Wills, Trusts & Estates Prof Blog

Structuring Tax-Efficient Trust Decantings After ‘the Guidance’

The article discusses the impact of IRS Chief Counsel Advice Memorandum 202352018 (CCA) on the practice of trust decanting in estate planning. Trust decanting involves transferring assets from one trust to another, but the CCA has caused concern among practitioners due to potential tax consequences.

The CCA highlighted tax issues when modifying a trust, particularly if changes affect beneficial interests. While some feared the CCA signaled the end of irrevocable trust decanting, the article clarifies that the CCA primarily addressed trust modifications that result in "materially different" terms, which can trigger tax consequences, such as gift taxes.

The article outlines key considerations for avoiding tax issues in trust decanting, emphasizing that changes should not alter beneficial interests, as established by the Cottage Savings case. Practitioners must ensure that the appointed trust’s terms are not materially different from the invaded trust’s to avoid taxable events.

The IRS has been studying issues around decanting for over a decade and has not yet issued comprehensive rulings on certain matters. The article advises caution and careful drafting when modifying trusts to prevent unintended tax consequences, such as the loss of generation-skipping transfer (GST) tax exemption or triggering gift taxes. The author suggests timely filing of gift tax returns to limit the IRS's scrutiny window on these transactions.

For more information see Michael Borger "Structuring Tax-Efficient Trust Decantings After ‘the Guidance’" Bloomberg Law, September 3, 2024. 

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

Billionaire's ex-wife makes claim about his pregnant new fiancée

John Paulson, a billionaire hedge fund manager, is embroiled in a legal battle with his estranged wife, Jenny Paulson, who has accused his new fiancée, Alina de Almeida, of orchestrating a plan to gain access to his $5.1 billion fortune. Jenny's legal team claims that Alina's pregnancy is a calculated move to secure financial benefits by expanding the class of beneficiaries to include the child, potentially causing financial harm to the daughters Paulson shares with Jenny. The couple's divorce proceedings began in 2021 after Jenny discovered Paul's relationship with Alina, and tensions have escalated as Paulson has since proposed to Alina.

Jenny's amended complaint argues that the pregnancy violates Domestic Relations Law by allowing a child born outside the marriage to potentially receive distributions from the trust established during their marriage. The complaint also accuses Paulson of violating the law by starting a new family while still legally married, which could create discord between his daughters and any future children. A source close to the case questions whether Paulson and Alina considered the potential financial benefits of having a child out of wedlock during the ongoing divorce.

In response, Paulson's attorney, Marilyn Chinitz, has denied the allegations and accused Jenny of attempting to enrich herself at the expense of her daughters. Chinitz argues that despite Jenny remaining one of the wealthiest women in the world post-divorce, she continues to push for more money out of a sense of humiliation that her daughters might be worth more than her. She asserts that the trusts will ensure the financial security of both Paulson's and Jenny's children for generations and urges Jenny to move on rather than prolong the legal battle.

For more information see Alexa Cimino "Billionaire's ex-wife makes claim about his pregnant new fiancée" Dailymail.com, August 30, 2024.

Special thanks to Laura Galvan (Attorney, San Antonio, Texas) for bringing this article to my attention.  

Estate planning lessons from the $600M fight over Michael Jackson’s music catalog

Michael Jackson's estate has faced ongoing legal challenges and tax disputes since his death in 2009, despite the continued financial success of his music. A significant event occurred in August 2024 when a California court approved the $600 million sale of Jackson’s music catalog, despite objections from his mother, Katherine Jackson, who argued that Michael never wanted his assets sold.

Jackson’s will, signed in 2002, left most of his estate to his children through a trust and granted his executors the authority to sell assets. Katherine Jackson's challenge was dismissed because the court determined that Michael’s will allowed such sales, emphasizing the importance of formally documenting wishes in a will.

The situation underscores the importance of clearly defined wills and the broad powers often granted to executors. It also provides lessons for estate planning, advising that wills should be carefully drafted with an understanding of executor powers. Imposing restrictions on asset sales can create challenges and may not align with future circumstances, as shown in a similar case involving Joseph Pulitzer. Ultimately, estate plans must be formalized in writing and carefully considered to avoid posthumous disputes and unintended consequences.

For more information see The Conversation's "Estate planning lessons from the $600M fight over Michael Jackson’s music catalog" Theconversation.com, August 28, 2024. 

Special thanks to Naomi Cahn (University of Virginia School of Law) for bringing this article to my attention.

Fixing Damaged ILITs (Plus a Checklist to Avoid Problems)

Long-term irrevocable trusts, particularly irrevocable life insurance trusts (ILITs), may need to be restructured or "fixed" due to various reasons such as poor initial design, changes in tax laws, or shifts in the grantor’s financial situation. These trusts, which often have life insurance as their primary asset, face unique challenges like managing Crummey withdrawal rights, generation-skipping transfer tax (GSTT) issues, and adapting to new life insurance policy options. 

