Sharp T&E Outline

Sharp’s Trusts and Estates I – Outline

I. Introduction

3 techniques of transferring wealth:

inter vivos transfer: transfer that takes place during the transferor’s lifetime

non-probate transfer: transfer that enters into some type of contract, and the terms of that contract control the disposition of that property when the transferor dies. Examples are joint accounts with survivorship rights, POD bank accounts, life insurance policies, and transfers pursuant to retirement benefits.

probate transfer: If O owns something, and that something has not been subject to some inter vivos or non-probate transfer, it will go to O’s heirs at law. In Texas, this happens automatically upon O’s death.

Exception: If O has a valid will, and a court of competent jurisdiction enters an order admitting that will to probate, that order of the court divests O’s heirs of their interest in the probate assets and vests ownership of those assets in the beneficiaries of the will.

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II. Trust Law

A. The Private Express Trust

Trust (text definition): entity in which ownership is divided between the trustee (who is sometimes said to hold “legal” title to the trust property) and the beneficiaries (said to hold “beneficial” title).

Is it appropriate to refer to a trust as an entity?entity: something that exists as a particular and discrete unit; organization that has a legal existence separate from that of its members; persons and corporations are equivalent entities.

Traditionally, a trust is not an entity. The trustee/beneficiary do not own an interest in the trust in the way that shareholders own a portion of IBM. The trust doesn’t own anything. You can’t sue a trust, and the trust can’t sue you.

Trust (Restatement): a fiduciary relationship with respect to property, subjecting the person by whom the property is held to equitable duties to deal with the property for the benefit of another.

Express trust (Texas Trust Code): fiduciary relationship with respect to property which arises as a manifestation by the settlor of an intention to create the relationship and which subjects the person holding title to the property to equitable duties to deal with the property for the benefit of another person

Note: “Express trust” because resulting trusts, constructive trusts, business trusts and security instruments are excluded from the TTC.

Trust (Scott on trusts): devise or tool for making dispositions of property.

These definitions are more correct.

Parties to a Trust

Settlor: person who creates the trust.-Usually, this person starts out with FSA to the property.-To create the trust, he will convey legal title to the trustee and equitable title to the beneficiary.

Ex: “O to A in trust for B…” (hallmark language of a trust)-In order to create an express trust, there must be a purpose. That purpose must be expressed by the settlor at the time he separates the legal and equitable title.

Ex: “O to A in trust for B” will not cut it in an express trust. There must be a purpose.

§112.031A trust may be created for any purpose that is not illegal. The terms of the trust may not require the trustee to commit a criminal or tortious act or an act that is contrary to PP.

Ex: “O to A with instructions to deliver the property to B if B commits a criminal act.” The court will not enforce this. Thus, A keeps the property.

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Shapira v. Union National Bank-Dr. Shapira died April 13, 1973. -A portion of his will devised his estate between his daughter and two sons. -A condition in the will required that the sons marry a Jewish girl with Jewish parents within seven years from the time of Dr. Shapira’s death in order to obtain their inheritance. -Daniel Jacob Shapira alleges that the condition is unconstitutional and a violation of public policy. He believes he should be given his inheritance free of all restrictions. Issue :

1. Do the upholding and enforcement provisions of Dr. Shapira’s will conditioning the bequests to his sons upon their marrying Jewish girls violate the Constitution of Ohio or the United States Constitution?

2. Does Dr. Shapira’s will unreasonably restrict marriage and thus violate public policy?

Notes:Daniel challenged the purpose of the arrangement as being unconstitutional and against PP.

Court said the purpose was acceptable, but it is possible for the settlor to go too far. In cases where the purpose is against PP: The court will interpret the settlor’s words as closely as possible to his intent, without the bad purpose.

What are valid purposes for creating trusts? -business reasons, economic reasons, personal planning, for children, etc.

Trustee: person who gets legal titleBeneficiary: person who gets equitable titleCorpus/Res: subject of trust

Two ways that express trusts can be created – Inter vivos trust: settlor conveys legal title to trusted and equitable title to beneficiaryTestamentary trust: settlor/decedent creates trust through his will

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B. Comparisons

The below situations are similar to trusts, with important differences:

Bank account: When I deposit money in a bank, I’m the creditor, and the bank is the debtor. In this situation, however, there is no separation of legal and equitable title. It’s a two-party transaction.

Third party beneficiary contract: Dad gets a life insurance policy for me. I’m the third party who benefits from the transaction. In this situation, there’s a contract that controls the disposition of the policy.

Deed of trust: When I want to buy a house, I have to sign a promissory note and a deed of trust. The deed of trust is the document by which the bank can take back the property if I don’t pay. Still, there’s no separation of title.

Equitable charge: O dies, and in his will, he says: “I devise Blackacre to A, provided that he pays B $1,000 a month for the first 10 years following my death.” This looks like a trust, but it’s really an equitable charge. When we look at the will, we look to the intent of the transferor. In this example, the transferor didn’t intend for A to hold and manage Blackacre for B. Instead, he said, in essence, “If A wants Blackacre, he has to pay $1,000 a month to B.”

Ex: O says, “I devise Blackacre to A if A will pay B $10,000 in cash.”This is not a trust. It’s a springing EI.

Principal/agent: In both this relationship and a trust, there’s a fiduciary relationship. Fundamental difference: The principal owns the property completely.

Bailor/bailee: I go to a fancy restaurant and give my coat to the coat check. They give me a claim check, which I present after dinner to get my coat back. This also seems like a trust, except that I never parted with ownership of my coat.

Texas Uniform Transfers to Minors Act (T.U.T.M.A.): O dies, and O’s sole heir at law is 10 years old. Clearly, there’s a need for management of the property. Thus, we need a probate court to appoint a surrogate guardian for the child who will manage the estate. The two are now in a fiduciary relationship, but title has not been separated. The child still owns FSA – she just can’t manage it.

What can be done to prevent this situation? O can transfer the property to a custodian under T.U.T.M.A. In this situation – just as when the court appoints a guardian – the two are in a fiduciary relationship. However, title has not been separated.

Power of appointment: Husband dies, devises Blackacre to his wife, and gives her a LE. He also gives her a power of appointment – Upon her death, she can pass the property to her kids. But if she doesn’t it will go to Baylor. In this situation, the husband is the donor, the wife is the donee, the kids are permissible appointees, and Baylor is the taker in default. Note: The

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donee is not in a fiduciary relationship with the permissible appointees. The donee is under no obligation to exercise the power.Life estates/remainders:

Perfect Union Lodge v. Interfirst Bank of San Antonio-A.H. Lumpkin, an attorney, drafted his own will. -One provision of the will read, “My said executors shall handle my estate during the life of my wife, Cornelia Lumpkin, and as long thereafter as may be reasonably necessary to carry out the terms of this my will…I hereby confer upon them all such powers as are given to Trustees under and by virtue of the provisions of the Texas Trust Act.”Issue: Did A.H. Lumpkin’s will create a testamentary trust?

Notes:On its surface, the will seems to create a LE with a remainder in Perfect Union Lodge:

“…given to her absolutely, for and during her natural life, to have the use and benefit thereof during her said natural life…Subject to the foregoing life estate devised to my wife…I devise…to Perfect Union Lodge…”

The following language, however, is ambiguous:“My said executors shall handle my estate during the life of my wife, Cornelia Lumpkin, and as long thereafter as may be reasonably necessary to carry out the terms of this my will…I hereby confer upon them all such powers as are given to Trustees under and by virtue of the provisions of the Texas Trust Act.”

Ordinarily, executors administrate an estate only for the probate period. Thus, the above language looked like a testamentary trust.

Good language about testamentary trusts:A testamentary trust is created through a transfer by will by the owner of property to another person or persons as trustee for a third person or persons. Implicit in this statutory definition is the requirement of a trustee with administrative powers and fiduciary duties. Even more fundamental than this, it is well established that the legal and equitable estates must be separated; the former being vested in the trustee and the latter in the beneficiary. Technical words of expression are not essential for the creation of a trust. To create a trust by a written instrument, the beneficiary, the res, and the trust purpose must be identified. It is not absolutely necessary that legal title be granted to the trustee in specific terms. Therefore, a trust by implication may arise, notwithstanding the testator’s failure to convey legal title to the trustee, when the intent to create a trust appears reasonably clear from the terms of the will, construed in light of the surrounding circumstances.

Note: During the course of this action, Cornelia dies. Therefore, regardless of whether the will creates a trust or a LE, it will go to the Lodge now. Why are they fighting this? If Cornelia holds a LE, she can’t generate any income from it because the Lodge (remainderman) won’t agree to sell (because the land is appreciating!). If Cornelia holds a trust, the trustees can sell the property on her behalf and generate some money.

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Understand: Cornelia isn’t behind this….she was old and incompetent. Her heirs are trying to maximize their recovery.In re Estate of Harry G. Lewis-Lewis’ will grants Lesikar and Rappeport each an undivided ½ interest in the residuary estate “for her use and benefit during her natural life.”-The will further provides that the daughters shall have, with respect to the properties devised to them, full power to use the property and consume the income therefrom, with sole power of management, but that each shall “preserve the corpus of the estate.”-The remainder is devised to the daughters’ children, if any, or if none, to the surviving daughter.-Rappeport contends that the residuary clause of the will actually created a testamentary trust which requires that distribution be prohibited during the trust’s existence.Issue: Did Lewis’ will create a testamentary trust or two life estates?

Notes:The will specifically designates the interests as “life estates,” and in numerous places uses words which are peculiarly descriptive of such estates.

The fact that the life estates are undivided interests in the same property presents no problem. A life estate may be devised to two or more persons as co-tenants. Further, a power of sale may validly be vested in a life tenant, and is not repugnant to the life estate.

The powers given by the will to manage and control the property during the devisees’ lifetimes is nothing more than the usual power of life tenants to operate, manage and use the property.

The fact that Lewis created in the same will a testamentary trust for his grandchildren indicates that he knew how to create such a trust if he desired, and reinforces the conclusion that he did not intend to create one for his daughters.

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Totten trusts:

Hypo: O has $10,000 in cash. He deposits this money in an account and signs a card: “O in trust for B (O’s child).” Has O created an express trust? What is the subject?

O has created a totten trust, and the subject is the account itself (not the $).

Green v. Green -George Green (Green) died intestate on March 7, 1985, and was survived by his wife, Hilda Green (Plaintiff) and three children, George Jr., Elizabeth and James (defendants), from a prior marriage. -During the marriage both husband and wife worked to contribute financially to the marriage and also to the upkeep of various properties. Some property was owned jointly. Some was just in Green’s name. -Green assumed responsibility for the majority of the couple’s finances including the purchase and sale of their real estate holding. The couple each paid a number of the bills. -Green told his daughter, Elizabeth, his specific intention to avoid a will and probate. He informed her that the funds in each of his eight bank accounts were left in trust to be distributed upon his death to the named beneficiaries. -Upon Green’s death, the money in the accounts was distributed to the beneficiaries. -Green had contributed all the money in the accounts, each account was held in trust for one of his heirs, Green was named as trustee on all eight accounts, and he retained physical possession of the bankbooks throughout his life. Most of his stocks were held jointly with one of his heirs. -Nothing passed through probate. Issue: Are the defendants (Green’s children) beneficially entitled to the sums of money in each account, which were placed on deposit by their father, Green?

Notes:All eight accounts were in the name of Green as trustee for each named beneficiary. Further, Green said he wanted to avoid probate, and all the beneficiaries knew that they were supposed to inherit from the accounts. Green’s retention of control, disposition, and appropriation of the funds in the account did not invalidate the trust or render them testamentary.

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A totten trust is different from a typical express trust. It’s a revocable trust. The settlor/trustee can withdraw money during his lifetime, and the beneficiary gets whatever is left when the settlor dies.

TX case: Flat v. Baldwin – O created a totten trust during his lifetime for the benefit of X. After O died, X tried to sue O’s estate for the amount of money that O withdrew during his lifetime, and for a breach of fiduciary duty. The court said it would not recognize totten trusts as express trusts in Texas, and the same rule stands today. As a result, O’s actions were an ineffective attempt to create a trust, and all the money went to O’s estate.

TX recognizes something similar to a totten trust, however. If O opens a bank account and says, “O in trust for B”, a trust account is created, which is governed by Chapter 11 of the Texas Probate Code.

§ 436(5)“Multiple party account” means a joint account, a convenience account, a P.O.D. account, or a trust account…

§ 436(14)“Trust account” means an account in the name of one or more parties as trustee for one or more beneficiaries where the relationship is established by the form of the account and the deposit agreement with the financial institution and there is no subject of the trust other than the sums on deposit in the account.

§ 439(c)Unless a contrary intent is manifested by the terms of the account or the deposit agreement or there is other clear and convincing evidence of an irrevocable trust, a trust account belongs beneficially to the trustee during his lifetime…

§ 439(c)If the account is a trust account and there is a written agreement signed by the trustee or trustees, on death of the trustee or the survivor of two or more trustees, any sums remaining on deposit belong to the person or persons named as beneficiaries, if surviving, or to the survivor of them if one or more beneficiaries die before the trustee does. If two or more beneficiaries survive, there is no right of survivorship in event of death of any beneficiary thereafter unless the terms of the account or deposit agreement expressly provide for survivorship between them.

During O’s lifetime, O owns the property in trust in FSA, and B owns nothing. Thus, the legal and equitable title are not separated.

Essentially, the trust account is the same as a P.O.D. account. With both of these accounts, B’s death does not affect the ownership of the account, because B didn’t have any ownership interest in the account. Rather, he has an expectancy. With an express trust, however, B owns an equitable title in the property. Thus, if B dies, his equitable interest will pass to his heirs. This is a significant difference.

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C. Essential Elements of an Express Trust

1. Trustee2. Purpose3. Beneficiary4. Identifiable Property (can be real, personal, tangible, intangible, etc.)5. Capacity/Intent

Hypo: I give my brother $10,000 and tell him to hold it until my grandson graduates from college. My grandson is not even two years old yet. Do we have a trust?

Yes. At the time I gave the money to my brother, I intended to make a gift to make my grandson, and at that point, I did not own the money anymore. This is an example of how easily a trust can be made. There are no formalities, as long as you have a trustee, purpose, beneficiary, property, and intent.

,1. Trustee

The trustee is a fiduciary. She must act in the interest of the beneficiary, not in self-interest.

A trust will not fail for want of a trustee. This might happen for a number of reasons:

1. The trust instrument might not name a trustee;2. The trustee named might fail to qualify or might die, be removed, or resign after creation3. The trustee might lack legal capacity to hold in trust.

Hypo: O owns FSA title to Blackacre, and he wants his grandson to own it. He tells his lawyer to draft a deed, whereby he would convey Blackacre to his friend A for the benefit of his grandson. A will hold Blackacre until the grandson turns 21, and then he will get it. O presents the idea to A, and A refuses to be trustee. O gets mad, puts the deed in his desk drawer next to his will, has a heart attack, and dies. His family finds the deed.

In this case, there’s no evidence of delivery or acceptance! In order to have a valid trust, you must have a valid transaction. In this case, the trustee never received the legal interest.

But what about the statement, “A trust will not fail for want of a trustee”? This statement will usually not apply in cases like this because it’s too difficult to determine O’s intent.

Hypo: O left the same language in his will.

In this case, A could still refuse, and the court would assign a trustee. This is the more likely application of, “A trust will not fail for want of a trustee.”

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Hypo: A accepts and then dies. The will is silent with regard to a substitute trustee.

What has happened to the legal interest? (It has to go somewhere – It can’t disappear!) It has vested in A’s heirs. But it wasn’t O’s intent that A’s heirs be a fiduciary. So the court then appoints a successor, and it’s the heirs’ responsibility to assign the interest to the newly appointed trustee.

The trustee must accept the trust:

§112.009: Acceptance by TrusteeThe signature of the person named as trustee on the writing evidencing the trust or on a separate written acceptance is conclusive evidence that the person accepted the trust. A person named as trustee who exercise power or performs duties under the trust is presumed to have accepted the trust.

It is not unusual for there to be two or more trustees. At common law, they were joint tenants. There is also a common law rule that all trustees must join in a decision for it to be valid.

§113.085: Exercise of Powers by Multiple TrusteesExcept as otherwise provided by the trust instrument or by court order:

(1) a power vested in three or more trustees may be exercised by a majority of the trustees; and

(2) if two or more trustees are appointed by a trust instrument and one or more of the trustees die, resign, or are removed, the survivor or survivors may administer the trust and exercise the discretionary powers given to the trustees jointly.

If the trustee dies, look to the trust instrument – See if the settlor addressed such a situation.

§ 113.083: Appointment of Successor Trustee(a) On the death, resignation, incapacity, or removal of a sole or surviving trustee, a successor trustee shall be selected according to the method, if any, prescribed in the trust instrument. If for any reason a successor is not selected under the terms of the trust

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instrument, a court may and on petition of any interested person shall appoint a successor in whom the trust shall vest.

Once a trustee accepts the trust, it’s difficult for him to get out of the situation, unless the document provides otherwise.

§113.081: Resignation of Trustee(a) A trustee may resign in accordance with the terms of the trust instrument, or a trustee may petition the court for permission to resign as trustee.

(b) The court may accept a trustee’s resignation and discharge the trustee from the trust on the terms and conditions necessary to protect the rights of other interested parties.

The court can remove the trustee under certain circumstances.

§113.082: Removal of Trustee(a) A trustee may be removed in accordance with the terms of the trust instrument, or, on the petition of an interested person and after hearing, a court may remove a trustee and deny part or all of the trustee’s compensation if:

(1) trustee materially violated or attempted to violate the terms of the trust and the violation or attempted violation results in a material financial loss to the trust;(2) trustee becomes incompetent or insolvent; or(3) in the discretion of the court, for other cause.

Merger Doctrine

A trust cannot exist unless there is a separation of legal and equitable title. Sometimes, the separation is made initially, but over time, the interests merge.

Hypo: O creates a trust, naming her husband as sole trustee, and providing that the principal is to be distributed to O’s daughter at the husband’s death. If the daughter dies before the husband, leaving the husband as her only heir, the husband has become the sole trustee and sole beneficiary.

In this case, the interests merge into FSA for the husband.

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2. Purpose

Active and Passive Trusts

In order to have a valid trust, there must be some purpose. It doesn’t take much, but there can’t be a complete absence of a purpose. A trust without a purpose is a passive trust. See TX rule below:

§112.031: Active and Passive Trusts(a) Except as provided by (b), title to real property held in trust vests directly in the beneficiary if the trustee has neither a power nor a duty related to the administration of the trust.

(b) The title of a trustee in real property is not divested if the trustee’s title is not merely nominal but is subject to a power or duty in relation to the property.

What if the object of the passive trust is personal property? Title cannot automatically vest in the beneficiary because the trustee has possession of the property. However, the beneficiary has the right to demand the property from the trustee.

Subsection (b) bends over backwards to find that a trust is not passive. Courts rarely deem a trust to be passive.

3. Beneficiary

An express trust cannot exist without an identifiable beneficiary.

Moss v. AxfordThe fifteenth paragraph states:

“I give, devise and bequeath all the rest, residue and remainder of my property to Henry W. Axford with the instructions to pay the same to the person who had given me the best care in my declining years and who in his opinion is the most worthy of my said property. I make him the sole judge and request that his signature with the signature of the person receiving said property shall be a sufficient release for my said executor.”

-Plaintiffs are sisters of Mrs. Girard and claim as her heirs. -Defendant Axford for a long time was attorney and advisor of Mr. and Mrs. Girard, drafted her will, and was named her executor. -Defendant Piers took care of Girard from the time the will was made until her death, and was designated by Axford as the person entitled to the residue of the estate under the above clause. -Plaintiffs contend that the clause was an invalid attempt to create an express trust because there was no beneficiary fully expressed and clearly defined. Issue: Was the clause in the will an invalid attempt to create an express trust, thus preventing Piers from being given the residue?

Notes:

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It is not necessary that a beneficiary be designated by name, or by a description which makes identification automatic. Nor that the testator have in mind the particular individual upon whom his bounty may fall… It is enough if the testator uses language which is sufficiently clear to enable the court by extrinsic evidence to identify the beneficiary. If by such evidence the court can make the identification necessary to give effect to the intention of the testator, the devise will be sustained.

This is an objective standard. It prevents people from creating a trust for “friends.” Too subjective!

The identity of the beneficiary must be ascertained either at the time of trust’s creation OR within the period covered by the rule against perpetuities:

§112.036: Rule Against PerpetuitiesThe rule against perpetuities applies to trust other than charitable trusts…Any interest in a trust may, however, be reformed or construed to the extent and as provided by § 5.043.

(Note the exception for charitable trusts. This allows such trusts to fully serve their purpose.)

Hypo: O creates a valid trust. “Trustee is to pay all the income to A for the remainder of A’s lifetime. Then, when A dies, the trustee is to deliver the property itself to A’s children.” A is currently five years old.

Equitable LE in A Equitable Crem in A’s children

A is the validating life, so this trust is ok under RAP.

Moss: At the time of the trust’s creation, we don’t know who the beneficiary is. However, Henry will be able to identify the beneficiary before the end of the RAP period. Why? Because Henry cannot identify them after he dies. Thus, the trust is valid.

What is the practical problem with a setup like this? If the beneficiaries are unidentifiable, there’s no one to hold the trustee accountable! How do we know if the trustee is fulfilling his fiduciary duties? The state could appoint an attorney ad litem to represent the interests of unidentifiable beneficiaries, but this assumes that there’s some litigation going on. Who else might have standing to complain about the trustee’s actions? A, O, or O’s heirs.

§111.004(2)“Beneficiary” means a person for whose benefit property is held in trust, regardless of the nature of the interest. (This includes unborn/unidentified beneficiaries.)

§111.004(10)“Person” means an individual, a corporation, a partnership, an association, a joint-stock company, a business trust, an unincorporated organization, or two or more persons having a joint or common interest, including an individual or a corporation acting as a personal representative or in any other fiduciary capacity. (This includes unborn and born persons.)

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§111.004(6)“Interest” means any interest, whether legal or equitable or both, present or future, vested or contingent, defeasible or indefeasible. (Any interest whatsoever!)A beneficiary is not required to accept a trust.

§112.010: Acceptance or Disclaimer by or on Behalf of Beneficiary(a) Acceptance by a beneficiary of an interest in a trust is presumed.(b) If a trust is created by will, a beneficiary may disclaim an interest in the manner and with the effect for which provision is made in the applicable probate law.(c) Except as provided by (c-1) of this section, the following persons may disclaim an interest in a trust created in any manner other than by will…

This means that when there’s an unborn/unidentifiable beneficiary, we presume they accept the trust.

What if an equitable interest is given to a beneficiary who is not ascertainable?CL rule: The property goes back to O’s heirs.RST: The trustee has a discretionary power, but no duty, to define the class members and distribute the property to them. This is not law right now, but it might be someday.

Unusual Beneficiaries

According to long-standing doctrine, a trust established for a pet would fail because the pet has no capacity to sue. Hence, the trustee would have no enforceable duties. However, some states have developed the “honorary trust”….

Honorary trust: So long as the purported trust is not for a purpose that is illegal or against public policy, we will allow the designated trustee to carry out the purpose of the trust, so long as the amount is reasonable. The designated trustee must be willing to manage the trust; otherwise, the property will go back to the heirs at law.

Ex: Trust for the saying of masses at my funeral

HB 1190: Added new § 112.037 to the Texas Trust Code, which expressly authorizes by statute express trusts for the care of animals.

charitable trust: At common law, this was the only exception for a trust that did not name a beneficiary. Modern courts also recognize it.

Ex: Millionaire dies and leaves millions to a trustee for the purpose of fighting leukemia. This doesn’t state a beneficiary, but public policy counsels that we allow this trust. It wouldn’t be practical to list every beneficiary.

How do we make sure that the trustee does what he says he’s going to do? A governmental agency (In TX, the Attorney General) regulates the trust.

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4. Identifiable Property

§111.04(12)“Property” means any type of property, whether real, tangible or intangible, legal or equitable. The term also includes choses in action, claims, and K rights, including a K right to receive death benefits as designated beneficiary under a policy of insurance, K, employees’ trust, retirement account, or other arrangement.

The legislature has left the door open to just about anything. The only exception: The property must be transferable (i.e., some K rights are non-transferable)

Brainard v. Commissioner-Dec. 1927 Taxpayer contemplated trading in the stock market during 1928. He consulted a lawyer and was advised that it was possible for him to trade in trust for his children and other members of his family. -Taxpayer discussed the matter with his wife and mother, and stated to them that he declared a trust of his stock trading during 1928 for the benefit of the family upon certain terms and conditions. Taxpayer agreed to assume personally any losses resulting from the venture, and to distribute the profits, if any, in equal shares to his wife, mother, and two minor children after deducting a reasonable compensation for his services.-During 1928 Taxpayer carried on the trading operations and made $10,000, which he reported in his income tax return for that year. The profits remaining were then divided in approximately equal shares among the family members, and the amounts were reported in their respective tax returns for 1928.-The amounts allocated to the beneficiaries were credited to them on the taxpayer’s books, but they did not receive the cash, except the taxpayer’s mother, to a small extent.Issue: Did the taxpayer create a valid trust, the income of which was taxable to the beneficiaries?

Notes:Issue: Who is the taxpayer? IRS: Brainard is the taxpayer (higher tax bracket).Brainard: Trust is the taxpayer (lower tax bracket).

The profits Brainard hoped to pass on to his family constituted an expectancy, not identifiable property. Thus, a trust was created, but it was not created until after the income was earned.Result: The income is taxable to Brainard individually, and the IRS wins.

How could Brainard have done this effectively? He could have taken $100,000 in cash and said, “I’m holding this $100,000 in trust for the benefit of my children, and I’ll invest it over the next year.” All he needed was some property to make the trust valid. His lawyer screwed up!

Speelman v. Pascal: A theatrical producer who held the rights to make a musical version of Pygmalion, assigned to his secretary (who was also his lover) a percentage of profits to be derived from the musical stage version of the play – a version which had not yet been written. Did the secretary acquire an enforceable right to the future profits from what became of My Fair Lady? The Court of Appeals held that she did. How is this different from Brainard? Speelman had acquired the contractual rights to produce My Fair Lady, whereas Brainard had nothing.

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5. Capacity/Intent

In order to create a trust, the settlor must have capacity:

§112.007: Capacity of SettlorA person has the same capacity to create a trust by declaration, inter vivos or testamentary transfer, or appointment that the person has to transfer, will, or appoint free of trust.

Testamentary transactions:1. Statute of Wills (TPC)2. Testamentary capacity

Inter vivos transactions: 1. Statute of Frauds2. Real v. Personal property3. Declaration of trust v. Transfer in trust4. Capacity to contract at the time of the creation of the trust (this is unique to TX)

We’ll look at these more later, but for now, notice that the capacity requirements are different.

In order to create a trust, a settlor must have intent:

Intent: specifically, to impose legally enforceable duties on the trustee on behalf of the beneficiary.

Precatory intent: Words of request or entreaty. If these are used, there’s no express trust.Mandatory intent: Words imposing an enforceable duty. If these are used, there is an express trust.

Four Corners Rule: essential elements of an express trust (trustee, beneficiary, property, purpose, intent) must be manifest within the four corners of the document that is admitted to probate after the settlor’s death.

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Hypo: “I bequeath $10,000 to my beloved brother, John Smith, but I ask him to use part of the money to care for our ailing cousin, Adam.”

This arguably contains all the elements of an express trust. However, the language “I ask” is precatory, and thus an express trust is not created.

Hypo: “I bequeath $10,000 to my beloved brother, John Smith, but I ask him to pay $50 per month toward care for our ailing cousin, Adam.”

This hypo is more questionable. The more details (i.e., amount of money, beneficiary), the more likely that an express trust has been created.

Hypo: “I bequeath $10,000 to my accountant, John Smith, who is instructed as to my charitable wishes.”

This is more likely to be mandatory. When someone bequeaths money to his accountant, he is most likely doing so for his accountant to manage it. When language addresses a pre-existing, legally recognized, close relationship, the language is probably mandatory. Additionally, the words “instructed” are more mandatory in nature.

With wills, we cannot provide the missing elements with extrinsic elements (Four Corners Rule). In this case, a resulting trust would probably occur in O’s heirs.

Hypo: “I bequeath $10,000 to my brother, John Smith, who is instructed as to my charitable wishes.”

This would be precatory. Because of the relation between O and his brother, it’s possible that O could have intended a gift. However, we wouldn’t need a resulting trust. John Smith owns in FSA.

Hypo: “O to A in trust for B.”

Here, there’s no purpose. Can the court provide a purpose for the trust? No! See Four Corners rule. This is a passive trust, and thus FSA vests in B.

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Spicer v. Wright -Leila Spicer died March 22, 1968, survived by her husband, Meade Spicer, Jr. her sole heir at law.-In her holographic will dated May 20, 1966, admitted to probate, she named her sister, Anne Beecher Wilson as “executor” without bond. -Anne Wilson died in 1970. Wright qualified as Mrs. Spicer’s administrator and filed a bill seeking aid and guidance in the construction of the will.The third paragraph of the will provided:

“My estate of every kind and description, personal, real estate, etc., I give to my sister, Anne Beecher Wilson to be disposed of as already agreed between us.”

Issue: Is the language of Mrs. Spicer’s will, read in context with the extrinsic evidence, sufficient to establish an intent to create an express trust?

Notes:Important language in will: “…to be disposed of as already agreed between us.”

This language sounds mandatory, but the court says it’s precatory. What effect?If mandatory The trust is invalid for lack of a beneficiary. Thus, resulting trust in O’s heirs.If precatory No trust is created. Thus, outright gift to sister in FSA.

Levin v. Fisch-Bertha Cohen’s will:

“All of my other property…I give, devise and bequeath to my two children, Suzanne Cohen Levin and Jay Howard Cohen…It is my desire that each year out of the annual rent proceeds, rents and revenues from such property during such year so received by my said daughter and son they pay to my sister Mrs. Laura Fisch the sum of $2,400…It is my desire that my children continue such payments during the remainder of my said sister’s life time provided that should my sister get married, then my said children should not continue payment.”

-When Bertha executed the will, she and Fisch were both widows, approximately 50 years of age. Bertha owned property worth $1 million, and Fisch owned property worth $25,000.-Children were 21 and 25. One year before, they inherited from their father property worth $1 million.-For two years prior to her death, Bertha paid Fisch $200/month. She also made other gifts to Fisch and her daughter of clothing and money. -Fisch was in poor health and unable to work full time. Her income was approximately $300/month.-Children argue that the phrase “It is my desire” should be given its ordinary and natural meaning (precatory), and should not be interpreted as a bequest or a mandatory instruction.Issue: Was Bertha’s “desire” that her children pay Fisch $2,400/month a suggestion or a mandate?

Notes:Important language from will: “It is my desire…”

The word “desire” in its ordinary and primary meaning is precatory, but is often construed when used in a will as directive or mandatory when it clearly appears that such was the intention of the testator form a consideration of the instrument as a whole and the surrounding circumstances.

In this case, the provision of the will for the payment to Fisch of $2,400 annually was set out specifically as well as the desire or direction of the testatrix that such payments should be discontinued in certain specified contingencies. This – along with the surrounding circumstances – suggests that the testatrix intended a positive directive.

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D. Creation of Trusts

Testamentary transactions: 1. Statute of Wills (TPC)2. Testamentary capacity

Inter vivos transactions: 1. Statute of Frauds2. Real v. Personal property3. Declaration of trust v. Transfer in trust4. Capacity to contract at the time of the creation of the trust (this is unique to TX)

1. Creation of Testamentary Transactions

One issue when dealing with testamentary transfers and the SOW:1. Is the express trust valid?

Hypo 1: O’s will: “O to A.” There is oral testimony from several priests that prior to O’s death, O and A had entered into an oral agreement that A would hold and manage this property for the benefit of B, another friend of O.

According to the Four Corners Rule, no extrinsic evidence can be used to create an express trust. Thus, A has FSA in Blackacre. This doesn’t seem fair. Does B have a remedy? Possibly:

Constructive trust: Not really a trust at all, but a remedial device used by courts to achieve results which do not easily fit within other doctrinal frameworks. No one intends to create a constructive trust. Instead, the constructive trust is a flexible, remedial device often used to prevent unjust enrichment. Constructive trusts are sometimes called “secret trusts.”

If the court imposes a constructive trust, A will become the “constructive trustee.” He will only hold Blackacre for as long as it takes him to transfer it to B.

Hypo 2: “O to A for B, and … (terms)”

This is what we want to create a valid, testamentary express trust!

Hypo 3: “O to A for B.” No other testimony.

There’s no purpose, so this is a passive trust. Thus, legal and equitable title merge and FSA vests in B.

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Hypo 4: “O to A for B.” Priests testify as to trust.

We can’t have an express trust because there’s no purpose. But if we admit the evidence, the court can impose a constructive trust. What if we don’t admit that evidence? We’re back to the passive trust situation, and B gets the property in FSA.

Hypo 5: “O to A as trustee.”

No identifiable beneficiary, so no express trust. Any remedy?

resulting trust: Generally arises when a settlor intends to create a trust, but the trust fails for some reason. For instance, when a settlor transfers property to a trustee in trust for beneficiaries too indefinite to permit enforcement (like hypo above), the courts say that the trustee holds the property in a “resulting trust” for the benefit of the settlor or settlor’s heirs. Practically, all that means is that once the court concludes that the express trust fails, the “trustee” must transfer the property back to the settlor. Similarly, if the trust has more property than necessary to accomplish its purpose, the trustee is said to hold the remainder in a resulting trust for the benefit of the settlor or settlor’s heirs.

We don’t know who the beneficiary is, but we know O didn’t intend to give Blackacre to A as an outright gift. Thus, a resulting trust will be imposed, and the property will go to O’s heirs.

Hypo 6: “O to A as trustee.” Priests testify as to trust.

It would seem that a constructive trust would be imposed for B’s benefit. But according to accepted common law, a resulting trust will be imposed. Equitable title will vest in O’s heirs rather than B. This is the rule in TX, but in other states, a constructive trust might result.

