Modifying and Terminating a Trust

Modification of trusts

1. modification by the settlor
2. modification by the court
   

The settlor can modify the trust if the settlor expressly reserved the power to modify the trust. The settlor can also modify the trust if the settlor has the power to revoke the trust.

Modification by the court for charitable trusts can be accomplished under the court's cy pres power (assuming general charitable intent.)

There can also be modification of private trusts under the doctrine of changed circumstances (deviation). The court can change the administrative or management provision of the trust. With deviation, the court is NOT changing the beneficiaries. The court may allow for a certain high-return type of investment activity that was not previously allowed because of changed circumstances such as a change in regulatory condition or the economy.

There are 2 requirements necessary for the court to apply the doctrine of changed circumstances. (1) unforeseen circumstances and (2) necessity (deviation is needed to preserve the trust).

Termination of trusts
The settlor has the power to revoke, under the majority rule, when the settlor expressly reserved the power to revoke to revoke in the trust instrument. Under the minority rule, the settlor has the power to revoke, unless the trust is made irrevocable.

There are 3 ways an irrevocable trust can terminate prematurely. The first way is if the settlors and ALL the beneficiary agree to terminate. "ALL" beneficiaries means that you must account for contingent remaindermen. Guardian ad litem (a guardian appointed to represent those parties to a suit who are incapacitated by infancy or otherwise) must be appointed to represent them.

The second way is if ALL the beneficiaries agree to terminate AND all material purposes have been accomplished. Equity will not see a trust continue to carry out a minor or insignificant purpose. You don't need a $100 million trust to accomplish a $100 purpose. With regard to spend thrift trusts, discretionary trusts, and support trusts, there is always a remaining purpose left, and thus you can never terminate these (unless the settlor is alive). Mandatory trusts are the only ones you can terminate. In California, you can terminate a trust if it has an uneconomically low principal because the trustee fees will eat up most of the principal.

The third way an irrevocable trust can terminate is through operation of law (passive trust and the Statute of Uses). The Statute of Uses comes into play when you have a private express trust with a corpus of real property, and the trust is "passive." The trustee isn't doing anything. The beneficiaries get legal title by operation of law, and thus the trust terminates. Not all jdxs recognize the Statute of Uses.

Charitable Trusts and Cy Pres

Under the Statute of Elizabeth, a charitable trust is a trust for eduction, the alleviation of poverty, alleviation of sickness, to help orphans. Under the restatement, it's any trust which confers a substantial benefit upon society. Examples of charitable trusts:

1. helping the poor;
   
2. advancing eduction;
   
3. helping the sick; or
   
4. promoting religion.
   

Creation of a charitable trust
A charitable trust is created in the same way that a private express trust is created. You need a manifestation of trust intent which can be done (1) at the testator's death by will or (2) during the settlor's lifetime by declaration of trust or by deed (3) of a presently existing interest in property that can be transferred (4) for a legal charitable purpose.

Beneficiaries of a charitable trust
In a charitable trust, there are no ascertainable beneficiaries, as in a private express trust because the beneficiary of a charitable trust is society at large. While an individual may receive an incidental benefit, the focus is on the society at large.

Where the beneficiary is of a small group of people, is this a charitable trust or a private express trust? For example, assume the settlor creates a trust to alleviate poverty among his poor relatives. Is this a charitable trust or is this a private express trust? Courts are split. One view is that this is a private express trust because only a few people are getting a benefit. Another view is that this is a charitable trust because whenever poverty is elimiated, society benefits.

Why care if the trust is a private express trust or a charitable trust? Because of the Rule Against Perpetuities (RAP) and Cy Pres.

Rule Against Perpetuities
The common law rule against perpetuities still applies in many jurisdictions but the rule does not apply to charitable trusts. Thus, a trust to alleviate poverty among the settlor's poor relatives, assuming this is a private express trust, will violate the RAP because it can vest more than 21 years after a life in being (it could vest 1000 years from now). A charitable trust, on the other hand, is not affected by the RAP. Thus, a charitable trust, such as a university chair, can endure forever.

Cy Pres
Assume settlor creates a charitable trust to build and maintain a free hospital for the poor. This is a good charitable trust. But let us assume that there is not enough money in the trust to do this. What happens if the charitable trust becomes impossible to carry on? There are 2 solutions. The first solution is a "resulting trust" and the corpus is returned to the settlor if alive and if not, to the settlor's estate or heirs. The second solution is cy pres.

Under the doctrine of Cy Pres ("as nearly as possible"), if the court finds that the settlor had a general charitable intent (to help the poor who are sick) and only the mechanism for effectuating that intent is not possible or practical (a free hospital), the court can modify the mechanism, cy pres, as nearly as possible, to effectuate settlor's general intent. The court may change the mechanism from a free hospital to a free out-patient clinic, if there is enough to build and fund a free out-patient clinic.

If the settlor manifests a general charitable intent but the mechanism for effectuating that intent is not possible, the court can modify the cy pres, as nearly as possible, to effectuate the settlor's general charitable intent.

How do we know whether the settlor's intent was general (so that cy pres can be used) or specific (which results in a resulting trust back to the settlor)? Introduce intrinsic and extrinsic evidence to ascertain the settlor's intent.

The following is an example where cy pres cannot be used. The settlor creates a charitable trust for Syracuse University Medical School. There is evidence that the settlor graduated from Syracuse University, taught there, was a dean there, and the settlor gave much money to the Syracuse University Medical School during his life and seldom to any other charity. The settlor has a specific charitable intent. The consequence is that we cannot use Cy Pres and if the trust becomes impossible, the principal will be placed in a resulting trust back to the settlor.

Simulanteous Death Issues

Survival requirement
To inherit under a will or trust, you must live longer than the decedent. Dead people can't take by will or by trust or by intestacy. If it can't be determined by clear and convincing evidence who survived whom, then it's presumed that one person didn't survive the other.

Ex: T and devisee die in a plane crash. We can't tell who survived who. Therefore the gift to the devisee has predeceased the T and the gift will either lapse or will be distributed under the anti-lapse statute.

Ex: A and B are joint tenants who died in a plane crash. You can't tell who survived whom. Split the joint tenancy. 1/2 to each. Same result if they were spouses or domestic partners with wills and community/quasi-community property.

Ex: if you have a life insurance policy and the insured and the beneficiary both die simultaneously, the beneficiary is deemed not to have survived. See if there is an alternative beneficiary. If not, the benefits are paid to the insured's estate: to the residuary devisee in the will if any, but if none, to the insured heirs. Note: if the policy premiums are paid for w/community property and the insured and beneficiary are spouses then half goes to the husband's estate and half goes to the wife's estate.

In California, under the rules of intestacy, the recipient must show clear and convincing evidence that s/he survived by at least 5 days (120 hrs). If she cannot then she is treated as having pre-deceased the decedent (and she gets nothing).

For purposes of wills, however, the recipient must show clear and convincing evidence that that person survived by just 1 second. We must know what is the exact time of death? Common law determined the time of death by irrevocable succation of circulatory and respiratory function (heart beating and breathing). The modern approach is the brain dead standard. This is a medical determination. Experts will determine when a person is brain dead.

The burden of proof is on person who said they survived, the person who stands to inherit.

Disclaiming an Inheritance
Many wealthy people do this for tax purposes. The IRS lets you “reject” an inheritance so you don’t have to pay tax on it. Requirements: (i) disclaim in writing, (ii) file w/the local probate court, (iii) within a certain amt of time.

Contracts to make a will or not make a will

Generally, a testator who executes a will can later revoke his gift because wills are "ambulatory." But what if there is a contract between the testator and his beneficiary providing that the testator will not revoke is will? In this case, if the testator revokes, the testator is in breach of the contract and upon the testator's death, the beneficiary can sue the testator's estate for breach of contract.

Requirements for a contract not to revoke (or to make a will)
There are 5 alternative ways in California. The first way to enforce this is the will states the material provisions of the contract. For example, the testator's will says "in consideration of the $5000 given to me, I have promised to devise Blackacre to Abel, and I hereby do devise Blackacre to Abel."

The second way if there is express reference in the will or other instrument (i.e. a trust) to a contract. The terms of the contract can be established by extrinsic evidence or oral testimony.

The third way if there is a writing signed by the decedent evidencing a contract.

The fourth way if if there is clear and convincing evidence of an agreement between the decedent and promisee that is enforceable in equity. This is estoppel.

Finally, the fifth way is if there is clear and convincing evidence of an agreement between the decedent and a third person for the benefit of the claimant that is enforceable in equity. This is estoppel as well.

When does the cause of action accrue?
The general rule is the COA arises when the decedent dies. No COA arises at breach because a moment before the decedent dies, she or he can execute a new will in compliance with the contract.

There is an exception if the decedent is engaging in conduct which would be a fraud on the promise. If the testator promised Abel to devise Blackacre to Amy, and the testator prepares to sell Blackacre with the intent to dissipate fund, because Amy will be irreparably harmed if the sale goes through, Amy can try to secure an injunction to prevent the sale during the testator's life.

Joint and mutual wills
A joint will is the will of 2 or more persons on one document. The provisions do not have to be reciprocal. When the first person dies, the will is probated. When the second person dies, the will is probated against.

A mutual will is the separate wills of 2 or more persons which are reciprocal. For example, a husband and wife may execute their own separate wills but the husband and wife both leave everything to each other.

