Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Friday, November 25, 2005

The Kenan Doctrine and IRC § 663(a)(1)

Robert T. Danforth (Associate Professor of Law, Washington and Lee University) has recently authored an article entitled The Interplay of Kenan v. Commissioner and Section 663(a)(1).

Here is the abstract of the article as posted on SSRN:

Kenan v. Comr. is the leading case for the proposition that a distribution of appreciated non-cash assets by a fiduciary in satisfaction of a pecuniary obligation triggers realization of gain by the trust or estate. The case is but a particular application of the more general principle (applicable to all taxpayers, not just fiduciaries) that a transfer of non-cash property to discharge an indebtedness results in gain or loss to the transferor, just as if the transferor had satisfied the indebtedness with cash and immediately thereafter sold the non-cash asset to the transferee. The Kenan doctrine - which applies only obligations to distribute a pecuniary amount - is often confused with subsection 663(a)(1) of the Code, under which an amount distributed by a fiduciary in satisfaction of a gift or bequest of a specific sum of money or specific property is excluded as an amount described in subsection 661(a) (for purposes of the distribution deduction) and subsection 662(a) (for purposes of computing the taxable income of the beneficiary). Some distributions by fiduciaries implicate both Kenan and subsection 663(a)(1). Some distributions implicate only one doctrine or the other, and some implicate neither doctrine. This commentary provides a roadmap for distinguishing the two doctrines and for understanding the interplay between them. The commentary begins by considering Kenan. It then considers several rulings that elaborate on the Kenan principle. The commentary next considers rulings in which both Kenan and subsection 663(a)(1) are implicated. The commentary concludes with an attempt to harmonize the two doctrines.

November 25, 2005 in Articles, Estate Administration, Estate Planning - Generally | Permalink | Comments (0) | TrackBack (0)

Thursday, November 24, 2005

Sex and Precatory Language

Assistant Professor Alyssa A. DiRusso of the Cumberland School of Law has recently authored an article entitled He Says, She Requests: Gender Differences in the Use of Precatory Language in Wills and Trusts.

Here is the abstract of her article as posted on SSRN:

Women and men talk differently. Psychological studies have shown that men and women choose different language to convey meaning: men tend to be more direct and forthright, while women tend to be more subtle and diplomatic. An area in which these gender differences is largely unrealized is in estate planning documents. In wills and trusts, testators and donors may choose to use "precatory language" - words of suggestion or hope that express the wishes of the donor, but are not legally binding. This article explores the impact that precatory language has in an estate plan, why women may be more likely to use precatory language than men, and what implications this has for estate planning attorneys who advise men and women with varying approaches for expressing themselves.

November 24, 2005 in Articles, Estate Planning - Generally, Trusts, Wills | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 23, 2005

Circumventing the Settlor's Intent in Charitable Trusts

Robert E. Atkinson (the Ruden, McClosky, Smith, Schuster & Russell Professor of Law at the Florida State University College of Law) has recently released an interesting paper entitled Low Road to Cy Pres Reform: Principled Practice to Remove Dead Hand Control of Charitable Assets.

Here is the abstract of Prof. Atkinson's article as posted on SSRN:

This paper deals with practical, if unorthodox, means for removing dead hand control of charitable assets: unilateral trustee disregard of dead hand restrictions, collaboration with state attorneys general to remove such restrictions without recourse to judicial action, purchase of control from private parties, and invocation of the power of eminent domain. Although these measures fall far short the general elimination of dead hand control that I have advocated elsewhere, their cumulative effect should be to erode such control, even as they free charitable assets in particular cases.

November 23, 2005 in Articles, Trusts | Permalink | Comments (0) | TrackBack (0)

Artists May Get Tax Break

The Senate has approved a bill which greatly benefits artists.  See Robin Pogrebin, Senate Bill Lets Artists Claim Price for Gifts , NY Times, Nov. 22, 2005:

Living writers, musicians, artists and scholars who donate their work to a museum or other charitable cause would earn a tax deduction based on full fair market value under a bill just passed by the Senate.

Currently such work receives only a deduction based on the cost of materials unless it is donated posthumously by the estates.

The measure was approved as an amendment to a broader $59.6 billion tax relief bill passed by the Senate early Friday. It now goes to a House-Senate conference committee. The House version of the tax relief bill does not include the arts provision * * *

November 23, 2005 in Estate Planning - Generally | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 22, 2005

Breach of Trust and Economics

Peter T. Wendel (Professor of Law, Pepperdine University School of Law), has recently published an article entitled The Evolution of the Law of Trustee's Powers and Third Party Liability for Participating in a Breach of Trust: An Economic Analysis, 35 Seton Hall L. Rev. 971 (2005).

