Oct 12, 2012 Phyllis C. Taite
Gerry W. Beyer,
Will Contests - Prediction and Prevention, 4
Estate Planning & Cmty. Prop. Law J. 1 (2011),
available at SSRN.
Gerry W. Beyer’s Will Contests-Prediction and Prevention starts with a discussion of reasons to anticipate a will contest. He points out society has come to accept nontraditional families as a societal norm and yet the likelihood of a will contest increases when a decedent makes bequests that pass outside of what we define as a traditional family. Thus, for example, from a planning standpoint the best option for a testator involved in a same-sex relationship is to create a will because the intestacy laws will not make provision for the surviving partner. The article points out that even when the testator plans in advance, the likelihood of this will being challenged by a blood relative is much higher than when bequests are made to traditional family members.
Professor Beyer points out that historically, no-contest clauses have been used as a weapon to deal with the potential threat of a will contest. Even so, Professor Beyer points out that no-contest clauses are becoming less reliable as a deterrent because enforceability may be called into question. With that in mind, Professor Beyer offers an alternative solution — an incentive not to contest the will: In exchange for not challenging the will for a period of 2 years after the date of death, the beneficiary would receive a gift. Such a provision may be especially valuable for states where no-contest clauses are not enforceable.
Professor Beyer also suggests the use of technology to provide “will insurance.” We’ve seen countless television shows where a decedent leaves a “video will.” I certainly cannot think of a circumstance where I would suggest that a client make a video will alone, although videotaping the execution ceremony is quite different. Certainly if a testator’s capacity may be called in to question a video could provide “will insurance,” but even in circumstances where competence is not questioned the testamentary intent may be established by use of statements made by the testator contemporaneous with the will execution. When properly done, the video execution could provide evidence of the adages estate planners and professor use frequently, such as the testator understanding the natural objects of his bounty, understanding the nature and extent of his property, understanding the disposition of his property under the will, and so on. The bequest to a same-sex surviving partner has more protection when supported by video evidence, but it still has inherent risk.
Professor Beyer also provides suggestions regarding witnesses to the will. The article is written in the context of an anticipated will contest. Thus it discusses the importance of the witnesses’ role in the execution process. In many cases, witnesses are persons who happen to be in the right place at the right time. They tend to have no personal relationship to the testator and can only testify about the testator’s demeanor at the time of the execution, if they remember. However, as Professor Beyer points out, if witnesses were specifically chosen with a will contest in mind, the witnesses could be much more useful. If attorneys chose witnesses who were personally acquainted with the testator, these witnesses are more likely to remember the execution and have a frame of reference to testator’s intent and capacity on the date of execution as well as a prior time when it is uncontested that testator had such capacity. In addition, it would be much easier to locate witnesses with whom there is a personal relationship in the event their testimony is required.
I highly recommend this article to academics, and to transactional attorneys as well as litigators. This article provides the framework to minimize the risk of a will contest or provide the best protection in the event of one.
Sep 21, 2012 Alyssa DiRusso
Sometimes a will is not just a will. In Mark Glover’s recent article, he illuminates the psychological power that the law of wills and the process of estate planning can have. Although I’ve long suspected many of us who work in the world of trusts and estates do so for psychological reasons (what drives us to attempt to control death?), I’ve never seen the connection between psychology and the law of death made so persuasively and concretely.
Professor Glover begins with a useful introduction to therapeutic jurisprudence. It seems a gentle and unobtrusive movement; it largely suggests that, all other things being equal, the law should tilt toward rendering positive psychological consequences rather than negative ones. Fair enough. The model requires an analysis of the impact of laws on people, noting both the negative and positive psychological effect of the constructs law has created. An analysis should lead to an adjustment in the law if the primary goals of the law could be accomplished in a way with better net psychological impact.
In the trusts and estates context, Professor Glover notes both negative and positive (“antitherapeutic” and “therapeutic”) psychological consequences of estate planning. Anxiety about death and dying, and being forced to address issues relating to that source of angst, can by psychically troublesome. Familial conflict and estate disputes also render negative psychological consequences. Fear of the probate and administration process may provoke an anxiety reaction as well. For clients most strongly affected by these concerns, the estate planning process can be a source of worry, anxiety, and negative emotions.
Much of estate planning, however, has therapeutic consequences, according to Professor Glover. Many testators can experience “peace and satisfaction” from both the anticipated result of estate planning and the process itself. The freedom of testation afforded by estate planning can produce satisfaction in a testator’s implementation of his individual preferences, not the least of which may be provision for the testator’s family after death. The lawyer as “counselor” in the estate planning process can also have positive psychological benefits; the relationship and interpersonal support, in addition to the expert advice provided, can reduce death anxiety and minimize other negative emotions associated with wills. The will execution ceremony itself may provide the comfort and satisfaction of ritual. Finally, the execution of a will provides an avenue for self-expression, conveying the testator’s values and emotional connections. On the whole, the positive psychological impact of estate planning appears to outweigh the negative.
