Keeping Current—Probate offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
ATTORNEYS: Confidential relationship arises when child performs legal work for parent. A daughter who was an attorney prepared a deed transferring real property from her mother to a revocable trust of which the daughter was the sole beneficiary. The trial court set aside the deed based on a presumption of undue influence stemming from a confidential relationship between parent and child. The appellate court affirmed, turning aside the argument that a confidential relationship could not arise because the Mississippi Rules of Professional Conduct 1.8(c) prohibits a lawyer from preparing an instrument that makes a gift to the lawyer “except where the client is related to the donor.” The court reasoned that the gift must be reasonable under the circumstance and the attorney-client relationship is per se a confidential one. Hodnett v. Hodnett, No. 2016–CA–00885–COA, 2018 WL 1805477 (Miss. Ct. App. Apr. 17, 2018).
LIFE ESTATE: Gift of residue to surviving spouse for express purpose of support creates life estate. A husband’s will gave the residue to his surviving wife and expressed the intention that she use the assets for her health and support as well as for the support and education of his son until the age of 18. When the wife died, any “remaining assets” would pass in trust for the son. In addition, the will stated that the couple had kept their assets separate and at the death of both spouses, their property would pass to their respective descendants. The court interpreted the language of the residuary clause to create a life estate by implication for the wife rather than fee simple ownership. Feeney v. Feeney, 811 S.E.2d 830 (Va. 2018).
NO-CONTEST CLAUSES: Clause disinheriting descendants of contesting beneficiary does not violate public policy. A settlor’s revocable trust included a no-contest clause directed at any challenge to the trust by several persons, including the settlor’s son Spencer, whom a previous trust amendment removed as beneficiary. Under the no-contest clause, any challenge directly or on behalf of Spencer or his children terminated the interests of Spencer’s children. Spencer brought an action challenging the amendment removing him as a beneficiary. A jury found the amendment valid and in a subsequent proceeding, the trial court found that Spencer had violated the no-contest clause and that his children were no long beneficiaries of the trust. On appeal, the Supreme Court of Wyoming affirmed, holding as a matter of first impression that the provision of the no-contest clause resulting in the forfeiture of the interests of minors because of the action of their parent does not violate public policy. EGW v. First Federal Savings Bank of Sheridan, 413 P.3d 106 (Wyo. 2018).
NO-CONTEST CLAUSES: No-contest clause of trust incorporated into will does not apply to challenge to will. A testator’s will gave the residuary estate to the trustee of the testator’s revocable trust and also expressly incorporated the trust into the will by reference. The trust included a no-contest clause revoking the gift of any beneficiary of the trust who contests or disputes its validity or attempts to “cancel or avoid any of the provisions of this Trust.” The trial court applied the no-contest clause to a challenge to the pour-over will, but the supreme court reversed, grounding its decision on the strict construction of the no-contest provision. Although the will incorporated the trust, the language of the no-contest clause referred only to contesting the trust. Sandstead-Corona v. Sandstead, 415 P.3d 310 (Colo. 2018).
POWERS OF APPOINTMENT: Non-general power not exercised by will. A testator created a revocable trust, terminating on his death, with the trust real property distributed to one child and “liquid resources” up to a stated dollar amount distributed to another child. The testator also created an irrevocable trust over which testator retained a non-general power to appointment to the testator’s descendants either during life or by will. The irrevocable trust expressly prohibited an appointment that in any way would result in an economic benefit to the testator. The testator’s will gave the residuary estate, defined to include any property over which the testator may have a power to appointment, to the trustee of the revocable trust. A dispute arose between the executor, who was also the principal beneficiary of the revocable trust, and one of the beneficiaries of the irrevocable trust over whether the will exercised the power of appointment. The trial court determined that the will did not exercise the power and the Supreme Court of Rhode Island affirmed. The court stated that if the will exercised the power, the property in the irrevocable trust would place the assets of the irrevocable trust in the testator’s residuary estate where they would be subject to the claims of creditors contrary to the terms of the power of appointment. Jaffe v. Pournaras, 178 A.3d 978 (R.I. 2018).
WILL FORMALITIES: Notary who acknowledges signatures of testator and one witness may serve as second witness. A testator signed her will in the presence of a notary public and another person who served as a witness. The notary signed an acknowledgment of the signatures of the testator and the other person. Ariz. Rev. Stat. § 14-2502(A)(3) requires that a will be signed “by at least two people, each of whom signed within a reasonable time after that person witnessed either the signing of the will . . . or the testator’s acknowledgment of that signature. . . .” The testator’s will was challenged on the ground of lack of due execution. The trial court invalidated the will, but the appellate court reversed, holding that the statute was unambiguous. The notary qualified as a witness because by signing the acknowledgment, the notary is a person to whom the testator acknowledged the testator’s signature. In re Estate of Bradley, 420 P.3d 215 (Ariz.Ct. App. 2018).
