Yearly Archives: 2019
Dec 17, 2019 Katheleen Guzman
Intents and acts are different things. Intent without act rings hollow or benign, and acts without intent can be perplexing or seem cavalier. But add one to the other—animate the intent through act, i.e. externalize what lives in the mind of one into the world of all—and powerful legalities result. Accidents turn into assaults; manslaughter into murder. Such casual communications as drafts or unsent texts could even become a last will and testament, accepted into probate as dispositive acts. This last context frames the inquiry that Professor David Horton explores with mastery in Wills Without Signatures.
It might seem that the unsigned will is too narrow an issue to warrant consideration. “No such thing,” one might say. “No signature, no intent; no intent, no will.” But with both precision and sweep, Professor Horton deconstructs that claim to build all sorts of bridges between small views and big pictures and much in between. The task is neither light nor insignificant. Old rules die hard. But with the continued relaxation of formalism and formalities, the constant expansion of technology, and the increasingly casual and tech-dependent ways in which people behave, unsigned (at least in the traditional sense) documents might indeed reflect the genuine last wishes of their makers. If so, and if “testamentary freedom” deserves the veneration that law and society claim for it, what can or must be extrapolated about intent/signature interplays demands analytic care.
Orthodox wills law is clear. Mirroring the equation above, valid wills require the confluence of testamentary intent plus formalities (legal acts). This duality makes particular sense within wills law, where the probate context itself generally ensures that the best evidence of the alleged testator’s alleged intent died when she did. By demanding some variation of the (hand)writing, witness, and signature trio, law seeks assurance that testamentary intent as claimed is likely true, and that the proffered document indeed represents the decedent’s near sacred desires. So viewed, the intent actuates the conduct, just as the conduct reveals the intent. But Professor Horton invites the deeper questions that such a calculation makes. In approaching the validity of the unsigned will, he at times sidles (and at other times, squares) up to far larger issues of the tricky interplay between intent, act, and proof—as well as intent, assent, and consent—including the slippery quality found in their testamentary form. Moreover, he does so with range, tying past to present practice and theory in a way that reveals a workable future path.
Wills Without Signatures begins on 17th century ground, when the pre-Statute of Frauds life for a decedent bequeathing chattels sometimes permitted their deathtime transfer even when no signature was affixed to a writing (or indeed, through no writing at all). By so situating matters within ecclesiastical English law and its colonial counterpart, Professor Horton reveals that notwithstanding the relentless formalism of the later Wills Act, the possibility of an unsigned will is actually less “new” than it seems. He continues by tracing the Australian and American experience with the “harmless error” doctrine, through which even wildly non-compliant documents might be accepted as wills given enough clarity and surety that their makers so intended them. Here is where things get even more interesting, at least where signatures are concerned.
What does a signature add? What does its absence remove? As earlier described, formalists would respond “everything.” But Professor Horton is dissatisfied with both that conclusion and the tepid underperformance of harmless error as its corrective, at least as often applied. For example, to demand “clear and convincing” evidence that a particular decedent intended a particular document to constitute her particular, capital “w” Will would render “blazingly idiosyncratic” any attempt to locate intent (or assent) within—and therefore qualify any “mere” draft, physical/digital file or correspondence awaiting some future finalized product as—having met the standard. Instead, he threads back to then extends a “momentum theory” that he’d sourced to earlier cases and related fields. Thereunder, an unsigned (and given the usual order of things, also likely unwitnessed) document could qualify as a valid will nevertheless whenever facts revealed “formidably” the likelihood that the testator had materially assented to its terms through readiness to soon sign either it or its polished iteration. This, to Professor Horton, could rescue all manner of unexecuted drafts, instructions, or texts—even those that the testator may not yet have read—from testamentary oblivion, as well as encourage a more sympathetic, intent-furthering cast to the problems lurking within digital wills. His theory is imaginative but careful; practical, grounded, but inspired. Moreover, it undertakes to self-limit so as to protect against some “anything goes” view of the will.
