This premier American Bar Association’s real property, trust and estate law conference will take place in Washington, D.C. May 8–11, 2024. The American Bar Association’s 36th Annual RPTE National CLE Conference is renowned for its exceptional business connection opportunities, innovative programming, and trending legal topics. We cannot forget about the latenight fun if you choose! WHY ATTEND?
Premier Experience: Upgrade your conference experience. As a premier registrant, you will gain exclusive access to the VIP Only Lounge, discounts on conference events, first access to reception, red carpet check-in area and gold name badge.
In-Depth Programming: Interactive sessions led by industry experts. Business Connection Opportunities: Connect with fellow legal professionals. Innovative Trending Legal Content: Stay at the forefront of the real property and trust and estate landscape.
A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!
Register for each webinar at http://ambar.org/ProfessorsCorner
Tuesday, September 17, 2024 12:30-1:30 pm ET
TBA
Register for each webinar at http://ambar.org/ProfessorsCorner DEATH AND TAXES: DYNASTY TRUSTS AND WEALTH IN AMERICA
Tuesday, January 9, 2024 12:30-1:30 pm ET
ACCELERATING AND DE-ACCELERATING THE MORTGAGE NOTE
Tuesday, March 14, 2024 12:30-1:30 pm ET
Tuesday, May 14, 2024 12:30-1:30 pm ET
Tuesday, February 13, 2024 12:30-1:30 pm ET A
Moderator: SHELBY D. GREEN, Elisabeth Haub School of Law, Pace University
Panelists: JAMES C. SMITH, University of Georgia
DAVID ZIVE, Ballard Spahr
DANIEL DURRELL, Locke Lord
Register for each webinar at ambar.org/ProfessorsCorner THE SUPREME COURT PROVIDES GUIDANCE IN CONNELLY V. UNITED STATES
REGULATION AND A FUNDAMENTAL RIGHT TO PRIVATE PROPERTY
Tuesday, June 11, 2024 12:30-1:30 pm ET
Tuesday,April 11, 2024 12:30-1:30 pm ET
A monthly webinar featuring a panel of professors addressing recent cases or issues of relevance to practitioners and scholars of real estate or trusts and estates. FREE for RPTE Section members!
A Publication of the Real Property, Trust and Estate Law Section | American Bar Association
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
Articles Editor, Trust and Estate
Michael A. Sneeringer
Brennan Manna Diamond
200 Public Square, Suite 1850 Cleveland, OH 44114 masneeringer@bmdllc.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
Maria Z. Cortes
Jennifer E. Okcular
Heidi G. Robertson
Melvin O. Shaw
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.
Chris Martin 410.584.1905 chris.martin@wearemci.com
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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 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 $95 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. 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.
SECTION NEWS
2024-2025 Section Leadership
The Section of Real Property, Trust and Estate Law welcomes its new leadership:
SECTION CHAIR
Benetta Y. Park, Boca Raton, FL
CHAIR-ELECT
Marie A. Moore, New Orleans, LA
TRUST AND ESTATE DIVISION VICE-CHAIR
Ray Prather, Chicago, IL
REAL PROPERTY DIVISION VICE-CHAIR
Kellye Curtis Clarke, Arlington, VA
DIVERSITY, EQUITY, AND INCLUSION OFFICER
Christina Jenkins, Dallas, TX
FINANCE OFFICER
James R. Carey, Chicago, IL
SECRETARY
George P. Bernhardt, Houston, TX
SECTION DELEGATES TO THE HOUSE OF DELEGATES
James G. Durham, Dayton, OH
Orlando Lucero, Albuquerque, NM
Mary E. Vandenack, Omaha, NE
REAL PROPERTY DIVISION COUNCIL MEMBERS
Wogan Bernard, New Orleans, LA
Sarah D. Cline, Frederick, MD
D. Joshua Crowfoot, Chattanooga, TN
Lilly Gerontis, New York, NY
Shelby D. Green, White Plains, NY
Soo Yeon Lee, Chicago, IL
Jin Liu, Tampa, FL
Eric M. Mathis, Detroit, MI
Kim Sandher, Seattle, WA
C. Scott Schwefel, Hartford, CT
James E. A. Slaton, New Orleans, LA
Kenneth A. Tinkler, Tampa, FL
REAL PROPERTY DIVISION ASSISTANT SECRETARY
Timnetra Burruss, Chicago, IL
TRUST AND ESTATE DIVISION COUNCIL MEMBERS
Mary Elizabeth Anderson, Louisville, KY
Brain Balduzzi, Philadelphia, PA
Carole M. Bass, New York, NY
Keri Brown, Houston, TX
Marissa Dungey, Cos Cob, CT
David E. Lieberman, Chicago, IL
Robert Nemzin, New York, NY
Benjamin Orzeske, Chicago, IL
Crystal Patterson, Louisville, KY
Anne Kelley Russell, Charleston, SC
Karen Sandler Steinert, Minneapolis, MN
Ryan Walsh, Chicago, IL
TRUST AND ESTATE DIVISION ASSISTANT SECRETARY
Bruce A. Tannahill, Wichita, KS
Section Nominations Committee
Pursuant to Section Bylaw §6.1(f), the names of the Section’s 2024-2025 Nominations Committee and the Section officer and council positions to be elected at the 2025 Section Annual Meeting are set forth below. Any Section member wishing to suggest a nomination should send the suggested nomination to one of the Nominations Committee members listed below.
Nominations Committee
Chair: Hugh F. Drake, Brown Hay & Stephens, 205 South Fifth Street Suite 1000, Springfield, IL 62701, hdrake@bhslaw.com
Vice-Chair: Robert S. Freedman, Carlton Fields PA, 4221 W. Boy Scout Blvd., Suite 1000, Tampa, FL 33607, rfreedman@carltonfields.com
Members: Cynthia Langelier Paine, Blank Rome LLP, 1825 Eye Street NW, Washington, DC 20006, cpaine@blankrome.com
David E. Lieberman, Levin Schreder & Carey Ltd, Suite 3800, 120 N La Salle St, Chicago, IL 60602-2463, david@lsclaw.com
Karen E. Boxx, Keller Rohrback LLP, Ste 3200, 1201 3rd Ave., Seattle, WA 98101-3052, kboxx@uw.edu
Positions to be elected for service commencing September 1, 2025
Office
Chair-Elect
Trust and Estate Division
Vice-Chair
Real Property Division
Vice-Chair
Finance Officer
Section Secretary
Section Delegate
Section Diversity Officer
Real Property Division Council Members
Incumbent
Marie A. Moore
Ray Prather
Kellye Curtis Clarke
James R. Carey
George P. Bernhardt
Mary E. Vandenack
Christina Jenkins
Wogan Bernard
Soo Yeon Lee
Eric M. Mathis
Kim Sandher
Assistant Secretary Timnetra Burruss
Trust and Estate Division Council Members
Carole M. Bass
Keri Brown
Karen Sandler Steinert
Ryan Walsh
Assistant Secretary
Bruce A. Tannahill
Eligible for Re-nomination?
Section Chair (Automatic)
Eligible for nomination as Chair-Elect
Eligible for re-nomination
Eligible for re-nomination
Eligible for re-nomination
Eligible for re-nomination
Eligible for re-nomination
Not eligible for re-nomination
Not eligible for re-nomination
Eligible for re-nomination
Eligible for re-nomination
Eligible for re-nomination
Eligible for re-nomination
Eligible for re-nomination
Not eligible for re-nomination
Not eligible for re-nomination
Eligible for re-nomination
Buy-Sell Agreements: Valuation Handbook for Attorneys
Buy-Sell Agreements: Valuation Handbook for Attorneys contains new and important information that will help attorneys draft or revise buy-sell agreements for closely-held and family business clients. This book contains the most comprehensive treatment of valuation and valuation processes in buy-sell agreements available today.
americanbar.org/products/inv/book/444367035
Insurance Law for Common Interest Communities: Condominiums, Cooperatives, and Homeowners Associations
Second Edition
FRANCINE L. SEMAYA, DOUGLAS SCOTT MACGREGOR, AND KELLY PRICHETT
This book offers comprehensive coverage of insurance-related topics involving common interest communities. It discusses and analyzes statutes, court decisions and policies on those topics and more. It is not only a useful reference tool for attorneys who represent common interest communities, but is also a valuable resource for community association managers, insurance producers, and common interest community boards.
americanbar.org/products/inv/book/ 434320656
Title Insurance, A Comprehensive Overview of the Law and Coverage
Fifth Edition
JAMES L. GOSDIN
PC: 5431129
1130 pages (and hundreds of pages of exhibits online)
Title insurance is an increasingly complex and critical factor in real estate transactions, and lawyers must be prepared to play equally critical roles as advisors to their clients. This updated and expanded edition provides practical tools and essential information for real estate attorneys who need to understand title insurance coverage.
ambar.org/titleinsrpte
Third-Party and Self-Created Trusts: A Modern Look
REBECCA C. MORGAN, ROBERT B. FLEMING, AND BRYN POLAND
This significantly updated edition of Third-Party and SelfCreated Trusts explains the effect that governmental legislation has had on trust law and guides you through the maze of federal laws that affect planning for the elderly and disabled. Focusing on the effect of the Omnibus Budget Reconciliation Act of 1993 on trusts for older and disabled Americans, this guide includes the full text of this act and outlines how it affects the drafting of trusts, illustrated by a comprehensive chart showing OBRA 1993’s effect on nine commonly used trusts.
americanbar.org/products/inv/book/430506927
UNIFORM LAWS UPDATE
Navigating the Uniform Law Commission’s Website
The Uniform Law Commission (ULC) is a nonprofit association of stateappointed attorney commissioners. The organization is funded mainly by state appropriations, supplemented by publishing royalties and occasional grants from foundations or federal agencies to fund specific projects. Its mission is to provide states with non-partisan, carefully conceived uniform state laws on topics where uniformity is feasible and desirable. By pooling resources from the individual states, the ULC can convene committees comprising nationally recognized expert attorneys who donate their time and expertise to develop uniform state laws. In doing so, the ULC helps to facilitate collaboration by state governments for areas where uniformity of law is beneficial, but federal oversight is not.
All of the ULC’s work is done in public. Meetings of the drafting committees that create uniform laws are open for attendance by any interested person. A wealth of information is available for RPTE members at the ULC’s website, www.uniformlaws.org.
Uniform Acts
The ULC website includes a page for each of the 172 current uniform and model acts. A “current” act is an act that has been approved by the ULC for promulgation to state legislatures and has not been withdrawn as obsolete or superseded by a subsequent act.
Most of these 172 current acts are “uniform” acts, which means the ULC recommends that state legislatures adopt the uniform language of the act,
Uniform Laws Update Co-Editor: Benjamin Orzeske, Uniform Law Commission, 111 N. Wabash Avenue, Suite 1010, Chicago, IL 60602.
Uniform Laws Update
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.
with only minor deviations to accommodate unique state circumstances, terminology, or legal procedures. Uniformity of law is a primary goal for uniform acts. Some others are “model” acts, which means the act represents a set of best practices recommended by the ULC, but there is no particular need for uniformity among states. Of course, the ULC can only recommend legislation. Elected officials can and sometimes do alter provisions of uniform laws as part of the legislative process.
The ULC web page for each current act generally contains the following information:
• A searchable PDF version of the act with official comments for download and reference;
• A Microsoft Word version of the act (without comments) for download, which state bill drafting offices may use as a template;
• An enactment map showing which states and jurisdictions have adopted the act;
• An enactment kit, including a summary, endorsements, and a list of talking points for use with elected officials and legislative staff;
• Links to related acts or previous versions of the act;
• Legislative bill tracking, with links to any current bills in state legislatures; and
• Contact information for the ULC Legislative Counsel assigned to provide support for the act.
From the top menu bar, select “Acts,” then “Browse Acts,” for an alphabetical list of all current acts. Each act is also tagged with one or more relevant subject areas. Real property practitioners may want to view the list of acts tagged with “Real Property, Mortgages, and Liens.” Trust and estate practitioners can review acts tagged with “Probate, Trusts, and Estates.”
Drafting and Study Committees
From the top menu bar of the ULC website, select “Projects” to view a list of drafting committees developing new uniform acts and study committees studying whether a specific legal topic meets the criteria for a uniform or model act. Drafting committees are open to any interested party who wants to participate. From any committee’s web page, you can choose to “follow” or “unfollow” the project. Followers will receive advance notice of all drafting committee meetings and copies of draft acts for review and comment.
Also, the “Projects” menu displays information about the ULC’s criteria for new projects and procedures for submitting proposals, plus a list of current committee rosters.
Meetings and Events
Under the Meetings and Events menu, you will find a calendar of upcoming ULC meetings—both committee meetings and annual meetings in which the entire body of uniform law
commissioners convenes each summer.
Anyone who elects to “follow” a drafting committee may register to attend committee meetings, either in person or remotely via Zoom. There is also a link for nonprofit organizations to apply for a grant to help cover travel expenses for in-person attendance.
News and Publications
The “News and Publications” menu will bring you to a summary of recent news involving uniform acts and their adoption by state legislatures.
You can also find on the “Publications” page:
• Links to the ULC’s most recent annual and quarterly reports;
• The official “Guide to Uniform and Model Acts,” which is published annually with a short
description of each act, an index of acts by category, and enactment charts for each current act;
• Manuals for Observers and ABA Advisors that describe the duties and roles of participants on ULC drafting committees; and
• A list, updated quarterly, of current ULC drafting projects and studies.
The “Videos” page contains general informational videos about the ULC and specific uniform acts. The “Webinar Series” contains archived presentations about specific ULC projects. Finally, the website has a link to a “Reprint Request” form used to request permission to republish uniform acts, often for CLE programs. The ULC’s current policy is to grant republication permission with no royalty fee when
ULC-copyrighted works are used for nonprofit educational purposes.
Legislation
The ULC periodically posts legislative reports showing all current and pending bills to adopt uniform acts in all 50 states, the District of Columbia, Puerto Rico, and the US Virgin Islands.
About ULC
Lastly, the “About ULC” menu contains a wealth of information about the organization—including its Constitution, bylaws, and rules of procedure—the names of commissioners appointed by each state, a list of frequently asked questions, staff contact information, policies, and more. n
SPRINGING TRUST PROTECTORS Now
You See ’Em, Now You Don’t
By Alexander A. Bove Jr.
It wasn’t that long ago that even the best estate-planning lawyers had no idea of the meaning and use of a trust protector. Today, estate-planning lawyers who are not at least familiar with the term should seriously consider changing their specialties.
Credit for the origin of the trust protector is often given to the offshore irrevocable asset protection trust, where a party (often an offshore attorney) would be given the authority as trust protector of the foreign trust to terminate the trust and return the protected funds to the settlor of the trust or other beneficiaries. This prospect gave the settlor a bit more comfort, somewhat alleviating the natural concern one would have in submitting a considerable portion of her wealth to the control of an unknown trustee on the other side of the world.
As the popularity of such trusts increased, so did the attention given to some of the more “creative” clauses not commonly used here in US trusts, such as the “flee clause” and the protector provisions, the latter apparently offering not only potential re-access to the funds as noted above, but also increased flexibility to the trust, which itself has long been the epitome of flexibility. Furthermore, the near irresistible attraction of the protector concept was its inherent simplicity, making it easy for lawyers to add a protector provision to their trusts. That is, lawyers who were frighteningly intimidated by attempting to draft workable generation-skipping allocation provisions found that they could easily draft trust-protector provisions while riding to the office. But why would they want such a provision in their trusts anyway?
Most trust problems arise after the trust has become irrevocable and has no provision that allows a change, such as a power to amend the trust or a power of appointment that may change the benefits of the trust. Otherwise, the only way to legally make a change to the trust is to petition the court for a reformation. Lawyers with experience in drafting and administering trusts will readily attest to the costs, complexity, delays, and often disputes encountered in the process of reforming a trust that needs court approval for reformation, and court approval is required for the great majority of estateplanning trusts. No one can predict the nature and extent of the future changes to the applicable law, the family, and the family circumstances, from simple things like changing domicile to more dramatic events such as divorces, lawsuits, untimely death of beneficiaries, and economic booms or disasters. If there were a way to accommodate the unforeseen changes in circumstances without the need for trust reformation, the day would be saved. Enter the trust protector.
I have defined the trust protector as a party who has powers over a trust but who is not a trustee. See Alexander A. Bove Jr., Trust Protectors: A Practice Manual with Forms (Juris Pub’g 2013). Powers that may be given to the protector are in one sense unlimited, but, of course, they are not really unlimited. As with basic trust law, they cannot extend to actions that
Alexander A. Bove Jr. is the founding partner of Bove & Langa in Boston, and author of several books, including Trust Protectors: A Practice Manual (Juris Publishing).
are illegal or against public policy, but that leaves a wide range of options, and a good drafter will use caution in giving powers to the protector. The powers granted to the trust protector can range from the power to change the trust situs to the power to add or delete beneficiaries and the power to change the very provisions of the trust (a total reformation). Thus, the existence of a trust protector in a trust can completely avoid the need for long and involved court proceedings for reformation.
Simple enough, but, as with any important trust provision, it generates many questions: Who can hold this position? What about the successors? And compensation? How extensive should the protector’s powers be? Can a beneficiary be the protector? Can the protector be removed? And so on.
But what to include in the actual provision for the trust protector is not the only subject of this discussion. (For a thorough discussion of the powers of a trust protector, see Bove, supra.) The main subject is this: Does every trust need a trust protector and
is there an alternative approach so that one becomes available if and when needed? Although it is impossible to tell, as noted above, whether and when a protector will be needed, one may ask what’s the harm in providing for one who will appear only when and while needed—a springing protector?
The questions that arise with springing protectors include most that apply to all protectors and are the subject of current dispute among estate-planning lawyers. For example, if the protector has the power to remove and replace the trustee (one of the most common powers), does the protector have a duty to periodically monitor the trustee’s performance to determine whether removal is called for? And if the protector merely stands by and does nothing, is the protector still entitled to a fee? Would the protector be liable if the trustee breaches its duty, but the protector stands by and does nothing? This was the issue in Robert T. McLean Irrevocable Trust v. Ponder, 418 S.W.3d 482 (Mo. Ct. App. 2014). All of these issues are normally dealt with in drafting the
trust-protector provision itself, whether or not a springing protector. Because the appointment of a springing protector is typically necessitated by the surfacing of a special need or a change in circumstances, however, some provisions tailored to the particular objective may be needed.
Some may ask, is there a legal basis for the role of the springing protector? This question may seem a bit obvious, as it is the same basis as that for a trust “advisor,” a position well and long recognized in the law of trusts. See Trust Advisors, 78 Harv. L. Rev. 1230 (1965); see also, e.g., Tenn. Code. Ann. § 35-16-108(b) (“‘advisor’ includes a trust ‘protector’”). Thus, the position of trust protector or springing trust protector may be legitimately created by simply providing for its creation under the terms of the trust in question. Further, most lawyers are familiar with the concept of a “springing” appointment, as in the case of a springing power of attorney, which takes effect on a person’s certification of incompetence, for example. In this case, we would include
a provision in the trust that would allow a party, such as the trustee, the settlor’s law firm, some independent professional acceptable to the settlor, or (not the first choice) a majority of the beneficiaries to name a trust protector, stating the circumstances of the need for a protector. The appointment would state the terms and conditions of the protector’s appointment, including the duration of the appointment. This is a major benefit because, unlike the normal appointment of a “permanent” protector, no actual removal would be necessary. The term of the appointment (and the powers) would simply end; the protector could not refuse to step down. (A permanent protector, on the other hand, might question the authority or applicable conditions for removal and request court confirmation or instructions.) Such an arrangement for the springing protector can be tailored precisely to the need for the protector— e.g., if the trust has a sole trustee—but the family circumstances and the trust assets would be better managed with a second trustee. The springing protector, once satisfied with the propriety of the change, could simply act to amend the trust, appointing a second trustee, and his term could thereupon end, and the trust would continue on its original course.
The trust provision allowing for the appointment of the springing protector might include a suggested set of provisions governing the appointment, such as compensation, exculpations (with a “good faith” rule), the right to trust information, the right to hire agents, and, in general, the right to carry out the protector’s duties. And it should be made clear that the protector will be acting for the benefit of the trust and its beneficaries. See Alexander A. Bove Jr., The Case Against the Trust Protector, 37 ACTEC L.J. 77 (2011).
A related and equally critical issue to keep in mind in appointing the springing protector is the potential adverse tax and creditor exposure implications in choosing the wrong party or giving the protector nonfiduciary, dispositive powers. If the protector’s powers are nonfiduciary, they may be deemed
personal and for both tax purposes and creditor’s reach purposes will be regarded as being at the personal disposal of the protector. See Alexander A. Bove Jr., Using the Power of Appointment to Protect Assets, 36 ACTEC L.J. 333, 340 (2010). This problem also extends to a beneficiary who may be appointed as protector. Id.
