Yearly Archives: 2017

Apples and Oranges, Or Trusts and Wills.

Feb 14, 2017 Sarah WaldeckAdd a Comment

Wills and many trusts have the same fundamental purpose: to transfer property at death. This raises perennial questions about the extent to which the law should treat these estate planning vehicles as functionally equivalent. I liked Deborah Gordon’s Forfeiting Trust because it reminds readers that consequences flow from the simple but fundamental distinction between wills and trusts. Trusts have trustees, beneficiaries, and the accompanying rules of fiduciary duty. Wills do not. Therefore not all rules that work well for wills can be applied to trusts.

No contest clauses—also known as forfeiture clauses—are Gordon’s subject. In wills, testators have long used these clauses to deter litigation. The testator leaves property to individuals who may be inclined to challenge the will on the ground that it was executed without capacity or compliance with statutory requirements, or that it was the product of undue influence, or that it is otherwise invalid. Then the testator inserts a clause providing that anyone who challenges the will forfeits her bequest. A beneficiary can still challenge the will, but only at considerable risk. If the court enforces the will, it also enforces the no contest clause.

Gordon explains that forfeiture clauses are beginning to show up in trusts. But, unlike in wills, settlors are not seeking to disinherit beneficiaries who challenge the validity of the trust instrument. Rather, settlors and the forfeiture clauses they write “purport to disinherit beneficiaries who challenge trustee decision-making.” (Pp. 459-60.) This strikes right at the heart of traditional trust law, because the threat of a beneficiary’s suit is the law’s primary means of incentivizing trustees to comply with fiduciary duty.

When a no contest clause appears in a will, the law is settled. In a minority of states, courts strictly enforce the clause and the challenger takes nothing if the will is deemed valid. A majority of states use a probable cause standard, whereby a challenger gets to keep her bequest even if the will is ultimately deemed valid, provided that a reasonable person would have concluded that the challenge was substantially likely to be successful. Both approaches respect the testator’s desire to deter spurious litigation, with probable-cause jurisdictions hedging against the risk that forfeiture clauses may deter beneficiaries from raising well-grounded claims about a will’s validity. But what if the forfeiture clause appears in a trust instead of a will, and the beneficiary is alleging that the trustee invested imprudently, or failed to account, or did not treat the beneficiary impartially, or violated other fiduciary obligations?

As Gordon documents, the law about forfeiture clauses in trusts is anything but settled. The Uniform Trust Code says nothing about these clauses. The Restatement (Third) of Trusts has a provision in draft form that absolutely prohibits no contest clauses aimed at beneficiaries who challenge trustee decision-making, but the comments state that courts may choose to enforce clauses in “extreme circumstances” where “certain disappointed or difficult beneficiaries might pursue unwarranted and unreasonable litigation against a trustee.” (P. 504, quoting Restatement (Third) of Trust § 96 cmt. ) Recently a growing number of appellate courts have confronted trust forfeiture clauses, with results that have been “increasingly inconsistent and haphazard.” (P. 460.) Several jurisdictions have deemed forfeiture clauses in trusts contrary to public policy because they “immunize fiduciaries from [state] law governing the actions of such fiduciaries.” (P. 485, quoting Callaway v. Willard, 739 S.E.2d 533, 539 (Ga. Ct. App. 2013)). In contrast, other jurisdictions “have either divested litigious beneficiaries of the right to inherit trust property or acknowledged that the law may allow for such a disinheritance.” (P. 492.)

Gordon recognizes that sensible treatment of trust forfeiture clauses must take into account what the settlor is trying to accomplish and what a normal, well-functioning trust requires. She explains that no contest clauses “reflect the respective trust creator’s desire to confer a legacy of sustained, functioning, and non-litigious interactions among the parties to the trust relationship.” (P. 512.) But, Gordon writes, “the differences between how trusts and wills operate mean that trust forfeiture clauses are fundamentally different than their narrower testamentary counterparts.” (P. 505.) Thus, she argues, the treatment of no contest clauses in wills is not the only relevant legal reference. Courts also should look to the law governing exculpatory clauses, which protect trustees from liability stemming from poor decision-making. (P. 507.) These clauses—like no contest clauses—“are intended to make a fiduciary’s job smoother (and more desirable) and both impact trustee accountability.” (P. 508.)

