Trusts Wills and Estates Flashcards
Trusts and Wills Opening Argument
“The law of trusts (both the Uniform Trust Code and common law) controls the dispersal of personal property to others under the protection of a fiduciary. Will and probate law governs the disposition of assets upon death.”
What is a trust?
“Trusts involve a fiduciary relationship, in which the grantor intentionally places legal title to property into the hands of a trustee to keep or administer for the benefit of ascertainable beneficiaries”
Requirements of a Trust
“A trust is a fiduciary relationship consisting of a settlor, intent, trustee, property, and ascertainable beneficiaries.” *if SIT with PA factors fail, discuss potential resulting or constructive trust based on all facts and circumstances to determine whether grantor showed sufficient intent to create trust* Settlor / Donor / Grantor / Trustor Intent to Properly Create Trust 1. Objective Manifestation – of present intent to create the trust for the benefit of another; actual transfer is not necessary 2. Mere Desire – not enough to show intent 3. Impermissible Purpose – cannot be illegal or require beneficiary to commit crime or tort Trustee – “The trustee must have legal capacity, can be court appointed if the named trustee fails, and must be someone other than or in addition to the beneficiary.” 1. Capacity – legal capacity 2. Appointment – court will appoint if named trustee refuses to serve, resigns, disclaims (dies) 3. Merger – occurs if only trustee becomes the sole beneficiary; if merger, trust terminates Property / Res 1. Specific Identity – deed of trust or other document of title sufficiently identifying property 2. Future Interest – must presently own or hold vested future interest in property to transfer it; exception is life insurance proceeds Ascertainable Beneficiaries 1. Acceptance Not Required 2. Future Family Beneficiaries – can identify unborn beneficiaries (“all my children”) 3. Class Beneficiaries a. Indefinite Class – trust may fail if too indefinite (“my friends”) b. Defined Selection – trust enforceable if instrument directs trustee to select beneficiaries from well-defined class and standard for selection defined c. Remainder Class – measured when remainder class takes; class members who die before distribution do not take d. “Surviving Heirs” – trust can be created w/term income beneficiary and heir remainder; deceased heirs shares go to remaining heirs 4. Animal Beneficiaries – valid in some states
Inter Vivos Trust
takes effect immediately upon forming
Testamentary Trust
takes effect only upon death of grantor; must comply w/SIT MA and SIT PA
Express Trusts
subject to SOF if testamentary or corpus is real estate 1. Instrument Controls – when in conflict w/statute, but trustee’s duties of good faith and fair dealing cannot be waived 2. Specific Directions – usually provided to trustee; binding 3. Accounting Designation 4. Beneficiary Accounting Designation Conflict a. Distribution Decisions – trustee must make reasonable decisions in good faith; instrument may give trustee absolute discretion to make distributions b. Corpus Invasion – trustee may have discretion to invade trust’s corpus upon some occurrence; e.g., “invade my principal to maintain my spouse’s lifestyle and health”
Implied Trusts
- Resulting Trust – court may find resulting trust where unsuccessful but good faith effort to create trust 2. Constructive Trust – court may find to mitigate inequity or avoid unjust enrichment a. Wrongdoing Remedy – wrongdoer becomes constructive trustee for the properly entitled beneficiary of the property b. Secret Trusts – trustee may have orally promised to hold property for beneficiary and failed to do so; can prove true intent by CACE (extrinsic); court may impose constructive trust
Utility of Trusts
- Reduce Estate Taxes 2. Living Trust – transfers assets when donor dies; helpful if assets in several states 3. Protect Assets – put property beyond reach of creditors or the government 4. Avoid Probate – maintain privacy; reduce delays in property distribution
Promise to Create a Trust
generally unenforceable unless sufficient consideration
Modification/Revocation of Trusts
- Must Reserve Power – in order to modify trust; CL: gift to trust irrevocable unless donor specifically reserves power to revoke, amend, or substitute assets 2. By Agreement – if donor and all beneficiaries agree, and it will not defeat material purpose of the trust 3. Petition for Judicial Proceeding – parties can go to court and ask for alteration of trust a. Interested Party Required – GAL required for minors, incapacitated parties b. Notification Required – to all interested parties c. Court Action – court will hear all evidence, direct trustee d. Equitable Deviation Doctrine – allows courts to equitably modify trust provisions upon unanticipated changed circumstances 4. Non-Judicial Resolution of Disputes – valid only to the extent the agreement doesn’t violate material purpose of a trust
