Trusts and Estates Outline
McDowell
Spring 2012
I. Intestacy
a. Introduction
i. Jefferson thought that property should belong to the state at death.
ii. Locke thought that children have a right to part of the estate because God gave man the principle of self-reservation to propagate their kind. – Natural right of man.
iii. There is no natural right to transfer property, only a civil right – Blackstone
1. Until 1980s, there was no natural or constitutionally protected right to transfer property at death.
a. Irving Trust Co. v. Day (USSC) 1942 – transfer at death is a statutory creation and nothing in the constitution prohibits the states from limiting or abolishing such right.
b. Hodel v. Irving (USSC) 1987 – Inheritance is protected by the “Just Compensation” clause.
2. People used to make inter vivos gifts of property to 3rd parties with their promise to give the property to T’s heirs at death – way to circumvent “no gift of property at death” rules.
iv. Transfer on death to children was originally indefeasible until children started becoming disobedient (why should they behave/take care of the sick old man when they are getting everything anyway?) – this practice also defrauded creditors from recovering their debts
1. SOLUTION: distribute property by TESTAMENT
b. Dead Hand
i. PUBLIC POLICY: To what extent should a person be able to use wealth to influence behavior after death?
1. ANSWER: it depends on their intentions
a. Property owners have a right to dispose of their property as they please
b. The goal of the laws of inheritance are to facilitate rather than regulate
2. Limits on T’s intentions:
a. Against Public Policy
i. TOTAL PROHBITIONS ON MARRIAGE (constrains B’s freedom of marriage)
1. “so long as B becomes a nun” is a prohibition on marriage
2. ONLY RESTRAINS FIRST MARRIAGES!
ii. UNREASONABLE RESTRAINTS ON MARRIAGE
1. Shapira – T gave his son an incentive trust “ To B only if he marries a Jewish girl w/in 7 years; gift-over to Israel”
a. RULE: A condition that the donee wil marry within a particular religion is enforced UNLESS IT AMOUNTS TO AN UNREASONABLE RESTRICTION ON MARRIAGE
b. Constitutionality – This is a restraint on son’s inheritance, not a restraint on his marriage – he is free to marry as he pleases, he just might not get his $.
c. Public Policy – This is not an unreasonable restraint on marriage
i. (Freedom of religious choice cannot be restrained by contracts)Wills are not contracts – IF he marries a Jewish girl he gets his money, if he doesn’t then he doesn’t. GRATUTIOUS TRANSFERS ARE NOT BASED IN K LAW
ii. (Coersive of choice of religious faith) – such conditions concerning marriage do not affect B’s religion, but only his choice in a wife – He can marry a Jewish girl and convert to Buddhism if he so pleases.
iii. (Not too many Jewish People in Ohio) Daniel cited the Maddox case in which the court struck down a provision where the B would only get her share if she married a member of a specific society. The court distinguished that case here by noting that in Maddox, the pool of eligible bachelors was 5 or 6 people, whereas Daniel could choose any Jewish woman from any place in the world.
iv. KEY: T’s intent was pro-Judaism (not restraining marriage)based on his gift-over to Israel.
¨ This reasoning could allow a restriction on race
¨ Note: the laws of Trusts would not allow such restrictions!
2. RESTATEMENT: Restraint unreasonably constrains B’s opportunity to marry if the marriage allowed by restraint is not likely to occur (i.e. if Daniel was gay)
3. Restraints MAY be allowed if MEANT TO ENABLE the beneficiaries, rather than spite them.
a. Example A: Joan gets $10,000 if she divorces her no-good husband. INVALID
b. Example B: If my sister divorces her husband, then my executor shall pay her living expenses, not exceeding $10,000, for four years or until she is able to support herself. VALID
i. NOTE: these are terrible provisions because it would keep probate open for years because of the use of the word IF.
iii. PROMOTING DIVORCE/UNDERMINING FAMILY RELATIONSHIPS
1. IF Daniel had been married to a non-Jewish girl at the time of his father’s death the provision would have been stricken BECAUSE IT WOULD HAVE PROMOTED DIVORCE, ONLY the “only if he marries a Jewish girl” provision would have been struck down, so the clause would then read “To B.”
2. INTENT IS KEY: some provisions that would encourage divorce can be upheld IF THEY HAVE BENIGN INTETIONS – “6k to B, but if her husband divorces her then 40k” shows intent to provide support
a. “so long as she remains my widow” is not valid but “until she remarries” is valid.
