From the Internal Revenue Service’s (IRS’s) release of the 2024 lifetime exemption and annual gift exclusion amounts, to the Social Security Administration’s announcement of 2024 cost-of-living adjustments and a new final rule regarding the use of FinCEN identifiers 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.

Estate Planning

Internal Revenue Service Releases 2024 Lifetime Exemption and Annual Gift Exclusion Amounts

Rev. Proc. 2023-34 (Nov. 9, 2023)

On November 9, 2023, the IRS issued Revenue Procedure 2023-34, providing the annual inflation adjustments for tax provisions to be used by individual taxpayers on their 2024 returns. The adjustments include the following:

• For 2024, the estate, gift, and generation-skipping transfer tax exemption amount is $13,610,000, an increase from $12,920,000 for transfers in 2023.
• The annual exclusion for gifts is $18,000 for calendar year 2024, an increase from $17,000 for 2023.
• For 2024, the first $185,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year, an increase from $175,000 for 2023.

Takeaways: These projections reflect the continued high rate of inflation. The increase in basic exclusion amount means that an individual will be able to transfer $690,000 ($1,380,000 for married couples) more free of transfer tax liability in 2024 than they could in 2023. The $18,000 annual exclusion amount for gifts represents the third increase in three years: the exclusion amount for gifts was increased to $17,000 in 2023 from $16,000 in 2022 after remaining at $15,000 from 2018 through 2021. Estate planning attorneys should work with clients to determine if they should take advantage of the planning opportunities provided by these increases, especially in light of the sunset of the enlarged exemption amount at the end of 2025.

Massachusetts Doubles Its Estate Tax Exemption Amount 

2023 Mass. Acts ch. 50, § 37

On October 4, 2023, Massachusetts Governor Maura Healey signed An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity (the Act), which, increases the state’s estate tax exemption amount to $2 million, effective retroactively for decedents dying on or after January 1, 2023 (§ 37). The estate tax generally applies to the taxable estates of decedents who are Massachusetts residents at the date of death and to the taxable estates of nonresident decedents who own real and tangible personal property located in Massachusetts at the date of death. (Mass. Gen. L. ch. 65C, § 2A).

Under prior law, no tax was owed if a decedent’s estate was $1 million or less. However, estates valued at more than $1 million were subjected to tax on the entire value of the estate. The Act amended prior law to provide a nonrefundable tax credit of up to $99,600 designed to cover the first $2 million; thus, only the amount exceeding $2 million is subject to the estate tax rather than the entire value of the estate. The new tax rates range from 7.2 to 16 percent, increasing with the size of the taxable estate. In addition, although the value of real property and tangible personal property located outside of Massachusetts is includible in a Massachusetts decedent’s gross estate, the Act provides that the amount of the estate tax will be reduced proportionately by the value of that property.

The Act also reduces the state’s short-term capital gains tax from 12 percent to 8.5 percent, effective January 1, 2023.

Further, the Act amends the Massachusetts “millionaire tax,” which is a 4 percent surtax on income exceeding $1 million. Beginning with the 2024 tax year, the Act requires married couples who file joint federal tax returns to also file joint, rather than individual, Massachusetts returns; this amendment precludes them from using a loophole that allowed married couples to double the amount of income not subject to the millionaire tax filing individually with the state and jointly at the federal level. This rule applies to the 2024 tax year.

Takeaways: Because the new estate tax exemption amount is retroactive to January 1, 2023, personal representatives who filed estate tax returns for decedents who died earlier this year may seek refunds based on the new exemption amount. Those whose estate tax returns are due soon may seek extensions to allow additional time for the Massachusetts Department of Revenue to issue revised estate tax forms. Massachusetts estate planning attorneys should advise affected clients to adjust their estate plans as needed to take advantage of the new exemption amount. On November 1, 2023, the Massachusetts Department of Revenue issued FAQs: New Estate Tax Changes as an additional resource for those affected by the new law.

