WILLS, TRUSTS, ANDESTATES

EDITORIAL ADVISORS

Erwin ChemerinskyAlston & Bird Professor of LawDuke University School of Law

Richard A. EpsteinJames Parker Hall Distinguished Service Professor of LawUniversity of ChicagoPeter and Kirsten Bedford Senior FellowThe Hoover InstitutionStanford University

Ronald J. GilsonCharles J. Meyers Professor of Law and BusinessStanford UniversityMarc and Eva Stern Professor of Law and BusinessColumbia University

James E. KrierEarl Warren DeLano Professor of LawUniversity of Michigan

Richard K. Neumann, Jr.Professor of LawHofstra University School of Law

Kent D. SyverudDean and Garner Anthony ProfessorVanderbilt University Law School

Elizabeth WarrenLeo Gottlieb Professor of LawHarvard University

EMERITUS EDITORIAL ADVISORS

Geoffrey C. Hazard, Jr.Trustee Professor of LawUniversity of PennsylvaniaDistinguished Professor of LawHastings College of the Law, University of California

Bernard WolfmanFessenden Professor of LawHarvard University

E. Allan FarnsworthOn January 31, 2005, Aspen Publishers lost a great author,colleague, and friend with the death of E. Allan Farnsworth,the Alfred McCormack Professor of Law at Columbia LawSchool and author of the seminal student treatise, Contracts,Fourth Edition, by Aspen Publishers.

Seventh Edition

WILLS, TRUSTS, ANDESTATES

Jesse Dukeminier

Late Maxwell Professor of LawUniversity of California, Los Angeles

Stanley M. Johanson

Fannie Coplin Regents Professor of LawUniversity of Texas

James Lindgren

Benjamin Mazur Research Professor of LawNorthwestern University

Robert H. Sitkoff

Associate Professor of LawNorthwestern University

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� 2005 David Sanders as Trustee of the David Sanders Living Trust, StanleyJohanson, James Lindgren, and Robert H. Sitkoff

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Wills, trusts, and estates / Jesse Dukeminier . . . [et al.]. — 7th ed.p. cm.

Rev. ed. of: Wills, trusts, and estates / Jesse Dukeminier, Stanley M.Johanson. 6th ed. c2000.ISBN 0-7355-3695-3 (hardcover : alk. paper)1. Wills — United States — Cases. 2. Estate planning — United

States — Cases. 3. Future interests — United States — Cases. 4. Trustsand trustees — United States — Cases. I. Dukeminier, Jesse.II. Dukeminier, Jesse. Wills, trusts, and estates.KF753.A7D8 2005346.7305 — dc22 2005007687

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Aspen PublishersA Wolters Kluwer Company

For Jesse Dukeminier,teacher to us all

Jesse Dukeminier, 1925-2003

7

SUMMARY OF CONTENTS

Contents xiList of Illustrations xxviiPreface xxxiAcknowledgments xxxv

Chapter 1. Introduction to Estate Planning 1Chapter 2. Intestacy: An Estate Plan by Default 59Chapter 3. Wills: Capacity and Contests 141Chapter 4. Wills: Formalities and Forms 199Chapter 5. Nonprobate Transfers and Planning for Incapacity 295Chapter 6. Construction of Wills 365Chapter 7. Restrictions on the Power of Disposition: Protection

of the Spouse and Children 417Chapter 8. Trusts: Creation and Characteristics 485Chapter 9. Building Flexibility into Trusts: Powers of Appointment 589Chapter 10. Construction of Trusts: Future Interests 623Chapter 11. Trust Duration and the Rule Against Perpetuities 671Chapter 12. Charitable Trusts 729Chapter 13. Trust Administration: The Fiduciary Obligation 771Chapter 14. Wealth Transfer Taxation: Tax Planning* 845

Table of Cases 929Author Index 937Index 943

*Chapter 14 was revised for the Seventh Edition principally by Stephanie J. Willbanks, Professor ofLaw at Vermont Law School.

ix

CONTENTS

List of Illustrations xxviiPreface xxxiAcknowledgments xxxv

Chapter 1. Introduction to Estate Planning 1

Section A. The Power to Transmit Property at Death: ItsJustification and Limitations 1

1. The Right to Inherit and the Right to Convey 1Jefferson’s Works 1Blackstone, Commentaries 1Locke, Two Treaties of Government 2Hodel v. Irving 3

2. The Policy of Passing Wealth at Death 10Parsons et al., The ‘‘Gift of Life’’ and Its Reciprocation 10Brittain, Inheritance and the Inequalityof Material Wealth 11

Halbach, An Introduction to Death,Taxes and Family Property 11

Bentham, The Theory of Legislation 12Oliver, Shapiro & Press, ‘‘Them That’sGot Shall Get’’: Inheritance andAchievement in Wealth Accumulation 12

Ascher, Curtailing Inherited Wealth 14Kristol, Taxes, Poverty, and Equality 16Note: Inheritance in the ErstwhileSoviet Union 17

Blum & Kalven, The Uneasy Case for ProgressiveTaxation 18

xi

Langbein, The Twentieth-Century Revolutionin Family Wealth Transmission 19

3. An Introduction to the Problem of the Dead Hand 20Restatement (Third) of Property: Wills

and Other Donative Transfers §10.1 20Shapira v. Union National Bank 21

Section B. Transfer of the Decedent’s Estate 301. Probate and Nonprobate Property 302. Administration of Probate Estates 31

a. History and Terminology 31b. A Summary of Probate Procedure 33

(1) Opening probate 33(2) Supervising the representative’s actions 36(3) Closing the estate 36

c. Is Probate Necessary? 37d. Universal Succession 39

Section C. An Estate Planning Problem 401. The Client’s Letter and Its Enclosures 40

Last Will and Testament of Howard Brown 412. Some Preliminary Questions Raised by Brown’s

Letter 423. Additional Data on the Browns’ Family and Assets 43

a. Family Data 43b. Assets 45c. Liabilities 47d. Assets and Liabilities: Summary 48

