From the unenforceability of arbitration clauses in trusts to the applicability of the Americans with Disabilities Act to small businesses, 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.
Arbitration Clause in Trust Cannot Be Enforced against Beneficiary under Virginia and Federal Arbitration Statutes
Boyle v. Anderson, 871 S.E.2d 226 (Va. Apr. 14, 2022)
Strother Anderson created an inter vivos irrevocable trust that was to be divided in equal shares to his daughter Sarah, his son John, and the children of his son Jerry. The trust document contained the following arbitration clause: “Any dispute that is not amicably resolved, by mediation or otherwise, shall be resolved by arbitration.” When Strother died, Sarah became the successor trustee of the trust. Linda, the widow of Strother’s son John and the ancillary administrator of John’s estate, filed a complaint against Sarah alleging that she had violated her fiduciary duties. Sarah filed a motion to compel arbitration, but it was opposed by Linda, who asserted that the trust was not a contract and that she, a beneficiary, had not agreed to arbitration.
The circuit court denied Sarah’s motion to compel arbitration, and she filed an interlocutory appeal asserting that the trial court had erroneously ruled that the trust agreement could not qualify as a written contract or agreement under Virginia’s version of the Uniform Arbitration Act (Va. Code §§ 8.01-581.01–.016) and the Federal Arbitration Act (9 U.S.C. §§ 1–16). The Virginia Supreme Court granted the appeal.
The court noted that the Virginia Uniform Arbitration Act establishes a public policy favoring arbitration, providing that “a written agreement to submit any existing controversy to arbitration or a provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable . . . .” However, the court ruled that a trust is not a contract because
- it is not an “agreement between two or more persons that creates an obligation to do or not do a particular thing” but rather is a donative instrument;
- it is formed differently: it is a conveyance of an equitable interest and does not depend upon the acceptance of an offer or mutual assent like a contract;
- unlike contracts, which require consideration, trusts are generally created by gratuitous transfer;
- in contrast to trustees, which owe fiduciary duties to beneficiaries, contractual parties are free to act in their own interests; and
- ownership of property in a trust is divided between the legal title in the trustee and the equitable title in the beneficiary, in contrast to contractual law, which lacks this division.
The court ruled that because a trust is not an agreement or a contract, neither the Virginia arbitration statute nor the federal arbitration statute, which require the enforcement of arbitration clauses in contracts and agreements, compelled arbitration of a dispute arising from the trust. Moreover, even if the trust were an agreement, the beneficiary of the trust would not be a party to it and thus could not be considered to have agreed to submit a claim against the trustee for breach of fiduciary duty to arbitration based upon the arbitration clause in the trust document.
Takeaways: Trusts and estates attorneys should check their state’s law to determine whether mandatory arbitration clauses in trusts are enforceable for disputes arising from a trust. However, an arbitration clause may be included in the trust document as the preferred rather than mandatory method of dispute resolution.
Trustee Violated Statutory and Fiduciary Duties Failing to Distribute According to Trust Terms and Provide Required Notice, and by Requiring Indemnification Before Distribution
Estate of Worrall v. J.P. Morgan Bank, 2022 WL 1284044 (Ky. Apr. 28, 2022)
Phillis Worrall was the beneficiary of a testamentary trust established upon the death of her father in 1958. The trust held specific shares of stock in one company, and the trustee had the discretion to pay them out to Phillis. The trust further provided: “[u]nless sooner terminated, this Trust shall terminate at the death of my said daughter, and said shares of stock shall in that event be paid over to her estate.” Phillis died in June 2018, and her son James, who was her sole beneficiary, was appointed executor of her estate in December 2018. The trustee was J.P. Morgan Chase Bank (the Bank).
