Yearly Archives: 2017

Can You Really Have Your Cake and Eat it Too?

Jul 7, 2017 Phyllis C. TaiteAdd a Comment

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.

Parentage by Presumed Consent

Jun 7, 2017 Solangel MaldonadoAdd a Comment

The marital presumption always elicits a lively discussion in a Family Law or Estates & Trusts course. But marriage equality for same-sex couples raises a new question: If a child born to a married woman is presumed to be her husband’s child, must the law also presume that a child born to a woman in a same-sex marriage is her wife’s child? Professor Paula A. Monopoli answers this question in the affirmative in her article Inheritance Law and the Marital Presumption After Obergefell and specifically addresses the role of the presumption in the context of inheritance law.

Courts confronted with the claim that marriage equality requires the extension of the marital presumption to same-sex couples have reached different conclusions. Professor Monopoli first analyses the cases that have refused to extend the marital presumption to a female spouse who is not the genetic or birth mother of a child birthed by her wife during the marriage. She explains that these courts have focused on only one goal of the presumption—establishing a biological connection between a birth mother’s child and her husband. Consequently, these courts have concluded that the marital presumption only applies where there is a possibility that the birth mother’s spouse could be the child’s biological parent.

Professor Monopoli then analyses the cases that have extended the marital presumption to a female same-sex spouse. These courts have noted that same-sex spouses are entitled to the same rights and benefits of marriage as different-sex spouses and that a child born during a marriage is presumed to be the child of both spouses.  Professor Monopoli agrees with these courts and focuses on the reasons for the marital presumption—to legitimize children, to ensure that children have two parents for legal purposes, and to protect the intact marital family from intrusion by third parties. She proposes that the law move away from the marital presumption’s origins as a proxy for a biological connection between a husband and his wife’s biological child and ground the presumption in presumed consent to be a parent of a child born during the marriage.  If the marital presumption is based on presumed consent, then the reasons for the presumption apply regardless of the possibility (or impossibility) of a biological relationship between the birth parent’s spouse and the child.

Given that we can easily establish a biological connection between an adult and a child through DNA evidence, the marital presumption’s biological origins are outdated. In contrast, a marital presumption based on presumed consent to be a parent would protect children of same-sex married couples in the same way that it traditionally protected the children of different-sex spouses. Although scholars have proposed abolishing the marital presumption altogether and relying on a functional parentage test, Professor Monopoli argues that given the limited resources of the probate court, it needs bright line rules to enable it to distribute assets to beneficiaries as efficiently as possible. However, she makes a distinction between family law cases—those involving determination of parentage in a custody or child support dispute—and inheritance law cases where the birth parent’s same-sex spouse is deceased. She argues that in the family law context where a finding of parentage will likely create significant duties (and rights) to the child, a spouse who is not a genetic or biological parent should be allowed to rebut the marital presumption by showing that she never consented to be a parent of her spouse’s biological child. In contrast, she argues that in inheritance cases, the presumption should be conclusive (irrebuttable) because the goal is to determine the decedent’s eligible heirs and transfer the assets to them efficiently. In other words, the spouse’s estate would not be allowed to rebut the marital presumption by showing that the decedent never consented to be a parent of her spouse’s biological child.

I spent a lot of time thinking about this distinction.  If a decedent never consented to be a parent of her spouse’s biological child, shouldn’t her estate be able to rebut the marital presumption? Although children of same-sex marriages should have the same rights to inherit from (or through) two parents as children of different sex-marriages, the law requires the children of different-sex marriages to show consent in certain cases. For example, the law has required a posthumously conceived child seeking to inherit from a deceased parent to show that the deceased parent consented to becoming a parent. As the Massachusetts Supreme Court has held “[a]fter the donor-parent’s death, the burden rests on the surviving parent, or the posthumously-conceived child’s other legal representative, to prove the deceased genetic parent’s affirmative consent to both … posthumous reproduction and the support of any resulting child.” Woodward v. Commissioner of Social Security, 760 N.E.2d 257 (Mass. 2002); see also UPC 2-120 (2008) (recognizing inheritance rights for a posthumously conceived child only if the parent consented to posthumous conception in a signed writing or consent is otherwise proven by clear and evidence).  If the law requires consent in posthumous conception cases, should evidence of lack of consent to be a parent to a same-sex spouse’s child be sufficient to rebut the marital presumption?

