Written by Robert Nickerson
Let's say your finally considering getting an estate plan created. Congratulations, your taking a big step into creating something that will give your family relief in which a plan is laid out in the worst-case scenario. After all, going through the process may sound like it can be stressful and even scary. I can tell you that the process can be straightforward as long as we're cataloging your assets, determining how their going to be distributed, and taking you through the bureaucratic red tape that makes it appear more complex then it actually is.
How often are things completely straightforward? Unfortunately, it's rare. In fact, you’ve probably gone ahead and started to do your own research. You've read some articles. You've picked up a book. You've seen all the rules and ideas that your estate plan can have. But you also probably have a lot on your mind. Who am I going to leave my home to? Whose going to receive my jewelry and heirlooms? What if I have someone in the family with special needs? This will undeniably cause your knowledge of estate plans to collide with the clouding of your own emotion. This is why I always recommend getting in contact with a lawyer before making a decision.
I've come across my fair share of questions from clients with information they've found. Sometimes its about a law in the state of California or about how it connects with Medicare. I also get questions about things I need to ensure is either outdated or even false. I'm going to go through four things I've seen as a misconception about estate planning that need to be cleared.
1. An estate plan should be based solely on tax mitigation
It may be tempting to work your estate plan around taxes, but I can tell you that planning everything only around taxes is a big mistake. Id say only 3% of people need to be worried about paying a federal estate tax. When my clients ask about taxes, I always ask about assets first. That determines if anything will be need to be reported to the government, but more importantly, keeps the focus back on family.
2. I should leave everything to my children
Before you get angry, I'm not at all saying you shouldn't leave your children with nothing. In fact, I would encourage leaving your assets to them. What I'd want to explain is that rather then just putting their name down on paper and moving on, we'd want to see if those assets can be used in a better way. It'll ultimately be yours to decide and I can help you decide how your assets are distributed in a fair manner.
3. All my children should get an equal amount
Yes, it's okay to say no. Most parents are concerned that they're not treating their children equally. Yes it might be good in spirit to split a million dollars between three of your kids. But lets face it, are all kids really the same. A lot of them will have different goals, different skills, and a better mindset. As difficult as the decision can be, you'll feel better if the assets are put in the hands of people you know will continue to keep it's value.
4. I can set up a trust and take care of everything
So you think you can create a trust? I admire your gumption, but your in for a complex time of books, rules, and regulation. A good example would be if you have a large value of assets, then a typical estate plan will involve setting up a trust. However, depending on a number of factors, it could either be revocable or irrevocable. Then there's the process of setting beneficiaries and whether they can set up the fiduciary. We can certainly recommend the direction your estate can go and how a trust in created for the person in question, but I'd advise against doing it yourself.
It's important to note that it's always best to speak to an attorney before making any decisions regarding an estate plan or updating them. I can give you an ease of mind by introducing the subject in a simple manner. If you want more information, you can contact my office for more information.
Written by Robert T. Nickerson
For those that use Instagram, if they follow pop star Britney Spears, they may have noticed that her stories (these are the short videos or pictures that appear for twenty-four hours for the uninformed) have gotten the attention of her fans that have gotten more concerned over her well being. Some of the content has included her talking to colors, talking about accidentally burning her gym with scented candles. Many people blame her current state on her father who has controlled her conservatorship ever since 2008.
The story behind Britney Spears and her conservatorship has gotten be to think about the many families I've helped out through my estate plans. I've had good families and bad families. I've had families who've already identified the problems that need to be addressed. Some don't even see a problem when there is one. So I thought I'd go through a little bit of what conservatorships are, what led Britney Spears to losing control of her own financial and medical decisions, and what you could do to ensure that you don't make the same mistakes.
So what is a conservatorship? A regular person, whose mental state is clear and seems to making appropriate decisions regarding their life and finances, will not need one. But let's say a person has a mental condition or illness like dementia or a physical disability that prevents them from being able to live on their own. A conservatorship is a legally set arrangement in which another party will make the ultimate decision regarding finances or even other aspects of their life.
So how are conservatorships decided? A guardian is set by a judge and will usually remain in place for about a year. Depending on the situation, the conservatorship can either be renewed or dissolved if its determined that it's no longer needed. These are often looked at annually to see what progress has been made and whether a guardian is still needed.
In the case of Britney Spears, her father has ultimate say in every decision she makes, which applies to finances, business, health, voting and even marriage. This kind of control means that she has a probate conservatorship. This places more of the decision making to the guardian assigned. While it may seem like a lot, this is quite common with a probate conservatorship. The other common type, which Britney Spears does not have, is a limited conservatorship. This would grant some power the person in question. But this also requires a degree of health that assumes the person is okay and mentally ready to have a say. This was something Britney Spears didn't have.
A lot of her trouble can be placed back to 2007 when the year proved challenging to the singer. A long with a very public divorce from Kevin Federline, she was faced with an ever increasing schedule of recording, performing, and consistent paparazzi. The pressure got to her and was placed in an involuntary psychiatric hold after she locked herself in a room with her son. This kind of involuntary hold, called a 5150 in the state of California is enacted when " A person, as a result of a mental health disorder, is a danger to others, or to himself or herself, or gravely disabled, a peace officer [or] professional person in charge... may, upon probable cause, take, or cause to be taken, the person into custody for a period of up to 72 hours for assessment, evaluation, and crisis intervention." After two stays in psychiatric facilities, her father, Jamie Spears was granted an emergency temporary conservatorship. This has become a standard conservatorship that has lasted over ten years. This can be more common for some cases, but it's rare for a high profile figure like Britney Spears.
