From Internal Revenue Service (IRS) and court decisions that certain trust modifications may result in gift tax liability to a nationwide injunction against the enforcement of the Corporate Transparency Act (CTA) and a Social Security Administration (SSA) final rule omitting food from in-kind support and maintenance (ISM) calculations, 2024 was full of significant legal developments. To ensure that you stay abreast of these changes, we have highlighted some of the most noteworthy developments of the year and analyzed how they may impact your estate planning, elder and special needs law, and business law practices.
Estate Planning
Certain Trust Modifications May Result in Gift Tax Liability
McDougall v. Comm’r, Nos. 2458-22, 2459-22, 2460-22, 163 T.C. No. 5 (Sept. 17, 2024); In re Estate of Anenberg v. Comm’r, No. 856-21, 162 T.C. (May 20, 2024); Chief Couns. Adv. 2023-52-018
In McDougall v. Commissioner, the estate claimed a marital deduction of approximately $54 million for property directed to a qualified terminable interest property (QTIP) trust, which benefited the surviving spouse (Bruce) and the couple’s adult children thereafter as remainder beneficiaries. Several years later, Bruce and the adult children entered into a nonjudicial agreement to commute the trust and distribute all trust assets outright to Bruce. The IRS filed notices of deficiency, arguing that the nonjudicial agreement resulted in a gift from the adult children of their remainder interests to their father.
However, in an earlier case, In re Estate of Anenberg, the court explicitly noted that it expressed no view about whether the nonspouse beneficiaries of a trust in that case had made a gift to the surviving spouse for gift tax purposes.
Takeaways: Certain trust modifications, such as the transactions in McDougall and In re Estate of Anenberg, may result in gift tax liability. For a more detailed discussion of McDougall, see WealthCounsel’s October 2024 recap of legal developments. For a discussion of In re Estate of Anenberg, see WealthCounsel’s June 2024 recap. See also Chief Couns. Adv. 2023-52-018, in which the IRS determined that beneficiaries of an irrevocable grantor trust that was modified to include a tax reimbursement clause were subject to gift tax, discussed in the January 2024 recap.
SECURE Update: IRS Issues Final Regulations on Required Minimum Distributions
Treas. Reg. pts. 1, 31, 54 (as amended by T.D. 10001, 89 Fed. Reg. 58886-01); Prop. Treas. Reg. pt. 1, 89 Fed. Reg. 58644-01 (July 19, 2024)
On July 18, 2024, the IRS issued final regulations addressing the changes to the required minimum distribution (RMD) rules under the Setting Every Community Up for Retirement Enhancement (SECURE) Act and SECURE 2.0 Act. The final regulations generally follow the 2022 proposed regulations. Notably, the final regulations retain the controversial requirement set forth in the proposed regulations that most designated beneficiaries who inherit a retirement account from an account owner who dies on or after reaching the account owner’s required beginning date and are subject to the 10-year rule under the SECURE Act must take RMDs every year throughout the 10-year period, with a full distribution on December 31 of the tenth year. The final rules, which apply for distribution calendar years beginning on or after January 1, 2025, state that there is no penalty and no requirement to make up for missed RMDs for the years 2021–2024. Nevertheless, retirement accounts inherited after 2019 must be fully distributed to the beneficiary within 10 years of the retirement account owner’s death.
Takeaways: The final regulations became effective September 17, 2024. Most beneficiaries subject to the 10-year rule must take their RMD for 2025; they may take missed RMDs for years 2021–2024 but are not required to do so. Regardless of whether the beneficiary takes any missed RMDs, for most beneficiaries, the retirement account must be fully distributed within 10 years of the account owner’s death.
Proceeds of Life Insurance Purchased by Closely Held Corporation and Used to Redeem Deceased Owner’s Shares Included in Corporation’s Value for Estate Tax Purposes
Connelly v. United States, No. 23-146, 2024 WL 2853105 (June 6, 2024)
Two brothers, Michael and Thomas, owned 100 percent of the shares of a closely held family business, Crown C. They entered into a stock purchase agreement providing that, at the death of one of the brothers, the other had the right to buy his shares. If the surviving brother chose not to purchase the shares, Crown C was required to purchase the deceased brother’s shares. Crown C purchased $3.5 million in life insurance policies for Michael and Thomas to fund its redemption obligation.
