Virginia State Bar

An agency of the Supreme Court of Virginia

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Trusts and Estates

A Section of the Virginia State Bar.

Winter 1998 Newsletter

Newsletter - Trusts and Estates

Volume 15, No. 1

REFORMING VIRGINIA'S POUR-OVER RULES - THREE PROPOSALS

By J. RODNEYJOHNSON1

Introduction. Forty years have passed since Virginia enacted legislation authorizing a testamentary pour-over into an existing inter vivos trust - a development that a contemporary commentator categorized as placing a testator "roughly in the position of a royal subject in Virginia prior to 1748. He has enviable flexibility."2 Although much of this flexibility still exists today, developments during the intervening forty years have combined to make Virginia's treatment of pour-overs something less than "enviable" when compared to almost every other state. This short article argues for the elimination of Virginia's pour-over problems by the enactment of three-part legislation that would (1) replace Section 64.1-73 with The Uniform Testamentary Additions to Trusts Act (1991); (2) eliminate the requirement that a non-resident serving as sole trustee of a receptacle trust post bond with surety; and (3) abolish the prohibition against out-of state banks serving as trustees of "receptacle trusts. A draft of the suggested legislation is attached. As this article is addressed to the members of the Virginia State Bar's Section on Trusts and Estates, it is written on the assumption that the reader is well versed in the uses and mechanics of pour-over wills and receptacle trusts. Accordingly, there will be no need to provide a comprehensive analysis of pour-over law in general, or of the Virginia statute in particular, before beginning a discussion of the problems and their solutions.

The Advantages of Uniformity and the Birth of UTATA. To mention the mobility of the American people is to state the obvious. And this would also be true of a reference to the geographic diversification of so many families and their wealth - whether this be accidental or intentional. In the context of planning for these clients with multi-state beneficiaries and/or assets, the task of the estate planner is made significantly easier if the same law governs all aspects of the estate plan3 - whether that estate planner is a Virginian looking outward or an out-of-state attorney working on a plan with a Virginia aspect. To this end, i.e., to help bring uniformity to state laws governing pour-over wills and receptacle trusts, the National Conference of Commissioners on Uniform State Laws (NCCDSL)4 promulgated the Uniform Testamentary Additions to Trusts Act in 1960. Three decades later NCCUSL revised the 1960 Act (i) to clarify certain aspects of the original, and (ii) to increase its intent-effectuating characteristics. The revision was promulgated as the Uniform Testamentary Additions to Trusts Act (1991), hereafter referred to as UTATA.5 At the present time, 45 states and the District of Columbia have adopted one of these two Acts. In addition to Virginia, the other non-enacting states are Louisiana, Missouri, Nebraska, and Wisconsin.

Comparing UTATA to Section 64.1-73 Form. It may come as a surprise that there are only three differences between the substance of present Virginia law and UTATA. This might be due to the form of Section 64.1-73 which, as a consequence of having been amended ten times since its enactment, has evolved (degenerated?) into a rather awkward, two-page statute of 1,234 words.6 UTATA, on the other hand, resolves the same issues more efficiently in only 487 words (including its Virginia modifications).

An out-of-state attorney from any of the 46 Uniform Act jurisdictions who is considering an estate plan involving a bequest or devise to a receptacle trust in Virginia is likely to assume, upon seeing our statute's length and complexity, that it must be significantly different from whichever Uniform Act happens to be in force in his state. Otherwise, why the length? Moreover, the fact that Virginia has not enacted either version of the Uniform Act would appear to provide corroboration for this conclusion. Of course a study of our two-page statute would show this out-of-state attorney that his initial assumption is in fact erroneous. However, the nature of the practice will not always justify the billable time that would be required to make this analysis in the typical case. Instead, the out-of-state attorney will often suggest some other alternative to the client, who might end up with a "second best" estate plan. A comparable problem is presented to the Virginia attorney who does not specialize in estate planning but who, from time to time, is presented with a situation where a pour-over might seem to be the preferred approach to reach a given objective. And so, the Virginia attorney goes to the code to "check it out" and there finds the two-page statute in question. However, as estate planning is only an incidental part of this attorney's practice, he, like the out-of-state attorney will not be able to understand the intricacies of Section 64.1-73 without a certain amount of study. And again, the economics of law practice are often going to preclude the costs of that study being charged to the present client or being absorbed by the attorney. The net result is the likely possibility of another "second best" estate plan for the client.

