Horribly Annoying Music; Supreme Court Justice Felix Frankfurter

In restaurants, waiting rooms, dentist offices, airports, grocery stores, phone-hold, ad nauseam, we are bombarded persistently with music and television content, not of our own choosing.  This is akin to someone forcing a book or other reading material three inches away from our face with the admonition “READ THIS”.

U. S. Supreme Court Justice Felix Frankfurter and I would have likely agreed fully with one another. While reading a recent The New Yorker magazine, my wife ran across a short comment about Justice Frankfurter having recused [removed] himself from the following 1952 case.  Click here for a link to the supreme court opinion in Public Utilities Comm’n v. Pollak, 343 U.S. 451 (1952).

What triggered my interest was Justice Frankfurter’s spot-on reaction to this 1952 case, that I include further below. This 1952 anecdote also gives me pause (without my further comment) to ponder where Supreme Court justices (and potential justices) fall now in 2018 as to the notion that a Supreme Court justice lays aside private views in discharging his or her judicial function.

The issue in this 1952 Supreme Court case dealt with some Washington DC public transportation passengers who asserted their constitutional rights were violated by having to listen to streetcar, bus, and railway piped-in music, announcements and advertisements. This content consisted generally of 90% music, 5% announcements, and 5% commercial advertising. The Supreme Court did not side with these constitutional objections.

And, Justice Frankfurter had such a strong reaction (and opposition) to this forced audio content, that he recused himself from the case with the following comment (which is in the published Supreme Court opinion) [I added the underlining below]:

Justice Frankfurter:

The judicial process demands that a judge move within the framework of relevant legal rules and the covenanted modes of thought for ascertaining them. He must think dispassionately and submerge private feeling on every aspect of a case. There is a good deal of shallow talk that the judicial robe does not change the man within it. It does. The fact is that, on the whole, judges do lay aside private views in discharging their judicial functions. This is achieved through training, professional habits, self-discipline and that fortunate alchemy by which men are loyal to the obligation with which they are entrusted. But it is also true that reason cannot control the subconscious influence of feelings of which it is unaware. When there is ground for believing that such unconscious feelings may operate in the ultimate judgment, or may not unfairly lead others to believe they are operating, judges recuse themselves. They do not sit in judgment. They do this for a variety of reasons. The guiding consideration is that the administration of justice should reasonably appear to be disinterested, as well as be so in fact.

 

This case for me presents such a situation. My feelings are so strongly engaged as a victim of the practice in controversy that I had better not participate in judicial judgment upon it. I am explicit as to the reason for my nonparticipation in this case because I have for some time been of the view that it is desirable to state why one takes himself out of a case.

 

Asset Protection Trust Planning for Divorce (a Nevada Win)

Here is a link to my recent publication in Steve Leimberg’s Asset Protection Planning Email Newsletter – Archive Message #358 (dated February 15, 2018), titled “Augmenting the 2017 Nevada Trust Win in Klabacka“.   Klabacka is the name of a 2017 Nevada Supreme Court opinion. You are welcome to pass along a digital or hard copy of my Leimberg piece to any other readers.

I suggest in this piece the possible  use of a prenuptial (or in some cases postnuptial) agreement in conjunction with self-settled asset protection trusts, as a way to protect each spouse’s respective property in the event of divorce.

But, because from time to time I also assist divorce lawyers with attacking and finding  chinks in the defensive armor of a divorcing spouse’s trust, this Klabacka piece also provides a backdrop highlighting the importance in any protective trust planning situation of crossing each “t” and dotting each “i”.  The devil in the details most often is the tipping-point difference in whether defensive trust planning succeeds, or fails.

As I state in this Klabacka piece, some lawyers — with too much overconfidence — cut corners in their trust planning process, especially failing to give sufficient attention to long-arm jurisdiction exposure when (and if) the trust becomes the target of litigious attack.