Joint and mutual wills are reciprocal wills on one document.

The execution of a joint or mutual will does not create a presumption of a contract to not revoke or make a will but it can be evidence of it in conjunction with other factors.

Remedies
Damages, specific performance, constructive trust.

Trustee's Duties

1. Trustees have certain powers.
2. Trustees owe a fiduciary duty to the beneficiaries of a trust.
3. Trustees owe certain duties to third persons.

1. Powers of a trustee
A trustee has all enumerated power. A trustee also has implied power (helpful to carry out the trust purpose). A trustee has the implicit power to sell trust property, to incur expenses, the power to lease, and to borrow (modern power).

Another view is that a trustee doesn’t have power other than those granted by the trust document. Selling a trust asset is never an implied power; it must be given expressly. Even with an overproductive asset that you need to sell to avoid being in breach of fiduciary duty, you still have to go to court and get permission to sell.

The modern way to give power to trustee in California is through a statutory list that is automatically read into the trust document. These powers are automatically granted unless the trust doc excludes them or the trust doc says something to the contrary.

2. Trustee Duties Owed to the Beneficiaries

Duty of Loyalty
There are 2 prongs to this duty. First, the trustee can’t engage in self-dealing. Second, the trustee can’t act under a conflict of interest.

No self-dealing allowed
The trustee can't engage in self dealing. What this means is that the trustee cannot buy/sell to/from the trust. He cannot profit personally from trust or engage in transactions with the trust. It is a per-se breach if the trustee engages in self dealing. It does not matter if the dealing is fair. There is no further inquiry.

However, there are 2 narrow exceptions. The first exception is if the settlor authorized the self-dealing transaction. If the instrument says the trustee can sell the property to himself, then this gives rise to further inquiry: (1) was it done in good faith AND (2) was it fair and reasonable?

The second exception is: if there was full disclosure to the beneficiaries and the beneficiaries consent, this will give rise to further inquiry: (1) was the transaction done in good faith AND (2) was it fair and reasonable?

If there is a breach of the duty of loyalty, the remedy is to undo the transaction. If you bought something, you must give it back to the trust and get the money you paid back OR if you sold something, you must take the item back from the trust and purchase price is refunded. If you can’t undo the transaction because you sold the trust asset to a third party, then you must disgorge profits and give the profits to the beneficiaries.

Measure of damage is "appreciation damages." This is the value of assets at the time of judgment minus what the trustee sold the assets for.

No conflict of interest allowed A conflict of interest is not a per se breach like a self-dealing transaction is. If there is a conflict of interest, you inquire further: (1) was the trustee was acting in good faith AND (2) was it fair and reasonable to the beneficiaries?

The remedy, if there was a conflict of interest, is recovery of trust assets that were not sold to bona fide purchasers.

If it was sold to a third party, assets are unrecoverable, but you can get money damages for unrecoverable assets. How much beneficiaries gets depends on whether the trustee has the “power of sale.” If trustee did NOT have "power of sale" then the recovery is equal to the value of assets at the time of judgment minus what the trustee sold the assets for. These are "appreciated damages." But if trustee did have "power of sale," then the recovery is only the market price at the time of sale minus what the trustee sold the assets for.

Duty of care
In addition to the duty of loyalty, trustees owe the beneficiaries a duty of due care. The trustee must act as a reasonably prudent person as if he is dealing with his own affairs. Remedies: damages, constructive trust, tracing, ratify if good for the beneficiary, removing the trustee.

Reasonable care and skill in managing the investment
3 standards for investing:

1. Some states have an exhaustive "state lists." Typically, they allow only for (i) federal government bonds, (ii) federally insured certificates of deposits, (iii) first deeds of trust in real estate, and (iv) sometimes stock of publicly traded corporation.
2. Common law "prudent person" standard: Under common law, the trustee must act as an ordinary prudent person who is investing his own property. There is even a higher standard if the trustee is a professional investor. Good investments under common law: (i) federal government bonds, (ii) first deeds of trust in real estate, (iii) federally insured certificates of deposit, (iv) blue chip stock, and (v) sometimes mutual funds, but (v) never a new business or second deeds of trust. Each individual investment is scrutinized.
3. Uniform "prudent investor" standard: the trustee must act as a prudent investor. Under a "portfolio theory" the trustee must look at each investment in light of the whole portfolio and in light of the purpose of the trust/investment strategy. She must look at the total return, rather than seeing whether each individual investment was prudent. Sometimes a trust may invest certain assets in types that traditionally would have been overly risky. If something turns out to be not prudent, those losses cannot be offset with gains made in other parts of the portfolio. Any particular investment is not invalid per se.
   

Under all standards, the trustee has a duty to diversity so if there is a loss, the whole portfolio is not destroyed. Under (1) and (2), no speculating is allowed. If the trustee breaches the duty to invest, the trustee must make good on the loss. If there is 2 investments, one loss and one gain, there is no netting allowed.

Duty not to delegate
Traditionally, the trustee alone must select investments of the trust and decide how to distribute.
The modern approach will allow delegation of picking investments, but deciding how to distribute must still be done by the trustee. The trustee must pick investors carefully and must supervise those she hires to help pick investments. The trustee may delegate minor ministerial tasks, but not tasks that require judgment. Although she can ask investors for advice, she must maintain discretion and make ultimate decisions.

Duty of impartiality
The trustee can’t favor one class of beneficiaries over another. If it’s producing too much income, but principal is stagnant, then it’s over-productive and it’s favoring income beneficiaries over the remainder beneficiaries

What to do with an over productive asset? If the asset is producing too much income and its value is going down (unfair to remainder beneficiaries). How to remedy? Put some money into improving, take high income and allocate to principal (take income out and earmark it as principal), or sell the asset and reinvest in property that is not over productive.

Remedy if an over-productive asset should have been sold earlier? Difference in value plus interest to account for time value of money. For example, a building was worth 300K when it should have been sold (in 2005). However, today (2009) its worth 200K. How much money should you give the remainder beneficiaries? There is a difference of 100K. Add interest: if interest rate is 5% that’s 5% times 32 years = 160K. You get 100K + 160K = 260K.

and divide it by 1+What do to with underproductive assets? You must sell it and get something else. How much does the remainder beneficiary get? If you sell the asset for 200K and the interest rate is 5% and you held it for 20 years, how to allocate between income and principal? Take the net proceeds and divide it by (1+ period of years * interest rate).

Sometimes you have to distinguish between income and principal:
(a) interest payment, dividends income, and dividends payable as stock in another company → income
(b) dividends of corp. stock itself (i.e. stock split), growth in the principal such as capital gain → principal (doesn’t change underlying ownership)
(c) assets that depreciate over time: royalties/mineral rights/copyrights must be allocated between income and remainder beneficiaries

Duty to keep control of the trust property / duty to collect the trust property
Trustee has to take possession of all the assets that should be in the trust.

Duty to preserve and protect trust assets
This includes getting insurance for any real estate.

Duty to earmark
the Trustee must earmark assets as “trust assets” (to identify which are trust assets and which are trustee’s assets). If a trustee owns a share of stock and its properly earmarked, it will be registered as "John Smith as trustee for ABC Trust."

Remedy? Under common law, any loss that was suffered by assets that were not properly earmarked become the liability of the trustee (strict liability). The modern rule requires causation. A trustee is only liable for the losses that result from the failure to earmark (not any loss). This would not include any ordinary market losses.

Duty to segregate
The trustee can't co-mingle his personal funds with trust funds. And the trustee can't co-mingle funds of trust A with trust B. If he breaches, can be removed and sued for loss.

Duty to furnish information about the trust to the beneficiary
The beneficiary has right to see entire trust instrument and look at the books. Otherwise, it's impossible to know if trustees are acting properly.

Duty to keep and render accounting
A trustee has a duty to make and provide and accounting at regular and reasonable intervals (at least 1x per yr). A trustee must give the beneficiary a statement of income and expenses of the trust. If the trustee fails to do so, beneficiary can file an action for accounting.

Generally, modern living trusts don’t involve court supervision. Accounting is done directly to beneficiaries. If they don’t get an accounting, they can go to court and make the trustee account. But if it involves a testamentary trust, there is more supervision. The accounting is made with the court. When the court receives the accounting and notice is given to beneficiaries (to contest) and no beneficiaries contest, then the judge will “allow” the accounting. The “allowance” acts as a SOL: any action taken prior to that accounting period cannot be re-opened unless fraud/concealment.

Duty to enforce /defend claims on behalf of the trust
This is a "reasonableness" standard.

Other duties

• Duty to make trust productive
• Duty to pay income to beneficiary
• Duty to exercise reasonable care in preventing breach by co-trustee
• Duty to administer the trust
• Duty to respect bank deposits

Revoking accounting of a trust
Paying money to someone who is no longer a beneficiary is a breach of fiduciary duty by the trustee. Courts supervise testamentary trusts and the court will approve and close the accounting of testamentary trusts. If no one objects to accounting, the court generally allows the accounting. When the trustee gets accounting approved by the court, this operates like a SOL, and gives the trustee assurance that it won’t later be challenged. However, you may be able to challenge previous accounting when there is fraud/concealment.

