More and more, I review trust agreements that appoint a trustee, but then appoint other individuals or institutions to perform certain tasks that are normally in the domain of the trustee. They are sometimes referred to as trust protectors, trust advisors, trust directors, special powerholders, investment trustees, or distribution trustees. I most often see these appointments in the areas of investments or distributions.
The trust language that attempts to divide the responsibilities of a trustee among a group is often unclear and give rise to difficult questions as to the scope of each individuals’ responsibilities. There is also the question of whether the trustee is responsible for the actions of the other appointees and if the appointees are fiduciaries. These problems with interpretation are often exacerbated because the laws are not clear about the division of these responsibilities and the liability of each actor. Read more >>
As long as I have been a probate paralegal, and even prior when I worked in financial services, I have spoken about assets with beneficiary designations, including life insurance, retirement accounts and annuities passing outside of probate as if they were a foregone conclusion. Period. End of Story. However, some recent situations have reminded me that the plot of the story may indeed have a surprise ending.
First of all, it bears reminding to our clients, that documents with beneficiary designations do not pass in accordance with the general instructions in the Decedent’s Will. I recently worked with a client that became concerned when we learned that an estranged family member received a portion of an IRA account due to the beneficiary designation. It was very confusing and upsetting to her that this family member received assets in addition to those provided for in the Will.
Secondly, there are situations where the beneficiary designation needs to be reviewed and confirmed, both at the time the designation is made and at the time of the claim. Read more >>
As regular readers of this blog know, one of our favorite topics is digital assets, including estate planning for digital assets. Today, we’re taking a slightly different focus and discussing developments in digital estate planning, more commonly known as electronic wills.
One of the more recent developments in estate planning is the concept of electronic wills. In general, an electronic will is one that is signed and stored electronically. Instead of signing a hard copy document in ink, the testator electronically signs the will, and it is also signed by witnesses and notarized electronically. Not surprisingly, companies like LegalZoom are very interested in this topic.
There are several proposals to repeal the estate tax currently percolating in Congress. None of these proposals appears to have been fully fleshed out, and it is unclear how the differences will be reconciled. Notably, none of the proposals reflects the Trump campaign position supporting a “mark to market” tax to be imposed at death. Below is a brief summary of the currently proposed legislation, and the key differences between them.
H.R. 451: Known as the “Permanently Repeal the Estate Tax Act of 2017,” this bill is the shortest. It states simply that for “decedents dying after December 31, 2016, Chapter 11 of the Internal Revenue Code of 1986 is repealed.” This operates to repeal the estate tax, but to leave the gift tax and generation-skipping transfer tax in place. Read more >>
The rules and regulations surrounding the operation of family foundations contain traps for the unwary and prohibit self-dealing transactions. We regularly help families navigate the complex rules regarding self-dealing transactions for private foundations.
These self-dealing rules tripped up the Donald J. Trump Foundation, which has admitted that it has engaged in self-dealing. How do we know? A private foundation is required to file a Form 990-PF each year and that return requires a foundation to answer questions regarding its activities and transactions. The following question caused issues for the Trump Foundation: “During the year did the foundation (either directly or indirectly): Transfer any income or assets to a disqualified person (or make any of either available for the benefit or use of a disqualified person)? By answering “Yes,” the Trump Foundation has admitted that a self-dealing transaction occurred. The Trump Foundation’s Form 990-PF (and many other foundations’ returns) are available through www.guidestar.com.
Will the estate tax be eliminated as part of the tax reform promised by the incoming administration? Unfortunately, my crystal ball is not working well and I don’t have an answer for that question. I would, however, like to share a bit of the tortured history of the estate and gift tax since the Civil War in the hope that it might give us some perspective when wondering what the future will bring.
A series of Acts between 1862-64 created an inheritance tax which helped finance the war effort. Rates were between .75% and 5% and there was an exemption of $1,000. In 1870 the inheritance tax was repealed. An estate tax was again instituted to fund a war effort in 1916, in response to World War I. The rates were between 1% and 10% and there was an exemption of $50,000.
Due to recently proposed regulations to Section 2704 by the U.S. Treasury Department, high net-worth taxpayers and their advisors need to act now to evaluate the best course forward. The proposed regulations threaten to significantly curtail the application of discounts to intra-family transfers of entity interests, which impact key gift and estate tax planning techniques used for high net-worth individuals. For wealthy families and their advisors, these proposed regulations call to mind the flurry of wealth transfer planning activity that took place in late 2012. Advisors are anticipating a very busy fourth quarter working with clients to address the impact of the proposed regulations.
