Current Developments in Estate Planning and Business Law: December 2020

Dec 11, 2020 10:00:00 AM

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From changes in the tax assessments of inherited property in California to new Paycheck Protection Program (PPP) guidance regarding the nondeductibility of expenses paid by PPP loans, 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.

Alabama Supreme Court Finds Clear and Convincing Evidence of Oral Trust

Ledbetter v. Ledbetter, 2020 WL 5814090 (Ala. Sup. Ct. Sept. 30, 2020)

Lois Ledbetter passed away on August 5, 2015, and was survived by three children: Russell, Laurie Ann, and Warren. In her will, Lois bequeathed her lake house and a $500,000 life insurance policy on her life to her son Russell. She expressly excluded Laurie Ann and Warren from the will. Laurie Ann and Warren unsuccessfully attempted to contest the will. During the will contest, they learned that the beneficiary of the life insurance policy was not their brother Russell individually, but was William R. Ledbetter, Trustee of The Lois Ann Ledbetter Family Irrevocable Trust (Trust) dated August 19, 1998. 

Russell claimed the life insurance proceeds and used them to pay estate and personal expenses, including the mortgage on the lake house. Laurie Ann and Warren filed suit against Russell asserting that Lois had created the trust for their benefit and that Russell had improperly used the funds. Although no signed trust document was located, they asserted an unsigned trust document naming Lois, Russell, Laurie Ann, and Warren was evidence of an enforceable oral trust. In a deposition, one of Lois’s attorneys testified that, although he could not recall specifically, it appeared that he had met with Lois and Russell to create an oral trust before obtaining a life insurance policy benefiting the trust. He typically referred clients to another attorney to memorialize the oral trust in a written trust instrument, and he testified that he would not have submitted the life insurance application in the absence of a valid oral trust.

The life insurance application, dated August 22, 1998, listed Lois as the insured and grantor and William R. Ledbetter, Trustee of the Lois Ann Ledbetter Family Irrevocable Trust dated August 19, 1998, as the sole owner and beneficiary of the insurance policy. The application, which was accompanied by a trust certification, was signed by Lois as the insured and by Russell as the trustee of the trust. The certification stated that the trust was created on August 19, 1998, and was in full force and effect at the time the insurance application was filed. Evidence showed that Russell had applied for a tax identification number for the trust and made at least one premium payment on the insurance policy.

Laurie Ann and Warren also submitted an unsigned trust document prepared by another attorney for Lois called the Lois Ann Ledbetter Family Irrevocable Insurance Trust Agreement. That document expressly stated that it reflected an oral agreement between the grantor and the trustee effective August 19, 1998. In addition to the unsigned trust document, the attorney’s handwritten notes specified that Warren and Laurie were to receive certain percentages of the “ILIT.” One of Lois’s friends also testified that Lois had stated that a life insurance policy was to be split equally between the three children.

Although the trial court granted summary judgment in favor of Russell, the Alabama Supreme Court reversed and remanded its decision on the basis that a fact-finder could reasonably have concluded that Laurie Ann and Warren had proven the creation and terms of an oral trust by clear and convincing evidence as required by the Alabama Uniform Trust Code.

Takeaways: Although some states, such as Alabama, allow oral trusts, some limit them to personal property and others require trusts to be in writing. The Ledbetter decision is a reminder for attorneys to follow up with clients to ensure that they sign well-drafted trust documents to eliminate ambiguity and avoid litigation among potential beneficiaries.

Proposition 19 Passed in California, Modifying Tax Assessments on Inherited Real Property

We covered this topic in another blog post. Click here to read it.

Colorado Supreme Court Holds That Personal Representative Is Only Entitled to Otherwise Privileged or Confidential Legal Files of the Decedent Necessary to Settle Estate

In re Estate of Rabin, 2020 WL 6387502 (Colo. Sup. Ct. Nov. 2, 2020)

Louis Rabin left his entire estate to his wife Claudine, whom he also named as his personal representative. Louis’s ex-wife, Suyue, made a claim against the estate based on promissory notes amounting to $200,000 that were payable to her upon Louis’ death. Although the notes had been executed during Louis’ marriage to Claudine, Claudine knew nothing about them until Suyue filed the claim. In an effort to get more information, Claudine asked Louis’ longtime attorney, Mark Freirich, for all of Louis’ legal files. Freirich refused on the basis that the files, amassed during his thirty years of representing Louis, were confidential and that he was prevented from disclosing them under Colorado Rule of Professional Conduct 1.6. Claudine then subpoenaed the files. 

Freirich initially sought to quash the subpoena on the basis that the production of the files would cause undue burden and expense and the attorney-client privilege had not been waived. After Claudine’s attorney clarified that they sought paperwork generated only during the timeframe in which the promissory notes were dated to understand the consideration for them, Freirich provided the documents in his possession pertaining to the notes, including copies of the promissory notes and his handwritten notes.