Having applied a basic therapeutic analysis to estate planning as a whole, Professor Glover next demonstrates how the theory could be applied to a specific example of wills law: military wills. Drawing on the general framework of the negative and positive psychological impact to be anticipated from the estate planning process, Professor Glover analyzes two reform movements within military wills: the reduction of states recognizing a privileged status for military wills, and the narrowing of the circumstances under which military wills may be executed (construing active military service more strictly). Given that those in active combat are less likely to be able to access any of the psychological benefits of estate planning if significant formalities of will execution are required, Professor Glover argues that therapeutic analysis weighs against removing the privilege of military wills in many states. Noting, however, that additional therapeutic benefits of estate planning may be accessed through attested wills if time permits (the counseling benefits of an attorney, the satisfaction of ritual), Professor Glover explains that the therapeutic balance weighs in favor of the restriction of access to military wills to those in active duty.
In conclusion, Professor Glover notes that a therapeutic jurisprudential framework can be applied to a variety of aspects of wills law. Indeed, his list of selected publications shows that he will apply the analysis to will execution in his next article (Mark Glover, The Therapeutic Function of Testamentary Formality, 61 U. Kan. L. Rev. __ (forthcoming)). I am sure it will be as satisfying a read as this article was. Until it is released, I suppose I will have to console myself with the therapeutic benefits of a nice cup of green tea, or maybe just update my will.
Jul 23, 2012 Thomas Gallanis
This fascinating book stems from the author’s Ph.D. dissertation at the University of London, supervised by Professor (now the Honorable Mr. Justice) David Hayton and Professors James Penner and Paul Matthews.
The book is a response to academic writing from the United States emphasizing the contractarian or organizational basis of trust law.
Dr. Lau’s account is also relevant to American trust law, even though our law will never be as proprietarian as the English law from which it descends. Still, American trust law, particularly as articulated in the Uniform Trust Code and the Restatement Third of Trusts, is experiencing a renewed appreciation of the property rights of the beneficiaries. Scholars of U.S. trust law will find much of interest in Dr. Lau’s thought-provoking book.
Jun 4, 2012 Stewart Sterk
Under what circumstances should courts permit a donor to undo what appears to be a completed gift – particularly when the gift is embedded in a real or imagined romantic relationship? After surveying existing law, Ruth Sarah Lee concludes that traditional doctrine does not adequately deter donees from subtly misleading donors into making generous gifts that the donor would never make if the donee had been honest about his or her intentions. Although the article’s focus is on a subspecies of lifetime gifts, its conclusions suggest possible application to testamentary gifts, and to how courts might approach doctrines of undue influence and tortious interference.
Although the conventional wisdom is that gifts are gestures of altruism, love, or kindness, that conventional wisdom does little to explain why a donor makes particular gifts. Much recent scholarship recognizes that gift-giving helps build relationships, in part by enhancing trust between donor and donee. Gifts, particularly gifts that require the donor to learn about the donee’s individual preferences, or gifts that are particularly expensive, perform an important signaling function: they indicate to the donee that the donor has an interest in a long-term relationship. As Ms. Lee points out, “[i]f the donor expected only a short-term relationship with the donee, he would not expect enough in return, in terms of affection or trust, for the gift to be worth its cost.” If gifts were freely revocable, they would lose that signaling advantage, because the donor would not be making the same sort of commitment to a relationship with the donee. Nevertheless, as Ms. Lee indicates, engagement gifts are routinely treated as revocable at the donor’s behest if the marriage does not occur. Courts invoke either the theory that the gift was conditioned on occurrence of the marriage, or that the theory that the gift was given only as consideration for the marriage.
Even when a romantic gift is not enmeshed in an engagement to be married, courts sometimes hold that the donor is entitled to revoke the gift on a theory of unjust enrichment or fraud. Why should that be? Ms. Lee points out that much as a donor sends a signal when the donor makes a gift, the donee sends a signal by accepting the gift: a signal of interest in developing the relationship. If a donee who has no interest in the relationship accepts gifts without communicating his or her lack of interest, the donor may be misled into making still more gifts. For this reason, Ms. Lee argues that explicit gold-digging is far less serious a problem than subtle gold-digging; the donor who makes gifts to the explicit gold-digger knows precisely what he (or she) is doing.
