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Trusts & Estates ClowneyFall 2012

Testamentary Freedom

Restatement (Third) 10.1The controlling consideration in determining the meaning of a donative document is the donors intention. The

donors intention is given effect to the maximum extent allowed by law.

DEFAULT RULEProperty owners have the nearly unrestricted right to dispose of their property as they please RATIONALEThey know how to best use their assets EXCEPTIONS

(1) Testator cannot use will to achieve any purpose that runs counter to the law (ex. T cannot condition a gift on avenging their death)

(2) Testator cannot do something that is against public policy to not violate public policy it needs to be

Clear Reasonable Giftover - Sometimes look to see if property is going to an alternative; shows T was thoughtful

Difficult to divine; examples contradictory; lots of power to judges (3) Some courts limit a Ts right to destroy property in a will because it is wasteful

Force the testator to internalize costs LOOK AT PURPOSE OF THE GIFT! Ex. pro-jewess > anti-shikse

Shapira v. Union National Banks (1974)Father make a will; he has 3 kids. The gift to the 2 boys was conditioned upon the fact that they

marry Jewish girls with Jewish parents. ProblemThis is not flexible. If alive, the testator could meet the girl and change his mind. Sons arguments(1) Violation of the 14

th Amendment (depriving him of the right to marry); court disagreed because will did not

restrict his right to marry, he just wouldnt get the money; also, there is not state actor (2) Violation of public policy (people should be free to marry who they want); court disagreed and said a reasonable restraint on marriage is not against public policy

Public policy is very hard to nail down, but here the court said this was PERMISSIBLE HOLDINGCourt said that restraint on marriage is ok if it is:

(a) Clear (b) Reasonable (c) Presence of a gift overif the condition is not fulfilled, money goes to a third party; shows T really thought about it (only

important in some cases)

HYPOS: T leaves his son $10 million, but if he joins the Catholic church within 7 years, he gets nothing NOT ALLOWED; coercive, against public policy;

anti-Catholic T leaves his son $10 million, but he must remain a good Catholic Too subjective, courts dont like T leaves son $10 million if he divorces his Catholic wife within 5 years of Ts death. If he doesnt, the money goes to an anti-Catholic league

Look at purpose; if it is to encourage divorce, it is not ok; if it is to take care of his son, it is ok T leaves son $10 million if he marries a non-African American woman within 10 years of Ts death Different than Shapira because the public

policy there was the right to get married

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Tax Issues

Estate taxWhole fortune; enforced before distributed, on the decedent Inheritance taxTax on person who receives the money; rates vary based on relationship of the decedent to the beneficiary

Kentucky has an inheritance tax, 3 classes: CLASS A: No tax (parents, spouses, children, grandparents, brothers, sisters) CLASS B: $1000 exempt, rest is taxed 4-16% (nieces, nephews, aunt, uncles, and great grandchildren) CLASS C: $500 exempt, rest is taxed 6-16%

Federal estate taxGenerally imposed on the net value of property owned by the decedent plus the value of property over which the decedent had substantial control

Only really wealthy people are subjected to this tax (less than 1% of Americans); no estate tax imposed unless you have more than $5.12 million (45% rate after that)

Con - huge administrative costs Unpopular tax for several reasons: (1) Double taxation (2) Optimism (Im gonna get rich) (3) Ignorance of how few actually pay (4) Branding - death tax (5) Gruesome Rationale

(1) Revenue raisingDoesnt do a good job with this justification because of the very small number of people taxed and high administrative costs (some say it is revenue negative)

(2) LevelingForm of social engineering designed to break up large fortunes (3) Wealth Redistribution promotes faster development

MAJOR LOOPHOLE

People with large estates can just give away their money before death; this is the reason that there is also a gift tax; BUT not every gift is taxed

Exceptions: (1) Annual exclusion (up to $13,000 per year) per person (e.g. husband and wife) (2) Medical expenses (3) Tuition payments that go directly to the school (4) Spouses (because they are one economic unit) (5) Lifetime exemption (additional $5.12 million over the course of Ts life) per person (e.g. husband and wife) (6) Charity

TAX FREE LIFETIME GIFTSOver the course of a persons life and death, they can give away $5.12 million tax free Ex.) $63,000 gift to son-- $13,000 is exempt; the other $50,000 goes towards the $5.12 million

Donor pays taxes on taxable gifts

CALCULATING ESTATE TAX (easy) (1) Calculate everything the decedent hasall assets owned at death (2) Determine the exemption applicable in the year of death (3) Subtract exemption amount from taxable estate (this year= $5.12 million) (4) Multiply balance by 35 %( 0.35)

CALCULATING ESTATE TAX (medium) (1) Calculate decedents GROSS ESTATE (anything transferred by will, property held in joint tenancy, revocable trusts, life

insurance, etc.) (2) From GROSS ESTATE, certain DEDUCTIONS are authorized by the Code. Gross estate Deductions= TAXABLE ESTATE

(a) Expenses of administration (b) State death taxes (c) Charity (d) Marital deduction (unlimited)

(3) Add back in any TAXABLE GIFTS made during life (ex. gifts above $13,000 that didnt go to spouse, charity, medical, or tuition); purpose is to figure out how much of the $5.12 million T used during their lifetime

(4) RATE SCHEDULE is applied to produce a TENTATIVE ESTATE TAX Over $5.12 million, tax is $155,800 + 35% of anything exceeding $500,000

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(5) Subtract any CREDITS (gift taxes already paid) Tax credit from $5.12 million exemption; Credit on $5.12 Million would be $1,772,800

Assets - Deductions = Taxable Estate Taxable Estate + Taxable Gifts = Tentative Estate Tax Base (Tentative Estate Tax Base - 500k)(0.35) + 155.8k - (tax credit of $1,772800) = liability

HYPOWolverine dies with $9 million in assets. In 1996, he gave Storm a gift of $3,013,000. He also gave Professor X $10,000 every

year. Wolverine is unmarried. 2 million to the Red Cross (1) Gross estate= $9 million (2) $9 - $2m = $7m (3) Prior taxable gifts= $7 million (gross estate) + $3 million (gifts)= $10 million tentative estate tax base (4) Apply rate schedule = ($10m-500k)(0.35) + $155,800 = 3,480,800 (5) $3,480,800 $1,772,800 = $1,708,000 = ESTATE TAX LIABILITY

BASIC TAX PLANNING STRATEGIES: What can you do to avoid paying taxes? (1) Aggressive use of the annual gift tax exclusion of $13K - wife and husband to all kids, grandkids; brother and his wife give to your

kids in exchange for you giving gifts to their kids, etc. (2) Use gift tax exclusion for tuition and medical expense payments (3) Take full advantage of the marital deduction (4) Life insurance, if configured properly, not part of decedents estate

(5) Make sure to give all of the $5.12 million lifetime giving; both parents should use the full exclusion (ex. $10.24 million estate= W dies; should leave H $5.12 million and kids $5.12 million)

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The Probate Process

PROBATE PROPERTYproperty that passes through probate under the decedents will or by intestacy; (1) establishing validity of will (2) monitoring distribution of decedents probate assets

No law says that probate is mandatory NON-PROBATE PROPERTYproperty that passes outside of probate under an instrument other than a will; distribution does not involve a

court proceeding Examples

Joint tenancy property (survivorship); life insurance; contracts with payable-on-death provisions; interests in trusts; joint bank accounts

TESTACY - dying with a will Bequeathto give away personal property in a will (i.e. anything that isnt land)

Legateeperson who receives the personal property Deviseto give away real property in a will

Deviseeperson who receives the real property

INTESTACY - dying without a will Personal property is DISTRIBUTED to NEXT OF KIN Real property DESCENDS TO HEIRS **Give is the best verb to use in drafting wills because it cannot be attacked

Subject Noun Verb Recipient

Realty Devise To devise, to descend to heirs Devisee

Personalty Bequest To bequeath, to distrubte to next of kin

Legatee

Why is probate unpopular?

