Document Executions and COVID-19

By: Jennifer Taddeo of Conn Kavanaugh Rosenthal Peisch & Ford ,Co-Chair of the BBA Trusts & Estates Communications Committee, and Abigail V. Poole of Samuel, Sayward & Baler.

The Novel Coronavirus is having a huge impact on the lives of all Massachusetts residents, and the elderly and disabled populations of the Commonwealth are especially vulnerable to delay in execution of their estate planning documents causing serious harm to their health and finances.

Under current Massachusetts law, all acknowledgments and signatures must be obtained in the physical presence of a notary public. However, protective measures being put in place to address COVID-19 will increasingly mean that individuals are unable to access a notary who is physically present. As a result, these vulnerable populations may be deprived of the ability to obtain services and complete essential legal documents necessary to protect themselves and their loved ones, especially as policies in place at skilled nursing facilities, assisted living facilities and other residential facilities are also now preventing notaries public from meeting in person with residents of these facilities.

A number of Trust and Estates attorneys in Massachusetts are working on ways to resolve these issues, including by potentially asking the Governor of the Commonwealth to sign an executive order, effective immediately, to permit notaries public who are licensed attorneys to obtain virtual acknowledgement and signatures from individuals for legal documents for a limited period of time due COVID 19. Seventeen other states already permit virtual notarization and five more have enacted virtual notarization laws that will soon take effect.

To share your thoughts on this issue, this potential solution, or any other possible approach, contact Michael Avitzur at mavitzur@bostonbar.org by March 19, 2020.

Editors’ note: The BBA will continue to watch this space and offer updates to its members. If you have information about relevant trust and estates matters or initiatives related to COVID-19, please send those to Alexa Daniel, at adaniel@bostonbar.org.

First Circuit to Hear Arguments in Question of Whether a Self-Settled Spendthrift Irrevocable Trust is Entitled To Creditor Protection After the Settlor’s Death

By: Caitlyn Glynn of Nutter

On Thursday March 5, 2020, the Massachusetts Supreme Judicial Court will hear oral argument on the following question, certified to it by the U.S. First Circuit Court of Appeals: whether a self-settled spendthrift irrevocable trust that is governed by Massachusetts law and allowed unlimited distributions to the settlor during his lifetime protects assets in such trust from a reach and apply action by the settlor’s creditors after the settlor’s death (docket and briefs available here).  The Massachusetts Uniform Trust Code addresses what the result would be in the case of a revocable trust and in the case of an irrevocable trust before a settlor’s death; however, there appears to be no statutory authority as to the result with the facts here: an irrevocable trust after a settlor’s death.

The facts begin in Arizona with the age-old tale of neighbors suing each other, here, over shared water rights.  They then quickly turn darker and end with suicide and double homicide.

Donald and Ellen Belanger were one set of neighbors in the lawsuit who had moved to Arizona from Massachusetts.  Armand and Simonne De Prins were the other set of neighbors, who eventually prevailed on the water rights suit and obtained a monetary judgment against the Belangers. Mrs. Belanger, distressed at least in part about the loss of the lawsuit, committed suicide. 

Four weeks after his wife’s suicide, Mr. Belanger contacted his attorney and created an irrevocable trust (the “Trust”).  The Trust was a self-settled trust that named his attorney as sole trustee, named himself as sole beneficiary during life, and his daughter as sole beneficiary after his death.  The Trust also contained a spendthrift clause and stated that Mr. Belanger could not “alter, amend, revoke, or terminate” the Trust.  After signing the Trust, Mr. Belanger transferred substantially all of his assets to the Trust.  Four months after signing the Trust, Mr. Belanger shot and killed the De Prinses.  Mr. Belanger then killed himself. 

The De Prinses’ son filed a wrongful death action in Arizona against Mr. Belanger’s estate and settled the wrongful death action with the personal representative of Mr. Belanger’s estate (who was also the trustee of the Trust).  Such settlement stipulated that collection of the judgment against the estate would be exclusively against the Trust and that a reach and apply action against the Trust would be transferred to the U.S. District Court of Massachusetts, where the trustee resides.  At issue was a single claim to reach and apply the Trust’s assets to satisfy the $750,000 wrongful death judgment against Mr. Belanger’s estate. 

After cross-motions for summary judgment, the District Court entered judgment for the De Prinses’ son holding that, under Massachusetts law, a self-settled trust cannot be used to shield one’s assets from creditors, even where the trust has a spendthrift provision and the trustee had made no distributions to the settlor prior to his death.  This is the question that the Court of Appeals then looked at. 

The Court of Appeals looked to Massachusetts case law and statutory law.  MUTC § 505(a)(3) provides that “[a]fter the death of a settlor, . . . the property of a trust that was revocable at the settlor’s death shall be subject to claims of the settlor’s creditors,” even despite a spendthrift clause.  This statute and Massachusetts case law make clear that the assets of a trust that was revocable during a decedent’s life would be reachable by his creditors at death. 

