Current Developments in Estate Planning and Business Law: November 2022

Nov 11, 2022 10:06:00 AM


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From the announcement of the 2023 limits on contributions to retirement accounts to a new proposed rule for classifying independent contractors, 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 practices.

IRS Announces Increases in 2023 Limits on Retirement Plan Contributions

On October 21, 2022, the Internal Revenue Service (IRS) announced an increase in the amount that individuals can contribute to their 401(k) plans, from $20,500 in 2022 to $22,500 in 2023. In addition, the catch-up contribution limit for employees who are aged fifty or older will increase from $6,500 in 2022 to $7,500 in 2023. The limits on contributions to traditional and Roth individual retirement accounts (IRAs) will increase from $6,000 in 2022 to $6,500 in 2023, with individuals aged fifty or over permitted to contribute an additional catch-up contribution of $1,000 (unchanged from 2022).

Takeaways: Many estate planning clients hold a large portion of their wealth in 401(k) plans and IRAs, which allow for tax-free or tax-deferred growth. Estate planning attorneys can help their clients obtain optimal benefits from these accounts by keeping them apprised of these substantial increases in contribution limits due to inflation and creating estate plans that consider their retirement accounts.

IRS Releases Private Letter Rulings Granting Portability Election Extension Requests

I.R.S. Priv. Ltr. Rul. 2022-42-003 (Oct. 21, 2022), I.R.S. Priv. Ltr. Rul. 2022-40-013 (Oct. 7, 2022)

For federal estate and gift taxes purposes, a portability election allows a decedent’s unused exclusion amount (known as the deceased spousal unused exclusion (DSUE) amount) to be applied to the surviving spouse’s subsequent transfers during life or at death. The IRS recently issued Revenue Procedure 2022-32, which became effective July 8, 2022, and superseded Revenue Procedure 2017-34. Revenue Procedure 2022-32 extends the time for estates that are not otherwise required to file an estate tax return under Internal Revenue Code (I.R.C.) § 6018(a) to make a portability election under I.R.C. § 2010(c)(5)(A) from the second to the fifth anniversary of the decedent’s date of death and allows a simplified method for obtaining the extension. This alleviates the need to request a private letter ruling (PLR) to obtain extensions, which is a lengthy and expensive process that may not be successful. 

The IRS continued its trend of granting portability election extension requests in PLRs that it released in October 2022 for requests that were submitted prior to the release of Revenue Procedure 2022-32. In both PLR 202242003 and PLR 202240013, the IRS granted the requests without providing details about their particular facts, merely stating that “[f]or various reasons, an estate tax return was not timely filed and a portability election was not made”; that “Decedent’s estate is not required under § 6018(a) to file an estate tax return”; and that its ruling was “based upon information and representations submitted by the taxpayer.”

Takeaways: Even if it is not required to report estate taxes, IRS Form 706 should be filed if there is any chance that a portability election will be beneficial. Portability-only filings are likely to become even more common once the current higher estate and gift tax exemption amount sunsets on December 31, 2025. To qualify for the simplified late election under Revenue Procedure 2022-32, the executor of the decedent’s estate must file a complete and properly prepared Form 706 that states at the top “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” within five years of the date of death of the deceased spouse. Those who miss the five-year deadline may still seek 9100 relief (so named after 26 C.F.R. § 301.9100-1) by requesting a PLR. Although there is no guarantee it will continue to do so, the IRS has been liberal in granting additional extensions of time for surviving spouses to make portability elections. 

New York and Florida Courts Address the Significance of Signature Cards in Determining Ownership of Joint Accounts 

In re Estate of Manchester, 172 N.Y.S.3d 918 (Surr. Ct. Aug. 18, 2022); In re Fischer, 173 N.Y.S.3d 481 (Surr. Ct. Sept. 1, 2022); Versace v. Uruven, LLC, 2022 WL 6827424 (Fla. Dist. Ct. App. Oct. 12, 2022)

New York. In two cases with very different facts and results, New York Surrogate Courts addressed whether joint bank accounts are property of the decedent’s estate or the surviving joint owner following the death of one owner.

In In re Estate of Manchester, the decedent’s wife, Patricia, was listed as a joint owner on a bank account. The court found that both the decedent and Patricia had signed the account card, which stated that by signing, the signatories acknowledged and agreed that “the account will be a Joint Account with Right of Survivorship unless it is a fiduciary or custodial account.” In support of her position that she was the owner of the account, Patricia relied on New York Banking Law § 675, which provides

(a) When a deposit of cash, securities, or other property has been made in or with any banking organization in the name of such depositor or shareholder and another person and in form to be paid or delivered to either, or the survivor of them, such deposit or shares shall become the property of such persons as joint tenants and shall be held for the exclusive use of the persons so named and may be paid or delivered to either during the lifetime of both or to the survivor after the death of one of them.

