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.
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.
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.]
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.”
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.
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.
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.
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.
If I were placing bets I would bet on the U.S. Supreme Court upholding the Affordable Care Act and its individual mandate. Two thoughts:
One. Keep in mind this current situation is deja vu as to the racial civil rights issues the U.S. Supreme Court dealt with in the 1960s. For example, in a 1964 U.S. Supreme case originating out of Atlanta, called the Heart of Atlanta Motel, Inc. v. United States, the issue was whether the Atlanta motel could be forced by law to allow blacks as guests in its motel. Here is the Supreme Court opinion. The motel argued the Commerce Clause did not apply in a manner that, in the motel’s view, resulted in “involuntary servitude” requiring the motel to rent rooms to customers not of its choosing.
The Supreme Court did not accept the Atlanta motel’s argument and held that “the Civil Rights Act of 1964 is a valid exercise of Congress’ power under the Commerce Clause as applied to a place of public accommodation serving interstate travelers.”
Here is an excerpt from the Heart of Atlanta Motel Supreme Court opinion referring to the motel’s argument. Note the motel’s attempt to use the notion of liberty in its argument:
[The motel argues it] is deprived of the right to choose its customers and operate its business as it wishes, resulting in a taking of its liberty and property without due process of law and a taking of its property without just compensation; and, finally, that, by requiring appellant to rent available rooms to Negroes against its will, Congress is subjecting it to involuntary servitude in contravention of the Thirteenth Amendment.
Two. I heard yesterday on the PBS Washington Week show an excellent analogy. That is, when a person goes to buy a car and decides not to make the purchase, the person ends up with no car and no one else otherwise bears the cost providing a car to this person. Thus, arguably in this example commerce is not affected from a constitutional law perspective.
However, by contrast, a person without health insurance who enters a hospital will most likely still obtain the medical services regardless of the absence of insurance. The fallout here — different from the car example above — is that other individuals who do have health insurance are adversely affected in that their health care costs and premiums will reflect increases taking into account these uninsured individuals.
This 2012 presidential race highlights typical overwrought overstatements about constitutional law and United States Supreme Court opinions; in particular, an example is the recent Supreme Court opinion in Hosanna-Tabor Evangelical Lutheran Church and School v. E.E.O.C. dealing with a longstanding doctrine called the ministerial exception. Here is my earlier October 21, 2011 blog post about this case.
Keep in mind this Hosanna-Tabor case stems from the Lutheran school having terminated one of its teachers after she was diagnosed with narcolepsy. The issue was whether the fired employee could sue her employer (the Lutheran school) under the Americans with Disabilities Act. In other words, under the ministerial exception the Lutheran school asserted (now, successfully) it is not subject to the Americans with Disabilities Act.
This was not a case where there was an issue about the fired employee’s religious beliefs being in conflict with the Lutheran church or the teacher having personal or lifestyle issues contrary to Lutheran doctrine.
As background, the ministerial exception is a judicial doctrine that has existed since around 1985. This doctrine gives religious institutions the freedom to choose their spiritual leaders not subject otherwise to employment discrimination laws (for example, a Catholic parish that does not hire women as priests or when Baptist churches do not hire gays as preachers, etc.).
Two points, in my view, about this case:
One, contrary to the overwrought overstatement by recent commentators (including, particularly, some talk-show radio hosts), the government (the current administration) in this Hosanna-Tabor case was not trying to gut and end in its entirety the ministerial exception with the result that religious institutions would no longer be able to choose their leaders, clergy, etc. Here is a copy of the government’s Brief.
Two, in my view the Supreme Court failed to narrow adequately this ministerial exception so that it applies only in employment situations centering more closely on a religious institution’s particular religious doctrine. By contrast, firing an employee on the basis of a health problem otherwise subject to the Americans with Disabilities Act is an over-application of this exception.
Below, by the way, is the specific holding by the Supreme Court in its recent Hosanna-Tabor opinion:
Today the Court holds only that the ministerial exception bars an employment discrimination suit brought on behalf of a minister, challenging her church’s decision to fire her. The Court expresses no view on whether the exception bars other types of suits.
Here is a copy of the U.S. Supreme Court opinion.