Current Developments in Estate Planning and Business Law: July 2021

Jul 9, 2021 10:00:00 AM


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From new state statutes designed to attract wealthy residents to the validity of employer vaccine mandates, 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 a few noteworthy developments and analyzed how they may impact your estate planning and business law practice.

States Vie to Attract the Wealthy

SB 1070, 2021 Leg., Reg. Sess. (Fla. 2021); H.R. 654, 87th Leg., Prior Sess. (Tex. 2021); SF 619, 89th Gen. Assemb., Reg. Sess. (Iowa 2021)

Florida Community Property Trust Act. On July 1, 2021, the Community Property Trust Act became effective in Florida, a separate property state, potentially providing substantial tax benefits to married couples. Under Internal Revenue Code § 1014(b)(6), when a spouse owning community property dies, the basis of both the deceased spouse’s and the surviving spouse’s 50 percent shares of the property is adjusted to the fair market value of the property at the date of the decedent spouse’s death. In contrast, under a separate property regime, only the half owned by the decedent spouse receives the stepped-up basis, meaning that if the asset is transferred during the living spouse’s lifetime, higher taxes will be owed. Some commentators have raised doubts about whether the Internal Revenue Service will allow a full step up in basis at the death of one spouse for assets held in a community property trust for individuals who do not live in a community property state.

A community property trust established under the new law would allow Florida residents and others, regardless of domicile, who establish Florida community property trusts to benefit from these tax advantages, as the property owned by the trust and the appreciation of and income from the property are deemed to be community property. Under the new statute, the community property trust must

  • expressly declare that the trust is a community property trust within the meaning of the statute,
  • have at least one trustee who is a qualified trustee (either spouse or both spouses if they are Florida residents or a trust company registered in Florida),
  • be signed by both settlor spouses with the formalities required for the execution of a trust, and
  • contain cautionary language at the beginning of the trust agreement set forth in the statute warning of the consequences of the formation of the trust and recommending consultation with separate counsel for each spouse if either of them has questions.

Another benefit of the Florida community property trust over community property trusts in most other states in which they are available is that an obligation owed solely by one settlor spouse may only be satisfied from that spouse’s one-half share of the community property trust unless otherwise provided in the trust agreement. 

Texas rule against perpetuities. An amendment to Texas law will extend the rule against perpetuities for trusts to 300 years. Pursuant to Texas Trust Code section 112.036, an interest in a trust must vest, if at all, (1) not later than 300 years after the effective date of the trust, if the effective date of the trust is on or after September 1, 2021; or (2) not later than 21 years after some life in being at the time of the creation of the interest, plus a period of gestation, for an interest in a trust that has an effective date before September 1, 2021, if the trust instrument provides that an interest in the trust vests under the statutory provisions applicable to trusts on the date that the interest vests. The author of the bill explained that the previous, more restrictive law limited Texans’ choices in developing estate and gift plans and put Texas at an economic disadvantage: Some Texans were developing estate plans in other states that have already extended their rule against perpetuities statutes, causing those dollars to leave the state for generations.

Iowa inheritance tax repeal. On June 16, 2021, Iowa Governor Kim Reynolds signed a bill repealing Iowa’s inheritance tax over the course of five years. Starting in 2021, the amount of the inheritance tax will be reduced by twenty percent per year until January 1, 2025, after which there will no longer be a state inheritance tax. Like Texas and Florida, Iowa policymakers hope that the change will make the state more attractive to wealthy families.

Takeaways: In this era of increased mobility, states are likely to continue to enact laws designed to attract new residents—particularly wealthy individuals and families fleeing high-tax states. 

Inherited 401(k) Excluded from Bankruptcy Estate

In re Dockins, No. 20-10119, 2021 WL 2309928 (Bankr. W.D.N.C. June 4, 2021)

Holly Corbell-Dockins (Holly) was named as the beneficiary of the 401(k) account of her former boyfriend. The former boyfriend died in February 2020. In March 2020, Wells Fargo Survivor Services notified Holly of his death and that she was the beneficiary of his 401(k) account. Holly and her husband filed a chapter 7 bankruptcy petition on April 2, 2020. Meanwhile, Wells Fargo set up a beneficiary account in Holly’s name, and she received an account statement in July 2020 showing that the account balance was $35,411.47.

