Flyover 4 - Interpreting wills

We're going to finish up our section on the law of wills with a quick grab bag of stuff about how to interpret wills when crazy stuff happens. We'll be looking at what happens if one spouse tries to disinherit the other. What if a beneficiary dies before a testator? And what if a beneficiary refuses to take a gift?

The Elective Share

Let's start with some rules about spouses. Imagine that Dorothy marries the Tin Man. During the course of their marriage, Dorothy earns $10 million selling sparkly shoes while the Tin Man stays home and takes care of the children. If Dorothy dies and her will leaves everything to Glenda the Good Witch, does the Tin Man get anything?

The answer is yes. In every state, the Tin Man ends up with a big chunk of the money. That said, there are two very different approaches to the threat of spousal disinheritance. Some states, including California and Texas, follow the civil law tradition of "community property." In community property jurisdictions, spouses split ownership of everything they earn during the course of the marriage.

In our example, Dorothy has made $10 million. In a community property state, half of the money belongs to her and half belongs to her spouse. At death, Dorothy is free to dispose of her share any way she pleases, but she can't give away the $5 million that belongs to the Tin Man. That's his money.

Now, most states aren't community property states. Instead, they follow the common law rule known as "separate property." In separate property states, spouses own what they individually acquire. In a separate property state, the $10 million that Dorothy earned belongs to Dorothy alone. Nevertheless, she still can't disinherit the Tin Man.

Every separate property state gives spouses the right to take what's known as the "elective share." If the surviving spouse is not satisfied with what they have received under the will, they can elect to take one-third of the dead spouse's stuff. If Dorothy disinherits the Tin Man, he can use the elective share to take one-third of the $10 million from Dorothy's estate.

The big question with the elective share is what stuff of Dorothy's is subject to the one-third clawback? Everybody agrees that the surviving spouse can reach things like bank accounts and tangible personal property. But what about if Dorothy has put her $10 million in a trust? Can the elective share reach trust property?

States vary wildly on this question. Some say no, trust property is beyond the reach of the elective share. However, most states and the UPC reason that it's essential for the elective share to reach a wide variety of property types. Otherwise, sneaky spouses could easily structure their holdings to avoid the elective share.

The issue about what property is subject to the elective share is pretty complicated, but here's what you need to remember. First, you should know that states vary on whether the elective share can reach what's known as "non-probate property." That's stuff like trusts, or real estate held as joint tenants and life insurance.

Second, the key issue is often how much control the dead spouse had over the disputed property. The more control, the more likely courts will be to find that the elective share applies. Trusts are the thing that come up most often. If the dead spouse had retained the power to modify or terminate the trust, these are often called revocable trusts. Then the trust property almost always counts as part of their estate for the purposes of the elective share.

Lapse

The next issue we need to confront is what happens if a will leaves property to someone who has predeceased the testator. This is called "lapse." The basic rule here is easy. If a person has died, they cannot accept a gift, but we need to think about what happens to the property.

First, we should ask if Dorothy named an alternative beneficiary for the gift. If she did, we simply follow her instructions. If she didn't, the gift fails. And when a gift fails, the property falls into what's known as the "residuary clause." That's a sweep-up or catch-all provision that distributes all of the person's stuff that they haven't already mentioned in the will.

So most wills end with something like, "Give everything else I own, the rest and remainder, to my mom." That part's the residuary clause. If there's no residue, the failed gift would pass by intestacy. Consider, for example, a will of Dorothy's that makes the following provisions: "(1) I leave my sparkly shoes to Glenda the Good Witch, or, if she should predecease me, to the Wizard of Oz; (2) I leave $10,000 to Scarecrow; and (3) I leave the rest and remainder of my estate to my spouse, Tin Man, and daughter, Golden Girl."

What happens here if there are some lapse issues? What happens to the shoes if Glenda predeceases Dorothy? Well, in that case, the property would go to the Wizard. Dorothy has named an alternative taker and we should follow her instructions.

What about the $10,000? What happens to the money if the Scarecrow predeceases Dorothy? Well, that gift would fail. The $10,000 would fall into the residuary clause and be distributed to Tin Man and Golden Girl.

Finally, what if Tin Man, one of the takers of the residue, predeceases Dorothy? Here, there's a small split among states. In a small minority of jurisdictions, the Tin Man's share would pass by intestacy. That's known as the "no residue of the residue" rule. But in a majority of jurisdictions, the Tin Man's half of the residue would go to Golden Girl, the other residuary taker.

Just to recap, the basic idea is that dead people can't take. By default, lapse gifts fall into the residuary clause of the will, and if there's no residue, the lapse gift passes by intestacy.

