Alert: New Massachusetts Homestead Legislation Signed Into Law

On December 16, 2010 Governor Patrick signed into law An Act Relative to the Estate of Homestead, a comprehensive revision of the Massachusetts declaration of homestead.

The previous law, M.G.L. c. 188, protected up to $500,000 of equity in a primary residence upon recording a declaration of homestead, but contained several confusing provisions that sometimes disadvantaged homeowners.

The new Homestead Legislation goes into effect on March 16th, 2011. Under the new law every Massachusetts homeowner will automatically receive $125,000 of creditor protection for the equity in their home, regardless of whether a homestead declaration is filed. Homeowners who file a declaration of homestead will continue to receive $500,000 of creditor protection. Moreover, the rules for filing a homestead declaration should be clearer, including that:

  • Trust beneficiaries are able to secure homestead protection,
  • A refinancing mortgage will not terminate previously filed homesteads,
  • Proceeds from the sale of a home or insurance are protected,
  • Spouses and co-owners who transfer property between and among themselves are protected, and
  • Homestead protection is extended to manufactured homes.

T&E Litigation Update – Ajemian v. Yahoo! Inc., Coyne v. Nascimento and Germain v. Girard

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 questions about this update or about T&E litigation generally, please feel free to e-mail the author by clicking on his name above.

Ajemian v. Yahoo! Inc.

In Ajemian v. Yahoo! Inc., Case No. 09E-0079-GC1 (Nov. 10, 2010), the Norfolk County Probate and Family Court (Casey, J.) addressed the question of whether the administrators of an estate could access the decedent’s e-mail account with Yahoo, including all of the decedent’s e-mails. Yahoo filed a motion to dismiss the administrator’s complaint in equity, arguing, inter alia, (1) that the forum selection clause in the “Terms of Service” contract between the decedent and Yahoo requires the action to be brought in California, (2) that the one-year limitations period set forth in the contract had expired, and (3) that the administrators had failed to state a claim upon which relief can be granted because the private e-mails in the decedent’s Yahoo account are not property of the decedent’s estate.

The Court granted Yahoo’s motion to dismiss based on the forum selection clause. The Court explained that these clauses are to be enforced in Massachusetts if (1) doing so is fair and reasonable, (2) the contract was not affected by fraud, undue influence or a disparate bargaining position, and (3) enforcement would not contravene a strong public policy of Massachusetts. Regarding online contracts in particular, the Court explained that courts elsewhere have applied traditional principles of contract law and determined whether the plaintiff had both reasonable notice of the online contract and manifested assent to its terms. Here, the Court rejected the administrators’ argument that forcing them to travel to California to litigate would be oppressive. Mere inconvenience and additional expense are not enough, especially where it may be assumed that the contracting party had received consideration for this inconvenience and expense. Moreover, the Court found it significant that the administrators’ legal remedies would not be reduced in California, because both Massachusetts and California consider the same principles in measuring fairness and reasonableness. The fact that the decedent may not have actually read the Yahoo contract was of “no consequence,” because the decedent was free to find another no-cost e-mail provider.

Given the enforceability of the forum selection clause, the Court held that the California court should determine when the one-year limitations period in the contract began running and whether it had expired. The Court likewise held that the “seminal issue” of whether the decedent’s e-mail accounts are property of his estate or Yahoo should also be resolved by the California court.

Coyne v. Nascimento

In Coyne v. Nascimento (Case No. 10-P-12, 2010 Mass. App. Unpub. LEXIS 1251 (Nov. 19, 2010)), a decision issued pursuant to Rule 1:28, the Appeals Court affirmed summary judgment against the plaintiff on statute of limitations grounds.

In August 2003, the plaintiff brought a complaint in equity in probate court against the defendant, who was the decedent’s attorney-in-fact, claiming that the defendant had breached her fiduciary duties by transferring certain securities and real estate to herself shortly before the decedent’s death in 2002. Then, in October 2006, the plaintiff filed a separate action in superior court against the defendant, claiming that the defendant had tortiously interfered with the plaintiff’s expectancy.

The Court held that the claim for tortious interference with expectancy was barred by the three-year limitations period pursuant to G.L. c. 260, § 2A, because the superior court action was filed more than three years after the probate court action. As the complaint in equity in probate court established, the plaintiff had actual knowledge of the facts underlying the tort claim. Actual knowledge was required because the defendant’s alleged interference with expectancy arose from her breach of fiduciary duty.

