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Wills Trusts and Estates Mendoza Outline

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Wills Trusts and Estates Mendoza Outline Powered By Docstoc
					Wills, Trusts, & Estates – Fall 2007 – Mendoza TRANSFER OF DECEDENT’S ESTATE  Probate – property that passes by will or intestacy  Nonprobate – property passing under an instrument other than a will o Joint Tenancy o Life Insurance o Ks w/ P.O.D. provisions (pensions, investments) o Trusts  Person Dies, probate necessary – personal rep o Duties:  Inventory assets  Pay creditors & Tax collectors  Clear Titles  Distribute remaining assets o Will names personal rep = executor o Will doesn’t = administrator  Must give bond unless waived  Dies Testate o Devise = real property to devisees o Bequeath = personal property to legatees  Dies Intestate o Real Property = descends to heirs o Personal Property = distributed to next-of-kin  Probate Procedure o Opening probate  Probate  Provides evidence of transfer of title  Protects creditors  Distributes decedent’s property after creditors are paid  Must be sought in jx where decedent was domiciled at time of death (Primary or Domicilliary)  Real Property in another jx, ancillary jx  Authorize to act on behalf of estate  Letters testamentary – executor  Letters of admin. – administrator  Ex parte probate & notice probate  Informal & Formal  UPC (Uniform Probate Code)  Any interested party can demand formal probate  Time for contest o Depends on Jx  Barring Creditors  Nonclaim statutes – time limits

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o Bar claims not filed w/in specified period of time after probate proceedings are begun; or o Whether or not probate started, bar claims not filed w/in longer period after decedent’s death o Supervising the Representative  Usually by courts  Some states let em do their thing  Interested party can demand supervision o Closing the Estate  Pay everyone off  Court grants discharge of admin. You can avoid probate o Universal succession (Louisiana & Europe)  Heir steps into shoes of decedent & pays everyone o CA – passes to spouse w/ no administrator Trusts o Legal Instruments o Application in many areas of law o Great flexibility in Estate Planning o O  X, Trustee  A  A has equitable Interest  X holds legal title  A holds beneficial title  X administrator  X has highest obligation in the law (fiduciary duty) o Trust Bifurcates title o Can also bifurcate use & enjoyment of property for a time  O  A for life, then to B o Rule Against Perpetuities  Easy to avoid  On bar exam

INTESTACY: AN ESTATE PLAN BY DEFAULT Basic Scheme  Basic Scheme o Intestacy is what estate planning lawyers plain around o 50% dies intestate – Why?  Afraid of death  Costs involved o Will devises part of probate estate – partial intestacy o State domiciled at death – personal property o State decedent’s real property located – real property o No living person has heirs – they have heirs apparent (expectancy)  Share of Surviving Spouse o Primary policy of intestacy statute is to carry out the probate intent of the average intestate decedent

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o Must decide:  What do they want?  Look at probated wills  Ask them o Spouses share too small?  Surviving spouse gets ½ under intestacy law  UPC – spouse gets all if same descendants  No descendants – half states make spouse share w/decedent’s parents. No parent, spouse might share with bros and sisses Simultaneous Death (USDA) o No ―sufficient evidence‖ as to the order, beneficiary deemed predeceased the donor. What is ―sufficient evidence‖?

Janus v. Tarasewicz Ill. 1985 H & W died from poisoned Tylenol. H’s life insurance named W as beneficiary and H’s mother as contingent beneficiary. H’s mother wanted life insurance. Insurance co. paid to W’s estate. Trial court found W survived H, even though they both were vegetables at relatively the same time. Affirmed.  Wills o o o o

Wills are code driven A will is testamentary So is a will substitute Will lets you designate guardianship  Court will choose otherwise  Intestacy Statute o If property is not disposed of in the will – Intestacy Statute You can only pass property that you own  A=B/A, A dies without will  If A married to B, A doesn’t own all of B/A  A can convey undivided ½ interest in B/A (In common property state)  UPC: Uniform Probate Code o 2-201(a) – any part not d.o.b. will, passes by intestate succession to heirs  Heirs are prescribed in Code o 2-102 – Spouse takes first o 2-103 – others (children and deceased children) o 2-105 – No takers – then state o 2-103(1) – Children and deceased children by representation (Child’s descendants divide share among themselves) A (widow)

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C’s children take C’s share by representation A’s heirs are B(1/3); F(1/6); G(1/6); and D(1/3) C’s spouse takes nothing it would go to the state b4 it would go to a son-in-law

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How is A’s estate distributed? There are 3 systems:  English Per Stirpes: Treats line of descendants equally: D(1/2); E(1/4); F(1/4)  Modern Per Stirpes: Divided into shares at generational level: D(1/3); E(1/3); F(1/3)  Per capita at each generation: See Below:

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D(1/3); E,F,G(2/9) Negative Disinheritance – express statement in will disinheriting a child o Property has to be given to someone else, or it will fall into intestacy Shares of Ancestors and Collaterals o All persons related by blood to decedent but who are not descendants or ancestors are Collateral Kindred o Descendants of decedent’s parents are First-Line Collaterals o Descendants of decedent’s grandparents other than decedent’s parents are Second-line Collaterals o Not survived by spouse, descendants, or parent –Bros and Sis.  Descendants of decedent’s Bros and Sis take by representation

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o No first-line collaterals, who’s next?  Parantelic System: passes to grandparents and their descendants, if none, then to great-grandparents and descendants and so on until an heir is found (UPC says beyond great-grandparents don’t take)  Degree-of-relationship system: passes to the closest of kin, counting degrees of kinship. Court steps up to nearest common ancestor and steps down to claimant.  CA allows mothers and fathers-in-law and brothers and sisters-inlaw, but never sons or daughters-in-law  Laughing Heirs: laughing all the way to the bank  Page 79 Table of Consanguinity Transfers to Children  Meaning of Children o Adopted Children Hall v. Vallandingham MD App 1988 Children of deceased brother were adopted by mother’s new husband. Decedent only had brothers and sisters as heirs. Lower court said kids weren’t entitled because they were adopted by other guy. 1958 code said adopted kids retained inheritance rights of natural parents and relatives. Removed in 1963 and now says kids are rebirthed into adopting families. Kids get nothing. UPC would let the kids get it – 2-114(b) Minary v. Citizens Fidelity Bank & Trust KY App 1967 Wife died leaving trust to H and 3 sons. H died, then 1 son, then next son with 2 children, last son adopted and trust terminated when he died. Did Alfred’s adoption of his wife Myra make her eligible to inherit? The trust said ―then heirs under law‖ so the adopted Myra is an heir, but also wife! Even though law lets you do it, it is cheating. Wills are not flexible, so you bring in trusts to gain some flexibility but trusts still aren’t that flexible O’Neal v. Wilkes GA 1994 Jury found O’Neal had been adopted by decedent Cook. Judge gave JNOV to Wilkes, Cook’s administrator on the ground that paternal Aunt did not have legal authority to contract w/Cook. Affirmed. Relatives of O’Neal had no legal authority to K for adoption. Hall = minor Minary = adult O’Neal = Equitable All = Statutory Adoptions Equitable Adoptions: “Equity regards done that which ought to be done”  Agreement between adoptive and natural parents  Natural parents must fully perform (hand over kid)

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Child must fully perform (moving in) Fail to complete legally Adoptive must raise as their own Adoptive must die intestate Then equitable adoption kicks in o Posthumous Children  Conceived before but born after father’s death. Kid in the womb at the time of parent’s death will be treated as if he is alive. Rebuttable presumption of 10 months. Kid has burnden if longer. Uniform Parentage Act says 20 days longer. Advancements o Common law: Any gift to a child was advancement of kid’s inheritance. Kid had burden to show. If advancement, goes into hotchpot. o UPC 2-109 says only advancement if:  1) decedent declared in contemporaneous writing or heir acknowledged in writing it is an advancement OR  2) same thing only don’t say ―advancement‖ o Valued at time advanced. Guardianship and Conservatorship of Minors o Guardian of the Person  Kid’s parents dies – no will providing for a guardian – court appoints from nearest relatives  G of the P has no right to deal with child’s property o Property Management Options  Guardianship of the property  Used to have full control  Then had to approve everything with the court and got a management fee  Conservatorship  Replaced guardian with conservator  Given ―title as trustee‖  Still go to court every year  Custodianship  Custodian given property to hold for minor  Guided by UTMA or UGMA  Devisee or gift made to X as ―custodian for [minor] under [state] UTMA.‖  Not supervised by the court, and can manage  Trusts  Tailor specifically to family circumstances and testator’s particular desires  When get money? 18 or 21 or when donor thinks kid is competent

