Trusts & Estates Essentials Power Point Slides Class #14

1. Trusts & Estates EssentialsPower Point Slides Class #14 3-7-19: NATIONAL CEREAL DAY

2. Trusts & Estates Essentials: Logistics • On Course Page Now • Info on Office Hours & [REASONABLE] E-Mail Qs • Chapter 2 Exam Syllabus & Sample Qs: QUESTIONS ON? • Check Course Page Regularly for Updates Thru 3/21 • Answers to Significant Student E-Mail or Office Qs • Updates/Corrections to Slides & Posted Info • Additional Exam Syllabi & Sample Qs (to be Complete by Midnight Wednesday March 13)

3. Trusts & Estates Essentials: Logistics • Today’s Coverage • Mostly Pretty Basic; I may add a few slides when I set up exam syllabi • I’ll Point Out Areas Subject to In-Depth Testing • You are Responsible for Info Covered on Posted Final Version of Slides (Will be Indicated on Exam Syllabi) • Qs about exam logistics/problems go to Registrar or Dean of Students (NOT ME!!!) QUESTIONS ON LOGISTICS?

4. UNIT THREE: TRUSTS CHAPTER 8: TRUST FORMATION & ELEMENTS §8.5 Charitable Trusts 8.5.1 Charitable Beneficiaries 8.5.2 Charitable Purposes 8.5.3 Duration and Modification of Charitable Trusts 8.5.4 Enforcement of Charitable Trusts

5. Charitable trusts differ from non-charitable trusts in the selection of beneficiaries, trust purposes, duration, and modification. • Charitable trusts are sometimes used to implement a plan of philanthropic giving. However, most large charitable gifts involving the creation of an entity are structured in the form of a charitable nonprofit corporation. • Many of the largest charities are structured, or were initially established, in the charitable trust form. • Kamehameha School Trust ($10.6 billion) • J. Paul Getty Trust ($8.68 billion) • Pew Charitable Trusts ($5.6 billion) • Leona & Harry Helmsley Charitable Trust ($5.5 billion) Charitable TrustsGenerally (from last time)

6. Charitable TrustsCharitable Beneficiaries The beneficiaries of charitable trusts must be the general public or an unascertainable segment of the general public constituting a class of charitable beneficiaries. By contrast to private trusts, a valid charitable trust is not established if the beneficiaries are ascertainable by name or description.

7. Charitable TrustsCharitable Beneficiaries A charitable trust may confer an incidental benefit on a private individual if the individual beneficiary is not selected solely by the settlor and the charitable purpose is advanced by conferring the private benefit. Example: A charitable trust provides scholarships for students demonstrating financial need. The trust furthers the charitable purpose of promoting education by providing incidental private benefits to the scholarship recipients.

8. Charitable TrustsCharitable Purposes UTC §405 Charitable Purposes; Enforcement. (a) A charitable trust may be created for the relief of poverty, the advancement of education or religion, the promotion of health, governmental or municipal purposes, or other purposes the achievement of which is beneficial to the community. (b) If the terms of a charitable trust do not indicate a particular charitable purpose or beneficiary, the court may select one or more charitable purposes or beneficiaries. The selection must be consistent with the settlor’s intention to the extent it can be ascertained. (c) The settlor of a charitable trust, among others, may maintain a proceeding to enforce the trust.

9. Charitable Purposes: Problem 8.5 UTC §405 (a) A charitable trust may be created for the relief of poverty, the advancement of education or religion, the promotion of health, governmental or municipal purposes, or other purposes the achievement of which is beneficial to the community. Client wants to establish a charitable trust to “build, endow, manage, and maintain a state-of-the art, tuition-free, secondary school to provide quality education for poor, orphaned, white girls of the Christian faith, so they may take their rightful places in the technology industries.” Race restriction clearly violates public policy. Religion more complex; easier case if “Christian education” for ANY poor orphaned girls

10. Charitable TrustsDuration and Modification At common law, charitable trusts were exempt from the Rule Against Perpetuities, so they could (in theory) last forever. The long duration of charitable trusts required the common law development of doctrines to address changing circumstances over the passage of time. Cy Pres (Change in Purpose) Equitable Deviation (Change in Means)

11. Charitable TrustsDuration and Modification • The doctrine ofcy pres permits a court to change the purposes of a charitable trust if the settlor’s stated purposes are (or become) illegal, impossible, or impracticable to accomplish or if accomplishing the settlor’s purposes would waste charitable assets. • The court may alter the trust’s charitable purposes to other purposes as close to (assez près = cy pres) the donor’s stated purposes as possible.

