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Uncaging the Donee’s Freedom

Mark Glover, Freedom of Inheritance, 2017 Utah L. Rev. 283 (2017), available at SSRN.

Policymakers have long focused on the freedom of disposition, the ability of donors to decide how their property should be distributed. These decisions are almost at the complete discretion of the donor. The donee, on the other hand, has a much smaller role in the process. The donee’s only real decision is deciding whether to accept or reject the donor’s gift. This choice is termed the freedom of inheritance. While the freedom of disposition is well understood, the freedom of inheritance has not been explored to the same extent.

Prof. Mark Glover’s article, Freedom of Inheritance, justifies the need to recognize the freedom of inheritance and how policymakers need to facilitate the freedom of inheritance for donees. Prof. Glover explains the importance, mechanics, and rationales behind the freedom of disposition. He then conducts parallel explanations for the freedom of inheritance. The article also analyzes how the freedom of inheritance aids the utility for both the donee and the donor. Prof. Glover delineates how the donee may be better prepared to handle the disposition of the donor’s property post-mortem with specific examples. Finally, the article emphasizes how to best facilitate the freedom of inheritance in contrast with the freedom of disposition.

The article articulates how the freedom of inheritance must be based off the freedom of disposition. By explaining the method for creating a disposition and the rationales behind those methods, Prof. Glover furthers demonstrates how the freedom of disposition is a long-standing and important process in modern society. He also points to the utility to both the donor and the donee as substantial reasons behind the current schemes of testate disposition. Finally, he explains that the donees are motivated to act in the donor’s best interest because of the incentive of receiving property upon the donor’s death.

When discussing the freedom of inheritance, the parallelism between the choices of the donee and donor make it apparent that the freedom of inheritance has just as important of a role in society as does the freedom of disposition. The donor has the overarching right to decide how his or her property is distributed should the donor take the proper steps under the law. Once the donee disclaims the property, the donee is treated as if the donee predeceased the donor and the alternate donee receives the property. This may be viewed as a severe limit on the right of the donee, as the donee cannot direct the new recipient of the property.

The rationale behind allowing the donee to disclaim property is that it allows the donee to determine the utility to the donee and the social welfare of the property itself. By not forcing the donee to take unwanted property, the donee can act in the best way for the donee’s selfish interest. While the donor may believe he or she is acting in the best interest of all involved, the fact remains that by the time certain facts come to light about the estate plan, it is far too late for the donor to react accordingly.

To further explain how the donor may not have planned properly, Prof. Glover uses two specific examples. If the donee were insolvent, then disclaiming the gift would have a greater social utility for the alternative donee and would allow the original donee to respect the wishes of the donor. In another example, the donor may not be able to plan correctly for the tax consequences that come with transferring property. By allowing for disclaimer, the donee can reduce the tax burden of the gift.

To facilitate effective disclaimers, there needs to be a formalized process similar to, but not as strict as, that of executing a will. This allows for finality in the process while still allowing the donee to have greater freedom. Additionally, clear timelines in disclaimer statutes empower the donee to act efficiently. Prof. Glover explains how the donee may be at risk of losing other freedoms or benefits by accepting property, like Medicaid, and disclaiming allows the donee to consider the donee’s interests first.

Overall, I highly recommend this article as a clear explanation of the importance of disclaimers for both the donor and the donee. Taking a view from the donee’s perspective is an innovative feature of Prof. Glover’s article. As an advocate for effective estate planning, I believe this article helps further demonstrate how estate planning involves legal and ethical considerations from both the donor’s and donee’s perspectives.

[Special thanks to the outstanding assistance of Bailey McGowan, J.D. Candidate May 2018, Texas Tech University School of Law, in preparing this review.]

Cite as: Gerry W. Beyer, Uncaging the Donee’s Freedom, JOTWELL (April 13, 2018) (reviewing Mark Glover, Freedom of Inheritance, 2017 Utah L. Rev. 283 (2017), available at SSRN), https://trustest.jotwell.com/uncaging-the-donees-freedom/.

Using Empirical Studies as a Basis for Updating Intestacy Laws

Danaya C. Wright & Beth Sterner, Honoring Probable Intent in Intestacy: An Empirical Assessment of the Default Rules and the Modern Family, 43 ACTEC L.J. 341 (2017).

The principal goal of any intestacy statute is to determine the probable intent of individuals who die without a will. Presumably, that means determining what most people who die without a will would want their wills to say if they were to have executed a will before dying. This is a particularly challenging endeavor, given that intent changes over time and may not be consistently the same throughout a large, multicultural country.

In their excellent article, Professor Wright and Ms. Sterner analyze 493 wills that were probated in Escambia and Alachua Counties, Florida, in 2013. They do this, the authors say, “[i]n light of the fact that marriage is a waning institution and a majority of children are currently being raised in nontraditional families—defined as blended, single-parent, or same-sex.”

Part I of the article reviews the history of empirical studies regarding testamentary intent. It notes that the two primary methods of doing this kind of empirical study are (1) phone surveys of living people and (2) an analysis of probate records in certain areas of the country. The article rightly notes that both of these methods have advantages and disadvantage. For example, because most people do not prepare wills until they are older, probate records may not give us an accurate picture of testamentary intent with respect to younger decedents. The article also identifies key empirical studies in this field, beginning with Richard Powell and Charles Looker’s 1930 study and ending with David Horton’s 2015 study.

In Part II of their article, Professor Wright and Ms. Sterner turn to their empirical study, which analyzed all wills that were recorded in the official records of two counties in Florida during the 2013 calendar year. In their study, they looked at such things as multiple marriages, the presence of stepchildren, and the use of pourover wills. They also noted the time between the execution of the will and their study to see if it made a difference if wills were executed closer to the time of death. 2013 was selected because it was recent but also ensured that the probate process was likely to be complete by the time of their study.

The two counties selected for the study were meant to be culturally, economically, and demographically diverse. Alachua County is the county that includes Gainseville, home to the University of Florida. It is a county that is predominantly Democrat. Escambia County is home to Pensacola, one of the largest military training sites in the Navy. It is predominantly Republican. Both counties are roughly two-thirds White (non-Latino), one-fifth African American, and about five percent Latino. Other races and ethnicities account for a very small portion of the population of both counties.

For each estate, the authors gathered data from at least three documents: (1) the Petition for Administration, (2) the Death Certificate, and (3) the Will (including any codicils). From those documents, they were able to gather data regarding date of death, gender, race, marital status, date of will execution, children, size of probate estate, courts costs, relationship between the decedent and the personal representative, testamentary dispositions, whether a trust existed, and the relationship between the trustee and the decedent. Most of this data is provided in table form in the article.

