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Trusts and Estates Outline

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Trusts and Estates Outline

    Trusts and Estates Outline Part II

    Professor Waggoner

    Fall 2000

    Chapter 8: Revocable Trusts and Other Will Substitutes

    A. Validity of Will Substitutes Form over Substance

    1. Revocable Trusts The Present Transfer Test

    ; Revocable inter vivos trusts, even one in which the settlor

    retains the right to income for life, are valid. Determined by

    the present-transfer test: UPON CREATION, THE TRUST

    TRANSFERRED AN EQUITABLE REMAINDER

    INTEREST IN THE TRUST CORPUS TO THE

    REMAINDER BENEFICIARY.

    ; A present transfer of a remainder interests- even one that is

    subject to divestment by power to revoke satisfies the test

    and obviates the necessity of memorializing the trust in a

    document that is executed in accordance with the formalities of

    a valid will.

    ; Transfer treated as inter vivos, not testamentary

    ; Revocable, Self-Declared Trust: revocable inter vivos trust

    where settlor acts as trustee for benefit of himself for life,

    remainder to chosen beneficiary (transfer that satisfies test is

    transfer to beneficiary)

    ; In re Estate of Pilafas, pp. 406

    FACTS: When the signed copies of Pilafas’ will and revocable

    trust could not be found at his death, the court held that he had

    revoked them both, dying intestate, and thus his five adult

    children were his heirs

    HOLDING: when a settlor reserves a power to revoke his trust

    in a particular manner or under particular circumstances, he can

    revoke it only in that manner or under those circumstances.

    Because no evidence was presented showing that he complied

    with the required method of revocation, the inter vivos trust

    was not revoked and remains valid.

    ; Inter vivos transfer in trust is irrevocable unless the grantor

    expressly retains a power to revoke

    ; Rights of Grantors Creditors and Creditors of the Grantors

    Estate: if grantor transfers assets to trust in order to defraud

    creditors, creditors can set the transfer aside in order to get paid

    (fraudulent transfer principle sets transfer aside). Restatement

    2d allows creditors to get paid even if transfer was not to

    defraud. Some states have even enacted statutes that allow

    estate and creditors to reach assets of a revocable trust.

    2. Other Will Substitutes The Present Transfer Test (1989 UPC ??6-101, -203, -211 to 214 and Pre 1989 UPC ??6-101 to 113, 6-201)

    ; tests widely used to validate many will substitutes

    ; Life Insurance and Life Insurance Trusts:

    - compliance with formalities for wills is not required - although they pay at death, beneficiary designation,

    when made, is treated as giving a present contract right - popular for estate planning is a life insurance trust. One

    type: transfer full ownership of policy to trustee.

    Another type: naming trustee as beneficiary of policy

    with directions to trustee to collect proceeds at death

    and carry out terms of trust.

    ; Multiple Party Accounts:

    - can be Totten trusts, joint, or payable on death - Totten: created when a person deposits his or her funds

    in a savings or bank account in his or her name “in trust

    for” another person. Depositor typically retains

    exclusive control until death. Usually created to by-

    pass probate. Only form distinguishes them from wills.

    Accepted in great number of states, but some courts

    won’t give effect to them b/c seems like an attempted

    testamentary disposition.

    - Joint accounts: contain a survivorship feature and the

    balance on hand at death of depositor shifts to the

    surviving co-account holder without going through

    probate. Funds not owned in joint tenancy. Upon

    deposit the other co-account holder acquires a present

    contract right to the deposit, payable upon the death of

    the depositor.

    - POD accounts: created when a depositor registers the

    account in his or her name “payable at death” to another

    person. In the absence of validtaing legislation,

    accounts are held to be testamentary, invalidating the

    attempted transfer of ownership.

    - Pre-1989 UPC: lifetime ownership of co-account

    holders in joint accounts was presumptively

    proportionate to each party's contribution to the balance

    on deposit. A POD account was owned solely by the

    depositor and a trust account was owned solely by the

    trustee. Presumptively created a survivorship feature in

    all accounts refutable by clear and convincing evidence. - 1989 Revision is consistent with pre-1989 version, but

    major changes include: (1) folding Totten accounts into

    definition and coverage of POD accounts; (2) statutory

    forms for joint accounts with or without survivorship.

    Goal of revision is to encourage financial institutions to

    use statutory forms.

