Post Midterm Flashcards
(187 cards)
1
Q
Revival
A
- Majority states hold that when second will is revoked, prior will is revived
- If subsequent will that revokes previous will is revoked by revocatory act, previous will remains revoked unless revived
- if a subsequent will that partly revoked the previous will is itself revoked, the presumption is the previous will is revived
2
Q
Marriage
A
- IF testator executes her will and subsequently marries, statutes in a large majority of states give the spouse his intestate share, unless it appears from the will that the omission was intentional or the spouse is provided for in the will provision
- Minority: premarital will is revoked entirely upon marriage
3
Q
Birth of children
A
Minority and TN rule: marriage followed by birth of children revokes a will executed before marriage
Majority: pretermitted child statute - gives child born after execution of will a share of parent’s estate
4
Q
2 doctrines that have effect on who takes what property
A
1) doctrine of incorporation by reference
2) doctrine of acts of independent significance
5
Q
Integration of wills
A
- allows for all papers present at the time of execution that are intended to be part of the will to be integrated into the will
- attorney can prevent problems by fastening documents and numbering pages wand testator initialing each page
6
Q
What papers constitute the will
A
- usually pages that are physically connected with staple and numbered or
- sufficient connection of language carrying over from page to page to show internal coherence
7
Q
Republication by codicil
A
- publication of will is testator’s statement to witnesses by words or action that a document is the testator’s will
- under doctrine of republication by codicil, a will is treated as re-executed as of the date of the codicil
8
Q
Republication by codicil vs. incorporation by reference
A
- republication: applies only to validly executed will
- incorporation by reference: can apply to incorporate into a will language or instruments that have never been validly executed
9
Q
Incorporation by reference requirements:
A
1) intent
2) document must be in existence
3) proper identification
10
Q
Contracts not to revoke a will
A
- mutual or reciprocal wills are quite common because spouses quite often want to favor each other followed by the same set of beneficiaries
- a joint and mutual will refers to a joint will in which the respective testators make similar or reciprocal provisions
- joint will is one instrument executed by both persons as the will of both, document is probated twice
- mutual wills are separate wills that contain similar or mirror-image provisions
- most courts do not presume contract
- many states have enacted statute of frauds provision
- some states have enacted statute of frauds provision
11
Q
Contracts concerning succession
A
- a contract to make a will or devise or to die intestate, if executed after the effective date of this article may be established only by
1) provisions of a will stating mater provisions of the contract,
2) an express reference in a will to contract and extrinsic evidence proving the terms of the contract, or
3) a writing signed by the decedent evidencing the contract
The execution of a joint will or mutual wills does not create a presumption of a contract not to revoke the will or wills
12
Q
Majority
A
- the execution of a joint will or mutual wills does not, by itself, give rise to a presumption of contract
- contract must be proved by clear and convincing evidence e
- many states subject contracts to SOF provision
13
Q
Mental capacity
A
To be capable of making a will, the testator must be 18 or older and capable of understanding in a general way:
1) the nature and extent of her property
2) the natural objects of her bounty
3) the disposition she is making of the property
4) relating these elements to one another and forming an orderly desire regarding the disposition of the property
14
Q
Comprehend action and its effect
A
- testator must understand what the testator is doing and its effect, must appreciate that the testator is making arrangements regarding who becomes the new owner of testator’s property
15
Q
Know nature and extent of property
A
Must know/ understand general nature and extent of the testator’s property.
- Does not need to be able to provide precise accounting of each asset the testator owns and its value
16
Q
Recognize natural objects of bounty
A
- must know / understand the individuals who would naturally benefit from her death
- needs to know identity of testators’ presumptive heirs
- unfairness does not equal incapacity
17
Q
Simultaneously hold elements in mind and make reasonable judgment
A
- hold the first three elements in testator’s mind simultaneously and for a long enough time to perceive their relationship to each other and to make a reasonable judgment.
18
Q
Mental capacity
A
- test is one of capability as opposed to actual knowledge
- need not be of average intelligence
- low level of capacity required to execute a will is because after death there is no concern about the economic consequences of an improvident devise
- greater capacity is required to execute a will than to marry
19
Q
Ante-mortem probate
A
- some states permit the probate of a will during testators life
- authorize a person to institute during during life an adversary proceeding to declare the validity of a will and the the testamentary capacity and freedom from undue influence of the person executing the will
- all beneficiaries and heirs must be parties to action
20
Q
Why require mental capacity?