The beauty of the springing protector is that it can be utilized repeatedly to deal with trust issues as they come along during the full term of the trust, without being bound to one protector and without resorting to court involvement, avoiding the need for a petition for reformation, and helping to ensure a smoother running of the trust. n
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:
Kathleen K. Law
Nyemaster Goode PC 700 Walnut Street, Suite 1600 Des Moines, IA 50309-3800 kklaw@nyemaster.com
FOR TRUST & ESTATE:
Michael
A. Sneeringer
Brennan Manna Diamond
200 Public Square, Suite 1850 Cleveland, OH 44114 masneeringer@bmdllc.com
On our website (www.americanbar.org/groups/ real_property_trust_estate/publications/probateproperty-magazine) click on the links under the “Probate & Property Resources” section for complete author guidelines and submission requirements.
If you have any questions, please email erin.remotigue@americanbar.org
KEEPING CURRENT PROPERTY
CASES
BOUNDARY DISPUTES:
One-year statute of limitations on claims challenging a trustee’s conveyance does not apply to adverse possession or boundary by acquiescence. The Vaudts purchased their home in 1991 and installed and maintained a landscape barrier with trees and bushes. The Enamorados purchased the neighboring property from a trustee in May 2021 and obtained a survey that showed that the Vaudts’ landscaping encroached on their land. The Vaudts sued to quiet title in June 2022, asserting both boundary by acquiescence and adverse possession. The trial court held the Vaudts were time-barred by a one-year statute of limitation precluding adverse claims “arising by reason of a transfer of an interest in real estate by a trustee.” Iowa Code § 614.15(5)(b). Overruling a precedent interpreting the statute, the supreme court reversed the dismissal of the Vaudts’ claims and remanded for further proceedings. It first clarified the distinction between claims for adverse possession and boundary by acquiescence. The former establishes a change of property ownership to a party that satisfied certain elements, but the latter involves a mutual recognition by adjoining landowners that a definitely marked line establishes their boundary. The court held that the statute of limitations applies only to an adverse claim related to a trustee’s transfer of property, not to the prior conduct of the two adjoining neighbors. The subsequent transfer of one adjoining property by a trustee’s deed has no relevance to the elements of the Vaudts’ claims. Vaudt
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.
BROKERS: Broker who finds tenant after listing agreement expires is not entitled to sales commission. The Tronnes signed an exclusive listing agreement commencing May 1, 2020, and expiring October 31, 2020, with a five percent commission if the broker procured a buyer or if an option to purchase was exercised. The agreement also had a 180-day tail period during which a commission was payable if the property was sold to a purchaser to whom the broker had shown the property. The parties also executed a separate property management agreement authorizing the broker to lease and manage the property initially from August 16, 2019, to September 1, 2020. The broker negotiated a lease with tenants who responded to his online advertisement pursuant to terms agreeable to the Tronnes. The tenants took possession in October 2020, and in January 2021, the Tronnes visited the community and dropped by the rental home where they spoke with the tenants about their buying the property. The tenants stated they were not financially able to purchase at that time. The parties ultimately executed a purchase agreement on April 30, 2021, one day after the tail period expired. The Tronnes closed the sale, and the broker filed suit alleging breach of both agreements and seeking to collect his commission. The Tronnes prevailed
on summary judgment with respect to the commission claim, and the supreme court affirmed. The court stated that the broker procured the purchaser as tenants during the term of the listing agreement and that the sellers’ discussing with the tenants the possibility of later purchasing the property did not equate to the broker’s procuring a ready, willing, and able purchaser. Additionally, emails between the sellers and tenants negotiating the terms of the lease, which included the sellers’ concession not to show the property during the lease term, did not transform the lease into an option contract. The broker never transmitted an offer to sell to the tenants at a specific price in exchange for particular consideration. Uhre Realty Corp. v. Tronnes, 3 N.W.3d 427 (S.D. 2024).
COTENANTS: Payment of mortgage debt upon sale is determined by express language of agreement and not by percentage of ownership. In 2021, Gwen inherited real property from her long-time domestic partner as a cotenant with his children. To continue living in the home, she needed to purchase the property from the estate. Gwen’s niece, Amber, and her husband, Diego, agreed to help with the purchase and to move in with Gwen. They agreed to take title as tenants in common and signed an agreement that set out rights and obligations: Gwen would contribute $233,375 to the purchase and Amber and Diego, $17,000; all would obtain a mortgage loan of $560,000, for which Gwen would be responsible for 30.68 percent and Amber and Diego 69.32 percent; Gwen would hold a 50 percent interest and Diego and Amber a combined 50 percent interest; and all other expenses, including utilities, maintenance, property taxes, and insurance, would be paid according to their ownership interests. After relations broke down between the parties, they discussed selling the property but
v. Wells Fargo Bank, 4 N.W.3d 45 (Iowa 2024).
disagreed on how they would divide the sale proceeds, specifically how to handle the mortgage payoff. Gwen filed an action seeking a determination on this issue, and the trial court ruled for Gwen, reasoning the language of the agreement was plain. Each of the parties was entitled to half of the sales amount, then the balance on the mortgage would come out of the parties’ respective halves of the proceeds—Gwen to pay 30.68 percent and Amber and Diego 69.32 percent. The supreme court affirmed, explaining that, in Montana, a contract is to be interpreted to give effect to the mutual intention of the parties at the time of contracting and, when reduced to writing, that intention is to be ascertained from the writing alone, so long as the writing is clear and not ambiguous, giving effect to the whole of the contract. Mont. Code § 28-3-301. Here, the agreement in plain terms contained a formula allocating responsibility for the mortgage debt, and there was no provision in the agreement that required the mortgage to be paid before distributing the sales proceeds equally to each owner. The 50/50 ownership provision could not be elevated to ignore the express provision for the mortgage obligation. Gerber v. Davalos, 547 P.3d 664 (Mont. 2024).
EASEMENTS: Improvements to RV parking space are insufficient to establish “comprehensive prescriptive easement.” In 2015, the Joneses purchased property, then immediately made substantial improvements near a block wall, including the installation of a new iron gate and utility hookups for their recreational vehicle. In 2016, Ghadiri purchased the property located on the other side of the block wall. Several years later, a survey showed that 591 square feet of his property were on the Joneses’ side of the block wall. Ghadiri acquired a permit to destroy the block wall and install a new wall on the property line at his expense. The Joneses filed a complaint against Ghadiri, claiming a prescriptive easement and title by adverse possession and seeking an injunction against the removal of the wall. After denial of the injunction,
Ghadiri removed the wall, then moved for summary judgment, asserting that the Joneses’ adverse possession claim failed because they had not paid property taxes on the disputed property and that a prescriptive easement was unavailable because it would result in his complete exclusion. After granting summary judgment to Ghadiri on the claim for adverse possession, the trial court noted that the Joneses’ claim for a prescriptive easement was “essentially a meshing of adverse possession with a prescriptive easement.” Given the dearth of Nevada caselaw on the availability of such easements, the trial court considered cases from neighboring states, such as California and Arizona. Following those cases, the court determined that a prescriptive easement “simply cannot be so extensive as to create the practical equivalent of an exclusive possessory estate” and that adverse use, as an element of a claim for a prescriptive easement, “cannot result in the complete exclusion of the owner of the servient estate.” Finding that no exceptional circumstances justified the Joneses’ requested prescriptive easement, the trial court granted summary judgment to Ghadiri on the easement claim. On the Joneses’ appeal, the supreme court affirmed. It noted that claims for title based on adverse possession and a prescriptive easement had become muddled in the law and that it was necessary to distinguish the concepts before considering the Joneses’ claim for a prescriptive easement. Although adverse possession is a doctrine giving title to land to the claimant, an easement—whether prescriptive, implied, or otherwise—grants a non-possessory interest that entitles the easement owner to make a limited use or enjoyment of another person’s land. Here, the Joneses asserted a claim for a prescriptive easement, but their requested relief aligned with adverse possession, demanding more than the mere use of the disputed property; in fact, they sought exclusive control of it. The trouble for the Joneses, as recognized by the trial court, was that they had not paid the requisite property taxes on the disputed property. It
Parking space in Jones v. Ghadiri; yellow line shows neighbors’ boundary. Photos courtesy of Attorney Malik W. Ahmad, Las Vegas, Nevada.
appeared that the Joneses were seeking title by adverse possession under the guise of an extraordinary prescriptive easement, known as a “comprehensive prescriptive easement,” which, unlike a typical easement, results in the owner of the servient estate being completely excluded from the subject property. Although the court did not recognize the claim in this case, it nonetheless noted that comprehensive prescriptive easements exist in some other states and went on to clarify when they might arise in Nevada. The court noted that the many jurisdictions, including Arizona, Florida, Idaho, Montana, and Utah, that have categorically rejected comprehensive prescriptive easements did so for two reasons. They blur the
distinction between adverse possession and easements, and they subvert the tax-payment requirement for adverse possession. California, however, has recognized that a comprehensive prescriptive easement may be warranted in exceptional circumstances, including a socially important duty of a utility to provide an essential service, such as water or electricity, or when public health or safety is at issue. Although there is no exhaustive list of exceptional circumstances that will justify a comprehensive prescriptive easement, the determination being generally a fact-intensive question, it was clear here that the Joneses’ claim failed— they had made improvements only to an RV parking space and the grant of a comprehensive prescriptive easement would deprive Ghadiri of nearly 600 square feet of usable space. Jones v. Ghadiri, 546 P.3d 831 (Nev. 2024).
FORECLOSURE: Claim that lender overcharged borrower for force-placed insurance owing to kickbacks from insurer is cognizable defense to foreclosure. Lewis obtained a mortgage loan for $384,000 from Hudson City Savings Bank (Hudson). After Lewis failed to pay his property taxes, Hudson paid them and thereafter increased Lewis’s monthly payment from $3,011 to $9,640. Lewis thereafter defaulted in making monthly payments and by failing to maintain his flood insurance policy. Hudson then purchased force-placed insurance coverage and added the premium to Lewis’s indebtedness. Hudson sued to foreclose, and Lewis filed an answer with five special defenses: fraud, breach of the implied covenant of good faith and fair dealing, unconscionability, unclean hands, and equitable estoppel. Except for equitable estoppel, the defenses were predicated on the allegation that Hudson charged Lewis more than its cost for the insurance. Lewis claimed that Hudson had an exclusive arrangement with the insurer, an indirect subsidiary, under which in exchange for the right to be the sole provider of force-placed insurance coverage, the insurer gave “kickbacks” to Hudson, which were
not passed on to Lewis. The trial court rejected this defense, finding that Lewis’s allegations on the “kickback” scheme pertained to industry practice and did not relate to the validity or enforcement of his specific mortgage. The supreme court reversed. The court found Lewis’s answer included allegations of wrongdoing regarding his specific mortgage, i.e., that Hudson’s misconduct increased his overall debt beyond that which was necessary to protect Hudson’s interest in the property, even as he did not specify the extent of this increase. A reasonable inference from the answer was that Hudson’s kickback scheme was ongoing and on a broad scale and that because Lewis entered into the mortgage agreement with the alleged scheme in place, the mortgage agreement was invalid. M&T Bank v. Lewis, 312 A.3d 1040 (Conn. 2024).
LANDLORD-TENANT: Duty to repair does not require landlord to make regular inspections to find safety problems. In 2005, a tenant leased a home with a water heater and furnace located in the crawl space beneath the bathroom. While away from home in January 2017, the tenant was notified that the public service company and fire department were at the home investigating a neighbor’s report of smelling natural gas. In March 2017, the tenant noticed the smell while standing in the front yard, and the fire department and public service company returned to investigate further. The tenant did not inform the landlord of either incident. In April 2017, the tenant entered the bathroom and turned on the light switch, which triggered an immediate explosion causing him serious injury. Evidence indicated the pipe supplying gas to the furnace was severely rusted and corroded. The landlord had not inspected the property during the tenant’s occupancy, nor immediately before that time. It was also discovered that a hole had developed in the bathroom floor allowing a leak into the crawl space that contributed to the corrosion of the gas pipe. Although the tenant and the
landlord spoke often during the tenancy, the tenant never discussed the bathroom floor issue with the landlord. The tenant sought damages for his injuries, asserting violation of the North Carolina Residential Rental Agreements Act, N.C. Gen. Stat. §§ 42-38 to -49, and breach of the implied warranty of habitability. The trial court granted summary judgment, dismissing all plaintiff’s claims. A split court of appeals reversed and remanded. A divided supreme court reversed. The supreme court noted that at common law the landlord ordinarily had no duty to repair and caveat emptor generally applied to leases. In 1977, the Act codified the implied warranty of habitability but did not render all common law obsolete. The Act instituted a landlord’s duty to repair but also implemented a notice requirement and retained the knowledge requirement found in the common law. Specifically, the Act requires landlords to make repairs only after receiving notice or acquiring actual knowledge of defects. Because the evidence indicated the tenant never notified the landlord of the gas issue, none of the tenant’s claims could be maintained. Terry v. Pub. Serv. Co.., 898 S.E.2d 648 (N.C. 2024).
MINERAL RIGHTS:
Conveyance of lots adjoining right of way transfers title to mineral estate to centerline of right of way. In 1974 and 1975, a developer platted and subdivided pastureland into three parcels. To access the individual parcels, the developer dedicated a road (11th Street) to the city and sold all three parcels by the end of 1975. None of the deeds included any reservation of mineral rights or any other interests. Over time, the three parcels were further subdivided and conveyed to new owners. In 2019—almost 45 years after the developer dedicated 11th Street and conveyed the parcels—the developer purported to convey to Great Northern Properties (GNP) its interest in the mineral estate beneath 11th Street. Shortly thereafter, GNP filed an action to quiet title to the mineral estate, naming as defendants the owners of the parcels abutting 11th Street and Extraction, a mineral developer with oil and gas leases from the individual parcel owners. Extraction’s leases gave it the right to drill and
produce oil and gas from beneath 11th Street regardless of who owned the mineral estate, so GNP’s suit sought, at least in part, to determine to whom Extraction had to pay royalties. Extraction’s answer asserted that the developer’s conveyances of the parcels abutting 11th Street in 1974 and 1975 also conveyed the mineral estate to the centerline of the street, relying on a rule known as the “centerline presumption.” In response, GNP maintained that the centerline presumption did not apply to mineral rights and that it should not be expanded. The trial court agreed with Extraction, concluding that the centerline presumption applied so that the lot owners—not the developer—owned the mineral estate beneath 11th Street. The intermediate appellate court affirmed, explaining that a conveyance of land by general description, without any reservation of a mineral interest, passes title to both the land and the underlying minerals. The appellate court outlined a test to determine when the centerline presumption applies to a conveyance of land, i.e., the grantor conveyed ownership of land abutting a right-of-way, owned the fee underlying the right-of-way at the time of conveyance, and conveyed all the property it owned abutting the right-of-way; and no contrary intent appeared on the face of the deed. On further appeal, the supreme court agreed with the appellate court in part, concluding that a conveyance of land abutting a right-of-way is presumed to carry title to the centerline of the surface estate and the mineral estate below unless a contrary intent appears on the face of the deed, but stated that the centerline presumption does not require that the grantor divest itself of all the property it owns abutting the subject right-of-way. Applying these principles, the court held that the centerline presumption applied to the mineral estates at issue in this case. Great N. Props., LLLP v. Extraction Oil & Gas, Inc., 547 P.3d 1110 (Colo. 2024).
PROPERTY TAX: Taxpayer is not required to pay disputed property taxes before appealing tax assessment. In 2014, the Jackson County assessor imposed an assessed value of
$33,445,837 on Grand Tower’s power plant property. In 2015, Grand Tower filed a timely appeal to the Property Tax Appeal Board, seeking a reduction. The Shawnee Community Unit School District, which receives funding from county property taxes, intervened in the appeal. While its appeal was pending, Grand Tower did not pay the taxes. In 2016, the county collector successfully applied for a judgment and sale order for the 2014 taxes and a third party purchased the 2014 taxes. In 2016, the school district filed an unsuccessful motion seeking the dismissal of Grand Tower’s appeal, asserting Grand Tower was required to pay taxes to pursue an appeal. In 2019, the board found Grand Tower, which had redeemed the 2014 and 2015 taxes in 2017, had proven that its property was overvalued for the years in dispute. The board reduced the assessed value for those years by roughly 90 percent. The appellate court affirmed, and the school district further appealed the board’s denial of its motion to dismiss. The supreme court affirmed. The court reviewed the statute governing property tax appeals, Ill. Consol. Code § 16-160, noting it nowhere states that a taxpayer must pay disputed property taxes to appeal an assessment. The section requires only that a petition be filed within 30 days of a local review board’s decision, regardless of whether any property tax payment is due. The 30-day deadline means that a taxpayer must in almost every instance initiate an appeal before the actual payments are due for the year in question. Also, language in the statute providing for a refund of taxes “if already paid” indicated conclusively that payment was not a prerequisite to an appeal. Shawnee Community Unit Sch. Dist. No. 84 v. Illinois Property Tax Appeal Board, 222 N.E.3d 214 (Ill. 2024).
TRESPASS: Cause of action accrues when reconstruction of culvert becomes observable on the land. In 2008, the City of Bristol reconstructed an existing culvert on Laviero’s property without permission and without obtaining an easement for the repair and reconstruction. In 2018, Laviero
sued the city and its engineers on the project for trespass and nuisance. The district court granted summary judgment to the defendants because Laviero’s claims were time-barred under their respective statutes of limitations. The supreme court affirmed. In Connecticut, common-law tort claims are generally subject to a three-year statute of limitations, which runs from the date of the act or omission complained of. Conn. Gen. Stat. § 52-577. Moreover, whereas a permanent trespass gives rise to a claim from the time the trespass is created, a continuing trespass gives rise to successive causes of action each time there is an interference with a person’s property, such that the statute of limitations begins to run anew with each act. Here, as a permanent trespass, Laviero’s cause of action accrued once some portion of the harm became observable. The uncontroverted evidence was that Laviero first discovered and expressed her dissatisfaction with the size and appearance of the completed culvert in 2008 and again surveyed her property in 2010 after the completed culvert had encroached upon her property lines. Construing the facts most favorably to Laviero, the alleged trespass became observable, at the very latest, in 2010. Therefore, her trespass claims were time-barred. Further, the district court correctly held that Laviero could not demonstrate that her claims should be tolled because of fraudulent concealment by the city that prevented her from learning of the existence of her cause of action. See Conn. Gen. Stat. § 52-595. Although Laviero nominally contended that the city lulled her into waiting to seek relief in court, she failed to set forth any evidence from which she could demonstrate that the city intentionally concealed facts that were necessary to establish her cause of action or that they did so to delay her filing of a complaint. For the same reasons, the district court properly found that Laviero’s nuisance claim was barred by the two-year statute of limitations under Conn. Gen. Stat. § 52-584. Laviero v. City of Bristol, 2024 U.S. App. LEXIS 2340, 2024 WL 393004 (2d Cir. Feb. 2, 2024).
ZONING: City’s agreement with landowner violates contract zoning ordinance and state’s shoreline zoning statute. In 1980, George and Nancy Driscoll jointly acquired two adjacent lots, Lots 201 and 202. Lot 201 had a single-family residence, and Lot 202 was undeveloped. At the time, both lots were “grandfathered” non-conforming uses that did not comply with the City of Saco’s zoning ordinances. In 1986, George conveyed his interest in Lot 202 to Nancy, and Nancy conveyed her interest in Lot 201 to George. In 2009, the Driscolls applied for a permit to build a single-family residence on Lot 202, then owned only by Nancy. The code enforcement officer denied their application. The Zoning Board of Appeals and appellate courts affirmed the denial, finding that Lot 202 lost its grandfathered status as a buildable lot when it was held in common ownership with Lot 201 and that the Driscolls’ subsequent division of the parcels did not restore that status. The Driscolls then applied for a contract zoning agreement that would “legislatively establish” their land “as two separate buildable lots.” 30-A Me. Rev. Stat. § 4352(8); § 1403-2. The planning board held a public hearing to consider the request and recommended that the city council deny the application, which it did. But later, on November 20, 2017, the city council reversed course, voting to approve the application in a
“Contract Zone Agreement,” which purported to exempt Lots 201 and 202 from the zoning restrictions that made Lot 202 unbuildable. The agreement came with conditions: the Driscolls had to (i) obtain the consent of the EPA before connecting the new house to the city’s sewer system; (ii) obtain site plan approval from the Planning Board within one year (with a possibility of a one-year extension; and (iii) seek a building permit within two years (with a possibility of a one-year extension). Although the Driscolls secured site plan approval by the deadline, they failed to obtain a building permit by November 20, 2019, and did not make a written request to extend that deadline by another year. On June 9, 2021, two years after a sand dune permit, which was required to get a building permit under 38 Me. Rev. Stat. §§ 480B(1), (8), 480-C(1)-(2), was issued, Nancy requested additional time to seek a building permit. After several meetings, the City Council approved her request and entered into an “Amended Contract Zone Agreement,” dated September 13, 2021, which extended the deadlines by one year, but provided that the failure to meet them would render the agreement null and void. By this time, however, the site plan approval had lapsed, so Nancy re-applied for approval, which the Planning Board voted in favor of. On November 17, 2021, a neighboring landowner, Dahlem, filed a sixcount complaint against the City and Nancy, appealing the City’s approval of the 2021 agreement. The court entered judgment for Dahlem, declaring that the 2017 agreement became null and void in 2019 and thereafter could not be amended or extended and also that it was otherwise invalid and unlawful for noncompliance with the City’s contract zoning
ordinance, as well as inconsistent with the state’s Mandatory Shoreland Zoning statute. The supreme judicial court affirmed. It ruled that although a contract zoning agreement is a “legislative act,” which amends a municipality’s zoning laws, it is still a contract. Applying rules of contract interpretation, the court concluded that the 2017 agreement clearly required the Driscolls to apply for a building permit by November 20, 2019. Here, the Driscolls did not apply for a permit, nor “seek” an extension, and nothing in the facts supported any tolling of the deadline. The contract term “null and void” meant the agreement would have no legal effect and was not simply voidable, by the failure to meet the deadlines. After the deadline had passed, the City could not “waive” the agreement back into existence. Moreover, the 2021 agreement was unlawful because it did not adhere to the required procedures, including first being considered by the Planning Board and supported by specific findings regarding compliance with the comprehensive plan, existing and permitted uses, and appropriate conditions. Me., Zoning Ordinance § 230-1705(C)-(G). Finally, the agreement was invalid because it purported to allow residential development on a shoreline lot that did not conform to the “minimum guidelines” enacted by the state Board of Environmental Protection. 38 Me. Rev. Stat. §§ 435, 438-A(1)-(2), as to size and amount of frontage area. Dahlem v. City of Saco, 314 A.3d 280 (Me. 2024).
