dying without a will

A person or property can be intestate

person entitled to take under the intestate succession law

no heirs when alive -> heir apparent

State where residence is located rules law (property)

State where person lives rules law (personal)

Federal law governs estate and gift taxes

lack of property

unaware of importance

indifference

cost time and effort

complexity

admission of mortality

reluctance of reveal private facts

rule of descent under which the oldest male inherits real property to the exclusion of younger males of equal relationship to the decedent

(think Jane Austen)

• identify intestate’s children

• determine if any predeceased child left a descendant who outlived intestate

• ascertain state’s method of handling multigeneration succession

heirs of equal degree take equal shares ( all children still alive)

BY THE HEAD

heirs take shares by right of representation at the generation closest to the decedent

BY WIDTH OR STOCK

Parents and First-Line Collaterals

first Grandparents and Second-Line Collaterals next

conceived before but born after intestate’s death if descendant, child inherits

if more distant relative, does not inherit

• treated like biological of adoptive parents

• adopted child inherits through the adoptive parents and their relatives

• adopted child may or may not inherit from biological parent; states vary

• adoptive parents can inherit from adopted child but biological can’t (unless split)

• previously could not inherit from biological mother or father

• now enjoy same rights as marital children

• although higher standards to prove paternity to inherit from father (sometimes after death)

• most states that eliminated the distinction between half and whole blood

• some states use Scottish rule where half-blooded only receive half shares

• few states allow half-blood to inherit only when no whole-blood her of same degree

• Murder - slayer’s statutes -> prohibits a murderer from inheriting the victim’s property

• Voluntary Manslaughter – usually prohibits inheritance

• Involuntary Manslaughter – usually inherits

• Noncriminal Killings – retains ability to inherit

• Heirs receive equal shares of both inter vivos (during life) and at-death transfers
• Advancements are irrevocable; heir does not have to pay if advancement is disproportionately large
• Any asset advancements are valued at the date of the advancement; appreciation and depreciation are ignored when going to hotchpot
• Burden of proof on heirs to prove gift was an advancement
• Advancement are usually not counted if advance predeceases decedent

• period by which an heir must outlive an intestate to inherit

• usually five days

• if heir dies prior to survival period, the property passes as if the heir had actually predeceased the intestate

• must have clear and convincing evidence of survival

• survival period does not apply if escheat would result

• undesirable property (land with toxic chemicals)

• moral or religious grounds (wrong to benefit from a death

• prevent creditors from taking property

• reduce tax burden

passes as if disclaiming heir predeceased decedent

heir cannot direct in any manner the distribution

decedent dies before house is closed

real property is treated as personal property

No right to make a will

states have granted this privilege

Must comply with state requirements to make will valid

1. Legal capacity
2. Testamentary capacity
3. Testamentary
4. Intent Formalities

age - emancipated minors

marital status - may permit underage if married 

military service

• comprehends action being taken and effect
• does not need to know term "will"
• knows nature and extent of his or her property - size of estate is significant
  
• recognizes natural objects of his or her bounty - miscounting or not remembering names does not deprive
• has elements in mind long enough to make reasoned judgment videotape can reduce challenge to testamentary capacity

Incapacitated people who have lucid intervals may have testamentary capacity

before or after execution does not matter, only during

Testamentary capacity

Standard

Testamentary capacity

mentally challenged individuals

• cautionary - make sure the testator had intention

• evidentiary - create reliable evidence of intent

• protective - harder to exert undue influence

• channeling - reassures testator that actions will be carried out

• connects testator with will and gives an air of finality
• required signature may be marks or fingerprints
• animus signandi: present intent to authenticate a document by signing it
• proxy signature: signed by another
  • must be signed in testator's presence
  • must be signed at testator's direction
  • testator doss not need to physically or educationally enabled to use a proxy
  • must use senses to witness proxy - phone call is no good but teleconference may be
• signature should be at the end of the will
  • do not leave blank space, because unauthorized insertions can be made; use asterisks or “signature page to follow”
  • include testamonium clause before signature

two witnesses are required to attest a will, should be at least 18 yrs old, and have capacity to know whether testator must publish will

announce to witnesses what document they are witnessing

• familiar with testator

• greater than the required number

• youthful and healthy

• traceable

• favorable to impress the court and jury

Will Execution Ceremony

Before the ceremony

proofread the will

ensure internal integration

make sure cohesive document

review will with testator

explain ceremony to client

Will Execution Ceremony

The ceremony

• select appropriate location
• avoid interruptions
• gather participants
• seat participants strategically
• make general introductions
• explain ceremony
• establish testamentary capacity
• establish testamentary consent
• conduct will execution
  • use blue ink
  • have testator initial each page
  • testator signs and dates will
• conduct witness attestation
  • witnesses sign and write home address
  • have witnesses initial each page
• complete self-proving affidavit before notary
• conclude ceremony

Will Execution Ceremony

After the ceremony

• confirm testator’s intent

• make copies of will

• discuss safekeeping of original will
  • usually with attorney

• provide testator with postwill instructions

emergencies

privacy

interim will

entertainment

• types of property covered – no real property
• amount of property
• condition of testator
• location of speaking will
• rogation testium – request that witnesses bear witness to the will
• number of witnesses
• proof
• notice

testamentary gift described in sufficient detail to identify the exact asset mentioned

“I leave my blue 2003 Honda Civic sedan…”

testamentary gift not described in sufficient deal to be a specific gift

“I leave a car…”

testamentary general gift of money

“I leave 25K to…”

general testamentary gift to be paid from a designated source

“I leave $25K from my account #5263478 at National city Bank…”

not very common

testamentary gift of property remaining after specific, general, and demonstrative gifts are satisfied

*can be unimportant, low-value property or can be the bulk of the estate

gift to a qualifying entity for social benefit

*if litigation occurs, state will be notified and attorney general has the right to intervene in the action

rule of construction that a general term following a list of specific items is to be interpreted to include only items of the same kind or class as the listed items.