A
- protects family from exploitation, intent to maintain family as economic unit
- assures sane person that disposition he requires will be carried out even if he becomes insane and makes another will
- protects senile or incompetent testator from exploitation
- engenders public acceptance of law
21
Q
Insane delusion
A
- false conception to reality
- testator may have sufficient capacity generally but suffering from insane delusion as to certain facts that my cause a will to fail for lack of capacity
- rule: delusion is insane even if there is some factual basis for it if a rational person in the testator’s situation could not have drawn the conclusion reached by testator
22
Q
Insane delusion standard
A
contestant must show:
1) testator labored under insane delusion and
2) the will or some part was a product of the insane delusion
Majority: view is that delusion is insane if rational person in the testator’s position could not have drawn the conclusion reached by the testator and this delusion must materially affect the will’s provisions
23
Q
Undue Influence
A
- coercion of testator
- if part of will is product of undue influence, that portion will be stricken
- donative transfer is invalid if procured by undue influence
- wrongdoer need not be present when donative intent was executed
- direct evidence rarely available
24
Q
Undue influence circumstantial evidence
A
Sufficient to raise inference of undue influence if contestant proves:
1) donor was susceptible to undue influence,
2) alleged wrongdoer had opportunity to exert undue influence,
3) disposition to exert undue influence, and
4) result that appeared to be result of undue influence
25
Presumption of undue influence
- must establish existence of confidential relationship
- usually must establish one more additional suspicious circumstance
- then shifts back to proponent of will to rebut presumption
26
No-contest clauses
Majority: enforces no-contest clauses unless there is probable cause for the contest
27
Statement of reasons
- individualized use of expressive language stating reasons for what might appear to be an unnatural disposition is helpful in resisting a later claim of undue influence
- be mindful of testamentary libel, which can lead disappointed heirs to challenge will on principle
28
No-contest clauses
- in terrorem clause
- provides that contestant to will shall take nothing
- discourages wil contests by putting the prospective contestant to the choice of taking a certain smaller provision in the will or perhaps nothing at all
- might inhibit a lawsuit that would prove lack of capacity or undue influence
- majority: courts should enforce no-contest clauses unless there is probable cause for the challenge
29
Bequest to attorneys
- presumption of undue influence when attorney drafter receives legacy except when attorney is related
- those portions will be stricken
30
Warning signs for will challenges
- radical departure from previous wills
- results in unnatural disposition (disinherits natural heirs)
- testator seems forgetful and has medical problems
- testator is accompanied to office by individual who is unnatural beneficiary of proposed will
31
Strategies for lawyers
- ask client for detailed signed letter setting forth in detail the reasons as to disposition
- lawyer records video discussion during which testator discusses reasons
- family meeting where testator explains reasons for bequest and favoring one over another
- arrange for professional exam of client's level of capacity
- extra precautions : disinterested witnesses, have witnesses sign affidavits as to their impression, use prominent witnesses who know testator
- consider no contest clause
- consider use of inter vivos trust instead, easier to establish capacity
32
Duress
- when undue influence becomes overly coercive
- threatened to perform or did perform wrongful act that coerced donor into making donative transfer that donor would otherwise not have made
- transfers made by duress are invalid
33
Fraud
- when testator is deceived by deliberate misrepresentation and does what she should not have done had the misrepresentation not been made
- misery must be made with both intent to deceive the testator and purpose of influencing testamentary disposition
34
Fraud continued
- provisions procured by fraud are invalid and remaining potions stand unless fraud permeates entire will or provisions are inseparable
- when court cannot do justice by refusing probate, will may be probated and then court with equity powers can impose constructive trust on beneficiary to remedy unjust enrichment caused by fraud
35
Fraud in the execution
- occurs when a person intentionally misrepresents the character or contents of the instrument signed by testator which does not in fact carry out testator's intent
36
Fraud in the inducement
- when misrepresentation causes testator to execute or revoke a will, to refrain from executing or revoking a will or to include a particular provision in wrongdoer's favor
- complicated to prove
37
Fraud and undue influence
- different from undue influence in that testator still has her free agency but makes a new estate plan based on the fraud while undue influence involves overcoming testator's free will
38
Tortious interference
- P must prove that interference involved conduct tortious in itself such as fraud duress, or undue influence to prevent to the proper disposition of an estate
- tort cannot be invoked if challenge is based on testator's mental capacity
- recognized in half the states but not TN
39
Tort law as alternative
- most courts require pursuit of probate remedies before commencing tort action for intentional interference, notwithstanding the different evidentiary burdens to satisfy
40
Constructive trust
- equitable remedy designed to prevent unjust enrichment of a wrongdoer
- i.e. where holder of legal title may not in good conscience retain the beneficial interest, equity converts her into a trustee
41
Mistaken or ambiguous language
- majority: follow traditional rules that bar admitting evidence to vary the written terms of a will
1) plain meaning (or extrinsic evidence rule) allows for admission of extrinsic evidence to resolve some ambiguities but plain meaning of words cannot be disturbed by evidence that another meaning was intended
2) No reformation rule: reformation is an equitable remedy that would correct a mistaken term to reflect testator's intent
42
Plain meaning, ambiguity, extrinsic evidence
- under plain meaning rule the will's words cannot be disturbed by evidence that another meaning was intended but in some cases extrinsic evidence may be admitted if the words of the will are ambiguous or lack a plain meaning
- patent ambiguities: ambiguity on the will's face cannot be resolved with extrinsic evidence, left to four corners of the document
- latent ambiguities: only appears when will's terms are applied to testator's property
43
Latent ambiguities
1st type: when will clearly describes a person or thing and two or more persons or things fit that description (equivocation)
2nd type: when no person or thing exactly fits the will's description, but two or more persons or things fit the description
- 2nd type more common
- Courts now allow extrinsic evidence for both patent and latent ambiguities to fulfill testamentary intent
44
Openly reforming wills for mistake
- growing number of courts reform a mistaken term in a will
- minority but no longer uncommon
- must prove testator's intentions by clear and convincing evidence
45
Death of beneficiary before testator
- if devisee does not survive testator, devise lapses (fails)
- all gifts made by will are subject to a requirement that the devisee survive the testator, unless the testator specifies otherwise
- most states: antilapse statutes have been enacted that, under specified circumstances, substitute another beneficiary for the predeceased devisee
46
Common law rules
CL rules regarding lapsed devises are default rules that apply if the will does not indicate what happens and the anti lapse statute is inapplicable. They are:
1) If specific or general devisee lapses, the divide falls into residue
2) If residuary devise lapses, the heirs of testator take by intestacy. If only a portion of residue lapses, the lapsed residue passes via intestacy rather than to the remaining residuary devisees ( no residue of a residue rule)
47
Common law rules continued
3) If the devise is to a class of persons and one member of the class predeceases the testator, the surfing members of the class divide the gift
4) Void devises are dealt with like lapsed devises, devisee is dead or devise is to an animal
48
Animals
Bequest can't be made to an animal, but trust can be created for animal
49
No residue of residue rule
- TN: maintains the rule
- Majority: reject the rule, determine that it is preferable that residuary legatee receive entire remainder rather than a portion go to intestate heirs
50
Antilapse Statutes
- Substitute other beneficiaries (usually descendants) for the dead beneficiary if certain requirements are met
- typical anti lapse statue provides that if a devisee is of a specified relationship to the testator and is survived by descendants who survive the testator, the descendants are substituted for the predeceased devisee
51
Antilapse Statutes continued
- theory behind them is one of presumed intent, assumed that testator would prefer for a substitute gift to the devisee's descendants rather than for gift to lapse
- scope of anti lapse statute applies to a lapsed devise only if the devisee bears the particular relationship to the testator specified in the statute.
