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P R O B A T E & P R O P E R T Y
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Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409, gwb@ProfessorBeyer.com. Contributors include: Dave L. Cornfeld, Claire G. Hargrove, Christopher L. Harris, and Prof. William P. LaPiana.
Keeping Current—Probate offers a look at selected recent cases, rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
ADOPTION: Exclusion of adopted beneficiaries does not apply to individuals born as the result of gestational surrogacy. In 1959, the settlor created New York trusts for the issue of his children that expressly stated that “adoptions shall not be recognized.” One of the settlor’s daughters and her husband became parents of fraternal twins through a surrogacy arrangement under which an anonymously donated ovum was fertilized with the husband’s sperm and carried to term by an unrelated surrogate mother. The agreement was governed by California law, and a California court subsequently issued a judgment of paternal relationship establishing the daughter and her husband as the parents of the twins. The trustees petitioned for construction of the trust. The court in In re Doe, 7 Misc. 3d 352 (N.Y. Sur. Ct. 2005), held that the settlor did not intend to extend the exclusion of “adoptions” to the assisted reproduction techniques at issue and that the California paternity order was entitled to full faith and credit in New York.
CONDITIONAL WILL: Will conditioned on dying during heart surgery not effective because death occurred later. The testator’s will stated that he made the dispositions in the will “in case” he died during pending heart surgery. The testator survived the operation and died sometime after the surgery in his sister’s home. The court in In re Estate of Perez, 155 S.W.3d 599 (Tex. App. 2004), held that the will was conditional and that the testator intended it to be effective only if the testator died during the surgery.
DOMESTIC PARTNERSHIP: New Jersey statute gives benefits of tenancy by entirety to same-sex couple. A same-sex couple residing in New Jersey entered into a marriage in Canada, a civil union in Vermont, and became registered domestic partners under New Jersey law. The partners transferred their home into a tenancy by the entirety from a joint tenancy with right of survivorship after the marriage and civil union but before the registration. They then claimed a 100% exemption from property tax based on the total disability of the veteran partner. The parties had been receiving a 50% exemption based on the veteran’s proportionate ownership of the joint tenancy. The court in Hennefeld v. Township of Montclair, No. 007682–2004, 2005 WL 646650 (N.J. Tax Ct. Mar. 15, 2005), held that the couple could not hold the residence in a tenancy by the entirety because comity does not require New Jersey to recognize the Canadian marriage or the Vermont civil union. The couple is entitled, however, to the 100% exemption under the New Jersey domestic partnership act from the date of their registration as domestic partners.
DOMESTIC PARTNERSHIP: Survivor of Vermont civil union may maintain wrongful death action under New York law. The court in Langan v. St. Vincent’s Hosp. of N.Y., 765 N.Y.S.2d 411 (N.Y. Sup. Ct. 2003), held that the survivor of a Vermont civil union may maintain a wrongful death action on the same basis as a spouse because the Vermont civil union is entitled to recognition in New York under interstate comity.
ESTATE TAX: No pick-up tax owed if other credits eliminate federal estate tax. In Comptroller of the Treasury v. Phillips, 865 A.2d 590 (Md. 2005), the court determined that an estate whose federal tax liability was completely eliminated by the credit for tax on prior transfers under Code § 2013 does not owe estate tax to Maryland. The state’s pick-up tax is limited to collecting monies that would otherwise have been paid to the federal government.
ESTATE TAX: Retroactive application of decoupling is manifestly unjust. New Jersey decoupled its estate tax from the federal estate tax credit effective July 1, 2002, applicable to estates of decedents dying after December 31, 2001. In Oberhand v. Director, Div. of Taxation, 22 N.J. Tax 55 (2005), the court held that the legislation cannot apply retroactively because, although such application does not violate due process, it would be “manifestly unjust” under well-established New Jersey case law.
ESTATE TAX: State pick-up tax must be linked to actual federal law. In 1981, the voters of Washington State passed an initiative limiting the state estate tax to the amount of the state death tax credit. The result of the initiative was codified. In 2001, the relevant statute was amended to define references to the Internal Revenue Code as referring to the Code as amended as of January 1, 2001. This statute has not been subsequently amended. The court in Estate of Hemphill v. State, Department of Revenue (Estate Tax), 105 P.3d 391 (Wash. 2005), held that the limitation of the tax to the amount of the federal credit requires the tax to be computed using the credit available for federal purposes. Accordingly, as of January 1, 2005, Washington has no state estate tax because the federal credit was completely phased out as of that date.