I don’t have an answer to this question or other fascinating questions raised by this article. For example, the cases that have addressed the marital presumption in the context of same-sex marriages have involved female couples. Does the marital presumption also apply to a married man’s same-sex spouse?  In other words, does marriage equality require that the law presume that a married man’s biological child born during the marriage is his husband’s child? Courts have refused to extend the marital presumption to a married man’s wife, at least in the family law context. Specifically, courts have rejected the argument that when a woman consents to her husband’s insemination of another woman with his sperm, with the understanding that the child will be a child of the marriage, the wife is the child’s parent. See Baby M., 109 N.J. 396 (1988);In re T.J.S., 212 N.J. 334 (2012). These courts have focused on the biological differences between a sperm donor and a surrogate mother. Do these differences mean that post-Obergefell courts must extend the marital presumption to same-sex female spouses but not same-sex male spouses?

The best articles push us to ponder challenging questions for days or weeks.  This article does just that.

America’s Next Top Probate Model

May 5, 2017 Gerry W. BeyerAdd a Comment

The idea of the “traditional family unit” is changing at a rapid pace that requires the law to adapt to effectuate a testator’s intent when administering a will. With 16.3 million unmarried Americans cohabiting and one in five children born into such households, the need for a valid will to avoid intestacy is at an all-time high. Specifically, more families are living with stepchildren or same-sex partners. This makes traditional intestacy statutes, which are designed to protect a more traditional family unit, potentially dangerous for a testator with a nontraditional family. Some states, however, permit ante-mortem probate which allows a testator to probate his or her own will prior to death thus ensuring that the testator’s at-death property distribution plans are upheld. States with ante-mortem probate statutes allow interested parties, such as will beneficiaries and heirs, to contest the will like they would in a post-mortem probate for issues such as undue influence, mental incapacity, or fraud. Unlike post-mortem probate, where the testator is deceased and the court must determine the testator’s capacity and intent without the testator’s input, ante-mortem probate allows the testator to avoid an unwarranted will contest, and the risk of intestacy if the contest is successful, by testifying at the probate hearing. Major concerns with ante-mortem probate statutes, however, are that will contents become public knowledge and that the litigation may strain familial relationships.

Katherine Arango’s article details the shift in American families and how an ante-mortem probate statute would protect nontraditional families. The article explains how adverse attitudes of courts and juries toward nontraditional families could lead to an intestacy distribution, which would be contrary to the testator’s intent. Ms. Arango highlights how ante-mortem probate provides nontraditional families security whereas traditional post-mortem probate cannot. By recounting the history of ante-mortem probate, the article delineates the slow awareness and affirmation of the importance of the doctrine in modern society. The article analyzes the different models of ante-mortem probate statutes and how those models protect the intent of the testator while also explaining possible complications. Then, the article evaluates currently enacted ante-mortem probate statutes. Finally, the article offers a new, comprehensive statute that could be inserted into the Uniform Probate Code as well as adopted by any state looking to implement this probate method.

The article’s in-depth discussion of the changing family dynamic further strengthens the suggestion that ante-mortem probate is essential to protecting a client’s estate planning desires in the modern age. By describing how intestacy laws were designed to protect bloodlines and create a fair and simple distribution scheme, the article focuses the reader’s attention on how intestacy disregards the testator’s intent should a court determine the will to be invalid. Instead, a better option for nontraditional families is a will that is further protected by an ante-mortem probate.

The article examines the history of ante-mortem probate and how issues of notice and finality of judgment originally cast doubt on the doctrine. The Supreme Court alleviated some of those issues by describing an appropriate standard for declaratory judgment in 1937. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 277 (1937). Issues of ripeness, notice, and finality of judgment remained and, although the Supreme Court held that a declaratory judgment could be granted, some states choose to avoid ante-mortem probate because of the lack of controversy surrounding a will because the testator is still alive. The article also describes how legal scholars attempted to establish a method for ante-mortem probate. Starting in 1977, five states enacted ante-mortem probate statutes.

The article describes the three traditional models of ante-mortem probate—the contest model, the conservatorship model, and the administrative model—and presents the arguments for and against each model. By analyzing how the five states with ante-mortem probate—North Dakota, Ohio, Arkansas, Alaska, and New Hampshire—use the doctrine, Ms. Arango demonstrates that the implementation of the doctrine has met with varying degrees of success. A successful ante-mortem probate makes the will incontestable after the testator’s death. However, the procedure, as currently implemented, publishes the will contents that could lead to family strife and expensive litigation. This author takes the history, models, and the current state statutes into account when she drafted a new framework for an ante-mortem probate statute.

