Please join me as we celebrate the 35th Anniversary of the Section of Real Property, Trust and Estate Law’s National CLE Conference in Washington, D.C. on May 10-12, 2023. This marks RPTE’s first time back in the nation’s capital in eight years and our return to an entirely in-person program.
This year’s Conference will present the latest developments in real estate and trust and estate law, as you capture a year’s worth of CLE credits. Our speakers feature leading practitioners and professionals, as well as governmental and judicial insiders. The Conference will also offer valuable networking opportunities with attorneys from across the country, including working lunches hosted by our substantive committees.
To take advantage of this wonderful venue, a variety of social events are planned for your enjoyment, highlighted by a private reception on Thursday evening at the Smithsonian National Museum of African American History and Culture.
I look forward to seeing you in Washington, D.C. in May!
Sincerely,
Hugh F. Drake Chair of the American Bar Association’s Section of Real Property, Trust & Estate Law
www.rptecleconference.com
EDITORIAL BOARD
Editor
Edward T. Brading 208 Sunset Drive, Suite 409 Johnson City, TN 37604
Articles Editor, Real Property Kathleen K. Law Nyemaster Goode PC 700 Walnut Street, Suite 1600 Des Moines, IA 50309-3800 kklaw@nyemaster.com
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Michael A. Sneeringer Porter Wright Morris & Arthur LLP 9132 Strada Place, 3rd Floor Naples, FL 34108 MSneeringer@porterwright.com
Senior Associate Articles Editors
Thomas M. Featherston Jr. Michael J. Glazerman Brent C. Shaffer
Associate Articles Editors
Robert C. Barton Travis A. Beaton Kevin G. Bender Jennifer E. Okcular Heidi G. Robertson Aaron Schwabach Bruce A. Tannahill
Departments Editor James C. Smith
Associate Departments Editor Soo Yeon Lee
Editorial Policy: Probate & Property is designed to assist lawyers practicing in the areas of real estate, wills, trusts, and estates by providing articles and editorial matter written in a readable and informative style. The articles, other editorial content, and advertisements are intended to give up-to-date, practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.
The materials contained herein represent the opinions of the authors and editors and should not be construed to be those of either the American Bar Association or the Section of Real Property, Trust and Estate Law unless adopted pursuant to the bylaws of the Association. Nothing contained herein is to be considered the rendering of legal or ethical advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. These materials and any forms and agreements herein are intended for educational and informational purposes only.
© 2023 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Contact ABA Copyrights & Contracts, at https://www.americanbar.org/about_the_aba/reprint or via fax at (312) 988-6030, for permission. Printed in the U.S.A.
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Cover
Leona Helmsley image courtesy of Wikimedia Commons. Getty Images Photo illustration by Andrew O. Alcala
All correspondence and manuscripts should be sent to the editors of Probate & Property
Probate & Property (ISSN: 0164-0372) is published six times a year (in January/February, March/ April, May/June, July/August, September/October, and November/December) as a service to its members by the American Bar Association Section of Real Property, Trust and Estate Law. Editorial, advertising, subscription, and circulation offices: 321 N. Clark Street, Chicago, IL 60654-7598.
The price of an annual subscription for members of the Section of Real Property, Trust and Estate Law ($20) is included in their dues and is not deductible therefrom. Any member of the ABA may become a member of the Section of Real Property, Trust and Estate Law by sending annual dues of $70 and an application addressed to the Section; ABA membership is a prerequisite to Section membership. Individuals and institutions not eligible for ABA membership may subscribe to Probate & Property for $150 per year. Single copies are $7 plus $3.95 for postage and handling. Requests for subscriptions or back issues should be addressed to: ABA Service Center, American Bar Association, 321 N. Clark Street, Chicago, IL 60654-7598, (800) 285-2221, fax (312) 988-5528, or email orders@americanbar.org.
Periodicals rate postage paid at Chicago, Illinois, and additional mailing offices. Changes of address must reach the magazine office 10 weeks before the next issue date. POSTMASTER: Send change of address notices to Probate & Property, c/o Member Services, American Bar Association, ABA Service Center, 321 N. Clark Street, Chicago, IL 60654-7598.
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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This wholly-revised practical manual describes and analyzes typical lease paragraphs for office, retail, and industrial leases, examining and exploring the concerns, needs, and desires of landlords, tenants, lenders, and brokers by analyzing typical lease paragraphs from each point of view. ambar.org/leasemanual
In writing this issue’s column for Young Lawyers Network, I’m reminded of its origin story. The Young Lawyers Network was created several years ago by RPTE member Hugh Drake (now Chair of the Section) as a means to connect, engage, and recruit young lawyers to the Section who did not find their way into the Section through its fellowship program. If you have considered becoming more involved in the Section, but you’re not sure how, please read on for the best ways to do so and, as a result, raise your level of practice as a lawyer.
In my opinion, the best way to get involved in the Section is to apply to be a Section Fellow for the upcoming bar year. The fellowship program is how I became involved in the Section. I was a Section Fellow from 2016-2018. Each year, the Section selects 10 applicants for its fellowship program. Typically, the Section chooses five individuals for the Trust & Estate division and five individuals for the Real Property division. To be considered for selection, a person must (1) have practiced in the trusts and estates or real property area for at least one year, (2) be younger than 36 years of age or have been admitted to the bar within the last 10 years, and (3) have demonstrated leadership at the state or local bar level or in the ABA Young Lawyers Division. If selected, you are assigned to work with the chair of a substantive committee of the Section. In my case, I was selected to participate in the retail leasing committee, which is
For more information on the RPTE YLN, please contact: Josh Crowfoot, Crowfoot Law Firm, 200 W. M.L.K. Boulevard, Suite 1000, Chattanooga, TN 37402, josh@ crowfootlaw.com.
part of the Leasing Group. The committee chair then gets you involved in the substantive work of the Section. In my case, I wrote a brief article for Probate & Property magazine and assisted colleagues in the Leasing Group with a presentation for the spring RPTE conference. Throughout the year, I learned the mechanics of how the Section works by attending membership committee calls. I also learned a lot by sitting on calls that organized and planned programming for the Section. As you read this, please know there is always an opportunity for you to write an article for the Section or put together an e-CLE or webinar.
This year the 2023 ABA RPTE Spring Conference will be held May 10 – May 12 in Washington, DC. The spring conference is stacked with excellent CLE programming, and you can get all your CLE credits for the entire year in one place. Many of the speakers at the conference also hold leadership positions within the Section, so it is also an opportunity to meet the lawyers in the Section who are most active and who can connect you with a fellow member in your practice area.
The Section has three publications: Probate & Property magazine, the eReport, and the RPTE Journal. Probate & Property releases a bi-monthly issue. Articles for the magazine can be written in a longer format (i.e., featured article) or a shorter format (i.e., the article you are currently reading). If you have an idea for Probate & Property, you can contact the articles editors for Probate & Property listed in the masthead at the front of this issue, and they can assist. Or you can reach out to me, and I’ll make sure you get connected with the right person in the Section. The
eReport is a quarterly electronic publication that includes more practical information and provides news on the Section’s activities and upcoming events.
The RPTE Journal is published three times each year with assistance from the University of South Carolina and best suited for a more in-depth, scholarly article. Each of these publications is always looking for worthwhile content for Section members, and getting published is the easiest way to raise your visibility as a lawyer and within the Section.
The Section is always looking for quality CLE programming in the form of webinars, eCLEs, and presentations at the spring conference. If you have an idea for a program, please reach out to the committee chair for your specific practice area. If you have difficulty finding that information online, feel free to reach out to me, and I’ll put you in touch with the right person. One of the benefits of my serving as an active member of the Section for many years is that I am confident I can connect you with the right person to the extent you want to get more involved in the Section.
Being involved in the ABA RPTE Section has introduced me to an incredible network of top-notch lawyers within our profession. Through my participation in the Section, I’ve learned and improved my skills as a speaker, writer, and practitioner. Also, fellow Section members have even referred business to me, and I have referred business to other members. As with most things in life, you get out of the Section what you put into it. It’s my sincere hope you’ll become an active member of the Section and have the same experience. n
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
State legislatures during their 2022 legislative sessions considered and enacted the following uniform acts and model acts of interest to RPTE members.
The Model Assignment of Rents Act was enacted in Michigan, the sixth state to do so. The act provides a comprehensive statutory system for the creation, perfection, and enforcement of security interests in rents from real property.
The Uniform Commercial Real Estate Receivership Act was enacted in Rhode Island and West Virginia, bringing the total number of enacting states to 12. This act standardizes the rules for receivers appointed to manage commercial property, resulting in greater predictability for litigants, lenders, and parties doing business with a company under receivership.
The Uniform Directed Trust Act was enacted in Kansas, the latest of 16 states to do so. This act clarifies the fiduciary duties and powers of trustees and other persons appointed under the terms of a trust to exercise some of a trustee’s traditional powers. The act was also introduced in New York and Rhode Island.
Utah enacted the Uniform Easement Relocation Act, becoming the second state to adopt this act, which encourages access easement holders to allow benign relocations and provides a procedure to obtain a court order for relocation when it would not harm the easement holder’s access rights. Nebraska has also adopted this act.
The United States Virgin Islands became the fifth jurisdiction to enact the Uniform Electronic Wills Act,
Uniform Laws Update Editor: Benjamin Orzeske, Chief Counsel, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.
provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.
which was also introduced in Georgia, Massachusetts, New Jersey, and the District of Columbia. This act allows estate planners to offer online services, including the execution of wills, with appropriate security procedures. (A companion act, the Uniform Electronic Estate Planning Documents Act, was approved by the Uniform Law Commission in 2022 and is now available for states that wish to adopt more comprehensive reforms.)
The Uniform Fiduciary Income and Principal Act was enacted in Virginia, the sixth state to adopt this modern update of the 1997 Uniform Principal and Income Act. The new act has comprehensive rules for unitrust conversions. The act was also introduced in California, Missouri, and Tennessee.
The most-enacted uniform law in 2022 was the Revised Uniform Law on Notarial Acts, the latest version of which includes optional provisions for remote ink notarization (RIN) in addition to remote online notarization (RON). Delaware, the District of Columbia, Maine, Rhode Island, Vermont, and the US Virgin Islands adopted the latest version of this act, with all but Rhode Island and Vermont electing to allow RIN. They join New Jersey, which enacted the latest revision last year, and 22 other states that have adopted the
2018 version that included the RON option only.
The Uniform Partition of Heirs Property Act was adopted in Maryland and Utah and considered by eight more legislatures last year. This act deters abusive partition actions that can force the sale of family-owned real estate, often resulting in sales prices at public auctions that are far below the fair market value. The act implements a series of due-process protections, including independent appraisal, an option for current owners to purchase the shares of selling owners, and a requirement for open-market sales rather than auctions. Twenty-one states have adopted this act.
Vermont enacted the Uniform Real Property Electronic Recording Act, becoming the thirty-ninth state to do so. This act enables but does not require recording offices to accept deeds and other documents in electronic form for recording. The Missouri Legislature also considered the act this year.
Oklahoma updated its statutes by adopting the Uniform Testamentary Additions to Trusts Act, a more comprehensive version of an earlier uniform law that overrode the common-law prohibition on pour-over wills. Twenty-seven states have adopted the latest version of this act.
Indiana became the thirteenth state to adopt the Uniform Trust Decanting Act, which governs the distribution of trust assets into a new trust with different terms. The act allows decanting for permissible purposes and clarifies when decanting is restricted.
Finally, the Uniform Transfers to Minors Act was adopted in South Carolina, the final state to do so—proving that true uniformity of state law is still possible!
A few other uniform RPTE acts were
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
introduced last year but did not cross the finish line: The Uniform Adult Guardianship and Protective Proceedings Jurisdiction Act in Florida, the new Uniform Community Property Disposition of Death Act in Nebraska, the Uniform Power of Attorney Act in the District of Columbia and Vermont, the Uniform Real Property Transfer
on Death Act in Maryland, New Hampshire, and Tennessee, and the Revised Uniform Residential Landlord and Tenant Act in Kentucky. In two states that have year-long legislative sessions, bills were pending at press time: the Uniform Trust Code in New York and the Uniform Power of Attorney Act in Michigan.
ULC Legislative Counsel provides support for the enactment of uniform laws in your state. Contact ULC Chief Counsel Benjamin Orzeske at (312) 4506621 or borzeske@uniformlaws.org. More information about these acts and other ULC drafting projects is available at www.uniformlaws.com. n
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
The Editorial Board of Probate & Property magazine is interested in reviewing manuscripts in all areas of trust and estate or real property law. Probate & Property strives to present material of interest to lawyers practicing in the areas of real property, trusts, and estates. Authors should aim to provide practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.
The complete Memorandum for Authors is available online at ambar.org/ppmemo.
The editors of Probate & Property are pleased to announce the winners of the magazine’s 2022 Excellence in Writing Awards:
Protect Your Practice: Necessary Engagement Letter Clauses to Revisit
By Maria E. O’Sullivan, Laura Joy Lattman, Soo Yeon Lee, and Sahmra A. Stevenson (January/February)
REAL PROPERTY
The Remotest Idea—Practical and Ethical Lessons Learned During the Pandemic
By Pamela E. Barker, Melissa G. Powers, and Ben Lund (September/October)
TRUST & ESTATE Crypto and Retirement Accounts—Can You?
By Mark R. Parthemer (September/October)
REAL PROPERTY
Key Lease Provisions to Consider in Due Diligence
By Amy Lawrenson, Imran Naeemullah, and Karen Nashiwa (July/August)
TRUST & ESTATE
Speechifying and Scribbling—A Candid Discussion about the “Why” and “How” of Integrating Public Speaking and Presentations into Your Trusts and Estates Career
By Stephen R. Akers, Carol A. Harrington, Paul S. Lee, Dana G. Fitzsimons Jr., and Terrence Franklin (November/December)
The Aerial View of Land Use: Preempting the Locals for Improved Housing Access
By Shelby D. Green and Bailey Andree (September/October)
TRUST & ESTATE
Celebrity Estate Planning: Misfires of the Rich and Famous V
By Jessica Galligan Goldsmith, Stacia C. Kroetz, David E. Stutzman, Daniel J. Studin, Erica Howard-Potter, Lauren G. Dell, and Samuel F. Thomas (September/October)
All articles published in Probate & Property during the current year will be eligible for the 2023 Excellence in Writing Awards. Any author interested in submitting an article should contact either Michael Sneeringer or Kathleen Law at the addresses listed on page 3. The magazine’s “Memorandum for Authors” is posted on the ABA website at ambar.org/ppmemo.
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Leona Helmsley image courtesy of Wikimedia Commons. Getty Images. Photo illustration by Andrew O. Alcala
Sensational sobriquets include the King of Swing, the Queen of Soul, the Sultan of Swat, Satchmo, the Say Hey Kid, the Manassas Mauler, and the Man in Black. A worthy addition is that unflattering moniker bestowed upon Leona Helmsley, a/k/a the Queen of Mean. This article proposes a new title for the late Leona—The Queen of Probate & Property. (The common or given names for those highlighting the start of this article, along with many more amazing appellations, are at the end of this article in The 100 Nickname Quiz! Take the quiz and see if you can identify all 100.)
Leona Helmsley established her place in the pantheon of wildly wealthy real property titans over decades, moving from high school dropout, to successful agent, to owning an amazing array of prized properties, including the Empire State Building. Along the way, she married real estate mogul Harry Helmsley in 1972, was convicted of federal tax fraud and spent 18 months in prison before being released on January 26, 1994, and inherited her husband Harry’s fortune upon his death in 1997 under a will he signed the day before Leona was released from prison.
A.
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
After accumulating an estate conservatively estimated at more than $5 billion, she passed away on August 7, 2007. But this article leaves the real property tale for others. See, e.g., Ransdell Pierson, The Queen of Mean: The Unauthorized Biography of Leona Helmsley (1989); Richard Hammer, Helmsleys: The Rise and Fall of Harry and Leona Helmsley (1990).
Instead, this article focuses on the probate side. Leona left a will addressing a cornucopia of issues with practical implications for even not-so-wealthy souls. With the 15th anniversary of Leona’s departing, we can reflect upon a few of her likely estate planning desires, review the related legal techniques used, assess the successes and failures of that planning, and distill some practical implications for today.
This article surveys six probate issues or opportunities, specifically: (i) using a will as the client’s primary dispositive vehicle; (ii) directing that the deceased be buried with valuable property; (iii) directing burial next to a pet; (iv) including long-term burial wishes in a will; (v) bequeathing money for the benefit of a pet or for the maintenance of a mausoleum; and (vi) tying behavior-incentive conditions to a bequest in trust.
Leona put out the family laundry, and her misanthropy, for the world to see. A copy of her will is available to all. Last Will and Testament of Leona Helmsley, Living Trust Network, https://bit. ly/3WauoJk. She left $12 million for the benefit of her nine-year-old, four-anda-half-pound dog, which was more than she left outright to any human being.
Despite the typical reluctance to speak ill of the dead, the public disclosure of her will inspired venom. See, e.g., Jeffrey Toobin, Rich Bitch: The Legal Battle over Trust Funds for Pets, New Yorker, Sept. 22, 2008, at 38. One philosophy professor compared her $12 million doggie transfer to “setting money on fire in front of a group of poor people.” Id. at 48 (quoting Professor Jeff McMahan of Rutgers University).
For some clients, this could be a cautionary tale. In the interest of
minimizing public scrutiny, clients can use a simple pour-over will and then a trust containing any unusual terms. The standard pour-over will would be a public document, but the trust with the juicy bits would be available to only the trustees, the beneficiaries, and their advisors. See Susan N. Gary, Transfer-onDeath Deeds: The Nonprobate Revolution Continues, 41 Real Prop., Prob. & Tr. J. 529, 537 (2006) (“[Unlike a will or deed] a revocable trust is not a public document . . . so the owner’s plan of distribution will not be public.”).
Keeping It Buried Leona’s will directs that she be “interred wearing [her] golden wedding band (which is never to be removed from [her] finger).” One generally can destroy his own property during lifetime, but a direction to destroy property at death may be capricious or violate public policy. One cannot validly bequeath $1,000 to a trustee with the direction to throw the $1,000 “into the sea,” and a trustee who followed such a direction would be liable to the estate for the loss. Restatement of Trusts § 124, cmt. g, Illus. #5. A Pennsylvania court declared invalid a decedent’s direction in her will that she be buried with her “diamonds and other jewelry.” Meksras Estate, 63 Pa. D.&C.2d 371 (Penn. Ct. Common Pleas 1974). The court reasoned that because the will was a public document, obeying the decedent’s direction would encourage grave robbing and thereby violate public policy.
On the other hand, there are many reports of decedents being buried in their cars or with their prized possessions. See Abigail J. Sykas, Waste Not, Want Not: Can the Public Policy Doctrine Prohibit the Destruction of Property by Testamentary Disposition, 25 Vt. L. Rev. 911, 926 (2001). When such a direction, which effectively destroys the property for the living, would be capricious or contrary to public policy is not clear. Id. (referring to the “abstract, amorphous public policy rationale”). A tome voted the creepiest book commonly found in U.S. law libraries indicates that a request to be buried wearing a wedding ring is
common. Percival Jackson, The Law of Cadavers 127, 183 (2d ed. 1950).
There are at least two takeaways regarding Leona’s approach. First, in light of concerns about grave robbing, it may be advisable to delete words like “golden” or other modifiers indicating significant value from the description. Second, Leona’s direction that the band should “never be removed from [her] finger” is insightful, as relatives reportedly have reopened graves to recover jewelry. See Kate Meyers Emery, More Famous Dead, Bones Don’t Lie (Dec. 20, 2012), https://bit.ly/3Didsba (discussing the reopening of Sammy Davis Jr.’s grave to grab $70,000 worth of jewelry). Although with decomposition the wedding band may fall from Leona’s finger eventually, she likely received some comfort from this will provision.
The media often reported that Leona wanted to be buried with her dog, but actually Leona’s will directed that the dog’s “remains shall be buried next to [Leona’s] remains.” It could have been crowded around Leona, as her will also directed that she be buried “next to” her predeceased husband, as well as “next to” her predeceased son. Leona and her planners were criticized for including this doggie provision because at the time an animal burial with a human was not authorized under either New York law or the rules of her chosen cemetery. Toobin, supra
Nevertheless, in hindsight, if consistent with the testator’s wishes, it may be wise to include such a provision. State laws are changing. In 2016, New York changed its law to provide that the cremated remains of a domestic animal could be buried with a human being. Many states are still silent on the issue, some states are on the road to change, and some states allow “whole-family” cemeteries with “full-body burial of a pet’s remains in the family burial plot.” See Elder Law 101: Can You Be Buried with Your Pet? (Mar. 4, 2020), http:// www.elderlawanswers.com; Sara Redding Ochon, Can Pet Ashes Be Buried with Humans? USA State by State Laws, hppts://farewellpet.com (offering a
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
50-state click-on guide to burying pet ashes with a human).
In this evolving era, what was prohibited today may be authorized tomorrow. As the testator may not die for some time, it may be advisable to include these clauses in a will and also to spell out the client’s “second choice” if legal or cemetery restrictions interfere with the most-favored plan. For example, if either law or cemetery restrictions prohibit human burial with a particular type of pet, would the testator want the animal cremated and the ashes sprinkled on the decedent’s grave (or deposited in an urn that could be buried at the foot of the testator’s plot)? Speaking back in 2013, one industry insider remarked that undertakers “will tell you ‘not a day goes by when I don’t put an urn of an animal into the casket of a human being secretly for a family.’” Elder Law 101, supra
Her dog died about four years after Leona. Because the dog could not be buried next to Leona, the dog was cremated and the ashes placed in an urn that was “privately retained.” Cara Buckley, Cosseted Life and Secret End of a Millionaire Maltese, N.Y. Times, June 9, 2011. When asked if the dog’s urn had been, or would be, added to Leona’s mausoleum, a member of the cemetery’s board stated, “In all honesty . . . we don’t know.” Id.
Deeply rooted tensions dominate the law regarding who controls the disposition of human remains. The refusal to find that the decedent has a traditional property right in his corpse suggests that the right of sepulcher rests with the living—usually first a spouse, and if none, the next of kin. Consistent with this view, most states allow an individual to designate an agent to make the decisions under a power of attorney or other document. See, e.g., Kimberly E. Naguit, Letting the Dead Bury the Dead: Missouri’s Right of Sepulcher Addresses the Modern Decedent’s Wishes, 75 Mo. L. Rev. 249 (2010). In reliance on a state statute, the Iowa Supreme Court famously refused to follow a decedent’s clear direction in
her will and a signed letter that she be buried in Montana, and instead found that her husband had the right to bury her in Iowa. In re Estate of Whalen, 827 N.W.2d 184 (Iowa 2013).
On the other hand, Roman law and long-standing common law principles respect “that decedents have the right [by will] to determine the manner and location of the disposition of their remains.” Tanya D. Marsh, You Can’t Always Get What You Want: Inconsistent State Statutes Frustrate Decedent Control over Funeral Planning, 55 Real Prop., Tr. & Est. L.J. 147, 150 (2020) (providing a thorough analysis of the history, policy, case law, and legislation for this issue, and including “a comprehensive appendix listing and summarizing each states’ . . . laws as an aid to practitioners”).