12. Charitable TrustsDuration and Modification • Under the doctrine of equitable deviation, if, because of circumstances unforeseen by the settlor, the means by which a settlor’s charitable purposes are to be accomplished become illegal, impossible, or impracticable the court may alter the administrative terms of the trust to facilitate accomplishment of the donor’s purposes by other means. • The alternate terms must be the least possible variation from the settlor’s in light of the changed circumstances.

13. Charitable TrustsEnforcement At common law, private parties, including the settlor, lacked standing to enforce the terms of a charitable trust. Enforcement powers resided exclusively in the state attorney general, vested with power to protect the public interest in charitable assets. The concern giving rise to this limited standing was that allowing private party standing could open the floodgates of vexatious litigation that would deplete charitable assets.

14. Charitable TrustsEnforcement UTC §405(c) changes the common law by authorizing settlor standing: “The settlor of a charitable trust, among others, may maintain a proceeding to enforce the trust.” This provision recognizes that Most settlors want to exercise control over charitable trusts. In practice, state attorneys general rarely invoked their parens patriae powers against charitable trustees to enforce the public interest.

15. UNIT THREE: TRUSTS TRUST FORMATION & ELEMENTS §10.2.1 Revocable Trusts as Will Substitutes & Pour-Over Wills

16. §10.2.1 Revocable Trusts as Will Substitutes & Pour-Over Wills Restatement (Third) of Property: WODT§ 3.8 – Pour-Over Devises: A “pour-over” devise is a provision in a will that adds property to an inter vivos trust or funds a trust that was not funded during the testator’s lifetime but whose terms are in a trust instrument that was executed during the testator’s lifetime.

17. §10.2.1 Revocable Trusts as Will Substitutes & Pour-Over Wills UPC2-511. Uniform Testamentary Additions to Trusts Act. (a) A will may validly devise property to the trustee of a trust established or to be established (i) during the testator's lifetime … or (ii) at the testator's death by the testator's devise to the trustee, if the trust is identified in the testator's will and its terms are set forth in a written instrument, other than a will, executed before, concurrently with, or after the execution of the testator's will … , regardless of the existence, size, or character of the corpus of the trust. The devise is not invalid because the trust is amendable or revocable, or because the trust was amended after the execution of the will or the testator's death.

18. §10.2.1 Revocable Trusts as Will Substitutes & Pour-Over Wills UPC2-511. Uniform Testamentary Additions to Trusts Act. … (c) Unless the testator's will provides otherwise, a revocation or termination of the trust before the testator's death causes the devise [to the trustee of a trust described in section (a)] to lapse.

19. UNIT THREE: TRUSTS Chapter 9: Distribution & Modification of Private Trusts §9.1.1 Distribution: Rights of Beneficiaries §9.1.2 Distribution: Rights of Creditors §9.1.3 Special Needs Trusts §9.2 Modification and Termination

20. Distribution & Modification of Private TrustsRights of Beneficiaries; Types of Trust Interests Mandatory (e.g. “the trustee will pay all the income of the trust to the beneficiary every month”). Mandatory interests are assignable (meaning that the beneficiary can sell them) and subject to attachment by creditors. Support (e.g. “the trustee will pay all of the income of the trust and such principal as is necessary to cover the beneficiary’s housing, food, clothing, health care, and education”) Spendthrift (e.g. “no beneficiary shall alienate their interest in the trust’). Spendthrift interests are neither assignable nor subject to attachment by creditors. Types of Trust Interests (Not mutually exclusive: trust interests sometimes exhibit more than one of these characteristics)

