The revocable living trust and the associated pour-over will have become the core of many modern estate plans. Under a typical pour-over will, property owned at death (and hence included in the probate estate) is devised to the trustee of an inter vivos trust, to be held in accordance with the terms of the trust. Usually the trust is funded by the testator and the trust instrument is executed by the testator before or concurrently with the testator's will. But "pour-over" is defined broadly as: "A will giving money or property to an existing trust." Black's Law Dictionary 1593 (7th ed. 1999). And in practice, the pour-over device is also used in other estate plans, such as with an "unfunded" life insurance trust or to pass a testator's probate assets to an inter vivos or testamentary trust established by some other person.
In most jurisdictions in the past, incorporation by reference and independent significance were the doctrines most often adopted to validate pour-over provisions. If the trust instrument was in existence and unamendable when the pour-over will was executed, the terms of the trust could be incorporated into the will. In the alternative, if the trust was amendable after the testator's will was signed but substantially funded before the testator died, the trust could stand as an extraneous fact of legal significance. But too often testamentary additions to a trust were invalidated because the receptacle trust was amendable after the testator's will was executed, and the court viewed the trust as having no pertinency in itself apart from any disposition of property made by the testator's will. See, e.g., Atwood v. Rhode Island Hosp. Trust Co., 275 F. 513 (1st Cir. 1921). The limitations and uncertainties of these doctrines eventually led to legislative reform.
In 1960 the Uniform Testamentary Additions to Trusts Act was promulgated in response to the need for administrative convenience and future flexibility in estate planning. The Uniform Act also became Section 2-511 of the Uniform Probate Code. The purpose of the Uniform Act is to remove conceptual difficulties that arise from application of either the doctrine of incorporation by reference or the doctrine of independent significance. The Uniform Act (or a similar statute) has been enacted in all jurisdictions. It bears emphasis, however, that there are substantive differences among the enabling statutes. Although the Uniform Act provides the framework for most pour-over legislation, lawyers must be familiar with the specific enabling statutes in their own states.
Under the Uniform Act, as revised in 1991, a will may devise property to the trustee of a trust established or to be established (1) during the testator's lifetime by the testator, by the testator and some other person (e.g., husband and wife executing a joint trust) or by some other person; or (2) at the testator's death. The trust must be identified in the testator's will with the trust's terms set forth in a written instrument other than a will. In the alternative, the trust's terms may be set forth in another individual's will if that other individual predeceases the testator.
Under the original Uniform Act and the law in most jurisdictions, the trust instrument must be executed before or concurrently with the testator's will. By contrast, the revised Uniform Act permits the trust instrument to be executed after the testator's will. For example, in jurisdictions that have adopted the revised Uniform Act or revised Section 2-511, without change, a will may distribute the testator's probate estate to "the First National Bank, as trustee of a trust that I will execute," if the testator thereafter executes the trust instrument.
The Uniform Act provides that a pour-over devise is not invalid because the trust is amendable or revocable or because the trust was amended after execution of the will or after the testator's death. Here modern pour-over laws remove from the doctrine of incorporation by reference the requirement that the writing be in existence (in its final form) when the will is executed. For example, a deceased spouse's will may direct distribution of probate assets to a revocable trust that remains amendable until the surviving spouse's death.
A trust is not established by executing a trust document; a trust is established only by transferring property to the trust. See Restatement (Third) of Property: Wills and Other Donative Transfers § 3.8 cmt. b (1999). The Uniform Act does not require, however, that the receptacle trust be funded before the testator's death. In the words of the Uniform Act, the will may distribute probate assets to a trust "regardless of the existence, size, or character of the corpus of the trust." The statutory scheme, then, is not conditioned on the existence of a trust but instead on the existence of a trust instrument. In other words, the trust itself need not be established during the testator's lifetime but instead can be established by the pour-over devise. Here modern pour-over laws dispense with the earlier requirement that the trust have independent significance apart from the trust's effect upon dispositions made by the testator's will.
Long after the original Uniform Act was promulgated, confusion remained over the important distinction between the existence of a trust and the existence of a trust instrument. For example, in Estate of Daniels, 665 P.2d 594 (Colo. 1983), a pour-over devise to an unfunded trust failed where the testator was told by his lawyer that the mere signing of the trust agreement would not activate it and that, before the trust could come into being, the testator would have to fund the trust. The testator then signed and returned the trust document to counsel to wait for further directions on it. The testator took no further action before he died. The testator's will devised the residue of his estate to the trustee of the trust, but it added that the residue would go elsewhere "if the trust created by said agreement was not in effect at my death." The Uniform Act was revised in 1991 to make absolutely clear that an inter vivos trust need not be funded before the actual pour-over at the testator's death.
