Trusts & Estates Outline

“In fact when God created the world Johnny V. was consulted as to how to set the metes and bounds. He owns Blackacre. When Babylon conquered Mesopotamia, Orth was there. Meteorites fall from heaven into his arms. When Noah walked off the ark and saw the rainbow, Orth declared the ark abandoned property.”

--- Random Dude from Carolina Law

Trusts & Estates Reading Notes 11 January 2010, pp. 71 Introduction

• General Will Stuff o Testate = Dying with a will o Intestate = dying without a will

§ Partial intestacy = disposing of only part of the estate § Governing Law

− Personal Property = law of the state of domicile − Real Property = law of the state of the property’s location

§ Model Uniform Probate Code − adopted by about 1/3 of states. − Sets forth the “ideal” probate and intestacy rules

o Heirs § No “heirs” until someone dies; until a death, they’re called “heirs apparent.”

− Expectancy = being an heir apparent − NOT a legal interest

§ An “expectancy” cannot be transferred by law. § You CAN, however, bargain for them by contract

• Share of surviving spouse Uniform Death Act 12 January 2010, pp. I. Intestacy

A. The Basic Scheme 1. Shares of Descendants

a. Simplest way: i. Set spouse’s share aside ii. Divide remainder among children iii. If one of those children dies first, then that child’s children inherit her share

(divided equally among them). b. Assume that the second generation has completely died, though; three systems

remain to distribute the wealth. i.

c. English per stirpes i. “by the stocks” ii. Divide the share as it were among the children; then give the grandchildren. iii. Followed by about one-third of jusridictions.

d. Modern per stirpes i. First, look to decedent’s kids. If any survive, follow English per stirpes. ii. If not, then divide the estate equally among the next generation.

e. Per capita at each generation i. Divide the shares at the first generation; the living there will each take a share. ii. THEN pool the remaining shares and divide among the living at the next

generation. iii. UPC adopts this

f. Disinheritance i. Originally, a will that disinherited only disinherited from a partial testacy; a

partial intestacy could still be inherited. ii. UPC changed this: allowed a negative will.

2. Shares of Ancestors and Collaterals a. Definitions:

i. collateral kindred – those related by blood not your ancestors or descendants ii. first-line collaterals – descendants of the decedent’s parents other than the

decedent and the decedent’s descendants iii. second-line collaterals – descendants of the D’s grandparents, other than D’s

parents and their descendants b. If you have a descendant, then parents and collaterals do not take. c. No descendants, no parents

i. Siblings take ii. If a deceased sibling, that sibling’s children take that sibling’s share

d. If no first line-collaterals, then two options: i. Parentelic system = passes up the paternity line, and then down to an heir ii. Degree-of-Relationship System = the closest to the deceased gets the estate

B. Transfers to Children 1. Meaning of “Children”

a. Adopted Children i. Hall v. Vallandingham (1988, p. 97)

(A) Children were adopted by their divorced mother’s new husband; father died and they claimed rights.

(B) Maryland law specifically chose not to grant them those rights. ii. Several different versions exist throughout the several states. iii. O’Neal v. Wilkes (1994, p. 109) states that a legal adoption must contain a

guardian of the child who signs away the custodial/legal rights of the child to the adopters. (A) Child was taken in by a family after her non-married mother passed away

and she lived with an aunt. The child then wanted to inherit from her adopted family.

(B) Court said that the person had no authority to adopt her because she had no guardian.

14 January 2009 (pp. 115-132)

• Posthumous Children o Children conceived before father’s death, but born after father’s death. o Rebuttable presumption of pre-mortem conception by father if born within 280 days.

• Nonmarital Children o At common law, no inheritance from a parent. Escheated if no heirs. o Most states have done away with this harsh treatment, allowing inheritance from the

mother. o SC has ruled that denying inheritance from father may violate equal protection.

• New Technology: Reproduction and New Forms Woodward v. Comm’r of Soc. Sec. (2002, p. 118) Facts: Warren Woodward had leukemia, and, knowing that chemotherapy might leave him sterile, he decided to have some semen withdrawn. Woodward died. His wife gave birth to twin girls, conceived in October 1995, 2 years after the husband’s death. She then applied for “child’s” benefits and “mother’s” benefits. Issue: Do children, resulting from posthumous artificial insemination, receive the same treatment as natural children? Holding: No – the children here do not. Rule: Where no evidence exists that the father intended his semen to be used in such a way, the children do not enjoy such rights. Rationale: Balanced interests of children, interests of State, and the reproductive choices of the individual. On balance, no evidence really existed that the father wanted his sperm used in this way. No affidavits, etc., existed to confirm this question. A man must indicate that he wanted his sperm used in such a way. In re Martin B. (2008, p. 126) Post-conceived children are considered part of the estate. Basically – there was a finding of fact here that gleaned the father’s intention (he had died of Hodgkin’s lymphoma). 19 January 2010 [Put in] 20 January 2010

C. Bars to Succession 1. Homicide

a. In re Estate of Mahoney (Vt. 1966, p. 145) – a woman was convicted of the voluntary manslaughter of her husband, who died intestate. She was his only heir, and the probate court disinherited her. The lower court remanded, giving the chancery (not the probate court) the opportunity to create a constructive trust for her estate.

b. “Slayer Rules” = rules adopted in most states barring a killer from inheriting from the victim i. Several states have enacted statutes for this; at common law, it did not matter. ii. Donors can also opt out of slayer rules. iii. Non Probate Property

(A) Almost all states bar inheritance by instestate victims (B) UPC bars slayer from accepting. (C) Many states, however, do not have as well-written laws.

iv. Who Takes?