In the ten years since, things have taken an interesting route. Britney Spears remained just as busy as ever with more tours, more albums, time as a judge on the X Factor, and even a Las Vegas show. Her conservatorship also saw some changed. She had married her boyfriend Jason Trawick in 2012 who was added as a co-conservator, until the next year when the engagement was called off. Her lawyer Andrew Wallet was also a co-conservator until 2019 when he resigned from his position. This left her father as sole conservator, but he also stepped down due to a personal health emergency. He then named a temporary third party, Jodi Montgomery, as the new day-to-day conservator.
So what about the rest of Britney Spear's family? Have any of them tried to intervene in the conservatorship? Her mother, Lynn, had put in multiple requests to be more involved with her estate, without much success. Her younger sister Jamie-Lynn, has dismissed any claims that her sister is unwell, claiming that her family has taken the best measures to help and blasted critics who've debated about Britney's sanity.
On August 19, a hearing determined that the current arrangement will remain in place, with the father coming back in as the role of sole conservator.
Given that we only know Britney Spears through her music and social media appearances, who knows what's really going on. What I will add is that given her continuous success, she seems to be managed by the right people who know how to keep her away from negative behavior. Something else could be going on, but none of us know.
Conservatorships can be set up for anyone. It's not just a luxury for the wealthy. In fact, under the right circumstance, this may even be a necessary move to the health and well being for someone you love. The Law Offices of Jeffrey C. Nickerson can help guide through the process and what steps to take. For more information, click on the button below to see what can be done.
Personal care contracts or caregiver agreements can solve a variety of problems because they allow an elderly or disabled individual the option to remain in their home while allowing funds to be paid out to that caregiver for assistance leading to a penalty-free transfer of assets and reimbursements for care provided.
In order for a care contract to be recognized and upheld by governmental agencies, the contract should be structured as a written employment contract setting forth the specific duties of the caregiver and the specific salary to be paid. Each state has different requirements that must be followed, so it is important to check on the requirements in advance. Generally, there must be (a) a written agreement in place between the individual providing services and the individual receiving care specifying the services to be provided which is signed and dated on or before the date the services began; (b) the services provided must not be duplicative of what is being paid to someone else; (c) the care recipient must have a demonstrated need for the personal services; (d) the services are necessary and essential; (e) compensation for the services must be made at the time services are performed; and (f) the fair market value of the services provided must be equal to the value of assets given for the services.
Funds should not be paid for caregiving assistance without a written contract in place since this will be viewed as a gift. Generally, it is not possible to pay for services rendered prior to the date of the written care contract. If there will be more than one caregiver, separate caregiver agreements should be obtained. A doctor’s letter should also be obtained establishing the need for the assistance.
Some states require that a caregiver log be maintained detailing the services provided under the personal care contract. If a caregiver fails to maintain such a detailed log, these states take the position that despite the fact that all of the other requirements have been met, the care provider cannot prove that the services were actually provided, and thus the care recipient cannot meet the burden that the payments were “transfers for fair market value.” In these states, it is essential that the caregiver keep a log of services performed.
It is also important that the contracted rate paid to the caregiver for services provided be reasonable. A good rule of thumb is to make sure that the hourly rate paid to the caregiver does not exceed the hourly rate which would be paid to a professional caregiver. If the hourly rate is excessive, then Medicaid will likely claim a portion of the funds paid to be a “gift” or a “transfer of assets” resulting in a period of ineligibility.
If the elderly or disabled individual is a wartime Veteran who is homebound and has limited finances, a personal care contract may also assist the Veteran in obtaining additional assistance under the VA Aid and Attendance benefit provisions. The VA requires a detailed care agreement and a doctor’s letter in order for such care agreement to be given consideration.
It is important that the contract detail the services to be provided by the caregiver, as well as the number of hours which the caregiver will work. Caregiver duties generally include assisting with activities of daily living, housekeeping duties, meal preparation and assisting with transportation of the care recipient, monitoring the recipient’s mental and physical condition, and providing companionship and assistance on a general basis.
Given the level of control involved in the typical personal care contract, this arrangement is generally treated as that of an employer/employee and not an independent contractor and will be taxed accordingly. The caregiver and care receiver must review and be aware of the tax obligations involved in these agreements.
If the requirements are not followed, the transfer of funds will be considered a gift and a penalty will be imposed. Obviously, if the individual still requires care, a written care contract can be put in place for all services going forward; however, this does not correct the past arrangement. The safest course is to put the care agreement in place prior to any transfer or payment for services.
It is recommended that this type of contract be prepared by an experienced special needs/elder law attorney after consulting with the individual and the family regarding the type of care needed, the funds to be paid for services, and the authority to be given to the caregiver.
About this Article: We hope you find this article informative, but it is not legal advice. You should consult your own attorney, who can review your specific situation and account for variations in state law and local practices. Laws and regulations are constantly changing, so the longer it has been since an article was written, the greater the likelihood that the article might be out of date. SNA members focus on this complex, evolving area of law. To locate a member in your state, visit Find an Attorney.
