Wills, Trusts & Estates Prof Blog

Article: The U.S. Supreme Court In Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income

Beckett Cantley and Geoffrey Dietrich recently published an article entitled, The U.S. Supreme Court In Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article.

As far back as 1929, several states have sought to broaden their tax base by expanding taxation to out-of-state trusts that have in-state beneficiaries, even when the beneficiaries possess only a contingent interest in the trust’s assets. On June 21, 2019, the U.S. Supreme Court confronted the constitutionality of this trust tax practice in North Carolina Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (“Kaestner Trust”). In Kaestner Trust, the Supreme Court issued a narrow decision in favor of the Trust, basing its opinion on a compilation of landmark constitutional law and civil procedure cases. Specifically, the Court ruled that the domicile of a contingent beneficiary on its own does not constitute sufficient “minimum contacts” between a trust and a jurisdiction for tax purposes, and thus the North Carolina statute violated the Due Process Clause of the U.S. Constitution.

Every jurisdiction has its own method of defining the minimum contacts necessary to bring a trust into its taxation orbit. In light of the Court’s decision, other state statutes that impose a fiduciary income tax based on weak connections may face constitutional scrutiny in the near future, including tax regimes containing “throwback” rules, “one-dollar” rules, and testamentary trust residency standards that rely indefinitely on the domicile of a testator. The main purpose of this article is to understand the Kaestner Trust decision, discuss how the impacted states have adjusted, and identify any statutes peripheral to the case that may face constitutional inquiry in the future.

The introduction to this article provides the foundation for understanding state trust taxation regimes and frames the controversy of multi-state taxation. Part II explains the facts within Kaestner Trust and analysis used by the Supreme Court in rendering the North Carolina statute unconstitutional. It also discusses how the North Carolina trust statute has been impacted. Part III identifies the other states, besides North Carolina, directly impacted by the Kaestner Trust decision and how these states have responded to the case. Part IV analyzes how the decision might promote further inquiry into the constitutionality of statutes that lie on the margins of Kaestner Trust. Finally, the article considers estate planning and trust drafting opportunities created by the case and concludes by briefly summarizing the significance of Kaestner Trust.

Anti Trusts, Reforming an Excessively Flexible Legal Tool

Eric A. Kades recently published an article entitled, Anti Trusts, Reforming an Excessively Flexible Legal Tool, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article.

Trusts are one of the most flexible legal tools in lawyers’ arsenals, deployed for socially desirable used ranging from supporting orphans to structuring complex investments. Trusts, however, are also used for a host of socially undesirable purposes, including restraint of trade, cheating creditors, establishing family dynasties akin to feudalism, and avoiding taxes. This negative litany shows that flexibility has a dark side, and these undesirable trust uses have accelerated in the last few decades. Creative lawyers continuously find novel uses for moldable tools like the trust. This article argues that long experience and recent developments teach us that dark eclipses light for private trusts: the costs of undesirable innovations exceed the benefits of desirable ones. Applying a novel normative theory of flexible legal tools, this article calls for fundamental reform of private trust law. With a small exception for financial investments, the current fully flexible private trust should be replaced with a much less flexible device, the Restricted Donative Trust, designed to prevent abusive uses while permitting desirable innovations.

 

Family Education Trusts: Leave a Lasting Legacy For Your Heirs

It is an important—and honorable—objective to provide for the educational needs for your children, grandchildren, and even future generations. One option that can be used to achieve that objective is a 529 plan. A 529 plan can be "a highly effective tool for funding tuition and other educational expenses on a tax-advantaged basis." 

However, after death, there's no guarantee that subsequent plan owners will continue to use it to achieve the objectives of the original owners. One alternative would be to create a family education trust that invests in a 529 plan. 

529 plans allow parents to make substantial, nondeductible constitutions up to and over $400,000 depending on the plan. 529 plans can be used to pay for tuition, books, fees, supplies, equipment, and room and board at most accredited colleges and universities and certain vocational schools. 529 plans may also be used to pay up to $10,000 per year per student for elementary and secondary school tuition.