“watch is not the same type of gift as cash, so cash cannot satisfy a specific watch”

• cash dividends belong to the person who owns the stock on the record date
• stock dividends and splits are changes in form, not substance
  • “I leave my 100 shares “– get all 250 shares
  • “I leave 100 shares” – get only 100 shares
• mergers are changes in form, not substance; gift will transfer
• dividend reinvestment is a change in substance – only get what was specifically stated in will

• beneficiary takes a specific testamentary gift free of encumbrances

• implied that money from the estate will pay off any debts on the property

• occurs only if there is express language requiring it in the will

1. property passing via intestate succession

2. residuary gifts

3. general gifts

4. demonstrative gifts

5. specific gifts prorate

*gift to a spouse is the last to abate

Marriage of Testator

common law v. modern law

• common law - the will of a single woman was revoked upon marriage
• modern law - the forced or elective share: a surviving spouse’s statutory right to a portion of the deceased spouses estate in lieu of the benefits , if any, provided in the will
• net probate estate or augmented estate (includes life insurance or jointly held property)
• not needed in a community property state
• ownership of earnings between spouses is governed by the law of the spouse’s domicile at the time the property was acquired

•  upon divorce, all provisions of a will executed during marriage in favor of an ex-spouse are void

• if spouses divorce then remarry, original terms of will stay in effect

• treat ex-spouse as legally predeceasing testator

• other ex-relatives may still receive gifts from will

• void of spouse will only be triggered on final divorce, not separation or filing for divorce

• children unintentionally omitted from a will

• better chance for forced share if omitted child is born after will is executed rather than before

• some states only provide for pretermitted children, not grandchildren

• if testator fails to provide for a living child solely because testator thought that the child was dead, the child is entitled to a pretermitted child share

Pretermitted Heirs

Excluded Situations

• will actually provides for pretermitted child (inclusion of class gift to children)
• provide for pretermitted child by way of nonprobate transfer
• extrinsic evidence demonstrates testator’s intent to exclude pretermitted child (Massachusetts-type statutes)
• will demonstrates an intent for pretermitted child not to share in estate (Missouri-type statutes)
• entire estate is left to pretermitted child’s other parent

Pretermitted Heirs

Determination of Share

• receives as if testator died intestate
• entire will revokes, and whole estate passes by intestacy
• intestate share only of the property that does not pass to child’s other parent
• if will leaves property to some of the children, pretermitted child’s share is limited to an intestate share based solely on these gifts

• if dead before will execution, gift is void

• alternate beneficiary should be named in will

• anti-lapse statute - law that provides for substitute beneficiaries to prevent a lapsed gift

• if not saved by statute, gift passes through to residuary clause

• goal is to provide a distribution that testator would have preferred over property passing under residuary clause or intestacy
• can be limited to testator's certain predeceased relatives
• some are broader and can include saving all gifts
• can be applied to class gifts
• naming an alternate beneficiary supersedes any anti-lapse statute

ambulatory

not legally effective until death

1. operation of law

2. revocation by physical act

3. revocation by subsequent writing

Revocation of Wills

Operation of Law

• automatic on occurrence of specified events or circumstances designated by law
• no extrinsic evidence allowed
  • marriage - forced share
  • divorce - provisions of former spouse are void
  • pertermitted heirs - forced share
  • death of beneficiary - anti-lapse statute may apply
  • beneficiary killed testator - precluded from unjust enrichment
  • alienation - inter vivos transfer
  • elapse of time - no revoke; will is distributed as stated
  • change of feelings toward beneficiary - no revoke; will is distributed as stated

Revocation of Wills

By a Physical Act

four requirements

1. capacity to revoke

2. intent to revoke

3. satisfactory physical act performed on the will

burning, tearing, cancelling, destroying by proxy - act as testator's direction and in testator's conscious presence

4. simultaneous existence of the first three requirements

Revocation of Wills

Partial Revocations

permitted under modern approach

• interlineation - words added to existing text
• strike-out - words removed from existing text but still readable
• obliteration - words removed from existing text and no longer readable

Revocation of Wills

By Subsequent Writing

• new will, codicil, document of revocation
  • express revocation of previous will at the beginning of new will
• revocation by inconsistency - will executed closest to time of death controls
• new wills are preferred to multiple codicils
• presumptions
  • nonrevocation = presumption of continuity - testator died without revoking his will
  • source of will and will itself must be free of suspicion
    
  • revocation = presumption will was revoked if cannot be found at testator’s death
• revival – reinstatement of a revoked will
• most states follow a no revival approach
• conditional revocation
  • express condition -> rare 
  • implied condition = dependent relative revocation 
• multiple originals -> not recommend, because later changes to one can conflict with the other