    ; Revoking Will Substitutes by Will: courts are divided

    - Totten trusts: revoked by appropriate divisions in the

    depositor’s will. UPC ?6-213 provides that a will may

    not alter the survivorship right in any multiple-party

    account or POD/

    - Life Insurance: most courts hold that a will to be

    ineffective to change the beneficiary designation on life

    insurance policies

    - Superwill: recent discussion of permitting hi so that

    testamentary control should be expanded to allow

    testators to change the beneficiary designations of all

    non-probate transfers other than true joint tenancies ; Joint Tenancies/ Tenancies by the Entirety: validity does not

    depend on compliance with formalities of wills. Creates an

    undivided interest in the entire property in each co-tenant.

    Includes a right of survivorship and property ownership shifts

    outside of probate to surviving co-tenant.

    B. Will Substitutes and the Subsidiary Law of Wills

    ; wills statute requirements apply regardless of the testator’s

    intent. Other rules of the law of wills, including antilapse

    statutes and statutes providing for revocation upon changes

    circumstances are different in that they yield to contrary

    intentions of testators.

    1. Revocation Upon Divorce (1990 UPC ??2-804 and Pre 1990 UPC ?2-508) ; Clymer v. Mayo, pp. 425

    FACTS: Mayo and his wife were divorced, and Mayo’s wife

    died after she executed a will and a revocable trust naming

    Mayo as beneficiary.

    HOLDING: In the absence of contrary intent, a divorce will

    revoke provisions of a spouse’s pour-over trust in favor of a

    former spouse.

    ; Massachusetts revocation-upon-divorce statute at issue in

    Clymer is of a type widely enacted throughout the country and

    is nearly identical to pre 1990 UPC ?2-508. These statutes

    expressly apply only to wills

    ; In Vasconi v. Guardian Life Ins. Co the court held that the

    presumption is now that the divorce property agreement

    revokes the designation of the ex-spouse as beneficiary. The

    ex-spouse is entitled to proceeds only if the agreement

    expressly so provides.

    ; A few states have enacted legislation providing for revocation

    of certain will substitutes upon divorce

    ; UPC ? 2-804 calls for revocation, upon divorce or annulment,

    of any revocable disposition. This section revokes benefits to

    former spouse and former spouse’s relatives.

    2. Antilapse Statutes (1990 UPC ??2-702, -706 and Pre 1990 UPC ??2-601, -605)

    ; apply by their terms only to wills and cases so far have

    concerned only revocable trusts.

    ; First National Bank of Bar Harbor v. Anthony, pp. 439

    FACTS: When one of the three children provided for in a trust

    set up by their father, Anthony, died before the father, the son’s

    three children asserted, after their grandfather Anthony’s death,

    that they were entitled to their father’s one-third interest in the

    trust.

    HOLDING: An inter vivos trust reserving to the settlor the

    income for life plus the power to revoke, with a remainder over

    at the death of the settlor, creates a vested interest in the

    remainderman subject to defeasance by the exercise of the

    power of revocation. The language of the trust suggests a

    disposition to the predeceased son’s estate rather than to the

    settlor’s estate.

    ; In re Estate of Button, pp. 442

    FACTS: Button drafted a revocable trust covering certain real

    property and naming his mother as a beneficiary; however, he

    did not provide for the disposition of the trust corpus were his

    mother to predecease him, and matters were further

    complicated when Button drafted a second trust which

    conflicted with the first but was never delivered to the trustee.

    HOLDING: When an estate is devised or bequeathed to any

    relative of the testator, and the devisees or legatee dies before

    the testator, leaving all lineal descendants, such descendants

    take the estate. Given the policy of the law against the lapsing

    of gifts to relatives of the deceased, it is appropriate to apply

    antilapse statutes to inter vivos trusts.

    ; Anthony and Button present conflicting views. The weight of

    authority favors the viewpoint of Anthony. The Restatement

    sides with Button (statutory language relating to the antilapse

    statute should be construed to apply to revocable trusts as well

    as to wills whenever that is possible).

    ; Comment to ?2-603, the antilapse provision contained in the

    1990 UPC, states that ?2-603 applies only to wills

    ; Although revocable trusts are will substitutes, this does not

    mean that all statutory rules pertaining to wills should be

    judicially extended to them.