Michael died October 1, 2013. Thomas chose not to purchase his brother’s shares, and Crown C used part of the $3.5 million it had received in insurance proceeds to purchase Michael’s shares. Thomas and Michael’s son agreed that the value of Michael’s shares was $3 million, and Crown C paid that amount to the estate.
Thomas, as executor, filed an estate tax return that valued Michael’s shares at $3 million as of the date of his death. The IRS asserted that the fair market value of Crown C should have included the $3 million in life insurance proceeds used to redeem Michael’s shares. After court rulings in favor of the IRS, the US Supreme Court granted certiorari.
The US Supreme Court concluded that, in calculating the estate tax, the fair market value of Crown C must be determined as of the date of Michael’s death, not the later date when his shares were redeemed. Therefore, the life insurance proceeds must be included in the valuation of Michael’s shares for estate tax purposes.
Takeaways: Estate and business planning attorneys should review clients’ buy-sell or stock redemption agreements with Connelly in mind to ensure they are structured to achieve their goals while minimizing estate tax. The US Supreme Court suggested that Michael and Thomas could have avoided the additional estate tax liability by using another type of agreement:
For example, the brothers could have used a cross-purchase agreement—an arrangement in which shareholders agree to purchase each other’s shares at death and purchase life-insurance policies on each other to fund the agreement. A cross-purchase agreement would have allowed Thomas to purchase Michael’s shares and keep Crown in the family while avoiding the risk that the insurance proceeds would increase the value of Michael’s shares.
Connelly v. United States, No. 23-146, 2024 WL 2853105 at *5 (June 6, 2024). Nevertheless, the court acknowledged that each strategy has drawbacks, for example, the risk created by a cross-purchase agreement that one of the brothers would have been unable to pay the premiums for an insurance policy on the other brother. Michael and Thomas avoided this risk by having Crown C purchase the insurance policies and pay the premiums. In addition, the court acknowledged that such a cross-purchase arrangement would have its own tax consequences. Read more about the Connelly case in WealthCounsel’s June 2024 recap.
Elder Law and Special Needs Law
SSA Issues Final Rule Omitting Food from ISM Calculations
Omitting Food From In-Kind Support and Maintenance Calculations, 20 C.F.R. §416 (March 27, 2024)
On March 27, 2024, the SSA released a final rule updating its regulations to exclude food from its ISM calculations. Under the final rule, which took effect on September 30, 2024, the SSA will consider only shelter expenses, including room, rent, and mortgage payments; real property taxes; heating fuel; gas; electricity; water; sewerage; and garbage collection services, in its ISM calculations. Although the SSA will omit food expenses from its ISM calculations, it will ask applicants or recipients who live in another person’s household whether others pay for or provide them with all of their meals for the sole purpose of determining whether to apply the one-third reduction rule or the presumed maximum value rule to value their shelter (click here for more information).
Takeaways: The final rule will ensure that food assistance provided by family and friends is treated the same as food support provided by charitable and government sources, which is not the case under the current rules. The rule is also designed to make ISM calculations easier for applicants, recipients, and agency employees to understand and apply. It will reduce the amount of information applicants and recipients must report, decrease the variability and increase the accuracy of monthly payments, and reduce the government’s administrative burden, resulting in savings. In addition, the final rule promotes greater equity by increasing the financial security of SSI recipients who, by definition, have low income and resources and are more likely to be food insecure.
CMS Issues Final Rule Enabling Patients with Traditional Medicare to Appeal Hospitals’ Reclassification of Status from Inpatient to Outpatient Receiving Observation Services
Medicare Program: Appeal Rights for Certain Changes in Patient Status, 42 CFR Parts 405, 476, and 489 (Oct. 11, 2024)
On October 11, 2024, the Centers for Medicare & Medicaid Services (CMS) issued a final rule establishing expedited and standard appeals processes for Medicare beneficiaries who meet other eligibility requirements and are admitted to a hospital as an inpatient but are later reclassified during their hospital stay from inpatient to outpatient receiving observation services. The result of such a reclassification is a denial of coverage for the hospital stay under Medicare Part A, which could negatively affect those who subsequently need care in a skilled nursing facility (SNF) because a three-day Medicare-approved inpatient hospital stay is required for Medicare to cover SNF care.
