Despite Divorce Decree that Provided Ex-Wife “Would Have No Claim Against [Decedent’s] Estate”, Tennessee Court of Appeals Upheld Validity of Ex-Wife’s Claim

The decedent’s ex-wife filed a claim against the estate to collect unpaid benefits awarded to her in their divorce.  The divorce decree entered into by the decedent and his ex-wife on October 30, 1990, provided that the ex-wife would receive 30% of the decedent’s “net monthly [Tennessee Valley Authority (“TVA”) Financed Pension.”  The divorce decree also provided that the ex-wife would “have no claim against the estate of [the decedent] and all payment stops at [the decedent’s] death.”

After the divorce, the ex-wife began receiving monthly payments of $210 in order to satisfy the judgment.  By 2006, the decedent’s TVA included a pension benefit and a supplemental pension benefit, totaling $2062.10, 30% of which was $618, but the ex-wife continued to receive only $210.

The decedent died on May 3, 2015, and the ex-wife timely filed her claim against the decedent’s estate on June 15, 2015. The parties agreed that the ten year statute of limitations barred recovery of amounts due before May 2005.

The Court interpreted the language of the divorce decree, finding that the ex-wife had no claim to survivor benefits, but that she did have the right to recover her pro rata share of the benefits that accrued prior to the decedent’s death.

Further, the divorce decree provided that the pension benefits portion of the divorce decree was intended to be a qualified domestic relations order (“QDRO”).  But, the divorce decree was not approved by the plan administrator as a QDRO.  The Court indicated that had the divorce decree been approved, the appropriate payments would have been made directly to the ex-wife and the current controversy would not have arisen.

In re Estate of Milford Cleo Todd, No. W2018-01088-COA-R3-CV. Filed Mar. 5, 2019.

Advertisements

Executrix Who Did Not Pay Estate Taxes Had No Standing to Pursue Federal Claim

Federal tax reimbursement statutes allow an estate to seek reimbursement from a trust for any estate tax that “has been paid” because of inclusion of that trust in the gross estate. Internal Revenue Code §§ 2207, 2207A, 2207B.  Because the estate did not pay any amount of the taxes on the trusts that were included in the gross estate, the executrix had no federal claim against the trusts.

Manley v. DeVazier, No. 17-2718 (8th Cir. Feb. 25, 2019) (unpub. op.).

New Bill Would Strip NCAA Tax-Exempt Status for Failure to Allow Students to Profit from Image Rights

The Student-Athlete Equity Act, introduced on March 14, would disqualify a “qualified amateur sports organization,” such as the NCAA, from receiving tax exempt status if such organization “substantially restricts” an athlete’s use or profit from his own name, image or likeness.

But, according to Jeremy Sheff, the director of the intellectual property law center at St. John’s University, the 34-word addition to the tax code proposed in the bill is unclear.  For example, the bill doesn’t address certain complex issues, such as the various state laws governing student athletes’ rights of publicity that could create a barrier to compliance.

Perine, Keith. NCAA Tax Status Tied to Athletes’ Image Rights Under New Bill. Bloomberg Law. March 15, 2019.

IRS Reminds Taxpayers to take Required Minimum Distributions

Yesterday, the IRS issued IR-2019-29, reminding taxpayers that, in most cases, Monday, April 1, 2019, is the date by which persons who turned age 70½ during 2018 (born July 1, 1947, to June 30, 1948) must begin receiving payments from Individual Retirement Accounts (IRAs) and workplace retirement plans.

The payments, called required minimum distributions (RMDs), are normally made by the end of the year. Those persons who reached age 70½ during 2018 are covered by a special rule, however, that allows first-year recipients of these payments to wait until as late as April 1, 2019, to get the first of their RMDs.  The second RMD, however, must still be taken by Dec. 31, 2019.

The required distribution rules apply to owners of traditional, Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

Tax Time Guide: Seniors who turned 70½ last year must start receiving retirement plan payments by April 1. IR-2019-29.  https://www.irs.gov/newsroom/tax-time-guide-seniors-who-turned-70-and-a-half-last-year-must-start-receiving-retirement-plan-payments-by-april-1

Victim’s Attorneys’ Fees Are Deductible under Code § 162(q)

Code § 162(q), new under the Tax Cuts and Jobs Act, provides that:

(q) Payments related to sexual harassment and sexual abuse. No deduction shall be allowed under this chapter for—

(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or

(2) attorney’s fees related to such a settlement or payment.

