Author: Megan (Neal) Knox of McDonald & Kanyuk, PLLC

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (H.R. 1865) into law, which contains the “Setting Every Community Up for Retirement Enhancement” (“SECURE”) Act of 2019.  The SECURE Act makes several changes to the rules pertaining to retirement savings and employee benefit accounts, which generally became effective January 1, 2020.  The SECURE Act increases opportunities for individuals to increase their retirement savings but also eliminates the ability to spread distributions of inherited retirement benefits over the life expectancy of most (but not all) beneficiaries.  Highlighted below are the provisions of the SECURE Act that may be of most interest to estate planners. 

A.     Changes to Lifetime Rules.

  1. Elimination on Age Limit for Contributions to Traditional IRAs. Prior to the SECURE Act, individuals could not contribute to a traditional IRA in, or after, the year in which such individual reached age 70 ½.  With the enactment of the SECURE Act, there is no longer an age cap on contributions to a traditional IRA.  Therefore, beginning in 2020, working individuals can continue to contribute to a traditional IRA without any age limit. 

  2. Starting Age for Required Minimum Distributions (“RMDs”) Extended. The SECURE Act raised the required beginning date (“RBD”) for RMDs from age 70 ½ to 72.  These rules apply to 401(a), 401(k), 403(b) and governmental 457(b) plans and traditional IRAs.  Individuals who reached their RBD prior to January 1, 2020 are currently in pay status and must continue to take RMDs.  The SECURE Act will not affect these individuals during their lifetimes.  For individuals who reach age 70 ½ after December 31, 2019, their RBD is April 1 of the year after the year in which they reach age 72.  With respect to certain plans, the RBD is April 1 of the year after the year in which the individual retires, if later. 


B.     Changes to Required Minimum Distribution (“RMD”) Rules After the Participant’s Death.

  1. Participants[1] Who Die After December 31, 2019. Generally, the following changes[2] apply to the post-death distribution rules for participants who die after December 31, 2019:

    a.     General Rule: 10-Year Payout Period. For more than 30 years, a so-called “Designated Beneficiary”[3] has been able to stretch RMDs from an inherited retirement account over such Beneficiary’s life expectancy, thereby maximizing the ability to defer income taxes.  The SECURE Act generally reduces this payout period rule to a maximum of 10 years after the year of the participant’s death.  Unlike the prior rule, distributions do not need to be made annually.  The retirement plan simply must be completely distributed out by the end of the 10-year period.

    b.     Exception for “Eligible Designated Beneficiaries.” A limited exception to the general 10-year rule is carved out for only five categories of Designated Beneficiaries: (1) the participant’s surviving spouse, (2) the participant’s minor child (but only until he or she reaches the age of majority), (3) a disabled person, (4) a chronically ill person, and (5) an individual who is not more than 10 years younger than the participant (collectively, the “Eligible Designated Beneficiaries”).   Eligible Designated Beneficiaries qualify for a modified version of the former life expectancy payout method, the modification being that after the Eligible Designated Beneficiary’s death, the remainder must be distributed within 10 years after the death of the Eligible Designated Beneficiary.  Additional noteworthy details regarding categories (2)–(4):

          i) Participant’s Minor Child. When a participant’s minor child reaches the age of majority,[4] the 10-year rule applies unless the child: (a) has not completed “a specified course of education” and is under the age of 26, or (b) is disabled when the child reaches the age of majority, so long as the child continues to be disabled.  Eligible Designated Beneficiary status does not apply to minor grandchildren or any other minor individuals.  If the participant’s child dies before reaching the age of majority, upon his or her death the 10-year rule applies.

         ii) Disabled and Chronically Ill Persons. An individual is considered “disabled” or “chronically ill” only if he or she meets the specific requirements defined under the Internal Revenue Code relating to these new rules.  The Designated Beneficiary’s status as disabled or chronically ill is determined as of the date of the participant’s death. 

    c.     Effect on Trusts for the Benefit of Eligible Designated Beneficiaries. If the participant designates a trust for the benefit of an Eligible Designated Beneficiary, that trust may or may not qualify for the life expectancy payout method.

         i) Conduit Trusts. A conduit trust is a trust under which all distributions from the retirement plan are required to be distributed immediately to the trust’s primary beneficiary.  Leaving benefits to a conduit trust for a single individual beneficiary are treated the same as if left outright to such beneficiary.  If the sole beneficiary is a Designated Beneficiary, the 10-year payout rule will apply.  If the sole beneficiary is an Eligible Designated Beneficiary, the life expectancy payout rule will apply. 

         ii) Accumulation Trusts. An accumulation trust is a trust under which the trustee may accumulate retirement plan distributions from the trust during the beneficiary or beneficiaries’ lifetime(s), with the remainder payable to another beneficiary upon a specified beneficiary’s death.  Unless new Treasury Regulations are issued, it is uncertain whether an accumulation trust with an Eligible Designated Beneficiary as a trust beneficiary will qualify for the lifetime expectancy payout rule because the exception to the 10-year rule does not apply if the Eligible Designated Beneficiary is not the sole  Even if the Eligible Designated Beneficiary is the sole lifetime beneficiary, he or she may not be considered the sole beneficiary of the trust since the trust assets will be distributed to the remainder beneficiary after his or her death.  It is also unknown whether an accumulation trust for the benefit of a participant’s children will qualify for the life expectancy payout if some are minors and some are adults at the time of the participant’s death.  However, the payout period for an accumulation trust for the benefit of a disabled or chronically ill beneficiary is certain.  It will qualify for the life expectancy payout even if the remainder will pass to another beneficiary upon the disabled beneficiary’s death, but only if the disabled beneficiary is the sole beneficiary during his or her life. 