LITERATURE
HOUSING: Even as the Fair Housing Act of 1968 has been the law for more than 50 years, fair access to housing is still a fraught proposition. Many lament that litigation is inadequate to address the lingering effects of de facto discrimination, instead arguing that personal and political strategies are the only viable tools. In Better Late Than Never: The Equitable Power of Federal Courts to Remedy Harms Caused by Historical Housing Discrimination, 57 UIC L. Rev. 507 (2024), Prof. Andrew Darcy challenges
The Driscolls’ two lots in Saco, Maine. Photo courtesy of Attorney Keith Richard, Archipelago, Portland, Maine.
the proposition that the federal judiciary is impotent to address the legacies of historical discrimination in housing access. He does so by contending that when the proper conditions are present, federal courts can and should use their equitable powers to address contemporary, community-wide harms that are linked to past, government-backed housing discrimination. Describing the equitable powers of the federal government to address violations of constitutional rights as “vast,” he recites a number of scenarios where this worked, including cases in which a federal court required a county to address the issue of homelessness and ordered the Department of Housing and Urban Development (HUD) to end segregation of government-supported housing. By these rulings, Prof. Darcy claims, the courts are addressing the vestiges of historical housing discrimination, even without a showing of present intent to harm. Deploying equitable remedial
powers, the courts reject the status quo that would leave past wrongful conduct to perpetuate social and economic inequities. Projecting further, Prof. Darcy ponders whether, if it is shown that a local government had contributed to the segregation of a community of color by relegating it to an area zoned for industrial use, an action under the HUD’s Affirmatively Furthering Fair Housing rule could be brought. As a remedy, the court might order rezoning. Or, if eminent domain was used in a discriminatory manner, he wonders whether redress might require community reinvestment and economic development. Many such scenarios might be candidates for equitable relief.
MORTGAGES:
In Consumer Fraud, Home Financing, and the Erosion of Trust, 118 Nw. U. L. Rev. 115 (2023), Prof. Emeritus Linda E. Fisher reviews the modern expansion of the capitalistic misrepresentation of goods and services
and its concomitant effect on the mental welfare of the general citizenry. “Transactionalism,” as she labels it, evidenced by the increased monetization and commodification of nearly every aspect of consumerism, steadily shrinks public trust as merchants ruthlessly manipulate prospective buyers by way of technological tracking through social media apps and related means. As one would expect, the harms associated with these activities fall disproportionately upon the have-nots of society. Low-income consumers are already economically challenged by the many barriers to affordable housing and consumer fraud in the home lending context. Although there have been attempts to address mortgage fraud, pressure steadily builds for a more robust, broader utilization of corrective measures. Prof. Fisher begins by noting that “consumers” are far from monolithic, recognizing that education, finances, socialization, and similar factors segment society in ways that many
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past and recent examinations of consumer habits ignore. Consumers falling on the lower end of the spectrum relative to such factors correspondingly fall on the higher end of skepticism and loss of trust in the marketplace. Prof. Fisher notes that home lending fraud was a direct cause of the Great Recession and the global financial meltdown of 2008, when many powerful wrongdoers in the mortgage and banking industries exploited the disadvantaged, leading to massive debt on substandard properties. Trust in financial institutions plummeted, a condition that she states the country has never recovered from. Prof. Fisher also looks at the resurgence of land contracts, chronicling their origin more than one hundred years ago, their prevalent use with minorities as a discriminatory way of limiting them from accruing wealth via private property ownership, limitations on them in the 20th century, and the unfortunate more current resurrection of them since our last foreclosure crisis. She notes the many ways in which the uniformed and unassisted find themselves deceived by various terms in these purported financing alternatives, causing individuals to lose significant sums on misplaced investments. Prof. Fisher points to legislative responses such as the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB), and the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), as vehicles that have provided more recent oversight of the mortgage lending landscape. She asserts that more needs to be done, however, especially to protect minorities in the wake of new challenges such as the COVID-19 pandemic and bank failures. Additionally, legislation has not yet addressed land contracts, exemplifying how responses to unscrupulous marketing are often too slow to prevent harm to the most vulnerable. Without faster and broader responses, consumer trust will continue to fade, and consumers at all points on the spectrum will ultimately suffer as a result.
SUBMERGED LAND: Who owns permanently submerged land when the submergence occurs because of gradual erosion, subsidence, and sea-level rise— the state or private landowners? Prof. John
Lovett, in Ownership of Submerged Land on the Louisiana Coast: Resolving the DualClaimed Land Dilemma, 84 La. L. Rev. 905 (2024), makes the case in favor of the state. In an exhaustive treatment of classic property law theory and the particular laws of Louisiana, he concludes that when land becomes permanently submerged beneath the Gulf of Mexico, an arm of the sea, or a navigable river or lake as a result of gradual erosion, subsidence, or sea level rise, that land generally becomes a public thing owned by the state. He states further that when this change in ownership takes place without any affirmative, artificial intervention by the state, the state does not, and should not, owe compensation to the former private landowners. In a time when ocean surges and sea level rise are becoming an increasing problem, this issue of submerged lands is emerging as an area of contention, and this article goes far in resolving competing claims.
WATER: In Moving Water: Managed Retreat of Western Agricultural Water Rights for Instream Flows, 49 Colum. J. Envtl. L. 249 (2024), Profs. Stephanie Stern and A. Dan Tarlock describe how the existing western water allocation policies and the system of state and private water ownership, largely the result of the post-Civil War responses to illegal gold and silver mining, thought necessary to encourage western settlement, are out of sync with the modern urbanized West, as well as with present environmental challenges. They assert that the persistent megadrought threatens agriculture as we know it. They propose a novel program whereby the federal government would acquire some western water rights from agricultural holders, just as it has acquired homes in residential “managed retreat” programs, and dedicate those rights to instream flows. Under this scheme, the federal government would reassert a federal role in western water allocation, which they claim accords with current needs as well as history.
LEGISLATION
GEORGIA gives owners an action against persons recording false or forged deeds. An owner may bring an action
to recover actual damages or $5,000, whichever is greater, as well as costs and attorney’s fees. 2024 Ga. Law 549.
FLORIDA enacts My Safe Florida Condominium Pilot Program. The program offers licensed inspectors for grants and hurricane mitigation efforts. Participation in the program requires a majority vote of the board of administrators or voting interests in the condominium. 2024 Fla. Laws ch. 208.
MAINE requires notice to property owners in tax foreclosure of entitlement to surplus. The amendments prescribe the form and procedures for giving notice. 2024 Me. Laws 640.
MARYLAND requires disclosures by sellers of property located within one mile of a superfund site. After receipt of a contract addendum identifying the site as being on the National Priorities List, a purchaser may rescind the contract and receive a full refund of monies paid on the contract. 2024 Md. Laws 352.
MARYLAND amends landlord-tenant laws to require shielding of court records. Records are shielded as a matter of course in proceedings in which no judgment of possession was entered and upon a special showing where possession was granted. 2024 Md. Laws 347.
MARYLAND prohibits the wrongful recording of a deed or other instrument. A person so acting can be charged with a misdemeanor and subject to a fine of $500. 2024 Md. Laws 369. n
2024–2026 RPTE FELLOWS
REAL PROPERTY FELLOWS
CASSANDRE DAMAS
Atlanta Volunteer Lawyers Foundation Atlanta, GA
TRUST & ESTATE FELLOWS
LEXIS GIBSON
Osterbrock & Associates, LLC Atlanta, GA
LEAH BOSTON
MEGHAN R. GORDON
Arnall Golden Gregory LLP Atlanta, GA
Miles & Stockbridge Baltimore, MD
CASEY C. HOLLOWAY
Brandon Lee Wolff, Esq. King of Prussia, PA
BRANDON LEE WOLFF
Law Office of Leah Boston LLC College Park, MD
SAMANTHA CONTRERAS
Croke Fairchild Duarte & Beres Chicago, IL
SAMUEL DANGREMOND
Curtis, Mallet-Prevost, Colt & Mosle LLP New York, NY
CARLY JOHNSON
Maslon LLP Minneapolis, MN
NATASHA D. MCFARLAND
Birchstone Moore LLC Washington, DC
Hidden snares can trip up real estate practitioners in many stages of negotiating various types of commercial sale purchase agreements. This article offers suggestions for how to navigate around less evident pitfalls. Topics addressed include implied warranties in deeds, liability waiver carveouts, and the sole discretion standard.
Protecting Implied Warranties in Deeds
Beware! Have you ever inadvertently gutted the implied warranties or covenants contained in a deed? You may have, without even knowing it. A diligent buyer’s counsel often takes great care when negotiating purchase agreements to modify the as-is and seller release provisions so that such provisions do not release the representations and warranties of the seller in the purchase agreement, or in the other documents delivered at closing. The buyer’s counsel often accomplishes this by meticulously adding to each provision language such as “except for the representations of Seller [expressly] set forth in this Agreement or the closing documents delivered by Seller in connection with the sale of the Property.” The seller’s counsel will often demand that the word “expressly” be included because she wants to limit the carveout to ensure her client is on the hook only for the specifically negotiated representations and warranties of the contract, including all of the limitations (i.e., limited survival, baskets, and caps) agreed to by the parties—and nothing more.
Hope K. Plasha is a partner at Patterson Belknap Webb & Tyler LLP in New York City. Misty M. Sanford is a partner in the Los Angeles office of Willkie, Farr & Gallagher LLP. She serves as the firm’s Chair of West Coast Real Estate. This article is revised and excerpted from an article under the same title originally published in the Fall 2022 American College of Real Estate Lawyers (ACREL) Papers.
Purchase Agreement Pitfalls to Avoid Traps for the Unwary
By Hope K. Plasha and Misty M. Sanford
In negotiating this release carveout, however, the parties often overlook the implied warranties or covenants of the deed. In most commercial transactions, the property is conveyed through a grant deed, limited warranty deed, or special warranty deed that may include implied warranties that protect the buyer. For example, in California, any fee simple conveyance that uses the word “grant” contains the following implied warranties: (a) the grantor did not previously convey the property or any interest therein to anyone else; and (b) at the time of the conveyance, the property is not burdened by any encumbrances “done, made or suffered by the grantor.”
See Cal. Civ. Code § 1113 (West, Westlaw through Ch. 8 of 2024 Reg. Sess.). So if the buyer agrees in the purchase agreement to waive all representations and warranties in connection with any of the closing documents (other than “express” representations and warranties) then, a waiver and release may very well include the implied warranties of the deed. Buyer’s counsel could address this issue by requesting inclusion of a statement that the release of “all” implied warranties not apply to the implied warranties of the deed, perhaps by proposing a clause similar to the following
Except as provided in the express representations and warranties of Seller set forth in Section [__] (Seller’s Representations and Warranties), Article [__] (Brokerage Commission) and the obligations of Seller in the Closing Documents (including, without limitation, any implied warranties of the Deed), …
Seller’s counsel, in turn, may question whether waiving the implied warranties of the deed is a legitimate concern for the buyer given that most sophisticated buyers of commercial real estate will obtain title insurance to protect the buyer regardless of any waiver. A question arises whether title insurance provides the protections a Buyer needs under these circumstances. Many clients (and counsel) prefer not to rely exclusively on the expectation
that the title company will cover damages that arise from a title issue for which the title company is, or may be liable. Certain exclusions from the title policy could make it difficult and time-consuming to collect against the title company. Moreover, if the title company ends up having to pay on a claim resulting from a breach of the implied warranties, it will likely subrogate against the seller. See Midfirst Bank v. Abney, 850 N.E.2d 373 (Ill. App. Ct. 2006); see also Am. Title Co. v. Anderson, 125 Cal. Rptr. 24 (Ct. App. 1975). A title company may be displeased to learn that subrogation is unavailable because the buyer expressly waived the implied warranties (and the title company may even refuse coverage under the common policy exception for acts of the insured).
Seller’s counsel may further argue that the title company does not need to rely on subrogation, anyway, because the title company likely required the seller to execute an owner’s affidavit, under which the seller expressly represented and warranted to the title company the same facts and circumstances covered by the implied warranties. In the authors’ experience, however, title companies are uncomfortable relying solely on the owner’s affidavit (particularly when the seller is a single-purpose entity that will have no assets once the sale transaction closes), and generally do not want the implied warranties to be waived.
Arguing that the implied warranties should be waived is a slippery slope. The whole point of a general warranty, special warranty, or grant deed in a commercial transaction (as opposed to a quitclaim or release deed) is for the seller to provide some assurances with respect to the title it is conveying (if applicable). If the parties intended to waive the covenants or implied warranties and rely exclusively on title insurance, why not just use quitclaim deeds or release deeds?
The answer is a practical one—many title companies are uncomfortable insuring title in the absence of title covenants, express and implied, and such an approach deprives the buyer of its
principal benefit in any deal, namely, good title. Accordingly, waiving the implied warranties of the deed is a step too far because it would disrupt the delicate balance of risk that has evolved in commercial purchase transactions, and upon which the title industry relies.
Other Potential Release Carveouts—Covenants, Fraud, and Third-Party Claims
In addition to the implied warranties of the deed, there are other issues that can arise for unwary buyers when negotiating the seller’s release provisions in a purchase agreement. If buyer’s counsel is not careful enough to closely parse seller’s counsel’s proposed release language, buyer’s counsel may later find that the language (intentionally or unintentionally) waives the following matters that a buyer may not want to waive: (a) seller’s covenants (as distinct from its representations and warranties) under the purchase agreement, the closing documents, and any other separate agreements; (b) fraud or material misrepresentation by the seller or its affiliated parties; and (c) third-party claims for events occurring at the property or arising before closing (including as a result of the seller’s due diligence investigations).
Here is an example of buyer-friendly carveout language to consider:
Nothing herein shall release Seller or the Seller Parties from any claims or liabilities arising out of (i) any breach of covenants, representations, or warranties set forth in this Agreement, any Closing Documents, or any other agreement, instrument, or document entered into by Seller or any of the Seller Parties after the Effective Date; (ii) fraud or material misrepresentation by Seller or the Seller Parties; or (iii) claims brought by any third party arising as a result of an event occurring at the Property prior to the Closing Date which was not caused by Buyer (collectively, “Excluded Claims”).
We will discuss each of these clauses in turn.
First, a carveout for the seller’s other obligations under the purchase agreement or any agreements intended to survive the closing should not be a controversial addition to the release. Purchase agreements typically include covenants made by the seller during the escrow period (e.g., a covenant not to enter into new leases without the buyer’s consent, a covenant to maintain the premises in the ordinary course, etc ), which need to remain enforceable by the buyer, and should not be released as of the signing of the purchase agreement. Also, at the closing, the seller will be executing the deed, a bill of sale, assignments, and other closing documents that include additional provisions that also need to remain enforceable by the buyer, and should therefore not be subject to a buyer’s global release of the seller. If the release in the purchase agreement broadly covers the seller’s affiliates, or is not limited solely to agreements related to the property, the parties may consider
A carveout for the seller’s other obligations under the purchase agreement or any agreements intended to survive the closing should not be a controversial addition to the release.
narrowing the scope of the release or carving out any other agreements that are in place now or that may be entered into with the seller’s affiliates that should not be released. For example, if an affiliate of the seller is staying in the deal, there may be a joint venture or other agreement with an affiliate that should not be released. Another example is ongoing agreements of the parties with respect to matters unrelated to the specific property being sold. All such agreements must remain enforceable and not be inadvertently released by the provisions of the purchase agreement.
Second, buyers typically do not release the seller if the seller commits fraud or material misrepresentation. In the majority of contract negotiations, the seller’s counsel will agree to exclude both from the seller’s release given it is difficult to argue that its client should have the ability to lie or conceal information without consequence. In another setting, some practitioners objected to the authors’ approach that a seller should be allowed such an unfettered contract right. Those sellers
argued that they could not agree to exclude fraud from the seller’s release because an allegation of fraud could open the door to liability for matters that the parties agreed should be the buyer’s responsibility.
Other sellers may argue there is no need to carve fraud out of the release given that claims of fraud cannot be waived as a matter of law. Although this proposition may be acceptable in most jurisdictions, it is not true in all jurisdictions. In those jurisdictions where fraud carveouts are acceptable, enforcement of such releases may not be easily accomplished. A savvy buyer’s counsel will argue that if fraud in fact cannot be waived as a matter of law, then there is no harm to the seller in expressly stating so in the contract. For example, in some jurisdictions (such as Delaware), a release of certain kinds of fraud claims given by a sophisticated commercial actor represented by counsel will be enforced. See Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824 (Del. 2021). For this reason, attorneys who do not primarily practice
A buyer should not release the seller from third-party claims that may be brought against the buyer for events that occurred before the buyer takes title to the property.
in the jurisdiction in question should seek advice from local counsel about the scope of any fraud waivers and requested carveouts.
That said, in most jurisdictions across the country, it is indeed customary for a seller to agree to exclude fraud and material misrepresentation from the seller’s release and as-is provisions. Even so, a seller may consider trying to limit this carveout in several ways.
A seller may try to limit the scope of the parties whose actions or statements can trigger a fraud claim to those the seller controls, such as the seller entity itself and its controlled affiliates. Often this will be accomplished by limiting the defined term “Seller Parties” to exclude agents or other third parties. Buyer’s counsel should consider pushing back because the seller selected those agents and has the power to enforce remedies (and to make claims) against them directly. Seller’s counsel may also want to limit this carveout to only fraud and material representation “as determined by a court of competent jurisdiction in a non-appealable decision”—language that does not significantly alter the parties’ respective risk and therefore often is agreeable to the buyer.
Third, a buyer should not release
the seller from third-party claims that may be brought against the buyer for events that occurred before the buyer takes title to the property. The quintessential example of this is a “slip and fall” claim brought against the buyer after the closing but that clearly occurred during the seller’s period of ownership. The need for this carveout arises only if the parties have not included post-closing mutual indemnities, indemnifying each other for events that occur during their respective periods of ownership. If the parties agree to such indemnifications (and if buyer has been careful not to waive the covenants under the purchase agreement and closing documents as discussed in the first carveout above), then this issue will already be covered. But if the transaction occurs in a market where it is not customary to include mutual indemnifications, then (unlike the two carveouts discussed above) this may be more controversial. In such instances, seller’s counsel may argue that the seller should have no liability to the buyer for these third-party claims because the buyer will have a solid defense against the claim—that the event did not occur during the buyer’s period of ownership. Some sellers will offer to include language that nothing in the release prevents the buyer
from asserting a defense that the buyer was not the owner of the property during the applicable period or language that expressly permits the buyer to interplead the seller into the action brought by a third party. From the buyer’s perspective, this simply does not go far enough. If the buyer has to expend money defending itself in a lawsuit brought by a third party and the buyer has a viable claim for damages against the seller, then the buyer should be able to bring it without being barred by the seller’s release language. Furthermore, if the seller is released from the claim by the buyer, the seller’s insurance may no longer cover the claim.
On the other hand, seller’s counsel may want to impose certain key limitations to protect her client as a condition to the seller’s agreement to exclude from the seller’s comprehensive release third-party tort claims occurring before the closing. For example, seller’s counsel should consider limiting the events to those that occur during the seller’s period of ownership only (as opposed to any time prior to closing). In addition, some sellers are especially sensitive to environmental claims (particularly operating companies that may have acquired a property through a series of mergers without records about its
long-term use). Counsel for these sellers will have crafted the environmental representations and warranties carefully to be as limited as possible and may be concerned that any carveouts from a broad release will undermine them.
