THE ESTATE PLANNING CONTEXT
Inheritance and its Limits
Testamentary Freedom & Public Policy
i. Testamentary Freedom
1. The ability for a person to dispose of his estate by will as he wishes
2. TF is not absolute – certain preexisting obligations have priority over all testamentary dispositions. In general, an executor is responsible for the payment of the decedent’s debts. Among other things for which an estate is liable is property received by the dcedent under a constructive trust, and torts of the decedent.
ii. Permissible Limitations on the right to dispose of property at death
1. Surviving Spouse
a. In all states (not GA though) decedent has to give something to spouse.
b. In WA no death right – but CP laws give wife 1/2 interest in property
2. Children
a. Get NO protection/guaranteed share (Except in Louisiana where minor and disabled adult children cannot be completely disinherited by a will)
3. ERISA/Pension Benefits
a. All money in a pension/retirement plan must be left to the SS – unless SS consents to having it left to someone else.
b. Significant b/c the bulk of one’s wealth is often held in pension
4. Estate Taxes
a. Government takes a bite before any dispositions are made
5. Mortmain Statutes (no longer constitutional)
a. Prohibited making changes to a will w/in a given period of time before death. Statutes invalidated changes and gave forced shares to heirs via intestacy rules.
i. Aimed at “fear of hell wills”
b. Statutes held as unconstitutional limitations on testamentary freedom.
6. Constitutional other public policy-based limitations
a. Conditions waived when:
i. What will demands violates the beneficiary’s constitutional rights to ask them to do what the conditions in the will ask
ii. The court just doesn’t have the stomach to enforce the conditions
b. Non-enforcement of conditions is heavily scrutinized because of strongly held belief in testamentary freedom
iii. Cases
1. Hodel v. Irving
a. F
i. Tracts being divided into increasingly tiny often worthless fractional interests.
ii. ILCA in 1983 required any interest 2% or less of tract as a whole or any interest that earned less than $100 in prior year escheated to the tribe. Effort to consolidate land.
iii. P’s were those who would have inherited but for ILCA. P’s sought injunctive & declaratory relief – said ILCA violated 5th A as unjust taking.
b. R
i. Right to decide who gets your property at death is a stick in the bundle that the government can’t take away without just compensation.
c. H
i. P’s have standing to assert the decedents’ right to control the disposition of their property. The taking of the right to devise without just compensation was an unconstitutional taking.
2. Shapira v. Union National Bank
a. F
i. T’s will bequeathed portion of estate to P (son) on the condition that P was married to a Jewish girl whose parents both were jews at the time of T’s death. If after 7 years, P still hadn’t married such a girl, then his share would go to Israel as the contingent beneficiary. P sues for a declaratory judgment declaring the condition unconstitutional, contrary to public policy and unenforceable. T was wise to have Isra
ii. Codicil directed that if the racial limitation was not enforceable, the gift should go to the University of MD with no restrictions
iii. Nursing home could not enforce b/c it would jeopardize Medicare status
b. R
i. Courts apply cy pres equitable doctrine under which they reform a written instrument with a gift to charity as closely to the donor’s intention as possible, so that the gift does not fail.
c. H
i. Court held condition so offensive that they wouldn’t even “see” it in the document. Completely struck the condition.
ii. Alternative plan not carried out b/c the original condition was so offensive.
Trust as Alternative to Conditional Inheritance as Means of Dead Hand Control
i. Incentive trusts = Can be a good alternative to complete disinheritance. Distributions from trust can be conditioned on passing drug test, being employed or in school.
ii. Spendthrift trust = funds protected from debts of beneficiary’s spouse or from divorce judgment.
Trustee can control the investment of funds to prevent the potential of a beneficiary donating it all to a cult leader or doing something stupid with it.
