Time to Modernize Massachusetts Trust Law

Author:
Brad Bedingfield, Esq., Wilmer Cutler Pickering Hale and Dorr LLP

Since the Uniform Law Commission first promulgated the Uniform Trust Code in 2000, Massachusetts has watched as a growing number of states, including neighbors Maine, Connecticut, New Hampshire and Vermont, adopted versions of the UTC. The flexibility and uniformity provided by the UTC has proven to be a great selling point in pitching settlors to establish trusts in UTC states, and trustees to migrate trusts to those states.

Now, it’s our turn.

Two bills currently before the Massachusetts legislature, the Massachusetts Uniform Trust Code (H. 2261 and S. 688) (“MUTC”) and a bill making certain important technical corrections to the Massachusetts Uniform Probate Code (“MUPC”) (S. 704), will go far towards modernizing trust law in Massachusetts. These bills, which have been endorsed by the Boston Bar Association, the Massachusetts Bar Association, and the Massachusetts Bankers Association, are important to ensure that Massachusetts remains competitive as a forum for trusts. They will streamline certain aspects of trust administration and probate court proceedings, reducing costs, inefficiency and uncertainty for trustees and for beneficiaries, and will ease the burden on the probate courts.

Some of the key benefits of the MUTC are that it:

  • Codifies much of the existing law of trusts (now spread between statutes and court decisions), thereby making the law of trusts more accessible;
  • Provides statutory guidelines regarding powers, duties and liabilities of trustees;
  • Provides more flexible rules regarding representation in court proceedings, in many cases eliminating the need for appointment of a guardian ad litem;
  • Eliminates the distinction between inter vivos and testamentary trusts, reducing the need for continued court oversight over testamentary trusts in many cases;
  • Gives standing to donors of charitable trusts to bring a proceeding to enforce the trust’s terms;
  • Provides courts with greater flexibility to modify or reform a trust instrument;
  • Provides statutory support for non-judicial settlement agreements, allowing many trust matters to be resolved outside of court;
  • Gives trustees the power to divide and combine trusts for tax or other purposes, and to terminate uneconomic trusts;
  • Allows for the creation of trusts with no specific beneficiaries, established for specific non-charitable purposes (so-called “purpose trusts”); and
  • Allows for directed trusts, in which certain powers may be granted to persons other than the trustees, with protection of trustees who act as directed.

The BBA’s statement to the Joint Committee on the Judiciary in support of the MUTC may be found here.

The provisions of the MUPC pertaining to trusts are scheduled to come into effect on January 2, 2012. This would also be the effective date of the MUTC, as filed. If passed, the MUTC will effectively replace the trust law provisions of the MUPC. However, if passage of the MUTC is delayed, courts, practitioners, trustees and beneficiaries will have to grapple with multiple disparate bodies of trust law in succession, unnecessarily increasing compliance costs and putting additional pressure on the courts.

In order to avoid this scenario, and to provide as much time as possible to prepare for the new law, both bills should be passed promptly.

At present, both bills are before the Joint Committee on the Judiciary. Therefore, please consider contacting your representatives and asking them (1) to urge the members of the Judiciary Committee to report these bills favorably out of the committee and (2) to vote for these bills, when they come to a full vote.

The phone numbers and email addresses of the members of the Judiciary Committee may be found here.

To identify your representatives, and for contact information, please click here.

A template letter for your consideration may be found here.

Thank you for helping to move Massachusetts trust law into the 21st century.

Passage of Probate Laws Needed ASAP

Author:
Kathleen Joyce, Government Relations Director, Boston Bar Association

The Massachusetts Uniform Probate Code (UPC) will be effective for estates on January 2, 2012; it became effective for guardianship on July 1, 2009. This landmark piece of legislation is something the BBA has worked on and supported for over 20 years. Not only does the UPC improve what was a deplorable situation concerning the appointment and conduct of guardians, but it will simplify the probate process for families and our courts while expediting the process for administering estates. The UPC facilitates the appointments of executors and also provides options for choosing informal or formal procedures to open and close probate matters. All in all, lawyers and the courts are pleased with it.

The Probate and Family Court has been educating its staff on the new law and working diligently to promulgate new forms that will be used when the rest of the UPC is rolled out in January. To supplement their efforts, the BBA will offer a continuing legal education seminar introducing the new estate rules in November to help practitioners navigate the changes.

Now what? The Legislature needs to pass two more bills quickly. The first, S733, contains technical corrections to the UPC. These corrective changes address issues that came to light during the initial implementation and take into account things like missed cross references, typos and other oversights. The second bill, the Massachusetts Uniform Trust Code (MUTC), is a companion piece to the UPC. Since the MUTC repeals most of Article VII of the UPC and replaces it with more current language, it would be advantageous to have all the statutory trust law provisions in the same place in the new MUTC and take effect as scheduled on January 2, 2012.

Like the UPC, the MUTC is a substantial bill that has been well-vetted. It was produced by the Uniform Laws Commission after a five-year drafting period. Then in 2005, an ad hoc committee of lawyers, including members of the BBA, was convened to review the bill in detail. They debated each section of the MUTC and, as a result, what we have is a statute that will simplify and make the trusts laws in Massachusetts more accessible.

Here are just a few reasons that the MUTC should be passed:

  • The laws concerning trust will be uniform, comprehensive and easy to find.
  • It will make the administration of trusts more uniform among the states.
  • It will reduce uncertainty and costly and needless litigation.
  • It provides guidance and protection for trustees who, by the terms of the trust, are to take direction from a non trustee.
  • It simplifies judicial proceeding regarding non judicial settlement agreements and modification and termination of trusts.