FIDUCIARY DUTY: Trustee surcharged for gross negligence in selecting investments. Settlor created a revocable trust for the benefit of herself and her spouse for their lives, terminating on the death of the second to die with distribution to their issue. The trust contained an exculpatory clause immunizing the trustee from liability for all but actual fraud, gross negligence, or willful misconduct. The trust investments were highly concentrated in the stock of the corporate trustee. In In re Scheidmantel, 868 A.2d 464 (Pa. Super. Ct. 2005), the court upheld the lower court’s surcharge of the trustee. The trustee had been grossly negligent in diversifying the trust investments to increase the potential for growth of capital when the primary purpose of the trust was support for the settlor and her spouse. In addition, the poor health of the survivor indicated that the trust would terminate in the near future.
GROSS ESTATE: Property decedent transferred into a family limited partnership included in gross estate. In Estate of Bigelow v. Commissioner, T.C. Memo. 2005–65, the court found that the decedent retained the right to enjoy various economic benefits from the property transferred to the FLP. Consequently, the property was includable in her gross estate because the transfer was not a bona fide sale for adequate and full consideration.
LIFE INSURANCE: Life insurance trust deemed to have no insurable interest in the decedent’s life. In Chawla ex rel. Giesinger v. Transamerica Occidental Life Ins. Co., No. Civ. A. 03-CV-1215, 2005 WL 405405 (E.D. Va. Feb. 3, 2005), the U.S. district court, interpreting Maryland law, determined that a life insurance trust has “no insurable interest in the life of the decedent” and that the policy was consequently void. The court explained that the trust would suffer no detriment from the insured’s death and, in fact, the trust would gain more from the life insurance proceeds than it would if the insured continued to live. The case is especially interesting because of a highly unusual set of facts that could have easily allowed the court to reach the same end result by finding that the insured misrepresented his health condition by not disclosing brain tumor surgery and chronic alcoholism treatment.
POWER OF ATTORNEY: Deposit into a joint account is a prohibited gift. In Estate of Herbert v. Herbert, 152 S.W.3d 340 (Mo. Ct. App. 2004), the court held that the statutory prohibition on an agent making gifts to him- or herself absent express authorization in the power of attorney applies to a deposit of the principal’s funds by the agent into a joint and survivorship account belonging to the principal and the agent. The court also indicated that oral permission from the principal is not sufficient.
SPENDTHRIFT TRUSTS: Trust immune from claim by surety. The administrator c.t.a. posted a bond backed by a corporate surety as a condition of his appointment. The will created testamentary spendthrift trusts for the administrator and his brother. The administrator breached his duties, the bond was declared forfeit, and the corporate surety received a judgment against the administrator, which it attempted to collect by levy on the administrator’s trust. In Jackson v. Fidelity and Deposit Co. of Maryland, 608 S.E.2d 901 (Va. 2005), the court held that the will did not limit the spendthrift protection given the trust and that the surety’s claim did not come within the statutory limits on spendthrift protection.
RULINGS AND REGULATIONS
CHARITABLE DEDUCTION: Charitable deduction available even though the heirs could contest because the possibility of a contest was negligible. PLR 200505008.
CHARITABLE REMAINDER TRUSTS: IRS creates safe-harbor procedure under which it will disregard the right of a surviving spouse to elect a statutory forced share from an inter vivos CRAT or CRUT if the surviving spouse waives the right to elect and actually makes no election. Rev. Proc. 2005–24.
CHARITABLE REMAINDER TRUSTS: IRS issues final regulations adopting the “worst in, first out” rule for charitable remainder trust distributions under Code § 664. TD 9190.
MARITAL DEDUCTION: Marital deduction not available for a trust because surviving spouse did not have unqualified right to all trust income. The trust provided that the trustee was to distribute net income to the surviving spouse “in such amounts and at such times as my wife, in her sole discretion but in consultation with the Trustee, shall desire for her maintenance, education, health or support commensurate with her station in life.” In TAM 200505022, the IRS determined that the surviving spouse lacked the unqualified right to income because of the standard imposed for the distributions and the requirement to consult with the trustee.
VALUATION: Final regulations issued to comply with the Walton decision. The gift tax special valuation rules were revised to provide that a unitrust or annuity interest payable for a specified term of years to the grantor (or the grantor’s estate if the grantor dies before the term’s expiration) is a qualified interest for the specified term. TD 9181.
