PART 2

 

 

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Basic Estate Planning Concepts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

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    CHAPTER 3  

 

 

 

 

Estate Planning Documents

 

 

 

 

 

 

 

 

OVERVIEW

 

Estate planning seeks to facilitate the transfer of the client’s wealth as efficiently as possible. Efficiency in estate transfer usually requires the preparation of one or more formal documents that will be accepted by the authorities who ultimately authorize and make the transfers. For example, the proper preparation and execution of a will are essential to the efficient disposal of any probate property. The will must be drafted clearly to ensure that the testator’s desires are correctly expressed, and it must be signed and witnessed according to law so the probate judge will accept it as the guide for the title transfer process.

      This chapter, the first of two introducing the principles of property transfer, explores the documents commonly used in the process of transferring wealth. Specifically, it examines the creation of four common property transfer mechanisms: joint tenancy, contract, the will, and the trust. The next chapter examines the actual process of property transfer whether guided by these documents or by the law of intestate succession.

      Generally, property transfers are regulated by state, not federal, law. State laws in this area vary, but there are definite patterns we can discuss. For instance, more than half the states have adopted all or a significant part of the Uniform Probate Code (UPC) and, therefore, have many property distribution laws in common. The UPC was introduced in 1966, partly in answer to the criticisms that probate procedures in the United States were too costly, too time-consuming, and too complicated. Idaho was the first state to adopt it in 1972. To read Idaho’s version of the UPC and to see which other states have adopted it, visit the web site maintained by Cornell Law School, http://www.law.cornell.edu/uniform/ probate.html.[1] In presenting the material in this and the next chapter, we will often refer to the laws of those states that have adopted the UPC, especially in


three major areas: will execution, intestate succession, and probate administration.

 

 

JOINT TENANCY ARRANGEMENTS

 

The acquisition of title in joint tenancy is ordinarily a simple matter, requiring the completion of one or two preprinted forms. Transfers can be done with or without the aid of an attorney. Deeds to transfer real property into joint tenancy are usually drafted by an attorney, although in some states the job may be done by a real estate agent, by the title company, or by an escrow agent. Similarly, when two or more people open an account such as a stock brokerage account or bank account, the professionals involved generally will ask whether title will be in joint tenancy or tenancy in common.

      Later in the text the reader will learn several significant disadvantages to taking title in joint tenancy. Deciding whether joint tenancy is appropriate is not always clear; however, our focus at this point is on how title in joint tenancy is taken, not whether it should be taken.

 

 

PROPERTY TRANSFER BY CONTRACT

 

A significant part of a person’s estate plan may be transferred pursuant to a contract. Examples of property that is transferred after the death of the owner (or the insured) are life insurance, pension and profit sharing plans, and individual retirement accounts (IRAs).

 

 

Life Insurance

 

Wealth derived from life insurance comes in two forms: the policy itself and the policy death proceeds. The policy may be transferred while the insured is alive. After the insured’s death, the proceeds are paid by the insurance company to the designated beneficiaries.

      During the policy application process, the applicant designates the beneficiary who will receive the proceeds at the insured’s death. Once the policy is issued, up until the death of the insured, the policy owner can easily change the beneficiary designation by giving the company written notice using its beneficiary designation form. Very rarely, there is an irrevocable beneficiary designation, i.e., the designation cannot be changed without the consent of the beneficiary or someone besides the owner. Such irrevocable designations may be the result of a divorce settlement or as a condition of a personal loan. Once certain conditions are met, the owner-insured may be free to change beneficiaries, e.g., once the children are grown or the loan is repaid.

      Arranging the transfer of title to a life insurance policy itself from one owner to another is simple. All that is required is the completion of a short assignment form that can be obtained from the insurance company.

 

 

Pension and Profit Sharing Plans

 

Pension and profit sharing plans are contracts between the employee-client and the employer. Ordinarily, the employer requests that the employee fill out a written form designating the beneficiary, the party who will be entitled to any benefits paid after the employee’s death. Thus, the actual process of beneficiary designation for most retirement plans is simple and straightforward.

 

 

WILLS AND TRUSTS

 

In contrast with the above transfer arrangements, the document preparation process for the will and the trust are not simple, for two reasons. First, unlike joint tenancy and written contracts, the will and the trust are capable of disposing of nearly all the client’s estate, as well as providing for the care of the client’s minor children. Thus, the will and the trust will inevitably be more complicated. Second, unlike insurance and retirement contracts, which are drafted by the insurer or the employer, wills and trusts are semi-custom, drafted to fit each client’s unique circumstances. The responsibility for choosing the terms for the lawyer to draft into the will and trust falls to each individual.

      The following material presents an overview of will and trust construction. Major topics include the legal requirements for a valid will, common will provisions, essential characteristics of trusts, and common provisions of the living trust and the testamentary trust.

 

 

THE WILL

 

Many people die leaving no formal directions as to the disposal of their property, who should manage their estate, or who should care for their minor children. In such cases, the state seeks to make these decisions equitably and sensibly, applying statutory rules to the surviving family situation. However, state law may conflict with the wishes of a decedent, whether unstated or even as recollected by the survivors. Compared to a properly planned estate, intestacy can result in unsuitable property disposition and higher taxes. Individuals can avoid an undesirable outcome by expressing, while still alive, their desires in a legally binding document that serves as a set of directions to be followed by those who survive. The will is the most common formal document for this purpose.

      A will is a legally enforceable document that expresses the testator’s directions for disposing of his or her probate property at death. In some states, wills can be oral, but laws usually greatly restrict the scope of their ability to dispose of wealth, generally limiting the application of oral wills to personal property worth less than a modest amount, such as $2,000. In addition, the testator, on execution, is often required to be a member of the armed forces or in peril of death. Practically speaking, wills prepared in the estate planning process are written.

 

 

Who May Execute a Will

                                                              

In most states, any individual 18 or older who is of sound mind may dispose of his or her property by will. The implications of this are twofold. First, individuals under age 18 cannot transfer property by will unless they are emancipated minors. A minor is emancipated if a court, after a petition and hearing, determines that the child should be free from parental control and given the status of an adult for contractual and other legal matters. In most states, a person under age 18 is considered an adult if he or she is married. Thus, in most instances, a deceased minor’s property will pass according to the laws of intestate succession, which will usually result in the property passing to the child’s parents or if the parents are also deceased, then to siblings. Second, a will can be denied probate if it can be established that the testator, at date of execution of the will, lacked testamentary capacity, was subject to undue influence or fraud, or acted mistakenly. These four concepts are discussed next.

      Testamentary capacity. Testamentary capacity concerns the testator’s mental ability to execute a legally enforceable will. A testator has testamentary capacity if he or she possesses each of the following three attributes:

 

      1.   Sufficient mental capacity to understand the nature of the act being undertaken (executing a will).

      2.   Sufficient mental capacity to understand and recollect the general nature of his or her property.

      3.   Sufficient mental capacity to remember and understand his or her relationship to the persons who have natural claims on his or her bounty and whose interests are affected by the provisions of the will.

 

      Essentially, in addition to being an adult, testators must know that they are executing a will, they must be aware of what they own, and they must be cognizant of family and friends. On its face, this test seems quite severe; strictly construed, it might prevent many older testators from executing a valid will. However, mere age and physical disability do not negate testamentary capacity. Probate courts have admitted to probate wills executed by individuals who were forgetful, absent-minded, alcoholic, or behaving peculiarly—even persons declared mentally incompetent, insane, under conservatorship, or who committed suicide shortly after executing a will. Indeed, the threshold is lower than that for contractual capacity, which may be as it should, given that the formation of a contract requires the ability to negotiate with another person, whereas executing a will does not. Nonetheless, failure to meet one or more of these three requirements will result in a finding of insufficient testamentary capacity. Examples of sufficient evidence of incompetence include senility, ongoing hallucinations, irrational beliefs, irrational behavior, and totally groundless beliefs about the testator’s spouse, children, or other family members. Generally, the outcome hinges on whether, at the time the will was executed, the three-prong test was met. Appellate courts are reluctant to “set aside” a will. They have reversed many cases where the jurors found that the testator lacked testamentary capacity, especially those cases where the testator disinherited immediate family members in favor of newly found friends. As a consequence, affirmed findings of testamentary incapacity are very rare.

      Anticipating the possibility of a will contest based on lack of testamentary capacity, some attorneys videotape the will execution of a testator who may have questionable capacity, believing that the taping will make capacity more credible. Others believe that videotaping can enhance the success of a contest, reasoning that testators may look terrible on the screen (especially if they are shown lying in a hospital bed), and that the taping constitutes evidence that even the will drafting attorney lacked confidence in the testator’s capacity.

      Undue influence. A will executed by a testator who was subject to undue influence by someone who stands to benefit, directly or indirectly, may also be denied probate. Undue influence is influence by a confidante that has the effect of overcoming the testator’s free will. Examples include improper persuasion and psychological domination, as when “Snake Oil Sam,” the smooth-talking newcomer, makes a romantic play for the 92-year-old widow, “encouraging” her to disinherit her children and leave her entire estate to him.

      Winning an undue influence case can be difficult. These cases often involve a person with a weak, unsound, or impaired mind. Indeed, the family may not be aware of a new, less favorable will until after the testator is dead. An element of fraud or deceit is a common thread in these cases. Juries tend to side with family members against outsiders whom they see as meddling non-relatives. Thus, a jury is likely to “rewrite” a will in keeping with what the jurors think is fair to the family. But, unless the evidence of undue influence is clearly in the record, this type of verdict is likely to be reversed on appeal.