Written by Robert Nickerson
There's no denying that having an estate plan can bring a lot of negative thoughts about your loved ones; especially death. But there's also no denying that every family needs one. We can prepare as much as we want for the future, but there's one thing we can never predict: timing. Timing reflects a lot of things: timing of sickness, timing of accidents, timing of health, and of course, timing of death. Because of that, don't assume everything will be automatically taken care of.
Of course, the next step is a tough one: having "the talk" with your elderly parents about planning for the inevitable. Believe it or not, this is a much harder "talk" then the "talk" you have with your teenage children. Your parents will probably try to defer the subject or explain that they'd rather have this conversation in another ten years. In fact, I cant guarantee a proven formula where they won't get emotional. But I do have some ideas that will make having this conversation a lot easier.
This should give you a good guideline on how to approach "the talk". It's no guarantee, though I think it'll make things easier.
If you want, we can even help have that conversation and help build an estate plan to make it less stressful for your loved ones and give the whole family more time to enjoy themselves. Call or email the office for more details.
Written by Robert Nickerson
In February of 2019, there was a lot of speculation regarding the $150 million dollar estate of Karl Lagerfeld in France. It had nothing to do with his financial assets or property. It had to do with his cat Choupette. Yes, his pet housecat. But this was more then a pet; Choupette was Karl's companion who was loved and had even appeared in many of his published photos, even in luxury fashion magazines. It was assumed that the cat would be well off thanks to his owners wealth who would have set something up in an estate plan to make sure it was cared for. But in a bizarre twist, a year after Karl had passed away, the administrator of the estate had "disappeared". This has created some odd legal questions relating to the cat and his inheritance.
Because there have been cases of fiduciaries being questioned for how their handling the administration of an estate, the courts have had to step in to litigate these actions. While I'm not that well read on estate laws in France, in the state of California, having a lot of time passed between a death and a fiduciary managing an estate would have open the door to a lot of questions.
In state of California, Karl's estate would have taken a couple of steps. Had he had a will, an executor of the will would have needed to submit an original to the superior court of the county of where it was written. A probate court would have found a personal representative to which then a hearing would finally determine a personal representative of Karl.
Regardless of what happens to the estate and the cat, beneficiaries need to understand their rights and to have the right attorney to inform them on what steps need to be taken as to not see a delay in their inheritance.
We can make sure all of our clients are properly informed for whatever estate plan their a part of or even in charge of. Contact us for more information.
Written by Robert Nickerson
Have you found yourself in a position where your not sure what to do when a love one has passed away? We've all been in that boat. It something that's never easy to talk about, but there are things you can do to make it easier. I've experienced a lot of people who want the right instructions on what happens when the loved one they've been caring for has finally passed. As I work with each family on their estate plans, I try to lay out exactly what needs to be done, who they need to talk to, which government agency or court to inform. To give you a little more information on what that all means, I've compiled a list of ten things one should at least be doing once someone has passed.
Editor's note: I thought I would take some time to share this article about a racer who had been struck with Covid-19 and his experience with it. Bob Tasca, driver of the Motorcraft/Quick Lane Ford Mustang Funny Car in the NHRA Mello Yello Drag Racing Series was recently diagnosed with COVID-19 and will miss this weekend's E3 Spark Plugs Nationals at Indianapolis Raceway Park. Tasca, 44, offered the following blog for his fans ahead of this weekend's event:
I want to thank everyone for all the well-wishes and prayers. I am truly blessed to have so many people praying for me. It has been an incredibly challenging time for me and my family. I hope my experience can help others get through this difficult time.
I was exposed to the virus on Father’s Day at a small gathering of family only at my Dad’s home. Even though we were all being cautious, at some point within an hour span eight members of my family contracted the virus. Within days, we tested positive. What was real scary, had I not been tested I would have exposed many other people to the virus because I had no real symptoms for seven days. The second week was far different.
As a driver, I live a healthy life. I eat well and exercise and was in very good health before I got COVID, but over the next seven days I was brought to my knees with symptoms.
What makes this virus so deadly is it attacks your whole body. I had body aches so bad I could hardly move, fever that lasted days, a resting heart rate that ping-ponged wildly for four straight days. However, what really took me down was my breathing. I ended up developing pneumonia in both of my lungs from the virus.
I had a dry cough that was uncontrollable. One morning my oxygen level dropped to a point where I knew I needed help. After spending a few days in the hospital they were able to help control my cough and get my lungs stronger. I can’t thank the staff of nurses and doctors at Kent County Hospital (Warwick, Rhode Island) enough. They are truly on the front lines of this fight!
Over the last few days I have definitely turned the corner. Now I need to focus on building myself back up. I’ve lost over 11 pounds.
My message to everyone that reads this is simple: First, do everything you can not to catch or spread the virus. Wear masks, respect social distancing guidelines, wash your hands (I believe I contracted the virus by touching something) and if you have any symptoms at all, get tested! Most people that get it will have mild symptoms, but you can spread it to people who could die if they get it.
Second, if you have any underlying conditions at all you need to take extra precautions. I was the healthiest person I knew and it took everything I had to pull through this. This isn’t a five-day bout with the flu. This is a 14-day-plus bout that attacks your nervous system, lungs and heart all at the same time. Don’t underestimate this virus—it can be deadly!
