Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409, gwb@ProfessorBeyer.com. Contributors include Dave L. Cornfeld, Claire G. Hargrove, Christopher L. Harris, and Prof. William P. LaPiana.
Keeping Current—Probate offers a look at selected recent cases, rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
APPORTIONMENT: Trust created for surviving spouse required to pay estate tax because of inclusion of trusts for the decedent’s children in his gross estate. The decedent held a power of appointment over several trusts for his children. The court in Lurie v. Commissioner, 425 F.3d 1021 (7th Cir. 2005), held that the value of these trusts was includible in his gross estate. The estate tax triggered by the inclusion exhausted the probate estate and was payable from a revocable trust established for his wife rather than from the trusts for his children that generated the estate tax. Accordingly, the marital deduction was reduced. The court recognized that if the decedent had realized that this would happen, he would not have included a provision in the marital trust that it was responsible for the estate taxes and instead would have provided for estate taxes to be apportioned to the trusts triggering the tax. Nevertheless, the court explained that it could not rewrite the decedent’s estate plan.
CY PRES: Services provided by substitute beneficiary must be within same geographic area as original beneficiary. The decedent’s will created two charitable trusts, one for each of two hospitals, both of which were listed by name and location. One of the hospitals was acquired by a for-profit corporation and could no longer be the recipient of trust distributions. The trial court ordered that the trust income be paid to the other hospital. On appeal, the court upheld the use of cy pres but vacated the decree directing payment, holding that permissible recipients of the trust income must provide health services in the same geographic area served by the former not-for-profit hospital. In re Estate of Elkins, 888 A.2d 815 (Pa. Super. Ct. 2005).
DOMESTIC PARTNERSHIP: Survivor of a Vermont civil union could not maintain a wrongful death action under New York law. In Langan v. St. Vincent’s Hosp. of New York, 802 N.Y.S.2d 476 (N.Y. App. Div. 2005), a divided court overruled the trial court and held that the survivor of a Vermont civil union could not maintain a wrongful death action on the same basis as a spouse because the Vermont civil union is not a “marriage.”
FAMILY LIMITED PARTNERSHIP: No discount allowed for nonbinding restrictions. A family limited partnership contained restrictive provisions. Because of these restrictions, the donor attempted to obtain a marketability discount for gift tax purposes. The court in Smith v. United States, No. 02–264 ERIE, 2005 WL 3021918 (W.D. Pa. July 22, 2005), disregarded the restrictions because the donor had a sufficiently large ownership interest in the partnership to amend the partnership agreement to eliminate the restrictions.
FIDUCIARY DUTY: Jury instruction must include indication that the settlor may alter duties in the trust instrument. In a complex security fraud case, the Supreme Court of Texas addressed the propriety of a jury instruction regarding breach of fiduciary duty. The instruction failed to reflect the possibility that the standard of care could be modified by agreement. Because the instruction did not account for contractual modifications, the court determined it was overly broad and consequently defective. Sterling Trust Co. v. Adderley, 168 S.W.3d 835 (Tex. 2005).
GROSS ESTATE: Recording data determinative of ownership of real property. In Estate of Maniglia v. Commissioner, 90 T.C.M. (CCH) 427 (2005), the court found that the decedent, as the sole beneficiary of a trust, was the sole owner of a real estate interest, rather than a one-half owner as reported. In making the determination, the court relied on various documents filed in the real property records. Consequently, the entire value of the property was included in the decedent’s gross estate.
HOMESTEAD: Probate homestead did not exist in property held as joint tenants with rights of survivorship. In Seehafer v. Seehafer, 704 N.W.2d 841 (N.D. 2005), the court held that a surviving spouse had no homestead rights in property held by the deceased spouse and a third party as joint tenants with right of survivorship. Because the decedent’s interest ended at death, there was nothing against which the surviving spouse could make a claim.
