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From a new final rule on nonfinanced real estate transfers to the suspension of an attorney whose actions left a client ineligible for Medicaid and a nationwide injunction on the enforcement of the Federal Trade Commission’s Non-Compete Rule, we have recently seen significant legal developments.
To ensure that you stay abreast of these changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning, elder and special needs law, and business law practices.
Estate Planning
Treasury Department Releases Final Rule Requiring Reporting of Certain Nonfinanced Residential Real Estate Transfers
Anti-Money Laundering Regulations for Residential Real Estate Transfers, 31 C.F.R. § 70.258 (2024)
On August 28, 2024, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury issued a final rule that imposes new nationwide reporting requirements on nonfinanced transfers of “residential real estate” (defined to include single-family homes, townhouses, condominiums, cooperatives, and apartment buildings for one to four families) to a transferee entity or a transferee trust in the United States. Notably, transfers to individuals and some types often used in estate planning are exempted from the rule’s reporting requirements. Similar to the goals underlying the Corporate Transparency Act (CTA), the new rule is designed to prevent nonfinanced transfers of real estate in the United States from being used to facilitate money laundering and other illicit activities such as drug and human trafficking, corruption, and fraud. The concern is that nonfinanced residential real estate transfers would otherwise avoid the scrutiny required for bank-financed transactions under the Bank Secrecy Act. Transfers within the scope of the final rule must be reported without regard to the purchase price or value of the real property; transfers of real estate that are gifts are subject to the reporting requirements of the rule unless they fall within one of several exceptions.
A reporting person, which includes certain persons involved in real estate closings and settlements, such as settlement agents, title insurance agents, escrow agents, or attorneys, must file a Real Estate Report (Report) with FinCEN within 30 days of the closing. Only one of the possible reporting persons, determined using a cascading approach, must file the Report.
The Report must include the following information:
- the identity of the reporting person
- the legal entity or trust to which the residential real property was transferred
- the beneficial owners of the transferee entity or trust
- the person who transferred the property
- the property being transferred
- information about the transfer
A transferee entity includes any legal entity other than a transferee trust or individual. A transferee trust may include “any legal arrangement created when a person (generally known as a grantor or settlor) places assets under the control of a trustee for the benefit of one or more persons (each generally known as a beneficiary) or for a specified purpose” and similar arrangements.
Some transfers are excepted from the reporting requirements, including, as mentioned, transfers to individuals and those resulting from the death of the owner of residential real estate. The final rule clarifies that the exception for transfers resulting from death includes all transfers resulting from death, “whether pursuant to the terms of a will or a trust, by operation of law, or by contractual provision.” In addition, the final rule adds an exception for transfers of residential real property to a trust that meet the following criteria:
- the transfer is for no consideration
- the transferor of the property is an individual (either alone or with the individual’s spouse)
- the settlor or grantor of the trust is that same transferor individual, that individual’s spouse, or both of them
Takeaways: In contrast to the CTA, which requires the disclosure of information by all entities that fall within the definition of a reporting company, this proposed rule applies to a specific type of transaction—nonfinanced transfers of residential real property to a transferee entity or trust. Please note that the beneficial ownership information (BOI) that is collected under the new final rule varies slightly from the information that must be reported under the BOI Rule which implements the CTA: (1) the real estate rule relies largely on taxpayer identification numbers instead of passport numbers regarding the unique identifying number; and (2) the real estate rule collects citizenship information, but the BOI Reporting Rule does not.
As noted, the final rule clarifies that all transfers resulting from death (whether pursuant to the terms of a will, a trust, or by operation of law) are generally excepted from its requirements. In this context, “transfers resulting by operation of law include, without limitation, transfers resulting from intestate succession, surviving joint owners, and transfer-on-death deeds, and transfers resulting from contractual provisions include, without limitation, transfers resulting from beneficiary designations.” As mentioned, many transfers to trusts for no consideration that are common in the estate planning context are exempt from the final rule’s requirements. The final rule will take effect December 1, 2025. FinCEN has issued Real Estate Reports Frequently Asked Questions and a Fact Sheet and expects to publish additional guidance in the future.
Elder Law and Special Needs Law
Attorney Faces Suspension for Accepting Transfer of Funds from Client that Left Client Ineligible for Medicaid
In re Abraham, No. 2024-01686 (N.Y. App. Div. July 19, 2024)
Markis Miguel Abraham was admitted to practice law in New Jersey in 2008 and in New York in 2010. In 2015, he represented a client in connection with a sale of real properties and a liquor license, preparation of estate planning documents, and two personal injury lawsuits. During his representation of the client, Abraham told her that he was interested in real estate investing. The client then offered him $140,000 to invest in real estate. Abraham, upon accepting the money, intended to treat it as a loan, but the client did not sign any documentation of the loan. Although Abraham initially deposited the money into his attorney trust account, he later moved it into his personal account.
