Trusts

Joint tenancies

Contractual rights (life insurance, PODs)

Intervivos gift

Transfer on death securities (TCDS)

Pods and Tods have 

-zero transaction costs

-much cheaper than dealing with trust ownership

  a.       A person may die totally intestate, that is, intestate as to the person, if the person does not leave any type of valid will.

b.       A person may also die partially intestate, that is intestate as to property, if the person’s valid will fails to dispose of all the person’s probate estate.  

Probate is

1. slow
2. public (once you have your will probated, it becomes available to the public at large)
3. complex and arcane (probate used to be a localized phenomenon—a single probate judge who created procedures that were designed for the locality), 
4. expensive.  

I.                   The gift is either automatically revoked (majority view)  or revocable at the donor’s discretion (minority view) if the donor survives the peril that induced the owner to make the gift.  The gift is also revocable at any time for any reason.  

 Valid Present Gift of Future Interest:  The donor may retain a life estate in property and transfer only a future interest.  The donee of a future interest owns an interest in the property but does not have the right to enjoy that ownership until some future time such as the donor’s death.  Thus, the donor can continue to possess and enjoy the property up to the moment of death but the property will not be in the donor’s probate estate b/c the donor had already transferred the future interest to that property.  

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  1.  
     1. Here there was constructive delivery of the letter.  The dad’s intent was the real issue.    
     2. Two possible interpretations
     3. 1.   This is an invalid document.  Not a valid will, an attempted will.  This is the stepmother’s point of view, she wants the document to be invalid.  Its an invalid will.  Invalid b/c there are no witnesses.  It is a will b/c it is an attempt to transfer something at death.  Testimentary—essence of document is to transfer decedent’s wealth on decedent’s death. 

2.   This is a valid present gift of a future interest or remainder interest.  Son’s argument.

I.                   Elements of Inter Vivos Gift

What were the element of my gift? I Did Acid

• Intent to make a present transfer
• Delivery (actual or constructive)
• Acceptance.  

•       no discrimination based on gender—gender neutrality, a will can trump the default here—
•       there is testamentary freedom, and there is a single rule for both real and personal property (stage 1 was focused on realty, main wealth came from real property, today wealth is comprised in intangible personal property).  
•       The most obvious is the spouse’s taking—the spouse is first in line.  

a.       If kindred (all blood relatives but no relatives created by marriage) and no issue (lineal line of descendants: children and grandchildren, only biological and adopted, foster children are neither issue nor kindred), SS takes first $200,000 and ½ the remaining personal property and ½ the remaining real property. 

b.      If issue, then SS takes ½ the personal property and ½ the real property.  In stage 2 with a SS and lineal descendants they each take half; unlike stage 1 where SS only gets life estate and eldest son gets the entirety.  In stage 3, the SS with lineal descendants takes the estate in its entirety. 

c.       If the deceased leaves no issue and no kindred, the SS takes the whole.  

 When a person dies with real property, it is distributed in equal shares to his children and to the issue of any deceased child by representation; if no surviving child of the intestate then to all his other lineal descendants.  If all such descendants are in the same degree of kindred to the intestate, they shall share the estate equally; otherwise, they shall take according to the right of representation. 

1.      If he leaves no issue, equal shares to father and mother, or to the surviving parent.  In stage 2, parents only take if there are no issue.  

   If he leaves no issue and no father and mother, then to his sisters and brothers and to the issue of any deceased brothers and sisters by right of representation; and if there is no surviving brother or sister of the intestate, to all the issue of his deceased brothers and sisters.  If all such issue are in the same degree of kindred to the intestate, they shall share the estate equally, otherwise according to the right of representation.  In order for siblings to benefit, there have to be no parents and no issue.  

1. Children and issue of any deceased child
2. Father and mother or surviving spouse
3. Sisters and brothers and deceased of any sisters and brothers
4. Kin in equal degree
5. Escheat

1.      Current version of Uniform Probate Code (UPC).  Note the more generous share for SS, but results differ if step-children are involved.  

UPC 2-102 Share of spouse

1. no parents, no decedants, no parents of decedent
2. all decedent's surviving decedants are also descedents and no step child
3. if parent of decedent survives
4. decedent only has kids from SS, but SS has kids from outside 
5. at least one of decedents kids are outside SS

1. no parents, no decedants, no parents of decedent -> SS all of estate
2. all decedent's surviving decedants are also descedents and no step child -> SS gets all 
3. if parent of decedent survives-> 200,000 plus 3/4 of estate
4. all decedents surving descendants are also descendants and surving spouse has kids outside the marriage -> 150,000 plus 1/2 estate
5. one more decedents kids are not from the SS -> 100,000 plus 1/2

a.       To the decedent’s descendants by representation;

b.     to decedent’s parents equally if both survive, or to the surviving parent;

c.      to the descendants of decedent’s parents (brothers or sisters) or either of them by representation

d.  survived by one or more grandparents or descendants of grandparents, ½ the estate passes to the decedent’s paternal grandparents equally if both survive, or to the surviving paternal grandparent, or to the descendants of the decedent’s paternal grandparents or either of them if both are deceased, the descendants taking by representation; and the other half passes to the decedent’s maternal relatives in the same manner; but if there is no surviving grandparent or descendant of a grandparent on either the paternal or the maternal side, the entire estate passes to the decedent’s relatives on the other side in the same manner as the half.  