Many buyers will not agree to release environmental claims, however. Indeed, some buyers require a carveout from the release for all environmental matters related to the property generally—regardless of whether a third-party claim is brought. If the buyer agrees to exclude claims for environmental matters from the carveout for third-party claims, the buyer should, at the very least, consider adding language clarifying that the release for environmental matters does not prohibit the buyer from impleading or otherwise naming the seller in the buyer’s defense. But if a seller has a lot of leverage, it may even try to prohibit a buyer from impleading the seller for environmental claims, using language like the following:
If, after the Closing, any third party or any governmental agency seeks to hold Buyer responsible for the presence of, or any loss, cost, or damage associated with, Hazardous Substances in, on, above, or beneath the Property or emanating therefrom or for any other environmental condition related to the Property, then Buyer shall not (i) implead the Seller or any affiliate, (ii) bring a contribution or similar action against the Seller or any affiliate, or (iii) attempt in any way to hold the Seller or any affiliate responsible.
This is aggressive, seller-friendly language, but some sellers have leverage to impose it either because of their reputation or the particular market conditions surrounding the asset.
Carveouts from the Cap on Seller’s Post-Closing Liability
Many of the same issues with respect to carveouts from the seller release provisions (e.g., fraud, material misrepresentation, third-party claims, etc.) also apply to the limitations on the
seller’s post-closing liability. Typically, purchase agreements limit the seller’s liability post-closing to a specific survival period (anywhere between three months and two years depending on the market and the dynamics of the particular deal) and impose an overall ceiling (and sometimes a floor) amount on such post-closing claims brought by the buyer. We refer to these here as the “seller’s post-closing limitations.” While the release carveout for the seller’s other obligations under the purchase agreement and closing documents discussed above does not apply to the seller’s post-closing limitations (because the whole point of the seller’s post-closing limitations is to limit these obligations), the other two release carveouts discussed above should be considered in the context of the seller’s post-closing limitations.
If buyer’s counsel stops there, though, she will miss considering additional carveouts to the seller’s post-closing limitations. Historically, the seller’s post-closing limitations applied only to breaches of the seller’s express representations and warranties in the purchase agreement (not to the seller’s breach of its covenants and obligations under the purchase agreement or closing documents). But sometimes sellers attempt to expand the seller’s post-closing limitations to apply to all of the seller’s post-closing liability for any covenants, obligations, representations, or warranties of the seller under the purchase agreement and closing documents. If the parties agree to expand the seller’s post-closing limitations in this way, then buyer’s counsel needs to be diligent in identifying key provisions of the purchase agreement that should be excluded from the cap and not time barred.
None of these should be controversial if identified, but it is easy to miss when moving too fast. For example, buyer’s counsel should exclude the deed entirely from the seller’s post-closing limitations. The same reasoning applies here as described above with respect to excluding the express and implied warranties of the deed from the buyer’s comprehensive release. Also, the
negotiated provisions of the purchase agreement that have allocated certain costs and fees between the parties should not be subject to the cap, floor, or survival period, including attorney fees, broker indemnities, prorations, closing costs, and any Code Section 1031 exchange indemnity.
Here is an example of a buyerfriendly carveout provision where the seller’s post-closing limitations are expanded to include all of the seller’s post-closing liability:
Notwithstanding any provision to the contrary contained in this Agreement or the Closing Documents, the following shall not be subject to the Basket Amount nor limited by the Cap Amount nor the Survival Period: (i) any liability arising under the Deed; (ii) any acts constituting fraud, intentional misrepresentation, or torts by Seller, as determined by a court of competent jurisdiction in a non-appealable decision; (iii) any third-party claims against Buyer or its successors and assigns brought as a result of an event occurring at the Property prior to the Closing Date not caused by Buyer; and (iv) any liability of Seller pursuant to Section [__] (Prorations; Credits), Section [__] (Brokers), Section [__] (Closing Costs), Section [__] (Attorney Fees), and Section [__] (1031 Exchange).
If the parties have agreed to postclosing mutual indemnities for events that occur during their respective periods of ownership, or if the seller has provided seller estoppels for leases (in lieu of tenant estoppels), then these indemnities and seller estoppels should also be excluded from the seller’s postclosing limitations.
Implied Covenants and Sole Discretion
Purchase agreements typically provide buyer and seller with various rights to approve or disapprove of certain matters (e.g , for the buyer, the results of
due diligence investigations) and to take (or to refrain from taking) certain actions (e.g , for the seller, permitting an assignment of the contract) at their respective “discretion.” While the unsuspecting lawyer may assure her client that the contract is clear on its face and, of course, it can exercise its discretion without fear because it says so right there in the contract, discretion does
not mean sole and absolute discretion, thanks to the implied covenant of good faith and fair dealing. It is well established that “[e]very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts § 205 (Am. L. Inst. 1981). What does this oft-quoted phrase mean in practice? “Neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”
Kirke La Shelle Co. v. Paul Armstrong Co., 188 N.E. 163, 167 (N.Y. 1933).
Would acting in bad faith in the exercise of one’s discretion “injure” the right of the other party to receive the “fruits” or “benefits” of a contract? Arguably it would. The duty of good faith requires the parties to negotiate reasonably with each other and it applies “when one party has discretionary authority to determine certain terms of the contract.” Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo. 1995). In such instances, discretion must be exercised in a good faith, reasonable manner so as not to undermine the expectations of the parties entering into the contract. However, the implied covenant of good faith and fair dealing does not “prohibit a party from doing that which is expressly permitted by an agreement.”
Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 826 P.2d 710, 728 (Cal. 1992).
For instance, “the implied covenant of good faith and fair dealing does not apply where a party to the contract has the absolute and exclusive authority to make the decision at issue.” Davco Acquisition Holding, Inc. v. Wendy’s Int’l, Inc., No. 2:07-cv-1064, 2008 WL 755283, at *7 (S.D. Ohio Mar. 18, 2008). This is because, “as a general matter, implied terms should never be read to vary express terms.” Carma Developers, 826 P.2d at 728. But where an agreement does not clearly and expressly address an issue, courts can try to “fill in the gap” as to the parties’ intent by reference to what a reasonable person would have expected under the implied covenant of good faith and fair dealing.
To avoid the uncertain outcomes of
such judicial interpretation, a seller and a buyer may prefer that their rights and obligations with respect to discretionary actions are clearly stated. One can accomplish this by providing that decisions will be taken not at the discretion or reasonable discretion of a party, but, rather, at such party’s sole and absolute discretion (and for any reason or no reason). A number of jurisdictions have found that sophisticated commercial parties can negotiate around the implied covenant by applying a sole and absolute discretion standard:
[T]he plain language of the contract makes clear that termination of the contract was a possibility and the parties, who were sophisticated, counseled business entities negotiating at arm’s length over a prolonged period of time, should have understood and expected that termination of the agreement could occur during that specified window of time, and that such a decision was the purchaser’s alone and did not need to be accompanied by any specific justification.
ELBT Realty, LLC v. Mineola Garden City Co., 144 A.D.3d 1083, 1084 (N.Y. App. Div. 2016) (internal citations omitted). Although the parties may think it would provide further comfort to just expressly waive the implied covenant itself, this is usually not permitted as a matter of law. See Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 443 (Del. 2005). Regardless, the strategies above may achieve the same goals without the full waiver, depending on the jurisdiction.
Conclusion
Buyers and sellers rely on their counsel to see not just the forest but also the trees. To that end, this article has identified important concepts that can sometimes be overlooked, proposed specific language from the perspective of both the buyer and the seller to address those concepts, and posed questions practitioners must consider to guide their clients away from hazards in the real estate jungle. n
KEEPING CURRENT PROBATE
CASES
MALPRACTICE: Beneficiaries of an unexecuted trust amendment have no cause of action against the settlor’s attorney. The Missouri intermediate appellate court held that the purported beneficiaries of an unexecuted trust amendment do not have standing to sue the settlor’s attorney. In Fallon v. Easley, 686 S.W.3d 287 (Mo. Ct. App. 2024), the court affirmed summary judgment for the attorney, finding a lack of privity and agreeing with other divisions of the court that Donahue v. Shughart, 900 S.W.2d 624 (Mo. 1995), which allowed disappointed beneficiaries to sue despite a lack of privity, was limited to controversies involving donative documents that had been executed.
NO-CONTEST CLAUSE: No-contest clause does not apply to a suit to remove a trustee for breach of duty. A parent’s trust included a no-contest clause, declaring the settlor’s intention to avoid litigation regarding the trust and requiring the forfeiture of the interest of any beneficiary who legally challenged or attempted to “impair the function” of the trust. One beneficiary brought a proceeding to remove the trustee, alleging a breach of fiduciary duties related to the care of trust property. The district court granted summary judgment for the trustee on the grounds that the beneficiary had violated the no-contest clause and was no longer a beneficiary. On appeal, the Supreme Court of Wyoming reversed in Spurlock v. Wyo. Tr. Co., 542 P.3d 1071 (Wyo. 2024), holding that the no-contest clause did not forbid all litigation brought by a beneficiary and a
Keeping Current—Probate Editor: Prof. Gerry W. Beyer, Texas Tech University School of Law, Lubbock, TX 79409; gwb@ ProfessorBeyer.com. Contributing Authors: Julia Koert, Paula Moore, Prof. William P. LaPiana, and Jake W. Villanueva.
Keeping Current—Probate offers a look at selected recent cases, tax rulings and regulations, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.
between the execution of the trust document and the bringing of the instant action.
SPENDTHRIFT RESTRICTIONS:
proceeding to remove the trustee was not a proceeding to “impair” the functioning of the trust.
PARTIAL INVALIDITY: A will may be partially voided to eliminate a bequest found to be the product of undue influence. In a case affirming the finding that a bequest in the testator’s will was the product of undue influence, the Supreme Court of Vermont in Matter of Crofut, 312 A.3d 1002 (Vt. 2024), held as a matter of first impression that partial voiding of the will to eliminate the bequest was the appropriate remedy and that the rest of the will may be enforced as written.
REFORMATION: Reformation granted on clear and convincing evidence. In Matter of Elton G. Beebe, Sr. Irrev. Tr., 380 So. 3d 905 (Miss. 2024), a divided Mississippi Supreme Court reformed an irrevocable trust applying Miss. Code Ann. § 91-8-425 (identical to U.T.C. § 415) holding that the settlor’s testimony that the settlor did not read the trust when it was executed and that the terms creating the remainder did not correspond to the settlor’s intent and other testimony regarding the settlor’s practice of sometimes not reading documents before signing them and affirming the settlor’s true intent was sufficient to allow reformation. The dissent emphasized the settlor’s duty under Mississippi law to read and understand the trust document and the settlor’s testimony that the settlor had not thought about the remainder provision in the 30 years
Attempt to transfer property in violation of a spendthrift restriction is void ab initio. The trust beneficiaries transferred their interests in real estate held in a trust with a valid restriction on both voluntary and involuntary alienation. The trust ended 11 years later, and seven years after that the beneficiaries sued the transferees. The transferees contended that the transfers were merely voidable and that the beneficiaries’ action was barred by the statute of limitations and laches. The circuit court held that the transfer was void ab initio and that therefore the action could proceed, a conclusion with which the Supreme Court of Appeals of West Virginia agreed in its opinion in Haymond v. Haymond, 900 S.E.2d 10 (W. Va. 2024).
TRUST INVESTMENTS:
Trust terms allow investments contrary to default rules. The opinion of the South Dakota Supreme Court in Redlin v. First Interstate Bank, 2 N.W.3d 729 (S.D. 2024), clearly illustrates the ability of trust terms to alter default rules governing the investment of trust property. The court held that terms waiving the trustee’s compliance with the Prudent Investor Act, authorizing investing “irrespective of any risk, nonproductiveness, or lack of diversification,” and expressly authorizing the deposit of trust property into savings or checking accounts, led to the trustee’s receiving a summary judgment in a suit brought by a beneficiary alleging breach of duty where the entire trust corpus consisted of $3 million in cash that earned less than $900 in the first year of the trust. The court held that the trust terms meant that the trustee could be liable only if it acted in bad faith or with gross negligence and that the loss of potential return did not amount to either.
TRUST MODIFICATION: Revocable trust may be modified by a writing signed by the settlor and delivered to the trustee. The California Supreme Court in Haggerty v. Thornton, 542 P.3d 645 (Cal. 2024), resolved a conflict among the California district courts, holding that under Calif. Prob. Code § 15402, the settlor or other person holding the authority to modify a revocable trust may do so by the method for revocation set forth in Calif. Prob. Code § 15401—a writing signed by the settlor or other person and delivered to the trustee—unless the terms of the trust set forth a method of modification and made that method exclusive.
TRUST MODIFICATION: Trust modified by transfer to another trust. Identical to U.T.C. § 602, Colo. Rev. Stat. § 15-5-602 allows the modification or revocation of a revocable trust by any method set forth in the trust terms, and if that method is not made exclusive, by any other method “manifesting clear and convincing evidence of the settlor’s intent.” The Colorado statute requires the use of “sole,” “exclusive,” “only,” or similar language to make the specified method exclusive. In Matter of Hunn Living Trust, No. 23CA108, 2024 WL 2066310 (Colo. May 9, 2024), the Colorado Supreme Court held that the statute abrogates Colorado common law requiring strict compliance with the method of revocation set forth in the trust terms. The court reversed a district court order seemingly based on the prior common law and remanded for a determination of whether the facts surrounding the settlor’s transfer of property held in the settlor’s revocable trust to another trust the settlor created showed the required intent by clear and convincing evidence.
TAX CASES, RULINGS, AND REGULATIONS
LOAN OR GIFT? Context of intrafamily transactions controls whether payments are loans or gifts. An estate appealed a Tax Court decision on an estate tax deficiency based on findings concerning multiple payments between the decedent and her son over a 32-year
period. In Estate of Mary P. Bolles v. Comm’r, 133 A.F.T.R.2d 2024-1235 (9th Cir. 2024), the Ninth Circuit affirmed the Tax Court’s decision that payments over the initial four-year period in the 1980s were loans to the son to support his architecture business. She had frequently loaned the architecture practice money when her husband owned it, the practice repaid the loans when the husband managed it, and she had a real expectation of payment once the architecture practice became solvent again. The Ninth Circuit also affirmed that payments made to her son over the remaining years were gifts, the default of intrafamilial payments. The context had changed, and the decedent no longer had an expectation of repayment: the son did not repay the initial loans, he had signed a document noting he had neither the assets nor earning capacity to make repayments, and the decedent had excluded him from her personal trust. The Ninth Circuit also held that the estate was not entitled to recover administrative and litigation costs as the Commissioner’s findings were substantially justified.
LITERATURE
AFRICAN INHERITANCE: In International Law, African Courts, Patriarchal Inheritance Systems and Women’s Rights, 51 Denv. J. Int’l. L. & Pol’y 59 (2022), John Mbaku explores how customary laws and traditional practices in many African countries often deny women and girls the right to inherit land, despite international and regional legal recognition of their property rights. Although legislation is needed to address this issue, progressive judicial rulings, such as the Court of Appeal of Botswana’s decision in Ramantele v. Mmusi, are providing important lessons on how to protect women’s inheritance rights from discriminatory customary laws and practices.
CONNECTICUT—TRUSTEE
REMOVAL: In You Have Broken My Trust: Removal of Trustees Revisited in the Connecticut Uniform Trust Code, 37 Quinnipiac Prob. L. J. 183 (2024), Marjorie Richardson discusses Connecticut’s adoption of the Uniform Trust Code in
2020 and how courts can establish precedent to achieve a fairer balance between settlors and beneficiaries. Richardson suggests making a removal statute mandatory to ensure beneficiaries’ ability to remove trustees under specified conditions. Alternatively, she suggests simplifying the process for “cause” removal yet empowering probate courts to appoint co-trustees. These suggestions can modernize trust laws and enhance beneficiary rights in Connecticut.
CONNECTICUT—UNDUE
INFLUENCE: In An Unclear Burden: Proving Undue Influence in Connecticut, 37 Quinnipiac Prob. L.J. 31 (2024), Jeffrey Cooper outlines the difficulties in defining and proving undue influence in will contests, emphasizing the shifting burden of proof under Connecticut law. Cooper emphasizes the need for the Connecticut Supreme Court to provide clear guidance on this crucial issue.
ELECTRONIC SIGNATURES: In How Adopting Uniform Rules for Electronic Signing and Acknowledgment of Formal Wills and Non-Testamentary Estate Planning Documents Can Increase Access to Estate Plans, 37 Quinnipiac Prob. L. J. 161 (2024), Sarah Stewart explains how modernizing estate planning laws to allow for electronic signatures and witnesses would improve document accessibility, particularly for marginalized communities, yet simplify legal processes and decrease related expenses.
GIFTS TO CAREGIVERS:
In Toward a New Generation of “Caregiver Statutes,” 31 Elder L. J. 239 (2024), Jamie McWilliam explores the evolution of caregiver statutes in probate law, which presume gifts to caregivers are invalid because of undue influence on vulnerable elders. These statutes have faced both praise and criticism, but little comparative analysis has been done. In this article, McWilliam provides a historical examination and proposes a new version of a caregiver statute to address current challenges while preserving the goal of combating elder abuse.
PROBATE JUDGE EXPERIENCE:
In Ruminations of an Accidental Probate Judge, 66-May Orange Cnty. L. 50 (2024), Hon. Gerald Johnston reflects on his experience
transitioning to probate court in 2002, highlighting the challenges and many rewards of practicing in this field of law. Despite initial struggles, he found a true passion in probate work, where he saw practitioners make a meaningful impact on people’s lives and families in need every day.
SELF-SETTLED ASSET PRO-
TECTION TRUSTS: In A Billionaire’s Dilemma: The Use of Self-Settled Asset Protection Trusts to Evade Economic Sanctions During Wartime, 37 Quinnipiac Prob. L.J. 40 (2024), Mark D’Augelli examines how US sanctions on Russian oligarchs are circumvented through complex asset protection methods like self-settled trusts. Despite efforts by the White House and Department of State, the use of these trusts, along with dual citizenship and intricate financial structures, complicates sanction enforcement. D’Augelli stresses the necessity of global financial transparency to hold Russian oligarchs accountable. He proposes legislative actions domestically and international collaboration to diminish financial secrecy in the trust business to enforce economic sanctions and slow down Russia’s war funding.
SOUTH DAKOTA—RULE AGAINST PERPETUITIES: In RAP Traps, 68 S.D. L. Rev. 374 (2023), Thomas Simmons explores how South Dakota’s repeal of the Rule Against Perpetuities in 1983 sparked the growth of the state’s trust industry. This article, the first of a two-part series, examines the traditional common law version of the Rule Against Perpetuities, its complexities, and inadequate reforms. The second part will delve into South Dakota’s unique application of the rule and the legislative repeal process.
TESTAMENTARY FREEDOM: In Freedom to Give, Devise, and Bequeath, 37 Quinnipiac Prob. L. J. 111 (2024), Raymond O’Brien discusses the desire of older, wealthy individuals to freely distribute their wealth without facing high legal costs and lawsuits. He suggests using modern estate planning tools such as inter vivos trusts and directed trusts to reduce the chances of disputes. O’Brien examines the experiences of three wealthy figures,
Seward Johnson, Huguette Clark, and Sumner Redstone, offering a different approach to prevent expensive conflicts and ensure their intended legacies.
WILL OR INTESTACY? In Is a Will Better Than Intestacy, 92 U. Cin. L. Rev. 631 (2024), Kristine Knaplund explores how scholars have advocated for courts and lawmakers to shift from strict rules for making wills to instead embrace functionalism to encourage more people to create wills. Even with more relaxed requirements, however, it is still uncertain whether these changes have led to fewer legal disputes or faster probate processes. In this enlightening article, Knaplund compares several empirical studies to ask five critical questions: “Are deathbed wills rare? Are there more wills probated today because of functionalism? Is there less litigation in the probate courts today? Are there fewer abandoned cases today? And finally, are wills better than intestacy because the probate period is shorter than that of intestate estates?”
LEGISLATION
ARIZONA adopts the Uniform Partition of Heirs Property Act. 2024 Ariz. Legis. Serv. Ch. 122.
INDIANA extends the Rule Against Perpetuities period to 360 years after the creation of a nonvested property interest. 2024 Ind. Legis. Serv. P.L. 61-2024.
INDIANA revises statutes governing transfer on death deeds. 2024 Ind. Legis. Serv. P.L. 99-2024.
IOWA removes the presumption that a spendthrift provision is a material
purpose of a trust. 2024 Ia. Legis. Serv. H.F. 2517.
MINNESOTA provides the grantee of a transfer on death deed with an insurable interest in the property. 2024 Minn. Sess. Law Serv. Ch. 91.
NEBRASKA adopts the Uniform Community Property Disposition at Death Act. 2024 Nebr. Laws L.B. 1317.
OKLAHOMA enacts the Revised Uniform Fiduciary Access to Digital Assets Act. 2024 Okla. Sess. Law. Serv. Ch. 115.
OKLAHOMA passes the Oklahoma Standby Guardianship Act. 2024 Okla. Sess. Law Serv. Ch. 41.
