Descendibility: The Neglected Stick in the Bundle

David Horton, Indescendibility, 102 Calif. L. Rev. __ (forthcoming, 2014), available at SSRN.

Should the right to transfer an asset after death extend to kidneys, personal injury claims, or frequent flier miles? In Indescendibility, Professor Horton provides a fascinating and in-depth examination of this neglected right in property law’s bundle of sticks. He maps out a theoretical justification for indescendibility, grounding it in a set of practical concerns about the administration of posthumous property, and offers several suggestions for law reform. Professor Horton has a knack for unearthing unique and cross-cutting themes in the law of trusts and estates, and this piece again provides readers with significant food for thought.

Part I takes us on a tour of the variety of things that have been made indescendible by law, as well as the diverse sources of law from which this indescendibility flows. The United States Constitution prohibits the descendibility of noble titles and hereditary privileges, a move by the early American political elites to distinguish themselves from the British. Indescendibility is also the standard rule for body parts, where descendibility has been regulated by statute or outright prohibited because body parts have not typically been considered to be property. The common law doctrine of abatement restricts descendibility of legal claims for physical injury. While this doctrine has been superseded by survival statutes in nearly all states, these statutes are inconsistent in their scope and application, sometimes leaving the abatement rule intact in practice. Indescendibility by contract is the newest frontier of interest, where fine print often prevents sports fans from passing season tickets to their heirs.

Part II turns to the existing theoretical justifications for indescendibility, none of which Professor Horton finds persuasive. Many of these are only partial defenses of indescendibility in a particular domain. The first account of indescendibility connects it to market-inalienability in the realm of body parts. Many of the rationales for market-inalienability, however, do not apply to indescendibility. A paternalist rationale for prohibiting market sales of organs during life does not apply to the dead, who do not suffer welfare losses from the sale of organs. Concerns about commodification are also less salient, as transferring organs without compensation after death is consonant with altruistic motives, and it is difficult to argue that it devalues the bodily integrity of the living when organs are harvested after death. In other words, indescendibility is not market-inalienability, nor should it be.

The second justification for indescendibility is formalistic in nature. Simply put, whether an object or entitlement is descendible turns on whether that object or entitlement is the decedent’s property. This argument is unappetizing to Professor Horton, who prefers to focus on whether granting a thing property status in life or at death serves relevant policy interests. This more contextual approach draws support from existing case law, which has recognized quasi-property rights in body parts under certain circumstances.

The third justification for indescendibility applies to the domain of legal claims. The reasoning here is that certain causes of action redress wrongs that are “personal” in nature. Professor Horton notes that this argument is rooted in the historical evolution of tort law, which replaced the personal duel between two combatants with a tort action as a way of channeling personal injury disputes into less violent avenues. Thus, the application of this understanding of the personal to descendibility is an historical artifact, and the “word balloon” of “personal” cannot otherwise be filled with coherent substantive content. Instead, he suggests that we focus on the deterrence rationale of tort law, which supports the descendibility of legal claims when a defendant might need to be discouraged from future misconduct.

In Part III, Professor Horton provides a cogent theoretical basis for indescendibility. He first puts indescendibility in the context of the law of inheritance, noting its mandatory nature. Once a person dies, anything and everything that is considered property of the decedent must pass to someone else. This process may not be so smooth for some types of property, engendering management, signaling, and line-drawing problems. Professor Horton labels these “administrability” concerns, and it is in them that he finds the justification for indescendibility.

With this theoretical grounding, Professor Horton offers several legal prescriptions. In the realm of body parts, he notes the various administrative issues with managing body parts after death. Once someone dies, organs must be harvested without delay to be useful, and thus physicians would need to ascertain decedent intent with respect to those organs immediately. Further, the inheritability of body parts may subject medical professionals to liability for failing to process organs quickly and get them to appropriate recipients. Despite these concerns, he is optimistic that these administrative issues might be overcome and suggests that we allow states to experiment with different regulatory regimes and financial incentives to determine potential paths forward.

For causes of action, Professor Horton advocates the abolishment of the abatement doctrine for existing claims, while being more circumspect for future claims, particularly those involving publicity rights. In supporting the abolishment of the abatement doctrine, he notes that the doctrine of mootness can perform the function of conserving judicial resources, which was in any case performed more clumsily by abatement.

Professor Horton again relies on existing doctrines to get the job done with indescendibility by contract. This time, he turns to unconscionability to police indescendibility terms in boilerplate contracts. The best candidates for application of the doctrine, he argues, are those terms that simply eliminate an asset in a way that benefits the drafter of the contract, such as provisions that terminate frequent flier miles at the death of their owner. The court should be less inclined to strike down terms that return a resource to a common pool, such as season tickets, or that protect an interest that the decedent might have had, such as a privacy interest in personal emails.

This piece stimulates readers to think critically about property rights taken for granted in other contexts, and it provides the best normative understanding of indescendibility to date. While no one would describe the suggested solutions as revolutionary, they reflect an understandably incremental or cautious approach to a contentious area of law.

 
 

Teaching Trusts and Estates

Robert H. Sitkoff, Trusts and Estates: Implementing Freedom of Disposition, 58 St. Louis U.L.J. 643 (forthcoming, 2014), available at SSRN.

Professor Robert Sitkoff’s article, Trusts and Estates: Implementing Freedom of Disposition, provides practical information and addresses major themes for professors teaching trusts and estates including intestacy, wills, trusts and planning for incapacity. It is a wonderful primer for professors and students new to the area of estates and trusts. For the more seasoned professors, Professor Sitkoff provides policy questions that will certainly provide an opportunity for healthy debates amongst the students. There are only a handful of articles that explicitly address trusts and estates pedagogy; this article does not simply summarize the curriculum, but rather it encourages law faculty to think in a big picture way about the overarching issues. As such, it is an important contribution to the scholarly literature.

Professor Sitkoff suggests that the subject be viewed through the lens of “freedom of disposition,” in contrast to the more traditional approach that usually proceeds according to methods of succession (probate succession by will and intestacy, and non-probate succession by inter vivos trust, pay-on-death contract, and other such will substitutes). While recognizing there are limitations on the freedom of disposition, he convincingly argues that law and policy start with this premise and that our analysis of them should also start that way. The priority, in a property transfer transaction, is placed on the intent of the transferor over the putative rights of the recipient of the property, whether the property passes via intestacy, will, trust, or nonprobate transfer.

