Probate and Estate Planning
EPIC 386 PA 1998-Rules of Construction and Interpretation for Transfers Upon Death
The Estate and Protected Individuals Code (EPIC), 386 PA 1998, introduces rules of construction and interpretation, applicable to all documents causing a transfer of property upon the death of an individual, that differ from those under which practitioners and courts have functioned for several years. Lawyers would be remiss if they did not take the time to review the rules established in EPIC. This article is to acquaint lawyers with some of the rules of construction and interpretation applicable to all governing instruments and those that apply only to wills.
RULES APPLICABLE TO ALL GOVERNING INSTRUMENTS
First, I would like to review the rules as they apply to donative dispositions in all governing instruments. The general rules are found in Article II, Part 7, and unless there is a contrary intention expressed in the instrument, these rules control the construction and interpretation of a governing instrument.1 ‘‘Governing instrument’’ is defined as:
[A] deed; will; trust; insurance or annuity policy; account with POD designation; security registered in beneficiary form (TOD); pension, profit-sharing, retirement, or similar benefit plan; instrument creating or exercising a power of appointment or a power of attorney; or dispositive, appointive, or nominative instrument of any similar type.2 (The term ‘‘trust’’ in the definition is not restricted to the revocable trusts that are commonly used in estate planning.)
The areas covered under the general rules set forth in Article II, Part 7 are survivorship, choice of law, relationships and adopted individuals, powers of appointment, and substitute takers or anti-lapse.
Survivorship By 120 Hours
EPIC expands the 120 survivorship rule to cover all events, governing instruments, and co-ownerships. Under the Revised Probate Code (RPC), 642 PA 1978, the rule was applicable only to wills.3 Under EPIC, it must be established by clear and convincing evidence that an individual survived an event, including the death of another individual, by 120 hours or that individual will be considered to have predeceased the event.4
Further, if property is co-owned, it must be shown by clear and convincing evidence that a co-owner survived the decedent owner by 120 hours. If this fact is not established by clear and convincing evidence, one-half of the co-owned property is treated as if one of the co-owners survived by 120 hours, and the remaining half is treated as if the other co-owner survived by 120 hours. Where there are more than two co-owners, and the evidence fails, the property is distributed on a pro rata basis according to the number of owners (i.e., three owners = 1/3 each).5 Survival by 120 hours is not required if any of the following apply:
•The language of the governing instrument deals explicitly with simultaneous deaths, or deaths in a common disaster, and the language is operable under the facts of the particular case.
•The governing instrument expressly indicates that a person need not survive by a specific time, or if the governing instrument provides a specific time other than the 120 hours. The survival must still be proved by clear and convincing evidence.
•If the imposition of the 120 hour survival rule would cause a nonvested property interest or a power of appointment to fail to qualify under the uniform statutory rule against perpetuities.
•The application of the 120 hour survival requirement to multiple governing instruments would result in an unintended failure or duplication of a disposition. Again, the survival must be established by clear and convincing evidence.6
Choice of Law
The governing instrument may include a choice of law provision that will determine the instrument’s meaning and legal effect. However, in the case of the will, and in certain instances in which the trust was revocable prior to death, the choice of law will not be recognized if the law of the choice of law state is contrary to the provisions relating to elective share, exempt property and allowances, or another public policy of this state that would be applicable to the governing instrument. In other words, one cannot eliminate these elections by application of a choice of law provision.7
Because the ability to include a choice of law provision in the governing instrument and the rules governing substitute takers apply to all governing instruments as defined earlier, it is important that the lawyer draw the law to the attention of the client and suggest that he or she review the various provisions in life insurance policies and other governing instruments that frequently contain a choice of law provision as part of the company’s standard terms.