MUTC § 505(a)(2) states that, “[w]ith respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit.”  Thus, during Mr. Belanger’s life, a creditor could have reached all of the Trust assets, as such trust assets could have been distributed to Mr. Belanger.  The statute leaves open whether an irrevocable trust is reachable by creditors after a settlor’s death.

It will be interesting to see what the Supreme Judicial Court rules.  In either event, it will be good to have certainty on this issue.  Stay tuned to this blog for the result.

MORE THAN YOU BARGAINED FOR: POTENTIAL ETHICAL VIOLATIONS FOR SOLICITING GIFTS OR ADDITIONAL BUSINESS FROM CLIENTS

Authors: Erin K. Higgins and Conor Slattery of Conn Kavanaugh

Estate planning attorneys strive to provide their clients with excellent service, and hope their good work will be rewarded with additional business from the client and the client’s network.  However, an estate planning attorney should ensure that the client is freely requesting those additional services, and they are not a result of any unethical solicitation by the attorney.  Additionally, an estate planning attorney should never solicit a gift from an estate planning client who is not a close family relative.

An estate planning attorney must not encourage a client to take actions that will result in additional business and the generation of substantial legal fees for the attorney, such as designating the estate planning attorney as the personal representative, trustee, or other fiduciary.  Such actions may amount to unethical solicitation.  An attorney should only agree to serve as a fiduciary at the direct request of the client.  If an attorney is designated as a fiduciary at the client’s request, the attorney may not charge his or her legal rates for purely administrative work or other non-legal work performed.  Rather, the attorney must charge a rate in line with the fair market rate for non-lawyers performing the same tasks, or face disciplinary action as happened in Matter of Chignola, 25 Mass. Att’y Disc. R. 112 (2009).  Similarly, an attorney should only safeguard a client’s will at the client’s direct request, not at the attorney’s suggestion, as the retention of a client’s will may lead to additional work for the drafting attorney if the client decides to revise his or her estate plan.  Where a client is unfamiliar with the options for safekeeping of estate planning documents, however, an attorney can provide the client with a list of options that may include the attorney’s firm holding the original documents. 

Additionally, pursuant to Rule of Professional Conduct 1.8(c) a lawyer shall not solicit any substantial gift, including a testamentary gift, from a client, or prepare an instrument for a client giving the lawyer a gift, unless the lawyer is closely related to the client.  For the purposes of Rule 1.8(c), a person is “closely related” to another person if related to such other person as sibling, spouse, child, grandchild, parent, or grandparent, or as the spouse of any such person.  To avoid violating Rule 1.8(c), an estate planning attorney should not draft any estate planning document naming the attorney as a beneficiary absent such a close relation to the client.  The Massachusetts Bar Association in Ethics Opinion No. 82-8 made it clear that the acceptance of any gift from the client will leave the attorney exposed to a possible charge of undue influence.  An estate planning attorney should insist that another practitioner draft any document naming the attorney as a beneficiary. 

Knowing when to step back from estate planning work out of a concern for unethical solicitation ultimately will save an attorney from much heartache down the road.  A lawyer who has questions about when he or she must step aside should seek advice from ethics counsel on the appropriate course of action. 

SECURE ACT CHANGES CERTAIN RETIREMENT ACCOUNT RULES

Author: Megan (Neal) Knox of McDonald & Kanyuk, PLLC

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (H.R. 1865) into law, which contains the “Setting Every Community Up for Retirement Enhancement” (“SECURE”) Act of 2019.  The SECURE Act makes several changes to the rules pertaining to retirement savings and employee benefit accounts, which generally became effective January 1, 2020.  The SECURE Act increases opportunities for individuals to increase their retirement savings but also eliminates the ability to spread distributions of inherited retirement benefits over the life expectancy of most (but not all) beneficiaries.  Highlighted below are the provisions of the SECURE Act that may be of most interest to estate planners. 

A.     Changes to Lifetime Rules.

  1. Elimination on Age Limit for Contributions to Traditional IRAs. Prior to the SECURE Act, individuals could not contribute to a traditional IRA in, or after, the year in which such individual reached age 70 ½.  With the enactment of the SECURE Act, there is no longer an age cap on contributions to a traditional IRA.  Therefore, beginning in 2020, working individuals can continue to contribute to a traditional IRA without any age limit. 

  2. Starting Age for Required Minimum Distributions (“RMDs”) Extended. The SECURE Act raised the required beginning date (“RBD”) for RMDs from age 70 ½ to 72.  These rules apply to 401(a), 401(k), 403(b) and governmental 457(b) plans and traditional IRAs.  Individuals who reached their RBD prior to January 1, 2020 are currently in pay status and must continue to take RMDs.  The SECURE Act will not affect these individuals during their lifetimes.  For individuals who reach age 70 ½ after December 31, 2019, their RBD is April 1 of the year after the year in which they reach age 72.  With respect to certain plans, the RBD is April 1 of the year after the year in which the individual retires, if later. 