3 policies behind intestacy

1. Decide what average person would want at date of death

2. Avoid swearing contest (actual wishes are irrelevant)

3. Should be a pro family doctring

FUNDAMENTALS OF INTESTATE SUCCESSION

I.                   Descendants/issue take to the exclusion of collaterals (siblings, nieces/nephews, cousins).

of collaterals (siblings, nieces/nephews, cousins).

II.                   Parents generally take if no issue to exclusion of other relatives.

III. Are marriage relationships good enough? 

a.       The vast majority of states have abandoned strict per stirpes distribution in favor of modern “per stirpes” distribution.  These states divide decedent’s property at the closest generation to the decedent in which there is at least one descendant living.  Stage 2: if all such descendants are in the same degree of kindred to the intestate, they share the estate equally (“per capita”); otherwise, they shall take according to the right of representation (like stage 1: strict per stirpes).  Stage 2 sometimes acts like stage 1 and sometimes acts like stage 3.    

There are two common ways of dealing with the problem of only having decedents of grandparents:  a parentelic system or a degree-of-relationship approach. What is the degree of relationship approach?

1.      Degree of Relationship/Kinship:” Determines heirs by counting the degrees of kinship between the intestate and the heir and then awarding the probate estate to the nearest next of kin.  Civil Law System:  Most common method.  The status of each potential heir is determined by counting the number of steps between the intestate and the potential heir as you pass through the common ancestor of both.  The total is the degree of the relationship.  The potential heir with the smallest number inherits the estate.  

There are two common ways of dealing with the problem of only having decedents of grandparents:  a parentelic system or a degree-of-relationship approach. What is the parentelic system?

1.      Parentelic systems search on each side of the family until an ancestor, or a descendant of an ancestor, is found.  The intestate’s probate estate not passing to the surviving spouse is divided into two halves.  These halves are ofen referred to as moieties.  One of these portions passes to the intestate’s maternal grandparents and the other portion to the paternal grandparents.  If both grandparents on the same side of the family are deceased, the entire moiety passes to the intestate’s aunts and uncles and their descendants in that family line. If no heir is found on one side of the family, then both moieties are usually combined and inherited by the heirs on the side of the family where survivors were located.    

§  For final, know two basic approaches and that the parentelic is the rule in the UPC and that the estate escheats to the state after that.    

§  UCC 2-114(b):  An adopted individual is the child of his or her adopting parent or parents and not of his or her natural parents, but adoption of a child by the spouse of either natural parent has no effect on (i) the relationship between the child and that natural parent, (this should be fairly obvious) or (ii) the right of the child or a descendant of the child to inherit from or through the other natural parent (this is the stepparent exception—here there is a crack in the general rule). (ex: if sally and dan were married and had a child, Elizabeth.  Sally died. Dan and sarah get married and sarah adopts Elizabeth.  Are the Grandparent’s still grandparents (Sally’s parents)?  Yes, b/c of this section for the purpose of inheriting from them—Elizabeth may inherit from them, but they may not inherit from her.  Here, Elizabeth gets two pieces of the pie—double bite.    

A number of states have invoked the doctrine of “equitable adoption” to permit inheritance.  In some states, the equitable adoption doctrine rests on the fiction that when a caretaker takes a child into her home, she impliedly agrees with the child’s natural parents that she will adopt the child.  If the parties rely on that agreement, the child will be entitled to whatever benefits flow from status as the caretaker’s child, even if the caretaker never performs that implied “agreement.”  Thus, the equitable adoption doctrine would permit the child to succeed to a share of the caretaker’s property by intestate succession. 

ADULT ADOPTION:  once a child reaches the age of majority, the refusal of the natural parent to consent to a stepparent adoption is no longer a legal barrier to adoption.  In some cases, adults have adopted adults for the express purpose of permitting them to inherit—generally not from the adoptive “parent,” but from some relative of the adoptive parent.  Does the person have to be a “child” in order to be adopted?  

• In stage 3 of divorce:  No fault divorce—aka “unilateral elective” divorce means that if one party wants a divorce you can get a divorce.  In stage 2:  3 fault based grounds for divorce: adultery, desertion or abandonment.  In stage 2 you couldn’t get a divorce just b/c you wanted to.

• In stage 1, she would have had dower.  In stage 2, she would have taken half. In stage 3, she would have taken everything.  If her husband had written her out of the will, what type of elective share would she be eligible to receive? 1/3.

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  1. When an adult woman got married she lost the capacity to sue or be sued, and to sell or contract in her own name (similar to a child).  As to property, the carryover impact was that the husband controlled the wife’s wealth.  Unless the father created a trust with his daughter as beneficiary or equitable estate his son-in-law couldn’t touch or impact.  

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  1. In stage 3, in common law, we (1) characterize the property (based on marital property (community v. separate) not based on title), (2) then value the property, and (3) divide the property (divide the property equitably not equally).  Once the property is valued, it is a crapshoot and the Judge gets to choose however he wants to divide the property.  While you are married in common law jurisdictions you are governed by community property, but at divorce even if they find that it is marital property, the Judge can divide the property 50/50 or 90/10.  In a common law jurisdiction, there is no presumption of a 50/50 split like the presumption in community property states.      