Uniform Transfers to Minors Act
covers irrevocable custodian trusts for the benefit of minors; property ownership vested in minor but control, management, and investment decisions rest solely w/custodian or trustee
Rule Against Perpetuities (RAP) Compliance
non-vested property interest is invalid unless when interest is created (inter vivos or testamentary) it is certain to vest or terminate w/in 21 years after the death of an individual then alive 1. Period Begins – when corpus delivered for irrevocable inter vivos trust; upon grantor’s death for revocable trusts 2. Gifts to Charities – RAP doesn’t apply to trusts where all vested interests are charitable, but if interest goes first to non-charitable interest and charity’s contingent interest is a remainder, RAP applies 3. “Wait and See” Rule – trust is not invalid upon creation; operation of trust continues until last possible time to see if vesting occurs
TRUSTEE’S RESPONSIBILITIES − PIN CALL
“The trustee must administer the trust assets, inform beneficiaries, not delegate discretionary duties, not commingle trust assets with her own, litigate on behalf of the trust, and adhere to the fiduciary duty of loyalty.” A. Properly Administer – “Trustees have a duty to administer the trust in good faith, in accordance with its terms and the interests of the beneficiaries. In most states, trustees are duty-bound to invest trust assets prudently and diversity investments.” 1. Prudent Business Person Investment Standard – trustee’s standard of care, that which a prudent business person would exercise in managing and safeguarding her own affairs and investments a. Two Trustees – must agree on administrative decisions, or a court must decide question b. Three or More Trustees – majority control for admin decisions 2. Preserve Principal and Diversification – duty to safeguard corpus of trust, and sometimes prioritize more than ensuring productivity (that the trust is growing); insure assets; diversify trust portfolio to reduce risk 3. Productivity of Assets and Speculation – try to maximize returns on principal assets w/out heavily investing in highly speculative ventures 4. Total Asset Management Standard – trustee shall consider the overall portfolio of assets B. Inform Beneficiaries – regularly as to activities of trust (assets and income); beneficiary can waive; special notice required if transaction requires more than 25% of trust assets C. Not Delegate Decisions – involving judgment or discretion D. Commingling of Assets Not Allowed – between trusts or trustee’s assets and trust E. Account to Beneficiaries – written statement annually is general rule F. Litigate on Behalf of Trust – and also defend from suit; jdx lies in county of situs of the trust G. Loyalty to Trust − “The trustee’s fiduciary duty of loyalty excludes self-dealing unless it is allowed by the instrument. A trustee must not take an opportunity of the trust, borrow from the trust, or use trust assets as collateral for a personal loan.” - don’t be an SOB 1. Self-Dealings – w/assets of trust 2. Opportunity of Trust 3. Borrowing from the Trust
Liability of Trustee
“The trust’s beneficiaries may bring suit against a trustee for the diminution of the trust corpus and lost earnings. A court may order that a trustee be removed, and appoint a successor. A declaratory action may order specific performance of the trustee’s duties or enjoin the trustee in the future.” 1. Beneficiaries Enforce – specific performance, injunction, or assignment of damages possible remedies 2. Trustee Removal – usually not done by court except for significant cause (unfitness, unwillingness to serve, PINCALL violation) 3. Prior Trustee, Co-Trustee, and Agents – current trustee liable for failure to pursue prior trustee who failed to perform properly; co-trustees j&s liable; trustee liable for improper delegation of duties, or failure to properly select or supervise a negligent agent 4. Trustee’s Defenses a. Instrument Exculpatory Provisions – enforceable for mere negligence lacking bad faith; not enforceable if breach intentional, gross negligence, bad faith b. Consent – if beneficiary knowingly consents or waives trustee’s breach of duty c. Statute of Limitation or Laches – may bar suit if beneficiaries fail to timely bring claim
Ownership Rights of Beneficiary
