Current Developments in Estate Planning and Business Law: August 2022

From the Internal Revenue Service’s extension of time to use the simplified method for electing portability to the enforceability of modifications to click-wrap agreements, we have recently seen significant developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning and business law practice.

Internal Revenue Service Extends Window to Use Simplified Method for Portability Election to Five Years

I.R.S. Rev. Proc. 2022-32, 2022-30 I.R.B. 101

The Internal Revenue Service (IRS) recently issued Revenue Procedure 2022-32, which became effective July 8, 2022, and superseded Revenue Procedure 2017-34. Revenue Procedure 2022-32 extends the time for estates that are not required to file an estate tax return under Internal Revenue Code (I.R.C.) § 6018(a) to make a portability election under I.R.C. § 2010(c)(5)(A) from the second to the fifth anniversary of the decedent’s date of death and allows a simplified method for obtaining the extension.

Takeaways: In the absence of the simplified procedure, an executor was required to seek relief under C.F.R. § 301.9100-3 (so-called 9100 relief) by requesting a private letter ruling from the IRS, which involved substantial delay and user fees. Using the simplified method, an executor who wants to elect portability and has not yet filed an estate tax return—and was not required to do so under I.R.C. § 6018(a)—only needs to file a “complete and properly prepared” estate tax return (Form 706) that states at the top that it is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” Under Revenue Procedure 2022-32, this simplified procedure may be used to elect portability on or before the fifth anniversary of the decedent’s date of death, a substantial extension of time beyond the two-year window provided by Revenue Procedure 2017-34. Those who miss the five-year deadline may still seek 9100 relief by requesting a private letter ruling. Click here to read more.

Internal Revenue Service Releases Proposed Regulations on the Deductibility of Interest Expenses and Present Value Concepts

Guidance Under Section 2053 Regarding Deduction for Interest Expense and Amounts Paid Under a Personal Guarantee, Certain Substantiation Requirements, and Applicability of Present Value Concepts, 26 C.F.R. 20, 87 Fed. Reg. 38331 (June 28, 2022)

The IRS recently issued proposed regulations that would amend existing regulations issued under I.R.C. § 2053 (expenses, indebtedness, and taxes). 

Deductibility of Interest Expense

The proposed regulations address the deductibility of interest expenses accruing on tax and penalties owed by an estate and on certain loan obligations incurred by an estate. 

Interest expense on tax and penalties. Although I.R.C.§ 2053(c)(1)(D) prohibits a deduction for section 6166 interest (extension of time for payment of estate tax where estate consists largely of interest in closely held business), the prohibition does not apply to non-section 6166 interest. The proposed regulations 

• reiterate that section 6166 interest is not a deductible administration expense under I.R.C. § 2053;
• provide that non-section 6166 interest that accrued on or after the decedent’s date of death on unpaid tax or penalties is deductible to the extent permitted by Treas. Reg. §§ 20.2053–1 and 20.2053–3(a);
• provide that non-section 6166 interest on estate tax deferred under section 6161 or section 6163 is actually and necessarily incurred in the administration of the estate because the grant of the extension was based on a demonstrated need to defer payment; and
• provide that, in general, non-section 6166 interest accruing post death on any unpaid tax or penalties in connection with an underpayment of tax or a deficiency is actually and necessarily incurred in the administration of the estate.

However, the proposed regulations also provide that, to the extent that non-section 6166 interest is attributable to the executor’s negligence, disregard of IRS regulations, or fraud with the intent to evade tax, it will not be considered actually and necessarily incurred in the administration of the estate and will not be deductible. 

Interest on loan obligations. The proposed regulations also provide that interest accruing on a loan obligation entered into by an estate to facilitate the payment of the estate’s taxes, other liabilities, and administration expenses is deductible only if

• the interest accrues pursuant to an instrument or contract that constitutes indebtedness under income tax regulations and general principles of tax law,
• both the interest expense and the related loan are bona fide in nature under Treas. Reg. § 20.2053–1(b)(2), and
• the loan on which the interest accrues and its terms are actually and necessarily incurred in the administration of the estate and are essential to its proper settlement under Treas. Reg.§ 20.2053–3(a).

