Table of Contents
Office Hours and Webinars
I am working on dates for May office hours, which I will release in early May. But, I will also start experimenting with live webinars in May. Paid subscribers will have access to the recordings and slides for live webinars after the fact. I plan to conduct one or two such webinars each month going forward.
Instead of leaving Q&A to the end of each webinar, I will instead build each webinar around your Q&A. Questions will be collected in advance (anonymously if you so choose) and then addressed as we go through the presentation. And, if you cannot attend, I will get you the answer if you do not want to remain anonymous.
So, if this interests you at all, stay tuned…
Helpful Hints
Here are some quick planning tips that came up recently:
Recent Private Letter Rulings (PLRs 202417007 and 202417012) reminded me of an important element to seeking late portability election relief – whether pursuant to Rev. Proc. 2022-32 or with the permission of the IRS after the 5-year period in that Procedure has passed. To qualify, the deceased spouse cannot have been required to file an estate tax return to begin with under IRC Section 6018 (which requires a 706 when the gross estate plus adjusted taxable gifts exceeds the basic exclusion for the year of death).
If you come across an irrevocable trust with tiered distributions to descendants at certain ages, it is difficult to convert that structure of trust into a lifetime trust. Doing so invokes issues such as self-settled trusts, the grantor trust rules under IRC Sections 678(a)(1) – (2), gross estate inclusion under IRC Section 2036, and GST exemption.
Business Roundup
New FTC guidance this week that gutted the enforceability of non-competes should be of interest to everyone. Please see my comments below in article summaries.
Yesterday I had the privilege of presenting “A Whole New World (of Estate Planning)” to the Colorado FPA chapter. The general premise of the discussion was the question of whether advisor-led online document providers are viable options for clients.
I won’t reveal my diagnosis, but generally my message was that the typical client and advisor are both solving the wrong problems with these tools. In-house estate planning assistance – whether in the form of software, staff, an advanced planning team, or your network of attorney referrals - should all be seen as tools. But, a truly advisor-led relationship requires more than just some fancy deliverables or a hand-off to a document platform. Tools are a logical answer to an emotional problem and thus should not be used in isolation.
Much has been published about the attorney interview process for estate planning, but advisors are often left to use trial-and-error to get there. There is a lack of clear guidance on a process for advisors, and often that clear “guidance” is not very objective because it invokes the use of some software assistance. But before investing in software, this interview process should be dialed in. This requires getting messy, by meeting emotion with attention instead of using logic to bypass emotion. (There are also compliance hurdles.)
The estate plan has often focused on documents, and the revenue generators in estate planning tend to be the creation and administration of documents. But, there are several other things that can be done to help clients.
For example, becoming an expert at analyzing nonprobate transfers is extremely low-hanging fruit.
For those aspiring to retain rising-gen clients, becoming an expert at analyzing the rights and responsibilities under trusts created by ancestors will be extremely important as part of the wealth wave (through which trillions of dollars will pass to generational trusts).
Even in quarterly meetings or monthly calls, there are several small exercises you can engage in to make estate planning a habit for your clients beyond just simply asking if they have gotten their documents done yet (such as helping them to write down a few account logins and passwords). This can create momentum towards the engagement of an attorney or estate planning tool for a client who is otherwise reluctant - after all, it is easiest to eat an elephant one bite at a time.
Finally, instead of sitting around worrying about how attorneys don’t reciprocate referrals, think of ways to creatively co-market with attorneys. (Which, as an aside, attorneys often have a network of several advisors. Becoming front-of-mind for attorneys in your network requires an entirely different skillset and understanding than other COIs. This skillset and understanding is somewhat related to the emotional/logical mismatch alluded to above.)
I have more content in this vein coming down the pike, but for now, it helps to give some solid thought as to whether you actually want estate planning to be part of your process. My ultimate message in this presentation was that you should not feel pressured to keep up with the Joneses. Referring all this work out to attorneys is, and has always been, a safe alternative.
(I also shared some prognostications about AI – mainly that its value in estate planning will be local in application for those who create or collect massive amounts of client documents to serve as a secure data set. While I don’t intend to paint all software providers with the same brush, please note that providers pitching AI reviews of documents may be using your clients’ documents to train their own AI.)
Article Summaries
The End of Non-Competes as We Know Them?
The FTC published a final rule this week, invalidating most non-competes – whether as a stand-alone agreement, a clause of a larger agreement, or even an internal policy (whether or not in writing).
This new rule kicks in 120 days from the April 23 date of publication, which should make the effective date August 21, 2024.
On and after that date, non-competes won’t be enforceable against workers – who are broadly defined to include employees, independent contractors, or even interns, externs, and volunteers (whether paid or unpaid). There are, however, two broad carve-outs.
One, for a non-compete that existed before the effective date, it is enforceable against any senior executive (a worker with policy-making authority who had annualized compensation over $151,164).
Two, regardless of when a non-compete is created, it is enforceable against any worker as part of a bona fide sale of a business (including a purchase of a worker’s equity in an entity).