Ambiguity of a Will

Patent

(obvious) unclear on its face

strangely described item ->resolved by extrinsic evidence

secret code -> resolved by extrinsic evidence

blank spaces -> rejected and would pass to residuary

Ambiguity of a Will

Latent

(Hidden) conveys sensible meaning on its face, but cannot be carried out without further clarification

beneficiary misdescription -> resolved by extrinsic evidence

property misdescription -> falsa demonstration non nocet – gift does not fail merely because its description is not precisely correct

Ambiguity of a Will

no apparent ambiguity

• provision is neither latently or patently ambiguous

• intro of extrinsic evidence that the testator did not mean for the will to say what it appears to say

• plain meaning rule – extrinsic evidence may not be used to disturb the plain meaning of a will

Integration

External

establishing the testator’s will by piecing together all wills, codicils, and testamentary instruments

To avoid external integration problems:

• all testamentary instruments should state the date of execution
• execute new will instead of codicil
• revoke old will by physical act

Integration

Internal

ensuring that the testator’s will contains all the original pages

To assure continuity:

• initial all pages
• securely fasten
• uniform paper and font throughout
• avoid blank spaces
• do not conclude each page with end of a sentence

incorporating the provisions of an existing document into a will by referring to the document in the will

incorporated document does not need to be legally effective or valid, just merely in existence

Incorporation by Reference

Requirements

1. intent – intend to incorporate the writing into the will

2. in existence – document is already written

3. identification – identify document with sufficient specificity

valid codicil can bootstrap the terms of an invalid will

treating an earlier will as if it were executed at a later date

• reexecute the same document
• execute codicil to existing will

doctrine allowing the use of circumstances outside the will to affect the disposition of property made in the will

• specific gift of a general name
• identity of beneficiary
• class gifts
• composition of gifts of contents of items are based on the contents at the time of the testator’s death

contents usually limited to tangible personal property and does not include items represented by certificate or title

property disposition note does not transfer property, because only significance is to dispose of property

• provision making a gift to an inter vivos trust

• trust does not need to be in existence when testator dies

• current terms of the trust determine beneficiaries, not when testator dies

“I wish”

• does not impose legally enforceable responsibilities

• courts are more willing to follow precatory language regarding administrative matters than gifts

gift to a group of beneficiaries designated be a generic reference rather than by their individual names

• specific listing of beneficiaries governs over the general use of a class reference
• time at which class membership is determined
  • indicated in will
  • natural closing – when it is impossible to add additional members
  • rule of convenience – when an existing member is first entitled to distribution

must have standing to contest a will – pecuniary interest 

expectancies and moral interests are insufficient

• testator lacked legal capacity

• testator did not have testamentary capacity

• testator did not execute the document with testamentary consent

• document and its execution did not comply with the requisite formalities

Will Contests

Insane Delusions

• testator’s mind is so warped by a false and unfounded belief that the testator cannot make a rational disposition of property

• testator believes to be true something that is actually false

• no credible evidence supports that belief

• cannot be a mere false belief – when confronted with facts, still believes falsehood

Will Contests

Nexus between delusion and will

must be a link between the delusion and property disposition

lack of nexus – will is valid

existence of nexus – will is set aside

religious-based delusion – courts usually do not charge as invalid

course of conduct designed to overpower testator’s mind and manipulate testator’s thoughts and actions

• influence exerted over the testator must be undue
• influence must subvert the testator’s mind
• influence must cause the testator to execute a will the testator would not have signed but for the influence

must be more than mere influence; spending time, buying gifts, etc.

•  direct evidence – rare, usually done in secrecy
• circumstantial evidence
  • motive
  • untraditional disposition
  • opportunity and access
  • relationship between testator and alleged undue influencer
  • susceptibility and ability to resist
  • connection between will and alleged undue influencer

 loss of gift

loss of law license

• limits gifts to charities

• requires the testator to survive by a certain period of time after executing a will containing a charitable gift

• certain percentage of testator’s estate

•  false representation

• knowledge of falsity

• reasonably believed

• causation

testator is deceived about the identity of the document or the contents of the will

• identity of instrument – another document is substitutes; also lacks testamentary intent

• contents of instrument – item is purposely left out or included without testator’s knowledge

testator is in error about the identity of the document or the contents of the will

• identity of instrument – lacks testamentary intent
• contents of instrument, inadvertently included provision – lack of testamentary intent
• contents of instrument, missing provision – courts unwilling to add to will, because of high risk of fraud

testator falsely believes a fact to be true and bases the will on that fact

• in absence of fraud or undue influence, courts do not permit mistakes to defeat the probate of a will
• should be written as a conditional statement to avoid mistakes

