Today’s class

1. Today’s class Will substitutes and the subsidiary law of wills Pour-over wills Joint tenancies in realty as our final example of a nonprobate way to transfer property Spouses holding a joint tenancy in their home

2. Follow up Earlier, we had a practice question involving standing to challenge a will, and we saw that heirs apparent under the rules of intestacy have standing Who else has standing? Interested persons—people who are beneficiaries under the will and people who were intended beneficiaries under a prior will and would receive less under the contested will What about a family member or friend who was victimized by the undue influence of a caretaker but doesn’t qualify as an heir apparent or beneficiary under a will? Tortious interference with an expectancy (pp. 215-220)

3. Will substitutes and the subsidiary law of wills • While will substitutes are not governed by the rules for executing a will, many of the rules regarding freedom of testation or implementation are applied • Spousal forced share (Oct. 28 class) • Ademption (pp. 380-389) and abatement (pp. 391-392) • Slayer rules (pp. 145-152) • In today’s class, we will consider how other rules for wills apply to will substitutes • Do the rules for revoking a will apply to a trust? Can creditors of the settlor reach the trust’s assets? • Are designations of an ex-spouse as beneficiary of life insurance or retirement plans automatically revoked?

4. Application of subsidiary law of wills to will substitutes, p.413 “Although a will substitute need not be executed in compliance with the statutory formalities required for a will, such an arrangement is, to the extent appropriate, subject to substantive restrictions on testation and to rules of construction and other rules applicable to testamentary dispositions.” Restatement (Third) of Property: Wills and Other Donative Transfers §7.2 (2003).

5. In re Estate and Trust of Pilafas In re Estate and Trust of Pilafas,p. 414 Pilafas executes a will and a revocable trust. Pilafas amends trust. Pilafas amends trust agreement and executes a new will. Pilafas dies. Neither will nor trust agreement are found after search of his house and belongings. Pilafas’ son petitions for adjudication of intestacy. Trust beneficiaries object. Questions presented: • Is the will revoked? • Is the trust revoked? • Yes. The will was last known to be in the testator’s possession and could not be found after his death • No. The trust agreement provided for revocation only through a writing.

6. Pilafas • Did the trust agreement really limit revocation only to a writing to the trustee? • Not necessarily. It said that the settlor “may at any time” revoke by a writing, but it didn’t say that a writing was the exclusive method of revocation (Patterson v. Patterson, 266 P.3d 828 (Utah 2011) and the modern trend of the UTC) • Does it make sense to have a different rule for revocation of trusts than for wills? Did Pilafas really intend to revoke his will but not his trust? • When you have a third-party trustee, the duty to revoke in writing can be justified in terms of protecting the trustee, who has a legal obligation to carry out the trust

7. Problems, p.415 • Does a will revoking the trust count as a revocation? • Yes, if the testator is the trustee (Lowry, Gardenhire), but not if a third-party is the trustee (Connecticut General) • What if Pilafas had ripped up his will and trust, and the pieces were found? • Still no revocation of the trust since a writing was required • What if UTC 602(c) applies? • Permits revocation by will or physical acts of revocation, but not by mere disappearance of the trust, since that is not clear and convincing evidence

8. State Street Bank and Trust Co. v. Reiser State Street Bank and Trust Co. v. Reiser p. 416 Sept. 1971 Nov. 1972 1973 Wilfred A. Dunnebier: • Creates inter vivos trust; retains power to amend or revoke trust and direct income or principal to his own use Impressed with Dunnebier’s work, assets, loan history and “the general cut of Dunnebier’s jib,” State Street Bank makes an unsecured loan to Wilfred for $75,000. Wilfred dies in an accident. His estate has insufficient assets to pay off the loan. • Conveys capital stock to trust; and • Executes a pour-over will, leaving residuary estate to trust.

9. Reiser • If Dunnebier had not transferred his assets to the trust, the bank could have recovered against his probate estate for the loan • Can the bank recover against the trust assets? • Yes—Dunnebier had retained control over the trust’s assets so that he could use the assets for his own benefit (i.e., he had not made an irrevocable gift to another person) • For all practical purposes, Dunnebier owned the trust’s assets

10. Trusts and the settlor’s creditors after the settlor’s death • Creditors can reach assets of revocable trust • But jointly-held property cannot be reached, and life insurance proceeds or retirement benefits generally are protected when they are paid to a spouse or child. • Unsettled issues • Must creditors exhaust probate assets first, or are the debts satisfied pro rata from probate and non-probate assets? • Do exemptions of probate property from creditors, designed to protect the spouse and dependent children, apply to nonprobate property?

11. Trusts and the settlor’s creditors after the settlor’s death • Unsettled issues (continued) • Must creditors proceed against the executor of the estate, who recovers the nonprobate assets for them, or may the creditors proceed directly against the holder of the property? • If the latter, and an owner of one nonprobate asset is successfully sued by a creditor, may the owner recover from other recipients of nonprobate assets? • Statutes of limitation require filing of creditors’ claims against probate assets within a given period after the decedent’s death, usually a year. Do the same rules apply to beneficiaries of nonprobate assets?

