Wills And Trusts Outline - © 1999 John M. Thompson

Created for Professor Gerry Beyer’s Wills, Trusts, and Estates class, Fall 1999

Santa Clara University School of Law

 

I.. Intestate Succession

A.. Surviving Spouse

      Types of law:

1.. common law

a.. distinction was made between real and personal property

i.. real property - spouse was not an heir and could not take by  intestacy because spouse was not a blood relative

ii.. personal property - husband took all personal property as soon as marriage occurred; if husband died first, the wife could inherit some of the property

2.. modern law

a.. surviving spouse is made and heir and can now take by intestacy

b.. states have protections for surviving spouse

      i.. statutes that prevent spouse from being cutout of the will

      ii.. homestead right - right to occupy home for a particular period of time

            3.. marital law

                  a.. common law used in most states - no marital property

      b.. community property (CA system) - when property is acquired

through marriage it is split fifty/fifty

            CA Law

            1..  type of property makes a big difference in distribution

a.. community property - property acquired during marriage while domiciled in CA or another community property jurisdiction

i.. CA - surviving spouse keeps half of property and inherits deceased spouses property; same as saying spouse gets all community property

ii.. quasi community property - property acquired during marriage that would have been community property has they been domiciled in CA

a)      applies to personal property where ever located, as well as real property located in CA

b)      restoration of community property - surviving spouse can force a person to return property if it was fraudulently transferred before the spouse died; four requirements for restoration

1)      deceased spouse must be domiciled in CA at time of death

2)      deceased spouse did not receive consideration for substantial value for transfer

3)      surviving spouse did not consent or join in writing

4)      deceased spouse still had some benefit of property

iii.. separate property - property owned before marriage; property acquired during marriage by gratuitous transfer (EX: inter vivos gift, inheritance); profits and income from separate property even if earned during marriage

a)      surviving spouses’ share depends on family situation:

1).. surviving spouse gets all - if no issue, no surviving parent, and no surviving descendants of parents

2).. surviving spouse gets half - if deceased spouse had one surviving spouse or children of deceased child (???), or the deceased spouse did not have any descendants but did have at least one parent surviving or a niece or nephew

3).. surviving spouse gets one third - where there are two or more bloodlines of descendants surviving (would have had to have had at least two children at some point in time)

2.. surviving spouse can waive all inheritance

                  a.. must be in writing and signed by the surviving spouse

                  b.. see Section 140 - 147 for more information

 

B.. Descendants

      1.. general rules

            a.. if no surviving spouse, descendants take everything

            b.. if there is a surviving spouse descendants take everything the surviving

spouse does not take

c.. CA prefers parents to siblings, grandparents to aunts and uncles, and cousins

            2.. ways to divide property

a.. per stirpes (by the roots, or by right of representation) - divide into shares based on the number of living children and deceased children

      i.. does not matter that no one in that generation did not survive

      ii.. create a share with every living descendant and every deceased

descendant with surviving descendants

b.. per capita with representation - divide into shares at first generation with a surviving member

                        i.. this attempts to treat equally related people equally

c.. per capita at each generation (this is the UPC approach and CA approach) - divide everything at the first generation and then keep dividing the further generation’s shares

      i.. divide at first generation with survivors

      ii.. if unmarried and no kids - goes half to each parent, or all to one parent

if other parent is dead (CA)

iii.. if no parents living - divide equally between all living grandparents

iv.. great-grandparents and their descendants take next

v.. if no one at all - property to deceased spouse’s parents

 

C.. Ancestors and Collaterals

 

D.. Escheat - goes to state if no one is left to take

 

E. Posthumous Heirs - a child conceived while person alive, but born after death

      1.. many states will not allow posthumous heirs to inherit

      2.. CA allows ALL posthumous heirs to inherit

 

F.. Adopted Individuals

      1.. how adopted child inherits from adopted parents:

            a.. just like a biological child

            b.. inherits from a through the adoptive parents

            c.. would inherit from grandparents and others just like a biological child

      2.. how adopted child inherits from biological family:

            a.. states vary

            b.. CA view:

i.. presumption that the adopted child does NOT inherit from or through biological parents

ii.  EXCEPTION: if child and biological parent live together as parent and child; OR either adopted by stepparent or the death of the natural parent after the death of a biological parent (???)

      3.. who would inherit from adopted child, if child had no spouse or descendants:

a.. generally adopted parents and family inherit from and through the adopted  child, just as if the child were biological

b.. states vary on inheritance rights of biological parents:

i.. CA is middle of the road approach

a).. presumption that biological parents do not inherit from or through biological parents

b).. EXCEPTIONS: full blooded siblings will only inherit if the adopted child could have inherited from the biological parents; if the child could inherit from the biological parent, and the adoption is by the spouse or the surviving spouse then the biological parents can inherit from the child

            4.. types of adoptions

                  a.. statutory adoption (formal, legal adoption)

                  b.. adoption by estoppel (equitable adoption)

                        i.. child lived with family, but was never officially adopted

            ii.. shares in the state as a child would, but is not an officially an

adopted child

                  c.. adult adoption

i.. in CA can only have an adoption of a younger person by an older person

           

G.. Non-marital Children (wedlock)

      1.. generally

a.. up until 1977 could not inherit from anyone

b.. in Trimble v. Gordon the USSC said there cannot by differences in inheritance based on marital status

c.. the next year, 1978, the USSC narrowed this, said it is okay to discriminate in some circumstances

            2.. CA law

a.. no discrimination in regard to Mother; just need proof that the mother gave birth to the child

b.. father is treated differently; there are situation in which paternity is presumed

                        i.. born during marriage or an attempted marriage or 300 days thereafter

                        ii.. the father marries the mother after child is born, and the father is

named as father on birth certificate, or the father pays child support

iii.. the father receives the child into his home and holds the child out as his biological child

iv. child can try to show natural parantege also by

      a).. through court of paternity

      b).. have a court judgment after father’s death (need clear and convincing evidence that the father openly held the child out as his own)

 

H.. Children from Alternate Reproduction

      1.. artificial insemination

            a.. mother is the birth mother

            b.. some question as to the father: if the donor is also the husband, then donor

is the father, but if not, the donor is not the father

c.. the woman who intended to procreate the child is the one who becomes the mother

 

I.. Stepchildren and Foster Children

      1.. stepchild - child of spouse that you have not adopted and is not yours

      2.. foster child - parent is unrelated to parentlike figures, but child was put there

by a government agency

      a.. most states say foster children do not have right to inherit

      b.. CA view; three ways that a step child might be able to inherit

            i.. to be determined to be a real child - then step or foster child will be

treated just like biological child   

ii.. continued during joint lifetimes

iii.. equitably adopted child

 

J.. Half-blooded Collateral Heirs

      1.. Scottish rule - half bloods take half as much (majority view)

      2.. half-bloods do not take at all, unless there are no whole bloods to take

(minority)

      3.. modern view - half or whole blood does not matter

 

K.. Non-United States Citizens

1.. common law - could not inherit from non-citizens; also real property could not be passed to aliens

      2.. United States - usually no restrictions

            a.. anyone can take regardless of citizenship

            b.. no person is disqualified to take as an heir because that person or a person

through whom he or she claims is or has been an alien

 

L.. Unworthy Heirs

      1.. forfeiture - if convicted of certain crimes, the state can take your property

      2.. civil death

            a.. treated as civilly dead in situations; smaller than forfeiture

            b.. property would go to heirs

      3.. murder of person that you would inherit from

            a.. policy - do not want people to benefit from evil conduct

            b.. CA has two part test to trigger statute

                  i.. felonious killing

                  ii.. intentional killing

      4.. if statute is triggered then killer is deemed dead for purposes of inheritance

            a.. unclear as to where the property goes

            b.. do not know if killer is treated as merely being dead, or treated dead

without any descendants (unresolved in CA)

            c.. there must be proof of the felonious killing; can be proved several ways

                  i.. gets charged and goes to jail

                  ii.. killer is convicted

                  iii.. preponderance of the evidence shows that the murder was felonious

and intentional (can be guilty even if not convicted in criminal court: OJ)

            d.. types of crimes

                  i.. voluntary manslaughter - felony and intentional; killer may not inherit

                  ii.. involuntary manslaughter - no intent to kill; killer may inherit

                  iii.. insanity - no intent; killer may inherit

                  iv.. self defense - intentional, but non-felonious; killer may inherit

            e.. suicide - does not effect who inherits (at common law property went to

state; common law user to call this “persons who destroy their lives”)

            f.. failure to support and acknowledge wedlock child

                  i.. biological parent cannot inherit unless the parent acknowledges and

cares for the child

                  ii.. modern trend imposes this requirement on all parents in order to inherit

from their children

            g..  commit adultery or abandon spouse -  CA does not mind; can still inherit

            h.. abusing elder or dependant adult

                  i.. cannot inherit if convicted of a crime related to abuse; OR

                  ii.. cannot inherit if person meets the following four elements:

                        a).. heir abused intestate (by clear and convincing evidence of abuse;

can also be financial abuse)

                        b).. can show heir acted in bad faith

                        c).. reckless, oppressive, fraudulent, or malicious

                        d).. after abuse, person did not recover

 

M.. Ancestral Property

1.. history

a.. developed from common law policy of keeping real property in the blood line of the original owner

b.. applies if an individual inherited real property and then died intestate without surviving descendants or first line collateral relatives

c.. has never been applied to personal property

d.. almost all states have rejected this doctrine

e.. under modern law the intestate decedent is treated as the original purchaser of all property the intestate owns at time of death

2.. CA law - where property goes that you acquired from a predeceased spouse when you die (§ 6402.5)

a.. must die with no descendants and no new spouse; other wise this statute does not apply

            b.. applies to all property you acquired from the predeceased spouse

            c.. real property - go back 15 years (if predeceased died within 15 years of

your death)

d.. personal property - go back 5 years (if predeceased died within 5 years of your death)

            e.. only applies if in total there is $10,000 or more remaining

      3.. intestate distribution scheme (CHECK THIS ???  APPLIES HOW?)

            a.. property goes to the descendants of the predeceased spouse (stepchildren)

            b.. no stepchildren the property goes to parents of the predeceased spouse

            c.. if no parents. Then descendants of predeceased spouse (brother in law, etc)

            d.. descendant’s next of kin are next; in none, then look to more distant

relatives of the predeceased spouse 

 

N.. Advancements - prepayment of inheritance while the intestate was still alive

1.. common law

a.. intended as early inheritance, then advancee would have to make an accounting of the money received

      b.. must account for money received before person died

      c.. this accounting process is called “going into hotchpotch”

2.. modern law

a.. most states, including CA, have reverse presumption: presumption is that the “advancement” is an absolute gift; everything we receive is a gift and not intended to be an advancement

b.. an advancement is an irrevocable gift; does not create a debt or a condition precedent to sharing in the estate

c.. gift is valued at date of the gift

3.. CA requirements for a gift to be an advancement

      a.. must be in writing

      b.. contemporaneous writing by advancer (person giving the gift; because

        don’t want person to change mind)

      c.. writing is also signed by advancee; can be introduced at any time

      d.. advancement applies to all, not just descendants (like some states); also

people like brothers and sisters

      e.. applies to all types of intestacy (all or partial intestacy)

 

O.. Survival

      1.. CA rules

a.. must have survived at least 120 hours after the decedent died in order to take under his will

b.. must be able to show by clear and convincing evidence that the person survived

            c.. talked about Kennedy airplane crash as an example

 

