Topics for today

1. Topics for today • Changes in property after execution of will • Will substitutes and the execution formalities • Will substitutes and the subsidiary law of wills

2. Changes in property after execution of will:Ademption by extinction • What happens if I leave my house in Indianapolis to one of my children in my will, but I sell the house before I die and move to a new home in Florida? • Under the traditional rule, my child would be out of luck because the bequest was a specific one—this is the “identity” theory of ademption by extinction. • Under the modern “intent” theory of ademption, my child might still take if the child could show that I intended my home in Florida to replace the one in Indianapolis in the will. Or my child might take the cash value of the Indianapolis home if the child could show that such was my intent.

3. What were the facts in Anton? (p.381) • After marrying for the second time, Mary Anton and her new husband received land from his daughter for a homestead. They built a duplex and lived in it. • After Mary’s husband died, she became sole owner of the duplex, and in her will, she bequeathed half of her interest in the duplex to the step-daughter. • She bequeathed the other half to a son from her first marriage. • She left the residue of her estate to the son and a daughter from her first marriage • The daughter, Nancy, also managed her financial affairs under a durable power of attorney

4. What were the facts in Anton? • Mary needed nursing home care because of Huntington’s Chorea • As expenses mounted for the nursing home, her daughter sold Mary’s assets to cover the costs • Ultimately, Mary’s daughter sold the duplex for $133,263. At the time of Mary’s death, $104,317 remained.

5. In re Estate of Anton In re Estate of Anton,p. 381 Mary First Wife First Husband Herbert Residue Duplex Gretchen Nancy Robert Aug. 2003 Dec. 2003 1976 1981 1998-2003 1986 Herbert dies. Mary executes a will: duplex to Gretchen and Robert; residue to Robert and Nancy. Mary has car accident, in nursing homes for the remainder of her life. Nancy becomes attorney-in-fact. Nancy sells Mary’s assets, apart from duplex, to pay for care. Nancy sells duplex. Mary dies. ~$104,000 remains

6. What should happen to the $104,317? What are the options? • Under the identity theory, the duplex was a specific devise, and it adeemed when the daughter sold it. • The $104,317 falls into the residue of the estate • But Mary was not aware of the sale. Can we assume that Mary intended to deny the step-daughter her bequest? • Under Iowa’s “modified intention theory,” involuntary removals of property from the estate are not adeemed (pp. 382-383) • But should the actions of the attorney-in-fact be attributed to Mary? • Ohio had said yes; Kansas had said no (pp. 383-384)

7. Anton and ademption, p.385 • Ademption by extinction applies when • T had knowledge of the transaction • T realized the effect of the transaction on the estate plan • T had an opportunity to revise the will • What about the fact that Mary knew her duplex might be sold to cover her expenses? Wouldn’t she have approved of the sale had she been competent? • The discussion with her daughter took place five years before the sale • Remote future contingencies are not enough to cause testators to rewrite their wills

8. Anton and ademption, p. 386 • The court concluded that the home did not adeem, and the step-daughter should take ½ of the $104,317. • In some states, the step-daughter and the son would have been entitled to ½ the sale value of the duplex • But would Mary have wanted her daughter to take nothing? • Very likely, she wanted to return the land that the step-daughter had given Mary and her husband on which they built the duplex • Once the land was gone, Mary probably would have favored her own daughter over her step-daughter

9. Problems, pp. 388-389 • A is entitled to the Rolls Royce under UPC comment • UPC comment doesn’t answer other motor vehicle hypotheticals • A is entitled to Whiteacre if it is a “mere replacement.” In Fletcher, T had executed a codicil after selling Whiteacre without mentioning the devise and the codicil assigned all property to the residue, so there was ademption. Court also mentioned delay between the two transactions and one was investment property while the other was a residence • Wendy takes nothing under common law identity theory. Under UPC, it would be very difficult for Wendy to rebut the presumption of ademption

10. An introduction to will substitutes • Will substitutes are like wills because • They dispose of the owner’s wealth upon death, • The owner has complete control over them while alive (including the power to amend and revoke), and • The interests of the beneficiaries are “ambulatory” (i.e., they don’t come into being until the owner’s death)

11. An introduction to will substitutes • Will substitutes are not subject to all of the formalities of wills • You’ll have a writing and a signature. But you won’t have the attestation and signatures of two witnesses. Is that a problem? • The short answer is no for the most part, and it makes sense that will substitutes are not held to the same level of formality as a will. When you consider the purposes of the formalities, you see that they’re generally well-satisfied by will substitutes.

