From an Internal Revenue Service memorandum regarding the modification of irrevocable grantor trusts, to a US Supreme Court dismissal of an ADA tester case and a new final rule regarding beneficial ownership information under the Corporate Transparency Act, we have recently seen significant developments in estate planning, elder law, 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, elder law, and business law practice.
Beneficiaries of Irrevocable Grantor Trust Modified to Include Tax Reimbursement Clause Subject to Gift Tax
I.R.S. Chief Counsel Adv. 2023-52-018 (Dec. 29, 2023)
On December 29, 2023, the Internal Revenue Service (IRS) Office of Chief Counsel released Chief Couns. Adv. (CCA) 2023-52-018, which addressed the gift tax consequences for the beneficiaries of an irrevocable trust that was modified by the trustee to add a clause that provided the trustee with the discretionary power to distribute principal and income from the trust to reimburse the grantor for income tax liability incurred due to the inclusion of trust income in the grantor’s taxable income.
In the situation addressed in the CCA, the taxpayer created an irrevocable trust during her lifetime for the benefit of her child and the child’s issue, per stirpes. She appointed an independent trustee—a person not related or subordinate to the taxpayer within the meaning of Internal Revenue Code (I.R.C.) § 672(c)—and provided the trustee with absolute discretion to distribute income and principal for the benefit of her child. The trust specified that when the taxpayer’s child died, the assets remaining in the trust should be distributed to the child’s issue, per stirpes. Under the terms of the trust, the taxpayer retained a power that caused her to be deemed the owner of the trust under I.R.C. § 671, creating an intentionally defective grantor trust; therefore, all income, deductions, and credits attributable to the trust were included in her taxable income.
As originally drafted, the trust instrument did not include any terms allowing the trustee to reimburse the trustmaker for payment of income taxes on trust assets.
One year later, the trustee filed a petition in state court seeking to modify the terms of the trust to provide the trustee with the discretion to reimburse the taxpayer for income taxes she paid as a result of the inclusion of trust income in her taxable income. As required by state law, the taxpayer’s child consented to the modification on the child’s own behalf and for any issue that the child would have in the future (the child did not have any issue at the time consent was provided). The court granted the trustee’s petition and issued an order modifying the trust as requested.
In CCA 2023-52-018, the IRS determined that as a result of the modification, the taxpayer became a beneficiary of the trust because she was entitled to discretionary distributions of income or principal to the extent necessary to reimburse her for taxes she paid as a result of the inclusion of trust income in her gross taxable income. In other words, according to the IRS, the effect of the modification was a transfer—that is, a gift—of the amount of those distributions from the taxpayer’s child and the child’s issue to the taxpayer. Further, the IRS noted that in situations in which a state statute provides beneficiaries with a right to notice and a right to object to a modification, the result will be the same if the beneficiary merely fails to exercise the right to object—rather than expressly consenting to the modification as in the factual situation addressed in the CCA.
The IRS determined that the situation was distinguishable from situations addressed in Revenue Ruling 2004-64, in which the original trust provided for a mandatory or discretionary right to reimbursement for the grantor’s payment of income tax attributable to trust income (see, e.g., Situation 3, in which the original trust document provided the trustee with a discretionary right to reimburse the grantor for the amount of income tax paid attributable to the trust’s income from the assets held by the trust was determined not to be a gift from the trust beneficiaries to the grantor).
Takeaways: Although CCA memoranda do not have precedential value, they are a good indication of the IRS’s view on an issue—and CCA 2023-52-108 represents a marked change. The IRS’s Priv. Ltr. Rul. 2016-47-001 had previously concluded that modifying a trust to include language giving a trustee discretion to reimburse the grantor for income tax paid as a result of inclusion of trust income in the grantor’s income was an administrative change that did not affect the beneficial interests in the trust. In footnote 1 of CCA 2023-52-108, however, the IRS expressly stated that this view “no longer reflects the position of this office.”