The Court also held that the claim was not tolled during the pendency of the probate court action under the doctrine of equitable tolling. The plaintiff could have simultaneously brought the superior court action and the probate court action and then requested a stay of the superior court action or an interdepartmental assignment or consolidation. “Probate proceedings do not delay the occurrence of the injury or the accrual of the claim; rather, probate proceedings operate to fix the extent of the injury. Until the end of probate, the precise value of a plaintiff’s expectancy naturally remains uncertain. But our law rejects this uncertainty as a reason to toll the statute of limitations.”

Germain v. Girard

In Germain v. Girard (Case No. 09-P-1710, 2010 Mass. App. Unpub. LEXIS 1167 (Oct. 28, 2010)), a decision issued pursuant to Rule 1:28, the Appeals Court addressed an award of legal fees pursuant to G.L. c. 215, § 39A.

This is the second decision issued by the Appeals Court in this case. The first decision (Germain v. Girard, 72 Mass. App. Ct. 409 (2008)) concerned the probate court’s approval and allowance of a will that was executed by the decedent in 2004, shortly before his death. The probate court had rejected a claim that the will was the product of undue influence. The Appeals Court reversed this ruling and remanded the case to the probate court with instructions that the burden of proof on the undue influence claim should have been shifted to the petitioner, who is the decedent’s stepdaughter, because her husband stood in a fiduciary relationship with the decedent and indirectly benefited from the will.

After a bench trial on remand, the probate court ruled that the stepdaughter had met her burden of proving that her husband had not unduly influenced the decedent. The Appeals Court affirmed.

The Appeals Court also affirmed the probate court’s allowance of the stepdaughter’s motion for legal fees pursuant to G.L. c. 215, § 39A. Section 39A authorizes the probate court to award an attorney compensation and reimbursement for legal services upon a showing that the services “conferred a benefit upon the estate, and ‘benefit conferred’ means assistance in ‘creating, preserving, or increasing the estate.’” Because the work of the stepdaughter’s lawyer preserved the decedent’s will, the Court held that a benefit was conferred on the estate and that the lawyer was entitled to compensation under the statute.

IRS Announces 2011 Inflation Adjustments

The IRS recently announced inflation adjustments for several tax provisions related to estate planning.

  • Valuation of Qualified Real Property in Decedent’s Gross Estate. The maximum reduction in estate tax value for qualifying real property used in a farm or business valued under section 2032A is $1,020,000 for estates of decedents dying in 2011.
  • Interest on a Certain Portion of the Estate Tax Payable in Installments. The value of a closely-held business interest on which the payment of estate taxes may be deferred (and on which interest will be charged at a rate of 2%) is increased to $1,360,000 for estates of decedents dying in 2011.
  • Annual Exclusion for Gifts. The gift tax annual exclusion remains at $13,000 for 2011.
  • Annual Exclusion for Gifts to Non-U.S. Citizen Spouse. The annual exclusion for gifts to a non-U.S. citizen spouse increases to $136,000 for 2011.
  • Tax Responsibilities of Expatriation. The exemption for appreciation in assets recognized by a covered expatriate is increased to $636,000 for expatriations that occur in 2011.
  • Expatriation to Avoid Tax. The standard for determining whether an expatriate is a “covered expatriate” under section 877A(g)(1) is based on whether his or her average annual net income tax exceeded $147,000 (increased from $140,000) for the five taxable years ending before the date of expatriation for tax years beginning in 2011.
  • Notice of Large Gifts Received from Foreign Persons. For 2011, gifts from foreign persons in excess of $14,375 in a taxable year are required to be reported.

See Rev. Proc. 2010-40 (Nov. 15, 2010).

The Defense of Marriage Act and Massachusetts’ Recognition of Same-Sex Marriage: A Summary of Recent Litigation

Kerry L. Spindler, Esq., Goulston & Storrs, P.C.

In summer of 2010, Judge Tauro of the United States District Court for the District of Massachusetts, held in two cases that the distinction drawn by the Defense of Marriage Act (“DOMA”)[1] between same-sex and opposite-sex marriage is in violation of the United States Constitution. Although the District Court has stayed the decisions while on appeal to the First Circuit, the status of same-sex marriage under federal law is an issue of ongoing importance to estate planners and their same-sex clients. Brief summaries of DOMA, in relevant part, and the decisions follow.

