Modern Rules of Construction & Extrinsic Evidence in Trusts & Estates

Trusts & Estates EssentialsPower Point Slides Class #13 3-5-19: NATIONAL CHEESE DOODLE DAY MARDI GRAS

UNIT TWO: WILLS CHAPTER 6: WILL DRAFTING PRINCIPLES & DEFAULT RULES §6.7 Rules of Construction & Extrinsic Evidence 6.7.1 Common Law Rules of Construction (Last Week) 6.7.2 Ambiguities cont’d 6.7.3 Mistake

Rules of Construction & Extrinsic EvidenceAmbiguities: Modern Approach Rstmt (Third) of Property: (WODT) § 11.1. Ambiguity Defined. An ambiguity in a donative document is an uncertainty in meaning that is revealed by the text or by extrinsic evidence other than direct evidence of intention contradicting the plain meaning of the text. Rstmt (Third) of Property: (WODT) § 11.2 (a). Resolving Ambiguities in Accordance with the Donor’s Intention. An ambiguity to which no rule of construction or constructional preference applies is resolved by construing the text of the donative document in accordance with the donor’s intention, to the extent that the donor’s intention is established by a preponderance of the evidence.

Rules of Construction & Extrinsic EvidenceAmbiguities: Modern Approach Rstmt (Third) of Property: (WODT) § 11.2 (b). Resolving Ambiguities in Accordance with the Donor’s Intention. Ambiguities to which no rule of construction or constructional preference applies include those arising when: 1) the text or extrinsic evidence (other than direct evidence contradicting the plain meaning of the text) reveals a mistaken description of persons or property. (2) the text reveals an apparent mistaken inclusion or omission. (3) extrinsic evidence (other than direct evidence contradicting the plain meaning of the text) reveals that the donor’s personal usage differs from the ordinary meaning of a term used in the text.

Ambiguities: Modern ApproachUniv. of So. Indiana Foundation (USIF) v. Baker: Facts • Grants in will (thru trust) to (1) T’s brother, Richard Baker, of “any and all proceeds and assets that were held in [T’s] individual retirement accounts [(IRAs) and] all of T’s automobiles, furnishings and otherpersonal property;” (2) USIF of the residue of T’s estate. • When T died, she owned real estate, IRAs, an automobile and tangible personal property (furniture, etc.), and investment assets (intangible personal property = bank accounts, certificates of deposit, treasury notes, and bonds). • Who gets intangible personal property?

Ambiguities: Modern ApproachUSIF v. Baker: Indiana S.Ct. Opinion Was the trust ambiguous re meaning of “Personal Property”? • Baker argued: unambiguous technical legal meaning. • USIF argued: unambiguous meaning of “personal effects.” • Ct: Though phrase has a technical legal meaning, written language as a whole casts substantial doubt over whether T intended that meaning. • Gift to Baker gave him all “automobiles, furnishings and other personal property” In context, this implies that “other personal property” would be of like kind (i.e., tangible) to the automobiles and furnishings that immediately precede the technical term. • Thus, phrase is ambiguous and, because the uncertainty can be discerned from the face of the trust, the ambiguity is a patent one.

Ambiguities: Modern ApproachUSIF v. Baker: Indiana S.Ct. Opinion Court says distinction between latent & patent ambiguities is not useful and decides to abandon it. It then finds extrinsic evidence showed T intended investment property to go to USIF. List of evidence in case on which court relied is useful for you as example of the kinds of evidence that can be relevant to these Qs.

Rules of Construction & Extrinsic EvidenceMistake • Common law prohibited reformation of a will to correct mistakes. • Modern trend embodied in UPC 2-805 allows judicial reformation to correct mistakes if there is clear and convincing evidence of the testator’s intent. • Extrinsic evidence is admissible to correct a mistake even if the relevant language is unambiguous. • This approach eliminates the need for the distinction between patent and latent ambiguity.

