CL, valid in FL, revocable, subject to creditors during life and death. If Bob predeceased me, his interest is automatically revoked, so Bob must survive. Tenancy By Entirety Account: Made for married couples. One spouse cannot withdraw any of the money unilaterally unless both names are on the account. Right of survivorship. Excellent creditor protection—one spouse’s creditors can only get at that spouse’s half.
53
Should have both signatures, but banks usually release money for one signature but the withdrawal is still property of both Presumption that an account held by two married people is a tenancy by entirety account, but can be rebutted by clear and convincing evidence to the contrary. Florida: Permits these only for husbands and wives.
Franklin v. Anna National Bank Account is a joint tenancy w/ right of survivorship. Bank account owner keeps switching the other persons name on it to whomever is giving him care at the time. Bank says he needs to come in and fill in proper paperwork when he dies. 3 objectives in putting someone else’s name on account: 1. joint account- A and B can both withdraw and the survivor of them owns the balance of the account - presumption of this - if married, presumption of joint account by the entirety 2. POD account- B cannot w/draw during A’s life, but B gets balance on A’s death 3. agency account- B can draw out of A’s account during A’s life but is not enetitled to the balance at death Issue: who is entitled to the balance at death? Hold: decedent’s attempts to change the account show his consistent view of the account as his own- money left in the account at his death should be the property of the estate. This was an agency account, not a joint account like his caretaker was asserting. Rule: some states says the paperwork tells who gets it, no extrinsic evidence, other states say they will permit EE if you can establish fraud, other states say EE allowed to show no intent to create a joint account.
54
VII. THE LAW OF TRUSTS: CREATION, TYPES AND CHARACTERISTICS [41, 42] GENERAL REQUIREMENTS INCLUDING INTENT Page 485-503 Chapter 8: Trusts: Creation and Characteristics SECTION A. INTRODUCTION 1. Background Trust: devise whereby a trustee manages property as a fiduciary for one or more beneficiaries. Trustee: holds legal title to the property, manages the trust and can sell trust property and replace it with property thought more desirable Beneficiaries hold equitable title, and are entitled to benefits flowing from the trustee’s management- payments from the trust income and sometimes from the trust corpus too Trust provides managerial intermediation- separating the benefits from burdens of ownership Private express trust: created gratuitously for the benefit of individual beneficiaries. 1. revocable trust- O retains the power to revoke the trust- avoids delays, costs, and publicity of probate 2. testamentary marital trust- H gives W a life estate to get a marital tax deduction (estate taxes post-poned until W’s death). o Don’t have to pay estate taxes on your wealth if you leave it to your spouse 3. trust for incompetent person 4. trust for minor- Ensures your kids cannot waste the money you leave to them; settlor can specify the age when the kids can collect o Protective trust 5. discretionary trust- trustee has absolute and sole discretion to pay the income or principle to beneficiaries as he sees fit. 2. The Parties to a Trust a. The Settlor: Creates the trust by delivering legal title of the trust property to the trustee. S imposes a duty upon T to the Bs Inter vivos trust: created during settlor’s life, which can be created in a o Self Declaration of trust- donor manifests intention to hold property in trust in a written declaration o Deed of trust- necessary if settlor is not the trustee, must deliver deed to trustee Testamentary trust: created by will Settlor may be both a trustee and a beneficiary o S can be T for B o S can have separate T for S as B o S can be and have T as T’s for S and other B’s o S can have co-T’s as B’s If T1 breaches the fiduciary duty, T2 as beneficiary can sue o CANNOT have the sole T being the sole B A trust relationship presupposed a duty owed by the T to the B’s Must be an enforceable duty from the trust b. The Trustee Can be single or multiple people (duties can be split), individuals, attorneys, family members, accountants, corporation, bank, may be settlor or a beneficiary. Every trust must have a trustee at all times, but a trust will not fail for want of a trustee. If the settlor doesn’t name a trustee, the court will appoint one. Vacancies in trusteeship occur all the time (such as when the trustee dies or if the trustee refuses the position). Well drafted wills will specify who is to become trustee if there is a vacancy. Trustees hold legal title to the trust property. Their legally enforceable duties…
55
o Manage the trust solely in the interests of the beneficiaries. o Preserve the property, make it productive, and sometime pay its income to the beneficiaries. Trusteeship entails: investment, administration, and distribution Trustees are held to a fiduciary standard of conduct: o Loyalty- administer the trust solely in the interest of the beneficiaries o Prudence- held to an objective standard of care o Subsidiary rules- impartiality between classes of beneficiaries (make wise and prudent investment decisions, keeping in mind the interests of the income beneficiaries and the remaindermen), keeping trust property separate from trustee’s own property, duty to inform and account to beneficiaries. Breach of Duty: Cannot delegate trust powers. If trustee mismanages the trust, he can be denied compensation, held personally liable, and removed as trustee by the court. if trustee has no duties- trust is said to be passive or dry and fails, beneficiaries acquire legal title Trustees’s personal creditors cannot get at the trust property. Once accepted, a trustee can only be released with consent of the beneficiaries or by a court order. o Uniform Trust Code modifies this to allow for resignation w/ 30 days notices to all interested parties
c. The Beneficiaries Holds equitable title to the property. Settlor can be a beneficiary, but not the sole beneficiary. (This would be outright ownership) A trustee can also be one of the beneficiaries, but not the sole beneficiairy Creates a present interest in the income, and a future interest of equity Remedies Against Trustee for Breach of Duty: Personal claim against the trustee for breach of trust, the same as creditors. If the property is given away by trustee, beneficiaries can get it back unless it has been bought by a bona fide purchaser for value. If trustee wrongly sells the property and buys new property, beneficiaries can enforce the trust on the new property. 3. A trust compared with a legal life estate Trusts are better than life estates. Life estates have many problems: (a) sale: life tenant has no power to sell the land in fee simple unless the instrument creating the life estate says so, (b) reinvestment of proceeds of sale: if the life tenant does sell the land (after getting a power of sale), courts look at the power of sale as a general power of appointment, which has serious estate tax disadvantages, (c) borrowing money: life tenant cannot mortgage the property (unless the remaindermen and reversioners all sign the mortgage), (d) leasing: can only rent the property if given the property to (because life tenant could die before the renter’s lease is up), (e) waste: cannot waste, (f) expenses: must pay taxes on the property and keep it in good repair, but only to the extent the income from the property covers those expenses, (g) creditors: if the life tenant owes money, his creditors can seize the life estate and sell it. (h) personalty versus realty: personal property often requires expert management (i) miscellaneous: no duty to insure the property (if it is insured and burns down, the life tenant can keep the insurance money and the remaindermen get nothing), trespassers may damages it, govt may exercise eminent domain, 3rd party may be injured on the premises 4. commercial uses of the trust Business trust: allows for the pooling of passive investment with professional managers o Mutual fund: take advantage of economies of scale, hire a professional investment advisor, and obtain a more diversified portfolio o Asset securitization: business loans are unsecured o Pension fund: managed by a professional trustee who is subject to a fiduciary obligation to beneficiary
56
SECTION B. CREATION OF A TRUST 1. INTENT to Create a trust Settlor must demonstrate intent to create a trust relationship: must want to separate legal title, impose a duty, and have the legal consequences of a trust. No ―magic‖ words to create a trust. Don’t even need to use the word ―trust.‖ Can simply say ―for the use and benefit‖ of another
Precatory Language: moral obligation unenforceable in court- ―To A, it is my wish and desire, (or I recommend, my fondest hope) that he looks after X and Y with this $1000.‖ These words are routinely construed not to be a trust—language does not bind A to do something (no legal duty), it merely obligates him (moral duty). Not an outright trust because it does not compel A. Precatory trusts- unenforceable dispositions of the sort X transfers $$ to X, it is my wish and desire that he use the money for the support of A and B. Is there a duty or not? Probably just precatory language of suggested use. Colton v. Colton- language could have been construed as precatory or with intent to make a trust, court said it was latter- Rule: each will must be construed in accordance with the language used in each particular case in light of all the circumstances Equitable Charge: When you devise property to somebody subject to the payment of money to another person. Not a trust. Creates a security interest in the transferred property; no fiduciary relationship. Debtor/creditor relationship, usually boils down to the applicability of fiduciary obligation FPC 737.111: if the trust is revocable, the testamentary aspects are void unless the trust is executed like a will
Lux v. Lux No fixed formula as to when a testamentary disposition should be classified as an outright gift or a trust. The result reached depends on the circumstances of each particular case. Asking for property to be maintained to the benefit of your grandchildren shows intent to put it in trust. Trust does not fail for want of trustee- court will appoint one Jimenez v. Lee Savings bond/deposit into account- for educational benefit of P. P’s dad, D took them out. Issue: was D a trustee of these (as P contends) or a custodian of these (as he contends). Custodian holds title under Uniform Transfers to Minors Act. Either way, beneficial interest is in his daughter. But if you have a trust relationship, D has a duty to periodically (every year) account for the use of this money to his daughter (P), while a custodian only has the duty to account at the end of the custodianship. If this is a custodianship, there is a 2 year window that P has to sue him when the custodianship is over- the statute runs whether he accounted or not. So this suit would be late because this was 2 years after her 18th birthday. But in a trust relationship, if you don’t account, the statute of limitations does not begin to run, so she can still file the suit. Hold: trust relationship- custodianships were still relatively new, less commonly used device Rule: Donors did not expressly direct D to hold the subject matter of the gift ―in trust‖ but this is not essential to create a trust relationship. It is enough if the transfer of the property is made with the intent to vest the beneficial ownership in a third person. Unless you unambiguously say it is a custodianship. Notes o Delivery of a gift need not a physical acceptance- a constructive or symbolic delivery will do Constructive delivery- gives the donee the means of obtaining the property such as a key. Symbolic delivery- gives the donee something symbolic of the object o Declaration of trust, unlike an absolute gift, does not require delivery since the settlor is also the trustee, and thus already has possession. In addition, a declaration of trust can be made orally (subject to statute of frauds). All that is necessary is that the donor manifest an intention to hold the property in trust.