The article starts with a discussion of intestacy and how intestacy statutes are based on the probable intent of the typical decedent. Professor Sitkoff explains the need for legislators to update intestacy laws to deal with evolving societal norms and changing family dynamics. For instance, same sex couples are recognized as a family unit yet most intestacy statutes do not adequately address property disposition from same sex couples to each other because they may not be legally married. Further, because only one parent may have a blood relationship to a child, most intestacy statutes would exclude that child from inheriting from the other parent. In situations such as these, the intestacy statues do not reflect the probable intent of the testator.

In cases where the decedent has made a will, the law imposes measures to ensure a will is authentic and made voluntarily to protect the freedom of disposition. In the early era of the Wills Act, certain wills were denied probate if the will violated any of the formalities, even if it was clear the testator made the will voluntarily. What purpose is served by denying a will that clearly reflects a testator’s intent or not revoking a will that testator clearly intended to revoke? Over time, legislatures have altered the laws to provide a greater balance between following formalities (ensuring authenticity) and honoring a testator’s intent (freedom of disposition). Professor Sitkoff also discusses how trusts have become the primary source for passing property at death. Trusts perfectly embody freedom of disposition as the trust instrument determines the trustee’s action and dictates when and how a beneficiary will receive distribution(s). He explains the creation and effective use of trusts, and introduces nonprobate transfers, also known as will substitutes. More wealth passes by will substitutes than wills and will substitutes are testamentary in nature. As such, should will substitutes be subjected to the Wills Act? Should will substitutes be subjected to subsidiary law of wills such as elective share, simultaneous death, divorce and antilapse the same as their wills counterparts?

By making transfers in trust, a settlor creates a situation in which a trustee will take control of and manage the trust property. The trustee has the responsibility of managing, investing and distributing trust property for the benefit of the beneficiaries. Because the trustee may have no beneficial interest in the trust, the fiduciary duties are designed to compel the trustee to act in the best interest of the beneficiaries—otherwise, beneficiaries would be at the mercy of any trustee mismanagement. Fiduciary duties are designed to protect the interests of the beneficiaries, but Professor Sitkoff points out that a trust is still an exercise of the settlor’s freedom of disposition. As such, should the settlor’s intent or purpose, regarding the trust, take priority when doing so would not be advantageous for the beneficiary? For instance, should a settlor have the freedom to abolish the duty to diversify when the risk of loss is shouldered by the beneficiary?

Finally, wealth transfer taxation is an important limitation of the freedom of disposition. Initially, the role of transfer taxation was strictly for raising revenue, then after World War I, it shifted to combating wealth inequality. The gift tax was implemented to prevent estate tax avoidance by transferring property inter vivos, and the generation skipping transfer tax was implemented to ensure taxation at each generation. How much should tax policy affect or limit freedom of disposition? Professor Sitkoff ends the discussion with what I perceive as a challenge for us to enter the debate regarding the proper scope of transfer tax policies when balanced against the freedom of disposition—the foundational premise of property transfers.

Overall, this article provides an insightful overview of the topics found in a typical trusts and estates course. The policy questions encourage engaged pedagogy. I enjoyed reading it and will require it for my students.

 
 

Trusts and Estates Law and the Question of Wealth Distribution

Early in the introduction to his arresting new book on wealth distribution, the French economist Thomas Piketty asserts that “the distribution of wealth is too important an issue to be left to economists, sociologists, historians, and philosophers.” (P. 2.) “Everyone,” he writes, should be interested. It seems to me that, on the issue of wealth distribution, trusts and estates scholars should be at or near the front of the queue. In any event, that is my excuse for choosing a book on economics as a JOTWELL selection for trusts and estates.

In the short time the English translation of Capital in the Twenty-First Century has been available (March, 2014), Piketty has achieved near rock-star status. The hard-copy version of the book, which runs 577 pages excluding the footnotes, is sold out on Amazon as I write this. It has been reviewed by all the major newspapers, discussed in all the business and academic journals, and debated across the blogs, and its themes have been batted around by commentators of all stripes. The New York Times, not content to restrict discussion of the splash the book is making to its opinion pages, recently featured Piketty in its Sunday Styles section. Reviews, references, debates and interviews continue. All of which seems to indicate that at least the chattering and scribbling classes, if not the public at large, are rather intrigued by the themes offered by the book.

In case you haven’t been paying attention, or if you haven’t yet been Pikettyed out, let me summarize a couple parts of the book that should be of particular interest to the trusts and estates lawyer. As noted, the book concerns itself with the distribution of wealth, a question with which Piketty has been engaged his entire career. It will no longer be a surprise to us that the ownership of wealth is highly skewed among the populace, but it is the fact of this disparity on the question of inheritance that I want to focus on in this review. First, Piketty’s data on the distribution question are the most comprehensive yet compiled. They show that the share of total wealth held by the top 10% in the United States is extraordinarily large, some 70% of the total and rising, with the top 1% holding over 30% of all wealth in the United States. Perhaps more importantly, the vast majority of Americans hold almost no wealth at all, with the entire bottom half owning only two percent. (P. 257.)

As to the question with which the trusts and estates lawyer concerns herself, that of inheritance, Piketty delivers an alarming message. His claim is that when the rate of return to capital exceeds the rate of economic growth, capital’s share of economic spoils becomes increasingly dominant. This, he says, will lead to what he calls a “patrimonial” society, the term he uses to indicate that inheritance, not work, will determine who gets what. And since he predicts that rates of growth are quite likely to be less than returns to capital going forward (P. 84, 95, 378 and others), inherited wealth will predominate. (also P. 351.)

Three factors produce a population’s “flow of inheritance.” (P. 385.) They are (i) the mortality rate (expressed as a percentage of the population); (ii) the ratio of average wealth of the dying to the average wealth of the living; and (iii) the capital income ratio (total capital stock/annual income flow). Aging baby boomers are expected to increase the mortality rate from our current point forward for the next few decades. As to the dying/living wealth ratio, Piketty’s data suggests that the famous “Modigliani Triangle,” which holds that wealth increases only until retirement and then decreases, is false. Especially when lifetime gifts are added back in, the dying have significantly more wealth than the living. The third factor, the capital income ratio, will increase with predicted lower growth rates, so long as savings rates are stable or increasing.