Who Should Act Now
In consultation with their advisors, the following taxpayers should look carefully at their assets to determine whether there are any opportunities to shift substantial value out of the taxpayer’s taxable estate before discounts effectively disappear:
Taxpayers whose estates are subject to the imposition of estate tax
Taxpayers who have historically made annual gifts of discounted business interests to family members or trusts
Taxpayers who have been considering establishing a long term trust for family members to hold business interests
Taxpayers who have an existing trust in place for family members
Taxpayers who have a need for business succession planning
Next Steps – What to Do and When
The proposed regulations could become final and effective as early as late December 2016 (although a later effective date is more likely) and a hearing on these regulations is scheduled for December 1st. As a result, all family business owners and wealthy taxpayers should take this opportunity to meet with their team of advisors to review their wealth transfer plans and, if additional transfers are warranted, initiate that process as soon as possible.
The affected taxpayers should consider gifts or sales of discounted business interests to family members or trusts by the end of this year. However, it is important to note that there will likely be a 3-year-look-back on transfers. These taxpayers should also consider the transfer of discounted entity interests to a trust in exchange for a note or an annuity interest to preserve future planning opportunities. While it is unclear whether the IRS will require some sort of consistency of valuation for payment of promissory notes and annuity interests, there is the potential that payments could be made with undiscounted interests later, further enhancing the tax savings. Read more >>
RUFADAA addresses these issues by setting forth the circumstances under which a fiduciary is allowed (or may gain) access to digital assets, while also taking into account the privacy interests of the testator, settlor, protected person, etc. (for ease of reference, I will generally refer to these people as the “Person”). RUFADAA also takes into account the interests of the custodians of the digital assets; a custodian is defined as the person or entity that carries, maintains, processes, receives, or stores a digital asset of a user and includes entities such as banks, Google, Yahoo, and Facebook. RUFADAA places paramount importance on the intent of the Person and limits a fiduciary’s automatic access to the content of the Person’s digital communications absent their consent or a court order.
There have been a number of recent changes to the mortgage lending laws. Under current law in Colorado, certain private loans secured by residential real estate may be subject to compliance with strict licensing and other requirements. Failure to comply could potentially result in misdemeanor charges and/or fines.
These new obstacles stem from provisions of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), and the Colorado Mortgage Loan Originator Licensing and Mortgage Company Registration Act (“CMLO Act”).
The Colorado Supreme Court upheld the strict privity doctrine for attorney malpractice claims by nonclients and reaffirmed that an attorney’s liability is limited to when the attorney has committed fraud or a malicious or tortious act, including negligent misrepresentation. Baker v. Wood, Ris & Hames, case number 2013SC551 (2016 CO 5).
In Baker, the dissatisfied beneficiaries sued the attorneys for their father and alleged as follows:
The attorneys failed to advise their father of the impact of holding property in joint tenancy.
The attorneys failed to advise their father that failing to sever those joint tenancies would frustrate his intent to treat his children equally with his stepchildren.
The attorneys’ actions allowed the surviving spouse to change their father’s estate plan after his death.
The attorneys drafted documents for the surviving spouse that were different from their father’s original plan.
The beneficiaries were the intended beneficiaries of the client’s plan, that the attorneys failed to advise the beneficiaries of the relevant facts, and that they had suffered damages as a result.
The beneficiaries asked the Colorado Supreme Court to adopt the “California Test” or the “Florida-Iowa Rule” and set aside the strict privity rule. The Court rejected the adoption of both tests and reaffirmed the strict privity rule. The Court also held that the beneficiaries’ claims would fail under both the California Test and the Florida-Iowa Rule.
The Court put forth the following rationales for upholding the strict privity rule in Colorado:
It protects the attorney’s duty of loyalty to the client and allows for effective advocacy for the client.
Abandoning strict privity could result in adversarial relationships between an attorney and third parties. This could result in conflicting duties for the attorney.
Without strict privity, the attorney could be liable to an unforeseeable and unlimited number of people.
Expanding attorney liability to nonclients might deter attorneys from taking on certain legal matters. The Court reasoned that this result could compromise the interests of potential clients by making it more difficult to obtain legal services.
Casting aside strict privity would increase the risk of suits by disappointed beneficiaries. Those suits would cast doubt on the testator’s intentions after his or her death when he or she is unavailable to speak.
The beneficiaries have other avenues available to them, including reformation of the documents.
A personal representative can pursue legitimate claims on behalf of a testator.
The Court held, “We further believe that the strict privity rule strikes the appropriate balance between the important interests of clients, on the one hand, and non-clients claiming to be injured by an attorney’s conduct, on the other.” As a result, the strict privity rule remains intact in Colorado.