Trusts and Estates
Two important changes
Widow’s third: In the 19th Century, a widow had the right to 1/3 of her husband’s estates, held as a life estate after which the property reverted to the beneficiaries of the decedent. Now, we have ownership rather than life estates.
Trusts: Started in the medieval period in feudal Britain, created to ensure that beneficiaries are taken care of by a caretaker, the trustee. It became a way for decedent settlor to exercise dead hand control over wealth from beyond the grave in Americas in the 19th century. They are now really long-term receptacles of family wealth.
The law had to respond to the need for investment, which came under the fiduciary duties of the trustees. In Britain, you could only invest in gov’t bonds, no equities.
The states responded by using the prudent standard, allowing for more diversified investments. As long as you are investing safely and prudently, as a trustee you have almost absolute discretion in investing a trust.
Taxation: Today, much of estate planning is to alleviate the tax liabilities of a testator.
Gift tax: Designed to avoid the problem of deathbed transfers of large sums of money.
Applicable exclusion amount (AEA): A portion of property that is excludable from the estate tax.
In 2001, the AEA was $675k, then you had to pay 55% on the excess.
In 2002, $1M and 50%.
In 2007/8, $2M and 45%.
In 2009, $3.5M and 45%.
In 2010, complete repeal, TAX FREE!!!
In 2011, back to 2001 numbers.
Concentrations of wealth bad? Anti-democratic? Do we want to create an American aristocracy?
Overview of Wealth Transfer
Inter vivos gift: A gift during one’s lifetime. Up to $12k tax-free per year per beneficiary. $24k for married filing jointly.
· Crummey trust: Inter vivos trust, this is an irrevocable trust and every year you can transfer $12k per beneficiary per year into the trust. This accumulates over time. But it must be under the auspices of a detached and disinterested generosity.
Will substitute: In our times, this may be the most important form of wealth transfer. An example of this is joint account. The account would be transferred to the other owner(s) at an owner’s death. Another example is life insurance. There are pension plans.
· Living trust: You place all the things you want to transfer into a trust and retain a life estate in the property after which you simply transfer the corpus into a trust and skip probate. Another advantage is that the trust is private and is not made part of public record.
Dying testate: Dying with a legally valid will. For a will to be valid you need to have
· Formalities: things such as the participation of witnesses, tests of presence: 1) witnesses have to see testator sign the will, 2) testator have to see witnesses sign the will, 3) witnesses have to see each other sign the will.
· Holographic will: (this is another type of will that has its own req’ts but not those of a normal will) intent, date, signature, and needs to be in the testator’s own handwriting.
· Intentionalities: You need to show the testator really wanted to effect the things in the will. Much of the time this is challenged with charging undue influence or mental incapacity. There are tests for this. De minimis test – You ask: do you know your beneficiaries? Do you know what’s going on? Do you know what you are planning to do?
If you divorce, and you were part of a will, the divorce automatically invalidates your part of the will.
Dying intestate: Dying w/o a legally valid will. This is what most people do. A court will decide what happens to your wealth according to the intestacy statutes of your state, these are default rules of wealth transfer. These are what most would imagine they would be.
In NY, e.g.,
· if you are a spouse w/ no children, 100% transfer to spouse.
· If you have children, no spouse, 100% to children.
· If you have no spouse and no children, then to parents.
· If you have no parents, spouse, children, then to siblings.
· If you die with a spouse and children, then spouse gets $50k off top and 50% of rest, and the other 50% to children.
· If none of the above, then to grandparents, if still alive.
Jefferson: No right to inheritance, a human construct.
Locke: Natural right of children to inherit from their parents.
Hodel v. Irving (Fractionalization of Indian lands and escheat provision, Right to Transmit) p. 3
O’Connor on power to transmit as constitutional right: “The regulation here amounts to virtually the abrogation of the right to pass on a certain type of property – the small undivided interest – to one’s heirs. In one form or another, the right to pass on property – to one’s family in particular – has been part of the Anglo-American legal system since feudal times…. Even in US concedes that total abrogation of the right to pass property is unprecedented and likely unconstitutional…. In holding that complete abolition of both the descent and devise of a particular class of property may be a taking, we reaffirm the continuing vitality of the long line of cases recognizing the States’, and where appropriate, the US’, broad authority to adjust the rules governing the descent and devise of property without implicating the guarantees of the Just Compensation Clause. The difference in this case is the fact that both descent and devise are completely abolished; indeed they are abolished even in circumstances when the gov’tal purpose sought to be advanced, consolidation of ownership of Indian lands, does not conflict with the further descent of the property.”