One immediate benefit of adopting UTATA's shorter and simpler language would be the elimination of the negative presentation that Section 64.1-73 made to both of these attorneys. In addition, it should be noted that there really are no authoritative resources to which an attorney might turn for an exposition of Virginia's pour-over statute if, for whatever reason, time and billing considerations are not a precluding factor. On the other hand, NCCUSL always provides official commentaries to assist the reader in understanding and applying its uniform acts. Moreover, because of the national importance attached to acts that receive wide-spread adoption, they are always the subject of expository and planning commentary in the national estate planning literature. Accordingly, a strong case can be made for Virginia's adoption of UTATA for at least three non-substantive reasons - uniformity, relative simplicity and the ready availability of authoritative educational and planning resources.

Comparing UTATA to Section 64.1-73 Substance. As noted previously, Virginia's pour over statute provides for the same results found in UTATA except in three instances. It simply takes Section 64.1-73 almost three times the length of UTATA to state these results. The three instances where the results under UTATA differ from those under present Virginia law,. which are all categorized by NCCUSL as being "intent-effectuating improvements," are described in the following three paragraphs.

First, Virginia law presently provides that, for a valid pour-over to an inter vivos trust, the inter vivos trust document must have been executed "before or concurrently with" the testator's pour-over will. UTATA, on the other hand, would allow a pour-over into an inter vivos trust that is executed "before, concurrently with, or after (emphasis added)" the testator's pour-over will. Although sequence of execution is not a major matter in the typical case, it can be the controlling factor in a given case, determining whether or not the testator's estate plan will succeed or fai1.7 It is submitted, however, that the decision of success or failure should never be based on any such trivial concern. Nevertheless, anecdotal evidence indicates that there continue to be instances in which, due to inadvertence or design, the receptacle trust document is not executed "before or contemporaneously with" the will and in which, then, the intended pour-over must clearly fail under present law. UTATA's intent-effectuating rule, which would save the testator's estate plan in these cases, is clearly the better one and thus should be adopted in Virginia.

Second, Virginia law presently provides that a pour-over "shall not be valid should the entire trust not be operative for any reason at the testator's death" UTATA, on the other hand, provides that "(u)nless the testator's will provides otherwise (emphasis added), a revocation or termination of the trust before the testator's death causes the devise or bequest to lapse." Thus, instead of governing this situation with an absolute rule of law mandating failure, as Virginia presently does, UTATA provides for a default rule-of invalidity that can be changed by the testator. It can be conceded, arguendo, that the testator may typically desire the pour-over to lapse if the receptacle trust does not exist to receive it. But to say "typically" is to recognize that there will be a certain number of instances where such a failure would definitely frustrate a testator's legitimate intent. Yet every such pour-over is condemned by Virginia's absolute rule. Suppose a testator, in a given case (probably one making a pour-over into a trust created by another), expressly provides that the intended pour-over shall be effective notwithstanding the non-existence of the receptacle trust at testator's death.8 It is submitted that no practical or policy reason can be offered for not honoring the testator's intent in such a case, and thus Virginia's present absolute prohibition ought to be eliminated. UTATA's intent-effectuating rule is the better one and should be adopted in Virginia.

Third, in regard to post-death amendments, Virginia law presently provides for a pour-over to be governed (i) in accordance with the receptacle trust's terms as of the testator's death, or (ii) "if the testator expressly so specifies in his will, and only in such event, as such terms are amended after the death of the testator." Under UTATA, on the other hand, a pour-over is governed in accordance with post-death amendments to the receptacle trust's terms "unless the testator's will provides otherwise." Thus, under both rules, the testator's intent regarding post-death amendments will control - if that intent is stated in his will. However, if the will is silent on the issue of intent, Virginia's default rule rejects post-death amendments while UTATA's default rule honors them. The question thus arises: Which default rule is most likely to be consistent with the testator's intent, and in the best interests of his estate plan, in those cases where his will provides no guidance? A major factor leading the writer to answer "UTATA" is the recognition that more and more estate planners are drafting trusts that last for longer and longer periods of time. In addition to this development being driven by the age-old desire for control, we now see (i) the restraining aspect of the common law Rule Against Perpetuities being reduced in some states and completely abandoned in others,9 and (ii) increasing client wealth leading to a corresponding increase in sheltering the generation-skipping transfer tax exemption for as long as possible.10 One thing is certain to occur as we deal with these longer duration trusts - change. There will be changes in tax law, environmental law, the stock market, the needs of beneficiaries, etc., that will have a continuing impact on the trust's operation within the framework of the testator's intent. For this reason, an increasing number of estate planners now include a mechanism in some inter vivos trusts to provide for their continuing amendability after the settlor's death. In these cases, as well as those in which the need was not foreseen by the drafter but a post-death modification of the receptacle trust has been accomplished by other means, it is submitted that the typical testator would want the pour-over amount to be governed by the same modification. And such is the default rule of UTATA. Thus, for the third time, UTATA's intent-effectuating rule is the better one and should be adopted in Virginia.

