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.
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.”
Where Marie Kondo taught us how to declutter our homes in The Life-Changing Magic of Tidying Up, Professor Wendy Gerzog provides in her article six proposals to declutter the estate tax. Author Kondo suggested that we examine each household item, ask whether it sparks joy, and then keep it only if we answer yes. Professor Gerzog writes that the estate tax should be more “reality-based,” meaning that the estate tax “should encompass testamentary property transfers at their real values, and the marital and charitable deductions should reflect actual marital and charitable transfers.” (P. 1037.) In her wide-ranging and thought-provoking article, Professor Gerzog examines certain “devices and distortions that have crept into the estate tax” (P. 1037.), discusses how each frustrates the goal of the estate tax, and then provides proposals to clear them from the estate tax.
The first device examined is the irrevocable life insurance trust (ILIT), the life insurance proceeds of which are excluded from the decedent’s gross estate. Professor Gerzog has two proposed changes as to ILITs, the first being to amend § 2035 to “include in decedent’s estate the full date of death proceeds of life insurance on the decedent’s life to the extent to which the decedent has paid, directly or indirectly, insurance premiums within three years of his death” (this proposal is intended to include “any transfers by decedent to a trust within three years of death that in fact can be traced to the payment of life insurance premiums on decedent’s life”). (P. 1042.) Professor Gerzog’s second proposal is to amend § 2042 such that, except when surviving partners in a business partnership use insurance proceeds to buy a deceased partner’s interest in the partnership, the decedent’s gross estate includes life insurance proceeds paid on decedent’s life to the extent to which the decedent at any time, directly or indirectly, paid the premiums on or irrevocably designated the beneficiary or beneficiaries of the policy. (P. 1043.)
Professor Gerzog persuasively argues that there are many fictions supporting ILIT proceeds being excluded from the decedent’s gross estate, such as (1) the decedent never owning any of the incidents of ownership of the policy and (2) neither the decedent nor the decedent’s estate receiving the life insurance proceeds. (P. 1039.) I find it elegant that Professor Gerzog seems, to me, to be applying a substance over form analysis to equate the estate tax’s treatment of life insurance proceeds whether inside or outside an ILIT—either way, the taxpayer designates the beneficiaries (either of the policy or of the trust) and pays the insurance premiums (often using Crummey powers). Even though, in an ILIT, the taxpayer does not “own” the policy and does not receive the proceeds, the taxpayer does direct the life insurance proceeds to those individuals the taxpayer selects as beneficiaries. I appreciate Professor Gerzog’s conclusion that “the ILIT is clearly a testamentary device and the value of the proceeds should be included in the decedent’s estate.” (P. 1043.) As a side note, I began to wonder whether there were any “costs” or “disadvantages” in the specific act of creating an irrevocable trust that would, perhaps, justify excluding ILIT life insurance proceeds. The oft-cited advantages to creating an ILIT seem, to me, to increase the taxpayer’s control over the life insurance proceeds (i.e., providing asset protection to beneficiaries’ creditors, increasing flexibility as to beneficiaries’ governmental benefits, allowing for flexible trust distribution terms, and enabling GST planning). This increased control over the life insurance proceeds created and directed by the taxpayer through an ILIT, in my view, supports gross estate inclusion.
The second device addressed is the lifetime transfer with grantor-retained (1) lifetime income interest, (2) lifetime enjoyment over non-income producing property, or (3) power over lifetime income or enjoyment. Professor Gerzog’s proposal is: “When a transferor splits a property interest and retains an income interest under § 2036, except where the transferee pays full and adequate consideration in money or money’s worth equal to the value of the underlying fee interest in the property, the date-of-death value of the underlying property is included in the decedent’s estate.” (Pp. 1048-1049.)
After analyzing the intent behind § 2036 and several cases interpreting it, Professor Gerzog insightfully concludes, “Someone who transfers a future interest in property to her child but retains the current enjoyment creates the split interest only to obscure the fact that she actually enjoys her property until her death when her child takes possession.” (P. 1046.) She persuasively notes (1) actuarial taxable can be inaccurate because they assume a constant interest rate and ignore capital appreciation, (2) a taxpayer only splits a property interest when the probabilities favor (because of the taxpayer’s personal situation) the use of the actuarial tables, and (3) transactions among unrelated third parties do not usually involve voluntarily splitting property interests. (Pp. 1047-48.) I admire Professor Gerzog’s proposal, and I assume that her reference to the transferor who “retains an income interest under § 2036” includes transferors retaining, under § 2036, lifetime enjoyment over non-income producing property or power over lifetime income or enjoyment.
The third distortion examined is the usage of actuarial tables by such devices as the charitable lead annuity trust (CLAT) and grantor-retained annuity trust (GRAT). Professor Gerzog proposes: “When a transferor directly or indirectly divides a fee interest into temporal interests, the value of any future interest shall be determined and taxed at distribution to the beneficiary at the highest transfer tax rate.” Similar to the foregoing second device, the donor-decedent-created partial interest is a strategy that transferors use “when the probabilities are skewed in their favor,” making the actuarial tables “a non-neutral valuation tool.” (P. 1050.) I can only admire Professor Gerzog’s concise explanation for her proposal: “By timing the valuation to the date of possession, the real value of the property is known; by requiring the trustee to pay the transfer tax prior to distribution of the property, compliance rates should be high. By taxing the property at the highest transfer tax rate, there will be certainty, ease of calculation, and a further abuse deterrent.” (P. 1052.)