    ; Precondition to the need for an antilapse statute is the

    existence of a requirement of survival. Without such a

    requirement, there is nothing for an antilapse statute to

    counteract. For wills, a devisee must survive the testator b/s the

    testator’s death is when the transfer is made. The donee of a

    future interests need only survive the completion of the gift. ; No cases have arisen involving extending antilapse statutes to

    life insurance, retirement plans, and POD accounts, but the

    cases for extension is much stronger b/c there is a survival requirement.

    ; Simultaneous or Near Simultaneous Deaths; Uniform Simultaneous Death Act: when the person whose lie is insured

    under a life insurance policy and the person who is the beneficiary of the policy die under circumstances in which there is no sufficient evidence that they dies otherwise than simultaneously, the proceeds of the policy are to be distributed as if the beneficiary predeceased the insured.

    - Janus v. Tarasewicz, pp. 450

    FACTS: Stanley and Theresa dies after ingesting

    cyanide-laced Tylenol capsules

    HOLDING: The determination of legal death must be

    made in accordance with the usual and customary

    standards of medical practice. Stanley dies on route tot

    he hospital while Theresa dies much later at the hospital.

    Theresa, therefore survived Stanley and the proceeds of

    the policy should go to her estate.

    - ?2-601 of the pre 1990 UPC imposed a 120 hour

    requirement of survival upon the devisees of the

    decedent’s will. No cases have sought to extend this

    will provision to all donative provisions.

    - ?2-702 of the 1990 UPC provides that for purposes of a

    donative provisions of a “governing instrument”

    (includes an insurance policy) an individual who is not

    established by clear and convincing evidence to have

    survived the death of another individual by 120 hours is

    deemed to have predeceased the other individual.

    C. Coordinating Parts Into a Coherent Whole

    1. Pour-Over Devises (1990 UPC ?2-511 and Pre 1990 UPC ?2-511)

    ; Supplemental Funding of Inter Vivos Trusts: adding funds to

    trust after the initial funding for (1) tax planning; (2) coordinate trust assets with other assets, including grantor’s probate estate at death and insurance proceeds.

    - Assets can all be merged into a singles trust entity

    through a pour-over.

    - To pour-over, grantor creates an inter vivos trust and

    then exercises a will devising part or all of the estate to

    the trustee of the receptacle trust.

    ; Uniform Testamentary Additions to Trusts Act (1960):

    legislatures enacted statutes that authorized testamentary additions to revocable or amendable trusts. Incorporated into the pre 1990 UPC ?2-511 and has been adopted in all but seven states.

    ; 1990 UPC ?2-511: Several changes to pre 1990 UPC ?2-511.

    - Inter vivos trust receptacle need not have been funded

    during the testator’s lifetime, but can be funded with a

    trust res by the pour-over devise itself.

    - Now allows the terms of the trust to be stated in a

    writing executed after as well as before or concurrently

    with will.

    - Allows testator’s will to provide that the pour-over

    devise is not to lapse even if the trust terminates or is

    revoked before the testator’s death

    2. Durable Powers of Attorney (1990 UPC ??5-501 to 505)

    ; Power of attorney creates an agency relationship between the

    maker of the power and the attorney-in-fact. Under traditional

    law, power terminated upon the principal’s death or incapacity

    ; 1990 UPC says that a durable power of attorney continues to

    be valid after the principal has become mentally incapacitated.

    Death of the principal does not automatically terminate the

    agent’s authority, wither.

    ; Uniform Statutory Form Power of Attorney Act: authorizes

    the execution of a fill-in-the-blanks type durable power of

    attorney that grants the agent the authority to act for the

    principal ion one or more or all of the thirteen broad categories

    by a check off procedure

    3. Custodial Trusts (Uniform Custodial Trust Act)

    ; Establishes a statutory trust that can be invoked by transferring

    property to another person as custodial trustee for the

    beneficiary.

    ; Designed to provide a statutory standby trust similar to the

    custodial arrangement for minors established by the Uniform

    Transfers to Minors Act.

    Chapter 10: Protection of the Family

    ; In American law, the decedent’s spouse is the only relative

    favored by a protection against intentional disinheritance. The

    decedent’s children and possible more remote descendants are

    granted protection only against unintentional disinheritance

    A. The Spouse’s Elective Share (1990 UPC ??2-201 to 214 and Pre 1990 UPC

    ??2-201 to 207)

    1. The Partnership Theory of Marriage

    ; Elective share: the percentage of the deceased spouse’s estate

    set by statute, that a surviving spouse may choose to receive

    instead of taking under a will or in the event of being

    unjustifiably disinherited.