Testamentary dispositions were broken into specific and residuary dispositions and broken down further if second or third spouses or stepchildren were involved. The most common testamentary disposition was to leave everything equally to the decedent’s children (35 percent of the cases). Second most common was everything to a spouse if alive and then to the children if the spouse failed to survive the decedent (29 percent of the cases). While wills for single marriage families tended to align with the state’s intestacy statute, wills of people in more than one marriage with children from a prior marriage did not conform as closely with the intestacy statute.

Some interesting trends were identified in the study. First, in the case of multiple marriages, men were far more likely to leave something to their wives than women were likely to leave something to their husbands. Second, women were more likely to devise property to children, nieces, nephews, and grandchildren than men, who were more likely to devise property just to their children. Third, White decedents were far more likely to die testate and have their estates probated than decedents of color. While the White population of the two counties was about 65 percent, 91 percent of the testate estates involved White decedents. Fourth, where stepchildren were clearly identified, the decedent overwhelmingly (82 percent) left something to the stepchildren. It also is worth mentioning that 100 percent of the estates involving stepchildren were estate of White decedents. That may tell us that intestacy statutes are not adequately addressing the needs of communities of color

In Part III, Professor Wright and Ms. Sterner compare their findings with common intestacy laws. That includes the Uniform Probate Code (UPC), which has been adopted by seventeen states. The authors note that more complex estate plans, including the use of trusts, typically occur when the family situation is complicated. They note that this would tend to benefit White and wealthy populations who have greater access to attorneys. They are particularly critical of intestate schemes, such as the UPC, that preferences collateral blood relatives, including aunts, uncles, cousins, and even children of cousins, over stepchildren, who tend to fall last, if at all, before the property escheats to the state.

The authors propose some concrete changes to intestate schemes. For example, they suggest that the marital status of a child’s parents should not determine a child’s inheritance rights. They also argue that a state probate code’s definition of parent and child should match the family code definition as long as it uses the “best interests of the living child” standard. Another possible change would be for the intestacy statute to give a surviving spouse who remarries only a life estate in property received from the first spouse, with the property ultimately passing to the first spouse’s children.

Some of the conclusions raised by Professor Wright and Ms. Sterner have potential issues and need to be examined further. For example, it may be problematic to make inferences about intestacy statutes from examining wills. People who have wills may have different goals than people who do not have the time or money to draft wills. Furthermore, wills do not contain any information about non-testamentary dispositions such as joint tenancies. In addition, while fascinating, more research would need to be done with respect to stepchildren, given that there are potential problems with looking at wills to determine if a decent had stepchildren.

Professor Wright and Ms. Sterner have written an excellent, thought-provoking piece. While their study is limited to only one year in two Florida counties, they need to start somewhere. More studies like this are needed throughout the United States to better understand probable testamentary intent. These studies could be used as a basis for state legislatures to begin updating their intestacy statutes to more accurately reflect the reality of probable intent. New statutes, if properly considered, should pay attention to gender, race, and class differences that surfaced in the authors’ study.

Cite as: Sergio Pareja, Using Empirical Studies as a Basis for Updating Intestacy Laws, JOTWELL (March 15, 2018) (reviewing Danaya C. Wright & Beth Sterner, Honoring Probable Intent in Intestacy: An Empirical Assessment of the Default Rules and the Modern Family, 43 ACTEC L.J. 341 (2017)), https://trustest.jotwell.com/using-empirical-studies-as-a-basis-for-updating-intestacy-laws/.

Using an Interesting Conversation to Teach Testamentary Capacity

Stephen R. Alton, The Strange Case of Dr. Jekyll’s Will: A Tale of Testamentary Capacity, 52 Tulsa L. Rev. 263 (2017).

The Strange Case of Dr. Jekyll and Mr. Hyde is a popular novella that was published by Robert Louis Stevenson in 1886. In the novella, Gabriel Utterson, a lawyer, investigates strange events involving Dr. Henry Jekyll and Edward Hyde. Dr. Jekyll is a respected man and Mr. Hyde is suspected of killing several people. Mr. Utterson becomes upset when Dr. Jekyll produces a holographic will that leaves the bulk of his estate to Mr. Hyde. He believes that Dr. Jekyll’s actions are a result of blackmail on the part of Mr. Hyde. After Dr. Jekyll commits suicide, Mr. Utterson finds a letter in which Dr. Jekyll confesses that he used a potion to transform himself into Mr. Hyde. Because he is unable to prevent himself from turning into Mr. Hyde Dr. Jekyll kills himself. In his entertaining and well-written article, Professor Alton presents an imagined conversation that he has with Mr. Utterson.

Their imagined conversation focuses on Dr. Jekyll’s testamentary capacity at the time he wrote the will leaving his property to Mr. Hyde. The article starts with a discussion of Dr. Jekyll’s general mental capacity. Professor Alton asserts that, on several occasions, Mr. Utterson indicated that he thought that Dr. Jekyll was of unsound mind. Professor Alton explains the standard courts apply to determine testamentary capacity. Because he teaches in Texas Professor Alton relies on Texas law. Under Texas law, the soundness of mind requirement is satisfied if the testator can understand (1) the activity in which he or she is engaging; (2) the nature and extent of his or her property; (3) the intended beneficiaries; (4) his or her dependents; and (5) the manner of distribution that he or she is making. The testator must also be able to form a reasonable judgment with regards to the four enumerated factors. Both Professor Alton and Mr. Utterson agree that the first four elements of the test were satisfied. Nonetheless, Mr. Utterson states that he believes that Dr. Jekyll “was so deranged in his mind that he could not form a reasonable judgment as to the other elements.” Therefore, Mr. Utterson thinks that Dr. Jekyll lacked the testamentary capacity to make a valid will. However, Professor Alton is not willing to concede that point because the capacity necessary for a person to make a will is so low compared to what is required for a person to execute a contract.

The hypothetical conversation continues when Mr. Utterson insinuates that Dr. Jekyll was suffering from an insane delusion at the time he wrote his will. In response, Professor Alton discusses several different definitions of insane delusion. Then, he opines that a mistaken belief is not the same thing as an insane delusion. When pressed by Professor Alton, Mr. Utterson is unable to identify the insane delusion under which Dr. Jekyll might have been suffering. Professor Alton notes that because Dr. Jekyll was actually transforming into Mr. Hyde it was reasonable for him to leave his property to Mr. Hyde. Consequently, the will was not a product of an insane delusion. Following the brief discussion of unsoundness of mind based on an insane delusion, Professor Alton turns the conversation towards undue influence and duress.

