Last Month at the BBA – Trusts & Estates Section Events in January 2022

By: Rebecca Tunney, Goulston & Storrs and Bryce Helfer, Nixon Peabody, Communications Committee, Trusts and Estates Section

Trusts & Estates Section Programs at the BBA last month: 

BBA Webinar: Introduction to Irrevocable Trusts. This program provided an introduction to the use of irrevocable trusts in estate planning, including income and estate tax implications, drafting considerations, and avoiding potential pitfalls.

BBA Webinar: Trusts & Estates Mid-Year Review.  An annual event not to be missed, the Trusts & Estates Mid-Year Review covered recent federal and state case law, legislation and tax law matters.

 

Upcoming Trusts & Estates Events at the BBA – January 2022

By: Bryce Helfer, Nixon Peabody and Rebecca Tunney, Goulston & Storrs, Communications Committee, Trusts and Estates Section

Upcoming Trusts & Estates Section Programs at the BBA this month: 

BBA Webinar: Introduction to Irrevocable Trusts. Thursday, January 6, 2022 10:00 AM to 11:00 AM.  This program will provide an introduction to the use of irrevocable trusts in estate planning, including income and estate tax implications, drafting considerations, and avoiding potential pitfalls.

BBA Webinar: Trusts & Estates Mid-Year Review. Monday, January 24, 2022 10:00 AM to 11:30 AM.  An annual event not to be missed, the Trusts & Estates Mid-Year Review covers recent federal and state case law, legislation and tax law matters.

 

What’s New for Estate and Gift Tax

By: Katelyn Allen, Nutter

IRS Issues Final Regulations that Establish $67 User Fee for Persons Requesting Issuance of Estate Tax Closing Letter.

TD 9957: Effective Date: October 28, 2021

            With the issuance of TD 9957, effective October 28, 2021, the IRS effectively established a $67 user fee for persons requesting the issuance of an IRS Letter 627, also known an as estate tax closing letter.

            All estates filing returns after the October 28, 2021 implementation date are required to request the issuance of an estate tax closing letter and pay the $67 user fee through the federal government fee payment portal, www.pay.gov.  In navigating the payment portal, the person authorized to request an estate tax closing letter will first select the agency (Department of the Treasury: Internal Revenue Service) and will then select “Estate Tax Closing Letter User Fee”. 

            The requestor will be required to submit an online form on the pay.gov portal, providing the decedent’s information, the executor’s information, and the amount of tax due as reflected on the Form 706 or Form 706-NA filed with the IRS. Once the information has been entered and the form has been submitted, the requestor must pay the user fee.  The user fee can currently be paid by credit or debit card, PayPal account, Amazon account, or via an ACH transfer from a private bank account.  The IRS specifically states that a requestor should not submit the online form or pay the user fee until nine months after the date of filing.

National Archives and Records Administration (NARA)’s Federal Records Centers reduces 75-Year Retention Period for Estate Tax Returns to 40 Years.

            Effective February 11, 2022, the National Archives and Records Administration (NARA)’s Federal Records Centers will reduce the current period of 75 years for retention of estate and gift tax returns to 40 years. 

            The NARA has indicated that the ultimate goal for the government-wide policy change is to transition federal record keeping to fully electronic, as well as reduce the volume of records stored and the storage costs for these records.

            Taxpayers are encouraged to request copies of older estate and gift tax returns in advance of the February 11, 2022 deadline.  Once the National Archives and Records Administration approves the shorter retention period, the IRS will be instructed to destroy estate and gift tax returns in the Federal Records Centers that are older than 40 years.

            In order to request a copy of an older estate and/or gift tax return, the requestor must have authorization to receive a copy of the return on behalf of the estate, in the case of an estate tax return.  The requestor must submit a completed Form 4506 (Request for Copy of Tax Return), provide the decedent’s name, address, and social security number, a copy of the decedent’s death certificate, and prove a fiduciary relationship through either a copy of Letters Testamentary approved by the court or a completed Form 56 (Notice Concerning Fiduciary Relationship).  The payment of a fee of $50 for each return requested is also required. 

Last Month at the BBA – Trusts & Estates Section Events in November 2021

By: Rebecca Tunney, Goulston & Storrs and Bryce Helfer, Nixon Peabody, Communications Committee, Trusts and Estates Section

Trusts & Estates Section Programs at the BBA last month: 

Estate, Gift and GST Tax Basics for the New Estate Planner. This program will provide an introduction to the estate, gift, and generation-skipping transfer taxes. Our speakers will describe the key components of each tax, explain how the taxes relate to one another, and provide context for how each tax is relevant for purposes of preparing an estate plan. This program is particularly relevant for new estate planners.