Leona’s will not only directed that she be buried next to her predeceased husband and her son at the Woodlawn Cemetery, but also it addressed a possibility far in the distant future. Her will directed that if her husband and son should be relocated, then she also should be relocated and reinterred next to them. She also directed that her brother and his wife be permitted to be buried in the Helmsley mausoleum, “but no other person.” Whether this latter desire would be achieved likely will depend on the applicable deed, agreement, and affidavit regarding the mausoleum and its use. See generally Anne K. Hansen, Who Is in My Grave? A Comparison of State and Local Laws in Illinois and Utah That Guide Resolution of Grave Plot Ownership Claims, 45 S. Ill. U. L.J. 139 (2020).
A will may be strong evidence of the decedent’s intentions regarding the
treatment of the body. “For centuries the last expression of bodily autonomy has been received with solemnity and honored by our laws to the fullest practical extent when declared with the formality of the last will and testament.” In re Estate of Whalen, 827 N.W.2d at 195 (Cady, C.J., dissenting). Anticipating the future may be especially relevant when there are doubts about the intended duration of the burial. In some cultures and geographic areas, burial frequently is only for a term of years based on an estimate of the time expected for the body to decompose to a certain extent.
Leona’s estate may be best known for its influence on estate planning for pets. Her will left $12 million in trust for the benefit of her nine-year-old, four-anda-half-pound Maltese named Trouble. Honorary trust statutes typically provide that only a reasonable amount may be held in a pet trust and that any excess must pass to the designated subsequent taker or the residuary beneficiary. In response to a request from Leona’s fiduciaries, a New York judge ruled that only $2 million was reasonable for her dog and that the other $10 million was excessive. Nevertheless, a leading pet trust expert astutely observed, “It’s not the reduction that is important; it’s that the judge said two million was appropriate. It’s a landmark case.” Toobin, supra, at 43 (quoting attorney Rachel Hirshfeld). That expert also said, “One of the greatest moments in my life was when the judge awarded $2 million [for the Helmsley dog].” Id.
Although it did not get the media
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Decedents have the right [by will] to determine the manner and location of the disposition of their remains.
barking like the transfer to the dog trust, Leona’s will also created a $3 million mausoleum fund to maintain, in “excellent condition,” the “final resting places” for herself, her husband, her son, and her mother, father, sister, and brotherin-law. The will also stated that all these final resting places would be inspected at least quarterly and “acid washed or steam cleaned at least once a year.” In addition, the fund may maintain subsequent final resting places if any of them are relocated. Apparently, there has been no challenge to the amount of the Helmsley mausoleum fund, perhaps because there is New York precedent for spending amazing amounts on burial and maintenance. See, e.g., In re Baeuchle’s Will, 82 N.Y.S.2d 371 (N.Y. 1947) (rejecting an argument that spending approximately $150,000 for the decedent’s burial and mausoleum maintenance fund in 1946 was unreasonable when the decedent’s entire estate was $175,000; in today’s dollars the amount spent on burial and maintenance in that case was approximately $2.15 million).
For both honorary trusts, Leona and her planners presumably anticipated the amounts would be challenged and smartly designated a subsequent taker for any amounts determined excessive. With honorary trusts, a common concern is enforcement because, by definition, there will be no surviving human beneficiary with standing to sue to police compliance. Leona, however, appointed five trustees for the mausoleum maintenance trust, so presumably there will be one or more individuals who will monitor compliance. In addition, Leona used her will to help justify the amounts contributed to the mausoleum trust. The will stated the mausoleums are to be inspected at
least quarterly, maintained in “excellent condition,” and acid-washed or steamcleaned at least annually.
In contrast, her will failed to list anticipated expenses that could justify the contribution to the pet trust. It may be advisable for a testator to explain why he is contributing to a pet trust by listing and explaining the expected expenses, such as veterinarian fees, special food, the expenses of a companion animal, and perhaps, most important, a fund for extraordinary drugs and medical care because the testator would prefer that the pet undergo surgery or other complicated procedures rather than being put to sleep. Some owners spend incredible amounts on drugs, surgery, dental care, and various medical treatments for their pets.
A decedent may desire to exert deadhand control over the future behavior of the living. Some testators provide incentives for children or grandchildren to end a drug habit and enter a rehab program, end an alcohol addiction, go to college or obtain an advanced degree, wed a member of a particular religious faith, or cease or pursue other activities. See Ellen Evans Whiting, Controlling Behavior by Controlling the Inheritance: Considerations in Drafting Incentive Provisions, 15 Prob. & Prop., Sept/Oct. 2001, at 6. Generally, these incentive clauses can be enforced if they are not too vague and do not violate public policy. Id.
For each of her favorite grandchildren, David and Walter, Leona left $5 million to a charitable remainder trust paying a five percent annual unitrust amount, which would be approximately $250,000 per year (initially) to David
and Walter. Leona’s will provided that a grandchild would continue to receive the annual payouts only if the grandchild visited the grave of his father (Leona’s son) “at least once each calendar year, preferably on the anniversary of [his] death (March 31, 1982).”
The will directs the five trustees of the charitable remainder trust to place a visitor book in the mausoleum, and the trustees are to rely on the visitor book in deciding if the grandchild satisfied the requirement. The trustees have no further duty to inquire and “shall have the right to presume that the [grandchild] did not visit the grave during that calendar year if [the grandchild’s] signature does not appear on the register for such calendar year.” This forfeiture provision will not apply if the trustees, in their discretion, determine a grandchild could not visit “by reason of physical or mental disability.”
While these provisions have been criticized as controlling, it seems unlikely that they would violate public policy. See Toobin, supra. Furthermore, the provisions appear sufficiently clear to avoid being invalidated for vagueness. Those drafting similar clauses may take away a few points—include exceptions when the restriction would no longer be appropriate (such as upon disability), be precise about the timing (such as clarifying that an annual requirement must be performed within each calendar year), and spell out how the trustees are to determine if the beneficiary met the condition.
On the probate side, Leona Helmsley merits the title Queen of Probate & Property because her will presents and addresses an astounding array of issues. For drafters, a recurrent lesson from her majesty’s will is the importance of anticipating post-death contingencies. Although few clients will have the wealth and personality of the Queen of Mean, many clients may appreciate a planner who can raise and address many of the concerns reflected in Leona’s will. n
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Incentive clauses can be enforced if they are not too vague and do not violate public policy.
The answers are at the end. Many of these nicknames are discussed in Peter Carlson, A Short History of Nicknames, Wash. Post, Apr. 2, 1998. “American history can be written in a rollicking roll call of nicknames.” Id.
Singers
#1: The Boss ____________________________________ #2: Godfather of Soul ____________________________________ #3: King of Pop ____________________________________ #4: The Man in Black ____________________________________ #5: Old Blue Eyes ____________________________________ #6: P. Diddy/Puffy ____________________________________ #7: Queen of Soul ____________________________________ #8: The Singing Cowboy ____________________________________
#9: Dizzy (trumpeter/jazz musician) _________________________________
#10: The Duke (actor) _________________________________
#11: J. Lo (actor) _________________________________
#12: King of Swing (clarinetist/band leader) _________________________________ #13: The Little Tramp (actor) _________________________________ #14: Muscles from Brussels (actor/martial artist) _________________________________ #15: Satchmo (trumpeter/singer) _________________________________ #16: Mr. Warmth (comedian) _________________________________
#17: The Bard of Avon (1564–1616) ________________________________
#18: Doctor Seuss (1904–1991) ________________________________
#19: King of Horror (1947–) ________________________________ #20: Papa (1899–1961) ________________________________
#21: Bubba ________________________________ #22: Dubya ________________________________ #23: Father of the Constitution ________________________________ #24: Gipper ________________________________
#25: Ike ________________________________
#26: Old Hickory ________________________________ #27: The Rail Splitter
#28: Sage of Monticello
#29: Silent Cal
#30: Tricky Dick ________________________________
#31: The Trust Buster ________________________________
#32: The Body (Minn.) (1951–) ________________________________
#33: The Governator (Calif.) (1947–) ________________________________
#34: Governor Moonbeam (Calif.) (1938–) ________________________________
#35: The Iron Lady (England) (1925–2013) ________________________________ #36: Kingfish (Louisiana) (1893–1935) ________________________________
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
#37: Black Jack (General) (1860–1948) ______________________________
#38: Lionheart (King) (1157–1199) ______________________________
#39: The Little Corporal (Emperor) (1769–1821) ______________________________
#40: Blackbeard (pirate) (c.1680–1718) _____________________________
#41: Buffalo Bill (American old west) (1846–1917) _____________________________
#42: Jackie O. (first lady) (1929–1994) _____________________________
#43: Jack the Dripper (abstract painter) (1912–1956) _____________________________
#44: Scarface (gangster) (1899–1947) _____________________________
#45: Lady Bird (first lady) (1912–2007) _____________________________
#46: Lucky Lindy (aviator) (1902–1974) _____________________________
#47: The Oracle of Omaha (investor) (1930–) ______________________________
#48: R.B.G. (justice) (1933–2020) ______________________________
#49: The Unabomber (criminal) (1942–) ______________________________ #50: Wizard of Menlo Park (inventor) (1847–1931) ______________________________
#1: All Rise _________________________________
#2: Big Hurt _________________________________
#3: Big Papi _________________________________
#4: Catfish _________________________________ #5: Charlie Hustle _________________________________ #6: Cool Papa _________________________________ #7: Mr. Cub _________________________________ #8: Georgia Peach _________________________________ #9: Hammerin’ Hank _________________________________ #10: Joltin’ Joe _________________________________ #11: Mr. October _________________________________ #12: The Ryan Express _________________________________ #13: Satchel _________________________________ #14: The Say Hey Kid _________________________________ #15: The Splendid Splinter _________________________________ #16: The Sultan of Swat _________________________________ #17: Yogi _________________________________
#18: Broadway Joe _______________________________ #19: The Bus _______________________________ #20: Joe Cool _______________________________ #21: Mean Joe _______________________________ #22: Prime Time/Neon Deion _______________________________ #23: Refrigerator ________________________________ #24: Sweetness ________________________________
#25: Black Mamba _______________________________ #26: CP3 _______________________________
#27: Dr. J _______________________________ #28: Earl the Pearl _______________________________ #29: His Airness _______________________________
#30: King James _______________________________ #31: Larry Legend _______________________________ via Wikimedia Commons
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
#32: Magic _______________________________ #33: Pistol Pete _______________________________ #34: Wilt the Stilt _______________________________ #35: Wizard of Westwood _______________________________ #36: Zen Master _______________________________
#37: The Great One __________________________ #38: Mr. Hockey __________________________ #39: Super Mario __________________________
#40: Hulk ____________________________ #41: Nature Boy ____________________________ #42: The Rock (also an actor) ____________________________
#43: The Black Knight _________________________ #44: The Golden Bear __________________________ #45: The Great White Shark __________________________
#46: The Greatest ___________________________ #47: Manassas Mauler ___________________________ #48: Raging Bull ___________________________ #49: Smokin’ Joe ___________________________ #50: Sugar Ray ___________________________
Answers:
via Wikimedia Commons
#38=Gordie Howe; #39=Mario Lemieux; #40=Terry Bollea (Hulk Hogan); #41=Richard Fliehr (Ric Flair); #42=Dwayne Johnson; #43=Gary Player; #44=Jack Nicklaus; #45=Greg Norman; #46=Muhammad Ali; #47=Jack Dempsey; #48=Jake LaMotta; #49=Joe Frazier; #50=Walker Smith Jr. (Sugar Ray Robinson or Sugar Ray Leonard)
Paige; #14=Willie Mays;#15=Ted Williams; #16=Babe Ruth; #17=Lawrence Berra; #18=Joe Namath; #19=Jerome Bettis; #20=Joe Montana; #21=Joe Greene; #22=Deion Sanders; #23=William Perry; #24=Walter Payton; #25=Kobe Bryant; #26=Chris Paul; #27=Julius Erving; #28=Earl Monroe; #29=Michael Jordan; #30=LeBron James; #31=Larry Bird; #32=Earvin Johnson; #33=Pete Maravich; #34=Wilt Chamberlain; #35=John Wooden; #36=Phil Jackson; #37=Wayne Gretzky;
Answers: Sports Nicknames: #1=Aaron Judge; #2=Frank Thomas; #3=David Ortiz; #4=Jim Hunter; #5=Pete Rose; #6=James Bell; #7=Ernie Banks; #8=Ty Cobb; #9=Hank Aaron; #10=Joe DiMaggio; #11=Reggie Jackson; #12=Nolan Ryan; #13=Leroy
#48=Ruth Bader Ginsberg; #49=Theodore John Kaczynski; #50=Thomas Edison
#38=Richard I of England; #39=Napoleon Bonaparte; #40=Edward Teach; #41=William Cody; #42=Jacqueline Kennedy Onassis; #43=Jackson Pollock; #44=Al Capone; #45=Claudia Alta Johnson; #46=Charles Lindbergh; #47=Warren Buffett;
#27=Abe Lincoln; #28=Thomas Jefferson; #29=Calvin Coolidge; #30=Richard Nixon; #31=Teddy Roosevelt; #32=Jesse Ventura; #33=Arnold Schwarzenegger; #34=Jerry Brown; #35=Margaret Thatcher; #36=Huey Long; #37=John J. Pershing;
Sinatra; #6=Sean Combs; #7=Aretha Franklin; #8=Gene Autry; #9=John (Dizzy) Gillespie; #10=John Wayne; #11=Jennifer Lopez; #12=Benny Goodman; #13=Charlie Chaplin; #14=Jean-Claude Van Damme; #15=Louis Armstrong; #16=Don Rickles;#17=William Shakespeare; #18=Theodor Seuss Geisel; #19=Stephen King; #20=Ernest Hemingway; #21=William Clinton; #22=George W. Bush; #23=James Madison; #24=Ronald Reagan; #25=Dwight Eisenhower; #26=Andrew Jackson;
Answers: Non-sports Nicknames: #1=Bruce Springsteen; #2=James Brown; #3=Michael Jackson; #4=Johnny Cash; #5=Frank
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
BROKERS: Construction contractor who is not licensed as broker is not entitled to compensation for finding buyer for property. Choice Homes LLC (Choice), a construction contractor, was owned by two individuals who were the only employees. Choice delegated all office work and actual construction to subcontractors, who were, like the owners, unlicensed to sell real estate. In 2018, Choice entered into an oral agreement to buy a residential property if Choice found buyers who would purchase the property from Choice. Choice found buyers and executed contracts for the owners of the property to sell to Choice for $750,000 and the buyers to purchase from Choice for $1.3 million. Choice never completed its contractual obligations under the buyers’ contract, causing the buyers to not proceed to closing. After talks with both parties regarding disclosures over the condition of the property, Choice never sought to enforce either contract. Later that year the property owners did sell the property to the buyers without Choice’s involvement. Choice sued the buyers to get “what’s fairly due” for introducing the parties and finding the buyers their “dream property.” The trial court granted the buyers summary judgment in full and dismissed Choice’s complaint, citing Nebraska Real Estate License Act (Act), Neb. Rev. Stat. §81.885.01-81.885.55, which requires licensing as a broker or salesperson to collect a fee or commission on the sale of real estate. The court looked beyond the labels used by the parties as to their roles and concluded that Choice acted
Keeping Current—Property Editor: Prof. Shelby D. Green, Elisabeth Haub School of Law at Pace University, White Plains, NY 10603, sgreen@law.pace.edu. Contributor: Prof. Darryl C. Wilson.
Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
to negotiate a sale of the property with the expectation of receiving compensation for its actions. Choice appealed, and the supreme court affirmed, noting that the Act prohibits lawsuits for compensation by non-licensees, broadly defines the term “broker,” and provides that a single act committed by a person required to be licensed violates the Act. The court found that Choice performed a plethora of prohibited acts for the sellers and buyers, including finding and soliciting the sale to the buyers, introducing the sellers and buyers, and negotiating the terms of the sale to the buyers. It rejected Choice’s claim to the statutory exception that it was acting on its own behalf as an owner of the property instead of on behalf of others. In fact, Choice performed multiple prohibited acts before and after its purported ownership period, all with the expectation of receiving compensation. Choice Home, LLC v. Donner, 976 N.W.2d 187 (Neb. 2022).
EMINENT DOMAIN: Taking of a temporary limited easement is not compensable under the before-andafter evaluation methodology used for permanent easements. A county’s highway bypass project included the reconstruction, relocation, and expansion of a highway abutting the backyard of the Backuses’ residence. As part of the project, the county separately acquired a temporary limited easement (TLE) within the greater
highway easement already owned by the county. Backus sought compensation from the county, alleging various damages stemming from the TLE. The county granted compensation, but Backus appealed the amount, claiming he was owed the difference in the value of his property before the project and after the project’s completion under Wis. Stat. § 32.09(6g). The supreme court noted that although the statute does not specify whether the beforeand-after formula applies to both permanent and temporary easements, the formula addresses severance damages, which is compensation awarded to a landowner for loss in value after a partial taking of land. The before-andafter valuation is intended to capture the effect of the entire public improvement project on the fair market value of the property. Because the methodology attempts to address permanent reductions in fair market value, the statute cannot be read to apply to TLEs. A TLE is only a temporary use, with the owner regaining all rights when the TLE terminates. Applying the before-and-after measure for TLEs would be inconsistent with the statute, as it would never capture the actual effect on the value of the TLE while it existed; instead, it would capture the effect on the value of the same property interests—the whole property burdened with the permanent easement but not the TLE. Because the statute does not apply, compensation for the taking of TLEs must be calculated under constitutional and common-law principles. Backus v. Waukesha County, 976 N.W.2d 492 (Wis. 2022).
FORECLOSURE: Ad stating that sale is subject to first deed of trust may render foreclosure of condominium super-priority lien invalid. Snowden defaulted on her condominium assessments with more than $12,000 in
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
arrears. The condominium association, Capital Park, initiated foreclosure and, in the newspaper ad for the sale, stated that the property would be sold “subject to any prior liens, encumbrances, and/or municipal assessments, if any, including subject to the first mortgage lien.” The highest bid at the sale was $63,000 by Omid Land Group. The trustee’s deed to Omid stated that conveyance was “subject to any prior liens and mortgages, including the first mortgage lien.” Nearly a year and a half later, U.S. Bank filed a complaint for judicial foreclosure, alleging that Snowden owed $545,769 secured by a first mortgage on the condominium unit. Omid filed an answer and counterclaim, alleging ownership of the property based on the trustee’s deed. U.S. Bank answered, asserting that the sale was invalid as not conducted in compliance with the law and that the terms of the sale were unconscionable. U.S. Bank later claimed that the condominium foreclosure sale was void as a matter of law because Capital Park advertised the sale as subject to existing mortgage liens. The trial court granted summary judgment to Omid. The court of appeals reversed, largely on the ground that the trial court failed to apply current law on the operation of super-priority liens. As made plain by recent court decisions, the foreclosure of a condominium “super-priority” lien extinguishes all other liens on the property. This is the case even if the condominium association tries to preserve the mortgage holder’s lien by advertising the sale as subject to the first mortgage or deed of trust and even if the association tries to recover more than the most recent six months portion of arrearages in assessments entitled to super-priority status. But, as a matter of equity, the holder of the first deed of trust can seek to avoid extinguishment by challenging the validity of the sale on the ground that the unit sold at a price greatly below the amount of the mortgage and the apparent value of the unit. The erroneous statement in the advertisement of sale that the title would be subject to the first deed of trust resulted in an insufficient and unconscionably low sales
price by misrepresenting the effect of the foreclosure sale on the bank’s deed of trust. Omid’s bid was only 20 percent of the original mortgage and significantly smaller than the mortgage debt at the time of foreclosure. The appellate court remanded for further proceedings. U.S. Bank Trust v. Omid Land Grp., 279 A.3d 374 (D.C. 2022).
LANDLORD-TENANT: Tenants exposed to lead poisoning, who have not obtained a judgment or settlement against landlord, are not third-party beneficiaries under landlord’s liability insurance. Two classes of former and present tenants sued landlords for exposure to lead paint in their apartments. Between the two groups’ filings, the landlord’s liability insurers were successful in either rescinding the policies or reducing the coverage on the basis that the landlords misrepresented that there was no lead paint on the premises, when in fact the city health department had issued citations for lead paint. The tenants sought recovery under the original policy limits. At trial, the insurers moved to dismiss on the basis that the tenants were not thirdparty beneficiaries under the original policies instead, only incidental beneficiaries without enforcement rights. The trial court denied the motion, ruling that the tenants were third-party beneficiaries with vested rights in the policies as they existed before rescission or modification and that any agreements between the insurers and the landlords did not affect the tenants’ rights. The intermediate appellate court affirmed, ruling that the claimants obtained vested rights in the policies when they suffered their injuries. On further appeal, the tenants lost. The court explained the difference between the two types of contract beneficiaries. A third-party beneficiary is such because the parties intend for the third party to have that status, with the right to enforce the terms of the agreement. In the insurance context, under the common law and by the express terms of the insurance policy, a party who has obtained a judgment or settlement against the named insured is
a third-party beneficiary, entitled to rights under the policy as it existed at the time of judgment or settlement. Although nothing in the landlords’ policies required the insurer or the named insured to obtain the consent of any other person before canceling or changing the policy terms, any such changes would not affect the vested rights of tort claimants who had secured judgments against or entered into approved settlements with their landlords before cancellation or modification of coverage. In contrast, a party who is only injured by the insured is viewed as an incidental beneficiary but with no affirmative rights against the insurer. Thus, the tenants who had only suffered injury from the lead paint, but had not yet reduced their claims to judgment or settlement at the time the policies were changed, were bound by the reduced insurance amounts. CX Reinsurance Co. v. Johnson, 282 A.3d 126 (Md. 2002).
MECHANICS’ LIENS: General contractor’s failure to post notice of commencement of work to internetbased registry does not impair priority of later-filed subcontractors’ mechanics’ liens. In 2017, Dostal Developers, the owner of five lots in a new residential subdivision, served as a general contractor and hired two subcontractors, Borst and Kelly, to install utilities and roads and to grade the lots. The Iowa mechanics’ lien statute required Dostal to post a notice within ten days after the commencement of work to the Iowa Mechanic’s Notice and Lien Registry (MNLR) website, Iowa Code §572.13(A)(1), but Dostal never posted a notice. Later in 2017, Dostal obtained construction loans for work on the five lots from Finance of America Commercial (FAC), which promptly recorded its construction mortgages. In 2018, the two subcontractors posted notices and mechanics’ liens for work done in 2017. Dostal defaulted on the mortgages in 2018, and the subcontractors were not paid. The subcontractors filed foreclosure actions and FAC moved to dismiss, pointing to failures of the subcontractors to post notice of the liens within ten days of the commencement of work
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
by Dostal. FAC claimed that the failure to comply with Iowa Code §572.13A(1) rendered the liens inferior, as a matter of law. FAC then filed a foreclosure action as well. The trial court found that all parties were entitled to foreclose, but that the mechanics’ liens had priority because Iowa Code § 572.13 gives a timely posted mechanic’s lien priority over all other liens that are perfected after the beginning of the contractor’s work. Because the subcontractors posted their liens within 90 days of completing their work, under Iowa Code §572.18(1), and FAC’s mortgages were recorded after they began their work, the subcontractor liens were superior. The supreme court affirmed, finding that the ten-day deadline for posting the notice of commencement to the registry applies only to general contractors and owner-builders, not to subcontractors. In the court’s reading of the statute, it would be absurd to require subcontractors to comply with the same ten-day deadline, not knowing when or if the general contractor had met the deadline; the ten days would necessarily expire before the condition precedent for posting was even satisfied. Because Borst and Kelly started their work before FAC’s mortgages were recorded, their liens had priority over FAC’s construction mortgage. Borst Bros. v. Finance of America Commercial, LLC, 975 N.W.2d 690 (Iowa 2022).
