Trusts & Estates
Fundamentals of Trusts & Estates – Anderson & Bloom
CHAPTER ONE – Lawyers, Estates and Trusts
§1.01 Serving Living Clients
•The Lawyer-Client Relationship
·Trust and Estates lawyers deal with the living, but the subject matter is death and disability.
·Counseling skills are as critical as legal knowledge in this setting.
ØHolsapple v. McGrath – malpractice liability
ØRULE: a 3rd party may maintain such a claim if the party is a “direct and intended beneficiary of the lawyer’s services,” so as to create a special relationship (Brody) However, the principle that a 3rd party may recover in certain cases was established for future cases.
ØRequirement for 3rd Party: A P must show that the testator (or grantor) attempted to put the donative wishes into effect and failed to do so only because of the intervening negligence of a lawyer.
PROBLEM: Client hired Attorney to prepare a will leaving Client’s estate to Client’s Brother. Attorney failed to have the will properly witnessed. Client’s will was declared invalid and all of his property passed to his parents under the state’s intestacy laws. Can Client’s Brother recover from Attorney for the value of Client’s estate?
1. Can Attorney be sued for malpractice when a will the attorney drafted was declared invalid due to not being properly witnessed?
18: Traditionally, one must have privity in order to bring suit – lawyer’s only duty was to the client. Public policies behind this rule is fear of exposing lawyers to unlimited liability and divided loyalty issues (who will attorney be loyal to – the client or the third-party beneficiaries?). However, modern law is based on a 3rd party beneficiary rule – liability extends to third-party beneficiaries as well as clients. Public polices behind this is to carry out the grantor’s intent and the attorney will more cautious when drafting – deters negligence as well as provide a remedy for a loss.
•Policy Concerns:
·Policies favoring privity requirement
·Fear of exposing lawyers to virtually unlimited potential for liability
·Fear of undermining lawyer’s duty of loyalty to the client
·Policies favoring liability to third parties
·To effect the grantor’s intent
·To provide a remedy for a loss
·To deter future negligence
·The Holsapple court strikes a balance by limiting liability to 3rd parties who demonstrate that:
·He/she was specifically identified by the donor as an object of the donor’s intent
·The expectancy was lost or diminished as a result of the lawyer’s negligence
PROBLEM: Oscar and Alma’s will provided: a gift to the other spouse contingent upon survival by 30 days; their nephews would take if both spouses were killed in a common disaster.” Oscar died of a stroke and 15 days later Alma died of cancer. Do the nephews have a claim against the lawyer?
»Nephews do not take due to the “common disaster” requirement – Oscar died of stroke and fifteen days later Alma died of cancer which is not a common disaster.
»Traditional view – no claim by nephews b/c there is no privity w/ lawyer.
»Third Party Beneficiary view – nephews were specifically identified by the donor as an object ofthe donor’s intent. However, there could be a problem with the second prong saying there was an expectancy that they lost or was diminished due to the lawyer’s negligence. We only know what the will says and anything else is a guess. But, good evidence/guess that they nephews were to take no matter what b/c they were the only ones named in the will.
»Applying Holsapple test, the nephews probably would not win b/c they cannot prove the lawyer’s negligence.
»Question of whether we should allow extrinsic evidence in to prove lawyer’s negligence; does the will speak for itself?
§1.02 An Overview of Inter-Generational Wealth Transfer
[B] Lifetime Transfers
·Devices which effectively transfer wealth at someone’s death, but which are not subject to the probate system.
·Often called a “will substitute” or “probate avoidance device.”
[1] Trusts
·Because trusts are so flexible, they are the single most useful estate planning device.
·Trusts are flexible because the essential elements are so few:
1.1._ property (sometimes called the “res”)
1.2._ held by someone (the trustee)
1.3._ to benefit someone else (the beneficiary).
·The property serves as the principal (or corpus) of the trust, invested to generate income for the beneficiaries.
·Creator of the trust = settlor, donor, trustor or testator – depending upon the situation and local custom.