  2. Participants Who Died Before 2020. The SECURE Act provides only a partial exemption for retirement accounts where the participant died prior to January 1, 2020.  If the participant died before January 1, 2020 and the original Designated Beneficiary dies after January 1, 2020, it is uncertain under the new rules whether the 10-year rule applies to the subsequent beneficiary or whether the payout period depends on whether the subsequent beneficiary is just a Designated Beneficiary (subject to the 10-year rule) or an Eligible Designated Beneficiary (eligible for the life expectancy payout).  If the original beneficiary is an accumulation trust, it is unclear whether a new distribution period begins when all the trust beneficiaries die or when any of the trust beneficiaries dies.  If both the participant and the original designated beneficiary died before January 1, 2020, the SECURE Act does not apply to the subsequent beneficiary.  The old rules will continue to apply, and the subsequent beneficiary would withdraw the remaining assets over what would have been left of the original beneficiary’s life expectancy had he or she continued to live. 

[1] The term “participant” used throughout this post means the individual who owned and contributed to a retirement account prior to his or her death.

[2] These changes apply only to certain defined contribution plans but not defined benefit plans, including certain annuity payouts in an IRA or other defined contribution plan that were locked in prior to the SECURE Act. 

[3] “Designated Beneficiary” is defined as: (a) an individual named as beneficiary by the participant or retirement plan, or (b) a trust that meets the IRS’ specific requirements.

[4] The age of majority differs among states but generally is either 18 years (as in Massachusetts) or 21 years.


IRS Releases Final Anti-Clawback Regulations

Author: Eric R. Cunnane of Goulston & Storrs

On November 26, 2019, the Treasury Department and the IRS issued final regulations adopting the regulations that were proposed in November of 2018 (83 Fed. Reg. 59343 (Nov. 23, 2018)), effectively ensuring that if a decedent uses the increased basic exclusion amount for gifts made while the Tax Cuts and Jobs Act (TCJA) is in effect and dies after the sunset of the TCJA (currently scheduled for Jan. 1, 2026), the decedent won’t be treated on his or her estate tax return as having made adjusted taxable gifts in excess of his or her basic lifetime exclusion amount (Treasury Decision 9884).

Specifically, the final regulations confirm that in calculating a decedent’s federal estate tax due, the basic exclusion amount used in the computation will be the greater of the federal exclusion amount in effect at the decedent’s date of death or the total amount of gifts previously excluded from tax due to the use of the exclusion amount in place at the time of the transfer (Regs. Sec. 20.2010-1(c)).

For example, if an unmarried individual made cumulative post-1976 taxable gifts of $9 million, all of which were sheltered from gift tax by the cumulative $10 million (indexed) in basic exclusion amount allowable on the dates of the gifts, and the individual dies after 2025 when the basic exclusion has reverted back to $5 million (indexed), the applicable credit amount against estate tax will be based on a basic exclusion amount of $9 million.

The final regulations also reinforce the notion of a “use it or lose it” benefit and direct that a taxpayer who uses exemption is deemed to utilize the base $5 million (indexed) exemption first and then the additional amount of exemption available through 2025.  For individuals dying after 2025, if no gifts were made between 2018 and 2025 in excess of the basic federal exclusion amount in effect at the time of death, the additional exclusion amount is no longer available.

In addition, the final regulations address portability and provide guidance with respect to how the deceased spousal unused exclusion (DSUE) amount is calculated under the new clawback rules.  The final regulations confirm that the reference to “basic exclusion amount” in Sec. 2010(c)(4), defining DSUE as the lesser of the basic exclusion amount or the unused portion of the deceased spouse’s applicable exclusion amount, is a reference to the basic exclusion amount in effect at the time of the deceased spouse’s death, rather than the basic exclusion in effect when the surviving spouse dies. As a result, the DSUE amount elected during the increased basic exclusion period will not be reduced when the sunset provisions become effective after 2025.

For example, an individual’s spouse died prior to 2026 at a time when the basic exclusion amount was $11.4 million.  The deceased spouse made no taxable gifts and did not have a federally taxable estate, and the spouse’s personal representative makes a portability election to allow the surviving spouse to take into account the deceased spouse’s $11.4 million DSUE amount.  At the time of the surviving spouse’s death, the surviving spouse had made no taxable gifts, had not remarried and the basic exclusion amount was $6.8 million.   The credit to be applied for purposes of computing the surviving spouse’s estate tax is based on the surviving spouse’s $18.2 million applicable exclusion amount, consisting of the $6.8 million basic exclusion amount on the surviving spouse’s date of death plus the $11.4 million DSUE amount, subject to the limitation of section 2010(d).

The final regulations do not directly address generation skipping transfer tax (GST) issues, as the IRS noted that the effect of the increased basic exclusion on the GST tax is beyond the scope of the regulatory project.  The IRS does state, however, in the preamble to the final regulations that “There is nothing in the statute that would indicate that the sunset of the increased [basic exclusion amount] would have any impact on allocations of the GST exemption available during the increased [basic exclusion amount] period.”

How to Approach Questions of a Client’s Mental Capacity in Estate Planning

Authors: Erin K. Higgins and Conor Slattery of Conn Kavanaugh

Clients of all ages may at one point or another become mentally incapacitated and unable to make important legal decisions. Questions of mental capacity arise most often with elderly clients, which leaves estate planning attorneys making mental capacity determinations more frequently than their colleagues practicing in other legal fields.