Beneficiary Deeds. Seven states (Arizona, Colorado, Kansas, Missouri, Nevada, New Mexico, and Ohio) have special provisions dealing with transfer-on-death deeds, also called beneficiary deeds. This technique operates similar to a pay-on-death bank account, that is, the beneficiary named on the deed has no interest until the owner dies. Like the depositor, the owner of the land may change the beneficiary designation at any time and for any (or no) reason. In Beneficiary Deeds and Estate Planning, Ala. Law., Mar. 2005, at 118, Michael A. Kirtland and Catherine Anne Seal advocate that Alabama adopt this technique.
Buy-Sell Agreements. David Berek reviews recent cases showing that the IRS is adopting a tough approach with buy-sell agreements used to determine the fair-market value of a business interest at death in Business Succession Planning: Lessons from True, Blount and Smith, 93 Ill. B.J. 94 (2005).
Deviation. In Just What the Doctor Ordered? The Doctrine of Deviation, the Case of Doctor Barnes’s Trust and the Future Location of the Barnes Foundation, 39 Real Prop., Prob. & Tr. J. 711 (2005), Jonathan Scott Goldman provides a detailed case study of a fascinating Pennsylvania case.
Domestic Partners. An evaluation of current inheritance rights of domestic partners and a proposal for inheritance law reform including a model statute are provided by T.P. Gallanis in Inheritance Rights for Domestic Partners, 79 Tul. L. Rev. 55 (2004).
Elder Same-Sex Partners. The specialized estate planning needs of older same-sex partners is highlighted in Ralph Randazzo’s article, Elder Law and Estate Planning for Gay and Lesbian Individuals and Couples, 6 Marq. Elder’s Advisor 1 (2004).
Family Limited Partnerships. Kara E. Major discusses the recent victory of the taxpayer over the IRS in Sibling Rivalry: The Successful Use of Family Limited Partnerships for Wealth Transfers in Estate of Stone v. Commissioner, 57 Tax Law. 947 (2004).
Georgia. In her article, Wills, Trusts, Guardianships, and Fiduciary Administration, 56 Mercer L. Rev. 457 (2004), Mary F. Radford examines the major cases decided and legislation enacted from June 2003 through May 2004.
Grantor Retained Annuity Trusts. Sarah Barr Kahl explores the intricacies of Code § 2702 in relation to GRATs in her note, The Ninth Circuit’s Approach to Revocable Spousal Annuities: Was Schott on Target?, 57 Tax Law. 935 (2004).
Life Insurance. Authors Neil A. Doherty, Brian A. O’Dea, and Hal J. Singer examine the benefits that an active secondary market for life insurance policies provides to the policyholder in their article, The Secondary Market for Life Insurance Policies: Uncovering Life Insurance’s “Hidden” Value, 6 Marq. Elder’s Advisor 95 (2004).
Long-Term Care. An exploration of various options available to senior citizens is found in Richard Knueppel’s article, Counseling Clients About Long-Term Care Expense: What Are the Alternatives?, 6 Marq. Elder’s Advisor 165 (2004).
Powers of Attorney. Helen W. Gunnarsson explores the debate regarding whether powers of attorney need to be amended to comply with the privacy rules of the Health Insurance Portability and Accountability Act in HIPAA and POAs Revisited, 93 Ill. B.J. 110 (2005).
Trust Beneficiaries. Robert Whitman advocates for the adoption of Resolution Procedures to Resolve Trust Beneficiary Complaints, 39 Real Prop., Prob. & Tr. J. 829 (2005).
Uniform Trust Code. David M. English explains The Creation of Trusts Under the Uniform Trust Code, J. Nat’l C. Prob. Judges, Spring 2005, at 6.
Arkansas adopts the Uniform Simultaneous Death Act. The Act will take effect on January 1, 2006. 2005 Ark. Acts 74.
Arkansas adopts Trust Code. This code, based in most part on the Uniform Trust Code, will take effect on September 1, 2005. 2005 Ark. Acts 1031.
Arkansas doubles the size of a decedent’s estate that qualifies for small estate treatment to $100,000. 2005 Ark. Acts 899.
Idaho authorizes purpose trusts. This legislation allows trusts for nonhuman, noncharitable purposes, such as to care for a pet animal, to be valid and enforceable. 2005 Idaho Sess. Laws 99.
Idaho requires posthumous heirs and beneficiaries to be born within 10 months of a decedent’s death. Previously, the statute permitted an afterborn to share in an inheritance or gift merely if he or she was conceived before the decedent’s death. This statute is a reaction to the increasing use of artificial reproduction techniques that allow a person who is conceived before a decedent’s death to be born years or decades thereafter (by freezing an embryo that is later implanted and brought to term, for example). 2005 Idaho Sess. Laws 123.
South Dakota expands powers of trust protectors. 2005 S.D. Laws 260. j