 

B.     Changes to Required Minimum Distribution (“RMD”) Rules After the Participant’s Death.

  1. Participants[1] Who Die After December 31, 2019. Generally, the following changes[2] apply to the post-death distribution rules for participants who die after December 31, 2019:

    a.     General Rule: 10-Year Payout Period. For more than 30 years, a so-called “Designated Beneficiary”[3] has been able to stretch RMDs from an inherited retirement account over such Beneficiary’s life expectancy, thereby maximizing the ability to defer income taxes.  The SECURE Act generally reduces this payout period rule to a maximum of 10 years after the year of the participant’s death.  Unlike the prior rule, distributions do not need to be made annually.  The retirement plan simply must be completely distributed out by the end of the 10-year period.

    b.     Exception for “Eligible Designated Beneficiaries.” A limited exception to the general 10-year rule is carved out for only five categories of Designated Beneficiaries: (1) the participant’s surviving spouse, (2) the participant’s minor child (but only until he or she reaches the age of majority), (3) a disabled person, (4) a chronically ill person, and (5) an individual who is not more than 10 years younger than the participant (collectively, the “Eligible Designated Beneficiaries”).   Eligible Designated Beneficiaries qualify for a modified version of the former life expectancy payout method, the modification being that after the Eligible Designated Beneficiary’s death, the remainder must be distributed within 10 years after the death of the Eligible Designated Beneficiary.  Additional noteworthy details regarding categories (2)–(4):

          i) Participant’s Minor Child. When a participant’s minor child reaches the age of majority,[4] the 10-year rule applies unless the child: (a) has not completed “a specified course of education” and is under the age of 26, or (b) is disabled when the child reaches the age of majority, so long as the child continues to be disabled.  Eligible Designated Beneficiary status does not apply to minor grandchildren or any other minor individuals.  If the participant’s child dies before reaching the age of majority, upon his or her death the 10-year rule applies.

         ii) Disabled and Chronically Ill Persons. An individual is considered “disabled” or “chronically ill” only if he or she meets the specific requirements defined under the Internal Revenue Code relating to these new rules.  The Designated Beneficiary’s status as disabled or chronically ill is determined as of the date of the participant’s death. 

    c.     Effect on Trusts for the Benefit of Eligible Designated Beneficiaries. If the participant designates a trust for the benefit of an Eligible Designated Beneficiary, that trust may or may not qualify for the life expectancy payout method.

         i) Conduit Trusts. A conduit trust is a trust under which all distributions from the retirement plan are required to be distributed immediately to the trust’s primary beneficiary.  Leaving benefits to a conduit trust for a single individual beneficiary are treated the same as if left outright to such beneficiary.  If the sole beneficiary is a Designated Beneficiary, the 10-year payout rule will apply.  If the sole beneficiary is an Eligible Designated Beneficiary, the life expectancy payout rule will apply. 

         ii) Accumulation Trusts. An accumulation trust is a trust under which the trustee may accumulate retirement plan distributions from the trust during the beneficiary or beneficiaries’ lifetime(s), with the remainder payable to another beneficiary upon a specified beneficiary’s death.  Unless new Treasury Regulations are issued, it is uncertain whether an accumulation trust with an Eligible Designated Beneficiary as a trust beneficiary will qualify for the lifetime expectancy payout rule because the exception to the 10-year rule does not apply if the Eligible Designated Beneficiary is not the sole  Even if the Eligible Designated Beneficiary is the sole lifetime beneficiary, he or she may not be considered the sole beneficiary of the trust since the trust assets will be distributed to the remainder beneficiary after his or her death.  It is also unknown whether an accumulation trust for the benefit of a participant’s children will qualify for the life expectancy payout if some are minors and some are adults at the time of the participant’s death.  However, the payout period for an accumulation trust for the benefit of a disabled or chronically ill beneficiary is certain.  It will qualify for the life expectancy payout even if the remainder will pass to another beneficiary upon the disabled beneficiary’s death, but only if the disabled beneficiary is the sole beneficiary during his or her life. 

  2. Participants Who Died Before 2020. The SECURE Act provides only a partial exemption for retirement accounts where the participant died prior to January 1, 2020.  If the participant died before January 1, 2020 and the original Designated Beneficiary dies after January 1, 2020, it is uncertain under the new rules whether the 10-year rule applies to the subsequent beneficiary or whether the payout period depends on whether the subsequent beneficiary is just a Designated Beneficiary (subject to the 10-year rule) or an Eligible Designated Beneficiary (eligible for the life expectancy payout).  If the original beneficiary is an accumulation trust, it is unclear whether a new distribution period begins when all the trust beneficiaries die or when any of the trust beneficiaries dies.  If both the participant and the original designated beneficiary died before January 1, 2020, the SECURE Act does not apply to the subsequent beneficiary.  The old rules will continue to apply, and the subsequent beneficiary would withdraw the remaining assets over what would have been left of the original beneficiary’s life expectancy had he or she continued to live. 

[1] The term “participant” used throughout this post means the individual who owned and contributed to a retirement account prior to his or her death.

[2] These changes apply only to certain defined contribution plans but not defined benefit plans, including certain annuity payouts in an IRA or other defined contribution plan that were locked in prior to the SECURE Act. 

[3] “Designated Beneficiary” is defined as: (a) an individual named as beneficiary by the participant or retirement plan, or (b) a trust that meets the IRS’ specific requirements.