 

 

Divorce: Attacking a Spouse’s Unilateral Trust

One spouse creates a trust during marriage. A divorce later arises. Can the trust be excluded for alimony and equitable division purposes? Here is my recent newsletter centering on a recent June 2017 Gibson Georgia Supreme Court opinion that addresses a spouse’s $3.2 million funding of two trusts without the other spouse’s knowledge.  My newsletter was published yesterday by Leimberg Information Services. You may reprint and distribute my newsletter to other readers. Click here for this newsletter.  Also, click here for more information about Leimberg Information Services.

Winner of the 2016 Heckerling Institute on Estate Planning Tax Court Opinion Writing Contest

 

This blog post is about my recent winning entry in the 2016 Heckerling Institute on Estate Planning Tax Court Opinion writing contest. This is a contest Richard Covey (who is with the New York law firm Carter, Ledyard & Milburn, LLP and a founding member of Heckerling) presented to the Heckerling participants.

This contest centered on an extremely interesting, and now in my evolving view, broadly relevant, estate tax planning question dealing with the QTIP marital deduction.

More particularly, this QTIP question is good food for thought for a broad number of married couples, especially whose net worth hovers around the combined (current) $10.9 million federal exemption value.   For this blog post I am not making a recommendation one way or the other about whether clients apply this QTIP planning.

I include the following two links for readers who wish to delve further into this QTIP question and my hypothetical Tax Court Opinion in response to the contest.

The first link is yesterday’s newsletter in the Leimberg Information Services newsletter service. Click here for a link to the newsletter.

Click this second link here for my contest Tax Court opinion.

You are welcome, and I have no objection, to anyone forwarding or printing this blog post and these two links for other readers.  Also email me if you have any thoughts or comments that further shed light on this QTIP question.  Here also is the link to the Leimberg Information Services website.

 

 

 

 

 

Deja Vu. The 1974 NIXON Subpoena.

Regardless of one’s choice in this 2016 presidential election, last night’s debate took me back to my days at Emory Law School in Atlanta.  In my first-year constitutional law course. The U.S. Supreme Court opinion in United States v. Nixon, 418 U.S. 683 (1974).

I include some more details at the end of this post about this Nixon case.  But, essentially it dealt with President Richard Nixon’s objection to complying with a subpoena for his release of information during the Watergate investigation.

This case made a lasting impression on me in that first-year law school class.  I have thought about it many times over the years in response to U.S. and world news, particularly involving political conflict.  I thought about it again last night.

The key point that struck me many years ago is the question our constitutional law professor raised.

That is, “What would have happened to the balance of our three-branch democratic government if President Nixon had disregarded the federal District Court order that he turn over the information subject to the subpoena?”

Keep in mind the subpoena had been served on Nixon by his own executive branch. The U.S. District Court is the judicial branch.

We will never know this answer.  To the tremendous (constitutional) benefit of our country, Nixon chose to comply with the federal court order and turn over the subpoenaed information.

Here is some more background information about this Nixon case. In short, in 1974 federal special prosecutor Leon Jaworski obtained a subpoena from the Justice Department ordering President Richard Nixon to turn over certain tapes related to the Watergate investigation.  Nixon was still in office at this time. Nixon objected and asked the U.S. District Court in D.C. to quash the subpoena.

As an interesting aside, the news media at that time reported that President Nixon’s attorney, in arguing to the District Court against against the subpoena, stated:

“The President wants me to argue that he is as powerful a monarch as Louis XIV, only four years at a time, and is not subject to the processes of any court in the land except the court of impeachment.”  

[excerpt from Trachtman, Michael G. (2007). The Supremes’ Greatest Hits: The 34 Supreme Court Cases That Most Directly Affect Your Life. Sterling. p. 131. ISBN 978-1-4027-4107-4.]

 

 

Borderline Incapacity; A Family’s Greatest Estate Planning Threat

Ponder, for a moment, who is the winner in this kind of litigation?

A family not willing to plan for incapacity may later find itself hemorrhaging from substantial legal fees and litigation costs.  I see nasty disputes arise when a family member becomes incapacitated, often the problem is Dad in his second marriage. I also remain steadfast with my belief that incapacity, especially borderline incapacity, is the greatest threat we all face in the context of our estate planning.

