Wills, Trusts, and Estates Outline

I.                 Trusts & Estates (Prof. David Herzig)
Fall 2011
Text: Wills, Trusts, and Estates, 7th Ed., Dukeminier, Johanson, Lindgren, Sitkoff
 
I.                   The Policy of Passing Wealth at Death
a.                  Ways a decedent’s property could be dealt with
1.                  Destroy it
2.                  Bury it with the decedent
3.                  Treat it as unowned and allow the first claimant to take possession
4.                  Confiscation by the government
5.                  Honoring the decedent’s wishes
b.                  Arguments supporting the right to inherit
1.                  Least objectionable way to deal with decedent’s property
2.                  Expression and reinforcement of family ties
3.                  Giving/bequeathing expresses affection and/or responsibility
4.                  Encourages property owners to provide for dependants that society would otherwise have to provide for
c.                  Arguments against the right to inherit
1.                  Perpetuates wide disparities in the distribution of wealth
2.                  Concentrates inherited economic power in the hands of the few
3.                  Denies equality of opportunity to the poor (fewer family resources from which to draw means less ability to pay for educational opportunities or to invest in business)
4.                  Rewards fortunate births rather than merit or productivity
d.                  Taxation of inherited wealth
1.                  Taxation of inherited wealth to raise significant revenue conflicts with Anglo-American tradition of freedom of testation.
2.                  An estate tax is a tax levied upon the decedent’s gross estate (probate and non-probate transfers); the tax is paid by the estate. An inheritance tax is imposed on each beneficiary; the size of the tax depends on the size of the bequest, and the tax is paid by the beneficiary.
i.                    Until the early 20th century, estate and inheritance taxes were passed by Congress only when there was an urgent need of revenue, and were promptly repealed once the crisis had passed.
ii.                  The 1916 estate tax was passed during WWI out of similar motives, but was not repealed immediately after the war because of rising social hostility against amassed fortunes. The tax remained in force since, with rates varying but not being repealed. 
iii.                Common loopholes to escape early estate taxes were gifting to charity (both estate and gift taxes allowed for tax-free unlimited gifts to charity) and dynasty trusts.
iv.                Reform began in 1976, and Congress continued to tinker with estate and gift taxes throughout the rest of the century.
a.                   The most significant reform, for T&E purposes, was the establishment of the generation-skipping transfer tax.
b.                  GST tax works as follows: Suppose O leaves property in trust for A for life, then to B for life, then to C for life, remainder to D. The GST tax would be owed at the death of A, B, and C. The tax levied is the highest rate of estate tax.
c.                   The estate tax is being phased out under the Economic Growth and Tax Relief Reconciliation Act passed in 2001; full repeal occurs in 2010 and the Act sunsets (estate taxes return to their 2001 state unless the Act is renewed).
3.                  Some scholars (e.g., Mark Ascher) argue that inheritance by healthy adult children should be heavily taxed – or even taxed out of existence – in order to curb one form of inequality. Inheritance by widows, minors, and the disabled would still be allowed, but heavily taxing inheritance by healthy adults would help even the playing field between the wealthy and the poor. Other proposals in a similar vein include 100% taxation of estates over a certain size.
i.                    Others point out that controlling inheritance does not correct the advantages of fortunate birth. Even were parents not allowed to bequeath their wealth to their children, the wealthy can invest in their children during life (education, business opportunities). (See Langbein’s essay, p. 19.)
ii.                  Additionally, if such controls did not operate to the same extent on gifts, the living would gift property during life, resulting in the same inequalities and avoiding the taxation.
II.                The Problem of the “Dead Hand”
a.                  Generally
1.                  Restatement (Third) of Property § 10.1: “The controlling consideration in determining the meaning of a donative document is the donor’s intention. The donor’s intension is given effect to the maximum extent allowed by law.”
2.                  Restatement (Second) of Property § 7.1: a will or trust provision is ordinarily invalid if it is intended to or tends to encourage disruption of a family relationship.
3.                  Restatement (Third) of Trusts § 29(c): trusts contrary to public policy are invalid. The comments to this provision indicate that restraints on marriage or religious freedom or restrains on beneficiary’s family relationships or choice of career are frowned upon, but must be balanced against conflicting social values.