    ; Partnership theory or marital sharing theory: the economic

    rights of each spouse are seen as deriving from an unspoken or

    imputed marital bargain under which the partners agree that

    each is to enjoy half interest in the fruits of the marriage, that is,

    in the property nominally acquired by and titled in the sole

    name of either partner during the marriage (other than in

    property acquired by gift or inheritance)

    - decedent who disinherits is seen as having reneged on

    the deal and restitution is an answer

    - law grants each spouse an entitlement to compensation

    for non-monetary contributions tot he marriage

    a. Community Property and Marital-Property Systems

    ; separate property (title based) system derives from English

    common-law, while community property developed in

    continental Europe

    ; Under common law system of separate property, husband and

    wife are separate owners of the assets they acquire during the

    marriage. Under the community property system, husband and

    wife own all assets acquired by either of them during the

    marriage in equal undivided shares.

    ; Uniform Martial Property Act: the property interest that each

    spouse acquires in all of the assets acquired by the economic

    activities of either during the marriage is a present, vested

    ownership right that does not depend on the survival of the

    other spouse

    ; Elective Share thought unnecessary under community Property:

    decedent’s surviving spouse is not seen as needing protection

    against disinheritance by elective share b/c he/she already owns

    ?

    ; Under community property systems and UMPA the couple’s

    property must be classified upon the first spouse’s death.

    Presumption that all property is community or marital property.

    Courts have also developed rules applicable to certain types of

    transactions (pp.520-21). These rules are default rules and

    couples may contract out of them

    ; Migratory Couples: couples that move from separate property

    states to community property states and vice versa

    - the law of the state where the couple is domiciled at the

    time assets were acquired controls ownership of these

    assets. Assets that either spouse earned during the

    marriage in a separate property state remain separate

    property.

    ; Quasi-community Property: property, other than real property

    located in other states, that would have been community

    property, but for the fact that it was acquired by decedent when

    the couple was domiciled in another state

    b. Equitable Distribution Upon Divorce

    ; Under equitable distribution upon divorce statues, courts have

    broad discretion to assign to either spouse property acquired

    during the marriage, irrespective of title, taking into account

    the circumstances of the particular case and recognizing the

    value of contributions of the non-working spouse ort

    homemaker to the acquisition of property (views marriage as a

    shared enterprise)

    - Uniform Marriage and Divorce Act: property subject to

    distribution is “property and assets belonging to either

    spouse or both however and whenever acquired.”

    Creates a “hotchpot” property scheme and eliminates a

    characterization problem.

    c. Conventional Elective Share Law

    ; All but one of the separate property states have decided that

    disinheritance of the surviving spouse if one of the few

    instance in which the decedent’s testamentary freedom must be

    curtailed

    ; No matter what the decedent’s intent, the separate property

    states say surviving spouse does have some claim to decedent’s

    estate (forced share)

    ; B/c forced share is expressed as an option that the survivor can

    elect or let lapse and not as a re-titling of the decedent’s

    property that automatically occurs at death, UPC uses the term

    “elective share”

    ; Traditional elective share statutes give spouse a right to a one-

    third share of decedent’s estate

    ; When marital assets have been disproportionately titled in the

    decedent’s name, conventional elective share law often entitles

    the survivor to less than an equal share. When marital assets

    have been disproportionately titled in the survivor’s name,

    conventional elective share law entitles the survivor to magnify

    the disproportion

    d. The 1990 UPC’s Redesigned Elective Share

    ; 1990 revisions of the UPC contain major changes in elective

    share. Purpose is to provide the surviving spouse a right of

    election that implements the partnership theory for the division

    of marital property at death

    ; Under both the traditional type and the augmented estate type

    of elective share statute, a surviving spouse’s share is less than

    the fifty percent share of the couple’s combined assets that the

    sharing theory would imply. Redesigned share is intended to

    change this by bringing elective share law into line with the

    partnership theory

    ; Accrual-Type Elective Share: 3 essential features

    - 1.) ?2-202(a) establishes a schedule under which the

    elective share adjusts to the length of the marriage. The

    longer the marriage the larger the elective share

    percentage.

    - 2.) ?2-203 to 2-208 elective share percentage is applied

    tot he value of the augmented estate, which includes the

    couple’s combined assets.