The fourth distortion addressed is the taxpayer’s intentional devaluation of property for transfer tax valuation purposes through such devices as the family limited partnership or family limited liability company. Professor Gerzog proposes: “Except in the case of an operating business, no discounts are allowed as to transfers of entity interests to family members with respect to any liquid assets transferred to that family entity.” A transfer exempt from her proposal must be made in the ordinary course of business, meaning that the transfer must be bona fide, at arm’s length, and without any donative intent. (P. 1053.).
The fifth and sixth distortions are the QTIP (qualified terminable interest property) provisions under the marital deduction and the CLAT provisions under the charitable deduction. Professor Gerzog proposes to repeal the QTIP statute (replacing it with a power of appointment trust), and, as to a CLAT when the property is distributed to the non-charitable donee, she proposes that the trustee shall pay a transfer tax, at the highest transfer tax rate, from trust assets at distribution. (Pp. 1058, 59) Professor Gerzog notes that the QTIP provisions allow for a marital deduction “without ceding control or ownership of the transferred property to the surviving spouse” and that the marital deduction “was intended to cover actual transfers of a fee property interest between spouses and was not intended for transfers of limited income interests to a spouse.” (Pp.. 1056, 57-58) As to a CLAT, Professor Gerzog argues that the charitable deduction should be allowed “only where the deduction primarily benefits a charity and not where a split-interest transfer to a charity is designed to benefit mainly the non-charitable beneficiary.” (P. 1058.)
This short review does not do justice to the breadth of issues discussed in Professor Gerzog’s article. Each of her six proposals impressively builds upon the many articles she has written on these wide-ranging topics. I learned much from this and Professor Gerzog’s other articles, all of which are things I like lots.
Joshua C. Tate, Personal Reality: Delusion in Law and Science
, 49 Conn. L. Rev
. __ (forthcoming 2017), available at SSRN
In Personal Reality, Professor Tate takes us on a wide-ranging tour through cases of delusional testators, empirical psychological studies, and assorted doctrinal reform proposals. This is all in the service of figuring out what to do with the insane delusion doctrine, which gives rise to cases with colorful facts but also judicial applications that raise red flags. In the end, Tate presents us with his solution: transforming the insane delusion doctrine from a sword for will contestants into a shield for will proponents. This is a clever and useful contribution to the lively debate over this doctrine, and this article is a must-read for those intrigued by this area of trusts and estates law.
The article starts with a history of the insane delusion doctrine. Beginning in the early 1800s, the legal doctrine developed concurrently with the scientific concept of monomania, or an irrationally held false belief on one subject that coexists alongside an otherwise rational mind. For example, in the case of Dew v. Clark, a testator believed that his daughter was from infancy an agent of Satan despite her being by all accounts of good character; he otherwise did not possess any other peculiar beliefs. If such a delusion affects the disposition in a will, as the court found that it did in that case, the delusion can lead to the will’s invalidation. The doctrine was not limited to the estates and trusts context, but its development in the realm of contract law took a different path. There, the legal realists made it a primary target, claiming that it was just a proxy for fairness determinations, which should be made explicit. As a result, the doctrine was eventually phased out and replaced with an inquiry geared towards assessing the fairness of the contractual transaction and the effects of undoing it.
The law of donative transfers was not as amenable to this type of doctrinal reformulation. Since the primary theoretical foundation for trusts and estates doctrine is the freedom of disposition, the key inquiry is whether a transaction accurately reflects donor intent, not whether the transaction is fundamentally fair in some broader sense. This does not mean, however, that the doctrine does not have its own share of problems. First, there is a line-drawing issue. In many cases, it may be difficult to assess whether a belief is in fact delusional. For example, some individuals strongly believe that their spouses are cheating on them, but absent a sex tape or a child whose DNA may be tested, it is not easy for a court to assess whether the belief is so far-fetched as to be delusional. Second, there is a causation problem. Even if there is a clear delusional belief, it may be difficult to assess whether a particular donative provision or document derives from that belief as opposed to some other cause. These uncertainties open the door for judges to impose their own beliefs about what a fair distribution of the testator’s assets would be, raising the same concerns that the legal realists had with the doctrine in contract law.
It is no wonder, then, that some commentators have argued for the abolition of the insane delusion doctrine. Tate thinks that this is premature, as delusions may still be relevant in determining whether a testator has general testamentary capacity. To reinforce this point, he describes the active efforts of psychologists and psychiatrists to better understand delusions and their relationship to other cognitive impairments. Thus far, the empirical studies have been inconclusive, but so long as such relationships might exist, Tate argues that it would be prudent to preserve the doctrine in some form.
