Wednesday, February 27, 2019

Ag Nuisances – Basic Principles


Land use conflicts are often present in urban, residential and commercial areas.  However, they also occur in rural areas.  Large-scale livestock agricultural operations, wind “farms” and similar rural land uses present many of the same issues.

How does the law handle rural land-use conflicts?  How can these conflict situations with adjoining landowners best be minimized or avoided? 

Land use conflicts in rural areas, ag nuisances and pointers for minimizes conflict among landowners – this is the discussion of today’s post.

What’s An Ag Nuisance?

A nuisance is an invasion of an individual's interest in the use and enjoyment of land rather than an interference with the exclusive possession or ownership of the land.  See, e.g., Peters, et al. v. Contigroup, et al., 292 S.W.3d 380 (Mo. Ct. App. 2009).  Nuisance law prohibits land uses that unreasonably and substantially interfere with another individual's quiet use and enjoyment.  The doctrine is based on two interrelated concepts: (1) landowners have the right to use and enjoy property free of unreasonable interferences by others; and (2) landowners must use property so as not to injure adjacent owners. In a nuisance action, proof of general damages (diminished quality of life) may be sufficient evidence to support a monetary award.  See, e.g., Stephens, et al. v. Pillen, 681 N.W.2d 59, 12 Neb. App. 600 (2004).

The two primary issues at stake in any agricultural nuisance dispute are whether the use alleged to be a nuisance is reasonable for the area and whether the use alleged to be a nuisance substantially interferes with the use and enjoyment of neighboring land.  See, e.g., Bower v. Hog Builders, Inc., 461 S.W.2d 784 (Mo. 1970)

Are Nuisance and Negligence the Same?

“Nuisance” and “negligence” are not the same thing.  Operating a farming or ranching activity properly and having all requisite permits may still constitute a nuisance if a court or jury determines the activity is “unreasonable” and causes a “substantial interference” with another person's use and enjoyment of property.  Whether a complained of activity, such as spreading manure, results in a “substantial” and “unreasonable” interference with another's property will depend on the facts of each case and the legal rules used in the particular jurisdiction.  See, e.g., Penland v. Redwood Sanitary Sewer Service District, 156 Or. App. 311, 965 P.2d 433 (1998).

Because each claim of nuisance depends on the fact of the case, there are no easy rules to determine when an activity will be considered a nuisance.  In general, a court faced with a particular nuisance claim will consider several factors.  Primary among these factors is whether the use complained of is a reasonable use that is common to the area or whether it is not suitable. See, e.g., May v. Brueshaber, 265 Ga. 889, 466 S.E.2d 196 (1995).  Also important is whether the use complained of is a minor inconvenience which happens very infrequently or whether it is a regular and continuous activity.  The nature of the property use being disturbed is also an important consideration.  If the interference has a significant impact on the complaining party's use of their own property, such as the prevention of living in the complaining party's home, a nuisance will likely be found.  Similarly, if the complained of use is preventing another landowner's use of their property that is a vital part of the local economy, the court will balance the economics of the situation and most likely conclude that the complained of use constituted a nuisance.  An additional important factor, but not conclusive in and of itself of the issue is whether the complained of use was in existence prior to the complaining party's use of their property which is now claimed to be interfered with.  A related concern, if the activity generating the alleged nuisance was in existence prior to the complaining party moving into the vicinity, is whether the nuisance activity was obvious at the time the complaining party moved in.  Many courts also attempt to balance the economic value to society of the uses in question.  If the complained of use adds jobs and income to the local economy, the value to society of continuing the alleged nuisance may outweigh the negative impact it causes.

If A Nuisance Exists, What Then?

If a court determines that a nuisance (just one that is anticipated to occur in the future) exists, it has much discretion in establishing an appropriate remedy for a nuisance.  The most common remedy is for the court to stop (enjoin) the nuisance activity. See, e.g., Moody, et al. v. Wiza, 2007 Ohio 5356 (Ohio Ct. App. 2007); Simpson, v. Kollasch, et. al., 749 N.W.2d 671 (Iowa 2008); Walker, et al. v. Kingfisher Wind, LLC, No. CIV-14-D, 2016 U.S. Dist. LEXIS 141710 (W.D. Okla. Oct. 13, 2016).  However, most courts try to fashion a remedy to fit the particular situation. See, e.g., Valasek v. Baer, 401 N.W.2d 33 (Iowa 1987); Spur Industries, Inc. v. Del E. Webb Development Co., 108 Ariz. 178, 494 P.2d 700 (1972)

Potential Defenses

Priority of location.  If a farmer gets sued for the alleged creation of a nuisance, how does the farmer mount a defense?  While there are no common law defenses that an agricultural operation may use to shield itself from liability arising from a nuisance action, as noted above, the courts do consider a variety of factors to determine if the conduct of a particular farm or ranch operation is a nuisance.  Of primary importance are priority of location and reasonableness of the operation.  Together, these two factors have led courts to develop a “coming to the nuisance” defense.  This means that if people move to an area they know is not suited for their intended use, they should be prohibited from claiming that the existing uses are nuisances.

Right-to-farm laws.  Every state has enacted a right-to-farm law that is designed to protect existing agricultural operations by giving farmers and ranchers who meet the legal requirements a defense in nuisance suits.  The basic thrust of a particular state's right-to-farm law is that it is unfair for a person to move to an agricultural area knowing the conditions which might be present and then ask a court to declare a neighboring farm a nuisance.  Thus, the basic purpose of a right-to-farm law is to create a legal and economic climate in which farm operations can be continued.  Right-to-farm laws can be an important protection for agricultural operations, but, to be protected, an agricultural operation must satisfy the law's requirements.  See, e.g., Alpental Community Club, Inc., v. Seattle Gymnastics Society, 86 P.3d 784 (Wash. Ct. App. 2004); Hood River County v. Mazzara, 89 P.3d 1195 (Or. Ct. App. 2004). 

The most common type of right-to-farm law is nuisance related.  This type of statute requires that an agricultural operation will be protected only if it has been in existence for a specified period of time (usually at least one year) before the change in the surrounding area that gives rise to a nuisance claim. See, e.g., Vicwood Meridian Partnership, et al. v. Skagit Sand and Gravel, 98 P. 3d 1277 (Wash. Ct. App. 2004).  These types of statute essentially codify the “coming to the nuisance defense,” but do not protect agricultural operations which were a nuisance from the beginning or which are negligently or improperly run.  For example, if any state or federal permits are required to properly conduct the agricultural operation, they must be acquired as a prerequisite for protection under the statute.  Another type of right-to-farm statute may be structured to bar local and county governments from enacting regulations or ordinances that impose restrictions on normal agricultural practices.  Still another type exempts (at least in part) agricultural uses from county zoning ordinances.  The major legal issue involving this type of statute is whether a particular activity is an agricultural use or a commercial activity.  In general, “agricultural use” is defined broadly.  See, e.g., Knox County v. The Highlands, L.L.C., 302 Ill. App. 3d 342, 705 N.E.2d 128 (1998), aff’d, 723 N.E.2d 256 (Ill. 1999).

An important point is that while right-to-farm laws try to assure the continuation of farming operations, they do not protect subsequent changes in a farming operation that constitute a nuisance after local development occurs nearby.  See, e.g., Davis, et al. v. Taylor, et al., 132 P.3d 783 (Wash. Ct. App. 2006); Flansburgh v. Coffey, 370 N.W.2d 127 (Neb. 1985).   While a right-to-farm law may not bar an action for a change in operations when a nuisance is present, if a nuisance cannot be established a right-to-farm law can operate to bar an action when the agricultural activity on land changes in nature. See, e.g., Dalzell, et al. v. Country View Family Farms, LLC, No. 1:09-cv-1567-WTL-MJD, 2012 U.S. Dist. LEXIS 130773 (S.D. Ind. Sept. 13, 2012), aff’d., No. 12-3339, 2013 U.S. App. LEXIS 13621 (7th Cir. Jul. 3, 2013). See also Parker v. Obert’s Legacy Dairy, 988 N.E.2d 319 (Ind. Ct. App. 2013).


Land use conflicts in rural areas are not uncommon and have become more prevalent in recent decades as the structure of agriculture had changed and new types of rural land uses have appeared.  To minimize conflict with neighbors and stay out of court defending a nuisance case, attention should be paid to certain key points.  Location of any facility that could give rise to a nuisance claim is key.  Related to location, particularly with respect to odor-related issues is wind direction.  For confinement livestock facilities, proper ventilation is key as is manure storage and field injection practices.  Of course, the overall appearance of farm structures is important - perhaps almost as important as are manure disposal practices. 

Keeping these points in mind just might keep the farming operation out of court.

February 27, 2019 in Civil Liabilities | Permalink | Comments (0)

Monday, February 25, 2019

Estate Planning in Second Marriage Situations


A married couple’s estate planning goals and objectives often dovetail - benefit the surviving spouse for life with the remaining property at the death of the surviving spouse passing to the children.  But, estate planning when a second marriage (either as a result of death or divorce) is involved is more complex, especially when each spouse has children from the prior marriage.  The estate planning techniques of first marriage situations often don’t work when a second marriage is involved.  But, the IRS recently blessed a second marriage estate planning technique.

Estate planning for second marriages – that’s the topic of today’s post.

Second Marriage Estate Plans

Potential problem areas.  Blended families are not uncommon.  When I first started practicing law, I was tasked with developing an estate plan for an older married couple.  Each one of them had outlived their prior spouse and each of them had children from that prior marriage.  They each had a separate farming/ranching operation.  It was imperative to them that their respective children carry on the farming/ranching business that was associated with each of them.  In this situation, the common estate plan for a married couple wouldn’t work.  It was no longer appropriate to balance ownership of all assets equally between the couple and then via reciprocal (i.e., mirror) wills leave a portion of the assets to the surviving spouse outright with the balance in a “credit-shelter” trust and the remainder at the death of the surviving spouse split between all of the kids (from both prior marriages).  This standard approach could have resulted in children of one family eventually owning the other family’s farming/ranching operation.  That would not have been a good result.

