Trust & Estate Law Archives

Massachusetts Supreme Judicial Court Provides Long-Awaited Guidance on the Use of Irrevocable Trusts in Medicaid Planning

More and more Americans are faced with the prospect of outliving their resources and rely on Medicaid to bridge the gap between expensive long-term health care and dwindling personal assets. Eligibility for Medicaid assistance, however, requires that an applicant's assets not exceed certain minimal levels. These low thresholds can make it extremely difficult for Medicaid applicants to avoid having to sacrifice a lifetime of savings before qualifying for Medicaid.

Trust Beneficiary Lacks Standing to Sue for Breach of Contract Calling for Trust to be Funded

On April 20, 2017, the Supreme Court issued a decision in Glassie v. Doucette, No. 2014-108-Appeal (R.I. 2017), holding that a Trust beneficiary lacked standing to sue as a third party intended beneficiary of a contract which called for the creation and funding of the Trust. During divorce proceedings, Donelson and Marcia, husband and wife, entered into a property settlement agreement under which Donelson agreed to create a trust for their minor child, Jacquelin and to fund the Trust with $10,000 per year until it contained a principal amount equivalent to Trusts that were previously created for her older sisters, Alison and Georgia. One month later, Donelson established the Trust. However, the Trust did not contain language that it was created pursuant to the property settlement agreement, or that he was required to fund the Trust with the sum of $10,000 per year until the value equaled the value of the Trusts for Alison and Georgia. Donelson died on February 3, 2011, having contributed $123,336.82 to the Trust - an amount which did not equal the value of Jacquelin's sisters' trusts. Jacquelin filed a claim against her father's estate which was denied. On a petition for determination of the disallowed claim, the Probate Court ruled that the claim should be decided by the Superior Court. Thereafter Jacquelin filed a Superior Court action alleging that Donelson had breached the property settlement agreement. About five months later, Jacquelin died unexpectedly and the Executrix of her estate was substituted as plaintiff. Defendant moved for summary judgment on grounds of standing, arguing that only the trustee has the capacity to file suit on behalf of the beneficiaries of a trust, and the claim was not cognizable since the Trust terminated upon Jacquelin's death. The Executrix responded that she was not suing on behalf of the Trust, but as the intended third party beneficiary to the property settlement agreement. The Superior Court granted defendant's motion for summary judgment and the Executrix appealed. On appeal, the Rhode Island Supreme Court wrote that "[A]lthough the beneficiary of such a trust is the beneficiary of the promise [under the contract], his rights must be enforced in accordance with the law of [t]rusts." Finding it undisputed that Donelson created a Trust pursuant to the property settlement agreement, the Court turned to Plaintiff's claim that it was not properly funded in breach of the contract and held that the provision requiring Donelson to fund the Trust "relates to Jacquelin's status as a beneficiary of the Trust and not as a third-party beneficiary of the property settlement agreement." Under the law of trusts, trust beneficiaries may only maintain proceedings in limited circumstances such as where the beneficiary is entitled to an immediate distribution or the trustee is unable, unavailable, unsuitable, or improperly failing to protect the beneficiary's interest. Thus, neither Jacquelin nor the Executrix of her Estate, as Trust beneficiary, could maintain an action as a third party beneficiary of the property settlement agreement. For more information, please contact our trust and estate attorneys, Bernard A. Jackvony, Gene M. Carlino and Rebecca M. Murphy at 401-824-5100 or email bjackvony@pldolaw.com, gcarlino@pldolaw.com and rmurphy@pldolaw.com.