57
[43] THE NECESSITY OF TRUST PROPERTY Page 508-518 A trust cannot exist without property in it (often called the res) The subject matter of the trust must be certain and identifiable. Trustee needs to know which property he is obligated to manage. Beneficiaries and court need to know what property they have an interest in If there is no certain and identifiable property, then you have no trust Hypo: A owes B 10k, can A declare himself trustee of the debt he owes B? Need to name identifiable property Need to have some sort of property to declare yourself trust of (land, stock, anything) Things that Qualify as Property: Money (as little as a penny), real property, any interest in property that may be transferred (contingent remainders, leasehold interests), royalties, life insurance policies, future profits to movies/plays/books, and future earnings from an existing contract. Things That Do Not Qualify as Property: Future profits from stocks, expectancies, future interests. FPC § 733.808: Death benefits (like individual and group life insurance policies, employee pension plan, annuities, and health/accident policies) are only made payable to the trustee at the time of the decedent’s death. Resulting trusts-equitable reversionary interest that arises by operation of law in 2 situations: 1. where an express trust fails or makes an incomplete disposition, or 2. where one person pays the purchase price for property and causes title to the property to be taken in the name of another person who is not a natural object of the bounty of the purchaser Unthank v. Rippstein Iva argued that Craft, after transferring all his property into the trust, had a resulting trust in the amount of his property not required to meet the payments to her (a resulting trust) but court said he did not have intent to create a trust, but just to make monthly gifts. Court will not admit it because although they are a holographic jurisdiction, the letter does not have the required testamentary intent. Iva says if its not a will, it was intended to be a declaration of trust, but there is no specific property. Her lawyers say his intent was to place all of his assets into the trust. Problem, because trusts cannot violate public policy- cannot create an inter vivos trust for others of all of your worldly assets because you leave yourself impoverished. But, this would be a lot of assets just to pay her 200$/month for 5 years. CL rule said if that you create it for a purpose and it is clearly accessible, the courts allow us to do something like that, and the excess remainder of the trust has a reversion to the settlor, called a resulting trust. Court says this are good arguments, but they don’t win- no intent to create a trust. Powell says this is wrong- for the same reason courts get class gift cases wrong. Most people don’t say they want a trust, they want a result. He wanted Iva to have $200/month, and if he died, he didn’t want this to be repudiated, so he wanted to bind his estate. He really intended a trust, he just didn’t know what to call it. If Iva had given any consideration, it would have been enforced as a trust. But the court says this is a gratuitious promise to make a gift. In TX every trust is revocable, unless you explicitly say it is irrevocable Brainard v. Commissioner Issue: whether the taxpayer’s 1927 declaration created a valid trust over the future 1928 profits. If the trust did not arise until after Brainard credited the 1928 profits on his books to the 4 beneficiaries, then those profits accrued to the taxpayer before the transfer in trust; hence, under the applicable tax law, those profits were taxable in 1928 to Brainard. If, however, the trust arose in December 1927 when the oral declaration was made, then the profits were taxable in 1928 to the beneficiaries. He didn’t report the profits he earned on the stock dealings, which the beneficiaries of the trust (wife, mother, child) should have reported it (this is outdated law) IRS says he should have reported it himself Hold: trust did not arise until after the profits were credited on the taxpayer’s books on the ground that there was no res at the time of the declaration of trust (Dec 1927). Future profits are not property until they’re earned. A trust arose in 1928 after the profits were earned because at that time Brainard reaffirmed his intent to have that trust bu
58
crediting the profits to the beneficiaries account in his ledger. If consideration is invoved, the trust doesn’t arise until 1928 when there is property- but then it automatically arises and you don’t need reaffirmation of intent. Rule: where there is no res at the time of a declaration of trust, the settlor must manifest a new his intent to create a trust when the res comes into being. During such intervening time, the taxpayer must be considered as a the sole owner of the profits and they were properly taxed to him as part of his income. HORNBOOK RULE: when a promise to create a trust of property to be received in the future is not supported by consideration, a trust arises when the property is received if BUT ONLY IF the settlor manifests his intention then (through words or conduct), and only then, to create a trust. If it was supported by consideration, once the property manifests, the trust AUTOMATICALLY arises and you do not need reaffirmation of intent. Speelman v. Pascal Issue: did the delivery of this paper constitute a valid complete present gift to the plaintiff by way of assignment of a share in future royalties when and if collected from the exhibition of the musical stage version and film version of ―Pygmalion‖? Hold: because the possibility of such a chose of action which the parties expected to ripen into reality and which did afterwards ripen into reality and that, therefore, the assignment created an equitable title which the courts would enforce. Rule: look to see as to whether there was a completed delivery of a kind appropriate to the subject property. *A future interest is a present property interest. The difference was in this case he held an exclusive license to produce this where as Brainiard didn’t Field v. Mayor of NY case is inconsistent with Brainard- able to assign profits from dealings that were not licenced So Speelman couldn’t be relying on Field case Powell says Speelmen is a gift case and Brainard is a trust case Powell also says that Pascal also did everything he could to deliver the property- if what he did didn’t work, then nothing would, and it would be against public policy. On the other hand, Brainard had alternatives Also, Speelman’s assignment was written, Brainard’s assignment was oral- so Speelman has evidence that the assignment was made, but how do we actually know Brainard made that oral statement in 1927 Powell thinks difference is Brainard is a tax case, Speelman is a basic property case- and the govt is concerned about retroactive manipulation of your affairs to minimize your income taxes. If this is true, the court mucked up trust law in its efforts to shore up tax policy. It would have been much better if the court had simply said, w/o addressing the Q of whether Brainard’s trust was valid under federal trust law, that is fine but will not be recognized for tax purposes. Grantor Trust Rules- p. 516- IRS Code- they tell us that whether or not you have a trust for estate law purposes, we will not recognized your trust for tax law purposes if it has 1+ of the following attributes in it: if it is taxed to the settlor instead of the beneficiaries, if your trust is revocable it is not honored for tax purposes, if you create an irrevocable trust but you are a beneficiary, it will not be honored for tax purposes. Notes, Problems and Questions Prevailing view is that a person can assign future earnings from an existing contract. Pr 2 p 516(a) no transfer because there’s been no delivery (b) valid- when you make a self declaration of trust, no delivery is required. You are settlor and trustee so it is meaningless to deliver to yourself. Valid even though O is making this self declaration, it doesn’t re-title the stock in the name of the trust (c) no good- this is Brainard- profits from next years stock dealings are not property (d) valid- if its property for gift purposes, its property for trust purposes
Note: Taxation of Grantor Trusts o creating a trust of future profits from stock trading to obtain an income tax advantage (as in Brainaird) is not available to a taxpayer today o grantor trusts: trusts in which the income is taxable to the settlor (grantor) because he has retained substantial control and is deemed by the Code to still be the owner of trust assets. Where the grantor has a reversionary interest and the value you ig at the inception of the trust exceeds 5%, the trust is a grantor trust.
59
Where the settlor or a nonadverse party either as trustee or in an individual capacity- is given discretionary power over income or principal exercisable without the consent of an adverse party, the trust is a grantor trust. Income from the trust is taxable to the settlor Exception if it is presently transferred to minor lineal descendant and settlor only takes a reversionary interest upon the death of that descendant under 21 Spousal attribution rule: a settlor is treated as holding any power or interest that is held by the settlor’s spouse if the spouse is living with the settlor at the time the property is transferred into trust. Key: except in the minor lineal descendant exception- when drafting an irrevocable trust for shifting income taxes on assets, do not leave a reversionary interest of any value in the settlor.