The author goes on to review and critique two existing proposals to reform the insane delusion doctrine. Professor Amy Ronner suggests importing a distinction embraced in the Diagnostic and Statistical Manual of Mental Disorders—bizarre versus non-bizarre delusions—into the general mental capacity doctrine, subsuming insane delusion into it. Bizarre delusions are clearly implausible while non-bizarre delusions are understandable to same-culture peers or could derive from ordinary life experiences. For example, the belief that a surgeon sneaks into your bedroom every night and removes an internal organ without leaving any evidence would be a bizarre delusion, while a belief that a friend is saying awful things about you behind your back without any evidence would be a non-bizarre delusion. Tate believes this raises similar line-drawing and bias problems as exist with the current doctrine. Specifically, many individuals hold strong beliefs in supernatural phenomena, especially of a religious nature. Requiring courts to evaluate whether religious beliefs are bizarre delusions would put them in an awkward position, to say the least.
Professor Alan Oxford’s reform proposal focuses instead on the remedy provided by the doctrine. Instead of striking down an entire will on the basis of insane delusion, he suggests that it should only lead to partial invalidity of provisions that resulted from the delusion. While recognizing the merits of this proposal in many cases, Tate argues that it does nothing to address the issues of personal bias that afflict the doctrine. Further, it would not help in cases where the insane delusion is the foundation of the entire donative document, as partial invalidity is the equivalent of complete invalidity in these cases.
Tate’s solution is to change insane delusion doctrine from being a basis to contest a will into a doctrine of partial sanity that would allow will proponents to defend portions of a will. After there has been a finding that the testator lacked mental capacity, proponents of the will could argue that the lack of mental capacity was due to a delusion. If this was true, then the court could grant the remedy of upholding the portion of the will that does not derive from the delusion.
There is much to like in Tate’s doctrinal reform. First, it advances valuable concepts in trusts and estates law. Making the insane delusion doctrine a vehicle for protecting partial testamentary intent rather than a means of importing personal biases into will contests further advances the freedom of disposition. Reformulating the doctrine in this way also reinforces the important ideas that capacity is context-specific and that there is a presumption of capacity for all adults. Second, it promotes doctrinal coherence in trusts and estates law. As Tate points out, converting insane delusion doctrine into grounds for partially upholding a will brings it into harmony with other doctrines, such as fraud, undue influence, and duress, which only serve to partially invalidate portions of wills that derive from those tainted influences. Third, as a practical matter, it mitigates the problems of bias in the insane delusion doctrine, serving the same ends that the reformulation of the doctrine in contract law did.
While the legal argument is tight, I was left wondering what place the science of delusions had in the piece. It was certainly interesting and informative to read about what scientists have been studying and discovering about delusions, but some more development of the legal implications of these inquiries would be helpful. In other words, what might scientists be able to tell us that would inform how we structure or apply the insane delusion doctrine? If scientists conclusively establish that delusions are connected to other cognitive impairments, these findings might not be relevant to a particular testator in a given case, and courts are likely already capable of figuring out when a delusion might be relevant for the four-part test of mental capacity. If scientists conclusively establish that delusions are not connected to other cognitive problems, these findings might not warrant abolition of the doctrine, given how delusions might still impact the legal test of mental capacity and how Tate’s doctrinal reformulation positions the doctrine as useful regardless. Developing the proper contours of the interface between the mind sciences and the law generally is a useful endeavor, and this article may provide a further avenue through which to explore that relationship and its utility to legal scholars.
Nancy A. McLaughlin, Conservation Easements and the Valuation Conundrum
, 19 Fla. Tax Rev.
225 (forthcoming 2016), available at SSRN
In this practical and timely article, Nancy McLaughlin undertakes a comprehensive analysis of the case law addressing valuation disputes of conservation and façade easements (conservation easements that are designed to maintain the historic character of a building’s façade). She reveals a number of ways in which taxpayers overvalue their easements, and uses what she finds to propose common-sense reforms.
Valuing property for purposes of determining a tax base is usually subjective and often contentious, so valuation-based taxes like the federal transfer taxes are vulnerable to valuation abuse. But property valuation also forms the basis for certain income tax deductions. Section 170(h) of the Internal Revenue Code, enacted in 1980, permits a deduction against the income tax for taxpayers who permanently contribute certain conservation or façade easements to governmental entities or charities. This provision is famously subject to abuse, and McLaughlin points out that valuation abuses have likely worsened over time, while the IRS has also become more adept at identifying abuses. According to McLaughlin’s calculations drawn from the case law, façade easement overvaluation by taxpayers in reported cases has increased from an average of about twice the court-determined value in the early cases to more than four times the court-determined value in the more recent cases. In the conservation easement category, overvaluation as determined from the case law has jumped from an average of about twice the court-determined amount to a whopping ten times over that amount in the more recent cases.
McLaughlin first describes the rules governing valuation and the penalties that can be imposed on taxpayers and their appraisers for overstating value. As in the case of the transfer taxes, the value of the charitable contribution of a conservation easement is “fair market value,” defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” The Treasury Regulations acknowledge that the best way to value a conservation easement is by reference to records of sales of comparable easements. Unfortunately, such a record is rarely, if ever, available. For this reason, most taxpayers use an alternative method approved by the regulations: the “before and after method.” This method values the easement as the difference between the value of the underlying property immediately before the donation and that of the property after its encumbrance by the donated easement. Each valuation is done at the property’s “highest and best use.”