Out-of-State Bank as Trustee of Receptacle Trust. Although Virginia law concerning a nonresident individual serving as a sole trustee of a receptacle trust has evolved from a pre-1991 absolute prohibition to a 1996 open-door policy,11 the absolute prohibition against an out-of-state bank serving in such a capacity continues in full force. Why this disparity? It certainly cannot be said to be for the protection of the beneficiaries, or to increase the likelihood that the decedent's intent might be more accurately honored because, on balance, the out-of state professional fiduciary is more likely to do the right thing more often than would the out-of-state layman. The only apparent reason for the prohibition against the out-of-state banks has been the desire to protect Virginia banks from any outside competition. Assuming that this was defensible public policy at one time, this basis has been substantially eliminated in -light of the recent subordinate coupling of most major Virginia banks with foreign ones. Moreover, the prohibition against an out-of-state bank serving as the trustee of a receptacle trust can be easily circumvented if such be the desire of the parties. The writer has been advised of the practice followed by one out-of-state bank, in some cases, of having the trust documents name one of the bank's trust officers (resident in northern Virginia) as the trustee, who will then qualify and serve as the institution's puppet. A far simpler approach, and the one that makes all foreign banks eligible, is to name a Virginia resident as trustee of the receptacle trust who, following the receipt of the pour-over and the estate's final accounting, will simply resign and appoint the originally intended out-of-state bank as successor trustee (pursuant to a very standard and innocently appearing clause in the trust). There are a reasonable number of cases where all of a Virginian's beneficiaries live out of state, and it will often make sense for such beneficiaries' trusts to be administered in their locality. It is submitted that, in these cases, no legitimate argument can be made to support a rule that allows a non-resident individual to serve as trustee of the receptacle trust and yet denies Virginians the privilege of using an out-of-state bank.

Eliminating the Surety Requirement. When Virginia's absolute prohibition against any nonresident individual serving as a sole personal representative was first relaxed in 1983, two requirements were imposed upon the limited group of the individuals who were granted permission to serve. First, the non-resident individual must appoint a resident agent for receipt of process in estate related matters. Second, the non-resident must post bond with surety, notwithstanding any language in the will purporting to waive the surety requirement.12 When the prohibition against making a pour-over to a receptacle trust that had a non-resident serving as sole trustee was first relaxed in 1991, these same two requirements were also imposed upon the nonresident individuals who were authorized to serve.

Although this parallel treatment undoubtedly seemed logical at the time, there was a significant flaw in this logic regarding the imposition of the mandatory surety requirement, and this surety issue has also raised some unanswerable questions in the offices of both the Clerk of Court and the Commissioner of Accounts.