It's also common in first marriages for the spouses to own the home and land as joint tenants with right of survivorship. Upon the death of the first spouse, the jointly held asset automatically passes to the surviving spouse.  While that results in the surviving spouse having complete ownership of the asset, that is often not a desirable outcome in a second marriage situation.  The survivor could leave the asset at death to their children of the first marriage. 

Beneficiary designations can also lead to a similar problem as jointly held property.  The spouse is often named as the beneficiary of life insurance, retirement plans/accounts, etc.  But, this can become a problem upon death and the subsequent remarriage of the surviving spouse. 

Potential solution.  One approach that is used in second (and subsequent) situations involves a revocable trust that is funded either during the grantor’s life or at death or via beneficiary designations (or some combination).  The grantor can amend or revoke the trust at any time before death, and on death the trust becomes irrevocable and continues for the surviving spouse’s benefit and the benefit of the children of the first marriage.  The trust income can be paid to the surviving spouse during life and the trust assets remaining at the surviving spouse’s life pass to the grantor’s children of the first marriage.  A “spendthrift” provision can be added to the trust to provide additional assurance that the assets ultimately land in the correct hands, and are not dissipated by creditors, etc.  In addition, the trust allows the grantor to maintain post-death control over the assets of the family from the first marriage.  The assets are not left outright to the surviving spouse of the second marriage, and the surviving spouse cannot change the estate plan to exclusively benefit the survivor’s own children, for example.

Handling Retirement Plans 

In second marriage situations, can an individual retirement account (IRA) also be placed in a trust so that account income benefits the surviving spouse of the second marriage for life with the account balance passing to the children of the pre-deceased spouse’s first marriage?  The tax code complicates matters, but a recent IRS private letter ruling shows how it can be accomplished. 

In general, annual required minimum distributions must be taken from traditional IRAs at the required beginning date (RBD) – April 1 of the year after the year in which the account owner turns 70 ½.  I.R.C. §401(a)(9)(C)(i)(l).  Special rules apply when the IRA owner dies after the RBD.  In that case, any balance remaining in the account is distributed in accordance with certain rules. For example, if the account owner didn’t designate a beneficiary, the post-death payout period is determined by what the deceased owner’s life expectancy was at the time of death.  Treas. Reg. §1.401(a)(9)-(5).  If the IRA owner named a non-spouse as the beneficiary, the account balance is paid out over the longer of the remining life expectancy of the designated beneficiary or the remaining life expectancy of the IRA owner.  Id. 

If the IRA owner designated the spouse as the IRA’s sole designated beneficiary, the required distribution for each year after death is determined by the longer of the remining life expectancy of the surviving spouse or the remaining life expectancy of the deceased spouse based on their age at the time of death.  Id. This can allow payouts to be “stretched.”  But, naming the surviving spouse as the beneficiary of an IRA also gives the surviving spouse the ability to treat the IRA as their own.  That means that the surviving spouse can name their own beneficiaries – not necessarily a good result in second marriage situations where each spouse has children of a prior marriage. 

Trust as a beneficiary.  Can a trust be named the beneficiary of the retirement plan so that the surviving spouse doesn’t have complete control over the account funds?  In general, the answer is “no.”  Treas. Reg. §1.401(a)(9)-4, Q&A 3.  However, a trust beneficiary (with respect to the trust’s interests in the IRA owner’s benefits) is treated as the designated beneficiary of an IRA if certain conditions are satisfied for the period during which the RMDs are being determined by treating the trust beneficiary as the designated beneficiary of the IRA owner.  See Treas. Reg. §1.401(a)(9)-4, Q&A 5(b).

Recent IRS ruling.  In Priv. Ltr. Rul. 201902023 (Oct. 15, 2018), the decedent created a revocable living trust during life.  The trust contained a subtrust to hold the benefits and distributions from his retirement plans (and other assets).  He died after attaining his RBD and after distributions from his IRA had started.  The revocable trust and the subtrust became irrevocable upon his death.  His IRA named the trust as the beneficiary.  The terms of the trust specified that property held by the subtrust were to be “held, administered, and distributed” for the sole benefit of his (younger) surviving spouse.  Upon her death, the trust specified that the retirement plan (along with the remaining assets of the subtrust) were to be divided equally between his children or their descendants.

The IRS noted that the trust identified the surviving spouse as the sole beneficiary of the subtrust in accordance with Treas. Reg. §1.401(a)(9)-4, Q&A 5(b)(3).  In addition, the trust required the trustee to pay the surviving spouse any and all funds in the subtrust that the trustee withdrew, including RMDs, and there could be no accumulation for any other beneficiary.  That satisfied the requirements of Treas. Reg. §1.401(a)(9)-4, Q&A-5 (valid trust under state law; trust is irrevocable or becomes so on death of account owner; the trust identifies the beneficiary; and the plan administrator is given appropriate documentation) and the surviving spouse was treated as the sole designated beneficiary of the IRA.  Thus, the IRS concluded that the payment to the two trusts (first to the revocable trust and then to the subtrust) was permitted by Treas. Reg. §1.401(a)(9)-4. Q&A-5(d) which says that if the trust beneficiary is named as the beneficiary of the account owner’s interest in another trust, that beneficiary will be treated as having been designated as the beneficiary of the first trust and, be deemed to be the IRA account owner for distribution purposes.    

In addition, the IRS determined that because the surviving spouse had a longer life expectancy that did the decedent, the applicable distribution period for the IRA should be based on her life expectancy.   This means that via the trust and the subtrust, the surviving spouse received RMDs as if she were the designated sole beneficiary.  Upon her death, any remaining assets of the subtrust will be distributed to the pre-deceased spouse’s children or their descendants.


Unique estate and business planning issues present themselves in second marriage situations.  Along with a well-drafted marital agreement, other steps should be taken to ensure the continued viability of separate farming/ranching operations that are brought into the subsequent marriage while simultaneously benefiting each spouse’s children of the prior marriages appropriately at the death of their respective parent.  Included in this planning is the treatment of retirement accounts.  The recent IRS ruling illustrates one way to leave an IRA to the spouse of a second marriage and avoid negative consequences.   

February 25, 2019 in Estate Planning | Permalink | Comments (0)

Thursday, February 21, 2019

New Development on Exclusion of Employer-Provided Meals


The Tax Code allows for the exclusion of the value of meals and lodging that an employer provides to an employee.  Of course, certain conditions must be satisfied for the exclusion to apply.  The basic idea is the providing of meals and lodging to an employee must be on the business premises, for the convenience of the employer and as a condition of employment for the value to not be included in the employee’s wages.  For farms and ranches in remote areas, this is a particularly attractive fringe benefit for C corporations.

But, a recent IRS Technical Advice Memorandum puts a new twist on the meals side of the equation.  It involves the presence of meal delivery services.

The exclusion of meals from an employees wages and meal delivery services – that’ s the topic of today’s post.

Meals and Lodging – The Basics

The value of meals and lodging furnished on the business premises for the employer's convenience and as a condition of employment are not taxable income to the employee (and the employee’s spouse and dependents) and are deductible by the employer if they are provided in-kind.  I.R.C. § 119. This tax treatment is available only for meals and lodging furnished to employees, not tenantsSee Weeldreyer v. Comm’r, T.C. Memo. 2003-324; Schmidt v. Comm’r, T.C. Memo. 2003-325; Tschetter v. Comm’r, T.C. Memo. 2003-326; Waterfall Farms, Inc. v. Comm’r, T.C. Memo. 2003-327.  Likewise, the value of meals and lodging furnished on the business premises for the convenience of the employer are not wages for FICA and FUTA purposes. 

As an employer-provided fringe benefit, the meals and lodging arrangement is available only to an individual who is an employee of a C corporation.  Owners of other entities cannot take advantage of this fringe benefit.  For instance, sole proprietors and partners in a partnership do not have the necessary employee status to qualify for the fringe benefit.  Also, I.R.C. §1372 bars S corporation employees who own, directly or indirectly, more than 2 percent of the outstanding stock from receiving tax-free fringe benefits, including the I.R.C. §119 meals and lodging fringe benefit.  In addition, with respect to S corporations, the I.R.C. §318 attribution rules apply in determining who considered to be an S corporation shareholder.

Focus on Meals

Meals that are provided to employees during working hours without the furnishing of lodging must be furnished for substantial non-compensatory business reasons of the employer.  Examples include emergency call situations, employer business activity that permits on a short meal break, and insufficient eating facilities in the vicinity of the employer’s premises. Treas. Reg. §1.119-1(a)(2).

A significant question is whether the value of groceries furnished to an employee that the employee then prepares into meals is eligible for the exclusion. The IRS claims that it is not. Rev. Rul. 77-806.  However, the courts have ruled that either the employer or the employee may prepare the groceries into meals, as long as the arrangement otherwise meets the requirements of I.R.C. §119Jacobs v. Comm’r, 493 F.2d 1294 (3d Cir. 1974); Harrison v. Comm’r, T.C. Memo. 1981-211.  The issue is not settled.  Some courts have held that groceries are included under the definition of meals, but other courts and the IRS have ruled that the value of groceries is not meals and is includible in an employee's gross income.

Under a 1997 provision, the cost of meals furnished on the business premises for the convenience of the employer is fully deductible as a de minimis fringe benefit. Under legislation passed in 1998, if more than one-half of the employees to whom meals are provided on the employer's premises are provided for the convenience of the employer, then all of the meals are treated as furnished for the employer's convenience, and the value of the meals is excludible from the employee's income and is deductible by the employer.  I.R.C. §119(b)(4).  But, there can’t be a cash allowance for meals.  If the allowance constitutes compensation, it’s included in the employee’s gross income.  See, e.g., Priv. Ltr. Rul. 9801023 (Sept. 30, 1997).