The IRS also noted that, pursuant to Treas. Reg. § 25.2511-2(a), a gift is measured by the value of the interest passing from the donor to which the donor has relinquished their rights without full and adequate consideration. Although Treas. Reg. § 25.2511-1(e) provides that gift tax applies only to the interest transferred when a donor gifts less than their entire interest in property, it also states that if the donor’s retained interest is “not susceptible of measurement on the basis of generally accepted valuation principles, the gift tax is applicable to the entire value of the property subject to the gift.” (emphasis added). In a situation in which the trustee has the absolute discretion to make or decline to make a distribution, and in which there may eventually be multiple beneficiaries, valuation of the interest transferred is difficult; thus, the beneficiaries could be subject to gift tax on the entire value of the property subject to the gift even if no distribution is ever made to the grantor. In the CCA, the IRS acknowledged that the determination of the value of the gift requires complex calculations, but also noted that the difficulty in determining the value of the gift will not provide a basis for the beneficiaries to escape the gift tax.
In addition to the valuation issues, CCA 2023-52-018 raises a host of other questions, including, but not limited to, (1) whether there is a taxable gift when the assets of a trust are decanted to a new trust or the original trust is merged into a new trust where the effect is to reduce the beneficiaries’ interest, and (2) the effect of a similar modification where neither the terms of the trust nor state law require the beneficiaries’ consents.
Including a tax reimbursement clause in the original trust document apparently would have avoided this problem in the factual situation addressed in CCA 2023-52-018; therefore, it may be prudent to proactively discuss the issue with clients who wish to create grantor trusts.
Trustee of Living Trust Who Was Beneficiary of Decedent’s Residuary Estate Had Duty to Collect and Protect Assets Not Yet Transferred to Trust
Barash v. Lembo, 303 A.3d 577 (Conn. Nov. 7, 2023)
Richard Ripps provided in his will that the residue of his estate was bequeathed to an amended and restated revocable trust for the benefit of his three children. The will and the trust were executed on the same day. Richard died in 2006. Richard’s three children and their mother, who was one of three co-trustees of the trust, filed suit in 2018 asserting that one of the other co-trustees, Barbara Lembo—who was Richard’s widow—had breached her fiduciary duty by failing to (1) collect and protect trust property, (2) investigate the alleged misconduct of the executor of Richard’s estate, and (3) seek to recover damages from the executor as a result of alleged misconduct. The plaintiffs sought damages and Barbara’s removal as co-trustee.
The trial court granted Barbara’s motion for summary judgment, holding that until the estate was settled, she had no duty to collect the assets that made up Richard’s residuary estate, which had not poured over to the trust. In addition, she had no duty to act against the executor of Richard’s estate based on misconduct related to those assets before their distribution.
On appeal, the Connecticut Supreme Court determined that the probate decree was not entitled to preclusive effect, but the primary issue was whether the trustee of a living trust that is the beneficiary of the decedent/settlor’s residuary estate had a duty to protect and collect assets that had not yet been transferred to the trust but were to be distributed to the trust when the estate was settled. The court agreed with the plaintiffs that the trial court’s conclusion was incorrect. It recognized that a trustee has a fiduciary duty—commencing when the trustee accepts the trusteeship—to administer a trust in the best interests of the beneficiaries. This duty requires the trustee to administer the trust as a prudent person would, i.e., exercising reasonable care, skill, and caution. Connecticut precedent establishes that a trustee has a fundamental duty to preserve and maintain trust assets and that a trustee must take reasonable steps to enforce and collect claims and demands belonging to the estate. Tatalian v. Tyler, 220 A.3d 802 (Conn. App. 2019).
A specific application of this duty is that the trustee must take reasonable steps to uncover and seek the redress of breaches of fiduciary duty committed by previous fiduciaries. Therefore, the court ruled that the trustee has a duty, “in the case of a testamentary trust against the executors of the estate, to compel them to transfer to him as trustee property [that] they are under a duty to transfer, or to redress any breach of duty committed by them.” Id. at 592 (quoting Restatement (Second) Trusts § 177, comment (a)). This rule also applies when the will includes a bequest to a living trust, as was the case in Barash: therefore, “[w]hen an inter vivos trust is a beneficiary of a will, the trustee has a duty to pursue reasonable claims on behalf of the trust against the executor of the estate.” Id. at 593. This duty further requires the trustee to exercise due diligence to “secure possession of all assets of the trust estate.” Id. at 595. However, the duty is not absolute: whether the trustee exercised due diligence must be considered in light of the circumstances surrounding the administration of the trust.
The court noted that because the trial court incorrectly held that Barbara did not have a duty to protect and collect the potential trust assets, it never reached the issue of whether there was sufficient evidence of her alleged breach of fiduciary duty to survive summary judgment. The court determined, based on its own review of the record, that there were genuine issues of material fact regarding whether Barbara had breached her fiduciary duties and that she knew or should have known about alleged breaches of fiduciary duty by the executor. Therefore, it reversed and remanded for further proceedings in accordance with its opinion.
