Topics for today
 Will substitutes and the subsidiary law of
wills
 Pour-over wills and revocable trusts in
modern estate planning
1
Will substitutes and the
subsidiary law of wills
 While will substitutes are not governed by the rules
for executing a will, many of the rules regarding
freedom of testation or implementation are applied
 Spousal forced share
 Ademption and abatement
 Slayer rules
 In today’s class, we will consider how some of the
rules for wills are applied to will substitutes
 Do the rules for revoking a will apply to a trust? Can
creditors of the settlor reach the trust’s assets?
 Are designations of an ex-spouse as beneficiary of life
insurance or retirement plans automatically revoked?
2
Application of subsidiary law of
wills to will substitutes, p.413
“Although a will substitute need not be
executed in compliance with the statutory
formalities required for a will, such an
arrangement is, to the extent appropriate,
subject to substantive restrictions on
testation and to rules of construction and
other rules applicable to testamentary
dispositions.”
Restatement (Third) of Property: Wills and Other Donative Transfers §7.2 (2003).
3
In re Estate and Trust of Pilafas,
In re Estate and Trust of Pilafas
p. 414
Pilafas
executes a
will and a
revocable
trust.
Pilafas
amends
trust.
Pilafas
amends trust
agreement
and executes
a new will.
Questions presented:
1) Is the will revoked?
2) Is the trust revoked?
Pilafas dies.
Neither will nor
trust agreement
are found after
search of his house
and belongings.
Pilafas’ son
petitions for
adjudication of
intestacy. Trust
beneficiaries
object.
1) Yes. The will was last known to be
in the testator’s possession and
could not be found after his death
2) No. The trust agreement provided
for revocation only through a
4
writing.
Pilafas
 Did the trust agreement really limit revocation only
to a writing to the trustee?
 Not necessarily. It said that the settlor “may at any
time” revoke by a writing, but it didn’t say that a writing
was the exclusive method of revocation
 Does it make sense to have a different rule for
revocation of trusts than for wills? Did Pilafas really
intend to revoke his will but not his trust?
 When you have a third-party trustee, the duty to revoke
in writing can be justified in terms of protecting the
trustee, who has a legal obligation to carry out the trust 5
Problems, p.415
1. Does a will revoking the trust count as a
revocation?
 Yes, if the testator is the trustee (Lowry, Gardenhire), but
not if a third-party is the trustee (Connecticut General)
2. What if Pilafas had ripped up his will and trust, and
the pieces were found?
 Still no revocation of the trust since a writing was required
3. What if UTC 602(c) applies?
 Permits revocation by will or physical acts of revocation,
but not by mere disappearance of the trust, since that is
not clear and convincing evidence
6
State Street Bank and Trust Co. v. Reiser
State Street
Bank and Trust
Co. v. Reiser
p. 416
Sept. 1971
Wilfred A. Dunnebier:
1) Creates inter vivos
trust; retains power
to amend or revoke
trust and direct
income or principal
to his own use
2) Conveys capital
stock to trust; and
3) Executes a pourover will, leaving
residuary estate to
trust.
Nov. 1972
Impressed with
Dunnebier’s work,
assets, loan history
and “the general cut
of Dunnebier’s jib,”
State Street Bank
makes an unsecured
loan to Wilfred for
$75,000.
1973
Wilfred dies in an
accident. His estate
has insufficient
assets to pay off the
loan.
7
Reiser
 If Dunnebier had not transferred his assets to the
trust, the bank could have recovered against his
probate estate for the loan
 Can the bank recover against the trust assets?
 Yes—Dunnebier had retained control over the trust’s
assets so that he could use the assets for his own benefit
(i.e., he had not made an irrevocable gift to another
person)
 For all practical purposes, Dunnebier owned the trust’s
assets
8
Trusts and the settlor’s creditors
after the settlor’s death
 Creditors can reach assets of revocable trust
 But jointly-held property cannot be reached, and life
insurance proceeds or retirements benefits generally are
protected when they are paid to a spouse or child.
 Unsettled issues


Must creditors exhaust probate assets first, or are the
debts satisfied pro rata from probate and non-probate
assets?
Do exemptions of probate property from creditors,
designed to protect the spouse and dependent children,
apply to nonprobate property?
9
Trusts and the settlor’s creditors
after the settlor’s death
 Unsettled issues (continued)

Must creditors proceed against the executor of the estate,
who recovers the nonprobate assets for them, or may the
creditors proceed directly against the holder of the
property?
 If the latter, and an owner of one nonprobate asset is successfully
sued by a creditor, may the owner recover from other recipients of
nonprobate assets?

