In the April and October 2012 issues of Trusts & Estates, I wrote articles, “The State of the States,” which provided an overview of some new state developments related to estate planning. Although we now have some permanence at the federal level, there continues to be considerable state activity on a number of trust and estate-related fronts since those articles appeared. With numerous legislative proposals swirling and new technologies leaving the law struggling to catch up, which proposals survived and how are we poised for the future?
Here’s an update on some key planning developments across the country, through Oct. 21, 2013.
Children Conceived After Death
With sophisticated storage techniques for genetic material and advances in medical technology, a child can be conceived after the death of one or both of the child’s genetic parents, leaving state legislatures hard pressed to keep up with an area in which the technology has fast outpaced the law. If a child is born after the death of a cancer victim or military officer, whose genetic material was stored before death, how should that child be treated for inheritance, intestacy and other purposes?
Intestacy statutes drafted long before the new technologies could even have been contemplated are often unclear in this context. At its heart, the fundamental issue revolves around balancing the interests of the children born of these new technologies and the interests of existing beneficiaries in certainty and finality, so that estates aren’t open indefinitely or closed prematurely. To strike a balance, some states have responded by enacting or introducing statutes that require an individual to consent to the use of stored genetic material after death and impose time limits within which a child must be conceived or born after death. To date, 18 states have enacted statutes explicitly dealing with posthumously conceived children.1 Of those, nine have enacted a version of the Uniform Parentage Act, which provides, in essence, that an individual who dies before placement of stored genetic material isn’t a parent of a resulting child, unless the individual consented to be a parent if the assisted reproduction occurred after death.2 In addition to requiring an individual to consent to the use of genetic material after death, other states impose time limits. Those time limits typically range from requiring birth within one year to four years after death. Here’s the latest legislative activity:
Connecticut. This state enacted legislation, effective Oct. 1, 2013, that provides certain inheritance rights to a child conceived and born after the death of one of his married parents.3 To qualify for those rights, the law requires a written document, signed and dated by both parents, specifically authorizing the surviving spouse to use the genetic material of the deceased spouse to posthumously conceive a child, who must be in utero within one year of death. Posthumously conceived children who qualify will receive the same rights as provided to children born in a parent’s lifetime after a parent’s will was executed or, in intestacy, will be included among the children who are entitled to inherit under state law. The new law includes posthumously conceived children in the definitions of “issue,” “children” and related terms in wills and trust instruments executed before, on or after the effective date, unless a contrary intent is indicated.
Maryland. This state enacted a statute in 2012 pursuant to which the definition of “child” for the purposes of estates and trusts includes a posthumously conceived child of an individual with stored genetic material if that individual consented in writing: (1) to the use of the genetic material for posthumous conception, and (2) to be the parent of a child posthumously conceived using that genetic material. On May 16, 2013, Governor Martin O’Malley signed an amendment into law,4 effective June 1, 2013, to impose a third requirement: that a posthumously conceived child be born within two years of death. These three requirements had already been enacted in 2012 with respect to a posthumously conceived child’s entitlement in intestacy, effecting consistency in that regard. The law applies only to children of individuals who die on or after Oct. 1, 2012.
Nebraska. On Jan. 11, 2013, this legislature introduced a proposal to allow relatives of a decedent “conceived” before death, but born thereafter, to inherit under certain specific circumstances.5 The decedent must have left written consent for issue posthumously conceived “via artificial insemination by husband” to inherit as if born during the decedent’s lifetime, and the issue must, in fact, be born within three years of death. This bill is pending.
New York. On May 21, 2013, the legislature introduced a proposal to clarify the circumstances under which a child born after the death of a genetic parent would be considered a child of that parent.6 Four requirements would have to be satisfied:
• In a written instrument signed not more than seven years before death, the genetic parent must:
(1) expressly consent to the use of the genetic material for posthumous reproduction, and (2) authorize a person to make decisions about the use of the genetic material after death;
• The person authorized in the writing must give notice to the personal representative of the genetic parent’s estate within seven months of the issuance of letters;
• The authorized person must record the writing in Surrogate’s Court within seven months of death; and
• The genetic child must be in utero with 24 months or born within 33 months of the genetic parent’s death.
If these four requirements are met, the child would be considered a distributee of the genetic parent and a child of the genetic parent for purposes of gifts to children, issue, descendants and similar classes in instruments of the genetic parent or of others. With regard to dispositive instruments in which the genetic parent wasn’t the creator, the provision is to be effective prospectively only. This bill is pending.
North Carolina. This state enacted legislation on June 26, 2013, which took effect immediately.7 The new law modernizes the way children born out of wedlock are referred to by removing references to “illegitimate” and “bastardy,” and allows a child born out of wedlock to inherit from a person who died prior to or within one year after birth, if paternity can be established by DNA testing.
As digitization in our modern world explodes, the ownership, transfer and disposition of digital assets present unprecedented challenges. Family members can face many hurdles in unlocking a decedent’s digital information, which can include social media, email and other personal and financial accounts. Practical obstacles include retrieving confidential user IDs and passwords. Establishing rights to access that information is complicated by Terms of Service (TOS) agreements with individual providers (which are typically entered into by clicking “I agree” on account opening). The TOS agreements usually govern what happens to an account on the owner’s death and can provide that all rights to the account cease on death and all data will be deleted. Heart-wrenching headlines have highlighted tragic stories of parents whose children have committed suicide or been killed and whose desperate attempts to access the social media sites of their children have been denied. Executors can face additional challenges in marshalling assets—indeed even discovering assets—the information about which is digitally stored.
Last year, only five states—Connecticut, Idaho, Indiana, Oklahoma and Rhode Island—had legislation regarding digital assets. Now, that number is up to seven, with Nevada and Virginia enacting statutes this year. The statutes in Connecticut and Rhode Island are limited in scope, dealing only with an executor’s ability to access a decedent’s email accounts. The other statutes have a broader reach. As technologies continue to evolve and the definition of “digital assets” takes on meanings not contemplated at the time laws were developed, the statutory scope becomes increasingly important. The Uniform Law Commission (ULC) is currently working on a draft uniform law entitled “Fiduciary Access to Digital Assets Act.” That proposal includes a comprehensive definition of digital assets to include all forms of electronic information. It provides for access and control over digital property by fiduciaries including personal representatives, trustees, conservators or agents acting under a power of attorney. On the request of a fiduciary with authority over digital property for access, ownership or a copy of that property, the custodian must provide the requested access, ownership or copy within 60 days. Custodians are granted immunity from taking any action in compliance with the statute.