Section D. Professional Responsibility 481. Duties to Intended Beneficiaries 49

Simpson v. Calivas 492. Conflicts of Interest 54

Hotz v. Minyard 54A. v. B. 57

Chapter 2. Intestacy: An Estate Plan by Default 59

Section A. The Basic Scheme 591. Introduction 59

Uniform Probate Code§§2-101, 2-102, 2-103, 2-105 60

Note: The Meaning of Heirs and theTransfer of an Expectancy 62

2. Share of Surviving Spouse 62Note: Domestic Partners and Intestate Succession 65Janus v. Tarasewicz 68

3. Shares of Descendants 73Note: Negative Disinheritance 77

xii Contents

4. Shares of Ancestors and Collaterals 78Massachusetts General Laws ch. 190, §3(6) 80Note: Half-Bloods 83

Section B. Transfers to Children 831. Meaning of Children 83

a. Adopted Children 83Hall v. Vallandingham 83Uniform Probate Code §§2-113, 2-114 86Minary v. Citizens Fidelity Bank & Trust Co. 89O’Neal v. Wilkes 94

b. Posthumous Children 99c. Nonmarital Children 100d. Reproductive Technology and New Forms of Parentage 101

Woodward v. Commissioner of Social Security 102Note: Surrogate Motherhood andMarried Couples 111

Note: Assisted Reproduction andSame-Sex Couples 113

2. Advancements 114Uniform Probate Code §2-109 115

3. Guardianship and Conservatorship of Minors 116a. Guardian of the Person 117b. Property Management Options 117

(1) Guardianship of the property 117(2) Conservatorship 118(3) Custodianship 118(4) Trusts 119(5) Variations on transfers to minors 120

An Exercise in Lawyering 122Will of Howard Brown(with Testamentary Trust) 122

Section C. Bars to Succession 1261. Homicide 126

In re Estate of Mahoney 126California Probate Code §259 132

2. Disclaimer 132Drye v. United States 134Troy v. Hart 136

Chapter 3. Wills: Capacity and Contests 141

Section A. Mental Capacity 1411. The Test of Mental Capacity 141

In re Estate of Wright 1412. Why Require Mental Capacity? 1463. Insane Delusion 148

In re Strittmater 149

Contents xiii

In re Honigman 150Langbein, Living Probate: The Conservatorship

Model 156Section B. Undue Influence 158

Estate of Lakatosh 159Restatement (Third) of Property: Wills and

Other Donative Transfers §8.3 160Lipper v. Weslow 162Note: No-Contest Clauses 167Note: Bequest to Attorneys 167In re Will of Moses 170In re Kaufmann’s Will 174An Exercise in Lawyering: Seward

Johnson’s Estate 176Section C. Fraud 186

Puckett v. Krida 187Section D. Duress 189

Latham v. Father Divine 189Section E. Tortious Interference with Expectancy 194

Marshall v. Marshall 194

Chapter 4. Wills: Formalities and Forms 199

Section A. Execution of Wills 1991. Attested Wills 199

a. The Function of Formalities 199Baron, Gifts, Bargains, and Form 199Lindgren, The Fall of Formalism 199Gulliver & Tilson, Classification of

Gratuitous Transfers 200Comparison of Statutory Formalities

for Formal Wills 203b. The Formalities in Action 203

Uniform Probate Code §2-502 203In re Groffman 204Stevens v. Casdorph 205Estate of Parsons 211Note: Purging Statutes 215Recommended Method of Executing a Will 215Note: Safeguarding a Will 218In re Pavlinko’s Estate 220In re Snide 223

c. Curative Doctrines 225Uniform Probate Code §2-503 226In re Will of Ranney 226In re Estate of Hall 231

2. Holographic Wills 236The Jolly Testator Who Makes His Own Will 236

xiv Contents

Gulliver & Tilson, Classification ofGratuitous Transfers 236

Kimmel’s Estate 237Estate of Mulkins 242Estate of Johnson 242Estate of Muder 243In re Estate of Kuralt 245

Section B. Revocation of Wills 2511. Revocation by Writing or Physical Act 251

Uniform Probate Code §2-507 252Problem: Revocation by Inconsistency 252Harrison v. Bird 253Note: Probate of Lost Wills 254Thompson v. Royall 255

2. Dependent Relative Revocation and Revival 259LaCroix v. Senecal 260Estate of Alburn 264Note: Revival 267Uniform Probate Code §2-509 268

3. Revocation by Operation of Law: Change in FamilyCircumstances 269

Uniform Probate Code §2-804 269Section C. Components of a Will 271

1. Integration of Wills 2712. Republication by Codicil 2723. Incorporation by Reference 273

Uniform Probate Code §2-510 273Clark v. Greenhalge 273Simon v. Grayson 277Uniform Probate Code §2-513 278Johnson v. Johnson 279

4. Acts of Independent Significance 285Uniform Probate Code §2-512 285

Section D. Contracts Relating to Wills 2861. Contracts to Make a Will 2872. Contracts Not to Revoke a Will 288

Uniform Probate Code §2-514 289Via v. Putnam 290

Chapter 5. Nonprobate Transfers and Planning for Incapacity 295

Section A. An Introduction to Will Substitutes 295Langbein, The Nonprobate Revolution andthe Future of the Law of Succession 295

Section B. Revocable Trusts 2991. Introduction 299

Farkas v. Williams 299

Contents xv

In re Estate and Trust of Pilafas 307State Street Bank & Trust Co. v. Reiser 308

2. Pour-Over Wills 310Uniform Probate Code §2-511 311Clymer v. Mayo 313

3. Use of Revocable Trusts in Estate Planning 316a. Introduction 316b. Consequences During Life of Settlor 316

Question 317c. Consequences at Death of Settlor: Avoidance of

Probate 318Note: Marketing of Living Trusts 321

Section C. Life Insurance, Pension Accounts, Bank Accounts,and Other Payable-on-Death Arrangements 322

1. Life Insurance 322Wilhoit v. Peoples Life Insurance Co. 325Estate of Hillowitz 328Uniform Probate Code §6-101 330Cook v. Equitable Life Assurance Society 331