Professor Alton mentions the Restatement and Texas definitions of undue influence and duress. Undue influence exists when someone exercises influence over a testator that causes the testator to make a will that he or she would otherwise not have made. Duress is a form of undue influence that involves the threat or performance of a wrongful act against the testator to force the testator to make a certain distribution. Mr. Utterson claims that Dr. Jekyll told him that Mr. Hyde dictated the terms of the will, but he is reluctant to categorize that as undue influence. Professor Alton counters that he does not believe that Mr. Utterson would be able to meet his burden of proving that the will was a product of undue influence. His doubt stems from the fact that Dr. Jekyll and Mr. Hyde were the same person, and a person cannot exercise undue influence over one’s own self. Mr. Utterson maintains that the will was a product of duress because Mr. Hyde used Dr. Jekyll’s dark secret to extort him. After Mr. Utterson gives examples to support his assertion, Professor Alton applies the legal test for duress to those facts. Based on that application, Professor Alton concludes that Mr. Utterson has made a good case for duress. Nevertheless, because Dr. Jekyll and Mr. Hyde were the same person the will would not be invalidated because of duress.

As the conversation winds down, Professor Alton asks that they examine the slayer rule. The slayer rule is in place to prevent a person from profiting from intentionally bringing about the death of the intestate decedent or the testator. Hence, a person is barred from inheriting from a person whom he or she intentionally kills. Professor Alton discusses the six times that Mr. Hyde was suspected of murdering Dr. Jekyll.  He deduces that Mr. Hyde could not have received any of Dr. Jekyll’s property if it had been proven that he caused Dr. Jekyll’s death. This part of the conversation is interesting. Dr. Jekyll and Mr. Hyde were the same person, so when Dr. Jekyll killed himself, one could conclude that Mr. Hyde killed Dr. Jekyll. As a result, the slayer rule would prevent Mr. Hyde from inheriting from Dr. Jekyll. Nevertheless, death prevents Mr. Hyde from inheriting from Dr. Jekyll. This legal issue is moot because, prior to his death, Dr. Jekyll changed his will and left Mr. Utterson as his sole beneficiary. That modification leads to an exploration of the issues of standing and presumption of undue influence.

Professor Alton uses an innovative approach to discuss material that some students may find uninteresting. His article reads like a short story, so it will keep the students engaged. Therefore, the article is a great learning tool for students enrolled in Estates and Trusts classes. It affords professors the opportunity to expose students to the different rules and doctrines that may impact a person’s testamentary capacity. In the article, Professor Alton points out the strengthens and weaknesses of arguments based upon the relevant legal doctrines. Assigning this article to students will enable them to participate in an interesting and important conversation.

Cite as: Browne Lewis, Using an Interesting Conversation to Teach Testamentary Capacity, JOTWELL (February 16, 2018) (reviewing Stephen R. Alton, The Strange Case of Dr. Jekyll’s Will: A Tale of Testamentary Capacity, 52 Tulsa L. Rev. 263 (2017)), https://trustest.jotwell.com/using-interesting-conversation-teach-testamentary-capacity/.

The Dead’s Online Accounts

Alberto B. Lopez, Posthumous Privacy, Decedent Intent, and Post-Mortem Access to Digital Assets, 24 Geo. Mason L. Rev. 183 (2016).

In Posthumous Privacy, Decedent Intent, and Post-Mortem Access to Digital Assets, Alberto B. Lopez discusses a distinctly modern problem: how much access should a personal representative have to decedent online accounts? Surprisingly few states have addressed this important question, although there is a recent flurry of proposals. Lopez argues that the legislative debate has failed to account for the decedent’s privacy interest and has mostly ignored decedent intent, the lodestar of estates and trusts law. He concludes that when decedent privacy and intent are properly “included in the legislative balance,” policies will lean “toward non-disclosure for individuals who die intestate and toward disclosure if the testator has instructed [by will] that account contents be available.” (P. 242.) While I would ultimately permit more access than Lopez recommends, his article is a must-read because it highlights an important estate planning problem and makes the reader ponder the appropriate scope of post-mortem privacy.

Digital accounts contain a plethora of information: photographs and other individual memories, email correspondence, entertainment files, individual work product, career information, financial data, and on and on and on. Some of this information makes the job of administrating an estate easier; some of it has subjective value to the decedent’s survivors; and some of it may even have actual market value.

Legislation defining a personal representative’s right of access is important because few decedents leave behind a list of accounts and the corresponding passwords. In the absence of a password, personal representatives cannot access an account without help from the service provider—Google, Facebook, or whomever. When asked for help, companies turn to their service agreements. As Lopez documents, these agreements are decidedly unfriendly towards personal representatives seeking access. Lopez’s article is filled with examples of family members litigating with tech companies over access to online accounts, including a father trying to determine whether his daughter left behind any unfinished literary works and a mother trying to access her son’s Facebook page after he was killed in a motorcycle accident.

Lopez describes the issue of access as “a tug-of-war between two basic principles—property rights versus the right to privacy.” (P. 202.) For those seeking access, “the information in the online account is property owned by the account user to be distributed at the user’s death.” (P. 202.) From the perspective of the online service provider, however, “whatever property rights a decedent may have in the contents of an account are trumped by the provider’s commitment to the privacy interest of its users.” (P. 202.)

Lopez carefully reviews the various legislative proposals and explains how they reflect either the property or privacy perspective or try to bridge the gap between the two. On the property side of the spectrum, for example, is a model law that “vest[s] fiduciaries with the authority to access, control, or copy digital assets and accounts.” (Pp. 203-204.) On the other side of the spectrum is a bill which requires personal representatives to obtain a court order before accessing online accounts and then narrowly defines the circumstances in which a court can grant such an order. Proposals that seek a Goldilocks compromise acknowledge that digital accounts are decedent property, but nonetheless restrict access by personal representatives on privacy grounds.

Lopez argues that debate over these proposals falls short in two ways. First, it does not adequately consider the decedent’s own privacy interest in account information. Instead, the debate focuses on the privacy of third parties whose information is tangled up with the decedent’s and might be revealed to the personal representative. Second, the debate has largely ignored decedent intent; that is, no one is focused on whether decedents would want their personal representatives to have broad access to digital accounts. (P. 229.) The combination of decedent privacy and intent lead Lopez to favor broad restrictions on a personal representative’s access to digital accounts, unless a decedent has a will that specifically grants access.

Lopez acknowledges that the common law does not recognize a post-mortem privacy interest. But he argues that misinterpretation, possible harm from disclosure, and collective action problems create the need for such a privacy interest, at least in the context of online accounts. (P. 227.) Lopez emphasizes the pitfalls of electronic communication, particularly how tone and meaning can be misunderstood. A living person can explain what is in an online account and minimize misinterpretations, but a decedent cannot. (Pp. 225-26.) Because digital accounts also contain both “sent” and “received” messages and material that is “co-constructed,” some people may suffer unintended harm “if privacy is not preserved at death.” (P. 228.) Although in extreme cases a survivor may take legal action to protect information in the decedent’s account, the more likely scenario is collective harm to multiple survivors, but with no single survivor experiencing enough harm to incentivize action. Lopez argues that these problems may warrant “a firewall” around a decedent’s online accounts.

