Estates and Trusts

CHAPTER 26 ESTATES AND TRUSTS

I. OBJECTIVES This chapter is designed to acquaint students with legal rules and procedures regarding the transfer of property at death, planning for disability, and planning devices that can be used to direct the transfer of property both at death and during life. After reading the chapter and attending class, a student should be able to: A. Understand the nature of a will, describe the usual requirements for a valid will, explain the concept of testamentary capacity, and explain how a will may be revoked or changed. 1. Understand the basic provisions of the Uniform Probate Code. B. Describe the uses of advance directives (living wills, durable powers of attorney, and durable power of attorney for health care). C. Understand the concept of intestacy and describe the underlying philosophy and typical distribution scheme of intestacy statutes. D. Explain the procedure for administering estates, and describe the tasks of the personal representative. E. Understand the concept of a trust, describe the roles of the individuals who create, administer, and benefit from a trust, appreciate the various purposes for which a trust might be created, explain the various types of trusts, and explain the basic requirements for creating a trust.

II. ANSWER TO INTRODUCTORY PROBLEM A. If he dies without a will, his property will distributed according to the rules of the state’s intestacy statute. B. The requirements for executing a will are discussed on page 582. C. Among the causes for invalidity are lack of testamentary capacity, failure to satisfy the formalities required for a will, and revocation of the will. D. The probate process is described on pages 590-591. E. The requirements for creation of a trust and duties of the trustee are discussed on pages 592- 594.

III. SUGGESTIONS FOR LECTURE PREPARATION A. Introduction 1. The lecture will focus on what happens to a person's property when he dies, and the ways in which he can direct that property and control the manner in which it is distributed through legal transactions that he makes during his life. Point out the importance of understanding how property is passed at death and taking steps to control the distribution of one's property. (For example, most students have probably heard of an acquaintance or family member's failing to make or update a will, with the result that his property did not end up going to his or her intended beneficiary). a. Describe the nature and applicability of the Uniform Probate Code. 2. Note that a competent estate planning professional may be able to formulate a plan for passing property to others at death and/or during life that will result in a tax savings to the estate (and increase the amount of money that will flow to the people one is trying to

Chapter 26: Estates and Trusts10 benefit). Emphasize, however, that estate planning is a complex field that is highly dependent on a thorough knowledge of both the law of estates and trusts and tax law. Point out that it is definitely not a do-it-yourself activity, and that a specialist in estate planning is probably necessary for a person who has an appreciable estate. B. Wills 1. In determining how a person's property is to be distributed when he dies, the law looks first to see if he had a will. The "back up" system developed by state intestacy statutes will kick in only if the decedent left no valid will or if he left a valid will that did not dispose of all of his property. Log On (p. 581) lists several good resources explaining why it is a good idea to have a will. 2. Review the terminology that is used with regard to wills. Explain the distinction between per capita and per stirpes by using the example on p. 514 of the text or making up one of your own. Example: Problem Case #3. 3. Discuss the fact that a will can only direct property owned by the testator at the time of his death and which does not pass through another planning device (such as a life insurance policy) or by operation of law (such as property owned in joint tenancy). You might want to list and briefly describe some of the other devices that are commonly used to direct property at death that would fall outside a will. 4. Describe the concept of testamentary capacity. Why do courts say that it takes less capacity to make a will than to make a contract? Discuss also the doctrine of undue influence as it is used to challenge the validity of a will. 5. Discuss the formal requirements for a valid will. Explain the function of such requirements. You might use your state's statutory requirements as an example of formal requirements. Explain what happens if a testator fails to comply with the formal requirements. a. Explain holographic and nuncupative wills. Note the difference between the two. Explain the requirements for a valid holographic will in the states that recognize them. You might check to see if your state recognizes holographic or nuncupative wills, and work that into the discussion. Example: Problem Cases #1 and 6. b. Mention that there is sometimes difficulty in interpreting wills. Discuss courts' approaches in these situations. Estate of Southworth v. North Shore Animal League (p. 583): Southworth, an unmarried woman who had no children, indicated interest in the North Shore Animal League. After several exchanges of information, she filled out a donor card for NSAL circling an option that stated “I am not taking action immediate action but my intentions are...” On this donor card she wrote, “My entire estate is to be left to North Shore Animal League.” She also wrote that the total amount that NSAL was likely to receive was “$500,000.” When Southworth died, NSAL claimed that the executed donor card was a holographic will. The court noted that the standards for holographic wills no longer preclude any pre-printed provisions, but that the donor card still did not satisfy the Probate Code standards for a valid holographic will because it did not indicate Southworth’s present testamentary intent. Rather, it indicated the intention to make a will in the future, which was not adequate. Points for Discussion: How did the trial court’s interpretation of Southworth’s intent differ from the appellate court’s? Does this opinion mean that a donor card could never be a valid holographic will? Who will receive Southworth’s property now that

