P R O B A T E   &   P R O P E R T Y
January/February 2004
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Keeping Current - Probate

Keeping Current—Probate Editor: Professor Gerry W. Beyer, St. Mary’s University School of Law, One Camino Santa Maria, San Antonio, TX 78228–8603, gwb@ProfessorBeyer.com. Contributors include Dave L. Cornfeld, Erik C. Greiner, William P. LaPiana, and Meribeth Novak.

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.

CASES

ADOPTION: “Lawful issue” includes adopted great-grandchildren. In construing two testamentary trusts, the court in Parker v. Parker, Nos. 2–02–312–CV & 2–02–313–CV, 2003 WL 21940705 (Tex. App. Aug. 14, 2003), held that a remainder to the children and heirs of the deceased children born of the income beneficiary’s body indicated the settlor’s intent to overturn a presumption against allowing adopted persons to take. A definition of descendants referring to “lawful issue” did not exclude adopted persons because it refers to individuals who become issue by any legal process.

AMBIGUITY: Extrinsic evidence is admissible to resolve latent ambiguity in an inter vivos trust. The sett-lor’s inter vivos trust provided for distribution of money from two investment accounts, both of which were described and referred to by number. After execution of the trust, the account numbers were changed by the investment manager for administrative reasons. In Eckels v. Davis, 111 S.W.3d 687 (Tex. App. 2003), the court held that the description of the accounts and identification by non-existent account numbers created a latent ambiguity that allowed the admission of extrinsic evidence to identify the assets referred to and held that the change of account numbers did not cause the gifts to adeem.

ATTORNEY-CLIENT PRIVILEGE: Executor may not waive the decedent’s attorney-client privilege. During a murder investigation, the prosecutor sought to compel disclosure of a deceased suspect’s communications with his attorney. In In re Miller, 584 S.E.2d 772 (N.C. 2003), the court held that the executor of the decedent’s will, his widow, could not waive the decedent’s attorney-client privilege.

DISCLAIMERS: Exercise of power of appointment prevented disclaimer. The court in Estate of Engelman v. Commissioner, 121 T.C. No. 4 (2003), held that a disclaimer on behalf of the decedent by her executor was ineffective because the decedent had exercised a power of appointment before her death that became irrevocable upon her death. These actions constituted an acceptance and precluded a later disclaimer.

EMPLOYMENT BENEFITS: Pre-nuptial agreement is an effective waiver. The court in Sabad v. Fessenden, 825 A.2d 682 (Pa. Super. Ct. 2003), held that a valid pre-nuptial agreement may waive the equitable distribution of pension plan benefits subject to ERISA.

EMPLOYMENT BENEFITS: The share of an ex-spouse may be paid to the ex-spouse’s estate. In Divich v. Divich, 665 N.W.2d 109 (S.D. 2003), the court held that an ex-spouse’s share of retirement benefits awarded under a property settlement is a property interest that may be paid to the ex-spouse’s estate if the ex-spouse dies first.

EXECUTORS: Fee for representation in compensation dispute cannot be recovered from the decedents estate. The court in In re Andrews’ Appeal from Probate, 826 A.2d 1267 (Conn. App. Ct. 2003), held that an executor may not be reimbursed for attorney fees incurred in the executor’s attempt to obtain a larger fee from the estate.

NONMARITAL CHILDREN: The testators reference to “children” excludes children born out of wedlock. The testator died in 1954 devising a life estate to A with a remainder to A’s children. At the time of the testator’s death, both A and A’s nonmarital daughter were living. The court in In re Estate of Boynton, 584 S.E.2d 154 (S.C. Ct. App. 2003), held that the nonmarital daughter was not the remainder beneficiary because the law at the time of the testator’s death excluded nonmarital children from the term “children” unless the testator’s intent to include such persons was clear. Accordingly, the testator’s heirs were entitled to the property under the terms of the gift, which provided for a gift over to them if A were to die without children.

