Wills and Trusts Flashcards
Insurance Proceeds
A beneficiary of a life insurance policy takes by virtue of the insurance contract. The proceeds are not part of the decedent’s estate, unless they are payable to the estate as beneficiary. Life insurance policies typically provide that proceeds will only be paid to a beneficiary named on an appropriate form filed with the insurance company; other possible methods of changing a beneficiary are thus viewed as being excluded by the insurance contract. However, some courts have upheld a beneficiary change by will if the insurance company does not object.
Incorporation by Reference
A will may incorporate by reference another writing not executed with testamentary formalities, provided the other writing meets three requirements: (i) it existed at the time the will was executed; (ii) the testator intended the writing to be incorporated; and (iii) the writing is described in the will with sufficient certainty so as to permit its identification.
Lapse
Under common law, if a beneficiary died before the testator or before a point in time by which he was required to survive under the will, the gift failed and went to the residue unless the will provided for an alternate disposition. Today, almost all states have anti-lapse statutes that provide for the alternate disposition of lapsed gifts. Typically, an anti-lapse statute will save the gift if: (i) the gift was made to a beneficiary related to the Testator by blood within a certain degree of relationship, and (ii) that beneficiary is survived by issue.
Abatement
Gifts by will are abated, i.e. reduced, when the assets of the estate are insufficient to pay all debts and legacies. If not otherwise specified in the will, gifts are abated in the following order: (i) intestate property; (ii) residuary bequests; (iii) general bequests; and then (iv) specific bequests. Abatement within each category is pro rata.
Trust - Marriage in a Trust
A trust can be created for any purpose, as long as it is not illegal, restricted by rule of law or statute, or
contrary to public policy. Trust provisions that restrain a first marriage have generally been held to
violate public policy. However, a restraint on marriage might be upheld if the trustee’s motive was
merely to provide support for a beneficiary while the beneficiary is single.
Here, because the trust provides that the son’s income interest would terminate upon his marriage no
matter what the circumstances of that marriage, the provision appears to be void for public
policy. There are no facts to suggest that the trust is only intended to support the son while he is
single. On the contrary, this is a mandatory trust, so the trust income is payable to the son without
considering how much financial support he needs.
Trust - Duty of Loyalty
A trustee is bound by a broad range of fiduciary duties, including a duty of loyalty. When a trustee
personally engages in a transaction involving the trust property, a conflict of interest arises between the
trustee’s duties to the beneficiaries and her own personal interest. A trustee buying or selling trust
assets is considered self-dealing, even if the transaction occurred at fair market value. When selfdealing is established, an irrebuttable presumption is created that the trustee breached the duty of
loyalty. No further inquiry into the trustee’s reasonableness or good faith will be required, because selfdealing is a per se breach of the duty of loyalty. When the duty of loyalty is breached, any beneficiary
has standing against the trustee if his interests are violated, and he can choose either to set aside the
transaction or to ratify the transaction and recover any profits therefrom
Trust - Prudent Investor Duty
The Uniform Prudent Investor Act (the “UPIA”) requires the trustee to act as a prudent investor would
when investing his own property. The trustee must exercise reasonable care, caution, and skill when
investing and managing trust assets unless the trustee has special skills or expertise, in which case he
has a duty to utilize such assets. Determinations of compliance under the UPIA are made with reference
to the facts and circumstances as they existed at the time the action was made, and they do not utilize
hindsight. Part of being prudent is taking care to make informed decisions regarding the investment
scheme and/or delegating such decision-making to an expert. In assessing whether a trustee has
breached this duty, the UPIA requires consideration of numerous factors, including (i) the distribution
requirements of the trust, (ii) the general economic conditions, (iii) the role that the investment plays in
relationship to the trust’s overall investment portfolio, and (iv) the trust’s need for liquidity, regularity of
income, and preservation or appreciation of capital. Although the trustee must adequately diversify the
trust investments to spread the risk of loss, investing in one mutual fund may be sufficient if the fund is
sufficiently diversified.
Trust - Money for the income or principal?
All assets received by a trustee must be allocated to either income or principal. The allocation must be balanced so as to treat present and future trust beneficiaries fairly, unless a different treatment is authorized by the trust instrument. The traditional approach assumed that any money generated by trust property was income and that any money generated in connection with a conveyance of trust property was principal. The traditional approach serves as the starting point for the modern approach. Under the UPAIA, a trustee is empowered to re-characterize items and reallocate investment returns as he deems necessary to fulfill the trust purposes, as long as his allocations are reasonable and are in keeping with the trust instrument. A distribution of stock is treated as a distribution of principal under the UPAIA.
In this case, the $30,000 in rents received from the office building and the $20,000 in cash dividends both constitute money that is generated by the trust property. Thus, they should be characterized as trust income. However, the $700,000 proceeds from selling the office building constitutes money generated in connection with a conveyance of trust property, and should be characterized as trust principal. The 400 shares in stock dividends should be treated as trust principal under the UPAIA.
Trust - Disclaimers
A gift to a group of individuals with an automatic right of survivorship is a class gift. A class remains open and may admit new members until at least one class member is entitled to obtain possession of the gift. A vested remainder accelerates into possession as soon as the preceding estate ends for any reason, such as the disclaiming of the estate by its holder. If the income beneficiary of a trust disclaims her interest, then the trust principal becomes immediately distributable to the presumptive remainder beneficiaries of the trust, provided no one would be harmed by making a distribution to them earlier than it would have been made had the income beneficiary not disclaimed.
Almost all states have enacted statutes that permit beneficiaries of trusts to disclaim their interest in the trust property. The state statute here requires that a disclaimer be made within nine months of the testator’s death. If the disclaimer is effective, the disclaiming party is treated as predeceasing the testator.
In this case, the son failed to disclaim his life estate interest because he did not disclaim within nine months of the testator’s death as required by the state statute. If he had been successful in disclaiming his interest, the life estate would have terminated and the grandchildren’s remainder would have accelerated into possession. However, because the son’s disclaimer was ineffective, the prior estate has not been terminated. The class of grandchildren entitled to share in the trust principal will not close until the son’s death.