P.. Disclaimers - reasons a person might not want to inherit property

      1.. if taxes exceed value of property

      2.. environmental risk

      3.. moral or religious reasons (don’t want to benefit from death of deceased)

4.. can avoid taxes by disclaiming the property (parents can disclaim and have the property pass directly to children; usually only worth it if $600,000 or more)

      5.. CA disclaimer rules

            a.. disclaimer must be in writing and signed by disclaimant

            b.. must identify in document what items are being disclaimed

            c.. disclaimer must be filed

i.. must be filed with a reasonable time after you discover you are going to inherit (under Federal law, must disclaim within 9 months of death

ii.. if disclaimed within 9 months it is presumed to be timely.  A reasonable time can never be shorter than 9 months ***

iii.. must be filed with the Superior Court or with the administrator of the estate, or anyone else having legal title or interest

            d.. one property is disclaimed, can’t revoke

6.. if property is disclaimed it is as if you predeceased the intestate; a disclaimer is not an assignment (disclaimant can not determine where the property goes)

      7.. can disclaim property coming under a will just like you can under intestacy

 

Q.. Assignment or Release of Expectancy

      1.. people do not have a right to inherit

      2.. the expectancy to inherit from someone who is alive does not create a property

right

      3.. although you cannot assign the expectancy you can make a contract

            a.. contract to give someone whatever you inherit

            b.. can also make a binding contract to sell your expectancy, but cannot

actually transfer it

            c.. risk is very high; extremely speculative

 

R.. Equitable Conversion

1.. occurs in situations when real is treated as personal or personal treated as real property

2.. heirs of real and personal property in CA are the same; equitable conversion is not an issue here (not like this in all states)

 

S.. Liability for Predeceased Intermediary’s Debts

      1.. situation: intestate that was creditor; child was debtor - child dies insolvent

      2.. the child of insolvent does not get a smaller share because the debt was unpaid;

shares of debtor’s issue are not made smaller to compensate for debt; inheritance goes directly to heir of intestate - not through estate of pre deceased intermediary

       

T.. Heir Designation

      1.. in OH and AK you can name anyone you want as an heir

      2.. CA does not have this

      3.. this solves problems for non-maritals who want to share property

 

U.. Choice of Law

            1.. personal property - jurisdiction is domicile of decedent at time of death; can be domiciled somewhere other than where you are located at time of death

            2.. real property - situs (state where real property is located)

 

II.. Wills - transfers nothing, creates only an expectancy; can give away separate property, half community, half of quasi community; a will is a document that transfers property that takes affect at death (unlike a deed with takes affect when executed); can leave property to anyone legally entitled to hold title to property

      A.. Elements for a valid will

            1.. Legal Capacity - the legal status necessary to execute a will; in CA:

                  a.. have to be at least 18; OR

                  b.. a conservator may make a will with the consent of the court

                        i.. people not of sound mind can have a conservator

                        ii.. minors can have a conservator

(a).. CA does not have a probate statute that allows a married minor to have a will; however it is allowed under the Family Code

      2.. Testamentary Capacity - have a sound mind

a.. understand nature of testamentary act (understand that a will controls what happens to their property when they die; do not need to know it is called a will)

b.. understand and recollect the nature of their property

c.. understand and know who will get their property

d.. age does not matter

e.. testamentary capacity is easier to get than contractual capacity because there is only one person involved (testator)

3.. Testamentary Intent - testator intended for the actual document being signed to be a will

                  a.. typical cases that arise:

i.. letter cases - person writes a letter to attorney or child saying what they want to do with their property; letters are not wills - usually just letter of instruction

ii.. sham will cases - wrote a will for a hazing event for a fraternity

iii.. specimen will - just a rough draft of a will

b.. must keep in mind intent when considering whether the above examples would qualify as wills

            4.. Formalities

                  a.. Generally

                        i.. four basic policies

                              (a).. ritual / cautionary function - demonstrate that the testator was

serious about making a will; not just an idle thought; testator was serious and deliberate

(b).. evidentiary function - create evidence of testator’s intent;  helps show what actually happened and reduces chance of forgery; generates evidence

(c).. protective function - by requiring all the technicalities it makes it harder for a will to exist that the testator did not really want

(d).. channeling function - confidence that a testator gets after going through the ceremony; gives the testator greater assurance that his desires will be carried out

                        ii.. there has been a trend over tine for loosening the formalities

                        iii.. CA is in the middle in regard as to the range or formalities required

                  iv....Types of wills

                        (a).. attested will - will that has witnesses

                              (b).. holographic will - a will in the testator’s own handwriting

(c).. cupative will - oral will

                              (d).. statutory will - form of the will is contained in state statute

                              (e).. soldiers’ and seamen’s wills - CHECK

                  b.. Formalities for attested will (in writing, signed, witnessed)

                        i.. will must be in writing (therefore CA does recognize cupative wills

                              (a).. language the will is in is irrelevant as long as it can be accurately

translated

                              (b).. recommended to use standard paper, permanent ink, English

                        ii.. will must be signed

                              (a).. ways to satisfy this requirement:

(i).. testator - signature need not be a fill name; just something made with the present intent to indicate a writing (although

recommended to use person’s full name)

1). Requirements for use of a mark in CA -

                                                a).. testator must not be able to write his name

                                                b).. testator’s name must be written near the mark by a

witness (witness writes the name of the person that cannot write and their own name)

                                                c).. most states do not have this requirement; harder to use

a mark in CA

(ii).. proxy - someone else signs signature for you (want people that could not write to be able to make a will

                                          1).. requirements for a proxy in CA -

a).. must be made in testator’s presence and with their direction

b).. no requirement that the testator be unable to write (unlike the mark requirement)

(iii).. conservatorship - can get court permission to make a will for a person that lacks capacity

                                          1).. requirements for conservatorship in CA -

                                                a).. no requirement where signature has to be

                                                b).. many states require that the signature be at the end of

the page (this is recommended for CA and that the testator and witnesses should initial every page)           

                        iii.. will must be witnessed; requirements:

                              (a).. at least two witness are required

                              (b).. in CA minimum age of witnesses is not specified but

recommended that they be 18 years or older

                              (c).. witnesses must be able to testify before a court

(i).. must know significance of oath to tell the truth and know the difference between the truth and a lie

                                    (ii).. witnesses must know they are witnessing a will

                                          1).. this is known as publication

                                          2).. this formality is rare in the USA, but CA has retained it

                              3).. witnesses do not need to know the contents of a will

                                          4).. testator or attorney should say “this is a will”

                              (d).. order in which people sign is important; three ways/views:

                                    (i).. strict/English view - witness must sign after the testator

(makes more sense is the logic; causes problems because some attorneys are not careful about order in which the will is signed)

                                    (ii) American view/continuous transaction view - as long as

signatures are affixed to the will at the same time, as part of a continuous transaction, the will is valid

(iii).. modified continuous transaction view - testator acknowledges the will

                                          1).. witness witnessed testator signing will

                                          2).. witness acknowledged testator’s signature

                                          3).. testator said “this is my will” means that testator can sign

first

                  (e). CA practice -

                        (i).. testator does not have to sign in the presence of witnesses

                        (ii).. testator can say either “this is my will” or “this is my

signature”

                        (iii).. witnesses do not have to sign in testator’s presence (unlike

most other states)

                        (iv).. witnesses do not have to sign in each other’s presence

(CHECK)

                        (v).. in CA have to have both witnesses together when the sign will

                  (f).. if witness is also a beneficiary - jurisdictions vary widely

                        (i).. will is void say some

                        (ii).. modern approach is that it is totally irrelevant

                        (iii).. CA approach is somewhat in the middle

                              1).. have not adopted view that will is invalid

                              2).. presumption in the statute is that if you were a beneficiary

of a will and a witness, you are evil (fraud, duress, menacing, undue evil)

3).. if you can rebut the presumption then you can take the full gift under the will

4).. if you cannot rebut the presumption the general rules is that your get nothing; if your gift fails there are several ways in which you can get around this

a).. if under intestacy or a prior will you would have received property anyway you will receive the smaller share or the amount you would have received (policy is that there is no motive to lie this way)

b).. show that there are other witnesses (testimony of other witnesses can be used to support the will)

                              (g).. qualifications for being a witness

                                    (i).. anyone can do it; best qualification is that person was there

                                    (ii).. in normal case it is fine that the witness does not know the

testator

                                    (iii).. general characteristics of good witnesses:

                                          1).. over 18 years old

                                          2).. disinterested and not a beneficiary

                                          3).. young and healthy

                                          4).. will be able to locate the witness in the future

                                          5).. presentable as a witness in court

                                          6).. witness sign self proving affidavit (if no contest, then

witness will not need to be produced for probate)

                                                a).. in CA do not need to have a notary to have an affidavit

                                                b).. if will is contested then the self proving affidavit is not

any good

                                                c).. in probate there must be witnesses; in order to avoid

bringing witnesses will must not be contested and there are self proving affidavits

                        iv.. will execution ceremony

                              (a).. good idea to have formal ceremony (good effect on client; good

PR; more likely to do all steps correctly; client’s intent will be carried out)

                  c.. Formalities for holographic will - prepared in testator’s handwriting

                        i.. exempt from witnessing requirement

                        ii.. variety of approaches to determine whether or not an instrument is

holographic

                              (a).. intent approach - if testator intended for any of the non

holographic material to be part of the will, the will is no longer holographic

                              (b).. surplus approach - if we can ignore the non-holographic material

and if the will still disposes of the property in the same way, then it can be treated as holographic

                              (c).. material provisions approach (UPC, modern view, CA approach) -

the will will be deemed holographic if the material provisions are in the testator’s handwriting (material provisions: names of the beneficiaries, property; store bought forms pass this view)

                        iii.. effect of a holographic will on a prior will is uncertain

                              (a).. if the holographic will is undated, the statute presume that the

holographic will is old and that the other will is newer

                              (b).. if there are two holographic wills that are undated the courts will

normally only give affect to the consistent provisions

                        iv.. when to use a holographic will

                              (a).. emergencies

                              (b).. for extreme privacy

                              c).. as an interim will (operates as a temporary will until a formal will

can be prepared)

                  d.. Formalities for a cupative will

                        i.. CA does not recognize cupative wills (some jurisdictions still do)

                  e.. Formalities for statutory will

                        i.. only authorized in 4 states (Maine, Michigan, CA, Wisconsin)

                        ii.  see § 6240; enacted around 1985

      B.. Classification of Testamentary Gifts (5 basic categories)

1.. specific gifts - property that can be identified precisely at the date of execution; property is clearly measurable at the time the will was made

            2.. general gift - transfer from general assets that does not leave specific property

                  a.. two basic types of property that are subject of general gifts:

i.. money - I leave $20,000 to X.  This is called a general pecuniary gift; fixed dollar amount gift

                        ii.. securities - I leave 100 shares of E-Bay stock to X (is general because

it was not identified precisely - if it had stock certificate numbers it would be specific)

3.. specific gifts of a general nature - the property is insufficiently described to be ascertainable as of date of will execution; instead the property is measured at the time of death

                  a.. I leave my car to ___ (do not know what type of car until testator dies)

            4.. demonstrative gift - I leave $10,000 from the sock under my bed to X

(indicates the source from where the money is to come from)

            5.. residual gift - I leave the remainder of my estate to X

C.. Ademption - refers to the failure of a specific gift because the property is no in the testator’s estate when the testator dies