Summary of DOMA. In 1996, Congress enacted, and President Clinton signed into law, DOMA. Section 3 of DOMA[2] defines the terms “marriage” and “spouse” for the purposes of federal law. Under this provision, “marriage” is limited to the union of one man and one woman, and “spouse” is limited to a husband or wife of the opposite sex.

Prior to DOMA, the federal government’s recognition of a marriage was determined by reference to the relevant state’s marital law.[3] DOMA’s uniform definition of marriage implicates more than 1,000 federal laws, and, as a result, a large number of federal benefits, rights and privileges where eligibility turns on marital status.[4]

Gill v. Office of Pers. Mgmt.: In Gill v. Office of Pers. Mgmt.,[5] the plaintiffs—a group of same-sex couples and surviving spouses of same sex couples, all married in Massachusetts—argued that DOMA denied them certain federal marriage-based benefits available to similarly-situated heterosexual couples in violation of the equal protection principles embodied in the Fifth Amendment’s Due Process Clause. Specifically, each plaintiff requested to be treated as married with respect to health benefits based on federal employment, social security retirement and survivor benefits, or income tax filing status. The federal government denied the requests, citing DOMA’s mandate that it recognize only heterosexual marriages. The District Court ultimately determined that DOMA “fails to pass constitutional muster even under the highly deferential rational basis test” because there is “no fairly conceivable set of facts that could ground a relationship between DOMA and a legitimate government objective.” In relying on the rational basis test the District Court bypassed the issue of whether the strict scrutiny standard, which is reserved for fundamental rights and suspect classes, was warranted.

The District Court began with an analysis of the four motivations articulated by Congress when it passed DOMA a decade and a half ago. First is that DOMA encourages responsible procreation and child-bearing. The District Court, however, cited consensus among medical, psychological and social welfare communities that children raised by gay and lesbian parents are as well-adjusted as those raised by heterosexual parents. Moreover, even if Congress believed in 1996 that children had the best chance of success if raised jointly by biological parents, a desire to encourage heterosexual couples to procreate and rear their own children does not provide a rational basis for denying same-sex marriage federal recognition. Finally, encouraging procreation generally is not a rational basis for denying recognition to same-sex marriage because the ability to procreate is not a precondition to marriage.

The government’s second motivation is that DOMA defends and nurtures the institution of traditional heterosexual marriage. However, DOMA’s denial of marriage-based benefits to same-sex spouses bears no reasonable relation to making heterosexual marriages more secure. Moreover, if Congress seeks to make heterosexual marriage appear more valuable or desirable, it achieves this only by punishing same-sex couples, and the Constitution will not abide by such “a bare congressional desire to harm a politically unpopular group”.

The government’s third and fourth motivations are that DOMA defends traditional notions of morality and preserves scarce resources. However, a governing majority’s view that a particular practice is immoral is not sufficient reason for upholding a law. Furthermore, although resource conservation can be a legitimate government interest, it alone does not justify a particular classification.

The District Court next looked to the motivations presently articulated by the government—that DOMA is a means to preserve the status quo pending resolution of a contentious debate taking place in the states over whether to sanction same-sex marriage, and that absent DOMA, the definitions of “marriage” and “spouse” under federal law would be too variable. Family law, however, is the province of the states, and the District Court found that Congress acted improperly in creating a federal definition of marriage. Moreover, the status quo at the federal level was for the federal government to continue to recognize any marriage declared valid under state law. DOMA thus does not maintain the status quo—it is a departure therefrom.

In concluding, the District Court held that the government’s rationale is “without footing”, found that there is no reason to believe that same-sex married couples are different than heterosexual married couples in any relevant way, and inferred that animus is the basis for DOMA’s distinctions. “Because animus alone cannot constitute a legitimate government interest”, there is no rational basis to support DOMA. Thus, DOMA, as applied to the plaintiffs, violates the equal protections afforded by the Due Process Clause.

Commonwealth of Mass. v. U.S. Dept. of Health & Human Servs. In the Commonwealth of Mass. v. U.S. Dept. of Health & Human Servs.,[6] Massachusetts, as the plaintiff, argued that DOMA violates the Constitution’s Spending Clause because it forces Massachusetts to discriminate against its own citizens in order to receive and retain federal program funds. It also causes Massachusetts to pay a disproportionate federal tax. Specifically, DOMA interferes with federal funding of the State Cemetery Grants Program and MassHealth, and increases Massachusetts’ Medicare Tax payments. Massachusetts also argued that DOMA violates the Constitution’s Tenth Amendment by intruding on Massachusetts’ exclusive authority in the area of family law.