Now, here's the big problem with the lapse doctrine. Imagine that Dorothy dies, and this time she's only survived by her brother, her brother's son, that's her nephew, and her spouse, the Tin Man. In her will, Dorothy gives her brother the wedding rings that belonged to their parents. The rest and remainder of the estate goes to the husband.

Now, what happens if Dorothy's brother predeceases her? Under the traditional rules, the wedding rings would fall into the residue and end up with the Tin Man. But is that really the best outcome? Is that what Dorothy would have wanted? Wouldn't Dorothy prefer the wedding rings to go to her nephew, the only living descendant of her parents?

In response to this issue, all states but Louisiana have passed anti-lapse legislation that prevents some gifts from automatically falling into the residue. The details of these statutes vary, but here's the gist. If a close blood relative predeceases the testator, any gift they receive from the will should go to their children rather than fall into the residue. In our example, if Dorothy's brother has died, anti-lapse legislation would give the wedding rings to her brother's child.

Now, whose gifts get saved by the anti-lapse laws? The most common approach is to save the gifts of anyone descended from the testator's grandparents. That means that most states don't let gifts to parents, kids, siblings, nieces and nephews, and cousins fail. Those gifts don't automatically fall into the residue if the beneficiary is dead. Instead, the anti-lapse law directs the gifts to an alternative beneficiary.

One last point: it's possible to contract around the anti-lapse statutes. In her will, she could write, Dorothy loves her brother, but she thinks her nephew is a munchkin-hating jerk. In response, she could write in her will, "I give my parents' wedding rings to my brother, but if he should predecease me, then give them to the Tin Man." That cuts the nephew out, and if she does that, the anti-lapse statute doesn't kick in.

To avoid problems of interpretation, testators who want to dodge the anti-lapse statute should clearly name an alternative taker. Here's an example of a poorly drafted provision. What if Dorothy's will says, "I give my parents' wedding rings to my brother if he survives me." What does that mean? What happens if Dorothy's brother predeceases her? Does the anti-lapse statute still hand the jewelry to the nephew, or does the "if he survives me" language tell us to give the rings to her brother's family only if he survives Dorothy?

This exact question has popped up on the MEE, and unsurprisingly, states differ on the answer. Most courts would find that Dorothy has contracted around the anti-lapse provisions. Since the brother didn't survive Dorothy, the rings would fall into the residue. However, the UPC and a small handful of states argue that the meaning of "if he survives me" is unclear, and as a result, the anti-lapse statute should still apply. That would give the rings to Dorothy's nephew.

Disclaimer

Another issue that the bar examiners like to test is disclaimer. Disclaimer is when a beneficiary of a will or intestacy statute or a trust declines to take their gift. Now, you might be asking, why would anyone ever refuse free money? The most common reasons to disclaim a gift are to shield property from creditors and to achieve intrafamily tax savings. To take full advantage of these benefits, disclaimers should be in writing and they should be made within nine months of the death of the decedent or the creation of the interest.

Let's do a hypothetical. Suppose that Dorothy dies without a will. She is survived by her husband, Tin Man, and their daughter, Golden Girl. As we talked about in a previous lesson, spouses get the first cut under intestacy. The Tin Man would stand to inherit the bulk of Dorothy's property.

If the Tin Man disclaims his gift, however, he is treated as if he has predeceased Dorothy. We pretend he's dead so he can't take the money. Under state intestacy law, Dorothy's estate would then pass to her child, Golden Girl. It's like the Tin Man never owned the property. His creditors couldn't get the money, and the state couldn't tax him on it.

Beneficiaries of wills and trusts can also disclaim. The same principle applies. If the beneficiary of a will disclaims, find the next alternative taker for the gift. For instance, let's imagine that Dorothy's will left the Tin Man $100,000. If the Tin Man declines the gift, it's just like lapse. We would ask if Dorothy has named an alternative beneficiary for the gift, and if she didn't, the gift would fall into the will's residuary clause. And if there's no residuary clause, the gift would pass by intestacy.

Last Bits

Now, before moving on to a discussion of trusts, let me mention three things that have not shown up on the MEE in the last decade. These aren't bar examiner favorites, but they seem primed for an appearance. First, what happens if a testator has a will that leaves a lot of money to their spouse, but then they get divorced? Are the gifts to the ex still good? Absolutely not. State law treats the ex-spouse as if they had predeceased the testator. Their gift would fall into the residue.

Second, every state has what's known as a slayer statute that prevents killers from taking the property of their victims. Generally, a civil, not a criminal, conviction of either murder or voluntary manslaughter is required.

And finally, there are two ways to revoke a will. A testator can repeal an old will by making a new will. Most professionally drafted wills start with a clause that revokes all prior testamentary documents. Additionally, a testator can revoke a will through a physical act. Tearing an unwanted will in half is the standard example. Be careful, because many states require that the revocatory act touch the actual words of the will.

That's all for today. I'll see you in the trust material.