Wills, Trusts & Estates Prof Blog

Owning Artworks

Rebecca Korach Woan (Owner, Chartwell Insurance Services) recently published her article entitled True Art Ownership, Private Wealth, May 2010.

An excerpt from the beginning of the article is below:

It should be axiomatic that no prudent art collector would buy an expensive work without establishing credible and lawful title to it. But simply having a title often isn’t good enough to secure the right of ownership. A good title can be easily spoiled if it is discovered that there was a theft in the artwork’s history (perhaps one of the “forced sales” that occurred during World War II). Art theft victims now have more means than ever to wage disputes, and recent court decisions have returned works of art to former owners even when the statute of limitations has expired. The Internet, meanwhile, offers databases that allow the cross-referencing of art auctions and databases of stolen artworks—tools that make it easier for theft victims to mount court challenges.

Thus the ownership history of artworks has become an increasingly sensitive issue for new buyers. As Lawrence Shindell, the CEO of ARIS Corp., says, “Just because the client bought it doesn’t mean the client owns it.” A work of art made before 1946 will always have a question mark hovering over it, and buyers of such pieces should be especially diligent before parting with their money. In the hushed and clubby world of art dealing, a persistent inquiry can sometimes seem impolite. But collectors who don’t proceed with due diligence can put their art at risk, especially if they sell the artwork to somebody else.

Special thanks to Jim Hillhouse (Wealth Counsel) for bringing this to my attention.

Estate Taxes Cause Fights Among Beneficiaries

As I previously blogged, fights over who must pay taxes on inheritances can cause feuds among beneficiaries. While most states’ default laws apportion taxes among all beneficiaries, a will can override these default laws.

A typical will contains a “Dad-buys-dinner” provision which instructs that all debts and taxes be paid by the estate. Jeffrey Pennell, a law professor, believes that more fights occur due to this “Dad-buys-dinner” provision than from any other. For example, Charles Kuralt left property in Montana to his longtime lover, spurring a court battle over whether Kuralt’s widow should have to pay the taxes on that gift.

The issue is growing more complex as people increasingly use non-probate assets to give away their estate. This leaves less money inside the estate to cover the taxes and increases the importance of the determination of who pays the taxes.

To prevent such fights, the testator needs to know the default rule of his state and then decide whether or not he wants his will to adopt it.

See Estate Tax Pitfalls Seen in Wisconsin Case, Financial Advisor, May 10, 2010

Happy Memorial Day

With the sincerest appreciation to all who have died in our nation's service.

Follow this link for detailed information on Memorial Day.

In-House Trust Capabilities for Investment Advisors

Advisors Institutional Services, a Massachusetts-based firm, believes that investment advisors can benefit from having in-house trust capabilities. By outsourcing trust services, investment advisors lose potential trustee fees and aren’t getting the flexibility that they need to meet clients’ sometimes unique needs.

Advisors Institutional Services helps investment advisors set up South Dakota-based trust companies. As I previously mentioned, South Dakota trusts are the easiest and cheapest trusts to set up, and they allow investment advisors great flexibility in meeting clients’ peculiar needs.

See Thomas Coyle, Helping Wealth Firms Start Trust Companies, Financial Adviser Blog, May 19, 2010. 

The Cost of the Estate Tax Mess

Paul L Caron (Professor of Law, University of Cincinnati) recently published his article entitled The Costs of Estate Tax Dithering, 44 Creighton L. Rev. (2010).

The abstract which is available on SSRN is below:

President Obama was widely criticized for “dithering” over the decision of whether to add more troops in the Afghanistan War. Yet Presidents and Congresses over the past decade escaped similar opprobrium for “dithering” in the face of the long-scheduled one-year repeal of the estate tax beginning January 1, 2010, to be followed by the reinstatement of the tax on January 1, 2011. Although the “smart money” agreed after the passage of the Bush tax cuts in 2001 that the Administration and Congress would never allow the repeal-reinstatement scenario to play out, that is precisely where we now find ourselves. In this TePoel Lecture and Keynote Address, delivered at Creighton University School of Law on April 16, 2010 as part of a Symposium on Estate Planning: Moral, Ethical, and Religious Perspectives, I discuss what the failure to enact a new estate tax law by the end of 2009 tells us about the state of our tax law and politics.

The lecture first discusses the history and purpose of the estate tax (and companion gift tax and generation-skipping tax). For eighty-five years, there was a rough consensus that the estate tax raised needed revenue, enhanced the progressivity of the tax system, and helped curb concentrations of wealth, in line with the experience of other countries. But the estate tax consensus evaporated in the United States during the 1990s and 2000s, as anti-tax advocates turned large swaths of the public and politicians against the estate tax, culminating in the 2001 Bush tax cuts (which unfolded in a context very similar to the recent health care reform legislation).