MECHANICS’ LIENS: Time for recording lien was not extended by COVID-19 emergency order tolling court proceedings. During the early months of the COVID-19 pandemic, a contractor sought to establish a mechanic’s lien on land leased to a developer for whom the contractor had performed work but had not been paid. In April 2020, the contractor recorded a notice of contract in the registry of deeds, but the notice failed to name the actual owner of the property land and also incorrectly described a neighboring parcel as the land. In July, the contractor filed a complaint seeking to enforce its mechanic’s lien. Then in September, the contractor corrected its error by recording an amended notice of
contract, properly identifying the owner and the land, but the statutory deadline of 90 days after completion of the work had elapsed. The landowner filed a motion to discharge the mechanic’s lien based on a late recording. The contractor argued that the 90-day statutory deadline was extended by four emergency orders of the Supreme Judicial Court, issued on April 1, April 27, May 26, and June 24, 2020, which modified in-person court operations and tolled “all deadlines set forth in statutes” that expired between March 17, 2020, and June 30, 2020. The trial court concluded that the deadline had been tolled. On appeal, the court explained that the referenced orders, issued pursuant to its superintendence authority under Mass. Gen. Law ch. 211, § 3, concerned court operations and pertained only to cases pending in court or to be filed in court, and did not apply to executive agencies such as the registry of deeds. Thus, the contractor lost its mechanic’s lien because it recorded a proper notice of contract too late. Graycor Constr. Co. v. Pacific Theatres Exhibition Corp., 193 N.E.3d 1083 (Mass. 2022).
MORTGAGE: Recording notice of trustee’s sale does not accelerate debt. In 2007, Bridges obtained a $500,000 loan to purchase a residential property, secured by a deed of trust. The promissory note and deed of trust included optional acceleration clauses authorizing the lender to accelerate the debt if Bridges defaulted. Both instruments required that the lender give notice of acceleration to Bridges, and the deed of trust also required that the lender provide notice of “(a) the default; (b) the action required to cure the default; (c) a date . . . by which the default must be cured; and (d) that failure to cure the default . . . may result in acceleration . . . and sale of the property.” In 2008, Bridges defaulted on the loan. The lender sent Bridges a notice of default, but it did not state that failure to cure the default would result in the acceleration of the loan or sale of the property. Bridges did not cure the default, which led to two notices of trustee’s sales,
one recorded in January 2009 and another recorded in May 2009. Neither notice invoked the optional acceleration clause, however, and the property was not sold. Seven years later, Bridges sought declaratory relief, arguing that the deed of trust could not be foreclosed because the six-year statute of limitations had expired. Bridges contended that the 2009 notices of trustee’s sales accelerated the debt, triggering the statute of limitations, Ariz. Rev. Stat. § 12-548(A)(1), which ran out in either January or May 2015. The trial court granted Bridges’s summary judgment motion, but the court of appeals reversed. The supreme court affirmed. It stated that as a matter of law, recording a notice of a trustee’s sale does not accelerate a debt. The plain language of the deed of trust showed that the acceleration was not self-executing; instead, it required specific notices and warnings. None of the notices of sale referred to or invoked the acceleration clause. Nothing in the communications to Bridges indicated that the lender was accelerating the debt. The court explained that the main reason why an express act of acceleration is required is that after a notice of sale under Ariz. Rev. Stat. § 33-813(A), a debtor can cure the default and reinstate the contract by paying only the “amount then due” before a trustee’s sale is held. Finding that mere notice amounts to an acceleration would nullify this right. Bridges v. Nationstar Mortg. L.L.C., 515 P.3d 1270 (Ariz. 2022).
RECREATIONAL USE IMMUNITY: Bollard placed in middle of biking trail may be a dangerous, latent condition subjecting landowner to liability. A bicyclist was riding on a biking trail developed by King County and hit a bollard placed in the middle of the trail, suffering severe injuries. The bollard was painted white and had a small red reflector attached to it. Years before the crash, an unknown person used fluorescent paint to write “POST” and other warnings on the pavement near the bollard to caution trail users as they approached it. But these conspicuous warnings had since faded.
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
On the morning of the accident, the weather was wet and the skies were gray. The bicyclist sued the county to recover for his injuries, and the county defended by claiming immunity under the recreational use statute that shelters landowners from liability to persons using their land for recreational purposes. Wash. Rev. Code § 4.24.210. At issue was a statutory exception “for injuries sustained to users by reason of a known, dangerous, artificial, latent condition for which warning signs have not been conspicuously posted.” Wash. Rev. Code § 4.24.210(4)(a). All four terms—known, dangerous, artificial, latent—modify “condition,” not one another, such that all must be present for the exception to apply. Jewels v. City of Bellingham, 353 P.3d 204 (Wash. 2015). The trial court granted summary judgment to the county, and a divided appellate court reversed. On appeal, the supreme court affirmed, finding questions of fact on the grounds for the exception. In particular, the court found that the bicyclist had offered evidence that the county’s placement of the bollard created a “dangerous” condition, using the ordinary meaning of that term. The bicyclist also presented expert testimony that, depending on
the weather conditions, such as gray days, the bollards quickly faded into the background and were not perceptible by bicyclists while riding. The court distinguished a prior case that held that a condition is not latent if a user standing nearby can perceive the condition. The court reworked the Jewels test, stating that latency should be determined from the vantage of the recreational user, that is, the moving cyclist. A strongly worded dissent chastised the majority for overruling Jewels sub silentio Schwartz v. King County, 516 P.3d 360 (Wash. 2022).
Covenants allowing homeowners association to prohibit solar panels for aesthetic reasons are void and unenforceable under solar access statute. Covenants recorded in 2011 for a residential neighborhood restricted many specific uses but did not specifically address residential solar panels. The declaration established a homeowners association and an Architectural Review Committee (ARC) empowered to disapprove property improvements for aesthetic reasons. The Farwigs installed solar panels on their home, which triggered a notice from the ARC requesting they submit an ARC permission form. The ARC denied their application, and the Farwigs appealed to the association, which affirmed the decision and demanded they remove the solar panels. The Farwigs refused, and the association fined them and also sued them for injunctive relief. The trial court granted partial summary judgment to the association, and a divided appellate court affirmed. The supreme court reversed, noting the case as one of first impression. A state solar access statute passed in 2007 invalidates covenants that “prohibit, or have the effect of prohibiting, the installation” of solar collectors, but the regulation of
“the location or screening of solar collectors” is allowed if the covenants do not prevent “the reasonable use of a solar collector for a residential property.” N.C. Gen. Stat. § 22B-20(b), (c). Also, the statute allows the prohibition of solar collectors in specific locations” that are visible by a person on the ground.” Id. § 22B-20(d). Here, the ARC’s treatment of the installation of solar collectors as an improvement subject to aesthetic regulation effectively gave ARC the ability to totally prohibit installation, without any of the statutory protections for solar collectors, and was thus invalid. Belmont Ass’n v. Farwig, 873 S.E. 2d 486 (N.C. 2022).
TITLE INSURANCE: Losses from disbursing closing payoff funds to fraudster who was not posing as an employee, vendor, or client of the insured is not covered by the cybercrime endorsement. Star Title, a settlement agent, was hired to close a residential real estate transaction. The seller of the home identified Capital Mortgage Services (CMS) as his lender and lienholder on the property. Osborne, Star Title’s transactions officer, confirmed that CMS did in fact have a lien on the home and requested payoff information. Initially, she contacted CMS at the phone number the seller provided and spoke to a representative who told her to submit a request for the information to an online address. Osborne sent an email requesting a “mortgage loan payoff letter.” She also provided the name of the sellers-mortgagors, the address of the property, the loan number, and the closing date, and attached a copy of the seller’s authorization form. Osborne then received what turned out to be a fraudulent email from an unknown actor who claimed to be a CMS payoff representative named “Kaitlyn Holt.” Osborne did not suspect that the email was fraudulent and simply verified that it correctly referenced the information she initially provided by email. The email from the fraudster contained a copy of the requested payoff statement, along with instructions for how to transfer the payoff funds. Star Title also received a second copy
of the payoff statement, via facsimile, purportedly sent by CMS. Osborne reviewed this fax and determined that it matched the statement provided earlier that day. Osborne then set up the wire transfer. Upon the approval by the transactions closer, the payoff funds were transferred to the account provided in the payoff statement. The closer did not reach out to the lender to verify that the wiring instructions were accurate. Thereafter, Osborne learned that CMS had not received the payoff funds. Star Title did not have a policy in place to call the lender directly to verify the wire transfer information. Star Title submitted a claim to its insurer, Illinois Union Insurance Company, under the cybercrime endorsement of its insurance policy. The endorsement includes a Deceptive Transfer Fraud clause, insuring against loss resulting from the transfer of funds as the direct result of fraudulent representations, sent electronically by a person purporting to be an employee, customer, client, or vendor of the insured. The insured must verify the authenticity of the transfer request in accordance with internal procedures. Illinois Union denied coverage. The district court granted Illinois Union’s motion for summary judgment based on the terms of the endorsement. The Eleventh Circuit affirmed. Construing the policy language according to its plain meaning, the terms “employee,” “customer,” “client,” and “vendor” are plainly understood. The fraudster who sent the email and subsequent fax identified herself as “Kaitlyn Holt,” a representative of CMS. But CMS was a mortgage lender, not an employee, customer, client, or vendor of Star Title. Star Title did not employ CMS for any purpose or control CMS’s work performance in any manner. Nor did Star Title sell CMS any particular product or provide it with any particular service. CMS did not have any sort of contract or agreement with Star Title. Merely providing a service to parties in closing the transaction did not make a difference. Recognizing that cybercrime is on the rise and that it makes sense to provide (and obtain) coverage for situations like this one, the court was yet constrained to read
the clause as written. Star Title Partners of Palm Harbor, LLC v. Illinois Union Ins. Co., 2022 U.S. App. LEXIS 24930, 2022 WL 4075048 (11th Cir. Sept. 6, 2022).
HOUSING: Prof. John G. Sprankling, in The Constitutional Right to “Establish a Home,” 90 Geo. Wash. L. Rev. 632 (2022), makes the case for establishing the right to home as a negative right that bars the government from unduly interfering with a person’s ability to rent or buy a home. He contends that this right has always resided in the Fourteenth Amendment as a fundamental right for the purpose of substantive due process analysis, much like the right to marry or to raise children. He asserts that any law that infringes the right, such as exclusionary zoning, must be evaluated under either the strict scrutiny or intermediate scrutiny tests. He provides a thorough history of the early notions on the importance of home in American law and social philosophy, noting the long-standing denial of this basic societal need to certain persons on account of race. Prof. Sprankling discusses the Supreme Court’s evolving interpretation of the Due Process Clause in the context of land use and personal rights. Although the Fair Housing Act can eliminate some exclusionary barriers to home ownership, the greatest value of recognizing this right as a fundamental constitutional right would be the removal of the deep deference long-afforded municipalities for their harmful land use regulations. Instead, they would need compelling justification. Although Prof. Sprankling’s analogies may be persuasive to housing advocates, given that the Supreme Court has refused to declare “housing” as a fundamental right and there appears a general reluctance to recognize new fundamental rights residing in the Constitutional penumbra (indeed, the Court seems more inclined to contract the list), recognition of this right to home may not be on the horizon.
PROPERTY THEORY: In Property’s Relation: Tracing Anthropology in
Property Theory, 73 Ala. L. Rev. 767 (2022), Prof. Meghan L. Morris shows how anthropology has deep roots in property theories, from realism to law and economics. This is largely because of the focus on relations between humans—anthropology and property are both about human nature. She shows how some of our most respected property law theorists have been influenced by or cast their theories in anthropological terms. For Karl Llewellyn, functionalism helped in the drafting of the Uniform Commercial Code. Harold Demsetz drew heavily on anthropological research for his work on externalities. Robert Ellickson embraced anthropological fieldwork methods for his study of cattle ranchers’ property norms. In understanding property, Carol Rose wrote about the importance of local knowledge, contingency, and different cultures. Prof. Morris believes the greatest reason why anthropology is important to property is its ability to refocus property beyond its “core debate over who and what is in relation, to deepen an understanding of how lines are drawn to create and substantiate the participants in property relations, and to further open up the relations themselves to sustained property.”
PUBLIC LANDS: In Inholdings, 46 Harv. Env’t L. Rev. 439 (2022), Prof. Kellen Zale analyzes inholdings, which are tracts of non-federally-owned land surrounded by federal public lands. She sums up the problems of this peculiar form of land ownership and offers a promising approach for addressing much of the chaos it creates. Inholdings make up nearly 17 percent of all federal lands and exist in almost every category of public lands, including national seashores, national forests, and national parks (amounting to nearly 2.6 million acres). These 10,000 separate parcels are developable. Inholdings arose from many different circumstances; it seems oversight and myopic public land policies are at the top of the list. Inholdings create numerous challenges to the management of surrounding public lands, impact adversely wildlife habitat,
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
watersheds, and historic and aesthetic resources, and make the development of a coherent land management policy nearly impossible. The traditional tools—land exchange, federal acquisition, and private conservation easements— have proven to be limited and largely ineffective. Prof. Zale claims that local land use regulation may offer the best prospects for filling this governance and regulatory gap. From zoning to subdivision regulations to a variety of other land use tools, including design review, land use law plays a key role in how intensively any privately-owned property may be developed. Land use laws can address concerns about the type of development on particularly sensitive lands. In this article, Prof. Zale develops a normative argument for local land use regulation, along with prescriptions for protecting our precious natural resources.
MAINE requires insurance coverage for the beneficiary of transfer on death deed. When the designated beneficiary obtains title to the real property at the grantor’s death, the beneficiary automatically is entitled to coverage under any property insurance policy taken out by the grantor. 2021 ME Ch. 497.
TENNESSEE specifies transfer taxes based on type of deed. A deed is treated as a quitclaim deed for transfer tax purposes if the deed only conveys the grantor’s interest to the grantee. A deed containing language evidencing an intent to convey the property itself or containing warranties of title is taxed as a transfer of a freehold estate. 2022 Tenn. Pub. Acts 834.
TENNESSEE amends real property law for acquiring additional easements for utility lines. If a person who already possesses a private easement or right-of-way of fewer than 25 feet determines that additional land is needed to extend utility lines to the person’s land, a new petition requesting additional land must be filed. 2022 Tenn. Pub. Acts 808.
VIRGINIA allows transfer of taxdelinquent property to a public or nonprofit land bank, in lieu of public auction. The law includes parcels containing a structure that is a
derelict building, when taxes and liens together, including penalty and accumulated interest, exceed 25 percent of the assessed value of the parcel. 2022 Va. Ch. 713. n
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As renewable energy becomes more popular and accessible, so do the regulations and requirements for owning, purchasing, or leasing energy projects. This article discusses the real property considerations in the purchase, ownership, and leasing of certain renewable energy projects.
Renewable project purchases are generally completed via a purchase and sale agreement in the form of a membership interest purchase agreement (MIPA) or an asset purchase agreement (APA). The purchase and sale agreement governs terms of the transaction, the liabilities of the parties, and guides the diligence process. The type of renewable project being developed, the stage of construction of the project, and the deal structure will determine the real estate diligence performed and the risks taken on by each party.
Three preliminary real property considerations for purchase and sale agreements for renewable projects are (1) the type of renewable facility; (2) the stage of development, and (3) the structure of the deal.
Wind project facilities tend to cover more land and are more spread out than solar projects. The volume of real estate documents to obtain as a developer or review as a buyer will be greater than with solar projects. Additionally, there are normally more landowners involved in a wind project. Because the facilities are more spread out, the likelihood of each title encumbrance affecting the project is lower; however, some such encumbrances inevitably will affect the project and the location of the encumbered property in the project can make the encumbrance more or less significant. Third-party subsurface rights are a concern near turbines and the substation but are less of a concern overall than on a solar project.
Karen M.T. Nashiwa is deputy general counsel of Triple Oak Power LLC in Portland, Oregon, focusing on wind energy project development. Spencer Davis is an associate at Mercer Thompson LLC whose practice is focused principally on representing both regulated and non-regulated electric power companies in their development, acquisition, and sale, and ownership and operation of wind, solar, battery storage, natural gas, transmission, biomass, and other energy projects. Olufunke Leroy is a real estate attorney based in the Philadelphia office of Holland & Knight, where she handles all aspects of commercial real estate transactions, including the acquisition, disposition, leasing, development, and financing of commercial real estate. Darnella J. Ward serves as Vice President and Commercial Underwriter for Chicago Title National Commercial Services in Seattle, where she brings a wealth of knowledge and experience to Seattle’s Chicago Title Commercial Services operation.
Regarding solar and battery storage projects, the majority of the project will be condensed into and continuous over one area, which means that each encumbrance on the property has a greater chance of adversely affecting the project. Third-party subsurface rights are also more of a concern and more difficult to obtain title coverage for. Normally, you are dealing with only one or a small number of landowners for a solar project compared to a wind project.
In the preliminary planning stage, not much work has been done by the current developer, so it is likely that less real estate information will be shared between a buyer and seller than in a typical real estate transaction, and the seller will be less willing to provide
representations and warranties as to the sufficiency of real property rights to successfully develop the project. The seller will also most likely be less willing to pursue title curatives.
When entering the construction phase, a buyer will want to know that the project has all of the real property rights necessary to successfully develop and operate the project. A seller may be required to pursue title curatives to get the buyer comfortable that the real property rights are not encumbered in a way that could negatively affect the project. Title curatives are often pursued throughout the construction phase, so it is likely that a seller would expect the buyer to take on some responsibility for pursuing title curatives if the purchase was completed prior to construction.
In the post-construction stage, the buyer is paying a premium for a completed project, so it will typically expect to be reassured that all property rights are sufficient for the successful operation of the project. Usually, all major title encumbrances will need to be cured prior to closing.
In an APA, the seller assigns all of the project assets to the buyer. Because all of the assets of the project will be assigned to the buyer at closing, it is important to analyze the assignment provisions in the site control agreements to make sure that the agreements are assignable and that the parties are complying with the assignment provisions. It is also important for the parties to negotiate which pre-closing liabilities will be assumed by the buyer or
retained by the seller. Typically, the seller retains rent and other amounts due to the landowner before closing, and the buyer assumes liabilities under the site control agreements from and after closing.
In an MIPA, the seller sells its membership interests in the project company to the buyer. Because the membership interests in the project company are being sold, the parties are not as concerned with assignment language in the site control agreements unless such language restricts an upstream change in ownership. If a title policy is being obtained at closing, then the buyer will want to make sure that it is not imputed with the knowledge of the project company (really, the seller) as it relates to title matters. Title companies normally are willing to issue a non-imputation endorsement if certain requirements are met.
The purchase and sale agreement will provide for the delivery of real estate documentation from the seller to the buyer. The seller will want to balance giving the buyer enough time to review real property information so that the buyer can become comfortable with the project against having an ongoing diligence process that delays closing, all while ensuring that the seller provides all the information required under the agreement so that the seller does not breach a covenant, representation, or warranty.
Before closing, the buyer will review the terms of each site control agreement to evaluate risks to the project and will confirm that the correct person or entity has signed such site control agreement. The buyer will also evaluate
title exceptions. The seller and buyer will decide who is responsible for curing title issues and which title issues need to be addressed. If the survey is prepared prior to construction, it will normally include the project plans overlaid on the property so that each party can evaluate different title risks. For example, if there is a third-party restrictive easement that was recorded before the project’s site control agreement and the preliminary survey shows that a project collection line from a wind turbine runs through the easement area, the project likely will need to obtain a crossing agreement with the third-party easement holder; however, even if there is a third-party restrictive easement on the property, if the preliminary survey (please note that this will need to be confirmed on the final As-Built Survey) does not show any project facilities crossing over the easement area, then no title curative action is needed.
At closing, the seller will likely be required to deliver a title policy to the buyer unless the project is still in the preliminary stages of development. The extent of title coverage provided at closing is negotiated between the parties. If the sale is closing at or after commercial operation of the project, the seller normally will provide the buyer with an as-built survey showing the final locations of the facilities so that the buyer can perform diligence based on the final facilities rather than the planned facilities. Additionally, closing estoppels are usually circulated to each landowner with whom the project has entered into a site control agreement to confirm that the agreement is in full force and effect and that there are no breaches or defaults to landowner’s knowledge, among other things, and then delivered to the buyer within a certain period to closing.
The purchase and sale agreement will also contain certain real estate representations and warranties.
Total Real Property Interests Being Conveyed. The buyer will want all site control agreements and all property to
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Before closing, the buyer will review the terms of each site control agreement to evaluate risks to the project and will confirm that the correct person or entity has signed the site control agreement.
be added to a schedule to the purchase and sale agreement. If the purchase agreement is an MIPA, then the buyer will want the seller to make a representation that there is no other property owned by the project company. If the purchase and sale agreement is an APA, then the buyer will want the seller to confirm no other property will be assigned to the buyer. This representation is valuable to a buyer so that the buyer can confirm the entire universe of real property rights it is obtaining and confirm that there are no additional real property liabilities that it is taking on.
Sufficiency of Real Property Interests. The buyer typically will want the seller to make a representation that the property rights being conveyed consist of all property rights necessary to construct, maintain, interconnect, and operate the project. As discussed above, depending on the stage of development, the seller may have good cause to push back on this representation. The seller may also request that the buyer rely on its diligence if it is providing all relevant real property information.
Valid Interest; Only Permitted Liens; No Breach. The buyer will normally request that the seller make a representation that the project company has a valid interest in the property, free and clear of all liens other than permitted liens, and that each agreement is in full force and effect without an existing breach or default. This is another way for the buyer to ensure that it is not walking into an unknown liability. The definition of permitted liens is normally heavily negotiated. The earlier in the development process, the more leverage the buyer has to request that the seller cure the title issues.
Delivery of Documents. The buyer will want the seller to make a representation that true and complete copies of any real property documentation have been provided and that all real property documentation has been provided so that the buyer can confirm that its diligence was based on complete and accurate information.
A wind or solar lease is essentially a specialized ground lease. Apart from usual ground lease considerations, there are special considerations with wind and solar leases.
The first step with onshore wind and solar leases is to check the applicable regulations. For example, South Dakota has special statutory requirements for wind and solar leases and easements. See S.D. Codified Laws §§ 43-13-16 through 43-13-20.5. Operations must occur within five years after the effective date of the agreement, and there is a maximum term of 50 years. See id. §43-13-17. Tracking the dates of agreements and the construction schedule is very important for developers. The lessee would not want to begin construction on a project four and a half years into a lease only to be hit with supply chain woes, necessitating negotiating with a lessor for a new lease, often at considerable expense—not to mention what such a replacement lease may mean for priority in the land and title insurance considerations.
Like all other leases and easements, onshore wind and solar leases should be clear on the use of the property. What is allowed for lessors and grantors? What is allowed for lessees and grantees? Because solar panels and solar projects take up most of the surface area, it is not feasible to have shared use of the land during a project’s operations term. Additionally, fences are often installed around solar panels, so access to the panels is limited to the project operation. Wind is different. Farmers can, and often do, use the area around wind turbines and other facilities for cattle grazing and farming. Because of the shared-use nature of wind projects, the respective rights and obligations of each party should be clearly set forth. For both wind and solar, the parties may wish to coordinate so that the lessor will not be left with inaccessible property.
