Real Property, Trust and Estate Law Journal - 2016

Real Property, Trust and Estate Law Journal - 2016

Fall 2016, Vol 51, No 2 (Full PDF)
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Local Counsel Opinion Letters in Real Estate Finance Transactions: A Supplement To The Real Estate Finance Opinion Report Of 2012
Joint Drafting Committee comprised of William B. Dunn, (Reporter), Edward J. Levin, (Co-Editor), Sterling Scott Willis, (Co-Editor) and Edward N. Barad, Kenneth P. Ezell, Jr., Catherine T. Goldberg, Raymond S. Iwamoto, Kenneth M. Jacobson, Robert J. Krapf, Charles L. Menges, David L. Miller, Laurence G. Preble, Lydia C. Stefanowicz, Robert A. Thompson, and Lawrence J. Wolk
The Report on Local Counsel Opinion Letters in Real Estate Finance Transactions supplements the Real Estate Finance Opinion Report of 2012 (the 2012 Report), which provided an update on the practice of opinion givers and recipients in a real estate finance transaction from the perspective of sole transaction counsel. Local counsel typically are involved in discrete and often disconnected pieces of these transactions. However, the opinions expressed in a local counsel's opinion letter cover many of the same topics addressed by lead counsel as well as other topics. The Report builds on the foundation of the 2012 Report to explore the role of local counsel, specific language of opinions local counsel may render, modification of assumptions on which opinions are based, and appropriate limitations of opinions. The Report discusses and illustrates assumptions, opinion statements, and limitations that are included in an Illustrative Opinion Letter Addendum. The Report is the first that focuses exclusively on opinion letters of local counsel. The Report provides many citations for further reference. The Report represents the collaborative effort of bar members of many jurisdictions, as members of three national bar organizations.

Charitable Donations To Nonprofit Employers
Alyssa A. DiRusso & Bradley S. Foster
When employees of charitable organizations have made donations to their employer, they have traditionally done so in a manner that is inefficient for tax purposes. In the traditional structure, the employee receives salary or wages from the employer, which triggers payroll taxes to both employer and employee as well as income tax to the employee (at the federal and often state and local levels). The employee then reconveys money to the employer, sometimes generating an offsetting income tax charitable deduction, but never recovering either the employer or the employee share of payroll taxes. This Article explores two alternative planned giving strategies that mimic the impact of an income tax charitable deduction while avoiding the trigger of payroll taxes for employer and employee. The first strategy is Voluntary Salary Reduction, or VSR, where an employee chooses to take a lower salary intending that the charity keep the balance for its charitable mission. The second strategy is Deliberate Overfunding of Flexible Spending Accounts, or DOFSA, where an employee willingly succumbs to the "use-it-or-lose-it" provisions of a health care flexible spending account and allows the balance remaining in the account to revert to the charitable employer. Either strategy avoids triggering payroll taxes on the funds remaining with the charitable employer and allows the employee to reallocate funds that would otherwise be taxes paid to government to either the employer or the employee. The Article discusses the risks of the strategies and the income ranges of employees for which each strategy provides the maximum tax benefit.

Non-Charitable Purpose Trusts: Past, Present, And Future
Richard C. Ausness
This Article focuses on non-charitable purpose trusts and how they enable estate planners to better carry out their clients' objectives. Specifically, it explores the history of non-charitable purpose trusts and summarizes the differences between private trusts, charitable trusts, and non-charitable purpose trusts. This Article also examines the treatment of non-charitable purpose trusts in England and the United States prior to the promulgation of the Restatement of Trusts in 1935. This Article surveys the recent adoption of non-charitable purpose trust provisions in the Uniform Trust Code and various Restatements and gives advice on drafting the trust instruments. Lastly, this Article concludes with suggested revisions to the Uniform Trust Code.

 

Spring 2016, Vol 51, No 1 (Full PDF)
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Dude, Where’s My Income? Examining Property Conversion Clauses In Marital Trusts
Patrick J. Duffey
The “Marital Deduction” matters. As an instrument of public policy, it is a powerful statement by Congress that spouses are a single taxable unit. As a planning tool it is a flexible technique, subject to no dollar limitation, with few technical restrictions, and with relatively simple practical application. For these reasons and others, it is widely used both during life and at death. In fact, there is no single deduction that is more significant. It is, simply, the foundation of an estate plan for the quintessential married couple.