SOUTH DAKOTA authorizes remote notarization. 2024 S.D. Laws Ch. 71.
UTAH enacts optional forms for transfer on death deeds and their revocation. 2024 Utah Laws H.B. 24.
VERMONT authorizes remote witnessing of and digital signatures on advance directives. 2024 Vt. Laws No. 88.
WASHINGTON adopts the Uniform Electronic Estate Planning Documents Act. 2024 Wash. Legis. Serv. Ch. 188.
WASHINGTON passes the Uniform Special Deposits Act. 2024 Wash. Legis. Serv. Ch. 23.
WEST VIRGINIA permits the electronic execution of trusts. 2024 W. Va. Laws H.B. 5561. n
AI and the Formulation of Critical Data for Trust Mediations
By Hon. John H. Sugiyama (Ret.)
Poet T. S. Eliot queried:
Where is the wisdom we have lost in knowledge?
Where is knowledge we have lost in information?
Attorneys seek information. From case to case, they may obtain innumerable bits of information. How they use information may distinguish them from each other—the good from the bad, the effective from the inept. Eliot’s musings offer a cautionary view of the tendency to concentrate on the acquisition of information without regard for how it should be used. The perception holds that with sufficient information alone, the mysteries of the ephemeral world of dispute resolution may be unraveled.
Attorneys embroiled in litigation need not be cognizant of the distinctions posed by the Eliot formulation. Even without conscious regard for his musings, they engage in forms of information processing, from the base to a level of comprehension acceptable to meet their needs. They seek to ascertain facts, both relevant and irrelevant. They attempt to determine how facts affect issues in dispute. They may or may not then act wisely on the information they have endeavored to obtain and analyze.
The balance of information, however, is often asymmetrical. One side has it; the other side doesn’t.
Discovery may alter that imbalance. But attorneys, unlike the threedimensional chess players with whom they sometimes are compared, must account for the telling effect of a fourth dimension: time. Especially in trust disputes, clients may be elderly and in need of testamentary distributions
for medical or other urgent needs. Investment opportunities may be fleeting if finances remain uncertain. Bequests may be insufficient to warrant substantial investment in litigation. If parties are intent on resolution rather than retribution, attorneys may be constrained to seek mediation before the costs of litigation exceed client capacity.
Confronted with such dilemmas, attorneys will soon be able to use artificial intelligence (AI) platforms as tools for mediation. Wisdom may be unnecessary for the achievement of settlement on acceptable terms. Nor would knowledge, although perhaps desirable, be required. But information would be essential. AI may serve that purpose, providing an economical tool for the retrieval and formulation of critical data.
AI Platforms
AI platforms that may support litigation
Hon. John H. Sugiyama (Ret.) is a mediator at JAMS. His principal office is located in Walnut Creek, California.
are beyond the rudimentary design phase. Two general types are involved: (i) rule-based and (ii) learning-based. From programmed instructions, nextlevel decisions are proposed: If X occurs, Y follows; or instead, if A is offered, B is posed as a viable response. With everexpanding databases, such guidance may be constantly refined.
Building upon these systems, two AI technologies are emerging: large language models (LLMs) and generative AI models. LLMs are conceived to handle language-related functions. Drawing from myriad sources, LLM programs can produce text that may be coherent and appropriate to the context of the query. Generative AI models are designed to produce creative artistic, musical, and literary content. Able to discern patterns and characteristics from troves of data, generative AI programs can produce unique images, imaginative sound combinations, and seemingly understandable writings. The
sophistication of both LLM-generated text and generative AI creations will increase without seeming limitation.
Eventually, a combined LLM and generative AI platform will be developed for mediations. Attorneys will present their evolving positions to a virtual mediator, an electronic creation of algorithms. The mediator will convey offers and counteroffers between the attorneys. Depending upon the sophistication of its guiding program, the mediator may offer analyses of and recommendations about the proposals based on information retrieved from a database of comparable cases.
This article, however, is not intended as an exploration of the demise of the human mediator. Such advanced technology is noted merely as the foundation for discussion of what will emerge sooner for attorneys. Less robust programs will complement the work of attorneys in preparation for mediations.
As noted earlier, attorneys may
occasionally be compelled to commence mediations despite discomfort with the information and knowledge they have. Two examples illustrate such lacunae in trust litigation: (i) allocation of assets between subtrusts and (ii) accountings of profits and expenditures. AI may fill these voids.
Subtrust Allocations
As a significant facet of their structure, family trusts may provide for the allocation of assets to subtrusts upon the death of the settlor. One purpose served by this structure is to minimize inheritance taxes that may be owed upon the death of the settlor. Another reason is to ensure, if feasible, that assets will be available for inheritance by remainder beneficiaries after the death of the trust’s principal beneficiaries, usually the settlor and spouse.
Not infrequently, successor trustees neglect to make the requisite allocations until compelled to do so by legal
AI may soon enable attorneys to formulate accounting data in multiple ways.
action. When such late allocations are undertaken, disputes may arise over the appropriate valuation of the subtrusts. In elemental terms, the argument is that, if allocations had been made properly at the time of the settlor’s death, the subtrust subject to funding should be valued at an amount higher than proposed by the successor trustee.
The calculation of such valuations, however, may be complex.
As a relatively simple example, suppose that a family trust holds stocks A and B at the time of the settlor’s death. Over time, A and B may increase or decrease in value, each at different rates. Each also may have dividends and splits in shares. Suppose further that the family trust specifies an equal distribution of assets to be made at the time of the settlor’s death between two subtrusts X and Y.
Under one commonly proposed scenario, A and B may be equally allocated between the subtrusts at the time of settlement. But such a post hoc distribution may not be fair to the remainder beneficiaries, who, for purposes of this illustration, are the recipients of subtrust Y. Most frequently, family trusts will specify that the proceeds from subtrust X, both interest and principal, may be used for the health and welfare of the principal beneficiaries and that interest and principal from subtrust Y may be invaded only under limited circumstances. Subtrusts X and Y thus are likely to have different values within months after the settlor’s death.
Attorneys can use basic spreadsheet formulas to chart the financial condition of subtrusts X and Y over time. The process is time-consuming and laborious, dependent upon accurate initial valuations, stock histories, and expense records. Attorneys may be relegated to positing different scenarios untethered by factually accurate calculations and projections.
AI will be able to support attorneys with these kinds of assessments. Programs can chart different ways that initial allocations could have been made, with corresponding balance projections for each. Programs can also check the validity of any projections offered by opposing attorneys. The savings to attorneys in terms of both time and money if they are not forced to perform this function manually should be substantial.
Trust Accountings
Although timely requested, trust accountings are not always timely filed. Accountings, especially those spanning years, are costly to prepare. Financial records must be retrieved and reviewed. Lines of data, perhaps numbering into the thousands, must be organized and entered.
Delays in the production of accountings may be exacerbated because successor trustees may be incapable of maintaining records and balancing even a rudimentary two-column ledger and may wish to withhold information indicative of
misappropriation of funds. Moreover, records furnished through discovery may be incomplete. Subpoenaed bank, financial management, and credit card statements will yield only numbers. If clients cannot wait for these matters to be fully resolved, attorneys, as previously noted, may be compelled to seek relief through mediation under less-thanideal conditions.
AI may soon enable attorneys to formulate accounting data in multiple ways. Entries may be categorized by group, and groups may be sorted in accounting format. Analyses of patterns of expenditures may be feasible. AI may constitute a tool to enable attorneys to acquire information that otherwise would not be accessible within imposed time constraints.
Attorneys currently perform these functions manually, but only if they have time and resources. AI will provide tools to perform them expeditiously and economically.
AI also will be effective in addressing other functions that similarly involve processing large sets of data. At a casual glance, one such operation in the trust context entails asset valuations. For real estate in particular, valuations are dependent upon comparisons of similar properties in the same location over a specified period. The subjective quality of assessments of similarity, sameness, and time may be enhanced or diminished depending upon the breadth of the data used. Another operation, one that is encountered in not just trust, but all litigation, involves transcripts, briefs, and other documents. Volumes of testimony, arguments, and related information often must be summarized, indexed, and crossreferenced. Such data may be useful only if subject to efficient retrieval.
The application of AI will be limited only by the imagination and creativity of attorneys. Attorneys will become increasingly dependent upon AI to handle volumes of information. The objective presumably will be the knowing use of that information. Whether wisdom will follow may then be left for later determination. n
NEW RPTE PUBLICATIONS
LITIGATING ADVERSE POSSESSION CASES: PIRATES V. ZOMBIES
By Paul Golden
2024, 279 pages, 6x9 Paperback/ebook
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Can a neighborhood Napoleon simply take over, and become the owner of, another neighbor’s property? Any attorney even considering approaching an adverse possession case, regardless of which side, must start here. This is the first known book that focuses on just this issue—and from the litigator’s point of view. It is a one-stop shop for practitioners, with not only full descriptions of the ins and outs of the elements and potential defenses, and sample pleadings, but also various practical tips, tricks, clues, and ideas for successfully litigating these unusual cases.
“Who would believe that a thirty-eight-chapter deep dive into every aspect of litigating adverse possession —that hoary doctrine that somehow transforms trespass into ownership—could also be an engaging and accessible read? Paul Golden has somehow pulled it off. This erudite and comprehensive volume will prove truly invaluable for practitioners as well as academics and students engaging with one of the most enigmatic, yet practically important, areas of property law.”
Nestor M. Davidson
Albert A. Walsh Professor of Real Estate, Land Use and Property Law, Fordham Law School
“Paul Golden’s book is a gold mine for any lawyer litigating an adverse possession case. The book collects cases on every aspect of adverse possession doctrine, and does far more than survey standard problems that complicate adverse possession law. Golden examines the peculiarities of local law in many states and outlines a variety of defenses available to adverse possession litigators. To top it off, Golden’s refreshingly breezy style makes it easy to digest the valuable information he doles out.”
Stewart Sterk
Mack Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University
Challenges in Estate Planning with Investment Real Estate
By Mary P. O’Reilly and Andrew L. Baron
Estate planning for clients in the investment real estate business is fraught with potential landmines that require careful consideration to ensure an effective plan. A key consideration for any estate plan is maintaining family harmony. This is particularly difficult for families in the investment real estate business, where the goal is often for all children—both those who are in and those who are outside of the business—to retain a stake in this incomeproducing asset. The tax aspects and illiquid nature of investment real estate also present unique challenges. In addition to the estate tax, which is typically the main focus
Mary P. O’Reilly is a partner at Meltzer, Lippe, Goldstein & Breitstone, LLP in Mineola, NY. She is Vice-Chair and former Chair of the ABA Wealth and Non-Tax Estate Planning Considerations Group of the Real Property, Trusts & Estates (RPTE) Section. Andrew L. Baron is a partner in the Private Wealth & Taxation Group at Meltzer, Lippe, Goldstein & Breitstone, LLP, with offices in New York and Florida.
in estate planning, income taxes must also be a key consideration because many real estate clients have so-called negative basis due to depreciation, refinancings, and past income tax deferral under Section 1031 of the Internal Revenue Code (the Code). Access to financial leverage also plays a critical role in estate planning for investment real estate families. Consideration must be given to ensure transfers do not violate existing loan covenants and take into account future access to financing. This article will explore each of these areas and provide suggestions on how to effectively navigate around these issues to build the most comprehensive and effective plan.
Family Harmony
Minimizing family disputes is essential to all estate planning. When a family business is involved, counsel must take special care to prevent it from causing rifts among family members. Parents often serve as the glue holding siblings together and preventing rivalries from spiraling out of control. After the parents are no longer alive, their absence may result in hidden
Estate planning is not the time for parents to leave it up to the children to figure it out for themselves.
tensions and conflicts among children coming to the surface. This is especially true for investment real estate families, where the business can serve as the catalyst for this strife.
One explanation for this is the opposing ways in which businesses and families reward stakeholders. In businesses, compensation and advancement are traditionally merit-based and generally determined by the hard work and skill of an employee. In contrast, in families, parents typically divide their assets equally among children or, if anything, give more to the child who is less capable to ensure all children will be cared for and provided for. These diametrically opposed approaches make it difficult to determine the most equitable means to pass down the business.
This is further exacerbated when some children have dedicated their lives to the business and others have followed different pursuits. It is often easier for clients in non–real estate businesses to address this issue because siblings who are outside of the business do not always remain business partners with the sibling who is working in the business. When the family business is investment real estate, however, clients almost always want all their children—whether involved in the business or not—to inherit interests in investment real estate that can provide them with a steady income stream. This means that children
who had been outside the business may be forced into a business partnership after their parents are gone, which is a great potential source of conflict.
Fueling this friction are the different perspectives of the children. For example, from the perspective of a hypothetical son working in the business, he has sacrificed his own personal future—of doing something solely for his own financial gain—to help his parents and grow the family’s wealth. Perhaps his own hard work and skill helped take the real estate to a new level of success that he attributes to himself. In contrast, from the perspective of the hypothetical daughter outside of the business, her brother was handed a job opportunity by mom and dad, who took him under their wings and trained him, while she had to work on her own to make her own career and future for herself. Both of these perspectives may be correct, and often they are not even voiced while mom and dad are alive. As previously mentioned, these issues typically arise after the parents have passed on because they are no longer there to play their role of keeping sibling relationships and rivalries in check. The influence of the children’s spouses often exacerbate these feelings.
The key to minimizing or preventing this sibling conflict is for the parents to address this explicitly in their planning. Children spend their entire lives
having parents decide how things will be, so estate planning is not the time for parents to leave it up to the children to figure it out for themselves. To maximize the chances of success, the plan should reward and incentivize the child who is in the business to continue to grow the business. It also should give the children outside of the business the opportunity to be bought out over time or the option of not participating in future deals or properties if they do not wish to have their finances under the thumb of their sibling. Often, arm’s-length business arrangements can be replicated with family-owned real estate. The key to determining which plan will work best for a family is understanding the type of investment real estate business the client is in and the different roles the family members and other third parties play. Regardless of the plan chosen, however, to ensure the greatest likelihood of success, it is worth repeating that this plan should be dictated by the parents in their planning and not left up to the children to figure out after the fact.
Tailored Succession Strategies
Unlike many other family businesses, one advantage of the investment real estate business for families that own multiple properties is that each property can typically stand on its own and have value apart from the other properties. This ability to divide the portfolio by property among the children is an advantage to owning a real estate business and is a simple and straightforward succession strategy, where each child or a trust for the child receives a separate building or an interest in a separate building. One benefit of this approach is that the children are not tied to each other financially, minimizing the business as a source of friction among them. From an income tax perspective, this should be done during the client’s life or during the estate administration process. Once children receive interests in different buildings, it is much harder to swap assets from one child to another child without income tax repercussions. As detailed below, transfers of real estate during
life should be made to “grantor trusts.” This is particularly helpful when giving each child a different property because it provides the ability to move property from one trust to another without income tax consequences.
One downside of the approach of dividing the portfolio among the children is that a property set aside for one child may outperform the properties set aside for the other children. Counsel can address this issue by providing an equalization mechanism in the will to compensate for any disparity in the values of the properties, including properties that have already been gifted and are outside of the taxable estate. Valuation and adjustment should be performed by a neutral third party to minimize potential conflicts among the siblings. Another downside to this approach is that the client may have reservations about the child who is outside of the business being able to manage that child’s own property without the help of the child who is involved in the business. In those instances, the clients can still divide the portfolio and name the child involved in the business as the manager of the sibling’s property, but should provide for financial incentives for that child’s continued management of all the properties, while also giving the child who owns the property the ability to change property managers if it is not working out.
Nonetheless, for many clients, separating the real estate and leaving each child in control of that child’s property is not a workable solution. For example, the client may not have confidence that the child outside of the business can successfully take on this responsibility of having ultimate control over the property manager. Also, the client may see investment real estate as an important asset to provide the child with a steady stream of income for life and may not want to leave it up to the child to liquidate and cash out of the business and shower the child with too much wealth. Although using trusts with an independent trustee can help mitigate against some of these concerns, this arrangement may not be fully satisfactory.
For many of these clients, appointing the child who is in the business, and who may share the same mindset about the long-term value and stability of investment real estate, to be in charge of the entire portfolio is essential to the planning. In these cases, special care and consideration must be given to help minimize potential conflicts among the children, and it is often helpful to separate management of the properties that are already owned and operated during the client’s life (Legacy Properties) from the management of new deals or properties that the child in the business may identify in the future to acquire and develop (Future Properties). In developing this planning, the way third-party property managers are compensated can be replicated here. For example, there are typically three different roles that need to be addressed when managing Legacy Properties. The first is the property manager, whose role involves dealing with the tenants, collecting rents, coordinating repairs, and running the day-to-day property operations. In the marketplace, property managers typically receive a percentage of rent, so compensation for a child performing these duties can be based on what third parties charge for this work in that market. The second role is the leasing broker, who is responsible for renewing leases or bringing in new tenants. Again, this is a role where a third party can be hired or their rates can be duplicated for the child performing this duty. The third role is the asset manager. The asset manager oversees the entire property, including hiring and overseeing a third-party property manager and the leasing agent, if such roles were outsourced. The compensation for the asset manager can also be replicated by looking to what third parties in investment real estate joint ventures are paid, which may include a percentage of a property’s revenue.
When the family real estate business is not just about maintaining Legacy Properties but also about acquiring and developing new properties, these future investments also must be carefully considered in a client’s succession planning. There is often tension between
the child in the business, who may seek to reinvest profits back into the business to develop or acquire additional properties, and the child out of the business, who wishes to receive those profits so that such child can be in control of a portion of that child’s inheritance and no longer under the sibling’s management. As such, clients should consider whether the child involved in the business has the authority to invest proceeds from Legacy Properties into new deals or whether the children outside of the business should have any say over this. A common way to address this tension is to provide that certain major decisions of the business, such as refinancings that pull equity out, improvements on an existing property over a certain amount, or the purchase of a new property, require the consent of a majority, a supermajority, or all of the children.
Again, to incentivize the child involved in the business to go into future deals, the compensation structure used in third-party joint ventures can be replicated. Typically, for new development, an operating partner is managing the development of the property and receives compensation in the form of a carried interest or promote (which has favorable capital gain treatment) and may receive other fees such as development management fees (based on the cost of construction) if it is also acting as the development manager. Additionally, the operating partner typically has some of the operating partner’s own capital invested in the deal (i.e., skin in the game), so the partner also gets a return on the equity interest like the other investors. In the family real estate business context, if new deals are being financed from Legacy Properties, each child can invest equity into the new deal (or can have the option not to participate) and the child involved in the business would serve as the operating partner and be compensated with a promote and whatever other fees are appropriate. In third-party joint ventures, the fees and promote vary in structure and amount depending on the type of property and the particular market; that
Providing the children with some ability to part ways is an important consideration that can be done by including a buy-out provision in the business operating agreement.
market practice could be mirrored in a joint venture arrangement among family members.
Buy-Out Provisions
Regardless of the real estate portfolio and the succession planning, providing the children (or cousins, in the next generation) with some ability to part ways is an important consideration that can be done by including a buyout provision in the business operating agreement. There are various different buy-out provisions that can be used, and each one can be customized. Below is a brief description of some of the most common types, which can be tailored to strike the balance the client wishes to achieve between incentivizing children to not sell their ownership stake (by not making liquidation too easy) and by not forcing siblings to be in business together if it is damaging their relationship (by not making a sale too difficult).
Right of First Refusal. If a child wants to sell to a third-party willing buyer, a right of first refusal is triggered and other family members have the option to buy at that price or sometimes even at a discount. If not, the child can sell to the original third-party buyer for the price that was offered by that buyer.
Buy-Sell Appraised Value. If a child does not want to continue with the
joint venture, the child can trigger a buy-sell mechanism, where the child agrees to either buy the interests of the other children or sell his interest to the other children (as elected by the other children) based on a purchase price determined by one or more appraisers (the agreement can designate the appraiser or name a neutral party to select the appraiser, or the children can pick their own appraisers). Sometimes, family buyers can purchase the interests over a term of years. The terms (money down, payment term, interest rate, collateral, default, etc.) can be predetermined and set forth in the agreement.
Shotgun/Revolver Buy-Sell. Enumerated major decisions can require majority or unanimous consent, and in the event of a dispute on a major decision, any child can make an offer to either buy the other child’s interest or sell his interest, in either case at a price set by the offering child. The offering child sets the price and terms. The nonoffering child then has the option to either accept the offer to sell (in which case that non-offering child becomes the seller) or buy (in which case the non-offering child becomes the buyer) on the same terms presented by the offering child.
Revolver with Sell Option. This option is similar to the above, but it prevents
one side from taking advantage of the other side’s illiquidity. The non-offering party, if it wants to buy but does not have the cash, has the option to instead require that the joint venture market the property for sale on those same terms. If the venture finds an outside buyer, a right of first refusal would then be triggered, where the offering child could purchase it.