TAX CASES, RULINGS, AND REGULATIONS
GRANTOR RETAINED ANNUITY TRUST (GRAT): Decedent’s gross estate includes value of assets transferred to a GRAT. As part of her estate planning, the decedent transferred her half of a partnership that owned rental real estate and the real estate itself to a GRAT. She was to receive annual annuity payments for 15 years or until she died. The trust corpus was to pass to her daughters after the annuity payments were fulfilled. The decedent died before the expiration of the annuity term. The GRAT property is part of the decedent’s gross estate if she retained the possession, enjoyment, or right to income from the property. IRC § 2036(a)(1). Although the statute did not expressly state that a fixed-term annuity was a right to income, the court looked to the substance of the GRAT and held that the annuity was part of the estate. The court also upheld an IRS regulation that includes GRAT property in a gross estate when the decedent retains an annuity and dies before the expiration of the annuity term as a reasonable interpretation of the statute. Badgley v. United States, 121 A.F.T.R.2d 2018-1816 (N.D. Cal. 2018).
INDIVIDUAL RETIREMENT ACCOUNT: IRA originally distributed to the decedent’s estate not includible in spouse’s gross income. Because the decedent did not designate a beneficiary for his IRA, the account was distributed to his estate. His wife, as executor, distributed that amount to herself as sole beneficiary and then deposited it (and an amount equal to the taxes withheld by the bank) in an IRA in her own name. A letter ruling treated the taxpayer as having received a distribution from the plan for purposes of IRC § 402, making her eligible to rollover the amount of the decedent’s IRA to an account in her own name. She was not required to include the amount of the decedent’s IRA in her gross income. PLR 201821008.
SHAM TRUST: Income from four partnerships owned by trust taxed to entity creators because trust is considered a sham. A husband and wife owned a freight-forwarding business and reported the income on their joint tax returns as pass-through income. They sought advice from CPAs on how to donate to charities anonymously and to make their businesses audit-proof. Based on the CPAs’ advice, they created a limited partnership to operate the business, retaining a five percent interest, and organized an irrevocable trust to hold the remaining interest. They also created a nonexempt charitable trust to receive income from the business and to donate the money to charities. The husband still controlled the business and managed each partnership, including the budgets, bills, and records. The irrevocable trust did not have a bank account. The trustee had no meaningful role in the trust’s operation and was not involved in the decision making for the business. After the restructuring, the limited partnership reported a substantial portion of the income as pass-through income to the trust, which reported the income, claimed deductions for income distributions to the charitable trust that offset the income, and reported little to no income tax liability on the income from the freight business. The charitable trust reported the pass-through partnership income it received from the irrevocable trust as nontaxable royalty income. The Tax Court determined that the irrevocable trust was a sham, making the income generated by the partnership taxable to the husband and wife. The Tax Court did not impose a penalty for underreporting because the IRS did not show they lacked reasonable cause. The husband knew that he was not paying income tax on his business income but believed he was honest in his income tax reporting as the untaxed money was being given to charity. Full Circle Staffing, LLC v. Commissioner, T.C. Memo 2018-66.
TAX LIEN: Federal tax liens attach to community property held in trust even though co-owner has innocent spouse protection. The government sought judgment for income tax assessments against a husband and his ex-wife and to foreclose federal tax liens on real property. The husband operated a jewelry business and purported to handle all tax matters although he stopped filing tax returns in 1999. The husband and wife had a joint bank account, but she did not write checks or have her own account or credit cards. Her husband gave her cash to pay for household expenses. Based on the husband’s initiative, the couple placed their residence in a trust and assigned their interest in the trust to a private company, but the assignment was never recorded and neither the trust nor the company paid anything for their interest in the property. The husband continued to make all decisions related to the property, live there, and pay the property’s bills. The wife did not understand the documents she had signed and believed she and her husband were the owners of the property. Before litigation, the IRS granted the ex-wife innocent spouse relief. The court held that innocent spouse relief applied only to her separate property and that the residence could be used to satisfy all liens obtained against the husband while the residence was part of the marital community. United States v. Kraus, 121 A.F.T.R.2d 2018-1323 (W.D. Wash. 2018).
TRUST MODIFICATION: Modification of trust to appoint grandchild as co-trustee does not grant power of appointment or trigger generation-skipping transfer tax. The trustees had the discretion to use principal and income for the benefit of a grandchild and her issue as the trustees saw fit for their reasonable support, care, education, and maintenance. The instrument required three co-trustees at all times. After all the initial trustees of the trust died, the trustees sought to appoint the grandchild as the third co-trustee. A letter ruling stated that the addition of the grandchild as trustee would not create a general power of appointment because the state statute limited discretionary distributions for the trustee’s own benefit to those necessary for health, education, maintenance, and support. The proposed appointment of the grandchild as a co-trustee was considered administrative in nature and not a shift of a beneficial interest to a lower generation in the trust. Neither the grandchild nor her issue would possess a general power of appointment. PLR 201817003.
Cryptocurrency. Michael Alan Goldberg explains the special issues raised by digital currency in Estate Planning for Cryptocurrency, Ill. B.J., Feb. 2018, at 38.