The proposed statute would be a no-reveal statute, meaning the contents of the will would not be public knowledge. Ms. Arango suggests the testator petition the court to determine the validity of the will with the court reviewing the will in camera. The public would have notice as to of the petition’s filing, modification, or revocation but not the contents of the will. This allows the will to remain confidential and lessens potential family tensions. The testator would have the burden to prove elements such as proper execution, requisite capacity, and rebut claims of undue influence under normal evidentiary rules. The testator would lose the benefits of the ante-mortem probate if the testator modifies or revokes the will unless the ante-mortem procedure was again used.

I highly recommend the statute proposed in this article as a model for state legislatures and the drafters of the Uniform Probate Code when considering ante-mortem probate because it fixes the issues with current ante-mortem probate statutes. As an advocate for ante-mortem probate for many decades, I can confidently say this article offers a cohesive alternative for current ante-mortem probate statutes in an age where intestacy laws are ill-equipped to handle the nontraditional family.

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

The Lucrative Business of Lending Against an Expected Inheritance

Apr 13, 2017 Sergio Pareja1 comment

Recently, private companies have begun advancing funds to estate beneficiaries in exchange for the beneficiaries’ anticipated inheritances from those estates. These “probate loans,” which have never even been mentioned in another law review article, are explored in detail by Professors David Horton and Andrea Cann Chandrasekher in Probate Lending.

In their excellent article, Professors Horton and Chandrasekher analyze 594 probate administrations that occurred in Alameda County, California, during 2007. Through this analysis, they learned that probate lending is more prevalent than one might expect. In fact, they discovered 77 probate lending deals in the 594 administrations. They also discovered that the lending companies paid beneficiaries about $800,000 in exchange for nearly $1.4 million in inheritances, producing an average markup of 69 percent per year.

Part I of the article surveys the rules governing the sale of rights. It begins with a discussion of litigation lending, that is, the practice of lending money to a plaintiff against her anticipated winnings. At common law, this practice was effectively prohibited because of the champerty doctrine, which prohibited the payment of financial support in return for a share of the ultimate recovery, and because courts refused to enforce attempted assignments of “choses in action.” The main concerns with allowing the alienation of legal grievances were that buyers commonly paid far less than the value of the claims, claim sales were thought to encourage litigation, and lawsuits were viewed as intrinsically personal and not capable of changing hands. Over time, however, these limitations receded, and entrepreneurs began to make litigation loans, which were not technically loans because repayment was contingent on recovery.

Probate lending is effectively an expansion of the litigation lending concept. Traditionally, it was not permissible to convey an interest in the estate of someone who was still alive. This mere “expectancy” was not even a form of property. Over time, some states began to allow this anticipatory assignment of inheritances. Furthermore, even in states that didn’t allow the assignment of an expected inheritance from a living person, it became permissible to assign an inheritance once a probate case had begun. Once that happened, the probate lending business began to thrive.

In Part II of their article, Professors Horton and Chandrasekher explain how they gathered their data and give an overview of the probate lending industry. They note that their data came exclusively from culling all 594 probate administrations that occurred in Alameda County in 2007. They note that only about five percent of the estates featured loans, but some estates had multiple loans. Importantly, they note that there is no significant correlation between the size of the estate or the duration of the estate administration and the existence of a probate loan.

In Part III, Professors Horton and Chandrasekher discuss the policy implications of their findings. First, they consider whether probate loans are usurious. As a general matter, usury law only applies to loans that are “absolutely repayable.” Probate loans generally have been exempt from these laws because, as loans against an anticipated inheritance, they have been held to not be absolutely repayable. Professors Horton and Chandrasekher challenge this conclusion by noting that repayment of the loans is nearly certain, unlike litigation lending. In the case of probate lending, the lender recouped the principal 96 percent of the time. Because of this, the argue that courts should weigh this fact and allow usury law to potentially apply to probate loans.

Second, they consider the potential applicability of the Truth in Lending Act (TILA) to probate lending. As a general matter TILA imposes strict liability upon creditors who fail to follow its strict disclosure mandates. In the one TILA case dealing with probate lending, a federal court held that TILA does not apply to probate lending because TILA does not cover “non-recourse advances” such a probate loans. According to Professors Horton and Chandrasekher’s data, however, probate loans are not truly non-recourse, and they would urge courts to consider the potential applicability of TILA to probate loans.

Third, they analyze whether probate loans violate the champerty doctrine. Specifically, they focused on whether probate lending increased the likelihood of conflict in the estate, which is one of the key rationales behind the champerty doctrine. Here, they learned that the presence of a probate loan increased the odds of a will contest far more than any other variable, including holographic wills, disinheritance, and intestacies. Despite that, they also found that litigation filed by lenders was sometimes in the best interest of the estate. Because of this, they do not recommend that courts use the champerty doctrine to police probate loans. Instead, testators should consider using anti-assignment clauses in wills.