Unfortunately, Piketty does run into some problems in gathering hard inheritance data for the United States. Estate tax returns are insufficient, as the federal estate tax has never applied to other than a small percentage of the population. Nonetheless, he draws some conclusions. He admits that, throughout the twentieth century, inherited wealth probably constituted a smaller percentage of the total in the U.S. than in France, primarily due to higher growth rates in the U.S. (Higher growth rates reduce the capital/income ratio, factor (iii), above.) He nonetheless estimates that “inherited wealth accounted for at least 50-60 percent of total private capital in the United States” beginning in 1970. And if population growth decreases, then inherited wealth will claim an increasingly larger share of the total.

I am certainly not qualified to critique Piketty’s economic theories and predictions, so will leave that to the economists. But his data showing high levels of wealth concentration speak for themselves. And given the legal mechanisms of inheritance, Piketty’s findings and predictions have some interesting implications for the T&E lawyer. If, as Piketty claims, inherited wealth will come to predominate, what role will the law of trusts and estates play in this process? It is no secret that U.S. trust law enables far more dead hand control of wealth than that of England. To take just a couple of examples, do Piketty’s claims, if credible, lend support to the position that mechanisms such as spendthrift trusts and Claflin restrictions are ill-advised? Can we afford to be sanguine about jurisdictions eliminating their Rules Against Perpetuities? Unless we wish to leave the important issue of wealth distribution to “economists, sociologists, historians, and philosophers,” these are the types of questions with which we must engage.


Editor’s note: For other Jotwell reviews of Thomas Piketty’s Capital in the Twenty-First Century see:
 
 

Navigating the Complexities of Assisted Reproductive Technology

Kristine S. Knaplund, Assisted Reproductive Technology: The Legal Issues, Prob. & Prop. Mag., Mar./Apr. 2014, at 48.

Kris Knaplund is one of the leading American scholars in the area of postmortem conception and its theoretical and doctrinal implications for the field of inheritance law. In her article, Assisted Reproductive Technology: The Legal Issues, Knaplund lays out the complex planning issues that arise in a variety of scenarios involving Alternative or Assisted Reproductive Technology (ART). This clear and succinct article is a must read for professors, practitioners and students alike. Knaplund educates readers about the increasing number of situations and clients that involve ART, ranging from a trust beneficiary who is planning to use a gestational surrogate to a hospital faced with the widow of a recently deceased man who wants to harvest his sperm to have future children.

Knaplund begins by defining assisted reproductive technology as “the handling of gametes (sperm or ova) outside the human body in order to achieve a pregnancy.” She notes that the three most common forms of ART are assisted insemination, in vitro fertilization, and gestational carriers. She then proceeds to illustrate the kind of legal issues that attach to each of the three forms. For example, in assisted insemination (more commonly known as artificial insemination) the sperm donor is typically not the legal father if the sperm has been given to a licensed physician. But if a donor dispenses with the physician and donates directly to the intended mother, the statutory safe harbor no longer applies. Knaplund outlines several state cases including Jhordan C. v. Mary K., 224 Cal. Rptr. 530 (Ct. App. 1986) where that scenario results in the sperm donor being declared the resulting child’s legal father.

Knaplund then provides a brief description of the parentage issues that can arise with the second and third forms of ART, noting that the use of donated gametes in IVF can result in questions of who may be a child and parent. This is also true in the case of a gestational surrogate and Knaplund notes the failure of state law to address this issue on a consistent basis, if at all. The Uniform Parentage Act (UPA) does contain a comprehensive framework that requires the intended parents to obtain court approval of any surrogate arrangement, with checks and balances built in to ensure that all the parties to the contract fully understand the rights and duties involved. One of the interesting points Knaplund makes is that, under the UPA, only heterosexual couples can seek such judicial approval. The result is that a same-sex couple seeking such validation would be denied judicial relief and the gestational carrier would be deemed to be the legal mother of the resulting child. Unlike the UPA, the 2008 amendments to the Uniform Probate Code (UPC) allow for a parent-child relationship to be established either by court order or by the intended parent functioning as a parent within two years of the child’s birth. This second method thus allows for an intended parent to establish legal parentage, even when there may be an unenforceable contract. However, most states have no statutes regulating gestational agreements and thus the intended parents usually adopt the child to establish legal parentage.

Having established the complexity of legal parentage issues that can arise when ART is used, Knaplund goes on to posit three important issues that arise and that should be addressed by scholars, practitioners and legislators: (1) Who is a descendent when donated gametes are used?; (2) Should estate planners anticipate that sperm or ova may be retrieved and used after a person has died; and (3) How long should the estate be left open awaiting a postmortem conception child to be born.

First, Knaplund illustrates the question of “who is a descendant” using the following case: settlor creates a trust in 1959 for his “issue” or “descendants” which provides that “adoptions shall not be recognized.” Forty years later, the settlor’s daughter and her husband contract with a gestational surrogate and they use a donated egg and the husband’s sperm to have twins. A California court determined that the daughter and her husband were the twins’ legal parents. A New York court was asked to interpret the trust and it found that the twins could be beneficiaries, even though New York does not recognize surrogacy contracts. (Since the California court conferred legal parentage on the settlor’s daughter, she did not have to adopt the twins.) The New York court declared that its public policy would not prohibit the court from giving recognition to the California court’s determination of parentage.

Second, it is not only estate planning clients that lawyers need to counsel on ART matters. ART raises ethical issues for clients like hospitals who are now often asked to retrieve sperm and sometimes even ova from patients who are in a persistent vegetative state or within 48 hours of death. Knaplund notes several cases, including In re Daniel Thomas Christy, No. EQVO68545 (Sept. 14, 2007) where an Iowa court ordered a hospital to go forward with postmortem sperm retrieval, finding that the decedent’s consent to be an organ donor under the state’s version of the Uniform Anatomical Gift Act extended to posthumous sperm retrieval. Knaplund also highlights the issues raised by previously deposited sperm, including whether a decedent can bequeath frozen sperm for future procreation.