Statutes of limitation require filing of creditors’ claims
against probate assets within a given period after the
decedent’s death, usually a year. Do the same rules apply
to beneficiaries of nonprobate assets?
10
Effect of divorce on
nonprobate assets

Recall that divorce nullifies will provisions in favor
of a spouse



UPC § 2-804 (also nullifies provisions in favor of
divorced spouse’s relatives)
Ind. Code § 29-1-5-8
What about other non-probate assets?



Cook and life insurance
Egelhoff and retirement benefits
Clymer and revocable trusts
11
Cook v. Equitable Life Assurance Soc’y
Cook v. Equitable
Life Assurance
Soc’y (1)
p.420
Doris
Douglas
Margaret
Daniel
Doris named
as Douglas’s
life insurance
beneficiary.
Douglas Douglas marries
and Doris Margaret, with
whom he later has
divorce.
a son, Daniel.
Why did the
Indiana court
recognize Cook’s
holographic will?
Douglas executes
holographic will,
leaving everything to
Margaret and Daniel.
Douglas
dies.
12
Cook v. Equitable
Soc’y
CookLife
v. EquitableAssurance
Life
Assurance Soc’y (2)
Cook’s Will
13
Cook and life insurance

Did the will revoke the beneficiary designation? If we were
following Cook’s intent, what would we say?


Yes. He specifically wrote in his will that he wanted his second wife
and son to benefit from the insurance policy.
What did the court say?


No. Cook did not follow the insurance policy’s procedures for
changing the beneficiary designation, and he had ample opportunity
to do so (pp. 421-422)—divorce lawyers be warned
Note that the court could have protected the interests of both the
life insurance company and Cook by imposing a constructive trust if
the designated beneficiary had been paid or by redirecting the
payment of proceeds if the company received notice of the will
before paying the first wife.
14
Pension and
retirement accounts
Defined
Benefit Plan
Annual payments made
upon retirement (annuity)
to worker and often
worker’s surviving spouse
 Payments continue until
death of worker and
spouse; no lump-sum
payout

Defined
Contribution Plan
Contributions made to an
identified account,
participant bears market risk
 At retirement, withdrawals
subject to distribution rules
 Lump-sum payout made
on death of worker and
spouse

15
Egelhoff and retirement plans

What were the facts in this case?




David and Donna Egelhoff were married, and David
designated Donna as the beneficiary of his life insurance
policy and retirement plan
David and Donna divorced and two months later, David
died without having changed his beneficiary designations;
he also died intestate
Under state law, David’s designations of Donna as the
beneficiary of his nonprobate assets were revoked upon
divorce; the benefits therefore should pass to his heirs
But does ERISA preempt the state statute?
16
Egelhoff
Egelhoff
Egelhoff v.v.
Egelhoff
p. 426
Kate
(first wife)
David
???
Samantha
Donna
(second wife)
???
Life Insurance
Pension Plan
David
17
Egelhoff and retirement plans

Why did the Court find preemption and bind David
by his beneficiary designations?


Under ERISA, pension plans are required to specify the
basis on which payments are made, and the plans must
be administered in accordance with the plan’s governing
documents
In addition, deferring to state law would compromise
ERISA’s goal of uniformity
18
Egelhoff and retirement plans

As the dissent observed, the result is problematic




It is not consistent with the usual intent of decedents
It gives Donna windfall—she already had received her fair
share of the couple’s assets when they divorced; she now
receives a big chunk of his share of the assets
The Court’s logic applies to many other state law rules
governing pension plans, like slayer rules
Lower courts have resisted Egelhoff by using
federal common law to save the state law rules

But there is less clarity about that than about state law
19
Pour-over wills and revocable
trusts in modern estate planning

The combination of a pour-over will and trust allows
people to avoid probate and to consolidate all of
their property into one instrument.