1.. By Extinction - when the property is no longer in the estate; relevant only for specific gifts

a.. common view is to look to the intent view - look to the intent of the testator

      b.. most jurisdictions abandon a very strict view - if the property is not

in the estate when the testator dies, the gift adeems and the beneficiary gets nothing

b.. CA view (minority) - has abandoned the ademption view, but does not go as far as some states with the intent view; many states allow tracing and may even permit the beneficiary to receive the value of the missing property; can also get proceeds that are left over (such as insurance from a burned down house that was left to you 21113)

2.. By Satisfaction - failure of a testamentary gift because the testator has already transferred the property to the beneficiary between the time of will execution and time of death (like an advancement)

a.. CA requires a satisfaction be proven in writing; three ways this can be done

            i.. will provides for satisfaction

            ii.. contemporaneous writing by the testator

            iii.. writing by the beneficiary that says the gift was made in

satisfaction

3.. How to avoid exemption

a.. each specific gift should contain an express statement of the testator’s intent should the gifted property not be in the estate when the testator dies

b.. should either provide a substitute gift or state that the beneficiary receives nothing if the exact item is not part of the estate

            G.. Changes in Value

1.. if the gift has changed in value, the beneficiary of a specific gift bears the burden of depreciation and the benefit of appreciation

      a.. changes in monetary value - inflation or depreciation does not matter

      b.. CA - a pecuniary gift (fixed dollar amount gift) starts earning interest one year after death if it is not distributed

                  2.. change in value of corporate securities

a.. form - if the change is only in form the beneficiary has a good chance of taking

                              i.. cash dividend

b.. substance - if the change is one of substance, the beneficiary usually will not benefit from the newly acquired securities

                              i.. stock splits and stock dividends

H.. Exoneration - refers to paying off debts on specifically given property before beneficiary receives the property; only relevant for specific gifts

1.. benefits the beneficiary; a beneficiary of a residual clause won’t like this because there will be less left over after the debt is paid off

            2.. presumptions - states either presume exoneration or don’t

a.. if not there is no presumption of exoneration, then the beneficiary gets the gift with the debt (such as a house with an outstanding mortgage)

                  b.. CA view - beneficiary takes WITHOUT exoneration

i.. can provide in the will for exoneration though; needs to be something other than a general directive (be very specific); applies to specific gifts only

                 

I.. Abatement - the reduction or elimination of a testamentary gift to pay an obligation of the estate or a testamentary gift of a higher priority

      1.. abatement order

            a.. first follow direction of the will

            b.. if no directions, examine the will to come up with a plan or purpose

            c.. last result is statutory order of abatement:

i.. property passing via intestate succession (property not provided for in will)

                  ii.. residuary gifts

                  iii.. general gifts to persons other than testator’s relatives

                  iv.. specific gifts to non-relatives

 

J.. Tax Apportionment - prevents the residual gift from bearing the entire estate tax burden in addition to all of the other claims against the estate

      1.. only applies to estate taxes (federal or state)

      2.. jurisdictions are divided between those that presume apportionment and those

that do not

a.. modern view - apportionment presumed (all beneficiaries pay their fair share of the taxes)

            b.. CA view - apportionment presumed

           

      K.. Marriage of Testator - this affects wills prior to marriage

            1.. spouse is likely to be entitled to some benefits regardless of what the will says

            2.. first spouse to die can only give away all separate property, half of the

community property, half of the quasi community property

3.. effect of marriage on will written before marriage:

a.. surviving spouse gets all the community property (the half owned by the first spouse to die)

      b.. surviving spouse also gets all the quasi community property

      c.. surviving spouse can either get one half or one third of the separate

property

d.. exceptions: if the person wrote that a surviving spouse would not get anything; non-probate transfers (life insurance); pre-nuptial agreement

           

      L.. Divorce of Testator - effects on a will

            1..  once divorced the ex-spouse will not take anything

            2.. property then passes as if the ex-spouse had predeceased

            3.. should put in will that if there is a filing for divorce the ex-spouse will not take

 

M.. Pretermitted Heirs - a child that is left out of a will; to protect a child from and accidental or inadvertent disinheritance, state legislators have enacted statutes which may provide for a forced share of the parent’s estate

1.. under most states there is no obligation to provide for your children in your will

      a.. a disinherited child is not an omitted child

      b.. omitted grandchildren do not fall within the statute

            2.. ways a pretermitted heir can occur:

                  a.. child born or adopted after will execution

                  b.. child is actually alive, but testator though the child was dead

                  c.. child is alive but testator did not know child was born

            3.. where to get the pretermitted heir’s share:

                  a.. first look to intestate property

                  b.. next take proportionally from all beneficiaries (do NOT use the abatement

order) 

c.. court has the power to satisfy the share in a different way if it is necessary to satisfy the testator’s intent; pretermitted child usually will take as if the estate had passed by intestacy

4.. exceptions - situations where the omitted child will not get a share (only apply to the omitted child who was born or adopted after will execution)

                  a.. intentionally left out and the intention is demonstrated in the will

                  b.. testator’s will actually provides for the pretermitted child (such as by the

inclusion of a class gift to children)

c.. testator provided for the pretermitted child by way of a non-probate transfer

d.. testator’s will demonstrates an intent for pretermitted children not to share in the testator’s estate

                  e.. testator’s entire estate is left to the pretermitted child’s other parent

 

      N.. Death of Beneficiary (Lapse) - beneficiary fails to survive the testator

            1.. normally the beneficiary cannot take anything; they lack the ability to hold title

            2.. CA statute says that beneficiary who does not survive testator does not take

            3.. should always provide a backup beneficiary in case first beneficiary is not

alive

            4.. assuming will is silent on backup beneficiaries, this is what would happen:

a.. look to see if the jurisdiction has an anti-lapse statute - this type of statute substitutes descendants of the pre-deceased  for the pre-deceased beneficiary

                  b.. CA anti-lapse statute

                        i.. look first for contrary indication in the will

                        ii.. demonstrate a sufficient relationship between survivor and beneficiary

                        iii.. statute does not apply if only friends

                        iv.. if no descendants of pre-deceased it would go to beneficiaries of the

residual

v.. if cannot be saved by the anti-lapse statute, the residual will pass by intestacy

                        vi.. if the residual is left to two people then the survivor would still get it;

courts presume survivorship language if the residual is passed to two people

 

      O.. Failure of Charitable Gift

            1.. reasons for failure

                  a.. the indicated charity no longer exists

                  b.. the specified charitable purpose is illegal, impossible to fil, or has already

been fulfilled

2.. cy pres - doctrine of equitable approximation; the court attempts to find a charitable beneficiary or charitable purpose that is sufficiently similar to what the testator provided in the will

                  a.. used to substitute a different charity for the one specified in the will

                  b.. many charities will show up at probate and argue why they are similar to

the charity the property was originally to go to

3.. if the will indicates what to do in the case of failure of a charitable gift the court will do that first

 

      P.. Survival - need clear and convincing evidence for survivorship in a will

            1.. most states follow the intestacy rule of a minimum of 120 hours for survival

            2.. CA is different - need clear and convincing evidence of survivorship

 

      Q.. Revocation

            1.. By operation of law - situations where a will is automatically revoked

                  a.. marriage of testator

                  b.. divorce of testator

                  c.. pretermitted heirs

                  d.. death of a beneficiary (lapse)

                  e.. beneficiary killed testator

                  f.. alienation - if the testator makes an inter vivos transfer of an item subject to

a specific devise or bequest in the testator’s will

                  g.. elapse of time - is irrelevant under modern law

            2.. By physical act - four requirements

                  a.. mental capacity to revoke

                  b.. revocation intent

                  c.. physical act

                        i.. burn the will up

                        ii.. tear the will up 

                        iii.. cancel, obliterate, destroy the will

                  d.. concurrence of capacity, intent, and physical act

                        i.. mistake does not count as revocation

3.. partial revocation - traditional approach is that partial revocation by obliteration, strike out, additions, are ineffective

                  a.. modern view - partial revocations permitted

                        i.. want to carry out testator’s intent

                        ii.. CA recognizes partial revocations

            4.. By Subsequent writing - preferred method; avoids ambiguity

                  a.. ways to have a revocation by subsequent writing

i.. express revocation - create a new will in which you expressly revoke the old will

                        ii.. an amendment to the existing will (a codicil) (not recommended)

                        iii.. revocation by inconsistency - a document that revokes the prior will

but does not contain replacement dispositive provisions

 

      R.. Presumptions - about whether a will was revoked or not

1.. presumption of continuity - if you have the original will it is presumed to be the real will

a.. the will must be found in the possession of the individual to whom the testator delivered the will; OR

b.. among the testator’s valuable papers in a place the testator kept such documents

            2.. presumption of revocation - if you cannot find the original will

                  a.. proponent of a will has a heavy burden to rebut this presumption

                  b.. typically the proponent must prove why the original cannot be produced by

any reasonable means, and prove the contents of the will

 

S.. Revival - refers to the process of revoking a prior will in a future will and then the will revoking the first will is revoked; reinstatement of a will the testator has already revoked

            1.. most common revival scenario:

                  a.. testator executed will 1

                  b.. then writes will 2 and revokes will 1

                  c.. will 2 is destroyed or lost: is will 1 valid?

            2.. three approaches to this question

                  a.. revival approach - theory that will number 2 was not effective until testator

dies; since testator revokes will 2, it never could have been revoked by will 1

                  b.. no revival approach - view will 2 as a revocation document and will

number 1 never takes effect; therefore testator dies intestate

                  c.. intent view (UCP, CA view) - try to figure out the intent

                        i.. first creates a presumption of no revival

                        ii.. then can introduce evidence to the contrary; divides into 2 situtations

depending on how will 2 was revoked

a). physical revocation of will two - examine testimony or subsequent

revocations; any type of extrinsic evidence can be used

b). if will 2 was revoked by will 3 - the only place we can look for

evidence of revival is to look in will 3

 

      T.. Conditional Revocation

1.. express condition - may execute a revoking instrument and expressly condition the revocation on the occurrence or nonoccurrence of a stated event or condition

            2.. implied condition (dependant relative condition; conditional revocation) - used

to impose a condition on the testator’s act of revoking a will

a.. the condition on which the person based the will on was not true so

therefore the revocation does not take place

                  b.. most common scenarios:

                        i.. replacement will ineffective

                        ii.. revocation by physical act

 

      U.. Multiple Originals

            1.. a testator may legally execute several copies of the same will

            2.. each copy that contains the testator’s signature is considered an original

            3.. a VERY BAD idea to do multiple wills - do NOT do it

 

      V.. Interpretation and Construction

            1.. Ambiguity - ambiguities are resolved by fact finder

a.. patent - a will provision that is unclear on its face and does not convey a sensible meaning

      i.. examples: non-intelligible words, undecipherable code

b.. latent - if it conveys a sensible meaning on its face, but cannot be carried out without further clarification; executor tries to do what will says but then finds out it is impossible to comply

i.. examples: leaving money to someone who does not exist, relatives of the same name, misdescription of property, specific gifts of a general nature (I leave my CAR to X - what did he mean by car? There are lots of vehicles that are not cars.)

c.. not readily apparent - no ambiguity on its face, but someone wants to produce evidence to say that the will does not say what it appears to say

i.. CA follows the plain meaning rule, and therefore PROHIBITS the use of extrinsic evidence when there is clear meaning (exception: technical words can use extrinsic evidence)

            2.. Integration

a.. external integration - establish testator’s will by piecing together all of the testator’s wills, codicils, and other testamentary instruments

i.. to avoid problems date everything, and physically revoke old documents

b.. internal integration - making certain the testator’s will contains no fewer and no more pages than it did when the testator executed it

3.. Incorporation by Reference - having an extrinsic document being part of the will even though it is not physically part of the will

      a.. requirements:

            i.. intent to incorporate writing

            ii.. in existence - the writing the testator wishes to incorporate must have

been in existence when the testator executed the will

iii.. identification - the writing to be incorporated must be specifically identified

b.. amending a codicil to a will constitutes republication of the old will (effective as of date of codicil; can have affect on Pretermitted children and more)

4.. Facts of Independent Significance - permits the use of facts and circumstances outside the will to impact the property disposition the testator made in the will (allowed in CA)

      a.. four common scenarios where this can occur:

i.. determination of an item when it is a specific gift of a general nature (I leave my car to X)

ii.. evidence to show who spouse is (if will says “I leave my property to my spouse”)

iii.. identification of members of a class gift (have to look outside the will to determine who are members of the class)

iv.. gift of contents of an item (EX: I leave my cedar chest to X.)