Like any construction project, there are applicable setback requirements
with which wind and solar projects need to comply. For example, Meade County, South Dakota, requires that wind turbines be set back from the nearest nonparticipating property line by at least 1,000 feet, whereas the setback requirement for a participating property line is two times the turbine height. See Meade Cnty., S.D., Wind Energy Conversion System Ordinance 32, art. III, sec. 3(A)(1), (2). Developers often include a setback waiver provision in leases and easements to have flexibility but should strive to comply with all applicable zoning and permitting regulations.
Wind and solar projects may affect neighboring landowners in different ways. For example, wind projects can lead to noise, flickering, and wake issues; solar panels may cause glare; and both projects may cause unpleasant dirt and inconvenience during construction. To encourage support of such projects, developers may enter into agreements where neighboring landowners agree to give an effects easement to the developer. Such neighbor agreements can also prevent litigation.
The events in John Wendell Woods v. Fayette County Zoning Board of Adjustment, 913 N.W.2d 275 (Table) (Iowa Ct. App. 2018), illustrate the importance of permitting and good neighborly relations. In 2018, neighboring residents in the City of Fairbank, Fayette County, Iowa, opposing a three-turbine project successfully forced the developer to take down the erected turbines. The developer applied to the Fayette County Board of Adjustment for a specialuse permit to construct the turbines, but the board denied the application. While contesting the denial, the zoning administrator requested an opinion from the county attorney as to whether a special-use permit was required. The county attorney opined that a special-use permit was not required, and the zoning administrator approved the developer’s applications for zoning compliance. The City of Fairbank and neighboring residents to the turbine property then commenced appeal and litigation. The issue worked its way through administrative review and
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courts, ending at the appellate level after the state supreme court declined to review the case.
Taxes tend to be an issue of great interest for landowners and developers alike. Mainly, whose responsibility is it to pay which taxes, and when does such obligation kick in? Developers generally will agree to pay for any increases in property taxes associated with their projects. Therefore, if the property loses its lower-rate agricultural classification and is classified as industrial land, the developer will pay for the difference in tax and any associated penalties. In light of this, it is always good to know from the outset what, if any, such taxes and penalties would likely be and for developers to consider them as part of a project’s financial modeling. Because solar projects use up so much of the land, solar landowners tend to negotiate for the payment of all property taxes. Developers may agree to pay all taxes or argue that those are the landowner’s responsibility because landowners would need to pay for those taxes regardless of whether landowners leased the property. Finally, as a drafting tip, be sure to address notice requirements for tax statements, have either party pay for the taxes (no one wants to deal with tax foreclosure), and account for reimbursement or offset.
What happens at the end of the project? No landowner wants wind turbines and solar panels left on its property at the end of an energy project. Therefore, standard lease provisions regarding restoration of the surface of the land to a reasonably similar condition should be inserted. So should a timeframe—a year to two years— for decommissioning the project and removing facilities. Many localities
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any form or by any means or
require a sort of decommissioning security—a bond, letter of credit, or other types of security—securing payment of decommissioning costs for project facilities. If such decommissioning security is not required, it is nevertheless common practice to have a lease provision obligating the developer to have such security during the operations term of the project. Although a landowner may want such security to be in place by the start of operations, the longer a developer has to post security, the longer such funds are tied up. Therefore, developers will often push that requirement out and tie it to the end of the project’s associated power purchase agreement or 20 years after operations begin.
Leasing and easement considerations are a bit different with offshore wind projects. Instead of negotiating and securing leases and easements with multiple lessors or grantors, a developer will need to secure such agreements with a handful of counterparties. Because the turbines are in the ocean instead of land, the Bureau of Ocean Energy Management (BOEM) and the state are the lessors. State waters generally extend from zero to three nautical miles off the state’s coastline, with the exception that they extend to nine miles for Texas, Puerto Rico, and Florida’s Gulf Coast. Federal waters extend from the state water boundary to 200 nautical miles off the coastline. Compared with an onshore project, there may be more lead time needed for counterparty review and public comment.
BOEM awards offshore wind leases via an auction, similar to oil and gas leases on federal land. First, BOEM
identifies the area and publishes the information. Then, if there’s interest, BOEM conducts an auction for the leasehold rights. The auction winner has the exclusive right to seek BOEM approval to develop the leasehold. BOEM needs to approve the developer’s site assessment plan before the developer may conduct site assessment activities and move forward with design and construction. Negotiation of the terms is limited since BOEM basically sets the terms. The BOEM lease includes the right to run a cable to landfall.
Once the transmission cables reach the shore, the wind project is much like an onshore project where rights are needed across land to lay cable and interconnection. Depending on the location, a lease or easement would be required with the county or city at the point of landfall until private land.
Developing and constructing an energy project requires the developer of the energy interest to own or control the land in some fashion and have an insurable interest in the land where the project is to be established. Typically, energy projects are not constructed or developed by the fee owner of the underlying land. Thus, for a title company to provide a title policy, an insurable interest must be established. The most recognizable means to establish an insurable interest in the land for the energy project is to create an easement or lease interest in the parcel or parcels of land where the proposed site is to be placed. Therefore, title considerations should be addressed when planning the site to minimize the risk of loss or damage due to the lack of an insurable interest in the land. Indeed, if the title to the project site fails during or after construction or the energy developer has a loss or a need to defend against a claim related to title issue, the development and operation of the energy project could be impaired.
As such, in addition to all the other investigations and due diligence conducted in procuring and choosing a
project location and its feasibility, a complete and accurate title search and examination of land and public records are a must for considering and finalizing the project.
Further, the purchase of a policy of title insurance that reflects the investment in the project real estate and improvements and the quantifiable loss is advisable as an attempt to protect those interests, outlay of capital, and expenditures. To provide title policy coverage, along with the other due diligence, a survey of the project land that evidences plottable (and non-plottable) easements, interests, encumbrances, improvements and buildings, fences, etc.; setbacks both recorded and in the zoning records; and physical features important to the location, construction, and operation of the project (and the proposed site plan for pending projects) is also an important and essential instrument in the title assessment.
This discussion illuminates certain points an energy developer, purchaser, investor, or lender should consider in minimizing the risk of loss arising out of a failure of or defect in title to land, and to effectively shift the risk and the expense to an insurance policy.
RFP (Request for Proposal)
Typically, the developer issues a request for proposal that outlines the parameters of the project, including, but not limited to, the amounts of the policies, coverages and endorsements, the timing for the title work, commitment and pricing for searches, out-of-pockets, and premiums based on the estimated amounts of the policies.
Once the developer accepts the proposal, the project is underway, with title searches culminating in commitments. The commitment outlines conditions and potential curative issues that must be satisfied and underwritten to provide coverages under the final policy. It is important for the developer to provide as much detail as possible and information from the seller’s due diligence war room to assist with the title
search and underwriting and curative process. In addition, survey due diligence, permitting, and zoning issues should be underway, as well as the information relevant to underwriting issues and coverages provided through the primary policy and endorsements.
The pro forma policy should be compiled sooner rather than later to give the scope and “example” of what the actual policy should look like. This will include the standard policy, extended coverage, and endorsement coverages.
The ALTA 36 series of endorsements are promulgated specifically for energy projects (e.g., wind farms, solar farms, traditional electricity-generating facilities, etc.). Such projects may include leaseholds and easements and fee interests. This series of endorsements insures against loss or damage for insured fee estates, leasehold estates, and easement interests used to create rights in the land for some or all the energy project improvements. These endorsements provide specific coverage and modify the policy terms and conditions.
ALTA Endorsements 36-06, 36.1-06, 36.2-06, 36.3-06, 36.7-06, and 36.806 provide similar coverage. These endorsements mirror and include elements of the ALTA Endorsements 13-06 (Leasehold—Owner’s), 13.1-06 (Leasehold—Loan), and 31-06 (Severable Improvements). ALTA 36-06 and ALTA 36.1-06 insure against loss or damage within title policies for an easement or an easement and a lease. ALTA 36-06 is designed for use with or attachment to an owner’s policy; ALTA 36.1-06 is designed for use with or attachment to a loan policy. ALTA 36.2-06 and ALTA 36.3-06 insure against loss or damage within title policies as to a lease, but not an easement. ALTA 36.2-06 is designed for use with or attachment to an owner’s policy; ALTA 36.3-06 is designed for a loan policy. ALTA 36.7-06 and ALTA 36.8-06 insure against loss or damage within title policies as to a fee estate. ALTA 36.7-06 is designed for use with or attachment to an owner’s policy; ALTA 36.8-06 is designed for use with or attachment to a loan policy.
There are certain requirements to underwrite the pro forma policy, including authority from the lessor and lessee, underwriting estate and probate issues, heirships, etc., along with authority for general partnerships, individuals (including powers of attorney), limited liability companies, limited partnerships, and limited liability partnerships, trusts, and corporations. Additional requirements include estoppels as they relate to easement and leases; owner’s affidavits to provide extended coverage and address off-record and inchoate lien rights and interests; satisfaction of mortgages and SNDAs reflected in the policy; and any other requirements dictated by the commitment. Additionally, the survey and zoning information are needed to issue and consider endorsements and coverages. Moreover, additional affidavits and underwriting requirements will be required if non-imputation coverage or mezzanine coverage is needed. Finally, if there is any work commenced on the project before or during closings, the mechanic’s lien underwriting will be a consideration.
If all the issues are addressed as underwritten, then the closing will entail only payment of the invoice or settlement statement along with the recording of documents necessary to establish the desired insurable interest in the easements or leases for the land. If not, then the above issues will prevent, or need to be dealt with before, closing.
Renewable energy developers should always be aware of what stage the project is in and the necessary procedures to follow at each stage. Attorneys should inform their clients about the difficulties and challenges they might face at each stage and adequately advise them to gather the appropriate documents they can early in the process. Moreover, attorneys should advise their clients of the various regulations and restrictions they might encounter at the federal, state, and local levels. n
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
CONTRACTUAL WILL: A surviving spouse substantially complied with the rules for presenting a claim related to a contractual will but was not entitled to specific performance. Spouses executed reciprocal wills and an agreement not to revoke their wills without the consent of the other spouse. After the marriage relationship deteriorated, one of the spouses filed for divorce and made a new will expressly disinheriting the other spouse. The petitioner spouse died before the divorce was finalized. The surviving spouse offered the reciprocal will for probate, and the decedent’s child by a previous marriage offered the later will. The probate court admitted the later will but appointed the surviving spouse as the personal representative. The surviving spouse filed a motion seeking specific performance of the agreement that accompanied the earlier wills. The circuit court denied the motion finding that the surviving spouse had not properly presented a claim and that the surviving spouse was not entitled to specific performance because there was an adequate remedy at law. On appeal by the surviving spouse, the South Dakota Supreme Court, in Matter of Estate of Smeenk, 978 N.W.2d 383 (S.D. 2022), held that the surviving spouse had substantially complied with the notice requirement of the non-claim statute, S.D. Codified Laws § 29A-3803(a), by filing the motion within the allotted time for presenting claims but that the surviving spouse failed to show the lack of a legal remedy. The primary
Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409, gwb@ ProfessorBeyer.com. Contributors: Claire G. Hargrove, Paula Moore, Prof. William P. LaPiana, and Jake W. Villanueva.
asset of the estate was the decedent’s remaining interest in payments under a contract for deed, and the court found no evidence that the amount due at the decedent’s death could not be calculated and thus be the subject of an action at law.
LEGAL CAPACITY: A person under a conservatorship may make a will without court approval. The decedent was under a conservatorship at the time of executing the decedent’s will, drafted by the conservator, which devised the decedent’s estate to three persons unrelated to the decedent. One of the decedent’s heirs challenged probate of the will on the grounds that Colorado law, Colo. Rev. Stat. § 15-14-411(1)(g), states that a conservator may make, amend, or revoke a protected person’s will only with court approval and on notice to interested persons. In what it describes as a case of first impression, the Colorado Court of Appeals held in In re Estate of Davies, No. 21CA0295, 2022 WL 3093724 (Colo. App. Aug. 4, 2022), that the statute does not apply when the protected person properly executes the will notwithstanding the conservator’s assistance in drafting the will.
NO-CONTEST CLAUSE: A nocontest clause cannot prevent a beneficiary from challenging the trust’s validity. In Slosberg v. Giller, 876 S.E.2d 228 (Ga. 2022), the Georgia
Supreme Court held that the inclusion of a no-contest clause in the terms of a trust cannot prevent a beneficiary from challenging the validity of the trust even if the clause states that any beneficiary who does so forfeits all interests in the trust and theoretically would no longer have standing to bring a contest. The no-contest clause is not effective unless the trust is valid and therefore the beneficiary can be penalized only if the challenge is unsuccessful. The court leaves open the question of whether an unsuccessful challenge will not result in forfeiture if the beneficiary had probable cause for bringing the action.
POWER OF ATTORNEY: A power of attorney must expressly grant the agent the authority to create a trust. The Massachusetts Supreme Judicial Court held as a matter of first impression in Barbetti v. Stempniewicz, 189 N.E.3d 264 (Mass. 2022), that an agent under a power of attorney may create a trust for the principal only if the power of attorney expressly grants the authority to do so. The court did not reach the question of whether the principal may delegate the authority to make a trust even with an express grant of authority in light of the requirement that the settlor intend to make a trust and have the capacity to do so.
SPECIAL NEEDS TRUST: A special needs trust terminated when beneficiary recovered from the injury. The beneficiary of a special needs trust properly created under Michigan law petitioned the court to direct the trustee to terminate the trust by reimbursing the state for the care provided and distributing the remaining trust property to the beneficiary. The trial court granted the petition because the beneficiary had recovered from the traumatic brain injury that was the source of the beneficiary’s disability. On appeal by the trustee, the
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intermediate appellate court affirmed in In re Special Needs Trust for Moss, No. 357836, 2022 WL 2760235 (Mich. Ct. App. July 14, 2022). The relevant Michigan statute, Mich. Comp. Laws § 700.412(2), allows termination of a trust because of circumstances the settlor did not anticipate if termination will further the settlor’s stated purpose or, if none is stated, the settlor’s probable intention. Because the stated purpose of the trust was to “supplement” the beneficiary’s quality of life on the assumption that the beneficiary would always be a disabled person, the beneficiary’s recovery was an unanticipated circumstance that fully justified termination.
TRUST AMENDMENT: A trust amendment must substantially comply with the trust terms. Arkansas law, Ark. Code Ann. § 28-73-602, allows the settlor to amend a revocable trust in any way that substantially complies with a method of amendment included in the trust terms. The Arkansas intermediate appellate court held in Baker v. Baker, 646 S.W.3d 397 (Ark. Ct. App. 2022), that a document, the heading of which did not include the word “amendment,” did not substantially comply with the trust, which requires that any document amending the trust be titled “The [name of trust] Amendment,” even though the settlor satisfied the other three requirements for a valid amendment (i.e., signed, dated, and in writing).
TRUST VALIDITY: The validity of a testamentary trust may be challenged after expiration of the time to challenge probate of the will. After admission to probate of the decedent’s will and appointment of the decedent’s two children as co-personal representatives, one of the children brought a petition seeking a determination of the validity of a testamentary trust, construction of its terms, and a declaration of the child’s rights as a beneficiary of the trust. The trial court granted the motion to strike the petition the decedent’s other child and the other beneficiaries of the trust brought on the
grounds that it was not filed within the three-month statutory period for challenging the validity of a will that begins with receipt of notice of administration under Fla. Stat. § 733.212(3). The intermediate appellate court reversed in Gundlach v. Gundlach, 339 So. 3d 997 (Fla. Dist. Ct. App. 2022), holding that that the petition did not challenge the validity of the will and therefore the statute was inapplicable.
TRUSTS: Trust modification statute does not confer right to jury trial. In Matter of Troy S. Poe Trust, 646 S.W.3d 771 (Tex. 2022), the Supreme Court of Texas held that Texas Property Code § 112.054 “does not confer a right to a jury trial in a judicial trust modification proceeding.” The court explained that the section discusses the court making the decision to modify in its discretion and there is no mention of a jury. The court remanded the case, however, for the appellate court to consider whether there may be a jury trial right under the Texas Constitution. The court refused to address this issue because it was not raised until the motion for rehearing in the lower court. Thus, whether a litigant may successfully demand a jury trial in a trust modification action remains uncertain in Texas.
ESTATE TAX: IRS can seek collection from an executor rather than compromise with an estate. After the decedent’s death, the executor sought legal advice concerning a provision in the decedent’s will and miscalculated the estate tax owed. The estate received a notice of a deficiency but did not have the funds to pay the tax because the executor had transferred over $1 million to beneficiaries over six years. The executor transferred over 60 percent of those funds after he received the notice of the deficiency. The executor sought an offer-in-compromise, which the IRS declined, stating it could collect more from other sources. The Third Circuit in Estate of Kwang Lee v. Commissioner, 130 A.F.T.R. 2d 2022-5640 (3rd Cir. 2022),
affirmed the Tax Court and agreed that the IRS did not abuse its discretion in rejecting the offer-in-compromise. The court noted that estate taxes take priority over other obligations, including the distribution of property to the beneficiaries, and that executors can be held personally liable for transferring property before satisfying a known estate tax. The court rejected the estate’s argument that its executor should not have been considered in the reasonable collection potential because more than three years had passed. In addition, reliance on professional advice did not excuse the executor. First, he relied on the counsel in preparing the returns, not distributing the assets. Second, there is no professional reliance defense when the executor has knowledge of the tax deficiency.
FOREIGN TRUSTS: Court considered the Liechtensteinian Stiftung a foreign trust. While working abroad, the taxpayer formed an entity as a Stiftung under the laws of Liechtenstein. The Stiftung’s organizational documents stated that its purpose was to provide education and general support to the taxpayer and his children. The documents prohibited commercial trade. Liechtensteinian public filings confirmed the prohibition of commercial business. The IRS issued penalties for failure to report timely the entity as a foreign trust. After the taxpayer paid the penalties, he filed a refund action. The Fifth Circuit in Rost v. United States, 44 F.4th 294 (5th Cir. 2022), upheld the district court’s decision that the Stiftung was a foreign trust. The court noted that a trust is an arrangement where trustees take title to property for the purposes of protecting or conserving it for the beneficiaries, and whether an entity is a trust for tax purposes depends on a facts-and-circumstances test. Several facts supported the finding of the entity as a trust including the organizational documents, familial purpose, and lack of a business objective or commercial activity. Because any disputes concerning the Stiftung must proceed to arbitration under Liechtensteinian law, it is a foreign trust, not a domestic one
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
FAMILY LIMITED PARTNERSHIPS: Grayson M.P. McCouch argues that recent Tax Court decisions treating “the discounted value of the partnership interest received by the decedent on formation of the partnership should be treated as partial consideration and allowed as an offset against the amount included in the gross estate” is misguided in Family Limited Partnerships, Bona Fide Sales, and Inadequate Consideration, 47 ACTEC L.J. 247 (2022).
INTELLECTUAL PROPERTY: In his Note, Intellectual Heirs Property: Why Certain Musical Copyrights Should Be Included in the Heirs Property Reform Movement, 29 J. Intell. Prop. L. 418 (2022), Austin Weatherly argues that the heirs property reform movement should broaden its scope to include musical copyrights that are inherited by the same methods that create heirs property in the real property context.
INTESTATE SUCCESSION: In Married, With Children at Death, 47 ACTEC L.J. 131 (2022), Emily S. Taylor Poppe reports the results of her “modern empirical assessment of dispositive preferences when a decedent is survived by a spouse and a descendant of the marriage.” She explains that intestate schemes may not “capture the preferred allocations of many individuals.”
NARRATIVE CAPACITY: In Narrative Capacity, 100 N.C. L. Rev. 1073 (2022), James Toomey argues for a new doctrine of capacity under which the law would recognize personal decisionmaking if and only if it is linked by a coherent narrative structure to the story of the decisionmaker’s life. Moreover, his article offers a test for determining which decisions meet this criterion and explains how the doctrine would work in practice.
NON-GRANTOR TRUSTS: Jonathan G. Blattmachr and Martin M. Shenkman discuss “the potential income tax disadvantages of non-grantor trusts and how
they might be avoided or mitigated” in Flexible Beneficiary Trusts: Reducing Income Tax on Non-Grantor Trusts, 47 ACTEC L.J. 301 (2022).
PET EUTHANASIA WILL PROVISIONS: Kaity Y. Emerson and Kevin Bennardo address the validity of pet euthanasia provisions in pet owners’ wills in Unleashing Pets from Dead-Hand Control, 22 Nev. L.J. 349 (2022).
POSTHUMOUS ENDORSEMENT:
Andrew Gilden’s article, Endorsing after Death, 63 Wm. & Mary L. Rev. 1531 (2022), closely examines the growing body of posthumous endorsement law and sets forth a new framework that better respects both the agency of the deceased as well as the continuing bonds among the deceased, their fans, and their families.
PROBATE LITIGATION: In his review of 443 recent probate administrations from San Francisco, California, David Horton sheds new light on the causes and consequences of probate litigation in Probate Litigation, 2022 U. Ill. L. Rev. 1149 (2022).
RULE AGAINST PERPETUITIES: Danny Fein “emphatically defends perpetual trusts and recent state-level repeals of the Rule Against Perpetuities” in A Defense of Perpetual Trusts, 47 ACTEC L.J. 215 (2022).
TAXATION: Mitchell M. Gans hypothesizes how the Supreme Court of the United States might deal with modern tax proposals such as taxing the increase in value of property before the owner sells it in Progressive Taxation and a Conservative Supreme Court: Reading the Tea Leaves, 47ACTEC L.J. 283 (2022).
TENANTS IN COMMON: Camille M. Davidson explains the issues that arise when a testator devises property as tenants in common in To My Children in Equal Shares: The Flaw of Estate Planning When Property Is Devised to Beneficiaries as Tenants in Common, 47 ACTEC L.J. 187 (2022).
WEALTH TAX: In The Intergenerational Equity Case for a Wealth Tax, 90 U. Cin. L. Rev. 735 (2022), Daniel Schaffa asks whether there are measures that might offer redress to a generation for the costs imposed on it by its predecessors and finds that a one-time wealth tax is a promising option.
CALIFORNIA clarifies the law regarding the parentage of children born as the result of assisted reproduction techniques. 2022 Cal. Legis. Serv. Ch. 159.
DELAWARE modernizes the law regarding the creation, regulation, operation, and dissolution of domestic statutory trusts. 2022 Del. Laws Ch. 381.
MICHIGAN excludes certain personal property held in trust from the Rule Against Perpetuities. 2022 Mich. Legis. Serv. P.A. 154.
NEW YORK enacts provisions governing supported decision-making by people with intellectual, developmental, cognitive, and psychosocial disabilities. 2022 Sess. Laws News of N.Y. Ch. 481.
NORTH CAROLINA authorizes remote electronic notarization. 2022 N.C. Laws S.L. 2022-54. n
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By Beck Groff and Susan N. Gary
On September 16, 2022, news media reported that Yvon Chouinard and his family had transferred voting control of Patagonia to a purpose trust and their nonvoting interests in the company to a 501(c) (4) nonprofit organization. The purpose trust will manage Patagonia as a for-profit company, continuing Chouinard’s emphasis on employee well-being. Profits from the company will be distributed to the nonprofit, which will support efforts to address climate change and work to protect undeveloped land.