Concern might remain over the elasticity of such terms as “formidable, material, ready, and ‘soon’” in imputing final assent to some technically inchoate plan. That said, such imprecision is not new, and as the reality of “circumstantial evidence” reflects, may be unavoidable whenever law peers into affairs of the mind. It would seem peculiar were law quite willing to punish crimes or deter torts based on indirect evidence of intent, yet ignore its fair appearance for death-time gifts, where the decedent to whom it is posthumously assigned will not suffer any negative consequences of finding it anyway. If intent matters (and it does) but accidents and other things happen (which they do), the safer bet for the fairness of probate is to meet testamentary intent where it surfaces, even if in non-traditional ways. Indeed, there must have been at least some intent in play, or there would not even be any testament-like (albeit unsigned) iteration to begin with and with which to later work.
I spent a good part of one 6-year-old summer trying to climb my grandmother’s maple tree. I tried jumping, running starts, ropes, stacked bricks—small solutions that offered no foothold. Later that fall, my mother encouraged me to try again. This time, I pushed off from her shoulders while pulling up into the lowest fork. I kept climbing, pulling down increasingly smaller branches along the way. I’d been looking at problems in the unyielding trunk: bark, roughness, and sap. I’d pictured the payoff as equally limited: the chance to sit in the tree. But as I cleared that initial hurdle, the view changed. And I remember thinking that the higher I could go, the farther I could see, and the more I could, by looking down toward the trunk then up toward the sky, somewhat picture time. In a way, this is what Professor Horton offers to those for whom intent really matters, and it is more than merely the possibility that an “unsigned will” is not, in fact, an oxymoron. He has given us shoulders, perspectives, possibilities, context, more questions worth asking, empathy, and a longer, broader view.
Sep 13, 2019 Michael Yu
All professional estate planners are familiar with the family limited partnership (FLP) as a gift and estate tax vehicle to create fractional discounts for federal gift tax purposes and to reduce the decedent’s gross estate for federal estate tax purposes. The main thesis of Professors Manns and Todd‘s piece is that a single-member LLC (SMLLC) is “the ideal initial entity in a gifting strategy.” (P. 325.) They contrast the SMLLC with the FLP, which “the literature continues to describe and analyze,” despite the fact that “the actual state law entity now is often an MMLLC [multi-member LLC].” (P. 344.) The professors discuss how an SMLLC “can be used to blunt the negative effects” (P. 325) (arguably, more successfully than an FLP) as to Internal Revenue Code sections 2512, 1015, and 2036, in part because of a Tax Court case, Pierre v. Commissioner.
In Pierre, the Tax Court held that, although an SMLLC may be disregarded under the check-the-box regulations for federal income tax purposes, those regulations do not provide for the LLC to be disregarded for federal gift tax purposes when a donor transfers an ownership interest in an LLC. (P. 344.) Professors Manns and Todd skillfully argue that, based on Pierre, a taxpayer can take advantage of the differing treatments of an SMLLC for federal income tax and federal gift tax purposes in the following situations (I do not cover in this jot all that the professors wrote).
First, as to section 2512 concerns about valuing gifts, SMLLCs offer advantages as a “first step in making gifts of entity interests.” (P. 349.) At the initial creation of a partnership (as opposed to an SMLLC), wealth disappears because the “aggregate value of those partnership interests almost always is less than the total value of the assets transferred to, and now owned by, the partnership, because minority ownership interests in entities are disadvantaged compared to direct ownership of assets.” (Pp. 348-49.) Professors Manns and Todd write that wealth disappearance is “permitted, or rather does not occur, when there is a ‘bona fide sale for an adequate and full consideration in money or money’s worth.'” (citing sections 2035(d), 2036(a), 2037(a), 2038(a)(1), and 2043(a)) (P. 349.) In transactions with donative intent (such as those among family members), the “bona fide sale” exception can apply “when the purpose for creating the entity is either (1) a business purpose or (2) a legitimate and substantial (or sometimes actual) nontax purpose.” (P. 349.) The professors note that a SMLLC created to hold investment assets [prior to making gifts of entity interests] “more easily can fit within the second (legitimate and substantial nontax purpose) prong than an MMLLC can.” (P. 349.)
Second, as to section 1015 concerns about a lifetime transfer of property with a built-in loss (which creates an adjusted gain basis and an adjusted loss basis for the donee), the Pierre case, per Professors Manns and Todd, makes section 1015 inapplicable as to an SMLLC. (P. 339.) Under Pierre, the SMLLC is disregarded when an LLC owner transfers an LLC interest such that, for federal income tax purposes, the owner transfers a proportionate share of LLC assets and not an LLC entity interest. (Id.) Accordingly, the value of the proportionate share of the LLC assets does not have a minority interest discount, which would exist if there had been a transfer of an LLC entity interest. Consequently, a taxpayer initially creating an SMLLC never, under section 1015, encounters the complicated situation of a partner having, as to her partnership interest, both an outside basis and an inside basis. (P. 340.)