12. Will substitutes, pp. 394-397 • Life Insurance • Pension Accounts • Joint Accounts • Revocable Trusts • Joint Tenancies Will Substitutes: 1) tend to be asset-specific; 2) avoid probate; and 3) are not subject to the Wills Act.

13. Farkas v. Williams,125 N.E.2d 600 (Ill. 1955), p. 398 Farkas v. Williams Contingent Remainder Interest Transfer In Trust Farkas (Settlor) Farkas (Trustee) Williams • Fiduciary Enforcement • Right to Revoke • Right to Income • Right to Principal • Right to Change Beneficiary Must this trust be executed with Wills Act formalities?

14. Farkas • This case illustrates the early efforts to justify revocable trusts on the grounds that they were not really will substitutes but were financial vehicles that transferred a present interest to the beneficiaries • According to the court, Farkas assumed fiduciary responsibilities toward Williams • But Williams really was in the same position as a named beneficiary in a will—Farkas could sell the assets in the trust and use the proceeds in any way he chose, just as if he had written a will with Williams as the beneficiary • In fact, as the UTC and later cases indicate (e.g., Moon, note 3, page 403; Linthicum), Williams really did not have any enforceable interests

15. Farkas • The lasting significance of Farkas comes from its observations at the end of the opinion that the formalities of the trust satisfied the purposes served by the formalities for wills (p. 402) • Thus inter vivos revocable trusts are valid will substitutes even though they do not have to meet the witnessing requirements of wills

16. Indiana on revocable trusts • An instrument creating an inter vivos trust in order to be valid need not be executed as a testamentary instrument . . . even though such trust instrument reserves to the maker or settlor the power to revoke, or the power to alter or amend, or the power to control investments, or the power to consume the principal, or because it reserves to the maker or settlor any one or more of said powers. • Ind. Code § 29-1-5-9

17. Linthicum v. Rudi Linthicum v. Rudi,148 P.3d 746 (Nev. 2006), p. 403 Myrna Claire L-Cobb Ernette Rudi ?? Claire executes a will and a revocable trust. Ernette and Myra named as successor trustees and beneficiaries of the trust. Claire executes a new will and amendment to trust. Rudi replaces Ernette and Myrna as beneficiary and successor trustee. Rudi and State petition for guardianship over Cobb. State awarded guardianship. Ernette and Myrna challenge amended trust seeking constructive trust or cancellation.

18. Linthicum • Why can’t Ernette and Myrna challenge the trust? • First the court observed that Nevada’s provisions for challenges to trusts apply to nontestamentary trusts, but we have here a revocable inter vivos trust • This argument does not make sense. A revocable inter vivos trust is a nontestamentary trust. • More importantly, the statute only gives standing to interested persons, and Ernette and Myrna don’t have a present interest. Because Claire can revoke the trust, Ernette and Myrna have “at most a contingent interest that has not yet vested.” As long as the trust is revocable, Ernette and Myrna had no legal rights until Claire died.

19. Question, p. 406 • The cases cannot be reconciled on the matter of the beneficiaries’ interests. Linthicum overtakes Farkas. • As a result, just as a beneficiary of a will cannot challenge the will until it takes effect upon the testator’s death, a beneficiary of a revocable trust cannot challenge a trust until it becomes irrevocable upon the settlor’s death. • At Claire’s death, Ernette and Myrna can challenge the trust or the amendments thereto on grounds of incapacity and undue influence (see UTC §604); during Claire’s life they can petition for guardianship of the person and/or the property.

20. Questions, p. 407 • While modern law does not impose any duty upon Farkas toward Williams while Farkas is alive, Williams would have recourse against a third-party trustee who looted the trust without Farkas’ knowledge, but still only after the trust becomes irrevocable. • If Farkas is incompetent, a guardian or conservator could sue the third-party trustee on Farkas’ behalf while he’s alive, and Williams could sue the trustee after Farkas’ death. See Restatement (Third) of Trusts § 74 and comments a(2) and (e). • Kentucky said yes, but it rejects the majority view and imposes fiduciary duties to beneficiaries of revocable trusts. Under the Restatement, there is no duty to disclose for revocable inter vivos trusts, but a duty of disclosure is triggered if the settlor loses capacity.