Taking her cue from the law on exculpatory clauses, Gordon suggests that courts take a burden shifting approach to forfeiture clauses in trusts. Under Gordon’s framework, forfeiture clauses are presumed invalid. Trustees, however, can rebut that presumption by proving that “(a) the settlor included the clause to address a particular concern, rather than simply as boilerplate and (b) the purpose for which the clause was included is, in fact, occurring.” (P. 509.) If the trustee makes this showing (and here Gordon returns to the law of wills), the burden would shift to the beneficiary to prove that the trustee actually violated fiduciary duties or that the beneficiary at least had probable cause to challenge the trustee’s actions.

Gordon’s burden-shifting approach is complex, but it balances the interests of the settlor against the realities of the trustee-beneficiary relationship. Settlors include forfeiture clauses to decrease the risk of meritless litigation and all its attendant costs—risks that can be very real. At the same time, however, the beneficiary’s ability to bring suit against a trustee is the legal mechanism for ensuring that trustees fulfill their fiduciary obligation. Because Gordon considers the fundamental distinction between wills and trusts as well as what settlors seek to accomplish with forfeiture clauses, she offers a sensible approach to an estate planning device whose use is on the rise.

We Are Family, Aren’t We? Modern Families and Outdated Probate Laws

Jan 20, 2017 Camille DavidsonAdd a Comment

In her article, Inheritance Equity: Reforming the Inheritance Penalties Facing Children in Nontraditional Families, Professor Danaya C. Wright examines the negative effect that outdated intestate succession statutes have on today’s modern families. Even though a majority of children today do not live in a 1950s type nuclear family, the intestate succession statutes in each of the fifty states still only protect those children. Families have evolved; state probate codes have not. Step-children, children born out of wedlock, children raised by lesbian or gay couples, and children raised by relatives are just some of the children who are disadvantaged by out of date inheritance laws. If laws of inheritance are to effectuate the desires of decedents, then they are failing. Professor Wright advocates for change and provides us with a model statute.

Professor Wright’s article begins a much-needed discussion about how probate codes and family law codes are not aligned. She states, and I agree, that an article such as this one could be written for each state. While family law has expanded the definition of family, probate codes remain rigid. Family law recognizes functional parents; probate law does not. Therefore, there are instances where a person may be responsible for child support while alive, but at his death the supported child is not entitled to an inheritance from him.

Professor Wright identifies two egregious situations where “the interplay of adoption and inheritance law” results in disadvantages to “millions of American children”. In situations where a functional parent does not formally adopt a child, such child most likely will not inherit from the functional parent. In situations where a co-parent adopts a child, the child is typically disinherited from a biological parent, even if the parent continues to function as a parent. She also articulates why a will does not always solve the issues of inheritance.

Suppose a father has a child with a first wife. After the death of the first wife, father remarries. His new spouse raises his daughter as her own, but does not adopt her.The father and his new wife have wills where each leaves his or her estate to the other. Therefore, at the death of the father, his estate goes to his surviving spouse, the new wife. If the wife’s will does not provide for contingent beneficiaries, at the wife’s death, her collateral relatives would be her legal heirs rather than her step-daughter. Also, if other family members devise gifts to the wife, the step-daughter would not inherit through her deceased step-mother, even though such step-mother was her functional parent. Other family members would need to execute wills to include the step-daughter as a beneficiary. Alternatively, let’s assume that the new wife adopts her step-daughter and her step-daughter’s maternal grandmother (her deceased mother’s mother) dies with a will devising her estate to her children, per stirpes. As a result of the step-parent adoption, that child is no longer her biological grandmother’s grandchild. She would not inherit by representation her mother’s share under her grandmother’s will. In each of these examples, the intent of the decedent does not prevail. Antilapse statutes and class gifts are also affected by the current presumptions.

I agree with Professor Wright that the presumption should be in favor of inheritance in such relationships. She argues for a number of legal changes including judicial discretion to use equitable principles and technical revisions to state probate codes. She provides s model statute that includes a functional child provision and the evidence needed to show that an individual was functioning as a parent. The model statute proposes that the intent to disinherit such child should be in writing.

Efficient administration of an estate is necessary in probate law. Courts should be concerned about children (or adults) wrongfully claiming to be heirs because a decedent acted as a parent. However, Wright suggests that this is a rare issue in practice. Trusts and Estates scholars should accept Professor Wright’s challenge and continue writing and discussing these issues. “When laws stop protecting the very population they seek to benefit, it is past the time for change.”