(b) The making of such deposit or the issuance of such shares in such form shall, in the absence of fraud or undue influence, be prima facie evidence, in any action or proceeding to which the surviving depositor or shareholder is a party, of the intention of both depositors or shareholders to create a joint tenancy and to vest title to such deposit or shares, and additions and accruals thereon, in such survivor. The burden of proof in refuting such prima facie evidence is upon the party or parties challenging the title of the survivor” (emphasis added).

The court agreed, holding that under Banking Law § 675 a presumption arises that the parties listed as joint owners intended to create a joint tenancy with rights of survivorship when the account is established in accordance with the statute and survivorship language is included on the signature card for the account. Further, for married couples, when a bank account is opened in the names of both spouses, there is a right of survivorship in the surviving spouse in the absence of evidence to the contrary. Although the presumption created by Banking Law § 675 can be rebutted by direct proof that no joint tenancy was intended or substantial circumstantial proof that the account was only opened for convenience, the decedent’s daughter, who had asserted that the account was owned by the decedent’s estate, had failed to produce any credible proof that the account had been opened for convenience only. As a result, the court ruled that the balance remaining in the account following the decedent's death belonged to Patricia and was not an asset of the estate.

In the New York case of In re Fischer, Stanka Sucich, an elderly woman, was taken by her home health aide, Omahdeo Rodrigues, and her driver, Alim Shaw, to her local bank so she could add Rodrigues to her bank accounts. The bank personnel refused to add Rodrigues. Rodrigues and Shaw then took Sucich to a different branch of the bank, which added Rodrigues to Sucich’s checking and savings accounts. The sum of $246,681.31 was immediately withdrawn from Sucich’s accounts and deposited in a new account at a different bank in Sucich’s and Rodrigues’s names. Sucich later died, and Rodrigues then transferred the funds in the account into her sole name. 

David Fischer, the administrator of Sucich’s estate, filed a petition asserting that Rodigues and Shaw had wrongfully converted the funds from Sucich’s accounts and that Rodrigues should return over $200,000 to Sucich’s estate.

The court stated that the burden of proving an inter vivos gift was on the party asserting ownership. In determining whether Rodrigues and Shaw had demonstrated donative intent, the court noted that parties asserting joint ownership of a bank account typically present a signature card bearing survivorship language, which is considered prima facie evidence under Banking Law § 675 of the intention of the signatories to create a joint tenancy with a right of survivorship. However, none of the parties presented signature cards, precluding the application of the presumption of joint ownership of the account. 

The court found that Sucich and Rodrigues, as caregiver, had a confidential relationship, characterized by the disparate power of one party over another. Rodrigues’s testimony demonstrated that Sucich was completely dependent upon her and Shaw for daily care and transportation. As a result of the confidential relationship, Rodrigues had an additional burden to demonstrate that the transaction was “fair, open, voluntary, and well understood, and therefore, free from undue influence.”

As a result, the court considered the totality of the evidence, including the statuses and relationships of the parties and any oral or written expressions of a gift. The court found that Rodrigues and Shaw had not presented any evidence of Sucich’s donative intent or capacity to form donative intent other than their self-serving claims about what Sucich had wanted. Further, the court found

the bald assertions, even when considered, are contradicted by the terms of decedent's Will—which does not bestow anything of significance on the respondents—and Rodrigues’ own testimony concerning the questioned transactions which describe her addition to the accounts as being a “matter of convenience” for decedent.

As a result, the court granted Fischer’s request for the return of $273,115.43—the balance of Sucich’s accounts on the date of her death—to the estate.

Florida. In Versace v. Uruven, LLC, the appeals court addressed a joint account held by a husband and wife in which the account signature card specified that it was a tenancy by the entirety account. Generally, tenancy by the entirety property is protected from a spouse’s creditors. The trial court had found that the joint account could be garnished for the husband’s individual debt because the account lacked one of the six unities of title and thus was not actually held by the spouses as tenants by the entirety despite the signature card form of title.  

The husband appealed the trial court’s ruling, relying on the Florida Supreme Court’s ruling in Beal Bank, SSB v. Almand and Assoc., 780 So.2d 45 (Fla. 2001), that if a signature card for a bank account expressly states that the account is held by spouses as tenants by the entirety, there is to be no further inquiry into the form of ownership.