A non-exclusive listing of these problems might begin from the standpoint of the clerk, who must set the amount of the trustee's bond and take the surety. On what amount is the bond to be based? On the value of the entire trust or only the value of the pour-over?13 It appears that the clerk must require the submission of at least a certified copy of the inter vivos trust in order to verify the required identification of trust, trustee, power to sell real estate, etc. What, then, does the clerk do with this copy of the inter vivos trust? Clearly the clerk must preserve it as a record to support his or her actions, but does the clerk record it and thereby destroy the privacy that was one of the reasons for using the inter vivos trust in the first place? If not, what does the clerk do? And, in either case, what is the authority for the clerk's action? After the initial bond and surety is set in the clerk's office, how is its continuing adequacy monitored? The Commissioner of Accounts is charged with this task in connection with all fiduciaries who are required to file annual accountings. But there is no requirement that the trustee of a receptacle trust make any accounting to the commissioner. Or, is there now an implied requirement for this trustee to make some kind of "submission" to the Commissioner of Accounts in order that the commissioner might ensure the continuing adequacy of the trustee's bond and surety? And, if the commissioner is supposed to verify adequacy of bond and surety, does the commissioner file a copy of the "submission" and a report of his actions with the court in the same way he does with an accounting? If so, won't this be automatically recorded by the clerk, thereby again breaching the intended privacy? Although these concerns vary in terms of importance, they add up to a very significant problem that appears to have only three possible solutions: (1) legislation directly addressing each issue; (2) retreating to the pre-1991 rule prohibiting pour-overs where the sole trustee is a non-resident; or {3} eliminating the bond and surety requirement for non-resident trustees of receptacle trusts. In addition to the obvious negatives associated with possible solutions (1) and (2), a further reality that must be recognized in connection with both is the simple negation mechanism previously discussed in connection with out-of-state banks.14 Thus, it is submitted that solution (3) - elimination of the bond and surety requirement - is the correct choice, and this is particularly so in light of the discussion in the following paragraph.

In examining the original reason for imposing a mandatory surety requirement on non-resident personal representatives in 1983, and on testamentary trustees in 1986, one discovers that this imposition was designed to help the Commissioner of Accounts force recalcitrant fiduciaries to comply with their inventory and accounting requirements. Although the commissioner has statutory remedies that are readily enforceable against Virginia fiduciaries, his office has no effective authority over a non-resident who takes the assets out of state and remains there. Thus, the requirement of the bond secured with nonwaivable surety was created as a device to insure that a non-resident serving as a sole personal representative or serving as a sole testamentary trustee would comply with the inventory and accounting requirements. This makes sense. But there are no such inventory and accounting requirements imposed on the trustee of an inter vivos trust.- Thus, the extension of the compliance device (bond and surety) to a situation where there is nothing with which to comply, does not make any sense and ought to be abolished.15

Conclusion. The forty years that have passed since Virginia enacted its initial pour-over legislation have witnessed an important estate planning tool become less "user-friendly" to attorneys and less responsive to the needs of their clients. The replacement of our present statute with UTATA would give us (i) relative simplicity in all cases, (ii) uniformity in multi-state cases, (iii) ready availability of authoritative educational and planning resources, and (iv) an increase in our intent-effectuating estate planning rules. Attached to this article is a draft for legislation that, for these reasons, would adopt UTATA, and would also, for the reasons discussed in the' text, (1) eliminate the flawed requirement that a non-resident serving as sole trustee of a receptacle trust post bond with surety, and (2) abolish the superficial prohibition against out-of-state banks serving as trustees of receptacle trustS.16 On October 17, 1998, the Virginia Bar Association's Executive Committee, acting at the request of the VBA's Section on Wills, Trusts, and Estates, voted to make this proposal a part of the Association's legislative package for the 1999 Session of the Virginia General Assembly.

PROPOSED POUR-OVER LEGISLATION

§ 64.1-73.1. Uniform Testamentary Additions to Trusts Act (1991). - A. A will may validly devise or bequeath property (including by the exercise of a power of appointment) to the trustee of a trust established or to be established (i) during the testator's lifetime by the testator, by the testator and some other person, or by some other person including a funded or unfunded life insurance trust, although the settlor has reserved any or all rights of ownership of the insurance contracts, or (ii) at the testator's death by the testator's devise or bequest to the trustee, if the trust is identified in the testator's will and its terms are set forth in a written instrument, other than a will, executed before, concurrently with, or after the execution of the testator's will or in another individual's will if that other individual has predeceased the testator, regardless of the existence, size, or character of the corpus of the trust. The devise or bequest is not invalid because the trust is amendable or revocable, or because the trust was amended after the execution of the will or the testator's death.

B. Unless the testator's will provides otherwise, property devised or bequeathed to a trust described in subsection A is not held under a testamentary trust of the testator but it becomes a part of the trust to which it is devised or bequeathed, and must be administered and disposed of in accordance with the provisions of the governing instrument setting forth the terms of the trust, including any amendments thereto made before or after the testator's death.

C. Unless the testator's will provides otherwise, a revocation or termination of the trust before the testator's death causes the devise or bequest to lapse.

