Current Developments in Estate Planning and Business Law: October Review

From sweeping employee classifications changes in California to uncertainties regarding the future of New Jersey’s Medical Aid in Dying for the Terminally Ill Act—we’ve seen some impactful developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we’ve highlighted five noteworthy developments and analyzed how they may impact your estate planning and business law practice. 

IRA Rollover Allowed After Beneficiary Changed by Court Order 

In PLR 201935005 (Aug. 30, 2019), the Internal Revenue Service (IRS) stated that a surviving spouse could roll over a decedent's individual retirement account (IRA). The IRA was initially payable to another beneficiary but was re-titled pursuant to a state court order. The order named the spouse as the sole beneficiary with an unlimited right to withdraw amounts from the IRA.

Takeaways: Practitioners should always think through the available options to “clean up” or “fix” undesirable beneficiary designations of qualified retirement plans so that these assets can be distributed in an income tax-efficient manner. Although the named sole beneficiary of the IRA in question is unknown based on the information contained in the PLR, we do know that the surviving spouse was able to successfully petition a state court for a change to retitle the IRA. Subsequently, the IRS ruled this to be an effective means of providing the surviving spouse with the option to roll the IRA into her own name to receive the attached income tax advantages of deferring the payment of required minimum distributions (RMDs) and stretching those RMDs over her lifetime. Thus, a state-court petition is an option that practitioners should consider when administering a decedent’s estate when the designated beneficiary of a qualified retirement plan is less than desirable from an income tax perspective.

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Projected Estate and Gift Tax Exemptions for 2020

Based on the inflation measure provided by the Tax Cuts and Jobs Act and Consumer Price Index for the 12-month period ending August 31, 2019, Thomson Reuters Checkpoint has released their projected inflation-adjusted Estate, Gift, Generation-skipping Transfer Tax, and other exclusion amounts for 2020, as follows:

1. The unified estate and gift tax exclusion amount (gift and estate tax exemptions) for gifts made and decedents dying in 2020 will be $11,580,000 (up from $11,400,000 in 2019).
2. The GST tax exemption for transfers made in 2020 will be $11,580,000 (up from $11,400,000 in 2019).
3. The gift tax annual exclusion amount for gifts made in 2020 will be $15,000 (the same amount as for gifts made in 2019 and 2018).
4. The annual exclusion for gifts to noncitizen spouses in 2020 will be $157,000 (up from $155,000 in 2019).
5. The special use valuation reduction limit for estates of decedents dying in 2020 will be $1,180,000 (up from $1,160,000 for 2019).
6. The portion of the estate tax that may be deferred on farm or closely held businesses at an interest rate of 2% per year, after the applicable exclusion amount is applied, will be $1,570,000 (up from $1,550,000 for 2019).
7. The foreign gift reporting threshold for gifts from a nonresident alien or foreign estate to a U.S. person (other than an exempt Code Section 501(c) organization) will be $100,000; the foreign gift reporting threshold for gifts from foreign corporations and foreign partnerships to a U.S. person (other than an exempt Code Section 501(c) organization) will be $16,649 in 2020 (up from $16,388 for 2019).

(JD SUPRA and Inflation-adjusted 2020 figures for transfer tax and foreign items (09/12/2019))

Takeaways: The projected inflation-adjustments for 2020 tax and exclusion amounts come as no surprise but could serve as a natural catalyst to discuss planning opportunities with clients who may be considering making large gifts or other updates to their estate planning based on the temporarily increased amounts allowed under the Tax Cuts and Jobs Act.

New Jersey: Physician-assisted suicide

New Jersey’s Medical Aid in Dying for the Terminally Ill Act was signed into law on April 12, 2019 and went into effect on August 1st. The law requires two doctors to sign off on a terminally ill patient’s request for physician-assisted suicide and for the terminally ill patient to be deemed an adult resident of New Jersey who has the mental capacity to make such a decision. The patient must voluntarily express a wish to die and request the necessary medication twice. One of the requests must be in writing and signed by two witnesses. One of the witnesses cannot be a relative or a beneficiary of the patient's estate. Additionally, the patient must have a chance to rescind the request. The patient must have the ability to self-administer the drug and must be offered other treatment options including palliative care.

In mid-August, the law was temporarily put on hold by a New Jersey state trial court judge in response to a lawsuit brought by a doctor practicing in the state. The order enjoined the New Jersey attorney general from enforcing the act. The temporary injunction was appealed and brought to an appellate court on an expedited basis, which ruled on August 27th that the lower court abused its discretion in granting the injunction and dissolved it. A copy of the order can be found here. That same day, the New Jersey Supreme Court declined to review the matter. The lawsuit filed by the doctor was remanded to the trial court judge for further proceedings. 

Other states with similar legislation include Maine, Oregon, California, Colorado, Hawaii, Vermont, Washington, and the District of Columbia.

Takeaways: Although the temporary injunction was dissolved in New Jersey, the outcome of the underlying case is still one to watch as a growing number of states consider passing similar legislation. According to one source, at least 13 states this year had active bills to expand or legalize physician-assisted suicide.

California shakes up employee classification considerations

In California, Assembly Bill 5 (AB 5) puts into law a 2018 judgment from the state's supreme court that created a new test for whether a worker should be considered an employee. This is likely to significantly affect companies like Uber and Lyft and has the potential for widespread impact. The bill was signed into law on September 18th and is effective January 1, 2020.  

Under the law, Californians will be considered employees of a business unless an employer can show the work they perform meets a detailed set of criteria established by the California Supreme Court in the 2018 Dynamex Operations West, Inc. v. Superior Court of Los Angeles ruling unless the workers are in an exempt profession (e.g., doctors, lawyers, insurance brokers). In the Dynamex case, the court held that there is a presumption that an individual is an employee unless the employer satisfies all three requirements of the ABC test, which requires: 

1. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
2. that the worker performs work that is outside the usual course of the hiring entity’s business; and
3. that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Workers in exempt professions will be tested under the Borello multi-factor test for determining employee versus independent contractor status.

Takeaways: Business owners should, at a minimum, use a checklist to ascertain whether a worker is truly a contractor, or acting more like an employee. If a hiring entity uses independent contractors, the hiring entity should carefully consider whether these workers properly meet the “ABC” test (or whether an exemption applies). AB 5 is thought to be just a first step in more worker-friendly legislation to come, and hiring entities must take action to ensure they are in compliance.

H.R. 3311: Small Business Reorganization Act of 2019

The Small Business Reorganization Act (“SBRA”) was signed into law on August 23, 2019, and is effective February 2020. The Act aims to make small business bankruptcies faster and less expensive by creating a new subchapter of Chapter 11 of the Bankruptcy Code specific to small businesses. At this time, the Act only applies to business debtors with secured and unsecured debts, subject to certain qualifications, of $2,725,625 or less.

Takeaways: In the past, smaller companies were forced to choose between liquidating their assets in a Chapter 7 bankruptcy, or pursue a time-consuming—and increasingly-expensive—Chapter 11 reorganization. Registered business entities, such as corporations and LLCs, have been ineligible to pursue a Chapter 13 reorganization. Lenders should be aware of the ramifications of the SBRA, as the new law will likely result in increased bankruptcy filings by smaller, family-run businesses that had previously been unable to pursue reorganization under Chapters 11 and 13 of the Bankruptcy Code.

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