Today’s class
 Will substitutes and the subsidiary law of
wills
 Pour-over wills
 Joint tenancies in realty as our final
example of a nonprobate way to transfer
property
 Spouses holding a joint tenancy in their home
1
Follow up
 Earlier, we had a practice question involving standing
to challenge a will, and we saw that heirs apparent
under the rules of intestacy have standing
 Who else has standing?
 Interested persons—people who are beneficiaries under
the will and people who were intended beneficiaries under
a prior will and would receive less under the contested will
 What about a family member or friend who was
victimized by the undue influence of a caretaker but
doesn’t qualify as an heir apparent or beneficiary
under a will?
 Tortious interference with an expectancy (pp. 215-220)
2
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 (Oct. 28 class)
 Ademption (pp. 380-389) and abatement (pp. 391-392)
 Slayer rules (pp. 145-152)
 In today’s class, we will consider how other rules for
wills apply to will substitutes
 Do the rules for revoking a will apply to a trust? Can
creditors of the settlor reach the trust’s assets?
 Are designations of an ex-spouse as beneficiary of life
insurance or retirement plans automatically revoked?
3
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).
4
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
5
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 (Patterson v. Patterson, 266
P.3d 828 (Utah 2011) and the modern trend of the UTC)
 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
6
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
7
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.
8
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
9
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 retirement 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?
10
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?
11
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 non-probate assets?



Cook and life insurance
Egelhoff and retirement benefits
Clymer and revocable trusts
12
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 an IN court
recognize Cook’s
holographic will?
It was properly
witnessed
Douglas executes
holographic will,
leaving everything to
Margaret and Daniel.
Douglas
dies.
13
Cook v. Equitable
Soc’y
CookLife
v. EquitableAssurance
Life
Assurance Soc’y (2)
Cook’s Will
14
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.
15
Note that UPC § 2-804 would have protected Cook
Pension and Retirement Plans
Defined Benefit
Plan
Defined Contribution
Plan
Individual
Retirement Account
 Employee typically
receives an annuity
 Employee owns a
specific account
 If benefit is
annuitized, no
remainder to pass at
death
 Employee controls
investment and
distributions in
retirement
 Similar to a defined
contribution plan, but
subject to contract
between account
holder and custodial
institution
 Uncommon today
among private
employers ($2.3
trillion (2012))
 Remainder passes
outside of probate to
designated
beneficiaries
 Common today
among public
employers ($4.6
trillion (2012))
 Favored by private
employers ($4.7 trillion
(2012))
 Remainder passes
outside of probate to
designated
beneficiaries
 IRAs are common
($5.1 trillion (2012)),
may include “roll over”
from DC plan
Cook and retirement plan
beneficiary designations

You can run into the Cook problem with beneficiary
designations for retirement plans. Testators sometimes try
to change retirement plan beneficiaries through their wills



Courts often reject the changes on the same grounds—the terms of
the retirement plan contract specify a particular procedure for
changing the beneficiary (p.415, problem 1)
Some states allow beneficiary redesignations by will, but only if the
will is specific about the retirement plan (or insurance policy) that is
being changed. (Nunnenman v. Estate of Grubbs, 374 S.W.2d 75
(Ark. App. 2010))
Note the lawyer liability problem lurking—if the lawyer does not ask
about non-probate asset beneficiaries, then the intended
beneficiaries may be able to sue
17
Egelhoff and retirement plans

What were the facts in this case?




David and Donna Egelhoff were married, and David
designated Donna as the beneficiary of the life insurance
policy and retirement plan that were benefits of his
employment
David and Donna divorced and two months later, David
died without having changed his beneficiary designations;
he also died intestate
Under state law, David’s designations of Donna as the
beneficiary of his nonprobate assets were revoked upon
divorce; the benefits therefore should pass to his heirs
But does ERISA preempt the state statute?
18
Egelhoff
Egelhoff
Egelhoff v.v.
Egelhoff
p. 426
Kate
(first wife)
David
???
Samantha
Donna
(second wife)
???
Life Insurance
Pension Plan
David
19
Egelhoff and retirement plans

Why did the Court find preemption and bind David
by his beneficiary designations?


Under ERISA, employee benefit plans are required to
specify the basis on which payments are made, and the
plans must be administered in accordance with the plan’s
governing documents
In addition, deferring to state law would compromise
ERISA’s goal of uniformity
20
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
21
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.






Avoiding probate—can’t avoid taxes, but can reduce other
costs
Privacy—both from strangers and disappointed heirs
Choice of law—can select which state’s law applies (which
also is allowed under UPC § 2-703)
Reduce delay–bequests can be disbursed more quickly
Amending estate plan—just amend the trust provisions
Blended family—greater control over disposition of estate
with surviving spouse and children from a prior marriage 22
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)
23
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
24
Model pour-over provision

I give my residuary estate to the then
acting trustee under the trust agreement
executed by me on _________ __, 20__,
and known as the O 20__ revocable Trust,
of which I am now trustee and X is named
as successor trustee, to be added to the
trust estate and held under that trust
agreement as in effect at my death
25
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.
26
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
27
retirement plan
Clymer v. Mayo
Clymer v. Mayo
p.445
Maria
Joseph
Life
Insurance
Marianne
Clara
Trust
and Life
Insurance
James
Niece and
Nephews
28
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
29
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.
30
Joint tenancies in land

The joint tenants have equal interests; most important
actions require the agreement of all tenants


Joint tenants cannot devise their shares in a will. Upon
death, the decedent’s share vanishes and is taken by
the other joint tenant(s).


Not unilaterally revocable, so an imperfect will substitute
(though Brousseau, p. 448, suggests some exceptions)
To pass by will, the joint tenants must sever the joint tenancy
and convert it into a tenancy in common.
Creditors can reach a joint tenant’s interest only during
the tenant’s lifetime.
31
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
32
UPC § 2-804(b): Revocation
upon divorce
Except as provided by the express terms of a
governing instrument, a Court Order, or a contract
relating to the division of the marital estate made
between the divorced individuals . . ., divorce . . .
(1) revokes any revocable (i) disposition or
appointment of property made by a divorced
individual to his [or her] former spouse in a
governing instrument and any disposition or
appointment created by law or in a governing
instrument to a relative of the divorced individual's
former spouse . . .
33
UPC § 1-201(18) : Governing
instrument
"Governing instrument" means a deed, will, trust,
insurance or annuity policy, account with POD
designation, security registered in beneficiary form
(TOD), pension, profit-sharing, retirement, or similar
benefit plan, instrument creating or exercising a
power of appointment or a power of attorney, or a
dispositive, appointive, or nominative instrument of
any similar type.
34