Remoteness.  As noted above, for meals to be excluded from an employee’s wages, the meals must be provided as a condition of employment, and be for the employer’s convenience and furnished on the employer’s business premises.  I.R.C. §119(a)(1).  The requirements seem to be easier for remotely located farms and ranches.  In those situations, its often not feasible for employees to go to town for meals.  That makes the argument easier that it’s necessary for the employee to eat on the premises – it’s for the employer’s convenience and as a condition of employment.  

The litigated cases reveal that the remote location of the business is a significant factor in excluding meals from an employee’s wages.  In a 1966 Wyoming case, Wilhelm v. United States, 257 F. Supp. 16 (D. Wyo. 1966), the taxpayers owned a ranch in a remote location several miles from the nearest town.  The taxpayers transferred the ranch, ranch-house and all of the equipment to the corporation and attempted to live in the house tax free.  The corporation also bought the food and treated it as a deductible expense.  The IRS challenged the practice.  The Federal District Court for the District of Wyoming ruled against the IRS and noted that the ranch was a grass ranch that put up very little hay and required constant attention by persons experienced in grass ranch requirements to keep cattle alive.  The court also noted that during snowstorms the cattle needed to be fed daily, needed to be moved, waterholes had to be kept open, and the cattle had to be protected against the hazards of being trapped or falling into ravines.  The court felt that the employees had no other choice but to accept the facilities furnished by the corporate employer, and that the food and lodging were furnished to the employees not only for the convenience of the employer, but that they were indispensable in order to have the employees on the job at all times.

The Wilhelm case was a very important decision, but it also raised the question of how a court would view the situation if the corporation were located in a less remote area. In 1971, the United States Court of Appeals for the 9th Circuit addressed this issue in the context of a grape and crop farming operation in Caratan v. Commissioner, 442 F.2d 606 (9th Cir. 1971).  In Caratan, the corporation was located within a ten-minute drive from a residential area of a nearby town. Company policy required supervisory and management personnel to reside on the farm. Company-owned lodging was supplied free of charge for this purpose. The court, in ruling against the IRS, held that the issue was not the remoteness of the corporation, but whether there was a good business reason to require the employees to remain on the premises. The court indicated that the nature of the farming enterprise would determine the reasonableness of requiring employees to reside on the premises rather than the location of the corporation from the nearest town. Whether corporate business required around the clock work such as is the case with a grain drying operation, a farrow-to-finish operation, a dairy or a cattle ranch with characteristics similar to the ranch involved in the Wilhelm case was the real issue.

Historically, cash grain operations have had the greatest difficulty in successfully excluding the cost of lodging and meals provided by the corporation to employees. The IRS has difficulty in accepting the fact that grain farmers simply cannot lock up their machinery after the fall harvest, return the next spring and expect it to still be there.  The IRS does not put much weight on security, and they think there is no reason why a grain farmer cannot live in town if all that occurs is the planting, cultivating and harvesting of a crop.  On the other hand, livestock ventures or those that are irrigating or drying grain typically have had better success against an IRS challenge. For example, taxpayers were successful in one case involving only a grain operation with the emphasis on grain drying as a reason to be on the premises on a continuing basis.  Johnson v. Comm’r, T.C. Memo. 1985-175; compare with J. Grant Farms, Inc. v. Comm’r, T.C. Memo. 1985-174.

Recent Tech Advice Memo.  If Caratan stands for the proposition that remoteness is not the issue, the most recent IRS development on employer-provided meals supports that position.  In Tech. Adv. Memo. 201903017 (Jan. 18, 2019), an employer provided meals to employees and an IRS examining agent sought guidance on whether the meals were excludible from the employees’ income. The National Office of IRS determined that the value of the meals was not excludible because of the employer’s goals of providing a secure business environment for confidential business discussions; innovation and collaboration; for employee protection due to unsafe conditions surrounding the business premises; and for improvement of employee health; and because of the shortened meal period policy. The National Office determined that the employer’s reasons weren't substantial non-compensatory business reasons as I.R.C. §119 requires. However, the IRS National Office determined that to the extent the taxpayer provided meals so that employees were available to handle emergency outages, the value of those meals were excludible from income under I.R.C. §119. Likewise, snacks provided to employees were excludible as a de minimis fringe.  

But, there’s a new twist to the TAM.  In the TAM, the IRS noted the increasing presence of meal delivery services.  The IRS noted that such services have become more prevalent, and that they tend to undermine the argument that an employee must take their meals on the business premises due to insufficient time to leave the premises for meals.  See, e.g., Treas. Reg. §1.119-1(a)(2)(ii)(c). 


Perhaps the issue of meal delivery services is not that big of an issue for farms and ranches that are truly remotely located in areas that meal delivery services don’t reach.  I.R.C. §119 and the associated Treasury Regulations, of course, don’t mention meal delivery services.  Likewise, there is no caselaw discussing meal delivery services either.    But, in any event, the TAM may be an indication that the IRS will be more likely to raise questions about employer-provided meals in the future.  The availability of a meal delivery service is now a new consideration.  And remember, on the employer side of the equation, beginning in 2018, the 100 percent deduction for amounts incurred and paid for the provision of food and beverages associated with operating a business dropped to 50 percent.  After 2025, the employer deduction is gone.

February 21, 2019 in Income Tax | Permalink | Comments (0)

Tuesday, February 19, 2019

Big EPA Developments – WOTUS and Advisory Committees


In the past few days, two big developments of importance to agriculture have occurred. Both involve the Environmental Protection Agency (EPA).  Last week, the EPA published its proposed rule redefining “waters of the United States” (WOTUS), triggering a 60-day comment period.  In another development, a federal trial court ruled that the EPA has the authority to bar persons currently receiving grant money from the EPA to serve on EPA scientific advisory committees.  Both of these developments are important to agriculture.

Recent EPA developments of importance to agriculture – that’s the topic of today’s post.

WOTUS Redefined

In prior posts over the past couple of years, I have detailed the continuing saga of the WOTUS rule – first as proposed by the Obama Administration’s EPA in 2015; the subsequent court battle; the new proposal by the Trump Administration’s EPA in 2017; more court litigation; and now a revised proposed definition that attempts to clarify what waters are subject to federal jurisdiction under the Clean Water Act (CWA). 

On December 11, 2018, the EPA and the U.S. Army Corps of Engineers (COE) proposed a new WOTUS definition.  That new definition was published in the Federal Register on Feb. 14, 2019.  82 FR 34899 (Feb. 14, 2019).  The proposed definition is subject to a 60-day public comment period that will close on April 15, 2019.  The publication of this new definition is in line with President Trump’s Executive Order of February 28, 2017, that the EPA and the Corps clarify the scope of waters that are federally regulated under the CWA. 

Drainage tile and ephemeral streams.  Under the newly proposed WOTUS definition, groundwater that drains through a farm field tile system is not a point source pollutant subject to federal control under the CWA’s National Pollution Discharge Elimination System  (NPDES).  This specificity shuts the door on the argument set forth in and rejected by the Iowa Supreme Court (construing Iowa law) in a 2017 decision.  See Board of Water Works Trustees of the City of Des Moines v. Sac County Board of Supervisors as Trustees of Drainage Districts 32, 42, 65, 79, 81, 83, 86, et al., No. C15-4020-LTS, 2017 U.S. Dist. LEXIS 39025 (N.D. Iowa Mar. 17, 2017)Also excluded from the WOTUS definition are ephemeral streams (those only temporarily containing water) and diffuse surface runoff that doesn’t enter a WOTUS at a particular discharge point.  

Ditches, PC wetland and farmed wetland.  The proposed rule also excludes ditches from the definition of a WOTUS unless the ditch is connected to a tributary of a WOTUS.  A tributary is defined as “…a river, stream or similar naturally occurring surface water channel that contributes ‘perennial or intermittent’ flow to a traditional navigable water or territorial sea in a typical year…either directly or indirectly through other jurisdictional waters such as tributaries, impoundments, and adjacent wetlands…”.   What is a “typical year”?  For starters, it doesn’t include periods of drought or extreme flooding.  It is one that is within the “normal range of precipitation” over a rolling 30-year period for a “particular geographic area.”  Tributaries “…do not include surface features that flow only in direct response to precipitation, such as ephemeral flows, dry washes, and similar features.”  In other words, dry channels are not “tributaries.”  There must be more than an insubstantial water flow to support federal jurisdiction as a tributary to a WOTUS.

Prior converted (PC) cropland is also not a WOTUS under the proposed WOTUS definition.  A prior converted wetland is a wetland that was totally drained before December 23, 1985.  However, farmed wetland can still be subject to regulation by the USDA.  A “farmed wetland” is a wetland that was manipulated before December 23, 1985, but still exhibits wetland characteristics. Drains affecting these areas can be maintained, but the scope and effect of the original drainage system cannot be exceeded.  See, e.g., Barthel v. United States Department of Agriculture, 181 F.3d 934 (8th Cir. 1999).    

One unanswered question is whether the EPA will accept federal farm program wetland mappings.  It would be nice if the new WOTUS definition would include the same standard as USDA on this issue.  If not, on this issue, farmers will be subject to two distinct federal agencies with two distinct standards.  

