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

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The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was to have repealed the federal estate tax for decedents dying in 2010 and replace the step-up in basis traditionally available to property transferred at death with a modified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.


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

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.

T&E Litigation Update – Hoffman v. University of Massachusetts Amherst, Kostick v. Fort Hill Community, and Krawczyk v. Beng

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.

Hoffman v. University of Massachusetts Amherst

In Hoffman v. University of Massachusetts Amherst, Case No. 10-P-1251, 2011 Mass. App. Unpub. LEXIS 731 (June 2, 2011), a decision issued pursuant to Rule 1:28, the Appeals Court affirmed an application for cy pres with respect to a charitable trust.

The trust provides for scholarships to boys of two particular Roman Catholic parishes to study forestry at Paul Smith’s College or the University of Massachusetts Amherst. The trustee’s application for cy pres to expand utilization of the trust was granted, with the consent of the Attorney General, and the Roman Catholic Bishop of Springfield subsequently filed a motion to intervene pursuant to Rule 24 and a motion for relief from the judgment pursuant to Rule 60(b)(6).

The Roman Catholic Bishop’s motion to intervene was denied. The Court explained that it is the exclusive function of the Attorney General to correct abuses in the administration of a public charity by the institution of proper proceedings, and to protect the public interests by proceeding as those interests may require. A party other than the Attorney General would have standing only if that party has an individual interest in the charitable organization distinct from the general public. The Court held that although the Roman Catholic Bishop operates the two parishes in question, the Roman Catholic Bishop is not a legal beneficiary of the trust. The Catholic males from the two parishes in question who would study forestry at either Paul Smith’s College or UMass Amherst are the legal beneficiaries. Therefore, the Roman Catholic Bishop lacked standing to intervene.

Even if the Roman Catholic Bishop were to have standing, it would not be entitled to relief from the judgment, because such relief would not be necessary to accomplish some “substantial justice.” The exact nature of the cy pres relief granted by the trial court is difficult to discern from the summary decision, but it seems to have included an ability to benefit Catholic students from outside of the two parishes in question, if necessary. In any event, the Court held that the trial court did not abuse its discretion in granting this relief.

Finally, the Court held that the Roman Catholic Bishop was not entitled to receive notice of the cy pres proceedings because the applicable statute, G.L. c. 214, § 108, requires that notice in a cy pres action be given only to heirs and other takers in default should the charitable gift fail. The Roman Catholic Bishop is neither.

Kostick v. Fort Hill Community

In Kostick v. Fort Hill Community, Case No. 10-P-1294, 2011 Mass. App. Unpub. LEXIS 697 (May 23, 2011), a decision issued pursuant to Rule 1:28, the Appeals Court addressed, among other questions, when the statute of limitations begins to run on a breach of trust or breach of fiduciary duty claim.

Fort Hill Community is a commune that was established in the 1960s. Fort Hill has engaged in real estate development, and the proceeds from the real estate development are held in a trust that names all Fort Hill members as equal beneficiaries. The declaration of trust provides that the trustees are to pay net income to the beneficiaries as the trustees deem advisable, and that each Fort Hill member is to remain a beneficiary unless the member ceases living with the other Fort Hill members or is deprived of membership by a four-fifths vote of the trustees. A person who ceases to be a member through either of these two mechanisms is not entitled to a share of the trust.

Plaintiff John Kostick was a member of Fort Hill, but he stopped living in Fort Hill in 1993. He alleges that he left the commune involuntarily and without a four-fifths vote of the trustees to expel him.

In 2007 or 2008, other members of Fort Hill received distributions from the trust. In November 2008, Kostick made a demand for his beneficial interest, which was rejected, and so he filed suit in superior court in February 2009. In his complaint, Kostick asserted claims for breach of trust, breach of fiduciary duty, an accounting, and a declaratory judgment.

The trustees moved to dismiss the complaint, and the court allowed their motion. Between the time of the court’s decision and entry of judgment, Kostick moved to amend his complaint. The court then entered judgment on the motion to dismiss and denied Kostick’s motion to amend. In denying the motion to amend, the court reasoned that Kostick’s claims are barred by the applicable statute of limitations, G.L. c. 260 § 2A, because the three-year limitations period began running on Kostick’s claims when he was ejected from Fort Hill many years earlier.