(1) Privacy concerns - will becomes a public document (2) Expensive (court costs, attorneys fees) (3) Time consuming

Why is probate good? (1) Dispute resolution (2) CreditorsWhen you start probate, it starts a short statute of limitations (3) Protects creditors (4) Clears title for real estate (very important!) (5) Prevents waste/ theftcan prevent abuses of personal property

When should you probate? (1) If money is in a bank account, you might need probate to release it (2) If real estate is left (3) If there is a question about who is an heir (4) If there are any potential claims from creditors

HOW PROBATE WORKS (1) Death certificatetake to courthouse with will

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(2) Need personal representative appointed (a) If named in will EXECUTOR (b) If no will ADMINISTRATOR (appointed by court; determined by statute)

DUTIES OF EXECUTOR/ ADMINISTRATOR

(1) Marshall the assets: Collection, Inventory, Appraisalgets letters testamentary (like a power of attorney) which says you can deal with decedents things

(2) Determine if formal or informal probate (3) Pay debts - executor has no personal liability (estate in bankruptcy) (4) Pay taxes (5) Distribute assets (6) Formal transfer of estate property according to the will or by state laws of intestate succession (if no will) (7) Notice: goes to all known kin; ad in the paper for creditors

Intestacy

Intestacy is common Only 30% of people die with a will If you do not make a will, intestacy statutes kick in Benefits of making a will:

(1) Personal autonomy; you get what you want (can give money to friends who wouldnt take under intestacy) (2) Less fighting (maybe) (3) Name guardian to take care of kids (4) Name your executor (5) It is easy

Why do people not make wills?

(1) People dont like to think about death (2) Takes time (3) Think its unimportant/think they dont have anything (4) Expensive (5) Privacy issues

PARTIAL INTESTACYWhen the testator does not account for all of the things they own when they die, intestacy laws kick in for the remainder

POLICIES BEHIND INTESTACY STATUTES

(1) Look to what they average person would want Problemmost people are not average

(2) Family protection UPC 2-101. Intestate Estate. Any part of a decedent's estate not effectively disposed of by will passes by intestate succession to the decedent's heirs as prescribed in this Code, except as modified by the decedent's will. A decedent by will may expressly exclude or limit the right of an individual or class to succeed to property of the decedent passing by intestate succession. If that individual or a member of that class survives the decedent, the share of the decedent's intestate estate to which that individual or class would have succeeded passes as if that individual or each member of that class had disclaimed his [or her] intestate share. UPC 2-102. Share of Spouse.

a. Alone in the World no descendant or parent of the decedent survives the decedent, spouse gets entire estate b. Nuclear Family all of the decedent's surviving descendants are also descendants of the surviving spouse and there is no

other descendant of the surviving spouse who survives the decedent, spouse gets entire estate c. No kids but Parents the first *$ 300,000+, plus three-fourths of any balance of the intestate estate, if no descendant of the

decedent survives the decedent, but a parent of the decedent survives the decedent;

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d. Shared kids and Kids of Surviving Spouse the first *$ 225,000+, plus one-half of any balance of the intestate estate, if all of the decedent's surviving descendants are also descendants of the surviving spouse and the surviving spouse has one or more surviving descendants who are not descendants of the decedent;

e. Decedent has Kids-Not Shared the first *$ 150,000+, plus one-half of any balance of the intestate estate, if one or more of the decedent's surviving descendants are not descendants of the surviving spouse.

Shared Kids Spouses Kids Decedents Kids Parent Spouses Share

Only Spouse No Doesnt matter No No 100%

Parents Alive No No No Yes - remaining estate

$300k + remaining estate

Nuclear Family Yes No No 100%

Will Smith (if

Jada dies) Yes Yes No $225k + remaining estate

Evil Stepmother Doesnt matter Doesnt matter Yes $150k + remaining estate

Problems with UPC

No protection for children if survivor decided not to give kids money Spouse under the UPC is not really defined; generally gay couples are not protected; transgender Doesnt protect co-habitators

HYPOS H & W are married. They have no kids or surviving parents in UPC jurisdiction. Who takes under intestacy? 2-102(1)(a) explains

that the wife takes 100% H & W are married and have one daughter. Who takes under intestacy? 2-102(1)(b) explains that the wife still takes 100%. The

thought is that the child is the wifes and she will take care of her. R & J are married and have no kids. All parents are alive. R dies intestate. Who takes under intestacy? 2-102(2) explains that J

gets the first $300,000 plus of anything else. Most of the time, the wife will get all. W & J are married and have 2 kids from their marriage and 1 from Ws prior marriage. J dies. Who takes under intestacy? 2-

102(3) explains that W gets $225,000 plus of balance. A & D get married. D has 3 children from a previous marriage. D dies. Who takes under intestacy? A gets $150,000 plus of the

balance.

KENTUCKY RULESpouse gets first $15K in personal property, then personal property; real estate KY tries to keep money and property in the bloodline. Mitigated some by dower laws. BAD FOR SPOUSES. KRS 391.020

When a person dies intestate and without issue owning real estate of inheritance which is the gift of either of his parents the parent who made the gift, if living, shall inherit the whole of such estate.

If a person under the age of eighteen (18)... HYPOS

J has $350,000. J has 2 children with R and 2 from a previous marriage. What is Rs share under the UPC? According to 2-102(4), R gets $150,000 + ($200,000)= $250,000

What if R dies first? According to 2-102(3), J gets $225,000 + ($125,000)= $287,500 Under KY law? $15,000 + ($235,000)= $182,500

2-103. Share of Heirs Other Than Surviving Spouse. Any part of the intestate estate not passing to the decedent's surviving spouse under

Section 2-102, or the entire intestate estate if there is no surviving spouse, passes in the following order to the individuals designated below who survive the decedent:

to the decedent's descendants by representation; if there is no surviving descendant, to the decedent's parents equally if both survive, or to the surviving parent; if there is no surviving descendant or parent, to the descendants of the decedent's parents or either of them by representation; if there is no surviving descendant, parent, or descendant of a parent, but the decedent is survived by one or more grandparents or

descendants of grandparents, half of the estate passes to the decedent's paternal grandparents equally if both survive, or to the surviving paternal grandparent, or to the descendants of the decedent's paternal grandparents or either of them if both are deceased, the descendants taking by representation; and the other half passes to the decedent's maternal relatives in the

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same manner; but if there is no surviving grandparent or descendant of a grandparent on either the paternal or the maternal side, the entire estate passes to the decedent's relatives on the other side in the same manner as the half.