Auction Buy-Sell. Here the children get an appraised value (again, agreement can set forth how the appraiser is chosen), and this is the starting point for the auction. Terms of eventual acquisition (money down, interest rate, collateral, default, etc.) are predetermined before the auction begins. Then the children have a blind auction from there (one round or multiple rounds), with the highest bidder being obligated to buy out the other, and the other being obligated to sell.
Call or Put Option. Any child may have the right to cause the venture to call or redeem the interest of one or more of the other children or to “put” its interest to the venture, typically after some period of time or after the occurrence of certain other events. The call or put price would typically be based on the fair market value of the underlying property.
Estate and Gift Tax Considerations
Minimizing estate and gift taxes is a key consideration for all estate planning. The federal estate and gift tax is imposed at a rate of 40 percent on all assets gifted during life or bequeathed at death that are in excess of the lifetime gift and estate tax exemption (Lifetime Exemption). Note there is no gift or estate tax on assets given to a qualified charity or to a US citizen spouse. The current Lifetime Exemption is $13,610,000; however, this amount is scheduled to sunset effective January 1, 2026, to $5 million (subject to an inflation adjustment). In addition to the 40 percent federal estate tax, clients may also be subject to a state estate tax, which is imposed by 12 states plus the District of Columbia. Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York,
Oregon, Rhode Island, Vermont, Washington, and the District of Columbia each have an estate tax. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania also each have a statelevel inheritance tax.
One of the most common strategies used to minimize the estate tax for investment real estate is to gift an indirect interest in investment real estate during life to an irrevocable trust for the benefit of the client’s descendants. Gifting to a trust for the child instead of to the child directly is recommended for various reasons, including protecting the gift from creditors (i.e., the child’s spouse in the event of a divorce) and from estate tax in the child’s estate if a client has available generation skipping transfer (GST) tax exemption. Also, if a client’s spouse is living, it is recommended to include the spouse as a potential beneficiary of the trust (such trusts are known as so-called spousal lifetime access trusts or SLATs) to maximize the flexibility with the planning so that the client can access gifted property through the spouse. These trusts should be set up as intentionally defective grantor trusts (further described below) to take advantage of the grantor trust rules. Here, the client gifts an interest in a closely-held company like a limited liability company or a limited partnership that owns the real estate (Real Estate LLC). As such, the property gifted is an interest in the Real Estate LLC, which is typically valued with lack of control and lack of marketability discounts. The effect is to reduce the amount of the Lifetime Exemption that is used to move the property out of the taxable estate. In other words, by gifting an interest in the Real Estate LLC, which owns the real estate, rather than gifting the real estate itself, clients are able to transfer more value while using less Lifetime Exemption.
Gifts made to these irrevocable trusts during life will reduce the Lifetime Exemption, meaning the client will have less Lifetime Exemption remaining at death, but the benefit is that the property and all its future appreciation during the client’s life will not be subject to estate tax at the client’s death.
For clients with assets in excess of the current Lifetime Exemption, it is recommended that they make gifts before 2026 to take advantage of the current increase in the Lifetime Exemption before it sunsets. (Lifetime gifting will also reduce the state-level estate tax for clients living in states where there is no state-level gift tax but there is a statelevel estate tax, such as New York.)
Any appreciation of the property in excess of this passes to the trust without any transfer taxes. Often, the transaction is structured so that the grantor first contributes the property to a closely held company like a limited liability company or a limited partnership and the grantor sells a non-managing and non-marketable interest in this company to the trust. As such, the property sold is valued with minority and unmarketability discounts, which serves to further diminish the value of the property that is frozen in the grantor’s estate.
Although utilizing the Lifetime Exemption to move interests in investment real estate out of the taxable estate to irrevocable trusts during life is recommended, for clients with large estates, gifting alone will be insufficient to fully protect the client’s estate from the estate tax. In these cases, clients will need to engage in further lifetime planning to freeze the value of their real estate portfolio and, over time, move the investment real estate and its appreciation out of their taxable estate. This is known as an “estate freeze,” and there are a few different ways to accomplish it.
One common estate freeze technique is known as “a sale to an intentionally defective grantor trust.” It is designed to freeze the value of an interest in investment real estate in the client’s estate at its current value and shift any appreciation in excess of the applicable interest rate to a trust for descendants without any gift or estate tax. In a typical plan, the client establishes an intentionally defective grantor trust (IDGT) for the benefit of family members, which means the trust is structured so that the client is treated as the owner of the trust for income tax purposes but not as the
owner for estate tax purposes. (Code Sections 671–679 list the powers that will make a trust a grantor type trust and care must be used to only use those powers that do not also cause estate tax inclusion such as the power to lend to the grantor for inadequate security or the power of the grantor to substitute assets for equivalent value.) The client “sells” an interest in the Real Estate LLC to a creditworthy IDGT for its fair market value (which is typically valued using lack of control and lack of marketability discounts) in exchange for a promissory note bearing interest at the applicable federal rate. (Although there is no direct law that requires the trust that engages in a sale must be creditworthy, most practitioners advise that the trust have assets equal to at least 10 percent of the value of the assets being sold to the trust.) Because the client is treated as the owner of the trust for income tax purposes, the transaction is not an actual “sale” for income tax purposes, so no income tax gain is realized on the sale of the property to the trust. Likewise, the client does not recognize any income tax upon receipt of the annual interest payments on the promissory note from the trust, nor does the trust get an offsetting interest deduction.
The sale to the IDGT effectively freezes the value of the property on the date of the sale, with any appreciation of the property in excess of the promissory note interest rate passing to the trust without requiring any Lifetime Exemption and without any estate or gift tax. Additionally, because the client is responsible for paying the trust’s income taxes, the assets in the trust are permitted to grow income-tax-free while the client further depletes the taxable estate while paying this income tax liability each year from the client’s other assets. This effectively allows the client to make a tax-free gift to the trust each year equal to the trust’s income tax liability.
Another common freeze strategy is a so-called zeroed-out grantor retained annuity trust (GRAT) (governed by Code Section 2702), to which the client contributes an interest in the Real
Estate LLC. This is similar to the IDGT, except that instead of the client receiving back a promissory note, the client receives back an annuity equal to the value of the real estate plus the rate of return at the Section 7520 rate that is applicable to GRATs. Similar to the sale to a grantor trust, a GRAT serves to freeze the value of the property in the client’s estate at its current value with any appreciation over the rate of return passing free of estate and gift tax to a trust for the client’s children with no use of the Lifetime Exemption. (Note that with a GRAT, a client cannot allocate the GST exemption, so trusts here should benefit only children and not grandchildren or more remote descendants. Further, clients should understand the mortality risk of the clawback associated with using GRATs that can result in estate inclusion if the client does not survive the annuity period.)
Income Tax Considerations
The benefit of these traditional estate planning techniques such as gifts, sales to IDGTs, and GRATs is that assets are removed from the taxable estate and escape estate tax on the client’s death. One downside, however, is the assets that are not included in a client’s taxable estate do not receive a step-up in income tax basis at the client’s death under Code Section 1014, which effectively erases any built-in gain on appreciated assets. Instead, the recipient takes the asset with a “carryover” income tax basis, meaning the recipient holds the asset subject to the same built-in gains the client had. Typically, this trade-off is worth it, because saving a 40 percent estate tax is better than saving a 20–25 percent capital gains tax. When it comes to investment real estate, however, this calculus is not so straightforward and must be carefully considered. In some instances, the income tax savings of having investment real estate included in the taxable estate may be more than the estate tax that would otherwise be due on it. This is because the estate tax is on the net equity of the real estate (i.e., the value of the property less the debt), whereas the
income tax is on the total gain realized, which includes nonrecourse debt like mortgage loans from financings and prior depreciation.
Most real estate investors hold properties long term, which results in a decreasing tax basis. Because the Code assumes investment real estate is a depreciating asset, taxpayers can depreciate its value over a term of years through depreciation deductions, providing them with a loss that offsets income earned from the property. This depreciation causes the tax basis in the property to decrease over time. Additionally, as properties increase in value, owners are able to refinance for larger loan amounts, effectively pulling equity out of the property with no immediate income tax gain. This debt increases the owner’s liability in excess of basis in the property. As such, when the property is later sold, these past depreciations and financings, which reduced basis below the debt amount, will be realized upon the sale, and in many cases result in a tax liability greater than the sales proceeds received after the lender is repaid. This phenomenon is commonly referred to as “phantom income.”
By way of illustration, assume a client owns a $10 million building subject to an $8 million mortgage with a $1 million tax basis due to depreciation. If the client sells the property for $10 million, the $9 million gain ($10 million sales price less the $1 million carryover basis) would be subject to a 25 percent section 1250 capital gains rate for depreciable real property, plus a 3.8 percent net investment income tax, for a total tax due of $2,592,000. The client will net only $2 million of sales proceeds once the $8 million mortgage is paid off, however, leaving the client with more tax due than proceeds received.
The same result would be achieved if the property were sold after the client gifted or sold the property to an irrevocable trust, because the trust takes the property with the same carryover basis as the client. In contrast, if the client died owning the property, the estate tax on the property would be 40 percent of the net value of $2 million, or $800,000,
with no income tax due if the family sells it after death, because of the basis step-up, leaving the family without any phantom income and instead with $1.2 million of proceeds after the loan and estate taxes are paid. Additionally, the family would have a new $10 million basis, which could be depreciated against and used to offset future income earned from the property. But once again, this calculus is not so simple because it does not capture the potential estate tax savings that would be realized if the property continued to appreciate over the client’s lifetime after it was gifted, which might be significant; nor does it reflect the reality that real estate investors will rarely sell and realize income tax gain and instead opt for Section 1031 exchanges so that they pay no income tax on the sale. Nevertheless, as illustrated above, the basis step-up at death may save real estate families more money in the long run and free future generations from the liquidity handcuffs of liabilities in excess of basis and endless Section 1031 exchanges, which have been under attack in recent White House budget proposals. See Press Release, The White House, Fact Sheet: The President’s Budget Cuts Taxes for Working Families and Makes Big Corporations and the Wealthy Pay Their Fair Share (Mar. 11, 2024) (proposing to eliminate “like-kind” exchanges).
Even for clients who do not contemplate selling property except through a Section 1031 exchange, one uncertainty of transferring real estate with liabilities in excess of basis to an IDGT or GRAT is the potential of triggering a portion of the built-in gain upon the death of the client. This is because the income tax repercussions of such properties upon the termination of the grantor trust status because of the client’s death are uncertain under current law.
Estate Tax Deferral
Another consideration that should not be overlooked in planning with investment real estate is qualifying for the estate tax deferral under Code Section 6166 because of real estate’s illiquid nature. Simply put, if a client owns
(together with family) 20 percent or more of a closely-held business that makes up 35 percent or more of the client’s adjusted gross estate, rather than having to pay the estate tax attributable to the business nine months from the date of the client’s death, the client’s estate can defer payment of the tax over time. The timing of the deferral and the interest rate on the deferred tax vary, with the maximum deferral being no payment of tax due for the first five years, followed by payment of the estate tax in equal payments over the next 10 years. Since the key to qualifying for this deferral is the client owning an interest in a closely held business, this should not be overlooked in doing estate planning for investment real estate. For a detailed discussion on how to qualify for Section 6166 estate tax deferral when planning with investment real estate, see Stephen M. Breitstone, Mary P. O’Reilly & Andrew L. Baron, Common Pitfalls in Estate Planning with Investment Real Estate, N.Y.
A lesser-known estate-planning freeze technique known as a “freeze partnership” should be considered when planning for investment real estate clients. The freeze partnership moves appreciation of the real estate out of the taxable estate while avoiding the income tax pitfalls of the GRAT and the sale to the IDGT. By carefully following the provisions of Code Section 2701, the freeze partnership freezes assets at their current values in the client’s taxable estate while shifting appreciation to the lower generations. Further, because the client retains an interest in the freeze partnership, the planning can be structured to take advantage of the estate tax deferral under Code Section 6166. Id.
In a freeze partnership (which is often done in the form of an LLC), the person doing the planning (Senior)
transfers investment real estate into an entity created for this planning (Freeze LLC) in exchange for a preferred or “frozen” interest. The Freeze LLC also creates the junior interest, which is a common or “growth” interest entitled to the growth of the underlying asset in excess of the preferred rate of return (which is referred to as the hurdle rate). (The freeze partnership does not work well for low-yielding assets that do not generate sufficient income to pay the required hurdle rate to Senior. In those instances, a “reverse freeze,” where Senior retains the common interest and transfers the preferred interest to an IDGT, should be considered. See id. § 16.02[1][e].) This rate is determined by an appraisal of a market return and is actually one downside to this technique over a GRAT and a sale to the IDGT because it is almost always a higher rate. (This higher hurdle rate, also known as the “leaky freeze problem,” can be mitigated against by “leveraging up” or through a “capital
shift.” See id. § 16.02[1][d].) Senior then transfers this junior interest to an IDGT for his or her descendants, while retaining the preferred or “frozen” interest in Senior’s estate. Under income tax principles, the liabilities in excess of basis and the capital value of the property contributed by Senior are allocated to the preferred interest and are entitled to a basis step-up under Code Section 1014 at Senior’s death, and the growth in excess of the hurdle rate allocated to the junior interest is outside of Senior’s taxable estate in the IDGT. This eliminates the phantom income attributable to liabilities in excess of basis (in the case of outright real estate ownership) or negative capital accounts (for real estate owned by a partnership or limited liability company).
Joint Revocable Trust
Another alternative for planning with low basis real estate among spouses is for them to create a jointly established revocable trust (the joint revocable trust). (Note that for clients who live in community property states, all community property receives a step-up upon the death of the first spouse. The joint revocable trust replicates this concept for other property and for clients not living in community property states.) The benefit of the joint revocable trust is that assets held in the trust receive an income tax basis step-up upon the death of the first spouse. The downside of the joint revocable trust is that the strategy does not freeze estate values. Accordingly, without further planning after the death of the first spouse, the property contributed to the joint revocable trust will all be included in the surviving spouse’s estate.
With this strategy, two spouses create and fund the joint revocable trust, with each spouse owning a separate share of the trust. Each spouse has the right to amend or revoke his or her portion of the trust (without the consent of the other) while both are living. The first spouse to die is granted a testamentary general power of appointment (i.e., the right to appoint principal among a class including such spouse, his or her creditors, his or her estate, or
the creditors of his or her estate) over the entire trust (including the other spouse’s share). Because the order of death of the spouses cannot be known, each spouse executes a will exercising his or her power of appointment over the entire trust directing the property to be held in continuing trust for the surviving spouse (typically with a credit shelter trust or marital trust allocation).
Because the first spouse to die has a general power of appointment over all assets in the joint revocable trust, the entire trust is includable in his or her estate pursuant to Code Section 2041 and should qualify as property acquired from a decedent under Code Section 1014, resulting in a step-up in basis for all the assets in the trust.
Section 1014(a)(1) of the Code states, “[e]xcept as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall … be the fair market value of the property as of the decedent’s death.” Code Section 1014(b)(4) further states that “Property Acquired from the Decedent” includes “[p]roperty passing without
full an adequate consideration under a general power of appointment exercised by the decedent by will.” Thus, on its face, the structure of the Joint Revocable Trust and exercise of the general power of appointment fall squarely within the basis step-up of Code Section 1014. Keep in mind that Code Section 1014(e) precludes a basis step-up if there is property acquired by the decedent within one year of death and such property is then transferred to the original donor of such property upon the decedent’s passing. It has been the IRS’s position in Private Letter Rulings and also in a Technical Advice Memorandum that although joint revocable trusts may be used to pull assets into the estate of the first-to-die spouse and be available to fund credit shelter or marital trusts, a basis step-up is not permitted because of the application of Code Section 1014(e). See I.R.S. Tech. Adv. Mem. 9308002 (Nov. 16, 1992); I.R.S. Priv. Ltr. Rul. 200101021 (Jan. 5, 2001); I.R.S. Priv. Ltr. Rul. 200210051 (Mar. 8, 2002). But these IRS rulings have drawn wide criticism from many commentators for their faulty logic and lack of analysis. See Howard M. Zaritsky, Running with the Bulls: Estate Planning Solutions to the “Problem” of Highly Appreciated Stock, 31-14 Univ. of Miami L. Ctr. on Est. Plan. § 1404; Richard A. Williams, Stepped-Up Basis in Joint Revocable Trusts, 133 Trusts & Estates, no. 6, June 1994, at 66; see also Frederic A. Nicholson, Ruling on the Joint Spousal Trust Ignores Statutory Intent, 59 Tax Notes 121 (Apr. 5, 1993). The IRS argues that the joint trust structure creates a gift from one spouse to the other upon death that is then immediately reacquired by the surviving spouse. But the grant of a general power of appointment is generally not considered a gift of the property over which it may be exercised. Also, directing that the property pass to the trust for the surviving spouse’s benefit, rather than outright to the spouse, should seemingly satisfy the plain language of Code Section 1014(e). The IRS also argues that the property does not pass from the deceased spouse to the surviving spouse as required under Code Section 1014(a) because
the surviving spouse never relinquished control; however, this fails to consider the plain language of Code Section 1014(b)(9), which states that property acquired through power of appointment satisfies this Section 1014(a) requirement.
Lending Implications
When estate planning with encumbered real estate (whether the property is owned directly in the client’s name or in an entity in which the client owns an interest), care must be taken to ensure transfers do not run afoul of transfer restrictions contained in the loan documents. Even when transfers for estate planning purposes—such as transfers to family members, trusts for their benefit, or other affiliated entities—are expressly permitted, they may require that notice be given to the lender before making such transfer or that other conditions be satisfied. Each lender and each deal are different. As such, before making any transfers, the relevant loan documents should be reviewed. Depending on the terms of the loan documents, the consequence of failing to follow the applicable notice or consent provisions could trigger a default or due-on-sale clause that accelerates the loan, or, worse, it could trigger recourse liability to the borrower or to a guarantor without anyone realizing it.
See Current Issues in Like-Kind Exchanges, SN023 ALI-ABA 879 (2007) (“A lender restriction might require that the loan becomes recourse to non-transferring [members] … in situations in which the transfer is not approved by the lender.”).
It is important for clients to understand that dealing with the lenders will take time and constitute a cost of the planning unless they handle it themselves. This is true even when mere notice to the lender (rather than their consent) is all that is required. Many lenders will request so called “knowyour-client” (KYC) inquiries and ask for updated organizational charts, formation documents of newly formed entities, and copies of the transfer documents. They may even ask for a legal opinion for due authority and valid existence of the new structure. Lenders
also may be permitted to charge fees under the loan documents for time spent reviewing the transfers.
Often, planning is done at the last minute, and it may not be possible to give notice or obtain lender consent in the short time frame allowed. Although not ideal, there are a handful of workarounds that may be considered in this scenario. One potential solution is to make the transfer subject to a condition subsequent that provides that if the lender does not subsequently give consent, the transfer of the property relating to that borrower is retroactively null and void. The benefit of this is that the transfer should relate back to the initial transfer date, but the downside is that it runs the risk of being considered an unpermitted transfer under the loan documents even if voided. Another solution is to transfer the interest subject to a condition precedent in the transfer documents, meaning the transfer is made upon the approval of the lender or upon expiration of the applicable notice period. This avoids the risk of an unpermitted transfer, but the downside is that the effective date of the transfer is upon expiration of the notice period or lender approval, as applicable.
Another consideration when planning with investment real estate is making sure the restructuring does not affect any net worth and liquidity requirements set forth in any guarantees to which any applicable family members or trusts have delivered, such as nonrecourse carveout guarantees that any family members or trusts may have delivered in connection with property financings. Some of these guarantees might also limit the ability of the guarantor to transfer assets if it would result in the net worth or liquidity requirements being breached.
A further aspect of the client’s business that must be considered when doing planning is the interplay of the finances between their various properties. Often real estate investors use the income from certain properties to help grow or develop other properties and improve their overall portfolio. Whether by using liquidity from
one property to improve or purchase another property, cross-collateralizing loans, or having one entity guarantee the loan of another entity, there may be significant interplay between the client’s various properties that must be considered in the estate planning. Understanding these relationships between the properties should not be overlooked when determining which properties to plan with. Also, knowing these details allows steps to be taken to prevent the operations of the real estate business from causing estate inclusion under Code Sections 2036 and 2038. For example, if a property that has been transferred outside of the estate is being used to guarantee loans of entities still owned by the client, a guarantee fee agreement can be implemented to keep the transaction at arm’s length and not leave it vulnerable to IRS attack. Additionally, when cashflow of one entity is used to improve a property owned by a different entity with no common ownership, this should be booked as a loan between the entities and should be tracked and paid.