3. Liability of trustee to a third party for breach of contract or torts committed by a trustee or someone hired by trustee

Contracts
Under common law, a trustee is personally liable for any torts or breach of contract. However, if the trustee wasn’t personally at fault in tort or entered into the contract in his representative capacity (not personally) then trustee can get indemnification from the trust if the trustee acted within his power. Under the modern approach, if the third person knows the trustee is entering into the contract in his representative capacity, then the trustee can only be sued in representative capacity. Judgment is entered against the trust, not the trustee personally. But if the trustee is at fault but not in his fiduciary capacity you can still go after the trustee personally.

Torts
Under common law, the trustee is sued in his personal capacity. If the trustee was without personal fault, she can get indemnification from the trust assets. Thus if the agent committed the negligent act, or if this is a case of strict liability, then the trustee can obtain indemnification.

Under the modern approach, the trustee is sued in his individual capacity and is liable personally for torts only if the trustee is personally at fault (acted negligently, or committed a tort). Thus if an agent committed the negligent act, or if this is a case of strict liability, the trustee is sued in his representative capacity.

Creating a Trust

A revocable living trust, a popular will substitute, is a great way to avoid probate. A revocable living trust is a trust that was created and took effect during the settlor's life. However, sometimes a settlor wants to create a trust and have it take effect after his or her death. These are testamentary trusts, and will be subject to probate.

Creation of a private trust
A trust is a fiduciary relationship with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

There are 4 requirements to create a private trust: (1) intent to create a trust, (2) "res" (or trust property), and (3) ascertainable beneficiaries. (4) legal purpose. Trustee is required but the trust wont fail for lack of a trustee.

Intent to create a trust
There must be a present manifestation of intent made by the settlor. You can't intend for the trust to arise later. No words are necessary, but if settlor (creator) says or writes the words “trust” or “trustee,” then an intent to create a trust is presumed. Intent to create a trust exists anytime one party transfers property to another party with (a) the intent to vest beneficial interest in a third party (equitable ownership to beneficiary) and (b) the intent to transfer legal interest to the trustee (intent to split legal ownership from beneficial interest).

Precatory expressions do NOT give rise to an intent to create a trust. When the decedent expresses merely a hope, wish or suggestion that the property be used for a certain purpose, courts generally hold that no trust was intended, only that the transferor wished his desire to be known so the transferee can comply if willing. The language isn’t strong enough to create a trust. But precatory words plus parole evidence (prior action) may give rise to an intent to create a trust.

You can have an oral trust for private property. Must be in writing if it involves real property.

"Res" (trust property)
The second element requires (1) an act of funding and (2) a property interest that will qualify as adequate property interest for purposes of funding the trust. The one exception to the funding requirement is pour over trusts.

Things that will fund a trust: fee simple absolute, future interest (contingency remainders), life insurance policy, bonds, or stocks.

Things that won't fund a trust: future profits of a business, a debt, a mere expectancy (what the settlor expects to inherit as a gift).

Ascertainable beneficiaries
Beneficiaries must be ascertainable. You must be able to objectively identify the beneficiaries by name. If the name is not provided the trust, it must contain a formula or a description of the beneficiary that permits the court to determine by objective means who they are. The term “friends” is not objectively ascertainable. The term “relatives” is ascertainable because the court can use the law of intestate succession to identify. "Pets" are not ascertainable beneficiaries (but it might be upheld as an honorary trust).

Corporations can be the beneficiary of a private express trust. Class gifts are valid, but a class can be too big. California is too big.

A child conceived when the interest was created and born later is an ascertainable person but watch for RAP. For example: O converys to the bank in trust, "to A but if liquor is ever sold, then to B." B's interest is void against RAP.

The trust must be created for a legal purpose
What if the trust is for an illegal purpose or is against public policy?

Illegality at creation
Court will try to exise the bad from the good. For example, if the settlor created a trust for Abe on the condition that Abe divorse his spouse, then such trust violates public policy and the court will exise the condition, and Abe takes free and clear of the condition. If it's not possible to exise, then the court will invalidate the trust at its inception. For example, if the settlor created the trust to defraud settlor's creditors, then the court can invalidate the whole trust so the creditors can attach assets. Another option is to allow the trustee to keep the property for himself or herself as punishment against the settlor who has unclean hands.

Illegality after creation
If a trust becomes illegal after creation, a "resulting trust" is decreed in favor of the settlor or the settlor's estate/heirs.

Categorizing trusts according to when it was created: during lifetime or after death?
Express living trust (revocable living trust)
Living trusts are dreated during life of the settlor. There are 2 ways to create a living trust: (1) but declaration of trust or (2) by deed.

The most popular way is through a declaration of trust. The settlor declares him or herself to be trustee of the specific property orally or in writing. If it involves real property, it must be in writing.

The second way to create a living trust is through a deed or transfer of trust. These must always be in writing. You write that you will make a third person a trustee of your property. Then, you transfer by deed your property into a trust and you declare X to be the trustee. There is an extra formality: the deed must be delivered (by delivering the trust property to the trustee or by delivering the deed itself). Moreover, a promise to deliver in the future will not give rise to a trust.

The key difference is that with declaration of trust, you make yourself the trustee, but with a deed of trust, a third person is trustee.

Testamentary trust
These are created by a will and do not avoid probate. The settlor writes in his or her will, something like: “I give $10,000 in trust to Y when I die for the benefit of A during life and upon A’s death to B.” It is the language in the will that creates the trust. It could be in the will or codicil.

The testamentary trust is to be distinguished from a pour over trust. If you have a will that pours your assets into your trust, this is NOT a testamentary trust. It’s a living trust because the actual trust is established when you are alive and all that the will does is pour over assets into the living trust.

Constructive trust
This is not a real trust. This is a type of restitution remedy to prevent unjust enrichement. Wrongdoer has one obligation: transfer the property to the intended beneficiary as determined by the court. A constructive trust is a means to disgorge a wrongdoer of ill-gotten gains. There are 4 situations a constructive trust can arise:

1. When a trustee of a private trust or charitable trust makes a profit because of self-dealing. Trustee will have to turn these profits over to the beneficiary.
   
2. Law of wills: there is fraud in the inducement or undue influence. Court will deny probate and makea the wrongdoer give the property to the intended beneficiary.
   
3. Secret trust in the law of wills: will facially gives a gift to A but the gift is really given on the basis of a promise by A to use the money for the benefit of B. After the court allows parole evidence to show the true beneficiary, B, the court will impose a constructive trust and make A transfer the property to B.
   
4. Oral real estate trusts. For example, a mom transfer property to son because she learns she has cancer. S on orally promised to give property back if and when the mom recovers, but son ends up keeping the property even though the mom recovered successfully. Most judges will create a constructive trust ordering the son to put the property in the constructive trust for the benefit of the mom. This requires (1) a confidential relationship, (2) a promise, (3) a transfer in reliance on the promise, (4) unjust enrichment, and (5) the transferor must have clean hands. The transaction can’t have been made for an improper purposes (i.e fraudulent conveyance to avoid creditors).

Things that look like trusts but aren’t really trusts
Honorary trust
These are set up for a particular purpose or goal. An honorary trust has no ascertainable beneficiaries and confers no substantial benefit to society. For example, a trust to further fox hunting, or leaving money behind for a pet Rover so he can be taken care of after the pet owner’s death. You can’t name a dog as a beneficiary, but if the purpose is honorable and not illegal the court may, at its discretion, qualify the arrangement as an honorary trust. If the trustee refuses to serve, it results in a "resulting trust." There are RAP problems with honorary trusts because there is no measuring life. Some courts allow the trust for 21 years and then a resulting trust follows

Totton Trust (Totton Account)
A Totton Trust is a bank account trust where the named beneficiary takes whatever is left in the account at the death of the owner of the account. This is not a true trust because the depositor / trustee owns the account during the depositor's life and owes the named beneficiary no fiduciary duties. It's just a will substitute. An example: "Mary Smith as trustee for John Jones." Mary is the settlor/depositor and she has full contorl during her life. She does not owe John any fiduciary duty. John takes whatever is left upon Mary's death.

The issue is whether the settlor in a Totton account did something during her life to elevate this lowly Totton Account into a full-blown private express trust with the full range of fiduciary duties. Courts will look to the action of the depositor / trustee for a manifestation of trust intent. No magic words are needed to create a private express trust, but if Mary told John "I have created this trust for you" then Mary has manifested an intent to create a trust and elevated this Totton account into a private express trust with a full range of fiduciary duties.

Resulting trust
This is a type of restitution remedy in case a trust fails. The assets go back to the settlor or the settlor's estate. There are 7 situations where a resulting trust is created.

1. The trust ends by its own terms and there is no provision indicating what happens to the corpus thereafter. Ex: settlor creates a trust to enable son to get her law school education. What happens when the son gets get law school education? Corpus goes back to the settlor after the son got his law school education.
   
2. The trust fails because there is no beneficiary. The trust says “to A for life then to B” When A died, B is dead. Thus, trust failed, and as a result, the judge will create a resulting trust.
3. When a chairtable trust ends because of impossibility and Cy Pres can't be used.
4. When a private express trust fails because after creation, the trust becomes illegal.
   