Elder Financial Exploitation. Rebecca C. Morgan, Pamela B. Teaster, and Randolph W. Thomas examine the basic elements that make up financial exploitation throughout the country, noting the difference in law and discretion, suggesting resources for prosecutors, and discussing how to thwart those who are taking advantage of an elderly population. A View from the Bridge: A Brief Look at the Progression of Cases of Elder Financial Exploitation Prosecutions, 25 Elder L.J. 271 (2018).
End of Life. Kathy L. Cerminara and Barbara A. Noah propose revisions to health professional training and payment policy to reduce as much as possible physical and existential suffering while progressing through the terminal phase of illness in Removing Obstacles to a Peaceful Death, 25 Elder L.J. 197 (2018).
Fiduciary Duty. Max Schanzenbach and Nadav Shoke demonstrate that a city’s public nature need not interfere with the application of fiduciary duties to its market transactions. Reclaiming Fiduciary Law for the City, 70 Stan. L. Rev. 565 (2018).
Forced Share Inheritance. In his article, Inheritance on the Fringes of Marriage, 2018 U. Ill. L. Rev. 235, Adam J. Hirsch explores the inheritance rights of individuals situated at the fringes of marital relationships: fiancés, spouses who are in the process of divorcing, and permanently separated spouses. He examines whether these categories of individuals ought to enjoy rights to forced shares of an estate comparable to those that ordinary spouses can claim by assaying the rationales for a forced share in to the context of these fringe categories.
Georgia Estate Law Update. Mary F. Radford describes selected cases and significant legislation from June 1, 2016 to May 31, 2017 that pertain to Georgia fiduciary law and estate planning in Wills, Trusts, Guardianships, and Fiduciary Administration, 69 Mercer L. Rev. 341 (2017).
Long-Term Care (LTC) Financing. Zachary Anderson analyzes a few of the many proposed solutions, establishes a framework that a viable solution should satisfy, and proposes a solution that could solve the LTC financing crisis. Solving America’s Long-Term Care Financing Crisis: Financing Universal Long-Term Care Insurance with a Mandatory Federal Income Tax Surcharge That Increases with Age, 25 Elder L.J. 473 (2018).
Medicare Compliance. Jason D. Lazarus addresses the growing concerns faced by attorneys who represent Medicare beneficiaries and offers advice on how to deal with Medicare issues strategically instead of ending up in federal court. Total “Medicare” Compliance in a New Age, 25 Elder L.J. 377 (2018).
Medicare Funding. In his Note, Uncle Sam Killed Grandma: How the Estate Tax Can Help Alleviate Medicare Uncertainty, 25 Elder L.J. 443 (2018), Alexander G. Karl surveys the history and functionality of Medicare and the estate tax and analyzes the impacts of budget cuts. He also suggests a congressional policy change that would allow the collected estate tax revenue to fund Medicare.
Alabama authorizes the parent or legal guardian of a terminally ill or injured minor to execute, in consultation with the minor’s attending physician, a directive for medical treatment and palliative care. Ala. Laws Act 2018-466.
Alabama enacts the Uniform Trust Decanting Act. 2018 Ala. Laws Act 2018-519.
Colorado enacts the Uniform Trust Code. 2018 Colo. Legis. Serv. Ch. 169.
Connecticut provides pregnant patients with greater ability to specify desires regarding withholding or withdrawing life support systems. 2018 Conn. Legis. Serv. P.A. 18-11.
Georgia amends its version of the Uniform Statutory Rule Against Perpetuities Act by increasing the time period for vesting to 360 years from 90 years. 2018 Ga. Laws Act 366.
Georgia passes the Revised Uniform Fiduciary Access to Digital Assets Act. 2018 Ga. Laws Act 560.
Kentucky adopts comprehensive legislation addressing abandoned property. 2018 Ky. Laws Ch. 163.
Kentucky enacts the Protection from Financial Exploitation Act. 2018 Ky. Laws Ch. 127.
Kentucky passes the Uniform Power of Attorney Act. 2018 Ky. Laws Ch. 185.
Maine adopts the Uniform Probate Code. 2018 Me. Legis. Serv. Ch. 402.
Maine approves the Revised Uniform Fiduciary Access to Digital Assets Act. 2018 Me. Legis. Serv. Ch. 359.
Maryland continues imposing an estate tax but raises the exemption amount to $5 million for decedents dying on or after January 1, 2019. 2018 Md. Laws Ch. 21.
Minnesota passes a law to protect older and vulnerable adults from financial exploitation. 2018 Minn. Sess. Law Serv. Ch. 161.
Nebraska passes the Health Care Surrogacy Act. 2018 Neb. Laws. L.B. 104.
Utah approves the Uniform Real Property Transfer on Death Act. 2018 Utah Laws Ch. 26.
Utah passes the Protection of Vulnerable Adults from Financial Exploitation Act. 2018 Utah Laws Ch. 159.