Owner's can also have control over "the timing of distributions, can change beneficiaries from one family member to another and can roll the funds over into another state's plan tax-free." 

Given the disadvantages of 529 plans, like the inability to invest assets other than cash, it could be beneficial to establish a family education trust to hold one or more 529 plans. 

See David T. Riedel, Family Education Trusts: Leave a Lasting Legacy For Your Heirs, Adler, Pollock, & Sheehan P.C., September 7, 2021. 

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

What Celebrities Who Have Died Without A Will Have Taught Us

Over the last few years, there has been an influx of athletes, musicians, and other celebrities who have died without an effective estate plan. The news stories covering the family battles over these estates, although entertaining, can be quite terrifying. 

Whether you are a famous celebrity or an "regular" person, here are some good reasons to complete an estate plan and avoid dying testate. 

1. It will be easier for family members to help you in a crisis 
2. It saves family members from playing detective
3. It can save you—and your family members—time and money
4. It can ensure that your assets are disposed of the way YOU choose
5. It can help minimize, or even eliminate, certain taxes 

"A good estate plan is a lot like flood insurance—if you don't have it when you need it, it's too late. . ."

See Cheryl A. Jones, Esquire, What Celebrities Who Have Died Without a Will Have Taught Us , Pessin Katz Law Firm, August 25, 2021. 

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

Article: Choice of Law for Cross-Border Trust Disputes in Japan: The Case for Adopting the Hague Trusts Convention

Ying Khai Liew recently published an article entitled, Choice of Law for Cross-Border Trust Disputes in Japan: The Case for Adopting the Hague Trusts Convention, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article:

This paper argues that cross-border trust disputes cannot adequately be dealt with using the existing choice of law rules in Japan, because pigeonholing trusts within any of those established choice of law categories distorts a proper understanding of trusts law and disappoints the autonomy and legitimate expectations of parties. Ultimately, this paper suggests that serious consideration ought to be given to adopting the Convention and the dedicated trusts choice of law rules it provides.

Charitable lead trusts do good while reducing estate taxes

Charitable lead trusts can be used as a wealth transfer technique to avoid estate taxes while also working "especially well in a low-interest rate environment. . ." 

Charitable lead trusts are typically implemented after your will, powers of attorney, and health care directives have been taken care of. Charitable lead trusts are often set up during your lifetime (inter vivos), but do not have to be and is a separate, standalone trust. 

Here is an example of how a charitable lead trust may work: 

Assume we have a couple with some extra money who want to benefit a charity. . .

The couple has an attorney draft a Charitable Lead Trust (CLT). The terms of the trust say that, for the lifetime of the couple (or the surviving spouse), the CLT will annually pay 5% of the trust to a qualified charity.

At the death of the surviving spouse, the money left in trust will go to (presumably) the couple’s children.

Because of the way it is set up, it is referred to as a “split-interest” gift where a portion of the gift to the trust goes to charity and a portion will ultimately go to the children.

Where do interest rates come in? The current interest rate is used to actuarially determine the amount of the gift going to the children, which the parents will use to file a gift tax return.

Of course, with limited exception, there is not actual tax assessed on a gift like that, it is just mandatory to report gifts that size to the Internal Revenue Service.

In low interest rate environments like the one we are currently in, "the calculated amount going to the children will appear to be lower, but the actual amount could be much higher, depending on the performance of the assets in the trust." 

For more information and examples of charitable lead trusts, 

See Beau Ruff (Guest Contributor), Charitable lead trusts do good while reducing estate taxes, Tri-Cities Area: Journal of Business, August 2021. 

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

NEVADA TRUSTS: SAFEGUARDING PERSONAL WEALTH

David A. Diamond, President of The Northern Trust Company of Delaware and Adviser to The Northern Trust Company of Nevada has provided wealth management tips regarding Nevada Trusts in a paper titled, Nevada Trusts: Safeguarding Personal Wealth (2021). Provided below is an Introduction to the Paper:

Many families and their advisers have found the State of Nevada to be a trust- friendly jurisdiction that promotes modern laws and enjoys attractive income tax advantages. This paper highlights the most significant legal and tax benefits for Nevada residents and nonresidents alike, and their professional advisers, who may be considering whether to establish a trust in Nevada.

