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.


Does My Digital Estate Belong to Me? Estate Planning for Digital Assets

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

In the article, Afterlife in the Cloud: Managing a Digital Estate, Professor Jamie Hopkins steps into the tangled web of estate planning for digital assets. Professor Hopkins’s article is timely and allows us to begin a much needed discussion about a new and important area of estate planning. He begins to answer the question of what happens to digital assets when an individual dies. Can an individual dispose of his or her digital assets in a will or trust? How should issues of security and privacy be addressed? Hopkins reminds us that digital assets are vast and complex and traditional estate planning tools do not adequately address the issues that are involved with transferring such assets at an individual’s death. He suggests a combination of federal legislation and better service agreements between service providers and users as a solution to the digital dilemma.

Although, I am not convinced that federal legislation is the appropriate mechanism, I agree that uniformity is in order. Since only a handful of states have addressed the issue, many individuals are not aware of whether they may transfer certain assets when they die. For example, in my will, I devise my real and personal property to my designated beneficiaries. When I executed my will several years ago, I used a 35mm camera to take pictures. I used a day planner to keep my schedule, I kept paper copies of bank statements and other financial documents, and I used a Rolodex to store information from professional contacts. Today, my digital photographs are stored on a hard drive or in a cloud. I use an online scheduler to keep my appointments, I use online banking for most of my investments, I share photographs and videos via Facebook, I download my music and books from ITunes, and I use Twitter for professional connections. I have numerous passwords to these accounts, and I have checked “I agree” to several online service agreements. Will my beneficiaries have access to my digital assets? Professor Hopkins’s article is a wake-up call for people like me.

Professor Hopkins defines digital assets broadly to include “any electronically stored information” that can be used for both business and social purposes. Digital assets contribute to the value of a business since businesses use digital assets for numerous purposes including marketing, payroll, and storing information. Social digital assets have now replaced once traditional assets.,Photographs are stored in clouds or on websites such as Facebook instead of in physical photo albums.

Since digital assets are stored “on a variety of mediums, devices, and locations,” anyone charged with managing such assets is bound to run into unforeseen complications. Even though most estate lawyers are not technology gurus, they may now have to locate digital assets and may be charged with determining the value of the assets in order to probate a simple estate. Not so long ago, a simple search through a desk or file cabinet could provide clues to bank accounts and other assets. Today, such a search may not uncover those digital assets that are stored in clouds or with third party services.

Even if the asset can be located, issues of privacy and ownership arise. A terms of service agreement may prevent an executor from gaining control of an asset in order to transfer it to a designated beneficiary. Terms of service agreements are not uniform and the issue of whether or not an account is transferrable may be governed by a contract between the service provider and the user. For example, Facebook memorializes a user’s account after his or her death and “is the sole holder of the any of the deceased’s digital assets.”

Professor Hopkins criticizes digital estate planning services because of the unanswered questions about owner privacy and security. For starters, given the rate of identity theft crimes, customers may not want to put passwords into a third party account. Also, there is high industry turnover so individuals may not be so trusting of companies without history.

Professor Hopkins highlights Oklahoma legislation that gives an executor control over a decedent’s digital accounts. But, as he points out, Oklahoma’s legislation does not address all digital assets. He suggests that since most states are on the sidelines, federal legislation is necessary to clarify digital asset ownership rights. Although the current fractured Congress will probably not pass federal legislation in the near future, the Uniform Law Commissioners are drafting model language with respect to digital accounts. Professor Hopkins also suggests that service providers should improve online service agreements. This seems much more feasible than the federal legislation.

I would like to see Professor Hopkins offer suggested language that would help resolve the digital dilemma. He has already highlighted issues of ownership and transferability. Suggested standard language for terms of service agreements or model legislation that each state legislature could then address would be beneficial to the discussion. In the meantime, there is no doubt that traditional wills and trusts will need to adjust to meet the challenges of the digital estate.


Filling in the Blanks

Adam J. Hirsch, Incomplete Wills, 111 Mich. L. Rev. 1423 (2013).

In his latest article, Incomplete Wills, Professor Adam Hirsch undertakes an elaborate analysis of the law governing the disposition of the portion of the testator’s probate estate undisposed of by the testator’s will. The breadth and depth of the research on which the article rests is formidable indeed. Although at first thought one might quarrel with the author’s assertion that the examination and classification of reported cases is a form of empirical research, he is candid about the limitations of the technique and his use of the cases is really quite traditional: they are illustrations of the great variety of circumstances in which the courts have considered real problems, in this instance, those caused by incomplete wills. And this use of the illustrations that the cases provide is the message of the article. Because wills are incomplete for many reasons, all of which are to some degree unintentional, the usually bright line rules that govern, exemplified by the closely related treatment of these topics in Restatement (Third) of Property (Wills and Donative Transfers) and the Uniform Probate Code (UPC), often give results that to varying degrees are out of sync with what we can learn of testators’ intentions.