Finally, Knaplund turns to a third issue that is very central to the probate administration process. If the goal of probate is to gather assets, pay debts and distribute to beneficiaries as efficiently as possible, ART by its very nature raises tremendous problems for the goal of a quick and efficient conclusion to the probate process. Knaplund cites UPC §2-120 as one statutory framework that gives courts explicit guidance as to the time by which a postmortem conception child must be either in utero—not later than 36 months after the decedent’s death—or be born—not later than 45 months after the decedent’s death. She goes on to describe the patchwork of approaches, or failure to even have an approach, to this issue in the various states. The reader is left with the a strong sense that this inconsistent approach must continue to be the focus of trusts and estates scholars, practitioners and legislators if we are to have a fair and comprehensive solution to the issues ART raises for our field.

In the final part of her article, Knaplund concedes that science is “rapidly outpacing the law” in this area of ART. While these developments challenge us as scholars and practitioners, they generate intellectual excitement and new opportunities to theorize as well. With crisp, clear prose, Knaplund has given the reader an excellent primer in the brave new world facing all of us involved in inheritance law and estate planning.

 
 

“Take your stinking paws off [my property], you damned dirty [judges and legislators]!”*

Daniel B. Kelly, Restricting Testamentary Freedom: Ex Ante Versus Ex Post Justifications, 82 Fordham L. Rev. 1125 (2013).

Professor Daniel B. Kelly’s well-researched and carefully reasoned article discusses the traditional justifications for restricting testamentary freedom, not only from a legal perspective, but also an economic or functional one. The article first discusses the structure and goal of American succession law and the relevance of distinguishing between the ex ante perspective versus the ex post perspective. Next, the article explains the economic justifications for restricting testamentary freedom. Finally, the article critically analyzes the legal limitations on testamentary freedom.

Professor Kelly begins by noting the fundamental principle of American succession law—testamentary freedom. One justification for the law generally deferring to owners of property in deciding how to utilize or transfer their property is that it promotes social welfare. An advantage of testamentary freedom is that it aligns an individual’s “incentive to work, save, and invest with what is socially optimal,” which would facilitate long-term capital accumulation and productivity. Another advantage of testamentary freedom is that, in many situations, the testator is likely to be better informed than legislators or judges on how best to distribute the testator’s property. Finally, Professor Kelly notes that testamentary freedom may benefit familial relationships. However, even with all these advantages, a system based on testamentary freedom does not always coincide with the overall goal of advancing social welfare, at least in part because the law sometimes fails to incorporate the ex ante perspective. Consequently, the issue arises of when should the courts facilitate testamentary freedom, even though doing so permits a testator to assert “dead hand” control, and when should the courts restrict testamentary freedom, even though doing so means intervening in the testator’s disposition of property.

To shed new light on this perennial issue, the article delves into the importance of distinguishing between ex ante and ex post analysis in the context of succession laws. Ex ante analysis looks at an event or dispute before the fact (forward looking) while ex post analysis looks at an event or dispute after the fact (backward looking). Professor Kelly notes the importance of this distinction because there is often a risk, among courts as well as legislators and law reformers, of ignoring or discounting ex ante considerations and adopting an ex post analysis. Professor Kelly notes the dangerousness of ignoring the ex ante perspective. In general, ex ante analysis is superior because, unlike an ex post perspective, the ex ante perspective “incorporates the effects of legal rules on incentives and avoids the trap of hindsight bias.” Thus, in the context of succession, ex ante analysis can assist in determining the circumstances when the legal system should step in on behalf of individuals not otherwise entitled to the testator’s property.

There are three justifications for restricting testamentary freedom: (1) imperfect information, (2) negative externalities, and (3) intergenerational equity. First, the testator is limited in foreseeing the future and the circumstances or events that could arise after his or her death; thus, legislators and courts assert that they should have the power to step in to modify a gift because of unforeseen circumstances. Second, the testator may attempt to transfer property in a way that entails “externalities” (external costs), which would cause the donative intent to be inconsistent with maximizing social welfare. Third, the testator could, by transferring property or imposing certain conditions on its use, neglect the utility of future generations, creating an intergenerational inequity.

Professor Kelly points out that although many of the legal restrictions imposed on testamentary freedom are consistent with these economic justifications, many legal doctrines have overlooked the incentives of testators and other parties and fallen into the “trap of hindsight bias” by failing to incorporate the ex ante analysis, which could assist in maximizing social welfare. For example, on the issue of trust modification, the English rule allowing modification of a trust if all the beneficiaries consent may be superior ex post. But, as Prof. Kelly argues, the American rule disallowing modification if so doing so would violate a “material purpose” of the trust might be justifiable ex ante. Moreover, the recent liberalization of the American rule in some states such as California may have a legitimate functional justification: namely, the settlor’s imperfect information.

However, law reform efforts that allow courts to modify a trust merely because the beneficiaries’ ex post interests outweigh the settlor’s material purpose may be problematic because the potential for intent-defeating intervention ex post can create perverse incentives for the settlor ex ante, including incentives that ultimately may hurt the beneficiaries themselves. (Compare, for example, Uniform Trust Code § 412(a) which allows a court to modify a trust because of “unanticipated circumstances” but requires that the modification be made “in accordance with the setttlor’s probable intention.”) Professor Kelly also notes that court intervention is not always warranted and intervention depends on the specific legal doctrine and the effects that intervention could have on the parties’ incentives.

Professor Kelly astutely concludes by stressing that if testators believe legislatures and judges will not facilitate their intent, testators are likely to be less happy, accumulate less property, and alter inter vivos gifts. Testators will gain the “forbidden fruit” of knowledge that the law often ignores their donative intent to benefit particular donees who are not the intended objects of their bounty. This is likely to harm not just the testators but donees as a class. In reality, giving testators the ability to exercise a certain degree of “dead hand” control actually may benefit donees in the long run, rather than necessarily restricting the testators’ freedom based on ex post considerations or categorically denying their ability to control property after death.

I highly recommend this stunning article to anyone interested in this insightful take on American succession laws. Although succession laws have been around for a while, the issue of how much control the legal system should afford the living versus the dead is still a hot topic, and Professor Kelly provides a unique, functional, and beneficial perspective for analyzing and potentially resolving this thorny issue.

[Special thanks to the outstanding assistance of Eva Hung, J.D., Texas Tech University School of Law for her assistance in preparing this review.]