Takeaways: Note that where a trust agreement creates subtrusts that have different trustees from the parent trust, the trustees of the subtrusts may have a similar fiduciary duty to exercise due diligence to compel the administrative trustee to transfer assets to the subtrusts.
Bill Prohibiting Unauthorized Sale of Biometric Data of Deceased Human Body Filed in Florida Senate
504, Reg. Sess. (Fla. 2024)
On January 9, 2024, S. 504, “An act relating to the sale of a deceased human body’s biometric data” was introduced in the Florida Senate. Biometric data is defined as “data generated by measurements of an individual’s biological characteristics,” including “fingerprints, voiceprints, eye retinas or irises, or other unique biological patterns or characteristics used to identify a specific individual.” S.B. 504 would prohibit the sale of the biometric data of a deceased human body if a person who is legally authorized to do so has opted out of the sale. In addition, a funeral establishment that (1) fails to provide a legally authorized person with a written disclosure of its policies regarding the deceased’s biometric data and specifying the biometric data it collects, the purpose of the collection, and whether it sells or intends to sell the data to a third party or (2) that sells the biometric data without providing a legally authorized person with the opportunity to opt out of the sale would be subject to disciplinary grounds under S. 504. The bill would not provide a private right of action.
The bill was filed after an Orlando man was contacted by a jewelry maker who offered to sell him jewelry containing his deceased mother’s fingerprint. The funeral establishment that had provided services to the family had obtained and provided his deceased mother’s fingerprint to the jewelry maker without the knowledge or consent of the man or other family members.
Takeaways: Three states currently have statutes protecting the biometric data of living people against unauthorized collection, use, and disclosure: Illinois (740 Ill. Comp. Stat. 14), Washington (H.R. 1155), and Texas (Tex. Bus. & Com. Code § 503.001). Illinois’s Biometric Information Act and Washington’s My Health My Data Act (effective for regulated entities on March 31, 2024, and for small businesses on June 30, 2024) provide a private right of action, but Texas’s Capture or Use of Biometric Identifier Act may only be enforced by the state’s attorney general. Although Fla. S. 504 would not provide a private right of action if enacted, it would be the first law in the nation to protect against the unauthorized use or sale of a deceased person’s biometric data.
Estate planners may wish to make their clients aware of such issues and include appropriate memorialization of wishes, even if laws do not (yet) exist in their jurisdiction.
Elder Law and Special Needs Law
US Supreme Court Dismisses Case Addressing Standing of ADA Tester as Moot
Acheson Hotels v. Laufer, 144 S. Ct. 18 (Dec. 5, 2023)
Plaintiff Deborah Laufer has filed hundreds of lawsuits under the Americans with Disabilities Act (ADA) (42 U.S.C. §§ 12101–12213 and 47 U.S.C. §§ 225 and 611) as an ADA tester who searches the internet for hotel websites that do not provide the required accessibility information to force their compliance and collect judgments. She filed a lawsuit against Acheson Hotels, LLC for noncompliance with the ADA even though she did not plan to stay at one of its hotels. Acheson argued that she lacked standing to sue under the ADA because she had no plan to book a room or stay at its hotel. The First Circuit Court of Appeals disagreed, holding that Deborah had standing to sue despite lacking an intention to stay at or book a room at one of Acheson’s hotels.
The United States Supreme Court granted certiorari to resolve a split among the federal circuit courts, noting in its opinion that Deborah had “single handedly generated a circuit split. The Second, Fifth, and Tenth Circuits have held that she lacks standing; the First, Fourth, and Eleventh Circuits have held that she has it.” Acheson Hotels v. Laufer, 144 S. Ct. 18, 21 (Dec. 5, 2023).
After the court granted certiorari, however, Deborah learned that her attorney had been suspended from the practice of law for lying in fee petitions and during settlement negotiations. She then voluntarily dismissed all of her pending suits with prejudice and filed a suggestion of mootness with the Supreme Court in her suit against Acheson. In addition, she disavowed an intention to file any future ADA tester lawsuits. Acheson asserted that the court should settle the standing issue for the sake of efficiency and expressed concern that Deborah had dismissed the case merely to evade the court’s review. The court was not convinced that Deborah had sought to manipulate the court’s jurisdiction because she had dismissed her pending cases voluntarily and had represented to the court that she would not file additional ADA tester cases. Therefore, although “the circuit split is very much alive,” Deborah’s case against Acheson was dead: the court dismissed it as moot, vacating the judgment and remanding the case to the First Circuit Court of Appeals with instructions to dismiss the case. Id. at 21.