21. Types of Trust Interests (Not mutually exclusive: trust interests sometimes exhibit more than one of these characteristics) • Discretionary (e.g. “the trustee will pay all of the income of the trust to the beneficiary that the trustee deems appropriate”). • Rstmt (3d) of Trusts §50. Enforcement and Construction of Discretionary Interests • (1) A discretionary power conferred upon the trustee to determine the benefits of a trust beneficiary is subject to judicial control only to prevent misinterpretation or abuse of the discretion by the trustee. • (2) The benefits to which a beneficiary of a discretionary interest is entitled, and what may constitute an abuse of discretion by the trustee, depend on the terms of the discretion, includingthe proper construction of any accompanying standards, and on the settlor's purposes in granting the discretionary power and in creating the trust.

22. Distribution & Modification of Private TrustsDistribution: Rights of Creditors UTC §501. Rights of Beneficiary’s Creditor or Assignee To the extent a beneficiary’s interest is not subject to a spendthrift provision, the court may authorize a creditor or assignee of the beneficiary to reach the beneficiary’s interest by attachment of present or future distributions to or for the benefit of the beneficiary or other means. The court may limit the award to such relief as is appropriate under the circumstances.

23. Distribution & Modification of Private TrustsDistribution: Rights of Creditors UTC §504 Discretionary Trusts; Effect of Standard . . . . (b) Except as otherwise provided in subsection (c), whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee's discretion, even if: (1) the discretion is expressed in the form of a standard of distribution; or (2) the trustee has abused the discretion. (c) To the extent a trustee has not complied with a standard of distribution or has abused a discretion: (1) a distribution may be ordered by the court to satisfy a judgment or court order against the beneficiary for support or maintenance of the beneficiary's child, spouse, or former spouse; [Restatement/Minority Position: Creditor has standing to challenge trustee abuse of discretion]

24. Distribution & Modification of Private TrustsDistribution: Rights of Creditors UTC Limits on Spendthrift Provisions §502(a) A spendthrift provision is valid only if it restrains both voluntary and involuntary transfer of a beneficiary’s interest. §502(a) §503(b): [Exceptions]: Not enforceable against (1) a beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance; (2) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust; and (3) a claim of this State or the United States to the extent a statute of this State or federal law so provides. §503(c) For exceptions, court can order attaching present or future distributions to or for the benefit of the beneficiary … as is appropriate under the circumstances.

25. Rights of Creditors & Spendthrift Trusts: Scheffel v. Krueger 1985: KK’s grandmother establishes a trust for his benefit. The trust requires the trustee to pay KK all of the income quarterly and principal if necessary for his maintenance, support and education. When KK turns fifty (which will be in 2016), he has the right to invade the principal. The trust contains a spendthrift clause. 1998: KK convicted and imprisoned for sexually assaulting a child. Child’s mother (LS) recovers $551K in damages from him. LS tries to attach his interest in the trust. Legal Q: Does spendthrift provision prevent LS from attaching KK’s interest in trust? New Hampshire S.Ct. holds that it does.

26. Rights of Creditors & Spendthrift Trusts: Scheffel v. Krueger Does spendthrift provision prevent [Tort Claimant] from attaching KK’s interest in trust? New Hampshire S.Ct. holds that it does. Relevant NH statutes have some exceptions, but not for tort claimants. Cases from other states creating exception for tort claimants are adjusting common law (caselaw) rules not statutory rules. Purpose of trust doesn’t fail b/c beneficiary is in prison even though NH pays for KK’s “maintenance [and] support…” Trust will be useful again when he gets out.

27. Distribution & Modification of Private TrustsSpecial Needs Trusts Self-settled special needs trusts: A disabled person can establish a special needs trust for his or her own benefit but only if the state will be reimbursed on the settlor’s death for all medical expenses paid by the state. Third party trusts: Third parties can create special needs trusts for the benefit of a disabled beneficiary without specifying that the state will be reimbursed when the disabled person dies. However, these trusts should be purely discretionary and provide that payment should be made not to the beneficiary, but to those who provide services to the beneficiary.