Contests of Wills

Remedies

• entire will could be ineffective – passes by intestacy or under a prior will

• portion of will is ineffective – that particular gift is void

• constructive trust can help prevent unjust enrichment

Preventing Will Contests

no-contest provision

beneficiary who contests the will loses some or all benefits under the will to be effective

must place disgruntled beneficiary at significant risk

Preventing Will Contests

statement of reasons for disposition

Preventing Will Contests

mean-spirited language

can bolster heir’s desire to contest

can also cause testamentary libel

• no-contest provision – beneficiary who contests the will loses some or all benefits under the will o to be effective, must place disgruntled beneficiary at significant risk
• statement of reasons for disposition
  • can ease a beneficiary’s anger for lesser gift
• mean-spirited language
  • can bolster heir’s desire to contest, can also cause testamentary libel
• holographic will – aura of validity; can serve as an unrevoked prior will
• affidavit acquisition – evidence of testator’s capacity around time of execution
• transaction documentation – letter explaining disposition scheme and the reasons behind it
• video-recording of the will execution ceremony
• preservation of prior will
• repeated wills
• traditional disposition
• nonprobate transfers
• simultaneous gift to heir – lack of testamentary capacity means simultaneous gift is also invalid
• contract not to contest
• antemorteum probate – probate while still alive
• family settlement agreement
• tortuous interference with expectancy – tort cause of action arising from improper interference with the plaintiff’s expectancy as an heir, beneficiary, or donee

will is effective only on the occurrence of a stated event or truth of a given statement

must name an actual condition and not just be a statement of inducement

condition precedent- condition must occur before a beneficiary may claim a gift

condition subsequent – beneficiary keeps a gift until a condition occurs

merely stating that a gift is to be used for a particular purpose does not impose a condition on the gift

courts are prone to uphold conditions based on personal habits

conditionals gifts should not go against public policies

single testamentary instrument containing the wills of two or more persons

rarely, if ever, appropriate

separate wills that contain parallel dispositive provisions

sweetheart wills

usually between husband and wife only married to each other and no children from other partners

• will that is either executed or not revoked as a consideration for a contract
• contract is revocable while contracting parties are alive
• if subject property is disposed of while alive, courts vary in resolution
  • constructive life tenant or change or second will without breach of contract
• revocation of 1st will
  • revocation is effective, but constructive trust may be the most common remedy
• service contracts
• quantum meruit – damages awarded as the reasonable value of services performed in a quasi-contractual relationship

Estate Administration

Reasons for formal process

successors in interest need proof that they are indeed the new owners of the decedent’s property

decedent’s creditors need to be paid

Estate Administration

steps of administration for personal rep

collects all of decedent’s probate assets

preserves and manages the property in a fiduciary capacity

pays creditors

distributes any remaining property to heirs and beneficiaries person with pecuniary interest will start the process of estate administration

1. locate the will
2. prepare application to initiate probate
3. file application in appropriate court
4. clerk of court gives citation
5. probate of will or determination of heirs
6. appointment of personal representative

Estate Administration

clerk of court gives citation

notifies interested party that a will has been filed for probate

solemn form probate – formal, noticed probate

common form probate – informal, ex parte probate

dependent – traditional estate administration in which mist steps are directly supervised by the court

independent – informal administration in which many steps are not supervised by the court

summary – abbreviated administration where an estate is small or debts are few

honesty

common sense and good judgment

financially responsible

investment experience and skill

awareness of legal issues

fiduciary personality

longevity

proximity

lack of distractions

prior approval

successors

• takes an oath of office
  • may need to post bond – deposit of money to ensure the proper performance of a personal rep’s duties
• court issues:
  • letters testamentary – testate
  • letters of administration – intestate
• collect and protect decedent’s probate assets
• manage decedent’s probate assets
• inventory and appraisement
• protect certain property from creditors
  • homestead – residence used by a decedent and his or her family
    • creditor protection
    • occupancy rights
  • exempt personal property
  • family allowance
  • waiver of protections
• notice to creditors
• pay creditors
• provide reports and accountings
• distribution and closing estate

• Provide non-estate planning benefits
• Accelerate asset distribution
  • consequences of probate delay
  • heirs and beneficiaries are unable to use property
  • property suffers from a gap in management
  • emotional impact of lengthy administration is prolonged
• Reduce estate planning and administration expenses
• Enhance confidentiality
• Minimize taxes
  • taxable estate may include property that is not part of the probate estate
• Retain flexibility
• Change with less difficulty
• Protect from creditors
• Isolate from contest
• Increase understandability

Outright Inter Vivos Gifts

Elements

present donative intent

delivery

acceptance

Inter Vivos Gift

Donative Intent

must be voluntary

no consideration, unless close relative and value exceeds consideration

must be immediately effective

irrevocable and unconditional

Inter Vivos Gift

Delivery

• property should leave donor's sphere of authority such that donor cannot stop transfer
• safety deposit box and escrow agent can be problematic
• constructive delivery - donor of property transfers to the donee the means of obtaining the property rather than the actual property
• symbolic delivery - donor gives the donee something that represents the property rather than the actual property
• deed of gift - written instrument that evidences donative intent, names the donee, and describes the property
• corporate stock: may need certificate or need corporate books changed to reflect new owner

Inter Vivos Gift

Acceptance

Inter Vivos Gift

Potential Benefits

donee's immediate enjoyment

donor satisfaction

donor relieved of responsibility

tax reduction

creditor protection

reduce elective share of surviving spouse

Inter Vivos Gift

Potential Disadvantages

• irrevocability

• lack of control

• leverage reduction

• jealousy

• minors and incompetents lack legal capacity

• transfer taxation

gift in contemplation of death

conditional and revocable

Transfers of Future Interest

future interest

Transfers of Future

interest remainder

an ownership interest in property that takes effect on the termination of a preceding estate, typically a life estate

vested - unconditional right to possession

contingent - right to possession only if condition precedent is satisfied

Transfers of Future Interest

executory interest

• right to designate the new owner of property
• donor - person severing ownership
• donee - person with power to appoint property
• objects of power - prospective new owners
• appointee - new owner after domed exercises power
• default taker - new owner if donee does not exercise power
• reverts to donor if default takers are not named

