Current Developments in Estate Planning and Business Law: February 2022

Feb 11, 2022 10:00:00 AM


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From new Internal Revenue Service (IRS) life expectancy tables for required minimum distributions to lowered reporting thresholds for third-party payment networks, 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.

IRS’s New Life Expectancy Tables for Required Minimum Distributions Now Effective

Treas. Reg. § 1.401(a)(9)-9, Updated Life Expectancy and Distribution Period Tables Used for Purposes of Determining Minimum Required Distributions (Nov. 12, 2020); I.R.S. Notice 2022-06 (Jan. 18, 2022)

As directed by President Trump’s 2018 Executive Order 13847, the Department of the Treasury released final regulations in 2020 updating the life expectancy and distribution period tables for individual retirement accounts and qualified plans for the first time in two decades to reflect longer life expectancies. The regulations became effective January 1, 2022. The tables allow retirees to take smaller required minimum distributions (RMDs), retaining funds in their retirement accounts for a longer period. 

The regulations include the following example: “a 72-year-old IRA owner who applied the Uniform Lifetime Table under formerly applicable § 1.401(a)(9)-9 to calculate RMDs used a life expectancy of 25.6 years. Applying the Uniform Lifetime Table set forth in these regulations, a 72-year-old IRA owner will use a life expectancy of 27.4 years to calculate RMDs.” 

In addition, on January 18, 2022, the IRS issued Notice 2022-6 (superseding and replacing Revenue Ruling 2002-62), updating its guidance and setting forth a new Uniform Lifetime Table for individuals under age 72 who take a series of substantially equal periodic payments (SOSEPP) not subject to the 10 percent penalty typically applicable to distributions made before age 59½. The Uniform Lifetime Table applies to any series of payments commencing on or after January 1, 2023, and may be used for any series of payments commencing in 2022. In addition, for SOSEPP distributions beginning in a year prior to 2023 using the RMD method that are calculated by substituting the Single Life Table, Joint and Last Survivor Table, or Uniform Lifetime Tables set forth in Notice 2022-6 for the corresponding table in Revenue Ruling 2022-62, the substitution will not be treated as a modification that would result in a 10 percent penalty.

Takeaways: The updated tables will result in lower required minimum distributions for retired people, individuals taking SOSEPP during their lifetimes, and some beneficiaries after a retiree’s death. This is generally beneficial for retirees: they can still take a higher distribution if necessary, but otherwise can extend the time during which the funds in their retirement account can grow tax-free. Surviving spouses and eligible designated beneficiaries who are still entitled to stretch distributions over their life expectancies post-SECURE Act will also generally benefit from lower income taxes. 

IRS Properly Levied Funds Held by Decedent in Usufruct Under Louisiana Law; Children Were Unsecured Creditors, Not Owners

Goodrich v. United States, No. 20-30422, 2022 WL 243907 (5th Cir. Jan. 5, 2022)

Louisiana residents Henry and Tonia Goodrich owned community property, including shares of stock and stock options in Goodrich Petroleum Corporation. Upon her death in 2006, Tonia left interests in some of the community property, including the Goodrich securities, to their three children subject to a usufruct (a civil law term describing the right of one individual to use and enjoy the property of another for a period of time, often the individual’s lifetime) in favor of Henry. Henry sold $857,914 of the Goodrich securities before his death in 2014, half of which belonged to him outright and half of which were attributable to the children’s naked ownership (similar to a remainder interest) subject to Henry’s usufruct.

At the time of Henry’s death, he owed $38,029 in assessed income tax for 2014, $312,078 for 2013, and $214,806 for 2012. A month after Henry’s death, his son and executor, Gil, opened a succession checking account through which all estate funds and expenses passed. In April 2017, the IRS placed a levy on the checking account to collect the unpaid taxes. The bank remitted the remaining balance of $239,927 to the IRS in May 2017, and the IRS applied it to Henry’s tax liability for 2012, leaving an unpaid balance of $471,818 for the 2013 and 2014 tax years.

Henry’s children filed suit claiming that the IRS had wrongfully levied the funds under Internal Revenue Code (I.R.C.) § 7426(a)(1) (authorizing a civil action against the United States for wrongful levy) because they were the owners of nearly $500,000 in liquidated Goodrich securities, i.e., Henry’s half of the community property that he shared with Tonia, subject to the children’s interest. The Fifth Circuit Court of Appeals noted that the dispositive issue was whether the children had a primary interest in the securities as owners or a secondary interest in them as creditors. Because state law controls in determining the nature of the legal interest, the court looked to Louisiana law. Relying on In re Succession of Catching, 35 So. 3d 449 (La. App. 2nd Cir. 2010), the court determined that Henry had a consumable property usufruct and thus had an ownership interest in the securities. Henry’s children had a claim against Henry’s estate as unsecured creditors and did not immediately become owners of the funds at Henry’s death. The IRS’s levy was not wrongful because it did not seize funds owned by the children, and its claim prevailed because it had priority over other creditors under I.R.C. § 6323.