Consistent with estates and trusts doctrine, Lopez writes that the central question is whether the decedent “intended to have the contents of online accounts remain private after death.” (P. 219.) If the decedent has a will that speaks to access, then the will should control. But most decedents die intestate or with wills that are silent about online accounts. Lopez cites survey data showing that 70% of respondents favored post mortem privacy, although he acknowledges methodological shortcomings in the survey instrument. Beyond survey data, however, the practical reality is that personal representatives are likely a decedent’s spouse or other very close relative. Lopez notes the strong possibility that “private communications stored in a decedent’s online account contain private information about the very person who will be given access to the account,” some of which may be particularly hurtful or that the decedent never intended to be seen. (P. 233) Lopez argues that these “mechanics of probate” suggest that decedents would prefer “a default rule of nondisclosure or very limited access.” (P. 233.)

Despite Lopez’s careful arguments, the pondering he prompted leads me to favor broader access for personal representatives than Lopez would prefer. For me, the issue of post-mortem privacy is inextricably linked to the reasonable expectations of the decedent and those tangled up in the decedent’s online accounts. In the age of Sony emails and pictures of a naked Jennifer Lawrence on iCloud, I question how the living, much less the dead, can have reasonable expectations of online privacy. Even beyond the possibility of cyber attack, sharing information with even one person always risks exposure. Beware the screenshot function on the iPhone or the “forward” command in Outlook; everything is one click away from being shared. Moreover, death is a mercilessly unprivate affair—from what happens to the body, to the cleaning out of one’s dwelling, to the public probate process. As for intent, I suspect that most decedents’ online life is a mixed bag, with some content they would prefer remain private and other content they would like their survivors to have. I worry more about what would be lost with restricted access than what would be revealed. Our online lives are vast closets, with a durability and magnitude far beyond what any hoarder could achieve in the physical world. But even though I would open the door wider than Lopez, I commend him for a painstakingly well-researched article that draws attention to an important estate planning issue and forces readers to consider whether dead head control should extend into the digital world.

Cite as: Sarah Waldeck, The Dead’s Online Accounts, JOTWELL (January 19, 2018) (reviewing Alberto B. Lopez, Posthumous Privacy, Decedent Intent, and Post-Mortem Access to Digital Assets, 24 Geo. Mason L. Rev. 183 (2016)), https://trustest.jotwell.com/deads-online-accounts/.

Strict Compliance and Wills Act Formalities

In the law of Wills, the testator’s intent is of upmost importance. If there is clear and convincing evidence of a testator’s intent, then a document intended to be his or her will should be probated, right? Not so fast—according to Professor John Langbein, in a jurisdiction that has adopted the strict compliance approach to Wills Act formalities a document will not constitute a validly executed will if all of the statutory requirements are not met, even when evidence shows that the testator intended the document to be his or her will. Langbein penned substantial compliance and harmless error proposals as alternatives to strict compliance. In Wills Act Compliance and the Harmless Error Approach: Flawed Narrative Equals Flawed Analysis?, Professor Peter T. Wendel asserts that Professor Langbein has not framed the narrative correctly and therefore the analysis of the issue is flawed. He rephrases the narrative so that the debate can continue in a less simplistic manner.

Wendel asserts that Langbein incorrectly painted a picture of strict compliance as a rigid villain that invalidates wills when there is not 100 percent compliance with Wills Act formalities. In his articles, Langbein uses conclusory language and assumes that the reader already agrees with him. Then, in each article, Langbein’s proposal is pitched as the solution to the injustice of the strict compliance approach. Professor Langbein first proposed a substantial compliance doctrine, and a decade later proposed a more lenient harmless error doctrine outlining when courts should probate documents that do not meet the requirements of the Wills Act. Although Langbein’s harmless error proposal has been adopted as part of the Uniform Probate Code and Restatement (third) of Property, most states have not adopted such proposal.

Professor Wendel argues that when Professor Langbein framed the narrative as a choice only between strict compliance and the Langbein proposals it was flawed. In reality, courts are creating a body of substantial compliance laws that are more pragmatic than the Langbein proposals. Wendel labels these approaches as flexible strict compliance. He says the real question is whether Langbein’s substantial compliance/harmless error proposals are better than the flexible strict compliance approach.

This article reminds the reader of the importance of framing a narrative. “He who phrases the issue usually wins the debate.” Professor Langbein phrased the issue—strict compliance negates the testator’s intent even when there is clear and convincing evidence of the testator’s intent. If the rigid formalities of the Wills Act are not absolutely adhered to there is no valid will to probate. His kinder and gentler approaches to strict compliance have been lauded and well received in the academy, However, states have been slow to enact statutes adopting the proposals because of the increase in administrative costs and the increased potential for fraud or misconduct.

Wendel walks us through Langbein’s substantial compliance article, as well as his later harmless error article. According to Professor Wendel, Professor Langbein used conclusory language that was harsh and rigid to describe strict compliance; therefore, his alternatives are the saving grace. He states that Langbein’s argument is flawed because most states do not rigidly apply strict compliance. He rephrases the issue as whether any benefits associated with Langbein’s proposals are worth the costs, especially since most states do not rigidly apply strict compliance. He does admit that more wills would be probated under the Langbein proposals, but suggests that Langbein’s holistic approach may not be a great as the academy would have us believe.

Professor Wendel rephrases the narrative—flexible strict compliance vs. Langbien and leaves us with a new narrative to discuss. He says the answer to that question is far from obvious.

Cite as: Camille Davidson, Strict Compliance and Wills Act Formalities, JOTWELL (December 7, 2017) (reviewing Peter T. Wendel, Wills Act Compliance and the Harmless Error Approach: Flawed Narrative Equals Flawed Analysis?, 95 Oregon L. Rev. 337 (2017)), https://trustest.jotwell.com/strict-compliance-and-wills-act-formalities/.

Trusts and Estates Law and the Redistribution of Wealth

Felix B. Chang, Asymmetries in the Generation and Transmission of Wealth, 78 Ohio St. L. J. (forthcoming 2018).

Data show that the very rich hold an ever-increasing share of global wealth while that held by the rest diminishes proportionately. And the United States stands out among developed nations for its particularly wide wealth disparities between the rich and the poor. Compared with many nations the rich in the U.S. are generally richer while many of the rest struggle to get by. This severe wealth inequality harms productivity and the broader economy and even threatens democracy and social stability.

Solutions focused on donative transfers of wealth by concerned legal academics often prescribe a tax and transfer system in the form of a robust gift and estate tax regime. But political realities continue to intervene, weakening the federal transfer taxes. Given the way current political winds blow, outright repeal of these taxes seems more likely than their rejuvenation.

Against this backdrop, Felix B. Chang, in his careful and measured article Asymmetries in the Generation and Transmission of Wealth suggests another path. According to Chang, trusts and estates law needs a comprehensive theory on inequality. In this, he writes, T&E lags behind business law and it is time to catch up; to “unify” asymmetries in the generation and transmission of wealth.