28. Distribution & Modification of Private TrustsModification & Termination UTC §411. Modification or Termination of Noncharitable Irrevocable Trust by Consent [(a) [A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust. . . ..] (b) A noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. A noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust. [Claflin case: Mass. S.Ct. enforces trust that distributes some of assets to settlor’s child at his 21st, 25th, 30th birthdays. Court says keeping him from blowing the $$ was a valid material purpose.]

29. Distribution & Modification of Private TrustsModification & Termination UTC §411. Modification or Termination of Noncharitable Irrevocable Trust by Consent [(c) A spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust.] (d) Upon termination of a trust under subsection (a) or (b), the trustee shall distribute the trust property as agreed by the beneficiaries. (e) If not all of the beneficiaries consent to a proposed modification or termination of the trust under subsection (a) or (b), the modification or termination may be approved by the court if the court is satisfied that: if all of the beneficiaries had consented, the trust could have been modified or terminated under this section; and the interests of a beneficiary who does not consent will be adequately protected.

30. Distribution & Modification of Private TrustsModification & Termination UTC §412. Modification or Termination Because of Unanticipated Circumstances or Inability to Administer Trust Effectively (a) The court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor’s probable intention. (b) The court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust’s administration. (c) Upon termination of a trust under this section, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust.

31. UNIT FOUR: OUTSIDE THE CONTROL OF THE WILL Family Protection Generally §7.3.1 Elective Share §7.3.5 Homestead & Other Protections §§4.2.4 & 7.2 Changes in Family Status §7.4 Protection Against Accidental Omission

32. Family Protection Generally Aspects of Many Issues Covered by the Course Act to Protect a Decedent’s Close Family Members Structure/Sequencing of Intestacy Statutes Factual Assumptions Used in Determining Capacity & Undue Influence Anti-Lapse Statutes Final Family Protection Issues = Rules That Can Trump Language of Wills to Protect T’s Family, (Usually Spouse & [Minor] Children) Spousal Elective Share & Rules re Family House & Household Goods Effect of Divorce on Previously Executed Will Protections for Accidentally Omitted Spouse & Children

33. Direct Family Protection:§7.3.1Spouse’s Elective Share Elective Share: In all American states (except Georgia) that employ a “Separate Property” system, the surviving spouse can choose to take statutorily determined “Elective Share” of a T’s property if that amount is greater than what the spouse would receive under the will. Community Property States (AZ CA ID LA NV NM TX WA WI) (NOTIO) do not use Elective Shares because the surviving spouse is roughly speaking) treated as the owner of half the property earned by the couple during the marriage).

34. Direct Family Protection:§7.3.1Spouse’s Elective Share Elective Share: In all American states (except Georgia) that employ a “Separate Property” system, the surviving spouse can choose to take statutorily determined “Elective Share” of a T’s property if that amount is greater than what the spouse would receive under the will. Calculation of the Share (NOTIO): Complex calculus for determining which property is considered and the percent that makes up the Elective Share (sometimes with a mandatory minimum) that has become even more complex recently. See Sections 7.3.2 and 7.3.3 for increase in complexity between 1969 and 1990 versions of UPC. Florida made some similar changes when it amended the Elective Share rules in 1999 (See Fl. Stat. 732.2035 et seq.)

35. Direct Family Protection:§7.3.5Homestead & Other Protections Most jurisdictions supplement the elective share or their community property system with three additional protections: Homestead Allowance; Tangible Property Set-Aside; Family Allowance These rights are generally immune from a decedent's creditors and other claimants. In combination with the elective share, these rights often leave very little property devisable by a middle-aged middle class married decedent.

36. Direct Family Protection:§7.3.5Homestead & Other Protections (1) Homestead Allowance: Many states give the surviving spouse special rights relating to the couple's primary residence. These entitlements vary tremendously. (DETAILS = NOTIO) In constitutions in some states (e.g., FL); created by statute in others. Range from a fee simple or life estate in the couple's home to a lump sum payment meant to help keep the family living there. UPC §2-402 gives a surviving spouse a flat amount of $22,500.

