Oklahoma Bar Journal
Use of a Revocable Living Trust as a Preferable Alternative to Probate: General Observations and Pitfalls to Avoid, Part 2
By Maria Tully Erbar and Andra Erbar Peterson
Previously, our survey of the uses and attendant possible pitfalls of a trust-centered estate plan has focused on issues relating generally to hypothetical “happily ever after” marital unions and resulting family units. But what happens when the happiness ceases to exist forever, and the family unit becomes dysfunctional? What issues are presented when the management of and forward planning for the marital estate that began on a jointly agreed, harmonious track is no longer joint and harmonious, and the marital union is dissolving? Are there any drafting precautions that – if made before the happy union goes southward – could help steer the preexisting, trust-based estate plan through such turbulent waters?
Yes. The first observation is that an antenuptial agreement may be helpful in such a situation. Note, in Dean v. Jelsma,1 the Supreme Court determined a prenuptial agreement that bestowed third-party beneficiary rights on a child of a former marriage could not be abrogated by a subsequent non-conforming will. Although it is unclear whether this same rationale would apply to a trust-centered estate plan followed by marital dissolution, such a result seems arguably reasonable. This is especially true considering the close relationship between judicial rulings with similar facts based in different contexts of wills and trusts.2 Absent a successful prenup, division of the marital estate and status of the family trust will be adjudicated in the divorce court. There, the various applicable statutes3 appear to be quite straightforward, especially in light of the statutory admonition to “make such division between the parties as may appear just and reasonable.”4 This division is to apply to the marital estate – something that is sometimes referred to as that estate that is “acquired by joint industry during coverture.” Courts have struggled to define exactly what is meant by the phrase “acquired by joint industry during coverture.” If a spouse gifts the other spouse property previously owned by the gifting spouse prior to marriage, is that property transmuted into property acquired by joint industry during coverture? Does acquisition of property by gift from one spouse to the other then become the separate property of the receiving spouse – or is it property acquired by joint industry?
PRESUMPTION OF A GIFT
Complications occur in probate proceedings when a spouse dies having transferred their separately acquired property to the other spouse in joint tenancy, raising a presumption of an intramarital gift of the asset into the marital estate.5 Thus, there has arisen from probate the “presumption of a gift” doctrine, which can only be rebutted by clear and convincing evidence.6 With that as the probate background, in divorce actions, the interplay of marital estate and contrary contractual trust provisions has a winding and convoluted history. In a case involving the transfer of the husband’s house and other properties into joint tenancy with the subsequent conveyance of an undivided one-half of said properties into the wife’s separate trust, it was held that the properties became marital when the joint tenancy transfers were made. The case was remanded for a determination whether the properties became separate property upon the conveyances of one-half interests into the trust7 In the case of Courts v. Aldridge,8 where a husband deeded farming property to his daughter but during his lifetime kept complete control of it and acted as if he still owned it, the transfer was deemed to create a resulting trust. A married man cannot make gifts of jointly acquired property during his lifetime without the consent or knowledge of his wife where the transfer is in fraud of the wife’s marital rights.
In a non-divorce proceeding, the wife’s allegation that her husband’s various gifts to other defendants during the marriage (in a sum exceeding $8 million) stated a claim for relief.9 Sanditen v. Sanditen changed the 50-year reign of York v. Trigg,10 wherein the court had previously determined a husband was not restricted from transferring non-homestead property to a trust inter vivos in the absence of a statute proscribing same. Twelve years after Sanditen, Thomas v. Bank of Oklahoma11 expanded the spousal election such that it controlled over opposing trust provisions (as a sidebar, reading these three cases in chronological succession provides a brief survey of evolving 20th-century attitudes about the role and rights of married women). Thereafter, the cases depend on the attitudes and analyses of the reviewing courts on a case-by-case basis. One thing certainly that can be gleaned from these cases is the contractual arrangements and apparent intentions of the parties hold significant sway in determining the rulings that result.
Title 60 O.S. §175A states that provisions in an express trust in favor of a spouse are revoked in the event of subsequent divorce. This statute and the indefiniteness and complexity of property division within a divorce case could spell disaster for the family trust, but there is a way to avoid this result by careful drafting of the original trust provisions. This course would be to clearly spell out what the parties intend to be applied to their trust – contractually and to state initially with clarity and specificity exactly what status and condition the parties intend to be applicable to their trust. The settlors must be specific about the status of property transferred to it so the contractual terms of the interim and ultimate disposition of their estate leave little room to litigate the issues. When such clear and definite provisions are employed, there is a safe harbor that exists within the statute at Subsection (B)(5) thereof that excludes the application of the automatic revocation in cases where, and to the extent that, “The trust contains a provision expressing an intention contrary to [automatic revocation] …” If your clients are aware of the possible havoc a future divorce could inflict upon the administration and distribution of their trust and estate plan intentions, they may wish to bind themselves in the future to a distribution plan presently delineated and in such event the trust instrument should specifically bar application of the automatic revocation rules in Section 175(A).
