Ferri v. Powell-Ferri: MA Supreme Judicial Court Decision Regarding Trust Decanting

Author:  Allison M. Whitmore, Morgan, Lewis & Bockius LLP

In the case of Ferri v. Powell-Ferri, the Massachusetts Supreme Judicial Court (SJC) responded to certified questions from the Connecticut Supreme Court concerning trustees’ authority to distribute (or decant) substantially all of the assets of an irrevocable trust into a new trust.  In connection with a Connecticut divorce proceeding, the Connecticut Supreme Court certified questions to the SJC about the construction of a Massachusetts trust created by the father of the trust’s beneficiary for the sole benefit of his son.

The terms of a 1983 trust authorized the Trustees to pay to or segregate irrevocably trust assets for the beneficiary. In addition, the beneficiary, at certain ages, had the right to request withdrawals up to fixed percentages of the trust assets.  At the time of the decanting, the beneficiary had the right to request a withdrawal of up to 75% of the trust property.  Without informing the beneficiary, the Trustees decanted the 1983 trust property to a new trust, under which the beneficiary could no longer exercise a withdrawal right.

Relying on Morse v. Kraft, the SJC looked to the terms of the trust instrument and other relevant evidence of the settlor’s intent when deciding whether the Trustees were authorized to decant.  The SJC found that the Trustees were granted broad discretion when making distributions to or for the benefit of the beneficiary.  The SJC also found that the beneficiary’s right to request a withdrawal of a certain percentage of the trust assets was not inconsistent with the authority to decant.  The two distribution mechanisms provided under the trust instrument were not mutually exclusive, the Trustees maintained full legal title to the trust property and they did not lose their ability to exercise their fiduciary duties over “withdrawable” trust assets.  Therefore, unless and until all of the trust assets were distributed in response to the beneficiary’s request for a withdrawal, the Trustees could exercise their powers and obligations under the trust, including the duty to decant if they deemed decanting to be in the beneficiary’s best interest.

 

 

Consolidated Matters: Hanna v. Williams, et. al. & Berkowtiz, et. al. v. Williams, et. al.

By, Glynis Ritchie, Esq. of Day Pitney LLP 

The conduct of two estate planning attorneys, in addition to a financial advisor, are under scrutiny in the consolidated matters, Hanna v. Williams, et. al., Superior Court No. 1684CV 0722 BLS 1 and Berkowtiz, et. al. v. Williams, et. al., Superior Court No. 1684CV 0724 BLS 1.  Both matters involve the same estate planning attorneys and financial advisor defendants.  In its recent memorandum and order, the Superior Court ruled on the defendants’ motions to dismiss for failure to state a claim for (i) tortious interference with an expectancy (with respect to an inheritance); (ii) violations of G.L. c. 93A, § 9; and (iii) civil conspiracy, among other claims.  The Court also addressed its jurisdiction over these probate-related matters.

The decision sets out a variety of colorful facts, alleged in the plaintiffs’ complaints and outlined in detail by the Court, calling into question the defendants’ conduct. The matters concern the execution of an estate plan by an 91-year-old client, then hospitalized, immediately prior to her death in 2013.  The 2013 estate plan consisted of a will and trust, the terms of which differed significantly from the decedent’s prior will, executed in 1961.  According to facts alleged, the new documents included provisions leaving nearly $2 million dollars to the decedent’s financial advisor; the drafting attorneys’ firm was named as trustee for resulting long-term family trusts (despite the two attorneys not having met the client prior to the signing conference). According to the plaintiffs, the attorneys and financial advisor were the only individuals present at the deathbed signing conference, and, at the time, the decedent was heavily medicated.  Upon returning to their firm, the attorneys requested an administrative assistant notarize the decedent’s signature, despite the assistant not having been present at the signing conference.  The decedent died six days after the new documents were executed; following her death, the would-be beneficiaries of the 1961 will raised alarm.

