Transcript An Introduction to Will Substitutes

An introduction to will
substitutes
 Will substitutes are like wills because
 They dispose of the owner’s wealth upon death,
 The owner has complete control over them while
alive (including the power to amend and revoke),
and
 The interests of the beneficiaries are “ambulatory”
(i.e., they don’t come into being until the owner’s
death)
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An introduction to will
substitutes
 Will substitutes are not subject to all of the
formalities of wills
 You’ll have a writing and a signature. But you won’t have
the attestation and signatures of two witnesses. Is that a
problem?
 The short answer is no for the most part, and it makes sense that
will substitutes are not held to the same level of formality as a
will. When you consider the purposes of the formalities, you see
that they’re generally well-satisfied by will substitutes.
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Will substitutes, pp. 394-397
“Pure” Will
“Impure” Will
Substitutes
Substitutes
 Life Insurance
 Joint Tenancies
 Pension Accounts
 Joint Accounts
 Revocable Trusts
Will Substitutes: 1) tend to be asset-specific; 2) avoid
probate; and 3) are not subject to the Wills Act.
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Farkas v. Williams,
Farkas v. Williams
125 N.E.2d 600 (Ill. 1955), p. 398
Farkas
(Settlor)




Right
Right
Right
Right
Transfer
In Trust
to
to
to
to
Farkas
(Trustee)
Contingent
Remainder
Interest
Williams
 Fiduciary Enforcement
Revoke
Income
Principal
Change Beneficiary
Must this trust be executed with Wills Act formalities?
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Farkas

This case illustrates the early efforts to justify revocable
trusts on the grounds that they were not really will
substitutes but were financial vehicles that transferred a
present interest to the beneficiaries

According to the court, Farkas assumed fiduciary
responsibilities toward Williams
 But Williams really was in the same position as a named
beneficiary in a will—Farkas could sell the assets in the trust and
use the proceeds in any way he chose, just as if he had written a
will with Williams as the beneficiary
 In fact, as the UTC and later cases indicate (e.g., Moon, note 3,
page 403; Linthicum), Williams really did not have any
enforceable interests
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Farkas

The lasting significance of Farkas comes from its
observations at the end of the opinion that the
formalities of the trust satisfied the purposes
served by the formalities for wills
 Thus inter vivos revocable trusts are valid will
substitutes even though they do not have to meet the
witnessing requirements of wills
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Indiana on revocable trusts

An instrument creating an inter vivos trust in
order to be valid need not be executed as a
testamentary instrument . . . even though such
trust instrument reserves to the maker or settlor
the power to revoke, or the power to alter or
amend, or the power to control investments, or
the power to consume the principal, or because it
reserves to the maker or settlor any one or more
of said powers.

Ind. Code § 29-1-5-9
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Linthicum v. Rudi,
Linthicum v. Rudi
148 P.3d 746
(Nev. 2006), p. 403
Claire
L-Cobb
Rudi
Claire executes a will
and a revocable
trust. Ernette and
Myra named as
successor trustees
and beneficiaries.
Ernette
Myrna
??
Claire executes a new
will and amendment
to trust. Rudi replaces
Ernette and Myrna as
beneficiary and
successor trustee.
Rudi and State
petition for
guardianship
over Cobb.
State awarded
guardianship.
Ernette and
Myrna challenge
amended trust
seeking
constructive trust
or cancellation.
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Linthicum
 Why can’t Ernette and Myrna challenge the trust?

First the court observed that Nevada’s provisions for
challenges to trusts apply to nontestamentary trusts, but
we have here a revocable inter vivos trust


This argument does not make sense. A revocable inter vivos
trust is a nontestamentary trust.
More importantly, the statute only gives standing to
interested persons, and Ernette and Myrna don’t have a
present interest. Because Claire can revoke the trust,
Ernette and Myrna have “at most a contingent interest that
has not yet vested.” As long as the trust is revocable,
Ernette and Myrna had no legal rights until Claire died.
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Question, p. 406
1. The cases cannot be reconciled on the matter of the
beneficiaries’ interests. Linthicum overtakes Farkas.


As a result, just as a beneficiary of a will cannot challenge
the will until it takes effect upon the testator’s death, a
beneficiary of a revocable trust cannot challenge a trust
until it becomes irrevocable upon the settlor’s death.
At Claire’s death, Ernette and Myrna can challenge the trust
or the amendments to it on grounds of incapacity and
undue influence (see UTC §604); during Claire’s life they
can petition for guardianship of the person and/or the
property.
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Questions, p. 407
2. While modern law does not impose any duty upon Farkas
toward Williams while Farkas is alive, Williams would have
recourse against a third-party trustee who looted the trust
without Farkas’ knowledge, but still only after the trust
becomes irrevocable.