* Paraphrased from Planet of the Apes (1968). Note that this epigraph may inaccurately suggest that Prof. Kelly is making a libertarian argument against restricting testamentary freedom in all circumstances, rather than an economic/functional argument for restricting testamentary freedom only in some circumstances. Nonetheless, I find it an apt epigraph as I personally am suspect of restrictions on testamentary freedom which override the testator’s intent when that intent is not illegal or against unarguable public policy.

 
 

The Supreme Court Flunks Again

John H. Langbein, Destructive Federal Preemption of State Wealth Transfer Law in Beneficiary Designation Cases: Hillman Doubles Down on Egelhoff, Vand. L. Rev. (forthcoming, 2014), available at SSRN.

Nearly twenty-five years ago, Professor John Langbein published an article with the arresting title The Supreme Court Flunks Trusts. The article critiqued the U.S. Supreme Court’s decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), a decision which, as Professor Langbein explained, “rest[ed] on an elementary error in trust law” (P. 208) producing “a nonsense reading of ERISA” (P. 209). The article’s reasoning was compelling, and particularly devastating was the article’s conclusion (PP. 228-9):

. . .Bruch is such a crude piece of work that one may well question whether it had the full attention of the Court. I do not believe that [the justices] would have uttered such doctrinal hash if they had been seriously engaged in the enterprise. . .

I understand why a Court wrestling with the grandest issues of public law may feel that its mission is distant from ERISA. The Court may increasingly view itself as having become a supreme constitutional court, resembling the specialized constitutional courts on the Continent. If so, the time may have come to recognize a corollary. If the Court is bored with the detail of supervising complex bodies of statutory law, thought should be given to having that job done by a court that would take it seriously. . .

In 2013, the Supreme Court flunked again, this time with the laws of succession and restitution. The case was Hillman v. Maretta, 133 S.Ct. 1943 (2013). Professor Langbein has again penned a valuable and withering critique. It is a must-read.

In order to understand Hillman and its flaws, a bit of doctrinal background is needed.

State probate codes have long contained a default rule of revocation on divorce: if a will is silent on the matter, a later divorce revokes a pre-divorce devise to the testator’s (now ex-) spouse. Imagine the following scenario: Harry and Wilma are spouses; while married, Harry executes a will benefiting Wilma; later, Harry and Wilma divorce; later still, Harry dies, having failed to update his will. The revocation-on-divorce rule in the state’s probate code revokes Harry’s devise to Wilma. The rationale for the revocation-on-divorce rule is straightforward: to effectuate Harry’s presumed intention.

The Uniform Probate Code, and the statutes of several states, extend the revocation-on-divorce rule of probate law into the realm of nonprobate transfers—transfers that occur, for example, through beneficiary designations of life insurance proceeds or the proceeds of pension plan accounts. The rationale for extending the revocation-on-divorce rule to nonprobate transfers is straightforward: these mechanisms of wealth transfer are functional substitutes for a will and should be governed by the same substantive rules.

Enter federal preemption. Section 514(a) of ERISA (the Employee Retirement Income Security Act of 1974) provides that the provisions of Titles I and IV of ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any [ERISA-governed] employee benefit plan.” 29 U.S.C. §1144(a).

In Egelholff v. Egelhoff, 532 U.S. 141 (2001), the U.S. Supreme Court was faced with a typical revocation-on-divorce scenario. David Egelhoff designated his wife, Donna, as the beneficiary of his pension benefits and life insurance proceeds. David and Donna later divorced. Two months after the divorce, David died in a car accident, not having changed his beneficiary designations. David’s children from a prior marriage argued that the State of Washington’s revocation-on-divorce statute (which, like Uniform Probate Code §2-804, extends the revocation-on-divorce rule to nonprobate mechanisms) revoked the designations benefiting Donna. A divided U.S. Supreme Court disagreed, holding that the state statute was preempted because the life insurance policy and pension plan were ERISA-governed. The Court supported its decision by pointing to the rationales for ERISA preemption, especially the desire for uniformity and ease of plan administration. But the effect of the decision—that the ex-spouse was entitled to the proceeds—was directly contrary to David’s likely intention. See, e.g., Thomas P. Gallanis, ERISA and the Law of Succession, 65 Ohio St. L.J. 185 (2004).

In response to the danger of federal preemption of state wealth transfer law, the Uniform Law Commission inserted the following provision into the Uniform Probate Code’s revocation-on-divorce statute (and into other UPC provisions that might be the subject of preemption):

If this section or any part of this section is preempted by federal law with respect to a payment, an item of property, or any other benefit covered by this section, a former spouse, relative of the former spouse, or any other person who, not for value, received a payment, item of property, or any other benefit to which that person is not entitled under this section is obligated to return that payment, item of property, or benefit, or is personally liable for the amount of the payment or the value of the item of property or benefit, to the person who would have been entitled to it were this section or part of this section not preempted.

Uniform Probate Code §2-804(h)(2). This provision imposes a post-distribution constructive trust for the purpose of remedying unjust enrichment. As the Official Comment to subsection (h)(2) explains: “This provision respects ERISA’s concern that federal law govern the administration of the plan, while still preventing unjust enrichment that would result if an unintended beneficiary were to receive the pension benefits. Federal law has no interest in working a broader disruption of state probate and nonprobate transfer law than is required in the interest of smooth administration of pension and employee benefit plans.”

We now come to Hillman, which was another standard revocation-on-divorce case. Warren Hillman named his wife, Judy, as the beneficiary of a life insurance policy governed by FEGLIA (the Federal Employees’ Group Life Insurance Act of 1954), which has a preemption provision similar to ERISA’s. The couple later divorced; Warren married Jacqueline; then Warren died without having revised his beneficiary designation. The plan administrator paid the proceeds to Judy as the named beneficiary. Jacqueline agreed that the state’s revocation-on-divorce rule was preempted but sued Judy for the proceeds under the state’s version of subsection (h)(2), the statutory constructive-trust remedy. In Hillman, the Court regrettably decided 8-0 that the statutory constructive-trust remedy was also preempted. Almost certainly, this result frustrated the donor’s intention regarding succession to his property and unjustly enriched his former spouse.