The basic presumption is that a person is legally competent to make decisions and execute legal documents.  Determining whether a client has the requisite capacity to make decisions involves assessing whether the client is able to effectively communicate and understand his or her decisions, and the consequences associated with these decisions.  The ABA Commission on Law and Aging has issued a handbook in collaboration with the American Psychological Association in order to aid attorneys in assessing whether or not their elderly clients are of a diminished capacity.  Some common warning signs of diminished capacity that estate planning attorneys should look out for when meeting with their clients are:

  • Repetitive phone calls or conversations where a client does not remember the previous conversations;
  • Reliance on a care-giver;
  • Completely forgetting a recent event; and
  • The client’s failure to recall his or her assets or previous decisions.

Once the client’s mental capacity comes into question, the estate planning attorney should attempt to review the client’s assets, personal information, and other basic information to see if the client is able to effectively communicate and recall such information. It may be prudent to ask another attorney to attend a meeting with a client as a witness to events and to assist in determining the client’s mental capacity. An attorney should remember that such a conversation may not only be awkward and difficult for himself or herself, but may be equally (if not more) embarrassing or intimidating for the client. In order to put the client at ease, the attorney should employ a conversational approach, rather than running through a checklist of questions akin to an interrogation, when evaluating a client’s capacity. For example, the attorney may begin the conversation by inquiring as to whether the client’s family is still planning a vacation, whether a grandchild is still playing a particular sport, how the client’s hobby is going, or simply discuss current events with the client as the attorney would if catching up with a friend over coffee.

If you reasonably believe that your client’s capacity is diminished, you may need to take action to protect the client’s interests and assets pursuant to Rule of Professional Conduct 1.14. Confidential client information is protected under Rule of Professional Conduct 1.6, and attorneys for the most part cannot disseminate such confidential client information without the client’s consent. However, an exception exists to Rule 1.6 when representing a client with a diminished capacity. An attorney is impliedly authorized to reveal confidential information when taking protective action on behalf of a client with diminished capacity, but only to the extent reasonably necessary to protect the client’s interests. See Rule 1.14(c). The estate planning attorney must take care to determine exactly what confidential client information, if any, must be disclosed to protect the client’s interests and assets, and limit any such disclosure to this identified information only.

Estate planning attorneys who fail to safeguard the assets and interests of their clients with diminished capacity may be subject to disciplinary action. In Matter of Reynolds, 15 Mass. Att’y Disc. R. 497 (1999), an attorney received a public reprimand for altering an elderly client’s estate plan to benefit the client’s live-in caregiver without inquiring about the parties’ relationship, where the attorney knew that this was a fundamental change to the estate plan to the detriment of the client’s family. The attorney in this situation should have conducted a diminished capacity review before making such a fundamental change to the client’s estate plan.

Questioning and determining a client’s mental capacity is never easy, and an estate planning attorney may face the difficult choice of whether he or she is ethically able to execute a client’s request. In these situations, estate planning attorneys may wish to consult with outside counsel on the appropriate course of action.

PLR 201942006: IRS Allows Extension to Elect Portability for Decedent’s Estate

PLR 201942006 (10/18/2019)

IRS Allows Extension to Elect Portability for Decedent’s Estate Because Estate Acted Reasonably and In Good Faith, and Granting Extension to Elect Portability Would Not Prejudice the Government’s Interests

Author: Katelyn L. Allen  of Nutter

In PLR 2019420006, the IRS granted an extension of time to a decedent’s estate to elect portability because (i) the decedent’s estate established it acted reasonably and in good faith, (ii) the requirements of Sections 301.9100-1 and 301.9100-3 were satisfied, and (iii) the granting of an extension by the Commissioner would not prejudice the interests of the government.

The circumstances under which the taxpayer requested a Private Letter Ruling from the IRS are as follows: A U.S. decedent died and was survived by a spouse. Based on the value of the decedent’s gross estate and taxable gifts made, the decedent’s estate was not required to file an estate tax return and did not file an estate tax return by the deadline of nine months after the decedent’s date-of-death. Once the decedent’s estate discovered that, in failing to file an estate tax return and elect portability, the decedent’s spouse’s estate would not be entitled to the unused portion of the decedent’s exclusion amount, the decedent’s estate filed a request for extension of time under Section 301.9100-3 to make a portability election. Section 301.9100-3 allows the Internal Revenue Commissioner to grant discretionary extensions of time to make an election in the case of tax filing due dates that are prescribed by regulation rather than by statute.

Section 2010(c)(5)(A) provides that an election is required for a surviving spouse to use a deceased spouse’s unused exclusion amount, and no election may be made if an estate tax return is filed after the filing deadline (including extensions). However, in this case no return was statutorily required to be filed.  Section 301.9100-1gives the IRS the discretion to grant a taxpayer a reasonable extension of time to make any election in situations where the due date is prescribed by regulation, under all subtitles of the Code except E, G, H, and I. Because requests for extension to elect portability are not granted automatically under Section 301.9100-2, the IRS looks to Section 301.9100-3 for the factors to be considered in granting a discretionary extension to make a portability election, as follows: (i) reasonable action and good faith; and (ii) prejudice to the interests of the government. The IRS ultimately concluded in this PLR that the decedent’s estate had provided evidence to establish that it acted reasonably and in good faith and that allowing the extension of time to elect portability would not prejudice the interest of the government. The IRS granted an extension of time of 120 days for the decedent’s estate to make the portability election, and upon the filing of a compete Form 706 electing portability, the surviving spouse would be entitled to the decedent’s unused exclusion amount.