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  1. .)  In community property states, there was “community property”—the wealth earned by either or both spouses during marriage.  It doesn’t matter how the wealth is titled—it is called the “economic partnership theory” of marriage in stage 2 and 3.  View marriage as a joint economic enterprise.  There can also be separate property as well—property brought into the marriage that was kept separate once you were married OR property received by one of the spouses alone by intervivos gift, or inheritance—by will or intestacy.  But whatever you earn by active efforts during marriage is community property.  Classic rule is 50/50 split at divorce.

NON-MARITAL CHILDREN

Stage 1 Rule:

 In stage 2, we go from being a bastard child in stage 1, to being an illegitimate child in stage 2.  The illegitimate child is the child of their mother, for inheritance purposes, and not the child of the father.  Today you often see the word “non-marital” child rather than “illegitimate.” Non-marital children could inherit from and through the mother, but severely restricted in terms of the father.   

1.      The U.S. Supreme Court creates stage 3.  Contemporary law influenced by several developments:  (a) U.S. Supreme Court finds legitimacy/illegitimacy a quasi-suspect class mandating intermediary scrutiny under the Equal Protection Clause.  The test is whether the classification is “substantially related to an important government interest.”  The book notes two major cases:  

2. Trimble v. Gordon and Lalli v. Lalli

Supreme Court invalidated an Illinois statute that provided that a non marital child could inherit from its father only if 

-parents had legitmated child by marrying each other and

-father had acknowledged the child

Supreme Court found statute unconstitutional

Stanley- non-marital couple together for 18 yrs, mom dies, court allows dad to adopt striking down stage 2 rule

Lehr - mom ran away and new dad wanted to adopt...old dad complains but never filed putative father's registry 

Fundamental rule is that you have to outlive the decedent...

The unfirorm simultaneous death act created a rebuttable presumption that each property owner survived each other 

The outline notes 7 different requirements for a valid disclaimer..What are they?

When Funny Apples Intest Pitiful Times Uncover

Writing- must be in writing by disclaimer

Filed- filed with proper authorities (feds want 9 month notice)

Administratrator - must file copy w/ admin of estate

Irrevocable - disclaimers are irrevocable

Partial - partial disclaimers are allowed

Timing - if you accept any of the benefits its too late

Unconditional - must be unconditiaonl ie not in exchange

Can a federal tax lien get through a disclaimer?

Do disclaimed assets count towards eligibility for public assistance?

Spousal protection

Community property states:

treated property as individuallly owned unless husband and wife took title as tentants by the entirety or as joint tenants

Widow: had life estate in 1/3 of realty

Widower: received life estate in all of his wife's realty

trust I create, of which I am sole trustee, and for which I am the lifetime beneficiary

Stage 2: no clear answer Sullivan allowed the trust to be reached. Statutes have been created which turn on subjective intent-

1. compute value of decedent spouse's

2. compute the SS' elective share

3. determine whether the dispositions already made for the SS

Is it ok in stage 2 & 3?

Agreement to waive elective share

Stage 2 could not waive elective share rights subject to certain limitations. 

Stage 3: A SS's waiver is acceptable (ie prenup)

limited exception that provides that the family homestead is generally beyond the reach of creditors. 

The 15K for a SS and if no SS then 15K for each surviving spouse

The SS and minor children are often granted the right to retain certain personal property free from claims of creditors

UPC provides for a maximum of 10k in addition to the homestead allowance

court may have authority to grant a family allowance for the suppport of the SS and minor children for a period time---

UPC limits the family allowance to a maximum of 18K for one period

Wife might have a double share- community property then elective share -- statutes now stop such a double interest

in opposite situation the wife is protected through quasi commmunity property..

protected from unintentional disinheritance, but can be intentionally disinherited

Child has no claim when 

-testator's will actually provides for pretermitted child,

-provided for outside of estate

-extrinsic evidence demonstrates the testator's intent

-testator's will demonstrantes an intent not to share

-entire estate is left to the pretermitted child's other parent

writing

signed

wholly in handwriting or must be attested

witnesses must be credible

witnesses must be over 14

witnesses must sign at the end of the will

in their own handwriting

in the presence of the testator

writing

signed or by some agent

signed by at least 2 individuals within a reasonable time after witnessed or acknowledgment of that signature or acknowledgment of the will

1. Legal capacity

2. Testamentary capacity

3. Testamentary Intent

4. Complaince with statutory formalities

In writing

Signed by testator - initials, firs names, nicknames may qualify; proxy signature allowed; no specific place

Witnesses- typically 2 witnesses; competentent or creddible; shouldn't be interested

Stage 1: testator should sign prior to attestation

Stage 2: approximately the same time as part of a continuing transaction

Stage 3: UPC - within reasonable time after

-observation

-acknowledgment of testator's signature

-testator acknkowledged the will

Substantial compliance -technical defects will not invalidate a will  designed to cure inequities from the formalism

UPC dispensing power - document is treated as if it had been executed in compliance with that section IF the proponent of the document establishes by clear evidence that the decedent intented the doc to constitute the decednets will 

Stage 1- intent view - if it was INTENDED TO BE PART OF THE WILL, the will is nonholographic

Stage 2- surplusage view -prevailing approach - allows nonholographic material to be ignored if it will not alter the testator's dispositive arrangements

Stage 3: material privison view --- deemed to be holographic if the most imporant words are in hand writing 

Oral or spoken wills (minority of states/not UPC) permit them under limited circumstances

- no real property

-overtaken by sudden and violent sickness

-must be spoken at home, where resided for 10 days, or if away from home before returning home

-witness must speak to it

-may need more than two

-if not probated within 6 months, proof needed that will was written with 6 days from when the testator spoke

0 notice -

-testator and witness intial each page

-different color of ink

-fastened together

-number 1 of 10 format

- consistent typeface scheme

-same type ink/cartridge

-blank space avoided

-don't conclude each page with the end of a sentence

stage 2: in existende, identification, intent

stage 3: exception to the in existence requirement

IBM STOCK EXAMPLE

KITCHEN EXAMPLE

I leave my 100 shares of stock to those people listed on the enveloped is not valid whereas I leave my 100 shares of stock to my oldest is fact of independent signifcance

Money in kitchen is not fact of ILS whereas money in bank is. 

