In the past month, we have seen significant developments in estate planning, business law, elder law, and special needs planning. We have highlighted the most noteworthy developments to ensure you and your firm stay informed of any changes. From a private letter ruling addressing trustee-to-trustee transfers of funds from estate-owned individual retirement accounts to cases rejecting a cap on noneconomic damages for an injured nursing home resident and sanctioning a litigant for misuse of AI instructions and a new Corporate Transparency Act final rule, read on to learn how these developments may impact your practice.

Estate Planning

IRS: Trustee-to-Trustee Transfer of Funds from Estate-Owned IRAs into IRAs Titled in Decedent’s Name for Benefit of Will Beneficiaries Is Not a Taxable Distribution or Impermissible Rollover 

I.R.S. Priv. Ltr. Rul. 2026-31-001 (May 6, 2026)

Decedent died without designating a beneficiary under his traditional individual retirement account (IRA) or his Roth IRA. As a result, upon his death, the Decedent’s estate (the Estate) became the beneficiary of both IRAs by default, and the custodian retitled them as IRAs of the Decedent for the benefit of (f/b/o) the Estate. The Decedent’s will directed that the traditional IRA and the Roth IRA pass in equal shares to two beneficiaries (the Beneficiaries). A state court later appointed one of the Beneficiaries as the administrator of the Estate.

Consistent with the terms of the will, the administrator proposed to divide the assets of the traditional IRA and the Roth IRA equally between the Beneficiaries through trustee-to-trustee transfers into two new IRAs, each to be titled “Decedent (Deceased) IRA f/b/o Beneficiary as beneficiary of Estate E.” The administrator requested private letter rulings that (1) the transfer of each Beneficiary’s one-half interest in the traditional IRA and the Roth IRA to the separate transferee IRAs would not be a taxable distribution to the Beneficiaries under I.R.C. § 408(d)(1) or an impermissible rollover under I.R.C. § 408(d)(3), and (2) after the transfers, the Estate would not have to include in its gross income, and the custodian of the transferee IRAs would not have to report as income to the Estate, any amounts later distributed from those IRAs to the Beneficiaries.

Note: Private letter rulings are anonymized and identifying details are removed and replaced with references to “Decedent”, “Estate E”, etc.

In response, the Internal Revenue Service (IRS) released Private Letter Ruling 2026-31-001 on July 31, 2026. The IRS noted that § 408(d)(1) generally requires amounts paid or distributed from an IRA to be included in the payee’s or distributee’s gross income, and that § 408(d)(3)(C) bars amounts received from an inherited IRA from being rolled over into another IRA. However, the IRS cited Revenue Ruling 78-406, noting that it specifically applied to a transfer by the original IRA owner from an IRA titled in their name to another IRA titled in their name. Revenue Ruling 78-406 provided that such a direct trustee-to-trustee transfer of IRA funds does not constitute a payment or distribution; therefore, the transfer is not a taxable event under § 408(d) or a rollover, provided that the transferee IRA remains titled in the same manner as the transferor IRA.

Applying that principle, the IRS ruled that because each transferee IRA would continue to be titled in Decedent’s name f/b/o the applicable Beneficiary as beneficiary of the Estate, the trustee-to-trustee transfer of each Beneficiary’s one-half interest in the traditional IRA and the Roth IRA to separate transferee IRAs would not be a taxable distribution under § 408(d)(1) or a rollover under § 408(d)(3). The IRS further ruled that, following the transfers, the Estate would not be required to include in its gross income, and the custodian of the transferee IRAs would not have to report as income to the Estate, any amounts later distributed from the transferee IRAs to the Beneficiaries. The ruling assumed that traditional IRA, Roth IRA, and the transferee IRAs would satisfy the requirements of § 408 at all relevant times, and it expressed no opinion about other tax consequences, including the required minimum distribution rules applicable to the IRAs.

Takeaways: Private Letter Ruling 2026-31-001 extends the trustee-to-trustee transfer principle of Revenue Ruling 78-406—applicable to transfers made by a living IRA owner—to a situation in which an estate is the IRA beneficiary by default because the decedent failed to designate a beneficiary. By allowing the estate’s fiduciary to divide an estate-owned IRA among multiple residuary beneficiaries through trustee-to-trustee transfers, rather than by first distributing the funds to the estate, the ruling enables each beneficiary’s separate inherited IRA to be funded without accelerating income recognition to the estate or the beneficiaries. This result depends on the transferee IRAs being retitled to reflect both the decedent and the estate as the named beneficiary, thereby preserving the character of the funds.