Right to transmit is a stick in the bundle of sticks we call property rights and if that stick is taken away, there must be just compensation under the constitution.
Ex. p. 10 Princess Di dies and has a pretty necklace. She wants to devise to sister.
1) Honoring her wishes
2) Gov’t confiscation – social leveling, but not much incentive to try
5) Bury w/ her
1) Ascher – No transmission to healthy adults, up to $400k to others
2) NJ – confiscation
First, people would move out of NJ. The US might respond and people might move out of the country. Second, there might be more inter vivos gifts to which NJ might set up more restrictive gift taxes. Third, people might simply make illegal transfers. Fourth, people might make a bargain sale.
Shapira v. Union Nat’l Bank (You must marry a Jew!, legality of the provisions of devise) p. 21
Wills are not restricted by the Constitution: “The right to receive property by will is a creature of law, and is not a natural right or one guaranteed or protected by either the OH or US constitutions…. It is a fundamental rule of law In Ohio that a testator may legally entirely disinherit his children…. This would seem to demonstrate that, from a constitutional standpoint, a testator may restrict a child’s inheritance.”
Reasonableness of marrying conditions: “The great weight of authority in the US is that gifts conditioned upon the beneficiary’s marrying w/in a particular religious class or faith are reasonable….”
Enforcing a will provision is not considered state action.
7 year time limit to marry: “It seems to the court … that the seven year time limit would be a most reasonable grace period, and one which would give the son ample opportunity for exhaustive reflection and fulfillment of the condition without constraint or oppression. Daniel is no more being ‘blackmailed into marriage by immediate financial gain,’ … than would be the beneficiary of a living gift or conveyance upon consideration of a future marriage – an arrangement which has long been sanctioned by the courts of this state.”
J. Black and Kafka: Black wanted private notes destroyed, Kafka wanted friend to burn diaries and works. Should an executor have to follow the wishes of an author?
Say you have a $500k house and you don’t want anyone else to live in it and provide that the house be destroyed after death. However, the gov’t will still assess an estate tax and your estate will still owe money even if the hose is destroyed.
Section B. Transfer of the Decedent’s Estate
Probate Property: passes under the decedent’s will or by intestacy.
Nonprobate Property: passing under an instrument other than a will.
Administration of Probate Estates
Personal representative: They are appointed to oversee the winding up to the decedent’s affairs. Their principal duties are:
(1) to inventory and collect the assets of the decedent;
(2) to manage the assets during administration;
(3) to receive an pay the claims of creditors and tax collectors;
(4) to clear any titles to cars, real estate, or other assets; and
(5) to distribute the remaining assets to those entitled.
If the person dies testate and in the will names the person who is to execute (that is, carry out the terms of) the will and administer the probate estate, that person is called an executor.
When the person in charge of administering estate the estate is not named in the will, the personal representative is called an administrator.
Problem 1 (p. 38)
Will devises entire estate to wife Martha if she survives him; otherwise to his children in equal shares (2 adult sons).
Personal Prop $10k à could probate, but realistically, not worth probating because too expensive for so little
Savings Acct. $5k à could probate, but she has right of survivorship and would simply show the bank proof he died.
Jt. Checking $1.5k à no probate, she is a co-owner
Pension plan annuity, gov’t bonds, life insurance à no probate
Car $7.5k à yes, because you must clear legal title
Consumer debts, funeral expenses, Utilities à she can take care of these as normal. No probate necessary.
Nonclaim statutes: Protection from creditors. Give a period of time when creditors may make claims against the estate after which no claims may be made.
What if Mr. Green was a compulsive gambler w/ crazy debt? Probate then?
What if Martha is scared of losing her home from blinding debt?
Homestead Exemption: This exempts a certain portion of the estate to supply a family residence. This is usually a life interest. However, usually, this amount is too small (like $10k).
Personal Prop. Set Aside: Corollary to the homestead exemption. Sets aside some portion of estate.
Death Certificates: Who gets them? This usually controls who gets the transfer of property.
Transfer of title affidavit (for cars): You bring an affidavit to the DMV and say you are the survivor of the decedent owner, and the DMV transfers title of the car to the survivor.
If you don’t probate a will, you don’t have a will, and the person dies intestate. Then intestacy laws kick in.
In the Greens’ case, Martha would get half and the sons would get a quarter each. The sons would simply not assert their claims and by default Martha would take the estate. Only in affirmative contests do probate courts step in.
Even if they are minors, the assumption is made that she uses the money to raise them so the money goes to her anyway.
