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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.
ABATEMENT: Trust language controls. The marital trust created from the decedent’s revocable lifetime trust directed that the trustees pay the trust’s pro rata share of estate tax in the surviving spouse’s estate and then directed that stock in a closely held company and one-quarter of other assets be distributed to decedent’s nieces and nephews with the remaining three-quarters to the decedent’s brother-in-law. The court in In re Rinaldo Revocable Trust, 696 N.W.2d 41 (Iowa 2005), held that federal law does not apply to abatement and whether or not the gift of closely held stock is similar to a specific bequest is irrelevant because language requiring the trust to pay its pro rata share requires that all assets in the trust abate ratably.
CHARITABLE GIFTS: Property given in trust lost its trust character after trustees expended it for charitable purpose. The testator’s will devised a portion of the residue in trust for the benefit of a hospital to be spent as directed by a committee of persons named in the will to create a memorial to the testator’s family. The committee expended the trust property to build a chapel on the hospital grounds completed in 1956. In 2003, the hospital decided to raze the chapel to expand its facilities. The court determined that (1) the expenditure of the trust property to build the chapel terminated the testamentary trust, (2) the will did not create a successor trust with the hospital as trustee, and (3) the will did not create a condition subsequent. St. Mary’s Medical Center, Inc. v. McCarthy, 829 N.E.2d 1068 (Ind. Ct. App. 2005).
DEPENDENT RELATIVE REVOCATION: Doctrine not applicable if subsequent will expressly revokes prior will. The decedent was the donee of a power of appointment the exercise of which required the fulfillment of certain conditions. After executing two wills that exercised the power in accordance with the required conditions, the decedent executed a new will expressly revoking all prior wills and purporting to exercise the power but which failed to fulfill the conditions. The court held that the property subject to the power passed to the default taker because the doctrine of dependent relative revocation cannot apply if the revocation is made by a completely valid will with an express revocation clause. Rosoff v. Harding, 901 So. 2d 1006 (Fla. Dist. Ct. App. 2005). Compare Wehrheim v. Golden Pond Assisted Living Facility, 905 So. 2d 1002 (Fla. Dist. Ct. App. 2005) (if the revocation clause is not invalidated by undue influence, dependent relative revocation is not applicable).
DIVERSIFICATION: Language allowing retention of stock of corporate trustee does not negate duty to diversify. The decedent’s inter vivos trust allowed the trustee to retain property added to the trust, including shares of a corporate trustee. After the decedent’s death, the corporate trustee sold other assets to raise necessary cash, increasing the concentration in its own stock to 86%. The stock declined greatly in value during the two-year period between death and the final distribution of the trust. The court in Wood v. U.S. Bank, N.A., 828 N.E.2d 1072 (Ohio Ct. App. 2005), held that the permission to retain stock of the corporate trustee overrode the duty of loyalty but that express language is necessary to override the duty to diversify as expressed in Ohio’s version of the Uniform Prudent Investor Act, which codified the common law of diversification. A retrial was necessary to determine if the statutory “special circumstances” excusing a lack of diversification were present.
FAMILY LIMITED PARTNERSHIPS: Fifth Circuit upholds Strangi II. The decedent transferred assets to a FLP in exchange for a 99% limited partnership interest. In Strangi v. Commissioner, 417 F.3d 468 (5th Cir. 2005), the court stated: “[W]e hold that the Tax Court did not clearly err in finding that Strangi’s transfer of assets to [the family limited partnership] lacked a substantial non-tax purpose. Accordingly, the ‘bona fide sale’ exception to § 2036(a) is not triggered, and the transferred assets are properly included within the taxable estate. We therefore affirm the estate tax deficiency assessed against the Estate.”
FIDUCIARY RESPONSIBILITY: Trustee liable for negligently providing information. A bank advised its client to make present interest annual exclusion gifts to an irrevocable trust to reduce estate taxes. An attorney selected by the client drafted the trust, but the trust but did not include a Crummey power. Three years after the creation of the trust, a trust officer told the drafting attorney about the problem, but nothing was done. The bank continued to advise the client to contribute to the trust. In Hatleberg v. Norwest Bank Wisconsin, 700 N.W.2d 15 (Wis. 2005), the court held that the bank was liable for the increased estate taxes because the bank negligently provided information by advising the client to make gifts to a trust it knew to be deficient.