A private letter ruling is binding only on the taxpayer who requested it and may not be used or cited as precedent, but estate planning practitioners may find the IRS’s reasoning persuasive when advising a fiduciary who wishes to divide an estate’s IRA among named beneficiaries under a will. This ruling also serves as a reminder of the importance of timely completing beneficiary designations: In the situation addressed in the ruling, if the Decedent had named the Beneficiaries directly on the IRAs, the Estate would not have needed to incur the expense of obtaining a private letter ruling (in 2026, generally $43,700) to divide the accounts in accordance with the Decedent’s wishes without the risk of triggering immediate tax liability.

Michigan Supreme Court: Revocable Trust Assets Are Generally Subject to Creditor’s Claims, but 401(k) and Life Insurance Proceeds Held by Trust Are Exempt

In re Estate of Fowler, No. 167501, 2026 WL 2090502 (Mich. July 20, 2026)

In November 2018, Jennifer Fowler took her elderly mother, Helen Fowler, from an assisted living facility to Jennifer’s home, where she killed Helen and then herself. The personal representative of Helen’s estate filed a wrongful death lawsuit against Jennifer’s estate. The circuit court found Jennifer’s estate liable and entered judgment in favor of Helen’s estate.

When Helen’s estate sought to collect the judgment, the personal representative of Jennifer’s estate asserted that the estate’s assets had been exhausted by funeral expenses and the cost of defending the wrongful death lawsuit. However, Jennifer had created a revocable living trust, which was the named beneficiary of her 401(k) account and life insurance policy.

Note: In many cases, life insurance does not pay out in the case of suicide. However, that was not the case in this circumstance.

Jennifer’s trustee filed a declaratory judgment action seeking to determine whether Helen’s estate, as a judgment creditor, could reach the 401(k) and life insurance proceeds held by the trust. The probate court ruled that the life insurance proceeds were subject to Helen’s estate’s claim but that the 401(k) proceeds were exempt. Both parties appealed, and the Michigan Court of Appeals held that both accounts could be used to satisfy the judgment. Jennifer’s trustee sought leave to appeal to the Michigan Supreme Court.

The Michigan Supreme Court first addressed whether the assets of a trust that was revocable during the settlor’s lifetime but became irrevocable upon the settlor’s death are subject to creditors’ claims under Michigan Compiled Laws sections 700.7506(1)(b) and 700.7605(1): Under those provisions, property of a trust that is revocable by the settlor at their death is subject to creditors’ claims, with certain exceptions. The court determined that those statutes and relevant commentary distinguish between trusts created as irrevocable living trusts and those created as revocable living trusts that became irrevocable at the settlor’s death. The court noted that Michigan’s legislature treats revocable living trusts as will substitutes; thus, as is the case under the law applicable to wills and probate estates, which provides that when a person dies leaving unpaid creditors, their estate is liable for their debts, a trust that is revocable at the settlor’s death generally remains liable for the settlor’s debts. Because the parties did not dispute that Jennifer was the single settlor of her revocable living trust, which remained revocable until her death, the court held that the property held by the trust was subject to the claims of Helen’s estate—unless a statutory exemption applied.

The court next considered whether the proceeds of Jennifer’s 401(k) were exempt under Michigan Compiled Laws section 700.7605(2), which excludes from a creditor’s reach both a trust established as part of certain qualified retirement plans, including a “plan that is qualified under § 401 of the Internal Revenue Code, 26 U.S.C. 401,” and all payments from such plans. Because the parties agreed that Jennifer’s trust was not established under the 401(k) plan provisions of 26 U.S.C. § 401, the court focused on the statute’s separate exemption for “all payments from” a qualifying plan. The court concluded that the legislature intended that all payments from a 401(k) plan—including the disbursement to Jennifer’s trust, which was the designated beneficiary of her 401(k), upon her death—were not trust property reachable by her creditors. Accordingly, the court held that Helen’s estate could not reach the 401(k) proceeds to satisfy the wrongful death judgment.

