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Recent Developments

ACTEC Elects Kathleen Sherby as President and Inducts 32 Trust and Estate Lawyers to the College 3/14/14

The American College of Trust and Estate Counsel (ACTEC) Fellow Ronald D. Aucutt Named IRSAC Member 2/6/14

The American College of Trust and Estate Counsel Announces 56 Newly-Elected Fellows 11/5/13

Upcoming CLE Teleseminars

Thursday, November 8, 2012
12:30 – 2:00 p.m. EST
How To Deal With Changing Realities in Asset Allocation: Fiduciary Liability in Turbulent Economic Times
Dominic J. Campisi, Evans, Latham & Campisi, San Francisco
Patrick J. Collins, Schultz Collins Lawson Chambers Inc., San Francisco
Susan D. Snyder, Northern Trust, Chicago

Thursday, December 13, 2012
*NEW START TIME: 12:00pm-1:30pm EST
Hurry Up or Wait? Year-End and 2013 Estate Planning Idea
Ronald D. Aucutt, McGuire Woods LLP, Tysons Corner, VA
Beth Shapiro Kaufman, Caplin & Drysdale, Chartered, Washington, DC
Diana S.C. Zeydel, Greenberg Traurig LLP, Miami, FL

Tax Court Excludes FLP Assets From Gross Estate

In Estate of Stone v. Commissioner, T.C. Memo 2012-48 (Feb. 22, 2012), the Tax Court held that woodland real estate transferred to a family limited partnership need not be included in the deceased general partner’s gross estate.  The Tax Court agreed that the decedent’s objectives to create a family asset and to protect against partition of the property were sufficient “legitimate and significant” nontax purposes to make the transfer of the woodland property to the family limited partnership a bona fide sale for adequate and full consideration, for purposes of Section 2036(a) of the Internal Revenue Code.  Based on that conclusion, the Tax Court rejected the Service’s attempt to include in the decedent’s gross estate the portion of the value of the real estate attributable to limited partner interests the decedent had given away during lifetime.

Georgia Case on Application of Florida Nonademption Statute to Real Estate under Contract to Sell at Time of Death.
Contributed by the ACTEC State Laws Committee.

In Melican v. Parker, the decedent’s will provided that “If I am still the owner of [a certain condominium] at the time of my death, notwithstanding any provision in my Will to the contrary, that property shall pass to” the testator’s long-time mistress. The testator was domiciled in Georgia; the condo was in Florida. Before his death, the testator entered into a contract to sell the condo, and the condo was sold after the testator’s death. The Georgia Supreme Court, construing Florida’s nonademption statute, held that the mistress was entitled to the proceeds from the sale of the condo. A dissent argued that, under Florida case law, when the testator entered into the contract to sell the condo, the beneficial ownership of the condo was equitably converted to the buyer and the devise to the mistress should fail because, at the time of his death, the testator no longer owned the condo. The majority concluded that the case law cited by the dissent had been overruled by the Florida nonademption statute.

Idaho Case on Legal Malpractice – Extent of Lawyer’s Duty to a Beneficiary.
Contributed by the ACTEC State Laws Committee.

An Idaho lawyer drafted a will in which the testator left the residue of his estate, “other than beneficial interests in trusts,” to a charity, and left “All beneficial interests that I have in any trusts” to an individual. When the will was drafted and at the decedent’s death, he had no beneficial interests in trust, but he had received a terminating distribution from a trust before the will was drafted. After the decedent’s death, the individual beneficiary, believing that the testator had intended that she receive the property that had been distributed to the decedent from the trust, sued the drafting lawyer for malpractice. Idaho recognizes an exception to the traditional requirement that the plaintiff must generally have been in privity with the defendant lawyer in a malpractice case and allows a non-client who is named in a testamentary instrument to sue the drafting lawyer. But in this case, the Idaho Supreme Court, in Soignier v. Fletcher, held that the lawyer had not breached his duty of care because the will unambiguously carried out the testator’s expressed intent, and a lawyer who drafts a will does not have a duty to see that the testator disposes of his property in any particular way nor any duty to monitor the legal status of property described in the will.

Proposed Regulations on 2-Percent Floor on Miscellaneous Itemized Deductions
Contributed by the ACTEC Fiduciary Income Tax Committee.

On September 6, 2011, the Internal Revenue Service issued new proposed regulations (REG-128224-06) providing guidance on which costs incurred by estates or trusts other than grantor trusts are subject to the 2-percent floor for miscellaneous itemized deductions under section 67(a) of the Internal Revenue Code, taking into account the decision in Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. 181, 128 S. Ct. 782 (2008), holding that fees paid to an investment advisor by a non-grantor trust or estate generally are subject to the 2-percent floor.  These proposed regulations provide that a cost is fully deductible to the extent that the cost is unique to an estate or trust, and for this purpose, it is the type of product or service provided to the estate or trust in exchange for the cost, rather than the description of the cost of that product or service, that is tested to determine the uniqueness of the cost.  The new proposed regulations would continue to require the unbundling of costs subject to the 2-percent floor that are included as part of a comprehensive commission or fee paid to the fiduciary, with the ability to use any reasonable method to allocate costs that are not readily identifiable.  The public hearing on the proposed rulemaking is scheduled for December 19, 2011, with comments to be submitted by early December.

Charitable Defined Value Clause Upheld
Contributed by the ACTEC Business Planning Committee.

In Hendrix v. Commissioner, U.S. Tax Court Docket No. 10503-03, T.C. Memo 2011-133, Filed June 15, 2011, the sole issue for decision was whether a formula gift clause should be disregarded where the clause limited the size of the portion of a transfer of stock passing to trusts for the transferors’ descendants to a set amount while any excess value was to be transferred to a community foundation. If the clause were respected, any revaluation of the transferred property on audit would not result in a gift tax because the excess value would pass in a manner qualifying for the gift tax charitable deduction. Based on the reasoning in McCord v. Commissioner, 461 F.3d 614 (5th Cir. 2006), rev’g. 120 T.C. 358 (2003), the court held for the taxpayer, rejecting the IRS’s argument that the clause should be disregarded because (a) the gift agreement was not negotiated at arm’s length or (b) the clause violated public policy.

Trusts & Estates: Will Contest: Testamentary Forgiveness of Note in Insolvent Estate Barred (FL)
Contributed by the ACTEC Fiduciary Litigation Committee.

Bernadette Lauritsen v. Brian Wallace April 1, 2011, (5th Dist., Case No. 5D10-1020).
Decedent killed his incapacitated spouse, his step-daughter and himself.  Decedent's daughter was appointed personal representative of Decedent's estate and retained litigation counsel to defend against challenges by several of Decedent's other children.  The probate court appointed an attorney to act as curator for the estate, the only asset of which was 50% of the value of a promissory note and mortgage held on real property, executed by Decedent's son and his wife before Decedent executed his will 11 days before his death.  The will forgave his 1/2 interest in the note; Decedent's wife's will did not.  
Several creditors' claims were filed in the estate as well as fees for the curator, the personal representative and counsel for the personal representative.  The only non-exempt asset available to pay the estate's administrative expenses, costs and debts was Decedent's 1/2 interest in the promissory note, which the probate court ruled was forgiven at the moment of Decedent's death.
 The court distinguished the facts of this case from a 1987 FL case which upheld the forgiveness of a debt because the language of forgiveness was contained in debt instrument itself and was not dependent upon the judicial validation of a will and order of a court admitting the will to probate.

NJ Supreme Court: Legal Malpractice against Estate Attorneys
Contributed by the ACTEC Fiduciary Litigation Committee.

Higgins v. Thurber (3/16/11) 14 A.3d. 745
Two beneficiaries of a decedent’s estate filed an action against the estate’s attorneys for legal malpractice, breach of contract, breach of the implied covenant of good faith and fair dealing, and for excessive and unreasonable fees.  The court granted the attorneys’ motion for summary judgment on the ground that the action was barred by NJ’s "entire controversy doctrine."  The attorneys successfully argued that, because the beneficiaries had not asserted their claims in the probate proceeding for an accounting, the beneficiaries were barred from bringing a subsequent action against them for legal malpractice. 
On appeal, the case was reversed and remanded, and certification was granted.  The New Jersey Supreme Court ruled in a very brief opinion that the entire controversy doctrine should not bar a separate action in respect of other parties.  Citing an earlier New Jersey decision, the Court observed that "an action for an accounting on an estate provides a means for addressing 'the conduct of the executor, not the conduct of others.'" [Citations omitted).

In re M. C. - California - involving the number of parents a child can have.
Contributed by the ACTEC Fiduciary Litigation Committee.

In re M. C. - filed May 6, 2011, Second District, Div. One
Cite as 2011 S.O.S. 2368
Woman is a presumed parent when she is married to the child's biological mother. Man who had an intimate relationship with mother prior to child's birth, but who lived in a distant state while child lived with mother in California was not a presumed father under Family Code Sec. 7611(d). Following the California Supreme Court’s decision in Adoption of Kelsey S., 1 Cal. 4th 816 (1992), the man was a "quasi-presumed father" since he held himself out as child's father from the time he learned of pregnancy, the mother lived with him during the first months of pregnancy, he acknowledged paternity, financially provided for mother for a time, ensured that she received prenatal care, told authorities he had always intended to be a father to child, and had no control over mother's decision to return to her spouse. However, a child may not have more than two parents.  Thus, while the juvenile court was correct in ruling that biological mother, her spouse, and her lover were all presumed parents, remand was required for court to resolve the conflicting presumptions.

Unbundling of Investment Advisory Fees by Trusts Delayed Until Final Regulations
Contributed by the ACTEC Fiduciary Income Tax Committee.

On April 13, 2011, the Internal Revenue Service released Notice 2011-37 relating to the “2% floor” of section 67(a) of the Internal Revenue Code and extending the no-unbundling-of-unitary fees pronouncement to fiduciary returns for all taxable years beginning before final regulations on this subject are published. This relieves trustees of the need to unbundle their fees through at least 2011. Trusts may deduct the full amount of the bundled fiduciary fees for these years without regard to the 2% floor, but payments by trustees to third parties for expenses subject to the 2% floor are readily identifiable and must be treated separately from the otherwise bundled fiduciary fees.

IRS Guidance on “Taxpayer” for Section 108 Purposes
Contributed by the ACTEC Fiduciary Income Tax Committee.


The Internal Revenue Service issued proposed regulations (REG-154159-09) on April 12, 2011 that provide guidance on the term “taxpayer” for purposes of applying section 108 of the Internal Revenue Code regarding discharge of indebtedness income of a grantor trust or a disregarded entity. The proposed regulations say that for purposes of applying section 108(a)(1)(A) and (B) to discharge of indebtedness income of a grantor trust or a disregarded entity, the term taxpayer as used in section 108(a)(1) and (d)(1) through (3) refers to the owner(s) of the grantor trust or disregarded entity.

Estate of Bartsch - California
Contributed by the ACTEC Fiducuary Litigation Committee.