    - Augmented estate consists of: DECEDENT side

    (1)decedent’s net probate estate and (2) the decedent’s

    non probate transfers to others. IN MIDDLE (3) the

    decedent’s non probate transfers to surviving spouse.

    SURVIVNG SPOUSE SIDE (4) property owned by

    the surviving spouse and amounts that would have been

    included in the surviving spouse’s non-probate transfers

    to others had the spouse been the decedent

    - 3.) ?2-209 surviving spouse’s own assets are counted

    first in making up the spouse’s ultimate entitlement, so

    that decedent’s assets are liable only if there is a

    deficiency

    - Redesigned UPC differs from community property

    system bc/t he rights accorded the spouse under the

    UPC are conditioned upon survival and UPC adds

    together and then splits all of the couple’s assets,

    including assets acquired before marriage and assets

    acquired by gift or inheritance.

    ; Implementation of Support Theory; Supplemental Elective Share Amount: spouse’s mutual duties of support during their joint lifetimes should be continued in some form after death in favor of the survivor, as a claim on the decedent’s estate

    - conventional elective share law does this poorly by

    giving a set fraction as an elective share. Disregards

    the survivors needs

    - 1990 UPC seeks to implement the theory by granting

    survivor a supplemental elective-share amount related

    to the actual needs. ?2-202(b) provides a supplemental

    elective share amount of $50,000. Under ?2-209(b) and

    (c), if the surviving spouse’s assets are less than the

    $50,000 minimum, then the spouse is entitled to

    whatever additional portion of the estate is necessary,

    up to 100% of it, to bring the survivor up to that

    minimum level.

    2. Protection Against Will Substitutes

    a. Common Law Theories

    ; Seifert v. Southern National Bank of South Carolina, pp. 535

    FACTS: Harry Seifert created a revocable trust into which a large majority of his assets were transferred and named his daughters from a former marriage as the beneficiaries, leaving nothing in the estate to satisfy his wife’s elective share

    HOLDING: Where a spouse seeks to avoid the payment of the

    elective share by creating a trust over which he exercises

    substantial control, the trust may be declared illusory and the

    trust assets included in the decedent’s estate. The right to

    receive a spousal elective share is a substantial one. Any

    attempt to circumvent payment must be met with great

    skepticism.

    ; Courts have adopted one of the other of two approaches to this

    problem: the fraudulent intent test or the illusory transfer test,

    which the court in Seifert adopted. The illusory transfer test is

    the predominant view.

    ; Leading case adopting the illusory transfer tests is Newman v.

    Dore. Court says that the only sound test of validity is whether

    the transfer was real or illusory. Test of whether the husband

    has in good faith divested himself of ownership or made an

    illusory transfer. Case gives spouse very limited protection

    against will substitutes. One of the most common revocable

    trust with a retained life estate - has been held not to be illusory ; Sullivan v. Burkin, pp. 540

    FACTS: Sullivan contended that the value of real estate placed

    in trust by her late husband should be considered part of the

    estate for purposes of providing her portion of the estate

    HOLDING: the surviving spouse has no claim against the

    assets of a valid inter vivos trust created by the deceased

    spouse even when the deceased spouse alone retained

    substantial rights and powers under the trust instrument. ; Restatement 2d ?34.1 an inter vivos donative transfer to

    others than the donor’s spouse that is a substitute for a will, or

    that is revocable by the donor at the time of the donor’s death,

    is subject to spousal rights of the donor’s spouse in the

    transferred property that would accrue to the donor’s spouse on

    the donor’s death if the transfer had been made by the donor’s

    will

    ; For purposes of computing the amount of the elective share,

    the value of a will substitute that is subject to the elective share

    is added to the decedent’s probate estate. 1990 UPC ?2-209

    and pre 1990 UPC ?2-207 state that beneficiaries of will

    substitutes are liable in contribution of a proportional part of

    their gifts in making up the spouse’s elective share

    b. The Decedent’s Non-Probate-Transfers-to-Others Component of the UPC’s

    Augmented Estate System (1990 UPC ?2-205, 2-207 and Pre 1990 UPC ??2-

    202(1))

    ; Another function of applying the surviving spouse’s elective

    share to the augmented estate is to deal with fraud on the

    spouse’s share. Function performed by the decedent’s non-

    probate transfers to others component of the augmented estate.

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