Prof. Hirsch first discusses negative wills at great length, asking under what circumstances express disinheritance should be effective to supplant the intestacy statute in the event of a partial intestacy (providing along the way a complete discussion of current American law on the subject). With appropriate noting of the limitations of the data, he attempts to classify the reported cases according to the reason for disinheriting a family member by means of a negative will. The most we can conclude from this effort is that “the data suggest a substantial scattering of testamentary motives.” That fact, in turn, leads to the conclusion that neither the traditional refusal to honor negative wills nor their blanket approval by the modern view exemplified by the Restatement and the UPC is the best way to go. He suggests instead a close inquiry into the motives for making a negative will. The legislature will need to create a presumption about the testator’s intent to create a negative will or not, a presumption which for now will be arbitrary but in the future will be refined in light of cases decided under the new rule of ascertaining testator intent.

Prof. Hirsch also draws a distinction between negative wills disinheriting potential heirs by name and “global negative wills” disinheriting all of the testator’s potential heirs. Although neither the Restatement nor the UPC draw the distinction, he believes it is worthwhile to do so because “scrupulous observance of global negative wills” would likely not carry out the testator’s intent. Global disinheritance clauses, he believes, citing cases in support, often result from clumsy attempts to excluded pretermitted children. In addition, where we can conclude such provisions are an expression of hostility toward the testator’s heirs, there are surely gradations of hostility. Besides, he asks, of a will that unexpectedly fails to dispose of the testator’s estate, if the resulting choice is between distribution in intestacy and escheat, how many testators who have disinherited all of their potential heirs would stick to a complete override of the intestacy statute? He suggests the legislative creation of a rebuttable presumption that a testator would not want a global disinheritance clause to stand in the event of an unanticipated partial intestacy.

The remainder of the article is similar: the existing rules, often as not enshrined in the Restatement and the UPC, do not take into account the wide range of testator intent illustrated in the cases. For example, both the Restatement and the UPC require that a negative will be created using express language and both state that the result of an effective negative will is that the disinherited are deemed to have disclaimed their intestate shares. In both cases, these bright line rules do not necessarily capture the intent of every testator who creates, or attempts to create a negative will. The deemed disclamer in particular creates odd results because under the UPC, a disclaimer overrides the application of the per capita at each generation scheme of representation, which is the default meaning of “representation” under the Restatement and the UPC.

The article continues with a fascinating discussion of “estate planning gimmickry” made possible by the negative will. For example, by disinheriting heirs, the testator might be able to prevent anyone from challenging the will (although Prof. Hirsch does note that the effectiveness of such an attempt is not at all certain). The author also suggests that it should be possible to create a “positive” will, a will that alters the statutory pattern of intestate succession. The article concludes with a discussion of the application of the doctrine of advancements to partial intestacy and the possibility of a distribution in partial intestacy following the distribution in the effective portion of the will. Here, Prof. Hirsch notes the problematic nature of the abolition of the “no-residue-of-a-residue” rule. Again, one can never be certain that an inflexible rule yields results that carry out the unexpressed intent of a majority of testators whose wills are incomplete and one can certainly point to cases where we can be fairly confident the rule does quite the opposite.

In the end, Prof. Hirsch advocates an approach to these cases of incomplete testamentary provision that is more like the approach of both courts and legislatures to cases of incomplete contracts, “a domain in which bracketed judicial discretion seems to function well enough in practice.” This is the sort of suggestion that is genuinely thought provoking, and when well described and supported, as it is here, well worth the effort to understand.


To Praise Testator’s Speech

David Horton, Testation and Speech, 101 Geo. L.J. 61 (2012).

Professor David Horton argues that testation is a form of expressive speech that may raise Constitutional concerns. In doing so, he reminds us of a basic reality—a will that disposes of property is also the will of an individual speaking to his or her family, friends, and community. Legal trends that emphasize efficiency over the testator’s individual voice are troubling.

Horton begins by examining three traditional analogies used by courts in deciding trust and estates cases—property, contract, and corporate law. In describing each analogy, Horton notes that none of these is spot on, there is an ill fit associated with each. This provides the intellectual space for other theories and perspectives, including speech. Horton acknowledges that his conceptualization of testation as Constitutional speech is also not a perfect fit; nevertheless it offers an intriguing lens through which to view some difficult cases and doctrines.

Testation and Speech considers history. The Roman origins of wills reveal a rich pattern of individual expression. These were public documents read aloud at civic gatherings. Over time, as laws, taxes, and lawyers became more involved in the estate planning process, the expressive voice of the individual testator arguably became less clear, though never silenced.

