New Reasons to Remember the Estate Taxation of Reversions

Multiple law reform efforts are underway to reverse the no-implied-conditions-of-survivorship rule historically applying to future interests. Yet, whenever the NICS rule is reversed, a reversion arises in the transferor of the future interests—which reversion will take effect if the newly-implied conditions of survivorship fail—unless the NICS-rule-reversal reform itself negates that reversion. The most well-known NICS-rule-reversal reform, Uniform Probate Code section 2-707, negates the transferor’s reversion, but other reforms do not. When the reversion is not negated, complicated transfer tax issues arise. First, for gift tax purposes, the reversion must be valued, because the value of the reversion is subtracted in valuing the transferor’s gift. Second, if the transferor dies at a time when any of the future interests she created continue as future interests (i.e., the interests have yet to arise in possession or fail), the at-death value of the transferor’s reversion is included in her federal gross estate under Internal Revenue Code section 2033, unless her reversion fails at her death, in which case Internal Revenue Code section 2037 includes an amount greater than the immediately-before-death value of the transferor’s reversion; section 2037 includes the after-death value of the property interests replacing the reversion. Application of section 2037 and of section 2033 in this context always requires determining the probability that one person survives another, and nothing presently exists in the legal literature to demonstrate how to do that. This article surveys life contingency actuarial mathematics and provides a method. Two points become clear. First, whatever the merits of reversing the NICS rule, the transferor’s reversion should be negated in any reform, which argues for the UPC approach. Second, through a series of case examples, this article demonstrates how to value a reversion, both when an inartful NICS-reversal reform creates one, and when a transfer expressly creates one, either by real intention or, as is more likely, by inadvertence

New Zealand Trustee Investing: Reflecting on Modern Portfolio Theory and the Ancient Distinction of Principal and Income

The New Zealand Trustee Amendment Act 1988 led the common law world in encouraging (perhaps requiring) trustees to use modern portfolio theory ( MPT ) techniques when investing trust funds. A recent High Court decision essentially held that trustees should have engaged in MPT-based investment since 1972. Full integration of MPT principles into trust law affects many areas of trust administration, perhaps most prominently the ancient distinction of principal and income. In addition, renewed attention to careful drafting of a settler\u27s investment and payout intentions and greater investment diversification are likely consequences of MPT-based trust investing

Testamentary Capacity Litigation in Virginia

In Rust v. Reid, a 1918 case involving testamentary capacity, the Supreme Court of Virginia wrote the cases upon this subject are almost without number, and they are not to be reconciled, but Rust referred to all of the decisions of this court on the subject of competency of jurors, which also had been at issue in the case. However, in its decision in Rust, the Court easily could have leveled the same self-criticism about its cases deciding (1) which party bears the burden of proof in testamentary capacity litigation; (2) whether a presumption of testamentary capacity exists; and (3) whether the jury is instructed about that presumption. Today, after a series of three cases decided in the last four years, those cases remain irreconcilable. The burden of proof in testamentary capacity litigation has been reversed at least eleven times in the history of Commonwealth. However, those reversals occurred only in the colloquial, and not the legal, sense. The Supreme Court of Virginia has never expressly reversed any of its decisions, nor, with one exception in 1908,\u27 has the court even admitted that a conflict exists. Kiddell v. Labowitz (2012), the most recent case, discovered a jury instruction from Huff v. Welch (1913), which had not been the subject of an appellate opinion for over sixty years, yet about which, according to Kiddell, [flor the next hundred years, the Court [had] addressed and approved the exact same instruction or a close variant. Under the Kiddell instructions (which make an important and inadequately explained change to the Huff instruction), even though the proponent of a will ostensibly bears the burden to prove testamentary capacity, the will\u27s opponent must present [e]vidence that is sufficient to satisfy an unprejudiced mind seeking the truth \u27 to overcome the presumption of testamentary capacity. Contrary to the express statement in Kiddell about a hundred-year consistency between Huff (1913) and Kiddell (2012), during that almost one hundred years fourteen cases flatly inconsistent with Huff were decided, including (1) three cases that placed the burden of proof upon the proponents without mention of the presumption at all, (2) seven cases that placed the burden of proof upon the proponents, said that the presumption existed, but indicated that the presumption was of the common variety and not told to the jury, and (3) four cases that placed the burden of proof upon the opponents, thus obviating any need for an evidentiary presumption in favor of the proponents. Just before Huff was decided (1913), the Wallen (1907) decision had provided another hundred-year canard. Wallen v. Wallen concluded that the presumption of testamentary capacity shifted the burden of proof to the opponent and cited Temple v. Temple (1807) as a case decided just one hundred years ago and never since questioned. Although Wallen and Temple were consistent, during the one hundred years between them, five cases had placed the burden on the proponent without benefit of any presumption, and three of them had required proof by clear and convincing evidence, yet Wallen mentioned none of them. Consequently, neither the hundred year consistency claimed by Kiddell (2012) about Huff s 1913 rule on instructing juries about the presumption of testamentary capacity, nor the hundred year consistency claimed by Wallen (1907) about Temple\u27s (1807) rule that the opponent bears the burden of proof on testamentary capacity actually existed. Moreover, the irreconcilable cases did not vanish after those declarations of hundred-year rules. After Wallen (1907) and Huff (1913), the burden-of-proof and effect-of-presumption cases continued widely to vary the rules without recognition of any inconsistency. This article is both a piece of doctrinal scholarship, describing which party bears the burden in testamentary capacity litigation and whether and how a presumption of testamentary capacity operates, and a piece of historical analysis, demonstrating two disturbing practices of the Supreme Court of Virginia within those doctrines: a rather cavalier attitude in not following precedent, and a rather careless method of citing it