Third, as to section 2036 concerns about a clawback into the decedent’s gross estate of the value of all property transferred previously to the SMLLC, Professors Manns and Todd point to Estate of Mirowski v. Commissioner. In that case, the Tax Court did not require that the gross estate include property previously transferred to the SMLLC (which transfers reflected valuation discounts allowed). The professors summarized the Mirowski case’s “roadmap for securing valuation discounts when an SMLLC is the starting vehicle for gifting entity interests”: (1) create the SMLLC for “legitimate, actual, significant non tax reasons,” (2) require in the operating agreement capital accounts under the applicable Treasury Regulations, (3) deny in the operating agreement the SMLLC creator from having the discretion to determine distribution amounts, and (4) avoid the negating factors from Estate of Purdue v. Commissioner (such as taxpayer on both sides of the transaction, taxpayer’s dependence on partnership distributions, and taxpayer’s failure to transfer property to the partnership, among other factors). (Pp. 368-69.)
Professors Manns and Todd’s piece is thought-provoking. The literature focuses on the FLP as a federal gift and estate tax vehicle. The professors have successfully posited the SMLLC as “the ideal initial entity in a gifting strategy” (P. 369) to preserve valuation discounts and to preclude gross estate inclusion of property initially transferred to the SMLLC.
Aug 7, 2019 David Horton
Michael J. Higdon, Parens Patriae
and the Disinherited Child (July 2, 2019), available at
SSRN.
In the United States, parents can disinherit their dependent children. This rule, which I’ll call the “disinheritance power,” is one of the most blazingly idiosyncratic strands of American law. Indeed, no other legal system gives decedents this cruel freedom. And although scholars have criticized the disinheritance power for decades, it remains firmly on the books.
Michael Higdon’s engaging new article attacks this problem from a new angle. Higdon proposes that states use the venerable doctrine of parens patriae as a safety valve against egregious exercises of the disinheritance power.
As Higdon explains, the disinheritance power is anomalous for several reasons. First, it’s a relic. American colonies imported the disinheritance power from England. But because England abandoned the disinheritance power in 1938, the U.S. has fallen far out of step.
Second, other countries do things very differently. In China, Nordic nations, and many civil law regimes, forced heirship gives all children a set percentage of a decedent’s property. Similarly, common law countries such as Australia, Canada, and England boast family maintenance statutes, which empower judges to override a testator’s wishes in the interests of fairness. Thus, by clinging to the disinheritance power, the U.S. “stand[s] alone.”
Third, even within American law, the disinheritance power is a paradox. For one, a living parent must support his or her minor children. It is not clear why this duty ends with the parent’s death. Moreover, although domestic courts and legislators often cite the primacy of testamentary autonomy, they also recognize common-sense limits to this principle. For instance, testators and settlors can’t insulate their assets from spouses or creditors. Likewise, judges invalidate bequests that violate public policy by causing negative externalities. Indeed, a court will refuse to enforce a provision in a will that instructs the executor to tear down the testator’s house because honoring such a provision would “harm[] the neighbors[ and] detrimentally affect[] the community.” Bizarrely, though, the disinheritance power invites decedents to saddle the government with the spillover cost of caring for their kids.
In a creative maneuver, Higdon suggests that states curb the disinheritance power through their parens patriae authority. Parens patriae is the government’s prerogative to “act as guardian for those who are unable to care for themselves, such as children or disabled individuals.” It surfaced in seventeenth century Britain, where it initially “only encompassed the Crown’s ability to protect lunatics (the temporarily insane) and idiots (the permanently insane).” (Pp. 26-27.) But due to a typographical error in a 1603 opinion—in which the publisher of Coke’s Reports accidentally substituted the word “infant” for “idiot”—judges soon extended parens patriae to children. Today, courts use the doctrine to override a variety of parental decisions that aren’t in a child’s best interests, including those relating to adoption, liability waivers, and divorce settlements.