The IRS has released some much needed guidance on interpreting Code § 162(q).  It is now clear that the attorneys’ fees of the victim remain deductible, regardless of whether there is a non-disclosure agreement as part of the settlement.

IRS guidance is still needed on whether 162(q) applies to a settlement with a non-disclosure agreement that settles multiple claims of employment discrimination or other employment-law claims, only one of which is related to sexual harassment or sexual abuse, and whether “related to” denies a deduction for the entire settlement, or whether the attorneys’ fees, and lack of deduction, is apportioned.

It is also unclear whether the IRS will consider payments made pursuant to a confidential agreement that does not settle sexual harassment claims but which contains a broad waiver of claims, including for sexual harassment, as “related to sexual harassment” and thus, preclude the deduction for attorneys’ fees.

2 Employment Discrimination Law and Litigation § 18.15.50

January 2019 update to Human Resources Guide § 5:57.70

Meaning of “Equivalent Value” under Code § 675(4)(C): Proceed Cautiously with Promissory Notes

Pursuant to Code § 675(4)(C), the grantor shall be treated as the owner of any portion of a trust in which the grantor has the power to reacquire the trust corpus by substituting other property of equivalent value.

A fact-based inquiry is necessary in order to determine whether a  promissory note substituted for hard assets is a substitution for equivalent value.  In Thomas Benson v. Robert Rosenthal, No. 15-782, 2016 WL 2855456 (E.D. La. 2016), the court found that there was a substitution of assets of equivalent value when the promissory note was secured by security interests in assets and bore a market rate of interest exceeding the applicable federal rate.  In In re Matter of Condiotti, No. 14CA0969 (Col. App. July 9, 2015 unpublished opinion), the court found that promissory notes that bore interest at the applicable federal rate were not of equivalent value to the assets in the grantor trust.

Likely, the willing buyer-willing seller fair market value standard is the proper valuation standard for proffered promissory notes rather than interest at the applicable federal rate.

LISI Estate Planning Newsletter #2707 (March 4, 2019) at http://www.leimbergservices.com   Copyright 2019 L. Paul Hood, Jr.

Another Amicus Brief Filed in Kaestner Case

The American College of Trust and Estate Counsel filed an amicus brief with SCOTUS in North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, but did so without supporting either party.  Instead, the Counsel explained the “nature of trusts, the taxation of trusts under federal and state law and due process jurisprudence that may affect the taxation of trusts.”

American College of Trust and Estate Counsel Files Brief in Trust Tax Case. Tax Notes: Federal and State Headlines. Mar. 4, 2019.

Law Professors Submit Brief in Support of North Carolina Department of Revenue

Law professors have submitted an amicus brief to SCOTUS in support of the North Carolina Department of Revenue with regards to North Carolina Dep’t of Revenue v. Kaestner Family Trust (“Kaestner”).  The question presented in Kaestner is whether the Due Process Clause prohibits a state from taxing the income of a trust based on a trust beneficiary’s in-state residency.

The law professors make the following arguments in favor of taxation by the state in which a trust beneficiary resides:

(1) The history of trusts shows that the trust was developed to preserve property for a beneficiary;

(2) Key attributes of modern trusts, including that (a) a trust cannot exist without a beneficiary, (b) only the beneficiary holds a beneficial property interest in the trust corpus, (c) a trustee’s obligation is to advance the beneficiary’s interests, and (d) a trust is not a separate legal entity, but a relationship created for a beneficiary; and

(3) The contacts that a trust’s beneficiary makes with a state cannot be disregarded in determining jurisdiction to tax income on a trust.

The law professors argue that because a beneficiary is and always has been the central constituent of a trust, a beneficiary’s residency in a taxing state necessarily creates a significant relationship between the taxing state and the trust income that is the object of the tax.