Testamentary expressive speech continues today, which Horton classifies in two ways—patent expressions (such as conditional bequests, gifts for purpose, and unusual commands) and expressions embedded in distribution plans. Patent expressions are well known to estate planning attorneys who at times need to counsel clients from including libelous statements in their wills. That such statements in a will can give rise to a libel claim underscores the testament-as-speech argument. Conditional gifts – such as involved in the highlighted Feinberg “Jewish clause” case1—similarly confirm the expressive potential of a will. That many testators do not use these well-known provisions does not undermine the expressive speech function for those who do.

On the other hand, all testators dispose of their property. Horton believes the disposition of property can be an implied form of expressive speech—it communicates in concrete fashion the feelings and judgments the testator has made about the property and beneficiaries. It bears particular significance for two reasons. First, the disposition expresses the testator’s individuality at death—a time that carries great weight and moment for the testator as well as those who survive her. Second, the disposition is also comprehensive, the sum total of feelings and property. It is quite sobering for all involved. One quibble I had with the article is in this section. The conclusion that the three quarters of testators who divide their property equally among their children reveal little in their estate plans sounds off to me. Can it be that such a dispositive plan is equally expressive as a plan that orders disparate treatment?  Those testators may simply be expressing equal love and affection for all their children, prodigals and stars alike.

Horton next tackles the policy implications of testation as speech. This is the novel and insightful crux of his article as he implicates a role for First Amendment free speech scrutiny as well as a return to the traditional emphasis on testator’s intent in close cases.

If testation is viewed as expressive speech, then certain legislative and judicial limits on testamentary freedom could raise First Amendment concerns. While the contours of First Amendment protection are “notoriously elusive,” a provision in a testator’s will (e.g., the “Jewish clause”) can be self-expression, contribute to the marketplace of ideas, and be a form of political speech; all of which values undergird classification of speech for First Amendment purposes.

Undue influence is troubling because many cases proceed from leaving property to nonrelatives, instead of the perceived norm of family. This plays out in case law as well as in legislation. California has a new statute that presumptively invalidates donative transfers from a “dependent adult” to a nonrelative paid caregiver. If such bequests are viewed through the lens of expressive speech, those bequests may similarly be a “ringing exercise of autonomy,” add to the marketplace of ideas, and arguably address “matters of public concern.” The statute and the doctrine may need to be rethought.

More troubling under his analysis are two UTC principles—the “benefit–the–beneficiaries” rule and that some doctrines are mandatory regardless of the settlor’s intent. The “benefit–the–beneficiaries” rule has generated much scholarly discussion but Horton’s expressive speech concern adds another perspective from which to ponder the new rule’s scope. He prefers an application that begins with, or at least takes into account, the settlor’s intent. More fundamentally he questions the need for the rule’s existence because traditional doctrines of modification and administrative deviation address the same issues of waste and loss that the rule ostensibly addresses.

A will can be more than merely a transfer of property, and when it is, a testator’s expressive speech should be valued, respected, and not dismissed as an inefficiency in wealth transmissions. Horton’s article is intellectually provocative, and it provides a new perspective on the endlessly fascinating issue of what people say, do, and mean in their wills.

  1. In re: Estate of Feinberg, 919 N.E.2d 888 (Ill 2009). []

Taxes and Brains

Adam Chodorow, Death and Taxes and Zombies, 98 Iowa L. Rev. 1207 (2013), available at SSRN.

Taxes and brains—or rather, braaaaaaains—have always gone well together, but never quite like this. The income tax and the estate tax present intricate mechanisms for levying assessments on the living and the dead. In Death and Taxes and Zombies, Professor Chodorow turns his attention to the middle of this Venn diagram: the undead. The article reveals that Congress and the IRS have utterly failed to address this topic, creating significant uncertainty as to how the tax laws would apply in the event of a zombie apocalypse.

The article leads the reader through a series of ordinary tax and legal scenarios and applies them to extraordinary circumstances. How do states address the question of what it means to be legally dead? When does federal law trump state law for purposes of determining whether an inheritance has passed? What constitutes taxable income? What are relevant valuation dates when property is transferred, and how are the basis rules applied in the context of transfers from a decedent? What are the loopholes in the estate tax and the income tax? And more important, how do these rules apply to zombies?

For example, Professor Chodorow addresses the question of whether a zombie would be taxed on earned income. The issue turns on whether the zombie is dead and controlled by another, in which case agency rules should attribute this income collected by the zombie to his principal. Self-directed zombies, however, appear to be “individuals” and “taxpayers” under the Tax Code, despite the lack of specific mention (readers are referred to section 7701 of the Internal Revenue Code). (Pp. 1220-21.) Whether the income is properly considered “in respect of a decedent” raises additional wrinkles. Professor Chodorow marvels that the regulations are silent on the matter. (P. 1221).

