Trusts & Estates

María Pabón López

This work of recent scholarship in the field of wills law and legal history is an excellent and thought provoking piece and anyone interested in a critical analysis of race in its historical context should read it. This article is quite special and well worth reading for its detailed archival research and its innovative analytical approach. It is a welcome addition to the legal scholarship that studies the influence of race in the United States legal system, particularly in the area of Trusts and Estates.

In this beautifully written and thoroughly researched article, Kevin Noble Maillard, an Assistant Professor at Syracuse University College of Law and the Director, Angela Cooney Colloquium for Law and Humanities brings to bear his knowledge of Critical Race Theory, and Critical Legal Studies into the realm of the law of wills.
Professor Maillard initially observes how wills in which the main devisees are nontraditional close family members of the testator pose tremendous challenges to courts that have to decide the posthumous wishes of the testator. This is even more the case when these wills have excluded collateral heirs. He then points out that the collateral heirs who object to will provisions where the bequests to the nontraditional family members seem to expand the definition of the testator’s family stand to benefit from the tension between testamentary freedom and the social deviance of the family. In such instances, courts may privilege the interests of collateral heirs to the detriment of the nontraditional close family member. These nontraditional close family members are usually the unmarried cohabitant and nonmarital children of the testator, often of a different race than the testator.  In Professor Maillard’s view, wills with nontraditional family devisees act as evidence of moral or social transgressions, such as interracial sex and extramarital reproduction. This may be a reason why such wills are often subject to will contests by collateral heirs, who aim to use their white privilege and legitimacy status to overcome the clear intent of the testator.

The article then examines antebellum and postwar will contests between disinherited white heirs and black or mixed-race devisees. Following this examination, the article interrogates how the courts defined the family in these cases and how they typically upheld the expectancy of the collaterals by using the privilege of the white heirs and their status as legitimate under the law. This detailed analysis of the archival evidence in these historical will contest cases is one of the strengths of this article. It is true that other scholars have previously examined testamentary freedom and the legitimacy of diverse families, yet they have paid little attention to what Professor Maillard terms “the color of inheritance.” Professor Maillard thoughtfully draws upon Critical Race theorist Cheryl Harris’s seminal work on whiteness as property and racial expectation interests, to show the primacy of whiteness as a justification of the voiding testamentary transfers. This is the innovative analytical approach of this article- the use of Critical Race Theory in the area of Trusts and Estates law.  Professor Maillard further analyzes the judicial legal resistance to nontraditional families in these will contests and concludes that it undermines donative freedom — a bedrock principle of the law of wills. Thus, this article is a much needed a critical initial inquiry of the influence of race in testamentary transfers. It is hoped that future scholarship can further expand the scope of this critical inquiry into contemporary times.

Joanna Grossman

The increasing complexity of family formation poses many challenges for law. When as many as five adults could be involved in the production of a single child – egg donor, sperm donor, gestational mother, intended mother and intended father, to take just the example of a complex surrogacy – we have to at least consider the possibility that some of our traditional rules are outdated.  Melanie Jacobs has written several pieces in which she considers whether the “two parent” rule is one of those outdated rules.  In this piece, she considers the financial implications of “multiple parentage,” including the implications for inheritance.  Why limit a child to two parents when additional ones may bring important financial as well as emotional resources to the table?

Courts and legislatures have, when given the opportunity, virtually all reaffirmed the rule that a child can have no more than two legal parents.  Thus, the Supreme Court ruled in Michael H. v. Gerald D. against granting legal parent status to the biological father of a child conceived in adultery.  The mother’s husband was conclusively presumed to be the child’s father under California law, and due process did not require that the biological father be given a formal role in his daughter’s life, even though he had acted as a parent for a significant period of time.  In a telling sentence, which Jacobs quotes, Justice Scalia writes that “law, like nature itself, makes no provision for dual fatherhood.”  And in numerous other cases, a third party with significant ties to a child – and, often, a significant role in planning for the child’s conception and birth – is ruled the odd man out.  Sometimes the excluded party is a lesbian partner who co-parented a child who has a legal father (and thus a second parent); sometimes it is a biological father, as in Michael H., whose rank in the parental hierarchy is trumped by another man’s claim to legal or presumed fatherhood; sometimes it is a former stepparent who engaged in substantial childrearing while married to the child’s mother or father; and sometimes it is one or more parties to a surrogacy, which, like the one described above, may entail the participation of as many as five different adults.

Although the tendency is to limit the number of parents to two, Jacobs discusses three instances in which children have been permitted to have more than two legal parents.  First, under Louisiana law, the possibility of dual paternity exists.  The state code imposes the usual presumption that a husband is the legal father of children born to his wife, but it simultaneously allows a biological father (or mother or child) to bring an action for paternity.  If paternity is proven, both the husband and the biological father can be recognized as “legal fathers” and both are obliged to support the child.  Second, a trial court in Pennsylvania ruled that a biological mother, her former same-sex partner, and their known sperm donor all had parental rights and obligations to the two children the trio produced.  Finally, Jacobs discusses the American Law Institute’s Principles of the Law of Family Dissolution, which recognize different categories of “parent” and specifically contemplate that a child could have more than two.