(A) Majority View: Killer is typically treated as having pre-deceased the victim.

(B) UPC treats the killer as having disclaimed the property; in turn treats disclaimant as having died immediately before the inheritance.

v. Criminal conviction is not necessarily required. (A) Criminal conviction is dispositive of disinheritance. (B) But if not convicted, you can seek a civil declarative judgment, made

possible by the lower burden of proof. 2. Disclaimer = a refusal by an heir or devisee to take the property inherited by or

devised to him i. Common law treated the title as having passed from the heir to the next

intestate successor. (A) Thus, you treat it as if the original heir pre-deceased the actual heir. (B) Original reason was feudal obligation – someone always had to be seised

of the land in order to fulfill the obligation as a vassal. b. Several conceptions

i. Gift – some states treat as an heir having made a taxable gift to his heir. ii. Some do not treat it as a gift, but instead as the operation of probate. iii. UPC: treats as pre-deceased; no devise to the disclaimant.

c. This rule often raised tax concerns. i. IRS says you must disclaim in 9 months.

II. Wills A. Execution of Wills

1. Attested Wills = presence of witnesses a. Formalities are present in wills; certain ones may be denied probate because of

failure to comply with statutes. i. Wills Act (1837) required two witnesses, both present together, to whom the

testator just sign in front of or acknowledge his prior signature. ii. Statute of Frauds (1677) permitted required a written will, 3 witnesses. iii. Most US states have relaxed the requirement, but they all have some.

b. Writing, Signing, Witnessing (“Attestation”) i. Some states take a very strict view: two people must, at the same time,

actually see the testator sign the will. See Stevens v. Casdorph (1998, p. 229): a will was denied probate after a wheelchair-bound man signed his will at a bank in front of one witness, but then got another witness from a teller’s window.

ii. Other states may follow different rules (A) Line of sight: as long as two people see you do it, you’ve done it.

iii. Signature (A) Some states require testator to sign the will before the witnesses sign it. (B) An electronic signature on a computer may count as a signature. Taylor v.

Holt (2002, p. 235). (C) A mere mark on the paper will count. In re McCabe (1990, p. 235): a man

with shaky hands was allowed to write an “X.” iv. Witnesses

(A) Estate of Morea (1996, p. 239) ruled that a purging statute

2. Holographic Wills a. Kimmel’s Estate (1924, p. 269) – held that a letter may qualify as a will.

i. Testamentary Intent – “if enny thing happens” speaks to his death being the condition on which the of the letter should take place.

ii. Conformation to Wills Act – “intent to execute was apparent” because he signed all his letters this way (“Father”); it was a valid signature.

b. Estate of Gonzalez (2004, p. 274) – held that a pre-printed, form will may prove testamentary intent in the context of the written portion, and that it may be determined to be a valid will. i. Printed portions of a will may be incorporated into a holographic will and can

be used to determine testamentary intent. ii. ALSO the rule under the UPC.

c. Generally three categories of statutes dealing with holographic wills: i. First-generation: “entirely written, signed, and dated.” ii. Second-generation: “material provisions;” follows 1969 UPC. iii. Third-generation: “material provisions” and extrinsic evidence allowed;

follows 1990 UPC. d. In re Estate of Kuralt (2000, p. 280) - Holographic testamentary documents,

written after a formal will, may serve as valid codicils. i. Court found the requisite testamentary intent. The letter said “she may

inherit.” ii. The letter also mentioned that he may die – obvious condition of a will.

B. Revocation of Wills 1. Revocation by Writing or Physical Act

a. All states allow the following two ways of revoking wills i. Subsequent testamentary writing (not necessarily a will) ii. Physical act (obliterating, burning, etc.) iii. UPC §2-507 gives both of these

(A) Subsequent will may revoke expressly or by inconsistency (B) An act (destruction, tearing, burning) will revoke a prior will; the act does

not have to touch any word on the page, but just the will. [ASK JVO ABOUT THIS PROVISION IN THE UPC]

b. Inconsistency i. Modern view

(A) anything that is inconsistent, and makes a complete disposition of the estate = a new will.

(B) Anything that is inconsistent with prior will and does not make a disposition of the entire estate = a codicil

ii. Harrison v. Bird (1993, p. 287) – the attorney destroyed Speer’s will at her instructions, but not in her presence. The four pieces, mailed back by the att’y, were not found in her personal effects. That being the case, the presumption of a destroyed will was not rebutted by any evidence. The will is thus considered destroyed.

c. Probate of Lost Wills i. Lost will = a will destroyed, lost without the consent of the testator, or

destroyed with the consent but not in compliance with the statute.