The court then addressed whether the life insurance proceeds were exempt under Michigan Compiled Laws section 700.7605(4), which excludes trust property that would not have been subject to a creditor’s claim against the settlor’s estate had it been paid other than to the settlor’s estate. Under Michigan Compiled Laws § 500.2207(2), life insurance proceeds are protected from an insured’s creditors when paid to a beneficiary other than the insured or the insured’s “executors or administrators.” Helen’s estate argued that a trustee should be treated as an “administrator” because trustees administer trusts, placing the trust-owned proceeds outside the exemption. The court rejected that argument, noting that the term “administrator” has historically referred to a person appointed to manage an intestate decedent’s estate, not to a trustee. Because Jennifer’s trust, rather than her estate, was the named beneficiary of the policy, the court held that the life insurance proceeds fell within the exemption and could not be reached by Helen’s estate to satisfy its judgment.

Accordingly, the court reversed the judgment of the court of appeals and remanded the case to the probate court for further proceedings consistent with its opinion.

Takeaways: The Fowler decision confirms that, in Michigan, a single-settlor revocable living trust generally remains liable for the settlor’s debts after death to the same extent as a probate estate, regardless of whether the trust received particular assets before or after it became irrevocable. However, the decision also highlights the value of the statutory exemptions: It affirms that naming a revocable living trust—rather than the settlor’s estate—as beneficiary of a 401(k) plan or life insurance policy protects those proceeds from the settlor’s creditors, although the trust remains otherwise liable for the settlor’s debts. Estate planning attorneys who draft revocable living trusts and coordinate beneficiary designations for retirement accounts and life insurance policies should take note of this distinction between trust property generally and the specific categories of exempt payments identified by Michigan statutes.

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Elder Law

Skilled Nursing Facility’s Elder Abuse and Negligence Liability Based on Custodial Neglect Not Subject to MICRA’s Cap on Noneconomic Damages

Aud v. RRT Enters., LP, 121 Cal. App. 5th 1231 (2026)

Betsy Jentz, an 84-year-old resident of a skilled nursing facility operated by RRT Enterprises, LP, was admitted to the facility in 2020 following a hip fracture. Although the facility assessed Betsy as high risk for falls, it did not develop a fall-prevention care plan until 10 months after her admission. Betsy fell multiple times during her stay, most severely on October 4, 2021, when, after no one responded to her call light, she got out of bed to use the bathroom unassisted and fell, fracturing her arm and several other bones. She also developed pressure sores because staff failed to reposition her, and she presented evidence that she was not provided adequate food, water, or assistance eating after she broke her arm. Betsy sued RRT and related management companies and individuals (collectively RRT), alleging violations of the Elder Abuse and Dependent Adult Civil Protection Act (Elder Abuse Act) and the rights of a resident or patient, and negligence.

A jury awarded Betsy a total of $2,342,800, including $1,837,032 in noneconomic damages. The trial court granted the RRT’s posttrial motions, conditionally reducing the economic damages to $69,812.19—the amount Medicare and Medi-Cal had actually paid for Betsy’s care—and reducing the noneconomic damages to $250,000 under the Medical Injury Compensation Reform Act’s (MICRA) cap on noneconomic damages recoverable from a healthcare provider for professional negligence. Further, it granted RRT’s motion for a new trial unless Betsy accepted the reduction in damages. Both sides appealed. Betsy died while the appeal was pending, and her nephew, Derek Aud, was substituted for her in the action.

While the appeal was pending, the California Supreme Court decided Holland v. Silverscreen Healthcare, Inc., 18 Cal. 5th 364 (2025), holding that MICRA’s arbitration provision applies only to claims based on a skilled nursing facility’s negligence in its capacity as a healthcare provider, not to claims based on its failure to fulfill its custodial duties as a resident’s caregiver. Under Holland, the failure to provide basic necessities such as hygiene, food, and hydration, and the failure of staff to attend to, monitor, or assist a resident with daily activities, are custodial failures rather than professional negligence. The Holland court determined that if the facility’s failure was due to inadequate staffing or supervision, the failure was custodial even when an appropriate care plan would require medical judgment.

Applying Holland, the Court of Appeal held that Betsy’s causes of action for negligence and elder abuse arose from RRT’s failures as her custodian, not from a failure to provide medical care, and were therefore not subject to MICRA’s $250,000 cap. The court explained that Betsy had not challenged the adequacy of the fall-risk assessment or care plan that the facility’s nursing staff had developed; rather, she argued that the facility lacked the staff and custodial resources to carry out the plan, including responding to her call light, assisting her to the bathroom, and monitoring her. Under Holland, these failures were custodial despite the fact that the creation of the plan implicated the medical staff’s expertise. The court also rejected the RRT’s argument that Betsy’s claims sounded in professional negligence merely because she arrived at the facility with a medical condition or because her expert discussed individualizing her care.