Who suffers for the legal limit on the number of parents a child can have?  The focus, generally, is on the loss experienced by the adults who are deprived the opportunity to parent a child they have been raising.  But, as Jacobs emphasizes in this piece, children suffer as well – they are deprived of a relationship they may have had with a particular adult, but they are also deprived of that person’s financial support.  For the most part, adults who do not qualify for legal parent status are not burdened with an obligation of child support.  Yet someone other than a child’s two primary parents may be best suited to provide such necessary support.

At the inheritance stage, children suffer as well under the two-parent regime.  Under the rules of intestate succession, children generally cannot inherit from more than two parents.  Thus, a child who has been adopted will inherit only from adoptive parents except in cases of a stepparent adoption.  But the current version of the Uniform Probate Code broadens the conception of parent-child relationships and seems to contemplate inheritance in some cases from or through more than two parents.  Jacobs advocates for greater inheritance rights for children with more than two functional parents.  Such a child, she argues “should also be able to inherit through that parent and potentially inherit from other relatives.  Any relative who wishes to foreclose such inheritance has an easy mechanism by which to opt out—a will.”  Greater recognition of multiple parentage would also open up other important sources of support like social security survivor benefits and wrongful death damages, both of which turn on state parentage law.

In the end, Jacobs argues for a framework that would potentially recognize additional parents and impose financial obligations that are “closely related to the particular nature of the custodial and/or visitation relationship.”  This, she argues, will “best protect the best interests of the child and the parents.”  She makes a strong case that the complications of recognizing multiple parents are outweighed by the benefits to children.

Joshua C. Tate

The problem of simultaneous death has troubled inheritance law for many centuries.  If a common accident kills both Mother and Son, and Mother’s will names Son as her primary devisee, does Mother’s property pass through Son’s estate to his heirs?  Or does it pass instead to the person next in line under Mother’s will?

American teachers of trusts and estates know where to look for the answer to this question:  a statute.  Since the mid-twentieth century, widely adopted uniform acts have attempted to solve the puzzle of simultaneous death by establishing a presumption of survivorship.  Yet this was not always the case.  In his new article, “Death by Disaster: Anglo-American Presumptions, 1766-2006,” Thomas Gallanis explores the history of the Anglo-American law of simultaneous death from the eighteenth century to the present day.  A modern lawyer may be surprised to learn that, for much of its history, the common law made no effort to establish legal presumptions to deal with the problem of simultaneous death.  In addition, the statutory presumptions that were eventually adopted in England are quite different from their contemporary American counterparts.

Gallanis begins his article by examining the history of the English common law of inheritance.  Under the common law, the problem of simultaneous death was treated as a question of fact that would be decided on a case-by-case basis.  By contrast, civil-law systems such as France adopted specific statutory presumptions that varied according to the age and sex of the decedents.  The civil-law system was eventually adopted in the state of Louisiana, which closely followed the French Code Civil.

In the twentieth century, Gallanis explains, both England and America adopted statutory presumptions.  In England, the change was effected by Parliament in 1922 in response to a suggestion by the Cardiff Law Society.  The Law of Property Act 1922, possibly inspired by the civil law, established a presumption that a younger decedent was presumed to have survived the elder.  Parliament subsequently modified the rule in 1952 for spouses, who were thereafter presumed to have survived each other for the purpose of distributing each spouse’s inheritance.

In America, change came in the form of uniform acts.  The first of these, the 1940 Uniform Simultaneous Death Act, took the position in all cases that Parliament would subsequently apply only to spouses:  each person would be deemed to have survived the other.  The wording of the 1940 Act, however, referred to cases where “there is no sufficient evidence” of survival.  This led to gruesome and undesirable results in cases like  Janus v. Tarasewicz, an estate dispute arising from the Tylenol murders in the early 1980s in which one spouse survived the other by only 2 days.  Because there was “sufficient evidence” of survival, the rule did not apply, even though that meant the property of the first spouse to die would pass through the other’s estate.  In the early 1990s, the Uniform Law Commission promulgated and amended a revised uniform act, which adopted a 120-hour rule in place of the “no sufficient evidence” standard.

Gallanis concludes his article by asking why it took Anglo-American law so long to develop a law of presumptions with regard to simultaneous death.  He suggests two plausible reasons.  First, advances in transportation increased the frequency of accidents, such as train, automobile, and plane wrecks, that would lead to simultaneous death.  Second, the common law’s tendency to delegate factual decisions to lay juries faded away as the lay jury itself declined in importance for civil disputes.  Gallanis views recent legislation in England and the United States as a positive development, by which “the presumption of survivorship was adapted for our modern age, where almost every day brings a newspaper account of another common disaster—and the consequent question whether A survived B.” (P. 200).