Chang asks us to conceptualize wealth as a (mostly closed) double-sphered system. One sphere generates wealth while the other transmits it. Legal rules affect each of these spheres. Roughly speaking, wealth is not created or destroyed but is instead “shifted in response to laws.” Imperfect rules in the wealth-generation sphere will thus aggravate imperfections in the system as a whole unless corrections are made elsewhere. So when laws in the wealth-generation sphere contribute to wealth disparities, and laws in the distribution sphere fail to mitigate those disparities, concentration of wealth continues. In Wang’s example, “a singular devotion to shareholder primacy [in business law] spurs income inequality, which in turn compounds wealth inequality when the estate tax” fails to redistribute this wealth. (P. 4.) Thus laws affecting the two spheres must be integrated to achieve our goals.

And what are those goals? Chang chooses a welfare economics approach based on an individual welfare analysis, “with priority given to wealth equality.” (P. 20.) Simply stated, laws that transfer wealth from the rich to the poor are favored, because “the poor (who begin with little wealth) value slight increases in wealth more than the wealthy (who begin with vast wealth).” (P. 21.) Further, using the Kaldor-Hicks efficiency model, a system that distributes wealth more equally is better than one that does not.

Chang poses and answers three “central questions” for trusts and estates law. First, what role does it play in “sustaining inequality?” Measured against his standard (transfer of wealth from rich to poor) he concludes that these laws are weak. The transfer taxes are anemic and laws enabling concentration of wealth (here he cites dynasty trusts) are strong. Second, who benefits? The rich, their financial institutions and advisers (including lawyers), as opposed to everyone else. Finally, what can be done inside the trusts and estates law context? Here we must confront the field’s overarching policy of freedom of disposition and “reorient the field around an equally pressing imperative: redistribution.” (P. 20.)

He divides the trusts and estates rules he analyzes into two categories. These are private rules that interact with the tax and transfer system (here he cites only the Rule Against Perpetuities (“RAP”)), and purely private rules. Purely private rules include those enabling spendthrift and asset protection trusts, fiduciary rules, and rules primarily affecting beneficiaries, such as abatement and ademption. He points out that the RAP, coupled with the generation-skipping transfer tax (“GST”), ensures that transfers to a grandchild’s generation are taxed. He concedes that the GST has been weakened by increased exclusion amounts, but insists that the RAP “should occupy a central role” in redistribution, despite admitting that many RAP-focused proposals may be “politically infeasible.”

Spendthrift and asset protection trusts pit settlors and beneficiaries against creditors. Tinkering with their rules might help transfer assets from the former to the latter, and would result in more equal wealth distribution if creditors are the less well-off. Chang looks at the creditor exceptions and suggests that they might be expanded, depending on whether empirical research would indicate that this would result in more equal distribution of wealth. He is similarly cautious in his suggestions for other rules, including fiduciary duties, abatement, ademption, cy pres, and execution formalities.

But what I found refreshing about Chang’s ideas were not so much his specific proposals for rule changes but rather his willingness to confront the normative principle of testamentary freedom by offering a limiting welfare alternative. Testamentary freedom is a fairness principle which Chang concedes should not be disregarded but rather should be balanced against welfare, or “aggregate well-being.” The “perils of inequality,” according to Chang, are proper justification.

Cite as: Kent D. Schenkel, Trusts and Estates Law and the Redistribution of Wealth, JOTWELL (November 9, 2017) (reviewing Felix B. Chang, Asymmetries in the Generation and Transmission of Wealth, 78 Ohio St. L. J. (forthcoming 2018)), https://trustest.jotwell.com/trusts-and-estates-law-and-the-redistribution-of-wealth/.

The Non-Domination Principle in Fiduciary Law

Evan J. Criddle, Liberty in Loyalty: A Republican Theory of Fiduciary Law, 95 Tex. L. Rev. 993 (2017), available at SSRN.

Fiduciary law crosses many domains, but it is of particular import to the field of trusts and estates, where it lays down rules of conduct for key actors within that legal system. In Liberty in Loyalty, Professor Criddle presents an appealing and detailed case for why republicanism is the theoretical basis for fiduciary law. This feat is impressive because he is very much swimming against the tide; scholars and judges alike have often seen classical liberal theory as fiduciary law’s guiding light. But the Article’s contribution is not merely theoretical. Important questions of doctrine turn on fiduciary law’s theoretical foundation, as Criddle skillfully shows. This article’s discussion is essential reading for scholars in numerous areas, most notably agency law, corporate law, and trust law, but it is also a valuable read for anyone interested in how the law manages relationships between those with unequal power.

Criddle starts by giving primers on the two main contestants for the soul of fiduciary law: republicanism and classical liberalism. Criddle acknowledges that republican theory is a big tent, but boils it down to two propositions. First, the state derives its authority from the people for the express purpose of promoting individual liberty. Second, the state accomplishes this task by protecting individuals from domination. Domination, in turn, is understood as being in a state of subjection—to either arbitrary power or alien control. Even if this power is not exercised, an individual will still be dominated if there is a chance that it will be exercised. While this understanding was developed with respect to public law, Criddle believes it applies equally well to private law, where the risk of domination is still present. Thus, the governing value of republicanism is liberty, which manifests as a non-domination principle. Classical liberals also value liberty but conceptualize it a bit differently. For them, actual interference or the likelihood of actual interference in an individual’s choices is the evil to be prevented. Thus, classical liberalism prizes a non-interference principle instead.

These non-domination and non-interference principles lead to distinctive methodologies for evaluating relationships. Republicans are concerned with the capacity for interference while classical liberals are focused on the risk of interference. As a result, republicans have the relatively easier task of identifying whether there is a prospect of interference in a given relationship. In fiduciary relationships, where one party entrusts another with power, this prospect is always present. Classical liberals, in contrast, must engage with empirical questions about the level of risk of interference and corresponding normative questions about whether risk levels are too high.

With this philosophical background, Criddle advances his two interrelated descriptive claims, which occupy the bulk of the Article. First, classical liberal theory is a poor match for fiduciary law. Second, republican theory is a good fit. His primary focus is the duty of loyalty, which also happens to be a major doctrinal battleground. Traditionally, this fiduciary duty has prohibited all conflicts of interest. For example, a trustee cannot benefit from trust transactions, even if those transactions might otherwise be benign. This comports with the non-domination principle of republican theory, which aims to prohibit even the possibility that a fiduciary might be acting improperly.