After carefully and clearly explaining the before and after methodology, McLaughlin launches into the various approaches used in determining fair market value. Here she consults not only the case law and regulations but also the professional valuation literature produced by the appraisal industry, and explains the pros and cons of the various approaches. She then looks at common errors made by appraisers, such as assuming that a property could be rezoned, which she asserts can dramatically increase the value of an appraisal of property before the easement is attached. She also explains certain rules contained in the Treasury Regulations, including those that require the tax deduction to be reduced by benefits that inure to the donor as a result of the easement. McLaughlin then reviews the various overvaluation penalties, including both those that apply to taxpayers and those that apply to appraisers.
McLaughlin then delves into the case law, separately reviewing cases dealing with façade easements and those concerning conservation easements. She concludes, in part, that appraisers often overvalue façade easements by paying too little heed to the mitigating impact of extant historic preservation laws, by using nonlocal comparables in the “sales comparison approach,” and generally misapplying certain methods of valuation. Penalties fail to deter overvaluation, as they are rarely imposed unless they are strict liability penalties. Problems McLaughlin uncovers in the conservation easement area lead her to conclude that appraisers often assert unrealistic highest and best uses, make unrealistic assumptions regarding rezoning possibilities, misapply certain valuation analyses, and fail to consider whether the easement increases the value of other properties owned by the taxpayer. As in the case of façade easements, valuation misstatement penalties are rarely applied unless they are strict liability penalties.
McLaughlin notes that Congress recently made enhanced taxpayer incentives for façade and conservation donations a permanent part of the law, while at the same time failing to pass legislation targeting valuation abuses in the face of the Treasury’s calls for reform. McLaughlin agrees with the Treasury that reform is needed, but dismisses its specific proposals as off the mark. One Treasury proposal calls for donee organizations to be subject to penalties and loss of donee status for accepting overvalued easements where these organizations had actual or constructive knowledge that they were overvalued. McLaughlin concludes that such reforms would have little effect for at least three reasons: high values are good for donees, as they increase the likelihood of donations; valuation is necessarily subjective, and therefore knowledge of overvaluation cannot be asserted except in the most egregious cases; and such a rule would incentivize donees to obtain their own valuations, doubling the IRS’s opponents in any litigation. McLaughlin also criticizes a Treasury proposal for electronic reporting as unlikely to have an effect in most cases. Finally, she asserts that the Treasury’s proposal for creation of a tax credit program as an alternative might actually increase abuse.
McLaughlin offers eight specific proposals for reform. She proposes an increase to the statute of limitations period during which the IRS could challenge the deductions to six years from the current three. She calls for increased and more detailed reporting requirements, and renews her call for the creation of an “Easement Advisory Panel” similar to the Art Advisory Panel that assists the IRS in curbing valuation abuses. She suggests that the Treasury create a comprehensive outline with instructions for a section 170(h) appraisal, similar to the Uniform Appraisal Standard for Federal Land Acquisitions. Appraisals meeting certain criteria that indicate possible abuse should be subject to automatic IRS review, and pre-trial processes for resolving disputes should be improved. Finally, McLaughlin offers concrete proposals for changes to the appraiser penalty provisions and suggests “safe harbor provisions” for certain easement terms so that easements that are valued as though they satisfy legal requirements actually satisfy those requirements.
McLaughlin has apparently been studying and writing about façade and conservation easements for many years. In this comprehensively researched article, she puts her considerable knowledge to use in an effort to suggest reforms designed to make deductions for charitable contributions of certain property interests reflect their actual value. Although experts in the area of conservation easements might have differences with some of McLaughlin’s analyses and prescriptions for reform, this paper stands as an example of how a careful legal scholar can produce work that will lead to better laws.
Cite as: Kent D. Schenkel, Reducing Valuation Error
(October 3, 2016) (reviewing Nancy A. McLaughlin, Conservation Easements and the Valuation Conundrum
, 19 Fla. Tax Rev.
225 (forthcoming 2016), available at SSRN), https://trustest.jotwell.com/reducing-valuation-error/
Adam J. Hirsch, Airbrushed Heirs: The Problem of Children Omitted from Wills,
50 Real Property, Trust and Estate L.J.
175 (2015), available at SSRN
One of the most frustrating aspects of the practice of estate planning and probate law is dealing with outdated plans. Specifically, when a testator has a change in circumstances and does not update his will or trust, we are left to speculate what the testator would have wanted.
Many jurisdictions provide statutory protections for children who were born or adopted by the testator after the will was created based on the presumption that these children were unintentionally disinherited. Professor Hirsch challenges this presumption by exploring the policy and the shortcomings of the various pretermission (“unintentional omission”) rules. He focuses on two policy perspectives: the concern that testators pretermitted children because of forgetfulness, and the concern that testators failed to update their wills to account for changed circumstances. He raises questions about whether a testator’s unambiguous plan should be disrupted and how long a will should remain obsolescent (i.e., may no longer reflect the desires of the testator), after a change in circumstance.
