Trusts and Estates

Week of 1-19-08

20 January 2009

153 students and 150 seats. Wow.
T&E in popular culture: Body Heat, Rothko, Flowers in the Attic, J. Howard Marshall.
This course emphasizes statutory interpretation, not cases so much. That's good, because we don't get enough of it.
There's also a strong "Law in Action" emphasis here. Even if one never practices law, this is important material.
There's a lot of technical material-- it piles up at the end. From day to day, it may not seem like too much: just working our way through the pack of problems.
There won't be too much lecture; the text should be straightforward. The book is lectures, on other words. It's not original work (it's licensed), but it's heavily edited. Class will be spent applying the material in the problems. Learn by applying it. It makes sense, therefore, to prepare by reading the problems.
There are two bodies of law that apply here: property and tax (the lay of "gratuitous transfers"). Different faculty may not cover tax, but that's kind of irresponsible, because tax implications are really important. The good news is that almost nobody pays taxes: the gift exemption ($13K this year) means that enormous amounts of property can be transferred tax-free. And federal estate tax doesn't kick in until $3.5M. So that excludes 99.9% of the people right there. We don't need to know in detail about that, but we need at least to spot potential tax issues when we run into them.
The fact that very few people pay estate tax turns out to create income tax advantages (more on this at the end of the semester).
The property law splits into two areas:
- Probate: When you die, you're no longer able to sell or give away your stuff. This is the state process for transferring property upon death. There are two ways to do this:
  - A Will: a letter to the court expressing your intentions. There are rules for constructing it, but basically that's what it is.
  - Intestacy: we don't have credible information about what your true wishes were, so we follow this set of rules. This protects against high administrative costs and ridiculous self-interested bickering between would-be beneficiaries.
- Non-Probate: this is becoming increasingly common-- passing property outside of the probate process. You can only do this when there is statutory or case law authority for doing so. Actually nowadays, the overwhelming majority of property is passed non-probate (especially between married people).
  - Life insurance: very common.
  - Trust: this has seen a huge increase in recent decades.
  - Retirement plans.
  - Joint tenancy
  - Just doing it, and hoping nobody objects: law in action. This works for small things, personal effects, etc., not mentioned in wills.
This is our chance to find The Right Answer, by the way, in black letter law: the intestacy statutes.
So CH 1 + Appendix A is just background information. Appendix A, by the way, is by Erlanger, for general consumers.
CH 2 is intestacy. Then wills, then trusts, than more non-probate stuff.
Then we get into spousal/family protections. The "election against the will," and so on. Then interpretation of wills and other documents. Then professional responsibility, community property, and finally tax.
In WI, "marital property" = "community property."
Most people have their highest net worth right before they retire (because of life insurance before work; it's no longer a cheap/free fringe benefit after you retire. Also because you start spending your retirement savings. And you can't spend your house because you live there.) So some of this wealth isn't real wealth. So you can have a very high net worth, even though you don't feel too wealthy: $300K life insurance, $200K house, and a job.
The notion that law is a self-contained body of rules is misleading. By far not all legal disputes are decided by a court, let alone the Supreme Court. Not only that, but the law doesn't just radiate instructions into the world; the world returns fire. Law in action includes "the law in peoples' heads:" what people think the law is. And legal proceedings have costs. So particularly in a field like T&E, where we're really dealing with family interactions, it doesn't make sense only to consider the law-- or the family.
In this case, we speak of "the decisionmaker," not "the court," since the court is rarely actually the decision-maker in these matters. A lot of this "law" is just transactions.
Pointing out errors counts as class participation. I am in group 2.
Exam is "modified closed book:" we can have 2 pages, and also the statutes. Note: do not write all over the statutes: highlighting, underlining, and the occaisional word are OK, but NOT MUCH.