But there is a peculiar, technical, and inflexible requirement of the Marital Deduction that, though extraordinarily important, is often overlooked by planners who largely rely on form documents to provide the necessary “boilerplate” provisions required for modern trusts: spousal conversion of unproductive property. This required power, often effectuated by a trust provision (a Property Conversion Clause), operates to fulfill the substance behind the command found in the Treasury Regulations (Regulations) that trustees must distribute all income from trust property in order to qualify for the Marital Deduction. When a trust holds a significant amount of unproductive property, that rule is rendered toothless without a power, exercisable by the spouse, to force the trustee to sell that property and purchase income-producing property in its place.

The questions raised by the spousal conversion power are numerous. When, if ever, does underproductive property become “unproductive” for purposes of the Regulations? What timing requirements are associated with the spouse’s right of conversion? When will local law suffice to fulfill this requirement? What portion of trust assets must be unproductive in order to trigger application of the conversion requirement? What portion of trust assets must be unproductive in order to trigger application of a given Property Conversion Clause? May the trustee use alternate methods to make adequate distributions to the spouse while preserving otherwise desirable (or unmarketable) trust property?

Brand: Modern Realty Transfers’ ICONIC Dimension
Michael N. Widener
This Article describes why modern real property law practice requires lawyers to learn, and remain versed in, the intellectual property dimensions of real property development, and the methods to harvest such “iconic features” when transferring title to, or a leasehold interest in, branded realty.

After The Guarantor Pays: The Uncertain Equitable Doctrines of Reimbursement, Contribution and Subrogation
Brian D. Hulse
This Article addresses the equitable doctrines of reimbursement, contribution, and subrogation as they apply to guarantors and other secondary obligors. Specifically, it explores in detail guarantors’ and other secondary obligors’ rights after they make payment under the guaranty or other secondary obligation and then seek to recover some or all of the amount paid from the borrower, other guarantors, or the collateral for the primary obligation. This article discusses the inconsistencies in the case law on these subjects, which can create unpredictable results. It concludes that, when multiple parties are liable on a common debt, in whatever capacity, they should enter into appropriate reimbursement and contribution agreements at the outset of the transaction to avoid litigation and unpredictable outcomes.

Section 2036 of the Internal Revenue Code: A Practitioner’s Guide
Leslie M. Levy
This Article summarizes the current law and issues surrounding section 2036 of the Internal Revenue Code (Code). Specifically, this Article examines retained rights that trigger section 2036. It also addresses the issues surrounding the definition of a “bona fide sale” and the different tests employed by different courts. Lastly, this Article examines the definition of “adequate and full consideration in money or money’s worth” and two highly debated issues in that area. It concludes that understanding the Internal Revenue Service’s (Service) position on the issues involving section 2036 can reduce the likelihood of a Service audit and lead to substantial estate tax savings.

The Only Thing Certain is Uncertainty: The Future of Estate Planning Without the Federal Estate Tax
Kevin T. Keen
Given the current political environment, the possibility of a federal estate tax repeal has seemingly become more likely. The effect of a possible near-term repeal of the federal estate tax creates further uncertainty in a field that is constantly evolving. This uncertainty is nothing new. However, taking into consideration the substantial and cascading changes of the American Taxpayer Relief Act of 2012, focusing on current proposed legislation to repeal the estate tax is important to present estate planning efforts. With the 2016 presidential election looming on the horizon, it is not unrealistic to foresee significant changes to the existing income and transfer tax regime ahead.

This Article discusses the current happenings with respect to the most recent efforts to repeal the federal estate tax, offers a glimpse into the possible consequences to the federal income and wealth transfer taxes as a result of such repeal, and explores what considerations may drive future estate planning should one of two circumstances involving a repeal of the estate tax materialize. It behooves the estate planner to consider these potential outcomes and leverage the uncertainty in planning. In any case, income tax considerations will continue to have an increasingly meaningful role in sophisticated estate planning, regardless of the uncertainty that lies ahead.

