The idea of the “traditional family unit” is changing at a rapid pace that requires the law to adapt to effectuate a testator’s intent when administering a will. With 16.3 million unmarried Americans cohabiting and one in five children born into such households, the need for a valid will to avoid intestacy is at an all-time high. Specifically, more families are living with stepchildren or same-sex partners. This makes traditional intestacy statutes, which are designed to protect a more traditional family unit, potentially dangerous for a testator with a nontraditional family. Some states, however, permit ante-mortem probate which allows a testator to probate his or her own will prior to death thus ensuring that the testator’s at-death property distribution plans are upheld. States with ante-mortem probate statutes allow interested parties, such as will beneficiaries and heirs, to contest the will like they would in a post-mortem probate for issues such as undue influence, mental incapacity, or fraud. Unlike post-mortem probate, where the testator is deceased and the court must determine the testator’s capacity and intent without the testator’s input, ante-mortem probate allows the testator to avoid an unwarranted will contest, and the risk of intestacy if the contest is successful, by testifying at the probate hearing. Major concerns with ante-mortem probate statutes, however, are that will contents become public knowledge and that the litigation may strain familial relationships.
Katherine Arango’s article details the shift in American families and how an ante-mortem probate statute would protect nontraditional families. The article explains how adverse attitudes of courts and juries toward nontraditional families could lead to an intestacy distribution, which would be contrary to the testator’s intent. Ms. Arango highlights how ante-mortem probate provides nontraditional families security whereas traditional post-mortem probate cannot. By recounting the history of ante-mortem probate, the article delineates the slow awareness and affirmation of the importance of the doctrine in modern society. The article analyzes the different models of ante-mortem probate statutes and how those models protect the intent of the testator while also explaining possible complications. Then, the article evaluates currently enacted ante-mortem probate statutes. Finally, the article offers a new, comprehensive statute that could be inserted into the Uniform Probate Code as well as adopted by any state looking to implement this probate method.
The article’s in-depth discussion of the changing family dynamic further strengthens the suggestion that ante-mortem probate is essential to protecting a client’s estate planning desires in the modern age. By describing how intestacy laws were designed to protect bloodlines and create a fair and simple distribution scheme, the article focuses the reader’s attention on how intestacy disregards the testator’s intent should a court determine the will to be invalid. Instead, a better option for nontraditional families is a will that is further protected by an ante-mortem probate.
The article examines the history of ante-mortem probate and how issues of notice and finality of judgment originally cast doubt on the doctrine. The Supreme Court alleviated some of those issues by describing an appropriate standard for declaratory judgment in 1937. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 277 (1937). Issues of ripeness, notice, and finality of judgment remained and, although the Supreme Court held that a declaratory judgment could be granted, some states choose to avoid ante-mortem probate because of the lack of controversy surrounding a will because the testator is still alive. The article also describes how legal scholars attempted to establish a method for ante-mortem probate. Starting in 1977, five states enacted ante-mortem probate statutes.
The article describes the three traditional models of ante-mortem probate—the contest model, the conservatorship model, and the administrative model—and presents the arguments for and against each model. By analyzing how the five states with ante-mortem probate—North Dakota, Ohio, Arkansas, Alaska, and New Hampshire—use the doctrine, Ms. Arango demonstrates that the implementation of the doctrine has met with varying degrees of success. A successful ante-mortem probate makes the will incontestable after the testator’s death. However, the procedure, as currently implemented, publishes the will contents that could lead to family strife and expensive litigation. This author takes the history, models, and the current state statutes into account when she drafted a new framework for an ante-mortem probate statute.
The proposed statute would be a no-reveal statute, meaning the contents of the will would not be public knowledge. Ms. Arango suggests the testator petition the court to determine the validity of the will with the court reviewing the will in camera. The public would have notice as to of the petition’s filing, modification, or revocation but not the contents of the will. This allows the will to remain confidential and lessens potential family tensions. The testator would have the burden to prove elements such as proper execution, requisite capacity, and rebut claims of undue influence under normal evidentiary rules. The testator would lose the benefits of the ante-mortem probate if the testator modifies or revokes the will unless the ante-mortem procedure was again used.