D. Unless at least one trustee of the trust is an individual resident of this Commonwealth, or an entity authorized to do a trust business in this Commonwealth, at the time the devise or bequest is to be distributed to the trust, the testator's personal representative shall not make any distribution to the trust until each non-resident individual and/or entity files with the Clerk of the Circuit Court of the jurisdiction wherein the testator's will was admitted to probate, a consent in writing that service of process in any action against the trustee or any other notice with respect to administration of the trust in the trustee's charge, may be by service upon a resident of this Commonwealth at such address as the trustee may appoint in the written instrument filed with the clerk. No further requirement shall be imposed upon any non-resident individual or entity as a condition to receiving the devise or bequest.

E. This section applies to a will of a testator who dies after June 30, 1999, and it shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this section among states enacting it.

ENDNOTES

1. Professor of Law, University of Richmond, Virginia. This article was drafted while the writer was serving as chair of a committee studying the Uniform Testamentary Additions to Trusts Act (1991) for the Virginia Bar Association's Section on Wills, Trusts and Estates. The other members of this committee were C. Daniel Stevens, of Christian & Barton, L.L.P., and Harry J. Warthen, III, of Hunton & Williams. The writer is indebted to these colleagues for their thoughtful comments and suggestions during the committee's study; however, the opinions expressed in this article, and any errors found herein, are the sole responsibility of the writer.

2. Neill H. Alford, Jr., Annual Survey of Virginia Law, 44. Va. L. Rev. 1405, 1406, at footnote 2 (1958).

3. This ease of task will also often result in better drafting and lower overall transaction costs, as well as increasing the number of options available to the client.

4. The writer serves as a Virginia Commissioner to the National Conference of Commissioners on Uniform State Laws.

5. UTATA is also found as Section 2-511 of the Uniform Probate Code (1990), and as Section 2-511 of the Uniform Act on Intestacy, Wills, and Donative Transfers.

6. It's crowning master piece is one sentence that contains 201 words.

7. For an early discussion of the sequencing issue, in the context of a pour-over to an insurance trust, see Ellsworth Wiltshire, Pour-Over Devise or Bequest to Life Insurance Trust - Sequence of Execution of Papers, 1 University of Richmond Law Notes 221 (1961).

8. In such a case, under UTATA, the attempted pour-over would be held in a trust governed by the terms of the receptacle trust (now revoked as to its original corpus), on principles paralleling the familiar concept of incorporation by reference.

9. House Bill No. 645, designed to eliminate the Rule Against Perpetuities in some cases, was introduced into the 1998 Session of the Virginia General Assembly, and carried over to the 1999 Session.

10. See the discussions in Thomas H. Foye, Using South Dakota Law for Perpetual Trusts, 12 Probate&Property 17 (January/February 1998); and Douglas J. Blattmachr and Richard W. Hompesch II, Alaska vs. Delaware: Heavyweight Competition in New Trust Laws, 12 Probate & Property 32 (January/February 1998).

11. For a discussion of this evolution, see J. Rodney Johnson, Annual Survey of Virginia Law: Wills, Trusts, and Estates, 31 U. Rich. L. Rev. 1249 (1997), and sources therein cited.

12. For a discussion of this development, see J. Rodney Johnson, Annual Survey of Virginia Law: Wills, Trusts, and Estates, 31 U. Rich. L. Rev. 1249 (1997), and sources therein cited.

13. The answer to this question is not as obvious as it might seem, because § 64.1-73{A)(2) provides in part that "(w)here any nonresident qualifies (emphasis added) pursuant to this paragraph, bond with surety shall be required ..." The argument is made that if the trustee of the receptacle trust must qualify before the clerk then, as in all other cases where a fiduciary qualifies before the clerk, the clerk must set bond based upon the entire amount under the fiduciary's control.

14. If, for instance, Virginia goes back to the pre-199I prohibition rule, its requirements can be easily avoided by having a resident as the initial inter-vivos trustee who will, after the pour-over distribution has been received and the decedent's estate has been closed, resign in favor of the intended non-resident.

15. The other requirement presently imposed on the non-resident serving as sole trustee of a receptacle trust is appointing an agent to receive service of process in trust-related litigation brought in Virginia. This is a good provision, for obvious reasons, and thus it is preserved in the attached legislative proposal.

16. The entire proposal is drafted to be effective on a prospective basis, with present Section 64.1-73 being retained to govern pre-enactment pour-overs.