Given the continued proliferation of digital assets and the need to come to grips with another area in which technology has fast outpaced the law, it’s likely that this topic will continue to receive attention. Once the uniform law is finalized, it will provide a prototype from which other states can base new statutory guidance. In the meantime, here’s the latest legislative activity:
Maryland. On Jan. 11, 2013, the legislature introduced a bill authorizing a personal representative to take control of or terminate a decedent’s social networking, microblogging and email accounts.8 That bill died but has been pre-filed for introduction in the new legislative session.
Michigan. On April 10, 2013, the legislature introduced a bill authorizing a personal representative to take control of or terminate a decedent’s social networking, microblogging and email accounts.10 That bill is pending.
Nebraska. On Jan. 10, 2013, the legislature introduced a bill authorizing a personal representative to take control of or terminate a decedent’s social networking, microblogging and email accounts.11 That bill is pending.
Nevada. This state enacted legislation, effective Oct. 1, 2013. The new law authorizes a personal representative to terminate any Internet account of a decedent, including social network, microblogging and email accounts.12
New Hampshire. On Jan. 3, 2013, the legislature introduced a bill authorizing a personal representative to take control of or terminate a decedent’s social networking, microblogging and email accounts.13 That bill died.
New Jersey. In May and June 2012, the Senate and Assembly introduced identical bills authorizing a personal representative to take control of or terminate a decedent’s social networking, microblogging and email accounts.14 Those bills are pending.
New York. The legislature has introduced three sets of bills.15 Two of them cover an executor’s ability to access social networking and email accounts. The third, introduced on April 17, 2013, is based on a version of the ULC’s Fiduciary Access to Digital Assets Act. These bills are pending.
North Carolina. The legislature introduced a proposal to enable a personal representative to access, take control of or terminate a decedent’s digital assets, defined broadly to include digital files, as they currently exist or may exist as technology develops, and digital accounts, including email, financial and personal accounts. The digital proposal was struck before the larger bill was enacted on June 12, 2013.16
North Dakota. On Jan. 21, 2013, the legislature introduced a bill authorizing a personal representative to take control of or terminate a decedent’s social networking, microblogging and email accounts.17 The bill died.
Oregon. On Jan. 14, 2013, the legislature introduced a proposal to enable a personal representative to access, take control of or terminate a decedent’s digital assets, defined broadly to include all property stored in a digital format and digital accounts, including email, social network and financial management accounts. The bill died.18
Virginia. The impetus for the passage of digital asset legislation in Virginia was the high profile case of Eric Rash, a 15-year-old who committed suicide. Desperate for answers, his parents turned to Facebook for clues, but they were denied access to their son’s account due to privacy policies. The new legislation, which became effective July 1, 2013, allows the personal representative of a deceased minor to assume the minor’s TOS agreement with an Internet provider for the purpose of obtaining access to the contents of the minor’s account. The legislation only applies to deceased minors and encompasses email, blogging and social networking accounts, but excludes financial accounts.19 Another proposal introduced by the legislature on Jan. 7, 2013, which would have given a personal representative access generally to a decedent’s social networking and microblogging websites and email accounts, died.20
Service provider initiatives. In response to the difficulties associated with accessing a decedent’s digital accounts, some providers have started offering account management services. For example, Google launched their “Inactive Account Manager” program in April 2013, which allows the account owner to decide what happens to data after the account has been inactive for a period of time specified by the owner. The owner can determine whether to delete the account data or share some or all of it with one or more trusted contacts.
California, Connecticut, Delaware, District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington currently permit same-sex marriages. Civil unions or domestic partnerships are allowed in Colorado, Hawaii, Illinois, New Jersey, Nevada, Oregon and Wisconsin. Challenges to the prohibition on same-sex marriage are pending in other jurisdictions.21
On June 26, 2013, in United States v Windsor,22 the U.S. Supreme Court held that Section 3 of the Defense of Marriage Act—which denies federal recognition of same-sex marriages—was unconstitutional. On Aug. 29, the Treasury Department and Internal Revenue Service announced that, in response to the Windsor decision, they’ll take a place-of-celebration approach, recognizing all legally married same-sex couples regardless of where the couple resides.23
In light of these landmark developments, there’s been a flurry of state-level activity, including the following:
Arizona. On Oct. 11, 2013, this state’s Department of Revenue announced that, because the Arizona constitution defines marriage as the union of one man and one woman, same-sex spouses are required to file separate state returns as single or head of household.24 The Department has created a new form, Schedule S, to allocate the income of same-sex couples filing a joint federal return between them for state purposes.
California. In Hollingsworth v. Perry,25 decided June 26, 2013, the Supreme Court ruled that opponents of same-sex marriage lacked standing to appeal a lower court determination that overturned Proposition 8, California’s same-sex marriage ban. Same-sex marriages, which had been permitted for several months before the passage of Proposition 8, resumed on June 28, 2013.
Colorado. This state enacted legislation, effective May 1, 2013, recognizing same-sex civil unions.26 Same-sex marriage is prohibited under the state constitution.
Delaware. This state enacted legislation, effective July 1, 2013, recognizing same-sex marriage.27
Hawaii. This state introduced legislation on Jan. 24, 2013 recognizing same-sex marriage.28 The legislation failed to pass before the legislative recess on May 3, 2013, but Gov. Neil Abercrombie has called for a special legislative session on Oct. 28, 2013, to address the issue. This state, which currently recognizes same-sex unions, also enacted legislation to clarify that a decedent who was in a civil union computes the state transfer taxes as if the civil union was recognized as a marriage under the Internal Revenue Code.29 The legislation is effective for individuals dying after Dec. 31, 2012.
Idaho. This state’s Tax Commission issued a Release on Oct. 4, 2013 to announce that, because Idaho law doesn’t recognize same-sex marriages, same-sex married couples who file joint federal returns must recompute their federal taxable income, as if they had used single or head-of-household filing status.30
Illinois. This state introduced legislation on Jan. 9, 2013 to recognize same-sex marriage.31 The bill didn’t pass before the legislative recess.