It is especially ironic that the political establishment allowed the estate tax to expire at a time with a greater need than ever for the revenues, progressivity, and wealth redistribution produced by the estate tax. The lecture discusses several consequences of the expiration of the estate tax, including the impact on the timing of deaths and the chaos confronting estate planners, tax lawyers, and accountants during this interregnum period - including the distribution of a decedent’s property where the estate planning documents employ formula clauses tied to the estate tax; the roles of lifetime non-charitable gifts and charitable gifts; the application of the new basis rules in the absence of IRS guidance; and the specter of Congress retroactively bringing back the estate tax. Although a unanimous Supreme Court sixteen years ago (United States v. Carlton, 512 U.S. 26 (1994)) gave a wide constitutional berth to Congress in enacting retroactive tax legislation, each passing day adds to the potential retroactive reach-back and increases the possibility in this Tea Party age that Justice Scalia’s critique of “bait-and-switch” taxation will attract more adherents. The lecture concludes by discussing three recent celebrity deaths - Casey Johnson, Ruth Lilly, and Dan Duncan - and asks whether any of those estates might contest a retroactive re-imposition of the estate tax. In many ways, a successful constitutional challenge would be a fitting denouement to the costs of estate tax dithering.

Prenuptial Agreements as an Estate Planning Tool

Recognizing that prenuptial contracts become scrambled in retirement benefits, a New York appeals court recently gave relief to lawyers who draft the contracts. Even if a former wife challenges the division of a retirement benefit, a man’s original intent for that retirement benefit in case of divorce is valid.

In order to properly keep retirement benefits separate, a document must be signed in addition to the prenuptial agreement. Under ERISA, only a spouse can waive rights to the retirement money, so it is important that this document is signed after the wedding.

Prenuptial contracts are on the rise as more people view them as a necessary estate planning tool rather than just preparation for a failed marriage.

See Arden Dale, Stay Ahead of Your Clients - Prenups and Pensions Can Get Snarled, Financial Adviser Blog, May 21, 2010. 

Special thanks to Jim Hillhouse (Wealth Counsel) for bringing this to my attention. 

Italian Alternatives to Wills

Andrea Bortoluzzi (Professor of Law, Insubria University) recently published his article entitled The Predisposition and Planning of Succession to the Control of an Enterprise in Italy: The Alternatives to a Will, The Selected Works of Andrea Bortoluzzi (2009). 

The abstract of the article is below:

The title of the paper refers to the instruments for devolving an estate that offer alternatives to the will, allowing the settlor to exercise autonomy in the disposal of assets, in other words to derogate from the discipline of the successione legittima (legal succession: forced inheritance by the operation of law in the event of intestacy or the invalidity of a will or when the will disposes of only part of an estate) and, where this is allowed, from that of the successione necessaria (forced inheritance by the operation of law protecting the interests of the relatives of the deceased (ascendant, spouse, descendant) if the will ignores their rights or if the deceased’s assets have been transferred to other persons during his lifetime by other legal instruments, circumventing the legal rules of forced inheritance). Rather than tackling the theme by looking at the rules of positive law and how they apply to individual cases, I have preferred to adopt a different stance and to start by considering the practical requirements of individuals in relation to positive law. In truth, the title reflects both sides of the law – positive and customary – since a system of fair institutions is always based on the conjunction between the two sides of the law: the formal and the procedural, the informal and the customary. If there exists a practice that tends to regulate succession in ways other than by the legal forms (and exist it does), this is because there are criticalities in the present point of equilibrium.

Catholic Social Thought May Offer Guidance on Estate Issues

Lucia Ann Silecchia (Professor of Law, Columbus School of Law) recently published her article entitled Integrating Catholic Social Thought in Elder Law and Estate Planning, CUA Columbus School of Law Legal Studies Research Paper No. 2010-27.

The abstract of the article which is available on SSRN is below:

A course in elder law or estate planning encompasses many of the most profound issues that arise in human life: the contemplation of mortality, ambivalent attitudes toward property and its proper distribution, complexities in family relationships, obligations to support loved ones, anticipation of physical or mental challenges, and reflections on one’s desired legacy to loved ones. Although there is much in the Catholic tradition and in the Scriptures themselves that speaks to these questions in an indirect way, this has not often been fully explored because this field may not, on its face, have an obvious connection to religious tradition. However, I believe that there are two distinct areas in which teachers in this field may draw on core principles of Catholic social thought to deepen the understanding that they and their students might have about these rich connections.