Be Wary of Tax Laws Concerning IRAs

This past June, the IRS issued a Private Letter Ruling (201623001) which impacts surviving spouses in community property states. The decedent and the surviving spouse were married in 2004 and lived in a community property state. They had a son, whom the decedent named as the sole beneficiary of his three IRAs. Upon the decedent's death, the surviving spouse filed a claim against his estate, seeking her one-half interest in the community property they owned together. The claim was settled and the settlement was approved by the court, which ordered that the IRA custodian assign a certain amount of the son's inherited IRAs to the surviving spouse as a spousal rollover IRA. Seeking to avoid paying a tax on the amounts paid to her from the IRAs, the surviving spouse requested four rulings: 1) that the settlement amount of the inherited IRAs be classified as the taxpayer's community property interest; 2) that the taxpayer be treated as a payee of the inherited IRAs; 3) that the IRA custodian distribute the settlement amount to the taxpayer in the form of a surviving spouse rollover; and 4) that the distribution to the taxpayer of the settlement amount from the inherited IRA not be considered a taxable event. Applying IRA Section 408, the IRA rejected the taxpayer's requests. The IRS first stated that under Section 408(d)(3)(C) rollovers are not permitted from non-spousal inherited IRAs, and Section 408 must be applied without regard to any community property laws. Thus, rejecting the surviving spouse's first request, the IRS stated that classifying the amount of the inherited IRA as the taxpayer's community property is a matter of state property law, not federal tax law.

Proposed 2704 Regulations May Have Substantial Impact on Estate Planning

Proposed 2704 Regulations, as they are now drafted, would make vast and substantial changes to the valuation of interests in many family-controlled entities, such as a Family Limited Partnership (FLP) or Limited Liability Company (LLC), for purposes of estate, gift, and generation-skipping transfer taxes. Currently, due to the restrictions placed on a limited partner of a FLP or non-managing member of an LLC, interests that are gifted are valued less than the fair market value of the gifted share, as the donor owns a non-controlling interest and his or her interest is not readily marketable. Thus, discounts for lack of control and lack of marketability apply, reducing the value for estate tax purposes. Additionally, a potential buyer will pay less for an interest that is subject to restrictive agreements, such as restrictions on transferability or formulas setting a withdrawal or repurchase price. Such restrictions are frequently used in buy-sell or stock restriction agreements between business owners. Similarly, a willing buyer will pay less for an interest that is subject to certain rights held by other interest owners, such as puts, calls, and liquidation rights. The Regulations will change the discount-ability of non-controlling interests. Specifically, they disregard certain restrictions on liquidation in determining the fair market value of a transferred interest. This means that transferring an interest in a FLP or LLC may be found to have been a transfer of higher value, rather than a transfer of discounted value. The higher the value of the gift transferred, the higher the gift tax. Additionally, the Regulations treat the lapse of voting or liquidation rights as an additional transfer, thus, another taxable event. As noted, the Regulations are in proposed form and certain aspects may become final as soon as December 1, 2016. If you are interested in forming a family limited partnership or limited liability company for the significant non-tax business advantages these types of entities provide, you should consider doing so before these Regulations become effective to also obtain the tax benefits noted above.

RI Supreme Court Provides Long Awaited Guidance on Trust Attorneys' Duty to Beneficiaries

In December of 2015, the Rhode Island Supreme Court provided guidance on the duties an attorney advising a trustee owes to the trust's beneficiaries. Audette v. Poulin, 127 A.3d 908 (R.I. 2015). Audette, the beneficiary of a trust, brought claims of negligence and breach of fiduciary duty against the attorney who advised the trustee. Apparently, though the trust allowed Audette a life estate in certain property, the trustee objected to Audette living in the property. Audette also wanted his elderly parents to live with him, but the trustee objected to this as well. The trustee thereafter sought legal advice from an attorney who indicated that the terms of the trust did not permit Audette's parents to live at the property. Despite the trustee's objection, Audette and his parents moved into the property. The trustee later commenced an action to evict Audette and his parents. The attorney who had advised the trustee also represented the trustee in connection with the eviction suit. Audette then filed a complaint against the trustee, the successor trustee (who had at that time assumed trusteeship) and the trust. Later, he added claims against the attorney for negligence and breach of fiduciary duty (which the court interpreted as essentially claims for legal malpractice). The attorney filed a motion to dismiss, arguing that he did not owe Audette a duty of care while he represented the trustee. The attorney's motion was granted and Audette appealed.

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