Beyond this, there is an accrual of cause of action exception (allowing enforcement of non-competes when a violation occurs before the effective date, even if discovered after the effective date) and a good-faith exception.
What I found interesting was the technical read of the definition of a non-compete clause. The lack of enforceability only appears to apply once employment with the issuer of the non-compete has terminated. So, non-competes against existing employees can still be enforced during their employment. Also, this lack of enforceability does not extend to other anti-competitive restrictions such as confidentiality, non-disclosure, and non-solicitation.
Estate Plan Changes During Pending Divorce: Interesting Outcomes?
The recent Michigan Court of Appeals opinion in Lyden v. Lyden highlighted an issue that is not commonly planned for – the effect of the death of one spouse during the pendency of a divorce.
This outcome is often bookended by two issues.
One, there is a stay on asset transfers during the divorce, which often creates a reluctance to change the estate plan until the divorce is finalized. But, as the Court noted here, these changes are usually superseded by the divorce property settlement anyway (which raises another issue about voidability of irrevocable transfers – a subject for another time).
Two, some but not all states create an automatic presumption that divorced spouses have predeceased each other for purposes of property distributions and fiduciary appointments under estate plans. This presumption can be overcome by express language to the contrary in governing documents, but this presumption does not kick in until the divorce court issues a decree of divorce.
In this case, we were confronted by an amendment to a revocable trust which occurred (1) before the divorce was finalized and (2) before the property settlement became enforceable. The amendment had the effect of disinheriting the surviving (divorcing) spouse. The survivor was able to claim the elective share, but this was much smaller than the marital property award being negotiated but which had not yet been finalized. As a result, the Court refused to reform the revocable trust or impose a constructive trust to give the survivor their equitable share of marital property.
The New SECURE Act Regulations: A Teaser
I am working on a broader overview of IRA stretch rules for individual and trust beneficiaries post-SECURE Act. And yes, I know I seem late to the punch since it has been almost 4 and a half years since the SECURE Act 1.0 was enacted.
But, what we do not yet have are final Treasury Regulations – which will be the focus of my upcoming article series. Regulations have been proposed but not yet finalized for over 2 years now, and one proposal in particular has led to a continuous kicking of the can by the IRS.
The issue for which the proverbial can keeps being kicked is the treatment of distributions from an inherited IRA under the new 10-year payout rule for designated beneficiaries. The proposed Regulations do not treat this as a lump-sum distribution to be made at the end of 10 years. Instead, they require life expectancy payouts through year 9, with a lump sum distribution of the inherited IRA balance in year 10.
If this new rule is finalized, it means both beneficiaries and plans who are subject to the 10-year rule but who have failed to follow this payout regime will be subject to penalties and possible excise taxes. So, the kicking of the can has come through a series of IRS Notices – 2022-53, 2023-54, and now 2024-35 – each of which have the effect of waiving life expectancy distributions (and related penalties and excise taxes) under the 10-year rule for the respective calendar years to which each Notice relates. Under the latest Notice, such RMDs are not required for 2024 but could kick in in 2025 if the Regulations (which the IRS anticipates being published no later than January 1, 2025) are indeed published by then.
Sale of Property Subject to Specific Devise
Facts and circumstances matter, but good drafting can save the day.
In Wynn v. Crumm, a case from the Ohio Court of Appeals, a trust called for an outright distribution of real property in fractional shares to 14 remainder beneficiaries. When the trustee proposed selling the real property, one of the remainder beneficiaries objected.
At issue was whether the settlor of the trust intended to specifically give this property to the 14 remainder beneficiaries. Ultimately, the Court answered this in the negative. Why? Because other provisions of the trust, which had the appearance of boilerplate, gave the trustee broad powers to sell trust property – with one such power expressly applying before the trust was to be divided.
So, the Court concluded that if the settlor had intended to specifically devise the real property to the 14 remainder beneficiaries, this power would not have been included in the trust.
To me, this appeared to be a specific devise at first glance. But, what was hidden in the facts was that the sole asset of the trust was the real property in question. As a result, I think the Court viewed this more as remainder distribution instead of a specific devise – hence the outcome. Typically, regardless of the terms of a will or trust, a fiduciary cannot sell property subject to a specific bequest or devise without the consent of the recipient except in narrow circumstances such as tax apportionment, or abatement for satisfaction of creditor’s claims.
C and S Corporations for Estate Planners: Eligible Shareholder Requirements
This article is part of my subscription offering. Focusing solely on S corporations, this article discusses some of the broader requirements and nuances when it comes to eligible S corporation shareholders.
Ultimately, an S corporation does not qualify for the S corporation election if it has an ineligible shareholder. And, the addition of an ineligible shareholder can terminate the S corporation election. This can be a very bad outcome from a tax perspective. Further, S corporations are limited to 100 shareholders.
There are complex rules for identifying shareholders, and even attributing shareholders among family members or from trusts and estates. This article covers some of these general rules, while teeing up subsequent discussions about specific elections (QSST and ESBT) that can be made for non-grantor trusts to cause such trusts to become eligible S corporation shareholders.