(A) A lost will can be proved by a copy in the testator’s lawyer’s office. (B) Good example of a huge number of lost wills was September 11th.

ii. Thompson v. Royall (1934, p. 290) – a purported revocation is ineffectual if it does not follow the statute. Here, she did not tear up the old will, nor did she execute another will in the same manner as the statute indicated.

2. Dependent Relative Revocation and Revival a. Definition: a testator seeks to destroy his will, but does not do so because he is

mistaken about the facts or law. (DRR) i. Theory is no true revocatory intent. ii. Typically arises when a testator seeks to destroy an old will in a mistaken

belief that he has a valid new will. b. LaCroix v. Senecal (1953, p. 295) – presents an easy application of the doctrine.

Testatrix wanted to continue the same scheme of devise; thus, the new residuary clause was found valid by the court in spite of its statutory deficiency (having a spouse of the devisee serve as a witness; prohibited by CT law).

C. Components of aWill 1. [INSERT] 2. [INSERT] 3. Incorporation by Reference

a. Clark v. Greenhalge (1991, p. 310) b. Johnson v. Johnson (1954, p. 317) – held that a legally valid holographic codicil,

written on an unexecuted will, may republish the prior will. 4. Acts of Independent Significance

a. Definition: identifying gifts/actions through descriptions, rather than names or titles.

b. “automobile owned at my death” = exactly what you own at death, whether it be a Lexus or a Hyundai

D. Contracts Relating to Wills 1. Contracts to execute or not execute a will are governed by contract law, not the law of

wills. 2. Contracts to execute a will 3. Contracts not to revoke a will

a. Problems with joint/mutual wills i. Definition:

(A) Joint will – one will executed by two people (B) Mutual wills – two wills, two people, mirror provisions

ii. Nothing wrong with them, but courts often imply a contract in fact not to change one when the document uses “we” or “our.”

b. Proof i. Typically written into a will. ii. Some states have enacted a statute of frauds provision. iii. UPC § 2-514 (p. 328) – execution of joint/mutual wills does not presume a

contract. You can ONLY have one provision in the will, express reference and extrinsic evidence, or an actual, written K.

III. CONSTRUCTION OF WILLS A. Mistaken or Ambiguous Language in wills

1. Traditional Approach = no extrinsic evidence, no reformation. a. Two doctrines operate to bar some evidence in the majority of states:

i. Plain meaning / no extrinsic evidence rule: Extrinsic evidence may be admitted to resolve some ambiguities, but the plain meaning of the will can’t be changed.

ii. No reformation rule: We need to interpret what the T actually said, not what he supposedly intended to say.

iii. Mahoney v. Grainger (1933, p. 336) – held that a will saying “heirs at law,” even if intended to mean cousins, will be probated under its true meaning, and the sole heir, the aunt, will inherit the residuary clause.

b. Ambiguities allow the presentation of extrinsic evidence. i. Patent ambiguities – dispositions in a will seemingly contradict each other.

Evidence is increasingly being allowed to determine T’s intent. ii. Latent ambiguity – either the description does not exactly fit anyone (most

common), or the description describes more than one person. Allows oral declarations as evidence.

iii. Figuring out whether an ambiguity is latent or patent is not always easy; courts have begun to eschew the distinction and allow evidence of T’s intent.

2. Correction Mistakes without the Power to Reform Wills a. At traditional common law, no reformation was allowed. Since then, the doctrine

of falsa demonstration non nocet – that a false manifestation does not doom the will. i. Arnheiter v. Arhneiter (1956, p. 343) – held that a description of real property

could be probated, when it gave the wrong address, but the right street. b. UPC has followed this approach. § 2-805 (2008).

i. Language can even be unambiguous. ii. You need clear and convincing evidence, though, of T’s intent.

c. Doctrine of probable intent – developed by NJ courts to address gaps in the testamentary scheme that arise after death i. not widely adopted in other states ii. Court looks at testamentary scheme and infers what the parties would have

wanted one. d. Courts have also recently allowed parties to take advantage of favorable tax laws

after death. B. Death of Beneficiary before Death of Testator

1. Lapsing of a devise a. If beneficiary dies before T, then the devise lapses – it fails. b. Most states have enacted anti-lapse statutes. c. Default rules in absence of these statutes

i. Specific or general devise ii. Residuary devise iii. Class Gift iv. Void Devise

d. Estate of Russell (1968, p. 359) – a residuary clause in the will bequeathed the entire estate to Chester and her dog; court held that the dog’s share passed to her

heirs at law (her niece, who was named in the will as a recipient of gold and diamonds only).

