Keeping Current Probate
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, Prof. William P. LaPiana, and Sean Yan.
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.
CHARITABLE DEDUCTION: Charitable deduction for faulty unitrust denied because the estate failed to file court proceeding to reform the trust. The court in Estate of Tamulis v. Commissioner, 509 F.3d 343 (7th Cir. 2007), refused to apply the substantial compliance doctrine. The court explained that the taxpayer knew that reformation was needed and “had no excuse” for the failure to do so. The court also stated that the reformation “requirement is not unimportant; it protects against efforts to bend trust law to get a tax benefit.”
ESTATE TAX ALLOCATION: Charitable gifts reduced by proportional share of state and federal estate taxes. In Hale v. Moore, Nos. 2005-CA-001895-MR & 2006-CA-000662-DG, 2008 WL 53871 (Ky. Ct. App. Jan. 4, 2008), involving the estate of Claudia Sanders, the widow of Kentucky Fried Chicken founder Colonel Harland Sanders, the court required charitable beneficiaries (two colleges) to have their shares burdened by a proportional amount of state and federal taxes. The court explained that Kentucky law does not exempt charitable gifts from being subject to reduction for transfer taxes unless the will expressly provides otherwise. The will did not contain any specific language that the gifts to the colleges were to receive special treatment or be exempt from taxes.
EXPECTANCIES: Last-minute change in a will is not fraudulent transfer. The testator’s ex-daughter-in-law sued her ex-husband and his sister, alleging that their mother changed her will shortly before her death, at her daughter’s insistence, to give to her daughter the share of the estate given to her son in a prior will so that he could avoid paying arrears of child and spousal support and that the daughter promised to make sure that her brother ultimately received the funds. The court affirmed dismissal of the complaint on the grounds that the mother’s change to her will could not be a fraudulent transfer because the son had no right to his mother’s estate. The court also held, however, that the ex-wife could amend her pleadings to allege a constructive trust based on the daughter’s alleged promise to convey the property to her brother. Cabral v. Soares, 69 Cal. Rptr. 3d 242 (Ct. App. 2007).
INCOME TAX: Investment advisory fees incurred by a trust are subject to the 2% floor. The U.S. Supreme Court in Knight v. Commissioner, 128 S. Ct. 782 (2008), sided with the IRS on the issue of the deductibility of investment advice fees paid by a trust. Normally, investment advisory fees incurred by individuals are deductible only to the extent they exceed 2% of an individual’s adjusted gross income. In this case, the trust argued that it should be allowed to deduct fully such fees under Code § 67(e)(1). The Supreme Court rejected the trust’s argument and held that investment advisory fees incurred by the trust were subject to the 2% floor. In a footnote, the court indicated that the analysis in this case was equally applicable to decedents’ estates.
INTESTACY: Parent may inherit from a child whom the parent did not support. A child received a large settlement of a medical malpractice action, which was eventually placed in a special needs trust that at the child’s death was to be distributed to her heirs under the law in effect at the time of her death. After the child died, the mother opposed the father’s claim to one-half the trust property on the grounds that he failed to support the child during her lifetime. In In re Rogiers, 933 A.2d 971 (N.J. Super. Ct. App. Div. 2007), the court affirmed the trial court’s grant of a summary judgment to the father on his claim to the estate, holding that the New Jersey intestacy statute does not condition the right of a parent to inherit from a child on the provision of child support.
PARENTAGE: A child conceived during marriage by in vitro fertilization and implanted in the mother’s womb after the father’s death is not the father’s heir. Ten embryos were produced through IVF using the husband’s sperm and his wife’s ova. Two embryos were implanted in the wife’s uterus, but the pregnancy terminated in a miscarriage. Approximately one month later, the husband died intestate. Eleven months after his death, two embryos were implanted in his wife’s uterus, resulting in the birth of a child 20 months after the husband’s death. The mother appealed a denial of her claim for Social Security benefits for herself and for the child to the federal district court, which certified to the Arkansas Supreme Court the question of whether the child is the father’s heir. In Finley v. Astrue, No. 07-627, 2008 WL 95775 (Ark. Jan. 10, 2008), the court said no. The Arkansas intestacy statute requires that a person be conceived before an intestate’s death to inherit. Because the statute was enacted in 1969, long before the development of IVF technology, the legislature could not have intended that a child created through IVF and implanted after a gamete donor’s death be an heir of the genetic parent. The court expressly declined to define the term “conceive.”