Many classical liberal scholars have challenged this view, noting that such a harsh rule removes from consideration a range of transactions that might be beneficial to the beneficiaries of a trust, even if they might also benefit the trustee. They have engaged in law reform efforts, with some success, to modify the traditional rule, allowing certain types of conflicted transactions so long as they are in the best interests of the beneficiaries. Criddle admits that this is the trend in American law with respect to the duty of loyalty, but he comes armed with plenty of other examples. Through a careful examination of the history and internal logic of fiduciary law, he reveals several areas, such as classifications of fiduciary relationships and remedies for breach of fiduciary duties, in which republican theory likewise better fits this area of law.

Criddle also advances the normative claim that republican theory should underlie fiduciary law. His primary argument for this seems to flow from his descriptive claims: republican theory should underlie fiduciary law because it is a better fit for fiduciary law. This argument certainly throws down the gauntlet to classical liberal scholars, challenging them to demonstrate how their vision of fiduciary law is both internally consistent and faithful to fiduciary law’s historical origins. It remains to be seen how classical liberal scholars might reply; their responses could range from defending classical liberalism at the level of theory to reimagining the entirety of fiduciary law to minimizing the importance of consistency and fit. However they respond, the ensuing exchange will be an interesting one. Thus, Criddle has succeeded admirably on two fronts: elaborating a robust and vibrant alternative to classical liberal conceptions of fiduciary law as well as meaningfully advancing the scholarly conversation.

Cite as: Alexander Boni-Saenz, The Non-Domination Principle in Fiduciary Law, JOTWELL (October 20, 2017) (reviewing Evan J. Criddle, Liberty in Loyalty: A Republican Theory of Fiduciary Law, 95 Tex. L. Rev. 993 (2017), available at SSRN), https://trustest.jotwell.com/the-non-domination-principle-in-fiduciary-law/.

Who Should Terminate or Modify Irrevocable Trusts?

Professor Bradley E.S. Fogel persuasively argues that “courts and legislatures should abandon trust termination by consent of the beneficiaries.” (P. 378.) He proposes that they should instead apply the doctrine of equitable deviation, in which irrevocable trusts (hereinafter “trusts”) are modified or terminated only in the case of “relevant circumstances not anticipated by the settlor” and when the court determines that “such modification furthers the settlor’s intent.” (P. 378.) Professor Fogel notes that several commentators “have encouraged facilitating trust termination by the beneficiaries to assure that the trust meets the beneficiaries’ needs and to allow for more efficient use of trust assets.” (P. 342.) However, courts and legislatures, he argues, “need to respect the primacy of the settlor’s intent”; conversely, giving preference to “the living beneficiaries before the court . . . fails to properly respect freedom of disposition and the settlor’s right, under American law, to place whatever conditions she likes on the gift she made.” (P. 343.)

Professor Fogel first summarizes the common law of trust termination by consent of the beneficiaries. He notes that many early U.S. cases followed the English law that “a vested beneficiary could terminate a trust and receive the assets outright regardless of the settlor’s intent or the terms of the trust.” (P. 344.) Over time, courts rejected easy trust termination, and the case Claflin v. Claflin, 20 N.E. 454 (Mass. 1889), “evolved into the common law rule that a trust cannot be terminated by the consent of the beneficiaries if ‘continuance of the trust is necessary to carry out a material purpose of the trust.’” (P. 347.) The most common “material purposes” found for trusts were spendthrift provisions, discretionary distribution provisions, and provisions delaying a beneficiary’s enjoyment of the property (such as to a certain age). (Pp. 347-48.)

Courts, in determining whether a trust has an unfulfilled material purpose, have sometimes faced situations in which the settlor has joined the beneficiaries in seeking trust termination. (P. 348.) Professor Fogel asks, because the goal of the material purpose doctrine is “to assure that the settlor’s intent in creating the trust is carried out,” then, if the settlor is seeking to terminate a trust that the settlor created, “what should be the role of the material purpose inquiry?” (P. 348.) Professor Fogel notes that, on the one hand, the settlor (unless also a trustee or a beneficiary) has no interest in the trust the settlor created, and it is the settlor’s intent when the trust was created that governs trust administration. (Pp. 348-49.) Accordingly, the fact that a settlor “changes her mind and wishes to revoke the trust should be irrelevant.” (P. 349.) On the other hand, “if the settlor and all of the beneficiaries want the trust to be terminated, it is unclear why the court should prevent such termination.” (P. 349.)

Per Professor Fogel, there are, therefore, “dueling policies regarding trust termination by consent of the beneficiaries: freedom of disposition versus the professed interests of the beneficiaries. If the settlor is one of the parties urging trust termination, both of these policies arguably militate toward termination.” (P. 349.) Professor Fogel notes that “this reasoning has carried the day” such that, if the settlor consents to the termination of the trust created by the settlor, “then all of the beneficiaries acting together may terminate the trust regardless of any unfulfilled material purpose.” (Citing the Restatement (Second) of Trusts, P. 349.)

I return to Professor Fogel’s question that, if the settlor is seeking to terminate a trust that the settlor created, “what should be the role of the material purpose inquiry?” (P. 348.) Although Professor Fogel writes later in his article that application of the equitable deviation doctrine makes the “frequently haphazard search for the trust’s ‘material purpose’ unnecessary,” (P. 379) I wonder if there is an implicit application of the equitable deviation doctrine in a “material purpose” inquiry that militates towards termination, as follows. If there is no material purpose of the trust left unfulfilled, then the “early” fulfillment of all material purposes of the trust was a circumstance unanticipated by the settlor when the settlor created the trust. Alternatively, if there is a material purpose of the trust left to be fulfilled, then there are, currently, other circumstances unanticipated by the settlor when the settlor created the trust. In sum, to me, the trust termination allowed to beneficiaries when they are joined by the settlor who created the trust (regardless of any unfulfilled material purpose) is an implied recognition and application of the equitable deviation doctrine.

Professor Fogel next discusses the difficulty of obtaining the consent of all beneficiaries of a trust, including addressing situations in which the beneficiary is a minor or unborn and unascertained. (P. 351.) Summarizing Professor Fogel’s thorough analysis is beyond the scope of this jot, but it is worthwhile to note that Professor Fogel considers one of the advantages of applying the equitable deviation doctrine to be “the elimination of the outsized importance sometimes given to non-consenting beneficiaries with remote interests.” (P. 379.)

Professor Fogel argues that, “[p]artially in response to the difficulty of terminating trusts by consent of the beneficiaries under common law, states enacted statutes that facilitated trust termination by the beneficiaries.” (P. 360.) Although the statutes generally accomplish their goals of making trust termination by consent of the beneficiaries easier, Professor Fogel submits that “they do not properly respect the settlor’s intent.” (P. 360.) Professor Fogel thoroughly analyzes the statutes from several states and the Uniform Trust Code; I highlight the few UTC provisions relevant to this jot.