Here also is a difficult question. That is, who do we trust and who will we designate as the person or persons who will step into our shoes for overseeing our affairs and property if we become incapacitated?

These names (your agents under a power of attorney, trustees, executor) must be trustworthy, self-starters, financially well-versed, and non-procrastinators. Using your own family members is fine. But, you still need to consider these characteristics.

Here are some additional key comments:

  • The term “conservator” typically refers to an entity or individual appointed by a court to manage and oversee an incapacitated person’s property. By contrast, a “guardian” is an individual appointed by the court to oversee an incapacitated person’s emotional and physical well-being, care, education, health, and welfare.
  • But, the goal is to have documents in place now (often revocable living trusts) for the management and oversight of your property to stave off getting a court involved in the event of your incapacity.
  • This means you must now have sufficient written documents as part of your estate planning that help defend against a court stepping-in and mandating a conservatorship or guardianship on your behalf.
  • The lawyer assisting you with this defensive planning must know the relevant procedural, evidentiary, declaratory judgment, and other important court / litigation rules so as best to block a court from becoming the arbiter in determining your incapacity.
  • Absent this planning, a Georgia court (my law office is in Atlanta) overseeing the fray as to a person’s possible incapacity is required to conduct a court proceeding (e.g., a trial) to determine whether incapacity exists. The litmus test is whether the person lacks sufficient capacity to make or communicate significant responsible decisions about the management of his or her property.
  • And, here is the kicker. If the court concludes there is incapacity, the court is not bound to name a family member as the conservator or guardian of the incapacitated person. Instead, the court has the power to name any conservator or guardian the court concludes is in the best interest of the incapacitated person. This might end up being the local county administrator or some other entity or person completely outside the family circle.
  • As to a court’s power to choose, click here merely as an example of a Georgia case where the son, whose mother was found to be incapacitated by the court, lost in his effort to be named by the court as his mother’s conservator. This case is In re Hodgman, 269 Ga. App. 34, 602 S.E.2d 925 (2004). The local county administrator was appointed by the court as the conservator. The son unsuccessfully argued that his having already been named as agent by his mother in her financial power of attorney and in her health care directive supported a conclusion that the court was bound to name the son as the conservator.

I have no personal knowledge of the following Georgia case that I include here as an example of what you hope to avoid. Click here. This case is In re Copelan, 250 Ga. App. 856, 553 S.E.2d 278 (2001), and illustrates what appears to have been a very expensive, time-consuming, painful ordeal for the family and for the mother who ultimately prevailed against her children seeking to have her deemed incapacitated.  Note there was a jury trial at the superior court level that the mother lost; she then successfully obtained a reversal of the jury verdict on appeal.  My guess is the angst and litigation expenses for these family members were substantial.

Finally, the court in this Copelan opinion pointed out that one of the sons had left a voice-mail message with another sibling threatening their mother with “embarrassment” in the community and referring to a lawyer who was ” ‘chomping at the bit’ to take the case.”

Divorce and Asset Protection Trusts

This post is not new news.   But, I had occasion a couple days ago to refer to the Delaware case below in my lawyering work.   I believe it provides some discussion points that many clients and practitioners may find important.  I purposely do not add my views or suggestions about these points.   They speak for themselves, at least to the extent of  being check-list items for asset protection planning.

This 2014 Delaware trust opinion involves a Delaware irrevocable dynasty trust created by a divorcing husband’s father, and including the husband’s sale to the Delaware trust of the son’s business, etc.  The sale was structured as a defective income tax sale [a BDIT sale for you tax readers].  The husband also is a beneficiary of the Delaware trust.

In the next sentence I include a link to a pdf copy of this 2014 Delaware Court of Chancery opinion in IMO Daniel Kloiber Dynasty Trust u/a/d December  20, 2002 C.A. No. 9685-VCL (August 1, 2014).   Click Delaware Case re Kloiber for a copy of the opinion.