2. Anti-lapsing Statutes a. These don’t actually prevent a lapse; they simply provide for legal beneficiaries

for the dead after a gift has lapsed. b. Statutes presuppose, often, that T would want a family member to receive estate. c. [ PUT MORE IN HERE ]

3. Class Gifts a. At common law, lapse class gifts are treated differently.

i. UPC Definition (A) “described by a group label” and “intended to take as a group” (B) subject to fluctuation (C) if described as a class, presumed to take as a class unless circumstances

indicate different T’s intent ii. Dawson v. Yucus (1968, p. 376)

(A) No class gift – goes to two named individuals. (B) Residuary clause implies that T knew how to make a class gift and chose

not to do so. (C) Exemplifies majority rule

b. Naming individuals and specifying their shares indicates that T is not group minded. i. Note that some statutes in some states (e.g., Texas) specify that SOME class

members who predecease T are repseumd to have been written out. ii. See example on p. 379/

C. Changes in Property After Execution of the Will 1. Ademption by extinction -

a. Ademption = extinction of a gift i. applies ONLY to specific gifts. ii. No ademption by extinction elsewhere.

b. Specific gifts i. Traditional Rule – property not there FAILS.

(A) Gift that is specified in the will (i.e. – “I give Blackacre”) (B) If that gift is sold, the bequest fails. (C) Thus, even if you buy Whiteacre, no one has a legal claim to it.

ii. Modern Rule (A) Intent theory – T intended someone to take Whiteacre. (B) You may be entitled to Whiteacre if you can show that T wanted you to

have it. c. General

i. T intends to confer a general benefit, i.e. – “I give $10,000.” ii. Other property may be sold to satisfy that bequest.

d. Demonstrative i. Hybrid between the 2 – “$10,000 from proceeds of farm sale.” ii. If not worth $10,000, that bequest may be satisfied by other means.

e. Residuary i. Everything else.

f. In re Estate of Anton (2007, p. 381) – held that a specific devise was NOT adeemed when T’s daughter, acting under power-of-attorney, sold T’s specific bequest when T had no knowledge. i. “An expression of intent in the indefinite future to sell assets for support is not

sufficient to cause ademption under our modified intention there where the testator is not aware that the specific action has taken place.”

ii. Ademption only occurs when (ALL conditions) (A) T has knowledge of a transaction involving a specific devise; (B) realizes the effect of the at transaction on the estate plan; AND (C) has the opportunity to revise the will.

g. Theories i. Identity theory – the sale of a specific devise adeems the devise. ii. Intention theory – beneficiary entitled to replacement/cash value if he can

show that T would have wanted that. 2. Stock Splits

a. Traditional Rule – bequest of 100 shares à devise of 100 shares; no more. b. Modern Rule – bequest of 100 shares represents the same proportionate

ownership à devise of 200 shares (assuming 1 split only once). 3. Ademption by Satisfaction (or just “Satisfaction”)

a. T transfers to beneficiary after the execution of a will. b. PRESUMPTION that this transfer satisfies the bequest. c. Akin to doctrine of advancements (p. 133)

4. Exoneration of Liens a. Common Law doctrine that T wanted mortgage to be paid out of residuary.

i. Suppose mortgage on land; T devises to A. ii. A may pay off the mortgage out of the residuary in some states.

b. UPC and majority: NO exoneration 5. Abatement

a. Estate has insufficient assets to pay debts as well as all the devises; all bequests then suffer. Analogous to bankruptcy.

b. Operates often in the following order: i. residuary devises reduced ii. general devises are reduced iii. specific and demonstrative reduced pro rata

c. Note that the residuary devise is often the most important devise, however. d. Thus, make important devises in terms of shares of residue. See problem on p.

392, Case 13. IV. Non-Probate Transfers & Preparing for Incapacity

A. Introduction to Will Substitutes B. Will Substitutes and the Wills Act C. Will Substitutes and the Subsidiary Law of Wills

1. Will substitutes are subject to the rules of construction of wills. a. It functions as a non-probate will, so it should be construed as such.

2. Revocable Trusts

a. Courts will apply rules of ademption and abatement to trusts if the circumstances dictate such (i.e. – not enough proeperty to satisfy the provisions of the instrument).

b. Courts have been reluctant to apply other provisions of the law of wills to will substitutes (i.e. – trusts.) i. See In Re Estate and Trust of Pilafas (1982, p. 414) – held that a trust lost at

death was valid, notwithstanding the presumption that a will not found at death is revoked.

ii. Creditors of an estate may be satisfied with the proceeds of an inter vivos trust. See State Street Bank and Trust Co. v. Reiser (1979, p. 416). There, D created an inter vivos trust, to which he had transferred the stock of five closely held corporations. HELD – those assets may be used to satisfy debts at death. MAJOIRTY VIEW.

3. Life Insurance a. Provides for insurance against death of the policy holder. b. Several different schemes

i. Annuity ii. Lump sum iii. Interest

c. A policy-holder must change the name of the beneficiary; a subsequent will purporting to change the beneficiary of a policy, especially when given time to do so, does not effect a change. Cook v. Equitable Life Assurance Soc. (1981, p. 420).

4. Pension and Retirement Accounts a. Not 100% sure what we need to get from these. b. You can specify a beneficiary on these when you die. c. The private pension system is tax-driven: the government permits exclusions of

certain retirement accounts from income. d. Federal law pre-empts state law regarding these retirement accounts. See

Egelhoff v. Egelhoff (2001, p. 426) – SCOTUS held that ERISA statutes, which mandated a formal change in the status of the beneficiary, pre-empts Wash. state law allowing merely a divorce to change the beneficiary.