If Farkas is incompetent, a guardian or conservator could sue the
third-party trustee on Farkas’ behalf while he’s alive, and Williams
could sue the trustee after Farkas’ death. See Restatement (Third)
of Trusts § 74 and comments a(2) and (e).
3. Kentucky said yes, but it rejects the majority view and
imposes fiduciary duties to beneficiaries of revocable trusts.
Under the Restatement, there is no duty to disclose for
revocable inter vivos trusts, but there is a duty to disclose if
the settlor loses capacity.
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Payable on death transfers
 Atkinson and Hillowitz illustrate the evolution of
trusts and estates law for POD transfers
 POD transfers include a wide range of
investments
 While POD transfers once were viewed as invalid
testamentary transfers, for lack of proper
witnessing, now they are treated as valid
nontestamentary transfers (i.e., valid will
substitutes), mostly via statutory provisions
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In re Estate of Atkinson,
In re Estate of Atkinson
175 N.E.2d 548 (Ohio Prob. 1961), p. 407
First
Wife
Walter
P.O.D. $5500
P.O.D. $1000
Patricia
Maxine
Emma
P.O.D. $2000
Are the certificates of deposit
invalid testamentary
dispositions?
Yes, according to traditional (but
superseded) law
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Estate Estate
of ofHillowitz
Hillowitz
238 N.E.2d 723 (N.Y. 1968), p. 409
Partnership
Abraham
Wife
“In the event of the death of any partner, his
share will be transferred to his wife, with no
termination of the partnership.”
This court viewed the transfer to the wife as a valid contract
rather than an invalid testamentary disposition
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Question, p.410
410. (1) Arguably, the POD designation in Atkinson was more
reliable since it was executed with a bank, and the maker’s
attention was focused on that provision. In Hillowitz, there
was no financial institution involved, and the POD provision
was probably a small part of an elaborate partnership
agreement and therefore might have not been given much
attention.

With statutory reform, the law expressly validates non-probate
transfers even without the formalities required of wills. That is the
case under UPC 6-101 and under Indiana law.
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Questions, pp.410 and412
410. (2) Analogy not sound. If the interest passes to a
surviving partner, that’s a bargained for exchange. If the
interest passes to the surviving spouse, that’s a gift.
Better to observe that this will substitute involves dealings
with partners disinterested in the beneficiary designation
and that the purposes of will formalities are served by the
partnership agreement
412. (1) The POD designations would have been valid in
Atkinson. The Farkas court would not have had to
consider whether Williams had an enforceable interest.
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UPC §6-101: Nonprobate
Transfers on Death, p.411
A provision for a nonprobate transfer on death
in an insurance policy, contract of employment,
bond, mortgage, promissory note, certificated
or uncertificated security, account agreement,
custodial agreement, deposit agreement,
compensation plan, pension plan, individual
retirement plan, employee benefit plan, trust,
conveyance, deed of gift, marital property
agreement, or other written instrument of a
similar nature is nontestamentary.
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Indiana on POD transfers

Ind. Code § 32-17-14-4
(b) A beneficiary designation made under this chapter must do the
following:
(1) Designate the beneficiary of a transfer on death transfer.
(2) Make the transfer effective upon the death of the owner of the
property being transferred.
(d) Except as otherwise provided in this chapter, a transfer on death
direction is accomplished in a form substantially similar to the following:
(1) Insert Name of the Owner or Owners
(2) Insert "Transfer on death to" or "TOD" or "Pay on death to" or
"POD".
(3) Insert the Name of the Beneficiary or Beneficiaries.
(e) An owner may revoke or change a beneficiary designation at any
time before the owner's death.
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Indiana on POD transfers

Ind. Code § 32-17-14-5
A transfer on death transfer:
(1) is effective with or without consideration;
(2) is not considered testamentary;
(3) is not subject to the requirements for a will
or for probating a will under IC 29-1 . . .
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Functions of formalities
“Does this remark indicate finality of intention to transfer ?”
[i.e., finality in the absence of writing a new will]

Ritual Function


Evidentiary Function


Supply satisfactory evidence to the court.
Protective Function


The performance of some ceremonial for the purpose of
impressing the transferor with the significance of his statements.
Prophylactic purpose of safeguarding the testator.
Channeling Function

Standardization of form simplifies administration.
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(p. 224)
UTC §603: Settlor’s powers;
Powers of withdrawal, p.403
(a) While a trust is revocable [and the settlor
has capacity to revoke the trust], rights of the
beneficiaries are subject to the control of, and
the duties of the trustee are owed exclusively to,
the settlor.
(b) During the period the power may be
exercised, the holder of a power of withdrawal
has the rights of a settlor of a revocable trust
under this section to the extent of the property
subject to the power.
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