From new Internal Revenue Service (IRS) proposed regulations relating to required minimum distributions to a new federal law ending forced arbitration for claims of sexual harassment and assault, 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 Issues Proposed Regulations Addressing Required Minimum Distributions
Required Minimum Distributions, 26 C.F.R. Parts 1 and 54 (2022)
On February 24, 2022, the IRS issued proposed regulations addressing required minimum distributions (RMDs) from retirement plans, providing additional clarity on some points, but raising questions regarding some others.
One unexpected provision is the apparent requirement that designated beneficiaries under retirement plans who inherit an IRA from the owner of the plan who dies after reaching age seventy-two and who are subject to the ten-year rule under the SECURE Act must take distributions every year throughout the ten-year period, with a full distribution on December 31 of the tenth year. The proposed regulations include the following example:
If an employee died after the required beginning date with a designated beneficiary who is not an eligible designated beneficiary, then the designated beneficiary would continue to have required minimum distributions calculated using the beneficiary's life expectancy as under the existing regulations for up to nine calendar years after the employee's death. In the tenth year following the calendar year of the employee's death, a full distribution of the employee's remaining interest would be required.
Many attorneys and commentators had previously thought that designated beneficiaries subject to the ten-year rule would be permitted to wait until December 31 of the tenth year following the calendar year of the decedent’s death to take a distribution.
In addition, some commentators have noted that the proposed regulations, at least in some circumstances, seem to allow distributions to be made using the life expectancy rule instead of the ten-year rule when the beneficiary named by the employee is an accumulation trust established for eligible designated beneficiaries who are not disabled or chronically ill. The proposed regulations include the following example:
. . . assume an employee names a see-through trust as the sole beneficiary, the trust permits specified amounts to be paid to the employee's niece until the niece reaches age 31 (age of majority plus 10 years), and those specified amounts are not required to include the immediate payment of plan distributions made to the trust. The trust is scheduled to terminate with a full distribution of all trust assets to the niece when the niece reaches age 31, but if the niece dies before this scheduled termination, then the amounts remaining in the trust will be paid to the employee's sibling. In that case, the only beneficiary designated under the plan for purposes of section 401(a)(9) and these regulations is the employee's niece because the employee's sibling is disregarded under the exception described in the preceding paragraph. However, if the see-through trust terms do not require a full distribution of amounts in the trust representing the employee's interest in the plan until the niece reaches age 35, then this exception does not apply, and both the employee's niece and sibling are treated as beneficiaries designated under the plan for purposes of section 401(a)(9) and these regulations.
The following are some additional important clarifications included in the proposed regulations:
- For the purposes of Internal Revenue Code § 401(a)(9)(E)(ii)(II) and (F), the child of an employee is considered to have reached the age of majority on the child’s twenty-first birthday. However, defined benefit plans that have used the prior definition of age of majority may retain that plan provision.
- A trust will not fail to satisfy identifiability requirements merely because an individual, i.e., the power holder, has the power to appoint a portion of the employee’s interest in the retirement plan to one or more individuals who are not identifiable.
- A see-through trust will not fail to satisfy the identifiability requirements merely because the trust is subject to state law that permits the trust terms to be modified after the death of the employee.
Takeaways: The proposed regulations apply for purposes of determining RMDs for calendar years on or after January 1, 2022. Compliance with the regulations will satisfy the requirement that taxpayers consider a reasonable, good-faith interpretation to the SECURE Act’s amendments to the RMD rules. Comments on the proposed regulations must be submitted by May 25, 2022. Join us for our Retirement Planning Workshop on April 7 and 8, 2022, where Natalie Choate, Esq will provide her insights on the proposed regulations.
Substantial Compliance with Bank’s Requirements for Change of IRA Beneficiary Is Sufficient
Werther v. Werther, 199 A.D.3d 546 (Supt. Ct. App. Div. 1st Dep’t Nov. 18, 2021)
The decedent, J. Lawrence Werther (Lawrence), funded a rollover individual retirement account (IRA) at Morgan Stanley in November 2015 naming his three children as equal beneficiaries. A few days later, Lawrence signed a durable power of attorney (POA) giving the defendant, Ellen Werther, authority over the IRA, including the authority to designate and change its beneficiaries. In October 2017, Lawrence signed a declaration of trust establishing a trust and designating Ellen as the trustee. The same day, Ellen (the Agent/Trustee) filled out and signed an IRA designation of beneficiary form that changed the beneficiaries of the IRA, naming the trust as its sole beneficiary. The beneficiaries of the trust were Lawrence’s two daughters, his former housekeeper, and his four grandchildren. Lawrence’s son was not a trust beneficiary. On October 18, 2018, Lawrence passed away, and on November 1, 2018, the Agent/Trustee sent the IRA designation of beneficiary form to Morgan Stanley.