While Professor Hirsch concedes that an existing child left out of a will is likely excluded intentionally, he challenges the presumption of inclusion by suggesting that pretermitted children may also be intentionally omitted if a testator does not update his plans after a certain period of time. Hirsch supports his premise by outlining why a testator might fail to update a will. The reasons include incapacitation, waiting for the right time, and just not getting around to it for a while (“lag time”). He then surmises that the longer the delay, the more likely it is that the testator did not want to update his plan. If that is the case, Professor Hirsch questions whether the implied pretermission rules should take effect.
Specifically, Professor Hirsch proposes that legislators balance the risk of unintentional/intentional disinheritance by setting a time for the presumption to expire. Additionally, he proposes a preferential share concept, based on the size of the estate, similar to intestacy statutes. In other words, if the estate is small, then the surviving spouse would receive all, or the bulk of the estate, but if the estate is sufficiently larger, then the pretermitted children would receive a direct share.
Professor Hirsch also identifies several shortcomings in the pretermission statutes, but I will address only three of them. The pretermission provisions under the Uniform Probate Code (UPC) apply only to children, and only seven jurisdictions expressly include their descendants. In addition, the UPC pretermission provisions do not cover embryonic children, and only eleven states expressly cover embryonic children. Furthermore, under the UPC the inheritance rights of posthumously conceived children will be evaluated on a case-by-case basis. According to the UPC, posthumously conceived children born to a surviving spouse are presumed to have intestacy rights, while children born to anyone else are not presumed to have intestacy rights. He questions why the intestacy rights of these children should differ from intestacy rights of any other children.
Another issue Professor Hirsch addresses is the rights of unknown children of the testator. A father of a child may be unaware that his past relationship resulted in the birth of a child, especially if he does not maintain contact with the mother of the child. In the case where a testator is unaware of a child at the time he created his will, Professor Hirsch proposes that a will should be considered obsolescent only after the testator becomes aware of the child, rather than basing it on the birthdate of the child. Currently only two jurisdictions make such a provision. Contrary to the view that pretermission statutes should not apply to these children because the testator did not have an opportunity to clarify his intent, Hirsch finds – based on a poll that he commissioned for the paper – that by large margins both men and women would prefer to have unknown children inherit equally with the known ones.
Next, Professor Hirsch addresses the fact that pretermission statutes under the UPC, and in most states, apply only to wills. Nonprobate assets and will substitutes that might comprise a majority of the value of an estate are not subject to the pretermission statutes. While the Restatement of Property indicates pretermission provisions should apply to comprehensive will substitutes such as revocable trusts, it excludes pay-on-death designations for bank accounts. Professor Hirsch asserts there should be no distinction because a pay-on-death account is the functional equivalent of a specific bequest.
Professor Hirsch also describes the advantages and disadvantages to permitting extrinsic evidence to determine testamentary intent and overcome the pretermission presumptions. An obvious disadvantage is the cost of adjudicating on a case-by-case basis. Other disadvantages include unreliable testimony, ambiguous testimony regarding the relationship with the omitted child, and misconstruing statements made by the testator. On the other hand, allowing extrinsic evidence would permit the drafting attorney to report any missing information and clarify issues to effectuate the testator’s intent about the omitted child. Another advantage to permitting extrinsic evidence is that it would make up for shortcomings in the statutes. Professor Hirsch suggests extrinsic evidence should be permitted to determine testamentary intent just as the UPC permits extrinsic evidence to override other default rules dealing with changed circumstances.
In short, Professor Hirsch concludes that existing rules regarding omitted children are inadequate. He suggests the rules should be more flexible; to wit, the presumption should be temporary and expire after a passage of time and should be decided on a case-by-case basis. Professor Hirsch’s article provides great topics of discussion for Trusts and Estates courses. His article also provides something to think about for drafters of future UPC and state statute revisions regarding omitted children.
In The One-Hundredth Anniversary of the Federal Estate Tax: It’s Time to Renew Our Vows, Paul L. Caron tracks how the modern estate tax has evolved since its 1916 inception and contends the tax should be modified to serve its original purposes. Caron analogizes the nation’s relationship to the estate tax as that of an aging marriage, arguing that our passion for the tax has cooled with the passage of time. He urges us to find that lost passion and renew our vows to the estate tax we once so adored. To do so, we must reinvigorate the estate tax and restore it to its historical position as an important, robust component of our federal tax system.
Caron contends that Congress enacted the federal estate tax in 1916 to serve three policy ends. First, the act was enacted as a revenue measure, conceived in part to meet the increasing fiscal obligations in the era of World War I. Second, the tax was designed to increase the progressivity of the tax system as a whole, counterbalancing a growing inequality of income in the early twentieth century. Third, the tax was structured to help curb rising concentrations of American wealth. Caron contends that these three goals are as relevant, and important, today as they were a century ago. To meet them, he urges, the federal estate tax should be reinvigorated by reversing the recent trend toward higher exemption levels and lower rates. Paraphrasing Proverbs 5:18, Caron urges us to restore “the estate tax of our youth.”
