Current Developments in Estate Planning and Business Law: March Review

From case law requiring notice for contingent beneficiaries to new federal rules applicable to joint employers, we have recently seen some significant developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we’ve highlighted a few noteworthy developments and analyzed how they may impact your estate planning and business law practice.

Contingent Future Remainder Beneficiaries Entitled to Notice

Roth v. Jelley, --- Cal.Rptr.3d ---, 2020 WL 882150 (Cal. Ct. App. 2020) 

McKie Roth Sr. created a trust in his will for the benefit of his wife, Yvonne, during her life. The terms of the trust granted Yvonne a testamentary power of appointment over the remainder. The will provided that if Yvonne did not exercise the power of appointment, by default, McKie’s three adult children from his prior marriage and Yvonne’s adult son from a prior marriage would each receive a one-fourth share of the remainder of the trust. The will further stated that if any of the adult children did not survive Yvonne, the surviving issue of the predeceased child would receive that child’s share, per stirpes.  Accordingly, the issue of the four adult children had a contingent remainder interest in the trust, which was subject to divestment if Yvonne exercised her power of appointment.

After McKie’s death in 1988, his three adult children brought a claim against his estate on an unrelated matter. As part of a settlement, they disclaimed any interest in the trust. The probate court issued a decree of final distribution in 1991 based on the settlement agreement which changed the default distribution scheme in the trust so that the remainder of the trust was to be distributed solely to Yvonne’s son if she failed to exercise her power of appointment. None of the issue of McKie’s three adult children, including Mark Roth, were provided notice of the 1991 decree despite the fact that it eliminated their contingent future remainder interests in the trust. Ultimately, Mark’s father predeceased Yvonne, and she died without exercising her power of appointment.

Mark petitioned the probate court to be recognized as a beneficiary of a testamentary trust created pursuant to the default distribution provision in his grandfather’s will, asserting that the 1991 decree was not binding on him because he had not received prior notice of it. The Court of Appeal agreed, holding that Mark had an actual property interest in the trust, which was adversely affected by the decree entered pursuant to the settlement agreement. The settlement agreement, which disclaimed Mark’s father’s contingent remainder interest, did not eliminate Mark’s property interest in the remainder of the trust because he was never given notice by mail and an opportunity to be heard prior to the hearing that purportedly eliminated his interest. Thus, the probate court’s 1991 decree was void.

Takeaways: In California, as well as other states (most of which have enacted the Uniform Trust Code), it is prudent to give prior notice to all contingent beneficiaries of any judicial modification of a trust or non-judicial settlement agreement that could adversely affect their interest, as well as obtain their signed approval (or the approval of a parent or guardian in the case of a minor), regardless of how remote their interest appears to be or how improbable it is that all the conditions will be met.

Executor Who Paid Beneficiaries and Creditors Before IRS Personally Liable for Estate Taxes

United States v. Marin, 2020 WL 378094 (S.D.N.Y. Jan. 22, 2020)

Ana Beatriz Marin died in 2007 with an estate worth $7,438,485, comprised mostly of real property as well as some cash, notes, and mortgages. Her handwritten will named two of her children, Carla and Philip, as co-executors of her estate. During 2008, the authenticity of the handwritten will was disputed, and the court appointed a temporary administrator of the estate who filed a tax return on behalf of the estate. The IRS assessed estate taxes of $1,869,340 against the estate.  The temporary executor elected to defer payment of the estate tax principal and make interest-only payments for five years, pay the remaining principal and interest in up to ten annual installments, and provide the IRS a bond or a consent to a special lien as collateral. In 2009, the court issued letters testamentary to Carla and Philip, appointing them co-executors, though Philip was later removed by the court as a co-executor. Following a 2010 audit, the IRS increased the total estate tax liability to $2,114,400.

The estate made payments pursuant to the installment election from 2008 through 2012 but defaulted by failing to make further payments and by failing to provide a bond or special lien to the IRS. In addition, the estate had not filed an income tax return since 2010 despite interim accountings showing the estate had received over $2 million in rental and other income since October 2009. Carla asserted that the estate was unable to pay the estate tax. In the meantime, Carla, who was also a beneficiary under the will, had made distributions to seven beneficiaries, including herself, as well as paid other non-priority debts prior to satisfying the estate’s outstanding federal tax obligations. Further, Carla resided in and used estate property for her own benefit.

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The government brought an action against Carla and other beneficiaries to recover the unpaid estate tax liabilities. The court refused to grant Carla’s motion to dismiss on multiple grounds, including that the government had alleged facts sufficient to withstand dismissal of its claim against Carla on the basis that an executor who pays the debt of an estate to another before paying the government is liable under the federal priority statute, 31 U.S.C. Section 3713. The court also rejected Carla’s contention that the government must first make tax assessments against her directly pursuant to 26 U.S.C. Section 6901 before bringing a transferee claim under 26 U.S.C. Section 6324(a)(2).