The problem, Ms. Lee argues, is that traditional remedies for unjust enrichment and fraud do not provide the right incentives for subtle gold-diggers. If doctrine only requires a donee to disgorge gifts received under false pretenses, a scheming donee faces no effective deterrent: if his (or her) chicanery is discovered, he must return the ill-gotten gains; if not, he gets to keep them. (Ms. Lee does ignore the time and effort the donee might spend cultivating an unpleasant donor’s interest.) She then identifies a recent case, United States v. Saenger, No. CR11-223RAJ, (W.D.Wash. 2012), in which a donee was convicted of mail fraud and sentenced to 46 months in prison for her role in convincing her elderly boyfriend to send her more than $2 million over the course of a five-year “relationship,” and suggests that in a limited set of cases, criminal penalties might be effective in inducing donees like Saenger to turn down extravagant gifts when they have no interest in a long-term relationship with the donor. Ms. Lee cautions, however, that “[p]unishment beyond the cost of the gift should be applied very sparingly” because it is only the role of the courts to protect donors from true fraud, not from “the manipulations of their partners, the entreaties of their lovers, or the generous whims of their own hearts.”
Whether gold-digging donees know enough law to worry about the legal consequences of their actions is a question that plagues deterrence-based arguments in this area. But if we take Ms. Lee’s argument on its own terms, the problems she identifies are not limited to lifetime gifts. Gold-diggers — both those who feign romantic interest and those who mislead testators in other ways – can lead those testators to make substantial bequests in their favor. The traditional remedy for misconduct by will beneficiaries is invalidation of the will on undue influence grounds. But that remedy suffers from the same defect as the unjust enrichment remedy against lifetime donees who induce donors to make extravagant gifts under false pretenses: its deterrence potential is limited. Ms. Lee’s analysis implicitly suggests that courts should consider punitive damages awards in at least some undue influence cases (see Estate of Stockdale, 953 A.2d 424 (N.J. 2008)), or should become more receptive to tortious interference with inheritance claims if punitive damages appear unfeasible in the context of a will contest proceeding.
May 4, 2012 Paula Monopoli
Camille M. Davidson,
Mother's Baby, Father's Maybe!-- Intestate Succession: When Should a Child Born Out of Wedlock Have a Right to Inherit from or Through His or Her Biological Father? 22
Colum. J. Gender & L. 531 (2011), a
vailable at SSRN.
One of the most important and interesting conversations among inheritance law scholars has been the role genetic connection should play in establishing parentage and rendering a nonmarital child eligible to inherit from her father. The advent of easy and reliable genetic testing has crystallized the issue and focused scholars on which paradigm we should adopt now that we no longer need “surrogate” rules in intestacy statutes, e.g., acknowledgement by a putative nonmarital father, to help establish whether a child is likely that man’s child. There is a spectrum in terms of potential paradigms, running from a purely genetic model at one end where a DNA test establishing paternity would make a nonmarital child eligible to inherit even if she had no relationship with her father to a purely functional approach where the father’s behavior and intent would be the linchpin of whether the child is eligible to inherit, regardless of her genetic connection. I would characterize the former model as a “child-centric” model where the interests of the nonmarital child trump that of the father and his other marital children since the nonmarital child does not have to rely on the father to take any affirmative action like acknowledgement in order for the child to be eligible to inherit.
In her recent article Mother’s Baby, Father’s Maybe!-Intestate Succession: When Should a Child Born Out of Wedlock Have a Right to Inherit from or Through His or Her Biological Father?, Camille Davidson argues for the adoption of such a child-centric model of establishing paternity in the area of inheritance law. She highlights some of the historical antecedents of our current patchwork of state laws on defining paternity. Davidson also adopts a comparative lens in evaluating how states should embrace the genetic connection between a nonmarital child and her father as dispositive of not only of paternity but of her eligibility to inherit from him. In so doing, Davidson makes a compelling argument for this approach and adds an important voice to the academic conversation in this area of inheritance law.
Davidson begins by noting the dramatically different results in eligibility for inheritance between some other countries and many states in the United States. She contrasts Iceland with North Carolina and notes that a nonmarital child would inherit in Iceland simply by virtue of establishing a genetic connection with her father. As Davidson correctly notes, this is not the case in many American states where a child would have to establish more – for example, that her father acknowledged her – in order to be eligible to inherit. She advocates for a uniform rule akin to the rule in Iceland where genetic connection alone would entitle that child to take her share of her father’s estate. This would be regardless of the father’s knowledge that the child even existed or despite behavior on his part that would indicate a lack of intent for a nonmarital child to inherit.
To support her argument, Davidson traces the history of United States Supreme Court jurisprudence as it establishes the parameters for states to enact statutes that apply different inheritance rules for children born inside and outside of wedlock. She then details the various state laws that govern intestacy and inheritance as applied to no marital children. These include statutes like that in North Carolina, which requires that a formal adjudication of paternity or the father must acknowledge the child in writing and file it with the court. Davidson attributes these requirements, in part, to the period during which slavery existed in this country. The slave masters, who were white, had both legitimate and non-legitimate families. Despite the genetic connection between the master and the nonmarital children who were slaves, they could not be heirs. She quotes from a 19th century Kentucky case in which the judge wrote, “the father of a slave is unknown to our law…”
Davidson argues that the inconsistent treatment of nonmarital children not only yields inconsistent results, it is also violative of the Equal Protection Clause. She notes that with the advent of easy DNA testing, there is no longer an arguable state interest in the orderly disposition of estates that the United States Supreme Court has found justifies different burdens in the past. I agree and have argued that the entire analytical framework of cases like Trimble and Lalli is undermined by the advances in such testing and that the cases warrant reconsideration.