California Adopts Uniform Directed Trust Act

801, 2023-2024 Reg. Sess. (Cal. 2023)

On October 10, 2023, Governor Gavin Newsom signed the California Uniform Directed Trust Act, which establishes the duties and responsibilities of trust directors (sometimes called trust advisors or protectors), i.e., those other than a trustee who have a role in directing a trust’s administration, and the duties and responsibilities of the trustee who is subject to the powers of the trust director, i.e., the directed trustee. The new law specifies the powers that may be given to a trust director and the information that must be exchanged between the trust director and the directed trustee. The law provides that a trust director has the same fiduciary duties and liabilities as a trustee in a like position and under similar circumstances. Further, it requires the directed trustee to comply with a trust director’s exercise or nonexercise of their power of direction unless compliance would require the trustee to engage in willful misconduct. 

Takeaways: The new law provides a regulatory framework for the use of trust directors alongside trustees in California. It provides fiduciary protection for beneficiaries and additional flexibility by enabling a grantor to structure a trust for their situation: a trustee can perform administrative duties and a trust director can attend to the needs and values of the trust’s grantor and beneficiaries. 

Trust Exempt from Realty Transfer Tax After Retroactive Modification 

Ebersole v. Pennsylvania, No. 360 F.R. 2020, 2023 WL 6560103 (Pa. Commw. Ct. Oct. 10, 2023)

On September 4, 2018, Bernard Ebersole and Jennifer Matlock, a married couple, created a trust (Trust). The Trust stated that assets transferred to the trust should be held “for our benefit while we are living.” Ebersole v. Pennsylvania, No. 360 F.R. 2020, 2023 WL 6560103, at *1 (Pa. Commw. Ct. Oct. 10, 2023). Bernard and Jennifer transferred three parcels of real property to the trust in January 2019. Under Pennsylvania law, certain transfers of real property would result in the assessment of a realty transfer tax; Bernard and Jennifer sought to ensure that these transfers would fall under an exemption. 

However, in August 2019, the Pennsylvania Department of Revenue assessed a realty transfer tax on each of the properties transferred to the Trust. The notice stated that the exemption did not apply because “[o]ne or more of the possible/contingent beneficiaries disqualified the transfer” and the Trust did not qualify as a living trust. Id. at *2.

In October 2019, Bernard and Jennifer amended the Trust to try to ensure the compliance necessary to avoid the tax assessments. Namely, they revised Article 5, entitled “Administration of Our Trust during a Grantor’s Incapacity,” to eliminate the power of the trustee to make distributions “for the health, education, and welfare of the dependent of the incapacitated grantor for support.” The amendment also eliminated the power of the trustee to make charitable or educational gifts on behalf of the incapacitated grantor. Further, it added a provision mandating that no distributions from the Trust “shall ever be made to any person who would fail to meet the requirements necessary to exclude the transfer of real estate to this Trust from taxation under . . . the Pennsylvania Realty Transfer Tax Act.” Id.

Several days after amending the Trust, Bernard and Jennifer filed a petition for a tax assessment redetermination. However, the Board of Appeals denied their petition, asserting that their amendment was irrelevant.

In December 2019, Bernard and Jennifer filed a petition with the Court of Common Pleas to modify the Trust to its inception date. The court then entered an order modifying the Trust to conform to the October 2019 amendment and making the modification “retroactive to September 4, 2018” (which was before the transfer that triggered the tax initially). However, the Board of Finance and Review denied Bernard and Jennifer’s challenge to the transfer tax assessment despite the court’s order. 

On appeal, Bernard and Jennifer asserted that the Board of Finance and Revenue erred in determining that the transfers to the trust were taxable. After rejecting several arguments made by the Commonwealth of Pennsylvania that Bernard and Jennifer had violated the Rules of Appellate Procedure and thus waived all issues in their appeal, the court considered the merits of the case. It noted that the realty transfer tax established in Article XI-C of the Tax Reform Code of 1971 established that the tax shall not be imposed upon the transfer to a trustee of an ordinary trust for no or nominal consideration when the “transfer of the same property would be exempt if the transfer was made directly from the grantor to all of the possible beneficiaries.” Id. at *5. Because Article XI-C specifically exempts direct transfers of real property to a spouse or child from taxation, a transfer to an ordinary trust that names a spouse or child as a beneficiary is thus also exempt. Article XI-C also exempts from taxation living trusts that function as will substitutes. 