Rules of Construction & Extrinsic EvidenceMistake: Estate of Herceg • T executed a will in 1999 with an empty residuary clause: “All the rest, residue and remainder of the property which I may own at the time of my death, real and personal, and wheresoever the same may be situate.” [Clearly a mistake.] • The executor argued that this provision should be construed to recite the same text as T’s 1997 will, which devised the residue of her estate “to my nephew” [and in] the event that my nephew … does not survive me, his share shall go to his wife…” The nephew did pre-decease the T and the wife was the executor.

Trusts & Estates Essentials: Logistics • Fri 3/22: Exam (See posted “Midterm” Exam schedule) • On Course Page • Assignments for Thursday • Info on Office Hours & E-Mail Qs March 4-21 • Exam Syllabus for Chapter 2 (indicating depth of test coverage) • Sample Multiple Choice Qs for Chapter 2 (Answers & Explanations Soon) • By Wednesday March 13, I will Post • Complete Exam Syllabus (indicating depth of test coverage) • Sample Multiple Choice Qs for All Chapters Covered

UNIT THREE: TRUSTS CHAPTER 8: TRUST FORMATION & ELEMENTS §8.3 Elements of Private Trusts Settlor (Check for Capacity & Intent) Trust Property (corpus or res) Creation/Instructions: Deeds of Trust (3d Party = T’ee) Declaration of Trust (Settlor = T’ee) Beneficiaries (Equitable Title) Trustees (Legal Title/Fiduciary Duties to Bfry)

Elements of Private Trusts (v. Charitable Trusts §8.5)Overview: Requirements for Creation Uniform Trust Code §401: Methods of Creating Trust. A trust may be created by: (1) transfer of property to another person as trustee during the settlor’s lifetime or by will or other disposition taking effect upon the settlor’s death; (2) declaration by the owner of property that the owner holds identifiable property as trustee; or (3) exercise of a power of appointment in favor of a trustee. (NOTIO)

Elements of Private Trusts (v. Charitable Trusts §8.5)Overview: Requirements for Creation Uniform Trust Code §402 Requirements for Trust Creation. (a) A trust is created only if: (1) the settlor has capacity to create a trust; (2) the settlor indicates an intention to create the trust; (3) the trust has a definite beneficiary or is: (A) a charitable trust; (B) a trust for the care of an animal, as provided in Section 408; or (C) a trust for a noncharitable purpose, as provided in Section 409; (4) the trustee has duties to perform; and (5) the same person is not the sole trustee and sole beneficiary.

Elements of Private TrustsUTC 402 (a)(1): Settlor Needs Capacity A settlor must have the mental capacity to create a trust. Revocable trusts, often used as will substitutes, are governed by the same capacity standard as wills. UTC §601. Diminished capacity is less of a concern for revocable trusts because they do not pose a substantial risk of allowing the settlor to impoverish herself. The settlor (or the settlor’s conservator) may revoke or amend the trust if necessary.

Elements of Private TrustsUTC 402 (a)(1): Settlor Needs Capacity A settlor must have the mental capacity to create a trust. Irrevocable trusts are governed by the same higher capacity standard applicable to the transfer of property free of trust (i.e., an inter vivos outright gift). Rstmt (3d) of Trusts §11(3). An irrevocable trust is more like an inter vivos gift because, once executed, it generally cannot be undone. Diminished capacity is therefore more of a concern for irrevocable trusts because they pose a more significant risk of allowing the settlor to impoverish herself.

Elements of Private TrustsUTC 402 (a)(2): Settlor Needs Intent to Create Trust Textbook at 355-56: Looking for Language creating fiduciary duties on trustee legally enforceable by beneficiary Need more than “precatory language” suggesting a preferred course of action without making it legally binding. See Q5 @ W360. Simply saying “in trust” may not be enough, but that phrase is not necessary if intent otherwise clear. Restatement predictably gives long list of factors to look at to discern intent.