Some points might seem basic, but if they are emphasized, it's because people get tripped up by it. See footnotes, e.g., for hints about the exam. Things that get emphasized in class are good exam fodder.
Good news: the rule against perpetuities is de-emphasized.
Typical assets include real estate. If people are married, it's generally either joint tenancy or survivorship marital property. This includes joint tenancy with children, by the way.
Sometimes we hear that in joint tenancy, each person owns 100% of an asset, and thus, upon death, there's no transfer. This is a property law approach, but it doesn't really work for T&E. It's a bit theoretical. Consider, for example, if one spouse has huge student loans: the bank shouldn't be able to take that spouse's 100% to the detriment of the other spouse's 100%. The transfer-on-death stuff takes place because the statute says it does, not because of some mystical ("two people own 100%") theory. Also taxes, by the way: there can be taxes on transfers of property between spouses. So creditors don't want this 100% stuff, and tax-men don't want it either. And we don't need the 100% stuff, because we have a statute that says what to do when one owner dies.
Another typical asset is life insurance. It can be complex, but it comes in two basic flavors:
- Term: the most basic. You buy it for a certain amount of time (like 20 years). It might have a flat rate for that full period, or maybe premiums go up because you have higher risk of dying as you age. You can cancel it, even though you bought for 30 years. This is a low-commission, commodity item. Often available through work. Life insurance is cheap when you really need it (when kids are young), and expensive when you hopefully don't.
- Cash value/whole life/universal life. These policies are much more expensive per year, but they have an investment component. The extra money builds up a fund to pay your life insurance when you're 85. It has an actual cash value: when you cancel it, you get some value back. Agents get much nicer compensation for selling these products, so there's more marketing hype/persuasion.
From an estate planning point of view, term is usually simpler and cheaper.
Retirement plans are a third main type of asset. This is a major thing in the US: employers can write off contributions as an expense, and you don't have to pay tax because it's set aside for you later. Meanwhile the money is at work in the economy. This works, by the way, because of statuory fiat.
Then there are cars, furniture, collections, etc. Most of these things aren't worth a great deal, and aren't major estate assets.
We'll generally be dealing with modest estates: tens of thousands of dollars, not millions. This isn't a course about rich people-- sometimes we'll deal with people who have no property at all. The only times we'll be dealing with major assets is when we'll be dealing with tax, and even then it's probably not cash assets: life insurance or some such.
Extremely important concept (from Appendix A). people talk about the "non-probate" revolution. Retirement plans weren't a big deal in the 40s-50s, for example. Also the revocable/living trust has become a major thing. So: IF SOMETHING IS NOT PROBATE, THEN IT'S NON-PROBATE. This seems like a trivial concept, but it's a problem. Say you have life insurance: your spouse is the main beneficiary, kids are the secondary. The will says "property goes to the spouse, and if there's no living spouse, it goes in trust for the kids." But the life insurance (probably the couple's major asset) will not go into the trust, because it is non-probate. It goes directly to the kids. And however much they paid to set up that trust was wasted money. So what you want to do is let the probate process create the trust (or create the trust in advance) and then have the life insurance pay into the trust.
People also screw up when they get divorced. Typically, the property resolution says that people keep their own life insurance (if it's term, it's not worth anything anyway). But just because you own your life insurance doesn't mean that you know who the beneficiary is. And the beficiary is who the contract gives the property to.
So these are coordination issues: probate/non-probate and who-owns-what. You might think you know who is going to get your property, but maybe you haven't made the proper designation.
Ownership in joint tenancy means a non-probate transfer. So you can will your house to someone, and your spouse still gets it-- it transfers outside of the probate process. Even if it's not in survivorship form, a person can only will away half the house.
Erlanger's Paradox: if you don't know whether something is community property, then you do know. Property is presumed to be community property (here) unless explicitly stated otherwise. Statutes create presumptions: "if x, y, z, then q" means "not q unless x and y and z."
Also, even though an asset is non-probate when the first spouse dies, it may be a probate asset when the other one dies.
So joint tenancy and probate/non-probate work in subtle ways.

22 January

Marital property. We use WI as an example, but we'll point out where it's unique. Mostly it's the same as anyplace. One thing: there is a Uniform Probate Code, but only about half the states have adopted it. WI has not, but our laws are heavily influenced by it. But note that there may even be minor tweaks in states that have adopted the code, so you still have to be careful.
There was a mistake last time, in the house-leaving example. Note that when he wrote that codicil, he didn't know for sure that his wife was alive-- he might have owned it outright if she happened to be dead (there's a 3-day survivorship rule, but still). The point is that non-probate property can turn into probate property: the underlying facts can change (marriage, divorce, birth, death: these all change things, so we want to be careful about planning for these eventualities). The overwhelming majority of legal activity is in transactional/planning, not litigating.