      Fraud. Fraud involves deception through false information. Some courts distinguish two types of fraud based on the action of the deceiver. Fraud in the inducement is where the testator is persuaded by lies of the wrongdoer to change his or her estate plan. For example, fraud exists if a niece tells her great-uncle she is penniless when, in fact, she is wealthy, or a daughter incorrectly tells her mother that her sister instigated a conservatorship proceeding, when actually they acted together. The other type is called fraud in the execution, where the person is deceived into signing a document not knowing that it is a will. An example would be obtaining a person’s autograph on a blank sheet of paper, then, with the help of accomplices, placing will language above it and witness signatures below to create what appears to be a genuine will.

      Mistake. Very rarely, a will can be successfully contested on the basis of a mistake. Examples include: (a) the testator leaves her estate to only one son, mistakenly believing that the other is wealthy; (b) the testator mistakenly leaves out an intended clause; or (c) the will mistakenly includes an unintended clause.

      Ordinarily, a finding of lack of testamentary capacity will invalidate the entire will, while a finding of undue influence, fraud, or mistake might invalidate only those provisions that relate to the specific problem.

 

 

Statutory Requirements for Wills

 

Most states, including those that have adopted the Uniform Probate Code, recognize at least two types of wills, the witnessed will and the holographic will.

      Witnessed will. Although state laws vary, a witnessed or attested will must meet the following three requirements:

 

            1.   It must be in writing (handwritten, typed, etc.).

            2.   The testator must sign the will in the presence of two witnesses (three in a few states).

            3.   The two witnesses must sign their names to the will, understanding that the instrument they sign is the testator’s will. The main purpose of requiring witnesses is to prevent forgery and coercion of the testator.

 

      Beneficiaries should not be witnesses to a will because that could imperil their right to receive some or all their bequest. In many states, a bequest to a witness is void, unless the witness is an heir. And in that case, the witness can take no more than his or her intestate share. In some other states, a beneficiary can witness the will, but if someone raises an undue influence challenge, the “interested witness” may take more than the intestate share only if he or she is able to rebut a statutory presumption that the bequest was procured by duress, menace, fraud, or undue influence. Inability to rebut this presumption might not totally invalidate the will, but it will probably invalidate some or all the bequest to that witness.

      Holographic will. If a written will does not meet all the requirements for a witnessed will, in most states, including those adopting the UPC, it can still be admitted to probate if it meets the requirements for a holographic will. Typical state requirements for a holographic will are:

 

  1. Signature is in the testator’s handwriting.

  2. All the “material provisions” of the will are in the testator’s handwriting.

 

      In the past, courts often refused to admit to probate holographic documents unless it was clear from reading just the handwritten portions that the document was the decedent’s will. In determining what parts of the will must be in the testator’s handwriting, some still follow the old rule, but many states now allow a preprinted will form to be treated as a holographic will so long as both the material provisions and the signature are in the decedent’s own handwriting.[2] The material provisions are the dispositive ones (who gets what), the identity of the executor, the nomination of guardians, and the like.

      Recently, the Uniform Probate Code added a section that allows a court to accept as testamentary documents instruments that do not meet the formal execution requirements of a witnessed will or the handwriting requirements of a holographic will. However, the proponent of the imperfectly executed will must establish by “clear and convincing evidence” that the writing being offered was intended by the decedent to be his or her will (or a codicil).[3] Clear and convincing evidence is a higher standard of proof than the usual civil case burden known as a preponderance of the evidence.

      Contrasting witnessed and holographic wills. There are two major differences between the two sets of formal requirements: first, the witnessed will requires the performance of certain activities by two witnesses. In contrast, the holographic will may, but need not, be witnessed. Second, the holographic will requires that all material provisions of the will be in the testator’s handwriting. In contrast, the witnessed will requires that only the testator and the witnesses’ signatures be in the person’s own hand, and even this may be unnecessary when a proper authorization is arranged. A testator can execute a will by directing another person to sign for him or her in the presence of the witnesses.[4] In this case, it may be a good idea to videotape the signing ceremony.

 

 

No Contest Clause

 

In the last few pages, we have described several technical requirements for a valid will including testamentary capacity, absence of undue influence, fraud, mistake, and certain specific execution requirements such as signatures by witnesses and the testator. Anticipating that dissatisfied persons may claim that one or more violations of these requirements have occurred, as a pretext for obtaining more of the estate, testators may insert in their will a “no contest” clause such as the one that follows:

 

I have purposely made no provisions herein for any other person or persons, other than as set forth in this will, and if any person contests this will, I revoke any share or interest given such person, and said share or interest shall be disposed of as though said person predeceased me without leaving issue.

 

      This usually, but not always, discourages will contests for several reasons. First, it will discourage only beneficiaries named in the will, not disinherited persons who stand to lose nothing by contesting. Second, beneficiaries may still wish to contest if they expect to gain considerably more than they will lose. Finally, in states that have adopted the UPC, such clauses are unenforceable if the contestant had probable cause for instituting the proceedings.[5] Perhaps most testators would desire this result anyway.

      What situations tend to invite will contests? The most common are where the testator chooses to disinherit family members in favor of a friend, a charity, a spouse married shortly before death, or where a testator treats children unequally. If the testator is very old or is ailing physically or mentally, a contest is even more likely.

      Will contests are infrequent, and successful contests are very uncommon. One study showed that fewer than three percent of wills offered for probate were challenged, and more than two-thirds of those challenges were unsuccessful. However, will contests may become more common for several reasons. As the general population continues to age, more elderly people of means will acquire “friends” who offer to assist them in their finances and work their way into the person’s estate plan. A high divorce rate has increased the number of children of former marriages, a group that is less likely to get along with the surviving spouse of a later marriage. When any of these situations or factors apply to a particular client, attorneys should take special precautions in drafting and executing the will.

 

 

The Simple Will

 

Wills can be quite lengthy and complex, but this section focuses on a relatively simple will. A simple will, as it is generally called, is a will prepared for a family having a small, or even a modest estate, where death taxes are not a significant concern. We will cover estate taxes in Chapter 5; and you will see that we are in a period of transition. The amount that can pass tax-free (assuming the decedent has not made significant lifetime gifts) is increasing, growing from the pre-1998 figure of $600,000 to $3,500,000 in 2009. Complete repeal of the estate tax takes place in 2010. However a “sunset” provision repeals the repeal as of 2011. There is considerable agreement that Congress will not allow this provision to take effect, so the shape of post-2010 tax law is uncertain. The estate tax repeal may be made permanent or the tax-free amount may be set at a high level and indexed for inflation.

      The simple will usually includes all the following: nominating an executor and, if there are minor children, a guardian; a waiver of the probate bond; and, in most cases, giving the testator’s property to the spouse, if alive, otherwise to the children by right of representation.

      Exhibit 3-1 presents a simple will that demonstrates the essential nature of this probate property transfer document. The reader is encouraged to study it carefully so that the analysis that follows is more readily understood.

 

EXHIBIT 3 - 1 Simple Will
 
 

 

 


                                                          WILL

                                                             OF

                                      WILLARD THOMAS SMITH

 

      I, Willard Thomas Smith, a resident of Mytown, Anystate, declare this to be my will. I revoke all prior Wills and Codicils.

 

First: Family and Guardian  I am married to Sue L. Smith, referred to in this will as “my wife.” I have three children, all from this marriage, whose names and birthdays are:

 

            Kristi M. Smith  June 27, 1987

            Heather L. Smith     April 19, 1989

            Todd R. Smith         May 11, 1991

Reference to “my children” or to “my child,” shall include children born later and children adopted by me. I have no deceased children.

      If my wife does not survive me, and it is necessary to appoint a guardian, I appoint Curtis J. Quint guardian of the person and estate of each such minor child. If for any reason Curtis J. Quint does not act as guardian, I appoint Maria S. Cruise as guardian of the person and estate of each such minor child.

 

Second: Executor The executor shall serve as follows:

      A.  Designation  I appoint my wife as my executor. If for any reason she does not so act, I appoint James A. Reliable to be my executor. If for any reason neither my wife nor James A. Reliable acts as executor, I appoint Third National Bank of Mytown to be my executor.

      B.  Bond waiver  No bond, surety, or other security shall be required of my executor.

 

Third: Disposition of Property  I make the following gifts of property:

      A.  Tangible personal property If my wife survives me by 30 days, I give her all my interest in our tangible personal property. If my wife does not survive me by 30 days, I give my tangible personal property to my issue, by right of representation, provided they survive me for that period. My executor shall consider their personal preferences in making the division. My executor has my permission to sell any of that property and distribute the proceeds to equalize the shares. My executor shall be Text Box: EXHIBIT 3 - 1 Simple Will  continued
discharged for all tangible personal property so given to any minor child if the child, or adult having the child’s custody, gives a written receipt to my executor.

      B.  Residue  If my wife survives me by 120 days, I give her the residue of my estate. If my wife does not survive me by 120 days, I give the residue to my issue, by right of representation, provided they survive me for that period. If neither my wife nor any of my descendants survives me by 120 days, I give the residue of my estate according to Anystate’s laws of descent and distribution, one half as if I had died with no will on the last day of that 120-day period, and one half as if it were my wife’s estate and she had died with no will on that last day.

      C. Taxes from residue  All death taxes imposed because of my death, as well as interest and penalties on those taxes, whether on property passing under this will or otherwise, shall be paid by my executor from the residue of my estate.

 

 

Fourth: Powers of Executor  My executor shall have unrestricted powers, without court order, to settle my estate as this will provides. In addition, my executor shall have the following powers:

 

1.   To make interim distributions of principal and income to those entitled to it.

2.   To sell, exchange, mortgage, pledge, lease or assign any property belonging to my estate.

3.   To continue operation of any business belonging to my estate.

4.   To invest and reinvest any surplus money.

 

      I have signed my name to this instrument on March 19, 2002, at Mytown, Anystate.

 

 

 

 

                                                                  Willard Thomas Smith   

                                                                                              Willard Thomas Smith  

 

 

Statement of Witnesses  We, the undersigned the witnesses, on March 19, 2002, sign our names to this instrument, being first duly sworn, and do hereby declare to the undersigned authority that the testator signs and executes this instrument as his last will and that he signs it willingly (or willingly directs another to sign for him), and that each of us, in the presence and hearing of the testator, hereby signs this will as witness to the testator’s signing, and that to the best of our knowledge the testator is eighteen years of age or older, of sound mind, and under no constraint or undue influence.