I highly recommend the statute proposed in this article as a model for state legislatures and the drafters of the Uniform Probate Code when considering ante-mortem probate because it fixes the issues with current ante-mortem probate statutes. As an advocate for ante-mortem probate for many decades, I can confidently say this article offers a cohesive alternative for current ante-mortem probate statutes in an age where intestacy laws are ill-equipped to handle the nontraditional family.
[Special thanks to the outstanding assistance of Bailey McGowan, J.D. Candidate May 2018, Texas Tech University School of Law, for her assistance in preparing this review.]
David Horton and Andrea Cann Chandrasekher, Probate Lending
, 126 Yale L.J.
Recently, private companies have begun advancing funds to estate beneficiaries in exchange for the beneficiaries’ anticipated inheritances from those estates. These “probate loans,” which have never even been mentioned in another law review article, are explored in detail by Professors David Horton and Andrea Cann Chandrasekher in Probate Lending.
In their excellent article, Professors Horton and Chandrasekher analyze 594 probate administrations that occurred in Alameda County, California, during 2007. Through this analysis, they learned that probate lending is more prevalent than one might expect. In fact, they discovered 77 probate lending deals in the 594 administrations. They also discovered that the lending companies paid beneficiaries about $800,000 in exchange for nearly $1.4 million in inheritances, producing an average markup of 69 percent per year.
Part I of the article surveys the rules governing the sale of rights. It begins with a discussion of litigation lending, that is, the practice of lending money to a plaintiff against her anticipated winnings. At common law, this practice was effectively prohibited because of the champerty doctrine, which prohibited the payment of financial support in return for a share of the ultimate recovery, and because courts refused to enforce attempted assignments of “choses in action.” The main concerns with allowing the alienation of legal grievances were that buyers commonly paid far less than the value of the claims, claim sales were thought to encourage litigation, and lawsuits were viewed as intrinsically personal and not capable of changing hands. Over time, however, these limitations receded, and entrepreneurs began to make litigation loans, which were not technically loans because repayment was contingent on recovery.
Probate lending is effectively an expansion of the litigation lending concept. Traditionally, it was not permissible to convey an interest in the estate of someone who was still alive. This mere “expectancy” was not even a form of property. Over time, some states began to allow this anticipatory assignment of inheritances. Furthermore, even in states that didn’t allow the assignment of an expected inheritance from a living person, it became permissible to assign an inheritance once a probate case had begun. Once that happened, the probate lending business began to thrive.
In Part II of their article, Professors Horton and Chandrasekher explain how they gathered their data and give an overview of the probate lending industry. They note that their data came exclusively from culling all 594 probate administrations that occurred in Alameda County in 2007. They note that only about five percent of the estates featured loans, but some estates had multiple loans. Importantly, they note that there is no significant correlation between the size of the estate or the duration of the estate administration and the existence of a probate loan.
In Part III, Professors Horton and Chandrasekher discuss the policy implications of their findings. First, they consider whether probate loans are usurious. As a general matter, usury law only applies to loans that are “absolutely repayable.” Probate loans generally have been exempt from these laws because, as loans against an anticipated inheritance, they have been held to not be absolutely repayable. Professors Horton and Chandrasekher challenge this conclusion by noting that repayment of the loans is nearly certain, unlike litigation lending. In the case of probate lending, the lender recouped the principal 96 percent of the time. Because of this, the argue that courts should weigh this fact and allow usury law to potentially apply to probate loans.
Second, they consider the potential applicability of the Truth in Lending Act (TILA) to probate lending. As a general matter TILA imposes strict liability upon creditors who fail to follow its strict disclosure mandates. In the one TILA case dealing with probate lending, a federal court held that TILA does not apply to probate lending because TILA does not cover “non-recourse advances” such a probate loans. According to Professors Horton and Chandrasekher’s data, however, probate loans are not truly non-recourse, and they would urge courts to consider the potential applicability of TILA to probate loans.
Third, they analyze whether probate loans violate the champerty doctrine. Specifically, they focused on whether probate lending increased the likelihood of conflict in the estate, which is one of the key rationales behind the champerty doctrine. Here, they learned that the presence of a probate loan increased the odds of a will contest far more than any other variable, including holographic wills, disinheritance, and intestacies. Despite that, they also found that litigation filed by lenders was sometimes in the best interest of the estate. Because of this, they do not recommend that courts use the champerty doctrine to police probate loans. Instead, testators should consider using anti-assignment clauses in wills.