Takeaways: Louisiana usufruct law distinguishes between consumable property such as money and nonconsumable property such as real estate. Consumable property subject to a usufruct may be sold by the usufructuary, who is considered an owner of the property; thus, it will be subject to a levy by the IRS to collect the usufructuary’s unpaid taxes. In contrast, the naked owners receive an immediate ownership interest in nonconsumable property subject to a usufruct. As a result, the property may be protected against a levy by the IRS based on liens arising after the naked owners obtained their ownership interest. When advising clients in this situation, estate planners should consider the vulnerability of the naked owners’ consumable interests in assets to IRS claims for decedents’ unpaid taxes.

Provisions in Will in Favor of Stepchild Automatically Revoked Under Michigan Law

In re Joseph & Sally Grablick Trust, No. 353951, 2021 WL 5976582 (Mich. Ct. App. Dec. 16, 2021)

Joseph Grablick executed a will on September 28, 2005, identifying Sally as his spouse and his living children as “Katelyn M. Wrecker, who is my step-child.” The will directed that his assets were left to “The Joseph & Sally Grablick Family Trust,” a joint revocable trust created by Joseph and Sally the same day as the will. The trust document also identified Katelyn as the only living child of the settlors and as the residuary beneficiary of the trust. A default provision for distribution named Dorothy Grablick, Joseph’s mother, and Judith Almasy, his sister.

Joseph and Sally divorced on April 3, 2019, and Joseph died on July 2, 2019. Katelyn was appointed personal representative of Joseph’s estate and filed a petition in the trust case and for probate in the will case. She also sought an order determining heirs. The court found that Katelyn was not a beneficiary of Joseph’s will or of the trust because the dispositions to her had been revoked under Mich. Comp. Law § 700.2807(1)(a)(i) when Joseph and Sally divorced. The court found that the Michigan legislature’s assumption in the Revised Probate Code (now repealed) and in the subsequently enacted Estates and Protected Individuals Code (EPIC)—applicable to Joseph’s will—was that when a testator provides for a spouse in a will but the couple later divorces, the testator would not want the former spouse to receive any portion of the testator’s estate even if the testator did not revise the will. Thus, the former spouse would not receive a distribution from the testator’s estate unless there was an expression in the will to the contrary. EPIC expanded that assumption to prevent dispositions to the former spouse’s relatives in the absence of an express provision in the will to the contrary. As a result, the disposition to Katelyn was deemed revoked due to Joseph and Sally’s divorce. In addition, Katelyn was not related to Joseph by affinity under Mich. Comp. Law § 2806(e) because she and Joseph were no longer related by a marriage after Joseph and Sally divorced, despite their close father-daughter relationship.

Takeaways: It is important to be aware of the effect of a divorce on a client’s will. In many states, provisions in a will in favor of a divorced spouse are automatically revoked unless the will clearly expresses an intent for the divorced spouse to remain a beneficiary. Some states, like Michigan, go even further, automatically revoking dispositions to any of the divorced spouse’s relatives in the absence of an express intention to the contrary. Provisions naming a divorced spouse as the executor of the will or trustee of the decedent’s trust are also often automatically revoked under state law. Divorcing clients should be counseled on revising their estate planning documents to avoid unfortunate outcomes that do not reflect their intent.

Claims for Tortious Interference with an Expectancy and Unjust Enrichment Not Subject to One-Year Limitations Period Applicable to Trust Contests

Sacks v. Dissinger, 178 N.E.3d 388 (Mass. 2021)

Aaron Sacks established the Aaron H. Sacks Revocable Trust (Trust) in August 2011. The Trust document provided that upon the death of Aaron and his wife, Sheila, their five children would each receive one-fifth of the trust’s assets, and if any of their children predeceased them, the predeceased child’s share would go to that child’s heirs. Their son Jeffrey died in June 2012 after declining further treatment for a brain tumor he had been battling for nearly two years. Jeffrey’s sisters Donna and Joan and his son, Matthew, supported his decision, but his mother, Sheila, who was suffering from dementia and the effects of a stroke, blamed them for supporting Jeffrey’s decision. Nancy, another of Jeffrey’s sisters, encouraged Sheila in this belief. Sheila then persuaded Aaron to remove Jeffrey’s children, Matthew and Rebecca, as beneficiaries of the trust, and he amended the trust document to provide that the trust property would be divided only between his four surviving children. Aaron died in August 2017, at which point the trust became irrevocable. Sheila died in July 2019, at which point Jeffrey’s children learned that they had been removed as beneficiaries of the trust. In November 2019, the children brought an action seeking rescission of the 2012 amendment, a claim of intentional interference with advantageous relations against Sheila’s estate and Nancy, and a claim of unjust enrichment against all of Jeffrey’s sisters. In each of the claims, the children alleged that Nancy and Sheila had exerted undue influence over Aaron.