D. Pour Over Wills and Revocable Trusts in Modern Estate Planning 1. Introduction 2. Dacey 3. Consequence during life of settlor 4. consequences after death of settlor 5. Pour-over-will

a. A will devises the residue of the estate to a previously constructed inter vivos trust.

b. Clymer v. Mayo (1985, p. 445) – held that a revocable trust, which had previously given everything to a now-divorced spouse of the decedent, did not leave anything to that former spouse.

E. Joint Tenancies in Realty 1. Joint Tenancy and Tenancy by the Entirety are the most popular and common

methods of avoiding the cost and delay of probate.

2. Typically, though, they operate in effect as imperfect will substitutes because they are not revocable.

3. A joint tenant cannot devise her share by will. You must sever the JT during your lifetime, creating a tenancy in common, and THEN devise your share.

F. Planning for Incapacity 1. Durable Power of Attorney

V. Restrictions on the Power of Disposition A. Invalid as against Public Policy B. Rights of the Surviving Spouse

1. Introduction to Marital Property Systems – the US has two basic schemes. a. Separate Property

i. originating in common law of England ii. Couples own separately all property that each acquires. iii. EXCEPT that which they have titled jointly. iv. This scheme stress autonomy over earnings.

b. Community Property i. Originating in law of France and Spain ii. Husband and wife own all acquisitions from earnings in equal, undivided

shares. iii. Stresses sharing of earnings between husband and wife as economic partners.

2. Rights of Surviving Spouse to Support a. Social Security

i. If a worker dies, typically his surviving spouse can take. b. Employee Pension Plans c. Homestead d. Personal Property Set-Aside e. Family Allowance f. Dower and Curtesy

3. Right of Surviving Spouse to a Share of D’s Property a. Elective Share b. Same-Sex Spouses c. Incompetent Surviving Spouses

i. In re Estate of Cross (1996, p. 484) – A Medicaid recipient was incompetent (Alzheimer’s) at the death of her spouse; Medicaid was paying for her treatment. Court held that the probate court could appoint a guardian to elect against a will devising nothing to her. (A) Ohio statute specified that if you don’t utilitze potential income, you’ll be

kicked off Medicaid. (B) But the probate statute said a guardian can only elect to take against the

will if it’s reasonably necessary. (C) The Court, however, read this statute against the backdrop of the Medicaid

statute, and ruled that it was necessary (otherwise she could be thrown off Medicaid).

ii. Two rules for elections against the will by a guardian of an incompetent: (A) MAJORITY – the court may take into account all the facts and

circumstances. Provides

(B) minority – guardian should elect against the will if it is to the surviving spouse’s economic benefit, calculated mathematically.

d. Property Subject to the Elective Share i. Judicial Responses – varied. Many courts use the “illusory” transfer test to

determine which non-probate assets are subject to elective share. (A) Sullivan v. Burkin (1984, p. 488) – rejected an elective share claim against

a inter vivos trust, but the Court announced that in the future, a spouse COULD elect against an inter vivos trust.

(B) Bongaards v. Millen (2003, p. 492) – rejected a similar claim, but this time against a testamentary trust over which the decedent spouse had power of appointment.

ii. Statutory Schemes (A) New York – a statutory scheme lists which assets are subject to elective

share. See p. 496. (B) Delaware – statute lists “all property includible in the D’s estate tax.” (C) 1969 UPC – “augmented estate.” Any probate transfer, PLUS some

nonprobate and inter vivos transfer during the marriage. See p. 497. (D) 1990 UPC – more in line with a community property scheme. See p. 499.

e. Election against a Life Estate i. A spouse may in some states challenge being left a life estate and not a fee

simple. ii. Some states, however, include that LE in the portion of the estate, and some

do not. iii. UPC was revised in 1993 to state that the surviving spouse is not “charge”

(i.e. – the LE is not considered a portion of the estate to satisfy elective share requirements).

VI. TRUSTS A. Creation

1. Only thing you need is the intention to create a trust. a. Jimenez v. Lee (1976, p. 558) – held that merely the known intention to give a

child savings bonds to finance an education will qualify those funds as a trust. b. Precatory trusts do not count as actual trusts.

i. These merely manifest an a “wish” or a “hope.” ii. They do not manifest an intention to create a trust.

c. Hebrew University v. Nye (1961, p. 563) – a trust was not created merely by the declaration of donative intent. i. Later declared that there was constructive delivery of a gift on remand. ii. NOT a trust, however.