In January 2014, the Uniform Law Commission revised the Official Comment to Uniform Probate Code §2-804 (the revocation-on-divorce provision) in response to Hillman. Here is the relevant excerpt from the new Official Comment, which draws on Professor Langbein’s article:

The Court’s decision in Hillman has many unfortunate consequences. First, the decision frustrates the dominant purpose of wealth transfer law, which is to implement the transferor’s intention. The result in Hillman, that the decedent’s ex-spouse remained entitled to the proceeds of the decedent’s life insurance policy purchased through a program established by FEGLIA, frustrates the decedent’s intention. Second, the Hillman decision ignores the decades-long trend of unifying the law governing probate and nonprobate transfers. The revocation-on-divorce rule has long been a part of probate law (see, e.g., pre-1990 Section 2-508). In 1990, this section extended the rule of revocation on divorce to nonprobate transfers. Third, the decision in Hillman fosters a division between state- and federally-regulated nonprobate mechanisms. If the decedent in Hillman had purchased a life insurance policy individually, rather than through the FEGLIA program, the policy would have been governed by the Virginia counterpart of this section.

Having previously flunked trusts in Bruch, the Court has flunked succession and restitution in Hillman. Professor Langbein’s article is well worth reading, and I recommend it highly. I also highly recommend another article to be published in the same Vanderbilt symposium: Lawrence W. Waggoner, The Creeping Federalization of Wealth-Transfer Law. Professor Waggoner’s article examines multiple areas in which federal law interacts with state wealth-transfer law, including revocation-on-divorce, the elective share, the validity of beneficiary designations, perpetual trusts, and Social Security survivor benefits. Professor Waggoner’s article is available on SSRN.

 
 

Expanding Surrogate Decisionmaking

Alexander A. Boni-Saenz, Personal Delegations, 78 Brook. L. Rev. 1231 (2013).

There are certain decisions that most individuals would agree are deeply personal and should be made by the individual, not the state, or a third party. The decision to marry, divorce, relocate, execute a will, or donate one’s organs are among those decisions. But what if an individual has lost the cognitive capacity, due to accident or illness, to make these decisions? In the health care context, individuals increasingly delegate decisions about medical treatment to a representative. States encourage individuals to delegate these decisions by making durable power of attorney for health care forms readily available on their websites. When individuals fail to plan for loss of decisional capacity, states often rely on a statutory list of potential surrogates (such as a spouse, an adult child, a parent, etc.) or court-appointed guardians to make health care decisions on their behalf.

Health care decisions are as personal as any decision can be. Yet, while delegation is increasingly accepted in the health care context, the law generally does not allow individuals to delegate other personal decisions such as the decision to marry, divorce, or execute a will. Why not? What are the harms, if any, of not allowing delegation of personal decisions? Should a person who lacks decisional capacity be doomed to remain in an unhealthy marriage? Should he be bound by his state’s intestate succession scheme even if it is contrary to his values and preferences? These are the questions that Alexander A. Boni-Saenz tackles in Personal Delegations.

Boni-Saenz argues that social justice and respect for the inherent worth of human beings require that all individuals be able to exercise fundamental capabilities such as the decision to marry, divorce, or make a will. He concludes that society must allow individuals who lack decisional capacity to exercise their fundamental capabilities and must also provide the means to do so, either through a surrogate appointed by the individual or, for those individuals who did not plan ahead, by a guardian appointed by the state.

Decisions to marry, divorce, travel, or execute a will are so personal and specific to the individual that it may be difficult to imagine how they could be delegated without destroying individual autonomy. These decisions are idiosyncratic, unpredictable, and do not lend themselves to objective assessments. One person’s definition of an ideal marriage or estate plan might be another’s prison or nightmare. Boni-Saenz argues that where an individual has delegated specific personal decisions to a surrogate, the surrogate empowers the individual by helping her exercise her capabilities. He analogizes the assistance provided by a surrogate to that provided by a wheelchair and accessible environments to a person with mobility impairments. While the individual may not be able to move about in the same way as one who is able to walk, he is nevertheless experiencing travel (albeit with assistance). Similarly, the cognitively-impaired individual who relies on a surrogate to make personal decisions is experiencing decisionmaking capabilities even though his experience will be different from that of a person with decisional capacity.

Boni-Saenz’s arguments are most persuasive when the cognitively-impaired individual planned ahead and delegated specific decisions to a surrogate who is aware of her wishes, values, and life plan. However, when a person did not plan for loss of decisional capacity, how is a court-appointed surrogate supposed to make decisions on his behalf without any guidance or knowledge of his preferences? Might it be preferable to leave in place the decisions she made before she lost decisional capacity? Boni-Saenz persuasively argues that nondelegation of personal decisions does not mean that a decision is not being made but rather constitutes a decision to maintain the status quo without regard to the potential harm or benefit to the cognitively-impaired individual. For example, not allowing delegation of the decision to divorce is a decision to continue the marriage. Not allowing delegation of the decision to make a will is a decision in favor of the state’s intestate succession plan.

Boni-Saenz argues that making decisions by default rules that do not take into account the individual’s wishes and circumstances cause greater harm to her personhood than delegating these decisions to a guardian who most likely knew her well and could carry out her wishes. This point is likely to cause many readers pause. We are all too familiar with cases of surrogates who have made decisions that are contrary to the ward’s wishes or interests. Surrogates make wrong decisions because they have no way of knowing what the ward would want. People do not often discuss (or even contemplate) in advance the scenarios that would lead them to seek a divorce. Even if they do, preferences often change when the person is confronted with the situation. If the individual does not know in advance what he might do, how would a surrogate?

Surrogates sometimes make decisions that are not in the ward’s best interests. As Boni-Saenz acknowledges, a guardian may also be a caregiver. As a result, the decisions the guardian makes on behalf of the ward may affect the guardian’s burdens—both financial and caregiving—thereby creating a potential conflict of interest. Professional guardians may have profit incentives that similarly create conflicts of interests.

Boni-Saenz acknowledges these concerns but argues that they are not caused by delegation of personal decisions but rather by the lack of guidance and oversight provided to surrogates. He proposes a number of reforms to guide guardians and limit their powers. He would preserve the current minimal capacity requirement for many personal decisions such as the decision to marry or make a will. He also suggests that we follow other countries’ approaches to guardianship and treat surrogates as assistants or mentors rather than as substantive decisionmakers. In cases where it is not possible to determine what the cognitively-impaired individual would decide, Boni-Saenz would direct the surrogate to make decisions based on the individual’s best interests. Finally, when it appears that a guardian has a conflict of interest, he would require that the guardian obtain judicial approval before making any personal decisions for the ward.