4.                  Shapira v. Union Nat’l Bank (OH 1924) (p. 21):
i.                    Background: Dr. Shapira’s will provided that his son David would receive a third of Dr. Shapira’s estate only if David was married to a Jewish woman within seven years of Doctor Shapira’s death. David challenged the provisions as unconstitutional (impinging on his fundamental right to marry; argument based on 14th Amendment and Shelley v. Kramer), contrary to public policy, and unreasonable.
ii.                  Holding: Testator’s may restrict a child’s inheritance. Partial restraints on marriage which impose only reasonable restrictions are not invalid, nor contrary to public policy.
iii.                Disposition: will’s provisions enforced.
5.                  Girard Trust Col v. Schmitz (NJ 1941) (notes p. 27): court held invalid a condition that testator’s brothers and sisters not communicate with siblings disliked by the testator.
6.                  The most extreme property-rights advocate would support virtually no limitations on the rule of the dead hand (perhaps stopping short of terms such as “property to X if X kills Y”); the extreme view on the other side is no inheritance rights and total escheatment to the state.
i.                    American law strikes a balance between the two: inheritance rights with some taxation of estates, and limitations imposed by the dead hand will generally be upheld if they are reasonable temporally and geographically.
ii.                  Capricious or overly restrictive conditions will not be upheld, as in the case of the man, a cigar smoker, who left all to his wife if she smoked five cigars a day.
b.                  Review of Future Interests
1.                  Transferor’s Interests (always vested; never a perpetuities problem):
i.                    Reversion: retained interest in the transferor that arises by operation of law when the transferor conveys a lesser estate than she had.
a.                   Example: “O to A for life, then to such of A’s children who survive A.” O has a reversion interest; if none of A’s children survive A, the property returns to O’s estate. If any of A’s children survive, the property goes to them in fee simple and O’s reversion interest is extinguished.
b.                  Reversions are always vested but may not always be possessory. In the example above, O’s interest is vested at creation, but if any of A’s children survive A, O’s interest will never become possessory.
ii.                  Possibility of reverter: a future interest retained by the transferor who conveys a fee simple determinable.
a.                   Example: “O to A so long as A uses the property as a school.” A’s interest is a fee simple determinable: it’s vested upon creation but is subject to divestment if A fails to perform the conditions specified. If A fails to use the property as a school, the property returns to O by operation of law.
iii.                Right of reentry for condition broken: a future interest retained by the grantor who conveys a fee simply subject to a condition subsequent.
a.                   Example: “O to A, but if the property ceases to be used as a school, O has a right to reenter.” A’s interest is a fee simple subject to condition subsequent. If the condition fails, O has the right to seize title to the land, but the land does not revert by operation of law. O must exercise the option to reenter.
2.                  Transferee’s Interests:
i.                    Vested remainder (never a perpetuities problem): a remainder given to a presently ascertained person not subject to any condition precedent other than the termination of preceding estates. Example: “O to A for life, then to B.” B’s interest is a vested remainder because B is presently ascertained and the gift is not subject to a condition precedent.
a.                   Vested remainder subject to divestment: remainder given to an ascertained person, but if a conditions subsequent happens, the remainder will terminate. Example: “O to A for life, then to B, but if B does not survive A, to C.” B’s interest is a vested remainder subject to divestment, with the condition subsequent being B’s death.
ii.                  Contingent remainder (always perpetuities risk): a remainder given to a person not presently ascertained or subject to a condition precedent
a.                   Example 1: “O to A for life, then to A’s children” and A is living but has no children. The gift to the children is a contingent remainder because there are no presently ascertained persons in the class.
b.                  Example 2: “O to A for life, then to B if B survives A; if B does not survive A, to C.” B’s interest is contingent because it is subject to a condition precedent (B’s surviving A).
c.                   Note: “Vested remainder subject to open” is called vested but for perpetuities purposes is contingent.  It’s a remainder given to a class of which there is at least one ascertained member, but to which more ascertained members may be added.  Example: “O to A for life, then to A’s children,” and A is still alive and has one child, B. The class interest is vested because B is ascertained, but so long as A is still alive, more members may be added to the class, which would reduce B’s take.
iii.                Executory interest (always contingent, always a perpetuities risk): an interest that divests either the transferor or another transferee of their interest.
a.                   Example 1: “O to A if A marries B.” If A ever marries B, the property immediately springs from O to A, i.e., O is divested of his interest upon A’s marriage to B. A’s interest is a springing executory interest.
b.                  Example 2: “O to A, but if A dies without surviving issue, to B.” If A dies without surviving issue, the property shifts from A/A’s estate to B. B’s interest i