As a State Cemetery Grants Program recipient, Massachusetts owns and operates two military cemeteries. Federal funds were used to construct the cemeteries and are now received to partially reimburse Massachusetts for veterans’ burials. Funding, however, is based on Massachusetts’ compliance with a federal regulation restricting the cemeteries to only veterans, their spouses, and children. DOMA precludes recognition of same-sex spouses, and thus prevents Massachusetts, contrary to its own laws, from burying a veteran’s same-sex spouse without risking a “recapture” of several million dollars of prior federal funding and foreclosing Massachusetts’ ability to receive future funds.

Massachusetts also receives annual federal funding in support of MassHealth. Although DOMA requires MassHealth to assess eligibility for same-sex spouses as if each were unmarried, the Massachusetts’ 2008 MassHealth Equality Act provides that no person recognized as a spouse under Massachusetts law will be denied benefits on account of DOMA. Massachusetts estimated that DOMA’s restrictions with respect to same-sex spouse participants have already cost the Commonwealth nearly $3 million.

In addition, the value of health care benefits provided to a same-sex spouse of a Massachusetts employee is imputed income to the employee for federal income tax purposes. Massachusetts, as an employer, pays a Medicare tax based on each employee’s taxable income. Where an employee is charged with imputed income as a result of same-sex health care benefits, Massachusetts pays a higher tax. Massachusetts estimated that DOMA’s disparate treatment of same-sex and opposite-sex spouses has cost it nearly $200,000 in additional taxes and expenses.

The District Court began with an analysis of the Spending Clause, which provides, in relevant part, that “Congress shall have Power to Lay and collect Taxes, Duties, Imposts and Excises, to pay Debts and provide for the common Defence and general Welfare of the United States….” The federal government argued that DOMA is within Congress’ authority under the Spending Clause to determine how money is best spent to promote the “general welfare” of the public. However, among the requirements that Spending Clause legislation must satisfy is that it must not be barred by other constitutional provisions. Spending Clause power thus cannot be used to induce states to engage in activities that would themselves be unconstitutional. Whereas this court just held in Gill that DOMA is barred by the equal protection principles of the Fifth Amendment’s Due Process Clause, it also held that the Spending Clause cannot be used to save DOMA and induce states to distinguish between same-sex and opposite-sex spouses.

Lastly, the District Court turned to the Tenth Amendment issue. A federal statute violates the Tenth Amendment if it regulates the states as states,[7] concerns attributes of state sovereignty, and impairs a state’s ability to structure integral operations in areas of traditional governmental functions. The District Court found that DOMA has a substantial impact on Massachusetts’ bottom line, intrudes on its ability to define the marital status of its citizens—the archetypical area of state sovereignty—and interferes with its authority to recognize same-sex marriages and afford individuals in such marriages the same benefits, rights and privileges as afforded to individuals in opposite-sex marriages. DOMA, therefore, is in violation of the Tenth Amendment.

Conclusion. Many predict that the Gill and Commonwealth of Massachusetts decisions will spend the next several years in the appeals process and may eventually become the subject of petitions for certiorari. The District Court’s stay of these decisions notwithstanding, the dynamic legal environment and litigation around DOMA suggest that estate planners working with same-sex spouses should strive to create flexible estate plans capable of producing optimal distribution, income, gift, and estate tax results in DOMA and post-DOMA situations. To this end, distribution and tax provisions should effectuate the client’s intent to the highest degree possible, whether or not DOMA is in effect when planning and death occurs.

[1] Pub. L. No. 104-199, 110 Stat. 2419 (1996).
[2] 1 U.S.C. § 7.
[3] Gill v. Office of Pers. Mgmt., 699 F. Supp. 2d 374, 391–93 (Mass. Dist Ct. 2010).
[4] Id. at 379.
[5] Id. at 374. 
[6] Mass. v. U.S. Dept. of Health & Human Servs., 698 F. Supp. 2d 234, 235 (Mass. Dist. Ct. 2010).
[7] The District Court acknowledges the federal government’s argument that an additional Medicare tax withholding does not offend the Tenth Amendment because this is regular of Massachusetts as an employer, rather than as a state.  The District Court dismisses this argument in determining that Massachusetts has standing to challenge DOMA’s interference in its relatios with its public employees under Bowen v. Pub. Agencies Opposed to Soc. Sec. Entrapment, 477 U.S. 41, 51 n. 17 (1986) and that the “states as states” criterion is not so broad as to preclude Massachusetts’ challenge to DOMA.