Relationships and Adopted Individuals
Terms such as uncles, aunts, nieces, or nephews are construed to include only those who are related by blood and to exclude those who are related by affinity. If a client wishes to include his or her nieces and nephews who are the blood nieces and nephews of the client’s spouse, a statement to specifically include those individuals must be made in the governing instrument. Terms that do not differentiate by half blood, such as brothers, sisters, nieces, or nephews, will be construed to include both the whole blood relative and the half blood relative.8
Just as is the case in the RPC, adopted children and children born out of wedlock are to be included in class gifts and other terms of relationship in accordance with the rules for intestate succession. However, under EPIC, the rule is extended to all governing instruments.9
EPIC goes further to address the situation when the transferor is not the natural or adopting parent of an individual but makes a disposition such as ‘‘To John Doe and the children of John Doe.’’ The reference to ‘‘children of John Doe’’ in this disposition would include only natural children of John Doe who lived with him while a minor, or lived with his parents, brother, sister, spouse, or surviving spouse while a minor, and to adopted children of John Doe who, as a minor, either before or after the adoption, lived in the household of John Doe.10
These provisions are intended to eliminate those out-of-wedlock children who did not live with their parent as minors, or with the designated relatives of the parent, and adopted children who were adopted as adults. While the out-of-wedlock child and the adopted child of the transferor are included in the term ‘‘child’’ or ‘‘children’’ regardless of the relationship with the transferor, there is no desire to extend the same relationship to those children of someone other than the transferor. This is particularly important when you consider the rules governing a substitute taker.
Powers of Appointment
Powers of appointment are to be construed so as to prevent an inadvertent exercise of the power. Therefore, when a power of appointment expressly requires that the power be exercised by reference, an express reference or a specific reference to the power or its source, the power can be exercised only by the donee making reference to the particular power or to the creating instrument. A general statement that the donee exercises all powers of appointment granted to him or her will not accomplish the exercise of a power of appointment.
Article II, Part 7 sets forth the rules for a substitute taker or, as the concept is frequently referred to, the anti-lapse rules. While it may seem repetitious, remember these rules apply to all governing instruments. The rules creating a substitute taker apply only to beneficiary designations where the beneficiary is a grandparent, a grandparent’s descendant, or the decedent’s step-child and not to the spouse of the transferor.11 A step-child is defined as a child of the decedent’s surviving, deceased, or former spouse, and not of the decedent.12
If the beneficiary fails to survive, a substitute gift is created in the descendants of the beneficiary. If a member of a designated class fails to survive, a substitute gift is created in the descendants of that member. The provision for a class designation does not apply to class gifts that are in the form of ‘‘issue,’’ ‘‘descendants,’’ ‘‘heirs of the body,’’ ‘‘heirs,’’ ‘‘next of kin,’’ ‘‘relatives,’’ or ‘‘family.’’
If the transferor does not wish to have the gift pass to the descendants of the named beneficiary, there must be specific language in the governing instrument indicating that the transferor does not wish to have the provisions applicable. Unfortunately, wording such as ‘‘if he survives me’’ or to ‘‘my surviving children,’’ are not, in the absence of additional evidence, a sufficient indication of an intent contrary to the application of the provisions.13
The comments to the substitute taker provisions in the Uniform Probate Code suggest the language ‘‘to John Doe, and not to his descendants’’ would be sufficient to avoid the application of the substitute taker rules. The lawyer must pursue the question of the client’s desired distribution if a particular beneficiary or member of a class of beneficiaries does not survive.
RULES APPLICABLE ONLY TO WILLS
In addition to the rules of Article II, Part 7 discussed above, EPIC contains specific rules applicable only to wills. The rules governing the execution and validity of the will are in Article II, Part 5 of EPIC, and the rules of interpretation and construction are set forth in Article II, Part 6 of EPIC.
Execution and Validity of the Will
The rule that the testator must be at least age 18 and of sound mind continues in EPIC.14 Unless one of the exceptions is applicable, a will is valid only if it meets all of the following:
• The will is in writing.
• The will is signed by the testator or in the testator’s name by someone in the testator’s conscious presence and by the testator’s direction.
• The will is signed by two individuals, each of whom signed within a reasonable time after he or she witnessed either the signing of the will or the testator’s acknowledgment of the signature. It should be noted that this is a change from the former rule that said the witnesses had to execute the will in the presence of the testator as well as in the presence of each other.