If a son dies before the father, but the son has minor grandchildren, there must be probate. This is because the guardian assumption is not present as she is not their parent.
What if he owned a house worth $80k? Probate! For Martha to get marketable title, she needs to perfect the title to the property. This is only if she wants to dispose of the property, but she could just as easily sit on it if she does not intend to get rid of it.
What if Mr. Green is alive ans asks if he should make a will? First, you get control of what happens to your stuff after you die. Second, it anticipates situations that aren’t ideal for the transfers you may want. Third, it protects your interests. Having it gives options later for those who survive.
Simpson v. Calivas (Bad drafting cost me $400k, Duty to 3rd parties in will drafting) p. 49
Duty exists regardless of pri
d other siblings, all would go to the surviving parent. If no parent survives, then it goes to the first line after parents which is siblings, and it is split evenly.
See Table of Consanguinity (p. 79)
Two methods (no first-line collaterals, parents, issue)
1. Parentelic system: Look to grandparents. Estate divides into halves (moieties). Half to maternal grandparents and half to paternal grandparents (1/4 per grandparent if surviving, ½ if only one surviving). If there is a deceased GP, their share goes to descendants. If deceased GP has no descendants, then to the GGPs’ level. Up a generation and over to the next issue ad infinitum.
2. Degree-of-kinship: The intestate estate passes to the closest 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 count the steps down to the claimant from the common ancestor.
“Laughing Heirs”: persons so distantly related to the decedent as to suffer no sense of bereavement, laughing all the way to the bank.
Escheat: If after all this, no one can be found to inherit the estate, then the gov’t is the ultimate taker. Nothing goes to waste. Property goes to the state in which the decedent was domiciled, but real property goes back to the state in which it exists.
Half-bloods: Those who are half-related (one parent in common). In England, the common law wholly excluded halfies. This rule has long been abolished in all American States. In a large majority of states, a relative of the half-blood is treated the same as a relative of the whole-blood. This is the position of UPC § 2-107.
Scottish rule: Half-blood takes half-share.
Transfers to Children
Hall v. Vallndingham (Can my children inherit even though they were adopted by their stepdad?, adopted children) p. 83
Adoption law history: It did not exist in the common law of England. This was a creation of statute in the Americas.
Transplantation: Once a child is adopted, they are “reborn” legally as the child of the adopting parent. They “die” legally as to the estate of the natural parent.
Rationale: “[MD adoptive law] entitles an adoptive person to all the rights and privileges of a natural child insofar as the adoptive parents are concerned, but adoption does not confer upon the adopted child more rights and privileges than those possessed by a natural child.”
This is a special rule for adoptions by a stepparent. This does not apply to orphan adoption.
Noncommutative property of adoption under UPC: Under the UPC, the kids could inherit from their natural uncle, but it’s not commutative; the uncle cannot inherit from the kids.
Twigg v. Mays (Switched at birth – who can Kimberly inherit from?, equitable adoption and inheritance) p. 87
Typically, the child will inherit from those whom the court determines to be the parents of the child.
Adult Adoption: The overwhelming majority of inheritance statutes draw no distinction between the adoption of a minor and the adoption of an adult.
No spouses or lovers: In the large majority of states, an adult person, married or unmarried, may adopt any other person, minor or adult, but the adoption of a spouse or lover may not be allowed.
Stranger-to the adoption rule: The adopted child is presumptively barred, whatever generic word is used, except when the donor is the adoptive parent. As adoption became more common and more socially acceptable, courts began to carve exceptions to the rule. In most states today, adopted children are presumptively included in gifts by T to the “children,” “issue,” “descendants,” and “heirs” of A.
Minary v. Citizens Fidelity Bank & Trust Co. (Heir adopted wife and she claims the inheritance, Adult adoption and inheritance) p. 89
Adoption should not eviscerate testamentary intent: “When one rule of law does violence to another it becomes inevitable that one must then give way to the other. It is of paramount importance that a man be permitted to pass on his property at this death to those who represent the natural objects of his bounty…. Adoption of an adult for the purpose of bringing that person under the provisions of a preexisting testamentary instrument when he clearly was not intended to be so covered should not be permitted and we do not view this as doing any great violence to the intent and purpose of our adoption laws.”
Special power of appointment: The use of adoption procedure for the purpose of creating a child to come within a class gift is in effect using adoption as a special power of appointment. If Amelia Minary had given her sons such a power to appoint at least a life estate to their spouses, Alfred’s desperate shenanigans wouldn’t have been