[44] THE NECESSITY OF BENEFICIARIES Page 518-521 A trust must have at least one ascertainable beneficiary (charitable trust does not need ascertainable beneficiary) Beneficiaries may be designated by class, but you must be able to ascertain the class. May be unborn or unascertained when the trust is created. Cannot be too unascertainable or they will fail (―friends‖ is not an ascertainable class). Courts need to know who the beneficiares are because they are the only ones with standing to sue. Trustee can decide the shares each beneficiary gets. If the beneficiaries are unascertainable, their shares are left to the trustee’s discretion. Private Trusts: Must know who specific beneficiaries are--can be children or lineal descendants and their children. When the settlor creates a private trust for family members, you don’t have standing anymore Charitable Trusts: Do not need to know who specific beneficiaries are. Must be made for a reasonably large and unidentifiable public group. Attorney General is charged with enforcing these which Powell doesn’t like because the AG is usually a political animal. The new FL trust code gives the settlor standing for charitable trusts FPC 732.808(1): making the trust beneficiary of a life insurance policy (but not the pour over clause) validates the trust
Clark v. Campbell Issue: whether the bequest for the benefit of the testator’s ―friends‖ must fail for the want of certainty of the beneficiaries. Hold: friends is a ―class‖ but it has no accepted statutory or other controlling limitations, so it fails Rule: where a gift is impressed with a trust ineffectively declared and incapable of taking effect because of the indefiniteness of the cestui que trust, the donee will hold the property in trust for the next taker under the will, or for the next of kin by way of a resulting trust. In this case court did not treat the will as creating a power of appointment because it is given to trustees. A power coupled with a trust must have trust principles apply. The holder of a power has the authority to act, but no duty to do so (whereas a trustee has a duty). This is the traditional rule. Rest, UTC and Florida Trust code overrule Clark though and will call this a power of appointment though. And if its not done w/in a reasonable amount of time, the power will be returned to the settlor’s estate. A private trust for an indefinite class of Bs can be given effect as a power of appointment. Note and Questions The test of validity for a class is: if the class of beneficiaries so described that some person might reasonably be said to answer the description, the power is valid. An appointment is invalid, however, if it cannot be determined whether the appointee answered the description. o Once the class descriptor itself has been ascertained, you can leave the amount of shares to be devised to the discretion of the appointer o Powell says what about an appointment? An authority, other than one inherent in property ownership to dispose of property
60
Every power has several players Creator (donor) Holder (donee) Objects (persons in whose favor the prop could be appointed to) Appointees (persons in whose favor the power is actually exercised, must be w/in the class of objects) Add in an appointment for W to have by will, and in default of exercise, to my descendants, per stirpes General power: permits the donee to appoint to herself, her estate, or the creditors of her either W has economic interest from the power you have given her Equated w/ ownership for tax purposes Non-general (special, limited) power: Donor restricted W/s authority to a group of persons who excludes herself, her estate, or the creditors of either Narrowed the class of permissible objects You’ve removed W’s economic stake Time Can be inter vivos- can appoint during life Can be testamentary- can appoint by will It is rare today to NOT have a power of appointment Usually given to trust beneficiaries to add flexibility Every discretionary power of a trustee is a power of appointment
Pets: In re Searight’s Estate Issue: is the testamentary bequest for the care of Trixie (a dog) valid in Ohioa) as a proper subject of a so-called honorary trust? b) as not being in violation of the rule against perpetuities? Hold: a) it is not unlawful-purpose is not capricious or illegal b) no because he only designated enough money to last for a few years (even though he indicated in his will it was for ―as long as the dog lives‖) which is less than the rule against perpetuities Notes: The main doctrinal impediments to providing at death for one’s pet or other domestic animal are 2: 1. pets are themselves property and hence ineligible to take under a will. An outright bequest to a pet is void. 2. pets do not qualify as a beneficiary whose existence can validate a trust Russell case Issue: How do you provide for an animal? 1. I leave my estate to Chester to take care of my dog. This is precatory- only suggestive, not legally binding. But what if Chester dies before the dog? 2. What about Chester as trustee for the care of my dog? Try to create a trust for the care of the dog- this does not work at CL because its not a valid trust because one of the requirement is you need to have at least one ascertainable human beneficiary. If it did work, would be a better arrangement because Chester has a duty to execute that trust the way it was intended. 3,. You can create an honorary trust- (1) care of animals, and (2) care of graves o CL says: void in many states for violating rule against perpetuities – skirt that by placing an outside duration of that trust. And, this is not a true trust- Chester cannot be sued to compel him to take care of that dog- no one has standing at CL to sue him, so its a lot like the precatory. It does eliminate Chester’s economic state. He is on his honor (a moral obligation) to take care of the dog. And the law gives her successors at death standing to look over Chester’s shoulder, and if he stops taking care of the dog, the court can take the money away from him and give it to her successors at death. Successors then get money, and dog goes to the pound.
61
o
Want to mix Chester’s interest with the dog’s interest. At CL, can nominate someone to enforce this trust. Trust continues until death of the last animal. Cannot provide for the offspring of existing pets. For the answer look at: a. instrument first b. state statute- sometimes this trumps the instrument c. common law- always has an answer
[45] WHEN MUST A TRUST BE IN WRITING Page 528-533 a. Oral Inter Vivos Trusts of Land Can make an oral trust of personal property. Cannot make an oral trust of real property because the Statute of Frauds applies. Inter vivos trusts of real property must be written and signed, unless (a) the beneficiary relied on the contract to his detriment, (b) it was an oral trust for gifts at the settlor’s death, or (c) it was an oral inter vivos trust for land. In the case of (c), if there exists extrinsic evidence of the testator’s intent, the court has 4 options… (1) Hear the extrinsic evidence and enforce the trust. (2) Refuse to hear the extrinsic evidence and adopt the status quo. (3) Impose a constructive trust- T will have to transfer the property outright to the intended beneficiary. (4) Impose a resulting trust/implied reversion (for O if he is still living, but if he is dead it will go at CL to his heirs and NOT his will beneficiaries)- Enter an order directing the beneficiary to transfer the property back to the testator. Can make an oral trust for your own benefit—transfer money or property to somebody (usually to avoid creditors, spouses, or taxes), making that person promise to reconvey the property back to you. Many times, the person will later refuse to, creating litigation. Court will impose a constructive trust with you as beneficiary, not settlor.
Ineffective Gifts: Courts will not interpret an ineffective gift as an express trust. If the donee relied on getting the gift and the reliance was to his detriment, a court of equity may compel the donor to make the gift. Donor holds the property in a constructive trust for the donee until he makes the gift. If someone makes an ineffective gift of property and then dies thinking the gift was effective, if the donee is someone close to the person (like a spouse or child), the donee can usually get a court of equity to complete the gift, even against the heirs. A constructive trust is created. Future Interests and Trusts: If a promise to create a trust with property to be received in the future is gratuitous (not supported by consideration), a trust arises only when the profits are received or when the property comes into existence, but only if the settlor reaffirms his intent (implicit or explicit) at that point to have a trust. If the promise to hold profits in the future in a trust is supported by consideration, the trust automatically attaches as soon as the property comes into existence. Power of Appointment: Does not need ascertainable beneficiaries, unlike trusts. No legal duty to perform (non-fiduciary), just authority and discretion to act. Test of Validity: If the class of beneficiaries is described so that some person out there might reasonably be said to meet the description, the power is valid. Majority Rule: If a trust fails, you cannot call it a power of appointment instead. Restatement of Trusts: (minority rule) Allows you to classify a failed trust as a power of appointment. Restatement doesn’t think a trust should fail simply because of a technicality.
62
Hieble v. Hieble Mom dying of cancer outright deeds her home to her son and daughter, but they have an oral understanding that if she doesn’t die from the cancer, she may request the return of the property and they will return it to her. Court sees this as mom as O, son and daughter as Trustees, and mom as Beneficiary. Mom and daughter have a falling out, she transfers the property, so now son is the only Trustee. Mom is worried son is going to marry, doesn’t like that, asks son to transfer property back to her, he doesn’t. He is trying to hide behind the statute of Frauds, saying the deed is effective on its face, but you can make oral conveyances of personal property in most states. Rule: where the owner of an interest in land transfers it inter vivos to another in trust for the transferor, but no memorandum properly evidencing the intention to create a trust is signed, as required by the Statute of Frauds, and the transferee refuses to perform the trust, the transferee holds the interest upon a constructive trust for the transferor if…the transferee at the time of the transfer was in a confidential relation to the transferor. Can avoid the statuts quo if 1 trustee and settlor have a confidential relationship, AND 2 T is repudiating by breaching that confidential relationship Confidential relationship: parent-child, brother-sister, etc. Beyond that, mom was ill at this time and had let her guard down, she had had recent surgery and was fearful of death, had received repeated assurances from son. If there is no confidential relationship, if there is a fraud in the inducement and T never intended to perform, a constructive trust will be imposed. Notes and Question Pappas v. Pappas Hold: a constructive trust could not be imposed upon George because Andrew, in misrepresenting the nature of the transfer in the divorce action, had perpetrated a fraud on the court and therefore did not have ―clean hands‖ b. Oral Trusts for Disposition at Death Olliffe v. Wells Rule: A trust not sufficiently declared on the face of the will cannot therefore be set up by extrinsic evidence to defeat the rights of the heirs at law or next of kin. Notes and Problems 1. Olliffe v. Wells is the origin of the distinction b/t a secret and semisecret trust. Secret Trust: When a will does not indicate at all that a trust has been made. If extrinsic evidence exists indicating that the trustee promised the settlor to use the money to benefit other people, the court will admit the evidence so the trustee cannot pocket the money—he must use it for the other people. If the intended beneficiaries can prove by c&c evidence that the trustee agreed to serve as trustee, the court will impose a constructive trust. Don’t have to show breach of confidential relationship. Don’t have to show fraud in the inducement. All you have to show by c&c standard was that T agreed to be trustee for B. Semi-Secret Trust: When a will indicates that a trust has been made but does not identify the beneficiaries. Extrinsic evidence showing that the trustee was to use the money for the benefit of others is not needed—the will indicates it. However, the trust fails because no beneficiaries are named!!! This is the overwhelming majority rule in the US. Restatement: says that a constructive trust for the beneficiary should be imposed in both cases FL quirk: FPC 737.111: directed at the portions of the trust that have testamentary aspects- if the oral trust has testamentary aspects, those aspects are void because the trust is not reduced to a writing and executed like a will. Even if the writing satisfies the statute o frauds for land, if that trust has testamentary aspects, compliance w/ the statute of frauds is not enough- need to comply w/ the statute of wills. [26-28] REVOCABLE TRUSTS Page 295-321(Chapter 5) SECTION C: REVOCABLE INTER VIVOS TRUSTS 1. Introduction
63
o o o
Revocable inter vivos trust is most flexible of all will substitutes b/c the donor can draft both the dispositive and the administrative provisions precisely to the donor’s liking The UPC and most states will deem a trust revocable unless the trust instrument specifically says it is irrevocable. Typical inter vivos trust involving a deed of trust, the creator of the trust (settlor) transfers legal title to property to another person as trustee pursuant to a writing in which the settlor retains the power to revoke, alter, or amend the trust and the right to trust income during lifetime. On the settlor’s death, the trust assets are to be distributed to or held in further trust for other beneficiaries. Creation: Created during settlor’s life in 2 ways… Deed of Trust: When settlor transfers the legal title to real property or money to another person as trustee pursuant to a writing. Settlor is not also trustee. Deed of trust or trust property must be delivered to trustee for trust to take effect. Three types of delivery… Actual Delivery Constructive Delivery: When you deliver something that gives the donee access to the subject matter of the gift, and act (or declare) like you intend to give that person dominion over the property. (keys to a car or safety deposit box) Symbolic Delivery: When we create an artificial symbol of the gift and deliver that instead of the gift. Declaration of Trust: Settlor self-declares that he is holding property in trust for the benefit of himself during his lifetime, with the remainder to pass to others at his death. Thus, settlor is also trustee. Does not require delivery nor deed of gift.
Revocation Rules: If the settlor reserves the power to revoke his trust only in a particular manner or under particular circumstances, he can revoke it only in that manner or under those circumstances. Undue Influence: Settlor has an absolute right to revoke as long as she is competent; even if someone is exerting undue influence on her to do so. In Florida and Mass., creditors can force a settlor to revoke his revocable trust to pay his debts.