1). Generally recognized presumption is that a gift of an item does not include its contents.

            5.. Precatory language - language that is not binding

            6.. Class gifts - one in which the testator designates a group of beneficiaries by a

generic reference rather than by their individual names

a.. if specific names and class gift language is used, the class gift will usually fail

b.. class is the class that exists when testator dies

c.. to determine the included person in class; just follow intestacy rules to tell if they are in or not; §21115

      V.. Will contests

            1.. insane delusions

                  a.. testator must believe that something is true when in reality it is false

                  b.. the misbelief must be irrational

2.. undue influence - T has testamentary capacity but was subjected to and controlled by an evil individual

                  a.. the person must actually exert an influence over the testator that is undue

                  b.. the influence must be so strong that it subverts and overpowers the

testator’s mind

c.. the influence must cause the testator to execute a will that the testator would not have signed but for the undue influence

3.. duress - connotes the direct use of violence, threats of brutality to the testator of the testator’s family, etc.

4.fraud - false representation, knowledge of falsity, reasonably believed, causation

5.. mistake - no evil conduct; testator is unilaterally mistaken; or innocently misled by someone else who was mistaken

a.. mistake in execution -  person signs something without knowing it is a will

      b.. mistake in inducement - person tells testator a false fact and testator bases

his will on that fact

      W.. Other will issues

            1.. conditional gifts

a.. condition precedent - condition must occur before you get the gift (reward condition)

                  b.. condition subsequent - you get the property, and only if you violate the

condition do you loose the property (punishment condition)

            2.. Combination wills -

                  a.. joint wills

                  b.. reciprocal wills

                  c.. contractual wills

3.. election will - a will that attempts to give away property the testator does not own, but instead is owned by a beneficiary of a will

 

III.. Estate Administration

-/- only 3 multiple choice questions on this

-/- see October 20, 1999 notes

 

IV.. Non-Probate Transfers

      A.. Ten reasons to use non-probative methods of property transfer

            1.. Non-estate planning benefits

                  a.. nongratuitous transfers - daily expenses

                  b.. gratuitous transfers - gifts

            2.. accelerate asset distribution

                  a.. delay is potentially damaging:

                        i.. the heirs and beneficiaries are unable to use the property

                        ii.. the decedent’s property may not be able to withstand a gap in

management

iii.. the decedent’s survivors may have to endure the emotional impact of a prolonged administration

            3.. reduce estate planning and administration expenses

            4.. enhance confidentiality

            5.. minimize taxes

a.. taxable estate may include assets that are not part of the decedent’s probate estate

            6.. retain flexibility

            7.. change with less difficulty - a person may revise many of the nonprobate

techniques with a minimum of effort thus avoiding extending procedures  and technicalities

8.. protect from creditors - very controversial; creditors do not think the death of a debtor should protect assets that were not protected during the debtor’s life

            9.. isolate from contest

            10.. increase understandability

 

B..  Types of Non Probate Transfers - five types

            1.. Inter vivos transfers - transfer of property while person is alive

                  a.. elements

i.. present donative intent - donor must have present intent to make a gratuitous transfer

            a).. donor should receive nothing for the transfer

            b).. transfer must be effective immediately

            c).. transfer must be permanent, unconditional, irrevocable

i).. courts might imply conditions on a gift (such as an engagement gift)

                        ii.. delivery - the property must be delivered to the donee

a).. constructive delivery - when the donor transfers to the donee the means of obtaining possession or control of the property rather than the actual property

b).. symbolic delivery - when the donor gives the donee something that represents the property instead of the property itself

c).. delivery of corporate stock - two approaches

            i).. gift is the certificate itself

ii).. stock certificate is only a symbol of ownership and the stock must be reregistered in the new owner’s name before the gift is effective

                        iii.. acceptance - donee must accept the property

a).. normally presumed because an inter vivos gift usually bestows a benefit on the donee

                  b.. potential benefits

                        i.. donee’s immediate enjoyment

                        ii.. donor satisfaction

                        iii.. donor relieved of responsibility

                        iv.. tax reduction (can give $10,000 per year per donee)

                        v.. creditor protection

                        vi.. reduce elective share of surviving spouse

                  c.. potential disadvantages

                        i.. irrevocable

                        ii.. lack of control

                        iii.. leverage reduction

                        iv.. jealousy

                        v.. minors and incompetents lack legal capacity

            2.. Gifts Causa Mortis - a gift made in contemplation of death

                  a.. the donor must fear that death is impending or imminent

                  b.. both conditional and revocable

i..  majority view - gift is automatically revoked if donor survives

ii.. minority view - the gift is revoked at the donor’s discretion if the donor survives; CA view

3.. Inter Vivos Gifts in Trust - a method of dividing title to property so that the legal interest is held by a trustee and the equitable interest by the beneficiary

4.. Transfers of Future Interests

            a.. remainder

i.. vested remainder - gives the right to obtain possession of the property as soon as the preceding estate terminates

ii.. contingent remainder - permits the donee to obtain possession of the property only if a condition precedent is satisfied

b.. executory interest - a type of future interest in a donee that cannot qualify as a remainder

            5.. Powers of Appointment - the right to designate the new owner of property

                  a.. this power may be severed from the property itself

                  b.. the owner is the donor

                  c.. the person with the power to appoint the property is the donee

i.. if this person fails to exercise his power, the property passes to the default takers; if non, the property reverts to the donor or the donor’s estate

                  d.. the prospective new owners are the appointees

                  e.. categorization

i.. general - no restrictions or conditions on the donee’s exercise of the power

ii.. specific, special, or limited - the donor may specify certain individuals or groups as the objects of the power

                        iii.. may also make the power conditional

                        iv.. may also dictate the method the donee must use to exercise the power

of appointment (inter vivos power, testamentary power, etc)

f.. Transfers to minors - minors lack legal capacity; several methods to still make transfers to minors

i.. transfer directly to the minor - best for gifts where the property is of relatively low value

                        ii.. place the property in trust for the benefit of the minor

                        iii.. the donor may transfer the property to a custodian for the minor

     

C.. Co-Ownership of Property

1.. Tenancy in common - not a probate avoidance technique because the deceased tenant’s share passes through the tenant’s estate to the appropriate heirs or beneficiaries (no survivorship)

2.. Joint tenancy - concurrent property ownership; must meet the four unities; CA Civ. Code 683 - joint nature must be stated for there to be joint tenants

                  a.  must meet the four unities

      i.. unity of time - all owners must become owners at the same time

ii.. unity of title - all joint tenants received their title from the same instrument

                  iii.. unity of interest - each joint tenant owns the same proportion of the

property

iv.. unity of possession - each joint tenant must have the right to occupy the entire property

b.. survivorship rights - a joint tenant’s rights end in favor of the surviving joint tenants

i.. when a joint tenant dies, the deceased tenant’s share is divided equally among the surviving joint tenants

a). many states now provide that the survivorship feature does not attach to a joint tenancy unless expressly stated in the instrument (to avoid accidental transfers); in CA, merely saying “joint tenants” is enough to give survivorship rights

c.. partition - joint tenants may dissolve the tenancy by either a voluntary or court-ordered partition

i.. the property must be divided equally; because it is often hard to divide property it is common for one tenant to buy the other out

 

D.. Multiple Party Accounts - contractual arrangements for the deposit of money with financial institutions (checking accounts, savings accounts, certificates of deposit)

            1.. joint account - an account payable on the request of one of two or more parties

a.. ownership rights - joint account belongs to the parties in proportion to the net contributions by each party

b.. withdrawal rights - each party has the virtually unlimited right to withdraw any or all of the money in the account

                  c.. rights after death of a depositor

i.. ownership rights - when one of the parties to a joint account dies the deceased party’s net contributions pass either to:

a). through the deceased party’s estate to the party’s heirs or beneficiaries

                              b). to the surviving joint parties; CA view

ii.. survivorship rights - to determine whether a surviving party has survivorship rights:

                              a). examine state law to ascertain the state’s presumption

i). Some states presume the account has no survivorship rights; survivorship rights only exist when expressly created by the parties in contract

                                    ii). Other states provide that survivorship rights are automatic

b). examine the actual contract to see if it rebuts the state law presumption

c). determine whether the state law permits extrinsic evidence to vary the contract

iii.. withdrawal rights - any party has the right to withdraw any and all of the funds on deposit

2.. the agency or convenience account - a joint account without survivorship rights

a.. the depositing party does not intend the other party to obtain the remaining funds when the party dies

b.. often used as an expense account for other party to pay primary party’s bills

3.. the payable on death account - becomes payable to designated persons only after the death of all original depositors

a.. the POD payees are not entitled to notice of withdrawal and their consent or approval is not required

      i.. no ownership rights are transferred until death

4.. the trust account - similar to a POD account; based on trust law rather than

contract law; takes form such as “depositor in trust for beneficiary”

      a.. modern law has stripped trust accounts of their trust law components

5.. Other multiple party account issues

a.. ability to alter contract by will - unlikely that a will provision would be sufficient to alter the terms of an account contract

b.. creditors - multi party accounts are not usually an effective method of avoiding creditors

c.. divorce - some jurisdictions allow the ex-spouse to take while others revoke the provisions automatically as a matter of law and then dispose of the property as if the ex-spouse had predeceased the depositor

      d.. survival - usually the claimant must survive the depositor by 120 hours

      e.. effect of depositor’s incapacity - no clear resolution at this time

      f.. make sure to review all of your client’s multi-party accounts to make sure

they comply with the applicable law (since the bank officer might not give out good information when the client set up the account)

 

E.. Contracts - used to direct the payment of money or delivery of other property upon an individual’s death (not covered in class very much)