absolute ownership interests unless terms expressly or impliedly provide otherwise; includes right of transfer if interest vested, or if future remainder 1. Transfer Rights – possible through inter vivos or testamentary transfer; transferee enjoys rights and is subject to any related restrictions 2. Instrument Alienation Restrictions – more likely to be allowed in inter vivos transfer than will; condition cannot violate public policy
Creditors of Beneficiaries
trusts often protect beneficiaries by specifying distribution is not subject to claims of the beneficiaries’ creditors; otherwise judgment creditor can place “charging order” on the trustee to require income distributions be paid to creditor 1. Spendthrift Trust – “A spendthrift trust prohibits assignment by beneficiary or attachment of future distribution by a beneficiary’s creditor.” Charging orders ineffective; subject to exceptions below 2. Support Trust – trustee obligated to pay for beneficiary’s support out of trust funds; limited to reasonable necessaries 3. Discretionary Trust – trustee given sole discretion to make or withhold distribution, beneficiary has no vested interest to be attached by creditors 4. Exceptions – state statute can specify that in certain public policy situations, vendor creditors can access trust a. Necessities b. Family Support c. Taxes d. Self-Serving Trusts – settlor cannot establish “self-settled asset protection trust” to protect property if settler is also beneficiary e. Fraudulent Transfers – creditor can recover assets if transfer occurred after the creditor’s claim arose
CHARITABLE TRUSTS
A. Registration and Enforcement – IRS, SOS B. Exempt from RAP C. Cy Pres Doctrine – court can substitute similarly purposed charity to effectuate grantor’s intent if the stated purpose of the trust becomes impossible
THIRD PARTY LIABILITY
A. Claim Against Trust – in tort or contract; can attach assets of the corpus after obtaining judgment B. Claims Against Trustee 1. Contracts – no personal liability if acting as good faith agent for trust principal; if liability attaches, indemnification from trust may be possible 2. Torts – personal liability for own torts or torts of subordinates if failure to supervise; indemnification only if trustee not at fault and damages arose from normal trust activities C. Claim Against Beneficiary – beneficiaries not liable D. Third Party Liability to Trust – if transferee receives trust property for less than full and fair value; liable to trust and beneficiaries for damages
TRUST TERMINATION
A. Consolidation and Merger – court can consolidate multiple trusts, trustees and settlers if trusts have same purpose and beneficiaries B. Term Expiration – trust may specify termination and pour over into another entity C. Purpose Accomplished, Illegal, or Impossible – court may order termination D. Merger – if beneficiaries and trustee become the same, merger happens; must have adverse interests to avoid merger E. Income Interest Terminates – corpus distributed to the remainder beneficiaries if all income beneficiaries die under doctrine of acceleration F. Donor Termination – can be done unilaterally G. Court Petition – policy of court generally against termination; income and remainder beneficiaries can petition court to terminate the trust; only granted if can show will not defeat any material purpose for which trust created 1. Minor Beneficiary – GAL appointed 2. Spendthrift Provision – doesn’t necessarily prohibit premature termination 3. Settlor and Beneficiaries’ Request – if all agree, court may order termination even if material purpose remains and/or trustee objects
Traditional Formal Wills
“A valid will requires: 1) the testator’s signature; 2) intent to devise; 3) testamentary capacity; 4) mental capacity; and 5) attestation by two witnesses.” 1. Requirements − SIT – MA a. Signed – in front of two witnesses b. Intent – testamentary at will’s execution c. Testamentary Age – 18 years old+ d. Mental Capacity − POT – testator must remember and understand Property nature and extent, Objects of her bounty, Testamentary effect of executing the devise e. Attested to – by two competent witnesses, not beneficiaries or takers, but if they are interested party, it’s not likely to invalidate the will, unless evidence of overreaching or undue influence 2. Court’s Equitable Power – presumption in favor of testacy, court will try and enforce a will as close to testator’s intent as possible; extrinsic evidence of intent OK 3. Components of a Will a. Integration – have testator initial each page and refer to total # of pages at end b. Incorporation by Reference – “A will may incorporate a by reference any separate writing if it is (1) in existence at the time the will is executed and (2) it is sufficiently described and identified.” 