Lawrence’s children moved for summary judgment on their claim for an equal distribution of the IRA assets, claiming that the Agent/Trustee had not sent the IRA designation of beneficiary form to Morgan Stanley until after Lawrence’s death, when the POA was no longer in effect. The Agent/Trustee filed a cross-motion seeking summary judgment that the trust was the sole beneficiary of the IRA and leave to amend the pleadings to include a counterclaim by the trust for a declaration regarding the validity of its interest in the IRA. The court denied the children’s motion and granted the Agent/Trustee’s motion.
On appeal, the Supreme Court, Appellate Division found that the Agent/Trustee was entitled to summary judgment on the counterclaim for a declaration that the trust was the sole beneficiary of the IRA. Even if a bank requires a beneficiary form to be tendered in advance, the requirement is not strictly enforced. The courts instead look for substantial compliance, and in this case, the Agent/Trustee established substantial compliance with Morgan Stanley’s requirements for changing the IRA’s beneficiaries. Morgan Stanley specified that beneficiaries may be changed “at any time in writing on a signed and dated form submitted to and accepted by Morgan Stanley” (emphasis added). Because the form could be submitted “at any time,” the Agent/Trustee substantially complied by submitting the form after Lawrence’s death. In addition, the Agent/Trustee signed the designation of beneficiary form before Lawrence’s death, when she still had authority to do so under the POA. The court noted that the “designation of beneficiaries is separate and distinct from tendering the form for changing beneficiaries.” Consequently, the court found that there were no issues of fact about the validity of the trust’s designation as beneficiary of the IRA. It affirmed the lower court’s judgment in favor of the Agent/Trustee and granted the Agent/Trustee’s request for summary judgment on the counterclaim.
Takeaways: Although the better practice is for an agent under a power of attorney to tender a form changing the beneficiary of an IRA in a timely manner, it may nevertheless be accepted if it is tendered after the principal’s death if doing so substantially complies with the bank’s requirements.
Modification of Trust Not Allowed if Inconsistent with Settlor’s Plain and Unambiguous Intentions
Skarsten-Dinerman v. Milton Skarsten Living Trust, 2021 WL 6109571 (Minn. Ct. App. Dec. 27, 2021)
Milton Skarsten established a revocable living trust in 2003, naming his six children as beneficiaries. At the time of his death in 2017, the trust held 507 acres of farmland, and according to its terms, the balance of each share of the trust estate after the payment of funeral expenses, estate taxes, and debts, was to be “retained in trust for the benefit of the beneficiaries” or their issue. Further, the trustee was to make distributions of the trust’s net income to the beneficiaries at least annually until three of Milton’s children died. After the death of three of Milton’s children, the trustee was to distribute the remaining balance of each share of the trust estate to the three surviving beneficiaries and by right of representation to the issue of the deceased beneficiaries. The trust document also contained a provision stating: “Except as expressly permitted by this paragraph, no sale of real estate included in the trust estate shall be permitted after my death.” The exception allowed the sale of land if necessary to pay Milton’s funeral expenses, estate taxes, and debts. Another provision required the trustee to exercise prudent judgment and care in “acquiring, investing, reinvesting, exchanging, retaining, selling, and managing the trust property.”
