Trusts and Estates Outline

 
“You can’t mean what you say if you can’t say what you mean.” –ploss.
 
TRUSTS & ESTATES OUTLINE Fall 2014
 
I.                   INHERITANCE & PROBATE
 
RIGHT v. PRIVILEGE
 
1. Governmental power to regulate
·         In Irving Trust Co. v. Day, the US Supreme Court said as much: “Nothing in the Federal Constitution forbids the legislature of a state to limit, condition, or even abolish the power of testamentary disposition over property within its jurisdiction.”
 
2. Right to transfer –government cannot abrogate completely
·         In Hodel v. Irving, however, the US Supreme Court reversed itself and held that the “escheat” provision of the Indian Land Consolidation Act of 1983 constituted an unconstitutional “taking” of decedent’s property without just compensation. The act completely deprived Indian landowners, without compensation, of the right to dispose of their fractional interests in Indian land by intestacy or devise if the decedent’s interest represented 2 percent or less of the total acreage in the tract and earned less than $100 during the preceding year. The decedent’s fractional interest would “escheat” to the tribe.
 
3. Public Policy Debate:
·         PRO: A person should have the power to transfer his or her property at death because such a policy is consistent with a system of private property; encourages and rewards a life of hard work; is consistent with and promotes family ties; encourages individuals to accumulate wealth for old age and to give to family; and encourages family members to love, serve, and protect their elders.
o   Locke= Practice is Universal & Natural. Strong desire to propagate family wealth and pass along property.
o   Brittain= Inheritance may grant wealth to donees without regard to their competence and performance, but the economic reasons for allowing inheritance are viewed in terms of proper rewards and socially valuable incentives to the donor.
·         CON: A person should not have the power to transfer his or her property at death because such a policy perpetuates economic disparity and discrimination and constitutes an unearned windfall to those who happen to have wealthy relatives –and such unearned wealth creates powers and privileges that are undeserved and denies equal opportunity to all children.
o   Bentham & De Tocqueville= social and political dangers of inherited wealth becoming the basis of enduring privilege. “Great fortune should not remain in the same hands.”
·         HISTORICAL COMPROMISE—permit but tax: Historically, the U.S. has tried to balance competing public policy arguments by permitting wealth to be transferred upon death, but imposing an estate and gift tax at significantly higher rates than those applied to earned income.
o   In 2001, however, Congress passed legislation that would phase out the estate tax via gradual increases in the taxable threshold and decreases in the tax rate. In 2011, the estate tax was restored to 2001 levels.
 
“DEAD HAND” CONTROL
 
“Dead hand control” arises where a decedent conditions a gift to a beneficiary upon a beneficiary behaving in a certain way. By qualifying the testamentary gift, the decedent is attempting to exercise control over the beneficiary even after the transferor’s death. Such conditional gifts are typically made in trust commonly known as an incentive trust.
 
Shapira v. Union Nat’l Bank: Will contained provision that beneficiary must marry a Jewish girl. Beneficiary challenged the qualification as unconstitutional. Court held that restriction was legit and not contrary to public policy. Restriction on inheritance, not on right to marry. No restraint on the freedom of religious practice & only partial restraint on marriage.
 
Gifts requiring a beneficiary to marry within a reasonable time period, even to someone of a particular religious background, have been held valid.
 
Restatement (Third) of Trusts §29(c) (2003): invalidates trusts that are “contrary to public policy.”
 
TRANSFERS OF THE DECEDENT’S ESTATE
 
Probate v. Nonprobate Property: Probate is the default.
 
NONPROBATE PROPERTY: The decedent has to take affirmative steps for the property to qualify as nonprobate property. Historically, only four types of property arrangements have qualified as nonprobate:
1.      Joint tenancy: Joint tenants hold the property in question concurrently. They own it in whole and in fractional shares. The key characteristic of joint tenancy is the right of survivorship. Upon the death of on joint tenant, his or her fractional share is extinguished, and the shares of the surviving joint tenants are recalculated. Technically, no property interest “passes” upon the death of a joint tenant.
2.      Life Insurance: Life insurance is an agreement between the insured and the insurance company that, upon the insured’s death, benefits will be paid to the beneficiary or beneficiaries selected by the insured. Life insurance proceeds are not probate property and are distributed directly to the beneficiaries without being subject to the probate process. At common law, life insurance contracts were the only type of contract with a payment on death (P.O.D.) clause that qualified as a valid will substitute.
a.       Modern Trend—P.O.D. contracts: A life insurance policy is a contract with a P.O.D. clause. The modern trend recognizes all contracts with P.O.D. clause as valid, nonprobate transfers exempt from the probate process.
3.      Legal life estates and remainders: when the party who holds a legal life estate dies, although the right to possession passes to the party holding the remainder, that transfer is the result of the original grantor’s division of the property between the life estate and remainder, not the result of the deceased life tenant passing a property interest. Properly created legal life estates and remainders avoid probate.
a.       Modern Trend—Transfer on Death Deed: A growing number of jurisdictions permit a transferor to create a revocable deed that does not pass any interest until the party dies. This arrangement permits a decedent to transfer his or her interest in real property upon death without the transfer being subject to the probate process.
4.      Inter vivos Trusts: A trust is an artificial legal entity that holds and manages property placed in the trust. Only property properly transferred to an inter vivos trust during the life of the party avoids passing through probate.
 
PROBATE PROPERTY: If the property in question does not qualify as nonprobate property, the property automatically falls to probate as the default system.
 
1. Functions of Probate:
·         Provides evidence of transfer of title to the new owners (clears title and makes property marketable again)
·         Protects creditors by providing a procedure for payment of debts
·         Distributes the decedent’s property to those intended after the decedent’s creditors are paid.
 
2. Intestacy is the default
 
3. Opting out of intestacy: One can opt out of intestacy by executing a will or by executing a will substitute—one of the recognized nonprobate methods of transferring property. If one properly executes a will substitute, the property in question totally avoids probate.
 
 
 
Probate Terminology:
A person dying testate devises real property to devisees and bequeathes personal property to legatees.
 
The Restatement applies devise to both realty and personalty.
 
With intestacy we say that real property descends to heirs; personal property is d