Here is the conclusion of Prof. Wendel's article:

The UTC grants broad powers to each trustee and abolishes the common law broad duty of inquiry. The net effect, vis-a-vis third parties interested in dealing with a trustee, is to turn each trustee into an agent. Having transformed the trustee, the UTC then applies the prevailing standard of liability for third parties interested in dealing with an agent. Third parties are protected as long as they act in good faith. The problem is that the UTC does not give trust beneficiaries the same power and control over the trustee that a principal has over an agent. Courts and juries intuitively recognize the inequity of holding trust beneficiaries responsible for the actions of their trustee when the trust beneficiaries neither select nor control the trustee. Courts and juries will couple hindsight bias with the fact-sensitive good faith standard to apply a de facto strict liability standard to third parties who participate in a breach of trust.

The most efficient way to counter the natural bias courts and juries have in favor of trust beneficiaries is to adopt an actual knowledge standard of liability. It is inequitable, however, to allow third parties who intentionally decide not to investigate suspicious facts to prevail over trust beneficiaries. A good argument can be made that a bad faith standard of liability best balances the competing economic and equitable considerations. Those jurisdictions that are inclined to adopt the UTC should consider revising section 1012 to provide that a third party who deals with a trustee is not liable unless he or she had actual knowledge of the breach or acted in bad faith. Those jurisdictions that are inclined to adopt the most efficient approach should consider Professor Fratcher's actual knowledge standard.

In those jurisdictions where the Uniform Trust Code's good faith standard is adopted, from a law and economics perspective one would predict greater use of trust protectors. A trust protector is a relatively new development, used primarily in offshore asset protection trusts. A trust protector can be given complete control over the trust, including the power to terminate the trust or replace the trustee if he or she deems it appropriate. Inasmuch as the Uniform Trust Code shifts more of the risk of loss to the trust beneficiaries, law and economics would predict settlors of private trusts to respond by increasingly appointing trust protectors to facilitate greater control and supervision over the trustee - thereby facilitating greater precautions on behalf of the trust beneficiaries to offset the increased risks they now bear. Where a trust protector is appointed, however, interesting issues will arise as to the scope of the trust protector's duty to monitor and supervise the trustee. No doubt some trust protectors will charge a fee for their services. In addition, in the event of a breach of trust, trust beneficiaries will sue the trust protector in addition to suing the third party who participated in the breach of trust. The use of trust protectors will only further increase the costs of administration associated with the good faith standard.

Maybe Professor Fratcher was not so wrong after all.

November 22, 2005 in Articles, Trusts | Permalink | Comments (0) | TrackBack (0)

Privity Rules in Nebraska

In her note, Privity, Duty, and Loss: in Swanson v. Ptak, the Nebraska Supreme Court again Endorses Privity in Legal Malpractice Actions, 84 Neb. L. Rev. 369 (2005), Tracy M. Mason discusses the case of Swanson v. Ptak, 268 Neb. 265, 682 N.W.2d 225 (2004).

Here is the conclusion to her article:

Teresa Stanton Collett observes that although "in many jurisdictions only the 'client' has standing to sue for injuries resulting from an attorney's negligence," many "estate planners and elder law specialists regularly counsel individuals who expect the lawyer to consider the interests of others - spouses, children, parents, or other family members." Although these expectations are different from those at issue in Swanson, in which the attorney was not retained by the decedent's family for estate planning purposes, Collett's observation goes to perhaps the best justification for abrogating the privity requirement - the fact that many decedents work from the assumption that the attorney is not just working for them, but for their families. Leota Swanson may not have had a successful claim even if Nebraska's strict privity requirement was eliminated. But in order to provide Nebraskans with the opportunity to have their day in court, the Nebraska Supreme Court should, at the very least, subject the privity requirement to a methodical reconsideration. The potential of an expanded Kurtenbach approach, one which includes a more generous sweep of potential malpractice plaintiffs than merely those with pre-existing attorney-client relationships, is to provide recovery for otherwise innocent plaintiffs who have experienced a loss due to an attorney's negligence, while still maintaining limits on attorney liability to third parties.

November 22, 2005 in Articles, Malpractice | Permalink | Comments (0) | TrackBack (0)

Monday, November 21, 2005

The Standing of a Settlor

A comment by Michael R. Houston (J.D. 2005, Northwestern University School of Law) provides An Answer to the Problem of Settlor Standing in Trust Law? (Estate of Wall v. Commissioner, 101 T.C. 300 (1993)), 99 Nw. U. L. Rev. 1723 (2005).   Here is the conclusion to Mr. Houston's article:

[T]he tax code expresses a preference for outright inter vivos gifts as opposed to transfers that the settlor can control up until the time of death. To take advantage of this preference, settlors often convey gifts by means of an irrevocable trust. This method has the advantage of reducing taxes paid (which benefits settlors and beneficiaries alike), while giving the settlor the ability to specify the terms and conditions governing the trust and trustee. Unfortunately for settlors, the tax code provisions 2036 and 2038 are so far-reaching that even the slightest interference by the settlor after trust creation can negate the desired tax advantages. This, combined with the traditional rule that withholds settlor standing in suits against trustees of irrevocable trusts, leaves the settlor with little recourse in the face of misbehaving or poorly performing trustees.

