Wills, Trusts & Estates Prof Blog

Imagine Canada Becoming a Tax Haven for Americans

Democrats are eyeing the presidency with an abundance of candidates for the next election, and if they are successful, it appears that the well-off will be paying more in taxes. Though the type of taxes that will be increased is not yet settled, the idea is getting wide-spread approval across the country among the nation's other income brackets.

Avoidance efforts are sure to increase, and the possibility of the most invasive method may seem more and more promising - leaving the country. France had a tax similar to the proposed tax by Representative Alexandria Ocasio-Cortez, but even more extreme. While Ocasio-Cortez wants to place a 70% tax rate on those that make more than $10 million a year, France imposed a "supertax" of 75% rate for citizens making more than 1 million euros per year. The tax only lasted for two years, and during that time many prominent, wealthy individuals moved to Belgium, and French corporations did not attract senior managers.

The potential tax increase in America may not produce a similar exodus of millionaires, because quite simply, America is not France. We have many important epicenters of the technology industry, the finance industry and others. And unlike Europe, there is not an abundance of thriving countries nearby. If the wealthy do decide to leave, their only option may be Canada, where the majority of the population speaks English and the top income rate is 33%: despite some Americans thinking Canada is a quasi-socialist economy thanks to its single-payer health-care system, it’s not actually a high-tax country.

See Noah Smith, Imagine Canada Becoming a Tax Haven for Americans, Financial Advisor, February 13, 2019.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.

Article on 'Chameleon-Hued Words': A Note on Discretionary Trusts

Mark Leeming published an Article entitled, 'Chameleon-Hued Words': A Note on Discretionary Trusts, Wills, Trusts, and Estates Law eJournal (2015). Provided below is an abstract of the Article.

This note seeks to identify some recurring misunderstandings and sources of imprecision in legal analysis involving trusts and, more particularly, discretionary trusts. It directs attention to the facts that the trust is a relationship, not a legal person, that the trustee will be personally liable although ordinarily with a right to recourse to trust assets, and that the term “discretionary trust” is descriptive, rather than normative, and is often used in quite different senses.

Eleventh Circuit: Florida Real Estate Law Prevented Collection of Federal Estate Taxes

In 1940, The Supreme Court held that “when the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement.” The Eleventh Circuit court was tasked recently with defining the relationship between that ruling and Florida statute § 95.231.

The statute allows a defective deed to be cured after five years. Such a deed was executed in Florida in 1998 when a father attempted to transfer property to a trust for the benefit of his son. After the father’s death in 2005, the United States imposed a series of liens on the property in an attempt to assess estate taxes.

Was the statute "putting a time limit upon enforcement" or was the defective deed effectively cured in 2003, 5 years after the execution of the deed? The middle Florida court held that the statute did not create good title because the deficiency was not among the technical defects within the statute’s scope. The Eleventh Circuit reversed, finding that the statute was “not a traditional statute of limitation but . . . a curative act with a limitation provision.”

See Lindsey Catlett, Eleventh Circuit: Florida Real Estate Law Prevented Collection of Federal Estate Taxes, Balch, February 18, 2019.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.

Article on Recalibrating Cy Pres Settlements to Restore the Equilibrium

Michael J. Slobom recently published an Article entitled, Recalibrating Cy Pres Settlements to Restore the Equilibrium, 123 Dickinson L. Rev. 281-306 (2018). Provided below is an abstract of the Article.

Class action settlement funds become “non-distributable” when class members fail to claim their share of the settlement or the cost of distribution exceeds the value of individual claims. Before 1974, parties had two options for disposing of non-distributable funds: escheatment to the state or reversion to the defendant. Both options undermine unique objectives of the class action—namely, compensating small individual harms and deterring misconduct.

To balance the undermining effects of escheatment and reversion, courts incorporated the charitable trust doctrine of cy pres into the class action settlements context. Cy pres distributions direct non-distributable settlement funds to charities whose work aligns “as near as possible” with the interests of the class. The class thus receives an indirect benefit from the distribution that it would not have received through escheatment or reversion.