Power of Appointment

General v. Special

general power of appointment - no limitations on who can be appointees

special power of appointment - donor specifies who can be appointees

direct

in trust

transfer to custodian of minor

• own equal undivided shares with right of survivorship
• four requirements of unity
  • time, title, interest, and possession
• Shares are equal even if one owner puts in more money
• Profits and liabilities from ownership are also shared equally
• can be severed by one of the owners to a third party

joint tenancy only by spouses

right of survivorship and cannot be severed by one of the spouse by conveying to third party

Joint Account

Ownership Rights

• during life - rights proportionate to a party's net contribution; not an immediate gift as in joint tenancy
• after death - rights go to other party or heirs; depends on rights of survivorship
• withdrawal rights
  • during life & after death - unlimited rights to withdraw any or all money from account

withdrawing party may be liable for conversion if the amount is in excess of his net contribution

Rights of survivorship should be explicitly stated

Extrinsic evidence may or may not be used

joint account without survivorship rights reason

[out of country or ailment]

payable to a designated person on the death of all original depositors

payee must outlive depositor; does not transfer to payee's heirs

held in revocable trust for a beneficiary

many states treat trust accounts as POD accounts

• wills do not usually affect, because account never reaches the estate
• not effective to evade creditors, because funds could be reached prior to death
• effect of divorce depends on state law
• mandatory survival period
• effect of depositor’s incapacity

• owner pays premiums, and upon death insurer pays proceeds to beneficiary

• must have insurable interest to obtain life insurance policy

• no income tax on life insurance proceeds

• term – paid if insured dies during designated term
• whole life – paid when the insured dies at any time
  • cash surrender value can be used as collateral
  • not a competitive rate of return on the cash value
  • constant premiums until advanced age, then no premiums needed
• universal life – whole life insurance in which the cash value receives a competitive rate of return
• endowment – whole life insurance in which premiums stop at a younger age and the cash value equals the face value at that time
• split dollar – insured and employer contribute to premiums and employer receives a share of the proceeds

• lump sum

• installments

• interest or deposit

• cannot collect if beneficiary intentionally killed insured

• mandatory survival period

• effect of divorce of beneficiary from insured depends on state law

second-to-die policy – payable only when second person dies (provides for children)

first- to-die policy – payable when first person dies (provides for spouse)

contract between an annuity provider and a purchaser in which, on payment of a lump sum, the provider agrees to make periodic payments to an annuitant for life or for a fixed term

protects a person from exhausting the person’s estate by living longer than anticipated

• commercial annuity – purchased from a company in the business of selling annuities
• private annuity – purchased from a private individual
• joint life annuity – payments are made until the first of two annuitants dies
• joint and survivorship annuity – payments are made until both of two annuitants die
• straight annuity – payments are equal
• variable annuity – payments depends on the investment success of the annuity provider

Employee Benefit and Retirement Plans

qualified plan

• defined benefit plan – determined amount is paid for a certain number of years or until death
• defined contribution – employer contributes to plan on employee’s behalf
• 401(k) – percentage of employee’s salary is put into benefit plan
• employee stock ownership plan – employer puts money into trust for employee to purchase company stock
• Keogh plan (HR-10) – self-employed benefit plans
• classic IRA – tax paid at end
• ROTH IRA – tax paid that the beginning

1. divide the title to the property into legal and equitable interests

2. impose fiduciary duties on the holder of the legal title to deal with the property for the benefit of the holder of the equitable title property

• principal, corpus, estate, res

*arises when an owner wants to bestow benefits but does not want to make an outright gift

creates trust by making the property transfer that divides title and imposes duties

(trustor, grantor, donor)

• Provide for and Protect Beneficiaries
  • minors
  • individuals who lack management skills
  • spendthrifts
  • persons susceptible to influence
• Flexible Distribution of Assets
• Protection against Settlor’s Incompetence
  • avoids outright gift that needs an inconvenient and costly guardianship
  • stand-by trust: settlor maintains considerable control over the trust property but designates a successor trustee in event of the settlor’s incapacit
• Professional Management of Property
• Probate Avoidance
• Tax Benefits
• Avoids Conflicts of Interest

express: created by express intent of the settlor

private: created for private beneficiaries

charitable: created for charitable beneficiaries

• Trust Intent
• Capacity
• Statute of Frauds Compliance – trust intent must be in writing
• Purpose – must not be illegal or against public policy
• Property – must be placed into trust and the trust must continue to hold property
• Trustee – must hold legal title and be obligated to deal with the property for the beneficiaries’ benefit
• Beneficiary – must hold equitable title to the property
• Rule Against Perpetuities – duration of private trust cannot exceed period permitted by the Rule

threshold factor in determining whether a conveyance of property is sufficient to create an express trust

Elements:

1. title divided into legal and equitable components

2. fiduciary duties imposed on holder of legal title

settlor does not need to understand the legal jargon to have intent

mere use of trust terminology is insufficient to show trust intent

precatory requests are not enough to impose the legally

enforceable responsibilities associated with being a trustee; lack of intent
future intent is insufficient to create a trust (unless actually follows through on intent)

Statute of Uses

Active Trust v. Passive Trust

active trust – trustee needs legal title to perform power or duty for beneficiary’s benefit

passive trust – trustee holds legal title without power or duty

Trusts

Split Title

• settlor must split title to trust property so that the same person does not own all legal and equitable interests in that property

• settlor may retain legal or equitable interest but not both

• co-beneficiary may also serve as trustee

• co-trustee may also be beneficiary

• two people may be trustees and beneficiaries, as long as they are not united in one person

Trusts

Merger

termination of a trust because the legal and equitable title to trust property become reunited in one person

trustee conveys to beneficiary – trust ends early; unlikely cause gives trustee bad reputation

beneficiary conveys to trustee – unlikely cause against public policy

trustee and beneficiary convey to third party – unlikely

• agency – no split of title
• bailment - transfer of possession of personal property from the owner to another for a specific purpose o change of possession, not title
• condition subsequent – no split of title and did not impose fiduciary duty
• custodianship – fiduciary duty but no title
• debt – full legal and equitable tile, so not trust
• equitable charge – equitable right to have a claim satisfied form particular property; no fiduciary
• guardianship – fiduciary relationship but no title
• personal representative of decedent’s estate – fiduciary relationship but no title
• power of appointment – no tile or fiduciary duty
• security arrangements- do not involve split title

Methods of Trust Creation

During Settlor's Lifetime

living trust = inter vivos trust

declaration of trust – settlor declares himself trustee and transfers equitable title to beneficiaries

transfer in trust – settlor transfers legal title and imposes fiduciary duties on trustee and retains or transfers equitable title to beneficiaries

Methods of Trust Creation

Upon Settlor’s Death

The Settlor

Capacity & Retention of Powers

• must have capacity to convey property to create a trust

• capacity for a testamentary trust is the same as executing a will

• if settlor names himself as trustee and has the option to revoke, trust is still created even though beneficiaries’ equitable interests are weak

Trusts - Statute of Frauds

When Writing Required

• writing can either be inter vivos or testamentary

• must at least name beneficiaries, the property, and how the property is to be used

• trustee may put statement in writing an admission against interest

• settlor cannot undo an outright gift by creating an instrument at a later time stating that a trust exists

Trusts - Statute of Frauds

Common Exceptions to Writing Requirement

• personal property

• part performance – if trustee acts, then cannot deny trust at a later time

• conveyance induced by evil conduct Statute of Frauds can be used as a defense of a donee who is now tried to be claimed as a trustee by the settlor.

Trusts

Effect of Statute of Frauds Violation

Trusts

Acknowledgment

Trust

Purposes

may create a trust for any purpose as long as that trust is not illegal

terms of trust may not require the trustee to commit an act that is criminal, tortuous, or against public policy

Trust Purposes

Determination of Validity of Purpose

• intent approach – illegal if existence of trust can induce another person to commit a crime

• use approach – valid because of the unquestionable appropriateness of providing for the health, education, and support of children who are deprived of their parents’ support

• defrauding creditors is an illegal trust purpose

• discrimination – courts go either way depending on the class that benefits from the trust

• appropriate remedy depends on the reason for the illegality of the trust
• defrauded creditor
  • set aside the conveyance to the trust to the extent of the creditor’s claim

1. court could undo the transfer (trust) and permit the settlor to regain the legal and equitable title
2.  court refuses to enforce the rights of seemingly equitable holder and trustee becomes outright owner

• contract rights (life insurance, retirement plan)

• property must be in existence and clearly ascertainable; cannot place into trust what settlor does not yet own

• right of a creditor to be paid can be a trust property but not a debt

• legal title to trust property must reach the hands of the trustee

• settlor must consummate intent by actually transferring the property

• declaration of trust – settlor should execute new deed of real property or gift to name settlor as trustee, not individual

• conveyance of trust - settlor should execute new deed of real property or gift to name trustee

Capacity
Acceptance
Qualification

Although trustee holds legal title, has no claim on property (cannot will away)

compliance with method specified in trust

written acceptance

acceptance implied from acts

Oath of Office

Surety Bond – trust can waive bond

can get many good qualities

disadvantages: costly resolution of deadlock, additional fees, joint and several liability

if successor is needed look to:

• trust instrument
• local trust statutes
• court appoints

may need to comply with trust instrument

comply with local law

must be able to take and hold title but does not need to manage

multiple beneficiaries may hold concurrent or successive interests

• must be definitively stated or clearly discernable

• “to distribute to those individuals whom my trustee so desires” – too vague

• “to distribute to those of my children whom my trustee so desires” – readily ascertainable

• “to distribute to those of my friends whom my trustee so desires” – cannot be ascertained with certainty

benefits from trust but is not a named beneficiary

usually do not have standing to enforce the trust, because no equitable title to trust

Trusts

Transfers and Assignments of Interest

• can transfer interest to third party
• can will away if interest survives death
• settlors rarely allow inter vivos and at-death transfers
• priority of assignment
  • English view – trustee distributes to first assignee who gives notice
  • American view – trustee distributes to first person to receive assignment