Takeaways: The final rule implements a court order issued in Alexander v. Azar, 613 F. Supp. 3d 559 (D. Conn. 2020), aff’d sub nom., Barrows v. Becerra, 24 F.4th 116 (2d Cir. 2022), a 2011 class action lawsuit requiring the Secretary of the US Department of Health and Human Services to create additional appeals processes for beneficiaries who have had Medicare Part A benefits denied for hospital inpatient services and SNF care as a result of a hospital’s reclassification of their status. The CMS projects that it will implement the appeals processes in early 2025. Improper reclassification can have massive financial and health consequences on those in the midst of a healthcare crisis. This final rule has been decades in the making, and to ensure the best client outcomes, practitioners should educate themselves about the process. Read more in WealthCounsel’s November 2024 recap.
Texas Supreme Court Requires Prior Occupancy for Home to be Excluded as Countable Resource
Texas Health & Human Ser. Comm. v. In re Estate of Burt, No. 22-0437, 2024 WL 1945484 (Tex. May 3, 2024)
Clyde and Dorothy Burt sold their family home to their daughter Linda and her husband, Robby, in 2010 and moved to a rental property. In August 2017, Clyde and Dorothy moved into an SNF. As part of a spend-down plan to ensure Medicaid eligibility, Clyde and Dorothy used cash assets and the cash value of a life insurance policy to buy an undivided one-half interest in the family home from Linda and Robby. After purchasing the one-half interest in the home, Clyde and Dorothy were left with $2,016.10, which was below the $3,000 maximum resource threshold for couples to be eligible for Medicaid assistance.
Both Clyde and Dorothy died while their application for Medicaid nursing facility assistance was pending. The Texas Health and Human Services Commission denied the estate’s claim for Medicaid assistance.
The Texas Supreme Court held that a property interest purchased after the Medicaid claim arises and where the residence is not occupied prior to the application will not be excluded from the calculation of available resources.
Therefore, the court reversed the judgment of the court of appeals and rendered judgment in favor of the Commission.
Takeaways: Texas attorneys must ensure prior occupancy as part of a spend-down strategy, even if for one day. Non-Texans should remember that even the most germane, run-of-the-mill Medicaid rule can be dramatically changed by a court majority with a disdain for means-tested benefits planning. Elder law practitioners from around the country who wish to counter similar positions regarding the countability of a home can refer to the expertly crafted dissenting opinion in Burt, where three justices showed that the court’s judicially created ruling is inconsistent with a plain reading of federal statute and regulation relating to the exclusion of a home. For additional discussion of the Texas Health & Human Services Commission case, see WealthCounsel’s June 2024 recap.
Business Law
Stay of Nationwide Preliminary Injunction Blocking Enforcement of CTA Confirmed
Texas Top Cop Shop, Inc., et al v. Garland et al, No. 4:24-cv-00478 (E.D. Tex. Dec. 3, 2024)
On December 3, 2024, the United States District Court for the Eastern District of Texas entered a nationwide preliminary injunction blocking the enforcement of the Corporate Transparency Act (CTA) and its implementing regulations. On December 23, 2024, the Fifth Circuit Court of Appeals issued a stay of the preliminary injunction, but the Court quickly reversed this decision on December 26, 2024, reinstating the nationwide injunction. The appeal remains expedited, with oral arguments awaiting scheduling.
Takeaways: In light of the Fifth Circuit’s December 26, 2024, ruling, reporting companies are not required to file beneficial ownership information reports pending a final decision on the constitutionality of the CTA’s reporting requirements. Read more about the Texas Top Cop Shop case in WealthCounsel’s December 2024 recap. In addition, WealthCounsel members may visit the CTA webpage on the member website for additional information and updates.
Updates on Federal and State Noncompete Clause Restrictions
On August 20, 2024, in Ryan LLC v. Federal Trade Commission, the US District Court for the Northern District of Texas blocked the enforcement of the Federal Trade Commission’s (FTC’s) final Non-Compete Clause Rule, which would have taken effect September 4, 2024.
Pennsylvania recently enacted a law banning noncompete agreements of more than one year for healthcare practitioners. Rhode Island’s governor recently vetoed a bill banning noncompete and nonsolicitation agreements in the employment context.
Takeaways: The trend is toward disfavoring noncompetition covenants, particularly for employees. Attorneys and clients should consider alternatives such as nondisclosure agreements if there is a risk that an employee whom a competitor later employs could cause harm to the business by disclosing confidential or proprietary information to the competitor. For more information, see WealthCounsel’s September 2024 and August 2024 recaps.