2. Pension Accounts 333Langbein, The Twentieth-Century Revolution

in Family Wealth Transmission 333Egelhoff v. Egelhoff 336

3. Multiple-Party Bank and Brokerage Accounts 341Franklin v. Anna National Bank of Anna 342

Section D. Joint Tenancies in Realty 344Section E. Planning for Incapacity 345

1. The Durable Power of Attorney 346Franzen v. Norwest Bank Colorado 347

2. Directives Regarding Health Care and Dispositionof the Body 350a. Advance Directives: Living Wills, Health Care

Proxies, and Hybrids 350Dresser, Precommitment: A Misguided Strategy

for Securing Death with Dignity 352Bush v. Schiavo 354Lindgren, Death by Default 358

b. Disposition of the Body 360Note: Elder Law 363

Chapter 6. Construction of Wills 365

Section A. Mistaken or Ambiguous Language in Wills 3651. The Traditional Approach: No Extrinsic Evidence,

No Reformation 365Mahoney v. Grainger 366

2. Slouching Toward Reformation: Correcting MistakesWithout the Power to Reform Wills 371

xvi Contents

The Causes and Effects of Will Defects 372Arnheiter v. Arnheiter 372Estate of Gibbs 374

3. Openly Reforming Wills for Mistake 374Erickson v. Erickson 374Restatement (Third) of Property: Willsand Other Donative Transfers §12.1 380

Langbein, Curing Execution Errors and MistakenTerms in Wills 380

Fleming v. Morrison 386Section B. Death of Beneficiary Before Death of Testator 387

1. Introduction 387Estate of Russell 388

2. Antilapse Statutes 392Uniform Probate Code §2-605 393Allen v. Talley 393Jackson v. Schultz 398

3. Class Gifts 399Restatement (Third) of Property: Wills andOther Donative Transfers §§13.1, 13.2 399

Dawson v. Yucus 400In re Moss 402American Law of Property §22.13 404

Section C. Changes in Property After Execution of Will 4051. Ademption by Extinction 405

Wasserman v. Cohen 406Uniform Probate Code §2-606 410

2. Stock Splits and the Problem of Increase 4123. Satisfaction of General Pecuniary Bequests 4134. Exoneration of Liens 4135. Abatement 414

Chapter 7. Restrictions on the Power of Disposition: Protectionof the Spouse and Children 417

Section A. Rights of the Surviving Spouse 4171. Introduction to Marital Property Systems 4172. Rights of Surviving Spouse to Support 419

a. Social Security 419b. Private Pension Plans 420c. Homestead 421d. Personal Property Set-Aside 422e. Family Allowance 422f. Dower and Curtesy 422

3. Rights of Surviving Spouse to a Share of Decedent’s Property 425a. The Elective Share and Its Rationale 425

Uniform Probate Code, Article II, Part 2, GeneralComment 426

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Contents xvii

Note: The Estate Tax Marital Deductionand the Dependency of Women 428

In re Estate of Cross 430In re Estate of Cooper 433

b. Property Subject to the Elective Share 438(1) Judicial responses 439

Sullivan v. Burkin 439Bongaards v. Millen 442

(2) Statutory schemes 445(3) The Uniform Probate Code 447

Note: Must the Surviving Spouse Accept a LifeEstate? 451

c. Waiver 451Uniform Probate Code §2-213 452In re Estate of Garbade 453In re Grieff 454

4. Rights of Surviving Spouse in Community Property 455a. Basic Information 455b. Putting the Survivor to an Election 457

5. Migrating Couples and Multistate Property Holdings 458a. Moving from a Separate Property State to

a Community Property State 459b. Moving from a Community Property State to

a Separate Property State 4606. Spouse Omitted from Premarital Will 462

Estate of Shannon 462Uniform Probate Code §2-301 465

Section B. Rights of Issue Omitted from the Will 4661. Protection from Intentional Omission 466

a. The Domestic Approach 466b. A Look Abroad: Family Maintenance Statutes 468

Lambeff v. Farmers Co-operative Executors& Trustees Ltd. 469

2. Protection from Unintentional Omission 473Azcunce v. Estate of Azcunce 475Uniform Probate Code §2-302 479In re Estate of Laura 481Estate of Treloar 483

Chapter 8. Trusts: Creation and Characteristics 485

Section A. Introduction 4851. Background 485

Note: Foreign Trust Law 4882. The Parties to a Trust 489

a. The Settlor 489b. The Trustee 490c. The Beneficiaries 493

xviii Contents

3. A Trust Compared with a Legal Life Estate 4944. Commercial Uses of the Trust 496

Section B. Creation of a Trust 4981. Intent to Create a Trust 498

Lux v. Lux 498Jimenez v. Lee 499The Hebrew University Association v. Nye (1961) 504The Hebrew University Association v. Nye (1966) 506

2. Necessity of Trust Property 508Unthank v. Rippstein 509Brainard v. Commissioner 511Speelman v. Pascal 512Note: Taxation of Grantor Trusts 516

3. Necessity of Trust Beneficiaries 518Clark v. Campbell 519In re Searight’s Estate 522

4. Necessity of a Written Instrument 528a. Oral Inter Vivos Trusts of Land 528

Hieble v. Hieble 528b. Oral Trusts for Disposition at Death 530

Olliffe v. Wells 530Section C. Rights of the Beneficiaries to Distributions from

the Trust 533Marsman v. Nasca 534Note: Extended Discretion 540Note: Exculpatory Clauses 541Note: Mandatory Arbitration Clauses 543

Section D. Rights of the Beneficiary’s Creditors 5431. Discretionary Trusts 544

Uniform Trust Code §504 5462. Spendthrift Trusts 547

Scheffel v. Krueger 549Shelley v. Shelley 550Uniform Trust Code §§502, 503 553

3. Self-Settled Asset Protection Trusts 557Federal Trade Commission v. AffordableMedia, LLC 560

In re Lawrence 566Note: Trusts for the State-Supported 569

Section E. Modification and Termination of Trusts 5721. Introduction 5722. Modification 574

In re Trust of Stuchell 574Uniform Trust Code §412 577Note: Reformation and Modificationfor Tax Advantages 578

Note: Trust Protectors 579

Contents xix

3. Termination 580In re Estate of Brown 580Note: Revocable Versus Irrevocable Trusts 584

4. Trustee Removal 585Uniform Trust Code §706 586

Chapter 9. Building Flexibility into Trusts: Powersof Appointment 589

Section A. Introduction 5891. Types of Powers 5892. Does the Appointive Property Belong to the Donor

or the Donee? 591Irwin Union Bank & Trust Co. v. Long 592Note: Tax Considerations for Powers 595

