Wills & Estates

Stanley Johanson, Fall 1994

Dapper, Mines, Oliver, Pichinson & Rowe

PART I: STUFF & THINGS

I. Restrictions on Testamentary Powers

A. Reasons for inheritance...

1. In a society based on private property, it is the least objectionable method of dealing with the owner's property upon his death.

2. Inheritance is the natural and proper expression and reinforcement of family ties (and families are good for society).

3. Family members have contributed intangibly to the wealth achieved by the testator.

B. Reasons against inheritance...

1. May grant wealth to donees w/o regard to competence and performance.

2. Transfer of great fortunes perpetuates wide disparities in the distribution of wealth, rigid class distinctions, and the concentration of economic power in the hands of the few.

Lewis v. State Bar of California Attorney Lewis had himself appointed administrator of Vacha's wife's estate (Vacha in prison) after wife died intestate. Lewis disbursed $20k to himself and did other bad faith things. Court sanctioned him. Court said Lewis made the following mistakes:

(1) failed to take measure to preserve the probate estate;

(2) failed to get probate ct approval for disbursements;

(3) failed to get ct approval for loan to himself;

(4) failed to keep accurate records.

Shapira v. Union National Bank Testator's will said son Daniel could take his share if he married w/i 7 yrs after death of testator to a Jewish girl whose parents are both Jewish. Daniel didn't and sued for his share claiming unconstitutional restriction on freedom to marry; cites Shelley v. Kramer to say that state (read Court) enforcement of private will provisions equal state action which restricts unconstitutionally.

a. Was the Court's enforcement state action?

(1) Probably not since the court is not restricting the right to marry. Besides, if mere enforcement of a will is unconst. then testator cannot be assured of enforcing his discriminations if the state could not. This would be a major extension of the 14th Am.

(2) On the other hand, if the testator were still living he could be influenced by changing circumstances.

b. What will Courts enforce regarding marriage?

(1) Total restraint on freedom to marry (divorce or separation) = against public policy, courts will not enforce.

(2) But, provisions encouraging separation or divorce may be enforced if it is shown that the dominant motive of the testator is to provide support in case separation or divorce occurs.

c. Shapira is really about what a will is:

(1) It's a piece of paper until it's probated.

(2) It's the duty of the court to uphold the testator's intentions w/i the limitations of law and public policy.

(3) Wisdom in judgment is not decided by the courts.

II. Professional Responsibility in Will Drafting and Estate Planning

PA. PRIVITY OF K = Defense to Negligence?

Ogle v. Fuiten privity of contract. Should we permit persons unnamed in the will, or persons named w/ gift conditioned on events which fail to occur, to bring an action for negligence against the drafting attorney?

1. Held: Privity of K is no defense to the att'y sued for negligence.

a. Modern trend: Att'y held liable for negligence to intended will beneficiaries even though no privity of K.

b. BUT, plaintiff must still prove all elements of negligence. Good allegation but difficult to find evidence since T is dead.

c. Texas Rule: Not settled by S/Ct, but 3 Courts of Appeals and long line of cases hold privity of K = defense to negligence.

2. Att'y's duty to update will to keep it w/i T's intentions

a. Heyer v. Flaig Att'y owes duty not only to T but also intended beneficiaries. Att'y's duty lasts until T's death. FACTS: Att'y's mistake was in overlooking omitted spouse statute which says that marriage after will is partially invalidated--spouse, by operation of statute, takes half. Att'y knew of impending marriage, yet failed to advise or account for its affect on will.

b. Negligence: Only if T's intentions proven, and it's proven that Att'y knew those intentions yet failed to act.

(1) T's Responsibility: Should let Att'y know if circumstances change. Will prepared for facts given at time of execution.

(2) Att'y's Responsibility:

(a) Should inform T of events that may change the degree to which the will tracks the client's intention. W/o this advice, Att'y is negl.

(b) If on retainer, Att'y may have duty to be proactive in tracking T's circumstances.

III. The Estate Planning Problem

A. Basic Considerations:

1. alternate executors

2. simultaneous death of H&W

3. "buzz" words which allow independent administration (see TPC Sec. 145: Empowers executor to act w/o intervention of court)

4. transfers to minors

a. guardianship

(1) types

(a) of person: resp. for custody & care

(b) of property: responsible for possession and management of child's property

(2) If named guardian dies...

(a) TPC 676: Ct appoints nearest ascendant in direct line (doesn't say which grandparents).