 

         John Meeks                                               Jennifer Jarrett                

Text Box: EXHIBIT 3 - 1 Simple Will  continued
   1341 Park St., Little Town, Anystate                 42 Short Rd., Little Town, Anystate

 

 

 

 

 


      Analysis of the simple will.  Let’s analyze the major provisions of this will, section by section.

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      Will of Willard Thomas Smith. In this introductory paragraph, the testator “declares” the document to be his will, satisfying the legal requirement that there be evidence of testamentary intent.

      A codicil is a separate written document that amends or revokes a will. It is executed if the testator wishes to make changes or additions to his or her will. It must meet all the legal requirements of a will, including subscription by witnesses, although in states that recognize holographic wills, a holographic codicil even to a witnessed will is acceptable if the codicil meets that state’s requirements for a holographic will.

      One of the more common methods of revoking a prior will is by executing a later will that declares such revocation, as is done in the Smith will. Revocation by “cancellation” with a “subsequent instrument,” as it is termed, can also be undertaken in any other signed, witnessed statement. A will can also be revoked by a physical act, such as burning, tearing, canceling, or otherwise destroying it, when such is done by the testator with an intent to revoke.[6]

      Revoking all prior wills and codicils eliminates the danger that provisions in prior wills that are inconsistent with the present will may cause confusion. Without a revocation clause, needless litigation might arise over whether the provisions in two or more wills are inconsistent. For example, in one state supreme court case, a decedent-testator had written two “last” wills within three weeks. The first simply left “a tract of land” to a friend. The second contained no revocation clause and left “all my effects” to siblings Y and Z. The court permitted a trial to determine whether the first will should be construed along with the second, reasoning that they were not necessarily inconsistent because the testator could have used the word “effects” to mean only personal property.[7] If the testator’s intent was to leave everything to Y and Z, inclusion of a revocation clause would have assured this result. If the intent was to preserve the gift of the land to the friend, then that should have been clearly stated in the second will.

      First: Family and guardian.  Naming all members of the immediate family assists the personal representative in finding relatives and locating assets.

      Including after born children in the will prevents a child born after the execution of the will from inheriting under the laws of intestate succession, a consequence which would probably conflict with the testator’s intent.

      A child who is still a minor when both parents are dead will have a guardian of the person and of the estate appointed by the probate court. A guardian of the person is responsible for the minor child’s care, custody, control, and education, while a guardian of the child’s estate is responsible for managing the minor child’s property. A testator’s nomination carries great weight and is usually

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followed; however, the probate judge does have the power to appoint someone else if there is good cause for not following the nomination. Nominating an alternate guardian increases the likelihood that the testator’s preferences will be followed.

      Second: Executor. Similar to the nomination of a guardian, the nomination of an executor and an alternate executor is helpful to the probate court in its selection process. The court will follow the recommendation of the testator unless there is good cause to do otherwise.

      Unless the bond is waived in the will, the executor is required to post a fiduciary bond. A bonding company, for a fee, insures the estate assets against losses caused by the personal representative’s breach of fiduciary obligations, whether the breach is the result of negligence or willful misconduct. The will can waive the bond requirement. The testator may consider a bond unnecessary because it results in additional expense to the estate, and/or because the executor is a highly trusted member of the testator’s family, such as the surviving spouse, and/or is also one of the major beneficiaries of the estate. Ordinarily, the bond amount will be set by the court to be equal to the total value of the personal probate property plus one year’s estimated income from all the probate property. The idea here is that the personal representative could run off with everything but the real property.

      Third: Disposition of property.  This simple will essentially leaves all property to the testator’s spouse, if surviving, otherwise to the children. The contingent interest of the children is sometimes referred to as a “gift-over” to the children. The will distinguishes the tangible personal property from the residue, which consists of all other probate assets. Thus, the spouse must survive by 30 days to take tangible personal property and 120 days to take the residue. If the spouse does not survive the requisite time period, the property passes to the children who do so survive.

      Inclusion of a survival requirement, such as 30 days or 120 days, reduces the likelihood that the death of both spouses in a common accident will result in subjecting some of the family property to two successive probates. This survival clause, as it is called, helps in situations not covered by the Uniform Simultaneous Death Act (USDA).

      Enacted by every state, the USDA provides that when transfer of title to property depends on the order of deaths, and when no sufficient evidence exists that two people died other than simultaneously, the property of each is disposed of as if each had survived the other. Thus, in the case of a childless married couple, the husband’s estate would pass to his blood relatives and the wife’s estate would pass to her blood relatives. This statute is of limited value, however, because it does not avoid double probate when the order of deaths can in fact be established. In some states, if it can be established that one spouse survived the other, even only by seconds, then the USDA will not apply and, absent a survival clause, there will be a double probate of the property owned by the first spouse to die. Perhaps worse, all the property may ultimately pass to that spouse’s in-laws, rather than the surviving relatives. Some states, including California, have legislated safeguards against inheritance by in-laws by requiring that the portion of the decedent’s estate attributable to the predeceased spouse pass, in some circumstances, to the predeceased spouse’s children, parents, or other kin.[8] The Uniform Probate Code requires a beneficiary of an estate to outlive the decedent by 120 hours or be deemed to have predeceased the decedent. This rule is not applied if it would cause the decedent’s property to escheat (revert) to the state.

      With regard to insurance on the life of a decedent, the USDA states that, in the event of an apparent simultaneous death of the insured and the beneficiary, the policy proceeds are to be distributed as if the insured survived the beneficiary. Thus, the proceeds will be paid to the contingent beneficiary, and if none, then to the owner’s probate estate.

      Section B of Article Three, covering the “residue,” is called the residuary clause. Failure to include it in a will can result in partial intestacy. In a recent case, the attorney who had drafted the decedent’s will admitted that he mistakenly omitted the residuary clause, but his notes showed that the decedent wanted the residue to go to a specific friend. The court would not allow admission of this evidence, ruling that extrinsic evidence is admissible to explain poorly drafted parts of a will, but cannot be used to put in parts that are missing.[9]

      Disposing of estate property by differentiating the tangible personal property from the residue can speed up probate distribution and can often save income taxes. In the chapter on fiduciary income taxes, the concept of distributable net income, or DNI, is discussed. A specific bequest of property, such as when the testator specifies a bequest of the tangible personal property, prevents the distribution from being labeled DNI. This generates less taxable income to the distributees (often the spouse and/or children), and correspondingly more taxable income to the estate, which is (hopefully) in a lower rate bracket.

      Instead of “tangible personal property,” some wills ill-advisedly use the term “personal effects,” which really means “tangible personal property, worn or carried about the person or having some intimate relation with the person.” Since automobiles and some other property are not considered “personal effects,” the broader term tangible personal property is preferred. Early distribution of this property also allows the executor to avoid the cost and trouble of storing it.

      Distribution by right of representation, or per stirpes as it is also called, is a method of allocating a bequest of the decedent’s property such that it follows the natural line of descent (e.g., the children of a predeceased child share that child’s portion of the estate.)

      The laws of intestate succession, also known as “laws of descent and distribution,” vary somewhat from state to state. They spell out the priority of succession rights of the decedent’s spouse and kin in the event of intestacy. In the event that his wife and all his descendants fail to survive him by 120 days, the testator has generously chosen to divide his property in halves, with one half going by intestate succession to his relatives and the other half going by intestate succession to his wife’s relatives.

      Fourth: Powers of executor.  Granting explicit powers to the executor can eliminate the need to secure permission of the probate court to undertake certain administrative actions. Ordinarily, testators would like their executors to act without undue delay.

      Signature clause and the statement of witnesses. Every state imposes formal requirements regarding the signing of the will by the testator and the role of the witnesses. The paragraph above the witnesses’ signatures increases the likelihood of compliance with these formal requirements by explicitly stating them and having the witnesses, by their signatures, acknowledge that such were carried out. The last sentence above the signatures of the witnesses offers some additional evidence of the testator’s capacity to execute a will. The Statement of Witnesses is also referred to as the attestation clause. When a will is signed and witnessed in the proper manner, such that it is a valid will, it is said to be executed.

      Other aspects of the simple will. Simple wills are most commonly drafted by attorneys for clients with modest estates where death taxes are not a concern. For a married couple, a simple will is usually prepared for each spouse. In most cases, the dispositive clauses are almost identical. Thus, the husband’s will leaves all to his wife, if she survives, otherwise to their children. And the wife’s will leaves all to her husband, if he survives, otherwise to their children. Such simple wills are commonly called reciprocal wills, mirror wills, or mutual wills.

      Occasionally, clients will want contractual wills, ones that cannot be revised once one of the parties (usually a spouse) dies. Sometimes these are done in the form of a single will for two people, called a joint will, although a joint will need not be contractual. Contractual wills are rare because most clients want the flexibility of being able to change an estate plan after one spouse dies. Joint wills should be avoided unless the clients really want a contractual will, because even if the clients did not intend the joint will to be irrevocable once one of the testators dies, a court may rule that this was the intent because there can be little other reason to create one will for two people.

      Wills that are more complex are less likely to be reciprocal in content. Typically, they are prepared by attorneys specializing in estate planning to reflect the inherently different preferences and different financial and tax circumstances of the spouses. This text will highlight many of these differences in later chapters.