The noncharitable perpetual purpose trust used by Patagonia is referred to as a stewardship trust in Oregon, Or. Rev. Stat. § 130.193 (2019). This strategy for business ownership is finding
Beck Groff is a member of the Class of 2023, University of Oregon School of Law. Susan N. Gary is a Professor of Law Emerita, University of Oregon School of Law.
increasing interest among founders who want to protect their businesses’ missions into the future. A purpose trust ownership structure can hold a business accountable to a business’s founding purpose, such as protecting the environment or promoting education. The purpose can also include providing employee control of the business and an emphasis on benefits for employees. The purpose is integral to the trust, with all decisions being made in furtherance of the trust and, therefore, in furtherance of the purpose. The trust operates without beneficiaries and may seek both economic benefits, like profit, and noneconomic benefits, like the ones described in this paragraph.
Although this structure seems to resemble a charitable trust because of the lack of ascertainable beneficiaries, the trust has a noncharitable purpose. The business held by the trust generates profits and uses these profits in furtherance of the purpose. Instead
of generating profits for shareholders, the trust is held accountable to its purpose above all else. Therefore, organizations that follow this structure are able to stay true to the purposes of the trust and operate into the future. The structure allows firms to maintain profitability and operate outside of the nonprofit realm while still being socially responsible and carrying on the central purpose the founders envisioned. The structure can be particularly helpful for family businesses with owners who want to retire but who do not have family members to take over the business. If the family business owners care about their employees, the community, or other noneconomic purposes, they may be able to use the stewardship trust model as a way to preserve the business for posterity.
This novel form of business structure varies significantly from the traditional models of ownership used
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
by most companies. Typically, noncharitable trusts are required to have discernable beneficiaries, but, under some state statutory regimes, noncharitable trusts can now be created without beneficiaries. These statutes allow a trust to be organized around its purpose, instead of on behalf of its beneficiaries, and in some states the trust can last in perpetuity. Uniform Trust Code (UTC) § 409, under which a trust can be created for a noncharitable purpose, has not been adopted in every state, and some of the UTC states still apply the rule against perpetuities to purpose trusts. In addition, UTC § 409 allows a court to reduce the amount held in a purpose trust if the court determines “that the value of the trust property exceeds the amount required for the intended use.” UTC § 409(3). Even if the business is in a state that does not yet provide for perpetual purpose trusts by statute, the business owners might use an Oregon
stewardship trust to hold the business. The stewardship trust may be an enticing tool for business organization for many companies, particularly small businesses.
The structure of a stewardship trust may at first seem complicated. In this model for business ownership, the trust owns the business, Or. Rev. Stat. § 130.193(2), and the business operates mostly as normal. The trust replaces private owners or shareholders who would otherwise own the company in a traditional business model. Unlike other trusts, the stewardship trust has a stewardship committee composed of various stakeholders like employees, nonvoting shareholders, and community members, and the committee directs the trustee in the administration of the trust. A stewardship trust operates as a directed trust, with the stewardship committee directing the trustee with respect to the management of the trust’s assets.
A stewardship trust also has at least one trust enforcer who ensures that the trustees and the committee operate the trust in the interest of the founding purpose. Or. Rev. Stat. § 130.193(3). This second level of accountability to the founding purpose makes the business structure more rigid, yet it enforces the company’s commitment to its purpose. The trustee or trustees are appointed by the trust stewardship committee, and these trustees manage the operation of the trust, as directed by the stewardship committee. Id. § 130.193(10). The stewardship committee has the duty of informing both the trustees and trust enforcers about the administration of the trust. Id. § 130.193(9). In general, the committee members, the trustees, and the trust enforcer all work together to ensure that the goals of the trust are being accomplished and that the business is being operated smoothly. The normal business operations will still require separate management, such
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as a board of directors, if the business is organized as a corporation. These directors or other managers will be accountable to the trust instead of to shareholders.
The stewardship trust ownership structure may seem rigid, and that is the point. If a stewardship trust could easily change its purpose, then business owners would have little reason to choose this structure over a more standard form that values profit over purpose. Modifying the trust is rather difficult as well, requiring the unanimous agreement of the stewardship committee and the trust enforcers, or, alternatively, action in court, to alter the terms of the trust. Id. § 130.193(10)–(11). Further, the system of checks and balances that spreads authority across the stewardship committee, the trustees, and the trust enforcers ensures that the business operations are serving the best interests of the trust. This barrier to structural change provides the stability this kind of business structure needs to be accountable to its overarching purpose, but the structure is not so limiting as to prevent the growth of the business over time. Indeed, the purpose of the stewardship trust should be broad and flexible enough to account for innovation or expansion of the business.
Two case studies explore some of the advantages and disadvantages of the stewardship trust model for corporate governance. These case studies are hypothetical, built from a study of several companies considering the stewardship trust structure. The hope is that these case studies will help other companies (and their advisors) think through the issues involved in a transition to steward ownership using a trust.
The first case study involves an educational resources company (Edu Resources) owned by its founder and current CEO. The founder wants to retire fully in the near future. Although strong leadership within the company can take over and run the company
after the CEO leaves, the owner, as its founder, wants to ensure that the company will continue to be governed by the socially constructive purpose with which the company was created. The company is profitable, so the owner could sell it, but new owners might eliminate many of the company’s more socially responsible programs.
Edu Resources specializes in providing online educational resources and reinvests most of its profits into its social mission, through the development of new educational programs and further research. The owner would like to transition the company from its current governance structure to being held in a stewardship trust, but the transition raises questions about how assets are moved from the existing company into the trust, with a number of difficult tax issues to consider.
Like many companies owned by a small number of people, Edu Resources is structured as an S corporation. An S corporation passes the income earned by the corporation through to its shareholders, who individually pay the taxes on that income. S corporations are thus taxed only once, at the individual level, and not at both the corporate and individual levels. The result is a lower effective rate compared to many other governance structures, although
limitations on which companies can use the S corporation structure exist so that not every company can take advantage of this tax benefit. S corporations can have no more than 100 shareholders, and shareholders must be individuals. Also, S corporations can have only one kind of stock. These structural controls limit the widespread use of S corporations but allow the shareholders of smaller corporations, like Edu Resources, to avoid double taxation on their income.
Unlike the tax treatment for S corporations, any income that remains in a trust is taxed in the trust. Trust income reaches the highest tax rate much more quickly than income taxed to an individual, IRC §§ 1(e), 641, so a structure that has taxable income at the trust level will not be beneficial. Settlors of stewardship trusts, like the owner of Edu Resources, will want the trust to own the company but operate the company so that little income is distributed by the company to the trust.
A stewardship trust cannot own stock in an S corporation because S corporation stock cannot be owned by nonindividuals. Therefore, the company will need to reincorporate as a C corporation, which has its own unique challenges. The transition from an S corporation to a C corporation does not have an immediate tax consequence, but when the stock is owned by the C corporation, the stock will be taxed at the corporate level and then again at the individual level if the corporation distributes dividends to owners.
The founder of Edu Resources wants to receive distributions from the company for a few more years. Until the founder transfers all the stock to the trust, distributions made from the C corporation to the founder will be taxed both at the corporate level and at the founder’s level. This double taxation makes the transition process less appealing to the founder, who is currently taxed only once as the owner of a Subchapter S company. Once the trust owns all the stock of the company, the double taxation can be avoided. The C corporation will use most of the profit at the corporation level so that only
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Once the trust owns all the stock of the company, the double taxation can be avoided.
minimal income is distributed to the trust—just enough to pay the costs of administration. For example, the corporation can hold some profit for research and development and for profit-sharing for employees.
After the company has been reincorporated as a C corporation, ownership of the company will be transferred to the trust. Either the trust will need to purchase the stock, or the owner may transfer the stock as a gift to the trust. Both methods come with advantages and disadvantages, so the choice of method will depend on factors such as the state where the business pays its taxes and its applicable tax rates, the number of owners of stock in the company, the amount of assets the trust owns, and the availability of financing tools, such as loans, to the trust.
If a company has numerous shareholders, none of which has a majority share, the shareholders will likely need to sell shares to the trust for it to gain ownership. This can be accomplished by first creating the trust and using financing tools, such as a loan from an impact investor or a small business administration loan, to buy the stock from shareholders. Alternatively, if the company has lots of cash on hand, it may wish to buy back the stock first and then make a gift transfer to the trust. Many S corporations may lack sufficient liquid assets to buy back the stock, but a company stock purchase strategy may work for some businesses hoping to use the stewardship trust model, such as a company with an ESOP that has numerous employee-owners.
For corporations with few shareholders, like Edu Resources, a different strategy is available. If one or two people own all the shares of the company, the owners can create the stewardship trust without the need to buy back stock from other investors. Oregon still has an estate tax but does not have a gift tax, so the owner may transfer ownership of the company’s assets to the trust as a gift without Oregon gift tax concern. In addition, the federal gift tax applies only when a donor has made
cumulative lifetime gifts in excess of around $12 million. The federal gift tax may be relevant for some larger firms transitioning to steward ownership, but for many smaller companies, like Edu Resources, a gift will be under the federal amount, at least as currently calculated. Congress may reduce the amount, and if Congress does nothing, the amount will revert to a lower amount ($5 million adjusted for inflation) at the end of 2025, so the federal transfer tax may prove to be a concern even for smaller companies.
The owner of Edu Resources has decided to transfer ownership of the company to the stewardship trust gradually, in order to continue to earn income for a few more years and to maintain oversight over the business. The company will first convert to a C corporation—so that the trust can own stock in the company—and the owner will then sell stock to the stewardship trust in $500,000 installments over the next eight years. Because the sales price of $4 million is lower than the fair market value of the company ($8 million), portions of each installment will be treated as a gift. Alternatively, the transition could be structured as a gift of half the stock in the first year, followed by the sale of the other half spread over eight years. Either way, the owner will continue to earn income throughout the change in governance of the company, and the sales proceeds will fund the owner’s retirement.
The disadvantage of this transition strategy, which includes conversion to a C corp, is that income tax will be generated at the corporate level and then again at the individual level as the shares are sold. Instead, the owners of Edu Resources might decide to continue to operate the company as an S corporation and make distributions to themselves until the $4 million is distributed. At that time, they would make a gift of their remaining interests in the company to the trust. The stewardship trust would not be created until the owners were ready to make the gift of the remaining interests in the company, but the planning could be done in advance.
The risk of any delay in transferring the business to the trust, either through an installment sale or by waiting until value is distributed to the owners, is that the owners may die before completion of the transfer of the stock to the trust. This risk is of particular concern for company owners who are older or worried about their health. The Oregon estate tax applies to an estate in excess of only $1 million, so owners of an Oregon company may wish to expedite the process so that the owner’s estate will not have to pay an estate tax should the owner die before the owner’s interest in the company has been completely transferred to the stewardship trust. An expedited transfer can be accomplished by structuring the stewardship trust as an intentionally defective grantor trust (IDGT).
An IDGT is a trust that is treated as a grantor trust for income tax purposes, with the result that the trust’s income will be taxed to the grantor. As a grantor trust, the trust can purchase stock from the owner without immediate tax consequences. The owner is selling stock to the trust, but because the trust is a grantor trust, for tax purposes the sale is from the owner to the owner. The sale by the owner to themself is not a taxable event.
To cause the trust to be treated as a grantor trust, the trust is structured to give the owner a power that will trigger grantor trust treatment under IRC § 674. The power causes the income to be taxed to the owner (the grantor) without causing the trust to be included in the owner’s estate for estate tax purposes. For example, the owner might retain the power to designate charities for charitable distributions from the trust. Another power might be the ability to borrow from the trust without adequate security, but this power will be appropriate only if the trust is likely to accumulate cash or cash-equivalent assets. The trust enforcer can be given the authority to remove the power later, and at that time the grantor trust treatment will end.
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Initially, the owner gives a sum of money, for example, $200,000, or some amount of company stock, to the trustee of the trust to create the trust. The trust then has sufficient assets to be able to get a small business administration loan, perhaps with the company as a co-borrower. If the company has a mission that appeals to impact investors, a social investment fund might be another source for a loan. The loan is used to finance the purchase of the stock.
The next step is the sale of the owner’s shares of stock in the company to the trust, in exchange for a note, with market-rate interest. The note can provide for interest-only payments, with a balloon payment at the end of a term of years, or for payments of principal. The note and the trust document should permit the trustee to prepay the note without penalty. The sale to the trust will have no tax consequences because the owner is the grantor of the trust— the sale is from the owner to himself for tax purposes.
The owner will be taxed on the installment payments from the trust as the owner receives them. The proceeds of the loan can be used to make payments on the note, and because the trust owns the company stock, dividends paid to the trust can also be used to pay the installments. As the grantor of a grantor trust, the owner will include the trust income on the owner’s individual tax return. Because the trust will use dividends it receives from the company to pay the installments, little taxable income should remain in the trust. The trust can include a nonmandatory provision to allow the trust to pay any tax owed by the owner as the result of the owner’s being taxable on trust income.
After the note is paid, the trust enforcer will remove the grantor’s power, thereby turning off the grantor trust status, and from that time forward, the trust will be treated as a separate taxpayer. The trust will own all the shares in the company, but profit from the company will be distributed to the trust only in amounts necessary to cover the administration costs in
the trust. Other profit can be reserved for research and development, to make profit-sharing payments to employees, or for charitable contributions. Of course, the loan will need to be repaid, too.
If the grantor (the former owner of the company) dies before the note is repaid, any amount remaining on the note will be included in the owner’s estate. It is unclear whether appreciation on the underlying assets will be included. The better outcome from a tax standpoint will occur if the note is paid before the grantor’s death. For that reason, the founder of Edu Resources may decide to make a gift of half of the stock in the first year of the transition, so any estate tax on that half of the value of the company will be avoided. That is, even if the grantor dies with some amount of the note unpaid, half the value of the company will have been removed from the estate through the gift.
A stewardship trust cannot own shares in an S corporation, so many of the challenges associated with transitioning governance structure and discussed in this case study are unique to S corporations. If the stewardship trust is being created to take control of a C corporation or an LLC, the trust may own the company itself. Thus, many of the concerns associated with converting an S corporation into a stewardship trust, such as double taxation, will not be issues for those companies. However, other concerns and considerations face companies of any organizational structure, and each company planning to transition to ownership by a stewardship trust will have its own set of challenges. The next case study considers some of these other challenges.
The second case study involves a sustainable farm in Oregon considering the stewardship trust model for its method of governance. This farm is organized as an LLC and engages in both educational opportunities and conservation. Providing good lives and opportunities to its employees is also important
to the farm’s business model. Both owners of the farm hope to have a structure that will keep the company running effectively and in line with these purposes after they retire. The farm was designed to be mission driven, and its owners would like it to maintain its purposes even after they are not operating the farm. If the farm is to transition from being operated as an LLC owned by two individuals to an LLC owned by a stewardship trust, the owners will face challenges like selecting the right people to act as trustees, trust enforcers, and stewardship committee members. Selecting parties that have a connection to the farm is a way to keep these parties accountable to the trust’s purpose, but identifying these parties may be difficult at first.
The farm might use a bank as a trustee for the stewardship trust. A corporate trustee would handle minimal administrative duties yet would not become overinvolved in the functioning of the business as an LLC. Using a bank is a good option for many companies that want the trustee to have little interference in the governance of the business. Further, the stewardship trust is a type of directed trust, so the duties of the trustee of a stewardship trust are relatively light in comparison to trusts in which trustees manage everything. Because of this focus on basic administrative duties instead of a role in actively managing the assets held in trust (i.e., the company), a bank would make an excellent trustee. Still, there are other options for the choice of trustee. For example, a company may wish to use a professional fiduciary instead. An individual trustee might be possible, but given the perpetual nature of a stewardship trust, successors would have to be carefully considered.
A stewardship trust requires a trust enforcer who will keep informed about the business operations without serving as a director of the company or as a trustee of the trust. The enforcer provides oversight but is not involved in running the business. The trust enforcer makes sure the purpose of the trust—running the business as intended by the founders—continues
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
to be carried out and can intervene to get the trust back on track if too much mission drift occurs. For the farm’s stewardship trust, an organization with a similar purpose would be a great enforcer. The farm is dedicated to land conservation, so a nonprofit organization like a land conservancy trust could be a good choice as enforcer for the farm. A land conservancy trust manages land conservation easements, a purpose different from that of the farm, but the land conservancy shares a dedication to conservation. A trust enforcer could even be a stewardship trust with a purpose similar to that of the company, although there are not enough stewardship trusts in existence at this point for this to be a realistic option. The stewardship trust structure requires at least one trust enforcer but allows for additional trust enforcers, if desirable for a particular trust.
The stewardship committee must comprise at least three people, all of whom act as fiduciaries for the stewardship trust. Or. Rev. Stat. § 130.190(4). The committee directs many of the actions of the trustee, in particular decisions with respect to the business, and the trust operates as a directed trust. Although the duties of committee members are not necessarily the same as being on a corporate board, many of the duties and responsibilities are shared between both governance structure models. Committee members should thus be individuals the trust creator believes will act effectively as fiduciaries for the trust. In the case of many family businesses, a child who would like to be involved with his parents’ business but not run it entirely would be an effective committee member.
For an organization dedicated to its employees, as the farm is, the stewardship trust committee could include employees who would ensure that their interests as stakeholders within the organization are not compromised after the organization becomes a trust. The farm would always like to pay its employees living wages, alongside other benefits like paid time off. One or more employees serving on the stewardship committee can represent these interests.
The stewardship committee may also have individuals representing organizations that are close partners to the trust, ensuring that these close partners do not have their interests in working with the trust severed after the change in structure. For example, if the farm has a nonprofit that operates alongside it yet will not become part of the trust, one spot on the stewardship committee could be reserved for someone serving as a director of the nonprofit. Thus, stewardship committee members should represent a wide variety of stakeholder interests so that the business is effectively administered.
Like the owner of the educational resources company in the first case study, the farm owners will face some challenges in preserving the business part of the farm while the trust property is being transferred. The farm owners want to retire more quickly than the owner of Edu Resources, however, so making gifts and sales over several years is not an effective method of transferring their property interests into the trust. The farm owners will have to determine the best way to transfer the LLC to the trust in a short amount of time. The transfer could be accomplished by having the trust acquire a social finance loan so that it can pay for shares of the LLC. Alternatively, or in addition, the trust could issue and sell nonvoting stock to parties interested in the organization’s purpose, such as impact investors. Some companies may have enough cash on hand or other cash streams to finance the transition into the stewardship trust form, without needing to obtain a loan or issue stock, but most businesses will need some additional source of financing. With the variety of the organizations that could adopt the stewardship trust model, business owners and estate planners
should be aware of the numerous tools available for the transition process.
Another way the farm differs from Edu Resources is that the farm owners are more concerned with solidifying the farm’s purpose and keeping its missions in place than with future profit generated by the farm. The farm owners have considered other options instead of the stewardship trust, such as using an ESOP model, because of the priority they place on the continuing welfare of their employees. But the owners find the way the stewardship trust preserves a business’s noneconomic purposes to be important and appealing. Because the income generated from the farm, such as from the sale of milk and cheese, is not a significant revenue source, the farm does not have to worry about the taxation of income in the trust. The trust is an appealing structure for ownership of the farm to use because the restrictive structure will preserve the mission over time. Although economic benefits can always be a factor, the noneconomic benefits of a stewardship trust may be the driving reason some businesses will choose to use this form.
These two case studies raise some of the issues a business owner will consider when contemplating transition to a stewardship trust as the governance structure for their business. Challenges exist, but for a business owner who wants to protect the business’s purposes, including noneconomic purposes, into the future, a stewardship trust may be a good option. The Oregon statute provides the broad outlines of the structure of such a trust, as well as default rules for operation of the trust, so an Oregon stewardship trust may be useful even for a business operating in another state. n
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By Mark R. Parthemer
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the Act), which focuses on climate investments, clean energy, and deficit reduction. The new legislation is a scaled-down version, albeit renamed, of the administration’s prior efforts, the Build Back Better Act.
Unlike the original Build Back Better Act, which contained numerous tax changes aimed at families of wealth and individuals earning over $400,000 per year, there are only four major tax-related revenue-raisers in the Act. Another key revenue raiser, drug pricing reform, is not a tax provision and therefore not addressed in this article. Before exploring the tax provisions, however, it is important to understand the budget reconciliation process, which was used to pass the Act.
Reconciliation has been used many times for tax changes, with three recent examples: the 2017 tax act (Pub. L. No. 115-97), often erroneously called the Tax Cuts and Jobs Act; the American Rescue Plan Act of 2021 (Pub. L. No. 117-2); and now the Inflation Reduction Act of 2022.
In fact, since reconciliation was established by the Congressional Budget Act of 1974, Congress has passed 27 reconciliation bills. Of these, 23 were signed into law. Of the 42 fiscal years from the first reconciliation bill in 1981 to fiscal year 2022, reconciliation was used in 24 years. There were two separate reconciliation bills in three of those years. Accounting for the fact that reconciliation was not possible in the 11 years when no budget resolution was passed, reconciliation has been used in 24 of the 31 (77 percent) budget resolutions since 1981 (What Is the Budget Reconciliation Process and Why Is It Important?, USA Facts (Aug. 1, 2022),
https://bit.ly/3S1bukJ, as updated by the author to include the Inflation Reduction Act).
Under reconciliation, each chamber drafts its own legislation, then a reconciliation committee merges the two into one. The merged bill then goes back to the House and Senate for “up/down” voting. When the House passed the 2017 tax act, it made an amendment to title it the Tax Cuts and Jobs Act. Thereafter, the Senate passed its version, but the Senate Parliamentarian ruled that the amendment by the House was out of order because it violated the Byrd rule (see Press Release, U.S. Sen. Comm. on the Budget, Parliamentarian Determines Three Provisions in Republican Tax Bill Are Impermissible (Dec. 19, 2017), https://bit.ly/3CGvyDD ). Days later, the House voted again on the bill but without the title. As a result, the official title of the 2017 act is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”
As part of the budget process, reconciliation bills are limited in scope and can relate only to changing laws that affect the national budget. So, why the popularity? In a word, filibuster. These bills benefit from a streamlined process in the Senate, and thus potentially are easier to pass than a regular bill.
The Senate may spend only 20 hours debating reconciliation bills. This is in contrast with ordinary bills, which senators can threaten to delay or prevent from reaching a vote through indefinite debate (i.e., filibuster). Even though most bills technically require a 51-vote majority to pass, Senate rules require 60 senators to vote for cloture, meaning to end debate of a bill. Cloture thus stops a filibuster and ripens a bill for a vote by the full Senate.
The practical result is that a reconciliation bill needs only 51 votes to pass in the Senate as opposed to 60 votes to avoid a filibuster. Reconciliation does not have the same benefit in the House, as representatives are always limited on speaking time when debating legislation.
Reconciliation bills also have important safeguards. Limitations were established in the 1980s through what
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is known as the Byrd rule, named after Senator Robert Byrd (D-WV). The Byrd rule seeks to prevent the expedited reconciliation process from being abused. Here are three examples:
1. Every measure in a reconciliation bill must relate directly to budgetary issues: government spending, revenue or taxes, or the debt limit. This means that measures without any budgetary effect cannot be included in a reconciliation bill. The Senate Parliamentarian decides when the Byrd rule has been violated and can strike provisions from the bill that are in violation of the rule.