January is less than five months away and, realistically, we are looking at a legislative schedule that at best might enact the bills by late September – not a lot of time to conduct the education and training necessary for a smooth implementation next January. Whatever can be done to facilitate the prompt passage of the MUTC legislation should be done. Adopting the MUTC will move Massachusetts into the 21st century in trust law.

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This article was first published on Issue Spot.

T&E Litigation Update – Furman v. Gossels, Sherman v. Shub, Cherubini v. Goodsell, Austin v. Austin, Paine v. Sullivan, McGeoghean v. McGeoghean

Author:
Mark E. Swirbalus, Esq., Day Pitney LLP

The T&E Litigation Update is a recurring column summarizing recent trusts and estates case law. If you have question about this update or about T&E litigation generally, please feel free to e-mail the author by clicking on his name above.

Furman v. Gossels

In Furman v. Gossels, Case No. 10-1603-BLS1, 2011 Mass. Super. LEXIS 84 (Super. Ct. May 24, 2011), the Superior Court addressed a business dispute that turned on the nature of the rights held by a beneficiary of a trust.

Siblings Elaine, Jerome and Walter were the members of a limited liability company, with each owning a one-third interest. The operating agreement of the LLC provides that only descendants of the siblings’ parents shall be members. The operating agreement also contains a restriction on the transfer of a membership interest, providing in part that a membership interest can be transferred only (1) to a descendant of the siblings’ parents or (2) to a trust in which all of the beneficial interests are owned by another member or a descendant and the trustee of which is a member. If a membership interest is transferred to an impermissible transferee, then the operating agreement gives the LLC the right to purchase that interest at a discounted price.

When Walter died in 2010, his membership interest passed through his estate to a family trust. Under the terms of the trust, his widow Miriam disclaimed her interest in the LLC and declined to act as trustee. The result of these actions was that Walter’s children, who (unlike Miriam) are descendants of the siblings’ parents, became the beneficiaries of Walter’s membership interest through the trust and Walter’s daughter Rebecca became the trustee.

The question presented in the litigation was whether Rebecca holds an ownership interest in the LLC and thus is a member, fulfilling the requirement that a membership interest can be transferred only to a trust of which a member is the trustee.

Elaine and Jerome argued that the trust is an impermissible transferee of Walter’s membership interest because Rebecca is not a member of the LLC. The Court disagreed, ruling that Rebecca and her siblings, as the beneficiaries of the trust, hold equitable interests in Walter’s membership interest and thus are the “real owners”. Accordingly, the trust is a permissible transferee because Rebecca, the trustee, is a member of the LLC.

The Court based its ruling on the following trust-law principles: “A trustee of a trust holds the legal title to trust property with the power to administer it for the benefit of the beneficiaries, in accordance with the terms of the trust instrument…. A beneficiary, on the other hand, is the owner of the trust res, has an equitable interest in the trust property, and is considered the real owner.”

Sherman v. Shub

In Sherman v. Shub, Case No. SUCV2007-BLS1, 2011 Mass. Super. LEXIS 146 (Suffolk Super. Ct. June 16, 2011), the Court entered summary judgment against the plaintiffs on their Chapter 93A claim against the defendant insurance advisers and attorneys relating to allegedly defective estate plans.

The plaintiffs purchased two life insurance policies that were to become assets of two irrevocable life insurance trusts. Some time later, the plaintiffs discovered defects in the trust instruments and related documents that could result in increased estate and gift tax liability in the future. The plaintiffs brought the Chapter 93A claim against the defendants for this potential liability.

The Court granted the defendant’s motion for summary judgment, holding that the plaintiffs’ alleged damages are too speculative to be actionable. The Court adopted the defendants’ argument that estate and gift taxes are subject to calculation only at the time of death, and that this calculation is subject to a number of variables (e.g., the value of the decedent’s estate; the nature and amount of any deductions, credits and exemptions that may be available in the estate; the state or jurisdiction in which the estate is located; the applicable federal and state estate tax laws in force at the time; the decedent’s marital status; and the identity of the beneficiaries of the estate). As the Court explained,

Here, even assuming that there are no changes in the [plaintiffs’] personal circumstances and the size of their estates at the time of their future deaths, the court can make no such assumptions with respect to the federal and state tax statutes that may be in effect. . . . [T]he court is not in a position to divine the future intent and/or actions of Congress or to make such a prognostication.

Cherubini v. Goodsell

In Cherubini v. Goodsell, Case No. 10-P-1245, 2011 Mass. App. Unpub. LEXIS 827 (June 24, 2011), a decision issued pursuant to Rule 1:28, the Appeals Court addressed the anti-lapse statute, G.L. c. 191, § 22, and its effect on purported assignments of interests in an estate.

Donald Goodsell predeceased Dominic Cherubini. One of Donald’s children, Edward Goodsell, argued that the portion of Dominic’s estate that would have passed to Donald should go directly to Edward rather than to all of Donald’s children by right of representation, because Donald’s other children had assigned their interests in Donald’s estate to Edward. The probate court disagreed, instructing the executor of Dominic’s estate to make distributions to all of Donald’s children by right of representation.

The Appeals Court affirmed, explaining that the anti-lapse statute operates to require the distribution of Donald’s share of Dominic’s estate directly to Donald’s surviving issue. In other words, Donald’s share would not pass through his estate, meaning that any assignment of interest in Donald’s estate would have no effect. The Appeals Court also rejected Edward’s argument that the assignment agreements were intended to include Donald’s share in Dominic’s estate, because Edward did not meet his high burden of proving mutual mistake, and found that the assignment agreements unambiguously pertained to Donald’s estate exclusively.

Austin v. Austin

In Austin v. Austin, Case No. 10-P-1342, Mass. App. Unpub. LEXIS 870 (July 7, 2011), a decision issued pursuant to Rule 1:28, the Appeals Court affirmed summary judgment for the defendant on the plaintiff’s reformation claim and the defendant’s claim to enforce the in terrorem clause in the settlor’s will.