As for racing, I’m brokenhearted I will not be with my team this weekend. This will be the first time in my career I’ll miss a race, but nothing is more important to me than the safety of my team, fans and competitors. Trust me, I’ll be back soon. I want to thank Jonnie Lindberg for stepping in for me. I know he will do great. He is a great driver and a first-class guy!
Last, I want to thank my “head nurse,” my wife. She has been amazing helping me through this. I couldn’t imagine going through this without her by my side.
I’ll be back!
From the taxation of trust income in California to landmark civil rights decisions by the U.S. Supreme Court, we have recently seen some significant developments in estate planning and business law. To ensure that you stay abreast of these legal changes, we’ve highlighted a few noteworthy developments and analyzed how they may impact your estate planning and business law practice.
All Trust Income Derived from California Sources Is Taxable, Regardless of Residence of Fiduciaries
Steuer v. Franchise Tax Board, ___ Cal. Rptr. 3d ___, 2020 WL 3496779 (Cal. Ct. App., June 29, 2020)
Raymond Syufy established the Paula Trust for the sole benefit of his daughter, Paula Syufy Medeiros. The trustees were authorized, but not required, to make distributions to her. Paula Trust had two co-trustees, one a resident of California and the other a Maryland resident. In 2007, Paula Trust, which held a limited partnership interest in Syufy Enterprises LP, sold stock to several companies. Some of the capital gain income from the sale was allocated to Paula Trust, which reported gross income of $2,965,099 on its 2007 tax return, with $2,831,336 of capital gain, including the sale of stock, all derived from California sources. The trust paid $223,425 in income tax to the state of California.
The trustees filed an amended 2007 fiduciary income tax return in 2012 requesting a refund of $150,655 for an overpayment of income taxes. Paula Trust asserted that the capital gain had been incorrectly reported as California source income. Paula Trust relied on Cal. Rev. & Tax Code section 17743, which states: “Where the taxability of income under this chapter depends on the residence of the fiduciary and there are two or more fiduciaries for the trust, the income taxable … shall be apportioned according to the number of fiduciaries resident in this state….” The trustees claimed that only one-half of the capital gain—the half apportioned to the California trustee—was taxable income, and that the amount apportioned to the Maryland trustee was not taxable.
After its administrative appeal was rejected, Paula Trust filed a tax refund suit in 2016. The trial court ruled in favor of Paula Trust, holding that Paula Trust’s California taxable income should be determined by apportioning its income based upon trust fiduciaries’ residence, regardless of whether the income was from a California source. According to the trial court’s judgment, Paula Trust was to receive a refund of the $150,655 it had claimed as an overpayment as well as $68,955.70 in interest.
The Court of Appeals reversed the trial court’s decision. The Court of Appeals held that pursuant to Cal. Rev. & Tax Code section 17041, personal income tax can be imposed on two bases: (1) residents are taxed on all income, regardless of whether it is from a California or non-California source; and (2) nonresidents are taxed on California-source income.
Under Cal. Rev. & Tax Code section 17742(a), 100 percent of a trust’s income is subject to California income tax if all trustees or all non-contingent beneficiaries are California residents. Rejecting Paula Trust’s argument that the statutory definition of “resident” is limited to “individuals” or “natural persons,” the court held that trusts are taxed on the same basis as individuals. Section 17041(e) states that the taxable income of trusts is subject to “taxes equal to the amount computed under subdivision (a) for an individual having the same amount of taxable income.” The court found that Section 17041(e), read together with section 17041(i), which states that the taxable income of any nonresident must include income from a California source, requires that trusts must be taxed on all California-source income, regardless of the residence of the trust fiduciaries. Moreover, the court held that the plain language of section 17743, the regulations expressly incorporated into that statute, and legislative history require the taxation of all of a trust’s California-source income—and only income derived outside of California should be apportioned according to the number of resident fiduciaries.
The court also upheld the trial court’s ruling that the sole beneficiary had only a contingent interest in the trust income, precluding the application of section 17742(a) to impose a tax on trust income based on residency, without regard to source, if there is a noncontingent beneficiary.
Takeaways: Tax is imposed on the entire amount of trust income derived from California sources, regardless of the residence of the trustees. The residence of a California trust’s fiduciaries is only relevant when a trust’s income is derived from sources outside of California, in which case it is apportioned according to the number of fiduciaries resident in California.
Tax Court Finds that “Loan” Is Actually a Gift
Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, 119 T.C.M. (CCH) 1502 (June 1, 2020)
Mary Bolles made numerous transfers of money to each of her children from the Bolles Trust, keeping a personal record of her advances and repayments from each child, treating the advances as loans, but forgiving up to the annual gift tax exclusion each year. Mary made numerous advances amounting to $1.06 million to her son Peter, an architect, between 1985 and 2007. Peter’s architecture career initially seemed promising, and during his early career, it seemed that Peter would be able to repay the amounts advanced to him by Mary. However, his architecture firm, which had begun to have financial difficulties by the early 1980s, eventually closed. Although Peter continued to be gainfully employed, he did not repay Mary after 1988. By 1989, it was clear that Peter would not be able to repay the advancements.
Although Mary was aware of Peter’s financial troubles, she continued to advance him money, recording the sums as loans and keeping track of the interest. However, she did not require Peter to repay the money and continued to provide financial help to him despite her awareness of his difficulties. Although Mary created a revocable trust in 1989 excluding Peter from any distribution of her estate upon her death, she later amended the trust, including a formula to account for the loans made to him rather than excluding him. Peter signed an acknowledgment in 1995 that he was unable to repay any of the amounts Mary had previously loaned to him. He further agreed that the loans and the interest thereon would be taken into account when distributions were made from the trust.