2. Reconciliation bills prohibit any measure that would increase the national deficit beyond the budget window. Technically, there is no set budget window, but Congress can establish the length of the budget window. Historically, that window has been 10 years, which is often why we see such laws or certain provisions of those laws “sunset” after 10 years.
3. No changes can be made to the Social Security trust funds.
For the Act, the Senate Democrats maintained and updated a one-page chart of the revenue and expenditures. The last updated chart was published August 11, 2022 (Chart 1).
As noted, the Act contains only four major tax items. A fifth, dealing with carried interest, was cut from the final bill and thus is not part of the law. Chart 2 contains some highlights for each item.
The Act establishes a minimum corporate income tax rate of 15 percent on applicable C corporations. It does not apply to S corporations, regulated investment companies, and real estate investment trusts. Each year, applicable corporations will pay the greater of (a) the regular corporate tax and (b) an alternative minimum tax of 15 percent
Total revenue raised $737 billion
15% corporate minimum tax $222 billion*
Prescription drug pricing reform $265 billion***
IRS tax enforcement $124 billion**
1% stock buyback fee $74 billion*
Loss limitation extension $52 billion*
Total investments
$437 billion
Energy security & climate change $369 billion*
Affordable Care Act extension $64 billion**
Western drought resiliency $4 billion***
Total deficit reduction $300+ billion
*Joint Committee on Taxation estimate **Congressional Budget Office estimate ***Senate estimate, awaiting final CBO score
of adjusted financial statement income (AFSI) less the foreign tax paid that year. It applies to corporations with financial statement income in excess of $1 billion for any three consecutive tax years preceding the tax year but ending after December 31, 2021 (Act amendments to IRC §§ 55 and 59).
The concept of alternative minimum tax is not new. It was first established in 1969 for individuals and later expanded in 1986 to include corporations. The corporate alternative minimum tax, however, was repealed in 2017. As with the individual alternative minimum tax, it was based on computing regular taxable income and adding back various preferences. What is novel is the Act’s approach of taxing “book income” even if adjusted.
Taxing a corporation based on financial or book income is unusual; however, a key modification from the original bill is that the measured income will be adjusted for certain items.
Specifically, the Act defines AFSI (under the newly added IRC § 56A)
as the taxpayer’s net income or loss as reported on the taxpayer’s applicable financial statement (defined in IRC § 451(b)(3) or in future regulations) for the year. Numerous adjustments are to be made to AFSI, including adjustments for statements covering different tax years, related entities, certain items of foreign income, effectively connected income, certain taxes, disregarded entities, and income from partnerships.
Perhaps the most important change in this area from the original bill is that AFSI is reduced by accelerated depreciation deductions and by amortization deductions related to qualified wireless spectrum. The adjustment for accelerated depreciation means depreciation deductions have the same effect on a corporation’s tax base for alternative minimum tax purposes as for regular tax purposes, including any benefit of bonus depreciation under IRC § 168(k). This adjustment is beneficial for each year in which the depreciation deduction for tax purposes is greater than the depreciation deduction for book purposes.
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Minimum corporate income tax
• 15% minimum tax rate
• Applicable to C corporations with AFSI of $1 billion*
• Tax paid will be creditable against future regular tax when greater than the minimum tax calculation
3, reflecting an impact on approximately 76 companies in the S&P 500 (left panel) and the reduction of earnings per share on the S&P 500 index of a modest .08 percent (and .04 percent for the buyback tax discussed below in Stock Buyback Surtax).
$80 billion of increased IRS funding
• 43% will be dedicated to taxpayer services, administrative and operational support, system modernization, and policy studies
• 57% will be dedicated to enforcement enhancements
• Revenue from increased enforcement efforts is estimated at $204 billion, for a net gain of $124 billion over 10 years
Stock buyback surtax
Loss limitation extension
• 1% surtax on corporate stock buybacks
• 2021 stock buyback volume exceeded $900 billion
• Limits business owners from using more than $250,000 of business losses against other types of nonbusiness income
• Originally part of the 2017 tax act and set to expire after 2025; now extended through 2028
A second component is approximately $80 billion of additional funding to the IRS, particularly for purposes of enforcement and collection. The Act summary indicates that by investing this $80 billion over the next 10 years, the IRS will collect $204 billion, for a net gain of $124 billion. Further, the Act proponents declared that none of the appropriated funds are to be used to increase taxes on any taxpayer with taxable income below $400,000.
Specifically, the following would be expended over the 10-year period:
• $3,181,500,000 for taxpayer services.
• $45,637,400,000 for enforcement.
• $25,326,400,000 for operations support.
Carried interest provision— DROPPED
• A provision originally limiting the capital gains treatment of a partnership’s profit interest was dropped
• Future discussion of this provision should be expected
*AFSI—Adjusted Financial Statement Income, averaged over the prior three years.
One of the largest differences between financial and tax income is the treatment of losses. Under tax rules, income is limited to zero, with losses carried forward to offset future income, capped at 80 percent. Under AFSI rules, a financial income loss will be carried forward to offset future financial income similar to the tax treatment and also capped at 80 percent. Financial statement net operating loss (NOL) is defined as the amount of net loss on the corporation’s applicable financial statement, after applying the AFSI adjustments, for tax years ending after December 31, 2019. A financial
statement NOL for any tax year may be carried over to each tax year following the tax year of the loss. Thus, AFSI is decreased by the lesser of (1) the aggregate amount of financial statement NOL carryovers to the tax year and (2) 80 percent of AFSI computed without regard to financial statement NOLs.
As with historic alternative minimum taxation, any tax paid under this new alternative minimum tax is creditable against regular tax in future years to the extent the regular tax in a succeeding year exceeds that year’s alternative minimum tax. The impact of the new tax is projected in Exhibit
• $4,750,700,000 for business systems modernization.
• $15,000,000 for the IRS to prepare and deliver a report to Congress on the cost of developing and running a free direct e-file tax return system, and additional funding to the Treasury Inspector General for Tax Administration ($403 million), the Office of Tax Policy ($104,533,803), U.S. Tax Court ($153 million), and Departmental Offices ($50 million) to enforce the Act.
Political debate has ensued regarding whether the Act will raise taxes on individuals earning less than $400,000 per year, something President Biden has pledged not to do. Further to this point, US Secretary of the Treasury Janet Yellen wrote a letter to Speaker of the House Nancy Pelosi about the Act and included this sentence:
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The legislation would either reduce or have no effect on the taxes due or paid by any family with income less than $400,000 and is fully consistent with the President’s pledge.
The letter, dated August 2, 2022, is available online at https://bit. ly/3MAMfok. This article takes no position about whether the legislation will or will not increase taxes for this group but points out two aspects of interest to tax practitioners, both relating to tax audits.
First, the new hires. The Act does not specify the number of new IRS hires; however, a 2021 report by the Treasury Department indicated that the $80 billion additional funding in the proposed-but-never-passed American Families Plan would enable the hiring of 87,000 new employees (about 57 percent in audit and enforcement) over a
10-year period. U.S. Dep’t of the Treasury, The American Families Plan Tax Compliance Agenda, at 16 (May 2021). Further, it has been reported that the Treasury Department projects the attrition rate at the IRS over the next five years will amount to 50,000 current IRS employees who will retire or take another job elsewhere. Megan Loe, The IRS Is Not Increasing Audits on Middle Class by Hiring 87K New Agents, Verify (Aug. 11, 2022), https://bit.ly/3D1F9Gc.
Second, in a carefully worded letter to IRS Commissioner Charles P. Rettig dated August 10, 2022, Secretary Yellen said the enhancement of enforcement resources “shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels.” Understanding it phrased this way, the gross number of audits indeed may increase on these businesses and households, but not disproportionately
to the number of audits on those earning more than $400,000. The letter can be found at https://bit.ly/3yHvsug.
The Act creates IRC § 4501, which assesses a 1 percent tax on corporate stock buybacks. It applies to the repurchase of stock by a publicly-traded US corporation. Section 4501 defines a taxable event as a “repurchase” under IRC § 317(b) and any economically similar transaction. The taxable value of a buyback can be offset by the fair market value of any stock issued during the tax year. There is a special rule for stock purchased by a specified affiliate.
The use of a buyback is a common way to provide funds to increase per-share value as well as provide shareholders a tax-advantageous source of cash versus a dividend. Buybacks are relatively common and can be valued at billions per year on the S&P 500 alone.
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
For 2021, the total value of buybacks exceeded $911 billion, and earlier this year it was reported that one firm predicts the volume in 2022 will exceed $1 trillion in value. Natasha Dailey, Companies Are on Pace to Buy Back a Record $1 Trillion in Stock This Year as Russia’s War in Ukraine and the Fed’s Planned Rate Hikes Rattle Markets, Bus. Insider India (Mar. 16, 2022), https://bit.ly/3S4LRQi.
Chart 3 also shows the projected impact of this buyback tax on earnings per share of the S&P 500 at approximately one dollar.
Taxpayer-unfriendly, the excess business loss limitation has been subject to much political adjustment, especially in light of its relative newness. Enacted in the 2017 tax act as IRC § 461(l), business owners were prohibited from using losses to offset more than $250,000 of their nonbusiness income (or $500,000 of nonbusiness income in the case of married couples). The dollar threshold amounts are indexed for inflation after 2018. The loss limitation applies to noncorporate taxpayers, or, in other words, to individuals and entities treated like individuals (i.e., passthrough structures).
The stated goal was to prevent highincome taxpayers from deducting business losses (which perhaps may be “on paper” only) to reduce other taxable income. The limit on pass-through losses was established for tax years beginning after December 31, 2017, and before January 1, 2026 (thus, for 2018–2025 filings). The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, suspended the loss limitation for tax years 2018 and 2019 (permitting amended filings to claim the full loss), with a new effective date of tax years beginning after December 31, 2020. The American Rescue Plan Act extended the loss limitation for one year, through 2026. The Inflation Reduction Act now extends the application for another two years, capturing tax years through 2028 by having the loss limitation expire on January 1, 2029.
Based on much-reported political machinations, the Act does not contain a change to the taxation of carried interest. Because this has become a hot topic, some tax practitioners would not be surprised to see it reappear at some point. As a result, a brief review may be in order.
Carried interest is a share of profits earned by general partners of private equity, venture capital, and hedge funds as a performance fee. It aligns the general partner’s compensation with the fund’s returns. Typically, carried interest is paid only if the fund achieves a minimum return, known as the hurdle rate.
For example, a limited partner invests $10,000 in a fund that charges 20-percent carried interest. The fund is successful (exceeds the hurdle rate) and the distribution to the limited partner is worth $100,000. The general partner receives as carried interest 20 percent of the amount the investor earned after the principal is paid back. The math would work as follows:
• General partner earns $18,000 (($100,000 – $10,000) x 20%)
• Limited partner receives $82,000 ($10,000 initial investment plus the $72,000 remainder after paying the general partner)
Carried interest appears to be compensation for services, but, under current tax law, it instead can receive more favorable tax treatment as longterm capital gains (maximum rate of 20 percent, with a potential additional net investment income tax of 3.8 percent) versus the highest federal marginal rate on ordinary income (37 percent).
Generally, short-term gain is taxed as ordinary income, where “short-term” is defined as held for a year or less.
Property held longer than one-year benefits from the reduced long-term capital gain rate. In 2017, the shortterm gain holding period for purposes of carried interest was extended to three years. Recent efforts (the original proposed Inflation Reduction Act and the original Build Back Better Act) have sought to extend the holding period for long-term capital gain treatment to five years. Others have advocated recharacterizing carried interest from a profits interest to a capital interest, which would result in taxation as ordinary income.
Most of the expenditure provisions of the Inflation Reduction Act of 2022 will not be triggered immediately but ratcheted in over the 10-year budget window. In contrast, the tax changes will be effective starting in 2023. We may see guidance from the IRS, perhaps in the form of regulations. Further, we may see future legislative attempts to amend these tax provisions, perhaps driven by midterm election results.
The author takes sole responsibility for the views expressed herein and these views do not necessarily reflect the views of the author’s employer. n
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Carried interest appears to be compensation for services, but under current tax law, it instead can receive more favorable tax treatment as long-term capital gains.By Paul M. Cathcart Jr.
In this article, guidance is offered regarding attempting to complete a taxable gift of securities, held in a brokerage account, before the gift can be reflected on the broker’s books. In the process, some of the governing law is identified to give the reader a foundation from which to answer other questions involving brokerage accounts. The author concludes that a declaration of trust, immediately followed by a conforming directive to the broker, labeled “irrevocable,” is generally the surest approach.
The question might be posed generally: When is an in-kind taxable gift from a brokerage account complete? The question typically seems trivial: The donor directs the gift, the broker debits the donor’s account as of a certain business day, and the gift is treated as complete on
that day. But suppose the donor wants to complete the gift before the debit occurs. For example, the donor may wish to complete the gift over the weekend if higher selling prices are foreseen in the coming week. See generally Treas. Reg. § 25.2512-2. Or the donor may be seeking to reduce the donor’s putative gross estate, for state estate-tax purposes, via a deathbed gift. (Completion of a taxable gift typically reduces the donor’s putative gross estate, and some state estate-tax calculations—unlike the federal estatetax calculation—generally ignore lifetime gifts. See, e.g., Mass. Gen. Laws ch. 65C, § 2A.) Can it be done?
Research quickly leads to the following on-point guidance regarding when a taxable gift of stock, at least, is complete:
If a donor delivers a properly indorsed stock certificate to the donee or the donee’s agent, the gift is completed for gift tax purposes on the date of delivery. If the donor delivers the certificate to his bank or broker as his agent, or to the
issuing corporation or its transfer agent, for transfer into the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation.
Treas. Reg. § 25.2511-2(h); see also Estate of Davenport v. Comm’r, 184 F.3d 1176, 1186 (10th Cir. 1999) (regulation not exhaustive).
The problem is that this guidance presupposes the donor’s possession of certificates evidencing ownership of the securities in question. The donor likely would have possessed those certificates in 1958 when the above-quoted guidance was first finalized, but that is not true today, at least if the securities are publicly traded. See generally U.C.C. art. 8 prefatory note pt. I (1994). For one thing, not all securities are “certificated”; ownership of some is evidenced only in the records of the issuer or its transfer agent. More importantly, certificates (if any) are issued only to the direct owners of securities, and today a donor rarely owns publicly-traded securities directly. The typical donor’s
interest is instead evidenced by entries on the books of a “securities intermediary,” typically a broker, with which the donor has an account. U.C.C. § 8-102(a)(14). Because the donor does not possess the presupposed certificates, the above-referenced guidance is largely irrelevant to the question posed.
The question must consequently be analyzed under more general giftand-estate-tax rules. As always, proper application of those rules requires an understanding of applicable local law. See, e.g., Morgan v. Comm’r, 309 U.S. 78, 80–81 (1940). Sources of law potentially applicable include both the accountholder’s agreement with the securities intermediary and the applicable version of the Uniform Commercial Code (U.C.C.) Article 8, Part 5, that has been adopted by every state, dealing with “how interests in securities are evidenced and transferred” under the above-described “indirect holding system.” U.C.C. art. 8 prefatory note pt. III.B.
With that background, it may be helpful to ask: Of what legal significance is the usual debit from the donor’s securities account? Can the donor complete an intended gift before the debit occurs—for example, by an irrevocable directive given to the securities intermediary, or by a written assignment delivered (only) to the intended donee?
The Supreme Court of South Carolina faced a related question in In re Estate of Rider, 756 S.E.2d 136 (S.C. 2014). A review of that case informs the current analysis. “The decedent had directed his bank to transfer specified assets in his investment account to a new account for his spouse but died before all of the assets were credited to her account.” Id. at 137. The question was whether the assets credited only after the decedent’s death remained part of the decedent’s probate estate (in which case they would benefit his descendants from a prior marriage). A subsidiary question was whether the U.C.C. or, instead, the South Carolina common law of agency controlled the outcome: Under the latter, the bank’s authority to credit the assets would have terminated on the date of the decedent’s
death (the bank having been notified on that day). The court concluded that the U.C.C. relevantly supplanted the common law, citing legislative history and commentary indicating that the U.C.C. was intended “to provide a uniform method of resolving issues in order to promote liquidity and finality, to be supplemented by (not thwarted by) the rules of agency and other applicable laws.” Id. at 143. The court further held that pursuant to the applicable U.C.C. provisions, the decedent’s directive was effective when made; it “[did] not become ineffective by reason of any later change in circumstances,” including the decedent’s death, id. at 141 (quoting S.C. Code Ann. § 36-8-107(e)); and the bank was consequently obligated to “obey his directive.” Id. at 143. In support of its holding, the court observed that under the U.C.C., a person generally acquires a “security entitlement” if the “securities intermediary does any of the following three things”:
(1) indicates by book entry that a financial asset has been credited to the person’s securities account;
(2) receives a financial asset from the person or acquires a financial asset for the person and, in either case, accepts it for credit to the person’s securities account; or
(3) becomes obligated under other law, regulation, or rule to credit a financial asset to the person’s securities account.
Id. (quoting S.C. Code Ann. § 36-8501(b)). The court had already held that the bank became “obligated” to credit the spouse’s account, within the meaning of paragraph (3), when the decedent issued his directive. The court consequently held that the assets credited to the spouse’s account only after the decedent’s death belonged to the spouse and were not part of the decedent’s probate estate.
“Irrevocable” Directive to Securities Intermediary Of what relevance is In re Estate of Rider to the tax question posed? By holding that a gift directive to a securities intermediary
determines the rights of donor and donee, even if it is not effectuated by the securities intermediary until after the donor’s death, the court indicated that the debit from the donor’s account is not crucial. The court expressly did not reach the question, however, whether the decedent’s directive completed a gift (under local law) at the time it was made. Id. at 142, n.3. In that regard, a seemingly important gift-and-estate-tax question is whether the directive was, or could have been made, irrevocable at the time it was made.
Following In re Estate of Rider, a donor attempting to complete a taxable gift before it can be reflected on the securities intermediary’s books may, as part of that effort, want to send the intermediary a directive to that effect, labeled “irrevocable,” even if the directive will not be immediately processed. An argument can be made that the gift is complete when the directive is sent. See U.C.C. §§ 8-102(a) (8), 8-507(a). Even if that argument is not persuasive, the directive is additional evidence of donative intent, which can only help. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers § 6.2 cmt. yy (2003).
Suppose that instead of directing his bank to transfer assets to his spouse’s account, the decedent in In re Estate of Rider had purported to give those assets to his spouse via a written assignment delivered to her, but not the bank, during his life. Could that alone have completed a taxable gift?
A threshold question is whether such an assignment can ever give the assignee property rights, in the context of the above-described “indirect holding system.” See 5 Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 122.2 (2d ed. 1993) (“If an intended donor manifests an intention to make a gift but fails under local law to achieve the intended result, no ‘transfer of property’ occurs, and a taxable gift has not been made.”). Based on what little guidance there is, the consensus appears to be that it can. See U.C.C. § 8-501 cmt. 5 (last two sentences); id. § 8-510 cmt. 3 (contemplating assignment); accord
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Jeanne L. Schroeder, Is Article 8 Finally Ready This Time? The Radical Reform of Secured Lending on Wall Street, 1994 Colum. Bus. L. Rev. 291, 425 n.321. The question potentially implicates the U.C.C., the agreement between the accountholder and the securities intermediary, and the applicable laws of gifts. Each is discussed briefly below.
The U.C.C. appears not to be directly relevant because, although it applies to the relationship between accountholder and securities intermediary, it does not apply to the relationship between wouldbe assignor and assignee. See U.C.C. art. 8 prefatory note pt. III.B; accord 7 William D. Hawkland et al., Uniform Commercial Code Series § 8-104:2 (through June 2022 update) (whether an “indirect holder of a security” has taken action “sufficient to effect a completed gift” is a question “not directly controlled by Article 8, but by the general law of gifts”). It has been suggested, however, that because under the U.C.C. an assignment does not, by itself, empower the assignee to direct the securities intermediary with respect to the subject assets, see U.C.C. § 8-507 cmt. 3, the assignment cannot, by itself, complete a gift under applicable local law.
Egon Guttman, Modern Securities Transfers § 6:16 (4th ed. through 2021 update). It seems to this author that that suggestion raises the questions, under non-U.C.C. law, what rights the assignment gives the assignee against the assignor (and perhaps the securities intermediary, but see U.C.C. § 8-501(b)(3) cmt. 2) and whether those are sufficient to complete a gift. Those rights might include, for example, the right to require that the assignor direct the securities intermediary to reflect the assignment on its books, cf. Restatement (Third) of Prop.: Wills & Other Donative Transfers § 6.2 cmt. h, and an adequate claim against any assignor who first sells the assets out from under the assignee (to a bona fide purchaser for value and without notice, see U.C.C. § 8-502), cf. Restatement (Second) of Prop.: Donative Transfers § 34.9 & cmt. b (1992). In any event, the U.C.C. may be at least indirectly relevant, to the extent it is part of the background against which is made any factual determination about whether there was donative intent and “delivery”
sufficient to complete the gift. Hawkland, supra
Suppose the agreement between accountholder and securities intermediary prohibits assignment of the accountholder’s interest. Does that alone prevent the envisioned assignment? Perhaps not. Any such clause might be interpreted narrowly on the theory that it is intended to protect the securities intermediary, and not to restrain the accountholder. See generally Howard O. Hunter, Modern Law of Contracts § 21:17 (2022 ed.).
If neither the U.C.C. nor the account agreement bars assignment, as between the would-be assignor and assignee, is assignment possible under the contemporary law of gifts? That law appears broadly approving of gift by written assignment or other “donative document,” if signed and delivered. Restatement (Third) of Prop.: Wills and Other Donative Transfers § 6.2(2) & cmts. p–u. And to the extent, if any, the contemporary law of contracts applies, but see U.C.C. § 8-503, that law likewise “favors a liberal assignment policy.” Hunter, supra, § 21:8.
So it may be possible to complete the envisioned gift by assignment. The preceding discussion, however, raises questions that do not have crystal clear answers. As relevant here, those questions relate to one overarching question: whether, in the context of the abovedescribed “indirect” system for holding securities, the envisioned assignment involves “delivery” sufficient to complete a gift under applicable local law. The same question is raised by the “irrevocable”-directive method, discussed further above.
That “delivery” question can at least largely be side-stepped by the use of a third method: a declaration of trust. No delivery is needed for a donor to declare that property, which is already the donor’s, is now held by the donor as trustee for the benefit of an intended donee. E.g., Restatement (Third) of Trusts § 10 cmt. e (2003); Guttman, supra; see also Treas. Reg. § 25.2511-2(g). For that reason, a declaration of trust is at least
generally the surest of the three methods discussed in this article.
If the intention is both to complete a taxable gift and also to exclude the trust property from the donor’s putative gross estate, the terms of any such trust should (of course) be consistent with those goals—for example, the trust should expressly be made irrevocable, and the donor-trustee’s distribution authority should be sufficiently constrained. See, e.g., Treas. Reg. § 25.2511-2(g); Old Colony Trust Co. v. United States, 423 F.2d 601 (1st Cir. 1970); Rev. Rul. 73-143. It is also advisable—although not strictly necessary—to notify the trust beneficiary (or beneficiaries) of the trust’s existence, and to memorialize that notice, in order to reinforce the existence of the trust relationship. E.g., Restatement (Third) of Trusts § 14 & cmt. c.