11 Chapter 26: Estates and Trusts the court has held that the donor card was not a valid will? Does the result in this case really match Southworth’s likely intent for the disposition of her estate? Additional Examples: Problem Cases #1, 4, 6, and 7. 6. Discuss the limitations on disposition by will, especially the rights of surviving spouses. Explain the concept of dower rights at common law, and note that many states have abrogated dower rights. (If you want to go into more depth, explain curtesy, too, and contrast it with dower). Discuss the more modern type of statutory share for surviving spouses under the UPC and other probate statutes. 7. Ethics in Action (p. 586): One of the ethical considerations is whether to respect the testator’s freedom to confer benefits on the beneficiaries that he has chosen. However, a conflicting consideration is the exclusion of people from a benefit solely on the basis of race. If you would like to see the legal analysis of this problem, see Home for Incurables of Baltimore City v. University of Maryland Medical System Corp., 746 A.2d 746 (Md. 2002). 8. Describe the ways in which wills may be revoked. Emphasize that a will confers no interest on its named beneficiaries during the life of the testator, and that it is revocable up to the moment of the testator's death. 9. Explain how a codicil may be used to change a provision in a will. Emphasize, however, that codicils must be executed with the same formalities one uses to execute wills. C. Advance Directives: Planning for Disability 1. Discuss the reasons why people are becoming more concerned with planning for disability. Explain the meaning of the term advance directive. Give examples of advance directives. 2. Explain the function of a living will. It would be helpful to look up the living will statute in your state and discuss its provisions and find out from a local medical professional how such wills are handled in your locality. Point out the age for executing a living will in your state (probably 18). 3. Explain and discuss the utility of the durable power of attorney. 4. Discuss durable powers of attorney for health care. If your state has a statute providing for such powers of attorney, you might discuss its provisions. 5. Discuss durable powers of attorney for health care. If your state has a statute providing for such powers of attorney, you might discuss its provisions. 6. Discuss the federal statute concerning advance directives. D. Intestacy 1. Note that if a person fails to make a valid will, the law will make one for him through state intestacy statutes. Naturally, the scheme of property distribution specified in such statutes may not be what the individual would have desired. They are designed to effectuate the presumed intent of the deceased person, and the assumption is that he would have wanted his property to go to his surviving spouse and/or closest blood relatives. They do not take into account the quality of the relationship that the decedent actually had with his heirs. E.g., you may despise one brother and adore another, but intestacy statutes would give them the equal right to inherit from you. 2. One good technique for illustrating the operation of intestacy statutes is to make a flow chart of the distributional scheme of your state's intestacy statute, and have your students trace how their property would be distributed. 3. Note that real property will pass according to the intestacy statute of the state in which it is located, while personal property will pass according to the state in which the deceased

Business Law: The Ethical, Global, and E-Commerce Environment, 12E 12 was domiciled. Explain the concept of domicile and note that domicile is also important for determining the venue of administration proceedings. 4. Point out some of the rules regarding inheritance by adopted children, illegitimate children, siblings related by one parent, and afterborn heirs. Note the purpose and effect of simultaneous death statutes. E. Administration of Estates F. Discuss the need for an organized procedure to collect the assets of an individual who has died, to satisfy his debts, to pay any taxes and administrative expenses, and to distribute the remaining assets. 1. Discuss the nature of the probate estate. 2. Note that the administration of an estate is usually carried out under the supervision of a specialized court, the probate court. 3. Describe the personal representative and his or her responsibilities. 4. Describe the steps in the probate process. G. Trusts 1. Define trust, and give a simple example of a trust, indicating who the trustee, settlor, and beneficiary are. Make it clear that while the trustee has legal title to the trust property, he has the responsibility to hold and manage it for the benefit of the beneficiaries. 2. Discuss the reasons for creating a trust. 3. Explain the requirements for a valid express trust. a. Discuss the special treatment of charitable trusts, emphasizing the cy pres doctrine. Example: Problem Case #5. 4. Discuss the powers and duties of the trustee. You may want to bring in a sample trust or your state's trust code and use the relevant provisions as examples. 5. Discuss the liabilities of a trustee. Example: Problem Case #2. 6. Discuss how trusts can be modified or revoked. 7. Explain spendthrift trusts. Make it clear that they are designed to protect the beneficiary of the trust, and that they are an exception to the general rule that the beneficiary can assign his interest in the trust. Discuss the exceptions to the enforceability of spendthrift clauses. Kulp v. Timmons (p. 594): After a judgment was entered against him and he failed to pay the judgment, the defendant conveyed his farm and boatyard—his major assets—to a joint irrevocable lifetime trust. He continued, however, to live on the land and to operate his business on it as he had always done, and the trust did not engage in any trust activity once it was formed. Kulp, Timmons’s employee, was badly injured on the job and won a worker’s compensation award but Timmons never paid the compensation. Timmons’s wife and son died and he became sole settlor, trustee, and lifetime beneficiary of the trust. Kulp sued Timmons to collect the judgment. With regard to whether Kulp could legally reach the trust assets, the court stated that although creditors generally cannot reach property held in a spendthrift trust to satisfy claims against a beneficiary, an exception is made when the trust was established to defraud creditors. The court pointed to a variety of facts of the case to determine that the creation of this trust was a fraud, and therefore void. Points for Discussion: What facts are important in determining that the trust was created to defraud creditors? What common law principle makes the contract void?

