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From a new SECURE final rule on required minimum distributions to new developments regarding the Federal Trade Commission’s Non-Compete Rule, we have recently seen significant legal developments. To ensure that you stay abreast of these changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning, elder and special needs law, and business law practices.
Estate Planning
SECURE Update: Internal Revenue Service 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 Internal Revenue Service (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 their 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.
The following are among the changes included in the final regulations: (1) if there are multiple beneficiaries of a retirement account, when the account owner dies, any of the beneficiaries may take any undistributed RMD for the year of death—the beneficiaries are not required to take a proportional share of the undistributed amount; (2) there is no deadline by which a surviving spouse must elect to make a spousal rollover of the deceased spouse’s retirement account; (3) there are new rules for trusts that will be divided into separate trusts at the death of the retirement account owner that allow individual RMD treatment based on status as a designated beneficiary or eligible designated beneficiary, thereby eliminating Type I applicable multibeneficiary trusts (AMBTs); (4) when an AMBT provides that other trust beneficiaries cannot receive any distributions from the trust until the death of the disabled or chronically beneficiary, the inclusion of a termination provision will not cause the trust to not be treated as an AMBT, and if terminated, the trust will be treated as being modified to add the other beneficiaries as of the date the termination occurred; and (5) individuals who have individual retirement accounts that include annuities are now allowed to aggregate the annuity and nonannuity assets when calculating their RMD to count the full amount of annuity payments toward the RMD total. The changes to AMBTs and other issues relevant to disabled or chronically ill beneficiaries are discussed below in a separate section, New SECURE Final RMD Regulations Eliminate Type 1 AMBTs.
The IRS also released new proposed regulations correcting an error in the SECURE 2.0 Act: individuals born in 1959 are required to begin RMDs at age 73 (as drafted, the original specified two ages—73 and 75—for individuals born in 1959). In addition, the proposed regulations provide that distributions from a designated Roth account do not count toward fulfilling an individual’s RMD for that year. They also include guidance about the circumstances in which a surviving spouse may elect to be treated as the deceased spouse and delay RMDs until the year the deceased spouse would have been required to take them, how the RMDs will be calculated, and the circumstances in which the election is automatic.
Takeaways: The final regulations are effective September 17, 2024. In addition, public comments on the new proposed regulations must be received by September 17, 2024. 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, the retirement account must be fully distributed within 10 years of the account owner’s death.
Join us August 21, 2024, at 1 p.m. (ET) for a complimentary webinar, SECURE RMD Final Regulations, presented by WealthCounsel’s Brian Albee, JD.
Trust Allowed Charitable Deduction for Amounts Set Aside for Foundation from Nonliquidating Distribution from S Corporation
I.R.S. Priv. Ltr. Rul. 2024-23-002 (June 7, 2024)
On June 7, 2024, the IRS issued Private Letter Ruling 2024-23-002, which addressed whether a trust, which is the sole shareholder of an S corporation, could deduct a contribution to a 501(c)(3) charitable foundation of real property distributed to the trust from the S corporation where the trust permanently sets aside the property for the benefit of the foundation (or pays the proceeds from its sale to the foundation).
The decedent involved established a revocable living trust (Trust) during his life that was treated as a grantor trust under I.R.C. § 676. The Trust provided that after the payment of certain bequests, taxes, and administrative costs and expenses, the residue of the Trust was to be distributed to a charitable private foundation (the Foundation), which was exempt from tax under I.R.C. § 501(c)(3). The decedent’s will specified that the residue of his estate would be distributed to the trustees of the Trust. The estate and the Trust filed an election under I.R.C. § 645 to treat the Trust as part of the estate for federal tax purposes, asserting that the Trust was a qualified revocable trust during the decedent’s lifetime.
