Current Developments: October 2023 Review

Oct 13, 2023 10:00:00 AM


monthly-recap (1)

From the inclusion of property interests in a marital estate that are gifted during a marriage to a divorcing spouse, to a determination of the scope of immunity provided to nursing homes under Connecticut’s COVID-19 executive order and a new proposed rule that would extend the deadline for some entities to report 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.

Estate Planning

Property Interests, Including Interest in Irrevocable Trust, Gifted to Wife During Marriage Includible in Marital Estate for Purposes of Equitable Distribution

Jones v. Jones, No. 21-P-655, 2023 WL 5729650 (Mass. App. Ct. Sept. 12, 2023)

Juliana and Dylan Jones were married in 1998. Dylan filed for divorce in 2017. In September 2019, the trial court issued a divorce judgment that divided the marital estate equally between Juliana and Dylan. Juliana appealed the judgment on the basis that the trial court had erred in including in the marital estate for purposes of equitable distribution her interests in several assets that had been gifted to her by her mother, including (1) her interest, as sole beneficiary, in the Juliana Jones Irrevocable Trust (JJIT); (2) a 99 percent interest in a limited liability company (LLC) that held title to the marital home and a one-third interest in real property located in Michigan; and (3) a certificate of deposit issued by UBS Financial Services. 

The JJIT contained provisions entitling Juliana to receive both discretionary distributions of trust income and principal that the trustee in his sole and absolute discretion deemed necessary for her best interests and welfare and a mandatory distribution of the trust corpus after her mother’s death. Juliana asserted that the trial court erred in its determination that she would ultimately receive the entire trust corpus because of the broad discretion provided to the trustee, which she argued made her interest in it too remote or speculative to be included in the marital estate. 

The Massachusetts Court of Appeals disagreed, holding that the trustee did not have the power to divest Juliana’s interest in the trust corpus despite a trust provision permitting him to postpone her enjoyment and possession of the mandatory distribution for a compelling reason. The court determined that the trustee’s discretion to postpone the mandatory distribution was subject to judicially enforceable limits. Further, the intention of Juliana’s mother, as settlor of the JJIT, to benefit Juliana did not preclude the inclusion of the JJIT in the marital estate because Juliana retained the trust interest. Therefore, Juliana’s interest in the JJIT was sufficiently fixed and enforceable to constitute a property interest that was includible in the marital estate, and the trial court properly included the JJIT in the marital estate for purposes of equitable distribution under Mass. Gen. Laws ch. 208, § 34.

The court also rejected Juliana’s assertion that the trial court had erred in applying Massachusetts law to determine whether her interest in an LLC that held Michigan real property was included in the marital estate: she argued that Michigan law was applicable and the law excluded the property from the marital estate. The court ruled that the Massachusetts equitable distribution statute, which permitted the trial court to assign property owned by either spouse including property located outside of Massachusetts, governed the property division. As a result, Juliana’s indirect interest in the Michigan real property was properly included in the marital estate.

Although the court did not go into detail regarding the UBS certificate of deposit also gifted to Juliana by her mother, it found that, because the JJIT, Michigan real property, and UBS certificate of deposit allowed Juliana and Dylan to enjoy a lifestyle they otherwise would not have been able to afford during their marriage, the trial court could reasonably conclude that those assets were “woven into the fabric of the marriage.” Jones v. Jones, No. 21-P-655, 2023 WL 5729650, at *9 (Mass. App. Ct. Sept. 12, 2023). Therefore, they were properly included in the marital estate for purposes of equitable distribution.

Takeaways: In drafting a trust for the benefit of one spouse, the grantor should keep in mind that if a court determines that the beneficiary spouse has a fixed and enforceable property right in the trust corpus, it may be includible in the marital estate in the event of a divorce. In addition, the court’s decision in Jones provides a reminder that, depending on the applicable state law, for purposes of determining which property is part of the marital estate for purposes of equitable distribution, a court may not be bound by “traditional concepts of title or property.” Id. at *3. Therefore, a spouse who wants to own property separately must carefully consider how assets gifted to them during the marriage are handled and avoid allowing them to benefit both spouses during the marriage.