Upon Mary’s death in 2010, the IRS assessed the estate with a deficiency of $1.15 million on the basis that Mary’s advances to Peter were gifts. Mary’s estate asserted that the advances were loans. Both parties relied upon Miller v. Commissioner, T.C. Memo 1996-3, aff’d, 113 F.3d 1241 (9th Cir. 1997), which spells out the traditional factors that should be considered in determining whether an advance of money is a loan or gift. To establish that an advance is a loan, the court should consider whether:
(1) there was a promissory note or other evidence of indebtedness, (2) interest was charged, (3) there was security or collateral, (4) there was a fixed maturity date, (5) a demand for repayment was made, (6) actual repayment was made, (7) the transferee had the ability to repay, (8) records maintained by the transferor and/or the transferee reflect the transaction as a loan, and (9) the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.
In addition, the court recognized that where a family loan is involved, an actual expectation of repayment and an intent to enforce the debt are crucial for a transaction to be considered a loan.
The court found that the evidence showed that although Mary recorded the advances to Peter as loans and kept records of the interest, there were no loan agreements, no attempts to force repayment, and no security. Because it was clear that Mary realized by 1989 that Peter would not be able to repay the advances, the court held that although the advances to Peter could be characterized as loans through 1989, beginning in 1990, the advances must be considered gifts. In addition, the court found that Mary did not forgive any of the loans in 1989, but merely accepted that they could not be repaid. Thus, whether an advance is a loan or a gift depends not only upon the documentation maintained by the parties, but also upon their intent or expectations.
Takeaways: Given the current low interest rate environment, intra-family loans are now an advantageous estate planning tool, and wealthier family members can make low-interest loans to younger, less affluent family members, providing them with liquidity and allowing them to benefit from appreciation on the borrowed amount that is greater than the interest rate. To avoid a loan being treated as a transfer subject to gift tax, it is crucial in those situations not only to consistently treat such advances as loans, for example, through the execution of a promissory note, charging interest, providing security, and complying with other factors set forth in the Miller decision, but also for lending parties to steadfastly demonstrate their intentions by documenting their expectation of repayment and by enforcing the terms of the loan.
Iowa Supreme Court Overrules Prior Decisions to Bar a Tortious Interference with Inheritance Claim Not Joined with a Timely Will Contest
Youngblut v. Youngblut, ___N.W.2d___, 2020 WL 3107690 (Iowa S. Ct. June 12, 2020)
Brothers Harold and Leonard Youngblut were the beneficiaries of their parents’ mirror wills. Upon their parents’ death in 2014, a dispute arose regarding their 2014 mirror wills. Those mirror wills provided that Harold would receive his parents’ share in Youngblut Farmland Ltd., their successful farming business. Another property owned by the parents in their own names, South Farm, was bequeathed to Leonard, provided that he tendered his stock in Youngblut Farmland to Harold for one dollar. However, under earlier 2011 mirror wills, the Youngblut Farmland shares and South Farm passed to Harold, with the rest and residue of the estate divided among Leonard and the other children.
Harold believed that Leonard and his other siblings had improperly influenced their parents, but decided not to contest the will because of a concern that he could be disinherited pursuant to a no-contest clause if the contest failed. Although Harold did not contest the will before the expiration of the statutory deadline, he soon filed suit against Leonard and several other siblings for tortious interference with an inheritance. The other siblings reached settlements with Harold and were dismissed from the suit. Although Leonard sought summary judgment in his favor on the basis that Harold had failed to file a timely will contest, the case against Leonard proceeded to a jury trial. The jury returned a verdict in favor of Harold, ordering Leonard to pay $396,086.88 plus $200,000 in punitive damages. Leonard appealed.
The Iowa Supreme Court reversed the lower court decision, providing a lengthy review of its contrary precedent and recent legal developments. Although it disagreed with courts and commentators seeing no role for the tort of intentional interference with an inheritance, it ruled that it must not be used as a de facto substitute for a will contest. Rather, overturning its prior contrary decisions, the court held that such a claim must be joined together with a timely will contest.
Takeaways: Although the Iowa Supreme Court will not preclude parties from bringing an action for tortious interference with an inheritance for inducing a decedent to execute a will through wrongful means, such a claim must be joined with a timely will contest brought pursuant to Iowa law.
Probate Court Orders Must Include Findings of Fact in Contested Trust Cases
In re Elaine Emma Short Revocable Living Trust Agreement, ___P.3d ___, 2020 WL 3288079 (Haw. Sup. Ct. July 18, 2020)
Elaine created the Elaine Emma Short Trust Agreement (the Trust). Although the Trust was amended several times, at the time of Elaine’s death in 2012, its terms provided that the successor trustee could only distribute trust income, not its principal, from David and William’s subtrusts as necessary to meet their needs for “health, education, support, and maintenance.” Further, because William had a drug-related disability, income distributions were required to be only for vital necessities until he had been drug-free for at least a year. The Trust did not provide for the distribution of principal to David and William after Elaine’s death or for the termination of their subtrusts. Further, it provided that if Elaine’s husband and descendants did not survive her, the Trust was to be distributed to her heirs-at-law upon her death. Elaine’s husband and William predeceased her, but David survived her.