The court affirmed parts of the trial court’s judgment, ordered the trial court to vacate its orders granting judgment notwithstanding the verdict and conditionally granting a new trial on noneconomic damages, and directed it to enter a new order denying the motion.

The court also affirmed the remainder of the trial court’s rulings in an unpublished portion of the opinion, including the trial court’s conditional reduction of economic damages to $69,812.19: It held that under Howell v. Hamilton Meats & Provisions, Inc., 52 Cal. 4th 541 (2011), a plaintiff may recover as economic damages no more than the amount actually paid or incurred for medical care. For a Medicare and Medi-Cal beneficiary, this is the amount those programs paid the providers rather than the amount billed.

Takeaways: The Aud decision, currently pending review by the California Supreme Court, applied the principles set forth in Holland in determining that MICRA’s $250,000 ($650,000 for actions filed on or after January 1, 2026) cap on noneconomic damages did not limit a nursing home resident’s recovery of court judgments for elder abuse and negligence claims arising from the nursing home’s failure to fulfill its custodial duties. Attorneys litigating claims against skilled nursing facilities should frame allegations of understaffing, inadequate supervision, and failure to assist with daily activities as custodial neglect claims rather than as challenging the medical judgment underlying a care or treatment plan to avoid MICRA’s damages cap.

Notably, an increasing number of states have begun to strike down, phase out, or increase caps on noneconomic damages. See e.g., Estate of Fisher v. Lee, No. A181233 (Or. Ct. App. July 1, 2026) (statutory cap on noneconomic damages in wrongful death cases violated Oregon’s constitutional guarantee of a substantial remedy).

ALJ Applied Wrong Eligibility Dates to CO Waiver Application

In re Lunn, No. 0990, 2026 WL 1998528 (Md. App. Ct. July 10, 2026)

A married woman, Renate Lunn, was diagnosed with ataxia in 1990. In September 2014, Renate secured a place on Maryland’s Service Registry to await an invitation from the Maryland Department of Health (Department) to apply for a Home and Community-Based Options Waiver (CO waiver), a Medicaid benefit that would allow her to receive healthcare in her home or in the community, similar to what she would receive in an institutional setting such as a nursing home or an assisted living facility. She was institutionalized in a short-term rehabilitation facility from December 2014 to February 2015. Seven years later, the Department invited her to apply for a CO waiver. On June 28, 2022, Renate submitted her application. The Department evaluated her financial eligibility as of June 1, 2022, the first day of her application month. The Maryland Medicaid Eligibility Determination Division (EDD) denied her application in September 2022.

Renate challenged the denial in a hearing before an ALJ. Although Renate and her husband had countable resources of $68,135.14 on June 1, 2022, the snapshot date of her application, Renate established at the hearing that as of November 1, 2022, their countable resources totaled $24,605.32. The ALJ concluded that Renate was not entitled to the spousal resource allowance because she was not institutionalized in a facility but lived at home with her spouse. Applying only the $2,000 individual resource allowance, the ALJ found her countable resources exceeded that limit and upheld the EDD’s denial. In addition, the ALJ found that the EDD had correctly determined that June 1, 2022, was the date on which her financial eligibility should be evaluated and that she was not financially eligible as of that date. The circuit court affirmed the ALJ’s decision. Renate died in June 2024 at age 83, and her personal representative filed a timely notice of appeal.

The Court of Appeals of Maryland rejected the Department’s argument that the appeal was moot because of Renate’s death, ruling that Renate’s personal representative may have the right to corrective payments if it concluded that the Department erred in denying Renate’s application.

Further, the court noted that the Department conceded the ALJ had erred in concluding that Renate was not entitled to the spousal resource allowance on the ground that she was not institutionalized. As set forth in 42 U.S.C. § 1396r-5(h)(1), a married applicant who lives in the community but might otherwise be institutionalized is deemed to be an institutionalized spouse. Consequently, Renate was an institutionalized spouse entitled to the spousal resource allowance and subject to a resource limit of $36,057.57 (one-half of the couple’s countable resources plus the $2,000 individual resource allowance).

Note: The Department asserted that the applicable resource limit was $36,057.57—one-half of the couple’s countable resources plus the $2,000 individual resource allowance—though that figure appears to reflect a $10 arithmetic error. The correct sum is $36,067.57.