Appellee, the husband’s creditor, asserted that because the bank account was initially opened by the wife alone, it lacked the unity of time—one of the six unities of title necessary to form a tenancy by the entirety. The husband and wife signed a new signature card several years later that stated it was a tenancy by the entirety account.

In Beal Bank, the court adopted two rules to clarify the law applicable to tenancy by the entirety. First, the court held

[a]s between the debtor and a third-party creditor (other than the financial institution into which the deposits have been made), if the signature card of the account does not expressly disclaim the tenancy by the entireties form of ownership, a presumption arises that a bank account titled in the names of both spouses is held as a tenancy by the entireties as long as the account is established by husband and wife in accordance with the unities of possession, interest, title, and time and with right of survivorship.

Second, the court held that “an express designation on the signature card that the account is held as a tenancy by the entirety ends the inquiry as to the form of ownership” and that there is no exception for failure of a unity. In addition, the court noted that following Beal Bank, the legislature enacted Fla. Stat. § 655.79(1), which states “[a]ny deposit or account made in the name of two persons who are husband and wife shall be considered a tenancy by the entirety unless otherwise specified in writing.” As a result, the tenancy by the entirety existed as a matter of statutory law, regardless of a failure of any of the common law requirements of unities. Therefore, “[n]o one need establish all the common law unities of tenancy by the entireties when a third party creditor seeks to garnish such an account.” Consequently, the court reversed the trial court’s issuance of a writ of garnishment as to the bank account owned by the spouses as a tenants by the entirety. 

Takeaways: Different forms of joint ownership are available in different jurisdictions, but bank accounts generally have signature cards regardless of the jurisdiction. In re Estate of Manchester and In re Fischer demonstrate the importance under New York law of both the joint owners’ relationship and the signature card to determine whether the deceased joint owner intended the other joint owner to have a right of survivorship or the funds to go to the decedent’s estate at death. Although it is rebuttable, New York Banking Law § 675 creates a presumption that parties intend to create a joint tenancy with rights of survivorship when the account is opened in accordance with statute and the signature card contains survivorship language. Further, the signature card is generally considered the best evidence of the decedent’s intent (see Estate of Butta, 192 Misc. 2d 614, 619 (Sur. Ct. Bronx Co. 2002), aff’d, 3 A.D.3d 347 (1st Dept. 2004)). In contrast to the New York cases, the Versace case in Florida addressed a bank account held by spouses as tenants by the entirety. The case demonstrates that the signature card for the account is also very important under Florida law: a signature card specifying that an account is held by spouses as tenants by the entirety is conclusive evidence of the ownership of the account. Given the popularity of joint ownership of accounts and the fact that different forms of joint ownership are available in different jurisdictions, estate planning attorneys should remind clients not only of the implications of this type of ownership under their state’s law, but also the significance of the information on their signature card.

California Court Adopts Narrow Interpretation of “Public Accommodation” under the American with Disabilities Act, Denying Accessibility Claim against Online-Only Business in the Absence of Intentional Discrimination

Martinez v. Cot’n Wash, Inc., 81 Cal. App. 5th 1026 (Cal. Ct. App. Aug. 1, 2022)

Abelardo Martinez was permanently blind and used screen readers to read content on the Internet. Abelardo asserted that Cot’n Wash, Inc., an online-only store, had failed to remove barriers to its website by not adding components necessary to make it accessible to blind individuals. He asserted that Cot’n Wash had failed to correct the access issues after his attorney notified it of its website’s lack of accessibility. Abelardo filed suit against Cot’n Wash, asserting that it had violated the Unruh Civil Rights Act (Unruh Act) (Cal. Civ. Code § 51). The trial court dismissed the suit based on Cot’n Wash’s successful demurrer that there was no violation of the Unruh Act because the alleged inaccessibility of Cot’n Wash’s website did not violate the Americans with Disabilities Act (ADA) (42 U.S.C. § 1211) and the alleged facts were insufficient to show Cot’n Wash’s discriminatory intent, which must be shown in the absence of a violation of the ADA. On appeal, Alejandro Martinez (Martinez), the successor-in-interest for his brother, argued that the trial court had erred in its finding.

