Trusts and Estates - UVA Law
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Flusche 1 of 16 Trusts and Estates – Outline I. Introduction (2) – no general inheritance right, dead hand problem, probate admin, elective share II. Intestacy (3) – default plan (no will, invalid, incomplete) – probable intent, family protection A. Basic Scheme – spouse gets all, then kids – must survive to inherit – distribution schemes B. Transfers to Children – be clear who a is a “child”, child “in being” from conception, advancements C. Bars to Succession – homicide (= disclaimed), disclaimer (= predeceased decendent) III. Wills: Capacity & Contests (5) A. Mental Capacity B. Undue Influence – ct tends to do what it wants – presumption of UI if attorney-drafter writes himself in C. Fraud – requires causation – inducement (to do or not do), execution (character or content of doc) D. Duress – exerting almost physical force so that someone must sign, can’t revoke, etc IV. Wills: Formalities & Forms (6) A. Execution of Attested Wills – in writing + Ws; ritual, EE, protective, channeling; presence, order, sign B. Curative Doctrines – dispensing power (C&C EE), substantial compliance (if most formalities met) C. Holographic Wills – written by T’s hand & signed – but how much writing in T’s hand? – T’s intent controls D. Revocation by Writing or Act – writing (w/ formalities) or physical act (that effects the words) E. Dependent Relative Revocation (“conditional rev.”) – revocation based on mistake not effective F. Revocation by Oper. of Law – divorce (no longer have spouse), marriage (intestate share), children G. Components – all papers at execution, intended to be will – will re-published upon codicil – incorporation by reference – acts of independent significance H. Contracts Relating to Wills – ct probates will, then looks to make person w/ contractual interest whole V. Will Substitutes: Nonprobate Transfers (9) A. Revocable Trust & Pour-Over Wills – be your own trustee – will pours assets into trust upon death B. Contract Based Planning – life insurance, POD accounts, multi-party accounts, super-wills C. Planning for Incapacity – durable power of attorney, living will, disposition of body VI. Interpretation of Wills (11) A. Admission of Ext EE & Correction of Mistakes – maj. = no ext EE, no reformation B. Lapse, Anti-Lapse, and Class Gifts – if beneficiary predeceases, devise lapses, anti-lapse saves the gift C. Ademption, Satisfaction, Abatement, and Exoneration of Liens – property ! in estate, adeemed by extinction; if general bequest, and writing that supports satisfaction, ademption by satisfaction, CL – debts paid out of residuary (UPC reverses) VII. Trusts: Creation, Types, and Characteristics (13) – split title, protect beneficiaries & settlor, avoid probate, tax A. Creation – intent to create fiduciary relationship, trust property, beneficiaries, written (if real estate) B. Beneficiaries’ Rights – look at discretion + distribution standards C. Modification & Termination – if all agree, can modify or terminate – look to settlor’s intent (modification) D. Charitable Trusts – must have “charitable” purpose, modify w/ cy pres, if purpose can’t be done VIII. Wealth Transfer Taxation – Tax Planning (16) (lifetime exemption amt = $1 million) A. Gift Tax – exclusions ($12k / person per year, tuition & med expenses, Crummy trusts), deductions B. Estate Tax – repealed in 2010 – life insurance, life estates, general power of appointment – step-up basis C. Generation Skipping Transfer Tax – applies to transfer to donor more than one generation down Flusche 2 of 16 I. Introduction A. Right to inheritance? – generally, no 1. Out of the options for disposing of property, two best (least wasteful) are: 2. Will / default rules 3. Confiscation by govt. (estate tax) 4. Ascher – equalize opportunity for kids by eliminating inheritance (except: spouse, disabled child, charity) 5. Kristol – limit inheritance to $1m to any single person – strive for equality B. Dead Hand 1. Problem – no ability to change your mind w/ changing circumstances 2. Restatement § 10.1 – donor’s intent controls, to max extent allowed by law & public policy 3. Flags: violations of spousal rights, creditors’ rights, marriage, alienation, ethnicity, race, illegal activity 4. Ex: father’s restriction on son marrying Jewish girl ok, since just limits inheritance (Shapira, p. 21) 5. Destruction? – wasteful, but T might destroy during lifetime if worried that ct won’t destroy C. Probate Property – passes under will or intestacy – everything in T’s sole name D. Nonprobate Property – automatically transfers (ex: trust, life insurance, payable-on-death, joint tenancy) E. Administration of Probate Estates 1. Terms: a. Will – devise real estate to devisees; bequeath personal prop. to legatees; say “I give” b. Intestacy – real estate descends to heirs; personal property distributes to next-of-kin c. Heirs apparent – people in line to take, while living 2. Procedure a. Open probate i. Appoint personal rep (will = executor; intestacy = administrator) (a) Executor – gets letters testamentary – can collect assets of estate (b) Administrator – gets letters of administration ii. If decedent owned real estate in another state, open ancillary admin in that state b. Functions – pays off creditors, transfers title to new owners, distributes remainder c. Personal Rep – collects property, pays creditors, distributes remainder, closes estate – responsible d. Types i. CL – common = no notice, executor administers estate; solemn = notice ii. Ex parte w/ prior notice (most states) – prior notice to interested parties before personal rep appoint iii. UPC – need original will + death certificate (a) Informal – no notice until after admitted to probate (w/in 30 days) (b) Formal – must give notice, ct supervises everything e. Time for contest – UPC = 3 years from death – sometimes specific justifications for contest spelled out f. Nonclaim statutes – bar creditors’ claims at X time i. Short form – notice by publication – barred w/in 2-6 months of appointment of personal rep ii. Long form – no notice – w/in 1 year of death g. Closing – must be done in timely manner – estate tax return (wait for closing letter, up to 18 months) F. Necessity of Probate – primarily, make sure titles transferred 1. Car? – many states have rules to allow affidavits for title transfer 2. Personal property? – possession presumed to be title 3. Small estate ($5k to $100k) – personal affidavits suffice G. Surviving Spouse 1. Homestead – protect home of spouse & family – jurisdictions differ on $ allowed 2. Personal property set-aside – creditors can’t touch tangible personal property up to certain $ 3. Family allowance – support spouse for estate admin period – larger, if dependent children 4. CL – dower – W gets life estate in 1/3 of H’s real estate; curtesy – H has life estate in ALL of W’s, if kids 5. Elective Share a. Amt – most jurisdictions = half of estate b. What is estate? – probate estate OR augmented estate? Flusche 3 of 16 c. Theory – partnership – assume half of estate; support – reasonable amt for support d. UPC – sliding scale based on marriage length – 1 year = 3%, 15+ years = 50% H. Professional Responsibility 1. Estate planning has one of highest rates of malpractice suits 2. Watch out for conflicts of interest II. Intestacy: Estate Plan by Default A. Basic Scheme 1. Default plan for property distribution – no will, invalid will, incomplete will 2. Policies: probable intent of decedent, family protection 3. Spouse gets everything, then to children 4. Why not up the line to ancestors? – most people want assets to children, children will earn more for society 5. Spousal share a. Same as elective share? – no – intestacy ~ will of decedent, elective share is against decedent’s will b. Until final divorce decree, spouse takes under intestacy AND elective share c. Domestic partners? – definitional issue 6. Simultaneous Death a. To outlive someone, must live longer than him by a moment in time b. USDA – neither inherits from the other c. Problem – life support systems can keep people alive (Janus, p. 68) d. Amended USDA – C&C EE that claimant outlived decedent by 120 hours e. In will, require at least 30 days 7. Shares of Descendants a. If member of line is deceased, their issue “represents” the deceased b. English per stirpes (14 states) i. Divide property into # of living children and deceased children who have issue ii. Children of deceased parent move into deceased parent’s shoes iii. Treats each line of descendants equally c. Modern per stirpes (half the states) i. If at least 1 surviving child, exactly like English ii. Go down to closest living generation iii. Treats each line, beginning with closest living generation, equally d. Per capita at each generation (12 states + UPC) i. Start dividing at generation where someone is alive ii. People who are deceased at that level – pool their shares & drop down to reps at next level iii. Treats each taker at each generation equally w/ other takers at that generation 8. UPC a. First, deal w/ the spouse i. 100% if: no descendants or parents OR all descendants are also spouse’s descendants ii. $200k + ¾ if: no descendants, but parent survives iii. $150k + ½ if: spouse has children from prior marriage iv. $100k + ½ if: decedent has children from prior marriage b. Everyone else i. No spouse, goes to descendants ii. If no descendants, go up and branch down iii. If none, go up to grandparents & split down iv. If no one can take, escheats to state 9. Shares of Ancestors and Collateral Kindred a. Collaterals = all blood relatives who are neither descendants nor ancestors (first-line = parent’s issue) b. All jurisdictions – if no spouse, no descendant, no parent – go to first-line collaterals c. If no first-line, two schemes: i. Parentelic – go straight up, look at their descendants – keep going until find someone living Flusche 4 of 16 ii. Degree-of-relationship – closest kin, counting degrees of relat. – count steps to common ancestor 10. Half-bloods – majority + UPC – treat exactly like full-bloods; minority – get half share B. Transfers to Children 1. Adopted Children a. If drafting will, be clear about who is a “child” b. UPC i. § 2-113 – if related by 2 lines, take larger share ii. § 2-114 – inherit through natural parents, unless adopted (except if adoption is from remarrying) c. Most states, adopted children included in class of “issue,” “heirs,” or “descendants” d. Ex: W remarries & husband adopts kids from prior marriage – kids can’t inherit from natural father (Hall, p. 83) 2. Adult Adoption a. Most states don’t distinguish btw adults & minors b. Reasons to do this: provide standing for will contest, special power of appointment 3. Posthumous Children a. Conceived before death, but born after b. Rule – treated as “in being” from moment of conception if: it’s to child’s advantage + born alive c. 280 gestational period – rebuttable presumption 4. Nonmarital Children a. All jurisdictions, can inherit from mother b. Practically, hard to determine father 5. Reproductive Technology a. Rule – genetic relationship + spouse’s consent to bear and support + statute of limitations i. (Woodward, p. 102 – H dies from leukemia after sperm extracted – W has twins 2 years later) b. Restatement of Property – must be w/in reasonable time of death, under circumstances where decedent would’ve approved of child’s right to inherit c. Uniform Parentage Act – affirmative consent (written EE) – but what about 20 years later? 6. Advancements a. Definition – any property given to a child b. CL – parents presumed to treat every child equally – pool together all shares & divide up c. Problem – virtually impossible to administer, even if just tracing big stuff d. Most states – reversed presumption – lifetime gifts NOT presumed to be advancement e. UPC – presumed to be gift, unless there is contemporaneous writing by donor OR contemporaneous writing by recipient acknowledging advancement f. Question clients about kids, status, health issues, schools, etc 7. Guardianship and Property Management of Minors a. Minor has no authority to make legal decisions b. Guardian of the person – cares for child and figures out what $ required – doesn’t control assets i. Biggest reason for young people w/ children to have a will c. Property i. Guardianship of the property (a) Strict ct supervision – must go to court for anything (b) Never let it happen! ii. Conservatorship (a) Has rights similar to trustee (b) Still reports to ct about once/year – file accounting to see what’s happening iii. Custodianship (a) Common method – new Uniform Transfers to Minors Act (UTMA) (b) Through will only (c) Very little ct supervision (d) Parents appointed a lot of the time Flusche 5 of 16 (e) By statute, child must get ALL $ at either age 18, 19, or 21, depending upon property & statute iv. Trust (a) Most