The Trust was the sole shareholder of an S corporation that owned real property. The S corporation intended to make a nonliquidating distribution of unimproved land to the Trust that would result in a gain for the taxable year of distribution. The Trust’s plan was to sell the real property to a third party and for the proceeds of the sale to be accounted for separately and set aside for the benefit of the foundation. If the Trust sold the real property in the same taxable year that the S corporation distributed it to the Trust, the Trust planned to distribute the proceeds of the sale to the foundation in the same taxable year it received the sale proceeds or in the following taxable year pursuant to its I.R.C. § 645 election. The Trust requested a private letter ruling that it would be allowed a charitable deduction under I.R.C. § 642(c) (deduction for amounts paid or permanently set aside for a charitable purpose) to the extent that the S corporation actually distributed the real property to the Trust and the Trust paid to the foundation or permanently set aside the real property or the proceeds from its sale for the foundation’s benefit.
The IRS ruled that the Trust could take an I.R.C. § 642(c) deduction for amounts of gross income that are paid to or set aside for the foundation to the extent gain would be includible in the gross income of the Trust for the taxable year as a result of the distribution of the real property from the S corporation. In its ruling, the IRS stated that it did not express or imply any opinion about the federal tax consequences of the facts of the case under any other I.R.C. provisions.
Takeaways: Although private letter rulings do not have precedential value for other taxpayers or IRS personnel, they are instructive regarding the IRS’s position on an issue. An election under I.R.C. § 645 allows a qualified revocable trust—defined in I.R.C. § 645(b)(1) as “any trust (or part of a trust) that, on the day the decedent died, was treated as owned by the decedent under section 676 by reason of a power to revoke that was exercisable by the decedent (determined without regard to section 672(e))”—to be treated for federal income tax purposes as part of a decedent’s estate during the election period (generally two years). The § 645 election may benefit some clients because the electing trust can report its income together with the estate’s income on a single combined tax return. In addition, although trusts are generally limited to filing on a calendar year basis, an electing trust may report income in the same year as the estate, which is allowed to report on a fiscal year or calendar year basis. If the estate chooses a fiscal year, income may be shifted to a later year. An executor or trustee makes the election by filing a completed Form 8855. The election cannot be revoked once it is made.
Note that although the IRS declined to rule on the issue in Priv. Ltr. Rul. 2024-230-02, the income it determined was deductible may be considered unrelated business income under I.R.C.§ 681, meaning that limitations would apply to the amount that can be deducted (See Treas. Reg. 1.681(a)-1).
Attorneys Who Represented Trustees in Action for Breach of Fiduciary Duty Did Not Automatically Represent Trust
In re Estate of Goldberg, No. 20220372, 2024 WL 2855382 (Utah June 6, 2024)
Leon Nelson and Marilynn Tetrick were co-trustees of the Stanley and Sandra Goldberg Trusts (the trusts). They hired attorneys to assist them in their duties as trustees. Some of the trust beneficiaries sued Leon and Marilynn for breach of their fiduciary duties. The court entered a judgment against Leon and Marilynn for $1.8 million, payable to the trusts. The court also removed Leon and Marilynn as trustees at the beneficiaries’ request and appointed successor trustees.
Leon and Marilynn petitioned the court to reduce the amount of the judgment. The beneficiaries opposed the reduction, and the successor trustees moved to disqualify Leon and Marilynn’s attorneys, who were the same attorneys who had represented them when they were trustees. The beneficiaries claimed that the attorneys had a conflict of interest under Utah Rule of Professional Conduct 1.9(a), which bars a lawyer who has represented a client in one matter from representing another person whose interests are materially adverse to the former client’s interests. The successor trustees argued that the attorneys Leon and Marilyn had hired to assist them as trustees and who had later represented them in the lawsuit had represented the trusts. Therefore, those attorneys could not represent Leon and Marilyn in their motion to reduce the judgment. The district court agreed and disqualified the attorneys.