- some statues only apply to descendants of testator while others are broader and apply to descendants of testators' parents and grandparents
52
Antilapse statute: default
- designed to implement presumed intent, they state default rules that yield to a contrary expression of the testator's actual intent
- words of survivorship alone are not sufficient of intent contrary to application of anti lapse statute
53
Importance of sound drafting
- lawyer should not rely on presumption that anti lapse will apply
- must draft will to provide for what happens if the intended devisee does not survive testator
54
Class gifts
- if class member predeceases testator, surviving members of the class divide the total gift, including deceased members share
55
Ademption (identity theory)
- when specific devises no longer exist at the time of the testators' death, the devise fails
- doesn't apply to general, demonstrative, or residuary devises
56
General devise
- testator intends to confer a general benefit, not a particular asset
57
Demonstrative devise
- hybrid
| - general devise payable from specific source
58
Intent theory of ademption
- newer intent theory of ademption: if specifically devised item is not in testator's estate, the beneficiary may nonetheless be entitled to the replacement for, or cash value of original item depending on whether the beneficiary can show that this is hat the testator would have wanted
59
Identity theory of ademption exceptions
- courts can get around identity theory by classifying a devise as general or demonstrative
60
Stock split
- Today: courts disregard old approach and conclude that devisee is entitled to additional shares received by testator as result of stock split (absent contrary showing of intent)
61
Exoneration of Liens
- when a will makes a specific devise of land on which there is a mortgage, UPC requires that devisee take the property subject to the mortgage lien
- traditionally devisee took land free of lien (mortgage paid by residuary assets) under doctrine of exoneration of liens
62
Abatement
- arises when estate has insufficient assets to pay debts as well as all the devisees; in such a case, some devisees must be abated or reduced. By divvying up a limited pie among claimants of different priorities, abatement operates like bankruptcy
- will can direct how devises should abate
63
Abatement continued
Absent any direction in the will, the devises should abate in the following order:
1) residuary devises are reduced first
2) general devises are reduced second
3) specific and demonstrative devises are the last to abate and are reduced pro rata.
64
Abatement UPC
because traditional abatement theory can frustrate testamentary intent, UPC provides that if testamentary plan would be defeated by the usual order of abatement, the shares of the distributes abate as may be necessary to give effect to the intention of the testator
65
Non probate transfers
- function as a private system of succession that runs in parallel to the probate system
66
4 main will substitutes
1) life insurance - functionally indistinguishable from a will
2) pension accounts: contain will substitutes in the form of beneficiary designations
3) bank, brokerage, and mutual fund accounts - covenant on account is like beneficiary in a will
4) revocable inter vivos trusts - replicates incidents of a will
67
Will substitutes
difference with wills in that
1) will substitutes are asset specific,
2) they avoid probate, and
3) formal requirements of will act are unnecessary
68
Will substitutes and wills act
- revocable trusts: very flexible because donor can draft both the dispositive and the administrative provisions to her liking
- trust is an arrangement where the trustee manages property in a fiduciary capacity for one or more beneficiaries
- trustee holds legal title while beneficiaries hold equitable title
69
Will substitutes and wills act continued
- person creating a trust is the settlor, grantor, or trustor
- trust created during settlor's life in an inter vivid trust (generally revocable)
- a trust create by will is a testamentary trust (irrevocable)
- a revocable trust may be created by deed of trust, whereby a settlor transfers the property to be held in trust. On death, the property is either distributed or held in further trust
70
Will substitutes and wills act continued
- initially case law held that revocable trusts created by deed of trust were ineffective to transfer property at settlor's death unless executed with Wills Act formalities
- Today: all jurisdictions allow revocable trust created by deed of trust to effect a non probate transfer on death
71
Will substitutes and wills act continued
A revocable trust may also be created by a declaration of trust where, as the name suggests, the settlor simply declares herself to be trustee of certain property for the benefit of herself during her life, with the remainder to pass to others at her death. The settlor retains the power to revoke the trust and the right to the trust income, and as trustee he also controls the management of the trust property.
72
Discretionary Trust
- trustee has discretion to pay any amount of income or principal to beneficiary
- ensures fiduciary administration and provides protection from creditors
- lessens income tax burden on family by allowing trustee to distribute income to the beneficiaries who are in the lowest tax bracket
73
Testamentary marital trust
- federal estate tac law permits a deduction for property given to a surviving spouse
- requires the trustee to pay income to wife for life and then on her death, pay the principal to the donor's children
- useful for surviving spouse needing professional money management or if spouse is stepparent
74
Trust for a minor
- current - federal gift tax allows for a tax-free gift of $15,000 per year donee.
- Outright gift to a donee creates special problems; however, as the minor cannot legally manage her property
- to facilitate annual tax free gifts of $15,000 to his minor daughter, donor creates a discretionary trust for the benefit of his daughter before she reaches 21, i.e. every year O can make a tax-free gift to his minor daughter
75
Individual vs. corporate trustees
- individual trustees usually cost less than corporate trustees, but may be less effective in portfolio management
- corporate trustees have necessary expertise, institutional bureaucracy and deep pockets to recover damages from
- trustees are entitled to "reasonable compensation". This is a default rule that may be displaced by contrary agreement
76
Individual vs. corporate trustees continued
- trustees 1) invest, 2) administer, and 3) distribute
- generally corporate trustees are better at investment and administration but personal trustees are better at distribution
- this has led to the naming of co-trustees
- modern law encourages delegation by trustees on matter outside their expertise
- trust protector - given specific power to order distributions, replace the trustee, etc
- directed trust - trustee is responsible for administration but must follow directions of a third party
77
Private trust company
- formed to serve as trustee for one or more trusts created by a single family
- wealthy individual or family can consolidate the various functions of trusteeship that might otherwise be parceled out through delegation, protection and directed trusts
- might be desirable if family wants to retain control over a family business or has other non financial objectives
78
Bifurcation of ownership
- bifurcation: trustee holds legal title to trust property but the beneficiaries have equitable or beneficial ownership
- 2 issues: 1) the effect on the rights of third parties with respect to trust property of the trustee personally and