In 2018, the client obtained a guardian after becoming incapacitated. Due to the $140,000 transfer to Abraham, the client was ineligible for Medicaid. She died in 2019 with significant medical debt. In 2019, Abraham had only repaid $5,000 of the loan. Prior to the client’s death, he also failed to timely respond to interrogatories in connection with his representation of her in the first personal injury lawsuit, resulting in a default judgment against her. In the second personal injury lawsuit, he failed to appear for mandatory arbitration, resulting in another default judgment against the client.
New Jersey’s Office of Attorney Ethics filed a complaint against Abraham asserting that he had violated New Jersey Rules of Professional Conduct 1.1 (competent representation), 1.3 (diligent representation), 1.8 (conflicts of interest), and 1.5 (safekeeping of property). Abraham signed a disciplinary stipulation admitting that he had violated the rules, and the Disciplinary Review Board imposed a three-month suspension. New York’s Attorney Grievance Committee (AGC) requested that the New York Supreme Court, Appellate Division, impose reciprocal discipline, asserting that Abraham had not notified it or the court of his New Jersey suspension. Abraham consented to the reciprocal discipline and did not raise any defenses. The court granted the AGC’s motion, and Abraham was suspended from practicing law in New York for a period of three months.
Takeaways: Abraham received a relatively lenient three-month suspension in New Jersey and New York. Nevertheless, it is crucial for attorneys to avoid conflicts of interest with their clients involving their funds and to ensure that they competently represent their clients: here, Abraham’s actions caused his client, who was probably elderly, to be ineligible for Medicaid and left her with substantial medical debts, and his inaction in the personal injury lawsuits resulted in two default judgments against her.
Florida Court Enforces Payback Provision in Special Needs Trust
Agency for Health Care Admin. v. Spence, No. 3D23-0552, 2024 WL 2306248 (Fla. Dist. Ct. App. May 22, 2024)
In 2004, Kathleen Spence adopted Ryan Joseph Spence. As part of the adoption, Kathleen entered into an Adoption Assistance Agreement (Adoption Agreement) with the Florida Department of Children and Families (the Department) specifying that the Department would provide Medicaid benefits for Ryan’s benefit. The Department made Medicaid payments on his behalf in compliance with the Adoption Agreement following his adoption.
Kathleen died in 2015, and her estate obtained a settlement in a wrongful death action. Michael Morrison and Ashley Nichole Spence were appointed as co-guardians of Ryan and as co-trustees of the estate. The probate court allocated the settlement proceeds between Kathleen’s minor children, including Ryan. The court directed that a special needs trust (SNT) funded with the settlement proceeds be established for Ryan because he was disabled and a Medicaid beneficiary. Michael established the SNT, which stated that its intention was “to satisfy Medicaid and Supplemental Security Income . . . program requirements so that its establishment and funding do not prejudice the Beneficiary’s eligibility for such public benefits.” Agency for Health Care Admin. v. Spence, No. 3D23-0552, 2024 WL 2306248, at *1 (Fla. Dist. Ct. App. May 22, 2024). The SNT also provided that upon Ryan’s death or early termination of the SNT, the trustee must distribute the lessor of the medical assistance provided to Ryan or the amount remaining in the SNT to Florida’s Agency for Health Care Administration (AHCA) and to any other state agency entitled to Medicaid reimbursement.
In 2023, Michael, as trustee and co-guardian, and Ashley, as co-guardian, filed a petition in the probate court seeking the termination of the guardianship and the distribution of all the SNT’s assets to Ryan, who had reached the age of majority and was no longer disabled or receiving Medicaid. The AHCA objected, claiming that it was entitled to reimbursement of $50,281.73 for medical assistance payments made on behalf of Ryan pursuant to the SNT’s payback provision before any of the SNT’s assets were distributed to Ryan. The trial court granted Michael and Ashley’s petition and denied AHCA’s claim.