During 2019, the Bank filed three motions seeking to liquidate the assets of the trust and pay the proceeds into the Registry of the Court. The first two motions were withdrawn, but the third motion, filed December 18, 2019, asserted that the liquidation, payment of trustee’s and attorney’s fees, and release of the trustee were necessary because James, as executor of Phillis’s estate, had repeatedly refused to sign the receipt and release as requested by the Bank despite the Bank’s notice to him and that had failed to take proper action to take possession of the trust assets. The release sought by the Bank would have released and discharged the Bank “from all claims, demands, suits, actions, liabilities and responsibilities of any kind, arising from or related to the entitlement that is described in this instrument.” In addition, by signing the release, James, as executor, would have approved of the accounts of the Bank, as trustee, from the inception of the trust and acknowledged that statements of the activities in the trust were available upon request. Further, the release stated that James, as executor
[a]grees to return any or all of the property described above, to JPMorgan Chase Bank, N.A., upon demand, if recourse thereto becomes necessary for the payment of taxes, expenses, costs or other demands in connection with the administration of the Trust, and agrees to indemnify the Trustee against all such demands or claims, to the extent the property described above is subject to such demands or claims.
Although James had hired a new attorney who requested time to review the case and verbally objected at the hearing that James did not want to indemnify the Bank, the district court granted the Bank’s motion because James had not filed a response to the Bank’s motion.
On appeal, James asserted, among other things, that the Bank had failed to perform as required by the terms of the trust and had violated its statutory and fiduciary duties. The Supreme Court of Kentucky agreed, ruling that the Bank had violated Kentucky’s trust code and its fiduciary duties.
Ken. Rev. Stat. § 386B.8-170(2) required the Bank, as trustee, to “proceed expeditiously to distribute the trust property to the persons entitled to it[.]” However, the Bank had not distributed the trust property to James expeditiously, but had delayed for more than a year, conditioning distribution on Worrall’s execution of an “overly broad release.” In addition, when James objected to signing the release, the Bank did not follow statutory procedures applicable when a trust terminates by its terms by failing to provide the following to him:
the fair market value of the net assets to be distributed, a trust accounting for the prior five (5) years and an estimate for any items reasonably anticipated but not yet received or disbursed, the amount of any fees, including trustee fees, remaining to be paid, and notice that the trust is terminating.
Ken. Rev. Stat. § 386B.8-180(a). The Bank also violated Ken. Rev. Stat. § 386B.8-180(5), which states that “[n]o trustee [of a] trust shall request that any beneficiary indemnify the trustee against loss in exchange for the trustee forgoing a request to the court to approve its accounts at the time the trust terminates . . . ”
The court also agreed with James’s assertion that the Bank had violated its fiduciary duties by liquidating the trust’s assets rather than distributing them in kind. The terms of the trust directed that the trust assets were to be distributed in kind, and the court found that the record did not disclose any reason justifying the Bank’s liquidation of the trust’s corpus to cash.
Although the court remanded the case to the district court to address the remedies to which James was entitled, it anticipated that he would be entitled to an accounting of the Bank’s actions as trustee for the five years prior to Phillis’s death and the period after her death, as well as the following monetary damages:
- reimbursement for capital gains James was required to pay
- reimbursement of the receiver’s fee
- payment of James’s attorney’s fees
- any loss in the value of the investments if their current value (as of the date of the court’s opinion) exceeded the amount James was paid following the liquidation in January 2020
Takeaways: Trusts and estate attorneys should carefully review any forms that a trustee requires the trust beneficiaries to sign prior to distribution to ensure that the trustee is not violating their statutory and fiduciary duties. In addition, attorneys should require trustees to provide beneficiaries with the notices and accountings mandated by their state’s trust code.
Important Changes to Florida Rule Against Perpetuities and Spousal Limited Access Trust Statutes
2022 Fla. Sess. Law Serv. Ch. 2022-96 (West); 2022 Fla. Sess. Law Serv. Ch. 2022-101 (West)
Extension of Rule Against Perpetuities Period
On May 3, 2022, Florida Governor Ron DeSantis signed a bill increasing Florida’s statutory rule against perpetuities period from 360 years to 1,000 years, effective for trusts created on or after July 1, 2022. Thus, an interest in a trust must vest within 1,000 years from the time the interest is created.