2. Necessity of Trust Property a. Trust is composed of a trustee, a beneficiary, and trust property.

i. This is also called a res – you MUST have a trust corpus, or res to have a valid trust.

ii. the ONLY exception under the UTC is the pour-over will. b. Unthank v. Rippstein (1964, p. 568) held that the a notation in a margin that he

would “bind his estate to make the $200 monthly payment” after death does not create the corpus of the trust.

i. Not sufficient certainty in the margin to make this count as the corpus of a trust.

ii. Because there’s no corpus in the trust, the “trust” must fail. c. Resulting trusts

i. This an equitable revisionary interest whereby a transferee does not have beneficial interest in the trust.

ii. [Get notes on this from class; fairly confusing.] B. Rights of the Beneficiary’s Creditors

1. Self-Settled Asset Protection Trusts a. CAN be gotten by creditors after a judgment. b. You CAN create spendthrifts trusts that provide only luxuries if you’re on

Medicaid. C. Modification and Termination of Trusts

1. Introduction a. If Settlor and Beneficiaries consent, then an irrevocable trust may be modified or

terminated. b. England

i. At death, the beneficiaries automatically inherit the corpus. ii. ABSENT Settlor’s consent, though, in England a court may modify a trust if it

is in the benefit of the beneficiaries. Almost all commonwealth countries have that rule.

c. United States i. A trust cannot be modified or terminated prior to the time fixed for

termination if termination would be contrary to the material purpose of the settlor.

ii. Claflin v. Claflin (1889, p. 642) established this doctrine. iii. This refers to modification or termination by consent of the beneficiaries. iv. Equitable deviation: changing of the trust terms in order to effectuate the

purposes of the trust (A) Must be necessary to accomplish trust’s purposes. (B) Can’t just show that it’s “better.”

2. Deviation and Changed Circumstances a. In re Riddell(207, p. 645) – held that a court may allow equitable deviation in a

trust if unanticipated circumstances arise. The court SHOULD have allowed the creation of a supplemental special needs trust to (a) care for Nancy; and (b) shield the assets from collection by the state. i. Here, settlers did not know about Nancy’s condition of schizophrenia. ii. The U.S. law allowed people to create supplemental special needs trusts

without being kicked off welfare. b. Trust Protector – a third party OR even the beneficiary who has powers written

into the trust to modify or terminate it. Used to draft trusts lasting well into the future. [Question: why not use the trustee? He’s already under a fiduciary obligation.]

c. Courts have become increasingly receptive to modification for income/estate tax advantages.

3. Claflin and Material Purpose

a. In re Estate of Brown (1987, p. 653) – held that a trust could not be terminated when the instrument used the terms “to provide for the remainder of their natural lives.” i. Here, the trust had two goals: provide for the education of the Π’s children,

and then provide for the Π’s material needs. ii. The court ruled that this created a lifelong obligation of the trustee, and it said

the Πs could not just terminate the trust. b. Relaxation of the Claflin doctrine has occurred in recent years.

i. Restatement (2000, p. 656) – you need the reasons for termination/modification to outweigh the “material purpose” AND the consent of all the beneficiaries

ii. UTC – Modification is “not inconsistent with a material purpose of the trust” (A) If all beneficiaries agree, no problem; go ahead and modify/terminate. (B) If not, the court can still do it if: (1) if they had agreed, the trust could be

modified (pretty much, if the modification is okay); and (2) the interest of the non-agreeing beneficiary will be adequately protected.

c. Revocable and Irrevocable Trusts i. Majority Rule: Trust created by a written instrument is irrevocable unless

there is an express or implied provision that the settlor reserves the power to revoke.

ii. Minority Rule (including, though Cal. and Tex.): A trust is revocable unless declared irrevocable.

4. Trustee Removal a. Trustee removal is NOT viewed as a modification of the trusts’ terms; it’s viewed

as a remedy for breach of the trust. b. Standard for removal: courts like to permit removal “only for cause.”

i. You want to set it high enough so that trustee can carry out settlor’s wishes in the face of an uncooperative beneficiary.

ii. BUT you don’t want it so high that he can’t be removed. c. Davis v. U.S. Bank Nat’l Ass’n (2007, p. 660) – held that a person could remove a

trustee and replace him with a trustee company when the rates would be significantly less.

VII. Powers of Appointment A. Introduction

1. Terminology a. Donor = person giving the power b. Donee = person receiving the power of appointment c. Objects = the range of permissible appointees d. Appointee = the person actually appointed e. Takers in Default = those who take the property should the power fail to be

recognized (typically a provision written into the Trust) f. General Powers = a power exercisable in favor of the done, his estate, his

creditors, or the estate’s creditors g. Special Powers = a power that CANNOT be exercise in favor of those listed (so

the done cannot appoint himself as beneficiary) h. Presently exercisable =

2. Relation-Back Doctrine a. Does the Power of Appointment equate to ownership?

i. Special powers – it does NOT equate to ownership. The appointment is seen to flow from the donor to the appointee (not from the donee)

ii. General powers – not always, but courts are starting to say that it does. b. This question typically occurs in creditor/debtor situations. c. Irwin Union Bank & Trust Co. v. Long (1974, p. 806) – held that the holder of a

presently exercisable general power of appointment may not be forced to withdraw principal from a trust. i. Long hand never exercise this power, so he had no money. ii. Court holds that an unexercised power may not be compelled by a court of

equity. 3. Tax Considerations for Powers of Appointment

a. It is possible to give property to someone in such a way that the donee does not have to pay estate taxes on it [unclear how much Orth will cover this in class]

B. Creation of Powers of Appointment 1. Pretty much: you JUST have to manifest intent. 2. No magic words: don’t have to use “appoint.” 3. It must confer discretion on the donee of that power.

a. Note that you can have a direct nondiscretionary disposition. b. Such a disposition would give someone instructions on what to do, but no

discretion. (see Case 6, p. 812). C. Exercise of a Power of Appointment

1. All you have to do is manifest an intent to exercise a legal (laws of the state) and permissible (scope of the power; determined by the instrument/trust) exercise of that power.