I would like to see Davidson identify and grapple a bit more with the counter-arguments to the adoption of a model which provides that a pure genetic connection renders a nonmarital child eligible to inherit. Those counter-arguments have been made by scholars like Lee-ford Tritt who would adopt a purely functional approach to parentage and there are important counterpoints to the argument that Davidson makes that it is the interest of the nonmarital child which should trump those of the genetic father or his other children, even in cases where the father has not relationship with the child.
It would also be useful for Davidson to more fully address the sound arguments in favor of a child-centric paradigm. For example, such fathers can always opt out of the default rules and exclude nonmarital children by will. There are also different goals for establishing paternity for family law purposes, for example determining custody and child support, as opposed to those of inheritance law which is more focused on the reallocation of property post-death. I hope to see Davidson build on these arguments in future articles. In this article, Davidson contributes much to the ongoing conversation by once again staking out the ground for a child-centric model of parentage in inheritance law.
Apr 20, 2012 Gerry W. Beyer
Kristine Knaplund’s well-written and researched article, Synthetic Cells, Synthetic Life, and Inheritance, discusses the legal and regulatory implications of new advances in synthetic biology that may one day lead to the creation of synthetic human gametes or embryos that are made without the use of existing genetic materials. The article first discusses the current state of assisted reproduction in the United States and the various techniques that are currently available for individuals with fertility problems. Next the article examines the existing regulations that may apply synthetic gametes and either encourage or prohibit research in this area. Finally, the article tackles the question of who will be the legal parents of a child created using synthetic gametes.
Prof. Knaplund notes that assisted reproduction is “big business” in the United States, with the exchange of eggs (ova) alone being worth $4.5 billion in the United States. The use of in vitro fertilization, where the egg and sperm are joined in a Petri dish and later implanted in a woman’s uterus, was first successfully used in 1978 and since then over 3 million babies have been born worldwide using assisted reproduction technologies (“ART”). Cryopreservation (freezing) of sperm, ova and embryos is commonly used today and preimplantation genetic diagnosis is used to screen for certain genetic or chromosomal diseases. If a synthetic sperm or ovum were created, the user could select for genetic characteristics that are not present in the intended parents.
Which existing regulations apply to synthetic gametes may affect whether research in this area is encouraged or restricted. ART have been largely unregulated by the federal government and the states and can quickly move from the experimental context to clinical practice. Additionally, many of the existing regulations would not apply to synthetic gametes because they do not contain human genetic material. More stringent FDA regulations may or may not apply to synthetic gametes depending on how broadly courts read the regulations. If the FDA regulations apply, it could prevent research into synthetic gametes until safety issues are resolved.
If a child is created using synthetic gametes, there remains the question of who the law will recognize as the child’s parents. Many state statutes have not been updated do include ova donations, which causes a problem when a donated ovum is placed in the intended mother because the ovum donor may claim to be the child’s parent. Some states have also had problems with gestational carriers because the law presumes the birth mother to be the child’s parent even though this is not what the parties intend. There also remains the problem of who will be considered the parents of a child who is created using synthetic gametes after one or both of the intended parents has died. If the decedent’s genetic material is used, the decedent can be presumed to be a parent of the child. However, if a synthetic gamete is used, the decedent has no biological connection to the child. While the Uniform Probate Code allows the decedent’s intent to be a parent to be shown by a written record, only three jurisdictions have enacted the UPC section on assisted reproduction. Courts may have difficulties in determining who the parents are of a child created using synthetic gametes because of the lack of a genetic parent.
Prof. Knaplund’s article points out several issues that may arise if (or when) synthetic gametes are able to be used to create a child, while also noting the current regulatory and legal problems caused by ART. While many ART have been left largely unregulated, others have been restricted due to safety concerns. While the creation of synthetic gametes would be a breakthrough in the scientific community, some may have safety concerns about creating a child without the use of human genetic material. Whether this new ART is cautiously regulated or left unfettered could determine how long it will be before a child is created using synthetic gametes. The complex issues of parentage that could arise for a child created from synthetic materials could cause problems under the current laws of many states. These issues as well as those raised by current ART may force more states to follow the lead of the Uniform Probate Code and focus on intended parents of a child rather than genetic parents.