2. Creation of Inter Vivos Transactions

O either transfers legal title and retains equitable title, or transfers equitable title and retains legal title.

pre-1943 TX followed the common law1943-1983 Texas Trust Act era

1983-present Texas Trust Code era

Two issues when dealing with inter vivos transfers and the SOF:1. Is the express trust valid?2. Is the express trust enforceable?

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Personal Property

pre-1943 Parol trusts of personal property were permitted.

Hypo: Featherston owns FSA in a piece of chalk. He declares in front of all of us, “I am the trustee of this piece of chalk for the benefit of my grandson. When he turns 21, I’m going to give him the chalk.” Years later, Featherston’s grandson comes asking for the chalk. What result?

We have a trustee, purpose, beneficiary, property, and intent. Thus, the trust is valid. Now the question is: Is the trust enforceable? Pre-1943, yes. So long as the grandson can prove the essential elements of the trust (via our testimony), the trust is enforceable.

1943-1983 Legislature created a special SOF for trusts (through the TTA). However, that SOF only applied to trusts dealing with real property. Thus, the chalk hypo above would come out the same.

1983-present Legislature created a new SOF for trusts (through the TTC). KNOW THIS!!

§ 112.004: Statute of FraudsA trust in either real or personal property is enforceable only if there is written evidence of the trust’s terms bearing the signature of the settlor of the settlor’s authorized agent. A trust consisting of personal property, however, is enforceable if created by:

(1) a transfer of the trust property to a trustee who is neither settlor nor beneficiary if the transferor expresses simultaneously with or prior to the transfer the intention to create a trust; or

(2) a declaration in writing by the owner of property that the owner holds the property as trustee for another person or for the owner and another person as a beneficiary.

Under the chalk hypo, Featherston can plead and prove the SOF (Or he can just be a good guy give over the chalk to his grandson……Remember, the trust is valid!!) However, if Featherston asks me to hold the chalk in trust for his grandson, (1) would apply, and the trust would be enforceable.

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Real property

pre-1943 It was possible to create an inter vivos trust of real property in a transfer but not a declaration situation.

Hypo: Featherston puts a piece of land in trust for his grandson, with himself as trustee.

Texas law would have required a writing, because this is a declaration situation.

Hypo: Featherston transfers his land to me to hold in trust for his grandson.

Texas courts would have enforced the trust, because this is a transfer situation.

1943-1983 A trust in relation to, or consisting of real property, shall be invalid unless created, established, or declared by written instrument. (This rule suggested that a real property trust was VOID unless it was in writing. This put Texas in a distinct minority.)

1983-present Current TTC statute:

§ 112.004: Statute of FraudsA trust in either real or personal property is enforceable only if there is written evidence of the trust’s terms bearing the signature of the settlor of the settlor’s authorized agent. A trust consisting of personal property, however, is enforceable if created by:

(1) a transfer of the trust property to a trustee who is neither settlor nor beneficiary if the transferor expresses simultaneously with or prior to the transfer the intention to create a trust; or

(2) a declaration in writing by the owner of property that the owner holds the property as trustee for another person or for the owner and another person as a beneficiary.

Hypo: Featherston conveys Blackacre to me. From the face of the deed, it appears that I have FSA. However, we had an oral agreement that I would hold the property in trust for Featherston’s grandson.

Valid trust? Yes, all elements are present. But what if I decide not to convey Blackacre when the grandson turns 21? I can plead the SOF, and I will be able to keep Blackacre.

Hypo: Same, but everyone in the class testifies to our oral agreement.

No change. I have a legal defense – the SOF. Does it matter that I’ve been unjustly enriched? Texas courts have traditionally said no. If we were to allow the imposition of a constructive trust, the SOF would become a nullity!

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Goodman v. Goodman-About five years before his death, Clive gave Gladys general power of attorney. -About one year before his death, he transferred his major asset, Ozzie’s East Tavern, to Gladys. -Gladys sold the tavern on an installment contract for $70k and deposited the money in her account. -Clive was survived by four children: Scott (17), Craig (16), Michelle (13), and his stepdaughter Tamara (21). He was also survived by his ex-wife, Shirley, who remained his close friend. -Eight years after Clive’s death, when Scott was 25 years old, he asked Gladys for the first time for money from the sale of Ozzie’s East and Clive’s other assets. -She told him she had taken care of Clive and felt she deserved it. Scott then hired a lawyer. -Shirley testified that Clive had a will, had transferred all of his property to Gladys, and intended his children to have his property when they were old enough to responsibly manage it. -She also testified that shortly after the funeral, Gladys told her there was no will but she would give the children Clive’s money when they were old enough to be responsible. -This information was relayed to the children. -Shirley also testified that in a conversation with Gladys they discussed at what age the children would get the money, and Gladys stated that she didn’t know so it would be sometime when they are mature enough to handle it. Issue:

1. Did Clive transfer his property to Gladys as a gift, or to hold in trust for the children?2. Is the children’s claim barred by the SOL?

Notes:Why was this inter vivos real property trust not invalidated by the SOF, like in our previous hypo?Washington had a SOF for real property trusts, just like Texas does. Because Gladys’ lawyer didn’t plead the SOF in a timely manner!!

As the defendant, you must plead SOF as an affirmative defense. The court won’t do it for you!

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Hypo: Parents were having financial problems. They deeded their house over to their son, with the understanding that once they got out of financial trouble, the son would convey it back. They continued to live in the house for years. Eventually, their son evicted them. Result?

Valid inter vivos express trust? Yes – trustee, purpose, beneficiary, property, intent. Thus, the parents can file suit to enforce the terms of the trust. The son will plead the SOF as an affirmative defense – This is a transfer of real property, and there was no written agreement. Conclusion: The express trust is unenforceable, and a constructive trust is ordinarily unavailable. Is there any situation where a constructive trust would be available?...

In the case of an inter vivos express trust:A constructive trust is only available if, at the time of the transaction, one of the parties committed fraud, duress, or undue influence.

For example: If the parents and son were in some type of confidential relationship at the time the transfer is made, the court can impose a constructive trust on the theory that the parents had the right to rely on the son’s word. Understand, however, that a mere familial relationship does not cut it. They had to have been very close to meet this standard.

Another creative argument for the son: the doctrine of clean hands. The parents deeded the house to their son to avoid their creditors, and that’s not good public policy. Parents’ response: This is our homestead, so we wouldn’t need to avoid creditors.

With respect to Goodman: Even if Gladys had pleaded the SOF, Featherston would have still imposed a constructive trust for the grandkids. Why? Because Gladys had power of attorney for Clive, so there was a close, confidential, pre-existing relationship. Thus, Clive had the right to rely on her word.

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Pope v. Garrett-Thomas Green, a neighbor and friend of Carrie Simons, brought to her to be executed a will prepared by him at her request, by the terms of which all of her property was devised to Garrett, who was not related to Simons. -Present in the room at the time, besides Garrett and Green, were the Reverend Preacher and Jewel Benson, a friend of Garrett, who had been requested to come as witnesses of the will, and Lillie Clay Smith, sister of Simons, Mary Jones and Evelyn Jones, nieces of Simons, and Alberta Justus. -When Simons prepared to sign the will, Evelyn Jones and Lillie Smith, by physical force or by creating a disturbance, prevented her from carrying out her intention to execute the will.-Simons was of sound mind at the time.-Shortly after the incident Simons suffered a severe hemorrhage, lapsed into a semicomatose condition and remained in that condition until her death. -There is no proof that any of the other heirs of Simons, other than the ones present in the room, were connected with the violence that prevented the execution of the will. Issue:

1. Should a trust be impressed in favor of Garrett upon the property described in the will? 2. If so, should the trust be impressed upon the interests inherited by all of the heirs or only upon

the interests inherited by those who participated in the acts of violence that prevented the execution of the will?

Notes:1. When the heirs of Simons who were guilty of the wrongful act acquired, by the inheritance, the

legal title to interests in the property, they became constructive trustees for Garrett. 2. The trust should be impressed upon the interests inherited by all of the heirs.

If property is acquired by someone wrongfully, Texas courts can impose a constructive trust not only on the wrongdoer, but also on whoever would be unjustly enriched by that wrongdoing.

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Garcia v. Fabela-The Garcias were the fee simple owners of their homestead located in Bexar County, Texas. -The real estate was encumbered by a vendor’s lien and deed of trust to secure payment of a promissory note in the original amount of $11,500. -The Garcias fell into default, the vendors elected to accelerate and foreclose. -The Garcias attempted to refinance the indebtedness with the Union State Bank but were rejected. -After the bank rejected their loan application, the Fabelas offered to help the Garcias avoid the impending foreclosure sale of their homestead.-The Fabelas offered to take legal title in the real estate in trust for the Garcias and to hold title as trustees until the outstanding balance due was paid and discharged in full. -The Fabelas agreed to use their superior credit rating to obtain funds to discharge the outstanding note and to refinance it with a new note. -Pursuant to this understanding, the Garcias executed a general warranty deed to the Fabelas, who in turn executed a deed of trust. -The Fabelas agreed to retain legal title in trust for the Garcias until the new note was paid, whereupon fee simple title would be reconveyed. The Fabelas further agreed to pay the property taxes and the installments due on the new note which was assigned by the Garcias to the Union State Bank. -The Fabelas and Garcias had been close friends for 20 years. -The next year, the Fabelas advised the Garcias that they no longer owned any interest in the real property and that no trust agreement existed between them. Issue: Does the confidential relationship in this case save the equitable action from being defeated by the Statute of Frauds? Notes:A constructive trust arises where a conveyance is induced on the agreement of a confidant to hold in trust for a reconveyance or other purpose, where the confidential relationship is one upon which the grantor justifiably can and does rely and where the agreement is breached. However, whether a confidential relationship exists is a fact question; thus, summary judgment was improper.

Rule: Ordinarily, a parol agreement between a grantor and a grantee that the property conveyed shall be held in trust for the grantor or some other person, is an express trust which cannot be enforced where the Statute of Frauds requires a written instrument to create a trust.

The abuse of the confidential relationship in this case consists merely of the Fabelas’ failure to perform their promise. The rule stated in the holding above is not limited to a particular class of persons. An abuse of confidence may be an abuse of either a technical fiduciary relationship or of an informal relationship where one person trusts in and relies upon another, whether the relationship is social, domestic, or merely personal.

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Nolana Development Association v. Corsi-Nolana was a joint venture composed of Conine, Hendricks and Rogers. Nolana’s only asset was a 40-acre tract, which was subject to an outstanding note and lien of $140,000.-Rogers sole his interest in Nolana to Manny Corsi, Ann Corsi’s husband. -As part payment, Manny assumed Rogers’ share of indebtedness, but in order to pay the additional purchase price, the land was refinanced with a $189,000 note at Jefferson Savings & Loan Association. The original $140,000 note was retired, and the additional $49,000 went to Manny, which he used primarily to purchase Rogers’ interest.-Title to the tract was placed in Ann Corsi’s name as trustee for the mutual convenience of all parties.-The $189,000 note was signed by Ann Corsi “as trustee,” Conine, and Manny Corsi, but not by Hendricks, even though she owned a 1/3 interest in Nolana.-Only Ann Corsi “as trustee” signed the deed of trust on the property.-In a letter to Conine and Hendricks, Manny and Ann Corsi acknowledged that Conine, Hendricks, and the Corsis each owned 1/3 of the property, and the Corsis agreed to be solely responsible for the additional $49,000 as well as for 1/3 of the original $140,000 debt. Ann Corsi signed this letter without the designation “as trustee.”-Jefferson informed the parties that the loan was in default and the foreclosure was imminent.-No one paid the note and Jefferson foreclosed.Issue: Was a trust created, with Ann Corsi as trustee?

Notes:There is no proof of the trust or duties. Therefore, there was no breach of fiduciary duty under an express trust theory.

Nolana did not create an express trust under any of the TTC provisions. Moreover, under the Statute of Frauds provision, a trust consisting of real property is invalid unless created by a written instrument and signed by the trustor. The term “trustee” appears in conjunction with Ann’s name on the note and deed of trust, but the mere designation of a party as “trustee” does not create a trust.

Even if a trust had been validly established, the record is devoid of any evidence describing Ann’s duties and responsibilities as trustee. If a trustee is not given affirmative powers and duties, the trust is passive, and legal title is vested in the beneficiaries.

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E. Retention of Control or Interest by Settlor

As trust law evolved, the following trusts were recognized gradually:

TS (irrevocable)

B

S/B T (irrevocable)

S/T B (irrevocable)

TS (irrevocable)

S for life, Rem to B

S/T S for life, (irrevocable)Rem to B

But eventually, people wanted the trusts to be revocable. More liberal trusts were recognized, with the following understanding: If a settlor has the power of revocation, we are going to treat that settlor as if he has full ownership of the property. (i.e., tax purposes, creditors)

TS (revocable)

B

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S/B T (revocable)

S/T B (revocable)

TS (revocable)

S for life, Rem to B

The above evolution took hundreds of years. Then lawyers pushed the envelope again, and the below trust was recognized. Some commentators thought the law was going way too far:

S/T S for life, (irrevocable)Rem to B

What’s the problem with this? By definition, a trust must create legally enforceable duties on the trustee to hold and manage the property for another person. In this situation, the beneficiary cannot practically enforce the duties that the trustee owes to him, because the trustee will just turn around and revoke the trust.

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Westerfeld v. Huckaby-Nov. 7, 1966 Miller executed two declarations of trust, each describing a separate lot. Miller also executed and recorded two separate quitclaim deeds by which she quitclaimed to herself as trustee and to her successor trustee the same lots covered by the declaration of trust.-The declarations of trust were for “the use and benefit of Huckaby.” Huckaby was also identified as the successor trustee upon Miller’s death or incapacity. -Miller reserved broad beneficial rights for herself.-Feb. 14, 1968 Miller died.Issue: Could Miller create valid trusts in her own property, even though she reserved in herself broad beneficial rights, as well as the right to revoke the trusts and the right to control or manage the acts of the trustee?

Notes:

S/T S for life, (irrevocable)Rem to B

The settlor/trustee’s heirs are arguing that this is not a valid trust.The beneficiary wants this trust be valid because it’s valuable!

Court says: For a valid trust to be created, some equitable interest must be passed to the beneficiary. That interest doesn’t necessarily have to be valuable (i.e., not many people would want to buy the beneficiary’s interest, since the settlor/trustee could just immediately sell it).

This was good estate planning! If you have a lot of confidence in your beneficiary, you can set up a trust like this, avoid probate, and ensure an easy transfer of your property after death.

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The above evolution took place during the TTA era. In the TTC, the legislature explicitly blessed the above trust:

§112.033: Reservation of Interests and Powers by SettlorIf during the life of the settlor, an interest in a trust or the trust property is created in a beneficiary other than the settlor, the disposition is not invalid as an attempted testamentary disposition merely because the settlor reserves or retains, either in himself or another person who is not the trustee, any or all of the other interests in or powers over the trust or trust property, such as:

(1) a beneficial life interest for himself;(2) the power to revoke, modify, or terminate the trust in whole or in part…

§112.051: Revocation, Modification, and Termination of Trusts(a) A settlor may revoke the trust unless it is irrevocable by the express terms of the instrument creating it or of an instrument modifying it.

(b) The settlor may modify or amend a trust that is revocable, but the settlor may not enlarge the duties of the trustee without the trustee’s express consent.

(c) If the trust was created by a written instrument, a revocation, modification, or amendment of the trust must be in writing.

Under the common law, the rule was exactly the opposite! The established rule now is that a trust is revocable unless is expressly deemed irrevocable.

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Pour Over Wills and Pour Over Trusts

Pour over trust: Valid, enforceable inter vivos trust. May be revocable or irrevocable, but most of the time revocable. May be funded or unfunded during the settlor’s lifetime. “Pour over” because we couple it with a pour over will.

Pour over will: “Whatever assets remain at my death, I devise to the trustee of that inter vivos trust.”

Another way to create a pour over trust:

Unfunded (Underfunded) insurance trust: Usually, this trust is nominally funded (Only $10 or so. If it was truly unfunded, there would be no trust property). Settlor will then take a life insurance policy and make the proceeds of the policy payable to the trustee of this trust.

These have been historically popular. However, sloppy lawyering, etc. has caused some problems. Sloppy lawyers would create a trust that was truly unfunded. Because there was no trust property, the trust was invalid. The insurance company would refuse to pay an invalid trust. For this reason, the legislature changed the definition of “property”:

§111.04(12)“Property” means any type of property, whether real, tangible or intangible, legal or equitable. The term also includes choses in action, claims, and K rights, including a K right to receive death benefits as designated beneficiary under a policy of insurance K, employees’ trust, retirement account, or other arrangement.

Thus, the right to receive funds from an insurance policy – something that was previously classified as an expectancy – is now “property” under Texas law.

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F. Nature of Equitable Interests

When determining whether we had a valid trust, we considered these issues:

Property v. Expectancy v. BP claimLegal v. Equitable

From now on, assume we have a valid trust.Now, we must identify what kind of equitable interest each beneficiary has. Issues:

Present interest v. Future interest: This depends upon the terms of the trust (intent of the settlor when he created the trust). If the trust is revocable, we look at the original interest that the beneficiary retained, but we should also realize that it could be revoked.

Right to income v. Right to principal: Principal is the original trust property, along with any and all mutations of the same. The income is the money that the trust makes, excluding the principal balance.

For purposes of our discussion, assume this setup:

TS

A for lifeRem to B

Remember the three general rules of ownership. If you own something, it is:1. Assignable2. Attachable3. Inheritable

But these are general rules, and general rules have exceptions.

Hypo: During A’s lifetime, could he assign his equitable interest?Yes. A only has an equitable LE, but that’s still a property interest.

Hypo: A gets in financial difficulties. Can his creditors attach the trust?Yes, but they can’t gain any greater rights than A has. Thus, the creditors only have an equitable LE.

Hypo: When A dies, can anyone inherit his interest?No. His LE terminates, and the remainder goes to B.

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Hypo: During B’s lifetime, could he assign his interest?Yes. He has a property interest.

Hypo: B gets in financial difficulties. Can his creditors attach the trust?Yes, but they can’t gain any greater rights than B has.

Hypo: If B dies before A, can anyone inherit his interest?Yes. His heirs/devisees will inherit his remainder.

Most trusts won’t be that simple. Most trusts we will encounter will be one of the following:

Mandatory: “S to A in trust.” The trust mandates that the trustee must deliver all the income to A in installments. Thus, the beneficiary has a mandatory income interest.

Ascertainable standard: “During A’s lifetime, the trustee shall distribute only as much income as A needs for A’s health, education, maintenance, or support.” The trust is typically called a support trust. A has an income interest that is subject to an ascertainable standard (HEMS). As remainderman, B has standing to argue if the trustee fails to support A in an appropriate way.

Discretionary: “During A’s lifetime, the trustee is to pay A only as much income as the trustee, in his discretion, deems appropriate.” Note: There is no reference to an ascertainable standard. A has an income interest, but it’s subject to the discretion of the trustee. Factors to consider when determining whether the trustee has exercised his discretion appropriately:

a. Did the trustee act in good or bad faith?b. Was the trustee biased toward either A or B?c. Did the trustee make deliberate or capricious decisions?

Hypo: Mandatory – assignable by A?Yes.

Hypo: Mandatory – attachable?Yes, but no rights greater than A has.

Hypo: Ascertainable standard (to educate A) – assignable by A?A could assign the trust to Baylor for his tuition, but he couldn’t assign it to pay his creditor.

Hypo: Ascertainable standard (to educate A) – attachable by Baylor?Yes. It’s for A’s education.

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Hypo: Ascertainable standard (to educate A) – attachable by MasterCard?No. It’s not for A’s education.

Hypo: Discretionary – assignable by A?Yes. However, the assignee cannot get rights greater than A’s. Thus, neither A nor the assignee could go to the trustee and demand payment. Also, if the trustee makes a distribution to assignee, B would be upset and the trustee would have breached a fiduciary duty to B.

Hypo: “Mandatory income to A.” At A’s death, B has the mandatory principal interest. At the time the settlor creates the trust, the settlor’s lawyer advises A: “You need to understand that these interests are property interests, and thus the beneficiaries can technically assign/attach them, etc.” Settlor doesn’t want that. What to do?

Attach a forfeiture provision (condition subsequent to the beneficiaries’ interests). “If at any time in the future, A attempts to assign his interest, or a creditor attempts to attach A’s interest, A’s interest will pass through a shifting EI to B.”

In TX and most other American jurisdictions, there’s an alternative that’s not so harsh:

disabling provision: “No beneficiary has the power to voluntarily or involuntarily assign his interest in the trust.” Thus, even if A tries to assign the interest, it goes back to him.

§ 112.035: Spendthrift Trusts(a) A settlor may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal or in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee.

(b) A declaration in a trust instrument that the interest of a beneficiary shall be held subject to a “spendthrift trust” is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle.

(c) A trust containing terms authorized under (a) or (b) may be referred to as a spendthrift trust.

(d) If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.

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Hypo: S transfers Blackacre to his friend in trust. Instruction: Pay Blackacre’s income to A for A’s lifetime, and then the principal to B. The trust purports to be a spendthrift trust. Someone has a claim against the settlor, and wants to attach the settlor’s property. Can the creditors get to some part of the trust?

Yes. They can attach the part of Blackacre that the settlor retains. Thus, they could attach the income for the life of the settlor. What about a creditor of the remainderman? That creditor could not attach any of the trust.

Hypo: S creates a spendthrift support trust. S is the beneficiary, and the trustee is instructed to use the money to support S during S’s lifetime. Could S’s creditors attach any part of it?

This is subsection (d) refers to: If the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.

Thus, to the maximum extent that the income or principal could be distributed to the settlor by the trustee, the creditor can get the entire thing.

If trust is revocable, S’s creditors can go after any and all property in the trust because of the power of revocation. It doesn’t matter whether a spendthrift provision is there or not.

Wilcox v. Gentry-In 1985, Frank Gentry created a revocable trust.-During his lifetime, Frank was the beneficiary of the trust. Upon his death, certain trust property was to be distributed to named individuals. -The residue of the Trust’s assets was to be divided into five equal shares. Four of these shares were to be distributed to the four individuals designated as their recipients. This action concerns the fifth share. -The trust states: “One share shall remain in trust until the death of Isabell Gentry. The trustee, in his sole discretion, may make such distributions of income and principal to her or on her behalf as the trustee deems advisable after giving due consideration to all sources of funds available to her…”-The courts agree that this is a discretionary trust. -Ron and Nancy Wilcox obtained a judgment against Isabell Gentry for fraud in the sale of a residential property. -Their judgment was for $40k actual damages and $11,667.35 punitive damages. -They garnished the Trust to seek satisfaction of their judgment. -Frank Gentry had died previously thus activating the relevant section of the Trust. Issue: If the trustee exercises its discretion and makes a payment on behalf of the beneficiary, is such payment subject to the creditors’ garnishment?

Notes:support trust: A creditor cannot attach a support trust to satisfy a debt. The trust can only be used for support of the beneficiary.

discretionary trust: The creditor can attach distributions made to or on behalf of the beneficiary. However, the creditor cannot force the trustee to make a distribution.

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Unlike discretionary trusts, spendthrift trusts permit a trust settlor to insulate trust assets from creditors while permitting the beneficiary to enjoy trust assets for purposes other than support or education. Different states handle spendthrift trusts differently.

Some states will allow a spouse or a child to go after the assets in a spendthrift trust for purposes of alimony or child support. Texas has one provision on this:

§154.005: Payments of Support Obligation by Trust(a) The court may order the trustees of a spendthrift or other trust to make

disbursements for the support of a child to the extent the trustees are required to make payments to a beneficiary who is required to make child support payments as provided by this chapter.

(b) If disbursement of the assets of the trust is discretionary, the court may order child support payments from the income of the trust but not from the principal.

*New change to §112.035*

§112.035: Spendthrift TrustsIf a beneficiary of the trust is the trustee, and if as trustee, the beneficiary has the ability to appoint income or principal to himself in accordance with an ascertainable standard, that does make the beneficiary a “constructive settlor.” (which would trigger (d))

Random points

Sometimes, a trust document will purport to give the trustee “unfettered discretion” or “absolute discretion.” For purposes of trust law, there’s no such thing. Trustees are always subject to fiduciary duties, not matter what the trust document says.

spray trust: trustee has discretion to pay the income to one or more named beneficiaries

Should a lawyer serve as a trustee for a client?Malpractice insurance will only protect you if you’re conducting lawyer duties. When you become a trustee, you step out of your lawyer shoes. Thus, you can get sued and you won’t have any safety net. In Featherston’s opinion, lawyers shouldn’t serve in a fiduciary capacity for clients.

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G. Duties and Powers of Trustees

For this section, assume we have a valid, enforceable trust.

Duties of Trustees

When you become a trustee, the law imposes certain legally enforceable duties.

General rules:

1. Duty to carry out the purposes of the trust-Do what you’ve been told to do.

2. Duty to take possession, preserve, protect, segregate, earmark-For example, you must separate the trust assets from your personal assets

3. Duty to exercise reasonable care and skill in carrying out responsibilities-Standard: reasonably prudent fiduciary under the same or similar circumstances

4. Duty to be a “prudent investor”-This includes the duty to make profitable use of the property, etc.

5. Duty of loyalty-In managing the trust property, recognize that it really belongs to the beneficiary. Thus, you must act in the sole interest of the beneficiary. Avoid any conflict of interest. Don’t engage in self-dealing.

6. Duty of impartiality-This goes hand in hand with the duty of loyalty. If there is more than one beneficiary, the trustee has the duty to act impartially and be fair to both beneficiaries.-Ex: When allocating receipts as between income and principal, you must allocate fairly so a proper accounting of those assets can be made.-If a bank is serving as fiduciary, it must comply with state/federal regulations.

7. Duty to keep beneficiaries informed of any material developments-It’s their property! Keep them informed.

8. Duty to account-Fiduciaries must keep good records. At reasonable times, the trustee has a duty to comply with a request from the beneficiary for an accounting of the trust.

Duty of Inquiry

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The duty of inquiry is not imposed on the trustee. It is imposed on third parties…

Rule: If you’re a third party who is engaged in a transaction with a known fiduciary (actual or constructive knowledge), it is your responsibility: 1) to confirm that you’re dealing with the real fiduciary; and 2) to confirm that the fiduciary has the authority to engage in that particular transaction. If you don’t inquire, you can be held personally liable to the beneficiary.

Hypo: Blackacre is an asset in trust. The terms of the trust prohibit the trustee from selling Blackacre except under certain circumstances. Nevertheless, the trustee decides – for an impermissible reason – that he wants to sell Blackacre. He markets the property and finds a buyer. He sells Blackacre and receives consideration for the sale. The buyer knows that the trustee is a fiduciary. The third party’s lawyer forgets that his client has a duty of inquiry. After the sale, the trustee skips town with the money. The third party then sells Blackacre. What should the beneficiary do?

Option A: He can sue the trustee, but the trustee is gone. Option B: He can sue the third party, alleging that the third party violated the duty of inquiry, and then ask the court to impose a constructive trust.

Texas has tweaked this rule:

§114.082: Conveyance by TrusteeIf property is conveyed or transferred to a trustee in trust but the conveyance or transfer does not identify the trust or disclose the names of the beneficiaries, the trustee may convey, transfer, or encumber the title of the property without subsequent question by a person who claims to be a beneficiary under the trust or who claims by, through, or under an undisclosed beneficiary.

This creates a narrow exception. If the terms of the trust are not in the trust records, but instead are elsewhere, actual/constructive notice won’t be imposed on the third party. This wouldn’t have helped in the above hypo.

§114.0821: Liability of Trust PropertyAlthough trust property is held by the trustee without identifying the trust or its beneficiaries, the trust property is not liable to satisfy the personal obligations of the trustee.

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Hypo: S conveys Blackacre to Jane. From the deed, it appears that Jane has FSA. However, at the time of the conveyance, S and Jane have an oral agreement that Jane will hold the property in trust until S’s children reach age 21. At 21, she will deliver Blackacre to S’s children. Jane incurs a personal debt. Creditors search the records and find the deed from S to Jane, which does not mention the trust. Creditors are prepared to attach the property, and S’s kids find out. What should you do as the family lawyer?

If Jane is a bad person and wants to get out of debt, she will assert the SOF, which she has every right to do. If Jane is a good person, she will explain that she doesn’t hold Blackacre in FSA. If she can provide proof that she holds Blackacre as trustee only, the creditors won’t be able to attach it.

Lesson: Put all terms of the trust in the trust instrument.

Powers of Trustees

Common Law – Trustee only has two types of powers:1. Express powers: settlor expressly grants these when they create the trust2. Implied powers: additional powers as are necessary to carry out the purpose

Texas law tweaks this setup:1. Express powers: settlor expressly grants these when they create the trust2. Implied powers: additional powers as are necessary to carry out the purpose3. Statutory powers: these were established when the TTC was established –

§113.001: Limitation of PowersA power given to a trustee by this subchapter does not apply to a trust to the extent that the instrument creating the trust, a subsequent court order, or another provision of this subtitle conflicts with or limits the power.

The settlor can negate any of these statutory powers if the he does not wish the trustee to have them. We’re not going to study the laundry list of statutory powers in this class, but know they’re there.

If the settlor leaves the exercise or non-exercise of a power to the discretion of the trustee, the trustee can choose what to do. If the beneficiary disagrees, he will bring an abuse of discretion action.If the settlor mandates duties for the trustee, it is mandatory that the trustee do those things.

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§113.051: General DutyThe trustee shall administer the trust according to its terms and this subtitle. In the absence of contrary terms in the trust instrument or contrary provisions of this subtitle, in administering the trust the trustee shall perform all of the duties imposed on trustees by the common law.

§113.059: Power of a Trustor to Alter Trustee’s Responsibilities(a)…the settlor by provision in an instrument creating, modifying, amending, or revoking the trust may relieve the trustee from a duty, liability, or restriction imposed by this subtitle.

§114.005: Release of Liability by Beneficiary(a) A beneficiary who has full legal capacity and is acting on full information may relieve the trustee from any duty, responsibility, restriction, or liability as to the beneficiary that would otherwise be imposed on the trustee by this subtitle, including liability for past violations, except as to the duties, restrictions, and liabilities imposed on corporate trustees.

(b) The release must be in writing and delivered to the trustee.

Keep in mind: This provision requires consent from all beneficiaries.

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H. Termination/Modification of Trusts

Under what circumstances can someone terminate/modify an already existing trust?

Settlor

Q: Is the trust revocable or irrevocable? (Recall: Trusts are revocable unless expressly irrevocable).

If it’s revocable, he has the right to terminate/modify the trust.If it’s irrevocable, he can only terminate/modify the trust in accordance with the trust agreement.

Trustee

Q: What powers does this particular trustee have? (Recall: express/implied, discretionary, etc.)

If the settlor granted the trustee the power to terminate/modify the trust, he can.If the settlor did not grant the trustee the power to terminate/modify the trust, he can’t.

Beneficiaries

English view: So long as we have 100% consent of any and all beneficiaries, they can force the trustee to comply with their wishes (bust the trust, modify the trust, etc.)

American jurisdictions: Even if we have 100% consent, we’re not going to allow the beneficiaries to bust the trust unless:

1) the beneficiaries obtain the consent of the trustee, or 2) the beneficiaries obtain the consent of the settlor, or

3) all the material purposes of the trust have been fulfilled.

Most courts say that a spendthrift provision is a material purpose in and of itself. Thus, it’s rare that an American court will allow the beneficiaries to bust the trust.

Even if a settlor is dead, corporate trustees will rarely give their consent. Why? It’s bad PR. Other people won’t want to use them as trustees if they allow the beneficiaries to walk all over them.

Compromise

If there is a legitimate controversy, and the beneficiaries agree to a compromise agreement, the courts will ignore the material purpose test.

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What if somewhere down the road, there’s a need to modify the trust, but we can’t get all the beneficiaries to agree?

Common Law:

Hypo: John (who died back in the 50’s) created a multimillion dollar testamentary trust: He gave his wife a life estate and his son the remainder. The wife gets $500 worth of income per month, and she has no right to invade the principal. Back when the trust was funded, $500 per month was a lot of money. But today, the wife would need $5,000 to maintain the same standard of life that she had in the 50’s. Until now, she’s lived on the $500 per month because she’s had her own business. But now, she’s too old to run her business. She tells the trustee that she needs more money. You are the lawyer for the trustee. What result?

We need to get the consent of all the beneficiaries – in this case, wife and son. What if the son is greedy or incapacitated? We must go to court. However, courts are hesitant to allow a deviation from the trust terms for distributive reasons.

Hypo: At the time John made the trust, he included a provision that precluded the trustee from ever selling one of the major trust assets: his beloved shares of Whamo stock. Today, Whamo is not doing so hot. It would be a lot better for the wife if the trustee could sell the stock and diversify. What now?

First, we should try to get the wife and son’s consent. If we can do that, do we also have to get the settlor’s permission? No. Unless the settlor maintained a power of revocation, or the settlor is also a beneficiary, we don’t need his permission. Thus, under the common law, if it’s an administrative issue, all you need is the consent of all the beneficiaries.

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Modern Practice

§112.054: Judicial Modification or Termination of Trusts(a) On the petition of a trustee or a beneficiary, a court may order that the trustee be changed, that the terms of the trust be modified, that the trustee be directed or permitted to do acts that are not authorized or that are forbidden by the terms of the trust, that the trustee be prohibited from performing acts required by the terms of the trust, or that the trust be terminated in whole or in part, if:

(1) the purposes of the trust have been fulfilled or have become illegal or impossible to fulfill; or

(2) because of circumstances not known to or anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of the purposes of the trust.

(b) The court shall exercise its discretion to order a modification or termination under (a) in the manner that conforms as nearly as possible to the intention of the settlor. The court shall consider spendthrift provisions as a factor in making its decision whether to modify or terminate, but the court is not precluded from exercising its discretion to modify or terminate solely because the trust is a spendthrift trust.

Hypo: Same, and son won’t agree to invasion of principal/sale of stock.