INCIDENTAL BENEFICIARIES: Organizations with similar purposes to charitable trust do not have standing. An animal welfare organization presented its accounting as the trustee of a charitable trust for its exclusive benefit and petitioned for permission to pledge the trust property as collateral for a line of credit. Other animal welfare organizations opposed the petition, asserting that they had an interest in the trustee beneficiary continuing to provide services they would otherwise have to provide. The court in In re Public Benev. Trust of Crume, 829 N.E.2d 1039 (Ind. Ct. App. 2005), held that the objectants were not persons having an interest in the trust and thus did not have standing. The court also determined that the doctrines of equitable deviation and cy pres did not apply.
NONPROBATE PROPERTY: Writing sufficient to restore beneficiary. Local law allows the owner of a nonprobate asset to pass the asset under the owner’s will and to override the change made in the will by a writing naming the original or a new beneficiary. In In re Estate of Cordero, 113 P.3d 16 (Wash. Ct. App. 2005), the testator executed a will changing the beneficiary of an investment account from the joint tenant he had placed on the account to his estate. Two years later, he and the former joint tenant met with his broker, and the testator signed an instrument setting forth the reasons for changing the investments in the account and stating that the former joint tenant planned to retain the new investment if the testator died during the next five years. The court determined that this document was sufficient to restore the joint tenancy with right of survivorship.
TAX APPORTIONMENT: State tax apportioned against QTIP under federal provision. In In re Estate of Klarner, 113 P.3d 150 (Colo. 2005), the court held as a matter of first impression that the apportionment of estate tax due Colorado under its “pick-up” tax because of the taxation of a QTIP trust in the surviving spouse’s estate is governed by Code § 2207A and not by the Colorado tax apportionment statute. Overriding statutory apportionment therefore requires an indication of specific intent to alter the statutory rule.
TRUST INVESTMENTS: Trustee has no fiduciary duty to remainder beneficiaries to produce growth equal to or greater than rate of inflation. The decedent created a testamentary trust with mandatory income to son, discretion to invade principal for son if “absolutely necessary” to provide essential support, and the remainder to the son’s descendants. The son and a bank were co-trustees. At the son’s insistence, the trust property was invested in tax-exempt property. After the son’s death, the remainder beneficiaries sued alleging breach of duty by the bank. In SunTrust Bank v. Merritt, 612 S.E.2d 818 (Ga. Ct. App. 2005), the court held that the gift of all the income to the son means that the bank did not breach any duty by allowing son to maximize the income and that there is no duty to invest to keep pace with inflation.
WILLS: Constructive death of ex-spouse does not fulfill condition precedent of death. Local law provides that on divorce, all provisions in a will in favor of the testator’s former spouse are read as if the former spouse had predeceased the testator. The testator died after divorce without altering his will, which gave the residue to his then spouse or, if they died simultaneously or if the spouse did not survive by thirty days, to his spouse’s daughter. The testator’s ex-spouse survived him by more than 30 days. The court held that the statute voids the gift to the ex-spouse but does not effect the other provisions of the will. Thus, the condition on the gift to the stepdaughter did not occur, and there being no further gift over, the testator died intestate. In re Estate of Nash, 164 S.W.3d 856 (Tex. App. 2005).
WILLS: “No residue of a residue” rule affirmed. Three of the eighteen residuary beneficiaries predeceased the testator, leaving no issue surviving the testator, so that the anti-lapse statute did not apply. The court held that the common law rule applied and thus the lapsed residuary gifts passed via intestacy. The court refused to imply survivorship language into the gift as is done in many states to avoid intestacy. In re Estate of McFarland, 167 S.W.3d 299 (Tenn. 2005).
Advance Directives. With an emphasis on Illinois law, Helen W. Gunnarsson explains how to Help Your Client Choose the Right Advance Directive, 93 Ill. B.J. 284 (2005).
Arkansas Trust Code. Lynn Foster provides guidance to Arkansas practitioners and judges in her article, The Arkansas Trust Code: Good Law for Arkansas, 27 U. Ark. Little Rock L. Rev. 191 (2005).
Divorce and Trusts. By using Colorado law as an example, Marc A. Chorney explains Interests in Trusts as Property in Dissolution of Marriage: Identification and Valuation, 40 Real Prop. Prob. & Tr. J. 1 (2005).
Family Limited Partnerships. Louis S. Harrison and John M. Janiga conclude that there are substantive economic justifications for FLPs in The Interplay of Behavioral Economics and Portfolio Management with the Current Examination of Family Partnerships by the Courts, 40 Real Prop. Prob. & Tr. J. 117 (2005).
Half-blooded Heirs. In Consanguinity, Sibling Relationships, and the Default Rules of Inheritance Law: Reshaping Half-blood Statutes to Reflect the Evolving Family, 58 SMU L. Rev. 137 (2005), Ralph C. Brashier discusses the increasingly common issues that arise with blended families.
