Current Developments in Estate Planning, Elder Law, and Business Law: September 2023 Review

Sep 15, 2023 10:00:00 AM


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From the Internal Revenue Service’s (IRS’s) announcement of a two-year transition period for the SECURE 2.0 Act’s Roth catch-up contribution requirement to the Equal Employment Opportunity Commission’s (EEOC’s) first settlement against an employer for the unlawful use of artificial intelligence to hire an employee, 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.

IRS Provides Two-Year Transition Period for SECURE 2.0 Roth Catch-Up Contribution Requirement

I.R.S. Notice 2023-62, 2023-37 I.R.B. 817 (Sept. 11, 2023)

Many employer retirement plans offer catch-up contributions up to a maximum of $7,500 (subject to adjustments for cost-of-living increases) to participants who will reach age fifty by the end of the relevant year. Section 603 of the 2022 SECURE 2.0 Act requires catch-up contributions made by participants whose prior-year Social Security wages exceed $145,000 (subject to adjustment) to certain employer retirement plans to be designated as Roth (i.e., after-tax) contributions for tax years beginning January 1, 2024. 

On August 25, 2023, the IRS issued Notice 2023-62 announcing a two-year administrative transition period postponing the implementation of the catch-up requirement under section 603 until January 1, 2026, to facilitate an orderly transition and compliance. During the transition period, retirement plans will not violate section 603 of the SECURE 2.0 Act if all participants, including high-earning participants, make catch-up contributions on a pre-tax basis. The notice also clarifies that participants who are age fifty and older are permitted to continue to make catch-up contributions after 2023 despite the inadvertent deletion of certain language in the SECURE 2.0 Act that some believed would prohibit plans from permitting eligible participants to make those contributions.

Takeaways: The transition period gives plan sponsors additional time to determine whether to offer a Roth contribution feature to their retirement plans and to implement the requirement that catch-up contributions for higher income participants be designated as after-tax Roth contributions. Notice 2023-62 also indicated that the IRS expects to issue further guidance to implement the SECURE 2.0 Act.

Attorney Who Previously Represented Multiple Family Members Disqualified from Litigation of Will Dispute 

Cordero v. Cordero, No. 3D23-0503, 2023 WL 5248059 (Fla. 3rd Dist. Ct. App. Aug. 16, 2023)

In 2012, the decedent executed a will specifying that his estate should be divided equally between his two sons, Rogelio and Rolando. The 2012 will was prepared by attorney Gustavo Gutierrez. Guitierrez also assisted the decedent in transferring two real properties to himself as the life estate holder with the remainder interests in Rogelio and Rolando. In addition to representing the decedent, attorney Guitierrez had also represented Rolando in several business and other transactions. 

The decedent executed another will in 2018 that left his entire estate to Rogelio and nothing to Rolando. Following the decedent’s death, Rolando initiated a proceeding in probate to revoke the 2018 will based on the decedent’s alleged incapacity and Rogelio’s alleged undue influence. Rolando also sought to disqualify Guitierrez from representing Rogelio in the will dispute, asserting that Guitierrez had a conflict of interest in representing Rogelio because of his prior representation of Rolando. 

After several hearings, the trial court determined that because of Gutierrez’s involvement in the decedent’s estate planning and lawsuits against the decedent’s business, he would be called as a fact witness in the will dispute. As a result, the court ruled that Gutierrez should be disqualified from participation in the litigation because his testimony would not fall into any of the exceptions set forth in rule 4-3.7(a) of the Rules Regulating the Florida Bar. Rule 4-3.7(a) states 

(a) When Lawyer May Testify. A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness on behalf of the client unless:

(1) the testimony relates to an uncontested issue;

(2) the testimony will relate solely to a matter of formality and there is no reason to believe that substantial evidence will be offered in opposition to the testimony;

(3) the testimony relates to the nature and value of legal services rendered in the case; or

(4) disqualification of the lawyer would work substantial hardship on the client.

The court distinguished case law suggesting that the disqualification should only preclude Gutierrez from participating in the trial rather than the entire case based on the applicability of Rule 4-1.9 of the Rules Regulating the Florida Bar. Rule 4-1.9 prohibits an attorney from representing a client against a former client in the same or a substantially related matter in which the client’s interests are materially adverse to the interests of the former client. It also prohibits an attorney from using information relating to the representation to the disadvantage of the former client or revealing information relating to the representation of the former client. The court determined that Gutierrez had represented Rolando in the same or a substantially related matter in which his interests were materially adverse to those of Rogelio because he (1) had prepared the 2012 will and trusts involving both sons, and (2) had mediated disputes related to the decedent’s corporation, both of which were relevant to the will dispute. In addition, Rogelio could use information Gutierrez had acquired during his representation of the decedent and Rolando to Rolando’s disadvantage. Therefore, the court affirmed the lower court’s decision to disqualify Gutierrez from the entire litigation.