First, the plaintiff contended that the probate court had erred as a matter of law in granting summary judgment for the defendant on the plaintiff’s reformation claim because there was a genuine issue of material fact as to whether the settlor, who was the parties’ mother, intended that her assets be equally distributed between them. Because a parcel of land transferred to the plaintiff through a QPRT resulted in the plaintiff paying more taxes than the defendant, the plaintiff claimed that the settlor’s intent was frustrated. The Appeals Court disagreed, holding there was no evidence that the settlor intended to treat her sons “equally”, and so reformation of the trust to conform with this alleged intent would have been inappropriate.

Second, the plaintiff contended that the in terrorem clause in the settlor’s will should not be enforced against his reformation claim because the claim did not challenge the will or the settlor’s revocable trust. He claimed that he only sought to revise the provisions of the QPRT, which was not covered by the in terrorem clause. Again, the Appeals Court disagreed, explaining that if the plaintiff’s QPRT taxes had been paid out of the settlor’s residuary estate, then reformation would have prevented Article Sixteenth of the will (the tax allocation provision) from being carried out in accordance with its terms, because that provision explicitly prohibits the residuary estate from paying the taxes of any trust other than the settlor’s revocable trust. Therefore, the Court held that the probate court had properly enforced the in terrorem clause against the plaintiff.

Paine v. Sullivan

In Paine v. Sullivan, Case No. 10-P-289, 2011 Mass. App. LEXIS 1042 (July 22, 2011), the probate court had ruled that the testator possessed testamentary capacity when he executed his last will and testament and that his will was not the product of undue influence. The Appeals Court reversed the probate court’s ruling on the testamentary capacity claim.

The Court explained that where there is evidence of lack of capacity, the presumption of sanity loses effect and the burden falls upon the proponent of the will to prove by a fair preponderance of the evidence that the testator was of sound mind when the instrument was executed. Here, the objector had offered evidence of lack of capacity, and thus the burden shifted to the proponent to prove capacity. The Court held that the proponent failed to meet this burden. The testimony of a medical expert was insufficient because, according to the Court, it was not clear that the medical expert’s opinion was supported by careful review of the testator’s medical records. The expert “cherry picked” portions of the medical records that could suggest the testator’s dementia was mild and ignored contrary medical records. Moreover, although the Court acknowledged that the testimony of a drafting attorney can be relevant, the drafting attorney was unable to offer any relevant evidence as to the testator’s capacity. He had not seen the testator in years, had spoken with him only by telephone, and was not aware that he had been diagnosed with dementia. Finally, the witnesses to the will, who were employees of the bank where the will was executed, could not recall the specifics of the execution.

McGeoghean v. McGeoghean

In McGeoghean v. McGeoghean, Case No. 10-P-407, 2011 Mass. App. Unpub. LEXIS 936 (Aug. 3, 2011), a decision issued pursuant to Rule 1:28, the Appeals Court affirmed the superior court’s judgment in all respects. The complicated facts of this case are not fully apparent from the decision, but the Court held that the superior court’s findings of fact and conclusions of law were not clearly erroneous. Two issues in particular bear noting.

First, the Appeals Court affirmed the superior court’s finding that the plaintiff John McGeoghean was entitled to quantum meruit damages in compensation for his actions in reliance on the oral promise of his mother, the decedent, to give him certain property and her interest in a business. The superior court did not specify whether the oral promise was one to make an inter vivos gift or a bequest in her will. Consequently, the Court held that the superior court, in awarding quantum meruit damages, had not impermissibly remade the dispositions in the will. Although a promise to include a bequest in a will is not enforceable under the Statute of Frauds, quantum meruit is an available remedy under these circumstances, and the superior court properly found that the plaintiff had rendered valuable services in reliance on his mother’s oral promise.

Second, the defendant argued that the plaintiff is judicially estopped from arguing promissory estoppel (i.e., reliance on the mother’s oral promise) because of a “Vaughan” affidavit filed by the mother in the plaintiff’s divorce action. In that affidavit, the mother had not mentioned a bequest of the property and her interest in the business to the plaintiff. Because the superior court had not found that the mother’s oral promise was one to make a bequest, however, judicial estoppel was not implicated. Moreover, even if the superior court had found that the oral promise was one to make a bequest, the Court held that the superior court would have been within its discretion in not applying judicial estoppel.

IRS Releases Notice 2011-76, Extending Due Dates for Forms 706, 706-NA and 8939 for 2010 Decedents

Author:
Kerry L. Spindler, Esq., Goulston & Storrs, PC

On September 13, 2011, the IRS released Notice 2011-76, providing the following:

  • An executor or administrator of an estate of a decedent who died in 2010 will receive an automatic six month extension of time to file an estate tax return (Form 706 or Form 706-NA) and pay the estate tax due if he or she timely files Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. Thus, an executor or administrator who files Form 4768 on or before September 19, 2011 will receive an automatic extension to March 19, 2012.[1] No substantiation of the reason for the requested extension is required.
  • The due date of Form 8939, Allocation of Increase in Basis of Property Acquired From a Decedent is extended from November 15, 2011 to January 17, 2012.[2] The IRS has not yet released a final Form 8939. 
  • Allocation of a decedent’s available GST exemption on Schedule R or R-1 attached to a timely filed Form 8939 is a timely allocation effective as of the decedent’s date of death. Automatic allocation rules apply if the executor or administrator timely files Form 8939 without attaching either Schedule. Automatic allocation rules also apply if the executor or administrator does not make a § 1022 Election, or timely revokes a § 1022 Election, unless he or she timely files Form 706 or 706-NA and attaches Schedule R or R-1.
  • Recipients of property from a decedent who died in 2010 may receive income tax penalty relief where such recipient also disposed of the property in 2010 but did not know whether the decedent’s executor or administrator would make a § 1022 Election, affecting the property’s basis, tax character or holding period, when filing his or her own income tax return and computing the income tax liability.