Nevertheless, Claudine persisted in seeking the production of the rest of the files on the basis that they were Louis’ property and that Colorado Revised Statutes section 15-12-709 (2020) granted her, as Louis’ personal representative, the right to take possession of his property. In addition, she asserted that Louis had waived his attorney-client privilege and right to confidentiality by naming her as his personal representative or that the attorney-client privilege belonged to his estate.

Although the trial court granted Freirich’s motion to quash, a division of the court of the appeals reversed the trial court’s order on the basis that the personal representative has a right to the client files held by a decedent’s attorney unless the decedent’s will provides otherwise. In addition, the court of appeals held that the personal representative becomes the holder of the attorney-client privilege, stepping into the shoes of the decedent, and thus disclosure of the client files does not violate the privilege. 

The Colorado Supreme Court granted Freirich’s petition for certiorari review. The supreme court reversed on the basis that clients have no property rights in the full set of legal files held by their attorney. Under Rule 1.16(d), which requires a lawyer to surrender papers and property to which the client is entitled, a client’s property is distinguishable from the client files that a lawyer usually maintains in the ordinary course of practice. Thus, the personal representative is not entitled under section 15-12-709 to take possession of the files except for those having intrinsic value or directly affecting valuable rights such as securities, negotiable instruments, deeds, and wills. Further, the supreme court held that the attorney-client privilege and the duty of confidentiality set forth in Rule 1.6 survive a client’s death, and thus, a decedent’s lawyer may not disclose a client’s files to the personal representative of the estate, except to the extent necessary to settle the decedent’s estate.

Takeaways: The Colorado Supreme Court’s decision clarifies that a personal representative does not step into the shoes of the decedent with regard to confidential client files maintained by the decedent’s attorney. Rather, only those files relevant to the settlement of the decedent’s estate may be disclosed.

Cook Children’s Medical Center Petitions U.S. Supreme Court for a Writ of Certiorari After Texas Advanced Directive Act Held Unconstitutional

T.L. v. Cook Children’s Medical Center, 607 S.W.3d 9 (Tex. Ct. App. July 24, 2020), review denied (Oct. 16, 2020), petition for cert. filed (U.S. Nov. 13, 2020)

T.L. was a minor child born prematurely in early 2019 with a congenital heart defect and a plethora of other serious medical conditions. Although her doctors initially hoped she might be able to improve enough to leave the hospital, they later informed her family that she was unlikely to live. In July 2019, her condition worsened, and frequent painful procedures were necessary to keep her alive. Her medical team ultimately determined that they had exhausted every viable surgical option and that her condition was terminal. Her mother did not believe that a cure was unavailable, and T.L.’s physicians eventually invoked the Texas Advanced Directive Act’s (Texas Health and Safety Code sections 166.001-166.209) procedures, which permits an internal review process in which the hospital’s ethics committee makes a decision regarding the appropriate course of action. Doctors and hospitals that comply with this process are immune from civil or criminal liability if they refuse to provide care. 

After Cook Children’s Medical Center was unable to find another hospital willing to treat T.L. in accordance with her mother’s wishes, T.L.’s mother obtained a temporary restraining order delaying the cessation of artificial life support. After a hearing, the trial court denied the mother’s request for a temporary injunction. The Texas Court of Appeals reversed, holding that the trial court had abused its discretion by denying the mother’s request for a temporary injunction on the basis that the hospital’s conduct constituted state action within the meaning of the Fourteenth Amendment of the U.S. Constitution and 42 U.S.C.A. section 1983, and that T.L.’s mother had been deprived of procedural due process. The court of appeals asserted that the Advanced Directive Act delegated to the hospital two traditional and exclusive functions of the state: the sovereign authority of the state to supervene the fundamental right of parents to make medical decisions for their child under the doctrine of parens patriae and the sovereign authority of the state to regulate what is or is not a lawful means or process of dying.

Cook Children’s Medical Center has now sought a writ of certiorari to the U.S. Supreme Court on the basis that clear and well settled law establishes that a statute immunizing certain acts does not transform private conduct by a private entity or actor into state action and that the question presented was exceptionally important, as the Texas Court of Appeals’ decision to strike down the Advanced Directive Act would place doctors and hospitals in the untenable position of being unable to refuse to provide treatment that they believe is ethically, morally, and medically wrong and of potentially facing conflicting directives from different family members, exposing them to litigation for medical malpractice.

Takeaways: Most states have statutory provisions (sometimes referred to as medical futility statutes) that allow physicians or other healthcare providers to refuse to comply with directions for treatment that contravene their professional or ethical judgment. Some, such as the Texas Advanced Directive Act, do not require the patient’s (or guardian’s) consent, though others are not clear about whether consent is required. Several states have enacted statutes (sometimes called nondiscrimination laws) that prohibit healthcare providers from refusing to provide life-sustaining medical treatment without consent. Stay tuned for the U.S. Supreme Court’s decision about whether it will hear the case.