1.. life insurance - contract between the owner and an insurer; the insurer promises to pay a stated amount, the proceeds or face value, to the beneficiary when a designated person, the insured dies

      a.. to obtain life insurance you need an insurable interest in the person’s life (a

strong reason to keep the person alive)

            i.. you have an insurable interest in your own life

            ii.. insurable interest in close family members (spouse, children, parents)

            iii.. company may have an insurable interest in a key employee

      b.. use of life insurance - an important and powerful estate planning tool

            i. can create an instant estate for the insured and his family

            ii.. the beneficiary is not required to pay income tax on the receipt of the

life insurance proceeds

                  c.. types of life insurance

i.. term life insurance - lasts for a specific term; only payable if the insured dies during the specified term; premiums increase as the insured ages; most economical for the young

ii.. whole life insurance - designed to provide protection for the insured’s entire life, not just a specified term

a). the amount of the premiums remains constant from the time the insurer issues the policy until the insured dies or reaches and advanced age (such as 90 or 100)

i).. excessive premiums build up in a reserve (called cash value or cash surrender value) and can be used as collateral for a loan or to borrow the case value

b). generally considered an unwise choice because insured overpays in the early years and does not receive a competitive rate of return on the cash value

iii.. universal life insurance - like whole life insurance except the cash value receives a competitive rate of return

iv.. endowment life insurance - similar to whole life and universal except that the premiums stop at a younger age (such as 62 or 65) and the cash value will equal the face value at that time

v.. split dollar life insurance - the insured ant the insured’s employer contribute to the premiums; when the insured dies the employer usually is paid the amount of the premium contributions; this has potential for considerable tax savings

                  d.. payment of proceeds - insurance owners get many options

                        i.. lump sum - most common

                        ii.. installment options - insurer makes periodic payments to the

beneficiary

                        iii.. interest or deposit option - insurer makes payment of interest to the

beneficiaries and transfers the proceeds at a later time

                        iv.. pay to trusts - good where beneficiary is a minor child, incompetent,

etc.

v.. effect of divorce on the life insurance policy - under common law, had little effect; some states have enacted statutes which automatically revoke beneficiary designations in favor of ex-spouse

 

F.. annuities - a contract between the purchaser of the contract and the annuity provider

1.. in exchange for a lump sum payment, the annuity provider will make periodic payments for the life of the annuitant

      2.. classifications of annuities

            a.. based on type

                  i.. commercial annuity - purchased form a company that sells annuities

                  ii.. private annuity - purchased from someone not in the annuity business

(such as a family member)

            b.. based on duration of the periodic payments

                  i.. straight life annuity - payments made only while annuitant is alive    

                  ii.. refund annuity - provider makes payments for the annuitant’s life, but

if the annuitant dies before receiving at least the amount paid for the annuity, the provider pays the difference between the purchase price and the amount already distributed

iii.. life annuity with a certain term - payments for the annuitant’s life, but if annuitant dies before term expires, the provider continues to make payments to a designated beneficiary

iv.. joint life annuity - provider makes payments until the first of the annuitants dies at which times payments stop

v.. joint and survivorship annuity - same as above, except the provider continues payments until both annuitants die

                  c.. characterized by how periodic payments are determined

                        i.. straight annuity - each payment is of the same amount

                        ii.. variable annuity - amount of payment changes based on the investment

success of the annuity provider

     

G.. Employee benefit and retirement plans

            1.. types of plans

a.. defined benefit plan - basic plan; employee gets a determinable amount of benefits payable for a certain number of years until the employee dies

b.. defined contribution plan - employer contributes to the plan on the employee’s behalf; the amount the employee receives upon retirement is based upon the amount contributed plus the success of the plan’s management in investing the contributions

c.. cash or deferred arrangement (CODA) - employer puts a percentage of the employee’s salary into the benefit plan; amount invested determines payments

d.. employee stock ownership plan (ESOP) - special kind of trust held by employer then makes contributions to the trust for benefit of employees; trustee purchases the corporate employer’s stock with contributions and holds the stock as the trust corpus

e.. Keogh plan - for self employed people, sole proprietors, partners; same rules as employee plans

f.. individual retirement accounts (IRA) - amount individuals may contribute is limited; do not pay taxes on contributions but must pay taxes on withdrawals 

g.. Roth IRA - must pay income tax on qualifying contributions but all distributions and earnings are free of tax

h.. simplified employee pension plan (SEP) - employers make contributions directly to their employee’s IRAs

            2.. protecting the surviving spouse

a.. federal law gives the employee the right to demand that the retirement plan be paid as a joint and survivor annuity

                  b.. changing this - regain ability to control payment

                        i.. request must be in writing

                        ii.. indicate that spousal consent is required to change the beneficiary or

form of benefits

 

V.. Trusts

      A.. Introduction

            1.. basic trust operation

                  a.. the owner must divide title to the property into legal and equitable interests

                  b.. the owner must impose fiduciary duties on the holder of the legal title to

the deal with the property for the benefit of the holder of the equitable title

c.. the holder of legal title manages the property (trustee) and makes payments for the benefit of the individual or charity

            2.. parties involved

                  a.. settler - person who creates a trust by splitting title (also known as trustor,

grantor, donor)

b.. trustee - person that holds legal title; gets no benefits and all the wok; might get a fee for being the trustee; personally responsible   

                  c.. beneficiary - person or entity that holds equitable title to the trust

            3.. purposes and uses of trusts - many reasons to convey property in a trust

                  a.. provide for and protect beneficiaries

                        i.. when giving property to minors

                        ii.. when giving property to individuals who lack management skills

                        iii.. spendthrifts - protect trust property from beneficiary’s own excess as

well as creditors

                        iv.. protect property from persons susceptible to influence

                  b.. provide for flexible distribution of assets - also have discretion

                  c.. protection against settlor’s incompetence - can avoid need for a guardian

                  d.. professional management of property - banks, trust companies have more

expertise and experience; greater investment opportunities

e.. probate avoidance - property in trust is not part of the probate estate upon the settlor’s death; the property is administered and distributed according to the terms of the trust; advantages - get property into hands of beneficiaries quickly; avoid gaps in management; evade probate publicity; tax avoidance

B.. Trust Creation

1.. Trust intent - threshold factor in determining whether a trust is created

a.. ascertain the settlor’s intent; the transferor must:

                  i.. divides title to the property into legal and equitable components

                  ii.. imposes enforceable fiduciary duties on the holder of legal title

b.. Statute of uses - beneficiaries equitable interest in real property was turned into a legal interest as well

i.. active trust - where the trustee actually needs legal title to the property to perform a power or duty for the beneficiary’s benefit

ii.. passive trust - an attempted split of title where the trustee is merely holding legal title without any power or duties with respect to the property

c.. split of title and merger - imposition of fiduciary duties on the holder of

legal title is sufficient to satisfy the split title requirement

i.. initial trust creation - must split title so that the same person does not own all legal and equitable interests

ii.. subsequent events - if all legal and equitable title becomes reunited in one person, merger occurs and the trust ceases to exist

                  d.. distinguishing trusts from other legal relationships

                        i.. agency - giving power of attorney but no legal title

                        ii.. bailment - change of possession; legal duties with basis in contract law

                        iii.. condition subsequent - does not split title

                        iv.. custodianship - does not give rise to a trust; no title to custodian

                        v.. debt - does not split title

                        vi.. equitable charge - just an equitable right to obtain money, not a

fiduciary right; occurs when a donor makes a transfer to a donee subject to the donee paying a certain amount of money to a third person or performing a particular duty

                        vii.. guardianship - fiduciary duty but no legal title

                        viii.. personal representative of decedent’s estate - merely have the right to

possess

                        ix.. power of appointment - title does not vest in appointee

                        x.. security arrangements - contractual, does not involve a split of title

2.. methods of trust creation; may be created while settler is alive or at time of settlor’s death

a.. inter vivos trust (living trust) - methods distinguished by identity of person who holds legal title to the property:

                        i.. declaration of trust - settlor declares himself to be the trustee

                        ii.. transfer in trust - transfers legal title to another as the trustee

                  b.. testamentary trust - split of title does not occur until settlor dies

                  c.. consideration - not necessary; is a gratuitous property transfer

            3.. the settlor - creates a trust by splitting the title

                  a.. capacity- same as the capacity needed to execute a will

                  b.. retention of powers - if the settlor makes a declaration of trust so that the

settlor is also the trustee, the reality of split of title and duty imposition is not too clear

            4.. statute of frauds - sometimes a trust must be evidenced by a writing

a.. when writing required - general rule is that trusts of real property must be evidenced by a written instrument

                        i.. CA view

                  b.. common exceptions to the writing requirement

                        i.. personal property - usually do not need a writing

                        ii.. oral trusts of real property that trustees partially perform - typically are

enforced

iii.. conveyance induced by evil conduct - no express trust will arise

a). courts will impose a constructive trust to prevent unjust enrichment of trustee

c.. standing to raise statute of frauds defense - meant to protect the trustee, so the trustee is the one with standing

d.. effect of violation of SOF - makes the trust unenforceable (voidable) rather than void

i.. trustee can carry out the terms of the oral trust although no one could have forced him to do so

e.. acknowledgement - notarized statement that the settlor willingly executed the trust as an act of his own free will

5.. trust purposes - may not be for illegal purpose; terms can impose more restrictions on trustee

                  a.. determining validity of purpose

i.. intent approach - a trust is illegal if it could induce another to commit a crime

                        ii.. use approach - focuses on how the property is actually to be used

b.. remedies for illegal trusts - appropriate remedy depends on the reason for illegality

i.. defrauded creditor - allow the creditor to set aside the conveyance to the trust

      ii.. other situations

            a).. undue the transfer - settlor would regain legal and equitable title

            b).. refuse to enforce the rights of the purported holder of equitable

title

6.. trust property - trust is a method of holding title to the property; existence of property is essential for creation

a.. types of trust property - any type as long as the settlor can transfer title to that property

i.. the property must be in existence and clearly ascertainable  (identifiable)

                  b.. transfer of property to trust - legal title must reach the hands of the trustee

            7.. the trustee - holds legal title and is bound by many fiduciary duties

a.. capacity - legal age and competent, a business entity must have authority (usually found in corporation’s charter which is derived from CA corporation law), and entity may need to meet additional requirements

i.. settlor can be a trustee (declaration of trust); also beneficiary can be the trustee as long as he is not the sole beneficiary

b.. acceptance - a person must accept to be a trustee; no liability just because you are named as a trustee

i.. trustee could sign a written acceptance; common practice to have the trustee sign the trust instrument at the same time as the settlor (usually with an inter vivos trust), or a separate written acceptance

      ii.. acceptance may be implied

a).. some states have a presumption of acceptance if the settlor has started to perform duties of the trustee

i).. CA exception (§15600b)- in an emergency situation a named trustee may take action to preserve trust property, but that will not be considered an acceptance

iii.. rejection (15601) - if person just does nothing; better method is written rejection - put rejection in writing

                        iv.. failure to accept position

                              a).. first step is to look to trust to see if an alternate has been named

                              b).. if not, the court can appoint a replacement

                        v.. reasons to be a trustee - money, emotional satisfaction

                        vi.. reasons not to be a trustee - a big burden, duty to behave as a fiduciary,

will be personally liable if you make mistakes, for some mistakes there is criminal liability

                  c.. qualification

                        i.. some states require an oath of office

                        ii.. bond - may need to post bond conditioned on the faithful performance

of trustee’s duties; state’s views vary:

      a).. require bond unless trust expressly waives bond

      b).. some statutes do not require bond unless the settlor expressly

requires it under the terms of the trust or the courts deem it necessary

c).. some states exempt corporate fiduciaries from the bonding requirement

d).. in CA (§15602) - bond is not required (for a personal representative it is the opposite)

      i).. settlor might require bond (the court could still waive it though)

      ii).. trust companies do not have to post bond - because to qualify

to be a trust company they had to meet lots of requirements

iii).. a court appointed individual successor not named by the settlor must post bond

                  d.. multiple trustees - all trustees must agree in decision making (in CA )

i.. benefits - better decisions may result; greater protection to the trust and the beneficiaries

ii.. drawbacks - both trustees must agree which may cause deadlocks; slow down the administration process; additional administrative fees may be charged

e.. successor trustees - if a trustee needs to be replaced, the courts will look to the trust for specified successors; next look to statute; if none, then courts will appoint a successor

f.. effect of holding legal title - the trustee has only legal title and those claiming through the trustee have no claim to the property