Alert: NY Passes Formula Savings Legislation

New York recently passed legislation to save formula provisions in wills, trusts and beneficiary designations executed prior to January 1, 2010, for decedents dying on or after January 1, 2010 and during the repeal of the federal estate tax and generation skipping transfer tax.  By statute, such formula provisions will be construed in accordance with federal law in effect on December 31, 2009. 

For more information, click here
For the relevant statute, click here.
For the relevant bill, click here

Ansin Case Confirms Validity of Postnuptial Agreements

Sarah M. Waelchli, Esq., Hemenway & Barnes, LLP

On July 16, 2010, the Massachusetts Supreme Judicial Court issued the first clear ruling that a postnuptial agreement is valid in Massachusetts. The case, Ansin v. Craven-Ansin (SJC-10548), provided a unanimous opinion that postnuptial agreements or “marital agreements” are permissible and fully enforceable if created properly. The SJC ruled, however, that postnuptial agreements will be subject to a higher level of scrutiny than prenuptial agreements or separation agreements.

Ansin involved a couple who had been married for 19 years prior to signing a postnuptial agreement. They had two adult sons and a combined estate of approximately $19 million. After periods of separation, the couple signed a postnuptial agreement to settle the division of their assets if they were to divorce. The parties were represented by separate counsel and engaged in substantial negotiations over the agreement. The SJC found that the couple was committed to continuing their marriage after signing the agreement, but two years later the husband filed for divorce. The SJC held that the agreement, which gave the wife $5 million and 30% of the appreciation in the marital assets (among other benefits) was enforceable.

The SJC set forth five standards for the enforceability of postnuptial agreements, each subject to the “careful scrutiny” of the court: (1) whether the agreement was free of coercion or fraud; (2) whether each party knowingly, and in writing, waived his or her rights to property and support upon divorce; (3) whether each party had the opportunity to hire counsel; (4) whether each party provided full and fair disclosure of finances, including current and reasonably anticipated assets, income and liabilities; and (5) whether the agreement was substantively fair and reasonable at the time of execution and upon divorce. As an additional hurdle to the enforceability of these agreements, the SJC placed the burden of satisfying these criteria on the spouse seeking to enforce the agreement.

The utility of postnuptial agreements in the estate planning context remains unclear. Estate planners may wish to use postnuptial agreements to ensure that particular family assets (the family business, family vacation home or other inherited assets) stay in the family line at death. While Ansin confirmed the enforceability of postnuptial agreements upon divorce and set forth standards that made sense in that context, it did not address the enforceability of such agreements upon death. Ansin may provide some guidance, but a clear ruling on the enforceability and standards for postnuptial agreements upon death is yet to come.

Estate and Trust Litigation in Federal Court

Mark E. Swirbalus, Esq., Day Pitney LLP

To say that federal courthouse doors have been swung wide open for estate and trust disputes may be an overstatement, but we might be seeing the beginning of a trend. Given the heavy case loads and budget cuts affecting the probate courts, litigating estate and trust disputes in federal court could be an attractive option under the right circumstances, particularly in light of recent decisions discussing the so-called “probate exception” to federal subject matter jurisdiction.

The Probate Exception

In Jimenez v. Rodriguez-Pagan, 597 F.3d 18 (1st Cir. D.P.R. 2010), the First Circuit provided a helpful primer on the probate exception. Borrowing from the Supreme Court’s decision in Markham v. Allen, 326 U.S. 490 (1946), the First Circuit explained that “[t]he probate exception is a judge-made doctrine stemming from the original conferral of federal equity jurisdiction in the Judiciary Act of 1789[,]” and that “[t]he ambit of that jurisdiction, coterminous with that exercised by the framers’ contemporaries in the English courts of chancery, ‘did not extend to probate matters.’” In Markham, the Supreme Court had held that federal courts have no authority to “interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court.”

Application of the probate exception proved difficult in the wake of Markham, because the standard that federal courts cannot “interfere” with probate proceedings did not lend itself to an easy definition.

In Marshall v. Marshall, 547 U.S. 293 (2006) (the Anna Nicole Smith case), the Supreme Court revisited the issue and provided some clarity, explaining that the “interference” language is essentially a reiteration of the general principle that when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res. Thus, the probate exception applies only where a federal court is being asked to engage in “purely” probate matters such as the probate or annulment of a will and the administration of an estate, or the disposal of property that is already in the custody of a probate court. The probate exception does not, however, bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction. Simply stated, the Supreme Court made clear in Marshall that the scope of the probate exception is “distinctly limited.”