ORDER: (1) Children, (2) Parents, (3) Parents descendants i.e. Siblings/Nieces/Nephews, (4) grandparents and grandparents

descendants, (5) Spouses family?

Simultaneous Death If W dies before H Ws money goes to H and when H dies it all goes to his parents ONLY Order of death can have profound impact on who gets what; but the COMMON LAW was totally unprepared to deal with the problem of

simultaneous death USDA (Uniform Simultaneous Death Act)If no sufficient evidence to show who died first, treat as if A survived and as if B survived Janus v. Tarasewicz (1985)H and W return from their honeymoon to go to the funeral of Ws brother. Both take Tylenol laced with cyanide

and both die. Life insurance policy of H: If W survives, goes to W. If W dies first, goes to mother. HOLDINGFound sufficient evidence that W outlived H. The judge in this case read sufficient to mean some) REMEDYAdd in your own clause to will that says if H/W survives you by 30/60/90 days STANDARDSufficient evidence; PROBLEM is that sufficient evidence isnt high enough to avoid fights; CLEAR AND CONVINCING

might be better (but still face some policy reason) UPCUse 120 Hour Rule: An heir or devisee who fails to survive the decedent by 120 hour (5 days) is deemed to have predeceased the

decedent; CLEAR AND CONVINCING EVIDENCE is the standard that they survived 120 hours Best practice is to extend to 60 or 90 days (let them enjoy it, live a little)

Shares of Descendants In ALL jurisdictions, after money goes to the spouse, it all goes to the kids (children take remainder of the property) When one of several children has died before the decedent, leaving descendants, all states provide that the childs descendants shall

REPRESENT the dead child and divide the childs share among themselves RATIONALEKids will get from parents; Administrative costs Complications raise when a child predeceases their parents THEORIES:

(1) English Per Stirpes Ask: How many living branches of the family? Each living branch gets the same amount GOODTreats all branches equally BADNot all grandchildren get the same amount; seems to reward families with less kids KENTUCKY RULE About 1/3 of the states follow this system

(2) Modern Per Stirpes (also called per capita with representation) Ask: Where is the first living generation? Like the per stirpes method but makes the initial division at the first generation where we have someone alive Only get a difference with per stirpes when all of the first generation is gone About of the state follow this system

(3) Per Capita at Each Generation UPC Method: 2-106(b) Everyone is a like generation and gets a like amount Initial division of shares is made at the level where one or more descendants are alive (like modern per stirpes), but the shares

of the deceased persons on that level are treated as one pot and are dropped down and divided equally among the representatives on the next generational level

RATIONALEEqually near, equally dear About 12 states follow this system 6/24

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If 4 is the only sibling alive, he gets and...

English and Modern Per Stirpes PCEG

a, b and c 1/12 3/28

d and e 3/28

f and g 3/28

h, i and j Nothing Nothing

If all siblings are dead...

English Per Stirpes PCEG and Modern Per Stirpes

a, b and c 1/12 1/10

d and e 1/10

f and g 1/10

h, i and j 1/12 1/10

There are no living descendants if only a son or daughter-in- law is left. For example, if Granny has 3 kids (1,2 & 3) and 3 is married to

A, if 3 dies before Granny and 1 & 2 survive Granny, 1 & 2 each take and A gets none. PREFERRED ORDER EVERYWHERE:

(1) Spouse (2) Kids (3) Parents (4) Siblings (5) Nieces/ Nephews

Shares of Ancestors & Collaterals Collateral KindredAll persons who are related by blood to the decedent but who are not descendants or ancestors are called collateral

kindred First Line CollateralsDescendants of the decedents parents, other than the decedent and the decedents descendants Second Line CollateralsDescendants of the decedents grandparents, other than the decedents parents and their descendants If there are no first line collaterals, the states differ on who is next in the line of succession. 3 main systems are used:

(1) PARENTELIC SYSTEM Under this system, the intestate estate passes to grandparents and their descendants, and if none to great-grandparents and

their descendants, and if none to great-great-grandparents and their descendants, and so on down each line (parentella) descended from an ancestor until an heir is found

1st

parentellaIf you have linear heirs (parents and children), look to see if anyone descended from your parents is still alive (siblings, nieces, nephews)

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2nd

parentellaIf no one is living from that group, ask: are your grandparents for anyone descended from your grandparents alive (uncles, cousins)

3rd

parentellaIf no one is alive in the 2nd

, move to the 3rd

people who descended from your great-grandparents

(2) DEGREE OF RELATIONSHIP SYSTEM - Consanguinity The intestate estate passes to the closes of kin, counting degrees of kinship. To ascertain the degree of relationship of the decedent to the claimant, you count the steps (counting one for each generation)

up from the decedent to the nearest common ancestor of the decedent and the claimant, and then you cont the steps down to the claimant from the common ancestor. The total number of steps is the degree of the relationship

Use Table of Consanguinity

(3) UPC METHOD (2-103) This method solves the problem of laughing heirs by drawing the line at grandparents and their descendants LAUGHING HEIRSpersons so distantly related to the decedent to suffer no sense of bereavement, laughing all the way to the

bank Look at the 1

st parentella; If nothing, look at the 2

nd parentella; If nothing there, it escheats to the state

Adopted Children Adoptions are purely statutory law because it was not recognized in the English common law (because they were concerned with

primogeniture) Halll v. Vallandingham (1988)

ISSUEWhether MDs law regarding natural inheritance by adopted persons should be construed as to deny the appellants the right to inherit through their natural paternal uncle when they were adopted as minors by their stepfather after the death of their natural father

HOLDINGCourt said no; since an adopted child cannot inherit from their natural parent, they cannot inherit THROUGH the natural parent by way of representation

LAWThe old law was that when you were adopted, you lost the right to inherit through your natural parent. The new law did not explicitly say that an adoptee had no rights to inherit from the natural parent

REASONINGThe court said that the new law wasnt meant to change the content; they didnt want to allow DUAL INHERITANCE; concerned about giving adoptees more rights than others

UPC METHODKey determination is whether there is a parent-child relationship.

2-116: If such a relationship exists, the parent is a parent of the child and the child is a child of the parent for the purpose of intestate succession by, from, or through the parent of the child

2-118(a): Regarding adoption, a parent-child relationship exists between an adopted child and the adoptive parent, but not between an adopted child and the childs genetic parents, with several EXCEPTIONS:

EXCEPTIONS: 1. If adopted by a spouse of a genetic parent, you can inherit through both 2. If adopted by relative of genetic parent you can still inherit through both 3. If adopted after death of genetic parent

STRANGER TO THE ADOPTION RULE (old rule)an adopted child is presumptively barred from inheriting except where donor is the

adoptive parent As adoption became more common and more socially acceptable, courts began to carve out exceptions to the stranger to the adoption

rule EXCEPTION: An adopted child might be permitted to take if adopted before, but not after, the testators death In most states today, a minor adopted by A is presumptively included in a gift by T to the children, issue, descendants, or heirs

of A. This presumption yields to a contrary expression of intent by the donor

ADULT ADOPTION Minary v. Citizens Fidelity Bank (1967)A sets up a trust for H and her 3 sons. When the last of these 4 dies, she wanted to give some

to heirs and then to the church. Alfred knows he is the last one left and when he dies, the money will go to Ts kids and the church so to fix this he adopts his wife.

