Wills and Trusts Outline

WILLS & TRUSTS
OUTLINE

Professor Gillett

Chapter 1 – Introduction To Estate Planning

I. DEFINITIONS:

(1) Decedent: Person who dies.
(2) Testate: with a will.
(3) Testator: one dying with a will.
(4) Intestate: without a will.
(5) Executor: Person designated to execute the will.
(6) Administrator: person in charge of gathering and distributing assets when one dies intestate.
(7) Devise: passing or giving real property.
(8) Devisee: person to whom real property is given.
(9) Bequest: passing or giving personal property.
(10) Legatee: person to whom personal property is given.
(11) Succession: the actual taking or receiving of the real or personal property.
(12) Heirs: People entitled to take property if decedent dies intestate.
(13) Beneficiary: person designated to receive life insurance benefits or benefit from trust.
(14) Descendant: anyone in the family line.

II. LIMITATIONS ON POWER TO TRANSMIT PROPERTY

(1) Constitutional Protection: the 5th Amendment prevents the taking of property without just compensation. Therefore, the State cannot abolish both (a) the passing of property by will and (b) the passing of property through intestacy. The State can abolish one or the other but not both. If both are abolished, the State has committed a “taking” in violation of the 5th amendment. [Hodel v. Irving]

3 Factors Courts use to Determine if “taking” has occurred:
(1) Economic Impact of Governmental Regulation;
(2) Interference with reasonable Investment Backed Expectations; and
(3) Character of Governmental Action.

Protections run to Decedent: The Constitutional protections run to the decedent – not the beneficiary. Thus, the decedent has the right to pass the property to whomever he wishes if done by will. Children do not have a constitutional right to inherit property and can be disinherited if the testator wishes.

Not “State Action”: A will does not have to pass Constitutional standards because there is no “state action.” The court merely effectuates the testator’s intent.

Can be Conditioned on Religion: a person has the right to condition his will on religion. Constitutional protections on freedom of religion do not apply.

(2) Statutory Forced Share: The testator can disinherit anyone except for a surviving spouse. The surviving spouse is entitled to a percentage of the estate via statute (statutory share).

(3) Rule against Perpetuities: Trusts and clauses of will devising property are subject to the rule of perpetuities.

(4) Estate and Gift Tax: the estate can be taxed.

a. Federal Estate Tax: the estate has a federal tax exemption of $1.5 million. A decedent may transfer assets to his or her heirs up to $1.5 million tax free. After $1.5 million, the estate is taxed at 50%.

b. Federal Gift Tax: Any individual can make an inter vivos gift up to $11,000 per donee, per year, without paying federal gift tax.

c. Oklahoma State Estate Tax: A decedent may transfer $100 without incurring state estate taxes.

Property given to Spouse not Taxed: the property given to a spouse is not subject to tax regardless of the amount.

(5) Uncertainty: conditions of a will can be void due to uncertainty if it is impossible for the court to determine whether the condition has been satisfied. For example, if the will conditions the grant on the devisee or legatee being a “good Christian,” the condition is void due to uncertainty because the court cannot tell what a “good Christian” is.

(6) Public Policy Restrictions: clauses of a will are unenforceable if they violate the following public policies:

a. Divorce: any provision that promotes or requires divorce is invalid.

b. Family Disharmony: any provision that encourages family disharmony is invalid.

Example: “I give $100,000 to my son but if my son and his wife continue to smoke tobacco, then to the University of Oklahoma.” This provision is enforceable as to the son but not the son’s wife because it would lead to family disharmony if the son was to quit smoking and the wife did not, causing the son to lose the inheritance.

c. Unreasonable Restraints on Marriage: restrictions based on marriage are perfectly legal unless they are unreasonable. They do not violate the fundamental right to marry guaranteed by the Constitution because the Constitution only prevents state action. [Shapira v. Union Nat’l Bank]

“Unreasonable” Restraint: The restraint is unreasonable if the marriage permitted by the will is unlikely to occur. [Rest. (Second) of Property, Donative Transfers § 6.2] The decision depends upon the court and the specific facts of the case. Thus, if the case is in New York where the court is liberal, being gay may render the condition void as marriage is unlikely to occur.

Examples: If the grant says “To Daniel unless he marries Colleen” the restraint would be unreasonable if Daniel was already engaged, or married, to Colleen since another permitted marriage is not likely to occur. Other examples include, clauses that would require that the heir marry at an early age, i.e. before the child reaches the age of consent, etc., and/or clauses that require marriage to a person of a specific religious faith when there are not a lot of people of that faith in the area, etc.

d. Racial Restrictions: racial restrictions of any kind may or may not be permitted depending upon the community and the restriction.

e. Destruction of Property: will provisions cannot encourage or mandate the destruction of pets, houses, or personal property.

f. Destruction of unfinished works: generally, a provision requiring the destruction of an artist’s unfinished work will be enforced unless the court determines that the public’s interest in the work outweighs the artists interest in having them destroyed

Contingent Beneficiary – “Gift Over” Provisions: The testator can include a provision providing that the gift shall go to another person in the event that the court declares that the provision violates public policy and the provision will be enforced by the court. Thus, if the court declares the provision void for violating public policy, it will enforce the gift-over provision.

Invalid Provision and no Contingent Beneficiary: If the will contains an invalid clause and does not provide for a contingent beneficiary in a “gift over” provision, courts have two options:

(1) Give property to original beneficiary: some states will give the property to the original beneficiary free of the restraint; or

(2) Allow property to pass intestate: other states void the gift altogether and allow the property to pass according to the state’s intestacy statutes.

III. PROBATE

“Probate”: probate is the judicial process by which the decedent’s estate is administered. The court ensures that the decedent’s debts are paid and transfers title to the decedent’s property to the beneficiary of the will, if the decedent had a will, or the decedent’s heirs pursuant to the state’s intestacy statutes.

Two (2) Types of Probate:

(1) Primary or Domiciliary Probate: The decedent’s estate is probated in the jurisdiction where the decedent was domiciled at the time of death. The court has jurisdiction over (a) all of the decedent’s personal property and (b) the decedent’s real property located within the state.

(2) Ancillary Probate: If the decedent owns real property in a state other than the one in which he was domiciled at the time of death, a second probate, known as an ancillary probate, is required in the additional state or states where the real property is located. Since the original court only has jurisdiction over the decedent’s real property located within that state, a subsequent probate must be filed within the other states in order transfer title of the real property to the decedent’s beneficiaries or heirs.

Non-Probate Property: the following classifications of property pass outside of probate:

(1) Joint Tenancy Property: all property held in joint tenancy (e.g. real estate, bank accounts, etc.) pass outside of probate. The decedent’s interest vanishes at death. Once death occurs, the remaining joint tenant files a death certificate and title to the property is then transferred to the remaining joint tenant only.

(2) Life Insurance: Life insurance proceeds are paid to the named beneficiary upon death. The life insurance is a contractual matter and, thus, probate is unnecessary. Upon presentation of a death certificate, the proceeds are paid directly to the named beneficiary.

(3) Contracts containing “Payable-on-Death” Provisions: If the decedent has a contract with a bank, employer, or other person or company to distribute certain property (usually a pension plan, IRA, or other type of “investment” plan) to a named beneficiary upon the decedent’s death, the property passes outside probate as a matter of contract law. Upon presentation of a death certificate, the property is paid directly to the named beneficiary.

(4) Interests in a Trust: When a decedent transfers property to a trust, the trustee holds the property for the benefit of t