Recent Application in Massachusetts

Two recent decisions by the United States District Court for the District of Massachusetts help to illustrate the “distinctly limited” nature of the probate exception.

In Dumas v. Snow, Civil Action No. 10-10187-GAO, 2010 U.S. Dist. LEXIS 86292 (D. Mass. Aug. 23, 2010), the plaintiff sought a declaration that she has a current income interest and a contingent remainder interest in a testamentary trust, and she also brought a claim for breach of fiduciary duty against the successor trustee, alleging that the trustee had failed to recognize her interest and to make proper distributions to her under the trust.

The defendants moved to dismiss the complaint for lack of subject matter jurisdiction, arguing that the plaintiff’s claims fell within the probate exception, or alternatively that the Court should exercise its discretion to abstain from adjudicating claims which it deems to be uniquely probate matters. The Court rejected both arguments and denied the motion to dismiss.

Regarding the probate exception, the Court explained that a federal court “may exercise its jurisdiction to adjudicate rights” in property in possession of a state probate court “where the final judgment does not undertake to interfere with the state court’s possession save to the extent that the state court is bound by the judgment to recognize the right adjudicated by the federal court.” Here, the plaintiff’s claim for a declaration regarding her interest in the trust would not interfere with any property in the possession of a probate court. Moreover, her claim for breach of fiduciary duty against the trustee would not interfere with a probate court’s administration of the estate. The decedent’s estate had already been settled in the Barnstable Probate and Family Court.

Based on the same reasoning, the Court held that there was no cause to abstain because there was no pending probate court action in which the same or similar issues were being presented. The Court noted that the defendants failed to cite any case in which a federal court abstained from exercising jurisdiction because a state court action might be filed.

In Harhay v. Starkey, Civil Action No. 08-CV-30229-MAP, 2010 U.S. Dist. LEXIS 45473 (D. Mass. May 10, 2010), the Court grappled with a family dispute that was described in Shakespearian terms. The decision begins memorably with the following prologue: “In Act I, Scene 2, of Shakespeare’s play, Hamlet describes his relationship with his stepfather as ‘little more than kin and less than kind.’ This litigation exemplifies the degree of venom, and utter confusion, that can arise from disputes among family members. It also provides an example of how judicial processes can be abused when family rancor threatens to demand more than its fair share of the court’s time.”

The plaintiffs alleged that the defendants, as executrix and counsel for the estates of their mother and two aunts, swindled them of their family inheritance by misappropriating assets during the mother’s lifetime with an allegedly forged power of attorney. The plaintiffs brought claims against the defendants for conversion, fraud, negligence and breach of fiduciary duty.

The defendants moved to dismiss the claims under the probate exception, arguing that the claims were based on the plaintiffs’ alleged interests as beneficiaries or heirs of three estates, and that this lawsuit followed apparently pending actions by the probate court. The Court held that the probate exception did not apply, however, because it cannot be used to dismiss tort claims merely because the issues intertwined with claims proceeding in probate court. All of the claims brought by the plaintiffs in federal court sounded in tort and sought damages against the defendants themselves, rather than against any of the estates. As the Court noted, these claims would not even be cognizable in probate court, which does not have jurisdiction to hear tort claims or award damages.

The Take-Away from these Decisions

The lesson learned from these decisions may be that federal court ought to be considered as a viable forum for certain estate and trust disputes. Despite the Court’s disdain for what it described as the “family rancor” in the Harhay case, the Court nevertheless may be sending a message that family disputes – hopefully with less rancor – are welcome in the John Joseph Moakley U.S. Courthouse.


Welcome to the Boston Bar Association’s Trusts & Estates Section blog.  We hope that this will be a useful forum for dialogue and information.  Thank you for visiting.

Important News from the T&E Section Re: Adopted Issue

Authored by:
Boston Bar Association Trusts & Estates Section

On July 1, 2010, there was an important statutory change to a longstanding rule of construction governing the treatment of adopted persons in wills, trusts and similar instruments executed before August 26, 1958. Adopted persons (or their issue) who were previously presumed to be excluded as beneficiaries where the instrument did not specify their status will now be presumed to be included, retroactively conferring upon them benefits they never before enjoyed and retroactively diminishing interests held by natural-born descendants.