LAWFor purposes of succession, adopted children shall be considered natural and legitimate child HOLDINGAdoption of an adult for the purpose of bringing that person under provision of a preexisting testamentary

instrument when he clearly was not intended to be so covered and should not be permitted The court saw this as an act of subterfuge and a violation of As intent (however, Clowney says we have no clue of As intent)

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UPC - no one adopted after age 18 counts as a class gift (to heirs) UNADOPTION

It is very hard to undo an adoption Risk of an adult adoption and bringing them into an inheritance scheme

EQUITABLE ADOPTION

Court proceedingall interested parties Very technical, formal area of family law Person who was raised from infancy by another doesnt become the latters child for purposes of intestacy if not formal proceeding However, some may be treated as if they had been formally adopted under equitable adoption LEGAL REQUIREMENTS: If no formal proceeding, what do you need?

ONeal v. Wilkes (1) Agreement between natural and adoptive parents (2) Performance by giving up of child (3) Performance by child in living in adoptive parents home (4) Parents take child in and treat it as their own

Why scholars dont like the focus on contract law that permeates equitable adoption: (1) The child doesnt have the capacity to contract (2) Partial performance by the child (3) Child is often hurt by not recognizing equitable adoption (4) Entire point of equity is to get around formalities

NON-MARITAL CHILDREN

Historically, a child born out of wedlock was filius nulliusa child of no oneand could inherit from neither his father nor mother Trimble v. Gordon (1977)SCOTUS said it was illegal to completely cut off inheritance rights of non-marital children because the child

is innocent and shouldnt be punished However, state statutes still LIMIT inheritance K.R.S. 391.105An illegitimate child can only inherit through the father if a) parents participate in a marriage ceremony before or

after the birth of the child (even if the marriage is void); OR b) if adjudication of paternity before death of the father or if after, by clear and convincing evidence (basically need DNA)

POSTHUMOUS CHILDREN (Conceived while father alive)

RULE(KRS) Under law, a child is in being at conception as long as it is born alive. As long as a wife has a child within 10 months of a husbands death, it is presumed to be his

A typical posthumous child case involves a child who is conceived before, but born after, a fathers death. REBUTTABLE PRESUMPTIONThe normal period of gestation is 280 days (10 lunar months). If the child claims that conception dated

more than 280 days before birth, the burden of proof is usually upon the child. UPA 204establishes a rebuttable presumption that a child born to a woman within 300 days after the death of her husband is a

child of that husband

ASSISTED REPRODUCTION Posthumously CONCEIVED childrenthe general rule is that a posthumously conceived child is, by definition, a non-marital child even

though the childs parents might have been married prior to a childs conception Woodward v. Commissioner of Social Security (2002)H had leukemia. He found out that the treatment would leave him sterile and he

made a donation at a sperm bank so that his wife could get pregnant. After Hs death, W used the sperm and had twin girls. Resulted in a fight with Social Security over survivor benefits

WIFES ARGUMENTSShe said that since there is a genetic relation, they should always be allowed to inherit; Social security argued that since the girls were not in being before his death, there was no inheritance

TESTNeed to show CONSENT to both HAVE the kids after death and CONSENT to SUPPORT them REASONING

(1) Best interests of the childjudge says it is always going to be in the best interests of the children (although could argue it is hurting the interests of pre-conceived kids) (2) States interest in orderly administration of estates (3) Reproductive autonomy of the deceased (not sure of his intention even though he wanted kids while alive)

OTHER APPROACHES:

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1. RESTATEMENT (THIRD) OF PROPERTY 2.5To inherit from the decedent, a child produced from genetic material of the decedent by assisted reproductive technology must be born within a reasonable time after the decedents death in circumstances indicated that the decedent would have approved of the childs right to inherit.

a. Problem the reasonable time language is kind of mushy 2. UNIFORM PARENTAGE ACTDecedent must consent to posthumous reproduction in a record 3. CALIFORNIA RULEA child of the decedent conceived after the death of the decedent shall be deemed to have been born in the

lifetime of the decedent if: a. Clear and convincing evidence that decedent consented in writing b. Notice to decedents estate within 4 months of his death that posthumous reproduction is a possibility c. Child is in utero within 2 years of death d. **Seems to be the most attractive rule**

SURROGACY

Still a very up in the air area of the law Options:

(1) Genetic parents (2) Surrogate/ husband (3) Third partycontractor

ENGLISH RULEChilds mother is the person who gives birth; the woman of the commissioning couple is NOT the mother even if her eggs were used. Where the surrogate is married, her husband is the father unless he can prove that he did not consent

CALIFORNIA RULEParents are determined not by genetic material nor who gave birth, but solely by the intent of the parties as shown by surrogacy contract

UPC 2-121In the absence of a court order to the contrary, the surrogate does not have a parent-child relationship with the child unless the surrogate is the childs genetic mother and no one else has a parent-child relationship with the child

Other courts uphold the genetic relationship

Advancements (Prepayment) COMMON LAWPresumed that ANY gift given to a child was an advancement, or prepayment of their share of the estate

REASONINGWhen a parent dies, presumed intent is equal distribution of assets. The only way to get this is to consider gifts a parent made during their lifetime

HOW TO DO THIS: (1) Add up all gifts given to a child during the parents lifetime (use value when gift given) (2) Add back into HOTCHPOT (the decedents estate) (3) Divide this amount into even shares among the heirs (4) Amount the child received previously should be charged against shares of the heirs

UPC 2-109The UPC hates advancements and reverses the common law rule: A lifetime gift is presumed NOT to be an advancement UNLESS it is shown to have been intended as such

REASONINGDont want heirs to fight REQUIREMENTMust be stated IN WRITING that it is an advancement by decedent or acknowledged in writing by heir

KY LAWGifts from parents and grandparents are considered advancements. However, for gifts for the maintaining or educating or the giving of money, to a child or grandchild, without any view to a portion or settlement in life, shall not be deemed an advancement

NOT A GOOD LAW Ideas for a better law: (1) Make a distinction between real and personal property; (2) Presumption of no advancement but compelling

evidence can overcome that presumption; (3) Presume all large gifts are advancements Advancements only apply when there is no will, but a good trust and estates lawyer will ask about gift given during life

HYPOS S dies without a will, leaving 3 nephews H, D & L. Before S died, he gave H $100,000. S leaves behind $50,000. How is it divided?

