Virginia State Bar

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Trusts and Estates

A Section of the Virginia State Bar.

Summer Newsletter 2016

Newsletter - Trusts and Estates

Volume 22, No. 14

Wills & Revocable Trusts: Functional Equivalents, Construed Differently
By Thomas D. Yates and Alvi Aggarwal

I. Intro

We tend to think of revocable trusts as being equivalent to and substitutes for wills; however, the same dispositive scheme, implemented with essentially the same words, can operate differently if written into a will than if written into a revocable trust.1  This is—in part—because the statutory rules of construction and definitions applicable to wills do not apply to trusts.2  In interpreting trusts, we may need to look more often to the common law.  Legislative changes to certain statutes may be appropriate to address some of the disparities.3  In the absence of that legislation, the authors believe that drafters of trusts ought to be aware of and consider addressing key differences between wills and trusts in trust documents.

II. Source and Scope of the Problem

In Virginia, there is no code section that comprehensively eliminates (or attempts to eliminate) differences in the interpretation of wills and trust documents.  The Uniform Trust Code contains a section that states, “[t]he rules of construction that apply in this State to the interpretation of and disposition of property by will also apply as appropriate to the interpretation of the terms of a trust and the disposition of the trust property.”4  That section of the uniform act is not among the provisions of the Virginia Code.5

Some sections of the Virginia Code are specifically applicable to both wills and trusts.  The section addressing the “meaning of child and related terms,” for example, is applicable to a “deed, will, trust or other instrument.”6  The default rule relating to interest on pecuniary legacies also applies to both wills and trusts, unless the testator or settlor expresses or implies a contrary intent.7  There are numerous other statutes applicable to both wills and trusts.

The Restatement (Third) of Trusts generally—but not in all cases—favors the application of will doctrines to trusts by courts.8  In Virginia, the authors have seen few, if any, cases consistent with the Restatement’s general position.

III. Specific Issues and Solutions

A. Failed Bequests and Devises.

The Virginia Code provides that if a non-residuary devise or bequest fails, unless the will provides otherwise, the devise or bequest lapses to the residue.9  In addition, if a share of the residue fails, unless the will provides otherwise, the property composing that share passes to the other residuary devisees or legatees in proportion to their interests in the residue.10  These sections of the Virginia Code apply only to wills, and there are no equivalent provisions for trusts.
If the settlor of a trust wishes for a failed specific bequest or devise to lapse to the residue or for a failed residuary share to be distributed among the other shares, the settlor’s trust should so provide.  A clause like the following can be adapted to require the distribution of a failed residuary share among the takers of the other shares: “In the event that there is no taker under the foregoing paragraphs of this Article X for any percentage of the Residuary Trust Fund, then the percentage or percentages for which there is no taker shall be distributed to those beneficiaries who are the takers of the other percentages of the Residuary Trust Fund under the foregoing provisions of this Article X in the proportions that the percentages of their respective shares of the Residuary Trust Fund bear to the total of the percentages of the share of the Residuary Trust Fund for which there are takers.”

B. Divorce

The Virginia Code contains a provision nullifying a former (by divorce or annulment) spouse’s appointment as executor, trustee, conservator, or guardian in a will, a power of appointment granted to the former spouse in a will, and any disposition or appointment of property made by will to the former spouse.11  This provision applies to wills.  There is no equivalent for trusts, though there are similar provisions for certain other dispositive documents.12
If the settlor of a trust wishes for divorce or annulment of the settlor’s marriage to affect the provisions of the settlor’s trust, the settlor’s trust should so provide.  In appropriate circumstances, the authors accomplish this by including a provision that says the former spouse is treated as having predeceased the settlor for all purposes under the document.