When the Legislature modernized Massachusetts law in 1958 to presume that adopted persons are included in terms such as “child”, “grandchild” and “issue” unless the instrument plainly states otherwise, it made the change effective only to instruments executed after the law’s effective date of August 26, 1958. The old law continued to apply to earlier instruments. Under that law, adopted persons were presumed to be included if they were adopted by the creator of the instrument, but were presumed to be excluded if they had been adopted by someone in the family other than the creator.

This clearly-understood rule of construction was changed by Chapter 524 of the Acts of 2008, which was signed by the Governor on January 15, 2009. That act abolished the distinction between instruments signed before and after August 26, 1958 by applying the modern rule of construction to all instruments. In other words, after the effective date of Chapter 524, adopted persons suddenly would be presumed to be included as children, grandchildren or issue under pre-1958 trusts.

This change came as a surprise to members of the bar and raised multiple concerns. First, the statute meant that the trustees of pre-1958 trusts might be unable to identify correctly the beneficiaries of those trusts. Second, Chapter 524 had the potential to wreck havoc on estate plans drafted in reliance on the old rule of construction. Many of these estate plans have been designed to include lifetime gifts or bequests that would compensate adopted persons who could not benefit from pre-1958 trusts established by other family members. To the extent that these arrangements are irrevocable, Chapter 524 could result in adopted persons receiving a greater combined benefit than similarly-situated biological descendants. Finally, Chapter 524 was potentially unconstitutional, as it could violate due process by reducing or eliminating the vested property rights of biological descendants.

Due to these concerns, the Boston Bar Association and other bar associations asked the Legislature to repeal the new act or to delay its original April 15, 2009 effective date. The legislation took effect as scheduled, but in response to these requests, the Legislature included provisions in the 2009 budget that essentially suspended the Chapter 524 changes during the year from July 1, 2009 to June 30, 2010. The bar’s further efforts to repeal Chapter 524 permanently were not successful, resulting in a change in the law when the suspension expired on July 1st and the rule of construction introduced by Chapter 524 returned.

The Boston Bar Association continues to work on the repeal of this new rule of construction introduced by Chapter 524. It also will be hosting a brown bag lunch at its offices on Friday, September 17, 2010, at 12:30 PM, to discuss the matter. In the meantime, lawyers should consider the effect of this change for their clients.

Proposed Change to Massachusetts Basis Rules to Address 2010 Changes in Federal Estate Tax Laws

Kenneth P. Brier, Esq., Brier & Geurden LLP
Andrew D. Rothstein, Esq., Goulston & Storrs, P.C.

As things stand now, there is some concern that as a result of the change in federal basis rules for 2010, and no corresponding Massachusetts change, a substantial, hidden Massachusetts tax problem has arisen for successors to decedents’ property.

When the federal government decided to reduce and repeal the federal estate tax beginning in 2002, it planned to offset some expected revenue loss by (i) eliminating the portion of the estate tax revenue it effectively shared with the states via the state death tax credit and (ii) eliminating in 2010 the so-called “step-up” in basis, which established date-of-death (or 6-month alternate) valuations for all inherited property.

Under this plan the estate of a 2010 decedent would pay no federal estate tax, but the decedent’s heirs would be responsible for paying income tax on pre-death capital gains on inherited appreciated property when they sell it. To some, this seemed like an acceptable tradeoff – capital gains taxes on pre-death gains in lieu of much higher estate taxes.

In response to the changes to the federal estate tax system, effective for decedents dying after December 31, 2002 Massachusetts enacted its own estate tax. The Department of Revenue indicated that the tax was enacted in order to preserve the revenue the Commonwealth received before the 2002 federal estate tax changes. However, at that time Massachusetts did not make any changes to its rules relative to the basis of property inherited from a decedent. As a result, it appears that decedents dying in Massachusetts in 2010 will be subject to Massachusetts estate tax on their assets and the decedent’s heirs will be responsible for paying income tax on pre-death capital gains on the inherited appreciated property when they sell it.

In effect, under the current Massachusetts tax rules assets that historically were subject to only one level of tax will now be subject to two levels of tax.