In 2019, three of Milton’s children created special needs trusts for themselves and assigned their beneficiary interests in Milton’s trust to their special needs trusts. The three children named one of Milton’s daughters, Mary, as their trustees. In 2020, Mary filed a petition pursuant to Minn. Stat. § 501C.0411(b), which allows courts to modify trusts under certain circumstances, asking the court to modify the trust to allow the farmland to be sold and the proceeds distributed to the beneficiaries. She asserted that the value of the farmland had decreased and would therefore provide reduced income to the beneficiaries, asserting that the terms of the trust did not prohibit a sale if it would provide a greater benefit to the children. In addition, Mary argued that there had been unanticipated changes in circumstances: the creation of the special needs trusts and the decrease in value of the farmland and the income it produced. Mary further asserted that the distribution of the trust after the death of three children would create an unequal outcome, providing much more benefit to the surviving children than to the first three to die. The petition stated that all children were living and consented to the modification. Mary later amended the petition to request that the trust be modified to permit the immediate distribution of the real property assets of the trust to the beneficiaries to avoid a violation of the trust terms prohibiting the sale of the farmland. The trustee opposed the modification on the grounds that it would contradict a material purpose of the trust, i.e., the preservation of the farmland as a continuing source of income for Milton’s children. The court agreed, denying Mary’s petition.
The Court of Appeals affirmed, holding that the plain and unambiguous language of the trust document showed that Milton’s intent—and a material purpose of the trust—was for the farmland to be retained to provide a continuing source of income for his six children until three of them died. Milton’s intent was controlling, “even if the beneficiaries disapprove of his choice.” Further, Milton’s intention that the farmland provide a reliable source of income for the beneficiaries did not require that there be a maximum possible return on investment. The establishment of special needs trusts for three of the children was not an unforeseen circumstance under the statute because the possibility that the other children might die first, potentially resulting in some or all of the funds ultimately going to the state as reimbursement for medical services, only provided the state with a speculative interest in the special needs trusts. The court noted that if the trust’s terms were modified to permit a sale of the farmland, the proceeds of the sale would be placed in the special needs trusts, similarly providing the state with an interest in the trusts’ assets. In addition, the decrease in value was not an unforeseen circumstance because Milton would likely have been aware of the possibility that the land’s value could fluctuate, both downward and upward.
Takeaways: Modifications of trusts will be permitted only when the modification is consistent with the material purpose of the trust. The fact that beneficiaries of a trust will not receive the maximum possible benefit during their lifetime is not a permissible reason for modifying a trust when the settlor’s stated intention is merely to provide them with a reliable source of income.
Congress Passes Bill Making Predispute Arbitration Agreements Unenforceable for Sexual Assault and Harassment Disputes
H.R. 4445, 117th Cong. (2021)
On March 3, 2022, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, which amends the Federal Arbitration Act (FAA) to provide that, at the election of an individual (or their representative) who is alleging sexual harassment or assault, a predispute arbitration agreement or waiver will be invalid and unenforceable with respect to a case filed under federal, tribal, or state law. The Act applies to any dispute or claim arising or accruing on or after its enactment.
The FAA governs agreements to arbitrate in which some economic activity of one of the parties involves or affects interstate commerce, even if the transaction, taken alone, does not have a substantial effect on interstate commerce. See Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265 (1995); Citizens Bank v. Alafabco, Inc., 539 U.S. 52 (2003); Crawford v. West Jersey Systems, 847 F. Supp. 1232, 1240 (D.N.J. 1994) (the contract “need have only the slightest nexus with interstate commerce” and the contractual activity need only facilitate or affect commerce tangentially). The FAA preempts conflicting state law applicable to arbitration agreements. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 682 (1996). As a result, the FAA, including this amendment, will apply to arbitration clauses included in most employment and independent contractor agreements.
Takeaways: Businesses should be advised that arbitration clauses included in their employment and contractor agreements will not preclude lawsuits asserting sexual harassment or assault. Employees and contractors may still arbitrate those claims if they choose. Policies should be implemented to discourage the behaviors leading to such claims.
LLC Member Seeking Information to Ascertain Whether Mismanagement Occurred Not Required to Provide Credible Proof of Mismanagement
Benjamin v. Island Mgmt., LLC, 267 A.3d 19 (Conn. 2021)
In a case of first impression, the Connecticut Supreme Court addressed when a member of a manager-managed limited liability company (LLC) is permitted to inspect the LLC’s books under Connecticut’s Uniform Limited Liability Act. In 2002, William Ziegler III created six trusts, which owned several family businesses, for the benefit of his six children. The defendant is a manager-managed LLC that was created to manage and build the family’s assets. Each child’s trust was a one-sixth member of the LLC. The LLC operating agreement was executed by the six children as trustees of their trusts. At the same time as the execution of the operating agreement, the children appointed two of their siblings, Bill and Cynthia, as comanagers of the LLC. Under the agreement, Bill and Cynthia were authorized to hire officers and set their salaries. The children later consented to the appointment of Bill and Cynthia as co-presidents of the LLC. Bill and Cynthia were both very involved in the family entities from which the LLC received income.
