Trusts and Estates Outline

Wills Trusts & Estates Outline
Professor Waldeck
Fall 2008

Introduction to Estate Planning:
· Power to Transmit Property at Death: Justifications & Limitations:
o (1) Right to Inherit & Right to Convey:
§ Historical View:
· Man’s rights in his property and wealth ended upon death
· Right of property was a “civil right” not a “natural right”
· Servants were considered heirs (under roof of decedent)
· Testaments and wills = useless and unknown (not cut family out)
§ Modern View:
· Man could dispose property & wealth via will (cut family out)
· Dispose via testament, by written or oral instructions properly witnessed & authenticated, according to deceased wants (aka Will)
· England (Henry VIII) à could only dispose of 1/3 to non-family
· Testaments, rights of inheritance and successions are all creatures of civil or municipal laws.
§ Langbein: Old v. Modern:
· Old = transferring patrimony upon death (family farm or firm)
· Modern = transferring inter vivos education (not property)
o Investment in skills (occurs during life)
o Children rely on educational expenses & not upon wealth Children making more money than parents
§ Policy on Modern View:
· Supporters:
o Encourages invention and industry
o Halbach: Incentive to family affection and solidarity
§ Comfort that after death loved ones will be taken care of
§ Incentive to work harder & encourage individual responsibility (Fruit of one’s labor)
§ Promotes saving – not consumption (pro-economy)
o Bentham: Incentive for children to take care of parents
§ Exchange Theory
· Critics:
o Oliver: Avoiding wide disparities of wealth
§ 80% of wealth inherited
§ 1987-2011 = Baby Boom will inherit $6.8 trillion.
· Parents gained wealth in 1940’s-1960’s
· Assets skyrocketed
§ Critics say à produces unequal opportunities
· Social & political dangers of inherited wealth becoming basis of enduring privilege
· “Great fortunes should not remain in the same hands . . . [therefore] there are rich men, but they do not form a class.”
§ Rewards not merit/productivity but fortunate birth
o Ascher: Support needs of Govt by progressive taxation
§ Should be taxed b/c “getting something for nothing”
§ Erase Government Deficit
o Blum: Some commentators argue that much wealth transfer from parents to children today occurs inter vivos in the form of education costs born by parents
§ Measurement of wealth excludes the inheritance of human capital, such as law or medical school degrees, entitlement benefits (SS, pensions, government income assistance, etc…)
§ Calculations overlook the life cycle effect (see above)
§ No race can be fair unless they start from same point
· Children inheriting (economic & culturally)
o Income of families (no tax can touch)
o Income, not wealth, is operative factor
· Cultural Inheritance:
o Opportunities of formal education, diet and medical attention can be equalized by economic means
o Need changes to fix these disparities
o Kristol: Concentrations of wealth is politically dangerous
§ Emergence of an oligarchy that would, through the power of wealth, perpetuate itself, and eventually constitute a kind of aristocracy.
§ Proposal:
· Distribution, tax free, to numerous individuals
· Put $1 million cap – able to be inherited to a single individual
· Dissolve into smaller fortunes upon death
· Help out the Younger Generation:
o Transfer of wealth tends to distort the motivations & corrupt the characters of young people.
o (2) Policy of Passing Wealth at Death:
§ Ascher: Curtailing Inherited Wealth [Tax Implications] · Estimated $150 billion pass at death each year (only $8 Billion taxed)
o If transfer at death allowed à US Govt could erase deficit
o Using Federal Wealth Transfer taxes to curtail inheritance, thereby increasing equality of opportunity while raising revenue
§ Make inheritance the “exception”
§ Inheritance should be something we tolerate when necessary – not always be protected.
· Ascher’s Proposal:
o All property @ death should be sold & given to Govt (Taxes)
o Six Exemptions:
§ (1) Marital Exemption:
· Accrue over life of marriage (marriage length = variable)
· Unlimited Amount
§ (2) Dependent lineal descendants
· Depend on age & phase out ($0 at age)
§ (3) Disabled Exemption:
· Generous portion allowed
§ (4) Lineal Ascendants (Grandparents, parents)
· Unlimited amount
§ (5) Universal Exemption:
· Moderate amount of property to pass
· Able to leave to persons of his or her choice
§ (6) Charitable Exemption:
· Fixed Amount
§ *Gift Tax increase substantially
§ *Eliminate direct inheritance by healthy, adult children
§ *Inheritance permitted where public policy justifies
· Ascher’s Effects [If Implemented]:
o (1) Lifetime gifts. People would give their propertyaway during life, necessitating (as Ascherrecognizes) a similar confiscatory system for intervivos gifts.
o (2) Moving out of state. People would move toother states, which would necessitate a unifiedfederal regime.
o (3) Support v. Gifts. Under many proposedconfiscatory schemes, parents would be allowed toprovide support in raising their children but notsubstantial gifts.
o (4) Bargains v. gifts. Parents would engage innumerous bargain sales with their children, with astrong incentive to undervalue the assets sold.
o (5) Salaries v. gifts. Children would beencouraged to participate in the family business sothat wealth can be passed down as current salary,with a strong incentive to overvalue the services ofthe child in setting the salary.
o (6) Illegal transfers. People would engage in tax evasion,making transfers under the table. If transactions involvingcash equivalents were accordingly restricted, efforts wouldbe made to convert financial assets into paintings, jewelry,and other tangible personal property that can be handedto children.
o (7) Enforcement costs. The policing costs of prohibitinggifts and inheritance would be enormous.
o (8) Encouraging wasteful consumption. One irony ofconfiscation is that the rich would be encouragedto spend their money even more lavishly—all inthe name of egalitarianism. They would also havean incentive to retire earlier than they otherwisemight.
o (3) Dead Hand Control:
§ The Restatement (Third) of Property: [§ 10.1 – Donor’s Intention] · Courts must give effect to Donor’s intentw/o regard to wisdom/fairness.
o Donor’s intention determines:
§ (1) Meaning AND
§ (2) Effect of a donative document.
o Principle of US law = freedom of disposition
§ Property owners have nearly unrestricted right to dispose of their property as they please
§ Courts are to facilitate and not regulate
§ Shapira v. Union National Bank:
· Facts: Decedent left a share of his estate to his sonsif they had married (or within seven years didmarry) a Jewish girl born of two Jewishparents. If the sons failed to do this, theirshare was left to the State of Israel. (left in Will)
· Issue: Is this restriction constitutional (enforceable) or against public policy?
· Is it Constitutional: [YES] o Son states that under Loving v. Virginia (Right to interracial marry) and under Shelley v. Kraemer (State action under 14th) that restriction is unconstitutional.
o Holding: T has right to disinherit children & therefore can place restrictions.
· Violate Public Policy: [NO] o Condition upon beneficiary’s marrying w/in a religious faith is reasonable
o Pennsylvania courts distinguish between:
§ (a) Gifts conditioned upon religious faith of beneficiary: [Violative] § (b) Those conditioned upon Marriage to persons of faith: [Allowed] · (i) Clayton Estate:Held that condition concerning marriage not affect the faith of the beneficiary and that the condition, operating only on the choice of a wife, was too remote to be regarded as coercive of religious faith.
· (ii) Maddox v. Maddox:Will stipulated that niece must remain a member of the Society of Friends to receive money
o Niece married outside Society of Friends & was banned from Society of Friends & lost inheritance
o Since there were only 5 single members of Society that condition was unreasonable restraint on marriage.
o Here – Cour