In his exploration of these three policy ends, Caron first addresses the federal estate tax’s role as a revenue measure. His detailed historical and policy analysis traces the history of the estate tax as a war tax from the 1797 stamp tax used to build up American armed forces for a potential war with France through the taxes that funded the Civil War and Spanish-American War. As the nation considered entry into World War I, Congress again turned to estate taxation and enacted the modern estate tax in 1916. However, as Caron illustrates with a series of graphs and charts, recent Congresses have largely eviscerated that tax as a source of revenue. Currently, the tax impacts just 0.2% of decedents and raises just 0.6% of federal revenue, a fraction of what the estate tax generated at its more youthful prime. Caron urges Congress to reverse this modern trend by lowering the tax exemption and raising the rate, changes that could double, or quadruple, the revenue-raising potential of the tax. He contends that this increase in estate tax revenue is vital in an era in which government expenditures and the national debt both continue to grow (due in part to the “wartime” demands of battling terrorism).
Caron next turns to the second historical justification for the estate tax: its ability to enhance the overall progressivity of the U.S. tax system. Caron’s work in this section utilizes economic data spanning back over a century to illustrate trends in income across socioeconomic groups. From this historical perspective, Caron illustrates a growing imbalance in income between the nation’s highest wage earners and the rest of the labor force, a phenomenon fueled in part by declining progressivity in the tax system over time. He argues that the trend must be reversed and offers the estate tax as a crucial tool in that effort.
In the final section of his paper, Caron pivots to his third major point: that the concentration of wealth is growing as imbalanced as is concentration of income. As he did with the issue of income inequality, he contends that the estate tax is uniquely suited to address this policy concern.
In sum, Caron contends, the America of 2016 looks similar to that of 1916 in numerous key ways. We are a nation at war in need of revenue, and inequalities of growth and income have risen to alarming levels. In 2016 as in 1916, the estate tax offers at least a partial solution to all of these ills. Although the estate tax seemingly has gone out of vogue with many politicians and policymakers, Caron urges us to rediscover the love we once felt for her.
Caron’s work is a pithy tour through of a century’s worth of economic history and estate tax policy. I recommend it highly.
Language matters. In her recent article, Not Your Mother’s Will: Gender, Language, and Wills, Karen Sneddon details just how much language matters in the context of wills and trusts. In a comprehensive review of linguistic theory and its intersection with inheritance law, Sneddon illuminates how will clauses and trust structures reflect gender schemas about men and women.
Sneddon first lays a foundation for her hypothesis that will drafting reflects masculine and feminine roles and norms by acquainting the reader with basic linguistic theory. She notes that wills are one of the most personal and oldest forms of legal writing. Sneddon goes on to introduce the concept of androcentrism as a driver of language-based gender norms. Phrases that focus on men as the typical and women as the atypical mirror what Sneddon describes as the remnants of patrimony. Cultures perform and reproduce gender through language. Using terms like “executor” and “executrix” implies that the latter is the less important variation on the central role. Interestingly, Sneddon asserts that prior to the nineteenth century there were fewer gender distinctions in language and actually more female executors. She suggests that the rise of Victorian ideals relating to the delicate nature of womanhood may have contributed to this shift away from women performing such public duties and that the increase in the gendered form “executrix” reflects those societal changes.
Sneddon proceeds to give the reader several striking examples of form book instructions and sample clauses that clearly reflect gendered views of women. For example: “As one author generalized in 1970, ‘Many older women with no family (and usually with estates that do not exceed $2,000) want to leave each memento they own to a different person.’”
These gender schemas are reified when included in form books in ways that are subtle but powerful. Sneddon highlights this entrenching effect when she writes, “Some modern form books continue to endorse gendered recommendations, such as a form that limits a daughter’s ability to appoint property to her husband. The form book does not present a similar sample provision to limit a son’s ability to appoint property to his wife.”
In addition to specific language in the text of instruments, Sneddon points out the gendered nature of estate planning structures like qualified terminable interest property trusts (QTIPs). For example: “Due to life expectancies, QTIPs are more frequently created for female spouses with the ultimate disposition of the trust property then being directed by the deceased male spouse.”
Sneddon goes on to note additional examples of gendered terms, like “testator” and “testatrix,” that imply the norm is male and the feminine version is the “other.” She gives examples of cases, form books and even a fairly recent ABA Probate & Property article that use gendered terms like “testatrix.” Sneddon argues that the continued use of these gendered labels, despite attempts to gender-neutralize the language of inheritance law, reinforces the idea that men and women can be expected to behave differently in bequeathing property and making dispositive decisions that reallocate their property after death. The use of such terms also diminishes women and tends to make them less visible in discourse within the field. Positing women as the “other” and the persistence of androcentrism in language slows our progress toward gender equality.
While I highly recommend this article to all those interested in both inheritance law and gender equality, it could be more succinct. That said, one reason it is fairly long is that the footnotes contain such a rich array of sources, some of which are tangential to the main point about gendered language, but all of which are fascinating to read.