SPENDTHRIFT TRUSTS: Tort victim may not reach trust. The beneficiary of a spendthrift trust committed murder. The estate of the victim recovered a tort judgment against the murderer. In Duvall v. McGee, 826 A.2d 416 (Md. 2003), the court refused to allow the estate of the victim to satisfy the tort judgment by recovering from the spendthrift trust. The court indicated that enforcing the spendthrift provision was not allowing the murderer to benefit from his crime but rather to benefit from a trust established by his mother.

STANDING TO CHALLENGE WILL: The nominated executor has standing to challenge a codicil naming a different executor. The decedent and her husband executed a contractual will leaving their property to a grandchild on the death of the second to die and nominating the attorney who drafted the will as the executor. Twenty-nine years after the husband’s death, the decedent executed a codicil naming the grandchild as the executor. In deciding In re Estate of Milward, 73 P.3d 155 (Kan. Ct. App. 2003), the court held that the attorney had standing to challenge the codicil. The court also determined that the execution of the codicil was not a breach of the contractual will.

TRUSTS: Investment of trust property in fixed income assets satisfied prudent person rule. The settlor gave a mandatory income interest to the settlor’s daughter and granted the trustee the discretion to pay principal to the daughter for her health, maintenance in reasonable comfort, and best interests. The daughter and the remainder beneficiaries objected to the trustee’s investment of the trust property solely in fixed income investments. The court in In re Trust Created by Martin, 664 N.W.2d 923 (Neb. 2003), held that the investments, which were made before the adoption of the prudent investor standard, were proper under the local version of the prudent person rule because the trust terms indicated that the settlor intended to benefit the life beneficiary even at the expense of principal.

VALUATION: Minority and lack of marketability discounts allowed when valuing family limited partnership. A family limited partnership contained both marketable securities and real property subject to a long-term lease. For gift tax purposes, the court in Lappo v. Commissioner, 86 T.C.M. (CCH) 333 (2003), allowed a 15% minority discount plus a 24% lack of marketability discount. Likewise, in Peracchio v. Commissioner, 86 T.C.M. (CCH) 412 (2003), the court allowed a 6% minority discount and a 29.5% lack of marketability discount when valuing an FLP consisting of marketable securities.

VALUATION: Non-assignable lottery payments do not need to be valued using Code § 7520 valuation tables. Estate of Gribauskas v. Commissioner, 342 F.3d 85 (2d Cir. 2003).

RULES AND REGULATIONS

CHARITABLE TRUSTS: IRS issues sample trust forms for charitable remainder annuity trust. Rev. Proc. 2003–53 (inter vivos CRAT for one measuring life); Rev. Proc. 2003–54 (inter vivos CRAT for terms of years annuity period); Rev. Proc. 2003–55 (inter vivos CRAT for consecutive interests for two measuring lives); Rev. Proc. 2003–56 (inter vivos CRAT for concurrent and consecutive interests); Rev. Proc. 2003–57 (testamentary CRAT for one measuring life); Rev. Proc. 2003–58 (testamentary CRAT for term of years annuity period); Rev. Proc. 2003–59 (testamentary CRAT for consecutive interests for two measuring lives); Rev. Proc. 2003–60 (testamentary CRAT for concurrent and consecutive interests).

DISCLAIMERS: Disclaimer effective even though consent of a nondisclaimant required. Under state law, the beneficiary had a right to disclaim within nine months of attaining age 21 if all interested parties consented. The IRS indicated that the disclaimer would be effective as a qualified disclaimer. PLR 200333023.

GIFT TAX: Correction of adjusted taxable gifts to reflect erroneous gift tax return permitted. PLR 200334020.

GIFT TAX: Formula gift not recognized as limiting amount of gift. TAM 200337012.

MARITAL DEDUCTION: Savings clause in trust effective when interpreting trust terms so that the trust will qualify for the marital deduction. TAM 200339003.

TRUST TERMINATION: No gain or loss occurs upon a non-pro rata distribution when trust terminates if the non-pro rata distribution is authorized by the trust or state statute. PLR 200334030.