Relatives with No Familial Relation Other than Common Great-Grandparents Not Heirs Under Florida’s Intestacy Statute 

State of Florida v. In re Estate of Bruening, No. 4D2022-2421, 2023 WL 6134933 (Fla. 4th Dist. Ct. App. Sept. 20, 2023)

Kyle Bruening, who never married and had no children, died intestate leaving a large estate. The probate court appointed Kyle’s friend Michael Mahoney as the curator of the estate. Michael filed an affidavit of heirs indicating no known heirs, but Katherine Mills subsequently filed an affidavit of heirs asserting that she was Kyle’s second cousin and that Kyle had died with no relatives other than her. Katherine later filed a petition for administration asserting that she had an interest in the estate as a beneficiary and identifying two other beneficiaries she described as second cousins once removed; they were later determined to be her nephew and niece. The probate court appointed her as personal representative and ultimately entered an order authorizing Katherine to devise Kyle’s estate to Katherine and her niece and nephew as descendants of Kyle’s great-grandparents under Fla. Stat. § 732.103 (entitled “Share of other heirs”).

The State of Florida appealed the ruling, and after a de novo view, the District Court of Appeal of Florida reversed. The court ruled that the plain language of Fla. Stat. § 732.103 does not recognize individuals who have great-grandparents in common but no other familial relationship with a decedent as a class of persons who were heirs of the intestate decedent’s estate. To the contrary, for decedents who never married, their heirs are limited to, in order, (1) the decedent’s descendants; (2) the decedent’s parents; (3) the decedent’s siblings, or if they are deceased, then the siblings’ descendants; (4) the decedent’s grandparents; and (5) the decedent’s aunts and uncles, or if they are deceased, then their descendants. The court noted that this limitation of the classes of heirs who may inherit under the intestacy statute has been called the “laughing heir” rule: “[i]t eliminates inheritance by persons so remotely related to the decedent that they suffer no sense of loss, only gain, at the news of the decedent’s death.” State of Florida v. In re Estate of Bruening, No. 4D2022-2421, 2023 WL 6134933, at *2 (Fla. 4th Dist. Ct. App. Sept. 20, 2023) (quoting Michael D. Simon, et al., Litigation Under Florida Probate Code, § 2.3C. (13th ed. 2023)). Accordingly, Kyle’s intestate estate would escheat to the state under Fla. Stat. § 732.107(1).

Takeaways: Intestacy statutes are the state’s determination of the way an average person would want their estate to be distributed had they executed a will. In reality, however, the distribution schemes set forth in state intestacy statutes often fail to accomplish a decedent’s true wishes. The Bruening case illustrates for clients the importance of implementing an estate plan. Had Kyle executed a will or trust, he could have avoided two potential outcomes that many clients would likely view unfavorably: inheritance of his wealth by the state or by relatives he did not intend to benefit.

Elder Law and Special Needs Law

Connecticut Supreme Court Denies Nursing Home’s Motion to Dismiss Wrongful Death Claim Based on COVID-19 Executive Order Providing Immunity Under Certain Circumstances

Manginelli v. Regency House of Wallingford, Inc., 347 Conn. 581, 298 A.3d 263 (Conn. Aug. 8, 2023)

Darlene Matejek was a resident of Regency House of Wallingford Nursing and Rehabilitation Center (Regency House), a nursing home. She required assistance for bed and wheelchair transfers. In April 2020, Darlene fell during a bed transfer. Regency House staff returned her to her bed but did not immediately inform her family of the fall. Staff also failed to treat her pain resulting from what was later diagnosed as fractures of both femurs, and did not obtain medical treatment for her for two days. In addition, Regency House did not provide the prescribed physical therapy after Darlene returned from a stay in the hospital. Darlene died in December 2020.