8.. the beneficiary - hold equitable title and have standing to enforce the trust (for private trusts; different rules for charitable trusts)

a.. capacity - any human that is alive can be a beneficiary; a legal entity (corporation) can also be a trust beneficiary

                        i.. several beneficiaries may hold concurrent interests

                        ii.. the beneficiaries may hold successive interests

                        iii.. (15800) - CA view - if the trust is revocable, the beneficiaries

cannot enforce the trust, the trustee owes the fiduciary duties to the person with the power to revoke (usually the settlor); the beneficiaries do not have standing

b.. adequacy of beneficiary designation - identity of beneficiaries must be adequately stated or trust will fail

      i.. can be named by name or class

      ii.. CA (§ 15205b2) grants trustee power to select the beneficiary (in book

example 19-45 and 19-47 would probably work)

c.. honorary trusts - a gift in which the donor intends to benefit a non human, non-charitable purpose (pets, maintain items of property)

i.. most American jurisdictions do not recognize honorary trusts; growing trend to permit these as long as the purpose is not unlawful

ii.. CA - can set up a trust for a designated pet or domestic animal; limited for the duration of the life of the animal; cannot be set up for pets descendants

-- limited in duration for 21 years to set up a trust for things like a clock, car, etc..

d.. Incidental beneficiaries - someone who was not named as a beneficiary, but benefits from the trust; usually do not have standing to enforce the trust

e.. disclaimer - beneficiaries are entitled to disclaim trust property

f.. transfers and assignments of beneficial interests - a beneficiary could give away or sell the interest

      i.. settlor’s usually restrict these powers

            a).. usually require a beneficiary to be alive to benefit from the trust

      b).. settlors usually include spendthrift provisions that prohibit

beneficiaries from transferring or assigning their interests

ii.. priority of assignment of beneficial interest - two basic approaches to deal with priority of conflicting assignments

a).. English view - priority is given to the first assignee who notifies the trustee of the assignment

b).. American view - priority is given to the first assignee unless the trust instrument provides otherwise

g.. availability of beneficiary’s interest to creditors - creditors rarely have the ability to reach the beneficiary’s interest in the trust

h.. spendthrift restrictions - included in almost every trust because they protect beneficiary’s from their own improvidence and their persona; creditors

i.. prohibits the beneficiary from selling, giving away, or otherwise transferring the beneficiary’s interest

ii.. prevents the beneficiary’s creditors from reaching the beneficiary’s interest in the trust

iii.. policies in support of: settlor has the right to dispose of property as he wishes; prevents beneficiaries from becoming public burdens should the trust be exhausted; creditors have the responsibility to investigate the debtor

iv.. some states refuse to enforce: take away the rights of legitimate creditor; encourage irresponsible spending

v.. exceptions to spendthrift restrictions - when settlor is beneficiary states will often refuse to enforce; creditors with claims for necessaries (food, clothing, shelter) will often reach trust income (public policy of encouraging creditors to supply basic necessities of life); child support; federal tax lien; settlement agreement; jurisdictions vary on this

1).. CA has more protection for creditors than most states (although still plenty of protection for beneficiary

2).. CA exceptions (not responsible for details): many uncertainties with how the exceptions interrelate

a).. monies due but unpaid (§ 15301b) - prevent beneficiary from avoiding creditors by going bankrupt before receiving money from trust; know this one a bit more since we spent more time on it

b).. cannot put money into trust to protect yourself from your own creditors; can’t be the beneficiary and the settlor of a spendthrift trust (some states will allow this, also offshore banking)

c).. spouse and child support (§ 15305) - policy

d).. restitution judgment owed by criminals in criminal cases (§ 15305)

e).. liability to reimburse state of CA for public support

f).. a court order limited to 25% of the amount to which the beneficiary is entitled (cannot be used if the money is needed for beneficiary’s support or dependence)

g).. distributions in excess in support of education (§ 15307)

h).. federal government claims - tax lien

vi.. creation - as long as intent is clear, it is good enough; see sample on page 338; usually just a paragraph saying it is a spendthrift trust

vii.. authorized in CA

i.. discretionary provisions - gives the trustee the power to spend the trust money as he sees fit; substitutes trustee’s judgment for the settlor’s

i.. often called a discretionary trust; trustees must act in good faith; may not act against public interest; trustee determines how much, if anything, the beneficiary gets

ii.. remedy for abuse of discretion - 1) the court can remove trustee (if trustee is evil); 2) court can exercise discretion for trustee; 3) court can scold trustee

iii.. jurisdictions are divided if granting a discretionary trust removes reasonableness requirement

iv.. CA (§ 16080) - discretionary power conferred upon a trustee is not left to trustee’s arbitrary discretion, but must act reasonably; must also act in good faith and cannot disregard the purposes of the trust.  This means there is NO such thing as absolute discretion. 

j.. support provisions - settlor can restrict use of trust money to basic needs, and educational expenses (called a support trust); can be mandatory or discretionary

i.. if discretionary - the trustee MAY (not required) to pay for the beneficiary’s support

ii.. support should be defined in trust - 1).. maintain person as they are (status quo support); 2).. enhance the beneficiary’s lifestyle; 3).. safety net, backup method of support

iii.. first dollars - you make the money first, and then you get the money from the trust

iv.. last dollars - only pays the difference between what person makes and their needs; a negative incentive to work

k.. pour over provisions - a clause in a will that makes a gift to an inter vivos trust; used to obtain benefits of trusts, but do not want to create them in their wills; money is poured over from the estate of the decedent into a trust

      i.. benefits

            a).. easier to change the trust than to change the will

            b).. easier to put all eggs in one basket (retirement plans, estate,

life insurance all payable to the estate); unified source

            c).. save expenses of multiple trusts (have money go to spouse’s trust)

      ii.. history

            a).. could not be done at common law

            b).. some states treated the trust as a fact of independent significance

iii.. Uniform testamentary additions to trusts act (commonly enacted; two versions - 1960, 1991)

a).. CA has the 1991 version of the Uniform Testamentary additions to trusts

i).. clear authorization of leaving something by will to a trust you create or a trust created by a third party

ii).. trust must be identified in the will (name, and date of execution)

            iii).. trust must be written (cannot be oral)

            iv).. trust instrument (physical sheet of paper) must be executed

before or concurrently with will execution (Uniform act says it could be created later; Prof thinks this is an error); the trust does not have to be in existence (just the instrument); means there does not have to be any property in the trust; meaning the initial funding of the trust can be the pour over amount; if the trust no longer exists prior to death, the money will not pour over

v).. money is governed by any amendments; if you pour over into someone’s else’s trust, you have to be careful because they might change provisions later

l.. life insurance trusts - life insurance owner may name a trust as the beneficiary

      i.. CA expressly authorizes leaving life insurance to a trust

      ii.. common technique when minor children are the beneficiaries

      iii.. inter vivos or testamentary? Depends on facts

      iv.. revocable or irrevocable? Depends on facts (tax benefits if irrevocable)

      v.. consider the positives and negatives

9.. rule against perpetuities - prohibits trusts in which the ability to ascertain the identity of the beneficiaries in who the equitable title will vest is delayed beyond some specific time (usually 21 years)

      a.. a contingent event must start within the period specified by the RAP

      b.. all trusts in remainder interests in a trust must vest within the perpetuities

period

c.. status - in the USA there is a tremendous range in how it works; about 10 states have abolished the RAP permitting the creation of dynasty trusts

i.. CA - about in the middle of states; has enacted the Uniform Statutopry Rule Against Perpetuities (21200-21231); has abolished the common law rule and substitutes a rule in its place:

            a).. you get 90 years from the date of creation for the interest to vest

            b).. is a wait and see approach - look to see if it really does vest within

the 90 years; either get 21 years from lives in being OR 90 years from date of creation, whichever is longer don’t look at potentialities, but look at what actually happens

c).. if it violates the rule, the interest is not made void, but the court simply fixes the interest so that it does not violate the rule

d).. want to include a RAP savings clause (indicate what happens to the property if RAP is violated - see sample p.360)

10.. charitable trusts (also known as public trust) - a trust established for the benefit of the community as a whole or for a relatively large segment of the community; beneficiary is the community as a whole

-- assume the rules are the same as other trusts unless we mention them here

                  a.. five widely recognized categories:

                        i.. relief of poverty

                        ii.. advancement of education

                        iii.. advancement of religion

                        iv.. promotion of health

                        v.. governmental or municipal purposes (parks, museums)

b.. size of charitable class - require a sufficiently large or indefinite class of beneficiaries (different than private trusts where you need ascertainable beneficiaries)

c.. description - may be specified in extremely broad terms; courts will always try to carry out the intent of the testator

d.. determination of charitable purpose - the court makes the determination of whether the purpose is charitable; each particular case depends on the exact facts and the judge; some apply a “generally accepted” standard

i.. when trust is for religion - it is okay as long as the religion is not illegal or against public policy; courts will not question whether religion is charitable or not

ii.. no bright line in determining whether a trust is charitable or not; just whether it is more likely or less likely to be charitable

                  e.. other charitable trust issues

i.. mortmain statutes - limits or restricts charitable gifts; constitutional validity is problematic (none in CA was set aside in 1975)

                        ii.. rule against perpetuities - not typically restricted

                        iii.. enforcement - by state attorney general; family usually contests the

trust; if trust is found to be invalid look to other instruments

                        iv.. tax benefits - must meet detailed and technical requirements but can

qualify for income, gift, and estate tax benefits

v.. cy pres - can be applied by courts to supply missing charitable trust beneficiaries

vi.. split interest trusts - a trust that is both private and charitable at the same time (charitable remainder trust, charitable lead trust)

 

C.. Trust Administration

      1.. overview

a.. accept trusteeship - no duties imposed until person accepts; sign acceptance document under § 5600

            b.. post bond - may be required of trustee to protect the beneficiaries from evil

trustee conduct; in CA not needed for a trustee (but for a personal representative it is required)

c.. register trust - some states require the trust to be registered with the court; no mandatory registration in CA; very rare; you MAY if it involves real property § 15210

            d.. possess and safeguard trust property - locate property, record deeds, buy

insurance, keep property safe; take reasonable steps to protect it § 16606

                  i.. earmark trust property - label the property as belonging to the trust and

keep it separate from trustee’s own property (avoid commingling)

            e.. identify and locate beneficiaries - need to know who receives trust property

            f.. follow settlor’s instructions

            g.. act as fiduciary - broad range of duties (exercise a high standard of care

when investing trust property, duty of loyalty, and avoid self dealing); duty to keep beneficiaries reasonably informed of trust and administration

h.. support and defend trust - defend attacks on the validity of the trust (§ 16011 - trustee must take reasonable steps to defend actions on a trust)

      2.. trust investments and standard of care - need to protect property but also make

it productive

            a.. selection of investments - states used to have a statutory legal list of

investments (such as government obligations, first mortgage on real property), but has been abandoned by almost all states; trustee held to a prudent person standard

                  i.. many states have modified this to include how a reasonable person

would deal with property of another: 1) examine safety of investment, 2) determine the potential to appreciate in value, 3) evaluate the income expected to be produced

ii.. prudent investor or portfolio standard (modern trend) - the appropriateness of the investment is base on the entire trust portfolio

a). CA 16047(a) - prudent investor must exercise reasonable, skill, care and caution; trustee must consider purposes of the trust, the trust terms, the distribution requirements, other circumstances

-/- look at tax consequences, income and appreciation, role that each investment fits into the portfolio