Artificial irrigation, lakes and ponds.  The proposed WOTUS definition also would exclude areas that are artificially irrigated.  This is an important exception for rice and cranberry farmers.  See, e.g., United States v. Johnson, 467 F.3d 56 (1st Cir. 2006).  Likewise, excluded are artificial lakes and ponds (a waterbody that doesn’t have a natural outflow) that are constructed in upland areas.  This would include such structures as farm ponds, stock watering ponds, water storage reservoirs, settling basins and log cleaning ponds.  This follows the rationale of a U.S. Supreme Court opinion in 2006.  See Rapanos v. United States, 547 U.S. 715 (2006).  The only catch is if they are covered under other sections of the proposed rule.  For example, a lake or a pond that is “susceptible” to use in interstate or foreign commerce or is subject to a tide’s ebb and flow is deemed to be a WOTUS.  See 33 C.F.R. §328.3.  Likewise, a lake or a pond that contributes “perennial or intermittent flow” to navigable waters of the United States is deemed to be a WOTUS.  What does that mean?  It would appear to mean that only those lakes and ponds that actually have some material influence on navigable waters satisfies the definition of a WOTUS.  Id. If there is no perennial or intermittent flow being contributed by the lake or pond, then the lake or pond is not jurisdictional (at least at the federal level).  But, what about headwater streams that are made artificially perennial by subsurface drainage systems?  Are those to be excluded from the WOTUS definition?  Also, how are ditches that have been excavated into groundwater to be treated if they don't receive perennial surface flows?  Hopefully these two questions will be clarified.

In addition, other water-filled depressions (such as those created by mining or construction activity when fill, sand or gravel is excavated) are excluded from the definition of a WOTUS if they are in uplands.  They are not excluded if they are created in a wetland area to begin with.

Hydrological connections.  The proposed definition says that “[a] mere hydrological connection from a non-navigable, isolated, intrastate lake or pond…may be insufficient to establish jurisdiction under the proposed rule.”  While that seems to be a bit vague, the proposal does state that flooding that occurs once in 100 years into a WOTUS does not trigger federal jurisdiction.  What is clear, however, is that “…ecological connections between physically separated lakes and ponds and otherwise jurisdictional waters” are not under federal control.  This is a major point concerning the proposed WOTUS definition. 

EPA Advisory Committees

A recent federal court decision, Physicians for Social Responsibility v. Wheeler, No. 1:17-cv-02742 (TNM), 2019 U.S. Dist. LEXIS 22276 (D. D.C. Feb. 12, 2019), ended an Obama-era EPA policy of allowing EPA advisory committee members to be in present receipt of EPA grants.  When President Trump took office, he nominated Scott Pruitt to be head of the EPA.  After Senate confirmation, Secretary Pruitt issued a directive regarding membership in its federal advisory committees specifying “that no member of an EPA federal advisory committee be currently in receipt of EPA grants.” The directive reversed an Obama-era rule that allowed scientists in receipt of EPA grants to sit on advisory panels.  That rule was resulting in biased advisory committees stacked with committee members that opposed coal and favored an expansive “Waters of the United States” rule among other matters. The plaintiffs were a group of individuals and organizations who were receiving EPA research grants, and were either serving on an EPA advisory committee or hoped to serve on a committee. They claimed that the new directive illegally barred grant recipients from being members of the advisory committees, and filed suit to invalidate the directive. The EPA claimed that appointment policy was reserved to agency discretion, and that the plaintiffs failed to allege a violation of any specific statutory provision.

The trial court agreed with the EPA’s position, finding that when making appointments to the committees, agency heads have complete discretion “unless otherwise provided by statute, Presidential directive, or other established authority.” One such restriction on their discretion, the trial court noted, is the applicable ethics rules, found in 18 U.S.C. §208, and the accompanying regulation that dictate that a grant recipient can participate on an EPA advisory committee without incurring liability. However, the court reasoned that while someone may serve on an advisory committee without incurring liability under the conflict of interest statute, that does not dictate that an agency must appoint him as a member.  In other words, the conflict of interest rules function as a floor, not a ceiling, for acceptable government service.

The plaintiff also claimed that the EPA failed to adequately explain its change in policy, and challenged it as arbitrary and capricious. However, the trial court determined that the arbitrary and capricious standard cannot be enough, by itself, to provide a meaningful standard for the court. Instead, the court explained that, “When an agency departs from its prior policy, it must display awareness that it is changing position, and it ‘must show that there are good reasons for the new policy.’ But it need not establish ‘that the reasons for the new policy are better than the reason for the old ones; it suffices that the new policy is permissible under the statute, that there are good reasons for it, and that the agency believes it to be better...’” This “reasonable and reasonably explained’ standard is deferential, so long as the agency’s action – and the agency’s explanation for that action – falls within a zone of reasonableness.” In defending its policy change, the EPA explained that “while receipt of grant funds from the EPA may not constitute a financial conflict of interest, receipt of that funding could raise independence concerns depending on the nature of the research conducted and the issues addressed by the committee.” Thus, the change was necessary “to ensure integrity and confidence in its advisory committees.” The trial court found the EPA’s explanation to be within the zone of reasonableness. Based on these findings, the trial court held that the EPA action was rational, considered the relevant factors and within the authority delegated to the agency, and granted the EPA’s motion to dismiss the case. 


The newly proposed WOTUS rule is designed to clarify just exactly what constitutes waters over which the federal government has regulatory authority.  It is a tighter definition in many respects than the 2015 version was.  Public hearings will be held during the 60-day comment period.  For those in the Midwest and Great Plains, public hearing will be held at the EPA building in Kansas City, KS on February 27 and 28.  For those wishing to submit written comments by the April 15 deadline, the comments should be identified by Docket ID No. EPA-HQ-OW-2018-0149 and submitted to the Federal Rulemaking Portal at: 

In addition, removing potential bias from EPA advisory committees is another step in the right direction.  Both developments have big implications for agriculture.

February 19, 2019 in Environmental Law | Permalink | Comments (0)

Friday, February 15, 2019

Tax Matters – Where Are We Now?


If you missed last week’s seminar/webinar, I covered the status of extender legislation, technical corrections, tax software issues and, of course, issues with the qualified business income deduction and the associated transition rule applicable to agricultural cooperatives and their patrons. 

If you’d like to view the video and get my 25-page technical outline, you can click here:

An update on where things sit in the midst of tax season – that’s the topic of today’s post.

Where Art Thou Technical Correction and Extender Legislation?

On January 2, 2019, the House Ways and Means Committee released a draft technical corrections bill that sought to correct “technical and clerical” issues in the Tax Cuts and Jobs Act (TCJA).   However, the newly constituted Ways and Means Committee with a Democratic majority is reported to be unlikely to take up the draft according to a staffer who made the comment at a conference in Washington, D.C. on January 29.

As for extender legislation, nothing has been enacted as of today to extend provisions for 2018 that expired at the end of 2017.  Extender legislation was introduced in early December, but then the bill was revised with the extender provisions stripped-out.  In mid-January Sen. Grassley, the chair of the Senate Finance Committee, said that he wanted to push an extender bill through, but there haven’t been any hearings scheduled yet.  On February 14, he said that he would push for a retroactive extension of expired tax credits that would last for two years (2018 and 2019).

There are numerous individual, business and energy-related provisions that await renewal, including the following:

  • Above-the-line deduction for certain higher-education expenses, including qualified tuition and related expenses, under R.C. §222.
  • The treatment of mortgage insurance premiums as qualified residence interest under I.R.C. §163(h)(3)(E).
  • The exclusion from income of qualified canceled mortgage debt income associated with a primary residence under I.R.C. §108(a)(1)(E)
  • 7-year recovery for motorsport racing facilities under I.R.C. §168(i)(15).
  • Empowerment zone tax incentives under I.R.C. §1391(d)(1)(A).
  • 3-year depreciation for race horses two years or younger under I.R.C. §168(e)(3)(A)(i).  
  • The beginning-of-construction date for non-wind facilities to claim the production tax credit (PTC) or the investment tax credit (ITC) in lieu of the PTC under I.R.C. §45(d) and §48(a)(5). 
  • The credit for construction of energy efficient new homes under I.R.C. §45L.  
  • The energy efficient commercial building deduction under I.R.C. §179D.  
  • Alternative fuel vehicle refueling property credit under I.R.C. §30C(g)
  • Incentives for alternative fuel and alternative fuel mixtures under I.R.C. §6426(d)(5) and §6427(E)(6)(c).  
  • Incentives for biodiesel and renewable diesel under I.R.C. §40A(a); I.R.C. §6426(e)(3); and I.R.C. §6427(e)(6)(B)

New Items for 2019

While the TCJA generally applies beginning with tax years effective after 2017, there are some unique provisions that change for 2019.  These include the following:

  • Medical expenses become more difficult to deduct. For 2018, itemizers could deduct medical expenses to the extent they exceeded 7.5% of the taxpayer’s adjusted gross income (AGI).  For 2019, the "floor" beneath medical expense deductions increases to 10%. R.C. §213(f). 
  • Big shift in the alimony tax rules. For payments required under divorce or separation instruments that are executed after Dec. 31, 2018, the deduction for alimony payments is eliminated, and recipients of affected alimony payments will no longer have to include them in taxable income.  The rules for alimony payments also apply to payments that are required under divorce or separation instruments that are modified after Dec. 31, 2018, if the modification specifically states that the new-for-2019 treatment of alimony payments (not deductible by the payer and not taxable income for the recipient) applies.  R.C. §§215; 71.
  • Shared responsibility payment is history. Obamacare generally provides that individuals must have minimum essential coverage (MEC) for health care, qualify for an exemption from the MEC requirement, or make an individual shared responsibility payment (i.e., pay a penalty) when they file their federal income tax return. The TCJA reduced the individual shared responsibility payment to zero for months beginning after Dec. 31, 2018I.R.C. §5000A(c)However, the I.R.C. §4980H “employer mandate” (also known as an employer shared responsibility payment, or ESRP) remains on the books. The employer mandate general provides that an employer that employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year is required to pay an assessable payment if: (i) it doesn't offer health coverage to its full-time employees; and (ii) at least one full-time employee purchases coverage through the Marketplace and receives an I.R.C. §36B premium tax credit.
  • Liberalized rules for hardship distributions from 401(k) plans. R.C. §401(k) plans may provide that an employee can receive a distribution of elective contributions from the plan on account of hardship (generally, because of an immediate and heavy financial need of the employee; and in an amount necessary to meet the financial need).  Under Treas. Reg.§1.401(k)-1(d)(3)(iv)(E), an employee who receives a hardship distribution cannot make elective contributions or employee contributions to the plan and to all other plans maintained by the employer, for at least six months after receipt of the hardship distribution.  The IRS has modify the regulation to delete the six-month prohibition on contributions and to make “any other modifications necessary to carry out the purposes of” I.R.C. §401(k)(2)(B)(i)(IV).  The revised regs are to apply to plan years beginning after Dec. 31, 2018.
  • There are other tax changes starting in 2019.  For example, the debt-equity documentation regulations apply to issuances in 2019; the accelerated phaseout of the tax credit for wind facilities continues; and many tax-exempt organizations face eased donor disclosure requirements.  Also, while not brand new for 2019, the election out of 100% bonus depreciation into 50 percent bonus is not available unless the tax year includes September 27, 2017.