I highly recommend this article to anyone interested in this cutting-edge area of the law. Although the number of children born in this manner is relatively small, the numbers will increase and if the law does not take Prof. Knaplund’s advice seriously to resolve these issues timely, significant problems along with time-consuming and costly litigation are sure to follow.
[Special thanks to the outstanding assistance of Mr. Bryan Jinks, J.D. Candidate, The Ohio State University Moritz College of Law, for his assistance in preparing this review.]
Mar 28, 2012 Solangel Maldonado
I have never had a pet (yes, very sad), so I must admit that in my Estates & Trusts course, I covered the cases involving gifts to pets with some amusement. After reading Frances Foster’s provocative article, Should Pets Inherit?, I will never teach those cases in quite the same way again. Building on many scholars’ (including her own) critiques of U.S. inheritance law’s focus on relationships based on blood, adoption, or marriage to the exclusion on those based on caregiving and affection, Professor Foster expands the universe of beings who should inherit to include non-human family members—pets.
Professor Foster briefly summarizes the rich literature showing that U.S. inheritance law excludes many people Americans consider nearest and dearest to them, including nonmarital partners, friends, and individuals with whom they share a de facto parent-child relationship. As a result, inheritance law often conflicts with and defeats decedents’ wishes to provide for individuals with whom they shared affectionate and supportive relationships. She points out that the law’s exaltation of family status over affection and support is so entrenched that attempts to give property to persons the law does not consider “family” are deemed “unnatural.” In my opinion, many would find few bequests more “unnatural” than dispositions to a pet, which the law deems to be property and as such, cannot inherit under the common law. As Professor Foster points out, bequests to a pet may be used as evidence of testamentary incapacity. After all, who in their right mind would leave property to a pet? However, Professor Foster persuasively demonstrates that given the vast majority of pet owners’ inclusion of their pets in their definition of family and their desire to provide for their pets after they pass, the law should allow and facilitate inheritance by pets.
I will admit that I approached the article with some skepticism. It is one thing to enforce provisions in wills leaving money for the care of a pet as some courts have done, or to eliminate obstacles to enforcement of pet trusts as forty-six jurisdictions have done. As Professor Foster concedes, as a result of legislative reforms, revocable trusts, pet retirement homes, and other mechanisms, Americans (at least those who have the foresight and resources to consult lawyers) are increasingly able to protect their pets through careful estate planning. Although these reforms are not perfect and their lack of uniformity leaves many legal questions unanswered and many pets unprotected, it is quite radical, many would say, to address the law’s shortcomings by granting pets the right to inherit. This is exactly what the law must do according to Professor Foster because, as the article demonstrates, current inheritance law does not only harm pets. Rather, the law’s failure to recognize Americans’ wishes to provide for their loved ones affects both the human and non-human objects of their bounty.
Professor Foster argues that the law should look to the decedent’s intent to provide for her pets as evidenced in a will or other written instrument (whether validly executed or not), oral statements, and the decedent’s “acts, state of mind … and intensity of feelings.” Courts would be guided by the decedent’s intent to provide for her pets, even at the expense of human family members, and the court would be bound by the amount devised for the care of pets even if it exceeds the amount needed for their care. In other words, Leona Helmsley’s dog Trouble would be entitled to enjoy the standard of living that a $12M inheritance can buy.
Under Professor Foster’s proposal, pets would inherit even in cases where there is no clear evidence of decedent’s intent to provide for them. In determining whether a pet will inherit, courts would focus on the relationship between a particular decedent and the pet “claimant,” including its duration, frequency of contact, interaction, emotional bond, and decedent’s care of the pet. Was the pet well-fed, groomed, and housed? Did it enjoy quality medical care, exercise, and luxuries not available to most pets? Courts would also look at what the pet provided to decedent—companionship, affection, better health, and service.
Given that only one-third of American households have children living with them but two-thirds have pets, I am persuaded that the law should honor decedent’s wishes to care for their animals. However (as all Jotwell articles must), the article raised a host of questions that I hope Professor Foster will address in future work. First, should pets inherit when decedent had a will but failed to provide for the pet? Should an elective share or omitted pet provision apply? Second, is it wasteful to honor decedent’s wishes to leave excessive amounts (see Trouble example, above) to their pets? The law will not enforce decedent’s wishes for her executor to burn her cash because it is wasteful. Isn’t $12M for a pet its equivalent? Third, is it efficient from a judicial resources standpoint for pets to inherit when a decedent died intestate and there is no clear evidence of intent to provide for them? One reason the family paradigm is so entrenched is its ease of administration. One simply looks at the intestacy statute and determines who inherits without any need for individualized determinations in most cases. Should we expect judges to examine how close decedent was to his pet and how much the pet enriched his life when there are many other pending cases on her docket? I agree that an individualized approach “would align inheritance law with current societal views or family and pets.” Nonetheless, I am afraid that given the law’s continued focus on family status rather than actual relationships even in cases where the claimant is a person, invoking Americans’ close relationships with their pets may do little to challenge the family paradigm.