The proposed regulations recognize that some estates face genuine liquidity issues and that loans may be the best way to satisfy their liabilities under those circumstances. However, the proposed regulations seek to prevent estates from intentionally creating illiquidity and then entering into loan agreements with related parties that do not permit principal and interest to be paid prior to the maturity date of the loan. Under those circumstances, although the loan may be bona fide, it would not be considered “actually and necessarily incurred in the administration of the estate” and thus the interest expense would not be deductible.

The proposed regulations provide a nonexclusive list of factors to determine whether the loan and its terms

• are reasonable and comparable to an arm’s-length loan,
• correspond to the estate’s ability to satisfy the loan, and
• are entered into with a lender that is not a beneficiary (or an entity controlled by the beneficiary) of the estate when there is no viable alternative to obtain the funds to satisfy the estate’s liabilities.

These factors will assist executors in determining whether the interest expense complies with the requirements of Treas. Reg. §§ 20.2053–1(b)(2) and 20.2053–3(a). 

Present Value Principles

The proposed regulations also address the application of present value principles to an estate’s deductions of certain expenses and claims. The preamble explains that “present value” is an accounting principle that recognizes the time value of money by taking into account that the longer a payor can defer payment, the more income the payor is able to earn on the amount of the deferred payment. The proposed regulations, if implemented, would apply present value principles to limit the amount of the allowable deduction under I.R.C. § 2053 for payments that are made an extended time after the decedent’s death. Limiting the deduction to the discounted amount of payments made after an extended time “will more accurately reflect the economic realities of the transaction.” 

In the preamble to the proposed regulations, the IRS recognizes that many estates pay all or most of their ordinary estate administration expenses during the three-year period after the date of the decedent’s death. Thus, the proposed regulations provide for a three-year “grace period” after the decedent’s death in which present value principles are not required to be applied in determining the amount deductible under section 2053. However, the proposed regulations would require the calculation of the present value amount of a deductible claim or expense made after the third anniversary of the decedent’s death. The regulations provide a formula for calculating the present value of those amounts and require the estate to file a supporting statement with Form 706 showing the calculations used in determining present value.

The proposed regulations also provide guidance on substantiation requirements for valuations of certain deductible claims against an estate and on the deductibility of amounts paid under a personal guarantee.

Takeaways: Electronic or written comments must be received by September 26, 2022, and the public hearing will be held on October 12, 2022. The regulations, if adopted, will apply to the estate of each decedent dying on or after the date of the publication of the Treasury decision adopting them as final regulations.

Uniform Electronic Estate Planning Documents Act Approved by Uniform Law Commission

On July 13, 2022, the Uniform Law Commission approved the Electronic Estate Planning Documents Act (Act) and recommended that all states enact it. The Act, which provides for the enforceability of electronic documents and electronic signatures of those documents, applies to electronic nontestamentary estate planning documents that are “not a will, or contained in a will,” including the following: 

• trusts
• powers of attorney
• advance directives
• nominations of guardians
• community property survivorship agreements
• disclaimers

In 2019, the Electronic Wills Act was approved by the Uniform Law Commission, and it has since been enacted in four states (Colorado, North Dakota, Utah, and Washington state) and the US Virgin Islands. Six additional states (Arizona, Florida, Illinois, Indiana, Maryland, Nevada) have passed their own e-wills statutes. These statutes establish the validity of electronic testamentary documents such as wills, codicils, and testamentary trusts and electronic signatures of those documents. Some of the statutes also permit a testator’s electronic signature to be remotely witnessed or notarized if certain requirements are met.

Takeaways: Although the COVID-19 pandemic led to some temporary emergency measures that allowed estate planning documents to be signed electronically, many of those measures have expired. It remains to be seen if the pandemic will have a permanent impact and state legislatures will be more inclined to enact the Electronic Estate Planning Documents Act, Electronic Wills Act, or similar statutes. 