[4] The age of majority differs among states but generally is either 18 years (as in Massachusetts) or 21 years.

 

IRS Releases Final Anti-Clawback Regulations

Author: Eric R. Cunnane of Goulston & Storrs

On November 26, 2019, the Treasury Department and the IRS issued final regulations adopting the regulations that were proposed in November of 2018 (83 Fed. Reg. 59343 (Nov. 23, 2018)), effectively ensuring that if a decedent uses the increased basic exclusion amount for gifts made while the Tax Cuts and Jobs Act (TCJA) is in effect and dies after the sunset of the TCJA (currently scheduled for Jan. 1, 2026), the decedent won’t be treated on his or her estate tax return as having made adjusted taxable gifts in excess of his or her basic lifetime exclusion amount (Treasury Decision 9884).

Specifically, the final regulations confirm that in calculating a decedent’s federal estate tax due, the basic exclusion amount used in the computation will be the greater of the federal exclusion amount in effect at the decedent’s date of death or the total amount of gifts previously excluded from tax due to the use of the exclusion amount in place at the time of the transfer (Regs. Sec. 20.2010-1(c)).

For example, if an unmarried individual made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million (indexed) in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025 when the basic exclusion has reverted back to $5 million (indexed), the applicable credit amount against estate tax will be based on a basic exclusion amount of $9 million.

The final regulations also reinforce the notion of a “use it or lose it” benefit and direct that a taxpayer who uses exemption is deemed to utilize the base $5 million (indexed) exemption first and then the additional amount of exemption available through 2025.  For individuals dying after 2025, if no gifts were made between 2018 and 2025 in excess of the basic federal exclusion amount in effect at the time of death, the additional exclusion amount is no longer available.

In addition, the final regulations address portability and provide guidance with respect to how the deceased spousal unused exclusion (DSUE) amount is calculated under the new clawback rules.  The final regulations confirm that the reference to “basic exclusion amount” in Sec. 2010(c)(4), defining DSUE as the lesser of the basic exclusion amount or the unused portion of the deceased spouse’s applicable exclusion amount, is a reference to the basic exclusion amount in effect at the time of the deceased spouse’s death, rather than the basic exclusion in effect when the surviving spouse dies. As a result, the DSUE amount elected during the increased basic exclusion period will not be reduced when the sunset provisions become effective after 2025.

For example, an individual’s spouse died prior to 2026 at a time when the basic exclusion amount was $11.4 million.  The deceased spouse made no taxable gifts and did not have a federally taxable estate, and the spouse’s personal representative makes a portability election to allow the surviving spouse to take into account the deceased spouse’s $11.4 million DSUE amount.  At the time of the surviving spouse’s death, the surviving spouse had made no taxable gifts, had not remarried and the basic exclusion amount was $6.8 million.   The credit to be applied for purposes of computing the surviving spouse’s estate tax is based on the surviving spouse’s $18.2 million applicable exclusion amount, consisting of the $6.8 million basic exclusion amount on the surviving spouse’s date of death plus the $11.4 million DSUE amount, subject to the limitation of section 2010(d).

The final regulations do not directly address generation skipping transfer tax (GST) issues, as the IRS noted that the effect of the increased basic exclusion on the GST tax is beyond the scope of the regulatory project.  The IRS does state, however, in the preamble to the final regulations that “There is nothing in the statute that would indicate that the sunset of the increased [basic exclusion amount] would have any impact on allocations of the GST exemption available during the increased [basic exclusion amount] period.”

How to Approach Questions of a Client’s Mental Capacity in Estate Planning

Authors: Erin K. Higgins and Conor Slattery of Conn Kavanaugh

Clients of all ages may at one point or another become mentally incapacitated and unable to make important legal decisions. Questions of mental capacity arise most often with elderly clients, which leaves estate planning attorneys making mental capacity determinations more frequently than their colleagues practicing in other legal fields.

The basic presumption is that a person is legally competent to make decisions and execute legal documents.  Determining whether a client has the requisite capacity to make decisions involves assessing whether the client is able to effectively communicate and understand his or her decisions, and the consequences associated with these decisions.  The ABA Commission on Law and Aging has issued a handbook in collaboration with the American Psychological Association in order to aid attorneys in assessing whether or not their elderly clients are of a diminished capacity.  Some common warning signs of diminished capacity that estate planning attorneys should look out for when meeting with their clients are:

  • Repetitive phone calls or conversations where a client does not remember the previous conversations;
  • Reliance on a care-giver;
  • Completely forgetting a recent event; and
  • The client’s failure to recall his or her assets or previous decisions.

Once the client’s mental capacity comes into question, the estate planning attorney should attempt to review the client’s assets, personal information, and other basic information to see if the client is able to effectively communicate and recall such information. It may be prudent to ask another attorney to attend a meeting with a client as a witness to events and to assist in determining the client’s mental capacity. An attorney should remember that such a conversation may not only be awkward and difficult for himself or herself, but may be equally (if not more) embarrassing or intimidating for the client. In order to put the client at ease, the attorney should employ a conversational approach, rather than running through a checklist of questions akin to an interrogation, when evaluating a client’s capacity. For example, the attorney may begin the conversation by inquiring as to whether the client’s family is still planning a vacation, whether a grandchild is still playing a particular sport, how the client’s hobby is going, or simply discuss current events with the client as the attorney would if catching up with a friend over coffee.