37. Direct Family Protection:§7.3.5Homestead & Other Protections Fl. Const. Art. X §4(c) “The HOMESTEAD shall not be subject to devise if the owner is survived by spouse or minor child, except the HOMESTEAD may be devised to the owner's spouse if there be no minor child.” Fl. Stat. 732.401: (DETAILS NOTIO) If Homestead held with spouse as tenants-by-the-entirety: All to spouse. Otherwise, If T is survived by just spouse: All to spouse If T is survived by just surviving descendants, passes as though thru intestacy If T is survived by both spouse and descendants, life estate to spouse + remainder to descendants alive at D’s death

38. Direct Family Protection:§7.3.5Homestead & Other Protections (Details NOTIO) (2) Tangible Property Set-Aside: Surviving spouse or, if no spouse, D’s surviving children can receive a statutorily set amount of tangible property: UPC §2-403: Up to $15,000 “in household furniture, automobiles, furnishings, appliances, and personal effects.” Fl. Stat. §732.402: Up to $20,000 in furnishings, furniture and appliances plus two cars. (3) Family Allowance: A statutorily set amount of $$$ designed to sustain the family during the administration/probate of D's estate. UPC §§2-404 & 2-405: Maximum of $27,000. Fl. Stat. §732.403: Maximum of $18,000.

39. Indirect Family Protection:§4.2.4 & §7.2 Changes in Family Status Revocation of Provisions re Divorced Spouse By default, divorce revokes all dispositions in favor of a former spouse.This default automatically updates estate planning documents based on the presumed intent not to benefit a former spouse. UPC § 2-804 applies to all “governing instruments,” which include wills and non-probate transfers. It also applies to dispositions favoring relatives of the former spouse. Fl. Stat. 732.507(2) just addresses wills and dispositions involving the former spouses themselves.

40. Direct Family Protection:§7.4 Protection Against Accidental Omission Pretermitted (left out) Spouse or Child Provisions Many states provide default rules that where a spouse or child is not mentioned at all in the will, they receive their intestate share, basically on the theory that they have been forgotten. These provisions only apply to spouses married after the will was executed, and (usually) only to children born after the will was executed. If the spouse or child is mentioned, but explicitly disinherited, the provisions generally do not apply. See, e.g., UPC §§2-301 & 2-302; Fl. Stat. §§732.301-732.302.

41. Direct Family Protection:§7.4 Protection Against Accidental Omission Example of Limits on Use of Pretermitted Spouse Provision Under UPC § 2-301. (NOTIO): [Spouse married to T after execution of will not treated as pretermitted where]: it appears from the will or other evidence that the will was made in contemplation of the testator’s marriage to the surviving spouse; the will expresses the intention that it is to be effective notwithstanding any subsequent marriage; or (3) the testator provided for the spouse by transfer outside the will and the intent that the transfer be in lieu of a testamentary provision is shownby the testator’s statements or is reasonably inferred from the amount of the transfer or other evidence.

42. Direct Family Protection:§7.4 Protection Against Accidental Omission Example of Limits on Use of Pretermitted Child Provision Under UPC § 2-302. (NOTIO): [Afterborn or after-adopted child effectively not treated as pretermitted where]: (a)(1) the will devised all or substantially all of the estate to the other parent of the omitted child and that other parent survives the testator and is entitled to take under the will. (b)(1) it appears from the will that the omission was intentional; or (b)(2) the testator provided for the … child by transfer outside the will and the intent that the transfer be in lieu of a testamentary provision is shownby the testator’s statements or is reasonably inferred from the amount of the transfer or other evidence.

43. Trusts & Estates Essentials: Epilogue: A Few Quick Thoughts on Professionalism • Thank You for Your Patience • Reading & Following Directions (& Timeliness) • Final Exam as Bar Training • Close Reading • Closed Book

44. Trusts & Estates Essentials: FIN