The Appeals Court reversed and remanded. On the statute of limitations question, the Court explained that a cause of action for breach of trust or breach of fiduciary duty does not accrue until the trustee repudiates the trust and the beneficiary has actual knowledge of the repudiation. Here, based on the facts alleged in the complaint, which must be deemed to be true, the trustees did not repudiate the trust until they rejected Kostick’s demand for his beneficial interest in November 2008, rather than when he alleges that he involuntarily left the commune without a four-fifths vote of the trustees, and thus his claims were not time-barred.

Krawczyk v. Beng

In Krawczyk v. Beng, Case No. 10-P-1443, 2011 Mass. App. Unpub. LEXIS 702 (May 24, 2011), another decision issued pursuant to Rule 1:28, the Appeals Court affirmed the appointment of a receiver to oversee and manage a parcel of property owned in trust. The Court explained that a receiver can be appointed within the discretion of the court to prevent waste or loss and conserve the assets in question for the benefit of all parties with an interest in the assets. Here, the Court held that the appointment of a receiver was appropriate as a “prophylactic measure to protect assets,” and clearly within the motion judge’s discretion, because of the discord between the parties and the trustee’s demonstrated inability to manage and protect the trust property.

Attention Life Tenants: Thou Shalt Not Waste

Mark E. Swirbalus, Esq., Day Pitney LLP

In the first half of 2011, the Appeals Court had two occasions to address the obligations of a life tenant. On each occasion, the Appeals Court sent the same clear message: a life tenant’s primary obligation is to preserve the property.

Comeau v. Coache

In January 2011, the Appeals Court issued a summary decision in Comeau v. Coache, Case No. 09-P-1984, 2011 Mass. App. Unpub. LEXIS 101 (Jan. 24, 2011).

Plaintiff Peter Comeau is the trustee of the Comeau Family Trust. He is also the life tenant of a one-story house in Ipswich that is owned by the trust and where he has resided for the last fifty years. Other family members, including the defendants, are the remainder beneficiaries of the trust.

The relevant provision of the trust instrument allows Mr. Comeau to “continue to occupy the dwelling as his principal residence, provided that he pay all real estate taxes, insurance, maintenance and utilities for the premises.” Accordingly, Mr. Comeau alone must bear financial responsibility for “maintenance” work on the property.

Over the objections of the remaindermen, Mr. Comeau arranged for various work to be done at the property, primarily consisting of the replacement of the original windows. After having the windows replaced, for which he himself paid out of his own pocket, Mr. Comeau sought an order from the probate court to compel the remaindermen to reimburse him for their proportional share of the window replacement, which he claimed to be a capital improvement that was necessary to preserve the property. The remaindermen responded by seeking to terminate Mr. Comeau’s life estate. They argued that the replacement of the windows constituted maintenance work for which he is solely responsible.

The probate court decided in favor of the remaindermen, finding that the window-replacement work constituted “elective and cosmetic” maintenance, and terminated Mr. Comeau’s right to occupy the property.

The Appeals Court reversed the termination of Mr. Comeau’s right of occupancy, holding that regardless of whether the replacement of the windows was maintenance or a capital improvement, Mr. Comeau had in fact paid for the work. The Court also noted that Mr. Comeau’s obligation to pay for maintenance work could be interpreted to be a condition subsequent, and such conditions are not favored in the law: “. . . there is substantial doubt whether the trust document intended that [Mr. Comeau] automatically forfeit his right to occupy the premises if he breached his duty to pay for maintenance.”

Perhaps most importantly, the Court pointed out that Mr. Comeau’s pattern of conduct over the years showed a continuing effort to preserve the integrity and value of the property ultimately benefiting the interests of the remaindermen. Therefore, in the absence of any harm to the property, Mr. Comeau’s pursuit of an arguable claim for reimbursement was not a material breach of the letter or purpose of the condition subsequent of the trust and thus did not warrant the severe sanction of dissolution of his life estate.

Matteson v. Walsh

In May 2011, in its decision in Matteson v. Walsh, 79 Mass. App. Ct. 402 (May 2, 2011), the Appeals Court amplified on the theme that a life tenant has an obligation to preserve the integrity and value of the property.