      Where should the original copy of the will be kept? The client’s safe deposit box makes good sense in those states (e.g., California) that do not seal boxes at the owner’s death. In states where safe deposit boxes are sealed at the owner’s death, access to the will is delayed until a state official can join the prospective executor in inventorying the contents of the box so as to ensure that the executor accounts for any jewelry, bearer bonds, and the like that might be there. Some attorneys recommend their own safe. Some people might view this as self-serving, since the executor will have to come to the attorney’s office to take charge of the will, thus giving the attorney a good chance of serving as the probate attorney. However, since the testator selected that attorney to draft the estate plan, it would seem reasonable to select that attorney to handle the probate. Some attorneys simply recommend a secure, handy place in the client’s home.

      Next, we examine the trust, the other major planning document of transfer.

 

THE TRUST

 

The principal parties to a trust are the trustor, the trustee, and the beneficiary. As a legal arrangement, a trust is created by the trustor and divides and transfers interests in property between two or more people. Any interests or control over the trust not given to the beneficiaries are either retained by the trustor, granted to the trustee, or held by both.

      A trust can take effect during the lifetime of the trustor, or it can take effect at the trustor’s death. The former is called a living (or inter vivos) trust, while the latter is called a testamentary trust - a complex will that is also called a “trust-will.” The testamentary trust document is covered later in the chapter.

      At any given moment, a trust is either revocable and amendable, in which case the trustor is capable of voiding (canceling) or amending it, or it is irrevocable, that is, not voidable or amendable. A living trust usually contains specific language stating whether it is revocable or irrevocable. A revocable living trust usually, but not always, becomes irrevocable at the death of the trustor(s). Like the contents of most wills, the provisions of a testamentary trust can be amended or revoked before the testator’s death by codicil, revocation, or destruction of the document. At the testator’s death, a testamentary trust takes effect and becomes irrevocable since the only person capable of amending or revoking it, the testator, is, of course, permanently unavailable.

      A trust usually contains two different legal types of property, principal and income. The principal of a trust is its invested wealth. Its size will fluctuate with changes in the market value, by additions (income or additional property), by charges (expenses or losses), and by distributions from it. In contrast with trust principal, the income of a trust is the return in money or property derived from use of the trust principal. Examples of income include cash dividends, rent, and interest. Trust income also has charges against it, most of which reflect expenses incurred in managing the trust property (e.g., insurance premiums and some portion of the trustee’s fee). Any trust income not distributed to beneficiaries is said to be accumulated in the trust and is generally accounted for as retained income, not principal, unless the trust agreement requires that accumulated income be added to principal.

      The accounting distinction between principal and income is particularly important, because most trusts contain provisions that bestow rights to principal and income to different beneficiaries. In the chapter on fiduciary income taxes, we will see that the distinction between principal and income will influence trust income taxation.

      The beneficiaries of an irrevocable trust are usually either income beneficiaries (i.e., those having an interest in the income) or principal beneficiaries (for example, a remainderman who stands to receive principal outright when the trust terminates). These two types of beneficiaries may have conflicting or “adverse” interests, because the increased distributions to one will generally decrease the distributions to the other. For example, high-yield/low-growth stock would tend to benefit the income beneficiaries more than the remaindermen whereas low-yield/high-growth stock would favor the remaindermen more than the income beneficiaries.

      The following material describes a living trust and a testamentary trust. Keep in mind that individual trusts vary greatly, so it is a stretch to call any trust used as an example here typical. These examples are merely to illustrate the basic form of each document. There are other ways of classifying trusts, especially in connection with tax planning. The chapters in Part 3 introduce several tax-saving trusts, including the bypass trust, the Crummey trust, and the QTIP trust.

 

 

Living Trust Instrument

 

A living trust is created by a document of agreement between the trustor (or settlor) and the trustee. Before we examine the actual instrument, let’s compare and contrast the characteristics of a living trust with a will.

      Similarities. The will and the living trust instrument are similar in three important ways. First, both serve as the guide to the disposition of property at death. Second, both have a fiduciary (the executor or the trustee) who is responsible for managing property for a period of time until the transfers can be completed. Third, both instruments are generally amendable and revocable, at least until the person creating the instrument dies. The will can nearly always be amended by a codicil, or revoked by its destruction or by execution of a later will that explicitly revokes earlier ones. One exception, of course, is the contractual will, which becomes irrevocable after the death or incapacity of the first co-testator. The living trust is either revocable or irrevocable. In most states, a trust must state that it is revocable, otherwise it becomes irrevocable upon execution. In the other states, the opposite rule is in effect, such that a trust is revocable unless stated to be irrevocable.

      Differences. The will and the living trust instrument are different in three important ways. First, they dispose of a totally different set of property. A living trust instrument disposes of property owned by the trustee in trust for the trustor (decedent), while a will disposes of probate property owned by the decedent at death. Thus, with regard to property transfers, the living trust instrument and the will are mutually exclusive; property owned by the trustee is not probate property, while probate property is owned by the decedent, not the trustee. Of course, the decedent’s will can transfer property, by way of the probate process, to the trustee of his or her living trust, or even to the trustee of a trust he or she did not create, such as one created by one’s spouse. A will that transfers property to a trustee is called a pour-over will, because it scoops up property and “pours” it into an existing trust.

      Second, with regard to choosing a fiduciary, a living trust instrument appoints a trustee whereas a will nominates an executor. A testamentary trust must nominate both an executor and a trustee. Since the trustor of a living trust is alive when the trustee is appointed, the trustor has control over the appointment. The trust instrument is a legal contract between the trustor and the trustee. On the other hand, the probate judge appoints the executor of a will after the testator’s death. The judge may appoint someone other than the nominated executor for any number of reasons, including the nominee’s inability to serve due to death, disability, or incompetence.

      Third, while the formal execution requirements for writing a will are quite strict, the requirements for properly executing a trust instrument are simple to meet. In most cases, the trust document is simply dated and signed by the trustor and the trustee. Witnesses are not required. However some attorneys have the trustor’s signature notarized to assure others of its validity, especially those who might have to rely on the document at a time when the trustor is incapacitated or deceased. Although the formalities surrounding the execution of a trust document are simpler than those for a will, the mental capacity necessary is set at a higher standard. The settlor must have contractual capacity. Given the nature of the trust document, this would be, in addition to testamentary capacity, the ability to understand and enter into a bilateral contractual agreement. In most states, one contesting a settlor’s (or a testator’s) capacity has the burden of proving the lack of capacity by “clear and convincing” evidence. This is a more difficult (i.e., higher) standard than the typical “preponderance” of evidence burden generally placed on the plaintiff in a civil case.

      Exhibit 3-2 presents a fairly simple living trust. It is not designed to break into several irrevocable trusts at the trustor’s death as some do in order to save estate taxes. We will discuss those later.


Text Box: EXHIBIT 3 - 2  Living Trust Instrument
                                                 JOHN C. JONES

                                            Revocable Living Trust

 

Dated March 19, 2002

 

TRUST AGREEMENT made March 19, 2002, between John C. Jones, as trustor, resident of Common County, Anystate, and John C. Jones, resident of Common County, Anystate, as trustee.

      1.   Trust property.  The trustor has set aside and holds in trust the property described on Schedule One, attached to this instrument. The trustee agrees to hold such property and any later accepted property, in trust, under the terms and conditions provided herein.

      2.   Successor trustee.  If John C. Jones for any reason ceases to act as trustee, his wife, Sarah E. Jones, shall serve as trustee. If Sarah E. Jones is unable or for any reason ceases to act as trustee, then First National Bank of Anytown shall serve as trustee.

      3.   Power to amend or revoke.  The trustor reserves the right at any time to amend or revoke this trust, in whole or in part, by an instrument in writing signed by him and delivered during his lifetime to the trustee.

      4.   Operation of trust during trustor’s lifetime.  During the trustor’s lifetime, the trustee shall administer and distribute the trust as follows:

            a.   Trust income.  The trustee shall pay the net income to the trustor at convenient intervals but at least quarter-annually.

            b.   Trust principal.  The trustee shall pay to the trustor from time to time such amounts of the principal of this trust as the trustor shall direct in writing or as the trustee deems advisable for the trustor’s support and comfort.

      5.   Operation of trust after trustor’s death.  On the death of the trustor, the trust estate shall be held, administered, and distributed as follows:

            a.   Wife survives by four months.  If the trustor’s wife survives trustor by four months, the trustee shall distribute the entire trust estate to the trustee of her revocable trust, dated the same date as this trust, to be held and administered according to its terms. If said trust is no longer in existence, then distribution shall be to trustor’s wife, free of trust.

            b.   Wife does not survive by four months.  If the trustor’s wife does not survive the trustor by four months and if no then-living child of the trustor is under age twenty-one, then the trustee shall divide the trust into as many equal shares as there are children of the trustor’s then living and children of the trustor’s then deceased with descendants then living. Each share set aside for a child then deceased with descendants then living shall be further divided into shares for such descendants, by right of representation. The trust estate shall be held, administered, and distributed in the manner described in subsections 5(b)(2)(a) and (b), below.

      If neither the trustor’s wife nor any of the trustor’s descendants survive the trustor by four months, the trustee shall distribute the entire trust estate according to Anystate’s laws of descent and distribution, one half as if the trustor had died with no will on the last day of the four-month period and one half as if it were the trustor’s wife’s estate and she had died with no will on the last day. If the trustor’s wife does not survive the
Text Box: EXHIBIT 3 - 2  Living Trust Instrument  continued

trustor by four months and if any then-living child of the trustor is under age twenty-one, then the trust estate shall be held, administered, and distributed as follows:

                        (1) Any child under age twenty-one.  So long as any of the trustor’s children are living who are under twenty-one, the trustee shall pay to or apply for the benefit of all the trustor’s children as much of the net income and principal as the trustee in the trustee’s discretion deems necessary for their proper support, health, and education, after taking into consideration, to the extent that the trustee considers advisable, the value of the trust assets, the relative needs, both present and future, of each of the beneficiaries, and their other income and resources made known to the trustee and reasonably available to meet beneficiary needs. The trustee may make distributions under this provision that benefit one or more beneficiaries to the exclusion of others. Any net income not distributed shall be accumulated and added to principal.

