In an always-anticipated annual tradition, McGuireWoods partner Ronald Aucutt, with help from his McGuireWoods colleagues, has identified the top ten estate planning and estate tax developments of 2018. Ron is chair emeritus of McGuireWoods’ private wealth services team. He is a past president of The American College of Trust and Estate Counsel; an observer and frequent participant in the formation of tax policy and regulatory and interpretive guidance in Washington, D.C.; and the editor of the Recent Developments materials presented each year at the Heckerling Institute on Estate Planning.
Number Ten: Spotlight on Trust Beneficiaries’ Rights to Be Informed
Number Nine: Trust Flexibility Versus “Dead Hand” Control
Number Eight: Inclusion of the Value of GRAT Assets in the Gross Estate
Number Seven: Travails of Family Limited Partnerships
Number Six: State Taxation of QTIP Trusts at the Surviving Spouse’s Death
Number Five: Crunch Time for Intergenerational Split-Dollar Arrangements
Number Four: The Proposed “Anti-Clawback” Regulations (Proposed Reg. §20.2010-1(c))
Number Three: Another Speedbump for Domestic Asset Protection Trusts
Number Two: Proposed Regulations Regarding the Section 199A Qualified Business Income Deduction and the Section 643(f) Multiple Trust Rules (Proposed Regs. §§1.199A-0 through -6 and 1.643(f)-1, Notice 2018-64)
Number One: More Developments Regarding Limits on the State Income Taxation of Trusts
Number Ten: Spotlight on Trust Beneficiaries’ Rights to Be Informed (Forgey)
In In re Estate of Forgey, 298 Neb. 865 (Feb. 9, 2018), the decedent had died in 1993, survived by three children. A trust into which he had transferred property during his life, with one of his children as the sole trustee, provided specific instructions about the division of the trust assets upon his death, gave the trustee broad discretion in administering the trust in good faith, and required annual reports to the beneficiaries.
The trustee failed to provide annual reports, failed to divide the trust assets, personally used land owned by the trust without paying rent, and was late in filing the federal estate tax return, resulting in an IRS assessment of over $2 million in penalties and interest. Twenty years after the decedent’s death, litigation within the family ensued over these breaches and many other allegations, too. After several years of litigation, including a four-day trial, the trial court found that a majority of the beneficiaries’ claims were unfounded. But the court did find the trustee guilty of some breaches and imposed some remedies.
The beneficiaries (including the widow of one beneficiary) appealed, claiming the remedies were not sufficient. Among other things, they specifically claimed that the trial court erred in not awarding them attorneys’ fees for their partially successful litigation efforts.
The Nebraska Supreme Court generally agreed with the trial court, but did order a larger charge to the trustee’s share of the trust assets with respect to his rent-free use of trust property. Regarding attorneys’ fees, the court was influenced by its view that much of the litigation had been caused by the trustee’s failure to keep the beneficiaries informed for 20 years. The court said that “[w]e understand the county court’s reluctance to award attorney fees, since the majority of the claims against [the trustee] were determined to be unfounded,” but noted that, in the absence of information, “the beneficiary had little choice but to file litigation to resolve any doubts about the trust’s administration.” Consistent with this view, the court denied the trustee’s cross-appeal claiming that his attorneys’ fees should have been paid by the trust.
Comment: The trust instrument in Forgey required annual reports to the beneficiaries, although the court indicated that the relevant Nebraska statute also imposed a duty to keep the beneficiaries informed. Section 105(b) of the Uniform Trust Code provides that the terms of a trust prevail over any provision of the code, with certain enumerated exceptions. One of the enumerated exceptions is the duty under Section 813(b)(2) and (3) to notify qualified beneficiaries who have attained 25 years of age about the existence of the trust, the identity of the trustee, and their right to request a trustee’s reports. Another enumerated exception is the duty under Section 813(a) to respond to a request for a trustee’s reports and other information reasonably related to the administration of the trust. But those two exceptions are placed in brackets, making them optional, explained in the comment to the 2004 amendment of Section 105 as “a recognition that there is a lack of consensus on the extent to which a settlor ought to be able to waive reporting to beneficiaries, and that there is little chance that the states will enact [these two exceptions] with any uniformity.” The explanation is correct in that regard; the versions enacted in the respective states vary greatly.