In her will, Dorothy Walsh devised real property in Chatham consisting of a summer cottage and an unattached garage to her son Robert Walsh as the life tenant, and thereafter, upon his death, to his heirs and her other two children, Elizabeth Gay Matteson and Catherine Baisly, as the remaindermen.

Mr. Walsh resided at the property, but he stopped paying taxes in or about 2004, resulting in the town’s issuance of a notice of tax-taking. Mr. Walsh also stopped paying to maintain the property, causing it to fall into disrepair. Ms. Matteson paid some of the delinquent taxes and hired someone to repair the premises, which were described as being in “considerable distress.” Eventually, however, she filed suit against Mr. Walsh for waste.

The superior court found that Mr. Walsh had committed waste through his non-payment of taxes and by allowing the deterioration of the buildings, ordering him to reimburse Ms. Matteson for the taxes and $53,000 in repair costs she had paid. The superior court also divested Mr. Walsh of his life estate and ordered that he, Ms. Matteson and Ms. Baisly were to hold title to the property as tenants in common.

The Appeals Court affirmed in part, rejecting Mr. Walsh’s argument that his failure to pay taxes did not result in waste because the property was neither seized nor sold. The Court explained that the only reason why the property was not seized and sold was that Ms. Matteson had stepped in to pay the outstanding debt, and that the threat to the remainder interests was sufficient to constitute prejudice to the inheritance. “Permitting the real estate taxes assessed to the property to remain unpaid to the point that the taxing authority records a tax-taking amounts to waste.”

The Court also rejected Mr. Walsh’s argument that his failure to maintain the property amounted to permissive waste for which he, as a life tenant, cannot be liable. The Court reasoned that the notion of permissive waste applies to a tenant at will, and that a life tenant is under a higher duty to preserve the estate for the benefit of the remaindermen.

As for the appropriate relief, the Court held that the superior court had erred in granting Mr. Walsh a fee interest in common after having ordered divestment of his life estate. When Mr. Walsh was divested of his life estate, the remainder interests vested, and he did not hold a remainder interest. If he had any heirs, their remainder interests might have vested, but he had none, and although he theoretically could have still produced an heir, the remainder interests are determined as of the date of recovery under the statute of waste, M.G.L. c. 242, § 1.


With these decisions, the Appeals Court fired an unmistakable warning shot: a life tenant is merely a visitor at the property in which he or she resides, and as such the life tenant must take care to preserve (i.e., not waste) the property for the benefit of the remaindermen. Every life tenant would be well-advised to heed this warning.

Massachusetts Probate Courts Release Revised and New Guardianship/Conservatorship Forms

When Article 5 of the MUPC became effective in July 2009, the Massachusetts Probate and Family Courts released a number of forms pertaining to Guardianship and Conservatorship. Since then, the Courts have collected and reviewed comments on the forms, and on May 30, 2011 released a series of revised and new forms.

The revised and new Guardianship and Conservatorship forms are available here. The Probate and Family Courts’ May 30, 2011 press release announcing the forms is available here. Practitioners should note that the Courts will continue to accept the earlier version of the forms until June 30, 2011.

The New Pet Trust Law and the Proposed Massachusetts Uniform Trust Code

Liza M. Connelly, Esq., Rackemann, Sawyer & Brewster

In January 2011, Governor Deval Patrick signed H. 1467 into law, making Massachusetts the 44th state to adopt a pet trust law. On April 7, 2011, the pet trust law came into effect. The law will be listed as M.G.L. c. 203, § 3C.

The proposed Massachusetts Uniform Trust Code (“MUTC”) also contains pet trust provisions in § 408. The most frequently asked question I heard once the pet trust bill was passed into law was: “How will this new law work with the proposed MUTC?” The answer is that the pet trust statute will be inserted into § 408 of the proposed MUTC and will completely replace the existing § 408.

In March of 2011, I met with Eric Hayes and Ray Young, two members of the MUTC Ad Hoc Committee, to discuss how the pet trust law would work with the proposed MUTC if it is passed. The MUTC Ad Hoc Committee suggested that the existing terms of § 408 of the proposed MUTC be lifted out and replaced with the pet trust law. If the proposed MUTC is adopted, the pet trust statute in M.G.L. c. 208, § 3C will be removed with a reference to the MUTC § 408 so that the only pet trust provision will be contained in the MUTC.