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Bars to Succession – Involuntary conduct of heirs Voluntary conduct (disclaimer)  Homicide o Killing – involuntary? o Must have intent to kill which leads to profit. Unintentional killing may not be a bar to succession o Conviction = killing = res judicata o Acquittal – might not BARD (civil POTE)  Open civil proceeding to see if person is liable. Then they would be barred. (so you could get an acquittal but still be barred if by POTE you’re liable in civil proceeding) In Re Estate of Mahoney VT 1996 Mahoney died intestate. Wife was tried for murder of Mahoney. Got 12-15. Court gave estate to mother and father. Wife who kills husband inherit from his estate? States have followed 3 different decisions: 1) slayer gets it; 2) Slayer doesn’t because shouldn’t profit from crime; 3) Slayer gets it but equity holds him to be constructive trustee. Court goes with #3 as probate court had no jx to give to parents. Reversed.  Disclaimer o When heir refuses to take property o Common law –couldn’t do this o Now it passes to heir and then to next heir o However, must accept o Almost all states have disclaimer statutes o Use to avoid creditors, however, don’t fuck with the government

Drye v. US 1999 Creditor is IRS. Disclaimer is beneficiary of 233,000. Allows it to pass to his daughter. SC said he held the property long enough to subject it to tax lien. If he had been disinherited by will – then no IRS interest Troy v. Hart MD 1997 Lettich was in oldies home, on Medicaid. Troy was his lawyer. L’s sis died and left him $300,000. L disclaimed b/c sis lawyer convinced him to. They were trying to rescind when L died. Court said valid disclaimer BUT had to deduct Medicaid expenses for the time he held the money before disclaiming. Court suggested constructing trust – intended to prevent unjust enrichment. WILLS: CAPACITY AND CONTESTS Mental Capacity  The test of Mental Capacity – test is capability o Testator:  Must be capable of knowing and understanding in a general way  The natural objects of his or her bounty

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The disposition that he or she is making of that property, and must be capable of  Relating these elements to one another and forming an orderly desire regarding the disposition of the property o It’s unethical for lawyer to draft will knowing mentally incapacitated o Mental Capacity scale:  Contracts (inter vivos) Highest  Testamentary |  Marriage Lowest In Re Estate of Wright CA 1936 Wright’s will denied probate on the ground of testamentary incapacity – appeals. W died and left friend his house, daughter another house, granddaughter Utah house. Gave 1 dollar to each of a lot of people. People testified he was quirky and soaked a fish in kerosene and sprayed kids with a hose. Court said testamentary capacity can’t be destroyed by showing few isolated acts, foibles, idiosyncrasies, moral or mental irregularities. No evidence offered to rebut W’s ability to transact or conduct his business or care for himself. Will stands.  Why require mental capacity? o Represents testator’s true desires o Mentally incompetent man or woman is not defined as a person o Protects decedent’s family o Succession to property must be reasoned and responsible act o Assures a sane person that their desires will be carried out if they later become insane. o Protects society at large from irrational acts o Protects senile person from being taken advantage of Insane Delusions – part or all of will may be invalid o Legal concept o False conception of reality that they hold against all evidence to the contrary o MJ: delusion is insane even if factual basis if rational person in position could not have drawn the conclusion reached o Mistake is different  Courts don’t invalidate b/c of mistake

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In Re Strittmater NJ 1947 D died leaving everything to Women’s party. Probably had split-personality. Took feminism to the extreme. Enough evidence to prove paranoid – schizophrenia – probate set aside. In Re Honigman NY 1960 H died survived by W. Cut off W with will and left her with statutory share for life with remainder to surviving brothers and sisters per stirpes. Wife objected. Jury said H wasn’t of sound mind. Suspected wife of cheating and was pretty paranoid about it.

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Issue wasn’t if wife was unfaithful, did he have reason to believe she was unfaithful. Yes. Reversed.  Living Probate o While testator is still alive o Americans don’t have to pay attorney’s fees when losing contested proceedings

Undue Influence  Generally o Must have a confidential relationship and something else (varies from state to state) o Four prong test:  Testator was susceptible to undue influence  The influencer had the disposition or motive to exercise undue influence  The influencer had the opportunity to exercise undue influence  The disposition is the result of the influence Estate of Lakatosh PA 1994 Roger Jacobs befriended Rose Lakatosh. Got power of attorney and drove her around. Rose was estranged from the family. Roger siphoned money to his friends. Rose living in filth. Dead cats everywhere. Executed will leaving almost everything to Roger. Three elements easily met: confidential relationship; roger received bulk of estate; Rose’s intellect was weakened. SC affirmed order of trial court revoking the probate of Rose’s will and imposing a constructive trust on Roger for 128k.  Burdens of Proof o First – proponent of the will to show that it was duly executed o Then – shifts to one challenging the will (those alleging undue influence)  They must establish confidential relationship + something o Shifts back tot eh influencer  Act with clean hands  Grantor acted willingly Restatement §8.3(b) – overcame donor’s free will o Comment – confidential relationship is not enough

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Lipper v. Weslow TX 1963 Sophie has 3 kids by 2 marriages. 1 kid dies. Sophie dies leaving everything to the other 2 kids. Kids of deceased kid contest. Sophie’s will has clause explaining why disinheriting grandkids. Will prepared by living son. Undue influence? Might raise suspicion, but does not supply proof of vital elements of undue influence. Will stands. Undue Influence – Duress – Fraud = all related  Fraud o Testator is led to do something that he or she would not otherwise do.

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Cases mainly focus on remedies in case of fraud or duress  Constructive Trust o Fraud in the Inducement – focuses on when a person misrepresents facts, thereby causing the testator to execute a will  Is it caused by a fraud? Puckett v. Krida TN App 1994 Nurses hired to care for Nancy Hooper. Convinced Hooper that her relatives were wasting her money and wanted to put her in a nursing home. = Fraud. Court set aside will.  Undue Influence and fraud, related, but separate causes of action. Courts might fuse  Undue influence – influencer has to replace the will of testator  Fraud – misrepresent fact on testator with the sole purpose to get new will in favor Latham v. Father Divine NY 1949 Mary died testate and left her property to father divine. Burden of Proof is on proponents – Father D. Then to challengers alleging duress. Challengers were first cousins of Mary. Testified that M wanted to change will but was prevented by Ds dudes and they killed her through an operation. Case was settled giving Father D small fraction after appeal’s court reversed.  Constructive Trust – ―fraud rectifying‖ equitable remedy that employes the language of trusteeship. Not itself a trust in which property is managed by a trustee for a beneficiary subject to a fiduciary obligation.

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WILLS: FORMALITIES AND FORMS Execution of Wills  Attested Wills o Formalities – strict compliance with statutes  Why require formalities?  Formalities serve the ritual function  Evidentiary function  Protective function  Channeling function  These are hijacked by strict compliance o To have a will:  Mental Capacity  Testamentary Intent  Writing  TOR – Sign  Witnesses Sign o Formalities relate to the elements of a will  Execution o Mechanical Process 10

Line of sight rule – must be able to see the witnesses sign Conscious Presence – sight, hearing, or general consequences of events let Testator know  Attestation Clause – Recites facts supporting due execution  Self-Proving Affidavit – swearing the attestation clause  ****Know the general rules—not what other states hold**** o Qualitative Analysis (of witnesses)  Witness must be competent (credible, disinterested)  Depends on statute  Stakes are high here Stevens v. Casdorph WV 1998 Miller went to bank with Casdorphs. Asked employee to witness execution of his will. After employee signed, took to two more employees to sign. Other employee didn’t see Miller sign will. Stevens (neice) would have taken intestate. Miller left everything to Casdorphs. Stevens want will set aside. Trial court gave SJ for Casdorphs. Stevens say all evidence says will not properly executed. App said not validly executed. Will set aside. Estate of Parsons Cal App 1980 Subscribing witness to will named in will as beneficiary ―disinterested‖ within Probate Code by filing disclaimer. PC §51 says gift to subscribing witness void unless two other and disinterested witnesses. Court holds subsequent disclaimer ineffective to render witness disinterested, will set aside. In Re Pavlinko’s Estate PA 1959 H died ’57, W died ’51. Ws will ’49, signed by husband, offered for probate by W’s brother, denied. W and H signed each other’s wills. Law says must be signed by testator. Will set aside. Affirmed.  Malpractice of Lawyers (sign wrong will) remedies: o Constructive Trust o Unjust Enrichment o Malpractice Insurance