Massachusetts SJC Grants Appellate Review to Consider Legal Relationship Between Commercial Custodian of IRAs and Named Beneficiary

UBS Financial Services, Inc. v. Donna M. Aliberti, SJC-12662, slip op. (October 22, 2019)

Author: Kaitlyn Sapp of Day Pitney LLP

On October 22, 2019, the Massachusetts Supreme Judicial Court issued a slip opinion that considered the legal relationship between UBS Financial Services (“UBS”), as a commercial custodian of individual retirement accounts (“IRAs”), and Donna Aliberti (“Aliberti”), as a named beneficiary of such accounts upon the death of the original account holder.



Patrick Kenney (“Kenney”) opened three IRAs with UBS in 2008 with the help of his sister-in-law, Margaret Kenney.  At this time, he designated Aliberti, his long-term girlfriend, as the sole primary beneficiary of all three IRAs.  In November 2013, Patrick completed two “IRA Beneficiary Designation Update Forms” in connection with two of the smaller IRAs (“IRA #1” and “IRA #2”).  These forms named Aliberti, Aliberti’s son, Patrick’s niece, and Patrick’s friend Craig Gillespie (“Gillespie”) as his beneficiaries, all to receive 25% each.  The third, unchanged IRA (“IRA #3”) was the largest of the three, with an approximate balance of $276,000.  Unfortunately, Patrick had incorrectly completed these forms and UBS declined to process them.  Margaret Kenney arranged to have the beneficiary update forms corrected, but Kenney died suddenly on December 2, 2013 without ever having them completed.


Near the end of December, UBS received a letter from Gillespie’s attorney incorrectly stating that Kenney was in the process of changing the third account’s beneficiaries when he passed.  The letter went on to say that Gillespie was going to have a court of law resolve the beneficiary issue with respect to IRA #3 and asked UBS to not make any distributions.  This prompted UBS to classify IRA #3 as “disputed,” which effectively froze the account until UBS received a court order with instructions, Gillespie withdrew any claim to the account, or the statute of limitations expired.  Shortly thereafter, Aliberti began contacting UBS asserting that she was the sole beneficiary of all three accounts.  IRA #1 and IRA #2 were liquidated and equally distributed to Aliberti, Aliberti’s son, Patrick’s niece and Gillespie.  At the time, Aliberti did not dispute this action.  However, over the course of the next year and eight months, Aliberti struggled with UBS to obtain information about the supposed dispute with Gillespie over IRA #3, forcing her to retain counsel.


Aliberti demanded distribution of IRA #3 multiple times and sent UBS a c. 93A demand letter alleging that UBS violated the consumer protection statute.  Finally, in August of 2015, UBS filed an interpleader complaint asking the court to determine ownership of IRA #3, joining Aliberti and Gillespie as defendants.  In March of 2016, all parties stipulated to partial dismissal of claims by Gillespie, resulting in his waiver to any ownership of IRA #3.  UBS still delayed distribution to Aliberti.  Aliberti agreed to release UBS from liability regarding the disbursement in exchange for prompt distribution, but retained her claims against UBS for breach of contract, breach of fiduciary duty, and violation of c. 93A.


Aliberti continued to pursue her counterclaims against UBS, and after several additional months of litigation, UBS filed a motion for judgment on the pleadings.  The Superior Court granted the motion, Aliberti appealed, and the Appeals Court reversed in part, finding Aliberti’s counterclaims well-pleaded.  The Supreme Judicial Court granted further appellate review of whether the claims for relief as to breach of fiduciary duty and violation of c. 93A were plausible.[1]



  1. Breach of Fiduciary Duty

To establish a claim for breach of fiduciary duty in Massachusetts, there must be a fiduciary duty owed to the plaintiff by the defendant, and injury to the plaintiff must have been proximately caused by defendant’s breach.[2]  Fiduciary duties may arise by (a) a matter of law, “such as trustee and beneficiary, or attorney and client,”[3] or (b) “as determined by the facts established,”[4] upon “evidence indicating that one person is in fact dependent on another’s judgment in business affairs or property matters.”[5] 


The Supreme Judicial Court found that no fiduciary relationship existed as a matter of law because the relationship between the custodian of a nondiscretionary IRA and a named beneficiary is not among the traditional familiar and well-recognized relationships giving rise to fiduciary duties.  The record did not support finding a fiduciary duty since the IRAs were not “trusts” and there was nothing to suggest that Patrick intended to create a trust.  Further, the court found that federal law did not change its analysis.  The Internal Revenue Code, which governs the tax aspects of IRAs, does not require an IRA to be a “trust.”  It could take the form of a custodial account, which was the case here.


The Court found that the facts also did not give rise to a fiduciary relationship.  Fiduciary duties may arise wherever “faith, confidence, and trust” is reposed by one party “in another’s judgment and advice.”[6]  Aliberti never claimed to repose trust and confidence in UBS’s judgment and advice, she simply relied on their cooperation in order to gain access to the assets of the IRA.  The court found this relationship was akin to a retail consumer relationship governed by contract, which did not establish any higher duty owed to Aliberti.  UBS only had a contractual duty to transfer the IRA proceeds in accordance with Patrick’s agreement, not a fiduciary duty.


  1. Violation of G. L. c. 93A

To establish a valid c. 93A claim, one must show that (a) the company has committed an unfair or deceptive act or practice, (b) the unfair or deceptive act or practice occurred in the conduct of any trade or commerce, (c) the claimant suffered an injury, and (d) the company’s unfair or deceptive act or practice was the cause of the injury.[7]  The court first determined that Aliberti was a proper plaintiff despite the absence of privity between Aliberti and UBS.  No privity was required because c. 93A allows any person injured by trade or commerce, even if indirectly, to bring a cause of action.[8]  The Court also held that the business context requirement of c. 93A was met because the interactions between an IRA custodian and a named beneficiary following the account holder’s death typically occurs in a business context within the meaning of c. 93A.