The UTC, following the common law, “requires the consent of all beneficiaries for trust termination, regardless of whether the settlor also consents”; the “beneficiaries” include “vested and contingent, as well as unborn and unascertained beneficiaries.” (P. 361.) The UTC, however, allows consent by a guardian ad litem for a beneficiary. (P. 361.) The UTC differs from the common law in allowing trust termination even if not all beneficiaries consent as long as the non-consenting beneficiary’s interests are “adequately protected” through payment of cash or an annuity. (Pp. 361-62.) Professor Fogel aptly notes that “the UTC allows beneficiaries of a trust to force an objecting beneficiary to surrender her interest in the trust,” which termination “conflicts with the settlor’s intent” because “the settlor gave that interest [in the trust] to the objecting beneficiary.” (P. 362.)

Professor Fogel’s focus on the settlor’s intent grounds his support for the equitable deviation doctrine replacing beneficiary-originated modification or termination of a trust. As he concisely notes, “The settlor’s intent—not the beneficiaries’ desires—is paramount.” (P. 369.) Trust termination occurring by consent of the beneficiaries allows the beneficiaries: (1) to deviate from the trust document, (2) to alter the settlor’s plan in the trust document, and (3) to escape conditions set by the settlor. (Pp. 369-70.) Trust modification or termination under the equitable deviation doctrine, on the other hand, “respects the settlor’s intent.” (P. 371.)

Per Professor Fogel, most states and the UTC allow under the equitable deviation doctrine “for modifications to dispositive provisions and even trust termination,” if it will “further the purposes of the trust.” (Pp. 370-71.) The court assesses “the settlor’s probable intention, if possible, in light of the unanticipated circumstances”; then, the court allows modification of the trust that the settlor would have done under the circumstances, thereby better effecting the settlor’s intent (Pp. 371-72)—which intent, but for the modification, is thwarted by circumstances unanticipated by the settlor when the settlor created the trust. Instead of focusing on the beneficiaries of the trust, the goal of the equitable deviation doctrine is “to effect, rather than thwart, the settlor’s intent.” (P. 372.)

This jot does not address the breadth of issues discussed in Professor Fogel’s article. He thoroughly analyzes the history and disadvantages of modification and termination of trusts by consent of the beneficiaries and forcefully argues in favor of the equitable deviation doctrine. He also applies the equitable deviation doctrine to cases, conceding that it is “possible that a beneficiary’s interest might be reduced or eliminated without his consent in an equitable deviation proceeding” because such reduction results from “the court’s attempt to effect the settlor’s intent.” (P. 376.) In sum, I enjoyed reading how the equitable deviation doctrine should replace modification and termination of trusts by consent of the beneficiaries because, as Professor Fogel elegantly summarizes, the “point of a trust is not to give the beneficiaries the interest they want”, but, rather, the “point of a trust is to give the beneficiaries what the settlor intended.” (P. 377.)

Cite as: Michael Yu, Who Should Terminate or Modify Irrevocable Trusts?, JOTWELL (September 19, 2017) (reviewing Bradley E.S. Fogel, Terminating or Modifying Irrevocable Trusts by Consent of the Beneficiaries—A Proposal to Respect the Primacy of the Settlor’s Intent, 50 Real Prop., Tr. & Est. L.J. 337 (2016)), https://trustest.jotwell.com/who-should-terminate-or-modify-irrevocable-trusts/.

Unfinished Business: Reforming the Elective Share

Angela Vallario, The Elective Share Has No Friends: Creditors Trump Spouse in the Battle Over the Revocable Trust, 45 Capital U. L. Rev. (forthcoming, 2017), available at SSRN.

Some of our inheritance laws still seem closer to those existing in 1217 instead of 2017. For example, the elective share statutes in a number of states still echo the old common law doctrine of dower. In her new article, The Elective Share Has No Friends: Creditors Trump Spouse in the Battle Over the Revocable Trust, Angela Vallario makes a persuasive case for statutory reform, especially in light of recent trust reform in many of those same states effectively putting creditors in a more favorable position than a surviving spouse.

Professor Vallario begins by describing the current state of the elective share in the United States. She notes that twenty-five of the nation’s separate property states have reformed their elective share statutes to more clearly reflect a joint partnership theory of marriage. However, sixteen states have failed to do so and retain what Vallario calls the “traditional” elective share. Vallario reminds readers that the traditional elective share was built on the remnants of dower. Surviving spouses who are disinherited can claim either a one-half or one-third share of the decedent’s estate. But the term “estate” under traditional statutes has included only probate assets, not non-probate assets like life insurance, joint tenancy property with third parties and trust property.

Over the years, courts developed equitable doctrines to recapture some of the assets that a decedent may have transferred to third parties through vehicles like joint tenancy or revocable or irrevocable trusts. These common law doctrines, often labeled as “fraud on the spouse,” were a cumbersome way to remedy the impact of a transfer intended to end-run the elective share statute. The drafters of the Uniform Probate Code (UPC) developed a model elective share statute that uses what the UPC calls an “augmented estate” framework. In other words, the disinherited spouse may take a share of a larger “augmented” estate that includes certain inter vivos transfers by the decedent and the surviving spouse’s own assets. Based a sliding scale tied to length of marriage, the surviving spouse may receive up to fifty-percent of the augmented estate. While a number of states eschewed this approach due to its perceived complexity (even some that adopted the UPC), a large number did reform their elective share statutes to embrace this more modern reflection of what a decedent’s wealth consisted of at death. With the advent of an increasing amount of wealth being transferred through non-probate devices, these reform states essentially increased the size of the “pot” against which the surviving spouse’s share would be applied.

However, as Vallario points out, sixteen “holdout” states have not brought their statutes into the modern age in this regard. Seven of the holdouts have enacted trust reform which has created the anomalous situation of creditors having more rights against a revocable trust than a surviving spouse. Vallario includes hypotheticals to illustrate what many would think is an odd and inequitable result as a policy matter.

After laying out a useful history of the structure and policy of traditional elective share statutes generally, Vallario delves into the common law exceptions that courts have developed over the years to avoid harsh results by application of the traditional elective share. Her analysis of the Maryland Court of Appeals case, Karsenty v. Schoukroun, 959 A.2d 1147 (Md. 2008), reveals some of the flaws in relying on judicial discretion rather than statutory reform to remedy these results. Such discretion minimizes predictability, yields inconsistent results and deters surviving spouses from exercising their right to elect against the will. These costs, Vallario argues, push toward statutory rather than judicial solutions. In fact, in the Karsenty case, the Maryland court noted that other states had adopted an augmented estate model but resisted creating such reform by what it called “judicial fiat.”