Legal Orphans. Richard L. Brown addresses the inheritance rights of legal orphans in Disinheriting the “Legal Orphan”: Inheritance Rights of Children After Termination of Parental Rights, 70 Mo. L. Rev. 125 (2005).
Marital Property. Leslie Joan Harris, in her article Tracing, Spousal Gifts, and Rebuttable Presumptions: Puzzles of Oregon Property Distribution Law, 83 Or. L. Rev. 1291 (2004), contends that marital property law, particularly divorce property law, expresses some of the most fundamental assumptions about a culture’s understanding of marriage.
Same-Sex Couples. In Essential Estate Planning for the Constitutionally Unrecognized Families in Oklahoma: Same-Sex Couples, 40 Tulsa L. Rev. 479 (2005), authors Camille M. Quinn and Shawna S. Baker contrast the legal hardships confronting same-sex couples with the legal rights available to those who are legally entitled to marry in Oklahoma.
Special Needs Trusts. Jason D. Lazarus dispels a dozen myths associated with how to Protect Public Benefits for Your Special-needs Client, Trial, June 2005, at 44.
Tortious Interference with Inheritance Rights. Diane J. Klein explores the development of the tort cause of action in A Disappointed Yankee in Connecticut (or Nearby) Probate Court: Tortious Interference with Expectation of Inheritance—A Survey with Analysis of State Approaches in the First, Second, and Third Circuits, 66 U. Pitt. L. Rev. 235 (2004).
Trust Intent. The Intention of the Settlor Under the Uniform Trust Code: Whose Property Is It, Anyway?, 38 Akron L. Rev. 649 (2005), by Alan Newman explores the inherent tension between allowing testators to determine the disposition of their property and preventing the dead from perpetually controlling the living.
Trusts and Beneficiaries. In Trust Transparency, 93 Ill. B.J. 278 (2005), Helen W. Gunnarsson reveals the results of an e-mail discussion among members of the Illinois bar, which revealed that most participants believed that a beneficiary is entitled to see the trust instrument.
Unitrusts. The ubiquitous use of 5% return unitrusts is the focus of an article by Joel C. Dobris entitled Why Five? The Strange, Magnetic, and Mesmerizing Affect of the Five Percent Unitrust and Spending Rate on Settlors, Their Advisers, and Retirees, 40 Real Prop. Prob. & Tr. J. 39 (2005).
Will Contests. Ray J. Koenig III and Adam S. Kornblatt examine the Illinois law applicable to Disappointed Would-be Legatees: Who Has Standing to Contest a Will?, 93 Ill. B.J. 294 (2005).
Will Formalities. Sean P. Milligan explores how strict compliance with will formalities can lead to unjust results and a frustration of testamentary intent in his article, The Effect of a Harmless Error in Executing a Will: Why Texas Should Adopt Section 2–503 of the Uniform Probate Court, 36 St. Mary’s L.J. 787 (2005).
Wisconsin’s Inheritance Tax. Jack Stark tracks both political and constitutional history in A History of the Wisconsin Inheritance Tax, 88 Marq. L. Rev. 947 (2005).
California authorizes a trustee, unless prohibited by the governing instrument, to convert a trust into a unitrust, under specified procedures. 2005 Cal. Legis. Serv. 100.
Florida adopts the Florida Uniform Disclaimer of Property Interests Act. This Act is modeled after the Uniform Disclaimer of Property Interests Act but contains substantial enhancements to many sections of the UDPIA. 2005 Fla. Sess. Law Serv. 2005–108.
Hawaii authorizes trusts for the care of pet animals. 2005 Haw. Sess. Laws 160.
Maine creates a streamlined procedure to review acts of an agent if the principal resides in a long-term care facility. 2005 Me. Legis. Serv. 283.
Maine validates durable powers of attorney executed in compliance with the laws of other states. 2005 Me. Legis. Serv. 284.
New Hampshire makes technical corrections to its version of the Uniform Trust Code. 2005 N.H. Laws 270.
North Carolina enacts a modified version of the Uniform Trust Code. The effective date is January 1, 2006. 2005 N.C. Sess. Laws 192.
Oregon restricts the ability of a person who physically or financially abuses a decedent to inherit and to be a beneficiary under a will and under many nonprobate arrangements. The disqualification exists even if there is no nexus between the abuse and the decedent’s death or the dispositive instrument. 2005 Or. Laws 270 & 535.
Oregon enacts the Uniform Trust Code. The effective date is January 1, 2006. 2005 Or. Laws 348.
Oregon excludes “special marital property” from its inheritance tax. 2005 Or. Laws 124.
Texas adds many Uniform Trust Code concepts into the Texas Trust Code. 2005 Tex. Sess. Law Serv. 148.