Professors Horton and Chandrasekher have written an excellent piece. While they acknowledge that it is limited in scope by virtue of the fact that they only analyzed data from one California county, their results lead to the inevitable conclusion that probate lending may be a widespread and growing phenomenon. As with a growing national concern about the adverse implications of payday lending, it seems that further studies and commentaries regarding the prevalence and implications of probate lending are warranted.

Ending the Cycle of “Ever-Changing” Wills

Mar 14, 2017 Browne LewisAdd a Comment

A will speaks at death. Therefore, the testator is free to change his or her will until the day he or she dies.   Giving a person the opportunity to change his or her will makes sense because testamentary dispositions are influenced by lifetime events. For example, after a will is executed, a beneficiary may die or the testator may lose ownership of some of the property mentioned in the will. Currently, persons are permitted to create irrevocable trusts. Although there is no prohibition against irrevocable wills, modern statutes do not provide for the use of such devises. Therefore, a method does not exist for a testator to make an irrevocable will. Nevertheless, in his timely and thought-provoking article, Is It Time For Irrevocable Wills?, Professor Alex M. Johnson, Jr. makes the case that the legal recognition of irrevocable wills would not negatively impact testamentary freedom. The availability of irrevocable wills may protect the testator who becomes incompetent after executing his or her will.

In attempt to support his assertion that irrevocable wills have a place in the testamentary process, Professor Johnson begins his article by briefly discussing the historical evolution of wills. During the Middle Ages, the law expressly deemed wills to be irrevocable. At that time, the property owner was permitted to use, a post obit transfer, an inter vivos conveyance, to make an irrevocable testamentary transfer of his property. The post-obit gift consisted of a contractual promise that the donor’s property would be delivered to the beneficiary after the donor died. Usually, the instrument creating the post-obit gift included a provision stating that the gift was irrevocable if the donor did not retain the right to revoke it. Once the Statute of Wills was enacted in 1540, wills were treated as if they were irrevocable. Professor Johnson asserts that no justification was given for making wills revocable instruments. He opines that lawmakers never intended to prohibit irrevocable wills. According to Professor Johnson, the issue of the irrevocability of wills was never fully discussed.   Consequently, there is no historical reason for not legally recognizing irrevocable wills.

Professor Johnson points out that a will is nothing more than a donative transfer. Thus, it should be irrevocable like other devices that are used to make donative transfers. Most other mechanisms used to transfer property may be irrevocable or revocable. On the one hand, an inter vivos gift becomes irrevocable once the property is delivered by the donor with the necessary intent and accepted by the donee. On the other hand, a gift causa mortis is revocable because it does not take effect unless the donor dies in the manner contemplated when the gift is given. Professor Johnson spends a significant amount of time discussing trusts as they relate to wills. The settlor has the discretion to make a trust irrevocable or revocable. By permitting donors and settlors to make irrevocable and revocable transfers, the law gives those persons the maximum amount of freedom to create instruments that carry out their wishes. That same freedom should be given to the testator when he or she executes a will.

Professor Johnson contends that the benefits of permitting irrevocable wills outweigh the costs. For example, Professor Johnson claims that the use of an irrevocable will may protect a testator who becomes incompetent. The existence of the irrevocable will permits the person’s competent self to commit his or her incompetent self to distribute the property in accordance with the wishes of the competent self. Moreover, legal recognition of an irrevocable will may help reduce the chances of improper revocations. For example, a testator who becomes incompetent may destroy his or her will based upon an erroneous or delusional belief. If this occurs in a jurisdiction that recognizes revocation by physical act, the person may end up dying intestate. If a person creates an irrevocable will, he or she would have to take specific steps to revoke or alter it. Thus, an incompetent person would not have the ability to revoke or alter his or her will. Hence, the testator’s property would be distributed based upon the wishes he or she expressed while competent.

The system created under the Statute of Wills has not kept up with changing times. Professor Johnson puts forth some compelling reasons why the law should reconsider the irrevocability of wills. The historical information contained in the article indicates that the decision to treat wills as revocable was made without much discussion or exploration. People are living longer and suffering from conditions that may render them incompetent. Therefore, people who revoke or alter their wills late in life run the risk of dying intestate if their new wills are deemed to be invalid. Irrevocable wills may provide one solution to this growing problem. As a result, it is time to have a thorough discussion about the irrevocability of will. Breaking the cycle of the ever-changing will may protect the testator and the probate system.