D= $25,000; L=$25,000 You DO NOT have to pay back advancements because it is obvious that Ss intent was for H to have at least $100,000

Before S died, he gave H a house worth $100,000. S leaves behind $500,000. At the time S dies, the house is worth $300,000. You use the amount of the gift at the TIME IT IS GIVEN (here $100,000). UPC says it is whenever he takes possession or when S dies, whichever is first Hotchpot= $600,000; D=$200,000; L= $200,000; H= $100,000 plus house he was previously given

When Children Inherit: Guardianship and Conservatorship of Minors

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A minor has neither the legal capacity to manage property nor the legal power to make most choices about how and where to live. GUARDIAN OF THE PERSONperson who has responsibility for a minor childs custody and care

If no person is designated by parents, the court will appoint a person, usually from among the nearest relatives The guardian has no authority to deal with the childs property

PROPERTY MANAGEMENT OPTIONS (1) GUARDIAN OF THE PROPERTY Default option

Court appointed Not favored and want to avoid PROBLEMSGuardian is tasked only with PRESERVATION, not trying to grow the property, just make sure it doesnt decrease;

have to get courts permission for everything; expensive; difficult to dip into principal for needed expenses (2) CONSERVATORSHIP Better option

Court appointed Person gets title to property Better than guardian because only requires 1 trip to court per year; more flexible; can invest more aggressively

(3) CUSTODIAN Made through will Uniform Transfers to Minors Act (UTMA)

Only used in estate planning Better because flexible, limited court supervision (only if minor contests); can dip into principal if it is beneficial to the minor

(4) TRUSTEE Best option Most flexible, least court supervised, tailored to specific family characteristics Needs the most planning

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Will Execution

Will Formalities

Requirements 1. Intent (no real test but best approach: Did the Testator really intend this document to pass his stuff at death?) 2. Testamentary Capacity a. Age of Majority b. Sound Mind 3. Formalities a. Signed b. 2 Witnesses c. Written Weird Formalities d. Publish - declare before witnesses that its your will e. Subscription - must sign at end of will

Formalities 1. Protective: makes it more difficult to bring fraudulent claims and by protecting testators intent 2. Evidentiary: ensures that documents offered for probate truly reflect testators intent 3. Ritualistic Function: makes testator appreciate the gravity of will making 4. Channeling Function: standardization makes everything easier English Rule - Compliance with Wills Act Required testator to sign or acknowledge will in presence of two witnesses at the same time Justified by slippery slope argument that fraud and forgery will run rampant Groffman need to have signature made in presence of witnesses C/L of Strict Compliance to will formalities Tests for Presence of Witnesses

1. Line of Sight/Presence Test (RULE) a. Witness needs to have been in position to see the signing if they were looking at the paper

2. General Consciousness a. be in general area of signing; hear/see it, generally aware of it

Problems with Video Wills (majority rule is that videotapes do not equal writing)

1. no ritual function 2. funnel people to lawyers 3. tampering 4. difficulty in finality

Signature Issues

1. Shows finality 2. Any mark can work as a signature e.g., an X

a. testator must intend it to authorize the will 3. DONT hold someones hand as they sign 4. Subscription - Signature typically needs to be at the bottom 5. KY Rule: can sign for someone with their authorization

Issues with Witnesses Witnesses may not remember signing a will

1. Attestation Clause: boilerplate language states that the formalities of the will has been satisfied, in the will

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2. Self proving Affadavit: separate paper generally attached to back of will; get it notarized, affirming that requirements of will have been satisfied

a. Substitute for witness testimony in court

Interested Witnesses 1. Common law - Invalidate the will 2. Void interested witnesss gift 3. Purging Statute - many states only void gift to extent it exceeds what beneficiary would get in intestacy What to do with leftover part: a. Residue Clause b. If son was residue taker, intestacy to someone else 4. UPC doesnt purge and says the will is valid

Estate of Morea 2 of three witnesses were also beneficiaries Son was allowed to serve as witness even though he was beneficiary b/c he did not benefit from will, took less than he would have in intestacy Supernumerary Witness - when an interested witness is extra he takes full bequest

How to do Ceremony

1. Focus on state law, will needs to be in state of testators residence 2. Pages numbered staples (once) and bound well

a. If will contest appears inevitable, find old friend whi is not a beneficiary; can testify to mental state of friend 3. Use good witnesses (secretaries are the best) 4. Get everyone in the same room (not beneficiaries) 5. Ask: Do you recognize this document? What is it? Have you read it? Do you understand how it disposes your property? 6. Testator signs, make sure everyone can see 7. Witness reads attestation clause 8. Witnesses sign self-proving affidavit in front of notary 9. Get notary to stamp that shit, HARD 10. Who keeps it? some states dont allow attorney to keep will, UPC does

a. Safety deposit box is the best 11. Tell them not to write on it 12. Make a copy

Notarized Wills UPC 2-502(a) provides for notarization as an alternative to attestation Why does a notary equal 2 witnesses: 1. Serves PERC functions as well as attestation 2. Lay people believe that notaries have legal effect

Tyranny of Formalities

1. Strict Compliance a. Poorly executed formality is treated as something like fraud

2. Substantial Compliance a. testamentary intent is needed b. sufficiently approximated the statutory formality and enables act to conclude that it serves the purpose of the will act

3. Dispensing power c. Dispensing of formalities if you show by clear and convincing evidence they intended it as a will a. Codified in UPC 2-503

Holographic Wills Requirements:

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1. Entire will MUST be in Testators handwriting 2. Signed 3. Doesnt need a witness Rationale: extra genuine, cheaper, more private (Clowney Loves Them), good option in emergencies Issues: deception, intent issues, lack of knowledge How much must be written? 1. Everything (Ky. Rule)--must be (a) written (2) signed and (3) dated (traditional approach) 2. Material Provisions (1969 UPC)-- all material provisions must be written but some aspects may be typed (date) a. Test: Can you eliminate the typed provisions and still have a will? 3. Material Portions (1990 UPC)-- extrinsic evidence allowed and only material portions required (date and introductory section may be typed) Conditional Wills: courts may ignore the condition if it does not happen (but see Shapiro)

Revocation Wills are ambulatory-can be modified at anytime during the lifetime of the testator Requirements to Revoke

1. mental capacity 2. intent to revoke 3. Affirmative act/substantial step

Presumption- if will is missing there is a presumption that the testator destroyed it, but this is a rebuttable presumption

Note: if you can rebut the presumption, then you can use extrinsic evidence to establish by clear and convincing evidence of the contents of the will

May be able to use substantial compliance or the dispensing power to prove a revocation Thompson v Royall mutilation needs to be on the face of the will, not on the back Mutilation Approaches:

In some states, physical act needs to touch the words of the will (Royall) UPC 2-507: would allow revocation by physical act regardless of the act touching the words of the will

Revocation of a copy:

Not good enough, revocation needs to be to the original will Partial Revocation

Traditionally partial revoked sections were ignored unless unreadable, then whole will may be struck down UPC 2-507: allow partial revocation by physical act

Subsequent Wills

If two wills are mutually exclusive, the second one prevails Codicil - second document does not distribute all property

Revoking codicil does not affect will Revoking original will revokes codicil too

Divorce

Statutes in almost all states provide that divorce automatically revokes portion of will to ex-spouse Most states do not extend the divorce revocation to spouses family UPC goes farther and revokes gifts to divorced spouses relatives

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Revocation by Subsequent Writing Prior will may be expressly revoked by writing that complies with the formalities

Dependant Relative Revocation (DRR)

If testator purports to revoke a will based on a mistaken assumption of law or fact, the revocation is ineffective if the testator would not have acted if he or she knew the truth

Classic DRR example: Testator makes earlier will, she revokes earlier will to make later will. Something wrong with later will (often formalities). Rather than distributing testators assets through intestacy, law treats earlier will as never revoked.

However, it may be shown that intestacy may be a better choice then the previous will--what is closer to Ts intent Can use DRR for mistake of fact

Must be in text of will Ex: I leave to Marge b/c Duff beer is out of business (but Duff actually is not out of business)

DRR is not necessary if state has adopted substantial compliance or dispensing power Revival/Salvage doctrine

Purposely destroying later will with intention of bringing back earlier one brings it back Need clear and convincing evidence of intent to bring back the first will

*DRR vs. Revival--Under DRR, the court determines something closer to want you want but not really want you wanted. Under Revival, you actually get what you want when you bring back the previous will.