Testamentary Capacity Litigation in Virginia

In Rust v. Reid, a 1918 case involving testamentary capacity, the Supreme Court of Virginia wrote the cases upon this subject are almost without number, and they are not to be reconciled, but Rust referred to all of the decisions of this court on the subject of competency of jurors, which also had been at issue in the case. However, in its decision in Rust, the Court easily could have leveled the same self-criticism about its cases deciding (1) which party bears the burden of proof in testamentary capacity litigation; (2) whether a presumption of testamentary capacity exists; and (3) whether the jury is instructed about that presumption. Today, after a series of three cases decided in the last four years, those cases remain irreconcilable. The burden of proof in testamentary capacity litigation has been reversed at least eleven times in the history of Commonwealth. However, those reversals occurred only in the colloquial, and not the legal, sense. The Supreme Court of Virginia has never expressly reversed any of its decisions, nor, with one exception in 1908,\u27 has the court even admitted that a conflict exists. Kiddell v. Labowitz (2012), the most recent case, discovered a jury instruction from Huff v. Welch (1913), which had not been the subject of an appellate opinion for over sixty years, yet about which, according to Kiddell, [flor the next hundred years, the Court [had] addressed and approved the exact same instruction or a close variant. Under the Kiddell instructions (which make an important and inadequately explained change to the Huff instruction), even though the proponent of a will ostensibly bears the burden to prove testamentary capacity, the will\u27s opponent must present [e]vidence that is sufficient to satisfy an unprejudiced mind seeking the truth \u27 to overcome the presumption of testamentary capacity. Contrary to the express statement in Kiddell about a hundred-year consistency between Huff (1913) and Kiddell (2012), during that almost one hundred years fourteen cases flatly inconsistent with Huff were decided, including (1) three cases that placed the burden of proof upon the proponents without mention of the presumption at all, (2) seven cases that placed the burden of proof upon the proponents, said that the presumption existed, but indicated that the presumption was of the common variety and not told to the jury, and (3) four cases that placed the burden of proof upon the opponents, thus obviating any need for an evidentiary presumption in favor of the proponents. Just before Huff was decided (1913), the Wallen (1907) decision had provided another hundred-year canard. Wallen v. Wallen concluded that the presumption of testamentary capacity shifted the burden of proof to the opponent and cited Temple v. Temple (1807) as a case decided just one hundred years ago and never since questioned. Although Wallen and Temple were consistent, during the one hundred years between them, five cases had placed the burden on the proponent without benefit of any presumption, and three of them had required proof by clear and convincing evidence, yet Wallen mentioned none of them. Consequently, neither the hundred year consistency claimed by Kiddell (2012) about Huff s 1913 rule on instructing juries about the presumption of testamentary capacity, nor the hundred year consistency claimed by Wallen (1907) about Temple\u27s (1807) rule that the opponent bears the burden of proof on testamentary capacity actually existed. Moreover, the irreconcilable cases did not vanish after those declarations of hundred-year rules. After Wallen (1907) and Huff (1913), the burden-of-proof and effect-of-presumption cases continued widely to vary the rules without recognition of any inconsistency. This article is both a piece of doctrinal scholarship, describing which party bears the burden in testamentary capacity litigation and whether and how a presumption of testamentary capacity operates, and a piece of historical analysis, demonstrating two disturbing practices of the Supreme Court of Virginia within those doctrines: a rather cavalier attitude in not following precedent, and a rather careless method of citing it

Higher Education Savings and Planning: Tax and Nontax Considerations

Funding higher education is among the critical financial decisions made by individuals and families. There are myriad options. Yet, the conventional wisdom—namely using Section 529 Plans—may not be the optimal vehicle to effectuate this goal. Therefore, this Article discusses various strategies to plan, save, and pay for higher education. It compares various savings methods including gifts, UTMA accounts, Section 529 Plans, trusts, and other vehicles. The analysis explores both tax and non-tax considerations, including the effect of different strategies on financial aid, transaction costs, investor control, income taxes, gift and estate taxes, flexibility, and creditor protection. This Article concludes that the ubiquitous Section 529 Plan may not be as effective as conventional wisdom suggests. Indeed, we argue that Section 529 Plans are optimal only when capital can be exclusively committed to education funding, which may not be the most desirable savings tactic for a wide swath of American families who need to plan for other financial needs (e.g., retirement and unforeseen medical needs)

Issues Arising upon the Death of the Sole Member of a Single-Member LLC

Sole entrepreneurs overwhelmingly choose the single-member limited liability company (SMLLC) as the business entity for their operations. Consequently, simplicity of formation and operation of SMLLCs is highly desirable, both to facilitate entrepreneurship and to acknowledge that costs, lack of knowledge, bad advice, or a combination of them very often will cause sole entrepreneurs to forego professionally drafted documents and accept default SMLLC rules in the jurisdiction of formation. The death of the sole member is always an anticipated, indeed inevitable, occurrence, so one would expect that the default statutory rules and the widely available forms for SMLLCs would address this eventuality adequately. Unfortunately, that is not the case. In this Article, we address how SMLLC organizational documents should always address the death of the sole member of an SMLLC, and we conclude that a provision for the nonprobate transfer on death of the sole member’s interest should be included. We also address the federal tax consequences of death-time transfers of SMLLC interests, and we uncover a thorny conflict between federal income taxes, which disregard the entity, and federal transfer taxes, which regard the entity