Boni-Saenz’s proposed reforms do not entirely eliminate the risk that surrogates will make wrong or harmful decisions. In the context of personal decisions it is often impossible to determine a person’s wishes or what is in her best interests. Despite these challenges, Boni-Saenz’s proposal is the best option available to enable those who have lost decisional capacity to exercise their fundamental capabilities.

Boni-Saenz focuses on individuals who possessed decisional capacity at some point and have since lost it as a result of accident or illness. As our population ages and life expectancy increases, many of us will experience loss of decisional capacity. However, society has a responsibility to ensure that individuals who never had decisional capacity in the first place (those who were born with cognitive impairments) are also able to exercise their capabilities. I hope Boni-Saenz and others will take up that issue next.

 
 

Are Inheritance Taxes Special?

Luc Arrondel & André Masson, Taxing more (large) family bequests: why, when, where?, (2013), available at HAL-SHS.

As I write this review, I am blatantly aware of the maxim “we like what we know.” I like Luc Arrondel and André Masson’s (A&M) working paper (lots) because it touches on themes I have previously written about (the clash between family autonomy and equality of opportunity as the central normative tension underlying the federal wealth transfer taxes) or enjoyed in other legal scholars’ work (the failure of economic models to account for “life in all of its fullness”). The contribution to these subjects made by A&M is interesting for two reasons: 1) they are economists by trade and 2) they offer a distinctly interdisciplinary analysis of the conundrum of wealth transfer taxation.

A&M first identify (and empirically document) a tax “puzzle:” revenues from wealth transfer taxation are very low and have fallen as a percentage of GDP in most developed countries over the past 50 years; whereas, revenues from lifetime capital taxation (including taxes on property/wealth and taxes on annual capital income flows) are generally higher and show no decreasing trend. The article discards several proffered explanations for this phenomenon (increased lobbying by the rich, growing international tax competition, and the relatively recent anti-government/tax movement) because these factors, intended to account for the growing unpopularity of inheritance taxation, would also imply—wrongly—a sharp decline in lifetime capital taxation.

A&M find some traction in a more recent theory offered by two other economists, Piketty and Saez (P&S), who specifically address the optimal mix between “one-off” inheritance taxation and lifetime capital taxation.1 Under the basic P&S model, if capital markets are perfect and riskless, then the two types of taxes are equivalent. However, when capital and insurance market imperfections (including random, uninsurable shocks to rates of return) are introduced, the model favors lifetime capital taxation because it can provide insurance against return risk more powerfully than bequest taxation. A&M concede that this theory might be able to explain a preference for lifetime capital taxation over inheritance taxation but argue that it fails to account for the diverging trends in the two taxes over time.

According to A&M, “reform” economists do not really understand the growing unpopularity of bequest taxation because they “are so concerned with destroying the widespread view in academic circles of zero capital taxation that they have come, more or less willingly, to overlook the specific issue of inheritance taxation.” Economists conceptualize wealth transfer taxes as involving the same equity/efficiency trade-off as other taxes. This view fails to account for the distinct character of inheritance taxation where family values, intergenerational links, and relationship to (one’s own) death play a crucial role.

A&M articulate the particular problem of wealth transfer taxation as a conflict between two incommensurable principles: family values and social justice considerations (including equality of opportunity). The former principle argues against inheritance taxation, whereas the latter value favors high bequest taxes. The growing aversion to wealth transfer taxation, which does not affect other forms of capital taxation, could then be due to an increased emphasis on the family, a weaker collective sense of social justice, or both. Relying on the work of sociologist Jens Beckert, A&M attribute much of the growing unpopularity of wealth transfer taxation primarily to an evolving view of the family as “a safe haven against growing insecurity and declining economic growth: it reflects waning trust in capital markets, the Welfare state, returns to education, and possibilities for upward social mobility.”

A&M suggest that reforms to bequest taxation should be viewed (and evaluated) as a means to “reconcile the two antagonistic principles.” They dismiss two reforms (substituting higher lifetime capital taxation for bequest taxation and including all wealth transfers in the income tax base) as insufficiently addressing the family vs. society dilemma. On the other hand, the authors view favorably a system that taxed inherited bequests more stringently than self-accumulated bequests (first proposed by Rignano), but recognize the virtual impossibility of its implementation.

In the last part of the article, A&M offer their preferred reform coined “Taxfinh” (tax (much) more (large) family inheritances). While spelled out in only the most general terms, the idea seems to be to levy a heavy tariff on transfers at death while exempting (or substantially reducing the burden on) lifetime transfers (to either family or charity). According to A&M “it is the only workable measure that endeavors to reconcile arguments of family values with principles of social justice, while also taking due consideration of the sharp increase in life expectancy in most developed countries.” While much of the Taxfinh discussion is particular to France, A&M offer U.S. audiences a surprisingly rich analysis of the familial, existential and societal interests implicated by wealth transfer taxation and a candid assessment of their own discipline’s failure to capture these aspects of the tax.



  1. Thomas Piketty & Emmanuel Saez, A Theory of Optimal Capital Taxation (Nat’l Bureau of Econ. Research, Working Paper No. 17989, 2012). []
 
 

Linking the Certainty of Death and Taxes

Reid Kress Weisbord, Wills For Everyone: Helping Individuals Opt Out of Intestacy, 53 B.C.L. Rev. 877 (2012).

Testamentary freedom gives a person the right to control the distribution of his or her property upon death. The main way for a person to exercise that right is to execute a Will. In the event a person dies without a Will, his or her estate is distributed based upon the scheme set forth in the applicable intestacy statute. Even though most Americans die without executing Wills, Professor Weisbord is convinced that the decision not to execute a Will is not an indication that a person wants his or her property to be distributed under the intestacy system. Professor Weisbord opines that most people do not understand the consequences of dying intestate.