C. Omitted Spouse.

The Virginia Code provides that an omitted spouse, i.e., a spouse who is not provided for in the testator’s will and who married the testator after the execution of the will, shall receive a surviving spouse’s intestate share, unless the will or a pre-marital or post-marital agreement establishes the omission was intentional.13  This provision applies only to wills, and the effect of the provision is to automatically partially revoke the testator’s will.
Where the decedent has a revocable trust and no probate estate, an omitted spouse does not have an equivalent right.  Of course, Virginia law provides other rights to such spouses, all of which require affirmative elections.14  Most important, the settlor’s omitted spouse can take the elective share; however, the elective share must be elected in a timely manner, and the intestate share and elective share will usually differ in entitlement.

D. Omitted Child.

The Virginia Code provides for certain children or descendants omitted from a testator’s will to receive a share of the testator’s estate.  If a childless testator makes no provision for or mention of children in the testator’s will and later has a descendant, the descendant is entitled to an intestate share.15  If a testator with children provides for the testator’s children living at the time the testator makes the will, specifically and by name, any subsequent children who are not named and provided for are entitled to the lesser of an intestate share or the largest share provided for any child.16  Like the provisions for the omitted spouse, these provisions apply only to wills.
The omitted children or descendants of the settlor of a funded trust may effectively be disinherited.  As a result, we generally include provisions to benefit all children of the settlor generally, which would include after-born children.

E. When Wills Speak.

The Virginia Code provides that wills speak immediately before death and are treated as (re-)made at the time of a republication by codicil.17  This provision, by its terms, applies only to wills.  There is no equivalent provision for trusts.

Wills and funded revocable trusts are fundamentally different: a revocable trust establishes property rights at the time of execution (subject to the settlor’s right of revocation), while a will does not.18  It would not make sense for revocable trusts to speak at death; however, there may be some provisions of revocable trusts that should effectively speak at death.  Drafters might take care to clarify when particular provisions of a will or trust are intended to speak.  For example, changes in the law might affect wills and trusts differently—a change in the provision relating to the exoneration of debts may alter whether a bequest in a will is exonerated, but might not alter whether the same bequest in a trust is exonerated.  One solution to this particular problem might be to state, as appropriate, whether certain statutes should apply as in effect on the date of execution or on the date of death. 

The authors suspect many practitioners are already providing in their trust amendments for the reaffirmation or republication of the entire agreement in amendments or are restating rather than amending trust documents.  To the extent that is not so, inclusion of a clause to reaffirm or republish the trust in any amendments may be worth considering.

F. Anti-Lapse.

The rule of lapse provides, in effect, that a testamentary disposition fails for lack of a taker, e.g., where the taker predeceases the testator.  Anti-lapse rules prevent certain bequests from lapsing.  The anti-lapse rule in the Virginia Code prevents a lapse where the named taker is a grandparent or a descendant of a grandparent of the testator.19  This provision applies only to wills.  There is no equivalent provision for trusts.  Simply put, the significance of the lack of an anti-lapse statute for trusts is that there is the possibility of a lapse in a trust when the equivalent bequest in a will would not lapse.

The authors consider it a best practice to explicitly provide—in a will or a trust—whether a named taker must survive the testator or settlor to take and who should receive property if the named taker predeceases the testator or settlor.  Often, our provisions provide that if the named individual predeceases the testator or settlor, the gift lapses and the property passes with the residue.  Sometimes, we provide several alternate dispositions to effectuate the settlor’s or testator’s wishes.

G. Advancements.

The Virginia Code provides the general rule that property given to a recipient during a testator’s lifetime is not an advancement against the recipient’s share under the testator’s will, but gifts will be treated as advancements if: (i) the will so provides; (ii) the testator so provides in a writing contemporaneous with the gift; or (iii) the recipient so acknowledges in writing.20  This Virginia Code section only applies to dispositions by will.  There is a similar provision for intestate and partially intestate dispositions,21 but no analogous provision for trusts.
To the extent a client wishes distributions to be treated as advancements against a trust beneficiary’s share, the trust document should so provide.  In addition to the matters addressed in the Code sections referenced above, the advancement provisions in a trust document (or will) might address potential issues like valuation, identification of gifts to be treated as advancements, how gifts to beneficiaries’ descendants are treated, and collecting from a beneficiary who has been advanced more than the beneficiary’s share.