Higdon urges courts to apply the doctrine of parens patriae to disinherited children in certain contexts. His thesis is persuasive and nuanced. Rather than aiming for the sky and advocating the abolition of the disinheritance power, he argues that judges should invoke parens patriae to protect “vulnerable child heirs”: “minor children, disabled adult children whose disabilities are such that they remain dependent upon their parents, and adult children who were abused at the hands of the testator parent during their minority.” (P.9.) Yet even when a child falls into one of these camps, Higdon would require the child to demonstrate additional harm, such as a lack of funds from other sources. In this way, Higdon would rein in the disinheritance power without significantly undercutting testamentary freedom.
To borrow a quote from Deborah Batts cited at the beginning of Higdon’s piece, “when it comes to inheritance, American children are in need of a champion.” (P. 3.)
Jul 4, 2019 Alexander Boni-Saenz
Alberto B. Lopez & Fredrick E. Vars,
Wrongful Living, 104
Iowa L. Rev. 1921 (2019).
Advance directives are often recommended, but rarely used. The latter fact is an alarming one, and Professors Alberto Lopez and Fredrick Vars tackle this problem in their Article Wrongful Living. After identifying the root causes of this state of affairs, they provide innovative practical and conceptual proposals for implementing the wishes of those who have taken the time to exercise their prospective autonomy. They argue for a tripartite solution to the persistent problem of advance directive underutilization. First, they recommend creating a nationwide registry of advance directives. Second, they suggest that attorneys be exposed to professional discipline and malpractice liability for failing to enter advance directives into said registry. Third, they reconceptualize the nature of the damages that flow from medical interventions that lead to undesired continued life, making wrongful living claims potentially more cognizable to courts. This holistic analysis of advance directives is admirable for providing a realistic blueprint for law reform, and the Article is a must-read for those scholars working in the areas of incapacity planning, health law, and torts.
Lopez and Vars first perform some necessary brush clearing by discussing the historical and philosophical background of advance directives. They detail the legal history of the device, including its origins in informed consent doctrine, the flurry of state and federal legislative activity that allowed and promoted its use, and the high-profile cases of Karen Ann Quinlan and Nancy Cruzan. They then turn to the thornier philosophical issues around advance directives, focusing on the Ronald Dworkin-Rebecca Dresser debates on their utility or normative desirability. They conclude, unsurprisingly, that advance directives do protect important autonomy or dignity interests, creating a need to analyze how best to legally implement them.
With this conceptual foundation, they turn to examining why advance directives fail to influence medical treatment decisions. One culprit is the current law, which places the onus on the declarant (their term for the person who filled out the advance directive) to notify medical institutions of the existence of the directive. Even when this is done, however, advance directives are often not placed in the medical record in a way that will make them operative in a medical setting. States and the private market have attempted to ameliorate this situation by offering advance directive registries, but these face several practical problems. First, the placement in a registry does not necessarily make the advance directive easily accessible to medical personnel at the moment of decision, as it might require passwords that only the declarant has. Second, there are significant costs to starting up such registries, explaining why many states have not endeavored to create them. Finally, the proliferation of private registries to make up for the lack of public ones actually further complicates the efforts of medical personnel, as it increases search costs to find the registry that houses a particular patient’s legal documents.
This leads to their first proposal: a national centralized registry for advance directives. There are two features that Lopez and Vars identify as must-haves for this registry. First, it must be searchable without needing information from the declarant, as she might not be in a condition to communicate or may have forgotten a login password. Second, the registry must be completely online, which allows for immediate viewing of the relevant documents. This is important as often medical decisions are made in emergency situations, and there is not time for the directive to be mailed or faxed. Lopez and Vars justify such a registry primarily on the basis that it reduces the costs of finding and using advance directives as well as saving on costs due to economies of scale. In response to critics who say that they are merely proposing another government bureaucracy, they point to the relatively successful Organ Procurement and Transplantation Network, a similar database used in emergency situations by medical professionals that is maintained by the Department of Health and Human Services.