2) the powers and duties of the trustee and the corresponding rights of the beneficiaries with respect to the trust property and against the trustee
79
Asset partitioning and third party rights
- because a trust is not a separate legal entity, but a fiduciary relationship, asset partitioning can be complicated
- trustee cannot sue, be sued, hold property and transact with respect to trust property in her own name. Rather, she transacts business with respect to trust property in her fiduciary capacity as such
80
Trustee liability
- Common law: trustee was personally liable for the debts and ownership arising from trust property ownership. the trustee, however, could seek indemnification from the trust fund
- This has been revised such that a creditor can seek recourse directly against the trust fund without recourse against the property of the trustee personally
- a personal creditor of the trustee cannot seek recourse against trust property
81
Beneficiaries
- hold equitable as opposed to legal title
- have claim against trustee for breach of trust and additional remedies relating to trust property itself
- beneficiaries can reclaim wrongfully disposed of property
- trusts usually involve both a present interest and equitable future interests in the income
82
Fiduciary Administration and beneficiary rights
- trustee has responsibility to manage trust property, i.e. all the responsibilities of typical ownership
- trustee must act according to fiduciary duties owed to the beneficiaries, namely the duties of loyalty, prudence and the subsidiary duties of impartiality, not to commingle and the duty to inform and account
83
Beneficiary remedies
- beneficiary is entitled to an election among remedies that include compensatory damages to restore the trust estate and trust distributions to what they would have been but for the breach and the disgorgement by the trustee of any profit earned by the trustee owing to the breach
84
4 functions of trusteeship
1) custodial function
2) administrative function
3) investment function
4) distribution function
85
Trust vs. legal life estate
1) legal life tenant has possession and control of property while trustee has legal title
2) legal life estate tenant has no right to sell but has duty to pay taxes and expenses
3) equitable life estate (Trust) allows trustees to allocate costs fairly between beneficiaries and to transact in relation to the trust property
4) equitable estate can be places outside creditor's reach
86
Commercial uses of trust
- today: many trusts remain preferred organization for mutual funds and asset securitization
- fed. law imposes mandatory trust form on employee pension funds
- pension funds and mutual funds hold nearly $20 trillion in assets and the asset securitization industry is worth more than $1 trillion
- most structured finance transactions and mutual funds that make use of a business trust employ a statutory as opposed to a common law trust
87
Common Trust Uses
1) Mutual fund: pooling of shares to achieve economies of scale allows for feasible portfolio management and simplifies diversification
2) Asset securitization: bank loans to individuals to purchase homes are secured by mortgages on individual homes. Bank then sells its payment rights to an asset securitization trust. The trust in turn sells equitable ownership in the trust to investors and manages the portfolio on their behalf
3) Pension funds: manage income subject to a fiduciary obligation to the employees of the company making contributions
88
Creation of a trust
1) Intent
2) Ascertainable beneficiaries and
3) Specific property to be held in trust
- Sole issue is whether grantor manifested an intention to create a trust, i.e. transfer of property for the use and benefit of another person manifests an intention to create a trust
89
TN Trust creation
1) transfer of property to another person as trustee during the settlor's lifetime or by will or other disposition taking effect upon settlor's death
2) declaration by owner of property that owner holds identifiable property as trustee
3) Exercise of a power of appointment in favor of a trustee or
4) a court pursuant to its statutory or equitable powers
90
TN requirements for creation
1) Settlor has capacity to create trust
2) Settlor indicated intention to create trust
3) trust has definite beneficiary or is
a) charitable trust
b) trust for care of an animal
c) trust for non charitable purpose
4) trustee has duties to perform and
5) same person is not the sole trustee and beneficiary
91
Testamentary trust
- created by will and must be inferred from language and structure of the will in light of all circumstances
92
Trust will not fail for want of trustee
- may have 1 or several trustees
- trustee may be settler if it is an inter vivos trust, a beneficiary or a third party
- courts will appoint a trustee if the testator creates a trust but fails to name a trustee, i.e. trust will not fail for want of trustee
93
Active duties
- trustee must have some active duties to perform, i.e. if it has not duties, it is deemed stale and fails
94
Precatory Language
- Supreme court has found precatory language (wish, hope) legally binding
- To ensure it remains non-binding, use language like "I wish, but do not legally impose"
95
Deed of trust
- unlike testamentary trust, which is created by will and must satisfy Wills Act, and an inter vivid trust in land, which must satisfy SOF, no particular formalities are required to create an inter vivid trust of personal property
96
Equitable charge vs. trust
- equitable charge is a devise of property of a certain sum of money to a third person
- creates a security interest in the transferred property with no fiduciary relationship, ie., more than a debtor secured creditor relationship
97
Problems related to delivery
- delivery needed to satisfy gift
- physical, constructive, and symbolic delivery with respect to gifts
- issue: can a gift that fails based on a delivery infirmity be re-characterized as a trust?
- the case law manifests that for purposes of forming a trust, all that is necessary is that the donor manifest an intention to hold the property in trust
98
Restatement of Trusts
- if property owner intends to make an outright gift inter vivid but fails to make the transfer that is required in order to do so, the gift intention will not be given effect by treating it as a declaration of trust
- a gift of personal property can be perfected on the basis of donative intent to make a gift is established by clear and convincing evidence
99
Necessity of trust property
Trust includes: 1) trustee, 2) beneficiary. and 3) trust property (res)
- Res can be any interest in property that can be transferred
- critical question: whether the trust corpus can be called property
100
Trusts vs. debts
- requirement of a trust res distinguishes a trust from a debt
- a trustee is a fiduciary who holds specifically identified property for the benefit of another
- a debt involves a personal obligation to pay sum of money to another
- crucial factor is whether the recipient of the assets is entitled to use them as his own and commingle them with her own assets
101
Resulting trusts
- an equitable reversionary interest that arises by operation of law in two situations, namely
1) where an express trust fails or makes an incomplete disposition or
2) where one person pays the purchase price for property and causes title to the property to be taken in the name of another person who is not the natural object of the purchaser's bounty
102
Expectation
- an expectation or hope of receiving property in the future, or an interest that has not come into existence or has ceased to exist does not qualify as res sufficient to create a trust.
