Testamentary Fragmentation and the Diminishing Role of the Will: an Argument for Revival

• Publication year: 2022

41 Creighton L. Rev. 155. TESTAMENTARY FRAGMENTATION AND THE DIMINISHING ROLE OF THE WILL: AN ARGUMENT FOR REVIVAL

Creighton Law Review

Vol. 41

KENT D. SCHENKEL(fn*)

I. INTRODUCTION

Avoiding probate continues to be a major objective in estate planning for a large contingent of the American public.(fn1) Probate avoidance is commonly carried out by techniques which, by legal necessity, must vary by asset category. Even where simple estates are concerned, in addition to a will, legal mechanisms such as beneficiary designations for retirement plans and insurance policies, joint bank accounts that carry survivorship rights, payable-on-death and transfer-on-death designations, and various types of trust accounts are commonly employed. Laws across jurisdictions may also be implicated, which may require drafting more documents and preparing additional forms. Despite the prodigious array of techniques currently available, new methods are continuing to be developed, discovered, touted and refined.(fn2) Consequently, estate planning, which at one time involved not much more than the drafting and execution of a will, is now laden with a multitude of fragmented techniques designed to pass along assets at one's death without the necessity of court supervision.(fn3)

This Article argues that the patchwork process of transferring property interests at death is needlessly ponderous and inefficient. An alternative to the disjointed collection of devices and advisers is needed. Testamentary transfer legislation and techniques should focus on brevity, simplicity and efficiency. These goals can be best achieved only by unifying the process of testamentary transfer under a single instrument. Fortunately, a unifying instrument already exists. Only by executing a will can a person, without taking any further legal steps, transfer all of a wide variety and number of property interests, effective on death, by way of one legal document.(fn4) Further, wills best serve the essential channeling function for a legal transfer of one's estate at death.(fn5) The only significant impediment to reviving the will as the instrument of choice for this purpose is that wills carry the burden of probate, which is now seen as largely unnecessary in many estates. Consequently, legislation should focus on relieving wills from probate.

Part II of this Article reviews the problems that arise from the fact that the testamentary transfer process has become so fragmented. Part III looks at how the will has become increasingly maligned as an instrument for effecting the gratuitous transfer of property interests at death. Part IV explores the channeling function of the will, while Part V provides a summary of the Article.

II. THE PROBLEMS WROUGHT BY FRAGMENTATION

A. COMPLEXITY AND INEFFICIENCY

Legal trends focused on probate avoidance were developed in response to people's preferences for simplicity, privacy and efficiency in their personal affairs and have generally been benign.(fn6) Ironically, lost in the ever-continuing search for more ways to transfer property outside of probate is the rather obvious fact that this balkanization of the estate planning process now rivals or even exceeds probate itself in complexity and inefficiency. While we have become very adept at evading probate, we have lost sight of what the public perceives as probate's offenses, and thus the reason the public wanted to elude the process in the first instance. The cost and complication of probate prompted circumvention attempts. Yet avoiding probate is coming at the cost of adding layers of new and additional complication to an already dauntingly inefficient process.

Professor John Langbein identified four major types of "will substitutes." Specifically, he identified life insurance, pension accounts, the revocable inter vivos trust and the so-called "imperfect will substitutes" such as common law joint tenancy.(fn7) Since that time, new techniques have been popularized. The devices are best divided into three major legal categories: those based on a third-party beneficiary contract; those based on the revocable living trust; and those based on titling of property.(fn8) Those based on contract include the pay-on-death or "POD" designations, which generally are enabled by legislation such as that found in part 2 of article VI of the Uniform Probate Code ("UPC"), entitled Multiple-Person Accounts. The UPC permits the contracting parties (the depositor institution and the account owner/depositor) to enter into a contract that allows the depositor to benefit a third party by making the account payable on the death of the depositor to one or more designated beneficiaries.(fn9) Similar in concept are the "transfer-on-death" ("TOD") provisions of the Uniform TOD Security Registration Act(fn10) contained in part 3 of article VI of the UPC, allowing for the transfer-on-death of security accounts by a comparable third party beneficiary arrangement.(fn11) Also based on contract and addressed in part 2 of article VI of the UPC are provisions for multiple party accounts. Another major category of assets are those assets transferred by designated beneficiary form. Specifically, these assets include insurance policies, annuities, and a wide variety of retirement plans and pension accounts.

The revocable living trust continues to gain popularity and is certainly no longer limited to the "carriage trade."(fn12) Indeed, the revocable living trust is often pushed to the masses as the best and even the only way to avoid probate.(fn13) Although a revocable living trust is essentially a nonprobate will, the instrument maintains the fictitious concept of a trust and thus requires title of all affected assets to be transferred to the trustee.(fn14) Consequently, despite all the hype about simplicity, when used to transfer the entire estate of a typical decedent outside of probate, a revocable living trust is procedurally much more complicated than a will. For assets that are not transferred by certificate of title or deed, the settlor may simply declare that the asset is being transferred to the trust; the trustee's indication of acceptance makes the transfer complete. Typically, the settlor and the trustee are the same person, simplifying the process even further. However, when assets have ownership status designated by title or deed, new documents must be prepared to reflect the trustee as the owner. Deeds to real property must generally be recorded. Assets involving third parties, such as bank accounts, must also be retitled in the name of the trustee, a process that involves new documentation being completed with the third party and signed by the owner/settlor. Beneficiary designations on assets that transfer by beneficiary designation form at death must be changed to name the trustee as beneficiary and indicate that the beneficiary will take title as a fiduciary. This process generally involves obtaining new forms from the insurance company, brokerage or retirement fund institution, completing and signing those forms, and returning the forms to the institution. There may be a period of delay before the institution's acceptance can be confirmed.

The above-described methods of transferring property at death have been referred to as the "pure" will substitutes, as persons succeeding to the property interests at the transferor's death essentially maintain no enforceable rights during the lifetime of the decedent. In contrast, most nonprobate transfers based solely on titling of property interests involve an actual transfer of an interest during the transferor's lifetime, creating a host of potential problems.(fn15) These techniques include the transfer of a remainder interest coupled with the retention of a life estate and the retitling of property in joint names with rights of survivorship. These methods of title transfer create enforceable rights in the transferee upon creation, are not revocable, and involve a gift of a present interest that can create gift tax and other problems. To alleviate these problems, some states are now adopting legislation that enables transfer-on-death deeds, which resemble the contractually-based payable-on-death transfers or beneficiary designation transfers.(fn16) These transfers are fully revocable by the transferor, involve no current gift of enforceable rights to the transferee, and would generally carry no gift tax implications. Yet, so long as the deed remains unrevoked at the transferee's death, the property interest passes to the named beneficiary outside of probate.(fn17)

Once the testator employs any of the above nonprobate transfer techniques, a subsequently executed will has no effect on the subject property.(fn18) Thus, the possibility that a client may have implemented any of the nonprobate techniques means that the attorney must carefully review each and every asset. For example, suppose that in a typical scenario, Testator, a widower, goes to Attorney and instructs her that that he wishes to implement an estate plan that will transfer all of his property in equal shares at his death to his adult children, X, Y and Z. In response to Attorney's further questioning, Testator indicates that if any of X, Y or Z predeceases him, he would like the predeceased child's descendants, if any, to take by representation, and if no descendants exist, then the other named children (or child) to take. It is not very complicated...