12. Effect of divorce on nonprobate assets • Recall that divorce nullifies will provisions in favor of a spouse • UPC § 2-804 (also nullifies provisions in favor of divorced spouse’s relatives) • Ind. Code § 29-1-5-8 • What about non-probate assets? • Cook and life insurance • Egelhoff and retirement benefits • Clymer and revocable trusts

13. Cook v. Equitable Life Assurance Soc’y (1) Cook v. Equitable Life Assurance Soc’y p.420 Doris Margaret Douglas Why did an IN court recognize Cook’s holographic will? Daniel It was properly witnessed Doris named as Douglas’s life insurance beneficiary. Douglas and Doris divorce. Douglas marries Margaret, with whom he later has a son, Daniel. Douglas executes holographic will, leaving everything to Margaret and Daniel. Douglas dies.

14. Cook v. Equitable Life Assurance Soc’y (2) Cook v. Equitable Life Assurance Soc’y Cook’s Will

15. Cook and life insurance • Did the will revoke the beneficiary designation? If we were following Cook’s intent, what would we say? • Yes. He specifically wrote in his will that he wanted his second wife and son to benefit from the insurance policy. • What did the court say? • No. Cook did not follow the insurance policy’s procedures for changing the beneficiary designation, and he had ample opportunity to do so (pp. 421-422)—divorce lawyers be warned • Note that the court could have protected the interests of both the life insurance company and Cook by imposing a constructive trust if the designated beneficiary had been paid or by redirecting the payment of proceeds if the company received notice of the will before paying the first wife. • Note that UPC § 2-804 would have protected Cook

16. Pension and Retirement Plans Defined Benefit Plan Defined Contribution Plan Individual Retirement Account • Employee typically receives an annuity • If benefit is annuitized, no remainder to pass at death • Uncommon today among private employers ($2.3 trillion (2012)) • Common today among public employers ($4.6 trillion (2012)) • Employee owns a specific account • Employee controls investment and distributions in retirement • Remainder passes outside of probate to designated beneficiaries • Favored by private employers ($4.7 trillion (2012)) • Similar to a defined contribution plan, but subject to contract between account holder and custodial institution • Remainder passes outside of probate to designated beneficiaries • IRAs are common ($5.1 trillion (2012)), may include “roll over” from DC plan

17. Cook and retirement plan beneficiary designations • You can run into the Cook problem with beneficiary designations for retirement plans. Testators sometimes try to change retirement plan beneficiaries through their wills • Courts often reject the changes on the same grounds—the terms of the retirement plan contract specify a particular procedure for changing the beneficiary (p.415, problem 1) • Some states allow beneficiary redesignations by will, but only if the will is specific about the retirement plan (or insurance policy) that is being changed. (Nunnenman v. Estate of Grubbs, 374 S.W.2d 75 (Ark. App. 2010)) • Note the lawyer liability problem lurking—if the lawyer does not ask about non-probate asset beneficiaries, then the intended beneficiaries may be able to sue

18. Egelhoff and retirement plans • What were the facts in this case? • David and Donna Egelhoff were married, and David designated Donna as the beneficiary of the life insurance policy and retirement plan that were benefits of his employment • David and Donna divorced and two months later, David died without having changed his beneficiary designations; he also died intestate • Under state law, David’s designations of Donna as the beneficiary of his nonprobate assets were revoked upon divorce; the benefits therefore should pass to his heirs • But does ERISA preempt the state statute?

19. Egelhoff v. Egelhoff Egelhoff v. Egelhoffp. 426 Kate (first wife) David Donna (second wife) ??? ??? Life Insurance Pension Plan Samantha David

20. Egelhoff and retirement plans • Why did the Court find preemption and bind David by his beneficiary designations? • Under ERISA, employee benefit plans are required to specify the basis on which payments are made, and the plans must be administered in accordance with the plan’s governing documents • In addition, deferring to state law would compromise ERISA’s goal of uniformity

21. Egelhoff and retirement plans • As the dissent observed, the result is problematic • It is not consistent with the usual intent of decedents • It gives Donna windfall—she already had received her fair share of the couple’s assets when they divorced; she now receives a big chunk of his share of the assets • The Court’s logic applies to many other state law rules governing pension plans, like slayer rules • Lower courts have resisted Egelhoff by using federal common law to save the state law rules • But there is less clarity about that than about state law

22. Pour-over wills and revocable trusts in modern estate planning • The combination of a pour-over will and trust allows people to avoid probate and to consolidate all of their property into one instrument. • Avoiding probate—can’t avoid taxes, but can reduce other costs • Privacy—both from strangers and disappointed heirs • Choice of law—can select which state’s law applies (which also is allowed under UPC § 2-703) • Reduce delay–bequests can be disbursed more quickly • Amending estate plan—just amend the trust provisions • Blended family—greater control over disposition of estate with surviving spouse and children from a prior marriage