5. When there is excess corpus in a private express trust.
   
6. When we have a purchase money resulting trust (PMRT) (see below).
7. Semi-secret trusts (see below).
   

Purchase money resulting trust (PMRT)
This is a type of remedy giving property back to the person who paid for property when a trust fails (if you purchase property and take it in the name of someone who isn’t the natural object of your bounty). This raises a presumption that it should go back to the settlor. For example, if you buy land and you put title in the bank’s name, the bank isn’t the natural object of your bounty. The presumption arises that this is a PMRT and unless rebutted it reverts to settlor. The reason someone may put title in bank’s name is because you want the bank to be trustee. The problem is that if the trust fails for some reason, we need a way to get trust back to the original owner. Mechanism for this is a PMRT.

Secret and Semi-secret trusts
Remember that testamentary trusts are created in a will and must be in writing to comply with the Wills Act formalities. Where testamentary trusts fail for lack of a writing, the issue is whether relief should be a constructive trust or a resulting trust. This depends on whether the failed testamentary trust is a "secret trust" or a "semi-secret trust."

A semi-secret trust is invalid and results in a resulting trust. The assets revert back to the settlor. There is something in the express language of the will hints that this devisee was not intended too take the property for his own benefit (evidence of an oral agreement). No extrinsic evidence is necessary to realize that the devisee was not intended to take beneficial interest so no extrinsic evidence is allowed. For example, a provision in a will says “to RW with oral instruction for benefit of X.” It’s semi-secret because we know that the testator doesn’t intend this to be an outright gift to RW, but we don’t know what the conditions are. How can you fix semi-secret trusts and save the trust? Through integration by reference.

With a secret trust nothing on the face of the will indicates that the testator intended the devisee to take the property as trustee. If there is extrinsic evidence that the devisee was supposed to take as trustee not devisee, the court uses extrinsic evidence to impose a constructive trust on the devisee, ordering devisee to transfer property to intended beneficiaries. The probate court will order assets go to the devisee. If the devisee misuses the funds, intended beneficiary can go to court of equity and request a constructive trust.

Remember that in a "resulting trust," the gift fails and proceeds fall back to the residue and it goes to residuary legatee. In a constructive trust, the proceeds go to the intended beneficiaries.

A minority approach imposes a constructive trust in favor of intended beneficiaries for both secret and semi-secret trusts.

For example, assume a couple has 2 children. The younger son is a drug-user and has been in a lot of trouble. The older son is living a productive life. Would it be fair to leave the entire estate to the older son with a verbal agreement that he make decisions in the best interest of the younger brother? Parents could leave the estate to the older son on the condition that he give $1,000 per month to the younger son. This is an equitable charge.

The parents could put in the will “we leave our estate our older son pursuant to the agreement we made with him about our younger son.” This is a "semi-secret trust" and it would be invalid. The consequence of a semi-secret trust is a "resulting trust" where the assets to back to the parents. The estate would fall into the residue.

So how can this be saved? Integration by reference. If you can do this, then you are ok and the written agreement becomes part of the text of the will.

Equitable charge
An equitable charge is a clause in the will. It isn’t a trust, but it simply creates a debt. An equitable charge gives property to someone subject to a particular duty to someone else. A recipient has a duty to someone else (usually to give them a sum of money). If the person doesn’t perform the duty to that person, then the other person can sue them for that debt.

For example “I give my farm to my daughter and my daughter is to pay my son $10,000 per year.” This raises the question of who owns the farm? One possibility is that the daughter owns the farm outright subject to an obligation that she pay $10,000 per year to her brother. This is an equitable charge. Another possibility is that she is trustee of the farm holding her for her brother as the beneficiary.

There is real a difference between the two possibilities. If the daughter is trustee only, she has fiduciary duties to her broother and he can sue if she didn’t fulfill her duty as trustee. But if this is an equitable charge, then he can only sue to enforce the debt.

Categorizing trusts according to how it distributes money:
Mandatory trust
The trustee must pay all the income (but not principal). The trustee has no discretion as to how much of the income to pay or who to pay income to. The beneficiary has a right to receive it and can sue if its not being paid. Because the beneficiary is entitled to receive income, creditors can get access to beneficiary’s mandatory payments. If there is a mandatory trust with more than 1 person as income beneficiaries, then assume each get an even share unless the settlor specified proportions.

The most common arrangement is mandatory as to income and discretionary as to principal.

Can the beneficiary assign or sell their mandatory right to income to a third party for a lump payment? Yes. This was a problem for wealthy children so lawyers came up with spendthrift trusts, also called a disabling restraint (see below)

Unitrust
The income depends on how the market is doing. The unitrust is a variation of a mandatory trust. The trustee must pay a percentage of the corpus. The income becomes part of the corpus and in intervals, a percentage of the principal is paid to the beneficiary. This is still mandatory. It's the trustee's job to measure the percentage and pay that specific percentage out.

*Discretionary trust*
In a discretionary trust, the trustee doesn’t have to pay the beneficiary income or principal. The trustee has sole and absolute discretion in determining how much to pay the beneficiary, if anything, and when to pay the beneficiary, if ever. Unless the trustee has “abused its discretion,” the income beneficiary cannot sue the trustee. Beneficiary has no right to receive income.

1. Can the beneficiary transfer his right to payment? One one hand, no because the beneficiary may not get anything. On the other hand, if there was an assignment, the assignee steps into the shoes of the beneficiary. Because the beneficiary could not force payment by the trustee, neither can the assignee.
   
2. Can creditors attach? Generally, discretionary payments are protected from creditors. However, some states allow creditors to collect up to 25% of discretionary payment if the trustee has notice of the debt and the trustee decides to pay.
   

Spray or "sprinkle" trust
This is a hybrid between a mandatory and discretionary trust. All the income must be paid to the income beneficiaries (mandatory). However, the trustee can decide how much income to give different beneficiaries (discretionary). If one child has greater need than another, then the trustee can give more to that child.

*Spend thrift trusts or provision*
A spend thrift trust is one where the beneficiary cannot transfer his right to future payments or income or principal and creditors cannot attach the beneficiaries right. To be effective, it must disable both voluntary and involuntary alienation. A provision in the trust will say that the beneficiary cannot assign or sell his or her interest and creditors cannot reach it:

"No beneficiary of this trust shall be allowed to voluntarily transefr his right to future payment, and no creditor shall be allowed to attach any beneficiary right to future payment."

3 testable issues:

1. Can the beneficiary voluntarily alienate his rights under the trust? No.
   
2. Can creditors attach the beneficiaries rights under the trust? Generally no, but there are exceptions for preferred creditors: a child or ex-spouse for child support or alimony, government (IRS), felony tort creditors (in California), or providers of necessities. Spend thrift trusts, however, are successful in protecting assets against bankruptcy creditors, ordinary tort creditors and ordinary contract creditors.
3. Can the settlor create a spendthrift trust for himself? These are called "self-settled trusts." Most states say no, but a minority of states, Alaska and Delaware, will allow you to set up self-settled asset protected trust, but generally you cannot do this to avoid an existing debt. But if you are a doctor and you want to prevent assets from malpractice that might arise in the future then perhaps you can set up a self-settled trust in Alaska or Delaware.
   

Support trust (type of discretionary trust)
The trustee is required to use only so much of the income or principal as is necessary for the beneficiary's health, support, maintenance and education. No more and no less. The trustee must figure out how much the beneficiary needs for her comfortable maintenance and support. A trust may look like a support trust, but often it's not. Almost every trust talks about support and well being, but this doesn’t make it a support trust. A support trust can only be used for support, and the beneficiary can only sue to get enough money as is needed for support.

1. Can the beneficiary voluntarily alienate or transfer her right to future payment under the support trust? No.
   
2. Can creditors attach the beneficary's right to future payment? Generally no, but preferred creditors can. Support trusts are accessible by creditors, but because the only interest the beneficiary has is one for support, the only creditors who can go after a support trust are those who provide necessities.

Creditors rights
In most states, including California, to the extent that the settlor could have revoked in his/her life, a creditor of settlor after the settlor’s death may reach the trust assets.

Example of trust language

"I the undersigned having purchased 100 shares of stock in X corp and having directed that the certificate of said stock be issued in my name as trustee for Richard Williams as beneficiary, do hereby declare that the terms and conditions upon which I shall hold said stock in trust are as follows: (1) during my life all cash dividends are to be paid to me individually, (2) upon my death the title to any stock subject hereto and the right to any subsequent payments or distributions shall be vested absolutely in the beneficiary."

This is a living trust created by a declaration of trust. This is revocable in California because it did not indicate revocability

"I give, devise, and bequeath all of the rest and residue of my estate… unto my son, Frederick Baugh and First National Bank, the survivor of them and their successors, as Trustee, in trust and confidence; nevertheless, for the following uses and purposes: My trustees shall pay from time to time the net income and so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter Ashley Baugh, or in their absolute and uncontrolled discretion, may apply the same for her maintenance, comfort and support."

This is a testamentary trust mandatory as to income and discretionary as to principal.

"I hereby order and direct my said nephew, Pasquale Guiliano, to expend at lease $5,000 and no more than $10,000 for the erection of a mausoleum which shall contain at least 6 compartments."

Honorary trust set up for a definite purpose.

"I hereby give, bequath, and devise to my niece, Susan Howell, all shares of stock in Brach Homes, Inc subject to the oral agreement made by me with Faris Sykes as follows: that Brach Homes shall pay unto Faris Sykes for the remainder of his natural life, the amt of annual salary he is currently receiving at the time of my death, and the amt of life insurance premiums upon his life which are currently being paid at the time of my death. This devise in this Article is subject to compliance with the aforesaid agreement."

