P R O B A T E   &   P R O P E R T Y
March/April 2003
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Articles from other issues of Probate and Property


Keeping Current - Probate

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.

DIVORCE: Statutory removal of ex-spouse as life insurance beneficiary may be applied retroactively. Resolving a conflict between lower appellate court opinions, the court in In re Estate of DeWitt, 54 P.3d 849 (Colo. 2002), held that the state statute that revokes on divorce all provisions in favor of the now ex-spouse is constitutional as applied to insurance beneficiary designations made and dissolutions of marriage occurring before the effective date of the statute if the decedent dies after the effective date.

EQUITABLE ADOPTION: Contractual basis of doctrine does not give adopted person the status of an heir. An equitably adopted daughter claimed a share of her foster grandmother’s estate as an “issue” of her late foster father. In Estate of Furia, 126 Cal. Rptr. 2d 384 (Cal. Ct. App. 2002), the court held that the contractual basis of equitable adoption gives the adopted person contract rights against the estate of the foster parent, not a right to inherit nor the status of issue. See also Jolley v. Seamco Laboratories, Inc., 828 So. 2d 1050 (Fla. Dist. Ct. App. 2002) (equitably adopted child not “survivor” for purposes of wrongful death statute).

ESTATE TAX APPORTIONMENT: Will direction to pay just debts and funeral expenses does not trump tax apportionment statute. The court in In re Estate of Siebrasse, 652 N.W.2d 384 (S.D. 2002), held that a general direction in the testator’s will to pay “just debts” followed by specific gifts to named beneficiaries did not imply that the testator intended to burden the residuary with federal estate taxes by negating the equitable apportionment statute.

Instead, the testator’s direction merely provided that debts and funeral expenses were to be paid from the residuary. The court explained that the estate tax is a debt of the estate and not of the testator. The court overturned its earlier decision in the same case in which it had held that a direction to pay debts first shifted the burden of federal estate taxes to the residuary.

GROSS ESTATE: Including gift tax paid for gifts made within three years of death in the donor’s gross estate does not violate constitutional guarantees of due process and equal protection of the laws. Estate of Armstrong v. Commissioner, 119 T.C. No. 13 (2002).

IN TERROREM PROVISION: Action to remove co-executor does not trigger forfeiture. A testator’s will contained an in terrorem clause providing that if a beneficiary contests the will that the beneficiary will forfeit all benefits under the will. A co-executor sought a declaratory judgment that commencing an action to remove the other co-executor would not trigger a forfeiture. In Preuss v. Stokes-Preuss, 569 S.E.2d 857 (Ga. 2002), the court held that the forfeiture clause must be strictly construed and because the clause refers to “beneficiaries,” strict construction does not allow it to be applied to a suit by one co-executor to remove another.

IN TERROREM PROVISION: Forfeiture does not result merely because beneficiary sues to ascertain correctness of a distribution. The testator’s will contained a clause prohibiting his sons from contesting or attacking any disposition by filing suit against any executor or trustee. One son, who was also a named co-executor, sued his brother, also a co-executor, and another co-executor, alleging machinations that reduced his gift under a formula contained in the will. The court in Kershaw v. Kershaw, No. 1011253, 2002 WL 31474192 (Ala. Oct. 25, 2002), held that because the law abhors a forfeiture, the in terrorem clause must be strictly construed. Because the son’s suit dealt with the computation of the distribution made to him rather than with “the disposition,” his suit did not violate the clause.

POWER OF ATTORNEY: Springing power of attorney does not need to be formally activated. A mother executed a springing durable power of attorney naming her son as her agent. The power never became operative because the mother was never certified incompetent according to its terms. The son, however, acted as her agent with her approval. The court in Smith v. Smith, No. E2001-03132-COA-R3-CV, 2002 WL 31429087 (Tenn. Ct. App. Oct. 30, 2002), held that the mothers’ conduct was enough to create a presumption of a confidential relationship between the son and mother just as if the power of attorney had become formally operative.