Will Components: What Writings Count as Part of the Will? Four Doctrines

1. Integration a. all papers present at the time of execution b. intended to be a part of the will

2. Republication by Codicil a. Primary will document is treated as re-executed at the date of the codicil (that mentions it) b. true even of wills you revoke c. only a prior properly executed will can be republished d. (Examples: will is invalid b/c of divorce; can re-execute previous will revoked by subsequent writing)

3. Incorporation by Reference a. Manifests will to incorporate b. Memo MUST exist at the time of will execution (does not have to satisfy formalities of wills act) c. Memo is identified in the will d. Must be a writing

i. UPC 2-513 1. allows incorporation by reference but drops requirements 2. needs signature on the document 3. only allowed for tangible personal property

4. Acts of Independent Significance a. Outside events by the testator or that impact the testamentary gift done for a reason other than to change the

testamentary scheme may be kept valid i. Ambiguity of Beneficiary

1. Testators will makes reference to facts or events to determine the beneficiaries of the will (gift to oldest surviving sister)

ii. Ambiguity of Gift 1. Will makes reference to facts or events to determine property that an ascertained beneficiary will receive

(I leave my automobile I own at death to my brother)

Contracts to Make a Will Contract to Make a Will: Ok

Classic situation: caregiver contracts with testator but the problem often arises b/c the deal was not written down Contract Not to Revoke a Will: Terrible Idea

Problem: relationships constantly change, financial conditions change UPC Mini Statue of Frauds:

(1) Will states terms of contract; or

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(2) Will references the contract; or (3) The existence of a signed contract

Mutual and Joint Wills (are they Ks not to revoke?):

Mutual Will- separate wills with reciprocal or mirror image provisions Joint Will- two people has the same document UPC 2-514: Mutual or Joint Wills do not create the presumption of the existence of a contract

Capacity

Planning for Incapacity Mental Capacity Types of Capacity:

1. Legal 2. Mental: Requires

a. Nature & Extent of property b. Know natural objects of his bounty/affection~ (Know who is important to you) c. Understand disposition of property d. Know how the first three prongs work together

**Knowledge Requirement: Does Not require Actual knowledge, just the capability of knowing ** Timing: you only need a moment of clarity to execute a will Rationale:

1. Gives effect to testators true desires 2. Legitimacy of the system 3. Protecting family

Litigation 1. The US allows complete disinheritance of children 2. Questions of capacity go to a jury

a. Estate planning: domicile your client/testator in a state without jury trials Burden of Proof:

Majority approach: burden is on the person contesting the will to show a lack of capacity by preponderance Minority approach: burden is on showing capacity after the contesting party rebuts the presumption of sanity

A. Insane Delusion False conception of Reality, holding belief that goes against reason or proof, not an entire worldview, just a few issues Test:

(1) Must show an insane delusion; AND Majority Test: Could a rational person have drawn the same conclusion Minority Test: If there is any factual basis for the conclusion than it is not an insane delusion

(2) Causation: the delusion materially affected the disposition of the will (look for unnatural distribution) Only portion of the will caused by insane delusion fails

Way to protect from ID

Anti Mortem Probate/Living Probate: testator can declare a will valid while still alive, shows capacity and freedom from undue influence

Problems: 1. If you show up and say they dont have capacity, it could ruin relationship, he could have moment of

clarity and write you out 2. Taxing for older people

B. Undue Influence Mental or Moral exertion that removes testators agency Really about control and coercion

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Two Types: 1. free will directly overcome by wrongdoer, no real choice 2. Subtle manipulation~ friend or advisor

Burden of Proof:

1. Confidential Relationship a. Fiduciary Duties; or b. Reliance- confidence (e.g. doctor); or c. Dominant/subservient~ caretaker/infirmed

2. Suspicious Circumstances a. weakened state b. unnatural disposition c. wrongdoer drafted will

3. How to Rebut?: a. must show testator acted freely and voluntarily b. Can show that the undue influence did not affect the disposition, look for another reason; like she already hated them

Gay People: has been used to invalidate wills of gay dewds

Courts dont like lawyer taking gifts under will and usually presume undue influence

Exception: can draft will for close family even if beneficiary, but make sure everyone gets along AND everyone gets natural share

Also, serving as executor and witness is bad - conflict

No Contest Clause: if people challenge the will (and lose) then they get nothing, Most states only enforce no contest clauses if there is no probable cause for challenging - dont want to discourage

meretricious lawsuits Issues: public document so it could spark a lawsuit, if you leave a person nothing they have nothing to lose

Recitals - if will contest foreseen, may be beneficial for testator to explain why he is favoring some beneficiaries over others

Never put in wills! Wills are public documents, people will sue for libel Could provoke a will contest May attract attention of probate clerk (only some jurisdictions)

Red Flags: Unnatural distributions Cutting family out Sudden changes in distributions Age of testator Blended families

Ways to Fix 1. Doctor examine testator 2. Get the big beneficiary out of the room and people who have known the testator for a long time in th 3. Recital 4. Family meeting to explain will - be respectful and say I love you 5. No contest clause with good carrot 6. Cut a check to the kids: if they cash it, then it will be hard to argue that they thought the testator was crazy that day 7. Domicile in areas that dont use jury trial

C. Fraud Two Types

1. Fraud in the Inducement--deceived by misrepresentation by/of circumstances that causes the testator to re-execute their will 2. Fraud in the Execution--fraud in the pages that are signed (fake will/the ole switcheroo)

Requirements:

1. Misrepresentation, needs to be knowing 2. Intent to deceive, not exactly intend to change the will, needs to be a foreseeable consequence (real hurdle to prove) 3. Result (will has to change) 4. Causation (real hurdle to prove)

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Failure to disclose: not fraud unless you had a duty to disclose

D. Duress When undue influence becomes overtly coercive Very rare because wills are ambulatory Definition: wrongdoer threatens or does an illegal act that coerces an estate to change will

E. Tortious Interference with Expectancy Not a challenge to the will, tort against a third party Requirements:

1. Reasonable expectation of inheritance 2. Defendants intentional and tortious behavior prevented you from getting inheritance 3. Many courts limit action to persons contesting will who cannot be made whole through normal will contest

a. Exs: deed in joint tenancy, hiding death of the testator Big strategic advantage: because not a will contest no contest clause has no effect and you can get punitives

Interpreting Wills

Language Problems Ambiguity

words have more than one meaning Analysis always starts by looking at the plain meaning of the words Two Types

Patent~ on the face of the will (e.g. giving three people half) Majority approach: No extrinsic evidence is allowed, needs to be in 4 corners of document General trend toward allowing extrinsic evidence Forces fight to be about whether ambiguity is patent or latent

Latent~ will describes two things that can fit the description or nothing fully fits the description (maybe only partially) 1. Two or more things Fit (equivocation) 2. Two or more things partly fit and nothing exactly does