Although the Commonwealth conceded that the amended Trust was a living trust, it argued that Bernard and Jennifer’s retroactive amendment could not defeat the assessment of the realty transfer tax. The court disagreed, citing 20 Pa. C.S. § 7740.6, which states, “The court may modify a trust instrument in a manner that is not contrary to the settlor's probable intention in order to achieve the settlor's tax objectives. The court may provide that the modification has retroactive effect.” Id. at *6. 

The court determined that both the relevant tax code and probate code sections addressed the subjects of taxation and trusts, and thus, must be read in pari materia, that is, “construed together, if possible, as one statute.” Id. at *8. After doing so, the court ruled that 20 Pa. C.S. § 7740.6 did not impose any limitations on a court’s authority to order a retroactive modification of a trust to achieve a settlor’s tax objectives, as long as the modification aligned with the settlor’s “probable intentions.” Further, the court found that the statements of value that Bernard and Jennifer filed with the recorder of deed demonstrated their tax objective, and their amendment of the Trust established their probable intention; therefore, their transfers of real property to the Trust were excluded from the realty transfer tax and their petition for a tax assessment redetermination should have been granted. Accordingly, the court reversed the order of the Board of Finance and Revenue and remanded for action consistent with the court’s opinion.

Takeaways: Revocable living trusts (RLTs) often contain gifting powers that can cause clients to miss opportunities to benefit from transfer tax exemptions, in jurisdictions where such exemptions exist, when real property is transferred to their trust. The Ebersole case provides an interesting strategy for an RLT to be amended retroactively to remove the gifting power for the transfer of realty property to the trust to qualify for the tax exemption. 

Estate Planning/Elder Law and Special Needs Law

Policy Owner Must Strictly Comply with Terms of Life Insurance Policy to Change Beneficiary Designation 

American Gen. Life Ins. Co. v. O.H.M., No. 22-10220, 2023 WL 5745485 (11th Cir. Sept. 6, 2023)

In 2003, Dev-Anand Maharajh purchased a $1 million life insurance policy from American General Life Insurance Company (American General), with his then-wife Jennifer named as the primary beneficiary and any children born to that marriage as contingent beneficiaries. While his divorce from Jennifer was pending in July 2008, Dev-Anand submitted a request to designate their daughter, O.H.M., as the sole primary beneficiary, with Jennifer as the trustee for O.H.M. under the minor beneficiary clause. Dev-Anand and Jennifer’s divorce was final in September 2008, and Dev-Anand married Lisa in 2009. 

After his marriage to Lisa, Dev-Anand submitted another request to modify his beneficiary designation to name Lisa as primary beneficiary of 75 percent and O.H.M. as primary beneficiary of 25 percent. He also listed both O.H.M. and his new wife Lisa’s minor child from her previous marriage as 50 percent contingent beneficiaries. American General sent Dev-Anand a letter indicating that his request could not be resolved until he specified different parties for the primary and contingent beneficiary designations and indicated his relationship with the new contingent beneficiary. Dev-Anand never responded to American General’s letter.

In April 2020, Dev-Anand died. Both Lisa, as widow and expectant beneficiary, and Jennifer, as parent and legal guardian of O.H.M., submitted “Proof of Death Claimant’s Statements” to American General. 

American General filed a complaint for interpleader relief in the federal district court due to its uncertainty about who was entitled to the policy’s death benefit. The district court granted O.H.M.’s motion for summary judgment, and Lisa appealed to the Eleventh Circuit Court of Appeals.

The court, in a de novo review, determined that, under Florida law, an insured “must strictly comply with the terms of the policy to effectuate a change in the beneficiary.” American Gen. Life Ins. Co. v. O.H.M., No. 22-10220, 2023 WL 5745485, at *2 (11th Cir. Sept. 6, 2023). The policy provided: 

While this policy is in force the owner may change the beneficiary or ownership by written notice to us. When we record the change, it will take effect as of the date the owner signed the notice, subject to any payment we make or other action we take before recording.

Id. The court found that under Florida law, the phrase “subject to any payment we make or other action we take before recording” must be read as creating “some objectively reasonable standard.” Id. The court further determined that strict compliance with the policy may require an insured to respond appropriately to cure defects. It agreed with the district court that American General had responded to Dev-Anand’s defective beneficiary request in an objectively reasonable manner and that his failure to respond to American General’s letter for 10 years was a failure to strictly comply with the terms of the policy. Although Lisa argued that nothing in the policy precluded American General from effectuating Dev-Anand’s beneficiary change request, the court disagreed, holding that only the owner may change the beneficiary: “Neither Lisa nor anyone else is entitled—after the owner’s death—to change the beneficiary.” Id. at *3. Accordingly, O.H.M. was entitled to 100 percent of the policy’s death benefit.