In conclusion, Sneddon’s readers will be exposed to intellectual disciplines, like linguistic theory, that give new depth to the words in testamentary instruments as one reads them in the future. Readers will also think more carefully about the choice of words as they draft instruments for their clients. And since being thoughtful wordsmiths is one of our primary roles as estate planners, that’s a very good thing.
Ante-mortem probate addresses a glaring deficiency with the post-mortem probate model prevalently used in the United States. In post-mortem probate contests the key witness—the testator—is deceased, leaving the courts with only indirect evidence of the testator’s capacity and freedom from undue influence. The relative ease with which individuals dissatisfied with the testator’s choice of beneficiaries may manipulate this indirect evidence encourages spurious will contests. In ante-mortem probate the testator executes a will and then asks for a declaratory judgment ruling that the will is valid, that all technical formalities were satisfied, that the testator had the required testamentary capacity to execute a will, and was not under undue influence. The beneficiaries of the will and the heirs apparent are given notice so they may contest the probate of the will. In addition to providing greater certainty to the testator of the will’s validity, the procedure makes will contests less likely. But ante-mortem probate is not without its price: The ante-mortem process may be extremely disruptive to the testator and the testator’s family. The testator may not wish to disclose the contents of the will nor to face the potential embarrassment that may occur if testamentary capacity is litigated. It involves additional costs and may raise due process and conflict of laws problems.
Susan G. Thatch’s article concisely discusses the advantages and disadvantages of implementing an ante-mortem probate statute in New Jersey and, by analogy, in any state. The article focuses on the debate of whether allowing ante-mortem probate is useful to testators or harmful to families by reviewing the ante-mortem probate model currently used by five states, as well as other models which scholars have suggested. The article takes the view that if the suggested statute is implemented, it should supplement instead of supplant traditional probate options already available to New Jersey citizens. Figuring out the best way to ensure peace of mind for the testator while fully considering the arguments for and against an ante-mortem probate statute forms the foundation of the article.
The article describes three principal models suggested for successfully structuring and implementing ante-mortem probate—the contest model, the conservatorship model, and the administrative model. Although all currently enacted state enabling statutes adopt the contest model, Ms. Thatch explains how each of the models operate and the benefits and disadvantages of each one. Overall, all of the models allow a court to determine if “the testator had adequate testamentary capacity and was free from undue influence” while the testator is still alive. The difference between the models is the extent to which beneficiaries and heirs are required to be notified and represented. By examining both the model currently used and those suggested by scholars, Ms. Thatch provides a comprehensive look at how New Jersey could structure its statute.
Ms. Thatch then analyzes the statutes in the five states where ante-mortem statutes is available—North Dakota, Ohio, Arkansas, Alaska, and New Hampshire. All of the states have statutes based on a variation of the contest model. Ms. Thatch acknowledges that North Dakota, Ohio, and Arkansas, states that have allowed ante-mortem probate since the 1970s, have reported a low usage of the ante-mortem probate procedure. However, Ms. Thatch explains that North Dakota and Ohio practitioners reported that it was valuable to have the statute available.
The article addresses how implementing an ante-mortem procedure in New Jersey would help practitioners have a valuable probate tool available to them. Although Ms. Thatch describes the current alternatives available to safeguard a testator’s intent, such as video-recording the will execution ceremony, creating an inter-vivos trust, using an inter-vivos transfer, and adding a no contest clause, the article explains why all of these options are not enough to ensure that the testator’s capacity will not be contested or that a beneficiary or heir will not claim undue influence.
In addressing the reasons for allowing ante-mortem probate, the article mentions the risk presented by the growing demographic of elderly citizens. Elderly citizens are at a greater risk of either being taken advantage of or having guardians inappropriately allocate or dispose of assets. Testators might benefit from having these pre-death probate disputes handled by ante-mortem probate. Additionally, ante-mortem probate can help ensure that the testator’s intent is not frustrated if the testator decides to depart from “deeply held societal values” when distributing assets. However, the article also mentions that the downside of allowing ante-mortem probate is that it can create family strife. The testator can determine whether the benefits of ante-mortem probate would exceed the potential difficulties. Because there are arguments for and against ante-mortem probate, the New Jersey Law Revision Committee will take into consideration the area of law and practitioners’ opinions before deciding whether the statute would be useful to testators and practitioners in New Jersey.
As a long-time advocate of ante-mortem probate, I highly recommend this article. Ms. Thatch makes well-reasoned arguments for allowing ante-mortem probate after considering both the value the statute could provide to testators and practitioners and the implications that may arise from its use.
[Special thanks to the outstanding assistance of Elizabeth Nanez, J.D. Candidate May 2016, Texas Tech University School of Law, for her assistance in preparing this review.]
Two years ago, my friend Myra died of cancer. She was survived by her husband Scott and their six-year old daughter Isla, as well as her parents, siblings, and many nieces and nephews. As Scott tried to make sense of his wife’s death, he was somewhat comforted by the knowledge that her pension and life insurance would cover the mortgage and keep their daughter in the only school she had ever known—the school where her mother had taught kindergarten.