23. Pour-over wills and revocable trusts in modern estate planning • There are some disadvantages • Creditors may have a longer statute of limitations period for filing claims against a trust than against a probate estate • Legal fees for a pour-over will and trust may be greater than for just a will • Less certainty about the application of the subsidiary law of wills (but most of the issues can be addressed by a well-drafted trust)

24. Pour-over wills, revocable trusts, and nonprobate transfers Donor Residuary Beneficiary: Trustee of T’s Revocable Trust Beneficiary: Trustee of T’s Revocable Trust Transfer of Assets Nonprobate Transfers Revocable Trust Pour-Over Will

25. Model pour-over provision • I give my residuary estate to the then acting trustee under the trust agreement executed by me on _________ __, 20__, and known as the O 20__ revocable Trust, of which I am now trustee and X is named as successor trustee, to be added to the trust estate and held under that trust agreement as in effect at my death

26. UPC §2-511:Testamentary additions to trusts, p.444 (a) A will may validly devise property to the trustee of a trust established or to be established … during the testator’s lifetime by the testator… or … at the testator’s death by the testator’s devise to the trustee, if the trust is identified in the testator’s will and its terms are set forth in a written instrument, other than a will, executed before, concurrently with, or after the execution of the testator’s will ... . The devise is not invalid because the trust is amendable or revocable, or because the trust was amended after the execution of the will or the testator’s death.

27. What were the facts in Clymer v. Mayo?, p.445 • In her second will, Clara Mayo executed a pour-over will and revocable trust • Her husband was the life beneficiary of the trust, with remainder interests to her nephews and nieces and then to Boston University and Clark University • Clara designated the trust as the beneficiary of her life insurance policy and retirement plan • Clara divorced her husband and made a close friend the beneficiary of her life insurance policy but did not change the retirement plan beneficiary or the terms of the trust • Thus, her ex-husband remained the principal beneficiary of her retirement plan

28. Clymer v. Mayo Clymer v. Mayop.445 Maria Joseph James Life Insurance Marianne Trust Niece and Nephews and Life Insurance Clara

29. What result in Clymer? • Under Massachusetts law, the interest of a spouse in a will is revoked upon divorce from the testator • Even though there was no similar statutory provision for trusts, the court applied the principle of revocation • The “will and trust were integrally related components of a single testamentary scheme” (second ¶ of opinion excerpt, p. 446) • Same result under UPC § 2-804 and Ind. Code § 30-4-2-15

30. Clymer and retirement plans • Why did this case come out differently from Egelhoff, where ERISA prevented the revocation of the divorced spouse’s beneficiary status? • In this case, the retirement plan assets followed the beneficiary designation, which was the trust. It was the trust beneficiary designation that was revoked, not the retirement plan beneficiary designation.

31. Joint tenancies in land The joint tenants have equal interests; most important actions require the agreement of all tenants Not unilaterally revocable, so an imperfect will substitute (though Brousseau, p. 448, suggests some exceptions) Joint tenants cannot devise their shares in a will. Upon death, the decedent’s share vanishes and is taken by the other joint tenant(s). To pass by will, the joint tenants must sever the joint tenancy and convert it into a tenancy in common. Creditors can reach a joint tenant’s interest only during the tenant’s lifetime.

32. Revocation of trusts The settlor may revoke or amend a revocable trust: • (1) by substantial compliance with a method provided in the terms of the trust; or • (2) if the terms of the trust do not provide a method or the method provided in the terms is not expressly made exclusive, by: • (A) a later will or codicil that expressly refers to the trust or specifically devises property that would otherwise have passed according to the terms of the trust; or • (B) any other method manifesting clear and convincing evidence of the settlor’s intent. • Uniform Trust Code §602(c) • Ind. Code § 30-4-3-1.5(c) [requires a writing for (2)(B)] • Restatement (Third) of Trusts § 63

33. UPC § 2-804(b): Revocation upon divorce Except as provided by the express terms of a governing instrument, a Court Order, or a contract relating to the division of the marital estate made between the divorced individuals . . ., divorce . . . (1) revokes any revocable (i) disposition or appointment of property made by a divorced individual to his [or her] former spouse in a governing instrument and any disposition or appointment created by law or in a governing instrument to a relative of the divorced individual's former spouse . . .

34. UPC § 1-201(18) : Governing instrument "Governing instrument" means a deed, will, trust, insurance or annuity policy, account with POD designation, security registered in beneficiary form (TOD), pension, profit-sharing, retirement, or similar benefit plan, instrument creating or exercising a power of appointment or a power of attorney, or a dispositive, appointive, or nominative instrument of any similar type.