Kansas. This state’s Department of Revenue issued a Notice on Oct. 4, 2013 to clarify that individuals of the same sex must file separate single or head-of-household Kansas tax returns, because Kansas only recognizes marriages between one woman and one man. The department will provide a worksheet for allocating the amount of income reported on the federal return to each individual.32
Louisiana. This state’s Department of Revenue issued a Revenue Information Bulletin on Sept. 13, 2013 to clarify that married same-sex couples who filed a joint federal return must file separate single or head-of-household Louisiana tax returns, because same-sex marriage is in direct contravention to Louisiana’s constitution.33
Maine. This state approved same-sex marriage by referendum vote and enacted legislation permitting same-sex marriage, effective Dec. 29, 2013.34
Maryland. This state approved same-sex marriage by referendum vote and enacted legislation permitting same-sex marriage, effective Jan. 1, 2013.35
Michigan. This state introduced a bill on July 18, 2013, to recognize as valid marriages between two individuals entered into outside Michigan that are valid under the laws of the jurisdiction where the marriage was performed.36 The bill is pending. This state’s Department of Treasury issued a Notice on Sept. 19, 2013 to clarify that married same-sex couples who file a joint federal return must continue to file Michigan returns using single or head-of-household filing status, because the constitution defines marriage as the union of one man and one woman.37
Minnesota. This state enacted legislation, effective Aug. 1, 2013, recognizing same-sex marriage.38 This state’s Department of Revenue issued Notices this year to clarify that Minnesota will treat all married couples the same for tax purposes, including income, gift and estate taxes.39 Specifically, income tax returns must be filed using the same filing status as federal returns.
New Jersey. This state introduced a bill on June 27, 2013 to recognize as valid same-sex marriages entered into outside of New Jersey that are valid under the laws of the jurisdiction where the marriage was performed. The bill is pending.40 By order dated Oct. 11, 2013, New Jersey’s Supreme Court agreed to hear an appeal, with first briefs due Nov. 4, 2013 and oral argument scheduled for Jan. 6-7, 2014.
In the meantime, on Sept. 27, 2013, a New Jersey judge ruled that same-sex couples must be allowed to marry to obtain equal protection of the law under the New Jersey constitution.41 The judge delayed the effective date of her ruling to allow the state to consider its options. On Oct. 21, Gov. Chris Christie withdrew the state’s appeal. As of 12:01 a.m. on Oct. 21, same-sex marriages became legal in New Jersey.
New York. This state’s Department of Taxation and Finance issued two Technical Memoranda on July 18 and Sept. 13, 2013. Since the July 24, 2011 effective date of the Marriage Equality Act, same-sex spouses and opposite sex spouses have been treated equally. Based on the Windsor decision and Revenue Ruling 2013-17, the Memoranda provide that this equal treatment now applies to the personal income tax and estate tax for earlier periods. For income tax years before 2011 and same-sex married spouses who died before July 24, 2011, amended returns may (but need not) be filed where the statute of limitations remains open.42
North Dakota. In Sept. 2013, this state’s Tax Commissioner issued guidance providing that, since North Dakota doesn’t recognize same-sex marriage, a same-sex couple can’t file using married status.43 Each individual must file using single or head-of-household status and complete Schedule ND-1S, Allocation of Income by Same-Sex Individuals Filing a Joint Federal Return.
Ohio. This state doesn’t authorize same-sex marriage or recognize same-sex marriages validly entered into in other jurisdictions.44 However, in Obergefell v. Kasich,45 decided July 22, 2013, the U.S. District Court for the Southern District of Ohio granted injunctive relief for a same-sex couple legally married in Maryland and resident in Ohio. Since the death of one partner was imminent, the couple wanted to ensure that their marriage would be recognized in Ohio. The court held that Ohio’s law prohibiting recognition of same-sex marriages validly entered into in other jurisdictions “likely violates the United States Constitution,” and ordered the Ohio Registrar of death certificates not to accept a death certificate unless the terminally ill partner is listed as married, and the other is listed as his surviving spouse.
On Oct. 11, 2013, this state’s Department of Taxation issued a release stating that, since Ohio doesn’t recognize marriage between persons of the same gender, same-sex spouses must file using single or head-of-household status and complete Ohio Schedule IT S.46 This is the schedule on which same-gender taxpayers filing a joint federal return must allocate their federal adjusted gross income between them.
Oklahoma. On Sept. 27, 2013, this state’s Tax Commission issued guidance providing that, since Oklahoma doesn’t recognize same-sex marriage, a same-sex couple can’t file a joint return.47 Each individual must file using single or head-of-household status and, if required to include a copy of the federal return, must provide a copy of the federal return that would have been filed prior to Rev. Rul. 2013-17.
Pennsylvania. Introduced a proposal on Sept. 9, 2013 to amend the definition of marriage in Pennsylvania from a civil contract between “one man and one woman” to “two people” and to recognize marriages legally performed outside the Commonwealth.48 The legislature had introduced another bill on June 24, 2013 to amend the tax code by including “domestic partner” in the definition of “spouse” for inheritance tax purposes.49 Both bills are pending.
In the meantime, for a same-sex couple to reduce the inheritance tax in this state where same-sex marriage isn’t authorized, one 65-year-old man was widely reported as having adopted his 73-year-old partner. In approving the adoption, the judge was quoted as saying: “Congratulations, it’s a boy.”50
Rhode Island. This state enacted legislation, effective Aug. 1, 2013, recognizing same-sex marriage.51 On Sept. 6, 2013,52 this state’s Division of Taxation issued detailed guidance in the form of frequently asked questions for taxpayers in same-sex marriages, including explaining that two people who are married on the last day of the calendar year must file using married status, but same-sex couples in a civil union can’t file as married.
Texas. This state introduced legislation on July 1, 2013 to authorize same-sex marriage and recognize same-sex unions legally performed elsewhere.53 The bill died. The Texas Supreme Court is poised to hear two cases to determine whether same-sex couples legally married in other states can be granted a divorce in Texas.54 Oral argument is scheduled for Nov. 5, 2013.
Utah. On Oct. 9, 2013, this state’s Tax Commission issued a release providing that, because Utah doesn’t recognize same-sex marriages, same-sex spouses can’t file joint Utah income tax returns.55 Same-sex spouses who file joint federal returns must recompute their federal income tax liability on a “mock” federal return as single or head of household and file accordingly.