At common law, the wife would be left without a remedy. But in modern practice, the wife could ask the court for judicial modification under §112.054(a)(2) – circumstances not known or anticipated by the settlor; namely, the increased inflation/cost of living. Also note that §112.054 doesn’t distinguish between distributive and administrative changes. Thus, either one is possible if you can meet the statutory requirements.

Amendment to §112.054 = even more authority for courts: HB 1190 (Sept. 1, 2005) In cases of circumstances not anticipated by the settlor: Rather than having to prove the traditional (a)(2) components, you must merely prove that modification will “further the purposes of the trust.”

Administrative non-dispositive provisions may be modified if necessary to prevent waste or avoid impairment of trust administration.

Modification or termination necessary to achieve the settlor’s tax objectives are permitted so long as the changes do not defeat settlor’s intent. (this change is retroactive)

If all the beneficiaries agree, a trust may be terminated if its continued existence is not necessary to achieve a material purpose. This provision allows virtual representation: If an ancestor of a beneficiary has a beneficial interest that is not inconsistent with his descendant’s interest, the ancestor beneficiary can give consent on behalf of his descendants.

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Cy Pres

In the case of a charitable trust: If the purposes of the trust are fulfilled, the trustee has a duty to ask the court to apply the doctrine of cy pres (modify the terms of the trust in order to keep the trust from reverting back to the settlor/settlor’s heirs under a constructive trust).

Ex: A trust is set up to fight the bubonic plague. Once the bubonic plague is gone, the trustee has the duty to ask the court to apply cy pres – i.e., use the trust to fight some other catastrophic disease.

Also consider §112.036: RAP doesn’t apply to charitable trusts. This is even more reason to apply the doctrine of cy pres.

Also consider the last sentence of §112.036: “Any interest in a trust may, however, be reformed or construed to the extent and as provided by § 5.043.” Thus, the legislature has extended the doctrine of cy pres to the express trust arena.

(see Sample Trust, Supp. p. 391)

III. The Effect of Incapacity

If an elderly person has made arrangements (i.e., an inter vivos trust where the settlor is trustee and a successor trustee is set forth in case of incapacity), there will be no need for court action.

However, when an elderly person is incapable of handling his affairs and no other arrangements have been made, a family member or interested person must initiate the default regime – a court-appointed conservator (also called committee or guardian).

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Edward D. Jones & Company v. Fletcher-Carlton Anness asked McKinney, a stockbroker, to help transfer securities owned by Anness’s aunt, Cairns, to Anness.-At the time Cairns was a 91-year-old widow in declining health.-Anness and his wife had lived with and taken care of Cairns for more than two years, and Cairns had paid them for their services.-Cairns’s niece, Fletcher, had managed Cairns’s financial affairs for ten years following the death of Cairns’s husband, but Fletcher returned that responsibility to Cairns a few weeks before Anness contacted McKinney.-Anness had Cairns’s power of attorney.-Anness proposed to effectuate the stock transfers using the power of attorney Cairns had given him, but McKinney did not know Anness or Cairns and insisted on meeting with Cairns before assisting with the transfer, so Anness arranged for McKinney to come to Cairns’s home. -McKinney conversed with Cairns at her kitchen table and helped her endorse to Anness securities worth more than $300k. -A year following the stock transfer, Fletcher and another of Cairns’s nieces, Weaver, concerned that Anness was taking advantage of Cairns, petitioned for Weaver to be appointed Cairns’s guardian.-Two months later Cairns died. -Anness initiated probate proceedings, which Fletcher contested. -The probate court appointed Fletcher temporary administrator of Cairns’s estate, and Fletcher then substituted for Weaver as plaintiff in the present action. Issue: Does a stockbroker have a legal duty to ascertain an elderly person’s mental capacity before assisting her in transferring stock?

Notes:

Hypo: I’m the bank’s lawyer. A bank officer calls me and says, “One of our long-time customers – a little old lady – came in here with her longtime caregiver and asked to withdraw everything (jewelry, cash, etc.). We’re concerned about her. What should we do?”

Legally, the bank should give her the money/property. This is an arms-length transaction, and the bank doesn’t have a duty to protect the woman. According to the court in Jones: “Unlike minors, the elderly are not presumptively incompetent, nor should they be.”

However, the bank officer could refuse to comply with her request. There’s always a risk that the old lady could come after the bank officer personally, but the bank officer might be able to take that risk.

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Under Texas law, someone can be incapacitated if they are:1. Of minority, or2. Unable to handle their affairs at any age

§601(14), (16): Definitions“Incapacitated person” means:

(A) a minor;(B) an adult individual who, because of a physical or mental condition is substantially

unable to provide food, clothing, or shelter for himself or herself, to care for the individual’s own physical health, or to manage the individual’s own financial affairs…

“Minor” means a person who is younger than 18 years of age and who has never been married or who has not had the person’s disabilities of minority removed for general purposes.

The Process of Establishing a Guardianship in TX

§601(11): Definitions“Guardian” means a person who is appointed guardian under § 693 of this code, or a temporary or successor guardian. Except as expressly provided otherwise, “guardian” includes the guardian of the estate and the guardian of the person of an incapacitated person.

Two types of guardians in TX. Frequently, the same person fulfills both roles.

§601(28), (32): Definitions“Proposed ward” means a person alleged to be incapacitated in a guardianship proceeding.“Ward” is a person for whom a guardian has been appointed.

When the applicant suspects that a person is suffering an incapacity, we refer to the person as a proposed ward. If it is proven that the proposed ward is incapacitated, they are a ward.

§604: Proceeding In RemFrom the filing of the application for the appointment of a guardian of the estate or person, or both, until the guardianship is settled and closed under this chapter, the administration of the estate of a minor or other incapacitated person is one proceeding for the purposes of jurisdiction and is a proceeding in rem.

General rules for choosing the proper location:Proper county County where the proposed ward resides.Proper court Court in that particular county that exercises probate jurisdiction. This depends on the county population. In large counties, there are statutory probate courts. In mid-size counties, there are county courts at law that have been granted probate jurisdiction, and you might end up in one of

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those courts or in the constitutional county court. In small counties, you will be in the constitutional county court.

§682: Application; ContentsAny person may commence a proceeding for the appointment of a guardian by filing a written application in a court having jurisdiction and venue. The application must be sworn to by the applicant and state:…

When you fill out an application, there are lots of requirements. It’s a big, expensive deal.

§633: Notice and Citation(a) On filing of an application for guardianship, notice shall be issued and served as provided by this section…

Next, the county clerk issues notice and citation. Notice is posted on the courthouse door, and the potential ward is served. Many other interested people must be served or given notice as well. It’s a complicated, lengthy process, and it can be fairly traumatic for the proposed ward

§633(f): Notice and CitationThe court may not act on an application for the creation of a guardianship until the Monday following the expiration of the 10-day period beginning the date service of notice and citation has been made…

Next, a hearing is scheduled. This section sets out the earliest possible date a hearing can be scheduled. What if there’s not time for that (i.e., we need someone to give consent for emergency medical care)? There’s an alternative proceeding called a “temporary guardian” which the court can issue.

§646: Appointment of Attorney Ad Litem(a) In a proceeding under this chapter for the appointment of a guardian, the court shall appoint an attorney ad litem to represent the interests of the proposed ward. The attorney shall be supplied with copies of all of the current records in the case and may have access to all of the proposed ward’s relevant medical, psychological, and intellectual testing records.

The job of an attorney ad litem is difficult. There’s a lot to do (interview the potential ward, arrange for medical testing, etc.)

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§645: Guardians Ad Litem(a) The judge may appoint a guardian ad litem to represent the interests of an incapacitated person in a guardianship proceeding.

(c) …The guardian ad litem shall protect the incapacitated person in a manner that will enable the court to determine what action will be in the best interests of the incapacitated person.

The court has the option of appointing a guardian ad litem if someone is needed to protect the potential ward’s best interest (i.e., the potential ward is in a coma, can’t speak for himself, etc.)

§648: Court Visitor Program(a) Each statutory probate court shall operate a court visitor program to assess the conditions of wards and proposed wards….

Courts must have this program so that an outside individual can evaluate the proposed ward. The court may appoint a court visitor at the request of any interested person, including the ward/proposed ward, or on its own motion.

§685: Hearing for Appointment of Guardian; Right to Jury Trial(a) A proposed ward must be present at a hearing to appoint a guardian unless the court, on the record or in the order, determines that a personal appearance is not necessary. The court may close the hearing if the proposed ward or the proposed ward’s counsel requests a closed hearing.

(b) The proposed ward is entitled, on request, to a jury trial.

(c) At the hearing, the court shall:(1) inquire into the ability of any allegedly incapacitated adult person to feed, clothe, and

shelter himself or herself, to care for the individual’s own physical health, and to manage the individual’s property or financial affairs;

(2) ascertain the age of any proposed ward who is a minor…(4) inquire into the qualifications, abilities, and capabilities of the person seeking to be

appointed guardian.

By now, the hearing will involve a lot of people: the proposed ward, the attorney ad litem, the guardian ad litem, the court visitor, and any other interested parties.

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§684: Findings Required(a) Before appointing a guardian, the court must find by clear and convincing evidence that:

(1) the proposed ward is an incapacitated person; (2) it is in the best interest of the proposed ward to have the court appoint a person as

guardian of the proposed ward; and(3) the rights of the proposed ward or the proposed ward’s property will be protected by

the guardian.

(b) Before appointing a guardian, the court must find by a preponderance of the evidence that:(1) the court has venue of the case;(2) the person to be appointed guardian is eligible to act as a guardian and is entitled to

appointment, or, if no eligible person entitled to appointment applies, the person appointed is a proper person to act as guardian;…

(4) the proposed ward is totally without capacity…to care for himself or herself and to manage the individual’s property, or the proposed ward lacks the capacity to do some, but not all, of the tasks necessary to care for himself or herself or to manage the individual’s property…

This section is crucial. It sets out the burdens of proof that must be met as to each argument.

§602: Policy; Purpose of GuardianshipA court may appoint a guardian with full authority over an incapacitated person or may grant a guardian limited authority over an incapacitated person as indicated by the incapacitated person’s actual mental or physical limitations and only as necessary to promote and protect the well-being of the person. If the person is not a minor, the court may not use age as the sole factor in determining whether to appoint a guardian for the person. In creating a guardianship that gives a guardian limited power or authority over an incapacitated person, the court shall design the guardianship to encourage the development or maintenance of maximum self-reliance and independence in the incapacitated person.

In making its decision, the court is required to tailor the guardianship based on the incapacitated person’s condition and needs.

§693: Order of Court(a) If it is found that the proposed ward is totally without capacity…to care for himself or herself and to manage the individual’s property, the court may appoint a guardian of the individual’s person or estate, or both, with full authority over the incapacitated person except as provided by law…

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If the requisite burdens of proof have been met, the court will appoint a guardian. The order of the court must contain findings of fact and specify a substantial amount of detail.

…(b) If it is found that the person lacks the capacity to do some, but not all, of the tasks necessary to care for himself or herself or to manage the individual’s property, the court may appoint a guardian with limited powers and permit the individual to care for himself or herself or to manage the individual’s property commensurate with the individual’s ability.

This is when the court customizes the guardianship according to the ward’s needs. Note: Entering the order of the court does not conclude the process. The order of the court simply serves to appoint the guardian.

§699: How Guardians QualifyA guardian is deemed to have duly qualified when the guardian has

-taken and filed the oath required under §700 of this code, -made the required bond,-filed it with the clerk-had the bond approved by the judge.

A guardian who is not required to make bond is deemed to have duly qualified when the guardian has taken and filed the required oath.

Oath/bond must be taken within 20 days after the order date granting letters of guardianship.

§659: Issuance of Letters of Guardianship(a) When a person who is appointed guardian has qualified under §699, the clerk shall issue to the guardian a certificate under seal, stating the fact of the appointment, of the qualification, the date of the appointment and qualification, and the date the letters of guardianship expire. The certificate issued by the clerk constitutes letters of guardianship.

§660: Letters or Order Made EvidenceLetters of guardianship or a certificate under seal of the clerk of the court that granted the letters issued under §659 is sufficient evidence of the appointment and qualification of the guardian and of the date of qualification.

At this point, the guardian assumes his duties as fiduciary, and the process is complete. The guardian can now present the letters of guardianship to third parties in order to prove his status.

§671: Judge’s Duty(a) The court shall use reasonable diligence to determine whether a guardian is performing all of the duties required of the guardian that pertain to the guardian’s ward.

The court retains a continuing role in the administration of the guardianship.

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What does a guardian of the estate do?-Maintain the fiduciary responsibility-Take possession of all ward’s property-Preserve and protect all ward’s property-Segregate guardianship assets from personal assets-Cancel the ward’s credit cards-Manage ward’s assets as a prudent person would-Obtain a written order from the court for any expenditures/sales-Carefully handle any creditor claims (consult a lawyer)-File an inventory within 30 days after qualification-File an accounting each year within 60 days of the anniversary of qualification

Note: Attorney’s fees and expenses can only be paid upon application and order, as with any other expenditure. Thus, you don’t just send a bill in a guardianship matter. The probate court must approve any and all expenditures.

What does a guardian of the person do?-Maintain physical possession of the ward and establish the ward’s legal domicile-Consent to medical, psychiatric, and surgical treatment other than the in-patient psychiatric commitment of the ward, but including the right to make end-of-life decision regarding the withdrawing of life support, hydration and nutrition-Care for, control and protect the ward-Provide the ward with clothing, food, medical care, and shelter-File an annual report setting forth specific information regarding the condition of the ward from a medical and social standpoint (to be filed within 30 days after receipt)-See that the ward is appropriately housed-Have frequent and meaningful personal visits with the ward-Insure the ward is receiving all available benefits for which he/she might be eligible-Obtain psychological, social services, training, educational, social and vocational opportunities for the ward as needed and appropriate-Authorize and arrange any needed medical, dental, opthomalogical and surgical treatment

§694: Term of Appointment of Guardian(a) Unless otherwise discharged as provided by law, a guardian remains in office until the estate is closed.

(b) The guardianship shall be settled and closed when the incapacitated person:(1) dies and, if the person was married, the person’s spouse qualifies as survivor in the

community;(2) is found by the court to have full capacity to care for himself or herself and to manage

the person’s property;(3) is no longer a minor; or(4) no longer must have a guardian appointed to receive funds due the person from any governmental source.

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This section sets parameters for when the guardianship concludes.Valdes-Fuerte v. The State of Texas-The probate court had appointed a guardian for Valdes-Fuerte. -Valdes-Fuertes was subsequently convicted of murder. Issue: Did the trial court error in failing to hold a hearing to determine Valdes-Fuentes’s competency to stand trial?

Notes:Is an IP incompetent to stand trial simply because of their IP status?No. The definitions of incompetency are completely different in these two contexts.

Weatherly v. Byrd-On Sept. 24, 1971 Aileen Mitchell executed a revocable inter vivos trust agreement naming herself as beneficiary. The purpose of the trust was to provide for the settlor during her lifetime and to dispose of the trust estate after her death. -Weatherly, her lawyer for some years, prepared the trust agreement and was also named as the trustee.-The trust stated that Mitchell had the right to alter, amend, revoke, or terminate the trust upon giving ten days written notice to the trustee.-Mitchell directed that the residue be divided between the named beneficiaries in the event the trust was not revoked prior to her death. - Mitchell became unable to care for herself and was placed in a convalescent home by Weatherly. -Byrd, a great niece, discovered that Mitchell was in the home and brought her back to Fort Worth.-In March 1973, Mitchell was declared an incompetent and Byrd was appointed guardian. -Mitchell resided with Byrd until May 1975, when she was placed in a convalescent home in Forth Worth where she remained until her death in April 1977. Issue: Does a guardian have the authority to exercise an incompetent settlor-ward’s right of revocation without seeking court authorization?

Notes:Can a guardian exercise the ward’s power of revocation?No. The power to revoke a trust is a purely personal right, and the guardian cannot exercise it. By the same token, a guardian is not allowed to execute a will on behalf of the ward.

But does this make a revocable trust effectively revocable?No. It simply means that the guardian must apply to a court of competent jurisdiction for authorization to revoke the trust.

Hypo: S executes a will, devising Blackacre to Child A and the residue of his estate to Child B. After execution of the will, S becomes incapacitated. Child B takes out a guardianship and becomes guardian of the estate/person. He is thus responsible for the care of his mother. Child B needs some cash to support mom, and he wants to sell Blackacre.

This creates a fiduciary problem. It’s a good example of why the guardian must ask the court’s permission before selling Blackacre. The court must determine whether the sale is appropriate in light of all the circumstances.

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Another problem: When B asks the court to sell, the court is required to post notice of the proposed sale on the courthouse door. What if A doesn’t see the notice? The lesson here is to stay informed of all the guardianship activities.What steps can we take to avoid these problems?

To avoid a guardianship of the estate:

Establish a revocable declaration of trust (like in Huckaby). In such a trust, the settlor makes herself trustee and appoints a successor trustee in case of death/incapacity.

Usually, the settlor attaches a $10 bill to the trust in order to nominally finance it. Then, she moves all assets out of her name individually and into her possession as trustee (bank accounts, house, property, furnishings, etc.).

How does this avoid a guardianship? In order to establish a guardianship, the court must determine that there is a need for one. If all of the IP’s assets are safely in the trust, and there’s a competent trustee to manage it all, there’s no need for a guardianship.

Downside: It’s expensive to prepare a trust and assign all of your assets. Further, it’s very easy to miss certain assets (avoid this by a pour over will). It also takes time.

It’s also wise to have your client execute a limited in nature, durable power of attorney. You can make a power of attorney durable by saying, “This power of attorney does not terminate in the event of incapacity.” In this way, the agent under the power of attorney can move the assets into the trust in case the client has become incapacitated.

Another less expensive option: Execute a will and a full power of attorney. This will authorize the agent to manage the person’s assets and property until the person’s death.

Downside: It’s sometimes difficult to get third parties (title companies, banks, etc.) to recognize the authority of the agent under the power of attorney. Why? Because the agent doesn’t have legal or equitable title like a trustee would; both legal and equitable title remain with the IP. Another problem: It’s fairly easy for a disgruntled family member to rock the boat. They can go down the courthouse, go through the process above, and establish a guardianship over the IP. If this happens, all agent’s powers under the power of attorney terminate automatically. (However, the disgruntled family member must give notice to all family members, so the agent could argue that all affairs are taken care of under the power of attorney.)

One way to guard against this: “In the event that I ever need a guardian, I want to fill that role. In any event, I don’t want to serve as my guardian.”

To avoid a guardianship of the person:

Step 1: Execute a healthcare power of attorney.Step 2: Execute a living will (Natural Death Act directive).

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A living will is a statement, executed by a person while still competent, that he/she wants to die with dignity (i.e., don’t want to be kept alive by machine).

IV. Community Property

A. Texas Marital Property

General rule in community property states:That which I acquire through my time/talents/labor = community property

Kellett v. Trice-In 1897, Kellett and Trice, who were married at the time, joined in the signed a deed which purported to make their separate property community property.-The deed stated:

“We, W.M. Kellett and Callie Kellett, husband and wife, in consideration of one dollar, from each of us in and to the property (hereinafter described) in which each of us shall hereafter own, hold, have, and enjoy and equal undivided community interest, to the end that all of the same may stand and be as all other property now owned by us, viz., community property, regardless of in whose name the title thereto may stand, and thereby avoid any further necessity of keeping separate accounts…”

-Trice, the former Mrs. Kellett, filed for divorce and sought to have the deed set aside. Issue: Can the wife, by conveyance in the manner indicated in the above deed, when joined by her husband in the manner required by statute, convert her separate estate into the community estate of herself and husband?

Notes:Can a husband and wife contractually change the status of property? No!

Mere agreement rule: There’s a constitutional guarantee to one’s separate property, and you can’t shed that constitutional protection by a mere agreement. Thus, the parties to the marriage cannot enter any type of agreements that are inconsistent with Art. 16, Sec. 15.

Rule of implied exclusion: If it’s not defined in the Texas constitution as separate property (i.e., you didn’t acquire it before marriage or by gift/devise/descent), it must be community property.

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Arnold v. Leonard-Leonard owned real property as part of her personal estate.-Arnold (as administrator of Schultz’s estate) wined a judgment against Leonard’s deceased husband.-Arnold attempted to seize the rents and revenues from Leonard’s real estate to satisfy the judgment.Issue: Is the provision of the acts of 1917 and 1921 that the rents and revenues derived from the wife’s separate property shall be separate property of the wife a valid provision in either of those statutes?

Notes:Under the rule of implied exclusion, the income from the wife’s separate property is community.However, the legislature set out a statute: “Income from the wife’s separate property is separate.”

The court says: This is unconstitutional! It violates the rule of implied exclusion!However, the legislature can change the management and liability rules. Why can they do this?

Art. 16, Sec. 15, Texas Constitution:“…Laws shall be passed more clearly defining the rights of the spouses, in relation to separate and community property…”

Thus, even though the income from the wife’s separate property is community, the legislature can prohibit the husband’s creditors from going after that income.

§3.001: Separate PropertyA spouse’s separate property consists of:

(1) the property owned or claimed by the spouse before marriage;(2) the property acquired by the spouse during marriage by gift, devise, or descent; and(3) the recovery for personal injuries sustained by the spouse during marriage, except any

recovery for loss of earning capacity during marriage.

This is the codification of the Art. 16, Sec. 15.

(see Graham below)

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Graham v. Franco-The car in which Mr. and Mrs. Franco were riding was struck from the rear at night by a truck owned by Graham and driven by Tillis. -The Francos testified that Mr. Franco was driving down the right side of the highway with lights burning. As to the rear lights, the testimony was that they had recently been checked and found to be in good order. -The truck driver testified that the Franco car was stopped on the highway with its lights off. -The jury found that the truck driver was negligent in failing to keep a proper lookout and that the acts of Mr. Franco in stopping the car on the highway and in having the car upon the highway without a rear light burning constituted negligence. -Each of such acts was found to be the proximate cause. Issue: Is the statute which provides: “The recovery awarded for personal injuries sustained by either spouse during marriage shall be the separate property of that spouse except for any recovery for loss of earning capacity during marriage” constitutional?

Notes:Wife wants her PI judgment to be separate property, and Husband wants it to be community.If we apply the rule of implied exclusion, the PI judgment has to be community. But the court says it’s separate. Is the court overruling Arnold? No, they’re creating an exception to Arnold.

Recovery for personal injuries to the body of the spouse, including disfigurement and physical pain and suffering, past and future, is separate property of the spouse.

Hypo: Husband is walking down the beach and stubs his toe. He looks down and finds a diamond ring. He does everything he can to find the true owner but is unsuccessful.

Under Mexican/Spanish law, this would be separate property. Why? Because the husband didn’t acquire it through the “toil of his body.” He simply happened upon it by accident.

Under the rule of implied exclusion, this would be community property. Why? Because it wasn’t acquired before marriage or by gift/devise/descent.

Hypo: Same, but husband finds the ring using a metal detector.

Under both Texas and Mexican/Spanish law, this would be community property.

Income rule: In Texas, income from separate property is community property. In most other community property states, this is not the case.

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B. Consequences of Characterization

Three types of marital property:1. Husband’s separate property2. Wife’s separate property3. Community property

Death works a partition of community property (DWAP).The surviving spouse retains her undivided ½ interest in the community property.The decedent’s undivided ½ interest vests in his heirs at law under §37 of the TPC.

§37: Passage of Title Upon Intestacy and Under a WillWhen a person dies, the general rule is that his property vests in his heirs at law. There are several conditions to this vesting:

Conditions:1. Heir must survive decedent by 120 hours.2. Heir’s vesting is subject to complete divestment if a will is admitted to probate.3. Heir’s vesting is subject to the rights of the decedent’s creditors.4. Heir’s vesting is subject to possession by a court appointed PR.

If record title is in both spouses name: Each own an undivided ½ interest.If record title is in the husband’s name: Husband owns legal title; Wife owns ½ of the equitable title.

Husband’s death converts the community property into a tenancy in common (as to the underlying equitable title). At some point down the line (probate, etc.), the partition in fact will take place.

Who are the husband’s heirs?

§45: Community Estate(a) On the intestate death of one of the spouses to the marriage, the community property

estate of the deceased spouse passes to the surviving spouse if:(1) no child or other descendant of the deceased spouse survives the deceased

spouse; or(2) all surviving children and descendants of the deceased spouse are also children

or descendants of the surviving spouse.(b) On the intestate death of one spouse to a marriage, if a child or other descendant of the deceased spouse survives the deceased spouse and the child or descendant is not a child or descendant of the surviving spouse, ½ of the community estate is retained by the surviving spouse and the other ½ passes to the children or descendants of the deceased spouse. The descendants shall inherit only such portion of said property to which they would be entitled under §43 of this code. In every case, the community estate passes charged with the debts against it.

If §45(a) is triggered – Wife gets the whole thing.

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If §45(b) is triggered – Wife gets ½, and the other ½ is split among the other children, whether they’re the children of this marriage or a previous marriage.

During the marriage…

§3.101: Managing Separate PropertyEach spouse has the sole management, control, and disposition of that spouse’s separate property.

The only exception to this is homestead.

Do I have any fiduciary duty to invest my separate property in a way that will generate income for the community? No.

§3.102: Managing Community Property(a) During marriage, each spouse has the sole management, control, and disposition of the community property that the spouse would have owned if single, including:

(1) personal earnings;Wages, salary, etc.

(2) revenue from separate property;Income from real property, etc.

(3) recoveries for personal injuries; and

(4) the increase and mutations of, and the revenue from, all property subject to the spouse’s sole management, control, and disposition…

We will refer to these things as a spouse’s “special community property.” (SCP)

Do I have complete, unfettered control over what I do with my SCP? No. Even though I have record legal title of my paycheck (it has my name on it), Scott has an equitable interest in my paycheck. Thus, my duty is similar to that of a trustee. Recall Arnold:

“Each marital partner owns an estate in the community property equal to that of the other partner; and that statutes empowering the husband to manage the wife’s separate lands and community assets make the husband essentially a trustee, accountable as such to the separate estate of the wife, or to the community.”

Also, see Howard:

“When land belonging to the community of husband and wife is deeded to both, each has legal title to it, but, when the conveyance is made to one only, the legal title is vested in that one, and the other has an equitable title.”

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Importantly, however, my duty is not exactly like that of a trustee. My only duty is the duty not to commit a fraud on the community.

(b) If community property subject to the sole management, control, and disposition of one spouse is mixed or combined with community property subject to the sole management, control, an disposition of the other spouse, then the mixed or combined community property is subject to the joint management control, and disposition of the spouses, unless the spouses provide otherwise by power of attorney in writing or other agreement.

A common example of this is a joint bank account. But do Scott and I both have to sign on the dotted line to write a check? No. You can change this contractually.

(c) Except as provided by (a), community property is subject to the joint management, control, and disposition of the spouses unless the spouses provided otherwise by power of attorney in writing or other agreement.

Cooper v. Texas Gulf Industries, Inc. -Cooper had previously filed a suit seeking to terminate a management contract on the property at issue and alternatively sought to rescind the sale of the property. -Cooper was the sole plaintiff in this case. -The trial court dismissed the first suit ‘with prejudice.’ -The Coopers argue that dismissal of the prior suit with prejudice is not res judicata of the instant suit because Dolores Cooper, being a grantee along with her husband in the deed to the real estate at issue, was a necessary party to a suit to cancel and rescind the sale.Issue: Is a wife an indispensable party in an action which concerns her joint community property?

Notes:When joint management community property is involved, the husband and wife are now joint managers. The wife is her husband’s equal with respect to management. Thus, neither spouse may virtually represent the other. All action with respect to the property requires the joinder of both husband and wife.

If one of the spouses wishes the other to represent him or her, §5.22(c) permits that arrangement provided the consenting spouse authorizes that representation by a power of attorney or other agreement in writing. No such writing is in evidence here.

Hypo: If Spencer and I own property as TICs, I can sell my undivided ½ interest. But if Scott and I own community property as TICs, I can’t do that without Scott’s joinder.

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Presumptions:If an asset is community, and it’s in the husband’s name, we’re going to presume it’s his SCP. If an asset is community, and it’s in the wife’s name, we’re going to presume it’s her SCP. If an asset is community, and it’s in both names, we’re going to presume it’s joint CP.

§3.104: Protection of Third Persons(a) During marriage, property is presumed to be subject to the sole management, control,

and disposition of a spouse if it is held in that spouse’s name, as shown by muniment, K, deposit of funds, or other evidence of ownership, or if it is in that spouse’s possession and is not subject to such evidence of ownership.

(b) A third person dealing with a spouse is entitled to rely, as against the other spouse or anyone claiming from that spouse, on that spouse’s authority to deal with the property if:

(1) the property is presumed to be subject to the sole management, control, and disposition of the spouse; and(2) the person dealing with the spouse:

(A) is not a party to a fraud on the other spouse or another person; and(B) does not have actual or constructive notice of the spouse’s lack of authority.

Note: This statute does not address whether something is separate or community property. It simply addresses whether something is in the wife’s name, the husband’s name, or both spouse’s names.

Hypo: Blackacre is in the husband’s name. Wife dies and has kids by a prior marriage. No will. Death works a partition, so the wife’s kids inherit the wife’s undivided ½ interest. After the wife’s death, the husband sells Blackacre to X. What result?

The husband had legal title, so he had apparent authority to sell Blackacre to X. However, he has the duty to turn over the kids’ portion of the proceeds.

Hypo: Same, but there’s another piece of property at issue (not the home). This property is in both the wife and husband’s name. What result?

This serves as actual notice to X. He should realize that joinder of the wife is required.

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How do these characterizations affect liability?

§3.201: Spousal Liability(a) A person is personally liable for the acts of the person’s spouse only if:

(1) the spouse acts as an agent for the person; or(2) the spouse incurs a debt for necessaries as provided by Subchapter F, Chapter 2.

(b) Except as provided by this subchapter, community property is not subject to a liability that arises from an act of a spouse.

(c) A spouse does not act as an agent for the other spouse solely because of the marriage relationship.

§3.202: Rules of Marital Property Liability(a) A spouse’s separate property is not subject to liabilities of the other spouse unless both spouses are liable by other rules of law.

(b) Unless both spouses are personally liable as provided by this subchapter, the community property subject to a spouse’s sole management, control, and disposition is not subject to:

(1) any liabilities that the other spouse incurred before marriage; or(2) any nontortious liabilities that the other spouse incurs during the marriage.

(c) The community property subject to the spouse’s sole or joint management, control, and disposition is subject to the liabilities incurred by the spouse before or during marriage.

(d) All community property is subject to tortious liability of either spouse incurred during marriage.

1. Whose debt is it? (Husband, Wife, or Husband/Wife)2. What type of debt is it? (Contractual or Tortious)3. When was the debt incurred? (Before marriage or During marriage)4. Are there any other circumstances that would cause one spouse to be vicariously liable for the

debts of the other spouse? (Agency, etc.)

Hypo: How much of each category can be used to satisfy each debt?

HSP CP WSP

Pre-Marital (H) K (H) Tort (H) J&S (H&W)

HSP 100% 100% 100% 100%

HSCP 100% 100% 100% 100%

JCP 100% 100% 100% 100%

WSCP 0% 0% 100% 100%

WSP 0% 0% 0% 100%

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§3.003: Community Property(a) Property possessed by either spouse during or on dissolution of marriage is presumed to be community property.(b) The degree of proof necessary to establish that property is separate property is clear and convincing evidence.

Hypo: Wife doctor is sued for malpractice. Patient wants to attach property to satisfy judgment.

The patient can attach all property possessed by either spouse during marriage, according to the above presumption. It’s the husband’s burden to come forward and prove by clear and convincing evidence that certain property is his SP. Otherwise, it’s presumed to be CP.

Hypo: When husband gets his paycheck, he always deposits it in a joint bank account. Husband is the sole breadwinner, and he is the only one who deposits money in the account. Wife breaches a K. Husband has no personal liability on the K (not a debt for necessaries). Can the creditor attach the joint account?

§3.102: Managing Community Property(b) If community property subject to the sole management, control, and disposition of one spouse is mixed or combined with community property subject to the sole management, control, an disposition of the other spouse, then the mixed or combined community property is subject to the joint management control, and disposition of the spouses, unless the spouses provide otherwise by power of attorney in writing or other agreement.

This statute is inapplicable! There’s no mixing of HSCP and WSCP.

This is account is solely HSCP. The fact that it’s a joint account simply means that the wife can write checks on it. In order to prove this fact, the husband must rebut the §3.104 presumption – that the account is subject to both of their management and control because it has both of their names on it – and his burden is only preponderance of the evidence.

Effect of Divorce

§7.001: General Rule of Property DivisionIn a decree of divorce or annulment, the court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.

This general rule is the key. In Texas, we don’t have court-ordered alimony.

We do have limited types of alimony in TX:1. Temporary alimony pending divorce2. “Contractual” alimony (when one spouse agrees to pay the other alimony)3. Maintenance alimony

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The chart above still applies in this setting. Courts don’t take away liability from either spouse in a divorce proceeding. If property was reachable by a creditor before a divorce, it is reachable after.Cameron v. Cameron-Mr. Cameron acquired most of his savings bonds at issue during his marriage to Sue Cameron while the couple was domiciled in common law states.Issue: What should become of savings bonds acquired in a common law state in the Camerons’ divorce proceeding?

Notes:§7.001: General Rule of Property DivisionIn a decree of divorce or annulment, the court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage.

When the legislature refers to the “estate of the parties” in §7.001, what are they referring to?Community property! Thus:

Court can’t award one spouse’s separate real estate to the other spouse (Eggemeyer)Court can’t award one spouse’s separate personal property to the other spouse (Cameron)

These seem like hard and fast rules. But later, the court says:“We recognize that property acquired in common law jurisdictions has historically been termed ‘separate’ property, but we hold that the property spouses acquire during marriage, except by gift, devise, or descent should be divided upon divorce in Texas in the same manner as community property, irrespective of the domicile of the spouses when they acquire the property.”

The court calls this type of property (property acquired in a common law state that would have been community if acquired in TX) quasi-community property. The court says it can treat this quasi-community property like community property in a divorce proceeding, and it doesn’t violate the constitution. This is a legal fiction, but the court uses it to get to the “right” result.