Takeaways: Acheson warned that if the case was dismissed, it may be a long time before the issue of standing to sue under the ADA was once again before the court: a hotel may regard a challenge to a federal circuit court of appeal’s precedent as “pointless.” Id. Nevertheless, the court emphasized that “we might exercise our discretion differently in a future case.” Id.
Settlement Agreement Provides Relief for SSI Recipients Who Were Assessed Overpayments and Had Unfair Reductions in Benefits During Pandemic
Campos v. Kijakazi, No. 21 Civ. 5143 (VMS), 2023 WL 8096923 (E.D.N.Y. Nov. 20, 2023)
On November 20, 2023, the named plaintiffs in a class action suit and the Social Security Administration (SSA) concluded nearly two years of litigation and settlement negotiations by obtaining approval from the federal district court for the eastern district of New York for a proposed settlement agreement.
The named plaintiffs were recipients of benefits from the federal Supplemental Security Income (SSI) program, which provides monetary support to low-income individuals who are blind, disabled, or aged 65 or older. Due to income and resource limitations that these individuals must meet to qualify for SSI benefits, any changes in their finances must be promptly reported to the SSA, and failure to report changes in their income could result in overpayments that the SSA would require them to repay.
In March 2020, the SSA closed its field offices due to the COVID-19 pandemic, impeding the ability of SSI recipients to report changes in their income and resources. The SSA issued an interim final rule, Waiver of Recovery of Certain Overpayment Debts Accruing during the COVID-19 Pandemic Period, on August 27, 2020, allowing the SSA to assume that certain individuals who accrued overpayment debts between March 20 and September 30, 2020, were without fault and applying a streamlined waiver process to decide waiver requests from those individuals. In their complaint, the named plaintiffs asserted that the interim final rule contained arbitrary limitations regarding when an SSI recipient could qualify for the streamlined waiver, causing many of them to be assessed overpayments and subjected to unfair and improper reductions in their benefits.
The settlement agreement contains the following terms:
- The SSA agrees to waive all of the March through September 2020 overpayments without requiring affected individuals to submit separate waiver requests.
- For individuals who have already repaid all or part of a waived overpayment to the SSA, the amount repaid is deemed an underpayment.
- The court certified a class that includes all individuals who incurred a manual SSI overpayment or an overpayment identified through automated processes between March 2020 and September 2020 or with an SSI overpayment debt incurred between October 2020 and April 2023.
- The SSA agrees to waive all manual SSI overpayments without requiring class members to take any action to benefit from the waiver.
- The SSA will repay any amounts it had previously recouped from affected SSI beneficiaries.
- Class members who were assessed an SSI overpayment between October 2020 and April 2023 and class members who were assessed an overpayment from March to September 2020 identified through automated processes will receive relief in the form of administrative guidance and notice sent to each class member.
Takeaways: Due to the closure of the SSA offices, many low-income SSI beneficiaries lost some or all of their benefits, magnifying their financial challenges during the COVID-19 pandemic. According to the New York Legal Assistance Group, which was appointed as class counsel in Campos, “[t]his settlement will provide automatic remedies to nearly a quarter million SSI recipients, who will have back benefits credited to their accounts without having to take any action.” In addition, the settlement agreement clarifies the standards for nearly two million additional SSI recipients by which they can request forgiveness of overpayments that arose during the pandemic.
FinCEN Issues Final Rule on Access to Beneficial Ownership Information Disclosed Pursuant to Corporate Transparency Act
Beneficial Ownership Information Access and Safeguards, 31 C.F.R. § 1010 (Dec. 22, 2023)
On December 21, 2023, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule (the Access Rule) spelling out the circumstances under which beneficial ownership information submitted to it by reporting companies pursuant to the Corporate Transparency Act (CTA) and in compliance with FinCEN’s Beneficial Ownership Information Reporting Rule may be accessed by specified federal agencies; state, local, tribal, and foreign governments; and financial institutions. In addition, it sets forth measures that those agencies and institutions must take to protect the confidentiality and security of the information. The CTA prohibits the knowing disclosure or use of beneficial ownership information from a report submitted pursuant to the CTA unless disclosure is permitted under the CTA. Violations may result in a civil penalty of $500 per day or criminal penalties of not more than $250,000 or imprisonment for up to five years.