A donor aiming to complete a taxable gift of securities from a brokerage account, before the gift can be reflected on the broker’s books, should consider making a signed, written declaration that the donor holds those securities in trust for the benefit of the intended donee (on otherwise appropriate terms), immediately followed by a directive to the broker, labeled “irrevocable,” that it update its books accordingly.
Regardless of which methods are employed as part of an attempt to complete the gift, the subject assets should be identified specifically—for example, by reference to specific securities or, perhaps, a percentage interest in the brokerage account as a whole. If there is insufficient specificity, there may, for that reason, be no gift or trust. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers § 6.2 cmt. t; Restatement (Third) of Trusts § 40 cmt. e. In particular, the donor should avoid specifying only a target dollar amount because that tends to suggest something other than a presently effective gift or trust (unless perhaps the intended subject assets are cash equivalents then in the account and the amount specified does not exceed their aggregate value). Cf. Estate of Cummins v. Comm’r, 66 T.C.M. (CCH) 1232 (1993). n
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The Single Biggest Problem in communication is the illusion that it has taken place.
—George Bernard ShawShaw was a cynic, but he has a point: We believe we’re communicating, but often we can’t get through to you, and you’re not making sense to us. As lawyers, we understand the value of clear, effective communication in our practices; the challenge is how to have meaningful conversations about the crucial topic of personal development. Whether we want to be the next chair of the Section, be better at balancing work and home demands, share our insights with a new generation, or develop strong new business ties, we need great communication.
That’s where the Section’s Leadership and Mentoring program comes in. The Leadership and Mentoring Committee has developed a mentoring program with a mission to cultivate in Section members exemplary skills that can be applied across diverse professional and social domains as well as at multiple levels within the Section. We seek to develop leaders through mentoring and training. The Section believes mentoring is critical to guiding and developing future leaders within the Section and helping Members develop their own practice. The program is open to all interested Section Members, and our participants have found the program tremendously rewarding.
In 2017, its inaugural year, the Leadership and Mentoring Committee sought to understand the qualities common to effective practitioners. Where better to look than to the former chairs of our Section? We interviewed over a dozen former chairs to
Jo Ann Engelhardt is a Managing Director of Bessemer Trust and a member of the Board of Governors of the ABA and the Board of Directors of the ABF. Toni Ann Kruse is a partner in the Private Client Group of McDermott Will & Emery LLP in New York and immediate former chair of the Charitable Group of RPTE.
understand what they have learned over the years, both in the Section and in their professional lives, across both Divisions. Their answers were illuminating and provided a roadmap to anyone who wishes to develop essential skills. The responses were collected in a summary that is posted on the Section website. The chairs answered questions including “What roles did you play in the Section that particularly prepared you for serving as a leader?” and were candid in commenting on “What happened along the path to leadership that you did not expect?” We also considered how other Sections across the ABA structured their mentorship programs and borrowed what we thought would make our program better.
Since the first mentoring class in the 2019–2020 Bar year, the program has had on average 14 mentor-mentee pairings, with some pairings continuing for a second year at a mentee’s request. Mentors and mentees don’t have a set curriculum, but they are provided with tools: a one-page guide, “Steps for a Successful Mentoring Relationship,” and a second one-page guide, “Keys to Successful Mentoring,” which offer specific action steps to take during the relationship. An additional document, “Reflections on Effective Mentoring Relationships,” is a brief compilation of observations by Section leaders at various levels and different practice settings. All of these documents are also available on the Section’s website. Each bar year, we seek a diverse class of mentees and mentors to ensure that the Section’s goals of diversity, equity, and inclusion not only are being honored but are being advanced. Mentorship is particularly important in working towards solving the endemic retention issues for women and diverse lawyers, and we aim to be part of that solution. Although each mentoring relationship is unique, the relationships have certain common features. One is a regular schedule of meetings, whether in person, by phone, or via Zoom, so that both parties treat their work as just as important as their professional jobs. Another is the mentor’s ability to listen
actively and communicate insights and recommendations that will complement the mentee’s current position and experience as well as his or her aspirations. If the pair can earn each other’s respect, if they can develop an understanding of what the mentee needs from the relationship, and if the mentor expresses empathy but is also candid, the pair will build trust—the foundation of any successful relationship. Then, the real communication begins. To set the pairs up for success right from the start, the following short but effective “Steps for a Successful Mentoring Relationship” is provided:
Every mentoring relationship is unique, but we ask that you take the following steps to get your mentoring relationship off to a good start:
1. Set and hold a call with your mentee within 10 days of your appointment.
2. During the call, set two or three goals you will work towards for the first six months, ideally to include these general topics:
• What are the two or three main results the mentee hopes to achieve during the mentorship (e.g , attain a specific role in the Section, gain meaningful Section jobs, help define for which roles or jobs the Mentee is best suited)?
• Which goal has priority? Sketch a plan to achieve the goal.
• Who else in the Section may be helpful or needed to achieve the goal?
3. Set a mutually agreeable call or meeting schedule to ensure the mentee is making progress and stick to it.
1. Make yourself available within reason based on your mentor’s availability.
2. Reflect on the two or three goals
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for the year before your first call with your mentor. Even if you’re not sure about the specifics, don’t come to the call empty-handed: Your mentor is wise but not a mind reader.
3. Be honest about your experience, time commitment, and goals—it’s not hubris to want to get ahead if you’re ready to work for it.
4. Let the Leadership and Mentoring Committee co-chairs know if the relationship is not progressing well and explain why so we can help.
When we asked attorneys who participate in the mentoring program for feedback, it was clear that having a Section mentor accelerated involvement in the Section and enabled access to all of the benefits that come with consistent participation. The benefits were also not only seen for mentees, but for mentors alike. For some Section members, the mentoring process broadened their understanding of how the Section works and helped them hone the ways the member wishes to contribute to the work of the Section. For example, several mentees received their first appointment to a Standing Committee after the mentorship relationship and have been very effective in their new roles. More seasoned Section members spent time with their mentors creatively solving workplace issues, including a transition to a solo
practice, addressing family issues while changing firms, or expanding their “brand” through writing articles for this magazine or participating in an eCLE. To gauge the effectiveness of the program overall, as well as hear what makes an individual mentoring relationship effective (or not), both mentees and mentors are asked to complete a five-question survey at the end of the relationship. We use the insights from the surveys as validation for what is working and to learn where we need improvement. Benefits of participation in the Section mentoring program were described by both mentors and mentees. Here is some direct feedback from Section mentors and mentees:
“[G]etting significant business has come as a result of mentoring . . . I have had a good number of local counsel real estate and litigation matters come my way from attorneys in [the Section] within the last 10 years in particular. The referrals grew the more I put into the relationships and organizations—in person appearances and speaking also helped raise my profile. The engagements arising through my [Section] experiences have over the years more than paid for the cost of the events over the years.”
“[W]hen someone I had relied upon at work as a mentor left the firm, I started to realize that
I could build relationships with my contemporaries around the country who are active in [the Section]. Now, I had a community, but I was still unsure how to take things to the next level. Leadership in the Section seemed unattainable to me; I was unsure what my next steps should be. Having a mentoring relationship made an enormous difference. I was encouraged to take some specific steps to get more involved. I wrote an article for Probate & Property that was well received, both within the Section and at my firm. My mentor suggested a role for me, and with her endorsement I was named to a position within the Section from which I can continue to grow and develop. By mutual agreement, my mentor and I extended the relationship for a second year, which was a huge help, as I also changed firms during that time. I felt much more capable of dealing with the stresses of a new firm knowing I had a mentor in my corner who was there to listen with my best interests in mind, first and foremost.”
“[T]he mentoring relationship and Section involvement can really improve so much more than one’s Section trajectory. It was by being active in the Section and watching the leaders conduct meetings,
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deal with different viewpoints or difficult people, and navigate a group of volunteers with tact and effectiveness that I started to learn those skills myself, and I’ve seen it happen with others. I’m more effective with my clients, my managers, my team, and even my kid sister as a result of spending time in Section activities. . . . [T]o learn the skills that can help a practice, impress potential clients with one’s confidence and skills in interpersonal relationships, and help one earn the respect of one’s peers and one’s manager—those are some of the best reasons to get and stay involved, and the fruits of a good mentoring relationship.”
The legal profession has historically been an apprenticeship-based career, so it is no surprise that mentorship is critical to developing leaders throughout our field. Law school teaches you to understand the law but does not fully prepare you to practice law—an endeavor that can be overwhelming and complex. Mentoring relationships can help mentees better articulate their visions and meet their goals and also helps mentors build a pipeline of future talent for leadership roles in the Section and the broader field.
An article published by the Forbes Communications Council highlights:
A good mentor is someone who is motivated and energized, cares about developing others, and is willing to commit their time. At the same time, if you are a mentee, make sure to dedicate the time and energy necessary to be mentored properly. It’s most effective when there is a good match between the mentor and mentee.
Paramita Bhattacharya, What Makes a Great Mentor, and the Importance of Having One, Forbes (Feb. 24, 2020), https:// bit.ly/3rInsoB.
A mentoring relationship can bear many fruits if the personal connection is strong and is properly maintained
over time. The mentor can teach his or her mentee aspects of substantive law and impart wisdom on many important aspects of the practice. In addition, a mentor may serve as a sounding board when a mentee is dealing with difficult dynamics within the mentee’s firm or when faced with important choices on the career path. Having the opportunity to hear the reason for a particular approach to solving a problem and to shadow another practitioner in leading meetings or presenting on substantive topics is invaluable. Many of what can be viewed as the “softer skills” of our practice are critical to success and can be learned only through observation and practice. Managing cases and colleagues, setting and meeting client expectations, determining how to network productively, and establishing personal marketing strategies—these are all skills that must be learned by doing and observing those we trust as they apply these skills in practice.
Starting with the 2022–2023 bar year, Leadership and Mentoring has become a part of the Standing Committee on Career Development and Wellness. This is a congenial home for Leadership and Mentoring to expand its work on the “Leadership” side of its mandate. Similarly, representatives from Leadership and Mentoring are
collaborating with Section colleagues by contributing thoughtful recommendations to improve the effectiveness of the nominations process by helping to identify potential leaders earlier in their Section careers and making clear the many pathways to leadership within the Section. In these tasks, as well as in the mentoring work we do, we insist that we hear from our Chief Diversity Officer and incorporate her recommendations. We also hope to work more closely with former Section Fellows, who are a very diverse group due to the program’s mandate that 50 percent of each class of Fellows be diverse, as defined by the ABA’s Goal III.
Sharing knowledge across generations of lawyers helps our profession thrive. Especially in this new hybrid world, informal mentorship has become more difficult, making opportunities for intentional mentorship even more important. It is difficult for young lawyers to navigate who to turn to when they do not know how to approach a project or whom to ask for help. We invite members of the Section to get involved and become that person for someone else—the opportunities abound for both mentors and mentees to create strong connections, foster new leaders, and rise together. n
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A mentor may serve as a sounding board when a mentee is dealing with difficult dynamics within the mentee’s firm or when faced with important choices on one’s career path.
Imagine that your firm represents a lender who finances residential and commercial property loans. Most of the legal work for these transactions is done on a fixed fee basis and uses the lender’s paper. Your law firm could distinguish itself by demonstrating the capacity to handle multiple transactions while rapidly turning around quality closing packages. A document automation system could reduce the time from term sheet to full lending package down to under five minutes and turbocharge your firm’s profitability.
Most lawyers who are familiar with document assembly software will recognize the truth of the above statement but will be skeptical of their ability to build a document automation app in a week. However, with the new “low-code” cloud-based document automation solutions now available, you can now build such an app in under a week, with a 100 percent return on investment (ROI) in the first quarter after rollout. These systems are easy to deploy. Only the author is required to install any software; everyone else works in the cloud. And, as I will show you in this article, these apps are easy to build.
By way of example, I will look at the low-code solutions offered by three leading vendors: NetDocuments, AbacusNext, and XpressDox. NetDocuments recently released PatternBuilder (https:// www.netdocuments.com/products/ patternbuilder) as a fully integrated document assembly app that can be launched from a Client/Matter workspace inside
Technology—Property Editor: Seth G. Rowland (www.linkedin.com/in/ sethrowland) has been building document workflow automation solutions since 1996 and is an associate member of 3545 Consulting® (3545consulting.com).
NetDocuments. AbacusNext has been moving its HotDocs Classic client base to its low-code cloud-based solution called HotDocs Advance (https://www.hotdocs. com/services/smb/). And XpressDox has largely reinvented its advanced software with the release of XpressDox 14 (https:// xpressdox.com/version-14/) a low-code and full-code solution in a single product.
I will not be offering a verdict on which product is better; each system has its strengths and weaknesses. Rather, I will show you the methodology of how to plan for, design, and then build an app on these platforms. Along the way, I will illustrate some different design philosophies in each application.
By way of disclosure, I am a former attorney who has been building document assembly solutions since 1996. As a consultant, I have built complete applications on each of the platforms discussed and at various times earned commissions on the sales of the software.
Building a document assembly app requires planning and effort. The more planning and effort you put into the project, the greater the reward in terms of productivity. Your goal should be to identify those document sets that will yield the greatest ROI. Your first project should be “pre-paid” based on your current business. Run the math. Review time entries,
looking at both the total hours as well as the number of days from receipt of the request to delivery of the final binder.
PatternBuilder, HotDocs, and XpressDox are sold on a subscription basis that includes a hosted cloud-based server from which your app will be run. Only the “app builder” or author needs to install any software. Everyone else needs only to log in variously to NetDocuments. com (for PatternBuilder), yourdomain. hotdocsadvance.com (for HotDocs), or us.xpressdox.com (for XpressDox). For an extra charge, you can self-host for HotDocs Advance and XpressDox; but then, you will not be building an app in a week.
On the investment side, in addition to software costs, factor in the time you and your paralegal will spend building the app. On the return side, look at the time savings on drafting; assume you can reduce that time by a factor of 10 (a 90 percent time savings). Also, factor in your increased capacity to handle new business now that your drafter is more productive. And factor in the substantial savings from avoiding workstation deployment, network support, and the cost of configuring and securing a web server. If you run an entrepreneurial law firm with a transactional process, the only real question is why you haven’t started sooner; you are leaving money on the table.
In our example, we are going to build a residential loan package. Don’t be too ambitious. Gather the set of forms required for a single state and a single lender. You will need a loan agreement, a promissory note, and a mortgage or deed of trust. Also include the loan guaranty, the corporate certificates, the environmental indemnity, and various other side agreements. You can add share pledges
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and UCC filing forms to the package. A deal summary and a closing checklist should round out the package. These should be Microsoft Word documents. Ideally, they should be styled with automatic numbering, cross-references, and all extraneous hard returns removed.
In the case of the UCC form, that can be a PDF, but you will want to rename the fields in the PDF so that their names describe the data that would be entered in the form. PatternBuilder, XpressDox, and HotDocs all work with both Word documents and PDF forms.
Mark-Up Variables in the Base Document. Collect one entire set of documents. Rename the files with a number (to sort them by importance) and a descriptive name (e.g. BNK01 Loan Agr. docx and BNK02 Mortgage.docx). Then start identifying all the merge field locations. For example, replace First National Bank, Inc. with <BANK Name TE>; replace ABC Carpets, Inc. with <BORROWER Name TE>; and replace the loan’s interest rate with <LOAN Interest PCT>. Go through the entire set of documents using a consistent markup. I will often have another Word document open with a table listing all my variables and what information they are replacing. If you are daring, you could try a global search and replace.
Consolidate Alternative Versions. It is far easier to maintain a system that has one mortgage template with alternative scenarios for a single borrower, married borrower, or entity than it is to maintain separate loan packages for each of these scenarios. A critical review of the documents will reveal differences centered around the preamble that sets out the parties, multiple signature blocks, and then party references (gender and verbs) throughout the document. With low-code document automation, those variations can be easily handled with logic. The beauty of low code is that it does not require learning some arcane computer code; logic rules are built with drag and drop and use simple English.
Moving onto the rest of the package, the addition of logic will handle the minor language differences between a 30-year fixed interest note and a 5-year balloon note with a variable interest
rate. Logic will also be used to determine whether to include or exclude a particular certificate or side agreement.
I am assuming that the attorney and paralegal are working together. Though the paralegal may be familiar with the existing forms, the attorney will know whether the differences that show up in the redline will require logic or whether they are artifacts of the legal drafting process that should have been expunged long ago. The attorney will focus on the markup; the paralegal will work with the low-code software and build the actual app.
Add Alternative Language in Brackets. For each type of document, pick one document to be used for your base template. Using Word’s “compare” function, you should be able to quickly identify the differences and the similarities. Identify the paragraphs that are different in each redlined document. Mark the language in the base document that needs to vary with a beginning and ending bracket. You can use Word comments or superscript text to indicate the logic for the inclusion (or exclusion) of that text. Now review the other documents. Where there is language that differs from the base template, determine whether those changes are (1) necessary, (2) an improvement on the base, and (3) if they are alternative language, the logic for the inclusion.
Reread your new base templates. You have already put angle brackets (e.g., “<” and “>”) around each of your variables. You should also have square brackets (e.g., “[“ and “]”) around any optional text with an annotation of the required logic for its inclusion or exclusion. It is time to design the intake form that will be presented to the end user for the app.
Open up an Excel spreadsheet. Create a table with the following column heads: Markup Tag, Dialog, Prefix, Variable, VarType, Full Variable, Prompt, Options, and Notes. In the first column, you put the markup tag that you used for the variable or rule in the template. In the next column, you put in the name of the section (dialog, tab, or page) into which you want to put the variable. PatternBuilder calls them “pages,” HotDocs calls them
“dialogs,” and XpressDox calls them “tabs.” They are functionally the same; these sections allow the user to group questions logically, with section headers, explanations, and logic. They are far superior to a dumb list of prompts. And with each of these applications, the prompts themselves can be smart, changing based on the user’s answers.
In the next three columns (Prefix, Variable, and VarType), you are going to put the elements of the final full variable name. The first element identifies the dialog on which the variable will be placed. The second element identifies the variable. The last element identifies the variable type. The full variable column concatenates all three elements into a single variable name. In the prompt column, set forth the question that will be presented to the user. If the question has multiple choices, specify what those choices will be in the options column. Finally, if there is some special logic or condition around the usage of the variable, use the last column to add your notes.
Now, have your paralegal go through the template and review your brackets and braces. If you missed any on this second review, your paralegal should add them to the template now and consult you if there are any questions. For each variable or logical block, make sure there is an entry on the Excel spreadsheet. Group the items by topic into sections. The sections should be divided into those questions that are relevant to all or most forms, and then those questions that are relevant to only particular forms. This will be important later when you build in logic.
As you place questions into sections, also reorder the rows of the spreadsheet so they appear in a logical order that would make sense to the end user. Start with the most important dialogs first; these are the questions that are used on most of the documents. In our example, you would group questions about the lender on the lender dialog, questions about the borrower on the borrower dialog, and questions about the nature of the loan on the loan dialog. These dialogs would appear first. If there are questions that only appear on a guaranty
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agreement, you would create a separate dialog for these questions and this dialog would have a logic rule that it would appear only if a guaranty was required.
Pay close attention to how you name your variables; the dividend will come later when you start “dragging and dropping” variables to build the master interview. We divide variable names into three parts. The prefix identifies the section where I want to put the variable. The suffix identifies the data type. And in the middle, we put what the question is. For example, the question: “What is the name of the lender?” becomes LENDER Name TE; it is in the lender section of my interview, it asks the name of that lender, and the data type is a “text” variable. By contrast, LOAN Maturity DA would be the loan maturity date in the loan section, and LOAN Interest PCT would be the interest rate as a percentage.
You may need to review the templates multiple times. Once your paralegal has the spreadsheet completed, you should review it; paying close attention to the questions asked and some of the logical rules that would control whether those questions appear in the interview.
The spreadsheet is your roadmap for building the app. With a well-designed spreadsheet, I usually hand off the app building to someone else who is at a lower billing rate than I am. The roadmap should tell the coder everything the coder needs to know. Here is where the design philosophies of PatternBuilder, HotDocs, and XpressDox differ.
Assigning Variables to Sections. The first step is to create the variables and assign them to sections.
In PatternBuilder, after you create the blank app, you must first create the pages. Give the page the same name as the section on the spreadsheet. Then add variables to the page, using the data type definition you put on your spreadsheet. All this happens in the cloud. PatternBuilder does have a desktop tool, but that is used primarily for inserting variables and logic blocks into Word documents. All the interview design and configuration occurs in the cloud.
In HotDocs, you need to install and
use a desktop application called HotDocs Author. Create a workspace. Add your templates to the workspace. We recommend creating an “Answer Intake” template which would be functionally equivalent to the “ app” in PatternBuilder. For each section, you would add a dialog. For each variable, you would add a “variable,” and then you would drag the variables onto the dialog.
In XpressDox, you also need to install a Word add-in on your desktop. This add-in appears as a toolbar ribbon inside Word. All activity is controlled by options on the ribbon. XpressDox is template driven; all the elements you need are stored on the actual Word document. With the new low-code version, XpressDox uses advanced wizards and hidden text to hide the complexity of the program. Just click the New Question button and follow the prompts. After you have created your questions, launch the Manage Interview wizard. All your questions will appear. Add tabs for each section; then drag the questions into the appropriate tab. As you add more questions, they will appear on the general tab, from which they can be reassigned to other tabs.
Apply Logic to Sections and Variables. The strength of the low-code solution is the ability to add complex logic without learning a new programming language. PatternBuilder, HotDocs, and XpressDox each take a different approach to add logic to the interview.
In PatternBuilder, you add logic to the page or the individual variable. For example, if you have a page of questions on limited guarantees, you would include a question: “Is anyone guaranteeing the loan?” If the answer is yes, then the page of questions on limited guarantees appears. Adding this rule is a matter of flicking the switch to “conditionally display” the page. You then choose the question and the answer that would trigger the display. To add logic to a question, you would flick the switch “show if” to yes and then add your logic rule. For more complex logic such as multiple questions, you would create a logic block, give it a name, and then use that.
In HotDocs, you can take two approaches: relevance or scripting. If you
choose relevance, the application will look at the logic inside the templates and then gray or hide questions that are deemed irrelevant. In the case of the limited guaranty, if that language in the template is surrounded by the question, “Do you need a limited guaranty?” and if that question is answered “no,” none of the limited guaranty questions will appear. If you choose scripting, then it will be up to the author to write a script for the entire dialog that includes “Hide and Show” instructions. Scripting gives you exceptional control over the interview.
In XpressDox, the default engine uses relevance. With the Manage Interview wizard, you choose which questions go on which tab and the order they appear. All the logic is handled based on the usage of those variables in the templates. If a question is needed, then it appears automatically. If none of the questions in a section is used, then the whole section disappears from the interview. If required, additional scripting can be used to conditionally force relevance even though a question is not actually used in the document.
Test, Test, and Test. In all three programs you can run a test assembly to see what the interview looks like in operation. I recommend testing the interview as a standalone and refining your questions, so they make sense in context. Please try not to change the underlying variable name. Changes in variable names require careful consideration because they may lead to additional changes elsewhere in your app.
Once your intake interview is built, it is time to convert your markup into functional templates. This is where these low-code programs shine. If you are consistent in your markup, conversion is a mix of (a) search and replace, (b) drag and drop, and (c) highlight and tag. Your Excel roadmap should show you what markup tag you used in the template and also what field or rule you wish to use in its place.