Majority approach: extrinsic evidence allowed Favored evidence is actions taken by the testator or written documents vs. oral testimony which is highly

disfavored by the courts Mistake

Definition: Language is clear but not the testators intent Old Rule: use the plain meaning of the language present (strict approach) Modern Rule: clarifies errors of identification or eliminates language to create an ambiguity, disregard mere details of

identification Minority: openly will fix mistake if, (1) Clear and convincing evidence (2) only allow extrinsic evidence in case of scriveners error

Dead Beneficiaries (Before Death of Testator) Types of Devises:

a. General: Monetary gift to a specific person satisfied by the general assets of the estate b. Specific: personal property/real estate (not cash) c. Demonstrative: a particular amount drawn from a specific fund (e.g. $10K from the sale of stock) d. Class Gift: a devise to two or more persons to share e. Residuary Clause: catch-all provision

Lapsed gifts a. A gift made to a person in a will that dies before will is probated

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b. Gift falls to the residuary Void Gift

a. Applies to beneficiaries that die before will is made; or b. Gifts to nonpersons

Residue Rules a. UPC 2-604 (majority) - if a residuary predeceases the testator, his share of residue is allocated to the other residuaries b. No residue of the residue rule (minority) - if a residuary predeceases the testator, that residuarys share passes by intestacy

rather than to the other residuaries Anti-lapse Statutes

a. Prevents certain lapsed gifts from falling into residue (or intestacy) by giving to intended takers issue b. Generally ONLY applies to blood relatives (policy being that you would the stuff to go to their/your family)

Contracting around Anti-Lapse Statute a. Boilerplate language: if he survives me is not enough b. A substitute gift can get around anti-lapse (A or B)

and just means fee simple, not a substitute gift or is a substitute gift, so will get around anti-lapse

Class Gifts a. Gift with a class label, provides its own anti lapse b. Anti lapse statutes can effect class gifts if the class is to close blood relatives c. Big issue of what is a class gift

Test: look for a class label, intent of testator is class minded Many courts require group labels

Property Change Ademption

a. specifically devised property not in estate at testators death Identity theory (C/L)- if a specific devise is not in estate at death they get nothing (only applies to specific devises)

Court get around identity theory by: (1) classifying gifts as either demonstrative or general and (2) giving unpaid insurance proceeds

Involuntary Transfer Rule- if assets leaves estate w/o testators consent, then beneficiary can be compensated out of funds

Intent theory - if property is not in estate then you can get the cash value if you can show that is what the testator would have wanted

UPC 2-606 Adopts Involuntary Dispositions: automatically allows cash value if conversion outside control Can take purchased replacement of gift (broader than Acts of Ind. Significance) Pure intent theory (burden is on beneficiary)

Abatement a. not enough money to cover all gifts made (generally creditors have dibs)

order that gifts are given: specific devises (money from selling item in demonstrative devise treated as specific) general devises (rest of demonstrative devise treated as general devise) [pro rata if not enough] residuaries

b. UPC 3-902: allows courts to ignore rules of abatement if it would frustrate the testators intent Fights the problem in the abatement order that often testator intends the residuary to be the most important gift

Restrictions on Disposition

Bars To Succession Moral worthiness is not a disqualification Slayer Statutes

Bars killer from getting property from the victim Specific issues:

Where is the line for for purposes of intent (murder vs. manslaughter)? Most states do not require a criminal conviction as a civil decision will be enough?

Is the family cut out as well? What about non-probate property?

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Ky Adultery Statute--another unfair statute for women but applies to spouse cohabiting with another person while married Disclaimer

you can reject/decline property passed to you through will or intestacy Reasons:

tax purposes avoid creditors

Exception: does not apply to the federal government SCOTUS: power to disclaim is a form of control over property, so fed govt is entitled to it Note that Medicaid is means tested and is one area where people would attempt to disclaim

Spousal Rights Social Security- if married for more than 10 years, she can elect to take spouses payout after he is dead (not both checks, only one) Pension Plans--ERISA Homestead exception Personal Property--certain states allow set-aside Dower - interest in husbands qualifying land (KY)

Marital Property Systems:

Community Property States: spouses have interest in all property Spouse gets half of what is acquired during the marriage so that prevents someone from getting half after being

married for 30 seconds Separate Property States: spouses keep what they earn

Two Theories underlying marital property systems Support- male breadwinner, wife at economic disadvantage Partnership- spouses contribute in different ways (UPC like this)

Elective Share [only applies separate property states]

cannot completely disinherit a spouse, typically gets Issue: no time requirement (married for a day and get a )

UPC: sliding scale for time married and percentage in elective share Four Questions

How Much? typically 1/3 Who can claim it? the spouse To what property does it apply?

a boring nightmare, just need to know the concern that a sneaky spouse may try to disinherit the other spouse through nonprobate transfers

Can you K around it? YES. prenup! Prenup: requirements:

1. Disclosure - fact dependent inquiry [no brightline rule] 2. Voluntary - avoid duress/undue influence allegations 3. Not unconscionable 4. Both parties w/ independent council

Why allowed? Romance avoid future conlficts protect children from earlier marriages

Inadvertent Disinheritance

Where an individual executes a valid will, thereafter marries, and thereafter dies without revoking or revising the will, a presumption arises that the testator did not intend to disinherit his or her new spouse.

Approaches i. A few states do nothing - let disinherited wife take elective share (will stands) ii. Traditional: statutes in some states automatically revoke premarital wills (wife takes intestate share) iii. Modern Trend: Most states give surviving spouse intestate share and additionally allow evidence to show that the

omission was not a mistake iv. UPC: will remains effective with respect to prior children other children get intestate

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Planning for Incapacity:

No planning: civil commitment or the court will have a conservator or a guardian appointed Very difficult for an adult b/c it requires clear & convincing evidence to get conservator appointed

Power of Attorney - written permission for someone to act on your behalf; agency relationship Problem is that it terminates upon incapacity

Durable Power of Attorney Does not terminate upon incapacity, only on death

Scope of Power of Attorney Generally, courts construe narrowly, drafters must be specific about what power agent has. Modern trend is for courts to look at document to discover drafters intent

Fraud Concern Attorney-in-fact (person given power of attorney) is a fiduciary, so have to be honest and loyal

Health care Rules No planning:

Default decision makers: 1. Spouse 2. Children 3. Parents 4. Siblings 5. Grandchildren [called surrogates] Substituted Judgment- what the person would have wanted States can demand C+C evidence of what the testators substituted judgment Can also make a health care PoA exclusively for healthcare decisions

Planning options: Living Wills or Medical Directives- spells out generally or hypothetically what a person wants in end of life state

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Trusts

--A legal device that separates the burdens of ownership from the benefits of the property Requirements for a trust:

1. Parties (cannot be sole beneficiary and sole trustee) a. Settlor-

i. person who creates the trust, if not the trustee you need to deliver it to the trustee b. Trustee

i. Doesnt need to be named, trust will not fail for want of a trustee (court will appoint trustee) ii. Takes it, invests it, distributes it iii. Duties kick in when the trust is created iv. Trustees are jointly and severally liable v. Resignation

1. Old Rule: you couldnt resign without court approval 2. Now you must give 30 days notice

c. Beneficiaries i. Can monitor the trustee and bring them into to court

2. Intent 3. Property

a. Needs to be in existence and ascertainable 4. Capacity 5. Legal Purpose

Sometimes these are additional concerns: 1. Statute of Frauds 2. Rule Against Perpetuities