One major issue in ILITs is the proper handling of Crummey withdrawal rights, which allow beneficiaries to withdraw gifts made to the trust, thereby qualifying them for the annual gift tax exclusion. If Crummey notice requirements have been neglected, steps can be taken to rectify the situation, such as documenting oral notice or filing a late gift tax return. The courts have ruled that the mere possession of a withdrawal right, even without notice, may be sufficient to qualify as a present interest for tax purposes, which could be leveraged in estate tax audits to argue that notice is not necessary.

Another common problem arises when the life insurance policy within the ILIT is no longer suitable or too expensive. Options to address this include using a tax-deferred exchange under I.R.C. § 1035 to replace the policy without recognizing gain, or establishing a new ILIT with a more appropriate insurance policy if the grantor is still insurable. However, caution is advised when lapsing or canceling a policy with outstanding loans, as this could trigger significant income tax consequences.

Finally, the article presents a detailed checklist for attorneys advising on ILITs, emphasizing the importance of avoiding reciprocal trust issues, ensuring that life insurance policies are owned exclusively by the ILIT trustee, and preventing the three-year rule problem by setting up the trust with a new policy. These steps help ensure that the ILIT functions as intended, providing tax benefits while protecting the assets for the beneficiaries.

For more information see Robert Adler and Michael J Hausman "Fixing Damaged ILITs (Plus a Checklist to Avoid Problems)" ABA Probate & Property July/August 2024 Edition, July 1, 2024. 

Bennett v. Gentile: Maryland Supreme Court Recent Decision

Pauline Bennett, the settlor of a revocable living trust, engaged attorney Thomas Gentile to draft her estate planning documents. Initially, the trust instrument provided for the distribution of her properties, including a specific property, Wissahican, to her daughter Audrey upon her death. Later, due to concerns about Audrey's financial mismanagement, Pauline amended the trust to remove Audrey as a beneficiary and intended to sell Wissahican to fund her care. After Pauline's death, a dispute arose between her daughters, Madelyn and Audrey, over the ownership of Wissahican.

The Circuit Court for Montgomery County ruled that the 2017 trust instrument, which provided Wissahican to Audrey, was still in effect, and thus Audrey was entitled to the property. Madelyn, as the successor trustee, then pursued claims against Gentile for legal malpractice, alleging that his negligent drafting of the 2019 trust instrument caused her to lose Wissahican. The circuit court granted summary judgment in favor of Gentile, holding that the strict privity rule barred Madelyn's claims and that she was not a third-party beneficiary of the attorney-client relationship between Pauline and Gentile.

The Supreme Court of Maryland reviewed the case and affirmed the circuit court's decision. The court held that the strict privity rule, as established in Noble v. Bruce, remains good law, meaning that a third party not in privity with an attorney cannot sue for negligence absent fraud or collusion. The court also concluded that Madelyn did not qualify as a third-party beneficiary because the primary intent of Pauline's engagement with Gentile was to ensure her own financial security and to exclude Audrey, not to benefit Madelyn directly. Therefore, Madelyn's claims against Gentile were barred, and the summary judgment in favor of Gentile was affirmed.

To read the full opinion see "Bennett v. Gentile" Justia, August 12, 2024.

Special thanks to Deborah Matthews (Virginia Estate Planning Attorney) for bringing this article to my attention.

Succession lessons of the Murdochs’ dynastic drama

Rupert Murdoch is attempting to amend his family trust to give his son Lachlan full control over Fox and News Corp, fearing that his more moderate children might challenge Lachlan's leadership. Murdoch believes that Lachlan's conservative approach is crucial for the company's success, even though research shows that appointing a family member as CEO can negatively impact business performance. This move reflects the complexities of dynastic succession, where the founder's desire for continuity may conflict with what's best for the company.

The article also touches on the broader implications of family-run businesses, particularly in politically influential industries like media. With two-thirds of companies globally being family-controlled, how succession is managed can have far-reaching effects beyond corporate governance, potentially influencing the nature of the news and political content these companies produce. The uncertainty surrounding family dynamics makes the outcome of Murdoch's decision unpredictable, despite his hopes for a seamless transition.

For more information see The editorial board, "Succession lessons of the Murdochs’ dynastic drama" The Financial Times, August 2, 2024. 

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

Inheritance on hold? Most Americans don't understand the time and expense of probate

A report titled The State of Probate in America reveals that many Americans are poorly informed about probate. A survey of 1,000 adults showed that over half don't know probate costs, less than half understand inheritance is not automatic, and only 2% know how long it takes to settle an estate, which averages 20 months.

Probate costs range from 3% to 7% of an estate's value. With a significant generational wealth transfer expected as baby boomers age, there is concern that millennials, many of whom are unprepared, will face confusion. Only 58% of millennials have discussed estate planning with older relatives, and 62% lack a will or trust.