Investment Company Not Liable to Principal for Breaches of Contract or Fiduciary Duties Where Its Actions Were Authorized by Agent Under Power of Attorney

Allen v. Brown Advisory, LLC, 2022 WL 2825840 (7th Cir. July 20, 2022)

Joseph Allen granted his daughter, Elizabeth, a broad financial power of attorney to act as his agent regarding financial matters, including his investment accounts held by Brown Advisory, LLC (Brown). The power of attorney provided that “any third party who receives a copy of this document may act under it” and stated that Joseph would indemnify third parties for claims that arise “because of reliance on this power of attorney.” 

Five years later, when he was in better health, Joseph revoked the power of attorney and sued Brown, alleging breach of contract and breach of fiduciary duty. Joseph alleged that Elizabeth had directed withdrawals that were not to his benefit and that had resulted in tax penalties of $90,000 per year for at least two years. Although he amended his complaint to add Elizabeth as a defendant, he later settled his claims against her, leaving Brown as the sole defendant in the case. 

Brown filed a motion to dismiss for failure to state a claim on the basis that it could not be liable for breach of contract because its actions were directed by Elizabeth and were undertaken in reliance upon the power of attorney. In addition, Brown asserted that under Maryland law, there is no independent cause of action for breach of fiduciary duty when a breach of contract claim is available to redress the same conduct. Although Brown later provided the court with notice that the Maryland Court of Appeals had recently issued a decision recognizing breach of fiduciary duty as a standalone cause of action, Joseph did not amend his original arguments. The district court granted Brown’s motion based on Brown’s original arguments.

The Seventh Circuit Court of Appeals affirmed. Although Joseph asserted that Brown had a contractual duty to supervise and direct investments in his accounts, Brown did not have a duty to restrict withdrawals made by Joseph or his agent, Elizabeth. To the contrary, Brown could not be held liable for breach of contract for an action specifically authorized by a power of attorney. The power of attorney at issue granted Elizabeth the same authority to make withdrawals that Joseph himself had. Thus, the breach of contract claim was properly dismissed.

Although it had not been addressed by the lower court, the Seventh Circuit Court of Appeals acknowledged the Maryland Court of Appeals’ decision in Plank v. Cherneski, 231 A.3d 436 (Md. Ct. App. 2020), which clarified the law by explicitly recognizing a cause of action for breach of fiduciary duty even if another cause of action such as breach of contract was available to redress the same alleged wrongdoing. Nevertheless, the court found that Joseph’s assertion that Brown should not have allowed Elizabeth to make the withdrawals from Joseph’s account did not state a claim for breach of fiduciary duty, as Brown had no fiduciary obligation to refuse to carry out transactions directed by Elizabeth and authorized by the power of attorney. Consequently, Joseph’s claim for breach of fiduciary duty was properly dismissed.

Takeaways: The unfortunate situation in Allen v. Brown Advisory, LLC provides a good reminder of the importance of advising clients to appoint agents under their powers of attorney who are trustworthy and well-qualified. A family member should not be chosen as an agent merely because of their genetic relationship to the client, but instead, because they are the most trustworthy and qualified choice to act as the client’s agent.

Modification of Click-Wrap Agreement Not Enforceable in the Absence of Notice and Unambiguous Manifestation of Assent by User

Sifuentes v. Dropbox, Inc., 2022 WL 2673080 (N.D. Cal. June 29, 2022)

David Sifuentes filed a lawsuit against Dropbox alleging that his Dropbox account had been compromised in 2012 because of a data breach and that Dropbox had failed to notify him of the breach. As a result, his personal information had been stolen and used by hackers, making his bank account vulnerable and requiring him to repeatedly change his login information for various accounts. 