The first part of this article will explore how attorneys can find guidance from Catholic social thought on issues that may arise as they advise individual clients on estate matters. Here, notions of responsible stewardship, familial obligations, the proper formation of one’s legacy, and medical planning raise important ethical questions at the individual level, as attorneys assist clients in developing their estate plans. In addition, my reflections in this first part will address the ways in which elder law practice provides a unique setting for law practice as a form of ministry. Unfortunately, lawyers engaging in elder law and estate planning practices are frequently and disproportionately the subject of serious ethical charges, given the temptations that they face and the particular vulnerabilities of those they serve. Thus, in this discussion of the representation of individual clients, I hope to reflect on what Catholic social thought may bring to the attorney’s understanding of the professional role.

The second part will present broader and more general questions about public policy toward the elderly—questions that can be the basis for much fruitful discussion in estate planning or elder law courses. It is often noted that the elderly are the largest growing segment of the American and global populations. Thus, the second section of this article will offer brief reflections on how Catholic social thought may contribute to some of these broader public policy discussions as our society considers how best to meet the needs of our elders. Although this article will not attempt to arrive at easy answers to any of these dilemmas, it hopes to begin reflection on them and to offer some ways of thinking about how Catholic social thought may offer some guidance in these complex areas of human life.

CLE on Understanding Your Clients

The ABA Section of Real Property, Trust and Estate Law is sponsoring a teleconference and live audio webcast CLE entitled Estate Planners Risk Assessment and Checklist: The Big Picture is Often Overlooked But Critical for All Estate Planners and Plans on June 8, 2010.  The program information is below:

Do you create impressive estate plans that negatively impact your clients' control, cash flow and financial statements? Are you trained to understand the dynamics of basic family psychology?

A client and their family are likely to judge the ultimate success of an estate plan based on personal concerns, not the legal and tax merits. A technically flawless plan may fail to achieve a client's goals if the planner does not consider family dynamics, client tendencies, and other non-tax, non-legal factors. Deciding on the techniques to recommend and provisions to draft requires considering more than the technical aspects of a plan, which estate planners may tend to overlook. Proper consideration of these non-legal, non-tax factors can help planners reduce serious potential problems, including future estate disputes, IRS audits, client complaints, and disputes with the client's other advisors.

Join us as our panel discusses 25 factors to consider and how being aware of the unique personal, family and business issues each client presents can lead to a better result for everyone involved.

Supreme Court Addresses the Interface Between ERISA and Trust Law

A summary of Conkright v. Frommert, 130 S. Ct. 1640 (2010) is below:

On Wednesday, the Court issued its opinion in Conkright v. Frommert, holding that a plan administrator’s interpretation of a retirement plan is entitled to deference, even when the administrator has previously offered an erroneous reading. Dividing on ideological lines, the Court reversed the Second Circuit, which had held that no deference was required when the administrator had misconstrued the plan at an earlier stage in the litigation.

In an opinion by Chief Justice Roberts, the Court began by noting that, because the text of ERISA is inconclusive, it should look to the principles of trust law to determine whether deference was appropriate. Under trust law, the Court found, whether deference to the administrator’s interpretation is warranted would depend on the terms of the plan itself: when, as here, the plan requires deference, the court should act accordingly.

Deeming the Second Circuit’s approach a “one strike and you’re out approach,” the Court characterized the lower court’s decision as inconsistent with the purposes of ERISA, the terms of the plan, and the principles of trust law. Under doctrines of trust law, the Court concluded, a trial court should reject the administrator’s construction only if bad faith were shown. Moreover, the purposes of ERISA counseled in favor of deference. When enacting ERISA, the Court noted, Congress intended to encourage companies to establish retirement plans. As such, ERISA represents a “careful balancing between ensuring fair and prompt enforcement of rights under a plan and the encouragement of the creation of such plans.” By permitting an employer to rely on the administrator for primary interpretive authority, deference to those interpretations preserves the “careful balancing on which ERISA is based.” Respect for the administrator’s view, the Court found, “promotes efficiency by encouraging resolution of benefits disputes through internal administrative proceedings rather than costly litigation.” It also promotes predictability and uniformity in judicial decisions.