4. Interpretation Issues – where ambiguous, court will try to effectuate grantor’s intent by considering extrinsic evidence to explain uncertainty a. Identification of Beneficiaries – “all my children” is enough b. Independent Significance – future taker can be determined under UPC “by reference to acts and events that have significance apart from the effect upon the dispositions made by the will” c. After-Acquired Property – passes under the will unless grantor’s intent to contrary is manifestly clear d. Doctrine of Worthier Title – applies where grantor creates a life estate w/remainder to grantor’s heirs; future interest treated as vested reversion; modern rule abolishes and gives future interest to grantor’s heirs determined as of the death of life estate e. Rule in Shelley’s Case – creation of a life estate w/remainder to heirs of life estate vests remainder interest to the life interest’s heirs, despite common law to the contrary f. Cy Pres Doctrine
Taker Problems
upon death, all takers have a mere expectancy of distribution a. Disinheritance – evidence must be clear and convincing b. Adopted and Half-Blood Children – treated as full parent-child relationship c. Omitted (Pretermitted) Surviving Children – post-testamentary children qualify for a forced share equal to their share had parent died intestate; if pre-testamentary and not provided for in will, children take nothing d. Born out of Wedlock – for intestate succession only, child entitled to full share if paternity established e. Divorce and Annulment – divorce: all provisions of will in favor of ex-spouse automatically revoked; exception applies if bequest survives divorce (e.g., pre-nup); ERISA: former spouses on insurance, employee benefit plans will still take after divorce unless actual K beneficiary is changed f. Omitted Later Spouse – surviving spouse will take half the community or joint property, or intestate share, whichever higher g. Lapsed Devise – named beneficiary dies before testator→returns to residue of estate h. Disclaimer – if beneficiary refuses to accept, and no alternative taker, back to residue i. Class Beneficiaries – membership determined as of testator’s death; class must be sufficiently identifiable; if too indefinite, devise may fail; will may direct PR to select beneficiaries from well-specified class j. “Surviving Heirs” – UPC construes term to mean those surviving as of settlor’s death when the distribution occurs k. Devise to “Issue” – includes potentially all decedent’s blood descendants; do grandchildren qualify? Depends on method specified in will l. Power of Appointment Taxation – named person who decides who takes certain property of decedent = taxed as part of estate; distribution restricted to class = not taxed m. Slayers and Abusers – of decedent take nothing
Property Problems
a. Ademption – when a will specifies a devise of property to a particular taker that was subsequently transferred or destroyed prior to death, taker takes nothing from residue; beneficiary can receive real property acquired before death that was meant to replace, or net proceeds from relevant insurance b. Accession – devised property value increases between will creation date and testator’s death, ONLY designated beneficiary takes increase (stays out of residue) c. Exoneration – applies if a specified asset going to particular devisee becomes subject to liability before testator’s death; devisee receives asset subject to liability d. Satisfaction – UPC: gifts to B’s prior to testator’s death don’t count against B’s share unless donor expressly states so
Codicils
“A codicil modifying an original will or an interlineation changing or eliminating a beneficiary requires all the formalities of a will if it creates a new testamentary scheme or adds new beneficiaries, not merely adding to the residue.” a. New Scheme – requires all formalities of a will, including 2 witnesses b. Republish by Reference – codicil referring to earlier will republishes it
Revocation
1) by physically destroying will w/intent of revocation; two witnesses must attest to destruction; presumption that codicil is also revoked; loss or accidental destruction not sufficient to revoke; 2) by executing a subsequent will a. Effect on Earlier Wills – physical revocation revives a former instrument only if a revival was testator’s intent, as shown by extrinsic evidence b. Codicil Effect – revocation of will in its entirety revokes any codicil unless contrary to grantor’s clear intent c. Partial Revocation – specific gifts can be taken away w/partial revocation, but none can be added w/out SIT MA d. Dependent Relative Revocation (DRR) – revives previous will if court concludes that grantor wouldn’t have revoked will #1 if she knew will #2 would fail