Kimberly Manginelli filed a lawsuit asserting wrongful death claims based on medical negligence and medical recklessness against Regency House and related entities in her individual capacity and as administratrix of Darlene’s estate, alleging that the injuries resulting from Darlene’s fall and the delay in treatment resulted in her death. Regency House and the other defendants (collectively Regency House) filed a motion to dismiss, asserting that Executive Order No. 7V, which had been issued by Connecticut Governor Ned Lamont on April 7, 2020, in response to the COVID-19 pandemic, provided them with immunity from suit. Executive Order No. 7V provided that health care facilities were immune from suit due to acts or omissions undertaken in good faith while providing health care services in support of the response to COVID-19, 

including but not limited to acts or omissions undertaken because of a lack of resources, attributable to the COVID-19 pandemic, that renders the health care professional or health care facility unable to provide the level or manner of care that otherwise would have been required in the absence of the COVID-19 pandemic and which resulted in the damages at issue.

Manginelli v. Regency House of Wallingford, Inc., 298 A.3d 263, 269 (Conn. Aug. 8, 2023). Regency House asserted that it had experienced administrative challenges during the pandemic and that Darlene’s fall had occurred during the height of the COVID-19 outbreak. Because Darlene’s treatment occurred during its support of the state’s COVID-19 response, Regency House argued that it was immune from liability under Executive Order No. 7V. The trial court denied Regency House’s motion to dismiss, ruling that the executive order applied only to acts or omissions involving the diagnosis or treatment of COVID-19 patients. 

On appeal, Regency House asserted that the trial court’s ruling rendered the “lack of resources” language superfluous. The Connecticut Supreme Court agreed that the trial court had construed the language of the order too narrowly, but ruled that it had properly denied Regency House’s motion to dismiss. The court determined that for immunity to apply, the plain and ambiguous language of the “lack of resources” clause required Regency House to establish that “(1) there was a lack of resources, absent an assertion of another relevant circumstance, attributable to the COVID-19 pandemic, and (2) this lack of resources caused the acts and/or omissions at issue.” Id. at 271. Because Regency House had failed to establish that a particular lack of resources due to the COVID-19 pandemic caused the acts or omissions alleged by Kimberly in the wrongful death suit, the trial court had correctly denied its motion to dismiss.

Takeaways: The Manginelli ruling provides additional clarity to plaintiffs and defendants regarding the scope of the immunity provided to healthcare facilities under Executive Order No. 7V by ensuring that its construction is neither unnecessarily narrow as to limit its designed protections for residents nor overly broad as to place unreasonable liability on health care facilities.

California Trial Court Erred in Limiting Distributions for Special Needs to Expenses Arising from Disability

McGee v. State Dep’t of Health Care Servs., 309 Cal. Rptr. 3d 93 (Cal. Ct. App. May 24, 2023) 

In 2012, the trial court established a special needs trust for the benefit of Dianna McGee as part of a medical malpractice settlement. The trust authorized the trustee to make distributions “to or for the benefit of the Beneficiary during her lifetime, such sums and at such times as the Trustee, in her discretion, determines appropriate and reasonably necessary for the Beneficiary's Special Needs.” McGee v. State Dep’t of Health Care Servs., 309 Cal. Rptr. 3d 93, 96 (Cal. Ct. App. May 24, 2023). The trial court interpreted “special needs” as referring only to “the beneficiary’s special needs as created by the limitations due to her condition.” Id. at 99. As a result, the trial court disapproved certain distributions made by Daniel McGee, a successor trustee, on the basis that he had made unnecessary purchases. The trial court imposed a surcharge on him, finding that the trust funds had been spent on Dianna’s behalf for matters that did not qualify as special needs. The trustee appealed.