The proposed MUTC’s replacement of § 408 with the pet trust statute will ensure that there are no gaps, conflicts or overlaps between the proposed MUTC and existing pet trust statute.

The members of the MUTC Ad Hoc Committee also requested one change to the statute. The pet trust statute as passed into law specifically exempts pet trusts created under it from the Rule Against Perpetuities (“RAP”). The MUTC Ad Hoc Committee has requested that the RAP be added back in, with the compromised language stating that the lives in being shall be measured on the animal or animals alive at the time of the settlor’s death or when the pet trust becomes irrevocable. The drafters and proponents of the pet trust law have agreed to this change, and it will be incorporated into the proposed MUTC.

If the proposed MUTC is adopted, the existing pet trust statute will replace the text currently found in MUTC § 408 and will contain RAP provisions. For the present time, the pet trust statute remains as drafted and passed into law.

Trusts and Estates in the Spotlight on Beacon Hill

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

A number of bills impacting trusts and estates practitioners are currently under consideration by Beacon Hill. On May 18, 2011, representatives of the Boston Bar Association, the Massachusetts Bar Association and the Massachusetts Bankers Association testified before the Joint Committee on the Judiciary regarding several of these bills, including a version of the Uniform Trust Code (Bill # H2261 / S688, discussed in further detail here); repeal of the 2008 Adopted Children’s Act (Bill # H2262, discussed in further detail here); and a bill pertaining to certain technical corrections to the Massachusetts Uniform Probate Code (Bill # S704). In addition, the Joint Committee is considering a bill pertaining to payment of interest on pecuniary legacies and distributions (Bill # S732). The Massachusetts Uniform Trust Code (which, as filed, is scheduled to become effective on January 2, 2012) would go a long way towards modernizing Massachusetts trust law, and would help bring Massachusetts in line with the twenty-three other states that have passed a version of the Uniform Trust Code, including Maine, New Hampshire and Vermont.

In addition, the Boston Bar Association, along with the Massachusetts Bar Association and the Massachusetts Bankers Association, is working with the Joint Committee on Taxation regarding a bill (Bill # H2559) pertaining to cost basis step-up on death. Because of an apparently accidental disconnect between various federal and Massachusetts statutes (discussed in further detail here), assets passing from Massachusetts decedents in 2010 and thereafter may no longer receive a step-up in cost basis for purposes of Massachusetts capital gains tax. Unlike the federal law, this apparent limitation on cost basis step-up is not limited to decedents who died in 2010, but will remain a problem indefinitely, unless corrected.

All of the foregoing bills are currently under Committee review, and all have been endorsed by the Boston Bar Association. If you are interested in helping to get these bills passed, please contact your congressional representative.

IRS Issues Guidance on Investment Advisory Costs Subject to 2% Floor Under I.R.C. Sec. 67(a)

On April 13, 2011, the Internal Revenue Service issued Notice 2011-37, providing interim guidance on the treatment of investment advisory and other costs subject to the 2% floor under I.R.C. Sec. 67(a). For taxable years beginning before the date final regulations on the issue are published, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2% floor.

Notice 2011-37 is scheduled to be published in Internal Revenue Bulletin 2011-20 on May 16, 2011.

IRS Releases 2010 Form 709 & Instructions

On March 15, 2011, the IRS released the Form 709 with respect to gifts made during calendar year 2010, and the accompanying Instructions.

The 2010 Form 709 may be found here.

The Instructions for the 2010 Form 709 may be found here.

March 17, 2011 Update:  The IRS has temporarily removed the 2010 Form 709 and related instructions to correct an error.  It is anticipated that revised documents will be posted soon.

New Massachusetts Homestead Act, Effective March 16, 2011

Robert H. Ryan, Esq., Bove & Langa, P.C.