§7.002: Division of Property Under Special CircumstancesIn addition to the division of the estate of the parties required by §7.001, in a decree of divorce or annulment, the court shall order a division of the following real and personal property, wherever situated, in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage:

(1) property that was acquired by either spouse while domiciled in another state and that would have been community property if the spouse who acquired the property had been domiciled in this state at the time of acquisition;

(2) property that was acquired by either spouse in exchange for real or personal property and that would have been community property if the spouse who acquired the property so exchanged had been domiciled in this state at the time of its acquisition.

Hypo: Husband and Wife live in Illinois. Husband works and Wife stays home to take care of kids. They decide to retire in South Padre. He liquidates his assets. If they divorce, what result?

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If they divorce, the property is quasi-community and will be divided as if it were community property.

C. Property Characterization

§3.003: Community Property(a) Property possessed by either spouse during or on dissolution of marriage is presumed to be community property.(b) The degree of proof necessary to establish that property is separate property is clear and convincing evidence.

Know this presumption, then see if there are any facts to rebut it.

§3.002: Community PropertyCommunity property consists of the property, other than separate property, acquired by either spouse during the marriage.

This is another way of stating the rule of implied exclusion.

Creamer v. Briscoe

Husband and Wife 1 settle on property. Wife dies. Husband and Wife 2 perfect title to land.

We start with the presumption that this land is the community property of Husband and Wife 2. Why? Because the deed was signed during their marriage. Understand: The fact that the deed is in the husband’s name does nothing to change this presumption.

However, the court holds that the land is the community property of Husband and Wife 1. Why?

Inception of title rule: The character of title to property as separate or community depends upon the existence/nonexistence of the marriage at the time of the incipiency of the right in virtue of which the title is finally extended. That title, when extended, relates back to that time.

In this case, the inception – settling on the land – occurred during marriage 1. Result: DWAP. So Husband retains his undivided ½ interest, and Wife 1’s heirs inherit her undivided ½ interest. Thus, Husband and Wife 1’s heirs are now tenants in common. Wife 2 gets nothing.

Hypo: Husband and Wife 1 are trespassers on the land. She dies before the limitations period has run. Husband marries Wife 2, and later, the limitations period runs, such that they gain record title.

The inception of this right is not when Husband and Wife 1 started trespassing. Trespassers don’t have a right to the land!

Dawson v. Dawson: Dawson purchased the property under a K for deed prior to the marriage. However, most of the consideration for the property was paid during marriage with community funds.

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Nevertheless – the character of property is determined not by the final acquisition of title, but by the origin or inception of title. Thus, the presumption that the property is community has been rebutted, and the property is separate.

Wierzchula v. Wierzchula

Man signs earnest money K, applies for loan, gets married, then individually signs deed/dot.

Hypo: Husband signs earnest money K before marriage. Closing takes place after marriage. At the closing, Husband signs a promissory note. To secure payment of the note, he signs a deed of trust. Over the next 30 years, the husband uses his salary (community property) to pay the mortgage – over $200,000.

This property is separate. Why? Inception of title rule.

Carter v. Carter

Man signs earnest money K, gets married, then both he and wife sign note/deed of trust/deed.

When a spouse uses separate property consideration to pay for land acquired during the marriage, and takes title to the land in the name of both husband and wife, it is presumed that the spouse intended the interest place in the other to be a gift. If this were to happen, husband and wife would each own an undivided ½ separate property interest in the land. However, this presumption is rebuttable.

Donald testified that he did not intend to make a gift of ½ interest in Lot 91 to Nancy. He testified that he did not request that both names be placed on the note and deed of trust. He merely accepted and signed the papers prepared by the savings and loan company. The parties had recently moved to Texas from a CL state and were unfamiliar with Texas property law. Additionally, Nancy offered no evidence that gift was intended.

Thus, the land is the separate property of the husband.

Hypo: Husband and Wife both sign the earnest money K before marriage. After marriage, they sign all the closing documents. What result?

Community property can only exist during marriage. So it would seem that when the husband and wife signed the earnest money K before marriage, they each gained an undivided ½ separate property interest in the land. HOWEVER, the Duke case held that the land was community. This is an isolated caveat that can be used if you want property in a similar situation to be classified as community.

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Bradley v. Love

Father deeds property to husband and wife. Court rules that it was a gift (no consideration).

Hypo: During marriage, Wife’s father conveys Blackacre to Husband and Wife. Deed recites that Husband and Wife paid $1,000 in consideration to the father. Husband and Wife decide to get a divorce, and Wife says, “Despite what the deed says, we didn’t pay my father any consideration.” The trier of fact believes her.

The wife’s evidence rebuts the community presumption. Thus, Husband and Wife each own an undivided ½ separate property interest in Blackacre.

Can we admit evidence that Wife’s father hated Husband? That he didn’t intend to make a gift to Husband? Yes. We’ve already gone beyond the parol evidence rule by admitting extrinsic evidence, so admission of more extrinsic evidence won’t hurt.

Cooke v. Bremond: Different result than the hypo above with respect to the parol evidence rule. Why? Because an innocent third party (potential BFP) was involved.

A third party could make a gift to the community. But under the rule of implied exclusion (Arnold v. Leonard), such a gift has to be separate property. Thus, a gift to husband and wife as a married couple results in an undivided ½ separate property interest for both.

Hypo: During marriage, Husband acquires Blackacre by way of a gift from his father. Afterward, Husband sells Blackacre for cash. Husband then takes that cash and purchases Whiteacre. Is Whiteacre community property or separate property?

If we were to apply the rule of implied exclusion, it would be community property. Why? Because it wasn’t acquired by gift/devise/descent. However……see the traceable mutation rule below, which changes this result.

Traceable mutation rule: To maintain the separate character of separate property, it is not necessary that the property of either husband or wife should be preserved in specie, or in kind. It may undergo

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mutations and changes, and still remain separate property; and so long as it can be clearly and indisputably traced and identified, its distinctive character will remain.

Smith v. Strahan

Husband uses his separate property to purchase Blackacre and has title placed in Wife’s name.

The community presumption is overcome in this case because we can prove that the husband used his separate property. But can we also overcome the presumption that the husband intended a gift to his wife? If the husband can prove that he had no donative intent, it will remain his separate property. Strahan couldn’t do this here.

Hypo: Assume $1,000 dollars was conveyed from Husband/Wife to Wife’s father to obtain land. Both Husband and Wife’s names are on the deed.

Community presumption because not gift/devise/descent. What if Husband could prove that the $1,000 was his separate property? Because Wife’s name was on the deed, we presume that ½ of the land was a gift from Husband to Wife. Thus, each owns a 50% separate property interest in the land.

Lesson: It’s critical that we dig into the source of the consideration. Otherwise, the community presumption stands.

Hypo: Same, but there’s no evidence as to the source of the consideration. But further evidence reveals that at the time of the transaction, Blackacre’s FMV was $1,000.

Community property because not gift/devise/descent.

Hypo: Same, but this time, evidence reveals that at the time of the transaction, Blackacre’s FMV was $10,000. Now – at the time of divorce – the FMV is $100,000.

The reality is that the original transaction was part gift/part sale. Thus, 1/10 of the purchase price was a sale, and 9/10 of the purchase price was a gift. At the time of divorce, the same proportion stands: 9/10 of the property is a gift, and 1/10 of the property is a sale. Thus, 45% goes to the separate property of each spouse, and 10% goes to the community.

Hypo: What if $500 of the $1,000 purchase price came from the husband’s separate property, and the source of the other $500 is unknown?

Husband – 50% separate, Wife – 45% separate, Community – 5%.

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Higgins v. Johnson

Husband used community property to purchase Blackacre and has title placed in Wife’s name.

In this case, we don’t presume that the husband was giving a gift to his wife because he used community property as consideration. However, the wife can now come in and prove that the husband had donative intent. If she can do this, it will become her separate property.

Story v. Marshall

Husband conveys community property to Wife in a deed which recites the Wife having paid $100 of consideration.

Deed from husband to wife = presumption of gift. However, husband can rebut this presumption with evidence that he didn’t intend to give a gift.

Smith v. Buss

Blackacre was conveyed to the wife in a deed reciting that consideration was paid out of her separate property.

This is a significant recital. The deed didn’t just say that that consideration was paid by the wife, it said that it was “paid out of her separate property.” Thus, we will assume that it is her separate property. The husband can come back and rebut this presumption by showing that the purchase money funds were community.

Magee v. Young

Blackacre was conveyed to wife in a deed reciting that consideration was paid by wife.

This was not a significant recital. It doesn’t say that the land was transferred to the wife as her separate property, or that the wife paid with her separate property. Rather, it simply says that the wife paid for it. That isn’t enough to trigger the presumption that this is the wife’s separate property. However, the wife can come in and present evidence that she did, in fact, use her separate property.

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Lindsay v. Clayman

Husband and wife enter into contract to have land conveyed to wife as wife’s separate property. Deed contains similar recital.

This is a significant recital. Thus, the presumption is triggered that this is the wife’s separate property. However, in this case – unlike Smith – the husband is a party to the transaction. Thus, the husband is estopped from presenting contrary evidence. Result: The triggered presumption is irrebuttable.

Hodge v. Ellis

Land is conveyed to wife in deed reciting that property was conveyed to her as her separate property but extrinsic evidence establishes that consideration was community.

This was a significant recital. Thus, the presumption is triggered that this is the wife’s separate property. However, in this case – unlike Smith – the husband is a party to the transaction (even though his name isn’t mentioned in the deed). Thus, the husband is estopped from presenting contrary evidence. Result: The triggered presumption is irrebuttable.

Dixon v. Sanderson-Mrs. Dixon, with one dollar, which she had before her marriage, bought a ticket in the Louisiana State Lottery, on which a prize of $15k was drawn.-The husband agreed, at the time the lottery ticket was bought, that whatever prize might be received on it should be the separate of the wife. -With a part of this the lots in controversy were bought and the improvements thereon made. -The money won and the property bought with the winnings have, as between the husband and wife, been treated as her separate estate. -The husband incurred a number of debts which eventually lead to the execution issued against the property. Issue: Is the property the separate property of Mrs. Dixon, such that the creditors cannot attach it to satisfy a debt against the husband?

Notes:This is the only Texas Supreme Court case addressing the marital property character of lottery tickets.

Hypo: Wife buys lottery ticket and hits the big one – $10 million. Assume the wife has evidence that the consideration paid for the lottery ticket ($1) was a gift from her mother.

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Presumption – community property. Wife will argue that this is a traceable mutation of her separate property. Court said no – lottery winnings are different. We’ll reimburse wife the $1 she paid, but this is community property, not separate property.

Heidenheimer Bros. v. McKeen-Part of Mrs. McKeen’s separate property – which was originally used as collateral – was used to purchase the merchandise at issue.-The rest of the purchase money came out of Mr. and Mrs. McKeen’s community fund.Issue: Admitting the facts with reference to the purchase of the merchandise to be as claimed by appellees, then is it not community property and subject to levy?

Notes:

Hypo: Husband needs a new car, but he doesn’t have cash. Great end of the year deals are running, and they advertise, “No money down.” He buys a car on a whim, and his wife knows nothing about it.

This is community property, presumptively. The consideration for this car was, “I, husband, promise to pay Ford $20,000 with interest.” Does that make it his separate property? Texas courts have been clear: Property acquired on credit, as a general rule, is going to be community property.

Hypo: Same, but husband goes to a bank instead.

Same result, unless it can be proven that the bank agreed to look only to husband for payment of debt.

Hypo: Same, but bank asks for collateral. The only collateral he has are some stocks that his grandfather gave him. Would this make it separate property?

No. Still community property.

McClintic v. Midland Grocery and Dry Goods Co.-The land in controversy was state school land.- McClintic proposed to Mrs. Skeen that, if she would file on the land for the benefit of herself and her children, he would furnish her with the money to cover all expenses and pay it out.-Mr. and Mrs. Skeen had an understanding between them that, if purchased, the land should belong to her individually and to her children.-Thereafter, Mrs. Skeen purchased the land from the state. Mr. Skeen joined Mrs. Skeen in executing the obligation to the state.-The only money paid was $126.76. Every cent was Mrs. Skeen’s separate property by gift from McClintic, pursuant to their agreement.Issue: Was it the community property of the Skeens, or was it separate property of Mrs. Skeen?

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Notes:This case is slightly different from the Heidenheimer case above. In this case, husband and wife agreed that the property would be her separate property. Thus, it’s separate.

Gleich v. Bongio -Felix Bongio and Bertha Bongio (now Gleich) had been man and wife for about 9 years when they divorced. -During the marriage, Felix and Sam Bongio purchased Lots 1, 2, 3, 12, 13, and 14 in Block 1 of the Brady addition in Houston at a price of $12k.-$5k was paid at the time of the purchase. $2k was paid to cover the full price of Lot 3 and the remaining $3k went towards the payment of the remaining 5 lots. -This left $7k which was secured by a vendor’s lien on the 5 lots. -The cash payment of $5k was made out of the separate estates of Felix and Sam Bongio. -Lots 12, 13, and 14 were sold for $11,500, out of which the vendor’s lien was paid off. -Felix and Sam, joined by their wives, executed a deed of trust on the remaining lots to secure a note for $3,500 for the purpose of constructing improvements on the said lots. -There was no agreement at any time between Felix and Bertha that the said property was intended to be or become the separate property of Felix. Issue: What is the status of property, with reference to its being separate or community, when purchased during marriage partly with separate funds of the husband and partly on the credit of the community?

Notes:

Hypo: Husband is about to buy a $10,000 car. Ford will require that the husband put $1,000 down. He does and borrows $9,000 from Ford. There are no special agreements as to who Ford will look to for payment.

This transaction is part payment and part promise to pay. All of this is community property. The $1,000 is presumed to be community property because there’s no evidence of its source. In addition, we apply the general rule that property acquired by credit is presumptively community property.

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Broussard v. Tian -During their marriage, Tian purchased the 520.5 acres from the Federal Land Bank.-The total consideration was $2,080. $480 in cash was paid out of the separate property of Tian and $1,600 was evidenced by a vendor’s lien executed by him.-There is no written purchase contract in evidence.-The deed, which ran to Tian, and the vendor’s lien note and deed of trust, which he alone executed, contained no recitals purporting to deal with the community or separate status of the purchase or source of the consideration. -Along with the $480 in cash, several substantial payments of principal and interest on the note were made out of the separate property of Tian.-The balance of the note was paid by the co-defendant-grantees.-The community estate paid out no money at all on the purchase. Issue: Was it the separate property of Tian or the community property of Tian and Broussard?

Notes:In this case, the lender has agreed to look only to the husband for him. Thus, if the husband defaults, the bank cannot attach any community funds.

When the husband makes his monthly payments, will the lender reject community funds? No. The lender doesn’t care where the money comes from. The monthly payments don’t change the character of the car. They simply give the community an equitable claim for reimbursement upon dissolution of the marriage.

Hypo: Car is 1/10 his separate property (gift from Aunt Sally), and 9/10 community property (husband’s promise to pay). Aunt Sally finds out what husband has done and wants him to have the car free and clear as his separate property. She gives him the other 9/10 to pay off the note.

This doesn’t change the character of the 9/10 interest as community. Why? Inception of title. However: When the marriage terminates, the husband’s separate estate will have a right of reimbursement as to the 9/10 interest.

Mortenson v. Trammell

Creditor intended to seek payment of the debt from Wife alone by requiring her to sign a note.

Therefore, it was separate property.

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Bell v. Bell-The parties were married in 1975 and separated in 1977, and are the parents of one child.-Jan has admitted that Robert used $15K of his separate funds as a down payment on the home the couple purchased after their marriage at a cost of $62K.-The home was stipulated to have a value of $85,500 at the time of trial, and was then subject to a $46,500 mortgage.-The balance of the community estate consisted of several shares of stock, three cars, and various items of personal property.Issue: Should the entire homestead have been allocated to the wife, despite the fact that $15K of the purchase price was paid by the husband’s separate estate?

Notes:Husband used $15k of separate property as a down payment on a home that was bought after marriage. The house was worth $62K, and the couple borrowed the money for the balance. There was no special agreement with the creditor.

Inception of Title Rule:15/62 is his separate property47/62 is community

Now, the property is worth $85,500. The same ratio applies.

Community funds were used to pay off the note and interest, but this doesn’t matter because of the inception of title rule. The community does not have a right to a reimbursement. Why? Because the community property is being expended in order to pay for the community interest.

Hypo: Same, but Husband pays earnest money before marriage.

According to the inception of title rule, the property is Husband’s separate property. The community will have a right to reimbursement (for payments made toward debt) when the marriage terminates.

Understand: This is the key difference between Bell (this case) and Carter (case before where husband pays earnest money before marriage)!

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Characterization of Life Insurance Policies

Life insurance is an asset. This asset can take on either a community or separate property character.

Common situation: O takes out a policy to insure his own life. O is the insured and the owner of the policy. He will designate a 3rd party beneficiary. This is a non-probate disposition.

Another situation: O takes out a policy to insure B’s life, with C as the beneficiary. In order to do this, O will have to get B’s consent. This is a non-probate disposition.

Another situation: O takes out a policy to insure his own life. He designates his estate as the beneficiary. After O’s death, the proceeds become a probate disposition.

Questions to ask:1. Who owns the policy?2. Who is the insured under the policy?3. Is there a designated 3rd party beneficiary? If so, who?

insured most important owner most important beneficiary most important

X: policy purchased Y: policy matures

We presume that the insured is the owner (because it’s the most common situation).

Owner has incidence of ownership. He can:-designate the beneficiary-cancel the policy-in whole life policy situations, borrow against the cash surrender value

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Once the owner dies, the incidence of ownership ordinarily disappears. Why? Because the insurance company’s only responsibility at that point is to pay proceeds to the beneficiary.

Types of policies –

Term policies: When you pay the premiums, you’re only paying for the insurance company’s assumption of the risk of insuring you.

Whole life (cash surrender) policies: If the owner surrenders the policy, the owner gets something significant back from the insurance company.

Life insurance policies are treated specially under Texas and federal law.

Under Texas law:1. The insured’s policy is exempt from the insured’s creditors.2. At the insured’s death, the proceeds are exempt from the insured’s creditors.

Under Federal law:1. When the beneficiary receives the proceeds, the proceeds are not defined as income under

the Internal Revenue Code.2. Life insurance is subject to be taxed as part of the estate if, directly prior to the insured’s

death, he possessed some incidence of ownership or he is the beneficiary. (What should you do to avoid this? Transfer your incidence of ownership to someone else within three years of your death.)

Wallace v. WallaceIssue: Did the trial court have the authority to divest Husband of title to three life insurance policies?

Notes:What’s unique about life insurance? It’s one of the most important assets in many households.

It would seriously restrict the trial court’s ability to fairly partition the community estate if it had no power to divest the named insured of title to life insurance policies which are an integral part of the community estate. Thus, courts can divide LI policies “justly and rightly” just like other assets.

Hypo: Husband takes out LI policy during marriage and designates kids as beneficiary. In the divorce proceeding, the court gives the policy to Ex-Wife. Did this infringe upon the kids’ rights?

No. As beneficiaries of the policy, the kids don’t own anything. They have a mere expectancy. After divorce, does the wife have the right to change the designated beneficiary to herself? Yes! She has incidence of ownership now.

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§7.004: Disposition of Rights in InsuranceIn a decree of divorce or annulment, the court shall specifically divide or award the rights of each spouse in an insurance policy (assuming the policy is community property).

Hypo: Husband takes out a LI policy during marriage and designates Wife as beneficiary. Divorce court awards the policy to Husband. Husband dies without ever changing the beneficiary. What result?

Under K law, the Ex-Wife still gets proceeds. The legislature made an exception to this:

§9.301: Pre-Decree Designation of Ex-Spouse as Beneficiary of Life Insurance(a) If a decree of divorce or annulment is rendered after an insured has designated the insured’s spouse as a beneficiary under a LI policy in force at the time of rendition, a provision in the policy in favor of the insured’s former spouse is not effective unless:

(1) the decree designates the insured’s former spouse as the beneficiary;(2) the insured redesignates the former spouse as the beneficiary after rendition of the decree; or(3) the former spouse is designated to receive the proceeds in trust for, on behalf of, or for the benefit of a child or a dependent of either former spouse.

(b) If a designation is not effective under (a), the proceeds of the policy are payable to the named alternative beneficiary or, if there is not a named alternative beneficiary, to the estate of the insured.

Egelhoff case: Washington had a statutory provision similar to this. The LI policy was a group life policy through the husband’s job. U.S. Supreme Court held that the statute could not void the beneficiary in an ERISA-regulated policy. Keep this in mind.

Hypo: Husband takes out a LI policy and designates Wife as beneficiary. Wife dies first. Assume the policy was community property prior to the wife’s death.

This is a DWAP situation. When she died, the husband retained his ½ interest in the policy and her ½ interest went to her heirs or devisees (TIC). If the heirs want their share, they can ask the court for a partition.

What ordinarily happens: Husband buys out heirs for their ½ interest.

Hypo: During marriage, husband takes out LI policy. He pays the initial premium and following premiums during marriage.

What is important in this situation? The nature of the cash used to pay the premiums.

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We start with the presumption that the cash was community property. However, the husband can prove (via the traceable mutation rule) that the cash was separate.

Hypo: What if the husband paid the initial premium with a gift from his mom, and the others with community property (his paycheck)?

The policy will be deemed his separate property because the initial premium was paid with separate property (inception of title rule/initial premium test). However, the community has a right to reimbursement from the husband’s separate estate.

One possible exception to this rule: Some have argued – If the policy in question is a pure term policy, a last premium test should be used. Why? Because in a pure term policy, a new policy is created each time you pay a premium. However, the reality is that most policies aren’t pure term.

Hypo: Husband owns policy on his life before he marries his wife. When he bought the policy, he designated mom as beneficiary. After marriage, he pays premiums out of his salary.

It’s the husband’s separate property because he acquired it before marriage. If she dies, we won’t DWAP it. But her estate will have a right to reimbursement.

Hypo: Wife purchases a policy on her life, designating her husband as beneficiary. Her will says, “I leave all my property to my kids by my former marriage.” Do the kids have a right to the LI proceeds?

No. Since the husband was beneficiary, it’s like the wife was making a gift to him at her death. As a gift, it’s his separate property. Thus, he doesn’t have to account to the kids.

Another way to look at it: When the wife dies, her ownership of the policy extinguishes. Thus, the kids aren’t entitled to anything.

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Jackson v. Smith-Sylvester’s insurance policy designated his sister, Betty Jackson, as beneficiary. The signatures of Sylvester and his wife, Eliza Smith, also appear.-Eliza testified that she did not read the application before signing it and that she relied on Sylvester’s representations that she “would be taken care of.”Issue: Who is entitled to the proceeds of this life insurance policy?

Notes:

Hypo: Husband purchases a policy on his life during marriage, designating his sister as beneficiary. Under his will, he gives all property to his kids by a prior marriage.

Where the surviving spouse establishes fraud on the community, that spouse may recover the ½ of the proceeds which represents that spouse’s ½ interest in the community property. The other half of the proceeds, representing the disposing spouse’s community interest, is a gift to the designated beneficiary and is unaffected by constructive fraud.

Understand: When the insurance company writes the check to sister, the wife must actively establish fraud on the community. She doesn’t automatically own something. Once she does, the court will impose a constructive trust.

What about the kids? Do they have an interest in the proceeds? No! The policy was “gifted” to the sister by the husband.

Martin v. Moran-The husband purchased a life insurance policy with community funds, payable “as directed by will.”-In his will, the husband named his executors as beneficiaries, directing them to invest the money in lots and houses.Issue: Is the money collected upon a husband’s life insurance policy, payable “as directed by will,” community property of the husband and wife or separate property of the husband?

Notes:

Hypo: Husband is aware of the Jackson case, and he really wants the proceeds to go to his sister. He changes the beneficiary in the policy to “his estate.” The then puts in his will, “I devise the proceeds of my LI policy to my sister, and all other assets to my kids.”

By doing this, the husband subjected the proceeds to probate. DWAP will occur when he dies – the wife will get ½ of the policy, and the sister will get ½ of the policy. Understand: There is no way that the husband can give the whole policy to his sister (unless he established the policy before marriage).

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Business Organizations

Allen v. Allen -“Marlene’s Beauty Salon” was a sole proprietorship and was owned and operated by Mrs. Allen for about 17 years prior to Aug. 21, 1978. -On that date, a corporate charter was applied for under the name of “Marlene’s Beauty Salon and Cuttery, Inc.” by Mrs. Allen.-This act of incorporation occurred almost eight months after the marriage. -There was no evidence to show that this $ was funded from anything other than the community estate.-All of the physical assets of the sole proprietorship “Marlene’s Beauty Salon” were retained in Mrs. Allen’s name and rented by her to the corporation. -Mrs. Allen continued to operate the beauty salon in the same location it had been in for the previous six years although under the new corporate name. -There was evidence that the management, employees, and clientele of the salon remained substantially the same following the incorporation. Issue: Did the trial court abuse its discretion in treating “Marlene’s Beauty Salon and Cuttery, Inc.” as part of the community estate to be divided in the property settlement?

Notes:

Hypo: Parent dies and devises $10,000 to each of her children, B and S. Both B and S want to go into the restaurant business. B takes his $10,000, uses it to lease a building, buy supplies, etc. His restaurant turns out to be extremely successful. Years later, he wants to retire. He finds a purchaser who will pay him $1 million for the restaurant. S incorporates her restaurant. She gives her $10,000 to the corporation in exchange for all of the corporation’s stock. Her restaurant is also successful. When she wants to retire, a purchaser offers to pay her $1 million for all of the corporation’s stock. After retirement, both B and S’s spouses divorce them. What is the characterization of B’s $1 million and S’s $1 million?

B We start with the presumption that the $1 million is community property. B, then, will have to present evidence that it is his separate property. How can he do this? His business is a sole proprietorship. The $10K was acquired by devise, and he purchased the entire initial inventory with it. But the chances of him proving that everything purchased for his business subsequently was purchased with the $10K are slim. Thus, B’s $1 million is community property.

S S’s business is a corporation. S can prove that everything purchased for the business was a traceable mutation of the stock, and that every share of stock is a traceable mutation of the original $10K. Thus, S’s $1 million is separate property.

Hypo: Same, Both B and S started business before marriage.

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B It will still be up to B to prove that everything purchased for his business was purchased with the $10K. This tracing will be impossible.

S S has an even easier burden of proof in this case.

Allen is different than the above hypos because Marlene can’t prove where her funds came from.

Under Texas law, a corporation does not exist until the issuance of a certificate of incorporation. There can be no title to a corporation until it actually exists; consequently, the inception of title doctrine can only be applied to a corporation as of the date of incorporation.

In Texas, corporations organized during marriage and capitalized entirely with traceable separate property of one spouse are characterized as the separate property of that spouse. Mrs. Allen could not satisfy this standard.

Scofield, Collector of Internal Revenue v. Weiss-Mr. Weiss was the owner of corporate stock as his separate property. -Shares of stock were issued to Mr. Weiss as stock dividends. -Mr. Weiss then gave the shares to his wife as a gift. -If the shares are his separate property, then he gave the entirety of the shares to his wife. The Weisses would then not be entitled to a reimbursement of half of the gift tax. -If the shares are community property of both the husband and wife, then he gave only his ½ interest in the shares to his wife. The Weisses would then be entitled to repayment of any of the gift tax. Issue: Were the gift shares of corporate stock in question, having been issued as stock dividends to the donor during marriage, community or separate property?

Notes:An original issue of corporate stock, which was separate property when issued to the husband, retains its separate character, no matter how much it increases in value as a result of surplus accumulated out of the earnings of the corporation. This is so, even though the increased value is largely due to the efforts and activities of the husband.

Point: Despite the fact that stock gets more valuable through efforts of the husband, it does not change to community property.

It is equally well settled that dividends paid in cash or property during the existence of marriage out of the earnings of a corporation on account of stock, the separate property of either spouse, are community property.

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Don’t get confused: Dividends (and salary) are community property. The increasingly valuable stock is separate property.

D. Compensation and Earning Capacity

Wages are generally community property. This fact is one of the only consistent issues across the board in community property states.

(see Bishop)Separate Separate

Marriage Termination

Bishop v. Williams-Mrs. Williams bought 275 acres of land soon after the death of her second husband, paying therefore $2k, the community property of herself and her second husband, and executing her three promissory vendor’s lien notes, for $250 each, payable one, two, and three years after Dec. 11, 1901. -Berry Bishop was not married at that time, and was not living with his mother, but at her request he came home, under an agreement (parol agreement) with her that he would work the farm on the 275 acre tract, support her and her family, and pay the notes as they fell due, in consideration of which she agreed to deed him the 80 acres of land in controversy, which adjoined the 275 acre tract. -There is no evidence as to how she obtained the 80 acres of land.-Bishop complied with this agreement, and on Dec. 11, 1903, Mrs. Williams executed a deed to him for the land in controversy, reciting the fulfillment by Bishop of the above mentioned contract.-Bishop married on May 24, 1903, and they occupied the land as their homestead until the fall of 1917. -At that time, they moved to Coleman.-On Nov. 5, 1904, Bishop executed a deed to his mother for the 80 acres, reciting as a consideration her promissory vendor’s lien note for $700. No such note was given, nor intended to be given, and no other consideration was promised or given.-Mrs. Bishop did not join in the execution of this deed.-Bishop explained that he executed this deed because the other children were complaining to his mother about her deeding the land to Bishop, so he executed the deed to prevent her being annoyed.-On Aug. 9, 1918, Bishop executed a deed to the land in controversy to his mother. Mrs. Bishop refused to join in this deed. Issue: Was the 80 acres community or separate property?

Notes:

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The title which Bishop obtained by the deed from his mother to him had its inception in a K between them, which was made about 2 years before his marriage, and part of the pecuniary consideration for the conveyance had been received by Mrs. Williams before the marriage of Bishop. Thus, it is inconsequential for characterization purposes that a significant amount of consideration was paid out of the community.

Hypo: Professional athlete signs a multi-million dollar K. He starts working/training before marriage and then gets married right before the season starts.

Husband will argue that the money from the K is his separate property (because the K was signed before marriage). Wife will argue that the money was earned during marriage.

Most commentators believe that in this hypo, the inception of title rule (and Bishop) would not apply. Why? Because the athlete didn’t earn the K money until the season started. His receipt of the money was contingent upon him playing.

Hypo: Professional athlete gets paid a signing bonus. Part is paid before marriage, and part is paid after marriage.

In this case, he gets the money whether he plays or not. Because his receipt of the money is not contingent upon him playing, it is entirely his separate property (due to the inception of title rule).

Nail v. Nail-The husband is an ophthalmologist.-The trial court found the value of his medical practice to be $131,759.64, inclusive of fixtures, furniture, equipment and accrued good will.-The court further found the value of the furniture and equipment to be only approx. $735.47, thus leaving a valuation of accrued good will in the sum of $131,024.17. -It was determined that the wife’s community interest was $40k. Issue: Does the accrued good will of the medical practice of the husband, an ophthalmologist, based as it is on his personal skill, experience, and reputation, as well as upon his continuing in the practice, constitute property that is subject to division as part of the estate of the parties?

Notes:Wife wants to make the professional goodwill of husband’s medical practice that he started after marriage subject to division as part of the community estate. The husband’s practice has some nominal assets, but the big ticket item is the goodwill.

Court’s response:

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Professional goodwill has no existence in property in and of itself, as a separate and distinct entity, and thus the court cannot divide up good will as part of the marital estate.

If the court allowed this, it would look like alimony. Alimony is against public policy in Texas so it makes sense that they would write this opinion.

Frausto v. Frausto-During the early part of the marriage, both husband and wife were school teachers.-It was agreed that the husband would enter medical school.-The wife continued to work while the husband was obtaining his medical degree, and during this time a considerable portion of all expenses of the marriage came from the wife’s earnings.-After the husband obtained his license to practice medicine, his earnings at the time were substantial, but his work record is spotty, at times he was unemployed, and at other times his earnings were not large by medical standards.-The husband testified that he sustained injuries to both of his legs and that this made it difficult to work at times, and that he had quit some jobs because of this problem.-There is also evidence that the husband was a heavy spender. -Despite their earnings, no large community estate was accumulated. Issue:

1. Is a professional education acquired during marriage a property right that is subject to divestment upon divorce?

2. Was the award of $20k justified on the basis of reimbursement?

Notes:Husband and wife agreed that husband would go to medical school. Wife worked and husband went to school. Considerable portion of all expenses came from wife’s earnings. After the husband got his license, his employment was sporadic (he claims health problems). No large community estate was ever established.

The court applied Nail and said that the increased earning capacity acquired during marriage is not property and cannot be subject to division upon divorce. Doesn’t this seem unfair to the other spouse who basically funded the education?

The law is starting to change in this area:O’Brien: Court made the husband “buy out” the wife’s interest in the degree. The issue then becomes: How do you value the degree? Court decided to look at what amount a plaintiff’s lawyer would claim in damages if he were hit by a Greyhound bus (about $800,000). Result: Husband starts his medical practice owing his wife $400,000.

Featherston says that it shouldn’t be too long before a case like this comes up in Texas again. He thinks that the lawyers will start making arguments from the O’Brien case.

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Family Code- Chapter 8: MaintenanceMaintenance is a form of limited alimony. It is only available when:

1. The spouses have been married at least 10 years, and2. One spouse is unable to be self-supporting.

One spouse will be required to make monthly “maintenance” payments to the spouse that is not self-supporting, but usually not for more than three years.

Diminished Earning Capacity

Graham v. Franco-The car in which Mr. and Mrs. Franco were riding was struck from the rear at night by a truck owned by Graham and driven by Tillis. -The Francos testified that Mr. Franco was driving down the right side of the highway with lights burning. As to the rear lights, the testimony was that they had recently been checked and found to be in good order. -The truck driver testified that the Franco car was stopped on the highway with its lights off. -The jury found that the truck driver was negligent in failing to keep a proper lookout and that the acts of Mr. Franco in stopping the car on the highway and in having the car upon the highway without a rear light burning constituted negligence. -Each of such acts was found to be the proximate cause. Issue:

1. Is the statute which provides: “The recovery awarded for personal injuries sustained by either spouse during marriage shall be the separate property of that spouse except for any recovery for loss of earning capacity during marriage” constitutional?