But having a registry is only part of the solution. It must be populated with advance directives in order to be effective. To illustrate this point, Lopez and Vars draw an interesting analogy between advance directives and wills, noting that the former is only useful if they are accessible quickly and during the life of the declarant, whereas the latter are only operative and needed some time after death. Thus, their second proposal: Attorneys who safeguard advance directives for their clients must adequately preserve them as they would other client property. The simplest and best way to do this would be to enter the advance directive into the national registry. Failure to do so could (and should, they argue) subject an attorney to both professional discipline and a legal malpractice action, thus creating an incentive for attorneys to comply. Here, the authors analogize registration to the attorney recordation of deeds after a real estate transaction, both of which put third parties on notice of the client’s interests.
Once the registry exists and is populated with a sufficient number of advance directives, the final part of the puzzle is getting medical professionals to use the registry and obey their patients’ memorialized commands. Their third proposal targets medical professionals, who might be subject to various claims for failing to comply with advance directives, specifically ones that require the discontinuation of life-sustaining treatment. Courts have been wary of wrongful life claims, primarily because they find it difficult to conceptualize continued life as a harm, as compared to nonexistence. In a clever move, Lopez and Vars reconceptualize the nature of the harm not as continued life but as a loss of enjoyment of life. The authors note that life-threatening medical events—if survived—are often followed by poor quality of life as compared with life before the medical event. This poor quality of life, in turn, is precipitated by a wrongful medical intervention caused by ignoring the dictates of an advance directive. Thus, the correct measure of damages is the difference between the quality of life in that previous state as compared to the diminished state that a person might find herself in after the wrongful medical intervention.
Whether courts will buy this particular conceptualization of damages is an open question. The harm of ignoring advance directives is more likely an injury to some type of dignity or prospective autonomy interest of the patient. However, as the authors note, courts are just as reluctant to expand dignity torts as they are to accept wrongful life claims. Therefore, the authors may provide a more realistic doctrinal route to recognition of the harms of not honoring advance directives. Coupled with their other proposals for a centralized registry and attorney incentives, we may have a path forward for making advance directives useful and effective.
May 27, 2019 Phyllis C. Taite
Nothing incites more dread in law students and professors than the words “Rules Against Perpetuities” (RAP). As states continue to pass laws abolishing or effectively nullifying the doctrine, professors celebrate deleting this topic from their syllabi. Professor Kades demonstrates why, from a social policy perspective, society at large should dread the death of the RAP. In this article, he challenges this trend and demonstrates the negative consequences resulting from dynasty trusts, following the demise of the RAP.
Prof. Kades starts with a brief discussion of wealth and income inequality. Relying, in part, on Thomas Piketty’s research, Prof. Kades discusses how wealth inequality has a greater impact on wealth concentration than income inequality. His research supports the notion that wealth inequality has outpaced income inequity amongst the top wealth holders. He attributes this phenomenon, in part, to a mixture of wealthier individuals earning a higher rate of return on investments and their ability to save a larger part of their income. As inequality grows, individuals have more property to transfer via inheritance.
Prof. Kades argues how growing wealth precipitates increased wealth transfers which in turn contributes to further wealth and inheritance inequality. Prof. Kades provides historical data illustrating periods in which inequality was tempered and when it rose. Tying wealth to property ownership, the research demonstrates that periods of wealth decrease coincide with periods when capital property prices decrease. This history also tends to show that the rate of return on capital assets significantly exceeds the growth rate for world output. He argues this phenomenon further increases wealth and inheritance inequality. As a result, each generation has more capital, which in turn increases their capacity to accumulate yet more capital.
The RAP comes out of a particular historical context. The English Judiciary, through judicial decisions, converted fee tails to fee simple estate to make land alienable. Alienability remains a primary concern for property owners, but it is not the only justification for the RAP. For example, some scholars justify the RAP as a balance between present and future generations of property owners, although others question the claim that the RAP promotes greater utility than permitting perpetual restrictions. Professor Kades’s view is that property owners seek to avoid restrictions on their control over their devises. The RAP exists to make property more alienable and to limit “dead-hand” control in order to maximize the efficient use of property. Now, however, more than half of the states have abolished or diluted their RAP laws, and the tax laws have not made adjustments to address the consequence of allowing property ownership in perpetuity. Consequently, wealthy donors may place property in trust for descendants multiple generations down and this property may never be taxed if the donor allocates his generation-skipping transfer tax exclusion to the trust and the property remains in trust. Prof. Kades argues the estate tax has the capacity to be one of the most effective weapons against dynastic wealth, but it has been used ineffectively.