Serving as a Conservator: The Impact of Hornibrook v. Richard for Fiduciaries.   Hear from the attorneys who argued the case in front of the SJC, Kristyn M. Kelley and Ethan C. Stiles, on the details of the recent Supreme Court Decision, Kevin Hornibrook v. Cherilyn Richard and its implications for future Conservators.  Our speakers will provide an overview of the facts of the case, their respective positions as argued to the SJC and provide insight on their perspectives on the outcome of the case.

 

Last Month at the BBA – Trusts & Estates Section Events in October 2021

By: Rebecca Tunney, Goulston & Storrs and Bryce Helfer, Nixon Peabody, Communications Committee, Trusts and Estates Section

Trusts & Estates Section Programs at the BBA last month: 

Probate Accountings Issues from a Litigation Lens Hear from professionals who serve as Trustees, Personal Representatives and Conservators on issues related to challenging and defending accountings, with a unique perspective from a litigator’s viewpoint.

Basic Estate Planning Documents: Will, Power of Attorney, Health Care Proxy, Living Will and MOLST Watch a review of the key components of wills, health care proxies, durable powers of attorney, living wills and related documents.  This program provides an introduction to these basic estate planning documents, including drafting suggestions and advice for avoiding pitfalls.

 

Upcoming Trusts & Estates Events at the BBA – October 2021

By: Bryce Helfer, Nixon Peabody and Rebecca Tunney, Goulston & Storrs, Communications Committee, Trusts and Estates Section

Upcoming Trusts & Estates Section Programs at the BBA this month: 

BBA Webinar: Probate Accountings Issues from a Litigation Lens. Tuesday, October 19, 2021, 2:00PM – 3:00PM.  Hear from professionals who serve as Trustees, Personal Representatives and Conservators on issues related to challenging and defending accountings, with a unique perspective from a litigator’s viewpoint..

Hear from professionals who serve as Trustees, Personal Representatives and Conservators on issues related to challenging and defending accountings, with a unique perspective from a litigator’s viewpoint.  Thursday October 7, 2021, 10:00AM-11:00AM. Join us for a review of the key components of wills, health care proxies, durable powers of attorney, living wills and related documents.  This program will provide an introduction to these basic estate planning documents, including drafting suggestions and advice for avoiding pitfalls.

 

Upcoming Trusts & Estates Events at the BBA – June 2021

By: Jennifer D. Taddeo, Conn Kavanaugh and Rebecca Tunney, Goulston & Storrs, Communications Committee, Trusts and Estates Section

Upcoming Trusts & Estates Section Programs at the BBA this month: 

Trusts & Estates End of Year Review 2021    Monday, June 21, 2021, 2:00 pm – 3:00 pm  An annual event not to be missed, the Trusts & Estates End of Year Review covers recent federal and state case law, legislation and tax law matters, with updates presented by the New Developments Committee, Public Policy Committee and Tax Law Updates Committee.

McGregor v. McGregor, 308 Neb. 405 (2021)

By: Craig Cataldo, Nutter

The Nebraska Supreme Court recently declined to approve a Non-Judicial Settlement Agreement (NJSA) because it violated a material purpose of the relevant trust.  While the ruling relies on a statutory presumption specific to the Nebraska Uniform Trust Code, it serves as an important reminder to practitioners that NJSAs are only valid to the extent they do not violate a material purpose of the underlying trust.  

Facts:

The trust at issue in McGregor provides for a “family trust” benefiting the decedent’s surviving spouse.  Upon her death, two “carve-out” trusts will be created for the benefit of the decedent’s children and their respective issue.  These carve-out trusts are to be funded with specific tracts of real estate and are to be equalized, to the extent possible, with liquid assets in the trust.  The trust specifically states the assets in the carve-out trusts “shall remain in trust” and that the trusts “shall be irrevocable and shall not be revoked or amended in whole or in part by the trustee, beneficiary, or any other person.”  Furthermore, the trust provides that the donor intended that each carve-out trust be a “non-support discretionary spendthrift trust that may not be reached by the beneficiaries[’] creditors for any reason.”  The decedent’s children have limited testamentary powers of appointment under the carve-out trusts and, in default of exercise, the trusts will be held for their issue.