The bankruptcy trustee argued that the inherited 401(k) was property of the bankruptcy estate. First, the trustee asserted that the inherited 401(k) account did not fall within the category of property not included in the bankruptcy estate set forth in 11 U.S.C. § 541(b). Second, the trustee asserted that the inherited 401(k) account was not exempt property under any applicable exemption statute, relying on Clark v. Rameker, 573 U.S. 122 (2014). In Clark, the Supreme Court held that an inherited individual retirement account (IRA) could not be exempt from the bankruptcy estate under 11 U.S.C. § 522(b)(3)(c), as it did not qualify as a retirement fund for three reasons: 1) the holder of the funds can never invest additional funds, 2) the holder must withdraw the funds within a certain time period, and 3) the holder can withdraw the full balance of the account at any time without penalty. 

However, Holly argued that the 401(k) account was not the property of the bankruptcy estate because under 11 U.S.C. § 541(c)(2), “a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” Moreover, she relied on Patterson v. Shumate, 504 U.S. 753 (1992), in which the Supreme Court ruled that Employee Retirement Income Security Act (ERISA)-qualified plans are encompassed in the phrase “applicable nonbankruptcy law.” Because 401(k) plans must include an antialienation provision under ERISA, they are excluded from the bankruptcy estate pursuant to § 541(c)(2).

The bankruptcy court noted that the issue of whether a 401(k) account inherited from a nonspouse prior to filing for chapter 7 bankruptcy was property of the bankruptcy estate was one of first impression. The court agreed with Holly that Patterson and § 541(c)(2), rather than Clark and § 522, were the controlling authorities. Unlike an inherited IRA, a 401(k) plan is a qualified plan under ERISA. ERISA mandates that “each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” In Patterson, the Supreme Court held that the ERISA-mandated transfer restrictions are “applicable nonbankruptcy law” and enforceable under § 541(c)(2) because plan fiduciaries are “required under ERISA to discharge their duties in accordance with the documents and instruments governing the plan.” In addition, the Patterson court noted that the stronger protection given to 401(k) plans is consistent with ERISA’s policy goal of protecting the interests of plan participants and their beneficiaries. As a result, the transfer restrictions in 401(k) plans are enforceable for the purposes of § 541(c)(2), meaning that 401(k) plans are excluded from the bankruptcy estate. 

Further, additional case law established that even when a debtor has the right to access the funds in a 401(k) account, if the funds remained with the plan administrator on the date of a chapter 7 filing, they continue to be protected by ERISA’s antialienation provision. Any funds withdrawn by the beneficiary prior to filing would be included in the bankruptcy estate. Because Holly did not withdraw any of the funds prior to the commencement of the chapter 7 bankruptcy, the funds were not the property of the bankruptcy estate.

Takeaways: Dockins clarifies that 401(k) accounts inherited by a nonspouse beneficiary are not included in the beneficiary’s bankruptcy estate, which is in contrast to IRAs inherited by nonspouse beneficiaries, which the Supreme Court, in Clark v. Rameker, ruled are included in the beneficiary’s bankruptcy estate. The case has not been appealed as of the date of writing.

Texas Supreme Court Dismisses Will Contest Based on Acceptance of Benefit Doctrine

Estate of Johnson, No. 20-0424, 2021 WL 2172532 (May 28, 2021)

The decedent, Dempsey Johnson, executed a will that included specific bequests, with the residuary going to three daughters, Lisa Jo Jones, Tia MacNerland, and Carla Harrison. In the will, Johnson also left a mutual fund and one-half of a bank account to MacNerland. Jones was named as the executor of the estate.

After Johnson’s death in August 2017, Jones applied to probate his will. In December 2017, she transferred the mutual fund account, valued at $143,229.15, to MacNerland, who assumed ownership of the account. However, in February 2018, MacNerland filed suit to set aside Johnson’s will on the basis that he had lacked testamentary capacity when the will was executed or that Johnson had executed the will under undue influence by Jones. Jones asserted that MacNerland had no standing to contest the will because she had accepted a benefit under it, i.e., ownership of the mutual fund account, which was never returned to the estate. MacNerland argued that because the inventory Jones had filed in May 2018 showed that the value of the estate was $1,427,209.94, the acceptance of benefits doctrine did not deprive her of standing because the value of the mutual funds was much lower than one-third of the value of her father’s estate, which was the amount she would have received had he died intestate.

The trial court dismissed the action for lack of standing. However, the court of appeals, relying on Holcomb v. Holcomb, 803 S.W.2d (Tex. Ct. App. 1991), reversed on the basis that Jones had failed to satisfy the burden of demonstrating that MacNerland had accepted benefits with a value greater than those to which she was entitled under the will or the intestacy statute.