The Court dismissed as “overblown” the employees’ argument that its interpretation would would encourage employers to game the system by providing employers with an incentive to offer unreasonable constructions in the first instance. The Court explained that deference did not necessarily mean that the plan administrator’s construction would prevail on the merits; rather, it meant only that the plan administrator’s interpretation would be upheld if reasonable. Thus, deference would not encourage deceptive behavior or unfairly skew litigation in favor of employers.

Anna Christensen, Court Rules on Deference for Retirement Plan Administrators, SCOTUSblog, April 24, 2010. 

Special thanks to Adam J. Hirsch (William and Catherine VanDercreek Professor of Law, Florida State University College of Law) for bringing this case to my attention.   

Wealthiest Face More Stringent Tax Audits

In the past, wealthy taxpayers’ sources of income included mainly wages, dividends, interest, and capital gains. Today, the wealthy taxpayers have many more complex methods of making money, such as through multi-tiered partnerships, trusts, hedge funds, and private foundations.

To expect one audit agent to verify a return with such forms of income is unrealistic. Thus, as IRS Commissioner Doug Shulman envisioned, the IRS is creating “wealth squads” to extensively examine the wealthiest taxpayers. A team of various experts will scrutinize each form of income, so people who fall into this category need to prepare themselves.

See Donald T. Rocen, IRS 'Wealth Squads' on the Way, Forbes.com, May 26, 2010.

Special thanks to Jim Hillhouse (Wealth Counsel) for bringing this to my attention.

Reformation of Wills in Massachusetts

The following summary is supplied through the courtesy of Martin D. Begleiter (Professor of Law, Drake University):   

William Bruinsma, a private and frugal man, died in 1998 leaving a will bequeathing one-half of the income from his residuary estate (including capital gains distributions from his securities and bank accounts) to each of a friend and his sister during their lifetimes and on their deaths, to 2 charities. He did not tell the drafting attorney the value of his assets. When he died, his estate was worth about $ 1.7 million, more than the applicable exemption amount at that time.

Ten years after his death, his executrix petitioned the court to reform the will to create a CRAT. The beneficiaries consented. Despite a potential tax savings of more than $466,000, the Supreme Judicial Court of Massachusetts denied reformation in Pellegrini v. Breitenbach, 2010 WL 2026754 (Mass.). Noting that past Massachusetts cases had allowed reformation of trusts, the court said that this will created no trust and that the court had previously held it had no power to reform wills.

Moreover, there was no mistake on the part of the drafting attorney, who had followed the decedent’s requests. There was no evidence that decedent cared about the tax consequences of the will. He was concerned about keeping the will simple and inexpensive. There was no certainty that the IRS would respect the reformation, coming as it did 10 years after decedent’s death. Even if decedent had intended to establish a charitable remainder trust, there was no evidence that he would have preferred a CRAT to a CRUT, given that the will did not mandate annual distributions of income. These factors led the court to decline to reform the will.

Nigerian Succession and Inheritance Laws

Kemi Mary Adekile recently published her article entitled Succession at Customary Law - Addressing the Crossroads of Constitutional Conflicts (April 14, 2010).

The abstract of the article which is available on SSRN is below:

This paper is a critical evaluation of the rules of succession and inheritance under Nigerian Law in relation to constitutional provisions of the Nigerian Law. It relates the issues of constitutional and human rights conflicts in customary law of succession to the modern legal discourse with a view to resolve the conflicts inherent in both systems.

What Happened to Hattie McDaniel's Oscar?

In 1940, Hattie McDaniel won Best Supporting Actress for her role as Mammy in “Gone With the Wind.” Upon her death, she bequeathed her award to Howard University where it was displayed for several years before disappearing. Possible explanations for the disappearance of this historic award, valued at $550,000, include:

• Students took it in protest to McDaniel’s role in the movie
• The plaque was moved for safekeeping and was never returned to its display case
• A professor walked away with it
• It was stolen and then sold to a collector

The academy refuses to create replacement awards for heirs who have come into possession of an award after the recipient’s death. Instead, the academy sent a framed photo of McDaniel and some commemorative McDaniel postage stamps to Howard University. Some people remain optimistic that the Oscar will eventually be found.

See J. Freedom du Lac, And Hattie McDaniel's Oscar Went to...?, The Washington Post, May 26, 2010.

Special thanks to Alfred Brophy (Professor of Law, UNC School of Law) for bringing this to my attention.   

Effect of a Prepaid Estate Tax

As I previously blogged, the concept of a prepaid estate tax is still under consideration, but is not the main focus of the most recent talks.  The effect of a prepaid estate tax is to create much-needed revenue for the government now, but a big decrease in collections in the distant future.  This could circumvent Congress's pay-as-you go rules.