Consider, for example, the impact of inheriting a Beacon Hill row house valued at $10 million at the decedent’s date of death but purchased for a tenth of that amount in the 1960s. Under the rules that existed last year, the heirs would have paid roughly $1,067,600 of Massachusetts estate tax and inherited the house with a basis equal to the date-of-death (or alternate) value, so if they sold it for its date of death value the day after the decedent died, there would be no Massachusetts capital gains tax. Under the rules that exist in 2010, the heirs would still pay roughly $1,067,600 of Massachusetts estate tax and inherit the house with a basis equal to what the decedent paid for it in the 1960s, so that if the heirs sell the property for its date of death value the day after the decedent dies, there would be a 5.3% Massachusetts capital gains tax on $9,000,000 of gain resulting in $477,000 of extra tax.

The concerns laid out above are based on a technical, but we think inescapable, reading of the applicable tax statutes.

Massachusetts has its own tax basis rules set forth in chapter 62, §6F. These rules interrelate heavily with the federal basis rules, but are independent of them. Section 6F(b)(2)(C) generally applies IRC §1014(b) (step-up in basis at death) to property acquired from a decedent. The reference to section 1014(b) of the Code, however, must be read in conjunction with the definition for “Code” for purposes of chapter 62, as set forth in §1(c). With exceptions for certain Code sections not relevant here, that definition provides that “Code” means the Internal Revenue Code of the United States, as amended on January 1, 2005 and in effect for the taxable year. “Code” therefore would include IRC §1014(f), enacted in 2001 under EGTRRA, which provides that §1014 shall not apply to decedents dying after December 31, 2009. So there is no longer any general Massachusetts basis step-up (or step-down) for property acquired from decedents.

In the absence of any general basis step-up, it seems that a successor’s initial Massachusetts basis would be determined under §6F(b)(2)(B), related to property whose federal basis is determined in whole or in part by application of the basis of prior property. That provision provides that the Massachusetts initial basis shall be the initial federal basis of the acquired property (or its Massachusetts basis, if different), if there was no federal gain or loss with respect to the transaction (presumably the transaction by which the property was acquired). Under §6F(c), Massachusetts initial basis is thereafter adjusted by applying the same adjustments as are made to the federal basis after the initial basis as determined, with certain exceptions. Among the exceptions, pointedly, “[t]here shall be disregarded any federal adjustment resulting from provisions of the Code that were not applicable in determining Massachusetts gross income at the time such federal adjustments were made….” Since the allocation of additional basis under IRC §1022 (applicable for 2010) is not an item in determining Massachusetts gross income, it does not seem that it can be a basis adjustment for Massachusetts tax purposes. In the absence of a legislative fix, it seems that all Massachusetts property acquired from decedents will be acquired with a carryover basis, without any further adjustment.

The lack of any Massachusetts basis step-up would create serious complications for any taxpayer acquiring property from a decedent this year or thereafter. . Without any basis step-up, Massachusetts basis would be lower than federal, and Massachusetts gains would be commensurately higher. Moreover, this disconnect creates a serious trap for so-called pourover trusts containing a “pecuniary” subtrust funding formula. Such a funding formula, though offering several advantages, has always imposed the potential of triggering of the recognition of gain upon funding. That problem has typically been manageable to the extent persons administering the trust are dealing only with post-mortem gains. It is a lot more serious to deal with gains accrued over the decedent’s lifetime and not reduced by the federal allocation of increased basis.

Our proposal is simply to maintain the section 1014 basis step-up rules this year and thereafter. Those rules have commonly been thought of as “fair play” in mitigating the potential for double taxation in the face of an estate tax. Given the Commonwealth’s continuation of its estate tax in the face of the apparently temporary federal repeal, a continuation of the basis step-up rules can be viewed as both consistent and fair. Our proposal is to state explicitly that IRC §1014(f) is not to be given any effect for Massachusetts purposes, thereby reading IRC §1014 back into the law. Consistent with that approach, the proposal also confirms that the federal $1.3/3 million additional basis allocations under IRC §1022(b) and (c) are not to apply for Massachusetts purposes.

One could conceive of an alternative whereby Massachusetts simply conforms its determination of basis in property acquired from decedents to the federal basis this year and thereafter. This approach would provide the benefit of avoiding the need, both for taxpayers and the DOR, to track divergent federal and state tax basis. However, we think that such divergent bases will be relatively uncommon, except for wealthier decedents for whom the $1.3/3 million additional federal basis step-up might not be sufficient to raise their bases to date-of-death fair market values, and we think that the estates of such wealthier decedents are the ones which commonly will be equipped to track separate federal and Massachusetts bases. We think that fairness considerations therefore should prevail over these limited concerns about added administrative burdens.