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[1] Consistent with §§ 301(d)(1) and (d)(2) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA)which extended the due date for filing an estate tax return, paying estate tax, making qualified disclaimers and allocating GST to no sooner than nine months from the date of the TRA’s enactment, the Instructions to Form 706 and the Instructions to Form 706-NA set September 19, 2011 as such due date with respect to the estates of decedents dying between January 1, 2010 and December 16, 2010. Click here for more information.


[2] IRS Notice 2011-66 set the November 15, 2011 due date. Click here for more information.

IRS Releases Notice 2011-66, Instruction Regarding § 1022 Elections and GST Allocation for 2010 Decedents

Author:
Kerry L. Spindler, Esq., Goulston & Storrs, PC

On August 5, 2011, the IRS released Notice 2011-66, providing instruction for how and when an executor or administrator of the estate of a decedent who died in 2010 can elect out of the estate tax/step-up basis rules of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA) and into the zero estate tax/modified carry-over basis rules of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGRTRRA). The Notice also addresses allocation of generation skipping transfer (GST) tax, transfer certificates and elections under I.R.C. § 645.

I. Making a § 1022 Election into EGTRRA’s Zero Estate Tax/Modified Carry-Over Basis Rules

EGTRRA was to have repealed the federal estate tax for decedents dying in 2010 and replace the step-up in basis traditionally available to property transferred at death with a modified carry-over basis regime. The TRA restored the federal estate tax for 2010 decedents, subject to a $5M federal estate tax exemption amount and a 35% maximum federal estate tax rate, and also restored the step-up in basis rules. This notwithstanding, TRA § 301(c) permits the executor or administrator of the estate of a 2010 decedent to elect into EGTRRA’s zero estate tax/modified carry-over basis rules.

A. Making the § 1022 Election

The executor or administrator of an estate of a 2010 decedent may make the § 1022 election by filing Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, no later than November 15, 2011. A Form 8939 filed before November 15, 2011 may be amended or revoked, but only on a subsequent Form 8939 filed no later than November 15, 2011. Otherwise, the election is irrevocable, except under the following circumstances:

  • Where the IRS receives multiple Forms 8939 and those forms collectively allocate basis increase in an amount greater than the amount of basis increase available, the IRS will invite the filers to submit a single restated Form 8939.
  • Where the sole purpose is to amend a timely filed Form 8939 to allocate Spousal Property Basis Increase (as defined in I.R.C. § 1022(c) and Revenue Procedure 2011-41, also released on August 5, 2011), and the timely filed Form 8939 was complete except for such allocation, the executor or administrator may file an amended Form 8939 no later than 90 days after the distribution of the property to which such increase is allocated.
  • Where an executor or administrator filed a timely Form 8939, he or she may file an amended Form 8939 under the automatic six month extension provisions of Treas. Reg. § 301.9100-2. The amended form must be filed no later than May 15, 2012. 
  • Where an executor or administrator filed a timely Form 8939, he or she may apply for relief to supplement the form under Treas. Reg. § 301.9100-3. The executor or administrator must prove that he or she acted reasonably and in good faith and that the interests of the government are not prejudiced. Moreover, the IRS will grant relief so as to allow supplemental information only if one or both of the following is present: (i) The executor or administrator discovered, after timely filing Form 8939, additional property to which he or she could have allocated basis increase, and/or (ii) the fair market value of the property reported on a timely filed Form 8939 has been adjusted as a result of an IRS examination or inquiry.
  • Whether or not the executor or administrator filed a timely Form 8939, he or she may apply for relief to file under Treas. Reg. § 301.9100-3. Again, the executor or administrator must prove that he or she acted reasonably and in good faith and that the interests of the government are not prejudiced. The amount of time that has passed since the decedent’s death may constitute a lack of reasonableness and/or prejudice.
  • Persons serving in the United States Armed Forces or affected by a federally declared disaster may have a longer period of time to file Form 8939, pursuant to I.R.C. §§ 7508 and 7508A.

At this time, only a draft Form 8939, published on December 16, 2010 is available. The final Form 8939 is expected to be available this fall.

B. Allocating Basis

If the executor or administrator makes a § 1022 election, he or she must also allocate Basis Increase, as defined in Revenue Procedure 2011-41, on Form 8939. The Revenue Procedure provides safe harbor guidance for making such allocation.

C. Reporting Property Acquired from the Decedent

Finally, if the executor or administrator makes a § 1022 election, he or she must value and report all property acquired from the decedent (except cash and property constituting the right to receive income in respect of a decedent) on Form 8939. He or she must report all appreciated property acquired from the decedent, valued as of date of death, that was required to be included on the donor’s gift tax return (Form 709), if the property was acquired by the decedent by gift, or by transfer for less than adequate and full consideration in money or money’s worth, during the three years prior to the decedent’s death (except certain property acquired by the decedent from his or her spouse).

Where the decedent is not a United States citizen, the executor or administrator reports only tangible property situated in the United States acquired from the decedent, and property acquired from the decedent by a United States person.

Individuals acquiring property from a decedent dying in 2010 and subject to a § 1022 election need information about the decedent’s basis in the property in order to determine their own basis. Accordingly, within thirty days of filing Form 8939, the executor or administrator must provide a statement to each recipient, regardless of whether the executor or administrator has allocated basis increase to the property received by that person. The statement must include the following information:

  • Name, address and phone number of the executor or administrator,N
  • ame and TIN of the recipient of the property,
  • Description of the property,
  • Adjusted basis of the property in the hands of the decedent and its fair market value at the time of death, Decedent’s holding period for the property,
  • Information regarding whether any gain on the sale of the property would be treated as ordinary income, and
  • Amount of basis increase allocated to the property (if any).