This is the law on the books:

	                                        Intestacy
	                                       /
                                       Probate
	                              /       \
	What does the }   Property Law         Will
	decedent own  }               \
				       Non-Probate

	                  Tax Law

People act like this is an internally consistent body of rules that generates authoritative answers.

That's true to an extent, but things sometimes work out different.
Community property systems are based on the law of Spain and France. States influenced by these nations have community property. Protip: Worth knowing which states are community property states. WA, CA, ID, NV, AZ, NM, TX, LA, WI. Many of these (not WI) have this principle in their constitutions, WI adopted this by statute in 1/1/1986 : also worth knowing. AK (Alaska) is often alleged to be a community property state, but it's not the default core law of marriage there. AK's law is very trust-friendly (there are restrictions on creditor rights, etc.). So there's a form of community property there that only applies to trusts and not the ordinary people. It's an attempt to lure trusts into the state, basically, for tax benefits. Not clear, really, if this will work-- there hasn't been the requisite test case yet to see if the feds recognize this as community property.
Anyway, WI's conversion was in the 80s, and it wasn't retroactive (that would have been a taking of some sort). 1/1/86 was an important date, but only if both spouses are domiciled here. There a thing called the "determination date" (§766.01(5)). The last to occur of:
1. Married
2. Both spouses domiciled in WI
3. After 1/1/86
WI is considered to be the only state that adopted the Uniform Marital Property act.
Marital property/community property is about what you own. A vested 1/2 interest in each asset by each spouse. All property is presumed to be marital property (WI says "marital," which is the same as "community"). Everything is 50-50. Everything: pants, cups, everything. Erlanger's wife doesn't get half the cup: she owns half the cup. He will leave her his half. It works both ways: when one spouse dies, the probate process assumes that ALL assets are community property.
When you die, you get salary up to the day you die. Your spouse has a vested interest in 50% of the income as you earn it.
Side effects: this expands peoples' ability to get credit, but it also expands the rights of creditors: all marital property can be sought to satisfy debt. Banks love marital property: it gives them more credit to extend, and more property to go after when a person defaults.
The two Classifications of property:
1. Community/marital
2. Separate/individual
There is also "unclassified" property. For example, property acquired between the time you moved to WI and 1/1/86. This is property not covered by the Marital Property Act. We also call it "pre-classified" property sometimes. It can be treated like separate or individual property-- you can follow the old rules, in other words, at least during the marriage. When you divorce or die, things might be different.
At death, pretty much all systems have spousal rights at death. Maybe not during the marriage, but when you die, the rules require some form of sharing. And all states use community property principles at divorce. This doesn't mean that all community property will be split 50-50, and no non-community property will be. All states have a divorce law, but the community property principles may apply differently at divorce.
Most of the community property rules are default rules: you can contract around them. Pre- and post-nuptial agreements, etc. In WI this power is very broad; some other states restrict how much the rules of marriage relationships can be subject to contract.
And there's migration, too: people move from state to state, and laws change as well.
Note that increasingly complex families (multiple spouses and children) make the question of "who owns what" (at death, not so much during the marriage) more complex. You see kids vs. step-parents, for example.
There are intestacy statutes, of course, and that's where we're headed next. James Brown, for example, had a will from his first marriage. You'd have thought he'd have had an estate plan. JFK, too, had a plan written before he had kids.
Five critical reasons to know about ththe law of intestacy:
1. No valid will, for whatever reason.
2. Beneficiaries aren't available (deceased, e.g., and no contingent beneficiary).
3. Partial intestacy: a valid will, but not all assets are disposed.
4. Will gets thrown out of probate: undue influence, incapacity, flaw in execution, etc.
5. Because intestacy is the final fail-safe default, the takers under intestacy are required to receive notice (they have the right, in this civil procedure, to challenge the will)
Note that while you're alive, you don't actually have a will: you have a document that will be admitted to probate when you die.
We talk all the time about a persons "heirs" and "inheritance." We think that we know all about it: Prince Charles is the heir to the throne. I inherited some money from my grandparents, etc. Legally, these familiar concepts are not correct: "heirs" are the takers under intestacy, and "inheritance" means to take under intestacy. It's sort of a technicality, but be careful on the exam, because there are cases where people have expressed a desire to leave something to their HEIRS, and that meant it went to their spouse, not their children. To receive something as the result of another's death is not the same as inheritance. We need to be careful in legal documents: if it's in a will, you're a beneficiary, not an heir.