• prohibits beneficiary from selling, giving away, or transferring interest
• prevents beneficiary’s creditors from reaching interest in the trust
• creditors can attack interest if no clause
• support of validity of spendthrift clauses
  • settlor has right to dispose of property as he wishes
  • prevents beneficiaries from becoming public burdens
  • creditors have responsibility to investigate and know trust is not a basis for granting credit
• usually not enforced when settlor is beneficiary
• increased willingness of states to uphold asset protection trusts
  • settlor and beneficiary are the same person and trust contains spendthrift clause

• creditors who provide necessaries

• spousal and child support claimants

• federal tax claims

• tort claimants (increasing number of states adopting)

• settlement agreement between trust parties

gives trustee discretion over which beneficiaries to pay and how much to pay to each

discretion may be broad, narrow, or anywhere in between, but must act in good faith, honestly, and for the purposes that the settlor stated in the trust

courts may review trustee’s decision but are reluctant to overrule a trustee’s honest exercise of discretion unless the beneficiary has extremely strong evidence of the trustee’s unreasonableness

trustee does not need to pay creditors unless ordered by the court

beneficiary does not own anything until distribution is received

exceptions to trustee discretion are the same as exceptions to spendthrift clause

trust restricted to beneficiary’s basic needs

define level of support or leave it up to trustee’s discretion

should state whether the trustee should consider the beneficiary’s other property and income

support includes the support of individuals whom the beneficiary is legally obligated to support

• trust can be beneficiary on a life insurance policy

• owner can transfer the policy itself into the trust

• helps create a unified plan for the insured’s estate

• inter vivos or testamentary?

• funded or unfunded?

• revocable or irrevocable?

prohibits trusts in which the ability to ascertain the identity of the beneficiaries in whom equitable title wil vest is delayed beyond a specified period of time

usually 21 years after trust is no longer revocable

Charitable Trust

categories of charitable purposes

relief of poverty

education

religion

health

governmental purposes

Charitable Trust

Size of Charitable Class

• if trust fails to be charitable, can be valid as private trust; may be constrained by Rule Against Prepetuities or not be eligible for tax breaks
• courts take into account:
  • amount of property (can benefit repeated individuals)
  • type of education student is required to pursue
• purpose cannot just be charitable but must benefit community
• awards and prizes encourage and reward socially valuable achievements

Charitable Trust

Description of Charitable Class

Charitable Trust

Determination of Charitable Purpose

• settlor’s opinion is irrelevant

• depends on facts of case and philosophy of the judge

• courts are more tolerant of trusts that advance the ideas held by a sizeable number of people, even if not majority

• courts are more tolerant of trusts that are religious based

not restricted by Rule of Perpetuities

state attorney general charged with the duty of enforcing charitable trusts for the benefit of the community

tax benefits

• accept trusteeship
• post bond
• register trust
• possess and safeguard trust property
• identify and locate beneficiaries
• follow settlor’s instructions
• act as fiduciary
• support and defend trust

Trust Administration

register trust

makes clear which court has jurisdiction in case legal action needs to be taken by beneficiaries

trust does not need to be registered in Illinois

Trust Administration

possess and safeguard trust property

• record deeds
• buy insurance
• keep the property repaired
• place valuable personal property in a safe deposit box
• register corporate securities
• earmark trust property: label property to show that it belongs to a trust -> retitle
  • trustee only liable if loss results from failure to earmark
  • certain property can be held in nominee (street name) form as long as arrangement is properly documented; securities registered in the name of a broker to facilitate trading
• avoid commingling -> absolute liability
• common trust fund

Trust Administration

support and defend trust

Trustee Duties

Selection of Investements

1. prudent person standard – degree of care and level of skill that a person of ordinary prudence would exercise in dealing with his own property trustee cannot offset a loss from one investment with a gain from another
2. prudent investor or portfolio standard – in evaluating the propriety of a trustee’s investments, the performance of the entire portfolio is considered, not the performance of each investment individually appropriateness of investment is based on the facts and circumstances at the time of the investment trustee with higher degree of skill has a duty to exercise that higher level of skill
3. noneconomic considerations social investment: considering nonmonetary factors in determining the propriety of investments, for example, the employment practices or environmental record of the company

Trustee Duties

Duty to Diversify

difficult with small trusts

any key assets (heirlooms) may not be a prudent investment, so settlor should include provision in trust for handling

trust provision requires the trustee to exercise trust powers as directed by someone else

ex. must follow advice of stockbroker

Trustee Powers

Sources of Powers

1. trust instrument –takes effect over state statute
2. state statutes – some states require that instruments mention the statutes in the instrument, while others do not
3. implied by circumstances – similar to necessary and proper clause of Constitution
4. court order

Trustee Powers

Delegation of Powers

• trustee may delegate mere ministerial powers but not discretionary acts
• trustee may delegate any investment or management decision provided that a prudent trustee of comparable skills could properly delegate under the same circumstances
• must be prudent in selecting an agent
• no respondeat superior type of ability exists between Trustee and the trust for the acts of agent

Trust Distributions

trustee distributes because:

trust instrument dictates

trustee exercises discretion given to him

Trust Distributions

Standard of Care

Trust Distributions

Competent Adult Beneficiary

Trust Distributions

Minor or Incapacitated Beneficiary

payments made to beneficiary’s guardian or custodian

payments can be made to others on the beneficiaries behalf (education, medical, etc.)