Farkas v. Williams Dr. Farkas bought mutual funds- he titled in his name as trustee in a living trust. Declaration of trust: revocable, amendable, and Farkas is the sole trustee. He retained the right to any dividends for himself. He retained the right to sell shares and provided that the proceeds of any sale belonged to only him. He retained the right to change the beneficiaries of the trust (when he made the trust, Williams, an employee was the sole beneficiary). Provides that Williams has to survive Farkas to receive the property. The court says (p. 301) - if it is a testamentary disposition, this is invalid b/c it doesn’t have the will formalities as required - inter vivos conveyances are not w/in the statute of wills though - it is possible to clothe a testamentary transfer in inter vivos form, but if so, it STILL has to have will formalities Issues: 1. was there a present transfer to Williams now? (if so- intervivos)- MUST find SOME devise that Williams got during life. 2. whether the retention of rights by Farkas are equivalent to what he would have had if the kept the property and left it in a will to Williams? If no interest passed to Williams during life, then it is a testamentary conveyance So is it an inter vivos transfer or does it have testamentary intent? Hold: it looks like Farkas hadn’t changed his rights at all, he kept all control and proceeds. This is a will in inter vivos clothing and thus is still a will and must be properly executed as a will. But all of these powers that Farkas gets are inherent in the power to revoke. Court looks for some right Williams got during life: Williams’s right to sue Farkas’s
64
estate if he gives them some of his property and then dies, technically breaching the trust. Court says this sliver of a right is enough to qualify it as an inter vivos trust. Powell says if this issue was actually presented to the court, they would say there was a de facto revocation. Rule: 2 tests: 1. whether beneficiary acquired a present interest when the trust was created 2. whether settlor retained too much control over the trust assets A revocable inter vivos trust should be allowed to have testamentary effect despite its noncompliance w/ the Wills Act formalities if it is valid under the law of trusts. Powell says if this thing has use to people, it ought to be permitted- there is no significant inter vivos conveyance Powell: revocable inter vivos trust is same as living trust. o 2 sets of provisions: 1. what Howard gets during his life- proceeds and rights 2. testamentary aspects of the trust at my death, here is what happens at my death if Wendy survives it all goes to her, if not then it all goes to kids, but if one is under 25 then continue the trust to the benefit of all kids and once the youngest is 25 they split it equally not all of H’s trust will be put in the trust when its created, will be put in his will and at his death add H’s probate estate to his trust if one of the children is under the age of 25 o life insurance and pension plan 1. if one of the kids is under 25 we probably want that to go to the trust 2. we name as beneficiart of the lif ins policy the trustee of the trust 3. ―to W if she is dead then to kids but if one is under 25 then to trustee of my revocable living trust‖ o costs 1. costs more to implement a living trust then a will or a testamentary trust 2. assets in trust escape administration in FL: costs of running assets through your probate estate is 1/3 more than the cost of running them through your living trust o guardianship 1. default rule for legal incapacity is guardianship this is just as bad as guardianship for kids his family will have to have him declared legally incompetenet money in trust is managed by trustee NOT guardian 2. could give agent power of attorney if H actually loses legal capacity then agent also loses capacity law permits us to make a durable power of attorney keeps the capacity of the agent until a court declares incompetence so once they become incompetent then act quickly and move the assets to the trust until someone brings him to court durable power of appointment- have to draft this- $$ o FL 1. Hanson v. Denklen- went to US SC- validates the Farkas kind of trust 2. SC said FL did not have jurisdiction over the trust 3. but having taken jurisdiction they held that the trust was testamentary conveyance and invalid 4. created the concern in FL that it was possible to keep so much power that the trust becomes testamentary 5. the implication is that even if you meet the formalities it will be treated as a will and go into administration 6. FPC 689.075: purpose of this statute is to overrule Hanson and validate revocable living trusts You can retain all of the power and it remains an inter vivos conveyance, and prop in that trust will skip administration in the state But if you serve as sole trustee- you must execute it w/ same formalities of a will- it remains a trust, just must use testamentary formalities g: creates 2 alternatives tests of validity 1. if its valid under the laws where its executed
65
2. if its executed under formalities of will in FL- trusts of personal prop don’t have to be executed like a will and therefore this doesn’t have to be executed like a will o FL SC just wrote G right out of there- unambiguous on its face o G was designed to be a full faith and credit provision o So legislature enacted FPC 737.111: execution requirements for express trusts Testamentary aspects of a trust are invalid unless executed with the formalities of a will Testamentary aspects are defined in (4) The ―at death‖ provisions This applies to any trust If a court puts a judgment in a trust then it must also meet the requirements of a will, witnesses and all that
Express Trusts: FPC § 737.111: Execution Requirements for Express Trusts… (1) Testamentary aspects of a trust are invalid unless executed with all the formalities of a will. (2) Full Faith and Credit Clause: If you execute a trust in another jurisdiction that doesn’t require it to be executed like a will, jurisdictions that do will still honor it. (3) Testamentary aspects of an amendment to a trust are invalid unless executed with all the formalities of a will. (4) ―Testamentary Aspects‖ means those provisions of the trust that dispose of the trust property on the death of the settlor other than to the settlor’s estate. Farkas Rule: When you make a trust, if you do not pass interests to your beneficiaries before you die, the intended trust will be deemed a testamentary trust, not an inter vivos trust, and it will be held invalid because it does not comply with the statute on wills. An inter vivos trust is only valid if the settlor transfers interest to someone else before he dies. Florida’s Farkas Rule: (FPC § 689.075) An otherwise valid written trust shall not be deemed invalid or deemed an attempted testamentary disposition for any of the following reasons because the settlor… (a) Has the right to revoke, amend, alter, or modify the trust in whole or in part. (b) Has the power to create a deed or will appointing the people/organizations that the income or principle will be paid to. (c) Has the power to add to or withdraw from the trust at any time. (d) Has the power to remove the trustee(s) and appoint a new one. (e) Has the power to control the trustee(s) in the administration of the trust. (f) Retained the right to receive all or part of the income of the trust during his life. (g) Is or becomes the sole trustee.
Notes and Problem: 1. trust is mgmt relation whereby the trustee manages prop for the benefit of 1+ beneficiaries o Trustee is held to a fiduciary standard of conduct o Trustee can be one of the beneficiaries, but not the sole beneficiary 2. two tests in Farkas 3. Estate of Brenner: where an individual manifests an intention to create a trust in prop to be acquired in the future, and thereafter confirms this intent by taking the steps necessary to transfer the property to the trust, the prop so transferred becomes subject to the terms of the trust. Powell says we do not know if trust can be revoked by physical act. When the trust specifies a method of revocation, that method is the exclusive method. In re estate and trust of Pilafas
66
Issue: whether the subsidiary law of wills should be applied to revocable inter vivos trusts Hold: provisions of decedent’s inter vivos trust transferred present remainder interests to the trust beneficiaries who are entitled to insist on full compliance w/ the terms of the trust instrument New FL trust code will say that if you specify a method in the instrument, you must substantially comply with it. But if you don’t, then any clear manifestation to revoke works. What would happen if Pilafas didn’t amend the trust after the divorce and he did not revoke anything? On the probate side the will stuff will be revoked w/ regard to the spouse’s share What about the trust You cannot revoke your revocable inter vivos trust by physical act if the trust specifies the method of revocation and you do not comply with that. Here it was a written instrument delivered to the trustee. Leaves open the question of whether you can revoke by physical act if the trust does not give a way to revoke. Horrible position to leave your client when the can revoke their trust by physical act. Creates the possibility of the trust being revoked behind the trustee’s back. Potential liability for actions taken under belief that the trust is good when it is no longer good. Should specify a methodology in the instrument. State Street Bank & Trust Co. v. Reiser Issue: are trust assets reachable by the bank after settlor’s death? Hold: yes- violates public policy to have an estate to live on but not an estate to pay your debts with Rule: where a person places prop in trust and reserves the right to amend and revoke, or to direct disposition of principal and income, the settlor’s creditors my reach in assets owned by the trust to settle his debts not covered by his estate Powell: when you try to create a trust for yourself, 2 rules: 1. maximum invasion rule: if you create a trust and you give the trustee the authority to distribute property from that trust back to you, your creditors can force the trustee to exercise that authority to the max. - law in most jurisdictions, and in FL where it is specifically addressed by statute: if there is a shortfall in the probate estate, personal rep certifies that amount to the trustee and then he has duty to distribute assets in that amount to the probate estate
Maximum Amount Rule: When you create an inter vivos trust for your own benefit, your creditors have access to the maximum amount which the trustee, under the terms of the trust, can distribute to you. To avoid this rule, you cannot be the permissable beneficiary of the trust. To escape creditors, make the trust for someone else, such as your spouse (but not you and your spouse). Public Policy: You should not be able to put your assets in trust for your own benefit so your creditors cannot get at them. Fraudulent Transfer Rule: Transfers and trusts made with the specific intent of defeating known creditors (or those looming on the horizon) can be set aside. When you place property in trust and you reserve the right to amend, revoke, and take the income or principle, after you die, your creditors can use the trust money to pay off your debts to the extent that your estate won’t cover them, but only the trust money you had control over at the time of your death. This is a creditor’s final remedy—they should not dip into trust funds unless debts cannot be satisfied by the decedent’s other assets.