On December 16, 2010, Governor Patrick signed Senate Bill 2406, AN ACT RELATIVE TO THE ESTATE OF HOMESTEAD (hereinafter referred to as the “Act”),[1] which is a complete revision of the Massachusetts homestead law. Although the statute will still be known as M.G.L. c. 188, the substantive provisions are much improved and, for the most part, clearer. This summary is intended to provide highlights to probate and trust and estate practitioners so that they may become familiar with changes that will become effective on March 16, 2011 (per Massachusetts legislative rules, laws generally become effective 90 days after the Governor signs the law).

There has been considerable discussion regarding homestead protection during the past few years by many practitioners and several articles have appeared in Massachusetts legal publications highlighting problems with the law. Many of these problems have been addressed by the Act.

Impact of Trust Ownership of Principal Residence on Homestead Declaration Under the Old Law

In a typical estate plan involving the use of trusts, the transfer of title of a principal residence is often done without proper consideration given to the issue of homestead protection. For several years, some practitioners have believed that a properly recorded homestead declaration on a principal residence could be preserved by reserving the homestead when a transfer of the principal residence was made to a trust. The authority generally cited for this position was c. 188 §7, where reference is made to termination of a homestead “by a deed conveying the property in which an estate of homestead exists, signed by the owner and the owner’s spouse, if any, which does not specifically reserve said estate of homestead {emphasis added}.” Accordingly, some practitioners believed that by specifically reserving a homestead when conveying the principal residence to a trust, the principal residence held in the trust would be protected by a homestead declaration.

However, it is understood that the Land Court has strictly relied on the ruling in Bristol County v. Spinelli [2] that a homestead cannot apply to registered land held in trust. Therefore, there has been a question as to whether the Land Court would recognize the reservation of a homestead declaration for a conveyance of registered land to a trust. Since Spinelli did not address recorded land, some practitioners have also believed that a homestead declaration might be effective for recorded land conveyed to a trust.

Who is Protected by a Homestead Declaration Under the Old Law?

A further issue of concern has been the determination of who benefits from the protection afforded by a homestead declaration. It is interesting to note that the old law clearly states that a c. 188 §1 declaration applies to a “family” as defined in the statute, which includes the declarant’s children and spouse. For c. 188 §1 purposes, the statute applies even if a child is an adult. However, c. 188 §4 provides for the continuation of the homestead upon the death of the declarant. But in that instance, c. 188 §4 refers to the “minor” children of the declarant, raising a valid question as to whether a new homestead must be declared by the surviving non-declarant spouse in order to provide protection to an “adult” child who is a member of the family.

If a couple owns a property as tenants-in-common, joint-tenants, tenants-by-the-entirety, or life tenants, the statute prior to the revision is clear that they are a family and a family can only record one c. 188 §1 homestead. Therefore, there is often a question as to which spouse should record the declaration of homestead. Generally, if the declarant spouse dies, the surviving spouse is protected. However, a c. 188 §1A elder and disabled homestead only applies to the owner who declared it and the homestead protection terminates at the same moment the c. 188 §1A declarant dies.

Furthermore, at times there has been confusion in some of the Registries of Deeds as to whether each non-spouse co-owner of a principal residence may file a homestead declaration. In response to the uncertainty, the Chief Title Examiner for the Land Court issued a memo to the Registries of Deeds, dated August 25, 2006, which confirmed that multiple homestead declarations may be filed by unrelated co-owners.

Questions About the Old Homestead Statute

As suggested by the above overview of key homestead issues, many questions about the old homestead statute have needed to be addressed, such as:

1) Why isn’t the homestead protection automatic?

2) How much equity is protected by the homestead declaration if there is more than one owner?

3) For estate planning purposes, does a homeowner have to choose between taking advantage of trust planning or homestead protection?

4) Is a homestead terminated by transfers within the family or upon the death of the declarant?

5) Are the proceeds from a sale of the principal residence or insurance for a casualty loss to a principal residence protected by a homestead?

6) Does the waiver of homestead in refinancing documents waive the homestead protection against all creditors?

7) Who should file the homestead? Should it be the spouse with greater exposure?

Key Highlights of the New Law Addressing These Questions

Automatic Homestead Protection

In response to concern that many homeowners are not aware of the requirement that a formal filing must be made in order to benefit from the homestead statute, the Act provides for an automatic allocation of homestead protection to a property that is the principal residence of the owner. However, the amount of automatic protection is limited to $125,000 of equity; a homeowner must still file a homestead declaration to benefit from the full $500,000 of equity homestead protection. The automatic homestead will apply to all existing principal residences as of March 16, 2011.