Holding accumulated capital in dynasty trusts, combined with the abolition of the RAP, exacerbates wealth and inheritance inequality. Prof. Kades argues that in addition to the negative effects of dynastic wealth, that wealth hoarding itself creates economic harms. He points out the economic health of the United States (U.S) relies on consumption and spending by the government and the private sector. The multiplier effect of government spending increases national income by encouraging consumer spending. However, dynastic trusts are not designed for spending. Instead, dynastic trusts are designed for maximum saving—for generations. As a result, government dollars used to purchase goods and services from businesses owned by dynasty trusts will reduce the multiplier, which negatively impacts the national income and inhibits the government’s ability to stimulate the economy.
Next, Prof. Kades introduces the concept of the “paradox of thrift,” which occurs when too much income is saved. When a large amount of wealth is held in dynastic trusts, it limits the government’s ability to respond to recessions, which has the greatest impact on individuals in the lowest wealth brackets. He argues that a savings rate that maximizes consumption—the “golden rule”—is equal to the sum of the depreciation rate for capital and the rate of growth of the population; he asserts that the U.S. rate has averaged substantially below this rate. In turn, this makes the economy ripe for economic decline.
Capital locked in dynasty trusts has another negative impact. The beneficiaries of dynasty trusts have major restrictions on their access to their property. In contrast, beneficiaries of non-dynastic trusts and estates have the ability to exercise control of their property, such that they may consume or dispose of it at will. They have the freedom to liquidate their property, spend assets, and leave nothing for the next generation. While this wasteful spending may be the type of behavior that estate planning professionals are hired to guard against, he argues donors should not have the power to lock up wealth to prevent future generations from spending it.
As a solution for these problems, Prof. Kades proposes tax-based solutions to curtail the negative effects of dynasty trusts. He highlights how the RAP and estate tax were designed to work together to curtail wealth concentration. Dynastic wealth benefits a few of the wealthiest families but has the potential to harm the majority of society by the negative impact it has on the economy. Even so, Prof. Kades does not advocate for reinstating the RAP. He points out that economists suggest that an effective way to curtail undesirable behavior is to institute a tax at a rate that reflects the external costs imposed on society by the undesirable activity. This solution would allow the government to raise revenue without deadweight loss.
To that end, Prof. Kades proposes taxing perpetuities at the federal level because of the systematic way states have passed laws with “race-to-the bottom” legislation to gain trust business. Further, dynastic wealth has a national impact on the economy, therefore, he argues the solution must be imposed on a national level. He identifies three specific harms associated with dynastic wealth: the paradox of thrift, the failure to save consistently with the golden rule, and the absence of wealth dissipation. In response to these harms, he offers a multilevel approach.
First, he proposes instating a mandatory minimum spending amount for trusts to encourage consumption, and a special income tax on dynasty trusts that have excess savings amounts that pull the national savings rate above the golden rule. Prof. Kades asserts these measures help to avoid the negative externalities associated with depressed consumption. In order for the special tax to be effective, he suggests a tax rate that would equal the amount of excess savings on all dynasty trusts with a savings rate above the golden rule rate based on the trust’s end of year value. The tax would automatically trigger only during times when the national saving rate rises above the golden rule level.
To address the paradox of thrift, Prof. Kades proposes a different short-term tax, since this phenomenon occurs during a recession. He does not propose a specific method, fraction, or amount but suggests the tax should automatically trigger during a recession. The amount should be determined based on the amount needed for employment restoration. Implemented correctly, he argues this tax will operate as an automatic stabilizer to counteract recessions because it will free funds destined for excess savings and redirect them to consumption or production of goods for consumption. Alternatively, he suggests that these funds could be used to cut taxes for low-income households.Together these taxes would discourage the type of excess saving that pose a threat to consumption-based economies.
Overall, Prof. Kades presents compelling proposals to curtail the negative effects of wealth concentration currently exacerbated by dynasty trusts. Relying on Piketty’s work, he outlines the drawbacks of dynasty trusts when combined with the abolition of the RAP in a majority of American jurisdictions. This article methodically outlines the harmful consequences of allowing dynasty trusts to continue without effective measures to combat wealth and inheritance inequality. I recommend this article to professors teaching Property, Trusts and Estates, Taxation, and tax policy courses. I also recommend this article to scholars interested in normative solutions to wealth, income, and inheritance inequality.