Final I.R.C. §199A Regulations

Deductions.  While I have addressed the final qualified business income deduction (QBID) regulations in prior posts, software issues remain.  One lingering issue involves how to handle business-related deductions.  The final regulations are consistent with the proposed regulations on the treatment of the self-employed health insurance deduction and retirement plan contributions.  Prop. Treas. Reg. §1.199A-1(b)(4) defines QBI as the net amount of qualified items of income, gain, deduction and loss with respect to a trade or business as determined under the rules of Prop. Treas. Reg. §1.199A-3(b).  The above-the-line adjustments for S.E. tax, self-employed health insurance deduction and the self-employed retirement deduction are examples of such deductions. 

The basic starting point is that QBI is reduced by certain deductions reported on the return that the business doesn’t specifically pay, including the deduction for one-half of the self-employment tax, the self-employed health insurance deduction, and retirement plan contributions.  The self-employed health insurance deduction may only “apply” to Schedule F farmers because, with respect to partnerships and S corporations, it is actually a component of either shareholder wages for an S corporation shareholder or guaranteed payments to a partner and, thus, may not reduce QBI.  The self-employed health insurance deduction should not be removed from an S-corporate owner on their individual return because it has already been removed on Form 1120-S.  Do not deduct it twice. If QBI were reduced by the amount of the I.R.C. §162(l) deduction on the 1040, QBI would be (incorrectly) reduced twice.  In other words, QBI should not be reduced by the self-employed health insurance from the S corporation or the partnership.  The deduction for the S corporation shareholder is allocated to the wage income, and the deduction for the partner is from the guaranteed payment.  The one-half self-employment tax deduction for the partner is allocated between guaranteed payments (if any) and that portion of the K-1 allocated income associated with QBI.  Some tax software programs are not treating this properly.  Watch for updates, such as a box to check on the self-employed health insurance screen.

The final regulations also clarify that the deduction for contributions to qualified retirement plans under I.R.C. §404 is considered to be attributable to a trade or business to the extent that the taxpayer’s gross income from the trade or business is accounted for when calculating the allowable deduction, on a proportionate basis.  See Prop. Treas. Reg. §1.199A-3(b)(vi).  When an S corporation makes an employer contribution to an employer-sponsored retirement plan, that contribution, itself, reduces corporate profits.  Thus, there is less profit on which the QBID can potentially apply.  Thus, for some S corporation owners, a contribution to an employer-sponsored retirement plant will effectively result in a partial deduction, but still subject the entire contribution, plus all future earnings, to income tax upon distribution.  The final regulations make clear that sole proprietors and partners must also “back-out” these amounts from business profits before applying the QBID.  This rule will make 401(k)s with a Roth-style option more valuable. 

The final regulations do not address how deductions for state income tax imposed on the individual’s business income or unreimbursed partnership expenses are to be treated.  The final regulations also don’t mention whether the deduction for interest expense to a partnership interest or an S corporation interest is business related.            

Some tax software is presently reducing QBI passed through from an S corporation or partnership by the I.R.C. §179 amount which is passed through separately.  Other tax software allows the practitioner to either include or exclude the I.R.C. §179 amount.  A suggested approach is to always exclude it at the entity level because it is not known if it can be deducted on the taxpayer’s personal return.  Operating properly, tax software should calculate QBI with a reduction for the I.R.C. §179 deduction at the individual level. 

Fiscal year entities.  The final regulations in January put an earlier report to rest that had surfaced in November of 2018.  The problem that was reported to be the case did not materialize.  Instead, under the final regulations, for purposes of determining QBI, W-2 wages, and the unadjusted basis in assets of qualified property, if an shareholder/partner/member receives any of these items from a passthrough entity having a fiscal year beginning in 2016 and ending before December 31, 2017, the items are treated as having been incurred by the individual during the individual's 2017 taxable year.  No QBID would be available. On the other hand, if an individual receives any of these items from a passthrough entity that has a fiscal year beginning in 2017 and ending in 2018, the items are treated as having been incurred by the taxpayer during the individual’s 2018 tax year.  That means the items may be taken into account in determining the individual’s QBID for 2018. 

Agricultural Cooperatives

During the webinar/seminar on Feb. 8, I also covered the transition rule that bridges the gap between the original QBID cooperative rule and the “fix” that occurred in March of 2018.  My detailed outline associated with the seminar goes through the various computations that might be encountered.  Of course, under the transition rule, a farmer’s calculation of their QBID for 2018 does not include grain sold to a cooperative if the cooperative accounted for those sales when calculating its domestic production activities deduction (DPAD) under former I.R.C. §119 on its 2018 return.  That means that a tax preparer is going to need certain information from the cooperative to prepare the patron’s return properly.  And, yes, in spite of what some tax software companies are saying the 2018 Form 8903 is available via the IRS website (Dec. 2018 version).


For further elaboration on these points and you can read up on my lecture outline and slide presentation associated with the Feb. 8 seminar/webinar.  I also went into detail on how to handle farm rentals with various scenarios.  That issue still seems to bedevil practitioners.  Again, you can access the video (no CE credit for not watching it live), my lecture outline and slides here:

February 15, 2019 in Income Tax | Permalink | Comments (0)

Wednesday, February 13, 2019

Non-Dischargeable Debts in Bankruptcy


Farm financial distress remains a big issue in the ag sector at the present time.  There has been an uptick in farm and ranch bankruptcy filings over the past few years.  This makes bankruptcy law, unfortunately, important to farmers and their legal counsel.

One of the particular rules of bankruptcy concerns the dischargeability of debts.  What debts can be erased?  What debts cannot?  Does a debtor’s conduct during the bankruptcy process matter when it comes to debt discharge?

Bankruptcy debt discharge rules – that’s the topic of today’s post.

Basic Principles of Bankruptcy

The U.S. bankruptcy system is governed by two objectives - (1) a “fresh start” for poor but honest debtors who can obtain a discharge for some (but not all) debts; and (2) a policy of fairness for the unsecured creditors.  The bankruptcy process attempts to provide secured creditors (in most instances) with the value of their collateral, and provides a procedure for unsecured creditors to share in the debtor’s assets on a basis of fairness and equality.

A major feature of bankruptcy in the United States, as noted above, is discharge of indebtedness.  This makes possible the “fresh start” for individual debtors.  While the basic rule is that only debts arising before bankruptcy filing are dischargeable, not all debts can discharged.

Debts Ineligible for Discharge

Categories.  Several categories of debts are not eligible for discharge:

  • Taxes entitled to a preference (normally those within the last three years), for which a return was not filed or was filed late, or for which a fraudulent return was filed or which the debtor tried to evade, are not dischargeable. Penalties on non-dischargeable taxes are likewise not dischargeable.  See, e.g., In re Zuhone, 88 F.3d 469 (7th Cir. 1996).
  • A federal income tax lien against exempt property is not discharged in bankruptcy although the debt for the taxes, penalties and interest secured by the lien may be discharged in bankruptcy. The exempt property may be subject to foreclosure and sale to pay the tax lien.
  • Debt incurred to pay state and local taxes is not discharged.
  • Fines, penalties and forfeitures payable to a governmental unit that are not compensation for pecuniary loss are not dischargeable, nor is debt incurred to pay fines and taxes.
  • Student loans that are insured, guaranteed or funded by a government unit, for-profit entity and non-governmental entity unless the loan was “due and payable” more than five years before the filing of bankruptcy are ineligible for discharge.
  • Claims neither listed nor scheduled by the debtor in time to permit the creditor to file a timely proof of claim cannot be discharged.
  • Alimony and child support is not dischargeable.
  • Nonsupport obligations incurred from divorce or separation is not dischargeable.
  • Claims based on fraud or defalcation while the debtor was acting in a fiduciary capacity or based on embezzlement or larceny are not eligible for discharge.
  • Claims based on willful or malicious injury are not dischargeable. For example, in In re Cantrell, 208 B.R. 498 (B.A.P. 10th Cir. 1997), the debtor's loan agreement required a bank’s prior consent for the sale of secured cattle and that payment for the cattle be by check made out jointly to the debtor and the bank.  The debtor sold much of cattle herd without remitting the sale proceeds to the bank.  This left much of the loan unpaid and unsecured at the time of bankruptcy filing.  The court held that the remaining debt was not dischargeable.
  • Debts that were (or could have been) listed in a prior bankruptcy proceeding and were not discharged in the earlier proceeding because of the debtor’s acts or conduct are not eligible for discharge.
  • Claims owed to a single creditor aggregating more than $600 for luxury goods and services incurred by an individual on or within 90 days of filing the bankruptcy petition cannot be discharged.
  • Cash advances aggregating more than $875 that are consumer credit under an open-end credit plan if incurred on or within 70 days before filing the bankruptcy petition (per line of credit) are not in line for discharge.
  • Claims arising from a judgment entered against the debtor for operating a motor vehicle, vessels or aircraft while legally intoxicated are not eligible for discharge.
  • Homeowner association, condominium and cooperative fees are not discharged.
  • Debt associated with pension and/or profit-sharing plans is not dischargeable.