Gallanis’s article focuses on the history of simultaneous death in the common law, not the contemporary policies that might make some presumptions better than others.  It is worth noting, however, that advances in medical technology have allowed life to be prolonged artificially following an accident in ways that were not possible in earlier historical periods.  In light of such technology, does a rule that makes the outcome depend on survival by 120 hours adequately take into account the perverse incentives that some heirs and devisees may have?  This is a question that would seem to benefit from further consideration.  While Gallanis is almost certainly correct that the current statutory presumptions are preferable to the blurry law of the past,  that does not mean that the new presumptions are perfect.  Codification does not, and should not, mean ossification.  Inspired by first-rate scholarship like Gallanis’s article, future generations of law reformers will no doubt continue to refine the law’s solutions for the ancient problem of simultaneous death.

Paula Monopoli

There is a distinct lack of empirical research in the area of inheritance law.  Domestically, inheritance law is the province of fifty different states.  Thus, conducting an empirical study of testamentary patterns is a painstaking process that requires fieldwork in multiple probate courts, often consisting of a tedious review of individual probate court case files or records.  And among the studies that have been done over the years, few have focused on the role of gender in our field.  That gap is the focus on Daphna Hacker’s new article, The Gendered Dimensions of Inheritance: Empirical Food for Legal Thought, in the Journal of Empirical Legal Studies, a peer-edited, peer-refereed, interdisciplinary journal.  Hacker is an Assistant Professor at the Buchman Faculty of Law, Tel Aviv University where she is also a faculty member in the NCJW Women and Gender Studies Program.

In her article, Hacker identifies four historical trends which have created the conditions under which women may exercise broader freedom to bequeath property at death.  These include laws which allowed women to own property in their own right, the abolition of rules that prevented women from inheriting property, the enactment of laws allowing women to be full participants in the labor force and the trend toward recognition of marital property rights in both spouses.  After identifying these trends, Hacker poses the following questions which empirical research could help us answer if it were more widely conducted: Do women take full advantage of this power to bequeath property?  Do they use this power to bequeath wealth as they wish?  Are there gendered dimensions to intestate succession?  And are there differences between the structure and content of men and women’s wills?

Hacker reviews twenty-three studies that offer some answers to those questions because they include gender as a focus, including her own empirical study.  (Hacker conducted a qualitative and quantitative study of the inheritance procedures of the Jewish population in the central region of Israel in which she examined 743 inheritance files and conducted in depth interviews with litigants and lawyers involved in probate disputes.) The premise of her article is that gender matters in inheritance but that we know surprisingly little about its impact since it has received scant attention as an area of empirical research.

In her review, Hacker draws conclusions from the findings in the twenty-three studies including the observation that wills are more likely to be challenged when daughters rather than sons are beneficiaries.  She offers normative suggestions about reform that take into consideration the tension between equality and some of the cultural differences in inheritance law, including the preference for sons as heirs.  Empirical work can have a powerful effect on policy.  A prominent illustration of this observation in recent years is Rob Sitkoff and Max Schanzenbach’s study, Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, investigating whether capital moves from one state to another as a result of abolition of the rule against perpetuities. The migration of capital that they documented offers support for those who argue that a state’s economy benefits from such legislative change.  I would agree with Hacker that the existence of empirical work is crucial for those interested in achieving gender equality through policy reform at both the domestic and international levels.

In addition to providing an important review of empirical studies available in our field, Hacker also provides a comparative view of inheritance law globally which also suffers from a lack of attention in the existing literature.  Finally, she notes the importance of the expressive dimension of inheritance law in terms of telling us much about spousal, inter-generational and other family and community relationships.  In each of these ways, she persuades the reader of the importance of conducting more empirical work in the area.

The only flaw in the structure of the article is its wide scope.  Hacker could have easily split the piece into two separate articles.  Her own empirical study of gendered patterns of inheritance generated through a review of Israeli family court records gets a bit lost in the overall review of the twenty-three studies.  Her study is timely and interesting and I would have liked to have seen it be the focus of its own article.  Apart from that minor criticism, Hacker has done an very useful service for inheritance law scholars in pulling together all of these studies into one place and demonstrating how much work we still have to do.  At a time when legal scholarship is focused increasingly on empirical work and methods and on comparative approaches in a global framework, inheritance law scholarship would do well to move further in these directions.

As Hacker says, “the scant empirical investigation of the possible gendered aspects of inheritance is . . . surprising, although typical of the general sociological neglect of inheritance.”  In her very interesting new article, Daphna Hacker takes a significant step toward remedying that neglect.  She has indeed given us much food for thought about gender differences in inheritance patterns, comparative approaches to inheritance law and the many rich empirical questions in our field that remain to be studied in the years to come.

Stewart Sterk

In the nearly 50 years since Norman Dacey’s How to Avoid Probate first hit the best seller list, law reformers have responded by making probate easier, faster, and less expensive – especially for families with modest means and modest needs.   These legal reforms, however, have barely made a dent in the use, and growth of probate avoidance devices.  In a recent article, Reconfiguring Estate Settlement, 94 Minn. L. Rev. 42 (2009), John Martin suggests replacing the probate system with a non-judicial registration system.  Although his proposal builds on the UPC and other reform statutes, Professor Martin contributes some new insights – not the least of which is that any reform effort may be doomed if it retains the “probate” label.