II. Allocating GST Tax to 2010 Transfers

TRA § 302(c) set a special GST tax rate of 0% with respect to generation skipping transfers made in 2010. Nevertheless, the other provisions of chapter 13 remain intact with respect to transfers made or deemed to have been made in 2010, including the allocation of GST exemption on a timely filed gift or estate tax return.

A. 2010 Estates

The GST tax applies to 2010 estates, whether or not the decedent’s executor or administrator makes a § 1022 election. Although the applicable rate for 2010 transfers is 0%, an executor or administrator who wants a decedent’s GST exemption to be allocated differently than it would be allocated under the deemed allocation rules must still file a timely federal estate tax return. An executor or administrator making a § 1022 election on Form 8939 must make such allocation on Schedule R of Form 8939.

B. Lifetime Transfers During 2010

If a donor made a lifetime direct skip transfer during 2010 and does not want the IRS to allocate GST exemption to the transfer (because the 2010 applicable rate is 0%), the donor may elect out of the automatic allocation of GST exemption in either of two ways:

  • Where the transfer constitutes an inter vivos direct skip not in trust, the donor needs only to timely file a Form 709. Reporting the direct skip on the Form 709 will constitute an election out of automatic allocation of GST exemption to the direct skip not in trust.
  • The donor may affirmatively elect out of automatic allocation by timely filing a Form 709 and describing the transfer and the extent to which automatic allocation is not to apply. This is required for all transfers made to GST trusts, regardless of whether the transfer constitutes a direct or an indirect skip.

C. Filing Deadline

Section 301(d)(2) of the TRA extends the due date for filing a gift or estate tax return reporting a GST transfer (direct skip, taxable distribution or taxable termination) made on or after January 1, 2010 but no later than December 16, 2010, to September 17, 2011. Where a GST transfer is being reported on Form 8939’s Schedule R (because the executor or administrator has made a § 1022 election), the form and schedule must be filed no later than November 15, 2011.

The TRA does not extend the due date for returns reporting indirect skips, regardless of when the transfer occurred. It also does not extend the due date for returns electing to treat a trust as a GST trust, or for returns reporting GST transfers that occurred after December 16, 2010.

III. Transfer Certificates

A transfer certificate is not required where a nonresident decedent who is not a citizen of the United States died in 2010 and the decedent’s executor or administrator makes a § 1022 election. The IRS will not issue transfer certificates in such cases.

IV. Section 645 Election to Treat a Trust as Part of an Estate

An executor or administrator who makes a § 1022 election, and who also wants to make a § 645 election to treat the trust as part of the estate for income tax purposes, may do so, and such trust will be treated as being part of the estate for all taxable years of the estate ending after the decedent’s date of death and ending before the second anniversary of the decedent’s death.

IRS Releases Final Form 706 and Instructions With Respect to 2010 Deaths

Author:
Kerry L. Spindler, Esq, Goulston & Storrs, PC

On September 8, 2011, the IRS released final Form 706 United States Estate (and Generation Skipping Transfer) Tax Return for decedents dying in 2010, and the Instructions thereto.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was to have repealed the federal estate tax for decedents dying in 2010 and replace the step-up in basis traditionally available to property transferred at death with a modified carry-over basis regime. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA) restored the federal estate tax for 2010 decedents, subject to a $5M federal estate tax exemption amount and a 35% maximum federal estate tax rate, and also restored the step-up in basis rules. This notwithstanding, TRA § 301(c) permits the executor or administrator of a 2010 estate to elect into EGTRRA’s zero estate tax/modified carry-over basis rules. This election (a § 1022 Election) will be made on a timely filed Form 8939 (see IRS Notice 2011-66).  This Form 706 is to be used only with respect to decedents who died during calendar year 2010 where the executor or administrator is not making a § 1022 Election.

Form 706 & Instructions

This Form 706 is due on or before September 19, 2011 with respect to the estates of decedents who died between January 1, 2010 and December 16, 2010. This is consistent with TRA § 301(d)(1) and § 301(d)(2), which extended the due date for filing the estate tax return, paying estate tax, making qualified disclaimers and allocating GST to no sooner than 9 months from the date of the TRA’s enactment. Also noteworthy are the following:

  • As discussed above and pursuant to TRA § 301(c), the executor or administrator of a 2010 estate may elect out of estate tax and elect into EGTRRA’s modified carry-over basis treatment of property acquired or passing from the decedent by timely filing Form 8939.
  • Pursuant to TRA § 302(a)(1), the federal estate tax exclusion amount is $5,000,000.
  • Pursuant to TRA § 302(a)(2), the maximum federal estate tax rate is 35%.
  • Pursuant to TRA § 302(c), the applicable rate for generation skipping transfers is zero.
  • Pursuant to TRA § 302(d)(1), prior gifts made by the decedent must be calculated at the rate in effect at the date of the decedent’s death.
  • Executors and administrators must provide documentation of their status, such as a certified copy of the decedent’s will or a court order designating the executor or administrator.

 In addition, the following are indexed for inflation and applicable to decedents dying in 2010:
  • The ceiling on special use valuation is $1,000,000.
  • The amount used in computing the 2% portion of estate tax payable in installments is $1,340,000.

Massachusetts Uniform Probate Code Announcement Regarding Community Service Projects and Fall Trainings

The Trusts & Estates Section of the Boston Bar Association and the Probate Law Section of the Massachusetts Bar Association are pleased to announce their collaboration with the Massachusetts Probate and Family Court Department to assist in the transition to the Massachusetts Uniform Probate Code for the Court, the bar and the community at large. Together they are developing a series of projects that will require the assistance of a team of lawyers located throughout the Commonwealth who are trained in MUPC issues and can serve as resources for others who have questions regarding the new law.