G.L. c. 93A does not define what constitutes “unfair” or “deceptive,” so the courts instead look to the circumstances of the case to determine if the company acted as such. Here, the Court found that UBS clearly acted unfairly by (1) denying Aliberti the funds she was entitled to; (2) for years; and (3) without good reason; (4) until she was forced to take legal action and incur unnecessary costs and fees.[9] The Court also determined that UBS filed an unjustified interpleader, considering there was never any real question as to whether or not Aliberti was entitled to IRA #3 as the sole designated beneficiary.



After determining that there was a plausible claim for violation of the consumer protection statute, the case was remanded to Superior Court for further proceedings.  However, the Supreme Judicial Court agreed with the Superior Court, that there was no plausible claim made for a breach of fiduciary duty owed to Aliberti as a beneficiary.  The court expressly found that the relationship between a commercial custodian of an IRA and a named beneficiary of such is similar to that between a retailer and consumer.  Unless the agreement between the original account holder and the service provider expressly creates a trust for the benefit of the designated beneficiary, then the custodian of the account owes no fiduciary duty to the beneficiary.

[1] UBS did not seek further review of the Appeals Court’s determination that the breach of contract claim was well-pleaded by Aliberti as an intended third-party beneficiary.

[2] Estate of Moulton v. Puopolo, 467 Mass. 478, 492 (2014).

[3] Smith v. Smith, 222 Mass. 102, 106 (1915).

[4] Warsofsky v. Sherman, 326 Mass. 290, 293 (1950).

[5] Markell v. Sidney B. Pfeifer Found., Inc., 9 Mass. App. Ct. 412, 444 (1978).

[6] Doe v. Harbor Sch., Inc., 446 Mass. 245, 252 (2006).

[7] Rafferty v. Merck & Co., 479 Mass. 141, 161 (2018).

[8] Ciardi v. F. Hoffman-La Roche, Ltd., 436 Mass. 53, 60 (2002).

[9] UBS Fin. Servs., Inc. v. Aliberti, 94 Mass. App. Ct. 180, 191 (2018).

IRS: Valuation of Publicly Traded Stock Must Consider Anticipated Merger

Office of Chief Counsel Internal Revenue Service Memorandum Number 201939002 (9/27/2019)

IRS: Valuation of Publicly Traded Stock Must Consider Anticipated Merger

Author: John H. Ramsey  of Goulston & Storrs PC

On September 27, 2019, the Office of Chief Counsel (“OCC”) of the Internal Revenue Service released a Chief Counsel Advice Memorandum (the “Memorandum”)[1] addressing the valuation of stock of a publicly traded corporation for gift tax purposes, where the corporation was engaged in negotiating a pending merger at the time of the gift.


The donor of the gift in question (the “Donor”) made a gift of shares of a publicly traded corporation, of which the Donor was both a co-founder and the Chairman of the Board, to a newly formed grantor retained annuity trust.  Prior to the gift, the corporation was engaged in exclusive negotiations with another corporation regarding a merger.  Sometime after the gift, the merger was announced and the price of the corporation’s stock increased substantially.

The OCC was asked whether, under such circumstances, the “hypothetical willing buyer and seller of shares in a publicly-traded company would consider a pending merger when valuing stock for gift tax purposes.”  The OCC concluded that yes, a hypothetical willing buyer and seller would consider a pending merger when valuing stock.

Section 25.2512-1 of the Gift Tax Regulations provides that the value of the property given as a gift is the “price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.”  If there is a market for shares of stock given as a gift, the mean between the highest and lowest quoted selling prices on the date of the gift is the fair market value per share.[2]  However, if it is established that quoted selling prices on the date of the gift do not represent the fair market value of the shares “then some reasonable modification of the value determined on that basis or other relevant facts … shall be considered in determining fair market value.”[3] 

In the Memorandum, the OCC cited case law stating that hypothetical willing buyers and sellers are presumed to have “reasonable knowledge of relevant facts” and are presumed to have made a reasonable investigation into the facts, concluding that “reasonable knowledge includes those facts that a reasonable buyer or seller would uncover during the course of negotiations over the purchase price of the property.”[4]    In addition, the OCC concluded that post-valuation events may be considered, if they are relevant to the question of value,[5] even if such events are unforeseeable as of the valuation date.[6]

Conclusion of the Office of Chief Counsel

The OCC concluded that the high and low quoted selling prices on the date of the gift did not represent the fair market value of the shares and that other relevant facts, including the pending merger, must be considered. 

In support of this conclusion, the OCC cited two cases in particular.  In Silverman v. Commissioner, T.C. Memo. 1974-285, aff’d, 538 F.2d 927 (2d Cir.1976), cert. denied, 431 U.S. 938 (1977), the Tax Court rejected expert testimony regarding the valuation of shares of a corporation that was, at the time of a gift, in the process of reorganizing ahead of a public sale because the testimony failed to take into account the future public sale.  In Ferguson v. Commissioner, 174 F.3d 997 (9th Cir. 1999), aff’g 108 T.C. 244 (1997), a case involving the anticipatory assignment of income doctrine, the court concluded that transfers of stock prior to a planned merger “occurred after the shares had ripened from an interest in a viable corporation into a fixed right to receive cash” because “the surrounding circumstances were sufficient to indicate that the tender offer and the merger were practically certain to proceed.”