H. Exercise of Power of Appointment by Redisuary Clause.

The Virginia Code previously provided that an exercise of a power of appointment by will was valid if the will was properly executed under Virginia law, notwithstanding any additional requirements the grantor of the power may have imposed for the execution of the will exercising the power.22

This provision of the Virginia Code was applicable only to exercises of powers by will; however, the Virginia version of the Uniform Power of Appointment Act, which became effective July 1, 2016, changed this rule significantly.  The new Virginia Code Section 64.2-2716 allows for substantial compliance with the requirements imposed by the grantor of the power if: (a) the powerholder had knowledge of and intended to exercise the power; and (b) the exercise “does not impair a material purpose” of the grantor of the power in imposing the requirement.

I. Gifts of Stock.

Unless the will says otherwise, bequests of securities in wills include the bequeathed shares owned by the testator at death and “any additional or other securities of the same entity owned by the testator by reason of action initiated by the entity, excluding any securities acquired by the exercise of purchase options, and any securities of another entity acquired with respect to the specific securities mentioned in the bequest as a result of a merger, consolidation, reorganization, or other similar action initiated by the entity.”23  This provision applies only to wills, and there is no equivalent provision for trusts.

This kind of provision could be useful in a trust, depending on the settlor’s intent.  The need for such a provision may arise in connection with bequests of the stock of family businesses.  To the extent the application of this kind of provision is desirable in a trust, the authors suggest including it.  A clause similar to the following may be adaptable for this purpose: “The Settlor gives to his daughter, Jane Doe, if she survives the Settlor, 500 shares of the common stock of Family Corporation.  This bequest shall include all shares of Family Corporation received by the Trustee after the original date of this Agreement with respect to the 500 shares, whether as a stock dividend, stock split or otherwise, and shares of any other corporation received in exchange for such shares if such exchange is attributable to an action (including, but not limited to, merger or reorganization) initiated by Family Corporation.”

J. Nonademption in Certain Cases

Unless the testator provides otherwise, certain property that would be adeemed by extinction is not adeemed: unpaid condemnation awards and casualty and fire insurance proceeds for specifically devised property are paid to the devisee,24 as are the proceeds of a disposition (and certain insurance proceeds) collected by an agent under a power of attorney, conservator, guardian, or committee acting for the testator during the testator’s life.25  This provision applies only to wills, and there is no equivalent provision for trusts.

To the extent the settlor of a trust wishes for the beneficiary of a specific bequest or devise to receive unpaid condemnation awards, proceeds of a trustee’s disposition, or casualty and fire insurance proceeds from the bequeathed property, the trust document should include the appropriate provisions.  Similarly, if the testator wishes a beneficiary to receive sales or insurance proceeds collected by the settlor’s fiduciary, the trust document should so specify.

K. Other issues

There are other differences, only some of which derive from statutes, which arise depending on whether property is distributed under a will or a revocable trust.  Among the more notable of those are differences in statutes of limitations, creditors’ rights, family rights26, fiduciary liability, and rights under the provisions of closely-held business agreements, e.g., shareholders’ agreements, operating agreements, and partnership agreements.  Under a shareholders’ agreement, for example, transferring property by will or by trust can entail different rights.  In a recent case, Jimenez v. Corr,27 the Virginia Supreme Court considered a shareholders’ agreement that allowed the transfer or bequest of shares to “immediate family,” but that did not contain a similar provision allowing transfers to trusts.  The Court, because one of the trustees was not a member of the decedent’s “immediate family,” determined that the transfer through the trust was not consistent with the shareholders’ agreement.28  The drafters of documents like shareholders’ agreements have control over the creation of rights and might consider whether differences in the treatment of trusts and estates are warranted.  In advising clients in estate planning or estate and trust administration, attorneys should not presume the interchangeability of the rights, duties, and obligations created under trusts and estates in the context of closely-held business agreements.

IV. Conclusion

It seems we, as the drafters of wills and trusts, are dealing with different and somewhat independent legal regimes for each type of document we draft.  Default rules and definitions are not the same for wills and trusts—the same provision in a will and a trust might not have the same meaning.29  These differences may present planning opportunities for the careful drafter and traps for the unwary.  The authors, having completed our work on this article, plan to review our own documents to ensure we are adequately addressing the issues we have described.