Equitable charge. The oral agreement is just a red herring: the text tells us the terms of the oral agreement.

"I give to J.O. Wiek of Tacoma, Washington my work bench, tools and guns, and I authorize J.O. Wiek to dispose of the rest of my belongings in such manner as I shall have discussed w/him prior to my death OR in such manner as I may instruct him by letter. My co-executors are to rely completely on the direction of J.O. Wiek in disposing all of the remaining items."

Semi-secret trust. Resulting trust back to the settlor (trust fails).

"I give to J.O. Wiek of Tacoma, Washington my work bench, tools and guns and other personal belongings." (Mr. Weik has promised me that he will distribute the money in such manner as I have expressed to him).

Secret trust.

"No interest in the principal or income of this trust shall be anticipated, assigned, encumbered, or subject to any creditor’s claims or to legal process, prior to its actual receipt by the beneficiary."

Spendthrift clause

If my sister, Rose Williams, shall survive me, I direct that my trustees shall use as much of said income as is necessary for the support and maintenance of my said sister at Stony Lodge Sanitarium in Ossing, NY.

Support trust.

"I give, devise, and bequeath all the rest, residue and remainder of my estate, whatever the situation, to the trustees under a Trust Agreement dated November 12, 1979, which I signed with my wife, Yoko Ono, and Eli Garner as trustee, to be added to the trust property and held and distributed in accordance with the terms of that agreement and in any amendments made pursuant to its terms before my death."

Pour over provision.

"My trustee is authorized to accumulate the net income or to pay or apply so much of the net income and such portion of the principal at any time and from time to time for the health, education, support, and comfortable maintenance and welfare of (1) my daughter Lisa Marie Presley and any other lawful issue I may have, (2) my grandmother, Minnie Mae Presley, (3) my father, Vernon Presley, and (4) such other relatives of mine living at the time of my death who in the absolute discretion of my trustees are in need of emergency assistance."

Discretionary trust.

Distributing Assets Under a Will: Changes in Beneficiaries and Property

Sometimes there are changes in beneficiaries. For example, if the beneficiary named in the will died before the testator, but had surviving children, would the surviving children take in place of the beneficiary? What do you do about later-born children or spouses who are not provided for in the will?

There are also problems that arise when there are changes in property: the assets that are named in the will no longer exist. Sometimes there aren't enough assets to give what the testator originally intended to give. How to you distribute assets among all the beneficiaries?

Lapsed Gifts: Changes in the beneficiary
Gifts under a will have an implicit survival requirement. For example, if the will says “to X” but if X has died before the testator, then the gift is said to have "lapsed." The gift will go to the next in line. It will revert into the residuary OR it will fall into laws of intestacy. Various legislatures asked: did the testator really want the gift to lapse? Wouldn't the testator want the gift to go to the issue of the deceased beneficiary?

If there is no will, the gift will pass through intestacy. The recipient must show survival by clear and convincing evidence that she or he survived the testator by 120 hours. If there is a will, the will can specify how long the recipient must survive. But if the will doesn’t specify how long she person must outlive the testator, then the recipient only have to show survival for a second.

Assume the will said “give residue to A, B, and C,” and A and B are alive but C has died. Under common law, there is no residue of a residue, and C's 1/3 will fall into intestacy. The portion of the residuary estate that did not itself pass under the will (C’s 1/3) could NOT be considered part of the residuary estate at all. Howevr, the modern approach is to give A and B 1/2 of the residuary estate. The residue goes to whoever is alive. The entirety of the remainder goes to the surviving residuary devisee.

Now assume the testator gave his "ranch to A, B, and C, and residue to charity." Assume A and B are alive and C is dead. Do A and B take C’s share of the ranch, or does C’s shares fall into intestacy, or does C’s shares go to charity? The modern rule does not apply on specific bequests. C’s gift lapses and goes to the charity, unless you can apply an "anti-lapse" statute to C’s shares, in which case, C’s share will go to C’s issue, if any.

Anti-lapse statutes
California has an anti-lapse statute (ALS). Assume you have a gift “to X” with no substitute disposition. In California, if X didn’t survive the testator, X's issue(s) take the recipient’s place if three requirements are met.

First, the recipient must be kindred to the T (blood relative/adopted) OR if the recipient was kindred to the T’s spouse. Kindred refers to a genetic relationship. For example, brothers and sisters are kindred. Note that the anti-lapse statute doesn’t apply if the recipient is the testator’s spouse. It only applies if the recipient is kindred to the testator’s spouse.

Second, the recipient died before the T.

Third, the recipient has surviving issue(s).

But there are situations where you do not apply the anti-lapse statute. Do not apply the anti-lapse statute if there is (1) an alternative disposition (to A, B, C, and D, and if someone doesn’t survive, then that person’s shares go to charity) or (2) there is contrary intent (“to my living children”).

If the anti-lapse statute applies, how is the saved property distributed? In California, under CPC § 240, distribution to issue(s) occur via modern per stripes. If the residue goes to A, B, C and D; and C and D have predeceased the testator, then the gift goes to C and D’s children. If C has one child, E, and D has two children F and G, then E, F, and G take in equal 1/3 shares.

Class gifts
Another way to prevent lapses is to analyze the gift as a “class gift.” You give something to a group of identifiable people. If one of them doesn’t survive, remaining members of the class take that person’s shares (the failed share is re-divided among other members). For example, the testator gives his baseball card collection to the members of his baseball club. If one member doesn’t survive the testator, then the remaining members share in the deceased member's share.

There are 3 types of classes: (1) natural class (named A, B, and C, and they all turn out to be your cousins), (2) express class and (3) intended class.

In Re: Moss, the testator gave his shares of his newspaper business to "E.J. Fowler and Emily’s kids, equally as tenants in common." The residuary clause gave the rest to his wife. E.J. Fowler predeceased the testator. What do we do with E.J. Fowler’s shares? Does it lapse? The first thing to do is to apply the anti-lapse statue. But E.J. Fowler has no issue. Perhaps a class gift analysis can save this gift. The second step is to apply a class gift analysis. Here, the court held that the testator intended to treat "E.J. Fowler and Emily kids" as a class. The testator structured the gift so that it paid income to wife for life, and upon wife’s death, to be held in trust for the benefit of E.J. Fowler and Emily’s kids, and then the residuary to his wife. The court held that the testator intended he didn’t want his wife to take outright, and that if the gift to E.J. failed, it would fall to the residuary and go to the wife, which was against the testator's wishes. The court said that E.J. Fowler and Emily’s kids were an intended class, so EJ’s shares went to the surviving members of Emily’s children.

Therefore there are 2 ways to save from lapsing. If it conflicts, apply in order: first, apply the ALS and if that fails, second, apply class gifts.

Pretermitted children and spouses
Pretermitted child
A pretermitted child is a child born or adopted after the will is executed and not provided for in the will. If there is a pretermitted child, that child will receive a share of the decedent's state equal to what s/he would have received under intestacy. For the pretermitted child to take this statutory share, other gifts will be abated (reduced). There are 3 exceptions where the pretermitted child will not take: (1) the decedent intentionally omitted the child, (2) at the time of execution the decedent had one or more children and transferred by will or revocable inter vivos trust substantially all of his estate to the parent of the omitted child (the law assumes that the other parent will care for the children), or (3) the decedent already provided for the child by something else in lieu of the will (i.e. buying an annuity for a child).

Pretermitted spouse
A pretermitted spouse is a surviving spouse who married the decedent after the execution of the will and is not provided for. The spouse will receive a statutory share of the decedent's estate equal to what s/he would have received udner intestacy. This is: the decedent's 1/2 of the community and quasi-community property (resulting in the surviving spouse owning 100%) and a share of the separate property according to the intestacy rules (but in no event can it be more than 1/2). Again, there are 3 exceptions: (i) intentional omission, (ii) decedent already provided for the spouse through something else, (iii) omitted spouse signed a waiver. The waiver must be in writing, signed by the waiving spouse before or during marriage, there must have been full disclosure of the decedent's finances, and the spouse must have been represented by independent counsel.

Changes in property
What happens if the property isn’t in the estate anymore or has been changed? This situation arises when there isn't enough property to give what the testator planned to give.

The first step is to classify the gifts. There are 3 types of gifts: specific, general, or demonstrative.

Specific gifts
Specific gifts refer to a particular identifiable piece of property. For example, "my 1990 Honda Civic," "my vase," "my bank account at ABC bank" are specific gifts. As a general rule of thumb “my” is usually in front of a specific gift. If the gift is “a 1990 Honda Civic” then perhaps it’s not specific.

General gift
The second type of gift is a general gift. A general gift refers to a general type of benefit such as a sum of money or 100 shares of Microsoft shares (and say you owned 1,000 shares). If you only had 100 Microsoft shares and you give away 100 Microsoft shares, then it’s a specific gift.

Demonstrative gift
Demonstrative gifts are general gift taken out of a specific source. For example, a $10,000 from bank account at First Bank is a demonstrative gift. $10,000 is general, but the bank account at First bank is specific.

Extinguishing specific gifts
If there is a specific gift and it’s no longer in the estate at the time of death, then that specific gift is extinguished. California has an intent requirement (minority). Thus the testator must intend for the thing to be extinguished. General and demonstrative gifts cannot be extinguished. If there is no money left, you try to find the money from some other source. If the residue had real estate, take the real estate, sell it and give the money to devisee.