- However, a person may assign future earning from an existing contract
103
Taxation of grantor trusts
- Treasury dept. has issued regulations spelling out circumstances where trust settlor would be liable for taxes based on dominion and control
- Spousal attribution rule: a settlor is treated as holding any power or interest that is held by the settlor's spouse if the spouse is living with the settlor at the time the property is transferred into trust
104
Taxation of grantor trusts
2 major exceptions:
1) Discretionary power to distribute, apportion or accumulate income or to pay out principal can be given to an independent trustee
2) When power to distribute principal is under a reasonably defined standard set forth in the trust instrument; or power is given any trustee other than settlor to distribute income according to a reasonably definite external standard set forth in the trust instrument
105
Practice point
When creating an inter vivid trust on a client's behalf, pay close attention to IRC 671 77 and the relevant regulations if the settlor wants to shift taxation on the income to the trust or its beneficiaries
106
Necessity of trust beneficiaries
- a trust must have one or more beneficiaries because there must be someone that the trustee owes fiduciary duties to
Exceptions:
1) Charitable trusts
2) Private trusts in favor of unborn children
107
Test of validity
- If the class of beneficiaries is described such that some person might reasonably be said to answer the description, the trust is valid. An appointment is invalid, however, if it cannot be determined whether the appointee answers the description
- Be aware of distinction between power of appointment and power coupled with a trust
108
Trust v. power of appointment
- be aware that beneficiaries are often given powers of appointment that are valid because they are non fiduciary and discretionary, i.e. to my wife for life and then to such of my descendants as she chooses
109
Trusts for pets and other non charitable purposes
- rule requiring defined beneficiary does not apply to charitable trusts because beneficiary interests are monitored by the state attorney general
- lack of an ascertainable beneficiary invalidates trusts for both animals and non-charitable purposes
- two solutions: 1) common law honorary trust and 2) statutory purpose trust
110
Honorary Trust
- transferee is not under a legal obligation to carry out the settlor's stated purpose but if the transferee declines, she is said to hold the property upon a resulting trust and the property reverts to the settlor or the settlor's successors
- must not violate RAP, i.e. void if it can last beyond all relevant lives in being plus 21 years
111
Statutory purpose trust
- states have statutes that permit a trust for a pet animal or other non charitable purpose such as maintaining a gravesite
- to avoid problem of lack of beneficiary, statutes provide for enforcement by either the settlor or the court
112
Necessity of written instrument
- Law does not require a writing to create a valid trust, i.e. an inter vivid oral declaration over personal property is enforceable
- Wills Act requires that testamentary trust be in writing and the SOF required an inter vivid trust of land to be in writing
- Problems arise with oral trust for disco
113
Trusts for pets and other non charitable purposes
- rule requiring defined beneficiary does not apply to charitable trusts because beneficiary interests are monitored by the state attorney general
- lack of an ascertainable beneficiary invalidates trusts for both animals and non-charitable purposes
- two solutions: 1) common law honorary trust and 2) statutory purpose trust
114
Honorary Trust
- transferee is not under a legal obligation to carry out the settlor's stated purpose but if the transferee declines, she is said to hold the property upon a resulting trust and the property reverts to the settlor or the settlor's successors
- must not violate RAP, i.e. void if it can last beyond all relevant lives in being plus 21 years
115
Statutory purpose trust
- states have statutes that permit a trust for a pet animal or other non charitable purpose such as maintaining a gravesite
- to avoid problem of lack of beneficiary, statutes provide for enforcement by either the settlor or the court
116
Necessity of written instrument
- Law does not require a writing to create a valid trust, i.e. an inter vivid oral declaration over personal property is enforceable
- Wills Act requires that testamentary trust be in writing and the SOF required an inter vivid trust of land to be in writing
- Problems arise with oral trust for disposition at death
117
Oral trusts of personal property
- valid in all but a handful of states
| - must be established by clear and convincing evidence
118
Secret vs. semisecret trust
- where the will indicates no trust, the trust is "secret" and courts admit evidence of the promise to prevent the trustee from unjust enrichment and impose a constructive trust for the benefit of the ostensible beneficiary
- where the will indicates that the trustee holds the property in trust but does not identify a beneficiary, a "semisecret" trust is created. Because the will on its face shows that the trustee is not meant to benefit personally, it is not necessary to admit evidence of any promise and the legacy fails, (goes to heirs)
119
Rise of non probate transfers
- will substitutes constitute a non probate system of private succession that competes with the public probate system
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Non probate revolution
- will substitutes fall on the will side of the gift/will distinction
- however case law has treated will substitutes as lifetime transfers
- courts have done this by straining logic
- of all will substitutes, only the transparently labelled "POD account" has persistently failed the present-interest test and has had to depend for the most part on statutory validation
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Modern law will substitutes
- modern law no longer denies the will- like nature of will substitutes and expressly validates them
- UPC and restatement both authorize POD designations in contracts
- today most banks, brokerage houses, mutual funds and other financial intermediaries allow POD and TOD designation on customer accounts
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Revoking or amending a revocable trust
- under traditional law, an inter vivos trust created by a written instrument was presumed irrevocable unless there was an express or implied reservation by the settlor or a power to revoke the trust .