By avoiding probate, you can’t avoid taxes, but you can
reduce other costs
You can maintain privacy—both from strangers and
disappointed heirs
You also can choose which state’s law applies
Bequests can be disbursed more quickly
You can amend the estate plan simply by amending the
trust provisions.
20
Pour-over wills and revocable
trusts in modern estate planning

There are some disadvantages



Creditors may have a longer statute of limitations period
for filing claims against a trust than against a probate
estate
Legal fees for a pour-over will and trust may be greater
than for just a will
Less certainty about the application of the subsidiary law
of wills (but most of the issues can be addressed by a
well-drafted trust)
21
Pour-over wills, revocable
trusts, and nonprobate transfers
Beneficiary:
Trustee of T’s
Revocable
Trust
Donor
Transfer of
Assets
Nonprobate
Transfers
Revocable
Trust
Residuary
Beneficiary:
Trustee of T’s
Revocable
Trust
Pour-Over
Will
22
Model Pour-Over Provision

“I give my residuary estate, which shall not
include any property over which I have
power of appointment, to the trustee of
that certain trust already created by me and
known as the JOHN DOE 20___
DECLARATION OF TRUST, as in effect at
my death, of which I now am trustee and of
which my spouse now is named as
successor trustee.”
23
UPC §2-511: Testamentary
Additions to Trusts, p.444
(a) A will may validly devise property to the trustee of a trust
established or to be established … during the testator’s lifetime
by the testator… or … at the testator’s death by the testator’s
devise to the trustee, if the trust is identified in the testator’s
will and its terms are set forth in a written instrument, other
than a will, executed before, concurrently with, or after the
execution of the testator’s will ... . The devise is not invalid
because the trust is amendable or revocable, or because the
trust was amended after the execution of the will or the
testator’s death.
24
What were the facts in
Clymer v. Mayo?, p.445

In her second will, Clara Mayo executed a pour-over
will and revocable trust
 Her husband was the life beneficiary of the trust, with
remainder interests to her nephews and nieces and then to
Boston University and Clark University
 Clara designated the trust as the beneficiary of her life
insurance policy and retirement plan
 Clara divorced her husband and made a close friend the
beneficiary of her life insurance policy but did not change
the retirement plan beneficiary or the terms of the trust
 Thus, her ex-husband remained the principal beneficiary of her
25
retirement plan
Clymer v. Mayo
Clymer v. Mayo
p.445
Maria
Joseph
Life
Insurance
Marianne
Clara
Trust
and Life
Insurance
James
Niece and
Nephews
26
What result in Clymer?


Under Massachusetts law, the interest of a spouse
in a will is revoked upon divorce from the testator
Even though there was no similar statutory
provision for trusts, the court applied the principle
of revocation


The “will and trust were integrally related components
of a single testamentary scheme” (second ¶ of opinion
excerpt, p. 446)
Same result under UPC § 2-804 and Ind. Code §
30-4-2-15
27
Clymer and retirement plans

Why did this case come out differently from
Egelhoff, where ERISA prevented the
revocation of the divorced spouse’s
beneficiary status?

In this case, the retirement plan assets followed
the beneficiary designation, which was the trust.
It was the trust beneficiary designation that was
revoked, not the retirement plan beneficiary
designation.
28
Revocation of trusts
The settlor may revoke or amend a revocable trust:


(1) by substantial compliance with a method provided in the
terms of the trust; or
(2) if the terms of the trust do not provide a method or the
method provided in the terms is not expressly made
exclusive, by:


(A) a later will or codicil that expressly refers to the trust or
specifically devises property that would otherwise have passed
according to the terms of the trust; or
(B) any other method manifesting clear and convincing
evidence of the settlor’s intent.
 Uniform Trust Code §602(c)
 Ind. Code § 30-4-3-1.5(c) [requires a writing for (2)(B)]
 Restatement (Third) of Trusts § 63
29
Why did the Indiana court recognize
Cook’s holographic will?
A will is legally executed if the manner of its
execution complies with the law, in force
either at the time of execution or at the time
of the testator's death, of
1)
2)
3)
This state, or
The place of execution, or
The domicile of the testator at the time of
execution or at the time of his death.
Ind. Code 29-1-5-5
30