If you are interested in volunteering with these efforts please contact Peter Shapland and Cameron Casey. Additional information will be broadcasted about these projects as they take shape this fall.

As an effort to educate the bar on the new law, which takes effect on January 2, 2012, several organizations throughout the state are sponsoring MUPC trainings. If you are interested in volunteering to help with these efforts, or simply want to stay updated on the new law, please consider attending one or more of these programs in the coming months.

The Boston Bar Association is currently accepting registrations for their training scheduled to be held this November.

The New Massachusetts Uniform Probate Code CLE
November 4, 2011
9:00 a.m. – 1:00 p.m.
Millennium Bostonian Hotel, Faneuil Hall Marketplace, Boston
Sponsored by: Boston Bar Association

The Massachusetts Bar Association, Suffolk University Law School and Massachusetts Continuing Legal Education, Inc. are also sponsoring CLE programs on this topic. Please check their websites for more information.

IRS Releases Revenue Procedure 2011-41 providing guidance on the application of the election under Section 1022

Author:
Joshua S. Miller, BNY Mellon Wealth Management
The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“2010 Tax Relief Act”), passed by Congress on December 17, 2010, made numerous changes to the estate, gift and GST laws. Two such changes were the reinstatement of the estate and GST tax and repeal of carry over basis retroactive to January 1, 2010. Notwithstanding those changes, Congress provided that the executor of the estate of a decedent who died in 2010 may make an election that allows the executor to apply the zero estate tax and carry over basis rules effective under EGTRRA before it was amended by the 2010 Tax Relief Act. Therefore, subject to the basis increase allocations made by the executor discussed below, the basis of the property acquired by the decedent will not step up to its fair market value at death. Instead, the property will be “treated as having been transferred by gift” according to IRC Section 1022 (“Section 1022”).
Section 1022 “allows the executor of … a decedent’s estate to allocate additional basis (“Basis Increase”) to increase the basis of certain assets that both are acquired from the decedent and are owned by the decedent … at death.” The executor may allocate up to $1,300,000 in basis increase for qualifying property. In addition, the executor may allocate up to $3,000,000 for “qualified spousal property.” Note that for a nonresident decedent who is not a citizen of the United States the basis increase is limited to $60,000, but the Spousal Property Basis remains at $3,000,000 for qualified spousal property. The election and basis allocations are reported to the IRS using the new form 8939. Form 8939 has yet to be released in its final version. A draft version can be found at http://www.irs.gov/pub/irs-dft/f8939–dft.pdf.
Revenue Procedure 2011-41, recently issued by the IRS, provides a safe harbor to executors who follow the procedures outlined in the Revenue Procedure and provides guidance on the application of the election. Some highlights of the Revenue Procedure are as follows:
1. Section 1022 applies only to property acquired from the decedent (as further set forth in section (4) of the Revenue Procedure).
2. Property acquired from a decedent includes “property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent” … “as well as property transferred by the decedent during the decedent’s lifetime to a qualified revocable trust.” In addition, it includes “any other property that passes from the decedent by reason of death to the extent that such property passes without consideration.”
3. Property does not include the decedent’s interest in a QTIP funded by the decedent’s predeceased spouse.
4. Exceptions to the above rules include property acquired by the decedent by gift or by transfer for less than adequate consideration during the three year period ending on the decedent’s death (subject to further exceptions as it relates to property transferred to the decedent from the decedent’s spouse).
5. “Basis Increase consists of the sum of the General Basis Increase (Aggregate Basis Increase and Carryovers/Unrealized Losses Increase) and the Spousal Property Basis Increase.”
6. The Spousal Property Basis Increase may be “allocated to property that is sold (regardless of whether the allocation of Spousal Property Basis Increase is made before or after such sale) prior to its distribution.”
7. The Spousal Property Basis Increase may be allocated to property held by a testamentary charitable remainder trust, provided that “the surviving spouse is the sole non-charitable beneficiary of the CRT.”
8. The allocation may be made on a “property-by-property” basis.
9. If the decedent died a resident of a community property state, the executor may allocate the basis increase to the surviving spouse’s one-half of the community property.
10. If an election is made under Section 1022, the decedent’s holding period for that property will be “tacked on” for the purposes of determining capital gains and losses.
11. “The tax character of property acquired from the decedent by a recipient is determined in the same way as the holding period.”
12. The executor may add unused passive losses to the basis of the decedent’s property.
13. “If an executor distributes appreciated property to satisfy a pecuniary bequest, the estate must recognize gain to the extent the FMV of the distributed property on the date of distribution exceeds its FMV on the date of the decedent’s death.”
14. The transfer of property by a U.S. person to a foreign estate or trust will be treated as a sale or exchange, even where the executor makes a Section 1022 election, but the allocation of basis will be deemed to occur prior to the transaction.
The purpose of the Revenue Procedure is to provide guidance to executors in: (i) determining the recipient’s basis in property acquired from a decedent and (ii) how basis allocations are to be made under Section 1022. Numerous decisions need to be made to determine how best to allocate the decedent’s basis increase. It is important that the preparer carefully review all decisions as the IRS will not accept an amended Form 8939 after the due date, except in certain specific situations.

IRS Releases Draft Form 706 and Instructions, and Draft Form 706-NA and Instructions, With Respect to 2010 Deaths

Author:
Kerry L. Spindler, Esq, Goulston & Storrs, PC

On June 17, 2011, the IRS released draft Form 706, United States Estate Tax Return for decedents dying in 2010, and draft instructions thereto. On August 4, 2011, the IRS released draft Form 706-NA, United States Estate Tax Return for nonresident decedents not citizens of the United States dying on or after January 1, 2010, and draft instructions thereto. 