Section B. Creation of a Power of Appointment 5981. Intent to Create a Power 5982. Powers to Consume 598

Sterner v. Nelson 598Section C. Release of a Power of Appointment 602

Seidel v. Werner 603Section D. Exercise of a Power of Appointment 607

1. Exercise by Residuary Clause in Donee’s Will 607Beals v. State Street Bank & Trust Co. 607Uniform Probate Code §§2-608, 2-704 613

2. Limitations on Exercise of a Special Power 6143. Fraud on a Special Power 6154. Ineffective Exercise of a Power 616

a. Allocation of Assets 616b. Capture 617

Section E. Failure to Exercise a Power of Appointment 618Loring v. Marshall 618

Chapter 10. Construction of Trusts: Future Interests 623

Section A. Introduction 623Section B. Classification of Future Interests 624

1. Types of Future Interests 6242. Future Interests in the Transferor 624

a. Reversion 624b. Possibility of Reverter; Right of Entry 625

3. Future Interests in Transferees 626a. Remainders 626b. Executory Interests 628

Section C. Construction of Trust Instruments 6301. Preference for Vested Interests 630

a. Acceleration into Possession 631In re Estate of Gilbert 632

xx Contents

b. Transferability 636c. Requiring Survival to Time of Possession 638

First National Bank of Bar Harbor v. Anthony 638Clobberie’s Case 642Note: Uniform Probate Code §2-707 — A NewSystem of Future Interests for Trusts 643

2. Gifts to Classes 648a. Gifts of Income 649

Dewire v. Haveles 649b. Gifts to Children, Issue, or Descendants 652c. Gifts to Heirs 655

Estate of Woodworth 655Uniform Probate Code §2-711 660Note: The Doctrine of Worthier Title 660Note: The Rule in Shelley’s Case 661

d. The Class-Closing Rule 662(1) Introduction 662(2) Immediate gifts 663

Note: Class-Closing Rules and PosthumouslyConceived Children 664

(3) Postponed gifts 665Lux v. Lux 666

(4) Gifts of specific sums 669

Chapter 11. Trust Duration and the Rule AgainstPerpetuities 671

Section A. Introduction 6711. Development of the Rule Against Perpetuities 6712. Summary of the Rule 674

a. Introduction 674(1) The rule and its policies 674(2) Why lives in being are used to measure

the period 675(3) The rule is a rule of proof 676

b. When the Lives in Being Are Ascertained 678Section B. The Requirement of No Possibility of Remote

Vesting 6781. The Fertile Octogenarian 6792. The Unborn Widow 681

Dickerson v. Union National Bank ofLittle Rock 681

3. The Slothful Executor 6854. The Magic Gravel Pit and Other Marvels 686

Section C. Application of the Rule to Class Gifts 6861. The Basic Rule: All-or-Nothing 6862. Exception to the Class Gift Rule 688

Contents xxi

a. Gifts to Subclasses 688American Security & Trust Co. v. Cramer 688

b. Specific Sum to Each Class Member 689Section D. Application of the Rule to Powers of Appointment 690

1. General Powers Presently Exercisable 690a. Validity of Power 690b. Validity of Exercise 690

2. General Testamentary Powers and Special Powers 691a. Validity of Power 691b. Validity of Exercise 692

(1) Perpetuities period runs from creationof power 692

(2) The second-look doctrine 692Second National Bank of New Haven v.

Harris Trust & Savings Bank 693Note: The ‘‘Delaware Tax Trap’’ or

How the Donee Can Choose BetweenPaying an Estate Tax or a Generation-SkippingTransfer Tax 694

Section E. Saving Clauses 695Note: Attorney Liability for Violating

the Rule 696Section F. Perpetuities Reform 697

1. The Cy Pres or Reformation Doctrine 6972. The Wait-and-See Doctrine 698

a. Wait-and-See for the Common Law PerpetuitiesPeriod 699

b. The Uniform Statutory Rule Against Perpetuities 700Uniform Statutory Rule Against

Perpetuities §§1-5 702In re Trust of Wold 704

3. Abolition of the Rule Against Perpetuities 711Dukeminier & Krier, The Rise of the

Perpetual Trust 712Section G. Other Durational Limits 723

1. The Rule Against Suspension of the Powerof Alienation 723

2. The Rule Against Accumulations of Income 725

Chapter 12. Charitable Trusts 729

Section A. Nature of Charitable Purposes 729Shenandoah Valley National Bank v. Taylor 729Note: Shaw’s Alphabet Trusts 737

Section B. Modification of Charitable Trusts: Cy Pres 737In re Neher 738Note: Discriminatory Trusts 742

xxii Contents

San Francisco Chronicle: The Buck Trust 743Philadelphia Story: The Barnes Foundation 746

Section C. Supervision of Charitable Trusts 750Carl J. Herzog Foundation, Inc. v.University of Bridgeport 750

Smithers v. St. Luke’s-Roosevelt Hospital Center 751Hawaii Journal: The Bishop Estate 763

Chapter 13. Trust Administration: The Fiduciary Obligation 771

Section A. Introduction 771Langbein, The Contractarian Basisof the Law of Trusts 772

Note: Agency Costs and the Fiduciary Obligation 774Notes and Question 776Note: Powers of the Trustee 777

Section B. The Duty of Loyalty 779Hartman v. Hartle 779In re Gleeson’s Will 780In re Rothko 783Note: Co-Trustees 790Restatement (Second) of Trusts §258 791

Section C. The Duty of Prudence 7911. The History of Trust-Investment Law 792

Langbein & Posner, Market Fundsand Trust-Investment Law 792

Restatement (Third) of Trusts: PrudentInvestor Rule 793

Note: The Constrained Prudent Man Rule 7942. Modern Trust-Investment Law 796

a. Sensitivity to Risk and Return 797Uniform Prudent Investor Act §2 797Estate of Collins 798Note: ERISA 803Note: Social Investing 804

b. Diversification 805Uniform Prudent Investor Act §3 805Langbein, The Uniform Prudent InvestorAct and the Future of Trust Investing 805