- the opposite is true now, as an inter vivos trust is deemed revocable unless declared otherwise
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Revocable trusts
- most flexible of will substitutes and like a will, it is not inherently asset specific
- a settlor of a revocable trust remains free to revoke the trust at any time for any reasons
- created by:
1) deed of trust whereby the settlor transfers to trustee the property to be held in trust, which is then distributed or held in further trust on settlor's death. All states allow a revocable trust to be created by deed of trust without Wills Act formalities
2) Declaration of Trust, whereby the settlor simply declares herself to be trustee for her own benefit during her lifetime, with remainder to pass per the declaration
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UTC 603
- while a trust is revocable [and settlor has capacity to revoke trust], rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to the settlor
- during the period the power may be exercised, the holder of a power of withdrawal has the right of a settlor of a revocable trust under this section to the extent of the property subject to the extent of the property subject to the power
125
Revocation by physical act
Although case law has concluded that trusts requiring a written revocation cannot be revoked by physical acts such as tearing, this has been reversed by the UTC's liberal rules for revocation and amendment, provided the trust did not provide for an exclusive means of revocation
126
Revoking or amending a revocable trust
- under traditional
127
UTC 602
- Unless a trust is expressly irrevocable, the settlor may revoke or amend the trust
- settlor has broad authority to revoke or amend the trust
- revocation or amendment must be shown by clear and convincing
128
Revocation by writing
Under UTC 602, a trust may be revoked by a subsequent writing including a will, without need for delivery to the trustee
129
Revocation by physical act
Although case law has concluded that trusts requiring a written revocation cannot be revoked by physical acts such as tearing, this has been reversed by the UTC's liberal rules for revocation
130
No present interest
- beneficiary of revocable trust has no legally enforceable interest while trust is revocable, only settlor may enforce trustee's fiduciary obligations
- consistent with treating a revocable trust as will substitute
131
Third party trustee and settlor incompetence
- if third party trustee misused funds while settlor was alive, the beneficiaries are entitled to enforce the usual rights of trust beneficiaries
- in the case of incompetent settlor, the UTC bars action by a beneficiary while the settlor retains power to revoke the trust, but this has been placed within parentheses, i.e. jurisdictions are free to change this rule
132
Revocation by writing
- Under UTC a trust may be revoked by a subsequent writing including a will, without need for delivery to the trustee
133
Irrevocable trusts and creditors
Trusts irrevocable on death can be reached by creditors in satisfaction of settlor's debts to them, to the extent not satisfied by settlors estate
134
Creditors and revocable trusts
- traditionally: a creditor had no recourse against property in a revocable trust unless the debtor was also a trust beneficiary, i.e. the debtor's ability to revoke and take back the trust was not considered sufficient ownership of the property
- Modern law: rejects this view, concluding that the power to revoke the trust is regarded as sufficient ownership to subject the trust to creditor claims during life and after death
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Creditors and other non probate transfers
- not all non probate assets are equal and creditors cannot reach certain non probate assets. These are:
1) Creditors of a joint tenant cannot reach jointly held property after the joint tenant's death
2) Life insurance proceeds are usually exempt from the insured's creditors if payable to a spouse or child
3) Retirement benefits are usually exempt
4) US savings bonds with a POD beneficiary may be exempt as well
136
Capacity and limitation periods for revocable trusts
- modern rule is to require no higher capacity to add property to a revocable trust than a will
- UPC and UTC provide for a three year limitations period to challenge wills and revocable trusts respectively
- UTC provides that the limitations period can be shortened to 120 days if the trustee sends the prospective contestant a copy of the trust instrument and a notice informing the person of the trust's existence, of the trustee's name and address, and of the time allowed for commencing a proceeding
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UPC 2-804
- revokes a disposition in favor of a former spouse in a "governing instrument" which is defined to mean a deed, will, trust, insurance or annuity policy, account with POD or TOD designation, pension plan or other such non probate transfer
- advise clients to update their estate plans upon divorce or separation
138
Ademption and abatement
- courts have applied state ademption doctrine for wills to a revocable trust that called for a transfer of specific property to a particular beneficiary on settlor's death
139
Antilapse controversy
- UPC applies anti lapse concepts to testamentary trusts
| - controversial
140
Capacity and limitation periods for revocable trusts
- modern rule is to require no higher capacity to add property to a revocable trust than a will
- UPC and UTC provide for a three year limitations period to challenge wills and revocable trusts respectively
- UTC provides that the limitations period can be shortened to 120 days if the trustee sends the
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Life insurance
- Life insurance shifts the economic risk of premature death to an insurance company.
- In 2011, benefit payments totaled $109.4 billion and the total value of policies is $20 trillion.
- Term life insurance is the cheapest and most common.
- Whole life insurance combines life insurance with savings and is the most expensive form of life insurance.
- Life insurance policies have long been valid to transfer property on death without Wills Act formalities.
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Lifetime consequences
- a revocable trust can facilitate property management by a fiduciary, although it can be cumbersome
- it can also be used in planning for incapacity and ensuring for continuity in property management
- trustee administration is less cumbersome and more flexible than establishing a conservatorship
- it may be used to keep title clear and avoid commingling marital property with property acquired before marriage, i.e. create a revocable trust of marital community property in community property states
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Probate avoidance
- because a revocable trust can be used to avoid probate and ensure continuity in property management upon death, i.e. it avoids the cumbersome process of requiring a personal representative to be appointed by a probate court to distribute property after probate is closed.
- Revocable trusts also provide privacy because a will is a public record.
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Probate avoidance continued
Revocable trusts, unlike testamentary trusts, are not subject to ongoing court supervision after the settler’s death unless an interested party brings suit to settle some trust matter.
Settlor’s of revocable trusts funded with personal property, but not land, may choose the state law to govern the trust, whereas a testamentary trust will be governed by decedent’s domicile at death.
Probate, however, has the advantage of providing for non-claim statutes to bar creditor claims after a short period of time.
145
Life insurance
Life insurance shifts the economic risk of premature death to an insurance company.
In 2011, benefit payments totaled $109.4 billion and the total value of policies is $20 trillion.
Term life insurance is the cheapest and most common.
Whole life insurance combines life insurance with savings and is the most expensive form of life insurance.
Life insurance policies have long been valid to transfer property on death without Wills Act formalities.
146
Divorce and insurance policies
- Changing an insurance beneficiary in a will but not on the insurance is ineffectual
147
Types of pension plans and retirement plans
1) Defined Benefit Plan – beneficiary receives a regular pension check on a monthly basis for the rest of her and her spouse’s life. This benefit is based on the length of work and the employee’s compensation at retirement. These plans are expensive to administer and are quite rare in today’s private sector, i.e. only 15% of private pension plans’ total wealth.
2) Defined Contribution Plan – employees and some employers contribute to a specific account for the employee. These plans are less expensive for employers and allow an employee to control the size and timing of distributions. These plans can be conveyed at death outside of probate.
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Pension and retirement plans
- Nearly 4 out of 10 families include someone who participates in a pension or retirement plan provided by an employer and these plans held $25 trillion in value, i.e. a substantial portion of the $90 trillion in total wealth.
- Pension plans are increasingly a means of estate planning.
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Growth in pension and retirement plans
- Brought about by the massive increase in life expectancy in the developed world.
- Most family assets are in the form of housing and financial wealth and family support is dropping.
- The federal government has created irresistible incentives to save for retirement via tax-qualified pension plans.
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Pension plans continued
The federal government incentivizes retirement savings by allowing:
1) Savings with pre-tax dollars;
2) Earnings and appreciation accrue and compound on a tax-free basis; and
3) Distributions from pension accounts are usually taxed at lower marginal rates because retirement income is lower than peak-earning income.
4) Income to accumulate after retirement so that retirement plans can be used as a tax shelter for savings and investment.
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Types of pension plans and retirement plans continued
3) Individual Retirement Account – similar to a defined contribution plan, it is governed by a contract between the account holder and the custodial institution. Most IRA accounts involve funds that have been “rolled over” from an employee defined contribution plan after that employee has changed employer.