More recent attempts to limit testamentary additions to unfunded trusts have been unsuccessful. For example, the pour-over statute in Texas, as originally enacted, did not contain the language "regardless of the existence, size, or character of the corpus of the trust." Even so, in Estate of Canales, 837 S.W.2d 662 (Tex. App.-San Antonio 1992, no pet.), the court held that a standby trust did not fail even though it was not funded before the testator's death. The court explained:
While the statute is not as clear as it might be, we think it authorizes unfunded standby trusts if its other requirements are satisfied. Its purpose was to uphold standby trusts and make them easily available as estate planning devices. Certainly nothing in the statute says that standby trusts are not valid unless they are funded. Indeed, it says that a testator may pour assets into "any" trust (1) that is identified in the will and (2) whose terms were written before or concurrently with the execution of the will. It would be strange drafting to displace some but not all of the common-law obstacles to standby trusts without stating clearly which obstacles were to remain in place. We think that if the legislature had meant to require that this particular kind of trust be funded, it would have said so, and would have said whether nominal funding would suffice.
Id. at 666; see also Estate of Bourcet, 668 N.Y.S.2d 329 (Sur. Ct. 1997). Thus the essential purpose of pour-over statutes, which is to authorize the use of unfunded standby trusts, seems to have been fully accepted.
Unless the testator otherwise directs, property devised to the receptacle trust becomes part of that trust. It does not necessarily follow that the testator's assets pass to the trust without probate. If the testator's property does not qualify for transfer without administration, the assets covered by a pour-over will are subject to probate. The pour-over assets are then administered and distributed in accordance with the receptacle trust's terms, including amendments to the trust made before or after the testator's death. The original Uniform Act required that the testator's will specifically authorize any amendments made after the testator's death. The revised Uniform Act has no such condition, so that amendments made after the testator's death are permissible unless the testator directs otherwise.
The Uniform Act prescribes no particular requirements for execution of the receptacle trust, providing only that it must be a written instrument. Execution requirements vary among the jurisdictions. Florida requires those provisions of the trust that dispose of trust property on or after the death of the settlor (other than to the settlor's estate) to be executed with the same formalities required for a will. New York requires that the trust and any amendments be executed with the same formalities required for recording a deed (i.e., notarized).
This rigorous requirement is not without exception. Even though New York generally does not recognize incorporation by reference, that doctrine has been used to validate a pour-over to an unacknowledged trust when there were no allegations or evidence of fraud, the trust agreement was signed contemporaneously with the will, and the trust agreement was identifiable, precise and definite. Estate of O'Brien, 649 N.Y.S.2d 220 (App. Div. 1996).
But in Estate of Pozarny, 677 N.Y.S. 2d 714 (Sur. Ct. 1998), involving a so-called "trust mill" estate plan, the court refused to apply incorporation by reference to save an amended revocable trust that was defectively executed, although the will called for application of the incorporation by reference doctrine, because the court found that the loose-leaf format of the instrument provided insufficient safeguards to assure the integrity, authenticity and validity of the document.
The original Uniform Act provided that a revocation or termination of the trust before the testator's death caused the pour-over devise to lapse. By contrast, the revised Uniform Act reads that, unless the testator's will provides otherwise, the pour-over devise will lapse. Typical pour-over provisions often direct that, if the trust does not exist at the testator's death, the testator nevertheless devises probate assets to the trustee named in the trust, to be held, administered and distributed according to the provisions of the trust existing when the will was executed, which are incorporated by reference. Arguably, such a provision may override a lapse provision such as that found in the Uniform Act. Therefore, if an inter vivos trust is revoked, it is important that the testator also revoke any pour-over will constituting part of the original estate plan, so as to avoid inadvertent distribution under the terms of a trust no longer in effect.
Illinois is unique, if not alone, in providing for the revival of a receptacle trust when it is terminated. See Estate of Stern, 636 N.E.2d 939 (Ill. Ct. App. 1994). In Stern, the decedent executed a pour-over will and revocable trust in 1980. The trust apparently terminated in 1988 and the testator executed a new will in 1989. The court held that, if the 1989 will were found to be invalid, the 1980 will would stand and Illinois' revival statute would operate to revive the earlier trust, since the purpose of that legislation was to continue the intent of the testator and to prevent intestacy.