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Thomas D. Yates and Alvi Aggarwal are attorneys at Yates, Campbell & Hoeg LLP in Fairfax, Virginia.  The firm’s practice is limited to estate planning and administration.  Tom (tyates@ychlaw.com) and Alvi (alvi@ychlaw.com) welcome your thoughts and comments on the subject matter of this article.

Endnotes

1Also consider what happens when the terms of the revocable trust are incorporated into the will by reference (e.g., to address the situation where the settlor accidentally revokes the trust).  The interpretation of provisions may be different just because of where the provisions are found.

2The problem is not limited to trusts: there are other non-probate transfers to which many of the rules of construction and definitions do not apply.

3A discussion of the appropriateness of such reform is beyond the scope of this article.  The authors suggest that any reformers consider which default doctrines really reflect testators’ or settlors’ intent and which rules (if any) should be mandatory.

4Unif. Trust Code § 112 (Unif. Law Comm’n 2010).

5Thorough consideration of whether this ought to be the law in Virginia and whether this section of the Uniform Trust Code should be enacted as written is beyond the scope of this article, though the authors see a number of potential problems with adopting a provision similar to section 112 of the Uniform Trust Code.

6Va. Code Ann. § 64.2-102.

7Id. § 64.2-425(A).

8See Restatement (Third) of Trusts § 25 cmt. d–e (Am. Law Inst. 2012).

9Va. Code Ann. § 64.2-416(A)(1).

10Id. § 64.2-416(A)(2).

11Id. § 64.2-412(A).

12For contractual death benefits, see Va. Code Ann. § 20-111.1.  For multi-party bank accounts, see Va. Code Ann. § 6.2-607.  For powers of attorney, see Va. Code Ann. § 64.2-1608(B)(3).  For rights of survivorship in real and personal property, see Va. Code Ann. § 20-111.

13Va. Code Ann. § 64.2-422.

14See Id. §§ 64.2-302, -309, -313.

15Id. § 64.2-419(A).

16Id. § 64.2-420(A).

17Id. § 64.2-414.

18Charles E. Rounds, Jr. & Charles E.Rounds, III, Loring and Rounds: A Trustee’s Handbook § 8.15.55 (2013 ed.).

19See Va. Code Ann. § 64.2-418.

20Id. § 64.2-417.

21See Id. § 64.2-206.

22Id. § 64.2-406 (repealed 2016).

23Id. § 64.2-415(B)(1).

24Id. § 64.2-415(B)(2).

25Id. § 64.2-415(B)(3).

26As to the exempt property and family allowances, there is some consistency and some inconsistency in the treatment of settlors’ and testators’ families. The exempt property and family allowances are applicable to “estates” and are in addition to benefits received “by the will of the decedent, by intestate succession, or by way of elective share.” Va. Code Ann. §§ 64.2-309, -310.  The rights to those allowances are, “subject to the settlor’s right to direct the source from which liabilities will be paid,” payable from the settlor’s revocable trust “to the extent the settlor’s probate estate is inadequate to satisfy those. . . allowances.” Va. Code Ann. § 64.2-747(A)(3).

27Jimenez v. Corr, 764 S.E.2d 115 (Va. 2014).

28Id. at 121–123.

29For additional information about this topic, the authors suggest the following resources:

Derek L. Smith, Statutory Differences Between Wills and Trust Agreements in Virginia, 13 Ann. Advanced Est. Plan. and Admin. Seminar (Committee on Continuing Legal Educ. of Va. Law Found. 1992).

Alan Newman, Revocable Trusts and the Law of Wills: An Imperfect Fit, 43 Real Prop. Tr. & Est. L. J. 523 (2008).

Melanie B. Leslie & Stewart E. Sterk, Revisiting the Revolution: Reintegrating the Wealth Transmission System, 56 B.C. L. Rev. 61(2015).