Dropbox filed a motion to compel arbitration, asserting that David had assented to its terms of service (TOS) in December 2011 that required arbitration by checking a box indicating his agreement before being allowed to create a Dropbox account. The 2011 TOS contained a provision stating that Dropbox could “revise these Terms from time to time” and that continuing to use Dropbox constituted assent to any modified terms. Dropbox stated that it had modified its TOS twelve times since David created his account and that David had assented to the modifications by continuing to use Dropbox. Dropbox added the arbitration provision to its TOS in 2014 and notified users of the change in an email containing hyperlinks directing them to the new TOS and describing the changes, including the following:

We’re adding an arbitration section to our updated Terms of Service. Arbitration is a quick and efficient way to resolve disputes, and it provides an alternative to things like state or federal courts where the process could take months or even years. If you don’t want to agree to arbitration, you can easily opt-out via an online form, within 30-days of these Terms becoming effective. This form, and other details, are available on our blog.

The federal district court for the Northern District of California noted that the 2011 online contract containing the TOS was a “click-wrap” agreement, in which “a user is presented with the terms and conditions and must click on a button or box to indicate that he agrees before he may continue.” Although David did not dispute his assent to the 2011 TOS, David contended that the 2011 TOS did not include an arbitration clause, and that he “never read, clicked on[, or] accepted any updated terms and condition [sic] including any emails sent concerning any changes to the (TOS)’s and the arbitration agreement.” 

The court denied Dropbox’s motion to compel arbitration because an online agreement is only valid if the user had actual or constructive notice of its terms. If the user did not have actual notice, the user would be deemed to have constructive notice only if (1) the website provided reasonably conspicuous notice of the terms and (2) the user took action—for example, clicked a button—which unambiguously manifested assent to the terms. The court found that Dropbox had not shown that David had actual notice of its TOS. In addition, the court found that David had taken no action to unambiguously manifest his consent. Although Dropbox contended that it had sent an email explaining its addition of the arbitration clause, there was nothing in the record to show that David had opened the email or that, to continue using Dropbox, he had to take action to manifest his consent. His ongoing use of Dropbox was irrelevant in determining whether he had notice of the changes. As a result, the court found Dropbox had failed to show by a preponderance of the evidence that David had actual or constructive notice of the changes in the TOS, and thus, he had not manifested his assent to the changes. The court denied Dropbox’s motion to compel arbitration.

Takeaways: When a business revises its TOS, in addition to a click-wrap agreement on its website, the business should also include a notice on its website of revisions to the TOS and require additional affirmative action by users, such as clicking a button to assent to later changes before the user is permitted to continue using the online service. In the event of litigation, a court may refuse to enforce the modifications made in a TOS in the absence of notice and affirmative action demonstrating a user’s consent despite the user’s continued use of the website.

EEOC Revises COVID-19 Guidance to Allow Mandatory Testing for Employees Only if Consistent with Business Necessity

Under the Equal Employment Opportunity Commission’s (EEOC’s) previous COVID-19 guidance, the EEOC determined that all employers could require employees to undergo viral COVID-19 tests prior to entering their workplace because, due to the circumstances created by COVID-19, the Americans with Disabilities Act’s (ADA’s) standards for conducting medical examinations were met. However, under new guidance issued by the EEOC July 12, 2022, employers can require viral COVID-19 tests only if they conduct an evaluation of current circumstances and the circumstances show that they are necessary under the ADA’s “business necessity” test for medical examinations or inquiries for employees. The guidance sets forth several factors that employers should consider in determining whether “current pandemic circumstances and individual workplace circumstances justify viral screening of employees to prevent workplace transmission of COVID-19.”

The guidance further states that the use of antibody tests is not permitted to determine whether an employee may enter the workplace under the ADA’s business necessity test because, according to the Centers for Disease Control and Prevention (CDC), antibody tests may not show whether an employee is currently infected or immune to infection.

The guidance also states that an employer may withdraw a job offer made to an individual who has tested positive for COVID-19, has symptoms of COVID-19, or has recently been exposed to COVID-19 i

1. the job requires an immediate start date,
2. the individual should not be in proximity to others according to the CDC, and
3. the job requires proximity to others.

Takeaways: Employers should revise their policies to ensure employees are only required to undergo viral testing if the ADA’s business necessity test is met.