Estate of Bartsch - filed March 22, 2011, First District, Div. One Cite as A126925
In a case involving the interpretation of a California statute, a California ACTEC Fellow (John A. Hartog, et al.), defended an appeal taken by the disinherited son of Hans Bartsch, who died testate in October 2008.  Mr. Bartsch’s  will left his estate to various family members and friends, but stated he had no issue living or deceased.   His son, whose paternity had been established several years after his birth, filed an action claiming a right to inherit his father’s estate as an omitted heir.  The executor filed an answer, which was followed by a petition for order for interim payment of attorney's fees and expenses.  The disinherited son argued that the executor should not receive payment from the estate for services performed by his attorney because the executor, who was also a beneficiary under Decedent's will, was not an impartial personal representative.  The trial court disagreed and awarded an interim payment which was upheld on appeal. 
In its decision, the appellate court first found that appellant (the disinherited son) had standing to challenge the probate court’s interim award of attorneys' fees and costs.  However, the appellate court disagreed with son’s  argument that the statutory language controlling heirship proceedings precluded an executor who was also beneficiary from acting "as a party to assist the court" under CA Probate Code Sec. 11704(b).

Estate of Stoker - California
Contributed by the ACTEC Fiducuary Litigation Committee.

Estate of Stoker - filed March 3, 2011, Second District, Div. Six.  Cite as 2011 S.O.S. 1274
This case involves two of California’s newer and more interesting developments, one being a required “Notification by Trustee” to all beneficiaries and heirs-at-law upon a trust [or portion thereof] becoming irrevocable [see California Probate Code Section 16061.7], and the other California Probate Code Section 6110(c)(2) which allows, where a will is not executed in compliance with the statutory requirements for witnesses, that “the will shall be treated as if it was executed in compliance with [the requirements for witnesses] if the proponent of the will establishes by clear and convincing evidence that, at the time the testator signed the will, the testator intended the will to constitute the testator’s will.”
In Stoker, the court held that, where the petition to admit the will to probate had the practical effect of challenging an earlier trust, the filing of the petition was an "action to contest the trust" within the meaning of California Probate Code Sec. 16061, which requires that such an action be brought within 120 days following service of notice by the trustee. The Will was dictated and signed by decedent and handwritten by another person--but was defective in form because it contained no witnesses' signatures.
The appellate Court held that the trial court did not err in admitting it to probate under Section 6110(c)(2) based on clear and convincing evidence of decedent’s intent in the form of testimony by two witnesses who saw him sign it. Public policy in favor of validating wills that reflect decedents’ intent supports retroactive application of Sec. 6110(c)(2) [which was effective as of January 1, 2009] to wills executed before its effective date. Lack of testamentary language, the absence of the use of the word “will,” or reference to death did not preclude finding that document was intended by decedent to be his will.

James Cosgrove vs. Mary Verna Hughes - Massachusetts
Contributed by the ACTEC Fiducuary Litigation Committee.

James Cosgrove vs. Mary Verna Hughes, 78 Mass. App. Ct. 739 (February 15, 2011)
Nieces and nephews of an intestate decedent brought a civil action in the Massachusetts Probate and Family Court, seeking a judgment declaring that the administratrix was not the decedent's daughter and therefore not an heir entitled to take under the intestacy statute, G. L. c. 190, § 7.  The judge granted the administratrix’s motion for summary judgment.  Although a genuine issue of fact existed as to whether the administratrix was the decedent's biological child, it was not a material fact under the intestacy statute because an affidavit sworn to by the decedent sufficed, within the meaning of the intestacy statute, as an acknowledgment that the defendant was the decedent's child.  Further, none of the evidence in the record raised a genuine issue of fact as to whether the decedent's signature on the affidavit was knowing and voluntary.  Finally, the court reasoned that the administratrix was not required to establish paternity by bringing an action to obtain a judgment of paternity under the intestacy statute because she did not contest paternity.
The administratrix’s summary judgment victory was up help by the appellate Court.

Recent State Law Cases
Contributed by the ACTEC State Laws Committee.

In Pence v. Haddock, the Missouri Court of Appeals considered two statutes: one that authorizes parties to enter into a contract to make a will or to revoke or not to revoke a will, and another providing that divorce revokes provisions in a will in favor of the former spouse. In this case, each party had been married before and each had a child from the prior marriage. The parties signed a joint will in which each agreed to leave his or her entire estate to the other and, at the death of the second spouse, to leave the remaining property equally to the two children. The will also provided that neither party would revoke it. They later divorced—an event not contemplated by the will—and the husband then died. When the former wife offered the will for probate, the probate court admitted the will and found that a valid contract had been established, but held that the provisions in favor of the former wife were revoked by the separate statute dealing with the effect of divorce. Consequently, the former wife was treated as if she had died before the husband. The appellate court affirmed, finding that the statutes are not in conflict.
Williams v. Williams involved a will that left the decedent’s entire estate equally to her three children, but also provided, “It is my desire that Kate Ida Williams [the adult, disabled daughter of one of the children] be taken care of as I did during my lifetime.” Kate’s mother argued that the will required the creation of a trust for Kate. Finding the language of the will unambiguous, the Court of Appeals of Mississippi held that the language concerning Kate was merely precatory, and therefore unenforceable.
The Superior Court of New Jersey, in In re Probate of Will and Codicil of Macool, interpreted that state’s harmless error statute, which allows a will to be probated despite technical execution defects if it is shown by clear and convincing evidence that the decedent intended the document to be the decedent’s will. In Macool, the testator had met with her attorney and the attorney had drafted a new will, but the testator died without ever having seen the draft. The court held that, for a writing to be admitted as a will under the New Jersey harmless error statute, the proponent must prove, by clear and convincing evidence, that the decedent actually reviewed the document and gave his or her final assent to it. The proponent of the Macool will did not meet that burden. In dicta, the court said, however, that the writing need not be signed by the testator in order to be admitted to probate under the harmless error statute.

In re Guetersloh - Texas case on Pro Se Trustee
Contributed by the Fiduciary Litigation Committee.

In re Guetersloh, 326 S.W.3d 737 (Tex. App.—Amarillo 2010, no pet. h.).
Trustee attempted to represent himself pro se, that is, without an attorney, in both his capacity as a trustee and in his individual capacity. The appellate court held that Trustee had no right to proceed pro se in his representative (trustee) capacity but could proceed without an attorney with regard to claims in his individual capacity.
The court explained that allowing Trustee to proceed pro se in his representative capacity would be the unauthorized practice of law. The court stated that “if a non-attorney trustee appears in court on behalf of the trust, he or she necessarily represents the interests of others, which amounts to the unauthorized practice of law.” The court relied on Steele v.McDonald, 202 S.W.3d 926 (Tex. App.—Waco 2006, no pet.) in which the court held that a non-lawyer may not appear pro se in the capacity as an estate’s independent executor.
Moral: A trustee who is not an attorney may not appear in court pro se in the trustee’s representative capacity.

Jarvis v. Feild - Texas Estate Administration Case on Venue and Inventory
Contributed by the Fiduciary Litigation Committee.

Jarvis v. Feild, 327 S.W.3d 918 (Tex. App.—Corpus Christi-Edinburg 2010, no pet. h.).
Litigant objected to the court’s venue to probate a will. Because Litigant did not object until Litigant appealed the admission of the will to probate, the court held that she waived her venue argument.
Moral: Objections to venue should be timely filed or else they will be deemed waived.
Litigant appealed asserting that an approved inventory was incomplete and misstated the value of the listed property. However, her appeal did not specifically indicate she was appealing the inventory order but rather objected to the approval of the account for final settlement which the court issued many months later. Litigant argued that the two orders were linked so the appeal of the account for final settlement automatically appealed the approval of the inventory. Although there was no support for Litigant’s argument, the court decided to review the inventory approval because appellate issues should be liberally construed so the right to appeal is not lost. After examining the evidence, the court determined that the trial court did not err in approving the inventory.
Moral: A person dissatisfied with the court’s approval of an inventory should take action in a timely manner and clearly indicate the court order to which the person is objecting.

Kucker v. Kucker - California - interpretation of Civil Code Sec. 1624(a)(7)
Contributed by the Fiduciary Litigation Committee.

Kucker v. Kucker - filed January 26, 2011, Second District, Div. Six. Cite as 2011 S.O.S. 526
California Civil Code Sec. 1624(a)(7), cannot be construed as applying to the transfer of shares of stock to a trust; plain meaning of the words of the statute manifests a legislative intent to limit the statute’s application to agreements to loan money or extend credit made by persons in the business of loaning money or extending credit. No California authority invalidates a transfer of shaof stock to a trust because a general assignment of personal property did not identify the shares.

In the Matter of the Trusts to be Established in the Matter of the Estate of Margaret A. Flood, Deceased - New Jersey - Doctrine of Probable Intent
Contributed by the Fiduciary Litigation Committee.

In In the Matter of the Trusts to be Established in the Matter of the Estate of Margaret A. Flood, Deceased, the court considered whether the doctrine of probable intent applies when a person dies intestate.
The facts in this case were largely undisputed. Decedent Margaret Flood was survived by four children. Two of her children were disabled and the beneficiaries of supplemental security income and Medicaid programs; one of them received special residential services and other benefits from the Division of Developmental Disabilities (DDD). When judgment was entered, DDD’s statutory lien exceeded $1 million, and was growing at a rate in excess of $300 per day.
Margaret first considered estate planning following her husband’s death in 2004. Her daughter-in-law, an attorney, certified that Margaret was concerned about protecting the inheritances of her disabled daughters from any obligations to reimburse the governmental entities that had provided benefits and services. Although in late 2004 Margaret expressed these concerns and a desire to retain an attorney, she did not consult an attorney until March 2008. Thereafter, Margaret’s plans were interrupted first by the illness of one of her daughters and then by an injury she sustained in April 2008.
Margaret died in May 2008, with an estate valued at $480,000. She never executed a will or testamentary trust.
The administrator of the estate filed an action seeking the court’s authorization to establish and fund the trusts he claims would have been created had Margaret’s death not intervened. The matter came before the trial court on the return date of the initial order to show cause. DDD opposed the relief sought. The parties agreed on the assumption that the decedent possessed the unfulfilled intent to create supplemental benefits trusts for her two disabled daughters. The dispute “turned on whether a court may animate such an intention in the complete absence of a will or testamentary trust.
The trial judge rejected DDD’s arguments and held that the doctrine of probable intent could reach that far.
The Appellate Division, however, disagreed and reversed. In the absence of a testamentary disposition, Margaret’s estate passed by way of intestacy, and her children’s interests vested immediately upon her death. N.J.S.A. § 3B:1-3. While the doctrine of probable intent has evolved into a broader and more liberal approach to will construction, the doctrine “cannot be used to write a will that the testator did not write.” In re Estate of Gabrellian, 372 N.J. Super. 432, 441 (App. Div. 2004), certif. denied, 182 N.J. 420 (2005).
In short, the Appellate Division confirmed that “the doctrine of probable intent is a rule of construction or interpretation and, therefore, presupposes an existing testamentary disposition.” In other words, “Where there is no will there can be no will construction.