Takeaways: Executors and personal representatives who have knowledge of or sufficient reason to know of a debt owed by an estate to the government, including liability for federal estate taxes, will be personally liable if they pay an estate debt to another, rendering it insolvent, before they pay the federal estate tax. In addition, beneficiaries will be subject to “transferee liability” to the extent of the value, at the time of the decedent’s death, of the transferred property when the estate fails to pay its federal taxes.

Taxpayers Must Provide Basis and Acquisition Date of Donated Noncash Property to Get Charitable Deduction 

Loube v. Comm'r, T.C. Memo. 2020-3 (Jan. 8, 2020)

Chad and Dana Loube (the Loubes) purchased a parcel of land on which there was a single-family home. They ultimately wished to demolish the house and construct a new one. However, prior to the demolition, they hired Second Chance, Inc., a 501(c)(3) charitable organization, to deconstruct the house. Second Chance used the deconstruction process, i.e., the removal of furniture, appliances, fixtures, and other materials of value, to teach marketable skills to individuals with barriers to employment and keep reusable materials out of the landfill. Second Chance informed the Loubes that they would be entitled to a tax deduction as a result of their contribution.

The Loubes timely filed their federal income tax return, claiming a noncash charitable contribution of $297,000 for the donation of the materials to Second Chance. However, their Form 8283, Noncash Charitable Contributions (“appraisal summary”) was incomplete, with several items, including their cost or adjusted basis and the acquisition date of the contributed property, left out. They did attach an appraisal to the return, however.

The IRS issued a notice of deficiency on the basis that the Loubes were not entitled to the noncash charitable deduction, and the Loubes instituted an action for redetermination. The Commissioner of the Revenue sought summary judgment in his favor.

The Tax Court granted the Commissioner’s motion on the basis that the Loubes had failed to strictly or substantially comply with the requirements of Section 155 of the Deficit Reduction Act of 1984 (DEFRA) by not supplying the basis and acquisition date in their appraisal summary. The Court opined that even if the Loubes had provided information sufficient to enable the basis and acquisition date to be gleaned by the Commissioner, Congress specifically passed DEFRA's heightened substantiation requirements to enhance the Commissioner’s efficiency in flagging properties for over-valuation from the face of the appraisal summaries rather than having to “sleuth through the footnotes of millions of returns” to determine if the taxpayers were entitled to their charitable deduction.

Takeaways: Merely attaching an appraisal to their return is insufficient for taxpayers to be entitled a noncash charitable contribution deduction when their appraisal summary is incomplete. In the absence of reasonable cause for being unable to provide the information, taxpayers must strictly comply with the requirements of DEFRA Section 155 by completely and accurately meeting all required elements on the appraisal summary (Form 8283). 

NLRB Issues Employer-Friendly Final Rule on Joint Employer Status

29 CFR Part 103

On February 26, 2020, the National Labor Relations Board (NLRB) released its final rule governing joint-employer status under the National Labor Relations Act. The rule restores, with some clarifications, the standard applied prior to 2015, when Obama-appointed NLRB members issued a decision that indirect control over working conditions could create a joint-employment relationship, subjecting companies without direct control to liability for unlawful labor practices by those considered joint employers, such as franchisees and contractors.

Under the final rule, to be a joint employer, a business must possess and exercise “substantial direct and immediate control over one or more essential terms and conditions of employment” of another employer’s employees. The final rule provides definitions of certain key terms, for example, what are considered “essential terms and conditions of employment” and the definitions of “substantial” and “direct and immediate control.”

Franchisors such as McDonalds and Burger King and companies that engage workers staffing agencies such as Kelly Services or Adecco are less likely to be considered joint employers under the final rule. This is significant because businesses considered joint employers must both bargain with unions that represent the jointly employed employees, could be jointly and severally liable for each other’s unfair business practices, and could be subjected to economic pressures if there is a labor dispute with the jointly employed employees’ union.

Takeaways: The question of whether a business is a joint employer remains quite fact specific. Businesses who may fall within the scope of the rule, which is effective on April 27, 2020, should be informed of how the new rule may affect their business relationships.

Florida Considering Stricter E-Verify Legislation

FL SB 664

The Florida Senate passed a bill (SB 664) on March 9, 2020 which would require employers to conduct immigration background checks on new hires using either the federal government’s E-Verify tool or an I-9 system. E-Verify, which is not mandatory for employers under federal law, is an online tool that allows employers to instantly verify the immigration status of a new employee. Employers who choose not to use E-Verify must maintain a three-year record of documents used by applicants when they complete an I-9 form, which is another method used to verify whether a worker is authorized to work in the United States.

The bill allows the state to conduct random audits of businesses that choose to opt out of using the federal E-Verify system. In addition, the bill authorizes the state to suspend the business licenses of non-compliance businesses.

Takeaways: Twenty states that have enacted similar legislation applicable to at least some employers: Alabama, Arizona, Colorado, Florida, Georgia, Idaho, Indiana, Louisiana, Michigan, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Utah, Virginia, and West Virginia. Most of these states only require compliance by state agencies and their contractors. If the bill is enacted, Florida will join Alabama, Arizona, Mississippi, and Tennessee, which require all employers, including private employers, to use either E-Verify or an I-9 system.

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