Oral (“Nuncupative”) and Handwritten (“Holographic”) Wills
not valid in many states
Conditional Wills
unless it’s clear something has to occur before the will becomes effective, survival of testator is not a defense against subsequent enforceability of will
Contract to Make a Devise
usually not enforceable absent valuable consideration (e.g., taking care of someone in exchange for her leaving you entire estate)
Mutual or Joint Wills
promise between two parties to devise in the same manner to certain 3d parties; bad idea generally
Family Restrictions on Disposition
family may have rights superior to testamentary scheme 1. Spouse – surviving spouse must ultimately end up w/at least a minimum ½ of all community and jointly-owned husband-wife property; minimum “forced share” also available by motion 2. Children – protection for minor children a priority; court will appoint GAL 3. Past Obligations – for child or spousal support cannot be avoided by re-marrying and naming new spouse as beneficiary in lieu of children 4. Prenuptial Agreement Conflict – pre-nup creates irrevocable contractual rights in divorce or death; usually terms therein are deemed to supersede a prior or subsequent will
WILL CHALLENGES
A. Grounds To Contest – proven by CACE; BOP on contestant; if will invalidated, reverts back to old will or intestate succession 1. Failure to Adhere to SIT – MA Creation Formalities 2. Capacity Absent – minor failure not enough, nor mild intoxication 3. Fraud in the Execution – misrepresentations to testator as to nature, concept, or character of physical will 4. Fraud in the Inducement – willful deceit or duress imposed to induce testator to make or change her will 5. Undue Influence – “To contest a will on the basis of undue influence requires a showing of a large devise, the opportunity to exert undue influence, active participation by the beneficiary in the preparation of the suspicious provision, and a fiduciary relationship.” a. Large Devise b. Opportunity to exert undue influence c. Active Participation of B in preparation of suspicious will provision d. Fiduciary relationship w/testator B. Dead Man’s Statute – prevents “interested party” from testifying about decedent’s oral statements concerning the matter at issue; documentary evidence OK, and non-takers can testify as to intent C. “In Terrorem” Clauses – generally enforceable, but not usually where contest brought in good faith and w/probable cause to believe will is a forgery or revoked D. Previous Will Revived if available, if not decedent presumed to have died intestate
UNIFORM SIMULTANEOUS DEATH ACT
if persons die simultaneously who are intestate takers or whose wills name the other person, heir is assumed to predecease the decedent (by 120 hours) unless clear evidence to contrary; property passes to own alternative specified takers, not heirs of the other
INTESTATE SUCCESSION
“If a person dies without a will, their heirs will take by intestate succession. In most states, the order of succession is: surviving spouse, issue, parents, siblings, siblings’ issue, grandparent’s issue, and finally the state by escheatment.” A. Advancement – The Uniform Probate Code does not view pre-death gifts as an advancement against intestate share. B. Marital or Community Property – most states have “elective share” statutes that require a minimum amount or % of decedent’s property at time of death must pass w/property; decedent spouse takes all decedent’s half-interest in community or jointly-owned property C. Separate Property – 1/3 to surviving spouse and 2/3 to children; if no kids, surviving spouse takes ¾ and ¼ goes to surviving parents or siblings; same-sex couples, step-children take nothing
Determining Shares for “Issue”
includes all blood descendants and is broader group than children 1. Per Stirpes – divided equally at decedent’s children level; predeceased children’s issue share equally amount their parents would have taken had they survived 2. Per Capita – by total head count, only made at level of 1st generation w/live takers a. Per Capita with Representation – shares of deceased generation are pooled at first level of live takers and lower takers share alike b. Per Capita at Each Generation – shares pooled at first level, division at final generation is equal among all takers, so all descendants of same degree from decedent take equal share
Collateral Relatives
if no surviving spouse, issue takes all; if neither, relative w/lowest # of people from decedent takes
Escheatment
estate’s property transfers to state if no takers; exception if decedent inherited property from deceased spouse who has other children surviving (passes to step-children of decedent)