Law Professors Submit Brief to U.S. Supreme Court Supporting North Carolina DOR. Tax Notes: State Tax Today, Trusts and Estates Taxation. Feb. 28, 2019.

How much is that Choupette in the Window?

Karl Lagerfeld, the former Chanel and Fendi creative director, died last week in France at age 85 leaving behind not only a beloved Birman cat named Choupette, but an estimated $200 million estate.  Unfortunately for Choupette, a cat, not even a Birman cat, can inherit property directly.

Remember that here, as in France, pets are considered property under the law, and therefore must be provided for in a trust document rather than as the recipient of an outright bequest. A gift of property (money) to property (a pet) is void under the law.  Even Choupette’s 300,000 plus Instagram followers can’t confer legal personhood on a cat.  [Not nearly as many followers as Nashville’s Doug the Pug’s 3.6 million, but I digress.]

In fact, although the Nonhuman Rights Group worked tirelessly to bestow “legal personhood” on Tommy the chimpanzee, on May 8, 2018, the New York Court of Appeals denied the Nonhuman Rights Group permission to appeal in its quest to find a judge who agreed “that chimpanzees are autonomous, self-aware, highly intelligent, emotionally complex beings who fit the definition of a ‘person’.”  Animals are property, not people, and a simple way for individuals to provide for them is by including an Animal Trust in their estate plan.

Tennessee law provides that an individual (the “settlor”) may create an Animal Trust to take effect during the settlor’s lifetime and/or a testamentary trust to take effect on the settlor’s death. An Animal Trust may only be created to benefit animals that are alive during the settlor’s lifetime, which may include animals in gestation but not yet born. The terms of the Trust may be enforced by a Trust Advisor or Trust Protector named in the trust instrument, or, if no such person is named, by an individual appointed by the court having jurisdiction over such Trust.

An Animal Trust may be as detailed as the pet owner desires, or it may leave decisions to the discretion of a named caregiver. For example, the settlor may wish to provide instructions regarding veterinary care and end-of-life decisions, or attach as an exhibit to the Trust a particular pet’s medications, dietary concerns, daily habits, pet insurance, and contact information for the pet’s regular care providers, including a veterinarian or dog walker.

Additionally, Tennessee Code Annotated Section 35-15-408(c) provides that to the extent the court determines that the value of the trust property exceeds the amount required for the intended use, it must pass as otherwise provided in the trust document, or if there is no such provision, to the settlor’s successors in interest. Although Leona Helmsley left $12 million in trust for her dog Trouble, the court decreased this amount to $2 million and the remaining $10 million passed to a trust for the benefit of various charities.  So, chances are, Choupette isn’t getting the entire $200 million estate.

Kassam, Sony, Lagerfeld’s Cat Won’t Get Her Paws on His Fortune.  France Will.  Bloomberg Daily Tax. Feb. 27, 2019.

Devisees Personally Liable for Unpaid Estate Taxes

If an imposed federal estate tax is not paid when due, a transferee, surviving tenant, or a beneficiary, who receives, or has on the date of the decedent’s death, property included in the decendent’s gross estate under sections 2034 through 2042, is personally liable for the estate tax.  In order to establish liability under § 6324(a)(2), the government must prove: (1) the estate tax was not paid when due and (2) the transferee, surviving tenant, or beneficiary received property included in the gross estate under §§ 2034 to 2042.

Estate tax returns must be filed within 9 months of the decedent’s death.  Here, the estate tax return was not filed until eight years after the decedent’s date of death.

Further, it is undisputed that the defendants were transferees, surviving tenants, or beneficiaries who had property on the date of the decedent’s death or received property as a result of the decedent’s death.

Here, the Court found that the devisees were liable for unpaid federal estate tax, penalties, and interest under 26 USC § 6324(a)(2).  It is undisputed that the estate’s federal estate tax was not paid when due and each defendant received property includible in the gross estate.

United States v. Ringling, No. 4:17-CV-04006-KES (D.S.D. Feb. 21, 2019).

Case: Devisees Personally Liable for Unpaid Estate Taxes (D.S.D.) (IRC §6324), Bloomberg Law Daily Tax Report. Feb. 25, 2019.