While commentators have addressed the issue by calling for settlor standing, the courts have indirectly provided an alternate solution by embracing a trustee removal power vested in the settlor. Despite initial IRS objections, the courts are apparently satisfied that in preserving a trustee removal power, settlors retain insufficient control over the trust property to trigger the adverse tax treatment of 2036 or 2038. The decisions in Wall and Vak represent good news for settlors because a comparison of settlor standing and the trustee removal power shows that the latter is likely to be more useful to settlors than standing rights. Compared to settlor standing, retention and exercise of a right to remove the trustee is relatively straightforward.  Moreover, since exercising the right does not require any proof of trustee misconduct, the removal power, as compared with standing, favors the granting of greater trustee discretion, which is an increasingly important component in modern trust management.

Although the decisions in Wall and Vak downplayed the possibility for significant trustee influence by the settlor who retains a trustee replacement power, the opinions struck solid ground in pointing to the ever-present fiduciary duties owed by the trustee to the beneficiaries. These underlying rights give the beneficiaries the ability to enjoin detrimental behavior by the trustee, and their retention keeps the decisions in Wall and Vak well within the confines of traditional trust law. This protection remains even if the trustee were to act at the suggestion of a settlor engaged in active oversight of trust operations. In the end, beneficiaries are not harmed by a retained trustee removal power, and they may in fact benefit as a result of increased trustee monitoring. To the extent that settlor comfort levels rise with their confidence that trust administration will be carried out diligently and efficiently, including adherence to the settlor's specific wishes, beneficiaries should also profit from increased donations via the trust medium. Should settlors ever be found to be abusing their removal power, courts could always insist upon a joint grant of the removal power to both the settlor and the beneficiaries (at least while the settlor is alive). This added layer of protection should inhibit trustee replacements designed to achieve results adverse to the beneficiaries, regardless of whether the actions rise to the level of breaching fiduciary duties.

Given the settlor's desire to minimize taxes while simultaneously maintaining the ability to influence trustee decisions on an on-going basis, Wall and Vak could scarcely have turned out better for the settlor. In short, trustee replacement powers serve the functions that settlor standing would, without (1) adverse tax consequences, (2) the uncertainties and cost of trial, or (3) doing violence to traditional trust law. Welcome to settlor's nirvana.

November 21, 2005 in Articles, Estate Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Sperm Donors' Offspring Connect

A recent report discusses the growing trend of children who are born as a result of artificial insemination to connect with their half-siblings.

See Amy Harmon, Hello, I'm Your Sister. Our Father Is Donor 150, NY Times, Nov. 20, 2005.

The Donor Sibling Registry

assist[s] individuals conceived as a result of sperm, egg or embryo donation who are seeking to make mutually desired contact with others with whom they share genetic ties. This may include:

    1. Their own or their child's half-siblings, or
    2. their own or their child's genetic father or mother,  or
    3. their genetic offspring. (egg, sperm or embryo donors who would be willing to have contact with the children born as a result of their donations are VERY WELCOME!).

Interesting intestate succession issues could arise.  Although most states provide that a sperm donor is not considered as a father, the law is less clear regarding the relationship between the half-siblings.

November 21, 2005 in Estate Planning - Generally, Intestate Succession | Permalink | Comments (0) | TrackBack (0)

Sunday, November 20, 2005

New Illinois Statutes Impacting Estate Planning

In David A. Berek, Three New Illinois Laws Affect Estate-Planning Practice, 93 Ill. B.J. 600 (2005), the author reviews:

  • The Illinois estate tax which was modified to account for property in other states;
  • Changes to limited liability law addressing operating agreements that create one or more series of members; and
  • the Disposition of Remains Act.

November 20, 2005 in Articles, New Legislation | Permalink | Comments (0) | TrackBack (0)

Saturday, November 19, 2005

Robert Blake Found Liable for Wife's Death

A California jury by a 10-2 vote has determined that Robert Blake is civilly liable for the death of his wife which may trigger the California slayer statute.

The jury pondered the issue for eight days and included in its verdict an award of $30 million to the survivors of Bonny Lee.

I assume Blake will appeal.

See Greg Risling, Civil Jury Says Blake Behind Wife's Murder, AP, Nov. 18, 2005.

Special thanks to Prof. Peter Henning of the White Collar Crime Prof Blog for bringing this development to my attention.

November 19, 2005 in Current Events, Estate Planning - Generally | Permalink | Comments (0) | TrackBack (0)