The Texas Supreme Court reviewed the decision de novo and reversed, noting that the acceptance of benefits doctrine, based upon equitable considerations, “does not permit the beneficiary of a will to grasp benefits under the will with one hand while attempting to nullify it with the other.” The court recognized that a party who is contesting a will may rebut the doctrine’s applicability by showing that the benefit was not accepted through the will and that the contestant otherwise has a present legal right to it: for example, by the acceptance of a bank account as a payable-on-death beneficiary. In rejecting the court of appeals’ reasoning, the supreme court determined that the Holcomb decision, upon which the court of appeals had relied, had incorrectly interpreted its decision in Trevino v. Turcotte, 564 S.W.2d 682 (Tex. 1978). Rather than supporting the theory adopted in Holcomb, the Trevino court had rejected it, holding that Turcotte’s heirs were estopped from contesting a will from which he had accepted benefits. 

Further, the court rejected MacNerland’s argument that she had standing because she had not accepted all that the will entitled her to receive. In such a case, she was free to enforce the will according to its terms rather than contest it: “A beneficiary must firmly plant herself on the side of the will’s validity or invalidity and accept the consequences of that election.” Thus, because MacNerland accepted benefits under Johnson’s will and made no attempt to return the mutual fund account to the estate or assert that her acceptance of it was involuntary, the supreme court reversed the judgment of the court of appeals and dismissed the suit.

Takeaways: Though estate litigation has been on the rise, likely stemming in part from an aging population and more complex types of family structures, the Texas Supreme Court’s clarification that parties who have accepted some benefit pursuant to the terms of a will lack standing to contest the will may discourage some contests.

Federal District Court Upholds Employer’s COVID-19 Vaccine Mandate

Bridges v. Hous. Methodist Hosp., No. H-21-1774, 2021 WL 2399994 (S.D. Tex. June 12, 2021), appeal filed, No. 21-20311 (5th Cir. June 14, 2021)

Houston Methodist Hospital instituted a policy requiring all employees to receive a COVID-19 vaccine by June 7, 2021, at its expense. Plaintiff Jennifer Bridges, along with 116 other employees, filed suit to block the vaccine mandate on the basis that Houston Methodist was unlawfully requiring employees to be vaccinated or face termination.

The Federal District Court for the Southern District of Texas dismissed Bridges’ wrongful termination claim on the basis that Texas law only protects employees against termination for refusing to commit an act for which the employee could face criminal penalties. Bridges’ complaint did not assert that she had refused to perform an illegal act, but only that the COVID-19 vaccines were experimental and dangerous. 

Further, Bridges asserted that the vaccine mandate violates public policy. The court, citing Jacobson v. Massachusetts, 197 U.S. 11 (1905) (state-imposed vaccine mandates do not violate due process), held that Texas did not recognize such a public policy exception to at-will employment, but even if such an exception had been available, the vaccine requirement would not violate public policy. The court also cited the Equal Employment Opportunity (EEO) Commission’s nonbinding technical assistance memorandum, which indicates that the federal EEO laws do not prevent an employer from requiring that all employees physically entering the workplace be vaccinated for COVID-19, with reasonable accommodations for employees who do not get vaccinated because of a disability or sincerely-held religious belief, practice, or observance.

The court also dismissed Bridges’ claim that the vaccine mandate violates public policy under 21 U.S.C. § 360bbb-3, which requires that the Secretary of Health and Human Services, upon introducing medical products intended for use in an emergency, ensure that product recipients understand the potential benefits and risks of use and have the option to accept or refuse the product. According to the court, § 360bbb-3 does not apply to private employers and does not create a private opportunity for Bridges to file suit.

In addition, the court rejected Bridges’ assertion that because the vaccines have not been fully approved by the Food and Drug Administration, Houston Methodist was forcing its employees to participate in a human trial in violation of 45 C.F.R. § 46.116 (General Requirements for Informed Consent) and the Nuremberg Code. The court held that the hospital employees were not participants in a trial and that the Nuremberg Code was applicable to private employers. Further, the court rejected Bridges’ assertion that she was being coerced to receive the vaccine. Rather, “Bridges can freely choose to accept or refuse a COVID-19 vaccine; however, if she refuses, she will simply need to work somewhere else.”

Takeaways: In light of the emergency authorization granted to the COVID-19 vaccines and reports of rare side effects, it is likely that Bridges is the first of many cases challenging employer vaccine mandates. It is important to note that the circumstances of each case may play a role: Although the court did not directly address the issue, it is possible that medical personnel and employees who come into close contact with vulnerable patients, such as those who filed suit in Bridges, may be subject to different standards.

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