Clarification of Extent of Protection for Multiple Owners

The Act clarifies that although multiple owners of a principal residence may benefit from homestead protection, the aggregate protection (not including the enhanced protection for elder or disabled owners) is limited to the $500,000 homestead amount. However, in the case of a married couple who can BOTH benefit from what is known as an elder and disabled homestead, the aggregate protection for the principal residence may be increased to $1,000,000 of equity. In the case of non-married co-owners of a principal residence (e.g. sibling co-owners) who ALL file for the elderly or disabled homestead, the aggregate protection is the product of $500,000 of equity multiplied by the number of owners who qualify for the elderly or disabled homestead. Depending on the circumstances, the aggregate protection for a property could be $125,000, $500,000, $750,000, $1,000,000, or even greater.

Finally – Homestead Applies to a Principal Residence Titled in Trust

In recognition of the extensive use of trusts to hold title to principal residences, the Act finally extends the benefit of homestead protection to principal residences for which title is held in trust. In order to obtain such protection, the trustee must file a declaration of homestead stating, among other things, the names of the beneficiaries who seek to obtain such homestead protection, and the fact that the property is their principal residence.

All in the Family

The Act provides that the transfer of a principal residence between family members does not terminate an existing homestead, even if the new deed fails to reserve the homestead upon the transfer. In addition, a homestead existing at the death or divorce of a person holding a homestead shall continue for the benefit of his or her surviving spouse or former spouse and minor children who occupy or intend to occupy said home as a principal residence. However, any adult child who has an ownership interest in the principal residence is required to file his or her own homestead declaration to take advantage of the increased protection of $500,000.

Sales and Insurance Proceeds Relating to Homestead Property are Protected

Finally resolving an age-old question, the proceeds from the sale of a principal residence, or the insurance proceeds from a principal residence that suffers a casualty loss, are protected by the homestead in order to purchase a new principal residence or repair a damaged one. The proceeds from a sale are protected for the period of one year from sale of the current principal residence. Insurance proceeds are protected for a two-year period from receipt of the proceeds.

Mortgage Waiver of Homestead is Just That

Another age-old question relates to whether the apparent blanket waiver of a homestead in mortgage documents terminates the protection of a homestead against all creditors. The Act provides the sensible answer that a mortgage does not terminate a previously filed homestead but only subordinates the homestead to the specific mortgage at issue.

Simple Solution to Which Spouse Files the Homestead

To resolve the question of which spouse should file the homestead the Act chooses a simple solution – it requires that both spouses who have an ownership interest in the principal residence sign the declaration of homestead. In addition, the declaration must identify each person receiving homestead protection, including the name of a spouse who may not be an owner. The declaration must also state that each person occupies, or intends to occupy, the property as his or her principal residence.

New Act – New Questions

1) Does an existing estate of homestead in effect March 16, 2011, continue in full force and effect?

• Yes, even if it does not comply with the execution requirements of the Act (e.g., only one spouse named in the deed signed the declaration under the homestead statute before the revisions, whereas the Act now requires both spouses whose names are on the deed to sign the declaration).

2) Do I still need to file a Declaration of Homestead if I intend to file for bankruptcy?

• Yes, if you want to obtain the full exemption amount available under the Act rather than the lower exemption amount available per the automatic homestead protection.

3) Will the Homestead Declaration now apply against pre-existing debts without the need to file for Bankruptcy?

• Yes, and this is a big change in the law.

Massachusetts Issues Guidance and Forms

The Secretary of the Commonwealth has recently published guidance and forms for filing a Declaration of Homestead under the new law.  Each can be found HERE.
[1] There has been some confusion when looking to read the Act on the State Legislative website. Please note the actual text of the final version of Senate Bill 2406 (186th Session 2009-2010) is set forth at House Bill 4878 (186th Session 2009-2010), pursuant to a House Amendment.  The new Act is set forth at Session Laws, 2010, Chapter 395, AN ACT RELATIVE TO THE ESTATE OF HOMESTEAD.

[2] 38 Mass. App. Ct. 655 (1995).