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In Re Snide NY 1981 Snide, decedent, and W intended to execute wills at the same time, signed each other’s. Lower court admitted, appellate reversed, High Court said will valid, wills are identical, no evidence of fraud. Will stands.   Mutual wills – one dies, the other will becomes a contract – can’t rescind Holographic Wills o Not recognized in majority of states o Those that do require precise compliance with specified formalities o Elements:  Mental Capacity

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 Testamentary Intent  Testator’s Signature  Writing  Witness o How can you distinguish dispositive intent from testamentary intent?  Channeling and Protective function—very poor in holographic will Kimmel’s Estate PA 1924 Dad sends letter stating who money goes to to his 2 kids and dies. Two questions: 1) Is the paper testamentary in character? 2) Is the signature to it a sufficient compliance with PA wills act? (signed it ―father‖) Yes Yes. Clear intent to execute. Holographic will stands. o Conditional Wills: Condition doesn’t happen? = will retains its validity o Most problems arise with writing requirement. Writing sufficient to be a holographic will, how much must be in Testator’s handwriting?  1st Generation: ―entirely written, signed, and dated‖  2nd Generation: ―Material Provisions‖ (1969 UPC)  3rd Generation: ―Material portions‖ and extrinsic evidence allowed (1990 UPC) Estate of Mulkins AZ 1972 1st Generation holograph. Had some printed text, but handwritten portion was testamentary portion. Will upheld Estate of Johnson AZ 1981 Testator filled in blanks, but didn’t get the witnesses. 1969 UPC adopted ―material provisions‖ in testator’s handwriting? No. Will Denied Estate of Muder AZ 1988 Will handwritten on a printed will form, but signed by only one witness. ―I give to‖ filled in name and possessions. Will upheld. Court held testator who uses preprinted form, and in his own handwriting fills in the blanks by designating beneficiaries and apportioning his estate and signing it has created a valid holographic will. In Re Estate of Kuralt MT 2000 Kuralt wrote holographic will to Shannon, then executed formal will. Was going to transfer title to all of MT cabin, but got ill. Wrote letter to Shannon saying inherit the MT place. Died. Shannon attempts to probate letter as a valid holographic codicil. DC said letter expressed intent to transfer posthumous. Affirmed. Wong Testamentary Capacity but no Testamentary Intent  arrows are not writings they are symbols (she was also cheating on him) –extrinsic evidence. Smith

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Attorney error – no probate of holographic will…Clear and convincing evidence—would be admitted, but court focused on attorney error. Revocation Of Wills  Revocation by Writing or Physical Act o Can Revoke by:  Subsequent writing executed with testamentary formalities  By physical act – destroying the will  No Oral (revocation) o Subsequent will  Presumed revoked if disposes of entire estate  May be codicil if not full disposition o Intent to revoke + physical act = revocation o Will not revokes – goes into probate o Most of the time – wills say ―I revoke all previous wills‖ *****Each state has its own revocation statute***** Harrison v. Bird AL 1993 Daisy executed will devising Crapps everything. Told attorney to revoke. Attorney sent pieces. Lower court held no revocation—attorney didn’t tear in her presence; no ratification; but arose a presumption that Daisy revoked b/c pieces couldn’t be found. Copy couldn’t be found. Burden shifts to Crapps—not enough evidence—will denied.  Lost Will—can be proved (contents)—may be admitted with clear and convincing evidence Thompson v. Royall Kroll signed a will. Then signed codicil. Then wanted to revoke, but judge wrote null and void – keep as memo. Dies – will admitted to probate by jury. Attempted revocation ineffectual – written words to revoke must affect the written portion of will. Will Stands.  Dependent Relative Revocation and Revival o Testator revokes under mistake of law or fact and wouldn’t have if he had known the truth – ineffective revocation.

LaCroix v. Senecal CT 1953 Dupre wrote codicil revoking language but including same language, just adding nickname and real name. Would she have done it if she knew Senecal got nothing b/c her husband witnessed codicil? Doctrine of dependent relative revocation – original will stands.  P. 262 #1 o DRR saves nephews bequest o May revoke bequest entirely o May bequest 1,000

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o Depends on holographic requirement  Must all be in T’s writing = $0  Provisions = $1500 o Partial revocation – only applies to crossing out 1,000 – gets 0 o Testamentary validity o Only keep 1500 if you can show the writing by the T constitutes a valid holographic will Dependent Relative Revocation applies only: o There is an alternative plan of disposition that fails o The mistake is recited in the terms of the revoking instrument or is established by clear and convincing evidence. Revocation by Operation of Law: Change in Family Circumstances o D = revocation of provisions for spouse o Will and then Marry – some states allow for intestate share unless omitted or provided for otherwise o May take forced share o Some states – kids = no premarital will

Components of a Will  Integration of Wills o Doctrine of integration – all papers at time of execution, intended to be part of will – are integrated into the will o What constitutes testating instrument o All papers present at time of execution and intended to be part of will are integrated into will o How is a will published?  When it is signed and witnesses sign (executed)  Republication by Codicil o Will is treated as re-executed as of the date of codicil  First will revoked by second – codicil can re-execute (republish) 1st and thereby revoke second. o Affirms previous will Clark v. Greenhalge 1991 Valid will 1971 – codicil 1980. Doctrin of republication by codicil essentially brings the 1971 will to 1980. (As if it was published in 1980). o Doctrine of republication only applies if you have a valid will (prior). o Incorporation by reference – any writing in existence when will is executed Johnson v. Johnson OK 1954 Looked at typewritten part and announced it to be a valid will. Then said holographic codicil to validated will. It saved the will through doctrine of republication by codicil. Typed will, no witnesses. Added handwriting at bottom that gave 10 bucks to brother and signed. Complete or holographic codicil to writing? Former not valid (no witnesses). Codicil would make the whole thing valid. Intention to add codicil is

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controlling. Republishes even if document incomplete. Valid holographic codicil incorporated prior will be reference and republished and validated prior will as of date of codicil. NONPROBATE TRANSFERS AND PLANNING FOR INCAPACITY An Introduction to Will Substitutes  Will Substitutes o Non probate wills o Four main will subs:  Life Insurance  Beneficiary can be changed until death  Pension Accounts  Bank, Brokerage, and mutual fund accounts  Revocable inter vivos trust o Imperfect Will Substitutes:  Joint Tenancy o Differences  Most are asset specific  Avoids probate—significant advantage  No formal requirements Life Insurance, Pension Accounts, Bank Accounts, And Other P.O.D. Arrangements  Life Insurance o Death Insurance o Financial risk of dying young o Whole  Ordinary or Straight  Life Insurance and Savings plan  Forced savings feature  Universal or Variable  More investment options o Term  No savings  Term expires – no dice  May provide for renewal or conversion with no regard for insured’s health o Settlement Options  Lump-sum payment  Annuity (ben. Life)  Interest for years followed by payment of principal  Periodic payments of interest and principal Wilhoit v. Peoples Life Ins. Co. 7th App 1955 Dude died and W had ins. Settlement kept in revocable trust with Insurance Co. Named beneficiary was stepson. Stepson died. W died and will named Robert Wilhoit as beneficiary of trust. Insurance co. refused to pay Wilhoit. DC gave SJ to Wilhoit.