Amendment to SLAT law
On May 10, 2022, Governor DeSantis signed into law a bill amending Florida law to allow Florida residents to form spousal limited access trusts (SLATs) that provide substantial asset protection benefits to the donor spouse. A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse, who is the beneficiary of the trust. SLATs can be used to protect the assets held by the trust from creditors and to minimize the federal estate tax. In a typical SLAT, the creditors of the donor spouse cannot reach the trust assets because the donor spouse is not a beneficiary of the trust. In addition, the trust assets are protected from the creditors of the beneficiary spouse if there is an independent trustee who has significant discretion regarding whether and when distributions may be made to the beneficiary spouse; or, if the beneficiary spouse is the trustee, distributions are mandatory or limited to the spouse’s reasonable need for health, education, maintenance, and support. The donor spouse may indirectly benefit from distributions to the beneficiary spouse. However, with a typical SLAT, when the beneficiary spouse dies, this indirect access to the assets held in the trust ceases.
The new Florida law allows the donor spouse to be a beneficiary of the trust upon the death of the beneficiary spouse (1) if the donor’s spouse is the beneficiary of the trust for the beneficiary spouse’s lifetime and (2) transfers to the trust are completed gifts under I.R.C. § 2511. Under the Florida statute, the trust assets “shall, after the death of the settlor’s spouse, be deemed to have been contributed by the settlor’s spouse and not by the settlor.”
Takeaways: Both new laws increase the attractiveness of Florida as a trust situs for clients who want to create trusts. Florida is not one of the nineteen states that currently permit domestic asset protection trusts. Because the new law, effective for trusts created and funded after June 30, 2022, enables the SLAT to act as an asset protection trust benefiting the donor spouse after the death of the beneficiary spouse, wealthy Florida residents are less likely to form domestic asset protection trusts in other states.
Related Small Businesses May Be Considered Integrated Enterprises under the Americans with Disabilities Act
Buchanan v. Watkins & Letofsky, 30 F.4th 874 (9th Cir. Apr. 7, 2022)
Amy Buchanan worked as a full-time associate for the law firm W&L Nevada, which was owned by partners Daniel Watkins and Brian Letofsky. Daniel and Brian also owned and were partners in another law firm, W&L California. Amy resigned from W&L Nevada in September 2016 after she experienced some health issues, but she returned to work there in December 2016 at a reduced schedule of twenty hours per week. In May 2017, Amy sought additional time off because of her health issues, and at that time, W&L placed her on an indefinite leave of absence.
Amy filed suit in Nevada state court against W&L Nevada, asserting that despite an agreement that her work would be limited to twenty hours a week, she was required to work more than that. She alleged discrimination and retaliation under the Americans with Disabilities Act (ADA). W&L Nevada removed the case to federal court. The district court granted W&L Nevada’s motion for summary judgment on the basis that it was not a covered employer under the ADA because it had fewer than fifteen employees and that Amy had not presented sufficient evidence to create a genuine issue of material fact that W&L Nevada and W&L California were an integrated enterprise. Amy appealed, arguing that the district court had erred in granting summary judgment in favor of W&L Nevada.
In its de novo review, the Ninth Circuit Court of Appeals noted that the ADA applies only to employers with fifteen or more employees. However, in analogous Title VII employment discrimination cases and cases under the Age Discrimination in Employment cases, the Ninth Circuit had adopted the integrated enterprise test. Under that test, even if an employer has fewer than fifteen employees, a plaintiff can bring an employment discrimination cases if (1) the defendant is so interconnected with another employer that the two form an integrated enterprise and (2) the integrated enterprise has fifteen or more employees. Although the court had not previously addressed whether the integrated enterprise test used in the Title VII context would apply in the ADA context, it determined that the integrated enterprise doctrine should apply to ADA cases because the “statutory scheme and language of the ADA and Title VII are identical in many respects,” and they have long been analyzed in a “parallel fashion.”
In determining whether the W&L Nevada and W&L California were an integrated enterprise, the court considered
- interrelation of operations,
- common management,
- centralized control of labor relations, and
- common ownership or financial control.