In re Estate of Janes 806Note: Calculating Damages forImprudent Investment 817

c. Delegation 818Shriners Hospitals for Crippled Children v. Gardiner 819Uniform Prudent Investor Act §9 820

Section D. Impartiality and the Principal and Income Problem 821Dennis v. Rhode Island Hospital Trust Co. 821Note: The Principal and Income Problem 827

Contents xxiii

Section E. Subrules Relating to the Trust Property 8301. Duty to Collect and Protect Trust Property 8302. Duty to Earmark Trust Property 8303. Duty Not to Mingle Trust Funds with the Trustee’s Own 831

Section F. Duty to Inform and Account to the Beneficiaries 832Fletcher v. Fletcher 832Uniform Trust Code §813 836National Academy of Sciences v. Cambridge Trust Co. 839

Chapter 14. Wealth Transfer Taxation: Tax Planning* 845

Section A. Introduction 8451. A Brief History of Federal Wealth Transfer Taxation 845

Note: Estate and Inheritance TaxesDistinguished 848

2. The Unified Federal Estate and Gift Taxes 849Unified Transfer Tax Rate Schedule 850

Section B. The Federal Gift Tax 8531. The Nature of a Taxable Gift 853

Holtz’s Estate v. Commissioner 853Note: Income Tax Basis 857

2. The Annual Exclusion 857Estate of Cristofani v. Commissioner 860

3. Gifts Between Spouses and from One Spouse toa Third Person 867

Section C. The Federal Estate Tax 8681. A Thumbnail Sketch of the Federal Estate Tax 8682. The Gross Estate: Property Passing by Will

or Intestacy 870a. Section 2033: Property Owned at Death 870b. Section 2034: Dower or Curtesy 871

3. The Gross Estate: Nonprobate Property 872a. Section 2040: Joint Tenancy 872

(1) Joint tenancy between persons other thanhusband and wife 872

(2) Joint tenancy and tenancy by the entiretybetween husband and wife 874

b. Section 2039: Annuities and Employee Death Benefits 874c. Section 2042: Life Insurance 875

4. The Gross Estate: Lifetime Transfers 876a. Section 2036: Transfers with Life Estate or

Control of Beneficial Rights Retained 876Estate of Maxwell v. Commissioner 877Old Colony Trust Co. v. United States 883Note: Family Limited Partnerships 886

*Chapter 14 was revised for the Seventh Edition principally by Stephanie J. Willbanks, Professor ofLaw at Vermont Law School.

xxiv Contents

b. Section 2038: Revocable Transfers 887c. Section 2037: Transfers with Reversionary

Interest Retained 888d. Section 2035: Transfers Within Three Years

of Death 8895. The Gross Estate: Powers of Appointment (§2041) 891

Estate of Vissering v. Commissioner 894Estate of Kurz v. Commissioner 897

6. The Marital Deduction 900a. Introduction 900b. Interests that Qualify for the Deduction 901

(1) The nondeductible terminable interest rule 901(2) Exceptions to the terminable interest rule 902

Estate of Rapp v. Commissioner 905Pond v. Pond 912

(3) Noncitizen spouses: qualified domestic trusts 915c. Tax Planning 915

7. The Charitable Deduction 917Section D. The Generation-Skipping Transfer Tax 919

1. The Nature of the Tax 9192. Rate and Base of Tax 9223. Exemption and Exclusions 9234. Definitions 924

a. Transferor 925b. Skip Person; Ascertaining Generations 925c. Interest 926

5. Tax Strategies 927Section E. State Wealth Transfer Taxes 928

Table of Cases 929Author Index 937Index 943

Contents xxv

LIST OF ILLUSTRATIONS

Professor Jesse Dukeminier (photograph) vii

Chapter 1Justice Sandra Day O’Connor (photograph) 4Cartoon by William Hamilton (‘‘fine old name’’) 18Judge Richard A. Posner (photograph) 26

Chapter 2Diagram of representation 73Diagram of per stirpes distribution 74Diagram of per capita at each generation distribution 75Professor Lawrence W. Waggoner (photograph) 76Diagram of representation 76Diagram of representation 77Diagram of representation among collaterals 78Table of Consanguinity 79Doris Duke with her butler (photograph) 93Doris Duke’s will signature 93Justice Leah Sears (photograph) 96Lauren Woodward with her children (photograph) 103Cartoon by Mick Stevens (‘‘other mother’’) 113Justice Ruth Bader Ginsburg 135

Chapter 3Cartoon by Frank Modell (‘‘blew it all’’) 147Alice Paul (photograph) 150Lord Hannen (etching) 158Cartoon by Peter Arno (‘‘lawyer as will beneficiary’’) 168

7

xxvii

Seward and Basia Johnson (photograph) 177Seward Johnson’s will signature 181Father Divine (photograph) 191Anna Nicole Smith and J. Howard Marshall (photograph) 195

Chapter 4Professor John H. Langbein (photograph) 234Charles Kuralt and Elizabeth Shannon (photograph) 246D.G. Johnson will 280Cartoon by Marvin Tannenberg (‘‘Hi there, Sidney!’’) 288

Chapter 5Norman F. Dacey, How To Avoid Probate! 306Cartoon by Chip Bok (‘‘I’d like permission’’) 351Terri Schiavo (photograph) 354

Chapter 6Causes and Effects of Will Defects 372Justice Ellen A. Peters (photograph) 378Thelma Russell’s property, 1999 (photograph) 390Aunt Fanny’s snuff bottles (photograph) 411

Chapter 7Cartoon by Peter Arno (‘‘disinherit everybody’’) 424Cartoon by Leo Cullum (‘‘Everything I have’’) 467President Calvin Coolidge in the gym (photograph) 474

Chapter 8Professor Austin W. Scott (photograph) 487Professor George G. Bogert (photograph) 502Ann Landers (photograph) 504Marianne Speelman (Zaya Kingman) (photograph) 514Samantha and Marie Dana (photograph) 525Tinker the Cat (photograph) 526The Rev. Eleazar M.P. Wells (photograph) 530Cartoon by Christopher Weyant (‘‘OK, you’re going to feel a prick’’) 558Kenkut dispenser (photograph) 561