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Insurance Co. says K governed by insurance law not law of wills and irrevocably named stepson so beneficiary is stepson’s heirs. App says agreement between W and Insurance Co. not insurance K. Like bank account. Affirmed. Wilhoit gets it. Estate of Hillowitz NY 1968 H partner in investment club. Club paid W $2800 on H’s death. Ex say invalid testamentary disposition and should be subject to will. W says valid K. 3rd party beneficiary K, performed on death not invalid. W gets it. Cook v. Equitable Life Ass. Ind App 1981 H purchased whole life insurance policy, naming W beneficiary. H and W divorced. H married Margaret and had a son. H made holographic leaving all worldly possessions to M and son 11 years later. Died 3 years later. Change beneficiary by will? No. Repercussions overrule equity. Most states, statute that revokes will provision for divorced spouse does not apply to insurance policy or P.O.D. naming spouse as beneficiary. Superwill – only if trust provides  Pension Accounts o Enhancement of Life Expectancy  Made pensions more reasonable  Surviving way beyond years of productivity o Pension wealth  People are expected to foresee need for retirement income  Fed has intervened – irresistible tax benefits  Contributions are tax-deferred  Earnings accrue and compound on tax-deferred basis. o Retirement—pays tax on sums distributed  Distributions from pension accounts usually taxed on lower marginal fees (than income) o Become less significant (tax has abated)  Annuitization Eliminates Succession  Only negligible fraction of pension savings = intergenerational transfer  Annuitization insures against living too long  Requires assets that can be liquidated predictably  Accoutns disappear at death of annuitants  Those who dies young pay for those who die old (opposite of life insurance

Egelhoff v. Egelhoff US 2001 WA statute says beneficiary of nonprobate revoked automatically on divorce. ERISA pre-empts statute? Yes. H employed by Boeing, W beneficiary of life insurance and pension plan (both governed by ERISA). Divorce, and H died 2 months later

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(intestate). Life insurance paid to W. Kids from previous marriage want life insurance proceeds. SC said statute directly conflicts with ERISA’s requirements that plans be administered, and benefits paid in accordance with plan documents. If will sub falls under ERISA – you look to ERISA, not State statute.  Multiple Party Bank Account o Three types  JT with right of survivorship  Survivor takes balance  Will Substitute  P.O.D. designation  No right to withdraw, but survivor takes  W/S  Agency/Convenience  Both have right to draw  Survivor does not take  Not W/S  Balance distributed through will (or intestacy)

Franklin v. Anna National Bank Ill App 1986 F put sister in law on account in JT with right of survivorship. Trial court said sis gets it. App reversed saying it’s the estate’s. 9 months after adding sis to account, F tried to remove her name (wrote letters to the bank). The attempt to change shows his consistent view of the account as his own. Money would have been found to be the property of the estate.  JT in realty o Take property in JT or T by the E. Will doesn’t devise interest in JT.

CONSTRUCTION OF WILLS Mistaken or Ambiguous Language In Wills  Traditional approach – no extrinsic evidence, no reformation o Plain meaning or not extrinsic evidence  Only admit extrinsic evidence to resolve some ambiguities  Words can’t be disturbed o No Reformation Rule  Words actually used, not words T purportedly intended to use Mahoney v. Grainger MA 1933 Helen gave heirs at law ―…to share and share alike.‖ Problem: deceased had several cousins who thought they were included. Evidence that she told attorney she wanted the 25 cousins to be included. Court did not allow this conversation—gave it all to the aunt (the only heir at law). Said clause not ambiguous so no extrinsic evidence. Note p. 368 #2 – PerryManor, Inc. – even though they sold the nursing home ―PerryManor‖ they still get the money 17

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Patent Ambiguities o Ambiguity that appears on the face of the will o Extrinsic evidence not used Latent Ambiguities o Dies not appear on face of will but manifests itself when the terms of the will are applied to T’s property or beneficiaries. o Extrinsic evidence has been used  Two types of latent  Equivocation – description fits 2 or more people  Description does not exactly fit any person or thing – more common Slouching toward reformation: Correcting Mistakes Without the Power To Reform Wills o Relief Granted  Undue Influence, Duress  Fraud  Lack of capacity, wisdom o No relief  Mistake

Arnheiter v. Arnheiter NJ 1956 Gurtel will said 304 Harrison sell and establish trust for each niece. Wrong address. Deed was 317 not 304. Court couldn’t allow extrinsic evidence, so the deleted the number 304 and let the paragraph say ―my property on Harrison‖ sot he nieces got it. Estate of Gibbs WI 1961 Robert J beneficiary, but name is Robert W. Will said Robert J living at xxx…Robert W lived there. Court allowed extrinsic evidence and dropped middle initial. App affirmed b/c middle initials susceptible to mistake. Death Of Beneficiary Before Death Of Testator  Review of Intestacy o Who takes?  Heirs o How determine?  At time of death – refer to table of consanguinity o Person hasn’t died  Heir apparent o Heir apparent predeceases  Goes to issue or takes through representation through table of consanguinity  English per stirpes  Modern Per stirpes  Per Capita at each generation  Will o Specific/General 18

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o Residuary – usually takes more Residuary Dies before T o All goes – intestacy o Same applies if 2 residuaries die o 1 survives 1 dies – 2 rules:  General Rule – other takes all  Minority Rule – No residue of a residue 1 takes half and the other half falls into intestacy

Estate of Russel CA 1968 Thelma left holographic will – all to Chester and Roxy – gold and diamonds to Georgia. Roxy is a dog and predeceases Thelma. TC gave all to Chester. P argues no ambiguity so no parol evidence (that Roxy is a dog) (P is niece). P would get under intestacy. SC held extrinsic evidence allowed but Chester does not take all. ½ to C and ½ to dog, but gift to dog is void. So passes to heirs at law. Niece gets half.  Antilapse Statutes o Substitute other beneficiaries for dead beneficiaries o Usually an issue of deceased beneficiaries o Applies only if devisee bears the particular relationship to testator specified in the statute  Some only descendants, some broader

Allen v. Talley TX App 1997 Decedent’s will contains words of survivorship which preclude application of antilaps statute? TC said it did. App affirmed. Mary bequeathed unto living brothers and sisters. At time executed, had 3 bros and 2 sis. At death, 1 bro and 1 sis, and lots of nieces and nephews. Primary concern is testator’s intent. Court looks at actual words of will, not what T should have written, or meant to write, when unambiguous. 2 living siblings split. ***Make sure you always provide for what happens if devisee predeceases***  Nonprobate transfers o P.O.D.: 3rd party beneficiary may pass to heirs  UPC requires POD bank accounts and transfer on death brokerage account beneficiaries to survive (Most K’s say ―to A if she is living‖)  Antilapse applies to bank accounts in POD form, Ks with POD beneficiary, ins., etc. o Revocable trusts:  Law of future interests applies  Trad., no requirement of survivorship o JT  Vanishes DE 1959

Jackson v. Schultz

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Dude dies leaving everything to wife and her heirs. W predeceases. Do stepkids get it? ―And‖ substituted for ―or‖? Yes.  Class Gifts o Treated differently from gift to individuals o Class member predeceases—class members divide the whole o ―group Minded‖ o Group label – not individual names only

Dawson v. Yucus IL 1968 W devised her 1/5 interest in family farm ½ to one nephew, ½ to other. One nephew predeceased. Class gift? TC held class gift not intended. Affirmed. Did not label class ―nephews,‖ lapsed and residue went into remaining estate. o Class gifts and antilapse statutes  Almost all states apply  Average Testator prefer deceased beneficiary heirs take Changes in Property After Execution of Will  Ademption by Extinction o Adeemed—taken away o Applies only to specific devises o Traditional Identity Theory  Gift extinguished (if not in estate) o Intent Theory  Cash value (if shown Testator’s intent) Wasserman v. Cohen MA 1993 F created revocable inter vivos trust. On death, trustee was to distribute to E. F sold prior to death. Never assigned interest to trust. Will left to trust. Court said adeemed. o Escape routes to avoid ademption  Classify devise as general or demonstrative  Classify inter vivos as change in form, not substance  Construe meaning of will as of time of death rather than time of execution  Create exceptions  UPC exceptions  Remaining balance on property sold  Unpaid amount on property  Unpaid fire or casualty insurance proceeds after property destroyed  Property obtained by Testator by foreclosure  Sale price of specific devised property sold by conservator Stock Splits