Drafting for Consistency
In the typical estate plan involving a pour-over will, the testator executes two instruments: a trust agreement (or declaration of trust) and a will. In addition, one or more deeds and other transfer documents conveying title to the trustee named in the trust are usually prepared. These various papers serve together as an integrated estate plan, and they should be drafted with strict consistency in mind. Recent cases suggest several areas where inconsistency can lead to costly litigation and a potential malpractice claim.
First and foremost, dispositive provisions and related transfer documents must furnish a coherent and unified estate plan. With the possible exception of tangible personal property and in the absence of some compelling reason for a probate transfer, gifts should be made through the trust instrument and not the will. The will should function largely as a safety net.
The implications of not following these fundamentals are demonstrated in Bullis v. Downes, 612 N.W.2d 435 (Mich. App. 2000). In Bullis, the lawyer drafted a revocable trust and a will according to the decedent's instructions. On the same day, the lawyer also had the decedent execute two deeds transferring the decedent's home and her cottage to the trust. Under the terms of the will, the decedent's daughter was to receive the decedent's home and her cottage. The will also contained a pour-over provision that directed the residue of the decedent's estate to the trust. The trust did not contain any provision specifically addressing how real property was to be distributed. Instead, after the decedent's death, all trust property was to be divided equally among the decedent's three children. The decedent's home and cottage could have passed through probate to her daughter if those assets had remained in the decedent's estate. In the alternative, those assets would have easily transferred to the daughter if the trust instrument had so provided.
The decedent's other two children argued that since the decedent's home and her cottage had been previously deeded to the trust, those assets necessarily should be divided equally among all three children. Eventually, the siblings settled their dispute, with the daughter foregoing her interest in the decedent's home.
Not surprisingly, the daughter sued the decedent's lawyer, and the court held that she had pleaded a legally sufficient claim of malpractice. The court had no difficulty finding that contemporaneously executed instruments that transfer property into a revocable trust, in order to effectuate the decedent's intended disposition of property, are part and parcel of the estate plan. In short, a lawyer must be careful that the will, the trust instrument, deeds and other transfer documents all work consistently to effectuate the decedent's distributive design.
It is also important to consider an alternative gift of any property subject to the pour-over provision--an alternative gift to be made in the will as distinguished from the trust instrument. Usually the pour-over provision distributes the testator's residuary estate. The lawyer cannot assume that the receptacle trust will be in existence at the testator's death or that the testator's probate estate will be of only nominal value, simply because the inter vivos trust has been fully funded at the outset. For this reason, the pour-over provision should be carefully drafted to avoid intestacy, unless that is the testator's desire should the primary estate plan fail for any reason.
The testator may wish that the receptacle trust be incorporated into the will, under the terms of the trust existing when the will is signed. In the alternative, the testator may want to name substitute takers in the event the pour-over devise lapses. Another possibility may be to give the trustee named as devisee in the will a special power of appointment to distribute outright or in trust to those who would otherwise take under the trust instrument. Whatever the case, the distribution of the testator's estate in the event of lapse-however remote-should not be left to hazard and chance.
Unless good reason otherwise exists, the executor of the testator's pour-over will should also be the trustee (or successor trustee, following the testator's death) of a self-settled revocable trust. After all, a chief benefit of the pour-over provision is to guarantee unified management of the decedent's property. Generally, assets that become subject to the trust by reason of a will become so subject when the testator dies, even though there is an intervening period of administration of the testator's estate. For this reason, in order to provide better unified management--particularly if there may be some delay in distributing probate assets to the trustee, the will should give the executor all of the powers of the trustee of the receptacle trust, subject to confirmation or court authority as required by law. Further, it is important not to refer loosely to the executor in the will as trustee; although they may be one and the same person, these fiduciaries serve in distinctly different capacities. See Lewis v. SunTrust Bank, Miami, N.A., 698 So. 2d 1276 (Fla. Dist. Ct. App. 1997), for problems that can arise when the testator names one person as trustee of an inter vivos trust and another person as executor and carelessly refers to the personal representative as "trustee" in the will.
Tax Apportionment Clauses
Most states have default provisions that apply unless the estate plan calls for another result with respect to the payment of death taxes. The statutes provide either for apportionment among specific beneficiaries (whose gifts are subject to transfer tax) or for the taxes to fall on the residuary estate. The latter result may significantly, yet unintentionally, reduce an otherwise tax-exempt gift passing to a surviving spouse or charity.