On appeal, the Utah Supreme Court reversed the district court, holding that although an attorney-client relationship can exist between an attorney and a trust, the relationship does not flow automatically from the attorney’s representation of the trustee but instead depends on the context. The court noted that Leon and Marilynn’s attorneys, in their engagement letters, indicated that they represented them in their capacities as trustees. The context revealed that Leon and Marilynn’s attorneys had only represented them as trustees and had never represented the trust. Therefore, Rule 1.9 did not apply, and the district court erred in granting the motion to disqualify.
Takeaways: The In re Estate of Goldberg case provides a reminder of the importance of clarity regarding the scope of the representation and the client’s identity. To minimize the risk of ethical or malpractice complaints, attorneys should clearly specify the tasks that the attorney will and will not undertake and the party they represent in a clear and comprehensive engagement letter signed by the attorney and client before the commencement of the attorney-client relationship.
Elder Law and Special Needs Law
New SECURE Final RMD Regulations Eliminate Type 1 AMBTs
Grand South Point, LLC v. Bassett, CV-23-0159, 2024 WL 3056050 (N.Y. App. Div. June 20, 2024)
The 2019 SECURE Act replaced the lifetime stretch distribution scheme for inherited retirement accounts with a ten-year payout rule for most nonspouse beneficiaries following the plan participant’s death. However, under the SECURE Act, preservation of the stretch distribution is possible for eligible designated beneficiaries, including certain special needs beneficiaries. An AMBT is a trust for multiple beneficiaries, one or more of whom is disabled or chronically ill, as defined by the SECURE Act. Under the 2022 proposed regulations, AMBTs could be either type I or type II.
- In a type I AMBT, immediately upon the account owner’s death, the trust divides into separate trusts for each beneficiary.
- Type II AMBTs remain a single trust following the death of the account owner, but none of the other beneficiaries can have any right to the employee’s interest in the retirement account until after the death of the final disabled or chronically ill beneficiary.
As mentioned, the final regulations make changes related to AMBTs that are particularly interesting to attorneys who assist clients with special needs planning. Under the final regulations, trusts that will be divided into separate trusts at the retirement account owner’s death are allowed individual RMD treatment based on status as a designated beneficiary or eligible designated beneficiary, thereby eliminating type I AMBTs. In addition, when an AMBT provides that other trust beneficiaries cannot receive any distributions from the trust until the death of the disabled or chronically ill beneficiary, including a termination provision will not cause the trust to not be treated as an AMBT. If terminated, the trust will be treated as being modified to add the other beneficiaries as of the date the termination occurred.
The final regulations state that, in situations involving employer-sponsored retirement plans, for an individual to be considered disabled or chronically ill for purposes of being an eligible designated beneficiary, documentation of their condition must be provided to the retirement plan. In general, an adult individual is disabled if they are unable to engage in any substantial gainful activity. However, because that standard is difficult to apply for young people under age 18 at the date of the account owner’s death, a different standard is applied to them: the beneficiary must have a medically determinable physical or mental impairment that results in marked and severe functional limitations and can be expected to result in death or for a long-continued and indefinite duration. The final regulations also provide a safe harbor for the determination of whether a beneficiary is disabled: if, as of the date of the employee’s death, the Commissioner of Social Security has determined that the individual is disabled for the purposes of Social Security benefits, then that individual will be deemed to be disabled.
However, chronically ill individuals must provide certification of their illness from a licensed healthcare practitioner that, as of the date of the certification, the individual is unable to perform, without assistance, at least two activities of daily living and that the period of that inability is reasonably expected to be lengthy.
Note that the final regulations impose no corresponding requirement to provide documentation of an eligible designated beneficiary’s disability or chronic illness to the custodian of an inherited individual retirement account.
Takeaways: The changes to AMBTs in the final regulations are significant. Special needs practitioners should review their clients’ trusts to determine if amendments are necessary.
Join us August 21, 2024, at 1 p.m. (ET) for a complimentary webinar, SECURE RMD Final Regulations, presented by WealthCounsel’s Brian Albee, JD.