                        (2) Youngest child reaches age twenty-one. When the youngest of the trustor’s then-living children reaches age twenty-one, the trustee shall divide the trust into as many equal shares as there are children of the trustor’s then living and deceased children who left issue. Each share set aside for the issue of a deceased child shall be further divided into shares, by right of representation, for such descendants. Each such share shall be distributed, or retained in trust, as hereafter provided.

                              (a)  Each share set aside for a descendant shall be distributed to that descendant free of trust when he or she reaches age twenty-one.

                              (b)  Each share set aside for a descendant who has not then reached age twenty-one shall be retained in trust. The trustee shall pay to or for the benefit of that descendant as much of the income and principal of the trust as the trustee, in the trustee’s discretion, considers appropriate for that descendant’s support, health, and education. When that descendant reaches age twenty-one, the descendant’s share shall be distributed to that descendant, free of trust. If that descendant dies before receiving distribution of that descendant’s entire share, the undistributed balance of that descendant’s share shall be distributed, free of trust, to that descendant’s then-living descendants, by right of representation, or if there are none, to the trustor’s then-living descendants, by right of representation. The share of a descendant for whom there exists a trust created by this instrument, shall augment that descendant’s trust.

      6. Restriction against assignment, etc.  No interest in the principal or income of this trust shall be anticipated, assigned, encumbered, or subject to any creditor’s claim or to legal process before its actual receipt by the beneficiary.

      7. Perpetuities saving.  Any trust created by this will that has not terminated sooner shall terminate twenty-one years after the death of the last survivor of the class composed of my wife and those of my descendants living at my death.

Text Box: EXHIBIT 3 - 2  Living Trust Instrument  continued

      8.  Powers of trustee.  To carry out the purposes of this trust, the trustee is vested with the following powers with respect to the trust estate and any part of it, in addition to those powers now or hereafter conferred by law:

            a.   To continue to hold any property, including shares of the trustee’s own stock, and to operate at the risk of the trust estate any business that the trustee receives or acquires under the trust as long as the trustee deems advisable.

            b.   To manage, control, grant options on, sell (for cash or on deferred payments), convey, exchange, partition, divide, improve, and repair trust property.

            c.   To lease trust property for terms within or beyond the term of the trust and for any purpose, including exploration for and removal of gas, oil, and other minerals and to enter into community oil leases, pooling, and unitization agreements.

            d.   To borrow money and to encumber or hypothecate trust property by mortgage, deed of trust, pledge, or otherwise.

            e.   To invest and reinvest the trust estate in every kind of property, real, personal, or mixed, and every kind of investment, specifically including, but not by way of limitation, corporate obligations of every kind, stocks (preferred or common), shares of investment trusts, investment companies and mutual funds, and mortgage participations, which persons of prudence, discretion, and intelligence acquire for their own account, and any common trust fund administered by the trustee.

            f.    In any case in which the trustee is required, pursuant to the provisions of the trust, to divide any trust property into parts or shares for the purpose of distribution, or otherwise, the trustee is authorized, in the trustee’s absolute discretion, to make the division and distribution partly in kind and partly in money, and for this purpose to make such sales of the trust property as the trustee may deem necessary on such terms and conditions as the trustee shall see fit.

 

      IN WITNESS THEREOF this instrument has been executed as of the date set forth on the first page of this instrument.

 

 

 

      John C. Jones                                    John C. Jones              

John C. Jones, Trustor                                                            John C. Jones, Trustee     

 

                          [Notarization of the signatures would appear here]

 

class=Section8>

      Analysis of the living trust instrument. Let’s examine the major provisions of this living trust instrument section by section.

      Trust agreement. A trust is, in effect, a contract or agreement between two parties, the trustor and the trustee. Both sides agree to perform certain tasks: among other things, the trustor agrees to deliver property described in Schedule One (not shown) to the trustee, and the trustee agrees to hold, administer, and distribute the trust property in keeping with the terms of the trust.

      In this living trust instrument, the trustor names himself to be initial trustee and names alternate successor trustees to take over when he resigns, becomes incapable of performing because of incapacity, or death. In other words, he might want to travel without worrying about managing the trust property or he might become too ill to manage it.

      1. Trust property. The instrument specifies that additional assets may be put in trust in the future, even after the trustor’s death. For example, a trustor’s will can be directed to “pour over” probate property into a trust.

      2. Successor trustee. Since the trust instrument states the trustee’s name in the opening paragraph, this section needs only name successor trustees. It is usual to name one or more of the remaindermen, if they are adults, as successors, since the remaindermen have a vested interest in managing and transferring the property efficiently. Sometimes the children are named as successor trustees, with the requirement that they have reached a certain age (e.g., twenty-five), in order to serve. Naming a bank, or other corporate entity, as a successor trustee virtually ensures that an experienced trustee will be available to serve for the duration of the trust. Some corporate fiduciaries will not assume the position of trustee unless the corpus is some minimum value. Where a corporate trustee is being considered, a meeting with the trust officers should be arranged to decrease the likelihood that the position will be refused later.

      3. Power to amend or revoke. This trust can be amended or revoked by a written document signed by the trustor and delivered to the trustee. An amendment is similar to a codicil to a will but without the strict formal execution requirements.

      4. Operation of trust during trustor’s lifetime. During the trustor’s lifetime, the trustee is required to pay to the trustor all income at least quarterly and any principal as requested. The reader will notice the wording assumes the trustor and the trustee are different parties. However, as mentioned above, most living trusts name the trustor as the initial trustee. Nevertheless, this paragraph is used in anticipation that, at some point, a successor trustee will take over the management of the trust.

      5. Operation of trust after trustor’s death. This section is substantially longer than the Disposition of Property section in the simple will. It provides for several alternative outcomes depending on who survives. First, the trust terminates if the trustor’s spouse survives the trustor by four months, with the result that all trust property will pass to her revocable trust or, if it is no longer in existence, then outright to her.

      Second, if the trustor’s spouse does not survive by four months and all the trustor’s children are over age twenty-one, the trust will terminate and distribute all assets free of trust to the children. However, if one or more of the trustor’s living children are younger than twenty-one, the trust continues as one trust. The trustee is instructed to collectively use trust principal and income to provide for all the children’s support, education, and other reasonable needs. Thus, the trustee has a limited power of appointment over the entire trust income and principal, with all living descendants named as permissible appointees. Then, when the youngest child reaches twenty-one, the trust is divided into equal shares, one for each child then living, and one for each deceased child for whom there are living descendants. The trust directs distribution to the younger generations by right of representation, also called “traditional per stirpes,” a concept more fully explained in a later chapter. Each share is then distributed outright to each descendant when he or she reaches age twenty-one. Thus, at the time the corpus is split, each child and any other descendant beneficiary who is at least age twenty-one will receive his or her share.

      Third, if the trustor’s spouse fails to survive the trustor by four months and no living child is under age twenty-one, the trust may or may not terminate, depending on whether there are underage descendants of deceased children. In any event, however, the trust estate is immediately divided into shares, and each child immediately receives his or her share. The balance of the trust corpus (held for these underage descendants of deceased children) will be administered in a manner (described below) quite similar to the way it is administered for a living child under age twenty-one. As each of these descendants reaches age twenty-one, he or she will receive an outright distribution of his or her share. Accordingly, the trust will terminate when the youngest living descendant of deceased children reaches age twenty-one.

      Finally, if the trustor is survived by neither a spouse nor descendants, the trust terminates and the trust property passes by intestate succession, with one half to the trustor’s relatives and the other half to the trustor’s spouse’s relatives. The laws of intestate succession are covered in the next chapter.

      The above disposition, using a trustee, has much to recommend it over the will’s provisions making outright gifts to the minor children, which requires a court-appointed guardian.

      6.   Restriction against assignment. This is an example of a spendthrift clause. Without it, the laws of many states would allow trust beneficiaries to transfer and encumber their interests in the trust property, and would enable the beneficiaries’ creditors to seize trust assets to satisfy their claims. For example, beneficiaries may not borrow money secured by their share of trust property, sell a future interest in it, or devise it. A spendthrift clause restricts such transfers. However, it only protects trust property while held by the trustee, not after it has been transferred outright to a beneficiary.

      7.   Perpetuities saving. This clause is included to prevent a contingent gift from being ruled invalid because it violates a law found in almost all states that requires interests to vest within some reasonable time after the transfer. This law is called the rule against perpetuities.

      8.   Powers of trustee. Since a trustee is likely to manage trust property for a considerably longer period than an executor is likely to manage an estate, the powers granted to the trustee are usually stated in more detail than those granted in a will to an executor. In addition to these powers, both the executor and trustee automatically have other implicit powers derived from statutory law and from case law, unless the document specifically prohibits such powers. For example, trustees have the power to defend against claims brought against the trust property, whether that power is specifically granted in the document.

      This living trust is uncomplicated primarily because it does not attempt to save estate taxes. If the other spouse survives the trustor spouse by four months, all corpus will pass to the surviving spouse’s revocable trust or outright to her. Like the simple will, it is created for families with modest estates, for whom death tax planning is not a significant concern. We will introduce a more complicated tax-saving living trust in the two chapters that deal with estate plans for the wealthy, where estate taxes are a concern.

class=Section9>

THE TESTAMENTARY TRUST

 

The testamentary trust, or trust-will, is the third principal document of property disposition commonly prepared by attorneys in the estate planning process. In essence, a testamentary trust is actually one type of will; it serves as the guiding document for the distribution of the testator-trustor’s probate property at death. In addition, it disposes of some, or all, of the probate property to the trustee of a trust that is newly created according to trust terms that are set forth as part of the will. This trust takes effect after the testator’s death at the end of the probate process. The actual creation of the trust, and the funding mechanism, is the order for distribution. The order names (appoints) the trustee, sets forth all the terms of the trust (generally quoting verbatim from the testamentary trust document), and orders the executor to distribute the estate to the trustee. The trustee uses the order as the governing document when dealing with third parties, such as banks, brokers, and title companies, rather than the original trust-will. Recording a certified copy of the order in those counties where real property is located serves to transfer the property from the estate to the trustee.