Probate varies by state and even within states, complicating the process. Experts recommend creating an estate plan, consulting an attorney if possible, discussing wills with family, and naming beneficiaries to streamline the process. Preparing an estate-planning file with important documents and information can also ease the burden on loved ones.

For more information see Daniel de Visé "Inheritance on hold? Most Americans don't understand the time and expense of probate," USA Today, July 30, 2024. 

Special thanks to Naomi Cahn (University of Virginia School of Law) for bringing this article to my attention.

Rupert Murdoch’s real succession drama − why the future of his media empire could hinge on a legal effort in Nevada

Rupert Murdoch is attempting to alter an irrevocable trust that holds significant ownership in Fox Corp. and News Corp., which impacts various media outlets. Currently, the trust stipulates that upon Murdoch's death, his four oldest children—Lachlan, James, Elisabeth, and Prudence—will equally determine the future of the media empire. Murdoch's efforts, dubbed "Project Harmony," aim to ensure Lachlan remains in control, hoping to prevent familial conflicts. This legal maneuver has been kept secret, with proceedings occurring in a confidential Nevada probate court.

Trusts are estate planning tools that manage and distribute property, often used to minimize taxes, protect assets, and avoid probate. Trustees, who manage the trust's property, are fiduciaries obligated to act in the beneficiaries' best interests. Trusts can prolong a donor's control over their property through appointed trustees.

In Nevada, irrevocable trusts can be modified by court order if all beneficiaries agree, or through "trust decanting" by trustees. Nevada's laws also allow settlors to maintain greater secrecy about trusts, even from beneficiaries. The Murdoch Family Trust's secrecy and location in Nevada align with these protective laws.

The trust dispute stems from Murdoch's 1999 divorce agreement ensuring his children would inherit News Corp. Murdoch's current concern is that equal governance among his children might lead to conflicts, particularly due to differing political views, threatening the company's stability. Although the trust is irrevocable, it allows changes made in good faith for beneficiaries' benefit. Murdoch argues that Lachlan's sole governance would be more profitable for the trust.

A court will decide if Murdoch's proposed changes are in good faith. This case highlights the complexities of trusts in managing family businesses and the challenges of ensuring harmony among heirs.

For more information see "Rupert Murdoch’s real succession drama − why the future of his media empire could hinge on a legal effort in Nevada" The Conversation, July 30, 2024. 

Special thanks to Naomi Cahn (University of Virginia School of Law) for bringing this article to my attention.

Article: The Law of Digital Resurrection

Victoria J. Haneman (Creighton University - School of Law) recently published, The Law of Digital Resurrection, 2024. Provided below is an Abstract:

The digital right to be dead has yet to be recognized as an important legal right. Artificial intelligence, augmented reality, and nanotechnology have progressed to the point that personal data can be used to resurrect the deceased in digital form with appearance, voice, emotion, and memory recreated to allow interaction with a digital app, chat bot, or avatar that may be indistinguishable from that with a living person. Users may now have a completely immersive experience simply by loading the personal data of the deceased into a neural network to create a chatbot that inherits features and idiosyncrasies of the deceased and dynamically learns with increased communication. There is no legal or regulatory landscape against which to estate plan to protect those who would avoid digital resurrection, and few privacy rights for the deceased. This is an intersection of death, technology, and privacy law that has remained relatively ignored until recently. This Article is the first to respect death as an important and distinguishing part of the conversation about regulating digital resurrection. Death has long had a strained relationship with the law, giving rise to dramatically different needs and idiosyncratic legal rules. The law of the dead reflects the careful balance between the power of the state and an individual's wishes, and it may be the only doctrinal space in which we legally protect remembrance. This Article frames the importance of almost half of a millennium of policy undergirding the law of the deceased, and proposes a paradigm focused upon a right of deletion for the deceased over source material (data), rather than testamentary control over the outcome (digital resurrection), with the suggestion that existing protections are likely sufficient to protect against unauthorized commercial resurrections.

Article: Constructive Trusts in Malaysia: A Methodological Reappraisal

Hang Wu Tang (Singapore Management University - School of Law) and Ying Khai Liew (University of Melbourne - Melbourne Law School) recently published, Constructive Trusts in Malaysia: A Methodological Reappraisal, 2024. Provided below is an Abstract:

In recent times, Malaysian courts have resorted to a ritual incantation of unconscionability and the notion of a remedial constructive trust to justify a declaration of a constructive trust. This methodology for approaching constructive trusts is unhelpful and has led the law to develop in an unprincipled and unpredictable fashion. Our central thesis is that the key Malaysian decisions could have been decided based on pre-existing legal principles upon which English and Commonwealth courts have declared a constructive trust. We argue that future courts ought to realign its methodology with the orthodox tradition of incremental development of the law in this area instead of resorting to broad notions of unconscionability and the remedial constructive trust.