Chapter 10Surrogate Renee R. Roth (photograph) 632

Chapter 11Duke of Norfolk (painting) 673Lord Chancellor Nottingham (painting) 673

xxviii List of Illustrations

Professor W. Barton Leach (photograph) 698Wells Fargo advertisement 714Map of perpetual trust states 719

Chapter 12Barnes Foundation Gallery (photograph) 748Brink Smithers (photograph) 752Smithers Institute Building (drawing) 753

Chapter 13Painting by Mark RothkoProfessor Harry M. Markowitz (photograph) 795Senator Rodney Janes (photograph) 806Wheaton-Anthony Building, Providence, Rhode Island (photograph) 823Leonard Troland (photograph) 840

Chapter 14Judge Frank H. Easterbrook (photograph) 897Judge Betty B. Fletcher (photograph) 906

List of Illustrations xxix

PREFACE

As trusts and estates lawyers, we are in the business of succession. The passing ofJesse Dukeminier in April of 2003 reminds us of this reality in a deeply personalway. In this seventh edition, we begin the process of authorship succession withJames Lindgren and Robert H. Sitkoff joining the book.

Wills, Trusts, and Estates is designed for use in a course on trusts and decedents’estates and as an introduction to estate planning. Our basic aim in this seventhedition remains as before: to produce not merely competent practitioners in thetrusts and estates field, but lawyers who think critically about problems in familywealth transmission and compare alternative solutions. Trusts and estates is avibrant field whose difficult policy questions demand careful consideration.

Since the 1960s, the law of wills has been undergoing a thorough renovation.Initially, the change was brought on by a swelling public demand for cheaper andsimpler ways of transferring property at death, avoiding expensive probate.Imaginative scholars then began to ventilate this ancient law of the dead hand,challenging assumptions and suggesting judicial and legislative innovation to sim-plify and rationalize it. Medical science complicated matters by creating varietiesof parentage and death-deferring machines unheard of a generation ago. Andlegal malpractice in drawing wills and trusts arrived with a bang. Scholars, science,and malpractice liability are a potent combination for driving law reform.

The use of trusts to transmit family wealth has become commonplace, not onlyfor rich clients, but also for those of modest wealth. In expanding, the law ofprivate trusts has annexed the law of future interests and powers of appointment,reducing these two subjects largely to problems in drafting and construing trustinstruments. The teachings of modern finance theory and the shifting locus ofwealth from land to financial assets has put pressure on the law of trust investmentand administration, which evolved in simpler times. As a result, the fiduciaryobligation has eclipsed limitations on the trustee’s powers as the principal devicefor safeguarding the beneficiary from mismanagement or abuse by the trustee.Meanwhile, the burgeoning tort liability of modern times has spawned an asset

xxxi

protection industry and with it nascent but radical change in the rights of creditorsto trust assets.Taxation of donative transfers has changed dramatically. The unlimited marital

deduction — which permits spouses to make unlimited tax-free gifts and bequeststo each other — is now a central feature of estate planning. In 1986, Congressenacted the generation-skipping transfer tax, implementing a policy of wealthtransfer taxation at each generation. This tax, like an invisible boomerang, isdelivering potentially lethal blows to the Rule against Perpetuities. In 2001,Congress enacted legislation that phases out the federal wealth transfer taxes by2010, but then in 2011 these taxes will revert to their pre-2001 form. Surely thiswill not be Congress’s last word on the subject.Throughout the book we emphasize the basic theoretical structure and the

general philosophy and purposes that unify the field of donative transfers. Weare interested in function, not form. To this end we have pruned away mechanicalmatters (such as a step-by-step discussion of how to probate a will and settle anestate, which is essentially local law, easily learned from a local practice book). Atthe same time, we have sought historical roots of modern law. Understanding howthe law became the way it is illuminates both the continuing growth of the law andthe sometimes exasperating peculiarities inherited from the past.Although we organize the material in topical compartments, we have also sought

a more penetrating view of the subject as a tapestry of humanity. Every illustrationincluded, every behind-the-scenes peek, every quirk of the parties’ behavior has itsplace, as a piece of ornament fitting into the larger whole. Understanding theambivalences of the human heart and the richness of human frailty, and realizingthat even the best-constructed estate plans may, with the ever-whirling wheels ofchange, turn into sand castles, are essential to being a counselor at law, as opposedto being a mere attorney.As we said in the first edition of this book, in 1972:

In this book we deal with people, the quick as well as the dead. There is nothing likethe death of a moneyed member of the family to show persons as they really are,virtuous or conniving, generous or grasping. Many a family has been torn apart by abotched-up will. Each case is a drama in human relationships — and the lawyer, ascounselor, draftsman, or advocate, is an important figure in the dramatis personae.This is one reason the estates practitioner enjoys his work, and why we enjoy ours.

This observation remains true today. In a changing reality the human dramaabides. Trusts and estates is a field concerned fundamentally with people.For their sage advice on this revision, we thank David Becker, Karen Boxx, Eric

Chason, Ronald Chester, Judith Daar, Joseph Dodge, Susan French, PhilipHamburger, Howard Helsinger, Adam Hirsch, Kenneth Joyce, Robert Katz,John Langbein, Ray Madoff, Bruce Mann, Geoffrey Manne, Alan Newman,Richard Primus, Randy Roth, Jeffrey Sherman, Ethan Stone, and Joshua Tate.In addition, we must single out two colleagues: Stephanie Willbanks for her assis-tance with tax matters throughout the book and her taking the lead in revisingChapter 14, and Helene Shapo for her ongoing encouragement and stimulation.We owe a great debt to Georgia Alexakis, Ericka Schnitzer, Jeremy Sitkoff, andCathy Yu for superb research assistance, and to Kathryn Hensiak and AmyMangan for additional research support. We thank Melody Davies, Sarah

xxxii Preface

Hains, Eric Holt, Carol McGeehan, and Carmen Reid at Aspen for bringing richintelligence and sound judgment to this project. Finally, we thank our partners,David Sanders, Gerrie Johanson, Valerie Lindgren, and Tamara Sitkoff, for theirsupport — both substantive and emotional — in bringing out this new edition.