RELATED DOCUMENTS
A. Power of Attorney (durable) 1. “A power of attorney is a principal’s authorization of an agent to operate on their behalf if they later become disabled or incapacitated.” 2. Creation – in writing, using words showing principal intends the authority to continue during disability or incapacity 3. Scope – can limit certain authority 4. Excluded Powers – economic power must be specified to be valid: power to make or amend life insurance Ks, make wills, donative transfers, trust activities, disclaim properties B. Medical Powers 1. Health Care Directive – power to pull the plug; no liability for wrongful death 2. Living Will – directs health care providers to withhold treatment if no hope of improvement C. Anatomical Gift Donation Directive
PROBATE PROCEEDINGS
“Upon a testator’s death, the original will and the death certificate must be submitted to court for probate within 30 days unless the will was destroyed or lost. A copy of the will can then be admitted if there is clear and convincing evidence that the will was not revoked and the court has proof of the proper execution and validity of the will.” A. Jurisdiction and Venue 1. Original Jurisdiction – county where decedent domiciled at time of death 2. Ancillary Administration – in another state if testator property held there as well 3. Matters Covered – very broad; appointment of personal reps, will contests, determination of heirship, title, rights in property, distribution of assets 4. Court Determinations – 1) sell, lease, or mortgage assets, 2) continue decedent’s business, 3) grant authority for partial/interim distributions, 4) approval of final reporting Procedure B. Personal Representative (PR) – administer probate estate a. Designated or Appointed – usually executor of will, surviving spouse, or nearest kin b. Fiduciary Role – trustee responsibilities apply to PR C. Admission to Probate – any interested person can petition court a. Petition Contents b. Will Contest Disclosure c. Lost or Destroyed Wills – must have CCACE of its existence and that is wasn’t revoked d. Non-Intervention Powers – PR doesn’t have to go to court to administer probate 3. Creditors a. Notice and Claim – PR publishes for 3 consecutive weeks in local newspaper b. Claim Approval and Rejection – claims < $1k allowed if not rejected w/in 6 months; claims > $1k must be allowed or rejected c. PR Personal Liability – PR who fails to pay known creditor becomes personally liable unless non-payment was w/out fault on PR’s part Traditional Administration Functions – collect estate assets/debts and make interim distributions to beneficiaries or run estate’s business; PR held to “prudent person” standard; authority to sell property at public or private sales and execute deeds to real property
Alternatives to Probate
“Alternatives to probate include community property agreements, insurance policies, retirement plans, pay-on-death accounts, joint bank accounts, and property held as joint tenants.” 1. Insurance Policies and Pension Plans – beneficiary designation therein controls 2. Joint Tenancies – vests subject property in the joint tenant 3. Pay-on-Death Accounts – balance at death goes directly to named beneficiary outside of probate; donor may w/draw funds before death 4. Trust Res – properly formed inter vivos trust removes transferred property from decedent’s estate; includes living trusts where donor is also a beneficiary; upon death, remaining beneficiary takes outside of probate a. Advantages – greater privacy regarding assets and distribution b. Disadvantages – no four or six-month creditor claim extinguishment 5. Pour-Over Wills – sends all assets at death into a trust created concurrently with or prior to the execution of the will 6. Community Property Agreements – In order for a community property agreement to be valid, it must 1) identify all marital assets as community property; 2) specify that all future-acquired assets are community property; 3) devise all community property to the surviving spouse.
Insolvent Estate Priority
- Costs of Administration 2. Funeral and Last Illness Expenses – Medicaid liens get paid first! 3. Family Maintenance 4. Taxes 5. Judgment Debts 6. Unsecured Debts 7. Beneficiaries
Abatement
shortfall in assets devised to takers; state statutes typically abate both real and personal property by: 1) intestate property; 2) general residual gifts; 3) general gifts of money; 4) specific gifts of non-monetary assets
Taxation
“The executor of a will must file a tax return to the IRS w/in 9 months of death. He may deduct state inheritance tax paid. Charities are generally excluded from tax apportionment.”