See Robert Frank, Proposed Estate Tax:  Pay Now, Die Later, WSJ, May 21, 2010. 

Special thanks to Jim Hillhouse (Wealth Counsel) for bringing this to my attention. 

Internet Privacy: Something Else to Worry About Post-Mortem

Christos Catsouras was not allowed to see his 18-year-old daughter’s body after she swerved his Porsche to her death on Halloween 2006. Three weeks later, pictures that the California Highway Patrol took at the accident site were posted on hundreds of websites.

When confronted, CHP officials said there was nothing that they could do. Catsouras sued CHP, and California’s 4th District Court established that surviving family members have standing to sue for invasion of privacy in cases such as this one.

Although the lawsuit against CHP hasn’t gone to trial yet, several states have already cited the Catsouras case as precedent in other privacy cases. Keith Bremer, one of the Catsouras family’s attorneys, expects other states to follow suit and enact laws that protect privacy.

“Right now, the law protects copyright more than it does privacy. The laws that were passed in this field, in the mid- to late 1990s, made sense at the time. That was the Jurassic era of the Internet.” --Michael Fertik, founder of ReputationDefender

Christopher Goffard, Gruesome Death Photos are at the Forefront of an Internet Privacy Battle, Los Angeles Times, May 15, 2010.

2009 Changes to Vermont's Probate Law

Stephanie J. Willbanks (Professor of Law, Vermont Law School) and Jonathan Secrest recently published their article entitled Changes to Vermont's Probate Law: Increasing the Surviving Spouse's Share and Other Measures, 35 Vermont Bar J. 26 (Summer 2009).   

The abstract of the article which is available on SSRN is below:

Vermont’s laws of descent and distribution and spousal elective share were established in the late 18th century and were closely aligned with the English common law provisions. Few changes were made in those laws until 2009. In that year, the Vermont Legislature amended the intestacy and spousal elective share provisions to provide increased support for a surviving spouse. This article analyzes those changes and suggests that further modifications are, perhaps, needed.

The Problem of FLP's

Laura Cunningham (Professor of Law,Benjamin N. Cardozo School of Law) recently published her article entitled The FLP, the Transfer Taxes, and the Income Tax, Cardozo Legal Studies Research Paper No. 297 (April 16, 2010). 

The abstract of the article which is available on SSRN is below:

Despite repeated calls for reform, Congress has declined to act to curb transfer tax avoidance through the use of family limited partnerships (“FLP’s"). Use of FLP’s allows taxpayers to substantially leverage their exemption from estate tax, and reduce the effective rate of tax on even the most liquid investment assets. This article reviews the current state of the law in the Tax Court on FLP’s, renews the call for Congressional action, and explains why FLP’s are not just a “death tax” problem.

CLE for New Estate Planners

The ABA Section of Real Property, Trust and Estate Law is sponsoring the Skills Training for Estate Planners CLE Program July 12-16, 2010 at the New York Law School.

This CLE will cover the following topics:

Basic Fundamentals and Substantive Skills Development:

• Marital deduction basics, including analysis of how much to use the use of disclaimers or partial QTIP elections, funding and fiduciary administration problems
• Charitable deduction planning including use of computer software
• Analyzing inter vivos gifting, both basic and sophisticated transactions such as GRATs and QPRTs, including an analysis of when such techniques make sense
• Life insurance planning, particularly with respect to irrevocable insurance trusts and the practical aspects of product selection, premium financing, and due diligence along with GST considerations
• Deferred compensation and employee benefits, including beneficiary designation alternatives and drafting such designations
• Practical tips on planning with the generation-skipping transfer tax
• Preparing flexible trusts with an eye to the future

Technical Skills Development:

• Tax compliance: hands-on manual preparation to learn how the tax law works and how software can produce errors
• Fiduciary administration and accounting and the tax aspects of postmortem and other fiduciary administration
• Valuation in practice, including how to select valuation experts and analyze their work
• Exposure to software programs and web sites that assist in the analysis of estate assets and facilitate construction of planning models

First Wills to Incorporate Digital Assets

I previously blogged about the official launch of Entrustet and the protection it offers to users’ digital assets. The two founders of Entrustet, Jesse Davis and Nathan Lustig, recently became the first people in America to incorporate their digital assets into legal wills. Attorney Nathan Dosch, who helped the two execute their wills, said that incorporating the digital assets was easy and that he’d feel comfortable doing the same thing for his current and new clients.

See Entrustet Founders Execute North America’s First Wills That Incorporate Digital Assets, PRWeb, May 24, 2010.