Federal courts have struggled to delineate requirements for cy pres settlements, and as a result, inconsistent approaches to the issue have emerged. This Comment examines those inconsistencies in light of the theory behind the doctrine’s importation into the class action context. It argues that the inconsistent approaches to cy pres settlements reflect unspoken judicial preferences for one of the two class action objectives that cy pres preserves.

This Comment begins by examining the history and modern principles of cy pres settlements. Next, it explores four federal circuit courts’ approaches to cy pres settlements and considers how each approach reflects the respective court’s preference for one class action objective over the other. This Comment then argues that courts should recalibrate their methods of assessing cy pres settlements to account for the theory behind the doctrine’s importation into the class action settlements context. Finally, it proposes a framework for assessing cy pres settlements that accounts for that theory.

United States Supreme Court to Consider Whether States May Tax Trusts Based on Residence of Beneficiary

The numerous changes in the tax law has caused many to alter their planning schemes, especially when it comes to those that have to pay state income taxes. Eleven states also currently tax trust beneficiaries based on their state of domicile. A number of practitioners believe that this policy violates the Due Process Clause of the United States Constitution, and the Supreme Court has decided to settle the issue.

In North Carolina Department of Revenue, Petitioner v. The Kimberley Rice Kaestner 1992 Family Trust, the state's Supreme Court held that the trust “did not have sufficient minimum contacts with the State of North Carolina to satisfy due process requirements….” Therefore, the state could not tax the trust solely because of the residency status of the beneficiary.

The facts of the case may make the decision of the Court quite narrow. The trust was not required to make distributions to its beneficiaries and in fact did not make distributions to the beneficiaries residing in North Carolina during the years at issue. The trustees were not located in North Carolina, the trust records were not kept in North Carolina and the trust’s financial advisors and assets were also outside of North Carolina.

See Margot Summers Edwards, United States Supreme Court to Consider Whether States May Tax Trusts Based on Residence of Beneficiary, Lexology, February 25, 2019.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.

Man's Radioactive Remains Spread Radiation all Over Cremation Chamber

A man passed away in Arizona from tumors two days after doctors had attempted to treat him with an infusion of a radioactive drug. Without the doctors' knowledge, five days later the man was cremated and the crematorium was unaware of the usage of the drug. Following an investigation of the crematorium and the employee who handled the man's remains, researchers found radioactive material left on the crematory equipment, including the "oven, vacuum filter and bone crusher."

A sample of the crematorium worker's urine also turned up trace amounts of radiation. It is not believed that the employee had contact with a dangerous dose of radiation, but it calls into question the way crematoriums handle the remains of those that may contain radioactive material.

The good news is, the researchers wrote, that lutetium 177 (the radioactive element in the injection) has a short range and short half-life. That means that any dangerous effects wouldn't have spread far or lasted very long.

See Rafi Letzter, Man's Radioactive Remains Spread Radiation all Over Cremation Chamber, Fox News, February 26, 2019.

 

Article on Good Estate Planning Process: A Panacea for Litigation

R. Kevin Spencer recently published an Article entitled, Good Estate Planning Process: A Panacea for Litigation, 11 Tex. Tech Est. Plan. Com. Prop. L.J. 137-150 (2018). Provided below is the introduction to the Article.

Every estate litigator must contend with an estate planner, but not every estate planner must contend with an estate litigator. Most doctors, if they practice long enough, assume that will sued at some point, i.e., their work product will be questioned or challenged. While estate planner cannot be sued by a beneficiary in Texas for their estate planning work due to lack of privity, most estate planners believe their work product will someday be contested; but it does not have to happen. The job of an estate litigator is to search for evidence proving the invalidity of a Will, based upon lack of testamentary capacity and undue influence. A failure of formalities and solemnities or "forgery or other fraud" are additional grounds for invalidity. Unlike fire inspectors, who must search for the origin pf a fire. estate litigators know a Will originates with the scrivener. This article reveals some of the secrets of estate litigators and suggests the diligence needed for estate planners to avoid them, such as the importance of documenting their work, and preparing to defend their work product. The quality of the process determines the quality of the product; a Will contest necessarily includes attacking the process. Much to the chagrin of estate litigators, this article arms estate planners with information and knowledge to avoid the attack. Some of the information may seem elementary to good estate planners, but, unfortunately, these errors occur time and time again. The development of a quality estate planning process will improve the product for the client and help to avoid scrutiny of the estate planner's work product in a Will contest.