In re Estate of Perez - Texas - Lost Will and Presumption of Revocation
Contributed by the Fiduciary Litigation Committee.

In In re Estate of Perez, testator died after executing two wills: one in 1975 leaving his estate to his Children and another in 1993 leaving his estate to his new Wife. Wife was successful in having the 1993 will admitted to probate even though she could not produce the original. Children appealed.
The appellate court affirmed. After reviewing Probate Code § 85, the court reviewed the evidence and determined that the it was sufficient to overcome the presumption of revocation that arises when the original will cannot be produced in court. The evidence the court found determinative included (1) Testator never asked his attorney to revoke the 1993 will or to make a new will, (2) the keys to the cedar chest in which Testator placed the will were easily available to Children before his death, and (3) several witnesses testified they saw Children remove items from the chest. However, there was no evidence that Children removed the 1993 will and Children testified they did not even know the will was in the chest.
Moral: A testator who wishes to revoke a will should not rely on revocation by physical act. As this court stated, only “a scintilla of evidence” is needed to support a trial court’s determination that a will proponent has rebutted the revocation presumption. Thus, revocation by a subsequent writing is preferable. Or, at least, a testator should make “a big production” out of revoking by physical act to create sufficient evidence of the revocation.

Estate of Shapiro v. United States - Nevada - Cohabitation Does Not Support Contractual Agreement
Contributed by the Fiduciary Litigation Committee.

In Estate of Shapiro v. United States, the 9th Circuit found that the District Court for the District of Nevada erred in finding that a cohabitant’s love, support, and homemaking services did not, as a matter of law, provide sufficient consideration to support a contractual agreement under Nevada law. The case involved a cohabiting couple who lived together for 22 years before the stay at home partner who did the cooking, the cleaning and managing household employees learned that decedent was having an affair with another woman. She sued in state court for breach of express and implied contract, breach of fiduciary duty and for quantum meruit claiming the couple had agreed to pool their resources and to share equally in each other’s assets.
While the action was pending, decedent died. The estate filed an estate tax return paying almost $11 million in estate and generation-skipping transfer taxes. After filing the return, the jury found in favor of the estate against the surviving partner who appealed the verdict and later settled her claim with the estate while the appeal was pending for $1 million, After settling the claim, the estate filed an amended estate tax return seeking to deduct $8 million from the value of the taxable estate under IRC Section 2053(a)(3) for the value of the partner’s claim. The IRS disallowed the deduction for the claim and refunded approximately $361,000 as a result of unrelated adjustments.
The estate brought suit in the district court seeking a refund based on the opinion of its expert that the claim was worth just over $5 million. The estate and the government filed cross motions for summary judgment. The district court ruled in favor of the government on the grounds that “no evidence exists that [partner] ever contributed anything other than love, support and management of [decedent]’s household,” which the court found, do not provide sufficient consideration to support a contractual agreement and in fact, was a gift from decedent to his cohabiting partner. In reversing and remanding the grant of summary judgment in favor of the government, the 9th Circuit held that the services supporting the claim can be quantified and have a value attached to them. The estate was within its rights to deduct the value of the yet-to-be-determined claim without waiving the right to contest the validity of the claim in state court.

Google Improves Security for Cloud Services
Contributed by the ACTEC Technology in the Practice Committee.

For lawyers considering entrusting client information and documents to an online service, security is a primary concern.  Google has recently enhanced the security of its Google Docs service, which allows the creation and sharing of word processor documents, spreadsheets, presentations, and other files.  Users can now opt to require a “2-step verification” process when logging in to a Google account.  When this option is selected, a user will need access to his or her phone, as well as the user name and password for the account, in order to obtain access.  When the user logs in with the user name and password, Google’s servers will send a text or voice mail message containing a verification code to the phone number associated with the user’s account.  The user must enter that verification code to gain access.  Thus, a hacker intent on stealing information from an account must not only steal or guess the user’s password, but must have access to the user’s phone as well.
Google made the 2-step verification process available to Google Apps customers last year.  It will now be available to all users.  To set it up, go to the Security section of your Google Account Settings and click the “Using 2-step verification” link.

Linton v. U.S. - Ninth Circuit Reversal on Step Transaction Theory on Gifts
Contributed by the ACTEC Business Planning Committee.

In Linton v. U.S. (Jan. 21, 2011), the Ct. of Appeals for the 9th Circuit declined to grant summary judgment on the step transaction doctrine in a case where an LLC was established and gifts of LLC interests were dated 9 days later (although the timing was disputed).  The court held that establishing an LLC is a business activity that makes sense whether or not a subsequent gift is made.  The court remanded the case to the District Court to determine when any gifts were actually made.

Third Circuit Court of Appeals: Who is a “child” under the Social Security Act?
Contributed by the ACTEC Fiduciary Litigation Committee.

In a case of first impression, the Third Circuit Court of Appeals considered the rights of posthumously conceived twins, born to a deceased wage earner and his widow, who were denied child survivor benefits under the Social Security Act.  Karen K. Capato, o/b/o B.N.C., K.N.C. v. Commissioner of Social Security (3rd Cir. 1/4/2011), Case No. 10-2027.
The facts of the case are similar to a case decided in the Ninth Circuit Court of Appeals in 2004 in Gillett-Netting v. Barnhart, 371 F.3d 593  (9th Cir, 2004) and worth a short discussion.  In Capato, the decedent was diagnosed with terminal cancer and advised that the treatment protocol could render him sterile.  As the couple wanted children, and prior to undergoing chemotherapy, the decedent deposited semen in a sperm bank where it was frozen and stored.  Although he began undergoing treatment, the widow conceived naturally and bore a son.  However, the couple wanted their son to have a sibling. The decedent's health deteriorated, and he died before his surviving spouse began undergoing in vitro fertilization of her husband's frozen sperm.
To complicate matters further, prior to his death, the decedent executed a will naming his two children of a prior marriage and the son born of his current marriage, but the will as executed did not include after-born children.
Eighteen months after his death, the surviving spouse gave birth to twins.  The following month, she applied for child survivor benefits on behalf of the twins, based on the earnings of the twins' deceased father.  The Social Security Administration denied the claim, and the widow appealed.  Following denial at an administrative hearing, the widow appealed to the District Court which upheld the findings of the Administrative Law Judge that "the twins, conceived after the death of their father, are not for Social Security purposes the child(ren) of the deceased wage earner...."
The obvious question, which the Third Circuit answered in the affirmative as had the Ninth Circuit in the earlier Gillett-Netting case, was whether the twins were the biological children of the deceased wage earner (Section 416(e) of the Social Security Act).  The Court of Appeals remanded the case to the District Court for a determination of whether, as of the date of decedent's death, the children were dependent or deemed dependent upon him, the final requisite for entitlement under the Act.

Hall v. Kalfayan - California Malpractice Case
Contributed by the ACTEC Fiduciary Litigation Committee.

Hall v. Kalfayan - filed December 8, 2010, Second District, Div. Four    Cite as 2010 S.O.S. 6817
In a resent California case of limited but important application to estate planners, a Second District Court of Appeals has held that a prospective beneficiary of a will could not maintain a cause of action for legal malpractice against the attorney who drafted the will where it was not executed before the testator's death.
However the facts in the case involve a will that was subject to approval by the Court in an existing Conservatorship proceeding under California's “Substitute Judgment” statute.
The Court stated:  “We agree with the Radovich and Chang courts that there is a need for a clear delineation of an attorney's duty to nonclients.  The essence of the claim in the case before this court is that Kalfayan failed to complete the new estate plan for Ms. Turner and have it executed on her behalf by her conservator before her death, thereby depriving Hall of his share of her estate. In the absence of an executed (and in this instance, approved) testamentary document naming Hall as a beneficiary, Hall is only a potential beneficiary. Kalfayan's duty was to the conservatorship on behalf of Ms. Turner; he did not owe Hall a duty of care with respect to the preparation of an estate plan for Ms. Turner.”  The Court went on the state further:  “This conclusion is particularly appropriate in this case, where Ms. Turner herself had not expressed a desire to have a new will prepared and had only limited conversation with Kalfayan about the disposition of her estate. In addition, there is no certainty that the court would have approved the petition for substituted judgment. We also observe that extending Kalfayan's duty to potential beneficiaries of Ms. Turner's estate would expose him to liability to her niece, whose share of the estate would have been reduced. This is precisely the type of unreasonable burden on an attorney that militates against expanding duty to potential beneficiaries.”

Modified Carryover Basis and 2010 Decedents - White Paper
Contributed by the ACTEC Communications Committee.

“Dealing with the Previously Unthinkable: Modified Carryover Basis and 2010 Decedents” - by Northern Trust's Chicago Estate Administration Manager Stacy E. Singer

This white paper addresses important year-end estate administration topics, including how to calculate the amount available for allocation, to which assets to allocate basis, as well as who is able to make such allocations.

CA Trusts and Estates - Definition of “Issue”
Contributed by the ACTEC Fiduciary Litigation Committee.

Citizens Business Bank v. Carrano - filed November 5, 2010, Second District, Div. Eight. Cite as 2010 S.O.S. 6310

A child was born out of wedlock to a married woman. The parents of child's biological father established a revocable trust that provided that the “issue” of a child of the trustors would be beneficiaries. The trust agreement defined “issue” to exclude children who were “adopted into” or “adopted out of” trustors’ bloodline; however, the agreement did not exclude from the definition of “issue” any biological child, including, as in this case, a child who was conceived by trustors’ son out of wedlock and raised by the biological mother and her husband but never formally adopted by the husband. In reversing the trial court, the Second District held that the child was unambiguously the “issue” of the trustors’ son and a beneficiary of the trust.

Paul Weiss and Lowenstein Sandler Ordered to Pay $1.96M for Filing Frivolous Suit
Contributed by the ACTEC Fiduciary Litigation Committee.

Bergen County, New Jersey, Superior Court Judge Ellen Koblitz doesn’t seem too worried about sparing the reputations of Paul, Weiss, Rifkind, Wharton & Garrison and Lowenstein Sandler. In June, she found that the two firms had filed a frivolous suit on behalf of billionaire Ronald Perelman in a family dispute over hundreds of millions of dollars. On Friday she issued a final opinion, rejecting the firms’ arguments for mercy and ordering them to pay $1.96 million in legal fees to the defendants, Perelman’s former father-in-law and brother-in-law. “Paul Weiss and Lowenstein Sandler argue that since they are both such important, well-regarded law firms, the mere finding that they engaged in frivolous litigation is deterrence enough,” Koblitz wrote. “A monetary sanction, however, is clearly appropriate here.”

For additional information see The American Lawyer article by Andrew Longstreth, August 26, 2010.  See:  The Am Law Litigation Daily blog on

California: Trusts and Estates
Contributed by the ACTEC Fiduciary Litigation Committee.

Araiza v. Younkin - filed September 29, 2010, Second District, Div. Six Cite as B221815
Where trustor named defendant as the beneficiary of a saving account opened before trustor’s death but later established a living trust that expressly stated her intent that the savings account be given to a different beneficiary, trial court properly relied upon the living trust to find that trustor had intended to change the beneficiary; because the change of beneficiary was made by a living trust rather than by a will, it is not invalidated by Probate Code Sec. 5302(e). Defendant forfeited appellate review of claim that the transfer of the savings account to beneficiary was invalid under Sec. 21350(a)(2) because drafter of the living trust was the son of beneficiary.