The trustee, First Hawaiian Bank (FHB), filed a petition for instructions regarding distribution and termination and for modification of the Trust in August 2015. Among other things, FHB asked the probate court to instruct the trustee that discretionary distributions of principal may be made from David’s subtrust. FHB listed the Cooks, that is, Elaine’s brother Leroy and his family, as contingent beneficiaries under her Trust. The Cooks opposed FHB’s modification that would allow the distribution of principal to David.
The probate court granted FHB’s petition, modifying the Trust to allow the distribution of principal to David, but its order did not contain any findings of fact as to whether the Trust contained ambiguity regarding the distribution of principal. The probate court’s order was affirmed by the Intermediate Court of Appeal.
On appeal, the Hawaii Supreme Court reversed and remanded the case, holding that the probate court should include findings of fact in orders in contested trust cases to avoid abuses of discretion and to enable meaningful appellate review. The probate court is not specially excepted under the Hawaii Probate Rules from having to make findings of fact in contested matters and should do so except when its refusal to do may be justified as a sound exercise of its discretion or when the parties agree to a resolution without an articulation of its basis.
Takeaways: In a contested matter, orders of the probate court must include findings of fact in contested trust cases with limited exceptions. Failure to do so impedes appellate review and necessitates remand of the case so the probate court can make the necessary findings of fact.
U.S. Supreme Court Holds that Title VII of the Civil Rights Act of 1964 Prohibits Employers from Discriminating Against Homosexual and Transgender Employees
Bostock v. Clayton County, 560 U.S. ___ (June 15, 2020)
Title VII of the Civil Rights Act of 1964 makes it “unlawful . . . for an employer to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any individual . . . because of such individual’s race, color, religion, sex, or national origin.” 42 U.S.C. 2000e–2(a)(1). In Bostock, the Supreme Court considered whether the termination of three long-term employees for being homosexual or transgender was a violation of Title VII’s prohibition against sex discrimination.
The Court held that an employer violates Title VII when it intentionally fires an employee based in part on sex. It is irrelevant if other factors such as the plaintiff’s attraction to the same sex or presentation as a different sex from that at birth contributed to the decision. In addition, it makes no difference that the employer would treat women as a group the same as men as a group, that is, that the employer is willing to subject all male and female homosexual or transgender employees to the same rule.
The Court found that it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex. For example, if an employer has two employees, both of whom are attracted to men and are, to the employer’s mind, materially identical in all respects, except that one is a man and the other is a woman, the employer discriminates against the male employee if it fires him for no reason other than the fact that he is attracted to men. In this situation, the employer is discriminating against him for traits or actions it tolerates in the female employee. That is, the employer is intentionally singling out an employee to fire based in part on the employee’s sex, and the employee’s sex is a “but-for” cause of his discharge.
Takeaways: Under Title VII, the term “employer” means “a person engaged in an industry affecting commerce who has fifteen or more employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year, and any agent of such a person,” although the law provides certain exceptions. Many employees in the United States are employed by employers that have fewer than 15 employees and are thus not covered by Title VII. Employers within the scope of Title VII should review their employee benefits packages, policies, and handbooks in light of Bostock to ensure they are in compliance with Title VII.
Paycheck Protection Program Loan Application Deadline Extended and New Legislation in the Works
On Saturday, July 4, President Trump signed a bill extending the deadline to apply for a Paycheck Protection Program (PPP) loan from June 30 until August 8. In addition, on June 18, 2020, Democrat Senators Ben Cardin, Chris Coons, and Jeanne Shaheen introduced the “Prioritized Paycheck Protection Program (P4) Act,” which would extend the June 30 deadline to December 30 or longer to apply for a forgivable PPP loan, while creating a new option for a second loan for borrowers with 100 employees or fewer that have lost at least half of their revenue due to the pandemic. A companion bill was introduced by House Democrat Representatives Angie Craig and Antonio Delgado. The bill, in its current form, includes the following provisions:
Estate planning is widely recognized as a means of transferring wealth from one generation to the next while minimizing both taxes and the risk of loss to creditors. A comprehensive estate plan not only transfers cash, investments, real estate, and vehicles, but also less commonly considered assets, such as intellectual property. While clients in certain professions—for example, authors, artists, small business owners, and inventors—often recognize the need to protect their valuable intellectual property, every client potentially has intellectual property that could provide a stream of income for family members or loved ones after the client passes away.
Intellectual property refers to works or inventions that are the result of human creativity and intellect and can be legally protected, e.g., by copyrights, patents, trademarks, or trade secrets. Such works and inventions are protected by federal (and sometimes state) law and can have great commercial value. Accordingly, clients should include intellectual property among the assets they share with their estate planning attorney at the outset of an engagement. In addition to the intellectual property itself, clients should disclose any related agreements, assignments, or licenses. Varying steps are necessary to legally protect different types of intellectual property, and the estate planning considerations for each can also vary in some respects. The four primary types of intellectual property are discussed below, along with key planning considerations for each.