The OCC concluded that, through analogy to these two cases, the value of the stock of the corporation “must take into consideration the pending merger” because a hypothetical willing buyer and willing seller “would be reasonably informed during the course of negotiations over the purchase and sale of [the shares] and would have knowledge of all relevant facts, including the pending merger.”  The OCC went on to conclude that “to ignore the facts and circumstances of the pending merger would undermine the basic tenets of fair market value and yield a baseless valuation.”

While this final conclusion may be true in this case, as the Donor would, if the pending merger were not considered, have the opportunity to act on insider information to transfer shares by a gift at an understated valuation, it is unclear from the Memorandum how the hypothetical willing buyer and seller would have reasonably obtained non-public information regarding the pending merger, particularly because, as the OCC states, the hypothetical buyer and seller are not “specific individuals or entities, and their characteristics are not necessarily the same as those of the donor and the donee.”[7]

It will be interesting to monitor the application of the Memorandum in this case and to cases in the future, in particular its applicability to donors who are not privy to non-public information relating to the value of publicly traded companies.  In the meantime, donors may want to consider engaging in this type of planning early, before generalized appreciation potential is reduced to a specific and anticipated sale or merger.

[1] Office of Chief Counsel Internal Revenue Service Memorandum Number 201939002 (9/27/2019). 

[2] Section 25.2512-2(b)(1).

[3] Section 25.2512-2(e).

[4] Estate of Kollsman v. Commissioner, T.C. Memo. 2017-40, aff’d, 123 A.F.T.R.2d 2296 (9th Cir. June 21, 2019).

[5] (citing Estate of Noble v. Commissioner, T.C. Memo. 2005-2, n.3)

[6] (citing Estate of Gilford v. Commissioner, 88 T.C. 38, 52-55 (1987))

[7] Citing Estate of McCord v. Commissioner, 120 T.C. 358 (2003), rev’d on other grounds, 461 F3d 614 (5th Cir. 2006); Estate of Newhouse v. Commissioner, 94 T.C. 193 (1990). 

Massachusetts Guidance Regarding Opportunity Zone Investments

TIR 19-7: Massachusetts Treatment of Investments in Qualified Opportunity Zones

Massachusetts Guidance Regarding Opportunity Zone Investments

Authors: Joshua Caswell of Howland Evangelista Kohlenberg LLP

The Tax Cuts and Jobs Act amended the Internal Revenue Code (the “Code”) to add Sections 1400Z-1 and 1400Z-2 (collectively, “Subchapter Z”) related to Opportunity Zones. Subchapter Z was designed to spur investment in designated distressed communities throughout the country by granting investors preferential tax treatment. Section 1400Z-1 includes definitional and procedural rules for designating Opportunity Zones. Section 1400Z-2 allows taxpayers to elect to receive certain federal income tax benefits to the extent that those taxpayers timely invest eligible gains into Opportunity Zones through a Qualified Opportunity Fund (“QOF”), an investment vehicle organized as a corporation or partnership for the purpose of investing in qualified opportunity zones.

Generally, investments in QOFs come with three main tax benefits: (1) investors can defer tax on capital gains timely invested into a QOF until no later than December 31, 2026; (2) investors that hold the QOF investment for five or seven years upon the expiration of the deferral period can receive a 10% or 15% reduction on their deferred capital gains tax bill; and (3) investors that sell the QOF investment after holding the investment for at least 10 years can receive the added benefit of paying no tax on any post-acquisition realized appreciation in the QOF investment.

The Massachusetts Department of Revenue (“DOR”) issued a Technical Information Release on June 17, 2019 (the “TIR”) intended to inform taxpayers and practitioners of the DOR’s official position on the treatment of QOF investments. TIR 19-7.

The TIR provides that because the Massachusetts personal income tax rules (including partnership tax rules) are based upon the Internal Revenue Code as amended on January 1, 2005 and not upon the current code, individuals and partnerships that invest in QOFs will not be able to take advantage of the tax benefits enumerated under Subchapter Z. For personal income tax purposes, a taxpayer who elects to defer gains under Subchapter Z must recognize such gains for Massachusetts income tax purposes in the year of the sale or exchange giving rise to such gains. Additionally, the basis adjustment rules under Subchapter Z do not apply in calculating future gains that must be recognized (for Massachusetts income tax purposes) upon the sale or exchange of a QOF investment.

The TIR also provides that because Massachusetts generally conforms to the Internal Revenue Code as currently in effect for corporations, for corporate excise tax purposes taxpayers who elect to defer capital gains under Subchapter Z will also defer such gains for Massachusetts purposes. Similarly, the federal basis adjustment rules under Subchapter Z will apply to corporations for Massachusetts purposes.

U.S. Supreme Court Decides Kaestner Case in Favor of Taxpayer in Narrow Holding

North Carolina Department of Revenue v. Kimberley Rice Kaestner  1992 Family Trust, 588 U.S.  (June 21, 2019)

U.S. Supreme Court Decides Kaestner Case in Favor of Taxpayer in Narrow Holding

Authors: Joshua Caswell and Leigh Furtado of Howland Evangelista Kohlenberg LLP

A.  Executive Summary.

In a unanimous opinion, the Supreme Court held that North Carolina’s efforts to tax the income of a trust based solely on the trust beneficiary’s residence in the state violated the Constitution’s due process clause.  After analyzing the beneficiary’s right to control, possesses, enjoy or receive trust assets, the Court concluded that North Carolina had not proven the necessary minimum connections between the state and the trust.  However, the ruling was a narrow one in light of the fact that the beneficiary had not received any distributions during the relevant time period and did not have the power to demand distributions.  Many questions remain as to whether a state could successfully base a tax on beneficiary residency where the beneficiary’s relationship to the trust assets differed from the facts of this case.