Business Law
New FAQs Clarify that Reporting Companies Formed during or after 2024 Must File Beneficial Ownership Information Report Even if Dissolved Before Report Is Due
On July 8, 2024, the US Department of the Treasury added to its Beneficial Ownership Information: Frequently Asked Questions (FAQs) regarding the obligations of reporting companies formed in 2024 and 2025 or later. As set forth in the Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, reporting companies created or registered on or after January 1, 2024, must file their initial beneficial ownership information report with FinCEN within 90 days of their creation or registration. Those created or registered on or after January 1, 2025, must file their BOI reports within 30 days. The FAQs clarify that reporting companies that cease to exist as legal entities—defined as those that have wound up their affairs, ceased conducting business, and entirely completed the process of formally and irrevocably dissolving—before their initial BOI report is due are still obligated to submit their BOI report. However, if the reporting company files a BOI report and then ceases to exist, they are not required to file an additional report with FinCEN notifying it that the reporting company has ceased to exist. In addition, a company is not required to file a BOI report if it ceased to exist—that is, entirely completed the process of formally and irrevocably dissolving—prior to January 1, 2024.
Takeaways: The FAQs state that the law of the jurisdiction in which the company is formed should be consulted for specifics on how to determine when a company ceases to exist as a legal entity, although they note that, in general, companies that are administratively dissolved or suspended for failing to pay a filing fee or similar requirements do not cease to exist as a legal entity unless the dissolution or suspension is made permanent.
Updates on Federal and State Noncompete Clause Restrictions
Federal Trade Commission (FTC) final Non-Compete Clause Rule: On April 23, 2024, the FTC issued its final Non-Compete Clause Rule, providing that it is a violation of section 5 of the FTC Act, 15 U.S.C. § 45, which prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce,” for persons to enter into noncompete clauses with workers after the September 4, 2024, effective date of the final rule. On July 23, 2024, the United States District Court for the Eastern District of Pennsylvania denied the plaintiffs’ motion for injunctive relief and a declaratory judgment, holding the final rule unlawful and setting it aside in ATS Tree Services, LLC v. FTC. In contrast, on July 3, 2024, in Ryan LLC v. Federal Trade Commission, the US District Court for the Northern District of Texas enjoined the enforcement of the final rule against the named plaintiffs. Ryan LLC filed a motion seeking a nationwide injunction against enforcing the final rule, and a decision is expected by August 30, 2024.
Pennsylvania Limits Noncompete Covenants for Health Care Providers. On July 17, 2024, Pennsylvania Governor Josh Shapiro signed the Fair Contracting for Health Care Practitioners Act, which, in most circumstances, bars noncompete covenants of more than one year entered into between a health care practitioner—a medical doctor, a doctor of osteopathy, a certified registered nurse anesthetist, a certified nurse practitioner, and a physician assistant—and an employer that impedes the ability of the practitioner to continue to treat patients or accept new patients. There are limited exceptions involving the sale of a medical practice and the recovery of certain reasonable expenses by the employer. The new law takes effect January 1, 2025.
Rhode Island Bill Banning Noncompete and Nonsolicitation Agreements with Employees Vetoed. On June 26, 2024, Rhode Island Governor Daniel McKee vetoed the Rhode Island Noncompetition Agreement Act. Governor McKee objected to the bill because it was even broader than the FTC Non-Compete Clause Rule: it would have invalidated existing noncompete agreements between employers and senior executives, which the governor believed could have detrimental consequences for businesses.
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 who a competitor later employs could cause harm to the business by disclosing confidential or proprietary information to the competitor.