California Voters Approve New California Privacy Rights Act

California Proposition 24, The California Privacy Rights Act of 2020. Initiative Statute. (2020)

Proposition 24, a ballot measure creating the California Privacy Rights Act (CPRA), was approved by California voters on November 3, 2020, and will become effective on January 1, 2023. It extends the business-to-business and employment information exemptions that exist under current law to January 1, 2023. The CPRA modifies the California Consumer Privacy Act of 2018, California’s current privacy law, in several ways.

The CPRA modifies the definition of a covered business: It applies to businesses that buy, sell, or share the private information of 100,000 or more consumers or households, rather than those that buy, sell, receive, or share, for a commercial purpose, the private information of 50,000 or more consumers, households, or devices as specified by current law. Thus, it reduces the impact of the law on small and midsize businesses. However, it expands other privacy requirements, as it applies to businesses that generate most of their revenue from sharing personal information in addition to those that sell it.

In addition, the CPRA imposes new disclosure and limitation requirements for “sensitive personal information,” which is a newly regulated category of data. Consumers have new rights under the law, including the right to correction, to opt out of automated decision-making technology, to access information about automated decision making, and to restrict sensitive personal information. Certain pre-existing rights, such as the right to delete, the right to know, the right to opt out, and opt-in rights for minors, have been expanded.

The CPRA regulates digital advertising by extending an opt-out right to personal information used for cross-context behavioral advertising (i.e., the “targeting of advertising to a consumer based on the consumer’s personal information obtained from the consumer’s activity across businesses, distinctly-branded websites, applications, or services other than the business, distinctly-branded website, application, or service with which the consumer intentionally interacts”), regardless of whether money or other valuable consideration is exchanged for the personal information. 

The CPRA also establishes a new regulatory agency, the California Privacy Protection Agency, which will have investigative, enforcement, and rulemaking powers. The CPRA eliminates the thirty-day cure period provided under the current privacy law and triples the maximum penalties for violations involving minors to $7,500.

Takeaways: Businesses that are covered by the CPRA will not only need to make sure they comply with its disclosure and limitation requirements, but must also require service providers and contractors to maintain the same level of protection. In addition, they must conduct privacy impact assessments and cybersecurity audits if their processing of consumers’ personal information presents a significant risk to consumers’ privacy or security. Businesses should begin making any adjustments necessary to ensure they are in compliance with the new law. Some parts of the CPRA are similar to the European General Data Protection Act (GDPR), so businesses that are already in compliance with the GDPR may require fewer modifications in their procedures to comply with the CPRA. However, they should not assume that the steps they have already taken are sufficient, as the two laws are not identical.

IRS Reiterates Nondeductibility of PPP-Funded Expenses and Provides Safe Harbor

Rev. Ruling 2020-27, Rev. Proc. 2020-51

IRS Notice 2020-32, issued in May 2020, stated that “no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the eligible expense results in forgiveness of the covered loan.” On November 18, 2020, the Internal Revenue Service (IRS) issued Revenue Ruling 2020-27 and Revenue Procedure 2020-51 to elucidate the rules regarding the deductibility of expenses paid by PPP funds.

Revenue Ruling 2020-27 provides guidance for borrowers who pay otherwise deductible expenses with PPP funds in 2020 but whose PPP loan is not forgiven until 2021. Two examples are given. In the first example, a taxpayer applies for forgiveness in November 2020, knowing the amount of expenses that qualifies for forgiveness, but the lender has not notified the taxpayer regarding whether the loan will be forgiven. The IRS states that the taxpayer has a reasonable expectation of reimbursement (i.e., through loan forgiveness) at the end of 2020 and thus the expenses are not deductible. In the second example, the taxpayer knows the amount of expenses that qualifies for forgiveness but does not apply for forgiveness before the end of 2020. Again, the IRS takes the position that the expenses are not deductible because the taxpayer has a reasonable expectation of reimbursement.

Revenue Procedure 2020-51 provides a safe harbor allowing a taxpayer to claim a deduction in the 2020 tax year for expenses that are otherwise deductible if the taxpayer received a PPP loan that the taxpayer reasonably expects to be forgiven after the taxpayer’s 2020 tax year, but forgiveness is fully or partially denied in a later year or the taxpayer does not request forgiveness. Under those circumstances, the taxpayer can deduct some or all of the expenses on a timely filed original tax or information return for the 2020 tax year, an amended 2020 return of administrative adjustment request, or a timely filed original tax or information return for the subsequent tax year. Taxpayers must file a statement providing information specified in Revenue Procedure 2020-51.

Takeaways: Some commentators have criticized the IRS’s position in Revenue Ruling 2020-27 on the basis that because the expenses are not deductible, a PPP borrower’s net business income is effectively increased despite the fact that Coronavirus Aid, Relief, and Economic Security (CARES) Act section 1106(i) explicitly states that loan forgiveness is excluded from gross income. Because a revenue ruling is not binding, some taxpayers may choose to adopt a position contrary to it. If so, they should consider filing IRS Form 8275 to disclose their position.


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