If you reasonably believe that your client’s capacity is diminished, you may need to take action to protect the client’s interests and assets pursuant to Rule of Professional Conduct 1.14. Confidential client information is protected under Rule of Professional Conduct 1.6, and attorneys for the most part cannot disseminate such confidential client information without the client’s consent. However, an exception exists to Rule 1.6 when representing a client with a diminished capacity. An attorney is impliedly authorized to reveal confidential information when taking protective action on behalf of a client with diminished capacity, but only to the extent reasonably necessary to protect the client’s interests. See Rule 1.14(c). The estate planning attorney must take care to determine exactly what confidential client information, if any, must be disclosed to protect the client’s interests and assets, and limit any such disclosure to this identified information only.

Estate planning attorneys who fail to safeguard the assets and interests of their clients with diminished capacity may be subject to disciplinary action. In Matter of Reynolds, 15 Mass. Att’y Disc. R. 497 (1999), an attorney received a public reprimand for altering an elderly client’s estate plan to benefit the client’s live-in caregiver without inquiring about the parties’ relationship, where the attorney knew that this was a fundamental change to the estate plan to the detriment of the client’s family. The attorney in this situation should have conducted a diminished capacity review before making such a fundamental change to the client’s estate plan.

Questioning and determining a client’s mental capacity is never easy, and an estate planning attorney may face the difficult choice of whether he or she is ethically able to execute a client’s request. In these situations, estate planning attorneys may wish to consult with outside counsel on the appropriate course of action.

PLR 201942006: IRS Allows Extension to Elect Portability for Decedent’s Estate

PLR 201942006 (10/18/2019)

IRS Allows Extension to Elect Portability for Decedent’s Estate Because Estate Acted Reasonably and In Good Faith, and Granting Extension to Elect Portability Would Not Prejudice the Government’s Interests

Author: Katelyn L. Allen  of Nutter

In PLR 2019420006, the IRS granted an extension of time to a decedent’s estate to elect portability because (i) the decedent’s estate established it acted reasonably and in good faith, (ii) the requirements of Sections 301.9100-1 and 301.9100-3 were satisfied, and (iii) the granting of an extension by the Commissioner would not prejudice the interests of the government.

The circumstances under which the taxpayer requested a Private Letter Ruling from the IRS are as follows: A U.S. decedent died and was survived by a spouse. Based on the value of the decedent’s gross estate and taxable gifts made, the decedent’s estate was not required to file an estate tax return and did not file an estate tax return by the deadline of nine months after the decedent’s date-of-death. Once the decedent’s estate discovered that, in failing to file an estate tax return and elect portability, the decedent’s spouse’s estate would not be entitled to the unused portion of the decedent’s exclusion amount, the decedent’s estate filed a request for extension of time under Section 301.9100-3 to make a portability election. Section 301.9100-3 allows the Internal Revenue Commissioner to grant discretionary extensions of time to make an election in the case of tax filing due dates that are prescribed by regulation rather than by statute.

Section 2010(c)(5)(A) provides that an election is required for a surviving spouse to use a deceased spouse’s unused exclusion amount, and no election may be made if an estate tax return is filed after the filing deadline (including extensions). However, in this case no return was statutorily required to be filed.  Section 301.9100-1gives the IRS the discretion to grant a taxpayer a reasonable extension of time to make any election in situations where the due date is prescribed by regulation, under all subtitles of the Code except E, G, H, and I. Because requests for extension to elect portability are not granted automatically under Section 301.9100-2, the IRS looks to Section 301.9100-3 for the factors to be considered in granting a discretionary extension to make a portability election, as follows: (i) reasonable action and good faith; and (ii) prejudice to the interests of the government. The IRS ultimately concluded in this PLR that the decedent’s estate had provided evidence to establish that it acted reasonably and in good faith and that allowing the extension of time to elect portability would not prejudice the interest of the government. The IRS granted an extension of time of 120 days for the decedent’s estate to make the portability election, and upon the filing of a compete Form 706 electing portability, the surviving spouse would be entitled to the decedent’s unused exclusion amount.

Massachusetts SJC Grants Appellate Review to Consider Legal Relationship Between Commercial Custodian of IRAs and Named Beneficiary

UBS Financial Services, Inc. v. Donna M. Aliberti, SJC-12662, slip op. (October 22, 2019)

Author: Kaitlyn Sapp of Day Pitney LLP

On October 22, 2019, the Massachusetts Supreme Judicial Court issued a slip opinion that considered the legal relationship between UBS Financial Services (“UBS”), as a commercial custodian of individual retirement accounts (“IRAs”), and Donna Aliberti (“Aliberti”), as a named beneficiary of such accounts upon the death of the original account holder.