CRAT Terminated - No Penalties, Not Self-Dealing, Etc. - IRS Letter Ruling 201040021.
Contributed by the ACTEC Communications Committee.

Situation. Donors created a 7% charitable remainder annuity trust providing payments to the two of them and then the survivor for life. Then the remainder goes to Charity. Payments were made to Donors in 20XX through 20XX.* They claimed an income tax charitable deduction in the year they created the CRAT and carried over the “excess” deductions in the two following years. Trustee filed Forms 1041-A and 5227 (and corresponding state tax returns) for the years 20XX through 20XX.

Here's a twist. The state franchise tax board in Donors' state requested that Trustee provide a statement showing a computation of the present value of Charity's remainder interest. Trustee obtained calculations of the charitable remainder at payout rates of 7 percent and 5 percent. Both calculations showed that Charity's remainder interest had a negative value. So Donors, Charity and Trustee agreed to rescind the CRAT and their agreement was approved by the state attorney general. The agreement treats the trust as void ab initio and the CRAT assets will be returned to Donors. Trustee represented to the IRS that Donors filed amended tax returns withdrawing their charitable deductions and paid all federal and state income taxes, including any interest and penalties that were due resulting from the amended returns. Trustee will file amended CRAT returns after the IRS rules on these transactions.

IRS rules:

 •     The return of assets to Donors will not constitute an act of self dealing and Trustee will not be liable under IRC §4941.

 •     The return of assets to Donors will not constitute a taxable expenditure and Trustee will not be liable under IRC §4945.

 •     The return of assets to Donors will not subject Trustee to the tax on termination of private foundation status imposed by IRC §507.

The IRS's analysis. IRC §4947(a)(2) provides that IRC §§507, 4941 and 4945 apply to portions of a trust for which a charitable deduction was allowed. Therefore, for IRC §4947(a)(2) to apply a charitable contribution deduction must have been allowable at the time it was taken. Under IRC §170(f)(2)(A), in the case of property transferred in trust, no deduction is allowed for the fair market value of a charitable contribution of a remainder interest in property which is less than the donor's entire interest in the property unless the trust is one of the following: (i) a charitable remainder annuity trust; (ii) a charitable remainder unitrust; or (iii) a pooled income fund. See Reg. §1.170A-6(b)(1). Here, the trust was purported to be a charitable remainder annuity trust. However, it did not satisfy the requirements of IRC §664(d)(1)(D) because it never had a remainder interest that had a value of at least 10% of the initial fair market value of all property placed in trust. The trust never met the requirements of IRC §170(f)(2) because it never met the requirements of IRC §664(d) to be a charitable remainder annuity trust. As such, the charitable contribution deductions taken by the donors were not allowable at the time that they were taken. Therefore, IRC §4947(a)(2) does not cause IRC §§507, 4941, or 4945 to apply to the trust. Letter Ruling 201040021.

Comment. Clearly Donors weren't entitled to an income tax charitable deduction for this attempted CRAT. When they learned that the trust didn't qualify (presumably after the state franchise tax agency's involvement), they could have amended their returns and not claimed a charitable deduction for the remainder interest. The trust assets would presumably return to them over the years until the corpus was exhausted. They would have been taxed on income and capital gains under the grantor trust rules - would have been taxed as if they hadn't created the trust. But they would have made a gift of the remainder to Charity that didn't qualify for the gift tax charitable deduction unless the right to change the charitable remainder organization was retained. And, depending on how the trust was drawn, they could also have lost gift tax marital deductions.

Something to think about. Why did Charity agree to the trust's termination with the assets being returned to Donors? Actuarially, they would receive nothing. But suppose Donors were killed in a common accident - way before the end of their life expectancies? In this case, the state attorney general agreed to the termination.

Additional thoughts. Suppose a CRAT flunks the 5% probability (so remote as to be negligible) test of Rev. Rul. 77-374? Would the IRS rule favorably on an ab initio termination? Be mindful, that the 10% minimum remainder requirement can be passed by a mile and yet the 5% probability test of Rev. Rul. 77-374 is flunked. Would a knowledgeable state attorney general approve a termination in that case? If court approval is required, would that approval be obtained? Would or should a charity agree to ab initio termination if there's a chance that is will receive the remainder interest?

Department of Labor Opinion on IRA Owner Granting a Brokerage Firm a Security Interest
Contributed by the ACTEC Communications Committee.

In DOL Advisory Opinion 2009-03A, the DOL stated that it was a prohibited transaction in violation of §4975 for an IRA owner to grant a brokerage firm a security interest in the assets of his non-IRA account held by the Broker as a requirement for establishing an IRA with the Broker.

The offending security interest was found in the boilerplate of the Broker’s account agreement and provided that all securities held in any account with the Broker currently or at any time thereafter would be “subject to a continuing first lien and first priority perfected security interest in favor of [the Broker] for discharge of all indebtedness to [the Broker]. In essence, this language required the IRA owner to pledge personal assets to secure IRA indebtedness, and to pledge IRA assets to secure indebtedness arising from personal assets.

The DOL stated that with a self directed IRA, the IRA owner would be a fiduciary and a disqualified person under §4975. The security interest represented an extension of credit prohibited by §4975(c)(1)(B), which prohibits the “direct or indirect lending of money or other extension of credit between a plan and a disqualified person.”

Even though the DOL was only asked for its opinion whether the granting of a security interest in non-IRA assets to secure IRA indebtedness was a prohibited transaction, the DOL also opined that the granting of a security interest in IRA assets to secure personal indebtedness was also a prohibited transaction in violation of §4975(c)(1)(B), (D) and (E).

The DOL broadened its opinion beyond what would have been required to respond to the request of whether the offending security interest was a prohibited transaction under §4975(c)(1)(B) to specifically state that such a security interest would also constitute a prohibited transaction in violation of (D), which prohibits transfers to or use by or for the benefit of a disqualified person, and (E), which prohibits a disqualified person from dealing with the income or assets of a plan in his own interest. The DOL stated that the security interest would constitute using the IRA’s assets for the IRA owner’s own benefit, thus invoking the broadest category of prohibited transactions, those “for the benefit of” the disqualified person.

UBTI for California CRT - California Non-Conformity to Federal Rule
Contributed by the ACTEC Communications Committee.

California's recent conformity legislation (April, 2010) specifically non-conforms to IRC 664(c), which brought a kinder, gentler rule for federal excise tax on UBTI in CRTs. The “old” federal rule subjected a CRT with even a dollar of net UBTI to taxation on all income under the rules for complex trusts. The “new” federal rule imposes an excise tax equal to the amount of actual UBTI. Thus, California will continue to impose the “old” rule at the state level on CRTs receiving UBTI in any year. California generally seeks to impose its fiduciary income tax rules on any trust that has California source income, a California trustee, or a California beneficiary. Thus, practitioners in other jurisdictions might want to watch for this issue.

DE Court of Chancery: Construction
Contributed by the ACTEC Fiduciary Litigation Committee.

In the Matter of Trust for Grandchildren of Wilbert L. and Genevieve W. Gore dated April 14, 1972, C.A. No. 1165-VCN, V.C. Noble (Del. Ch. Sept. 1, 2010) (Mem. Op.)

The Gores (whose manufacturing company is known for Gore-Tex fabrics) established a trust for the benefit of their grandchildren. In response to a Petiton For Construction filed by a Co-Trustee of the trust, the DE Chancery Court applied the doctrine of unclean hands to bar a trust beneficiary, who was the adopted ex-husband of the Co-Trustee, from claiming a personal economic interest.

Colorado Case on Mediation and Court Approval of Settlement over Objection of One Beneficiary
Contributed by the ACTEC State Laws Committee.

Some of the beneficiaries of a trust brought suit for removal of a trustee, accounting, surcharge, and damages for breach of fiduciary duty. During mediation, one of the beneficiaries participated “only intermittently by telephone,” but the parties present at the mediation thought that an agreement had been reached. Although it was discovered several days later that the beneficiary who had not fully participated did not agree to the settlement terms, the trustee moved the court to approve the settlement, and it did so. The dissenting beneficiary appealed, and in Saunders v. Muratori the Colorado Court of Appeals, analogizing a suit by a trust beneficiary for the benefit of the trust to a shareholder’s derivative suit on behalf of a corporation, held that the trail court could properly approve the settlement even over the objection of one of the beneficiaries, if the settlement was just and reasonable. The appellate court affirmed the trial court, determining that the record supported the trial court’s conclusion that the settlement was fair and reasonable.

Colorado Case on Arbitration Clause in Engagement of Attorney for Estate Planning
Contributed by the ACTEC State Laws Committee.

A client hired a lawyer and they signed an agreement that provided for all disputes to be settled, at the sole option of the lawyer, by arbitration. After the lawyer performed work for the client, the client died, and his estate sued the lawyer for malpractice, civil conspiracy, and tortious interference with inheritance. The estate alleged that the client had lacked sufficient mental capacity to comprehend the lawyer’s advice and the documents that the lawyer drafted. When the lawyer moved to compel arbitration, the estate asserted that the court should deny the motion because the arbitration provision was unconscionable and because the client did not have sufficient capacity to enter into the contract. The trial court ordered arbitration and the estate appealed. In Grimm v. Evans, the Colorado Court of Appeals held that the trial court was required to determine both the unconscionability and capacity issues, because they were threshold issues as to whether an agreement to arbitrate existed, the appellate court remanded for a hearing on those issues.

Texas Case on Equal Protection in a Same-Sex Couple Divorce
Contributed by the ACTEC State Laws Committee.

A same-sex couple married in Massachusetts and one of them later sought a divorce in Texas. The State of Texas intervened, alleging that the petitioner was not a party to a “marriage” under Texas law and praying for dismissal of the petition. The trial court denied the state’s request, held that provisions of the Texas constitution and the Texas Family Code limiting marriage to same-sex couples violated the equal protection clause of the Fourteenth Amendment to the United States Constitution, and concluded that it had jurisdiction to hear the divorce action. On appeal, the Texas Court of Appeals reversed and remanded in In re Marriage of J.B. and H.B. The Court of Appeals determined that Texas law stripping courts of jurisdiction over same-sex divorce do not discriminate against a suspect class nor implicate a fundamental right, and the court therefore applied the rational-basis test, rather than strict scrutiny, in evaluating the equal protection claim. The court concluded that Texas “has a legitimate interest in promoting the raising of children in the optimal familial setting,” that “[i]t is reasonable for the state to conclude that the optimal familial setting for the raising of children is the household headed by an opposite-sex couple,” and that Texas law is rationally related to that goal.

California Appeals Court Finds Unpaid Caregiver Not Care Custodian under Probate Code
Contributed by the ACTEC Fiduciary Litigation Committee.