      As a will, the testamentary trust must conform to all legal requirements for the execution of a will. It therefore contains all essential provisions found in any will, such as nomination of a guardian of the person and estate of the testator’s minor children, nomination of executors, and a section for the attestation by witnesses. It may also have provisions that make outright gifts of certain property (e.g., the tangible personal property may be given to the spouse or children free of trust).

      In addition to containing all provisions customarily found in other wills, the testamentary trust, like the living trust, must include other unique clauses that relate to the trust itself. Thus, it will include provisions for distributing probate property into the trust, for naming one or more trustees, for stating who will be the trust beneficiaries, for specifying how much income and principal they will receive and when they will receive it, and for describing the trustee’s duties and powers in connection with managing the trust property. Of course, all but the first clause just mentioned are also included in a living trust.

      It should be noted that being a will, the testamentary trust is not an “agreement” between testator and future trustee. In fact, the potential trustee may not even be aware that he or she will one day be asked to perform this task, and may not even be born when the testamentary trust was signed. Before the court order of distribution, the nominated trustee will have to file with the court a consent to serve as trustee. Exhibit 3-3 presents a relatively uncomplicated testamentary trust.

 

Text Box: EXHIBIT 3 - 3 Testamentary Trust (Trust-Will)
                                                       WILL OF

 


                                      WILLARD THOMAS SMITH

 

      I, Willard Thomas Smith, a resident of Mytown, Anystate, declare this to be my will. I revoke all prior Wills and Codicils.

 

 

First: Family and Guardian  I am married to Sue L. Smith, referred to in this will as “my wife.” I have three children, all from this marriage, whose names and birthdays are:

     

            Kristi M. Smith  June 27, 1987

            Heather L. Smith     April 19, 1989

            Todd R. Smith         May 11, 1991

 

Reference to “my children” or to “my child,” shall include children born later and children adopted by me. I have no deceased children.

      If my wife does not survive me, and it is necessary to appoint a guardian, I nominate Curtis J. Quint guardian of the person and estate of each such minor child. If for any reason Curtis J. Quint does not act as guardian, I nominate Maria S. Cruise

as guardian of the person and estate.

 

 

Second: Selection of Fiduciaries I nominate the following fiduciaries:

      A.  Designation of Executor  I nominate my wife as my executor. If for any reason she does not so act, I nominate James A. Reliable to be my executor. If for any reason neither my wife nor James A. Reliable acts as executor, I nominate Third National

Bank of Mytown to be my executor.

      B.  Designation of trustee  I nominate such of my children as are over age twenty-five as co-trustees. If my children are unable to serve as trustees, then I nominate James A. Reliable as the trustee of all trusts provided for under this will. If for any reason neither my children nor James A. Reliable are available to serve as trustee, I nominate Third National Bank of Mytown as trustee.

      C.  Bond waiver  No bond, surety, or other security shall be required of my executor or of my trustee.

 

 

Third: Disposition of Property  I make the following provisions for my probate property:

      A.  Tangible personal property  If my wife survives me by 30 days, I give her all my interest in any tangible personal property. If my wife does not survive me by 30 days, I give my tangible personal property in equal shares to those of my children who survive me by 30 days. My executor shall consider their personal preferences in making that division. If my children are still minors, my executor has my permission to sell any of that property and distribute the proceeds to equalize the shares. My executor shall be discharged for all tangible personal property so given to any minor child if the child or adult having the child’s custody gives a written receipt to my executor.

      B.  Residue  If my wife survives me by four months, I give her the residue of my estate. If my wife does not survive me by four months and all my living children are then over age twenty-one, I give the residue in equal shares: one to each child who survived me by four months, and one share for each deceased child whose issue is then living. If any issue of a deceased child entitled to a share is under age twenty-one, his or her share shall be administered as set forth at subparagraph two of this Third Article.

      If my wife does not survive me and if any child of mine is under age twenty-one, then the residue of my estate shall not vest in the children as provided above; rather, such property shall be distributed in trust to the trustee named above, to be held, administered, and distributed as follows:

            1.   Any child under age twenty-one  So long as a child is under age twenty-one, the trustee shall pay to or apply for the benefit of my children, as much of the net Text Box: EXHIBIT 3 - 3 Testamentary Trust (Trust-Will) continued
income and principal as the trustee in the trustee’s discretion deems appropriate for their proper support, health, and education, after taking into consideration, to the extent that the trustee considers it advisable, the value of the trust assets, the relative needs, both present and future, of each of the beneficiaries, and their other income and resources made known to the trustee and reasonably available to meet beneficiary needs. The trustee may make distributions under this provision that benefit one or more beneficiaries to the exclusion of others. Any net income not distributed shall be accumulated and added to principal.

            2.   Youngest child reaches age twenty-one  When the youngest child reaches age twenty-one, the trustee shall divide the trust into as many equal shares as there are children of mine then living and children of mine then deceased with descendants then living. Each share set aside for a child of mine then deceased with descendants then living shall be further divided into shares for such descendants, by right of representation. Each such share shall be distributed, or retained in trust, as hereafter provided.

                  a.   Each share set aside for a child, or for the descendant of a deceased child who has reached age twenty-one, shall be distributed free of trust.

                  b.   Each share set aside for a descendant who has not reached age twenty-one shall be retained in trust. The trustee shall pay to, or for the benefit of, that descendant as much of the income and principal of the trust as the trustee, in the trustee’s discretion, considers appropriate for that descendant’s support, health, and education. When the descendant reaches age twenty-one, that descendant’s entire share shall be distributed to that descendant, free of trust. If that descendant dies before receiving distribution of that descendant’s entire share, the undistributed balance of that descendant’s entire share shall be distributed to that descendant’s then-living descendants, by right of representation, or if there are none, to my then-living issue, by right of representation. In the latter event, the share of a descendant for whom there exists a trust created by this instrument shall augment that descendant’s trust.

      C.  Taxes from residue  All death taxes imposed because of my death and interest and penalties on those taxes, whether on property passing under this will or otherwise, shall be paid by my executor from the residue of my estate.

      D.  Restriction against assignment, etc.  No interest in the principal or income of this trust shall be anticipated, assigned, encumbered, or subject to any creditor’s claim or to legal process before its actual receipt by the beneficiary.

      E.   If all beneficiaries die before full distribution  If neither my wife nor any of my descendants survives me by four months, I give the residue of my estate according to Anystate’s laws of descent and distribution, one half as if I had died with no will on the Text Box: EXHIBIT 3 - 3 Testamentary Trust (Trust-Will) continued
last day of that four-month period, and one half as if it were my wife’s estate and she had died with no will on that last day.

      F.   Perpetuities saving  Any trust created by this will that has not terminated sooner, shall terminate twenty-one years after the death of the last survivor of the class composed of my wife and those of my issue living at my death.

 

 

Fourth: Powers of Executor  My executor shall have unrestricted powers, without court order, to settle my estate as this will provides. In addition, my executor shall have all powers my executor thinks necessary or desirable to administer my estate, including the following:

      A.  To make distributions of principal and income on an interim basis to those entitled to it.

      B.   To sell, exchange, mortgage, pledge, lease, or assign any property belonging to my estate.

      C.   To continue operation of any business belonging to my estate.

      D.  To invest and reinvest any surplus money.

 

 

Fifth: Powers of Trustee  To carry out the purposes of any trust created under Article Three, and subject to any limitations stated elsewhere in this will, the trustee is vested with the following powers with respect to the trust estate and any part of it, in addition to those powers now or hereafter conferred by law:

      A.  To continue to hold any property, including shares of the trustee’s own stock, and to operate at the risk of the trust estate any business that the trustee receives or acquires under the trust as long as the trustee deems advisable.

      B.   To manage, control, grant options on, sell (for cash or on deferred payments), convey, exchange, partition, divide, improve, and repair trust property.

      C.   To lease trust property for terms within or beyond the term of the trust and for any purpose, including exploration for and removal of gas, oil, and other minerals and to enter into community oil leases, pooling, and unitization agreements.

      D.  To borrow money and to encumber or hypothecate trust property by mortgage, deed of trust, pledge, or otherwise.

      E.   To invest and reinvest the trust estate in every kind of property, real, personal, or mixed, and every kind of investment, specifically including, but not by way of limitation, corporate obligations of every kind, stocks (preferred or common), shares of investment trusts, investment companies and mutual funds, and mortgage participations, which persons of prudence, discretion, and intelligence acquire for their own account, and any common trust fund administered by the trustee.

      F.   In any case in which the trustee is required, pursuant to the provisions of the trust, to divide any trust property into parts or shares for the purpose of distribution, or Text Box: EXHIBIT 3 - 3 Testamentary Trust (Trust-Will) continuedotherwise, the trustee is authorized, in the trustee’s absolute discretion, to make the division and distribution in kind, including undivided interests in any property, or partly in kind and partly in money, and for this purpose to make such sales of the trust property as the trustee may deem necessary on such terms and conditions as the trustee shall see fit.

class=Section10>

Text Box: EXHIBIT 3 - 3 Testamentary Trust (Trust-Will) continued      I have signed my name to this instrument on March 19, 2002, at Mytown, Anystate.

 

 

 

                                                                            Willard Thomas Smith   

                                                                                                                             

Statement of Witnesses  We, the undersigned witnesses, on March 19, 2002, sign our names to this instrument, being first duly sworn, and do hereby declare to the undersigned authority that the testator signs and executes this instrument as his last will and that he signs it willingly (or willingly directs another to sign for him), and that each of us, in the presence and hearing of the testator, hereby signs this will as witness to the testator’s signing, and that to the best of our knowledge the testator is eighteen years of age or older, of sound mind, and under no constraint or undue influence.