Takeaway: The American General case provides a reminder about the substantial impact of a policyholder’s failure to update beneficiary designations in a manner wholly consistent with the insurer’s policy and procedure. Elder law and estate planning attorneys can provide a great service to their clients by reminding them to update their beneficiary designations, not only for their insurance policies, but also for their retirement and other accounts.

Elder Law and Special Needs Law

Social Security Administration Announces Cost-of-Living Adjustments for 2024

On October 12, 2023, the Social Security Administration announced a 3.2 percent cost-of-living adjustment (COLA) for 2024 for the 71 million Americans who receive Social Security or Supplemental Security Income (SSI) benefits. The COLA will be included in benefits payable to Social Security beneficiaries starting in January 2024 and to SSI recipients starting on December 29, 2023. The maximum SSI amounts for 2024 are $943 for an eligible individual, $1415 for an eligible individual with an eligible spouse, and $472 for an essential person.

Takeaways: The 2024 COLA, although much lower than the 2023 COLA of 8.7 percent, will help individuals who receive Social Security and SSI benefits mitigate the impact of inflation. Seniors on fixed incomes are particularly affected by inflationary economic conditions. Elder law attorneys can use the news of the cost-of-living adjustment to meet with clients to ensure that existing estate planning documents remain aligned with current client goals. Individuals with disabilities and low-income seniors are eligible for SSI only if their income and resources fall within certain limits. SSI benefits may only be used to pay for basic needs such as food, clothing, and housing. Because SSI benefits will be reduced by income or in-kind support from others, special needs practitioners may recommend the creation of a special needs trust or ABLE Account to provide funds for expenses such as clothing, education, and recreation without affecting SSI eligibility.   

Business Law

FinCEN Issues Final Rule on Reporting Companies’ Use of Unique Identifying Numbers for Beneficial Owner Reports

Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities, 31 C.F.R. pt. 1010 (2023)

On November 7, 2023, the Department of the Treasury issued a final rule providing guidance to business entities that are reporting companies under the Corporate Transparency Act (CTA) about when and how they may use an entity’s Financial Crimes Enforcement Network (FinCEN) identifier instead of identifying information about beneficial owners when providing the beneficial ownership information for certain related entities. The CTA requires reporting companies to submit certain information about the company. In addition, they must provide certain information about the company’s beneficial owners—those who own or control the entities—and the individuals who are the company applicants who filed the documents necessary to form the company. This information includes (1) the individual’s full legal name; (2) date of birth; (3) current residential or business street address; and (4) a unique identifying number from an acceptable document such as a passport—or the individual’s FinCEN identifier (See 31 U.S.C. 5336(b)(2)).

The new final rule amends the FinCEN’s 2022 Beneficial Ownership Information Reporting Requirements Rule (Final Reporting Rule) to include additional rules for the use of a FinCEN identifier—“a unique identifying number that FinCEN will issue to individuals who have provided FinCEN with their BOI and to reporting companies that have filed initial BOI reports.” 

Obtaining a FinCEN identifier is not required, but it is an option aimed at simplifying the reporting process and allowing business entities or individuals to report identifying information directly to FinCEN. The Final Reporting Rule finalized the use of FinCEN identifiers for individuals but did not finalize the rule pertaining to the use of a business entity’s FinCEN identifier in lieu of information about an individual beneficial owner. The CTA specifies that if an individual “is or may be a beneficial owner of a reporting company by an interest held by the individual in an entity that, directly or indirectly, holds an interest in the reporting company,” the reporting company may report the appropriate entity’s FinCEN identifier in lieu of providing the individual’s BOI. 31 U.S.C. 5336(b)(3)(C).

The new final rule provides three criteria that must be met for a reporting company to report certain intermediate entities’ FinCEN identifier instead of information about an individual beneficial owner, specifically,

(1) The other entity has obtained a FinCEN identifier and provided that FinCEN identifier to the reporting company;

(2) An individual is or may be a beneficial owner of the reporting company by virtue of an interest in the reporting company that the individual holds through an ownership interest in the other entity; and 

(3) The beneficial owners of the other entity and of the reporting company are the same individuals. 