Professors Horton and Chandrasekher have written an excellent piece. While they acknowledge that it is limited in scope by virtue of the fact that they only analyzed data from one California county, their results lead to the inevitable conclusion that probate lending may be a widespread and growing phenomenon. As with a growing national concern about the adverse implications of payday lending, it seems that further studies and commentaries regarding the prevalence and implications of probate lending are warranted.
A will speaks at death. Therefore, the testator is free to change his or her will until the day he or she dies. Giving a person the opportunity to change his or her will makes sense because testamentary dispositions are influenced by lifetime events. For example, after a will is executed, a beneficiary may die or the testator may lose ownership of some of the property mentioned in the will. Currently, persons are permitted to create irrevocable trusts. Although there is no prohibition against irrevocable wills, modern statutes do not provide for the use of such devises. Therefore, a method does not exist for a testator to make an irrevocable will. Nevertheless, in his timely and thought-provoking article, Is It Time For Irrevocable Wills?, Professor Alex M. Johnson, Jr. makes the case that the legal recognition of irrevocable wills would not negatively impact testamentary freedom. The availability of irrevocable wills may protect the testator who becomes incompetent after executing his or her will.
In attempt to support his assertion that irrevocable wills have a place in the testamentary process, Professor Johnson begins his article by briefly discussing the historical evolution of wills. During the Middle Ages, the law expressly deemed wills to be irrevocable. At that time, the property owner was permitted to use, a post obit transfer, an inter vivos conveyance, to make an irrevocable testamentary transfer of his property. The post-obit gift consisted of a contractual promise that the donor’s property would be delivered to the beneficiary after the donor died. Usually, the instrument creating the post-obit gift included a provision stating that the gift was irrevocable if the donor did not retain the right to revoke it. Once the Statute of Wills was enacted in 1540, wills were treated as if they were irrevocable. Professor Johnson asserts that no justification was given for making wills revocable instruments. He opines that lawmakers never intended to prohibit irrevocable wills. According to Professor Johnson, the issue of the irrevocability of wills was never fully discussed. Consequently, there is no historical reason for not legally recognizing irrevocable wills.
Professor Johnson points out that a will is nothing more than a donative transfer. Thus, it should be irrevocable like other devices that are used to make donative transfers. Most other mechanisms used to transfer property may be irrevocable or revocable. On the one hand, an inter vivos gift becomes irrevocable once the property is delivered by the donor with the necessary intent and accepted by the donee. On the other hand, a gift causa mortis is revocable because it does not take effect unless the donor dies in the manner contemplated when the gift is given. Professor Johnson spends a significant amount of time discussing trusts as they relate to wills. The settlor has the discretion to make a trust irrevocable or revocable. By permitting donors and settlors to make irrevocable and revocable transfers, the law gives those persons the maximum amount of freedom to create instruments that carry out their wishes. That same freedom should be given to the testator when he or she executes a will.
Professor Johnson contends that the benefits of permitting irrevocable wills outweigh the costs. For example, Professor Johnson claims that the use of an irrevocable will may protect a testator who becomes incompetent. The existence of the irrevocable will permits the person’s competent self to commit his or her incompetent self to distribute the property in accordance with the wishes of the competent self. Moreover, legal recognition of an irrevocable will may help reduce the chances of improper revocations. For example, a testator who becomes incompetent may destroy his or her will based upon an erroneous or delusional belief. If this occurs in a jurisdiction that recognizes revocation by physical act, the person may end up dying intestate. If a person creates an irrevocable will, he or she would have to take specific steps to revoke or alter it. Thus, an incompetent person would not have the ability to revoke or alter his or her will. Hence, the testator’s property would be distributed based upon the wishes he or she expressed while competent.
The system created under the Statute of Wills has not kept up with changing times. Professor Johnson puts forth some compelling reasons why the law should reconsider the irrevocability of wills. The historical information contained in the article indicates that the decision to treat wills as revocable was made without much discussion or exploration. People are living longer and suffering from conditions that may render them incompetent. Therefore, people who revoke or alter their wills late in life run the risk of dying intestate if their new wills are deemed to be invalid. Irrevocable wills may provide one solution to this growing problem. As a result, it is time to have a thorough discussion about the irrevocability of will. Breaking the cycle of the ever-changing will may protect the testator and the probate system.
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.