Estate of Donald Richard Austin - A California case filed September 15, 2010, Fifth District - Cite as F058119

California case law and statutes have struggled with defining who is a “care custodian.” There is a presumption that lifetime or testamentary gifts from a “dependent adult” to a care custodian are the product of the care custodian’s undue influence over the dependent adult. A recent California case has carved out an exception for a person who provided limited services to a dependent adult, including taking him to medical appointments and preparing meals, and who received no payment for those services. Such a person was not a care custodian, as that term is used in California Probate Code Sec. 21350, and was therefore not presumptively disqualified from receiving gifts from the dependent adult.

New York Case on Privity between Estate Planning Attorney and Decedent’s Estate
Contributed by the ACTEC State Laws Committee.

In Schneider v. Finmann, the New York Court of Appeals held that “privity, or a relationship sufficiently approaching privity,” exists between an estate planning lawyer and the personal representative of the client’s estate, so that the personal representative may maintain a malpractice action against the lawyer for alleged negligence that resulted in increased estate taxes.

Deductibility of Interest
Contributed by the ACTEC Fiduciary Income Tax Committee.

Stick v. Commissioner, T.C. Memo. 2010-192. The Tax Court concluded that interest paid by a residual trust on a Graegin-type loan used to pay estate tax liabilities was not deductible under Code Section 2053 as an administration expense for estate tax purposes. The Court reasoned that the trust failed to show that the loan was necessary. Although sufficient liquid assets were available to pay estate tax liabilities, the trust elected to borrow $1.5 million from a foundation to pay estate taxes. The trust also claimed an interest deduction on its Form 1041 for each year, and this deduction was apparently not challenged. Because the estate was not entitled to an estate tax interest deduction, Code Section 642(g) did not operate to disallow the income tax deduction to the trust.

Illinois Case on Application of the Slayer Statute
Contributed by the ACTEC State Laws Committee.

The Appellate Court of Illinois, in Dougherty v. Cole, refused to create an exception to the state's slayer statute where the decedent's son had killed the decedent, but was found not guilty of murder by reason of insanity. The Illinois slayer statute excludes a person from inheriting if the heir intentionally and unjustifiably caused the decedent’s death. The trial court held that the son was barred by the slayer statute because he had intended to kill his mother notwithstanding that he lacked criminal intent as a result of his mental illness. The appellate court affirmed, holding that the trial court had correctly applied the slayer statute and that the son was barred from inheriting.

Georgia Case on Creditors Reaching a Spendthrift Trust
Contributed by the ACTEC State Laws Committee.

Answering a question certified to it by a federal district court in a bankruptcy matter, the Georgia Supreme Court in Phillips v. Moore determined that where a settlor established an irrevocable trust with a spendthrift provision, under which the settlor retained the right to all of the trust income and a testamentary general power of appointment (with a gift over to others in default of exercise), but retained no right to principal distributions, the settlor was considered the sole beneficiary of the trust. As a result, the settlor’s creditors could reach the trust property.

Indiana Case on Lapsed Bequest
Contributed by the ACTEC State Laws Committee.

In Keck v. Walker, the testator’s will left the residue of her estate to several individuals, including her first cousin. After the cousin died, the testator signed two codicils, and in each one she continued to name the deceased cousin as a residuary beneficiary. When the testator died, the cousin’s children sought the cousin’s share of the testator’s estate. The Indiana Court of Appeals held (in an unpublished opinion) that, under the general rule, the gift to the deceased cousin lapsed and passed to the other residuary beneficiaries. The fact that the cousin had died before the testator signed the codicils did not make the will ambiguous, and the court refused to consider extrinsic evidence of the testator’s intent.

2010 ACTEC -- ALI-ABA Ethics Teleconference

The 2010 ACTEC -- ALI-ABA Ethics Teleconference on Current Ethical Issues for Estate Planners will be presented on Thursday, October 28, 2010 from 12:00 noon to 2:00 pm ET. This is the fourth year that ACTEC has presented the Ethics Teleconference and attendees found the other three interesting and beneficial in their practices and this year's conference will be no exception. Each attendee should be get two hours of Ethics CLE credit.

Tax Court Allows Substantial Valuation Discount for Built-In Capital Gains
Contributed by the ACTEC Business Planning Committee.

In Estate of Jensen v. Commissioner, T.C. Memo 2010-182 (Aug. 10, 2010), the Tax Court allowed the full amount of the discount claimed by the Estate for capital gains which would be realized by a C corporation on sale of its appreciated real estate holdings. In doing so the Tax Court gave little weight to the analysis provided by the Service’s expert based on data from closed-end mutual funds, and little weight to arguments by the Service that the tax liability could be mitigated through an S election or a like-kind exchange. The Tax Court instead applied a present value analysis based on projected asset appreciation and holding period, and calculated its own discount amounts which exceeded even the amount claimed by the Estate.

Ninth Circuit Addresses Scope of Discretion of Trustee of Wholly Charitable Trust
Contributed by the ACTEC Fiduciary Litigation Committee.

Day v. Apoliona, 08-16704 (United States Court of Appeals for the Ninth Circuit) 7/26/10

The U.S. Court of Appeals for the Ninth Circuit found that the district court did not err in granting summary judgment to the trustees of a Hawaii state agency that administered a portion of a public trust created, in part but not exclusively, to benefit native Hawaiians.  The Court reasoned that federal law did not oblige the trustees to use proceeds only for native Hawaiians. Where the trust gave trustees broad discretion to serve its purposes, the district court properly found that the challenged expenditures were sufficiently directed to one or more permitted trust purposes. The State’s [Hawai’i] spending of far more money each year on public education--one of the permitted trust purposes--than it received from the trust did not deprive any beneficiary of standing to bring a claim for breach of trust for lack of injury.

Statute of Limitations Issue in the Context of a Construction of a Will
Contributed by the ACTEC Fiduciary Litigation Committee.

In re Estate of Florence, 307 S.W.3d 887 (Tex. App.—Fort Worth 2010, no pet. h.)

The Testator’s will gave his Wife, among other things, his “tangible property.” The residuary of the estate passed into a testamentary trust. After Wife died over 20 years later, the issue arose as to whether real property was included within the term “tangible property” and thus was part of Wife’s estate having passed to her under Testator’s will, or, instead, whether the real property passed under the testamentary trust.

The Texas appellate court’s decision focused not on the merits of the claim but rather on whether the statute of limitations had run on the interpretation action brought by the beneficiaries of Wife’s will. Both sides agreed that the residuary four year statute of limitations applied, but disagreed as to when the time began to run. The court rejected the argument that limitations began to run from the date Testator’s will was admitted to probate. Instead, the court determined that limitations did not run until the claim was made that the term “tangible property” included not only tangible personal property but real property as well.

Thus, according to this court, a statute of limitations for interpretation actions begins to run when parties advocate conflicting interpretations, not when the testator’s will is admitted to probate.

California Law Revision Commission Requests Public Comment

The California Law Revision Commission has released Liability of Nonprobate Transfer for Creditor Claims and Family Protections, a background study discussing the liability of assets transferred outside of probate for the payment of the decedent’s debts and support of the decedent’s dependents. The report summarizes existing California law on the issue, describes alternative approaches followed in other jurisdictions, and makes specific recommendations for reform.

Before beginning active consideration of this topic, the Commission is requesting public comment on the issues raised in the background study. In particular, the Commission would like to receive comment on the nature and extent of any problems in this area and the merits and disadvantages of the recommended reforms.

To receive timely consideration, comments should be submitted by November 1, 2010.

DE Chancery Court: Trust Accounting
Contributed by the ACTEC Fiduciary Litigation Committee.

In this Delaware Chancery court decision, the court held that a plaintiff who brought a counterclaim for improper investment mix against a corporate trustee who had requested a court to approve its accounting was rejected and further that, with certain adjustments, the trustee’s accounting was approved.
Merrill Lynch Trust Company, FSB v. Campbell, et seq., C.A. No. 1803-VCN (Del. Chancery Kent County 2009 and 2010).

California case on Production of Trustee Accounting
Contributed by the ACTEC Fiduciary Litigation Committee.

Soria v. Soria - A California case filed June 14, 2010, Fourth District, Div. Three - Cite as 2010 S.O.S. 3245
A Civil action [not filed in the Probate Court] alleging that the defendants breached their duties as trustees and seeking an injunction to compel defendants to produce an account--in an action in which the existence of a trust was in dispute.  The appellate Court held that this Civil action was not a contest of a trustee’s account within the meaning of California Probate Code Sec. 17211(b), which authorizes recovery of attorney fees where “a beneficiary contests the trustee’s account and the court determines that the trustee’s opposition to the contest was without reasonable cause and in bad faith ...”
The Appellate Court distinguished the recent case of Leader v. Cords (2010) 182 Cal.App.4th 1588 in which Division One of the Fourth Appellate District had allowed recovery of attorney’s fees in an proceeding in Probate in which beneficiaries successfully petitioned the probate court for an order compelling the trustee to make a final distribution and for an order compelling the trustee to reimburse the beneficiaries’ attorneys fees pursuant to the same code section.
Comment:  Read the Leader case because it is a judicial extension of the governing statute.

Delaware Case on Attorney-client privilege
Contributed by the ACTEC Fiduciary Litigation Committee.

N.K.S. Distributors, Inc. v. Christopher J. Tigani et al. - A recent Delaware Court of Chancery order applied the attorney/client privilege to communications between a trustee and his counsel to bar a beneficiary of the trust from accessing those communications. The order decided that the trust beneficiary could not compel the trustee’s counsel to produce documents that contained legal advice given to the trustee pertaining to the trust, unless the trustee sought the advice for the benefit of the trust beneficiary.

California Appeal Affirms Adequate Remedy in the Probate to Assert a Claim for Fraud/Undue Influence
Contributed by the ACTEC Fiduciary Litigation Committee.

Brother who alleged his sister and brother-in-law interfered with his expected inheritance by unduly influencing their mother to sign a codicil to her will that gave $1,000,000 each to sister’s children could not bring a cause of action in tort because he had an adequate remedy in probate.
Munn v. Briggs - filed June 10, 2010, Fourth District, Div. One
Cite as 2010 S.O.S. 3153

Missing will
Contributed by the ACTEC State Laws Committee.

The Massachusetts Supreme Judicial Court rejected the attempted probate of a copy of a missing will in In re Estate of Beauregard. The court applied the evidentiary presumption that a will traced to the testator’s possession and not found after death is presumed to have been destroyed by the testator with the intent to revoke it. The court held that the presumption may be overcome by a preponderance of the evidence, rather than some higher burden of proof such as clear and convincing evidence, but upheld the trial court’s determination that the presumption had not been overcome.

Contributed by the ACTEC State Laws Committee.

California’s anti-lapse statute was applied in Estate of Tolman, in which the decedent’s will left $10,000 to each of two grandchildren, who were the daughters of a deceased son, and the residue to the decedent’s daughter. The will also included a statement that the decedent intentionally omitted providing for any heirs other than those named in the will and that anyone else who successfully claimed to be an heir would receive one dollar. The daughter who was to receive the residue died before the testator. The California Court of Appeal held that the antilapse statute applied despite the language leaving only one dollar to an heir not mentioned in the will, with the result that the residue passed to the descendants of the deceased daughter.