 

Background

Patrick Kenney (“Kenney”) opened three IRAs with UBS in 2008 with the help of his sister-in-law, Margaret Kenney.  At this time, he designated Aliberti, his long-term girlfriend, as the sole primary beneficiary of all three IRAs.  In November 2013, Patrick completed two “IRA Beneficiary Designation Update Forms” in connection with two of the smaller IRAs (“IRA #1” and “IRA #2”).  These forms named Aliberti, Aliberti’s son, Patrick’s niece, and Patrick’s friend Craig Gillespie (“Gillespie”) as his beneficiaries, all to receive 25% each.  The third, unchanged IRA (“IRA #3”) was the largest of the three, with an approximate balance of $276,000.  Unfortunately, Patrick had incorrectly completed these forms and UBS declined to process them.  Margaret Kenney arranged to have the beneficiary update forms corrected, but Kenney died suddenly on December 2, 2013 without ever having them completed.

 

Near the end of December, UBS received a letter from Gillespie’s attorney incorrectly stating that Kenney was in the process of changing the third account’s beneficiaries when he passed.  The letter went on to say that Gillespie was going to have a court of law resolve the beneficiary issue with respect to IRA #3 and asked UBS to not make any distributions.  This prompted UBS to classify IRA #3 as “disputed,” which effectively froze the account until UBS received a court order with instructions, Gillespie withdrew any claim to the account, or the statute of limitations expired.  Shortly thereafter, Aliberti began contacting UBS asserting that she was the sole beneficiary of all three accounts.  IRA #1 and IRA #2 were liquidated and equally distributed to Aliberti, Aliberti’s son, Patrick’s niece and Gillespie.  At the time, Aliberti did not dispute this action.  However, over the course of the next year and eight months, Aliberti struggled with UBS to obtain information about the supposed dispute with Gillespie over IRA #3, forcing her to retain counsel.

 

Aliberti demanded distribution of IRA #3 multiple times and sent UBS a c. 93A demand letter alleging that UBS violated the consumer protection statute.  Finally, in August of 2015, UBS filed an interpleader complaint asking the court to determine ownership of IRA #3, joining Aliberti and Gillespie as defendants.  In March of 2016, all parties stipulated to partial dismissal of claims by Gillespie, resulting in his waiver to any ownership of IRA #3.  UBS still delayed distribution to Aliberti.  Aliberti agreed to release UBS from liability regarding the disbursement in exchange for prompt distribution, but retained her claims against UBS for breach of contract, breach of fiduciary duty, and violation of c. 93A.

 

Aliberti continued to pursue her counterclaims against UBS, and after several additional months of litigation, UBS filed a motion for judgment on the pleadings.  The Superior Court granted the motion, Aliberti appealed, and the Appeals Court reversed in part, finding Aliberti’s counterclaims well-pleaded.  The Supreme Judicial Court granted further appellate review of whether the claims for relief as to breach of fiduciary duty and violation of c. 93A were plausible.[1]

 

Discussion

  1. Breach of Fiduciary Duty

To establish a claim for breach of fiduciary duty in Massachusetts, there must be a fiduciary duty owed to the plaintiff by the defendant, and injury to the plaintiff must have been proximately caused by defendant’s breach.[2]  Fiduciary duties may arise by (a) a matter of law, “such as trustee and beneficiary, or attorney and client,”[3] or (b) “as determined by the facts established,”[4] upon “evidence indicating that one person is in fact dependent on another’s judgment in business affairs or property matters.”[5] 

 

The Supreme Judicial Court found that no fiduciary relationship existed as a matter of law because the relationship between the custodian of a nondiscretionary IRA and a named beneficiary is not among the traditional familiar and well-recognized relationships giving rise to fiduciary duties.  The record did not support finding a fiduciary duty since the IRAs were not “trusts” and there was nothing to suggest that Patrick intended to create a trust.  Further, the court found that federal law did not change its analysis.  The Internal Revenue Code, which governs the tax aspects of IRAs, does not require an IRA to be a “trust.”  It could take the form of a custodial account, which was the case here.

 

The Court found that the facts also did not give rise to a fiduciary relationship.  Fiduciary duties may arise wherever “faith, confidence, and trust” is reposed by one party “in another’s judgment and advice.”[6]  Aliberti never claimed to repose trust and confidence in UBS’s judgment and advice, she simply relied on their cooperation in order to gain access to the assets of the IRA.  The court found this relationship was akin to a retail consumer relationship governed by contract, which did not establish any higher duty owed to Aliberti.  UBS only had a contractual duty to transfer the IRA proceeds in accordance with Patrick’s agreement, not a fiduciary duty.

 

  1. Violation of G. L. c. 93A

To establish a valid c. 93A claim, one must show that (a) the company has committed an unfair or deceptive act or practice, (b) the unfair or deceptive act or practice occurred in the conduct of any trade or commerce, (c) the claimant suffered an injury, and (d) the company’s unfair or deceptive act or practice was the cause of the injury.[7]  The court first determined that Aliberti was a proper plaintiff despite the absence of privity between Aliberti and UBS.  No privity was required because c. 93A allows any person injured by trade or commerce, even if indirectly, to bring a cause of action.[8]  The Court also held that the business context requirement of c. 93A was met because the interactions between an IRA custodian and a named beneficiary following the account holder’s death typically occurs in a business context within the meaning of c. 93A.