2. if you don’t give trustee authority power to distribute prop back to you, but keep the right to revoke- Rest 2nd of trusts says in the absence of a state statute, creditors have no rights because a power to revoke is not a property interests. But Rest 3rd of trusts says if you keep the power to revoke the trust, your creditors can force you to revoke the trust to reach the property to satisfy you debts during life- accepted by Uniform Trust Code - law in most jurisdictions today, and in FL Problem with doing this judicially instead of legislatively- only solves one case
67
Probate assets are used first to settle your claim, when they are insufficient to pay off creditors claims and administration, personal rep has to certify the amount unsatisfied to the trustee and trustee has a duty to notice the personal rep that the trust exists. Taxes that you owe will be the same whether you keep your money to yourself or put some in the trust- you do not alter your tax bill at your death by using an inter vivos trust. FPC § 733.808: Death benefits of any kind may be made payable to the trustee under a trust agreement or declaration of trust not in existence at the time of the death of the holder. (Authorizes beneficiary designation.) Death benefits, unless paid to the personal representative, shall not be deemed to be part of the decedent’s estate and shall not be subject to any obligation to pay the expenses of the administration and obligations of the decedent’s estate or for contribution required from a trust to any greater extent than if the proceeds were payable directly to the beneficiaries named in the trust. Notes and Problems 2. life ins proceeds or retirement benefits are usually exempt from creditors if paid to spouse/child, same with savings bonds w/ payable on death provisions and joint tenancy, but UPC §6-215 allows them to reach payable on death provisions if probate is insufficient
2. Pour-Over Wills o Pour over will- when O wants to merge his probate assets into an inter vivos trust at his death o Incorporation by reference- requires that the trust instrument be in existence at the time the will is executed o Doctrine of independent significance- requires that the inter vivos trust have some property transferred to it during life o Make sure the life insurance is covered by the same scheme
Pour-Over Wills: The rule that a trust cannot dispose of property acquired after the trust is executed which is not transferred to the trust can be circumvented by executing a will pouring over after-acquired property into the trust. Creation: Create a revocable inter vivos trust with X as trustee. Transfer property to X. Execute a will devising the residue of your estate to X, as trustee, to hold under the terms of the inter vivos trust. This puts your probate assets into the trust upon your death, avoiding probate. Theories for Validating Pour-Over Wills: Incorporation by Reference: A will can incorporate by reference a trust instrument in existence at the time the will is executed. Requires that the trust instrument be in existence at the time the will is executed. Independent Significance: A will may dispose of property by referring to some act that has significance apart from disposing of probate assets—by reference to an inter vivos trust that disposes of assets transferred to the trust during life. Requires that some property be transferred to it during life. UPC § 2-511: Uniform Testamentary Additions to Trusts Act (adopted by most states, including Florida). Permits a will to pour-over probate assets into an inter vivos trust as amended on the date of death. The initial trust must exist when we execute the will or must be executed concurrently with the will. You cannot use this if you are going to create the trust in the future. Basically allows a pour-over to a trust to be created after the will is executed. FPC § 732.513(1): Validates pour over clauses even though the only propery is the expectancy of the pour over clause itself even though the only property is the expectancy is the pour over clause itself. Cures the rule that the pour over clause fails if the trust fails- needs to have property, not just the mere expectancy
68
UPC §2-511 Testamentary Additions to Trusts Questions, problem and note 3. a revocable trust can dispose only of property transferred to the trust during life, and a settlor cannot transfer to the trust property he does not have Clymer v. Mayo Facts: under her new will, the bulk of her estate was to pour over into the new revocable trust of which her husband was beneficiary. Then they divorced. Issue: was H’s interest in the trust revoked as a result of the divorce (did the will statute apply to her inter vivos revocable trust)? Does Mass apply the probate statute that would have written him out of her will on divorce to the revocable inter vivos trust. Hold: yes- legislative intent is that a divorced spouse should not take under a revocable trust executed in these circumstances. FL has statute that addresses this: FPC 737.106- divorce revokes all provisions for an ex-spouse and a decedent’s inter vivos trust. The rest of the trust is valid though. Only provisions regarding ex-spouse are struck. Powell says you need to have some property in the trust for it to be valid- this trust in this case did not have any property in it, you cant pour over into it then- it passes by intestacy. Court says you are wrong on 2 counts: 1. Mass and almost every other state will say that a beneficiary of a life insurance or other contractual has property interest in that policy right now. So if you are beneficiary, that person is giving you something right now. But he can change his mind, so it is not vested, but it IS an interest in a present contract. So when this person made a beneficiary, he gave the trust property to make it valid trust. Real reason for this is that a contrary rule would render all life insurance policies testamentary,. Precise issues that Farkas was grappling with- do we see a conveyance TODAY? If we don’t life in policies are testamentary and would be invalid unless executed w/ formalities of a will and make it part of the probate estate, so that bad. 2. pour over clause- beneficiary under a will has no property interest in the future possibility of getting stuff - Powell says: uniform testamentary additions to trust act: FPC 732.513- purpose is to insure that the pour over clause is valid if you executed the trust before the will - there is a hidden affect: d: because only res is the possible expectance is a divorce under a will, changes from CL which says this tether alone will continue to validate the trust. Notes and Problem: 1. where a settlor names the trustee of her inter vivos trust as the beneficiary of her life ins policy by does not add any other funds or assets to the trust, the inter vivos is called an unfunded life insurance trust. If the settlor adds other assets to the inter vivos trust, it is called a funder inter vivos trust. 2. revocation by divorce: deemed to have predeceased the settlor - UPC §2-804 stretches it to these will substitutes but is limited by Egelhoff v. Egelhoff which holds that fed law preempts the applicability of state revocation-on-divorce states to federally regulated pension benefits.
Life Insurance Trusts: Unfunded Life Insurance Trust: When a settlor names the trustee of her inter vivos trust the beneficiary of her life insurance policy, but does not add any other funds or assets to the trust. The property is the trustee’s contingent right to receive the proceeds of the policy. Funded Inter Vivos Trust: When other assets are added to the life insurance policy. You can name the beneficiary of your life insurance policy the same person who is the trustee of your trust. The trustee will not collect the policy until you die. Conceptually, this is not an inter vivos conveyance to the trustee because the trustee won’t exist until you die.
69
Empty Trusts: If a trust becomes empty, it evaporates. To avoid this, you could staple a $1 to the trust instrument, that way it has some money in it no matter what. But under the FPC and UPC, it is not even necessary to do that much.
Incapacity: If a person becomes incapacitated before he has funded his trust, a guardian can be appointed to fund the trust. Guardians are not allowed to create or amend a trust or write a will, but they are allowed to fund a trust already created. Florida law allows this, but not all states.
3. Use of Revocable Trusts (living trusts) in Estate Planning a. Introduction o Revocable trust can be created by a declaration of trust (settlor is trustee), or by a deed of trust (3rd party is trustee) b. Consequences During Life of Settlor 1. property mgmt by fiduciary- 3rd party trustee may be selected to manage a funded revocable trust 2. keeping title clear- keeps separate and apart property that a husband or wife or both want not to be commingled with their other assets 3. income and gift taxes- taxable to the settlor 4. dealing with incompetency- co-trustee can act alone if settlor becomes incompetent o Question: what provisions would you make for determining when the settlor is incompetent? o Durable power of attorney
Advantages During Settlor’s Life: Settlor can appoint a third party trustee so he doesn’t have to manage his property himself. Can evaluate the trustee’s performance and appoint a new one if not satisfied. Allows settlor to draft dispositive and adminstrative provisions exactly as he wants. Helps husbands and wives keep separate property apart from their jointly owned property. Can be used to plan for the settlor’s incapacity. Disadvantages During Settlor’s Life: May make sales and mortgages of trust property more difficult. Banks may want to see the trust instrument to make sure the settlor can indeed enter into the transaction. No federal tax advantages in creating a revocable trust—the IRS treats the settlor as if he still owns the property in the trust, so he is taxed on it. Trusts are more expensive to create than wills.
c. Consequences at Death of Settlor: Avoidance of Probate 1. costs-smaller than those dealing w/ probate because legal title passes to trustee 2. delays- income and principal can be disbursed to the beneficiaries much more quickly 3. creditors- normal statute of limitations applies (as opposed to short term for probate) 4. publicity- inter vivos trust is not recorded in a public place, secrecy 5. ancillary probate- land can be transferred inter vivos, avoids probate b/c passes to trustee during O’s life 6. avoiding restrictions protecting family members- elective share does not extend to revocable trusts created by decedent spouse
Advantages After Settlor’s Death: Can act as a will (designate guardian for children, name personal representative, take care of ―housekeeping‖ stuff).
70
Avoids costs of probate (court and lawyer costs). Avoids delays of probate—assets are passed directly to the named beneficiaries upon the settlor’s death. Avoids publicity of probate—trusts are not made public like wills are. Thus, nobody can find out what assets wealthy people have and steal from them or kidnap them for ransom. Not subject to gift taxes. You can fund revocable trusts to keep a spouse from getting your property under the elective share. Even if your state allows a spouse to take from a trust under the elective share, you can fund the trust in a state that doesn’t allow that. You can also use a trust to put assets beyond the reach of an illegitimate child you don’t want to mention in your will. Disadvantages After Settlor’s Death: The law of trusts is not as settled as the law of wills. Can be contested for lack of mental capacity and undue influence. But it is more difficult to set aside a trust on these grounds than a will.