The court found that the ALJ had also erred in concluding that Renate did not qualify for the CO waiver because her and her husband’s resources exceeded the resource limit, even accounting for the spousal resource allowance, on June 1, 2022, the first day of the month of her application. The Department did not cite a statute or regulation permitting or requiring it to evaluate a CO waiver only on the first day of the month in which the applicant is invited to apply. It relied principally on its internal policy manual, which lacked the force or effect of law and did not fully support its position. The court instead pointed to the Department’s regulations, which stated that the “[c]urrent eligibility shall have a period of consideration of a 6-month period beginning with the month of application for Medical Assistance.” In re Lunn, No. C-03-CV-23-000973, at 5 (citation omitted). In addition, the Department’s internal policy manual similarly stated “[c]urrent eligibility for institutionalized persons is determined for the initial period under consideration as well as the succeeding 6-month period under consideration.” Id. at 6 (citation omitted).

The court further noted that, in 2022, the Maryland legislature had amended § 15-132(e)(1)(ii) of the Maryland Health General Code to require the Department to send a notice informing applicants that they have six months after submitting their applications to meet eligibility requirements. The court determined that the 2022 amendment did not create a new right that gave applicants six months to meet eligibility requirements, but it did require the Department to inform applicants of a pre-existing right to satisfy those requirements within six months.

Therefore, the court found that Renate and her husband had six months from June 1, 2022, to meet the financial-eligibility requirements of a CO waiver and had successfully done so on November 1, 2022. The court reversed the circuit court’s judgment and remanded for further proceedings consistent with its opinion.

Takeaways: The Lunn court’s decision confirms that community spouses applying for Medicaid home- and community-based waivers are entitled to the same spousal resource allowance available to applicants in nursing facilities. It also serves as a reminder to elder law attorneys that a beneficiary’s death during the pendency of an appeal does not necessarily mean that a challenge to an erroneous benefits denial is moot where retroactive corrective payments remain available.

Business Law

FinCEN Issues New Final Rule Permanently Eliminating CTA Reporting Requirements for US Persons

Beneficial Ownership Information Reporting Requirement Revision, 91 Fed. Reg. 52508 (Aug. 14, 2026) (to be codified at 31 C.F.R. pt. 1010)

On August 13, 2026, the Financial Crimes Enforcement Network (FinCEN) issued a new final rule that permanently eliminates all Beneficial Ownership Information (BOI) reporting requirements for US persons—beneficial owners, company applicants, and legal entities—under the Corporate Transparency Act of 2020 (CTA). The final rule adopts an interim final rule (IFR) (with some changes) that FinCEN issued on March 26, 2025, that dramatically narrowed the BOI reporting requirements. Like the IFR, the new final rule exempts all domestic entities from any BOI reporting obligations, leaving only foreign entities that are registered to do business in the US subject to those requirements. In addition, as in the IFR, foreign reporting companies are not required under the new final rule to report BOI for beneficial owners who are US persons.

The final rule’s revisions to the IFR include the following:

• It expands the US-person exemption beyond beneficial owners to also cover company applicants—individuals who file or direct the filing of a foreign entity’s registration—meaning that foreign entities no longer need to report US persons in that capacity.
• It eliminates the requirement for any US person holding a FinCEN identifier, as either a beneficial owner or a company applicant, to update or correct their previously submitted information.
• It relocates the US-person exemption language from the beneficial owner definition section to the reporting content section (found at 31 C.F.R. § 1010.380(b)) to avoid confusion; the original placement had created ambiguity for other rules that cross-referenced the beneficial owner definition.

The rule also announces FinCEN’s plans to delete previously collected information of US persons from its database; it will provide a public notice when the deletion process is complete.

The stated rationale of the final rule is that collecting BOI from the vast majority of law-abiding domestic small businesses is not highly useful to law enforcement and national security relative to the compliance burden imposed—a balance that the CTA directs FinCEN to strike and is reinforced by President Trump’s Executive Order 14,192 on deregulation.

The final rule became effective August 14, 2026.

Takeaways: FinCEN estimates that the final rule’s additional exemptions (beyond the IFR) will save roughly $233,000 in the first year and about $209,000 annually thereafter, on top of the multibillion-dollar savings already attributed to the IFR’s broader exemptions. The reporting obligations previously imposed on domestic entities—and risk of fines, penalties, and imprisonment for noncompliance—largely impacted small businesses, as many larger entities were excluded from the definition of a reporting company.