avoid self-dealing and other conflicts of interest

cannot favor one beneficiary over another unless trust permits favoritism

Trustee Duty of Loyalty

Buying and Selling Trust Property

• trustee may not purchase trust assets for personal use or to close relatives
• indirect transfers also prohibited

Trustee Duty of Loyalty

Borrowing Trust Property

Trustee Duty of Loyalty

Purchase of Common Investments

try to avoid common investments

if small part of large corporation, then investments may be negligible

Trustee Duty of Loyalty

Transfers between Trusts

Trustee Duty of Loyalty

Dealings with Beneficiaries

Trustee Duty of Loyalty

Self-Employment

Trustee Duty of Loyalty

Ramifications of Breach of Loyalty Duties

• self-dealing
  • courts will not consider good faith or fairness of transaction
• conflict of interest
  • courts will consider good faith or fairness of transaction

Trustee Duty of Loyalty

Permitted Self-Dealing

• should be included in provision giving trustee permission to self-deal
• if settlor did not authorize:
  • obtain consent from all beneficiaries after full disclosure
  • seek permission from court

Trustee Duty of Loyalty

Loyalty and Investment Duties Compared and Contrasted

• loyalty duties do not need evaluation; if conduct occurred, duty was breached
• investment and management duties are breached when conduct falls below applicable standard

Liability of Trustee to Third Parties

Contract Liability

trustee is personally liable for any breach of contract for performance of the trustee’s investment and managerial duties

• to escape liability, contract must sufficiently describe and reference the trust; puts parties on notice
• may need to sign contract as “John Hancock, Trustee”
• to escape liability, include no trustee liability clause in contract
• trustee may not recover from beneficiaries unless they had previously entered into indemnification agreement

Liability of Trustee to Third Parties

Tort Liability

• tort plaintiffs may sue trustee in the trustee’s representative capacity and to recover against trust property
• trustee may not be allowed to seek reimbursement from trust property
• personal fault = personal liability

Liability of Trustee to Third Parties

Liability as Property Owner

income beneficiaries vs. remainder beneficiaries

UNIFORM PRINCIPAL & INCOME ACT

Three ways to determine how to allocate:

1. settlor provided instructions in trust instrument

2. follow appropriate state statute

3. must allocate to principal if first two fail

• stock proceeds
• principal rent on real or personal property
• income interest from CD
• income eminent domain awards
• principal insurance proceeds
• principal trustee may have the power to adjust to allocate a balance between income and principal

Trusts

Corporate Distributions

• cash dividend
• income stock dividend
• principal stock split
• principal merger
• principal

premium: purchase price is above face value; good for income beneficiaries

discount: purchase price is below face value; good for remainder beneficiaries

trustee may want to make adjustments to keep both types of beneficiaries happy

• rights arise on the date specified in trust or date asset becomes subject to the trust
• inter vivos trust: asset becomes subject on the date settlor transfers asset; all due income goes to trust
• testamentary trust
  • receipts due but not paid at testator’s death -> principal
  • income receipts on periodic payments due at testator’s death -> income
  • dividends are not apportioned; owner on record date gets the dividends

if interest ends between trustee payments (Son’s ends and Daughter’s begins):

• Son entitled to income that has been collected but not yet distributed
• Son is not entitled to uncollected income that is due before interest ends
• Son receives no portion of periodic payments, even the amount that accrued while Son was the income beneficiary

income: property taxes; insurance premiums; interest on loans; ordinary repairs; reasonable allowance for depriciation; legal expenses for income interests; tax on receipts considered income

principal: costs of investing principal; capital improvements; legal expenses for remainder interests; income tax on capital gains.

Trustee compensation and expenses associated with accountings are expenses for both beneficiaries.

current beneficiary is entitled to a fixed percentage of the value of the trust property annually

all increases inure all beneficiaries, and all losses are shared

• duty to keep accurate records of all transactions involving trust property and to provide accountings to beneficiaries
• accountings usually provided once per year, when the trust terminates, or change in trustee
• accountings should contain lists of:
• trust property and value
• all receipts and disbursements along with which were allocated to income or principal
• liabilities of the trust
• trustee should volunteer accountings once a year to: 
  • have an easier time preparing them (not so old)
  • have a god psychological impact on beneficiaries
  • start a stated limitations period for challenges
• some courts allow settlor to waive accountings

• trustee will receive compensation unless trust 

• expressly provides that trustee is not to be paid

• can be based on a statutorily provided fee schedule

• reduces the value of the trust and consequently the property available for the beneficiaries

• may need court approval for reasonable compensation

• deviation
• circumstances
• purpose fulfilled, becomes illegal, or becomes impossible to fulfill
• compliance with terms would impair trustee to accomplish purpose of trust
• courts can authorize:
  • changing the trustee
  • permits trustee to perform acts not authorized or forbidden in trust instrument
  • prohibit trustee from performing acts that the settlor mandated in trust instrument
  • modify terms of the trust
  • terminate the trust

courts do not usually change dispositive provisions (who are the beneficiaries)

• settlor
  • presumption that the settlor may not make changes to the terms of the trust and may not regain title to trust property
  • must reserve powers in trust instrument