Takeaways: The Cordero case is a reminder that estate planning, elder law, and business planning attorneys must take steps to avoid conflicts of interest, breaches of confidentiality, or impermissible dual representation when multiple family members seek their services. Written informed consent waiving potential or actual conflicts should be obtained when an attorney represents multiple family members. Further, an attorney should decline the representation of a new client whose interests are materially adverse to those of one of the attorney’s former clients, regardless of whether the new and former clients are related.

New York Court of Appeals Finds Transfer of Real Property to Attorney-in-Fact under Power of Attorney Is Compensation for Services Instead of Gift

In re Maika, 39 N.Y.3d 1137 (N.Y. Ct. App. Apr. 25, 2023)

The decedent, Frank Maika, suffered from severe disabilities prior to his death in July 2017. In February 2010, Frank executed a power of attorney authorizing five of his twelve children to act on his behalf regarding real estate transactions and healthcare expenses if a majority of them agreed to the transaction. The power of attorney did not authorize them to make major gifts on Frank’s behalf. 

Frank’s son Philip Maika was one of the attorneys-in-fact under the power of attorney. Philip and one of his sibling were also Frank’s primary caregivers. In March 2017, Philip and two siblings, acting as Frank’s attorneys-in-fact, conveyed Frank’s home to Philip and the other caregiver as compensation for their caregiving services. The home was conveyed to them as joint tenants, and Frank retained a life estate in the property. 

After Frank’s death, the administrator of his estate filed a petition alleging that the transfer of the home had been an improper gift that was not authorized under the power of attorney and that it should be delivered to Frank’s estate. Philip and his sibling sought summary judgment in their favor, but it was denied by the lower court. The New York Supreme Court Appellate Division reversed, granting their motion for summary judgment and dismissing the administrator’s petition. 

The New York Court of Appeals (New York’s highest court) affirmed, holding that Philip and his sibling had made a prima facie showing of their entitlement to summary judgment and that the petitioner had failed to raise a triable issue of fact in response. The court determined that unrebutted evidence showed that Philip and the other sibling who provided care for Frank had requested compensation for their caregiving services and that their request had been approved by a majority of the attorneys-in-fact, including Philip. However, because Frank lacked liquid assets, only one of his caregivers had previously received a small payment, and the house had been transferred to Philip and his sibling as compensation for their services.

Two judges dissented, asserting that an attorney-in-fact has “a duty to act in the utmost good faith and undivided loyalty toward the principal, and must act in accordance with the highest principles of morality, fidelity, loyalty and fair dealing.” In re Maika, 39 N.Y.3d 1137, 1138 (N.Y. Ct. App. April 25, 2023). Therefore, an agent generally may not make a gift of money or property that is the subject of the agency relationship in the absence of a “clear showing that the principal intended to make the gift.” Id. In addition, when the parties are related, there is a presumption that services are rendered in consideration of love and affection, with no expectation of payment. Mantella v. Mantella, 268 A.D.2d 852, 853, 701 N.Y.S.2d 715, 716 (N.Y. App. Div. 2000). 

The dissent stated that to make the requisite showing that they acted within their authority, the attorneys-in-fact were required to demonstrate that they had transferred the home to Philip and his sibling as compensation for their caregiving services in accordance with Frank’s instructions, or that, in making the transfer, they were acting in Frank’s best interest. The dissent stated that Philip’s assertion that

the power of attorney gave the attorneys-in-fact absolute authority to make decisions on decedent's behalf regardless of decedent’s wishes or best interest—which the majority appears to endorse by concluding that decedent’s best interest is “not germane”—cannot be reconciled with the fiduciary obligations of attorneys-in-fact nor with the plain language of the power of attorney itself.

In re Maika, at 1139. Because Philip and his sibling had not demonstrated that Frank himself had intended to compensate them or that the compensation was in Frank’s best interest, the dissent argued that the administrator had raised issues of fact regarding whether the transfer of the home amounted to self-dealing by Philip or was inconsistent with the obligation of the attorneys-in-fact to act in Frank’s best interest. 