Types of Trusts: Testamentary Trust: When title is delivered in settlor’s will. Settlor cannot also be trustee. Private Express Trust: Gratuitously created for the benefit of individual beneficiaries. Marital Trust: Helps surviving spouse escape paying certain taxes on the money in the trust. Trusts for Incompetents Trusts for Minors: Ensures your kids cannot waste the money you leave to them; settlor can specify the age when the kids can collect. Dynasty Trust: Preserves family capital for future generations. Eliminates/reduces estate and generationskipping transfer taxes at the death of future generations. Duration is usually controlled by the Rule Against Perpetuities (extends 360 years in Florida). Only made by very wealthy people. Irrevocable Life Insurance Trust: Tax shelter—helps beneficiary of a life insurance policy escape paying certain taxes on the money. Asset Protection Trust: Doctors and businessman put their money in a trust so creditors cannot get it if they commit malpractice beyond the limits of their insurance. Ensures they will not get wiped out if they are negligence. Not entirely legal, so they are mostly made in foreign countries. Passive Trust: A trust where the trustee has no duties to perform. There is no reason to have this type of trust, so it fails. If it fails, beneficiaries acquire legal title to the property. Honorary Trust: Not a true trust, trustee’s duties are morally obligatory, but not legally enforceable. If trustee violates the terms, someone else with standing can sue, and if they win, they get the trust money free of responsibility. Grantor Trust: If settlor makes a trust for 5 years with income payable to someone else during that time but the settlor still gets complete control over the principle and gets a reversion after the 5 years, the court will hold that the settlor is the owner and can be taxed on the income. FPC § 732.116: True trust for pets alive at the time the trust is created (pet’s offspring not included). Testator names a successor. Trustee uses money to care for the pet, when it dies, the money goes to the successor. If the court thinks the amount left in the trust is too large for the care of the pet, the court removes the excess money and gives it to the successor now. Resulting Trust: Arises by operation of law when an express trust fails or makes an incomplete gift. Statute of Frauds does not apply. No traditional fiduciary relationship—trustee doesn’t hold and manage property for the beneficiary, instead must reconvey the property to the beneficial owner upon demand. Constructive Trust: Arises by operation of law—flexible remedy imposed to prevent unjust enrichment. When property is acquired under circumstances that the holder of the legal title cannot in good conscience keep it, equity converts him into a trustee with a duty to convey the property to someone else because keeping it would be wrong. Happens when someone obtains an inheritance through fraud and when someone breaches a contract not to revoke a will.
71
[46] RIGHTS OF BENEFICIARIES TO DISTRIBUTIONS Page 533-543
Mandatory Trust: Settlor must decide how often the distribution will occur (monthly, yearly). Trustee must distribute all the income. Beneficiaries have a right to the income from the property in the trust in equal shares. If the trustee won’t distribute, the beneficiaries can take him to court. Discretionary Trust: Discretion: Trustee has discretion over payment of either the income, the principal, or both. A trustee’s discretion is never absolute! Enforceable duty to inquire into the needs of each beneficiary—must do more than tell the beneficiary to contact them if he needs money. However, if the language of the trust instrument indicates the trustee has ―sole‖ or ―uncontrolled‖ discretion, courts are hesitant to limit that power. Courts examine the motive, good faith, and reasonableness of the trustee’s decision not to distribute. Standard: Always look at the STANDARD associated with the trust to determine what the trustee’s discretion is!!! (―for support and maintenance‖) Stricter standard = More court supervision of trustee Lesser standard = Less court supervision of trustee If there is a strict standard, the beneficiary can sometimes force distributions out of the trust . Extended discretion: if the trustee has simple discretion unqualified by adjectives such as sole, absolute, uncontrolled, then courts will not substitute their judgment for that of the trustee so long as the trustee acts not only in good faith and from proper motives, but also within the bounds of a reasonable judgment. No language, however strong, will entirely remove any power held in trust from the reach of a court of equity, Subjective standard: emphasizes the trustee’s good faith and proper motives and dispenses w/ the requirement of reasonableness Other courts apply a reasonableness test rd UTC §814 and Rest 3 §50 comment c both provide that these adjectives are not interpreted literally as well Different Needs: You should set up a discretionary trust when the beneficiaries have different needs. That way the trustee can meet those needs, using discretion to distribute different shares to the beneficiaries. If the beneficiary quits his job just to get more money from the trust, the trustee will argue that he doesn’t have to distribute more money because the beneficiary created the need. Surplus Income: If more income is generated in a year than the beneficiaries need, the trustee has discretion not to distribute out the extra income, and instead roll it over onto the principal. Additional Resources: Trustees cannot take a beneficiary’s other resources into account when distributing their share unless the trust instrument specifically says so (low standard). Courts presume the settlor intended the beneficiaries to receive support from the trust regardless of their other resources. Limitations on Liability: Can the settlor include a provision (exculpatory or exoneration clause) relieving the trustee from liability for performing his trustee duties poorly? Insertion of such clauses looks like undue influence at work, so courts look at 6 factors… (1) Whether the trustee, before making the trust, had a fiduciary relationship to the settlor. (2) Whether the trust instrument was drawn by the trustee or someone acting on his behalf. (3) Whether the settlor had independent advice about the provisions of the trust instrument. (4) The experience, knowledge, and sophistication of the settlor. (5) Whether inserting the clause was due to undue influence or other improper conduct. (6) The extent and reasonableness of the clause. Usually the line is drawn at bad faith, reckless indifference, and intentional or willful neglect UTC says that it is invalid unless the trustee proves it is fair under the circumstances and that its existence and contents were adequately communicated to the settlor.
72
Mandatory Arbitration Clauses: do not preven beneficiary from bring suit against the trustee in court Trustor’s right to reserve power over trust administration matters is not absolute and a trustor of an inter vivos trust may not unilaterally strip trust beneficiaries of their right to access the courts absent their agreement. NB: If a beneficiary asks the trustee for an accounting, the statute of limitations runs once the court has approved the accounting. If they don’t approve it, the clock doesn’t run. Support trust: if trustee’s discretion is limited by an ascertainable support standard Discretionary support trust: combines an explicit statement of discretion with a stated support standard
Hypo: 100K in trust to distribute or accumulate or spray the income or principal to A for life, remainder to B These words expand the trustee’s discretion You can limit it by saying ―distribute it for the support of A, B, and C‖- so the trust money can only be used for support You can say for ―health, support, maintenance, and education‖- discretion is left to the trustee to decide what support, maintenance are, it is a ―station in life test‖ but also is an ascertainable standard, and on the fringes, the courts will second guess the trustee. You can say for the beneficiary’s ―benefit‖- pretty much every distribution is for the beneficiary’s benefit You can say for the beneficiary’s ―happiness, comfort, etc‖- the trustee’s decision to distribute or not to distribute will not be second guess by the court provided T acts honestly in good faith, and with proper motives (their fee is a function of the size of the trust- improper motive) All must be within the bounds of reasonable judgment within the trustee’s discretion You can state principles that these factors are in the absolute control of the trustee- this keeps the court out (but you cannot really have a trust with complete and absolute control of the trustee because for a trust to work, the trustee has to have an enforceable duty that the court can intervene in- it would eliminate the standard of reasonableness.)- FL courts say you must not only have good faith but you must not be arbitrary and capricious. Beneficiary can sue to have trustee removed, but court will just order the trustee to do what he is supposed to do. Do you take B’s other resources into account before you distribute trust assets? Rest 2nd: if the instrument is silent- the presumption is the settlor wanted to provide the B with support whether or not the B could support herself Rest 3rd: creates a slight presumption you are to take into account B’s other resources Could cause a problem with the remaindermen too, if you’ve been distributing to the B when the B did not need it. Trustee can be sued- because at CL, a breach of trust is a breach of trust. You can write in a provision to relieve the T of liability if he reasonably relies on the B’s statements about support to him. What about the happiness, etc. standard? Usually, courts will not substitute their judgment for the trustee’s If they find the trustee is being unreasonable, they will remove him though Corporate trust companies Knee jerk reaction of them is not to distribute if there is any question about whether to distribute- because the B’s remedy would reach into their pocket to replenish the trust from their assets. They want exculpation clause too (except for intentional wrongs, decisions made in bad faith which can never be exculpated out of) Marsman v Nasca Issue: does a trustee, holding discretionary power to pay principal for the ―comfortable support and maintenance‖ of a beneficiary, have a duty to inquire into the financial resources of that beneficiary to recognize his needs? If so, what is the remedy for such failure? Hold: the trustee was under a duty to inquire into the beneficiary’s needs and circumstances, not just ask B why he needed extra money- that scared him and made him not want to ask for any more money. Powell says T has duty to inquire and periodically assess B’s status, and come up with a plan to meet their needs- not just wait for B to ask for money and then determine whether to give it or not-no ―squeaky wheel get’s the oil‖ type analysis allowed.