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was to have repealed the federal estate tax for decedents dying in 2010 and replace the step-up in basis traditionally available to property transferred at death with a modified carry-over basis regime. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA) restored the federal estate tax for 2010 decedents, subject to a $5M federal estate tax exemption amount and a 35% maximum federal estate tax rate, and also restored the step-up in basis rules. This notwithstanding, TRA § 301(c) permits the executor or administrator of a 2010 estate to elect into EGTRRA’s zero estate tax/modified carry-over basis rules. This election, as well as any reporting of a GST transfer resulting from a 2010 death, will be made on a timely filed Form 8939 (see IRS Notice 2011-66).

Draft Form 706 & Instructions

This Form 706 is to be used only with respect to decedents who died during calendar year 2010. The Form 706 will be due on or before September 19, 2011 with respect to the estates of decedents who died between January 1, 2010 and December 16, 2010. This is consistent with TRA § 301(d)(1) and § 301(d)(2), which extended the due date for filing the estate tax return, paying estate tax, making qualified disclaimers and allocating GST to no sooner than 9 months from the date of the TRA’s enactment. Also noteworthy are the following:

  • As discussed above and pursuant to TRA § 301(c), the executor or administrator of a 2010 estate may elect out of estate tax and elect into EGTRRA’s modified carry-over basis treatment of property acquired or passing from the decedent.
  • Pursuant to TRA § 302(a)(1), the federal estate tax exclusion amount is $5,000,000.
  • Pursuant to TRA § 302(a)(2), the maximum federal estate tax rate is 35%.
  • Pursuant to TRA § 302(c), the applicable rate for generation skipping transfers is zero.
  • Pursuant to TRA § 302(d)(1), prior gifts made by the decedent must be calculated at the rate in effect at the date of the decedent’s death.
  • Executors and administrators must provide documentation of their status, such as a certified copy of the decedent’s will or a court order designating the executor or administrator.

In addition, the following are indexed for inflation and applicable to decedents dying in 2010:

  • The ceiling on special use valuation is $1,000,000.
  • The amount used in computing the 2% portion of estate tax payable in installments is $1,340,000.

Draft Form 706-NA & Instructions

An executor or administrator must file Form 706-NA if the non-resident/non-citizen decedent’s gross estate located in the United States is valued at more than $60,000 as of the decedent’s date of death. Like the Form 706, the Form 706-NA will be due on or before September 19, 2011 with respect to the estates of decedents who died between January 1, 2010 and December 16, 2010. Also like the Form 706:

  • The maximum federal estate tax rate is 35%.
  • The applicable rate for generation skipping transfers is zero with respect to decedents who died in 2010 and 35% for decedents who died after 2010.
  • Prior gifts made by the decedent must be calculated at the rate in effect at the date of the decedent’s death.
  • Executors and administrators must provide documentation of their status.

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Update as of August 29, 2011:  The IRS has removed the draft Form 706 for decedents dying in 2010 from its website.  The IRS has also updated the draft instructions to Form 706 as of August 1, 2011, and the draft instructions to Form 706-NA as of August 24, 2011.

Does Equity Really Abhor a Forfeiture? Recent In Terrorem Litigation

Author:
Joseph L. Bierwirth, Jr., Esq., Hemenway & Barnes LLP

Two recent cases, one in Massachusetts and one in New Hampshire, involve application of no-contest (or in terrorem) clauses to trust and estate litigation. In these types of cases, courts are called upon to balance two conflicting, long-standing principles. Leaning in favor of enforcement is the maxim central to most trust and will interpretation — that the intent of the testator or grantor shall be given effect. Tilting against enforcement is the principle that equity does not favor a forfeiture. Most jurisdictions try to tread the middle path, finding such clauses to be enforceable but construing them narrowly or allowing post-mortem litigation without fear of forfeiture only if brought in good faith and with probable cause. As always in the law, God is in the details; cases rise and fall on the particular facts at play. The two recent cases, Savage v. Oliszczak, 77 Mass. App. Ct. 145 (2010) and Shelton v. Tamposi, Case No. 31602997-EQ-2109, Hillsborough County Probate Court (August 2010), add to the body of law exploring this balance of interests and should be known by all attorneys representing beneficiaries and fiduciaries in court proceedings.

The Savage case is, in a sense, fairly straightforward. The parties were the adult children of Georgenia Hatch, who died leaving a will and trust. The will identified the trust as the sole beneficiary of Georgenia’s estate; the trust, in turn, contained dispositive provisions and an in terrorem clause as follows:

If any person, including a beneficiary, other than me, shall in any manner, directly or indirectly, attempt to contest or oppose the validity of this agreement, including any amendments thereto, or commences or prosecutes any legal proceedings to set this agreement aside, then in such event such person shall forfeit his or her share, cease to have any right or interest in the trust property, and shall be deemed to have predeceased me.

After Georgenia’s death, the executors named in her will filed a petition to probate the will. Thereafter, three of Georgenia’s children each filed an affidavit of objections to allowance of the will, asserting that Georgenia lacked testamentary capacity and was unduly influenced to execute the proffered will. After a year of litigation, the objections were withdrawn. The plaintiff trustees brought an action in the probate court for a determination that the will contest, although aborted, constituted a challenge sufficient to trigger the in terrorem provision in the trust. The probate judge entered an order finding no violation of the no-contest clause and the trustees appealed.