Mar 14, 2012 Kerry Ryan
“It is not a matter of the cure being worse than the disease. It is rather, that the cure has become the disease.” This line, written by Leo Schmolka, is quoted in Mark Ascher’s recently published article calling for repeal of (most of) the grantor trust rules. I quote Schmolka here too because he so pithily captures “the irony of using anti-abuse rules to abuse the tax system.” The tax avoidance vehicle of choice is known as an “intentionally defective grantor trust” or “IDGT” (sardonically pronounced “I dig it”). As noted by Ascher, “even their name seethes with irony.”
Ascher’s article makes three main points: 1) the grantor trust rules are obsolete; 2) their continued existence leads to significant erosion of our income and transfer tax bases; and 3) as a result the grantor trust rules (or at least most of them) should be repealed. To be sure, most of these points are not new, and indeed, two other recent articles cover similar ground. However, Ascher’s is by far the most comprehensive and, in my opinion, persuasive of the three.
Trust income is normally taxable either to the trust or its beneficiaries, unless the settlor (aka “grantor”) retains too much “dominion and control” over the trust — in which case items of trust income, deductions and credits are attributed to the settlor and reportable on his or her own tax return. The statutory grantor trust rules (aka “subpart E”) identify which interests or powers retained by or on behalf of a trust’s settlor will cause a trust to be ignored for income tax purposes. The reader of Part I of Mark Ascher’s article will understand that the statutory grantor trust rules were a codification of Treasury regulations designed to supplant the vague and ultimately unworkable “dominion and control” standard articulated by the Supreme Court in the Clifford case.
Part I of Ascher’s article also describes the original purpose of the grantor rules (“to prevent high-income taxpayers from avoiding the impact of the progressive nature of the federal income tax by creating certain types of inter vivos trusts with which to splinter income”) and then persuasively argues that these rules are no longer needed for this purpose. Why? According to Ascher, the tax world is significantly different now than it was in 1954 when the bulk of subpart E was enacted. Ascher cites compression of the tax brackets applicable to trusts as the single most important change making subpart E obsolete. Since 1986, trusts hit the maximum marginal tax rate at extremely low levels of income, as compared to individual taxpayers. Thus, there is little to no tax benefit in shifting income to an inter vivos trust when that income would be taxed at the trust level.
Part II of Ascher’s article discusses how taxpayers are taking advantage of the grantor trust rules to achieve spectacular tax savings. The game, so to speak, is to create an inter vivos trust (IDGT) that is ignored for income tax purposes, but respected for transfer tax purposes. Taxpayers can achieve this incongruous tax result by exploiting the difference between the transfer and income tax definitions of “dominion and control.” The transfer tax benefits include those associated with most estate freeze techniques. For little to no gift tax cost, a settlor can remove the transferred property and all subsequent appreciation from the gross estate. The IDGT kicker, however, is that for as long as the trust remains a grantor trust, the settlor is able to make an additional annual tax-free gift to the trust beneficiaries in the amount of the income tax paid.
Ascher’s discussion of the ostensible income tax benefits of using an IDGT is particularly insightful. He first observes that the income tax regime applied to any inter vivos trust is implicitly elective. The problem for Ascher is not electivity per se, but that the grantor trust rules “regularly produce diametrically different results based on truly trivial differences.” Next, Ascher highlights how subpart E fails to deal with all of the collateral tax consequences of grantor trust status. In particular, it is virtually silent on how to account for transactions between the settlor and his or her grantor trust.
Out of this statutory void grew a popular estate planning technique wherein a settlor sells appreciated property to his or her grantor trust in return for an installment note. While the astonishing transfer tax savings garner most of the press, Ascher distinguishes himself by engaging in a thoughtful and thorough discussion of the transaction’s uncertain income tax consequences. As he points out, for income tax purposes, the most important question may be what is the trust’s basis in the “purchased” assets? As long as we get that answer right, any untaxed gain will eventually be accounted for. However, by Ascher’s account, some practitioners are taking the questionable (although not entirely unsupportable) position that under certain circumstances nobody has to “pay the piper.”
After requesting more administrative guidance (and expressing doubt that it will be forthcoming), Ascher calls for repeal of most of the grantor trust rules. Under his proposal, revocable trusts would be the only domestic trusts subject to the grantor trust regime. All other domestic irrevocable trusts would be treated as separate taxpayers. He argues that revocable and irrevocable trusts are sufficiently different to justify different tax treatment. I prefer Ascher’s proposal to those calling for wholesale repeal of subpart E because it preserves the statutory overrule of the Clifford case. Ascher’s case is so persuasive and the number of calls for reform so numerous, one wonders in this fiscal environment how much longer policymakers can continue to ignore such low-hanging revenue fruit?