·A settlor may create a trust either through a lifetime transfer or by will.
·A trust created during the settlor’s life is called a living (or inter vivos) trust. There is no ongoing judicial supervision. Living trusts avoid the probate process.
·A trust created by will is called a testamentary trust. These are typically subject to the continuing jurisdiction and supervision of the probate court.
[2] Other Lifetime Transfers
·While the living trust is the most complex probate-avoidance devise, others are more
common.
·Joint tenancy holdings are popular (real estate, bank accounts, stocks and bonds can all be held in “joint with survivorship” form)
·Because the survivor no longer shares ownership with the one who has died, the decedent effectively has transferred wealth at death; because of the legal theory that the survivor has owned the property all along, however, no probate process is required.
·Funds paid by a third party at the death of someone are often treated as contract rights of the beneficiary, rather than property of the one who died.
·Life insurance is the most common example of this way of giving money at death.
·Usually fall into one of two categories:
1.1._ Term life – covers the risk of someone dying during the term of the policy
1.2._ Whole life – incorporates an investment feather as well
·Both bypass the probate system because they are not viewed as property of the decedent.
· “Payable-on-death” and “Transfer-on-death” is another way to avoid probate
·Statutes have authorized bank accounts and, more recently, mutual funds and other securities to be held in these forms. The explosion of retirement funds has also produced a new way of accumulating wealth and leaving it to survivors outside of probate.
·Subsidiary law of wills – rules about how to interpret documents in various situations – holds many lessons for non-probate transfers.
[C] Guardianships
·People need guardians when they cannot handle their
in 2011
[B] The Gift Tax
·Taxes transfers of property by lifetime gift
·Exclusion of $10,000 annually to each donee (husband and wife each get $10,000 gift annually to each donee)
·Under the 1997 Taxpayer Relief Act, this amount was adjusted for inflation beginning in 1998.
PROBLEM: Bill makes the following gifts this year:
·$5,000 to his daughter C, for a cruise
·$5,000 to his daughter, C for college expenses
·$10,000 to his son, A for a new car
·$10,000 to his son, B for down payment on a house
·$25,000 in jewelry to his wife.
What is Bill’s gift tax liability?
»He has none – can give $10,000 to EACH donee and have no tax liability. There is a marital deduction so you can give your spouse any amount you want.
»What about all the other gifts that are given throughout the year, such as birthday, etc.?
»Presents an ethical problem – do you tell clients who are doing year end tax stuff do you tell them? Can’t advise a client to do something illegal
»Presents a practical problem – will you be caught by the IRS?
PROBLEM: What is Bill’s gift tax liability it he only gift he makes this year is $20,000 to daughter C for college expenses?
»$10,000 tax liability – when does he have to pay?
»Bill doesn’t have to pay tax now; he starts using his unified credit.
[C] The Estate Tax
·Taxes transfers of property upon death
·Methodology:
·Start by identifying the gross estate
·Includes probate property as well as life insurance, joint tenancy property, retirement benefits, property in living trusts, pay-on-death accounts, general powers of appointments, gifts you’ve kept control of
·Subtract deductions (Marital, Charitable, etc.)
·Result = the taxable estate
·If estate under $675,000, no tax owed
·If estate is over $675,000, it is taxed but gets the $220,050 credit for the first $675,000.
·Avoiding probate is NOT avoiding taxes.
[1] The Gross Estate
·Gross estate = accounting concept which attributes to a decedent property in the decedent’s probate estate as well as non-probate property which benefits the decedent.
·Includes probate property as well as:
·Life Insurance
·Joint Tenancy Property
·Retirement Benefits
·Property in Living Trusts
·Pay-on-Death Accounts
·General Powers of Appointment
[2] The Marital Deduction: Planning for Married Couples
·Marital deduction allows decedent to transfer unlimited amounts to surviving spouse tax-free.
·What’s the catch?
·The assets are taxed when they are transferred upon the death of the surviving spouse
·Therefore, unless the surviving spouse depletes the property, the tax is simply postponed.