flexible, but also more expensive (b) Can do whatever you want, as long as not violating public policy v. Facility of payment clauses (a) Usually done for tangible personal property – technically, children don’t get this either (b) Executor can distribute to defined person 8. Protection from Intentional Omission a. Children have no right to inheritance, except sometimes in LA b. Easiest to leave something to disfavored child – less likely he/she will contest the will c. Forced share for children? i. LA – if child under 23, mentally infirm or disabled, w/ exceptions d. Interrorum clause – if you contest this will, you get nothing 9. Protection from Unintentional Omission a. Pretermitted child statutes b. Almost all jurisdictions have these – some apply to children after will execution, others to all children c. UPC i. If T omits any child born/adopted after executing will ii. If no other children living at time of execution – omitted child gets intestate share, unless person taking under will is parent of child (usually spouse) iii. Presume no intent to omit child, unless can show intent w/in document or nonprobate transfer C. Bars to Succession 1. Homicide a. If you kill someone, and you inherit as a result, we may void that, depending upon mens rea b. UPC – applies to nonprobate transfers as well c. States – slayer treated as having predeceased the decedent d. UPC – slayer treated as having disclaimed the property (which = predeceasing) e. Heirs of slayer? – majority – allows them to take – they are innocent f. Under UPC – if conviction of felonious killing, slayer is barred – if acquitted, ct could decide based on preponderance of EE g. If slayer barred, ct will impose constructive trust on him (Mahoney, p. 126 – was it intentional?) h. Should there be exception for mercy killings? – EE problems 2. Disclaimer a. Post-mortem estate planning – beneficiaries can alter estate plan w/ disclaimers b. If disclaim, treated as predeceasing the decedent c. UPC – no time limit, but want it done w/in 9 months of creation of interest (for Fed Tax) d. Avoid creditors – majority allows it, but minority doesn’t e. Fed won’t observe legal fictions defined by states, when they upset valid fed claims (Drye, p. 134 – son disclaimed inheritance to avoid tax liens, passing estate to his daughter) f. If disclaim inheritance, can mess up Medicaid qualification, even though you have no $ (Troy, p. 136) III. Wills: Capacity and Contests A. Mental Capacity B. Undue Influence 1. Courts tend to do what they want to get the result they want, regardless of the law 2. Presumption of UI when an attorney writes himself into will, unless related to T 3. Widow cut out children of deceased son from first H – no undue influence by son (Lipper, p. 163) 4. Intimate relationship gives rise to presumption of UI (Moses, p. 170) 5. Revocable trust / living trust a. Will substitute b. Transfer all your assets into trust, often name yourself as trustee c. Less likely to be invalidated by ct – would have to undo all transactions of the trust since inception Flusche 6 of 16 d. If person lived under trust for several years, harder to say that there was UI in creation 6. Ct undid will regarding 2 homosexual men (Kaufmann, p. 174) C. Fraud 1. Inducement – misrepresentation of facts that caused T to do something or not do something 2. Execution – misrepresentation of character or content of document T signs 3. UI doesn’t require misrepresentation 4. Often have both fraud and UI – also may have capacity issues 5. Requires causation 6. Nurses provided care for old woman, convinced her that family was bad & to change will (Puckett, p. 187) D. Duress 1. Definition = someone exerting almost physical force so that someone must sign will, can’t revoke, etc 2. Ct invalidated will – assertion that religious org had dr. kill woman so couldn’t revoke (Fr. Divine, p. 189) IV. Wills: Formalities and Forms A. Execution of Attested Wills 1. Attested will = in writing + witnesses (it was will, T signed in front of them, had mental capacity) 2. Functions: a. Ritual – impress importance upon T b. Evidentiary – allows ct to rely on will – saves time and effort c. Protective – more difficult to exert UI d. Channeling – easier to determine wishes, if channeled through standard formalities 3. Minority – allows oral wills (small amts of personal property, members of armed forces) 4. UPC § 2-502 – requires attestation – no longer has presence requirement 5. Will invalidated if don’t comply w/ formalities (Groffman, p. 204 – didn’t acknowledge signature in front of both witnesses, witnesses didn’t sign in presence of each other and T) 6. Ct might be draconian, invalidate will even if 4 functions served (Stevens, p. 205 – T signed will in lobby, witnesses didn’t sign in front of him) 7. Requirements a. Presence – T, witnesses – tests: line of sight, conscious presence, UPC (eliminated) b. Order – T must sign first – witnesses are attesting to the T’s signature c. Valid signature – any mark, as long as intended by T – if doing for someone, they must ask for help 8. Additions after T’s signature (don’t do it) a. Depends upon what jurisdiction says about subscription (will signed at end & nothing follows) b. Some might invalidate whole will, others deem extra line to be ineffective codicil 9. Publication – T tells witnesses that document is a will – ask T “Is this your will?” 10. Video or electronic – not a good idea – only some jurisdictions allow oral wills in limited circumstances 11. Attestation clause a. Recitation by witnesses that the will was duly and validly executed b. Not required by any state – professional malpractice not to include it – prima facie EE of due execution 12. Notarization – only required in LA – always want to have notary for self-proving affidavit 13. Typically, don’t permit family members to be witnesses – want disinterested people, not beneficiaries 14. Function of witnesses: a. Ancient CL – interested person not competent to sign as witness to a will b. Most jurisdictions have purging statutes – interested witness either forfeits interest & will stands OR forfeit amt in excess of intestacy amt c. Supernumerary witnesses – if one is interested, may allow interested witness to take interest under will 15. Witness must be disinterested at time of execution – disclaimer doesn’t count (Parsons, p. 211) 16. Procedure a. Fasten all pages together – number pages & recite total number b. Lawyer makes