2. Can the acts of contributory negligence of the husband be imputed on the wife so as to bar her recovery?

Notes:

Hypo: Wife gets run over by Greyhound bus and is injured. She settles with Greyhound for a lump sum of $10 million. What is the character of this $10 million dollars?

We start with the community presumption. Is there anything else that she would have to prove in order to make it her separate property? We would have to break it down…

Her recovery for personal injury is separate property:

§3.001: Separate PropertyA spouse’s separate property consists of:

(3) recovery for personal injuries sustained by the spouse during marriage, except any recovery for loss of earning capacity during marriage.

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Her recovery for lost earning capacity, medical expenses, etc. is her special community property:

§3.102: Managing Community Property(a) During marriage, each spouse has the sole management, control, and disposition of the community property that the spouse would have owned if single, including:

(3) recoveries for personal injuries.

Hypo: Same, but Wife was a neurosurgeon. She recovers $10 million – $6 million for her bodily injury and $4 million for decreased earning capacity. Husband then runs off with someone else. Husband then dies and leaves all of his property to his girlfriend, Tootsie, in his will. What does Tootsie get?

Tootsie will not get any of the $6 million because it is the wife’s separate property. However, she will get $2 million of the $4 million since it is community property, and community property gets DWAPed.

Hypo: Same, but the wife cannot prove how much of the $10 million is separate and how much is community.

Tootsie would get a ½ interest in the entire $10 million because the wife could not meet her burden of proof to show which part is separate and which part is community. This is why it is very important for an attorney to break down personal injury lawsuits into the particular areas of recovery.

Hypo: $4 million is for the wife’s loss of earning capacity. Is this inconsistent with Nail and Frausto? Why is an increase in earning capacity separate, but a recovery for loss of earning capacity is community?

Those cases said that earning capacity was unique to the spouse. When the wife gets a lump sum for loss of earning capacity, shouldn’t it belong to the wife as her separate property? The closest thing that we have here is the Graham v. Franco rule….

If you represent the injured person--- you should argue that the §3.001 is unconstitutional.

Whittlesey v. Miller-Stewart Miller and Whittlesey were in a car accident.-A couple of years later, Stewart Miller and Whittlesey entered into a settlement agreement whereby Stewart released Whittlesey from liability in connection with the accident for consideration of $9,650. -Ann Miller then brought this suit. Issue: Does one spouse have an independent action for loss of consortium as a result of physical injuries caused to the other spouse by the negligence of a third party?

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Notes:Each spouse recovers for losses peculiar to the injury sustained by each of them. On the one hand, the impaired spouse recovers for those distinct damages arising out of the direct physical injuries. On the other hand, the recovery for the loss of consortium by the deprived spouse is predicated on separate and equally distinct damages to the emotional interests involved.

Hicks v. HicksIssue : Are any of the proceeds of the post-divorce settlement community property because they represent compensation for disability during the marriage?

Notes:Where an injured worker is married at the time of the injury and remains married throughout the period of disability, the workmen’s compensation award is community property.

This is so because compensation awards are intended to compensate an injured worker for his loss of earning capacity.

On the other hand, compensation for disability for a period after divorce is not community property even though the injury may have occurred when the parties were married, and a divorce settlement that awards such future benefits to the claimant’s former spouse has been held to be an involuntary judicial assignment of workmen’s compensation benefits forbidden by Texas law.

Fringe Benefits

When the employer pays a portion of the premiums for his employees’ group insurance policy, he gets an income tax deduction. The employee obviously benefits. Thus, it’s a win-win situation.

Contributions to the employee’s retirement plan are most important for this class. One example:

401(k) plan: In lieu of a raise, companies make contributions to their employees’ 401(k) plans via an administrator. The administrator, then, invests that money, where it grows tax-free. Enron administrators were investing in Enron stock while still getting deductions! When the employee retires, he has a choice to make:

1. Take the benefits out of the plan in a lump sum, in which case the employee must pay income taxes immediately; 2. Take the benefits out of the plan and roll them over into an IRA (Income Retirement Plan), deferring the income tax; or3. Take the benefits out of the plan and put them in some type of an annuity, such that the employee will be paid installments for the rest of his life.

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All of this is governed by ERISA (Employees’ Retirement Income Security Act).

3 stages to a retirement plan:

Stage 1 When I’m young and working, I’m neither vested nor matured. I’m in a probationary status with my employer. My interest in the retirement plan is contingent, meaning – If I quit/am fired/die during this early period, all of my benefits disappear and revert back to the employer.

Stage 2 At this stage, I am vested but not matured. If I quit/am fired/die, I have a benefit I can take with me.

Stage 3 At this stage, I am vested and matured (I have retired). I now face the three choices above.

What if the employee is married throughout all three stages and then retires?

Since he is married, federal trumps state law. For many claimants, federal law mandates that the death benefit come out of the plan in the form of a QJSA (Qualified Joint and Survivor Annuity). This means that the employee will receive installments for the rest of his life, and after he dies, his wife will receive installments for the rest of her life.

However, federal law allows both husband and wife jointly to opt out of a QJSA.

Other choices:-OA (Other Annuity), i.e., on the husband’s life only-LS (Lump Sum)-LS/RO (Lump Sum Roll Over) into IRA.

What if the couple divorces during Stage 3?

All of the above plans will be community property based on our facts.

QJSA OA Can be divided on a just and right basis by the divorce courtLS LS/RO

What if the employee dies during Stage 3?

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QJSA Follow the terms of the K: Pay the wife $X/month. There’s nothing to DWAP.OA Follow the terms of the K. LS DWAP, assuming there’s no special K.LS/RO There will probably be third party beneficiary. If not, DWAP.

What if the non-employee spouse dies first (during Stage 3)?

QJSA Follow the terms of the K: Husband continues to get his installments.OA Follow the terms of the K.LS DWAP, assuming there’s no special K.LS/RO There’s probably a provision granting everything to husband. If not, DWAP.

What if the couple divorces during Stage 2?

For practical purposes in Texas, retirement plans will still be subject to a just and right equitable division, even if probationary in nature.

However: If the divorce court grants an interest in the husband’s retirement plan to the wife, the grant must also comport with federal law. In other words: In order for the wife to enforce the court order against the plan administrator, it must comply with QDRO (Qualified Domestic Relations Order).

Herring v. Blakeley-James and Ellen Herring were divorced on Aug. 2, 1960.-At the time of divorce, Mr. Herring received no property. However, Mr. Herring filed an inventory in which he listed both the profit-sharing plan and the annuity as assets, but specifically noted that no funds would be available from these plans until his employment terminated.-Mr. Herring, as an employee of Marathon, was a qualified participant in a “PF Employee’s Profit-Sharing Plan and Trust Agreement,” which was created by Pacific, and the funds under the plan were entirely contributed by Pacific and Marathon.-In 1952, Mr. Herring was issued and became the holder of a certificate issued by the John Hancock Mutual Life Insurance Company by virtue of its group annuity contract with Pacific. -Under the provisions of the certificate, Mr. Herring would be entitled to a retirement annuity based on his contributions and his employer’s contributions.-Under both these plans the employee had the unrestricted right to designate a beneficiary to receive certain death benefits. He also had the right to change the beneficiary at will.-After the divorce, Mr. Herring changed the beneficiary on both plans from Mrs. Herring to Blakeley. -When Mr. Herring died 10 months later, the death benefits from the profit-sharing plan amounted to $11,623.48 and from the annuity contract, $2,285.48.Issue: Are a profit-sharing plan and trust agreement and a retirement annuity plan property? If so, shall such property be classed as community property?

Notes:

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Plan in this case was vested but not matured (Stage 2).Court held: This is a property interest (community, specifically).

There is no requirement in Texas that community property must be reducible to immediate possession before a divorce court can take jurisdiction to determine the parties’ rights therein. Community rights may exist in interests that cannot be reduced to possession, such as remainder or reversion rights.

What if the employee dies during Stage 2?

Federal law mandates that the benefit be paid out to the spouse in the form of a QSA (Qualified Survivor’s Annuity), under which the spouse will be paid $X/month for the rest of her life. ERISA mandates this unless both spouses agree to something other than a QSA.

They could agree to:OALS (pay taxes up front)LS/RO into spousal IRA (defer paying income tax until age 70.5)

What if the non-employee spouse dies during Stage 2? Assume her will devises all of her separate property to her kids from a former marriage. Will her portion of the plan benefits go to the kids?

Allard v. Frech-Mr. Allard possessed a retirement plan with General Dynamics in the amount of $102,080 which vested in 1982 prior to the death of his wife. -Mr. Allard contends that his wife’s one-half interest in his retirement benefits should not be allowed to continue after her death and pass under her will to the Allards’ adult child and grandchildren.Issue: What is the proper method to be utilized when dealing with retirement benefits in instances where the marriage is terminated by the death of the non-employee spouse?

Notes:Imagine the employee’s surprise: He’s been building up this pension plan for his entire life, and when his spouse dies, she devises her half to kids by a former marriage!.....(see next case)

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Boggs v. Boggs-Isaac Boggs worked for South Central Bell from 1949 until his retirement in 1985. -Isaac and Dorothy, his first wife, were married when he began working for the company, and they remained husband and wife until Dorothy’s death in 1979. They had three sons.-Within a year, Isaac married Sandra, and they remained married until his death in 1989. -Upon retirement, Isaac received various benefits from his employer’s retirement plans. -One was a lump-sum distribution from the Bell System Savings Plan for Salaried Employees (Savings Plan) of $151,628.94, which he rolled over into an IRA. He made no withdrawals and the account was worth $180,778.05 when he died. -He also received 96 shares of AT&T stock from the Bell South Employee Stock Ownership Plan (ESOP). In addition, Isaac enjoyed a monthly annuity payment of $1,777.67. -Dorothy, the first wife, bequeathed to Isaac one-third of her estate, and a lifetime usufruct (life estate) in the remaining two-thirds. To her sons, she gave the naked ownership in the remaining two-thirds, subject to Isaac’s interest. -All agree that, absent pre-emption, LA law controls and that under it Dorothy’s will would dispose of her community property interest in Isaac’s undistributed pension plan benefits. -Sandra contests the validity of Dorothy’s testamentary transfer. -Isaac bequeathed to Sandra outright certain real property including the family home. His will also gave Sandra a lifetime usufruct in the remainder of his estate, with the naked ownership interest being held by the sons. Issue: Does ERISA pre-empt a state law allowing a nonparticipant spouse to transfer by testamentary instrument an interest in undistributed pension plan benefits?

Notes:Under ERISA: If the employee dies first, the plan must go to the spouse. The statute is silent about what happens when the spouse dies first.

Why would ERISA protect the spouse more than the employee? Because many states say that the spouse has no interest in the employee’s plan because it is the employee’s property. Further, most community property states use the terminable interest rule: When the spouse dies, the community ceases to have an interest in retirement benefits.

The U.S. Supreme Court held that ERISA (federal law) impliedly preempts state law.

Result for purposes of Texas law: Allard and Valdez have been overruled. If a plan is covered by ERISA, the non-employee spouse cannot devise her ½ interest to anyone but her employee spouse.

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What if the couple divorces during Stage 1?

For practical purposes in Texas, retirement plans will still be subject to a just and right equitable division, even if probationary in nature.

However: If the divorce court grants an interest in the husband’s retirement plan to the wife, the grant must also comport with federal law. In other words: In order for the wife to enforce the court order against the plan administrator, it must comply with QDRO (Qualified Domestic Relations Order).

Cearley v. Cearley Prior to the divorce on June 2, 1975, Robert Cearley had served 19 years as an enlisted man in the Air Force, during which period he and Shirley Cearley had been married for 18 years.-Robert was to have completed the 20 years necessary for receipt of retirement benefits on May 7, 1976, and his enlistment at the time of the divorce extended to Aug. 31, 1976. Issue: Does the wife have a fractional interest in future military retirement benefits if and when received by the husband?

Notes:Plan in this case was neither vested nor matured (Stage 1).Court held: This is a property interest.

Other issue in this case: Cearley made contributions before and after marriage. Further, he made contributions in both Texas and a common law state. What result?

Everything accrued prior to marriage is community property, and everything accrued before marriage is separate property.

What if the employee dies during Stage 1?

The employee’s interest is contingent, so it reverts back to the employer at his death.

What if the non-employee spouse dies during Stage 1?

Boggs rule applies.

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Weaver v. Keen-Frank Weaver and Patsy Keen were married in 1967. During a portion of their marriage, Frank was employed by Baylor College of Medicine. -In 1972, Frank purchased two annuity contracts issued by Teacher’s Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF). -Frank named Patsy as the primary beneficiary of those annuity contracts. -Baylor made contributions to the annuity contracts until 1980 when Frank quit. -In 1982, Frank and Patsy divorced. As part of the property settlement, Frank received the annuity contracts as his sole and separate property.-Frank married Diana in 1983. They were married for 11.5 years before his death in 1995.-At the time of Frank’s death, Patsy remained the beneficiary designated on Frank’s annuity contracts.-The plans’ administrators, relying on this designation and the plan document, paid part of the death-benefits to Patsy.-Frank’s mother, Rita Weaver, the contingent beneficiary under each plan, did shortly after this lawsuit was filed. Diana, as the independent executrix of both Frank’s and Rita’s estates, continued this suit against Patsy. Issue: Under federal law, is a former spouse, who was designated as the primary beneficiary of an ERISA-qualified pension plan, entitled to the proceeds under that plan?

Notes:

Hypo: Divorce court awards the husband a 100% interest in his retirement plan (because the wife was getting other stuff). The retirement plan is private, so it is governed by ERISA. However, he had designated his wife (now ex) as beneficiary. He forgets to change it back.

It had already been established the ERISA trumps the state redesignation statutes (like §9.302).

Our Waco Court of Appeals came up with a novel idea to get to the right result: The deceased employee would not want the benefits to go to his ex. Thus, we’ll depend on federal common law – not the statute – when we ignore the erroneous beneficiary designation. The Texas Supreme Court affirmed this, and the U.S. Supreme Court denied certiorari.

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Eichelberger v. Eichelberger-1946 William began working for the railroad.-1957 William and Helen were married.-1973 William was placed on disability retirement under the Railroad Retirement Act.-1976 The couple separated and divorced. -At the time of the divorce, William was 54 years old and was employed at a motel for $50 per week from which he paid $10 for his room. He also received $419.95 each month as his railroad retirement benefits.-Helen, on the other hand, had minor education and was without skill to qualify her for any particular employment. She was 57 years old, lived in rented quarters, and had $50 in cash and three $25 U.S. Savings Bonds. Her income was from babysitting at $5 per day; however, she had not children to sit for at that time.Issue: Does the Supremacy Clause of the U.S. Constitution preempt the divorce court’s division of a spouse’s entitlement to benefits under the federal Railroad Retirement Act?

Notes:This court seemed inclined to rule on this case pursuant to Cearley (which held that retirement benefits earned during the marriage constitute a community asset subject to division and consideration in the equitable division of the community estate of the parties upon divorce, even though the rights are contingent and not yet matured or vested).

However, Cearley involved private retirement benefits, and this case involves government retirement benefits. For most federal employees, their retirement benefits are nearly all they have. Therefore, Congress didn’t intend for the spouse to get part of it. The Supreme Court’s recent decision in Hisquierdo controls:

Benefits payable under the Railroad Retirement Act and the expectation of ultimately receiving future benefits under the Act are not subject to division by a state court as “property” upon divorce. State courts may not “anticipate” such benefits by awarding upon divorce such other property of the parties that would compensate the non-employee spouse for the denied benefits in the retirement.

McCarty: Soldier in CA divorces his wife. U.S. Supreme Court held that a state divorce court cannot authorize distribution of a military retirement plan because Congress didn’t intend it.

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Where did that leave Texas? Under the Cearley case, Texas courts had been dividing up retirement benefits left and right. In 1983, Congress responded to the McCarty case. It enacted Uniform Services Former Spouses Protection Act, whereby Congress specifically authorizes state divorce courts to divide up military retirement benefits.

Result: We’re back with Cearley. State divorce courts can divide up military retirement benefits.

Plans that can be divided by the divorce court in TX:1. military retirement2. military disability3. federal worker’s comp4. civil service retirement pay5. civil service disability pay

Plans that cannot be divided by the divorce court in TX:1. fleet reserve pay2. military readjustment benefits3. railroad retirement benefits4. social service benefits5. veteran’s administration benefits6. national service life insurance

E. Management and Control – Separate

Assume we’re dealing with separate property. What might happen to it upon marriage termination?

DeBlane v. Lynch

Are the crops (grown on wife’s separate land by wife’s separate slaves) community or separate?

Court says community. How can we reach this conclusion using our modern rules? Rule of implied exclusion. The crops are not a traceable mutation – once grown, they’re not connected to the land.

Note: Increases or decreases in the value of land do not affect its character. However, if something is grown on the land anew, that growth is community property.

Stringfellow v. Sorrells

Mule is wife’s separate property. However, husband uses his time/talent/efforts and community funds to make the mule more valuable. Is the increase in value community property?

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No. An increase in value due to community effort/funds does not change the separate property character of the mule.

What if the mule had a baby? It would be more akin to the cotton above – thus, community property.

Overcoming the Community Presumption

Theories (not rules of law….rather, points of advocacy):

1. Item tracing : The proponent of separate character must establish by clear and convincing evidence that the property was obtained by separate funds or credit.

2. Community out first rule : If a fund has community and separate sources, we presume that community comes out first.

3. Pro rata approach : If a fund has community and separate sources, but there’s no item tracing, we assume that any funds came out proportionately.

Hypo:

1960: Wife buys Blackacre for $10K.

1985: Wife tells Blackacre for $100K.

1986: Wife gets a CD with the money.

1987: CD matures and wife gets $110K. She then places it in a separate bank account. She immediately writes two checks: One for $10K to her stockbroker (to invest in Super Soy), and one for $100K to the bank to get a CD. The Super Soy stock is now worth $1 million, and the CD is now worth $120K.

1990: Husband dies and leaves all his property to Tootsie.

The wife must trace the assets back to Blackacre:

When Blackacre increased in value, it didn’t change the character.

The wife must then produce the receipt to show that the CD was purchased with the Blackacre funds. Assume she can.

The extra $10K earned on the CD will be community (earned from separate funds).

Bank account is part separate ($100K), part community ($10K).

The wife must then produce stock certificates for Super Soy. But how do we know which $10K she used to purchase the Super Soy stock? If she made a contemporaneous business record saying, “This $10K is from my separate funds,” that would be sufficient to establish the separate property character. Assuming she can show this, the other $90K in the bank account

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would be separate, and $10K would be community. If she can’t, Tootsie will get half of the $1 million. Note: The “community out first” theory won’t help the wife unless Super Soy went belly up.

Lesson: The best way to trace is item tracing. But you must have the necessary records!!

Commingling: If the party who owns the separate property is unable to rebut the community property by clear and traceable evidence, a commingling has occurred. Thus, the property is community.

Horlock v. Horlock-At the time of the marriage Roy Horlock owned properties having a net value of approx. $1 million. -Subsequent to the marriage Roy sold separate property real estate for approx. $700k. He also received payments in excess of $200k under certain contracts which has been entered into prior to the marriage and which the Roy had already performed.-The total of the separate property sold and collected subsequent to the marriage was $921,000. -Roy placed the proceeds of these sales into an investment account at the First City National Bank. -The account existed prior to marriage and had been in use by Roy, who was engaged in the real estate business.-Roy commingled the proceeds of the sale of his separate property with the community property. Issue: Is Roy Horlock entitled to reimbursement for the use of his separate funds to enhance, improve, and increase the value of the community estate?

Notes:Husband admits that he can’t trace in this case. However, in order to alleviate the bite of the community result (he brought a lot of money into this marriage), the court allows reimbursement. Thus, the husband’s separate estate is a creditor of the community estate.

If you can’t trace, remember this case. You might be able to salvage something.

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Hypos:

Assume a $100K CD is clearly separate property (purchased before marriage).

A CD by itself doesn’t increase/decrease in value. Thus, any interest earned is community property.

Assume Blackacre is separate property (gift to wife). Blackacre goes up in value. Further, Blackacre earns rental income and produces crops.

Increase in property value doesn’t change Blackacre’s characterization as separate. The rental income and crops are community (produced from separate).

Assume Blackacre has pine trees on one section. They are separate because they’re fixtures on the land. A lumber company offers the wife $100K to clear the trees off the land.

The $100K is still separate property. It’s a traceable mutation of the land.

Texaco thinks there’s oil on Blackacre. The wife enters into a lease with Texaco, and oil is produced. The wife has received $1 million in royalty payments.

The royalty payments are separate property. They are a traceable mutation of the oil in the ground.

When the wife entered into the lease, Texaco paid the wife a bonus of $10K.

The bonus is separate property. Why? Because it’s a down payment on the royalties.

Between the bonus and the royalties, Texaco paid delay rentals.

Those delay rentals are community property (revenues from rental of the land). What might happen in this case? If the wife doesn’t keep sufficient records, there might be a commingling. We would advise her to keep the bonus/royalties in one account, and the delay rentals in another account.

During the marriage, wife and husband decide to build a house on Blackacre. They use community funds to construct it.

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The house is an attachment of Blackacre, and thus takes on the characterization of Blackacre (separate). However, the community will have a claim for reimbursement from the wife’s separate estate (Dakan).

Wild blueberries start growing on Blackacre (not the result of planting).

This crop is still community property. It doesn’t matter whether the crop is the result of the community’s time/talent/labor or not.

Wife and husband are in the business of growing and selling Christmas trees on Blackacre.

These trees will be community property (unlike the trees in the hypo above). Why? Because these trees are grown like a crop (even though they’re not annually renewable and take 4-5 years to grow).

Husband decides to cut the pine trees himself and then sell them to the lumber company, hoping he’ll get more money than if the lumber company expends its own labor.

This is like the mule case. The community may have a claim for reimbursement, but the husband’s time/talent/labor doesn’t change the separate character of the land.

Husband decides to put in an oil well himself and then sell the oil to Texaco, hoping he’ll get more money than if Texaco expends its own labor.

This is different! Analogy: If the husband digs clay out of the ground and sells it, the proceeds are still separate. But if the husband digs the clay out, makes a brick out of it, and then sells it, the proceeds are community.

Courts recognize that it takes a lot of labor to get oil out of the ground and into a tank. Thus, the oil in the tank is a new product. The same principal would apply if the husband cut the pine trees, milled them into lumber, and then sold the lumber. Key factor: Severability. (Norris)

Husband physically builds the house on Blackacre. Is this consistent with the severability theory, such that the house would be characterized as community property?

No. The house wasn’t removed from the land like the clay/oil/trees. In order to apply the severability theory, there must be a new product produced from something that was once attached to the land.

Husband owns 1,000 shares of IBM stock that he brought into the marriage. We know that any increase in value remains separate property. We also know that any dividends will be community property. What if the stock splits – 1,000 shares become 2,000 shares?

The separate property character remains.

What if instead of dividends, IBM issues more shares?

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The separate property character remains. The individual owner’s interest in the stock basically keeps the same value.

Assume now that the IBM is a closely-held, small company. Husband owns all the stock before marriage. During marriage, he’s elected as president, chairman of the board, etc. He expends his time/talent/labor to make IBM a huge success (stock goes from $1 million to $10 million).

Remember the mule case! Just because the husband expends his time/talent/labor on the stock doesn’t mean that it is converted to community property.

However, if the community hasn’t received sufficient compensation as a result of the husband’s time/talent/labor on his separate property, it will have a claim for reimbursement. (Jensen). This was a big deal because previously, the court had only allowed claims for reimbursement when community funds were used to improve separate property. These are called Jensen claims.

Now assume the wife builds the house on Blackacre herself.

Now – because of Jensen – we might reimburse the husband (community).

Claims for Reimbursement

Originally, Texas courts only recognized these claims for use of community funds to enhance separate.When community funds are used to enhance separate property, a debtor/creditor relationship is created between the two spouses. That debt only matures upon termination of the marriage (divorce or death).But once this debt matures, what is the amount of the debt?

Jensen: If the community hasn’t received sufficient compensation as a result of the husband’s time/talent/labor on his separate property, it will have a claim for reimbursement.

I can expend a reasonable amount of time/talent/labor necessary to manage and preserve my separate estate without worry of having to compensate the community.

If I expend more than a reasonable amount of time/talent/labor necessary to manage and preserve the separate estate, the community will have a right to reimbursement.

If I expend a lot of time/talent/labor and also make a new product, my separate estate will have a right of reimbursement from the community.

Reimbursement works both ways!! See more rules below.

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Pennick: Reimbursement is an equitable principle, not a matter of right. Before reimbursing anyone, the court must take all the pluses and minuses into consideration.

Today, pursuant to 2001 legislation in TX…Two types of reimbursement:

Claims for economic contribution, §3.402(a)

Use of C funds to pay off the principal of a debt secured by SPOR

Use of C funds to make a valuable improvement to S land

Economic contribution does not include:-expenditures for ordinary maintenance or repair-taxes, interest, or insurance-contribution of time, toil, talent or effort

§3.403: Claim Based on Economic Contribution(e) The use and enjoyment of property during a marriage for which a claim for economic contribution to the property exists does not create a claim of an offsetting benefit against the claim.

Hypo: Husband and wife pay off Blackacre with community funds and make capital improvements with community funds. However, the husband lives there for 20 years.

We don’t take this beneficial enjoyment into account!!

§3.404: Ownership Interest Not Created(b) A claim for economic contribution…does not create an ownership interest in property, but does create a claim against the property of the benefited estate by the contributing estate. The claim matures on dissolution of the marriage or death of either spouse.

§3.405: Management RightsThis subchapter does not affect the right to manage, control, or dispose of marital property as provided by this chapter.

§3.406: Equitable Lien

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(a) On dissolution of a marriage, the court shall impose an equitable lien on property of a marital estate to secure a claim for economic contribution in that property by another marital estate.

Claims for reimbursement, §3.402(b)

All other reimbursement claims

§3.408: Claim for Reimbursement(b) A claim for reimbursement includes: (non-exhaustive list!)

(1) payment by one marital estate of the unsecured liabilities of another marital estate;(2) inadequate compensation for time, toil, talent, effort of a spouse by a business entity under the control/direction of that spouse. (Jensen claims)

Recall that economic contribution does not include:-expenditures for ordinary maintenance or repair-taxes, interest, or insurance-contribution of time, toil, talent or effort

Thus, these claims fall under reimbursement!

§3.409: Nonreimbursable ClaimsCourt may not recognize a marital estate’s claim for reimbursement for:

(1) the payment of child support, alimony, or spousal maintenance;(2) the living expenses of a spouse or child of a spouse;(3) contributions of property of a nominal value;(4) the payment of a liability of a nominal amount; or(5) a student loan owed by a spouse.

Marshall v. Marshall-The partnership (Marshall Pipe and Supply Company) engaged in the business of exploring for, developing, and producing oil and gas. -The partnership acquired all of its oil and gas leases before Woody’s marriage to Arlene.-The partnership disbursed $542,315.72 to Woody during the marriage. -The partnership records and Woody’s tax returns reflect that some amounts were distributed as salary and some amounts as distribution of profits. -The partnership agreement provided that it would pay Woody $700 in salary per month. For the duration of the marriage, the amount comes to $22,400. -The agreement also provides that all other distributions are from the distributee’s share of the profits. Issue: Were the profits paid out by the partnership to Woody his separate property or the community property of Woody and Arlene? Notes:

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Hypo: Brothers own Blackacre. They decide to start a partnership, and they contribute Blackacre in exchange for their partnership interests. Texaco comes along and sets up an oil/gas lease on Blackacre. It pays royalties, bonuses, etc. to the partnership.

Partnership property isn’t marital property. However, a partnership interest is separate property. The royalties, bonuses, etc. are community property because they were earned during marriage.

Trusts and Marital Property

Hypo: Prior to marriage, wife’s father creates an irrevocable, inter vivos trust for his daughter. He funds it with $1 million. Trust terms: “During the beneficiary’s lifetime, the trustee must distribute the income to take care of her. At her death, the principal is to be delivered to her heirs.” Wife marries husband, and trustee distributes $100,000 to the wife during marriage.

Husband will argue that this is income generated from separate property (not acquired by gift/devise/descent), so community. Some TX cases agree. Others would hold that the $100K is part of the gift given to the wife by her father. So we don’t know this answer definitively. Featherston thinks it should be community.

Hypo: Same, but the trustee has the discretion to distribute the income.

In this case, the trustee doesn’t have to distribute the income to the wife. It’s his choice. Thus, he is completing the gift from the father. Thus, it’s separate property, and TX cases have so held across the board.

Hypo: Same, but the trustee can distribute income for the wife’s health, education, maintenance and support (ascertainable standard).

Featherston says: If income is used for wife’s HEMS, there’s no money on the table to argue about. It’s gone! Thus, the better argument is that the income was a gift (thus separate property). No cases on this.

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Property Damage

Hypo: Wife’s parents give her a brand new car. There’s no doubt that the car is her separate property. She insures the car and pays the premiums with community funds. Later, she has a wreck and totals the car. The insurance company gives the wife $25,000 to buy a new car.

Is the $25,000 community property because it comes from the policy, or is it separate property because it replaces the separate property car? The new §3.008 solves this problem:

§3.008: We trace to the car, not the policy. So it’s separate property.

If you’re representing the husband, you’ll argue that the community has a right of reimbursement for the premium payments.

Hypo: Farmer’s corn crop is completely damaged by a negligent crop duster, and he won’t be able to farm for 10 years. The farmer files a lawsuit against the crop duster. Who does the recovery belong to?

The damages need to be divided into two parts. The damages for the lost crop should go to the community. The damages to the land should go to the separate estate.

Hypo: Wife’s parents give her a mobile home. Husband and Wife both insure the mobile home. They separate and the husband burns down the mobile home. The wife claims for insurance, and the insurance company defends by saying that it is against public policy to award damages to someone who committed the damage.

Court said that the mobile home was her separate property (inception of title). They went on to say that his actions would not prevent her from recovering ½ of the proceeds for her separate property. They indicated that the result might not be the same if the mobile home was community property.

F. Management and Control – Community

Three types of community:

1. JointManagement and control rights in both spouses. Anything affecting the property requires the joinder of both spouses. Consequently, there are very few cases about mismanagement of joint community property.

2. His special3. Her special

Texas cases have held that the managing spouse owes a fiduciary duty not to commit a fraud on the community. However, that fiduciary duty is not spelled out in the family code (§3.102(a)). Don’t forget it!

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Hypo: During marriage, can the husband take his SCP and sell it for good and valuable consideration?

Yes. He doesn’t need his wife’s joinder to do this. It can’t be a fraud on the community because he received good and valuable consideration for it. He hasn’t deprived the community of anything!

§3.102: Managing Community Property(a) During marriage, each spouse has the sole management, control, and disposition of the community property that the spouse would have owned if single, including:

(4) the increase and mutations of, and the revenue from, all property subject to the spouse’s sole management, control, and disposition.

Hypo: Can he pledge his SCP to secure a debt?

Yes. Same reason.

Hypo: Can he transfer his SCP in the form of a gift?

Horlock v. Horlock

Husband made gifts to kids from first marriage and blind mom. Is this fraud on the wife 2?

Wife 2 has two options here:

Actual fraud – She will have to prove lack of consideration (check) and an intent to defraud the community (very difficult because you must look into the husband’s mind).

Constructive fraud – She will have to prove that the gifts were unfair (see factors below). Then the burden will shift back to the husband, who must show that the gifts were fair.

In considering the wife’s claim of a constructive fraud, there are three primary factors:1. size of the gift in relation to the total size of the community estate;2. adequacy of the estate remaining to support the wife in spite of the gift; and3. relationship of the donor to the donee

Assuming the community estate was worth $1 million, the husband’s gifts to his three daughters constituted no more than 13% of the total estate. The remaining minimum figure of $870K would be sufficient to provide for the needs of the wife.

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Carnes v. Meador-Ray opened the checking account in the name of “Ray D. Meador or Patsy Jean Meador Carnes,” before his marriage to Meador in 1967.-At the time of the marriage, $7,238 was in the checking account. Thereafter, and until the time of his death the decedent made withdrawals and deposits to this account.-Several months before his death, decedent gave his son-in-law $10k by check from this account.-At his death, the balance was $9k.-A CD in the sum of $10k was purchased in the name of “Ray D. Meador or Patsy Jean Meador Carnes,” before decedent’s marriage to Meador. -After the marriage an additional $5k was added to this initial $10k to purchase a $15k CD also in the same names. -The CD was renewed annually. -The decedent and Meador’s separated but did not divorce or enter into a written separation agreement. Each lived apart, paid his or her own bills, and filed separate income tax returns. -Decedent then died intestate two years later. -These funds are treated as community property.Issue:

1. Did the opening of the account and the purchase of the CD in the name of the decedent ‘or’ Carnes constitute a gift of the funds by decedent to Carnes?

2. Is Carnes entitled to recover the funds as joint tenant with a right of survivorship? 3. Was Carnes a third party beneficiary of a contract between the bank and the decedent such that

she should receive the funds in the CD or the checking account? 4. Was the decedent’s transfer of an interest in community property to his daughter a constructive

fraud on the rights of the wife?

Notes:Was the opening of the account in dad/daughter’s names evidence of fraud on the community? No. The account belongs to the person who opens the account.

Different result if dad authorizes daughter to make withdrawals from the account? Yes. This triggers the Horlock analysis above.

If the surviving spouse is successful in proving fraud on the community, what will she get?Her portion of the community property – ½ of the account.

What if the same facts arise in the divorce context?Court will make a just and right division.

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Davis v. Prudential Insurance Co.-March 11, 1960 Glen and Charlene were married.-Nov. 14, 1960 Prudential issued a policy of group life insurance on the life of Glen, the face value of which was $9K. The policy was purchased with community funds. Charlene was named as the beneficiary.-April 1, 1961 Face value was increased to $11K.-Aug. 8, 1961 Charlene filed for divorce.-Aug. 29, 1961 Glen named his mother, Edna, as beneficiary.Issue: Was it fraudulent for Glen to name his mother as beneficiary after Charlene filed for divorce?