1. property not disposed of by will 

2. residuary devises 

3. general devises

4. specific devises

Exoneration 

Stage 2 rule:

Stage 3 rule:

Debt on an item:

Stage 2: debt on specific item presumed to be paid by residuary

Stage 3: presumption of nonexoneration...

Stage 2: the residuary

Stage 3: each person, but its effect is not really in place when many use a non apportionment 

• If you WANT ademption, you have to put language in will “blackacre to John, but no proceeds or any replacement property if I don’t own blackacre at the time of my death” or “and the devise shall adeem if blackacre is not owned.” 
• If you DO NOT want ademption, state in the will “blackacre to John, or the proceeds or any replacement property to John” or “but this devise shall not adeem.”  

Grandchild v. the friend. Richard one son applied 30k to saving bonds. 

General bequest of 20k to a friend and a speccific bequest of stock from account to granchildren.

Estate lacked funds to satisfy both accounts

McGee v. McGee holding and test

Test: 1. whether gift is a specific legacy and 2. whether it is found in the estate at time of testators death

Court held that the testator's intention was that her granchildren receive only the money in her bank account and not the money proceeds (purchased bonds) or investments

CL rule - rebuttable presumption of advancement

Stage 3 UPC - presume not an advancement, this presumption can be overcome of course through deduction of the gift, contemporaneous writing that this is satisfaction, devisee acknowledges in writing

• The presumption is that the gift will lapse and will go to residuary clause and if that was the only devisee, then the estate is passed intestate

As a general rule how will the words in a will be interpretted?

will had language "to the surving children of brother," does the grandchild collect? In other words, are grandchildren "surviving children." So this Jaqueline take it all or only 1/2 of the estate

Held. No. Affirm. In the will “children” means children and does not include grandchildren and therefore Daniel’s children cannot share in the distribution of the corpus of the trust.

• Couple has no children, each has nieces and nephew.
• Create seperate wills
• Archie's will says if his spouse predeceased him stuff goes to archies nieces and nephews
• Archie dies first

Issue. Does the terms used in the decedent’s will “my nieces and nephews” include nieces and nephews by consanguinity and those by affinity?

Held. No. Affirm. The trial court was correct in holding that “my nieces and nephews” only included those children of Archie’s brothers and sisters.

George and Lena Adele Gibbs executed wills with an identical provision disposing of property to a “Robert J. Krause, now of 4708 North 46th Street, Milwaukee, Wisconsin.” However, they intended to make a gift to a “Robert W. Krause” who unbeknownst to the Gibbs, lived at a different address

Issue. Whether a court may correct a mistake in a will, if the mistake relates to an incorrect middle initial of a beneficiary.

Held. Yes. Here the testator intended to leave a gift to a beneficiary with the same first and last name, but with a different initial from that identified in the will. Middle initials are highly susceptible to error and extrinsic evidence is proper to show the testator’s intent. The court may correct the error.

Wills 6th paragrah says that residuary clause passes to person in 8th paragrath, but 8th paragrath names no one

Lawyer wants to introduce extrinsic evidence

Was it allowed? NO-> Courts are more willing to fix trust documents though

What does the phrase "my residence" mean when two lots are adjacent to each other and both are pocessed.

Lawyer's best memory was not admissible.

Court held that testator's residence include both lots 36 and 37. NO issue of fact. SJ granted. 

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  1. Revocation by a physical act to the original will
  2. Revocation by subsequent instrument
  3. Revocation by operation of law due to a change in the testator’s circumstances (i.e., divorce). 

• What is involved in a revocation of a physical act?

• makes the issue of physical control of the original will critical 
• mere physical destruction of the will is not sufficient
• physical activity to a copy is not sufficient
• by physical act you can take away but you cannot add (you could scratch out someone's name, but not addone)

-by executing subsequent will

-performing a revocatory act on the will if performed with revocatory intent

Decedent’s daughter appeals a judgment admitting a copy of her father’s will to probate. His daughter contends that since the original copy was not found among his personal effects at the time of death that it is presumed to have been destroyed with the intent of revoking it.

If the two wills are completely inconsistent, the subsequent will revokes the prior will.  In other circumstances, the two wills may not be entirely inconsistent.  The wills then may be harmonized.  

First will gave tract of land to Miss Luffman.  Second will gave all her “effects” to brothers and sisters.  The issue is which will applies and is the prior will revoked?  No revocation clause in second will revoking the first one.  Issue: whether the two wills are inconsistent such that they cannot stand together?  Does the word “effects” encompass all personal property or everything she owns?  

• he North Carolina Supreme Court found that the second will does not explicitly include any phrase that invalidates the first will.
• The Court further found that there is no reason why both wills could not stand. There was no reason to assume that the first will was invalid by implication.
  • You could infer that Wolfe means the second will to be acodicil to the first, and that he did not intend it to invalidate the first will.