Following the decedent’s death, the surviving spouse and the decedent’s two children executed a settlement agreement which provided for an equal, outright distribution to the decedent’s children upon the death of the surviving spouse.  Six years after the agreement was signed, the surviving spouse attempted to revoke it via email and one of the decedent’s children sought to have the agreement approved by the court.  

The trial court issued an order finding the agreement was nonbinding.  First, the court stated that the undetermined beneficiaries of the carve-out trusts—the decedent’s grandchildren—were “interested persons” and, therefore, needed to consent to the agreement for it to be binding.  Second, the court found that even if all interested parties consented, the agreement violated a material purpose of the trust, which was to leave the property in trust for the decedent’s children during their lives and then to their issue when they die.  The ruling was appealed. 

Analysis:

Under Neb. Rev. Stat. § 30-3801, “[a] nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust” and spendthrift provisions are presumed to be a material purpose of the trust.  The court looked at the language in the trust evidencing that a material purpose was to keep the property in trust; specifically, the instrument provides that the carve-out trusts “shall remain in trust”, that the trusts shall be irrevocable, and that the donor intended the carve-out trusts to be spendthrift trusts that cannot be reached by the beneficiaries’ creditors.  Therefore, the court concluded the trusts were designed to “hold the beneficiaries’ interests in trust and restrain the transfer of such interests”.  The court explained that an outright distribution would allow the beneficiaries’ creditors to reach the property and allow the decedent’s children to transfer the property during their lives and not at death, which also conflicts with the limited power of appointment in the carve-out trusts. 

Result:

The Nebraska Supreme Court concluded the spendthrift provision was a material purpose of the trust which the settlement agreement violated by distributing the assets outright rather than in trust.  Accordingly, the Court held the settlement agreement was invalid.

Relevance to Massachusetts:

Unlike the Massachusetts Uniform Trust Code (MUTC), the Nebraska statute explicitly states that “[a] spendthrift provision in the terms of the trust is presumed to constitute a material purpose of the trust.”  This provision clearly guided the Nebraska Supreme Court in reaching its decision as the trust at issue specifically provided that the carve-out trusts were intended to be spendthrift trusts. 

This case may be of interest to practitioners in Massachusetts, however, because many standard trusts include spendthrift provisions.  Although § 111 of the MUTC does not explicitly state that a spendthrift provision is a presumed material purpose, a spendthrift clause is a common example of a material purpose and would likely be treated as such under the MUTC.  See 21 Mass. Prac., Probate Law and Practice § 3:2 (3d ed.); cmt. to § 411 of MUTC Ad Hoc Committee Report.  Moreover, it was not only the spendthrift language that factored into the Nebraska Supreme Court’s reasoning.  The Court also highlighted that the carve-out trusts were structured to restrain the beneficiaries from transferring the assets during life, evidenced by the limited power of appointment at death.  Given that this is a common structure for many trusts benefiting a decedent’s children, practitioners preparing NJSAs involving distributions may need to consider whether a material purpose of the trust would be violated by distributing trust assets outright.

Another interesting element of the McGregor case is that just because the surviving spouse previously consented to the agreement, does not mean it is valid.  This serves as a reminder to practitioners that NJSAs are only valid to the extent they comply with the MUTC.  Accordingly, if a party who signs an NJSA decides to back out of it, the agreement’s enforceability on all parties involved may hinge on whether it violates a material purpose of the trust. 

Upcoming Trusts & Estates Events at the BBA – May 2021

By: Jennifer D. Taddeo, Conn Kavanaugh and Rebecca Tunney, Goulston & Storrs, Communications Committee, Trusts and Estates Section

Upcoming Trusts & Estates Section Programs at the BBA this month: 

Trust Administration and Recent Developments in Massachusetts Divorce Law    Thursday, May 20, 2021  Our panelists will discuss recent developments in divorce law relating to trusts and how these developments can impact the drafting and administration of trusts to protect assets in the event of a beneficiary divorce.

Wealth and Estate Planning in the Digital Age: A Guided Tour of Cryptocurrencies, Non-Fungible Tokens, and Other (Stunningly Valuable) Digital Assets  Monday, May 24, 2021   Our distinguished panel will explore the rapidly evolving world of digital property, to look at how old ideas (like burying gold in the backyard) are being translated into new and exotic technologies.  The panel will then examine the extraordinary impact that these new technologies are having on what used to be prosaic estate planning strategies. For example, Bitcoin, with its staggering volatility, is an asset well-suited for funding a Grantor Retained Annuity Trust – or GRAT.  Meanwhile, the secrecy – and value – of passwords and passkeys in the digital era is the equivalent of holding the treasure map to Blackbeard’s buried treasure; if it is not preserved carefully and passed on at death, the treasure can be lost forever.  And that could lead to a personal representative’s nightmare: the IRS recently held that the estate of an individual who died owning millions of dollars’ worth of cryptocurrency owed tax of the known value of those assets at death, even though the passkey was lost with the death of the decedent and the assets are now unreachable by the estate!  Come join us for a fascinating journey to the intersection of technology, huge wealth, and estate planning, where tax analysis and science fiction often complete – and sometimes collide.  