Exoneration of liens
What if you inherit something with a lien? Under common law, liens on property were exonerated (the executor would take assets and pay off any mortgages on the property so you would get the property free and clear). But under modern rules, liens pass with the property. Person who inherits is responsible for the liens unless the testator's will states that the specific gift is to be exonerated. A general direction "to pay all my just debts" will not exonerate.

Abatement (reducing gifts)
What if you don’t have enough assets to pay off things in the will? First, you pay off specific and demonstrative gifts first. If there's not enough to do that, then split the gift pro rata between specific and demonstrative. Relatives have priority over non-relatives. Second, if anything is left over, you pay general gifts. Relatives have priority over non-relatives. Third, if anything is left over, pay off the residuary legatees.

For example, assume the testator gives "my 1980 Ford to A (worth $10,000), $100,000 cash to B, and $30,000 from the sale of my car collection to C.... resisue to D." When the testator died, all he had was the Ford worth $10,000 and $10,000 cash. The gift to A is specific. The gift to B is general. The gift to C is demonstrative. The gift to D is in the residuary.

First, we take the specific and demonstrative gifts. Here, that is the Ford to A and the $30,000 from the sale of the car collection to C. There isn’t enough to pay off both so we have to do a pro rata split. Since the Ford is worth $10,000 and the money is worth $30,000 that’s a 1:3 split. We take the $20,000 of proceeds that split it up: $5,000 goes to A and $15,000 goes to C.

Example: T makes the following will.

I give my house to A
I give 100 shares of ABC stock to B
I give $100,000 from my account at First Bank to C
I give the residue to D

At death, T’s estate has 200 shares of ABC stock (worth $100/share), the house (worth $100,000) and $30,000 in Second Bank. What do A, B, C, and D get, if anything?

Step 1: Classification. The house to A is specific, the 100 share of ABC stock to B is general, and
the $100,000 from my account at First Bank to C is demonstrative.

Step 2: Distribution. In total, we need $210,000 to distribute ($10,000 shares + $100,000 house + $100,000 bank account) but we only have $150,000. First, we pay specific and demonstrative. $100,000 house and $100,000 bank account. We don’t have enough so we have to do a pro rata split. 1:1 split. We have $150,000 in the estate and half goes to A and half to C. Thus, $75,000 goes to A and $75,000 to C. B and D don't get anything.

Suppose T sold the house and spent all the proceeds on a wild living, telling her friends, “I’m spending A”s inheritance!” Does this change the distribution and if so how? In California, to extinguish a gift, you need to show (i) a specific gift, (ii) is not in the estate upon death, and (iii) intent to extinguish. We are to pay specific and demonstrative first, but the specific gift was extinguished. So, nothing to A, and $50,000 to C. Nothing to B and nothing to D.

Now assume the house was sold and the proceeds of $100,000 remain in the estate so that the bank account now has $130,000. T does not want A to get the proceeds from the sale of the house. Who gets what? The gift to A was extinguished because it’s a specific gift, it wasn’t in the estate upon death and the T meant to extinguish. Result: we have $230,000 in the estate. Demonstrative gets her full $100,000 (100 shares at $100/share). We have $130,000 remaining. We give it to general gifts. The 100 shares of stock is given to B: $100,000 given to B (100 shares at $100/share). We now have $30,000 left. That goes to the residuary. D gets $30,000.

Ademption by Extinction
As explained previously, extinction applies to a specific gift. T gives the 1990 Honda Civic, but the T sold it and bought a 2000 Chevy. The 1990 Honda civic is not longer in the estate. Was it specific? Yes. Still in estate? No. Thus, it’s extinguished under the general rule. In California, it's only extinguished if the T intended to extinguish the gift. If so, T does not get the money from proceeds and does not get the Chevy.

How to know whether it’s still in the estate? Distinguish form from substance. A's will gives Cindy “my savings account in First Bank.” T takes the money out and put it into a Second Bank. The gift is still in the estate and is not extinguished (mere change in form). But if the T had bought stock, then the gift would be extinguished (change in substance). Cindy doesn’t get the stock. California has one more requirement. The T, in getting rid of the asset, must have intended to extinguish the gift. When T bought stock, if T did not intend to extinguish gift, Cindy can get the stock.

An installment sale of proceeds, a casualty award, or an eminent domain award will not be subject to ademption by extinction if the payment are paid after the testator's death. However, those proceeds paid during the testator's life, they are only saved if the recipient can trace the proceeds into one bank account. Recipient can argue that by making the proceeds easily tracable, testator intended no ademption by extinction. Testator intended beneficiary to take all the proceeds, even those payable during the testator's lifetime.

Ademption by Satisfaction
If a gift is made to the person during the person’s lifetime, is that lifetime gift taken out of the person’s share? For example, "$100,000 to B." If B was given $40,000 during his life, does this $40,000 offset the $100,000? A lifetime gift is not in satisfaction of something in the will unless there is written evidence. California requires that the will itself provides for a deduction of a living gift OR there must be a contemporaneous writing signed by a beneficiary that the testator intended a lifetime gift to be deducted by the gift made by the will. Generally, only general gifts are adeemed by satisfaction. If the beneficiary pre-deceases the testator, the anti-lapse statute could provide for the issue of the beneficiary.

An "advancement" is similar to satisfaction. An advancement is a living down payment made by an intestate to a heir apparent. The rules are the same for the rules for ademption by satisfaction. The anti-lapse statute doesn't apply.

Will Substitutes (Non-Probate Transfers)

Private Trusts
A private trust is a fiduciary relationship with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

Trust assets do not go through probate. Revocable living trusts go into effect while the settlor (creator) is alive. Testamentary trust go into effect when the settlor dies. The presumption in California is that living trusts are revocable. It is important to note that the things in the trust belong to the trust, not the settlor.

Creating a revocable living trust
First, there must be a declaration of trust. The settlor must say “I declare that I hold X in trust” and I designate Y as trustee. It’s possible to do this orally if the SOF doesn’t require a writing. The trust becomes effective when you make the declaration.

Second, the settlor must give up at least a tiny bit of interest for creation of a valid living trust. A revocable living trust is valid even if it only transfers things at death. Even having to give written notice to yourself to revoke or change the trust constitutes some interest. Giving a beneficiary the right to sue after the trustee’s death is also an interest. If you don’t find an interest being given up, then it’s testamentary, and you must meet all the wills formalities.

Third, the settlor must specify which items go into the trust. Usually there is an appendix that lists the items in the trust.

Finally there must be ascertainable beneficiaries. For more on private trusts.

Revoking a trust (different than revoking a will)
For trusts, a simple intent to revoke (tearing it up) revokes a trust unless there are specific instructions on how to revoke in the trust documents. Specific instructions trumps intent. So if the trust documents specify how to revoke, then that is the ONLY way to revoke, EVEN IF you manifest intent to revoke and tear up the trust documents. No matter how senseless the directions are, you have not revoked the trust unless you followed the specific instructions in the trust. Note that revocable living trusts become irrevocable upon settor’s death.

This is very different than revoking a will. See previous post on revoking a will. The only way to revoke a will is by physical act, a subsequent will that expressly revokes the first will, if a subsequent will is inconsistent with the first will, or through operation of law.

Can creditors get to assets of a revocable living trust?
Just because the living trust becomes irrevocable because the settlor died doesn’t necessarily mean the creditors can’t reach it. To the extent that the settlor could have had access to the assets during his life, the creditors can too, even after the settlor's death. But creditors can only go after the trust to the extent the estate doesn’t satisfy their debt after going after the estate first.

However, if the settlor put his or her assets in an irrevocable living trust, the creditors can’t reach it (before or after the settlor's death) because the settlor can’t touch it either.

Pour over trusts (different than testamentary trust)
A pour over trust is a trust that is funded through a will. The terms of trust are in a separate document. The will simply dictates what goes into the pour over trust. For example, the will says: X to A, Y to B, Z to C, and the residue to be placed in Trust J.

In contrast, a testamentary trust is not only funded through a will, but it is also created by a will, so the terms of the trust are in the actual will itself - not in a separate trust document.

To have a valid pour over trusts, there must be a separate trust in existence. The UTATA view is that it doesn’t matter that the trust has no assets until the testator dies and the assets pour over. You may validate a trust via incorporation by reference. The UTATA view is also that you can change the trust informally in a way that doesn’t change your will. For example, you can cross out C and put D in your trust as residuary beneficiary of the pour over trust and it will be effective. Note that you can’t do this is a will, or a pour over provision because you must meet the formalities of a will change. See post on execution of wills.

Pour over trust must go through probate
A living trust avoids probate, but a pour over trusts must still go through probate. The judge must issue an order directing that you place the assets in a trust. But the advantage of a pour over trust is that assures the testator a uniform scheme of putting all remaining assets in a trust. It accounts for all assets after the testator dies. A living trust, on the other hand, must specifically name all assets, thus it’s virtually impossible account for all your assets in a living trust. The testator could acquire an asset after creation of a living trust, for example.

Revocation of pour over trusts by divorce?
In California, although divorce revokes, as a matter of law, gifts by will, it does not revoke gifts made through a trust! If you get divorced, it will not revoke dispositions made by will substitutes/trusts. However, in some states, divorce revokes a gift in a will that is part of a single testamentary scheme with a will (including pour over trusts).