A petition for probate of the 2013 will was then filed in the Essex County Probate and Family Court.  In the following months and years, extensive litigation took place regarding the validity of the 1961 and 2013 wills.  The parties of the probate court matter eventually entered into a Compromise Agreement approved by the probate court. Pursuant to that Agreement, the beneficiaries under the 1961 will received a percentage of what they would have been entitled to under the 1961 estate plan.  The Agreement did not establish the validity of either will, but it did provide that legal fees (then totaling approximately $1,240,000) be paid by the Estate.  The would-be beneficiaries of the 1961 will, and the personal representative of the decedent’s Estate, then brought actions in Superior Court for recovery of monetary damages and legal fees.

In addressing the question of jurisdiction, the Superior Court analyzed the standard for making a claim for tortious interference with an expectancy.  The tort, which is recognized in Massachusetts, requires proof that “but for” the interference, a plaintiff would have received something (for example, additional inheritance).  A plaintiff need not prove that a particular will is invalid, but merely that the procuring of the will in question was a tortious act.  Furthermore, there may be recovery notwithstanding a prior will admitted to probate.

Defendants argued that the Superior Court lacked jurisdiction to hear such a claim because the claim was, at its heart, a will contest; will contests, the defendants furthered, are within the exclusive jurisdiction of the probate court. The Court disagreed.  It clarified that, despite defendants’ argument, this is not a will contest, but a separate tort claim.  The probate court does not have jurisdiction to decide such actions for money damages.  As such, if the Superior Court also lacked jurisdiction to hear such a matter, the plaintiffs would have no adequate remedy.  On this basis, the Court denied defendants’ motion to dismiss for lack of subject matter jurisdiction.

The Court then held that the plaintiffs alleged sufficient facts to state a claim for intentional interference.  In setting aside defendants’ argument that they knew nothing of the 1961 will (and therefore could not have intentionally denied anyone an expectancy), the Court clarified that such a claim requires only that the defendants intentionally interfere with an expectancy, not that they knew the scope or details of the expectancy in question.  A valid claim is established where there was a reasonable likelihood of expectancy, and defendants’ conduct caused the persons affected to settle a lawsuit for less than what those individuals would otherwise have received.  The facts here, the Court found, are sufficient to sustain such a claim.

The Court granted the defendants’ motion to dismiss the would-be beneficiaries’ claim of professional negligence (because the defendants owed no duty of care to the would-be heirs) but denied their motion with respect to the alleged violations of G.L. c. 93A, § 9 and civil conspiracy, among others.  In doing so, the court cleared the way for this already extensively litigated matter to continue on its path toward an ultimate resolution.

BBA Event Recap: Lifetime Planning on Death’s Door

Program Date:  Friday, February 24, 2017

Panelists:  Jaclyn S. O’Leary and Sean T. Donovan of  Day Pitney LLP

Program Chairs:  Sara Goldman Curley of Nutter McClennen & Fish LLP and David L. Silvian of Day Pitney LLP, co-Chairs of the Estate Planning Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  The panelists for this program discussed opportunities for income and estate tax savings that attorneys can provide to clients who are nearing the end of their lives. It also covered practical steps that attorneys can take in order to make sure that clients’ wishes are carried out and unpleasant surprises are minimized.

 

BBA Event Recap: Non-Judicial Settlement Agreements – How Are They Being Used?

Program Date:  Wednesday, February 8, 2017

Panelists:  Sara A. Wells of Morgan Lewis, Eric David Karlberg of Prince Lobel Tye LLP, and Alison Irving Glover of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Program Chairs:  Stacy K. Mullaney of Fiduciary Trust Company and Liza M. Connelly of Boston Private, co-Chairs of the Trust Administration Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  The Massachusetts Uniform Trust Code was enacted more than four years ago.  In the years since, trustees and beneficiaries have utilized non-judicial settlement agreements to resolve matters and effect various changes to irrevocable trusts.  The program provided an expert panel of trusts & estates attorneys on how non-judicial settlement agreements are being used by trustees to facilitate trust administration and resolve issues.  It explored the issue of what is a “material purpose” and who are the “interested persons” who need to be a party to an non-judicial settlement agreement, key terms under the law.  The panelists also shared some examples of matters they have handled with non-judicial settlement agreements and some key issues that arise for a trustee or attorney advising a trustee to consider.