Replacing Fill Points. It is best to replace the markup tags in several passes. Work your way through the spreadsheet.
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Start with simple fill-point variables such as names, addresses, dates, and amounts. Replace each of these brackets with the new one from your intake sheet.
In PatternBuilder, there is a Word plugin and an online editor. If your templates have outline numbering or special formats, you must use the Word plugin. For quick and dirty templates with no formatting requirements, you can use the online editor. Both the Word plugin and online editor have a side panel that gives you access to all the variables in your app. From there it is a matter of dropping the variables in place in the document. If your markup has the same name as the variable, you can run a wizard that automatically replaces those markup tags with PatternBuilder variables.
In HotDocs, there is a desktop application (HotDocs Author) that has a workspace explorer to manage the templates, a component studio to manage the interviews, and a HotDocs field editor as a Word plugin to handle inserting variables. Once you have created the master interview, all your variables should be available in the field editor. Highlight the text and choose “placeholder.” You must choose the type of variable field before you can find your variable on the list. If the variable doesn’t exist, you can create it directly from the sidebar in Word.
In XpressDox, there is a full desktop install, but there is no need to leave Word to do any of your work. Everything you need is in the Word plugin ribbon. You have access to a command assistant which contains both your data elements and all available commands. If you have named your fields with prefixes denoting the section or dialog where they are placed, you would have a nicely sorted dictionary of all available fields. If you forgot to add a question, just click on the “New Question” button and define the prompt and variable name.
Add Rules to Conditional Text. Once all the fill points are done, turn to the conditional text. This is where you will integrate the scenario logic you captured on Day 1 to set off the alternate paragraphs.
In PatternBuilder, conditional text needs to be placed in a logic block. Inside that logic block, you can have other logic
blocks. You then insert the logic block with its formatted text into the template. While nested logic is supported, it can sometimes be hard to build and maintain these complex logic structures.
In HotDocs, conditional text is controlled by a begin logic tag and an end logic tag in the actual Word template. Highlight the conditional text. Then, under action items, choose “Create a conditional region”. Choose your condition type, select your variable and define the rule. There is support for complex conditions, as well as the ability to nest multiple layers of logic. For reusable blocks of text, you can also use Insert templates surrounded by conditions.
In XpressDox, the conditional text is similarly controlled by begin and end logic tags in the Word template. Complex and nested logic is also supported. Just highlight the conditional text block and click on the “IF BLOCK” button. Select your variable from the list and choose the condition. The correct code is added to the template. If you need to revise it, you can just edit the text of the rule directly. Like HotDocs, there is support for conditionally inserted templates. You can insert templates as a signature block or letterhead that contain variables that are passed into the block at runtime, thereby simplifying the template design.
Calculated Variables and Text, Number, and Date Formatting. Finally review the template to address special formatting requirements, such as expressing amounts formatted as dollars or in words. There may be capitalization requirements. In some cases, you may have dates or amounts that are derived from other questions. For example, if you have a loan amount and an interest rate, you might want to calculate the monthly principal and interest payments. If you have a closing date and a term of the loan, you might want to calculate the maturity date and the last payment date.
In PatternBuilder, there are logic blocks that define values, others that define conditional expressions, and others that define resulting blocks of text. These are built within the app with an expression editor. For a conditional expression, just choose the variables you want to test and the values you want to test for. If there is
an additional condition, just click on “Add Expression.” When you are done, give the logic block a name, and you can use it anywhere in the app. As for formatting text, dates, numbers, and currency, when you add the variable to your template, there is an option to apply formatting that depends on the type of variable. Just choose what you want to be done and drop the variable in place.
In HotDocs, you can choose to create logic blocks called “computation variables,” or you can simply just type the logic into your template. The computation variables make sense if you want to reuse the logic in multiple places; otherwise, using the IF BLOCK wizard to build your logic string is easier. As for text, date, and number formatting, there are format examples that handle everything from special dates, to current, to capitalization. If there isn’t one that meets your requirements, you can create a computation that has parameters and does whatever you need.
In XpressDox, like HotDocs, you can choose to create logic blocks called a script that contains all your rules; you can use the If Block wizard, or you can simply type the logic of the rule. Script blocks are particularly powerful in XpressDox as they can contain local variables, parameters, and formatted text. You can also choose “Edit Fill Point” at any time to add formatting to a variable, with a full range of formatting options.
Up to this point, you have built a master interview and several individual templates. It is not yet an application. You need to tie together the interview and templates into a single app. To do so, you will need to understand what rules determine whether or not a document should be included in the package. You need to build a document wizard that tells the program which documents to assemble.
Picklist Versus Logic. The choice to do a picklist and define logic depends on the level of sophistication of the end user. The picklist is the easiest way to both create and present a document wizard. Users can be presented with a series
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
of checkbox variables, one for each document, with the name of the document to be assembled. If the user checks the box associated with a particular document, then that document will be assembled into the package. But what if the user is unsophisticated and doesn’t fully understand which documents are required for the loan package? In this case, you would ask a series of questions about the type of loan and the parties. Based on the answers to those questions, the correct set of documents for the package would be chosen.
Single Document Versus Separate Documents. In defining a wizard, you also need to define what the output will be. If all your templates are Microsoft Word documents, you can merge them into a single Word document and output
them to Word or PDF. Alternatively, you can produce a series of individual Word documents. In XpressDox and PatternBuilder, you can set the name of each of those output documents. In HotDocs, output documents get the filename associated with the template. If you have a mix of pdf forms and Word documents, you would need to choose to output separate documents. Depending on your desired output, your app design would change.
In PatternBuilder, you would create a page early on, maybe even the first page, where you would ask which documents the user wants to prepare. If you were doing rule-based document selection, your first pages would define the type of loan, the type of property being financed, and the nature of the parties. Based
on these answers, certain pages would appear and on the final pages, you would place conditions on the assembly of individual templates. Because PatternBuilder is integrated into the NetDocuments workspace, you can also automatically file the output documents directly into the ClientMatter workspace. Because PatternBuilder doesn’t at present support inserted templates as HotDocs and XpressDox do, however, you are limited to producing individual documents.
In HotDocs, you would build an Answer Intake template to hold the interview questions. You then could add a series of ASSEMBLE instructions if you wished to have a bundle of individual documents. Alternatively, you could create a master template with INSERT instructions to merge the chosen templates into a single output.
The Editorial Board of Probate & Property magazine is interested in reviewing manuscripts in all areas of trust and estate or real property law. Probate & Property strives to present material of interest to lawyers practicing in the areas of real property, trusts, and estates. Authors should aim to provide practical information that will aid lawyers in giving their clients accurate, prompt, and efficient service.
Manuscripts should be submitted to the appropriate articles editor:
FOR REAL PROPERTY: FOR TRUST & ESTATE: Kathleen K. Law
Michael A. Sneeringer
In XpressDox, the best practice would be to create a master template. That template would contain an InsertTemplate instruction to insert the full text of the template into the master document or it could use MergeTemplate instructions, which would merge the template as a separate document, using the answers given in the master interview. Once the documents are assembled, there is the ability to dictate the name of the documents and the folder in which to put the documents. Recently, integration was added to file documents back to NetDocuments workspaces directly.
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The new low-code, cloud-based document automation solution can make it possible for more attorneys than ever to access the power and efficiency of document assembly. With the ability to quickly create smart interviews and code smart templates, there is no excuse not to be using a document assembly system. Using the above instructions will allow you to easily and quickly create a legal document package of any type. The end result will be quickly seen in improvements on the bottom line and in the smiles of your satisfied clients. In answer to the question: “Can you really build an app in a week?” I would most definitely say “Yes!” n
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
Words have energy and power with the ability to help, to heal, to hinder, to hurt, to harm, to humiliate, and to humble.
—Yehuda BergLawyers earn their living by being skilled at the use of words in both written and verbal form. One of the first-year law school courses is typically legal writing. Early in legal training, lawyers are asked to convert their written advocacy into oral arguments. Lawyers are encouraged to use “plain writing” and write and speak in a way that seeks to make the complex simple. Well-written briefs followed by wellpresented oral arguments can win cases; the same tools used poorly will have a different result. The intentions of a settlor are more likely to be effectuated as the result of a well-written trust document than a poorly-written one.
Several years ago, I received a letter from a young woman whom I had mentored early in my career. The young woman wrote to me about several things that I said to her when I was mentoring her that she said led her to finish a particular college degree, pursue a particular career path, and achieve a significant position at an early age. I had told her that I believed in her, thought that she was intelligent and capable of pursuing the college degree she was considering, and that she would need to see obstacles as challenges to overcome.
When I read that letter, I was thrilled to realize that encouragement could have a positive effect and be remembered. On the other hand, I worried about the times that I might have been in a bad space and been negative to someone. Since then, I have made a conscious effort to give serious consideration to my use of words in all areas of my life, rather than just in legal advocacy.
We will be better off if we are in a positive relationship with those around us. In today’s world, we often dash off e-mails or make posts on social media. Writing an e-mail to someone is not a conversation and is easily misread. A Facebook post about
Contributing
37, No 1 © 2023
in any form or by any
or
my awful day isn’t likely to help anyone else or myself. I mostly post inspirational thoughts, about my love for coffee, events, and factual tax developments.
Most attorneys have a high volume of emails and, to get our inboxes cleared out, we sometimes review and reply to emails at a rapid pace. It is important to give as much thought to the verbiage of our emails as we do to the verbiage of our real estate agreements and trusts. At one point, my firm worked with a consultant who interviewed everyone at the firm. A key issue was that I sent off one-line emails regularly, which sometimes led recipients to believe I was terse or angry when I was just trying to clear out the inbox. We worked with the consultant to develop strategies to use e-mail differently. In particular, we added more in-person conversations to discuss the language and meaning of emails.
During the pandemic, we put together an internal well-being task force. One idea that came out of the group was to ask a wise paralegal to send out “Words of Wisdom” every Wednesday. It became so popular that others volunteered to add “Monday Inspiration” and “Friday Well Wishes for the Weekend.” The simple use of words to encourage each other and build our team has had an incredibly powerful effect. Creating a positive environment has built a bond that we haven’t had before at our law firm.
Have you ever listened to what you say to yourself? Have you ever caught yourself saying anything to yourself such as “I’m just no good at this,” “Wow, that was stupid,” or “Why can’t I figure this out?”
Being intentional about what we say to ourselves can significantly improve our own well-being. To accomplish that, you first have to listen to your self-messaging. When I started doing that, I identified a voice that I started calling “The Incessant Internal Critic.” I realized that my internal critic was pretty harsh. Once you become aware of self-messaging, you can start to make simple changes in what you say to yourself. For example, instead of saying “This project is just too hard, and I am going to have an awful day trying to get through it”, try “I have a very challenging project today. I’m grateful to have some background and great support.” Instead of saying “How could I have missed that,” try “I notice that I have a challenge to work on.”
We are trained in the use of the word. We can use our skills to improve our well-being by improving our relationships and changing the way we message to ourselves. n
Short-term rentals are a challenge to municipalities. A short-term rental is the temporary rental of all or part of a residence for a brief period. Municipalities have prohibited, regulated, and licensed short-term rentals to prevent changes in the character of the neighborhood where they are allowed and to prevent health and safety problems. Regulations can include a permit requirement, a limit on the number of days a unit can be rented or on how many units can be rented in each residence, a requirement that hosts must be permanent residents, different rules for residential and commercial areas, compliance with noise, trash, and parking regulations, and safety measures such as requiring fire safety equipment and carbon monoxide detectors.
Restrictions like these limit an owner’s freedom to use her property and create losses in economic value by reducing rental income, provoking lawsuits that these restrictions are an unconstitutional taking of property. This column discusses judicial decisions that have reached different outcomes in applying US Supreme Court regulatory takings rules to short-term rental ordinances.
The US Supreme Court’s Troubled Penn Central Doctrine Takings litigation is problematic, and US Supreme Court takings rules are conflicting and incomplete. In Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978), which upheld New York City’s historic landmarks law and which the Supreme Court calls its “default” takings decision, the Court adopted three factors for regulatory takings cases. They are: (1) the economic impact of
the regulation on the claimant; (2) the extent to which the regulation has interfered with distinct investment-backed expectations; and (3) the character of the governmental action.
In a recent Third Circuit case, Nekrilov v. City of Jersey City, 45 F.4th 662 (3d Cir. 2022), which held that a shortterm rental ordinance was not a taking, Judge Bibas concurred and provided a rare judicial critique of the Penn Central takings factors. Beginning with a comment that “regulatory-takings doctrine is a mess,” he argued that “[a]pplying the Penn Central factors is challenging. For one, they are hard to define and thus hard to meet.” He could have added that the success rate for claimants is very low. Defining economic impact is one of the difficulties. The plaintiffs relied on lost profits, which is a partial takings claim. Judge Bibas did not discuss partial takings but explained that “precedent is muddy on whether lost profits count as an economic burden,” quoting conflicting Supreme Court decisions. He added that “we do not know how severe an economic loss must be to satisfy that factor” and that the Supreme Court had not spelled out a “mathematically precise” formula. He quoted the US Supreme Court cases that acknowledge that a 95 percent reduction in value might be enough but added Penn Central’s suggestion that reductions in value of 75 percent and 87.5 percent that had occurred in other cases were not enough. These examples imply that a partial taking is not a taking under the takings clause.
The investment-backed expectations factor lacks clarity. Judge Bibas quoted a court of appeals case holding that “investment-backed expectations are reasonable only if they take into account the power of the state to regulate in the public interest.” This rule, which the US
Supreme Court has never adopted, creates a circularity problem. It allows the purpose of the law that is attacked as a taking to define investment-backed expectations. This rule means that investment-backed expectations do not exist if a law’s regulation is in the public interest, such as a law regulating shortterm rentals.
Judge Bibas then explained that “[a]pplying Penn Central can be hard for a second reason: we do not know how much weight to give each factor.” Courts reject takings claims by applying only one Penn Central factor, a “one-strikeyou’re-out” rule. This practice, he said, is “especially troubling because Penn Central overlaps with per se regulatory takings claims.” He is referring to the third Penn Central factor, which requires courts to consider the character of the governmental action that is attacked as a taking. Penn Central explained that this factor was meant to distinguish between physical and non-physical takings and that a court will find a taking more readily “when the interference with property can be characterized as a physical invasion by government.”
The problem with this distinction is that the Supreme Court has now decided that physical takings are per se takings, making the character of the governmental action factor redundant. Judge Bibas speculated that “[s]mart lawyers” will try to frame their takings cases as per se takings, but “where does that leave Penn Central?”
In Nekrilov, a city had legalized shortterm rentals but later adopted an ordinance that imposed new restrictions. Short-term rentals were limited to 60 nights a year and allowed only for property owners. Plaintiffs invested in properties for leasing as short-term
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
rentals after the adoption of the first ordinance and before the adoption of the second ordinance. They sued, unsuccessfully claiming that the second ordinance was a taking.
The court applied the rule that economic impact under the first factor usually is measured by the effect a regulation has on the value of a property. Plaintiffs lost an estimated 50 percent to 66 percent of their potential revenue from short-term rentals because of the second ordinance, but the court held that this loss was not a “drastic” reduction in value that amounted to a taking, especially because the properties retained multiple beneficial uses. It quoted a US Supreme Court case holding that loss of profits is a “slender reed” for a takings claim but did not acknowledge the “muddled precedent” on this issue.
The plaintiffs also claimed the first ordinance that allowed short-term rentals, coupled with encouraging statements made by city officials, created an investment-backed expectation. The court disagreed. The first ordinance and official statements were only qualified endorsements. For example, restrictions in the first ordinance provided that short-term rentals could not “materially disrupt the residential character of the neighborhood.” The plaintiffs may have relied on the first ordinance when deciding to invest in short-term rentals, the court held, “but they failed to take into account the restrictions in place in that ordinance and the City’s strong interest in regulating residential housing.” This is the circularity problem.
The court then considered the character of the second short-rental ordinance, rejected claims of bad faith in its adoption, and upheld it as a general zoning regulation that restricted the use of residential housing to protect the residential housing market. This is a novel interpretation. The Supreme Court did not include good faith and legislative purpose as factors bearing on the character of the governmental action.
Most state cases have rejected taking claims against short-term rental ordinances, but a Texas court, applying a
“two-strike rule,” considered two of the Penn Central takings factors and refused to dismiss a takings claim against an ordinance that prohibited short-term rentals. City of Grapevine v. Muns, 651 S.W.3d 317 (Tex. Ct. App. 2021) (petition for review filed). The plaintiffs pleaded that the first zoning ordinance and city employee encouragement created reasonable investment-backed expectations for short-term renting. The court held that fact issues existed on the economic impact and investment-backed expectations claims that the trial court had to consider.
The plaintiffs rented their residential property for several years on a shortterm basis without interference from the city under the zoning ordinance that applied at that time. It allowed a “singlefamily detached dwelling” in the zoning districts in which the short-term rentals were located, defined as “an enclosed building having accommodations for and occupied by only one family.” The court held that this definition did not prohibit short-term rentals because the word “family” did not require a “single housekeeping unit” related by blood or marriage. Neither did the ordinance include occupancy-duration restrictions “when none are there.” Not all courts agree with the Texas court on these issues. See the extensive discussion in Slice of Life, LLC v. Hamilton Township Zoning Hearing Bd., 207 A.3d 886 (Pa. 2019).
The city prohibited short-term rentals in a short-term rental ordinance after receiving complaints such as noise disturbances, increased vehicle traffic, and street-parking problems, and an increase in complaints from residents about short-term rental guests. Applying the Penn Central takings factors as applied under Texas takings law, the court held that the plaintiffs suffered an economic impact under the first factor. It applied the rule that lost profits are a relevant takings factor that affects the value of a property and the severity of the economic impact on a property owner. An inability to continue renting property on a short-term basis because of an ordinance “can constitute evidence of economic impact.”
The city argued that a taking did not occur because the plaintiffs could lease their properties on a long-term basis as an alternative and because they admitted that their properties were worth more than when they were purchased. The court rejected these arguments, holding that short-term rentals generate a higher average rent than long-term leases and that the ordinance prevented the plaintiffs from participating in this “active, lucrative market.” Penn Central does not support this rule. The Penn Central Court approved cases holding that a taking does not occur “when the challenged governmental actions prohibited a beneficial use to which individual parcels had previously been devoted and thus caused substantial individualized harm.”
Applying the second Penn Central investment-backed expectations takings factor and quoting and discussing Texas cases, the court held that existing and permitted uses are a “primary expectation,” that historical uses of the property are critically important, and that regulations at the time of purchase and knowledge of existing regulations should be considered. This rule is consistent with Penn Central, which implies that a taking occurs when a regulation interferes with a “primary expectation concerning the use of the parcel.” The US Supreme Court has also adopted a rule that notice of existing regulations should be considered, and courts have applied this rule in takings cases.
The result in the Texas case may be explained by the decision to completely prohibit short-term rentals, which eliminated any opportunity to earn income from this activity. Less drastic regulations might survive a takings claim under the Texas rules, particularly noise, trash, and safety measures that are necessary to protect public health.
Confusion and ambiguity exist in takings law. It does not provide a principled doctrine that courts can use to decide takings cases, which makes takings litigation difficult and unpredictable. Recent Supreme Court cases have resolved some issues at the edges, but a rewrite of Penn Central is unlikely. n
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
This is my first The Last Word column, and I shall open with this peek behind the curtain. For more than a decade, we have benefitted from the tireless work of Marie Antoinette Moore, a highly respected real estate attorney based in New Orleans, who has consistently provided The Last Word columns for our education and professional growth.
I had intended to share a few of Marie’s accomplishments. She is, after all, a member of both the Louisiana and Alabama Bar Associations. She is a double ‘Bama graduate (RTR!), where she was a member of the Order of the Coif and an associate editor of the Alabama Law Review. She is a Fellow in the American College of Real Estate Lawyers and has rightfully earned numerous professional awards and recognitions. However, when I mentioned that I might tout her accomplishments, Marie adamantly “suggested” — and I can assure you her suggestion was quite clear — that I not do so. Quoting Monty Python, she proclaimed herself “not dead yet,” nor, she continued, is she retiring. Thus, she concludes that honoring her work in this space is untimely. So, I won’t. Thus, having shared this backdrop, I consider myself in compliance with her request.
To mark this transition of column editors, we turn to the eminently quotable Winston Churchill, who said, “This is not the end; it is not even the beginning of the end, but it is, perhaps, the end of the beginning.”
The Last Word column typically focuses on word usage, grammar, and clear expression in writing. I will continue this theme and, as a frequent public speaker, include observations relevant to oral presentations as well. Though I
The Last Word Editor: Mark R. Parthemer, Glenmede, 222 Lakeview Avenue, Suite 1160, West Palm Beach, FL 33401, mark. parthemer@glenmede.com.
do not claim to have Marie’s erudition, as a frequent contributor to, and reader of, Probate & Property magazine, I have become a passionate believer in the value this magazine provides to ABA RPTE members — and thereby to those to whom we are in service, our clients.
This brings us to the theme of this column: conspicuous perspicuity. Now, let’s not conflate perspicuous with perspicacious. The former entails clarity and lucidity, especially in expression; the latter entails acute, penetrating discernment. Both attributes are desirable for those who read this magazine (and, of course, many others), but in this issue, the focus is on clarity.
Clarity of expression can be captured in one word: perspicuity. It is better understood, however, when fully expressed as the unnamed quality of clearly written prose that includes a carefully defined purpose, logical organization, well-constructed sentences, and precise word choice. Perspicuity is relevant in every form of legal persuasion, including in court, contractual, and estate planning documents and in communications with clients and their teams of advisors. There is not, alas, a checklist for perspicuity. It may be best known as an analog to the famous observation by Supreme Court Justice Potter Stewart, who in his concurring opinion in Jacobellis v. Ohio, 378 U.S. 184 (1964), a case dealing with hard-core pornography, wrote, “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description, and perhaps I could never succeed in intelligibly doing so. But I know it when I see it.” Id. at 197. To paraphrase, clarity of expression also perhaps cannot be easily defined (at least, by me), but we all know it when we see (or read or hear) it.
A cornerstone of the Real Property, Trust and Estate Section of the ABA is
to be a community, embracing relevant practitioners in their efforts to develop personally and professionally. It provides a network, collegiality, education, and resources that enable practitioners to become better, more effective client service professionals. Our Section is a nurturing ground as lawyers become counselors at law and evolve from those who simply know the law, to reliable advisors who can strategically apply the law as they guide clients based on each client’s particular set of circumstances.
When so advising clients, clarity of expression is critical. We need to be able to communicate with both professionals and laypersons. As my elementary school English teacher would say, “To understand others and be understood by all, know the big words but use the small.” Doing so embodies the conspicuous aspect of communication—it must be apparent and manifest. To accomplish a noticeable form of clarity, we must endeavor to be well-informed and intentional in placing our understanding in words, expressions, and examples that are readily understandable by our intended audiences.
Such efforts inherently include wordchoice precision—again, a conscious act. Its importance was captured by Mark Twain, who once said, “The difference between the right word and almost the right word is like the difference between lightning and a lightning bug.” Growing up as an estate tax planning lawyer, I once was told by a mentor that we are folks who give answers that clients cannot understand to questions they didn’t know they had. Our profession is replete with conversations chock full of what may sound gibberish to some clients, but we perform better service when expending the effort to communicate clearly and carefully. How we do so is by being conspicuously perspicuous. n
Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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