At the time of this 2014 Delaware opinion the husband and wife were in the midst of a contested divorce in Kentucky. With the above trust purposely having been designed to exist only under Delaware law, during the course of the Kentucky divorce the husband — without success — asked this Delaware court for a restraining order to prevent his divorcing wife from pulling the Delaware trust into the Kentucky divorce arena.

The Delaware court’s comments I refer to below are in support of the court denying the husband’s request for the temporary restraining order. The Delaware court, therefore, did not have a judicial need actually to answer these jurisdictional questions. Rather the Delaware court’s Kentucky v. Delaware jurisdictional commentary helped the court support its denial of the restraining order request.

I make only the following three points for purposes of this blog post:

One is the Delaware court’s raising of the question that the husband as seller of his business to the Delaware trust is possibly deemed merely a third-party rather than a trust beneficiary (as to the sale). Accordingly, this sale to the trust and the husband as seller are possibly not matters limited to or bound by Delaware trust law.

Two is the Delaware court’s discussion about the wife’s claims against the trust (in the Kentucky divorce) possibly not being subject to or bound by Delaware trust law.  The Delaware court stated that the wife — at the time of the pending Kentucky divorce — was no longer a beneficiary of the Delaware trust because of the trust’s definition of a spouse, etc. The trust includes a “moving definition” of spouse that applied to cut this wife out as a trust beneficiary once she and her husband separated at the time of the divorce action. Therefore, the Delaware court suggested the wife arguably is merely a third-party not bound by Delaware trust law, who can assert her claims against the trust in the Kentucky divorce proceeding.

Three is the Delaware Court’s apparent, broad embracing of the constitutional Full Faith and Credit Clause in relation to the Kentucky divorce action and the wife’s fraudulent transfer claims against her husband in the Kentucky court.

Finally, I make clear here that I am not licensed as a lawyer in Delaware and, as with all my blog posts, my above comments are not legal or tax advice that a reader may rely on, particularly under Delaware law.

 

 

$$$ Costly Tax Return Errors

The U.S. Tax Court published its first 2016 memorandum opinion that illustrates very well the costly result of improper tax return compliance, as well as the downside of representing yourself in Tax Court.  This is Gemberle v. Commissioner, T.C. Memo 2016-1 (January 4, 2016). Click here for the Tax Court web link to the pdf court opinion and type Gemberle in the “Case Name Keyword” box.

In short, the taxpayers deducted a conservation easement charitable deduction on their 2007 income tax return (with a carryover portion of the deduction on the 2008 return), but failed to attach to their returns a copy of the written appraisal supporting the easement value.  The tax law expressly mandates that a written appraisal must be attached to the tax return.  The court opinion gives you the specific Internal Revenue Code references, etc.   The taxpayers in this case did obtain a written appraisal for the easement value prior to filing their tax returns.  But again, they simply failed to include it with the tax returns. The IRS denied the easement deduction.

The taxpayers, representing themselves, took this charitable deduction issue to court before the United States Tax Court.  As to an important trial procedural error, the taxpayers did not make their appraiser available at the trial, thus preventing the IRS from cross-examining the appraiser, etc.  In response to this unavailability of the appraiser, the Tax Court did not allow the written report as evidence in the trial.

The Tax Court denied the easement charitable deduction in its entirety;  the court also imposed a 20% penalty for failure to include the appraisal with the tax return; and the court applied a 40% gross valuation penalty.  [Again, the tax law references to these penalties are fully discussed in the court opinion.]  My guess also is the taxpayers expended a great deal of time, worry, and money in this failed effort.

Bottom line.  Get good, effective help if you need it for tax issues and litigation.   This simply is an appropriate cost-benefit consideration.

 

 

 

 

 

Family Business in a Trust; the 3.8% Medicare Investment Tax

Here is the situation for this blog post. John Doe dies. John was the patriarch of his family’s 40-year operating business. John worked full-time, actively in the business.   The business operates as a pass-through LLC entity for tax reporting purposes. While John was alive the LLC’s net income was not subject to the 3.8% Medicare investment tax.   This is because John actively participated in the business.