Notes:Was there evidence of constructive fraud when the husband changed the beneficiary to mom?No. In the divorce court, we don’t care about the beneficiary designation. The divorce court will simply make a just and right division.

The only time the wife must prove fraud on the community is when the husband dies first. Any other situation is DWAP.

Kemp v. Metropolitan Life Insurance Co.-Jan. 1, 1940 While George had entered into an annuities/insurance plan, the certificate in question was issued by Metropolitan. In that certificate, George reserved the right to change the beneficiary. Mrs. Willie Kemp, George’s mother, originally was named beneficiary. -April 1, 1943 George changed the beneficiary to his wife, Martha Maud Kemp.-March 26, 1946 George’s mother died.-Dec. 2, 1946 George again changed the beneficiary from Martha to his sisters, Natalie Kemp Baker and Mary Lou Smith.Issue: Was it fraudulent for George to change the beneficiary from his wife to his sisters?

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Notes:In the case of a disposition of community property in fraud of the wife’s rights:

-The wife has a right of recourse first against the property of the husband. -If resort to the husband’s estate proves unavailing, the wife has a right of recourse against the person to whom the property has been conveyed or transferred.

Remedy against third party beneficiary constructive trust

Street v. Skipper-The insurance policies at issue were owned by the community property estate during the marriage but made payable to the estate of William Street upon his death.Issue: Was Street’s gift of community funds to his estate capricious, excessive, or arbitrary?

Notes:“Although Street gave his wife’s share of the community property proceeds of the life insurance policies to his estate, he also bequeathed to her certain portions of his share of the community estate that aptly made up the difference. She still received more than half of the community estate, and this disposition was not unfair to her. Thus, the gift of the community funds to his estate was not capricious, excessive, or arbitrary.”

Why can’t the wife just say DWAP? Why does she have to prove constructive fraud? How do we reconcile this Martin v. Moran?

In Martin, the bottom line holding is that the husband is without authority to devise her part of the proceeds. In Street, the court ignores this idea. This issue has not been fully resolved because these are both lower court cases. This issue only exists when the proceeds of an insurance policy are paid to the estate.

Hypo: What if the policy is not community property but instead is the separate property of the decedent? What are the wife’s rights?

At most, she has a right of reimbursement of ½ of the premiums paid during the marriage.

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Schlueter v. Schlueter-Richard and Karen Schlueter married in 1969.-In Dec. 1992, Mr. Schlueter began investing in emus. -He contributed $3250 of community funds toward two pairs of the birds, but eventually sold his interest to his father, Hudson Schlueter, for $1k. -The emu business was worth $10k when the sale occurred.-Mrs. Schlueter did not know the details of the business and did not find out that her husband had sold his interest to her father-in-law until after Mr. Schlueter filed for divorce.-Shortly before Mr. Schlueter filed for divorce, he accepted a $30,360.41 from his employer as an incentive for early retirement.-He turned the check over to his father for deposit in his father’s account. His father wrote himself a check for $12,565, allegedly to reimburse past loans to Mr. Schlueter. -About a week later this action was filed. Issue: What remedies are available to a spouse alleging fraud on the community committed by the other spouse?

Notes:What is the nature of fraud on the community? Prior to this case, fraud on the community was a tort and would allow the recover of punitive damages. This court comes back and says that fraud on the community is not a tort cause of action and is instead just the way in which we divide property upon divorce. Thus, no punitive damages are allowed.

The state’s community property system provides additional remedies against a spouse for improper conduct involving community property. The court may consider fraud on the community in its division of the estate of the parties, and that may justify an unequal division of the property.

Additionally, it is well settled that a trial court may award a money judgment to one spouse against the other in order to achieve an equitable division of the community estate. Of course, the money judgment can only be used as a means for the wronged spouse to recoup the value of his or her share of the community estate lost through the wrongdoer spouse’s actions. Because the amount of the judgment is directly referable to a specific value of lost community property, it will never exceed the total value of the community estate. This money judgment can be satisfied out of the wrongdoing spouse’s separate property.

Subsequent cases have affirmed that if we exhaust the community and his separate property, the next step is to impose a constructive trust on the third party.

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Note: In probate court, there is no attempt to make the wife whole out of the CP. Instead, we go straight to the money judgment, etc.

Hypo: Husband goes to Vegas and gambles away the community assets.

In the case of waste, you first attempt to make the wife whole by an unequal division of the remaining community assets. Why? Because waste of community is properly considered when dividing a community estate.

Can we get a money judgment in a waste situation? No case law on this.

Barnett v. Barnett-The Prudential policy was a term life issued during the marriage of Christopher and Marleen Barnett. -It was not a renewal of the Great Southern or Metropolitan Life policies that had been issued when Christopher was single, nor was it a renewal of the second Metropolitan Life policy that was issued after Christopher married Marleen. -The premiums on the Prudential policy were paid with community funds.-Christopher’s employer was the actual owner of all the policies, but Christopher, that is his estate, was the beneficiary. -Marleen’s state law remedy is to impose a constructive trust on one half of the proceeds of the Prudential policy that insured the life of her estranged husband. She contends that since her claim is against the executrix of her husband’s estate and not the administrator of the ERISA plan that ERISA is not implicated. -Dora, Christopher’s mother, contends that ERISA extinguishes all community property rights in a life insurance policy provided under an ERISA plan.Issue:

1. Was the Prudential policy a mutation of prior policies, thus making it separate property? 2. Does Marleen’s claim for fraud on the community “relate to” her husband’s employee benefit

plan within the meaning of ERISA’s general preemption provision? 3. Does ERISA preempt Marleen’s state law property rights to impose a constructive trust on

policy proceeds to remedy a constructive fraud on the community?

Notes:The wife is relying on constructive fraud. Her state-law remedy is an action for fraud on the community. The TX Supreme Court confirms that this is a possible remedy.

Problem in this case: We’re dealing with an ERISA-regulated policy. ERISA does not recognize the concept of constructive fraud. Thus, ERISA takes away a TX state-law remedy.

Hypo: What if this was a retirement plan and not a life insurance policy?

The wife would not have to prove a fraud on the community. Why? Because ERISA says that when the policy holder dies, the spouse is entitle to the entire amount in a QJSA.

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Land v. Marshall

Husband created a revocable trust without the wife’s knowledge. When the husband died, the wife was expecting DWAP of the property that went into the trust. The court didn’t do this.

The wife’s chances of proving actual fraud were slim. Why? Because he was trying to take care of her when he created the trust. She also failed to meet the burden of proof for constructive fraud.

Husband had the power to put the property in trust. However:Doctrine of illusory trusts: When the wife’s community share is involved, she can require the trust to be real rather than illusory, genuine rather than colorable.

Featherston points out – It’s not the trust that is illusory. The transfer is illusory because the husband created a revocable trust.

Because of the illusory trust doctrine, the wife can pull her property out of the trust. What happens then? When the wife’s pulls her property out of the trust, it frustrates the purpose of the trust. Therefore, we have a resulting trust with the remaining funds in favor of the settlor and his heirs (the daughter).

Note: This opinion has only been applied to revocable trusts, but Featherston doesn’t see why it could not also apply to a trust account.

Dillingham v. Dillingham-In a divorce action, the court treated corporate assets, allegedly the separate property of Mr. Dillingham, as though it was community property and the court divided the corporate property equally between Mr. and Mrs. Dillingham. Issue: Did the trial court error in dividing the corporate property equally between Mr. and Mrs. Dillingham?

Notes:What new concept does the court introduce? Alter ego.

Under certain circumstances, we ignore the corporate entity and treat the corporate assets as community property. We do this if the husband is operating the corporation as his alter ego.

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Incapacity (again)

§883: Incapacitated Spouse(a)…When a husband or wife is judicially declared to be incapacitated:

(1) the other spouse, in the capacity of surviving partner of the marital partnership, acquires full power to manage, control, and dispose of the entire community estate as community administrator, including the part of the community estate that the incapacitated spouse legally has the power to manage in the absence of the incapacity, without an administration.

New term introduced here!

(2) if the incapacitated spouse owns separate property, the court shall appoint the other spouse or another person or entity…as guardian of the estate to administer only the separate property of the incapacitated spouse.

If the other spouse wants to manage the incapacitated spouse’s separate property, she will have to go through the motions of becoming a guardian (which we learned).

(c) If a spouse who is not incapacitated is removed as community administrator or if the court finds that the spouse who is not incapacitated would be disqualified to serve as guardian…or is not suitable to serve as community administrator for any other reason, the court:

(1) shall appoint a guardian of the estate for the incapacitated spouse…

(2) after taking into consideration the financial circumstances of the spouses and any other relevant factors, may order the spouse who is not incapacitated to deliver to the guardian of the estate of the incapacitated spouse a portion, not to exceed ½, of the community property that is subject to the spouses’ joint management, control, and disposition.

(f) This section does not partition community property between an incapacitated spouse and a spouse who is not incapacitated.

(h) An order under this section does not affect the enforceability of a creditor’s claim existing on the date the court renders the order.

When the court finds that the competent spouse is not qualified to manage the community estate and gives ½ of the community estate to the guardian, this is not a partition.

(e) The duties and obligations between spouses, including the duty to support the other spouse, and the rights of any creditor of either spouse are not affected by the manner in which community property is administered under this section.

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Effect: Even if the competent spouse is appointed to manage the community property of the incompetent spouse, the competent spouse only has a duty not to commit fraud on the community. This is not a very lofty duty.

G. Transactions Between Spouses

Gorman v. Gause

This couple tried to shortcut all the crap. They didn’t want to be governed by TX marital prop. law.

Court said: You can’t do that. The Texas Constitution must be followed. A husband and wife do not have the power, by mere agreement, to change the status of community property yet to be acquired to that of the wife’s separate property.

Note: This doesn’t mean that the couple can’t make any agreements.

Examples of things they can do:HSP WSPWSP HSPHSCP WSPcommingling CP and SP all CPswapping assets, traceable mutation

Ex: Community buys HSP, so HSP becomes community and community becomes HSP

King v. Bruce

This was an attempt to partition community property so that it is each spouse’s separate property. Bruce was a savvy Baker & Botts lawyer, so he tried to get around the rules.

However, going to NY didn’t help. The Texas Constitution didn’t allow him to partition (rule of implied exclusion).

What happened next? Mr. Bruce got the Texas Constitution changed (1948 amendment):

Partition and exchange agreement: “Provided that a husband and wife, without prejudice, to pre-existing creditors, may from time to time by written instrument partition between themselves in severalty or into equal undivided interest all or any part of their existing community property, or exchange between themselves the community interest of one spouse in any property for the community interest of the other spouse in other community property, whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property of such spouse.”

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Tittle v. Tittle

This couple wants to convert their separate property into community property (for tax purposes).

Problem: The Texas Constitution didn’t permit that at the time.Note: Commingling or swapping can accomplish this. You just can’t do it by agreement.

This time, a powerful lawyer wasn’t adversely affected. It took 50 years, but finally the Constitution was amended:

Transmutation agreement:“Spouses may agree in writing that all or part of the separate property owned by either of them shall be the spouses’ community property.”

Hilley v. Hilley

Husband wanted to partition community stock certificates, creating a JT with survivorship rights.

The husband’s kids by a prior marriage said: Your attempt didn’t work, so DWAP! We get ½. TX Supreme Court said: It violates the mere agreement rule to create survivorship rights.

Free v. Bland- 1941 to 1945, Free, using community property, purchased several United States Savings Bonds. -The bonds were all issued to Mr. and Mrs. Free.-Under the Treasury Regulations which govern bonds issued in that form, when either co-owner dies, ‘the survivor will be recognized as the sole and absolute owner.’-After Mrs. Free passed away in 1958, this controversy arose between the husband and the son, who was the principal beneficiary under the wife’s will. -The TX Supreme Court, based on its decision in Hilley v. Hilley, ruled in favor of the son. Issue: Does the Treasury Regulations creating a right of survivorship in United States Savings Bonds pre-empt any inconsistent Texas community property law by virtue of the Supremacy Clause of the Constitution?

Notes:This was the one exception to the holding in Hilley:

State law which prohibits a married couple from taking advantage of the survivorship provisions of United States Savings Bonds merely because the purchase price is paid out of community property must fall under the Supremacy Clause.

The 1987 amendment to the TX Constitution changed all this:

Survivorship rights agreement:“Spouses may agree in writing that all or part of their community property becomes the property of the surviving spouse on the death of a spouse.”

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Williams v. Williams-The Williams entered into an agreement prior to marriage in which they agreed to waive the constitutional and statutory rights of a surviving spouse to a homestead and other exempt property. -Both parties had substantial separate property which they desired to preserve for themselves. -There was no interest in any minor children to protect. Issue: Is a premarital agreement to waive the constitutional and statutory rights of a surviving spouse to a homestead and other exempt property valid?

Notes:Can spouses waive their homestead rights in a premarital agreement?This court says yes.

Can the spouses agree that income from separate property will be separate property?No. This violates the TX Constitution.

Castleberry: Husband made a gift of community property to his wife (thus making it her separate property). Why did he do this? He was getting old and didn’t want the property to be included in his estate when he died (tax advantages). IRS said: “In TX, income from separate property is community property. And if you make a gift, but keep getting the income from the gift during your lifetime, we’re going to include the property in your estate when you die.”

Then came the 1980 amendment, in direct response to the Castleberry case:

Spousal donation rule:“If one spouse makes a gift of property to the other, that gift is presumed to include the income of the property which might arise from that gift of property.”

Spousal income agreement rule:“The spouses may from time to time, by written instrument, agree between themselves that the income or property from all or part of the separate property then owned by one of them, or which thereafter might be acquired, shall be the separate property of that spouse.

Note: These are exceptions to the income rule (income from separate is community)!!

Note: Would the Spousal Income Agreement Rule from 1980 have saved the Williams’ prenup? No! The Rule only applied to spouses, and the Williams were not yet spouses when the signed their prenup.

Can spouses agree to partition property pre-marriage? See the 1980 amendment:

Expanded partition and exchange rule:“Persons about to marry and spouses, without the intention to defraud existing creditors, may by written instrument from time to time partition between themselves all or part of their property, then existing or to be acquired…”

This gives us the power to create a community-free marriage!!

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*All of these amendments are consolidated into the 2000 amendment.*The legislature has codified many of these Constitutional amendments:

Before the 1987 amendment, spouses couldn’t create a right of survivorship. After the 1987 amendment, the legislature codified the new “survivorship rights agreement” rule:

§451: Right of SurvivorshipAt any time, spouses may agree between themselves that all or part of their community property, then existing or to be acquired, becomes the property of the surviving spouse on death of a spouse.

§452: FormalitiesAn agreement between spouses creating a right of survivorship in community property must be in writing and signed by both spouses….

The 1987 amendment talks only about “an agreement in writing.” It says nothing about the agreement being signed by both parties. Is §452 unconstitutional, then? Or is the legislature passing laws to more clearly define the constitution? No answer yet.

§453: Ownership and Management During MarriageProperty subject to an agreement between spouses creating a right of survivorship in community property remains community property during the marriage of the spouses. Such an agreement does not affect the rights of the spouses concerning management, control, and disposition of the property subject to the agreement unless the agreement provides otherwise.

§454: Transfers NontestamentaryTransfers at death resulting from agreements made in accordance with this part of the code are effective by reason of the agreement involved and are not testamentary transfers…

This section makes it clear that when you set up survivorship rights correctly, you necessarily avoid DWAP.

§455: RevocationA [survivorship] agreement may be revoked in accordance with the terms of the agreement. If the agreement does not provide a method for revocation, the agreement may be revoked by a written instrument signed by both spouses or by a written instrument signed by one spouse and delivered to the other spouse….

§461: Rights of Creditors…The community property subject to the sole or joint management, control, and disposition of a spouse during marriage continues to be subject to the liabilities of that spouse upon death without regard to a right of survivorship.

So if Husband dies and his creditors come after the community property with survivorship rights, Wife will have to account.

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Uniform Premarital Agreement Act

§4.002: FormalitiesA premarital agreement must be in writing and signed by both parties. The agreement is enforceable without consideration.

§4.004: Effect of MarriageA premarital agreement becomes effective upon marriage.

§4.006: Enforcement(a) A premarital agreement is not enforceable if the party against whom enforcement is requested proves that:

(1) the party did not sign the agreement voluntarily; or(2) the agreement was unconscionable when it was signed and, before signing the agreement, that party:

(A) was not provided a fair and reasonable disclosure of the property or financial obligations of the other party;(B) did not voluntarily and expressly waive, in writing, any right to disclosure of the property or financial obligations of the other party beyond the disclosure provided; and(C) did not have, or reasonably could not have had, adequate knowledge of the property or financial obligations of the other party.

(b) An issue of unconscionability of a premarital agreement shall be decided by the court as a matter of law.

(c) The remedies/defenses in this section are the exclusive remedies/defenses…

Common law: arms length burden is on contesting personnon-arms length burden is on proponent of agreement

After §4.006: non-arms length burden is on contesting person

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Marital Property Agreement

§4.102: Partition or Exchange of Community PropertyAt any time, the spouses may partition or exchange between themselves all or part of their community property, then existing or to be acquired, as the spouses may desire. Property or a property interest transferred to a souse by a partition or exchange agreement becomes that spouse’s separate property.

[The partition or exchange of property includes future earnings and income arising from the property as separate property of the owning spouse unless the spouses agree in a record that the future earnings and income will be community property after the partition or exchange.]

Codification of the expanded partition rule.

Commentators became concerned that this portion was unconstitutional. Why? Recall:

Spousal income agreement rule:“The spouses may…by written instrument, agree between themselves that the income or property from all or part of the separate property then owned by one of them, or which thereafter might be acquired, shall be the separate property of that spouse.

The Constitution doesn’t allow income from separate property to become separate automatically. Rather, the spousal income agreement rule says that the spouses may, by written agreement, agree to such a setup. As a result, this section of §4.102 was recently deleted.

§4.103: Agreement Between Spouses Concerning Income or Property from Separate PropertyAt any time, the spouses may agree that the income or property arising from the separate property that is then owned by one of them, or that may thereafter be acquired, shall be the separate property of the owner.

Codification of the spousal income agreement rule.

§4.104: FormalitiesBoth partitions and exchange agreements (§4.102) and spousal income agreements (§4.103) must be in writing and signed by both parties. [Such agreements do not need consideration.]

Featherston thinks this language is unconstitutional for purposes of a partition/exchange agreement. Why? Because a partition is a division of land, and without consideration, a partition would be a gift. Why would this create problem?...

Hypo: Husband gives Blackacre to Wife as a gift.

The spousal donation rule says that the income from Blackacre will be separate property.

Hypo: Husband partitions Blackacre such that ½ of it is WSP. No ¢ given.

§4.104 says that the income from Blackacre in this case will be community property. This doesn’t make sense! A partition agreement requires consideration!

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§4.105: Enforcement[Same enforcement provision that appears in the Uniform Premarital Agreement Act.]

§4.106: Rights of Creditors(a) A provision of a partition or exchange agreement made under this subchapter is void with respect to the rights of a preexisting creditor whose rights are intended to be defrauded by it.

Agreement to Convert Separate Property to Community Property(Codification of 2000 amendment)

§4.202: Agreement to Convert to Community PropertyAt any time, spouses may agree that all or part of the separate property owned by either or both spouses is converted to community property.

Codification of the transmutation rule

§4.203: Formalities(a) An agreement to convert separate property to community property:

(1) must be in writing and:(A) be signed by the spouses;(B) identify the property being converted; and(C) specify that the property is being converted to the spouses’ community

property; and(2) is enforceable without consideration.

(b) The mere transfer of a spouse’s separate property to the name of the other spouse or to the name of both spouses is not sufficient to convert the property to community property…

§4.205: Enforcement[(b) outlines the adverse consequences of converting separate to community, such as exposure to creditors, loss of management rights, loss of property ownership, etc.]

Recall: In light of all the potential adverse consequences, why would someone want to do this? Tax benefits. Usually older couples enter into transmutation agreements.

§4.206: Rights of Creditors(a) A conversion of separate property to community property does not affect the rights of a preexisting creditor of the spouse whose separate property is being converted.

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Beck v. Beck

Couple enters into a premarital agreement in 1977. As it stands in 1977, the agreement is void. Can the 1980 amendment apply retroactively to save the agreement?

The legislative history suggests that one purpose of the amendment was to uphold the intentions of spouses who entered into premarital agreements before 1980. Thus, the court allows the 1980 amendment to apply retroactively. This shocked practitioners everywhere.

Hypo: 1980 Husband and Wife own community property. They deposit it into a joint bank account with survivorship rights. At that time, their setup was void. First spouse doesn’t die until 2005. Can the 2000 amendment be retroactively applied?

No definitive case law on this. Featherston: Based on the legislative history in Beck (that the agreement must be in writing and signed by both spouses for retroactivity to apply), this would probably be ok.

However: If a deed provides that the husband and wife are receiving land as joint tenants with a right of survivorship, it would probably not be ok. Why? Because grantees don’t normally sign the deed.

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H. Effect of Death of Spouse

Issues faced upon divorce (before just and right division):

1. CharacterizationEach spouse prepares an inventory, providing which assets are separate and which are community. If the inventories differ, we face litigation.

2. Economic Contribution/Reimbursement Spouses may have contributed funds to other property, etc.

3. Creditor ClaimsThe divorce court can’t do anything to prejudice the rights of pre-existing creditors. However, the divorce court can decide who will pay which debt (Husband pays debts X, Y, and Z; Wife pays debts A, B, and C).

4. Child Support

5. Maintenance/Temporary Support

6. Wrongful Transfers

Waste Husband gambles $1K away in Vegas, Wife must plead.

Actual/Constructive fraud Husband commits fraud on community; Options: Just and right division, or Wife gets $ judgment, or Court imposes a constructive trust on whoever Husband gave property to.

Illusory transfers Husband puts all of his special community property into a revocable trust with his kids as the beneficiary. Wife can get her portion out, and court imposes a constructive trust on the rest for the kids’ benefit.

7. Spousal Tort ClaimsThis could be anything from assault to battery to IIED. Note: You cannot collect these damages out of community property – only the other spouse’s separate property.

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So what about death of a spouse? Do most of these issues come into play in the probate context? Yes!

Issues faced upon death of a spouse (before DWAP):

1. CharacterizationThe decedent’s executor will prepare an inventory, and the surviving spouse will have a chance to challenge it. If they disagree, we face litigation. But we still start with the community presumption!

Major difference: Quasi-community property, which only exists in the probate context.

2. Economic Contribution/Reimbursement Major difference: The divorce court must impose a lien to secure the debt. The probate court is given discretion and may impose a lien if necessary.

3. Creditor Claims This issue is even more important in the probate context!

4. Child Support The parent’s obligation to support the child dies with the parent unless there’s a

contractual obligation. If there is, the kids will fall under creditor claims.

5. Maintenance/Temporary SupportHowever, after the first spouse’s death, the surviving spouse and minor children might

be entitled to a family allowance. More later.

6. Wrongful TransfersSame, but remedies may be different (1/2)

7. Spousal Tort ClaimsThis could be anything from assault to battery to IIED.

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Types of dispositions on death:

1. Inter vivos transfersWhile O is alive, he makes an inter vivos transfer of a present interest.

If it’s is an irrevocable transfer, the property cannot be reached by creditors (unless the property was transferred to defraud creditors). If it’s a revocable transfer, the property can be reached by creditors.

2. Non-probate contractual dispositionsTrust accounts, retirement benefits, life insurance, multiple-party bank accounts, etc.

§450: Provisions for Payment or Transfer at Death[Statutory acknowledgement of non-probate contractual dispositions. Thus, such dispositions do not vest in a decedent’s heirs at death. Rather, they are distributed according to the contractual agreement.]

§450:(b) Nothing in this section limits the rights of creditors under other laws.

Urban myth: If a person gets rid of his property through a non-probate contractual transfer before death, his creditors won’t be able to get to the property after his death. This section debunks the myth!

3. Probate transfersThrough rules of intestacy or will, DWAP, etc.

§37: Passage of Title Upon Intestacy and Under a Will[These rules do not apply to inter vivos transfers or non-probate contractual dispositions. They only apply to the property left at death that hasn’t been transferred in another way.]

§45: Community Estate[Tells us who the heirs of the decedent are. DWAP, etc.]

§38: Persons Who Take Upon Intestacy(a) Intestate Leaving No Husband or Wife(b) Intestate Leaving Husband or Wife

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Hypo: Wife dies.

3P WSP WSCP JCP HSCP HSP

NP NP NP NP

P P P P

WSP Non-probate:Husband cannot complain about any non-probate transfers because it is her separate property and she owes him no fiduciary relationship with respect to it. Husband’s only possible complaint: WSP was used to purchase a life insurance policy and CP paid the premiums. This would give Husband a claim for reimbursement.

Probate:Immediately upon Wife’s death, her probate assets belong to her heirs under §38b or the devisees under her will.

WSCP Non-probate:If Husband is designated as beneficiary, the kids from Wife’s first marriage have no complaint. She has sole management and control over her SCP.

If the kids from Wife’s first marriage are designated as beneficiaries, Husband will have a complaint. First, he is entitled to the premiums paid out of CP and becomes a creditor of deceased Wife’s estate. Second, he can go after the kids as beneficiaries of the policy and impose a constructive trust on ½ of the proceeds (by pleading and proving fraud on the community).

What if Wife puts WSCP into a joint account for her and her boyfriend with the right of survivorship? She has the power to do this because the property is subject to her management/control. In this case, Husband would have a claim for fraud on the community.

If Wife gave WSCP to kids, Husband would have to prove fraud on the community. If Wife puts the same property in a revocable trust for the kids, however, Husband would not have to plead and prove fraud on the community. Instead, he could prove illusory transfer. Husband could then get back his ½ without having to do anything else. If Wife’s trust was irrevocable, it would not be an illusory transfer and Husband would still have to prove fraud on the community.

Probate:DWAP occurs at the moment Wife dies. Husband retains his ½, and her ½ passes under §45 or under her will.

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JCP Non-probate:An example of this is a joint bank account. Do the kids have any standing to complain? No. The kids have no claim to non-probate assets. They are the default takers.

What if this property was transferred by K to a 3P? Can Husband complain? If he joined in the transfer (which was required in order for the transfer to be valid), he has no standing to complain. If he didn’t join in the transfer: He will point out to the court that the transaction was void (he doesn’t have to plead fraud on the community!). Result: It’s probate property, so DWAP.

Probate:DWAP occurs at the moment Wife dies. Husband retains his ½, and her ½ passes under §45 or under her will.

HSCP Non-probate:Would the husband and wife ever enter into a K concerning HSCP that describes what happens when she dies? Yes…

One example is an IRA. Usually it’s in the husband’s name, and the K only explains what happens when he dies. What happens if the wife dies first? DWAP. He retains his ½ and her heirs get her ½. How can the husband avoid this? The couple must agree with Merrill Lynch that the proceeds will pass non-probate to him in the event that she dies first.

Probate:DWAP occurs at the moment Wife dies. Husband retains his ½, and her ½ passes under §45 or under her will.

HSP At most, Wife’s estate could have a claim for reimbursement/economic contribution from the HSP.

Remember: There’s no partition fairy. Just because the above things “occur” doesn’t mean they take place magically. After wife’s death, an administrator will take over (either designated by will or appointed by court). In TX, however, you must merge community property law with common law administration concepts.

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§177: Distribution of Powers Among Personal Representatives and Surviving Spouse(b) When a PR…has duly qualified, the PR is authorized to administer:

-the SP of the deceased spouse,-the CP which was by law under the management of the of the deceased spouse, and -all of the CP that was by law under the joint control of the spouses.

The surviving spouse, as surviving partner of the marital partnership, is entitled to retain possession and control of:

-all CP which was legally under the sole management of the surviving spouse

PR: WSP WSCP JCP Probate

SS: HSP HSCP

§156: Liability of Community Property for DebtsThe CP subject to the sole or joint management, control, and disposition of a spouse during marriage continues to be subject to the liabilities of that spouse upon death. In addition, the interest that the deceased spouse owned in any other nonexempt CP passes to his or her heirs or devisees charged with the debts which were enforceable against such deceased spouse prior to his or her death. In the administration of community estates, the survivor or PR shall keep a separate, distinct account of all community debts allowed or paid in the administration and settlement of such estate.

Before death, creditors can’t reach the surviving spouse’s special community property. However, the second sentence of §156 allows creditors to reach the deceased spouse’s interest in the surviving spouse’s special community property.

§250: Inventory and Appraisement [Within 90 days of qualifying, the PR must file an inventory and appraisement with the court.]

Inventory will include: -Decedent’s SP-SP subject to administration by PR, which includes 100% of SCP, 100% of JCP -Debts owing to the decedent -Surviving spouse’s ½ interest in the surviving spouse’s SCP.

The surviving spouse can challenge the inventory.

The PR then goes through the process of paying the debts. After the debts are paid, the parties get together and have a closing. The surviving spouse is entitled to his ½ interest in the JCP and WSCP, and he must account to the estate for the estate’s ½ interest in HSCP.

The parties have a ½ interest in each and every community asset. It’s not just a matter of adding up value!!!

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What if the deceased spouse has a will?

Hypo: Husband’s will says, “I devise all of my property to my kids.”

Husband has the power of testamentary disposition in his separate property and his ½ of the community estate. However, the wife still has some rights….

§282: Nature of Homestead Property ImmaterialThe homestead rights of the surviving spouse and children of the deceased are the same whether the homestead be the separate property of the deceased or community property between the surviving spouse and the deceased, and the respective interests of such surviving spouse and children shall be the same in one case as in the other.

§283: Homestead Rights of Surviving SpouseOn the death of the husband or wife, leaving a spouse surviving, the homestead shall descend and vest in like manner as other real property of the deceased and shall be governed by the same laws of descent and distribution.

§284: When Homestead Not PartitionedThe homestead shall not be partitioned among the heirs of the deceased during the lifetime of the surviving spouse, or so long as the survivor elects to use or occupy the same as a homestead, or so long as the guardian of the minor children of the deceased is permitted, under the order of the proper court having jurisdiction, to use and occupy the same.

Homestead rights are similar to but not the same as a LE. Wife has the right to live on the homestead until she abandons the it or dies. The kids can’t take possession or sell the property.

If the home is community property, the kids take the husband’s ½ and the wife keeps her ½, but she still has the homestead right of occupancy.

§286: Family Allowance to Surviving Spouses and Minors(a) Unless an affidavit is filed under Subsection (b) of this section, immediately after the inventory, appraisement, and list of claims have been approved, the court shall fix a family allowance for the support of the surviving spouse and minor children of the deceased.

(b) Before the approval of the inventory, appraisement, and list of claims, a surviving spouse or any person who is authorized to act on behalf of minor children of the deceased may apply to the court to have the court fix the family allowance by filing an application and a verified affidavit describing the amount necessary for the maintenance of the surviving spouse and minor children for one year after the date of the death of the decedent and describing the spouse’s separate property and any property that minor children have in their own right. The applicant bears the burden of proof by a preponderance of the evidence at any hearing on the application. The court shall fix a family allowance for the support of the surviving spouse and minor children of the deceased.

This is known as the widow’s allowance or family allowance. The court, at its discretion, can set aside an amount for wife’s support for one year. This can’t go to creditors or the kids.

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§271: Exempt Property to Be Set Apart(a) Unless an affidavit is filed under Subsection (b) of this section, immediately after the inventory, appraisement, and list of claims have been approved, the court shall, by order, set apart for the use and benefit of the surviving spouse and minor children and unmarried children remaining with the family of the deceased, all such property of the estate as is exempt from execution or forced sale by the constitution and laws of the state.

(b) Before the approval of the inventory, appraisement, and list of claims, a surviving spouse, any person who is authorized to act on behalf of minor children of the deceased, or any unmarried children remaining with the family of the deceased may apply to the court to have exempt property set aside by filing an application and a verified affidavit listing all of the property that the applicant claims is exempt. The applicant bears the burden of proof by a preponderance of the evidence at any hearing on the application. The court shall set aside property of the decedent’s estate that the court finds is exempt.

The wife has the right to have property set aside (up to $60k of husband’s exempt separate property) during formal administration. They aren’t going to take the widow’s furniture, etc. immediately.

§278: When Estate is SolventIf, upon a final settlement of the estate, it shall appear that the same is solvent, the exempted property, except the homestead or any allowance in lieu thereof, shall be subject to partition and distribution among the heirs and distributees of such estate in like manner as the other property of the estate.

If the estate is solvent, the exempt separate property is subject to distribution.

§279: When Estate is InsolventShould the estate, upon final settlement, prove to be insolvent, the title of the surviving spouse and children to all the property and allowances set apart or paid to them under the provisions of this Code shall be absolute, and shall not be taken for any of the debts of the estate except as hereinafter provided.

If the estate is insolvent, the exempt separate property becomes wife’s separate property.

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Hypo: Husband’s will says, “I devise Blackacre to my wife. I devise the rest, residue, and remainder to my kids.” All the property is community property. All assets have been acquired in his name. They are living in a rented apartment (no homestead). Other main asset is AT&T stock.

At the time of husband’s death, DWAP occurs, so the kids own his ½ interest and wife retains her ½ interest. When the will goes to probate, the husband’s ½ interest in Blackacre vests in the wife.

With the AT&T stock, DWAP occurs, but the husband can only devise his ½ interest. Therefore, the wife retains her ½ interest in the stock.

Dakan v. Dakan-G.W. Dakan was married to Wife 1 until her death. He and Wife 1 had four children.-During his marriage to Wife 1, G.W. acquired Lot 7.-Thereafter, G.W. married Mary.-Mary used her separate and community funds to make substantial improvements to Lot 7.-G.W. died. His will said:

“I hereby give Lot 7, together with all improvements thereon, to my four children.”“My wife is to receive $100 per month from the rentals of Lot 7, and she shall live on the homestead tax-free for as long as she desires.”

Issue: Was Mary put to an election under the will of her deceased husband?