POWER OF APPOINTMENT: “Any” supports construction of special power of appointment as exclusive. A mother’s will created trusts for her daughters and gave each daughter a testamentary special power of appointment, directing the trustee to distribute “any amount” of the principal and undistributed income to any of the testatrix’s descendants “and” any charitable organization. The first daughter to die exercised her power of appointment entirely in favor of charity. The surviving sister filed a claim for one-half of the trust property, alleging that her sister violated the terms of the power of appointment by appointing all the trust property to charity. The court affirmed the dismissal of the claim, holding that the testatrix’s use of the word “any” indicated her intent to create an exclusive power of appointment. In re Estate of Hope, No. 06CA2003, 2007 WL 4336228 (Colo. Ct. App. Dec. 13, 2007).
REVOCABLE TRUSTS: Language giving the beneficiaries present interests does not invalidate trust amendment. A mother created a revocable trust that was to terminate on her death and be distributed equally among her three children. The trust stated that the interest of the beneficiaries “is a present interest” that continues until the trust is revoked or terminated other than by the settlor’s death. Similar language has been held to require that changing the beneficiary’s interest requires revocation of the entire trust. Shortly before her death, the mother amended the trust to change one son’s interest to forgiveness of any debt owed to her at the time of her death. The court first disapproved a prior case holding that a trust is invalid unless the beneficiary’s interest vests during the settlor’s lifetime and disavowed the use of the term “vested subject to divestment” to refer to a beneficiary’s interest in a revocable trust. The court adopted the view of Restatement (Third) of Trusts § 25 that a trust may exist although the beneficiaries’ interests are contingent on surviving the settlor or other events. The court then held that the amendment was valid because it only amended and did not divest the son’s interest. Hoggan v. Hoggan, 169 P.3d 750 (Utah 2007).
REVOCABLE TRUSTS: Trust provision prohibiting the exercise of powers reserved to the settlor by anyone other than the settlor includes the set-tlor’s agent. The decedent created a revocable trust naming her husband as the trustee. She also executed a durable power of attorney naming her husband as her agent and giving him the power to transfer property to her revocable trust. Two years later, her husband purportedly acting as her agent executed an amendment to the trust that removed certain property from the trust, which he then transferred to one of the couple’s three children. After the decedent’s death, the other children sued to set aside the amendment. The court held that the language of the trust prohibiting a conservator or guardian of the settlor or “any other person” other than the settlor from exercising the rights reserved to the settlor extended to an agent. Gurfinkel v. Josi, 972 So. 2d 927 (Fla. Dist. Ct. App. 2007).
TRUST AMENDMENT: Presumption that amendments by the settlor were properly delivered applies even though the trustee accepted the amendments after the set-tlor’s death. An Illinois land trust provided that amendments are valid when made by a written instrument delivered to the trustee but that any amendment changing any “duty, right, power, liability, or responsibility” of the trustee would be effective on acceptance by the trustee. The settlor executed an amendment changing the beneficiaries on her death, but the grantor’s attorney mailed the amendment to an incorrect address, causing the amendment to be cosigned by the trustee the day after the settlor’s death. In upholding the amendment, the court held that the amendment did not concern the trustee’s duties, that therefore a presumption existed that the amendment had been received before the settlor’s death, and that the trial court’s holding that the evidence was not sufficient to overcome the presumption was not against the weight of the evidence. Estate of Bantsolas v. Bantsolas, 878 N.E.2d 1227 (Ill. App. Ct. 2007).
TRUST REVOCATION: Joint power to revoke limits the power of the sole surviving settlor to revoke. A husband and his wife created a joint revocable trust reserving to themselves the power to revoke and stating that the sale or other disposition of the trust property “by us” would be a revocation. A divided Pennsylvania Supreme Court reversed the appellate court, reported in the March/April 2006 column, and held that the language of the revocation provision unambiguously prevents the surviving settlor from exercising the power to revoke. Scalfaro v. Rudloff, 934 A.2d 1254 (Pa. 2007).
TRUSTS: Extrinsic evidence deemed insufficient to permit the reformation of a document revoking a trust. The settlor sent a letter to the corporate trustee of her revocable lifetime trust stating, “I am revoking my trust.” The settlor made statements indicating that she intended to revoke the trust but also made statements to a bank officer and an attorney that led them to conclude that she intended only to remove the bank as trustee, and the attorney prepared documents to do so. The settlor died from injuries sustained in an accident before she could execute the papers. In In re Trust Created by Isvik, 741 N.W.2d 638 (Neb. 2007), the court held that the Nebraska Uniform Trust Code applied to the question of whether the trust was revoked; that the letter could be subject to reformation because it met the definition of a “term of the trust”; that under Nebraska precedents dealing with the reformation of written instruments, the trial court was correct in hearing extrinsic evidence in determining whether to reform the letter to express an intent to remove the bank as trustee; and that the evidence of the grantor’s intent not to revoke was not clear and convincing.