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Succession issues for pension and retirement accounts
- With two-thirds of American wealth now held in pension and retirement accounts, these plans are now prominent in estate planning.
- The problem is people don’t understand the significance of the death beneficiary designation in their retirement plans and state laws with regard to these plans are often inconsistent and conflict with federal law.
153
Changing beneficiary designation
- Courts are split on requiring strict compliance with contract terms to change a beneficiary designation for an IRA
- Majority: will does not change either a life insurance or an IRA beneficiary designation
154
ERISA and subsidiary law of wills
ERISA also preempts state law on spousal share rights, replacing state law with a mandatory federal rule.
155
UPC Nonprobate transfers on death
Allows for use of nonprobate transfers to transmit property at death without satisfying Wills Act or other testamentary formalities provided the money is paid to the individual set forth in the contract or in a separate writing or if the money ceases to become payable in the event the promisee dies before the promisor.
156
TOD security accounts
TOD registrations are now allowed in nearly all states.
Most banks, brokerage houses, mutual funds and other financial intermediaries allow POD and TOD designations on their customers’ accounts.
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Savings account - Totten trust
In the landmark case of In re Totten, 71 N.E.748 (N.Y. 1904), O deposits money in a savings account in the name of “O, as trustee for A.” O retained the right to withdraw the funds and A was entitled to what remained in the account at A’s death.
The court upheld this arrangement as not testamentary, declaring that a “tentative” revocable trust had been created.
These savings account trusts have come to be known as Totten trusts.
Per the UPC, the Totten trust is abolished as a formal category and instead treated as a POD account.
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Multiple party bank and brokerage accounts
If a bank or brokerage account is joint and survivor, owned by “A and B, as joint tenants with right of survivorship,” both A and B have the power to draw on the account, but the survivor alone owns the balance, which does not pass via probate.
Sometimes something other than a true joint tenancy is intended, i.e. an agency or convenience account is intended.
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UPC Joint tenancy
The UPC authorizes a joint tenancy account with right of survivorship, an agency account and a POD account.
Under the UPC, joint bank accounts belong to the named parties during their lifetimes in proportion to the net contributions of each to the sums on deposit, unless there is clear and convincing evidence of a different intent.
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Antilapse statutes
The UPC imposes a requirement of survivorship on beneficiaries of a POD bank account and TOD security account.
The UPC also includes an antilapse provision for nonprobate transfers, which substitutes the surviving descendants of a predeceased named beneficiary.
161
Non probate transfer of real property
Real property is less suited to nonprobate transfer, as the deed must be changed by probate administration or otherwise.
This can be resolved via revocable trust, the joint tenancy by the entirety and TOD deed for real property.
162
Joint tenancy and tenancy by the entirety
Upon the death of one tenant, the surviving tenant owns the property absolutely. This obviates the need for probate administration.
If a joint tenant wants someone other than the joint tenant to take her share of the property at death, she must sever the joint tenancy during her life, converting it into a tenancy in common.
A creditor must seize the joint tenant’s interest during the joint tenant’s life, because the interest vanishes at death.
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TOD deed for real property
A substantial minority of states have enacted statutes such as the Uniform Real Property Transfer on Death Act (2009), absorbed into the UPC as §§ 6-401 through 407, which allow the transfer of property via TOD deed.
Under these statutes T can identify the beneficiary who will succeed to the property on T’s death by recording a TOD deed.
Neither TN nor KY allows for TOD deeds to transfer real property.
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Planning for incapacity
Based on the aging population, an estate lawyer’s practice will increasingly focus on planning for an incapacitated client.
One method of dealing with an incapacitated client’s property is via a conservatorship.
Others are revocable trusts and durable powers of attorney.
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Conservatorship UPC
Expensive, time-consuming and problematic.
A court may appoint a conservator to manage an incapacitated person’s property.
A court must find, by CCE, that the person is unable to manage property and business affairs because that person is unable to manage property and business affairs because of an impairment.
A court must also find, by preponderance of the evidence, the person’s property will be wasted unless management is provided.
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Revocable trusts
A trust instrument can provide for a successor trustee in case of the settlor’s incapacity or the settlor may be a co-trustee, with provision for the co-trustee to act alone in the case of the settlor’s incapacity.
Trust instrument should include a means of determining whether the settlor is incapacitated.
Trustee can only act with respect to property placed in the trust by the settlor prior to incapacity.
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Durable power of attorney
Ordinary power of attorney creates an agency relationship whereby the agent, called an attorney-in-fact (usually not a lawyer) is given a written authorization to act on the principal’s behalf.
The traditional power of attorney, however, terminates on the principal’s incapacity.
This has led to the durable power of attorney (remember Estate of Anton).
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Durable power of attorney continued
Durable power of attorney continues throughout the incapacity of the principal until she dies, authorized by UPC §§ 5-501 to 5-505 (1990) and the laws of all 50 states.
Controlled by the common law of agency as modified by state power of attorney statutes.
Principal, if competent, can terminate the durable power of attorney at any time.
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Durable power of attorney continued
Attorney-in-fact owes the fiduciary duties of loyalty and obedience to the principal. Durable powers must be created by written instruments that often must be witnessed and notarized.
Unlike trusts, powers of attorney end at death and attorneys-in-fact do not own property and have limited powers under traditional agency laws.
If agent dies, the power terminates unless a successor is appointed by a court.
Third parties prefer to deal with trustees than with agents.
170
TN durable power of attorney
T.C.A. § 34-6-101 et seq. is the “Uniform Durable Power of Attorney Act.”
T.C.A. § 34-6-102 defines a durable power of attorney as:
a power of attorney by which the principal designates another as the principal’s attorney in fact in writing and the writing contains the words ‘This power of attorney shall not be affected by subsequent disability or incapacity of the principal,’ or ‘This power of attorney shall become effective upon the disability or incapacity of the principal,’ or similar words showing the intent of the principal that the authority conferred shall be exercisable, notwithstanding the principal’s subsequent disability or incapacity.
171
Powers of Attorney
Majority view is that an agent acting under a power of attorney cannot make, amend, or revoke the principal’s will, but the agent may create, modify or revoke a trust if the power to do so is expressly granted in the power of attorney instrument.