Jesse Dukeminier, 1925-2003Stanley M. JohansonJames LindgrenRobert H. Sitkoff

January 2005

Editors’ note: All citations to state statutes and the United States Code are to suchstatutes as they appear on Lexis or Westlaw on the date cited. Footnotes arenumbered consecutively from the beginning of each chapter. Most footnotes inquoted materials are omitted. Authorities cited in quoted materials are sometimesomitted or edited for readability. Editors’ footnotes added to quoted materials areindicated by the abbreviation: — Eds.

Preface xxxiii

ACKNOWLEDGMENTSACKNOWLEDGMENTS

Books and Articles

American Law Institute, Restatement (Second) of Trusts (1959), Restatement(Third) of Trusts (1992), Restatement (Third) of Trusts (2003),Restatement (Third) of Property (1999), Restatement (Third) of Property(2003). � 1959, 1992, 1999, 2003 by the American Law Institute.Reprinted by permission of the American Law Institute.

Ascher, Mark L., Curtailing Inherited Wealth, 89 Mich. L. Rev. 69 (1990).Reprinted by permission of the author and the Michigan Law Review.

Blum, Walter, & Harry Kalven, The Uneasy Case for Progressive Taxation, 19U. Chi. L. Rev. 417 (1952). � 1952 by the University of Chicago. Reprintedby permission of Professor Blum and the University of Chicago Law Review.

Buck, Estate of. California Superior Court Opinion, 21 U.S.F. L. Rev. 691 (1987).Reprinted by permission of the University of San Francisco Law Review.

de Bruxelles, Simon, Baby Conceived After 60th Birthday Celebration, The(London) Times, Jan. 16, 1998. � 1998 by Times Newspapers Limited.Reprinted by permission of News International Syndication.

Dukeminier, Jesse, and James Krier, The Rise of the Perpetual Trust, 50 UCLA L.Rev. 1303 (2003). Reprinted by permission of Professor Krier and the UCLALaw Review.

Gray, Francine du Plessix, The New ‘‘Older Woman,’’ N.Y. Times, §7 (BookReview), Jan. 15, 1978, p.3. � 1978 by the New York Times. Reprinted bypermission of Georges Borchardt, Inc.

Gulliver, Ashbel, & Catherine Tilson, Classification of Gratuitous Transfers, 51Yale L.J. 1 (1941). � 1941 by the Yale Law Journal. Reprinted by permissionof Professor Gulliver, The Yale Law Journal Co., and Fred B. Rothman & Co.

Halbach, Edward C., Jr., An Introduction to Chapters 1-4, in Death, Taxes andFamily Property (E. Halbach ed. 1977). � 1977 by West Publishing Co.Reprinted by permission of the author and West Publishing Co.

xxxv

Kristol, Irving, Taxes, Poverty, and Equality, The Public Interest 26-28 (no. 37, Fall1974). � 1974. Reprinted by permission.

Landers, Ann. Column. Reproduced by permission of Esther P. Lederer andCreators Syndicate, Inc.

Langbein, JohnH., Substantial Compliance with theWills Act, 88Harv. L. Rev. 489(1975). � 1975 by the Harvard Law Review Association. Reprinted by permis-sion of the author and the Harvard Law Review.

————, Living Probate: The Conservatorship Model, 77 Mich. L. Rev. 63(1978). � 1978 by the Michigan Law Review. Reprinted by permission ofthe author and the Michigan Law Review.

————, Excusing Harmless Errors in the Execution of Wills: A Report onAustralia’s Tranquil Revolution in Probate Law, 87 Colum. L. Rev. 1(1987). � 1987 by the Directors of the Columbia Law Review Association,Inc. All rights reserved. Reprinted by permission of the author and theColumbia Law Review.

————, The Twentieth-Century Revolution in Family Wealth Transmission, 86Mich. L. Rev. 722 (1988). Reprinted by permission of the author and theMichigan Law Review.

————, Curing Execution Errors and Mistaken Terms in Wills: TheReinstatement of Wills Delivers New Tools (and Duties) to Probate Lawyers,Probate and Property, Vol. 18, No. 1, January/February, 2004. � 2004.Reprinted by permission of the American Bar Association.

Margolick, David, Undue Influence (1993). � 1993 by David Margolick. Excerptsreprinted by permission of HarperCollins Publishers.

National Conference of Commissioners on Uniform State Laws (NCCUSL),excerpts from the Uniform Probate Code (1969, 1990), Uniform PrudentInvestor Act (1994), Uniform Statutory Rule Against Perpetuities (1986),Uniform Transfers to Minors Act (1983, 1986), Uniform TestamentaryAdditions to Trusts Act (1991), and Uniform Trust Code (2000). � 1969,1983, 1986, 1990, 1991, 1993, 2000, 2001, 2003, 2004 by NCCUSL.Reprinted by permission of NCCUSL.

Plotz, David, Judicial Restraint: Sol Wachtler’s Worthy Sentiments on Prison, Slate,April 16, 1997. Reprinted by permission of United Media.

Posner, Richard A., Economic Analysis of Law (6th ed. 2003). � 2003 Richard A.Posner. Reprinted by permission of Judge Posner.

Scott, Austin W., The Law of Trusts, vol. 1 (William Fratcher 4th ed. 1987). � 1987by the Estate of Austin Wakeman Scott. Reprinted by permission of AspenPublishers, Inc.

With His Wife in Limbo, Husband Can’t Move, the New York Times, Nov. 2, 2003,§1, at 18. Reprinted by permission of Georges Borchardt, Inc.

Photographs and Illustrations

Barnes Foundation Gallery. � The Barnes Foundation. Photograph. Reproducedby permission of The Barnes Foundation.

Bogert, George G. Photograph. Reprinted by permission of the University ofChicago Library, Special Collections.

xxxvi Acknowledgments

Bok, Chip. Cartoon.� 2003 ChipBok and Creators Syndicate, Inc. Reproduced bypermission of Chip Bok and Creators Syndicate, Inc.

Coolidge, Calvin. Photograph. Jan. 31, 1923. Photograph by Herbert E. French,National Photo Company Collection, Library of Congress, Prints andPhotographs Division, Digital Reproduction Number cph 3a35018.