Professor Martin describes the UPC’s flexible system for administration of estates, which allows interested parties to calibrate their contact with the judicial system to match their need for judicial protection, and also catalogs the small estate procedures enacted in states that have not adopted the UPC.  Despite the availability of these modern probate systems, lawyers and their clients continue to seek out non-probate alternatives.  Why is this a problem?  Because, as Professor Martin points out, probate avoidance generates unnecessary expenditures on bypass devices and encourages unscrupulous peddling by “trust mills” that prey on fear of the probate process.  In addition, the proliferation of probate avoidance devices requires co-ordination, and creates unexpected difficulties when the co-ordination is less than perfect.

To combat these difficulties, Professor Martin suggests replacing the probate system with a registration system.  When a decedent dies, an interested party could file either a will or, if there appears to be no will, an affidavit of heirship, with a registrar in a newly created Office of Estate Registration.  The registrar’s duties would be similar to those of a clerk charged with recording real property deeds:  the registrar would check to make sure the document, on its face, complies with the necessary formalities, and would then accept the document for registration.  If, as is usually the case, there is no dispute over distribution of the estate and no need for administration, there would be no further governmental involvement; the beneficiaries would simply take the assets to which they were entitled.  If administration were needed, the personal representative named in the will (or, if there is no will, the representative appointed according to statutory priority) would receive the equivalent of letters testamentary, and would perform the usual functions of collecting assets and dealing with liabilities.   In the ordinary case, neither judicial oversight nor any sort of accounting would be necessary.  There will never be any formal closing of the estate.  Of course, there will be a small minority of cases in which judicial intervention might be necessary, but Professor Martin suggests that intervention should come only at the initiation of an interested party, not as a matter of routine.

Professor Martin’s registration system resembles in many respects the UPC’s informal probate provisions.  There are, however, two significant differences.  The first is the name:  Professor Martin would banish the word probate from the system, in large measure so that lawyers can inform their clients that they can avoid probate without using revocable trusts or other probate-avoidance devices.  In light of the fear and loathing “probate” engenders in the population at large, this suggestion is an ingenious one, worthy of incorporation into any reform system.

The second significant difference involves confidentiality.  In Professor Martin’s system, the content of wills would not be a matter of public record; instead, content would be available only on a “need to know” basis.   In this respect, Professor Martin would bring the law of wills closer to the law of inter vivos trusts, in part to eliminate one reason parties might opt for revocable trusts rather than wills.  For two reasons, I’m not persuaded of the wisdom of this approach.  First, especially with respect to real property, the contents of a will may be important to prospective purchasers (and their title searchers) for a long time.  Suppose, for instance, a will leaves real property to one of decedent’s children.  The children themselves – the only parties interested in decedent’s estate – simply register the will and divide up the property in accordance with decedent’s instructions.  When, a decade later, the child who inherited the real property seeks to sell it (or dies), how is a prospective purchaser to know whether the child’s title is good?  So long as the will is a matter of public record, the purchaser can be confident about the state of title; if the will is confidential, doctrine will have to develop some other mechanism for title assurance.  That, in turn, leads to my second objection to confidentiality:  so long as the will is confidential for some purposes and not for others, litigation will arise about who is entitled to see the will – engendering costs that have the potential to exceed any tangible benefits.

Debate about the wisdom of confidentiality, however, should not obscure Professor Martin’s more important objective:  bridging the gap between inter vivos and testamentary transfers.   With a registration system in place, there would be little reason for a person to create a trust merely to avoid the probate system; instead, a person would create a trust only when there was a significant reason to divide legal from beneficial title.  Professor Martin believes – perhaps correctly – that removing the sharp distinctions between probate and nonprobate transfers would provide legislators with an impetus to harmonize the substantive law of gratuitous transfers, removing some of the anomalies present in current doctrine.

Estates lawyers as a group are a conservative lot.  Whether they can banish “probate” from their vocabulary is an open question.  Professor Martin’s article suggests that there is good reason to try.

Jeffrey Cooper

With the stock market of recent years dashing so many hopes and dreams, investors are all asking the same questions:  How could we have let this happen?  How can we be sure it won’t happen again?  Included among those asking these questions are the beneficiaries of countless trusts who have witnessed significant declines in the value of their trust portfolios.  In his article “Rethinking Trust Law Reform: How Prudent is Modern Prudent Investor Doctrine?,” Professor Stewart E. Sterk joins this search for answers, ultimately concluding that modern prudent investor laws fail to adequately protect trust beneficiaries in troubled economic times.

Professor Sterk’s article consists of three major Parts.  In Part I, Professor Sterk lays the historical framework for his analysis by summarizing the evolution of laws governing trust investment management.  In particular, he explores how two widely-accepted economic theories regarding the behavior of financial markets, modern portfolio theory (“MPT”) and the efficient capital market hypothesis (“ECMH”), came to influence trust investment law.  Sterk chronicles how both the Restatement (Third) of Trusts and the Uniform Prudent Investor Act wholeheartedly embraced MPT and ECMH in a quest to encourage the investment of trust funds in the manner these theories suggested would maximize the economic interests of trust beneficairies.