3. Doesn’t like breaking off contact with siblings
iv. WASTE – There is 0 economic worth to you at death – if you can’t bear the cost of destroying property during life, you shouldn’t be able to destroy it at death.
v. ENCOURAGEMENT OF UNLAWFUL ACTIVITY
1. Example: I leave all of my estate in trust to pay for NJ driver speeding tickets – incentive to speed (unlawful act) – invalid.
vi. Void for vagueness
1. “so long as she remains a practicing catholic – there is really no way to determine if B is a “practicing catholic” – is going to church once a year sufficient?
3. CONDITIONS PRECEDENT ARE ALWAYS UPHELD!!!!!!!!! (because the condition has either happened or hasn’t happened upon T’s death)
a. Example A: To Mary, If she is still married to Jim AT MY DEATH $5,000. If divorced, then 50K. Mary Is either married or divorced when T dies. – Even if Mary knew about the provision before T’s death, she had the opportunity to persuade her against this provision.
c. Probate – state supervised system of transfer of property upon death.
i. Probate means it is property that passes through the will upon death; non-probate items do not pass through the will (i.e. trusts, life insurance, etc.)
ii. Functions:
1. Clears Title 2. Protects creditors 3. appoints guardians 4. handles all transfers (except for non probate & trust)
a. Note: Order of payout: 1. Creditors 2. Specific Devises 3. General Devises (i.e. 10K to Ann) 4. Residuary devise
iii. DUAL VOCABULARY *******
REAL
PROPERTY
PERSONAL
PROPERTY
TESTATE
WILL
DIVISES to beneficiaries
Testament
Bequeaths to Legatees
INTESTATE
Descends
to heirs
Distributed
to next of kin
iv. Statutory Preference for Administrators of intestate estates: Spouse, Children, Parents, Siblings, Creditors -> all required to give bond (if testate, T could have waived bond – saves $)
v. PROBATE IS NOT REQUIRED WHEN:
1. non-probate property
2. and/or non-traceable probate property (jewelry, furniture, etc.) is passing – only if no title needs to change hands and all beneficiaries agree not to probate.
3. and/or small bank accounts, wage claims, cars, etc. -> all can be transferred by filling out forms
4. AND after all debts are paid, remaining estate is small enough (5k to 100K, depending on state) to qualify for summary administration.
vi. PROBATE CAN BE AVOIDED – transferring all assets into joint tenancies or inter vivos trust before death
1. Decedent had only non-probate property AND/OR small bank accounts, wage claims, & titled items that can be transferred by forms rather than probate (i.e. cars).
2. Decedent’s estate is so small after paying all debts that it qualifies for SUMMARY ADMINISTRATION ($5K to $100K, depending on state)
vii. Punishing rule – if a person dies without a will then the government takes 100% – NO STATES HAVE THIS RULE!
viii. Ante-mortem probate – three states allow people to probate their will BEFORE they die
d. Professional Responsibility
i. Duties to intended Beneficiaries
1. OLD RULE: No duty because no privity of K (some states still hold) – only duty to Testator
2. MODERN RULE: Lawyer owes a duty of reasonable care because lawyer has reason to know that testator is making the will to benefit the beneficiaries (K law of 3rd party beneficiaries)
e. Intestacy Generally
i. Any asset not covered in a will follows the law of intestacy
1. T’s intent for such property will NOT be considered
2. It is the estate plan for
a. people without a will
b. wills that fail or that do not include all property
3. Serves as the default rules of construction for terms in will – i.e. what does “heirs” mean?
ii. If no takers, then the property escheats to the State.
f. Spouse and Children
i. Spouse Rules
1. Leaves no children or parents
a. Surviving spouse gets 100%
2. Leaves Children or Parents
a. Common Law Intestacy – Spouse was entitled to a life estate of 1/3 of the husband’s property (dower) – heirs owned it subject to the life-estate.
b. Old Rule – Wife gets 1/3 or ½ of the estate outright (more if there were children of the marriage) and the rest is divided equally among children. If no children, wife splits it with parents. If no parent’s wife gets 100%.
c. UPC/ NJ rule –
i. All children belong to the marriage – 100% to surviving spouse – conduit theory that children will still benefit from it.
ii. Either party has a child form another marriage – Surviving spouse gets a lump sum plus a percentage of the rest. (NJ – 3B:5-3)
ii. Simultaneous Death Acts (INTESTACY ONLY – or Will where time is not provided)
1. Generally
a. Both do not have to die from the same cause – can be completely unrelated.
2. Old Rule: Sufficient evidence is required to show that B survived T to get his share. – i.e. have to provide some evidence that the party survived the T.
a. Tylenol Case
3. New Rule: 120 hour rule – B must survive T by 120 hours (5 days) by CLEAR AND CONVINCING EVIDENCE in order to take.
4. NJ follows new rule and it is applicable to J/T property as well.
iii. Shares of Descendants (the portion that doesn’t go to the surviving spouse) 3 ways to take:
1. NOTE: If a person dies leaving no issue, it is as if they never existed (so if D dies in the following examples, pretend he doesn’t exist!