Washington state. This state approved same-sex marriage by referendum vote and enacted legislation permitting same-sex marriage, effective Dec. 12, 2013.56 On
Aug. 15, 2013,57 this state’s Department of Revenue issued an Excise Tax Advisory to explain, among other matters, that same-sex spouses are allowed estate tax spousal benefits, including a marital deduction and a state qualified terminable interest property (QTIP) election.
Wisconsin. On Sept. 6, 2013,58 this state’s Department of Revenue issued guidance reiterating that, since Wisconsin doesn’t recognize same-sex marriage, a same-sex couple can’t file a joint return. Each individual must file using single or head-of-household status, and same-sex couples who file joint federal returns must complete a new form, Schedule S, which shows the amount of income reported on the federal return allocable to each individual.
Estate and Gift Tax
Connecticut. This state introduced four separate bills to repeal or phase out the estate tax.59 All four died.
Delaware. In 2009, this state enacted a temporary estate tax, which was scheduled to sunset on July 1, 2013. On March 28, 2013, Gov. Jack Markell signed legislation to eliminate the sunset, effectively making Delaware’s estate tax permanent.60
Indiana. This state repealed its inheritance tax, retroactively to Jan. 1, 2013.61 The new law replaces one enacted in 2012 that would have phased out the inheritance tax over a 9-year period, beginning in 2013.
Minnesota. The 2013 Omnibus Tax Act, which Gov. Mark Dayton signed into law on May 23, 2013 results in:62
• Creating a new 10 percent gift tax, effective
July 1, 2013;
• Beginning in 2013, including taxable gifts made within three years of death in a decedent’s estate. Under prior law, lifetime gifts weren’t includible as estate assets.
• Beginning in 2013, disregarding pass-through entities owning real or tangible property located in Minnesota for estate tax purposes, effectively imposing an estate tax on non-residents with property physically located in-state, even if held through such an entity.
New Jersey. This state introduced legislation on June 24, 2013 that seeks to expand the exemption from inheritance tax to all lineal relatives.63 Currently, spouses, domestic partners, fathers, mothers, grandparents and children are exempt, but the statute doesn’t explicitly extend beyond two generations to relatives such as great grandparents or great grandchildren. The proposal would exempt all lineal relatives that ascend or descend from a decedent by blood or law. The bill is pending.
New York. This state introduced legislation on Jan. 29, 2013 that would increase the $1 million estate tax threshold by $1 million a year to $2 million in 2013, $3 million in 2014, $4 million in 2015 and $5 million in 2016 and thereafter.64 The bill is pending.
North Carolina. This state enacted legislation that repealed the estate tax for individuals dying on or after Jan. 1, 2013.65
Ohio. The Ohio estate tax doesn’t apply to individuals dying after Dec. 31, 2012.66
Oregon. This state introduced legislation on Feb. 21, 2013 that would increase the $1 million estate tax threshold to $2 million in 2014, $3 million in 2015, $4 million in 2016 and $5 million in 2017 and thereafter.67 The bill died.
Pennsylvania. This state enacted legislation, effective July 9, 2013, that eliminates the inheritance tax on small businesses that: (1) have 50 or fewer employees, (2) have a net book value of assets of less than $5 million, and (3) continue to operate as a family business for at least seven years.68
Rhode Island. The legislature introduced several different bills to increase the estate tax threshold to $1.5 million or $2 million, to conform the estate tax exemption to the federal exemption amount and to exclude farmland from the inheritance tax.69 All of these bills died.
Tennessee. This state passed legislation to phase out its inheritance tax through 2015 (with an exemption of $1.25 million in 2013, $2 million in 2014 and $5 million in 2015), culminating with full repeal for individuals dying in 2016 or thereafter.70
Vermont. This state introduced legislation to provide for state level portability between spouses of the state exemption amount, currently $2.75 million.71 To qualify, an estate tax return must be filed on which the deceased spousal unused exclusion amount is computed and the portability election is made. The same bill allows for a separate state QTIP election regardless of whether that election is made for federal purposes. Currently, separate state QTIP elections aren’t permitted. The bill is pending.
Washington state. This state enacted legislation to reinstate the legislature’s intent in enacting a stand-alone estate tax in 2005, which had been narrowed by judicial construction.72 The new law is effective both prospectively and retroactively to individuals dying after May 17, 2005. For individuals dying before Jan. 1, 2006, there’s a $1.5 million estate tax exemption, for those dying between Jan. 1, 2006 and Dec. 31, 2013, a $2 million exemption and for those dying in 2014 and thereafter, a $2 million exemption, indexed for inflation.
For individuals dying after Jan. 1, 2014, the new law also increases estate tax rates for estates valued over $4 million (to a maximum rate of 20 percent for estates over $9 million) and creates an estate tax deduction of up to $2.5 million for qualified family-owned business interests. The business must have been owned by the decedent or a family member for at least five of the eight years preceding death, and the value of the decedent’s interest in the business must exceed 50 percent of the decedent’s Washington taxable estate and can’t be valued at more than $6 million.
Wisconsin. The Wisconsin estate tax is tied to the federal credit for state death taxes. For deaths after Dec. 31, 2012, the American Taxpayer Relief Act of 2012 made permanent changes to the federal estate tax that resulted in the elimination of Wisconsin’s estate tax. Legislation signed on July 1, 2013 clarifies that, unless the federal estate tax law is modified to provide a federal estate tax credit for state death taxes, Wisconsin doesn’t have an estate tax for individuals dying after Dec. 31, 2012.73
There’s been continued state-level activity regarding decanting, whereby the assets of an irrevocable trust can potentially be appointed into a new trust with different terms. On Dec. 20, 2011, the Treasury Department and IRS issued a Notice requesting comments on the tax implications of a change in the beneficial interests of a trust pursuant to a decanting transfer.74 Many organizations submitted comments. While we’re awaiting an IRS response to the comments and guidance on decanting (which was omitted from the 2012-13 and 2013-14 IRS Priority Guidance Plans), here are the latest developments:
Alaska. Pursuant to legislation that became effective on Sept 9. 2013, substantial amendments were made to this state’s decanting laws, tracking closely the 2011 revisions made to New York’s statute.75 Under the new law, if a trustee has unlimited discretion to invade principal, the current beneficiaries of a new appointed trust can be one or more of the current beneficiaries of the invaded trust, to the exclusion of others. Similarly, the remainder beneficiaries of the new appointed trust can be one or more of the remainder beneficiaries of the invaded trust, to the exclusion of others. The new trust provisions can include the grant of a power of appointment (POA) (including a presently exercisable power) to one or more current beneficiaries of the invaded trust, provided that a beneficiary who’s granted the POA was eligible to receive property outright under the old trust.