Unauthorized Practice of Law
Contributed by the ACTEC State Laws Committee.

An Indiana insurance marketing company that sold estate plans to customers (usually retirees) and then used financial information that had been collected from the customers to sell them insurance products was found to have engaged in the unauthorized practice of law, in Indiana ex rel. Indiana State Bar Association v. United Financial Systems Corporation. The company used a panel of lawyers to prepare the estate plan documents (such as a will, trust, powers of attorney, and deeds)—for which the customer paid $2,695 and the panel lawyer was paid $225—but nonlawyers met with and collected the information from the customers and delivered and supervised the signing of the documents. The Indiana Supreme Court held that company’s business model “has marginalized the attorney’s role to such a degree as to cross the line of permissible practices.”  The court entered an injunction against the company and also ordered it to provide a copy of the court’s opinion to customers, to offer refunds to certain customers, and to pay attorney’s fees and costs of the Indiana State Bar Association.

Common Law Marriage
Contributed by the ACTEC State Laws Committee.

Estate of Duval addressed the validity of an alleged common law marriage involving several jurisdictions. The decedent, Duval, and Hargrave generally split their time between South Dakota and Mexico, but had also spent time in Oklahoma. Following Duval’s death, the South Dakota circuit court found that Hargrave was Duval’s common law wife. Although South Dakota does not recognize common law marriage entered into in that state, it recognizes common law marriages validly entered into in another jurisdiction. The circuit court determined that a valid common law marriage existed under the law of Mexico and under the law of Oklahoma. The South Dakota Supreme Court reversed, holding that a concubinage under Mexican law was not the legal equivalent of a common law marriage. In addition, Oklahoma law required proof, by clear and convincing evidence, of (1) a mutual agreement or declaration of intent to marry, (2) consummation by cohabitation, and (3) the couple publicly holding themselves out as married. The Supreme Court held that Duval had not established the first element, so that no common law marriage existed under Oklahoma law.

Disposition of Last Remains
Contributed by the ACTEC State Laws Committee.

Arkansas’s disposition-of-last-remains statute was at issue in Long v. Alford. The decedent’s will said that he had made arrangements for burial in a specific plot in a certain cemetery, and directed that his ex-wife make all funeral arrangements. Unaware of the directions in the will, the decedent’s child arranged for the funeral and had the decedent buried in a different plot. Five months after the decedent’s death, the ex-wife petitioned to have the body exhumed and re-buried in the plot the decedent had designated in his will. The trial court denied the petition, and the Arkansas Court of Appeals reversed. The Court of Appeals held that although the ex-wife might have waived her right to make decisions about the disposition of the body by not coming forward sooner, the decedent’s wishes as expressed in the will still controlled under the statute. The court of Appeals did, however, affirm the trial court’s allowance of the child’s claim for approximately $10,000 in funeral expenses because the child acted in good faith and was unaware of the directive in the will when the expenses were incurred.

Will Execution
Contributed by the ACTEC State Laws Committee.

In In re Estate of Howard Griffith, the trial court denied probate of a document that had been signed by two witnesses and which included both an attestation clause and an affidavit that said that the testator had declared the document to be his will in the presence of the witnesses. Despite those provisions in the will, the trial court found that the witnesses in fact did not know that they were signing a will. Accepting that finding by the trial court, the Mississippi Supreme Court affirmed the denial of probate, holding that Mississippi’s wills act requires actual or constructive publication of a non-holographic will by the testator and that the witnesses know that they are signing a will.

Effect of Subsequent Sale on Valuation of Closely Held Interest
Contributed by the ACTEC Business Planning Committee.

In Ringgold Telephone Company v. Commissioner, TC Memo 2010-103, a C corporation converted to an S corporation and six months later sold a minority interest in a partnership it owned to the partnership’s controlling owner.  The value was at issue to determine built-in gains tax.  The court held that the sale price was highly relevant but not controlling, and evidence regarding the actual buyer was considered.  The court valued the partnership interest at an amount lower than the subsequent sale price, taking into account that the purchaser had a history of paying premium prices to avoid exercise of other owners’ rights of first refusal.

Deduction for Noncompetition Payments
Contributed by the ACTEC Business Planning Committee.

Recovery Group Inc. v. Commissioner, T.C. Memo. 2010-76, held that payments under a one-year covenant not to compete agreed to in connection with the redemption of an employee’s stock were deductible over 15 years under Internal Revenue Code § 197(d)(1)(E).

Bankruptcy Exemption for Inherited IRA
Contributed by the ACTEC Employee Benefits in Estate Planning Committee.

The 8th Circuit Bankruptcy Appellate Panel ruled that an inherited IRA established by direct rollover from a decedent’s IRA is exempt in a federal bankruptcy proceeding. In re Nessa, 105 AFTR 2d 2010-XXXX (April 9, 2010). In a footnote it acknowledges the recent Chilton decision to the contrary in Texas and criticizes Chilton as wrongly decided.

8th Circuit Affirms Holman
Contributed by the ACTEC Business Planning Committee.

The 8th Circuit has upheld the Tax Court Opinion in Holman v. Commissioner, a gift tax case involving transfers of limited partner interests of a partnership funded with Dell, Inc. stock.  The issues on appeal were whether § 2703 applied to ignore certain transfer restrictions in the partnership agreement in valuing the transfer and the amount of the lack of marketability discount. The 8th Circuit stated that "context matters" and, while investment-related activities can sometimes satisfy the § 2703(b)(1) "bona fide business arrangement" test, a partnership that holds a fraction of stock in a highly liquid and easily valued company with no stated intention to retain that stock or invest according to any particular strategy, does not meet the standard.

Further Extension of Interim Guidance on Deductibility of Investment Advisory Fees by Trusts
Contributed by the ACTEC Fiduciary Income Tax Committee.

On April 1, 2010, the Internal Revenue Service released Notice 2010-32 extending to 2009 fiduciary income tax returns its no-unbundling-of-unitary fees pronouncement with regard to trust investment advisory fees subject to the “2% floor” of section 67(a) of the Internal Revenue Code. Notice 2010-32 modifies and supersedes Notice 2008-116 and relieves trustees of the need to unbundle their fees for 2009 returns. Trusts may deduct the full amount of the bundled fiduciary fees for 2009 without regard to the 2% floor, but payments by trustees to third parties for expenses subject to the 2% floor are readily identifiable and must be treated separately from the otherwise bundled fiduciary fees.

House Passes Bill with GRAT Limitation Provisions
Contributed by the ACTEC Communications Committee.

H.R. 4849, which would impose significant new limits on grantor retained annuity trusts (GRATs), is now one step closer to enactment. See its Section 307.  The bill, the “Small Business and Infrastructure Jobs Tax Act of 2010” was approved by the House of Representatives on March 25, 2010, and must now be considered and approved by the Senate. As proposed, new GRAT limits, including a mandatory ten-year term, would be effective for transfers after the date of enactment, i.e. they would be effective for transfers after the date that the President signs the bill into law.  This provision is estimated to raise approximately $800 million over the first five years and $4.45 billion over ten years. The GRAT provision is the only transfer tax provision in the House bill.

District Court Denies Annual Exclusion for Gifts of LLC Interests
Contributed by the ACTEC Business Planning Committee.

In Fisher v. United States, 105 A.F.T.R. 2d 2010-1347 (March 11, 2010), the United States District Court for the Southern District of Indiana granted summary judgment to the Internal Revenue Service, holding that the taxpayer’s gifts of LLC interests did not qualify for the annual exclusion for federal gift tax purposes. In doing so the District Court rejected the taxpayer’s argument that the donees’ right to transfer their interests to third parties, after providing the LLC a right of first refusal at the third-party offer price (but with payment using a 15 - year non-negotiable promissory note), was sufficient to create a present interest for purposes of the gift-tax annual exclusion.

Forthcoming Guidance Concerning Charitable Remainder Trusts and Section 2511(c)
Contributed by the ACTEC Charitable Planning and Exempt Organizations Committee.

Treasury officials have informally advised ACTEC Fellows that guidance concerning charitable remainder trusts and section 2511(c) will be forthcoming as a priority item. Naturally, we do not know what the guidance will say.

California Appellate Court Case: Award of Trustee Fees
Contributed by the ACTEC Fiduciary Litigation Committee.

Probate court abused its discretion in awarding fees to trustee without any explanation for what it concluded trustee had reasonably incurred those fees and without specifying the amount of that award. An assessment of reasonableness for a fee award depends not only on what fees were reasonably incurred but also on whether such fees are reasonably and prudently incurred for the trust.
Donahue v. Donahue - filed February 24, 2010, Fourth District, Div. Three

Cite as 2010 SOS 698

[Footnote:  the Trustee had a 45 member legal team from three separate law firms with billing rates up to 690/hr including many Fellows.  The appellant was represented by 2 attorneys who billed $375/hr.]

CA Supreme Court Decision - Conservatorship
Contributed by the ACTEC Fiduciary Litigation Committee.

Court hearing under the Lanterman-Petris-Short Act (a CA statutory conservatorship proceeding for an individual who is gravely disabled as a result of mental disorder [CA Welfare & Institutions Code Section 5000, et seq.]).  CA Supreme Court held that the conservatorship proceeding did not violate the Act or the conservatee’s constitutional right of due process by accepting the representation of conservatee’s attorney--that the conservatee was waiving his right to be present for hearing and was not contesting petition--where attorney personally discussed the proceedings with conservatee, and there was no allegation that attorney misrepresented the contents of that discussion.

Conservatorship of John L. - filed February 25, 2010

Cite as 2010 SOS 970

California Case - In Terrorem Will Clause and Anti-Lapse Statute
Contributed by the ACTEC Fiduciary Litigation Committee.

A statement in a testator’s will expressing her desire not to provide for any unmentioned heirs and limiting recover to $1 for any unmentioned person who successfully claimed to be an heir did not manifest an intention to preclude predeceased residual beneficiary’s issue from inheriting under Probate Code Sec. 21110(a)’s anti-lapse provision.

Estate of Tolman - filed February 11, 2010, Second District, Div. Eight

Cite as 2010 SOS 861

IRS Notice 2010-19 and CRTs
Contributed by the ACTEC Charitable Planning and Exempt Organizations Committee.

IRS Notice 2010-19 was issued on February 2, 2010 with apparent good intentions. The IRS says in the Notice that it was trying to discourage some misguided taxpayers from misinterpreting the language of Code section 2511(c) enacted as part of the 2001 Tax Act (“EGTRRA” for short). The plain language of section 2511(c) – which applies to gifts made after December 31, 2009 – says that “a transfer in trust shall be treated as a transfer of property by gift, unless the trust is treated as wholly owned by the donor or the donor’s spouse under [the grantor trust rules]....”