Takeaways: The Access Rule is designed to protect the confidentiality of beneficial ownership information submitted to FinCEN by reporting companies. Reporting companies—defined generally as any company formed by filing paperwork with the Secretary of State or equivalent official—that are created or registered before January 1, 2024, have until January 1, 2025, to file an initial report. Business entities created or registered after January 1, 2024, and before January 1, 2025, will have 90 days after creation or registration to file a report. Entities created on or after January 1, 2025, will have 30 days to submit the reports to FinCEN. FinCEN has now launched its BOI E-Filing System to support the electronic filing of the required reports. In addition, it has established a webpage for those interested in obtaining a FinCEN ID, which is a unique identifying number issued to an individual by FinCEN to simplify the reporting process. WealthCounsel members can check our CTA webpage for new developments, webinars, articles, drafting updates, client handouts, and marketing materials.
New York Enacts LLC Transparency Act
995B/A. 3484, 2023-2024 Reg. Sess. (N.Y. 2023)
On December 23, 2023, New York Governor Kathy Hochul signed the LLC Transparency Act, which is similar to the federal Corporate Transparency Act (CTA) and requires the disclosure of beneficial ownership information for limited liability companies (LLCs) formed in New York. Section 215 of the Act specifies that beneficial ownership information must be filed with New York’s Department of State when the articles of organization are filed. The following information must be disclosed:
(1) full legal name
(2) date of birth
(3) current business street address
(4) a unique identifying number from an acceptable identification document defined in 31 U.S.C. § 5336 (a)(1) (Corporate Transparency Act)
Further, the information must be updated when changes occur.
An LLC may comply by submitting a copy of the initial report submitted to the federal government under the CTA. The LLC Transparency Act contains some exemptions for larger companies that are already regulated as set forth in the CTA. Failure to comply for 30 days or more will result in a past-due notice in the Department of State’s records. Failure to comply for a period exceeding two years will result in a $250 fine and a public notice of delinquency.
Although the initial version of New York’s LLC Transparency Act would have created a publicly available database containing the personal information of beneficial owners, due to privacy concerns, Governor Hochul negotiated a compromise agreement with the legislature that would make the information accessible only to government and law enforcement agencies. The new law will take effect January 1, 2025.
Takeaways: Governor Hochul’s office indicated that the Act is designed so bad actors will be held accountable for “wage theft, money laundering, tenant mistreatment and other unlawful activity” due to the “opaque ownership structure of an LLC.” Businesses formed on or before the New York LLC Transparency Act’s effective date must file the beneficial ownership information required with the Department of State no later than January 1, 2025, and entities formed on or after that date must file a report when their articles of organization are filed.
LLCs and other business entities are required to comply with the beneficial ownership reporting requirements of the federal CTA starting January 1, 2024. As noted, timely submission to the New York Department of State of a copy of the initial report that was filed with the federal government as required by the CTA will also comply with the New York LLC Transparency Act.
Texas Prohibits Private Employers from Imposing a COVID-19 Vaccine Mandate
7, 88th Leg. 3rd Special Sess. (Tex. 2023)
On November 10, 2023, Texas Governor Greg Abbott signed S. 7, which prohibits private employers from adopting or enforcing COVID-19 mandates and specifies administrative penalties for noncompliance. The law, which applies to employees, contractors, and applicants, prohibits the adoption or enforcement of a mandate requiring a COVID-19 vaccination and bans adverse action for refusal to obtain a COVID-19 vaccination. Healthcare facilities and providers and physicians may establish and enforce a reasonable policy that requires unvaccinated individuals who are employees or contractors of the facility, provider, or physician to use protective medical equipment based on the level of risk the individual presents to patients from the individual’s routine and direct exposure to patients; the establishment and enforcement of such a policy is not an adverse employment action under the law. Employers that violate S. 7 will be subject to an action by the attorney general for injunctive relief. In addition, the Texas Workforce Commission may impose an administrative penalty of $50,000 per violation unless the employer takes corrective action.
Takeaways: S. 7 takes effect February 6, 2024, and applies only to actions that employers take on or after that date. Employers should immediately review their COVID-19 vaccination policies and implement modifications necessary to ensure their compliance with the new law.