EPIC changes the rule that a devisee may not be a witness to a will without destroying his or her gift in the will. Any individual generally competent to be a witness may act as a witness to a will.15
A new provision appears in EPIC that allows a document or writing that is not otherwise executed with all the formalities of a will to be treated as being validly executed. The proponent of the document or writing must establish, by clear and convincing evidence, that the decedent intended the document or writing to constitute either the decedent’s will, a partial or complete revocation of the will, the addition or alteration of the decedent’s will, or a partial or complete revisal of the formerly revoked will.16
A significant addition to EPIC is the formality of creating a self-proved will. The self-proved will can be admitted to probate without the testimony of any subscribing witnesses. The self-proved will speaks only to the validity of the signature of the testator. It does not affect the ability of one to challenge the will on other grounds such as competency and undue influence.
The language for the self-proved will is set forth in Section 2504 and the lawyer is advised to use the appropriate statutory language. In order to have a valid self-proved will, it is necessary to have two witnesses and a third party who is a notary execute the affidavits. It is only necessary for all to execute the will once. Even though the self-proved will requires an additional person for execution, the usefulness of the self-proved will outweighs this inconvenience. Remember, a will that is not a self-proved will, but is otherwise validly executed, is a valid will; however, witnesses may be required if there is a challenge to the signature of the decedent.
The allowance for the incorporation of a list disposing of items of tangible personal property continues in EPIC. The list must be signed by the testator and must describe the items and devisees with reasonable certainty.17 The list does not have to be witnessed. While it is not a requirement, I recommend that the list be dated. This may be valuable if there is more than one list with repetitive devises.
The statutory will continues in EPIC. The Michigan Statutory Will, as published in EPIC, is not self-proved but can be made self-proved by simply attaching the affidavit provided for under Section 2504(2), which makes a previously made will self-proved.
Substitute Taker Under a Will
The rules of construction and interpretation, which are applicable only to wills, contain the same provisions for the creation of a substitute taker if a devisee fails to survive the testator. However, the rules go further and provide that, unless the language of a power of appointment expressly excludes the substitution, a power to the substitute taker is created if the appointee fails to survive. This is the case regardless of whether the substitute is an object of the power.18 In the case where there is no substitute taker for a gift in a will, the devise becomes a part of the residue.19
Therefore, because the rules for substitute takers do not apply to a gift to the testator’s spouse, if the spouse fails to survive, the gift will become part of the residue. Further, if there is more than one residual beneficiary and the substitute gift rules do not apply to the beneficiaries, upon the failure of a beneficiary to survive the testator the gift shall go to the remaining beneficiaries of the residue.20
EPIC, similar to the RPC, addresses the situation where there has been a devise of certain securities and, prior to the death of the testator, there are increased securities due to stock splits, reinvestment of dividends, exchange of stock, or some other increase directly related to the original stock devised in the will. EPIC provides that the additional stock is part of the original devise. However, EPIC clarifies the situation where cash has been distributed prior to the death of the testator, with respect to the specifically devised securities, and provides that the cash is not part of the devise.21
EPIC continues the theory of nonademption of specific devises found in the RPC but carries out the new theory of the ‘‘intent’’ of the testator. Under the old theory, or the ‘‘identity’’ theory found in the RPC, if the specific property could not be identified, then the ademption of the devise occurred. Section 2606 (e) and (f) reflect the new theory and provide that the real property or tangible personal property owned by the testator at death, which was acquired as a replacement for specifically devised real property or tangible personal property, was the property of the specific devisee.
Further, unless the facts and circumstances indicate that the testator intended the ademption, or that the ademption is consistent with the testator’s manifested plan of distribution, the value of the specifically devised property is the property of the specific devisee to the extent the specific property is not in the estate and its value or replacement is not given to the specific devisee under some other provision of the section.
Provisions for Particular Types of Property
EPIC settles the question of what happens when there is a specific devise that is subject to a mortgage or other secured indebtedness and provides that the property is transferred subject to the mortgage or indebtedness regardless of whether the will contains a general directive that all debts be paid. This also applies to a transfer resulting from the exercise of a power of appointment, which is the equivalent to a specific devise.22
Only in the event that any of the following are true will property transferred to a devisee during the life of the testator be treated as satisfaction of a devise:
•The will provides for a deduction of the gift.