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o Testator executes will to A of 100 shares. Shares split 3 for 1. A gets 100 or 300? Many Modern courts discarded old approach – find A gets 300 o Dividends  Treated differently by some courts  UPC and Restatement – treated same as splits Doctrine of Satisfaction o AKA ademption by satisfaction o Applies when T makes transfer to devisee after executing will o Rebuttable presumption gift is in satisfaction of gift made by will o Like advancements under intestacy o Some states require intent in writing Exoneration of Liens o Land devised subject to mortgage o Some states – free of mortgage (debt paid by residuary) o Most states and UPC say you get mortgage too Abatement o Turns on classification of devise as specific, general, or residuary o Arises when debts and devises > assets o Operates like bankruptcy o Order:  Residuary devises reduced  General devises reduced  Specific and demonstrative devises reduced last and pro rata o UPC 3-902 takes intent of T into deciding abatement

RESTRICTIONS ON THE POWER OF DISTRIBUTION Rights of Surviving Spouse in Community Property  Putting survivor to an election o Widow’s election  Will by H devising all C.P. in trust to pay income to W for life with remainder to others on W’s death  Requires W to elect b/t surrendering her half of C.P. and taking under husbands will  Migrating Couples and Multistate Property Holdings o Conflict of law rules:  Law of situs controls problems relating to land  Law of marital domicile at time that personal property is acquired controls characterization of the property (separate or community)  Law of marital domicile at death of one spouse controls survivor’s marital rights  Moving from a Separate Property State to a Community Property State o Ownership of moveable property determined by laws of State where couple is domiciled when property acquired. o Separate Property to Community Property and H dies – W may get nothing o Quasi-Community Property rectifies this

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D/N/A to stuff outside state as law of situs applies and W gets forced share  Analogous to elective share Moving from Community Property State to Separate Property State o Generally, change in domicile from CP to SP – no change pre-existing property rights o Uniform Disposition of Community Property Rights at Death Act, enacted in 14 SP states, provides that CP brought into the state (an all property – including land in the state – traceable to CP) remains CP for purposes of testamentary disposition, unless the spouses have agreed to convert it into SP. o Tax benefits  H & W CP 100k. H dies when worth 300k. Estate tax is on ½ (150k) unless devised to W, then no tax. Income tax: W sells, for 325k, taxed on only 25k. (increase from 300k)  H & W move to SP and change title to JT (at 100k). H dies property worth 300k. Estate tax same. Income tax: Ws new basis is 50k (1/2) plus 150k, or 200k. W sells property for 325k, taxed on 125k. o CP by right of survivorship  H can’t devise his ½ - option when taking in CP – offered in 5 states.  CA says no administration unless surviving spouse elects administration.

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Estate of Shannon Cal App 1990 R makes will in ’74 intentionally omitting everybody but daughter. ’86 marries L. ’88 R dies. L filed petition for family allowance and determination of entitlement as an omitted surviving spouse. Court denied L petition to determine heirship. L dies and estate appeals. App reversed, saying issue is whether will shows specific intent to exclude L. Other side failed to prove intent to disinherit L and rebut presumption of revocation. Rights of Issues Omitted From the Will  Protection from Intentional Omission o Domestic Approach  All states but LA, kid is SOL if disinherited  However, courts may use doctrines flexibly to provide for disinherited children (lack of capacity, undue influence, etc.)  Protection from Unintentional Omission Azcunce v. Estate of Azcunce FL 1991 Child born after execution of father’s will and before execution of codicil takes under statute (will and codicil fail to provide for child). Held that where the codicil expressly republishes will, kid is not permitted child under statute. Kid is SOL.

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Pretermitted child statutes – enacted in almost all states – follow one of two patters: o Protect only children born (or adopted) after execution of the will o Operate in favor of children alive when the will was executed as well as afterborns  Failure to name all of the testator’s living children in the will invites a challenge under the pretermitted child statute

TRUSTS: CREATION AND CHARACTERISTICS Introduction  Background o A trust is a device whereby a trustee manages property as a fiduciary for one or more beneficiaries. The trustee holds legal title to the property, can sell property, and can replace with property thought more desirable. Beneficiaries hold equitable title and are entitled to payments from trust income and sometimes trust corpus too. o Many uses for trust  Estate plans  Commercial Use o A trust provides managerial intermediation o Estate Planning  Revocable trust  Testamentary marital trust  Trust for incompetent person  Trust for minor  Parties to a Trust o Settlor, Trustee, beneficiary(ies) o Settlor:  Creates trust  Aka trustor  During life (inter vivos trust) – declaration or deed  Upon death (testamentary trust) o Trustee:  May be one or several  May be settlor or beneficiary  Court will appoint if not named or named refuses or dies  3 distinct functions:  Investment  Administration  Distribution o Beneficiary(ies)  Hold equitable interests  Have a personal claim against trustee for breach of trust  Most have successive beneficial interests  Most life estates and future interests are trusts  Trust compared with a Legal Life Estate

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o Legal life tenant has possession and control of property o Trustee has legal title to trust property o Legal life tenant – no right to sell o LLT – can’t mortgage it o LLT – general power of appointment o LLT – creditor can reach Commercial uses of the trust o Before corporations – big trusts  Why we call it antitrust law  Allowed for pooling passive investment with big managers

Creation of a Trust  Intent to Create a trust o Sole question is whether the grantor manifested an intention to create a trust guardianship o ―for the use and benefit of‖ Jimenez v. Lee OR 1976 P brought suit against father alleging he was trustee for her. Lower court dismissed. 2 gifts: Grandma purchased $1000 bond; $500 gift from client in account. Bond = D and/or P and/or mom. Account = D & P & 2 siblings. D cashed bond – invested in stock ―custodian for P.‖ Part of account also invested ―Custodian.‖ TC held D didn’t hold trust in either. SC says ―it is enough if the transfer of property is made with the intent to vest the beneficial ownership in a 3rd person.‖ Doesn’t matter that D purchased stock as ―custodian‖ b/c trust was already created. Rev’d.  Precatory Language o Moral obligation unenforceable in court o ―precatory trusts‖ o ―recommendation‖ ―wish‖ ―hope‖ o Do not put recitals in testamentary instruments o Be specific ―not legally require‖ Equitable charge o Devise property to a person subject to a payment to a certain person o Creates a security interest in the property o More of relationship of debtor and secured creditor Gift o Donor must deliver property to donee, and donee must accept o May be constructive or symbolic o Fail to perfect = trust law  Can failed gift be saved by recharactirizing it as a declaration of trust?  Declaration of Trust o Does not require delivery o Can be made orally (SoF) o Must have intention

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The Hebrew University v. Nye CT 1961 Nice library of Prof and Wife. Prof died and then Wife died. Executor is D and Hebrew institutions are P. Controversy is between 1 charitable trust and other Hebrew organization. Wife said she was giving to organization in Israel. Spent the rest of her life packing and cataloguing books for shipment. TC held trust was created by declaration of trust made by wife (for organization in Israel). SC says orally made herself trustee at luncheon in Israel. But, problem with intent. Declaration of trust can’t be made for sole reason that gift failed. No Trust. Remanded. The Hebrew University v. Nye CT 1966 P now claims gift inter vivos by constructive or symbolic delivery. Court finds delivery of memorandum coupled with decedent’s acts and declarations sufficient to complete gift. Constructive Delivery. Held for P. Magic words???  Necessity of Trust property o Trust: three elements  Trustee  Beneficiary  Trust Property o Trust cannot exist without trust property (res) o Trust res may be 1 dollar or 1 cent or any interest in property that can be transferred.