VALUATION: The court may reject both the taxpayer’s and the government’s values. In Estate of Thompson v. Commissioner, 499 F.3d 129 (2d Cir. 2007), the court upheld the Tax Court’s rejection of both the taxpayer’s and the government’s valuation of stock in a closely held corporation. The court rejected the taxpayer’s argument that the Tax Court was bound to accept the taxpayer’s value once the court rejected the government’s value. The Tax Court was thus permitted to conduct its own valuation of the stock. Nonetheless, the appellate court remanded the case to correct a calculation error.
WILL CONSTRUCTION: Restrictive language creates life estate. The testatrix’s will gave a farm to her two daughters with the restriction that it not be sold during their lives and for 21 years thereafter, and on their deaths, title was to vest in “the heirs of their bodies per stirpes.” The court reversed the trial court judgment that the daughters owned the land in fee simple, holding that the language giving the land to the daughters’ heirs indicated that the testatrix did not intend to give a fee simple but rather a life estate with a remainder in the heirs. The court remanded the case for consideration of what effect, if any, the restriction on sale has on the remainder interest. Barnett v. Estate of Anderson, 966 So. 2d 915 (Ala. 2007).
RULINGS AND REGULATIONS
CHARITABLE DEDUCTION: Five-year charitable lead trust funded with S-corporation stock approved for income, gift, and estate tax purposes. PLR 200747001. The ruling sets forth a “blueprint” that may be followed when a settlor wants to fund a charitable lead trust with S-corporation stock.
DISCLAIMER: Nonqualified disclaimer of income interest in QTIP trust gives rise to gift tax of income interest value and net gift for the remainder interest. PLR 200801009.
ESTATE TAX: Under certain circumstances, stock in a closely held corporation may be used as collateral to secure an estate tax that has been deferred under Code § 6166. CCA 200747019.
GENERATION-SKIPPING TRANSFER TAX: Conversion of grandfathered GST tax trust to a unitrust in accordance with state law does not cause trust to lose its GST tax-exempt status. PLR 200752026.
Do-Not-Resuscitate Orders. In Resuscitating Elderly Wards in Michigan: Should a Legal Guardian Be Allowed to Execute a “Do-Not-Resuscitate” Order on a Legally Incapacitated Individual’s Behalf?, 9 T.M. Cooley J. Prac. & Clin. L. 257 (2007), Nicole E. Bergeron explores the legal and social ramifications of a guardian making life-or-death decisions for an incapacitated ward.
Intestate Succession. In Children of Men: Balancing the Inheritance Rights of Marital and Non-Marital Children, 39 U. Tol. L. Rev. 1 (2007), Browne Lewis addresses the inheritance rights of nonmarital children.
Kentucky—Dower. In her note Married in Kentucky: A Surviving Spouse’s Dower Right in Personalty, 96 Ky. L.J. 99 (2007), Elizabeth S. Muyskens analyzes the way that Kentucky courts define and administer personal property in the context of dower.
Medicaid. In How Medicaid Planning Affects Other Issues, 71 Tex. B.J. 110 (2008), Rick B. Weaver provides a basic framework of Medicaid concerns that may be used for planning purposes.
Nebraska—Uniform Trust Code. A framework for analysis of the broader issues under the Nebraska version of the Uniform Trust Code is presented by William H. Lyons and John M. Gradwohl in Discretionary Trusts, Support Trusts, Discretionary Support Trusts, Spendthrift Trusts, and Special Needs Trusts Under the Nebraska Uniform Trust Code, 86 Neb. L. Rev. 231 (2007).
Special Needs Trusts. Randy Drewett discusses SNTs in a UTC Environment: Is Third-Party Disability Planning at Risk?, 71 Tex. B.J. 114 (2008). The author provides a review of both sides of the issue of whether UTC enactment will adversely affect the protections traditionally associated with SNTs.
Uganda—Intestate Succession. Rachel C. Loftspring offers an analysis of one country—Uganda—and one particular right—inheritance—as a small piece within a much larger discussion in Inheritance Rights in Uganda: How Equal Inheritance Rights Would Reduce Poverty and Decrease the Spread of HIV/AIDS in Uganda, 29 U. Pa. J. Int’l L. 243 (2007).
President Bush signs Technical Corrections Act of 2007. Among other things, this legislation retroactively repeals the gift and estate tax charitable deduction limit on valuation of subsequent fractional personal property gifts. Although the income tax limits remain, this removes many problems for fractional art gifts.
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Vol. 22 No.2