-/- look at beneficiary’s expenses, look at amount of money in trust when determining how much risk that can be taken (more money, more risk allowed)

-/- look assets special relation to the trust (real property)

b). prudent investor standard is most likely the wave of the future; however it makes the job harder since the trustee has to do more research, know more

c).. evaluate the investment at time investment was made (16051)

d).. settlor can increase the standard if he does not like the prudent person standard; can also limit types of investments

                  b.. duty to diversity - trustee must not put all eggs in one basket

                  c.. exculpatory clauses - settlor may expand or restrict types of investments;

also can reduce the standard of care (often done for family members who are not serving for a fee) (in CA default is the reasonable person standard, but settlor may expand or restrict it 16604(b))

i.. if you have better skills you have to use them, if you say you have better skills you are bound to what you represented, and if you don’t have better skills you are still held to prudent investor standard

d.. directory provision - requires the trustee to exercise certain trust powers as directed by another person or group (ex: follow advice of a stock broker)

d.. duty to review investments - must periodically review investments to make sure they are still appropriate for trust; frequency of review varies with type of investment

i.. if you take over as trustee (prior trustee dies, resigns) - must review investment, get out of bad investments, look to see if there was any breach of fiduciary duties of prior trustee, if they breached, you have a duty to go after them and if you don’t you can be liable for them

ii.. settlor’s can remove some of the liability of trustees - usually when trustee is a friend, family member; often common to include exculpatory provisions to lower standard of care

a).. in CA - can only exculpate regular negligence (not anything bad faith, reckless, or illegal - 16461)

3.. trustee powers - trustee needs a wide array of powers such as buy, sell, rent, lease, lend, borrow, mortgage, settle claims, manage corporate securities

      a.. sources of powers

i.. trust instrument - settlors typically included (in the past) comprehensive list of trustee powers; now states have codified much of this (16200)

a).. trustee does not have to go to court to take advantage of these powers

ii.. State statutes - lists that may be incorporated by reference;

a) only have statutory powers if the settlor expressly mentions the powers in the trust instrument

b). some states enact statutory lists of powers trustees automatically possess unless the settlor expressly restricts them (CA VIEW)

-/- CA 16220-249 - lists all the statutory powers; allows trust instruments to be a lot shorter

-/- only time you have to worry about putting powers in trust is if settlor wants to vary the powers (usually limited situations, just a few lines)

c). some states do not list the trustee powers but instead provide that trustees have whatever powers are necessary to deal with trust property

iii.. Implied by circumstances - powers are limited by equity; the trustee is deemed to possess that power if the settlor must have intended the trustee to have it to accomplish trust objectives; used more in states without big statutory lists

a). 16200(c) - CA codifies implied powers; implied powers are available

iv.. court order - court may grant additional powers beyond those the settlor or state statute provides; may also limit powers in any manner

b.. delegation of powers - conflict between how much powers the trustee may delegate; traditional view is that is that the trustee may not delegate mere ministerial duties but may not delegate discretionary acts (such as how much money to distribute); hard to apply this rule because everything involves some discretion; some states now apply a prudent person standard

i.. CA (16012) - trustee cannot delegate acts the trustee can be reasonably expected to perform (EXCEPTION: 16052 - can delegate investment and management functions; part of the prudent investor rule; this is a big change from common law; but still have to exercise a lot of caution when delegating; if you delegate properly not liable if they mess up (16401))

ii.. if multiple trustees - cannot delegate all to one trustee; can still be liable to other trustees (16013); each co trustee must participate and take reasonable steps to prevent breach of co-trustees

4.. trust distributions - the trustee’s responsibilities related to distribution from the trust either because the instrument requires the distribution or because the trustee decided to make a distribution by exercising the discretion granted by the settlor

a.. standard of care - generally trustees are under an absolute and unqualified duty to make trust distributions to the correct persons

b.. competent adult beneficiary - distributions should be made directly to the beneficiary if an adult

c.. minor incapacitated beneficiary - distributions for a minor should be made to the beneficiary’s guardian or conservator (under 16245 a trustee can pay to a minor directly, such as an allowance); can also pay on behalf of minor (pay education directly, food, rent, car, health care); under common law you could not pay on behalf of without court permission

5.. duty of loyalty - beneficiaries are owed duties of undivided loyalty and utmost good faith with regard to all trust matters; trustee must avoid self-dealing and all other conflict of interest situations; trustee cannot profit from being a trustee

a.. buying and selling trust property - trustee may not purchase trust assets for the trustee’s personal use; cannot sell trustee’s personal assets to the trust

b.. borrowing trust property - may not self deal by borrowing from trust unless the settlor expressly authorizes these loans in the trust instrument

c.. purchase of common investments - the trustee and the trust should not each contribute to the purchase of  a parcel of real property; do not want trustee in the position of making decisions for both the trustee and the trust

d.. transfers between trusts - trustee may not sell property to another trust for which the trustee is also serving as the trustee

e.. dealing with beneficiaries - duty of fairness is owed

f.. self employment - a trustee with special skills should not be tempted to employ himself because he will create a conflict of interest situation

g.. ramifications of breach of loyalty duties - depends whether the act was self dealing or only a conflict of interest

i.. self dealing - trustee is personally liable for self dealing (such as purchasing a trust asset); most courts do not consider good faith, honesty, reasonably, etc..

a).. no-further-inquiry rule - 1) the strict rule guards against self dealing because trustee has everything to loose; 2) deters trustees of other trusts from self dealing; 3) hard to tell if trustee was acting in good faith or was really acting in a fraudulent manner (often called constructive fraud)

ii.. conflict of interest - courts take a more relaxed approach; will consider good faith

h.. permitted self dealing - if a settlor wants to permit self dealing, the settlor should include a trust provision giving the trustee permission to self deal

i.. if self dealing not authorized, there are two additional ways trustee may obtain authority to do so: 1). Obtain consent of all beneficiaries; 2) seek court permission

6.. liability of trustee to third parties - may be liable to persons other than the beneficiaries

a.. contract liability - personally liable for any breach of contract unless it is made clear that the trustee’s liability is limited to the trust and that trustee is not individually liable

      b.. tort liability - may commit a tort during the administration of the estate

i.. some states now protect trustee so that plaintiffs can only recover directly against trust property

c.. liability as property owner - liability for property taxes that exceed trust value

i.. modern laws limit trustee’s liability to the amount that the trust can afford to reimburse trustee

7.. Allocation of receipts and expenses - problems arise when one beneficiary has the right to trust income and the other has a right to the principal when the trust terminates; conflicting interests develop and it is up to the trustee to balance the interests; three ways to determine allocation: 1) check the trust instrument for instructions; 2) if silent, follow relevant state statutes; 3) if no statute, allocate in a reasonable and equitable manner

a.. general allocation rules - if property is lost and compensation is paid, that money goes towards the principal; if money is gained through use of the principal that money is income

i.. principal - all proceeds from sale of stock are principal, eminent domain awards compensate for the loss of principal and are therefore principal; insurance proceeds for lost property; dividends of shares of stock (Massachusetts rule - stock dividends of shares of the declaring corporation’s own stock are principal); stock splits are principal; shares that result form a merger (represent a change of form, not substance)

            ii.. income - rent is income, interest is income, cash dividends are income,

b.. wasting assets - an asset that goes down in value as it is used to produce income beyond what would be considered mere depreciation from normal use and age (natural resources)

i.. open mine doctrine - if settlor had begun exploiting the mine before transferring the property to trust, the income beneficiary is entitled to all proceeds; if exploitation began after transfer to trust, all proceeds go to principal

ii.. timber - grows back, so trustee must make allocation that is reasonable and equitable

iii.. intangibles (patents, copyright, royalties) - a portion of the receipts must be allocated to principal to compensate for loss in value

c.. business and farming operations - computed in accordance with generally accepted accounting principles (GAAP)

i.. most states provide that a loss cannot be carried into future years to reduce the amount of net income to which the income beneficiaries are entitled

                  d.. Bond Premiums and discounts - states vary

                  e.. under productive property - unless permitted in trust instrument, property

that does not earn income should not be retained

f.. rights of income beneficiaries

i.. right to income - arises on the date specified in the trust

ii.. asset become subject to an inter vivos trust on the date asset is transferred

iii.. asset is subject to testamentary trust on date of the testator’s death

            g.. apportionment of income among beneficiaries -

            h.. allocation of expenses

i.. income - property taxes, insurance premiums, interest on loans, repairs, allowance for depreciation, legal expenses concerning income beneficiaries, taxes on receipts considered income

ii.. principal - cost of investing principal, capital improvements, legal expenses concerning principal beneficiaries, income tax on capital gains

i.. unitrust approach - beneficiaries receive fixed percentage of the value annually

            8.. Accountings - trustee has duty to keep accurate records of all transactions

a.. most states allow beneficiary to make a reasonable request once a year for an accounting

b.. if the instrument waives it, you do not have to do an accounting

9.. Compensation - most states allow compensation unless the trust specifically states that the trustee is not to be paid

a.. trustee may determine own salary using a statutory fee schedule based on value of trust, amount of trust transactions, or whatever compensation is reasonable under the circumstances

b.. determination of reasonableness - use the following factors: time, gross income, appreciation, unusual or special skills, loyalty to trust, risk assumed, fees charged by other trustees, character of work, trustee’s own estimate of the value of services

10.. trust modifications - under proper circumstances the terms of a trust may be modified

                  a.. by court - judicial modifications fall into two categories:

i.. deviation - the trustee may deviate from the settlor’s instructions if court is convinced settlor would have agreed; deviation usually occurs if:

                              a).. purposes have been fulfilled

                              b).. purposes have become illegal

                              c).. purposes are now impossible to fulfill

                              d).. compliance with terms of trust would defeat or impair ability to

accomplish purposes of the trust

                        ii.. cy pres - use to provide a substitute beneficiary for a charitable trust     

                  b.. by parties

i.. settlor - under most states the settlor has these powers only if the trust instrument specifically reserves them to the settlor; or if there is an inter vivos document signed by settlor and delivered to the trustee during the trustees lifetime

a). most states say gifts are irrevocable, but CA holds that trusts are PRESUMED revocable;

b). may be made irrevocable if there is a provision in the trust that makes it irrevocable (tax benefits, enhanced creditor protection)

c).. should always provide in the trust expressly if the trust is revocable or not

ii.. trustee - normally lacks power to make unilateral changes to trust unless trust instrument or state law gives power

a). if there is an uneconomically low corpus - can go to court and ask for a termination; if under $20,000 trustee can terminate trust without having to go to court first

                        iii.. beneficiaries - may consent to modification

a).. if irrevocable trust - beneficiaries can agree to modify or terminate (15403); need unanimous, and court approval

b).. court will not automatically grant this if there are any material purposes remaining; CA does not adopt material purpose test strictly because the material purposes can be overcome if the problems outweigh the material purposes

c).. court cannot terminate if there is a spendthrift provisions - and most trusts have spendthrift provisions, and the beneficiary therefore cannot terminate the trust (may still be able to modify)

d).. can modify irrevocable trust if all beneficiaries AND settlor agree (15404)