MARITAL DEDUCTION: Flaw in will ignored to carry out the testator’s intent to have the estate qualify for the marital deduction. The testator wrote his own will shortly after the enactment of the unlimited marital deduction. His will, however, contained a provision that would prevent the bequest to his spouse from qualifying for the marital deduction because it required that she survive until distribution of the estate. The court in Sowder v. United States, No. CV-02–0136-WFN, 2005 WL 3610011 (E.D. Wash. Nov. 10, 2005), examined the totality of the circumstances to determine that the testator intended the bequest to qualify for the marital deduction and disregarded the negative inconsistent disqualifying survival condition.
NO CONTEST CLAUSE: Clause applied separately to marital deduction and exempt trusts. At the death of a husband, the revocable trust created by the husband and his wife divided into an irrevocable trust funded with the applicable exclusion amount and a marital deduction trust amendable by the survivor. The original trust included a no contest clause. After the survivor’s death, one of the couple’s children wished to challenge amendments made to the marital trust. The court upheld the trial court’s determination under Cal. Prob. Code § 21320 that a challenge to the marital trust was not a challenge to the exempt trust and could not result in forfeiture of an interest in that trust. McIndoe v. Olivos, 33 Cal. Rptr. 3d 689 (Cal. Ct. App. 2005).
POWERS OF APPOINTMENT: Requirement of specific reference satisfied by substantial compliance. A husband’s will granted his wife a general testamentary power of appointment over trust property to be exercised by “specific reference.” The wife’s will stated her intention to dispose of all property including any “as to which I may have a general power of appointment by will.” The intermediate appellate court overturned summary judgment for the takers in default, holding that under Kentucky law a requirement of specific reference may be met by substantial compliance and that the wife’s will met that standard. Hudson v. Old Nat’l Trust, No. 2004-CA-001468-MR, 2005 WL 2323344 (Ky. Ct. App. Sept. 23, 2005).
TRUST FUNDING: Assignments of IRA and brokerage account deemed sufficient to fund trust. The decedent had created a revocable trust and transferred to it the assets listed on “Schedule A,” which listed an IRA and a brokerage account. Affirming the lower court, the Ohio intermediate appellate court held that both assets were trust property, the assignment being sufficient to end the beneficiary designation under the IRA agreement. Stephenson v. Stephenson, 836 N.E.2d 628 (Ohio Ct. App. 2005).
TRUST INTERPRETATION: Support includes the support of the beneficiary’s family. In In re Estate of Stevens v. Lutch, 617 S.E.2d 736 (S.C. Ct. App. 2005), the court held that a grant of discretion to a trustee to distribute principal and income for the “support” of a beneficiary allows the trustee to make distributions to pay for the private education of a beneficiary’s minor children.
TRUST REVOCATION: Joint power to revoke does not limit the power of a sole surviving trustee to revoke. A husband and a wife created a joint revocable trust reserving to themselves the power to revoke and stating that a sale or other disposition of the trust property “by us” would be a revocation. A divided appellate court held that the husband, as the sole surviving trustee, had the power to convey trust property and thus revoke the trust. Scalfaro v. Rudloff, 884 A.2d 904 (Pa. Super. Ct. 2005).
TRUSTEE LIABILITY: A trustee may be liable under a state’s consumer protection act. An accountant and self-described “professional trustee” was found liable for breaching fiduciary duties owed to client-beneficiaries and also was held liable under the Massachusetts Consumer Protection Act. The intermediate appellate court affirmed, holding that the defendant was engaged in the conduct of an enterprise. In this case, the use of the trust form was a sham to enable him to gain access to his clients’ funds for his own purposes. Quinton v. Gavin, 835 N.E.2d 1124 (Mass. App. Ct. 2005).
VALUATION: Estate tax valuation of an IRA was not entitled to a discount for the income tax liability resulting from distributions to beneficiaries. The court in Estate of Kahn v. Commissioner, 125 T.C. No. 11 (2005), reasoned that a willing buyer would not have such liability and would pay full value.
VALUATION: Minority and marketability discounts allowed for 94.83% interest in family limited partnership. In Estate of Kelley v. Commissioner, 90 T.C.M. (CCH) 369 (2005), the court allowed a 12% minority discount and a 23% marketability discount for the decedent’s 94.83% interest in a family limited partnership whose assets consisted of cash and certificates of deposit.