Unthank v. Rippstein TX 1964 Dude wrote letter to Rippstein 3 days before his death. Wanted to give her 200 bucks a month for 5 years. Crossed out ―if I live that long‖ and wrote in margin that he wanted to bind his estate to it. R unsuccessfully tried to probate as codicil. Tried again and denied by TC. App rev’d, holding voluntary trust. Margin note created declaration of trust? Court says no. Not sufficient certainty in language. Most of what he did was express an intention to make monthly gifts followed by ineffectual attempt to bind his estate in futuro.   Trusts v. Debts o Decide whether recipient of funds is entitled to use them as his own and commingle them with his own monies Resulting Trusts o Equitable reversionary interest o Arises in 2 situations  Express trust fails or makes an incomplete disposition  1 person pays 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. 7th Cir. 1937

Brainard v. Commissioner

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Dude said he would create trust on next year’s stock profits. Did so and reported it on taxes. Trust arise before profits? No. Trust arose after profits. So first statement of declaration is out because no res. (has to renew his intent when he gets the res) Speelman v. Pascal NY 1961 Pascal wrote to secretary saying he was going to give her his shares of profits of musical and movie not yet produced. Died after. Did this constitute valid, complete, and present gift by way of assignment? Yes. Clark v. Campbell NH 1926 Had no beneficiaries – main problem. Dude said ―friends‖ that the trustee should select. Trustees argued this was a power for them to appoint. Also argued Dude intended trustees to get property outright. Court said no. Position of trustee made by clear wording – can never get property outright. (Ambiguous wording might have worked for trustees.) In Re Searight’s Estate OH 1950 George made testamentary disposition to dog Trixie to Florence with 1,000 in bank of 75 cents a day to take care of dog. But dog has no legal right (can’t sue) so can’t be beneficiary in a trust. General rule – no ben, no trust. But court said it is an honorary trust – trustee has burden of caring for dog – no legal trust – court said when you have a trustee willing to accept duty of care – trust does not fade. Probably would not survive rule against perpetuities (covered later)  Necessity of a written instrument o Writing required if you have inter vivos gift of land o Also required if you have a testamentary trust (trust only valid if will is valid) o O  X (to pay income for life to A) then to B  Not writing but oral declaration  Statute of Frauds prevents—what happens  Courts are split o X takes = some o X takes but with constructive trust to prevent unjust enrichment

Heible v. Heible CN 1972 P transferred title from herself to herself and son and daughter in JT. Later daughter conveys back, son does not. Mom sues son (they had agreed to convey it back). Court found constructive trust on son based on oral agreement and confidential relationship of parties. Pappas v. Pappas CN 1973 Dude 67 marries 23 year old. Dude conveys property to son (knows divorce is coming). Dude orally says son has to reconvey after divorce. Dad sues. Court allows son to reneg. Gotta have clean hands to get a constructive trust!

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Oral Trusts For Disposition at Death

Olliffe v. Wells MA 1881 Ellen assigned her estate to Wells to distribute to what he thinks is best. Wells says she wanted it to be used for charitable purposes. St. Stevens Mission – also Well’s Mission. If trust setup unlawful, goes to heirs. Court said should go to heirs b/c it is a failed trust. o Secret trusts – conveyance to trustee with no language of trust.  Constructive Trusts o Semi-Secret Trusts – language that creates intent to create trust. But beneficiaries not stated  No constructive Trusts o Many courts still continue to apply distinction between ST and SST Rights of the Beneficiaries to Distributions From the Trust  Trusts – Mandatory and Discretionary o Mandatory: Trustee must distribute all income o Discretionary: Trustee has discretion over payment of either income or principle or both o May be limited to an ascertainable support standard (support trust) o Discretionary Support Trust Marsman v. Nasca MA app 1991 Trustee of discretionary support trust have a duty to inquire into financial resources? If so, remedy for failure? S died ’71, survived by 2nd H and daughter. Lawyer trustee. Give H reasonable care and maintenance in lawyer’s discretion. Remainder to daughter and family. H remarried, drew up will leaving everything to Marge. H needed funds, Lawyer wanted request and reason in writing. H into nursing home, can’t pay bills, daughter takes over and gets house at Hs death. What about Marge? Daughter dies. Daughter’s husband kicks out Marge. App says he keeps house. But H should have gotten help from trust and he didn’t. Exculpatory clause is effective, so Lawyer not personally liable, but payments that would have allowed H to keep house and pay bills will be paid from trust to Hs estate   Duty to inquire – ―deem advisable for his comfortable support and maintenance‖ Limitations on Trustee? o Absolute – reasonable test o UTC – Good faith o Restatement (3rd) – ―absolute‖ not interpreted literally, must act honestly

Rights of Beneficiary’s Creditors  Discretionary Trust o Trad – Creditors can’t reach trust o Some – Creditors can get paid before beneficiary o Pure Discretionary – beneficiary rights?

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Trustee no give money, remedy? Court will compel if it finds abuse of discretion (breach of fiduciary duty) o Exculpatory trust purporting to insulate trustee from judicial review altogether is unenforceable Spendthrift Trusts o Settlor controls what beneficiary can do with beneficiary’s interest o Normally beneficiary’s interest is freely transferable  ST prevents assigning or selling o Spendthrift – beneficiary can’t voluntarily alienate interest o Not ST unless settlor expressly inserts spendthrift clause o Settlor – transferring trust res to X as trustee for benefit of A  Who owns res?  US – settlor – STT allowed  UK – beneficiary – STT not allowed o NY – all are ST unless expressly otherwise o CREDITORS CAN’T REACH!  Can reach after receiving income  Dude files for Ch 7 bankruptcy, then gets 30 M from ST – free and clear

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Scheffel v. Krueger NH 2001 Dude beneficiary to spendthrift trust. Gets a judgment against him for molesting. P wanted to attack trust to satisfy judgment. Trial Court held spendthrift provision enforceable and dismissed. SC affirmed, saying law says creditors can’t reach, and no public policy exception exists. o Focus: determine rights of creditors of beneficiaries when STT provision o Great value given to settlor’s wishes Shelley v. Shelley OR 1960 Beneficiary of ST trust married 2x divorced 2x, 2 children by each marriage. Both D’s had child support and 1 had alimony. Beneficiary disappeared. ST provision given effect to bar claims of beneficiary’s childred? Court said it could decide on exceptions to general rule, and Public Policy clearly demands the support payments. Beneficiary’s duty to support former W and children should override ST provision. Not on corpus, however, but children could invade as beneficiaries and in ―emergency.‖  Judgment for child or spousal support can be enforced against the debtor’s interest in spendthrift trusts in the majority of states o Min – can’t o Some – granted this power by statute. Discretionary Trust – ben asks for money, T says no o Can ben sue?  Yes, abuse of discretion o Can creditor of ben sue for abuse of discretion?  No – ben has legal interest, creditor does not (generally)  UTC – codifies – unless type of creditor (like Shelly) §504(c)

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ERISA – pension plans may not be assigned or alienated

Modification & Termination of Trusts  Introduction o If the settlor and all beneficiaries consent, an irrevocable trust may be modified or terminated o What if settlor is dead?  US – no, even if all beneficiaries consent, if it would be contrary to a material purpose of the settlor  Claflin Doctrine – settlor owns property – settlor must agree to termination or modification. Even if beneficiaries agree – can’t be against material purpose of settlor. o What is a settlor material purpose?  Must control the dead man’s hand  Modification In Re Trust of Stuchell OR App 1990 Life beneficiaries to trust want to modify b/c retarded kid will get it on their deaths and won’t qualify for public assistance. Rule: can modify, unless sole reason is would be more advantageous to beneficiaries. Affirmed – no modification. Retard SOL. Courts apply dead hand control practically. o Some states have statutes that allow mod for impecunious beneficiaries (Court’s discretion) o Restatement 3rd creates liberalizing trend (UTC as well) – moving in the direction of UK law (ben control) o Admin. Directions – easier to get changed for changed circs o Should changes in circs justify modification of terms?  Cal Probate Code: Yes (circumstances not known or anticipated by settlor) and would impair or defeat purposes of trust  UTC: same  Admin: impractical or wasteful  Upon term – distribute in a manner consistent with purposes of trust o Reformation: equitable remedy that conforms an instrument to what it was intended to say o Modification: under equitable deviation principles changes the terms of the instrument to reflect not what the settlor meant to say, but what the court believes the settlor would have said had the settlor anticipated the changed circumstances o Trust Protector: has the ability to alter trust and hire or fire trustees (usually bank institutions.) Can increase or decrease payouts, etc  Codified in handful of states  Ratified by UTC Termination o Generally, can’t be terminated if: 29

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ST trust Beneficiary not to receive the principal until attaining a specific age  Discretionary trust  Trust for the support of beneficiary o These provisions usually deemed to state a material purpose of the settlor In Re Estate of Brown VT 1987 Dude died, created trust for educations of nephew’s kids. When education complete, pay income to nephew and wife for life, remainder to then living kids. Educations complete, paying income to nephew and wife –N and W petitioned for term, arguing sole purpose of trust completed. Kids agreed. LC agreed. SC rev’d, saying there was a second purpose: to insure life-long income for N and W at discretion of trustee. Settlor’s intention would be defeated if trust were allowed. NO TERMINATION o Most states – trust irrevocable unless express or implied provision that settlor reserves power to revoke o Handful – opposite (CA, TX, OK)  UTC as well o Revoked by will? – Trad: no; UTC: yes Trustee Removal o Remedy for breach of trust, not mod. o Must set threshold high as to allow trustee to carry out settlor’s wishes, but not too high as to allow mismanagement.  TRAD: Courts remove for serious breach, but not disagreement or simple breach  UTC: serious breach, lack or cooperation impairs administration of trust, unfit, unwilling trustee, and substantial change of circumstances.