Fifth Circuit Withdraws Prior Opinion and Holds That Meaning of Limited Partner Turns on Managerial Role, Not State Law Label, for Self-Employment Tax Purposes

K Alain, L.L.L.P. v. Comm’r, No. 24-60240, 2026 WL 2333930 (5th Cir. Aug. 12, 2026)

Sirius Solutions, LLLP (Sirius) (renamed K Alain, LLLP during the course of litigation) is a limited liability limited partnership (LLLP) formed under Delaware law and owned by a general partner and several limited partners. On its federal tax returns for 2014, 2015, and 2016, Sirius allocated all of its ordinary business income for each of those years to its limited partners and excluded the limited partners’ distributive shares of partnership income or loss from its calculation of net earnings from self-employment. The IRS audited its tax returns. It determined that the distributive share exception in Internal Revenue Code (I.R.C.) § 1402(a)(13) did not apply because Sirius’s limited partners were not limited partners for the purposes of the exception. The IRS adjusted the net earnings from self-employment upward: from $0 to $5,915,918 for 2014, from $0 to $7,372,756 for 2015, and from $0 to $490,291 for 2016. Sirius petitioned the Tax Court for readjustment of its 2014, 2015, and 2016 returns. The Tax Court, however, relied on its prior decision in Soroban Capital Partners LP v. Commissioner, T.C.M. (RIA) 2025-052 (2025), rejected Sirius’s challenges on the grounds that, under the limited partner exception to self-employment tax, the term limited partner, which is not defined in the Code, means passive investor, and Sirius’s limited partners were not passive investors. Sirius appealed.

In Sirius Solutions, LLLP v. Commissioner, 165 F.4th 374 (5th Cir. 2026), the Fifth Circuit Court of Appeals rejected the Tax Court’s interpretation of the meaning of limited partner in I.R.C. § 1402(a)(13). The court determined that limited partner should instead be defined as a partner in a limited partnership that has limited liability.

However, on rehearing, in K Alain, L.L.L.P. v. Commissioner, No. 24-60240, 2026 WL 2333930 (5th Cir. Aug. 12, 2026), the Fifth Circuit withdrew its prior opinion in Sirius Solutions, LLLP and substituted a new opinion addressing the sole question of what limited partner means in § 1402(a)(13). In its majority opinion, applying ordinary-meaning statutory interpretation, the court evaluated how the phrase was understood in 1977, when Congress enacted the exception. Based on contemporaneous legal dictionaries, uniform limited partnership acts, period treatises, and court decisions, the court concluded that the original public meaning of limited partner in § 1402(a)(13) is a partner who plays no significant role in managing or running the business.

Thus, the court rejected the Tax Court’s Soroban “passive investor” standard as untethered to the statutory text and unsupported by a meaningful analysis of the 1977-era meaning. The majority also rejected the Commissioner’s reliance on decades of IRS partnership-return instructions defining a limited partner solely by reference to limited liability, reasoning that years of consistent administrative practice cannot rehabilitate an interpretation inconsistent with the statute’s plain text.

Because the Tax Court had applied Soroban’s passive-investor test rather than the managerial-control standard the Fifth Circuit adopted, the court vacated the Tax Court’s judgment and remanded for the Commissioner and the Tax Court to evaluate whether the partners at issue were limited partners under the newly articulated standard.

Takeaways: The K Alain decision resolves, at least within the Fifth Circuit, a dispute over how § 1402(a)(13)’s limited-partner exception to self-employment tax applies to state law limited partnerships and limited liability limited partnerships whose partners are actively engaged in the business. The court rejected the Tax Court’s stricter passive investor test from Soroban and its own prior stance that a limited partner should be defined as a partner in a limited partnership that has limited liability. The Fifth Circuit’s managerial control standard may permit partners with some functional involvement in the enterprise to nonetheless qualify for the self-employment tax exclusion, as long as they do not play a significant role in managing or running the business.

Because the court remanded the case to the Tax Court for application of this new standard, attorneys advising limited liability limited partnerships, limited partnerships, and similar pass-through entities on self-employment tax exposure should watch for the decision on remand, monitor whether other circuits issue contrary opinions, and continue to document and advise partners regarding the actual roles they play in day-to-day management, since those roles—not a partner’s state-law title—are central to the analysis under either standard. See our discussion of the Fifth Circuit’s now-withdrawn opinion in our February 2026 monthly update and the discussion of the Soroban case in our February 2024 monthly update.