73
Issue: can trustee be exculpated for liability? Hold: in this case yes because there was no evidence that the insertion of the clause was an abuse of the trustee’s fiduciary relationship w/ the settlor at the time of drawing her will Powell says we have an ascertainable standard- she has broadened the discretion to give T absolute control and discretion of distributing the trust income and principal to the B. Remedies for the breach: Can you get the house back for Cappy’s estate and give it to Margaret (his 2nd W after 1st W died)- no, because Richard (son) is protected as a bonafide purchaser If T breaches fiduciary duty and property is improperly sent to someone else- normally can get it back, but NOT if its in a buyer in faith purchaser’s hands. Richard had given consideration and took care of house. If T had been paying the costs of maintaining the home and Cappy’s life as he should have- Cappy would have had a larger estate. Court orders T to refund those amounts from the trust principal which then get distributed to Margaret. That money is held in a constructive trust for Margaret. What if that’s not enough to refund what Margaret should have gotten had T done it correctly. Does T have to dip into his own individual bank account? (remember- T’s failure to distribute cased Cappy to distribute the home to Richard, where as if T had distributed properly, Cappy would have owned the home at his death Margaret). No- because of the exculpation/exoneration clause (which is provided to the court). T was exculpated for all liability except for willful breaches of trust. This was not a willful breach of trust. These clauses must use a balancing test to determine if they are valid (cant be exculpated for all liability- not bad faith, intentional breaches, was the clause bargained for, is it reasonable?). This court holds the clause valid even though it was inserted by T because there was no breach of a fiduciary duty by T when he put the clause in the trust. Enforceability of the clause was important to T because a lot was riding on it, and Settlor (Sarah, W1) consented to it, and these types of situations. The rule about B’s and exculpatory clauses is that B has to have some understanding of what it means though and know his rights. UTC changes the trust case- when exculpatory clauses are put into the instrument at the suggestion of T, the presumption is they are unenforceable, unless the T can show the clause itself was communicated to the client. There is a presumption of beach of fiduciary duty. FL- the bank has to show the clause was communicated DIRECTLY to the client (can be through an attorney) [47] SPENDTHRIFT TRUSTS: CREDITORS’ RIGHTS Page 543-557 Both provide a means of making property available to the beneficiary, but not his creditors Income to A for life, Remainder to B o What if A runs up a bill at Sears- what are Sears’ rights? o A has a right to income o Normal rule: assets are subject to your creditors Sears could attach its claim to A’s interest, but A’s interest terminates when he dies, so Sears will not want to buy this interest unless they bid the amount of their claim (and it’s low) Instead, court will enter an order to direct income to Sears until A’s claim is paid off, then it will distribute income to A Different if you add discretion to the trust
1. Discretionary Trusts o Pure Discretion: The creditor cannot, by judicial order, compel the trustee of a discretionary trust to pay him o Theory is that because the beneficiary has no right to a payment, neither does the beneficiary’s creditors If A needs support, and the trustee is holding the $$ to accumulate interest- the trustee has a duty to meet that need, but not if it is discretionary Because A cannot force payments from the trust (no right to income), the creditor (Sears) cannot attach to A’s interest If Sears gets a judgment against A, they can compel the trustee to pay them first before they pay A
74
o o
o
o o o o
In some states the creditor may be entitled to an order directing the trustee to pay the creditor before paying the beneficiary BUT the beneficiary of a support trust cannot alienate her interest Nor can creditors of the beneficiary reach the beneficiary’s interest, except suppliers of necessaries may recover through the beneficiary’s right to support Beneficiary’s children and spouse may enforce claims for child support and alimony against the beneficiary’s interest in a support trust Discretionary support standard: for any distributions other than support is wrongful If A opens charge account at Publix for groceries, then A can force trustee to pay that bill (or the trustee could pay that bill because there is a duty) because it is for support. But it is not settled that Publix can go to the trustee to compel payment. In states where it is settled, the creditor cannot compel the trustee to make payment. This is a level of protection even in a discretionary support trust. So A can dis creditors, even if they gave credit for support, like Publix. Rest and UTC reject the distinction b/t support and discretionary trust, unifying creditors’ rights for all trusts that had fit w/in either of the former categories, but they have different rules UTC §504: Discretionary trusts, effect of standard Protective trusts- the trustee is directed to pay income to A, but if A’s creditors attach A’s interest, A’s mandatory income interest ceases, whereupon a discretionary trust automatically arises. The trustee then has discretion to apply the income for A’s benefit and the creditors of A cannot demand any part of it Spendthrift clause: no interest of any B shall be assignable by them, nor shall they be subject to the claims of B’s creditors Additional level of protection See below
2. Spendthrift Trusts
Created by imposing a disabling restraint upon the beneficiaries and their creditors A beneficiary of a spendthrift trust cannot voluntarily alienate her interest Debt Problem: Creditors cannot reach a beneficiary’s trust property (because the property is owned by the trustee). However, creditors can reach the beneficiary’s income from the trust. In the past, creditors could have the beneficiary’s income attached and sold, with proceeds applied to the debt (extreme measure). Courts didn’t like to do this, so instead they ordered the trustee to distribute the beneficiary’s income to the creditor until the debt is paid off. But the settlor of a trust wouldn’t want this to happen—they would want their beneficiary to keep receiving the income from the trust. Spendthrift Clause: Thus, settlor adds in a spendthrift clause—―No interest of any beneficiary may be assigned by the beneficiary nor may it be reached by his creditors.‖ Valid in Florida and most states. Prevents beneficiary from selling or assigning their interest and prevents creditors from attaching it. Prevents creditors from getting at the beneficiary’s income, so beneficiary maintains a steady flow of income for the rest of his life. Creditor can ask to see the trust to see if there is a spendthrift clause (but not tort claims) Once the beneficiary gets the income money and it is in his bank account, the money is fair game— creditors can try to get it before the beneficiary spends it. To avoid this, the settlor can say that the income goes ―to the beneficiary or for his support.‖ This language allows the trustee to pay the beneficiary’s bills directly, that way the money is never released into the beneficiary’s hands. If the trustee does not pay the income to the beneficiary and instead allows it to accumulate in a discretionary support trust… Courts will usually force the trustee to pay creditors for debts used for the support of the beneficiary (such as food bills). If the trust is a purely discretionary trust, even these creditors do not have to be paid, as long as the trustee acts in good faith, at least until the trustee decides to start
75
distributing to the beneficiary again. But the beneficiary can request that no distributions be made until the statute of limitations for the creditor’s claims runs out. Courts will not force the trustee to pay creditors for debts not used for support of the beneficiary (bill for a Rolex watch—this is a luxury, not a support item).
Exceptions to Spendthrift Clauses: (see page 555 to expand on these if need be) (1) Claims for child support for beneficiary’s children. Most states, including Florida (from a FL SC case Bacardi that actually dealt with alimony, but said the case is even more compelling for child support) The children can force the trustee to distribute the income for their use, and if the income is insufficient, they can force distribution of the principal. (2) Claims for alimony for beneficiary’s ex-spouse. Some states, including Florida. States that don’t recognize this exception view ex-spouses the same as other creditors. States that allow this only allow it as a last-resort remedy. (3) Tort claims. Some states, but not Florida. (4) Federal taxes. But if you are a beneficiary of a purely discretionary trust, you cannot force distributions of property interest, so you have no property that a federal lien can attach to. State legislature can carve out an exception for this if they want to (5) Creditors who have provided minimal life necessities, like Medicaid. You cannot make a self-settled trust for yourself so you can protect your assets yet still qualify for Medicaid. Violates public policy. But you can set up a trust for someone else (spouse) to provide them with some extra money yet still allow them to qualify for Medicaid. This money pays for extras beyond the ―bare bones‖ provided by Medicaid (called a ―supplemental needs trust‖). You can create a revocable, discretionary trust for your own benefit and still qualify for Medicaid as long as you promise that all unused money will go to Medicaid after you die. FL legislature does not have a necessities exception (there is under the Restatment of Trustsbut not FL’s) (6) Creditors can reach any income distributed in excess of what the beneficiary actually needs for his support and education. Only in a few states, determined by the beneficiary’s ―station-in-life.‖ (7) creditors who extended interest to the beneficiary’s trust? New FL trust code recognizes this exception too Most trusts should include spendthrift clauses. However, for some wealthy people, it isn’t always tax efficient. It sometimes makes more sense for a beneficiary to give up their right to income from the trust and give it to somebody else (a child) for tax purposes. Spendthrift clauses will not allow this. This would be the only situation where these clauses are not a good idea. Some states allow a beneficiary to voluntarily give up their right to income from the trust to insulate it from creditors, but most states say this violates public policy. Beneficiaries can always disclaim their rights to interest by filing a disclaimer 9 months from the date of the settlor’s death. UTC §502 spendthrift provision UTC §503 exceptions to spendthrift provision Child support, alimony, services that support the B’s interest Creditors can go in and get the interest that should have been given to B but wasn’t because B and T were in cahoots (but NOT in FL) And in FL you cannot create a trust for yourself to escape your creditors
76
Scheffel v. Kruger P wanted attachment of D’s beneficiary interest in his trust to satisfy the judgment against him for sexually assaulting her child. Court said no because there was a spendthrift provision in his trust and the state statute provides only 2 exceptions to it (1. if the beneficiary is the settlor and the trust is not special needs trust established for a person with disabilities, 2. if it regarded fraudulent transfers). The legislature specifically made these exceptions so the court presumes no others were intended. The public policy reasons P relies on are based in judicially-created spendthrift law and this court isn’t willing to go there. Also, the trust cannot be terminated because it may still have a purpose while D is in jail and when he gets released. Court was asked to create a judicial exception for tort claims, but they wouldn’t because this was up to the legislature because they had already made exceptions for 2 other claims, if they wanted to carve out one for tort claims, they would have. Few states (not FL) and the restatement have embraced Tort exception Shelly v. Shelly Issue: whether the spendthrift provision will be given effect to bar the claims of the B’s children for support and the P’s claim for alimony. Rule: court can impose upon the privilege of disposing of property if its view is consistent w/ public policy unless the legislature has expressed contrary view. Hold: public policy requires that the interest of the B of a trust should be subject to the claims for support from his children and former wives. Reason: the duty of the H to support his former Ws and Cs should override the restriction called for by the spendthrift provision. However- with respect to the trust corpus, they cannot reach is because B’s interest in that was discretionary. Creditors rights: to what extent is B’s interest in a trust alienable? Hypo: 1. pay income to Sam for life, remainder (principal) to X. Sam doesn’t want the periodic installments- wants to sell his right to P for a lump sum, convert his equitable interest to cash. Law says yes- the right to income is no different than any other interest in property- you can buy one, sell one, give on away. No one will want to buy it for the lump sum you want it for- need to discount for present value. Purchaser sees a lot of risk: that it may not earn that % interest for 30 years, that Sam might live longer than predicted (and like 30 more yearly payments), risk in the discount rate to calculate present value, and if Sam dies early- what you buy dies with him. 2. Sam owes Dillards a lot of money- can they reach his right to income? It is treated similarly as all assets are, so yes. It will be sold to pay off the administrative cost of the sale, then Dillards, then remainder to Sam. Courts don’t like that because they cant sell that income interest any better than Sam could. Who will buy it? Dillards will buy it! They will bid the amount of its claim, maybe a little less, but nobody else will bid.
[48] MODIFICATION AND TERMINATION OF TRUSTS Page 572-587 1. Intro If the settlor and all beneficiaries consent, an irrevocable trust may be modified or terminated If settlor is dead or does not consent to modification/termination, question arises if Bs can modify/terminate it if they all agree o In the US the great weight of authority holds that a trust cannot be terminated or modified prior to the time fixed for termination even if all the beneficiaries consent Clafin doctrine- if termination or modification would be contrary to a material purpose of the settlor.