B.  Case Summary.

In an opinion issued on June 21, 2019 and authored by Justice Sotomayor, the Supreme Court held that North Carolina’s efforts to tax the income of a trust based on the trust beneficiary’s residence in the state violated the Constitution’s due process clause.

In 1992, Joseph Lee Rice III (“Rice”) formed a trust for the benefit of his children (the “Trust”) in his home state of New York.  Rice named a fellow New York resident as the initial trustee.  In 1997, Rice’s daughter, Kimberley Rice Kaestner (“Kimberley”), moved to North Carolina.  In 2002, the Trust was divided into sub-trusts for Rice’s children.  The instant case relates to the sub-trust for Kimberley and her three children (“Kimberley’s Trust”), which was controlled by the same agreement that controlled the Trust.  Critically, this meant that Kimberley’s Trust was a so-called fully discretionary trust (the trustee had exclusive control over the allocation and timing of trust distributions).

This case arose when North Carolina attempted to tax the income earned by Kimberley’s Trust from 2005 to 2008.  Under N.C.G.S. § 105-160.2, the income tax of an estate or trust “is computed on the amount of the taxable income of the estate or trust that is for the benefit of a resident of [the] State.”  Applying this statute, the North Carolina Department of Revenue assessed a tax of more than $1.3 million.

During the relevant period, the beneficiaries of Kimberley’s Trust were all residents of North Carolina.  However, the trust’s grantor was a resident of New York, the trust was governed by New York law, the trust’s documents and records were kept in New York and the custodians of the trust’s assets were all located in Boston, Massachusetts.  At no point during the relevant period was the trustee a North Carolina resident.  Moreover, the trust earned no income in North Carolina, made no distributions to Kimberley or her children and the trustee had only “infrequent” contact with Kimberley.  Finally, Kimberley’s Trust maintained no physical presence in North Carolina, made no direct investment the state and held no real property therein.

Kimberley’s Trust alleged that North Carolina’s imposition of its tax violated the due process clause because the trust lacked the necessary minimum contacts with the state.  North Carolina argued that the presence of in-state beneficiaries was sufficient to satisfy the minimum-contacts requirement under the court’s modern jurisprudence.

The Supreme Court rejected the state’s arguments, beginning its analysis by observing that tax due process cases are analyzed under a two-step framework that requires (1) “some minimum connection” between the taxpayer and the state, and (2) a rational relationship between the income the state seeks to tax and the state.  The opinion focuses on the first part of this test, which is determined under the same minimum-contacts framework used to analyze questions of personal jurisdiction under International Shoe Co. v. Washington, 326 U. S. 310 (1945), and subsequent, related cases.

In cases like this one, the hard question is not whether the beneficiary’s contacts are sufficient, but whether they matter for purposes of the minimum-contacts analysis.  The opinion holds that whether a beneficiary’s in-state contacts are relevant at the trust level depends on “the extent of the in-state beneficiary’s right to control, possess, enjoy, or receive trust assets.”

Applying this test to Kimberley’s Trust, the court concluded that the in-state beneficiaries lacked the requisite control or possession for their contacts with North Carolina alone to establish jurisdiction.  They neither received money from the trust during the relevant period nor had any right to demand trust distributions.  Furthermore, because the Trust gave the trustee sole discretion over distributions, there was no guarantee that a particular beneficiary would ever receive a distribution.  As such, North Carolina’s statute violated the Constitution’s due process clause of the Constitution.

C.  Remaining Questions and Considerations.

Not unexpectedly, the Court’s holding was quite narrow and limited by the facts of the case at hand where Kimberley had not received any distributions during the relevant time period.  The justices took great care to emphasize that the Court was not ruling on the appropriateness of state taxation of trust income under many other factual scenarios where the relationship of the beneficiary to the trust assets differed from the case at hand.  In the concurrence, Justice Alito stated that the connection of North Carolina to the trust income was “unusually tenuous” in this matter and that therefore the Court’s opinion is circumscribed.

As a result, the Court provided little guidance on the following scenarios:

  1. In the opinion and at oral argument, the Justices emphasized that Kimberley and her children could not count on receiving any specific amount of income from the Trust in the future. Would the outcome be different if a trust distributes to a beneficiary at a particular age?  It should be noted that the terms of the Kaestner Trust directed that Kimberley’s share be distributed to Kimberley when she reached aged forty, but the Trustee rolled over the trust estate to a new trust as permitted under New York law.
  2. North Carolina argued that a ruling in Kimberley’s favor would result in forum shopping and invalidate state taxation statutes around the country. The Court found this argument unconvincing and noted that only a small handful of states consider beneficiary residency as the sole basis for trust taxation, and even fewer rely on the residency of the beneficiary where it is uncertain if the beneficiary will receive distributions.
  3. The Court noted that “critically” the Kaestner trustee had exclusive control over the allocation and timing of distributions. Would the result have been different if the trust contained an ascertainable standard but did not require distributions?
  4. The Due Process clause requires that when a tax is based on the residency of a beneficiary, he or she must have some degree of possession, control or enjoyment of the trust property. But, the Court also refused to address what degree of possession, control or enjoyment sufficiently supports taxation.
  5. Similarly, the Court did not consider whether a beneficiary’s ability to assign an income interest would constitute sufficient possession, control or enjoyment to support taxation.
  6. Since the lack of distributions and/or the ability to demand distributions resolved the question in the Kaestner case, the Court did not consider the Trust’s broader argument that the trustee’s contacts alone determine a state’s power over a trust. This line of argument resulted from disputed interpretations of Hanson v. Denckla, 357 U.S. 235 (1958).  The Court did not explicitly rule out a circumstance where beneficiary residence provides sufficient minimum contacts for taxation.  The question remains as to what relationship between the beneficiary and the trust assets would be sufficient to satisfy the Due Process Clause.
  7. This decision does not address state laws that consider beneficiary residency as one of a number of factors. The question remains as to the appropriate weight to assign to this factor going forward when balancing the considerations outlined in those statutes.
  8. The Trust did not raise a challenge to the practice known as throw-back taxation where a state taxes accumulated income at the time it is distributed. By bringing this issue up on its own accord is the Court indicating a potential opening for future arguments?
  9. In drafting trusts, settlors will need to weigh the potential tax benefits of a completely discretionary trust where the beneficiary cannot demand distributions against the cost to the beneficiaries of less control over the trust assets.