•The testator declared in a contemporaneous writing that the gift is in satisfaction of the devise or that its value is to be deducted from the value of the devise.
•The devisee acknowledges in writing that the gift is in satisfaction of the devise or that its value is to be deducted from the value of the devise.23
OTHER RULES THAT AFFECT THE DRAFTING OF WILLS AND TRUSTS
In addition to the rules discussed above, which are under titles specifically addressing wills and other governing instruments, there are provisions throughout EPIC the lawyer needs to become familiar with as they affect the way in which wills and trusts may be drafted.
EPIC provides an entirely new set of rules relative to the apportionment of estate taxes.24 If the client does not wish taxes to be apportioned according to the statute, the client must make that intent clear in the governing instrument. The most significant change from current Michigan law is that the will is not the only instrument in which the provisions regarding tax apportionment may appear. However, a general direction in the will regarding tax apportionment prevails if there is no other provision and also prevails if there is a conflict in the direction in any other document. The will remains the trump card with regard to tax apportionment.
The scheme for apportionment of taxes provided in EPIC does not apply to tax apportionment controlled by federal law such as life insurance beneficiaries, power of appointment property, QTIP property, retained interests, and generation-skipping transfer taxes.
Repeal of Childress
In Re Childress Trust, 486 NW2d 141; 194 Mich App 319 (1992) held that the term ‘‘presently vested beneficiary,’’ found in MCL 700.814, required the trustee to keep all beneficiaries informed, including contingent beneficiaries. The grantor may designate in the trust instrument who will receive annual accountings from the trustee.25 If there is not specific direction, the trustee must follow the directive in Section 7303 with regard to which beneficiaries will receive information and accountings. However, it should be kept in mind that under EPIC a beneficiary who does not receive an account may assert his or her claims at a later date when the beneficiary finally receives an account, unless the claim is barred under Section 7307.
Distribution Under Right of Representation
A significant change from current law is the application of the term ‘‘representation’’ in EPIC. The rule set forth in Section 2103 applies to intestate succession26 and substitute gifts,27 as well as to the language of any document written after April 1, 2000, providing for distribution by right of representation. Unless the governing instrument provides otherwise, division of the asset at the first generation will be equally among the members of that generation whether living or deceased.
For example, if there are five children, the share would be divided into five equal shares. However, if more than one of the children fails to survive the decedent, the shares of all deceased children will be divided equally among the surviving grandchildren who are children of the deceased children. For example, where there are five children, and child #1 has two children, child #2 has three children, child #3 has one child, child #4 has two children, and child #5 has one child, and children #1, #3 and #5 fail to survive, the three shares will be divided equally among four grandchildren rather than have each of the deceased child’s share pass to his or her children for equal division among only his or her children. This is a per capita division at the second and subsequent generations when more than one of the earlier generation fail to survive the decedent.
A lawyer needs to know the rules discussed in this article and needs to discuss these issues with the client. Does the client understand what distribution will occur when the term ‘‘by right of representation’’ is applied? Does the client know what will happen if a beneficiary does not survive? Did the client think about this and will the desired result occur under the rules in EPIC? All too often, clients are faced with language they read but do not understand. An explanation of the default provisions of EPIC will cause the client to give thought to the terms of the will beyond the desire to leave equally to his or her children and will result in a well-considered estate plan.
1. Sec. 2701.
2. Sec. 1104(j).
3. Sec. 133.
4. Sec. 2701(1) and 2701(2).
5. Sec. 2702(3).
6. Sec. 2702(4).
7. Sec. 2705.
8. Sec. 2707.
9. Sec. 2702(1).
10. Sec. 2707(2) and (3).
11. Sec. 2709.
12. Sec. 2708(e).
13. Sec. 2709(c).
14. Sec. 2501.
15. Sec. 2505.
16. Sec. 2503.
17. Sec. 2513.
18. Sec. 3603(1)(e).
19. Sec. 2604.
20. Sec. 2604(2).
21. Sec. 2605.
22. Sec. 2607.
23. Sec. 2608.
24. Sec. 3920-3923.
25. Sec. 7303.
26. Sec. 2103.
27. Sec. 2603 and 2709.