What is a codicil?  

Does it generally require the same formalities as a will?

Suppose testator executes a will, and then a codicil.  If testator subsequently revokes the codicil, has testator also revoked the will?  

An amendment to a will.

Yes. 

No. Revocation of the codicil leaves the will, without the revoked codicil, intact. 

• There are certain events that make questionable the validity of all or part of a will.  Divorce is the classical one.  In stages 2 and 3, the law assumes disposition to spouses who are now ex-spouses are invalid.  If you wrote the will while you were spouses, but upon death you are divorced.       

The testator's revocation is conditioned on the belief that her new disposition will take effect -> disposition is not effective -> revocation is not effective. 

Revocation is presumptively ineffictive if testator made revocation:

1) in connection with dispositive object which failed

2) false assumption of law or fact

Presumption can be overcome by a showing of contrary intention

Its low so long as testator

-understands the nature of the business

-has recollection of the property

-how he wishes to dispose

He is ok, even if he is weak. 

Who decides capacity questions?

Iron glove -- dominant and weak personality

Velvet glove ---- subtle manipulation

.  ABA Rule:  A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless: 

(1)   the lawyer reasonably believes the representation will not be adversely affected; and

(2)   the client consents after consultation.  When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implication of the common representation and the advantages and risks involved. 

ABA Rule:  Further, “a lawyer should not prepare an instrument giving the lawyer or a person related to the lawyer as parent, child, sibling, or spouse any substantial gift from a client, including a testamentary gift, except where the client is related to the donee.  

Other Confidential Relationships Involving Non-Relatives. 

 In an era in which many elderly and infirm people live in nursing homes, the owners and operators of those nursing homes have significant opportunity to influence testamentary dispositions.  A disposition in favor of a nursing home operator is inherently suspicious.  

• Counsel could have arranged for Seward to explain why he chose to exclude the children, and why he chose to favor Basia.  This could be prepared in a letter or in an affidavit.  It could be videotaped.  The lawyer could also interview the testator with video record, to explain the will and give him the opportunity to show his deliberation and volition. 
• Involve potential witnesses:  the lawyer can obtain witnesses, including medical experts, to familiarize themselves with the testator’s condition at the time of the making of the will.
• No-contest clause:  if the testator provides modest but conditional devises for each child.  The condition would be that all the children’s devises would be canceled if any child contested the will.  

The likelihood of contest is greater.  Courts considered heterosexual spouses to be the “natural objects of a decedent’s beneficence,” but regarded gay lovers as illegitimate beneficiaries whose undue influence over the testator unnaturally pressured the testator into an improper decision. 

• A relationship that family members may not be happy about, a jury or judge may take a less than sympathetic view of the relationship.  The problem really isn’t that distinct, use the same tactics—charitable remainder trusts, joint tenancies, etc. 
• Planning strategies for these couples include: 

1. no contest clause

2. lifetime agreements with family

3. adoption brings in complications

4. charitable remainder

5. non-probate alternative

A flat tax is exactly that—a set tax for ALL individuals.  It is the same tax rate for individuals who make $20,000 or $60,000.  Actually, it is more like a regressive tax b/c an individual who makes $90,000 only pays the same amount that an individual who earns $20,000 pays; effectively, the higher earner pays a lower percentage of taxes.  A regressive tax actually benefits higher income earners.   Medicare (1.45%--pure flat tax) and Social Security (6.2%--flat and then regressive) are flat taxes. 

Your marginal tax rate is what the next dollar will be taxed at—look this up.  The rate that your next dollar will be taxed.

A progressive tax increases the greater the wealth that is generated.  The Federal Income Tax is progressive.  The more income you earn, the higher the tax on your last dollar.  

Deductions (taxes, mortgage payments) and exclusions, for our purposes, are the same thing. Charitable donations are deductible.  For our estate system, we will be dealing with a 45% tax rate.  Exemptions—$3,400 exemption for all individuals who are not claimed as dependents, and you get $3,400 for every dependent you have.  The amount a charitable donation saves you, through a deduction, depends upon your marginal tax rate.  Exemption—means the income is exempted and is not taxed. 

—reduces your taxes dollar for dollar.  ex: child tax credit, for every dependent child under the age of 17 at end of given tax year, you have a $1,000/child tax credit so long as your income is not over a certain amount.  A credit actually saves you the amount of the credit—credits are effectively more valuable, relatively than deductions (which allow you to save a percentage amount of the total deduction). A deduction reduces your taxable income—a credit reduces your tax dollar for dollar.  

You may get 1 million dollars worth of gifts to give tax-free.  You don’t have to keep track of all the gifts you make.  You get to give $12,000 per donee and doesn’t count against your 1 million tax-free amount.  If what you give to an individual in a particular year, doesn’t count against your tax-free amount.  This is called the annual exclusion.  If you’re married, you can double that—you can give your children double the annual exclusion amount—up to $24,000.  Interspousal transfers are NOT taxable events.  