If the trustee doesn’t have unlimited discretion, the beneficiaries of the new appointed trust must be the same as the invaded trust, and the new trust must contain the same language regarding the trustee’s ability to invade principal. The trustee must include a POA in the new appointed trust if such a power existed in the invaded trust, and the class of permissible appointees must be the same as in the invaded trust.
The new appointed trust can have a term that’s longer than the term provided for in the invaded trust. Vested trust interests can’t be affected by the exercise of the power.
Delaware. This state enacted amendments to its already expansive decanting laws to provide that no trustee or advisor has a duty to exercise the statutory decanting power and, absent willful misconduct, won’t be liable for failure to consider its exercise.76
Massachusetts. On July 29, 2013, in Morse v. Kraft,77 the Supreme Judicial Court of Massachusetts ruled that a trustee who had full discretion to distribute trust principal “for the benefit of” the beneficiary, could distribute the assets to a different trust that allowed beneficiaries to act as trustees, a power that was prohibited in the original trust. According to the court, although there’s no inherent power in Massachusetts for trustees to make distributions in further trust, such a transfer was authorized under the terms of the trust at issue. In addition to language authorizing discretionary distributions “for the benefit” of the beneficiary, there was express language that the trustee may exercise his “full power” and “discretion,” “without order or license of the court” and also affidavit evidence from the settlor, draftsman and trustee that a decanting power was intended. However, the court also stated that:
In light of the increased awareness, and indeed practice, of decanting, we expect that settlors in the future who wish to give trustees a decanting power will do so expressly. We will then consider whether the failure to expressly grant this power suggests an intent to preclude decanting.
Michigan. This state enacted three bills relating to decanting, which took effect on Dec. 26, 2012.78 Together, they form the new decanting laws in Michigan. One bill confers on trustees who have a presently exercisable discretionary power to make distributions of income or principal, the power to appoint all or part of the property subject to the power to a trustee of a second trust. A discretionary power to make distributions is considered presently exercisable if the timing of a distribution depends only on the trustee’s judgment as to what’s in a beneficiary’s best interests. The power to make distributions isn’t considered discretionary if it’s limited by a definite and ascertainable standard. The beneficiaries of the second trust may include only permissible appointees of the trustee’s discretionary distribution power, even if fewer than all. The second trust may grant to one or more beneficiaries a special or general POA, including a power to appoint to individuals who aren’t beneficiaries of the first trust. This bill provides that it’s intended to codify the common law in effect in Michigan. Pursuant to another bill that was enacted, a trustee can distribute property subject to discretionary distribution authority to a trustee of a second trust, even if the discretion is limited by a standard. The terms of the second trust can’t materially change the interests of the beneficiaries of the first trust. There’s a 63-day notice requirement.
Rhode Island. This state revised its decanting statute, effective July 15, 2013, to eliminate the previous prerequisite to decanting that a trustee have an absolute power to invade.79
South Carolina. This state introduced legislation on March 19, 2013 to confer on trustees who have the discretionary power to distribute principal or income the power to appoint all or part of the property subject to that discretion to the trustee of another trust, including a trust created by the trustee of the first trust.80 The beneficiaries of the second trust may include only beneficiaries of the original trust, and future beneficial interests in the original trust can’t be accelerated to present interests in the second trust. If the trustee’s discretionary distribution power is subject to an ascertainable standard, the second trust must include the same standard and be exercisable in favor of the same beneficiaries. The second trust may confer on a beneficiary of the original trust a POA exercisable among appointees who aren’t beneficiaries of the original or second trust. This proposal is pending.
South Dakota. This state revised its decanting statute, effective July 1, 2013, to provide that a trustee may, but is no longer required to, notify beneficiaries before decanting.81
Tennessee. This state revised its decanting statute, effective July 1, 2013, to provide, among other amendments, that the second trust may confer a POA on a beneficiary of the original trust to whom principal could be distributed.82 The power can be exercisable among appointees who aren’t beneficiaries of the original or second trust.
Texas. This state enacted decanting legislation, effective Sept. 1, 2013.83 Under the new law, if a trustee has full discretion to invade principal, the trustee can distribute principal to a second trust for the benefit of one or more of the current beneficiaries of the first trust and one or more of the remainder beneficiaries of the first trust. The new trust provisions can include the grant of a POA (including a presently exercisable power) to one or more current beneficiaries of the first trust who are eligible to receive property outright under the first trust. The class of permissible appointees can be broader than or different from the first trust.
If the trustee has limited discretion, the beneficiaries of the second trust must be the same as the first trust, and the second trust must contain the same language regarding the trustee’s ability to distribute income or principal. The trustee must include a POA in the second trust if such a power existed in the first trust, and the class of permissible appointees must be the same as in the first trust.
The second trust can have a term that’s longer than the first trust. Vested trust interests can’t be affected by the exercise of the power. Notice of the exercise of the power is required.
Wyoming. This state enacted a very simple provision, effective July 1, 2013, allowing a trustee who has discretionary distribution authority to make distributions in further trust.84
Directed Trust/Trust Protectors
A directed trust allows for the separation of investment, distribution and administrative responsibilities traditionally associated with the role of trustee. An issue in many jurisdictions is the extent to which a trustee can rely on the trifurcation of these responsibilities. Case law in many states seems to indicate that there’s some level of continuing fiduciary responsibility and oversight. Some jurisdictions have statutes that specifically allow separation of responsibilities.
Several states have recently introduced and/or enacted legislation to clarify that obligations can be separated in the trust context, so that a trustee can rely on the direction of an investment or distribution advisor, with no responsibility to monitor, oversee or second-guess the advisor.