Forbes estimated the value of the family entities at more than $2.8 billion: the annual distributions to each child’s trust were less than one percent of that amount. After William’s death in 2008, Helen, one of his children, asserted that larger distributions should be made to benefit the trust beneficiaries. Other children, including Bill and Cynthia, argued that the distribution levels were satisfactory and that more earnings should be retained to preserve the family’s wealth for future generations. Nothing in the operating agreement or the instrument that created the children’s trust addressed William’s intentions regarding the matter.
In 2016, the other children provided Helen with a buyout offer for her interests in the family entities. However, the offer was substantially less than one-sixth of the value estimated by Forbes. Helen made four written demands for inspection of the LLC’s books and records under Conn. Gen. Stat. § 34-255i, which permits LLC members to obtain “information regarding the activities, affairs, financial condition and other circumstances of the company” under certain circumstances. Helen’s stated purposes for her demands were to determine the value of her membership interest in the LLC and to ascertain the condition and affairs of the family entities so that her trust could exercise its LLC membership rights in an informed manner. She also asserted concerns about the management arrangements and compensation of the LLC’s managers and officers, including Bill and Cynthia, alleging that there was a conflict of interest arising from their financial interests as officers and managers of the LLC, their trust’s interests, their roles in the businesses, and their roles in the businesses managed by the LLC. The LLC produced many records, but declined to produce other information it asserted was irrelevant or already disclosed, or information it asserted was requested improperly. Helen filed suit seeking to compel the LLC to comply with her demands. The trial court entered judgment in Helen’s favor, and the LLC appealed.
The Connecticut Supreme Court declined to rely on voluminous case law in the corporate context holding that a shareholder seeking to inspect corporate records to investigate whether the corporation has been properly managed must provide facts demonstrating a reasonable basis to suspect mismanagement. Rather, it noted an important distinction between the statutory schemes for the inspection of corporate and LLC records: Connecticut’s Business Corporation Act permits inspection if the shareholder’s demand is made “in good faith and for a proper purpose.” In contrast, the Connecticut LLC Act only imposed a good faith requirement in cases in which records are sought by a dissociated member. As a result, the court held that “[t]he absence of this good faith requirement for current LLC members cuts strongly against imposing a credible proof requirement on such members.” The court, which provided an extensive analysis, rejected the LLC’s claim that Helen’s inspection demands were insufficient.
Takeaways: A well-drafted operating agreement can avoid the difficulties encountered in Benjamin v. Island Mgmt. by thoroughly addressing the parties’ rights and obligations with respect to the LLC’s books and records. As the court noted in its analysis, an LLC may, “through its operating agreement, impose reasonable restrictions on the availability and use of information provided for under § 34.255i.”
New Pay Transparency Laws in New York City and Colorado
N.Y. City Admin. Code §§ 8-102, 8-107; Colo. Rev. Stat. §§ 8-5-101 to 8-5-203
New York City and Colorado have enacted pay transparency acts, requiring businesses to state a salary range on job listings to provide gender pay equity.
New York City’s new pay transparency law takes effect on May 15, 2022. It requires employers of four or more workers, including part-time and temporary employees, interns, and independent contractors, to post salary ranges in job listings.
In Colorado, the Equal Pay for Equal Work Act took effect January 1, 2021. It requires employers of one or more employees to include compensation in job postings, notify employees of promotional opportunities, and keep job description and wage rate records.
Other jurisdictions, including California, Connecticut, Maryland, Rhode Island, and Washington state, have enacted laws requiring employers to provide the compensation range upon request or when an offer is made, but not as part of the job listing.
Takeaways: Businesses located anywhere in the country that post job listings nationwide seeking remote workers must be aware of these new laws. If the position will or can be performed in Colorado or New York City, the employer must disclose the salary ranges in the job listing. Penalties for noncompliance may be steep, with Colorado’s law permitting fines of $500 to $10,000 per violation and New York City’s law permitting fines up to $125,000.