As detailed above, there are many challenges in estate planning for the real estate investor. Paramount is making sure the business succession planning is structured to minimize potential fighting among children. Minimizing the estate and gift tax is also a key focus, but income tax planning and estate tax deferral also must be considered, particularly when a client’s real estate has liabilities in excess of basis. Finally, loan documents must be reviewed and the finances of the properties must be considered to make sure the planning does not have any negative financial consequences for the client. n
Five Common GST Allocation Mistakes and How to Avoid Them
By Carol G. Warley, Amber Waldman, and Rachel Ruffalo
The generation-skipping transfer tax (GSTT) is complex and often misunderstood. The GSTT was enacted to prevent attempts at avoiding estate tax. It ensures that large transfers of wealth are taxed at a similar rate, regardless of whether assets pass to children or to more remote descendants. To safeguard specific transfers from the GSTT, section 2631(a) established a lifetime generation-skipping tax (GST)
Carol G. Warley is RSM’s Washington National Tax private client services tax practice leader. She is located in Houston, Texas. Amber Waldman is a member of RSM’s Washington National Tax Practice. She is located in McLean, Virginia. Rachel Ruffalo is a member of RSM’s Washington National Tax Practice. She is located in Miami, Florida.
exemption, analogous to the exemptions provided under the estate and gift tax frameworks. Taxpayers can allocate their available GST exemption during life or at death to shield assets from the GSTT.
To ensure the GST exemption is used effectively, it is essential to plan meticulously to prevent its underutilization or incorrect application. Below, we explore five common GST exemption allocation mistakes and outline strategies to avoid them.
Mistake 1: Failing to Account for the GST Exemption Already Automatically Allocated to Prior Unreported Gifts under the Gift Tax Filing Threshold
Generally, gifts less than the annual exclusion under section 2503(b) are not
required to be reported on Form 709. Many taxpayers are inclined to avoid filing a gift tax return when it is not required. But neglecting to report certain generation-skipping transfers on Form 709 may lead to complications in tracking the associated allocation of the GST exemption over time.
The automatic allocation of the GST exemption to direct skips under section 2632(b) and indirect skips under section 2632(c) occurs whether or not the transfer is reported on Form 709.
To illustrate, consider two unreported gifts. First, in 2023, a taxpayer made a $10,000 gift to a trust for the benefit of grandchildren. In the same year, the taxpayer makes a $10,000 gift to a trust for the benefit of children and descendants that is, by definition, a “GST trust” under section 2632(c)(3)(B). Both gifts
Consider filing a gift tax return, even if it is not required, to track the automatic allocation of the GST exemption.
qualified for the gift tax annual exclusion under section 2503(b) because of the beneficiaries’ right to withdraw the transfers. Since there are no taxable gifts, the taxpayer did not file a 2023 Form 709. But the transfers did not qualify for the GST annual exclusion under section 2642(c). Because these gifts were not reported on a gift tax return, the automatic allocations that occurred under section 2632(b) and (c) could be overlooked or forgotten.
Older gifts made below the annual exclusion amount often go unreported and are easily forgotten. These gifts can come back to haunt taxpayers many years later, however, when planning to make multigenerational gifts. Recreating a detailed gifting history to determine a taxpayer’s remaining GST exemption can be a costly and timeconsuming process.
Planning point: Consider filing a gift tax return, even if it is not required, to track the automatic allocation of the GST exemption. If a taxpayer decides not to file, maintain records of the automatic allocation that occurred.
Mistake 2: Overfunding a Trust Intended to Be GST Exempt with Not Enough GST Exemption Remaining
Taxpayers often make gifts without consulting their advisors, leading to a common misunderstanding: The remaining gift tax exemption and remaining GST exemption are not always the same. This can cause confusion about how much can be
transferred to a trust without causing a portion of the trust to be subject to GSTT. A taxpayer might be able to transfer a certain amount without paying gift tax, but the amount they can transfer while keeping the trust GST exempt is often different. Further, as highlighted in mistake one above, there may be prior unreported transfers, whether under the annual exclusion or more significant transfers that were not captured on a Form 709. These transfers may have used a significant portion of the remaining GST exemption but were not accounted for on the most recently filed gift tax return. This oversight underscores the importance of conducting a comprehensive review of prior GST exemption allocations before making significant transfers.
Overlooking prior automatic allocations of the GST exemption could result in future challenges for taxpayers. They could find themselves with less GST exemption than expected when making future multigenerational transfers. This could introduce complications where there is not enough GST exemption to protect a future transfer, resulting in a mixed inclusion ratio and an unintended future GSTT liability. For example, the same taxpayer from mistake one above decides to create a new trust that is intended to be exempt from the GSTT. The taxpayer contacts a tax advisor and ask how much gift exemption remains. Because all prior gifts were under the annual exclusion, the tax advisor informs the taxpayer that the full $13.61 million 2024 lifetime
exemption remains. The tax advisor was not aware of the 2023 gifts that used $20,000 of the taxpayer’s lifetime GST exemption. The taxpayer funds the new trust with $13.61 million and wishes to allocate $13.61 million of GST exemption to the trust. The full $13.61 million GST exemption is not available, however, due to the 2023 gifts. The new 2024 trust now has a mixed inclusion ratio and is not fully exempt from the GSTT.
Planning point: A thorough examination of all prior transfers and their effect on the current available GST exemption is essential for multigenerational planning. Ensure that all advisors are informed of the past allocations of the GST exemption, especially if not shown on a Form 709. This proactive approach ensures that future planning endeavors consider the taxpayer’s accurate remaining GST exemption.
Mistake 3: Neglecting to Make an Affirmative Section 2632(c) Election and Relying Solely on Automatic Allocation Rules
The automatic allocation rules under section 2632(c) were designed to simplify the process of allocating the GST exemption to lifetime transfers. The rules under section 2632(c) automatically apply a transferor’s GST exemption to certain transfers considered “indirect skips,” which are transfers in trust that are not considered direct skips but that could potentially have a generation-skipping transfer with respect to the transferor. These rules apply to trusts that meet the definition of a GST trust under section 2632(c)(3) (B). The goal of these rules is to protect certain assets from the GSTT. But relying on the automatic allocation rules for indirect skip transfers without making an affirmative election can lead to unintended consequences and limit future estate planning opportunities. Automatic allocation of the GST exemption becomes a problem when the transferor’s intentions do not align with the outcomes dictated by these rules. Two examples illustrate the potential pitfalls of an automatic allocation. First, consider a trust designed to
benefit the transferor’s children (nonskip persons) and descendants. The transferor believes that the children will deplete the trust assets, leaving nothing for the skip person descendants. The trust does not meet any of the exceptions under section 2632(c) (3)(B), so absent an election out of the automatic allocation rules, the transferor’s available GST exemption would be applied to transfers made to this trust, potentially wasting the exemption on a trust that will never make generationskipping transfers. This misallocation would reduce the GST exemption available for other transfers that would directly benefit skip persons, leading to a potential GSTT liability in the future.
Next, consider a trust that does not meet the specific criteria to be classified as a GST trust under section 2632(c)(3) (B). The trust, however, contains provisions to allow it to benefit skip persons. If the transferor relies on the automatic allocation rules without making an affirmative election, GST exemption would not be allocated to this trust. This oversight could result in trust distributions to skip persons being subject to the GSTT.
Under section 2632(c)(3)(B)(iv), a trust will not be a GST trust if any part of the trust would be included in the estate of a non-skip person if that person were to die immediately following the transfer. Certain withdrawal rights are treated as equivalent to a general power of appointment before they expire, meaning the value would be included in the non-skip person’s estate. If a donor makes a gift to a trust that grants certain withdrawal rights, the trust would not be a GST trust in the years that withdrawal rights in excess of the section 2503(b) annual gift tax exclusion would be included in the non-skip person’s estate. Consequently, GST exemption would not be automatically allocated to such transfers. This can cause problems for trusts that would otherwise be considered GST trusts, and the transferor is relying on automatic allocation rules to protect the trusts from the GSTT.
Another common pitfall in the realm of automatic allocation of GST
exemption involves the failure to make an affirmative opt-out election for transfers subject to an estate tax inclusion period (ETIP), such as transfers made to grantor retained annuity trusts (GRATs) or qualified personal residence trusts (QPRTs). The ETIP is a critical timeframe during which the value of the transferred property could be included in the transferor’s gross estate. Section 2642(f)(1) provides that any allocation of the GST exemption to property subject to an ETIP cannot be made until the ETIP concludes. This delay is significant because the value of the property, and consequently the strategic allocation of the GST exemption, can be accurately assessed only at the end of the ETIP, when, it is hoped, the assets have appreciated in value. Many taxpayers overlook the necessity of making an explicit opt-out election during the ETIP, leading to automatic allocations of GST exemption at the end of the ETIP. Such automatic allocations may not align with the transferor’s intentions, potentially resulting in the inefficient use of the GST exemption. For example, a taxpayer transfers an $8 million asset to a two-year GRAT in exchange for a qualified annuity in 2024. The taxable gift is $1. The taxpayer does not make a section 2632(c) election out on the taxpayer’s 2024 Form 709. The ultimate beneficiary of
the GRAT is a GST trust under section 2632(c)(3)(B), but the taxpayer does not believe it will ever benefit skip persons. In 2026 when the GRAT term ends, it is successful and transfers $10 million to the ultimate beneficiary. The $10 million of the transferor’s GST exemption is automatically allocated to the transfer, which is a waste of the GST exemption to the extent non-skip persons deplete the trust.
Planning point: Determining whether the automatic allocation rules apply to a transfer is not a straightforward exercise. Instead, transferors can proactively control the application of the automatic allocation rules to indirect skip trusts by making an affirmative section 2632(c) election on a timely filed Form 709. They have the option to “opt-in,” under Treas. Reg. section 26.2632-1(b) (3), to treat the trust as a GST trust and allow the automatic allocation of their available GST exemption to both current and future transfers. Alternatively, they can “opt-out,” under Treas. Reg. section 26.2632-1(b)(2)(iii), to have the automatic allocation rules not apply to both current and future transfers. To avoid potential complications, consider making a preemptive affirmative optout election for transfers subject to an ETIP, especially if the trust will never benefit skip persons. Further, consider setting reminders for when the ETIP
ends so that an informed decision can be made as to whether the transferor should allocate the transferor’s GST exemption to the trust.
To ensure the transferor’s intentions are accurately reflected, it is crucial to carefully consider making an affirmative election when initially funding an indirect skip trust. If an affirmative election is not made on the gift tax return reporting the initial transfer to the trust, it should be made as soon as possible to ensure allocation of the GST exemption is in line with the transferor’s intentions.
Mistake
4: Gifting to a Spousal Lifetime Access Trust (SLAT) without Understanding the GST Exemption Gift-Splitting Implications
Spousal lifetime access trusts (SLATs) are a common estate planning vehicle because they allow assets to be gifted and thus removed from an estate while offering the flexibility of spousal access to distributions, if needed. Issues may arise, however, when the transferor plans to make a gift-splitting election in the same year the transferor makes a transfer to a SLAT. This combination can often lead to unintended GST exemption allocation consequences.
Generally, section 2513(a) allows spouses to treat gifts made by one spouse to a third party as being made one-half by each spouse. This election applies to all gifts made by either spouse during the year. Section 2652(a) (2) states that when a gift-splitting election is made and one-half of such gift is treated as made by the donor’s spouse, it should be treated consistently for purposes of generation-skipping transfers. Treas. Reg. section 26.2652-1(a) (4) provides that when a gift-splitting election is made, the donor is treated as the transferor of one-half of the value of the entire property and the spouse is treated as the transferor of one-half of the value of the property, regardless of the interest the electing spouse is actually deemed to have transferred under section 2513. The regulations are silent as to the GSTT treatment when the entire gift is not eligible for gift
splitting, and a gift-splitting election is made for other gifts that are eligible for gift splitting.
Gifts to SLATs are often not eligible for gift splitting under section 2513 because the donor spouse has a beneficial interest in the trust that is not severable. Only the severable portion, for example, withdrawal rights to individuals other than the spouse, can be split. The portion allocable to the spouse and the portion not allocable to a specific beneficiary cannot be split. This creates a potential misunderstanding of who the GST transferor is with respect to transfers to SLATs and how GST exemption is allocated between spouses when a gift-splitting election is made.
For example, a donor makes a $1 million gift to a trust in 2024 for the benefit of the donor’s spouse and descendants. The donor’s two children can withdraw $18,000 each of the 2024 contribution to the trust. Additionally, the donor made $36,000 gifts to other family members with the intent of making a gift-splitting election to treat those gifts as made $18,000 by the donor and $18,000 by the spouse, all qualifying for the gift tax annual exclusion. How is the donor’s and spouse’s GST exemption allocated to the transfer to the SLAT?
Following Treas. Reg. section 26.26521(a)(4), because a portion of the gift is eligible for gift splitting, the donor is treated as a 50 percent GST transferor and the spouse is treated as a 50 percent GST transferor. Although only the $18,000 withdrawal right portions of the $1 million gift are eligible for gift splitting, $500,000 of the donor’s GST exemption can be allocated to the transfer and $500,000 of the spouse’s GST exemption can be allocated to the transfer. The donor may be surprised by this result. Having two transferors of a trust, rather than just one, can complicate future planning and available remedies. Planning point: When funding a SLAT, carefully consider the impact of gift splitting on the allocation of the GST exemption. If possible, make the transfer in a year when gift splitting is not needed for other gifts to simplify the analysis needed to properly report
the allocation of the GST exemption to the SLAT.
Mistake 5: Wasting the GST Exemption by Making Distributions to Non-skip Persons
from a GST-Exempt Trust
When developing an estate plan, understanding the taxpayer’s intentions for each generation is fundamental in planning to maximize the use of the taxpayer’s available GST exemption. Ultrawealthy taxpayers may unintentionally waste their precious GST exemption when they establish trusts that provide benefits to both non-skip and skip persons. This oversight happens because any distribution to a non-skip person from a trust that is exempt from the GSTT is effectively a waste of the taxpayer’s exemption. The original intent behind allocating the transferor’s GST exemption to the trust was to shield the assets within the trust from being subject to the GSTT. Distributions made to non-skip persons, however, do not need to be shielded from the GSTT.
Planning point: When possible, exempt assets should be set aside for skip persons. Creating separate trusts for non-skip and skip persons could provide a more efficient use of a transferor’s GST exemption.
Conclusion
Navigating the complexities of the GSTT can be challenging. Unfamiliarity with the rules can lead to unintended tax consequences or inefficient use of a transferor’s valuable GST exemption. Awareness and careful consideration of these rules can help to prevent such outcomes. n
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The Value of Adding Basic Funeral Planning to Your Practice
By Damon J. Wenig
AWestern legal concept established well over 2,000 years ago recognizes that people should have control of their disposition after they die. This idea, created by ancient Romans, allowed people to predetermine what happens to their bodies after death. As long as the decisions were properly established before their death, the individual could prescribe the manner of disposition and ceremony after their death. But what happens when these disposition directives are not established? Or further, what if they were not established correctly?
Under common law, a dead human body is quasi-property belonging to the nearest relative. In mortuary law, this construct is known as the right and duty of disposition, which grants rights to the nearest family members to make disposition decisions after death.
Although a line of authority seems to be relatively straightforward, it has become less linear as families have denuclearized and more options for disposition have been made available. The authority established by these disposition directives during the preplanning process have become increasingly important in establishing legal authority at the time of death.
Needless to say, integrating funeral preplanning in the estate planning process has become even more important for attorneys and deathcare providers. This article will give a high-level education of disposition directives and, more importantly, explain how attorneys can work with deathcare providers and their clients to incorporate funeral preplanning and funding into their practices, thus avoiding complex legal and financial difficulties that often arise at the time of death.
Damon J. Wenig, MBA, CFSP, is the National Preneed and Funeral Expense Trust Director at Krause Financial. He is also a licensed funeral director.
All states have a route for disposition directives to ensure that people or those in charge after their deaths can control dispositions.
Disposition Directives
Funeral directors generally take direction from the next of kin regarding the final disposition and ceremony of the deceased. The family succession line determines who is responsible and able to make crucial decisions at the time of death.
In a case where a competent spouse remains, or one adult child or sibling, the progression is most often linear and straightforward. But as families continue to denuclearize and become more socially complex, these succession lines of authority become increasingly more complicated.
Circumstances surrounding the death of an unmarried child whose disposition rights fell to divorced parents are often complicated, further compounding the difficulty amid the pressure of trauma and grief. Or, perhaps, other relationally complex situations arise between siblings’ varying faith beliefs and their applicability to their parents’ final wishes.
Case Study: The Jones Family Dilemma
Upon the sudden passing of their elderly mother, the Jones family found themselves entangled in a dispute regarding the mother’s wishes surrounding her final disposition. Mrs.
Jones, previously widowed, had two daughters. One daughter served as her primary caregiver and confidante. The other daughter lived out of state and had a socially fractured relationship with the family.
Before her death, Mrs. Jones had shared her desire to have the same type of funeral as her late husband, a traditional burial funeral and mass. After Mrs. Jones died and the out-of-state daughter was notified, she insisted that a cremation take place to reduce the costs and ecological impact.
The family was at a standstill. The local daughter, who had a close relationship with her mother, was compelled to follow her mother’s requests before death but was unable to move forward despite knowing her mother’s desire. Legally, in most states, each child has an equal right—an equal vote of sorts. Thus, each vote is now competing.
In this scenario, the funeral home was unable to move forward with preparing Mrs. Jones’s body for burial or cremation because a legal majority of the next of kin did not agree on the method of final disposition. This left everything hanging in the air, while tensions continued to rise and relationships continued to disintegrate.
This familial conflict highlights the complexities of modern funeral
planning and the need for advance legal directives to navigate competing interests.
The Solution: Proper Funeral Planning
These complexities are quickly resolved with proper planning and diligence. The resolution to this dilemma could have been simple. Ahead of death, advance directives through appropriate planning and Right of Disposition paperwork could have been executed according to state law. Mrs. Jones could have either excluded certain individuals from having rights in the process or given all authority to one person, thus alleviating relational conflict for survivors and the guilt associated.
Even if the next of kin are in agreement, they may misunderstand their loved one’s wishes. Or, perhaps, those wishes changed over the years, and different directions were given to different people. Even in the most functional, loving family, the time of grief and death elicits emotionally charged outcomes. Having appropriate discussions and preparing the proper legal documents ahead of time help reduce the natural tension and dynamics that arise amid grief, as in the case of Mrs. Jones. Although each state has its own unique legal documents and nuances in the law surrounding final disposition authority, all states have a route for disposition directives to ensure that people or those in charge after their deaths can control dispositions.
Michael D. Sharkey, who is both a mortuary law attorney and a licensed funeral director, strongly advocates for attorneys to include basic legal funeral planning discussions within the realm of estate planning practices. He asserts, “Simply put, setting up the Right of Disposition before the death helps eliminate the disputes at the time of death.” Sharkey recognizes that funeral planning is often overlooked by many attorneys as a potential addition to their service offerings. Yet, he argues, “It’s an important value-added service. If for no other reason than you are trying to just give a comprehensive understanding of a person’s legal rights
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and obligations, you are making a true impact.”
The Will Is Not the Right Place for Disposition Instructions
You might consider that discussing these matters with clients and including them in the will is sufficient. The necessity of preparing separate, accessible documents cannot be overstated. Sharkey explains, “When you put the disposition directions in the will, the intention was good, but the actual reality is that it just doesn’t work. The authorization of disposition should be kept in a place that is highly accessible, and ideally with the funeral home of choice in a preneed file.”
As there is no federal legislation that guides the right to disposition, this also means that a firm understanding of one’s state laws and how they correlate to your clients’ needs is crucial. For example, in Wisconsin, Wisconsin Statutes § 154.30 prescribes specific outlines for these rights but also gives a person authority through a specified advance directive form to control arrangements.
During the critical moments following a death, funeral providers immediately turn to the legal next of kin for urgent decision-making, sometimes within an hour of the event. If neither the family nor the funeral home possesses any preexisting disposition directives, the default process is guided
by the next of kin, often before the will is ever viewed or discussed. Typically, it is several days after the death before the will is reviewed with the family, by which time the funeral arrangements are likely to have already been set in motion.
In this case, Wisconsin’s Authorization for Final Disposition provides a clear and proper pathway for these instructions to take place. For these reasons, it is vital that disposition directives are meticulously drafted by the attorney and then shared and communicated clearly with the family. This proactive approach ensures that all parties are informed and aligned regarding the deceased’s final wishes and who is authorized to make decisions concerning their disposition. Additionally, if a specific funeral home has been chosen prior to death, these directives should also be forwarded to the establishment to be kept on file, thus facilitating a seamless adherence to the predetermined plans at the time of death.
Beyond the Paperwork
The title of these deathcare directives often denotes specifics around disposition preferences, but it’s important to remember that they extend much broader than one’s choice for final disposition. Some individuals choose to narrow in on specific details surrounding funeral details, such as the desired location of their funeral, funeral food
preferences, or even specifics around what jewelry should be buried or cremated with the individual.
Further, as cremation continues to gain popularity, these directives can also give directions as to what should be done with the cremated remains. Some families choose to have an urn buried in a cemetery or placed in a niche in a mausoleum. Some choose to scatter the remains in a mutually agreed-upon scenario, and others choose to keep the cremated remains or give them to family members. As the options continue to broaden, having a thorough, detailed outline becomes even more important.