 

G.L. c. 93A does not define what constitutes “unfair” or “deceptive,” so the courts instead look to the circumstances of the case to determine if the company acted as such. Here, the Court found that UBS clearly acted unfairly by (1) denying Aliberti the funds she was entitled to; (2) for years; and (3) without good reason; (4) until she was forced to take legal action and incur unnecessary costs and fees.[9] The Court also determined that UBS filed an unjustified interpleader, considering there was never any real question as to whether or not Aliberti was entitled to IRA #3 as the sole designated beneficiary.

 

Conclusion

After determining that there was a plausible claim for violation of the consumer protection statute, the case was remanded to Superior Court for further proceedings.  However, the Supreme Judicial Court agreed with the Superior Court, that there was no plausible claim made for a breach of fiduciary duty owed to Aliberti as a beneficiary.  The court expressly found that the relationship between a commercial custodian of an IRA and a named beneficiary of such is similar to that between a retailer and consumer.  Unless the agreement between the original account holder and the service provider expressly creates a trust for the benefit of the designated beneficiary, then the custodian of the account owes no fiduciary duty to the beneficiary.

[1] UBS did not seek further review of the Appeals Court’s determination that the breach of contract claim was well-pleaded by Aliberti as an intended third-party beneficiary.

[2] Estate of Moulton v. Puopolo, 467 Mass. 478, 492 (2014).

[3] Smith v. Smith, 222 Mass. 102, 106 (1915).

[4] Warsofsky v. Sherman, 326 Mass. 290, 293 (1950).

[5] Markell v. Sidney B. Pfeifer Found., Inc., 9 Mass. App. Ct. 412, 444 (1978).

[6] Doe v. Harbor Sch., Inc., 446 Mass. 245, 252 (2006).

[7] Rafferty v. Merck & Co., 479 Mass. 141, 161 (2018).

[8] Ciardi v. F. Hoffman-La Roche, Ltd., 436 Mass. 53, 60 (2002).

[9] UBS Fin. Servs., Inc. v. Aliberti, 94 Mass. App. Ct. 180, 191 (2018).

IRS: Valuation of Publicly Traded Stock Must Consider Anticipated Merger

Office of Chief Counsel Internal Revenue Service Memorandum Number 201939002 (9/27/2019)

IRS: Valuation of Publicly Traded Stock Must Consider Anticipated Merger

Author: John H. Ramsey  of Goulston & Storrs PC

On September 27, 2019, the Office of Chief Counsel (“OCC”) of the Internal Revenue Service released a Chief Counsel Advice Memorandum (the “Memorandum”)[1] addressing the valuation of stock of a publicly traded corporation for gift tax purposes, where the corporation was engaged in negotiating a pending merger at the time of the gift.

Background

The donor of the gift in question (the “Donor”) made a gift of shares of a publicly traded corporation, of which the Donor was both a co-founder and the Chairman of the Board, to a newly formed grantor retained annuity trust.  Prior to the gift, the corporation was engaged in exclusive negotiations with another corporation regarding a merger.  Sometime after the gift, the merger was announced and the price of the corporation’s stock increased substantially.

The OCC was asked whether, under such circumstances, the “hypothetical willing buyer and seller of shares in a publicly-traded company would consider a pending merger when valuing stock for gift tax purposes.”  The OCC concluded that yes, a hypothetical willing buyer and seller would consider a pending merger when valuing stock.

Section 25.2512-1 of the Gift Tax Regulations provides that the value of the property given as a gift is the “price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.”  If there is a market for shares of stock given as a gift, the mean between the highest and lowest quoted selling prices on the date of the gift is the fair market value per share.[2]  However, if it is established that quoted selling prices on the date of the gift do not represent the fair market value of the shares “then some reasonable modification of the value determined on that basis or other relevant facts … shall be considered in determining fair market value.”[3] 

In the Memorandum, the OCC cited case law stating that hypothetical willing buyers and sellers are presumed to have “reasonable knowledge of relevant facts” and are presumed to have made a reasonable investigation into the facts, concluding that “reasonable knowledge includes those facts that a reasonable buyer or seller would uncover during the course of negotiations over the purchase price of the property.”[4]    In addition, the OCC concluded that post-valuation events may be considered, if they are relevant to the question of value,[5] even if such events are unforeseeable as of the valuation date.[6]

Conclusion of the Office of Chief Counsel

The OCC concluded that the high and low quoted selling prices on the date of the gift did not represent the fair market value of the shares and that other relevant facts, including the pending merger, must be considered. 

In support of this conclusion, the OCC cited two cases in particular.  In Silverman v. Commissioner, T.C. Memo. 1974-285, aff’d, 538 F.2d 927 (2d Cir.1976), cert. denied, 431 U.S. 938 (1977), the Tax Court rejected expert testimony regarding the valuation of shares of a corporation that was, at the time of a gift, in the process of reorganizing ahead of a public sale because the testimony failed to take into account the future public sale.  In Ferguson v. Commissioner, 174 F.3d 997 (9th Cir. 1999), aff’g 108 T.C. 244 (1997), a case involving the anticipatory assignment of income doctrine, the court concluded that transfers of stock prior to a planned merger “occurred after the shares had ripened from an interest in a viable corporation into a fixed right to receive cash” because “the surrounding circumstances were sufficient to indicate that the tender offer and the merger were practically certain to proceed.”