TRUST BENEFICIARIES: Remainder beneficiary is not bound by arbitration agreement between brokerage and trustee. A trustee and brokerage house signed an account agreement providing for arbitration of disputes. When a remainder beneficiary discovered that the trust account contained almost no assets and that the trustee had made significant withdrawals using an ATM card and a credit card linked to the account, the remainder beneficiary sued the trustee and the brokerage house for negligence. In Clark v. Clark, 57 P.3d 95 (Okla. Ct. App. 2002), the court held that the remainder beneficiary was not bound by the arbitration agreement for a variety of reasons. The brokerage house owed the remainder beneficiary duties unrelated to the account agreement, the remainder beneficiary had no knowledge of the agreement, the agreement itself stated that no one other than the trustee had an interest in the account, and the trustee was not an agent for the trust or the trust beneficiaries.

TRUST REFORMATION: Trust reformed to include adopted out issue excluded because of attorney s drafting error. A grandmother’s inter vivos trust directed that at her death the trust property would pass to her son “ per stirpes.” The lawyer testified that the grandmother intended to include all five of her son’s children if her son predeceased her and neither she nor her son informed the lawyer that two of those children had been adopted by their mother’s second husband. Although “ per stirpes” is unambiguous and excludes adopted outs under local law, the lawyer’s testimony was clear and convincing evidence of a unilateral drafting error and equity was available to reform the trust to include the adopted out children. Schroeder v. Gebhart, 825 So. 2d 442 (Fla. Dist. Ct. App. 2002).

TRUST REFORMATION: Trust reformed to remedy both typographical and substantive tax-related errors. In Colt v. Colt, 777 N.E.2d 1235 (Mass. 2002), the court reformed an inter vivos trust to remedy two typographical errors (an omitted date referring to grantor’s husband’s trust and a mistaken cross-reference to the husband’s trust) as well as language that might be construed as having adverse generation-skipping transfer tax consequences. The court characterized all of these mistakes as scrivener’s errors.

TRUST REVOCATION: General residuary clause in will does not revoke inter vivos trust. The decedent created a revocable inter vivos trust to which he transferred substantially all of his property. At the same time, he executed a pour over will. One year later, he executed a new will drafted by a different attorney that did not mention the trust. After his death, a will beneficiary sued alleging that the will revoked the trust. In In re Estate of Furst, 55 P.3d 664 (Wash. Ct. App. 2002), the court held that the will did not have a latent ambiguity, that extrinsic evidence was not admissible, and that the will could not revoke the trust because it did not mention the trust.

CHARITABLE REMAINDER UNITRUST: Settlor’s addition of assets to CRUT that fails to meet the 10% minimum present value of the remainder interest test allowed by treating the contribution as a separate trust with the same terms as the original trust but with a reduced payout rate (but not less than 5%). PLR 200245058.

CHARITABLE REMAINDER UNITRUST: Trust qualifies as a CRUT even though payments are to be made to trust for an incapacitated beneficiary instead of directly to a named beneficiary. PLR 200240012.

DISCLAIMER: Contingent beneficiaries of pre-1977 trusts may effectively disclaim an interest within nine months of reaching majority. PLR 200240015.

TRUST REFORMATION: Reformation of net income charitable remainder unitrust to a standard unitrust as originally intended by the parties did not trigger disqualification. PLR 200244011.

VALUATION: IRAs not discounted for estate tax purposes to reflect income taxes that will be payable by the beneficiaries upon their receipt of IRA distributions. The IRS also indicated that a lack of marketability discount was not available. TAM 200247001.

Charitable Gifts. Christopher H. Gadsden explores the expansion of the state’s attorney general powers for charitable trusts and its potential effect on trustees and donors in The Hershey Power Play, Tr. & Est. 8(Nov. 2002).

Discriminatory Transfers. Florence Wagman Roisman discusses The Impact of the Civil Rights Act of 1866 on Racially Discriminatory Donative Transfers, 53 Ala. L. Rev. 463 (2002).