2. D to Parent; step 2 parent to Gparents; step three Gparents to D’s Aunt; Step 4 D’s aunt to surviving cousin. THE RELATIVE(S) WITH THE CLOSEST KINSHIP TAKE
apacity.
4. Factors showing capability:
a. Doctor’s testimony
b. lay witness observations
c. Attorney notes
d. Cannot use guardianship as a basis because guardianship is only imposed when a person does not have the ability to enter into CONTRACTS which has a higher standard than capacity to make a will. (so a person with a guardianship can still make a will) Why the higher standard? To protect the assets a person needs to live on – not so important when the person is dead.
5. Why require capacity? to protect T from exploitation, protect T’s family, provide legitimacy to the laws of inheritance.
6. Professional Responsibility – “reasonable belief as to capacity” – if borderline, you must still draft it.
ii. Insane Delusion – ONLY THE INSANE DELUSION CLAUSE IS INVALIDATED! [narrower than capacity]
1. Only fails IF THE DELUSION AFFECTS THE DISPOSITION!
a. T believes martians abduct humans and put probes in their brains – leaves everything to his two sons à not invalidated
b. T believes martians abduct humans and put probes in their brains – leaves everything to a trust to remove the probes from human brains à invalidated.
2. LEGAL concept of insanity, not psychological à how to know:
a. “false concept of reality”; example: “all Irishman have red hair”
b. T’s opinion is unchanged after proof of the contrary (differentiates between insanity and mistake – mistake is generally not invalidated)
3. MAJORITY RULE: IF a factual basis can be shown for the delusion, but a RATIONAL PERSON IN T’S SITUATION could not have found as T found, then it is an insane delusion and the bequest/devise is invalidated.
a. Contestant must prove that the delusion materially affected or influenced the will. Breeden.
4. Keep Strittmatter in mind – what is sane and insane is based on societal views!
iii. Undue Influence – only if T makes a donative transfer THAT HE WOULD NOT HAVE OTHERWISE MADE!
1. Minimal coercion is sufficient
2. No need for confidential relationship or for the coercer to be a beneficiary.
3. Subjective factors (age, weakness, sickness, et.) can be used to offer proof
4. Old Rule:
a. Presumption of a valid will
b. Contester gives evidence of possible undue influence
i. TEST ONE:
1. Donor was susceptible to influence (Diminished capacity)
a. can be rebutted by evidence of capability – i.e. managing her own affairs, knows her family, paid her bills, etc .
2. wrongdoer had opportunity to exert influence
3. wrongdoer had disposition to exert influence
4. resulted in an appearance of undue influence.
ii. TEST TWO:
1. (these give rise to a presumption of UI) Wrongdoer had a confidential relationship with T &
a. Fiduciary relationship – money
b. Reliant relationship – trust and confidence
c. Dominant/subservient relationship (i.e. caregiver)
2. Some other circumstances
a. any circumstance that would lead a person to believe the wrongdoer influenced the will – i.e. they drafted it, donor was weak minded, unnatural distribution, new will drastically changed, etc.
c. Proponent must prove by clear and convincing evidence that there was no undue influence
i. Proponent acted in good faith
ii. Donor acted FREELY, INTELIGENTLY, and VOLUNTARILY. – donor would have done the same either way.
5. Watch out for undue influence as a way to circumvent freedom of testation -> homosexuatity concerns (like Kauffman) – have T name an arbitrator in the will (someone he knows rather than court) or CREATE AN INTERVIVOS TRUST!
6. Gifts to attorneys generally fall under this category as a presumption of undue influence unless the attorney is related to the T.
iv. Fraud – T is deceived by a DELIBERATE misrepresentation (about type A,B, or C below) and makes a bequest that he would not otherwise have done.
1. Very difficult to prove: The wrongdoer must have the INTENT to deceive, KNEW his statement was false, and PURPOSE to influence the testator.
2. ONLY USED IF T MADE A GIFT SHE NORMALLY WOULD NOT HAVE MADE!
3. Types:
a. Fraud in the inducement – misrepresentation causes T to execute or revoke a will, or to refrain from executing or revoking a will, or to include a provision in wrongdoer’s favor.
b. Fraud in the execution – handing T a will that she thinks is her will, but wrongdoer knows is not, and she executes it.
c. Fraud in the Revocation – not destroying the will as asked to.
4. If found, then all of the people who benefitted from wrongdoer’s act will be disinherited – WD has T take her own son out of the will and give everything to WD, and WD’s brothers and sisters à brothers and sisters get nothing as well as WD.