1. Determine All Gifts Made by Donor.  Prepare a comprehensive list of all gifts of property the donor has made during the donor’s entire lifetime. Include the date of the gift, the identity of the donee, the relationship between the donor and donee, and how the gift was used.  These things may be significant later in the computation process. 
2. Value Each Gift.  Fair market value on the day the donor made the gift.
3. Subtract Excluded Gifts.  Several types of gifts are excluded from the federal gift tax and must be removed from the list.  The two most important excluded gifts are those that qualify for the annual exclusion or the educational and medical expense exclusion. 
4. Subtract Deductions.  Two other types of gifts are also subtracted from the list of gifts:  gifts to a spouse, which qualify for the marital deduction, and gifts for the public benefit, which qualify for the charitable deduction. 
5. Adjust for Certain Pre-1977 Gifts.  If the donor made the gifts after September 8, 1976 but before January 1, 1977, an amount computed under IRC 2505(b) is subtracted.
6. Compute Gift Tax.  You may now compute the gift tax by (a) figuring the tentative tax on all taxable gifts the donor has made over the donor’s lifetime (computed as if made during the current year), (b) subtracting the tentative tax on all taxable fits the donor has made in prior years (compute as if the donor made all of the donor’s prior taxable gifts in the current year but did not make any of the current year’s gifts.  You now compute the donor’s tentative tax for the current year by subtracting the tentative tax on all taxable gifts made in prior years from the tentative tax on all taxable gifts the donor has ever made), and (c) subtracting any unused portion of the applicable credit amount.  The applicable credit amount, formerly called the unified credit when the gift and estate credit amounts were the same, is a credit against the tentative tax.  

Three types of transfers are subject to the federal gift tax.  

1. The irrevocable gift:  Gift may be outright or in trust as long as it is complete.  The donor must not have retained the right to reacquire the asset or change the beneficiary.  (Ex: personal checks and promissory notes are transfers that are still incomplete.  The donee can stop payment on the check or refuse to pay the promissory note.) 
   • When a trust is created in favor of a person—you must ask whether the Donor has the right to revoke the trust.  If the trust is revocable, the gift is incomplete and thus not subject to the gift tax.
2. A transfer that is for less than adequate and full consideration in money or money’s worth.

·         A transfer is not subject to gift tax merely b/c the consideration the transferor gave is not equal to the consideration received.  A taxable gift occurs when the transfer is for less than adequate and full consideration in money or money’s worth.

·         The consideration must be “money or money’s worth” not in acts.  A child who quits smoking and drinking in order to get $20,000 from parent after a year—has not given consideration sufficient to avoid the federal gift tax.  The parent will be treated as making a gift to child. 

1. The holder of a general power of appointment exercises the power in favor of someone other than the holder or the holder’s creditors.

The value of a gift is “the price at which such property would change hands between a willing buyer and seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.”  The amount of a gift for gift tax purposes is the value of the property at the date of the gift.  

1. annual exclusion

2. education and medical expense exclusion

1. For gifts made from 1982-2001, the first $10,000 in value of the present interest gifts to each donee per calendar year was not subject to the gift tax.  The annual exclusion was adjusted for inflation to $11,000 for gifts made in 2002-2005.  As of January 1, 2006, the annual exclusion was raised to $12,000.  There is no upper limit on the amount a donor may exclude.  Likewise, there is no limit on the number of donees who may receive gifts that qualify for the annual exclusion. 
   • Future interests in property do not qualify for the exclusion.  If donor retains a life estate in real property but transfers a remainder interest to donee, the value of the remainder interest does not qualify for the annual exclusion.  The annual exclusion applies only to present interests in property.
   • Except for the value of any income interest, a transfer to a trust does not usually qualify for the annual exclusion because the donee/trust beneficiary does not receive a present interest.  The donee does not have an unrestricted right to the immediate use, possession or enjoyment of the property placed in trust.  However, there is an exception for a minor’s trust.  The following requirements must be met: (1) Beneficiary is under age 21 at the time of the transfer, (2) Beneficiary is the Sole Life Beneficiary (only person who may receive the benefit from any distributions from the trust during the beneficiary’s lifetime), (3) Beneficiary is the Sole Remainder Beneficiary at Age 21 (beneficiary must have the right to obtain all remaining trust income and principal upon reaching age 21), and (4) Beneficiary Controls the Remainder if Beneficiary Dies Before Reaching Age 21.  If these requirements are met, the transfer will NOT be treated as a gift of a future interest and thus WILL qualify for the annual exclusion. 

1. The educational and medical expense exclusion applies only to gifts that are made directly to an educational organization or a person who provides medical care.  Payments can be made to any person so long as the payment is made directly to the institution.  If the money is given to you, for the purpose of paying the money for tuition, it is taxable. 
   • An exclusion is NOT available if a trust is set up and the trustee is required to pay your tuition expenses.  A check must be written directly to the institution. 
   • The only gifts that qualify are those for tuition.  Gifts for room, board, and books do NOT qualify. 
   • The medical exclusion applies to all amounts paid for medical insurance even though payments are not made directly to someone who provides medical care.  If you have a bill at Brookwood Hospital, if someone pays your hospital bill, that is excluded from gift and estate tax.  You are not taxed on it and it does not use up your tax-free amount.  

Deductions

1. Marital Deduction:  Gifts to a donee who is the donor’s spouse at the time of the gift are generally deductible and thus are not subject to federal gift tax.  It is an unlimited marital deduction.  Likewise, property passing to the donor’s spouse generally is deductible and is not subject to the federal estate tax.  There is also no restriction on the amount of property that the decedent may transfer to a spouse, so it is called the unlimited marital deduction as well.  Gifts of life estates and other terminable interests usually do NOT qualify for the deduction. 

