Upcoming Trusts & Estates Section Programs at the BBA this month:
Posts Categorized: Litigation Update
Upcoming Trusts & Estates Section Programs at the BBA this month:
BBA Webinar: Turning 18 – Guardianship, Benefits and Housing for Young Adults with Special Needs. Tuesday, March 15, 2022, 12:00 PM to 1:00 PM. For children with special needs, turning 18 is a major turning point. Now that the child is no longer a child, the parent or other caregiver will need to address changes in available benefits, needs, as well as their ability to make medical and financial decisions on behalf of the disabled person who is now a legal adult. Join our panelists as they discuss three of the major planning points: government benefits, housing and guardianship. Attendees will also receive a “Turning 18” checklist specifically drafted for special needs families.
BBA Webinar: The Delaware Advantage for Personal Trusts. Monday, March 28, 2022, 10:00 AM to 11:00 AM. Delaware is generally renowned for its trust and tax law advantages and its innovative estate planning vehicles. Further, it is regarded as one of the best places for trust administration. Even if your clients do not live in Delaware, there are reasons to consider establishing a trust in Delaware or moving an existing trust to Delaware. Delaware has over 100 years of established trust law and Wilmington Trust is one of the firms that has helped to develop these laws. Jeff Wolken, Wilmington Trust’s national expert in Delaware trust planning, along with Kerry Reeves, will go over everything you ever wanted to know about Delaware trusts.
Upcoming Trusts & Estates Section Programs at the BBA this month:
BBA Webinar: “Fixing” Irrevocable Trusts: Decanting, Non-Judicial Settlement Agreements, and Other Tools. Thursday, February 10, 2022 12:00 PM to 1:00 PM. This program will provide an introduction to various methods for changing the course of an existing Massachusetts irrevocable trust, including how and when to consider: (1) modification, (2) reformation, (3) decanting, and (4) a non-judicial settlement agreement.
BBA Webinar: The Messy Intersection of Divorce and Trust Law – Everything but Pfannenstiehl. Tuesday, February 15, 2022 12:00 PM to 1:00 PM. Panelists will discuss various estate and trust related issues that might arise during divorce proceedings, including conflicts between the terms of marital/divorce agreements and estate planning documents as well as the rights of non-parties in divorce proceedings when trust interests are implicated.
Upcoming Trusts & Estates Section Programs at the BBA this month:
BBA Webinar: Introduction to Irrevocable Trusts. Thursday, January 6, 2022 10:00 AM to 11:00 AM. This program will provide an introduction to the use of irrevocable trusts in estate planning, including income and estate tax implications, drafting considerations, and avoiding potential pitfalls.
BBA Webinar: Trusts & Estates Mid-Year Review. Monday, January 24, 2022 10:00 AM to 11:30 AM. An annual event not to be missed, the Trusts & Estates Mid-Year Review covers recent federal and state case law, legislation and tax law matters.
The Supreme Judicial Court and the Probate and Family Court each issued new Standing Orders that went into effect May 4, which supersede the prior Standing Orders. It is important to read both new Standing Orders together: the SJC Standing Order is available here and the Probate and Family Court Standing Order is available here.
Pursuant to the SJC Standing Order, until at least June 1, the courthouses will remain closed to the general public, except to address emergency matters that cannot be resolved through remote methods, such as telephone, video conference, e-mail, and comparable means. The Probate and Family Court Standing Order enumerates 10 categories of emergency matters, which include, among other things, petitions and motions concerning medical treatments, petitions for appointment of a temporary guardian or conservator, and petitions and motions for appointment of special personal representatives.
Regarding non-emergency matters, the SJC Standing Order directs the Trial Court departments to identify the categories of non-emergency matters that each will attempt to address virtually. In its Standing Order, the Probate and Family Court has identified a goal of hearing as many case types and events as possible. Accordingly, beginning on May 11, 2020, the Probate and Family Court will attempt to hear virtually all case types and events, except for trials and evidentiary hearings, where it is practicable to do so. Determinations concerning the volume of cases to be heard and the case types will be made by the Register and First Justice and will differ across divisions of the Probate and Family Court.