RULES AND REGULATIONS
CHARITABLE REMAINDER TRUSTS: Court modifications of CRUT requiring the beneficiaries to pay the estate tax if necessary to permit funding of the trust before a final determination of the estate tax did not cause trust to cease to qualify under Code § 664. PLR 200539022.
ESTATE TAX: The use of a private trust company when discretionary distribution powers were restricted to independent directors did not cause the trust assets to be included in the decedent’s estate. PLR 200531004.
GENERATION-SKIPPING TRANSFER TAX: Failure to exercise nonlapsing power of withdrawal is not a constructive addition for GST tax purposes. The property, however, will be included in the child’s estate at death and child will be deemed the transferor. PLR 200540004.
Breach of Trust. Peter T. Wendel argues that eliminating the common law broad duty of inquiry would substantially reduce the transaction costs for third parties interested in dealing with a trustee, thereby improving efficiency. The Evolution of the Law of Trustee’s Powers and Third Party Liability for Participating in a Breach of Trust: An Economic Analysis, 35 Seton Hall L. Rev. 971 (2005).
Celebrity Rights. In Wills, Trusts, Schadenfreude, and the Wild Wacky Right of Publicity: Exploring the Enforceability of Dead-Hand Restrictions, 58 Ark. L. Rev. 43 (2005), William A. Drennan proposes that a celebrity should be able to stop uses that ostracize the celebrity from society but should not be able to stop uses that merely bring the celebrity “back to earth.”
Illinois. In Three New Illinois Laws Affect Estate-Planning Practice, 93 Ill. B.J. 600 (2005), David A. Berek reviews the Illinois estate tax that was modified to account for property in other states, the changes to limited liability law addressing operating agreements that create one or more series of members, and the Disposition of Remains Act.
Nebraska. Tracy M. Mason discusses the protections still available to attorneys who are accused of malpractice regarding wills in Privity, Duty, and Loss: In Swanson v. Ptak , the Nebraska Supreme Court Again Endorses Privity in Legal Malpractice Actions, 84 Neb. L. Rev. 369 (2005).
Retirement Planning. James M. Poterba discusses the risks that retirement savers participating in 401(k) plans face in his article, Individual Decision Making and Risk in Defined Contribution Plans, 13 Elder L.J. 285 (2005).
Same-Sex Couples. In Equality at the End: Amending State Surrogacy Statutes to Honor Same-Sex Couples’ End-of-Life Decisions, 13 Elder L.J. 255 (2005), Rebecca K. Glatzer examines and evaluates the various statutory approaches to surrogate decision making to effectuate the health care wishes of same-sex couples.
Settlor’s Enforcement Right. A settlor’s ability to enforce the terms of an irrevocable trust is the question explored by Michael R. Houston in his article, Estate of Wall v. Commissioner: An Answer to the Problem of Settlor Standing in Trust Law?, 99 Nw. U.L. Rev. 1723 (2005).
Trustee Removal. In her article, Changing Horses: Some Thoughts on the Removal of Trustees, 18 Quinnipiac Prob. L.J. 273 (2005), Gayle B. Wilhelm examines the history of trustee removal and some of the issues arising from Connecticut’s recent legislative changes.
Vermont. Should Vermont adopt the Uniform Probate Code? That is the issue analyzed by Stephanie J. Willbanks in her article, Parting Is Such Sweet Sorrow, But Does It Have to Be So Complicated? Transmission of Property at Death in Vermont, 29 Vt. L. Rev. 895 (2005).
Massachusetts enacts Uniform Principal and Income Act. 2005 Mass. Legis. Serv. 129.
Michigan modernizes various probate laws. Michigan modified its disclaimed interest statute to explain the effect of a disclaimer by a donee of a power of appointment. The statute also clarified that a personal representative, conservator, or trustee may hire an attorney who is associated with the personal representative, conservator, or trustee and may act on the attorney’s recommendation without independent investigation. 2005 Mich. Legis. Serv. 204.
New York clarifies that creditors of a donee of a power of appointment may not attach the assets subject to a power that may be exercised in favor of the donee’s maintenance, education, health, and support. 2005 N.Y. Laws 700.