2. A residuary clause CAN, in some instances, exercise a power of appointment a. Note that powers of appointment, if exercise in a testamentary capacity, may need

specific reference. i. Majority Rule: Presumption that a residuary clause does NOT exercise a

power of general appointment. ii. Minority Rule: residuary clause exercise power of appointment unless a

countray intent affirmatively appears b. Neither do “blanket clauses” do this. c. Note that anti-lapse statutes also apply often to powers of appointment.

3. Limitations on the Exercise of a Power of Appointment a. Almost everywhere, a donee of a genral power of appointment can appoint

outright or in futehre trust and create new powers of appointment. b. Types of special powers of appointment

i. Exclusive – a donor has the right to appoint the any amount of the property to ANY of the objects. Look for language of “to any one or more” or “to such of.”

ii. Nonexclusive – the terms of the instrument specify that the donee must appoint some portion to each. Look for language of “to all and everyone” or “to each and everyone.”

iii. Note that different jurisdictions have different presumptions. If the intent is unclear through the language, then that state will fall back on its presumption. The modern rule (Restatement) is that the appointment is presumed exclusive.

4. Fraud on a Special Power a. You cannot appoint to a person who is not an object. b. To the extent that such an appointment is an attempt to circumvent the limitation,

it is void. 5. Ineffective Exercise of a Power of Appointment – Suppose a power is ineffectively

executed. You can STILL carry out the donee’s purpose sometimes through the doctrines below. a. Allocation

i. Arises when appointive property (property over which the donee has power of appointment) and the donee’s property are disposed of under the same instrument (typically the donee’s will).

ii. Most common is a “blending” clause. In that situation, allocate the trust where it should go and use the residue of the estate to effectuate the rest of the gift. (A) Suppose trust of $100,000 (appointable to D’s descendants), D has

property of $350,000. (B) Gives $100,000 to daughter-in-law (obviously a non-descendant) and

$350,000 to daughter. (C) Daughter-in-law will receive $100,000 of D’s estate; the remaining

$250,000 of D’s estate AND the trust principal will pass to daughter. iii. If no blending clause, and the will seeks to make an improper gift, the will

still operates as if there were a blending clause. b. Capture [Note: this involves the passage of property, not a power. The power to

appoint is given to one person.] i. Applies to general powers and only when the attempted appointment si

ineffective or incomplete. ii. At common law, an ineffective appointment, unable to pass through

allocation, would go to the takers in default, or, if none, back to the donor’s estate.

iii. Capture = passage of appointive property to donee’s estate when he manifests an intention to assume control of the property for all purposes.

D. Release of a Power of Appointment E. Failure to Exercise a Power of Appointment

1. General a. First, look to takers in default. b. If no takers in default, then it reverts to the donor’s estate.

2. Special a. First, takers in default. b. Then, if none, the property may pass to the objects of that power. c. Otherwise, it reverts to the donor’s estate.

VIII. Construction of Trusts: Future Interests A. Introduction

1. Typically, now are involved in trusts, not fee simples. 2. Remember: a future interest is treated like a tangible res.

B. Classification of Future Interests 1. Future Interests Defined

a. No present possessory right to the property. i. But – can enjoin current owner from committing waste. ii. Can also protect anything that impairs the value of the future right to

possession. b. Future interests, however, create a right to possession in the future.

i. Different from “expectancies” because an expectancy doesn’t involve a title; there has been no transfer of anything.

ii. 2. Interest in the transferor

a. Reversion i. The interest remaining in grantor when he transfers an estate of a lesser

“quantum” (e.g. – life estate). ii. All reversions are vested interests. iii. Not all of them actually result in possession, however. If you have a reversion

following a contingent remainder, it won’t happen automatically. b. Possibility of Reverter

i. Interest that remains in the grantor after the conveyance of a fee simple determinable.

ii. A breach of the condition automatically transfers the title in fee simple back to the grantor.

c. Right of Entry (also called “power of termination”) i. Interest that remains in the grantor after the conveyance of a fee simple on

condition subsequent. ii. A transfer back to grantor does not happen automatically. iii. Grantor must choose whether or not to exercise his right to re-enter the

property and take possession. 3. Interest in a transferee

a. Remainder = the interest in a transferee that becomes possessory on the expiration of all prior interests simultaneously created

b. Vested remainder i. Two conditions:

(A) Given to a presently ascertained person. (B) Not subject to a condition precedent (other than termination of the

preceding estates) ii. Different degrees of “vested” remainders

(A) “Partial divestment” (for example: a gift to a class, “A’s children,” where one child is alive, but a later one is born)

(B) Divestment – the remainder may be divested upon a breach of a condition subsequent attached to that remainder. This is NOT a condition precedent (that would make it a contingent remainder). But it depends solely on the words of the instrument.