Feb 13, 2012 Lynda Wray Black
In his May, 2011 article, Who Are The Beneficiaries of Fisk University’s Stieglitz Collection?, Alan L. Feld presents an intriguing case study. Charitable giving is not new, nor are the issues of donor standing, beneficiary standing or the doctrine of cy pres. In fact, the issues arising from the obsolescence or dis-utility of charitable gifts recently have captured the attention both of the general public and the academy. Professor Susan N. Gary’s article entitled, The Problems With Donor Intent: Interpretation, Enforcement, and Doing the Right Thing, 85 Chi-Kent L. Rev. 977 (2010) presented a comprehensive analysis of the legal issues implicated in a variety of noteworthy failed charitable gifts.
By focusing on the Stieglitz Collection, a muti-million dollar collection of artwork housed and maintained at Fisk University in Nashville, Professor Feld’s article serves as an important complement to the somewhat longer piece by Professor Gary. Professor Feld raises important issues including the role of the state’s attorney general in overseeing charitable trusts, fidelity to the all too often enigmatic intent of the donor, the tension between the doctrine of cy pres and literal interpretation of conditions on gifts, the importance of determining the charitable beneficiaries, and questions of who has standing to sue to enforce charitable purposes. Professor Feld presents compelling reasons for expanding the legal standing of the beneficiaries of a charitable trust.
Beginning in the late 1940’s, Georgia O’Keeffe transferred photographs from the estate of her deceased husband, Alfred Stieglitz, together with her own works of art to Fisk University with an express limitation that the artwork could not be sold. Fisk initially honored the donor’s request; however, in the early 2000’s the university experienced financial difficulties that threatened the operation of its programs. As the maintenance of an art collection was secondary to the primary charitable purposes of Fisk, the university proposed selling part of the Stieglitz Collection under the doctrine of cy pres.
Fisk sought court approval of a settlement agreement pursuant to which the Crystal Bridges Museum of Bentonville, Arkansas, an art museum founded by members of the Sam Walton family, would pay Fisk $30 million for an undivided one-half interest in the Collection. Pursuant to the proposed agreement, each of Crystal Bridges and Fisk would display the artwork for six months per year. The Georgia O’Keefe Foundation protested the proposed sale, claiming that the Foundation had an enforceable reversionary interest in the paintings.
While the Chancery Court agreed with the Foundation, the Court of Appeals held that there was no reversionary interest and that the application of cy pres was appropriate. Upon remand, the Chancery Court allowed a modified sale to Crystal Bridges on several conditions including the segregation of part of the proceeds of sale as an endowment fund for the upkeep of the Stieglitz Collection.
After setting the stage for the drama, Professor Feld analyzes the interest of each actor. First, Fisk University desperately needs funds to continue operating, and even though selling the collection would violate the express restraint on alienation, the proposed sale to Crystal Bridges would permit Fisk to display the paintings for half of each year while at the same time receiving a sufficient infusion of cash to permit the university’s remaining a viable charitable entity. Allowing Crystal Bridges to purchase an interest in the Stieglitz Collection benefits this developing museum by adding importantly to its collection of American art. In addition, the sale to Crystal Bridges furthers an important objective of The Georgia O’Keefe Museum (substituted in the litigation for the Foundation), namely, enhancing the public accessibility of Ms. O’Keefe’s works. In contrast, the sale to Crystal Bridges at least partially diminishes the expectations of the citizens of Nashville in keeping the unique and valuable collection in their city. Additionally, the court must attempt to follow the intent of Georgia O’Keefe, but determining such intent is often difficult, especially when the donor is deceased and unanticipated circumstances have arisen. The final actor is the Tennessee Attorney General whose role is to advocate for the diverse public interests that benefit from the enforcement of the charitable gift.
Absent a retained property right in the gifted property, donors generally lack the standing to sue a charity to enforce conditions attached to the gift. Retaining a right, however, may be an undesirable way to backstop donor intent as the retained interest may jeopardize the income tax benefits of the charitable gift. Like donors, beneficiaries generally lack standing to sue to enforce a gift. Professor Feld points out that under New York law, the law applied by the Tennessee court in the Fisk case, an applicable exception grants standing when there is a small and clearly defined subclass of beneficiaries possessing a special interest in the gift.
Courts typically rely on the doctrine of cy pres to permit a charity to modify an onerous condition on a gift; however, such doctrine is decidedly donor-focussed and, according to Professor Feld, often leaves the courts guessing at donor intent while failing to address the often determinable interests of intended beneficiaries. Professor Feld concludes that both donors and narrowly defined classes of beneficiaries should be allowed greater leeway to sue to enforce conditional charitable gifts.