Use of FinCEN Identifiers for Reporting Beneficial Ownership Information of Entities, 31 C.F.R. pt. 1010 (2023). However, “if at any time the reportable beneficial owners of either the reporting company or the entity whose FinCEN identifier was reported changes such that the two are no longer identical, then the reporting company must file an update with FinCEN and can no longer report the relevant entity’s FinCEN identifier.” Id. The new rule is effective January 1, 2024. The preamble of the new final rule states that it is intended to “improve the clarity of the provision and make it more likely that reporting companies will use the FinCEN identifier as intended.” 

Takeaway: Millions of small businesses will need to file beneficial ownership reports to comply with the CTA starting in January 2024. Existing entities must file beneficial ownership reports before the end of 2024 and new entities must file their reports within 30 days after they are created or registered—although another new rule has been proposed that may extend their filing deadline to 90 days. In September 2023, FinCEN issued a Small Entity Compliance Guide, but additional guidance, including the new final rule, continues to be issued. The latest final rule related to FinCEN identifiers is significant because the use of a FinCEN identifier will ease the administrative burden for business entities that must file multiple reports in situations where multiple reporting companies are related to each other.

Internal Revenue Service Provides Withdrawal Process for Employee Retention Credit Claims

On October 19, 2023, the IRS announced a withdrawal process for employers who filed an Employee Retention Credit (ERC) claim (a refundable tax credit designed to encourage businesses to continue paying employees during the COVID-19 pandemic under certain circumstances) after being pressured by promoters. The withdrawal option is available to employers who filed an ERC claim but have not yet received a refund, enabling them to avoid the possibility of having to repay a refund for which they are ineligible, along with interest and penalties. Those who willfully file fraudulent claims but later withdraw them are not exempt from criminal investigation and potential prosecution. 

In September 2023, the IRS imposed a moratorium on processing new ERC claims and increased the processing time for claims submitted before the moratorium because of a large number of ineligible claims and concerns about ERC scams.

Takeaways: The new withdrawal process provides relief to employers victimized by promoters that pressured them into filing ineligible claims by treating claims that are withdrawn as if they had never been filed.

California Enacts New Employment-Related Laws

616, 2023-2024 Reg. Sess. (Cal. 2023); S. 848, 2023-2024 Reg. Sess. (Cal. 2023); Assemb. B. 1076, 2023-2024 Reg. Sess. (Cal. 2023)

Governor Gavin Newsom recently signed several employment-related bills, including the following, which are effective January 1, 2024: 

Senate Bill 616: On October 4, 2023, Governor Newsom approved a bill increasing the amount of paid sick leave employers are required to provide employees from no less than 24 hours or three days to no less than 40 hours or five days. In addition, the new law increases the total amount of paid sick leave employers must permit employees to accrue and carry over from one year to the next from six days or 48 hours to ten days or 80 hours. 

Senate Bill 848: On October 11, 2023, Governor Newsom signed a bill making it an unlawful employment practice for an employer to refuse to grant an employee’s request for up to five days of unpaid leave for reproductive-related losses, such as a failed adoption or surrogacy, miscarriage, stillbirth, or unsuccessful assisted reproduction. The leave must be taken within three months of the event. The employer is not obligated to grant a total amount of reproductive loss leave time in excess of 20 days within a 12-month period if more than one loss event occurs during that period. 

Assembly Bill 1076: On October 13, 2023, Governor Newsom signed a bill codifying case law that voided noncompete agreements in the employment context. The new law requires employers to provide written notice to current and former employees who were employed after January 1, 2022, that any noncompete covenants they signed are void. The notice must be provided no later than February 14, 2024. Failure to provide the notice or inclusion of a noncompete in an employment agreement is a per se act of unfair competition. 

Takeaways: California has once again reinforced its pro-employee stance by enacting several employment-related laws. Employers should adapt their policies and procedures to ensure compliance with the new leave laws and take steps to ensure that timely written notice is provided to all employees who have signed an employment agreement containing a noncompete clause or a standalone noncompete agreement. In addition, going forward, no California employee or prospective employee should be asked to sign a noncompete agreement.