The California Court of Appeals disagreed. The court held that Martinez had failed to allege that Cot’n Wash’s website was a “place of public accommodation” under the ADA because the statutory language does not currently include websites that have no connection to a physical space. The court acknowledged a split among the federal courts: the First, Second, and Seventh Circuits have adopted the view that websites are public accommodations under the ADA, while the Third, Sixth, Ninth, and Eleventh Circuits have adopted the view that websites are not public accommodations, but that a denial of access to a website can support a claim under the ADA if it impedes a plaintiff’s equal access to or enjoyment of goods and services at a defendant’s physical facility. However, the court of appeals ruled that, considered together, the plain language of the ADA, the maxims of statutory construction, and the ADA’s legislative history failed to establish that online-only retail websites are “places of public accommodation.” In declining to provide a judicial expansion of the statutory definition, the court held the following:

Congress’s failure to provide clarification in the face of known confusion—and, to a lesser extent, the DOJ's similar failure—is not a reason for us to step in and provide that clarification. To the contrary, it is a reason for us not to do so. This is

particularly true, given that providing clarification in the manner Martinez requests could have sweeping effects far beyond this case, none of which has been the subject of legislative fact-finding.

The court noted that in the absence of an Unruh Act claim based on a violation of the ADA, a claimant must prove intentional discrimination—that is, willful, affirmative misconduct with the specific intention of discriminating based on a protected trait. The court found that Martinez had failed to allege evidence of anything more than a disparate impact of a neutral structure. Cot’n Wash’s failure to change a facially neutral policy or action (i.e., the structure of its website) was not enough to provide intentional discrimination under the Unruh Act. As a result, the court held that the trial court had correctly sustained Cot’n Wash’s demurrer.

Takeaways: At present, the Martinez decision forecloses Unruh Act claims filed against online-only businesses based on lack of website accessibility under the ADA. In addition, it clarifies that failure to remedy an alleged barrier to access after notification is insufficient to establish intentional discrimination under the Unruh Act.

Department of Labor Releases Proposed Rule Addressing Employee and Independent Contractor Classification (Again)

I.R.S. Chief Couns. Mem. 2022-37-010 (Aug. 19, 2022); Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 29 C.F.R. §§ 780, 788, 795 (Oct. 13, 2022)

On October 13, 2022, the Department of Labor (DOL) published a proposed rule reversing course on the standards developed during the Trump Administration and contained in the current  independent contractor classification rule. The current rule to determine whether a worker is an independent contractor or an employee identifies five economic reality factors but emphasizes the consideration of two core factors: the nature and degree of control over the work and the worker’s opportunity for profit or loss. The amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production were to serve as additional guideposts in the analysis. 

The new proposed rule “proposes to return to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.” The DOL believes that the proposed rule is more consistent with the DOL’s historical approach and case law. In determining whether the worker is an independent contractor or an employee, the proposed rule would require the following six nonexhaustive factors to be given equal probative weight:

  1. the opportunity for profit or loss—that is, whether the worker exercises managerial skill that affects the worker's economic success or failure in performing the work
  2. whether investments by the worker are capital or entrepreneurial in nature
  3. the degree of permanence of the working relationship and if the lack of a permanent relationship is due to the worker’s independent business initiative
  4. the nature and degree of control exercised over the performance of the work
  5. the extent to which the work performed is an integral part of the employer’s business or is more peripheral to it
  6. whether a worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative that is consistent with the worker being in business for themselves instead of being economically dependent on the employer

Takeaways: Because the proposed rule requires an equal consideration of all six factors, businesses that wish to classify their workers as independent contractors rather than employees will be required to meet a more difficult threshold, and DOL enforcement actions and penalties will likely be more frequent. The rule, once final, will impact the gig economy as well as other businesses that depend upon independent contractors. Written comments should be submitted on or before December 13, 2022.

Delaware Court Finds Restrictive Covenants with Sale of Business Unenforceable

Kodiak Bldg. Partners, LLC v. Adams, 2022 WL 5240507 (Del Ch. Ct. Oct. 6, 2022)

Philip Adams was a general manager of a roof truss manufacturer, Northwest Building Components (Northwest), which operated from a single location in Idaho. He also owned an 8.3 percent interest in the company. Kodiak Building Partners, LLC (Kodiak), a Delaware limited liability company, owned several companies in the building and construction industry.

In June 2020, Kodiak entered into a stock purchase agreement with Northwest whereby it acquired Northwest’s goodwill and stock, including Philip’s 8.3 percent interest. In connection with the purchase, Kodiak and Philip entered into a restrictive covenant agreement that included noncompetition and nonsolicitation provisions. The restrictive covenant agreement also contained a provision in which Philip acknowledged the reasonableness and necessity of the covenants and purported to waive unreasonableness as a possible defense to the enforcement of the agreement.