Recent cases show that integrated estate plans involving a revocable trust and pour-over will, each with its own tax apportionment provisions, may be prone to ambiguity and uncertainty. In Estate of Wathen, 64 Cal. Rptr. 2d 805 (Ct. App. 1997), the will directed that all estate taxes on both probate and nonprobate property be charged to and paid out of the trust, "as provided therein," and then confusingly directed "without adjustment among the residuary beneficiaries," and without "collect[ion] from any beneficiary." The only thing in the trust document about taxes was a provision permitting the trustees to pay estate taxes out of the trust estate, so that the trust proved to be of no help in resolving the ambiguity.
In Estate of Robinson, 720 So. 2d 540 (Fla. Dist. Ct. App. 1998), the pour-over will directed that estate taxes be paid from the residuary estate without apportionment. In direct conflict, the trust instrument directed that the taxes be paid out of the trust principal. Surely the testator never intended that the estate taxes be paid twice! See also Estate of Meyer, 702 N.E.2d 1078 (Ind. Ct. App. 1998) (holding that the last instrument in time controls when there is a conflict between unambiguous tax provisions in a will and an inter vivos trust).
The no-contest clause is one way to discourage litigation over the decedent's estate. The no-contest clause, in effect, creates a condition upon a gift. In those jurisdictions that enforce such provisions, a beneficiary contesting the decedent's dispositive plan usually forfeits the interest the beneficiary would otherwise receive. As a result, courts strictly construe no-contest clauses, limiting their application to the particular case and language used. For this reason, where a no-contest clause is included in the pour-over will but not in the companion revocable trust, it may fail in its purpose if the language conditions only devises under the will.
In Estate of Lindstrom, 236 Cal. Rptr. 376 (Ct. App. 1987), the decedent executed a pour-over will that devised her estate to the trustee of her revocable trust. The will also contained a no-contest clause, which conditioned any devise under the will but made no mention of the trust or gifts to be made by the trustee under that instrument. The court held that a beneficiary's unsuccessful contest of the decedent's testamentary capacity with respect to the will did not bar that beneficiary from receiving his share under the decedent's trust. The court reasoned that the will and trust were not a "testamentary package" in which the no-contest clause in one document could be applied in the other. In order for the no-contest clause to operate on the trust, the provision must properly refer to the trust. Better yet, the trust should include its own no-contest clause.
Pour-Over Will and Elective Share
All noncommunity property states except Georgia give a surviving spouse a share of the decedent's estate. Historically, the elective share (or forced share) was limited to a fraction of the deceased spouse's probate estate. With the proliferation of nonprobate transfers, notably the revocable living trust, most jurisdictions have by statute or case law augmented the deceased spouse's estate to include testamentary substitutes. Most of these jurisdictions now define the augmented estate as including a self-settled inter vivos trust over which the deceased spouse retained a power to revoke or consume. See, e.g., Sullivan v. Burkin, 460 N.E.2d 572 (Mass. 1984). A few states have not extended the surviving spouse's elective share to nonprobate assets.
If a deceased spouse executes a revocable trust and a pour-over will in a jurisdiction that limits the elective share to probate assets, and if the surviving spouse takes an elective share in the deceased spouse's estate, the surviving spouse may also take his or her interest in the trust even though that interest may be paid from assets that pour over from the probate estate. See, e.g., Bravo v. Sauter, 727 So. 2d 1103 (Fla. Dist. Ct. App. 1999). If the testator does not want the surviving spouse to "double dip" in this manner, then the trust instrument should expressly deny the surviving spouse an interest in the trust if that spouse elects to take against the will. See Johnson v. Sandler, Balkin, Hellman & Weinstein, P.C., 958 S.W.2d 42 (Mo. Ct. App. 1997) (holding that a lawyer who fails to warn the client about the elective share, thus dismantling the client's estate plan, may be liable for malpractice).
The pour-over will provides administrative convenience and future flexibility in estate planning. Often the pour-over will serves mainly as a safety net to make sure a decedent's probate assets are managed and distributed according to the terms of the inter vivos trust. Unfortunately, there may be a tendency to minimize the importance of the pour-over will because of its supporting role. The lawyer must be ever diligent in drafting the integrated estate plan to see that the pour-over will does not become an instrument of ambiguity and inconsistency that may later fail the very estate plan it is intended to serve.
Thomas C. Taylor Jr. practices with Geary, Shea, O'Donnell & Grattan, P.C., in Santa Rosa, California.