Elements of Private TrustsUTC 402 (a)(2): Settlor Needs Intent to Create Trust Rstmt (3d) of Trusts §13, comment d. Factors for ascertaining the settlor’s intent to create a trust: … the specific terms and overall tenor of the words used; the definiteness or indefiniteness of the property involved; the ease or difficulty of ascertaining possible trust purposes and terms, and the specificity or vagueness of the possible beneficiaries and their interests; the interests or motives and the nature and degree of concerns that may reasonably be supposed to have influenced the transferor; …

Elements of Private TrustsUTC 402 (a)(2): Settlor Needs Intent to Create Trust Rstmt (3d) of Trusts §13, comment d. Factors for ascertaining the settlor’s intent to create a trust: the financial situation, dependencies, and expectations of the parties; the transferor’s prior conduct, statements, and relationships with respect to possible trust beneficiaries; the personal and any fiduciary relationships between the transferor and the transferee; other dispositions the transferor is making or has made of his/her wealth; and whether the result of construing the disposition as involving a trust or not would be such as a person in the situation of the transferor would be likely to desire.

Intent to Create a Trust: Estate of Mannara & Problem 8.3 LANGUAGE OF WILL I, Lydia Mannara, hereby give my power of attorney to my friend, Christodoulas Pelaghias, [sic] I empower him to make decisions concerning my health, life support and any medical arrangements. I hereby appoint him Executor of my last will and testament. I hereby bequeath all of my assets to my two nephews in trust for their education.[Emphasis added. Nephews were children when LM died]

Estate of Mannara & Problem 8.3 I hereby bequeath all of my assets to my two nephews in trust for their education. Court finds no intent to create a trust b/c the will does not: Designate a trustee; although generally not fatal; court can appoint Might also be true b/c testatrix was layperson that she thought duty would fall on executor Impose enforceable active duties on the transferee to manage the funds; or Provide enough detail about duration, how trust principal/income was to be used for nephews’ benefit, etc.

Estate of Mannara & Problem 8.3 I hereby bequeath all of my assets to my two nephews in trust for their education. Authors note that trusts to pay for education of minor children are common and may well have been what T subjectively intended. Court focus on objective evidence of intent suggests it is trying to avoid the use of extrinsic evidence to explain the single sentence in Q. Might be difficult to flesh out intended terms of trust by a T drafting will in imminent fear of death.

Problem 8.4: Language in T’s Will = Trust? I give all of my property to my father, Hans, if he survives me, and if he does not survive me, I give all of my property to my step-mother, Molly, if she shall survive me. If either my father or my step-mother survive me, I give nothing to my three children, namely: Hans, Albertus, and Ashley, or to any descendant of any child who shall not survive me. I make this provision for the reason that I feel confident that any property which my father or step-mother receive from my estate will be used in the best interests of my children as my father or step-mother may determine in their exclusive discretion. [Doesn’t look like instructions but precatory language; court holds it too uncertain to create trust.]

Elements of Private Trusts2. Trust Property The trust corpus or res must be in existence or ascertainable when the trust is created. The requirement of a trust res flows from the requirement that a trust impose enforceable duties on the trustee. (Without the existence of property for trustee to manage, there are no enforceable duties to impose upon the trustee. See UTC §402 (a)(4). Trust property must be sufficiently and specifically identified in the trust instrument. For an inter vivos trust, the trust property must be delivered to the trustee. See Cate-Schweyen (W362) NOTIO

Elements of Private Trusts2. Trust Property Trust property can consist of any interest in property but cannot consist of an expectancy interest that the settlor hopes to receive in the future. [E.g., as heir apparent to a living person.] Important Exception: A trust may remain unfunded (dry) during a settlor’s lifetime if the settlor has a pour-over will that devises assets to the trust. (We’ll briefly return to this idea Thursday.)