 

Fall 2016, Vol 50, No 3 (Full PDF)
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Terminating or Modifying Irrevocable Trusts by Consent of the Beneficiaries – A Proposal to Respect the Primacy of the Settlor’s Intent
Bradley E.S. Fogel
In most states, an otherwise irrevocable trust may be terminated or modified by all of the beneficiaries as long as the trust does not have an unfulfilled material purpose. With few exceptions, however, a settlor of a trust is allowed to put whatever conditions she likes on her largesse. The beneficiaries might dislike the trust terms or wish they were different, but they are merely looking a gift horse in the mouth. After all, it was the settlor’s choice to make the gift in the first place. The wants of the beneficiaries are only relevant to the extent that the settlor decided to make them relevant. Thus, trust termination by consent of the beneficiaries is inapposite in American trust law.

Trust modification or termination by consent of the beneficiaries should be abandoned in favor of the doctrine of equitable deviation. Equitable deviation allows trust modification (or even termination) based on circumstances not anticipated by the settlor. Such changes are made to better effect the settlor’s intent. Equitable deviation respects the primacy of the settlor’s intent and recognizes that, due to unanticipated circumstances, trust modification or termination may improve the trust's efficacy in effecting that intent.

Property and Secrecy
Amnon Lehavi
Real estate ownership is conventionally viewed as a clear matter of public record. Yet purchasers of real estate are increasingly employing legal techniques to preserve their anonymity by registering their properties through trustees or opaque shell companies. This turn of events calls for delineating the appropriate boundaries of secrecy in property.

This Article identifies primary contexts in which the issue of secrecy comes up in the law, including in financial and proprietary settings, such as secret trusts or undisclosed accumulation of shares in public corporations. It then underscores the unique features of secrecy in real estate. It offers an innovative analysis of the ways in which anonymous property holdings might affect various types of stake-holders, from central and local governments up to neighboring property owners in both their individual and collective capacities, such as in a homeowner association. The analysis establishes normative criteria for requiring property owners to disclose relevant details. It calls, however, to distinguish between a duty to provide information and the operative results of such disclosure in regard to interested parties’ capacity to act on such information.

This Article argues that, somewhat counter-intuitively, an elaborate discussion of the proper limits to the interest in secrecy would challenge prevailing forms of exclusion and other types of defensive or offensive tactics against “unwelcomed neighbors,” when-ever such practices have no normative merit. The discourse on secret real estate holdings would therefore shed broader light on the underlying societal features of ownership.

Understanding the Regulations Affecting the Deductibility of Investment Advisory Expenses by Individuals, Estates and Non-Grantor Trusts
Domingo P. Such, III & Tina D. Milligan
This Article addresses the new 2015 federal income tax rules governing the deductibility of investment advisory expenses and the confusion surrounding them. Specifically, the Article provides the context and impact of these new regulations, clarifies the current classification of investment advisory expenses, outlines methodologies for fiduciaries in unbundling fiduciary and investment advisory fees, and explains the limitations under current law. The Article also addresses the confusion surrounding the new rules for corporate fiduciaries, which require the “unbundling” of investment advisory fees when comingled with fiduciary fees using “any reasonable method.” The Article concludes that taxpayers should consult with their financial advisors and tax professionals to minimize the impact of deductibility limitations.

With Great Power Comes Great Culpability: Addressing Agency Costs in Durable Powers of Attorney
Danica J. Brustkern
This Article discusses alternative methods for monitoring those who become agents under durable powers of attorney. A durable power of attorney presents an easily abused principal/agent relationship because the principal is unable to monitor the agent once the principal has lost capacity. Because durable powers of attorney involve agency costs that are similar to those seen in the context of trusts and guardianships, this Article looks to the methods of monitoring the “agents” in each of those relationships and discusses whether these methods could—or should—be adopted for use in the context of durable powers of attorney. Ultimately, this Article finds that adapting the concept of a “trust protector” to durable powers of attorney could address the agency costs in these relationships with minimal sacrifice of the aspects of durable powers that made them so popular and useful to begin with.