The best thing about the article may be its biting sense of humor. (“If people who become zombies are considered dead for federal estate and income tax purposes, little will change. Becoming a zombie will be no different than dying from pneumonia, aside from the part where you eat your friends and loved ones.” (P. 1222.)) The “call to arms” tone of the paper is a subtle critique of overzealous academics who get carried away with their own importance. Not everything is an apocalypse.

It is likely, though, that the true strength of the article is as a teaching tool. The basics of tax law are important for students to learn, but can be dry and inaccessible. For students, the article is concise (about 25 pages), fairly comprehensive, and an easy and enjoyable read. It models good legal writing and citation support. It also teaches the value of creativity and considering transactions from different perspectives. I will be assigning it as part of the second day’s reading in my Estate and Gift Tax class this fall.

It takes really meaty brains to put together an article this unique. I can only hope no zombie reads the article and decides to feast upon Professor Chodorow.


Rules or Standards For Intestate Succession?

Intestate succession law has traditionally been directed toward accomplishing two objectives: effectuating the likely intent of intestate decedents and minimizing administrative costs. Within the so-called “traditional” family, those objectives are rarely at odds. As a result, intestate succession law has traditionally been relatively simple: the decedent’s property is distributed to the decedent’s spouse and issue, and the only areas of controversy surround how much the spouse should take, and whether distribution to issue should be per stirpes, per capita, or by the UPC’s more refined “by representation” scheme.

In her recent article, however, Professor Susan Gary identifies the growing complexity in intestate succession law. That complexity is a response to increasing recognition that intestate succession statutes designed for the traditional family often frustrate the intent of decedents whose family is not traditional. To deal with non-traditional families, Professor Gary notes that a number of states have attempted to bring domestic partners, children born through assisted reproduction, stepchildren, and even informally adopted children within the intestate succession scheme, and cites a variety of scholarship supporting this expansion. Similarly, she identifies statutory provisions designed to disinherit intestate heirs when it would appear that the decedent would not want those heirs to take; in addition to slayer statutes, she discusses cases of child or spousal abandonment, and cases of elder abuse. These refinements of more traditional intestate succession statutes presumably increase the number of cases in which intestate succession doctrines effectuate the intent of intestate decedents, but, as Professor Gary observes, they are not perfect; they do not anticipate all of the circumstances in which a decedent might want to vary the most common patterns of distribution.

That leads to Professor Gary’s suggestion: we should focus less on fine-tuning intestate succession provisions, and more on giving courts discretion to consider how individual decedents might have wanted their assets distributed. Professor Gary recognizes that the idea is not revolutionary. She points out that some states already confer limited discretion on judges, and she emphasizes that family maintenance provisions in force in a number of Commonwealth countries operate, apparently successfully, even though they give judges even greater discretion in distributing estate assets.

Professor Gary’s article essentially raises a now familiar question in the intestate succession context: if we want to effectuate the intent of intestate decedents, should we do so through a regime of rules or a regime of standards? The prevailing approach to intestate succession law has been to use rules. Rules tend to be preferable when the legal problem at hand involves deciding a large number of cases, most of which fall into a much smaller number of patterns. In those circumstances, the investment in refined rules, which then can be inexpensively applied to individual cases, seems optimal. By contrast, when the number of patterns approaches the number of cases, the ex ante investment in rulemaking seems counterproductive, and we gravitate toward standards. Professor Gary’s thesis—and she may be right—is that as the number of family situations expands, intestate succession law should move in the direction of standards.

Of course, Professor Gary is fully aware of the most significant question about intestate succession law: how important is it to effectuate the decedent’s intent—especially when too much investigation into the issue could eat up much of the estate? People who expect their preferences to depart from legal norms always have the option to draft wills and revocable trusts that make intestate succession largely irrelevant. But, as Professor Gary points out, most people don’t write wills, making it at least somewhat important to try to have intestate succession doctrine reflect our best guess about a decedent’s intent.

Professor Gary nevertheless recognizes that if we move from rules to standards, we should at least have presumptive rules, and we should place obstacles in front of claimants who seek to rebut the presumption. She suggests, for instance, permitting judges to assess costs against the petitioning heir in order to discourage frivolous claims. Obstacles like these would go a long way towards making Professor Gary’s proposal workable; here, though, I might prefer an absolute rule depriving courts of any discretion, and requiring the claimant to post a bond as an admission ticket to any litigation. The bond would cover reasonable costs and attorneys’ fees of the presumptive heirs as well. That might discourage claimants from filing suit just to obtain leverage in any settlement discussions with the presumptive heirs.

In short, as always, Professor Gary has produced a thought-provoking article.