The court noted that Amy had presented evidence that the W&L Nevada and W&L California shared a website, a toll-free phone number, an email template footer identifying both offices, an Internal Revenue Service taxpayer identification number, and an employee roster. In addition, the two offices shared operational and administrative work. Daniel and Brian were the only partners and managed both offices, including all significant employment matters. In addition, they owned both W&L Nevada and W&L California, providing an inference of common financial control. Consequently, the court reversed and remanded the district court’s grant of summary judgment in favor of W&L Nevada.
Takeaways: Small business owners, including equity owners of law firms, may assume that they are exempt from federal discrimination statutes, including the ADA. However, under the Ninth Circuit’s ruling in Buchanan, owners of more than one small business should take steps to establish separate operational, managerial, and financial control over their businesses to avoid application of those statutes under the integrated enterprise doctrine.
California Employers of Five or More Employees Must Register for CalSavers Retirement Program by June 30, 2022
The CalSavers Retirement Savings Trust Act (Act), passed in 2016, requires employers that do not sponsor a retirement plan to participate in CalSavers, an automatic enrollment individual retirement account. The Act applies to eligible employers that are engaged in “a business, industry, profession, trade, or other enterprise” in California and employ at least five employees, at least one of whom is an eligible employee. An eligible employee is at least eighteen years old, an employee under the California Unemployment Insurance Code, and receives a Form W-2 with California wages from an eligible employer. Employees may opt out of the program by providing written notice to CalSavers by phone or on its website, but if they do not opt out within thirty days of the employer’s registration, they will be automatically enrolled in the program.
Takeaways: California legislators are considering expanding the scope of the CalSavers program by lowering the number of eligible employees for coverage under the Act to one, which would cover nearly all employers in the state. In the meantime, employers of five or more employees should register by June 30, 2022, if they have not already done so.
Court Finds Arbitration Agreement in Employee Handbook with Reservation of Right to Modify or Abolish Policies Illusory
Coady v. Nationwide Motor Sales Corp., 32 F.4th 288 (4th Cir. Apr. 25, 2022)
Former employees of Nationwide Motor Sales Corporation (Nationwide) sued the company, asserting that Nationwide had engaged in fraudulent payment practices that had reduced their sales commissions and final paychecks. Nationwide sought to compel arbitration based on provisions in its employee handbook that expressed the intention to arbitrate employment disputes. The final paragraph of the arbitration provisions stated: “By my signature on the ‘Employee Handbook and Operating Procedures’ Acknowledgement Receipt, I confirm that I have read and understand each of the four sections set forth above in this Agreement.” In addition, it provided: “I, the undersigned (Employee), acknowledge[ ] receipt of the (Employer) “Employee Handbook and Dealer Operating Procedures” written publication and have read and understood all sections therein and specially: . . . Agreement to Submit All Employee Disputes to Arbitration.”
The handbook also contained the following disclaimer:
I further understand that the employer has the right, from time to time, to make and enforce new policies or procedures and to enforce, change, abolish or modify existing policies, procedures or benefits applicable to employees as it may deem necessary with or without notice.
The employees asserted that the arbitration agreement was invalid, as it was an illusory promise based upon Nationwide’s reservation of the right to modify or abolish the policies, procedures, and benefits set forth in the handbook.
The Fourth Circuit Court of Appeals, which applied Maryland law, agreed. The court found that the acknowledgement receipt was a part of the arbitration agreement because the arbitration provisions included language expressly incorporating the acknowledgment receipt. In addition, the acknowledgment receipt also identified the arbitration provisions as a part to which it specifically applied. Further, under Maryland law, “a promise to arbitrate is illusory if the employer reserves the right to—and thus cannot constitute the consideration necessary to support a binding contract—if the employer reserves the right “to alter, amend, modify, or revoke the Arbitration Policy . . . at any time with or without notice.” Thus, the court upheld the district court’s denial of Nationwide’s motion to compel arbitration.
Takeaways: Employee handbooks often contain disclaimers like the reservation of rights provision in Nationwide’s handbook. Employers should include provisions they may wish to enforce against employees, such as arbitration agreements or restrictive covenants, in a separate contract, such as an employee contract entered into for full consideration.