There have been significant legal developments in recent months—from two rare Supreme Court cases in our practice area to an uptick in litigation over no-contest clauses—we’re here to help you grapple with and learn from these cases. Read our break down of just a few of the most impactful developments so far this year.
1. State taxation of trusts
Several states have legislation testing the boundaries of their ability to tax trusts with limited in-state connections. In the second Supreme Court case within the past year, one state’s ability to tax trust income was struck down. In North Carolina Department of Revenue v. Kaestner 1992 Family Trust, No. 13-457, 2019 WL 2552488 (U.S. June 21, 2019), the US Supreme Court unanimously ruled that the mere presence of in-state beneficiaries alone does not permit the state to tax trust income that has not yet been distributed to the beneficiaries where the beneficiaries have (1) no right to demand income and (2) no guarantee that they would eventually receive the income from the trust.
Read more about this case here.
2. Rise in estate litigation and the use of no-contest clauses
So far this year, we’ve seen fewer tax developments. This is due, primarily to the doubling of the federal exemption amount brought on by the Tax Cuts and Jobs Act. There has been a rise, however, in cases of fiduciary, probate, and estate litigation brought on by disgruntled beneficiaries. Ironically, several cases involve the use of “in terrorem” clauses, also known as no-contest or forfeiture clauses, used by individuals to thwart potential challenges to their estate plans.
Missouri, Mississippi, Missouri, and Georgia recently had significant cases addressing no-contest clauses. In Georgia, 14 beneficiaries challenged the legal validity of a trust based on a claim of undue influence over the settlor by her children (who are also trustees). Duncan v. Rawls, 812 S.E.2d 647 (Ga. Ct. App. 2018). Due to the lack of implied probable cause, the Georgia court concluded that the trial court did not err by enforcing the no-contest clause against a claim of undue influence. However, the court did remand the case to consider whether the beneficiaries claim of tortious interference with the expectation of gift is barred by the no-contest clause.
Estate planners should take note of these cases, as they demonstrate the short-comings of ill-crafted or boilerplate no-contest clause. It's important to continue to thoughtfully include these provisions in clients’ will or trust if there is good reason. So long as attorneys stay away from boilerplate language, and instead, carefully tailor these clauses to fit each clients’ unique circumstance (and jurisdiction). WealthDocx®—WealthCounsel’s legal drafting software—has standard and expanded clauses that can easily be edited to fit a client’s unique situation or concerns.
3. Ruling on the revocation-on-divorce statute
In the second Supreme Court Case in our practice area, Sveen v. Melin, 138 S.Ct. 1815 (2018), the Court was presented with the question of whether a Minnesota revocation-on-divorce statute may validly operate retroactively. The Minnesota law, enacted in 2002, provided that “the dissolution or annulment of a marriage revokes any revocable … beneficiary designation ... made by an individual to the individual’s former spouse.” Minn. Stat. § 524.2–804(1). The statute further provided that if one spouse made the other spouse the beneficiary of a life insurance policy (or similar asset), their divorce automatically revokes that designation, and instead, at the insured’s death, the insurance proceeds go to the policyholder’s contingent beneficiary, or to their estate if no contingent beneficiary exists.
In Sveen v. Melin, respondent Kaye Melin (decedent’s ex-wife) and the decedent’s children (from another marriage)—petitioners Ashley and Antone Sveen—made competing claims for the insurance proceeds. The Sveen children argued that under Minnesota’s revocation-on-divorce law, their father’s and Melin’s divorce in 2008 canceled out her beneficiary designation—making them the rightful recipients. However, Melin claimed that because the law did not exist when the policy was purchased and she was named as the primary beneficiary in 1997, that retroactively applying the law to the policy would violate the Contracts Clause. While the District Court awarded the insurance money to the Sveens, the Eighth Circuit reversed the decision, holding that the retroactive application of Minnesota’s law does violate the Contracts Clause. Here, the Supreme Court reversed, finding no violation of the Contract’s Clause.
In light of this case, estate planners should know whether their state has a similar revocation on death statute. Most states revoke testamentary dispositions upon divorce, but others (26) are adopting the UPC’s expanded approach of revoking non-probate transfers, such as beneficiary designations, as well. You should also counsel your clients to update their estate planning documents as well their beneficiary designations as soon as they divorce.
4. Misstating charitable deductions on Form 706
Despite the changes brought on by the Tax Cuts and Jobs Act, charitable deductions remain an important tax-saving tactic for higher net worth clients. A recent case demonstrates the havoc improper estate administration can cause, particularly in miscalculating basis information.
Last month, the US Court of Appeals for the D.C. Circuit affirmed the Tax Court's decision, denying the entire claimed charitable deduction for a gift (valued at $33 million), because the correct basis information was not included on the appraisal summary. In Dieringer v. Commissioner, 123 AFTR2d 2019-1020 (2019), the Executor of the estate was found to have overstated the amount of the charitable deduction when filling out Form 706. The deduction amount was based on the value of estate property at the time of the decedent’s death—an amount which was less than what was actually received by the charity.
The petitioner, the Executor of the decedent’s estate, argued that the Tax Court should have taken into account the events that occurred after the decedent's death in their determination of the value of the charitable deduction. However, the Tax Court found that there was no evidence of any events where there was a significant decline in the economy that would have decreased the value of the property being donated. The Court affirmed the Tax Court’s decision and upheld the reduction of the amount of the charitable deduction and the assessment of a tax deficiency.
In light of this case, charitable deductions, and the valuation of gifts should be handled with great care. Practitioners should counsel fiduciaries that while it might be tempting to strive for the highest possible deduction, the actual value of what was received by the recipient is critical to report to the IRS.
If you’d like to learn more about current legal cases and their impacts on estate planning, attend the session “Current Developments in Estate Planning” taught by Yvonne Olivere, JD, at Symposium this July in Boston. See other similar sessions and get your conference pass here.