RIGHTS OF OTHER HEIRS
Having addressed instances of post-funding divorces, we should look at how the “rights” of other heirs may come into conflict with trust terms as set out by its settlors. Most of us have probably been guilty of applying “forced heir” nomenclature to cases of pretermitted heirs in probate matters involving such situations. But as our courts have pointed out in Estate of James, “Oklahoma’s pretermitted heir statute … is not a limitation on a testator’s power to dispose of his or her property … [but] is an assurance that a child is not unintentionally omitted from a will.”12 James also distinguishes pretermitted rights as to wills from other vehicles whereby a beneficiary receives her “bequest,” such as insurance policies, certain bank accounts and trusts. As to all the others, this case clearly indicates no pretermitted heir savings clause applies to trusts. There is an interesting proposition to be found in James that bears on the different applications and interpretations of trust provisions from will provisions: “Disposing of property is an inalienable natural right throughout a person’s lifetime. However, the method of disposition of property after death and the right of inheritance are statutory.” The clear result of this language is the drafter of a trust-centered estate plan should reflect her clients’ wishes as to all heirs and, as a precautionary measure, make suitable mention (in the words of the statute) of “any omitted children or for the issue of any deceased child.” Because of the clear language of the statute (note the limiting language of “given by the will”), our courts have explicitly and consistently denied claims of alleged pretermitted heirs as not applicable to a trust-centered distributive scheme found where the benefit – if any – is not derived through testamentary “oversight.”13
The best practice, however, would be to ascertain all possible statutory or other (i.e., “contractual”) claimants and then specifically mention them in the trust along with any specific distributions or lack thereof. This would successfully cut off such pretermitted or other expectancy or contractual claims to a distributive share. The reader may remember the example in the preceding portion of this article of Mrs. Smith’s written promise of the million-dollar graduation gift to Mary Jane. That example highlights what is meant by “all possible contractual claimants,” and that’s why “contractual” is included among those matters whose existence and status require clear ascertainment prior to drafting the trust. Statements should be included in the trust indenture that either 1) no promises were ever made and no expectancies ever created thereby or 2) specifically renouncing any known claims. Alternatively, if and in the event the promise was made, your client should be instructed to revisit the matter with the future beneficiary in order to reach the best possible disentanglement now rather than to endure costly litigation in futuro.
The preceding part of this article discussed the pretermitted heir situation. There is also another matter that bears some similarity to the pretermission issue: lapse caused by the death of the beneficiary prior to the death of the settlor or termination of the trust. Application of 60 O.S. §175.56 offers a partial solution to this lapse problem in that the statute provides that in such event, distribution is to be made to the “lineal descendants” of such deceased beneficiary “by right of representation, in the same manner as the beneficiary would have done had he been living at the time for distribution of the trust.” However, this possibly leaves open the question as to how the substitution is to occur.
Twenty-three years after the passage of Section 175.56, in the case of O'Donoghue v. Dooley,14 the Oklahoma Supreme Court made some clarification by holding that distribution of a deceased’s beneficiary’s share to that beneficiary’s lineal heirs must be done by means of a per stirpes or “lineal by blood” categorization. In O’Donoghue, the subject distributive provision of the trust expressly called for such a per stirpes distributive scheme, but the dead beneficiary had left no children. The question was whether distribution could be made to a widow of a deceased beneficiary, and the court said no. The drafter should pay careful attention to her client’s wishes as to how her estate is to be distributed in the event the initial beneficiaries predecease the grantor. Being selective in the use of terms such as “by representation” and “per stirpes” – and situations where only the widow or widower of a deceased beneficiary is left alive – will help to effect a distribution compatible with the client’s desires.15
Concerning contested matters of trust distribution after the settlor’s death, the inclusion of a no-contest provision will go a long way in the abatement of later fights over trust construction and/or distribution of its assets. In terrorem clauses are useful devices that likely may already be somewhat familiar to your client, and their inclusion in the trust and pour-over will should be discussed. They are generally enforceable in most jurisdictions and have specifically been recognized as valid by Oklahoma courts.16 Wallace Revocable Trust follows the ruling in Matter of Estate of Westfahl,17 that such “no contest” clauses are not only acceptable in wills and trusts but “are favored by public policy.” Note, though, that Westfahl puts forward the rule that, “A forfeiture clause should not be invoked if the contestant has probable cause to challenge a will based on forgery or subsequent revocation …” Presumably, this same caveat applies to trusts, as discussed in Wallace, and this should be especially so considering the specific statutory sections that reference construction and interpretation of trust provisionsand concerning matters addressing breach of trust or removal of a trustee.19
THE LAW OF ADEMPTION
Ademptions and resulting trust concepts involve situations, respectively, where the object of a bequest no longer exists (or has been previously transferred to the beneficiary by other means) and where the trust appears to have no end game. The law of ademption deals with property that once was – but is no longer – part of the estate; the same conceptual framework would apply to trust circumstances, and the instrument should be drafted accordingly to obviate such circumstances. What about providing for after-acquired or overlooked property – that is, property that was not included initially through oversight or that was acquired later but not titled in the trust? Probate law provides for such situations.20 Trust law does not.21
At this point, the circle has brought us back to the beginning of the preceding installment of this article, where the authors advised that the pour-over will “acts as a very useful guard against possible subsequent trouble from omissions to the trust or after-acquired property, but the will is a prophylactic rather than a driving force for the estate plan.” This is nowhere more evident and exceedingly useful than in cases of properties that were omitted – for whatever reason – from inclusion into the trust. Thus, every trust-centered estate plan must include, as part and parcel thereof, a pour-over will. It will fill in this gap, providing a conduit by which after-acquired or after-discovered property can be channeled for distribution – under the terms and in the manner your client wanted. It can direct distribution of such property to the intended ultimate beneficiary of the now-defunct trust by means of a clause that provides for distribution upon terms identical to those of the former trust as same existed at the time of death of the settlor.