Fraud.  A debtor in financial distress must be very careful not to engage in fraudulent conduct.  In general, a debtor is denied discharge for fraudulent conduct within one year of filing the bankruptcy petition or during the bankruptcy case or for failure to explain a loss of assets or preserve sufficient recorded information concerning the debtor's financial condition or business transactions.  In general, a creditor doesn’t have to prove that its reliance on the debtor’s misrepresentation was reasonable.  The creditor need only show that its reliance was justifiable.  See, e.g., In re Eccles, 407 B.R. 338 (B.A.P. 8th Cir. 2009).

Relatedly, claims based on the receipt of money, property or services by fraud, false pretenses or a materially false written statement concerning the debtor's (or an insider’s) financial condition intentionally made to deceive creditors are not in line for discharge.  11 U.S.C. §523(a)(2)(B)This point was illustrated recently by a bankruptcy case from Tennessee involving a farmer.

In In re Blankenship, No. 16-10839, 2019 Bankr. LEXIS 7 (Bankr. W.D. Tenn. Jan. 2, 2019), the defendant filed Chapter 11 bankruptcy in 2016. A month after filing, the defendant sought permission to obtain post-petition financing from the plaintiff (an ag lender) in the form of a crop loan to produce and harvest the debtor’s 2016 soybean crop.  To obtain the crop loan, the defendant completed a “Crop Loan Application,” and submitted a “Farm List” to the plaintiff.  The paperwork listed the acreage and yearly rent prices for each parcel of land the defendant planned on farming during that year.

The total acreage listed in the paperwork was well over 8,000 acres. Based on the documentation, the plaintiff approved and made a $1,949,880 crop loan to the defendant.  In 2017, the defendant converted the Chapter 11 case to a Chapter 7 case and subsequently defaulted on the crop loan, at a time when the outstanding balance was $355,012.  The plaintiff sued, claiming that outstanding balance was non-dischargeable under 11 U.S.C. §523(a)(2)(B).  As noted above, under that provision, a creditor seeking to have debt excepted from discharge must establish that the debtor, with intent to deceive, used a materially false written statement to obtain a loan from the creditor and that the creditor reasonably relied on the statement to loan funds to the debtor. 

The bankruptcy court determined that the Crop Loan Application and the Farm List constituted a written statement, and the fact that the Farm List was not attached to the Crop Loan Application was immaterial.  It was more than simply a projection of the acres to be farmed in 2016 - it was a concrete representation of the debtor’s need for $1.9 million.  While the documentation indicated that the debtor planned to farm about 8,000 acres, the debtor actually farmed about 5,000 acres and had profit of approximately $1.5 million less than projected in the documentation.  Consequently, the bankruptcy court regarded the projected acreage and profit numbers as “substantially untruthful” and “materially false.”  The bankruptcy court determined that the there was nothing in the documentation that would have alerted the creditor to the falsity of the information provided, and that the creditor reasonably relied on the information to loan the $1.9 million – an amount necessary for the debtor to plant 8,000 acres.  The bankruptcy court also concluded that the debtor had intent to deceive via the false documentation based on the totality of the circumstances including the fact that the debtor had attested that the Farm List was an accurate representation of the amount of land they were going to farm.  The bankruptcy court pointed out that the debtor knew that the amount of land actually farmed in the prior year was only 5,200 acres.  The bankruptcy court found it inconceivable that the defendant anticipated being able to increase row crop production by almost 50 percent from the previous year based on leasing additional land, while being in an active bankruptcy case. Consequently, the remaining balance of the loan was not dischargeable.   


There is no doubt that times are tough in agriculture.  When finances get strained, it can take an emotional toll on the parties involved.  Even the temptation to engage in conduct that could be construed as fraudulent should be avoided.  Legal, financial and tax counsel should be consulted and allowed to assist throughout the painful process of debt adjustment and, perhaps, reorganization of the farming or ranching operation for long-term success.  In the Tennessee bankruptcy case discussed above, the debtor was not represented by legal counsel.  That was a big mistake.  

February 13, 2019 in Bankruptcy | Permalink | Comments (0)

Monday, February 11, 2019

Is There A Common-Law Right To Hunt (and Fish) Your Own Land?


The Founders understood that governments can often be the biggest obstacle to individual, inalienable rights – those rights that cannot be revoked by some outside (governmental) force.  While a representative form of government can be the best protector of individual rights, it can become the “tyranny of the majority” as noted by John Adams and Alexis De Tocqueville.

The matter of inalienable rights is important to farmers and ranchers.  Land ownership and the rights associated with land ownership is of primary importance to agricultural businesses and families.  One of those rights involves the right to hunt (and fish) the property that an individual owns. 

That’s the topic of today’s post – an individual’s rights to hunt (and fish) their own property.

State Regulation of Hunting Rights

All states have an elaborate set of statutes and regulations governing the hunting of wildlife in that particular state.  The rules govern hunting on state-owned public land as well as privately owned land.  In addition, the hunting rules vary depending on the type of game – big game; small game; fur-bearing or fowl.  The state rules also depend on whether the hunter is a resident of the particular state or a nonresident.  The rules tend to be less restrictive for residents, particularly those in certain age ranges, than they are for nonresidents.  The fees for licenses and/or permits are also much lower for residents than nonresidents, with typical exceptions for full-time students and service members.

As for non-resident landowners, the state rules vary from state-to-state.  Kansas, for example, requires a nonresident “hunt-on-your-own-land” deer permit.  That permit is available to either a resident or nonresident who actively farms a tract of 80-acres or more in the state.  The property must be owned in fee simple.  The name on the deed must be denoted in a particular manner.  

The Iowa approach is different.  Hunting rights in Iowa don’t follow ownership.  A nonresident landowner has no inalienable right to hunt their own property – property for which they pay taxes to the state of Iowa.  The portion of the Iowa hunting laws defining “resident” and “owner” were the subject of a recent case.

Iowa Case

Iowa hunting law allows a resident landowner to obtain annually up to two deer hunting licenses - one antlered or any sex deer hunting license and one antlerless deer free of charge. Iowa Code §483A.  A resident landowner may also buy two antlerless deer hunting licenses. “Owner” is defined as the owner of a farm unit who is a resident of Iowa. Iowa Code §483A.24(2)(a)(3).   A “resident” is defined as including a person with a principle or primary residence or domicile in Iowa, a full-time student, a non-resident under age 18 who has a parent that is an Iowa resident or a member of the military that claims Iowa residency either by filing Iowa taxes or being stationed in Iowa.  Iowa Code  §483A.1A(10).  Nonresident landowners must apply for antlered licensing. The state allots 6,000 antlered or any sex deer hunting licenses to nonresidents via a lottery system for a fee.  If a nonresident landowner does not receive an antlered license through the lottery system, "the landowner shall be given preference for one of the antlerless deer only nonresident deer hunting licenses."

The plaintiff owned 650 acres in southcentral Iowa, but was not domiciled in Iowa.  Over the prior six-year period, the plaintiff received nonresident antlered deer hunting licenses through the lottery four times. The other two years the plaintiff obtained a nonresident antlerless deer hunting license. The plaintiff has been able to hunt every year on his property, but as a nonresident landowner and by paying the higher fees associated with being a “nonresident.” 

In 2016, the plaintiff, in Carter v. Iowa Department of Natural Resources, No. 18-0087, 2019 Iowa App. LEXIS 119 (Iowa Ct. App. Feb. 6, 2019), filed a declaratory action against the state requesting a ruling establishing him as an "owner" under for purposes of Iowa deer hunting laws.  He claimed that not treating him as an “owner” violated his inalienable rights and his equal protection rights under the Iowa Constitution. The state did not respond within 60 days and the action was treated as having been denied.  The plaintiff sought judicial review.

The trial court rules for the state.  On further review, the appellate court affirmed.  While the plaintiff claimed that he had an inalienable right to hunt the property that he owned and paid taxes on to the state of Iowa, the appellate court held that the state’s differential treatment between residents and non-residents for obtaining hunting licenses for antlered deer was reasonable, not arbitrary, and constituted an appropriate use of the state’s police power.  The appellate court also determined that the different treatment of residents and non-residents served a legitimate governmental interest in conserving and protecting wildlife that was rationally related to that legitimate governmental interest.  The court, citing Democko v. Iowa Department of Natural Resources, 840 N.W.2d 281 (Iowa 2013), noted that 2013 decision held that landownership in Iowa does not give the landowner the right to hunt the land because the landowner has no interest in or title to wildlife on the owner’s property.  That wildlife, the Supreme Court had determined in 2013, is owned by the state of Iowa.  Thus, there is no common law right to hunt based on ownership.  The legislature, as the Iowa Supreme Court noted in 2013, established extensive hunting laws (and the subsequent underlying regulations) that had eliminated that right in a manner consistent with the legitimate state interest of wildlife preservation.

What About Private Farm Ponds?

As noted, the Iowa Supreme Court, in 2013, removed from the “bundle of sticks” of private property ownership, the common law right to hunt wildlife on one’s own property.  But what about fish in a pond on privately owned property?  Does the landowner have a right to fish their own pond without going through the state?  The answer may not be as obvious as it seems it should be.  It’s also an issue that is currently being debated in Iowa.  Current Iowa law says that the Iowa Natural Resource Commission (Commission) can’t stock private water unless the owner agrees that the private water is opened to the public for fishing.  Iowa Code §481A.78.  In other words, if the state stocks a private pond, the landowner must make the pond available for public fishing.  However, the law allows the Commission to investigate a private pond to determine if the “living conditions” of the fish in the private pond are suitable and then provide breeding stock on the owner’s request.  In that instance, the private pond need not be opened for public fishing.  Id.