 

 

         John Meeks                                               Jennifer Jarrett               

   1341 Park St., Little Town, Anystate                 42 Short Rd., Little Town, Anystate

 

 

 

 

      Notice that, unlike the living trust shown in Exhibit 3-2, this particular testamentary trust creates only a contingent trust (i.e., a trust that comes into existence only if a certain combination of events happens, specifically, if the testator’s wife fails to survive him and one or more beneficiaries is under age twenty-one). Not all testamentary trusts are contingent. For example, a testamentary trust could provide that a trust be created that gives the surviving spouse a life estate, followed by a life estate for the children, with the remainder going to the grandchildren.

 

 

The Rule Against Perpetuities

 

The rule against perpetuities (the rule) originated in English common law. The rule acts to prevent a transferor from controlling the disposition of property for an unreasonably long period after making the transfer. The rule is generally stated as follows:

 

No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.

 

      Thus, the rule has the effect of invalidating a future contingent interest which might not vest within twenty-one years after the death of certain people alive (the measuring lives) at the time the document creating the interest became irrevocable.[10] The statutes of all states except Alaska, Idaho, Wisconsin, North Dakota, and South Dakota contain some variation of this rule. Charitable trusts are exempt from the rule, making them potentially infinite in duration.

      In estate planning, an interest in property can take effect during the transferor’s lifetime, or it can take effect at the transferor’s death. A transfer into an irrevocable living trust is an example of the creation of a property interest that will take effect during the transferor’s lifetime, whereas a transfer into the typical revocable living trust and a transfer by will are examples of transfers that create interests that do not take effect until the transferor’s death.

      Thus, to satisfy the requirements of the rule, the interest must vest, if at all, within twenty-one years after the death of someone alive at the moment of transfer into an irrevocable trust, or at the moment of the transferor’s death, for interests created by will or by revocable living trust.

      The rule is satisfied if an interest vests (or fails) immediately on its transfer. Thus, a statement in a will giving a bequest “to John, for his life, then to Mary or her estate,” creates vested interests for both John and Mary at the testator’s death. Nothing (except, in Mary’s case, the passage of time) will prevent them from receiving possession of the property. Of course, if John dies before the testator, his interest (a life estate) will immediately fail. Therefore, the rule need only be used to determine the validity of contingent future interests; that is, interests that are not vested when created.

      The requirement that the interest must vest “if at all” means that a contingent future interest will not violate the rule merely because it failed to vest due to the happening of a contingency that did not work in favor of a named party. Thus, the transfer “to Jane if she survives Margo” gives Jane a contingent future interest that must vest or fail to vest within the permitted time. Failure to vest will not violate the rule, so long as that failure (or non-failure) must occur within the required period. Thus, Jane will or will not survive Margo, an outcome that will be determined as soon as one of them dies. If one cannot be sure that one or the other of these outcomes will definitely happen during the period, then the interest violates the rule.

      To qualify under the rule, an interest must vest or fail to vest “not later than twenty-one years after some life in being at the creation of the interest.” The “life in being” concept is difficult to explain precisely. For our purposes, however, we can say that the persons permitted to be “lives in being” are usually those mentioned or identified in the transfer document itself. Thus, for the transfer “to Carrie for her life, then to Carrie’s living children,” Carrie would be the sole measuring life. She is alive at the creation of the children’s interest, and the length of her life span will determine the devolution of the property. Taking a second example, the provision that a trust will terminate “twenty-one years after the death of the last survivor of the class composed of my wife and those of my issue living at my death” identifies the measuring lives as all the people in the class. This “perpetuities saving clause,” included in the testamentary trust in Exhibit 3-3, is a clause that can further protect an interest from vesting too remotely.

      The requirement of vesting within “twenty-one years” after the death of a life in being was originally included to enable the transferor to control the disposition of property for his or her life, for the lives of the children, and for the period of the grandchildren’s minority, but no longer. For those individuals, all interests created which are contingent solely on parent survival will usually vest within the required period. The children’s interest will vest by the time of the death of the transferor, and the grandchildren’s interest will vest within twenty-one years of the death of the last surviving child. Thus, their interests will vest within the required period. On the other hand, a great-grandchild’s interest will typically (but not always) vest after the twenty-one year period, and thus will usually fail.

      A violation of the rule will cause that particular interest to be void. The interest will then revert to the transferor or the transferor’s successors.

      Let us consider some examples. In each case, assume that the transferor has died, leaving a will containing the disposition clause shown as the initial quote.

 

EXAMPLE 3 - 1.  Ted’s will stated, “To my wife, Mary, for her life, then to Bill or his estate.” Both Mary’s and Bill’s interests vested immediately when the will took effect (at Ted’s death) because at that point, nothing except the passage of time could delay their possession or enjoyment. Therefore, neither interest is contingent, that is, dependent on the happening of a future event, other than the passage of time. Applying the rule, their interests “must vest...not later than....” Thus, both interests are valid under the rule.

 

EXAMPLE 3 - 2.  Continuing with the prior example, assume the following is also included in Ted’s will: “...then to my great, great, great-grandchildren...” Assuming that Ted is survived only by children and grandchildren, it is possible that the great, great, great-grandchildren’s contingent interest will vest more than twenty-one years after the death of all children and grandchildren, who are the only apparent lives in being at Ted’s death. Thus, their interests are void.

 

EXAMPLE 3 - 3.  Theresa’s will stated, “To my husband, Bert, for his life, then to my son James, if still living, otherwise to Ron or his estate.” Bert’s vested interest is valid under the rule for the same reason that Mary’s was in the preceding example. Both James and Ron have contingent interests in the property. Thus, we must ask whether they must vest within the specified time. Both James’s and Ron’s interests will vest, if at all (either one or the other will never vest, depending on whether James survives Bert), within “twenty-one years after some life in being”. Bert is “a life in being” at the time of Theresa’s death, and both interests will vest or will fail to vest at his death well within the time limit of the rule. Therefore, both James’s and Ron’s interests are valid under the rule.

 

EXAMPLE 3 - 4.  Tom’s will stated, “To my wife Sarah, for her life, then to my son Greg, for his life, then equally to Greg’s living children when the youngest child reaches age 25.” Are Greg’s children’s interests valid under the rule? Sarah, Greg, and any children alive when the trust became irrevocable at Tom’s death are “lives in being” at the creation of the interest. But more children could be born to Greg, and they would not be lives in being at the time the trust became irrevocable, yet they would (by the terms of the trust) each have an interest that could vest, more than twenty-one years after the deaths of Sarah, Greg, and any of the children that were born when the trust became irrevocable. Therefore, the grandchildren’s interests are void, and Tom or his successors would receive a reversionary interest that follows the death of Greg. Since Tom’s only living issue is Greg, violation of the rule probably means that Greg would have the interests in fee. Note that had the trust called for the interests to vest when Greg’s oldest living child reaches age twenty-one, then all the children’s interests would vest within a life in being plus twenty-one years, even if none of the children were born when the trust became irrevocable, since all children would be born within Greg’s lifetime.

 

Here are two general rules of thumb when applying the rule to transfers of interests to surviving issue:

 

      1.   Transferors usually can create valid contingent interests for their grandchildren, as long as the interests must vest by the time their grandchildren reach age twenty-one. The law tacks on the period of gestation to the twenty-one years; hence a grandchild born after the father’s death can have his or interest vest at age twenty-one without violating the rule.

      2.   Transferors usually can create valid interests for their great-grandchildren only if they outlive their children or specify the measuring lives as persons alive at the transferor’s death, e.g., “all interests shall vest no later than twenty-one years after the death of the last survivor of settlor’s issue who was alive when this trust became irrevocable.”

 

      Today, not all dispositions in violation of the rule are invalid. Two types of safeguards designed to overcome the rule are available to transferors. First, most states have enacted statutes that limit application of the rule, or even invalidate it entirely. For example, many states have enacted a “wait and see” statute which, in effect, finds an interest void only if the interest turns out in fact not to vest within the required period. In addition, some states have a type of wait-and-see statute stating that any interest which actually vests within a certain period of time (e.g., 60 years) after its creation cannot be declared void, even if it violates the rule. In 1986 the National Conference of Commissioners on Uniform State Laws approved the Uniform Statutory Rule Against Perpetuities, recommending that all states enact it. It includes a wait-and-see period of 90 years after creation.

      Another statutory safeguard is the application of the “cy pres” rule to enable the courts to correct violations of the rule, if at all possible, so that the transferor’s intentions can be respected. Cy pres, French for “as near as possible,” is a principle used primarily in the context of charitable bequests, to permit the substitution of one beneficiary for another when the original charitable purpose is impossible, illegal, or impractical to carry out. For example, over a century ago, one testator left property in trust to fight for the cause of abolition. After the 13th Amendment freed the slaves, a court applied cy pres to permit the trust to continue by assisting freed slaves.

      The second type of safeguard is to protect against a perpetuities violation and involves the lawyer’s insertion in the document of the earlier mentioned perpetuities saving clause, similar to the one in the testamentary trust in Exhibit 3-3. Such a provision, however, may act to prevent the client from making an otherwise valid transfer, perhaps simply because the attorney chose not to test the interest against the rule. In fact, none of the above safeguards is as effective as the thoughtful analysis and planning of an expert.

      Yet, one must have some sympathy for the lawyers who use the clause. The rule often requires complex analysis to test a given interest, and it can even puzzle experts. One state supreme court held that, given the complexity of the rule, an attorney who created a will that violated the rule was not liable because he had used the ordinary skill commonly exercised by lawyers.[11] It is doubtful that a similar case would be decided the same way today.

      The purpose of this discussion has been to present an overview of the rule against perpetuities. All members of the estate planning team should have at least a general understanding of the rule, primarily because it constitutes a constraint on how far into the future one can maintain control.