On appeal, the Florida District Court of Appeal, after a de novo review, reversed the lower court’s ruling. The court determined that the terms and intent of the SNT were clear and unambiguous and that its language was controlling. The SNT was established to ensure that Ryan would remain eligible for government assistance despite his receipt of the settlement proceeds: the quid pro quo for this benefit was the SNT’s payback provision, which mandated that the remaining assets could not be distributed to Ryan until AHCA was repaid for medical assistance paid on his behalf. Under Program Operations Manual System (POMS) SI 01120.203, Medicaid payback cannot be limited to the period after the establishment of the SNT. The fact that the Adoption Agreement did not contain payback provisions was not relevant to the determination of the distribution of the SNT’s assets.
Takeaways: If Ryan’s SNT had not included the payback language, he would not have been eligible for Medicaid benefits. As the court noted, the language of the payback provision in the SNT was clear; therefore, any alleged intention expressed in the Adoption Agreement that it should not be enforced was irrelevant.
Business Law
Federal District Court Imposes Nationwide Injunction on the Enforcement of FTC Non-Compete Clause Rule
Ryan LLC v. Fed. Trade Comm’n, No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024)
On August 20, 2024, in Ryan LLC v. Federal Trade Commission, the United States District Court for the Northern District of Texas blocked the enforcement of the Federal Trade Commission’s (FTC’s) final Non-Compete Clause Rule, holding that the FTC had exceeded its statutory authority in promulgating the final rule and that the rule was arbitrary and capricious. The court’s ruling imposes a nationwide ban on the enforcement of the rule, which would have taken effect September 4, 2024.
The FTC issued the final rule on April 23, 2024. It provides that it is a violation of section 5 of the Federal Trade Commission Act for persons to enter into noncompete clauses with workers. For all current and past workers whose noncompete clauses would have been invalidated by the final rule, employers would have been required to provide “clear and conspicuous notice to the worker by the effective date that the worker’s noncompete clause will not be, and cannot legally be enforced against the worker,” unless the worker’s contact information is unavailable.
In general, existing noncompete clauses with senior executives would have been allowed to remain in effect after the rule’s effective date, but existing noncompete clauses with other workers would not have been enforceable. In addition, under the final rule, it would have been an unfair method of competition to enter into or attempt to enter into, enforce or attempt to enforce, or represent that workers are subject to new noncompete clauses, regardless of whether the affected workers are senior executives or other workers.
Takeaways: The Ryan LLC court’s ruling is likely to be appealed by the FTC. It is notable that a Florida federal district court determined that the final rule was unenforceable based on the major questions doctrine, which was not addressed in Ryan LLC. See Properties of the Villages, Inc. v. Fed. Trade Comm’n, No. 5:24-cv-316-TJC-PRL (M.D. Fla. Aug. 14, 2024).
At least one federal district court has issued a contrary ruling. On July 23, 2024, in ATS Tree Services, LLC v. Federal Trade Commission, the Eastern District of Pennsylvania denied ATS Tree Services’s motion for a preliminary injunction, finding that the FTC has the authority to ban noncompete agreements and that the plaintiffs had not shown that they would be irreparably harmed if it went into effect.
If the Ryan LLC ruling is reversed on appeal and the final rule is permitted to go into effect, it would have a profound impact: as the FTC notes in the final rule, one in five—around 30 million—American workers are currently bound by noncompete clauses. Consequently, the implementation of this rule would significantly impact employees and businesses. The final rule states that it preempts state laws that conflict with it but does not affect or limit state laws that do not conflict with it. At present, only California (Cal. Bus. and Prof. Code §§ 16600, 16600.1), Minnesota (Minn. Stat. § 181.987), North Dakota (N.D. Cen. Code § 9-08-06), and Oklahoma (15 Okla. Stat.§ 219A) have enacted statutes completely banning noncompete clauses in the employment context, so the final rule will preempt the vast majority of state laws if the FTC’s likely appeal is successful.
In recent years, multiple states have enacted more limited restrictions on noncompete agreements: for example, in Pennsylvania, the Fair Contracting for Health Care Practitioners Act, H.B. No. 1633, which prohibits noncompete covenants of more than one year in duration between health care practitioners and their employers, was recently enacted and will take effect January 1, 2025.
New York’s Freelance Isn’t Free Act Now Effective
N.Y. S.B. S8039 (Aug. 28, 2024)
On August 28, 2024, New York’s Freelance Isn’t Free Act (FIFA) became effective. The new law protects independent contractors who provide services of $800 or more for a hiring party over a period of 120 days. The hiring party is defined as a natural person or organization but excludes governmental entities. The hiring party must enter into a written contract (either physical or electronic) with the independent contractor containing the names and mailing addresses of both parties, an itemization of all services the contractor will provide, the date when payment will be made to the contractor or the mechanism that will determine the date, and the date the contractor must submit a list of services provided to hiring party so payment can be processed. The hiring party must retain a copy of the written contract for at least six years. The FIFA mandates that the hiring party must pay the contractor on or before the date set forth in the contract or within 30 days of the completion of services if the contract does not specify a date. Further, hiring parties are prohibited from taking adverse action or discriminating against contractors who seek to exercise their rights under the FIFA.