LITERATURE

Charitable Trust Administration. Five possible solutions are offered to encourage the focus of public interest throughout the life of the charitable trust in Ilana H. Eisenstein’s Keeping Charity in Charitable Trust Law: The Barnes Foundation and the Case for Consideration of Public Interest in Administration of Charitable Trusts, 151 U. Pa. L. Rev. 1747 (2003).

Charitable Trust Policy. Mark Sidel discusses Law, Philanthropy and Social Class: Variance Power and the Battle for American Giving, 36 U. C. Davis L. Rev. 1145 (2003).

Charitable Trusts and Discrimination. In Race and Sex Discrimination in Charitable Trusts, 12 Cornell J.L. & Pub. Pol’y 275 (2003), James W. Colliton suggests that charitable trusts discriminating on the basis of race or sex should be unenforceable.

Charitable Trusts and the Performing Arts. Jeffrey G. Sherman suggests the “123 trust” and the “subscription series trust” as possible solutions in I Say It’s Spinach: Charitable Trusts to Remedy Market Failures in the Performing Arts, 71 UMKC L. Rev. 809 (2003).

Disclaimers. With a focus on the Uniform Disclaimer of Property Interests Act and its provisions for the disposition of disclaimed interests, acceptance as a bar to disclaimer, and the ramifications of a disclaimer by an insolvent person, William P. LaPiana explores Some Property Law Issues in the Law of Disclaimers, 38 Real Prop. Prob. & Tr. J. 207 (2003).

Elder Law. Donna S. Harkness urges for fraudulent consumer practices to be reconciled with elder law in Packaged and Sold: Subjecting Elder Law Practice to Consumer Protection Laws, 11 J. L. & Pol’y 525 (2003)

Estate Tax—Illinois. The ramifications of recent Illinois legislation decoupling the state estate tax from the federal estate tax are discussed by David A. Berek in IllinoisNew Estate-Tax Law, 91 Ill. B.J. 465 (2003), and by Helen W. Gunnarsson on Illinois Says “Noto Estate Tax Elimination, 91 Ill. B.J. 379 (2003).

Forced Share of Surviving Spouse. Angela M. Vallario critiques the elective share statutes of common law states and borrows from community property principles to propose a statute that is consistent with the division of property at divorce in Spousal Election: Suggested Equitable Reform for the Division of Property at Death, 52 Cath. U.L. Rev. 519 (2003)

Life Insurance Trusts Foreign. In The Foreign Irrevocable Life Insurance Trust as Asset Protection: Potential for Abuse and Suggestions for Reform, 9 Conn. Ins. L.J. 613 (2002–2003), Richard Lewis discusses financial privacy, financial security, and tax efficiency.

Power of Attorney. Helen W. Gunnarsson explains the potentially risky and unpleasant task of serving as an agent in The Perils of POA Agency, 91 Ill. B.J. 376 (2003).

Texas. Gerry W. Beyer discusses recent judicial developments in Texas in Wills & Trusts, 56 SMU L. Rev. 2071 (2003).

Trusts in China. Charles Zhen Qu provides a detailed analysis of The Doctrinal Basis of the Trust Principles in Chinas Trust Law, 38 Real Prop. Prob. & Tr. J. 345 (2003).

Unitrusts. New legislation and its impact on unitrusts and forfeiture rules are discussed by John C. Welsh in Estates and Trusts, 53 Syracuse L. Rev. 519 (2003).

LEGISLATION

California clarifies the duties and rights of the coroner with regard to anatomical gifts. 2003 Cal. Legis.Serv. 309.

California expands the list of individuals the drafter of a will or other donative instrument may not name as a beneficiary to include domestic partners as well as spouses and fiduciaries. 2003 Cal. Legis. Serv. 444.

Michigan allows an 18-year-old patient of sound mind to designate another individual able to make an anatomical gift of the patient’s organs. 2003 Mich. Legis. Serv. 63.

New Jersey limits the authority of an agent to make gifts under a power of attorney. A power of attorney does not authorize the agent to gratuitously transfer property of the principal to the agent or to others unless the power of attorney expressly and specifically so authorizes. 2003 N.J. Sess. Law Serv. 138.

New York revises disclaimer law. 2003 N.Y. Laws 589.

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