Vallario is on the same page as the Karsenty court. She notes that, “State legislatures who are able to hold hearings, gather information, and draft bills, are in the best position to protect the interest of the surviving spouse.” (P. 13.) She urges the sixteen “holdout” states to reform their statutes but acknowledges the variety of interests that converge to thwart such reform. In addition to Vallario’s insight about the anomaly of creditors being in a better position than surviving spouses vis a vis a revocable trust, this last section of Vallario’s article is a unique and pragmatic addition to the literature on the elective share. Her assessment of the various constituencies, including the various sections of the organized bar, probate judges and creditors, and whether and why they might oppose reform is spot-on. Vallario concludes that surviving spouses are an unlikely constituency to pool their resources to lobby for reform. The organized estate planning bar is in the best position to remedy the inequities inherent in the traditional elective share.

Vallario has written before about elective share reform in Spousal Election: Suggested Equitable Reform for the Division of Property at Death, 52 Cath. U. L. Rev. 519 (2003). That article, cited by the Maryland Court of Appeals in the Karsenty case, is also well worth reading. As more states consider reform, I look forward to future scholarship from Professor Vallario on this important statutory protection within marriage.

Cite as: Paula Monopoli, Unfinished Business: Reforming the Elective Share, JOTWELL (August 3, 2017) (reviewing Angela Vallario, The Elective Share Has No Friends: Creditors Trump Spouse in the Battle Over the Revocable Trust, 45 Capital U. L. Rev. (forthcoming, 2017), available at SSRN), https://trustest.jotwell.com/unfinished-business-reforming-the-elective-share/.

Can You Really Have Your Cake and Eat it Too?

Self-settled domestic asset protection trusts (DAPTs) are trusts that permit a settlor to use a spendthrift provision in a trust where he is also a beneficiary to protect his assets from creditor claims. DAPTs evolved from offshore asset protection trusts which historically allowed self-settled asset protection trusts. Today, a majority of states within the US do not permit a settlor to create such a trust. DAPTs defy logic in that a person should not be able to place their assets in trusts, benefit from the trust, and then not have those funds available to pay to their debts. Yet, these trusts continue to gain popularity in the United States. A number of jurisdictions have enacted laws that permit self-settled DAPTs. Alaska was the first state in the U.S. to adopt DAPT law, and fifteen states, including South Dakota, the subject of this article, followed.

Since these trusts are relatively new, there are still questions regarding when or whether assets are protected from creditor claims and which transfer taxes are applicable. The answers to these question are found in the statutory provisions. In analyzing the DAPT, determining the level of control the settlor has retained in the trust is the key. In their article, Mark Krogstad and Matthew Van Heuvelen explore the estate and gift tax implication of South Dakota’s DAPT laws.  This interesting article provides practical information for practitioners, scholars and professors who, draft, study and/or teach DAPT laws from any state.

Although they acknowledge that the primary motivation for DAPTs is to protect assets from judgements and creditor claims, their article focuses on the estate and gift tax implications. The authors point out how creditor access to a DAPT affects whether the transfer to the trust was a completed gift for transfer tax purposes. For instance, a purely discretionary trust does not give beneficiaries an enforceable right to compel trustee to make a distribution. Since a creditor does not have more rights than a beneficiary, it follows that a creditor will also not have the power to compel a distribution.

The original version of South Dakota’s DAPT laws provided exceptions for payments of alimony, child support and tort claims against the settlor. According to the authors, this could have been significant in that it risked creating liability for estate  taxes because the trust was subject to creditor claims and thus treated as property of the settlor . Subsequently, however, South Dakota changed its laws to provide even more protections for settlors. In 2011, South Dakota eliminated the exception for tort claims and in 2013, it eliminated the exception for child support and alimony obligations that arose after a property transfer to a DAPT. These changes eliminated virtually all creditor claims against the trust and makes the transfer more like a completed gift than ever before.

While Krogstad and Van Heuvelen acknowledge that keeping the property out of the reach of creditors is a primary concern, they also acknowledge the settlor’s competing interest—settlor must actually give up dominion and control, which could trigger a gift tax. They further explain that settlors tend to retain a certain level of control over the property based on the concern that they may need access to the property in the future. To balance these interests, settlors often retain an inter vivos or testamentary non-general power of appointment. Even with balancing the issue of retaining power, but not too much power, there is the added effect of the settlor as a beneficiary of his/her own trust. Krogstad and Van Heuvelen indicate this issue is often eliminated by choosing an independent trustee and making the trust a purely discretionary trust. In the case of a purely discretionary trust, the settlor does not have the right to compel a distribution and therefore lacks the kind of control that would be tantamount to ownership.

Krogstad and Van Heuvelen explain that if the transfer to the DAPT is not a completed gift, then the property will likely be included in the gross estate under I.R.C. §§ 2036 and/or 2038 because of the retained beneficial interest, direct (power of appointment) or indirect control (implied agreement). Even so, their focus, in determining whether the property was included in the gross estate, is whether creditors have a right to use the property to satisfy the settlor’s debt under the South Dakota DAPT laws.

Guidance, the authors say, is found in the IRS’s Private Letter Rulings (PLR) 98-37-007 and 2009-44-002. PLR 98-37-007 was requested to determine whether a proposed transfer to an Alaska Trust was subject to an estate or gift tax. The trust was a discretionary irrevocable trust with settlor/beneficiary as a permissible distributee with no express or implied agreement with the trustee. Further, the settlor had no known prior or future debt and was not under an obligation for an order child support. The PLR indicated the proposed transfer would be subject to the gift tax but made no definitive ruling as to whether the estate tax was applicable. PLR 2009-44-002 was also requested to determine the estate and gift tax implication of a transfer to an Alaska Trust. The trust was established as an irrevocable spendthrift trust in which settlor/beneficiary was also a permissible distributee. This trust specifically prohibited settlor, his estate, his creditors and the creditors of his estate from receiving income or principal at termination. This PLR also concluded that a gift tax was triggered and took a step further to indicate the trustee’s discretionary authority to distribute income or principal to settlor was not, by itself, enough to implicate IRC § 2036.

While both PLRs were based on Alaska trusts and the IRS did not conclusively indicate the estate tax implications of these transfers, Krogstad and Van Heuvelen argue because creditors cannot reach the assets, the property should be excluded from the gross estate. In applying this logic to the revised South Dakota DAPT laws, which strengthened the protections against creditors, they conclude the new DAPTs laws are less susceptible to creditors and more likely to avoid estate taxes. They specifically suggest the South Dakota DAPT is an option for those settlors who are leery of traditional irrevocable trusts because they may need some access to the funds. As a result, these settlors would have the benefit of their property without exposing the property to creditor claims, in essence, they can have their cake and it too.

Cite as: Phyllis C. Taite, Can You Really Have Your Cake and Eat it Too?, JOTWELL (July 7, 2017) (reviewing Mark Krogstad and Matthew Van Heuvelen, Domestic Asset Protection Trusts: Examining the Effectiveness of South Dakota Asset Protection Trust Statutes for Removing Assets from a Settlor’s Gross Estate, 61 S.D. L. Rev. 378 (2016)), https://trustest.jotwell.com/can-you-really-have-your-cake-and-eat-it-too/.