Jan 9, 2012 Anne-Marie Rhodes
In 2009, the Illinois Supreme Court upheld a decedent’s right to make a gift with a religious restriction, the “Jewish Clause.” Estate of Feinberg was extensively reported, bitterly litigated, and placed a white-hot spotlight on gifts with restrictive or discriminatory conditions attached. In Some Arguments Against Discriminatory Gifts and Trusts, 31 Oxford J. Legal Stud. 303 (2011), Matthew Harding presents arguments to eliminate the freedom to discriminate in the disposition of property, whether for charitable or private purposes. Harding’s primarily-UK focus and philosophical arguments offer a wider and refreshing view of this public policy debate. The end result is a sharpened understanding of our own system.
Harding’s thesis is that the common law can and should develop to eliminate the freedom to discriminate in the disposition of property by gift or trust, whether for charitable or private purposes. He rejects the counterargument of a donor’s personal autonomy. Harding divides his article into two equal parts: Can the common law prohibit discriminatory gifts and, should the common law do so?
Can the common law prohibit discriminatory gifts?
Harding begins his argument with the traditional cases upholding the right of the donor to impose discriminatory provisions, even if the consequence is a forfeiture. Most of the cases are from the 1800s, with the notable exception of the 1976 case of Blathwayt v. Baron Cawley, which upheld a forfeiture clause if one became a Roman Catholic. Against this background, he traces a line of mid-to-late-20th century cases in which judges showed reluctance in enforcing discriminatory clauses. These cases involved charitable gifts where the donees (all related to education) are themselves reluctant to enforce the religious or national origin discriminatory conditions. Harding acknowledges that the charitable purpose of these gifts provides the intellectual moment for the shift away from a donor’s unrestricted freedom to discriminate. By specifically making a disposition for the public benefit, a donor can fairly be held to a public norm of non-discrimination.
The typical technique used in striking the discriminatory clause is declaring the requirement void for vagueness. As a rule of construction requiring strict certainty in the application of any condition, it is conceptually neutral as to the content, motivation, or impact of the condition. The law is essentially baffled by the donor’s condition and finds it administratively inefficient to enforce it. This easy-out allows the common law to evolve, but it is not a technique that will end such clauses. Lawyers will merely adapt their drafting to meet the strict certainty standard.
These half measures – charitable gifts and strict certainty – are unworthy alternatives to a direct public policy analysis of discriminatory gifts. Harding issues a call for a robust discussion that must directly confront the argument of personal autonomy. Is the time ripe for such a discussion in England? Clearly a country’s social and political currents are important in public policy discussions. EU membership may have added a new factor that provides a nudge toward an anti-discrimination norm in the English common law of gifts and trusts.
England’s Human Rights Act of 1998 brought the European Convention on Human Rights into English domestic law. Its impact on the development of the common law has been described in human rights literature as “weak indirect horizontal effect.” Whether and to what extent English common law judges will import the anti-discrimination norm into private gifts remains an open question. There are sufficient differences between succession law in civil law and common law jurisdictions to cause pause, but the mere idea of this harmonizing externality in English common law jurisprudence is fascinating on its own. It is a softly significant point.
Should the common law prohibit discriminatory gifts?
Having disposed of the descriptive portion, Harding moves to the prescriptive analysis, and to the central argument of personal autonomy in private transactions. He rejects the historic strength of personal autonomy in private gifts and believes the anti- discrimination norm must prevail.
The traditional distinction between public/charitable gifts and purely private does not persuade him that a court as a public institution should not itself have access to public norms in resolving private disputes. On the other hand, he also does not believe there is judicial duty to intervene, or if intervening, that the court must necessarily value anti-discrimination over personal autonomy. Basically, the anti-discrimination norm should be part of the court’s deliberation, not necessarily its conclusion. Quoting from the 1976 Blathwayt decision, “discrimination is not the same thing as choice.”
Harding challenges the personal autonomy argument. Choice is not valuable in and of itself; rather, choice is only valuable if it is in pursuit of the good. Discriminatory gifts in support of group identity or religion, i.e., those motivated by “good” discrimination, can also be seen as motivated by an intolerance of difference. Therefore, such gifts create divisions and undermine pluralism. Consequently, any gift that makes reference to elements of identity, such as race, sex, and religion, would be struck. Does this just move the goal post? That is, could lawyers draft around the discrimination prohibition, as they do or try to do in the strict certainty standard? My suspicion is that for short-term trusts, the answer is probably yes, but that as trust terms lengthen, a restriction will be harder to achieve. Would lawyers begin including arbitration clauses in their documents in an attempt to avoid adverse judicial determinations? This is already happening.
These questions reveal the main reason that I liked the article: it was a good intellectual stretch, comparative, philosophical, and free ranging, with some practical sensibilities. It is a nice warm up for the upcoming semester. Welcome back.