The questions can be sort of tricky, so it's OK to make a mistake: that's how we learn.
A system for drawing. Check it out.
```
	A -- B 
	
```
means A and B are spouses.
```
	A -- B
	|____|
	
```
Means that they had some children.
Problem 1a. First, all property goes to B. §852.01(1)(a)1 Note that Wis. Stats. have a rigorous numbering system. Chapeter dot two digit sub number sub lowercase-letter number. Same result if the kids are all from the same marriage. Not all states do this-- some will give the children a share (WI used to do this, about 25 years ago). Note that the net estate is simply what's left after tax, creditors, probate expenses, and lawyer fees. There can be questions about what constitutes a marriage: civil unions, common-law marriage, etc. That's up to the jurisdiction; WI doesn't care about these things, but some do. Anyway, it's important to check who gets spousal status.
Problem 1b. It's like this:
```
	A -- B
	|____||___|
	c1 c2   c3
	
```
B has a child from a different marriage. c = child. The same statute: §852.01(1)(a)1 : it doesn't matter about c3. As long as both A's kids (c1 and c2) are also B's kids, B gets it all. "Issue" is defined in §851.13, and it does not include people without a parent-child relationship (i.e., blood children and adopted ones).
Problem 1c. Same situation as 1b, but in a common-law state with UPC intestacy law. UPC is different: we give the spouse the first $150K plus half of what remains. See UPC §§ 2-102(3) and 2-103(1). A's kids get the remaining 50%. This is intended to protect A's family interest: if B has a will that says "I leave everything to my kids," then the shares given to A's kids will be diluted.
Problem 2. For property law, it doesn't matter what state you die in. It can make a difference (like how your body is handled, whether autopsy is required, etc.), but not about property. Conflicts of law: real estate gets handled by the jurisdiction where it is, and personal property gets handled by state of domicile. So, because of survivorship marital property, everything but the cabin is non-probate, and therefore not subject to intestacy law. We have this:
```
	     P
         |___|
	     A -- B
	
```
P is a parent of A. So, looking at UPC § 2-102(2), we decide that B gets $200K + 75% of what remains (75% of $400K = $300K) so $500K to B. And we might guess that the remaining $100K to parent. Note that in WI, B would get it all. But parents aren't mentioned in § 2-102(2)-- it does not give authority for giving to parents. §2-103(2) is where we get that authority: $100K to parent.
But wait! The family was domiciled in WI. This means that all property is presumed to be marital property. Ownership is not determined by title: in WI, a house might be marital property even though only one name is on the title. Also cars, etc. So under WI law, the property is presumed to be marital. ("Rebuttal by acquisition of title:" we could rebut the marital presumption by finding evidence that the property was acquired before 1986 or something).
But wait again! What does ND care about WI's ideas of ownership? ND law applies, but ND can look to other jurisdictions (this is a standard thing: both statutes and case law look to laws of other jurisdictions). So we look to the jurisdiction that has the strongest interests at stake. ND has the strongest in who commits waste on the land, or who develops it, etc. But not in who owns the property. This is why a WI spouse can't just empty a bank account, drive to a non-community-property state (IL) and open a bank account. There's an act (Uniform Disposition of Community Property at Death) that about 8 non-community-property states have passed which recognizes community property brought into the state.
ND isn't going to go looking for community property-- it requires a proactive claim. But if it's community property, there's not $600K in probate, only $300K. And so then we give $200K of that, plus 75% of the remaining $100K ($75K) to the spouse, and $25K goes to the parent. So the difference here is whether parent gets $25K or $100K (a difference of $75K). This is right on the cusp of whether it's worth fighting about-- getting experts to ND to testify about community property and how it should be recognized and stuff.
Ultimately, we don't know what will happen: much will depend on who cares. The surviving spouse and the surviving parent are the decisionmakers here: maybe they want to just let the spouse have it. Or not, but they might still be able to settle things without going to court. ND law applies, and ND should (but may not) recognize the community property. So we might end up with a few different results, and the first guess could be the ultimate outcome.