Scott’s comfort was short-lived. Although Myra did have a pension and life insurance, neither Scott nor their daughter were the beneficiaries. When Myra began working as a school teacher many years ago, she designated her mother and only nephew at the time as the beneficiaries of her life insurance and state pension. Years later, she married Scott and had a daughter together, but never updated her beneficiary designations. She simply forgot. But she also believed that because she did not have a will, Scott would inherit everything she owned and use it to take care of their daughter. She was wrong. Although Scott inherited her very modest intestate estate, her pension and life insurance benefits went to her mother and oldest nephew instead of Scott—her intended beneficiary and intestate heir. The family was torn apart and Isla has had almost no contact with her maternal relatives since her mother’s death.
In their article, Revisiting the Revolution: Reintegrating the Wealth Transmission System, Professors Melanie B. Leslie and Stewart E. Sterk illustrate the law’s failure to address the problems created by the proliferation of non-probate instruments. This failure has deprived intended beneficiaries, like Scott, of assets that the decedent intended them to take and has also enabled wrongful takers, including former spouses, to receive assets that the decedent clearly did not want them to have.
Many individuals hold the bulk of their assets in non-probate instruments, such as retirement accounts, life insurance contracts, payable on death (POD) bank accounts, and revocable trusts. These instruments are not governed by wills law doctrines or the default rules of intestacy—rules that aim, among other goals, to honor decedent’s likely intent. Yet, the law does little to effectuate (and sometimes even frustrates) the decedent’s intent when her assets are held in non-probate instruments. As Leslie and Sterk demonstrate, these non-probate instruments have led to a fragmented and uncoordinated wealth transfer system in which donors, lawyers, and beneficiaries often lack accurate and complete information. They have also increased both the likelihood of error when creating an estate plan and the risk that wrongful takers of assets held in non-probate devices will squander them before their rightful beneficiaries have an opportunity to claim them.
Leslie and Sterk remind us that these problems were not unforeseen. They note that thirty years ago Professor John Langbein cautioned that non-probate transfers would create some potential challenges but he was optimistic that these would be addressed by lawmakers and financial intermediaries. Yet, they have not been. Leslie and Sterk’s examination of the beneficiary forms provided by insurance companies demonstrate that these forms are rarely designed to carry out the donor’s intent. In fact, they are often downright confusing—even to experts like Leslie and Sterk. In addition, state legislators have failed to extend wills law doctrines that are designed to effectuate the decedent’s intent (such as anti-lapse statutes, revocation-upon-divorce rules, and doctrines dealing with spouses and children omitted from a will) to non-probate assets.
In Leslie and Sterk’s view, the benefits of avoiding probate are sufficiently advantageous that we should not throw the baby out with the bath water. Consequently, they focus on reforms that would allow donors to continue to transfer wealth outside of the probate process while also ensuring that non-probate transfers accurately reflect the donor’s intent. For example, they recommend the creation of statutory forms for non-probate transfers to ensure donors understand the transfers they are making. They also recommend that states require custodians of non-probate assets to notify the decedent’s spouse and children of their existence and that they wait thirty to sixty days before distributing the assets to the designated beneficiaries to ensure that they are not dissipated before the intended takers have an opportunity claim them.
Their most important proposal, in my view, is one that some states and the UPC have adopted, but not fully. Leslie and Sterk propose extending all of the wills law doctrines designed to carry out decedent’s intent to non-probate instruments. Although some states apply certain intent-furthering doctrines (like revocation-upon-divorce) to both probate and non-probate instruments, they have not extended all of these doctrines to non-probate devices. Had the rule dealing with an omitted spouse in a will (UPC 2-301) applied to Myra’s pension and life insurance, Scott would have received Myra’s entire pension and life insurance, as she wished.
Leslie and Sterk’s most controversial reform is probably their recommendation to grant executors and administrators authority to alter the decedent’s non-probate transfers when they believe the transfers would thwart the decedent’s overall estate plan. Such power risks increased litigation from beneficiaries who receive less after the executor’s or administrator’s adjustments than under decedent’s designation (as Leslie and Sterk acknowledge). It could also take us down a dangerous road that, in my view, is best avoided. It is quite challenging for neutral factfinders in a courtroom with clear evidentiary rules to determine a decedent’s wishes. I think it would be more difficult, maybe impossible, for an executor or administrator (who is often a family member or friend) to objectively ascertain decedent’s wishes even if she lacks a financial interest in the disposition of assets.
One of Leslie and Sterk’s reforms directly addresses the problem of forgetful donors. They propose creating a nationwide voluntary registration system that would list each individual’s nonprobate transfers. Anytime a registered individual (again, registration is voluntary) attempts to make a transfer, the financial intermediary would remind her about her past designations. This reminder might be all some individuals need to help them coordinate their non-probate transfers and incorporate them into their overall estate plan. Other donors, like Myra, might benefit from an annual email reminder to check their beneficiary designations to make sure they reflect their wishes.
My initial reason for selecting this article as a Jotwell read was personal as I saw firsthand how a nonprobate transfer tore a family apart. However, the reforms Leslie and Sterk recommend are sure to help carry out the intentions of countless decedents even when they chose to avoid probate.