Finally, when the trust by its own terms has no ultimate beneficiary, the law provides for a resulting trust. By inserting language to assure there is never a dearth of beneficial interests and referencing distribution of trust proceeds to a pour-over will (with the two instruments having essentially mirrored provisions), the need to rely on the potential result of curative statutes that may – or may not – achieve the final result envisioned by Mrs. Smith can be obviated.
All the vignettes outlined above and in the earlier installment present potential scenarios that could affect the quality of your client’s lifetime relationship to her trust – as well as her beneficiaries’ experience in concluding it. No degree of investigation, due diligence nor finesse in drafting the trust will guarantee a conflict-free trust administration. Unfortunately, this is true in a trust-free estate plan as well. Thoughtful trust preparation may uncover a problem that can be corrected concerning that ill-considered earlier deed that placed Blackacre into joint tenancy. By uncovering such title issues and making necessary corrective adjustments, the attorney can avoid an unpleasant surprise that would be a disservice to the client and would fail to meet the hopes and expectations of the intended and disappointed beneficiary. Careful attention to the client’s factual, situational history as well as to her dispositive wishes, together with drafting that considers foreseeable circumstances will create a trust that serves your client well.
ABOUT THE AUTHORS
Maria Tully Erbar is a solo practitioner at Maria Tully Erbar, Attorney at Law PC in Oklahoma City. Her practice is focused primarily on probate, trusts, guardianships and family law matters. She is a member of the OBA Estate Planning, Probate and Trust Law Section, as well as the Family Law Section.
After attaining her M.A. in vocal performance from OU, Andra Erbar Peterson spent several years singing professionally. She is a recent graduate of the OCU School of Law with practice interests in wills and estates, family law, real estate law, health law and immigration law. She is also a licensed realtor.
- 1957 OK 163, 316 P.2d 599.
- Wills and related probate (wills and intestate succession) have a much longer and more varied history; it is often upon these cases that current conflicts are decided, and it is often useful to attempt to analogize from probate to trust law. The effort is commendable – and probably the best path through unexplored territory – but results are not always the same. “… [T]he trend in both statutory and case law is to subject trusts, and persons interested in them, to the same law that would apply if the settlor had instead used a will to provide for the disposition of her property at her death. … while there are many revocable trust issues that are being, and should be, resolved by reference to the law of wills, there are many others for which that is not the case.” Newman, Alan, “Revocable Trusts and the Law of Wills: An Imperfect Fit” (2008). Akron Law Publications. 169. http://ideaexchange.uakron.edu/ua-law-publications/169.
- 43 O.S. §§204, 205.
- 43 O.S. §121 (B).
- See Shackelton v. Sharrard, 1963 OK 193, 385 P.2d 898.
- See Smith v. Villareal, 2012 OK 114, 298 P. 3d. 533 and Jackson v. Jackson, 1999 OK 99, 995 P.2d. 1109.
- Bartlett v. Bartlett, 2006 OK CIV APP 112, 144 P.3d 173.
- 1941 OK 405, 120 P.2d 362.
- Sanditen v. Sanditen, 1972 OK 39, 496 P.2d 365.
- 1922 OK 257, 209 P. 417.
- 1984 OK 41, 684 P.2d 553.
- In re Estate of James, 2020 OK 7, 472 P3d 205, at ¶17.
- See Estate of Jackson, 2008 OK 83, 194 P.3d 1269 and Welch v. Crow, 2009 OK 20, 206 P.3d 599.
- 2016 OK 110, 383 P.3d 773.
- Probate law seems subject to similar confusion. See 84 O.S. §§142, 177 and 178 and Matter of Estate of Worsham, 1993 OK CIV APP 122, 859 P.2d 1134 and In re Estate of Prather, 1974 OK CIV APP 24, 527 P.2d 211.
- Generally, see Newman, op cit, Section VI(F) and specifically as to Oklahoma law, see In re: Wallace Revocable Trust, 2009 OK 34, 219 P.3d 536.
- 1983 OK 119, 674 P.2d 21.
- 60 O.S. §175.23.
- 60 O.S. §§175.57 and 175.39.
- 84 O.S. §146.
- To the contrary, 60 O.S. §175.44 specifically provides that any property “not embraced in the trust and not otherwise disposed of” is “left in the trustor of the trust or his successors.” This illustrates the necessity for a pour-over will with terms that are compatible for such an unexpected contingency.
Originally published in the Oklahoma Bar Journal – OBJ 92 Vol 4 (April 2021)