Gifts
Gift causa mortis is a gift made in contemplation of imminent death. Giving money away while you are alive effectivly avoids probate. A valid gift requires (1) intent to make a gift and (2) delivery. Delivery means it must be manually handed over, if possible. Constructive delivery is where you give someone something that allows them to access the item/gift (such as a the key or a combination to a safe-deposit box). Constructive delivery is found when the donor has done everything possible to effectuate a delivery and there is no issue of fraud or mistake. Symbolic delivery is where you deliver title or pink slip to a car.

An expectation of profit or earnings can be considered property for purposes of a gift, it but it's not property for purposes of funding a trust.

Contracts with payable on death provisions
Bank accounts or securities registered in beneficiary form. There might be a payable on death provision to a contract or pension fund or part of life insurance policy that says if I die, pay X. In this case, the assets will be paid directly to X. X doesn’t have to go to court. You just get a death certificate and X gives it to the bank. This avoids probate.

Moreover, creditors can’t get these when you die.

Note you cannot change the beneficiary of a POD by will. You have to go to the bank or the insurance company and tell them you want to change the beneficiary.

Life insurance
Putting money in life insurance policy is also another way to avoid probate.

Joint tenancy
Making your intended heir a “joint tenant” also avoids probate. A joint tenant automatically receives the property and creditors can’t reach assets of a joint tenancy post-death.

Note that changing a beneficiary of a will substitute by means of a will is almost always ineffective. For example, John has a bank account that lists Ellen as the beneficiary when she dies. Later, he makes a will that gives Tom the assets in the bank account. The money in the account goes to Ellen and it does not go through probate after Ellen provides the bank with a death certificate.

Living will
A living will honors how you wish to die. There are certain life support issues that may arise. A person can express their desire through a living will. Alternatively, they can execute a power attorney (letting someone else decide).

Revoking a Will and Dependent Relative Revocation (DRR)

Any testator with capacity can revoke all of part of his will at anytime. A valid will, once executed, can be revoked by (i) a written instrument, (ii) a physical act, or (iii) operation of law (i.e. divorce). Dependent relative revocation (DRR) is a doctrine that can "undo" a revocation.

(i) Revocation by subsequent written instrument
Executing a valid subsequent will that 1) expressly revokes previous will or 2) is inconsistent with the previous will.

Express revocation
A will that expressly revokes a previous will will say something like “I revoke the will made on January 1, 2000” or “I revoke any will previously made.” A formally attested wills can be revoked by a holographic wills (and vice versa). An oral revocation is completely invalid

Revocation through inconsistency
Making an inconsistent disposition in a subsequent will may revoke the previous will. For example, Sam has a will giving his car to Alice, and the rest of his estate to Mel. He then makes another will giving his car to Bob. The second will partially revoked the first will and is therefore considered a codicil to the first will. The gift to Alice is revoked and Bob gets the car. Mel continues to get the rest of the estate. You must read the 2 documents together.

In another example, assume Debbie has a will giving all of her estate to Ann. She then makes another will giving all of her estate to Becky. The second will revokes the first one because it is completely inconsistent.

(ii) Revocation by physical act
There are 3 requirements that must be satisfied for a will to be revoked by physical act. First, the will must be “burned, canceled, destroyed, torn or obliterated.” It's not enough to write “void” or “cancel” in the margin. You have to mutilate it. You can write something that effects the face of the will like an X through the whole will.

Second, the act must be accompanied simultaneously by a present intent to revoke the instrument. Therefore, accidental burning will not revoke the will. Where the act of revocation is performed by a person other than the testator, the other person must act in the presence of the testator and at the testator’s direction.

Third, the act must be done by the testator or by someone in the testator's presence and at his direction.

Partial revocation
You can always revoke partially by express subsequent will, however because of fraud concerns, most states do not allow partial revocation by physical act. California is one state that allows for partial revocation by physical act.

Sometimes hard to see whether the testator intended to revoke some or all. If the testator clearly strikes out one sentence, that’s a partial revocation. If the testator puts X through paragraph that’s partial as well and the rest of the will is effective. But sometimes you can’t tell if they are trying to revoke whole thing. In that case, the judge interprets the will.

Cancellation and interlineation: you cannot informally add to a formal will
While you can informally revoke a formal will, you can’t informally add to a formal will. Assume someone crossed out Jim’s name in a will and writes in Jane instead of Jim. The crossing out is allowed as as revocation, the addition of Jane is not valid. You can’t add to a formal will by crossing out a name and adding someone else’s name, BUT you can do this with holographic wills! If you had a holographic will it can be changed informally by crossing out and adding a new name. If it’s a holographic will, crossing out a provision and adding a new one in his handwriting is both a revocation and a valid new disposition. Testator's prior signature is deemed adopted at the time of interlineation and all material terms are in the testator's handwriting.

If, in between the lines, you write “I give my entire estate to Jane” and the testator signs it, NOW there is a holographic will. There is a material provision and it was signed, so this will be an effective holographic codicil, and the gift to Jane will be carried out.

Assume the testator executes a typed formally attested will that states "I leave $10,000 to Monica." Then, the testator takes a pen and crosses out the the $10,000 and writes $15,000 above the $10,000. Testator signs his name. Do we have a valid holographic codicil on top of a formal will? No. The $15,000 gift is invalid as a holographic will because material provisions (gifts and names of the beneficiaries) are not in the testator's own handwriting. Because the $10,000 gift to Monica has been revoked by physical act (cancellation + intent), Monica takes nothing.

But dependent relative revocation (discussed below) can save this gift. Basically, we can save Monica's gift so she takes the original $10,000. The revocation is said to have been conditional on the $15,000 being effective. Since the $15,000 wasn't effective, by operation of law, the $10,000 revocation was never effective. Clearly, the testator would rather Monica take $10,000 over nothing because the testator indicated that he wanted to increase his gift to Monica. If Monica can't take $15,000, let her at least take $10,000.

However, if testator's interlineation was $5,000 rather than $15,000, dependent relative revocation may not save Monica's gift. Perhaps the testator wanted Monica to take nothing than $10,000.

Note that a cancellation will not increase a gift. If testator write "I leave my farm to X and Y" and then he crosses out Y, then X gets 1/2 of the farm and Y's 1/2 will go to the residuary.

Duplicate copy vs. duplicate original
Destruction of a duplicate copy will not revoke, but destruction of a "duplicate original" will revoke the will. Assume a lawyer has a will executed for a client and keeps the original in his office safe. He gives the client a photocopy that wasn’t signed. If the client destroys the copy with intent to revoke the will, the will still remains in effect. Sometimes, however the lawyer will make a "duplicate original" will (both documents are properly executed). If the testator tears up a "duplicate original," then the will is validly revoked.

If a will is not found at death, there is a presumption of revocation
This presumption arises if the testator is known to have will at her house and it’s in her possession. After she dies the will, the will can’t be found. There will be a presumption that the testator destroyed the will with intent to revoke the will. However, you can produce evidence to rebut. This presumption can be rebutted by showing someone had motive and opportunity to destroy the will.

If a will is found in a mutilated condition at the testator's death and when last seen it was in the testator's possession, there is a rebutable presumptino that the testator mutilated the will with the intent to revoke the will.

Codicil revocation
An act of physical revocation performed on a codicil will not revoke the will even if the testator intended to. Revocation of codicil only revokes the codicil. But, if you revoke the will, and not the codicil, the revocation of the will also revokes the codicil.

(iii) Revocation through operation of law
A will is revoked by operation of law through marriage or divorce. It is deemed that people would not want their wills to stand because of the change in circumstance. Unless you can show testator intended it to stay in effect, marriage or divorce will destroy previously made wills. This applies only to wills in California, and it does not apply to will substitutes.

(iv) "Revival" and Dependent Relative Revocation (DRR)
Revival occurs when will #2 is valid, then revoked. Will #1 is "revived." For example, will #1 is executed. Will #2 is executed, and will #1 is either expressly or implicitly revoked in whole or in part by will #2 (through a revocation clause or inconsistency). Then, will #2 is revoked. Is will #1 now admissible to probate as originally executed (i.e. is will #1 revived?). Generally no, will #1 is not revived, but in California, if the testator in revoking will #2, manifests an intent to revive will #1 to come back to existence, will #1 is revived. But you must show when will revoked will #2, the testator intended will #1 to be revived.

Dependent relative revocation is a different concept. It occurs when will #2 was never valid to begin with or does not properly effectuate the testator's inent. Will #1 is "unrevoked." Generally DRR arises when you revoke will under a mistake. DRR is also called “conditional revocation” or “second best doctrine.” The basic idea is that a revocation (will #1) is dependent (conditional) upon another disposition (will #2) being effective/valid. For example, assume testator revokes will #1 by tearing it up and drafts will #2 in its place. She thought that will #2 is valid, but it’s not -- or perhaps will #2 does not effectuate intent because of the disinterested witness rule or because it didn't meet the wills formalities. Testator would not have revoked will #1 if she knew the truth, that will #2 is invalid / ineffective. Therefore the will #1 remains in effect. The rule is this:

If the testator revoked his will under the mistaken belief that a substantially identical will or codicil effectuates his intent, then by operation of law, the revocation of the first will be deemed conditional or dependent on the second will effectuating the testator’s intent. If the second will does not effectuate the testator’s intent, then the first will, was never revoked.

Under DRR, will #1 is not revoked if 3 elements are met.