Recent state-level directed trust developments include:
Alaska. This state enacted directed trust legislation, effective Sept. 9, 2013.85 A trustee who’s required to follow the directions of an advisor isn’t liable to a beneficiary for the consequences, regardless of the information available to the trustee, and the trustee doesn’t have an obligation to review, inquire, investigate or make recommendations or evaluations before complying with the directions. An advisor is a fiduciary with the exclusive obligation to account to the beneficiaries and to defend an action brought by the beneficiaries regarding the trustee’s exercise of the advisor’s directions.
Delaware. This state revised its comprehensive directed trust statute to clarify that a trustee has no duty to inquire as to assets in a directed portion of a trust account to satisfy the trustee’s duty of prudence when making investment decisions in the non-directed portion.86
Hawaii. This state introduced legislation on Jan. 24, 2013, which provides that, when one or more individuals are given the authority to direct a fiduciary’s investment, distribution or other decisions, those individuals are considered advisors and fiduciaries.87 If the governing instrument provides that a fiduciary is to follow the direction of an advisor, and the fiduciary acts in accordance with the direction, then, except in the case of willful misconduct, the fiduciary won’t be liable for any resulting loss. A directed fiduciary has no duty to monitor or consult with the advisor or communicate with or warn any beneficiary that the fiduciary might have exercised its discretion differently. The legislation is pending.
Illinois This state enacted directed trust legislation, effective Jan. 1, 2013, creating three categories of directing party: (1) investment trust advisor; (2) distribution trust advisor; and (3) trust protector.88 A directing party is a fiduciary, subject to the same standards as a trustee, unless the governing instrument states otherwise, provided that the governing instrument can’t exonerate a directing party from the duty to act in the best interests of the trust. A directed fiduciary has no duty to monitor, review, inquire, investigate, evaluate or warn with respect to a directing party’s exercise or failure to exercise any power of direction. A directed fiduciary won’t be liable for following a direction except in cases of willful misconduct.
Montana This state enacted directed trust legislation, effective Oct. 1, 2013. A trustee must follow the directions of a directing party unless manifestly contrary to the terms of the trust or the trustee knows that to do so would constitute a serious breach of a fiduciary duty.89 A directing party is presumptively a fiduciary, required to act in good faith and liable for any loss resulting from breach of fiduciary duty.
Ohio. This state enacted detailed significant changes to its trust law that took effect on March 27, 2013.90 Ohio law already allowed for a power to direct, providing that a trustee (an “excluded” fiduciary) isn’t liable for losses resulting from certain actions or failures to act when other individuals are granted certain powers with respect to the administration of the trust. Specifically, fiduciaries who are excluded from exercising a power aren’t liable for losses resulting from compliance with an authorized direction. Pursuant to the new law, the limitations on liability are extended to fiduciaries appointed to handle administrative duties only. Such fiduciaries will have no duties other than administrative duties specifically described and (as is the case with excluded fiduciaries) will have no obligation to perform investment reviews or make investment recommendations if there’s an investment director.
Tennessee. This state enacted legislation, effective July 1, 2013, which clarifies and details the role and liability of trust advisors and protectors under its directed trust law.91 It provides that a trust advisor or trust protector, other than a beneficiary, is a fiduciary, required to act in good faith, but is an excluded fiduciary with respect to powers granted exclusively to other trustees, advisors or protectors. A trust advisor or trust protector is any person who has any one or more of a list of enumerated powers, including the power to direct trust investments, modify or amend the trust or change the governing law or perform a specific duty normally required of a trustee. If an excluded fiduciary is to follow directions with respect to investment, distribution or other decisions, the excluded fiduciary has no duty to monitor or consult with the direction advisor or communicate with or warn any beneficiary that the fiduciary might have exercised its discretion differently. An excluded fiduciary won’t be liable for any loss resulting from complying with a direction, including if the director breached its own fiduciary obligations or acted beyond the scope of its authority.
Domestic Asset Protection
On the heels of the domestic asset protection trust (DAPT) legislation signed into law last year in Virginia,92 the following states have enacted or updated their DAPT laws in 2013:93
Ohio. The Legacy Trust Act,94 which took effect on March 27, 2013, allows for the creation of a “legacy trust,” by which a transferor is given the ability to make a qualified disposition of assets and remain a beneficiary through actions of a qualified trustee. A creditor from before the qualified disposition must bring an action by the later of: (1) 18 months after the qualified disposition; or (2) six months after the qualified disposition is or could reasonably have been discovered if the creditor files a suit or makes a written demand for payment within three years after the qualified disposition. A creditor from after the qualified disposition must bring the action within 18 months. Any person can serve as an advisor of a legacy trust, except a transferor, who can act as an advisor only in connection with investment decisions. Advisors are considered fiduciaries.
The transferor may retain the right to veto distributions from the trust, remove and appoint advisors or trustees, hold a special testamentary POA and be a discretionary income or principal beneficiary.
South Dakota. This state has had DAPT legislation since 2005. Changes made to the statute pursuant to amendments that took effect on July 1, 2013,95 include:
• Clarifying that a trust won’t be deemed revocable due to the potential or actual reimbursement to the transferor for income taxes attributable to trust assets if: (1) the trust provides expressly for the payment of taxes, and (2) a payment would be the result of a trustee’s acting in its discretion or pursuant to a mandatory direction in the trust instrument or at the direction of an advisor.
• Shortening the time period within which an action for fraudulent transfer must be brought. Existing creditors must bring an action within the later of two years (shortened from three) after the transfer is made or six months (shortened from one year) after the transfer is or reasonably could have been discovered. Those who became creditors after the transfer to the trust must bring an action within two years (shortened from three) after the transfer is made. In either case, the burden is on the creditor to prove the matter by clear and convincing evidence.
Tennessee. This state has had DAPT legislation since 2007. Changes made to the statute pursuant to amendments that took effect on July 1, 201396 also include shortening the period within which a claim must be brought. A creditor whose claim arose before the transfer must bring an action within the later of two years (shortened from four) after the transfer is made or six months (shortened from one year) after the transfer is or reasonably could have been discovered. If the creditor became a creditor after the transfer to the trust, the action must be brought within two years (shortened from four) after the transfer is made. The creditor must prove by clear and convincing evidence an intent to defraud that specific creditor.