The Standing Orders also affect deadlines in the Probate and Family Court that fall between March 16 and June 1 in the following ways:
1. Most Deadlines are Tolled until a Date after June 1: The deadline extensions of Paragraph 12 of the SJC Order control with the exception of five enumerated types of deadlines listed below. Thus, in most instances, Paragraph 12 of the SJC Standing Order extends all deadlines (based on “statutes, court rules, standing orders, tracking orders, or guidelines”) that expire between March 16 and June 1.
The new deadline is calculated by determining the number of days remaining after March 16 until the original deadline, and add that number of days after June 1. For example, if the original deadline was March 20, then 4 days remained as of March 16, so the new deadline would be June 5 (June 1 plus 4 days).
The new deadline calculations also apply to deadlines that would have originated during the pandemic. For example, if you served discovery while working from home during this pandemic, Paragraph 12 of the SJC Order directs that your new deadline only begins to run as of June 1.
2. The Five Exceptions – These Deadlines Are Not Tolled: Under Paragraph H of the Probate and Family Court Standing Order, the above tolling does not apply to the following five types of deadlines:
i. Findings required by G. L. c. 208, § 1A;
ii. Objection period in G. L. c. 208, § 21, so that judgments absolute may enter in divorce cases;
iii. Time period to file an answer or any other responsive pleading to a contempt summons;
iv. Time period to file an appearance or affidavit of objections pursuant to G. L. c. 190B, § 1-401; and
v. Time period to request a motion for a new trial or to amend findings and/or judgments in Rule 59.
Thus, for cases involving these five types of deadlines with expiration dates falling between March 16 and June 1, the deadlines are not extended. This is a trap for the unwary as failure to take heed of these exceptions could result in a defendant being defaulted if they failed to file an answer or responsive pleading to a contempt summons, or a respondent could lose the opportunity to appear and file an affidavit of objections.
The new Standing Orders also address the operations of the Clerks’, Registers’, and Recorder’s Offices, all of which continue to conduct court business for emergency matters and non-emergency matters as designated by their respective court department. Specifically, the Probate and Family Courts are accepting new matters for filing by mail, e-mail, or e-filing were available, unless filings in emergency matters cannot be accomplished electronically.
For other details about trials and extensions of Probate and Family Court orders, including for treatment plans and temporary orders of appointment in guardianship and conservatorship cases, please review the SJC Standing Order (here) and the Probate and Family Court Standing Order (here).
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.
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.
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.
In Estate of Weaver (Case 15-P-714) (March 2, 2016), three siblings appealed an order of the Probate and Family Court. The Weaver siblings were children of the decedent’s first marriage. During the decedent’s second marriage he and his wife executed reciprocal Wills, leaving their estates to each other, with the decedent’s step-daughter as the alternate recipient. In challenging the Will, the siblings claim undue influence as well as alcohol and drug use by the decedent and his second wife as factors. Decedent’s second wife predeceased him and he did not change his Will prior to his death leaving his entire estate to his step-daughter on his death.
The Appeals Court affirmed the decision of the Probate and Family Court, striking the decedent’s children’s affidavits of objection to his Will. The court found that had his Will been influenced by his deceased wife and estranged step-daughter, enough time had passed in which he could have changed his Will if he so desired.
Regarding the accusations of drug and alcohol abuse, the Appeals Court found there was no evidence that the decedent was under the influence when he executed his Will or the he did not understand its contents. The Appeals Court further found the decedent was in contact with his children after his wife’s death, and that he was aware of the terms of his Will. The court found “ample opportunity” to update his Will, if he so desired.
Overview: Transfer made as part of settlement of family litigation is not a taxable gift
Summary: The Tax Court case, Estate of Redstone v. Commissioner, 145 T.C. No. 11, focuses on a family dispute that led to a transfer of 33 ⅓ shares of a family business to a trust for the shareholder’s two children. The issue the Tax Court reviews is whether the shareholder’s transfer of stock in trust for his two children was a gift subject to the gift tax or whether it constituted a bona fide, arm’s-length transaction that was free from donative intent and that was “made in the ordinary course of business.”