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TRUST ADMINISTRATION: THE FIDUCIARY OBLIGATION Introduction  Trustee: fiduciary obligations trustee owes to trust o Investment o Admin o Distribution  Not only by trustee o Executor burdened w/ financial obligation as well o Directors to shareholders o Etc.  Financial Obligation o Duty of loyalty o Duty of prudence o Duty to subsidiary rules that apply to 1 and 2  Relate to trust administration 30

o Loyalty – imposes on T obligation to refrain from self dealing and conflict of interest transactions o Prudence – reasonable person o Subs – invest, enforce and defend, diversify investments – minimize costs, etc. Compliance with rules of loyalty and prudence adduced after the fact!  Source of trustee power o Trust instrument o Statutes – state law Hartman v. Hartle NJ 1923 Dorothea died ’21 testate. Named 2 sons in law executors. Sell and divide equally (5 children). Sold farm to a son (3000) who bought for sister (wife of one of the executors). She sold to Mike (D) for 5000. Got sued for improper and fraudulent sale. Can’t sell to self or W of trustee. Daughter gets 1/5 of profits. Duty of Loyalty Estate of Collins Cal App 1977 Ps beneficiaries under testamentary trust of deceased. Ds were deceased biz partner and lawyer – trustees. Ts filed for termination. Ps objected – improper investing – wanted surcharge. TC found for Ds. App says evidence d/n support finding that Ds properly invested – rev’d.  Purchaser – obligation to trust? o Y wants to buy BA from trust o Prob #1 p 778  X sells BA to B, who has notice of trust (no notice, no obligation)  B believes sale is necessary for support of A (ben) but it isn’t  Can B purchase w/ no problem?  CL standard very strict – not then no  UTC – B reasonably believes – okay  Y loses – may be required to re-convey

Can’t self deal regardless of value! Even if you bid more – absolute duty of loyalty Hartman Executor had to disgorge profits In Re Gleeson’s Will Ill App 1955 Trustee was tenant. Near end of lease term LL dies and names tenant trustee. Can’t be both – should choose one or the other. Profits made on crop had to be paid to children.  Beneficiary consent?

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o Can after full disclosure, Trustee acted in good faith, transaction must be objectively fair and reasonable Seek advance judicial approval? Yes Settlor Consent? Always o Bank allowed to deposit in own institution when trustee

Duty of Prudence  Imposes objective standard of care  Particularly hard on trustee when it comes to investments o Basic relationship b/t Risk v. Reward(return) o What balance does trustee have to strike?  Courts have given lists that are conclusively prudent (strong bias towards corpus protection)  Prudent Man Rule – intended to have trustees strike a balance (risk v. reward) ―observe how men of prudence manage their own affairs‖  Codified in UPIA o Widely adopted o 3 core concepts  Increased sensitivity b/t risk and reward  Diversification imperative  Experts allowed o Applies to total portfolio, not 1 specific asset o Takes bens income into account Collins 80,000 trustees received. High risk not smart – widow and children. Invest 50 of 80 into second mortgage. Lawyer represented dev who received 2nd mortgage – violates loyalty—self dealing. Violated PMR and UPIA.  ERISA o Prudent Investor Rule is standard. Duty of Loyalty = exclusive benefit rule

Diversification  Uniform Prudent Investor Act (1994) o §3 Diversification  Trustee shall diversify unless reasonably determines purposes of trust better served w/out diversifying  Trustees owe duty (fiduciary) (UPIA) o Loyalty – sensitivity to Risk/Return o Prudence - diversification o Subsidiary – delegation  3 different risks o Market o Industry 32

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Last two are subject to diversification

In Re Estate of Janes NY 1997 Janes dies ’73, survived by W. Janes’ 3.5M estate – 2.5M stock – 71% Kodak – 1.7M. Janes’ ’63 will and ’69 codicil made 3 trusts: 1)Marital deduction trust of 50% Estate’s assets to W for life – gave W invasion of principal and testamentary power over remaining principal. 2)Charitable trust – 25% of Estate – annual distributions to selected charities. 3) Rest paid to W for life then went into Charitable trust. By ’78, shares had fallen from 135 to around 40. W sued to surcharge petitioner for losses due to imprudent retention of high concentration of Kodak stock. Court found for W’s estate (W died ’86) and imposed 6M surcharge on Petitioner. Cour adopted ―lost profits‖ or ―market index‖ measure – what proceeds would have yielded had they been diversified in ’73. Appellate Division modified damages, but upheld LC finding that petitioner liable for negligent failure to diversify…Proper measure was value of the capital that was lost – difference b/t value of stock at time should have been sold and value when ultimately sold = 4M. Highest court affirms  What if Settlor says don’t sell and ben wants to sell? o Retention Authorized  Older cases  By express language in the trust instrument – settlor can relieve the trustee of the duty to diversify so that the trustee may retain the trust’s inception assets  If authorization to retain is discretionary or permissive, may be abuse if trustee retains  Courts give narrow interp to these provisos o Retention Required  Trustee must retain  Undiversification almost always bad for ben  Changed circs usually allow you to get around – have to petition the court

Delegation  Traditional Nondelegation Rule: ―Trustee under a duty to ben not to delegate‖  Can’t delegate fiduciary obligation to an expert Shriners Hospitals v. Gardiner AZ 1987 G made trust pay income to daughter, Mary Jane and 2 grandchildren, Charles and Robert, remainder to Shriners. MJ trustee, Charles 1st alt, Robert 2nd alt. MJ let Charles do investing. Charles embezzled. Shriners sued MJ for surcharge – improper delegation. Court said she could delegate, but question of causation. Impartiality and the Pricipal and Income Problem  Duty of Impartiality o Balance

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Trustee must strike a balance b/t beneficiaries and their respective interests

Dennis v. Rhode Island Hospital Trust Co. 1st Cir. 1984 Great-grandchildren of Alice Sullivan claimed the Bank trustee breached fiduciary obligations owed to them as bens of trust created in 1920. Trust will cease to exist in ’91. (21 years after death of last child). After that distributes all income for benefit of living issue, principal to issue surviving in ’91. 2 GG kids are entitled to income until ’91, and then principal. DC ordered surcharge of 365,000, b/c it found that trustee should have sold the buildings (principal asset of trust) in 1950 – this apparently restored trust to it’s 1950 level. App affirms w/ one exception – BUILDING FLEXIBILITY INTO TRUSTS: POWERS OF APPOINTMENT Introduction  Types of Powers o Powers of appointment in bens  Powers that give bens ability to choose who next will take the beneficial interest in the property subject to the power  Allow settlor to postpone and delegate o Terminology  Donor – person who creates power of appointment  Donee – person who holds power  Objects of the Power – persons in whose favor power may be exercised  Appointee – person in whose favor power has been exercised  Takers in default of appointment – if donee fails to exercise power  General Power – power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate.  Special Power – power not exercisable in favor of the donee, his estate, etc.  Does the appointive property belong to donor or donee? o CL – viewed as donor’s – donee merely does an act for donor.  Relation back doctrine. o Some situations – Donee of general power treated as owner – Fed Tax laws Irwin union Bank v. Long IN 1974 V got judgment from P of 15k from divorce decree. This action = V trying to get paid from P’s trust. P allowed to w/draw 4% of trust corpus per year. TC gave this 4% to V. P contends general power, and that if power not exercised, creditors can’t reach (P never has W/drawn). V argues P has absolute control and use of 4% corpus. App reversed, saying P has no control until it is exercised, therefore creditors can’t reach. CONSTRUCTION OF TRUSTS: FUTURE INTERESTS Introduction