However, this fishing provision of Iowa law has become contentious.  Legislation is presently being worked up in the Iowa legislature that would strike that law entirely and replace it with a new provision specifying that the Commission “shall not stock a private pond or lake.”  SF 203.  The new legislation would allow the Commission to stock a creek or stream flowing through private property.  Id. The legislation also specifies that a fishing license is not required to fish on an entirely land-locked private pond so long as it is not located on a natural stream channel or connected via surface water to waters of Iowa.  Id.


Apparently, there is no “resident” requirement in the law governing the fishing of private ponds in Iowa.  So, a nonresident can fish their own pond even though living out of state, but a nonresident has no common law right to hunt their own property in Iowa.  “Wildlife,” however, belong to the state of Iowa while they are present there.  That is, of course, unless a resident (or nonresident) collides with wildlife on an Iowa public roadway and incurs damage and/or injury in the collision.  Hmmm….  That might be the topic of a future post.        

Do you know the rules in your state?  

February 11, 2019 in Real Property, Regulatory Law | Permalink | Comments (0)

Thursday, February 7, 2019

Defects In Real Estate Deeds – Will Time Cure All?


The law sets forth particular requirements that a real estate deed must satisfy to be effective to convey title in the manner in which the parties to the transaction desire.  Those requirements, for example, might concern particular deed language, recordation, or even the manner in which the deed is executed. 

But, just how technical are those requirements?  Is a failure to precisely follow all of the rules fatal to the conveyance of the property involved?  Can a party to a real estate transaction use a minor “foot-fault” by the other party as a means of getting out of what is discovered to be a bad deal?  What if the “defect” isn’t discovered until several years after the deed is executed and title conveyed?  Does the passage of time matter?

That’s the topic of today’s post – the impact of the passage of time on deed defects.

Curative Statutes

All states have all curative statutes designed to address various types of errors associated with real estate deeds. The statutes vary greatly from state-to-state, and deal with various possible defects.  However, they all have one purpose – to cure defects following the passage of a certain amount of time.   The goal is to allow title examiners to rely upon recorded documents that may have some minor defect once an appropriate length of time has passed.  If execution and recording of the deed is defective, that generally does not impact the validity of the conveyances between the parties to the conveyance. It only impacts whether constructive notice to the world was effective. 

Recent Case.  A recent decision by the U.S Court of Appeals for the Eleventh Circuit dealt with the Florida curative statute and how it applied to a alleged deed defect in a case involving an IRS attempt to foreclose on the real estate.  In Saccullo v. United States, No. 17-14546, 2019 U.S. App. LEXIS 1056 (11th Cir. Jan. 11, 2019), a father executed a deed in 1988 that conveyed a tract of real estate to a trust for the benefit of his son.  But, the deed was witnessed by only one person rather than two as Florida law required.  The father died in 2005, and the IRS asserted that the estate owed $1.4 million in delinquent federal estate tax. In 2015, the IRS filed a tax lien against the property on the basis that it was property that was included in the decedent’s estate.

The son sued, claiming that the lien was inapplicable.  He claimed that the property was not included in the father’s estate because it had been transferred to the trust before the father’s death. The IRS acknowledged that there had been an attempted transfer to the trust before death, but claimed that the properly had not actually been conveyed to the trust because the deed execution was not properly witnessed.  As a result, the IRS claimed, the property was included in the father’s estate at death and was subject to the IRS lien for unpaid taxes. The IRS motioned for summary judgment and the trial court agreed, granting the motion.

On appeal, the appellate court reversed noting that Florida law (Fla. Stat.§95.231) specifies that an improperly executed deed is considered valid five years after recordation. While the IRS claimed that this “curative” statute required “some form of formal adjudication” before it cured a deed and that, even if it did apply automatically, the statute essentially constituted a statute of limitations.  As a statute of limitations, the IRS claimed, it couldn’t apply in a manner that bound the United States.  The IRS cited an old U.S. Supreme Court opinion for that proposition.  See United States v. Summerlin, 310 U.S. 414 (1940). 

The appellate court disagreed with the IRS. The appellate court noted that while the Florida Supreme Court had not squarely addressed this particular issue, the clear weight of Florida authority favored applying the curative statute automatically five years after a deed is recorded and did not require any adjudication. The appellate court also held that Summerlin did not apply because the deed had been cured before the father died (the deed was executed and recorded 17 years before the father died) and, at the time of curing, was deemed to be effectively conveyed to the trust. As a result, there was no statute of limitations issue because the IRS claim failed to accrue. The result was that, upon the father’s death, the real estate was not included in his estate and the IRS lien couldn’t attach to it.  

The “take-home” from the case is that the Florida statute was drafted precisely enough to cure what is probably a commonly-overlooked defect in Florida.  The statute also triggered the running of the five-year period from the date the deed was recorded.  In other words, the act of recording the deed had to occur to start the five-year timeframe running.  Five years was also a long-enough period of time to ensure that no bona fide purchasers would be impacted.  The statute of limitations issue was also not problematic because the IRS lien for unpaid federal estate tax couldn’t arise until after the father had died.  By that time, much more time than five years had passed since the deed had been executed and recorded. 


Where a defect associated with a real estate deed prevents the conveyance from being effective, a curative statute would not help unless it clearly provides that something that was defective because of a statutory requirement is deemed effective with the passage of time.   That’s a lesson for practitioners to keep in mind.  Real estate deeds are often a big part of the business of agriculture.  It’s also a lesson for legislator’s drafting curative statutes to remember to draft carefully.  If drafted carefully, the passage of time will cure defects.

February 7, 2019 in Real Property | Permalink | Comments (0)

Tuesday, February 5, 2019

Can a State Tax a Trust With No Contact With the State?


Last summer, the U.S. Supreme Court decided South Dakota v. Wayfair, 138 S. Ct. 2080 (2018), where the court upheld South Dakota’s ability to collect taxes from online sales by sellers with no physical presence in the state.  That decision was the latest development in the Court’s 50 years of precedent on the issue, and I wrote on the issue here:

Does the Supreme Court’s opinion mean that a state can tax trust income that a beneficiary receives where the only contact with the state is that the beneficiary lives there?  It’s an issue that is presently before the U.S. Supreme Court.  It’s also the topic of today’s post – the ability of a state to tax trust income when the trust itself has no contact with the taxing state.

The “Nexus” Requirement

Article I, Section 8 of the U.S. Constitution says that, “The Congress shall have the regulate commerce…among the several states…”.  That is a rather clear statement – the Commerce Clause grants “exclusive authority [to] Congress to regulate trade between the States.”  As I pointed out in the blog post on the Wayfair decision last summer, a state tax will be upheld when applied to an activity that meets several requirements:  the activity must have a substantial nexus with the state; must be fairly apportioned; must not discriminate against interstate commerce, and; must be fairly related to the services that the state provided.  Later, the U.S. Supreme Court said that a physical presence was what satisfied the substantial nexus requirement.  

The physical presence requirement to establish nexus was at issue in Wayfair and the Court determined that a “substantial nexus” could be present without the party subjected to tax having a physical presence in the taxing jurisdiction.  But, the key point is that the “substantial nexus” must be present.  Likewise, the other three requirements of prior U.S. Supreme Court precedent remain – the tax must be fairly apportioned; it must not discriminate against interstate commerce, and; it must be fairly related to services that the state provides.  In other words, taxing a business without a physical presence in the state cannot unduly burden interstate commerce.  The Wayfair majority determined that the South Dakota law satisfied these tests because of the way it was structured – limited application (based on transactions or dollars of sales); not retroactive; the state was a member of the Streamlined Sales and Use Tax Agreement; the sellers at issue were national businesses with a large online presence; and South Dakota provided tax software to ease the administrative burden. 

Taxing an Out-Of-State Trust?

The U.S. Supreme Court has now decided to hear a case from North Carolina involving that state’s attempt to tax a trust that has no nexus with the state other than the fact that a trust beneficiary is domiciled there.  Kimberley Rice Kaestner Trust 1992 Family Trust v. North Carolina Department of Revenue, 789 S.E.2d 645 (N.C. Ct. App. 2016), aff'd., 814 S.E.2d 43 (N.C. 2018), pet. for cert. granted, No. 18-457, 2019 U.S. LEXIS 574 (U.S. Sup. Ct. Jan. 11, 2019).  The trust at issue, a revocable living trust, was created in 1992 with a situs of New York. The primary beneficiaries were the settlor’s descendants. None of the descendants lived in North Carolina at the time of the trust’s creation. The trust was divided into three separate trusts in 2002, one for each of the settlor’s children. The beneficiary of one of the sub-trusts was a North Carolina resident at that time. The trustee was replaced in 2005 with a successor trustee who resided in Connecticut. North Carolina tax returns were filed for tax years 2005-2008 for the accumulated trust income, that was distributed to the beneficiaries, including the non-North Carolina beneficiaries. In 2009, the trust filed a claim for a refund of North Carolina taxes in an amount slightly exceeding $1.3 million. The trust claimed that N.C. Gen. Stat. §105-160.2, which assesses tax on the amount of taxable income of the estate or trust that is for the benefit of a North Carolina resident, was unconstitutional on due process and Commerce Clause grounds. The defendant denied the claim, and the hearing officer later dismissed the case for lack of jurisdiction.

The trial court dismissed the request for injunctive relief with respect to the refund claim, but denied the defendant’s motion to dismiss the constitutional claims. The trial court then granted summary judgment for the trust on the constitutional claim and ordered the defendant to refund the taxes paid on its accumulated income.