Unfortunately, argues Professor Sterk, the economic history of the past decade revealed that modern investment law placed too much faith in MPT and ECHM.  As the stock market endured a boom and bust cycle over the past ten years, most equity investors endured a gut-wrenching emotional roller-coaster but generated no net investment returns.  Modern trust investment laws exposed trust beneficiaries to this same tragic scenario, leaving many longing for the “good old days” of boring, stable, safe trust investments.

In Part II of his article, Professor Sterk explores the shortcomings of modern portfolio theory as the basis for trust investment law and questions several of the core principles of MPT and ECMH.  In particular, Sterk questions the widely-accepted notion that since risk-averse investors will demand a higher return from risky investments, invisible market forces ensure that riskier investments (e.g., common stocks) will provide superior returns to less risky investments (e.g., bonds).  Sterk suggests that modern investors may be far less risk-averse than the ECHM presumes, and thus far more likely to overvalue investments in common stocks–a phenomenon compounded by investors misperceiving the true risks inherent in such investments.  Sterk also contends that investor behavior may be less rational than MPT envisions, offering the ‘dot.com bubble’ of the late 1990s as a case in point.

In Part III, Professor Sterk considers the trust investment law implications of the past decade of experience.  In particular, Sterk concerns himself here with the agency costs which result from modern trust law misaligning beneficiaries’ economic interests with those of trustees.  The crux of this perceived agency cost problem lies in the way trustees market their own services.  Drawing in part on the work of Melanie Leslie and Rob Sitkoff, Sterk suggests that market forces and the battle for trust business drove trust companies and other professional fiduciaries to focus more on generating higher investment returns (which they hoped to “advertise” as a means of gaining additional market share) and worry less about the risks taken to secure those returns.  Professional trust companies thus sought out riskier investments as a means to generate additional business, yet trust beneficiaries bore the true financial risk of these decisions.  Rather than lead to the optimal investment of trust funds, prudent investor laws misaligned the interests of professional trustees and the beneficiaries they were supposed to be serving.

Professor Sterk’s article leads us in one of two possible directions.  If, as he suggests, the fundamentals of investment management have truly changed such that riskier investments no longer compensate investors with higher returns, we might need a new regime that more effectively aligns the interests of trustees and beneficiaries and encourages more appropriate risk-taking by fiduciaries.  Sterk sketches out what such a regime might look like, suggesting that prudent investor laws should offer trustees more precise investment guidelines–including “safe harbors” from liability designed to channel trustees towards more appropriate asset allocations for trust portfolios.  Alternatively, however, the market may simply be doing what markets have always done–cycling, correcting, and recentering to a new baseline from which it will soon move forward.  If the latter is true, then Professor Sterk’s proposal might lead us to do the very thing he now suggests prudent investor laws may have done–create a new investment regime which would have worked brilliantly in the previous market cycle but which is ill-suited to the current one.

Professor Sterk seemingly concedes this final point.  By his own admission, he offers his article not as a complete solution but merely as a means to begin a dialogue about the investment experience of the last decade and its implications for laws governing the investment of trust funds.  This is a crucial dialogue and Professor Sterk has made an extremely valuable opening comment.  There is much more to be said, and written, on this topic, and many, including myself, ultimately might disagree with some of Professor Sterk’s viewpoints.  That doesn’t make Professor Sterk’s article less valuable.  Indeed, to the contrary, the more fervent the dissent and discussion which ensues, the more we will have to thank Professor Sterk for focusing scholarly attention on a crucial emerging issue in the field of trust investment law.

Julia Belian

In the wake of disaster, we as a species invariably reach out with untold generosity, donating vast amounts of cash and supplies to assist the victims.  And, just as invariably, at least some of the charitable organizations through which most of us funnel our compassion will drop the ball through some form of mismanagement.  In the past twenty years, the relief efforts following almost every major disaster – spring flooding in the Midwest, mudslides and wildfires on the West Coast, hurricanes throughout the Gulf of Mexico, tsunamis in the South Pacific, and, most famously, Katrina – have been plagued by reports of mismanagement ranging from lack of meaningful oversight to outright embezzlement.

Which should mean that right now, as the world struggles to come to the aid of a ravaged and overwhelmed Haiti, would be a prime time to consider meaningful reform of the standards by which such charities conduct their critical business.  For several years, Prof. Melanie B. Leslie of Cardozo School of Law has offered a clarion call for reform of the rules governing fiduciary conflicts of interest, especially within the nonprofit sector.  In the wake of the catastrophic earthquake January 12, the arguments and suggestions in her article The Wisdom of Crowds? Groupthink and Nonprofit Governance deserve serious attention.