Now, this example takes a different turn:

At John Doe’s death he leaves the family business to his wife Jane. John’s two adult sons work full-time in the family business.   Jane does not work in the business.

Following John’s death the 3.8% investment tax will now likely apply to the LLC’s net income. This can be a financial surprise to this Doe family where there was no 3.8% investment tax while John was alive, but the costly 3.8% tax surfaces after John’s death.

This example brings up three important points:

One. This 3.8% investment tax planning should be on the front-burner of your estate planner’s To-Do list in view of the early 2014 U.S. Tax Court opinion in Frank Aragona Trust v. Commissioner, 142 T.C. No. 9 (3/27/14).  Click here for a copy of this opinion.

[Keep in mind this Aragona case deals with whether business losses in a trust situation are passive activity losses that have to be suspended for later tax return recognition.  But, the relevance of Aragona to the 3.8% investment tax is the similar question of whether the ownership of a business is a passive activity triggering the 3.8% tax.]

Two. There are planning opportunities that can help avoid this 3.8% investment tax. This gets into the purposeful design of a surviving spouse trust for Jane that will hold the family business interest after John’s death, and the related design of the trustee designations.

Three. This is one of dozens of examples where income tax planning must now be a priority for one’s estate planning.

Estate Taxes: Gay Married Couples Finally Get a Level Playing Field

For many years I have advised gay clients to include a marital deduction provision in their core estate planning documents in the event the law were to develop to the point of allowing this deduction for gay married couples.  That time is now approaching with much greater clarity and momentum,

A recent June 6 Order of a New York federal District Court in a case filed by gay widow Edith Windsor granted Ms. Windsor’s claim for a federal estate tax refund of $350,000.  This is the estate tax Ms. Windsor’s late wife’s estate paid as a result of the IRS denying the estate’s marital deduction.  Here is the June 6, 2012 federal District Court Order.

This estate tax deferral benefit of the federal marital deduction has been available to married heterosexual couples under federal tax law (and under most state laws) since the 1948 enactment of the marital deduction.  The federal marital deduction is currently within Section 2056 of the Internal Revenue Code.  

The widespread and typical use of this marital deduction has enabled heterosexual married couples to delay the burden of costly estate tax until the death of the second spouse, regardless of the size of the first-to-die spouse’s estate.

At issue was DOMA (the federal Defense of Marriage Act) and whether DOMA prevented the marital deduction in Ms. Windsor’s situation by not recognizing Edith Windsor and her late wife’s marriage under Canadian law. 

What makes this Edith Windsor case particularly compelling is that the U.S. Department of Justice last year expressly refused to enforce DOMA, thus, correspondingly, advancing no objection to the marital deduction in this Windsor case.  

In response to the DOJ’s refusal to enforce DOMA, the Bipartisan Legal Advisory Group of the U.S. House of Representatives (“BLAG”) intervened in Ms. Windsor’s case so as to defend the constitutionality of DOMA and, also correspondingly, deny the estate’s marital deduction.

As set forth in the above District Court Order, the District Court concluded DOMA is unconstitutional as applied to Ms. Windsor, thus resulting in the inability of the IRS (and BLAG) to deny the marital deduction for Ms. Windsor’s wife’s estate.

For additional reading, here is the legal brief Edith Windsor’s lawyers filed on her behalf. This is very well written and worth the time to read.  Note that Ms. Windsor was represented by a top-notch New York law firm Paul, Weiss, Rifkind, Wharton & Garrison, along with the ACLU and the New York Civil Liberties Union Foundation.

The above development further highlights the importance of gay couples continuing to include marital deduction planning in their estate planning documents so as to seek and obtain the benefit of this estate tax deferral.

Ashley Alderman, a lawyer in our Atlanta office, assisted me with this post.  Click here for her law firm bio.