                        iv.. family settlement doctrine - parties may agree to a settlement that

includes changes to the trust; the settlement must concern a genuine controversy

11.. Trust termination - upon termination, remaining trust property becomes reunited in the hands of the remainder beneficiaries

      a.. express terms of trust (15407) - most typical

      b.. revocation by settlor - only if a revocable trust

      c.. termination by beneficiaries - most courts will not allow termination if any

material purpose remains

d.. merger - trustees and beneficiaries can unite all legal and equitable title in one person

e.. lack or property - terminate if trust runs out of property

f.. court order - if purposes have been fulfilled; general court order OR deviation

g.. trust purpose becomes illegal, fulfilled, or impossible

h.. economically low principle - either determined by trustee (if under $20,000) or by court

i.. unanimous beneficiary consent - no material purpose remains, or if one does remain, the court agrees that termination is appropriate unless spendthrift clause

j.. all beneficiaries and settlor consent

k.. duties of trustee upon termination - trustee can exercise trust powers for the reasonable period of time necessary to wind up the affairs of the trust

-/- follow instructions of trust instrument

-/- follow agreements if beneficiary and settlor agreed; 15410 - distribution of the remaining property

D.. Trust Enforcement

1.. procedural matters

      a.. person must have standing - usually beneficiaries an trustees

b.. jurisdiction and venue must be correct - go to superior court (17000); the county depends whether it was testamentary (can choose either the place where state is being administered or the principle place of administration 17005) or inter vivos (county of principle place of administration)

i.. if dealing with internal affairs of the trust you are not entitled to a jury trial (17006)

      2.. remedies against the trustee

a.. money damages (16440) - four basic methods to compute money damages when holding a trustee personally liable for a breach; MOST COMMON

                  i.. lost value - award of loss or depreciation of value

                  ii.. profit made by trustee - profit trustee gained

                  iii.. lost profits - profits the trust would have earned had the duty not been

breach

iv.. punitive damages - an intentional breach is considered a tort in many states and may justify punitive damages

b.. removal of trustee (15642) - courts may remove trustee if there is a showing of cause; examples of conduct constituting cause; SECOND MOST COMMON:

                        i.. breach of trust - violates investment standard of care, self deals, etc.

                        ii.. trustee becomes insolvent - no one to hold liable if trustee insolvent

                        iii.. trustee becomes incompetent

                        iv.. other causes - any cause which court believes is sufficient

                        v.. lack of cooperation among co-trustees

                        vi.. excessive compensation of trustee

                        vii.. generally a trustee is not liable for the bad acts of a prior trustee,

unless new trustee does not pursue the old trustee, etc.

c.. pre-breach remedies - before a breach of trust actually occurs several remedies are available:

i.. decree to carry out the trust - court order to carry out duties; this is an easy, non-stressful option

      ii.. injunction (16420a2) - prevent trustee from performing improper act

      iii.. appointment of receiver - person who can quickly take possession of

trust property if court fears trustee will not obey an injunction

iv.. increase bond - increase or require bond

v.. declaratory judgment - ask the court whether something would be a breach; courts are leery of doing this unless there is an immediate and genuine legal problem

d.. criminal sanctions - misapplication by fiduciary; severity of crime depends on amount of money put at risk

            3.. remedies involving trust property

                  a.. tracing - to recover actual trust property or proceeds; may not trace if BFP

                        i.. tracing distinct items - just grab the items

                        ii.. tracing commingled items - harder, make a chart separating the money

based on its source and evaluate each transaction based on applicable rules

b.. subrogation - subrogate the rights of the creditor who was paid; one creditor steps into the shoes of another thus getting the same position as the creditor who was paid

            c.. marshalling - may be able to force trustee to marshal claims;

            d.. bona fide purchasers - when person pays value for the property AND

without notice of the trust, the person is a BFP; cannot recover against a BFP

i.. CA - act in good faith; pay valuable consideration; be without actual knowledge that the trustee is exceeding his powers, or improperly exercising them

ii.. common law - third element was you had to be without knowledge that you were dealing with a trustee

e.. CA - if the decedent’s estate is inadequate to pay settlor’s claim, the property in a trust is subject to creditor’s claims (in a revocable trust which becomes irrevocable when the creditor dies - makes sense because while settlor was alive, creditors could reach property in a inter vivos revocable trust); if the creditor could have got it while the settlor was alive, they should be able to get it when they are dead

      4.. remedies against the beneficiary - beneficiary is liable if

            a.. misappropriation or wrongful dealing with trust property

            b.. consenting to or participating in a breach with the trustee

            c.. failure to repay a loan of trust funds

            d.. failure to repay an excess distribution

            e.. 16249b - unique to CA - a person who wrongfully takes or conceals trust

property is subject to double damages (does not apply to negligence); liable for twice the value of the property

      5.. causes of action against third parties - torts, contracts

      6.. barring of remedies - a beneficiary might be barred from recovering in 

certain circumstances

a.. settlor’s approval in trust instrument - settlor may authorize breaching conduct; an exculpatory clause - CA permits these (16461)

i.. exception - cannot exculpate willful or evil conduct; can only exculpate negligent breaches

ii.. exception - cannot exculpate a breach that causes trustee to make a profit

b.. prior approval or ratification by beneficiary

c.. court decree - court may relieve trustee from any duty, limitation, or restriction

d.. statute of limitations - time varies; usually begins to run when the beneficiary actually knows or should have known by reasonable diligence that the trustee breached the trust

i.. CA - if the matter is revealed in the accounting, the beneficiary must bring suit within three years, or the SOL runs

ii.. CA -  if the beneficiary discovers the breach or should have discovered the breach, the SOL is three years from that time

e.. laches - if there is a to much delay between assertion of beneficiary rights, trustee may not be able to defend himself adequately and therefore claim is barred

f.. revocable trust - if the settlor is not complaining the beneficiaries cannot sue trustee

g.. beneficiaries can consent to a breach - 16463, 64, 65 - there must be a full revelation of everything in regard to the breach so that the beneficiary is consenting with full knowledge

h.. can beg the court to relieve trustee of liability -

E.. Resulting Trusts - arises by operation of law when facts and circumstances show that a person had the intent to hold equitable title to the property although legal title is in the hands of another (often called implied trusts); do not have trust terms, do not involve ongoing fiduciary relationship; beneficiary is person who had implied intent to hold equitable title; can only be for the settlor (or if deceased successor’s in interest, heirs or survivors); imply trust-like relationship with goal of carrying out person’s intent

1.. failure to create express trust - resulting trust may arise if settlor did not indicate trust purpose, describe beneficiaries specifically, or comply with RAP; and settlor never said what to do if trust was not valid

a.. semi-secret trust - where there is an express statement there is to be a trust, but its terms are not set forth; example in book might work in CA under §15205;  would fail for indefiniteness and property would revert back

2.. failure of express trust to dispose of all trust property - a resulting trust will be created

a.. express trust with a corpus that is too big - usually caused by sloppy drafting; trust to care for X for X’s life, at end of X life property is left over but no residual clause.  Goes back to settlor or settlor’s successor’s in interest; called an implied reversion

3.. purchase money resulting trust (PMRT) - if the person who pays the purchase price for property does not receive title to that property but instead directs the seller to transfer the property to another person

a.. buyer gives money to seller, but instead of title going to buyer it goes to someone else upon purchase

i.. this could be interpreted as a gift (donor/donee); usually parent child and husband and wife; law presumes gift if it is one of these two relationships

ii.. could be interpreted as a loan (creditor/debtor); expectation is repayment of loan

iii.. could also be interpreted as a PMRT (settlor or beneficiary/trustee); settlor beneficiary intended to have an interest in the property and the trustee was only supposed to be holding legal title

a). example: go to car dealer, man buys car for friend, friend gets car, in this situation the law presumes a PMRT (unless there was extrinsic evidence to show the property was a gift)

F.. Constructive Trusts - an equitable remedy a court imposes to prevent unjust enrichment; court adapts the split of title attribute when a person acquired title to property in an unconscionable manner; court decides that person holds ONLY legal title; a remedy, so you have to plead and ask for it; must show a connection between the property you want constructive trust over and the evil conduct

      1.. plaintiff must be able to identify particular property that was taken

      2.. plaintiff must not be unjustly enriched

      3.. types of conduct that give rise to constructive trusts:

a.. fraudulent conduct - knowingly made a false representation to Plaintiff that P reasonably relied on (very common)

b.. abuse of confidential relationships - relationship is confidential if person’s guard was let down and they were not treating the other person as if they were in an arm’s length transaction

c.. unperformed promises made in contemplation of death - if one person induces the transfer of property and promises to do something with the property at a later time, but then reneges on the promise (sometimes called secret trust)

G.. Trust bank accounts - contracts; just like Pay on Death accounts

      1.. not a trust; no split of title

      2.. just like a POD account

      3.. example: A in trust for B (just like a POD account)

            a.. NOT A TRUST

            b.. advise a client to use a POD account instead

            c.. POD - no tax or creditor protection, but benefit is, not part of probate estate

 

VI.. Conclusion

      A.. exam information

            1.. Saturday September 4, 3-6pm

            2.. totally closed book, closed code

                  a.. the bar is closed book, closed code

            3.. kinds of questions - will get point and time suggestions

a.. objective - 75 questions, mostly multiple choice, a few true false, fill in scan-tron sheet, 75 points; spend about 1.5 hours on this portion; questions are evenly spread throughout the course; about 2-3 questions from each day’s class period

b.. essay - 3 questions, each worth 25 points; space is limited (5-15 lines per section) predominantly: (how much does a certain person get, discuss here; who gets this asset, discuss here) can use computer, but have to stick to number of lines; total essays fit on 11 sheets of pages (some short sheets)

                        i.. intestacy

                        ii.. wills

                        iii.. trusts

4.. bring writing materials and may bring a calculator (but nothing really needs a calculator)

5.. see Internet for e-mail and office hours

6.. no citations to probate code sections, no extra credit for code sections

7.. use CA law unless indicate otherwise

8.. Hints for exam/common mistakes

a.. read questions VERY carefully (25% of errors on essay are caused by misreading facts); will need to keep track of facts, dates, who has which children

b.. don’t make problems on essay tougher than they are; if he says the will is valid, it is.  Don’t need to go through validity elements.  Might say “discuss the two elements of the trust that are most at issue”

c.. objective questions -

i.. multiple choice - some have only one right answer

ii.. multiple choices - some ask you to select all correct choices (could be 1 - 4 correct answers); all correct choices, and NO incorrect choices in order to get credit; there is always at least one correct answer

d.. essay - since they are divided into subparts, you have lots of time to think; only have to write three to four pages per question, and have 30 minutes per questions; don’t make up your own question

      i.. look for missing facts; questions might lack facts that you need

      ii.. don’t have to fill up all the space - can still get a good grade by filling

up half the space

iii.. key thing is to find issues; failure to find issues is the number one problem students have on exams

a). need a correct and relevant statement of the applicable law after you find the issue; most people will get the statement of the law correct

b). analyze the law - apply the laws to the facts and reach a conclusion; many questions have a right answer so your conclusion should be right; points will be given for the conclusion itself if there is a clear way it should come out

e.. time constraints - budget time carefully; lots of reading and thinking; don’t waste you time trying to get the really hard questions and not have enough time to get the easy ones

      B.. common mistakes (most common to least common)

            1.. issue spotting

            2.. weak analysis

            3.. misreading facts

            4.. not knowing law

      C.. curve will be balanced between both classes

      D.. final thoughts

            1.. enjoyed having the class

            2.. thanks for helping me feel welcome at SCU

            3.. being in class is a lifetime license to contact Beyer for any information

you

might ever need; we will always be one of his students and therefore always can call him

4.. ready to enter a very noble profession; ability to help people but also to do tremendous harm

      a.. try not to use the profession for evil

      b.. be dedicated, ethical, help the profession

5.. good luck on exam, future, professionally!