The trustees argued that a pour-over will and trust should be read as an integrated estate plan, Clymer v. Mayo, 393 Mass. 754, 766 (1985), and therefore the challenge to the will necessarily implicated the no-contest clause in the trust. After all, if the will were voided, then the trust would not have been funded and its dispositive provisions (incorporating Georgenia’s plan for distribution of her wealth) would have been thwarted. The Appeals Court, however, disagreed. In the court’s view, the trust had independent legal and financial significance — the trust could have been funded during Georgenia’s lifetime or received non-probate assets upon her death, such as by designation as the beneficiary of a life insurance policy. The court further noted that the purpose of an in terrorem clause is to deter challenges to a will. In this case, given that the clause was contained in a trust instrument which was not required to be publicly filed, it could have no deterrent effect on a challenge to the will; not to mention that it would be unfair to require forfeiture when it was not certain from the record whether the trust beneficiaries had notice of the no-contest clause in the trust before launching their will contest. In the end, the Appeals Court recited the black-letter law that no-contest clauses are legally valid and enforceable in Massachusetts, but held that the defendants’ challenge was simply directed to the will not the separate trust.

The New Hampshire case produced a far different result. The case involved a trust created by Samuel Tamposi, a prominent New Hampshire real estate developer, for the benefit of his six children and future generations. Mr. Tamposi died in 1995, leaving over $20 million in trust comprised mostly of various business and real estate interests in New Hampshire and Florida. He named two of his sons, Sam Jr. and Stephen, as “investment directors” for the trust, a position authorized by the New Hampshire Uniform Trust Code (called a “trust advisor” in the Code). In his trust instrument, Mr. Tamposi indicated his strong desire that his hand-picked investment directors have authority to retain the family business and real estate interests in the trust, even if these assets constituted an inordinate proportion of overall trust investments.

Trouble began not long after Mr. Tamposi’s death when two of the Tamposi children, including Betty Tamposi, objected to proposed actions by the trustee. Petitions for declaratory judgment were filed and, after five years of litigation and mediation, the parties reached a Settlement Agreement making certain reformations to the trust. The Settlement Agreement was approved by the probate court in February 2007. But peace did not last long — Betty filed new litigation against her brothers in October 2007 after they refused to release “$2 million in seven days” to the beneficiaries, as demanded in a letter from Betty’s trustee.

In her complaint, Betty presented a laundry list of claims. The trial was protracted, with numerous lay and expert witnesses, and 556 exhibits entered into evidence. Betty alleged a variety of breaches of fiduciary duty; the first claim was for her brothers’ purported failure to defer to the direction of the trustee of Betty’s subtrust (the main Tamposi trust having been divided into subtrusts for each of the Tamposi children). According to Betty, the role of investment director was subsidiary to that of trustee – in her view, once her trustee demanded funds to be made accessible, the investment directors were obliged to liquidate assets to fund the request. The court, however, found that Mr. Tamposi intended to grant to his investment directors “unequivocal authority to make investment decisions and rendered their decisions neither reviewable or reversible by the trustee.” In a similar vein, the court rejected Betty’s claim that the investment directors failed to appropriately invest assets to ensure sufficient liquidity. The court noted that Mr. Tamposi expressed a preference for his sons to maintain the family business and that they had properly done so, creating “substantial annual income and long-term growth for the current and future beneficiaries.” In like manner, the court found against Betty on her remaining claims and emphasized that Sam Jr. and Stephen had done nothing but fulfill their father’s clear plan that the family business would continue, managed by the investment directors for the benefit of all the Tamposi children equally.

Evidently frustrated by their sister’s continued demands and litigation efforts, the defendants requested that the court find her in violation of the in terrorem provision contained in the trust:

If any person shall at any time commence or join in the prosecution of any proceedings in any court or tribunal…to have…this trust…set aside or declared invalid or to contest any or all of the provisions included in…this trust…or to cause or to induce any other person to do so, then and in that event such person shall thereupon forfeit any and all right, title and interest in or to any portion of this trust, and this trust shall be distributed in the same manner as would have occurred had such person died prior to the date of execution of this trust.

In analyzing the effect of this provision in light of Betty’s pursuit of the litigation, the court concluded that the lawsuit in essence contested several express provisions of the trust. The court found that Betty was fully aware of her father’s intentions and the degree of authority he conferred on the investment directors to implement his strategy for his trust — by challenging these provisions, Betty acted in bad faith. As a result, the court found that the in terrorem clause had been violated and ruled that Betty had forfeited her right, title and interest in the trust, citing cases from other jurisdictions where a no-contest clause in a trust was enforced. Tumminello v. Bolten, 873 N.Y.S. 2d 731, 732 (NY 2009) and Ackerman v. Genevieve Ackerman Family Trust, 908 A.2d 1200, 1204 (DC 2006).

The court next addressed the timing of Betty’s forfeiture. The language of the trust indicated that forfeiture would occur at the time legal proceedings were commenced: “If any person shall…commence…proceeding in any court…then and in that event such person…shall thereupon forfeit…” Thus, the court ruled that the forfeiture dated back to 2007 and ordered Betty to reimburse the trust for all distributions received by her after the date of the filing of the original complaint, amounting to millions of dollars.

Would a Massachusetts court reach the same result? The legal principles accepted in each jurisdiction appear similar, though the Tamposi judge expressly noted in his opinion that “probably no jurisdiction has stood more steadfastly for giving effect to the intention of the testator rather than arbitrary rules of law than New Hampshire,” quoting Burtman v. Burtman, 97 N.H. 254, 257 (1952). On the planning side, the cases highlight (once again) the need to pay particular attention to drafting with broad language and including no-contest provisions in both will and trust, if that is the client’s intent. From a litigation perspective, plaintiff’s counsel should be particularly aware of the risks involved in pursuing litigation in the face of a strong in terrorem provision, and counsel for fiduciaries should recognize the willingness of the courts to enter remedial orders under the right circumstances.