(C) Look at the COMMAS to determine whether something is vested or contingent. (1) If the condition is contained by commas, typically not a condition

precedent (and thus a vested remainder subject to divestment). (2) If no commas, then the condition is part of the gift (and thus a

contingent remainder). (3) See examples on pages 842-43.

c. Contingent remainder i. One of two conditions:

(A) not given to a presently ascertained person; or (B) subject to a condition precedent

d. Executory Interests i. Differs from a remainder in that it is a divesting interest. ii. “Shifting” executor interest – divests transferee of property. iii. “Springing” executor interest – divests transferor of property (e.g. – “to

daughter A when she marries B”). C. Construction of Trust Instruments

1. The law prefers vested interests. a. Arose during feudal England (so some of the policy concerns are obsolete), but

ultimately makes land more alienable. b. Acceleration into Possession

i. At common law, a vested remainder “accelerates” (or converts) into possession. (A) A contingent remainder, however, does not do so until all the conditions

precedent have occurred and the persons have been ascertained. (B) Raises a problem if a transferee disclaims and remaindermen are not

indicated. ii. Disclaimer statues have been erected by courts to deal with this problem. iii. In re Estate of Gilbert (1992, p. 847) – held that a transferee may divest his

trust. c. Transferability

i. Common Law Rules (A) At common law, vested remainders were transferable inter vivos (B) Contingent were not.

ii. Modern rule: MOST states now permit the transfer of contingent remainders. iii. Note, however, a spendthrift clause will render inalienable during the life of

the owner of the interest. 2. Gifts to Classes

a. Gifts of Income b. Gifts to Children, Issue, or Descendants c. Gifts to Heirs

i. Estate of Woodworth (1993, p. 869) – pretty much ignored the trust provisions. If possible, courts will construe a vested remainder whenever possible.

ii. See Case 18 (p. 875). Question: how can you have a presumption contradictory to the trust’s express terms?

iii. Doctrine of worthier title: most states have abolished this. Old doctrine was that a trust with a remainder to a beneficiary’s “heirs” was presumed to that the settlor intended to retain a reversion in himself (which he could then alienate/devise, etc.).

iv. Rule in Shelley’s Case: If land was conveyed to a grantee for life, and then to the grantee’s heirs, the law created a fee simple. (A) NOT a rule of construction; a rule of law. (B) abolished in nearly all states, though.

d. Class-Closing Rule (or “rule of convenience”) = a class will close at the life tenant’s death with distribution to then-born children and exclusion to later-born children. i. Immediate gifts to a class: the class closes immediately, and the class

members can take. (A) Exception: if no class members exist at death of Testator/Settlor, then that

class remains open until the class must be closed by the death of the ancestor.

(B) See Cases on p. 878. Once a class member reaches 21, that class closes. ii. Postponed gifts – if a gift is postponed in possession until a life tenant dies,

the class will not close until the time for taking possession. (A) Thus, a gift to a class of remainder beneficiaries will not close until the

life tenant is dead; AND (B) it will not close under the rule of convenience unless you’ve got one

remainderman. iii. Lux v. Lux (1972, p. 880) – held that the class gift “to my grandchildren”

would be held in trust and shall not be sold until “the youngest . . . has reached 21 years of age” will close when the youngest grandchild alive at the time of the T’s death reaches 21.

IX. Rule Against Perpetuities A. Introduction

1. First came up in Duke of Norfolk’s case a. Interesting, but ultimately meaningless history b. Solely concerned with when a future interest would vest.

2. Originally, not limited to the modern rule; simply put a “cap” on a future remainder. B. Orthodox Rule against Perpetuities

1. Summary a. Rule and its policies = restriction on the remote vesting of interests

i. Rationale (A) Dead hand (B) Keep property marketable

ii. Originally applied to land; now applies mainly to trusts b. Perpetuities period is measured by lives in being at creation of instrument. c. Rule of logical proof

i. “Life in being” = ANY person who is alive at the time of the gift. BUT – the gift must vest or fail within 21 years after the death of that person.

ii. Ask: “When will the interest vest or fail?”

iii. Contingent interest is fine if it will best within the relevant life within 21 years.

d. Validating life must be in being when the perpetuities period starts to run. i. So by will à perpetuities period starts at death of testator. ii. By trust à validating life must be in being when the trust takes effect.

e. Rule and trust duration i. Rule limits trust only indirectly. ii. All trusts must best or fail within the perpetuities period.

2. Fantastical characters a. Fertile Octogenarian

i. This gift may fail because it presumes an after-born child. ii. A child may be born after the Testator has died – thus, this child cannot be a

measuring life; the gift fails. b. Unborn Widow c. Slothful Executor d. Magic Gravel Pit & Other Marvels