·         Use up the tax-free amount.  The wealthy spouse who predeceased a child and a husband, should leave half her estate to the spouse and half of her estate to her child. 

1. Charitable Deduction:  An unlimited number and amount of gifts to qualifying religious, educational, governmental, and other charitable organizations are deductible.  Charity is NOT considered to be a gift.  You cannot conclude that your child is your charity nor can you identify a specific poor person.  That is NOT a charitable deduction.  On the other hand, if you give to an organization that assists that person, you can deduct the amount. 

Spouses may treat gifts made by one spouse to a third person as if each spouse made one-half of the gift.  The split gift technique permits spouses to reduce their gift tax liability by lowering their tax brackets, using two annual exclusions per donee, and offsetting tax liability with two applicable credit amounts. 

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   • The election to split gifts must be made on an annual basis.  Is spouses decide to split gifts in any particular year, they must elect to split ALL gifts to ALL donees during that year. 

Determine contents of gross estate

Value gross estate

Subtract decution

Determine Tax base

Compute estate Tax

1. .  The decedent’s taxable estate may then be calculated by subtracting the marital deduction, the charitable deduction, and deductions for expenses, debts, taxes, and losses during the administration process.

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   • Deduction for Expenses, Debts, and Taxes.  Funeral expenses, administration expenses, debts, and taxes are deductible from the gross estate. 
   • Deduction for Losses.  Losses caused by fires, storms, shipwrecks, or other casualties as well as theft losses are deductible from the gross estate if they are incurred during the settlement of the estate.  This deduction is not available if insurance covers the losses. 
   • State Death Tax Deduction.  Under the EGTRRA, state death taxes on property included in the decedent’s gross estate are deductible from the gross estate provided the decedent dies in 2005 or thereafter (but before 2011).  

1. ) Figure the tentative tax on the decedent’s estate and then (b) subtracting credits and related adjustments such as the applicable credit amount, gift tax payable on lifetime transfers, state death tax credit, and the credit for recently paid estate taxes on the same property.  

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   • The gross estate includes all property, real or personal, tangible or intangible, wherever located to the extent of the decedent’s interest at the time of decedent’s death.  Includes non-probate assets as well as a variety of lifetime transfers.  

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   • In determining the amount of joint tenancy property to include in the decedent’s gross estate when the joint tenants are not spouses, you begin with the presumption that ALL the property is included.  A lesser amount may be included if there is proof that the survivor originally contributed toward the purchase of the property with the survivor’s own funds.  

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   • One-half of the property is in the decedent’s gross estate regardless of the contributions of both spouses; that is, it does not matter whether the survivor contributed none of the funds, all of the funds, or a portion of the funds.  The marital deduction will prevent Decedent’s estate from owing estate tax because of this inclusion.  

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   • Various types of contracts, such as annuities, pension plans, and individual retirement accounts, provide for the payment of proceeds upon the decedent’s death.  Assuming the decedent had the right to recedive the benefits from these arrangements, the value of the death benefits that remain when the decedent dies is part of the gross estate.  However, if the decedent did not have power to name the beneficiary of the death benefits b/c they are payable by statute to the decedent’s spouse or children, none of these benefits are included in the decedent’s gross estate—such as Social Security.  

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   • The gross estate contains the value of life insurance proceeds paid by reason of the decedent’s death if either (1) the proceeds are payable to the decedent’s estate or personal representative, or (2) the decedent owned any incidents of ownership (the right to change the beneficiary, surrender or cancel the policy, assign the policy, borrow the policy’s cash value) in the policy at the time of decedent’s death.  

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   • If the decedent had the ability to alter, amend, revoke, or terminate a transfer, then that property is included in the decedent’s gross estate.  The property is also included if the decedent had one or more of the prohibited powers and relinquished it within three years of decedent’s death.  

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   • Property the decedent transferred during life may be part of the gross estate if the decedent retained a reversionary interest.  The property is included ONLY if (1) the donee must survive the decedent to receive the property, and (2) the decedent retained a reversionary interest that exceeds 5% of the value of the transferred property.  This section rarely results in property being included in a decedent’s gross estate b/c trusts and other instruments usually contain a sufficient number of alternate beneficiaries so that the property does NOT revert to the decedent’s estate. 

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   • Certain transfers decedent made within a relatively short time prior to the decedent’s death are included in the gross estate.  Examples:  (1) gifts of life insurance policies and similar assets that have the potential of being far more valuable when the decedent dies than when the decedent gave them away, if the gift occurred within three years of death, and (2) gift tax paid on gifts that the decedent made within three years of death. 

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   • Property subject to a general power of appointment that the decedent had at the time of the decedent’s death is included in the gross estate.  The property is included regardless of whether the decedent exercise the power by will or failed to exercise the power.  A general power of appointmet is one that the decedent could exercise in favor of the decedent, the decedent’s estate, the decedent’s creditors, or the creditors of the decedent’s estate.  If, however, the decedent’s power was limited to an ascertainable standard relating to the decedent’s health, education, support, or maintenance, the power is not general, and thus the property subject to the power would NOT be part of the decedent’s gross estate.  This type of restriction is often referred to as a HEMS standard, an acronym for health, education, maintenance, and support.  

