Nonprobate Succession
Nonprobate transfers have become increasingly common to avoid probate. Probably the most common nonprobate transfer is the revocable trust. That is, the trustor retains the right to revoke the trust during the trustor’s life.
Wills Act and Present Transfer
The question comes down to, what is the requirements to establish a revocable trust? Does it need to comply with the Will’s Act? Ultimately, the answer is no. However, the next issue then is that a revocable trust often looks like a testamentory will or trust. Essentially, the big difference between a revocable trust and a testamentary document is when the transfer occured. A revocable trust is created during the life of the testator while a testamentary document is created upon death.
Abandoning Present Transfer Doctrine
Fulp v. Gilliland
998 N.E.2d 204 (Ind. 2013).
Facts
Ruth and Harold Sr were married, had three kids and farmed land. When Harold Sr died, Harold Jr. took over and continued to farm. Ruth put the farm in a trust, naming herself as the trustee and primary beneficiary and her three kids as the remainder beneficiaries.
Later, Ruth was put in a nursing home and decided to sell the farm to pay for her expenses. Harold Jr. purchased the farm (without any undue influence) at a significantly discounted rate. That ultimately means the trust remainder was significantly reduced. Nancy, another child of Ruth and Harold Sr., protested.
This leads the court to question, who does the trustee of a revocable trust owe a fiduciary duty to: only the trustor, the remainder beneficiaries, or both?
Analysis
The trustee has a fiduciary duty only to the trustor during the trustor’s life. At that point, the trustee then has a duty to the remainder beneficiaries. In the case where the trustor and trustee are the same person, then the trustee does not owe a duty to the remainder beneficiaries during that person’s life.
The reason for the rule is because sometimes the interests of the beneficiaries and the trustor would conflict. In those situations, the trustor’s intention would trump. For example, if a trustor decided to revoke the trust, that would be against the interest of the beneficiaries; however, the trustor retains the power to do so.
Here, Ruth was trustor, trustee, and primary beneficiary. It was her intent to create a revocable trust and name herself as the trustee and primary beneficiary. The farm was to be used for whatever purpose she desired. So, she was free to sell the farm and keep the sale in the family at a discounted rate. There is no duty to the residuary beneficiaries because that would go against her interest in creating a revocable trust. Even though the trust creates another duty to the residuary beneficiaries, that duty does not arise until after the death of the testator (administration can handle the transfer well).
Additional Notes
The key takeaway from this case is that a revocable trust is a completely different instrument. This is not a will, and it is not a trust (that is, there is no bifurcation of ownership). Instead, this instrument becomes a trust upon the death of the testator. Once the testator passes, then the revocable trust becomes an irrevocable trust.
Revoking or Amending the Trust
Patterson v. Patterson
266 P.3d 828 (Utah 2011).
Facts
A few months before her death, Darlene Patterson removed her son Ron as a beneficiary of her trust because she had provided enough for his care throughout his life. After her death, Ron challenged the amendment, saying it was void because the amendment had not followed the amendment process listed in the trust (a removal of a beneficiary would revoke the trust).
Analysis
The previous rule is that a trustee had the burden of proof to say an amendment was valid. When the beneficiaries had a vested interest in the trust, any amendment required the revocation of the will and creation of a new one. Here, there was no revocation, but only an amendment. This rul was statutorily overruled. Now, a trust can be expressly amend or revoke as long as it is substantially provided within the terms of the trust. Here, the only requirement was a written instrument where the trustor’s intent is delivered to the trustee. That was not done in this situtation. However, the method of revocation was not exclusive and there was another method evidencing the trustor’s intent. So, the written instrument of amendment is sufficient to make the amendment.
Subsidiary Law of Wills
Should a will substitute be required to protect creditors and spouses just like a will? Yes, but based only on public policy rather than statute.
State Street Bank and Trust Co. v. Reiser
389 N.E.2d 768 (Mass. App. 1979).
Facts
Dunnebier maintained primary ownership of five closely held corporations. The stock of these corporations were put in an inter vivos trust and then executed a will naming the trust as the residuary beneficiary.
A few months later, Dunnebier applied for a loan. Upon reviewing Dunnebier’s history and assets, the bank decided to provide an unsecured loan. Unfortunately, Dunnebier died approximately four months later in an accident.
The question is whether the bank could access the assets in the trust to recover the debt.
Analysis
During Dunnebier’s life, the bank would have had access to the trust. This ought to remain true after the debtor’s death, stating public policy reasons for paying debts. The revocable trust is being used as a will substitute. So, the rights of others ought to be protected the same as a will.
Additional Notes
Although there are some rights (creditors can make a claim on the trust), others are lacking. For instance, in a creditor situation, trustees are not required to notify creditors of the death of the debtor while an executor of a will would be required to do so.
Clymer v. Mayo
473 N.E.2d 1084 (Mass. 1985).
Facts
Clara Mayo named her husband James as the beneficiary of her life insurance policy and retirement plans. James was also named the life beneficiary of a revocable trust. Later, the trustees of the trust were named the beneficiaries of the life insurance policy and retirement plans. The whole purpose of this structure was to unify the estate planning in one instrument, the trust.
Eventually, Clara and James divorced. Although James was removed as a beneficiary for the life insurance policy, he remained a beneficiary of the trust. When Clara died a couple years later, the litigation ensued.
The question is whether James’s interest in the trust would have been revoked by nature of the divorce.
Analysis
The entire purpose of the trust was an estate planning device. Nothing was to go into effect (including the funding of the trust) until the death of Clara. In other words, the revocable trust was designed to be a will substitute. As a will substitute, it makes sense to follow the subsidary law of wills. Here, that means a testator would not expect a divorcee to take under a will. Likewise, a divorcee should not expect to take under a trust where the trust was designed to be a will substitute.
Revocable Trusts Today
Most people today put all their assets into a revocable trust to unify the estate planning. There are typically three aspects to this
- A pour-over will
- This is simply where a will names the trust as the residual beneficiary.
- Lifetime transfers
- A main purpose of having a lifetime transfer is to have more flexibility during the life of the trustor. For instance, the trustor can have the money managed by a third-party trustee in the event of incapacity.
- Nonprobate transfers
- Another main purpose is to avoid probate upon the death of the trustor; this is more private and difficult to contest. The only issue here is that thre may be some uncertainty about subsidiary law of wills.