Two Delaware Chancery Court Cases Clarify Implications of LLC Act Provisions

Hassanein v. NTO Fund I, No. 2025-0299-DH, 2026 WL 2240127 (Del. Ch. Aug. 4, 2026); Bengson v. Elevate RCM Holdings, LLC, No. 2025-1347-DG, 2026 WL 2409798 (Del. Ch. Aug. 10, 2026)

Hassanein v. NTO Fund I

In 2021, Nichola Eliovits, a co-founder of DermBiont, Inc., asked his friend Tamer Hassanein for a short-term loan to fund the company. Rather than executing a loan directly between themselves or with DermBiont, the two formed NTO Fund I, LLC (the Company) as an intermediary, with Nichola as the sole manager and majority economic owner and Tamer as the minority member. Tamer advanced $1,924,417.78 to the Company, which the limited liability company (LLC) agreement described in some places as a loan and, in others, as a capital contribution. The agreement required Nichola to make a capital contribution sufficient to repay the funds by a stated maturity date and required the Company to use that contribution to repay Tamer immediately. Nichola never made the required contribution, and the Company never repaid the funds to Tamer. Tamer demanded repayment and, when the Company refused, he sued the Company for breach of the repayment obligation, sued Nichola for breach of the contribution obligation, and sued Nichola under section 18-502 of the Delaware LLC Act (LLC Act) as a creditor entitled to enforce a member’s unfulfilled contribution promise. A magistrate judge recommended dismissing all three counts.

The Court of Chancery denied the motions to dismiss on various bases (some not discussed here), including that Tamer had standing to sue Nichola directly for breach of the contribution obligation. The court noted that the Delaware Supreme Court, in Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), had established the test for determining whether a claim is derivative or direct: The issue turns solely on who suffered the alleged harm—the business entity or the individual shareholder (later applied to LLC members in subsequent case law)—and who would receive the benefit of the recovery. The court acknowledged that under Tooley, the claim to enforce the contribution requirement in the present case would be derivative because the company did not receive the money that Nichola was contractually obligated to contribute. However, the court noted that contrary authority supported the position that the claim was direct. The court viewed the implications of section 18-502(b)’s default rule requiring unanimous consent by all LLC members to compromise a member’s obligation to contribute “unless otherwise provided” in the LLC operating agreement as particularly persuasive: The court held that the requirement of unanimous member consent implies that any member may enforce such a claim directly. If the claim were derivative, the LLC’s governing body would have the authority to decide whether to assert it and thus could refuse to enforce it—effectively compromising the obligation to contribute without unanimous member consent. The court found that Nichola could not impartially consider a demand to sue himself, making the pursuit of a derivative claim futile. Consequently, the court ruled that Tamer had stated a claim on which relief could be granted.

Bengson v. Elevate RCM Holdings, LLC

Dena and Rick Bengson (the Bengsons) became members of Elevate RCM Holdings, LLC (Elevate) in 2023, when Elevate’s subsidiary acquired their business in exchange for cash and membership units. In connection with the transaction, the Bengsons executed joinder agreements binding them to Elevate’s operating agreement. The operating agreement contained a provision stating that a member “irrevocably and unconditionally waives, to the fullest extent permitted by applicable law,” any inspection or information rights, except to the extent expressly required by the LLC Act or the operating agreement. Bengson v. Elevate RCM Holdings, LLC, No. 2025-1347-DG, 2026 WL 2409798, at *1 (Del. Ch. Aug. 10, 2026).

After Elevate sold its subsidiary in July 2025 and distributed the proceeds to its members, the Bengsons became concerned that their payout did not reflect the transaction’s true value. They eventually served a formal demand under section 18-305 of the LLC Act seeking 10 categories of books and records. Elevate rejected the demand, asserting that the Bengsons had waived their statutory inspection rights. The Bengsons filed suit in the Court of Chancery.