sure T read & understands will c. In room, closed door – 3 witnesses, attorney, notary, T d. “Is this your will?” Flusche 7 of 16 e. “Does it state your intentions of how you want to dispose of your property after death?” f. “Do you want X, Y, and Z to attest your will today?” g. Everyone needs to be able to see T sign h. T initials bottom, right-hand corner of every page (and recites at end) i. Lawyer can paraphrase attestation clause for witnesses j. After T signed, witnesses sign names & write down addresses k. Self-proving affidavit – in attestation clause OR separate document – notarized statement that all ok l. While everyone still there, make sure all is good m. THEN have notary sign n. Memo to client file that everything done right – ESP. if something out of the ordinary 17. Storage of will – best option = firm’s vault – make sure known location, safe from hazard or modification 18. H and W signed mirror-image wills, but signed wrong ones – cases came out opposite a. (Pavlinko’s Estate, p. 220 – refused probate – real question = testamentary intent) b. (Snide, p. 223 – narrow exception – ct reformed will by switching the names) B. Curative Doctrines 1. Dispensing power – ct can dispense w/ formalities if C&C EE that decedent intended document to be a will a. (Hall, p. 231 – lawyer drafted joint will, told H and W valid until changes incorporated – ok) 2. Substantial compliance – most of formalities met, but some aren’t a. (Ranney, p. 226 – witnesses only signed 2-step affidavit – remanded to make sure witnesses intended to witness the will) 3. Which is stricter? – substantial compliance (in theory) – but courts apply doctrine to get result they want 4. Most important formalities a. Writing – evidentiary b. Signature – intent + understanding by T c. Attestation – why require? – don’t for life insurance, revocable trusts, etc C. Holographic Wills 1. Basic requirements – written by T’s hand and signed 2. Letter written to children held valid as will, since says “if enny thing happens” (Kimmel’s Estate, p. 237) 3. Conditional will – majority holds valid – language of condition is justification for writing 4. Requirements a. Signature – majority = anywhere on document b. Handwriting – how much? i. 1st Gen – entirely written, signed, and dated by T’s hand (9 states) ii. 2nd Gen – material provisions + signature (5 states + original UPC) iii. 3rd Gen – material portions (1990 UPC) – amt and who is getting it c. Arizona examples i. Mulkins (p. 242) – 1st Gen – some preprinted language – treated as “surplusage” ii. Johnson (p. 242) – 2nd Gen – ct denied probate of fill in the blank will iii. Muder (p. 243) – same as Johnson – but upheld will (more like 2nd Gen should be applied 5. Must look to whether T intended document to be a will (Kuralt, p. 245 – ct looks to whether T intended to transfer property) 6. Court denied probate of document that lawyer didn’t treat as a will (Smith, p. 251 – lady writes intentions on scrap of paper, mails to lawyer – lawyer staples to H’s probate file) D. Revocation of Will by Writing or Physical Act 1. Two methods: writing (executed w/ testamentary formalities) OR physical act (destruction, writing on works, marking through signature, etc) 2. Oral revocation not permitted – opens door for fraud 3. UPC a. Subsequent will that revokes previous will or part of it expressly or by inconsistency b. Revocatory act – by T or in T’s conscious presence & under T’s direction WITH intent to revoke – includes: burning, tearing, canceling, obliterating, or destroying any part – doesn’t have to touch words Flusche 8 of 16 4. Most jurisdictions require physical act to actually effect the words on the document 5. Revocation by inconsistency – subsequent will disposes of property in a different manner a. If fully disposes of property = revocation b. If doesn’t fully dispose = codicil c. Majority – revocation of codicil doesn’t revoke original will 6. Presumption – if will in T’s possession, but not found at death = revoked (Harrison, p. 253 – T asked attorney to revoke will – attorney ripped it up, mailed to T – pieces not found at death – will not revoked by lawyer, but presumption kicks in) 7. Lost wills – need C&C EE of contents OR a copy – some states don’t allow probate, unless in existence at T’s death OR fraudulently destroyed during T’s life 8. Writing on back of documents “null and void” does not revoke (Thompson, p. 255 – not a formal will, nor holographic will – but, under UPC, this would be revocation) 9. Partial revocation by physical act (line through a provision giving $ to A) a. Not valid in many jurisdictions (could be holographic codicil) b. UPC permits it E. Dependent Relative Revocation (a.k.a. “conditional revocation”) 1. Equitable doctrine – if T revokes will based on mistake, revocation not effective IF T wouldn’t have revoked will, had T known actual law / fact 2. Justification – mistake negates required intent to revoke – intent is tainted b/c of mistake 3. Presumption – T would prefer will #2 to intestacy – rebuttable by facts and circumstances 4. Usually applied only when alternative plan of disposition fails OR mistake is recited in document 5. (LaCroix, p. 260 – T executes codicil to clarify nephew’s name – but Senecal’s interest purged, since H is a witness – Ct upheld 2nd will) 6. (Alburn, p. 264 – T executes 1st will, then 2nd will (revoking 1st) – T revokes 2nd will by physical act, ends up intestate – Ct probates 2nd will) 7. Revival a. English CL – will #1 not revoked unless will #2 in existence until T’s death b. Majority – will #1 revoked by will #2 at time of will #2’s execution (need intent to revive will #1) c. Minority – revoked will not revived unless re-executed w/ testamentary formalities d. UPC – first will revoked by #2 – tear up #2, will #1 presumed revoked – partial revocation, presume will #1 is revived F. Revocation by Operation of Law 1. Divorce a. Will – provisions for divorced spouse are revoked i. UPC – cuts out relatives of ex-spouse AND renders void appointment of former spouse as fiduciary b. Nonprobate transfers – doesn’t usually revoke – UPC – revokes any revocable transfer c. Retirement & pension plans – fed has special rules 2. Marriage – new spouse gets either intestate share or forced share 3. Children – depends upon pretermitted child statutes – some: will + marriage + children = revoked will G. Components of a Will 1. Will = all papers present at execution, intended to