 

      This chapter has introduced the documents used in the transfer of an estate, with particular emphasis on the simple will, the living trust, and the testamentary trust. The next chapter focuses on the actual process of transfer of the property disposed of by these documents, with particular emphasis on the probate process and its handling of intestate succession. Later chapters will again discuss trusts in connection with saving estate taxes, with special emphasis on what are called bypass trusts and marital deduction trusts.

 

 

 

 

 

QUESTIONS AND PROBLEMS

 

  1. (a) Which of the following types of property can be held in joint tenancy: real estate, stocks, vehicles, bank accounts, and/or tangible personal property? (b) What is the main advantage to this form of title?

 

  2. Does the right to choose or change the beneficiary designation reside with the insured? Explain.

 

  3. Is the insured the only one allowed to own life insurance on his or her life? If not, how does one go about changing ownership to a life insurance policy?

 

  4. (a) Name the major documents used in the estate planning process to transfer wealth. (b) Do they all require the same effort in their preparation? Why or why not?

 

  5. Describe the five major reasons why a will might not be admitted to probate.

 

  6. Name and describe the two different types of wills recognized by many states.

 

  7. Can a valid will meet the typical statutory requirements for both the witnessed will and the holographic will? Why or why not?

 

  8. (a) What is a simple will? (b) List its major sections.

 

  9. (a) What is a codicil? (b) Why is it mentioned in the typical will?

 

10. (a) Why does the will nominate two types of guardians? (b) Must the probate judge follow the testator’s nominations?

 

11. Why might it be a mistake to waive (as part of one’s will) the requirement of an executor’s bond? When does waiving one make the most sense?

 

12. What is the purpose of a clause directing that all death taxes be paid from the residue?

 

13. Why does the disposition section in a will contain a survival clause?

 

14. Describe the contents of the “Statement of Witnesses” section of a will.

 

15. (a) Distinguish between a living trust and a testamentary trust. (b) Are all testamentary trusts established in wills?

 

16. (a)  Of the three documents highlighted in this chapter, how many are wills? (b) How many create trusts?

 

17. Contrast the living trust in Exhibit 3-2 with the testamentary trust in Exhibit 3-3 in terms of: (a) When the trust takes effect. (b) Who is the appointed or nominated trustee. (c) Whether the trust principal is subject to probate administration at the trustor’s death. (d) Who are the income beneficiaries. (e) Who are the remaindermen.

 

18. (a)  Describe, in general, how the living trust included in Exhibit 3-2 disposes of income and principal. (b) Which parties stand to receive a contingent future interest? (c) When, if ever, will each future interest become vested?

 

19. List the sections of a testamentary trust that are common to all witnessed wills and the sections that are found only in testamentary trusts.

 

20. Finnegan, a widower, died last week. He is survived by the following family members (current ages in parentheses): Two children, Joe (30) and Gary (17). Joe has four children, Jackie (5), John (3), Carol (2), and Bob (1). Finnegan is also survived by three other grandchildren: Floyd (4) and Fred (3), the sons of Finnegan’s deceased daughter Kerri, and Kitty (9), the daughter of Finnegan’s deceased daughter Shirley. Kerri’s and Shirley’s husbands, Kurt (29), and Rolf (31), are still alive. Joe has come to your office requesting some information. Assuming that Finnegan’s large estate will be distributed in accordance with the testamentary trust contained in Exhibit 3-3, answer the following: (a) Who will receive the property (i.e., principal), and (b) assuming no more family members die at a young age, when will they receive it?

 

21. What is the purpose of the rule against perpetuities?

 

22. Helen’s will leaves one half of her wealth outright to Vinnie and the other half in trust for Johnny, with all income payable annually to Johnny and, at the earlier of Johnny’s death or his reaching age twenty-one, corpus to Johnny or his estate. Does this will violate the rule? Why or why not?

 

23. Holly’s will leaves her property in trust, with income to her living children for life, then income to her then-living grandchildren for their lives, and then remainder over to her then living great-grandchildren. Who will get Holly’s property?

 

24. Generally, how do drafters of trust documents avoid violation of the rule today?



ANSWERS TO QUESTIONS AND PROBLEMS (odd numbered only)

 

  1. (a) All the property listed can be held in joint tenancy, indeed it is hard to think of any that cannot be. It might be harder to establish that form of ownership for tangible personal property unless one has some type of title certificate (e.g., car registration would make it clear how title is held). Nevertheless, three friends could buy a kayak together and agree that they will own it equally, if one dies the survivors will own it, etc., and the owners would joint tenants. (b) Advantage? The good old right of survivorship. The simplicity of transfer of title if one co-owner dies.

 

  3. No, it is very common to have someone else own the policy, i.e., the spouse of the insured (less common today with the 100% marital deduction than it was prior to 1982), the children of the insured, or the trustee of an irrevocable life insurance trust. To change ownership, the owner uses a form supplied by the insurance company that will accomplish this; it is likely to be titled “Assignment of Policy” or “Change of Ownership.” This needs to be distinguished from merely changing beneficiary designation, since in changing beneficiary designations the owner does not part with ownership or control, whereas changing ownership obviously results in parting with all benefits, title, and control.

 

  5. Five major reasons why a will may not be admitted to probate:

 

      (a)  Lack of testamentary capacity; that is, failure to be aware: (1) that they are executing a will; (2) of what they own; (3) of their heirs

(b)  Undue influence, or over-persuasion

(c)  Fraud

(d)  Mistake

(e)  Format (formality) problems, e.g., one witness where the state of domicile requires two

 

  7. In many states, a valid will can theoretically meet the typical requirements for both the witnessed will and the holographic will because the formal requirements are not usually mutually exclusive. Such a will would usually have to be written, with all material provisions written in the testator’s hand, and signed in the presence of two witnesses.

  9. (a)  A codicil is a separate written document that amends or revokes a prior will.

(b)  It is mentioned in the revocation clause to prevent needless litigation over the construction of two or more wills.

 

11. Not waiving the bond can protect the estate from breaches of trust by the executor. This may be important when the testator nominates or anticipates that the probate judge may appoint a non-professional, who is not related to the decedent, to be executor.

 

13. A survival clause avoids the risk of (1) double probate, and (2) unintended disposition to in-laws, etc., when one spouse survives the other a short period.

 

15. (a)  A living trust takes effect during the trustor’s lifetime, while a testamentary trust takes effect after the testator’s death. The latter is funded through the probate process.

      (b)  Yes, by definition all testamentary trusts are established in wills.

 

17.

 

3-2 living trust

3-3 testamentary trust

a.

takes effect?

on execution and funding

upon probate order

b.

nominated trustees?

John C. Jones (trustor and trustee)

children over age 25, if none, then James A. Reliable.

c.

probated?

no, probate avoidance

yes, the funding mechanism is the probate process

d.

income beneficiaries?

initially the trustor, John C. Jones, then children, if wife does not survive the four-month survivorship period

none, if wife survives, otherwise the children until they reach the ages set for termination of the trust

e.

remaindermen?

wife, if she survives the four-month survivorship period, otherwise the children.

the children, but only if the trust is funded. This happens if wife does not survive the four-month survivorship period.

     

19. Sections common to all witnessed wills: (1) Declaration and Revocation,  (2) Family and Guardian, (3) Executor, (4) Disposition of Property, (5) Powers of Executor, (6) Statement of Witnesses.

 

Sections found only in trust wills: (1) Designation of Trustee, (2) Powers of Trustee.

 

21. The purpose of the rule is to prevent a transferor of property from controlling the disposition of property for an unreasonably long period after making the transfer.

 

23. Both Holly, her children, and any grandchild alive when she dies are lives in being insofar as this trust is concerned. The income interests of the children and the grandchildren vest within the rule’s outer limits but the remainder to the great-grandchildren violates the rule. The great-grandchildren’s interests fail because there is a chance that a child could give birth to a child (Holly’s grandchild) after Holly died. That grandchild would not be a life in being, hence any child born to that grandchild (i.e., the child would be Holly’s great-grandchild) would have, according to the trust, an interest that was not within the outer limits of the rule. Due to the violation of the rule, the remote interests of the great-grandchildren are cut off and the grandchildren would end up with remainder interests instead of just income interests. Note that the common law rule does not take a wait and see approach, e.g., it does not allow us to wait and see whether any grandchildren are born after Holly dies.

 

 

 


 

                                                    ENDNOTES

 



[1].             According to the National Conference of Commissioners on Uniform State Laws, (see Legislative Status & Information on Uniform Acts at http://www.nccusl.org), the following states have adopted all or part of the UPC: Alaska, Arizona, Colorado, Hawaii, Idaho, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Pennsylvania, South Carolina, South Dakota, Utah, Vermont, and Wisconsin. Numerous other states have adopted the UPC in an incomplete form.

[2].             See California Probate Code § 6111(c) @ http://www.leginfo.ca.gov/calaw.html.

[3].             See UPC § 2-503 (e.g., see South Dakota’s Title 29A-2-503 using the URL for the Legal Research Institute at Cornell Law School: http://www.law.cornell.edu/uniform/ probate.html).

[4].             UPC § 2-504, see South Dakota’s UPC @ http://www.law.cornell.edu/uniform/probate. html.

[5].             UPC § 2-517 see South Dakota’s UPC @ http://www.law.cornell.edu/uniform/probate. html.

[6].             UPC § 2-507 see South Dakota’s UPC @ http://www.law.cornell.edu/uniform/probate. html.

[7].             Wolfe’s Will, 185 NC 563 (1923).

[8].             Cal. Probate Code § 6402.5 @ http://www.leginfo.ca.gov/calaw.html.

[9].             Knupp v. District of Columbia, 578 A. 2d 702 (D.C. Ct. App., 1990).

[10].           For an interesting discussion of the rule against perpetuities, see http://www.wwlia.org/ ruleperp.htm

[11].           Lucas v. Hamm, 56 Cal. 2d 583 (1961).