The Northern Trust Institute brings the breadth and depth of the firm to address the increasingly complex and sophisticated wealth management needs of our clients and their advisers. Informed by the latest insights and continually vetted through feedback, our advice is grounded in real-world outcomes and backed by proven credibility.

We believe you will find this information helpful as you work to create meaningful legacies.

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

Article: Impossibility Results about Inheritance and Order of Death

Due Wang recently published an article entitled, Impossibility Results about Inheritance and Order of Death, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article:

If several relatives died with no will, the order of their deaths could affect the inheritance result. When the order of death is unknown, there are three approaches to determine the inheritance result: apply an inheritance method that is not affected by the order of death; artificially assign the order of death; regulate that persons with unknown orders do not inherit each other. The last approach is adopted by the current French Civil Code (denoted as the French Approach). We prove that under some basic requirements, the French Approach is the only valid solution to the order of death problem. Therefore, we propose that every country should adopt the French Approach. In the appendix, we study the existence and uniqueness of inheritance methods that are invariant for different orders of death and only violate one requirement, such as gender equality.

Wife’s Fraudulent Transfer Claim Against Husband For Transferring Business Interests To Trust Failed Due To The Statute Of Repose

In Austin v. Mitchell, "a wife filed suit alleging her ex-husband fraudulently transferred a portion of his limited partnership interest in a family limited partnership to a trust for the benefit of his children." No. 05-19-01359-CV, 2021 Tex. App. LEXIS 4536 (Tex. App.—Dallas June 8, 2021, no pet. history). 

The trial court granted summary judgment in favor of the husband and the wife appealed. The court of appeals first addressed the husband's statute of repose defense. The wife claimed that the husband's transfer was fraudulent because it was made:

without fair consideration and the husband was left insolvent as a result; with actual intent to hinder, delay, or defraud the wife; or without receiving reasonably equivalent value at a time when the husband believed or should have believed his debt to the wife was beyond his ability to pay as payments became due.

The court affirmed the summary judgment after it found that the evidence showed that the wife should have known of the transfer more than four years before the suit due to the husband's testimony in a deposition, in which the Wife's attorney was present. 

Although the wife argued that she had standing, the court disagreed stating that the wife did not have sufficient connection to the trust. 

See David Fowler Johnson, Wife’s Fraudulent Transfer Claim Against Husband For Transferring Business Interests To Trust Failed Due To The Statute Of Repose, Texas Fiduciary Litigator: The Intersection of Texas Courts and the Fiduciary Field, June 29, 2021. 

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

Allen Weisselberg resigned from the top of the Trump Organization. So who’s running the company now?

"Allen Weisselberg—the Trump Organization's most powerful employee not named 'Trump'—resigned his post in the company's leadership." 

Weisselberg was one of two trustees at the trust that owns and controls Trump's company. Weisselberg resigned from Trump's company as well as "dozens of others at Trump subsidiaries" after he was charged with running a tax-fraud scheme inside the company. 

Although Weisselberg gave up his post as trustee, he still works at the company. The company is currently facing a slew of financial and legal problems. 

Due to Weisselberg's resignation and the other problems the Company is facing, there are some things that may be changing. As of now, Donald Trump Jr. is the most powerful officer of the Company. 

The Trump Organization is controlled by the Donald J. Trump Revocable Trust—"a legal entity to which Trump transferred his hundreds of companies when he took office in 2017." 

Trump's business was originally run by a trust so that he could "relinquish management" in order to avoid conflicts of interest as president. Although it is not clear why, Trump never changed the arrangement after leaving the White House. 

As it turns out, Trump never really gave up his power considering he used a revocable trust to hold his business assets. 

It will be interesting to see how the power shifts due to the problems the Company has endured and continues to face. 

See David A. Fahrenthold, Josh Dawsey, & Jonathan O'Connell, Allen Weisselberg resigned from the top of the Trump Organization. So who’s running the company now?, Washington Post, July 21, 2021. 

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