The California Court of Appeals found that it must determine, in a de novo review, the meaning of the phrase “special needs” as it was used in the trust instrument to resolve the appeal. It found that the trust instrument defined special needs broadly as “the requisites for maintaining the Beneficiary’s good health, safety, and welfare when, in the discretion of the Trustee, such requisites are not being provided by any public agency[.]” Id. Expenses addressing Dianna’s health, safety, and welfare would involve more than expenses arising from her disability, including many that would not be paid by a public agency. Further, the court determined that the trust was not a support trust whose terms only authorized the trustee to pay amounts necessary for Dianna’s education or support. Rather, its purpose was to supplement public benefits or resources when they were “unavailable or insufficient to provide for the Special Needs of the Beneficiary.” Id. 

The court ruled that the broad definition of special needs contained in the trust instrument was consistent with its interpretation of 42 U.S.C. § 1396p(d)(4) (see Lewis v. Alexander, 685 F.3d 325, 350–51 (3rd Cir. 2012) (“Congress did not include any requirement that proceeds from a special needs trust be used solely for treatment of the beneficiary's disability.”)) and the Social Security Administration’s treatment of special needs trusts in determining whether a special needs trust beneficiary qualifies for Supplemental Security Income. Further, the court held that a trustee is not prohibited from making distributions that affect the beneficiary’s eligibility for public benefits if those distributions are in the beneficiary’s best interests. Therefore, the trial court abused its discretion by applying a narrower definition of special needs.

The court of appeals reversed and remanded for the trial court to exercise its discretion using the proper standard. Although the trial court should not merely rubber stamp a special needs trust accounting, it also should not substitute its judgment and discretion for that of a trustee who has acted within the proper limits. McGee, 309 Cal. Rptr. 3d at 103. The trustee’s discretion is broad but not absolute. Because a special needs trust is intended to preserve the beneficiary’s eligibility for public benefits, the trustee must demonstrate that distributions do not reduce or eliminate the beneficiary’s eligibility for public benefits by providing income or countable resources to the beneficiary, unless he can demonstrate that such distributions were made in good faith and were in the beneficiary’s best interests. 

Takeaways: The term special needs trusts often includes both self-settled (created with the beneficiary’s funds) and third-party (created by a parent or other third party) special needs trusts. While distinctions exist between them, the underlying purpose of both is to supplement, not supplant, assistance provided by public benefits programs. The McGee case highlights that the needs of a disabled person are not confined to expenses related to their disability, and special needs trusts are typically intended to supplement public benefits when they are insufficient to provide for a beneficiary’s needs. Expenses for books, television, Internet, travel, clothing, and toiletries “would rarely be considered extravagant.” Lewis, 685 F.3d at 333.

Business Law

FinCEN Issues Proposed Rule to Temporarily Extend Beneficial Ownership Reporting Deadline to 90 Days

Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024, 88 Fed. Reg. 66730 (proposed Sept. 28, 2023) (to be codified at 31 C.F.R. § 1010)

On September 28, 2023, the Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that would amend the 2022 final rule addressing beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA), which takes effect January 1, 2024. Under the final rule, business entities created or registered on or after January 1, 2024, must file initial BOI reports with FinCEN within 30 days of their creation or registration. The proposed rule would extend the period for entities created or registered on or after January 1, 2024, and before January 1, 2025, to file their initial BOI report from 30 days to 90 days. However, entities created or registered on or after January 1, 2025, must comply with the 30-day filing deadline imposed by the 2022 final rule.

Takeaways: The proposed rule is intended to provide business entities created in 2024 with relief in the form of additional time to understand and comply with the new BOI reporting requirements. Public comments regarding the proposed rule must be submitted no later than October 30, 2023. Note that on September 18, 2023, FinCEN published a Small Entity Compliance Guide to help affected entities comply with the reporting requirements imposed by the CTA and final rule.

You can learn more about the Corporate Transparency Act by registering for our complimentary webinar, New Reporting Requirements for Estate Planning Clients with Business Entities: Are You Ready? happening November 1.