Takeaways: Although the New York Court of Appeals was divided on whether there were issues of fact, the end result was that, because the home was transferred to Philip and his sibling as compensation for services, the fair market value of the property was taxable to Philip and his sibling as income in the year in which they received it (see IRS Publication 525 (2022), Taxable and Nontaxable Income). When a family member is compensated for caregiving services, they must report the compensation on their Form 1040 or 1040-SR; however, whether they are required to pay self-employment taxes depends upon their particular facts and circumstances (see Family Caregivers and Self-Employment Tax; Household Employer’s Tax Guide). 

Although the Maika case did not address the issue, it is possible that Frank could have been eligible for Medicaid. Attorneys representing seniors who want to or need to become eligible for Medicaid should remind their clients that proactive planning is crucial. In most states, Medicaid has a sixty-month look-back rule, mandating that if assets are transferred for less than fair market value during that time frame, a penalty period of Medicaid ineligibility will be established. However, the child caretaker exception (42 U.S.C. § 1396p(c)(2)(a)(iv) and C.F.R. § 433.36(f)) allows seniors to give their primary home to an adult child who has been providing them with care or sell it to the child for less than its fair market value without risking their long-term care Medicaid eligibility. In addition, the caretaker exception protects the home from Medicaid’s estate recovery program. For the child caretaker exception to apply, the adult child must move into their parent’s home, live with the parent for a minimum of two years immediately prior to the parent’s admittance to a nursing home, and provide a level of care sufficient to delay the parent’s need to enter a nursing facility.

For seniors who are currently eligible for Medicaid, government funds may be available to provide compensation for family and other caregivers under a consumer-directed personal assistance Medicaid program.

Declaration of Trust Ownership Not Part of Trust Agreement

Schaddelee v. Deleon, No. 362521, 2023 WL 4143639 (Mich. Ct. App. June 22, 2023)

In February 2021, Ronald Schaddelee Sr. executed a trust agreement naming two of his children, Maria and Ronald Jr., as co-trustees. The trust agreement stated that the trust was irrevocable. Upon Ronald Sr.’s death, the co-trustees were instructed to divide the trust property into separate shares among the trust beneficiaries. 

On the same day he signed the trust agreement, Ronald Sr. signed a declaration of trust ownership stating that he transferred and conveyed “all property, whether owned or later acquired, regardless of the means by which acquired,” listing several specific categories of assets including financial accounts, and generally “any property that now or at any time after the date of this declaration is held in my name or any variation of my name.” Schaddelee v. Deleon, No. 362521, 2023 WL 4143639, at *1 (Mich. Ct. App. June 22, 2023). The declaration of trust further stated that Ronald Sr. and the co-trustees “affirm[ed] and declare[d]” the following: 

  • I will hold all property described above solely and exclusively for and on behalf of the trust as trust owner, subject to any and all instructions from the acting trustee.
  • Except to the extent of beneficial interests provided to me under the terms and provisions of the trust agreement, as now written and as may be amended in the future, I have and shall have no personal interests in any of the properties described above.

Id. Several years prior to establishing the irrevocable trust, Ronald Sr. had opened an investment account and designated Maria as the beneficiary of the account.

Ronald Sr. died in March 2021. In September 2021, Ronald Jr. filed a petition in the probate court for the removal of Maria as co-trustee, alleging that she had refused to transfer the proceeds of the investment account into the trust and had therefore violated the declaration of trust ownership and her fiduciary duties. He eventually filed a motion for summary disposition asserting that Maria had promised in the declaration of trust ownership not to hold a personal interest in property that Ronald Sr. intended to be transferred into the trust. Maria asserted that the proceeds of the investment account had flowed to her as the named beneficiary of that account rather than to the trust. 

The probate court determined that the declaration of trust ownership was not a binding agreement, but merely a statement—made by Ronald Sr. as the settlor of the trust and agreed to by Ronald Jr. and Maria as co-trustees—of the assets that Ronald Sr. “believed he owned and intended to flow into the trust.” Further, the court found that the investment account “flowed directly to Maria through the beneficiary designation” and thus was not a part of the trust. Id. As a result, the court granted summary disposition in favor of Maria.

In its de novo review of the probate court’s legal conclusion, the Michigan Court of Appeals affirmed, ruling that the trust agreement was the “contract creating the trust.” In contrast, the declaration of trust ownership was “not part of the agreement creating the trust” but instead “a schedule of general property categories that he might own and that he expected to flow into the trust.” Id. at *3 (emphasis added). As a result, the probate court had properly granted summary disposition in favor of Maria.