The FIFA authorizes New York’s attorney general to investigate complaints of violations and provide remedies, but contractors who allege violations may also bring a private action to recover damages.
Takeaways: New York practitioners should encourage clients to review their relationships with independent contractors to ensure that they have executed written contracts in compliance with the FIFA. Even in states where written contracts are not required in this context, they are recommended when forming relationships with independent contractors to clearly specify the scope of work, payment terms, and due dates for projects. In addition, the written contract can include language designed to clearly define the nature of the relationship to help avoid a determination that the independent contractor is actually an employee of the hiring party. WealthCounsel members with the Trusts and Estates Professional and Elite subscriptions have access to Business Docx®, which includes an independent contractor agreement.
Business Owner Who Failed to Enter into an Enforceable Contract Loses Business after Transferring It to Fiancée
Belya v. Campbell, 2024 Me. 62, 2024 WL 3764339 (Me. Aug. 13, 2024)
Randall Belyea was the sole shareholder and president of Belyea Enterprises, Inc., which delivered packages for FedEx pursuant to a five-year contract. Under the contract, Randall was named as the “Authorized Officer” for Belyea Enterprises. He maintained the company’s trucks, made hiring and firing decisions, managed drivers, and was entitled to profits received due to the FedEx contract. The FedEx contract was the sole source of the company’s income.
When the contract expired in 2016, FedEx notified Randall that it would not renew the contract with Belyea Enterprises because of a 2012 misdemeanor charge made against him. He was disqualified as a FedEx contractor and was not permitted to be present at FedEx’s terminal, drive a vehicle associated with FedEx, or meet with FedEx representatives.
Although Randall initially planned to shift the contract into his son’s name and transfer his interest in the company to his son in exchange for his own continued employment with Belyea Enterprises, his fiancée, Heather Campbell, persuaded him to transfer ownership of the business to her and put the contract in her name. Heather assured Randall that “nothing was going to change” regarding the business and that he would continue to be its owner, run the business, and receive its profits. Belya v. Campbell, 2024 Me. 62, 2024 WL 3764339, at *1 (Me. Aug. 13, 2024). Heather told him that she would be the owner “on paper only” and would meet with FedEx representatives at the terminal. Id. Randall transferred all of his stock in Belyea Enterprises to Heather in August 2016 and resigned from his corporate offices. He received no compensation in exchange for the stock transfer. Heather was the sole shareholder and corporate officer.
Until 2018, Randall continued to run the business except for the interactions with FedEx representatives at the terminal and Belyea Enterprises’ bank accounts remained in his name. At the end of 2018, Heather told Randall to leave her home, terminated his employment with Belyea Enterprises, and restricted his access to the company’s bank accounts.
Randall filed suit against Heather alleging breach of contract and a number of other claims. Although a jury found that Heather was liable for damages for breach of contract, the court granted her motion for judgment as a matter of law, concluding that the jury could not have reasonably found that the parties had reached a meeting of the minds on the specific terms to form a contract—an essential element of the breach of contract claim.
On appeal, the Maine Supreme Court affirmed the lower court’s determination that the jury could not have reasonably found that the terms of Randall and Heather’s arrangement were sufficiently definite to form an enforceable contract. Rather, the terms of the alleged contract failed to “fix exactly the legal liabilities of each party,” making it impossible for the court to enforce it. Id. at *5. The alleged contract did not contain sufficiently definite terms regarding Heather and Randall’s roles and obligations, actions or inactions by Randall that would constitute a breach of the alleged contract and Heather’s remedies in the event of such a breach, the duration of the contract, and details regarding a potential future reconveyance of the business to Randall. Therefore, the court affirmed the lower court’s judgment.
Takeaways: Randall’s decision to transfer his business to his fiancée without executing an enforceable agreement was a costly mistake. The Maine Supreme Court’s ruling provides business planning attorneys with a reminder of the importance of encouraging their clients and potential clients to engage them to provide legal advice and contract drafting services when they seek to transfer or sell their business.