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   • A spouse may make unlimited tax free transfers to the other spouse, both during life and at death.  Requirements must be met—and one of these requirements is that the SS cannot receive a terminable interest, that is, an interest the SS could lose b/c of a lapse of time or the occurrence or nonoccurrence of some event.  Ex’s include life estates and gifts that end upon remarriage.  There is an extremely important exception to this rule for qualified terminable interest property (Q-Tip).  The deceased spouse can construct a trust to provide lifetime benefits for the SS, require the remaining corpus to be paid to whomever the deceased spouse desires, and still permit the deceased spouse’s estate to claim the marital deduction for this property.  To prevent the property from again escaping transfer liability, Q-TIP property that remains upon the SS’s death is part of the SS’s gross estate despite the fact that the SS may have no control over the corpus or any power to direct its distribution.   

MARITAL DEDUCTION

1. transfer must meet 6 requirements to qualify.  (1) The deceased spouse must have been a U.S. citizen or resident at the time of death. (2) The deceased spouse must actually be survived by the SS. (3) The SS must be a citizen of the U.S. (4) The deceased spouse’s gross estate must include the property. (5) The interest must pass from the deceased spouse to the SS such as by will, through intestacy, or via a nonprobate transfer (survivorship rights or as the named beneficiary on a life insurance policy or other contract.) (6) The interest cannot be a nondeductible terminable interest.  

TRUSTS!!

Beneficiary holds “beneficial title” or “equitable title.”  What does this mean?

• What this means is that the trust is OWNED by one person for the BENEFIT of another.  The trustee has a fiduciary duty and has no benefit from the funds in trust.  Trustees normally negotiate to be paid.  Professional trustees are usually paid a percentage of trust assets each year.  Other than professional trustees, there are amateur trustees (acting as your own trustee) and family member trustees.  Some of these will be paid and others won’t.

Rarely would it be advisable to recommend creating a legal life estate rather than a trust.  Reasons: 

1. When a life tenant and remaindermen share ownership of property, no one person has power to sell a fee simple interest in the property.  In order to sell, both people have to consent.  (With a Trust, a trustee has the sole ability to sell property and act).
2. A legal life tenant has no power to lease the property for a period beyond the expiration of the life estate.  Problem is how long the life estate lasts—when person dies, lease is over—reduces amount of money you can get for the lease.  (Whereas a trustee sitting on a trust can guarantee a lease for as long as he wants).
3. When ownership is divided between legal life tenant and remaindermen, the life tenant’s management responsibilities are often murky.  Who is in charge of paying for repairs?  Life tenant has the responsibility to maintain the property—but what does that mean? (In a trust, you have the trustee with a fundamental duty to preserve the value of the corpus, house, etc.).  

Why put property in trust?

1. Avoiding Taxes—but you don’t always avoid taxes just by avoiding probate.  In order to avoid taxes, you must give up all control and benefit from the trust.  For this class, we don’t need to know which trusts qualify for tax avoidance.
2. Avoid probate—if you create an inter vivos trust while still alive.  Probate is slow, expensive, complex, and public.  Are trusts the opposite of all those things? Trusts are potentially more private if not put in a will but made as an inter vivos gift.  Trust are not simple, though—they are complex.  Trusts are not cheap either—The difference is that you do avoid probate fees with a trust, but you usually pay more upfront and you have to pay a professional trustee each year.
3. Minors—if you want to transfer money to minors without a guardian ad litem. 
4. Dead-Hand Control—not going to give the money outright, but I’m going to slowly administer it.  It preserves the money for more generations.  You can situs (make it’s creation) a family trust in a state that has abolished the Rule against Perpetuities in order to get around it.  States want to attract a trust industry—and they make their laws attractive in order to achieve it.  Reason for primogeniture—to preserve great estates.  Invest the corpus so that it will grow with inflation to maintain for generations.  Too much wealth spoils people to receive it in one chunk. 
5. Management—trustees divide management from benefit.  You need someone who can manage the wealth and the investment.  In the investment world, the fiduciary standards are very low.  Be careful.  The field is filled with conflicts of interest.  Many trustees will choose certain stocks where they get paid a commission for holding them—
6. Intergenerational Control—want the wealth to benefit a diverse group of people—people not yet born.  Splitting up benefits across generations. 

The Beneficiary, the Property, and the Trustee

A trust settlor may name the sole trustee one of the beneficiaries of the trust, and may name the sole beneficiary one of the trustees of the trust.  Moreover, the settlor may name the same two or three parties as trustees and as beneficiaries of the trust.  Know merger doctrine for final exam.  The same person may not, however, serve as sole trustee and sole beneficiary.  If circumstances arise in which the same person becomes sole trustee and sole beneficiary, that person’s legal title and equitable title “merge,” and the trust terminates.  The person holds the trust property free of any trust.

The Need for Identifiable Beneficiaries 

No trust fails for want of a beneficiary, but no trust exists in the absence of a beneficiary.   

• Court can always appoint a trustee if the trustee dies.  If a trust ever lacks a beneficiary, the will is invalid. Obviously, a beneficiary cannot be appointed. 
• Second aspect of case:  in order for Henry Axford to give someone this property, he’d have to have it.  Henry likely signs a document that says to whom the property should be given, and gives it to the executor.  The executor then gives it to the person. Here, Henry never really has the property.  This looks like a “power of appointment”—a power you never hold, but the power to look out at a group of people defined by the document and appoint one of them as the recipient.  If someone had argued this was merely a power of appointment, we wouldn’t have had to go through all these trust rules.
• If the testator leaves criteria for determining beneficiaries in a will, the Will will be declared invalid unless the law finds the beneficiaries “clearly ascertainable.”