Elements of Private Trusts3. Documents for Creation/Instructions Deeds of Trust (for 3d Party Trustee) Declarations of Trust (for Settlor as Trustee) For Both: Uniform Trust Code §407 adopts majority position allowing oral trusts but only if proven by clear & convincing evidence. A few states require trusts to be in writing.

Elements of Private TrustsUTC 402 (a)(3): Beneficiaries The existence of at least one beneficiary other than the settlor is an essential element of a valid trust. Without at least one third party beneficiary to whom the trustee owes fiduciary duties, there is no reason for the trust to exist. Restatement (Third) of Trusts §44. A trust is not created, or if created will not continue, unless the terms of the trust provide a beneficiary who is ascertainable at the time or who may later become ascertainable within the period and terms of the rule against perpetuities. Uniform Trust Code § 402(b). A beneficiary is definite if the beneficiary can be ascertained now or in the future, subject to any applicable rule against perpetuities.

The Rule Against Perpetuities:A Very Brief Introduction (NOTIO) No interest is good unless it must vest, if at all, within 21 years of some life in being at the time of the grant. One Rule to Ring Them All, One Rule to Find Them, One Rule to Bring Them All and in the Darkness Bind Them.

The Rule Against Perpetuities • Purposes: Increase Alienability; Limit Dead Hand Control • Paradigm Grant: In a will, Tom leaves his estate to “my friend Jerry and his heirs, but when the first of my grandchildren turns 21, to that grandchild.” (Knowing-Your-Children Theory) • Problems • When rule originated, time regarding land measured by generations. • Rule can be triggered by (i) Conditional Grants Identifying People by Status Rather than Name; or (ii) Conditional Business Grants with no People in Them (Options; Security Interests) • Many States Have Repealed/Limited by Statute. FL, e.g., doesn’t apply until 99 years has passed. Thus, could have trust capital waiting 99 years for beneficiary to be ascertained.

Beneficiaries: Will of Boyer “[All T’s property given] to my Trustee, George A. Morrison, in Trust.” “I direct my Trustee to distribute all of my estate according to my instructions which I may give to him from time to time … signed or initialed by me. In the event, by whatever circumstance, I fail to leave such instructions to my Trustee, then I direct my Trustee to distribute my estate according to his discretion, bearing in mind the many conversations we have had together in which I have named those who are the objects of my generosity.” No written instructions found; court finds unfettered discretion in trustee re beneficiaries too broad, so trust was unenforceable.

Elements of Private TrustsUTC 402 (a)(3): Beneficiaries Uniform Trust Code § 402(a) A trust is created only if: … (3) the trust has a definite beneficiary or is: (A) a charitable trust (we’ll get to) (B) a trust (“honorary trust”) for the care of an animal, as provided in Section 408; or (C) a trust for a noncharitable purpose [e.g., care of a cemetery plot][, as provided in Section 409;

Elements of Private TrustsUTC 402 (a) (4) & (5): Trustees A trust must have at least one trustee. If a trust fails to appoint a trustee, or an appointed trustee refuses to serve, resigns, or dies, a court will appoint a trustee. Service as trustee is voluntary and cannot be imposed by the settlor. Upon acceptance of a trusteeship, however, a trustee may only resign by complying with the terms of trust, obtaining consent of all beneficiaries, or obtaining court approval.

Elements of Private TrustsUTC 402 (a) (4) & (5): Trustees: Compensation (NOTIO) Trustee compensation must be reasonable (to avoid the problem of self-dealing). The trust may expressly state the terms of trustee compensation or it may have to be determined judicially. Rauschenberg (W373) is an interesting case determining appropriate compensation for trustees of a trust with more than $2 billion in assets where the trustees’ labor seems to have added significant value. The case was affirmed by the 2d DCA in 2016.