21. Payable on death transfers • Atkinson and Hillowitz illustrate the evolution of trusts and estates law for POD transfers • While POD transfers once were viewed as invalid testamentary transfers, for lack of proper witnessing, now they are treated as valid nontestamentary transferes (i.e., valid will substitutes), mostly via statutory provisions

22. In re Estate of Atkinson In re Estate of Atkinson,175 N.E.2d 548 (Ohio Prob. 1961), p. 407 First Wife Walter Emma P.O.D. $5500 P.O.D. $1000 P.O.D. $2000 Are the certificates of deposit valid testamentary dispositions? Patricia Maxine No, according to traditional (but superseded) law—no witnessing Any way to view the certificates as valid testamentary dispositions? OH is not a holographic state

23. Estate of Hillowitz Estate of Hillowitz 238 N.E.2d 723 (N.Y. 1968), p. 409 Partnership Wife Abraham “In the event of the death of any partner, his share will be transferred to his wife, with no termination of the partnership.” This court viewed the transfer to the wife as a valid contract rather than an invalid testamentary disposition

24. Question, p.410 • (1) Arguably, the POD designation in Atkinson was more reliable since it was executed with a bank, and the maker’s attention was focused on that provision. In Hillowitz, there was no financial institution involved, and the POD provision was probably a small part of an elaborate partnership agreement and therefore might have not been given much attention by Abraham. • With statutory reform, the law expressly validates non-probate transfers even without the formalities required of wills. That is the case under UPC 6-101and under Indiana law.

25. Questions, p.410 and p.412 • (2) The POD provision in Hillowitzcame out of dealings between Abraham and his disinterested partners who had no interest in him designating one beneficiary over another. The arms-length transaction and written record of the beneficiary designation assure us of the reliability of the designation. • (1) The POD designations would have been valid in Atkinson. The Farkascourt would not have had to consider whether Williams had an enforceable interest.

26. Indiana on POD transfers • Ind. Code § 32-17-14-4 (b) A beneficiary designation made under this chapter must do the following: (1) Designate the beneficiary of a transfer on death transfer. (2) Make the transfer effective upon the death of the owner of the property being transferred.(d) Except as otherwise provided in this chapter, a transfer on death direction is accomplished in a form substantially similar to the following: (1) Insert Name of the Owner or Owners (2) Insert "Transfer on death to" or "TOD" or "Pay on death to" or "POD". (3) Insert the Name of the Beneficiary or Beneficiaries.(e) An owner may revoke or change a beneficiary designation at any time before the owner's death.

27. 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 • Ademption and abatement • Slayer rules • 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?

28. 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).

29. 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.

30. 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 • 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

31. 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

32. 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.

33. 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

34. 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 retirements 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?

35. 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?

36. 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 other non-probate assets? • Cook and life insurance • Egelhoff and retirement benefits • Clymer and revocable trusts (Wednesday)

37. 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.

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

39. 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.

40. Pension and retirement accounts • Annual payments made upon retirement (annuity) to worker and often worker’s surviving spouse • Payments continue until death of worker and spouse; no lump-sum payout • Contributions made to an identified account, participant bears market risk • At retirement, withdrawals subject to distribution rules • Lump-sum payout made on death of worker and spouse

41. 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?

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

43. 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

44. 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

45. 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

46. Functions of formalities “Does this remark indicate finality of intention to transfer ?” [i.e., finality in the absence of writing a new will] • Ritual Function • The performance of some ceremonial for the purpose of impressing the transferor with the significance of his statements. • Evidentiary Function • Supply satisfactory evidence to the court. • Protective Function • Prophylactic purpose of safeguarding the testator. • Channeling Function • Standardization of form simplifies administration.

47. UTC §603:Settlor’s powers; Powers of withdrawal, p.403 (a) While a trust is revocable [and the settlor has capacity to revoke the trust], rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor. (b) During the period the power may be exercised, the holder of a power of withdrawal has the rights of a settlor of a revocable trust under this section to the extent of the property subject to the power.

48. UPC §6-101: Nonprobate Transfers on Death, p.411 A provision for a nonprobate transfer on death in an insurance policy, contract of employment, bond, mortgage, promissory note, certificated or uncertificated security, account agreement, custodial agreement, deposit agreement, compensation plan, pension plan, individual retirement plan, employee benefit plan, trust, conveyance, deed of gift, marital property agreement, or other written instrument of a similar nature isnontestamentary.

49. Indiana on POD/TOD transfers • Ind. Code § 32-17-14-5 • A transfer on death transfer: • is effective with or without consideration; • is not considered testamentary; • is not subject to the requirements for a will or for probating a will under IC 29-1 . . . • Ind. Code § 32-17-14-11 • A transfer on death deed must be: • executed by the owner or owner's legal representative and • recorded with the recorder of deeds