Georgia Case on Creditors Reaching a Spendthrift Trust
Contributed by the State Laws Committee.
9/1/10

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 State Laws Committee.
9/1/10

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 The Indiana Court of Appeals held (in an unpublished opinion) that, under the general rule, the gift to the deceased cousin lapsed and passed to the other residuary beneficiaries.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
8/31/10

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.
8/10/10

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.
7/29/10

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.
7/13/10

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
7/9/10

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.
6/19/10

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.
6/19/10

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.
6/19/10

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.
6/19/10

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.
6/10/10

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.

Antilapse
Contributed by the ACTEC State Laws Committee.
6/10/10

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.
6/10/10

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.
6/10/10

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.
6/10/10

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.
6/10/10

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.
5/14/10

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.
4/19/10

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.
4/16/10

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.
4/12/10

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.
3/29/10

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.
3/29/10

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.
3/29/10

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.
3/23/10

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.
2/26/10

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.
2/26/10

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.
2/9/10

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.
2/9/10

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.
2/5/10

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.
2/5/10

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.
2/4/10

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.
2/4/10

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.
2/4/10

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.
2/4/10

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.
2/4/10

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.
2/4/10

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.
2/4/10

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.
1/13/10

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.
1/6/10

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.
1/5/10

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 1^st
Contributed by the ACTEC Communications Committee.
12/17/09

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:  http://online.wsj.com/article/SB126098351451293981.html

California Case - No Violation of Trust’s No-Contest Clause
Contributed by the ACTEC Fiduciary Litigation Committee.
12/17/09

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.
12/16/09

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.
12/15/09

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.
12/08/09

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.
12/02/09

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.
12/02/09

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.
12/02/09

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.
12/02/09

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.
11/17/09

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.
11/16/09

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
11/11/09

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.
11/03/09

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.
11/03/09

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.
11/03/09

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.
11/02/09

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.
10/22/09

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.