Few observers ever expected this law to have any application, as most expected some more permanent reform, or at least some extension, of the pre-2010 federal transfer tax before the end of December 2009. When nothing happened at the end of 2009, several commentators looked at the newly effective section 2511(c) and interpreted it perhaps to mean that transfers to grantor trusts cannot be completed gifts. Clearly, this is not what the quoted language says, but the uncertain commentators fell into the trap of concluding that the simple statement, followed by the word “unless” should lead to the conclusion -- nowhere stated in the law -- that a transfer to a trust wholly owned by the grantor or the grantor’s spouse shall not be treated as a transfer of property by gift. Unfortunately, the IRS in Notice 2010-19 , while purporting to clear up this misconception, created a significant new ambiguity of its own making.

The Notice states that “Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax. Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse under [the grantor trust rules]... is considered to be a transfer by gift of the entire interest in the property under section 2511(c).” Read literally, this guidance gives us a whole new set of rules applicable to charitable remainder trusts. And the new rules are not favorable to taxpayers who wish to use charitable remainder trusts in familiar ways.

Consider a typical charitable remainder trust established by A, who retains an income interest (in annuity trust or unitrust form). If A provides for a successive life interest after her death -- for example, an interest in an adult sister -- we have heretofore thought that we did not have a completed gift to the sister if A retained the right to revoke the sister’s interest by will at A’s death. But the Notice seems to say that if a retained power is not sufficient to render the trust a wholly grantor trust, and in the case of this CRT it is not, then the entire transfer is taxable currently as a gift (presumably, with a charitable deduction for the value of the charitable interest after the second death).

Indeed, it may even be the case that the income interest retained by A is taxable as a gift at the creation of the trust. The Notice suggests as much to some readers. There are other uncertainties.

Our fellow Erik Dryburgh has spoken with the author of the Notice. She has told him that the IRS is aware of the issues that the Notice creates for CRTs, but it appears that the IRS is comfortable for the moment with the ambiguity it has created, because the IRS does not know what Congress intended by section 2511(c). A number of ACTEC Fellows have requested clarification from the IRS on this important issue.

Interests in Family Limited Partnership Escape Estate Tax and Marital Deduction Challenge
Contributed by the ACTEC Business Planning Committee.

In Estate of Shurtz v. Commissioner, T.C. Memo 2010-21 (Feb. 3, 2010), the Tax Court rejected attempts by the Internal Revenue Service (i) to include in the decedent’s gross estate the value of the limited partnership’s underlying assets (ii) but to limit the marital deduction only to the discounted value of the decedent’s general and limited partnership interests. The Tax Court determined that, because the decedent formed the limited partnership in part to protect her investment in Mississippi timberland from litigation risks, and in part to facilitate continued efficient management of the timberland even after transferring partial ownership interests to other family members, Section 2036(a) of the Internal Revenue Code did not apply even though the decedent also wanted to reduce estate taxes. Since the Tax Court held that Section 2036(a) did not apply, it concluded that there was no mismatch between the value of the decedent’s interests for estate-tax inclusion purposes and their value for marital deduction purposes.

IRS Issues Guidance on Transfers in Trust Made in 2010
Contributed by the ACTEC Communications Committee.

The Internal Revenue Service released Notice 2010-19 describing the rule that apply to taxpayers making gifts in trust after December 31, 2009. According to the notice, a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property transferred. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.

Vermont Supreme Court Rules on Validity of Disclaimers
Contributed by the ACTEC State Laws Committee.

In Carvalho v. Carvalho, the Vermont Supreme Court held that, although disclaimers are generally irrevocable, they may be challenged on the grounds of undue influence, coercion, or incompetence. Moreover, the court applied the rule from will contest cases based on undue influence that, where the execution of the document occurred under suspicious circumstances (the disclaimer was facilitated by the contingent beneficiary of the estate and the lawyer who drafted the disclaimer and presented it to the disclaimant appeared to be representing parties with conflicting interests), the burden of going forward with the evidence shifts to the party who would benefit from document to show that it was not the product of undue influence.

Nebraska Supreme Court Malpractice Case
Contributed by the ACTEC State Laws Committee.

In Perez v. Stern, a widow hired a lawyer to pursue an wrongful death claim on behalf  of herself, her two minor children, and the deceased husband’s estate. The lawyer filed a complaint, but the action was dismissed because the complaint was not timely served. Almost three years later, the widow filed a malpractice action against the lawyer on behalf of herself and the children. The trial court granted the lawyer’s motion for summary judgment, ruling that the malpractice action was barred by the statute of limitations. The Nebraska Supreme Court reversed, holding that the lawyer owed an independent legal duty to the children and that, as to them, the statute of limitations was tolled by their minority.

Virginia Supreme Court Rules on Enforceability of No-Contest Clause
Contributed by the ACTEC State Laws Committee.

The Virginia Supreme Court, in Keener v. Keener, held that a no-contest provision in a revocable trust, like a no-contest provision in a will, should be strictly enforced according to its terms. The court concluded that one child’s application to the court to open the decedent’s estate as an intestate proceeding did not trigger the no-contest provision in the trust because it was not an objection to or contest of any provision of the trust.

Illinois Supreme Court Case on Tortious Interference with a Testamentary Expectation
Contributed by the ACTEC State Laws Committee.

In Shriners Hospitals for Children v. Bauman, the testator had signed a will in 1964 leaving her estate to the hospitals if she died without descendants. In 1999, she signed a new will naming her pastor as sole beneficiary. When she died in 2003, the 1999 will was probated. In 2006, the hospitals became aware of the 1964 will and brought an action to contest the 1999 will based on undue influence and fraud, and also asserted a tort claim for intentional interference with an expectancy of inheritance. The trial court dismissed all of the claims based on Illinois’s six-month limitation period for filing a will contest. The hospitals appealed only the dismissal of the tort claim. The Illinois Supreme Court held that the six-month statute did not bar the tort claim, but emphasized that its holding does not extend to a plaintiff who fails to bring a tort claim within the period for failing a will contest “where the will contest remedy was available.”

Ohio Court of Appeals Case on Will Revocation Issue
Contributed by the ACTEC State Laws Committee.

The Ohio Court of Appeals held, in Horst v. Horst, that a testator’s marking an “X” across portions of the text of her will, blackening other language, writing in the margin, and crossing out other language did not amount to tearing, canceling, obliterating, or destroying the will so as to revoke it under the Ohio statute.

Delaware Court of Chancery Case on Trustee Prudent Investor Standard
Contributed by the ACTEC State Laws Committee.

In Merrill Lynch Trust Company, FSB v. Campbell, the Delaware Court of Chancery approved the trustee’s accounting for its administration of a charitable remainder unitrsut that had been established on the recommendation of the settlor’s Merrill Lynch, Pierce, Fenner & Smith, Inc. broker. The trust provided for a 10% payout rate for the life of the settler, then for her husband if he survived, and then for her three children until the last of them died, with the remainder to pass to five charities, which gave the trust an expected duration of approximately 50 years. This structure led the trustee to an investment strategy that heavily weighted equities and, when the market declined, the value of the trust fell by about 60%. The settler was unsuccessful in an arbitration proceeding against the brokerage firm, and then sought to remove the trustee. The trustee refused to resign unless the settler provided a release and, when she refused to provide the release, the trustee sought approval of its accounting. The court dismissed as time-barred the settlor’s counterclaim that she had been induced to enter into the trust by misleading misrepresentations and omissions on the part of the brokerage firm and the trustee. The trust agreement “set a nearly unreachable standard,” and, given the constraints of that agreement, the court held that the trustee had not breached the prudent investor standard.

Rhode Island - Domestic Partner’s Ability to Make Funeral Arrangements
Contributed by the ACTEC State Laws Committee.

The Rhode Island legislature has overridden the governor’s veto of a bill that allows a surviving domestic partner to make funeral arrangement for the deceased partner. The bill is available here and the veto override is reflected here.

Two New Decisions Arising out of California:
Contributed by the ACTEC Fiduciary Litigation Committee.

Conservatorship of Deidre B. (filed January 11, 2010, Fourth District, Div. Three ). The Appellate Court held that the trial court did not violate the conservatee’s due process rights by accepting a stipulation filed by her attorney which included the attorney’s sworn declaration that conservatee was told, understood, and agreed to its terms. The stipulation stated that the conservatee consented to reestablishment of conservatorship and waived her right to a formal hearing. The Appellate Court could not consider a post-judgment declaration, which was never presented to the trial court for a ruling, in which conservatee raised new factual allegations challenging her knowing consent to stipulated reestablishment. Instead, the Appellate Court decided that the appropriate procedure when a conservatee seeks to challenge his or her consent after entry of a stipulated judgment is to have any new factual allegations resolved at the trial court level through a petition for rehearing or a habeas petition.

Suleman v. Superior Court (Petersen)( filed January 8, 2010, Fourth District, Div. 3). In this case, involving the famous “Octomom,” the Appellate Court held that a non-relative petitioning for appointment of a guardian for a minor’s estate must establish standing under California Probate Code Sec. 1510(a) by pleading ultimate facts demonstrating financial misconduct or alleging other information sufficient to warrant court intervention in the management of minor’s money or other property. The Appellate Court noted that the test for determining whether a non-relative has standing to file a petition for appointment of a guardian is the same as test for determining whether petition’s allegations are sufficient to survive a motion to dismiss. The Appellate Court found that the probate court erred by ordering an investigation without providing mother with notice or an opportunity to be heard before issuing its order.

Annual Exclusion Denied for Gifts of Limited Partnership Interests
Contributed by the ACTEC Business Planning Committee.

Price v. Commissioner, T.C. Memo 2010-2 (Jan. 4, 2010), held that gifts of interests in a family limited partnership did not qualify for the annual exclusion for federal gift tax purposes. Tax Court Judge Thornton rejected the taxpayers’ attempts to distinguish Hackl v. Commissioner, 118 T.C. 279 (2002), aff’d 335 F.3d 664 (7th Cir. 2003).

Corporate Formation & Liquidation in Same Year Disregarded for Income Tax Purposes
Contributed by the ACTEC Business Planning Committee.

In PLR 200952036, a limited partnership decided to convert to a corporation to try to raise capital. When that strategy did not work, the corporation liquidated into a limited liability company in the same year in which the corporation was formed. The interests of the owners of the LLC were substantially similar in all material respects to their interests in the partnership, and the LLC agreed to make distributions to its owners as if the entity had never converted to a corporation. The IRS ruled favorably that the incorporation would be disregarded and, therefore, there was no taxable corporate liquidation upon the conversion of the corporation to an LLC. Private Letter Rulings (PLRs) are binding authority only on the taxpayers requesting them.

Federal Estate Tax Will Likely Expire January 1st
Contributed by the ACTEC Communications Committee.

The federal estate tax will likely expire as scheduled January 1, 2010, as Senate Democratic leaders failed in an effort to pass a short-term extension to override the tax ’s expiration.  For more details see:

California Case - No Violation of Trust’s No-Contest Clause
Contributed by the ACTEC Fiduciary Litigation Committee.

In a recent appellate Court case in California proposed modification petition requesting an order striking or modifying a special needs trust provision in a trust pursuant to California Probate Code Sec. 15409 did not violate trust’s no-contest clause.