For example, in 2005 the North Carolina General Assembly enacted the Uniform Trust Code with the exceptions discussed above, thus permitting a grantor to override the default requirements to give notice to qualified beneficiaries and respond to requests from qualified beneficiaries for information. But in Wilson v. Wilson, 690 S.E.2d 710 (N.C. App. 2010), the Court of Appeals invalidated that choice, stating that “the beneficiary is always entitled to such information as is reasonably necessary to enable him to enforce his rights under the trust or to prevent or redress a breach of trust,” and that the statute “does not override the duty of the trustee to act in good faith, nor can it obstruct the power of the court to take such action as may be necessary in the interests of justice.”
Debate continues over the understandable desire of some grantors to create “secret trusts.” Cases like Forgey may be invoked by some and distinguished by others, but may not change many minds.
Number Nine: Trust Flexibility Versus “Dead Hand” Control (Horgan, Shire)
Horgan (Florida). In Horgan v. Cosden, 249 So.3d 683 (Fla. Dist. Ct. App. May 25, 2018), review denied, Docket No. SC18-1112 (Fla. July 30, 2018), a trust had become irrevocable when the grantor died in 2010. The trust was to pay income to the grantor’s son for his life, with the remainder distributed, upon the grantor’s son’s death, to three institutions of higher education. In 2015, the beneficiaries agreed to terminate the trust and divide the trust assets on an actuarial basis. One co-trustee agreed; the other did not. The trust was silent on early termination, although it contained a spendthrift clause.
The court noted that the grantor clearly “wanted to provide for her son financially via incremental distributions of income until he died and then give the entire principal to the three educational institutions. Terminating the Trust before this event will frustrate the purposes of the Trust. The Settlor twice amended the Trust and could have made a lump sum distribution to her son, … but she chose not to do so. She also included spendthrift provisions designed to protect each beneficiary’s interest.” The court also viewed the cited justifications for termination, such as the burden of trustees’ fees and exposure to market fluctuations, as factors of which the grantor was aware when she chose the trust terms. Accordingly, the court ruled that early termination of a trust can occur only for the best interest of the beneficiaries when viewed in the light of the settlor’s intentions, and refused to allow it here.
Shire (Nebraska). In In re Trust of Jennie Shire, 299 Neb. 25, 907 N.W.3d 263 (Feb. 16, 2018), the decedent had died in 1948, and her will created a trust paying $500 per month to the grantor’s daughter (who died in 1983) and then to her granddaughter (who was born in 1945) for life. The remainder beneficiaries will be the residuary beneficiaries of the grantor’s estate, determined when the granddaughter dies.
The granddaughter requested an increase in her distributions, and the corporate trustee petitioned the court for approval. The opinion states that the granddaughter’s annual income was less than $14,000 (including $6,000 from the trust), while the trust assets had a value of just under $1 million with annual income estimated to be from $64,000 to $81,000. The court also noted the introduction of evidence that $500 adjusted for inflation since 1948 would be either $4,997 or $5,400.29. (That would translate to annual distributions of either $59,964 or $64,803.48, which would be comparable to the projected income of the trust.) The trustee had taken measures to identify and notify the contingent beneficiaries, and many of them appeared and supported the granddaughter’s request. Other contingent beneficiaries appeared, but offered no opposition, including the Nebraska Attorney General’s Office on behalf of charitable beneficiaries. The only opposition was the virtually obligatory opposition of the court-appointed counsel for unknown and undiscovered heirs.
The trial court denied the granddaughter’s request because it would adversely affect future beneficiaries. The Nebraska Supreme Court agreed.
Comment. Flexibility in the administration of a trust is a relatively modern, but generally quite welcome, trend. Section 111 of the Uniform Trust Code, completed by the Uniform Law Commission in 2000, provides that “interested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust … to the extent it does not violate a material purpose of the trust.” Section 411(c) (not included in the version approved by every state) provides that “[a] spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust.”
Then came these two cases. Both requests to the courts seem reasonable, and yet they were turned...