Notes:The Texas Widow’s election comes from the doctrine of equitable election in the Holliday case.

Election: He who accepts a benefit under a will must adopt the entire contents of the instrument.The law does not permit the husband to devise either separate property or community property of the wife without her consent. But if he attempts to do so, and she accepts under the will, as devisee, rights she would not otherwise be entitled to, she is estopped from questioning the disposition of her property upon the doctrine of election.

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Hypo: “I devise Blackacre to my kids. I devise the rest, residue, and remainder to my wife.”

Husband can only devise his half interest in Blackacre, so he did not have the testamentary power to give all of Blackacre to the kids.

Based on Dakan, what are the results of the above hypo?The wife has the option of election. If there is going to be an election, there must be a benefit and a detriment. Election is a equitable doctrine. If you are a beneficiary under a will and you elect to take under the will, you must adopt the entire content of the will and allow the intent of the testator to be enforced.

The wife has two choices:

1. If she elects to take under the will, she gets 100% of the AT&T stock and the kids will have 100% of Blackacre. She will have to deed her ½ of Blackacre to the kids (b/c of DWAP).

2. If she elects not to take under the will, she retains her ½ of Blackacre, and the kids get the husband’s ½ of the AT&T stock. We will treat the will as if she pre-deceased her husband.

She has the right to an election because she can’t be required to give up her ½ interest in the community property. This is called the Texas Widow’s Election.

Hypo: “I devise Blackacre to my wife for life, remainder to my kids.”

If there is going to be an election, there must be a benefit and a detriment. In this case, the wife has an election. Why? Benefit: Husband is giving his ½ of Blackacre as a LE; Detriment: Husband is giving away her ½ interest as a remainder.

*The widow’s election is similar to Land, but different. In Land, a trust was established which gave a LE to the wife and a remainder to the daughter. Land dealt with a inter vivos transfer (i.e., the husband has the right to convey his special community property). The wife had a kind of an election: leave the property in the trust or attack the transfer as illusory. Don’t confuse these two situations!

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V. Death and No Will

A. Law of Intestacy

Hypo: O is a TX resident. He has a ranch in OK with a truck, home, etc. The rest of his property is in TX. All of his assets are probate assets. O dies intestate.

Conflict of law rules – Rule 1: The law of the situs governs as to real property.Rule 2: The law of the domicile governs as to personal property.

Thus: As to any real property in TX, TX law governs. As to any real property in OK, OK law governs. As to any personal property, TX law governs.

§37: Passage of Title Upon Intestacy and Under a WillWhen a person dies, the general rule is that his property vests in his heirs at law. There are several conditions to this vesting:

Heir’s vesting is subject to complete divestment if a will is admitted to probate.

Relation back – Heirs are divested, and property goes from heirs to devisees

Expectancy Probate of will Death (Property vests in heirs)

Heir must survive decedent by 120 hours.

§47: Requirement of Survival by 120 Hours(a) A person who fails to survive the decedent by 120 hours is deemed to have predeceased the decedent for purposes of…intestate succession….If the time of death of the decedent or of the person who would otherwise be an heir, or both, cannot be determined, and it cannot be established that the person who would otherwise be an heir has survived the decedent by 12 hours, it is deemed that the person failed to survive for the required period. This subsection does not apply where its application would result in the escheat of an intestate estate.

Assume O and A die in a car accident. This prevents the court from having to determine whether O or A died first.

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Generally, heir must be “in being and capable in law to take as heir” at the time of death.

§41: Matters Affecting and Not Affecting the Right to Inherit(a) No right of inheritance shall accrue to any person other than to children or lineal descendants of the intestate, unless they are in being and capable in law to take as heirs at the time of the death of the intestate.

Hypo: At the time of A’s death, A’s spouse is pregnant. Is Little A (still an embryo) an heir of A?

Yes. §41(a) says that “children or lineal descendants” of the intestate don’t have to be “capable in law to take as heirs.” Thus, they only have to be “in being.” This is sometimes called the embryonic exception.

Hypo: Same, but O has two children, A and B. A and B are killed in a car accident. Is Little A an heir of B?

No. Because Little A is not a “child or lineal descendant” of B, Little A must be “in being and capable in law to take as an heir.” Little A is in being, but he is not capable in law to take as an heir.

Heir’s vesting is subject to the rights of the decedent’s creditors.

Heir’s vesting is subject to possession by a court appointed PR.

We’ve already learned about the above two conditions.

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The laws of intestacy are up to the states and legislative whim. Thus, the legislature has tried to draft intestacy laws that reflect most people’s intent.

Hypo: At the time of O’s death, O is not married. What are the rules?

§38: Persons Who Take Upon Intestacy

(a) Intestate Leaving No Husband or Wife. Where any person, having title to any estate, real, personal, or mixed, shall die intestate, leaving no husband or wife, it shall descend and pass in parcenary to his kindred, male and female, in the following course:

1. To his children and their descendants.

2. If no children or descendants, then to his father and mother, in equal portions. But if only the father or mother survive the intestate, then his estate shall be divided into two equal portions, one of which shall pass to such survivor, and the other half shall pass to the brothers and sisters of the deceased, and to their descendants. If no brothers or sisters, then the whole estate shall be inherited by the surviving father or mother.

3. If no father or mother, then the whole estate shall pass to the brothers or sisters of the intestate, and to their descendants.

4. If there be none of the kindred aforesaid (no father, mother, brother, sister) then the inheritance shall be divided into two moieties, one of which shall go to the paternal and the other to the maternal kindred, in the following course:

To the grandfather and grandmother in equal portions. If only one of these are living, then the estate shall be divided into two equal parts, one of which shall go to such survivor, and the other shall go to the descendant or descendants of such deceased grandfather or grandmother. If no descendants, then the whole estate shall be inherited by the surviving grandfather or grandmother. If no surviving grandfather or grandmother, then the whole estate shall go to their descendants, and so on without end, passing in like manner to the nearest lineal ancestors and their descendants.

This section is reminiscent of Roman law and puts TX in the distinct minority of states. Most states say that if there isn’t a surviving father, mother, brother, or sister, the estate passes to the “next of kin.” Who penned this? Thomas Jefferson. He had written the intestacy laws for Virginia, and Texas adopted this section in full.

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O

A B C

a bb ccc

If we were to take the language in §38(a)(1) literally (To his children and their descendants), we would divide O’s estate into 9 shares – a per capita distribution. To understand the correct rule, look at §43:

§43: Determination of Per Capita and Per Stirpes DistributionWhen the intestate’s children, descendants, brothers, sisters, uncles, aunts, or any other relatives of the deceased standing in the first or same degree alone come into the distribution upon intestacy, they shall take per capita, namely: by persons; and, when a part of them being dead and a part living, the descendants of those dead shall have a right to distribution upon intestacy, such descendants shall inherit only such a portion of said property as the parent through whom they inherit would be entitled if alive.

What does this mean?

3 types of heirs:1. Those related to the decedent through the lineal line of descent (children, grandchildren, great-grandchildren, etc.)2. Those related to the decedent to through the lineal line of ascent

(parents, grandparents, great-grandparents, etc.)3. Those related to the decedent, but not through a lineal line of descent or ascent; (also called collaterals – brothers, sisters, aunts, uncles, cousins, etc.)

Representation: If heirs are in a lineal line of descent – 1. A living ancestor cuts of the inheritance rights of his descendants.2. The descendants of a deceased ancestor step into the deceased ancestor’s shoes for

inheritance purposes.

Thus, only A, B, and C inherit (because they cut off the inheritance rights of the grandchildren).

Hypo: If A dies before O, who would inherit?

Dead guys can’t inherit. Thus, Little A, B, and C would inheritNote: Little A is not inheriting from A. He is inheriting directly from O.

Hypo: If A and C die before O, who would inherit?

Little A – 1/3B – 1/3Little Cs – 1/9 each

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Hypo: If A, B, and C die before O, who would inherit?

Little A – 1/3Little Bs – 1/6 eachLittle Cs – 1/9 each

This would be the result if we interpreted our TX statute in the strict per stirpes sense (CL).However – In 1993, the TX statute was amended so that it takes a modern per stirpes approach. In this scenario (where all of O’s children predecease O), we skip the children, go the grandchildren, and each of them get a 1/6 interest.

Per stripes (applies before 1991 in TX): Always start at the first level below O (children in this case). Add up the number of descendants on that level who survived O by 120 hours. Then add the number of descendants on that level who predeceased O but left descendants surviving.

Ex: 0 + 3 1/3 goes to Little A, 1/3 goes to the Little Bs, and 1/3 goes to the Little Cs.

Modern per stirpes (applies after 1991 in TX): Always start at the first level where, in fact, descendants survived O (grandchildren in this case). Add up the number of descendants on that level who survived 0 by 120 hours. Then add the number of descendants on that level who predeceased O but left descendants surviving.

Ex: 6 + 0 1/6 goes to each grandchild

X

A B C D

E F G H I J K L

M N O P Q U

Strict Per Stirpes: E – 1/12 H – 1/4 I – 1/12 L – 1/4F – 1/12 J – 1/12N – 1/24 K – 1/12O – 1/24

Modern Per Stirpes: E – 1/8 H – 1/8 I – 1/8 L – 1/8F – 1/8 J – 1/8N – 1/16 K – 1/8O – 1/16

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Hypo: At the time of O’s death, O is married. What are the rules?

Note: The below section only applies to O’s separate property.

§38: Persons Who Take Upon Intestacy

(b) Intestate Leaving Husband or Wife. Where any person having title to any estate, real, personal or mixed, other than a community estate, shall die intestate as to such estate, and shall leave a surviving husband or wife, such estate of such intestate shall descend and pass as follows:

1. If the deceased have a child or children, or their descendants, the surviving husband or wife shall take 1/3 of the personal estate, and the balance of such personal estate shall go to the child or children of the deceased and their descendants. The surviving husband or wife shall also be entitled to a LE in 1/3 of the land of the intestate, with remainder to the child or children of the intestate and their descendants.

2. If the deceased have no child or children, or their descendants, then the surviving husband or wife shall be entitled to all the personal estate, and to ½ of the lands of the intestate, without remainder to any person, and the other ½ shall pass and be inherited according to the rules of descent and distribution; provided however, that if the deceased has neither surviving father nor mother nor surviving brothers or sisters, or their descendants, then the surviving husband or wife shall be entitled to the whole of the estate of such intestate.

(The highlighted phrase means we must look to §43 for the correct rule.)

If O has kids or grandkids:

O’s wife takes 1/3 of the personal property. Rest goes to kids and their descendants.

O’s wife gets a LE in 1/3 of the real property. Remainder goes to kids and their descendants.

Note: If HS, wife has a right to occupy the entire property for her life or until she abandons it.

If O has no kids or grandkids:

O’s wife gets all of the personal property.

O’s wife gets ½ of the real property, without remainder to any person. Other ½ passes through the rules of descent. If O has no surviving mother, father, brother, sister, or their descendants, then O’s wife will get all of the real property.

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Recall…

§45: Community Estate(a) On the intestate death of one of the spouses to the marriage, the community property estate of the deceased spouse passes to the surviving spouse if:

(1) no child or other descendant of the deceased spouse survives the deceased spouse; or

(2) all surviving children and descendants of the deceased spouse are also children or descendants of the surviving spouse.

(b) On the intestate death of one spouse to a marriage, if a child or other descendant of the deceased spouse survives the deceased spouse and the child or descendant is not a child or descendant of the surviving spouse, ½ of the community estate is retained by the surviving spouse and the other ½ passes to the children or descendants of the deceased spouse. The descendants shall inherit only such portion of said property to which they would be entitled under §43 of this code. In every case, the community estate passes charged with the debts against it.

If §45(a) is triggered – Wife gets the whole thing.If §45(b) is triggered – Wife gets ½, and the other ½ is split among the other children, whether they’re the children of this marriage or a previous marriage.

Hypo: At the time of O’s death, he is only survived by collateral heirs. What are the rules?

§38: Persons Who Take Upon Intestacy

(a) Intestate Leaving No Husband or Wife. Where any person, having title to any estate, real, personal, or mixed, shall die intestate, leaving no husband or wife, it shall descend and pass in parcenary to his kindred, male and female, in the following course:

3. If no father or mother, then the whole estate shall pass to the brothers or sisters of the intestate, and to their descendants.

A - B

C D X E

F G H I J K

Go to the siblings level, and add up how many siblings survived X (1). Then add siblings who predeceased X but left descendants (2). 1/6 each goes to F and G. D gets 1/3. 1/9 each goes to I, J, and K (essentially the same rule as before).

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Hypo: At the time of O’s death, he is not survived by anyone. What are the rules?

§38: Persons Who Take Upon Intestacy

(a) Intestate Leaving No Husband or Wife. Where any person, having title to any estate, real, personal, or mixed, shall die intestate, leaving no husband or wife, it shall descend and pass in parcenary to his kindred, male and female, in the following course:

4. If there be none of the kindred aforesaid (no father, mother, brother, sister) then the inheritance shall be divided into two moieties, one of which shall go to the paternal and the other to the maternal kindred, in the following course:

To the grandfather and grandmother in equal portions. If only one of these are living, then the estate shall be divided into two equal parts, one of which shall go to such survivor, and the other shall go to the descendant or descendants of such deceased grandfather or grandmother. If no descendants, then the whole estate shall be inherited by the surviving grandfather or grandmother. If no surviving grandfather or grandmother, then the whole estate shall go to their descendants, and so on without end, passing in like manner to the nearest lineal ancestors and their descendants.

Because both parents are dead, we divide the property into two moieties. If both GF1 and GM1 are alive, each one takes ½ of the paternal moiety. If GF1 is dead and has descendants, they would take his half by representation. If he has no descendants, GM1 takes all of the moiety.

Since both GF2 and GM2 are dead and have no descendants, we divide the maternal moiety into sub-moieties. One is split between GGF1 and GGM1, and the other is split between GGF2 and GGM2. If both sets of GGPs are dead, we divide the sub-moieties into sub-sub-moieties, and so on until we find someone who can inherit.

If no heirs can be found on one side of the family, that moiety passes to the other side of the family.

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GGF1 GGM1 GGF2 GGM2

GF1 GM1 GF2 GM2

F M

DEC

§41: Matters Affecting and Not Affecting the Right to Inherit(b) Heirs of Whole and Half Blood. In situations where the inheritance passes to the collateral kindred of the intestate, if part of such collateral be of the whole blood, and the other part be of the half blood only…each of those of half blood shall inherit only half so much as each of those of the whole blood; but if all be of the half blood, they shall have whole portions.

Because Mother and Father are dead, the decedent’s property passes to collateral kindred. According to the statute, Whole Brother should get twice as much as Half Brother. To figure out the percentages, double the number of whole siblings and then add the number of half siblings. Divide up the portions so that the whole siblings get twice as much as the half siblings. In this case, Whole Brother gets 2/3, and Half Brother gets 1/3.

Assume that Whole Brother and Half Brother are dead. We follow the same process for the nieces and nephews. Thus, each Whole Niece/Nephew gets 1/5, and each Half Niece/Nephew gets 1/10.

Follow the same process as above. Thus, the Whole Uncle will get 2/3 and the Half Aunt will get 1/3.

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M F W2

DEC B ½ B

GM GF W2

F ½ A U M

DEC

X and Y are both lineal descendants, so they both inherit equally. Don’t get confused because they are half siblings of each other! That doesn’t matter when their common parent is the deceased!

Adoption

If an adoption takes place, public policy now dictates that the adopted child shall be treated as a childof the adoptor for all purposes. Inheritance ramifications:

1. Adoptee will still be considered a child of his biological parents for inheritance purposes.2. Adoptee will now be considered an heir of the adoptor(s). 3. If the adoptee dies, his heirs will be his adopted parents, not his biological parents.

§40: Inheritance By and From an Adopted ChildFor purposes of inheritance under the laws of descent and distribution, an adopted child shall be regarded as the child of the parent or parents by adoption, such adopted child and its descendants inheriting from and through the parent or parents by adoption and their kin the same as if such child were the natural child of such parent or parents by adoption, and such parent or parents by adoption and their kin inheriting from and through such adopted child the same as if such child were the natural child of such parent or parents by adoption. The natural parent or parents of such child and their kin shall not inherit from or through said child, but said child shall inherit from and through its natural parent or parents…

This is true unless the court cut off the child’s inheritance rights from his natural parents through the adoption process. (from Family Code)

§40 only applies to our rules of intestate succession. Thus, when §38 says “children,” it includes adopted children. §40 does not apply when we’re interpreting a will or trust.

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M F W2

X Y

Adult Adoption

Why is this normally done? Picture a little old lady who doesn’t have any close relatives. She befriends her neighbor and they become very close. The neighbor takes care of the old lady, etc. Old lady decides that she wants her neighbor to inherit (rather than her distant nieces and nephews). If she puts this in her will, the nieces and nephews will likely contest it (“Old lady was unduly influenced by neighbor,” etc.). But if the old lady adopts the neighbor, the nieces and nephews cannot contest it.

§162.507: Effect of Adoption(a) The adopted child is the son or daughter of the adoptive parents for all purposes.(b) The adopted child is entitled to inherit from and through the adopted adult’s adoptive parents as though the adopted adult were the biological child of the adoptive parents.

*Adult adoptee cannot inherit from his biological parents!!*

Adoption by Estoppel

Hypo: During a marriage, H and W strike a deal with an unwed mother and promise that they will adopt the child. For whatever reason, H and W never get around to the official adoption proceedings. H and W die intestate and are survived by this child and other children born to them. Who are the heirs of the H and W?

The courts in most jurisdictions, including TX, would invoke the doctrine of adoption by estoppel. The estate would be estopped from denying the adoption of the child because the unwed mother detrimentally relied on the promise of H and W.

Hypo: Same, but the child dies first. Child is survived by her biological mother and H and W who have raised the child. Who are the heirs of the child?

The biological mother. The child did not do anything to be estopped. Therefore, there is no estoppel theory that would allow the H and W to be the heirs of the child.

Hypo: Same, but one of the siblings (a natural child of H and W) or an aunt and uncle or grandparent dies. Is the child an heir of the sibling, aunt, uncle, grandparent etc.?

Under the adoption by estoppel, only the adoptive parents and their privies are estopped to deny the adoption. The estoppel to deny the adopted status does not operate or work against collateral kindred not in privity with the adoptive parents. Thus, the sibling, aunt, uncle, or grandparent can deny the adoption.

Normally, the natural children of H and W fall under the privity umbrella. However, aunts and uncles would not.

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Non-marital children

Historically, the non-marital child was a non-entity for inheritance purposes. As time evolved, the approach softened. The child was legitimate as to the mother but not the father.

The question has always been: What do we do with daddy’s little bastard????

Beginning in 1977 the law changed dramatically….

§42: Inheritance Rights of Children (a) Maternal Inheritance. For the purpose of inheritance, a child is the child of his biological or adopted mother, so that he and his issue shall inherit from his mother and from his maternal kindred, both descendants, ascendants, and collaterals in all degrees, and they may inherit from him or his issue.

(b) Paternal Inheritance. (1) For purpose of inheritance, a child is the child of his biological father if the child is born under circumstances described by §160.201, Family Code, is adjudicated to be the child of the father by court decree as provided by Chapter 160, Family Code, was adopted by his father, or if the father executed an acknowledgment of paternity as provided by Subchapter D, Chapter 160, Family Code, or a like statement properly executed in another jurisdiction, so that he and his issue shall inherit from his father and from his paternal kindred, both descendants, ascendants, and collaterals in all degrees, who is not otherwise presumed to be a child of the decedent, or claiming inheritance through a biological child of the decedent, who is not otherwise presumed to be a child of the decedent, may petition the probate court for a determination of right of inheritance. If the court finds by clear and convincing evidence that the purported father was the biological father of the child, the child is treated as any other child of the decedent for the purpose of inheritance and he and his issue may inherit from his paternal kindred, both descendants, ascendants, and collaterals in all degrees, and they may inherit from him as his issue. This section does not permit inheritance by a purported father of a child, whether recognized or not, if the purported father’s paternal rights have been terminated.

The biological link between child and father can be established either while the father is alive or after the father’s death. The child can bring suit in the probate court to prove the biological link. The child has the burden to prove this by clear and convincing evidence.

As for the maternal inheritance, the child only has to prove the biological link between child and mother by a preponderance of the evidence.

Note: This seems to bring up an equal protection claim, but the courts have consistently allowed these different burdens of proof.

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Scientifically Generated Descendants (s.g.d.’s)

§42(a) does not define “biological mother.” Modern medicine has evolved so much that we do not have any clear cut definition. §160.201 of the Family Code says, “A mother-child relationship is established by the mother giving birth to the child, adjudication of the mother’s maternity, or adoption.”

What if the woman giving birth is a surrogate mother? If the surrogate mother dies intestate, is the child an heir of the surrogate mother? What if the egg is donated by someone else?

We will not get into the details of these scenarios because the law has not kept up with modern medicine. We do not have any clear answers.

§160.201 of the Family Code says, “The father-child relationship is established by an rebuttable presumption of paternity, an acknowledgement of paternity, an adjudication of the man’s paternity, adoption of the child, or the man’s consenting to assisted reproduction by his wife which resulted in the birth of the child.”

Minority and Incapacitation

What happens if one of the heirs is a minor child? Does this affect the minor child’s ability to be an heir, to own property? No.

What if the heir is an incapacitated adult? Does this affect the incapacitated adult’s ability to be an heir, to own property? No.

The minor or incapacitated adult can own property, but they can’t manage it.

Who manages the property of the minor or incapacitated adult?

Incapacitated Adults: guardian of the estate.

Minors: There is an option – A guardianship of the estate, or a custodianship under the TX Uniform Transfers to Minors Act. This is at the option of the PR of the decedent’s estate. If the amount owing to the minor is more than $25K, the PR needs the consent of the court to use the custodianship. The most widely used method is the guardianship of the estate. In either event, the minor gets the property at age 18.

Escheat

If we can’t find any heirs of the decedent, the state gets the property. The property escheats to the state. This very rarely happens.

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B. Special Situations

Property v. Expectancy

Upon O’s death, O is divested of property because a dead guy can’t own property. The property (probate assets) is transferred to the heirs at the instant of death. Prior to O’s death, the heirs only had an expectancy.

§47 requires the heirs to survive for 120 hours after the death of O. Who owns the property during that 120-hour period? The heirs’ ownership rights relate back to the time of death. Upon admission of a will to probate, the ownership rights of the devisees relate back to the time of death.

Expectancy Property

Date of Death120 hours period Will admitted to probate

Assignments

§37B: Assignment of Property Received from a Decedent(a) A person entitled to receive property or an interest in property from a decedent under a will, by inheritance, or as a beneficiary under a life insurance contract, and who does not disclaim the property under §37A of this code, may assign the property or interest in property to any person.

(b) The assignment may, at the request of the assignor, be filed as provided for the filing of a disclaimer under §37A(a) of this code. The filing requires the service of notice under §37A(b) of this code.

(c) Failure to comply with the provisions of §37A of this code does not affect an assignment under this section.

(d) An assignment under this section is a gift to the assignee and is not a disclaimer or renunciation under Section 37A of this code.

(e) An assignment that would defeat a spendthrift provision imposed in a trust may not be made under this section.

This section applies to transactions after the death of O. As of the moment of death, the heirs can assign their property interest, creditors can attach it, and it can be inherited. These rights are subject to §37 and the possessory right of the PR.

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Pre-death assignments v. Post-death assignments

O

X A B C

a b b c c c

Hypo: Prior to O’s death, A assigns his interest to X. Can A do this?

No. A doesn’t have a property interest that can be assigned. All he has is an expectancy.

Hypo: Prior to O’s death, A gives his interest as a gift to X.

A still doesn’t have anything to give, so X doesn’t own anything. O later dies. Who are O’s heirs? A is still O’s heir. X could argue that A promised to give him the property interest. However, there was no consideration so the contract is unenforceable. X might be able to prove after-acquired title.

Hypo: Same, but A pre-deceases O.

O’s heirs are a, B, and C. X has absolutely nothing.

Hypo: X paid good and valuable consideration for A’s interest.

X did not buy anything because A did not have anything to sell. At O’s death, assuming A is still alive, X should be able to enforce the contract against A.

Hypo: Same but A pre-deceases O.

X has no rights to O’s estate based on the contract with A because A was never an heir of O. X might have a breach of contract claim against A’s estate.

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Renunciation and Disclaimers

Post-death assignment: Party receives property through devise or descent and then transfers it.

Disclaimer: Party disclaims property; Effect is that the disclaiming party has “predeceased” O. Disclaimer must take place prior to 9 months after O’s death according to Texas law.

Hypo: O

A B C (disclaims)

a b b c c c

We pretend that C has predeceased O. Thus, the little c’s are O’s heirs (not C’s assignees).

Hypo: Same, but creditor had a claim against C before O’s death. Can this be a transfer in fraud of C’s creditor?

No. We’re applying the legal fiction that C never acquired a property interest. Thus, he never had anything to transfer.

Hypo: Same, but C doesn’t have any children.

Property would go to A and B.

One exception under federal law (5th Circuit): A Texas heir or devisee cannot effectively disclaim property in order to prejudice the federal government who has a tax lien against the heir.

Main purpose of disclaimers? Tax benefits. If O devises property to C, C might recognize that the property will be subject to two sets of estate taxes (O’s and one day C’s). Thus, the IRS lets you effect a valid disclaimer to avoid two sets of estate taxes.

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Advancements

Hypo: During O’s lifetime, O transfers $10K to A as a loan. O dies before the loan is repaid. What should we do now?

Loan will be listed in O’s estate inventory, and it will be the PR’s duty to pursue the claim against A (if O’s estate is insolvent). If O’s estate is not insolvent, the PR will simply reduce A’s inheritance by $10K.

Hypo: Same, but debt is barred by the SOL.

Rule We still debit A’s inheritance by $10K. This is known as the retainer rule.

Hypo: The $10K was an advancement by O to A.

§44: Advancements(a) If a decedent dies intestate…property the decedent gave during the decedent’s lifetime to a person who, on the date of the decedent’s death, is the decedent’s heir, or property received by a decedent’s heir under a non-testamentary transfer is an advancement against the heir’s intestate share only if:

(1) the decedent declared in a contemporaneous writing or the heir acknowledged in writing that the gift or non-testamentary transfer is an advancement; or(2) the decedent’s contemporaneous writing or the heir’s written acknowledgement otherwise indicates that the gift or non-testamentary transfer is to be taken into account in computing the division and distribution of the decedent’s intestate estate.

If A fails to survive O, the property is not taken into account in computing the division and distribution of O’s estate, unless O’s contemporaneous writing provides otherwise.

Hotch Pot Estate: A method of valuing the advancement

Probate estate at O’s death $20K +$10K

$30K HPE

Each heir is entitled to 1/3 of the HPE. But A already has $10K which is 1/3. Thus, A gets nothing, and B and C each get $10K.

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Releases

Hypo: Prior to O’s death, there was a $10K transfer to C. There was also a document: C, for good and valuable consideration (i.e. $10K), agreed not to assert his rights as an heir when O dies. O dies, and C survives. C didn’t realize when he signed the release that O’s estate was worth millions of dollars. Is the release effective?

Yes. C freely contracted and received good and valuable consideration. Thus, he is estopped from denying the effect of the release.

Mow v. Baker-W. B. Baker, deceased, was married twice. -His first wife died intestate in 1891. They had five children, three girls and two boys.-W. B. Baker married the second time to Sallie Baker, from which marriage three children were born.-In 1907, W. B. Baker and his second wife, Sallie, entered into a settlement, and contract in writing, with all five children of the first marriage joined by their husbands and wives. -The contract provided that each would be paid $1,000 and in exchange the children would give up all interest in the estate. -The contract was signed, and acknowledged in due form of law by all of the parties, and recorded in the deed records of Colman County. -After the execution of the contract, but before the death of W. B. Baker, Emma Stovall, one of the signors of the contract, died intestate, and left surviving her four children. Issue: Does the contract prohibit the children from the first marriage and the children of Emma Stovall, W. B. Baker’s grandchildren, from inheriting from W. B. Baker’s estate?

Notes:Emma Stovall purported to release something that never happened, and that never became vested in her. She could not release/sell something that the law vested in her children directly.

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White Kids agree to release any claims they might have to Father’s estate. White Kid 5 predeceases Father. How do we divide up Father’s estate?

First: Divide the estate as if there were no release. Each child (both White and Black) would be entitled to 1/8. Thus, Grandchildren each get 1/32.

Next: Because of the release, the amount that the White Kids would have been entitled to goes to the Black Kids (third party beneficiaries of the release between Father and White Kids). Thus, Black Kids each get 7/24 (1/3 of 7/8). Grandchildren still get 1/32. Why? Because White Kid 5 was never an heir of Father, and his release was ineffective.

Killer Heirs

Texas does not have a slayer’s statute.

Murchison: Wife killed husband to get at his insurance policy (under which she was beneficiary). The couple had no kids. The court agreed that it was bad public policy to let the wife collect the insurance proceeds. However – if we ignore the beneficiary, the policy goes back to the husband’s estate. Because he had no kids, the wife was his sole heir at law!! The court allowed the wife to inherit the policy, saying that it was the legislature’s job to enact a “slayer’s statute.”

The legislature responded, but not with a true slayer’s statute. Why? Because slayer’s statutes apply generally to convicted felons, and most people in Texas at that time were convicted felons.

§41: Matters Affecting and Not Affecting the Right to Inherit(d) Convicted Persons and Suicides. No conviction shall work corruption of blood or forfeiture of estate, except in the case of a beneficiary in a life insurance policy or contract who is convicted and sentenced as a principal or accomplice in willfully bringing about the death of the insured, in which case the proceeds of such insurance policy or contract shall be paid as provided in the Insurance Code of this State, as same now exists or is hereafter amended; nor shall there be any forfeiture by reason of death by casualty; and the estates of those who destroy their own lives shall descend or vest as in the case of natural death.

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M F W2

Hypo: B murders O. The other heirs are upset. Is there anything we can do about this, since Texas doesn’t have a general slayer’s statute?

The court will certainly impose a constructive trust.

§41: Matters Affecting and Not Affecting the Right to Inherit(c) Alienage. No person is disqualified to take as an heir because he or a person through whom he claims is or has been an alien.

Family Agreement

Families can agree on how to divide up an estate. So long as all of the people who are heirs of O join in the agreement, there is no one to complain. Thus, there must be 100% agreement.

For example: The family can, with the agreement of the devisees under the will, decide not to submit the will to probate.

§94: No Will Effectual Until Probate Except as hereinafter provided with respect to foreign wills, no will shall be effectual for the purposes of proving title to, or the right to the possession of, any real or personal property disposed of the will, until such will has been admitted to probate.

VI. Wills

A. Execution of Wills

Three types of dispositions to avoid intestacy: 1. Inter vivos transaction2. Non-probate contractual disposition3. Will

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Will: Revocable disposition of O’s probate estate to take effect at O’s death.

By its very nature, a will is revocable. A testator is always free to change his mind. He can amend or revoke the will.

If O is single, O has testamentary power over his entire probate estate. This is an absolute testamentary power. The testator can do whatever he desires with his property upon his death. There is no forced heirship in any American jurisdiction except Louisiana (shocker).

If O is married, the decedent spouse’s testamentary power is only over the decedent’s separate property and his ½ interest in all the community property.

Requirements for the testator to exercise his testamentary power:1. testamentary capacity 2. testamentary intent3. testamentary formalities 4. non-revocation

Testamentary Capacity

At the time and date of the will, the testator must have had testamentary capacity. To have testamentary capacity, the testator must be of a certain age and have the mental capacity to know the “objects of his bounty.” He must also have the mental capacity to understand the nature and extent of his bounty. He must have sufficient mental capacity to make a reasonable disposition of his property. The court does not require that he make a reasonable disposition, but just that he have the capacity to make a reasonable disposition. This is the common law definition of testamentary capacity that has been codified in the Texas Probate Code.

§57: Who May Execute a WillEvery person who has attained the age of eighteen years, or who is or has been lawfully married, or who is a member of the armed forces of the United States or the auxiliaries thereof or of the maritime service at the time of the will is made, being of sound mind, shall have the right and power to make a last will and testament, under the rules and limitations prescribed by law.

§58: Interests Which May Pass Under a Will(a) Every person competent to make a last will and testament may thereby devise and bequeath all the estate, right, title, and interest in property the person has at the time of the person’s death, subject to the limitations prescribed by law.

(b) A person who makes a last will and testament may: (1) disinherit an heir; and (2) direct the disposition of property or an interest passing under the will or be intestacy.

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Testamentary Intent

Did the testator intend for the document to be a disposition that does not go into effect until death?

Price v. Huntsman-Velma Lorenz executed a will, prepared by Judge Grimes, attorney, on June 16, 1961, by which she bequeathed all of her properties to Mrs. Louise Lorenz Huntsman and John F. Lorenz (relatives of her deceased husband). -Velma Lorenz was a school teacher. Her husband was dead, and she had no children or close relatives. -Velma became ill in 1964. Visitors testified that she appeared ill physically, but mentally alert. -On May 18, 1964, she was found unconscious in her home, taken to the hospital where she died. -On her desk in her home, after her death, was found an envelope partially sealed and addressed to Grimes. The envelope was delivered to Grimes, who opened it. -The envelope contained five savings account books, the key to Velma’s bank box, $20, and two writings (all in the handwriting of Velma). -The letters asked Grimes to make changes to her will. Issue: Did Mrs. Lorenz intend by the writing of the letters to create with such writings her will or codicil; or did she intend instructions to her attorney for the preparation of a new will or a codicil to include the changes designated in the writings?

Notes:

Codicil: Amendment to a previous will; testamentary doc. that must contain the requirements of a will.

“To be effective as a will or codicil, the writing must be testamentary in character. An instrument is not a will (or codicil) unless it is executed with testamentary intent. The animus testandi does not depend upon the maker’s realization that he is making a will, or upon his designation of the instrument as a will, but upon his intention to create a revocable disposition of his property to take effect after his death. It is essential, however, that the maker shall have intended to express his testamentary wishes in the particular instrument offered for probate.”