D.  Conclusion.

As the Supreme Court stated, North Carolina’s argument failed to grapple with the wide variation in the interests of beneficiaries to trust assets and the impact of different discretionary standards on beneficiary possession, control and enjoyment.  The sufficiency of minimum contacts in the trust taxation context will inevitably result in a fact-specific inquiry.  Although it is now clear that a state cannot base a tax on undistributed income to a beneficiary who has not received distributions and cannot demand such distributions, there are still many unanswered questions for practitioners involved in both the drafting and the administration of trusts.  As the State of North Carolina asserted in its brief, trust income nationally exceeded $120 billion in 2014, and states, beneficiaries and trustees are all motivated to protect their perceived slice of the pie.

U.S. Supreme Court Grants Petition for Writ of Certiorari in Trust-Level State Income Tax Case

North Carolina Department of Revenue, Petitioner v. The Kimberley Rice Kaestner 1992 Family Trust, 814 S.E.2d 43 (N.C. 2018)

U.S. Supreme Court Grants Petition for Writ of Certiorari in Trust-Level State Income Tax Case

Author: Megan Neal of McDonald & Kanyuk PLLC

On October 9, 2018, the North Carolina Department of Revenue (“NC DOR”) filed a Petition for Writ of Certiorari to the U.S. Supreme Court, appealing the decision of the North Carolina Supreme Court in North Carolina Department of Revenue, Petitioner v. The Kimberley Rice Kaestner 1992 Family Trust, 814 S.E.2d 43 (N.C. 2018) (“Kaestner”).  The NC DOR asked whether the existence of a resident beneficiary of a non-grantor trust can trigger a trust-level state income tax within the state of the beneficiary’s residence.  On January 11, 2019, the U.S. Supreme Court granted the NC DOR’s Petition.

In Kaestner, the trust at issue was created by a New York resident grantor and was governed by New York law.  The trustee was a resident of Connecticut.  All books and records were kept, and all tax returns and accountings were prepared, in New York.  No beneficiary resided in North Carolina until years after the trust’s creation.  All of the trust’s assets consisted of financial investments that were kept in Boston.  The trust gave the trustee full discretion and no distributions had been made.  The North Carolina resident beneficiary received accountings and legal advice from the trustee and his firm and travelled to New York to discuss investment opportunities for the trust.  North Carolina taxed the trust on its accumulated income.  The trust paid the tax but sought a refund.  After the NC DOR denied its refund request, the trust filed a complaint alleging that the North Carolina tax violated the due process clause of the 14th Amendment and the Commerce Clause of the U.S. Constitution.  The Business Court held that taxation of the trust was unconstitutional and ordered that the trust be refunded with interest.  The NC DOR appealed the Business Court’s decision to the North Carolina Court of Appeals, which affirmed the Business Court’s decision, but the NC DOR appealed again.

The North Carolina Supreme Court ultimately determined that the trust at issue did not have sufficient minimum contacts with North Carolina to satisfy due process requirements.  Minimum contacts require “the taxed entity [to] ‘purposefully avail itself of the benefits of an economic market in the taxing state’…”.  Kaestner, 814 S.E.2d at 48. Simply put, a taxed entity’s minimum contacts cannot be established by a third party’s minimum contacts with the taxing state, and, here, mere contact with a North Carolina beneficiary does not constitute purposeful availment of North Carolina’s benefits and protections.

To date, the U.S. Supreme Court has been silent on whether a trust-level state income tax based solely on the residence of its beneficiaries comports with due process.  The Petition states, “[t]here is now a direct split spanning nine states. Four state courts have held that the due process clause allows states to tax trusts based on trust beneficiaries’ in-state residency.  Five state courts, including two state supreme courts …have concluded that due process forbids these taxes.”  The due process clause should not have different meanings in different states.

Practitioners should keep a keen eye out for the U.S. Supreme Court’s decision.  Any U.S. Supreme Court decision will assuredly have a substantial impact on planning to minimize trust-level state income tax.

February 26, 2019 Lunch re: Pro Bono Opportunities with Veterans Legal Services

The Trusts & Estates Consortium (“TEC”) is inviting trusts and estates attorneys to lunch to meet with attorney Lynn Girton from Veterans Legal Services (“VLS”) to hear about volunteer opportunities to provide pro bono estate planning services to veterans in need. Please contact Jennifer Civitella Hilario at if you can attend.

When:  February 26th 2019 from 12pm-1pm

Where: John Hancock, 197 Clarendon Street, Boston MA