California Supreme Court Upholds Proposition 22 Allowing App-Based Drivers to be Independent Contractors
Castellanos v. State of California, S279622, 2024 WL 3530208 (Cal. July 25, 2024)
In 2020, California voters enacted Proposition 22, the Protect App-Based Drivers and Services Act (Cal. Bus. & Prof. Code §§ 7448–7467), which provides that drivers for app-based transportation or delivery companies are independent contractors rather than employees if certain criteria are met. It also provides them with new benefits, including healthcare subsidies, a minimum earnings guarantee, compensation for vehicle expenses, occupational accident insurance, and protection against discrimination and harassment. Proposition 22 was passed in response to the 2019 enactment of Assembly Bill No. 5, which codified the stringent ABC test for determining whether a worker is an independent contractor, and the subsequent ruling by the California Court of Appeal in People v. Uber Technologies, Inc., 270 Cal. Rptr. 3d 290 (Cal. Ct. App. 2020) that Uber and Lyft drivers must be treated as employees under Assembly Bill No. 5.
Several individuals and unions filed suit, asserting that Proposition 22, specifically section 7451, conflicts with article XIV, section 4 of the California Constitution, which provides California’s legislature “with plenary power, unlimited by any provision of this Constitution, to create, and enforce a complete system of workers’ compensation, by appropriate legislation.” Although the trial court agreed, holding that section 7451 was invalid, the California Court of Appeal reversed.
On appeal, the California Supreme Court addressed whether the legislature’s plenary power to enact legislation on workers’ compensation was exclusive or if the voters were also permitted to legislate on workers’ compensation by enacting section 7451. The court rejected the plaintiffs’ contention that an initiative statute such as section 7451 was prohibited under the state constitution because it removed entire classes of workers from the workers’ compensation system enacted by the legislature, limiting its plenary power. In a lengthy analysis, the court relied on its own precedent in Independent Energy Producers Association v. McPherson, 44 Cal. Rptr. 3d 644 (Cal. 2006), in which it had rejected the argument that similar language in another section of the California Constitution conferred exclusive power on the legislature to take a specified action. The court held that because the power of the initiative includes “the power to abrogate existing laws,” it would unduly restrict the initiative power to preclude the electorate from undoing any action taken by the legislature pursuant to article XIV, section 4. Castellanos v. State of California, S279622, 2024 WL 3530208, at *8 (Cal. July 25, 2024). In addition, it concluded that section 7451 does not restrict the legislature’s authority to enact workers’ compensation legislation or conflict with article XIV, section 4 of the California Constitution.
Takeaways: The California Supreme Court’s ruling means that app-based drivers for rideshare and delivery companies will retain their status as independent contractors if they determine their own work schedules and hours, are not prohibited from working for multiple ride-share or delivery companies or in any other lawful occupation or business, and are permitted to choose whether to accept delivery requests. Proposition 22 also provides benefits that independent contractors typically do not receive, including minimum pay, a healthcare subsidy for drivers who work a certain number of hours, occupational accident insurance, and auto insurance.
Important Related Legal Developments
US Supreme Court Overrules Chevron USA, Inc. v. Natural Resources Defense Council, Inc.
Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (June 28, 2024)
On June 28, 2024, the US Supreme Court overruled Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), in which it had required courts to defer to the interpretations of federal agencies if a statutory provision they administer is ambiguous regarding a specific issue and if the agency’s interpretation was a permissible construction, even if the court would have interpreted it differently. The court ruled that under the Administrative Procedure Act (APA), courts may not defer to an agency’s interpretation of the law. Rather, the APA “codifies for agency cases the unremarkable, yet elemental proposition reflected by judicial practice dating back to Marbury: that courts decide legal questions by applying their own judgment.” Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2247 (June 28, 2024).
Takeaways: The impact of Loper Bright on regulations that affect estate planning, elder law, and business planning remains to be seen. It could impact tax regulations, recently issued regulations implementing the Corporate Transparency Act, and the FTC Non-Compete Clause Rule (which takes effect September 4, 2024), in the absence of court action enjoining its enforcement. WealthCounsel will monitor developments and provide relevant updates as they arise.