 

A Win for Trusts & Asset Protection in Massachusetts

Author:  Annette K. Eaton, Nixon Peabody LLP

After a year of living with the uncertainty caused by the Massachusetts Appeals Court’s decision in Pfannenstiehl v. Pfannenstiehl, on August 4, 2016 the Massachusetts Supreme Judicial Court reversed the decision, representing a major win for the asset protection features of trusts in Massachusetts.

In August 2015, the Massachusetts Appeals Court issued the unprecedented decision in Pfannenstiehl allowing a husband’s beneficial interest in a discretionary spendthrift trust with an ascertainable standard to be included in his marital estate and divisible in a divorce proceeding.   

The 2015 decision sent shockwaves through the Massachusetts estate planning community, casting uncertainty upon all discretionary spendthrift trusts, especially those that employed an ascertainable standard for distributions, i.e. “comfortable support, health, maintenance, welfare and education,” such as the trust at issue in Pfannenstiehl.  Although, many estate planners in recent years have had reservations about employing ascertainable standards for this very reason, there had been no prior case in Massachusetts which specifically included a discretionary trust with an ascertainable standard in a beneficiary’s marital estate in the event of divorce until Pfannenstiehl.  Historically, a spouse’s interest in a discretionary spendthrift trust has been excluded from the marital estate because the interest is considered to be too remote and speculative to be deemed an asset.  This is because distributions to beneficiaries are generally within the trustee’s discretion even if subject to an ascertainable standard. 

However, on August 4, 2016, the Massachusetts Supreme Judicial Court reversed the Appeals Court’s decision, holding that the beneficiary’s right to receive distributions from the trust was “speculative” and did not render his right to future distributions from the trust to be “sufficiently certain such that it may be included in the marital estate.”  As a result, discretionary spendthrift trusts with ascertainable standards are once again safe, for now, from being included in a marital estate in the event of divorce.

Practice Fundamentals Series: Estate, Gift and GST Tax Basics for the New Estate Planner

Program Date: Monday, November 28, 2016

Panelists: Susan A. Robb of First Republic Trust Company and Danielle R. Greene of Boston Private

Program ChairsHeidi Seely of Rackemann, Sawyer & Brewster, P.C. and Nikki Marie Oliveira of Bass Doherty & Finks, P.C.

Materials: Click here for panelists’ handout.

Program Topic:  Panelists provided an introduction to the estate, gift and generation-skipping transfer taxes.  The program content included a review of the key components of each tax, how the taxes related to one another, and context of the relevancy of each tax for purposes of preparing an estate plan.

IRS Announces Inflation-Adjusted Amounts for 2017

Author:  Susan A. Robb, First Republic Trust Company

On October 25, 2017, the IRS released Revenue Procedure 2016-55, which outlined various inflation-adjusted amounts for 2017.  These amounts apply to returns for tax year 2017 that will be filed in 2018.  Some of the key provisions are as follows:

Estate and Gift Tax

  • Estates of decedents who die during 2017 will have a basic exclusion amount of $5,490,000, up from $5,450,000 for estates of decedents who died in 2016.
  • Accordingly, the generation-skipping transfer tax exemption will also rise to $5,490,000 for 2017.
  • The annual exclusion from gift tax will remain at $14,000 for 2017.
  • The exclusion from tax on a gift to a spouse who is not a U.S. citizen will be $149,000 for 2017, up from $148,000 for 2016.