Leslie’s article, currently available as a working paper on SSRN, succinctly and clearly lays out the dilemma that lies at the heart of nonprofit management:  With no principal readily available to monitor, and no market to correct, nonprofit boards of directors are uniquely vulnerable to the phenomenon of “groupthink,” a process by which the desired advantages of information exchange are subverted by interpersonal group dynamics.  When a board of directors lacks clear external standards or monitoring, Leslie argues, information asymmetries among the members of the group are more likely to be resolved, not by forthright questioning and discussion, but by confirmation bias and ingroup bias, both of which are further fueled by the desire for group cohesion which is arguably more powerful in the nonprofit sector than in a business setting.  Current law governing fiduciary duties – both state law and the federal law governing tax exempt organizations – not only fails to correct this inherent problem, it actually exacerbates it by setting forth “fuzzy” standards rather than clear rules.  “Fuzzy” standards necessarily require interpretation, and in a setting already prone to cognitive errors, that process of interpretation itself actually increases the board’s tendency to overestimate its own objectivity, to overestimate a proposed deal’s fairness, to under-investigate the true market conditions, and to discourage confrontation among its members.

Leslie proposes two options for correcting the problem of “fuzzy” fiduciary standards, both of them based on her preference for rules.  Rules, she argues, communicate more clearly what the norms of behavior are in a given context and thereby reduce parties’ overestimation of their own compliance, and she offers empirical evidence to support her contention that clearly demarcated rules do more strongly determine parties’ behaviors.  Her first suggestion – and clearly her own personal preference – is to prohibit all self-dealing, period.  She argues that a blanket prohibition on self-dealing would not have to have the dire consequences often predicted, especially for smaller or rural nonprofits, but she also concedes that popular opinion tends to strongly oppose such a bright-line rule.  Her second proposal relies on a set of lower-order rules that, taken together, would not absolutely prohibit self-dealing, but would, I think, get us nearly there anyway, simply by making the process of approving such a transaction more trouble than it would usually be worth to most nonprofit boards.  That is, after all, exactly what Leslie is trying to suggest:  So long as the standards governing self-dealing transactions make engaging in such transactions no more onerous than engaging in non-self-dealing transactions, those standards quietly convey a message to nonprofit managers that such transactions are legally and morally equivalent.  Leslie’s goal is to upend this applecart and, instead, to make clear to nonprofit directors that self-dealing transactions should be presumed impermissible, whether rebuttably or irrebuttably.

It is hard to see how Leslie’s suggestions could be taken amiss.  This “hard” version of the fiduciary duty of loyalty is, at the least, the starting point for learning the concept (or, at least, it is when I teach it), with such ideas as the business judgment rule coming later as particular exceptions to the general duty, exceptions justified in the business world by the availability of shareholder monitoring and self-correcting markets.  Granted, any nonprofit director more accustomed to the rules for business decision-making will likely feel that such strictures hobble their efforts to get things done quickly and thereby provide more benefit to those in need.  But recent history and my own personal experience serving on nonprofit boards tell me that Leslie is right:  Those things we do in the name of beneficence are not always most beneficial for those we serve.  In one of the numbers in the Broadway musical “Avenue Q,” the characters encourage the audience that “When you help others, you can’t help helping yourself,” but that’s precisely the problem.  In the wake of disaster, we as a species do invariably reach out with untold generosity – but we also invariably overestimate our ability to do so in the impartial and objective way required of fiduciaries.  Leslie’s suggested rules would “build a fence” around our benevolence and thereby help us protect our generous impulses from our own short-sighted selves.

Gerry Beyer

What fun!  That was my first reaction to this new book by Herbert Nass, the famous New York attorney who has worked on the estate plans of countless celebrities.  By using the wills of the rich, famous, and infamous as examples, Nass guides readers though the most common and significant mistakes individuals and their attorneys make during the estate planning process.

In the span of eleven chapters, Nass sets out his top 101 missteps which individuals and their attorneys are prone to take when planning an estate.  A good way to get a flavor of the scope of his coverage is to peruse the titles of his chapters:

• The Single Biggest Mistake is Not Planning for the One Certainty in Life … Death
• Mistakes Involving Tangible Personal Property
• Mistakes Involving Real Estate
• Mistakes Involving Executors and/or Trustees
• Mistakes Involving Guardians, Minors, or Step-Children
• Mistakes Involving Prior Marriages, Prenuptial Agreements, and Significant Others
• Estate Planning Mistakes Involving Tax and Copyright Issues
• Estate Planning Mistakes Involving Disgruntled Friends and Family
• Mistakes Involving Funerals, Burials, or Cremation
• One-of-a-Kind Mistakes by Celebrities and Icons
• Rookie or Boneheaded Mistakes

Perhaps the best feature of this book is the inclusion of real-life examples for most of the mistakes which often include reproductions of the actual wills or other documents which contain the errors.  Significant to note is that most of these are not from the wills typically reproduced such as those of Elvis, President Kennedy, and Anna Nicole Smith.  See Wills of Famous and Influential People. Here are some examples showing the novelty and diversity of the samples reproduced: Jackie Gleason, Phil Silvers, W.C. Fields, Mae West, Rock Hudson, Gloria Swanson, James Morrison, and John Cassavetes,

Not only is Biggest Mistakes an entertaining read for its intended lay audience, it also serves as a useful resource for practitioners and a learning tool for law students.