be part of will 2. Republication of Codicil a. Will treated as re-published as of date of codicil, when updating carries out T’s intent b. Can republish will that was result of UI, fraud, or lack of capacity c. CANNOT republic will that didn’t meet formalities d. If first will can’t be probated, can’t be republished by codicil 3. Incorporation by Reference a. Can specifically incorporate another document that is unattested, but in existence at time of incorp. b. UPC – language of incorporating document must manifest intent to incorporate c. Notebook incorporated in T’s will that said “memorandum” (Clark, p. 273) d. For tangible personal property, many jurisdictions & UPC allow document prepared at any time Flusche 9 of 16 e. Handwritten statement at bottom of typewritten page, incorporates & republishes typed part (Johnson, p. 279 – WRONG – handwritten part doesn’t reference typewritten part, not valid codicil) 4. Acts of Independent Significance a. Will is effective to transfer property, even if that is affected by acts or events, provided they have lifetime motive or significance apart from will b. Extrinsic EE used to prove identify of person or property under the will c. If designations identified by facts that have independent significance, gifts upheld d. UPC – acts can occur before / after execution of will OR before / after T’s death H. Contracts Relating to Wills 1. Under law of K – ct will probate will that exists, then find a way to make person w/ contractual interest whole 2. Contracts to make a will – often exchange of care for bequest in will – can have oral K to make will 3. Contracts not to revoke a. Often in joint wills and mutual wills b. Generally, no legal consequences inherent in joint will (but good EE that parties wouldn’t revoke) c. (Via, p. 290 – protecting spouses more important public policy) V. Will Substitutes: Nonprobate Transfers A. Revocable Trust (living trust) and Pour-Over Wills 1. Revocable Trusts a. Basics i. Third party trustee – deed of trust ii. Be your own trustee – declaration of trust iii. Settlor = person who creates the trust iv. Trustee holds legal title to all assets in the trust (can sell, transfer, etc) v. Beneficiary holds equitable title (trustee owes him fiduciary duty) vi. Revocable trust – settlor retains right to revoke & change b. Buying stock certificates issued in T’s name as trustee for X, signed declaration of trust = trust (Farkas, p. 299 – function of wills fairly satisfied) c. UTC, p. 305 i. Revocable trust – while trust is revocable by settlor, trustee only owes duties to settlor ii. But once settlor incapacitated, trustee owes duties to beneficiaries d. Allowed to execute trust, then fund it later (Brenner, p. 305 – put property in trust 5 days after creation) e. Trust not presumed revoked if not found after T’s death (Pilafas, p. 307 – trustee may never know it was revoked) f. Revocation – make provisions clear – UTC = any act that shows intent to revoke g. Creditors can get into trust for satisfaction of debts (State Street Bank, p. 308) 2. Pour-Over Wills a. Used in conjunction w/ revocable trusts b. Usually have distribution of tangible personal property through will c. Might exercise power of appointment d. Give all rest, residue, remainder to revocable trust e. Happens at END of probate of will f. Incorporation by reference i. For wills – writing must be in existence at will execution ii. UPC & many jurisdictions – for revocable trust, can be done at any time g. UPC – amendments to revocable trusts, can be done orally h. Divorce revokes ex-spouse’s trust provision through pour-over will, if trust unfunded during life (Clymer, p. 313 – spouse might not be reminded to change provisions in will to remove ex-spouse) 3. Use of Revocable Trusts in Estate Planning a. Figure out what client really wants to do w/ estate – determine testamentary intent b. Revocable trust costs time and $ right now Flusche 10 of 16 c. Has nothing to do w/ estate, income, or gift taxes d. Married couples usually have two trusts e. Benefit to funded revocable trust – if person becomes infirm, continuity of property management f. Ancillary probate – can be avoided g. Privacy – revocable trusts aren’t public record h. Disadvantage – creditors can reach it during settlor’s lifetime AND at death B. Contract Based Planning 1. Life Insurance a. Taxable for estate taxes – also provides liquidity for paying estate taxes b. Protects spouse, children c. Types i. Whole life = insurance + investment – internal growth can pay its own premiums ii. Term – pure insurance – lower premiums, but have nothing at end of term d. Settlement options: lump sum payment, annuity, etc e. Wills can’t change beneficiary designations – must change it on company’s proper form f. Ct will try to figure out what is best & get to result that T intended (Wilhoit, p. 325 – W got H’s proceeds, sent back to company to hold for her, residue to brother – W executed will, saying $ to stepson – Ct calls it a contract of deposit, but doesn’t apply POD provision) 2. POD Contracts a. Partnership interests are taxable in the estate b. Designating W beneficiary of partnership interests is allowed, even though doesn’t comply w/ Wills Act (Hillowitz, p. 328) c. UPC – POD provisions are non-testamentary d. Under law of wills, beneficiary has to survive 3. Super-Wills a. Why not let people change beneficiary designations all in one place? i. Advantages: clearer intent, easier for T ii. Disadvantages: no safeguards, no notice to old beneficiaries b. Assets probably become probate assets c. Ancillary rules come into play – elective share, pretermitted children d. NO jurisdiction actually has this 4. Multi-Party Accounts a. Types: joint & survivor, POD, agency, tauten trust, transfer on death payment for securities accounts b. Usually done by bank – joint acct w/ rights of survivorship – but not usually what people intend c. To change person on bank acct, must use bank’s form (Franklin, p. 342 – F becomes caretaker for W; letter from W not enough to give survivorship rights to F) d. UPC i. Three types: joint tenant w/ survivorship, agency, POD ii. Allow ext EE to prove joint acct, if established incorrectly iii. Can figure in deposits of co-owner to show how much each person really gets C. Planning for Incapacity 1. Revocable Trust a. Specifies that trustee should be appointed when I’m incapacitated b. Specifies what incapacity means c. Trust must be funded for