This Man Won't go into a Nursing Home. He'll Spend His 'Golden Age' at the Holiday Inn

Terry Robinson has done the math and figured out a unique retirement strategy: staying at the hotel chain Holiday Inn will be cheaper than a nursing home. With the benefits of complimentary toiletries, a swimming pool, workout room, free breakfast and happy hour, topped off with the long-term stay and senior discounts, Robinson said that he will be saving $128 per day compared to the average nursing home.

The chain has more than 1,100 locations, so he would still have the opportunity to travel if he so desired. While the waiting list for a nursing home could be months long, a reservation could be made today for a Holiday Inn. 

Robinson said with a $5 tip per day the employees will be treating him like a customer rather than a patient. And, the staff will "call an ambulance . . . Or the undertaker" if anything goes wrong. There also will not be an issue with family visiting and even staying for a couple days. "The grandkids can use the pool."

See Kristin Lam, This Man Won't go into a Nursing Home. He'll Spend His 'Golden Age' at the Holiday Inn, USA Today, February 26, 2019.

Special thanks to Naomi Cahn (Harold H. Greene Professor of Law, George Washington University School of Law) for bringing this article to my attention.

Tax the Rich? Here’s How to Do It (Sensibly)

Politicians on both sides of the aisle agree that the tax system is in dire need of repair. The argument is how to do it so that it is equitable and fair. Some want to fix it so that it generates more revenue; others want to use it as a tool to decrease the wealth inequality. Are those appropriate goals? Is there any surprise that the public distrusts taxes so much?

Democratic presidential candidates are suggesting numerous ways to increase the tax rates of the wealthy. Other Democrats are proposing headline grabbing ideas, such as Ms. Ocasio-Cortez’s Green New Deal. But there may be other ways to patch up the system without completely tearing it down.

High net-worth Americans legally skirt the estate tax, even before the exemption increase brought by the Tax Cuts and Jobs Act. One major avenue is by passing much of their riches to their heirs without paying taxes on capital gains - ever. According to the Center on Budget and Policy Priorities this accounts for “as much as about 55 percent for estates worth more than $100 million,” using this stepped-up basis. Closing this loophole would raise more than $650 billion over a decade, estimates the Congressional Budget Committee. 

Capital gains are taxed much less than income taxes. Warren Buffett says his secretary pays a higher tax rate than he does as the rate for capital gains top out at 20%, while a person making a $40,000 salary would be taxed at 22%. 

See Andrew Ross Sorkin, Tax the Rich? Here’s How to Do It (Sensibly), New York Times, February 25, 2019.

Special thanks to Matthew Bogin, (Esq., Bogin Law) for bringing this memorandum to my attention.

Trusts Remain Out of Favour with Wealthy Families [UK]

In the United Kingdom, advisors warn that wealthy families are steering away from trusts due to increased tax rates and concerns about privacy. The number of trusts that are being utilized has fallen for the third year in a row according to the latest statistics from HM Revenue & Customs. The total income reported in respect of trusts and estates also fell, down £500m or 17 per cent to £2.4bn in 2016-17.

Not only has the image of trusts been damaged by high-profile tax scandals, but the introduction a trust registry in 2017 has caused many clients to worry about privacy. A trust’s income and gains are also now taxed at the highest rates, added Kay Ingram, chartered financial planner at LEBC.

There may still be advantages to trusts concerning the inheritance tax (IHT), as the wealth within a trust is separated from an individual's personal wealth. Therefore assets within a trust are not liable to the 40% inheritance tax rate, as well as avoiding the increasing probate fees in the country. 

The government is currently consulting on how the trusts regime can be reformed to be simpler, fairer and more transparent. The consulting period ends February 28. 

See Emma Agyemang, Trusts Remain Out of Favour with Wealthy Families, Financial Times, February 15, 2019.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.