Although most practitioners will not learn anything earthshaking, the examples serve as reminders of what happens if they do not exercise proper care in each step of planning an estate.  I predict, however, that almost every estate planner will come away with something previously unconsidered.  Here is one of the insights I gained.  I consistently warn my students not to unstaple a will once it is stapled together because contestants use multiple staple holes as evidence of fraudulent page substitution.  I had not thought of what to do once removal is done – how does one “unring the bell.”  Nass provides a wonderful suggestion – obtain an affidavit from the person who removed the staples which explains the circumstances behind that removal.  He even includes a sample affidavit.

For law students, this book brings to life many of the key pitfalls typically discussed by their professors such as executing documents improperly, naming an even number of co-fiduciaries, and failing to plan for out-of-state real property.  One important warning, however, is in order.  In Nass’s attempt to make the book accessible to a wide audience, he often generalizes legal rules.  These overstatements may be confusing at times such as the admonition that serving as a witness to a will in which the witness is a beneficiary would void the gift.  Although still true in many states, students who study primarily the Uniform Probate Code which provides in § 2-505(b) that this fact is irrelevant may be left wondering “what’s going on here?”

Learning from your own mistakes is good, learning from the mistakes of others is better, and not making mistakes in the first place is best.  Biggest Mistakes helps readers avoid making the mistakes themselves by learning from the errors of others in both an informative and engaging manner.  Definitely, a good deal!

Wendy Gerzog

The article Revisiting Dickman: Are Loans of Tangible Property Gifts? by Joseph M. Dodge, recently posted on SSRN, exhaustively covers this central question left unanswered by the Supreme Court in its 1984 Dickman decision. Dodge describes a common scenario in wealthy families: informally, parents allow their adult child to use their vacation home rent-free for an unspecified time. The piece then delves into the query about whether or not that familiar occurrence is a taxable gift. To answer that question, the article takes the reader into a wide-ranging discussion that includes property interests, imputed income, psychic benefits, Internal Revenue Code section 7872 (dealing with gift tax and income tax consequences of below-market interest loans of money), revocable transfers, and the estate tax consequences of the retained enjoyment of property.

Dodge argues against subjecting tangible personal use property to the gift tax. After all, he suggests, when you swim in a neighbor’s pool, that neighbor has not transferred a property interest to you. The permission to use property does not create a property interest in the user because it implicitly includes the power to revoke that permission.  Dodge analyzes Dickman, criticizing the court’s minimizing the real problem of cost-free loans of personal-use tangible property when it stated that the IRS was not interested in taxing such neighborly or familial gifts. The court too easily dismisses the issue by saying that, in any event, the annual exclusion and credit exemptions would shelter those transactions from any transfer tax. He critiques the court’s overgeneralizations and explains that the gift tax is not a tax on foregone economic opportunities but a tax on wealth transfers. Moreover, he states that the annual exclusion would not be available if a transaction was characterized as forming a tenancy at will plus a reversion, because there would be no ascertainable present value of the child’s interest.   After examining the case under different transfer tax principles, Dodge concludes that Dickman was doctrinally confused and wrongly decided.

Indeed, Dodge wishes that the court had not chosen to decide Dickman, because Congress was already working on Internal Revenue Code section 7872, which provides a statutory imputed cross payment approach. Dodge considers that provision to be the best unified solution to both the gift and income tax issues in the case; in addition, he contends that it correctly does not apply to the rent-free use of tangible personal-use property. Dodge does not believe that Dickman should be extended to his hypothetical scenario because in allowing such cost-free personal use of the parents’ vacation home, there is no property transfer (generally such event would not constitute even a tenancy at will); alternatively, if there is a property transfer, the transfer is incomplete because of the retained power to revoke. Further, it lacks value and has no tax avoidance potential.

When Dodge focuses on the policy issue of whether or not such loaned use of personal use property can have the effect of transfer tax avoidance, he asks whether or not by making their vacation home available to their adult child, the parents are diminishing their estate and he concludes that they are not. It is axiomatic that a gift of services is not subject to transfer tax because there is no diminution of the transferor’s estate. According to Dodge, a loan of tangible personal use property likewise does not result in a transfer of wealth. While the recipient receives something of value, the property owner has not thereby reduced his assets.

Moreover, although the gift tax is sometimes described as a backup to the income tax, according to Dodge, there is no danger of income tax abuse by shifting income to the property owner’s child. In this factual setting, the child would lack the right to rent the property to another so that any rental income derived by illegally renting the property would belong to the owner. Dodge acknowledges that it is reasonable for the income tax, an annual tax incorporating the concept of realization, to tax interest-free loans of money. However, he considers it unsound for the gift tax to tax a child’s rent-free use of a vacation home because the gift tax is imposed once, only at the time of a completed gift of a property interest.

Dodge concludes by distinguishing between a gift term loan of tangible property and gift demand loan of similar property in a non-commercial context. He explains that a gift term loan is a taxable gift that should be taxed and valued under the applicable Code section depending on whether the gift is made to a family member, to a non-related individual, or to a charity. A gift demand loan to an individual, by contrast, should not be subject to gift tax because there is no property transfer, there is an incomplete gift, Dickman does not provide a basis to extend its holding to this activity, or it represents only a consumption or quasi-support benefit given to third parties.