Income Tax

  • Highest tax bracket
    • The 39.6% tax rate will affect single taxpayers whose income exceeds $418,400 ($470,700 for married taxpayers filing jointly) for 2017, up from $415,050 ($466,950 for married taxpayers filing jointly) for 2016.
    • The 39.6% rate will apply to estates and trusts with income of more than $12,500 for 2017, up from $12,400 for 2016.
  • Standard deduction
    • The standard deduction for married filing jointly will rise to $12,700 for 2017, an increase of $100 from 2016.
    • For single taxpayers and married individuals filing separately, the standard deduction will rise to $6,350 for 2017, up from $6,300 for 2016.
    • For heads of households, the standard deduction will rise to $9,350 for 2017, up from $9,300 for 2016.
  • Itemized deductions
    • For individuals, the limitation for itemized deductions for 2017 will begin with incomes of $287,650 or more ($313,800 for married couples filing jointly).
  • Personal exemption
    • The personal exemption for 2017 will remain unchanged at $4,050.
    • The personal exemption is subject to a phase-out that will begin with adjusted gross incomes of $261,500 ($313,800 for married couples filing jointly) and phase out completely at $384,000 ($436,300 for married couples filing jointly).
  • “Kiddie tax”
    • The kiddie tax threshold amounts will remain unchanged for 2017. The kiddie tax applies to dependents under nineteen and dependent full-time students under twenty‑four who have unearned income of more than $1,050 but less than $10,500.
    • As was the case for 2016, for 2017, the first $1,050 of unearned income a child earns will be offset by the $1,050 standard deduction (assuming the child has no earned income), and the next $1,050 of such unearned income will be taxed at the child’s tax rate.
    • All of the child’s unearned income in excess of $2,100 will be taxed at the parent’s tax rate.
  • AMT
    • The Alternative Minimum Tax exemption amount for 2017 will be $54,300 and begin to phase out at $120,700 ($84,500, for married couples filing jointly, for whom the phase out begins at $160,900). The 2016 exemption amount was $53,900 ($83,800 for married couples filing jointly).
    • The AMT exemption amount for estates and trusts will be $24,100 for 2017, up from $23,900 for 2016.
    • For 2017, the 28 percent tax rate will apply to taxpayers, including estates and trusts, with taxable incomes above $187,800 ($93,900 for married individuals filing separately).
  • Foreign earned income exclusion
    • For 2017, the foreign earned income exclusion will be $102,100, up from $101,300 for 2016.
  • Parking and transportation
    • For 2017, the monthly limitation for the qualified transportation fringe benefit will remain at $255.
    • The monthly limitation for qualified parking will also remain at $255.

BBA Event Recap: Trust Owned Real Estate – Navigating the Administration Issues

Program Date:  Wednesday, November 9, 2016

Panelists: Liza Connelly of Boston Private and Stacy K. Mullaney of Fiduciary Trust Company.

Program Chairs:  Liza Connelly of Boston Private and Stacy K. Mullaney of Fiduciary Trust Company, co-Chairs of the Trust Administration Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  This program covered the myriad of issues facing trustees who hold real estate in irrevocable trusts such as issues on trustee succession, insurance, expense allocation between trust and beneficiary-occupant and between trust income and principal, and the obligation to obtain “highest and best” price in a sale of real estate.  The panelists discussed the issues facing trustees when administering trust-owned real estate and how to avoid potential pitfalls in both the administration and the sale of real estate.

 

 

BBA Event Recap: Estate Planning for Owners of Closely Held Businesses

Program Date:  Friday, October 28, 2016

PanelistsJeffrey W. Roberts and Johanna L. Wise Sullivan of Nutter McClennen & Fish LLP

Program Chairs:  Sara Goldman Curley of Nutter McClennen & Fish LLP, and David L. Silvian of Day Pitney LLP, co-Chairs of the Estate Planning Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  This program provided an overview of key issues and planning points that attorneys should keep in mind when engaging in estate planning for a business owner.  It included an overview of different tax structures (C corporations, S corporations and LLCs), other structural issues (women owned businesses and business succession planning), and drafting considerations.  The panelists also discussed planning options, including the use of discounted valuations, freezing techniques and liquidity issues.

 

BBA Event Recap: Planning for Contested Estates: Estate Planning Strategies to Avoid (or Prevail In) Litigation

Program Date: Tuesday, October 18, 2016

PanelistsAlison Irving Glover of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Marshall D. Senterfitt of Goulston & Storrs, and Ryan P. McManus of Hemenway & Barnes LLP

Program ChairsMarshall D. Senterfitt of Goulston & Storrs and Ryan P. McManus of Hemenway & Barnes LLP, co-Chairs of the Fiduciary Litigation Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  This program provided an in-depth review of estate planning strategies and best practices to be employed when a contest is possible or even likely.  The program focused on steps that can be taken during the planning stage to reduce the likelihood of litigation and to ensure that an estate plan, if challenged, will be upheld.  The panelists included a discussion of procedures that can be employed to try to achieve certainty and finality when litigation is anticipated.