Professor Weisbord seeks to articulate a reason for the high rate of intestacy. He rejects the argument that people fail to execute Wills because they are afraid to think about their own mortality. To justify his rejection of that argument, Professor Weisbord asserts that people confront and plan for death by using non-testamentary transfer devices like life insurance and retirement plans with death benefit provisions. Professor Weisbord concludes that procrastination is the most plausible explanation for the high rate of intestacy. He maintains that most people procrastinate when it comes to making a Will because the process is complex and intimidating. According to Professor Weisbord, the Will-making process is complicated because the Will has to be attested to by witnesses and drafted using complex legal language. Professor Weisbord states, “In short, simplifying the will-making process would likely reduce testamentary procrastination.”

In an attempt to make Will execution more accessible, Professor Weisbord proposes linking Will making to tax filing. At the time a person files his or her state income tax return, he or she would have the opportunity to fill in the blanks of a testamentary schedule. This schedule would be attached to the state income tax return just like any other tax schedule. Professor Weisbord thinks a testamentary schedule would have several advantages. First, the testator would have the opportunity to fill out the schedule when he or she is already gathering information on money, income, property, and dependents. Second, people filing income tax returns are the ones who are likely to have property to distribute at death. Third, since income taxes have to be filed annually, the information contained in the testamentary schedule would be updated yearly. This would give a person the chance to review and to make changes to his or her testamentary distributions at least once a year. Fourth, the state would keep the testamentary schedule until it is probated, so the testator would not have to worry about losing his or her Will. Fifth, linking testamentary decision-making with income tax filing might help reduce the intestacy rate because the majority of Americans file their income taxes. Sixth, a person who hires a professional tax preparer might decide to consult with an estate planner if he or she makes a Will at the same time he or she files taxes. Seventh, preparation of the testamentary schedule may help a person who decides to execute a formal Will in the future. Once the person has a copy of the testamentary schedule, he or she can take that to an attorney to have a Will drafted. Finally, over a period of time, people may become used to dealing with estate planning issues and be prompted to execute Wills.

In the final part of the article, Professor Weisbord acknowledges that his proposal has some shortcomings. One concern is that someone other than the testator may file a testamentary schedule on the testator’s behalf. As a result, there is a potential for fraud. For instance, the testator’s daughter may file a testamentary schedule indicating that the testator desired to leave her the bulk of his or her estate. Professor Weisbord contends that the possibility of fraud will be diminished because the schedule would contain a warning indicating the criminal sanctions that a person would face if they filed a fraudulent testamentary schedule. In addition, prior to filing the testamentary schedule, the person would be required to submit confidential information from the testator’s previous state income tax return. Another weakness of the proposed testamentary schedule is the possibility that the testator’s private information would be disclosed. According to Professor Weisbord, testamentary privacy would be protected by the confidentiality and nondisclosure rules already in place to protect filed income tax returns. A further concern is that the testator may be unable to create a customized estate plan because the testamentary schedule will have a limited number of estate planning options. Without a customized estate plan, the court may not be able to ascertain the testator’s intent. In response to that shortcoming, Professor Weisbord notes that having a limited statement of testamentary intent will benefit a decedent more than dying intestate. One purpose of the Will formalities is to ensure that the testator appreciates the significance of the testamentary act. That purpose may be defeated because the proposed testamentary schedule process may be too informal. Nonetheless, Professor Weisbord notes that, for most people, filing income taxes is a serious process, so linking estate planning to income tax filing will enable people to understand the legal significance of making a Will. A final shortcoming of the proposed testamentary schedule is the fact that states have limited resources; therefore, they may be unable to absorb the expense of processing and storing the testamentary schedules. In order to reduce those costs, Professor Weisbord recommends that states charge a nominal fee for the service.

The distribution under the intestacy system often does not reflect the intent of the majority of people who die without executing a will. The innovative proposal Professor Weisbord discusses in his article may help to lower the rate of intestacy by making the Will making process simpler and more affordable.

 
 

A Decedent’s Digital After-Life

Jamie Patrick Hopkins, Afterlife in the Cloud: Managing a Digital Estate, 5 Hastings Sci. & Tech. L.J. 210 (2013), available at SSRN.

A decedent might have gone to join his digital property in the clouds, but for the estate lawyer here on earth, these digital assets may require more novel and not (as of yet) widely embraced estate planning techniques.

In his recent article, Professor Jamie P. Hopkins identifies the digital assets that increasingly are property interests of a decedent’s estate. The mechanics for establishing joint ownership of digital assets is less than clear; the importance of including digital assets in the estate plan for their post-death transfer is highlighted.

Each digital asset at death becomes an estate asset that must be identified, valued and transferred. This is an inescapable truth, whether the digital asset in an individual’s Facebook page (with typically zero financial value), an on-line store of a sole proprietorship (with a going-concern value) or an electronic folder of never before seen photographs by a world-class photographer (with values high enough to trigger estate and inheritance taxes on their transfer).

Even the non-tech savvy client typically possesses digital assets. The dusty, yellowing pages of the family photo album are being replaced by digital storage. Traditional approaches to locating physical assets may prove insufficient in locating digital assets. And even once found, digital assets are typically password protected. So rather than searching for one safe deposit box key, the probate attorney requires a (potentially) unique “password key” to each asset.

As digital assets cannot exist independently of the online service provider, the extent of the surviving property interest in a digital asset may be limited by contract with the online service provider. Some digital assets are strictly non-transferable, more like a right than a true property interest.

Professor Hopkins does an excellent job of guiding digital estate planners in adapting to these situations in a legal environment that is still new and growing. The article specifically highlights the need for legislative solutions and points to a few already-existing examples. The author also informs the reader of a few online service providers who offer post-mortem asset management services for their digital assets. With good reason, estate planners and others should be wary of this new market given the uncertainty around its potential for longevity and security.

Just as other areas of law such as commercial law (electronic chattel paper), property law (online property records), and courts in general (electronic filing) have moved into the digital area, estate planning must follow suit. This article does well to point out some key issues in the area and provide suggestions for improvement and guidance. By reminding estate planners to leave private information out of wills if working in this arena or to move the digital assets entirely to a trust for easy transferability, Hopkins offers practical advice for a situation that may not yet have reached practicability for many. The article leaves out a few questionable scenarios such as digital assets belonging to multiple parties (couples’ Facebook pages for one example), but extends practical logic to estate planning in a manner that is thought-provoking and innovative.