Internal Revenue Service Imposes a Moratorium on Processing New Employee Retention Credit Claims

Due to concerns about aggressive promoters and marketing aimed at inducing small businesses with employees to pursue ineligible or fraudulent claims based on the Employee Retention Credit (ERC), the Internal Revenue Service (IRS) announced on September 14, 2023, that it would immediately halt processing new claims through “at least” the end of 2023. The ERC is a refundable tax credit for businesses that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022, and were impacted by the COVID-19 pandemic. 

The IRS will continue to process ERC claims that it received before the moratorium, but the time for processing those claims will increase from 90 to 180 days to allow strict compliance reviews. New claims may continue to be filed, but they will not be processed until after the moratorium period.

Takeaways: In its announcement, the IRS warned that many of the ERC claims that it is currently processing are “likely ineligible” and recommended that businesses that have not filed an ERC claim carefully review existing ERC guidelines with a trusted tax professional before submitting a claim. Those who have filed a claim they now suspect was submitted improperly may withdraw it if it has not yet been processed.

US Department of Labor Proposes an Increase in Salary Threshold for Exemptions Under Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) requires employers to pay nonexempt employees overtime pay—that is, time and one-half their regular hourly wage rate—if they work more than 40 hours during a workweek. However, employees employed in “a bona fide executive, administrative, or professional capacity” (29 U.S.C. § 231(a)(1)) are exempt from the FLSA’s overtime requirements if they also meet a salary test prescribed in US Department of Labor (DOL) regulations. This is commonly referred to as the white-collar exemption

On September 8, 2023, the DOL issued a proposed rule that would substantially increase the salary threshold for employees to fall within the white-collar exemption from $684 per week to $1054 per week ($35,568 to $55,068 per year).

The proposed rule would also increase the salary threshold for the highly compensated employee exemption from $107,432 per year to $143,998. This exemption applies to employees paid on a salary basis whose primary duty includes office or nonmanual work and who regularly perform at least one of the exempt duties or responsibilities of an exempt white-collar employee.

In addition, the proposed rule seeks to add an automatic updating mechanism that would facilitate “timely and efficient” updating of all earnings thresholds.

Takeaways: The public may submit comments on the proposed rule on or before November 7, 2023. Please note that the FLSA does not preempt stricter state exemption standards; if a state’s standards are higher than those established under the FLSA, the state’s standard applies in that state.

California Amends Law Banning Noncompetition Agreements to Prohibit Out-of-State Employers from Enforcing Agreements Signed Outside California

2023 Cal. Legis. Serv. Ch. 157 (S. 699) (West)

On September 1, 2023, California Governor Gavin Newsom signed Senate Bill 699 (to be codified at Cal. Bus. & Prof. Code § 16600.5), which amends its prior law providing that noncompetition clauses are void except under limited circumstances set forth by statute. The amendment makes any contract that is void under the law “unenforceable regardless of where and when the contract was signed.” Therefore, noncompetition agreements executed in other states by out-of-state employers and employees may not be enforced against employees who later seek or accept jobs with California employers. Employees, former employees, or prospective employees may enforce the law by bringing a private action for injunctive relief, actual damages, or both, as well as reasonable attorney’s fees and costs. In addition, the amended law provides that an employer who enters into a contract that is void under the law or attempts to enforce a contract that is void under the law commits a civil violation.

Takeaways: Some commentators believe that the new law will result in an increase in litigation by out-of-state employers that will bring suit to enjoin employees or former employees from commencing a new job in California or between out-of-state and California employers over employees the California employers seek to hire who have signed noncompetition agreements. Others have noted that the new law may be vulnerable on comity principles or constitutional grounds such as the dormant commerce clause, which limits a state’s ability to enact laws that create an undue burden that exceeds the local benefit of a law (See Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)). The law will take effect January 1, 2024.

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