Dana, Marie, with Samantha. Photograph. Los Angeles Times photo by AnacletoRapping. Reproduced by permission of TMS Reprints.

Devine, Father. Photograph by Otto Bettmann. � Bettmann/CORBIS.Reproduced by permission.

Duke, Doris. Photograph of signature on her will. From Surrogate’s Court, NewYork County, New York.

Duke, Doris, and her butler. Photograph by Marina Garnier. Reproduced by per-mission of Marina Garnier.

Dukeminier, Jesse. Photograph. Reproduced by permission of David Sanders.Easterbrook, Frank H. Photograph. Reproduced by permission of Judge

Easterbrook.Fletcher, Betty B. Photograph. Reproduced by permission of Judge Fletcher.Ginsburg, Ruth Bader. Photograph. Photograph by Steven Petteway, Supreme

Court of the United States. Reproduced from the Collection of theSupreme Court of the United States through the Curator’s Office (202)479-3298. Reproduced by permission of Justice Ginsburg.

Hannen, James. Etching. Reproduced by permission of the National PortraitGallery.

Janes, Rodney. Photograph from the New York Red Book, 1940 Edition. � NewYork Legal Publishing Corp. Reproduced by permission.

Johnson, Seward. Photograph of signature on will. From Surrogate’s Court, NewYork County, New York.

Johnson, Seward and Basia. Photograph. Reproduced by permission of DavidMargolick.

Kenkut dispenser. Photograph. Reproduced by permission of Kenkut Products,Inc.

Kuralt, Charles, with Patricia Shannon. Photograph. Reproduced by permission ofAP/World Wide Photos.

Landers, Ann. Photograph. Reproduced by permission of Creators Syndicate,Inc.

Langbein, John H. Photograph. Reproduced by permission of the Yale Law SchoolOffice of Public Affairs and Professor Langbein.

Leach, W. Barton. Photograph. Courtesy of Art & Visual Materials, SpecialCollections Department, Harvard Law School Library.

Markowitz, Harry M. Photograph. Reproduced by permission of ProfessorMarkowitz.

New Yorker, The. The New Yorker Magazine, Inc., holds copyrights in thefollowing cartoons: (1) cartoon by Peter Arno � 1940, 1968, 1996;(2) cartoon by Peter Arno � 1942, 1970, 1998; (3) cartoon by Leo Cullum� 1995; (4) cartoon by Wm. Hamilton � 1977; (5) cartoon by Frank Modell� 1972; (6) cartoon by Mick Stevens � 1994. These cartoons are reprintedby permission of the Cartoon Bank, a division of The New Yorker Magazine(cartoonbank.com). All rights reserved.

7

Acknowledgments xxxvii

Norfolk, Duke of. Painting by Gerard Soest, 1677. � 2004 Tate, London.Reproduced by permission of the Tate Gallery, London.

Nottingham, Lord Chancellor. Painting after Godfrey Kneller, 1680. Reproducedby permission of the National Portrait Gallery, London.

O’Connor, Sandra Day. Photograph. Photograph by Dane Penland, SmithsonianInstitution, Collection of the Supreme Court of the United States.Reproduced by permission of Justice O’Connor.

Paul, Alice. Photograph. Harris and Ewing, 1920. Library of Congress, Prints andPhotographs Division, Digital Reproduction Number cph 3a21383.

Peters, Ellen Ash. Photograph. Reproduced by permission of Justice Peters.Posner, Richard A. Photograph. Reproduced by permission of Judge Posner.Roth, Renee. Photograph. Reproduced by permission of Surrogate Roth.Rothko, Mark. Number 22. Oil on canvas, 90900(h) · 80111/800(w). 1949. The

Museum of Modern Art, New York. Gift of the artist. Photograph � 1998Kate Rothko Prizel and Christopher Rothko/Artists Rights Society (ARS),New York. Reproduced by permission of ARS.

Russell, Thelma, property at 4422 Palm Ave., La Mesa, California. Photograph.Reproduced by permission of David Sanders.

Schiavo, Terri Schindler. Photograph. Reproduced by permission of Mary Schindler.Scott, Austin W. Photograph by Fabian Bachrach. Courtesy of Art & Visual

Materials, Special Collections Department, Harvard Law School Library.Sears, Leah. Photograph. Reproduced by permission of Justice Sears.Smith, Anna Nicole, with husband J. Howard Marshall II. Photograph. � 1994

Mitchell Gerber/CORBIS. Reproduced by permission.Smithers, R. Brinkley. Photograph. Reproduced by permission of The

Christopher D. Smithers Foundation, Inc.Smithers Institute Building, East 93rd Street, New York City. Photograph.

Reproduced by permission of The Christopher D. Smithers Foundation, Inc.Snuff bottles. Photograph. Reproduced by permission of David Sanders.Speelman, Marianna. Photograph.�Daily News LP. Reproduced by permission of

the New York Daily News.Tannenberg, Marvin. Cartoon.� 1966 by Playboy. Reproduced by special permis-

sion of PLAYBOY Magazine.Tinker the Cat. Photograph. Reproduced by permission of BBC News Online.Troland, Leonard. Photograph. Reproduced by permission of the Harvard

University Archives.Waggoner, Lawrence W. Photograph. Reproduced by permission of Professor

Waggoner.Wells, Eleazer M.P. Photograph. Reproduced from The Church Militant, April

1944, p.4 by permission of the Episcopal Diocese of Massachusetts.Wells Fargo. Advertisement. Used with permission from Wells Fargo Bank, N.A.Weyant, Christopher. Cartoon. Originally appeared in Barron’s, Feb. 16, 2004.

Reproduced by permission of Christopher Weyant.Wheaton-Anthony Building, Downtown Providence, R.I. Photograph. By Warren

Jagger, 1982, Library of Congress, Prints and Photographs Division, HistoricAmerican Buildings Survey, Reproduction Number HABS, RI, 4-PROV,166-2.

Woodward, Lauren, and children. Photograph. Reproduced by permission of theAssociated Press, the Salem News, and Amy Sweeney.

xxxviii Acknowledgments

WILLS, TRUSTS, ANDESTATES