13 Chapter 26: Estates and Trusts 8. Explain implied and constructive trusts, and give examples of each.

IV. RECOMMENDED REFERENCES A. R. MENNELL, WILLS AND TRUSTS IN A NUTSHELL (1979).

V. ANSWERS TO PROBLEMS AND PROBLEM CASES 1. No. The court stated that the law favors testacy over intestacy and that when it is at all possible, interpretations should favor testacy. Foster often substituted dashes in place of commas in her writing. Thus, the court interpreted the “farm--house + contents” language to devise both the farm house and acreage to the testator’s daughter. Foster v. Foster, 472 S.E.2d 678 (W. Va. Ct. App. 1996). 2. Yes. Summary judgment should not have been given in favor of trustees because exculpatory provisions of an express trust did not relieve trustees of liability for willful misconduct, and such misconduct was alleged by the plaintiffs. Neuhaus v. Richards, 846 S.W.2d 70 (Tex. App. 1992). 3. The issue is whether the trust should be construed to give the trust corpus to the grandchildren as individuals (per capita) or as representatives of their fathers (per stirpes). The court stated that "the purpose of a court in interpreting a will or trust is to ascertain the intention of the testator or the settlor. The intention of the testator or settlor is to be found from the wording of the document as a whole, giving each word meaning." It held that the intent expressed by the trust was that the settlors wanted their two sons to share the income from the trusts for as long as the sons lived, and after the death of both of them, the property should go to their children by representation of their fathers. The court stated that any other construction would require that the words per stirpes be construed to mean per capita. First National Bank of Peoria v. Singer, 549 N.E.2d 940 (Ill. Ct. App. 1990). 4. Yes. In interpreting a will, the testator’s intention controls. Here, Haag wished to reward his employees for their past and continued service by leaving all his stock to the employees who were still living and working for the company at the time of his death. Where a bequest is to several individuals, equality is the rule unless the testator indicates otherwise. “Therefore, we conclude from the language and arrangement of words that the testator intended to make a gift of all of his shares to three persons with one receiving 500 shares and the other two receiving the balance, which they divide equally, the longer in service to the company receiving the odd share. The testator’s intent is further indicated by the manner in which he made corrections on the holograph. He struck through the name of Melvin Printz....This demonstrates the testator’s method of deleting a beneficiary and canceling a bequest.” Haag v. Stickley, 389 S.E.2d 691 (Va. Sup. Ct. 1990). 5. The trust will be directed to Marymount Memorial Trust Fund to be administered according to the terms of Crawshaw’s will. The doctrine of cy pres permits a court to implement a testator’s intent and save a gift to charity by substituting beneficiaries when the named charitable beneficiary is unable to take the gift. Here, Crawshaw had a general charitable intent of an educational nature. In Re: Estate of Crawshaw, 819 P.2d 613 (Kan. Sup. Ct. 1991). 6. Yes. The court noted that Iola’s name was typewritten on the trust and that she had told the notary public who notarized the document that she had signed it. The notary’s acknowledgement was prima facie proof of Iola’s signature. The signature complied with an Arkansas statute. The court, therefore, held that the execution of the trust and related instruments was in compliance with the applicable law. Smith v. Wharton, 349 Ark. 351 (2002).

Business Law: The Ethical, Global, and E-Commerce Environment, 12E 14 7. Yes. The intent of the testator was dispositive as to whether the granddaughters were included. There was no evidence that the testator would intend to include in his bounty his adopted grandsons but not his adopted granddaughters. Connecticut National Bank and Trust Co. v. Chadwick, 585 A.2d 1189 (Conn. 1991).

VI. ONLINE RESEARCH: LIVING WILLS A simple keyword search for “living will” will bring up many examples, such as http://www.uslivingwillregistry.com/, which, under its Advance Directive Forms link, links to legal requirements for living wills in the various states and http://www.rights.org/deathnet/LWC.html.

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