(b) TPC 680: minor >14 yrs old may choose, subj. to court approval

(c) TPC 681: Persons ineligible to be guardian

(d) TPC 690: Only one person may be guardian. Such person may be guardian of more than one, if to the advantage of ward.

(3) Who can be appointed?

(a) Trad'ly, not non-residents--at least as guardians of estate; this keeps assets w/i state.

(b) Guardian bonds--guardian must provide unless will excuses

b. trust for benefit of--most flexible (more later)

c. conservator: like guardian, but w/ only one annual trip to court

5. instructions in case of death of intended beneficiaries (otherwise state law defaults apply, e.g. anti-lapse statute)

6. final contingency (atom bomb clause)--all intended beneficiaries predecease--what charity?

7. "to descendants per stirpes" generally better than "to children" b/c more specific.

Note: If will says "to DNs per stirpes" and all T's children predecease, rule of construction says follow state's intestate distribution scheme.

a. TX: per capita by representation.

b. UPC: per capita by representation.

B. Why everyone needs a will...

1. Avoid intestate distribution

2. Make contingency for common disasters

3. Appoint guardians

4. Appoint executors

5. Waive bond

6. Create trusts

7. Simplify administration by TX independent administrator

8. Tax planning

IV. Community Property

A. CP States

1. Lousiana

2. Texas

3. New Mexico (UPC)

4. Arizona

5. California

6. Washington

7. Idaho (UPC)

8. Nevada (UPC)

9. Wisconsin

B. Spouse's Separate Property

1. consists of:

a. Property acquired prior to marriage (and all other property bought w/ income from those assests) is SP.

b. Property acquired during marriage by give, devise or descent is SP.

c. Recovery for personal injury is SP. EXCEPTION: medical expenses & lost wages.

2. Classification as SP under the following circumstances:

a. CP may be partitioned into SP: By written agreement, signed by both spouses. Tex Const. art. 16, 15. Tex. Fam. Code Ann. 5.52.

b. Tracing Principle: Assets purchased w/ SP are SP.

c. "Conflict of Laws" SP: Property acquired in CL state remains SP when couple moves to CP state.

d. "Quasi-Community Property"

(1) Texas:

(a) for purposes of division upon divorce: "Imported" SP is classified as CP if it would be CP had it been acquired in TX.

(b) Hanua v. Hanua: Q-CP principle n/a in probate

C. Community Property Defined

1. CP = property other than SP, acquired by either spouse during marriage.

2. CP Presumption: All property presumed to be CP, UNLESS clear and convincing evidence shows otherwise.

3. Income from SP

a. American Rule: Income from SP is SP.

b. Spanish Rule: Income from SP is CP. (TX, ID, LA; see below).

c. But note: Capital gains are SP.

(a) Example:

YEA R / FACTS / SEPARATE PROPERTY / COMMUNITY PROPERTY
0 / H buys 400 shares of Varoom funds w/ SP. / 400 / 0
1 / Varoom declares dividend of $1/share, for total of $400 ($240 = capital gain; $160 = ordinary income). Dividend disbursed as add'l 50 shares ($8/share). / 430
400 original SP +
30 sh. = $240 capital gain divided by $8 per share. / 20
20 sh. = $160 ordinary income divided by $8 per share.
2 / Varoom declares dividend of $1/share, for total of $450 ($225 = capital gain; $225 = ordinary income). Dividend disbursed as add'l 50 shares ($9/share). / 453.89
430 from YR-1 +
23.89 sh. = 430*(225/450)/9.
430 = $1/sh. * 430 SP sh.
225/450 = % capital gain in total dist.
9 = price /sh. / 46.11
20 sh. from YR-1 +
26.11 sh. = 20/9 + 430*(225/450)/9

d. Spouses may agree that income from SP shall be SP.

e. Both rules subject to presumption for CP.

D. Classification of Assets as CP or SP

1. Inception of Title Rule: separate or community character determined at the time the asset is acquired.

a. Installment purchases begun before marriage

(1) Inception of title rule--SP

(2) Proration rule (CA): Property is part-CP and part-SP in proportion to the amount of the sale price paid out of SP before marriage and the amount of CP funds paid out after marriage.

(3) Example: Life insurance policy taken out before marriage. Under inception of title rule, the policy is considered SP, but CP is entitled to reimbursement. Under Pro Rata Share Rule, proceeds are CP proportionately.