On appeal, the appellate court affirmed. The appellate court determined that the trust failed to have sufficient minimum contacts (as required by the Due Process Clause) with North Carolina to subject the trust to North Carolina income tax. The court cited both International Shoe Co. v. Washington, 326 U.S. 310 (1945) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) to support its position on this point. The trust did not have any physical presence in the state during the tax years at issue, contained no North Carolina property or investments, had no trust records that were created or kept in North Carolina, and the place of trust administration was not in North Carolina. Basing the imposition of state tax on a beneficiary’s domicile, by itself, did not establish sufficient minimum contacts with the state to satisfy the Due Process Clause and allow North Carolina to tax a non-North Carolina trust. The appellate court held that Brooke v. Norfolk, 277 U.S. 27 (1928) was controlling. In that case, a Maryland resident created a testamentary trust with a Maryland situs for a Virginia beneficiary. Virginia assessed tax on the trust corpus, but the Court held the assessment to be unconstitutional.

On further review, the state Supreme Court affirmed, also noting that a key to the case was that the trust beneficiary did not receive trust distributions during the years at issue. As such, the North Carolina statute violated the Due Process Clause of the U.S. Constitution.

The North Carolina Supreme Court’s decision was delivered 13 days before the U.S. Supreme Wayfair decision, and was based on the controlling U.S. Supreme Court decision at that time – Quill.  Consequently, the North Carolina Department of Revenue, based on Wayfair, sought U.S. Supreme Court review.  On January 11, 2019, the U.S. Supreme Court agreed to hear the case. 


State taxation of trusts varies greatly from state to state in those states that have a state income tax.  A trust’s situs in a state certainly permits that state to subject the trust to the state’s income tax as a resident.  But, a trust may be tied to a state in other ways via a grantor, trustee, assets, or a beneficiary.  In addition, whether a trust is a revocable or irrevocable trust can make a difference. For instance, the Illinois definition of  “resident” includes “an irrevocable trust the grantor of which was domiciled in this State at the time such trust became irrevocable.”  35 ILCS/1501(A)(20)(D); see also, Linn v. Department of Revenue, 2 N.E.3d 1203 (Ill. Ct. App. 2013).  Indeed, a trust may have multiples states asserting tax on the trust’s income. 

However, due process requires that before a state can tax a trust’s income, the trust must have a substantial enough connection (e.g., nexus) with the state.  How the U.S. Supreme Court decides the North Carolina case in light of its Wayfair decision will be interesting.  It’s a similar issue but, income tax is involved rather than sales or use tax.  In my post last summer (noted above) I discussed why that difference could be a key distinction.  In addition, while a trust could be subject to state income tax based on its residency, the trust has grantors and trustees and beneficiaries and assets that can all be located in different states – and can move from state-to-state (at least to a degree). 

The U.S. Supreme Court decision will have implications for trust planning as well as estate and business planning.  Siting a trust in a state without an income tax (and no rule against perpetuities) is looking better each day.

February 5, 2019 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Friday, February 1, 2019

Time to Review of Estate Planning Documents?


The laws surrounding estate planning have changed significantly in recent years and have done so multiple times.  That means that it might be a good idea to review wills, trusts and associated estate planning documents to make sure they still will function as intended at the time of death. 

But, just exactly what should be looked for that might need to be modified?  One item is clause language in a will or trust that is now outdated because of the current federal estate tax exemption that is presently much higher than it has been in prior years. 

That’s the topic of today’s post – the need to review and modifying (when necessary) clause language in a will or trust that no longer will work as anticipated because of the increase in the federal estate tax exemption.

Common Will and Trust Language

Wills and trusts that haven’t been examined in the last five to seven years should be reviewed to determine if pecuniary bequests, percentage allocations and formula clauses will operate as desired upon death. For example, if will or trust  language refers to the “Code” and/or uses Code definitions for transfer tax purposes, or otherwise refers to the Code to carry out bequests, that language may now produce a result that no longer is consistent with the testator’s intent.

Common language used in wills and trust to split out shares to a surviving spouse in “marital deduction” and “credit shelter” amounts often refers to the “Code.”  In other words, the split of the shares is tied to the amount of the federal estate tax exemption at the time of the testator’s death.  This results in an automatic adjustment of the marital deduction portion of the first spouse’s estate (as well as the credit shelter amount) in accordance with the value of the federal estate tax exemption at the time of the decedent’s death. 

Why is such language an issue?  For starters, it could result in nothing being left outright to a surviving spouse.  For example, a clause that leaves a surviving spouse “the minimum amount needed to reduce the federal estate tax to zero” with the balance passing to the spouse in life estate form could result in nothing passing outright to the surviving spouse in marital deduction form.  That would be the case, for example, with respect to an estate that is not large enough to incur federal estate tax.  Presently, the threshold for estate taxability at the federal level is a taxable estate of $11.4 million which means that very few estates will be large enough to incur federal estate tax.  For nontaxable estates, the formula language that was designed to minimize estate tax by splitting the bequests to the surviving spouse between marital property and life estate property no longer works - surviving spouse would receive nothing outright.   

On the other hand, a beneficiary of an estate that is not subject to federal estate tax would receive everything under a provision that provides that the beneficiary receives “the maximum amount that can pass free of federal estate tax.” 

Formula clause language.  As can be surmised from above, a common estate planning approach for a married couple facing the possibility of at least some estate tax upon either the death of the first spouse or the surviving spouse has been for the estate of the first spouse to be split into a marital trust and a credit shelter (bypass) trust.  To implement this estate planning technique, the couple’s property is typically re-titled, if necessary, to roughly balance the estates (in terms of value) so that the order of death of the spouses becomes immaterial from a federal estate tax standpoint.  This necessarily requires the severance of joint tenancy property.  Estate “balancing” between the spouses is critical where combined spousal wealth is between one and two times the amount of the federal estate tax exemption.  For many years that range was between $600,000 and $1.2 million.  Then the ranged ratcheted upward to between $3 million and $6 million.  It then moved upward again to a range of $5 million to $10 million.  Now it is a range of $11.4 million to $22.8 million.  

What formula clause language does is cause the trusts to be split in accordance with a formula that funds the credit shelter trust with the deceased spouse’s unused exemption, and funds the marital trust with the balance of the estate.  As indicated above, the increase in the exemption can cause, a complete “defunding” of the surviving spouse’s marital trust and an “over stuffing” of the credit shelter trust.  That may not be what the decedent had planned to occur.  For instance, here’s a sample of language to be on the lookout for:

“To my Trustee…that fraction of my residuary estate of which the numerator shall be a sum equal to the largest amount, after taking into account all allowable credits and all property passing in a manner resulting in a reduction of the Federal Estate Tax Unified Credit available to my estate, that can pass free of Federal Estate Tax and the denominator of which shall be the total value of my residuary estate

For the purpose of establishing such fraction the values finally fixed in the Federal Estate Tax proceeding in my estate shall control.    

The residue of my estate after the satisfaction of the above devise, I devise to my spouse; provided that, any property otherwise passing under this subparagraph which shall be effectively disclaimed or renounced by my spouse under the provisions of the governing state law or the Internal Revenue Code shall pass under the provisions of paragraph…”.

To reiterate, while the above language typically worked well with federal estate tax exemption levels much lower than the current $11.4 million amount, the language can now result in an “over-stuffed” credit shelter trust (and related de-funding of the marital trust).

Consider the following example:

John and Mary, a married couple, had a combined spousal wealth of $3 million in 2001 at a time when the exclusion from the estate tax was $1 million.  As part of the estate planning process, they re-titled their assets and balanced the value of the assets between them to eliminate problems associated with the order of their deaths.  Assuming John dies first with a taxable estate of $1.5 million, the clause would result in $1 million passing to the bypass trust and $500,000 passing outright to Mary in the marital trust created by the residuary language.  Upon Mary’s subsequent death, her estate would consist of her separate $1.5 million (assuming asset values have not changed) and the $500,000 passing outright to her under the terms of John’s will.  With a $1 million exclusion, only $1 million would be subject to the federal estate tax.

With the present $11.4 million exclusion, the clause would result in John’s entire estate passing to the bypass trust, and nothing passing outright to Mary as part of the marital trust.  While the couple’s estate value is not large enough to trigger an estate tax problem, it would be better to have some of the property that the clause caused to be included in the bypass trust be included in Mary’s estate so that it could receive an income tax basis equal to the date of death value.  With the present $11.4 million exclusion, all of John’s property could be left outright to Mary and added to her separate property with the result that Mary’s estate would still not be subject to federal estate tax.  But, all of the property would be included in her estate at death and the heirs would receive an income tax basis equal to the fair market value at the time of Mary’s death. 

Charitable bequests.  The same problem with formula clause language applies to many charitable bequests that are phrased in terms of a percentage of the “adjusted gross estate” or establish a floor or ceiling based on the extent of the “adjusted gross estate.”


The standard advice has been to routinely revisit existing estate planning documents every couple of years.  Not only does the law change, but family circumstances can change and goals and objectives can change.  But, the rules surrounding estate planning have been modified several times in recent years which means that plan should be revisited even more frequently. 

One final thought.  The current rules sunset at the end of 2025 and then revert back to the rules in play in 2018.  That means that the estate tax exemption would go back to $5 million plus inflation adjustments.  So, just because federal estate tax might not be a problem for a particular estate, that doesn’t mean that estate planning can be ignored.  Reviewing wills and trusts for outdated language is important, but overall objectives should be reviewed and related documents such as financial and health care powers of attorney should be executed or modified as necessary. 

The bottom line - there remain numerous reasons for seeing an estate planning attorney for a review of estate planning documents.  Examining drafting language in older wills and trusts is just one of them.

February 1, 2019 in Estate Planning | Permalink | Comments (0)