Utah. Effective May 14, 2013, this state enacted new DAPT legislation, replacing prior law.97 The new law removes the previous requirement for a corporate trustee and the statutory exemptions from asset protection for certain creditors, which limited the protection and raised estate inclusion concerns. An action by a creditor for fraudulent transfer is extinguished unless the creditor became a creditor before the transfer, and the action is brought within the later of two years after the property is transferred to the trust or one year after the creditor could have reasonably discovered the transfer. The limitations period can be shortened to 120 days by sending a notice to known creditors and publishing a notice in a general circulation newspaper in the settlor’s county of residence. Interestingly, an earlier draft of the statute contained a requirement that 80 percent of the trust assets be held in Utah, but that requirement was removed in the final version.
Wyoming. This state enacted changes to its asset protection laws that took effect July 1, 2013.98 Among other revisions, the statute is amended to clarify that a trust won’t be deemed revocable due to the potential or actual reimbursement to the transferor for income taxes attributable to trust assets if: (1) the trust provides expressly for the payment of taxes, and (2) a payment would be the result of a trustee’s acting in its discretion or pursuant to a mandatory direction in the trust instrument or at the direction of an advisor. Another amendment expands the rights of creditors by allowing a creditor to assert a claim against the trustee, trust protector, trust advisor or person involved in the drafting of the trust, if the creditor can prove, by clear and convincing evidence, that the transfer of the property to the trust was fraudulent.
Power to Adjust/Unitrust Regimes
The precepts of the prudent investor rule govern the investment of trust assets. Pursuant to those precepts, a trustee is required to invest for“total return.” That is, a trustee is required to invest in a way that benefits both income and principal beneficiaries. However, when beneficial interests clash, the source of return becomes critical, and the tension between investing for income and investing for growth can become more pronounced. Fortunately, the power to adjust and unitrust regimes provide trustees with the means to implement the mandate of total return investing, in effect, by preempting the definition of fiduciary accounting income. Under a power to adjust regime, the trustee is permitted to make adjustments between income and principal to be fair and reasonable to all beneficiaries. Under the unitrust regime, the trustee can convert the income beneficiary’s interest into a unitrust payout of a fixed percentage of the trust’s principal.
Every state, except North Dakota, has enacted one or both of these regimes, and every trustee or advisor should be aware of these powerful tools.
Recent state-level total return developments include:
Alabama. This state, which already has the power to adjust regime,99 enacted a unitrust regime that took effect on Aug. 1, 2013.100 The unitrust payout must be between 3 percent and 5 percent.
Alaska. This state enacted amendments to its unitrust regime that took effect on Sept. 9, 2013.101 Under prior law, the unitrust regime provided for a 4 percent default unitrust payout calculated over a 3-year rolling period. The new law gives a trustee the ability to select a unitrust payout between 3 percent and 5 percent and to determine whether the smoothing period should be three, four or five years.
South Carolina. South Carolina currently has a power to adjust regime. Included in a larger bill introduced on March 19, 2013 was a proposal for the establishment of a unitrust regime, with a payout between 3 percent to 5 percent.102 This bill is pending.
South Dakota. This state enacted legislation, effective July 1, 2013, that enables a trustee to select a unitrust payout between 3 percent to 5 percent.103 Prior law provided for a fixed 3 percent payout.
Utah. This state, which already has the power to adjust regime, enacted a unitrust regime, effective May 14, 2013, with a 3 percent to 5 percent payout.104
—The author would like to thank her colleague Theresa Fortin, a wealth advisory associate at Wilmington Trust in New York, for her invaluable contributions to this article.
1. Ala. Code Section 26-17-707; Cal. Prob. Code Section 249.5; Colo. Rev. Stat. Section 19-4-106(8); Col. Rev. Stat. Section 15-11-120; Conn. Gen. Stat. Sections 45a-268-272; Del. Code Ann. Tit. 13, Section 8-707; Fla. Stat. Section 742.17; Iowa Code Section 633.220A; La. Rev. Stat. Ann. Section 9:391.1; Md. Estates and Trusts Code Ann. Section 1-205(a)(2); N.M. Stat. Ann. Section 40-11A-707; N.C. G.S. 29-19(b)(3); N.D. Cent. Code Sections 14-20-65, 30.1-04-19(11); Ohio Rev. Code Ann. Section 2105.14; Tex. Fam. Code Ann. Section 160.707; Utah Code Ann. Section 78B-15-707; Va. Code Ann. Section 20-158(B); Wash. Rev. Code Sections 26.26.730; Wyo. Stat. Ann. Section 14-2-907.
2. Ala. Code Section 26-17-707; Colo. Rev. Stat. Section 19-4-106(8); Col. Rev. Stat. Section 15-11-120; Del. Code Ann. Tit. 13, Section 8-707; N.M. Stat. Ann. Sec-
tion 40-11A-707; N.D. Cent. Code Sections 14-20-65, 30.1-04-19(11); Tex. Fam. Code Ann. Section 160.707; Utah Code Ann. Section 78B-15-707; Wash. Rev. Code Sections 26.26.730; Wyo. Stat. Ann. Section 14-2-907.
3. Connecticut Public Act No. 13-301.
4. Maryland H.B. 857 (2013).
5. Nebraska LB 134 (2013).
6. New York A.7461 (2013).
7. North Carolina H.B. 219 (2013).
8. Maryland S.B. 29 (2013).
9. Massachusetts H.1314 (2013); Massachusetts S.702 (2013).
10. Michigan S.B. 293 (2013).
11. Nebraska LB 37 (2013).
12. Nevada S.B. 131 (2013).
13. New Hampshire H.B. 116 (2013).
14. New Jersey A.B. 2943/S.B.2077 (2013).
15. New York A.823 (2013); New York A.6729/S.4895 (2013); New York A.6034/S.2429).
16. North Carolina S.B. 279 (2013).
17. North Dakota H.B. 1455 (2013).
18. Oregon S.B. 54 (2013).
19. Virginia H.B. 1752 (2013).
20. Virginia S.B. 914 (2013).
21. For example, Complaint, Jernigan v. Crane, 4:13-CV-410 (July 15, 2013); Complaint, Whitewood v. Corbett (July 9, 2013).