Types of trusts: Inter vivos Trusts: comes into effect during settlors lifetime Testamentary Trusts: trust created by will Revocable and Irrevocable Trusts Mandatory Trust, ex: make quarterly distributions

Certain amount at certain time, Issue: Very little discretion for trustee, cant take into account change of circumstances

Maintenance Trust ex: Maintenance and support of beneficiary Maintenance is broad term Keep beneficiary in same standard of living they are used to Default Position: do not take into account other income received by beneficiary (note: many trust documents provide for

accounting for other sources of income brought in by beneficiary) Duty to inquire into their life circumstances

Discretionary Trusts: Limits:

Sole and unchallenged discretion: still requires some good faith Types:

Spray: has to distribute all income but to whomever Sprinkle: does not have to distribute all income Support: (see above)

Duties: 1. Duty of Loyalty: For whom do I exercise the powers?

a. Serve interests of beneficiaries b. Follow terms of the trust c. No Self-Dealing

i. No further inquiry rule: court does not care if terms are fair or not, absolutely no self-dealing 1. Rationale:

a. Easy to administer rule against self-dealing b. Dont want beneficiaries having to prove whether it hurt estate

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c. Temptation ii. Statutory exceptions to rule of no self-dealing:

1. Institutions - may invest trust money in mutual funds 2. Advance Approval doctrine: Authorize explicitly in trust that self-dealing is ok

a. Courts construe narrowly 3. Settlor if alive can implicitly authorize self-dealing (ex. CEO of company trust owns) 4. Get all beneficiaries to consent in writing 5. Petition a court for approval (advisory opinion)

d. (Vs. Self-Interested Transaction)~ Most courts say they follow the NFI approach but most look at the facts to see if their was any harm to the beneficiary or trust

e. Relying on Attorneys can show care but not a complete safe harbor f. Co-trustees: if you see a violation then there is a duty to bring a court case to make it stop g. Damages:

i. Joint and severally liable ii. Exculpatory Clauses: we allow exculpatory clauses but not to shield for bad faith or reckless indifference iii. Look to see who wrote the exculpatory clause iv. One case held that the duty was on the beneficiary to show validity of exculpatory clause (Clowney thinks this is

wrong) 2. Duty of Prudence: How do I use powers?

a. Control and Manage assets b. Account for property c. Keep trust property separate d. Balance interests of different beneficiaries: duty of impartiality

3. Duty of Prudence Approaches a. Traditional

i. Safe List: Judge puts out list that says what investments are safe and if you choose investments of the list then you a prudent

ii. Prudent Man Rule: no list but held to the standard of what a prudent man would invest his property--the key is that primary goal is the preservation of the principle and only secondary is generating income

b. MODERN RULE: Reasonably Prudent Investor Rule i. No isolation-look at all investment in comparison to others, ii. No uncompensated risk- look at risk and reward, iii. Diversification is key

1. Types of Risks: Firm, Industry, and Market (diversification minimizes industry risk and firm risk but not market risk)

2. Exceptions a. Mandate: big bold letters etc b. Tax purposes c. Non fungible plus something else (emotional attachment could help) d. Trust not diversified but scheme of larger trust group is diversified

3. Note: some states hold that there is an absolute duty to diversify even if trust doc says that the assets must stay in certain in stock

iv. Delegation: You can and probably should delegate to a more skilled investor 4. Duty of Impartiality

a. High dividend stock benefits beneficiary while high growth stock benefits remaindermen b. impartiality doesnt mean equality because a trust can have its own priorities c. You can prefer different parties in a trust d. Typically keeps the beneficiary comfortable or what they are accustomed to e. Uniform Principal and Income Act - allows trustee to invest in assets historically considered unproductive (no dividend) and

then allocate to income beneficiaries a portion of the trusts capital Beneficiaries: Trust w/o Beneficiaries:

Resulting Trust: If court determines there are no specific beneficiaries, purported trustee holds in resulting trust for benefit of settlor and settlors estate

Honorary Trust: Legal instrument where a settlor creates a trust for a specific, non-capricious purpose but there is no beneficiary to enforce the trust;

Trustee is on their honor to carry out terms, but no imposition of fiduciary duties Trustee can still be sued, but only to return money to settlor

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Most common honorary trusts: Trusts for care of pets Maintenance of cemetery plot

Needs to be specific: my relative ~ ok vs. my friends~ not ok (Indefinite beneficiary - dont know who can sue trustee) Intent No magic words to create a trust~ key is making sure the burdens and the benefits are separated

Precatory language-- words that express a request or desire (hope or wish) but no duty A trustee needs to have a duty imposed on them If no duty, then it may just become a gift to the donee Evidentiary standards allow the courts to look at the potential trustee to determine whether a trust was formed (i.e. giving

money to a lawyer or bank is probably not a gift but a trust) Necessity of Trust Property Can be just about anything, must be:

1. In existence a. Expectation or hope cannot be put into trust b. Look for K, certainty of existence, oral vs written (Brainard no trust vs Pascal Trust)

2. Ascertainable a. Property must be clearly defined with sufficient certainty; danger of putting property in trust that the settlor intended to

use for other purposes Secret Trust: Secret and Semisecret

Secret: Purports to make absolute gift, but by secret agreement, the beneficiary is actually a trustee Courts allow extrinsic evidence to establish the terms and prevent unjust enrichment Ex. I leave to X

Semi-secret Trust - trust mentioned in will but doesnt name beneficiaries In most states it fails and goes to residue/intestacy I leave to X to carry out my plan

Necessity of a Written Instrument In most states, you can create an oral inter vivos trust

Existence of oral trust must be proved by clear and convincing evidence No good lawyer would create an oral trust!

Land: written instrument necessary due to the statute of frauds Testamentary Trusts must be written since the will must be written

Creditors: Garnishment Creditor can garnish trust income Steps into shoes of beneficiary, i.e. if beneficiary has right to distribution creditor does and vice versa Mandatory vs. Discretionary Trusts

Mandatory Trusts: the creditor will get absolute right to receive; creditor need to attach to the trust itself instead of suing the beneficiary

Discretionary Trust: creditor cannot compel a trust allocation b/c the beneficiary has no power to compel a distribution BUT: when a distribution is made, the creditor gets it

Education and Support Trust: certain creditors can get to this E.g. University can get to trust b/c the trust is meant for education; beneficiary could have gotten money from the

trust to pay for education so creditor has right to do so Gambling debts: may depend on whether you are a professional gambler or not but probably not part of

maintenance and support Spendthrift Trust: the interest of the trust beneficiary shall not be capable of assignment or seizure by any legal process.

This prevents beneficiary from selling interest AND it prevents creditors from getting to it by attaching to the trust

This does not prevent the creditor from suing the beneficiary directly Why do we prevent liability?

Settlors intent: doesnt want creditor to get anything Creditor can protect themselves~ you dont have to lend money to those people BUT this doesnt

really work in Tort actions General note: the interest in trusts are alienable (i.e. your disbursements can be sold) Carveouts:

Deadbeat Dad: public policy exception-- there was nothing the mom or kids did Clowney think there needs to be more judicial activism here

Self-Settled Asset Protection Trusts: Traditionally not allowed to do this b/c we didnt want people to hide assets

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Offshore Banks: certain islands started to allow Americans to do this and then other states started to allow this