Nonprobate Transfers and Planning for Incapacity

Question 1

Major Types of Will Substitutes

Answer 1

1. Revocable inter vivos trust
2. Life insurance
3. Payable-on-Death (POD) accounts
4. Transfer-on-Death (TOD) accounts
5. Individual Pension accounts.

Question 2

1. Should Wills Act formalities be required for validity?

Answer 2

1. most courts say No.

Question 3

Should the subsidiary law of wills apply to will substitutes?

Answer 3

No clear answer, but UPC and Restatement attempt to unify general principles of probate with nonprobate transfers

1. (e.g., divorce revocation, slayer rule, 120 hour survival rule, and antilapse statutes extended to nonprobate transfers).

Question 4

Revocable Trusts -

1. Wills Formalities?
2. Rights of Beneficiaries
3. Settlor as Trustee
4. Revocation or Amendments

Answer 4

1. No Wills Formalities - a revocable trust can be openly acknowledged as a will substitute (without the need for formalities) even if the settlor serves as sole trustee or reserves control over the trust estate.
2. Rights of Beneficiaries - While a trust is revocable [and the settlor has capacity to revoke the trust], rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.
3. Settlor as Trustee - If settlor is also trustee, any action taken by trustee-settlor that diminishes trust corpus cannot be a breach of trust, but is rather an implied revocation of any other beneficiary’s interest.
4. Revocation or Amendments -
   
   1. Presumption of Revocability - an inter vivos trust is revocable unless declared to be irrevocable.
   2. Manner of Amendment/Revocation – a revocable trust can be amended or revoked in any manner that clearly manifests the settlor’s intent to do so, unless the trust instrument specifies a particular exclusive method. (See e.g., UTC 602)

Question 5

The Subsidiary Law of Wills -

1. Restatement View
2. Creditors
   
   1. and Revocable Trusts
   2. and Other Nonprobate Transfers
3. Revocation Upon Divorce
4. Joint Accounts

Answer 5

1. Restatement 3d - the subsidiary law of wills (testation, construction, etc) apply to nonprobate transfers.
   
   1. Note - no uniform rule but this is what professor wants you to know.
2. Creditors
   
   1. Revocable Trusts - if settlor retains power to revoke, the trust property is subject to the claims of the settlor’s creditors during life and at death.
      
      1. Also applies to taxes for IRS purposes.
   2. Other NonProbate Transfers - Although creditors may reach property in a revocable trust settled by the decedent, they cannot reach certain other nonprobate transfers.
3. Revocation Upon Divorce -
   
   1. Majority/Texas/UPC Rule - Statutes in nearly all states provide that divorce presumptively revokes:
      
      1. any provision in a decedent’s will in favor of the decedent’s divorced spouse; and
      2. any provision in a nonprobate asset in favor of the decedent’s divorced spouse.
4. Joint Accounts - Majority/Texas Rule –If an account does not include express language indicating the owners are joint tenants with right of survivorship, the account will not automatically pass to the other if one dies. It will pass as probate property under the intestacy rules

Question 6

Pour-Over Wills - Generally

Answer 6

•A pour-over will only controls the disposition of the testator’s probate property. If the testator makes a later will substitute, the will substitute rather than the will governs the disposition of the property subject to that will substitute.

Question 7

Pour-over Wills - Traditional Thoeries of Validity

Answer 7

Minority Rule – a minority of states still require one of two traditional theories of validating pour-over wills: incorporation by reference or acts of independent significance

1. Incorporation by Reference – A will can incorporate by reference a document in existence at the time the will is executed. So, trust document needs to be in existence at time pour-over will is made.
2. Acts of Independent Significance - a will may dispose of property by referring to some act or event that has significance apart from disposing of probate assets — in this context, by reference to a trust that disposes of property transferred to the trust during life. The trust instrument does not have to be in existence when the will is executed, but the trust must have some property in it prior to the testator’s death.

Question 8

Life Insurance - can changing the beneficiaries of a will alter the beneficiaries designated on a life insurance policy?

Answer 8

no, cannot change beneficiary of a life insurance by will. Need to go to life insurance provider and change beneficiary designation.

Question 9

Pensions -

1. Can you change the beneficiary of a pension by changing the beneficiary of a will?
2. Federal Preemption

Answer 9

1. Changing Beneficiaries -
   
   1. Majority Rule – no, a will is ineffective to change a non-probate account beneficiary designation.
   2. Minority Rule – a change of beneficiary can be accomplished in a will so long as the language of the will is sufficient to identify the account involved and shows an intent to change the beneficiary.
2. Federal Preemption - any ERISA compliant plans (whether pension or otherwise) are subject to federal preemption, which means any contradictory state law regarding disposition is invalid.