The Court of Chancery ruled in favor of Elevate, holding that section 18-305 does not expressly prohibit members from contractually waiving the statutory default inspection right, and that Delaware’s policy of maximizing freedom of contract for LLCs permits sophisticated parties to bargain away such rights so long as the waiver is clear, unequivocal, and knowingly made. The court rejected the Bengsons’ argument that the operating agreement’s carve-out for rights “expressly required” by the LLC Act preserved a baseline inspection right, explaining that section 18-305 is a default provision rather than a mandatory one and does not expressly prohibit the waiver of its default inspection right. The court also rejected the Bengsons’ contentions that the operating agreement was an unnegotiated contract of adhesion and that the waiver required separate consideration, finding instead that the Bengsons were sophisticated parties who negotiated the sale of their company and received cash and membership units as consideration for the entire transaction, including their agreement to be bound by the operating agreement. Accordingly, the court denied the Bengsons’ request to inspect Elevate’s books and records.

Takeaways: The Delaware Chancery Court’s decisions in Hassanein and Bengson provide additional clarity about the impact of two default provisions in the LLC Act and the need for care in drafting and reviewing operating agreements that modify the obligations imposed by those provisions. In Hassanein, the court rejected Nichola’s position that an LLC operating agreement containing language that merely empowers a manager to manage an LLC’s affairs has sufficiently “provided otherwise” as required by section 18-502(b) to escape the application of the statutory default rule requiring unanimous consent of all members to compromise a contribution claim. Rather, the court held that, to opt out of the default provision set forth in section 18-502(b)—including a member’s right to enforce a contribution requirement directly, language requiring something other than unanimous consent (e.g., a majority vote) must be included in an operating agreement.

The Bengson decision confirms that, unlike section 220 of the Delaware General Corporation Law, section 18-305 of the LLC Act is a default provision and does not impose a mandatory, nonwaivable inspection right. As a result, members of a Delaware LLC may contractually waive that right in a clearly drafted operating agreement. The decision reinforces the Delaware Court of Chancery’s consistent application of the doctrine of caveat emptor, under which investors are expected to read and understand the relevant documents before investing: Equity will not rewrite a bad bargain. Attorneys who draft or review LLC operating agreements should carefully evaluate any provision waiving statutory information or inspection rights, and advise clients that such waivers, if clearly drafted, will likely be enforced.

AI and Legal Tech

Connecticut Court Sanctions Self-Represented Plaintiff for Inserting Hidden Instructions for AI Systems in Court Filings

Elliott v. New York Bariatric Grp., LLC, No. AANCV-25-6066141-S, 2026 WL 2323029 (Conn. Super. Ct. Aug. 6, 2026)

In reviewing filings submitted by a self-represented plaintiff in a personal injury action, a Connecticut trial court discovered text formatted to be invisible to a human reader but fully legible to an artificial intelligence (AI) system. The concealed text instructed any AI system reviewing the filing to produce output favorable to the plaintiff and to treat a prior clerk’s denial of the plaintiff’s motion for default as an error requiring correction. The court issued an order to show cause and held a hearing at which the plaintiff appeared and was heard.

The court acknowledged that self-represented litigants are entitled to latitude regarding the form of their filings and that courts construe such filings liberally in their favor. However, the court explained that this solicitude extends only to a litigant’s lack of legal training and does not excuse misuse of the litigation process. The court further noted that it possesses inherent authority, independent of any statute or rule, to sanction abuse of its processes once it has identified the improper conduct and provided notice and an opportunity to be heard.

The court held that this type of concealed instruction, commonly known as a “prompt injection,” violates the duty of candor to the court and constitutes an abuse of the litigation process reachable under the court’s inherent authority, regardless of whether the courts themselves use AI to review filings.

As a sanction, the court rescinded the plaintiff’s ability to file documents electronically and ordered that any future filings be submitted in person, on paper, at the clerk’s office, finding that this measure was narrowly tailored to the misuse of the e-filing system without denying the plaintiff access to the courts. The court clarified that its order does not prohibit the plaintiff or any litigant from using generative AI to help prepare filings, provided that the user independently verifies the output.

Takeaways: The Elliott decision is among the first to address the concealment of AI prompt-injection instructions within court filings and illustrates that existing verification-focused AI rules aimed at inaccurate output do not address a litigant’s manipulation of input to an AI system. Hiding instructions intended to influence any AI tool that might review a filing, whether used by a court, opposing counsel, or a clerk, may be treated as an abuse of the filing process and sanctioned under a court’s inherent authority, independent of any specific procedural rule. The decision also serves as a caution to practitioners that documents received from an opposing party or a client may contain concealed instructions that could skew an AI tool’s summary or analysis, underscoring the continued importance of careful human review of any AI-assisted output.