Important Related Legal Developments
American Bar Association Releases Formal Opinion on Lawyer’s Use of Generative Artificial Intelligence Tools
ABA Comm. on Ethics and Professional Responsibility, Formal Op. 512 (2024)
On July 29, 2024, the American Bar Association (ABA) issued Formal Opinion 512 addressing questions raised by the use of generative artificial intelligence (AI) tools under the ABA Model Rules of Professional Conduct. The formal opinion identifies and provides guidance regarding ethical issues raised by lawyers’ use of generative AI, acknowledging that updates will be needed to address the use of specific AI tools as they develop.
The formal opinion includes the following guidance:
Competence. Lawyers’ obligation to provide competent representation under Model Rule 1.1 does not require lawyers who use generative AI tools in their representation of clients to become generative AI experts. Rather, they must gain a reasonable understanding of the risks and benefits of using a particular generative AI tool or seek out others who have relevant expertise and can provide them with guidance about the tool’s capabilities and limitations. Due to the potential for generative AI tools to provide inaccurate or discriminatory results, lawyers should engage in an appropriate degree of independent verification or review of their output, depending on the specific generative AI tool and the task it performs. They must not rely solely on a generative AI tool to perform tasks that require professional judgment.
Confidentiality. Model Rules 1.6, 1.9, and 1.18 generally require lawyers to maintain the confidentiality of information relating to the representation of current, former, and prospective clients. Lawyers who intend to input client information into generative AI tools must perform a fact- and client-driven analysis of the risk that such information may be disclosed, both to others outside the firm and anyone inside the firm who may not protect the information from improper disclosure or use. Due to the risk of disclosure, clients’ informed consent based on the lawyer’s best judgment is required before their information may be input into a generative AI tool. Including boiler plate language in an engagement letter is insufficient to satisfy a lawyer’s ethical obligations. A lawyer does not need to obtain a client’s informed consent for the use of AI tools that does not involve inputting client information into the tool.
Communication. In circumstances in which a client’s informed consent is not required under Model Rule 1.6, lawyers should consider whether their duty to communicate under Model Rule 1.4 requires disclosure of the use of a generative AI tool in the representation. For example, if the use of the AI tool impacts the basis or reasonableness of the lawyer’s fee, its output will influence a significant decision in the representation, or if its undisclosed use would violate terms in the engagement letter or the client’s reasonable expectations about how the lawyer intends to accomplish the objectives of the representation, then disclosure may be required. This determination should be based on the facts and circumstances of the particular representation.
Meritorious Claims and Contentions and Candor toward the Tribunal. Pursuant to Model Rules 3.1, 3.3, and 8.4, lawyers must carefully review output from a generative AI tool to verify that assertions made to a court based on its output are not false.
Supervisory Responsibilities. Under Model Rules 5.1 and 5.3, managerial lawyers have an ethical duty to establish clear policies regarding the permissible use of generative AI tools by lawyers and nonlawyers in the firm and make reasonable efforts, including training, to ensure their compliance. Lawyers must also make reasonable efforts to ensure that nonlawyers outside of their law firm, including generative AI providers and tools, conform with the lawyers’ ethical duties, for example, to do work capably and protect clients’ confidential information.
Fees. Pursuant to Model Rule 1.5, lawyers’ fees and expenses must be reasonable, and the basis on which the lawyer will charge the fee must be communicated to clients. If a lawyer intends to charge a client for the use of a generative AI tool, the lawyer should explain the basis for the charge. If a lawyer’s efficiency is improved due to use of a generative AI tool, they must reflect the time savings if they charge an hourly rate. The reasonableness of flat rates must also be evaluated, and if efficiency is increased due to the use of a generative AI tool, attorneys may need to reevaluate their flat fee structures to account for this. In addition, the lawyer should consider the particular circumstances to determine whether the use of a generative AI tool is overhead that should not be charged to a client or an expense that it would ordinarily be reasonable for a lawyer to bill to a client. A lawyer may not charge clients for time spent learning how to use generative AI tools unless the client requests that the lawyer use a particular generative AI tool: Under these circumstances, they should agree upon the billing terms, preferably via a written agreement.
Takeaways: As mentioned, it is likely the ABA will continue to issue guidance regarding generative AI as it develops further. Attorneys should be knowledgeable of and comply with the ethics rules in their jurisdiction; several jurisdictions have already issued guidance regarding generative AI. For a discussion of some of the guidance recently issued by various states, see Ethical Implications of Generative Artificial Intelligence on the Practice of Law, recently published in the WealthCounsel Quarterly.