Charitable Estate Tax Deduction for LLC Membership Interests Reduced by Discounts for Lack of Marketability and Control

By: Keirsa Johnson, Hemenway & Barnes LLP

Warne v. Commissioner, T.C. Memo 2021-17, United States Tax Court

Background

Miriam Warne owned ground leases on several properties in California, which she and her late husband held through five separate LLCs.  Prior to her death, Miriam transferred fractional interests in four of the five LLCs to her children and grandchildren but retained 100% ownership over Royal Gardens LLC (“Royal Gardens”) through her revocable trust.  Upon her death, Miriam left 75% of her interest in Royal Gardens to the Warne Family Charitable Foundation (“Foundation”), and the remaining 25% to St. John’s Lutheran Church (“Church”).

On the timely filed Form 706, the estate reported the date of death value for Warne Family Trust’s 100% ownership interest in Royal Gardens as $25,600,000.  It also reported a corresponding charitable deduction of $19,200,000 for the gift of its 75% interest in Royal Gardens to the Foundation, and a deduction of $6,400,000 for the gift of its 25% interest to the Church. The Commissioner issued a notice of deficiency determining, among other things, a decrease in the estate’s charitable contribution deduction to $21,405,796. [1]

Analysis

The Commissioner argued that, because both the Foundation and the Church received only a partial interest in Royal Gardens, lack of control and lack of marketability discounts should apply to those gifts.  The value of the deduction, the Commissioner argued, should reflect the value received by the charity.

The estate disagreed, arguing that applying valuation discounts to charitable gifts would undermine the public policy encouraging charitable giving.  Furthermore, the estate argued that, because it held 100% of the interest in Royal Gardens and gave that 100% to charitable organizations, it was entitled to deduct 100% of the Royal Gardens value.

The Commissioner and the estate both cited the Ninth Circuit case of Ahmanson Foundation v. United States[2] as support for their positions.  In Ahmanson, the decedent owned 100 shares of a corporation.  Upon his death, he gave 99 nonvoting shares to a charitable foundation and one voting share to his son.  The Ninth Circuit ruled that the 100 shares were fully includable in the decedent’s estate, but the charitable deduction for the gift of 99 nonvoting shares would be discounted.  The Tax Court summarized the Ahmanson ruling by stating that “when valuing charitable contributions, we do not value what an estate contributed; we value what the charitable organizations received.”

The Warne estate argued that, unlike Ahmanson, 100% of the Royal Gardens value was given to charity, and therefore a valuation discount should not apply.  The Tax Court disagreed, ruling that it does not matter who receives the majority interest, “it is the value of the property received by the donee that determines the amount of the deduction available to the donor.”  The Tax Court went on to uphold the charitable valuation discounts stipulated to by the parties.

Takeaway

This case illustrates the fact that, even when 100% of a decedent’s interest in property passes to charitable beneficiaries, valuation discounts may still apply, resulting in the estate paying some estate tax on such property.  Therefore, it is important to think about the structure of the charitable gifts during the planning stage, and to note any split when calculating the actual value of the gift after the decedent’s death.  If the decedent had left the interest in the LLC to only one of the charities, it would have received a full charitable deduction, resulting in no estate tax payable with respect to such property.

[1] The Commissioner disputed the appraised value, the reported valuation discounts, or both, for each of the five LLCs owned by the Warne family.  Where these values were disputed, the Tax Court provided a detailed analysis of both the estate’s and the Commissioner’s expert evaluations, and the ultimate determination as to the value and discount of each property in dispute.  The valuation of the four LLCs for which no charitable deduction was claimed is not part of this discussion.

[2] Ahmanson Found. v. United States, 674 F.2d 761 (9th Cir. 1981).

Interested in writing for the Boston Bar Association’s Trusts & Estates Section Blog?   Please contact the Communications Committee co-chairs, Rebecca Tunney at RTunney@GOULSTONSTORRS.com and Jennifer Taddeo at jtaddeo@connkavanaugh.com.