this to work 2. Durable Power of Attorney a. NEED ONE, even if you have funded revocable trust b. Principal – person who establishes PoA c. Agent – attorney in fact d. Types of power: i. Limited – by time or transaction Flusche 11 of 16 ii. Regular – terminates on incapacity of principal iii. Durable – survives incapacity of principal e. Permitted by ALL – must be in writing (some require attestation & notary) f. Writing must say “durable” and will survive incapacity of principal g. Durable PoA ends at death of principal h. Agent – doesn’t hold title to property – not settled law re what he can do i. No impact on probate j. Be careful of stale document – banks reluctant to accept k. Storage – in firm’s vault – instruct them to release when doctor sends note, etc l. Really no one to watch over agent m. Who to appoint? – single person, understands assets, has access to assets n. Agent gets sweeping powers under CL (Franzen, p. 347 – brother of W’s husband allowed to terminate trust under PoA, against wishes of W) o. Agent can change estate plan – sell property (ademption), huge potential for abuse, power to make gifts (must be explicit in docs) 3. Health Care Directives a. Every state allows individual (or agent) to refuse treatment – requirements vary b. Two different docs: i. Advanced directive (OR living will) – what treatment you want, in advance ii. Durable PoA for healthcare – appoint agent to advocate on your half, according to living will c. Physician required to follow directives, unless against his conscience OR public policy i. Drafting – can require physician to transfer to place where physician will do it d. Witnesses – impartial (lawyer, secretaries) – not family members e. Be specific – if not specific, it invites contest (just the opposite of wills) f. Revocation – oral is ok (most jurisdictions), provided there is proof g. Issues w/ respect to consent – wishes can change, unforeseen circumstances, providers might not do what you want, people might not understand the docs they are executing h. Schiavo, p. 354 i. Financial concerns ii. Should every decision about life support go to trial? iii. Guardian shouldn’t have financial interest v. protect integrity of guardian system iv. Is person going to be strong enough to turn off machines, even if that’s what patient wants? i. Healthcare v. financial – might be disagreement – put in both docs that health trumps finances j. Include self-designation of guardian of property or person – appoint agent 4. Disposition of the Body a. Communicate wishes to family, in a document apart from will b. Some directions are void against public policy c. Anatomical gifts – can give body for research or implantation, or for transplantation for an individual 5. Elder Law – holistic approach – issues: housing, fraud, UI, Medicare, etc VI. Interpretation of Wills A. Admission of Ext EE and Correction of Mistakes 1. Probate is about interpreting & construing the will (although issues can arise before probate) a. Interpretation – determining T’s actual intent from language of will b. Construction – can’t figure out actual intent, so do your best to presume T’s intent 2. Types of probate: (just have to do w/ level of supervision, ct involvement, and reporting) a. Common v. solemn (few jurisdictions) i. Common – no notice, just administer – person can file caveat, notice provided, converts to solemn b. Formal v. informal (much more common) 3. Basic procedure: a. Look at 4 corners of will b. If it’s clear – done Flusche 12 of 16 c. If can’t resolve meaning, look to ext EE (some admissible, some not) d. If admissible ext EE doesn’t resolve, apply maxims of construction i. If T executed will – presume T didn’t intend to die intestate ii. Will is construed as a whole iii. If two constructions equally plausible, treat equally related people similarly iv. Legal terms in will given legal meaning, unless EE to the contrary v. Non-legal terms given plain & ordinary meaning 4. Majority – no ext EE, no reformation a. Two rules: plain meaning rule (no ext EE); no reformation (can’t change words) b. (Mahoney, p. 366 – T wants residue to 1st cousins, lawyer writes “heirs at law” – Ct, no reformation – residue goes to maternal aunt [sole heir at law]) c. (Smith, p. 368 – T gives to “Perry Manor,” which was nursing home, but sold – Ct, goes to Nevada corporation, since nursing home name changed) d. Different kinds of ambiguity i. Patent – appears on face of will (strange description, secret code, direct conflict) – won’t fill in blanks ii. Latent – manifests when terms of will applied (a) Equivocation = will clear, but 2+ things fit the description (b) Nothing fits description (Ihl, p. 370 – T leaves to H and W at X address, they divorce & move – Ct, everything to 1st W, since had relationship w/ T) e. Personal usage exception – T has odd way of referring to someone, allow ext EE to prove who T meant 5. Correcting Mistakes w/out Reforming Wills (but leaning that way) a. (Arnheiter, p. 372 – will contains wrong address – Ct removes house # to have “patent” ambiguity, inferring that street must mean the only house T owned there) b. (Gibbs, p. 374 – H and W leave residue to friend, but attorney put in wrong guy – Ct, details of ID are prone to mistake, so receive ext EE to show what T intended) 6. Openly Reforming Wills for Mistake a. CT SC overrules prior precedent – let in ext EE to determine if T meant to provide for contingency of marriage (if not, subsequent marriage revokes will) (Erickson, p. 374) b. Narrows the exception – scrivener’s error – prove C&C EE that lawyer goofed i. If unjust enrichment, admit will to probate, then impose constructive trust ii. Prevent unnecessary litigation iii. What EE required? – testimony by scrivener, drafts, previous stmt or docs from T c. Massachussetts – always reform for tax avoidance d. Gifts by implication B. Lapse, Anti-Lapse, and Class Gifts 1. Lapse a. If beneficiary predeceases T, devise lapses b. Specific devise – falls into residue c. General devise – falls into residue d. Residuary – goes to intestacy e. Class gift – if one member of class predeceases, surviving members take f. Void devise – one in which beneficiary is ineligible at will execution g. (Russell, p. 388 – T leaves estate to Chester & Roxy [dog] – Ct gives half to Chester, rest to niece) 2. Anti-lapse Statutes a. Default rule that applies when will isn’t clear that T intended a different result b. Applies to ALL types