The intent must be manifested within the four corners of the document.

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Testamentary Formalities

States differ with respect to the formality requirements for wills.

Background: Either the Statute of Frauds Act of 1677 or the English Wills Act of 1837 is the basis for states’ will requirements. TX’s will requirements are based on the SOF Act of 1677.

Conflicts of law principals for wills: A TX resident might own property in TX and another state. It depends primarily on whether the property is real or personal. If it is real property, the law of the situs controls. If it is personal property, the law of the testator’s domicile controls (the domicile is determined at the time of the testator’s death).

.

Hypo: O’s will meets the requirements of TX law but not OK law.

The will is effective in TX as to the real and personal property. It is also effective as to the personal property in OK. The will is ineffective for OK real property.

Most modern statutes say that if the will is effective in the state it was executed, we will treat it as if it is effective in our state.

TPC Section 59: Requisites of a Will(a) Every last will and testament, except where otherwise provided by law, shall be in writing and signed by the testator in person or by another person for him by his direction and in his presence, and shall, if not wholly in the handwriting of the testator, be attested by two or more credible witnesses above the age of fourteen years who shall subscribe their names thereto in their own handwriting in the presence of the testator.

This is all that is required for a TX will to be valid.

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There are two types of written wills in TX: -Attested wills-Holographic wills (only about ½ of the states recognize holographic wills)

Attested Wills

Texas will law is very liberal:-No date requirement-No specific form of attestation-No delivery requirement-No publication requirement

Texas law requires an attested will to be:

1. In writingDoesn’t matter what you write on, what you write with, etc.A Braille will satisfies the writing requirement.

2. Signed Whatever the testator intends to be his signature is valid.

Ex: “Tom” is ok if Featherston intends for it to be his signature.Ex: “X” is ok if the testator intends for it to be his signature.

What might be helpful 10 years down the line?

John X Doe his mark

If a witness makes this notation around John Doe’s “X”, it might help any evidentiary disputes years later.

Ex: Testator is too weak to finish his signature. Witness finishes the signature. Heirs attack, saying the testator had intended to write “John Doe” but only wrote “John.” Heirs win.

3. By the testator OR proxyThere must be evidence that the testator affirmatively asked the proxy to sign for him, and the proxy must be in the testator’s presence when signing.

Ex: Better – “John Doe, by Tom Featherston in the presence of John Doe.”

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4. No location requirement for signature of testator or witnessesi.e., Signature doesn’t have to be at the end of the will.

Ex: Will is in testator’s handwriting. Top of will says, “Will of John Doe.” John Doe fails to put his signature at the end. In TX, you will argue that “Will of John Doe” in John Doe’s handwriting counts as his signature. (This argument will fail, but only because “Will of John Doe” wasn’t intended to be a signature. Not because of location.)

5. At least two witnessesWitnesses must be at least 14 years old and credible. In this context, “credible” means “competent to testify under the rules of evidence.”

In TX, “credible” includes:-testator’s spouse-beneficiary’s spouse-convicted person-lawyer who drafted the will*-beneficiary, if non-beneficiary witness corroborates -executor, if only receiving statutory compensation-executor, if receiving more than statutory compensation and non-beneficiary witness corroborates

In TX, “credible” excludes:-person with lack of mental capacity-beneficiary alone-executor alone, if receiving more than statutory compensation

*Lawyer will be disqualified from representing the estate.

6. Attestationa. Testator must acknowledge to witnesses that this is his “act and deed.”

No publication requirement, but publication is good practice.b. There must be a request to witness, either express or implied.

An express request to witness is better practice.c. Witness must sign the document in the presence of the testator.

Witness does not have to sign in presence of other witnesses.Testator does not have to sign in presence of any witness.

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Hypo: Testator is close to death in the hospital but mentally competent. He asks me to prepare a will for him, and I do so. I come back to the hospital and get two nurses to be witnesses. I say, “Is this your will?” He says yes. I say, “Do you ask these nurses to sign as your witnesses?” He says yes. He stays in bed, and the nurses turn their back to the bed in order to sign on a table.

Visual presence test: Testator must have been able to see the witnesses’ pen to the paper.

Conscious presence test: Testator, using all of his senses, must have reached the conclusion that the witnesses signed in his presence.

In TX, we have cases that go both ways. The more modern view is conscious presence.

Hypo: Everyone signs at roughly the same time. Is it fatal that the parties didn’t sign in the “proper” order?

No. As long as it takes places as part of a continuing transaction, it’s ok.

Hypo: Testator signs his will, and acknowledges to two people that the document is his will. One person signs as a witness, but the other person signs as the notary public. Is the will void?

Yes. The statute requires two witnesses, not one witness and one notary public!

§59: Requisites of a Will…Such a will or testament (attested or holographic) may, at the time of its execution or at any subsequent date during the lifetime of the testator and the witnesses, be made self-proved, and the testimony of the witnesses in the probate thereof may be made unnecessary, by the affidavits of the testator and the attesting witnesses, made before an officer…of this State.

Hypo: Last page of will Typed will, testator signs, affidavit, testator signs, witnesses sign.Is this a validly executed will?

In Wich, the court said that this type of will is void. Why? The witnesses signed the affidavit, not the will. Before you have a valid affidavit, you must have a valid will. Eventually (thanks to Missy’s law review article), the legislature changed this rule.

§59: Requisites of a Will(b) …A signature on a self-proving affidavit is considered a signature to the will if necessary to prove that the will was signed by the testator or witnesses, or both…

The self-proving affidavit is prima facie evidence of proper attestation of the will (witnesses don’t have to come testify!).

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Don’t confuse an attestation clause with a self-proving affidavit. An attestation clause is a paragraph within the will itself. It ordinarily appears below the testator’s signature and above the witnesses’ signatures. It contains language which recites as having happened certain things during the process of execution. The attestation clause is used: to refresh the memories of the witnesses at the time of probate, and to raise a rebuttable presumption that what is stated actually happened. A well-drafted will has both.

Typical language of an attestation clause: “The undersigned witness hereby acknowledges that….[facts].”

Integration of WillsA will may be written on more than one page, but not every page needs to have the testator/witnesses signatures. It’s sufficient if all of the pages comprising the will were present at execution, and the testator intended that all of the pages be a part of the will.

How do you prove that all the pages were there at the time of execution?How do you prove that the testator intended that all of the pages be a part of the will?

You can rely on a presumption of integration if: 1. There is some kind of physical connection of the pages, or

-Stapled, etc.2. There is some kind of internal coherence

-Consecutive numbering, consistency/logical sequence, etc.

Holographic Wills

§60: Exception Pertaining to Holographic WillWhere the will is written wholly in the handwriting of the testator, the attestation of the subscribing witnesses may be dispensed with. Such a will may be made self-proved at any time during the testator’s lifetime by the attachment or annexation thereto of an affidavit by the testator to the effect that the instrument is his last will; that he was at least 18 years of age when he executed it (or, if under such age, was or had been lawfully married, or was then a member of the armed forces of the U.S. or of an auxiliary thereof or of the Maritime Services); that he was of sound mind; and that he has no revoked such instrument.

Problems with holographic wills:

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1. Proof of handwritingUsually proven up by someone familiar with his handwriting, expert testimony, etc.

2. Proof of intent

3. Location of signature in some jurisdictions (but not in TX)

4. Non-holographic material within a holographic will

Hypo: O uses hotel stationary to make a holographic will. It has a space to fill in the date, but part of it is pre-printed. It also contains the pre-printed name of the hotel and address of the hotel. Everything else is in O’s handwriting. Is this document wholly holographic?

Case law is all over the board. No definitive TX Supreme Court case on this. Different approaches:

Intent test: If the testator intended for any of the non-holographic material to be part of the will, the entire will is void. In this case, the partially pre-printed date makes O’s will void.

Surplus test: If the non-holographic material is mere surplus (i.e., not an essential part of the will), we ignore it and the rest of the will is valid. Wills don’t have to be dated in TX, so O’s will is valid.

5. Interpretation/constructionMost of the time, holographic wills are not executed in the presence of an attorney. Thus, they’re difficult to interpret.

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Non-Revocation

§63: Revocation of WillsNo will in writing, and no clause thereof or devise therein, shall be revoked, except by a subsequent will, codicil, or declaration in writing, executed with like formalities, or by the testator destroying or canceling the same, or causing it to be done in his presence.

Revocation is a purely statutory concept. You can’t revoke a will unless you’ve done so in compliance with the revocation statute.

Revocation – like execution – is a testamentary act. Thus, it requires:1. Testamentary capacity at the time of the purported revocation2. Manifestation of intent to revoke3. Revocation in compliance with §63

TX has never recognized the concept of revocation by operation of law.

Revocation by operation of law: If the testator has a dramatic change in personal circumstances after execution of his will, that change in circumstances may work a revocation.

Hypo: O signs his will while he’s still single. The will left all property to O’s parents. 10 years later, he marries. 5 years after that, he has a child. 5 years after that, he dies. What result?

Most states would say that his dramatic change in circumstances worked a revocation.TX doesn’t adopt this view.

TX does have a similar rule that we’ve studied: Husband designates Wife as beneficiary of his insurance policy. He forgets to change the designation after divorce. The Family Code provision will void the beneficiary designation. Similar rules exist for retirement benefits and revocable trusts. Other similar rules:

§69: Voidness Arising from Divorce(a) If, after making a will, the testator is divorced or the testator is divorced or the testator’s marriage is annulled, all provisions in the will in favor of the testator’s former spouse, or appointing such spouse to any fiduciary capacity under the will…

Key: This section does not work a revocation of the will. It only voids the sections of the will in favor of the now ex-spouse.

§67: Pretermitted Child

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(a) Whenever a pretermitted child is not mentioned in the testator’s will, provided for in the testator’s will, or otherwise provided for by the testator, the pretermitted child shall succeed to a portion of the testator’s estate as provided by (a)(1) or (a)(2).

(c) “Pretermitted child” means a child of a testator who, during the lifetime of the testator, or after his death, is born or adopted after the execution of the will of the testator.

Understand: A testator does not have to leave his children anything. There’s no forced heirship in TX, and the obligation to take care of your child is extinguished at death. This is not a revocation statute.

However, you must be intentional in your attempt to disinherit your child! Otherwise, it might be viewed as an accidental omission.

§58b: Devises and Bequests That are Void(a) A devise or bequest of property in a will is void if made to:

(1) an attorney who prepares or supervises the preparation of the will; or(2) a parent, descendant of a parent, or employee of the attorney described in (1); or(3) a spouse of any of the above individuals. (2005 amendment)

(b) This section does not apply to: (1) a devise or bequest made to a person who:

(A) is the testator’s spouse;(B) is an ascendant or descendant of the testator; or(C) is related within the third degree by consanguinity or affinity to the testator; or

(2) a bona fide purchaser for value from a devisee in a will.

Total or partial revocations by a subsequent writing (will or codicil)

Hypo: Will 1 – “I devise all my property to A.” Will 2 – “I devise all my property to B.”Both wills were properly executed. At the time of the testator’s death, which one is the will?

The will later in time controls. Thus, Will 2 totally revoked Will 1 by implication.

The well-drafted document will include an express revocation clause:“I revoke the will that devised to .”

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Hypo: Will 1 – “I devise Blackacre to A, residuary to B.” Will 2 – “I devise Blackacre to C.” Both wills were properly executed. At the time of the testator’s death, which one is the will?

This time, we will admit both wills to probate. Will 2 does not manifest an intent to totally revoke Will 1. The language isn’t totally inconsistent. To the extent of any inconsistency, Will 2 (later in time) controls. C gets Blackacre, and B gets residuary. This is also an implied revocation.

In this case, the best course of action would have been to draft a codicil (express).“I intend to amend my former will, and I revoke the section that devised Blackacre to B.”

Hypo: Will 1 – “I devise all my property to A.” Will 2 – “I devise all my property to B.”Will 1 is attested, and Will 2 is holographic. Can a holographic will revoke a prior attested will?

§63: Revocation of WillsNo will in writing, and no clause thereof or devise therein, shall be revoked, except by a subsequent will, codicil, or declaration in writing, executed [with like formalities], or by the testator destroying or canceling the same, or causing it to be done in his presence.

“With like formalities” has been interpreted by courts to mean “With testamentary formalities.” Thus, a holographic will can revoke a prior attested will in TX.

Note: Subsequent writing need not be a will/testamentary declaration. It may simply revoke the prior document. (Will 1 – “Blackacre to A.” Document 2 – “I hereby revoke Will 1.” Result: Intestacy)

Total or partial revocation by a subsequent physical act

Requirements:-Testamentary capacity-Intent to revoke

Hypo: Testator keeps his will in a desk drawer. He dies and the will is destroyed in the fire. Later proof shows that Testator started the fire (either accidentally or intentionally).

Here, we must determine whether Testator had an intent to destroy the document (not necessarily an intent to start the fire).

Clear intent to revoke:-Tearing up-Writing “VOID” across the face-Cutting name out

Proxy revocation is allowed. Destruction must take place in the presence of testator!

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Hypo: Testator is on his deathbed. He asks his son to destroy his will. Son flushes the will down the toilet in the next room. Revocation?

No. Destruction didn’t take place in the testator’s presence.

Hypo: Executed original of the will was last known to be in the presence of the testator. After death, we can’t find the executed original, or it’s located but has a huge “X” across it.

Rebuttable presumption in this situation Testator destroyed will with intent to revoke.

It’s the practice of many lawyers to make multiple executed originals. The above presumption applies to all of these originals. However, all copies must be accounted for (sometimes difficult). Practical knowledge: Don’t make multiple originals. Just make photocopies.

What should be done with the original? Some lawyers keep the original in their personal vault. If not, the testator should keep it in a safety deposit box and tell his family members where it is. Featherston’s personal preference: The client should be responsible for keeping up with his will. That responsibility should not fall on the lawyer. Make a note in the client’s file that the client took the original with him!!

Can a testator partially revoke his will by a subsequent physical act?

Hypo: Testator is too lazy to hire a lawyer to revoke part of his will. In the presence of two local priests, he scratches several things out and makes changes.

Blackacre A for life, then to BWhiteacre A and BGreenacre C ARedacre D

TX courts have said: TX statute does not allow partial revocation by a subsequent physical act.Thus, we ignore the strikeouts and admit the will to probate as it was before.

One exception: Assume the will was not attested, but instead was holographic. In this case, we admit the will to probate in its modified format. Result: The modified will is a brand-new will.

What’s the best way to do what the testator wanted? A properly executed codicil!!

Note: The priests are there to prove the facts later on.

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Hypo: W1 – “I devise all my property to A.” W2 – “I devise all my property to B.”Both wills are properly executed. Before O dies, he destroys Will 2 with capacity and intent. Did O die testate or intestate?

TX courts have gone three different ways –

Common law view: A will is a revocable disposition to take effect at death. In between, a will is ambulatory. Thus, we wait until O dies and see which documents are still standing. O died testate, and W1 will be submitted to probate.

Ecclesiastical view: As of the date that the new document was signed, the testator’s intent was to revoke the old document. Thus, W1 was revoked as of the execution date of W2. O died intestate.

Hybrid view: Did W2 expressly or impliedly revoke W1? If express, we follow the ecclesiastical view. If implied, we follow the common law view.

Latest pronouncement of the TX Supreme Court: We follow the ecclesiastical view. Once revoked, always revoked.

Hypo: Client comes to you and says, “I made W1, and later I made W2. Now I want to bring W1 back to life. What can I do?” What is the best way to revalidate W1?

Methods of Revalidating W1:

1. Have your client execute a brand new will.Best, cleanest way to revalidate.

2. Have your client bring W1 to your office. Go through the execution ceremony again. Sloppy, but ok.

3. Republication by codicil (not accepted in all jurisdictions, but accepted in TX)Client creates a one-page codicil. In it, he incorporates by reference the original document and republishes it. He manifests his intent to make the old document a part of the new codicil and then executes the new codicil.

Trap for the unwary: TX courts have held that you can incorporate typewritten pages into a holographic codicil. However, the codicil is no longer wholly in the handwriting of the testator, and it can’t be admitted to probate! Some states look past this problem, but TX courts do not. Lesson: If your old document is attested, make sure that your new codicil is attested.

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Final Analysis for Will Execution

Was there due execution?

1. Did the testator, at the time of execution, have the requisite capacity?2. Does the document purporting to be the will manifest testamentary intent (4 corners)?3. Was the document properly executed according to testamentary formalities, or is it a

valid holographic will? (see requirements above)

A self-proving affidavit (executed with the assistance of a notary) is prima facie evidence of due execution!!An attestation clause is only a presumption of due execution.

After the will was duly executed, was the will revoked?

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(Insert handout)

Hypo: Testator has died. Family member comes to you with D1.

We will need to prove:-testator’s handwriting and signature-testamentary capacity (family)-testamentary intent (four corners) Burden of proof is on proponent of will-non-revocation

Hypo: Same, but family member comes to you with D2.

This will is null and void. Because it isn’t wholly in the testator’s handwriting, it must be attested.

Hypo: Same, but family member comes to you with D3.

We will need to prove:-testamentary capacity (family)-testamentary intent (four corners) -acknowledgement of “This is my will; Burden of proof is on proponent of willyou are my witnesses” (witnesses)-non-revocation

Hypo: Same, but family member comes to you with D4.

Same burden of proof as with D3, but better because it has an attestation clause. The attestation clause creates a presumption of due execution. Thus, the burden of persuasion shifts to the contestants.

Hypo: Same, but family member comes to you with D5.

Under old law, this would have been null and void (because witnesses signed the self-proving affidavit and not the will). Under new law, this is ok. Same burden of proof as with D3 and D4.

Hypo: Same, but family member comes to you with D6.

We still have to prove the above elements. Even this is not a slam-dunk, but it makes things a lot easier. This is what we want to see!!

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Fraud, Duress, Coercion, Undue Influence

Hypo 1: H, through fraudulent means (fraud, duress, coercion, etc.), prevents T from executing a will that would leave everything to B. T had capacity and intended his property to go to B. H is the last person in the world T would want his property to go to. Did T die testate or intestate?

We don’t have execution, so T died intestate. What should I do as B’s representative? Assert fraud, and ask the court to impose a constructive trust.

Hypo 2: B, through fraudulent means (shotgun to the head), gets T to sign a holographic will leaving all of his property to B. T had capacity. Did T die testate or intestate?

T didn’t have intent, so T died intestate.

Hypo 3: Assume there is a previously executed, valid will leaving everything to B. B learns that T is about to revoke the will. B, through fraudulent means, prevents T from revoking the will. T had capacity and intent. Did T die testate or intestate?

T died testate. He may have had the capacity and intent to revoke the will, but he didn’t destroy the will. What should I do as H’s representative? Assert fraud, and ask for a constructive trust.

Hypo 4: Assume there was a previously executed, valid will. H, through fraudulent means, forces T to tear up the will. T had capacity.

T didn’t have intent to revoke, so T died testate.

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If an intended beneficiary dies before the testator, we say the gift to the beneficiary “lapsed.” In other words, the gift doesn’t go to the beneficiary’s estate. Until the testator dies, the beneficiary has a mere expectancy! If the gift was specific (“I devise Blackacre to A”), that gift lapses, and the property subject to the gift passes as part of the residuary estate. If there are no residuary beneficiaries, or the will doesn’t have a residuary clause, the property passes to the testator’s heirs at law.

§68: Prior Death of Legatee(b) Except as provided by (a), if a devise or bequest, other than a residuary devise or bequest, fails for any reason, the devise or bequest becomes a part of the residuary estate.

Hypo: “I devise Blackacre to A, residuary to B.” A and B die before T.

The specific gift to A lapsed. Blackacre goes into the residuary, but the residuary gift to B lapsed too. Thus, the entire residuary goes to H. This is the common law rule, stated in §68(b). But look at TX’s statutory rule in §68(a):

§68: Prior Death of Legatee(a) If a devisee who is a descendant of the testator or a descendant of a testator’s parent is deceased at the time of the execution of the will, fails to survive the testator, or is treated as if the devisee predeceased the testator by §47 (120 hour rule) or otherwise, the descendants of the devisee who survived the testator by 120 hours take the devised property in place of the devisee.

Is A a lineal descendant of either the testator or the testator’s parents? Did A have any descendants who survived A by 120 hours? Assume A has a spouse and a son. Blackacre will go to A’s son as a substitute beneficiary, according to §68(a). Same rule will apply with regard to B.

Consider, also:

§68: Prior Death of Legatee(e) This section applies unless the testator’s last will and testament provides otherwise. For example, a devise or bequest in the testator’s will such as “to my surviving children” or “to such of my children as shall survive me” prevents application of (a).

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B. Probate and Contest of Wills

§94: No Will Effectual Until Probated Except as hereinafter provided with respect to foreign wills, no will shall be effectual for the purpose of proving title to, or the right to the possession of, any real or personal property disposed of by the will, until such will has been admitted to probate.

Two other things must happen before will is admitted to probate:1. Testator must die2. Court of proper jurisdiction and venue must enter an order admitting the will to probate

Probate in the solemn form (other states): After submitting the will to probate, actual notice must be given to all the heirs. Notice states that the court will consider the will, and if it’s valid, the heirs will be divested of the decedent’s property.

Probate in the common form (TX):

1. File original will and application for probate. The best place is the county where testator resided at the time of death. This will be an in rem proceeding, so the court must have in rem jurisdiction.

2. County clerk assigns the estate to the proper court and notifies the sheriff.

3. Sheriff issues citation by posting on courthouse door for 10 days – constructive knowledge.Earliest possible date for hearing: first Monday after passage of 10 days after posting.

Is it strange that we can divest heirs in TX without giving them actual notice? There’s a trick that makes it ok by due process standards:

§93: Period for Contesting ProbateAfter a will has been admitted to probate, any interested person may institute a suit in the proper court to contest the validity thereof, within two years after such will shall have been admitted to probate…

How long do you have to admit the will to probate? 4 years. If you combine that with the above rule, this process could go on for years!!

4. Most of the time, the hearing to admit the will to probate will be ex parte (because in rem). In other words, only the applicant, applicant’s lawyer, and witnesses will be present.

5. At the hearing, the proponent bears the burden to prove:-The testator is dead (no death certificate necessary, just witness testimony);-The testator had real/personal property ($10K+) within jurisdiction of the court;-The court has proper venue (county where testator resided at the time of death);-Due execution (self-proving affidavit or evidence); and-Non-revocation

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6. The court must then decide how to probate the will. Two choices:

-Appoint a PRIf a PR is designated in the will, he becomes the executor.If a PR is not designated in the will (or if the designated person is unwilling or unable to act), the court will appoint an administrator. In this case, we must prove that there is a real necessity for administration.

-Order muniment of title (unique to TX)To accomplish this, we must convince the court that there is no need for formal administration. We do this by proving that there are no outstanding debts (other than debts secured by liens on real estate). If the court orders a muniment of title, administration is over.

Note: Muniment of title can be ordered even if the will designates a PR. Just provide proof.

7. Will the PR be dependent or independent? An independent PR handles probate in much the same way as a trustee handles a trust – very freely. A dependent PR has many more constraints – He must ask the court’s permission for most actions related to probate. This choice must be noted in the court’s order!

8. If a PR is appointed, the court decides whether there’s a need for an appraiser.

9. The court then enters the order.

10. The PR must qualify for office. To do so, he must file an oath of office and, perhaps, provide a fiduciary bond and have that bond approved by the court.

11. The county clerk issues letters certifying that this guy is the duly appoint and qualified PR. If administrator: letter of administration. If executor: letters testamentary.

12. At this point, formal administration begins.

13. Once administration ends, the estate closes.

A B C D E F G E to G = formal adm.

Will Death 120hrs PW/PR PR Qualifies Close Estate PW/MT “letters”

Two types of will contests in TX:

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1. Pre-probate contests: Heirs enter objections before the court issues its order admitting the will to probate.

2. Post-probate contests: §93 lawsuit to set aside a will that has already been admitted to probate. Heirs have two years after probate to initiate this type of lawsuit. The two-year period can be extended if there is fraud or forgery to two years after discovery of the fraud or forgery. Incapacitated persons and minors have two years after the removal of their disability to file suit.

Same issues as in probate:-Whether testator is dead;-Whether testator had real/personal property within jurisdiction of the court;-Whether the court has proper venue;-Whether there was due execution; and-Whether the will was revoked

Pre-probate Burden of proof is on the proponentPost-probate Burden of proof is on the heir

Hypo: I represent an heir. I’m aware that the proponents have filed the will for probate. Should I contest the will pre-probate or post-probate?

It would seem logical to contest the will pre-probate. Why? Because the burden of proof is on the proponent.

Is there any procedural benefit to waiting and filing a §93 lawsuit?

You would bear the burden of proof, so you would get to talk to the jury first and last!

Also – The burden of proof shifts only on the essential elements above. If you’re dealing with fraud/duress/undue influence (affirmative defenses), the burden of proof will be on the contestant no matter what. Keep this in mind!

Pre-probate Still purely an in rem action so you don’t have to make all heirs/devisees parties.Post-probate Most courts have held that every heir/devisee must be made a party

If a charity is named in the will, the attorney general must be made a party (whether pre or post). Institutions of higher education, they are a necessary party in all contexts (pre or post).

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If you represent the heir, determine whether the will has an in terrorem clause (“to strike terror”):

“If any beneficiary contests this will, either pre-probate or post-probate, either directly or indirectly, all provisions, all devises, and all fiduciary appointments in this will in favor of that person are null and void. The property to which they would have been entitled will pass as if that party and all of his descendants predeceased the testator.”

Hypo: Heir initiates a contest with probable cause and loses. Is the in terrorem clause triggered?

Most courts say yes. So be careful!

ElectionBefore your client accepts any benefits under the will, read the will carefully. Are there any strings attached? Does your client have to give up any rights?

VII. Transfer Tax

Types of Transfer Taxes:1. Estate Tax2. Gift Tax (T&E II)3. Generation-Skipping Transfer Tax

History

Prior to 1977 Bifurcated system. Only the estate tax and gift tax existed. Separate systems for each.

Jan. 1, 1977 Congress introduced a unified system. Today, there is only one basic transfer tax.

If the transfer tax is triggered during the donor’s lifetime (by the donor making a sizeable gift), the donor might have to file a gift tax return. This must be filed on April 15 of the year following the gift.

If the transfer tax is triggered at the death of the person, we still call it an estate tax. The PR files a U.S. Estate Tax Return, which is due 9 months after the date of death.

Congress also enacted the Generation-Skipping Transfer Tax in 1977.

Jan 1, 2002 Huge tax reform legislation. Product of compromise between the Bush and Congress.

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State Death Taxes

Some states have an “estate tax.” It’s similar to what the federal government imposes. It’s an excised tax on the transferor’s privilege of transferring property to another, where that transfer is not made for good and valuable consideration (if a transfer is made for good and valuable consideration, it’s an income tax issue).

Some states have an “inheritance tax.” It’s the flip-flop of an estate tax. It’s an excised tax imposed on the recipient’s receipt of property when the recipient did not pay good and valuable consideration.

Some states have both. At one point in time, Texas had both. In 1981, the Texas legislature repealed the inheritance tax but retained the estate tax.

“Credit” tax: Under federal law – as a means to promote revenue sharing between state and federal governments – Congress allowed Texas to receive a small percentage (up to 10%) of the estate tax that would otherwise go to the IRS. As part of the 2001 legislation, Congress eliminated the “credit” against the federal tax and converted it into a deduction. Result: As of Jan. 1, 2005, we no longer have any kind of state death tax in TX.

Basic Formula for Estate Tax

Gross Estate - Deductions

Taxable Estate + Post ’76 taxable gifts

Tentative Tax Base

This is what we take to the tax tables! If the TTB is $2 million, the TT is $780,800 (according to the table on p. 462). But this is not the amount of tax that the decedent pays! We must subtract the decedent’s unified credit in the year of the decedent’s death. If the year is 2006, that amount is $780,800 (according to the table on p. 464). Thus, the decedent pays no taxes on his estate.

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Gross Estate Note: Valuation for all of this FMV at time of death

Probate dispositions

Includes real property, stocks and bonds, mortgages receivable, cash on hand, etc.If it is the type of interest that passes to heirs/devisees, we include it.

Non-probate contractual transfers

If decedent had incidence of ownership, it’s included.

If Husband and Wife own property as true JTs, we include only the decedent’s ½ undivided interest in his gross estate. However: If the JTs are not husband and wife…When the first JT dies, 100% of the property is included in his gross estate, unless it can be shown that:

1. the other tenant contributed to half of the purchase price; or2. both tenants acquired it by gift or devise.

Multi-party bank accounts: To the extent of the decedent’s ownership in the joint account (amount of contribution to account), it is included in the decedent’s estate.

Annuities: Qualified retirement benefits (401K, pension, etc.). Upon the employee’s death, the value of the death benefit is included in the employee’s gross estate.

General powers of appointment

Hypo: Grandfather dies and gives Blackacre to Grandson. Says, “Grandson can appoint anyone to own this property once he dies. If Grandson makes no appointment, Blackacre goes to Baylor.”

A plain vanilla LE is not included in the gross estate. But if the court determines that Grandson can appoint to himself, his estate, or his creditors, it’s included in Grandson’s gross estate.

Special Lifetime Transfers

3-year rule

Hypo: O gives a life insurance policy away during his lifetime.

The IRS says – If O dies within 3 years of making the transfer, the policy is included in O’s gross estate.

Retained life estate

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Hypo: O to A for life, remainder to B. Should anything be included in A’s gross estate when A dies?

No inclusion in A’s estate when A dies.

Hypo: Same, but B dies before A. Should anything be included in B’s gross estate when B dies?

This remainder is included in B’s gross estate at B’s death.

Hypo: Remainder to B. O retains life estate.

This is a retained life estate. It seems as if this wouldn’t be includable in O’s gross estate. But the Internal Revenue Code says it is. Value? Full FMV at the time of O’s death.

Effective at death

Hypo: O conveys a springing EI to B. It becomes effective at the time of O’s death. Includable in O’s gross estate?

Yes. Same rule as above under the Internal Revenue Code.

Revocable transfers

All assets in a revocable trust are included in O’s gross estate. This rule applies to any type of revocable transfer.

Qualified Terminable Interest Property (Q-Tip)

Only applies to married couples.

Husband dies first and leaves Blackacre to Wife for life, remainder to kids.Wife dies first and leaves Blackacre to Husband for life, remainder to kids.

When the executor files the necessary documents, he can make a Q-Tip election for federal tax law purposes. Consequence: When surviving spouse dies, full FMV of Blackacre will be included in that spouse’s gross estate.

Why would O want to make this election? See “marital deduction” below.

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TX residents: Federal law recognizes our community property system. If the decedent was married at the time of death, with regard to any asset which is included in the gross estate:

If the asset was the decedent’s separate property – 100% inclusion in the gross estateIf the asset was the couple’s community property – Only the deceased spouse’s undivided ½ interest is included in the gross estate.

Deductions

Ordinary

Funeral

Administration expenses

Debts and mortgages

Special

Marital deduction

In TX, this deduction is unlimited. It gives spouses the opportunity to defer any transfer tax until the death of the surviving spouse.

Hypo: O wants to use the marital deduction to provide for his wife, but he wants the property to go to his kids upon her death (i.e., he doesn’t want her to remarry and give the property to Gig).

General rule Property that passes into trust for the surviving spouse does not qualify for the marital deduction.

Exceptions:1. A trust will qualify if it is an estate trust. At her death, the

trust assets pass into and become a party of her probate estate.2. A trust will qualify if the surviving spouse is entitled to all of

the income that the trust generates, plus a general power of appointment.

3. After 1982: A trust will qualify if the executor makes a Q-Tip election. This is why O would want a Q-Tip election!

Charitable deduction

With regard any property included in the gross estate that ends up with a qualified charity, the decedent gets a dollar-for-dollar deduction.

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Post ’76 taxable gifts

Inter vivos gift in excess of “annual exclusion” amount and which is not included in the gross estate as a special lifetime transfer. The annual exclusion is currently $11,000/donee. For our purposes, assume that there are no taxable gifts.

Tentative Tax Base

The amount on which the tentative tax is computed. The net tax owing is the tentative tax reduced by certain credits (i.e., the unified credit was $345,800 until 2004).

Applicable Exclusion Amount Maximum Rate

2002, 2003 $1,000,000 2002 50%2004, 2005 $1,500,000 2003 49%2006-2008 $2,000,000 2004 48%2009 $3,500,000 2005 47%2010 --- 2006 46%2011 $1,000,000 2007-2009 45%

2010 ---2011 55% (plus 5% surcharge)

Bottom line: Starting in 2006, there’s a $2 million exemption. But we don’t use this number to calculate the tax! Instead, we apply the unified credit of $780,800 against the Tentative Tax Base.

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Generation-Skipping Transfer Tax

P ($10 million)

Roughly 50% to Uncle Sam

C ($5 million)

Roughly 50% to Uncle Sam

G ($3 million)

People got wise to what was happening. Instead of P giving the entire FSA to C, he would give a LE to C and leave the remainder to G. Under this plan, G ends up with $5 million instead of $3 million:

P ($10 million)

Roughly 50% to Uncle Sam

C ($5 million)

Nothing because C has a LE!

G ($5 million)

Congress thought this was too much of a tax break, so it imposed the Generation-Skipping Tax.At C’s death, we’re going to impose the GST tax. G ends up with ~$2.5 million:

P ($10 million)

Roughly 50% to Uncle Sam

C ($5 million)

GST tax (despite LE)

G ($2.5 million)

Congress decided this was a bit too harsh, so they imposed the GST exemption. The amount of the exemption is the amount of the applicable exclusion.

Super-wealthy people wised up. In many families, C was already wealthy (from participating in P’s business, etc.). Thus, P would skip C altogether and give everything to G:

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P ($10 million)

C Estate tax

G ($5 million)

Congress thought this was too much of a tax break. Thus: If C is still alive at the time of P’s death, and P has the audacity to skip C, G will pay $5 million in estate taxes + ~$2.5 million in GST tax:

P ($10 million)

C Estate tax + GST tax

G ($2.5 million)

If C is dead at P’s death: No GST tax is added.

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