Dodge’s article is imaginative, insightful, and very well written. It is a must read. How often you find an article that teaches you an incredible amount about transfer taxes, and at the same time provides a piercing review of one of the most revolutionary and recent Supreme Court pronouncements in the gift tax and income tax areas?

Tom Gallanis

There is a central tension in the law of trusts between the rights of the settlor and of the beneficiaries.  On the one hand, the organizing principle of the law of donative transfers, as stated in Section 10.1 of the Restatement 3d of Property (Wills and Other Donative Transfers), is that the “donor’s intention is given effect to the maximum extent allowed by law.”  On the other hand, the Restatement 3d of Trusts emphasizes in Section 27(2) that “a private trust, its terms, and its administration must be for the benefit of its beneficiaries.”  A similar benefit-the-beneficiaries rule is codified in Section 404 of the Uniform Trust Code (UTC) and made mandatory in UTC Section 105.

This essay, Burn the Rembrandt?  Trust Law’s Limits on the Settlor’s Power to Direct Investments, by one of America’s leading scholars of trust law, Professor John Langbein of the Yale Law School, explores the limits that trust law places on the power of the settlor, as the author of the trust’s terms, to direct the trustee’s investment decisions.  The essay is a response to an earlier article in the Boston University Law Review by Professor Jeffrey Cooper, in which Professor Cooper criticized the benefit-the-beneficiaries rule, instead proposing greater deference to the intentions of the settlor, for example where the settlor “intentionally and thoughtfully impaired beneficiaries’ economic rights.” See Jeffrey A. Cooper, Empty Promises: Settlor’s Intent, the Uniform Trust Code, and the Future of Trust Investment Law, 88 B.U. L. Rev. 1165, 1166 (2008).

Professor Langbein’s response begins with an “arresting example” (p. 378) provided several years earlier by Professor Gareth Jones of Cambridge University: “A settlor may destroy his own Rembrandt. But he cannot establish a trust and order his trustees to destroy it.”  See Gareth H. Jones, The Dead Hand and the law of Trusts, in Death, Taxes and Family Property 119, 126 (Edward C. Halbach, Jr., ed, 1977).  Using this example, Professor Langbein explores the reasons why trust law limits the “unilateral dominion” (p. 379) of the settlor.  He points to the need for dead hand control and also for the recognition and enforcement of the equitable property rights of the beneficiaries (and the corresponding fiduciary duties of the trustee).  As he explains, “A transferor who chooses to use the trust form . . . must accept that minimum regime of fiduciary obligation that defines a trust” (p. 380).

One of the many innovations of the UTC, promulgated in 2000 and amended in subsequent years, was to organize in one place—Section 105—the rules of trust law that are mandatory.  These rules apply irrespective of the settlor’s contrary intent.  As Professor Langbein rightly emphasizes, however, the content of the mandatory rule that the trust must be for the benefit of the beneficiaries is not much of an innovation.  Trust law has long insisted that the settlor cannot “countermand the trustee’s duty to act in good faith” (p. 383).  There is an “irreducible core,” as Professor David Hayton has written, to the trustee’s fiduciary duty.  See David Hayton, The Irreducible Core Content of Trusteeship, in Trends in Contemporary Trust Law 47, 48-49 (A.J. Oakley ed. 1996).  I have explored this irreducible core with respect to the trustee’s duty to keep beneficiaries informed of the trust and its administration.  See Thomas Gallanis, The Trustee’s Duty to Inform, 85 N.C. L Rev. 1595 (2007).  In this Essay, Professor Langbein explores the irreducible core of prudent investment.

The Restatement 3d of Trusts has much to say about the duty of prudent investing, as does the Uniform Prudent Investor Act, incorporated into the UTC as Article 9.  Relying on the economic insights of modern portfolio theory, the duty of prudent investment is, for the most part, default law.  The settlor is given great latitude to use the terms of the trust to direct the trustee’s investment decisions.  There is an outer limit to the settlor’s power, however.  As with other core duties of the trustee, the duty of prudent investment cannot be eliminated entirely.   This idea, in a related context, is expressed well in the Comment to UTC Section 412(b), on the modification of the trust’s administrative terms where “continuation of the trusts on its existing terms would be impractical or wasteful or impair the trust’s administration.”  The Comment states in pertinent part: “Although the settlor is granted considerable latitude in defining the purposes of a trust, the principle that a trust have a purpose which is for the benefit of its beneficiaries precludes unreasonable restrictions on the use of trust property. An owner’s freedom to be capricious about the use of the owner’s property ends when the property is impressed with a trust for the benefit of others.” (Emphasis added.)

In this Essay, Professor Langbein explains why the benefit-the-beneficiaries rule appropriately places an outer limit on the settlor’s authority to direct investments, and he responds to Professor Cooper’s concerns that this limit will adversely affect settlor or trustee behavior or increase litigation.

The Essay is well worth reading, and I commend it highly.