Protection is available for “original works of authorship”1 such as books, movies, songs, computer software, photographs, and architectural works. These works do not have to be published to be protected, but they generally have more commercial value after publication. A copyright exists from the moment an original work is created and “fixed in any tangible medium of expression,”2 but in order to enforce it in a lawsuit for infringement, it must be registered with the United States Copyright Office. In addition, the copyright symbol (©) should be used to provide public notice that the copyright is protected. In general, copyright protection lasts for seventy years following the author’s death. Works created by employees within the scope of their employment, known as works made for hire, expire the sooner of 95 years from first publication or 120 years from creation. Works published prior to 1978 are subject to more complex expiration terms.
If a client owns a copyright, both the original work, i.e., the book, painting, etc., and the copyright should be included in the client’s will or trust. If the copyright is not specifically mentioned in the will or trust, it will be transferred to the client’s heirs by a residuary clause, which disposes of all property not specifically dealt with elsewhere in the will. As a result, one person could end up with the book or painting and another with the copyright. In addition, depending on how valuable the copyright is, the heirs who inherit it could unintentionally have a heavier tax burden than heirs receiving other property.
Because the future value of a copyright is impossible for the author of a work to know, copyright law gives the author the right to terminate most transfers or licenses of the copyright at a future date, providing the author with an opportunity to market the work once its fair value is known. This termination right, which passes to the author’s surviving spouse and children when the author dies, cannot be waived or transferred to anyone else during the author’s life. If the author were to transfer the copyright to a trust, for example, the statutory heirs could undo the author’s intent. The only exception is a transfer of the copyright by will, which cannot be terminated by the statutory heirs. Although establishing a trust is preferable for many other types of property to avoid probate proceedings, a will should typically be used to transfer copyrights to the beneficiaries to avoid possible termination of the transfer by the statutory heirs.
In addition to transferring a copyright by will or trust, a client should also consider transferring a copyright by lifetime gift. Although a transfer by lifetime gift is the simplest of the copyright transfer strategies, estate planners should caution clients that a lifetime gift may fail to exclude substantial appreciation in the value of the copyright from the author’s taxable estate due to potential estate inclusion issues connected to the author’s termination right. In addition, a copyright is not eligible for capital asset treatment when it is owned by a taxpayer whose basis is determined at least in part by the copyright author’s basis. A gift of a copyright will therefore prevent the copyright from qualifying as a capital asset because the recipient adopts the transferor’s basis for income tax purposes. On the other hand, if the author dies with the copyright in the author's taxable estate, the copyright receives a stepped-up basis equal to the fair market value at the author’s death or alternate valuation date, and it automatically qualifies as a capital asset that has been held for over a year.
Any lifetime gift or bequest of a copyright should provide explicit instructions to the estate's executor or trustee. Authors may appoint a special literary executor to properly administer the intellectual property rights associated with their works. Estate executors should consider recording an author’s death in the United States Copyright Office to cause the copyright to extend for 70 years; otherwise, the work will be presumed to be in the public domain upon the earlier of 95 years from the date of first publication or 120 years from the creation of the work.
Protection is available to any person who invents or discovers “any new and useful process, machine, manufacture, or composition of matter”4 or makes any improvement of them. There are three types of patents available for different types of inventions: utility patents, design patents, and plant patents. A utility patent protects a new and useful process, machine, manufactured item, composition of matter, or an improvement to any of them. A design patent protects a new, original, and ornamental design of a manufactured item. A plant patent protects a distinct and new variety of plant. To be eligible for patent protection, an invention must not have been previously publicly disclosed. Before filing an application for a patent, a comprehensive patent search should be done. Performing a patent search can be an involved process, and it is advisable to obtain the help of a patent attorney or agent to conduct the search. An attorney can also help with the preparation and filing of a patent application with the United States Patent and Trademark Office to ensure that the patent obtained will provide sufficient protection for the invention. Once the patent is granted, it lasts fourteen to twenty years (depending on the type of patent) from the date the application is filed. Periodic fees are required to maintain it.
Unlike copyrights, there is no termination right for patents, which can be freely transferred by a will or to a trust for the benefit of selected loved ones. Transferring ownership to a trust is often a good choice to avoid the expense, time, and lack of privacy of the probate proceedings required for transfers via a will. Patents should be clearly identified in estate planning documents, which should state the owner of the patent, the patent number, those who have the right to license the patent, and the parties who are responsible for paying the fees required to maintain the patent. In addition, the transfer to the new owner should be recorded with the United States Patent and Trademark Office. If an inventor dies before filing a patent application or during the application review process, the executor may apply for the patent and be issued the patent if "proper intervention" is performed. Executors should be aware of their obligations with respect to inventions and patents as early as possible, and ideally, during the inventor’s lifetime.
Due to the short lifespan of patents, estate planners may want to help their clients weigh the option of a lifetime transfer of a patent to reduce the client’s potential estate tax liability on the patent’s appreciated value against the income tax benefit of keeping the patent as part of the client’s taxable estate, thereby receiving a step up in basis at the client’s death.
Protection is available for brand names and logos used to identify and distinguish the goods and services of one source from those of another. Although merely using a trademark (without obtaining a trademark registration) protects it under common law, this legal protection only extends to the geographic region in which the trademark is used. A state trademark registration provides protection throughout the state of registration. However, if the trademark holder eventually wants to expand its business beyond that state, it is important to register the trademark with the United States Patent and Trademark Office to obtain the benefit of nationwide protection. Before registering the trademark, it is best practice to perform a comprehensive trademark search to ensure that the desired trademark—or one that could be confusingly similar—is not already in use. Using the trademark symbol (®) puts the public on notice that a brand name or logo is federally registered and protected. The initial term of a federal trademark registration is ten years; a registration can be renewed indefinitely for additional ten-year terms for a fee, provided that the trademark owner can prove continued use of the trademark in the United States. A federally registered trademark is enforceable as long as the trademark is used in commerce and defended against infringement.