First, the testator must revoke a will (usually by physical act and sometimes by a subsequent instrument).

Second, the testator must have had a mistaken belief of law or fact at time of revocation. For example, when revoking will #1, T thought will #2 was valid or that will #2 would effectuate his intent.

Third, the testator would not have revoked will #1 if he knew the truth. If the testator would rather have will #1 apply than his propert pass through intestacy, then it's good evidence that he wouldn't have revoked will #1 if he knew the truth.

DRR is really "the second best doctrine" because it won’t give the testator his first choice. It will un-revoke will #1 but your really wanted will #2. It won’t make will #2 valid. But if you’d rather have will #1 than have it go by intestacy, then DRR can help.

Promises not to revoke or promises to make a will
Promises not to revoke is governed under contract law. The non-breaching party can sue for specific performance, but there must be written evidence of the contract. CPC § 150(A)(1) ("provision of a will stating material provision of the contract, express reference to a contract in a will to a contract and extrinsic evidence proving the terms of the contract, in a signed writing by the decedent evidencing the contract"). Generally, a joint will or a mutual will won't create a presumption that it creates a promise not to revoke. However, some courts do hold that they promise not to change the joint plan.

Executing a Will: Formal Wills & Holographic Wills

There are two basic types of wills: (1) formal wills, and (2) holographic wills (informal wills).

Execution of Formal Wills
These are referred to as “tested” or “witnessed" wills. In contrast, holographic wills (informal wills) do not have to be witnessed. To have a valid formal will, five requirements must be met.

First, the will must be in writing. In California, oral wills are not valid.

Second, the will must be signed by the testator. It can be signed informally as "Dad" or if the person is illiterate, "X" is okay. If the testator is incapable of signing the will himself, he can ask someone else to sign it on his behalf, but it must be at the testator's direction and in testator's presence. The person who signs has to sign the testator's name.

Third, the will must be signed by 2 witnesses that are present at the same time who understand that the document being signed is the testator's will.

Fourth, the 2 witnesses must see the testator sign the will or they must see or hear the testator acknowledge his signature or acknowledge that this is his will. Usually witnesses will sign under an attestation clause (although not technically required). It recites what the witnesses did (which witnesses were present, who saw the testator sign the will, etc). Either the testator can say “this is my signature” or he can say “that’s my will.”

Fifth, the testator must have testamentary intent. The testator must intend that this document be his will. If you sign a formally attested, that is strong evidence that there was testamentary intent.

Who can be a witness?
The person must be competent. The witness doesn't have to know the content of the will. The witness should not be "interested" (if you receive an interest from the will, then you are interested). Under common law, the signature of interested witness didn’t count.

In California, a signature of an interested witness counts and the will is still valid, but there is a presumption (rebuttable) that the witness exerted undue influence on the testator. Unless rebutted, the witness gets nothing. What is undue influence? See my testamentary capacity post.

However, if the interested witness is someone who would have inherited by intestacy, the interested witness will still receive his or her interested shares.

Self-proving affidavits and attestation clauses
Neither are required but are typically included. Attestation clauses show intent to be a witness. Usually it will say something like “we hereby witness the will” (present tense). Attestation clauses are useful in proving due execution of a will. It makes out a prima facie case that the will was duly exercised and thus the will may be admitted to probate even though the witness predeceases the testator or cannot recall the events of execution. Self-proving affidavits say that you witnessed it already (past-tense). Usually it wills ay something like “we have witnessed the will.” This can be done by someone other than who did the attestation clause.

Components of a will
The concept of integration is important in understanding the components of a will. Generally, papers that are present at the time of execution and that the testator intends to be part of the will are part of the will. If something is physically attached, you can use doctrine of integration. The lesson is: use a stapler to attach documents you want to be considered part of the will.

For example, if the testator comes to the execution ceremony with a piece of paper that gives away some personal possessions and it is attached, through the doctrine of integration, the separate list could be part of her will and would be carried out. But if the list is not physically present when the will is executed, it is not part of her will.

Incorporation by reference
A writing in existence when a will is executed may be incorporated by reference if the language of the will manifests intent to incorporate and describes the writing sufficiently to permit its identification. CPC § 6130.

Codicils
A codicil is an amendment or an addition to a will. It must be executed with the same formalities as a will. If you have validly attested will and you created a codicil, it's okay that the codicil is handwritten as long as the codicil is valid as a holographic will. (see below for a discussion on holographic wills). The two documents must be read as a single document and will be dated on date of codicil. For example, if a woman executes a will in 1990 and in 2000, she executes a codicil to the 1990 will, the documents are read together as a single will, dated 2000.

Doctrine of republication by codicil
The doctrine of replication by codicil can help if you are trying to later incorporate a document by reference. There must be a manifestation of intent to incorporate and the document must be clearly identified.

Replication by codicil may validate a will that was previously invalid. If the first will was invalid because there was lack of capacity or perhaps it wasn’t properly executed, and then later you add a valid codicil, the valid codicil can validate the previously invalid will. Basically, if there is capacity and proper execution of the subsequent codicil, then the first will becomes valid. For example, if a woman was not competent when she executed her 1990 will, but she was competent when she executed the 2000 codicil, the proper execution of the 2000 codicil republishes or validates the 1990 will, and both docs will be carried out. A simple little handwritten sentence (codicil) can breath life into an otherwise invalid will.

Is it a codicil or a will?
Is the subsequent document a codicil to the first will or a second will? If its carefully drafted, a good lawyer will say “codicil” but sometimes you have to figure out whether it’s a codicil or a whole new will. If there is a revocation clause, you can assume it’s a will. If there is no revocation clause, but there is total inconsistency, it revokes by inconsistency and the document is probably a will. If it's only partly inconsistent, then you probably have a codicil.

Substantial compliance / clear and convincing evidence of intent
For testators dying on or after January 1, 2009, under California Probate Code § 6110(2), if a writing or document doesn’t meet the witnessing formalities of a will, the writing or document is treated as if it meeting all formalities if you have clear and convincing evidence that at the time the T signed the will, he intended the will to be his will. But we still need T’s signature and 2 witnesses signatures. So failing to have both witnesses be present at the same time the T signed the will could be overlooked.

Dispensing power
Some other states recognize dispensing power (harmless error) which is the approach advocated in the UPC, not California. Dispensing power excuses any formal requirement for executing or revoking a will if the proponent can establish by clear and convincing evidence that the testator intended the document to be his will. This is broader than CA’s rule. Thus, although the T mistakenly signed the wrong will, this would not be excused under the CA rule, but it would be excused under dispensing power.

Exception to formalities: changing a will by non-testamentary acts
You don’t need to meet the formalities requirement again if you change a will by non-testamentary acts. Acts of independent significance permit a testator to effectively change the disposition of his property without formally changing a will. If acts or events changing the disposition have some significance beyond avoiding the requirements of the will, then they are allowed.

Foreign wills
What about people who move to CA from another state? They are now domiciled in CA. CA law determines whether their will is valid. But what if they come from a state with different formality requirements? (i.e. some states don’t require that the 2 witnesses be present at the same time). In CA, a will is valid if (1) it was executed in compliance with CA law, (2) it is was in conformity of the law of the state where the will was executed or the place of testator's domicile at the time of execution.

Execution of Informal or Holographic Wills
Informal or holographic wills are valid in California and about ½ of other states. Holographic wills do not have to be witnessed. However, 3 requirements must be met to qualify a document as a valid holographic will.

First, it must be signed by the testator. Note that the provision allowing another to sign at the testator’s direction and presence only applies to formal, not holographic wills. The testator must actually sign the document. The signature can be anywhere in the document.

Second, at least one material provision must be in testator’s own handwriting. “Material” means it must have some legal effect. The best example is giving away assets. If you give money away that’s material. Other things that are material include: naming beneficiaries, revoking a previous will, appointing someone executor or guardian of your kids.

Third, the testator must have testamentary intent. For example, a man writes a letter to his daughter and he signs it “dad” and at the end he writes a P.S. that says “if anything happens to me, I want you to have my entire estate.” The P.S. is a valid holographic will. The use of “estate” and his contemplation of death shows testamentary intent. He signed it, and giving away assets is a material provisions, so this is a valid holographic will. When a writer is contemplating death or is using of legalese such as “estate,” this tends to show testamentary intent.

Extrinsic evidence is admissible to ascertain the testator's intent.

Problems of pre-printed form wills
David buys a printed will form that says “I give ___ to ___.” He fills in “$1000” and “Jane Smith” in the blanks. Here, there is no material provision in his handwriting. David's handwriting simply read “$1000 Jane Smith” -- which is meaningless. This is not a valid holographic will. To determine the material provisions you look at handwriting parts only. However, if David had instead written, “I give $1000 to Jane Smith,” this is a material provision in his handwriting.

However, to determine whether there is testamentary intent, you are permitted to look to printed part, as well as the handwritten part, to see if there is testamentary intent.

The only way to give effect to pre-printed wills is to see if it’s valid as a formal will: does it meet elements to be a formal will?

Even if it doesn't meet the requirements to be a will, if the testator told people she executed her will, then the document might be admitted into probate as her will.

Date requirement?
CA doesn’t require a date to be on the will. But failing to date can create inconsistency problems. If there is no date, there is a rebuttable presumption that it was executed before any other will, thus any other will is going to trump the undated will. So it’s not a good idea not to date. But technically it's not required.