Takeaways: Because Ronald Sr. failed to either fund the investment account to the trustees of his trust or change the beneficiary designation of the investment account to name the trust—rather than Maria—as the beneficiary, Maria became the owner of the account immediately upon her father’s death. In other words, the beneficiary designation, and not the general assignment in the declaration of trust ownership, governed how the account passed after Ronald Sr.’s death. Estate planning and elder law attorneys can help their clients avoid probate and family disputes by encouraging them to promptly fund their trusts by appropriately titling their assets in the name of their trust and executing pour-over wills and not to rely exclusively on general words of assignment for trust funding. Estate planning and elder law attorneys should always bear in mind that beneficiary designations (whether they be transfer-on-death or pay-on-death designations added to financial accounts, life insurance, or retirement accounts) will often be found to be controlling.

EEOC Obtains First Settlement Against Employer for Use of AI Tool That Violated Antidiscrimination Statute

Equal Employment Opportunity Comm’n v. iTutorGroup, Inc., No. 1:22-cv-2565-PKC-PK (E.D.N.Y. Aug. 9, 2023)

On August 9, 2023, the Equal Employment Opportunity Commission (EEOC) requested court approval for its first settlement pursuant to the terms of a consent decree in a case involving alleged discrimination stemming from a hiring company’s use of an artificial intelligence (AI) tool that automatically rejected male job applicants over the age of sixty and female applicants over the age of fifty-five. The EEOC alleged that iTutorGroup, Inc. had violated the Age Discrimination in Employment Act (ADEA) by using an AI tool that solicited applicants’ birthdates and unlawfully used that information to discriminate against certain applicants based on their age. The charging party was a female applicant over the age of fifty-five who was rejected for consideration for a tutoring position when she entered her actual birth date but received an interview request after resubmitting the application using a different birth date indicating a younger age. The EEOC asserted that more than 200 other applicants were also unlawfully rejected because of their age.

Pursuant to the consent decree, iTutorGroup must distribute $365,000 to the 200-plus applicants whose applications were rejected in violation of the ADEA. In addition, iTutorGroup must invite all of those applicants to reapply, adopt antidiscrimination policies, and require staff involved in hiring to participate in antidiscrimination training.

Takeaways: This case reiterates the strong position that the EEOC has taken against the discriminatory use of AI in hiring decisions. In May 2022, the EEOC issued guidance explaining how employers’ use of AI in hiring decisions may violate the Americans with Disabilities Act and providing practical tips for employers to facilitate compliance with the law and for employees whose rights may have been violated. The guidance clarified that employers are responsible for violations even if the AI tools are designed or administered by an entity other than the employer. To ensure compliance, the EEOC recommends that employers confirm with vendors that AI tools will not ask unlawful questions in an employment application and conduct internal assessments to screen for bias before using an AI tool in their hiring process. 

Illinois Enacts Employment Laws Requiring Notices for Remote Workers and Salary Transparency

Ill. HB 3733 (June 30, 2023); Ill. HB 3129 (Aug. 11, 2023)

Notice Requirements

On June 30, 2023, Illinois Governor J.B. Pritzker signed Ill. HB 3733, which requires employers with remote workers to distribute work-related notices electronically by email or a conspicuous posting on the employer’s website or intranet site. Remote employees are defined as “employees who do not regularly report to a physical workspace.” The law applies to notices required by the Illinois Minimum Wage Law, the Illinois Equal Pay Act, the Illinois Wage Payment and Collection Act, and the Illinois Child Labor Law. The new notice requirement will take effect on January 1, 2024. 

Salary Transparency

Governor Pritzker signed Ill. HB 3129 on August 11, 2023, amending the Equal Pay Act of 2003 to require employers with fifteen or more employees to disclose pay scales and benefits in job postings and to retain records demonstrating compliance with the law, effective January 1, 2025. The disclosure requirements apply not only to job postings for employees who work within the state of Illinois but also to those who perform work outside of Illinois. In addition, the law requires employers to announce all opportunities for promotion to all current employees no more than fourteen calendar days after the employer makes an external job posting for the position.

Takeaways: These new laws protect employees who are physically located within the state of Illinois and outside of the state. Illinois employers should take steps to ensure they comply with these new notice and pay transparency requirements to avoid statutory penalties.

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