Summary of Facts: Edward Redstone (“Edward”), along with his brother, Sumner, and father, Mickey, incorporated a closely-held family company National Amusements, Inc. (“NAI”). Upon NAI’s incorporation, Mickey contributed a disproportionate amount of capital. Nevertheless, Edward, Sumner and Mickey each were listed as the registered owners of an equal ⅓ of NAI’s shares, equal to 100 shares each.
Edward was eventually forced out of the business after numerous family disputes within the Redstone family, originally stemming from the institutionalization of Edward’s son, Michael, by Edward, for psychiatric problems. Edward felt marginalized, not only with his family, but also within the family business. Eventually, Edward quit the business. Upon leaving, Edward demanded possession of the 100 shares of common stock registered in his name.
Mickey refused to give Edward the stock certificates. Mickey argued that a portion of the shareholder’s stock, though registered in Edward’s name had actually been held since NAI’s inception in an “oral trust” for the benefit of Edward’s children, because of Mickey’s disproportionate contribution of capital. Mickey contended that he had gratuitously accorded Edward more stock than he was entitled to, and the “extra” shares should be regarded as being held in trust for Edward’s children.
The parties negotiated for six months in search of a resolution. Edward sued NAI to recover the 100 shares of stock that were registered in his name. A settlement was ultimately reached. The parties agreed in a Settlement Agreement that Edward was the owner of 66 ⅔ shares of the stock, and the remaining 33 ⅓ shares of stock would be transferred into irrevocable trusts for the benefit of Edward’s two children. The Settlement Agreement further provided that Edward would transfer the 66 ⅔ shares to NAI for $5 million.
The IRS determined that Edward’s transfer of stock to the irrevocable trusts for the benefit of his children was a taxable gift. The IRS further determined that in addition to gift tax owed, there were further penalties for fraud, negligence and failing to file a gift tax return.
Applicable Legal Principles and Analysis: Where property is transferred for less than adequate and full consideration in money or money’s worth, the amount by which the value of the property exceeds the value of the consideration is deemed a gift. A transfer of property within a family group normally receives close scrutiny as to whether it is a gift. However, on numerous occasions, the Tax Court has held that a transfer of property between family members in settlement of bona fide unliquidated claims was made for “full and adequate consideration” because it was a transaction in the “ordinary course of business.” A transfer of property will be regarded as made for “a full and adequate consideration” in the “ordinary course of business” only if it satisfies the three elements specified in Treas. Reg. Sect. 25.2512-8. The three elements are that the transfer is bona fide, transacted at arm’s length and free of donative intent.
The Tax Court held that the transfer was not a gift as it satisfied all three elements. The settlement was “bona fide” because the parties “were settling a genuine dispute as opposed to engaging in a collusive attempt to make the transaction appear to be something it was not.” See 145 T.C. No. 11, at 21. The transfer was at “arm’s length” as Edward acted “as one would act in the settlement of differences with a stranger.” See id. at 22. The Tax Court found that Edward was genuinely estranged from his father. There were legitimate business grievances against one another that led to the parties being represented by counsel and engaged in adversarial negotiations for many months prior to settlement that was incorporated into a judicial decree. The transfer was free of donative intent as Edward transferred stock to his children not because he wished to, but because his father demanded it. See id. at 25. At the time of the settlement, Edward had no desire to transfer stock to his children but was forced to accept this transfer in order to placate his father, settle the family dispute, and obtain a $5 million payment for his 66 2/3 shares.
Take Away Considerations: In the settlement of litigation in a family related context, concerns are often raised by planners as to whether any parties are making taxable gifts as a result of the settlement. Although transfers in compromise and settlement of genuine trust and estate disputes will typically be treated as transfers for full and adequate consideration in the ordinary course of business, this Tax Court case summarizes certain factors to consider in this context, which include: whether a genuine controversy existed between the parties; whether the parties were represented by and acted upon the advice of counsel; whether the parties engaged in adversarial negotiations; whether the value of the property involved was substantial; whether the settlement was motivated by the parties’ desire to avoid the uncertainty and expense of litigation; and whether the settlement was finalized under judicial supervision and incorporated in a judicial decree. See 145 T.C. No. 11, at 20. These factors offer helpful guidelines for practitioners to consider when advising clients whether a transfer of property in the context of a family settlement should be reported as a taxable gift.