Similar to a patent, a registered trademark can be transferred by either a will or by establishing a trust to benefit selected beneficiaries. As is the case with patents, a trust is often the better choice. Documentation should be filed with the United States Patent and Trademark Office to record the assignment of the trademark registration to the new owner. In order to maintain the legal protection provided under trademark law, it is important that the executor, the trustee, or any individual who inherits a registered trademark continue to use the trademark and defend it against infringement. In addition, the executor, trustee, or new owner should continue to renew the trademark registration and pay the required fees.
A trade secret is information that is (a) not generally known outside of the owner's organization and control, (b) has independent economic value as a result of not being generally known, and (c) is subject to reasonable measures to maintain its secrecy. Trade secrets are often comprised of formulas, compilations, programs, patterns, devices, methods, techniques, or processes. The recipe for Coca-Cola is one of the most well-known examples, but businesses of any size can own valuable trade secrets. Trade secret protection aims to prevent wrongful access to confidential information. It is available under both state and federal law, and it generally continues until the information becomes publicly available or the owner no longer derives economic value from its secrecy. Since the value of a trade secret lies in its confidentiality, and trade secrets are associated with businesses, individual estate plans are not typically used to transfer trade secrets. Moreover, the risk of a trade secret being exposed through such a transfer is often not worth the potential tax benefits.
A Note about Royalties
Intellectual property that has been transferred or licensed to another party often generates royalties or other income that becomes part of a decedent’s estate. Alternatively, those payments could be directed to a living trust or a trust established at the decedent’s death. At the time of the decedent’s death, any publishers or other agencies should be notified to direct the payments to the trust or to the loved ones who have inherited the right to receive those royalties. It may also be helpful to name an executor or trustee with expertise in managing intellectual property and the income it generates to ensure its value is maximized.
The transfer and continued protection of intellectual property requires careful consideration of transfer requirements, fees, and ongoing use or filing obligations. Clients and estate planning counsel should discuss whether the intended recipient of a transfer of intellectual property has the necessary funds—and desire—to maintain the asset, as intellectual property can diminish in value if the owner is unable to maintain the asset. If intellectual property is generating a royalty stream, those funds may be sufficient to pay the continued costs of ownership or insurance premiums for insurance coverage on the intellectual property. Finally, a client should consider additional planning to provide the intellectual property recipient with the necessary funds to properly maintain the asset.
Written by Robert T. Nickerson
With the coronavirus wreaking havoc on the U.S. economy, the federal funds rate has taken a nosedive, dropping from 1.75% in January to 0.25% as of June 10th. With rates projected to hover around 0% for the foreseeable future, now is a great time to leverage low interest rates in your estate planning strategies and help clients to maximize their wealth for themselves and their families even in times that are economically challenging. Below are three wealth transfer strategies to consider.
1. Passing on assets tax-free and locking in low “hurdle rates”
A grantor retained annuity trust (GRAT) is an excellent way to take advantage of the current low interest rates. As an irrevocable trust, a GRAT allows the grantor to transfer property into the trust and receive an annuity payment for a specific length of time. When the grantor passes away, the assets are handed off, tax-free, to the designated beneficiaries.
The Section 7520 interest rate is fixed by the Internal Revenue Code and is set as the “hurdle rate” at the time the GRAT is established. Section 7520 rates are currently low, so any appreciation of the trust’s assets above that hurdle rate gets passed tax-free to the trust beneficiaries at the end of the term specified in the GRAT document. With the interest rates so low, there is greater potential for a tax-free payout down the road. Additionally, because the assets belong to the trust, they will be passed on without triggering gift and estate tax liabilities.
2. Hurdle rates and charitable planning
A charitable lead annuity trust (CLAT) is similar to a GRAT—the only difference being that the fixed annuity payments go to a charity instead of the grantor, making it a great option for charitably inclined individuals. Also like a GRAT, a CLAT’s assets are assumed by the IRS to grow at the hurdle rate that is determined when the trust is created. Any appreciation above the hurdle rate passes tax-free to the beneficiaries at the end of the term set forth in the CLAT document.
3. Selling appreciating assets to a grantor trust
Another way to lessen tax liability and pass on more money to trust beneficiaries is to consider selling appreciating property to an intentionally defective grantor trust (IDGT). IDGTs are effective for estate tax purposes but “defective” for income tax purposes, meaning that the grantor — not the trust — pays tax on income earned in the trust, allowing trust assets to grow. The interest rate that must be charged on the promissory note is the applicable federal rate as of the month of the sale. With interest rates currently so low, property sold to the trust is more likely to earn a higher rate of return than the interest on the loan. Asset appreciation will accrue to the trust rather than the donor. Once sold to the trust, the property is no longer considered to be a part of the grantor’s estate. Assets sold to the IDGT will be excluded from the grantor’s gross estate to the extent the grantor outlives the term of the note.
While we can't offer financial advice, we can still ensure your estate plan and financial future in a legally bound document. Contact our office for more information.
Jeffrey C. Nickerson - Estate Planning Attorney - My Passion is Special Needs Planning!