Elder Law. Richard L. Kaplan discusses how emphasis on EGTRRA hurts the overall elder law agenda in Crowding Out: Estate Tax Reform and the Elder Law Policy Agenda, 10 Elder L.J. 15 (2002).

Family Limited Partnership Valuation. Wendy C. Gerzog discusses Estate of Strangi v. Commissioner and provides A Different Take on the FLP Valuation Game, 97 Tax Notes 683 (Nov. 4, 2002).

Health Care Decisions. Amy Stewart Sanders discusses Resources to Address Consumer Health Care Concerns, 65 Tex. B.J. 830 (2002), with an emphasis on Texas law.

Michigan. Sharla K. Raab provides A Comparative Analysis Between the Uniform Probate Code and Michigans Estates and Protected Individuals Code, 79 U. Det. Mercy L. Rev. 593 (2002).

Minnesota. To learn more about the practical implications of Minnesota’s Descent of Homestead Statute, read Gregory J. Duncan’s Home Sweet Home? Litigation Aspects to Minnesota’s Descent of Homestead Statute, 29 Wm. Mitchell L. Rev. 185 (2002).

New York. John C. Welsh provides an overview of the implications for estate planning attorneys of recent New York legislation and case law in Estates and Trusts, 52 Syracuse L. Rev. 375 (2002).

Pooled Trusts. A. Frank Johns provides a detailed description of a self-settled special needs pooled trust and its ethical considerations in Legal Ethics Applied to Initial Client-Lawyer Engagements in Which Lawyers Develop Special Needs Pooled Trusts, 29 Wm. Mitchell L. Rev. 47 (2002).

Section 529 Plans. Susan Hansen discusses the risks of using this tax-saving provision as a wealth transfer technique until the IRS issues its final rules in Beware the 529 Hype, Tr. & Est. 9 (Oct. 2002).

Virginia. J. Rodney Johnson provides a review of recent legislative and judicial developments in Wills, Trusts, and Estates, 37 U. Rich. L. Rev. 357 (2002).

California requires the court, to the extent resources are available, to implement procedures to ensure that every guardian annually completes and returns a status report. 2002 Cal. Legis. Serv. ch. 1115.

Hawaii requires that a creditor be warned of the shortened statute of limitations when the personal representative disallows a claim. If the creditor is not warned, the period is extended from 60 days to 18 months. 2002 Haw. Law Act 82.

Iowa permits a trustee to convert an income trust to a total return unitrust and to reconvert a total return unitrust to an income trust under specified circumstances. 2002 Ia. Legis. Serv. ch. 1086.

Kansas changes presumptive death requirements for persons absent after catastrophic events. 2002 Kan. Laws ch. 71.

Michigan amends provisions regarding taxation of estates and generation-skipping transfers of property. 2002 Mich. Legis. Serv. P.A. 347.

Missouri redefines when a person does not engage in the trust business and amends provision regarding unitrust valuation. 2002 Mo. Legis. Serv. S.B. 742.

New York enhances regulation of charitable contributions and the holding and administering of charitable assets. 2002 N.Y. Sess. Law ch. 43.

Ohio enacts Uniform Simultaneous Death Act. 2002 Ohio Laws File 90.

Ohio increases value of uneconomical trust that the court may terminate to $100,000 from $50,000 and modernizes fiduciary duties relating to transfers at death. 2002 Ohio Laws File 126.

Pennsylvania enacts Uniform Principal and Income Act, updates rules for equitable apportionment of federal estate taxes, and permits the transferor of property under the Uniform Transfers to Minor’s Act to require that the custodian hold the property until the minor reaches age 25. 2002 Pa. Legis. Serv. Act 2002–50.

Pennsylvania revises prudent investor rule particularly with regard to charitable trusts. 2002 Pa. Legis. Serv. Act 2002–133. j

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, Christian J. Hack, William P. LaPiana, and Alicia Pierce.