(4) Business Acquired before marriage in which owner/spouse works after marriage:

(a) Some states treat appreciation in value of business as SP, provided that owner was compensated fairly for labor (the wages = CP).

(b) In California, appreciation is CP if appreciation is due to skills of spouse; but if appreciation is due to general market rise, then it's SP

b. Assets purchased during marriage--presumptively CP.

c. Assets acquired on credit during marriage

(1) Community credit presumption: Since either spouse may bind the community on a K, it is presumed that spouse has acted on community's behalf, even though

(a) SP is source of credit; and

(b) SP used as down payment.

(2) What it takes to rebut community credit presumption: The spouse must sign purchase agreement obligation as "S, for his separate estate" so that there's a clear indication that lender looked only to SP as basis of credit.

d. Community funds used to enhance value of SP--Reimbursement Claim

(1) Equitable claim possible for community funds used to enhance value of SP.

(2) Discharge of encumbrance: Penick v. Penick: Community reimbursment claim recognized only if claimant can show that expenditures of community > benefits rec'd by community.

(a) Examples (where benefits > expenditures)

i) property used as couple's home

ii) property produced community income

(3) Interest and Taxes: TX Cts apply balancing test on whether to grant reimbursement--expenditures > benefits.

(4) Improvements--Reimbursement based on enhanced value:

TX S/Ct: claim for reimbursement measured by the enhancement in value to the benefited estate.

(5) No reimbursement claim where expenditures maintain value: It must be shown that the expenditures increased the value of the SP so that it would be inequitable for the spouse to retain the increase w/o reimbursement.

(6) Burden of Proof on Claimant

(7) Separate funds spent on living expenses--gift to community

e. Community Reimbursement Claim--Amount to which other spouse entitled

(1) a reimbursement claim belongs to the community

(2) Death--spouse entitled to 1/2 of comm. reimb. claim

(3) Divorce--Reimb. claim subject to "Just and Right" equitable division.

If marriage ends in divorce, all CP subject to equitable division.

2. Effect of how title is taken

a. CL States: the manner in which title is taken determines ownership.

b. CP States:

(1) title is not controlling

EXCEPTION: title in spouse's name "as her sole and separate property." In order to override the general rule, if comm. funds used there must be evidence that the other spouse participated in the transaction.

(2) time of acquisition and source of funds determines whether CP or SP.

(3) CP presumption (any time during marriage).

3. Commingling of SP and CP; Tracing

a. Commingled bank account: While the CP presumption is difficult to overcome, the party claiming SP is aided by the presumption that community funds were withdrawn first, before separate funds.

b. Lowest intermediate balance principle: If balance of bank account falls below amount of SP, that "lowest intermediate balance" becomes the SP in the end.

4. Attempts by spouses to alter character of assets

a. Spouses cannot convert SP into CP by agreement

b. Gifts "to the community" are SP

E.g. W's dad gives land "to W and my son-in-law, H, to be held by them as community property."

H & W hold the land as TIC, each w/ undivided 1/2 share of SP since cannot impress donated property w/ community status.

c. Spouses can convert CP into SP: Agreement must be...

(1) in writing

(2) signed by both spouses

(3) voluntary

d. Spouse can make gift of interest in CP to other spouse

5. Management of CP

a. General Rule: Either spouse has power to manage CP.

(1) Exception (TX only)--Earnings: Each spouse has sole management power over earnings kept separate. If commingled, they are subject to joint management.

(2) Exception--Real property: Most J/Ds require both spouses to join in transfers or mortgages.

(3) Exception--Gifts: See fraud on spouse doctrine, etc.

6. CPWROS

a. 1980 TX. Const. Am. expanded scope of permissible agreements

(1) Spouses and persons about to marry can partition community to be acquired in the future as well as existing CP.

(2) Spouses can agree that the income from each's SP shall be that spouse's SP--common in prenuptial agreements

(3) If one spouse makes a gift to the other spouse, the gift is presumed to include the income from the donated property.

b. 1987 Const. Am.: CPWROS

(1) "...spouses may agree in writing that all or part of CP becomes the property of the SS on the death of a spouse."

(a) TPC 451: Right of Survivorship: Spouses can agree that all CP becomes property of SS upon death of the other.

(b) TPC 452 Formalities

i) Agreement must be...

a) in writing

b) signed by both

ii) Phrases sufficient to create ROS:

a) "w/ rt. of survivorship"

b) "will become property of the survivor"