The OCC concluded that, through analogy to these two cases, the value of the stock of the corporation “must take into consideration the pending merger” because a hypothetical willing buyer and willing seller “would be reasonably informed during the course of negotiations over the purchase and sale of [the shares] and would have knowledge of all relevant facts, including the pending merger.”  The OCC went on to conclude that “to ignore the facts and circumstances of the pending merger would undermine the basic tenets of fair market value and yield a baseless valuation.”

While this final conclusion may be true in this case, as the Donor would, if the pending merger were not considered, have the opportunity to act on insider information to transfer shares by a gift at an understated valuation, it is unclear from the Memorandum how the hypothetical willing buyer and seller would have reasonably obtained non-public information regarding the pending merger, particularly because, as the OCC states, the hypothetical buyer and seller are not “specific individuals or entities, and their characteristics are not necessarily the same as those of the donor and the donee.”[7]

It will be interesting to monitor the application of the Memorandum in this case and to cases in the future, in particular its applicability to donors who are not privy to non-public information relating to the value of publicly traded companies.  In the meantime, donors may want to consider engaging in this type of planning early, before generalized appreciation potential is reduced to a specific and anticipated sale or merger.

[1] Office of Chief Counsel Internal Revenue Service Memorandum Number 201939002 (9/27/2019). 

[2] Section 25.2512-2(b)(1).

[3] Section 25.2512-2(e).

[4] Estate of Kollsman v. Commissioner, T.C. Memo. 2017-40, aff’d, 123 A.F.T.R.2d 2296 (9th Cir. June 21, 2019).

[5] (citing Estate of Noble v. Commissioner, T.C. Memo. 2005-2, n.3)

[6] (citing Estate of Gilford v. Commissioner, 88 T.C. 38, 52-55 (1987))

[7] Citing Estate of McCord v. Commissioner, 120 T.C. 358 (2003), rev’d on other grounds, 461 F3d 614 (5th Cir. 2006); Estate of Newhouse v. Commissioner, 94 T.C. 193 (1990). 

Massachusetts Guidance Regarding Opportunity Zone Investments

TIR 19-7: Massachusetts Treatment of Investments in Qualified Opportunity Zones

Massachusetts Guidance Regarding Opportunity Zone Investments

Authors: Joshua Caswell of Howland Evangelista Kohlenberg LLP

The Tax Cuts and Jobs Act amended the Internal Revenue Code (the “Code”) to add Sections 1400Z-1 and 1400Z-2 (collectively, “Subchapter Z”) related to Opportunity Zones. Subchapter Z was designed to spur investment in designated distressed communities throughout the country by granting investors preferential tax treatment. Section 1400Z-1 includes definitional and procedural rules for designating Opportunity Zones. Section 1400Z-2 allows taxpayers to elect to receive certain federal income tax benefits to the extent that those taxpayers timely invest eligible gains into Opportunity Zones through a Qualified Opportunity Fund (“QOF”), an investment vehicle organized as a corporation or partnership for the purpose of investing in qualified opportunity zones.

Generally, investments in QOFs come with three main tax benefits: (1) investors can defer tax on capital gains timely invested into a QOF until no later than December 31, 2026; (2) investors that hold the QOF investment for five or seven years upon the expiration of the deferral period can receive a 10% or 15% reduction on their deferred capital gains tax bill; and (3) investors that sell the QOF investment after holding the investment for at least 10 years can receive the added benefit of paying no tax on any post-acquisition realized appreciation in the QOF investment.

The Massachusetts Department of Revenue (“DOR”) issued a Technical Information Release on June 17, 2019 (the “TIR”) intended to inform taxpayers and practitioners of the DOR’s official position on the treatment of QOF investments. TIR 19-7.

The TIR provides that because the Massachusetts personal income tax rules (including partnership tax rules) are based upon the Internal Revenue Code as amended on January 1, 2005 and not upon the current code, individuals and partnerships that invest in QOFs will not be able to take advantage of the tax benefits enumerated under Subchapter Z. For personal income tax purposes, a taxpayer who elects to defer gains under Subchapter Z must recognize such gains for Massachusetts income tax purposes in the year of the sale or exchange giving rise to such gains. Additionally, the basis adjustment rules under Subchapter Z do not apply in calculating future gains that must be recognized (for Massachusetts income tax purposes) upon the sale or exchange of a QOF investment.

The TIR also provides that because Massachusetts generally conforms to the Internal Revenue Code as currently in effect for corporations, for corporate excise tax purposes taxpayers who elect to defer capital gains under Subchapter Z will also defer such gains for Massachusetts purposes. Similarly, the federal basis adjustment rules under Subchapter Z will apply to corporations for Massachusetts purposes.