Elements of Private TrustsUTC 402 (a) (4) & (5): Trustees: Powers The flexibility of trusts to manage property without court supervision is largely a function of the trustee’s powers: the more powers vested in the trustee, the more flexible the trust. Under UTC §815, a trustee holds all powers expressly conferred by trust and, except as limited by the trust, “all powers over the trust property which an unmarried competent owner has over individually owned property.” This broad authorization of powers allows trustees to perform the functions of trust administration without incurring the cost of seeking court approval or ratification. The law constrains trustees from abusing their broad powers by imposing personal liability for breach of fiduciary duties.

UNIT THREE: TRUSTS CHAPTER 8: TRUST FORMATION & ELEMENTS §8.4 Types of Private Trusts This section is mainly vocabulary

Common Types of Private Trusts Marital trusts: for the benefit of the surviving spouse Spendthrift trusts: protects assets against the beneficiary’s creditors Descendants’ trusts: accumulates income for future generations until distribution is required under the Rule Against Perpetuities Minority trusts: for the benefit of individuals younger than the age of majority Beach-bum trusts: distributions determined by the amount of the beneficiary’s own earnings Special needs trusts: for the benefit of disabled individuals

Types of Private TrustsInter Vivos vs. Testamentary Trusts An inter vivos trust is created and becomes operative during the settlor’s lifetime. A testamentary trust is a trust created under the terms of a valid will.

Types of Private TrustsRevocable vs. Irrevocable Trusts A revocable trust may be revoked or amended during the settlor’s lifetime. During the settlor’s lifetime, all trustee duties are owed to the settlor because the right to revoke makes her the de facto owner of the trust property. UTC § 602. The trustee has a duty to inform and report to the settlor of a revocable trust and the settlor may take actions against the trustee for breach of trust. UTC § 603.

Types of Private TrustsRevocable vs. Irrevocable Trusts An irrevocable trust may generally not be revoked unilaterally by the settlor once created. The settlor of an irrevocable trust has the right to petition for removal of a trustee. UTC §706(a). Default Rules: Absent an express designation, The majority of states presume all trusts to be irrevocable. The UTC follows the minority approach, presuming that the trust is revocable.

Types of Private TrustsRevocable vs. Irrevocable Trusts Implications of revocability for creditors’ claims: The property of a revocable trust is subject to claims of the settlor’s creditors because the settlor remains the de facto owner. A settlor’s creditors have more limited ability to reach the property of an irrevocable trust: The creditors may reach only the maximum amount that can be distributed for the settlor’s benefit under the irrevocable trust (assuming the full exercise of discretion by the trustees. ) If a settlor of an irrevocable trust is not a named as a beneficiary, the settlor’s creditors may not attach any trust property to satisfy the settlor’s debts (unless the creation of the trust is determined to be a fraudulent transfer).

Types of Private TrustsPerpetual Trusts (NOTIO) Perpetual trusts, which provide an endless series of life estates, are possible in states that have repealed or limited the Rule Against Perpetuities. They allow settlors to maximize the value of the trust assets by postponing the applicability of the Generation Skipping Transfer Tax.

UNIT THREE: TRUSTS CHAPTER 8: TRUST FORMATION & ELEMENTS §8.5 Charitable Trusts 8.5.1 Charitable Beneficiaries 8.5.2 Charitable Purposes 8.5.3 Duration and Modification of Charitable Trusts 8.5.4 Enforcement of Charitable Trusts

Charitable trusts differ from non-charitable trusts in the selection of beneficiaries, trust purposes, duration, and modification. • Charitable trusts are sometimes used to implement a plan of philanthropic giving. However, most large charitable gifts involving the creation of an entity are structured in the form of a charitable nonprofit corporation. • Many of the largest charities are structured, or were initially established, in the charitable trust form. • Kamehameha School Trust ($10.6 billion) • J. Paul Getty Trust ($8.68 billion) • Pew Charitable Trusts ($5.6 billion) • Leona & Harry Helmsley Charitable Trust ($5.5 billion) Charitable TrustsGenerally

Modern Rules of Construction & Extrinsic Evidence in Trusts & Estates