The defendants filed a motion to dismiss, asserting that all three of the counts were time-barred under Massachusetts Uniform Trust Code § 604. Section 604 allows a judicial proceeding to contest a revocable trust within one year after the settlor’s death. The superior court granted the defendants’ motion, and the children appealed the intentional interference and unjust enrichment claims. The children voluntarily dismissed their claim for rescission. 

The Supreme Judicial Court of Massachusetts noted that a claim for rescission challenges the validity of a trust: because the relief sought would change or revoke the trust, a claim for rescission implies that the trust, as is, is not enforceable or valid.

The court also distinguished between a contest and a noncontest: 

We understand a trust contest … as an action where the underlying facts are assessed for their effect on all or part of a trust (e.g., invalidity), while a noncontest is an action where the underlying facts are assessed for their effect on a person (e.g., harm). The ultimate object of a contest is a determination of a trust’s validity, not the personal liability or even culpability of the settlors, beneficiaries, or trustees.

The court noted that the explanatory comments to the nearly identical section of the Uniform Trust Code explicitly excluded intentional interference with an expectancy from the purview of the statute. In addition, the court held that the children’s claim for intentional interference did not challenge the nature or validity of the trust, but rather, a determination of the harm they asserted was caused by Sheila and Nancy. It distinguished the case from the will context, in which no separate cause of action in tort based on a defendant’s undue influence could be asserted when there had been an adequate remedy during probate. In contrast to a will, which “must be declared valid before any transfers of property occur,” there is no affirmative ruling on the validity of a revocable trust in the absence of a trust contest. Rather, “[n]ot only are trusts not probated, but also would-be beneficiaries are far less likely to learn of their exclusion from a trust” than from a will. As a result, the children’s claim for intentional interference with an expectancy claim was not barred by the one-year limitation period set forth in section 604.

The court also determined that because the children’s claim for unjust enrichment is an equitable claim based on tortious conduct perpetrated by one person against another, the claim was not a trust contest that would be time-barred under section 604.

Takeaways: Attorneys should be alert for situations in which some trust beneficiaries appear to be influencing a grantor to make modifications that favor them and disfavor other beneficiaries. This case provides a sad reminder that making changes to estate plans amid emotional circumstances is often unadvisable, as it can lead not only to an expensive lawsuit, but also to damaged family relationships.

American Rescue Plan Act Lowers Reporting Threshold from $20,000 to $600 for Businesses and Individuals Using Third-Party Payment Networks

The American Rescue Plan Act of 2021 lowers the Form 1099-K (Payment Card and Third Party Network Transactions) reporting threshold from aggregate payments of $20,000 and 200 transactions to $600 in aggregate payments with no minimum number of transactions, effective January 1, 2022. As a result, websites such as PayPal, CashApp, and Venmo, used by many small businesses and individuals to sell goods or services, must report payments exceeding the $600 threshold to the IRS. Small businesses and individuals who use those applications for transactions with amounts exceeding $600 will receive the Form 1099-K and must report the income listed on it on their income tax return. This reporting requirement will inform the IRS about millions of transactions that previously went unreported.

Takeaways: Form 1099-K is an informational tax form and may include amounts that are not taxable, such as payments from family members or friends that are reimbursements or gifts. As a result, individuals and businesses should keep accurate records of personal and business transactions or consider using separate accounts. The IRS website addresses several frequently asked questions about payment card and third-party network transactions.

Nonlawyer-Owned Alternative Legal Services Provider Approved to Operate in Arizona 

ElevateNext, an alternative business structure, has been approved in Arizona to operate in tandem with an integrated law firm to assist clients with general corporate matters. In 2020, Arizona eliminated Model Rule of Professional Conduct 5.4, which prohibits nonlawyers from having an economic interest in a law firm or participating in attorney fee-sharing. Seventeen applications for alternative business structures have been approved. ElevateNext’s CEO asserted that the company is not competing with traditional law firms, but is aimed at aiding customers who have technology, consulting, and legal service needs.

Takeaways: Alternative business structures must be approved pursuant to Arizona R. Sup. Ct. 33.1, which states that they may not “employ any person to provide legal services in the State of Arizona unless the person is licensed to practice law or otherwise authorized to provide legal services under Rule 31.1 or 31.3.”

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