Though drafting and retaining these legal documents is an important service inclusion, adding funeral planning extends beyond individual preferences; it carries legal weight. Attorneys excel at protecting clients’ interests, necessitating readiness for all potential scenarios, even the sensitive ones. Incorporating funeral planning into your services not only ensures the legal preservation of your clients’ last wishes but also provides indispensable reassurance to their families.
It’s crucial to understand that diving deep into funeral planning isn’t always advisable for you or your client. But fostering referral networks and connecting clients with reputable funeral service providers not only offers outstanding service to your client but also opens the door to new business opportunities for you.
The level of involvement of attorneys in assisting clients with funeral planning can vary greatly. Some lawyers simply initiate discussions, encouraging clients to think about these matters and making referrals. Others help individuals set up and fund a funeral expense trust or preneed policy, ensuring the financial viability of the funeral plans and protecting assets for potential Medicaid eligibility. Incorporating general funeral planning into your practice allows you to customize your level of engagement yet enhance the quality of your relationships with clients and funeral professionals in your community.
Funeral Planning in Crisis Situations
In scenarios necessitating crisis planning, your clients and their families are confronted with the complexities of Medicaid eligibility. Funeral planning offers an opportunity to allocate funds for funeral expenses through options like a funeral expense trust or preneed arrangement, helping to safeguard assets for Medicaid qualification and instilling peace of mind for the client and their loved ones. Some clients choose to extend the discussions with local funeral providers to ensure comprehensive arrangements. This allows them to have even greater control and clarity regarding their wishes. By addressing their final wishes, you not only fulfill their desires but also expedite Medicaid eligibility.
Dale M. Krause, founder and CEO of Krause Financial, primarily assists estate planning and elder law attorneys in Medicaid planning with their senior clients, and he views funeral planning as a crucial part of that process. Krause is an attorney in the field of elder law and crisis Medicaid planning. He explains, “Funeral planning is
an essential piece of the crisis Medicaid planning process since it helps clients set aside funds for these inevitable expenses, safeguard their legacy, and ensure a dignified farewell—all while navigating the Medicaid spend-down.”
Proactive Funeral Planning
Proactive planners understand the importance of charting their course, even amid uncertainty. Although they may not currently face a crisis, these clients recognize the value of forward thinking and are looking for ways to set up plans for greater ease and agility when the need arises. Whether they’re establishing initial planning documents or transitioning into retirement, providing funeral preplanning services empowers them to dictate their final arrangements. This proactive approach eases the burden on their loved ones, sparing them from difficult decisions during challenging periods.
According to Krause, there is also a crucial benefit in incorporating the funeral plan while having these proactive estate planning discussions. Krause says, “By planning proactively, your clients not only secure their legacy but
also lay the groundwork for potential Medicaid qualification in the future.” In essence, proactive planning can help avoid a future crisis and still help the client qualify for Medicaid if necessary. He adds, “Thoughtful funeral preparation will empower them to navigate life’s uncertainties with confidence, ensuring both financial security and peace of mind for themselves and their loved ones.”
Conclusion
For attorneys, basic funeral planning extends far beyond merely drafting legal documents—it’s about accompanying your clients through one of life’s most poignant passages with heartfelt compassion and unwavering expertise. Moreover, it presents an occasion to forge deeper connections with clients and fellow local professionals, offering a caliber of service that distinguishes you from other estate-planning and elder law practitioners. You have the power to redefine the essence of comprehensive care for your clients, ensuring that their ultimate desires are cherished with utmost dignity and profound respect. n
LAND USE UPDATE
The Supreme Court Speaks on Legislative Exactions
An exaction requires a developer to pay or provide for a public facility or amenity as a condition of receiving permit approval. Exactions are widespread and an important supplement to property and other local taxes. They are a vital financial resource for local governments, especially when statutory and constitutional tax provisions limit property taxes. Exactions can add thousands of dollars to the price of a new house. Exactions are either administrative or legislative. An administrative exaction is a condition required to approve a building permit based on an individualized assessment. A law applies a legislative exaction to some or all new residential developments without an individualized assessment. Sheetz v. County of El Dorado, 144 S. Ct. 893 (2024), in an opinion by Justice Barrett, held that the takings clause applies to legislative exactions. Courts divided on this issue before Sheetz, as discussed in my Land Use Update on exactions (37 Prob. & Prop. 58 (March/April 2023)).
The Sheetz Decision
In Sheetz, a legislative traffic impact fee required as a building permit condition funded road and transit improvements. The county did not do an individualized assessment but based the fee on countywide estimations.
The California appellate court held that the county correctly applied a statutory test for impact fees, Sheetz v. County of El Dorado, 300 Cal. Rptr. 3d 308 (Ct. App. 2022), vacated and remanded, 144 S. Ct. 893 (2024), but
Land Use Update
Editor: Daniel R. Mandelker, Stamper Professor of Law Emeritus, Washington University School of Law, St. Louis, Missouri.
Sheetz claimed that the fee was an unlawful “exaction” of money that had to comply with the US Supreme Court’s takings clause decisions on exactions, Nollan v. California Coastal Comm’n, 483 U. S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994). Justice Barrett agreed and held that the takings clause “does not distinguish between the legislative and administrative permit conditions.”
Justice Barrett distinguished building permit conditions, such as impact fees, from land use restrictions. Land use restrictions are not a taking if they are “reasonably necessary to effectuate a substantial government purpose,” but they are a taking if they sap too much property value or frustrate investmentbacked expectations. Permit conditions are more complicated. If denying a permit would advance a “legitimate police-power purpose,” the government may impose a condition to serve the same purpose instead. This permit condition is “a hallmark of responsible land-use policy.” The landowner must accept the bargain or abandon the proposed development. The bargain has a “different character” when the reasons for withholding or conditioning a building permit are unrelated to the government’s land-use interests. It then amounts to “an out-and-out plan of extortion.”
Justice Barrett held that Nollan and Dolan addressed possible abuse of the permitting process with tests modeled on the unconstitutional conditions doctrine. She discussed Dolan, which requires a “rough proportionality” for permit conditions based on the impact of a development on the governmental land-use interest. A permit condition that requires more than is necessary to mitigate harm from new development
has the same potential for abuse as a condition unrelated to that purpose. She did not discuss Nollan.
Justice Barrett next provided a detailed discussion of the takings clause, concluding that “Nothing in constitutional text, history, or precedent supports exempting legislatures from ordinary takings rules” and adding that the county “no longer contends otherwise.”
Justice Gorsuch agreed in his concurrence. He argued that nothing about the Nollan/Dolan test depended on whether the challenged condition was imposed on a large class of properties, a single tract, or something in between. “The logic of today’s decision” was consistent with these cases.
The Takings Clause and Impact Fees
Justice Barrett’s decision answers the limited question presented to the Court. She did not go beyond the question, explaining that “We do not address the parties’ other disputes over the validity of the traffic impact fee, including whether a permit condition imposed on a class of properties must be tailored with the same degree of specificity as a permit condition that targets a particular development.” Justice Sotomayor’s concurrence, Justice Jackson joining, added that the question presented did not include the antecedent question of whether the traffic impact fee could trigger Nollan/Dolan scrutiny as a compensable taking imposed outside the permitting context.
Justice Kavanaugh’s concurrence, Justices Kagan and Jackson joining, argued that the Court’s decision did not “address or prohibit the common government practice of imposing permit conditions, such as impact fees, on
new developments through reasonable formulas or schedules that assess the impact of classes of development rather than the impact of specific parcels of property.”
In the oral argument in Sheetz, Justice Kagan directed a question to counsel for the county, expressing the view that Nollan and Dolan do not apply to legislative impact fees. She argued that “Nollan and Dolan were focused on individual parcels, individual property owners, and this is a general scheme, and it would be very difficult to apply Nollan and Dolan analysis literally to a
general scheme.” Counsel agreed, but Justice Kagan omitted her argument in a concurrence.
Applying Nollan and Dolan to Impact Fees
It is not clear whether impact fees satisfy the Nollan/Dolan tests. Impact fees should meet the Nollan nexus test. In Nollan, the California Coastal Commission required an easement across a beach to provide a view of the ocean as a condition for a permit for a beachfront house. The Court held that the required nexus was lacking because
an ocean view does not require beach access. Meeting the nexus test for exactions since Nollan has not been a problem, and the impact fee in Sheetz should meet this test because it furthers the county’s road and transit improvements program.
Dolan’s rough proportionality test raises more problems. The Court in Dolan rejected a greenway easement that the city required for an enlarged store within the existing 100-year floodplain and on all property 15 feet above the floodplain boundary as a condition to a permit. The city code required
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15 percent of the site to be maintained as open space, and the Court held that the undeveloped area of the floodplain required by the city code would nearly have satisfied the easement requirement. This restriction suggests that a court could reject an impact fee if there is an adequate alternative, such as public funding.
The Dolan Court also rejected the required dedication of a pedestrian/ bicycle pathway adjacent to the floodplain as a condition of receiving the permit. The city did not meet its burden that the development generated an additional number of vehicle and bicycle trips that were reasonably related to the project. Legislative impact fees cannot meet this burden because they are based on assumptions for classes of development, not on individualized assessments for specific projects.
Impact Fees under the California Mitigation Fee Act
In Sheetz, the California appellate court analyzed the El Dorado County traffic impact mitigation fee under the California Mitigation Fee Act, which provides rules for impact fees. Cal. Gov. Code §§ 66000 to 66008. As the county explained in its brief to the California appellate court, the General Plan identified and funded projects needed to address increased traffic levels caused by new development. County Department of Transportation experts projected growth attributable to new development across a “20-year time horizon” using “land use growth” forecasts based on existing development, housing, and building permit data.
Traffic-modeling experts applying “industry standard” methods identified “basic road system improvement needs resulting from the growth forecasted” and identified specific road-improvement projects necessary to accommodate projected traffic increases from new development. After estimating the total costs of roadway projects attributable to new development, the county department allocated these costs across the various categories of anticipated development.
The allocation process relied on an “eight-zone structure” that divided the county along geographic lines based on the “different land use characteristics of various areas of the County,” and department experts calculated the percent of new traffic growth attributable to each zone tied to specific road segments. Fee rates for categories of development projects were calculated by dividing the “total costs [of all traffic improvement projects] for each zone” by the “projected growth” of each category of development and the “applicable trip generation rates for each use.”
In Sheetz, the California appellate court held that one of the tests for impact fees in the Mitigation Fee Act applied to quasi-legislative impact fees for a class of development projects, like the county’s impact fee. That test requires an agency to determine how there is “a reasonable relationship” between both “the fee’s use and the type of development project on which the fee is imposed” and “the need for the public facility and the type of development project on which the fee is imposed.” The court held that the county established a reasonable relationship between the fee charged and the burden posed by Sheetz’s development.
The court held that an alternative statutory test applies to adjudicatory, case-by-case decisions to impose a development impact fee on a development project. It requires a “reasonable relationship” between the amount of the fee and all or part of the cost of a public facility that is “attributable to the development on which the fee is imposed.” In addition to California, several states have impact fee statutes, but statutory tests vary.
In another California appellate court case, Home Builders Association of Tulare/ Kings Counties, Inc. v. City of Lemoore, 112 Cal. Rptr. 3d 7 (Ct. App. 2010), the impact fee funded community and recreation facilities that would be needed to maintain the current level of service as the city grew. The city assumed that population size determines facility need and based the impact fee on
the existing community and recreation facility asset value ratio to population. It divided the facility asset value of existing community recreational facilities by the current population to determine per capita cost. It then multiplied per capita cost by the population per unit of development type to determine the fee per unit.
This formula is the standard-based method for calculating impact fees, and the court held that it did not prevent there being a reasonable relationship between the fee and the burden created by development. There was “no question” that the increased population from new development placed additional burdens on city-wide community and recreation facilities.
It is not clear whether the US Supreme Court would approve a reasonable relationship test based on classes of development or a standardbased method of calculation based on population because these tests do not consider whether an impact fee is attributable to development. The Court could hold that the statutory test requiring a reasonable relationship “attributable to the development” achieves rough proportionality because it is an individualized assessment. Still, Dolan rejected a “reasonableness” test for exactions that many state courts had adopted.
Postscript: Sheetz cited Knight v. Metropolitan Government of Nashville & Davidson County, 67 F.4th 816 (6th Cir. 2023), which reversed the District Court decision discussed in my Exactions Update. Knight rejected the legislative vs. administrative distinction. Nashville did not argue that the exaction satisfied the unconstitutional conditions doctrine. The Sixth Circuit decision discusses when an exaction amounts to “extortion.” n
CAREER DEVELOPMENT AND WELLNESS
The Magic of a Professional Development Plan
One of my most important actions as a young lawyer was writing a “business plan” for myself. I wrote a new plan annually for the first several years of my career. Thankfully, the firm I worked for required it because I probably would not have done it otherwise. Much to my benefit, the firm had a structured format and philosophy for preparing these plans. I loved writing mine. It gave me pause to think about what I wanted, reflect on my strengths and weaknesses, and use a structured format to dream big and problem-solve.
This type of plan can go by many names—a business plan, a CEO plan, a professional or personal development plan, or simply written goals, outcomes, or resolutions. Regardless of what it is called, the concept remains the same: create a written plan charting your goals in your legal career over the coming months and years. An essential concept is that every lawyer is a “business of one.” Not just a part of a firm or company but you alone—the CEO of your own marketing, R&D, and revenuegenerating capabilities.
Why Should You Plan?
We are all generally aware of the research concluding that writing down your goals, committing to action steps, and developing a support network dramatically increases success in attaining those goals. Sources consistently report that you are 42 percent more likely to reach your goals if you write them down. Is there any serious disagreement among lawyers and other professionals that setting goals and writing them down is a good idea? And yet, only a few lawyers I know write down their goals, let alone have a comprehensive written strategy that they update regularly.
If you are still unconvinced, consider this: when I was a young lawyer (maybe three or four years into practice), I wrote down a specific person who I wanted to have as a client. At that time, having this person as a client seemed unlikely. In addition to writing this name down, my plan that year contained implementation items that would move me toward
Contributing Author: Heather Johnston, Sapphire Law Group, 111 Woodmere Road, Suite 240, Folsom, CA 95630, hjohnston@ sapphire.law.
my goals. For example, I participated in organizations that my ideal clients participated in, wrote articles that I thought would be useful to the types of clients I wanted to have, and made connections that would lead to other connections. Importantly, my plan did not take a shotgun approach—I was strategic with my time and efforts. More than a decade later, and long after I had forgotten the specific contents of any particular professional development plan I had written in my younger lawyer days, I got a phone call that would make me a believer—the client whose name I wrote down all those years ago was calling me to ask me to represent her. I had forgotten she existed, but now she asked for my help. I was thrilled. Writing these plans was useful and made a tremendous difference in my career, but something powerful happened the day the client called me. I recommitted to writing these plans annually and encouraged everyone on my team to write one.
Structure of a Professional Development Plan
There are some beautiful templates, both from a content perspective and an aesthetic perspective. But a plan doesn’t have to be pretty or look a certain way. It needs to be effective. The most effective plans include some standard essential components:
1. Perhaps the most crucial rule is remembering the basics and using “SMART” goals (goals should be specific, measurable, achievable, relevant, and timebound). Avoid focusing too much on the “achievable” element so you can one day end up with the client of your dreams, too!
2. Not only should each goal be achievable, but the plan as a whole should be achievable. Make sure the plan is realistic based on your resources—including money and time. You need fewer if you have huge goals (from a money or time commitment perspective). If you have goals that take little time or money, you can add a few more to the plan. The best plans estimate each goal’s time, monetary cost, and overall plan. In addition, you may need “buy-in” from your firm or other organization if you need approval of one or more aspects of the plan or if they will pick up the bill.
3. Create a plan with both shortterm and long-term goals. Short-term goals should generally support and help create a foundation for the longer-term goals.
4. Create balance for yourself and within your plan. Focus on all the aspects you need to develop yourself as a successful professional. This likely includes networking, continuing education, firm involvement, establishing a mentor-mentee relationship, technical skill development, practice and time management improvements, and personal health and wellness. A plan that is all schmoozing may sound fun (or not!) and may even be effective for getting certain types of clients. Still, it is not sustainable or as effective as creating a plan that balances networking with education and technical skill development and developing your skills as a contributor and leader within your team, firm, or broader professional organizations.
5. Reflect on and write down the why of each goal. Be sure to consider and articulate what achieving this goal will do for you and how it will further your overall vision for your career.
6. Get feedback on your plan. Feedback is an invaluable tool to get perspective, ideas, and support. It helps to view feedback as neutral information you can accept and incorporate into your plan or choose to set aside. It also helps to remember that feedback is a gift that others give you, so be grateful for their time and perspective, even if you disagree. Finally, only some provide good feedback. Finding people who can give you valuable and neutral feedback might be one of your very first goals.
Tips for Writing a Professional Development Plan
1. Set aside time every day or week to work on your plan to make
progress, both in writing the plan and in implementing the goals. It doesn’t have to be perfect; the most challenging part is usually just getting started. Done is better than perfect.
2. Update your plan (or create a new one) at least annually.
3. Have a brainstorming session with trusted colleagues, family, or friends.
4. Play to your strengths. If you hate public speaking, you can create a goal to improve public speaking. But an entire plan full of goals that scare you and that you are naturally disinclined to do will probably have lackluster results.
5. Acknowledge and work on your weaknesses. Balance playing to your strengths with some goals that work on your weaknesses.
6. You need to push yourself to know what you are capable of. Your plan should include some goals that push your limits and facilitate growth. n
THE LAST WORD
Striking the Right Chord with an Apostrophe
Alleged failure to use an apostrophe spiked a cortisol release for Australian realtor Anthony Zadravic. In his Facebook post on October 22, 2020, which he deleted within 12 hours, he commented on his former employer who, Zadravic said, “was selling multi million $ [sic] homes in Pearl Beach but can’t pay his employees superannuation.” https://tinyurl.com/2advtvap. In Australia, “superannuation” is a retirement plan for which an employer must contribute 11 percent of an employee’s earnings into the employee’s account.
The Facebook post prompted a defamation action against Zadravic in New South Wales. Notice the difference between the post as written, “employees superannuation,” and the phrase with an apostrophe added, “employee’s superannuation.” The trial court ruled against the defendant’s motion to dismiss the matter and found that using the plural “employees” suggested a systematic pattern of misconduct. The court concluded that “to fail to pay one employee’s superannuation might be seen as unfortunate; to fail to pay some or all of them looks deliberate.” Id.
Lack of attention to aprostrophe use also occurs closer to home. In a Missouri case involving two defendants, an attorney criticized the opposing counsel’s complaint, arguing that the inconsistent use of an apostrophe when referencing “defendants”
The Last Word Editor: Mark R. Parthemer, Glenmede, 222 Lakeview Avenue, Suite 1160, West Palm Beach, FL 33401, mark. parthemer@glenmede.com.
and “defendant’s” made it impossible to determine which allegations were meant for both defendants or one of them. The criticism took place through an eight-page listing of resulting questions. See https://tinyurl.com/yrhd2c8v.
One form of apostrophe misuse is common enough to earn the name “the greengrocer’s apostrophe.” This is when an apostrophe is wrongly used in the plural form of an abbreviation or noun, such as “Apple’s $3 per pound.”
In addition to their use in singular and plural possessives, apostrophes also are used in contractions. With contractions, the concern is not so much misuse as tone.
What is tone? Tone reveals the author’s attitude about a subject or topic. It can be delivered primarily through word choice, punctuation, and syntax. Similarly, when engaging with someone in person, your facial expression, vocal pitch, and body language convey a certain tone that informs the language you use in conversation. Hear the difference in pitch between a person attempting to coax a smile out of a baby versus reprimanding a teenager for thoughtless behavior.
By using the right tone in writing, readers can better understand the author’s emotions and passion regarding a topic. The tone signals how the author intends the writing to make the reader feel. The tone might be delightful or sarcastic, lighthearted or aggressive, casual or intense, but all can be conveyed through writing.
The tone of a commentary, verbal or written, is affected by using a
contraction (or not). A contraction can accelerate the reader’s cadence or reflect a less formal presentation simply by mashing two words together to make them shorter. It also can make your writing seem more conversational and make the reader feel included— wouldn’t you agree?
Traditionally, we have been taught to avoid contractions in formal writing, but their use in informal writing is acceptable. The formality of a writing or presentation is enhanced by avoiding contractions. When was the last time you reviewed a US Supreme Court opinion riddled with contractions? Next, consider the dialogue in a favorite novel and how the author used sentence and word construction to deliver the desired tone. A rule of thumb on whether to use a contraction might be found by considering whether to wear a bathing suit to a party. Well, it depends, doesn’t it, on whether it is a formal dinner party or a holiday pool party?
A careful, intentional use of a contraction can aid a verbal or written presentation. What tone do you want to strike? If more formal, consider avoiding contractions. The well-timed, well-placed use of contractions can be effective if you’re trying to drive momentum or foster a connection in your writing. Every accomplished musician, writer, or speaker must strike the right note to provide the appropriate tone. Could it be a masterpiece with the wrong tone? I hope you’ll agree that it cannot be—or should that be, “it can’t be”? n
ARIA RESORT & CASINO
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