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You must be able to identify, so that you can avoid, intent-defeating technical rules of future interests law still with us, as well as commonly encountered examples of ambiguous language

Classification of Future Interests Determined by arbitrary rules of CL not by certainty of possession  Interest in the Transferor o Reversion o Possibility of reverter o Right of entry (power of termination)  Interests in a transferee o Vested remainder o Contingent remainder o Executory interest  Rule Against Perpetuities (RAP) o No interest in real or personal property is good unless it must vest if at all not later than 21 years after some life  Reversion o Interest remaining in the grantor, or in the successor in interest of a testator, who transfers a vested estate of a lesser quantum than that of the vested estate which he has o Never created; retained interest that arises by operation of law when the transferor has conveyed away a lesser estate than the transferor had. o Would not violate RAP b/c it is a retained interest  Possibility of Reverter; Right of Entry o Possibility of reverter is the future interest that remains in the grantor who conveys a fee simple determinable.  O conveys ―to School Board so long as used for a school‖ The School Board has a fee simple determinable; O has a possibility of reverter, which becomes possessory automatically upon expiration of the determinable fee. o Right of entry for condition broken is the future interest that is retained by the grantor who conveys a fee simple subject to a condition subsequent.  O conveys ―to School Board, but if the land ceases to be used for school purposes, O has a right to reenter.‖ School Board has a fee simple subject to a condition subsequent; O has a right of entry, which O has the option to exercise or not. o These are usually not found in Trusts  Remainders o Future interest in a transferee that will become possessory, if at all, upon the expiration of all prior interests simultaneously created. o Must only be possible, not certain o Take value of property and subtract value of life estate = value of remainder o Either vested or contingent  Vested if

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1) it is given to a presently ascertained person and 2) is not subject to a condition precedent (other than the termination of the preceding estates)  Contingent if  1) it is not given to a presently ascertained person or  2) it is subject to a condition precedent Executory Interests o Differs from remainder in that it is a divesting interest o Springing and Shifting  Shifting – an executory interest that may divest another transferee if a specified event happens (shifts the property from one transferee to another)  Springing – an executory interest that may divest the transferor in the future if a specified event happens  Don’t see springing today (to my daughter when she gets married) Problems o O conveys a fund in trust ―for A for life, then to A’s children, but if at A’s death A is not survived by any children, then to B.‖ At the time the trust is created, A has not children. What interests are created?  A = Life Estate; A children Contingent Remainder; B Alternative Contingent Remainder o Same as above, but 2 years later, two children, C and D, are born to A. C dies, devising his property to his wife, W. A dies. To whom should the trust assets be distributed?  C and D = Vested Remainder Subject to Open; B has shifting Executory Interest.  W takes half, D takes half o O conveys a fund in trust ―for A for life, then to such of A’s children as survive A, but if none of A’s children survive A, then to B.‖ At the time the trust is created, A has two children, C and D. Then C dies, devising his property to his wife, W. A dies. To whom should the trust assets be distributed?  A = Life Estate; children condition precedent = Contingent Remainder; B = Alternate Contingent Remainder  D gets all (difference is ―any children‖ v. ―such as survive‖)

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Construction of Trust Instruments  Court construes an instrument in order to construct an estate plan  Preference for vested instruments o CL had strong preference – ambiguous instruments as creating vested rather than contingent remainders o Consequences:  Vested remainder was not subject to the doctrine of destructibility of contingent remainders that defeated the grantor’s intent

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Vested remainder accelerated into possession upon termination of the life estate, solving vexing problems of possession and undisposed income  Vested remainder was transferable inter vivos, making land more alienable  Vested remainder was not subject to the RAP, rule that defeats grantor’s intent Acceleration into possession o CL – vested remainder accelerated into possession whenever and however preceding estate ends. CR d/n accelerate b/c remaindermen are not entitled until ascertained and condition precedent has occurred.

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In Re Estate of Gilbert NY 1992 Dude dies leaving 40B estate. W and 4 children. Trust for W and 4 for kids. W dies and her Trust added to 4 kids’ trusts. Lester – religious nut – disclaims. Executor argues trust not created yet – wholly discretionary – if allowed to disclaim, then no trust can ever be created and protect someone who might need it in the future. Court held renunciation valid and Lester treated as if he had died without issues.  Transferability o At common law, Vested Remainders, including defeasibly vested ones, were transferable inter vivos o Contingent Remainders and executory interests were not o Today – only 9 states o Future interest contingent upon surviving to the time of possession not transferable at death. Requiring survival to time of possession o General rule: no requirement remaindermen live to time of possession o If vested remainder subject to divestment, courts read divestment language strictly

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TRUST DURATION AND THE RULE AGAINST PERPETUITIES Introduction  Development of the Rule Against Perpetuities o People wanted to control their land forever o Courts were like, no way, dawg  Summary of the Rule o Restriction on the remote vesting of interests, but does not apply to charitable trusts. o Vested interests are not objectionable, but contingent interests are.  If O conveys a fund in trust ―for A for life, then to B‖ B has a vested remainder, but  If O conveys a fund in trust ―for A for life, then to B if B survives A,‖ then B has a contingent remainder o Limits the time during which property can be made subject to contingent interests to ―lives in being plus 21 years‖

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o Two basic purpose:  Keep property marketable and available for productive development in accordance with market demands  Limit ―dead hand‖ control over the property, which prevents the current owners from using the property to respond to present needs o All legal and equitable contingent future interests created in transferees are subject to the Rule Against Perpetuities. Why lives in being? o Allows the settlor to deduce who is capable of controlling the land now— persons he knows and sees. o Draws the line b/t those people and people he cannot know and see It is a rule of proof o Contingent future interest is void from the outset, if it is not certain that the interest will either vest or fail—that one or the other must happen— within 21 years after the death of ―some life in being at the creation of the interest.‖ o O ―to pay the income to A for life, then to A’s children for their lives, then to pay the principal to B.‖ A has no children. A’s life estate is vested in possession upon creation. The remainder to A’s children for their lives will vest in possession or, if there are no children, fail upon A’s death. B’s remainder is vested in interest upon creation. Thus, all interests created by the transfer are valid.

Example 2005 – interest created – AB&C are alive – they are lives in being 2006 – AB&C die + 21 years 2027 – ends RAP Under what conditions can interest vest remotely? o Condition precedent occurs after o CP is linked to after-born person  After-born person does not extend (lives in being +21)  After born can arise in: o Fertile octogenarian o Unborn widow  P. 677 2b o To A for life, then to B if any person goes to the planet Saturn  2027 RAP ends – Saturn in 2030  Interest vests, but void as an issue from the beginning Look out for CP that can occur outside the RAP period  After-born person (see example) o 2006 – D is born o 2007 – AB&C die o + 21 o 2028 RAP runs 

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o ―then living‖ – 2030 vests in D, but entire conveyance is void Dickerson v. Union National Bank of Little Rock AR 1980  Unborn Widow Case  Real problem is ambiguous language o N—Cecil and Martin o Cecil—A,B o Martin—C,D,E,F,G o Martin marries X later  Failure to ID Martin’s Widow  Bodily heirs – means issue  Using issue=multi-generational class (p640 n 3)  Relevant lives = ABCDEFG – 2005  2006 – X is born  2026 – martin marries X  2027 – Cecil, Martin, ABCDEFG all die  +21  2048 end RAP  2068 – X dies  Bodily heirs of M & C interest’s vest  Void at issue  Court didn’t talk about unborn child turning 25 past the perpetuities period  P. 684 #2 o To my son = valid o Widow if any = valid b/c it is for life—it will either vest or fail at death of son o Principal to son’s children = vested (b/c no condition precedent) subject to total divestment o Red Cross = shifting executory interest. It can divest children of their interest.  Does conveyance to red cross violate RAP?  YES  Why?  B/c of unborn widow – interest could occur beyond perpetuities period. Conveyance to Red Cross = invalid (void at issue) Ambiguous Language = bad!!! Just understand these exercises; you’ll be fine on the final Application of the Rule to Class Gifts  In order for class gift to be valid o CP must be met o All or nothing rule  All class members must satisfy CP (p. 686)  Class must Close  All CP for every member must be satisfied before perpetuities period ends

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Zach Zach Law Student
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