Balian v. Balian - filed December 11, 2009, Second District, Div. Five

As a reminder, effective January 1, 2010, California by statutory change has  limited the effective of no-contest clause and abolished the use of declaratory relief actions to determine if a no-clause would be applicable to a proposed petition.

IRS Issues Proposed Rules on Basis Reporting
Contributed by the ACTEC Fiduciary Income Tax Committee.

Proposed regulations (REG-101896-09) issued by the IRS on December 16, 2009 on basis reporting reflect changes in the law made by the Energy Improvement and Extension Act of 2008 that require brokers, when reporting the sale of securities to the IRS, to include the customer’s adjusted basis in the sold securities and to classify any gain or loss as long-term or short-term. The proposed regulations also reflect changes in the law that alter how taxpayers compute basis when averaging the basis of shares acquired at different prices and expand the ability of taxpayers to compute basis by averaging.

Estate Tax and Graegin Loan
Contributed by the ACTEC Fiduciary Income Tax Committee.

In addition to finding that a transfer of stock to a family limited partnership (FLP) was a bona file sale and not includible in the decedent’s gross estate under section 2036(a), the Tax Court allowed an administration expense deduction under section 2053 for a portion of various professional fees and executor’s commissions.  However, with respect to a “Graegin” loan from the FLP to the estate, the court found the alleged loan to be unnecessary and the interest thereon not immediately deductible under section 2053(a)(2).

Estate of Black v. Commissioner, 133 T.C. No. 15, filed December 14, 2009.

California Trust Case - Spendthrift Trust Beneficiary/Trustee and Damages for Her Breach
Contributed by the ACTEC Fiduciary Litigation Committee.

The California Second District Appellate Court has held that the beneficiary of a spendthrift trust who also acted as trustee and committed a breach causing financial harm to the trust could have her interest in the trust estate impounded to satisfy a claim arising from her misfeasance because the damage resulting from her breach would otherwise be sustained by the beneficiaries.

Chatard v. Oveross - filed November 30, 2009, Second District, Div. Four

Cite as 2009 SOS 6904

Florida: Undue Influence Case
Contributed by the ACTEC Fiduciary Litigation Committee.

Trusts & Estates: Challenging Right to Revoke Trust

Settlor of revocable trust removed all assets from trust and titled them in joint tenancy with one of three sisters.  Upon Settlor’s death, successor Trustee of Decedent’s revocable trust filed suit against surviving joint tenant challenging the transfer of assets and termination of trust on the ground of incapacity.  In reliance on Florida National Bank of Palm Beach County v. Genova, 460 So. 2d 895 (Fla. 1984), trial court dismissed action which was upheld on appeal.  The time to challenge Settlor’s revocation as the product of undue influence was during Settlor’s lifetime, not after her death.
MacIntyre v. Wedell, 12 So. 3d 273 (Fla. 4th DCA 2009)

California: Trustee de son tort Case
Contributed by the ACTEC Fiduciary Litigation Committee.

Trusts & Estates: Trust Beneficiary Standing to Sue

Trust beneficiary had standing to sue fellow beneficiary for aiding trustee in transferring property out of trust in breach of trustee’s duties. Trial court erred in failing to consider and make necessary findings as to whether plaintiff could recover from defendant under a theory that after trustee’s death, defendant--by holding herself out as trustee and purporting to perform trustee’s duties--became a trustee de son tort and could thus be held liable for breach of those duties.

King v. Johnston - filed November 9, 2009, Fourth District, Div. One

Cite as 2009 SOS 6416 (--- Cal.Rptr.3d ----, 2009 WL 3720951, 09 Cal. Daily Op. Serv. 13,591, 2009 Daily Journal D.A.R. 15,871, Cal.App. 4 Dist., November 09, 2009 (NO. D054136)

Illinois: Elder Abuse Case
Contributed by the ACTEC Fiduciary Litigation Committee.

Elder Law: Third Party Consent to Trust Amendment/Revocation

An estate planning lawyer who sought to protect his elderly clients (perhaps, former clients) from improvidently changing their estate plan is vindicated by the Illinois Appellate Court, 3d District, in a unanimous decision.  
Dunn v. Patterson

Cite as Nos. 3-07-0881, & 3-08-0350 (Cons.) (3d Dist. Nov. 18, 2009) SCHMIDT (Will Co.) Reversed and remanded.

California: Clarification of Real Party in Interest Case
Contributed by the ACTEC Fiduciary Litigation Committee.

Trusts and Estates:  Who is the Real Party in Interest?  The Trust or the Trustee?

Where two individuals entered into a real estate partnership acting in their respective capacities as trustees of family trusts, the partners were the individuals, not the trusts. A trust is a relationship by which one person or entity holds property for the benefit of another and is not a separate entity from its trustees; trustees act as individuals when carrying out trust business.

Presta v. Tepper - filed October 28, 2009, publication ordered November 24, 2009, Fourth District, Div. Three

Cite as 2009 SOS 6795 (--- Cal.Rptr.3d ----, 2009 WL 3469176, 09 Cal. Daily Op. Serv. 14,132, Cal.App. 4 Dist., October 28, 2009)

Recent Developments in State Law
Contributed by the ACTEC State Laws Committee.

California law creates a presumptive disqualification of a care custodian from receiving a donative transfer from a dependent or elder adult, but with an exception for transfers to a care custodian who is the dependent adult’s spouse. In a case involving the estate of comedian and actor Richard Pryor, the California Court of Appeal, Second Appellate District, Division Four, refused to create an exception to the exception where the marriage to the care custodian was allegedly the product of undue influence and fraud. The opinion is available here.
Rhode Island Governor Donald L. Carcieri has vetoed a bill that would have given a decedent’s surviving domestic partner the right to make funeral arrangements for the deceased. The text of the bill is available here and the veto message is available here.
The Georgia Supreme Court has confirmed that, under Georgia law, a spouse seeking to enforce a pre-nuptial agreement must demonstrate that there was full and fair disclosure of all material facts, including that party’s income. The opinion is here.

Christiansen Decision Affirmed
Contributed by the ACTEC Business Planning Committee.

In Estate of Christiansen v. Commissioner, No. 08-3844 (8th Cir. Nov. 13, 2009), the United States Court of Appeals for the Eighth Circuit affirmed the decision of the United States Tax Court (130 T.C. 1 (2008)) that use of a formula disclaimer, based on values as finally determined for federal estate tax purposes, neither renders the amount of the federal estate tax charitable deduction subject to an impermissible contingency nor violates public policy. The result is to allow the estate tax charitable deduction for the portion of the disclaimed property passing directly to a qualified charity as a result of a valuation increase on audit.

Gain From Surrender of Insurance Policy Is Ordinary Income

On November 3, 2009, the U.S. Tax Court held that the gain from the surrender of a life insurance policy was ordinary income and not capital gain. Barr v. Commissioner, T.C., No. 8705-08, T.C. Memo. 2009-250. Lillian Barr is the mother of petitioner Harvey Barr. In 1980, Lillian bought a life insurance policy to help her children pay the anticipated estate tax liability after her passing. Harvey has been an attorney since 1964 and is admitted to practice in the U.S. Tax Court. In 2005, Lillian and Harvey decided the policy was no longer necessary, and Harvey, as the owner of the policy, surrendered it. Harvey did not include any of the proceeds of surrender in his gross income on his 2005 return, although the transaction was reported on Forms 1099-R and 1099-DIV. The Tax Court found that the gain from the surrender of the life insurance policy was ordinary income, and that the Harvey and his wife, who filed a joint return, were liable for the accuracy-related penalty. The Tax Court’s treatment of the proceeds of surrender is consistent with reasoning and results of Revenue Ruling 2009-13, 2009-21 I.R.B. 1029.

California: Determination of Trust Settlor’s Capacity
Contributed by the ACTEC Fiduciary Litigation Committee.

Rands v. Rands (September 30, 2009), Second District, Div. Six (Cite as 2009 SOS 6195)

Husband and wife established a revocable trust that included a provision for establishing a settlor’s incapacity by written cerifications from two physicians. Under this provision, the determination of incapactity could be revoked by the same procedure. Two of settlor’s treating physicians certified that he was mentally incompetent. One year later, two other physicians certified that the settlor was no longer mentally incompetent. On appeal, the Court held that the later certifications of mental competence were insufficient to reestablish competence because neither of the physicians who found settlor to be mentally competent was aware of the earlier certifications of mental incompetence.

New Jersey: Probate Attorneys’ Fees
Contributed by the ACTEC Fiduciary Litigation Committee.

38-2-5740 I/M/O Will of Riley, App. Div. (per curiam)

This case involves an appeal by the executrix of an award of counsel fees to plaintiff , an unsuccessful proponent of a purported codicil to the decedent’s will, and of the denial of the executrix’s application for sanctions against plaintiff. The panel affirms the fee award and the decision regarding sanctions, finding that the probate judge did not abuse her discretion. The panel remands to the Probate Court for verification (a) that the litigation is being funded by plaintiffs, and not a third-party ; (b) of the amount, if any, that has been paid to counsel by plaintiffs ; (c) of the amount, if any, still owed to ensure that counsel is or has been paid the full amount of the award ; and (d) that Rule 4:42-9(a)(3) is not being used to reimburse fees paid or payable by a non-party.

California Supreme Court: No-Contest Clause in Trust Agreement
Contributed by the ACTEC Fiduciary Litigation Committee.

Johnson v. Greenelsh (October 29, 2009), CA Supreme Court Cite as 2009 SOS 6223

The California Supreme Court determined that challenging a surviving spouse’s mental capacity to transfer trust assets and to appoint a successor trustee did not violate the no-contest clause contained in a trust agreement. The Court drew a distinction between a proceeding contesting a settlor’s mental competence to exercise rights under a trust, and one in which the action contesting a settlor’s mental competence would constitute an attack on the trust itself because such action would effectively nuliffy the estate plan established by the trust.

Disproportionate Distribution Can Be Cured After the Fact to Avoid Termination of S Election
Contributed by the ACTEC Business Planning Committee.

In Private Letter Ruling 200944018, the IRS ruled that, when disproportionate distributions were made by an S corporation in one year, corrective action taken in the following year cured any inadvertent termination of the corporation’s S election that might have occurred. The fact that the corrective action was necessarily non-pro-rata did not itself cause any second-class-of stock problem. A PLR is binding only on the taxpayer requesting it.

Roth IRA Cannot Be Shareholder Of S Corporation
Contributed by the ACTEC Business Planning Committee.

The United States Tax Court held recently that a Roth IRA could not be a shareholder of an S corporation, even prior to the recent issuance of a Treasury Regulation which says that, except in very limited circumstances. The case is Taproot Administrative Services, Inc. v. Commissioner, 133 T.C. No. 9 (September 29, 2009). Treasury Regulation 1.1361-1(h)(1)(vii), which became final on August 13, 2008, now provides specifically that individual retirement accounts (including Roth IRAs) are not eligible S corporation shareholders, unless they satisfy the narrow exception created in Code Section 1361(c)(2)(A)(vi) for stock in a bank or depositary institution holding company that was held by the IRA or Roth IRA as of October 22, 2004.

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