In some states and the UPC, a guardian or conservator appointed by the court also has the power to make, amend, or revoke the ward’s will.
172
Potential for abuse
A power of attorney can authorize an agent to perform virtually any act with respect to the principal’s property. The breadth of this power creates a fear of abuse of power by agents.
173
Uniform power of attorney act
The Uniform Law Commission has proposed a Uniform Power of Attorney Act that has been drafted to reconcile the divergent state laws on powers of attorney and to address the recurring problem areas in their use. Under the new act (so far enacted in ID and NM) the term attorney-in-fact is replaced with the term agent and, in contrast to current law, presumes that powers of attorney are durable unless the instrument states otherwise.
The act specifies the agent’s fiduciary duties, sets forth mandatory duties, powers in respect of trusts, gifts, and beneficiary designations.
Tennessee relies on the “Uniform Durable Power of Attorney Act,” i.e. T.C.A. § 34-6-101 et seq. and has not yet incorporated the Uniform Power of Attorney Act.
174
Gifts and enhanced formalities
Whether an agent may make gifts from the principal’s property raises difficulties.
In most states, an agent cannot make a gift without specific authorization because of the potential for abuse.
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Healthcare
- The U.S. Supreme Court has concluded that each person has a right to make health care decisions for herself and to refuse medical treatment.
- A person may exercise this right by way of an advance directive because in the absence of such a directive, health care decisions fall to the spouse or next of kin.
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Directive regarding health care and disposition of the body
- Advance Directives: Living Wills, Health Care Proxies and Hybrids.
- U.S. Supreme Court has held that each person has a constitutional right to make health care decisions for herself, including the right to refuse medical treatment. Cruzan v. Director of Mo. Dept. of Health, 497 U.S. 261 (1990).
- If state law requirements are met, a person may state her wishes about terminating medical treatment or appoint an agent to make decisions for her. Where a person’s wishes are not clearly expressed, the state may assert an interest in favor of preserving life and prevent the withdrawal of treatment.
- In resolving a conflict over the wishes of an incompetent individual, the law relies on advance directives and default rules in the absence of an advance directive.
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Advance directives
3 basic types
1) instructional directives such as a living will or a Medical Directive, specifying how one wants to be treated in end-of-life situations or in the event of incompetence.
2) Proxy directives, such as a health care proxy or durable power of attorney for health care, designating an agent to make health care decisions for the patient.
3) Hybrid or combined directives that incorporate elements of the first 2 directives.
- oral revocation is valid
178
Problems with advance directives
Rarely completed.
Fail to convey meaningful information.
People making directives have poor understanding of what they are deciding.
People cannot predict the medical conditions they will face.
Preferences regarding future treatment may change over time.
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Tennessee Law Durable power of attorney for health care
Set forth in T.C.A. §§ 34-6-201 through 34-6-218.
Provides broad powers to attorney in fact to make decisions as to health care of principal, before or after death of principal, “to the same extent as the principal could make health care decisions for the principal if the principal had the capacity to do so…” T.C.A. § 34-6-204.
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TN Law revocation of power of attorney for heath care
T.C.A. § 34-6-207 deals with revocation of health care powers of attorneys. Allows principal to revoke power of attorney by notifying either agent or health care provider of revocation either orally or in writing.
181
Uniform health care decisions act
Promulgated in 1993, it takes a hybrid approach, including forms that create a durable power of attorney and offer the person a chance to indicate how aggressively she would like to be treated. The agent must make decisions in accordance with the patient’s wishes. The health care provider must follow the instructions except where contrary to the provider’s conscience or contrary to generally accepted medical practice.
182
Health care decisions for an incompetent person
When making health care decisions for an incompetent patient, an agent for health care decisions is held to a “substituted judgment” standard of what the patient has chosen or would have chosen in that situation. Some commentators say the standard should be the “best interests of the patient.”
183
Health care decisions for an incompetent
In the absence of an advance directive designating an agent, responsibility for an incompetent patient’s decisions regarding health care usually falls to the patient’s spouse or next of kin, subject to the state’s interest in preserving life.
Per the Uniform Health Care Decisions Act, decisions are to be made by surrogates in the following order: 1) the spouse, unless legally separated; 2) adult child; 3) a parent; or 4) adult sibling. If more than one person in the class, majority rule.
Tennessee has adopted the Health Care Decisions Act under T.C.A. § 68-11-1801 et seq.
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Physician assistance: euthanasia and assisted suicide
Oregon became the first and only state to authorize physician-assisted suicide.
Under the Oregon law, a physician is relieved of criminal and civil liability for prescribing a lethal dose of medicine to an adult if certain conditions are met.
In Gonzalez v. Oregon, 546 U.S. 243 (2006) the US Supreme Court upheld the Oregon law from a challenge by the U.S. Justice Department.
The adult patient must suffer from an incurable disease that is likely to produce death within 6 months, must make several requests.
WA and MT now also authorize physician aid in dying.
185
Rise of elder law
The field of elder law, dealing with the legal problems of the elderly, began to develop in the 1990s.
Issues range from health care, asset preservation, Medicaid eligibility, retirement, competency and guardianship, discrimination, elder abuse and housing and institutionalization.
Lawyers can also help with pension plans and Social Security, durable powers of attorney, conservatorships and trusts to preserve assets if the elderly person is admitted to a state institution.
186
Disposition of the body - postmortem remains
Historically people had little say over their remains at death. Courts have since carried out the wishes of the deceased person provided these wishes do not conflict unreasonably with the desires of the living.
Some states have passed mortal remains legislation.
If a person dies by violence or in suspicious circumstances, however, all states require an autopsy regardless of the deceased person’s wishes.
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TN elective share statute
§ 31-4-101. Right of election; net estate
(a)(1) The surviving spouse of an intestate decedent who elects against taking an intestate share, or a surviving spouse who elects against a decedent's will, has a right of election, unless limited by subsection (c), to take an elective-share amount equal to the value of the decedent's net estate as defined in subsection (b), determined by the length of time the surviving spouse and the decedent were married to each other, in accordance with the following schedule:
The elective-share married to each other:
percentage is:
less than 3 years 10% of the net estate
3 years but less than 6 years 20% of the net estate
6 years but less than 9 years 30% of the net estate
9 years or more 40% of the net estate