22. United States v. Windsor, 133 S. Ct. 2675 (2013).
23. Revenue Ruling 2013-38 I.R.B. 201.
24. Arizona Department of Revenue, News Release, Oct. 11, 2013.
25. Hollingsworth v. Perry, 133 S.Ct. 2652 (2013).
26. Colorado S.B. 13-011 (2013).
27. Delaware H.B. 75 (2013).
28. Hawaii S.B. 1369 (2013).
29. Hawaii S.B. 1188 (2013).
30. Idaho State Tax Commission Release, Oct. 4, 2013.
31. Illinois H.B. 10 (2013).
32. Kansas Department of Revenue, Notice 13-18, Oct. 4, 2013.
33. Louisiana Department of Revenue, Revenue Information Bulletin No. 13-024 (Sept. 20, 2013).
34. Maine L.D. 1860 (2012).
35. Maryland S.B. 116 (2011).
36. Michigan H.B. 4910 (2013).
37. Michigan Department of Treasury Notice to Taxpayers, September 2013.
38. Minnesota HF 1054 (2013).
40. New Jersey S.B. 2925 (2013).
41. Decision on Motion for Summary Judgment, Garden State Equality v. Dow, Docket L-1729-11 (Sept. 27, 2013).
42. New York State Department of Taxation and Finance Technical Memorandum TSB-M-13(9)M (July 18, 2013); New York State Department of Taxation and Finance Technical Memorandum TSB-M-13(5)I, (10)M (Sept. 13, 2013).
44. Ohio Constitution Art. XV, Section 11; ORC Ann. Sections 3101.01(C)(2)-(3).
45. Obergefell v. Kasich, 2013 U.S. Dist. LEXIS 102077 (S.D. Ohio, July 22, 2013).
46. Ohio Department of Taxation, Individual Income Tax—Information Release IT 2013-01, Oct. 11, 2013.
47. Oklahoma Income Tax Filing Status for Same Sex Couples, Public Notice, Oklahoma Tax Commission, Sept. 27, 2013.
48. Pennsylvania H.B. 1647 (2013).
49. Pennsylvania H.B. 1569 (2013).
51. Rhode Island S.B. 38 (2013).
52. Same-Sex Marriage and Taxes: Frequently Asked Questions (FAQs), Rhode Island Division of Taxation, Sept. 6, 2013; Advisory 2013-20, Rhode Island Division of Taxation, Sept. 6, 2013.
53. Texas H.B. 20 (2013).
54. In the Matter of the Marriage of J.B. and H.B., Case No. 11-0024 (S.Ct. Texas); State of Texas v. Angelique, Case No. 11-0222 (S.Ct. Texas).
55. Utah State Tax Commission, News Release (Oct. 9, 2013).
56. Washington S.B. 6239 (2013).
57. Excise Tax Advisory No. 3179.2013, Washington Department of Revenue, Aug. 15, 2013.
58. Tax Guidance For Individuals In A Same-Sex Marriage, Wisconsin Department of Revenue, Sept. 6, 2013.
59. Connecticut S.B. 423 (2013); Connecticut H.B. 5043 (2013); Connecticut H.B. 5490 (2013); Connecticut S.B. 573 (2013).
60. Delaware H.B. 51 (2013).
61. Indiana H.B. 1001 (2013).
62. Minnesota HF 677 (2013).
63. New Jersey A.B. 4268 (2013).
64. New York A.5293/S.3035 (2013).
65. North Carolina H.B. 998 (2013).
66. 2011 Ohio Laws 28, H.B. 153 (2011).
67. Oregon S.B. 671 (2013).
68. Pennsylvania H.B. 465 (2013).
69. Rhode Island S.B. 22 (2013); Rhode Island H.B. 5249 (2013); Rhode Island H.B. 5470 (2013); Rhode Island H.B. 5307 (2013); Rhode Island S.B. 18 (2013).
70. 2012 Tenn. Pub. Acts, Ch. 1057, H.B. 3760 (2012).
71. Vermont H.399 (2013).
72. Washington H.B. 2075 (2013).
73. 2013 Wisconsin Act 20, Wisconsin A.B. 40 (2013).
74. Notice 2011-101, 2011-52 I.R.B. 932.
75. Alaska S.B. 65 (2013).
76. Delaware S.B. 138 (2013).
77. Morse v. Kraft, 466 Mass. 92 (2013).
78. Michigan S.B. 978 (2012); Michigan S.B. 979 (2012); Michigan S.B. 980 (2012).
79. Rhode Island H.B. 5501 (2013).
80. South Carolina S.538 (2013).
81. South Dakota H.B. 1056 (2013).
82. Tennessee S.B. 713 (2013).
83. Texas H.B. 2913 (2013).
84. Wyoming H.B. 139 (2013).
85. Alaska Sess. Laws ch. 45, S.B. 65 (2013).
86. 12 Del. C. Section 3302(c)(3).
87. Hawaii H.B. 1300 (2013).
88. Illinois P.A. 97-0921, H.B. 4663 (2012).
89. Mont. Code Ann. Section 72-38-808(2), Montana S.B. 251 (2013).
90. Ohio H.B. 479 (2013).
91. Tennessee S.B. 713 (2013).
92. 2012 Virginia Pub. Acts, Ch. 555, S.B. 11 (2012).
93. For recent case law, see Waldron v. Huber, 493 B.R. 798, 2013 Bankr. LEXIS 2038 (May 17, 2013), in which the debtor, who resided in Washington, created an Alaskan domestic asset protection trust. All of the assets, except a $10,000 certificate of deposit, the creditors, the beneficiaries, the trustees (except for the Alaskan corporate trustee) and the attorney who prepared the trust were all located in Washington and, at the time of the trust’s creation, the debtor was facing a threat of litigation. Under these circumstances, the court declined to honor the Alaskan choice-of-law provision, exposing the trust assets to the claims of the grantor’s creditors in bankruptcy. For more information on this decision, see Jonathan D. Blattmachr, Matthew D. Blattmachr and Jonathan G. Blattmachr, “Avoiding the Adverse Affects of Huber,” Trusts & Estates (August 2013) at p. 20.
94. Ohio H.B. 479 (2013).
95. South Dakota H.B. 1056 (2013).
96. Tennessee S.B. 713 (2013).
97. Utah H.B. 222 (2013).
98. Wyoming H.B. 139 (2013).
99. Ala. Code Section 19-3A-104.
100. Alabama H.B. 394 (2013).
101. Alaska S.B. 65 (2013).
102. South Carolina S.538 (2013).
103. South Dakota H.B. 1056 (2013).
104. Utah S.B. 198 (2013).