of bequests c. Provides substitute beneficiary, if devise lapses d. UPC § 2-605 – applies to g-parents or descendants of them, and stepchildren e. (Allen, p. 393 – devise to “living brothers & sisters to share & share alike”; T survived by 2 siblings – Ct, siblings must survive to take) Flusche 13 of 16 f. Nonprobate transfers – other transfers aren’t governed by Wills Act rules i. POD acct – UPC, beneficiary must survive depositor, unless K says otherwise ii. UPC anti-lapse – applies to POD, life insurance, pensions, etc iii. Revocable trusts – usually no survivorship requirement implied iv. Joint tenancy – no such thing as lapse 3. Class Gifts a. When one member of class dies, other members divide entire gift among themselves b. What is a “class”? i. Restatement – words must demonstrate T was “group minded”; class is subject to open ii. Gift to A and children of B – individual + class – if A dies, gift lapses c. When do you determine class membership? – two rules i. Natural closing of class – impossible for additional people to join it ii. Rule of convenience – closes at first time when any member is entitled to take d. Most courts lenient in including adopted children e. (Dawson, p. 400 – half interest to each of 2 nephews (out of 5) – not class gift – probably wrong) f. (Moss, p. 402 – gift to A (niece) and children of sister; A predeceases – class gift) C. Ademption, Satisfaction, Abatement, and Exoneration of Liens 1. Terms a. Specific bequest – specific or identifiable piece of property b. General bequest – something intended to convey general benefit c. Demonstrative – intended to convey general benefit, but paid from specified source 2. Ademption by Extinction a. Only applies to SPECIFIC devises b. If property isn’t in T’s estate at death, “adeemed by extinction” i. Identity – devisee gets nothing ii. Intent (majority) – devisee might get cash value, if can show T’s intent c. (Wasserman, p. 406 – devised property owned in separate realty trust, sold – identity – W gets nothing) d. Exceptions to identity theory i. Reclassify devise – might characterize it as general or demonstrative ii. Change in form – (ex: stock goes through mergers, acquisitions, etc) – transfer economic realities iii. Construe meaning of will as of T’s death (ex: give 1933 Honda to A, but have new Honda at death) e. UPC – devisee gets replacement property OR devisee gets cash value, if T didn’t intend ademption 3. Satisfaction of General Pecuniary Benefits a. Ademption by satisfaction b. Akin to doctrine of advancements c. Applies only to general pecuniary bequests d. UPC – presumption against advancement, unless contemporaneous writing to the contrary 4. Exoneration of Liens a. CL – debt paid out of residuary (many jurisdictions follow this) b. UPC (+ several states) – specific devise passes subject to mortgage 5. Abatement a. Happens when estate lacks sufficient funds to satisfy all debts, bequests, etc b. Debts get priority c. Reduce devises (absent language in will): residuary, general, specific & demonstrative (pro rata) VII. Trusts – Creation, Types, and Characteristics A. Introduction 1. Split title – legal title + equitable title 2. Settlor – person who creates trust 3. Trustee – holds legal title a. Bound by fiduciary duties b. Two sets of rules to follow: trust document, state law fiduciary rules Flusche 14 of 16 4. Beneficiary – holds equitable title 5. Property in trust – corpus 6. Termination – property gone OR trust instructions completed 7. Capacity to execute – many states, same capacity as will; some states, K standard (lower) 8. Purposes & uses a. Protect beneficiaries b. Play w/ the way assets distributed c. Protect settlor against incompetence d. Probate avoidance e. Professional property management f. Tax benefits g. Avoid statutory conflicts of interest (blind trust) 9. Commercial trusts – statutory business trust, asset securitization trust (mortgage company) 10. Parties to a trust (need not be 3 different people) a. Settlor – creates trust – either i. Declaration of trust – can be oral (but need writing for real estate) – manifest intention ii. Deed of trust – must deliver property to trustee before valid b. Trustee i. Trust doesn’t fail for want of trustee – but must have duties to perform, or trust fails (dry trust) ii. Duties: investment, administrative, taxes, distribute assets iii. Fiduciary standards of loyalty & prudence + subsidiary rules iv. Can be personally held liable (even criminally) if breaches duties v. UTC – can resign on 30 days notice to all interested persons c. Beneficiary i. Enjoys the property, limited by trust terms ii. Can sue trustee for breach of trust iii. In no better position than any other creditors of trustee iv. Can go after gratuitous beneficiaries, but purchasers for value are safe v. Several types: equitable life interest, equitable remainder for life, equitable contingent remainder in fee simple, equitable reversion 11. Difference btw trusts & life estates – best to do a trust a. To sell property, need life tenant & all remaindermen to sign-off b. General power of appointment risk c. Creditors can reach legal life estate d. Life tenant usually responsible for taxes, but what about repairs? B. Creation of a Trust 1. Intent to Create Trust – Did settlor manifest intention to setup fiduciary relationship? a. (Lux, p. 498 – “to g-children, share & share alike,” “shall be for benefit of them” – trust) b. (Jimenez, p. 499 – g-mother gave bond to son, saying to hold for education of daughter – trust [especially since father admitted he was holding it in trust]) c. Precatory language i. Moral obligation, not legally enforceable ii. (Colton, p. 501 – T “requests” X to make gifts & provisions to mother & sister – trust) d. Equitable charge i. Donor makes transfer to donee, under condition that donee does something for 3rd party ii. Not a trust – no fiduciary relationship created e. (Hebrew U., p. 504 – W donating library to U, but didn’t deliver – not a trust, but symbolic delivery) f. Restatement – if inter vivos gift fails, don’t turn into declaration of trust – but do so in marginal cases 2. Necessity of Trust Property – anything called property under state law a. (Unthank, p. 509 – C writes to R that he will “bind” his estate to pay monthly, but no set aside – no res) b. Trust v. debt – creditor of beneficiary can reach benefits, but trustee’s creditors can’t reach res Flusche 15 of 16 c. Interest in future profits != property interest for trust res (Brainard, p. 511) d. Contingent remainder is valid (majority) e. Can assign future profits (Speelman, p. 512 – Pascal had license to produce musical, gives profit share) f. Grantor trusts i. If you retain sufficient control over assets, taxed on those for income tax ii. Might want to create grantor trust for income tax, yet have gift completed for transfer tax 3. Necessity of Trust Beneficiaries a. Private trusts must have one or more ascertainable beneficiaries b. Must be someone to whom trustee owes fiduciary duties, and someone who can take trustee to ct c. (Clark, p. 519 – devise to “friends” as class – fails – resulting trust = reversion to residuary estate) d. Resulting trust – equitable reversionary interest in settlor – when express trust fails e. Power of appointment – granted to donee, who can appoint property to people – done in will f. Honorary trust – as long as not unlawful & “trustee” is willing to carry it out (Searight’s Estate, p. 522 – trustee given power to pay money for care of dog – invalid as private trust, but honorary trust) 4. Necessity of a Written Instrument a. Statute of Frauds – prevents oral conveyance of land b. (Hieble, p. 528 – mom transfers property to herself & children w/ agreement they will convey it back – son refuses – Ct, constructive trust, no EE that mom had unclean hands) c. (Pappas, p. 529 – dad getting divorce, conveys to son w/ agreement to give back – son refuses – Ct, son keeps property; dad didn’t have “clean hands”) d. (Olliffe, p. 530 – estate to Reverend to distribute as he saw fit – Ct, trust not clear from face – resulting trust on Reverend for heirs) i. Semi-secret trust – someone else knows the terms = resulting trust ii. Secret trust – no indication of trust at all = constructive trust iii. Restatement – resulting trust in both situations C. Beneficiaries’ Rights 1. Mandatory trust – trustee has NO discretion over assets 2. Discretionary trust – trustee has discretion over distribution a. Level of discretion AND distribution standards b. Support trust – direction to distribute amounts that are necessary for support c. Discretionary support trust – distribute amounts for support + trustee’s discretion 3. If trust says “after having considered available sources of support” – trustee has affirmative duty to examine finances AND distribute assets a. (Marsman, p. 534 – Farr breached duties – constructive trust on Sally & children) 4. Majority – assume trust assets should be used to support, regardless of other assets 5. Remaindermen – more likely to sue – trustee tries to minimize outlays – but settlor intends front-end person to benefit most 6. Extended discretion – simple (good faith, proper motive, reasonable judgment), sole (give benefit of doubt) 7. Exculpatory clause – if drafter is trustee, invalid, unless trustee proves its fair & adequately communicated D. Modification and Termination 1. If settlor & all beneficiaries consent, can modify or terminate 2. General view (Claflin doctrine) – look to settlor’s intent if trying to modify 3. (Stuchell, p. 574 – remainder of trust goes to children, one of whom is retarded, would disqualify for public assistance – Ct, no modification, only purpose is to change beneficiaries) 4. Courts more willing to modify for administration purposes, rather than dispositive 5. Reformation – equitable remedy to correct mistake in the will – trying to fix drafting mistakes 6. Modification – looking at what settlor would’ve intended, had he known about changed circumstances 7. UTC – ratifies trust protectors – some jurisdictions don’t impose fiduciary obligations E. Charitable Trusts 1. Nature of Charitable Purposes a. Must have charitable purpose Flusche 16 of 16 b. Can give trustee discretion to decide who the beneficiaries will be & what charitable purposes will be c. Potential class of beneficiaries must be broad enough to say there is a general public benefit d. Can last forever – no rule against perpetuities problem e. Enforced by state AG f. If setup correctly, no taxes owed g. But charitable purpose must be found – education, poverty, general public interest h. (Taylor, p. 729 – trust distributes money to kids at Christmas & Easter – benevolent, not charitable) 2. Modification of Charitable Trusts: Cy Pres a. When charitable purpose no longer capable of being performed, ct can modify – do nearly as possible what settlor intended b. (Neher, p. 738 – house devised to Village for hospital – general charitable purpose – Town Hall ok) c. UTC – general charitable purpose is presumed d. Amt of money might be so great that it will never be needed – could reform b/c of waste VIII. Wealth Transfer Taxation – Tax Planning A. Gift Tax 1. Excise tax on privilege of transferring property during lifetime 2. Applies when you make completed gift of present interest in property 3. Includes gifts of joint tenancy real estate property 4. Exclusions: a. Annual - $12,000 per person (can use spouse’s annual amt too) b. Payment of tuition & medical expenses c. Transfer to minors (Crummy trust, § 2503(c) trust) 5. Deductions a. Need to file gift tax return b. If make gift to charity or spouse, 100% deduction 6. Lifetime exemption amount - $1 million exclusion 7. Carryover basis – donee reports capital gain based on donor’s basis B. Estate Tax 1. 2010 – repealed, 2011 – $1 million exemption 2. Lifetime Exemption counts against you here too (same amt) 3. Tax assessed on property owned or passing at death, over which decedent had substantial control 4. Included: life insurance, life estates, general power of appointment, QTIP 5. Deductions: funeral expenses, charitable gifts, gifts to spouse, state death taxes 6. Adjusted Gross Estate – Exemption Amount = Taxable Estate 7. Basis – step-up at death – FMV at death – in 2010, carryover basis C. Generation Skipping Transfer Tax 1. Applies when donor makes transfer to individual who is deemed to be a “skip” generation 2. Rationale – trying to prevent dynasty trust, keep giving $ to the state 3. Three different ways: a. Taxable terminations – trust setup for grandchildren b. Taxable distributions – trust continues, but distribution given to grandchildren c. Direct skip – g-parent directly gives $ to g-child 4. Exception – predeceased child (but disclaimer doesn’t count) D. Planning – make sure each spouse has at least $2 million, to use up exemption
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