Beneficiaries’ Rights to Modify or Terminate a Trust:
77
Common Law: (most states, Florida) A trust cannot be terminated prior to the time fixed for termination, even though all beneficiaries consent, if termination would be contrary to a material purpose of the settlor. Claflin Doctrine: Only allows beneficiaries to terminate a trust when… (1) All beneficiaries agree. (poses unborn beneficiary problem) (2) There is no further trust purpose of the settlor left to be served. Under the Claflin rule, virtually no trust can be terminated!!! Because ALL present and future beneficiaries have to consent 1. if you leave something to someone unborn or descendants, the B’s cannot terminate the trust because they are not born 2. appointed guardians can only terminate the trust if it’s in the unborn B’s best interest- but this is never gonna happen Claflin does not apply when the trust has a Spendthrift Clause, when the benefits flow for the support of a beneficiary, or when the trust specifies an age at which the beneficiary gets the money. So if its an age related trust it cannot be terminated FPC § 737.4031: If the purpose of a trust has been fulfilled or if circumstances have changed so the terms of the trust would defeat its purpose, the court can modify the terms (including administrative and distributive terms), terminate the trust, allow the trustee to do acts not allowed by the trust, or prohibit the trustee from doing acts that are required by the trust. A trustee or any beneficiary can ask the court to modify an irrevocable trust if compliance with the trust terms is no longer in their best interests. FPC § 737.402(3): If the trustee decides that the market value of the trust is less than $50,000 and continuing the trust according to its terms will defeat/substantially impair the goals of the trust, the trustee can use discretion to terminate the trust and distribute the trust property, including principal and undistributed income, to the beneficiaries in shares consistent with the settlor’s intent. UPC § 706: A court can remove a trustee who commits a material breach of trust, cannot cooperate with other co-trustees, has made bad investment decisions, or because of changed circumstances.
2. Modification In re Trust of Stuchell- Equitable Deviation Doctrine Remainder beneficiary was retarded, if the trust was not modified, his remainder will be distributed directly to him if he survives the 2 life income beneficiaries, and if that happens he cannot get the public assistance he needs CL says that trust may be terminated if (1) all B’s agree, (2) none of the Bs is under a legal disability, and (3) trust’s purposes would not be frustrated by doing so. But the court says no- cite restatement of trusts- this may be conventinet for the child, but that is not a reason to deviate from the trust terms without a showing of lack of anticipation of unforeseen circumstances of the settlor, and this would be deviation of the distribution terms not administrative terms, basically because of the Clafin doctrine- will not modify the trust. Court does not use the Administrative and Equitable deviation changed circumstances doctrine If fed law stays the same, in 2010, no estate tax that year no matter how rich you are- when Congress realizes what they have done, 200 years into the guture, if they do act they will have to grandfather irrevocable trusts in. huh? Notes: 2. In some states, the problem of the impecunious widow has been ameliorated by statute 3. Drafting advice 4. Administrative deviation and changed circumstances - deviation from trust terms- because of changed circumstances (equitable deviation)
78
Pulitizer case- the court held that even though the sale was prohibited by the settlor, it has power to authorize sale in circumstance where the trust estate was in jeopardy, and it approved the sale o Borrowed from the Cy Pres Doctrine- Court determined the general intent of his trust was to provide for his family. Circumstances have changed in an unforeseen way- he would never have guess his newspaper would fail. They authorized the sale of stock because the primary purpose of the trust. o Equitable deviation of dispositive terms and changed circumstances o When it was never anticipated, the court will probably deviate o In most jurisdiction, this deviation is restricted to administrative terms but probably not distribution terms in a trust that says pay all income to A, but you find that the income of the trust isn’t enough to keep A situated, but although it was never anticipated by the settlor that this income wouldn’t be enough, the court will not deviate from the distribution terms and pay him out of the principle. Burden on settlor to draft a trust to anticipate unforeseen circumstances Settlor cannot make the trust’s terms immutable (that means opting out of the law of modification and termination, as in UTC §105b4)
UTC §412- modification or termination because of unanticipated circumstances or inability to administer trust effectively Note: reformation and modification for tax advantages: 1. reformation- an equitable remedy that conforms the instrument to what the settlor actually intended at the time of execution (usually because of lawyer error in drafting the document) 2. equitable deviation- modification to achieve the settlor’s probable intent in light of changed circumstances - specifically endorsed by UTC §416
Equitable Deviation: Allows beneficiaries to deviate from ADMINISTRATIVE terms after the settlor’s death due to UNANTICIPATED changed circumstances. Similar to Cy Pres, but works for private and charitable trusts. Cannot deviate from distributive trust terms. Only works when the beneficiary’s new circumstances are inconsistent with the settlor’s general intent for the trust. FPC § 737.403: A trustee can consolidate several similar trusts, sever any trust into two or more trusts, or segregate funds from one trust into an account to pay federal taxes.
Note: trust protectors - can appoint a trust protector
3. Termination Generally a trust cannot be terminated if it is a spendthrift trust, if the beneficiary is not to receive the principal until attaining a specified age (that is enjoyment is postponed), if it is a discretionary trust, or if it is a trust for support of the beneficiary It is possible to terminate a testamentary trust by a compromise agreement ending in a will contest
Can an Irrevocable Private Trust be Terminated? Common Law: Only if the settlor and all the beneficiaries consent.
79
Trustee has no say unless also a beneficiary, but has a duty to defend the trust. Too hard to get consent of all possible conceivable beneficiaries because some may not be born yet. Unborn beneficiaries must be represented by guardians, who only consent if it is in the unborn’s best interests. If the settlor is dead already, the trust cannot be modified/terminated. Nowadays, courts sometimes reform/modify trusts to obtain income or estate tax advantages.
Can a Charitable Trust be Terminated? Cy Pres Doctrine: (most states, including Florida) When the charitable purposes of a trust have been accomplished, the trust can be revoked. Allows courts to reform the trust and put the money to a new charitable use. Theoretically restricted to charitable trusts Attorney General will argue that the court reallocate the trust to a similar purpose To use Cy Pres, courts need to figure out the settlor’s… General Intent: What the settlor’s primary purpose in creating the trust was. ―For polio research‖: If the court thinks the settlor’s sole purpose for making the trust was to donate money for polio research, after a cure is found, the trust money reverts back to the settlor’s estate. But if the court thinks the settlor’s intent was generally charitable, after a polio cure is found, the court will apply the money to researching other diseases. Primary/Specific Direction: Obtained from the instrument itself, from the directions the settlor gave us. If the court finds broader than primary direction, they will just reform the trust and move on to the next similar purpose Normal assumption of the court is to reform, not terminate- when you put it in the charitable domain, you really can’t get it back Can reform the trust administratively (like if it says research polio in Cleveland- and that facility closes) or in it’s purpose (since polio’s been cured- to a new disease) In re Estate of Brown- no spendthrift clause, no age related clause, no Claflin doctrine Issue: whether any material purpose of the trust remains to be accomplished, thus barring its termination. The lifetime beneficiaries want the trust terminated because the sole remaining purpose was to maintain their lifestyle and that the distribution of the remaining assets was necessary to accomplish this purpose. The trustee objects- he is protecting his fee Hold: trust cannot be terminated because the goals of the trust (1- educational purpose had been achieved, but 2assurance of life long income for the beneficiaries through mgmt and discretion of the trustee was not). Trustee must use all of the income and such part of the principal as is necessary for this purpose- to pay the lifelong stream of income for nephew Rule. An active trust may not be terminated, even with the consent of all the beneficiaries, if a material purpose of the settlor remains to be accomplished
Rule Against Perpetuities: Limits our ability to create contingent interests in trusts (meaning, it limits our ability to make trusts for unborn people). At common law, you could create a trust for the lifetime of people known to you, plus 21 years (usually comes to 90 years). But many states have changed this rule. Charitable trusts are not subject to this- could last forever Movement in Alaska to repeal this, and same in Delaware FL bar was trying to decide to repeal the rule b/c people were going to AK and DE But you avoid a tax trap by having the rule- some ultimate limitation In FL in 2000 there was a bill to extend it to 1000 years Limited: Floridians can create trusts for 360 years. Effectively it is repealed But if you want to buy into this- you have to allow courts to modify the trust in the best interest of the B’s even if it is inconsisten with your intent FPC 737.4031(1)- a combination of the deviation doctrine and claflin doctrine in one
80
Court can modify admin or distrib terms of the trust in anyway they want at the request of ANY beneficiary, but the modification canny be inconsistent with their reading of the settlor’s intent (but a spendthrift clause will not prevent them from acting) This applies to the 90 year trust FPC 737.4031(2)– give the court the same authority to tinker with the trust on ANY petition of the court or trustee when it is in the best interest of the B of the trust regardless of whether it contravenes the settlor’s intent This applies to the 360 year trust FPC 737.4032- allows changes to a trust consistent with the settlor’s intent w/o court invervention through the consenf of all Bs- basically the Claflin doctrine- but if you can get that strange alighnment of stars you can actually do the deed w/o court permission Trustee has to agree to Subject to the same problems of claflin doctrine, but it does exist AK reinstated its rule for 5000 years
4. Trustee Removal This is a remedy for breach of trust, not a modification of trust terms
On trust modification- there are restrictions in the CL rules that make them largely unworkable. In private trusts the deviation doctrine doesn’t work very well because it only applies to administrative rules. The claflin doctrin is largely unworkable because of how courts have applied it. FL is better, gives the court ability to modify consistent w/ settlors intent w/o all B’s consenting. And if you want a 360 year trust, all Bs have to want it even if its inconsistent w/ the settlor’s intent. 1. these statutes are good enough to do anything we want, but there are a acouple situations where it would be more helpful to have more targeted statute. a. reform trust to accomplish continuing tax objective for things that have been placed in jeopardy by Congress. Congress doesn’t always grandfather old trusts. b. cure mistakes- although ―reform‖ is a bad word with wills, courts frequently reform trusts to cure scrivener’s errors. The new trust code will say you can correct any error if you can show it was made by clear and convincing evidence.
New trust code: 1. inter vivos trusts revocable by default 2. if try to create a trust for friends- unascertainable class of Bs- new trust code will treat that as a power of appointment and allow the trustee to appoint the money to friends
81