In October 2021, Philip resigned from Northwest and began work as general manager for Builders FirstSource, a manufacturer and supplier of building materials including roof trusses, located approximately twenty-four miles from Northwest. A few months later, Northwest discovered that it had lost a job to Builders FirstSource as a result of Philip’s work. Kodiak sought injunctive relief on the basis that Philip had breached his noncompetition and nonsolicitation covenants. 

To obtain a preliminary injunction, the movant must demonstrate (i) a reasonable probability of success on the merits, (ii) a threat of irreparable injury if an injunction is not granted, and (iii) that the balance of the equities favors the issuance of an injunction. The court noted that under Delaware law, noncompetition covenants must be closely scrutinized to ensure that they are reasonable in geographic scope and temporal duration, advance a legitimate economic interest of the party seeking to enforce it, and survive a balancing of the equities. The court acknowledged that restrictive covenants in connection with the sale of a business are not evaluated as strictly as those contained in an employment agreement. However, if such covenants are unreasonable in part, Delaware courts are reluctant to “blue pencil” the agreement to enable partial enforcement to the degree considered reasonable.

After conducting its evaluation, the Delaware court determined that Kodiak was not reasonably likely to succeed on the merits. The sections of the restrictive covenant agreement that purported to waive Philip’s right to challenge its reasonableness were against public policy because they sought to avoid the court’s review of the restrictive covenants. The court rejected Kodiak’s argument that Philip had willingly entered into the restrictive covenant agreement and should be held to his bargain. Rather, it held that “[p]ublic policy requires Delaware courts to evaluate noncompetition and nonsolicitation contracts holistically, carefully, and nonmechanically, with an eye towards reasonableness, equity, and the advancement of legitimate business interests.” Failure to review the covenant because of an employee’s promise not to challenge it and language describing the covenants as reasonable would fly in the face of public policy.

In determining whether Kodiak had a legitimate business interest that was sufficient to justify the enforcement of the restrictive covenants, the court noted that in the context of a sale of a business, the purchaser has a legitimate economic interest in the assets and information it acquired in the sale. However, the restrictive covenant sought to protect not only Northwest’s goodwill, but also that of Kodiak and other members of its group of companies, which were not legitimate business interests related to the sale. Rather, “[r]estrictive covenants in connection with the sale of a business legitimately protect only the purchased asset's goodwill and competitive space that its employees developed or maintained.” Kodiak’s legitimate economic interest in its purchase of Northwest did not extend to goodwill and competitive space of other companies it owned. As a result, the noncompetition and nonsolicitation covenants were overbroad and unenforceable.

Philip also challenged the geographic scope of the restrictive covenants, which purported to prohibit him from competing anywhere within Idaho and Washington and within a 100-mile radius of any of Kodiak’s companies. In addition, the restrictive covenant agreement sought to prohibit him from soliciting not only Northwest’s customers, but customers of Kodiak’s companies. The court found that the scope of the covenants was overbroad to the extent that it prohibited competition in geographic areas surrounding Kodiak-owned companies other than Northwest and the solicitation of customers of Kodiak-owned companies other than Northwest.

The activities restricted by the noncompetition covenant were also unreasonably broad, as they encompassed much more than the manufacture and sale of Northwest’s roof trusses; they prohibited Philip from engaging in any activity or business similar to or competing with Kodiak’s companies. As a result, the court held that the covenant was unreasonable because it was broader than required to protect the goodwill Kodiak had purchased from Northwest.

The court further held that because the restrictive covenants were more restrictive than necessary to protect Kodiak’s legitimate business interests, the equities favored Philip, and it would be inequitable to enforce unreasonably broad covenants against him. 

Because Kodiak had failed to establish that a breach of the covenants would cause irreparable harm, it failed to satisfy the standard for a preliminary injunction. Accordingly, the court denied its motion, allowing Philip to continue working as a general manager for Northwest’s competitor.

Takeaways: The court’s decision in Kodiak is a reminder that business planning attorneys should draft restrictive covenants carefully to prohibit competition by a seller of a business and former employee only to the extent necessary to protect the legitimate business interests of the purchaser. Kodiak also makes it clear that a purchaser cannot rely on a seller’s contractual waiver of its right to contest the reasonableness of a restrictive covenant. The court’s opinion further expressed the reluctance of Delaware courts to “blue pencil” restrictive covenants to enable them to be enforced only to the extent that the court determines is reasonable. In the current environment where restrictive covenants are disfavored, it is prudent to draft them narrowly.

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